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| SONC > SEC Filings for SONC > Form 10-Q on 10-Jul-2009 | All Recent SEC Filings |
10-Jul-2009
Quarterly Report
Overview
Performance in the third quarter ended May 31, 2009 included a decrease in system-wide same-store sales of 5.4% and a decrease in Partner Drive-In same-store sales of 7.7%. Restaurant level and operating margins declined as a result of the de-leveraging impact of lower sales volumes coupled with rising commodity costs.
For the third quarter of fiscal 2009, revenues decreased 9.9%, while operating income decreased 7.5%. Net income decreased 2.7% during the quarter and earnings per share decreased 3.5% to $0.27 per diluted share from $0.28 in the year-earlier period. For the first nine months of fiscal 2009, revenues decreased 5.7%, while operating income decreased 21.4%. Net income decreased 18.8% during the period and earnings per share decreased 18.2% to $0.53 from $0.64 in the year-earlier period. Net income for the third quarter of fiscal 2009 included a gain on the refranchising of Partner Drive-Ins of $10.8 million and a provision for the impairment of long-lived assets of $7.9 million, Net income for the first nine months of fiscal 2009 includes the aforementioned items and a gain on early extinguishment of debt totaling $6.4 million.
The following table provides information regarding the number of Partner Drive-Ins and Franchise Drive-Ins in operation as of the end of the periods indicated as well as the system-wide growth in sales and average unit volume. System-wide information includes both Partner and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company's revenues because franchisees pay royalties based on a percentage of sales.
System-Wide Performance
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2009 2008 2009 2008
Percentage increase (decrease) in sales (0.9 %) 4.1 % 0.6 % 6.3 %
System-wide drive-ins in operation (1):
Total at beginning of period 3,511 3,394 3,475 3,343
Opened 34 41 100 111
Closed (net of re-openings) (19 ) (7 ) (49 ) (26 )
Total at end of period 3,526 3,428 3,526 3,428
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Average sales per drive-in: $ 287 $ 299 $ 789 $ 814
Change in same-store sales (2): (5.4 %) (0.4 %) (4.3 %) 1.5 %
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless
the Company determines that they are
unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
System-wide same-store sales decreased during the third quarter as a result of a decline in average check and, to a lesser extent, a decrease in traffic (number of transactions per drive-in). The Company has implemented a number of initiatives to improve system-wide same-store sales. These include promotions that drive traffic such as the Everyday Value Menu, loyalty, such as Happy Hour, and check. Traffic improved in the second and third quarters with the implementation of the Everyday Value Menu as well as other initiatives. In addition, the system is implementing a new pricing tool at the drive-in level as well as other initiatives designed to elevate the level of customer service.
The following table provides information regarding drive-in development across the system. Retrofits represent investments to upgrade the exterior look of our drive-ins, typically including an upgraded building exterior, new more energy-efficient lighting, a significantly enhanced patio area, and improved menu housings.
System-Wide Drive-In Development
Three months ended Nine months ended
May 31, May 31,
2009 2008 2009 2008
New drive-ins:
Partner 2 6 10 16
Franchise 32 35 90 95
System-wide 34 41 100 111
Rebuilds/relocations:
Partner 2 1 4 4
Franchise 9 16 40 45
System-wide 11 17 44 49
Retrofits, including rebuilds/relocations:
Partner 4 51 23 128
Franchise 82 228 327 630
System-wide 84 279 350 758
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Results of Operations
Revenues. The following table sets forth the components of revenue for the
reported periods and the relative change between the comparable periods.
Revenues
(In thousands)
Three months ended Percent
May 31, Increase/ Increase/
2009 2008 (Decrease) (Decrease)
Revenues:
Partner Drive-In sales $ 144,279 $ 178,338 $ (34,059 ) (19.1 %)
Franchise revenues:
Franchise royalties 33,399 32,463 936 2.9 %
Franchise fees 1,350 1,410 (60 ) (4.3 %)
Gain on sale of Partner Drive-Ins 10,846 ? 10, 846 100.0 %
Other 2,029 787 1,242 157.8 %
Total revenues $ 191,903 $ 212,998 $ (21,095 ) (9.9 %)
Nine months ended Percent
May 31, Increase/ Increase/
2009 2008 (Decrease) (Decrease)
Revenues:
Partner Drive-In sales $ 439,034 $ 484,762 $ (45,728 ) (9.4 %)
Franchise revenues:
Franchise royalties 88,830 86,786 2,044 2.4 %
Franchise fees 3,372 3,669 (297 ) (8.1 %)
Gain on sale of Partner Drive-Ins 10,917 ? 10,917 100.0 %
Other 2,813 2,583 230 8.9 %
Total revenues $ 544,966 $ 577,800 $ (32,834 ) (5.7 %)
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The following table reflects the growth in Partner Drive-In sales and changes in comparable drive-in sales for Partner Drive-Ins. It also presents information about average unit volumes and the number of Partner Drive-Ins, which is useful in analyzing the growth of Partner Drive-In sales.
Partner Drive-In Sales
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2009 2008 2009 2008
Partner Drive-In sales $ 144,279 $ 178,338 $ 439,034 $ 484,762
Percentage increase (decrease) (19.1 %) 1.5 % (9.4 %) 5.8 %
Drive-ins in operation (1):
Total at beginning of period 669 665 684 654
Opened 2 6 10 16
Acquired from (sold to) franchisees (177 ) 11 (194 ) 15
Closed (2 ) - (8 ) (3 )
Total at end of period 492 682 492 682
Average sales per drive-in $ 249 $ 264 $ 689 $ 732
Percentage increase (decrease) (5.7 %) (4.1 %) (5.9 %) 0.7 %
Change in same-store sales (2) (7.7 %) (3.9 %) (6.8 %) 0.3 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not
considered closed unless the Company determines that they are
unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
The decreases in Partner Drive-In sales were largely driven by the decline in same-store sales for existing drive-ins in both periods and the refranchising of 194 Partner Drive-Ins, which was partially offset by sales from newly constructed drive-ins. The Company has implemented initiatives designed to provide a unique and high quality customer service experience with the goal of improving same-store sales. These initiatives include restructuring the Partner Drive-In organization, simplifying incentive compensation plans for store-level management, implementing a customer service satisfaction measurement tool, and implementing a more effective pricing tool at the drive-in level.
The following table reflects the growth in franchise income (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.
Franchise Information
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2009 2008 2009 2008
Franchise fees and royalties (1) $ 34,749 $ 33,873 $ 92,202 $ 90,455
Percentage increase 2.6 % 6.2 % 1.9 % 11.3 %
Franchise Drive-Ins in operation: (1)
Total at beginning of period 2,842 2,729 2,791 2,689
Opened 32 35 90 95
Acquired from (sold to) company 177 (11 ) 194 (15 )
Closed (17 ) (7 ) (41 ) (23 )
Total at end of period 3,034 2,746 3,034 2,746
Franchise Drive-In sales $ 861,645 $ 836,568 $ 2,312,731 $ 2,249,589
Percentage increase 3.0 % 4.5 % 2.8 % 6.5 %
Effective royalty rate 3.88 % 3.88 % 3.84 % 3.86 %
Average sales per Franchise Drive-In $ 295 $ 309 $ 811 $ 835
Change in same-store sales (2) (4.9 %) 0.5 % (3.7 %) 1.7 %
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(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section
of Management's Discussion and Analysis in our
Annual Report on Form 10-K for the year ended August 31, 2008.
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not
considered closed unless the Company determines that they are
unlikely to reopen within a reasonable time.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
Franchise royalties experienced a 2.9% increase in the third quarter related primarily to royalties from new and refranchised drive-ins. This increase was offset by the impact of the decline in same-store sales at Franchise Drive-Ins. For the three quarters of fiscal year 2009, franchise royalties increased 2.4% related primarily to royalties from new Franchise Drive-Ins.
Franchise fees decreased by 4.3% in the third fiscal quarter and 8.1% for the first three quarters of fiscal 2009 compared to the same periods in the prior year. The decline resulted from fewer Franchise Drive-In openings, in addition to a decline in fees associated with the termination of area development agreements compared to the prior-year period.
The Company recognized a $10.8 million gain from the refranchising of 177 Partner Drive-Ins during the third quarter ended May 31, 2009. We retained a minority ownership interest in the operations of 82 of the refranchised drive-ins.
Other income increased by $1.2 million to $2.0 million in the third fiscal quarter of 2009 and by $0.2 million to $2.8 million for the first nine months of fiscal 2009. The increase for the third quarter resulted primarily from rental revenue on refranchised drive-ins in which the Company retained ownership of real estate.
Operating Expenses. The following table presents the overall costs of drive-in operations, as a percentage of Partner Drive-In sales. Minority interest in earnings of Partner Drive-Ins is included as a part of cost of sales, in the table below, since it is directly related to Partner Drive-In operations.
Restaurant-Level Margins
Percentage
Three months ended points
May 31, Increase/
2009 2008 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 27.3 % 26.4 % 0.9
Payroll and other employee benefits 31.3 30.5 0.8
Minority interest in earnings of Partner Drive-Ins 3.3 3.6 (0.3 )
Other operating expenses 21.0 20.5 0.5
82.9 % 81.0 % 1.9
Percentage
Nine months ended points
May 31, Increase/
2009 2008 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 27.6 % 26.3 % 1.3
Payroll and other employee benefits 32.5 30.8 1.7
Minority interest in earnings of Partner Drive-Ins 2.7 3.4 (0.7 )
Other operating expenses 22.1 20.6 1.5
84.9 % 81.1 % 3.8
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Restaurant-level operating costs increased overall for both the three- and nine-month periods compared to the same periods of the prior year, although to a lesser extent in the third quarter. The increases resulted from higher commodity prices, higher labor costs driven by minimum wage increases and the de-leveraging impact of lower sales. The impact from these margin pressures was partially offset by a decline in minority partners' share of earnings.
Selling, General and Administrative ("SG&A"). SG&A expenses increased 4.5% to $16.4 million during the third fiscal quarter of 2009 compared to the same period of fiscal year 2008, and increased 5.9% to $48.9 million for the first nine months of 2009 versus the same period of 2008. We anticipate that SG&A costs will continue to increase, but at a more moderate pace in the fourth quarter of fiscal year 2009 as a result of refranchising.
Depreciation and Amortization. Depreciation and amortization expense decreased 12.2% to $11.5 million in the third quarter of fiscal year 2009, and decreased 2.5% to $37.0 million for the first nine months of 2009. Capital expenditures during the first nine months of fiscal year 2009 were $30.0 million. Looking forward to the fourth quarter of 2009, we expect depreciation and amortization to decline in the range of 10% to 15% as a result of refranchising.
Provision for Impairment of Long-Lived Assets. In the third quarter of fiscal 2009, we recorded a $7.5 million charge primarily related to long-lived asset impairments resulting from the decline in expected cash flows of 12 underperforming restaurants as well as the impairment of assets held for sale.
Interest and Other Expense, Net. Interest and other expense, net decreased $2.1 million to $9.9 million for the third quarter and decreased $10.2 million to $26.0 million for the first nine months of fiscal year 2009 as compared to the same periods in fiscal year 2008. The primary cause for the year-to-date decrease is the $6.4 million gain from early extinguishment of debt that resulted from purchasing $25.0 million of the Company's fixed rate notes at a discount in February 2009. Excluding the gain, the decrease in net interest expense for the third quarter, and for the first nine months of fiscal 2009 primarily relates to the reduction in debt due to scheduled amortization payments on our fixed rate notes, and a declining rate on our variable rate notes. We expect the purchase of debt to result in an annualized decrease in interest expense of approximately $1.3 million going forward.
Income Taxes. Our income tax rate during the third quarter was approximately 37.5%, as compared to 37.9% for the same period of 2008. The provision for income taxes reflects an effective tax rate of 38.6% for the nine-month period of fiscal year 2009 as compared to 37.6% in the same period of 2008. The lower rate for the third quarter of 2009 compared to the second quarter of 2009 primarily relates to the reduction in the reserve for uncertain tax positions and a favorable annual true-up of federal and state taxes that occurred in the quarter. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of option exercises and dispositions by option-holders and as circumstances on individual tax matters change.
Financial Position
During the first nine months of fiscal year 2009, cash balances increased $68.5 million primarily as a result of refranchising Partner Drive-Ins and advances under the Company's variable funding notes. Assets held for sale increased $9.1 million as a result of refranchising plans as of May 31, 2009. During the third quarter, net property and equipment decreased approximately $54.9 million, primarily as a result of depreciation of $48.9 million, the disposition of $29.7 million in assets related to the refranchising of 177 Partner Drive-Ins and reclassification of assets to assets held for sale, offset by capital expenditures of $30.0 million for the nine months. Goodwill allocated to refranchised drive-ins resulted in a net decrease of $30.0 million for the first nine months of fiscal year 2009.
Total current liabilities decreased $10.6 million or 9.4% during the first nine months of fiscal year 2009 primarily as a result of the general decline in accounts payable and accrued liabilities associated with lower sales. The noncurrent portion of long-term debt decreased $56.8 million or 7.9% reflecting scheduled principal payments and the purchase of a portion of the fixed rate notes, offset by net advances of $12.3 million on the variable rate notes.
Stockholders' deficit decreased $41.1 million or 64.1% during the first nine months of fiscal year 2009 due to income from operations and $8.7 million in additional capital from exercises of stock options.
Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities decreased $28.4 million or 31.3% to $62.1 million in the first nine months of fiscal year 2009 as compared to $90.5 million in the same period of fiscal year 2008. This decrease resulted primarily from lower operating income for the first nine months of fiscal 2009.
Investing Cash Flows. Net cash generated by investing activities was $45.4 million in the first nine months of 2009 as compared to $87.7 million used in investing activities in the same period of fiscal year 2008. Purchases of property and equipment of $30.0 million were mre than offset by proceeds of $81.0 million from the sale of the operating assets of 194 Partner Drive-Ins. We opened ten newly constructed Partner Drive-Ins, purchasing the real estate for all of these new drive-ins. The following table sets forth the components of our investments in capital additions for the first nine months of fiscal year 2009 (in millions):
New Partner Drive-Ins, including drive-ins under construction $ 15.0 Retrofits, drive-thru additions and LED signs in existing drive-ins 5.4 Rebuilds, relocations and remodels of existing drive-ins 4.3 Replacement equipment for existing drive-ins and other 5.3 Total investing cash flows for capital additions $ 30.0 |
Financing Cash Flows. Net cash used in financing activities was $39.1million in the first nine months of 2009 as compared to $4.5 million provided in the same period of fiscal year 2008. The amount used is primarily attributable to the scheduled pay-down and purchase of debt during the period. In addition, no purchases of treasury stock were made during the first nine months of fiscal year 2009 compared to $46.6 million purchased in the same period of the prior year.
The Company has a securitized financing facility of variable funding notes that provides for the issuance of up to $200.0 million in borrowings and certain other credit instruments, including letters of credit. As of May 31, 2009, our outstanding balance under the variable funding notes totaled $187.3 million at an effective borrowing rate of 1.5%, as well as $0.4 million in outstanding letters of credit. During the second quarter, upon request of the Company to draw down the remaining $12.3 million in variable funding notes from one of the lenders, the lender, which had previously filed for Chapter 11 bankruptcy, notified the Company that it could not meet its obligation. The Company no longer considers the $12.3 million to be available. See Note 9 of the Notes to Consolidated
Financial Statements in the Company's Form 10-K for the fiscal year ended August 31, 2008 for additional information regarding our long-term debt.
We plan capital expenditures of approximately $45 to $50 million in fiscal year 2009. These capital expenditures primarily relate to the development of additional Partner Drive-Ins, retrofits of existing Partner Drive-Ins and other drive-in level expenditures. We expect to fund these capital expenditures through cash flow from operations as well as cash on hand.
As of May 31, 2009, our total cash balance of $140.7 million ($112.7 million of unrestricted and $28.0 million of restricted cash balances) reflected the impact of the cash generated from operating activities, borrowing activities, proceeds from refranchising Partner Drive-Ins, and capital expenditures mentioned above. We believe that existing cash and funds generated from operations will meet our needs for the foreseeable future.
Critical Accounting Policies and Estimates
Critical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company's Form 10-K for the fiscal year ended August 31, 2008.
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