Sonic 2003 Annual Report Download - page 24

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Management’s Discussion and Analysis
sales, remained flat as lower than expected beef costs and a moderation in dairy costs were offset by slightly increased
discounting from standard menu prices. Payroll and employee benefits, as a percentage of company-owned restaurant
sales, increased 40 basis points as a result of an increase in average wage rates, increased investment in store-level labor as
a part of the our commitment to outstanding customer service, and an increase in training and store-level management
for the rollout of the breakfast program to a significant number of restaurants. Other operating expenses, as a percentage
of company-owned restaurant sales, decreased 13 basis points primarily as a result of the leverage of higher sales volumes
and improvements in utility costs. Minority interest in earnings of restaurants decreased, as a percentage of company-
owned restaurant sales, to 4.5% during fiscal year 2002, compared to 4.7% in fiscal year 2001 as a result of the decline in
overall restaurant-level margins.
Selling, general and administrative expenses decreased, as a percentage of total revenues, to 8.4% during fiscal year
2002, compared with 9.3% in fiscal year 2001 as a result of the leverage of operating at higher sales volumes.
Depreciation and amortization expense increased 9.3% to $26.1 million during fiscal year 2002 compared to 17.6% in
fiscal year 2001 while declining as a percentage of revenue to 6.5% as compared to 7.2% the prior year. The increase in
depreciation resulted primarily from new drive-in development and store acquisitions in the third fiscal quarter of 2002.
The company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” effective September 1, 2001 which resulted
in a reduction in amortization expense of $2.2 million during fiscal year 2002 as compared to fiscal year 2001, excluding
any related tax effects.
During fiscal year 2002, two drive-ins in developing markets became impaired under the guidelines of FAS 121 –
“Accounting for the Impairment of Long-Lived Assets,” and estimates were revised on three stores which were previously
impaired under FAS 121. As a result, a provision for impairment of long-lived assets of $1.3 million was recorded for the
drive-ins’ carrying cost in excess of their estimated fair value. During fiscal year 2001, two drive-ins became impaired
under FAS 121 resulting in an impairment of $0.8 million.
Income from operations increased 21.8% to $82.3 million during fiscal year 2002 from $67.6 million in fiscal year
2001 due primarily to the growth in revenues and other matters discussed above.
Net interest expense during fiscal year 2002 increased 14.4% to $6.3 million from $5.5 million in fiscal year 2001.
This increase was the result of additional borrowings to fund share repurchases of $26.0 million and capital expenditures
of $71.1 million, including $20.5 million for acquisitions.
Provision for income taxes reflects an effective federal and state tax rate of 37.25% for fiscal year 2002 and 2001. Net
income increased 22.4% to $47.7 million in fiscal year 2002 compared to $39.0 million in fiscal year 2001. Diluted
earnings per share increased to $1.13 per share during fiscal year 2002, compared to $0.93 per share in fiscal year 2001,
for an increase of 21.5%.
Liquidity and Sources of Capital
Net cash provided by operating activities increased $6.7 million or 8.1% in fiscal year 2003 as compared to the same
period in fiscal year 2002, primarily as the result of the increase in operating profit before depreciation and amortization,
partially offset by the gain on disposition of assets and the provision for deferred income taxes.
We opened 35 newly-constructed restaurants and acquired a net of 11 existing restaurants from franchisees in fiscal
year 2002. We funded total capital additions for fiscal year 2003 of $90.0 million, which included the cost of newly-
opened restaurants, new equipment for existing restaurants, retrofits of existing restaurants, restaurants under construction,
acquired restaurants, and other capital expenditures, from cash generated by operating activities and through borrowings
under our line of credit. During fiscal year 2003, we purchased the real estate for 22 of the 87 newly-constructed and
acquired restaurants. We expect to own the land and building for most of our future newly-constructed restaurants.
We repurchased approximately 1.2 million shares of common stock under our stock repurchase program during fiscal
year 2003 at an aggregate cost of $26.5 million. Our Board of Directors expanded the stock repurchase program in
August 2003, increasing the funds authorized for the repurchase of the company’s common stock to $50.0 million and
extended the term of the program to December 31, 2004. As of August 31, 2003, our total cash balance of $13.2 million
reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures
mentioned above.
We had an agreement with a group of banks which provided the company with an $80.0 million line of credit
expiring in July of 2004. On April 23, 2003, we amended the bank line of credit agreement to increase the maximum