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Nathan's(NATH) - 2022 Q3 - Quarterly Report
Nathan'sNathan's(US:NATH)2022-02-04 11:03

PART I. FINANCIAL INFORMATION Presents the company's financial statements, notes, management's discussion, market risks, and controls Item 1. Financial Statements. Presents Nathan's Famous, Inc.'s unaudited consolidated financial statements and accompanying notes Consolidated Balance Sheets The consolidated balance sheets detail the company's financial position, showing changes in assets, liabilities, and equity Consolidated Balance Sheets (in millions) | Metric | Dec 26, 2021 (in millions) | Mar 28, 2021 (in millions) | Change (Dec 2021 vs Mar 2021) (in millions) | | :--- | :--- | :--- | :--- | | Total Assets | $114.455 | $108.809 | +$5.646 | | Total Liabilities | $169.756 | $171.287 | -$1.531 | | Total Stockholders' Deficit | $(55.301) | $(62.478) | +$7.177 (reduction in deficit) | | Cash and cash equivalents | $86.168 | $81.064 | +$5.104 | | Current maturities of long-term debt | $40.000 | $- | +$40.000 | | Long-term debt, net | $107.349 | $146.831 | -$39.482 | Consolidated Statements of Earnings The consolidated statements of earnings show significant revenue and net income growth for both periods Consolidated Statements of Earnings (in millions) | Metric (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $25.913 | $18.030 | 43.7% | $90.110 | $57.555 | 56.6% | | Income from operations | $5.613 | $4.403 | 27.5% | $23.754 | $20.081 | 18.3% | | Net income | $2.130 | $1.359 | 56.7% | $11.438 | $9.014 | 26.9% | | Basic EPS | $0.52 | $0.33 | 57.6% | $2.78 | $2.19 | 26.9% | | Diluted EPS | $0.52 | $0.33 | 57.6% | $2.78 | $2.19 | 26.9% | | Dividends declared per share | $0.35 | $0.35 | 0.0% | $1.05 | $1.05 | 0.0% | Consolidated Statements of Stockholders' Deficit (Thirteen weeks) For the thirteen weeks, the company's total stockholders' deficit decreased due to net income offsetting dividends Consolidated Statements of Stockholders' Deficit (Thirteen weeks, in millions) | Metric (in millions) | Balance, Sep 26, 2021 | Dividends on common stock | Share-based compensation | Net income | Balance, Dec 26, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Deficit | $(55.999) | $(1.440) | $0.008 | $2.130 | $(55.301) | Consolidated Statements of Stockholders' Deficit (Thirty-nine weeks) For the thirty-nine weeks, the company's total stockholders' deficit decreased, driven by net income Consolidated Statements of Stockholders' Deficit (Thirty-nine weeks, in millions) | Metric (in millions) | Balance, Mar 28, 2021 | Shares issued (share-based comp) | Withholding tax (share-based comp) | Dividends on common stock | Share-based compensation | Net income | Balance, Dec 26, 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Stockholders' Deficit | $(62.478) | $- | $(0.007) | $(4.320) | $0.066 | $11.438 | $(55.301) | Consolidated Statements of Cash Flows For the thirty-nine weeks, the company generated positive net cash from operating activities Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity (in millions) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (in millions) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $9.896 | $5.710 | +$4.186 | | Net cash used in investing activities | $(0.465) | $(0.398) | -$0.067 | | Net cash used in financing activities | $(4.327) | $(5.827) | +$1.500 | | Net increase (decrease) in cash and cash equivalents | $5.104 | $(0.515) | +$5.619 | | Cash and cash equivalents, end of period | $86.168 | $76.602 | +$9.566 | Notes to Consolidated Financial Statements Provides detailed disclosures and explanations for the consolidated financial statements NOTE A - BASIS OF PRESENTATION Financial statements are unaudited, GAAP-compliant, seasonal, and impacted by COVID-19 - Financial statements are unaudited and prepared in accordance with GAAP, with results being seasonal20 - COVID-19 pandemic continues to impact the business, but the company experienced higher revenues in fiscal 2022 compared to fiscal 20212425 - Uncertainty remains regarding the ultimate duration and impact of COVID-19 variants (Omicron, Delta) on the business25 NOTE B – ADOPTION OF NEW ACCOUNTING STANDARD The company adopted ASU 2019-12 on March 29, 2021, simplifying income tax accounting with no material impact - Adopted ASU 2019-12 on March 29, 2021, simplifying income tax accounting26 - The adoption did not materially impact the consolidated financial statements26 NOTE C – NEW ACCOUNTING STANDARD NOT YET ADOPTED The company is evaluating ASU 2016-13 (CECL model) for credit losses, effective in Q1 fiscal year 2024 - Evaluating ASU 2016-13 (CECL model) for credit losses on financial instruments27 - Standard effective for Nathan's in Q1 fiscal year ending March 31, 202427 NOTE D – REVENUES Total revenues significantly increased for both periods, driven by Branded Products and franchise fees Revenue by Source (in millions) | Revenue Source (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Branded Products | $16.901 | $10.003 | 69.0% | $51.960 | $24.450 | 112.5% | | Company-operated restaurants | $1.736 | $1.319 | 31.6% | $9.502 | $6.247 | 52.1% | | License royalties | $5.878 | $5.898 | -0.3% | $24.218 | $24.689 | -1.9% | | Franchise fees and royalties | $0.919 | $0.420 | 118.8% | $2.993 | $1.087 | 175.3% | | Advertising fund revenue | $0.479 | $0.390 | 22.8% | $1.437 | $1.082 | 32.8% | | Total revenues | $25.913 | $18.030 | 43.7% | $90.110 | $57.555 | 56.6% | Revenue by Geographical Market (in millions) | Geographical Market (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | United States | $25.066 | $17.810 | 40.7% | $87.545 | $56.723 | 54.3% | | International | $0.847 | $0.220 | 285.0% | $2.565 | $0.832 | 208.3% | | Total revenues | $25.913 | $18.030 | 43.7% | $90.110 | $57.555 | 56.6% | - Deferred franchise fees increased from $1.773 million at the beginning of the 39-week period to $2.022 million at the end, with $0.661 million in new deferrals32 NOTE E – INCOME PER SHARE Basic and diluted EPS for both periods increased significantly, reflecting higher net income Income Per Share | Metric | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.52 | $0.33 | 57.6% | $2.78 | $2.19 | 26.9% | | Diluted EPS | $0.52 | $0.33 | 57.6% | $2.78 | $2.19 | 26.9% | - Options to purchase 20,000 shares (2021) and 10,000 shares (2020) were excluded from diluted EPS calculation as their exercise price exceeded the average market price3637 NOTE F – CASH AND CASH EQUIVALENTS Cash and cash equivalents increased to $86.168 million, with no significant risk Cash and Cash Equivalents (in millions) | Metric | Dec 26, 2021 (in millions) | Mar 28, 2021 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $86.168 | $81.064 | +$5.104 | - Substantially all cash balances exceed Federal government insurance limits, but the Company does not believe it is exposed to significant risk38 NOTE G – FAIR VALUE MEASUREMENTS The company uses a three-level fair value hierarchy, classifying long-term debt as Level 2 - Long-term debt is classified as Level 2 in the fair value hierarchy, with fair value estimated from observable secondary market pricing39 Long-Term Debt Fair Value (in millions) | Metric (in millions) | Dec 26, 2021 Face Value | Dec 26, 2021 Fair Value | Mar 28, 2021 Face Value | Mar 28, 2021 Fair Value | | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $150.000 | $152.961 | $150.000 | $154.420 | NOTE H – ACCOUNTS AND OTHER RECEIVABLES, NET Accounts and other receivables, net, increased to $14.175 million, driven by branded product sales Accounts and Other Receivables, Net (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | Branded product sales | $10.185 | $6.480 | +$3.705 | | Franchise and license royalties | $2.992 | $5.224 | -$2.232 | | Other | $1.183 | $0.293 | +$0.890 | | Total receivables | $14.360 | $11.997 | +$2.363 | | Less: allowance for doubtful accounts | $0.185 | $0.345 | -$0.160 | | Accounts and other receivables, net | $14.175 | $11.652 | +$2.523 | - The allowance for doubtful accounts is determined by reviewing past due accounts, loss history, customer ability to pay, and economic conditions43 NOTE I – PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets decreased to $821 thousand Prepaid Expenses and Other Current Assets (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | Income taxes | $- | $0.280 | -$0.280 | | Real estate taxes | $0.140 | $0.087 | +$0.053 | | Insurance | $0.257 | $0.388 | -$0.131 | | Marketing | $0.181 | $0.196 | -$0.015 | | Other | $0.243 | $0.374 | -$0.131 | | Total prepaid expenses and other current assets | $0.821 | $1.325 | -$0.504 | NOTE J – GOODWILL AND INTANGIBLE ASSETS Impairment tests for goodwill and intangible assets showed no charges were necessary - COVID-19 triggered interim impairment tests for goodwill and definite-lived intangible assets4647 - No impairment charges were recorded for goodwill or intangible assets for the thirteen and thirty-nine-week periods ended December 26, 2021, and December 27, 20204647 NOTE K - LONG LIVED ASSETS The company reviewed long-lived assets for impairment due to COVID-19, finding no charges required - Long-lived assets were reviewed for impairment due to COVID-19 impact, with restaurant operating losses being a primary indicator49 - No impairment charges were recorded for long-lived assets for the thirteen and thirty-nine-week periods ended December 26, 2021, and December 27, 202050 NOTE L – ACCRUED EXPENSES, OTHER CURRENT LIABILITIES AND OTHER LIABILITIES Accrued expenses and other current liabilities decreased to $5.410 million Accrued Expenses and Other Current Liabilities (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | Payroll and other benefits | $2.207 | $2.793 | -$0.586 | | Accrued rebates | $0.288 | $0.132 | +$0.156 | | Interest | $1.552 | $4.057 | -$2.505 | | Deferred revenue | $- | $0.841 | -$0.841 | | Total accrued expenses and other current liabilities | $5.410 | $8.478 | -$3.068 | Other Liabilities (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | Reserve for uncertain tax positions | $0.733 | $0.653 | +$0.080 | | Other | $- | $0.121 | -$0.121 | | Total other liabilities | $0.733 | $0.774 | -$0.041 | NOTE M – INCOME TAXES Effective tax rates for the thirty-nine-week periods were 28.1% and 27.7% - Effective tax rates were 28.1% for fiscal 2022 period and 27.7% for fiscal 2021 period54 - Unrecognized tax benefits totaled $0.445 million, with $0.307 million in accrued interest and penalties as of December 26, 202154 NOTE N – SEGMENT INFORMATION Nathan's operates through three segments, with Branded Product and Licensing driving growth - Company operates in three segments: Branded Product Program, Product Licensing, and Restaurant Operations55 - Branded Product Program and Product Licensing are the largest contributors to the Company's profits and primary drivers of growth111 Segment Revenues (in millions) | Segment Revenues (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Branded Product Program | $16.901 | $10.003 | 69.0% | $51.960 | $24.450 | 112.5% | | Product licensing | $5.878 | $5.898 | -0.3% | $24.218 | $24.689 | -1.9% | | Restaurant operations | $2.655 | $1.739 | 52.7% | $12.495 | $7.334 | 70.4% | | Corporate (Advertising fund revenue) | $0.479 | $0.390 | 22.8% | $1.437 | $1.082 | 32.8% | | Total revenues | $25.913 | $18.030 | 43.7% | $90.110 | $57.555 | 56.6% | Segment Income from Operations (in millions) | Segment Income from Operations (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Branded Product Program | $1.681 | $1.550 | 8.5% | $5.096 | $3.074 | 65.8% | | Product licensing | $5.832 | $5.852 | -0.3% | $24.081 | $24.552 | -1.9% | | Restaurant operations | $(0.069) | $(1.162) | 94.1% | $0.623 | $(2.193) | 128.4% | | Corporate | $(1.831) | $(1.837) | 0.3% | $(6.046) | $(5.352) | -13.0% | | Income from operations | $5.613 | $4.403 | 27.5% | $23.754 | $20.081 | 18.3% | NOTE O – SHARE-BASED COMPENSATION Total share-based compensation decreased for both periods, with new stock options granted Share-Based Compensation Cost (in millions) | Compensation Cost (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Stock options | $0.008 | $0.021 | -61.9% | $0.052 | $0.064 | -18.8% | | Restricted stock | $- | $0.008 | -100.0% | $0.014 | $0.023 | -39.1% | | Total compensation cost | $0.008 | $0.029 | -72.4% | $0.066 | $0.087 | -24.2% | - As of December 26, 2021, $0.122 million of unamortized compensation expense remains, expected to be recognized over approximately twenty-two months62 - During the thirty-nine-week period ended December 26, 2021, 10,000 stock options were granted at an exercise price of $68.50 per share, vesting ratably over four years64 NOTE P – STOCKHOLDERS' EQUITY The Board declared quarterly cash dividends and maintains a stock incentive and repurchase program - Board declared three quarterly cash dividends of $0.35 per share for fiscal 2022, totaling $1.440 million each7071 - Board authorized an increase in the regular dividend from $0.35 to $0.45 per quarter, effective February 4, 202272 - As of December 26, 2021, 198,584 shares were available for future option grants or 181,683 shares for restricted stock grants under the 2019 Plan75 - As of December 26, 2021, 133,550 shares remained to be repurchased under the sixth stock repurchase plan, which has no set expiration date77 NOTE Q – LONG-TERM DEBT The company's long-term debt consists of $150 million of Senior Secured Notes, with a $40 million partial redemption Long-Term Debt, Net (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | 6.625% Senior Secured Notes due 2025 | $150.000 | $150.000 | $0 | | Less: unamortized debt issuance costs | $(2.651) | $(3.169) | +$0.518 | | Less: Current maturities of long-term debt | $(40.000) | $- | -$40.000 | | Long-term debt, net | $107.349 | $146.831 | -$39.482 | - On December 15, 2021, the company announced a partial redemption of $40 million of the 2025 Notes, completed on January 26, 2022, at 101.656% of principal90 - The redemption resulted in a loss on early extinguishment of approximately $1.4 million and is expected to reduce future cash interest exposure by $2.65 million per annum90114 NOTE R – LEASES The company acts as both lessee and lessor, with future lease commitments detailed Lease Cost (in millions) | Lease Cost (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Operating lease cost | $0.378 | $0.370 | 2.2% | $1.223 | $1.181 | 3.6% | | Variable lease cost | $0.057 | $0.292 | -80.5% | $1.023 | $1.007 | 1.6% | | Less: Sublease income, net | $(0.041) | $(0.009) | 355.6% | $(0.062) | $(0.031) | 100.0% | | Total net lease cost | $0.394 | $0.653 | -39.7% | $2.184 | $2.157 | 1.2% | - Weighted average remaining lease term for operating leases is 6.5 years, with a weighted average discount rate of 8.875% as of December 26, 202198 Future Lease Commitments (in millions) | Future Lease Commitments (in millions) | Payments (Operating Leases) | Receipts (Subleases) | Net Leases (in millions) | | :--- | :--- | :--- | :--- | | Fiscal year 2022 (remainder) | $0.381 | $0.038 | $0.343 | | Fiscal year 2023 | $1.849 | $0.168 | $1.681 | | Fiscal year 2024 | $1.774 | $0.169 | $1.605 | | Fiscal year 2025 | $1.678 | $0.169 | $1.509 | | Fiscal year 2026 | $1.712 | $0.169 | $1.543 | | Thereafter | $3.762 | $0.183 | $3.579 | | Total lease commitments | $11.156 | $0.896 | $10.260 | NOTE S – COMMITMENTS AND CONTINGENCIES The company settled a lease guaranty and expects no material adverse effect from litigation - Company settled a Guaranty of Lease for a Brooklyn restaurant, paying a $37,500 termination fee in January 2022101 - Management believes ongoing ordinary litigation will not materially affect financial position, cash flows, or results of operations102 NOTE T – SUBSEQUENT EVENTS The company evaluated subsequent events, finding no other events requiring recognition or disclosure - No other subsequent events requiring recognition or disclosure were identified through the filing date104 - Financial statements are unaudited and include normal recurring adjustments. Results are seasonal and not necessarily indicative of full fiscal year performance20 - Disclosures are adequate but should be read with the Annual Report on Form 10-K for the fiscal year ended March 28, 202122 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses the company's financial performance, condition, and outlook, covering revenues, costs, and liquidity Forward-Looking Statements This section highlights forward-looking statements, subject to risks where actual results may differ - Forward-looking statements are identified by words like "believes," "expects," "projects," and relate to strategy, plans, and financial results105 - Risks include the impact of COVID-19, licensing agreements (especially with John Morrell & Co.), debt service, economic conditions, commodity prices, and labor laws106 Introduction Nathan's Famous, Inc. markets its brand and sells products through restaurants, licensing, and branded programs - Nathan's primarily markets its brand and sells products through company-owned restaurants, franchising, product licensing, and the Branded Product Program108109 - As of December 26, 2021, the restaurant system included 242 franchised units (120 Branded Menu Program) and 4 company-owned units, operating in 18 states and 14 foreign countries110 - Strategic emphasis is on increasing distribution points across all business platforms, with Licensing and Branded Product Programs being the primary growth and profit drivers111 Impact of COVID-19 pandemic on our business While revenues increased in fiscal 2022, uncertainty persists from COVID-19 variants, labor, and supply - Revenues increased in the first nine months of fiscal 2022 as COVID-19 cases stabilized and restrictions eased116 - Uncertainty remains due to the Omicron variant, evolving government restrictions, challenges in attracting and retaining employees, and intermittent product shortages from suppliers116 - The full impact of the pandemic on financial condition, liquidity, operations, and workforce is still evolving and cannot be reasonably estimated118 Critical Accounting Policies and Estimates The company's financial statements rely on estimates for revenue, leases, impairment, compensation, and taxes - Key accounting policies and estimates include revenue recognition, leases, impairment of goodwill and other intangible assets, impairment of long-lived assets, share-based compensation, and income taxes119 - No significant changes to accounting policies since March 28, 2021, except for the adoption of ASU 2019-12119 Adoption of New Accounting Standard The company adopted ASU 2019-12 on March 29, 2021, which did not materially impact its financial statements - Refer to Note B for details on the adoption of ASU 2019-12, which had no material impact120 New Accounting Standards Not Yet Adopted The company is evaluating ASU 2016-13 (CECL model) for credit losses, effective in Q1 fiscal year 2024 - Refer to Note C for details on new accounting standards not yet adopted, specifically ASU 2016-13 (CECL model)121 - The CECL model is required for Nathan's in Q1 fiscal year ending March 31, 202427 EBITDA and Adjusted EBITDA The company provides EBITDA and Adjusted EBITDA as non-GAAP measures to assess operating performance - EBITDA and Adjusted EBITDA are non-GAAP measures used to assess operating performance and underlying business trends122 - EBITDA is defined as net income excluding interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA further excludes share-based compensation124 EBITDA and Adjusted EBITDA (in millions) | Metric (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $2.130 | $1.359 | 56.7% | $11.438 | $9.014 | 26.9% | | EBITDA | $5.899 | $4.789 | 23.2% | $24.673 | $21.321 | 15.7% | | Adjusted EBITDA | $5.907 | $4.818 | 22.6% | $24.739 | $21.408 | 15.6% | Results of Operations (Thirteen weeks ended December 26, 2021 compared to December 27, 2020) For Q3 fiscal 2022, total revenues increased by 44%, driven by Branded Product Program and restaurants Revenues (Thirteen weeks) Branded Product Program sales surged, restaurant sales rose, franchise fees doubled, and license royalties decreased Revenue by Source (Thirteen weeks, in millions) | Revenue Source (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Branded Product Program Sales | $16.901 | $10.003 | 69.0% | | Company-owned restaurant sales | $1.736 | $1.319 | 31.6% | | License royalties | $5.878 | $5.898 | -0.3% | | Franchise fees and royalties | $0.919 | $0.420 | 118.8% | | Advertising fund revenue | $0.479 | $0.390 | 22.8% | - Branded Product Program hot dog volume increased by approximately 40%, and average selling prices increased by 19%129 - Franchise restaurant sales increased to $12.280 million from $6.178 million, with 88% of the franchise system open compared to 62% in the prior year132 - 39 ghost kitchens opened during the third quarter fiscal 2022135 Costs and Expenses (Thirteen weeks) Total cost of sales increased by 79%, decreasing gross profit margin due to higher costs Costs and Expenses (Thirteen weeks, in millions) | Expense (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Cost of sales | $16.040 | $8.937 | 79.5% | | Restaurant operating expenses | $0.547 | $0.759 | -27.9% | | Depreciation and amortization | $0.259 | $0.288 | -10.1% | | General and administrative expenses | $2.975 | $3.253 | -8.5% | | Advertising fund expense | $0.479 | $0.390 | 22.8% | - Gross profit margin decreased from 21% to 14% due to a 31% increase in the average cost per pound of hot dogs in the Branded Product Program137138 - Company-owned restaurant cost of sales increased due to higher commodity and labor costs, impacted by New York State minimum wage increases139 Other Items (Thirteen weeks) Interest expense remained constant, interest income decreased, and other income was minimal Other Items (Thirteen weeks, in millions) | Item (in millions) | 13 Weeks Ended Dec 26, 2021 | 13 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Interest expense | $(2.650) | $(2.650) | 0.0% | | Interest income | $0.024 | $0.089 | -73.0% | | Other income, net | $0.003 | $0.009 | -66.7% | Provision for Income Taxes (Thirteen weeks) The income tax provision for Q3 fiscal 2022 reflected an effective tax rate of 28.8% - Effective tax rate for Q3 fiscal 2022 was 28.8%, unfavorably impacted by a 0.2% return to provision adjustment145 - Unrecognized tax benefits of $0.445 million and accrued interest/penalties of $0.307 million as of December 26, 2021146 - Total revenues increased by 44% to $25.913 million, and total sales increased by 65% to $18.637 million, primarily due to easing COVID-19 restrictions128129 - Net income increased by 56.7% to $2.130 million11 Results of Operations (Thirty-nine weeks ended December 26, 2021 compared to December 27, 2020) For the thirty-nine weeks, total revenues increased by 57%, and total sales doubled Revenues (Thirty-nine weeks) Branded Product Program sales more than doubled, restaurant sales increased, and franchise fees surged Revenue by Source (Thirty-nine weeks, in millions) | Revenue Source (in millions) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Branded Product Program Sales | $51.960 | $24.450 | 112.5% | | Company-owned restaurant sales | $9.502 | $6.247 | 52.1% | | License royalties | $24.218 | $24.689 | -1.9% | | Franchise fees and royalties | $2.993 | $1.087 | 175.3% | | Advertising fund revenue | $1.437 | $1.082 | 32.8% | - Branded Product Program hot dog volume increased by approximately 98%, and average selling prices increased by 7%148 - Franchise restaurant sales increased to $40.910 million from $15.366 million, with 242 franchised outlets operating compared to 215 in the prior year151152 - 164 ghost kitchens opened during the fiscal 2022 period, compared to 75 in the fiscal 2021 period153 Costs and Expenses (Thirty-nine weeks) Total cost of sales more than doubled, decreasing gross profit margin due to higher costs Costs and Expenses (Thirty-nine weeks, in millions) | Expense (in millions) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Cost of sales | $51.536 | $24.161 | 113.3% | | Restaurant operating expenses | $2.874 | $2.622 | 9.6% | | Depreciation and amortization | $0.807 | $0.900 | -10.3% | | General and administrative expenses | $9.702 | $8.709 | 11.4% | | Advertising fund expense | $1.437 | $1.082 | 32.8% | - Gross profit margin decreased from 21% to 16% due to a 14% increase in the average cost per pound of hot dogs in the Branded Product Program155156 - General and administrative expenses increased by $0.993 million, driven by higher incentive compensation ($0.324 million), insurance ($0.159 million), and marketing/trade show expenses ($0.360 million)160 Other Items (Thirty-nine weeks) Interest expense remained constant, interest income decreased, and other income was minimal Other Items (Thirty-nine weeks, in millions) | Item (in millions) | 39 Weeks Ended Dec 26, 2021 | 39 Weeks Ended Dec 27, 2020 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Interest expense | $(7.951) | $(7.951) | 0.0% | | Interest income | $0.088 | $0.309 | -71.5% | | Other income, net | $0.024 | $0.031 | -22.6% | Provision for Income Taxes (Thirty-nine weeks) The income tax provision for the fiscal 2022 period reflected an effective tax rate of 28.1% - Effective tax rate for fiscal 2022 period was 28.1%, compared to 27.7% in fiscal 2021 period163 - Unrecognized tax benefits of $0.445 million and accrued interest/penalties of $0.307 million as of December 26, 2021163 - Total revenues increased by 57% to $90.110 million, and total sales increased by 100% to $61.462 million, driven by COVID-19 recovery147148 - Net income increased by 26.9% to $11.438 million11 Off-Balance Sheet Arrangements As of December 26, 2021, Nathan's had no open hot dog purchase commitments - No open purchase commitments for hot dogs as of December 26, 2021, or December 27, 2020165 - The company may enter into future purchase commitments if market conditions are favorable165 Liquidity and Capital Resources Cash and cash equivalents increased to $86.168 million, but net working capital decreased Liquidity and Capital Resources (in millions) | Metric (in millions) | Dec 26, 2021 | Mar 28, 2021 | Change (in millions) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $86.168 | $81.064 | +$5.104 | | Net working capital | $48.204 | $80.072 | -$31.868 | - Net working capital decreased due to the reclassification of $40 million of 2025 Notes as a current liability for partial redemption166 - Management believes available cash, cash equivalents, and cash from operations will be sufficient to finance operations, debt service, dividends, and stock repurchases for at least the next 12 months179 - The company paid quarterly dividends of $0.35 per share totaling $4.320 million during the fiscal 2022 period and increased the quarterly dividend to $0.45 per share effective February 4, 2022171176 Inflationary Impact The company experienced significant cost volatility for hot dogs, food products, and utilities - Average cost of hot dogs increased by approximately 14% between April 2021 and December 2021 compared to the prior year183 - Hot dog costs increased significantly since July 2021 due to higher beef, labor, packaging, transportation, and supply chain challenges184 - Minimum wage increases in New York State have impacted labor costs at company-owned restaurants and franchisees, potentially affecting margins and growth188190 - The report contains forward-looking statements subject to known and unknown risks, including the impact of COVID-19, licensing agreements, debt obligations, economic conditions, and changes in consumer tastes105106 - Strategic emphasis is on increasing distribution points across all business platforms: Licensing, Branded Products, and Restaurant System (including ghost kitchens)111 Item 3. Quantitative and Qualitative Disclosures About Market Risk. The company is exposed to market risks from interest rates, commodity costs, and foreign currency Cash Earnings on $86.168 million cash could change by $215,000 per annum for interest rate changes - Earnings on $86.168 million cash and cash equivalents could change by $0.215 million per annum for every 0.25% interest rate change193 Borrowings Interest expense on $150 million of 2025 Notes could change by $375,000 per annum - Interest expense on $150 million of 2025 Notes could change by $0.375 million per annum for every 0.25% interest rate change194 - The company does not anticipate entering into interest rate swaps or other financial instruments to hedge its borrowings194 Commodity Costs The company faces significant volatility in hot dog and food product costs - Average cost of hot dogs increased by approximately 14% between April 2021 and December 2021 compared to the prior year195 - Hot dog costs have significantly increased since July 2021 due to higher beef, labor, packaging, and transportation costs, and supply chain challenges196 - The company may use purchase commitments and pass through price increases to customers to mitigate commodity cost volatility197198 Foreign Currencies Foreign franchisees primarily transact in USD, reducing foreign currency exposure - Foreign franchisees transact in USD, reducing foreign currency risk199 - The company does not hedge against foreign currency fluctuations and does not expect a material impact on financial results199 - The company is exposed to market risks from interest rates (cash and borrowings), commodity costs (hot dogs, food products), and foreign currencies193194195199 - A 10% change in food and paper product costs would impact cost of sales by approximately $4.714 million for the thirty-nine-week period ended December 26, 2021198 Item 4. Controls and Procedures. Management concluded that disclosure controls and procedures were effective Evaluation of Disclosure Controls and Procedures Management, with CEO and CFO, concluded that disclosure controls and procedures were effective - Disclosure controls and procedures were evaluated and deemed effective by management, CEO, and CFO201 Changes in Internal Controls No material changes in internal controls over financial reporting occurred during the quarter - No material changes in internal controls over financial reporting during the quarter202 - The company is monitoring and assessing the impact of the hybrid working environment on internal controls203 Limitations on the Effectiveness of Controls The company acknowledges that no control system can provide absolute assurance - Control systems provide reasonable, not absolute, assurance204 - Disclosure controls and procedures are effective at the reasonable assurance level204 - CEO and CFO concluded that disclosure controls and procedures were effective as of December 26, 2021201 - No material changes in internal controls over financial reporting occurred during the quarter, despite a hybrid working environment due to COVID-19202203 - Control systems provide reasonable, not absolute, assurance of meeting objectives204 PART II. OTHER INFORMATION This section provides additional information, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings. The company reported no legal proceedings - No legal proceedings to report206 Item 1A. Risk Factors. The company refers to risk factors discussed in its Annual Report on Form 10-K - Refer to the Annual Report on Form 10-K for a comprehensive discussion of risk factors206 - Additional unknown or currently immaterial risks may also adversely affect the business206 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The company reported no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds to report207 Item 3. Defaults Upon Senior Securities. The company reported no defaults upon senior securities - No defaults upon senior securities to report209 Item 4. Mine Safety Disclosures. The company reported no mine safety disclosures - No mine safety disclosures to report210 Item 5. Other Information. The Board declared a quarterly cash dividend of $0.45 per share, payable on March 4, 2022 - Board declared a quarterly cash dividend of $0.45 per share, payable March 4, 2022211 Item 6. Exhibits. This section lists the exhibits filed with the Form 10-Q - Includes certifications by CEO and CFO (Sarbanes-Oxley Act Sections 302 and 906)215 - Contains the Cover Page Interactive Data File (iXBRL) and financial statements formatted in iXBRL213215 SIGNATURES The report is duly signed by Eric Gatoff, CEO, and Robert Steinberg, CFO, on February 4, 2022 - Report signed by Eric Gatoff (CEO) and Robert Steinberg (CFO) on February 4, 2022218