Flanigan’s Enterprises, Inc. — FY2014 Form 10-K
Business and reporting period. The company operates casual restaurants and package liquor stores, primarily in South Florida, through company-owned operations and controlled limited partnerships; it also franchises units. Fiscal 2014 was the 52 weeks ended September 27, 2014. The filing also reports the quarter ended September 27, 2014.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Total revenue | $89.802 million | $82.798 million |
| Income from operations | $6.514 million | $4.637 million |
| Net income | $4.596 million | $2.932 million |
| Net income attributable to company shareholders | $2.765 million; $1.49 per share | $1.977 million; $1.06 per share |
| Operating cash flow | $8.251 million | $6.744 million |
| Capital expenditures | $3.769 million | $5.702 million |
| Cash at year-end | $8.099 million | $7.058 million |
| Total debt | $13.331 million | $13.546 million |
- Revenue rose 8.46%; management attributed part of the increase to the Miami limited-partnership restaurant opened in December 2012. Excluding that restaurant, revenue grew 7.42%.
- Comparable weekly restaurant food sales increased 6.85% and bar sales 11.68%. Same-store package-liquor sales averaged $265,000 weekly versus $254,000.
- Restaurant food-and-bar gross margin improved to 65.16% from 64.73%; package-liquor gross margin was essentially unchanged at 30.12% versus 30.10%. Operating expenses were 92.75% of sales, down from 94.40%.
- Operating margin was approximately 7.3% of revenue; net income attributable to shareholders was approximately 3.1% of revenue. Interest expense declined to $736,000 from $818,000.
- Working capital was $2.904 million, up from $2.383 million. Current assets were $13.394 million and current liabilities $10.490 million. The company reported compliance with loan covenants.
- Fourth-quarter revenue was $21.739 million versus $19.918 million; income from operations was $1.250 million versus $967,000; shareholder-attributable net income was $463,000 versus $222,000, and diluted EPS was $0.25 versus $0.12.
Changes, outlook, and risks
- Management expects restaurant food and bar sales to increase in FY2015, but anticipates lower restaurant gross profit from higher food costs. It expects liquor-store sales and margins to remain stable, while higher food, insurance, health-care, and other expenses may pressure net income.
- No new restaurant was in development at year-end. The company plans to continue looking for restaurant locations, likely using its limited-partnership model; it is not actively seeking new liquor-store locations. Planned FY2015 refurbishing is approximately $600,000. Management believes cash and operating cash flow will fund operations and capital expenditures for at least 12 months.
- After year-end, the company committed to purchase approximately $4.3 million of baby-back ribs at fixed prices for 2015 (the filing gives two different amounts for one supplier commitment: $266,000 in MD&A and $226,000 in the notes; verify the correct figure).
- During FY2014 the company bought a property leased to a franchisee for $1.25 million, financed $900,000 with a seller mortgage, and repaid or modified other debt. Several modified mortgages are payable to entities controlled by directors; related-party transactions and governance merit review.
- Key exposures include intense restaurant and liquor retail competition, food and labor-cost inflation, customer spending and traffic, South Florida weather and windstorm coverage, lease renewals, alcohol licensing, food safety, and possible healthcare-law costs. The company had two dram-shop claims and is uninsured above $7 million per occurrence and in aggregate. Seven employment-related lawsuits were settled after year-end for about $193,000; the amount had been accrued.
- Four of ten affiliated limited-partnership restaurants had returned investors’ initial cash; one location was described as facing limited cash flow amid increased competition. The company consolidates nine partnerships it controls, so reported consolidated earnings include amounts attributable to noncontrolling investors.
Most important facts to verify
- Reconcile the rib commitment discrepancy ($266,000 versus $226,000) and confirm the total 2015 purchase obligation.
- Review debt maturity and balloon-payment schedules, related-party mortgage terms, and liquidity after scheduled repayments and capital spending.
- Assess whether sales growth and margins can persist if food, labor, insurance, and other costs rise while management limits menu-price increases.
- Examine comparable-store trends, the Miami restaurant’s performance, and cash generation and distributions across controlled partnerships.
- Confirm the status and insurance coverage of the dram-shop claims and other self-insured contingencies.
The independent auditor issued an unqualified opinion on the consolidated financial statements. Management concluded internal control over financial reporting was effective; the auditor did not provide an internal-control attestation.