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SONC > SEC Filings for SONC > Form 10-Q on 8-Jan-2014All Recent SEC Filings

Show all filings for SONIC CORP

Form 10-Q for SONIC CORP


8-Jan-2014

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 increased 2.2% during the first quarter of fiscal year 2014 as compared to an increase of 3.0%, for the same period last year. Same-store sales at Company Drive-Ins increased 1.9% during the first quarter of fiscal year 2014 as compared to an increase of 4.2% for the same period last year. We believe the successful implementation of initiatives, 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 key initiatives such as increased media effectiveness and our innovative product pipeline in supporting our layered day-part promotional strategy to drive same-store sales. To achieve earnings growth 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. Positive same-store sales is the most important layer and drives operating leverage and increased operating cash flows.

Revenues increased to $126.7 million for the first quarter of fiscal year 2014 from $126.0 million for the same period last year. Franchising revenues were the primary driver of the growth in revenues, which reflects the increase in same-store sales and new drive-in development partially offset by the decline in lease revenues. Lease revenues declined due to a franchisee's purchase during the second quarter of fiscal year 2013 of land and buildings previously leased or subleased from the Company. Restaurant margins at Company Drive-Ins improved 80 basis points during the first quarter of fiscal year 2014 primarily as a result of leverage from same-store sales increases.

First quarter results for fiscal year 2014 reflected net income of $8.2 million or $0.14 per diluted share, as compared to net income of $6.1 million or $0.11 per diluted share for the same period last year. Excluding the $0.5 million or $0.01 per diluted share tax benefit resulting from the IRS' acceptance of a federal tax method change during the first quarter of fiscal year 2014, net income and diluted earnings per share for the first three months of fiscal year 2014 increased 26% and 18%, 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.

                                          Three months ended         Three months ended
                                           November 30, 2013          November 30, 2012
                                            Net        Diluted        Net         Diluted
                                          Income         EPS        Income          EPS
Reported - GAAP                          $   8,208    $   0.14     $   6,133      $   0.11
Tax benefit from the IRS' acceptance
of a  federal tax method change               (484)      (0.01)             -             -
Adjusted - Non-GAAP                      $   7,724    $   0.13     $   6,133      $   0.11


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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
                                               November 30,
                                            2013          2012
Increase in total sales                       2.4  %       2.7  %

System-wide drive-ins in operation(1):
Total at beginning of period                3,522        3,556
Opened                                          7            1
Closed (net of re-openings)                   (12)          (8)
Total at end of period                      3,517        3,549

Average sales per drive-in                $   266      $   258

Change in same-store sales(2)                 2.2  %       3.0  %
---------

(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.

                                  Revenues
                              ($ in thousands)

                           Three months ended                     Percent
                              November 30,          Increase      Increase
                            2013         2012      (Decrease)    (Decrease)
Revenues:
Company Drive-In sales   $  93,499    $  93,456      $     43          0.0  %
Franchise Drive-Ins:
Franchise royalties         30,912       29,914           998          3.3
Franchise fees                 309            6           303      5,050.0
Lease revenue                  886        1,486          (600)       (40.4)
Other                        1,046        1,146          (100)        (8.7)
Total revenues           $ 126,652    $ 126,008      $    644          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
                                           November 30,
                                        2013          2012
Company Drive-In sales               $ 93,499      $ 93,456
Percentage decrease                       0.0  %       (3.4) %

Company Drive-Ins in operation(1):
Total at beginning of period              396           409
Opened                                       -             -
Sold to franchisees                        (7)             -
Closed (net of re-openings)                (1)             -
Total at end of period                    388           409

Average sales per Company Drive-In   $    239      $    230

Change in same-store sales(2)             1.9  %        4.2  %
---------

(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 1.9% for the first quarter of fiscal year 2014, as compared to an increase of 4.2% for the same period last year. Company Drive-In sales were flat during the first quarter of fiscal year 2014, as compared to the same period last year, mainly due to a $2.0 million increase in same-store sales and $0.5 million of incremental sales from new drive-in openings offset by a $2.5 million decrease in sales related to drive-ins that were closed or refranchised during the preceding twelve months.


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The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues. 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
                                             November 30,
                                           2013           2012
Franchise Drive-In sales               $ 829,995      $ 808,660
Percentage increase                          2.6  %         3.4  %

Franchise Drive-Ins in operation(1):
Total at beginning of period               3,126          3,147
Opened                                         7              1
Acquired from the Company                      7               -
Closed (net of re-openings)                  (11)            (8)
Total at end of period                     3,129          3,140

Average sales per Franchise Drive-In   $     270      $     262

Change in same-store sales(2)                2.3  %         2.9  %

Franchising revenues(3)                $  32,107      $  31,406
Percentage increase                          2.2  %         3.4  %

Effective royalty rate(4)                   3.72  %        3.70  %
---------

(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.

(3) 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, 2013.

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

Same-store sales for Franchise Drive-Ins increased 2.3% for the first quarter of fiscal year 2014, as compared to an increase of 2.9% for the same period last year. Franchising revenues increased $0.7 million, or 2.2%, for the first quarter of fiscal year 2014, compared to the first quarter of fiscal year 2013. The increase in franchise revenues was primarily attributable to an increase in royalties related to the growth of same-store sales and an increase in franchise fees from the opening of seven new Franchise Drive-Ins during the quarter. Partially offsetting these increases was a decline in lease revenue due to a franchisee's purchase during the second quarter of fiscal year 2013 of land and buildings previously leased or subleased from the Company.


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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
                                           November 30,         Percentage Points
                                         2013         2012          Decrease
Costs and expenses:
Company Drive-Ins:
Food and packaging                      28.1  %       28.5  %         (0.4)
Payroll and other employee benefits     35.6          35.8            (0.2)
Other operating expenses                23.3          23.5            (0.2)
Cost of Company Drive-In sales          87.0  %       87.8  %         (0.8)

Drive-in level margins improved by 80 basis points during the first quarter of fiscal year 2014 as a result of leverage from improved same-store sales. Food and packaging costs were favorable by 40 basis points, which resulted from menu price increases that outpaced commodity cost inflation. Payroll and other employee benefits, combined with other operating expenses, improved 40 basis points mainly as a result of leveraging improved sales.

Selling, General and Administrative ("SG&A"). SG&A expenses increased $0.9 million, or 5.4%, to $17.0 million for the first quarter of fiscal year 2014. This increase is primarily related to salary and benefits as a result of additional headcount in support of the company's technology initiatives and higher variable compensation due to improved operating performance.

Depreciation and Amortization. Depreciation and amortization decreased $0.6 million, or 5.3%, to $10.0 million in the first quarter of fiscal year 2014, as compared to the same period last year. This decline is primarily the result of a franchisee's purchase during the second quarter of fiscal year 2013 of land and buildings previously leased or subleased from the Company.

Net Interest Expense. Net interest expense decreased $1.3 million, or 16.8%, in the first quarter of fiscal year 2014, as compared to the same period last year. This decrease was due to a decline in our weighted-average interest rate attributable to our partial debt refinancing completed in the fourth quarter of fiscal year 2013 and a decline in our long-term debt balance. For additional information on long-term debt see our Annual Report on Form 10-K for the year ended August 31, 2013.

Income Taxes. The provision for income taxes reflects an effective tax rate of 32.1% for the first quarter of fiscal 2014 as compared to 36.6% for the same period in 2013. The decline in the first quarter tax rate was primarily attributable to a $0.5 million tax benefit resulting from the IRS' acceptance of a federal tax method change. Our fiscal year 2014 tax rate may vary depending upon the reinstatement of employment tax credit programs that expired on December 31, 2013, and pending resolution of certain tax matters. Further, our tax rate may continue to vary from quarter to quarter depending on the timing of stock option dispositions by option-holders and as circumstances on other tax matters change.

Financial Position

Total assets decreased $4.2 million, or 0.6%, to $656.6 million during the first three months of fiscal year 2014 from $660.8 million at the end of fiscal year 2013. The decrease in total assets is largely attributable to the decline in net property, equipment and capital leases of $2.9 million from depreciation during the first three months of the year, partially offset by capital additions. Additionally, we saw a decline of $2.9 million in accounts and notes receivable, net, mainly related to the seasonality of our business. These decreases are partially offset by increases in cash primarily attributable to cash generated from operations during the quarter.

Total liabilities decreased $12.1 million, or 2.1%, to $571.3 million during the first three months of fiscal


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year 2014 from $583.3 million at the end of fiscal year 2013. This decrease was primarily attributable to a $7.2 million decrease in accrued liabilities which mainly related to the payment of bonuses and other liabilities that were accrued as of August 31, 2013 and $2.4 million of scheduled debt principal payments during the first three months of fiscal year 2014.

Total stockholders' equity increased $7.9 million, or 10.1%, to $85.3 million during the first three months of fiscal year 2014 from $77.5 million at the end of fiscal year 2013. This increase was primarily attributable to current-year earnings of $8.2 million.

Liquidity and Sources of Capital

Operating Cash Flows. Net cash provided by operating activities increased $13.3 million to $28.1 million for the first three months of fiscal year 2014, as compared to $14.8 million for the same period in fiscal year 2013. This increase primarily resulted from the receipt of a federal income tax refund of $7.5 million and lower income tax payments for the first three months of fiscal year 2014, as compared to the same period last year, mainly attributable to the timing of estimated payments. The increase was partially offset by a net decrease of $1.5 million from changes in operating assets and liabilities primarily related to timing of payments.

Investing Cash Flows. Cash used in investing activities during the first three months of fiscal year 2014 increased $2.5 million to $5.7 million compared to $3.3 million for the same period in fiscal year 2013. The table below outlines our use of cash for investments in property and equipment for the first three months of fiscal year 2014 in millions.

Replacement equipment and technology for existing drive-ins $ 5.0
Brand technology investments                                  1.0
Rebuilds, relocations and remodels of existing drive-ins      0.8
Newly constructed drive-ins                                   0.8
Total purchases of property and equipment                   $ 7.6

These purchases increased $1.7 million compared to the same period last year primarily related to our increased investments in technology. Additionally, proceeds from the sale of surplus property declined $1.5 million due to less activity versus the prior year.

Financing Cash Flows. Net cash used in financing activities decreased $17.1 million to $4.3 million for the first three months of fiscal year 2014 from $21.4 million for the same period in fiscal year 2013. This decrease primarily relates to a $9.7 million reduction in purchases of treasury stock and a $5.6 million increase in proceeds from stock option exercises. Additionally, our mandatory debt payments declined as a result of our fourth quarter of fiscal year 2013 partial debt refinance.

In August 2013, our Board of Directors extended the share repurchase program authorizing us to purchase up to $40 million of our outstanding shares of common stock through August 31, 2014. During the first three months of fiscal year 2014, approximately 0.4 million shares were acquired pursuant to this program for a total cost of $7.5 million. The total remaining amount authorized, as of November 30, 2013, was $32.5 million. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. The share repurchase program may be extended, modified, suspended or discontinued at any time.

As of November 30, 2013, our total cash balance of $109.5 million ($95.9 million of unrestricted and $13.6 million of restricted cash balances) reflected the impact of the cash generated from operating activities, stock option exercise proceeds, cash used for share repurchases, debt payments and capital expenditures mentioned above. We believe that existing cash, funds generated from operations and the $100 million available under our Series 2011-1 Senior Secured Variable Funding Notes, Class A-1, will meet our needs for the foreseeable future.


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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 Annual Report on Form 10-K for the fiscal year ended August 31, 2013.

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