Sonic 2014 Annual Report Download - page 21

Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Selling, General and Administrative (“SG&A”). SG&A expenses increased 5.1% to $69.4 million for fiscal year 2014, and
increased 1.3% to $66.0 million during fiscal year 2013 as compared to fiscal year 2012. The increase in SG&A expense for fiscal
year 2014 was largely attributable to an increase in salary and benefits as a result of additional headcount in support of the
company’s technology initiatives and higher variable compensation due to improved operating performance. The increase for fiscal
year 2013 was largely attributable to an increase in variable compensation offset by a decline in bad debt expense due to improved
sales and profitability at Franchise Drive-Ins.
Depreciation and Amortization. Depreciation and amortization expense increased 4.5% to $42.2 million in fiscal year 2014. The
increase during fiscal year 2014 was primarily attributable to our increased investment in technology initiatives at Company Drive-
Ins partially offset by a franchisee’s purchase, during the second fiscal quarter of 2013, of land and buildings previously leased or
subleased from the Company. Depreciation and amortization decreased 3.6% to $40.4 million in fiscal year 2013. The decline in
fiscal year 2013 was primarily a result of the franchisee’s purchase of land and buildings described above.
Provision for Impairment of Long-Lived Assets. Provision for impairment of long-lived assets decreased $1.7 million to $0.1
million in fiscal year 2014, compared to $1.8 million 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 Income and Expense, Net. Fiscal year 2014 reflected $0.2 million in other operating income compared to other
operating net expense of $1.9 million for fiscal year 2013 and other operating income of $0.5 million for fiscal year 2012. This $2.1
million change for fiscal year 2014 and $2.4 million change for fiscal year 2013 are both primarily the result of the loss recorded
on the closure of 12 lower-performing Company Drive Ins at the end of fiscal year 2013.
Net Interest Expense. Excluding the item outlined below, net interest expense decreased $3.6 million in fiscal year 2014 and
$2.5 million in fiscal year 2013. The decrease in fiscal year 2014 was primarily related to a decline in our weighted-average interest
rate attributable to our partial debt refinancing completed in the fourth quarter of fiscal year 2013 and a decline in our long-term
debt balance. The decrease in fiscal year 2013 was primarily the result of a decline in our long-term debt balance. Fiscal year 2013
reflects 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. See “Liquidity and Sources of Capital” and “Item 7A. 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 35.0% for fiscal year 2014 compared with 34.8%
for fiscal year 2013. The slightly higher effective income tax rate for fiscal year 2014 was primarily attributable to legislation that
reinstated and extended the Work Opportunity Tax Credit (“WOTC”) in fiscal year 2013 but expired in fiscal year 2014. The tax rate
for fiscal year 2013 decreased from the fiscal year 2012 rate of 37.7%. This decrease 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 WOTC. Our fiscal
year 2015 tax rate may vary depending upon the reinstatement of the WOTC, which expired 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 $9.8 million, or 1.5%, to $651.0 million during fiscal year 2014 from $660.8 million at the end of fiscal year
2013. The decrease during the year was primarily attributable to a decline in cash of $42.2 million and current-year depreciation of
$42.2 million. These declines were partially offset by $79.0 million in property and equipment additions (largely technology).
Total liabilities increased $5.0 million to $588.3 million during fiscal year 2014 from $583.3 million at the end of fiscal year
2013. The increase was primarily attributable to the $4.9 million dividend declared in August 2014 and payable in November 2014.
Total stockholders’ equity decreased $14.8 million, or 19.1%, to $62.7 million during fiscal year 2014 from $77.5 million at the
end of fiscal year 2013. This decrease was primarily attributable to $80.0 million in purchases of common stock under our stock
repurchase program and was partially offset by current-year earnings of $47.9 million and $17.4 million from the issuance of stock
related to stock option exercises during fiscal year 2014.
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