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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File Number 0-18051
DENNY’S CORP ORATION
(Exact name of registrant as specified in its charter)

Delaware |  | 13-3487402
(State or other jurisdiction of incorporation or organization |  | (I.R.S. Employer 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 are a code)
Securities registered pursuant to Section 12(b) of the Act:

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
$.01 Par Value, Common Stock |  | DENN |  | The Nasdaq Stock Market LLC

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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 | ☒ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | Emerging Growth 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 ☒
As of July 24, 2019, 59,427,331 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 Statements of Shareholders' Deficit (Unaudited) | 6
Condensed Consolidated Statements of Cash Flows (Unaudited) | 8
Notes to Condensed Consolidated Financial Statements (Unaudited) | 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 31
Item 4. Controls and Procedures | 31
PART II - OTHER INFORMATION |
Item 1. Legal Proceedings | 31
Item 1A. Risk Factors | 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 32
Item 6. Exhibits | 32
Signatures | 33

2

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

| June 26, 2019 |  | December 26, 2018
| (In thousands, except per share amounts)
Assets |  |  |
Current assets: |  |  |
Cash and cash equivalents | $ | 2,292 |  |  | $ | 5,026 |
Investments | 3,115 |  |  | 1,709 |
Receivables, net | 18,628 |  |  | 26,283 |
Inventories | 2,347 |  |  | 2,993 |
Assets held for sale | 15,420 |  |  | 723 |
Prepaid and other current assets | 15,615 |  |  | 10,866 |
Total current assets | 57,417 |  |  | 47,600 |
Property, net of accumulated depreciation of $160,548 and $226,620, respectively | 97,047 |  |  | 117,251 |
Financing lease right-of-use assets, net of accumulated amortization of $13,282 and $15,526, respectively | 16,701 |  |  | 22,753 |
Operating lease right-of-use assets | 115,338 |  |  | — |
Goodwill | 37,080 |  |  | 39,781 |
Intangible assets, net | 55,736 |  |  | 59,067 |
Deferred financing costs, net | 2,031 |  |  | 2,335 |
Deferred income taxes | 20,848 |  |  | 17,333 |
Other noncurrent assets | 36,538 |  |  | 29,229 |
Total assets | $ | 438,736 |  |  | $ | 335,349 |
Liabilities |  |  |  |  |
Current liabilities: |  |  |  |  |
Current finance lease liabilities | $ | 2,651 |  |  | $ | 3,410 |
Current operating lease liabilities | 16,999 |  |  | — |
Accounts payable | 25,237 |  |  | 29,527 |
Other current liabilities | 53,842 |  |  | 61,790 |
Total current liabilities | 98,729 |  |  | 94,727 |
Long-term liabilities: |  |  |  |  |
Long-term debt | 271,000 |  |  | 286,500 |
Noncurrent finance lease liabilities | 20,470 |  |  | 27,181 |
Noncurrent operating lease liabilities | 107,368 |  |  | — |
Liability for insurance claims, less current portion | 12,642 |  |  | 12,199 |
Other noncurrent liabilities | 71,099 |  |  | 48,087 |
Total long-term liabilities | 482,579 |  |  | 373,967 |
Total liabilities | 581,308 |  |  | 468,694 |
Shareholders' deficit |  |  |  |  |
Common stock $0.01 par value; 135,000 shares authorized; June 26, 2019: 109,291 shares issued and 59,807 shares outstanding; December 26, 2018: 108,585 shares issued and 61,533 shares outstanding | $ | 1,093 |  |  | $ | 1,086 |
Paid-in capital | 601,902 |  |  | 592,944 |
Deficit | (257,079 | ) |  | (306,414 | )
Accumulated other comprehensive loss, net of tax | (26,913 | ) |  | (4,146 | )
Treasury stock, at cost, 49,484 and 47,052 shares, respectively | (461,575 | ) |  | (416,815 | )
Total shareholders' deficit | (142,572 | ) |  | (133,345 | )
Total liabilities and shareholders' deficit | $ | 438,736 |  |  | $ | 335,349 |

See accompanying notes
3

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

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands, except per share amounts)
Revenue: |  |  |  |  |  |  |
Company restaurant sales | $ | 95,447 |  |  | $ | 102,741 |  |  | $ | 193,992 |  |  | $ | 203,934 |
Franchise and license revenue | 56,437 |  |  | 54,593 |  |  | 109,303 |  |  | 108,673 |
Total operating revenue | 151,884 |  |  | 157,334 |  |  | 303,295 |  |  | 312,607 |
Costs of company restaurant sales, excluding depreciation and amortization: |  |  |  |  |  |  |
Product costs | 23,363 |  |  | 25,054 |  |  | 47,268 |  |  | 49,989 |
Payroll and benefits | 36,866 |  |  | 41,065 |  |  | 76,698 |  |  | 82,291 |
Occupancy | 5,498 |  |  | 5,435 |  |  | 11,282 |  |  | 11,082 |
Other operating expenses | 14,103 |  |  | 15,021 |  |  | 28,695 |  |  | 30,071 |
Total costs of company restaurant sales | 79,830 |  |  | 86,575 |  |  | 163,943 |  |  | 173,433 |
Costs of franchise and license revenue, excluding depreciation and amortization | 28,871 |  |  | 29,049 |  |  | 55,929 |  |  | 57,605 |
General and administrative expenses | 18,453 |  |  | 15,597 |  |  | 37,264 |  |  | 32,157 |
Depreciation and amortization | 5,048 |  |  | 6,691 |  |  | 11,281 |  |  | 13,205 |
Operating (gains), losses and other charges, net | (26,433 | ) |  | 462 |  |  | (35,368 | ) |  | 822 |
Total operating costs and expenses, net | 105,769 |  |  | 138,374 |  |  | 233,049 |  |  | 277,222 |
Operating income | 46,115 |  |  | 18,960 |  |  | 70,246 |  |  | 35,385 |
Interest expense, net | 5,382 |  |  | 5,385 |  |  | 10,789 |  |  | 10,010 |
Other nonoperating income, net | (273 | ) |  | (629 | ) |  | (1,696 | ) |  | (417 | )
Income before income taxes | 41,006 |  |  | 14,204 |  |  | 61,153 |  |  | 25,792 |
Provision for income taxes | 6,767 |  |  | 2,578 |  |  | 11,424 |  |  | 4,407 |
Net income | $ | 34,239 |  |  | $ | 11,626 |  |  | $ | 49,729 |  |  | $ | 21,385 |
Basic net income per share | $ | 0.57 |  |  | $ | 0.18 |  |  | $ | 0.82 |  |  | $ | 0.33 |
Diluted net income per share | $ | 0.55 |  |  | $ | 0.18 |  |  | $ | 0.79 |  |  | $ | 0.32 |
Basic weighted average shares outstanding | 60,290 |  |  | 63,644 |  |  | 60,970 |  |  | 64,038 |
Diluted weighted average shares outstanding | 62,082 |  |  | 66,128 |  |  | 62,937 |  |  | 66,552 |

See accompanying notes
4

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

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Net income | $ | 34,239 |  |  | $ | 11,626 |  |  | $ | 49,729 |  |  | $ | 21,385 |
Other comprehensive income (loss), net of tax: |  |  |  |  |  |  |
Minimum pension liability adjustment, net of tax of $5, $7, $11 and $13, respectively | 16 |  |  | 21 |  |  | 32 |  |  | 43 |
Changes in the effective portion of the fair value of derivatives, net of tax of $(3,701), $1,117, $(8,323) and $68, respectively | (10,619 | ) |  | 3,201 |  |  | (22,771 | ) |  | 192 |
Reclassification of derivatives to interest expense, net of tax of $(3), $58, $(10) and $22, respectively | (11 | ) |  | 168 |  |  | (28 | ) |  | 64 |
Other comprehensive (loss) income | (10,614 | ) |  | 3,390 |  |  | (22,767 | ) |  | 299 |
Total comprehensive income | $ | 23,625 |  |  | $ | 15,016 |  |  | $ | 26,962 |  |  | $ | 21,684 |

See accompanying notes
5

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Quarter Ended June 26, 2019 and June 27, 2018
(Unaudited)

| Common Stock |  | Treasury Stock |  | Paid-in Capital |  | Deficit |  | Accumulated Other Comprehensive Loss, Net |  | Total Shareholders’ Deficit
| Shares |  | Amount |  | Shares |  | Amount |  |  |  |
| (In thousands)
Balance, March 27, 2019 | 108,986 |  |  | $ | 1,090 |  |  | (47,948 | ) |  | $ | (432,519 | ) |  | $ | 598,825 |  |  | $ | (291,318 | ) |  | $ | (16,299 | ) |  | $ | (140,221 | )
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 34,239 |  |  | — |  |  | 34,239 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (10,614 | ) |  | (10,614 | )
Share-based compensation on equity classified awards | — |  |  | — |  |  | — |  |  | — |  |  | 2,637 |  |  | — |  |  | — |  |  | 2,637 |
Purchase of treasury stock | — |  |  | — |  |  | (1,536 | ) |  | (29,056 | ) |  | — |  |  | — |  |  | — |  |  | (29,056 | )
Issuance of common stock for share-based compensation | 118 |  |  | 2 |  |  | — |  |  | — |  |  | (2 | ) |  | — |  |  | — |  |  | — |
Exercise of common stock options | 187 |  |  | 1 |  |  | — |  |  | — |  |  | 442 |  |  | — |  |  | — |  |  | 443 |
Balance, June 26, 2019 | 109,291 |  |  | $ | 1,093 |  |  | (49,484 | ) |  | $ | (461,575 | ) |  | $ | 601,902 |  |  | $ | (257,079 | ) |  | $ | (26,913 | ) |  | $ | (142,572 | )

| Common Stock |  | Treasury Stock |  | Paid-in Capital |  | Deficit |  | Accumulated Other Comprehensive Loss, Net |  | Total Shareholders’ Deficit
| Shares |  | Amount |  | Shares |  | Amount |  |  |  |
| (In thousands)
Balance, March 28, 2018 | 108,259 |  |  | $ | 1,083 |  |  | (44,222 | ) |  | $ | (371,812 | ) |  | $ | 595,069 |  |  | $ | (340,348 | ) |  | $ | (5,407 | ) |  | $ | (121,415 | )
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 11,626 |  |  | — |  |  | 11,626 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | 3,390 |  |  | 3,390 |
Share-based compensation on equity classified awards | — |  |  | — |  |  | — |  |  | — |  |  | 1,180 |  |  | — |  |  | — |  |  | 1,180 |
Purchase of treasury stock | — |  |  | — |  |  | (792 | ) |  | (12,658 | ) |  | — |  |  | — |  |  | — |  |  | (12,658 | )
Issuance of common stock for share-based compensation | 211 |  |  | 1 |  |  | — |  |  | — |  |  | (1 | ) |  | — |  |  | — |  |  | — |
Balance, June 27, 2018 | 108,470 |  |  | $ | 1,084 |  |  | (45,014 | ) |  | $ | (384,470 | ) |  | $ | 596,248 |  |  | $ | (328,722 | ) |  | $ | (2,017 | ) |  | $ | (117,877 | )

See accompanying notes
6

Denny’s Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Deficit
For the Two Quarters Ended June 26, 2019 and June 27, 2018
(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 26, 2018 | 108,585 |  |  | $ | 1,086 |  |  | (47,052 | ) |  | $ | (416,815 | ) |  | $ | 592,944 |  |  | $ | (306,414 | ) |  | $ | (4,146 | ) |  | $ | (133,345 | )
Cumulative effect adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (394 | ) |  | — |  |  | (394 | )
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 49,729 |  |  | — |  |  | 49,729 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (22,767 | ) |  | (22,767 | )
Share-based compensation on equity classified awards | — |  |  | — |  |  | — |  |  | — |  |  | 1,652 |  |  | — |  |  | — |  |  | 1,652 |
Purchase of treasury stock | — |  |  | — |  |  | (2,043 | ) |  | (37,997 | ) |  | — |  |  | — |  |  | — |  |  | (37,997 | )
Equity forward contract settlement | — |  |  | — |  |  | (389 | ) |  | (6,763 | ) |  | 6,763 |  |  | — |  |  | — |  |  | — |
Issuance of common stock for share-based compensation | 465 |  |  | 5 |  |  | — |  |  | — |  |  | (5 | ) |  | — |  |  | — |  |  | — |
Exercise of common stock options | 241 |  |  | 2 |  |  | — |  |  | — |  |  | 548 |  |  | — |  |  | — |  |  | 550 |
Balance, June 26, 2019 | 109,291 |  |  | $ | 1,093 |  |  | (49,484 | ) |  | $ | (461,575 | ) |  | $ | 601,902 |  |  | $ | (257,079 | ) |  | $ | (26,913 | ) |  | $ | (142,572 | )

| Common Stock |  | Treasury Stock |  | Paid-in Capital |  | Deficit |  | Accumulated Other Comprehensive Loss, Net |  | Total Shareholders’ Deficit
| Shares |  | Amount |  | Shares |  | Amount |  |  |  |
| (In thousands)
Balance, December 27, 2017 | 107,740 |  |  | $ | 1,077 |  |  | (43,151 | ) |  | $ | (355,626 | ) |  | $ | 594,166 |  |  | $ | (334,661 | ) |  | $ | (2,316 | ) |  | $ | (97,360 | )
Cumulative effect adjustment | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (15,446 | ) |  | — |  |  | (15,446 | )
Net income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 21,385 |  |  | — |  |  | 21,385 |
Other comprehensive income | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 299 |  |  | 299 |
Share-based compensation on equity classified awards | — |  |  | — |  |  | — |  |  | — |  |  | 1,076 |  |  | — |  |  | — |  |  | 1,076 |
Purchase of treasury stock | — |  |  | — |  |  | (1,863 | ) |  | (28,844 | ) |  | — |  |  | — |  |  | — |  |  | (28,844 | )
Issuance of common stock for share-based compensation | 444 |  |  | 4 |  |  | — |  |  | — |  |  | (4 | ) |  | — |  |  | — |  |  | — |
Exercise of common stock options | 286 |  |  | 3 |  |  | — |  |  | — |  |  | 1,010 |  |  | — |  |  | — |  |  | 1,013 |
Balance, June 27, 2018 | 108,470 |  |  | $ | 1,084 |  |  | (45,014 | ) |  | $ | (384,470 | ) |  | $ | 596,248 |  |  | $ | (328,722 | ) |  | $ | (2,017 | ) |  | $ | (117,877 | )

See accompanying notes
7

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

| Two Quarters Ended
| June 26, 2019 |  | June 27, 2018
| (In thousands)
Cash flows from operating activities: |  |  |
Net income | $ | 49,729 |  |  | $ | 21,385 |
Adjustments to reconcile net income to cash flows provided by operating activities: |  |  |
Depreciation and amortization | 11,281 |  |  | 13,205 |
Operating (gains), losses and other charges, net | (35,368 | ) |  | 822 |
Amortization of deferred financing costs | 304 |  |  | 303 |
Gain on investments | (106 | ) |  | — |
Gain on early extinguishments of debt and leases | (83 | ) |  | (161 | )
Deferred income tax expense | 4,944 |  |  | 2,896 |
Share-based compensation | 4,966 |  |  | 2,561 |
Changes in assets and liabilities: |  |  |
Decrease (increase) in assets: |  |  |
Receivables | 7,545 |  |  | 2,323 |
Inventories | 646 |  |  | 38 |
Other current assets | (4,748 | ) |  | (253 | )
Other assets | 6,110 |  |  | (445 | )
Increase (decrease) in liabilities: |  |  |
Accounts payable | (2,190 | ) |  | (7,280 | )
Accrued salaries and vacations | (4,597 | ) |  | (2,029 | )
Accrued taxes | (952 | ) |  | 428 |
Other accrued liabilities | (4,264 | ) |  | (6,352 | )
Other noncurrent liabilities | (8,062 | ) |  | (1,345 | )
Net cash flows provided by operating activities | 25,155 |  |  | 26,096 |
Cash flows from investing activities: |  |  |
Capital expenditures | (6,777 | ) |  | (9,512 | )
Acquisition of restaurants and real estate | (4,706 | ) |  | (10,416 | )
Deposits on acquisitions of real estate | (4,320 | ) |  | — |
Proceeds from sales of restaurants, real estate and other assets | 47,938 |  |  | 4 |
Investment purchases | (1,300 | ) |  | — |
Collections on notes receivable | 858 |  |  | 1,921 |
Issuance of notes receivable | (718 | ) |  | (2,455 | )
Net cash flows provided by (used in) investing activities | 30,975 |  |  | (20,458 | )
Cash flows from financing activities: |  |  |
Revolver borrowings | 66,500 |  |  | 66,500 |
Revolver payments | (82,000 | ) |  | (43,500 | )
Long-term debt payments | (1,547 | ) |  | (1,643 | )
Proceeds from exercise of stock options | 550 |  |  | 1,013 |
Tax withholding on share-based payments | (3,178 | ) |  | (1,696 | )
Purchase of treasury stock | (37,266 | ) |  | (28,964 | )
Net bank overdrafts | (1,923 | ) |  | 1,419 |
Net cash flows used in financing activities | (58,864 | ) |  | (6,871 | )
Decrease in cash and cash equivalents | (2,734 | ) |  | (1,233 | )
Cash and cash equivalents at beginning of period | 5,026 |  |  | 4,983 |
Cash and cash equivalents at end of period | $ | 2,292 |  |  | $ | 3,750 |

See accompanying notes
8

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 or the Company, is one of America’s largest full-service restaurant chains based on number of restaurants. At June 26, 2019, the Denny's brand consisted of 1,702 restaurants, 1,569 of which were franchised/licensed restaurants and 133 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 (“GAAP”) 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 are reasonable.
These interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto for the fiscal year ended December 26, 2018 which are contained in our Annual Report on Form 10-K for the fiscal year ended December 26, 2018. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year ending December 25, 2019.
Note 2. Summary of Significant Accounting Policies
Newly Adopted Accounting Standards
Effective December 27, 2018, the first day of fiscal 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The new guidance established a right-of-use model (“ROU”) that requires lessees to recognize a ROU asset and a lease liability for all leases with terms greater than 12 months. Lessees classify leases as financing or operating. The guidance requires lessors to classify leases as sales-type, direct financing or operating. We elected to apply the modified retrospective transition approach as the date of initial application without restating comparative period financial statements. Results for reporting periods beginning after December 26, 2018 are presented under Topic 842. Prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under Topic 840. Our transition to Topic 842 represents a change in accounting principle.
The new guidance provided a number of optional practical expedients in transition. We elected the package of practical expedients that permitted us not to reassess our prior conclusions regarding lease identification, lease classification or initial direct costs. In addition, we did not elect the practical expedient which would have permitted us to use hindsight in evaluating our leases, nor did we elect the land easement practical expedient. In preparation for adoption, we implemented a new lease management system.
Upon adoption of Topic 842, we recorded operating lease liabilities of $101.3 million and ROU assets of $94.1 million related to existing operating leases. In addition, we recorded a cumulative effect adjustment increasing opening deficit by $0.4 million and deferred tax assets by $0.1 million. The lease liabilities were based on the present value of remaining rental payments under previous leasing standards for existing operating leases primarily related to real estate leases. Exit cost and straight-line lease liabilities that existed at the adoption date were reclassified against the ROU assets upon adoption. The amount recorded to opening deficit represents the initial impairment of ROU assets, net of the deferred tax impact.
See Note 3 for further information about our transition to Topic 842 and the newly required disclosures.
Additional new accounting guidance became effective for us as of December 27, 2018 that we reviewed and concluded was either not applicable to our operations or had no material effect on our consolidated financial statements and related disclosures.
9

Accounting Standards to be Adopted
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.
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. Leases
Lessee
We lease certain real estate and equipment for our restaurants and support facilities. At contract inception, we determine whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time. We recognize a lease liability and an ROU asset at the lease commencement date.
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently measured at amortized cost using the effective interest method.
Operating lease ROU assets are initially and subsequently measured throughout the lease term at the carrying amount of the lease liability adjusted for initial direct costs, prepayments, accrued payments and lease incentives, if any. Lease cost is recognized on a straight-line basis over the lease term. Finance lease ROU assets are initially measured at cost and subsequently amortized on a straight-line basis over the lesser of the useful life or the lease term. ROU assets are assessed for impairment using the long-lived assets impairment guidance.
The new lease guidance provides practical expedients and accounting elections for our ongoing accounting after adoption. We elected the practical expedient to not separate nonlease components (such as common area maintenance) from lease components in regard to all leases and the portfolio approach in applying the discount rate to our leases.
Key estimates and judgments include how we determine (1) lease payments, (2) lease term and (3) the discount rate used to discount the unpaid lease payments to present value.
We have certain lease agreements structured with both a fixed base rent and a contingent rent based on a percentage of sales over contractual levels, others with only contingent rent based on a percentage of sales and some with a fixed base rent adjusted periodically for inflation or changes in fair market value of the underlying real estate. Contingent rent is recognized as sales occur. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The exercise of lease renewal options is at our sole discretion, except in certain sublease situations in which we have determined that it is reasonably certain that one or more options will be exercised, including where the exercise of a sublease option compels us to exercise the renewal option of the underlying master lease. Renewal option periods are included in the measurement of lease ROU asset and lease liability where the exercise is reasonably certain to occur. Initial terms of real estate leases generally range from 10 to 20 years, exclusive of options to renew, which are typically for five year periods. Leases of equipment consist primarily of restaurant equipment, computer equipment and vehicles. Initial terms of equipment leases generally range from three to five years.
The discount rate used to determine the present value of the lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate implicit in the lease.
10

Lessor
We lease or sublease certain restaurant properties to our franchisees and occasionally to third parties. The lease descriptions, terms, variable lease payments and renewal options are the same as the lessee leases described above. Similar to our lessee accounting, we elected the lessor practical expedient to not separate nonlease components from lease components in regard to all leases.
The components of lease costs were as follows:

|  |  | Quarter Ended |  | Two Quarters Ended
| Classification |  | June 26, 2019 |  | June 26, 2019
|  |  | (In thousands)
Lease costs |  |  |  |  |
Finance lease costs: |  |  |  |  |
Amortization of right-of-use assets | Depreciation and amortization |  | $ | 885 |  |  | $ | 1,881 |
Interest on lease liabilities | Interest expense, net |  | 1,318 |  |  | 2,834 |
Operating lease costs: |  |  |  |  |
Operating lease costs - company | Occupancy |  | 2,476 |  |  | 4,979 |
Operating lease costs - franchise | Costs of franchise and license revenue |  | 3,611 |  |  | 7,076 |
Operating lease costs - general and administrative | General and administrative expenses |  | 27 |  |  | 53 |
Variable lease costs: |  |  |  |  |
Variable lease costs - company | Occupancy |  | 1,812 |  |  | 3,668 |
Variable lease costs - franchise | Costs of franchise and license revenue |  | 1,512 |  |  | 2,938 |
Variable lease costs - general and administrative | General and administrative expenses |  | 5 |  |  | 10 |
Variable lease costs - closed stores | Restructuring charges and exit costs |  | — |  |  | 55 |
Sublease income | Franchise and license revenue |  | (6,249 | ) |  | (12,008 | )
Total lease costs |  |  | $ | 5,397 |  |  | $ | 11,486 |

Lease terms and discount rates were as follows:

| June 26, 2019
Weighted-average remaining lease term (in years) |
Finance leases | 9.0 |
Operating leases | 9.5 |
Weighted-average discount rate |
Finance leases | 24.3 | %
Operating leases | 6.4 | %

11

The components of lease income were as follows:

|  |  | Quarter Ended |  | Two Quarters Ended
| Classification |  | June 26, 2019 |  | June 26, 2019
|  |  | (In thousands)
Lease income |  |  |  |  |
Operating lease income - franchise | Franchise and license revenue |  | $ | 5,846 |  |  | $ | 11,271 |
Operating lease income - closed stores | Restructuring and exist costs |  | 66 |  |  | 132 |
Variable lease income - franchise | Franchise and license revenue |  | 2,280 |  |  | 4,400 |
Variable lease income - closed stores | Restructuring charges and exit costs |  | 12 |  |  | 24 |
Total lease income |  |  | $ | 8,204 |  |  | $ | 15,827 |

Cash and supplemental noncash amounts were as follows:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 26, 2019
| (In thousands)
Cash paid for amounts included in the measurement of lease liabilities: |  |  |
Operating cash flows from finance leases | $ | 1,318 |  |  | $ | 2,834 |
Operating cash flows from operating leases | 6,441 |  |  | 12,752 |
Financing cash flows from finance leases | 752 |  |  | 1,547 |
Right-of-use assets obtained in exchange for new finance lease liabilities | 305 |  |  | 305 |
Right-of-use assets obtained in exchange for new operating lease liabilities | 22,481 |  |  | 27,531 |

12

Maturities of lease liabilities and receipts in accordance with Topic 842 as of June 26, 2019 were as follows:

| Lease Liabilities |  | Lease Receipts
| Finance |  | Operating |  | Operating
| (In thousands)
Remainder of 2019 | $ | 3,554 |  |  | $ | 12,440 |  |  | $ | 13,070 |
2020 | 6,625 |  |  | 22,390 |  |  | 24,202 |
2021 | 6,101 |  |  | 19,576 |  |  | 22,100 |
2022 | 5,836 |  |  | 17,309 |  |  | 19,961 |
2023 | 5,149 |  |  | 14,536 |  |  | 17,012 |
Thereafter | 29,974 |  |  | 82,149 |  |  | 105,310 |
Total undiscounted cash flows | 57,239 |  |  | 168,400 |  |  | $ | 201,655 |
Less: interest | 34,118 |  |  | 44,033 |  |  |
Present value of lease liabilities | 23,121 |  |  | 124,367 |  |  |
Less: current lease liabilities | 2,651 |  |  | 16,999 |  |  |
Long-term lease liabilities | $ | 20,470 |  |  | $ | 107,368 |  |  |

Maturities of lease liabilities in accordance with Topic 840 as of December 26, 2018 were as follows:

| Commitments |  | Lease Receipts
| Capital |  | Operating |  | Operating
| (In thousands)
2019 | $ | 9,271 |  |  | $ | 23,504 |  |  | $ | 21,001 |
2020 | 8,664 |  |  | 20,161 |  |  | 18,493 |
2021 | 8,010 |  |  | 17,316 |  |  | 16,573 |
2022 | 7,320 |  |  | 14,646 |  |  | 14,887 |
2023 | 6,451 |  |  | 11,881 |  |  | 12,932 |
Thereafter | 33,670 |  |  | 49,004 |  |  | 65,273 |
Total | 73,386 |  |  | $ | 136,512 |  |  | $ | 149,159 |
Less imputed interest | 42,795 |  |  |  |  |
Present value of capital lease obligations | $ | 30,591 |  |  |  |  |

13

Note 4. Refranchisings and Acquisitions
Refranchisings
The following table summarizes the activity related to our current refranchising and development strategy. Gains on the sales of company restaurants and real estate are included as a component of operating (gains), losses and other charges, net in our Condensed Consolidated Statements of Income. See Note 5.

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (Dollars in thousands)
Restaurants sold to franchisees | 37 |  |  | — |  |  | 40 |  |  | — |
Gains on sales of company restaurants: |  |  |  |  |  |  |  |  |  |  |
Cash proceeds | $ | 36,004 |  |  | $ | — |  |  | $ | 38,837 |  |  | $ | — |
Notes receivable | 470 |  |  | — |  |  | 470 |  |  | — |
Less: Property sold | (9,675 | ) |  | — |  |  | (10,225 | ) |  | — |
Less: Goodwill | (925 | ) |  | — |  |  | (1,004 | ) |  | — |
Less: Intangibles | (1,646 | ) |  | — |  |  | (1,646 | ) |  | — |
Total gains of sales of company restaurants | $ | 24,228 |  |  | $ | — |  |  | $ | 26,432 |  |  | $ | — |
Real estate parcels sold | 3 |  |  | — |  |  | 4 |  |  | — |
Gains on sales of real estate: |  |  |  |  |  |  |  |  |  |  |
Cash proceeds | $ | 3,850 |  |  | $ | — |  |  | $ | 8,538 |  |  | $ | — |
Noncash consideration | — |  |  | — |  |  | 3,000 |  |  | — |
Less: Property sold | (756 | ) |  | — |  |  | (946 | ) |  | — |
Less: Other assets | (6 | ) |  | — |  |  | (6 | ) |  | — |
Total gains on sales of real estate | $ | 3,088 |  |  | $ | — |  |  | $ | 10,586 |  |  | $ | — |

In addition to the cash proceeds received on the sale of real estate during the first quarter, we also recorded additional noncash consideration for the fair value of restaurant space we expect to receive within a building being developed by the buyer of the real estate. The $3.0 million of noncash consideration is recorded as a component of other noncurrent assets in our Condensed Consolidated Balance Sheets. The fair value of the noncash consideration is based upon Level 2 inputs.
As of June 26, 2019, we have recorded assets held for sale at their carrying amount of $15.4 million (comprised of property of $13.4 million, goodwill of $1.7 million, reacquired franchise rights of $0.2 million and other assets of $0.1 million) related to 49 company restaurants and one piece of real estate. There were $0.7 million in assets held for sale as of December 26, 2018 related to three company restaurants and one piece of real estate.
Acquisitions
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. The following table summarizes our acquisition activity.
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| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (Dollars in thousands)
Restaurants acquired from franchisees | — |  |  | 1 |  |  | — |  |  | 6 |
Purchase price allocation: |  |  |  |  |  |  |
Reacquired franchise rights | $ | — |  |  | $ | 119 |  |  | $ | — |  |  | $ | 5,434 |
Property | — |  |  | 92 |  |  | — |  |  | 1,121 |
Goodwill | — |  |  | — |  |  | — |  |  | 1,574 |
Total purchase price | $ | — |  |  | $ | 211 |  |  | $ | — |  |  | $ | 8,129 |
Financing leases recorded | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,409 |
Real estate parcels acquired | — |  |  | 1 |  |  | 2 |  |  | 1 |
Total purchase price | $ | — |  |  | $ | 1,787 |  |  | $ | 4,706 |  |  | $ | 1,787 |

Note 5. Operating (Gains), Losses and Other Charges, Net
Operating (gains), losses and other charges, net were comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Gains on sales of assets and other, net | (26,839 | ) |  | (27 | ) |  | (36,314 | ) |  | (64 | )
Restructuring charges and exit costs | 406 |  |  | 408 |  |  | 946 |  |  | 768 |
Impairment charges | — |  |  | 81 |  |  | — |  |  | 118 |
Operating (gains), losses and other charges, net | $ | (26,433 | ) |  | $ | 462 |  |  | $ | (35,368 | ) |  | $ | 822 |

Gains on sales of assets and other, net were primarily the result of sales of company restaurants and real estate as part of our refranchising and development strategy. See Note 4.
Restructuring charges and exit costs were comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Exit costs | $ | 52 |  |  | $ | 275 |  |  | $ | 174 |  |  | $ | 299 |
Severance and other restructuring charges | 354 |  |  | 133 |  |  | 772 |  |  | 469 |
Total restructuring charges and exit costs | $ | 406 |  |  | $ | 408 |  |  | $ | 946 |  |  | $ | 768 |

Exit cost liabilities were $0.1 million and $1.2 million as of June 26, 2019 and December 26, 2018, respectively. As a result of the adoption of Topic 842, exit cost liabilities related to lease costs are now included as a component of operating lease liabilities in our Condensed Consolidated Balance Sheets. See Note 3.
As of both June 26, 2019 and December 26, 2018, we had accrued severance and other restructuring charges of $0.6 million. The balance as of June 26, 2019 is expected to be paid during the next 12 months.
15

Note 6. Receivables
Receivables were comprised of the following:

| June 26, 2019 |  | December 26, 2018
| (In thousands)
Receivables, net: |  |  |
Trade accounts receivable from franchisees | $ | 11,349 |  |  | $ | 11,459 |
Financing receivables from franchisees | 3,310 |  |  | 3,211 |
Vendor receivables | 2,299 |  |  | 4,016 |
Credit card receivables | 1,263 |  |  | 5,955 |
Other | 692 |  |  | 1,942 |
Allowance for doubtful accounts | (285 | ) |  | (300 | )
Total receivables, net | $ | 18,628 |  |  | $ | 26,283 |
Other noncurrent assets: |  |  |
Financing receivables from franchisees and other | $ | 1,363 |  |  | $ | 1,528 |

Note 7. Goodwill and Other Intangible Assets
The following table reflects the changes in carrying amounts of goodwill.

| (In thousands)
Balance, December 26, 2018 | $ | 39,781 |
Adjustments related to the sale of restaurants and reclassifications to assets held for sale | (2,701 | )
Balance, June 26, 2019 | $ | 37,080 |

Other intangible assets were comprised of the following:

| June 26, 2019 |  | December 26, 2018
| Gross Carrying Amount |  | Accumulated Amortization |  | Gross Carrying Amount |  | Accumulated Amortization
| (In thousands)
Intangible assets with indefinite lives: |  |  |  |  |  |  |
Trade names | $ | 44,087 |  |  | $ | — |  |  | $ | 44,087 |  |  | $ | — |
Liquor licenses | 166 |  |  | — |  |  | 166 |  |  | — |
Intangible assets with definite lives: |  |  |  |  |  |  |
Reacquired franchise rights | 16,826 |  |  | 5,343 |  |  | 19,933 |  |  | 5,119 |
Intangible assets, net | $ | 61,079 |  |  | $ | 5,343 |  |  | $ | 64,186 |  |  | $ | 5,119 |

The decreases in goodwill and reacquired franchise rights during the current year were the result of sales of company restaurants and reclassifications to assets held for sale as part of our refranchising and development strategy. See Note 4.
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Note 8. Other Current Liabilities
Other current liabilities consisted of the following:

| June 26, 2019 |  | December 26, 2018
| (In thousands)
Accrued payroll | $ | 18,894 |  |  | $ | 23,395 |
Accrued insurance, primarily current portion of liability for insurance claims | 7,511 |  |  | 7,323 |
Accrued taxes | 6,715 |  |  | 7,667 |
Accrued advertising | 4,305 |  |  | 7,413 |
Gift cards | 4,754 |  |  | 6,546 |
Other | 11,663 |  |  | 9,446 |
Other current liabilities | $ | 53,842 |  |  | $ | 61,790 |

Note 9. Fair Value of Financial Instruments
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)
| (In thousands)
Fair value measurements as of June 26, 2019: |  |  |  |  |  |  |
Deferred compensation plan investments (1) | $ | 12,589 |  |  | $ | 12,589 |  |  | $ | — |  |  | $ | — |
Interest rate swaps, net (2) | (35,608 | ) |  | — |  |  | (35,608 | ) |  | — |
Investments (3) | 3,115 |  |  | — |  |  | 3,115 |  |  | — |
Total | $ | (19,904 | ) |  | $ | 12,589 |  |  | $ | (32,493 | ) |  | $ | — |
Fair value measurements as of December 26, 2018: |  |  |  |  |  |  |
Deferred compensation plan investments (1) | $ | 11,235 |  |  | $ | 11,235 |  |  | $ | — |  |  | $ | — |
Interest rate swaps, net (2) | (4,475 | ) |  | — |  |  | (4,475 | ) |  | — |
Investments (3) | 1,709 |  |  | — |  |  | 1,709 |  |  | — |
Total | $ | 8,469 |  |  | $ | 11,235 |  |  | $ | (2,766 | ) |  | $ | — |

(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 10 for details on the interest rate swaps.

(3) | The fair value of investments is valued using a readily determinable net asset value per share based on the fair value of the underlying securities. There are no significant redemption restrictions associated with these investments.

See Note 4 for the disclosures related to the fair value of assets held for sale and acquired franchise restaurants.
Note 10. Long-Term Debt
Denny's and certain of its subsidiaries have a credit facility consisting of a five-year $400 million senior secured revolver (with a $30 million letter of credit sublimit). The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million. As of June 26, 2019, we had outstanding revolver loans of $271.0 million and outstanding letters of credit under the senior secured revolver of $20.5 million. These balances resulted in availability of $108.5 million under the credit facility. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 4.74% and 4.43% as of June 26, 2019 and December 26, 2018, respectively. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans was 4.74% and 4.48% as of June 26, 2019 and December 26, 2018, respectively.
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A commitment fee, which is based on our consolidated leverage ratio, is paid on the unused portion of the credit facility and was 0.35% as of June 26, 2019. Borrowings under the credit facility bear a tiered interest rate, also based on our leverage ratio, and was set at LIBOR plus 2.25% as of June 26, 2019. The maturity date for the credit facility is October 26, 2022.
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). 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. We were in compliance with all financial covenants as of June 26, 2019.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted 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 variable interest payments due on forecasted notional amounts.
Under the interest rate swaps, we pay a fixed rate on the notional amount in addition to the current interest rate as determined by our consolidated leverage ratio in effect at the time. A summary of our interest rate swaps as of June 26, 2019 is as follows:

Trade Date |  | Effective Date |  | Maturity Date |  | Notional Amount |  | Fixed Rate
|  |  |  |  |  | (In thousands) |  |
March 20, 2015 |  | March 29, 2018 |  | March 31, 2025 |  | $ | 120,000 |  |  | 2.44 | %
October 1, 2015 |  | March 29, 2018 |  | March 31, 2026 |  | 50,000 |  |  | 2.46 | %
February 15, 2018 |  | March 31, 2020 |  | December 31, 2033 |  | 80,000 |  | (1) | 3.19 | %

(1) | The notional amounts of the swaps entered into on February 15, 2018 increase annually beginning September 30, 2020 until they reach the maximum notional amount of $425.0 million on September 28, 2029.

As of June 26, 2019, the fair value of the interest rate swaps was a liability of $35.6 million, which is recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets. See Note 16 for the amounts recorded in accumulated other comprehensive loss related to the interest rate swaps.
Note 11. Revenues
Our revenues are derived primarily from two sales channels, which we operate as one segment: company restaurants and franchised and licensed restaurants. The following table disaggregates our revenue by sales channels and types of goods or services.

| Quarter Ended | Two Quarters Ended
| June 26, 2019 | June 27, 2018 | June 26, 2019 | June 27, 2018
| (Dollars in thousands)
Company restaurant sales | $ | 95,447 |  |  | $ | 102,741 |  |  | $ | 193,992 |  |  | $ | 203,934 |
Franchise and license revenue: |  |  |  |  |  |  |
Royalties | 26,672 |  |  | 25,192 |  |  | 51,912 |  |  | 50,357 |
Advertising revenue | 19,884 |  |  | 19,530 |  |  | 38,826 |  |  | 38,840 |
Initial and other fees | 1,755 |  |  | 1,810 |  |  | 2,894 |  |  | 3,227 |
Occupancy revenue | 8,126 |  |  | 8,061 |  |  | 15,671 |  |  | 16,249 |
Franchise and license revenue | 56,437 |  |  | 54,593 |  |  | 109,303 |  |  | 108,673 |
Total operating revenue | $ | 151,884 |  |  | $ | 157,334 |  |  | $ | 303,295 |  |  | $ | 312,607 |

Balances related to contracts with customers consist of receivables, deferred franchise revenue and deferred gift card revenue. See Note 6 for details on our receivables.
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Deferred franchise revenue consists primarily of the unamortized portion of initial franchise fees that are currently being amortized into revenue and amounts related to development agreements and unopened restaurants that will begin amortizing into revenue when the related restaurants are opened. Deferred franchise revenue represents our remaining performance obligations to our franchisees, excluding amounts of variable consideration related to sales-based royalties and advertising. The components of the change in deferred franchise revenue are as follows:

| (In thousands)
Balance, December 26, 2018 | $ | 20,538 |
Fees received from franchisees | 2,361 |
Revenue recognized | (1,289 | )
Balance, June 26, 2019 | 21,610 |
Less current portion included in other current liabilities | 2,162 |
Deferred franchise revenue included in other noncurrent liabilities | $ | 19,448 |

Deferred gift card liabilities consist of the unredeemed portion of gift cards sold in company restaurants and at third party locations. The balance of deferred gift card liabilities represents our remaining performance obligations to our customers. The balance of deferred gift card liabilities as of June 26, 2019 and December 26, 2018 was $4.8 million and $6.5 million, respectively. During the two quarters ended June 26, 2019, we recognized revenue of $1.8 million from gift card redemptions at company restaurants.
Note 12. Share-Based Compensation
Total share-based compensation cost included as a component of general and administrative expenses was as follows:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Performance share awards | $ | 2,463 |  |  | $ | 942 |  |  | $ | 4,461 |  |  | $ | 2,020 |
Restricted stock units for board members | 250 |  |  | 269 |  |  | 505 |  |  | 541 |
Total share-based compensation | $ | 2,713 |  |  | $ | 1,211 |  |  | $ | 4,966 |  |  | $ | 2,561 |

Performance Share Units
During the two quarters ended June 26, 2019, we granted certain employees 0.3 million performance share units with a grant date fair value of $20.47 per share 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 share units with a grant date fair value of $17.58 per share that vest based on our Adjusted EPS growth rate versus plan, as defined under the terms of the award. The performance period for these performance share units is the three year fiscal period beginning December 27, 2018 and ending December 29, 2021. 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 two quarters ended June 26, 2019, we issued 0.3 million shares of common stock related to vested performance share units. In addition 0.4 million shares of common stock were deferred and 0.2 million shares of common stock were withheld in lieu of taxes related to vested performance share units.
As of June 26, 2019, we had approximately $18.1 million of unrecognized compensation cost related to all unvested performance share awards outstanding, which have a weighted average remaining contractual term of 2.1 years.
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Restricted Stock Units for Board Members
During the two quarters ended June 26, 2019, we granted less than 0.1 million restricted stock units (which are equity classified) with a weighted average grant date fair value of $19.44 per unit to non-employee members of our Board of Directors. The restricted stock units vest after a one year service period. A director may elect to convert these awards into shares of common stock either on a specific date in the future (while still serving as a member of our Board of Directors), upon termination as a member of our Board of Directors, or in three equal annual installments commencing after termination of service as a member of our Board. During the two quarters ended June 26, 2019, 0.1 million restricted stock units were converted into shares of common stock. As of June 26, 2019, we had approximately $0.7 million of unrecognized compensation cost related to all unvested restricted stock unit awards outstanding, which have a weighted average remaining contractual term of 0.9 years.
Note 13. Income Taxes
The effective income tax rate was 16.5% for the quarter ended and 18.7% for the two quarters ended June 26, 2019, compared to 18.1% and 17.1% for the prior year periods. During the quarter ended June 26, 2019, we completed an Internal Revenue Service federal income tax audit of the 2016 tax year. Upon completion of this audit, revaluations of certain tax positions were performed and as a result, we recognized a net benefit of 4.8% and 3.3% for the 2019 quarterly and year-to-date periods, respectively. In addition, the 2019 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 3.6% and 2.8%, respectively. The 2018 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 5.2% and 4.6%, respectively.
Note 14. Net Income Per Share
The amounts used for the basic and diluted net income per share calculations are summarized below:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands, except for per share amounts)
Net income | $ | 34,239 |  |  | $ | 11,626 |  |  | $ | 49,729 |  |  | $ | 21,385 |
Weighted average shares outstanding - basic | 60,290 |  |  | 63,644 |  |  | 60,970 |  |  | 64,038 |
Effect of dilutive share-based compensation awards | 1,792 |  |  | 2,484 |  |  | 1,967 |  |  | 2,514 |
Weighted average shares outstanding - diluted | 62,082 |  |  | 66,128 |  |  | 62,937 |  |  | 66,552 |
Basic net income per share | $ | 0.57 |  |  | $ | 0.18 |  |  | $ | 0.82 |  |  | $ | 0.33 |
Diluted net income per share | $ | 0.55 |  |  | $ | 0.18 |  |  | $ | 0.79 |  |  | $ | 0.32 |
Anti-dilutive share-based compensation awards | 630 |  |  | 1 |  |  | 630 |  |  | 1 |

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Note 15. Supplemental Cash Flow Information

| Two Quarters Ended
| June 26, 2019 |  | June 27, 2018
| (In thousands)
Income taxes paid, net | $ | 11,992 |  |  | $ | 1,495 |
Interest paid | $ | 10,230 |  |  | $ | 9,224 |
Noncash investing and financing activities: |  |  |
Issuance of common stock, pursuant to share-based compensation plans | $ | 7,453 |  |  | $ | 4,619 |
Noncash consideration received in connection with the sale of real estate | $ | 3,000 |  |  | $ | — |
Execution of finance leases | $ | 305 |  |  | $ | 2,484 |
Treasury stock payable | $ | 803 |  |  | $ | — |
Notes received in connection with disposition of property | $ | 470 |  |  | $ | — |
Insurance proceeds receivable | $ | — |  |  | $ | 282 |

Note 16. Shareholders' Deficit
Share Repurchase
Our credit facility permits the purchase of Denny’s stock and the payment of cash dividends subject to certain limitations. In October 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $200 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 2018, as part of our previously authorized share repurchase programs, we entered into a $25 million accelerated share repurchase (the "ASR") agreement with MUFG Securities EMEA plc (“MUFG”). We paid $25 million in cash and received approximately 1.1 million shares of our common stock (which represents the minimum shares to be delivered based on the cap price) and recorded $18.2 million of treasury stock related to these shares. The remaining balance of $6.8 million was recorded as additional paid-in capital in shareholders’ deficit as of December 26, 2018 as an equity forward contract.
During the two quarters ended June 26, 2019, we settled the ASR agreement with MUFG. As a result, we received final delivery of an additional 0.4 million shares of our common stock. The total number of shares repurchased was based on a combined discounted volume-weighted average price (“VWAP”) of $17.04 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 $6.8 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, during the two quarters ended June 26, 2019, we repurchased a total of 2.0 million of our common stock for approximately $38.0 million. This brings the total amount repurchased under the current repurchase program to 6.6 million shares of our common stock for approximately $109.6 million, leaving approximately $90.4 million that can be used to repurchase our common stock under this program as of June 26, 2019. Repurchased shares are included as treasury stock in our Condensed Consolidated Balance Sheets and our Condensed Consolidated Statement of Shareholders' Deficit.
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Accumulated Other Comprehensive Loss
The components of the change in accumulated other comprehensive loss were as follows:

| Defined Benefit Plans |  | Derivatives |  | Accumulated Other Comprehensive Loss
| (In thousands)
Balance as of December 26, 2018 | $ | (827 | ) |  | $ | (3,319 | ) |  | $ | (4,146 | )
Amortization of net loss (1) | 43 |  |  | — |  |  | 43 |
Net change in fair value of derivatives | — |  |  | (31,094 | ) |  | (31,094 | )
Reclassification of derivatives to interest expense, net (2) | — |  |  | (38 | ) |  | (38 | )
Income tax (expense) benefit related to items of other comprehensive loss | (11 | ) |  | 8,333 |  |  | 8,322 |
Balance as of June 26, 2019 | $ | (795 | ) |  | $ | (26,118 | ) |  | $ | (26,913 | )

(1) | Before-tax amount related to our 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 two quarters ended June 26, 2019.

(2) | Amounts reclassified from accumulated other comprehensive loss into income represent payments either received from or made to the counterparty for the effective portions of the interest rate swaps. These amounts are included as a component of interest expense, net in our Condensed Consolidated Statements of Income. See Note 10 for additional details.

Note 17. 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 June 26, 2019, no events had occurred that caused us to make payments under these guarantees. There were $1.8 million and $2.5 million of loans outstanding under these programs as of June 26, 2019 and December 26, 2018, respectively. As of June 26, 2019, the maximum amount payable under the loan guarantees was $0.8 million. As a result of these guarantees, we have recorded liabilities of less than $0.1 million as of both June 26, 2019 and December 26, 2018, 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.
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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.
Factors Impacting Comparability
Impact of New Leases Standard
Upon adoption of Topic 842, we recorded operating lease liabilities of $101.3 million and ROU assets of $94.1 million related to existing operating leases. In addition, we recorded a cumulative effect adjustment increasing opening deficit by $0.4 million and deferred tax assets by $0.1 million. The lease liabilities were based on the present value of remaining rental payments under current leasing standards for existing operating leases primarily related to real estate leases. Exit cost and straight-line lease liabilities that existed at the adoption date were reclassified against the ROU assets upon adoption. The amount recorded to opening deficit represents the initial impairment of ROU assets, net of the deferred tax impact.
We elected to apply the modified retrospective transition approach as of the effective date as the date of initial application without restating comparative period financial statements (the “effective date method”). Results for reporting periods beginning after December 27, 2018 are presented under Topic 842. Prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting under Topic 840. See Note 2 and Note 3 for information on the implementation of Topic 842 and its impact on our Condensed Consolidated Financial Statements.
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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 |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (Dollars in thousands)
Revenue: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Company restaurant sales | $ | 95,447 |  |  | 62.8 | % |  | $ | 102,741 |  |  | 65.3 | % |  | $ | 193,992 |  |  | 64.0 | % |  | $ | 203,934 |  |  | 65.2 | %
Franchise and license revenue | 56,437 |  |  | 37.2 | % |  | 54,593 |  |  | 34.7 | % |  | 109,303 |  |  | 36.0 | % |  | 108,673 |  |  | 34.8 | %
Total operating revenue | 151,884 |  |  | 100.0 | % |  | 157,334 |  |  | 100.0 | % |  | 303,295 |  |  | 100.0 | % |  | 312,607 |  |  | 100.0 | %
Costs of company restaurant sales, excluding depreciation and amortization (a): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Product costs | 23,363 |  |  | 24.5 | % |  | 25,054 |  |  | 24.4 | % |  | 47,268 |  |  | 24.4 | % |  | 49,989 |  |  | 24.5 | %
Payroll and benefits | 36,866 |  |  | 38.6 | % |  | 41,065 |  |  | 40.0 | % |  | 76,698 |  |  | 39.5 | % |  | 82,291 |  |  | 40.4 | %
Occupancy | 5,498 |  |  | 5.8 | % |  | 5,435 |  |  | 5.3 | % |  | 11,282 |  |  | 5.8 | % |  | 11,082 |  |  | 5.4 | %
Other operating expenses | 14,103 |  |  | 14.8 | % |  | 15,021 |  |  | 14.6 | % |  | 28,695 |  |  | 14.8 | % |  | 30,071 |  |  | 14.7 | %
Total costs of company restaurant sales | 79,830 |  |  | 83.6 | % |  | 86,575 |  |  | 84.3 | % |  | 163,943 |  |  | 84.5 | % |  | 173,433 |  |  | 85.0 | %
Costs of franchise and license revenue, excluding depreciation and amortization (a) | 28,871 |  |  | 51.2 | % |  | 29,049 |  |  | 53.2 | % |  | 55,929 |  |  | 51.2 | % |  | 57,605 |  |  | 53.0 | %
General and administrative expenses | 18,453 |  |  | 12.1 | % |  | 15,597 |  |  | 9.9 | % |  | 37,264 |  |  | 12.3 | % |  | 32,157 |  |  | 10.3 | %
Depreciation and amortization | 5,048 |  |  | 3.3 | % |  | 6,691 |  |  | 4.3 | % |  | 11,281 |  |  | 3.7 | % |  | 13,205 |  |  | 4.2 | %
Operating (gains), losses and other charges, net | (26,433 | ) |  | (17.4 | )% |  | 462 |  |  | 0.3 | % |  | (35,368 | ) |  | (11.7 | )% |  | 822 |  |  | 0.3 | %
Total operating costs and expenses, net | 105,769 |  |  | 69.6 | % |  | 138,374 |  |  | 87.9 | % |  | 233,049 |  |  | 76.8 | % |  | 277,222 |  |  | 88.7 | %
Operating income | 46,115 |  |  | 30.4 | % |  | 18,960 |  |  | 12.1 | % |  | 70,246 |  |  | 23.2 | % |  | 35,385 |  |  | 11.3 | %
Interest expense, net | 5,382 |  |  | 3.5 | % |  | 5,385 |  |  | 3.4 | % |  | 10,789 |  |  | 3.6 | % |  | 10,010 |  |  | 3.2 | %
Other nonoperating income, net | (273 | ) |  | (0.2 | )% |  | (629 | ) |  | (0.4 | )% |  | (1,696 | ) |  | (0.6 | )% |  | (417 | ) |  | (0.1 | )%
Income before income taxes | 41,006 |  |  | 27.0 | % |  | 14,204 |  |  | 9.0 | % |  | 61,153 |  |  | 20.2 | % |  | 25,792 |  |  | 8.3 | %
Provision for income taxes | 6,767 |  |  | 4.5 | % |  | 2,578 |  |  | 1.6 | % |  | 11,424 |  |  | 3.8 | % |  | 4,407 |  |  | 1.4 | %
Net income | $ | 34,239 |  |  | 22.5 | % |  | $ | 11,626 |  |  | 7.4 | % |  | $ | 49,729 |  |  | 16.4 | % |  | $ | 21,385 |  |  | 6.8 | %
Other Data: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Company average unit sales | $ | 612 |  |  |  |  |  | $ | 570 |  |  |  |  |  | $ | 1,193 |  |  |  |  |  | $ | 1,135 |  |  |  |
Franchise average unit sales | $ | 419 |  |  |  |  |  | $ | 402 |  |  |  |  |  | $ | 821 |  |  |  |  |  | $ | 798 |  |  |  |
Company equivalent units (b) | 156 |  |  |  |  |  | 180 |  |  |  |  |  | 163 |  |  |  |  |  | 179 |  |  |  |
Franchise equivalent units (b) | 1,543 |  |  |  |  |  | 1,543 |  |  |  |  |  | 1,539 |  |  |  |  |  | 1,543 |  |  |  |
Company same-store sales increase (c)(d) | 4.4 | % |  |  |  |  | (0.1 | )% |  |  |  |  | 2.9 | % |  |  |  |  | 1.5 | % |  |  |
Domestic franchise same-store sales increase (c)(d) | 3.7 | % |  |  |  |  | (0.8 | )% |  |  |  |  | 2.5 | % |  |  |  |  | 0.2 | % |  |  |

(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.

(d) | Prior year amounts have not been restated for 2019 comparable units.

24

Unit Activity

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
Company restaurants, beginning of period | 170 |  |  | 182 |  |  | 173 |  |  | 178 |
Units opened | — |  |  | — |  |  | — |  |  | — |
Units acquired from franchisees | — |  |  | 1 |  |  | — |  |  | 6 |
Units sold to franchisees | (37 | ) |  | — |  |  | (40 | ) |  | — |
Units closed | — |  |  | (3 | ) |  | — |  |  | (4 | )
End of period | 133 |  |  | 180 |  |  | 133 |  |  | 180 |
Franchised and licensed restaurants, beginning of period | 1,535 |  |  | 1,542 |  |  | 1,536 |  |  | 1,557 |
Units opened | 6 |  |  | 8 |  |  | 8 |  |  | 18 |
Units purchased from Company | 37 |  |  | — |  |  | 40 |  |  | — |
Units acquired by Company | — |  |  | (1 | ) |  | — |  |  | (6 | )
Units closed | (9 | ) |  | (9 | ) |  | (15 | ) |  | (29 | )
End of period | 1,569 |  |  | 1,540 |  |  | 1,569 |  |  | 1,540 |
Total restaurants, end of period | 1,702 |  |  | 1,720 |  |  | 1,702 |  |  | 1,720 |

Company Restaurant Operations
During the quarter ended June 26, 2019, company restaurant sales decreased $7.3 million, or 7.1%, primarily resulting from 24 fewer equivalent company restaurants as compared to the prior year period, partially offset by a 4.4% increase in company same-store sales. During the two quarters ended June 26, 2019, company restaurant sales decreased $9.9 million, or 4.9%, primarily resulting from 16 fewer equivalent company restaurants as compared to the prior year period, partially offset by a 2.9% increase in company same-store sales. The decrease in equivalent company restaurants was the result of our refranchising and development strategy.
Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 83.6% for the quarter and 84.5% year-to-date from 84.3% and 85.0%, respectively, in the prior year periods.
Product costs remained relatively constant at 24.5% for the quarter and 24.4% year-to-date compared to 24.4% and 24.5%, respectively, for the prior year periods with offsetting changes in pricing and commodities.
Payroll and benefits were 38.6% for the quarter and 39.5% year-to-date compared to 40.0% and 40.4%, respectively, in the prior year periods. The decrease for the quarter was primarily due to a 0.8 percentage point decrease in payroll taxes and fringe benefits resulting from the impact of refranchising certain restaurants and lower unemployment payroll tax rates and a 0.5 percentage point decrease in workers' compensation costs related to claims development. The quarter ended June 26, 2019 included $0.3 million in favorable workers' compensation experience, as compared to $0.1 million of unfavorable workers' compensation experience in the prior year period. The year-to-date decrease was primarily due to a 0.6 percentage point decrease in payroll taxes and fringe benefits for the reasons described above and a 0.4 percentage point decrease in workers' compensation costs related to claims development. The two quarters ended June 26, 2019 included $0.4 million in favorable workers' compensation experience, as compared to $0.1 million of unfavorable workers' compensation experience in the prior year period.
Occupancy costs were 5.8% for both the quarter and year-to-date compared to 5.3% and 5.4%, respectively, for the prior year periods. The increases for the quarter and year-to-date periods were related to increases in property insurance costs and the impact of refranchising restaurants where we own the real estate.
25

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

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (Dollars in thousands)
Utilities | $ | 3,106 |  |  | 3.3 | % |  | $ | 3,359 |  |  | 3.3 | % |  | $ | 6,478 |  |  | 3.3 | % |  | $ | 6,764 |  |  | 3.3 | %
Repairs and maintenance | 2,080 |  |  | 2.2 | % |  | 1,887 |  |  | 1.8 | % |  | 3,968 |  |  | 2.0 | % |  | 3,777 |  |  | 1.9 | %
Marketing | 3,239 |  |  | 3.4 | % |  | 3,711 |  |  | 3.6 | % |  | 6,946 |  |  | 3.6 | % |  | 7,476 |  |  | 3.7 | %
Other direct costs | 5,678 |  |  | 5.9 | % |  | 6,064 |  |  | 5.9 | % |  | 11,303 |  |  | 5.8 | % |  | 12,054 |  |  | 5.9 | %
Other operating expenses | $ | 14,103 |  |  | 14.8 | % |  | $ | 15,021 |  |  | 14.6 | % |  | $ | 28,695 |  |  | 14.8 | % |  | $ | 30,071 |  |  | 14.7 | %

Increases in repairs and maintenance as a percentage of company restaurant sales were primarily related to the timing of sales of company restaurants as part of our refranchising and development strategy.
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 |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (Dollars in thousands)
Royalties | $ | 26,672 |  |  | 47.3 | % |  | $ | 25,192 |  |  | 46.1 | % |  | $ | 51,912 |  |  | 47.5 | % |  | $ | 50,357 |  |  | 46.3 | %
Advertising revenue | 19,884 |  |  | 35.2 | % |  | 19,530 |  |  | 35.8 | % |  | 38,826 |  |  | 35.5 | % |  | 38,840 |  |  | 35.7 | %
Initial and other fees | 1,755 |  |  | 3.1 | % |  | 1,810 |  |  | 3.3 | % |  | 2,894 |  |  | 2.6 | % |  | 3,227 |  |  | 3.0 | %
Occupancy revenue | 8,126 |  |  | 14.4 | % |  | 8,061 |  |  | 14.8 | % |  | 15,671 |  |  | 14.3 | % |  | 16,249 |  |  | 15.0 | %
Franchise and license revenue | $ | 56,437 |  |  | 100.0 | % |  | $ | 54,593 |  |  | 100.0 | % |  | $ | 109,303 |  |  | 100.0 | % |  | $ | 108,673 |  |  | 100.0 | %
Advertising costs | $ | 19,884 |  |  | 35.2 | % |  | $ | 19,530 |  |  | 35.8 | % |  | $ | 38,826 |  |  | 35.5 | % |  | $ | 38,840 |  |  | 35.7 | %
Occupancy costs | 5,512 |  |  | 9.8 | % |  | 5,645 |  |  | 10.3 | % |  | $ | 10,761 |  |  | 9.8 | % |  | $ | 11,474 |  |  | 10.6 | %
Other direct costs | 3,475 |  |  | 6.2 | % |  | 3,874 |  |  | 7.1 | % |  | 6,342 |  |  | 5.8 | % |  | 7,291 |  |  | 6.7 | %
Costs of franchise and license revenue | $ | 28,871 |  |  | 51.2 | % |  | $ | 29,049 |  |  | 53.2 | % |  | $ | 55,929 |  |  | 51.2 | % |  | $ | 57,605 |  |  | 53.0 | %

Franchise and license revenue increased $1.8 million, or 3.4%, for the quarter and $0.6 million, or 0.6%, year-to-date compared to the prior year periods. Royalties increased $1.5 million, or 5.9%, for the quarter primarily resulting from a 3.7% increase in domestic same-store sales and the impact of our refranchising and development strategy. Year-to-date royalties increased $1.6 million, or 3.1%, primarily resulting from a 2.5% increase in domestic same-store sales and the impact of our refranchising and development strategy, partially offset by four fewer equivalent units for the period.
Advertising revenue increased $0.4 million, or 1.8%, for the quarter compared to the prior year period resulting from the impact of the increase in same-store sales, partially offset by changes to certain international restaurants' contribution arrangements. Year-to-date advertising revenue remained flat, as the impact of the increase in same-store sales was offset by the impact of the changes in international restaurants' contributions. Initial and other fees decreased $0.1 million, or 3.0%, for the quarter and $0.3 million, or 10.3%, year-to-date compared to the prior year periods. The year-to-date decrease was the result of fewer franchise restaurants closed in the current year period resulting in less accelerated revenue recognition. Occupancy revenue increased $0.1 million, or 0.8%, for the quarter and decreased $0.6 million, or 3.6%, year-to-date compared to the prior year periods. The year-to-date decrease was primarily the result of scheduled lease expirations.
26

Costs of franchise and license revenue decreased $0.2 million, or 0.6%, for the quarter and $1.7 million, or 2.9%, year-to-date compared to the prior year periods. Advertising costs increased $0.4 million, or 1.8%, for the quarter and remained flat year-to-date. Occupancy costs decreased $0.1 million, or 2.4%, for the quarter and $0.7 million, or 6.2%, year-to-date. The changes to advertising costs and occupancy costs were a result of the changes in the related revenues noted above. The decreases in other direct costs of $0.4 million, or 10.3%, for the quarter and $0.9 million, or 13.0%, year-to-date resulted primarily from decreases in franchise administrative costs. As a result, costs of franchise and license revenue as a percentage of franchise and license revenue decreased to 51.2% for both the quarter and two quarters ended June 26, 2019 from 53.2% and 53.0% for the prior year periods.
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 |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
General and administrative expenses | $ | 12,436 |  |  | $ | 13,010 |  |  | $ | 25,305 |  |  | $ | 26,473 |
Share-based compensation | 2,713 |  |  | 1,211 |  |  | 4,966 |  |  | 2,561 |
Incentive compensation | 2,919 |  |  | 1,126 |  |  | 5,457 |  |  | 3,093 |
Deferred compensation valuation adjustments | 385 |  |  | 250 |  |  | 1,536 |  |  | 30 |
Total general and administrative expenses | $ | 18,453 |  |  | $ | 15,597 |  |  | $ | 37,264 |  |  | $ | 32,157 |

General and administrative expenses decreased by $0.6 million for the quarter and $1.2 million year-to-date primarily due to the rationalization of certain business costs in connection with our refranchising and development strategy. Share-based compensation increased $1.5 million for the quarter and $2.4 million year-to-date. Incentive compensation increased $1.8 million for the quarter and $2.4 million year-to-date. The increases in share-based compensation and incentive compensation primarily resulted from our performance against plan metrics. Changes in deferred compensation valuation adjustments have offsetting gains or losses on the underlying nonqualified deferred plan investments included as a component of other non-operating income, net.
Depreciation and amortization was comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Depreciation of property and equipment | $ | 3,267 |  |  | $ | 4,591 |  |  | $ | 7,550 |  |  | $ | 9,071 |
Amortization of financing lease ROU assets | 886 |  |  | 1,018 |  |  | 1,881 |  |  | 2,089 |
Amortization of intangible and other assets | 895 |  |  | 1,082 |  |  | 1,850 |  |  | 2,045 |
Total depreciation and amortization expense | $ | 5,048 |  |  | $ | 6,691 |  |  | $ | 11,281 |  |  | $ | 13,205 |

The decreases in depreciation and amortization expense during the current year were primarily related to refranchising restaurants and reclassifying certain restaurants to assets held for sale as part of our refranchising and development strategy.
27

Operating (gains), losses and other charges, net were comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Gains on sales of assets and other, net | (26,839 | ) |  | (27 | ) |  | (36,314 | ) |  | (64 | )
Restructuring charges and exit costs | 406 |  |  | 408 |  |  | 946 |  |  | 768 |
Impairment charges | — |  |  | 81 |  |  | — |  |  | 118 |
Operating (gains), losses and other charges, net | $ | (26,433 | ) |  | $ | 462 |  |  | $ | (35,368 | ) |  | $ | 822 |

Gains on sales of assets and other, net for the current year periods were primarily comprised of $24.2 million related to the sales of company restaurants and $3.1 million related to the sale of real estate for the quarter and $26.4 million related to the sales of company restaurants and $10.6 million related to the sale of real estate year-to-date. These sales were part of our refranchising and development strategy.
Restructuring charges and exit costs were comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Exit costs | $ | 52 |  |  | $ | 275 |  |  | $ | 174 |  |  | $ | 299 |
Severance and other restructuring charges | 354 |  |  | 133 |  |  | 772 |  |  | 469 |
Total restructuring and exit costs | $ | 406 |  |  | $ | 408 |  |  | $ | 946 |  |  | $ | 768 |

Operating income was $46.1 million for the quarter and $70.2 million year-to-date compared to $19.0 million and $35.4 million, respectively, for the prior year periods.
Interest expense, net was comprised of the following:

| Quarter Ended |  | Two Quarters Ended
| June 26, 2019 |  | June 27, 2018 |  | June 26, 2019 |  | June 27, 2018
| (In thousands)
Interest on credit facilities | $ | 3,541 |  |  | $ | 3,021 |  |  | $ | 6,935 |  |  | $ | 5,611 |
Interest on interest rate swaps | (14 | ) |  | 226 |  |  | (38 | ) |  | 86 |
Interest on financing lease liabilities | 1,318 |  |  | 1,570 |  |  | 2,834 |  |  | 3,174 |
Letters of credit and other fees | 320 |  |  | 338 |  |  | 624 |  |  | 658 |
Interest income | (43 | ) |  | (49 | ) |  | (85 | ) |  | (78 | )
Total cash interest | 5,122 |  |  | 5,106 |  |  | 10,270 |  |  | 9,451 |
Amortization of deferred financing costs | 152 |  |  | 151 |  |  | 304 |  |  | 303 |
Interest accretion on other liabilities | 108 |  |  | 128 |  |  | 215 |  |  | 256 |
Total interest expense, net | $ | 5,382 |  |  | $ | 5,385 |  |  | $ | 10,789 |  |  | $ | 10,010 |

Interest expense, net increased by $0.8 million year-to-date primarily due to higher average interest rates.
Other nonoperating income, net was $0.3 million for the quarter and $1.7 million year-to-date, compared to $0.6 million and $0.4 million, respectively, for the prior year periods. Nonoperating income primarily resulted from gains on deferred compensation plan investments.
28

Provision for income taxes was $6.8 million for the quarter and $11.4 million year-to-date, compared to $2.6 million and $4.4 million for the prior year periods. The effective tax rate was 16.5% for the quarter and 18.7% year-to-date, compared to 18.1% and 17.1% for the prior year periods. During the quarter ended June 26, 2019, we completed an Internal Revenue Service federal income tax audit of the 2016 tax year. Upon completion of this audit, revaluations of certain tax positions were performed and as a result, we recognized a net benefit of 4.8% and 3.3% for the 2019 quarterly and year-to-date periods, respectively. In addition, the 2019 quarterly and year-to-date rates included the impact of excess tax benefits relating to share-based compensation of 3.6% and 2.8%, respectively. The 2018 periods included the impact of excess tax benefits relating to share-based compensation of 5.2% and 4.6%, respectively. We expect the 2019 fiscal year effective tax rate to be between 20% and 23%. 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 $34.2 million for the quarter and $49.7 million year-to-date compared with $11.6 million and $21.4 million for the prior year periods.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash generated from operations, borrowings under our credit facility (as described below) and proceeds from the sales of company restaurants as part of our refranchising and development strategy. 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:

| Two Quarters Ended
| June 26, 2019 |  | June 27, 2018
| (In thousands)
Net cash provided by operating activities | $ | 25,155 |  |  | $ | 26,096 |
Net cash provided by (used in) investing activities | 30,975 |  |  | (20,458 | )
Net cash used in financing activities | (58,864 | ) |  | (6,871 | )
Decrease in cash and cash equivalents | $ | (2,734 | ) |  | $ | (1,233 | )

Net cash flows provided by operating activities were $25.2 million for the two quarters ended June 26, 2019 compared to $26.1 million for the two quarters ended June 27, 2018. The decrease in cash flows provided by operating activities was primarily due to the timing of prepaid expense payments during the two quarters ended June 26, 2019 and the runoff of working capital deficit following the sales of company restaurants. We believe that our estimated cash flows from operations for 2019, 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 12 months.
Net cash flows provided by investing activities were $31.0 million for the two quarters ended June 26, 2019. These cash flows were primarily comprised of proceeds from sales of restaurants and real estate of $47.9 million, partially offset by capital expenditures of $6.8 million, acquisitions of real estate of $4.7 million, deposits on the acquisition of real estate of $4.3 million, and investment purchases of $1.3 million. Net cash flows used in investing activities were $20.5 million for the two quarters ended June 27, 2018. These cash flows were primarily comprised of capital expenditures of $9.5 million, acquisitions of restaurants and real estate of $10.4 million and notes receivable issuances of $2.5 million.
29

Our principal capital requirements have been largely associated with the following:

| Two Quarters Ended
| June 26, 2019 |  | June 27, 2018
| (In thousands)
Facilities | $ | 3,108 |  |  | $ | 4,462 |
New construction | 1,901 |  |  | 808 |
Remodeling | 1,019 |  |  | 865 |
Information technology | 641 |  |  | 1,336 |
Other | 108 |  |  | 2,041 |
Capital expenditures (excluding acquisitions) | $ | 6,777 |  |  | $ | 9,512 |

Capital expenditures and acquisitions for fiscal 2019 are expected to be between approximately $38 and $43 million, including between $23 and $28 million of real estate acquisitions through like-kind exchanges.
Cash flows used in financing activities were $58.9 million for the two quarters ended June 26, 2019, which included cash payments for stock repurchases of $37.3 million and net long-term debt repayments of $17.0 million. Cash flows used in financing activities were $6.9 million for the two quarters ended June 27, 2018, which included cash payments for stock repurchases of $29.0 million, partially offset by net long-term debt borrowings of $21.4 million,
Our working capital deficit was $41.3 million at June 26, 2019 compared to $47.1 million at December 26, 2018. The decrease in working capital deficit was primarily related the recognition of $15.4 million in assets held for sale related to the anticipated sales of company restaurants, the runoff of working capital deficit following the sales of company restaurants and the timing of payments impacting the receivables balances, partially offset by the adoption of Topic 842, which resulted in the recognition of $17.0 million in current operating lease liabilities as of June 26, 2019. 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 June 26, 2019, we had outstanding revolver loans of $271.0 million and outstanding letters of credit under the senior secured revolver of $20.5 million. These balances resulted in availability of $108.5 million under the credit facility. The credit facility includes an accordion feature that would allow us to increase the size of the revolver to $450 million. Prior to considering the impact of our interest rate swaps, described below, the weighted-average interest rate on outstanding revolver loans was 4.74% as of June 26, 2019. Taking into consideration our interest rate swaps, the weighted-average interest rate of outstanding revolver loans remained at 4.74% as of June 26, 2019.
A commitment fee, which is based on our consolidated leverage ratio, is paid on the unused portion of the credit facility and was 0.35% as of June 26, 2019. Borrowings under the credit facility bear a tiered interest rate, which is based on our consolidated leverage ratio and was set at LIBOR plus 225 basis points as of June 26, 2019. The maturity date for the credit facility is October 26, 2022.
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). 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. We were in compliance with all financial covenants as of June 26, 2019.
Interest Rate Hedges
We have interest rate swaps to hedge a portion of the forecasted 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 variable interest due on forecasted notional debt obligations. As of June 26, 2019, the fair value of the interest rate swaps was a liability of $35.6 million, which is recorded as a component of other noncurrent liabilities in our Condensed Consolidated Balance Sheets.
30

Implementation of New Accounting Standards
Information regarding the implementation of new accounting standards is incorporated by reference from Note 2 to our unaudited condensed consolidated financial statements set forth in Part I, Item 1 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, 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, including changes in the fair value, refer to Notes 9, 10 and 16 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 2019, we implemented new controls in connection with our adoption of the Accounting Standards Updates related to Topic 842, Leases. These new controls resulted in changes to the leasing process and related 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 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 17 to our unaudited condensed consolidated financial statements set forth in Part I, Item 1 of this report.
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 26, 2018.
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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 June 26, 2019.

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)
March 28, 2019 - April 24, 2019 | 646 |  |  | $ | 17.72 |  |  | 646 |  |  | $ | 107,995 |
April 25, 2019 - May 22, 2019 | 404 |  |  | 19.27 |  |  | 404 |  |  | $ | 100,193 |
May 23, 2019 - June 26, 2019 | 486 |  |  | 20.13 |  |  | 486 |  |  | $ | 90,398 |
Total | 1,536 |  |  | $ | 18.89 |  |  | 1,536 |  |  |

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

(2) | On October 27, 2017, we announced that our Board of Directors approved a new share repurchase program, authorizing us to repurchase up to an additional $200 million of our common stock (in addition to prior authorizations). Such repurchases may take place from time to time in 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 June 26, 2019, we purchased 1,536,132 shares of our common stock for an aggregate consideration of approximately $29.1 million pursuant to the share repurchase program.

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

Exhibit No. |  | Description
10.1 |  | Summary of Non-Employee Director Compensation as of May 8, 2019.
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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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: | July 30, 2019 | By: | /s/ F. Mark Wolfinger |
|  |  | F. Mark Wolfinger |
|  |  | Executive Vice President, Chief Administrative Officer and Chief Financial Officer |
Date: | July 30, 2019 | By: | /s/ Jay C. Gilmore |
|  |  | Jay C. Gilmore |
|  |  | Vice President, Chief Accounting Officer and Corporate Controller |

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