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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 May 31, 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 June 26, 2014, approximately 54,076,056 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 

 

 


 

Table of Contents

 

SONIC CORP.

Index

 

  

 

 

 

 

 

Page

 

 

Number

PART I.  FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at May 31, 2014 and August 31, 2013

4

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended May 31, 2014 and 2013

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 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

13

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

 

 

 

Item 4.

Controls and Procedures

21

 

 

 

PART II.  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

21

 

 

 

Item 1A.

Risk Factors

21

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

 

 

 

Item 6.

Exhibits

23

 

 

 

 


 

Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SONIC CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

 

2014

 

2013

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

34,840 

 

$

77,896 

Restricted cash

 

 

9,806 

 

 

11,823 

Accounts and notes receivable, net

 

 

38,608 

 

 

29,142 

Income taxes receivable

 

 

4,773 

 

 

7,728 

Prepaid expenses and other current assets

 

 

11,108 

 

 

14,133 

Total current assets

 

 

99,135 

 

 

140,722 

Noncurrent restricted cash

 

 

6,684 

 

 

6,791 

Notes receivable, net

 

 

7,481 

 

 

10,013 

Property, equipment and capital leases

 

 

767,098 

 

 

729,197 

Less accumulated depreciation and amortization

 

 

(338,666)

 

 

(329,536)

Property, equipment and capital leases, net

 

 

428,432 

 

 

399,661 

 

 

 

 

 

 

 

Goodwill

 

 

77,093 

 

 

77,093 

Other assets, net

 

 

22,534 

 

 

26,514 

Total assets

 

$

641,359 

 

$

660,794 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

15,085 

 

$

13,100 

Franchisee deposits

 

 

3,436 

 

 

4,048 

Accrued liabilities

 

 

37,622 

 

 

37,221 

Income taxes payable

 

 

2,166 

 

 

4,241 

Current maturities of long-term debt and capital leases

 

 

13,628 

 

 

14,320 

Total current liabilities

 

 

71,937 

 

 

72,930 

Obligations under capital leases due after one year

 

 

23,676 

 

 

22,458 

Long-term debt due after one year

 

 

430,037 

 

 

437,380 

Deferred income taxes

 

 

38,829 

 

 

34,915 

Other non-current liabilities

 

 

19,343 

 

 

15,647 

Total non-current liabilities

 

 

511,885 

 

 

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

 

 

223,985 

 

 

224,768 

Retained earnings

 

 

787,229 

 

 

758,138 

Treasury stock, at cost; 64,096 shares (62,025 shares at August 31, 2013)

 

 

(954,860)

 

 

(906,625)

Total stockholders’ equity

 

 

57,537 

 

 

77,464 

Total liabilities and stockholders’ equity

 

$

641,359 

 

$

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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

111,014 

 

$

108,445 

 

$

286,361 

 

$

285,607 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

38,795 

 

 

35,833 

 

 

96,598 

 

 

91,749 

Lease revenue

 

 

1,081 

 

 

1,089 

 

 

2,682 

 

 

3,524 

Other

 

 

1,297 

 

 

1,267 

 

 

2,939 

 

 

2,903 

Total revenues

 

 

152,187 

 

 

146,634 

 

 

388,580 

 

 

383,783 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Food and packaging

 

 

32,175 

 

 

30,776 

 

 

81,454 

 

 

80,954 

Payroll and other employee benefits

 

 

37,737 

 

 

37,924 

 

 

101,108 

 

 

102,837 

Other operating expenses, exclusive of

 

 

 

 

 

 

 

 

 

 

 

 

depreciation and amortization included below

 

 

21,805 

 

 

21,356 

 

 

62,049 

 

 

62,143 

Total cost of Company Drive-In sales

 

 

91,717 

 

 

90,056 

 

 

244,611 

 

 

245,934 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

17,639 

 

 

16,943 

 

 

50,530 

 

 

48,540 

Depreciation and amortization

 

 

11,022 

 

 

9,783 

 

 

31,087 

 

 

30,447 

Other operating (income) expense, net

 

 

128 

 

 

(142)

 

 

(37)

 

 

(353)

Total costs and expenses

 

 

120,506 

 

 

116,640 

 

 

326,191 

 

 

324,568 

Income from operations

 

 

31,681 

 

 

29,994 

 

 

62,389 

 

 

59,215 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,328 

 

 

7,170 

 

 

19,095 

 

 

22,293 

Interest income

 

 

(112)

 

 

(153)

 

 

(373)

 

 

(462)

Loss from early extinguishment of debt

 

 

 -

 

 

 -

 

 

 -

 

 

492 

Net interest expense

 

 

6,216 

 

 

7,017 

 

 

18,722 

 

 

22,323 

Income before income taxes

 

 

25,465 

 

 

22,977 

 

 

43,667 

 

 

36,892 

Provision for income taxes

 

 

8,689 

 

 

8,184 

 

 

14,576 

 

 

12,389 

Net income

 

$

16,776 

 

$

14,793 

 

$

29,091 

 

$

24,503 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.31 

 

$

0.26 

 

$

0.52 

 

$

0.43 

Diluted income per share

 

$

0.30 

 

$

0.26 

 

$

0.51 

 

$

0.43 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5

 


 

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SONIC CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

Nine months ended

 

May 31,

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

Net income

$

29,091 

 

$

24,503 

Adjustments to reconcile net income

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

31,087 

 

 

30,447 

Stock-based compensation expense

 

2,784 

 

 

2,812 

Other

 

(3,195)

 

 

(53)

(Increase) decrease in operating assets:

 

 

 

 

 

Restricted cash

 

1,979 

 

 

1,112 

Accounts receivable and other assets

 

(4,168)

 

 

(209)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

(1,435)

 

 

2,102 

Accrued and other liabilities

 

4,317 

 

 

2,797 

Income taxes

 

10,598 

 

 

(7,661)

Total adjustments

 

41,967 

 

 

31,347 

Net cash provided by operating activities

 

71,058 

 

 

55,850 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment 

 

(54,738)

 

 

(28,378)

Proceeds from sale of assets

 

1,653 

 

 

32,342 

Other

 

(415)

 

 

140 

Net cash provided by (used in) investing activities

 

(53,500)

 

 

4,104 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on debt

 

(7,340)

 

 

(31,076)

Purchases of treasury stock

 

(68,884)

 

 

(36,538)

Proceeds from exercise of stock options

 

16,700 

 

 

11,181 

Other

 

(1,090)

 

 

(2,614)

Net cash used in financing activities

 

(60,614)

 

 

(59,047)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(43,056)

 

 

907 

Cash and cash equivalents at beginning of period

 

77,896 

 

 

52,647 

Cash and cash equivalents at end of period

$

34,840 

 

$

53,554 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes (net of refunds)

$

4,826 

 

$

21,074 

Non-cash investing and financing activities:

 

 

 

 

 

Change in obligation to acquire treasury stock

 

571 

 

 

(1,058)

Notes receivable and direct financing leases from property disposition

 

 -

 

 

8,661 

 

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

 

6

 


 

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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 (“U.S.”) 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.    

 

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.

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,”  which requires entities to recognize revenue in the way it expects to be entitled for the transfer of promised goods or services to customers.  The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it becomes effective.  This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period and is to be applied retrospectively, with early application not permitted.  The Company is currently evaluating the effect that this pronouncement will have on its financial statements and related disclosures.  

 

 

 

 

 

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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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2014

 

2013

 

2014

 

2013

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

16,776 

 

$

14,793 

 

$

29,091 

 

$

24,503 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding– basic

 

 

54,382 

 

 

56,005 

 

 

55,544 

 

 

56,492 

Effect of dilutive employee stock options and

 

 

 

 

 

 

 

 

 

 

 

 

unvested restricted stock units

 

 

1,371 

 

 

840 

 

 

1,476 

 

 

626 

Weighted average common shares – diluted

 

 

55,753 

 

 

56,845 

 

 

57,020 

 

 

57,118 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$

0.31 

 

$

0.26 

 

$

0.52 

 

$

0.43 

Net income per common share – diluted

 

$

0.30 

 

$

0.26 

 

$

0.51 

 

$

0.43 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities excluded(1)

 

 

1,025 

 

 

3,327 

 

 

1,036 

 

 

3,877 

—————————

 

 

 

 

 

 

(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 Company’s 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 sharesDuring March 2014, 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 nine months of fiscal year 2014, approximately 3.6 million shares were repurchased for a total cost of $69.4 million, resulting in an average price per share of $19.32

The total remaining amount authorized under the share repurchase program, as of May 31, 2014, was $10.6 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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2014

 

2013

 

2014

 

2013

Provision for income taxes

 

$

8,689 

 

 

$

8,184 

 

 

$

14,576 

 

 

$

12,389 

 

Effective income tax rate

 

 

34.1 

%

 

 

35.6 

%

 

 

33.4 

%

 

 

33.6 

%

 

The lower effective income tax rate during the third quarter of fiscal year 2014 was primarily attributable to a favorable annual return to provision adjustment.   The effective tax rate for the first nine months of fiscal year 2014 decreased slightly compared to the prior year primarily due to the tax benefit resulting from the IRS’ acceptance of a federal tax method change during the first quarter of fiscal year 2014 combined with the favorable return to provision adjustment from the third quarter of fiscal year 2014

 

As of May 31, 2014, the Company had $2.2 million of unrecognized tax benefits, including $0.3 million of interest and penalties.  During the first nine months of fiscal year 2014, the liability for unrecognized tax benefits decreased $0.4 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 $1.6 million to an increase of $0.1 million depending on the timing and terms of the examination resolutions.

 

 

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

5.Accounts and Notes Receivable

 

Accounts and notes receivable consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

 

2014

 

2013

Current Accounts and Notes Receivable:

 

 

 

 

 

 

Royalties and other trade receivables

 

$

18,340 

 

$

16,506 

Notes receivable from franchisees

 

 

1,038 

 

 

4,003 

Receivables from advertising funds

 

 

12,596 

 

 

5,203 

Other

 

 

7,764 

 

 

4,977 

Accounts and notes receivable, gross

 

 

39,738 

 

 

30,689 

Allowance for doubtful accounts and notes receivable

 

 

(1,130)

 

 

(1,547)

Accounts and notes receivable, net

 

$

38,608 

 

$

29,142 

 

 

 

 

 

 

 

Noncurrent Notes Receivable:

 

 

 

 

 

 

Receivables from franchisees

 

$

4,386 

 

$

5,003 

Receivables from advertising funds

 

 

3,840 

 

 

5,810 

Allowance for doubtful notes receivable

 

 

(745)

 

 

(800)

Notes receivable, net

 

$

7,481 

 

$

10,013 

 

The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business.  Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment.  The receivables from advertising funds represent transactions in the normal course of business.  The increase in current receivables from advertising funds (the “funds”) during the first nine months of fiscal year 2014 primarily relates to timing of the funds receipts and disbursements.  The Company expects the funds to repay approximately $6.0 million of the current receivable balance by its fiscal year end. 

 

6.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 May 31, 2014, the balance of the franchisee’s loan was $6.2 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 May 31, 2014, the amount remaining under these guaranteed lease obligations totaled $9.7 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)

 

7.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 $32.5 million at May 31, 2014 and $39.1 million at August 31, 2013.  This fair value is estimated using Level 1  inputs.

 

At May 31, 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 $440.3 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)

 

8.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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2014

 

2013

 

2014

 

2013

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins

 

$

111,014 

 

$

108,445 

 

$

286,361 

 

$

285,607 

Franchise Operations

 

 

39,876 

 

 

36,922 

 

 

99,280 

 

 

95,273 

Unallocated revenues

 

 

1,297 

 

 

1,267 

 

 

2,939 

 

 

2,903 

Total revenues

 

$

152,187 

 

$

146,634 

 

$

388,580 

 

$

383,783 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins

 

$

19,297 

 

$

18,389 

 

$

41,750 

 

$

39,673 

Franchise Operations

 

 

39,876 

 

 

36,922 

 

 

99,280 

 

 

95,273 

Unallocated income

 

 

1,169 

 

 

1,409 

 

 

2,976 

 

 

3,256 

Unallocated expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

(17,639)

 

 

(16,943)

 

 

(50,530)

 

 

(48,540)

Depreciation and amortization

 

 

(11,022)

 

 

(9,783)

 

 

(31,087)

 

 

(30,447)

Income from operations

 

 

31,681 

 

 

29,994 

 

 

62,389 

 

 

59,215 

Net interest expense

 

 

(6,216)

 

 

(7,017)

 

 

(18,722)

 

 

(22,323)

Income before income taxes

 

$

25,465 

 

$

22,977 

 

$

43,667 

 

$

36,892 

 

 

 

 

 

 

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Table of Contents

 

 

 

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 5.3% during the third quarter and increased 3.1% for the first nine months of fiscal year 2014 as compared to increases of 0.1%, and 0.9%, respectively, for the same periods last year.  Same-store sales at Company Drive-Ins increased 5.2% during the third quarter and 3.0% for the first nine months of fiscal year 2014 as compared to a decrease of 1.1%  and an increase of 1.5%, respectively, for the same periods last year.  Our continued positive same-store sales are a result of the 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 increased to $152.2 million for the third quarter of fiscal year 2014 from $146.6 million for the same period last year and increased to $388.6 million for the first nine months of fiscal year 2014 from $383.8 million for the same period last yearThe increase in revenues was primarily attributable to an increase in Company Drive-In sales and Franchise Drive-In royalties related to the growth of same-store sales.  Restaurant margins at Company Drive-Ins improved 40 basis points during the third quarter and improved 70 basis points during the first nine 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,  partially offset by increased commodity costs.

 

Third quarter results for fiscal year 2014 reflected net income of $16.8 million or $0.30 per diluted share, as compared to net income of $14.8 million or $0.26 per diluted share for the same period last year.  Net income and diluted earnings per share for the third quarter of fiscal year 2014 increased 13% and 15%, respectively.  Net income and diluted earnings per share for the first nine months of fiscal year 2014 were  $29.1 million and $0.51, respectively, as compared to net income of $24.5 million and $0.43 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 nine months of fiscal year 2014 would have both increased by 19%.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

May 31, 2014

 

May 31, 2013

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

29,091 

 

$

0.51 

 

$

24,503 

 

$

0.43 

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

 

 

 -

 

 

 -

 

 

(743)

 

 

(0.02)

Adjusted - Non-GAAP

 

$

28,607 

 

$

0.50 

 

$

24,075 

 

$

0.42 

 

 

 

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Table of Contents

 

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,

 

 

2014

 

2013

 

2014

 

2013

Increase in total sales

 

 

5.8 

%

 

 

0.1 

%

 

 

3.4 

%

 

 

1.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

3,507 

 

 

 

3,526 

 

 

 

3,522 

 

 

 

3,556 

 

Opened

 

 

10 

 

 

 

 

 

 

23 

 

 

 

10 

 

Closed (net of re-openings)

 

 

(7)

 

 

 

(6)

 

 

 

(35)

 

 

 

(40)

 

Total at end of period

 

 

3,510 

 

 

 

3,526 

 

 

 

3,510 

 

 

 

3,526 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

320 

 

 

$

301 

 

 

$

819 

 

 

$

787 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

5.3 

%

 

 

0.1 

%

 

 

3.1 

%

 

 

0.9 

%

—————————

 

 

 

 

 

 

 

 

 

(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

 

 

May 31,

 

Increase

 

Increase

 

 

2014

 

2013

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

111,014 

 

$

108,445 

 

$

2,569 

 

2.4 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

38,519 

 

 

35,756 

 

 

2,763 

 

7.7 

 

Franchise fees

 

 

276 

 

 

77 

 

 

199 

 

258.4 

 

Lease revenue

 

 

1,081 

 

 

1,089 

 

 

(8)

 

(0.7)

 

Other

 

 

1,297 

 

 

1,267 

 

 

30 

 

2.4 

 

Total revenues

 

$

152,187 

 

$

146,634 

 

$

5,553 

 

3.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Percent

 

 

May 31,

 

Increase

 

Increase

 

 

 

2014

 

 

2013

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

286,361 

 

$

285,607 

 

$

754 

 

0.3 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

95,807 

 

 

91,491 

 

 

4,316 

 

4.7 

 

Franchise fees

 

 

791 

 

 

258 

 

 

533 

 

206.6 

 

Lease revenue

 

 

2,682 

 

 

3,524 

 

 

(842)

 

(23.9)

 

Other

 

 

2,939 

 

 

2,903 

 

 

36 

 

1.2 

 

Total revenues

 

$

388,580 

 

$

383,783 

 

$

4,797 

 

1.2 

%

 

 

 

 

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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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2014

 

2013

 

2014

 

2013

Company Drive-In sales

 

$

111,014 

 

 

$

108,445 

 

 

$

286,361 

 

 

$

285,607 

 

Percentage increase (decrease)

 

 

2.4 

%

 

 

(1.5)

%

 

 

0.3 

%

 

 

(2.9)

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

388 

 

 

 

405 

 

 

 

396 

 

 

 

409 

 

Opened

 

 

 

 

 

 

 

 

 

 

 

 

Acquired from (sold to) franchisees

 

 

 -

 

 

 

 

 

 

(7)

 

 

 

 

Closed (net of re-openings)

 

 

 -

 

 

 

 -

 

 

 

(1)

 

 

 

(4)

 

Total at end of period

 

 

389 

 

 

 

407 

 

 

 

389