Nathan's(NATH) - 2020 Q4 - Annual Report

Franchise Operations - As of March 29, 2020, the franchise system consisted of 216 franchised units, down from 255 units at the beginning of the period, reflecting a net closure of 55 units[245]. - Franchise restaurant sales decreased to $61,542,000 in fiscal 2020 from $65,607,000 in fiscal 2019, impacted by unit closures and a 2.3% decline in comparable domestic sales[306]. - The company recognized $951,000 of forfeited franchise fees in fiscal 2020, significantly higher than $192,000 in fiscal 2019, due to terminations of Master Franchise Agreements[308]. Financial Performance - Total sales for the fiscal year ended March 29, 2020, were $70,559,000, a decrease of approximately 1.4% compared to $71,561,000 for the fiscal year ended March 31, 2019[301]. - Foodservice sales from the Branded Product Program were $57,586,000 for fiscal 2020, down from $57,960,000 in fiscal 2019, reflecting a volume decrease of approximately 2.1%[301]. - Company-owned restaurant sales decreased to $12,973,000 in fiscal 2020 from $13,601,000 in fiscal 2019, with comparable sales increasing by approximately 4.5% when excluding the sold restaurant[303]. - License royalties increased to $25,859,000 in fiscal 2020, up from $23,615,000 in fiscal 2019, driven by an 11.0% increase in retail volume[305]. - Total cost of sales increased by $1,709,000 to $54,488,000 in fiscal 2020, resulting in a gross profit margin of 22.8%, down from 26.2% in fiscal 2019[310]. - General and administrative expenses rose by $928,000 or 6.7% to $14,779,000 in fiscal 2020, primarily due to transformation efforts within the restaurant business[315]. - Interest expense for fiscal 2020 was $10,601,000, compared to $10,792,000 in fiscal 2019, reflecting a decrease due to the shorter fiscal year[317]. Debt and Financing - The Company issued $150 million of 6.625% Senior Secured Notes due 2025, with annual interest expense expected to be $9.94 million[247][254]. - The 2025 Notes have no scheduled principal amortization payments prior to maturity on November 1, 2025[250]. - The Company authorized the repurchase of up to $10 million of the 2025 Notes effective June 1, 2020[252]. - The Company authorized the repurchase of up to $10 million of the 2025 Notes, with no set time limit on the repurchases[263]. - The Company recorded a loss on early extinguishment of debt of $8.87 million for the year ended March 25, 2018, related to the redemption of the 2020 Notes[248]. Cash Flow and Investments - Cash and cash equivalents increased to $77,117,000 as of March 29, 2020, up from $75,446,000 at March 31, 2019, representing a $1,671,000 increase[324]. - Cash provided by operations was $12,349,000 for the fiscal 2020 period, primarily driven by net income of $13,435,000[325]. - The company declared and paid four regular dividends of $0.35 per common share, totaling $5,912,000 during the fiscal 2020 period[324]. - The company repurchased 85,642 shares of common stock for $4,966,000 during the fiscal 2020 period[327]. - The company anticipates making investments in existing restaurants and supporting the growth of its Branded Product and Branded Menu Programs using operating cash flow[335]. Regulatory and Market Conditions - The Company expects declines in sales and profits from its Branded Product Program due to the closure of venues like sports arenas and amusement parks[240]. - The minimum hourly rate of pay in New York State will increase to $14.50 on December 31, 2020, and $15.00 on July 1, 2021, significantly affecting the company's operations[345]. - The company incurred approximately $6,000 in additional costs during fiscal 2020 due to the Fair Work Week Legislation, which requires predictable work schedules for fast food workers[348]. - The company expects future labor costs to be impacted by ongoing minimum wage increases in New York State and other labor regulations[312]. Revenue Recognition and Accounting - Revenue from license royalties is generally based on a percentage of sales, recognized on a monthly basis when earned and collectible[268]. - Franchise fees and royalties that are not collectible are recorded as bad debts until paid or collectibility is assured[279]. - The Company maintains a national advertising fund, with revenues and expenses fully consolidated into the financial statements under Topic 606[281]. - The adoption of Topic 606 did not impact the timing and amount of revenue recognized from the Branded Product Program and Company-owned restaurant sales[266][267]. - The Company recognizes revenue from sub-leasing properties as income when earned and collectible[283]. Asset Management - Goodwill amounts to $95,000 from the acquisition of Nathan's in 1987, and intangible assets related to Arthur Treacher's total $1,269,000[285]. - The Company recorded amortization expense of $84,000 for the fiscal year ending March 29, 2020, related to its intangible assets[286]. - Operating lease assets and liabilities recognized as of the first day of fiscal year 2020 were $7,804,000 and $8,533,000, respectively[294]. - The Company has determined that no impairment exists for goodwill and intangible assets as of March 29, 2020, and March 31, 2019[285]. Cost and Price Volatility - The average cost of hot dogs increased by approximately 11.4% between October 2019 and March 2020 compared to the previous year, impacting market prices which were about 6.7% higher[341]. - The company expects to continue experiencing price volatility for beef products and has previously entered into purchase commitments to mitigate rising costs[343]. - A short-term increase or decrease of 10.0% in the cost of food and paper products for the year ended March 29, 2020, would have altered the cost of sales by approximately $4,908,000[358]. - The company expects to experience price volatility for beef products during fiscal 2021 due to market conditions and the COVID-19 pandemic[357]. - The company has not hedged against fluctuations in commodity prices, exposing future purchases to market changes[358]. - Continued increases in labor, food, and operating expenses may necessitate a reconsideration of the pricing strategy to maintain margins[349]. Taxation - The effective tax rates for the fiscal year ended March 29, 2020, and March 31, 2019, were 25.4% and 26.9%, respectively, with adjustments reducing the rates by 1.3% and 1.1% due to tax benefits from stock compensation[321]. - Unrecognized tax benefits amounted to $311,000 as of March 29, 2020, with an estimated potential reduction of up to $16,000 in the next fiscal year[322]. Other Financial Metrics - The Fixed Charge Coverage Ratio is currently set at 2.0 to 1.0, which applies to determining additional restricted payments and debt incurrence[258]. - As of March 29, 2020, the company had total cash contractual obligations of $168,712,000, with net obligations of $167,362,000 after accounting for sublease income[338]. - As of March 29, 2020, the company's cash and cash equivalents totaled $77,117,000, with earnings affected by interest rate changes[353]. - The company had $150.0 million of 2025 Notes outstanding as of March 29, 2020, with interest expense sensitive to interest rate fluctuations[354]. - The company does not believe fluctuations in foreign currencies would materially impact financial results, as foreign franchisees conduct business in U.S. dollars[359].