10-Q 1 q1201710-q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 29, 2017
Commission File Number 0-18051
DENNY’S CORPORATION
(Exact name of registrant as specified in its charter)

Delaware |  | 13-3487402
(State or other jurisdiction of |  | (I.R.S. Employer
incorporation or organization |  | Identification No.)

203 East Main Street
Spartanburg, South Carolina 29319-0001
(Address of principal executive offices)
(Zip Code)
(864) 597-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer | þ | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | Emerging growth company | ¨
|  |  |  | (Do not check if a smaller reporting company) |  |  |  |  |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of April 26, 2017, 69,863,607 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

TABLE OF CONTENTS

| Page
PART I - FINANCIAL INFORMATION |
Item 1. Financial Statements |
Condensed Consolidated Balance Sheets (Unaudited) | 3
Condensed Consolidated Statements of Income (Unaudited) | 4
Condensed Consolidated Statements of Comprehensive Income (Unaudited) | 5
Condensed Consolidated Statement of Shareholders' Deficit (Unaudited) | 6
Condensed Consolidated Statements of Cash Flows (Unaudited) | 7
Notes to Condensed Consolidated Financial Statements (Unaudited) | 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 24
Item 4. Controls and Procedures | 24
PART II - OTHER INFORMATION |
Item 1. Legal Proceedings | 24
Item 1A. Risk Factors | 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 25
Item 6. Exhibits | 26
Signatures | 27

2

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Denny’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)

| March 29, 2017 |  | December 28, 2016
| (In thousands)
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 1,740 |  |  | $ | 2,592 |
Receivables | 18,738 |  |  | 19,841 |
Inventories | 3,088 |  |  | 3,046 |
Assets held for sale | 1,754 |  |  | 1,020 |
Prepaid and other current assets | 6,277 |  |  | 9,408 |
Total current assets | 31,597 |  |  | 35,907 |
Property, net of accumulated depreciation of $255,163 and $255,185, respectively | 133,141 |  |  | 133,102 |
Goodwill | 35,607 |  |  | 35,233 |
Intangible assets, net | 54,703 |  |  | 54,493 |
Deferred financing costs, net | 1,787 |  |  | 1,936 |
Deferred income taxes | 23,845 |  |  | 17,683 |
Other noncurrent assets | 27,479 |  |  | 27,797 |
Total assets | $ | 308,159 |  |  | $ | 306,151 |
Liabilities |  |  |  |  |
Current liabilities: |  |  |  |  |
Current maturities of capital lease obligations | $ | 3,319 |  |  | $ | 3,285 |
Accounts payable | 21,030 |  |  | 25,289 |
Other current liabilities | 52,719 |  |  | 64,796 |
Total current liabilities | 77,068 |  |  | 93,370 |
Long-term liabilities: |  |  |  |  |
Long-term debt, less current maturities | 230,000 |  |  | 218,500 |
Capital lease obligations, less current maturities | 24,481 |  |  | 23,806 |
Liability for insurance claims, less current portion | 14,347 |  |  | 14,853 |
Other noncurrent liabilities | 26,945 |  |  | 26,734 |
Total long-term liabilities | 295,773 |  |  | 283,893 |
Total liabilities | 372,841 |  |  | 377,263 |
Commitments and contingencies |  |  |
Shareholders' equity (deficit) |  |  |  |  |
Common stock $0.01 par value; shares authorized - 135,000; March 29, 2017: 107,536 shares issued and 70,241 shares outstanding; December 28, 2016: 107,115 shares issued and 71,358 shares outstanding | $ | 1,075 |  |  | $ | 1,071 |
Paid-in capital | 587,369 |  |  | 577,951 |
Deficit | (366,050 | ) |  | (382,843 | )
Accumulated other comprehensive loss, net of tax | (2,016 | ) |  | (1,407 | )
Shareholders’ equity before treasury stock | 220,378 |  |  | 194,772 |
Treasury stock, at cost, 37,295 and 35,757 shares, respectively | (285,060 | ) |  | (265,884 | )
Total shareholders' deficit | (64,682 | ) |  | (71,112 | )
Total liabilities and shareholders' deficit | $ | 308,159 |  |  | $ | 306,151 |

See accompanying notes
3

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands, except per share amounts)
Revenue: |  |  |
Company restaurant sales | $ | 93,779 |  |  | $ | 90,386 |
Franchise and license revenue | 34,131 |  |  | 34,256 |
Total operating revenue | 127,910 |  |  | 124,642 |
Costs of company restaurant sales: |  |  |
Product costs | 23,133 |  |  | 22,653 |
Payroll and benefits | 37,397 |  |  | 34,461 |
Occupancy | 4,734 |  |  | 4,800 |
Other operating expenses | 12,571 |  |  | 12,197 |
Total costs of company restaurant sales | 77,835 |  |  | 74,111 |
Costs of franchise and license revenue | 9,746 |  |  | 10,003 |
General and administrative expenses | 17,509 |  |  | 16,927 |
Depreciation and amortization | 5,736 |  |  | 5,493 |
Operating (gains), losses and other charges, net | 783 |  |  | (125 | )
Total operating costs and expenses, net | 111,609 |  |  | 106,409 |
Operating income | 16,301 |  |  | 18,233 |
Interest expense, net | 3,541 |  |  | 2,774 |
Other nonoperating (income) expense, net | (357 | ) |  | 27 |
Net income before income taxes | 13,117 |  |  | 15,432 |
Provision for income taxes | 4,744 |  |  | 5,478 |
Net income | $ | 8,373 |  |  | $ | 9,954 |
Basic net income per share | $ | 0.12 |  |  | $ | 0.13 |
Diluted net income per share | $ | 0.11 |  |  | $ | 0.13 |
Basic weighted average shares outstanding | 71,004 |  |  | 77,060 |
Diluted weighted average shares outstanding | 73,241 |  |  | 78,877 |

See accompanying notes
4

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Net income | $ | 8,373 |  |  | $ | 9,954 |
Other comprehensive income, net of tax: |  |  |
Minimum pension liability adjustment, net of tax of $9 and $8 | 14 |  |  | 13 |
Recognition of unrealized loss on hedge transactions, net of tax of $(397) and $(2,997) | (623 | ) |  | (4,693 | )
Other comprehensive loss | (609 | ) |  | (4,680 | )
Total comprehensive income | $ | 7,764 |  |  | $ | 5,274 |

See accompanying notes
5

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders’ Deficit
(Unaudited)

| Common Stock |  | Treasury Stock |  | Paid-in Capital |  | Deficit |  | Accumulated Other Comprehensive Loss, Net |  | Total Shareholders’ Deficit
| Shares |  | Amount |  | Shares |  | Amount |  |  |  |
| (In thousands)
Balance, December 28, 2016 | 107,115 |  |  | $ | 1,071 |  |  | (35,757 | ) |  | $ | (265,884 | ) |  | $ | 577,951 |  |  | $ | (382,843 | ) |  | $ | (1,407 | ) |  | $ | (71,112 | )
Cumulative effect adjustment | — |  |  | — |  |  | — |  |  | — |  |  | 551 |  |  | 8,420 |  |  | — |  |  | 8,971 |
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 8,373 |  |  | — |  |  | 8,373 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (609 | ) |  | (609 | )
Share-based compensation on equity classified awards | — |  |  | — |  |  | — |  |  | — |  |  | 1,857 |  |  | — |  |  | — |  |  | 1,857 |
Purchase of treasury stock | — |  |  | — |  |  | (984 | ) |  | (12,292 | ) |  | — |  |  | — |  |  | — |  |  | (12,292 | )
Equity forward contract settlement | — |  |  | — |  |  | (554 | ) |  | (6,884 | ) |  | 6,884 |  |  | — |  |  | — |  |  | — |
Issuance of common stock for share-based compensation | 396 |  |  | 4 |  |  | — |  |  | — |  |  | (4 | ) |  | — |  |  | — |  |  | — |
Exercise of common stock options | 25 |  |  | — |  |  | — |  |  | — |  |  | 130 |  |  | — |  |  | — |  |  | 130 |
Balance, March 29, 2017 | 107,536 |  |  | $ | 1,075 |  |  | (37,295 | ) |  | $ | (285,060 | ) |  | $ | 587,369 |  |  | $ | (366,050 | ) |  | $ | (2,016 | ) |  | $ | (64,682 | )

See accompanying notes
6

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Cash flows from operating activities: |  |  |
Net income | $ | 8,373 |  |  | $ | 9,954 |
Adjustments to reconcile net income to cash flows provided by operating activities: |  |  |
Depreciation and amortization | 5,736 |  |  | 5,493 |
Operating (gains), losses and other charges, net | 783 |  |  | (125 | )
Amortization of deferred financing costs | 148 |  |  | 148 |
(Gain) loss on early extinguishments of debt and leases | 73 |  |  | (8 | )
Deferred income tax expense | 3,225 |  |  | 3,722 |
Share-based compensation | 1,973 |  |  | 1,948 |
Changes in assets and liabilities: |  |  |
Decrease (increase) in assets: |  |  |
Receivables | 3,345 |  |  | 2,634 |
Inventories | (41 | ) |  | 256 |
Other current assets | 3,131 |  |  | 4,587 |
Other assets | (2,312 | ) |  | (647 | )
Increase (decrease) in liabilities: |  |  |
Accounts payable | (2,277 | ) |  | 1,023 |
Accrued salaries and vacations | (11,584 | ) |  | (16,433 | )
Accrued taxes | (215 | ) |  | (273 | )
Other accrued liabilities | (1,204 | ) |  | (2,926 | )
Other noncurrent liabilities | (1,133 | ) |  | (684 | )
Net cash flows provided by operating activities | 8,021 |  |  | 8,669 |
Cash flows from investing activities: |  |  |
Capital expenditures | (3,017 | ) |  | (3,831 | )
Acquisition of restaurants and real estate | (3,800 | ) |  | (1,476 | )
Proceeds from disposition of property | 252 |  |  | 1,581 |
Collections on notes receivable | 612 |  |  | 401 |
Issuance of notes receivable | (1,010 | ) |  | (219 | )
Net cash flows used in investing activities | (6,963 | ) |  | (3,544 | )
Cash flows from financing activities: |  |  |
Revolver borrowings | 31,000 |  |  | 18,500 |
Revolver payments | (19,500 | ) |  | (12,500 | )
Long-term debt payments | (826 | ) |  | (756 | )
Proceeds from exercise of stock options | 130 |  |  | 290 |
Purchase of treasury stock | (11,742 | ) |  | (3,832 | )
Net bank overdrafts | (972 | ) |  | (4,361 | )
Net cash flows used in financing activities | (1,910 | ) |  | (2,659 | )
Increase (decrease) in cash and cash equivalents | (852 | ) |  | 2,466 |
Cash and cash equivalents at beginning of period | 2,592 |  |  | 1,671 |
Cash and cash equivalents at end of period | $ | 1,740 |  |  | $ | 4,137 |

See accompanying notes
7

Denny’s Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Introduction and Basis of Presentation
Denny’s Corporation, or Denny’s, is one of America’s largest full-service restaurant chains based on number of restaurants. At March 29, 2017, the Denny's brand consisted of 1,731 restaurants, 1,559 of which were franchised/licensed restaurants and 172 of which were company operated.
Our unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, certain information and notes normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. In our opinion, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. Such adjustments are of a normal and recurring nature. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 28, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2016. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 27, 2017.
Note 2. Summary of Significant Accounting Policies
Newly Adopted Accounting Standards
Effective December 29, 2016, we adopted Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows.
As required by the guidance, excess tax benefits recognized on share-based compensation expense are reflected on a prospective basis in our condensed consolidated statements of income as a component of the provision for income taxes rather than paid-in capital. The cumulative-effect adjustment to retained earnings from previously unrecognized excess tax benefits resulted in an $8.8 million increase in deferred tax assets and a decrease to opening deficit.
In addition, we have elected to account for forfeitures as they occur. The cumulative-effect adjustment to retained earnings from previously estimated forfeitures resulted in a $0.4 million increase to opening deficit, a $0.2 million increase in deferred tax assets and a $0.6 million increase to additional paid-in capital. As allowed by the update, on a retrospective basis, cash flows related to excess tax benefits recognized on stock-based compensation expense are classified as operating activities in the condensed consolidated statements of cash flows. There was no material impact on the prior periods retrospectively adjusted. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as financing activites.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The new guidance simplifies the subsequent measurement of goodwill by eliminating the second step of the two-step impairment test. Impairment is measured based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. We early adopted ASU 2017-04 as of March 29, 2017 on a prospective basis. The adoption of this guidance did not have any impact on our consolidated financial statements.
8

Accounting Standards to be Adopted
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The new guidance clarifies the principles used to recognize revenue for all entities and requires companies to recognize revenue when it transfers goods or service to a customer in an amount that reflects the consideration to which a company expects to be entitled. The FASB has subsequently amended this guidance by issuing additional ASUs that provide clarification and further guidance around areas identified as potential implementation issues, including principal versus agent considerations, licensing and identifying performance obligations, assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach upon adoption. All of the standards are effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018). The guidance allows for either a retrospective or cumulative effect transition method with early application permitted. The guidance is not expected to impact the recognition of company restaurant sales or royalties from franchised restaurants. Upon adoption, initial franchise fees, which are currently recognized upon the opening of a franchise restaurant, are expected to be deferred and recognized over the term of the underlying franchise agreement. We are currently evaluating the impact this guidance will have on the recognition of other transactions on our consolidated financial statements, including our advertising arrangements with franchisees currently reported on a net versus gross basis in our consolidated statements of earnings, and the effect it will have on our disclosures. We have not yet selected a transition method.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The new guidance requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. We are currently evaluating the impact the adoption of this guidance will have on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The new guidance replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform financial statement users of credit loss estimates. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019 (our fiscal 2020) with early adoption permitted for annual and interim periods beginning after December 15, 2018 (our fiscal 2019). We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which provides guidance for accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018 (our fiscal 2019) with early adoption permitted. The guidance will be adopted using a modified retrospective approach. Based on a preliminary assessment, we expect the adoption will result in a significant increase in the assets and liabilities on our consolidated balance sheets, as most of our operating lease commitments will be recognized as operating lease liabilities and right-of-use assets. We are continuing our evaluation, which may identify additional impacts this standard will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”. The new guidance addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied using a retrospective transition method to each period presented. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
9

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The new guidance clarifies the definition of a business. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”. The new guidance requires an entity to report the service cost component in the same line on the income statement as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. ASU 2017-07 is effective for annual and interim periods beginning after December 15, 2017 (our fiscal 2018) with early adoption permitted. The guidance is to be applied prospectively. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
We reviewed all other newly issued accounting pronouncements and concluded that they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements as a result of future adoption.
Note 3. Receivables
Receivables were comprised of the following:

| March 29, 2017 |  | December 28, 2016
| (In thousands)
Current assets: |  |  |
Receivables: |  |  |
Trade accounts receivable from franchisees | $ | 9,943 |  |  | $ | 10,513 |
Financing receivables from franchisees | 4,978 |  |  | 2,804 |
Vendor receivables | 1,630 |  |  | 3,865 |
Credit card receivables | 1,342 |  |  | 1,678 |
Other | 1,125 |  |  | 1,261 |
Allowance for doubtful accounts | (280 | ) |  | (280 | )
Total current receivables, net | $ | 18,738 |  |  | $ | 19,841 |
Noncurrent assets (included as a component of other noncurrent assets): |  |  |
Financing receivables from franchisees | $ | 638 |  |  | $ | 732 |

The $2.2 million increase in financing receivables from franchisees is primarily the result of a short-term franchisee note receivable related to the sale of real estate.
Note 4. Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill.

| (In thousands)
Balance, December 28, 2016 | $ | 35,233 |
Additions related to acquisition | 374 |
Balance, March 29, 2017 | $ | 35,607 |

10

Other intangible assets were comprised of the following:

| March 29, 2017 |  | December 28, 2016
| Gross Carrying Amount |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
| (In thousands)
Intangible assets with indefinite lives: |  |  |  |  |  |  |
Trade names | $ | 44,077 |  |  | $ | — |  |  | $ | 44,076 |  |  | $ | — |
Liquor licenses | 166 |  |  | — |  |  | 166 |  |  | — |
Intangible assets with definite lives: |  |  |  |  |  |  |
Franchise and license agreements | 190 |  |  | 188 |  |  | 190 |  |  | 186 |
Reacquired franchise rights | 12,090 |  |  | 1,632 |  |  | 11,498 |  |  | 1,251 |
Intangible assets | $ | 56,523 |  |  | $ | 1,820 |  |  | $ | 55,930 |  |  | $ | 1,437 |

During the quarter ended March 29, 2017, we acquired three franchised restaurants for $1.4 million, of which $0.6 million was allocated to reacquired franchise rights, $0.5 million to property and $0.4 million to goodwill. In addition, we recorded $0.4 million of capital leases in connection with the acquired franchised restaurants. We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on Level 3 fair value estimates.
Note 5. Other Current Liabilities
Other current liabilities consisted of the following:

| March 29, 2017 |  | December 28, 2016
| (In thousands)
Accrued salaries and vacation | $ | 15,757 |  |  | $ | 27,056 |
Accrued insurance, primarily current portion of liability for insurance claims | 6,260 |  |  | 6,651 |
Accrued taxes | 7,192 |  |  | 7,407 |
Accrued advertising | 8,539 |  |  | 8,051 |
Gift cards | 4,461 |  |  | 5,474 |
Other | 10,510 |  |  | 10,157 |
Other current liabilities | $ | 52,719 |  |  | $ | 64,796 |

Note 6. Operating (Gains), Losses and Other Charges, Net
Operating (gains), losses and other charges, net are comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Software implementation costs | 2,124 |  |  | — |
Gains on sales of assets and other, net | (1,440 | ) |  | (644 | )
Restructuring charges and exit costs | 99 |  |  | 519 |
Operating (gains), losses and other charges, net | $ | 783 |  |  | $ | (125 | )

11

Software implementation costs of $2.1 million for the quarter ended March 29, 2017 were the result of our investment in a new cloud-based ERP system. Gains on sales of assets and other, net of $1.4 million for the quarter ended March 29, 2017 primarily related to real estate sold to a franchisee.
Restructuring charges and exit costs were comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Exit costs | $ | 31 |  |  | $ | 151 |
Severance and other restructuring charges | 68 |  |  | 368 |
Total restructuring charges and exit costs | $ | 99 |  |  | $ | 519 |

The components of the change in accrued exit cost liabilities are as follows:

| (In thousands)
Balance, December 28, 2016 | $ | 1,896 |
Exit costs (1) | 31 |
Payments, net of sublease receipts | (875 | )
Interest accretion | 28 |
Balance, March 29, 2017 | 1,080 |
Less current portion included in other current liabilities | 246 |
Long-term portion included in other noncurrent liabilities | $ | 834 |

(1) | Included as a component of operating (gains), losses and other charges, net.

As of March 29, 2017 and December 28, 2016, we had accrued severance and other restructuring charges of $0.3 million and $0.4 million, respectively. The balance as of March 29, 2017 is expected to be paid during the next 12 months.
Note 7. Fair Value of Financial Instruments
Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:

| Total |  | Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Valuation Technique
| (In thousands) |  |
Fair value measurements as of March 29, 2017: |  |  |  |  |  |  |  |  |
Deferred compensation plan investments (1) | $ | 11,792 |  |  | $ | 11,792 |  |  | $ | — |  |  | $ | — |  |  | market approach
Interest rate swaps, net (2) | (1,776 | ) |  | — |  |  | (1,776 | ) |  | — |  |  | income approach
Total | $ | 10,016 |  |  | $ | 11,792 |  |  | $ | (1,776 | ) |  | $ | — |  |  |
Fair value measurements as of December 28, 2016: |  |  |  |  |  |  |  |  |
Deferred compensation plan investments (1) | $ | 11,248 |  |  | $ | 11,248 |  |  | $ | — |  |  | $ | — |  |  | market approach
Interest rate swaps (2) | (756 | ) |  | — |  |  | (756 | ) |  | — |  |  | income approach
Total | $ | 10,492 |  |  | $ | 11,248 |  |  | $ | (756 | ) |  | $ | — |  |  |

(1) | The fair values of our deferred compensation plan investments are based on the closing market prices of the elected investments.

(2) | The fair values of our interest rate swaps are based upon Level 2 inputs, which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. See Note 8 for details on the interest rate swaps.

12

Those assets and liabilities measured at fair value on a nonrecurring basis are summarized below:

| Significant Other Observable Inputs (Level 2) |  | Impairment Charges |  | Valuation Technique
| (In thousands) |  |
Fair value measurements as of March 29, 2017: |  |  |  |  |
Assets held for sale (1) | $ | 1,754 |  |  | $ | — |  |  | market approach
Fair value measurements as of December 28, 2016: |  |  |  |  |
Assets held for sale (1) | $ | 1,020 |  |  | $ | 1,098 |  |  | market approach

(1) | As of March 29, 2017 and December 28, 2016, assets were classified as assets held for sale and, if necessary, were written down to their fair value. The fair value of assets held for sale is based upon Level 2 inputs, which include sales agreements.

Note 8. Long-Term Debt
Denny's Corporation and certain of its subsidiaries have a credit facility consisting of a five-year $325 million senior secured revolver (with a $30 million letter of credit sublimit). As of March 29, 2017, we had outstanding revolver loans of $230.0 million and outstanding letters of credit under the senior secured revolver of $22.4 million. These balances resulted in availability of $72.6 million under the revolving facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.61% and 2.45% as of March 29, 2017 and December 28, 2016, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 2.78% and 2.74% as of March 29, 2017 and December 28, 2016, respectively.
A commitment fee of 0.25% is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was set at LIBOR plus 175 basis points as of March 29, 2017. The maturity date for the credit facility is March 30, 2020.
The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by the Company and its material subsidiaries and is secured by assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the cash flows of our floating rate debt. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on specific notional debt obligations.
Based on the interest rate as determined by our consolidated leverage ratio in effect as of March 29, 2017, under the terms of the swaps, we will pay the following fixed rates on the notional amounts noted:

Period Covered |  | Notional Amount |  | Fixed Rate
|  | (In thousands) |  |
March 31, 2015 - March 29, 2018 |  | $ | 120,000 |  |  | 2.88 | %
March 29, 2018 - March 31, 2025 |  | 170,000 |  |  | 4.19 | %
April 1, 2025 - March 31, 2026 |  | 50,000 |  |  | 4.21 | %

13

As of March 29, 2017, the fair value of the interest rate swaps was a net liability of $1.8 million, which is comprised of assets of less than $0.1 million recorded as a component of other noncurrent assets and liabilities of $1.8 million recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. See Note 14 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.
Note 9. Defined Benefit Plans
During the second quarter of 2016, we completed the liquidation of the Advantica Pension Plan (the “Pension Plan”).
The components of net periodic benefit cost were as follows:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Pension Plan: |  |  |
Service cost | $ | — |  |  | $ | 105 |
Net periodic benefit cost | $ | — |  |  | $ | 105 |
Other Defined Benefit Plans: |  |  |
Interest cost | $ | 21 |  |  | $ | 23 |
Amortization of net loss | 23 |  |  | 21 |
Net periodic benefit cost | $ | 44 |  |  | $ | 44 |

We made contributions of less than $0.1 million to our other defined benefit plans during both the quarter ended March 29, 2017 and the quarter ended March 30, 2016. We expect to contribute $0.1 million to our other defined benefit plans over the remainder of fiscal 2017.
Additional minimum pension liability, net of tax, of $0.9 million related to our other defined benefit plans is reported as a component of accumulated other comprehensive loss in our Condensed Consolidated Statement of Shareholders’ Equity as of both March 29, 2017 and December 28, 2016, respectively.
Note 10. Share-Based Compensation
Refer to Note 2 for the impact of the adoption of ASU 2016-09. Total share-based compensation cost included as a component of net income was as follows:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Performance share awards | $ | 1,940 |  |  | $ | 1,734 |
Restricted stock units for board members | 33 |  |  | 214 |
Total share-based compensation | $ | 1,973 |  |  | $ | 1,948 |

14

Performance Share Awards
In January 2017, we granted certain employees approximately 0.3 million performance shares that vest based on the total shareholder return (“TSR”) of our common stock compared to the TSRs of a group of peer companies and 0.3 million performance shares that vest based on our Adjusted EBITDA growth rate, as defined under the terms of the award. As the TSR based performance shares contain a market condition, a Monte Carlo valuation was used to determine the grant date fair value of $13.05 per share. The performance shares based on the Adjusted EBITDA growth rate have a grant date fair value of $12.17 per share, the market value of our common stock on the date of grant. The awards granted to our named executive officers also contain a performance condition based on the attainment of an operating measure for the fiscal year ended December 27, 2017. The performance period for these performance shares is the three year fiscal period beginning December 29, 2016 and ending December 25, 2019. They will vest and be earned (from 0% to 150% of the target award for each such increment) at the end of the performance period.
During the quarter ended March 29, 2017, we made payments of $3.9 million in cash and issued 0.4 million shares of common stock related to performance share awards.
As of March 29, 2017, we had approximately $13.5 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which is expected to be recognized over a weighted average of 2.1 years.
Restricted Stock Units for Board Members
As of March 29, 2017, we had approximately $0.3 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which is expected to be recognized over a weighted average of 2.1 years.
Note 11. Income Taxes
The effective tax rate was 36.2% for the quarter compared to 35.5% for the prior year period. Refer to Note 2 for the impact of the adoption of ASU 2016-09. The 2016 period benefited by 1.6 percentage points from state jobs tax credits claimed for prior years' hiring activity.
Note 12. Net Income Per Share
The amounts used for the basic and diluted net income per share calculations are summarized below:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands, except for per share amounts)
Net income | $ | 8,373 |  |  | $ | 9,954 |
Weighted average shares outstanding - basic | 71,004 |  |  | 77,060 |
Effect of dilutive share-based compensation awards | 2,237 |  |  | 1,817 |
Weighted average shares outstanding - diluted | 73,241 |  |  | 78,877 |
Basic net income per share | $ | 0.12 |  |  | $ | 0.13 |
Diluted net income per share | $ | 0.11 |  |  | $ | 0.13 |
Anti-dilutive share-based compensation awards | 580 |  |  | — |

15

Note 13. Supplemental Cash Flow Information

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Income taxes paid, net | $ | 395 |  |  | $ | 311 |
Interest paid | $ | 3,261 |  |  | $ | 2,452 |
Noncash investing and financing activities: |  |  |
Issuance of common stock, pursuant to share-based compensation plans | $ | 4,946 |  |  | $ | 3,497 |
Execution of capital leases | $ | 1,523 |  |  | $ | 532 |
Treasury stock payable | $ | 862 |  |  | $ | 256 |
Notes received in connection with disposition of property | $ | 1,750 |  |  | $ | — |

Note 14. Shareholders' Equity
Share Repurchase
Our credit facility permits the purchase of Denny’s stock and the payment of cash dividends subject to certain limitations. In May 2016, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $100 million of our common stock (in addition to prior authorizations). Under this program, we may, from time to time, purchase shares in the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended) or in privately negotiated transactions, subject to market and business conditions.
In November 2016, as part of our previously authorized share repurchase programs, we entered into a variable term, capped accelerated share repurchase (the “ASR”) agreement with MUFG Securities EMEA plc (“MUFG”), to repurchase an aggregate of $25 million of our common stock. Pursuant to the terms of the ASR agreement, we paid $25 million in cash and received approximately 1.5 million shares of our common stock (which represents the minimum shares to be delivered based on the cap price) and recorded $18.1 million of treasury stock related to these shares. The remaining balance of $6.9 million was recorded as additional paid-in capital in shareholders' equity as of December 28, 2016 as an equity forward contract.
During the quarter ended March 29, 2017, we settled the ASR agreement with MUFG. As a result, we received final delivery of an additional 0.5 million shares of our common stock, bringing the total number of shares repurchased pursuant to the ASR agreement to 2.0 million. The total number of shares repurchased was based on a combined discounted volume-weighted average price (“VWAP”) of $12.36 per share, which was determined based on the average of the daily VWAP of our common stock, less a fixed discount, over the term of the ASR agreement. As a result of settling the ASR agreement, we recorded $6.9 million of treasury stock related to the settlement of the equity forward contract related to the ASR agreement.
In addition to the settlement of the ASR agreement, during the quarter ended March 29, 2017, we repurchased 1.0 million shares of our common stock for approximately $12.3 million. This brings the total amount repurchased under the May 2016 repurchase program to 2.7 million shares of our common stock for approximately $33.1 million, leaving approximately $66.9 million of our common stock that can be repurchased under this program as of March 29, 2017.
Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Equity.
16

Accumulated Other Comprehensive Loss
The components of the change in accumulated other comprehensive loss were as follows:

| Pensions |  | Derivatives |  | Accumulated Other Comprehensive Loss
| (In thousands)
Balance as of December 28, 2016 | $ | (945 | ) |  | $ | (462 | ) |  | $ | (1,407 | )
Amortization of net loss (1) | 23 |  |  | — |  |  | 23 |
Net change in fair value of derivatives | — |  |  | (912 | ) |  | (912 | )
Reclassification of derivatives to interest expense (2) | — |  |  | (108 | ) |  | (108 | )
Income tax (expense) benefit related to items of other comprehensive loss | (9 | ) |  | 397 |  |  | 388 |
Balance as of March 29, 2017 | $ | (931 | ) |  | $ | (1,085 | ) |  | $ | (2,016 | )

(1) | Before-tax amount related to our Other Defined Benefit Plans that was reclassified from accumulated other comprehensive loss and included as a component of pension expense within general and administrative expenses in our Condensed Consolidated Statements of Income during the quarter ended March 29, 2017. See Note 9 for additional details.

(2) | Amounts reclassified from accumulated other comprehensive loss into income, represent payments made to the counterparty for the effective portions of the interest rate swaps. These amounts are included as a component of interest expense in our Condensed Consolidated Statements of Income. We expect to reclassify approximately $0.4 million from accumulated other comprehensive loss related to our interest rate swaps during the next twelve months. See Note 8 for additional details.

Note 15. Commitments and Contingencies
We have guarantees related to certain franchisee loans. Payments under these guarantees would result from the inability of a franchisee to fund required payments when due. Through March 29, 2017, no events had occurred that caused us to make payments under these guarantees. There were $7.5 million and $7.9 million of loans outstanding under these programs as of March 29, 2017 and December 28, 2016, respectively. As of March 29, 2017, the maximum amounts payable under the loan guarantees was $1.2 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both March 29, 2017 and December 28, 2016, which are included as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets and other nonoperating expense in our Condensed Consolidated Statements of Income.
There are various claims and pending legal actions against or indirectly involving us, incidental to and arising out of the ordinary course of the business. In the opinion of management, based upon information currently available, the ultimate liability with respect to these proceedings and claims will not materially affect the Company's consolidated results of operations or financial position.
Note 16. Subsequent Events
We performed an evaluation of subsequent events and determined that no events required disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements reflect our best judgment based on factors currently known and are intended to speak only as of the date such statements are made. Forward-looking statements involve risks, uncertainties, and other factors which may cause our actual performance to be materially different from the performance indicated or implied by such statements. You should consider our forward-looking statements in light of the risks discussed under Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the United States Securities and Exchange Commission. While we may elect to update forward-looking statements at some point in the future, we expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
17

Statements of Income
The following table contains information derived from our Condensed Consolidated Statements of Income expressed as a percentage of total operating revenues, except as noted below. Percentages may not add due to rounding.

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (Dollars in thousands)
Revenue: |  |  |  |  |  |  |
Company restaurant sales | $ | 93,779 |  |  | 73.3 | % |  | $ | 90,386 |  |  | 72.5 | %
Franchise and license revenue | 34,131 |  |  | 26.7 | % |  | 34,256 |  |  | 27.5 | %
Total operating revenue | 127,910 |  |  | 100.0 | % |  | 124,642 |  |  | 100.0 | %
Costs of company restaurant sales (a): |  |  |  |  |  |  |  |  |
Product costs | 23,133 |  |  | 24.7 | % |  | 22,653 |  |  | 25.1 | %
Payroll and benefits | 37,397 |  |  | 39.9 | % |  | 34,461 |  |  | 38.1 | %
Occupancy | 4,734 |  |  | 5.0 | % |  | 4,800 |  |  | 5.3 | %
Other operating expenses | 12,571 |  |  | 13.4 | % |  | 12,197 |  |  | 13.5 | %
Total costs of company restaurant sales | 77,835 |  |  | 83.0 | % |  | 74,111 |  |  | 82.0 | %
Costs of franchise and license revenue (a) | 9,746 |  |  | 28.6 | % |  | 10,003 |  |  | 29.2 | %
General and administrative expenses | 17,509 |  |  | 13.7 | % |  | 16,927 |  |  | 13.6 | %
Depreciation and amortization | 5,736 |  |  | 4.5 | % |  | 5,493 |  |  | 4.4 | %
Operating (gains), losses and other charges, net | 783 |  |  | 0.6 | % |  | (125 | ) |  | (0.1 | )%
Total operating costs and expenses, net | 111,609 |  |  | 87.3 | % |  | 106,409 |  |  | 85.4 | %
Operating income | 16,301 |  |  | 12.7 | % |  | 18,233 |  |  | 14.6 | %
Interest expense, net | 3,541 |  |  | 2.8 | % |  | 2,774 |  |  | 2.2 | %
Other nonoperating (income) expense, net | (357 | ) |  | (0.3 | )% |  | 27 |  |  | 0.0 | %
Net income before income taxes | 13,117 |  |  | 10.3 | % |  | 15,432 |  |  | 12.4 | %
Provision for income taxes | 4,744 |  |  | 3.7 | % |  | 5,478 |  |  | 4.4 | %
Net income | $ | 8,373 |  |  | 6.5 | % |  | $ | 9,954 |  |  | 8.0 | %
Other Data: |  |  |  |  |  |  |  |  |  |  |
Company average unit sales | $ | 553 |  |  |  |  |  | $ | 554 |  |  |  |
Franchise average unit sales | $ | 385 |  |  |  |  |  | $ | 388 |  |  |  |
Company equivalent units (b) | 170 |  |  |  |  |  | 163 |  |  |  |
Franchise equivalent units (b) | 1,561 |  |  |  |  |  | 1,548 |  |  |  |
Company same-store sales increase (decrease) (c)(d) | (1.6 | )% |  |  |  |  | 3.5 | % |  |  |
Domestic franchise same-store sales increase (decrease) (c)(d) | (1.1 | )% |  |  |  |  | 2.3 | % |  |  |

(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 restaurants that were open the same period in the prior year.

(d) | Prior year amounts have not been restated for 2017 comparable units.

18

Unit Activity

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
Company restaurants, beginning of period | 169 |  |  | 164 |
Units opened | — |  |  | 1 |
Units acquired from franchisees | 3 |  |  | 1 |
Units sold to franchisees | — |  |  | (4 | )
Units closed | — |  |  | — |
End of period | 172 |  |  | 162 |
Franchised and licensed restaurants, beginning of period | 1,564 |  |  | 1,546 |
Units opened | 8 |  |  | 11 |
Units purchased from Company | — |  |  | 4 |
Units acquired by Company | (3 | ) |  | (1 | )
Units closed | (10 | ) |  | (9 | )
End of period | 1,559 |  |  | 1,551 |
Total restaurants, end of period | 1,731 |  |  | 1,713 |

Company Restaurant Operations
During the quarter ended March 29, 2017, company restaurant sales increased $3.4 million, or 3.8%, primarily resulting from a seven equivalent unit increase in company restaurants as compared to the prior year period, partially offset by a 1.6% decrease in company same-store sales.
Total costs of company restaurant sales as a percentage of company restaurant sales increased to 83.0% for the quarter from 82.0% in the prior year period.
Product costs decreased to 24.7% from 25.1% primarily due to lower commodity costs. Payroll and benefits increased to 39.9% from 38.1% primarily due to a 1.1 percentage point increase in labor costs and a 0.7 percentage point increase in workers' compensation costs. The increase in labor costs primarily resulted from minimum wage increases. The current quarter included $0.2 million in favorable workers' compensation claims development, as compared to $0.9 million of favorable workers' compensation claims development in the prior year period. Occupancy costs decreased to 5.0% from 5.3% primarily due to decreases in general liability insurance costs.
Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (Dollars in thousands)
Utilities | $ | 3,053 |  |  | 3.3 | % |  | $ | 2,951 |  |  | 3.3 | %
Repairs and maintenance | 1,663 |  |  | 1.8 | % |  | 1,602 |  |  | 1.8 | %
Marketing | 3,621 |  |  | 3.9 | % |  | 3,242 |  |  | 3.6 | %
Other direct costs | 4,234 |  |  | 4.5 | % |  | 4,402 |  |  | 4.9 | %
Other operating expenses | $ | 12,571 |  |  | 13.4 | % |  | $ | 12,197 |  |  | 13.5 | %

19

Franchise Operations
Franchise and license revenue and costs of franchise and license revenue were comprised of the following amounts and percentages of franchise and license revenue for the periods indicated:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (Dollars in thousands)
Royalties | $ | 24,544 |  |  | 71.9 | % |  | $ | 24,144 |  |  | 70.5 | %
Initial fees | 484 |  |  | 1.4 | % |  | 526 |  |  | 1.5 | %
Occupancy revenue | 9,103 |  |  | 26.7 | % |  | 9,586 |  |  | 28.0 | %
Franchise and license revenue | $ | 34,131 |  |  | 100.0 | % |  | $ | 34,256 |  |  | 100.0 | %
Occupancy costs | $ | 6,506 |  |  | 19.1 | % |  | $ | 7,063 |  |  | 20.6 | %
Other direct costs | 3,240 |  |  | 9.5 | % |  | 2,940 |  |  | 8.6 | %
Costs of franchise and license revenue | $ | 9,746 |  |  | 28.6 | % |  | $ | 10,003 |  |  | 29.2 | %

During the quarter ended March 29, 2017, royalties increase d $0.4 million, or 1.7%, primarily resulting from a 13 equivalent unit increase in franchised and licensed restaurants and a higher average royalty rate as compared to the prior year period, partially offset by a 1.1% decrease in domestic same-store sales. Initial fees remained flat. The decrease in occupancy revenue of $0.5 million, or 5.0%, was primarily the result of lease expirations.
Costs of franchise and license revenue decrease d $0.3 million, or 2.6%. Occupancy costs decrease d $0.6 million, or 7.9%, primarily resulting from lease expirations. Other direct costs increase d $0.3 million, or 10.2%. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decrease d to 28.6% from 29.2%.
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 were comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Share-based compensation | $ | 1,973 |  |  | $ | 1,948 |
Other general and administrative expenses | 15,536 |  |  | 14,979 |
Total general and administrative expenses | $ | 17,509 |  |  | $ | 16,927 |

Other general and administrative expenses increase d by $0.6 million primarily resulting from $0.9 million in investments in personnel and service fees related to cloud-based Enterprise Resource Planning (“ERP”) systems. The increase also included $0.5 million related to market valuation changes in our non-qualified deferred compensation plan liabilities. These increases were partially offset by a $0.8 million decrease in incentive compensation. Offsetting gains on the underlying plan investments are included as a component of other non-operating income, net. The software implementation costs related to the ERP systems are expensed as incurred and included as a component of operating (gains), losses and other charges, net.
20

Depreciation and amortization was comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Depreciation of property and equipment | $ | 4,217 |  |  | $ | 4,351 |
Amortization of capital lease assets | 994 |  |  | 826 |
Amortization of intangible and other assets | 525 |  |  | 316 |
Total depreciation and amortization expense | $ | 5,736 |  |  | $ | 5,493 |

The increase in amortization of intangible and other assets is primarily due to the increase in reacquired franchise rights related to acquisitions of franchised restaurants during the current and prior year.
Operating (gains), losses and other charges, net were comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Software implementation costs | 2,124 |  |  | — |
Gains on sales of assets and other, net | (1,440 | ) |  | (644 | )
Restructuring charges and exit costs | 99 |  |  | 519 |
Operating (gains), losses and other charges, net | $ | 783 |  |  | $ | (125 | )

Software implementation costs of $2.1 million for the quarter ended March 29, 2017 were the result of our investment in a new cloud-based ERP system. We expect to recognize additional costs of approximately $2.4 million during 2017 to complete the implementation. Gains on sales of assets and other, net of $1.4 million for the quarter ended March 29, 2017 primarily related to real estate sold to a franchisee.
Restructuring charges and exit costs were comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Exit costs | $ | 31 |  |  | $ | 151 |
Severance and other restructuring charges | 68 |  |  | 368 |
Total restructuring and exit costs | $ | 99 |  |  | $ | 519 |

Operating income was $16.3 million for the quarter ended March 29, 2017 compared to $18.2 million for the quarter ended March 30, 2016.
21

Interest expense, net was comprised of the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Interest on credit facilities | $ | 1,498 |  |  | $ | 1,046 |
Interest on interest rate swaps | 108 |  |  | 212 |
Interest on capital lease liabilities | 1,393 |  |  | 995 |
Letters of credit and other fees | 280 |  |  | 278 |
Interest income | (15 | ) |  | (13 | )
Total cash interest | 3,264 |  |  | 2,518 |
Amortization of deferred financing costs | 148 |  |  | 148 |
Interest accretion on other liabilities | 129 |  |  | 108 |
Total interest expense, net | $ | 3,541 |  |  | $ | 2,774 |

Interest expense, net increased by $0.8 million primarily due to the increased balance of our credit facility and an increase in capital leases.
Other nonoperating income, net was $0.4 million compared to expense of less than $0.1 million for the prior year period. The current year income was primarily the result of gains on deferred compensation plan investments.
The provision for income taxes was $4.7 million for the quarter ended March 29, 2017 compared to $5.5 million for the quarter ended March 30, 2016. The effective tax rate was 36.2% compared to 35.5%. Refer to Note 2 for the impact of the adoption of ASU 2016-09. The 2016 rate benefited by 1.6 percentage points from state jobs tax credits claimed for the prior years' hiring activity. We expect the 2017 fiscal year effective tax rate to be between 35% and 37%. The annual effective tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.
Net income was $8.4 million for the quarter ended March 29, 2017 compared with $10.0 million for the quarter ended March 30, 2016.
Liquidity and Capital Resources
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 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:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Net cash provided by operating activities | $ | 8,021 |  |  | $ | 8,669 |
Net cash used in investing activities | (6,963 | ) |  | (3,544 | )
Net cash used in financing activities | (1,910 | ) |  | (2,659 | )
Increase (decrease) in cash and cash equivalents | $ | (852 | ) |  | $ | 2,466 |

Net cash flows provided by operating activities were $8.0 million for the quarter ended March 29, 2017 compared to $8.7 million for the quarter ended March 30, 2016. The decrease in cash flows provided by operating activities was primarily due to the decrease in net income for the current year period. We believe that our estimated cash flows from operations for 2017, 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 used in investing activities were $7.0 million for the quarter ended March 29, 2017. These cash flows were primarily comprised of capital expenditures of $3.0 million, acquisitions of restaurants and real estate of $3.8 million and note receivable issuances of $1.0 million. Cash flows for acquisitions include $2.4 million of real estate associated with relocating a high-performing company restaurant due to the impending loss of property control and $1.4 million for the reacquisition of three franchised restaurants.
Our principal capital requirements have been largely associated with the following:

| Quarter Ended
| March 29, 2017 |  | March 30, 2016
| (In thousands)
Facilities | $ | 1,767 |  |  | $ | 1,260 |
New construction | 109 |  |  | 950 |
Remodeling | 230 |  |  | 1,303 |
Information technology | 86 |  |  | 245 |
Other | 825 |  |  | 73 |
Capital expenditures | $ | 3,017 |  |  | $ | 3,831 |

Capital expenditures and acquisitions for fiscal 2017 are expected to be approximately $22 to $24 million, including the relocation of three high-performing company restaurants due to the impending loss of property control and the above mentioned acquisitions of real estate and franchised restaurants.
Cash flows used in financing activities were $1.9 million for the quarter ended March 29, 2017, which included cash payments for stock repurchases of $11.7 million and accounts payable funding of $1.0 million, partially offset by net long-term debt borrowings of $10.7 million.
Our working capital deficit was $45.5 million at March 29, 2017 compared to $57.5 million at December 28, 2016. The decrease in working capital deficit was primarily related to the payout of accrued incentive compensation during the quarter ended March 29, 2017. 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
As of March 29, 2017, we had outstanding revolver loans of $230.0 million and outstanding letters of credit under the senior secured revolver of $22.4 million. These balances resulted in availability of $72.6 million under the revolving facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 2.61% as of March 29, 2017. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 2.78% as of March 29, 2017.
A commitment fee of 0.25% is paid on the unused portion of the revolving credit facility. Borrowings under the credit facility bear a tiered interest rate, which is based on the Company’s consolidated leverage ratio and was set at LIBOR plus 175 basis points as of March 29, 2017. The maturity date for the credit facility is March 30, 2020.
The credit facility is available for working capital, capital expenditures and other general corporate purposes. The credit facility is guaranteed by the Company and its material subsidiaries and is secured by assets of the Company and its subsidiaries, including the stock of the Company's subsidiaries. It includes negative covenants that are usual for facilities and transactions of this type. The credit facility also includes certain financial covenants with respect to a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the cash flows of our floating rate debt. We designated the interest rate swaps as cash flow hedges of our exposure to variability in future cash flows attributable to payments of LIBOR due on specific notional debt obligations.
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Based on the interest rate as determined by our consolidated leverage ratio in effect as of March 29, 2017, under the terms of the swaps, we will pay the following fixed rates on the notional amounts noted:

Period Covered |  | Notional Amount |  | Fixed Rate
|  | (In thousands) |  |
March 31, 2015 - March 29, 2018 |  | $ | 120,000 |  |  | 2.88 | %
March 29, 2018 - March 31, 2025 |  | 170,000 |  |  | 4.19 | %
April 1, 2025 - March 31, 2026 |  | 50,000 |  |  | 4.21 | %

As of March 29, 2017, the fair value of the interest rate swaps was a net liability of $1.8 million, which is comprised of assets of less than $0.1 million recorded as a component of other noncurrent assets and liabilities of $1.8 million recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.
Implementation of New Accounting Standards
Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our condensed consolidated financial statements set forth in Part I of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
With the exception of changes in the fair value of our interest rate swaps and the related expected reclassification from accumulated other comprehensive income, there have been no material changes in our quantitative and qualitative market risks since the prior reporting period. For additional information related to our interest rate swaps, refer to Notes 8 and 14 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this report.
Item 4. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management conducted an evaluation (under the supervision and with the participation of our President and Chief Executive Officer, John C. Miller, and our Executive Vice President, Chief Administrative Officer and Chief Financial Officer, F. Mark Wolfinger) as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, Messrs. Miller and Wolfinger each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicated to our management, including Messrs. Miller and Wolfinger, as appropriate to allow timely decisions regarding required disclosure.
During the first quarter of 2017, we implemented a new human resources and payroll system as well as new lease administration software, which resulted in changes to certain of our processes and procedures for internal control over financial reporting. We are currently evaluating how these changes impact the effectiveness of internal controls over financial reporting.
There were no other changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding legal proceedings is incorporated by reference from Note 15 to our condensed consolidated financial statements set forth in Part I of this report.
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Item 1A. Risk Factors
There have been no material changes in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer
The table below provides information concerning repurchases of shares of our common stock during the quarter ended March 29, 2017.

Period | Total Number of Shares Purchased |  | Average Price Paid Per Share (1) |  | Total Number of Shares Purchased as Part of Publicly Announced Programs (2) |  | Approximate Dollar Value of Shares that May Yet be Purchased Under the Programs (2)
| (In thousands, except per share amounts) |  |
December 29, 2016 - January 25, 2017 | 232 |  |  | $ | 12.47 |  |  | 232 |  |  | $ | 76,270 |
January 26, 2017 - February 22, 2017 | 804 |  | (3) | 12.44 |  | (3) | 804 |  | (3) | $ | 73,113 |
February 23, 2017 - March 29, 2017 | 502 |  |  | 12.40 |  |  | 502 |  |  | $ | 66,879 |
Total | 1,538 |  |  | $ | 12.43 |  | (3) | 1,538 |  |  |

(1) | Average price paid per share excludes commissions.

(2) | On May 26, 2016, we announced that our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to an additional $100 million of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time on the open market (including pre-arranged stock trading plans in accordance with the guidelines specified in Rule 10b5-1 under the Exchange Act) or in privately negotiated transactions, subject to market and business conditions. During the quarter ended March 29, 2017, taking into consideration the settlement of the ASR agreement (described below), we purchased 1,537,617 shares of our common stock for an aggregate consideration of approximately $12.3 million, pursuant to the share repurchase program.

(3) | Includes the settlement of the $6.9 million equity forward contract and the final delivery of 0.5 million shares of our common stock received under the ASR agreement we entered in November 2016 to repurchase an aggregate $25 million of our common stock. In total 2.0 million shares of our common stock were repurchased pursuant to the ASR agreement at an average purchase price of $12.36 per share.

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Item 6. Exhibits
The following are included as exhibits to this report:

Exhibit No. |  | Description
10.1 |  | Denny's Inc. Deferred Compensation Plan, as amended and restated effective March 1, 2017 (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 of Denny's Corporation (Commission File No. 333-216655)).
31.1 |  | Certification of John C. Miller, President and Chief Executive Officer of Denny's Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny's Corporation, pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of John C. Miller, President and Chief Executive Officer of Denny's Corporation, and F. Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer of Denny's Corporation, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema Document
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

|  | DENNY'S CORPORATION |
Date: | May 2, 2017 | By: | /s/ F. Mark Wolfinger |
|  |  | F. Mark Wolfinger |
|  |  | Executive Vice President, Chief Administrative Officer and Chief Financial Officer |
Date: | May 2, 2017 | By: | /s/ Jay C. Gilmore |
|  |  | Jay C. Gilmore |
|  |  | Vice President, Chief Accounting Officer and Corporate Controller |

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