Nathan's(NATH) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for the thirteen weeks ended June 30, 2019, including the impact of adopting the new lease accounting standard (Topic 842) Consolidated Balance Sheets Total assets increased to $105.0 million as of June 30, 2019, primarily due to the recognition of operating lease assets, while the stockholders' deficit improved to $(65.1) million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 (Unaudited) | March 31, 2019 | | :--- | :--- | :--- | | Total Assets | $105,001 | $94,306 | | Cash and cash equivalents | $73,903 | $75,446 | | Operating lease assets | $7,655 | - | | Total Liabilities | $170,149 | $164,450 | | Long-term debt, net | $145,622 | $145,449 | | Operating lease liabilities (Current & Long-term) | $8,373 | - | | Total stockholders' deficit | $(65,148) | $(70,144) | - The company adopted the new lease guidance (Topic 842) in the first quarter of fiscal 2020, resulting in the recognition of operating lease assets of $7.8 million and liabilities of $8.5 million as of April 1, 2019[21][23] Consolidated Statements of Earnings Total revenues slightly increased to $30.5 million for the thirteen weeks ended June 30, 2019, with net income growing to $5.4 million or $1.28 per diluted share Consolidated Earnings Summary (in thousands, except per share data) | Metric | Thirteen Weeks Ended June 30, 2019 | Thirteen Weeks Ended June 24, 2018 | | :--- | :--- | :--- | | Total Revenues | $30,518 | $30,168 | | Income from Operations | $9,448 | $9,087 | | Net Income | $5,369 | $4,795 | | Diluted EPS | $1.28 | $1.13 | | Dividends declared per share | $0.35 | $0.25 | Consolidated Statements of Cash Flows The company experienced a net decrease in cash and cash equivalents of $1.5 million, ending the quarter with $73.9 million, primarily due to operating and financing activities Cash Flow Summary (in thousands) | Cash Flow Activity | Thirteen Weeks Ended June 30, 2019 | Thirteen Weeks Ended June 24, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,036) | $(2,812) | | Net cash used in investing activities | $(106) | $(138) | | Net cash used in financing activities | $(401) | $(1,371) | | Net decrease in cash | $(1,543) | $(4,321) | | Cash at end of period | $73,903 | $53,018 | Notes to Consolidated Financial Statements These notes detail the adoption of Topic 842, disaggregated revenues by segment, long-term debt, and segment performance, highlighting the Branded Product Program and Product Licensing as key drivers Disaggregated Revenues by Segment (in thousands) | Segment | Thirteen weeks ended June 30, 2019 | Thirteen weeks ended June 24, 2018 | | :--- | :--- | :--- | | Branded Product Program | $16,113 | $16,445 | | Product licensing | $8,722 | $8,098 | | Restaurant operations | $5,201 | $5,130 | | Total Revenues | $30,518 | $30,168 | Income from Operations by Segment (in thousands) | Segment | Thirteen weeks ended June 30, 2019 | Thirteen weeks ended June 24, 2018 | | :--- | :--- | :--- | | Branded Product Program | $2,203 | $2,531 | | Product licensing | $8,676 | $8,053 | | Restaurant operations | $750 | $750 | | Corporate | $(2,181) | $(2,247) | | Total Income from Operations | $9,448 | $9,087 | - The company has $150 million of 6.625% Senior Secured Notes due in 2025, and as of June 30, 2019, was in compliance with all associated covenants[68][71] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial performance for the quarter, highlighting increased license royalties, improved profitability, and the impact of commodity costs and labor wage increases Results of Operations Total revenues increased by 1.1% to $30.5 million, driven by higher license royalties, while gross profit margin slightly decreased to 23.8% due to increased beef costs - License royalties increased by 7.7% to $8.7 million, primarily due to an 8.2% increase in royalties from the John Morrell & Co agreement, driven by a 6.6% increase in retail volume[116] - Foodservice sales from the Branded Product Program decreased by 2.0% to $16.1 million, attributed to a 0.9% decrease in volume and a 0.5% decrease in average selling prices[113] - Gross profit margin decreased to 23.8% from 24.5% year-over-year, mainly due to higher beef costs in the Branded Product Program, which was partially offset by higher margins from company-operated restaurants[121] EBITDA and Adjusted EBITDA (Non-GAAP Measures) The company's non-GAAP EBITDA increased to $10.1 million and Adjusted EBITDA rose to $10.2 million for the thirteen weeks ended June 30, 2019 Reconciliation of Net Income to EBITDA and Adjusted EBITDA (in thousands) | Metric | Thirteen weeks ended June 30, 2019 | Thirteen weeks ended June 24, 2018 | | :--- | :--- | :--- | | Net income | $5,369 | $4,795 | | Interest expense | $2,650 | $2,650 | | Provision for income taxes | $1,816 | $1,724 | | Depreciation and amortization | $310 | $345 | | EBITDA | $10,145 | $9,514 | | Share-based compensation | $28 | $81 | | Adjusted EBITDA | $10,173 | $9,595 | Liquidity and Capital Resources Cash and cash equivalents decreased to $73.9 million due to debt service and dividend payments, with management affirming sufficient liquidity to fund operations and obligations for the next 12 months - Cash and cash equivalents decreased by $1.5 million during the quarter to $73.9 million at June 30, 2019[133] - The company has $150 million of 6.625% Senior Secured Notes due 2025, with semi-annual interest payments of approximately $5.0 million[134][135] - The Board declared a quarterly cash dividend of $0.35 per share, with the first quarter dividend of $1,479,000 paid on June 28, 2019[64][133] - As of June 30, 2019, 245,868 shares remained available for repurchase under the company's sixth stock repurchase plan[67][152] Inflationary Impact The company faces inflationary pressures from escalating beef prices, resulting in a 0.7% higher hot dog market price, and increased labor costs due to New York State minimum wage legislation - Beef prices moderately escalated between January and June 2019, causing the market price for hot dogs to be approximately 0.7% higher than in the prior-year period[161][177] - New York State legislation increased the minimum wage for fast-food workers, reaching $15.00/hour in New York City effective December 31, 2018, significantly affecting the company's two restaurants there[164][167] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate fluctuations affecting cash and fixed-rate debt, and significant commodity price volatility, particularly in beef, impacting cost of sales - A 0.25% change in interest rates would impact annual earnings on cash by approximately $185,000 and annual interest expense on borrowings by $375,000[175][176] - The company faces significant volatility in beef costs, where a 10% short-term change in food and paper product costs would have impacted the cost of sales for the quarter by approximately $1,370,000[177][179] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal controls - The Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period, the company's disclosure controls and procedures were effective[181] - No changes in internal controls over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal control[182] PART II. OTHER INFORMATION Legal Proceedings The company reported no material legal proceedings for the period - None[185] Risk Factors The company refers investors to the comprehensive risk factors detailed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019 - The company refers to the risk factors discussed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019[185] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the quarter - None[186] Other Information The Board of Directors declared a second quarterly cash dividend of $0.35 per share, payable on September 6, 2019 - Effective August 9, 2019, the Board declared a quarterly cash dividend of $0.35 per share, payable on September 6, 2019[189] Exhibits This section lists the exhibits filed with the Form 10-Q report, including CEO and CFO certifications and XBRL-formatted financial statements - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL data files (101.1)[193]