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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Denny's Corporation    DENN

DENNY'S CORPORATION

(DENN)
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DENNY : S CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

03/01/2021 | 03:49pm EDT

The following discussion should be read in conjunction with our Consolidated Financial Statements and the notes thereto.

Overview


Denny's restaurants are operated in 49 states, the District of Columbia, two
U.S. territories and 11 foreign countries with principal concentrations in
California (23% of total restaurants), Texas (12%) and Florida (8%). At
December 30, 2020, the Denny's brand consisted of 1,650 franchised, licensed and
company restaurants. Of this amount, 1,585 of our restaurants were franchised or
licensed, representing 96% of the total restaurants, and 65 were company
restaurants.

Our revenues are derived primarily from two sales channels, which we operate as
one segment: company restaurants and franchised and licensed restaurants. The
primary sources of revenues are the sale of food and beverages at our company
restaurants and the collection of royalties, advertising revenue, initial and
other fees and occupancy revenue from restaurants operated by our franchisees
under the Denny's name. Sales and customer traffic at both company and
franchised restaurants are affected by the success of our marketing campaigns,
new product introductions, product quality enhancements, customer service,
availability of off-premise dining options, and menu pricing, as well as
external factors including competition, economic conditions affecting consumer
spending and changes in guests' tastes and preferences. Sales at company
restaurants and royalty, advertising and fee income from franchised restaurants
are also impacted by the opening of new restaurants, the closing of existing
restaurants, the sale of company restaurants to franchisees and the acquisition
of restaurants from franchisees.

Costs of company restaurant sales are exposed to volatility in two main areas:
payroll and benefit costs and product costs. The volatility of payroll and
benefit costs results primarily from changes in wage rates and increases in
labor related expenses, such as medical benefit costs and workers' compensation
costs. Additionally, changes in guest counts and investments in store-level
labor impact payroll and benefit costs as a percentage of sales. Many of the
products sold in our restaurants are affected by commodity pricing and are,
therefore, subject to price volatility. This volatility is caused by factors
that are fundamentally outside of our control and are often unpredictable. In
general, we purchase food products based on market prices or we set firm prices
in purchase agreements with our vendors. In an inflationary commodity
environment, our ability to lock in prices on certain key commodities is
imperative to controlling food costs. In addition, our continued success with
menu management helps us offer menu items that provide a compelling value to our
customers while maintaining attractive product costs and profitability.
Packaging costs also fluctuate with changes in delivery and off-premise sales.

Our fiscal year ends on the last Wednesday in December. As a result, a
fifty-third week is added to a fiscal year every five or six years. Fiscal 2020
included 53 weeks of operations, whereas 2019 and 2018 each included 52 weeks of
operations. We estimate that the additional operating week added approximately
$6.3 million of operating revenue in 2020.

Impact of the COVID-19 Pandemic

Sales Trends


The COVID-19 pandemic significantly impacted our sales during 2020. In 2019,
prior to the impacts of the COVID-19 pandemic, our average annual restaurant
sales were $2.5 million for company restaurants and $1.7 million for domestic
franchised restaurants. In 2020, as a result of the COVID-19 pandemic, our
average annual restaurant sales declined to $1.8 million for company restaurants
and $1.2 million for domestic franchised restaurants. Additionally, average unit
volumes of off-premise sales have more than doubled since the beginning of the
COVID-19 pandemic, supported by temporarily waived delivery fees, curbside
service programs and shareable family meal packs.










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The following table presents monthly sales results compared to the equivalent fiscal periods in 2019:


   Domestic System-Wide Same-Store Sales(1) Compared to 2019 Fiscal Periods:

                                             Fiscal Year 2020: (31%)
                Q1: (6%)              Q2: (57%)               Q3: (34%)                Q4: (33%)
            Jan   Feb    Mar     Apr     May     Jun     Jul      Aug     Sep     Oct     Nov     Dec
            3%    2%    (19%)   (76%)   (65%)   (41%)   (39%)    (35%)   (28%)   (26%)   (27%)   (41%)


The following table presents domestic capacity restrictions:

            Domestic Capacity Restrictions as of December 30, 2020:

                                % of Domestic System
                   75% Capacity or Social Distancing      29%
                   50% - 66% Capacity                     23%
                   25% - 33% Capacity                      5%
                   Off-Premise Only                       39%
                   No Restrictions                         1%
                   Temporarily Closed                      3%
                   Total                                  100%


Franchise and License Revenue Reductions

In addition to the impacts that reduced sales had on franchise and licenses revenues, certain forms of franchise support resulted in reductions to these revenues throughout 2020 including:

•abatement of $6.0 million of royalties including $1.9 million in the first quarter, $3.1 million in the second quarter and $1.0 in the fourth quarter; •abatement of $1.3 million of advertising fees in the first quarter.

Cost Savings Initiatives

In response to the COVID-19 pandemic, we also implemented the following cost savings initiatives:


•suspended travel and canceled in-person field meetings;
•placed holds on all open corporate and field positions;
•significantly reduced restaurant level staffing across the company restaurant
portfolio;
•meaningfully reduced compensation for our Board of Directors and multiple
levels of management; and
•furloughed over 25% of the employees at our corporate office, approximately
half of which were subsequently separated from the Company.

We subsequently eased certain of these cost savings measures. For example, we have resumed recruiting for certain corporate and field positions, and the compensation reductions expired on June 25, 2020.


We also secured $2.6 million of federal tax credits in connection with wages
paid to retained employees during the crisis under the Coronavirus Aid, Relief,
and Economic Security (CARES) Act.

Liquidity Actions Taken


Effective February 27, 2020, we suspended share repurchases, and effective March
16, 2020 terminated our Rule 10b5-1 Plan in both cases in light of uncertain
market conditions arising from the COVID-19 pandemic.
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Due to the impact of the COVID-19 pandemic, effective May 13, 2020 and December
15, 2020, the Company and certain of its subsidiaries entered into a second and
third amendment, respectively, to the current credit facility which amended the
credit agreement dated as of October 26, 2017. See Liquidity and Capital
Resources - Credit Facility. As of December 30, 2020, the Company was in
compliance with its financial covenants related to the amended credit facility.

On July 6, 2020, we closed on the issuance and sale of 8,000,000 shares of
common stock. Net proceeds of $69.6 million were received after deducting the
underwriters' discounts and commissions and offering expenses payable by the
Company and disbursed to pay down the outstanding balance on the credit
facility.

Growing and Revitalizing the Brand


Over the last five years, our growth initiatives have led to 169 new restaurant
openings. During 2020, our franchisees opened 20 restaurants, of which eight are
international franchised locations, including four in Canada, two in Mexico, and
one each in Indonesia and Central America. Our goal is to increase net
restaurant growth through both domestic and international avenues. Domestic
growth will continue to focus on markets in which we have modest penetration.
Development agreements related to the sale of 113 of our company restaurants
during 2018 and 2019 and recently enhanced development agreements in Canada and
the Philippines are expected to stimulate both domestic and international growth
over the next several years.

A total of 22 remodels were completed during 2020, consisting of 20 at
franchised restaurants and two at company restaurants. Eleven of these remodels
were in our Heritage image, which we launched in late 2013. This updated look
reflects a more contemporary diner feel to further reinforce our America's Diner
positioning. The remaining 11 restaurants updated to our Heritage 2.0 image
which features more attention-grabbing exterior elements while extending the
relaxing interior elements from the original Heritage program. As of the end of
2020, approximately 91% of the restaurants in the system have been remodeled to
one of our two Heritage images.

Balancing the Use of Cash


Though certain strategies have been impacted by the COVID-19 pandemic, we are
still focused in the longer term on balancing the use of cash between
reinvesting in our base of company restaurants, growing and strengthening the
brand and returning cash to shareholders. During 2020, cash capital expenditures
were $7.0 million. Our real estate strategy is to redeploy proceeds from the
sale of certain pieces of our owned real estate to acquire higher quality real
estate underlying company and franchised restaurants. During 2020, we generated
$9.4 million of cash proceeds from the sale of real estate.

Prior to suspending share repurchases, during 2020, we repurchased a total of
1.7 million shares of our common stock for $34.2 million. Since initiating our
share repurchase program in November 2010, we have repurchased a total of 54.0
million shares of our common stock for $553.9 million. The Company is prohibited
from paying dividends and making stock repurchases and other general investments
until the date of delivery of our financial statements for the fiscal quarter
ending September 29, 2021. See Liquidity and Capital Resources - Credit
Facility.

In December 2019, the Board approved a new share repurchase authorization for
$250 million. As of December 30, 2020, there was approximately $248.0 million
remaining under our current repurchase authorization.

Other Factors Impacting Comparability

For 2020, 2019 and 2018, the following items impacted the comparability of our results:

•Company restaurant sales decreased from $411.9 million in 2018 to $118.2 million in 2020, primarily from the impact of the sale of 113 company restaurants to franchisees during 2019 and 2018 and, in 2020, the impact of the COVID-19 pandemic.


•Royalty income, which is included as a component of franchise and license
revenue, increased from $101.6 million in 2018 to $108.8 million in 2019
primarily as a result of the sale of company restaurants to franchisees,
increases in same-store sales and a higher average royalty rate. The subsequent
decrease to $67.5 million in 2020 was primarily due to the impact of the
COVID-19 pandemic on our business.

•Occupancy revenues, included as a component of franchise and license revenue,
result from leasing or subleasing restaurants to franchisees. When restaurants
are sold and leased or subleased to franchisees, the occupancy costs related to
these restaurants move from costs of company restaurant sales to costs of
franchise and license revenue to match the
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related occupancy revenue. Additionally, as leases or subleases with
franchisees expire, franchise occupancy revenue and costs could decrease if
franchisees enter into direct leases with landlords. Occupancy revenue has
increased from $32.0 million in 2018 to $41.9 million in 2020 as a result of the
sale of restaurants to franchisees, partially offset by the impact of lease
expirations. At the end of 2020, we had 265 franchised restaurants that were
leased or subleased from Denny's, compared to 243 at the end of 2018.
______________

(1)  Domestic system-wide same-store sales include sales at company restaurants
and non-consolidated franchised and licensed restaurants that were open the same
period in noted prior period. While we do not record franchise and licensed
sales as revenue in our consolidated financial statements, we believe
system-wide same-store sales information is useful to investors in understanding
our financial performance, as our royalty revenues are calculated based on a
percentage of franchise sales. Accordingly, system-wide same-store sales should
be considered as a supplement to, not a substitute for, our results as reported
under GAAP.



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Statements of Operations

                                                                                                 Fiscal Year Ended
                                                       December 30, 2020                         December 25, 2019                         December 26, 2018
                                                                                              (Dollars in thousands)
Revenue:
Company restaurant sales                      $       118,160             40.9  %       $       306,377             56.6  %       $       411,932             65.4  %
Franchise and license revenue                         170,445             59.1  %               235,012             43.4  %               218,247             34.6  %
Total operating revenue                               288,605            100.0  %               541,389            100.0  %               630,179            100.0  %
Costs of company restaurant sales, excluding
depreciation and amortization (a):
Product costs                                          29,816             25.2  %                74,720             24.4  %               100,532             24.4  %
Payroll and benefits                                   51,684             43.7  %               118,806             38.8  %               164,314             39.9  %
Occupancy                                              11,241              9.5  %                18,613              6.1  %                23,228              5.6  %
Other operating expenses                               21,828             18.5  %                46,257             15.1  %                60,708             14.7  %
Total costs of company restaurant sales               114,569             97.0  %               258,396             84.3  %               348,782             84.7  %
Costs of franchise and license revenue (a)             94,348             55.4  %               120,326             51.2  %               114,296             52.4  %
General and administrative expenses                    55,040             19.1  %                69,018             12.7  %                63,828             10.1  %
Depreciation and amortization                          16,161              5.6  %                19,846              3.7  %                27,039              4.3  %
Operating (gains), losses and other charges,
net                                                     1,808              0.6  %               (91,180)           (16.8) %                 2,620              0.4  %
Total operating costs and expenses, net               281,926             97.7  %               376,406             69.5  %               556,565             88.3  %
Operating income                                        6,679              2.3  %               164,983             30.5  %                73,614             11.7  %
Interest expense, net                                  17,965              6.2  %                18,547              3.4  %                20,745              3.3  %
Other nonoperating (income) expense, net               (4,171)            (1.4) %                (2,763)            (0.5) %                   619              0.1  %
Net income (loss) before income taxes                  (7,115)            (2.5) %               149,199             27.6  %                52,250              8.3  %
Provision for (benefit from) income taxes              (1,999)            (0.7) %                31,789              5.9  %                 8,557              1.4  %
Net income (loss)                             $        (5,116)            (1.8) %       $       117,410             21.7  %       $        43,693              6.9  %

Other Data:
Company average unit sales                    $         1,812                           $         2,477                           $         2,300
Franchise average unit sales                  $         1,181                           $         1,669                           $         1,615
Company equivalent units (b)                               65                                       124                                       179
Franchise equivalent units (b)                          1,614                                     1,578                                     1,538
Company same-store sales increase (decrease)
(c)(d)                                                  (36.7) %                                    1.9  %                                    1.8  %
Domestic franchised same-store sales increase
(decrease) (c)(d)                                       (30.9) %                                    2.0  %                                    0.6  %



(a)Costs of company restaurant sales percentages are as a percentage of company
restaurant sales. Costs of franchise and license revenue percentages are as a
percentage of franchise and license revenue. All other percentages are as a
percentage of total operating revenue.
(b)Equivalent units are calculated as the weighted average number of units
outstanding during a defined time period.
(c)Same-store sales include sales from company restaurants or non-consolidated
franchised and licensed restaurants that were open the same period in the prior
year. While we do not record franchise and licensed sales as revenue in our
consolidated financial statements, we believe domestic franchised same-store
sales information is useful to investors in understanding our financial
performance, as our royalty revenues are calculated based on a percentage of
franchise sales. Accordingly, domestic franchised same-store sales should be
considered as a supplement to, not a substitute for, our results as reported
under GAAP.
(d)Prior year amounts have not been restated for 2020 comparable restaurants.

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Unit Activity

                                                                                      Fiscal Year Ended
                                                   December 30, 2020                   December 25, 2019                December 26, 2018
Company restaurants, beginning of period                       68                                 173                              178
Units opened                                                    -                                   -                                1
Units acquired from franchisees                                 -                                   -                                6
Units sold to franchisees                                       -                                (105)                              (8)
Units closed                                                   (3)                                  -                               (4)
End of period                                                  65                                  68                              173

Franchised and licensed restaurants, beginning
of period                                                   1,635                               1,536                            1,557
Units opened                                                   20                                  30                               29
Units purchased from Company                                    -                                 105                                8
Units acquired by Company                                       -                                   -                               (6)
Units closed                                                  (70)                                (36)                             (52)
End of period                                               1,585                               1,635                            1,536
Total restaurants, end of period                            1,650                               1,703                            1,709



Company Restaurant Operations

Company same-store sales decreased 36.7% in 2020 and increased 1.9% in 2019
compared with the respective prior year. Company restaurant sales for 2020
decreased $188.2 million, or 61.4%, primarily resulting from a 59 equivalent
unit decrease in company restaurants and a 36.7% decrease in company same-store
sales caused primarily by dine-in restrictions and temporary closures related to
the COVID-19 pandemic. Company restaurant sales for 2019 decreased $105.6
million, or 25.6%, primarily resulting from a 55 equivalent unit decrease in
company restaurants, partially offset by the increase in same-store sales.

Total costs of company restaurant sales as a percentage of company restaurant sales were 97.0% in 2020, 84.3% in 2019 and 84.7% in 2018 consisting of the following:


Product costs were 25.2% in 2020 and 24.4% in 2019 and 2018. For 2020, the
increase was due to increases in paper products due to the increase in delivery
and to-go orders related to the COVID-19 pandemic. For 2019, leverage gained
from increased pricing offset the impacts of commodity price increases.

Payroll and benefits were 43.7% in 2020, 38.8% in 2019 and 39.9% in 2018. The
2020 increase as a percentage of sales was primarily the result of sales
deleveraging caused by lower sales resulting from the COVID-19 pandemic. The
2020 increase included a 3.2 percentage point increase in management labor, 0.8
percentage point increase in team labor, and 0.3 percentage point increase in
fringe benefits. The 2019 decrease was primarily due to a 0.4 percentage point
decrease in payroll taxes and fringe benefits, a 0.5 percentage point decrease
in labor resulting from the impact of refranchising restaurants and a 0.1
percentage point decrease in workers' compensation costs related to claims
development.

Occupancy costs were 9.5% in 2020, 6.1% in 2019 and 5.6% in 2018. For 2020, the
increase as a percentage of sales was primarily due to the sales deleveraging
effect caused by the COVID-19 pandemic. Additionally, the impact of
refranchising of restaurants during 2019 where we owned the real estate
contributed to the rate increase. The 2019 increase was related to a 0.3
percentage point increase in rental costs primarily due to the impact of
refranchising restaurants and a 0.2 percentage point increase in general
liability costs primarily due to higher property insurance costs.

Other operating expenses consisted of the following amounts and percentages of company restaurant sales:

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                                                                                  Fiscal Year Ended
                                            December 30, 2020                     December 25, 2019                     December 26, 2018
                                                                               (Dollars in thousands)
Utilities                            $   5,148                4.4  %       $  10,359                3.4  %       $  14,347                3.5  %
Repairs and maintenance                  2,608                2.2  %           6,792                2.2  %           7,761                1.9  %
Marketing                                3,904                3.3  %          11,195                3.7  %          15,008                3.6  %

Other direct costs                      10,168                8.6  %          17,911                5.8  %          23,592                5.7  %
Other operating expenses             $  21,828               18.5  %       $  46,257               15.1  %       $  60,708               14.7  %



Other direct costs were higher as a percentage of sales for 2020 due to the
deleveraging effect of lower sales as well as higher delivery costs due to the
increase in delivery sales during the COVID-19 pandemic. For 2019, the increases
in repairs and maintenance as a percentage of company restaurant sales were
primarily due to additional costs related to the sale of company restaurants
sold to franchisees as part of our refranchising and development strategy.

Franchise Operations

Franchise and license revenue and costs of franchise and license revenue consisted of the following amounts and percentages of franchise and license revenue for the periods indicated:

                                                                                   Fiscal Year Ended
                                            December 30, 2020                      December 25, 2019                      December 26, 2018
                                                                                 (Dollars in thousands)
Royalties                            $   67,501               39.6  %       $  108,813               46.3  %       $  101,557               46.5  %
Advertising revenue                      53,745               31.5  %           81,144               34.5  %           78,308               35.9  %
Initial and other fees                    7,332                4.3  %            6,541                2.8  %            6,422                2.9  %
Occupancy revenue                        41,867               24.6  %           38,514               16.4  %           31,960               14.6  %
Franchise and license revenue        $  170,445              100.0  %       $  235,012              100.0  %       $  218,247              100.0  %

Advertising costs                    $   53,745               31.5  %       $   81,144               34.5  %       $   78,309               35.9  %
Occupancy costs                          26,732               15.7  %           25,806               11.0  %           22,285               10.2  %
Other direct costs                       13,871                8.1  %           13,376                5.7  %           13,702                6.3  %
Costs of franchise and license
revenue                              $   94,348               55.4  %       $  120,326               51.2  %       $  114,296               52.4  %



Royalties decreased by $41.3 million, or 38.0%, in 2020 primarily resulting from
a 30.9% decrease in domestic same-store sales. Additionally, we abated $6.0
million of royalties during the year to help our franchisees weather the impact
of the COVID-19 pandemic. Partially offsetting these decreases was an increase
of 36 equivalent units resulting from our refranchising and development strategy
in 2019. Royalties increased by $7.3 million, or 7.1%, in 2019 primarily
resulting from a 40 equivalent unit increase from the impact of our
refranchising and development strategy and a 2.0% increase in domestic
same-store sales. The average domestic royalty rate, including the impact of
abatements, was 3.86%, 4.22% and 4.17% for 2020, 2019 and 2018, respectively.

Advertising revenue decreased $27.4 million, or 33.8%, in 2020 resulting from
the decrease in same-store sales. Additionally, we abated $1.3 million of
advertising fees during the year. Partially offsetting these decreases was an
increase of 36 equivalent units resulting from our refranchising and development
strategy in 2019. Advertising revenue increased $2.8 million, or 3.6%, in 2019
resulting from the the increase in equivalent units and impact of the increase
in same-store sales. Initial and other fees increased $0.1 million, or 1.9%, as
the recognition of revenue on additional franchised units from the sale of
restaurants to franchisees exceeded the impact of less accelerated revenue
recognition during 2019 as a result of fewer franchised unit closures compared
to 2018.

Occupancy revenue increased $3.4 million, or 8.7%, in 2020 primarily resulting
from additional leases and subleases to franchisees as a result of our
refranchising and development strategy in 2019. Occupancy revenue increased by
$6.6 million, or 20.5%, in 2019 primarily resulting from the sale of restaurants
to franchisees.

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Costs of franchise and license revenue decreased $26.0 million, or 21.6%, in
2020. The decreases were primarily related to lower advertising costs, which
corresponds to the related advertising revenue decreases noted above. Occupancy
costs increased $0.9 million, or 3.6%, in 2020, primarily related to the sale of
leased company units to franchisees in the prior year, partially offset by lower
percentage rent expense as a result of the sales decreases. Other direct costs
increased $0.5 million, or 3.7%, primarily due to $1.5 million of bad debt
allowances resulting from actual and expected losses on franchise related
receivables due to the COVID-19 pandemic. As a result, costs of franchise and
license revenue as a percentage of franchise and license revenue increased to
55.4% for 2020 from 51.2% in 2019.

Costs of franchise and license revenue increased $6.0 million, or 5.3%, in 2019.
Advertising costs increased $2.8 million, or 3.6%. Occupancy costs increased
$3.5 million, or 15.8%. The changes to advertising costs and occupancy costs
were a result of the changes in the related revenues noted above. Other direct
costs decreased $0.3 million, or 2.4%. The decrease resulted primarily from
lower franchise administration costs. As a result, costs of franchise and
license revenue as a percentage of franchise and license revenue decreased to
51.2% in 2019 from 52.4% in 2018.

Other Operating Costs and Expenses


Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.

General and administrative expenses are comprised of the following:

                                                                               Fiscal Year Ended
                                                   December 30, 2020           December 25, 2019           December 26, 2018
                                                                                (In thousands)
Corporate administrative expenses                $           41,135          $           50,319          $           52,439
Share-based compensation                                      7,948                       6,694                       6,038
Incentive compensation                                        4,351                       9,425                       6,388
Deferred compensation valuation adjustments                   1,606                       2,580                      (1,037)
Total general and administrative expenses        $           55,040          $           69,018          $           63,828



Total general and administrative expenses decreased by $14.0 million, or 20.3%,
in 2020 and increased by $5.2 million, or 8.1%, in 2019. Corporate
administrative expenses decreased by $9.2 million in 2020 and decreased by $2.1
million in 2019. The 2020 decrease was primarily due to cost savings initiatives
related to the COVID-19 pandemic, including tax credits related to the CARES Act
of approximately $1.7 million and the rationalization of certain business costs
in connection with our refranchising and development strategy. The 2019 decrease
was primarily due to the rationalization of certain business costs in connection
with our refranchising and development strategy. Share-based compensation
increased by $1.3 million and $0.7 million in 2020 and 2019, respectively.
Incentive compensation decreased by $5.1 million in 2020 and increased by $3.0
million in 2019. The changes in share-based compensation and incentive
compensation for both periods primarily resulted from our performance against
plan metrics and as the result of modifications to certain 2018 and 2019
share-based compensation awards during the fourth quarter of 2020. See Note 12
to our Consolidated Financial Statements for further details on the
modifications. Changes in deferred compensation valuation adjustments have
offsetting gains or losses on the underlying nonqualified deferred plan
investments included as a component of other nonoperating (income) expense, net.

Depreciation and amortization is comprised of the following:

                                                                             Fiscal Year Ended
                                                 December 30, 2020           December 25, 2019           December 26, 2018
                                                                              (In thousands)
Depreciation of property and equipment         $           11,284          $           13,295          $           18,506
Amortization of finance right-of-use assets                 1,870                       2,991                       4,451
Amortization of intangible and other assets                 3,007                       3,560                       4,082
Total depreciation and amortization expense    $           16,161          $           19,846          $           27,039



In 2020 and 2019, the decrease in total depreciation and amortization expense
was primarily a result of the sale of owned company units to franchisees as part
of our refranchising and development strategy during 2019.

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Operating (gains), losses and other charges, net are comprised of the following:
                                                                              Fiscal Year Ended
                                                  December 30, 2020           December 25, 2019           December 26, 2018
                                                                               (In thousands)
Gains on sales of assets and other, net         $           (4,678)         $          (93,608)         $             (513)

Restructuring charges and exit costs                         2,403                       2,428                       1,575
Impairment charges                                           4,083                           -                       1,558
Operating (gains), losses and other charges,
net                                             $            1,808          $          (91,180)         $            2,620



Gains on sales of assets and other, net of $4.7 million for 2020 primarily
related to the sale of real estate. Gains on sales of assets and other, net of
$93.6 million for 2019 related to the sale of restaurants and real estate to
franchisees. Gains on sales of assets and other, net of $0.5 million for 2018
primarily related to $1.2 million of insurance settlement gains on fire-damaged
and hurricane-damaged restaurants, partially offset by $0.7 million of losses on
sales of company owned units to franchisees. See Note 13 to our Consolidated
Financial Statements for details on refranchisings.

Restructuring charges and exit costs were comprised of the following:

                                                                              Fiscal Year Ended
                                                  December 30, 2020           December 25, 2019           December 26, 2018
                                                                               (In thousands)
Exit costs                                      $              204          $              272          $              518
Severance and other restructuring charges                    2,199                       2,156                       1,057
Total restructuring and exit costs              $            2,403          $            2,428          $            1,575



During the year ended December 30, 2020, the Company permanently separated
approximately 50 support center staff resulting in increased severance and other
restructuring charges for the year. Severance and other restructuring charges
for 2019 and 2018 were primarily the result of positions eliminated as part of
our refranchising and development strategy.

Impairment charges of $4.1 million for 2020 were the result of assessments of
the recoverability of assets resulting from the impact of the COVID-19 pandemic.
Impairment charges of $1.6 million for 2018 primarily related to the impairment
of an underperforming unit.

Operating income was $6.7 million in 2020, $165.0 million in 2019 and $73.6 million in 2018.

Interest expense, net is comprised of the following:

                                                                             Fiscal Year Ended
                                                 December 30, 2020           December 25, 2019           December 26, 2018
                                                                              (In thousands)
Interest on credit facilities                  $            8,658          $           11,685          $           11,792
Interest on interest rate swaps                             3,160                         291                         307
Interest on finance lease liabilities                       3,129                       4,537                       6,354
Letters of credit and other fees                            1,259                       1,208                       1,288
Interest income                                               (96)                       (170)                       (146)
Total cash interest                                        16,110                      17,551                      19,595
Amortization of deferred financing costs                      875                         608                         607
Amortization of interest rate swap losses                     783                           -                           -
Interest accretion on other liabilities                       197                         388                         543
Total interest expense, net                    $           17,965          $           18,547          $           20,745


Interest expense, net decreased during 2020 and 2019 primarily due to a reduction in financing lease interest resulting from the sales of restaurants to franchisees during 2019.

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Other nonoperating (income) expense, net was income of $4.2 million for 2020,
income of $2.8 million for 2019 and expense of $0.6 million for 2018. The income
for 2020 includes losses on interest rate swaps of $7.4 million resulting from
the discontinuance of hedge accounting treatment on a portion of our interest
rate swaps and income of $10.3 million related to interest rate swap valuation
adjustments on dedesignated interest rate swaps subsequent to the
discontinuation of hedge accounting and $1.8 million in gains on deferred
compensation plan investments. The income for 2019 primarily resulted from gains
on deferred compensation plan investments. The expense for 2018 was primarily
the result of losses on deferred compensation plan investments, partially offset
by gains on lease terminations. For additional details related to the interest
rate swaps, see Note 9 to our Consolidated Financial Statements.

The provision for (benefit from) income taxes was a benefit of $2.0 million for
2020, expense of $31.8 million for 2019 and expense of $8.6 million for 2018.
The effective tax rate was 28.1% for 2020, 21.3% for 2019 and 16.4% for 2018.

For 2020, the difference in the overall effective rate from the U.S. statutory
rate was primarily due to state and foreign taxes and the generation of
employment credits. The 2020 rate was also impacted by a $0.9 million benefit
from the statutory rate differential due to a net operating loss carryback to a
prior year and an expense of $1.0 million from disallowed compensation
deductions.

For 2019, there was no significant difference between our effective tax rate and
the statutory tax rate of 21%. The impact of state taxes on the statutory rate
was partially offset by the generation of employment and foreign tax credits. In
addition, the 2019 rate benefited $2.0 million related to share-based
compensation and $2.0 million related to the completion of an Internal Revenue
Service federal income audit of the 2016 tax year.

The 2018 rate was primarily impacted by the statutory tax rate reduction under
the Tax Cuts and Jobs Act of 2017. For 2018, the difference in the overall
effective rate from the U.S. statutory rate was primarily due to state taxes and
the generation of employment and foreign tax credits. In addition, the 2018 rate
benefited $1.4 million related to share-based compensation.

Net income (loss) was a loss of $5.1 million for 2020, income of $117.4 million for 2019 and income of $43.7 million for 2018.

Liquidity and Capital Resources

Summary of Cash Flows


Our primary sources of liquidity and capital resources are cash generated
from operations and borrowings under our credit facility (as described below).
Principal uses of cash are operating expenses, capital expenditures and, prior
to the second quarter of 2020, the repurchase of shares of our common stock.

The following table presents a summary of our sources and uses of cash and cash equivalents for the periods indicated:

                                                                                    Fiscal Year Ended
                                                        December 30, 2020           December 25, 2019           December 26, 2018
                                                                                     (In thousands)
Net cash provided by (used in) operating activities   $           (3,137)         $           43,327          $           73,690
Net cash provided by (used in) investing activities                4,651                     104,969                     (32,017)
Net cash used in financing activities                               (994)                   (149,950)                    (41,630)
Increase (decrease) in cash and cash equivalents      $              520          $           (1,654)         $               43



Net cash flows used in operating activities were $3.1 million for the year ended
December 30, 2020 compared to net cash flows provided by operating activities of
$43.3 million for the year ended December 25, 2019. The decrease in cash flows
provided by (used in) operating activities was primarily due to the impacts of
the COVID-19 pandemic and the timing of prior year accrual payments. Net cash
flows provided by operating activities were $43.3 million for the year ended
December 25, 2019 compared to $73.7 million for the year ended December 26,
2018. The decrease in cash flows provided by operating activities was primarily
due to the reduction in equivalent units and the related runoff of liabilities
resulting from the sale of company restaurants. We believe that our estimated
cash flows from operations for 2021, combined with our capacity for additional
borrowings under our credit facility, will enable us to meet our anticipated
cash requirements and fund capital expenditures over the next twelve months.

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Net cash flows provided by investing activities were $4.7 million for the year
ended December 30, 2020. These cash flows are primarily proceeds from the sale
of real estate of $9.4 million and proceeds from the sale of investments of $2.9
million, partially offset by capital expenditures of $7.0 million and investment
purchases of $1.4 million. Net cash flows provided by investing activities were
$105.0 million for the year ended December 25, 2019. These cash flows are
primarily comprised of $129.7 million of proceeds from the sale of assets,
including $119.0 million from the sale of 105 restaurants and $10.7 million from
the sale of real estate. These cash flows are offset by capital expenditures of
$14.0 million and acquisitions of real estate of $11.3 million. Net cash flows
used in investing activities were $32.0 million for the year ended December 26,
2018. These cash flows are primarily comprised of capital expenditures of $22.0
million and acquisitions of restaurants and real estate of $10.4 million. Cash
flows for acquisitions include $8.1 million for the reacquisition of six
franchised restaurants, $1.8 million for real estate and $0.5 million related to
a prior year acquisition.
Our principal capital requirements have been largely associated with the
following:
                                                                              Fiscal Year Ended
                                                  December 30, 2020           December 25, 2019           December 26, 2018
                                                                               (In thousands)
Facilities                                      $            4,107          $            9,078          $            9,613
New construction                                                23                       2,019                       3,186
Remodeling                                                     992                       1,124                       4,525
Information technology                                       1,386                       1,060                       1,930
Other                                                          454                         694                       2,771
Capital expenditures (excluding acquisitions)   $            6,962          $           13,975          $           22,025



Cash flows used in financing activities were $1.0 million for the year ended
December 30, 2020, which included net debt repayments of $31.6 million, cash
payments for stock repurchases of $36.0 million offset by proceeds of $69.6
million from the issuance of common stock. Cash flows used in financing
activities were $150.0 million for the year ended December 25, 2019, which
included stock repurchases of $94.5 million and net debt repayments of $49.0
million. Cash flows used in financing activities were $41.6 million for the year
ended December 26, 2018, which included stock repurchases of $61.2 million and
the purchase of a $6.8 million equity forward contract related to an accelerated
share repurchase agreement we entered into in 2018, partially offset by net debt
borrowings of $24.3 million.
Our working capital deficit was $28.5 million at December 30, 2020 compared with
$42.8 million at December 25, 2019. The decrease in working capital deficit was
primarily related to lower payables and accruals resulting from the impacts of
the COVID-19 pandemic. We are able to operate with a substantial working capital
deficit because (1) restaurant operations and most food service operations are
conducted primarily on a cash and cash equivalent basis with a low level of
accounts receivable, (2) rapid turnover allows a limited investment in
inventories and (3) accounts payable for food, beverages and supplies usually
become due after the receipt of cash from the related sales.

Credit Facility


We have a $375 million senior secured revolver due October, 26, 2022. As of
December 30, 2020, we had outstanding revolver loans of $210.0 million and
outstanding letters of credit under the senior secured revolver of $17.3
million. These balances resulted in availability of $147.7 million under the
credit facility prior to considering the liquidity covenant in our credit
facility. Factoring in the liquidity covenant, our availability was
$81.6 million. The credit facility is available for working capital, capital
expenditures and other general corporate purposes. The credit facility is
guaranteed by Denny's and its material subsidiaries and is secured by assets of
Denny's and its subsidiaries, including the stock of its subsidiaries (other
than our insurance captive subsidiary). During the year, we executed two
amendments to our credit agreement, which modified the agreement as described
below.

On May 13, 2020, we entered into an amendment (the "Second Amendment") to our
credit agreement. As a result of the Second
Amendment, beginning May 13, 2020 until the date of delivery of our financial
statements for the fiscal quarter ending June 30,
2021, the interest rate of the amended credit agreement was increased to LIBOR
plus 3.00% and the commitment fee, paid on the unused portion of the credit
facility, was increased to 0.40%. During this period, we also had supplemental
monthly reporting obligations to our lenders and were prohibited from paying
dividends and making stock repurchases and other general investments.
Additionally, capital expenditures were to be restricted to $10 million in the
aggregate from May 13, 2020 through the fiscal quarter ending March 31, 2021.

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The Second Amendment temporarily waived certain financial covenants. The
consolidated fixed charge coverage ratio was
waived until the fiscal quarter ending March 31, 2021, at which point the
covenant level was to revert to a minimum of 1.50x. The consolidated leverage
ratio covenant was waived until the fiscal quarter ending March 31, 2021, at
which point the covenant level was to increase from 4.00x to 4.50x, stepping
down to 4.25x in the second quarter of 2021 and 4.00x in the third fiscal
quarter of 2021 and thereafter. In addition, the Second Amendment added a
monthly minimum liquidity covenant, defined as the sum of unrestricted cash and
revolver availability, ranging from $60 million to $70 million, commencing on
May 13, 2020 to May 26, 2021.

On December 15, 2020, we executed an additional amendment (the "Third
Amendment") to our credit agreement. Commencing with the effective date of the
Third Amendment until the date of delivery of the financial statements for the
fiscal quarter ending December 29, 2021, the interest rate shall remain LIBOR
plus 3.00%. As of the effective date of the Third Amendment, the accordion
feature is removed, and the total credit facility commitment is $375 million and
will be reduced to $350 million on July 1, 2021. Commencing with the effective
date of the Third Amendment until the date of delivery of the financial
statements for the fiscal quarter ending September 29, 2021, the Company will
continue to have supplemental monthly reporting obligations to its lenders and
will be prohibited from paying dividends and making stock repurchases and other
general investments. Additionally, existing restrictions on capital expenditures
of $10 million in the aggregate will remain in effect through March 31, 2021, at
which point the restrictions will expand to $12 million in the aggregate through
September 29, 2021.

The Third Amendment temporarily waives certain financial covenants. The
consolidated fixed charge coverage ratio covenant is waived through March 31,
2021, at which point the covenant level will be a minimum of 1.00x, adjusting to
1.25x on July 1, 2021, and 1.50x on September 30, 2021 and thereafter. The
consolidated leverage ratio covenant is waived through March 31, 2021, at which
point the covenant level will be a maximum of 5.25x, stepping down to 4.75x on
July 1, 2021, and 4.00x on September 30, 2021 and thereafter. In addition, the
Third Amendment maintains a monthly minimum liquidity covenant, defined as the
sum of unrestricted cash and revolver availability, of $70 million, commencing
on the effective date until the date of delivery of the financial statements for
the fiscal quarter ending September 29, 2021. We were in compliance with all
financial covenants as of December 30, 2020.

Prior to considering the impact of our interest rate swaps, described below, the
weighted-average interest rate on outstanding revolver loans was 3.15% as of
December 30, 2020. Taking into consideration our interest rate swaps that are
designated as cash flow hedges, the weighted-average interest rate of
outstanding revolver loans was 5.01% as of December 30, 2020.

Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted cash flows of
our floating rate debt. See Part II Item 7A. Quantitative and Qualitative
Disclosures About Market Risk for details on our interest rate swaps.
Contractual Obligations

Our future contractual obligations and commitments at December 30, 2020
consisted of the following:

                                                                          Payments Due by Period
                                                            Less than 1                                               5 Years and
                                           Total               Year             1-2 Years          3-4 Years           Thereafter
                                                                              (In thousands)
Long-term debt                          $ 210,000          $        -      

$ 210,000 $ - $ - Finance lease obligations (a)

              38,556               4,737              8,121              6,334               19,364
Operating lease obligations               209,824              25,184             42,527             36,074              106,039
Interest obligations (a)                   19,279              10,516              8,763                  -                    -
Defined benefit plan obligations            2,307                 716                956                222                  413
Purchase obligations (b)                  155,631             155,631                  -                  -                    -
Unrecognized tax benefits (c)               1,047                   -                  -                  -                    -
Total                                   $ 636,644$  196,784$ 270,367$  42,630$   125,816



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(a)Interest obligations represent payments related to our long-term debt
outstanding at December 30, 2020. For long-term debt with variable rates, we
have used the rate applicable at December 30, 2020 to project interest over the
periods presented in the table above, taking into consideration the impact of
the interest rate swaps that are designated as cash flow hedges for the
applicable periods. The finance lease obligation amounts above are inclusive of
interest.
(b)Purchase obligations include amounts payable for company and franchised
restaurants under purchase contracts for food and non-food products. Many of
these agreements do not obligate us to purchase any specific volumes and
include provisions that would allow us to cancel such agreements with
appropriate notice. For agreements with cancellation provisions, amounts
included in the table above represent our estimate of purchase obligations
during the periods presented if we were to cancel these contracts with
appropriate notice.
(c)Unrecognized tax benefits are related to uncertain tax positions. As we are
not able to reasonably estimate the timing or amount of these payments, the
related balances have not been reflected in this table.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates


Our reported results are impacted by the application of certain accounting
policies that require us to make subjective or complex judgments. These
judgments involve estimations of the effect of matters that are inherently
uncertain and may significantly impact our quarterly or annual results of
operations or financial condition. Changes in the estimates and judgments could
significantly affect our results of operations and financial condition and cash
flows in future years. Descriptions of what we consider to be our most
significant critical accounting policies are as follows:

Self-insurance liabilities. We are self-insured for a portion of our losses
related to certain medical plans, workers' compensation, general, product and
automobile insurance liability. In estimating these liabilities, we utilize
independent actuarial estimates of expected losses, which are based on
statistical analysis of historical data. Our estimates of expected losses are
adjusted over time based on changes to the actual costs of the underlying
claims, which could result in additional expense or reversal of expense
previously recorded. See Note 2 to our Consolidated Financial Statements for a
further discussion of our policies regarding self-insurance liabilities.

Impairment of long-lived assets. We evaluate our long-lived assets for
impairment at the restaurant level on a quarterly basis, when assets are
identified as held for sale or whenever changes or events indicate that the
carrying value may not be recoverable. For assets identified as held for sale,
we use the market approach and consider proceeds from similar asset sales. We
assess impairment of restaurant-level assets based on the operating cash flows
of the restaurant, expected proceeds from the sale of assets and our plans for
restaurant closings. For underperforming assets, we use the income approach to
determine both the recoverability and estimated fair value of the assets. To
estimate future cash flows, we make certain assumptions about expected future
operating performance, such as revenue growth, operating margins, risk-adjusted
discount rates, and future economic and market conditions. If the long-lived
assets of a restaurant are not recoverable based upon estimated future,
undiscounted cash flows, we write the assets down to their fair value. If these
estimates or their related assumptions change in the future, we may be required
to record additional impairment charges. See Note 2 and Note 14 to our
Consolidated Financial Statements for further discussion of our policies
regarding impairment of long-lived assets.

Dedesignation of Interest Rate Hedges. We estimated the amount reclassified from
accumulated other comprehensive loss, net to other nonoperating expense
(income), net due to the dedesignation of certain hedge relationships as a
result of cash flows from certain interest rate swaps no longer being probable
of occurring. In determining this estimate, we utilized credit default curve and
recovery rate assumptions applied to forecasted balances of variable rate debt.
The credit default curve and recovery rate assumptions are based on industry
data for companies with similar credit and risk profiles. To estimate forecasted
balances of variable rate debt, we make certain assumptions about expected
future operating performance, such as revenue growth, operating margins, uses of
cash, and future economic and market conditions. See Note 9 to our Consolidated
Financial Statements for a further discussion of our policies regarding interest
rate swap dedesignation.

Income taxes. We make certain estimates and judgments in the calculation of our
provision for income taxes, in the resulting tax liabilities, and in the
recoverability of deferred tax assets. We record valuation allowances against
our deferred tax assets, when necessary. Realization of deferred tax assets is
dependent on future taxable earnings and is therefore uncertain. We assess the
likelihood that our deferred tax assets in each of the jurisdictions in which we
operate will be recovered from future taxable income. Deferred tax assets do not
include future tax benefits that we deem likely not to be realized.

We record a liability for unrecognized tax benefits resulting from more likely
than not tax positions taken, or expected to be taken, in an income tax return.
We recognize any interest and penalties related to unrecognized tax benefits in
income tax
                                       36
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expense. Assessment of uncertain tax positions requires judgments relating to
the amounts, timing and likelihood of resolution. See Note 15 to our
Consolidated Financial Statements for a further discussion of our policies
regarding income taxes.
Recent Accounting Pronouncements

See the Accounting Standards to be Adopted section of Note 2 to our Consolidated Financial Statements for further details of recent accounting pronouncements.

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