Sonic 2013 Annual Report Download - page 28

Management's Discussion and Analysis of Financial Condition and Results of Operations
Contractual Obligations and Commitments
In the normal course of business, Sonic enters into purchase contracts, lease agreements and borrowing
arrangements. The following table presents our commitments and obligations as of August 31, 2013 (in thousands):
Payments Due by Fiscal Year
More than
Less than 1 – 3 3 – 5 5 Years
1 Year Years Years (2019 and
Total (2014) (2015 to 2016) (2017 to 2018) thereafter)
Contractual Obligations
Long-term debt (1) $ 559,521 $ 31,958 $ 61,926 $ 299,497 $ 166,140
Capital leases 34,387 6,090 10,002 8,706 9,589
Operating leases 141,998 11,195 21,754 19,463 89,586
Purchase Obligations (2) 50,523 25,855 24,668 ––
Other(3) 13,782 ––––
Total $ 800,211 $ 75,098 $ 118,350 $ 327,666 $ 265,315
(1) Includes scheduled principal and interest payments on our 2011 Fixed Rate Notes and 2013 Fixed Rate Notes
and assumes these notes will be outstanding for the expected seven-year life with an anticipated repayment
date in May 2018 and July 2020, respectively.
(2) 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.
(3) Includes $2.6 million of unrecognized tax benefits related to uncertain tax positions and $11.2 million related
to guarantees of franchisee leases and loan agreements. As we are not able to reasonably estimate the timing
or amount of these payments, if any, the related balances have not been reflected in the “Payments Due by
Fiscal Year” section of the table.
Impact of Inflation
We are impacted by inflation which has caused increases in our food, labor and benefits costs and has increased
our operating expenses. To the extent permitted by competition, increased costs are recovered through a
combination of menu price increases and alternative products or processes, or by implementing other cost reduction
procedures.
Critical Accounting Policies and Estimates
The Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this
document contain information that is pertinent to management's discussion and analysis. The preparation of
financial statements in conformity with generally accepted accounting principles requires management to use its
judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities. These assumptions and estimates could have a material effect on
our financial statements. We evaluate our assumptions and estimates on an ongoing basis using historical
experience and various other factors that are believed to be relevant under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.
We perform a periodic review of our financial reporting and disclosure practices and accounting policies to
ensure that our financial reporting and disclosures provide accurate and transparent information relative to the
current economic and business environment. We believe the following significant accounting policies and estimates
involve a high degree of risk, judgment and/or complexity.
Accounting for Long-Lived Assets. We review Company Drive-In assets for impairment when events or
circumstances indicate they might be impaired. We test for impairment using historical cash flows and other relevant
facts and circumstances as the primary basis for our estimates of future cash flows. This process requires the use
of estimates and assumptions, which are subject to a high degree of judgment. These impairment tests require us
to estimate fair values of our drive-ins by making assumptions regarding future cash flows and other factors. It is
reasonably possible that our estimates of future cash flows could change resulting in the need to write down to fair
value certain Company Drive-In assets.
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