Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
1.
Summary of Significant Accounting Policies
Operations
Sonic Corp. (the “Company”) operates and franchises a chain of quick-service
restaurants
in the United States
(“U.S.”)
. It derives its revenues primarily from Company Drive-In sales and royalty fees from franchisees. The Company also leases real estate and receives equity earnings in noncontrolling ownership in a number of Franchise Drive
‑
Ins.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company, its wholly
owned subsidiaries and
a number of
Company Drive-Ins
in which a subsidiary has a controlling ownership interest
. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S.
generally accepted accounting principles (“GAAP”)
requires management to make estimates and assumptions that affect the amounts reported and contingent assets and liabilities disclosed in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences may be material to the financial statements.
Reclassifications
Certain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current-year presentation.
Segment Reporting
In accordance with
Accounting Standards Update (“ASU”)
280, “Segment Reporting,” the Company uses the management approach for determining its reportable segments. The management approach is based upon the way that management reviews performance and allocates resources.
T
he Company’s chief operating decision maker and his management team review operating results on a consolidated basis for purposes of allocating resources and evaluating the financial performance of the Sonic brand. Accordingly, the Company has determined that it has
one
operating segment and
,
therefore,
one
reporting segment.
Cash Equivalents
Cash equivalents consist of highly liquid investments, primarily money market accounts that mature in three months or less from date of purchase, and depository accounts.
Restricted Cash
As of
August 31, 2016
, the Company had restricted cash balances totaling
$
1
6.0
million for funds required to be held in trust for the benefit of senior noteholders under the Company’s debt arrangements. The current portion of restricted cash of $
1
5.9
million represents amounts to be returned to Sonic or paid to service current debt obligations. The noncurrent portion of $
0
.
1
million represents interest reserves required to be set aside for the duration of the debt.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Accounts and Notes Receivable
The Company charges interest on past due accounts receivable and recognizes income as it is collected. Interest accrues on notes receivable based on the contractual terms of the respective note. The Company monitors all accounts and notes receivable
for delinquency and provides for estimated losses for specific receivables that are not likely to be collected. The Company assesses 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 the Company’s accounts receivable based on historical trends.
Account balances generally are charged against the allowance when the Company believes that the
collection is no longer reasonably assured
.
The Company continually reviews its allowance for doubtful accounts.
Inventories
Inventories consist principally of food and supplies that are carried at the lower of cost (first-in, first-out basis) or market.
Property, Equipment and Capital Leases
Property and equipment are recorded at cost, and leased assets under capital leases are recorded at the present value of future minimum lease payments. Depreciation of property and equipment and amortization of capital leases are computed by the straight-line method over the estimated useful lives or the lease term, including cancelable option periods when appropriate, and are combined for presentation in the financial statements.
Accounting for Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which generally represents the individual drive-in. The Company’s primary test for an indicator of potential impairment is operating losses
of the related drive-in
. If an indication of impairment is determined to be present, the Company estimates the future cash flows expected to be generated from the use of the asset and its eventual disposal. If the sum of undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Fair value is typically determined to be the value of the land since drive-in buildings and improvements are single-purpose assets and have little value to market participants. The equipment associated with a
drive-in
can be easily relocated to another
drive-in
and therefore is not adjusted.
Surplus property assets are carried at the lower of depreciated cost or fair value less cost to sell. The majority of the value in surplus property is land. Fair values are estimated based upon
management’s assessment as well as
independent
market value
assessments of the assets’ estimated sales values.
Goodwill and Other Intangible Assets
Goodwill is determined based on
an
acquisition purchase price in excess of the fair value of identified assets. Intangible assets with lives restricted by contractual, legal or other means are amortized over their useful lives. The Company tests goodwill at least annually for impairment using the fair value approach on a reporting unit basis.
Since the Company is one reporting unit, potential goodwill impairment is evaluated by comparing the fair value of the Company to its carrying value. The fair value of the Company is determined using a market approach. If the carrying value of the Company exceeds fair value, a comparison of the fair value of goodwill against the carrying
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
value of goodwill is made to determine whether goodwill has been impaired. During the fourth quarter
s
of fiscal year
s
2016
and
2015
, the annual assessment of
the
recoverability of goodwill was performed
,
and
no
impairment was indicated.
The Company’s intangible assets subject to amortization consist primarily of acquired franchise agreements,
intellectual property
and other intangibles. Amortization expense is calculated using the straight-line method over the
asset’s
expected
useful life
. See note
4
- Goodwill and Other Intangibles for additional
related
disclosures
.
Refranchising
and Closure
of Company Drive-Ins
Gains and losses from the sale
or closure
of Company Drive-Ins are recorded as
“
o
ther operating
(
income
)
expense, net
”
on the Consolidated Statements of Income.
Revenue Recognition, Franchise Fees and Royalties
Revenue from Company Drive-In sales is recognized when food and beverage products are sold. Company Drive-In sales are
presented net of sales tax and other sales-related taxes.
The Company
’s
gift card program
serves all Sonic
D
rive-
I
ns and is administered by the Company
on behalf of a system advertising fund
. The Company
records a liability in the period in which a gift card is sold.
The g
ift cards do not have expiration dates. As gift cards are redeemed, the liability is reduced with revenue recognized on redemptions at Company Drive-Ins. Breakage is the amount on a gift card that is not expected to be redeemed and that the Company is not required to remit to a state under unclaimed property laws. The Company estimates breakage based upon the
historical
trend in redemption patterns from previously sold gift cards. The Company’s policy is to recognize the breakage
,
using the delayed recognition method
,
when it is apparent that there is a remote likelihood the gift card balance will be redeemed. The Company reduces the gift card liability for the estimated breakage and uses that amount to defray the costs of operating the gift card program. There is no income recognized on unredeemed gift card balances.
Costs to administer the gift card program
, net of breakage,
are included in the receivables from advertising funds as set forth in note
3
– Accounts and Notes Receivable.
Such costs were
not material
in fiscal years
2016
,
2015
and
2014
.
F
ranchise fees are recognized in income when the Company has substantially performed or satisfied all material services or conditions relating to the sale of the franchise
,
and the fees are
generally
nonrefundable.
D
evelopment fees are nonrefundable and are recognized in income on a pro-rata basis when the conditions for revenue recognition under the individual development agreements are met. Both franchise fees and development fees are generally recognized upon the opening of a Franchise Drive-In or upon termination of the agreement between the Company and the franchisee.
The Company’s franchisees
pay royalties based on a percentage of sales
. Royalties
are recognized as revenue when they are earned
.
Advertising Costs
Costs incurred in connection with advertising and promoting the Company’s products are included in other operating expenses and are expensed as incurred. Such costs amounted to
$
2
3
.
4
million
, $
24.5
million
and
$
22.4
million
in fiscal years 2016, 2015 and
2014
, respectively.
Under the Company’s franchise agreements, both Company Drive-Ins and Franchise Drive-Ins must contribute a minimum percentage of revenues to a national media production fund (
“
Sonic Brand Fund
”
) and spend an additional minimum percentage of gross revenues on advertising, either directly or through Company-required participation in advertising cooperatives. A
significant
portion of the advertising
cooperative
contributions
is
remitted
to
the
System
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Marketing Fund, which purchases advertising on national cable and broadcast networks
and
local broadcast networks
and
also
funds other national media
expenses
and sponsorship opportunities. As stated in the terms of existing franchise agreements, these funds do not constitute assets of the Company, and the Company acts with limited agency in the administration of these funds.
Accordingly, neither the revenues
and expenses nor the assets and liabilities of the advertising cooperatives, the Sonic Brand Fund or the System Marketing Fund are included in the Company’s consolidated financial statements. However, all advertising contributions by Company Drive-Ins are recorded as
an
expense on the Company’s financial statements.
Under the Company’s franchise agreements, the Company is reimbursed by the Sonic Brand Fund for costs incurred to administer the fund at an amount not to exceed
15%
of the Sonic Brand Fund’s gross receipts. Reimbursements from the Sonic Brand Fund are offset against selling, general and administrative expenses
and totaled
$5.
2
million,
$
5
.
0
million and
$4
.4
million in fiscal years
2016,
2015
and
2014, respectively.
Technology Costs
Under the Company’s franchise agreements, both Company Drive-Ins and Franchise Drive-Ins must pay a set technology fee to the Brand Technology Fund (“BTF”)
,
which was established in the third quarter of fiscal year 2016. The BTF
administers cybersecurity and other technology programs
for the Sonic system
. As stated in the terms of existing franchise agreements, these funds do not constitute assets of the Company, and the Company acts with limited agency in the administration of these funds. Accordingly, neither the revenues
and expenses nor the assets and liabilities of the BTF are included in the Company’s consolidated financial statements. However, technology fees paid by Company Drive-Ins are recorded as
an
expense on the Company’s financial statements.
Under the Company’s franchise agreements, the Company is reimbursed by the BTF for costs incurred to administer the fund at an amount not to exceed 15% of the BTF’s gross receipts. Reimbursements from the BTF are offset against selling, general and administrative expenses and totaled $2.5 million in fiscal year 2016.
Operating Leases
Rent expense is recognized on a straight-line basis over the expected lease term, including cancelable option periods when it is deemed to be reasonably assured that the Company would incur an economic penalty for not exercising the options. Within the terms of some of the leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when appropriate. The lease term commences on the date when the Company has the right to control the use of the leased property, which can occur before rent payments are due under the terms of the lease. Contingent rent is generally based on sales levels and is accrued at the point in time it is probable that such sales levels will be achieved.
Stock-Based Compensation
The Company
grants
incentive
stock options (“ISOs”),
non-qualified stock options
(“NQs”) and
restricted stock units (“RSUs”). For grants of
NQs
and RSUs, the Company expects to recognize a tax benefit upon exercise of the option or vesting of the RSU
. As a result, a
tax benefit is recognized on the related stock-based compensation expense
for these types of awards
. For grants of
ISOs
, a tax benefit only results if the option holder has a disqualifying disposition. As a result of the limitation on the tax benefit for
ISOs
, the tax benefit for stock-based compensation will generally be less than the Company’s overall tax rate and will vary depending on the timing of employees’ exercises and sales of stock.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Stock-based compensation is measured at the grant date based on the calculated fair value of the award and is recognized as an expense on a straight-line basis over the requisite service period of the award
,
generally the vesting period of the grant. For additional information on stock-based compensation
see note 1
2
- Stockholders’ Equity
(Deficit)
.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect earnings. These benefits are principally generated from employee exercises of
NQs
, the vesting of RSUs
and disqualifying dispositions of
ISOs
.
The threshold for recognizing the financial statement effects of a tax position is when it is more likely than not, based on the technical merits, that the position will be sustained upon examination by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority. Interest and penalties related to unrecognized tax benefits are included in income tax expense.
Additional information regarding the Company’s unrecognized tax benefits is provided in note 1
1
- Income Taxes.
Fair Value Measurements
The Company’s financial assets and liabilities consist of cash and cash equivalents, accounts and notes receivable, accounts
payable
and long-term debt. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying amounts due to the short
-
term nature of these assets and liabilities.
The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
|
·
|
|
Notes receivable
-
As of
August 31, 2016
and
2015
, the carrying amounts of notes receivable (both current and non-current) approximate fair value due to the effect of the related allowance for doubtful accounts.
|
|
·
|
|
Long-term debt
- The Company prepares a discounted cash flow analysis for its fixed
and variable
rate borrowings to estimate fair value each quarter. This analysis
uses
Level 2 inputs from
market information available for public debt transactions for companies with ratings that are similar to
the Company’s
ratings and
from
information gathered from brokers who trade in
the Company’s
notes. The fair value estimate required significant assumptions by management. Management believes this fair value is a reasonable estimate. For more information
regarding the Company’s long-term debt, see note
9
-
Debt and note 1
0
- Fair Value of Financial Instruments.
|
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis, which means these assets and liabilities are not measured at fair value on an ongoing basis but are subject to periodic impairment tests. For the Company, these items primarily include long-lived assets, goodwill and other intangible assets. Refer to sections “
Accounting for Long-Lived Assets”
and “Goodwill and Other Intangible Assets,” discussed above,
for inputs and valuation techniques used to measure the fair value of these nonfinancial assets.
The fair value was
based
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
upon management’s assessment as well as
independent market value assessments
which involved Level
2 and Level
3 inputs.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled for the transfer of promised goods or services to customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it becomes effective.
Further, in March 2016, the FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”
which clarifies the guidance in ASU No. 2014-09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer.
In April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,”
which clarifies the guidance in ASU No. 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property.
All standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, which requires the Company to adopt the standard in fiscal year 2019. The standards are to be applied retrospectively or using a cumulative effect transition method, with early application not permitted. The Company does not believe the new revenue recognition standard will impact our recognition of sales from Company Drive-Ins and our recognition of royalty fees from franchisees. We are currently evaluating the effect that this pronouncement will have on the recognition of other transactions on the financial statements
, including the initial franchise fee
currently
recognized upon the opening of a Franchise Drive-In,
and related disclosures and have not yet selected a transition method
.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” This update requires debt issuance costs to be presented in the balance sheet as a reduction of the related liability rather than as an asset.
The recognition and measurement guidance for debt issuance costs are not affected by this update.
This update is effective for fiscal years beginning after December 15, 2015, including interim periods within that reporting period, and is to be applied retrospectively; early adoption is permitted.
The update will be adopted in the first quarter of fiscal year 2017 and will
require reclassification of debt issuance costs from other non-current assets to long-term debt within
the Company’s
consolidated balance sheets
.
As of August 31, 2016, the carrying amount of unamortized debt issuance costs totaled $14.4 million. Other than this reclassification, the adoption of this ASU will not have any impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.” The update provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for fiscal years beginning after December 15, 2015.
The update will be adopted in the first quarter of fiscal year 2017 and will not have a material impact on the Company’s financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” as part of its simplification initiatives. The update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. The Company adopted this standard in the first quarter of fiscal year 2016. The Company’s current deferred tax asset balance of
$2.2
million was classified as noncurrent and netted with noncurrent deferred tax liabilities as of November 30, 2015, and all future deferred tax asset balances will be recorded as such. No prior periods were retrospectively adjusted
, as such the balance of
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
$2.2
million remained in current assets at August 31, 2015.
The reclassification did not have a material effect on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new standard
, which replaces existing lease guidance,
requires lessees to recognize
on the balance sheet a liability to make lease payments and a corresponding right-of-use asset
.
The guidance also requires certain qualitative and quantitative disclosures
designed to assess
the amount, timing and uncertainty of cash flows arising from leases.
Accounting guidance for lessors is largely unchanged. The standard is effective for fiscal years beginning after December 15, 2018
,
which will require the Company to adopt the provisions in the first quarter of fiscal 2020, with early application permitted.
This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients.
Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-04, “Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored-value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. The adoption of the update is not expected to have a material impact on the Company’s financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, an accounting policy election for forfeitures, statutory tax withholding requirements and classification in the statements of cash flows. Upon adoption, any future excess tax benefits or deficiencies will be recorded to the provision for income taxes in the consolidated statements of operations, instead of additional paid-in capital in the consolidated balance sheets. The update is effective for fiscal years beginning after December 15, 2016
;
however
,
early application is permitted. The transition method to be applied varies depending on the area of update being adopted. The Company is
currently evaluating the effect that this update will have on its financial statements and related disclosures
.
In June 2016,
the
FASB issued ASU No
.
201
6
-13, “Financial Instruments – Credit Losses.” The update was issued to provide more decision-useful information about the expected credit losses on f
inancial instruments. The update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for fiscal years beginning after December 15, 2019
,
with early adoption permitted for fiscal years beginning after December 15, 2018. The update should be adopted using a modified-retrospective approach.
The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures
.
In August 2016, the FASB issued ASU
No.
2016-15, “Statement of Cash Flows
–
Classification of Certain Cash Receipts and Cash Payments.”
The update is intended to reduce diversity in practice in how certain transactions are classified and will make eight targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the amendments
will apply
prospectively as of the earliest date practicable.
The Company is
currently evaluating the effect that this update will have on its financial statements and related disclosures
.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended August 31,
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
64,067
|
|
$
|
64,485
|
|
$
|
47,916
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding– basic
|
|
48,703
|
|
|
52,572
|
|
|
55,164
|
Effect of dilutive employee stock options
|
|
|
|
|
|
|
|
|
and unvested RSUs
|
|
966
|
|
|
1,381
|
|
|
1,455
|
Weighted average common shares
outstanding – diluted
|
|
49,669
|
|
|
53,953
|
|
|
56,619
|
|
|
|
|
|
|
|
|
|
Net income per common share – basic
|
$
|
1.32
|
|
$
|
1.23
|
|
$
|
0.87
|
Net income per common share – diluted
|
$
|
1.29
|
|
$
|
1.20
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded
(1)
|
|
615
|
|
|
342
|
|
|
988
|
—————————
|
|
|
|
|
|
|
|
|
(1) Anti-dilutive securities consist of
stock options and unvested RSUs that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive
.
3
.
Accounts and Notes Receivable
Accounts and notes receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
2016
|
|
2015
|
Current Accounts and Notes Receivable:
|
|
|
|
|
|
|
Royalties and other trade receivables
|
|
$
|
19,994
|
|
$
|
19,713
|
Notes receivable from franchisees
|
|
|
5,531
|
|
|
996
|
Receivables from system funds
|
|
|
4,372
|
|
|
4,965
|
Other
|
|
|
6,507
|
|
|
6,977
|
Accounts and notes receivable, gross
|
|
|
36,404
|
|
|
32,651
|
Allowance for doubtful accounts and notes receivable
|
|
|
(967)
|
|
|
(1,074)
|
Current a
ccounts and notes receivable, net
|
|
$
|
35,437
|
|
$
|
31,577
|
|
|
|
|
|
|
|
Noncurrent Notes Receivable:
|
|
|
|
|
|
|
Receivables from franchisees
|
|
$
|
7,170
|
|
$
|
5,676
|
Receivables from system funds
|
|
|
5,466
|
|
|
1,571
|
Allowance for doubtful notes receivable
|
|
|
(74)
|
|
|
(31)
|
Noncurrent n
otes receivable, net
|
|
$
|
12,562
|
|
$
|
7,216
|
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business. Substantially all of the n
otes receivable from franchisees are collateralized by real estate or equipment
.
The increase in
current notes receivable from franchisees
is due to short
-
term financing for
refranchised drive-ins and
newly constructed drive-ins sold to franchisees
.
The receivables from system funds represent transactions in the normal course of business.
The increase in
noncurrent receivables from system funds
relates to the BTF established in the third quarter of fiscal year
2016
, as discussed in note 1 – Summary of Significant Accounting Policies.
4
. Goodwill and
Other Intangibles
As of
August 31, 2016
, the Company had $7
6
.
7
million of goodwill.
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
|
$
|
77,076
|
|
$
|
77,093
|
Goodwill acquired during the year
|
|
|
-
|
|
|
65
|
Goodwill disposed of related to the sale of Company Drive-Ins
|
|
|
(342)
|
|
|
(82)
|
Balance at end of year
|
|
$
|
76,734
|
|
$
|
77,076
|
The gross carrying amount
of franchise agreements, intellectual property, franchise fees and other intangibles subject to amortization was $
9
.
2
million and
$10.
4
million at
August
31,
2016
and
2015
, respectively
. Accumulated amortization related to these intangible assets
was $5.
7
million and
$5.
9
million at
August
31,
2016
and
2015
, respectively. Intangible assets amortization expense
was $0.9
million for each of the fiscal years ended August
31,
2016,
2015
and
2014. At
August
31,
2016
, the remaining weighted-average life of amortizable intangible assets was approximately 1
1
years. Estimated intangible assets amortization expense is $0.9 million annually for fiscal year
2017
and $0.3 million for fiscal years
2018,
2019
and
2020
and
$0.2 million
for fiscal year
2021
.
5
.
Refranchising of Company Drive-Ins
During fiscal
year
2016, the Company refranchised the operations of 38 Company Drive-Ins and recorded a gain of $1.
8
million
.
The Company retained a non
-
controlling operating interest in
25
of these refranchised drive-ins
.
Gains and losses are recorded as other operating income (expenses), net on the Consolidated Statements of Income. The Company
plans to
refranchise other operations as part of
its
refranchising initiative to move toward an approximately 95%-franchised system
.
6
.
Leases
Leasing Arrangements as a Lessor
The Company’s leasing
activities
consist principally of leasing certain land
and
buildings as well as subleasing certain buildings to franchise operators. The land and building portions of all leases are classified as operating leases with lease terms expiring
through
August
203
1
.
These leases include provisions for contingent rentals that may be received on the basis of a percentage of sales in excess
of stipulated amounts. Income is not recognized on contingent rentals until sales exceed the stipulated amounts. Some leases contain escalation clauses over the lives of the leases. For property owned by third parties, the lease term runs concurrently with the term of the third-party lease arrangement. Most of the leases contain renewal options at the end of the initial term for periods of
five
years.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Future minimum rental payments receivable as of
August 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
Years ended August 31:
|
|
|
|
|
|
|
2017
|
|
|
|
|
$
|
7,738
|
2018
|
|
|
|
|
|
8,339
|
2019
|
|
|
|
|
|
8,890
|
2020
|
|
|
|
|
|
9,382
|
2021
|
|
|
|
|
|
8,990
|
Thereafter
|
|
|
|
|
|
50,709
|
|
|
|
|
|
$
|
94,048
|
Leasing Arrangements as a Lessee
Certain Company Drive-Ins lease land and buildings from third parties. These leases, with lease terms expiring
through August 20
31
, include provisions for contingent rents that may be paid on the basis of a percentage of sales in excess of stipulated amounts
. For the majority of leases, the land portions are classified as operating leases, and the building portions are classified as capital leases.
Future minimum rental payments required under operating leases and maturities under capital leases that have initial or remaining noncancel
l
able lease terms in excess of one year as of
August 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Capital
|
Years ended August 31:
|
|
|
|
|
|
|
2017
|
|
$
|
10,914
|
|
$
|
5,051
|
2018
|
|
|
10,864
|
|
|
4,448
|
2019
|
|
|
10,840
|
|
|
3,596
|
2020
|
|
|
10,754
|
|
|
3,256
|
2021
|
|
|
10,030
|
|
|
3,134
|
Thereafter
|
|
|
63,733
|
|
|
7,018
|
Total minimum lease payments
(1)
|
|
$
|
117,135
|
|
|
26,503
|
Less amount representing interest averaging
6.2%
|
|
|
|
|
|
(5,439)
|
Present value of net minimum lease payments
|
|
|
|
|
|
21,064
|
Less amount due within one year
|
|
|
|
|
|
(3,673)
|
Amount due after one year
|
|
|
|
|
$
|
17,391
|
—————————
|
|
|
|
|
|
|
(1)
Minimum payments have not been reduced by future minimum rentals receivable under noncance
l
lable operating and capital subleases of
$
1
6
.
8
million and
$
0
.
6
million
, respectively. They also do
not include contingent rentals which may be due under certain leases. Contingent rentals
for capital leases
amounted to
$
0
.
9
million
, $
1.0
million and
$0.8
million
in fiscal year
s
2016,
2015
and
2014
, respectively
.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Total rent expense for all operating leases consists of the following for the years ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Minimum rentals
|
|
$
|
12,441
|
|
$
|
12,659
|
|
$
|
12,449
|
Contingent rentals
|
|
|
284
|
|
|
174
|
|
|
161
|
Total rent expense
|
|
|
12,725
|
|
|
12,833
|
|
|
12,610
|
Less sublease rentals
|
|
|
(2,372)
|
|
|
(2,235)
|
|
|
(1,905)
|
Net rent expense
|
|
$
|
10,353
|
|
$
|
10,598
|
|
$
|
10,705
|
7
.
Property, Equipment and Capital Leases
Property, equipment and capital leases consist of the following at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
Useful Life
|
|
2016
|
|
2015
|
Property, equipment and capital leases:
|
|
|
|
|
|
|
|
Land
|
|
|
$
|
154,420
|
|
$
|
157,861
|
Buildings and improvements
|
8
–
25
yrs
|
|
|
341,956
|
|
|
343,598
|
Drive-In equipment
|
5
–
7
yrs
|
|
|
132,678
|
|
|
139,494
|
Brand technology development and other equipment
|
2
–
5
yrs
|
|
|
110,364
|
|
|
92,825
|
Property and equipment, at cost
|
|
|
|
739,418
|
|
|
733,778
|
Accumulated depreciation
|
|
|
|
(352,390)
|
|
|
(330,219)
|
Property and equipment, net
|
|
|
|
387,028
|
|
|
403,559
|
|
|
|
|
|
|
|
|
Capital leases
|
Life of lease
|
|
|
43,991
|
|
|
48,079
|
Accumulated amortization
|
|
|
|
(28,857)
|
|
|
(30,232)
|
Capital leases, net
|
|
|
|
15,134
|
|
|
17,847
|
Property, equipment and capital leases, net
|
|
|
$
|
402,162
|
|
$
|
421,406
|
Depreciation expense for property and equipment was
$
4
0.4
million,
$
41.7
million and
$
3
7
.6
million for fiscal years
2016
,
2015
and
2014
, respectively. Land, buildings and equipment with a carrying amount of
$
1
56.6
million at
August 31, 2016
,
were leased under operating leases to franchisees and other parties. The accumulated depreciation related to these buildings and equipment was
$
6
2.5
million at
August 31, 2016
. Amortization expense related to capital leases is included within “
d
epreciation and amortization” on the Consolidated Statements of Income. As of
August 31, 2016
, the Company
had
11
drive
-ins under construction with costs to complete.
Interest
incurred in connection with the construction of new drive-ins and technology projects is capitalized. Capitalized interest was
$0.
6
million
,
$0.
4
million
and $
0.
5
million
for fiscal year
s
2016
, 2015 and
2014
, respectively
.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
8
. Accrued Liabilities
Accrued liabilities consist of the following at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Wages and employee benefit costs
|
|
$
|
23,416
|
|
$
|
20,501
|
Property taxes, sales and use taxes and employment taxes
|
|
|
8,936
|
|
|
9,282
|
Unredeemed gift cards
|
|
|
10,571
|
|
|
9,285
|
Other
|
|
|
8,990
|
|
|
11,646
|
|
|
$
|
51,913
|
|
$
|
50,714
|
9
.
Debt
Long-term debt consists of the following at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Class A-2 2016-1 senior secured fixed rate notes
|
|
$
|
423,938
|
|
$
|
-
|
Class A-1 2016-1 senior secured variable funding notes
|
|
|
-
|
|
|
-
|
Class A-2 2013-1 senior secured fixed rate notes
|
|
|
155,000
|
|
|
155,000
|
Class A-2 2011-1 senior secured fixed rate notes
|
|
|
-
|
|
|
272,488
|
Class A-1 2011-1 senior secured variable funding notes
|
|
|
-
|
|
|
10,500
|
Other
|
|
|
-
|
|
|
40
|
|
|
|
578,938
|
|
|
438,028
|
Less long-term debt due within one year
|
|
|
(1,417)
|
|
|
(9,790)
|
Long-term debt due after one year
|
|
$
|
577,521
|
|
$
|
428,238
|
At
August 31, 2016
, future maturities of long-term debt were
$
1
.
4
million for fiscal year
2017
,
no
maturities for fiscal year
s 2018 and 2019,
$155.0
million for fiscal year
2020 and
no
maturities for fiscal year
2021
.
During
fiscal year 2013,
in a private transaction, various subsidiaries of the Company (the “
Co-Issuers
”)
refinanced and paid
$155
.0
million of the
Series 2011 Senior Secured Fixed Rate Notes, Class A-2 (the “
2011 Fixed Rate Notes
”)
with the issuance of
$155
.0
million of Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013 Fixed Rate Notes”), which bear interest at
3.75%
per annum. The 2013 Fixed Rate Notes have an expected life of
seven
years, interest payable monthly, no scheduled principal amortization and an anticipated repayment date in
July 2020
.
On May 17, 2016,
in a private transaction,
the Co-Issuers issued
$425.0
million of Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”)
,
which bear interest at
4.47%
per annum. The 2016 Fixed Rate Notes have an expected life of
seven
years with an anticipated repayment date in
May 2023
.
The Co-Issuers also entered into a securitized financing facility of Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the 2016 Fixed Rate Notes, the “2016 Notes”)
to replace the
Series 2011-1 Senior Secured Variable Funding Notes, Class A-1 (the “2011 Variable Funding Notes”)
. Th
e 2016
revolving credit facility
provides access
to
a maximum of
$150.0
million of 2016 Variable Funding Notes and certain other credit instruments, including letters of credit. Interest on the 2016 Variable Funding Notes is based on the one-month London Interbank Offered Rate or Commercial Paper, depending on the funding source, plus
2.0%
, per annum. An annual commitment fee of
0.5%
is payable monthly on the unused portion of the 2016 Variable Funding Notes facility. The 2016 Variable Funding Notes have an expected life of
five
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
years with an anticipated repayment date in
May 2021
with
two
one
-year extension options available upon certain conditions including meeting a minimum debt service coverage ratio threshold.
Sonic used a portion of the net proceeds from the issuance of the 2016 Fixed Rate Notes to repay its existing 2011 Fixed Rate Notes
and
2011 Variable Funding Notes in full and to pay the costs associated with the securitized financing transaction, including prepayment premiums.
Loan origination costs associated with the Company’s 2016 transaction totaled
$12.
5
million and were allocated among the 2016 Notes.
Loan costs are being amortized over each note’s expected life, and the unamortized balance is categorized as “debt origination costs, net” on the Consolidated Balance Sheets.
In connection with the 2016 transaction described above, the Company recognized an $8.8 million loss from the early extinguishment of debt during the third quarter of fiscal year 2016, which primarily consisted of a
$5.9
million prepayment premium and the
$2.9
million write-off of unamortized deferred loan fees remaining from the refinanced debt.
As of August 31, 201
6
, the
weighted-average interest cost of the 2013 Fixed Rate Notes
and the 2016 Fixed Rate Notes
was
4.1%
and
4.8
%
, respectively. The weighted-average interest cost includes the effect of the loan origination costs.
While the 2013 Fixed Rate Notes
and the 2016 Fixed Rate Notes
are structured to provide for seven-year lives from their original issuance dates, they have legal final maturity dates of
July 2043
and
May 2046
, respectively.
The 2016 Variable
Funding
Notes are structured to provide for a
f
i
ve
-year life
with two one-year options available under certain conditions and with
a legal final maturity date of
May 20
4
6
.
The Company intends to repay or refinance the 201
3 Fixed Rate
Notes and the 201
6
Notes on or before the end of their expected lives. If the Company prepays the debt prior to the anticipated repayment date the Company may be required to pay a prepayment penalty under certain circumstances. In the event the
2013 Fixed Rate
Notes and the 201
6
Notes are not paid in full by the end of their expected lives, they are subject to an upward adjustment in the
annual
interest rate of at least
5%
. In addition, principal payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 201
6
Variable Funding Notes will become unavailable.
The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote, indirect subsidiaries of Sonic Corp. that hold
substantially all of Sonic's franchising assets and real estate. As of
August 31, 2016
, assets for these combined indirect subsidiaries totaled
$3
0
8.
5
million, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of
$1
6
.
0
million. The 2013 Fixed Rate Notes
and the 2016 Notes
are secured by franchise fees, royalty payments and lease payments, and the repayment of the 2013 Fixed Rate Notes
and the 2016 Notes
is expected to be made solely from the income derived from the Co-Issuer's assets. In addition, the Guarantor, a Sonic Corp. subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the 2013 Fixed Rate
Notes
and the 2016 Notes
and pledged substantially all of its assets to secure those obligations.
Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic, guarantees or is in any way liable for the obligations of the Co-Issuers under the 2013 Fixed Rate
and the 2016 Notes
. The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries, principally related to managing the assets included as collateral for the 2013 Fixed Rate Notes
and the 2016 Notes
and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.
The 2013 Fixed Rate
and the 2016 Notes
are subject to a series of covenants and restrictions customary for transactions of this type, including (i) required actions to better secure collateral upon the occurrence of certain performance-related events, (ii) application of certain disposition proceeds as note prepayments after a set time is
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
allowed for reinvestment, (iii) maintenance of specified reserve accounts, (iv) maintenance of certain debt service coverage ratios, (v) optional and mandatory prepayments upon change in control, (vi) indemnification payments for defective or ineffective collateral, and (vii) covenants relating to recordkeeping, access to information and similar matters. If certain covenants or restrictions are not met, the 201
3
Fixed Rate
Notes and the 201
6
Notes are subject to customary accelerated repayment events and events of default. Although management does not anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts outstanding could become immediately due and payable.
10
.
Fair Value of Financial Instruments
The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company has no financial liabilities that are required to be measured at fair value on a recurring basis.
The Company categorizes its assets and liabilities recorded at fair value based upon the following fair value hierarchy established by FASB:
|
·
|
|
Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
·
|
|
Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
·
|
|
Level 3 valuations use unobservable inputs for the asset or liability.
Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
|
The Company’s cash equivalents are carried at cost which approximates fair value and
totaled
$
59
.
2
million
and
$
41
.
1
million at
August 31, 2016
and
2015
, respectively.
This fair value is estimated using Level 1 methods.
At
August 31, 2016
, the fair
value of the Company’s 201
3
Fixed Rate Notes
and 201
6
Fixed Rate Notes
approximated the carrying value of
$
579
.
6
million
, including accrued interest.
The fair value of the 201
3
Fixed Rate Notes
and
201
6
Fixed Rate Notes is estimated using Level 2 inputs from market information
available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information
gathered from brokers who trade in the Company’s notes.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
1
1
. Income Taxes
The Company’s income before the provision for income taxes is classified by source as domestic income.
The components of the provision for income taxes consist of the following for the years ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
20,137
|
|
$
|
14,597
|
|
$
|
16,580
|
State
|
|
|
3,791
|
|
|
3,576
|
|
|
3,490
|
|
|
|
23,928
|
|
|
18,173
|
|
|
20,070
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,372
|
|
|
10,592
|
|
|
5,328
|
State
|
|
|
137
|
|
|
(1,528)
|
|
|
450
|
|
|
|
4,509
|
|
|
9,064
|
|
|
5,778
|
Provision for income taxes
|
|
$
|
28,437
|
|
$
|
27,237
|
|
$
|
25,848
|
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate due to the following for the fiscal years ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Amount computed by applying a tax rate of
35%
|
|
$
|
32,377
|
|
$
|
32,103
|
|
$
|
25,818
|
State income taxes (net of federal income tax benefit)
|
|
|
2,553
|
|
|
1,330
|
|
|
2,562
|
Employment related and other tax credits, net
|
|
|
(2,324)
|
|
|
(2,096)
|
|
|
(1,537)
|
Change in uncertain tax position
s
|
|
|
(3,027)
|
|
|
-
|
|
|
-
|
Federal tax benefit of statutory tax deduction
|
|
|
-
|
|
|
(4,093)
|
|
|
-
|
Other
|
|
|
(1,142)
|
|
|
(7)
|
|
|
(995)
|
Provision for income taxes
|
|
$
|
28,437
|
|
$
|
27,237
|
|
$
|
25,848
|
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Deferred tax assets and liabilities consist of the following at August 31:
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts and notes receivable
|
|
$
|
387
|
|
$
|
411
|
Leasing transactions
|
|
|
3,222
|
|
|
3,260
|
Deferred income
|
|
|
2,991
|
|
|
2,810
|
Accrued liabilities
|
|
|
6,187
|
|
|
5,630
|
Stock compensation
|
|
|
2,446
|
|
|
2,831
|
Other
|
|
|
685
|
|
|
541
|
State net operating losses
|
|
|
16,303
|
|
|
14,222
|
Total deferred tax assets
|
|
|
32,221
|
|
|
29,705
|
Valuation allowance
|
|
|
(14,638)
|
|
|
(12,041)
|
Total deferred tax assets after valuation allowance
|
|
$
|
17,583
|
|
$
|
17,664
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
(1,119)
|
|
$
|
(1,315)
|
Investment in partnerships, including differences in capitalization,
|
|
|
|
|
|
|
depreciation and direct financing leases
|
|
|
(4,125)
|
|
|
(3,711)
|
Property, equipment and capital leases
|
|
|
(31,565)
|
|
|
(31,167)
|
Intangibles and other assets
|
|
|
(21,628)
|
|
|
(20,341)
|
Debt extinguishment
|
|
|
(1,676)
|
|
|
(2,515)
|
Total deferred tax liabilities
|
|
|
(60,113)
|
|
|
(59,049)
|
Net deferred tax liabilities
|
|
$
|
(42,530)
|
|
$
|
(41,385)
|
|
|
|
|
|
|
|
Net deferred tax assets and liabilities are classified as follows:
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
$
|
2,164
|
Noncurrent
|
|
|
(42,530)
|
|
|
(43,549)
|
Total
|
|
$
|
(42,530)
|
|
$
|
(41,385)
|
State net operating loss carryforwards expire beginning in
December 201
6
through
May 203
7
. Management does not believe the Company will be able to realize the state net operating loss carryforwards utilizing future income exclusive of the reversal of existing deferred tax liabilities and therefore has provided a valuation allowance of
$1
4
.
6
million and
$1
2
.
0
million as of
August 31, 2016
and
2015
, respectively.
As of
August 31, 2016
and
2015
,
respectively,
the Company had approximately $
0
.
6
million and $
3
.
7
million of unrecognized tax benefits, including approximately
$0.
3
million and
$0.4
million of accrued interest and penalty. If recognized, these benefits would favorably impact the effective tax rate. The liability for unrecognized tax benefits
de
creased $
3
.
0
million in fiscal year
2016
.
The
de
crease
was primarily related to
the favorable resolution of a federal tax audit and a statute of limitations expiration of a federal tax position
. This entire change in balance impacted the Company’s tax rate.
The Company recognizes estimated interest and penalties as a component of its income tax expense, net of federal benefit, as a component of “
p
rovision for income taxes” in the Consolidated Statements of Income. During the year
s
ended August 31,
201
6
and
2015
, the
Company recognized a net benefit of
$0.1
million and net expense
of
$0.1
million
, respectively
,
and
negligible net expenses in
fiscal year 2014
.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
A reconciliation of unrecognized tax
benefits is as follows for fiscal years ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance at beginning of year
|
|
$
|
3,652
|
|
$
|
2,461
|
Additions based on tax positions related to the current year
|
|
|
-
|
|
|
254
|
Additions for tax positions of prior years
|
|
|
725
|
|
|
937
|
Reductions for tax positions of prior years
|
|
|
(2,838)
|
|
|
-
|
Reductions due to settlement
|
|
|
(212)
|
|
|
-
|
Reductions due to statute expiration
|
|
|
(702)
|
|
|
-
|
Balance at end of year
|
|
$
|
625
|
|
$
|
3,652
|
The Company or one of its subsidiaries is subject to U.S. federal income tax and income tax in multiple U.S. state jurisdictions. At August 31, 201
6
, the Company was subject to income tax examinations for its U.S. federal income taxes and for state and local income taxes generally after fiscal year 20
12
. The Company anticipates that the results of any examinations or appeals, combined with the expiration of applicable statutes of limitations and the additional accrual of interest related to unrecognized benefits on various return positions taken in years still open for examination, could result in a change to the liability for unrecognized tax benefits during the next 12 months ranging from
a negligible increase
t
o a decrease of
$
0
.
6
million depending on the timing and terms of the examination resolutions.
12. Stockholders’ Equity
(Deficit)
Employee Stock Purchase Plan
The Company has an employee stock purchase plan (“ESPP”) that permits eligible employees to purchase the Company’s common stock at a
15%
discount from the stock’s fair market value. Participating employees may purchase shares of common stock each year up to the lesser of
10%
of their base compensation or
$25
thousand in the stock’s fair market value. At August 31, 2016,
0.8
million shares were available for grant under the ESPP.
Stock-Based Compensation
The Sonic Corp. 2006 Long-Term Incentive Plan (the “2006 Plan”) provides flexibility to award various forms of equity compensation, such as stock options, stock appreciation rights, performance shares, RSU
s
and other share-based awards. At August 31, 2016,
7.0
million shares were available for grant under the 2006 Plan. The Company grants stock options to employees with a
seven
-year term
and a
three
-
year vesting period and
grants
RSUs to employees with a minimum vesting period of
three
years. The
Company grants stock options to its Board of Directors with a
seven
-year term and
one
-
year vesting period and also grants RSUs to its
Board of Directors that vest over
one
year. The Company’s policy is to issue shares from treasury stock to satisfy stock option exercises, the vesting of RSUs and shares issued under the ESPP.
Total stock-based compensation cost recognized for fiscal years 2016, 2015 and 2014 was $3.8 million, $3.5 million and $3.7 million, respectively, net of related income tax benefits of
$1.2
million,
$1.0
million and
$1.7
million, respectively. At August 31, 2016, the total remaining unrecognized compensation cost related to unvested stock-based arrangements was
$7.1
million and is expected to be recognized over a weighted average period of
2.0
years.
The Company measures the compensation cost associated with stock option-based payments by estimating the fair value of stock options as of the grant date using the Black-Scholes option pricing model. The Company believes the valuation technique and approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during
fiscal year
s
2016, 2015 and 2014. Estimates of fair value
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
are not intended to predict actual future events or the value ultimately realized by the employees who receive equity awards. The fair value of RSUs granted is equal to the Company’s closing stock price on the date of the grant.
The per share weighted average fair value of stock options granted during 2016, 2015 and 2014 was
$8.23
,
$8.83
and
$6.82
, respectively. In addition to the exercise and grant date prices of the awards, certain weighted average assumptions that were used to estimate the fair value of stock option grants in the respective periods are listed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Expected term (years)
|
|
5.3
|
|
|
5.0
|
|
|
4.7
|
|
Expected volatility
|
|
34
|
%
|
|
34
|
%
|
|
37
|
%
|
Risk-free interest rate
|
|
1.4
|
%
|
|
1.3
|
%
|
|
1.5
|
%
|
Expected dividend yield
|
|
1.5
|
%
|
|
1.2
|
%
|
|
-
|
%
|
The Company estimates expected volatility based on historical daily price changes of the Company’s common stock for a period equal to the current expected term of the options. The risk-free interest rate is based on the
U.S.
treasury yields in effect at the time of grant corresponding with the expected term of the options. The expected option term is the number of years the Company estimates that options will be outstanding prior to exercise considering vesting schedules and historical exercise patterns.
Stock Options
A summary of stock option activity under the Company’s stock-based compensation plans for the year ended August 31, 2016, is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (Yrs.)
|
|
|
Aggregate Intrinsic Value
|
Outstanding September 1, 2015
|
|
2,873
|
|
$
|
14.00
|
|
|
|
|
|
Granted
|
|
494
|
|
|
29.28
|
|
|
|
|
|
Exercised
|
|
(976)
|
|
|
10.49
|
|
|
|
|
|
Forfeited or expired
|
|
(57)
|
|
|
27.51
|
|
|
|
|
|
Outstanding at August 31, 2016
|
|
2,334
|
|
$
|
18.37
|
|
3.90
|
|
$
|
25,279
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at August 31, 2016
|
|
1,548
|
|
$
|
13.23
|
|
2.89
|
|
$
|
24,304
|
Proceeds from the exercise of stock options for fiscal years 2016, 2015 and 2014 were $3.8 million, $18.7 million and $17.4 million, respectively. The total intrinsic value of options exercised during the years ended August 31, 2016, 2015 and 2014 was
$18.9
million,
21.8
million and
$13.0
million, respectively.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
Restricted Stock Units
A summary of the Company’s RSU activity during the year ended August 31, 2016 is presented in the following table:
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
|
Weighted Average Grant Date Fair Value
|
Outstanding September 1, 2015
|
|
66
|
|
$
|
28.49
|
Granted
|
|
51
|
|
|
28.07
|
Vested
|
|
(13)
|
|
|
31.32
|
Forfeited
|
|
(12)
|
|
|
31.69
|
Outstanding at August 31, 2016
|
|
92
|
|
$
|
28.90
|
The aggregate fair value of RSUs that vested was
$0.4
million during the fiscal year ended August 31, 2016 and
$1.1
million during the fiscal years ended August 31, 2015 and 2014.
Share Repurchase Programs
In August 2014, the Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $
105.0
million of its outstanding shares of common stock beginning September 1, 2014 through August 31, 2015. In October 2014, the Company entered into an accelerated share repurchase (“ASR”) agreement with a financial institution to purchase
$15.0
million of the Company’s common stock. In exchange for a
$15.0
million up-front payment, the financial institution delivered approximately
0.6
million shares. During January 2015, the ASR purchase period concluded. The Company paid an additional
$0.1
million with
no
additional shares delivered, resulting in an average price per share of
$26.32
. In February 2015, the Company entered into additional ASR agreements with a financial institution to purchase
$75.0
million of the Company’s common stock. In exchange for a
$75.0
million up-front payment, the financial institution delivered approximately
2.1
million shares. The ASR transactions completed in July 2015 with
0.3
million additional shares delivered, resulting in an average price per share of
$31.38
. The Company reflected the ASR transactions as a repurchase of common stock for purposes of calculating earnings per share and as a forward contract indexed to its own common stock. The forward contract met all of the applicable criteria for equity classification. Including shares repurchased through the ASR transactions described above, during the fiscal year 2015, approximately
4.2
million shares were repurchased for a total cost of $123.8 million, resulting in an average price per share of
$29.46
.
In August 2015, the Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to
$145.0
million of its outstanding shares of common stock through August 31, 2016. The Board of Directors further extended the share repurchase program effective May 2016, authorizing the purchase of up to an additional
$155.0
million of our outstanding shares of common stock through August 31, 2017. During fiscal year 2016, approximately
5.2
million shares were repurchased for a total cost of
$148.3
million, resulting in an average price per share of
$28.48
.
The total remaining amount authorized under the share repurchase program, as of August 31, 201
6
, was
$132.9
million.
Share repurchases will be made from time to time in the open market or otherwise, including through an ASR
transaction
, under the terms of a Rule 10b5-1 plan, in privately negotiated transactions or in round lot or block transactions. The share repurchase program may be extended, modified, suspended or discontinued at any time.
We
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
plan to fund the share repurchase program from existing cash on hand at August 31, 2016, cash flows from operations and borrowings under our 2016 Variable Funding Notes.
Dividends
In August 2014, the Company initiated a quarterly cash dividend program and paid a quarterly dividend of
$0.09
per share of common stock, totaling
$18.8
million for fiscal year 2015, and paid a quarterly dividend of
$0.11
per share of common stock, totaling $21.3 million for fiscal year 2016. Subsequent to the end of fiscal year 2016, the Company declared a quarterly dividend of
$0.14
per share of common stock to be paid to stockholders of record as of the close of business on
November 9, 2016
, with a payment date of
November 18, 2016
. The future declaration of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s Board of Directors.
1
3
.
Employee Benefit and Cash Incentive Plans
The Company sponsors a qualified defined contribution 401(k) plan for employees meeting certain eligibility requirements. Under the plan, employees are entitled to make pre-tax contributions. The Company matches an amount equal to the employee’s contributions up to a maximum of
6%
of the employee’s salaries depending on years of service. The Company’s contributions during fiscal years
2016
,
2015
and
2014
were $
1.
8
million
,
$1.
6
million and
$1.
3
million, respectively.
The Company has
short-term and long-term
cash incentive plans
(the “Incentive Plans”) that apply to certain
employees
, and grants of awards under the Incentive Plans are at all times subject to the approval of the Company’s Board of Directors. Under certain awards pursuant to the Incentive Plans, if predetermined earnings goals are met, a predetermined percentage of the employee’s salary may be paid in the form of a bonus. The Company recognized as expense incentive bonuses
of $
1
3
.
4
million,
$
12.4
million and
$
9
.
5
million during fiscal years
2016
,
2015
and
2014
, respectively.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
1
4
.
Commitments and Contingencies
Litigation
The Company is involved in various legal proceedings and has certain unresolved claims pending. Based on the information currently available, management believes that all claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business, operating results or financial condition.
Note Repurchase Agreement
On December 20, 2013, the Company extended a note purchase agreement to a bank that serves to guarantee the repayment of a franchisee loan, with a term through
2018
, and also benefits the franchisee with a lower financing rate. In the event of default by the franchisee, the Company would purchase the franchisee loan from the bank, thereby becoming the note holder and providing an avenue of recourse with the franchisee. The Company recorded a liability for this guarantee which was based on the Company’s estimate of fair value. As of August 31,
2016
, the balance of the franchisee’s loan
was $
5
.
8
million.
Lease Commitments
The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees. Under these agreements, which expire through
20
29
, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of
August 31, 2016
, the amount remaining under these guaranteed lease obligations totaled
$
7
.
4
million. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore,
no
liability has been provided.
Purchase Obligations
At
August 31, 2016
, the Company had purchase obligations of
approximately $
23
5
.
8
million which primarily related to its estimated share of system-wide commitments for food products. The Company has excluded agreements that are cancelable without penalty.
Table of Contents
SONIC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2016, 2015 and 2014
(In thousands, except per share data)
1
5
.
Selected
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
Second Quarter
|
Third Quarter
|
|
Fourth Quarter
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total revenues
|
$
|
145,803
|
|
$
|
139,856
|
|
$
|
133,160
|
|
$
|
126,219
|
|
$
|
165,239
|
|
$
|
164,748
|
|
$
|
162,118
|
|
$
|
175,266
|
Income from operations
|
|
26,045
|
|
|
22,538
|
|
|
22,212
|
|
|
16,991
|
|
|
38,880
|
|
|
36,370
|
|
|
40,315
|
|
|
40,529
|
Net income
(1)
|
$
|
12,458
|
|
$
|
10,085
|
|
$
|
10,819
|
|
$
|
7,662
|
|
$
|
15,353
|
|
$
|
20,442
|
|
$
|
25,437
|
|
$
|
26,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
(2)
|
$
|
0.25
|
|
$
|
0.19
|
|
$
|
0.22
|
|
$
|
0.14
|
|
$
|
0.32
|
|
$
|
0.39
|
|
$
|
0.54
|
|
$
|
0.51
|
Diluted income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
(2)
|
$
|
0.24
|
|
$
|
0.18
|
|
$
|
0.22
|
|
$
|
0.14
|
|
$
|
0.31
|
|
$
|
0.38
|
|
$
|
0.53
|
|
$
|
0.50
|
—————————
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
)
For fiscal year 2016,
i
ncludes the after tax gain on
the
sale of real
estate of
$1.2
million
and
a tax benefit of
$0.6
million from the retroactive reinstatement of the Work Opportunity Tax Credit and resolution of income tax matters
in the second quarter
,
the
$5.7
million after tax loss from early extinguishment of debt in the third quarter
and the after tax gain on the sale of Company Drive-Ins of
$0.7
million and the FIN
48 release o
f
income tax credits and deductions of
$3.0
million in the fourth quarter
.
For fiscal year 2015, i
ncludes a tax benefit of
$0.7
million from the retroactive reinstatement of the Work
Opportunity Tax Credit and resolution of income tax matters in the second quarter
,
a federal tax benefit of
$1.7
million from the recognition of a prior-year statutory tax deduction and a tax expense of
$0.6
million from the retroactive effect of federal tax law change during the third quarter and a federal tax benefit of
$1.5
million from the recognition of a prior-year statutory tax deduction and
$1.7
million from a change in deferred tax valuation allowance during the fourth quarter.
(2)
The sum of per share data may not agree to annual amounts due to rounding.