Adjusted Income Before Taxes*, Denny's target metric for earnings, increased 15.6% to $10.9 million compared with $9.5 million in the prior year quarter. In the fourth quarter, the provision for income taxes was $2.5 million, reflecting an annual effective tax rate of 36.4%. Due to the use of net operating loss and tax credit carryforwards, the Company paid only $0.2 million in cash taxes in the fourth quarter and $2.0 million in 2012.
Denny's net income was $6.5 million for the fourth quarter 2012, or $0.07 per diluted share, which was impacted by $0.7 million of impairment expense. Prior year quarter net income of $92.0 million, or $0.94 per diluted share, was impacted by the recording of an $89.1 million, or $0.91 per diluted share, net deferred tax benefit resulting 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.
For the full year 2012, Denny's generated $48.8 million of Free Cash Flow* which the Company used to reduce its outstanding term loan by $28.0 million and to return value to shareholders by repurchasing 4.8 million shares for $22.2 million. Since initiating our share repurchase strategy in November 2010, the Company has repurchased 11.5 million shares and now has 3.5 million shares remaining in its current authorized share repurchase initiative.
Mark Wolfinger, Executive Vice President, Chief Administrative Officer and Chief Financial Officer, concluded, "We are pleased that we have reached our target of being a 90% franchised system, which has enabled us to drive significant improvements in our financial performance. Our franchise focused business model enables us to continue to reinvest in the growth of the brand, pay down debt and repurchase shares. Despite numerous external headwinds facing the restaurant industry in 2013, we anticipate growing adjusted earnings per share by at least 10% and generating close to $50 million in Free Cash Flow* this year, after reinvestments in our company restaurants."