20150531 10Q Q3

Table of Contents

 

 

;

 

 

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, 2015

 

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 29, 2015, approximately 51,919,891 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, 2015 and August 31, 2014

4

 

 

 

 

Condensed Consolidated Statements of Income for the three and nine months ended May 31, 2015 and 2014

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2015 and 2014

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

11

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

 

 

 

Item 4.

Controls and Procedures

19

 

 

 

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

20

 

 

 

Item 6.

Exhibits

21

 

 

 

 


 

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,

 

 

2015

 

2014

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,922 

 

$

35,694 

Restricted cash

 

 

9,972 

 

 

13,208 

Accounts and notes receivable, net

 

 

33,616 

 

 

32,833 

Income taxes receivable

 

 

1,734 

 

 

1,887 

Prepaid expenses and other current assets

 

 

11,863 

 

 

12,090 

Total current assets

 

 

80,107 

 

 

95,712 

Noncurrent restricted cash

 

 

6,556 

 

 

6,652 

Notes receivable, net

 

 

6,770 

 

 

8,155 

Property, equipment and capital leases

 

 

786,796 

 

 

771,019 

Less accumulated depreciation and amortization

 

 

(356,488)

 

 

(329,050)

Property, equipment and capital leases, net

 

 

430,308 

 

 

441,969 

 

 

 

 

 

 

 

Goodwill

 

 

77,066 

 

 

77,093 

Other assets, net

 

 

22,178 

 

 

21,391 

Total assets

 

$

622,985 

 

$

650,972 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

17,422 

 

$

17,207 

Franchisee deposits

 

 

780 

 

 

2,678 

Accrued liabilities

 

 

46,615 

 

 

43,681 

Income taxes payable

 

 

3,332 

 

 

2,461 

Current maturities of long-term debt and capital leases

 

 

13,564 

 

 

13,484 

Total current liabilities

 

 

81,713 

 

 

79,511 

Obligations under capital leases due after one year

 

 

21,673 

 

 

23,050 

Long-term debt due after one year

 

 

431,182 

 

 

427,527 

Deferred income taxes

 

 

49,712 

 

 

37,611 

Other non-current liabilities

 

 

20,099 

 

 

20,598 

Total non-current liabilities

 

 

522,666 

 

 

508,786 

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, 2014)

 

 

1,183 

 

 

1,183 

Paid-in capital

 

 

221,059 

 

 

225,004 

Retained earnings

 

 

830,081 

 

 

801,202 

Treasury stock, at cost; 66,231 shares (64,505 shares at August 31, 2014)

 

 

(1,033,717)

 

 

(964,714)

Total stockholders’ equity

 

 

18,606 

 

 

62,675 

Total liabilities and stockholders’ equity

 

$

622,985 

 

$

650,972 

 

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,

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

118,369 

 

$

111,014 

 

$

310,816 

 

$

286,361 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

43,704 

 

 

38,795 

 

 

114,375 

 

 

96,598 

Lease revenue

 

 

1,569 

 

 

1,081 

 

 

3,613 

 

 

2,682 

Other

 

 

1,106 

 

 

1,297 

 

 

2,019 

 

 

2,939 

Total revenues

 

 

164,748 

 

 

152,187 

 

 

430,823 

 

 

388,580 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Food and packaging

 

 

32,727 

 

 

32,175 

 

 

87,128 

 

 

81,454 

Payroll and other employee benefits

 

 

40,898 

 

 

37,737 

 

 

110,049 

 

 

101,108 

Other operating expenses, exclusive of

 

 

 

 

 

 

 

 

 

 

 

 

depreciation and amortization included below

 

 

22,955 

 

 

21,805 

 

 

65,484 

 

 

62,049 

Total cost of Company Drive-In sales

 

 

96,580 

 

 

91,717 

 

 

262,661 

 

 

244,611 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

20,699 

 

 

17,639 

 

 

57,625 

 

 

50,530 

Depreciation and amortization

 

 

11,435 

 

 

11,022 

 

 

34,634 

 

 

31,087 

Other operating (income) expense, net

 

 

(336)

 

 

128 

 

 

 

 

(37)

Total costs and expenses

 

 

128,378 

 

 

120,506 

 

 

354,924 

 

 

326,191 

Income from operations

 

 

36,370 

 

 

31,681 

 

 

75,899 

 

 

62,389 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,382 

 

 

6,328 

 

 

18,981 

 

 

19,095 

Interest income

 

 

(91)

 

 

(112)

 

 

(290)

 

 

(373)

Net interest expense

 

 

6,291 

 

 

6,216 

 

 

18,691 

 

 

18,722 

Income before income taxes

 

 

30,079 

 

 

25,465 

 

 

57,208 

 

 

43,667 

Provision for income taxes

 

 

9,637 

 

 

8,689 

 

 

19,019 

 

 

14,576 

Net income

 

$

20,442 

 

$

16,776 

 

$

38,189 

 

$

29,091 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.39 

 

$

0.31 

 

$

0.72 

 

$

0.52 

Diluted income per share

 

$

0.38 

 

$

0.30 

 

$

0.70 

 

$

0.51 

 

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)

 

 

 

 

 

 

 

Nine months ended

 

May 31,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Net income

$

38,189 

 

$

29,091 

Adjustments to reconcile net income

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

34,634 

 

 

31,087 

Stock-based compensation expense

 

2,572 

 

 

2,784 

Provision for deferred income taxes

 

10,088 

 

 

3,832 

Other

 

(3,644)

 

 

(2,397)

(Increase) decrease in operating assets:

 

 

 

 

 

Restricted cash

 

3,312 

 

 

1,979 

Accounts receivable and other assets

 

(931)

 

 

(4,168)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

2,105 

 

 

(1,435)

Accrued and other liabilities

 

8,098 

 

 

4,317 

Income taxes

 

6,079 

 

 

5,968 

Total adjustments

 

62,313 

 

 

41,967 

Net cash provided by operating activities

 

100,502 

 

 

71,058 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment 

 

(30,867)

 

 

(54,738)

Proceeds from sale of assets

 

4,089 

 

 

1,653 

Other

 

4,148 

 

 

(415)

Net cash used in investing activities

 

(22,630)

 

 

(53,500)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on debt

 

(63,842)

 

 

(7,340)

Proceeds from borrowings

 

67,500 

 

 

 -

Purchases of treasury stock

 

(95,597)

 

 

(68,884)

Proceeds from exercise of stock options

 

15,763 

 

 

16,700 

Payment of dividends

 

(14,153)

 

 

 -

Other

 

(315)

 

 

(1,090)

Net cash used in financing activities

 

(90,644)

 

 

(60,614)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(12,772)

 

 

(43,056)

Cash and cash equivalents at beginning of period

 

35,694 

 

 

77,896 

Cash and cash equivalents at end of period

$

22,922 

 

$

34,840 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes (net of refunds)

$

2,927 

 

$

4,826 

Non-cash investing and financing activities:

 

 

 

 

 

Change in obligation to acquire treasury stock

 

(259)

 

 

571 

Change in obligation for purchase of property and equipment

 

(2,327)

 

 

3,113 

 

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 (“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, 2014, 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 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.  

In April 2015, FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.”  This update requires debt issuance costs to be presented in the balance sheet as a reduction of the related liability rather than an asset.  This pronouncement is effective for reporting periods beginning after December 15, 2015, including interim periods within that reporting period, and is to be applied retrospectively; early adoption is permitted.  The Company is currently evaluating the effect this guidance will have on its financial statements and related disclosures.

In April 2015, FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.  The guidance provides clarification on whether a cloud computing arrangement includes a software license.  If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract.  The update is effective for reporting periods beginning after December 15, 2015.  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,

 

 

2015

 

2014

 

2015

 

2014

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

20,442 

 

$

16,776 

 

$

38,189 

 

$

29,091 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding– basic

 

 

52,022 

 

 

54,382 

 

 

52,851 

 

 

55,544 

Effect of dilutive employee stock options and

 

 

 

 

 

 

 

 

 

 

 

 

unvested restricted stock units

 

 

1,369 

 

 

1,371 

 

 

1,442 

 

 

1,476 

Weighted average common shares – diluted

 

 

53,391 

 

 

55,753 

 

 

54,293 

 

 

57,020 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$

0.39 

 

$

0.31 

 

$

0.72 

 

$

0.52 

Net income per common share – diluted

 

$

0.38 

 

$

0.30 

 

$

0.70 

 

$

0.51 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities excluded(1)

 

 

379 

 

 

1,025 

 

 

335 

 

 

1,036 

—————————

 

 

 

 

 

 

 (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 2014, the Company’s Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $105 million of its outstanding shares of common stock to be repurchased through August 31, 2015.  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 October 2014, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to purchase $15 million of the Company’s common stock.  In exchange for a $15 million up-front payment, the financial institution delivered approximately 0.6 million shares.  During January 2015, the ASR purchase period concluded, and the Company elected to settle the agreement in cash rather than shares.  Accordingly, the Company paid $0.1 million, and no additional shares were delivered, resulting in an average price per share of $26.32.

   

In February 2015, the Company entered into additional ASR agreements with a financial institution to purchase $75 million of the Company’s common stock.  These ASR transactions were funded with available cash on hand and funds from borrowing on the Company’s Series 2011-1 Senior Secured Variable Funding Notes, Class A-1 (the "2011 Variable Funding Notes").  In exchange for a $75 million up-front payment, the financial institution delivered approximately 2.1 million shares.  Subsequent to the end of the third quarter, the ASR transactions completed with 0.3 million additional shares delivered, resulting in an average price per share of $31.38.

 

The Company reflected the ASR transactions 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.

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

 

Including shares repurchased through the ASR transactions described above, during the first nine months of fiscal year 2015, approximately 2.9 million shares were repurchased for a total cost of $95.3 million.  Including the 0.3 million shares received at completion of the ASR transactions subsequent to the end of the third quarter, approximately 3.2 million shares were repurchased for a total cost of $95.3 million, resulting in an average price per share of $29.76The total remaining amount authorized under the share repurchase program, as of May 31, 2015, was $9.7 million.

 

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,

 

 

2015

 

2014

 

2015

 

2014

Provision for income taxes

 

$

9,637 

 

 

$

8,689 

 

 

$

19,019 

 

 

$

14,576 

 

Effective income tax rate

 

 

32.0 

%

 

 

34.1 

%

 

 

33.2 

%

 

 

33.4 

%

 

The lower effective income tax rate during the third quarter of fiscal year 2015 was primarily attributable to amending prior years’ federal tax returns in order to claim certain allowable tax deductions. The lower effective income tax rate during the first nine months of fiscal year 2015 was primarily attributable to the recognition of prior years’ federal tax deductions and legislation that was passed during the second quarter to retroactively reinstate and extend the Work Opportunity Tax Credit (“WOTC”).

 

As of May 31, 2015, the Company had $3.3 million of unrecognized tax benefits, including $0.4 million of interest and penalties. During the first nine months of fiscal year 2015, the liability for unrecognized tax benefits increased $0.9 million. The increase was primarily due to new uncertain tax positions related to a federal tax deduction and an adjustment to a federal tax credit. 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 $2.7 million to an increase of $0.1 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.  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, 2015, the balance of the franchisee’s loan was $6.0 million.

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

 

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, 2015, the amount remaining under these guaranteed lease obligations totaled $8.1 million.  At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, no liability has been provided.

 

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 $33.7 million at May 31, 2015 and $34.4 million at August 31, 2014.  This fair value is estimated using Level 1 inputs.

 

At May 31, 2015, 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 $430.5 million, including accrued interest.  At August 31, 2014, the fair value of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying value of $437.8 million, including accrued interest.  The fair value of the Company’s 2011 Variable Funding Notes at May 31, 2015 approximated the carrying value of $11.0 million, including accrued interest.  At August 31, 2014, the 2011 Variable Funding Notes had no balance.  The fair value of the 2011 Fixed Rate Notes, 2013 Fixed Rate Notes and 2011 Variable Funding 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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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 6.1% during the third quarter and increased 8.3% for the first nine months of fiscal year 2015 as compared to an increase of 5.3% and 3.1%, respectively, for the same periods last year.  Same-store sales at Company Drive-Ins increased 5.5% during the third quarter and 8.0% for the first nine months of fiscal year 2015 as compared to an increase of 5.2% and 3.0%, 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, combined with an improving macro environment.  Along with new technology initiatives implemented in Company Drive-Ins during fiscal 2014, we continue to focus on key initiatives such as increased media effectiveness, an innovative product pipeline and our layered day-part promotional strategy to drive same-store sales growth.  All of these initiatives drive Sonic’s multi-layered growth strategy which incorporates same-store sales growth, operating leverage, deployment of cash, an ascending royalty rate and new drive-in development.  Same-store sales growth is the most important layer and drives operating leverage and increased operating cash flows.

 

Revenues increased to $164.7 million for the third quarter and $430.8 million for the first nine months of fiscal year 2015 from $152.2 million and $388.6 million, respectively, for the same periods last year.  The increase in revenues was attributable to a same-store sales growth at Company and Franchise Drive-Ins and a license conversion increasing royalty rates for approximately 900 Franchise Drive-Ins. Restaurant margins at Company Drive-Ins improved by 100 basis points during the third quarter and 90 basis points for the first nine months of fiscal year 2015, attributable to moderating commodity costs and improved inventory management at the drive-in level.  For the nine months ending May 31, 2015, margin improvement is also attributable to leverage from higher sales and improved food and packaging costs.

 

Third quarter results for fiscal year 2015 reflected net income of $20.4 million or $0.38 per diluted share, as compared to net income of $16.8 million or $0.30 per diluted share for the same period last year.  Excluding the non-GAAP adjustment further described below, net income and diluted earnings per share for the third quarter of fiscal year 2015 increased 15% and 20%, respectively.  Net income and diluted earnings per share for the first nine months of fiscal year 2015 were $38.2 million and $0.70, respectively, as compared to net income of $29.1 million and $0.51 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 2015 increased 27% and 24%, respectively.

 

 

 

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The following analysis of non-GAAP adjustments is 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

 

 

May 31, 2015

 

May 31, 2014

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

20,442 

 

$

0.38 

 

$

16,776 

 

$

0.07 

Recognition of prior-period federal tax benefit

 

 

(1,722)

 

 

(0.03)

 

 

 -

 

 

 -

Retroactive effect of federal tax law change

 

 

612 

 

 

0.01 

 

 

 -

 

 

 -

Adjusted - Non-GAAP

 

$

19,332 

 

$

0.36 

 

$

16,776 

 

$

0.07 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Nine months ended

 

 

May 31, 2015

 

May 31, 2014

 

 

Net

 

Diluted

 

Net

 

Diluted

 

 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

38,189 

 

$

0.70 

 

$

29,091 

 

$

0.51 

Recognition of prior-period federal tax benefit

 

 

(1,722)

 

 

(0.03)

 

 

 -

 

 

 -

Retroactive effect of federal tax law change

 

 

612 

 

 

0.01 

 

 

 -

 

 

 -

Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters

 

 

(666)

 

 

(0.01)

 

 

 -

 

 

 -

Benefit from the IRS' acceptance of a federal tax method change

 

 

 -

 

 

 -

 

 

(484)

 

 

(0.01)

Adjusted - Non-GAAP

 

$

36,413 

 

$

0.67 

 

$

28,607 

 

$

0.50 

 

 

 

 

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The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the periods indicated as well as the system-wide change in sales and average unit volume.  System-wide information includes both Company Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company’s revenues, since franchisees pay royalties based on a percentage of sales.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

System-wide Performance

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2015

 

2014

 

2015

 

2014

Increase in total sales

 

 

7.0 

%

 

 

5.8 

%

 

 

9.4 

%

 

 

3.4 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

3,508 

 

 

 

3,507 

 

 

 

3,518 

 

 

 

3,522 

 

Opened

 

 

 

 

 

10 

 

 

 

23 

 

 

 

23 

 

Closed (net of re-openings)

 

 

(2)

 

 

 

(7)

 

 

 

(29)

 

 

 

(35)

 

Total at end of period

 

 

3,512 

 

 

 

3,510 

 

 

 

3,512 

 

 

 

3,510 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

341 

 

 

$

320 

 

 

$

894 

 

 

$

819 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

6.1 

%

 

 

5.3 

%

 

 

8.3 

%

 

 

3.1 

%

—————————

 

 

 

 

 

 

 

 

 

(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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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

 

 

2015

 

2014

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

118,369 

 

$

111,014 

 

$

7,355 

 

6.6 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

43,541 

 

 

38,519 

 

 

5,022 

 

13.0 

 

Franchise fees

 

 

163 

 

 

276 

 

 

(113)

 

(40.9)

 

Lease revenue

 

 

1,569 

 

 

1,081 

 

 

488 

 

45.1 

 

Other

 

 

1,106 

 

 

1,297 

 

 

(191)

 

(14.7)

 

Total revenues

 

$

164,748 

 

$

152,187 

 

$

12,561 

 

8.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Percent

 

 

May 31,

 

Increase

 

Increase

 

 

 

2015

 

 

2014

 

(Decrease)

 

(Decrease)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

310,816 

 

$

286,361 

 

$

24,455 

 

8.5 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

112,553 

 

 

95,807 

 

 

16,746 

 

17.5 

 

Franchise fees

 

 

1,822 

 

 

791 

 

 

1,031 

 

130.3 

 

Lease revenue

 

 

3,613 

 

 

2,682 

 

 

931 

 

34.7 

 

Other

 

 

2,019 

 

 

2,939 

 

 

(920)

 

(31.3)

 

Total revenues

 

$

430,823 

 

$

388,580 

 

$

42,243 

 

10.9 

%

 

 

 

 

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The following table reflects the changes in sales and same-store sales at Company Drive-Ins.  It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In Sales

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2015

 

2014

 

2015

 

2014

Company Drive-In sales

 

$

118,369 

 

 

$

111,014 

 

 

$

310,816 

 

 

$

286,361 

 

Percentage increase

 

 

6.6 

%

 

 

2.4 

%

 

 

8.5 

%

 

 

0.3 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

392 

 

 

 

388 

 

 

 

391 

 

 

 

396 

 

Opened

 

 

 

 

 

 

 

 

 

 

 

 

Acquired from (sold to) franchisees

 

 

 -

 

 

 

 -

 

 

 

 

 

 

(7)

 

Closed (net of re-openings)

 

 

 -

 

 

 

 -

 

 

 

(1)

 

 

 

(1)

 

Total at end of period

 

 

394 

 

 

 

389 

 

 

 

394 

 

 

 

389 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per Company Drive-In

 

$

301 

 

 

$

286 

 

 

$

797 

 

 

$

738 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales(2)

 

 

5.5 

%

 

 

5.2 

%

 

 

8.0 

%

 

 

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.

 

Same-store sales for Company Drive-Ins increased 5.5% for the third quarter and 8.0% for the first nine months of fiscal year 2015, as compared to an increase of 5.2% and 3.0%, respectively, for the same periods last year, showing continued momentum from the Company’s successful implementation of initiatives to improve product quality, service and value perception, combined with an improving macro environment.  Furthermore, we continued to focus on our innovative product pipeline and increased media effectiveness while benefitting from the implementation of new technology initiatives at Company Drive-Ins.  Company Drive-In sales increased $7.4 million during the third quarter and $24.5 million during the first nine months of fiscal year 2015, as compared to the same periods last year, mainly due to an increase in same-store sales of $6.0 million and $22.3 million, respectively.

 

 

 

 

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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

 

Nine months ended

 

 

May 31,

 

May 31,

 

 

2015

 

2014

 

2015

 

2014

Franchise Drive-In sales

 

$

1,065,109 

 

 

$

995,259 

 

 

$

2,803,391 

 

 

$

2,560,933 

 

Percentage increase

 

 

7.0 

%

 

 

6.2 

%

 

 

9.5 

%

 

 

3.7 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise Drive-Ins in operation(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

3,116 

 

 

 

3,119 

 

 

 

3,127 

 

 

 

3,126 

 

Opened

 

 

 

 

 

 

 

 

20 

 

 

 

22 

 

Acquired from (sold to) the Company

 

 

 -

 

 

 

 -

 

 

 

(1)

 

 

 

 

Closed (net of re-openings)

 

 

(2)

 

 

 

(7)