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| SONC > SEC Filings for SONC > Form 10-Q on 6-Jul-2012 | All Recent SEC Filings |
6-Jul-2012
Quarterly Report
In the Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "Sonic Corp.," "the Company," "we," "us," and "our" refer to Sonic Corp. and its subsidiaries.
Overview
Sales momentum for the third quarter and first nine months of fiscal year 2012 continued to improve, particularly considering the strong prior-year same-store sales results. System-wide same-store sales increased 2.8% during the third quarter and 2.2% during the first nine months of fiscal year 2012, as compared to increases of 3.9% and 0.9%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins increased by 3.7% for the third quarter and 2.3% for the first nine months of fiscal year 2012 as compared to increases of 6.5% and 2.4%, respectively, for the same periods last year. We believe the initiatives we have implemented over the last few years, including product quality improvements and a greater emphasis on personalized service, have set a solid foundation for growth which is reflected in our operating results.
Revenues decreased to $149.4 million for the third quarter of fiscal year 2012 from $152.1 million for the same period last year and decreased to $392.8 million for the first nine months of fiscal year 2012 from $394.8 million for the same period last year. The decrease in revenues was primarily related to a decline in sales resulting from the refranchising of 34 Company Drive-Ins during the second fiscal quarter of 2012, partially offset by an increase in same-store sales. Restaurant margins at Company Drive-Ins improved by 140 basis points during the third quarter of fiscal year 2012 and improved by 30 basis points during the first nine months of fiscal year 2012, reflecting the leverage of positive same-store sales as well as moderating commodity cost inflation.
Third quarter results for fiscal year 2012 reflected net income of $14.4 million or $0.24 per diluted share as compared to a net loss of $4.7 million or $0.08 per diluted share for the same period last year, which included a $17.8 million after-tax loss or $0.29 per diluted share from early extinguishment of debt. Net income and diluted earnings per share for the first nine months of fiscal year 2012 were $21.6 million and $0.36, respectively, as compared to net income of $6.9 million and $0.11 per diluted share for the same period last year. Excluding a $1.1 million tax benefit recognized during the first quarter of fiscal year 2011 relating to the favorable settlement of state tax matters and a $14.4 million after-tax net loss on the early extinguishment of debt recognized during the first nine months of fiscal year 2011, net income and diluted earnings per share for the first nine months of fiscal year 2011 were $20.3 million and $0.33, respectively.
The following non-GAAP adjustments are intended to supplement the presentation of the Company's financial results in accordance with GAAP. We believe the exclusion of these items in evaluating the change in net income (loss) and diluted earnings per share for the periods below provides useful information to investors and management regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results for the Company and predicting future performance.
Three Months Ended Three Months Ended
May 31, 2012 May 31, 2011
Net
Net Diluted Income Diluted
Income EPS (Loss) EPS
Reported - GAAP $ 14,407 $ 0.24 $ (4,651 ) $ (0.08 )
After-tax loss from early
extinguishment of debt - - 17,760 0.29
Adjusted - Non-GAAP $ 14,407 $ 0.24 $ 13,109 $ 0.21
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Nine Months Ended Nine Months Ended
May 31, 2012 May 31, 2011
Net Diluted Net Diluted
Income EPS Income EPS
Reported - GAAP $ 21,583 $ 0.36 $ 6,939 $ 0.11
After-tax net loss from early
extinguishment of debt - - 14,439 0.24
Tax benefit from favorable tax
settlement - - (1,073 ) (0.02 )
Adjusted - Non-GAAP $ 21,583 $ 0.36 $ 20,305 $ 0.33
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The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the periods indicated as well as the system-wide change in sales and average unit volume. System-wide information includes both Company Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company's revenues, since franchisees pay royalties based on a percentage of sales.
System-wide Performance
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2012 2011 2012 2011
Percentage increase in sales 2.4 % 4.7 % 2.9 % 1.3 %
System-wide drive-ins in operation(1):
Total at beginning of period 3,550 3,555 3,561 3,572
Opened 7 12 19 26
Closed (net of re-openings) (7 ) (8 ) (30 ) (39 )
Total at end of period 3,550 3,559 3,550 3,559
Average sales per drive-in: $ 294 $ 287 $ 768 $ 747
Change in same-store sales(2): 2.8 % 3.9 % 2.2 % 0.9 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, 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 following table provides information regarding drive-in development across the system.
Three months ended Nine months ended
May 31, May 31,
2012 2011 2012 2011
New drive-ins:
Company - - - -
Franchise 7 12 19 26
System-wide 7 12 19 26
Rebuilds/relocations:
Company 1 - 1 2
Franchise 5 4 14 11
System-wide 6 4 15 13
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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
2012 2011 (Decrease) (Decrease)
Revenues:
Company Drive-In sales $ 110,070 $ 113,745 $ (3,675 ) (3.2 %)
Franchise Drive-Ins:
Franchise royalties 35,599 34,825 774 2.2
Franchise fees 202 385 (183 ) (47.5 )
Lease revenue 2,056 1,828 228 12.5
Other 1,500 1,315 185 14.1
Total revenues $ 149,427 $ 152,098 $ (2,671 ) (1.8 %)
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Nine months ended Percent
May 31, Increase Increase
2012 2011 (Decrease) (Decrease)
Revenues:
Company Drive-In sales $ 294,037 $ 297,454 $ (3,417 ) (1.1 %)
Franchise Drive-Ins:
Franchise royalties 89,980 88,650 1,330 1.5
Franchise fees 851 1,271 (420 ) (33.0 )
Lease revenue 4,605 4,347 258 5.9
Other 3,317 3,045 272 8.9
Total revenues $ 392,790 $ 394,767 $ (1,977 ) (0.5 %)
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The following table reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.
Company Drive-In Sales
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2012 2011 2012 2011
Company Drive-In sales $ 110,070 $ 113,745 $ 294,037 $ 297,454
Percentage (decrease) increase (3.2 %) 4.6 % (1.1 %) (0.5 %)
Company Drive-Ins in operation(1):
Total at beginning of period 412 451 446 455
Sold to franchisees (1 ) (4 ) (35 ) (6 )
Closed (net of re-openings) (2 ) (2 ) (2 ) (4 )
Total at end of period 409 445 409 445
Average sales per Company Drive-in $ 268 $ 256 $ 688 $ 665
Percentage increase 4.7 % 7.6 % 3.5 % 3.6 %
Change in same-store sales(2) 3.7 % 6.5 % 2.3 % 2.4 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, 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.
Same-store sales for Company Drive-Ins increased 3.7% for the third quarter of fiscal year 2012 and 2.3% for the first nine months of fiscal year 2012, as compared to increases of 6.5% and 2.4%, respectively, for the same periods last year. Company Drive-In sales decreased $3.7 million and $3.4 million during the third quarter and first nine months of fiscal year 2012, respectively, as compared to the same periods last year. The quarter-to-date decrease was primarily driven by a $7.8 million decrease in sales caused by the refranchising of drive-ins during the second quarter of fiscal year 2012 and during fiscal year 2011 partially offset by a $3.7 million improvement in same-store sales. The year-to-date decrease was primarily attributable to a $10.7 million decrease in sales caused by the refranchising of drive-ins discussed earlier and a $2.0 million decrease related to drive-ins that were closed during or subsequent to the first nine months of fiscal year 2011 partially offset by a $6.5 million improvement in same-store sales and $2.9 million of incremental sales from new drive-in openings during fiscal year 2011.
The following table reflects the change in franchising revenues (franchise royalties, franchise fees and lease revenues) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.
Franchise Information
($ in thousands)
Three months ended Nine months ended
May 31, May 31,
2012 2011 2012 2011
Franchising revenues(1) $ 37,857 $ 37,038 $ 95,436 $ 94,268
Percentage increase 2.2 % 3.1 % 1.2 % 0.7 %
Franchise Drive-Ins in operation(2):
Total at beginning of period 3,138 3,104 3,115 3,117
Opened 7 12 19 26
Acquired from company 1 4 35 6
Closed (net of re-openings) (5 ) (6 ) (28 ) (35 )
Total at end of period 3,141 3,114 3,141 3,114
Franchise Drive-In sales $ 934,449 $ 906,401 $ 2,431,649 $ 2,352,065
Percentage change 3.1 % 4.7 % 3.4 % 1.6 %
Effective royalty rate 3.81 % 3.84 % 3.70 % 3.77 %
Average sales per Franchise Drive-In $ 298 $ 292 $ 779 $ 760
Change in same-store sales(3) 2.7 % 3.6 % 2.2 % 0.8 %
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(1) Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended August 31, 2011.
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, 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.
Same-store sales for Franchise Drive-Ins increased 2.7% for the third quarter of fiscal year 2012 and 2.2% for the first nine months of fiscal year 2012, as compared to increases of 3.6% and 0.8%, respectively, for the same periods last year. Franchising revenues increased $0.8 million, or 2.2%, for the third quarter of fiscal year 2012 and $1.2 million, or 1.2%, for the first nine months of fiscal year 2012 as compared to the same periods last year. The increase in franchising revenues was primarily driven by an increase in franchise royalties, partially offset by a decrease in franchise fees. The increase in franchise royalties was primarily attributable to an increase in same-store sales, and incremental royalties from newly constructed and refranchised drive-ins, partially offset by a lower effective royalty rate stemming from a temporary reduction in royalty rates from various development incentives and certain franchisee restructuring efforts.
Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and maintenance, rent, property tax and other controllable expenses.
Company Drive-In Margins
Three months ended
May 31, Percentage points
2012 2011 (Decrease)
Costs and expenses(1):
Company Drive-Ins:
Food and packaging 27.8 % 28.1 % (0.3 )
Payroll and other employee benefits(2) 35.0 35.6 (0.6 )
Other operating expenses 20.2 20.7 (0.5 )
Cost of sales 83.0 % 84.4 % (1.4 )
Nine months ended Percentage points
May 31, Increase
2012 2011 (Decrease)
Costs and expenses(1):
Company Drive-Ins:
Food and packaging 28.2 % 28.1 % 0.1
Payroll and other employee benefits(2) 36.2 36.5 (0.3 )
Other operating expenses 22.4 22.5 (0.1 )
Cost of sales 86.8 % 87.1 % (0.3 )
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(1) Calculated as a percentage of Company Drive-In Sales.
(2) Effective April 1, 2010, we revised our compensation program at the Company Drive-In level. As a result of these changes, noncontrolling interests are immaterial for the periods presented and have been included in payroll and other employee benefits.
Restaurant-level margins improved by 140 basis points during the third quarter of fiscal year 2012 and by 30 basis points during the first nine months of fiscal year 2012, reflecting leverage from improved same-store sales. Food and packaging costs improved by 30 basis points during the quarter and remained relatively flat during the first nine months of fiscal year 2012, which was a combination of moderating commodity cost inflation, effective inventory management and moderate price increases taken over the preceding twelve months. Payroll and other employee benefits as well as other operating expenses improved by a combined 110 basis points during the third quarter of fiscal year 2012 and improved by a combined 40 basis points during the first nine months of fiscal year 2012, primarily as a result of leverage from improved sales.
Selling, General and Administrative ("SG&A"). SG&A expenses decreased by $0.3 million for both the third quarter and first nine months of fiscal year 2012, as compared to the same periods last year, which was largely attributable to declines in bad debt expense due to improved sales and profitability at Franchise Drive-Ins.
Depreciation and Amortization.Depreciation and amortization expense remained relatively flat for the third quarter of fiscal year 2012 increasing by $0.1 million to $10.3 million and increased by $0.5 million to $31.3 million for the first nine months of fiscal year 2012 as compared to the same periods last year. Of the $0.5 million year-to-date increase, approximately $0.3 million was attributable to the amortization of intellectual property acquired during the second quarter of fiscal year 2012 relating to a point-of-sale system that is used by a majority of the Sonic system.
Net Interest Expense. Net interest expense decreased in the third quarter and first nine months of fiscal year 2012 as compared to the same periods last year primarily as a result of a $28.2 million loss from the early extinguishment of debt related to the refinancing of our previously outstanding debt in May 2011. In addition, net interest expense for the first nine months of fiscal year 2011 includes a $5.2 million gain from the early extinguishment of debt in the second quarter of fiscal year 2011. Excluding the early extinguishments of debt, net interest expense decreased $0.2 million for the third quarter of fiscal year 2012 and $0.6 million for the first nine months of fiscal year 2012. The decrease in net interest expense relates to a decline in debt partially offset by a higher weighted average interest rate. See "Liquidity and Sources of Capital" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" below for additional information on factors that could impact interest expense.
Income Taxes. The provision for income taxes reflects an effective tax rate of 37.6% for the third quarter of fiscal year 2012 as compared to 37.1% for the same period in 2011. Our effective income tax rate increased to 37.8% for the first nine months of fiscal year 2012 from 24.0% for the first nine months of fiscal year 2011. The higher effective income tax rate for the first nine months of fiscal year 2012 was primarily attributable to a $1.1 million decrease in our liability for unrecognized tax benefits resulting from the settlement of state tax audits during the first quarter of fiscal year 2011 and the expiration of tax credit programs during the second quarter of fiscal year 2012. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by option-holders, changes in tax credit legislation, changes to uncertain tax positions, and as circumstances on other tax matters change.
Financial Position
Total assets decreased $13.0 million, or 1.9%, to $666.7 million during the first nine months of fiscal year 2012 from $679.7 million at the end of fiscal year 2011. This decrease was primarily attributable to a $19.9 million decrease in net property, equipment and capital leases resulting primarily from depreciation during the year partially offset by capital additions. The $4.5 million increase in current assets during the first nine months of fiscal year 2012 was primarily related to an increase in cash as a result of improved sales.
Total liabilities decreased $10.2 million, or 1.6%, to $617.8 million during the first nine months of fiscal year 2012 from $628.0 million at the end of fiscal year 2011. This decrease was primarily attributable to scheduled debt principal repayments of $11.3 million during the first nine months of fiscal year 2012.
Total stockholders' equity decreased $2.8 million, or 5.4%, to $48.9 million during the first nine months of fiscal year 2012 from $51.7 million at the end of fiscal year 2011. This decrease was attributable to $25.5 million in purchases of common stock under our stock repurchase program during the first nine months of fiscal year 2012. These purchases were partially offset by current year earnings of $21.6 million.
Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities increased $15.7 million to $63.9 million for the first nine months of fiscal year 2012 as compared to $48.2 million for the same period in fiscal year 2011. This increase primarily relates to an improvement in same-store sales and profitability as well as changes in restricted cash.
Investing Cash Flows. Cash used in investing activities during the first nine months of fiscal year 2012 increased slightly to $12.2 million compared to $10.7 million for the same period in fiscal year 2011. During the first nine months of fiscal year 2012, we used $12.9 million of cash for purchases of property and equipment as outlined in the table below as well as $3.4 million of cash to purchase intellectual property related to a point-of-sale system that is used by a majority of the Sonic system. These cash outflows were partially offset by $8.6 million in proceeds primarily related to the sale of operations and a portion of the real estate for 34 Company Drive-Ins. The balance of the change relates to an increase in notes receivable and other investments. The following table sets forth the components of our investments in capital additions for the first nine months of fiscal year 2012 (in millions):
Replacement equipment and technology for existing drive-ins and other $ 6.5 Corporate technology investments 3.7 Rebuilds, relocations and remodels of existing drive-ins 2.5 New Company Drive-Ins, including drive-ins under construction 0.2 Total investing cash flows for capital additions $ 12.9 |
Financing Cash Flows. Net cash used in financing activities decreased $45.2 million to $39.6 million for the first nine months of fiscal year 2012 from $84.8 million for the same period in fiscal year 2011. Approximately $39.9 million of the change relates to a decrease in debt extinguishment costs incurred in connection with the refinancing of our previously outstanding debt during the third quarter of fiscal year 2011. In addition, approximately $39.0 million of the decrease relates to a reduction in debt payments during the first nine months of fiscal year 2012 as compared to the same period last year, primarily due to lower mandatory principal payments under our new financing. These decreases were partially offset by the use of $25.5 million of cash during the first nine months of fiscal year 2012 to purchase outstanding common stock under our stock repurchase program as discussed below, and by changes in restricted cash related to our new debt obligations.
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