NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of Sonic Corp. (the “Company”). In the opinion of management, these financial statements reflect all adjustments of a normal recurring nature, including recurring accruals, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. In certain situations, recurring accruals, including franchise royalties, are based on more limited information at interim reporting dates than at the Company’s fiscal year end due to the abbreviated reporting period. Actual results may differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended
August 31, 2016
, included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for a full year or any other interim period.
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.
Reclassifications
Certain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current-year presentation.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, the FASB has issued clarifying guidance with ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." ASU No. 2016-08 provides guidance for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. ASU No. 2016-10 clarifies 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. ASU No. 2016-20 provides corrections or improvements to issues that affect narrow aspects of the guidance.
The Company plans to adopt the standards in the first quarter of fiscal year 2019, which aligns with the required adoption date. The standards are to be applied retrospectively or using a cumulative effect transition method. The Company does not believe the new revenue recognition standard will impact the recognition of sales from Company Drive-Ins or the recognition of royalty fees from franchisees, nor will it have a material impact to the recognition of gift card breakage. The Company expects the pronouncement will impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a Franchise Drive-In. The impact on these fees has not yet been estimated, and no transition method has been selected. The Company continues to evaluate the effect that this pronouncement will have on other transactions, the financial statements and related disclosures.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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 year 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 the 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 – Extinguishment 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 year 2019; however, early adoption is permitted. The adoption of the update will not have an impact on the Company’s financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses.” The update was issued to provide more decision-useful information about the expected credit losses on financial 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 year 2021, 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 year 2019. 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 of this update but does not believe it will have a material impact on its financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory," as part of its simplification initiatives. The update requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than deferring the recognition until the asset has been sold to an outside party as is required under current GAAP. The update is effective for fiscal year 2019. The new standard will require adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings, and early adoption is permitted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." The update requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for fiscal year 2019. The amendments should be adopted on a retrospective basis to each period presented, and early adoption is permitted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment." To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to adopt this standard in fiscal year 2017. The adoption of this standard will have no impact on the Company's consolidated financial statements.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The update is effective for fiscal year 2019. The update is to be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its financial statements and related disclosures.
The Company has reviewed all other recently issued accounting pronouncements and concluded they are not applicable or not expected to be significant to our operations.
Recently Adopted Accounting Pronouncements
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. In August 2015, the FASB issued ASU No. 2015-15, which addresses the SEC’s comments related to the absence of authoritative guidance within ASU No. 2015-03 related to line-of-credit arrangements. The SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2017, which resulted in a reclassification of unamortized debt issuance costs of
$11.3 million
related to the Company's fixed rate notes from non-current assets to long-term debt, net, within the Company's consolidated balance sheet, resulting in a corresponding reduction in total assets and total long-term liabilities as of August 31, 2016. Other than this reclassification, the adoption of this ASU did not have any other impact on the Company's consolidated financial statements. As of
May 31, 2017
, there was
$9.9 million
of unamortized debt issuance costs related to the Company's fixed rate notes included within long-term debt, net, on the Company's condensed consolidated balance sheet.
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 Company adopted this standard in the first quarter of fiscal year 2017 on a prospective basis. The adoption did not have a material impact on the Company’s consolidated financial statements.
During the first quarter of fiscal 2017, the Company early adopted 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. As required by the update, on a prospective basis, the Company recognized excess tax benefits related to share-based payments in the provision for income taxes in the condensed consolidated statements of income. These items were historically recorded in additional paid-in capital. As allowed by the update, on a prospective basis, cash flows related to excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in the Company's condensed consolidated statements of cash flows. These prospective changes did not have a material impact on the Company's financial statements for the first half of fiscal year 2017. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be classified as a financing activity. The stock compensation expense continues to reflect estimated forfeitures.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31,
|
|
Nine months ended
May 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,751
|
|
|
$
|
15,353
|
|
|
$
|
42,832
|
|
|
$
|
38,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding– basic
|
|
42,402
|
|
|
48,377
|
|
|
43,972
|
|
|
49,192
|
|
Effect of dilutive employee stock options and unvested restricted stock units
|
|
691
|
|
|
949
|
|
|
757
|
|
|
1,021
|
|
Weighted average common shares outstanding – diluted
|
|
43,093
|
|
|
49,326
|
|
|
44,729
|
|
|
50,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share – basic
|
|
$
|
0.44
|
|
|
$
|
0.32
|
|
|
$
|
0.97
|
|
|
$
|
0.79
|
|
Net income per common share – diluted
|
|
$
|
0.44
|
|
|
$
|
0.31
|
|
|
$
|
0.96
|
|
|
$
|
0.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive securities excluded
(1)
|
|
1,362
|
|
|
686
|
|
|
1,095
|
|
|
550
|
|
__________________
|
|
(1)
|
Anti-dilutive securities consist of stock options and unvested restricted stock units 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.
|
Share Repurchase Program
|
In August 2015, the Company’s 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
.
In October 2016, the Company's Board of Directors increased the authorization under the share repurchase program by
$40.0 million
. During the first
nine
months of fiscal year
2017
, approximately
4.9 million
shares were repurchased for a total cost of
$127.7 million
, resulting in an average price per share of
$25.95
. The total remaining amount authorized under the share repurchase program as of
May 31, 2017
was
$45.2 million
.
Share repurchases may be made from time to time in the open market or otherwise, including through an accelerated share repurchase program, under 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.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
The following table presents the Company’s provision for income taxes and effective income tax rate for the periods below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31,
|
|
Nine months ended
May 31,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Provision for income taxes
|
|
$
|
9,663
|
|
|
$
|
8,122
|
|
|
$
|
21,601
|
|
|
$
|
20,618
|
|
Effective income tax rate
|
|
34.0
|
%
|
|
34.6
|
%
|
|
33.5
|
%
|
|
34.8
|
%
|
The effective income tax rate during the third quarter of fiscal year 2017 was comparable to the same period in the prior fiscal year. The lower effective income tax rate for the first
nine
months of fiscal year 2017 was due primarily to the recognition of excess tax benefits related to stock option exercises due to the early adoption of ASU No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” in the first quarter of 2017. Excess tax benefits recognized as a component of the provision for income taxes in the condensed consolidated statements of income were negligible in the first quarter of fiscal year 2017 and
$0.7 million
and
$0.1 million
in the second and third quarters of fiscal year 2017, respectively. Please refer to the "Recently Adopted Accounting Pronouncements" section of note 1 - Summary of Significant Accounting Policies for details regarding the adoption of this standard. The decrease in tax rate for the first nine months of fiscal year 2017 was partially offset by the favorable impact of the retroactive reinstatement of the Work Opportunity Tax Credit in the second quarter of fiscal year 2016.
|
|
5.
|
Accounts and Notes Receivable
|
Accounts and notes receivable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
August 31,
2016
|
Current Accounts and Notes Receivable:
|
|
|
|
|
Royalties and other trade receivables
|
|
$
|
21,301
|
|
|
$
|
19,994
|
|
Notes receivable from franchisees
|
|
985
|
|
|
5,531
|
|
Receivables from system funds
|
|
2,458
|
|
|
4,372
|
|
Other
|
|
16,712
|
|
|
6,507
|
|
Accounts and notes receivable, gross
|
|
41,456
|
|
|
36,404
|
|
Allowance for doubtful accounts and notes receivable
|
|
(1,095
|
)
|
|
(967
|
)
|
Current accounts and notes receivable, net
|
|
$
|
40,361
|
|
|
$
|
35,437
|
|
|
|
|
|
|
|
|
Noncurrent Notes Receivable:
|
|
|
|
|
|
|
Receivables from franchisees
|
|
$
|
6,884
|
|
|
$
|
7,170
|
|
Receivables from system funds
|
|
3,233
|
|
|
5,466
|
|
Allowance for doubtful notes receivable
|
|
(40
|
)
|
|
(74
|
)
|
Noncurrent notes receivable, net
|
|
$
|
10,077
|
|
|
$
|
12,562
|
|
The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment. The receivables from system funds represent transactions in the normal course of business. The decrease in current notes receivable from franchisees is due to short-term financing for refranchised drive-ins and newly constructed drive-ins sold to franchisees that were established in fiscal year 2016 and were repaid in the first and third quarters of fiscal year 2017. Of the increase in other current accounts and notes receivable,
$7.0 million
is due to a franchisee exercise of an option to purchase real estate, which was collected immediately following the third fiscal quarter. The decrease in noncurrent receivables from system funds is due to payment on notes extended in fiscal year 2016 related to the establishment of the Brand Technology Fund.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
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.
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
. 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
May 31, 2017
, the balance of the franchisee’s loan was
$5.6 million
.
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
2029
, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of
May 31, 2017
, the amount remaining under these guaranteed lease obligations totaled
$6.8 million
. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore,
zero
liability has been provided.
|
|
7.
|
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 on the following fair value hierarchy established by the 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, some of which are included in restricted cash, are carried at cost which approximates fair value and totaled
$58.0 million
at
May 31, 2017
and
$59.2 million
at
August 31, 2016
. This fair value is estimated using Level 1 inputs.
At
May 31, 2017
and
August 31, 2016
, the fair value of the Company’s Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”) and Series 2013-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2013 Fixed Rate Notes” and, together with the 2016 Fixed Rate Notes, the “Fixed Rate Notes”) approximated the carrying value, including accrued interest, of
$578.2 million
and
$579.6 million
, respectively. At
May 31, 2017
the fair value of the Company's Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the Fixed Rate Notes, the “Notes”) approximated the carrying value of
$34.1 million
, including accrued interest. At
August 31, 2016
the 2016 Variable Funding Notes had
no
balance. The fair value of the 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.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
|
|
8.
|
Other Operating Income
|
During the first quarter of fiscal year 2017, the Company recorded a gain of
$3.8 million
on the sale of minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. The gain is reflected in other operating income, net, on the condensed consolidated statement of income.
|
|
9.
|
Refranchising Initiative
|
Refranchising Transactions
In June 2016, the Company announced plans to refranchise Company Drive-Ins as part of a refranchising initiative to move toward an approximately
95%
-franchised system. During fiscal year 2016, the Company refranchised the operations of
38
Company Drive-Ins. Of the Company Drive-Ins refranchised in fiscal year 2016,
29
were completed as part of the refranchising initiative announced in June 2016. The Company retained a non-controlling minority investment in the franchise operations of
25
of these refranchised drive-ins.
During the first half of fiscal year
2017
, the Company completed transactions to refranchise the operations of
110
Company Drive-Ins and
retained a non-controlling minority investment in
106
of these refranchised drive-ins. The Company completed the refranchising initiative in the second quarter of fiscal year 2017. All subsequent sales of Company Drive-Ins are considered sales in the normal course of business.
Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below associated with refranchised drive-ins are recorded in other operating income, net, on the condensed consolidated statement of income. The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins):
|
|
|
|
|
|
|
|
|
|
Three months ended
May 31, 2017
|
|
Nine months ended
May 31, 2017
|
Number of refranchised Company Drive-Ins
|
—
|
|
|
110
|
|
|
|
|
|
Proceeds from sales of Company Drive-Ins
|
$
|
—
|
|
|
$
|
20,036
|
|
Proceeds from sale of real estate
(1)
|
4,749
|
|
|
4,749
|
|
Proceeds receivable from sale of real estate
(1)
|
6,977
|
|
|
6,977
|
|
|
|
|
|
Real estate assets sold
(1)
|
(12,095
|
)
|
|
(12,095
|
)
|
Assets sold, net of retained minority investment
(2)
|
847
|
|
|
(7,891
|
)
|
Initial and subsequent lease payments for real estate option
(1)
|
195
|
|
|
(3,201
|
)
|
Goodwill related to sales of Company Drive-Ins
|
—
|
|
|
(966
|
)
|
Deferred gain for real estate option
(3)
|
141
|
|
|
(899
|
)
|
Gain (loss) on assets held for sale
|
—
|
|
|
(65
|
)
|
Refranchising initiative gains (losses), net
|
$
|
814
|
|
|
$
|
6,645
|
|
_______________
|
|
(1)
|
During the first quarter of fiscal year 2017, as part of a
53
drive-in refranchising transaction, the Company entered into a direct financing lease which included an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, because the exercise of this option could occur at any time within 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option was applied as the initial minimum lease payment for the real estate. The franchisee initiated exercise of a portion of the option during the third fiscal quarter, resulting in a loss of
$0.4 million
. A portion of the proceeds were received subsequent to the end of the quarter. Until the option is fully exercised, the franchisee is making monthly lease payments which totaled
$0.2 million
for the third fiscal quarter, net of sub-lease expense, and is included in other operating income.
|
|
|
(2)
|
Net assets sold consisted primarily of equipment. During the third quarter of fiscal year 2017, the Company made an adjustment to retained minority investment.
|
|
|
(3)
|
The deferred gain of
$0.9 million
is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable.
|
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
Refranchising Initiative
Fiscal Year 2016
|
Number of refranchised Company Drive-Ins
(1)
|
29
|
|
|
|
Proceeds from sales of Company Drive-Ins
|
$
|
3,568
|
|
|
|
Assets sold, net of retained minority investment
(2)
|
(2,402
|
)
|
Goodwill related to sales of Company Drive-Ins
|
(194
|
)
|
Refranchising initiative gains (losses), net
|
$
|
972
|
|
_______________
|
|
(1)
|
Company Drive-Ins refranchised as part of the refranchising initiative announced in June 2016.
|
|
|
(2)
|
Net assets sold consisted primarily of equipment.
|
Direct Financing Leases
As part of the refranchising initiative, the Company entered into direct franchising leases in fiscal year 2016 and the first half of fiscal year 2017. Components of net investment in direct financing leases as of
May 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
2017
|
|
August 31,
2016
|
Minimum lease payments receivable
|
|
$
|
18,043
|
|
|
$
|
15,108
|
|
Less unearned income
|
|
(6,115
|
)
|
|
(5,134
|
)
|
Net investment in direct financing lease
|
|
11,928
|
|
|
9,974
|
|
Less amount due within one year
|
|
(317
|
)
|
|
(115
|
)
|
Amount due after one year
|
|
$
|
11,611
|
|
|
$
|
9,859
|
|
Future minimum rental payments receivable as of
May 31, 2017
are as follows:
|
|
|
|
|
|
|
|
Direct Financing Lease
|
Years ended August 31:
|
|
|
2017
|
|
$
|
257
|
|
2018
|
|
1,048
|
|
2019
|
|
1,117
|
|
2020
|
|
1,230
|
|
2021
|
|
1,326
|
|
Thereafter
|
|
13,065
|
|
|
|
18,043
|
|
Less unearned income
|
|
(6,115
|
)
|
|
|
$
|
11,928
|
|
Initial direct costs incurred in the negotiation and consummation of direct financing lease transactions have not been material. Accordingly, no portion of unearned income has been recognized to offset those costs.
SONIC CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
(Unaudited)
Assets Held for Sale
Assets held for sale as of May 31, 2017 totaled
$7.5 million
and consist of real estate that is expected to sell within one year as part of the real estate options extended to franchisees in connection with the Company’s refranchising initiatives. Such assets are classified as assets held for sale upon meeting the requirements of ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets” and are included in prepaid and other current assets on the Company's condensed consolidated balance sheet. These assets are recorded at the lower of the carrying amounts or fair values less costs to sell. Assets held for sale totaled
$5.3 million
at August 31, 2016 and consisted of Company Drive-In operations included in the refranchising initiative.