Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SONC > SEC Filings for SONC > Form 10-Q on 5-Apr-2013All Recent SEC Filings

Show all filings for SONIC CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SONIC CORP


5-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

System-wide same-store sales were flat during the second quarter and increased 1.5% for the first six months of fiscal year 2013 as compared to an increase of 3.5% and 1.7%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins increased 1.9% during the second quarter and 3.1% for the first six months of fiscal year 2013 as compared to 3.1% and 1.4%, respectively, for the same periods last year. Sales for the second quarter and first half of fiscal year 2013 were impacted as a result of one less day than the prior year due to leap year in February 2012. Excluding the extra day impact, the increase in same-store sales for the second quarter of fiscal year 2013 would have been approximately 1.3% and 3.3% for the system and Company Drive-Ins, respectively. Same-store sales for the first half of the year would have been approximately 0.6% and 0.7% higher for the system and Company Drive-Ins, respectively. Additionally, the second quarter is typically the most volatile for us due to seasonality and weather. We believe the initiatives we have implemented over the last few years, including product quality improvements, a greater emphasis on personalized service and a tiered pricing strategy, have set a solid foundation for growth which is reflected in our operating results. We continue to focus on our innovative product pipeline, and our recent shift from local to national media expenditures is supporting our day-part promotional strategy to drive same-store sales. We utilize a multi-layered growth strategy which incorporates same-store sales growth, operating leverage, deployment of cash, an ascending royalty rate and new drive-in development to achieve earnings growth. Positive system-wide same-store sales is the most important layer and drives operating leverage and increased operating cash flows.

Revenues decreased to $111.1 million for the second quarter of fiscal year 2013 from $115.1 million for the same period last year and decreased to $237.1 million for the first six months of fiscal year 2013 from $243.4 million for the same period last year. The decrease in revenues was primarily related to 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 and 110 basis points during the second quarter and first six months of fiscal year 2013, respectively. This is a reflection of the leverage of positive same-store sales as well as the refranchising of 34 lower performing drive-ins in the second fiscal quarter of last year.

Second quarter results for fiscal year 2013 reflected net income of $3.6 million or $0.06 per diluted share, as compared to net income of $1.7 million or $0.03 per diluted share for the same period last year. Excluding the $0.3 million after-tax loss or $0.01 per diluted share from early extinguishment of debt and the $0.9 million benefit or $0.02 per diluted share, which includes the retroactive reinstatement of the Work Opportunity Tax Credit ("WOTC") and resolution of certain income tax matters, net income and diluted earnings per share for the second quarter increased 81% and 67%, respectively. Net income and diluted earnings per share for the first six months of fiscal year 2013 were $9.7 million and $0.17, respectively, as compared to net income of $7.2 million and $0.12 per diluted share for the same period last year. Excluding the debt extinguishment and $0.8 million or $0.02 per diluted share tax benefit, as described above, net income and diluted earnings per share for the first six months increased 29% and 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 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.


Table of Contents
                                                Three Months  Ended               Three Months  Ended
                                                 February 28, 2013                 February 29, 2012
                                                Net            Diluted            Net            Diluted
                                               Income            EPS            Income             EPS
Reported - GAAP                              $    3,577        $   0.06       $     1,677       $    0.03
After-tax loss from early extinguishment
of debt                                             315            0.01                -               -
Retroactive tax benefit of WOTC and
resolution of tax matters                          (857 )         (0.02 )              -               -

Adjusted-Non-GAAP                            $    3,035        $   0.05       $     1,677       $    0.03


                                                  Six Months Ended                 Six Months Ended
                                                 February 28, 2013                February  29, 2012
                                                Net            Diluted            Net            Diluted
                                               Income            EPS            Income             EPS
Reported - GAAP                              $    9,710        $   0.17       $     7,176       $    0.12
After-tax loss from early extinguishment
of debt                                             315            0.01                -               -
Retroactive tax benefit of WOTC and
resolution of tax matters                          (743 )         (0.02 )              -               -

Adjusted-Non-GAAP                            $    9,282        $   0.16       $     7,176       $    0.12

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                             Six months ended
                                  February 28,           February 29,           February 28,           February 29,
                                      2013                   2012                   2013                   2012
Increase (decrease) in
total sales                                (0.5 %)                 3.6 %                   1.6 %                 2.0 %
System-wide drive-ins in
operation(1):
Total at beginning of
period                                    3,549                  3,555                   3,556                 3,561
Opened                                        3                     10                       4                    12
Closed (net of re-openings)                 (26 )                  (15 )                   (34 )                 (23 )

Total at end of period                    3,526                  3,550                   3,526                 3,550


Average sales per drive-in:      $          229          $         225         $           487         $         472

Change in same-store
sales(2):                                   0.0 %                  3.5 %                   1.5 %                 1.7 %

(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.

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.


Table of Contents

                                    Revenues

                                ($ in thousands)



                                             Three months ended                                      Percent
                                      February 28,         February 29,          Increase            Increase
                                          2013                 2012             (Decrease)          (Decrease)
Revenues:
Company Drive-In sales               $       83,706       $       87,185       $     (3,479 )              (4.0 %)
Franchise Drive-Ins:
Franchise royalties                          25,821               25,590                231                 0.9
Franchise fees                                  175                  364               (189 )             (51.9 )
Lease revenue                                   949                1,261               (312 )             (24.7 )
Other                                           490                  684               (194 )             (28.4 )

Total revenues                       $      111,141       $      115,084       $     (3,943 )              (3.4 %)

                                              Six months ended                                       Percent
                                      February 28,         February 29,          Increase            Increase
                                          2013                 2012             (Decrease)          (Decrease)
Revenues:
Company Drive-In sales               $      177,162       $      183,967       $     (6,805 )              (3.7 %)
Franchise Drive-Ins:
Franchise royalties                          55,736               54,381              1,355                 2.5
Franchise fees                                  180                  649               (469 )             (72.3 )
Lease revenue                                 2,435                2,549               (114 )              (4.5 )
Other                                         1,636                1,817               (181 )             (10.0 )

Total revenues                       $      237,149       $      243,363       $     (6,214 )              (2.6 %)

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                            Six months ended
                                  February 28,           February 29,          February 28,           February 29,
                                      2013                   2012                  2013                   2012
Company Drive-In sales           $       83,706         $       87,185        $      177,162         $      183,967
Percentage increase
(decrease)                                 (4.0 %)                 0.9 %                (3.7 %)                 0.1 %

Company Drive-Ins in
operation(1):
Total at beginning of period                409                    446                   409                    446
Opened                                       -                      -                     -                      -
Sold to franchisees                          -                     (34 )                  -                     (34 )
Closed (net of re-openings)                  (4 )                   -                     (4 )                   -

Total at end of period                      405                    412                   405                    412


Average sales per Company
Drive-In                         $          207         $          201        $          437         $          419
Percentage increase                         3.0 %                  4.1 %                 4.3 %                  2.4 %

Change in same-store
sales(2)                                    1.9 %                  3.1 %                 3.1 %                  1.4 %

(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.


Table of Contents

Same-store sales for Company Drive-Ins increased 1.9% for the second quarter of fiscal year 2013 and 3.1% for the first six months of fiscal year 2013, as compared to an increase of 3.1% and 1.4%, respectively, for the same periods last year. Excluding the extra day impact discussed above, same-store sales for the second quarter and first half of fiscal year 2013 would have been approximately 3.3% and 3.8% respectively. Company Drive-In sales decreased $3.5 million, or 4.0%, during the second quarter of fiscal year 2013 as compared to the same period last year. This decrease was primarily attributable to a $4.4 million reduction in sales from the 34 refranchised drive-ins discussed earlier and a $0.6 million decrease related to drive-ins that were closed during the preceding twelve months partially offset by a $1.3 million improvement in same-store sales and $0.2 million of incremental sales from new drive-in openings. Company Drive-In sales decreased $6.8 million, or 3.7%, for the first six months of fiscal year 2013 as compared to the same period last year. Similar to the quarter, this decrease is primarily attributable to an $11.2 million reduction in sales from refranchised drive-ins and $1.0 million related to drive-ins that were closed during the preceding twelve months partially offset by a $5.0 million improvement in same store sales and $0.4 million of incremental sales from new drive-in openings.

The following table reflects the change in franchising revenues, 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                            Six months ended
                                    February 28,           February 29,          February 28,          February 29,
                                        2013                   2012                  2013                  2012
Franchising revenues(1)            $       26,945         $       27,215        $       58,351        $       57,579
Percentage increase (decrease)               (1.0 %)                 2.8 %                 1.3 %                 0.6 %

Franchise Drive-Ins in
operation(2):
Total at beginning of period                3,140                  3,109                 3,147                 3,115
Opened                                          3                     10                     4                    12
Acquired from company                          -                      34                    -                     34
Closed (net of re-openings)                   (22 )                  (15 )                 (30 )                 (23 )

Total at end of period                      3,121                  3,138                 3,121                 3,138


Franchise Drive-In sales           $      712,934         $      712,903        $    1,527,736        $    1,494,126
Percentage increase                           0.0 %                  4.0 %                 2.2 %                 2.2 %

Effective royalty rate(3)                    3.62 %                 3.59 %                3.65 %                3.64 %

Average sales per Franchise
Drive-In                           $          232         $          229        $          494        $          480

Change in same-store sales(4)                (0.3 %)                 3.6 %                 1.3 %                 1.7 %

(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, 2012.

(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 franchise royalties as a percentage of Franchise Drive-In sales.

(4) Represents percentage change for drive-ins open for a minimum of 15 months.

Same-store sales for Franchise Drive-Ins decreased 0.3% for the second quarter of fiscal year 2013 and increased 1.3% for the first half of fiscal year 2013, as compared to an increase of 3.6% and 1.7%, respectively, for the same periods last year. Excluding the extra day impact discussed above, same-store sales for the second quarter and first half of fiscal year 2013 would have been approximately 1.0% and 1.9%, respectively. Franchising revenues decreased $0.3 million, or 1.0%, for the second quarter of fiscal year 2013 and increased $0.8 million, or


Table of Contents

1.3%, for the first half of fiscal year 2013. The decrease in franchise revenues during the second quarter of fiscal year 2013 was primarily attributable to a decrease in lease revenue resulting from a franchisee-exercised option to acquire land and buildings leased or subleased from the Company relating to previously refranchised drive-ins. The increase in franchising revenues during the first half of fiscal year 2013 is primarily attributable to an increase in same-store sales, partially offset by various development incentives and certain franchisee restructuring efforts. In addition, approximately $0.5 million of the increase in franchising revenues during the first six months of fiscal year 2013 was attributable to incremental royalties from the 34 refranchised drive-ins discussed earlier.

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
                                                  February 28,          February 29,        Percentage Points
                                                      2013                  2012           Increase (Decrease)
Costs and expenses:
Company Drive-Ins:
Food and packaging                                         28.1 %                28.3 %                    (0.2 )
Payroll and other employee benefits                        37.6                  37.5                       0.1
Other operating expenses                                   22.5                  23.8                      (1.3 )

Cost of sales                                              88.2 %                89.6 %                    (1.4 )


                                                           Six months ended
                                                  February 28,          February 29,        Percentage Points
                                                      2013                  2012                (Decrease)
Costs and expenses:
Company Drive-Ins:
Food and packaging                                         28.3 %                28.5 %                    (0.2 )
Payroll and other employee benefits                        36.6                  36.9                      (0.3 )
Other operating expenses                                   23.1                  23.7                      (0.6 )

Cost of sales                                              88.0 %                89.1 %                    (1.1 )

Drive-in level margins improved 140 basis points during the second quarter of fiscal year 2013 and 110 basis points during the first six months of fiscal year 2013, reflecting leverage from improved same-store sales and, to a lesser extent, the refranchising of 34 lower performing Company Drive-Ins during the second quarter of fiscal year 2012. Food and packaging costs improved 20 basis points during the quarter and first six months of fiscal year 2013, which resulted from benign commodity cost inflation and modest price increases taken over the preceding twelve months. Payroll and other employee benefits as well as other operating expenses improved by a combined 120 basis points during the second quarter of fiscal year 2013 and 90 basis points during the first six months of fiscal year 2013, primarily from leveraging positive same-store sales.

Selling, General and Administrative ("SG&A"). SG&A expenses decreased $0.6 million, or 3.8%, to $15.5 million for the second quarter of fiscal year 2013 and remained relatively flat increasing by 0.3% for the first six months of fiscal year 2013 as compared to the same periods last year. The decrease in SG&A for the second quarter was primarily attributable to a decline 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 second quarter and first half of fiscal year 2013, decreasing by $0.4 million to $10.1 million and $0.3 million to $20.7 million, respectively, as compared to the same periods last year.

Net Interest Expense. Net interest expense decreased in the second quarter and first six months of fiscal year 2013 as compared to the same periods last year. This decrease was largely offset by a $0.5 million loss from the early extinguishment of debt related to our $20.0 million prepayment in January 2013. Excluding the early


Table of Contents

extinguishment of debt, net interest expense decreased $0.5 million for the second quarter of fiscal year 2013 and $0.9 million for the first six months of fiscal year 2013. The decrease was primarily due to a decline in our long-term debt balance. See "Liquidity and Sources of Capital" and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" below for additional information on long-term debt.

Income Taxes. The provision for income taxes reflects an effective tax rate of 15.8% for the second quarter of fiscal 2013 as compared to 39.2% for the same period in 2012. Our effective income tax rate decreased to 30.2% for the first half of fiscal year 2013 from 38.3% for the first half of fiscal year 2012. These declines were primarily attributable to the expiration of a state statute of limitations related to an uncertain tax position and legislation that was passed to reinstate and extend WOTC during the second quarter of fiscal year 2013. 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 $56.1 million, or 8.2%, to $624.7 million during the first six months of fiscal year 2013 from $680.8 million at the end of fiscal year 2012. The decrease in total assets was attributable, in part, to the use of $25.6 million of cash for the acquisition of outstanding common stock under our stock repurchase program during the first half of fiscal year 2013. Additionally, during the second quarter, we received $29.7 million in cash in conjunction with a transaction in which a franchisee exercised an option to acquire land and buildings leased or subleased from us relating to previously refranchised drive-ins. As a result of this transaction, we used $20.0 million in cash to make a prepayment on our Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the "2011 Fixed Rate Notes"). This prepayment and our scheduled debt payments totaled $27.5 million for the first six months of fiscal year 2013 and were a large contributor to the decrease in cash. In addition, net property, equipment and capital leases decreased by $45.1 million, primarily reflecting the sale of land and buildings to a franchisee for previously refranchised drive-ins, as well as from depreciation during the first half of the year, partially offset by capital additions.

Total liabilities decreased $45.6 million, or 7.3%, to $575.9 million during the first six months of fiscal year 2013 from $621.5 million at the end of fiscal year 2012. This decrease was primarily attributable to $27.5 million scheduled and early debt principal repayments during the first six months of fiscal year 2013 and a decrease in income taxes payable of $11.3 million stemming mainly from tax payments during the first half of fiscal year 2013. Accrued liabilities also decreased $7.2 million primarily related to the payment of bonuses and other liabilities that were accrued as of August 31, 2012.

Total stockholders' equity decreased $10.5 million, or 17.7%, to $48.8 million during the first six months of fiscal year 2013 from $59.2 million at the end of fiscal year 2012. This decrease was attributable to $24.5 million in purchases of common stock under our stock repurchase program during the first six months of fiscal year 2013. These purchases were partially offset by current year earnings of $9.7 million and stock option exercises of $5.8 million during the first half of fiscal year 2013.

Liquidity and Sources of Capital

Operating Cash Flows. Net cash provided by operating activities decreased $5.9 million to $21.9 million for the first six months of fiscal year 2013 as compared to $27.8 million for the same period in fiscal year 2012. This decline primarily resulted from an increase in income tax payments in the first half of fiscal year 2013 as compared to the same period last year, partially offset by current year earnings.

Investing Cash Flows. Cash provided by investing activities during the first half of fiscal year 2013 increased $23.5 million to $19.9 million compared to the use of $3.6 million of cash for the same period in fiscal year 2012. During the first six months of fiscal year 2013, we used $13.9 million of cash for . . .

  Add SONC to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SONC - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.