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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

 

FORM 10-Q

_____________________

Picture 1

(Mark One)

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended February 28, 2014

 

OR

 

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to ________________

 

Commission File Number 0-18859

_____________________

 

SONIC CORP.

(Exact name of registrant as specified in its charter)

_____________________

 

 

 

 

 

 

 

Delaware

 

73-1371046

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

 

 

 

 

 

 

 

300 Johnny Bench Drive

 

73104

Oklahoma City, Oklahoma

 

(Zip Code)

(Address of principal executive offices)

 

 

 

(405) 225-5000

(Registrant’s telephone number, including area code)

_____________________

 

 


 

Table of Contents

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer

Accelerated filer                 

Non-accelerated filer   (Do no check if a smaller reporting company)

Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of March 31, 2014, approximately 54,349,291 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 

 

 


 

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SONIC CORP.

Index

 

  

 

 

 

 

 

Page

 

 

Number

PART I.  FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at February 28, 2014 and August 31, 2013

4

 

 

 

 

Condensed Consolidated Statements of Income for the three and six months ended February 28, 2014 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended February 28, 2014 and 2013

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

20

 

 

 

Item 4.

Controls and Procedures

20

 

 

 

PART II.  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

20

 

 

 

Item 1A.

Risk Factors

20

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

 

 

 

Item 6.

Exhibits

22

 

 

 

 


 

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SONIC CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

 

2014

 

2013

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,117 

 

$

77,896 

Restricted cash

 

 

8,589 

 

 

11,823 

Accounts and notes receivable, net

 

 

24,732 

 

 

29,142 

Income taxes receivable

 

 

7,949 

 

 

7,728 

Prepaid expenses and other current assets

 

 

11,397 

 

 

14,133 

Total current assets

 

 

87,784 

 

 

140,722 

Noncurrent restricted cash

 

 

6,717 

 

 

6,791 

Notes receivable, net

 

 

7,868 

 

 

10,013 

Property, equipment and capital leases

 

 

755,659 

 

 

729,197 

Less accumulated depreciation and amortization

 

 

(340,325)

 

 

(329,536)

Property, equipment and capital leases, net

 

 

415,334 

 

 

399,661 

 

 

 

 

 

 

 

Goodwill

 

 

77,093 

 

 

77,093 

Other assets, net

 

 

23,827 

 

 

26,514 

Total assets

 

$

618,623 

 

$

660,794 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

11,562 

 

$

13,100 

Franchisee deposits

 

 

3,599 

 

 

4,048 

Accrued liabilities

 

 

29,319 

 

 

37,221 

Income taxes payable

 

 

2,107 

 

 

4,241 

Current maturities of long-term debt and capital leases

 

 

14,518 

 

 

14,320 

Total current liabilities

 

 

61,105 

 

 

72,930 

Obligations under capital leases due after one year

 

 

25,020 

 

 

22,458 

Long-term debt due after one year

 

 

432,485 

 

 

437,380 

Deferred income taxes

 

 

35,510 

 

 

34,915 

Other non-current liabilities

 

 

18,233 

 

 

15,647 

Total non-current liabilities

 

 

511,248 

 

 

510,400 

Stockholders’ equity:

 

 

 

 

 

 

Preferred stock, par value $.01; 1,000 shares authorized; none outstanding

 

 

 -

 

 

 -

Common stock, par value $.01; 245,000 shares authorized;

 

 

 

 

 

 

118,309 shares issued (118,309 shares issued at August 31, 2013)

 

 

1,183 

 

 

1,183 

Paid-in capital

 

 

218,874 

 

 

224,768 

Retained earnings

 

 

770,453 

 

 

758,138 

Treasury stock, at cost; 63,915 shares (62,025 shares at August 31, 2013)

 

 

(944,240)

 

 

(906,625)

Total stockholders’ equity

 

 

46,270 

 

 

77,464 

Total liabilities and stockholders’ equity

 

$

618,623 

 

$

660,794 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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SONIC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

February 28,

 

February 28,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

81,848 

 

$

83,706 

 

$

175,347 

 

$

177,162 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

26,582 

 

 

25,996 

 

 

57,803 

 

 

55,916 

Lease revenue

 

 

715 

 

 

949 

 

 

1,601 

 

 

2,435 

Other

 

 

596 

 

 

490 

 

 

1,642 

 

 

1,636 

Total revenues

 

 

109,741 

 

 

111,141 

 

 

236,393 

 

 

237,149 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Food and packaging

 

 

23,043 

 

 

23,546 

 

 

49,279 

 

 

50,178 

Payroll and other employee benefits

 

 

30,031 

 

 

31,448 

 

 

63,371 

 

 

64,913 

Other operating expenses, exclusive of

 

 

 

 

 

 

 

 

 

 

 

 

depreciation and amortization included below

 

 

18,437 

 

 

18,811 

 

 

40,244 

 

 

40,787 

Total cost of Company Drive-In sales

 

 

71,511 

 

 

73,805 

 

 

152,894 

 

 

155,878 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

15,886 

 

 

15,467 

 

 

32,891 

 

 

31,597 

Depreciation and amortization

 

 

10,031 

 

 

10,069 

 

 

20,065 

 

 

20,664 

Other operating income, net

 

 

(36)

 

 

(218)

 

 

(165)

 

 

(211)

Total costs and expenses

 

 

97,392 

 

 

99,123 

 

 

205,685 

 

 

207,928 

Income from operations

 

 

12,349 

 

 

12,018 

 

 

30,708 

 

 

29,221 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,384 

 

 

7,448 

 

 

12,767 

 

 

15,123 

Interest income

 

 

(144)

 

 

(168)

 

 

(261)

 

 

(309)

Loss from early extinguishment of debt

 

 

 -

 

 

492 

 

 

 -

 

 

492 

Net interest expense

 

 

6,240 

 

 

7,772 

 

 

12,506 

 

 

15,306 

Income before income taxes

 

 

6,109 

 

 

4,246 

 

 

18,202 

 

 

13,915 

Provision for income taxes

 

 

2,002 

 

 

669 

 

 

5,887 

 

 

4,205 

Net income

 

$

4,107 

 

$

3,577 

 

$

12,315 

 

$

9,710 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.07 

 

$

0.06 

 

$

0.22 

 

$

0.17 

Diluted income per share

 

$

0.07 

 

$

0.06 

 

$

0.21 

 

$

0.17 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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SONIC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Six months ended

 

February 28,

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

Net income

$

12,315 

 

$

9,710 

Adjustments to reconcile net income

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

20,065 

 

 

20,664 

Stock-based compensation expense

 

1,839 

 

 

1,948 

Other

 

(2,321)

 

 

718 

Decrease in operating assets:

 

 

 

 

 

Restricted cash

 

3,447 

 

 

2,702 

Accounts receivable and other assets

 

6,277 

 

 

6,625 

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

(2,216)

 

 

986 

Accrued and other liabilities

 

(5,215)

 

 

(6,209)

Income taxes

 

1,729 

 

 

(15,197)

Total adjustments

 

23,605 

 

 

12,237 

Net cash provided by operating activities

 

35,920 

 

 

21,947 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment 

 

(31,587)

 

 

(13,917)

Proceeds from sale of assets

 

1,030 

 

 

31,861 

Other

 

3,002 

 

 

1,977 

Net cash provided by (used in) investing activities

 

(27,555)

 

 

19,921 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on debt

 

(4,893)

 

 

(27,468)

Purchases of treasury stock

 

(57,847)

 

 

(25,550)

Proceeds from exercise of stock options

 

12,327 

 

 

3,000 

Other

 

(731)

 

 

(2,010)

Net cash used in financing activities

 

(51,144)

 

 

(52,028)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(42,779)

 

 

(10,160)

Cash and cash equivalents at beginning of period

 

77,896 

 

 

52,647 

Cash and cash equivalents at end of period

$

35,117 

 

$

42,487 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes (net of refunds)

$

4,638 

 

$

20,087 

Non-cash investing and financing activities:

 

 

 

 

 

Change in obligation to acquire treasury stock

 

530 

 

 

(1,102)

Notes receivable and direct financing leases from property disposition

 

 -

 

 

8,661 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

 

1.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of Sonic Corp. (the “Company”).  In the opinion of management, these financial statements reflect all adjustments of a normal recurring nature, including recurring accruals, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP.  In certain situations, recurring accruals, including franchise royalties, are based on more limited information at interim reporting dates than at the Company’s fiscal year end due to the abbreviated reporting period.  Actual results may differ from these estimates.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended August 31, 2013, included in the Company’s Annual Report on Form 10-K.  Interim results are not necessarily indicative of the results that may be expected for a full year or any other interim period.  The second fiscal quarter is typically the most volatile for the Company due to seasonality and weather.

 

Principles of Consolidation

 

The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries and a number of Company Drive-Ins in which a subsidiary has a controlling ownership interest.  All intercompany accounts and transactions have been eliminated.

 

Reclassifications

 

Certain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current-year presentation.

 

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

2.Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

February 28,

 

February 28,

 

 

2014

 

2013

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,107 

 

$

3,577 

 

$

12,315 

 

$

9,710 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding– basic

 

 

55,958 

 

 

55,798 

 

 

56,125 

 

 

56,735 

Effect of dilutive employee stock options and

 

 

 

 

 

 

 

 

 

 

 

 

unvested restricted stock units

 

 

1,450 

 

 

625 

 

 

1,528 

 

 

519 

Weighted average common shares – diluted

 

 

57,408 

 

 

56,423 

 

 

57,653 

 

 

57,254 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$

0.07 

 

$

0.06 

 

$

0.22 

 

$

0.17 

Net income per common share – diluted

 

$

0.07 

 

$

0.06 

 

$

0.21 

 

$

0.17 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities excluded(1)

 

 

1,117 

 

 

3,735 

 

 

1,042 

 

 

4,151 

—————————

 

 

 

 

 

 

(1)  Anti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive.

 

 

3.Share Repurchase Program

 

In August 2013, the Company’s Board of Directors extended the share repurchase program authorizing the Company to purchase up to $40 million of its outstanding shares of common stock and, in January 2014, the Company’s Board of Directors approved an incremental $40 million authorization that allows for up to $80 million of common stock to be repurchased through August 31, 2014.  Share repurchases may be made from time to time in the open market or otherwise,  including through an accelerated share repurchase program, under terms of a Rule 10b5-1 plan, in privately negotiated transactions or in round lot or block transactions.  The share repurchase program may be extended, modified, suspended or discontinued at any time.

In February 2014, the Company entered into an  accelerated share repurchase (“ASR”) agreement with a financial institution to purchase $40 million of the Company’s common stock.  In exchange for a $40 million up-front payment, the financial institution delivered approximately 2.1 million shares.  Subsequent to the end of the second quarter, the ASR purchase period concluded with no additional shares delivered, resulting in an average price per share of $19.13.  

The Company reflected the ASR transaction as a repurchase of common stock for purposes of calculating earnings per share and as a  forward contract indexed to its own common stock.  The forward contract met all of the applicable criteria for equity classification.

Including repurchases under the ASR transaction described above, during the first six months of fiscal year 2014, approximately 3.1 million shares were repurchased for a total cost of $58.4 million, resulting in an average price per share of $19.06

The total remaining amount authorized under the share repurchase program, as of February 28, 2014, was $21.6 million. 

 

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

4.Income Taxes

 

The following table presents the Company’s provision for income taxes and effective income tax rate for the periods below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

February 28,

 

February 28,

 

 

2014

 

2013

 

2014

 

2013

Provision for income taxes

 

$

2,002 

 

 

$

669 

 

 

$

5,887 

 

 

$

4,205 

 

Effective income tax rate

 

 

32.8 

%

 

 

15.8 

%

 

 

32.3 

%

 

 

30.2 

%

 

The lower effective income tax rate during the second quarter and first six months of fiscal year 2013 was 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 the Work Opportunity Tax Credit (“WOTC”). 

 

As of February 28, 2014, the Company had $2.1 million of unrecognized tax benefits, including $0.3 million of interest and penalties.  During the first six months of fiscal year 2014, the liability for unrecognized tax benefits decreased $0.5 million.  The decrease was primarily related to the IRS’ acceptance of a federal tax method change that impacted the Company’s tax rate.  The Company recognizes estimated interest and penalties as a component of its income tax expense, net of federal benefit.  If recognized, the entire amount of unrecognized tax benefits would favorably impact the effective tax rate.

 

The Company or one of its subsidiaries is subject to U.S. federal income tax and income tax in multiple U.S. state jurisdictions.  The Company is currently undergoing examinations or appeals by various state and federal authorities.  The Company anticipates that the finalization of these examinations or appeals, combined with the expiration of applicable statutes of limitations and the additional accrual of interest related to unrecognized benefits on various return positions taken in years still open for examination, could result in a change to the liability for unrecognized tax benefits during the next 12 months ranging from a decrease of $1.5 million to an increase of $1.3 million depending on the timing and terms of the examination resolutions.

 

5.Contingencies

 

The Company is involved in various legal proceedings and has certain unresolved claims pending.  Based on the information currently available, management believes that all claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business, operating results or financial condition.

 

On December 20, 2013, the Company extended a note purchase agreement to a bank that serves to guarantee the repayment of a franchisee loan, with a term through 2018, and also benefits the franchisee with a lower financing rate.  In the event of default by the franchisee, the Company would purchase the franchisee loan from the bank, thereby becoming the note holder and providing an avenue of recourse with the franchisee.  The Company recorded a liability for this guarantee which was based on the Company’s estimate of fair value.  As of February 28, 2014, the balance of the franchisee’s loan was $6.3 million. 

 

The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees.  Under these agreements, which expire through 2029, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee.  As of February 28, 2014, the amount remaining under these guaranteed lease obligations totaled $10.0 million.  At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, no liability has been provided.

 

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

6.Fair Value of Financial Instruments

 

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The Company has no financial liabilities that are required to be measured at fair value on a recurring basis. 

 

The Company categorizes its assets and liabilities recorded at fair value based upon the following fair value hierarchy established by the Financial Accounting Standards Board:

 

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.  An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

 

Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include:  (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

Level 3 valuations use unobservable inputs for the asset or liability.  Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 

The Company’s cash equivalents are carried at cost which approximates fair value and totaled $31.8 million at February 28, 2014 and $39.1 million at August 31, 2013.  This fair value is estimated using Level 1  inputs.

 

At February 28, 2014, the fair value of the Company’s Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) and Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013 Fixed Rate Notes”) approximated the carrying value of $442.7 million, including accrued interest.  At August 31, 2013, the fair value of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying value of $447.6 million, including accrued interest.  The fair value of the 2011 Fixed Rate Notes and the 2013 Fixed Rate Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s notes.

 

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

7.Segment Information

 

Operating segments are generally defined as components of an enterprise for which separate discrete financial information is available as the basis for management to allocate resources and assess performance. 

 

Based on internal reporting and management structure, the Company has two reportable segments: Company Drive-Ins and Franchise Operations.  The Company Drive-Ins segment consists of the drive-in operations in which the Company owns a controlling ownership interest and derives its revenues from operating drive-in restaurants.  The Franchise Operations segment consists of franchising activities and derives its revenues from royalties, franchise fees and lease revenues received from franchisees.  The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in the Company’s most recent Annual Report on Form 10-K.  Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources between segments.

 

The following table presents the revenues and income from operations for each reportable segment, along with reconciliation to reported revenue,  income from operations and income before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

February 28,

 

February 28,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins

 

$

81,848 

 

$

83,706 

 

$

175,347 

 

$

177,162 

Franchise Operations

 

 

27,297 

 

 

26,945 

 

 

59,404 

 

 

58,351 

Unallocated revenues

 

 

596 

 

 

490 

 

 

1,642 

 

 

1,636 

Total revenues

 

$

109,741 

 

$

111,141 

 

$

236,393 

 

$

237,149 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins

 

$

10,337 

 

$

9,901 

 

$

22,453 

 

$

21,284 

Franchise Operations

 

 

27,297 

 

 

26,945 

 

 

59,404 

 

 

58,351 

Unallocated income

 

 

632 

 

 

708 

 

 

1,807 

 

 

1,847 

Unallocated expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

(15,886)

 

 

(15,467)

 

 

(32,891)

 

 

(31,597)

Depreciation and amortization

 

 

(10,031)

 

 

(10,069)

 

 

(20,065)

 

 

(20,664)

Income from operations

 

 

12,349 

 

 

12,018 

 

 

30,708 

 

 

29,221 

Net interest expense

 

 

(6,240)

 

 

(7,772)

 

 

(12,506)

 

 

(15,306)

Income before income taxes

 

$

6,109 

 

$

4,246 

 

$

18,202 

 

$

13,915 

 

 

 

 

 

 

 

 

 

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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 1.4% during the second quarter and increased 1.8% for the first six months of fiscal year 2014 as compared to flat sales and an increase of 1.5%, respectively, for the same periods last year.  Same-store sales at Company Drive-Ins increased 1.3% during the second quarter and 1.6% for the first six months of fiscal year 2014 as compared to an increase of 1.9%  and 3.1%, respectively, for the same periods last year.  Our continued positive same-store sales, in light of adverse weather during the second quarter of fiscal year 2014, are a result of successful implementation of initiatives, including product quality improvements, a greater emphasis on personalized service and a tiered pricing strategy, that have set a solid foundation for growth.  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 decreased to $109.7 million for the second quarter of fiscal year 2014 from $111.1 million for the same period last year and decreased to $236.4 million for the first six months of fiscal year 2014 from $237.1 million for the same period last yearA decline in Company Drive-In sales was the primary driver of the decrease in revenues for the second quarter and first half of fiscal year 2014 and was mainly attributable to the closure of 12 lower performing Company Drive-Ins on August 31, 2013 and the refranchising of seven Company Drive-Ins during the first quarter of fiscal year 2014.  Partially offsetting this decline was an increase in franchising revenues.  Restaurant margins at Company Drive-Ins improved 80 basis points during the second quarter and first six months of fiscal year 2014 primarily as a result of leverage from improved same-store sales and the closure of 12 lower performing Company Drive-Ins on August 31, 2013.

 

Second quarter results for fiscal year 2014 reflected net income of $4.1 million or $0.07 per diluted share, as compared to net income of $3.6 million or $0.06 per diluted share for the same period last year.  Excluding the prior year non-GAAP adjustments further described below, net income and diluted earnings per share for the second quarter of fiscal year 2014 would have increased 35% and 40%, respectively.  Net income and diluted earnings per share for the first six months of fiscal year 2014 were $12.3 million and $0.21, respectively, as compared to net income of $9.7 million and $0.17 per diluted share for the same period last year.  Excluding the non-GAAP adjustments further described below, net income and diluted earnings per share for the first half of fiscal year 2014 would have increased 27% and 25%, 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.

 

 

 

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

 

February 28, 2014

 

February 28, 2013

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

4,107 

 

$

0.07 

 

$

3,577 

 

$

0.06 

After-tax loss from early extinguishment of debt

 

 

 -

 

 

 -

 

 

315 

 

 

0.01 

Retroactive tax benefit of Work Opportunity Tax Credit ("WOTC") and resolution of tax matters

 

 

 -

 

 

 -

 

 

(857)

 

 

(0.02)

Adjusted - Non-GAAP

 

$

4,107 

 

$

0.07 

 

$

3,035 

 

$

0.05 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Six months ended

 

 

February 28, 2014

 

February 28, 2013

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

12,315 

 

$

0.21 

 

$

9,710 

 

$

0.17 

Tax benefit from the IRS' acceptance of a federal tax method change

 

 

(484)

 

 

(0.01)

 

 

 -

 

 

 -

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

 

$

11,831 

 

$

0.20 

 

$

9,282 

 

$

0.16 

 

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 28,

 

 

2014

 

2013

 

2014

 

2013

Increase (decrease) in total sales

 

 

0.8 

%

 

 

(0.5)

%

 

 

1.5 

%

 

 

1.6 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

System-wide drive-ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

3,517 

 

 

 

3,549 

 

 

 

3,522 

 

 

 

3,556 

 

Opened

 

 

 

 

 

 

 

 

13 

 

 

 

 

Closed (net of re-openings)

 

 

(16)

 

 

 

(26)

 

 

 

(28)

 

 

 

(34)

 

Total at end of period

 

 

3,507 

 

 

 

3,526 

 

 

 

3,507 

 

 

 

3,526 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

234 

 

 

$

229 

 

 

$

499 

 

 

$

487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

1.4 

%

 

 

0.0 

%

 

 

1.8 

%

 

 

1.5 

%

—————————

 

 

 

 

 

 

 

 

 

(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.

 

 

 

 

 

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Table of Contents

 

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

 

 

February 28,

 

Increase

 

Increase

 

 

2014

 

2013

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

81,848 

 

$

83,706 

 

$

(1,858)

 

(2.2)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

26,376 

 

 

25,821 

 

 

555 

 

2.1 

 

Franchise fees

 

 

206 

 

 

175 

 

 

31 

 

17.7 

 

Lease revenue

 

 

715 

 

 

949 

 

 

(234)

 

(24.7)

 

Other

 

 

596 

 

 

490 

 

 

106 

 

21.6 

 

Total revenues

 

$

109,741 

 

$

111,141 

 

$

(1,400)

 

(1.3)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

 

Percent

 

 

February 28,

 

Increase

 

Increase

 

 

 

2014

 

 

2013

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

175,347 

 

$

177,162 

 

$

(1,815)

 

(1.0)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

57,288 

 

 

55,736 

 

 

1,552 

 

2.8 

 

Franchise fees

 

 

515 

 

 

180 

 

 

335 

 

186.1 

 

Lease revenue

 

 

1,601 

 

 

2,435 

 

 

(834)

 

(34.3)

 

Other

 

 

1,642 

 

 

1,636 

 

 

 

0.4 

 

Total revenues

 

$

236,393 

 

$

237,149 

 

$

(756)

 

(0.3)

%

 

 

 

 

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Table of Contents

 

 

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 28,

 

 

2014

 

2013

 

2014

 

2013

Company Drive-In sales

 

$

81,848 

 

 

$

83,706 

 

 

$

175,347 

 

 

$

177,162 

 

Percentage decrease

 

 

(2.2)

%

 

 

(4.0)

%

 

 

(1.0)

%

 

 

(3.7)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

388 

 

 

 

409 

 

 

 

396 

 

 

 

409 

 

Opened

 

 

 -

 

 

 

 -

 

 

 

 -

 

 

 

 -

 

Sold to franchisees

 

 

 -

 

 

 

 -

 

 

 

(7)

 

 

 

 -

 

Closed (net of re-openings)

 

 

 -

 

 

 

(4)

 

 

 

(1)

 

 

 

(4)

 

Total at end of period

 

 

388 

 

 

 

405 

 

 

 

388 

 

 

 

405 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per Company Drive-In

 

$

213 

 

 

$

207 

 

 

$

452 

 

 

$

437