Denny's Corporation Reports Results for First Quarter 2013

Adjusted Net Income Per Share* Increased 48.4% to $0.08

Refinances Credit Facility and Increases Share Repurchase Authorization by 10 Million Shares

SPARTANBURG, S.C. - April 30, 2013 // GLOBE NEWSWIRE // - Denny's Corporation (Nasdaq:DENN), franchisor and operator of one of America's largest franchised full-service restaurant chains, today reported results for its first quarter ended March 27, 2013.

First Quarter Summary

  • System-wide same-store sales decreased 0.7%, comprised of a 0.5% decrease at domestic franchised restaurants and a 1.5% decrease at company restaurants, with a 1.7% increase in system-wide same-store sales on a two-year basis.
  • Opened seven new franchised restaurants and closed six franchised restaurants bringing total restaurant count to 1,689.
  • Net Income of $7.1 million, or $0.07 per diluted share, grew 20.7% compared with the prior year quarter Net Income of $5.9 million, or $0.06 per diluted share.
  • Adjusted Net Income per Share* of $0.08 grew 48.4% compared with the prior year quarter Adjusted Net Income per Share* of $0.05.
  • Generated $12.6 million of Free Cash Flow* used to reduce outstanding term loan debt by $4.0 million and repurchase 341,100 shares for $1.9 million.

Subsequent to the First Quarter

  • Refinanced credit facility providing lower interest costs and increased flexibility for the Company to continue to return cash to shareholders.
  • Authorized additional 10 million shares for ongoing share repurchase program bringing the total number of shares remaining in the outstanding programs to 12.4 million.

John Miller, President and Chief Executive Officer, stated, "Denny's delivered another quarter of solid results, as we continued to successfully execute against our key objectives implemented to strengthen and grow our position as one of the largest franchised American full-service restaurant brands. We remain focused on revitalizing Denny's image with our 'America's Diner' positioning, increasing the growth of the Denny's brand, and growing profitability and free cash flow. As we move forward, we will continue to work closely with our franchisees to increase restaurant level performance and new restaurant growth, while also balancing our capital allocation between reinvestments in the brand and returning value to shareholders."

First Quarter Results

For the first quarter of 2013, franchise and license revenue increased 2.7% to $33.5 million compared with $32.6 million in the prior year quarter. The $0.9 million increase in franchise revenue was primarily driven by a $0.5 million increase in royalties and higher occupancy revenue from 45 additional equivalent franchise restaurants. Company restaurant sales of $81.0 million decreased $13.1 million due to 36 fewer equivalent company restaurants. This decrease reflects the continuing impact of selling company restaurants to franchisees as part of the Company's FGI refranchising strategy that was completed at the end of 2012.

Denny's opened seven new franchised restaurants in the first quarter of this year and closed six franchised restaurants bringing the total restaurant count to 1,689. Franchise operating margin increased $0.8 million to $22.1 million primarily due to the increases in franchise royalties and occupancy margin. Franchise operating margin (as a percentage of franchise and license revenue) was 65.9%, an increase of 0.6 percentage points. The increase was primarily due to the increase in royalties and occupancy margin and was partially offset by lower initial fee revenue from refranchising six restaurants in the prior year quarter.

Company restaurant operating margin decreased $2.3 million primarily due to the impact of selling company restaurants to franchisees. Company restaurant operating margin (as a percentage of company restaurant sales) was 14.7%, a decrease of 0.4 percentage points. The decrease was primarily driven by higher product costs and higher occupancy costs, due to favorable general liability claims development in the prior year. These increases were partially offset by lower payroll and benefits costs primarily driven by lower incentive compensation and medical costs.

Total general and administrative expenses decreased $0.5 million to $15.2 million in the quarter. Depreciation and amortization expense decreased by $0.8 million primarily as a result of the sale of restaurants in 2012. Interest expense decreased by $1.7 million as a result of a $26.3 million reduction in total gross debt over the last 12 months and lower interest rates under the Company's refinanced credit facility. In the first quarter, the provision for income taxes was $3.6 million, reflecting an effective tax rate of 33.5%. Due to the use of net operating loss and tax credit carryforwards, the Company paid only $0.3 million in cash taxes in the first quarter.

Denny's first quarter net income of $7.1 million, or $0.07 per diluted share, grew 20.7% compared to prior year quarter net income of $5.9 million, or $0.06 per diluted share. Adjusted Net Income* of $7.1 million, or $0.08 per diluted share, grew 43.2% compared to Adjusted Net Income* of $5.0 million, or $0.05 per diluted share, in the prior year quarter.

Denny's generated $12.6 million of Free Cash Flow* in the first quarter, a portion of which the Company used to reduce its outstanding term loan by $4.0 million and to repurchase 341,100 shares for $1.9 million. Since initiating its share repurchase strategy in November 2010, the Company has used $53.3 million to repurchase 12.6 million shares through April 24, 2013. The Company recently announced that the Board of Directors approved a new share repurchase program authorizing the repurchase of an additional 10 million shares of its common stock, in addition to repurchases previously authorized. As of April 24, 2013, the Company has 12.4 million shares remaining in its current authorized share repurchase initiative.

Denny's recently entered into a new five-year $250 million senior secured bank credit facility, comprised of a $60 million term loan and a $190 million revolving line of credit. At the time of closing there were $105 million of borrowings under the new revolving line of credit. The refinanced facility has a reduced interest rate starting at LIBOR plus 200 basis points for the term loan and revolver, and lower amortization, as the term loan will be amortized 5% per year in the first two years, 7.5% in the subsequent two years, and 10% in the fifth year, with the balance due at maturity.

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, concluded, "Our new credit facility and share repurchase authorization are testaments to the tremendous progress Denny's has made over the past several years with its franchise-focused business model, which enables us to continue to reinvest in the growth of the brand and return cash to shareholders through our increased share repurchase program."

Business Outlook

The Company continues to successfully execute against its key objectives implemented to strengthen and grow its position as one of the largest American full-service restaurant brands. These include:

    Revitalize Denny's image with its "America's Diner" positioning.
  • Increase the growth of the Denny's brand both domestically and internationally.
  • Grow profitability and Free Cash Flow* through a primarily franchise-focused business model that balances reinvesting in the brand with debt repayment and returning cash to shareholders.

The following full year 2013 estimates are based on management's expectations at this time. 

  • System-wide same-store sales growth between 0% and 1.5%.
  • New restaurant openings (all franchised) between 40 and 45 restaurants with net restaurant growth between 5 and 10 restaurants.
  • Total G&A, including share-based compensation, between $59 million and $61 million.
  • Adjusted EBITDA* between $76 million and $80 million.
  • Cash capital expenditures between $19 million and $21 million, including approximately 20 to 25 remodels at company restaurants and the acquisition of two parcels of real estate for approximately $2.4 million in the second quarter of this year.
  • Depreciation and amortization between $20.5 million and $21.5 million.
  • Net interest expense between $9.5 million and $10.5 million with net cash interest expense between $8.0 million and $9.0 million. The closing of the Company's new bank facility will result in a non-cash one-time charge to other nonoperating expense of approximately $1.2 million in the second quarter of 2013
  • Cash taxes between $2.5 million and $3.5 million with income tax rate between 35% and 40%.
  • Free Cash Flow* between $45 million and $48 million.

* Please refer to the historical reconciliation of net income to Adjusted Net Income, Adjusted Net Income Per Share, Adjusted EBITDA, and Free Cash Flow included in the tables below.

Conference Call and Webcast Information

Denny's will provide further commentary on the results for the first quarter 2013 on its quarterly investor conference call today, Tuesday, April 30, 2013 at 5:00 p.m. ET. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny's website at investor.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.

About Denny's

Denny's is the franchisor and operator of one of America's largest franchised full-service restaurant chains, based on number of restaurants. Denny's currently has 1,689 franchised, licensed, and company restaurants around the world with combined sales of $2.5 billion including 1,591 restaurants in the United States and 98 restaurants in Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic and New Zealand. As of March 27, 2013, 1,525 of Denny's restaurants were franchised and 164 restaurants were company operated. For further information on Denny's, including news releases, links to SEC filings and other financial information, please visit the Denny's investor relations website at investor.dennys.com.

The Company urges caution in considering its current trends and any outlook on earnings disclosed in this press release. In addition, certain matters discussed in this release may constitute forward-looking statements. These forward-looking statements, which reflect its best judgment based on factors currently known, are intended to speak only as of the date such statements are made and involve risks, uncertainties, and other factors that may cause the actual performance of Denny's Corporation, its subsidiaries and underlying restaurants to be materially different from the performance indicated or implied by such statements. Words such as "expects", "anticipates", "believes", "intends", "plans", "hopes", and variations of such words and similar expressions are intended to identify such forward-looking statements. Except as may be required by law, the Company expressly disclaims any obligation to update these forward-looking statements to reflect events or circumstances after the date of this release or to reflect the occurrence of unanticipated events. Factors that could cause actual performance to differ materially from the performance indicated by these forward-looking statements include, among others: the competitive pressures from within the restaurant industry; the level of success of the Company's strategic and operating initiatives, advertising and promotional efforts; adverse publicity; changes in business strategy or development plans; terms and availability of capital; regional weather conditions; overall changes in the general economy, particularly at the retail level; political environment (including acts of war and terrorism); and other factors from time to time set forth in the Company's SEC reports and other filings, including but not limited to the discussion in Management's Discussion and Analysis and the risks identified in Item 1A. Risk Factors contained in the Company's Annual Report on Form 10-K for the year ended December 26, 2012 (and in the Company's subsequent quarterly reports on Form 10-Q).

 

DENNY'S CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

(In thousands)

3/27/2013

  12/26/2012

Assets

 

 

Current assets

 

 

Cash and cash equivalents

$10,263

$13,565

Receivables, net

16,762

19,947

Current deferred tax asset

20,238

19,807

Other current assets

9,109

11,291

Total current assets

56,372

64,610

Property, net

105,426

107,004

Goodwill

31,430

31,430

Intangible assets, net

48,369

48,920

Noncurrent deferred tax asset

42,305

45,776

Other noncurrent assets

27,391

27,145

Total assets

$311,293

$324,885

 

 

 

Liabilities

 

 

Current liabilities

 

 

Current maturities of long-term debt

$9,250

$8,500

Current maturities of capital lease obligations

4,135

4,181

Accounts payable

19,336

24,461

Other current liabilities

46,529

54,682

Total current liabilities

79,250

91,824

Long-term liabilities

 

 

Long-term debt, less current maturities

156,750

161,500

Capital lease obligations, less current maturities

16,012

15,953

Other

57,462

60,068

Total long-term liabilities

230,224

237,521

Total liabilities

309,474

329,345

 

 

 

Shareholders' equity

 

 

Common stock

1,044

1,038

Paid-in capital

563,483

562,657

Deficit

(488,437)

(495,518)

Accumulated other comprehensive loss, net of tax

(24,745)

(24,999)

Treasury stock

(49,526)

(47,638)

Total shareholders' equity (deficit)

1,819

(4,460)

Total liabilities and shareholders' equity

$311,293

$324,885

 

 

 

Debt Balances

(In thousands)

3/27/2013

12/26/2012

Credit facility term loan due 2017

$166,000

$170,000

Capital leases

20,147

20,134

Total debt

$186,147

$190,134

 

 

DENNY'S CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

 

 

Quarter Ended

(In thousands, except per share amounts)

3/27/2013

  3/28/2012

Revenue:

 

 

Company restaurant sales

$81,030

$94,163

Franchise and license revenue

33,460

32,575

Total operating revenue

114,490

126,738

Costs of company restaurant sales

69,120

79,955

Costs of franchise and license revenue

11,402

11,312

General and administrative expenses

15,159

15,663

Depreciation and amortization

5,224

6,060

Operating (gains), losses and other charges, net

134

(165)

Total operating costs and expenses, net

101,039

112,825

Operating income

13,451

13,913

Interest expense, net

2,800

4,456

Other nonoperating expense (income), net

1

(295)

Net income before income taxes

10,650

9,752

Provision for income taxes

3,569

3,887

Net income

$7,081

$5,865

 

 

 

Basic net income per share

$0.08

$0.06

Diluted net income per share

$0.07

$0.06

 

 

 

Basic weighted average shares outstanding

92,350

96,075

Diluted weighted average shares outstanding

94,461

97,878

 

 

 

Comprehensive income

$7,335

$6,133

 

 

 

General and Administrative Expenses

Quarter Ended

(In thousands)

3/27/2013

3/28/2012

Share-based compensation

$1,175

$790

Other general and administrative expenses

13,984

14,873

Total general and administrative expenses

$15,159

$15,663

 

 

DENNY'S CORPORATION

Income, EBITDA, Free Cash Flow, and Net Income Reconciliations

(Unaudited)

 

 

Income, EBITDA and Free Cash Flow Reconciliation

Quarter Ended

(In thousands)

3/27/2013

  3/28/2012

Net income

$7,081

$5,865

Provision for income taxes

3,569

3,887

Operating (gains), losses and other charges, net

134

(165)

Other nonoperating expense (income), net

1

(295)

Share-based compensation

1,175

790

Adjusted Income Before Taxes (1)

$11,960

$10,082

 

 

 

Interest expense, net

2,800

4,456

Depreciation and amortization

5,224

6,060

Cash payments for restructuring charges and exit costs

(672)

(781)

Cash payments for share-based compensation

(890)

(355)

Adjusted EBITDA (1)

$18,422

$19,462

 

 

 

Cash interest expense, net

(2,485)

(3,750)

Cash paid for income taxes, net

(343)

(213)

Cash paid for capital expenditures

(3,006)

(1,836)

Free Cash Flow (1)

$12,588

$13,663

 

 

 

Net Income Reconciliation

Quarter Ended

(In thousands)

3/27/2013

3/28/2012

Net income

$7,081

$5,865

Gains on sales of assets and other, net

18

(1,955)

Impairment charges

523

Tax effect (2)

(6)

521

Adjusted Net Income (1)

$7,093

$4,954

 

 

 

Diluted weighted-average shares outstanding

94,461

97,878

 

 

 

Adjusted Net Income Per Share (1)

$0.08

$0.05

 

(1) The Company believes that, in addition to other financial measures, Adjusted Income Before Taxes, Adjusted EBITDA, Free Cash Flow, Adjusted Net Income and Adjusted Net Income Per Share are appropriate indicators to assist in the evaluation of its operating performance on a period-to-period basis. The Company also uses Adjusted Income, Adjusted EBITDA and Free Cash Flow internally as performance measures for planning purposes, including the preparation of annual operating budgets, and for compensation purposes, including bonuses for certain employees. Adjusted EBITDA is also used to evaluate its ability to service debt because the excluded charges do not have an impact on its prospective debt servicing capability and these adjustments are contemplated in its credit facility for the computation of its debt covenant ratios. Free Cash Flow, defined as Adjusted EBITDA less cash portion of interest expense net of interest income, capital expenditures, and cash taxes, is used to evaluate operating effectiveness and decisions regarding the allocation of resources. However, Adjusted Income, Adjusted EBITDA, Free Cash Flow, Adjusted Net Income and Adjusted Net Income Per Share should be considered as a supplement to, not a substitute for, operating income, net income or other financial performance measures prepared in accordance with U.S. generally accepted accounting principles.

(2) Tax adjustments for the three months ended March 27, 2013 are calculated using the Company's year-to-date effective tax rate of 33.5%. Tax adjustments for the three months ended March 28, 2012 are calculated using the Company's full year 2012 effective tax rate of 36.4%.

 

 

DENNY'S CORPORATION

Operating Margins

(Unaudited)

 

 

 

Quarter Ended

(In thousands)

3/27/2013

3/28/2012

Company restaurant operations: (1)

 

 

 

 

Company restaurant sales

$81,030

  100.0%

$94,163

  100.0%

Costs of company restaurant sales:

 

 

 

 

Product costs

21,146

26.1%

23,533

25.0%

Payroll and benefits

31,546

38.9%

37,753

40.1%

Occupancy

5,228

6.5%

5,774

6.1%

Other operating costs:

 

 

 

 

Utilities

3,127

3.9%

3,714

3.9%

Repairs and maintenance

1,349

1.7%

1,688

1.8%

Marketing

3,016

3.7%

3,535

3.8%

Legal settlements

276

0.3%

98

0.1%

Other

3,432

4.2%

3,860

4.1%

Total costs of company restaurant sales

$69,120

85.3%

$79,955

84.9%

Company restaurant operating margin (2)

$11,910

14.7%

$14,208

15.1%

 

 

 

 

 

Franchise operations: (3)

 

 

 

 

Franchise and license revenue

 

 

 

 

Royalty and license revenue

$21,027

62.9%

$20,527

63.0%

Initial and other fee revenue

280

0.8%

436

1.3%

Occupancy revenue

12,153

36.3%

11,612

35.7%

Total franchise and license revenue

$33,460

100.0%

$32,575

100.0%

 

 

 

 

 

Costs of franchise and license revenue

 

 

 

 

Occupancy costs

$8,853

26.5%

$8,723

26.8%

Direct franchise costs

2,549

7.6%

2,589

7.9%

Total costs of franchise and license revenue

$11,402

34.1%

$11,312

34.7%

Franchise operating margin (2)

$22,058

65.9%

$21,263

65.3%

 

 

 

 

 

Total operating revenue (4)

$114,490

100.0%

$126,738

100.0%

Total costs of operating revenue (4)

80,522

70.3%

91,267

72.0%

Total operating margin (4)(2)

$33,968

29.7%

$35,471

28.0%

 

 

 

 

 

Other operating expenses: (4)(2)

 

 

 

 

General and administrative expenses

$15,159

13.2%

$15,663

12.4%

Depreciation and amortization

5,224

4.6%

6,060

4.8%

Operating gains, losses and other charges, net

134

0.1%

(165)

(0.1)%

Total other operating expenses

$20,517

17.9%

$21,558

17.0%

 

 

 

 

 

Operating income (4)

$13,451

11.7%

$13,913

11.0%

 

(1) As a percentage of company restaurant sales

(2) Other operating expenses such as general and administrative expenses and depreciation and amortization relate to both company and franchise operations and are not allocated to costs of company restaurant sales and costs of franchise and license revenue. As such, operating margin is considered a non-GAAP financial measure. Operating margins should be considered as a supplement to, not as a substitute for, operating income, net income or other financial measures prepared in accordance with U.S. generally accepted accounting principles.

(3) As a percentage of franchise and license revenue

(4) As a percentage of total operating revenue

 

 

DENNY'S CORPORATION

Statistical Data

(Unaudited)

 

 

 

 

Same-Store Sales

Quarter Ended

 

(increase/(decrease) vs. prior year)

3/27/2013

3/28/2012

 

Company Restaurants

(1.5)%

0.8%

 

Domestic Franchised Restaurants

(0.5)%

2.8%

 

Domestic System-wide Restaurants

(0.7)%

2.5%

 

System-wide Restaurants

(0.7)%

2.4%

 

 

 

 

 

Average Unit Sales

Quarter Ended

 

(In thousands)

3/27/2013

3/28/2012

 

Company Restaurants

$494

$470

 

Franchised Restaurants

$349

$349

 

 

 

 

 

 

 

Franchised

 

Restaurant Unit Activity

Company

& Licensed

Total

Ending Units 12/26/12

164

1,524

1,688

Units Opened

0

7

7

Units Closed

0

(6)

(6)

Net Change

0

1

1

Ending Units 3/27/13

164

1,525

1,689

 

 

 

 

Equivalent Units

 

 

 

Year-to-Date 2013

164

1,526

1,690

Year-to-Date 2012

200

1,481

1,681

 

(36)

45

9

Media Contact:

Liz DiTrapano, ICR
646-277-1226

Source: Denny's Corporation

###

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