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| SONC > SEC Filings for SONC > Form 10-Q on 9-Jan-2009 | All Recent SEC Filings |
9-Jan-2009
Quarterly Report
Overview
Results for the first quarter ended November 30, 2008 reflected a number of challenges including weak consumer sentiment accompanying the general business recession as well as rising commodity and labor costs. System-side same-store sales declined during the quarter, and the performance of Partner Drive-Ins continued to lag behind that of Franchise Drive-Ins. The de-leveraging impact of lower sales volumes coupled with rising costs also led to lower restaurant and operating margins during the quarter.
For the first quarter of fiscal 2009, revenues decreased 3.2%, while operating income decreased 29.7%. Net income decreased 47.5% during the quarter and earnings per share decreased 45.5% to $0.12 per diluted share from $0.22 in the year-earlier period.
The following table provides information regarding the number of Partner Drive-Ins and Franchise Drive-Ins in operation as of the end of the periods indicated as well as the system-wide growth in sales and average unit volume. System-wide information includes both Partner and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company's revenues since franchisees pay royalties based on a percentage of sales.
System-Wide Performance
($ in thousands)
Three months ended
November 30,
2008 2007
Percentage increase in sales 1.2 % 7.2 %
System-wide drive-ins in operation (1):
Total at beginning of period 3,475 3,343
Opened 39 36
Closed (net of re-openings) (9 ) (11 )
Total at end of period 3,505 3,368
Average sales per drive-in $ 262 $ 268
Change in same-store sales (2) (3.6 %) 2.1 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
System-wide same-store sales decreased 3.6% during the first quarter of fiscal year 2009 as a result of decrease in average check and, to a lesser extent, a decrease in traffic (number of transactions per drive-in).
The following table provides information regarding drive-in development across the system. Retrofits represent investments to upgrade the exterior look of our drive-ins, typically including an upgraded building exterior, new more energy-efficient lighting, a significantly enhanced patio area, and improved menu housings.
System-Wide Drive-In Development
Three months ended
November 30,
2008 2007
New drive-ins:
Partner 5 5
Franchise 34 31
System-wide 39 36
Rebuilds/relocations:
Partner 2 -
Franchise 19 15
System-wide 21 15
Retrofits, including rebuilds/relocations:
Partner 13 38
Franchise 128 202
System-wide 141 240
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Results of Operations
Revenues. The following table sets forth the components of revenue for the
reported periods and the relative change between the comparable periods.
Revenues
($ in thousands)
Three Months Ended November Percent
30, Increase/ Increase/
2008 2007 (Decrease) (Decrease)
Revenues:
Partner Drive-In sales $ 153,047 $ 159,285 $ ( 6,238 ) (3.9 %)
Franchise revenues:
Franchise royalties 29,055 28,639 416 1.5 %
Franchise fees 1,171 1,240 (69 ) (5.6 %)
Other 793 1,017 (224 ) (22.0 %)
Total revenues $ 184,066 $ 190,181 $ ( 6,115 ) (3.2 %)
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The following table reflects the changes in Partner Drive-In sales, average unit volumes and comparable sales for Partner Drive-Ins. It also presents information about the number of Partner Drive-Ins, which is useful in analyzing the growth of Partner Drive-In sales.
Partner Drive-In Sales
($ in thousands)
Three months ended
November 30,
2008 2007
Partner Drive-In sales $ 153,047 $ 159,285
Percentage change (3.9 %) 8.8 %
Drive-ins in operation (1):
Total at beginning of period 684 654
Opened 5 5
Acquired from (sold to) franchisees (8 ) 5
Closed (1 ) (2 )
Total at end of period 680 662
Average sales per drive-in $ 226 $ 243
Percentage change (7.0 %) 3.3 %
Change in same-store sales (2) (6.6 %) 2.9 %
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(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
For the first fiscal quarter of 2009, Partner Drive-In sales decreased 3.9%. The decrease was largely driven by the decline in same-store sales for existing drive-ins, which was partially offset by sales from newly constructed and acquired drive-ins. The Company believes the decline in performance at Partner Drive-Ins is attributable, at least in part, to consumer reaction to aggressive price increases taken during fiscal year 2007, combined with a decline in service. Since the deterioration in performance became apparent during the third quarter of fiscal year 2008, several actions have been taken, including an organizational restructure (management and personnel changes) as well as a simplified incentive compensation plan, which strengthens the partnership program and places increased emphasis on customer service. In addition, we implemented a more strategic approach to pricing. These efforts are expected to have a positive impact on Partner Drive-In sales.
The following table reflects the growth in franchise income (franchise royalties and franchise fees) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.
Franchise Information
($ in thousands)
Three months ended
November 30,
2008 2007
Franchise fees and royalties (1) $ 30,226 $ 29,879
Percentage increase 1.2 % 14.2 %
Franchise Drive-Ins in operation (2):
Total at beginning of period 2,791 2,689
Opened 34 31
Acquired from (sold to) company 8 (5 )
Closed (8 ) (9 )
Total at end of period 2,825 2,706
Franchise Drive-In sales $ 757,443 $ 740,288
Percentage increase 2.3 % 6.9 %
Effective royalty rate 3.84 % 3.87 %
Average sales per Franchise Drive-In $ 270 $ 274
Change in same-store sales (3) (2.9 %) 1.9 %
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(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended August 31, 2008.
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(3) Represents percentage change for drive-ins open for a minimum of 15 months.
Franchise royalties experienced a 1.2% increase related primarily to royalties from new Franchise Drive-Ins, offset by the impact of the declining effective royalty rate and the decline in same-store sales at Franchise Drive-Ins.
Franchisee fees remained relatively constant at approximately $1.2 million for the first fiscal quarter of both 2009 and 2008. Franchisees opened 34 new drive-ins in the first fiscal quarter of 2009, compared to 31 new drive-ins in the first fiscal quarter of 2008. Fees associated with the termination of area development agreements decreased $0.2 million for the first fiscal quarter of 2009 compared to prior year, offsetting the higher revenue resulting from the increase in new drive-in openings.
Operating Expenses. The following table presents the overall costs of drive-in operations, as a percentage of Partner Drive-In sales. Minority interest in earnings of Partner Drive-Ins is included as a part of cost of sales, in the table below, since it is directly related to Partner Drive-In operations.
Restaurant-level margins declined overall in the first fiscal quarter of 2009 as a result of higher commodity prices, higher labor costs driven by minimum wage increases and the de-leveraging impact of lower sales. These negative impacts were offset by the decline in minority partners' share of earnings reflecting the margin pressures described above.
Selling, General and Administrative. Selling, general and administrative expenses increased 8.4% to $16.2 million during the first fiscal quarter of 2009 compared to the same period of 2008. Headcount additions were the primary contributor to the year-over-year increase.
Depreciation and Amortization. Depreciation and amortization expense increased 6.7% to $13.0 million in the first quarter. Capital expenditures during the first three months of fiscal year 2009 were $15.1 million. Looking forward, capital expenditures are expected to total approximately $60 to $65 million for the year.
Provision for Impairment of Long-Lived Assets. We assess drive-in assets for impairment on a quarterly basis under the guidelines of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." During the first fiscal quarter of 2009, one Partner Drive-In was impaired, resulting in charges of $0.4 million to reduce the carrying cost of the related assets to estimated fair value. 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 assets associated with one or more of these drive-ins to fair value.
Interest Expense. Net interest expense decreased $0.3 million to $11.7 million as compared to the same period in fiscal year 2008. The decrease is primarily attributed to the reduction in debt due to scheduled amortization payments on our fixed rate notes.
Income Taxes. The provision for income taxes reflects an effective federal and state tax rate of 41.4% for the first quarter of fiscal year 2009 as compared to 38.0% in the same period of 2008. The higher rate in the first quarter of fiscal year 2009 is due primarily to federal tax adjustments, the impact of which are amplified by lower net income for the period. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by stock option-holders and as circumstances on individual tax matters change.
Financial Position
During the first fiscal quarter of 2009, current assets decreased 2.6% to $96.8 million compared to $99.4 million as of the prior fiscal year end, due primarily to lower royalty receivable balances associated with seasonally lower sales and the collection of other receivables. Net property and equipment decreased approximately $13.3 million primarily as a result of depreciation of $12.9 million and the disposition of $12.5 million in property and equipment related to the sale of eight Partner Drive-Ins to a franchisee, offset by capital expenditures of $15.1 million, and sales and retirement of assets for the balance of the change. These changes combined with the decrease in current assets to produce a 2.1% decrease in total assets to $818.5 million as of the end of the first quarter of fiscal year 2009.
Total current liabilities decreased $6.7 million or 5.9% during the first fiscal quarter of 2009 primarily as a result of the general decline in payables associated with lower sales. The noncurrent portion of long-term debt decreased $21.8 million or 3.0% as a result of reflecting scheduled principal payments on the fixed rate notes and payment of $10.0 million on the variable rate notes. Overall, total liabilities decreased $27.3 million or 3.0% as a result of the items discussed above.
Stockholders' deficit improved $9.4 million or 14.7% during the first three months of fiscal year 2009. Earnings of $7.1 million, along with $2.1 million for the combination of stock compensation and the proceeds and related tax benefits from the exercise of stock options, decreased the stockholders' deficit.
Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities decreased $11.1 million or 37.6% to $18.3 million in the first fiscal quarter of 2009 as compared to $29.4 million in the same period of fiscal year 2008. The decrease resulted primarily from lower net income for the first fiscal quarter of 2009, along with increased use of cash for operating assets and liabilities.
Investing Cash Flows. Net cash used in investing activities decreased by $23.2 million to $1.8 million in the first fiscal quarter of 2009 as compared to $25.0 million in the same period of fiscal year 2008. Capital expenditures of $15.1 million were mostly offset by proceeds of $14.4 million from the sale of Partner Drive-Ins. We opened five newly constructed Partner Drive-Ins, purchasing the real estate for all of these new drive-ins. The following table sets forth the components of our investments in capital additions for the first three months of fiscal year 2009 (in millions):
New Partner Drive-Ins, including drive-ins under construction $ 9.2 Retrofits, drive-thru additions and LED signs in existing drive-ins 2.1 Rebuilds, relocations and remodels of existing drive-ins 1.0 Replacement equipment for existing drive-ins and other 2.8 Total investing cash flows for capital additions $ 15.1 |
Financing Cash Flows. Net cash used in financing activities increased by $13.8 million to $15.0 million in the first fiscal quarter of 2009 as compared to $1.1 million in the same period of fiscal year 2008. The increase resulted from having sufficient cash on hand to fund operating and investing activities without taking advances on the Variable Funding Notes. In addition, no purchases of treasury stock were made during the first quarter of fiscal year 2009 compared to $26.7 million the same period of the prior year.
The Company has a securitized financing facility of Variable Funding Notes that provides for the issuance of up to $200.0 million in borrowings and certain other credit instruments, including letters of credit. As of November 30, 2008, our outstanding balance under the Variable Funding Notes totaled $175.0 million at an effective borrowing rate of 3.38%, as well as $0.3 million in outstanding letters of credit. Subsequent to November 30, 2008, the Company requested to draw down the remaining $24.7 million available under the Variable Funding Notes. Two lenders are each responsible for funding 50% of the total amount available. One of the lenders filed for Chapter 11 bankruptcy on September 15, 2008. This lender notified the Company that it could not meet its obligation at the current time. Consequently, of the $24.7 million requested, the Company received approximately $12.4 million. The Company currently does not consider the remaining amount of approximately $12.3 million to be available. Prior to August 31, 2008, the Company was aware of possible issues with the lender and had taken advances that were held in cash to ensure liquidity for short-term financing needs. See Note 9 of the Notes to Consolidated Financial Statements in the Company's Form 10-K for the fiscal year ended August 31, 2008 for additional information regarding our long-term debt.
We plan capital expenditures of approximately $60 to $65 million in fiscal year 2009, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of additional Partner Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in level expenditures. We expect to fund these capital expenditures through cash flow from operations as well as cash on hand.
As of November 30, 2008, our total cash balance of $73.7 million ($45.9 million of unrestricted and $27.8 million of restricted cash balances) reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures mentioned above. We believe that existing cash and funds generated from operations will meet our needs for the foreseeable future.
Critical Accounting Policies and Estimates
Critical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company's Form 10-K for the fiscal year ended August 31, 2008.
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