Denny's reports Q3 net earnings of US$5.4M, down from earnings of US$8M in year-ago period, impacted by US$2.5M in impairment expenses and US$1.3M cost for unfavorable workers' compensation claims development

Nevin Barich

SPARTANBURG, South Carolina , October 30, 2012 (Business Wire) – Denny’s Corporation (DENN), franchisor and operator of one of America's largest full-service restaurant chains, today reported results for its third quarter ended September 26, 2012.

Third Quarter Summary

System-wide same-store sales grew 0.4%, which marks the sixth consecutive quarter that system-wide same-store sales have been positive.

Opened 12 franchised units, including the first international university unit located in Canada at the Southern Alberta Institute of Technology.

Signed first international development agreement in South America for 10 units in Chile.

Franchise operating margin increased $1.0 million to $22.3 million while franchise operating margin (as a percentage of franchise and license revenue) was 64.9%.

Company restaurant operating margin increased 0.6 percentage points to 14.7% compared with the prior year, and was impacted by $1.3 million for unfavorable workers’ compensation claims development.

Adjusted Income Before Taxes* grew 9.3% to $13.1 million compared with the prior year.

Net income of $5.4 million, or $0.06 per diluted share, was impacted by $2.5 million in impairment expense and $1.3 million for unfavorable workers’ compensation claims development.

Generated $12.9 million of Free Cash Flow* in the quarter which was used to reduce outstanding term loan debt by $7.0 million and repurchase 1.0 million shares.

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

Third Quarter Results

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

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

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

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

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

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

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

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

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

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

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

Business Outlook

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

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

Further Information

Denny’s will provide further commentary on the results for the third quarter of 2012 on its quarterly investor conference call today, Tuesday, October 30, 2012 at 5:00 p.m. ET. Interested parties are invited to listen to a live broadcast of the conference call accessible through the investor relations section of Denny’s website at ir.dennys.com. A replay of the call may be accessed at the same location later in the day and will remain available for 30 days.

Denny's is the franchisor and operator of one of America's largest full-service restaurant chains, based on number of units. As of September 26, 2012, Denny’s had 1,687 franchised, licensed, and company-owned restaurants across the United States, Canada, Costa Rica, Mexico, Honduras, Guam, Curaçao, Puerto Rico, Dominican Republic and New Zealand. For further information on Denny's, including news releases, links to SEC filings and other financial information, please visit the Denny's investor relations website.

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