Sonic 2011 Annual Report Download - page 24

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Management's Discussion and Analysis of Financial Condition and Results of Operations
Operating costs for Company Drive-Ins remained flat in fiscal year 2011 as compared to the same period last year. Food
and packaging cost increases during fiscal year 2011 were driven by investments in product quality improvements and
higher commodity costs. Payroll and other employee benefit costs increased as a result of increased compensation costs
associated with our new compensation program at the Company Drive-In level which was effective April 1, 2010. As a result
of our new compensation program introduced as an alternative to our traditional ownership program, compensation costs
that were formerly reflected as noncontrolling interests are now included in payroll and other employee benefits. The new
compensation program provides managers and supervisors a larger portion of guaranteed base compensation but retains
a significant incentive component based on drive-in level performance. Other operating expenses decreased, as a
percentage of sales, attributable to leverage from positive same-store sales. The increase in operating costs in fiscal year
2010 as compared to fiscal year 2009 was a result of high labor costs driven by minimum wage increases and the de-
leveraging impact of lower same-store sales.
Selling, General and Administrative (“SG&A”). SG&A expenses decreased 2.8% to $64.9 million during fiscal year
2011 and increased 5.5% to $66.8 million during fiscal year 2010. The decrease in SG&A expense for fiscal year 2011
was largely attributable to a decline in stock compensation expense resulting from a revision in our long-term compensation
strategy as well as to declines in bad debt expense, which was primarily related to our provision for bad debt in the prior
year and which has moderated in fiscal year 2011 due to an improvement in sales trends. The increase in SG&A expense
for fiscal year 2010 was primarily attributable to $2.9 million in provision for bad debt expenses, as well as professional
fees associated with financial restructuring services for franchisees.
Depreciation and Amortization. Depreciation and amortization expense decreased 3.3% to $41.2 million in fiscal year
2011 and decreased 11.3% to $42.6 million in fiscal year 2010. The decrease in depreciation and amortization expense
for fiscal year 2011 was primarily attributable to the provision for impairment of long-lived assets recorded in the fourth
quarter of fiscal 2010 and, to a lesser extent, a result of refranchising 16 Company Drive-Ins in fiscal year 2010. The
decrease in depreciation and amortization expense for fiscal year 2010 was largely attributable to the refranchising of 205
Company Drive-Ins in fiscal year 2009. Capital expenditures during fiscal year 2011 were $21.2 million. For fiscal year
2012, capital expenditures are expected to be approximately $25 to $30 million.
Provision for Impairment of Long-Lived Assets. Provision for impairment of long-lived assets decreased $14.3 million for
fiscal year 2011. This decrease was primarily the result of the $15.2 million non-cash impairment of long-lived assets we
recorded in fiscal year 2010, to reduce the carrying cost of the related operating assets to an estimated fair value. The
provision for impairment increase from $11.2 million in fiscal year 2009 to $15.2 million in fiscal year 2010 primarily related
to lower sales and profits for Company Drive-Ins resulting from the sustained economic downturn and weak results during
the summer months for operating stores. Assets impaired included operating drive-ins, property leased to franchisees,
surplus property and other assets.
The decision whether to close or continue to operate a drive-in is made independently of the impairment process. 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 to fair value
assets associated with one or more of these drive-ins.
Net Interest Expense. The increase in net interest expense for fiscal year 2011 is primarily the result of a $28.2
million loss from the early extinguishment of debt related to the refinancing of our previously outstanding debt in May
2011. In addition, net interest expense for fiscal year 2011 includes a $5.2 million gain from the early extinguishment of
debt that resulted from purchasing a portion of our Series 2006-1 Senior Secured Variable Funding Notes, Class A-1 (the
“2006 Variable Funding Notes”) at a discount in the second quarter of fiscal year 2011. Excluding the early
extinguishments of debt, net interest expense decreased $3.9 million for fiscal year 2011 from 2010, primarily attributable
to lower levels of borrowings stemming from $120.4 million in debt buy-backs of our 2006 Variable Funding Notes and Series
2006-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2006 Fixed Rate Notes” and, together with the 2006 Variable
Funding Notes, the “2006 Notes”) and scheduled principal payments of $45.4 million since fiscal year 2010. See “Liquidity
and Sources of Capital” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below for additional
information on our May 2011 refinancing and factors that could impact interest expense.
Income Taxes. The provision for income taxes, excluding income attributable to noncontrolling interests, reflects an
effective tax rate of 32.3% for fiscal year 2011 compared with 29.7% for fiscal year 2010. The increase for fiscal year 2011
was primarily attributable to a $1.8 million tax benefit associated with the stock option exchange program that was
implemented during the third quarter of fiscal year 2010, partially offset by a $1.1 million decrease in our liability for
unrecognized tax benefits resulting from the settlement of state tax audits during the first quarter of fiscal year 2011.
The provision for income taxes, excluding income attributable to noncontrolling interests, reflects an effective tax rate of
38.4% for fiscal year 2009. The decline in the tax rate for fiscal year 2010 as compared to 2009 was primarily related to