Sonic 2014 Annual Report Download - page 24

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, 2014 (in thousands):
Payments Due by Fiscal Year
More than
Less than 1 – 3 3 – 5 5 Years
1 Year Years Years (2020 and
Total (2015) (2016 to 2017) (2018 to 2019) thereafter)
Contractual Obligations
Long-term debt(1) $ 526,895 $ 31,198 $ 60,756 $ 274,774 $ 160,167
Capital leases 35,096 5,149 9,585 7,563 12,799
Operating leases 124,971 11,274 20,446 17,642 75,609
Purchase obligations(2) 307,997 29,050 44,435 47,338 187,174
Other(3) 18,008 – – – –
Total $ 1,012,967 $ 76,671 $ 135,222 $ 347,317 $ 435,749
(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 $2.5 million of unrecognized tax benefits related to uncertain tax positions and $15.5 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 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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