Sonic 2009 Annual Report Download - page 21

Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Partner Drive-In sales.
Minority interest in earnings of Partner Drive-Ins is included as a part of cost of sales, in the table below, since it is directly related to
Partner Drive-In operations.
Percentage
Restaurant-Level Margins points
Year ended August 31, Increase/
2009 2008 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 27.6% 26.5% 1.1
Payroll and other employee benefits 32.2 31.1 1.1
Minority interest in earnings of Partner Drive-Ins 2.7 3.3 (0.6)
Other operating expenses 22.1 20.9 1.2
84.6% 81.8% 2.8
Percentage
points
Year ended August 31, Increase/
2008 2007 (Decrease)
Costs and expenses:
Partner Drive-Ins:
Food and packaging 26.5% 25.7% 0.8
Payroll and other employee benefits 31.1 30.4 0.7
Minority interest in earnings of Partner Drive-Ins 3.3 4.1 (0.8)
Other operating expenses 20.9 20.1 0.8
81.8% 80.3% 1.5
Restaurant-level margins declined overall in fiscal year 2009 as a result of higher commodity prices, higher labor costs driven by
minimum wage increases and the de-leveraging impact of lower same-store sales. These negative impacts were offset by the decline in
minority partners’ share of earnings reflecting the margin pressures described above. During the year, the pressure on commodity costs
began to subside and turned favorable in the fourth quarter. Looking forward, the company expects the commodity costs to be favorable
in fiscal year 2010. However, the minimum wage increase that was effective in July 2009 will continue to pressure labor costs.
Selling, General and Administrative (“SG&A”). SG&A expenses increased 3.6% to $63.4 million during fiscal year 2009 and 4.2%
to $61.2 million during fiscal year 2008 reflecting, in part, ongoing efforts to manage expenses with slowing revenue growth. Salary
and health insurance increases were the primary contributor to the increase for fiscal year 2009. Stock-based compensation is included
in SG&A, and, as of August 31, 2009, total remaining unrecognized compensation cost related to unvested stock-based arrangements
was $12.2 million and is expected to be recognized over a weighted average period of 1.1 years. See Note 1 and Note 13 of the Notes
to the Consolidated Financial Statements for additional information regarding our stock-based compensation.
Depreciation and Amortization. Depreciation and amortization expense decreased 5.1% to $48.1 million in fiscal year 2009 primarily
as a result of refranchising Partner Drive-Ins. Depreciation and amortization expense increased 12.3% to $50.7 million in fiscal year 2008
primarily as a result of additional capital expenditures for newly-constructed Partner Drive-Ins, the retrofit and relocation of existing
Partner Drive-Ins and the acquisition of Franchise Drive-Ins. Capital expenditures during fiscal year 2009 were $36.1 million. For fiscal
year 2010, capital expenditures are expected to be approximately $30 to $40 million.
Provision for Impairment of Long-Lived Assets. We assess drive-in assets for impairment on a quarterly basis under the guidelines
of SFAS 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” Based on the company’s analysis, we recorded a provision
of $11.2 million in fiscal year 2009 to reduce the carrying cost of the related operating assets to an estimated fair value. This provision
was attributable to the declining trend in Partner Drive-Ins sales and profits that occurred throughout fiscal year 2009. We continue to
perform quarterly analyses of certain underperforming drive-ins. It is reasonably possible that the estimate of future cash flows associated
with these drive-ins could change in the future resulting in the need to write-down assets associated with one or more of these drive-
ins to fair value. While it is impossible to predict if future write-downs will occur, we do not believe that future write-downs will impede
our ability to grow earnings.
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