Sonic 2013 Annual Report Download - page 25

Management's Discussion and Analysis of Financial Condition and Results of Operations
Depreciation and Amortization. Depreciation and amortization expense decreased 3.6% to $40.4 million in
fiscal year 2013 and increased 1.7% to $41.9 million in fiscal year 2012. The decline in fiscal year 2013 was
primarily a result of a franchisee’s purchase of land and building leased or subleased from the Company relating to
previously refranchised drive-ins during the second quarter of fiscal year 2013. The increase in depreciation and
amortization expense for fiscal year 2012 was primarily attributable to the amortization of intellectual property
acquired during the second quarter of fiscal year 2012 for the Sonic system’s legacy point-of-sale technology that
is expected to be replaced over the next several years.
Provision for Impairment of Long-Lived Assets. Provision for impairment of long-lived assets increased $1.0
million to $1.8 million in fiscal year 2013, compared to $0.8 million for fiscal years 2012 and 2011. The increase
in fiscal year 2013 was primarily the result of the $1.6 million impairment charge for the write-off of assets
associated with a change in the vendor for the Sonic system’s new point-of-sale technology.
Other Operating Income and Expense, Net. Fiscal year 2013 reflected $1.9 million in net expenses compared
to a net income of $0.5 million and $0.6 million for fiscal years 2012 and 2011, respectively. This $2.4 million
increase was primarily a result of the closure of 12 lower-performing Company Drive-Ins on August 31, 2013, in
conjunction with an assessment in advance of capital expenditures for pending technology initiatives.
Net Interest Expense. Excluding the items outlined below, net interest expense decreased $2.5 million and $0.9
million in fiscal year 2013 and 2012, respectively, primarily related to a decline in our long-term debt balance. In
fiscal year 2013, net interest expense includes a $4.4 million loss on extinguishment of debt related to our $20.0
million debt prepayment during the second quarter and our $155.0 million partial debt refinancing in the fourth
quarter. Fiscal year 2011 reflects a $28.2 million loss from the early extinguishment of debt related to the
refinancing of our debt in May 2011 and a $5.2 million gain from the early extinguishment of debt related to the
repurchase of our variable funding notes in the second quarter of fiscal year 2011. 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 34.8% for fiscal year 2013
compared with 37.7% for fiscal year 2012. The lower effective income tax rate for fiscal year 2013 was primarily
attributable to the expiration of a state statute of limitations related to an uncertain tax position and legislation
that reinstated and extended the Work Opportunity Tax Credit (“WOTC”). The tax rate for fiscal year 2012 increased
from the fiscal year 2011 rate of 32.3%. This increase 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. Our fiscal year 2014 tax rate may vary depending upon the
reinstatement of employment tax credit programs that are scheduled to expire on December 31, 2013, and pending
resolution of certain tax matters. Further, 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 and as circumstances on other
tax matters change.
Financial Position
Total assets decreased $20.0 million, or 2.9%, to $660.8 million during fiscal year 2013 from $680.8 million at
the end of fiscal year 2012. The decrease during the year was primarily due to a decline in net property, equipment
and capital leases of $43.3 million, reflecting the second quarter of fiscal year 2013 sale of land and buildings to a
franchisee for previously refranchised drive-ins, as well as from depreciation during the year, partially offset by capital
additions. This decline is, in part, offset by a $25.2 million increase in cash from our operations, partially offset by
capital expenditures, purchases under our stock repurchase programs and debt repayments.
Total liabilities decreased $38.2 million, or 6.1%, to $583.3 million during fiscal year 2013 from $621.5 million
at the end of fiscal year 2012. This decrease was primarily attributable to scheduled and early debt principal
repayments of $34.5 million during fiscal year 2013.
Total stockholders’ equity increased $18.2 million, or 30.7%, to $77.5 million during fiscal year 2013 from $59.2
million at the end of fiscal year 2012. This increase was largely attributable to current-year earnings of $36.7 million
and $14.0 million related to stock option exercises and the related tax benefits. These increases were partially offset
by $35.5 million in purchases of common stock under our stock repurchase program during fiscal year 2013.
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