Nathan's(NATH) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements show an increase in total assets to $84.0 million and a reduction in the total stockholders' deficit to $(47.5) million as of September 25, 2022, with total revenues growing 20.3% year-over-year to $77.2 million and net income increasing by 40.7% to $13.1 million, while net cash provided by operating activities was $9.8 million and financing activities used $5.6 million Consolidated Balance Sheets As of September 25, 2022, total assets were $84.0 million, an increase from $78.5 million at March 27, 2022, driven by higher cash and accounts receivable, with total liabilities decreasing slightly to $131.4 million and the total stockholders' deficit improving from $(55.0) million to $(47.5) million Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Sep 25, 2022 (Unaudited) | Mar 27, 2022 | | :--- | :--- | :--- | | Total current assets | $71,619 | $65,400 | | Total assets | $83,973 | $78,516 | | Total current liabilities | $15,031 | $16,412 | | Total liabilities | $131,430 | $133,504 | | Total stockholders' deficit | $(47,457) | $(54,988) | Consolidated Statements of Earnings For the thirteen weeks ended September 25, 2022, total revenues increased 14.0% to $37.5 million and net income rose 68.1% to $6.0 million, while for the twenty-six-week period, total revenues grew 20.3% to $77.2 million and net income increased 40.7% to $13.1 million with diluted EPS reaching $3.20 Statement of Earnings Summary (in thousands, except per share amounts) | Metric | Thirteen Weeks Ended Sep 25, 2022 | Thirteen Weeks Ended Sep 26, 2021 | Twenty-six Weeks Ended Sep 25, 2022 | Twenty-six Weeks Ended Sep 26, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $37,497 | $32,878 | $77,217 | $64,197 | | Income from operations | $9,914 | $7,439 | $21,694 | $18,141 | | Net income | $5,958 | $3,545 | $13,095 | $9,308 | | Diluted EPS | $1.46 | $0.86 | $3.20 | $2.26 | | Dividends declared per share | $0.45 | $0.35 | $0.90 | $0.70 | Consolidated Statements of Cash Flows For the twenty-six weeks ended September 25, 2022, net cash provided by operating activities was $9.8 million, increasing from $8.9 million in the prior-year period, while net cash used in financing activities rose to $5.6 million due to higher dividend payments and treasury stock repurchases Cash Flow Summary (in thousands) | Cash Flow Activity | Twenty-six weeks ended Sep 25, 2022 | Twenty-six weeks ended Sep 26, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,772 | $8,922 | | Net cash used in investing activities | $(398) | $(343) | | Net cash used in financing activities | $(5,580) | $(2,887) | | Net increase in cash and cash equivalents | $3,794 | $5,692 | | Cash and cash equivalents, end of period | $53,857 | $86,756 | Notes to Consolidated Financial Statements The notes detail accounting policies, COVID-19 and inflation impacts, revenue disaggregation showing strong growth in Branded Products, segment performance highlighting Product Licensing as most profitable, and information on debt, leases, and shareholder activities like dividends and stock repurchases - The company experienced pandemic and inflationary pressures, with the average cost of hot dogs for the twenty-six weeks ended Sep 25, 2022, being approximately 8% higher than the prior-year period[25] Disaggregated Revenues (Twenty-six weeks ended, in thousands) | Revenue Source | Sep 25, 2022 | Sep 26, 2021 | | :--- | :--- | :--- | | Branded Products | $45,201 | $35,059 | | Company-owned restaurants | $8,994 | $7,766 | | License royalties | $19,727 | $18,340 | | Franchise fees and royalties | $2,292 | $2,074 | Income from Operations by Segment (Twenty-six weeks ended, in thousands) | Segment | Sep 25, 2022 | Sep 26, 2021 | | :--- | :--- | :--- | | Branded Product Program | $4,552 | $3,415 | | Product licensing | $19,636 | $18,249 | | Restaurant operations | $2,117 | $692 | | Corporate | $(4,611) | $(4,215) | | Total Income from operations | $21,694 | $18,141 | - The company declared quarterly cash dividends of $0.45 per share for the first two quarters of fiscal 2023, an increase from $0.35 per share in the prior year[71][72] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 14% revenue growth in Q2 FY2023 to increased customer traffic and higher Branded Product Program sales, with gross profit margins improving despite inflationary pressures, while strong liquidity of $53.9 million supports operations, debt service, increased dividends, and stock repurchases Results of Operations - Thirteen Weeks Ended September 25, 2022 In Q2 FY2023, total revenues rose 14% to $37.5 million, driven by increases in Branded Product Program and Company-owned restaurant sales, with license royalties growing 10% and gross profit improving to 20% of sales due to stabilized beef prices, leading to a 33.3% surge in income from operations to $9.9 million Q2 FY2023 vs Q2 FY2022 Revenue Performance (in thousands) | Revenue Category | Q2 FY2023 | Q2 FY2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $37,497 | $32,878 | 14.0% | | Branded Product Program Sales | $22,030 | $19,063 | 15.6% | | Company-owned Restaurant Sales | $5,271 | $4,437 | 18.8% | | License Royalties | $8,413 | $7,658 | 9.9% | - The volume of hot dogs sold in the Branded Product Program increased by approximately 9% YoY, with average selling prices increasing by about 4%[113] - Gross profit as a percentage of sales improved to 20% from 14% YoY, as beef prices stabilized and declined slightly compared to the significantly higher costs in the prior-year quarter[121][122] Results of Operations - Twenty-six Weeks Ended September 25, 2022 For the first half of FY2023, total revenues increased 20% to $77.2 million, with Branded Product Program sales growing 29% driven by a 19% increase in hot dog volume and a 9% rise in average selling prices, while gross profit as a percentage of sales improved slightly to 18% despite an 8% increase in hot dog costs First Half FY2023 vs First Half FY2022 Performance (in thousands) | Metric | H1 FY2023 | H1 FY2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $77,217 | $64,197 | 20.3% | | Branded Product Program Sales | $45,201 | $35,059 | 28.9% | | License Royalties | $19,727 | $18,340 | 7.6% | | Gross Profit | $9,630 | $7,329 | 31.4% | - The volume of hot dogs sold in the Branded Product Program increased by approximately 19% YoY for the 26-week period[135] - Cost of sales in the Branded Product Program increased 29%, driven by the 19% volume increase and an 8% increase in the average cost per pound of hot dogs[143] Liquidity and Capital Resources The company's cash position increased by $3.8 million to $53.9 million in the first half of FY2023, with operating activities generating $9.8 million in cash, while $3.7 million was used for dividend payments and $1.9 million for stock repurchases, and management believes current cash and operating cash flow are sufficient to fund operations and capital returns for at least the next 12 months - Cash and cash equivalents increased by $3.8 million during the first half of fiscal 2023 to a total of $53.9 million[155] - During the period, the company paid two quarterly dividends of $0.45 per share, totaling $3.7 million[159][162] - The company repurchased 35,434 shares of common stock for $1.9 million under its 10b5-1 Plan[159][161] - Management believes cash on hand and cash from operations will be sufficient to finance operations, debt service, and capital returns for at least the next 12 months[167] EBITDA and Adjusted EBITDA The company uses non-GAAP measures EBITDA and Adjusted EBITDA to assess operating performance, with Adjusted EBITDA increasing to $10.3 million for the thirteen weeks ended September 25, 2022, and rising to $22.4 million for the twenty-six-week period Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Metric | Thirteen Weeks Ended Sep 25, 2022 | Thirteen Weeks Ended Sep 26, 2021 | Twenty-six Weeks Ended Sep 25, 2022 | Twenty-six Weeks Ended Sep 26, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income | $5,958 | $3,545 | $13,095 | $9,308 | | EBITDA | $10,329 | $7,742 | $22,386 | $18,774 | | Adjusted EBITDA | $10,323 | $7,771 | $22,388 | $18,832 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate changes on cash and debt, and significant volatility in commodity costs, particularly for beef, with a hypothetical 10% change in food and paper costs impacting cost of sales by approximately $4.1 million in the first half of FY2023, though no hedging instruments are used as foreign payments are in USD - The company faces significant commodity price risk, noting that the average cost of hot dogs in fiscal 2023 was 8% higher than in fiscal 2022, and 19% higher in fiscal 2022 than in fiscal 2021[179] - A hypothetical 10.0% short-term increase or decrease in the cost of food and paper products for the twenty-six week period would have changed cost of sales by approximately $4,095,000[181] - The company has $110 million in fixed-rate debt, so it is not directly exposed to interest rate fluctuations on its borrowings, and foreign currency risk is minimal as payments are generally made in U.S. dollars[178][182] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 25, 2022, with no material changes to internal controls over financial reporting occurring during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of the end of the reporting period, the company's disclosure controls and procedures were effective[183] - There were no changes in internal controls over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[184] PART II. OTHER INFORMATION Legal Proceedings The company reported no legal proceedings during the period - None[187] Risk Factors There are no new risk factors presented in this report, with the company referring to the risk factors discussed in its Annual Report on Form 10-K for the fiscal year ended March 27, 2022 - The report directs investors to carefully consider the risk factors discussed in the Annual Report on Form 10-K for the fiscal year ended March 27, 2022[187] Unregistered Sales of Equity Securities and Use of Proceeds Under its sixth stock repurchase plan, the company repurchased 15,064 shares during the quarter at an average price of $54.53 per share, with 98,116 shares remaining authorized for repurchase as of September 25, 2022 Issuer Purchases of Equity Securities (Q2 FY2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 27 - July 24, 2022 | 11,189 | $54.52 | | July 25 - Aug 21, 2022 | 3,875 | $54.56 | | Aug 22 - Sep 25, 2022 | - | - | | Total | 15,064 | $54.53 | - As of September 25, 2022, there were 98,116 shares remaining to be repurchased under the sixth stock repurchase plan[188] Other Information On November 3, 2022, the Board of Directors declared a quarterly cash dividend of $0.45 per share, payable on December 2, 2022, to shareholders of record as of November 21, 2022 - The Board declared a quarterly cash dividend of $0.45 per share on November 3, 2022[194] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (302 and 906) and the financial statements formatted in iXBRL - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and iXBRL data files[198]