Sonic 2012 Annual Report Download - page 23

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Management's Discussion and Analysis of Financial Condition and Results of Operations
Restaurant-level margins remained flat in fiscal year 2011 as compared to 2010. 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. Other operating expenses decreased, as a
percentage of sales, attributable to leverage from positive same-store sales.
Selling, General and Administrative (“SG&A”). SG&A expenses remained relatively flat for fiscal year 2012 as compared
to the prior year, increasing by 0.4% to $65.2 million, and decreased 2.8% to $64.9 million during fiscal year 2011 as
compared to fiscal 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 declines in bad debt
expense due to an improvement in sales trends.
Depreciation and Amortization. Depreciation and amortization expense increased 1.7% to $41.9 million in fiscal year
2012 and decreased 3.3% to $41.2 million in fiscal year 2011. Of the $0.7 million increase in fiscal year 2012, approximately
$0.4 million was attributable to the amortization of intellectual property acquired during the second quarter of fiscal year
2012 relating to a point-of-sale system that is used by a majority of the Sonic system. 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, the refranchising of 16 Company Drive-Ins in fiscal year
2010.
Provision for Impairment of Long-Lived Assets. Provision for impairment of long-lived assets remained steady at
$0.8 million for fiscal years 2012 and 2011 and decreased $14.3 million in fiscal year 2011 from 2010. This decrease
was primarily the result of the $15.2 million non-cash impairment of long-lived assets recorded in fiscal year 2010 to
reduce the carrying cost of the related operating assets to an estimated fair value. This provision primarily related to lower
sales and profits for Company Drive-Ins resulting from the sustained economic downturn and weak results during fiscal 2010
for operating stores. Assets impaired included operating drive-ins, property leased to franchisees, surplus property and other
assets.
Net Interest Expense. Net interest expense decreased in fiscal year 2012 as compared to the same period last year
primarily as a result of a $28.2 million loss from the early extinguishment of debt related to the refinancing of our debt in May
2011. In addition, net interest expense for fiscal year 2011 included a $5.2 million gain from the early extinguishment of debt
in the second quarter of fiscal year 2011, and net interest expense for fiscal year 2010 included a $0.3 million loss from the
early extinguishment of debt during the third quarter of fiscal year 2010. Excluding the early extinguishments of debt, net
interest expense decreased $0.9 million in fiscal year 2012 and $3.9 million in fiscal year 2011, primarily related to a decline
in debt partially offset by a higher weighted average interest rate. See “Liquidity and Sources of Capital” and “Quantitative
and Qualitative Disclosures About Market Risk” below for additional information on factors that could impact interest expense.
Income Taxes. The provision for income taxes reflects an effective tax rate of 37.7% for fiscal year 2012 compared with
32.3% for fiscal year 2011. The higher effective income tax rate for fiscal year 2012 was primarily attributable to a $1.1
million favorable settlement of state tax audits during the first quarter of fiscal year 2011 and the expiration of tax credit
programs during the second quarter of fiscal year 2012. The provision for income taxes, excluding income attributable to
noncontrolling interests, reflects an effective tax rate of 29.7% for fiscal year 2010. The increase in the tax rate for fiscal year
2011 as compared to 2010 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 the $1.1 million favorable state
tax settlement during 2011 discussed earlier. Our tax rate may continue to vary significantly from quarter to quarter depending
on the timing of stock option exercises and dispositions by option-holders, changes in tax credit legislation, changes to
uncertain tax positions, and as circumstances on other tax matters change.
Net Income - Noncontrolling Interests. As a result of the change to a new compensation program for Company Drive-Ins
in April 2010, compensation costs that were formerly reflected as noncontrolling interests relating to store-level managers are
now immaterial and included in payroll and other employee benefits.