Sonic Corp.
SONIC CORP (Form: 10-Q, Received: 07/01/2016 14:06:52)

Table of Contents





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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, 2016

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 p rincipal e xecutive o ffices)

 

 



(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 27 , 201 6 , approximately 4 7 , 544 , 487   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 , 2016 and August 31, 2015

4



 

 



Condensed Consolidated Statements of Income for the three and nine   months ended May 31 ,   2016   and 2015

5



 

 



Condensed Consolidated Statements of Cash Flows for the nine months ended   May 31, 2016  and   2015

6



 

 



Notes to Condensed Consolidated Financial Statements

7



 

 

Item 2.

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

14



 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23



 

 

Item 4.

Controls and Procedures

24



 

 

 PART II.  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

24



 

 

Item 1 A.

Risk Factors

24



 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

25



 

 

Item 6.

Exhibits

26



 

 

 


 

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,



 

2016

 

2015

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,362 

 

$

27,191 

Restricted cash

 

 

10,875 

 

 

13,246 

Accounts and notes receivable, net

 

 

38,162 

 

 

31,577 

Income taxes receivable

 

 

818 

 

 

1,741 

Assets held for sale

 

 

13,426 

 

 

 -

Prepaid expenses and other current assets

 

 

8,922 

 

 

11,683 

Total current assets

 

 

171,565 

 

 

85,438 

Noncurrent restricted cash

 

 

151 

 

 

6,524 

Notes receivable, net

 

 

9,888 

 

 

7,216 

Property, equipment and capital leases

 

 

759,366 

 

 

781,857 

Less accumulated depreciation and amortization

 

 

(367,737)

 

 

(360,451)

Property, equipment and capital leases, net

 

 

391,629 

 

 

421,406 



 

 

 

 

 

 

Goodwill

 

 

76,436 

 

 

77,076 

Debt origination costs, net

 

 

14,996 

 

 

7,056 

Other assets, net

 

 

15,001 

 

 

15,308 

Total assets

 

$

679,666 

 

$

620,024 



 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

17,873 

 

$

13,860 

Franchisee deposits

 

 

833 

 

 

870 

Accrued liabilities

 

 

47,296 

 

 

50,714 

Income taxes payable

 

 

772 

 

 

8,910 

Current maturities of long-term debt and capital leases

 

 

6,126 

 

 

13,467 

Total current liabilities

 

 

72,900 

 

 

87,821 

Obligations under capital leases due after one year

 

 

18,545 

 

 

20,763 

Long-term debt due after one year

 

 

577,521 

 

 

428,238 

Deferred income taxes

 

 

43,816 

 

 

43,549 

Other non-current liabilities

 

 

25,344 

 

 

22,220 

Total non-current liabilities

 

 

665,226 

 

 

514,770 

Stockholders’ equity (deficit):

 

 

 

 

 

 

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, 2015)

 

 

1,183 

 

 

1,183 

Paid-in capital

 

 

234,863 

 

 

232,550 

Retained earnings

 

 

874,169 

 

 

851,715 

Treasury stock, at cost;   70,441   shares ( 67,249 shares at August 31, 2015)

 

 

(1,168,675)

 

 

(1,068,015)

Total stockholders’ equity (deficit)

 

 

(58,460)

 

 

17,433 

Total liabilities and stockholders’ equity (deficit)

 

$

679,666 

 

$

620,024 



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,



 

2016

 

2015

 

2016

 

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

115,143 

 

$

118,369 

 

$

314,339 

 

$

310,816 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

46,687 

 

 

43,704 

 

 

122,656 

 

 

114,375 

Lease revenue

 

 

2,141 

 

 

1,569 

 

 

5,132 

 

 

3,613 

Other

 

 

1,268 

 

 

1,106 

 

 

2,075 

 

 

2,019 

Total revenues

 

 

165,239 

 

 

164,748 

 

 

444,202 

 

 

430,823 



 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

Food and packaging

 

 

32,089 

 

 

32,727 

 

 

87,248 

 

 

87,128 

Payroll and other employee benefits

 

 

39,912 

 

 

40,898 

 

 

111,635 

 

 

110,049 

Other operating expenses, exclusive of

 

 

 

 

 

 

 

 

 

 

 

 

depreciation and amortization included below

 

 

22,442 

 

 

22,955 

 

 

65,450 

 

 

65,484 

Total cost of Company Drive-In sales

 

 

94,443 

 

 

96,580 

 

 

264,333 

 

 

262,661 



 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

20,617 

 

 

20,699 

 

 

62,342 

 

 

57,625 

Depreciation and amortization

 

 

11,405 

 

 

11,435 

 

 

33,461 

 

 

34,634 

Other operating (income) expense, net

 

 

(106)

 

 

(336)

 

 

(3,071)

 

 

Total costs and expenses

 

 

126,359 

 

 

128,378 

 

 

357,065 

 

 

354,924 

Income from operations

 

 

38,880 

 

 

36,370 

 

 

87,137 

 

 

75,899 



 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

6,776 

 

 

6,382 

 

 

19,465 

 

 

18,981 

Interest income

 

 

(121)

 

 

(91)

 

 

(326)

 

 

(290)

Debt extinguishment costs

 

 

8,750 

 

 

 -

 

 

8,750 

 

 

 -

Net interest expense

 

 

15,405 

 

 

6,291 

 

 

27,889 

 

 

18,691 

Income before income taxes

 

 

23,475 

 

 

30,079 

 

 

59,248 

 

 

57,208 

Provision for income taxes

 

 

8,122 

 

 

9,637 

 

 

20,618 

 

 

19,019 

Net income

 

$

15,353 

 

$

20,442 

 

$

38,630 

 

$

38,189 



 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.32 

 

$

0.39 

 

$

0.79 

 

$

0.72 

Diluted income per share

 

$

0.31 

 

$

0.38 

 

$

0.77 

 

$

0.70 



 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.11 

 

$

0.09 

 

$

0.33 

 

$

0.27 



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,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Net income

$

38,630 

 

$

38,189 

Adjustments to reconcile net income

 

 

 

 

 

to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

33,461 

 

 

34,634 

Stock-based compensation expense

 

2,688 

 

 

2,572 

Loss from early extinguishment of debt

 

8,750 

 

 

 -

Provision for deferred income taxes

 

964 

 

 

10,088 

Other

 

(6,908)

 

 

(3,644)

(Increase) decrease in operating assets:

 

 

 

 

 

Restricted cash

 

2,351 

 

 

3,312 

Accounts receivable and other assets

 

(4,545)

 

 

(931)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

4,632 

 

 

2,105 

Accrued and other liabilities

 

(3,261)

 

 

8,098 

Income taxes

 

1,470 

 

 

6,079 

Total adjustments

 

39,602 

 

 

62,313 

Net cash provided by operating activities

 

78,232 

 

 

100,502 



 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment  

 

(26,467)

 

 

(30,867)

Proceeds from sale of assets

 

12,701 

 

 

4,089 

Other

 

(1,678)

 

 

4,148 

Net cash used in investing activities

 

(15,444)

 

 

(22,630)



 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Payments on debt

 

(421,020)

 

 

(63,842)

Proceeds from borrowings

 

563,000 

 

 

67,500 

Restricted cash for securitization obligations

 

6,393 

 

 

21 

Purchases of treasury stock

 

(111,406)

 

 

(95,597)

Proceeds from exercise of stock options

 

5,878 

 

 

15,763 

Payment of dividends

 

(16,154)

 

 

(14,153)

Debt issuance and extinguishment costs

 

(18,339)

 

 

(12)

Other

 

1,031 

 

 

(324)

Net cash provided by (used in) financing activities

 

9,383 

 

 

(90,644)



 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

72,171 

 

 

(12,772)

Cash and cash equivalents at beginning of period

 

27,191 

 

 

35,694 

Cash and cash equivalents at end of period

$

99,362 

 

$

22,922 



 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid during the period   for:

 

 

 

 

 

Income taxes (net of refunds)

$

18,258 

 

$

2,927 

Non-cash investing and financing activities:

 

 

 

 

 

Change in obligation to acquire treasury stock

 

(578)

 

 

(259)



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 f iscal year ended August 31, 2015 , 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.



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 an entit y to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled for the transfer of promised goods or services to customers.  The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU will replace most of the existing revenue recognition requirements i n U.S. GAAP when it becomes effective Further, in March 2016, the FASB issued ASU No. 2016-08, “ Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) , ”   which clarifies the guidance in ASU No. 2014-09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer.     In April 2016, the FASB issued ASU No. 2016-10, “ Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing , which clarifies the guidance in ASU No. 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. All standards are effective for fiscal years beginning after December 15,  201 7 , including interim periods within that reporting period , which requires the Company to adopt the standard in fiscal year 2019.  The standards are to be applied   retrospect ive ly or using a cumulative effect transition method , with early application not permitted.  The Company does not believe the new revenue recognition standard will impact our recognition of sales from Company Driv e -Ins and our recognition of royalty fees from franchisees.   We are currently evaluating the effect that this pronouncement will have on the recognition of other transactions on the financial statements and related disclosures and have not yet selected a transition method .  

In April 2015, the 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 as an asset.  This update is effective for fiscal years beginning after December   15,   2015 , including interim periods within that reporting period, and is to be applied retrospectively; early adoption is permitted.  In August 2015, the FASB issued ASU 2015-15, which addresses the SEC’s comments related to the absence of authoritative guidance within ASU 2015-03 related to line-of-credit arrangements.  The SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

outstanding borrowings on the line of credit arrangement.  The adoption of these updates is not expected to have a material impact on the Company ’s financial statements.

In April 2015, the FASB issued ASU No . 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.  The u p date 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 fiscal years beginning after December   15,   2015.  The adoption of the update is not expected to have a material impact on the Company’s financial statements.

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” as part of its simplification initiatives.  The update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  The update is effective for fiscal years beginning after December   15,   2017 ; however , early application is permitted.  The Company adopted this standard in the first quarter of fiscal year 2016.  T he Company’s current deferred tax asset balance of $2.2 million was classified as noncurrent and netted with noncurrent deferred tax liabilities as of November 30, 201 5 , and all future deferred tax asset balances will be recorded as such.  No prior periods were retrospectively adjusted .  

In February 2016, the FASB issued ASU No. 2016-02, “Leases.”  The new standard requires lessees to recognize the assets and liabilities arising from leases on the balance sheet.  Accounting guidance for lessors is largely unchanged.  The standard is effective for fiscal years beginning after December   15,   2018 with early application permitted.  The Company is currently evaluating the effect that this standard will have on its financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, “ Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products ,   which is intended to eliminate current and future diversity in practice related to de recognition of prepaid stored-value product liability in a way that aligns with the new revenue recognition guidance.  The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted.  The adoption of the update is not expected to have a material impact on the Company’s financial statements.



In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, an accounting policy election for forfeitures, statutory tax withholding requirements and classification in the statements of cash flows. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets.  The update is effective for fiscal years beginning after December 15, 2016, however early application is permitted.  The transition method to be applied varies depending on the area of update being adopted.  The Company is currently evaluating the effect that this update 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,



 

2016

 

2015

 

2016

 

2015

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

15,353 

 

$

20,442 

 

$

38,630 

 

$

38,189 



 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares
   outstanding– basic

 

 

48,377 

 

 

52,022 

 

 

49,192 

 

 

52,851 

Effect of dilutive employee stock options

 

 

 

 

 

 

 

 

 

 

 

 

   and unvested restricted stock units

 

 

949 

 

 

1,369 

 

 

1,021 

 

 

1,442 

Weighted average common shares
    outstanding – diluted

 

 

49,326 

 

 

53,391 

 

 

50,213 

 

 

54,293 



 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share – basic

 

$

0.32 

 

$

0.39 

 

$

0.79 

 

$

0.72 

Net income per common share – diluted

 

$

0.31 

 

$

0.38 

 

$

0.77 

 

$

0.70 



 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive securities excluded (1)

 

 

686 

 

 

379 

 

 

550 

 

 

335 

—————————

 

 

 

 

 

 

  (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-dilutiv e.



3. Share Repurchase Program



In August 201 5 , the Company’s Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $1 4 5 million of its outstanding shares of common stock to be repurchased through August 31, 201 6 The Board of Directors further extended the share repurchase program effective May 2016, authorizing the purchase of up to an additional $155 million of our outstanding shares of common stock through August 31, 2017.  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.



D uring the first nine   months of fiscal year 201 6 , approximately 3 . 9  million shares were repurchased for a total cost of $ 110 . 8  million , resulting in an average price per share of $ 28 . 56



The total remaining amount authorized under the share repurchase program as of May 31, 2016 was $ 170 . 4  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,



 

2016

 

2015

 

2016

 

2015

Provision for income taxes

 

$

8,122 

 

 

$

9,637 

 

 

$

20,618 

 

 

$

19,019 

 

Effective income tax rate

 

 

34.6 

%

 

 

32.0 

%

 

 

34.8 

%

 

 

33.2 

%



The higher effective tax ra te in both the third quarter and the first nine months of fiscal year 2016 was primarily attributable to the fiscal year 2015 effective rate being favorably impacted by the recognition of prior years’ federal tax deductions .  



5 . Accounts and Notes Receivable



Accounts and notes receivable consist of the following:







 

 

 

 

 

 



 

 



 

May 31,

 

August 31,



 

2016

 

2015

Current Accounts and Notes Receivable:

 

 

 

 

 

 

Royalties and other trade receivables

 

$

20,401 

 

$

19,713 

Notes receivable from franchisees

 

 

1,304 

 

 

996 

Receivables from system funds

 

 

6,066 

 

 

4,965 

Other

 

 

11,398 

 

 

6,977 

Accounts and notes receivable, gross

 

 

39,169 

 

 

32,651 

Allowance for doubtful accounts and notes receivable

 

 

(1,007)

 

 

(1,074)

Accounts and notes receivable, net

 

$

38,162 

 

$

31,577 



 

 

 

 

 

 

Noncurrent Notes Receivable:

 

 

 

 

 

 

Receivables from franchisees

 

$

6,069 

 

$

5,676 

Receivables from system funds

 

 

3,852 

 

 

1,571 

Allowance for doubtful notes receivable

 

 

(33)

 

 

(31)

Notes receivable, net

 

$

9,888 

 

$

7,216 



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 system funds represent transactions in the normal course of business.  The increase in other current accounts and notes receivable is due to the timing of various receipts and disbursements.   

 

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.  In the event of default by the franchisee,

 

 

 

10

 


 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

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, 2016 , the balance of the franchisee’s loan was $ 5 . 8  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, 2016 , the amount remaining under these guaranteed lease obligations totaled $ 7 . 9  million.  At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, no liability has been provided.



7 . Debt



On May 17, 2016, various subsidiaries of the Company (the “Co-Issuers”) issued $425.0 million of Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”) in a private transaction which bears interest at 4.47% per annum.  The 2016 Fixed Rate Notes have an expected life of seven years with an anticipated repayment date in May 2023 .   At May 31, 2016, the balance outstanding under the 2016 Fixed Rate Notes including accrued interest totaled $425.7 million and carried a weighted-average interest cost of 4.79%, including the effect of the loan origination costs described below.



The Co-Issuers also entered into a securitized financing facility of Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the 2016 Fixed Rate Notes, the “2016 Notes”).  This revolving credit facility allows for the issuance of up to $150.0 million of 2016 Variable Funding Notes and certain other credit instruments, including letters of credit.  Interest on the 2016 Variable Funding Notes is based on the one-month London Interbank Offered Rate or Commercial Paper, depending on the funding source, plus 2.0% , per annum.  An annual commitment fee of 0.5% is payable monthly on the unused portion of the 2016 Variable Funding Notes facility.  The 2016 Variable Funding Notes have an expected life of five years with an anticipated repayment date in May 2021 with two one-year options available upon certain conditions including meeting a minimum debt service coverage ratio threshold.   At May 31, 2016, there was no balance outstanding under the 2016 Variable Funding Notes.



Sonic used a portion of the net proceeds from the issuance of the 2016 Fixed Rate Notes to repay its existing Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) and Series 2011 1 Senior Secured Variable Funding Notes, Class A-1 (the “2011 Variable Funding Notes” and, together with the 2011 Fixed Rate Notes, the “2011 Notes”) in full and to pay the costs associated with the securitized financing transaction, including prepayment premiums. 



Loan origination costs associated with the Company’s 2016 transaction totaled $12.6 million and were allocated among the 2016 Notes.   Loan costs are being amortized over each note’s expected life, and the unamortized balance is categorized as “debt origination costs, net” on the Condensed Consolidated Balance Sheets.



While the 2016 Fixed Rate Notes and the 2016 Variable Rate Notes are structured to provide for seven-year and five-year lives, respectively, they have a legal final maturity date of May 2046.   The Company intends to repay or refinance the 2016 Notes on or before the end of their respective expected lives.   In the event the 2016 Notes are not paid in full by the end of their expected lives, the Notes are subject to an upward adjustment in the annual interest rate of at least 5%.   In addition, principal payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2016 Variable Funding Notes will become unavailable.



The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote, indirect subsidiaries of Sonic Corp. that hold substantially all of Sonic’s franchising assets and real estate.   As of May 31,   2016, assets for these combined indirect subsidiaries totaled $315.4 million, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of

 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

$11.0 million.   The 2016 Notes are secured by franchise fees, royalty payments and lease payments, and the repayment of the 2016 Notes is expected to be made solely from the income derived from the Co-Issuer’s assets.   In addition, the Guarantor, a Sonic Corp. subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the 2016 Notes and pledged substantially all of its assets to secure those obligations.



Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic, guarantees or in any way is liable for the obligations of the Co-Issuers under the 2016 Notes.   The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries, principally related to managing the assets included as collateral for the 2016 Notes and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.



The 2016 Notes are subject to a series of covenants and restrictions similar to the Company’s 2011 Notes and customary for transactions of this type.   If certain covenants or restrictions are not met, the 2016 Notes are subject to customary accelerated repayment events and events of default.   Although management does not anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts outstanding could become immediately due and payable.



In connection with the 2016 transaction described above, the Company recognized an $8.8 million loss from the early extinguishment of debt during the third quarter of fiscal year 2016, which primarily consisted of a $5.9 million prepayment premium and the $2.9 million write-off of unamortized deferred loan fees remaining from the refinanced debt.



8 . 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 on the following fair value hierarchy established by the FASB :



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 , some of which are included in restricted cash, are carried at cost which approximates fair value and totaled $ 85 . 1  million at May 31, 2016 and $ 41 . 1  million at August 31, 2015 .  This fair value is estimated using Level 1 inputs.



 

 

 

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SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(In thousands, expect per share data)

(Unaudited)

 

At May 31, 2016 , the fair value of the Company’s 2016 Fixed Rate Notes and Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013   Fixed Rate Notes” and, together with the 2016 Fixed Rate Notes, the “Fixed Rate Notes” ) approximated the carrying value of $ 580 . 8  million, including accrued interest.  The fair value of the 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.



9 . Assets Held for Sale



Assets held for sale consist of Company Drive-Ins that are expected to sell within one year as part of the Company’s plan to move toward an approximately 95%-franchised system .  Such assets are classified as assets held for sale upon meeting the requirements of ASC 360 , “Accounting for the Impairment or Disposal of Long-Lived Assets.”  These assets are recorded at the lower of the carrying amount s or fair values less costs to sell.  Assets are no longer depreciated once classified as held for sale.  The following table sets for th the components of assets held for sale:







 

 

 

 

 

 



 

 

 

 

 

 



 

May 31,

 

August 31,



 

2016

 

2015

Assets

 

 

 

 

 

 

Property, equipment and capital leases

 

$

12,925 

 

$

 -

Goodwill, net

 

 

501 

 

 

 -

Total assets held for sale

 

$

13,426 

 

$

 -









 

 

 

 

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Table of Contents

 

Item 2.  Management’s Discuss ion 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



Sales momentum continued in the third quarter and first nine months of fiscal year 2016 despite declining consumer spending in the restaurant industry   and modestly unfavorable weather during the period.  System-wide same-store sales increased 2.0 % during the third quarter   and increased 4.4 % for the first nine months of fiscal year 201 6 as compared to an increase of 6.1 % and 8.3 %, respectively, for the same period s last year.  Same-store sales at Company Drive-Ins increased 0.9 % during the third quarter and 3.6 % for the first nine months of fiscal year 201 6 as compared to a n increase of 5.5 %   and 8.0 %, respectively, for the same period s last year Our continued positive same-store sales are a result of the successful implementation of initiatives, including product quality improvements and innovation , a greater emphasis on personalized service , new technology , a tiered pricing strategy and a media strategy that have set a solid foundation for 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 increa sed to $ 165.2  million for the third   quarter and $ 444.2  million for the first nine months of fiscal year 201 6 from $ 164 . 7  million and $ 430.8  million, respectively, for the same period s last year.  The increase in revenues was primarily attributable to same-store sales growth at Company and Franchise Drive-In s.     Restaurant margins at Company Drive-Ins were unfavorable   by 40 basis points during the third   quarter and favorable by 40 basis points for the first nine months of fiscal year 201 6 ,   reflecting positive same-store sales , partially offset by   the impact of the newly established Brand Technology Fund (“BTF”) that became effective March 1, 2016 .  



Third quarter results for fiscal year 201 6 reflected net income of $ 15.4  million or $0. 31   per diluted share as compared to net income of $ 20.4  million or $0. 38   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 third quarter of fiscal year 2016 increased 9 % and 19 %, respectively.  Net income and diluted earnings per share for the first nine months of fiscal year 2016 were $ 38.6  million and $0. 77 , respectively , as compared to net income of $ 38.2  million and $0. 70 per diluted share for the same period last year.   Excluding the non-GAAP adjustments further described belo w, net income and diluted earnings per share for the first nine months   of fiscal year 2016 would have increased 17 % and 27 %, respectively.    



 

 

 

14

 


 

Table of Contents

 

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, 2016

 

May 31, 2015



 

Net

 

Diluted

 

Net

 

Diluted



 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

15,353 

 

$

0.31 

 

$

20,442 

 

$

0.38 

Loss from early extinguishment of debt

 

 

8,750 

 

 

0.18 

 

 

 -

 

 

 -

Tax impact on debt extinguishment (1)

 

 

(3,027)

 

 

(0.06)

 

 

 -

 

 

 -

Federal tax benefit of prior-year statutory tax deduction

 

 

 -

 

 

 -

 

 

(1,722)

 

 

(0.03)

Retroactive effect of federal tax law change

 

 

 -

 

 

 -

 

 

612 

 

 

0.01 

Adjusted - Non-GAAP

 

$

21,076 

 

$

0.43 

 

$

19,332 

 

$

0.36 



 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended

 

Nine months ended



 

May 31, 2016

 

May 31, 2015



 

Net

 

Diluted

 

Net

 

Diluted



 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

38,630 

 

$

0.77 

 

$

38,189 

 

$

0.70 

Loss from early extinguishment of debt

 

 

8,750 

 

 

0.18 

 

 

 -

 

 

 -

Tax impact on debt extinguishment (1)

 

 

(3,027)

 

 

(0.06)

 

 

 -

 

 

 -

Gain on sale of real estate

 

 

(1,875)

 

 

(0.04)

 

 

 -

 

 

 -

Tax impact on real estate sale (2)

 

 

664 

 

 

0.01 

 

 

 -

 

 

 -

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

 

 

(585)

 

 

(0.01)

 

 

(666)

 

 

(0.01)

Federal tax benefit of prior-year statutory tax deduction

 

 

 -

 

 

 -

 

 

(1,722)

 

 

(0.03)

Retroactive effect of federal tax law change

 

 

 -

 

 

 -

 

 

612 

 

 

0.01 

Adjusted - Non-GAAP

 

$

42,557 

 

$

0.85 

 

$

36,413 

 

$

0.67 

—————————

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Tax impact during the period at an effective tax rate of 34.6%  

(2)   Tax impact during the period at an adjusted effective tax rate of 35.43 %



 

 

 

15

 


 

Table of Contents

 

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operati ng 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,



 

2016

 

2015

 

2016

 

2015

Increase in total sales

 

 

3.3 

%

 

 

7.0 

%

 

 

5.3 

%

 

 

9.4 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

3,528 

 

 

 

3,508 

 

 

 

3,526 

 

 

 

3,518 

 

Opened

 

 

16 

 

 

 

 

 

 

34 

 

 

 

23 

 

Closed (net of re-openings)

 

 

(1)

 

 

 

(2)

 

 

 

(17)

 

 

 

(29)

 

Total at end of period

 

 

3,543 

 

 

 

3,512 

 

 

 

3,543 

 

 

 

3,512 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

347 

 

 

$

341 

 

 

$

933 

 

 

$

894 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales (2)

 

 

2.0 

%

 

 

6.1 

%

 

 

4.4 

%

 

 

8.3 

%

—————————

 

 

 

 

 

 

 

 

 

(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.





 

 

 

16

 


 

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



 

2016

 

2015

 

(Decrease)

 

(Decrease)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

115,143 

 

$

118,369 

 

$

(3,226)

 

 

(2.7)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

46,296 

 

 

43,541 

 

 

2,755 

 

 

6.3 

 

Franchise fees

 

 

391 

 

 

163 

 

 

228 

 

 

139.9 

 

Lease revenue

 

 

2,141 

 

 

1,569 

 

 

572 

 

 

36.5 

 

Other

 

 

1,268 

 

 

1,106 

 

 

162 

 

 

14.6 

 

Total revenues

 

$

165,239 

 

$

164,748 

 

$

491 

 

 

0.3 

%



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Nine months ended

 

 

 

 

 

Percent



 

May 31,

 

Increase

 

 

Increase



 

2016

 

 

2015

 

(Decrease)

 

 

(Decrease)

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

314,339 

 

$

310,816 

 

$

3,523 

 

 

1.1 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

121,565 

 

 

112,553 

 

 

9,012 

 

 

8.0 

 

Franchise fees

 

 

1,091 

 

 

1,822 

 

 

(731)

 

 

(40.1)

 

Lease revenue

 

 

5,132 

 

 

3,613 

 

 

1,519 

 

 

42.0 

 

Other

 

 

2,075 

 

 

2,019 

 

 

56 

 

 

2.8 

 

Total revenues

 

$

444,202 

 

$

430,823 

 

$

13,379 

 

 

3.1 

%



 

 

 

17

 


 

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,



 

2016

 

2015

 

2016

 

2015

Company Drive-In sales

 

$

115,143 

 

 

$

118,369 

 

 

$

314,339 

 

 

$

310,816 

 

Percentage increase (decrease)

 

 

(2.7)

%

 

 

6.6 

%

 

 

1.1 

%

 

 

8.5 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-Ins in operation (1) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of period

 

 

375 

 

 

 

392 

 

 

 

387 

 

 

 

391 

 

Opened

 

 

 -

 

 

 

 

 

 

 -

 

 

 

 

Sold to franchisees

 

 

 -

 

 

 

 -

 

 

 

(9)