Denny's Corporation Reports Results for Third Quarter 2012

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Denny's Corporation Reports Results for Third Quarter 2012

-Adjusted Income Before Taxes* Grows 9%-

-Achieves Sixth Consecutive Quarter of Positive System-wide Same-Store Sales -


SPARTANBURG, S.C.--(BUSINESS WIRE)-- Denny's Corporation (NAS: DENN) , franchisor and operator of one of America's largest full-service restaurant chains, today reported results for its third quarter ended September 26, 2012.

Third Quarter Summary

  • System-wide same-store sales grew 0.4%, which marks the sixth consecutive quarter that system-wide same-store sales have been positive.
  • Opened 12 franchised units, including the first international university unit located in Canada at the Southern Alberta Institute of Technology.
  • Signed first international development agreement in South America for 10 units in Chile.
  • Franchise operating margin increased $1.0 million to $22.3 million while franchise operating margin (as a percentage of franchise and license revenue) was 64.9%.
  • Company restaurant operating margin increased 0.6 percentage points to 14.7% compared with the prior year, and was impacted by $1.3 million for unfavorable workers' compensation claims development.
  • Adjusted Income Before Taxes* grew 9.3% to $13.1 million compared with the prior year.
  • Net income of $5.4 million, or $0.06 per diluted share, was impacted by $2.5 million in impairment expense and $1.3 million for unfavorable workers' compensation claims development.
  • Generated $12.9 million of Free Cash Flow* in the quarter which was used to reduce outstanding term loan debt by $7.0 million and repurchase 1.0 million shares.

John Miller, President and Chief Executive Officer, stated, "We are pleased that we achieved our sixth consecutive quarter of positive system-wide same-store sales despite the ongoing challenging consumer economic environment. We continue to grow and revitalize the brand and are making progress in our efforts to differentiate Denny's in the market place. As Denny's approaches its 60th anniversary and 1,700th location, we believe that Denny's will grow its position as one of the largest American full-service brands in the world. Our recent partnership to open units in South America is another step toward that goal. By executing on our strategies to further reinforce our position as America's Diner, we will build on our efforts to grow the brand and increase shareholder value."

Third Quarter Results

For the third quarter of 2012, franchise and license revenue increased 7.3% to $34.4 million compared with $32.0 million in the prior year quarter. The $2.3 million increase in franchise revenue was primarily driven by a $1.2 million increase in occupancy revenue and $0.9 million increase in royalties due to 60 additional equivalent franchise restaurants. Company restaurant sales of $86.6 million decreased $18.1 million due to 49 fewer equivalent company restaurants compared with the prior year quarter. This decrease reflects the continuing impact of selling company-owned units to franchisees as part of our FGI refranchising strategy that will be completed at the end of 2012. Denny's total operating revenue, including both company restaurant sales and franchise revenue, was $120.9 million compared with $136.7 million in the prior year quarter.

Denny's opened 12 new franchised units in the third quarter of this year, including the first international university unit located in Calgary, Canada, at the Southern Alberta Institute of Technology. During the quarter, Denny's closed nine franchised and company restaurants and franchisees purchased five company-owned restaurants.

Franchise operating margin increased $1.0 million to $22.3 million primarily due to the increases in occupancy margin and franchise royalties. Franchise operating margin (as a percentage of franchise and license revenue) was 64.9%, a decrease of 1.5 percentage points compared with the prior year quarter, primarily due to an increase in direct franchise costs.

Company restaurant operating margin decreased $2.0 million primarily due to a $1.3 million unfavorable workers' compensation claims development and the impact of selling company-owned units to franchisees. Company restaurant operating margin (as a percentage of company restaurant sales) was 14.7%, an increase of 0.6 percentage points compared with the prior year quarter. The current year quarter included a 1.5 percentage point unfavorable impact from worker's compensation claims development.

Total general and administrative expenses increased $1.4 million compared with the prior year quarter primarily due to higher performance-based compensation accruals.

Depreciation and amortization expense decreased by $1.7 million compared with the prior year quarter, primarily as a result of the sale of restaurants over the past two years. Net operating gains, losses and other charges, which include restructuring charges, exit costs, impairment charges and gains or losses on the sale of assets, decreased $1.6 million in the quarter. The decrease was primarily the result of lower gains on the sale of company-owned units to franchisees and higher restructuring costs.

Interest expense decreased $1.7 million to $3.1 million as a result of a $37.4 million reduction in total gross debt over the last 12 months and lower interest rates under the refinanced credit facility.

Adjusted Income Before Taxes*, Denny's target metric for earnings, increased 9.3% to $13.1 million compared with the prior year quarter Adjusted Income Before Taxes* of $12.0 million.

In the third quarter, the provision for income taxes increased $2.8 million, primarily due to a higher effective tax rate of 37.4% compared to 4.8% effective tax rate in the prior year quarter. The change in the effective tax rate compared to the prior year resulted from the release of a substantial portion of the valuation allowance on certain deferred tax assets based on our improved historical and projected pre-tax income. Due to the use of net operating loss and tax credit carryforwards, the Company only paid $0.5 million in cash taxes in the third quarter.

Denny's net income was $5.4 million for the third quarter 2012, or $0.06 per diluted share, compared with prior year period net income of $8.0 million, or $0.08 per diluted share. Net income was impacted by $2.5 million in impairment expense and $1.3 million for unfavorable workers' compensation claims development.

In the first three quarters of 2012, Denny's has generated $41.5 million of Free Cash Flow* which the Company has used to reduce its outstanding term loan by $22.0 million and repurchase 2.4 million shares. As of October 26, 2012, the Company has repurchased approximately 10 million shares since initiating a share repurchase strategy and now has 5 million shares remaining in its current authorized share repurchase initiative.

Business Outlook

Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, stated, "The continuous improvements we are making to our franchised-focused business model are reflected in our results where we have been able to generate new unit growth, positive same-store sales, and growing profitability. Our franchise-focused business model provides financial stability and flexibility enabling us to navigate the challenging environment while continuing to return value to shareholders through debt repayment and share repurchases."

Based on year-to-date results and management's expectations at this time, Denny's is updating its full-year 2012 financial guidance to reflect the third quarter results and current thinking for the fourth quarter. The Company anticipates that the system will achieve its second consecutive year of positive same-store sales. Despite the challenging consumer economic environment, the company expects Adjusted Income Before Taxes* to grow more than 20% this year while generating around $50 million of Free Cash Flow*.

Component Full Year 2012 Guidance

Previous**

 

Current

Franchise Same-Store Sales1.0% to 3.0%1.0% to 1.5%
Company Same-Store Sales0.0% to 2.0%0.0% to 0.5%
New System Units45 - 50

(includes 1 company-owned unit)

46 - 48

(includes 1 company-owned unit)

Adjusted EBITDA*$80M to $84M$77M to $80M
Adjusted Income Before Taxes*$45M to $49M$45M to $48M
Interest Expense, net$12.5M to $13.5M

(includes $10.5M to $11.5M of net cash interest expense)

No Change
Cash Capital Expenditure$15M to $16MNo Change
Cash Taxes$3M to $4M$2M to $2.5M
Free Cash Flow*$51M to $55M$49M to $52M

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

** As announced in First Quarter 2012 Earnings Release on April 30, 2012 and reiterated in Second Quarter 2012 Earnings Release on July 31, 2012.

Further Information

Denny's will provide further commentary on the results for the third quarter of 2012 on its quarterly investor conference call today, Tuesday, October 30, 2012 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 ir.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.

Denny's is the franchisor and operator of one of America's largest full-service restaurant chains, based on number of units. As of September 26, 2012, Denny's had 1,687 franchised, licensed, and company-owned restaurants across the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic and New Zealand. 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.

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 our 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 28, 2011 (and in the Company's subsequent quarterly reports on Form 10-Q).

  
DENNY'S CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Quarter Ended
(In thousands, except per share amounts) 9/26/12 9/28/11
Revenue:
Company restaurant sales$86,575$104,659
Franchise and license revenue 34,370 32,023
Total operating revenue 120,945 136,682
Costs of company restaurant sales73,80889,887
Costs of franchise and license revenue12,07810,747
General and administrative expenses14,70213,335
Depreciation and amortization5,2876,955
Operating (gains), losses and other charges, net 3,380 1,791
Total operating costs and expenses 109,255 122,715
Operating income 11,690 13,967
Other expenses:
Interest expense, net3,0884,796
Other nonoperating expense, net 38 780
Total other expenses, net 3,126 5,576
Net income before income taxes8,5648,391
Provision for income taxes 3,201 406
Net income$5,363$7,985
 
 
Net income per share:
Basic$0.06$0.08
Diluted$0.06$0.08
 
Weighted average shares outstanding:
Basic 94,705 96,997
Diluted 96,745 98,746
 
Comprehensive income$5,631$7,985
  
DENNY'S CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Quarters Ended
(In thousands, except per share amounts) 9/26/12  9/28/11
Revenue:
Company restaurant sales$271,977$313,235
Franchise and license revenue 100,437  95,105
Total operating revenue 372,414  408,340
Costs of company restaurant sales231,506271,989
Costs of franchise and license revenue34,77633,397
General and administrative expenses45,15041,566
Depreciation and amortization17,17421,377
Operating (gains), losses and other charges, net (794) 843
Total operating costs and expenses 327,812  369,172
Operating income 44,602  39,168
Other expenses:
Interest expense, net10,53715,390
Other nonoperating expense, net 7,941  2,526
Total other expenses, net 18,478  17,916
Net income before income taxes26,12421,252
Provision for income taxes 10,295  1,013
Net income$15,829 $20,239
 
 
Net income per share:
Basic$0.17 $0.21
Diluted$0.16 $0.20
 
Weighted average shares outstanding:
Basic 95,472  98,132
Diluted 97,196  100,203
 
Comprehensive income$16,633 $20,239
 
DENNY'S CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
  
(In thousands) 9/26/12  12/28/11 
Assets
Current assets
Cash and cash equivalents$24,148$13,740
Receivables, net13,61414,971
Assets held for sale1,5822,351
Current deferred tax asset18,70615,519
Other 10,183  14,712 
 68,233  61,293 
Property, net103,235112,772
Goodwill30,40230,764
Intangible assets, net49,20850,921
Noncurrent deferred tax asset47,94360,636
Other assets 26,833  34,115 
Total assets$325,854 $350,501 
 
Liabilities
Current liabilities
Current maturities of long-term debt$9,781$2,591
Current maturities of capital lease obligations4,2644,380
Accounts payable17,60425,935
Other current liabilities 53,673  54,289 
 85,322  87,195 
Long-term liabilities
Long-term debt, less current maturities166,250193,257
Capital lease obligations, less current maturities16,23918,077
Other 57,480  61,648 
 239,969  272,982 
Total liabilities 325,291  360,177 
 
Shareholders' equity
Common stock1,0371,027
Paid-in capital561,665557,396
Deficit(501,998)(517,827)
Accumulated other comprehensive loss, net of tax(24,009)(24,813)
Treasury stock (36,132) (25,459)
Total shareholders' equity 563  (9,676)
Total liabilities and shareholders' equity$325,854 $350,501 
 
 
Debt Balances
(In thousands) 9/26/12  12/28/11 
Credit facility term loan due 2017, net of discount of $0 and $2,251, respectively$176,000$195,749
Capital leases and other debt 20,534  22,556 
Total debt$196,534 $218,305 
     
DENNY'S CORPORATION
Income, EBITDA, Free Cash Flow and G&A Reconciliations
(Unaudited)
 
Income and EBITDA ReconciliationQuarter EndedThree Quarters Ended
(In thousands) 9/26/12  9/28/11  9/26/12  9/28/11 
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