Sonic 2015 Annual Report Download - page 26

Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Accounts and Notes Receivable. We charge interest on past due accounts receivable and recognize income as it is collected.
Interest accrues on notes receivable based on the contractual terms of the respective notes. We monitor all accounts and
notes receivable for delinquency and provide for estimated losses for specific receivables that are not likely to be collected.
We assess credit risk for accounts and notes receivable of specific franchisees based on payment history, current payment
patterns, the health of the franchisee’s business and an assessment of the franchisee’s ability to pay outstanding balances.
In addition to allowances for bad debt for specific franchisee receivables, a general provision for bad debt is estimated for
accounts receivable based on historical trends. Account balances generally are charged against the allowance when we
believe it is probable that the receivable will not be recovered and legal remedies have been exhausted. We continually review
our allowance for doubtful accounts.
Quantitative and Qualitative Disclosures About Market Risk
Sonic’s use of debt directly exposes the Company to interest rate risk. Fixed rate debt, where the interest rate is fixed
over the life of the instrument, exposes the Company to changes in market interest rates reflected in the fair value of the debt
and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Sonic is also exposed
to market risk from changes in commodity prices. The Company does not utilize financial instruments for trading purposes.
Sonic manages its debt portfolio to achieve an overall desired position of fixed and floating rates.
Interest Rate Risk. Our exposure to interest rate risk at August 31, 2015, was primarily based on the 2011 Fixed Rate
Notes and 2013 Fixed Rate Notes with an effective rate of 5.4% and 3.75%, respectively, before amortization of debt-related
costs. At August 31, 2015, the fair value of the 2011 Fixed Rate Notes and 2013 Fixed Rate Notes approximated their
carrying value of $428.1 million, including accrued interest. To derive the fair value, management used market information
available for public debt transactions for companies with ratings that are similar to our ratings and information gathered
from brokers who trade in our notes. Management believes this fair value is a reasonable estimate. Should interest rates
and/or credit spreads increase or decrease by one percentage point, the estimated fair value of the 2011 Fixed Rate Notes
and 2013 Fixed Rate Notes would decrease or increase by approximately $12 million, respectively. The fair value estimate
required significant assumptions by management.
Commodity Price Risk. The Company and its franchisees purchase certain commodities such as beef, potatoes, chicken
and dairy products. These commodities are generally purchased based upon market prices established with vendors. These
purchase arrangements may contain contractual features that limit the price paid by establishing price floors or caps; however,
we generally do not make any long-term commitments to purchase any minimum quantities under these arrangements other
than as disclosed under “Contractual Obligations and Commitments.” We also do not use financial instruments to hedge
commodity prices because these purchase arrangements help control the ultimate cost.
This market risk discussion contains forward-looking statements. Actual results may differ materially from this
discussion based upon general market conditions and changes in financial markets.
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