Sonic 2014 Annual Report Download

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AHEAD
ROAD
The
Annual Report 2014

Table of contents

  • Page 1
    ROAD AHEAD Annual Report 2014 The

  • Page 2
    ... (QSR) category. Unique, signature menu items are made when you order and include premium chicken sandwiches, footlong quarter-pound coneys and six-inch premium beef hot dogs, and breakfast burritos. Likewise, we are famous for our freshly made onion rings, Real Ice Cream, Tots, and more than...

  • Page 3
    ... consecutive year of increasingly positive same-store sales. 90bps The improvement in company drive-in margins during fiscal 2014, reflecting leverage from same-store sales growth and strategies to improve storelevel profitability. 9¢ The initial rate of Sonic's quarterly cash dividend that...

  • Page 4
    ... fiscal 2014 is a positive indicator of future success as we continue to build our brand. Highlights of fiscal 2014 include: • A system-wide same-store sales increase of 3.5%; • A 90-basis-point improvement in company drive-in level margins; • An ongoing increase in our drive-in development...

  • Page 5
    ...rate. Further, new drive-in development is anticipated to continue to increase this fiscal year. Our franchise business model continues to generate ongoing strong cash flows, and we remain committed to enhancing shareholder value through regular and sizable share repurchases. In fact, over the past...

  • Page 6
    .... At Sonic, customers not only set the tempo for their meal, they have ultimate control over the menu itself and can customize virtually any item on the menu, from snacks to sandwiches and desserts to drinks. And we're talking about more than just leaving something off of your chicken sandwich; we...

  • Page 7
    ... real future transformations in the way Sonic will engage with customers, manage our business and improve profitability. The latest wave in this technology push is the implementation of Sonic's new point-of-sale (POS) system and Point of Personalized Service (POPS). POPS is a customer-driven digital...

  • Page 8
    ... (left), Vice President of Product and Packaging Innovation, oversees Sonic's new Culinary Innovation Center, which opened in the Company's headquarters during October 2014. Chicken Bliss At just 450 calories, our 100% all-white-meat grilled chicken breast sandwich satisfies the most discerning...

  • Page 9
    ...our menu, featuring premium chicken sandwiches, six-inch premium beef hot dogs, and, of course, Real Ice Cream. Combined with Sonic's ongoing success in menu development, these product enhancements have resonated with customers and have emerged as key sales drivers. Since introducing our new chicken...

  • Page 10
    ... and Brooke. Together, they own and operate 38 drive-ins in three states. All are active in the family business, along with Gary's brother, Larry. As Gary sees it, their business is a generational blend, building on the foundation created by his parents and preserving the Kinslow legacy for the next...

  • Page 11
    ... in the Merritt's generations! The Merritt Group, based in Las Cruces, New Mexico, and now operating 145 drive-ins, has pioneered Sonic's entry into new and developing markets throughout the brand's history across New Mexico, Nevada, Arizona, Texas, and Colorado. Developing new markets actually has...

  • Page 12
    ...balance in food quality, service, selection, convenience, and value. While fast casual often garners many of the headlines in this discussion, it's hard to match the complete package that Sonic offers. Our combination of high-quality ingredients, the breadth of our menu choices, our drive-in service...

  • Page 13
    11

  • Page 14
    ... benefit from the acceptance by the IRS of a federal tax method change. $.31 3 2011 2012 2013 2014 89% 11% $1,037 $1,066 $1,109 Franchise Drive-Ins Company Drive-Ins Same-store Sales 3.5% System-wide Average Sales Per Drive-Ins $1,153 2.2% 2.3% .05% 2011 2012 2013 2014 2011 2012 2013...

  • Page 15
    ...and 2010, respectively. Effective April 1, 2010, we revised our compensation program at the Company Drive-In level. As a result of these changes, noncontrolling interests are immaterial for fiscal years 2014, 2013, 2012 and 2011 and have been included in payroll and other employee benefits. (2) 13

  • Page 16
    ... the number of operating Franchise Drive-Ins and new drive-in openings. Lease revenues are generated by the leasing of land and buildings for Company Drive-Ins that have been sold to franchisees. Overview of Business Performance. System-wide same-store sales increased 3.5% during fiscal year 2014 as...

  • Page 17
    ...of $1.6 million related to the write-off of assets associated with a change in the vendor for the Sonic system's new point-of-sale technology. The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the years indicated as...

  • Page 18
    ... reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales. Company Drive-In Sales Year Ended August 31, 2014 2013 2012 $ 405...

  • Page 19
    ... of Financial Condition and Results of Operations Same-store sales for Company Drive-Ins increased 3.5% for fiscal year 2014 and 2.5% for fiscal year 2013, showing continued momentum from the Company's successful implementation of initiatives to improve product quality, service and value perception...

  • Page 20
    ... tax and other controllable expenses. Percentage Points Increase (Decrease) Company Drive-In Margins Year Ended August 31, 2014 2013 Costs and expenses: Company Drive-Ins: Food and packaging Payroll and other employee benefits Other operating expenses Cost of Company Drive-In sales 28.7% 34.5 21...

  • Page 21
    ... for fiscal year 2013 and $0.8 million for 2012. The decrease in fiscal year 2014 was primarily the result of the $1.6 million impairment charge in fiscal year 2013 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...

  • Page 22
    ... of fiscal year 2013, of land and buildings previously leased or subleased from the Company. Financing Cash Flows. Net cash used in financing activities increased $13.8 million to $75.2 million for fiscal year 2014 as compared to $61.4 million in fiscal year 2013. This increase primarily relates to...

  • Page 23
    ... per share of common stock to be paid to stockholders of record as of the close of business on November 12, 2014, with a payment date of November 21, 2014. The total dividend payable at August 31, 2014 was $4.9 million and is included in accrued liabilities in the consolidated balance sheet. Future...

  • Page 24
    .... Purchase obligations primarily relate to the Company's estimated share of system-wide commitments to purchase food products. We have excluded agreements that are cancelable without penalty. These amounts require estimates and could vary due to the timing of volumes and changes in market pricing...

  • Page 25
    ... relating to market and other conditions, many of which are outside of our control. We estimate expected volatility based on historical daily price changes of the Company's stock for a period equal to the current expected term of the options. The expected option term is the number of years...

  • Page 26
    ...-related costs. At August 31, 2014, the fair value of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated their carrying value of $437.8 million, including accrued interest. To derive the fair value, management used market information available for public debt transactions for companies...

  • Page 27
    Condensed Consolidated Balance Sheets (In thousands, except per share amounts) August 31, 2014 2013 Assets Current assets: Cash and cash equivalents Restricted cash Accounts and notes receivable, net Income taxes receivable Inventories Prepaid expenses Other current assets Total current assets ...

  • Page 28
    ...per share amounts) 2014 Year Ended August 31, 2013 2012 $ 402,296 130,737 4,785 4,767 542,585 $ 404,443 128,013 6,575 4,699 543,730 Revenues: Company Drive-In sales Franchise Drive-Ins: Franchise royalties and fees Lease revenue Other Total revenues Costs and expenses: Company Drive-Ins: Food and...

  • Page 29
    ... stock Other Balance at August 31, 2013 Net income Cash dividends declared per common share Stock-based compensation expense Purchase of treasury stock Exercise of stock options and issuance of restricted stock Other Balance at August 31, 2014 Common Stock $ 1,183 1,183 1,183 1,183 Paid...

  • Page 30
    ... from exercise of stock options Debt issuance and extinguishment costs Other Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental cash flow information Cash paid...

  • Page 31
    ... 2013 and 2012 (In thousands, except per share data) 1. Summary of Significant Accounting Policies Operations Sonic Corp. (the "Company") operates and franchises a chain of quick-service restaurants in the United States. It derives its revenues primarily from Company Drive-In sales and royalty fees...

  • Page 32
    ... are computed by the straight-line method over the estimated useful lives or the lease term, including cancelable option periods when appropriate, and are combined for presentation in the financial statements. Accounting for Long-Lived Assets The Company reviews long-lived assets whenever events or...

  • Page 33
    ... periods when appropriate. The lease term commences on the date when the Company has the right to control the use of the leased property, which can occur before rent payments are due under the terms of the lease. Contingent rent is generally based on sales levels and is accrued at the point in time...

  • Page 34
    ...fair value due to the effect of the related allowance for doubtful accounts • Long-term debt - The Company prepares a discounted cash flow analysis for its fixed rate borrowings to estimate fair value each quarter. This analysis uses Level 2 inputs from market information available for public debt...

  • Page 35
    ...net cash flows expected to be generated over the remaining life of the Company Drive-Ins. This involves estimating same-store sales and margins for the cash flow periods. When impairment exists, the carrying value of the asset is written down to fair value. In fiscal years 2014 and 2012, the Company...

  • Page 36
    ... to Consolidated Financial Statements August 31, 2014, 2013 and 2012 (In thousands, except per share data) 4. Accounts and Notes Receivable Accounts and notes receivable consist of the following: August 31, 2014 2013 Current Accounts and Notes Receivable: Royalties and other trade receivables Notes...

  • Page 37
    ... lease term, write-down of real estate and other costs associated with store closures. Additionally, in the second quarter of fiscal year 2013, a franchisee purchased land and buildings leased or subleased from the Company relating to previously refranchised drive-ins. At the time of the sale...

  • Page 38
    ... August 31, 2014, 2013 and 2012 (In thousands, except per share data) Leasing Arrangements as a Lessee Certain Company Drive-Ins lease land and buildings from third parties. These leases, with lease terms expiring through August 2030, include provisions for contingent rents that may be paid on the...

  • Page 39
    ... Financial Statements August 31, 2014, 2013 and 2012 (In thousands, except per share data) 8. Property, Equipment and Capital Leases Property, equipment and capital leases consist of the following at August 31:: Estimated Useful Life Property, equipment and capital leases: Land Buildings...

  • Page 40
    ....9 million, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of $19.9 million. The 2011 Notes and the 2013 Fixed Rate Notes are secured by franchise fees, royalty payments and lease payments, and the repayment of...

  • Page 41
    ... The fair value of the 2011 Fixed Rate Notes and the 2013 Fixed Rate Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company's ratings and from information gathered from brokers who trade in the...

  • Page 42
    ... rate of 35% State income taxes (net of federal income tax benefit) Employment related and other tax credits, net Adjustment of prior year deferred tax items Other Provision for income taxes $ $ $ $ During fiscal year 2012, the Company conducted a reconciliation of its tax basis balance sheet...

  • Page 43
    ... tax benefits decreased $0.1 million in fiscal year 2014. The decrease was primarily related to the IRS' acceptance of a federal tax method change offset by a new uncertain position related to a federal credit. This entire change in balance impacted the Company's tax rate. The Company recognizes...

  • Page 44
    ...shares of common stock each year up to the lesser of 10% of their base compensation or $25 thousand in the stock's fair market value. At August 31, 2014, 0.8 million shares were available for grant under the ESPP. Stock-Based Compensation The Sonic Corp. 2006 Long-Term Incentive Plan (the "2006 Plan...

  • Page 45
    ...table below: 2014 4.7 37% 1.5% -% 2013 4.9 48% 0.8% -% 2012 4.9 48% 0.8% - Expected term (years) Expected volatility Risk-free interest rate Expected dividend yield The Company estimates expected volatility based on historical daily price changes of the Company's common stock for a period equal to...

  • Page 46
    ... to Consolidated Financial Statements August 31, 2014, 2013 and 2012 (In thousands, except per share data) Stock Repurchase Programs In October 2011, the Company's Board of Directors approved a $30 million share repurchase program. Under that program, the Company was authorized to purchase up to...

  • Page 47
    ...initiatives and an impairment charge of $1.6 million related to the write-off of assets associated with a change in the vendor for the Sonic system's new point-of-sale technology in the fourth quarter of fiscal year 2013. The sum of per share data may not agree to annual amounts due to rounding. 45

  • Page 48
    ... effectiveness of Sonic Corp.'s internal control over financial reporting. /s/ KPMG LLP Oklahoma City, Oklahoma October 24, 2014 The Board of Directors and Stockholders of Sonic Corp. We have audited the accompanying consolidated balance sheet of Sonic Corp. as of August 31, 2013, and the related...

  • Page 49
    ... adequate internal control over financial reporting. The Company's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems...

  • Page 50
    ... over financial reporting as of August 31, 2014, based on the criteria established in Internal Control - Integrated Framework - 1992 issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet...

  • Page 51
    ... Retail Systems Management Robert P. Franke Senior Vice President of Franchise Sales and International Development Michael J. Gallagher Vice President of Development and Franchising Rochelle L. Guinn Vice President of Human Resources Compliance and Technology Ralph Heim Vice President of Media and...

  • Page 52
    ...this program, of $0.09 per common share, was paid during the first quarter of fiscal year 2015 on November 21, 2014, to shareholders of record as of November 12, 2014. Future payments of dividends will be considered by the Company's Board of Directors after reviewing, among other factors, returns to...

  • Page 53

  • Page 54
    300 Johnny Bench Drive, Oklahoma City, OK 73104 | sonicdrivein.com