Nathan’s Famous, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended March 25, 2018 (52 weeks), compared with fiscal year ended March 26, 2017. The filing also presents fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions unless stated otherwise.
Business context
Nathan’s is primarily a branded-product marketer, wholesaler, licensor and restaurant franchisor, with five company-owned restaurants. Its 276 franchised units and five company-owned units operated across 20 U.S. states and 12 foreign countries. Revenue comes mainly from foodservice product sales through the Branded Product Program (BPP), retail product royalties and restaurant/franchise operations.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue | $104.2 | $96.3 | +8.3% |
| Operating income | $27.1 | $26.3 | +3.1% |
| Net income | $2.6 | $7.5 | −64.9% |
| Diluted EPS | $0.62 | $1.78 | Lower |
| Adjusted EBITDA | $29.1 | $28.3 | +2.7% |
| Net cash from operations | $18.9 | $10.4 | +$8.5 |
Sales were $76.7 million, up 8.3%; BPP foodservice sales increased to $62.6 million, with volume up approximately 9.4%. License royalties rose to $23.0 million from $20.4 million. Franchise fees and royalties declined to $4.5 million from $5.1 million.
Gross profit on sales fell to $18.0 million from $19.2 million; reported gross margin on sales declined to 23.4% from 27.1%. Higher beef costs and higher company-restaurant labor costs pressured margins. Company-owned restaurant sales declined to $14.1 million from $14.6 million, which management attributed chiefly to unfavorable summer weather and lower Coney Island sales. Comparable domestic franchise sales fell 1.5%.
Net income included an $8.9 million loss on early debt extinguishment and a $0.8 million impairment charge for one restaurant. Interest expense was $13.6 million, down from $14.7 million. Adjusted EBITDA is a non-GAAP measure; its reconciliation adds back the debt-extinguishment loss and impairment charge.
Fourth-quarter revenue was $19.9 million versus $19.2 million; gross profit was $2.5 million versus $2.9 million, operating income was $4.5 million versus $4.7 million, and net income was $0.4 million versus $0.7 million.
Cash at year-end was $57.3 million, working capital was $53.7 million, and operating cash flow was $18.9 million. The company reported $150 million principal outstanding on its senior secured notes, due 2025; carrying value net of issuance costs was $144.8 million. Total assets were $80.1 million and stockholders’ deficit was $84.6 million. The filing states management believed available cash and operating cash generation would fund operations and debt service for at least the next 12 months.
Material changes and notable items
- In November 2017, Nathan’s issued $150 million of 6.625% senior secured notes due 2025 and redeemed its $135 million 10.0% notes due 2020. The refinancing is expected to reduce annual debt-service requirements by approximately $4.1 million; expected annual interest on the new notes is approximately $9.9 million. The refinancing generated a $6.75 million call premium and contributed to the $8.9 million extinguishment loss.
- The company paid a $5-per-share special dividend in January 2018, totaling approximately $20.9 million. Subsequent to year-end, the board authorized a regular $1-per-share annual dividend, payable quarterly, and declared an initial $0.25-per-share payment.
- Franchise units decreased to 276 from 279: 40 opened and 43 closed during FY2018. The company entered an agreement to sell its Bay Ridge, Brooklyn restaurant and property for estimated gross proceeds of $12.25 million; closing was anticipated in FY2019, but is not assured.
- The company recorded a $0.8 million long-lived-asset impairment at one restaurant. It reported no impairment of goodwill or indefinite-lived intangible assets.
Outlook, risks and contingencies
- Management expects continued beef-price volatility in FY2019 and says rising food costs may pressure margins if not offset by pricing or purchasing arrangements. The company had no open hot-dog purchase commitments at year-end.
- New York minimum-wage increases and New York City scheduling rules may increase labor costs. Management estimated scheduling-change penalties could reach $10,000 per day at the two beach locations during peak summer periods; actual impact was uncertain.
- Results depend substantially on John Morrell & Co.: related royalties were $19.4 million in FY2018, about 18.7% of total revenue. The filing also cites concentration in BPP accounts: seven customers generated approximately 79% of BPP business, with one accounting for approximately 32% of that business.
- Supply concentration is significant: the primary hot-dog supplier represented 92% of product purchases. The filing also describes potential brand and supply effects from a May 2017 report of visible metal flakes in a limited number of hot-dog packages.
- The notes impose restrictive covenants, including limits on additional debt, dividends and certain asset transactions. Nathan’s reported covenant compliance at year-end. The Tax Act’s interest-deduction limitation may raise after-tax borrowing costs; management estimated a FY2019 tax rate of approximately 27%–30%, excluding discrete items and stock-compensation tax benefits.
- The company disclosed ordinary-course litigation, a recorded $0.2 million liability under a Brooklyn lease guarantee, and an estimated $0.4 million potential multi-employer pension withdrawal liability; management said it had no plan to withdraw and did not consider withdrawal reasonably likely.
- Revenue standard ASC 606 was scheduled for adoption in FY2019. The company expected upfront franchise, renewal and development fees to be recognized over agreement terms, with an estimated $2.0 million reduction to accumulated deficit on adoption. Advertising fund contributions and expenses would be presented gross; FY2018 revenue would have been approximately $2.5 million higher under that presentation, with no material expected net-income effect.
No specific consolidated revenue or earnings guidance was provided. Management’s outlook includes planned expansion of branded-product distribution, franchising and licensing, while noting that results are seasonal and typically strongest in the first two fiscal quarters.
Most important facts for investors to verify
- Whether John Morrell’s licensing and supply arrangements, including customer concentration within that business, remain stable and deliver the expected royalties.
- Whether BPP account concentration, beef-cost volatility and the ability to pass costs through to customers affect future sales and margins.
- Whether the Bay Ridge property sale closes on the anticipated terms and timing, and how proceeds are used.
- Cash generation, interest obligations and covenant capacity under the $150 million notes, particularly alongside dividends and any repurchases.
- The realized effects of New York labor laws, the Tax Act’s interest-deduction limits and ASC 606 adoption on costs, taxes and reported revenue.