Sonic 2015 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, 2015 (in thousands):
Payments Due by Fiscal Year
More than
Less than 1 – 3 3 – 5 5 Years
1 Year Years Years (2021 and
Total (2016) (2017 to 2018) (2019 to 2020) thereafter)
Contractual Obligations
Long-term debt(1) $ 506,189 $ 30,663 $ 309,547 $ 165,979 $ –
Capital leases 31,236 5,254 9,405 6,694 9,883
Operating leases 123,396 11,374 22,050 20,974 68,998
Purchase obligations(2) 283,171 28,895 45,657 48,640 159,979
Other(3) 17,640 – – – –
Total $ 961,632 $ 76,186 $ 386,659 $ 242,287 $ 238,860
(1) Includes scheduled principal and interest payments on our 2011 Notes and 2013 Fixed Rate Notes and assumes these
notes will be outstanding for the expected seven-year life with anticipated repayment dates 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 $3.6 million of unrecognized tax benefits related to uncertain tax positions and $14.0 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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