Nathan's(NATH)2020-11-06 11:08Business Performance - As of September 27, 2020, the restaurant system consisted of 214 franchised units, a decrease from 241 units in the previous year, with 93 Branded Menu units[106]. - The primary drivers of recent growth have been the Licensing and Branded Product Programs, which are now the largest contributors to the Company's revenues and profits[107]. - Approximately 60% of franchised locations have reopened as of the date of the report, with many closures impacting franchise fees and royalties[113]. - The COVID-19 pandemic has negatively impacted revenue and net income, with expectations of continued adverse effects for the remainder of fiscal 2021[115]. - Total sales decreased by 43% to $12,692,000 for the thirteen weeks ended September 27, 2020, compared to $22,106,000 for the same period in 2019[126]. - Foodservice sales from the Branded Product Program decreased by 40% to $9,698,000 for the second quarter fiscal 2021, impacted by the COVID-19 pandemic[126]. - Total Company-owned restaurant sales decreased by 49% to $2,994,000 during the second quarter fiscal 2021 compared to $5,924,000 in the same period of 2020[127]. - Franchise restaurant sales declined to $6,969,000 in the second quarter fiscal 2021, down from $18,323,000 in the second quarter fiscal 2020[130]. - Comparable domestic franchise sales were $5,638,000 in the second quarter fiscal 2021, down from $10,112,000 in the second quarter fiscal 2020[130]. Financial Performance - The Company incurred annual interest expense of $9,937,500 from the issuance of $150,000,000 of 6.625% Senior Secured Notes due 2025, reducing cash interest expense by $3,562,500 compared to previous notes[110]. - General and administrative expenses decreased by $947,000 or 27% to $2,612,000 in the second quarter fiscal 2021 compared to $3,559,000 in the same period of 2020[138]. - Overall cost of sales decreased by 39% to $9,927,000 in the second quarter fiscal 2021 compared to $16,289,000 in the second quarter fiscal 2020[133]. - Adjusted EBITDA for the second quarter fiscal 2021 was $8,040,000, compared to $8,123,000 for the same period in 2019[125]. - Cost of sales decreased by 52% to $15,224,000 in fiscal 2021 compared to $31,711,000 in fiscal 2020, with gross profit at $4,151,000 or 21.4% of sales[152]. - General and administrative expenses decreased by $2,040,000 or 27% to $5,456,000 in fiscal 2021 from $7,496,000 in fiscal 2020[158]. - Cash and cash equivalents increased to $81,519,000 at September 27, 2020, up by $4,402,000 from $77,117,000 at March 29, 2020[164]. - Cash provided by operations was $9,107,000 in fiscal 2021, primarily from net income of $7,655,000[167]. - Cash used in investing activities was $318,000 in fiscal 2021 for capital expenditures related to the Branded Product Program[168]. - Cash used in financing activities totaled $4,387,000 in fiscal 2021, including $2,880,000 for quarterly dividends[169]. Cost Management - The Company has implemented cost-saving measures, including reduced payroll costs and postponed non-essential capital spending[122]. - The sales and profits from the Branded Product Program have been adversely affected due to many customers operating in closed venues[114]. - The company is developing strategies to minimize the financial impact of increased labor costs and has recently raised certain selling prices to offset cost increases[185]. - Future results could be materially impacted by supply constraints on beef and increased costs compared to earlier periods[109]. - The average cost of hot dogs between October 2019 and March 2020 was approximately 11.2% higher than the same period in the previous year, and 9.4% higher between October 2019 and September 2020 compared to the prior year[180]. - A short-term increase or decrease of 10.0% in the cost of food and paper products for the twenty-six week period ended September 27, 2020 would have impacted the cost of sales by approximately $1,310,000[199]. - The company expects to experience price volatility for beef products during fiscal 2021 due to market conditions and the impact of the COVID-19 pandemic on the meat processing industry[182]. Operational Strategies - The Company has launched curbside delivery at three of its four Company-owned restaurants and introduced "ghost kitchens" for product marketing[122]. - The Company aims to improve the performance of the existing restaurant system and grow through franchising efforts, focusing on core items and higher quality menu offerings[108]. - The company expects to make investments in existing restaurants and support the growth of Branded Product and Menu Programs[175]. Risk Management - The company highlights the importance of considering risk factors that could materially affect its business and financial condition, as detailed in the Annual Report on Form 10-K[203]. - The minimum hourly wage for fast food workers in New York State is set to increase to $14.50 on December 31, 2020, and $15.00 on July 1, 2021, which could significantly affect the company's operations[184]. - The company has not attempted to hedge against fluctuations in commodity prices, which may expose it to market volatility in future purchases[198]. - The company has not purchased future contracts or options to hedge against foreign currency fluctuations, as payments are generally made in United States dollars[200]. - There were no changes in internal controls over financial reporting during the quarter ended September 27, 2020, that materially affected internal control[201]. - The Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective at a reasonable assurance level[202]. - The company acknowledges that no control system can provide absolute assurance against fraud or control issues[202]. - There are no legal proceedings currently affecting the company[203]. Tax and Liabilities - As of September 27, 2020, the company had unrecognized tax benefits of $333,000, with a potential decrease of $16,000 expected within the next year[179]. - The company recorded a liability of $110,000 related to the Brooklyn Guaranty, which does not include potential additional costs that are not reasonably determinable[179]. - The company had $150,000,000 of 2025 Notes outstanding, with interest expense expected to change by approximately $375,000 per annum for each 0.25% change in interest rates[194]. - Cash and cash equivalents totaled $81,519,000 as of September 27, 2020, with earnings on this cash expected to change by approximately $204,000 per annum for each 0.25% change in interest rates[193].