Nathan's(NATH) - 2019 Q4 - Annual Report

Franchise Operations - The franchise system consisted of 255 Nathan's franchised units located in 22 states and 14 foreign countries as of March 31, 2019, down from 276 units the previous year, reflecting a net decrease of 21 units [227]. - During the fiscal year ended March 31, 2019, Nathan's opened 13 franchised restaurants but closed 34, resulting in a net loss of 21 units [227]. - The company had 276 franchised restaurants operating at the beginning of the fiscal year ended March 31, 2018, indicating a decline in franchise operations over the subsequent year [227]. - Franchise restaurant sales decreased to $65,607,000 in fiscal 2019 from $69,838,000 in fiscal 2018, primarily due to unit closures [282]. - Comparable domestic franchise sales for fiscal 2019 were $51,038,000, a slight increase from $50,253,000 in fiscal 2018, reflecting a 0.4% decline on a 52-week basis [282]. - Franchise restaurant sales decreased to $69,838,000 in the fiscal 2018 period from $74,553,000 in the fiscal 2017 period, primarily due to unit closures [307]. Revenue Generation - The company generated revenues primarily from the Branded Product Program, restaurant operations, and product licensing agreements, with a focus on selling Nathan's products in supermarkets and club stores [225]. - The Branded Product Program allows foodservice retailers to sell Nathan's proprietary products, which has been a significant revenue source since its introduction in 1998 [224]. - License royalties increased to $23,615,000 in fiscal 2019 from $23,020,000 in fiscal 2018, driven by a 2.2% increase in volume [281]. - License royalties rose to $23,020,000 in the fiscal 2018 period, compared to $20,368,000 in the fiscal 2017 period, driven by a 9.3% increase in volume [306]. Financial Performance - Total sales for fiscal 2019 were $71,561,000, a decrease from $76,708,000 in fiscal 2018, with foodservice sales from the Branded Product Program dropping from $62,623,000 to $57,960,000 [278]. - Gross profit for fiscal 2019 was $18,782,000, representing 26.2% of sales, an improvement from $17,956,000 or 23.4% of sales in fiscal 2018 [287]. - Total cost of sales decreased by $5,973,000 to $52,779,000 in fiscal 2019 compared to $58,752,000 in fiscal 2018 [287]. - General and administrative expenses increased by $360,000 or 2.7% to $13,851,000 in fiscal 2019, primarily due to higher marketing and professional fees [292]. - Interest expense for fiscal 2019 was $10,792,000, down from $13,591,000 in fiscal 2018, reflecting changes in debt structure [296]. - Cash provided by operations for fiscal 2019 was $11,156,000, driven by net income of $21,493,000 and non-cash operating items of $2,561,000 [324]. Debt and Interest Expenses - Nathan's expects to incur annual interest expense of $9,937,500 and approximately $690,000 in annual amortization of debt issuance costs due to the issuance of $150 million in 6.625% Senior Secured Notes due 2025 [234]. - The company made required semi-annual interest payments of $4,968,750 on the 2025 Notes during the fiscal year ended March 31, 2019 [231]. - Nathan's has no scheduled principal amortization payments on the 2025 Notes prior to its final maturity on November 1, 2025 [232]. - The company expects to incur interest payments of $9,937,500 for the fiscal year ending March 29, 2020 [331]. - As of March 31, 2019, the company had $150.0 million of 2025 Notes outstanding, with interest expense fluctuating by approximately $375,000 per annum for each 0.25% change in interest rates [350]. Asset Management - The company recorded an impairment charge of $790,000 for long-lived assets at one restaurant during the fiscal year ended March 25, 2018 [268]. - Upon adopting new lease accounting standards, the company expects to recognize additional operating lease liabilities of approximately $8,500,000 and a Right of Use asset of approximately $7,800,000 [275]. - The company recorded a gain on the sale of property and equipment of $11,177,000 in fiscal 2019, related to the sale of a restaurant and a regional office [294]. Cash Flow and Dividends - Cash and cash equivalents increased to $75,446,000 as of March 31, 2019, up by $18,107,000 from $57,339,000 at March 25, 2018 [323]. - Net working capital rose to $72,237,000 from $53,702,000 at March 25, 2018 [323]. - The company declared and paid four regular dividends of $0.25 per common share, totaling $4,187,000 during the fiscal year ended March 31, 2019 [323]. - Cash provided by investing activities was $12,328,000, primarily from the sale of a restaurant in Bay Ridge, Brooklyn, NY for $11,445,000 [325]. - Cash used in financing activities totaled $5,377,000, including regular cash dividends of $4,187,000 and stock repurchases of 14,390 shares for $1,000,000 [326]. Market Conditions and Risks - The company has a critical dependency on its agreement with John Morrell & Co. for the manufacturing and sale of hot dogs, sausage, and corned beef, which poses risks related to product quality and supply availability [228]. - The company anticipates continued volatility in beef prices, which could impact operational results [339]. - The company expects to experience price volatility for beef products during fiscal 2020, which could impact operational results [352]. - A short-term increase or decrease of 10.0% in the cost of food and paper products for the year ended March 31, 2019 would have increased or decreased the cost of sales by approximately $4,706,000 [353]. - Foreign franchisees generally conduct business in United States dollars, reducing risks from foreign currency fluctuations, which are not expected to materially impact financial results [355].