28, 2017
Delaware |
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(State or other jurisdiction of incorporation or organization) | 73-1371046 (I.R.S.Employer Identification No.) | |||
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300 Johnny Bench Drive |
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Oklahoma City, Oklahoma (Address ofprincipalexecutiveoffices) | 73104 (Zip Code) | |
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Large accelerated filer ☒ | Accelerated filer ☐ | |
Non-accelerated filer ☐ (Do | Smaller reporting company ☐ |
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SONIC CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) February 29, August 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $ $ Restricted cash Accounts and notes receivable, net Income taxes receivable Prepaid expenses and other current assets Total current assets Noncurrent restricted cash Notes receivable, net Property, equipment and capital leases Less accumulated depreciation and amortization Property, equipment and capital leases, net Goodwill Other assets, net Total assets $ $ LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ $ Franchisee deposits Accrued liabilities Income taxes payable - Current maturities of long-term debt and capital leases Total current liabilities Obligations under capital leases due after one year Long-term debt due after one year Deferred income taxes Other non-current liabilities Total non-current liabilities Stockholders’ equity (deficit): Preferred stock, par value $.01; 1,000 shares authorized; none outstanding - - Common stock, par value $.01; 245,000 shares authorized; 118,309 shares issued (118,309 shares issued at August 31, 2015) Paid-in capital Retained earnings Treasury stock, at cost; 69,445 shares (67,249 shares at August 31, 2015) Total stockholders’ equity (deficit) Total liabilities and stockholders’ equity (deficit) $ $ SONIC CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited) Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Revenues: Company Drive-In sales $ $ $ $ Franchise Drive-Ins: Franchise royalties and fees Lease revenue Other Total revenues Costs and expenses: Company Drive-Ins: Food and packaging Payroll and other employee benefits Other operating expenses, exclusive of depreciation and amortization included below Total cost of Company Drive-In sales Selling, general and administrative Depreciation and amortization Other operating (income) expense, net Total costs and expenses Income from operations Interest expense Interest income Net interest expense Income before income taxes Provision for income taxes Net income $ $ $ $ Basic income per share $ $ $ $ Diluted income per share $ $ $ $ Cash dividends declared per common share $ $ $ $ SONIC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Six months ended February 29, February 28, 2016 2015 Cash flows from operating activities: Net income $ $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Stock-based compensation expense Other Decrease in operating assets: Restricted cash Accounts receivable and other assets Increase (decrease) in operating liabilities: Accounts payable Accrued and other liabilities Income taxes Total adjustments Net cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Proceeds from sale of assets Other Net cash used in investing activities Cash flows from financing activities: Payments on debt Proceeds from borrowings Purchases of treasury stock Proceeds from exercise of stock options Payment of dividends Other Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period $ $ Supplemental cash flow information Cash paid during the year for: Income taxes (net of refunds) $ $ Non-cash investing and financing activities: Change in obligation to acquire treasury stock $ $ applicable or not expected to be significant to our operations. As of February 28, 2017, there was $10.4 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. to shares withheld for tax purposes continues to be classified as a financing activity. The stock compensation expense continues to reflect estimated forfeitures. Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Numerator: Net income $ $ $ $ Denominator: Weighted average common shares Effect of dilutive employee stock options and unvested restricted stock units Weighted average common shares Net income per common share – basic $ $ $ $ Net income per common share – diluted $ $ $ $ Anti-dilutive securities excluded(1) ————————— Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Provision for income taxes $ $ $ $ Effective income tax rate % % % % year 2016 related to the establishment of the Brand Technology Fund. 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. the third quarter of fiscal year 2016. Three months ended Three months ended February 29, 2016 February 28, 2015 Net Diluted Net Diluted Income EPS Income EPS Reported – GAAP $ $ $ $ After-tax gain on sale of real estate - - Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters Adjusted - Non-GAAP $ $ $ $ Six months ended Six months ended February 29, 2016 February 28, 2015 Net Diluted Net Diluted Income EPS Income EPS Reported – GAAP $ $ $ $ After-tax gain on sale of real estate - - Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters Adjusted - Non-GAAP $ $ $ $ System-wide Performance ($ in thousands) Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Increase in total sales % % % % System-wide drive-ins in operation(1): Total at beginning of period Opened Closed (net of re-openings) Total at end of period Average sales per drive-in $ $ $ $ Change in same-store sales(2) % % % % ————————— Revenues ($ in thousands) Three months ended Percent February 29, February 28, Increase Increase 2016 2015 (Decrease) (Decrease) Revenues Company Drive-In sales $ $ $ % Franchise Drive-Ins: Franchise royalties Franchise fees Lease revenue Other Total revenues $ $ $ % Six months ended Percent February 29, February 28, Increase Increase 2016 2015 (Decrease) (Decrease) Revenues Company Drive-In sales $ $ $ % Franchise Drive-Ins: Franchise royalties Franchise fees Lease revenue Other Total revenues $ $ $ % Company Drive-In Sales ($ in thousands) Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Company Drive-In sales $ $ $ $ Percentage increase % % % % Company Drive-Ins in operation(1): Total at beginning of period Opened - - - Acquired from (sold to) franchisees Closed (net of re-openings) - - Total at end of period Average sales per Company Drive-In $ $ $ $ Change in same-store sales(2) % % % % ————————— Franchise Information ($ in thousands) Three months ended Six months ended February 29, February 28, February 29, February 28, 2016 2015 2016 2015 Franchise Drive-In sales $ $ $ $ Percentage increase % % % % Franchise Drive-Ins in operation(1): Total at beginning of period Opened Acquired from (sold to) the company Closed (net of re-openings) Total at end of period Average sales per Franchise Drive-In $ $ $ $ Change in same-store sales(2) % % % % Franchising revenues(3) $ $ $ $ Percentage increase % % % % Effective royalty rate(4) % % % % ————————— Company Drive-In Margins Three months ended February 29, February 28, Percentage Points 2016 2015 Increase (Decrease) Costs and expenses: Company Drive-Ins: Food and packaging % % (0.5) Payroll and other employee benefits 0.4 Other operating expenses (0.5) Cost of Company Drive-In sales % % (0.6) Six months ended February 29, February 28, Percentage Points 2016 2015 Increase (Decrease) Costs and expenses: Company Drive-Ins: Food and packaging % % (0.6) Payroll and other employee benefits 0.1 Other operating expenses (0.5) Cost of Company Drive-In sales % % (1.0) payments. $24.1 million. $97.5 million, resulting in an average price per share of $26.21. Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14 under the Securities Exchange Act of 1934). Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level. Total Number of Shares Maximum Dollar Purchased as Value that May Total Average Part of Publicly Yet Be Number of Price Announced Purchased Shares Paid per Plans or Under the Period Purchased Share Programs Program(1) December 1, 2015 through December 31, 2015 $ $ January 1, 2016 through January 31, 2016 February 1, 2016 through February 29, 2016 Total ————— 31.02 Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14 32.01 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 32.02 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document 31.02 Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14 32.01 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 32.02 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF XBRL Taxonomy Extension Definition Linkbase Document 101.LAB XBRL Taxonomy Extension Label Linkbase Document 101.PRE XBRL Taxonomy Extension Presentation Linkbase DocumentSONIC CORP.36,106 27,191 8,551 13,246 29,970 31,577 1,930 1,741 8,467 11,683 85,024 85,438 6,465 6,524 6,701 7,216 788,067 781,857 (376,841) (360,451) 411,226 421,406 76,937 77,076 20,394 22,364 606,747 620,024 15,337 13,860 729 870 40,034 50,714 8,910 13,384 13,467 69,484 87,821 19,493 20,763 484,863 428,238 41,806 43,549 24,321 22,220 570,483 514,770 1,183 1,183 234,489 232,550 864,126 851,715 (1,133,018) (1,068,015) (33,220) 17,433 606,747 620,024 February 28,
2017 August 31,
2016ASSETS Current assets: Cash and cash equivalents $ 33,890 $ 72,092 Restricted cash 8,397 15,873 Accounts and notes receivable, net 28,064 35,437 Current investment in direct financing lease 16,001 115 Prepaid expenses and other current assets 8,488 14,140 Total current assets 94,840 137,657 Noncurrent restricted cash 124 140 Investment in direct financing lease 11,687 9,859 Notes receivable, net 10,236 12,562 Property, equipment and capital leases 701,609 766,522 Less accumulated depreciation and amortization (342,490 ) (374,142 ) Property, equipment and capital leases, net 359,119 392,380 Goodwill 75,763 76,734 Debt origination costs, net 2,767 3,093 Other assets, net 17,128 16,236 Total assets $ 571,664 $ 648,661 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 12,896 $ 14,372 Franchisee deposits 850 720 Accrued liabilities 39,109 51,913 Income taxes payable — 2,568 Current maturities of long-term debt and capital leases 3,826 5,090 Total current liabilities 56,681 74,663 Obligations under capital leases due after one year 16,270 17,391 Long-term debt, net 593,147 566,187 Deferred income taxes 42,500 42,530 Other non-current liabilities 20,757 23,533 Total non-current liabilities 672,674 649,641 Stockholders’ deficit: Preferred stock, par value $.01; 1,000 shares authorized; none outstanding — — Common stock, par value $.01; 245,000 shares authorized; 118,309 shares issued (118,309 shares issued at August 31, 2016) 1,183 1,183 Paid-in capital 235,230 234,956 Retained earnings 906,065 894,442 Treasury stock, at cost; 75,182 shares (71,670 shares at August 31, 2016) (1,300,169 ) (1,206,224 ) Total stockholders’ deficit (157,691 ) (75,643 ) Total liabilities and stockholders’ deficit $ 571,664 $ 648,661 95,313 92,309 199,196 192,447 36,047 32,407 75,969 70,671 1,399 979 2,991 2,044 401 524 807 913 133,160 126,219 278,963 266,075 26,213 25,828 55,159 54,401 35,359 33,880 71,723 69,151 20,100 19,924 43,008 42,529 81,672 79,632 169,890 166,081 20,785 18,138 41,725 36,926 11,057 11,539 22,056 23,199 (2,566) (81) (2,965) 340 110,948 109,228 230,706 226,546 22,212 16,991 48,257 39,529 6,467 6,318 12,689 12,599 (105) (97) (205) (199) 6,362 6,221 12,484 12,400 15,850 10,770 35,773 27,129 5,031 3,108 12,496 9,382 10,819 7,662 23,277 17,747 0.22 0.14 0.47 0.33 0.22 0.14 0.46 0.32 0.11 0.09 0.22 0.18 Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Revenues: Company Drive-In sales $ 64,286 $ 95,313 $ 151,438 $ 199,196 Franchise Drive-Ins: Franchise royalties and fees 34,328 36,047 74,467 75,969 Lease revenue 1,675 1,399 3,056 2,991 Other (131 ) 401 748 807 Total revenues 100,158 133,160 229,709 278,963 Costs and expenses: Company Drive-Ins: Food and packaging 17,616 26,213 41,732 55,159 Payroll and other employee benefits 25,332 35,359 57,098 71,723 Other operating expenses, exclusive of depreciation and amortization included below 14,278 20,100 33,704 43,008 Total cost of Company Drive-In sales 57,226 81,672 132,534 169,890 Selling, general and administrative 18,296 20,785 38,050 41,725 Depreciation and amortization 9,734 11,057 20,011 22,056 Other operating income, net (7,725 ) (2,566 ) (10,565 ) (2,965 ) Total costs and expenses 77,531 110,948 180,030 230,706 Income from operations 22,627 22,212 49,679 48,257 Interest expense 7,227 6,467 14,416 12,689 Interest income (262 ) (105 ) (756 ) (205 ) Net interest expense 6,965 6,362 13,660 12,484 Income before income taxes 15,662 15,850 36,019 35,773 Provision for income taxes 4,699 5,031 11,938 12,496 Net income $ 10,963 $ 10,819 $ 24,081 $ 23,277 Basic income per share $ 0.25 $ 0.22 $ 0.54 $ 0.47 Diluted income per share $ 0.25 $ 0.22 $ 0.53 $ 0.46 Cash dividends declared per common share $ 0.14 $ 0.11 $ 0.28 $ 0.22 23,277 17,747 22,056 23,199 1,919 1,785 (3,408) (775) 4,787 5,884 2,514 7,776 1,464 (411) (9,932) (4,748) (3,919) 6,326 15,481 39,036 38,758 56,783 (17,808) (23,351) 9,490 2,332 3,201 3,088 (5,117) (17,931) (59,397) (4,895) 116,000 48,500 (74,326) (95,597) 3,754 14,323 (10,852) (9,469) 95 (176) (24,726) (47,314) 8,915 (8,462) 27,191 35,694 36,106 27,232 14,645 1,708 (2,632) (259) Six months ended February 28, 2017 February 29, 2016 Cash flows from operating activities: Net income $ 24,081 $ 23,277 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,011 22,056 Stock-based compensation expense 1,802 1,919 Other (9,972 ) (3,408 ) (Increase) decrease in operating assets: Restricted cash 7,159 4,787 Accounts receivable and other assets 4,621 2,514 Increase (decrease) in operating liabilities: Accounts payable (941 ) 1,464 Accrued and other liabilities (15,605 ) (9,932 ) Income taxes (3,581 ) (3,919 ) Total adjustments 3,494 15,481 Net cash provided by operating activities 27,575 38,758 Cash flows from investing activities: (27,772 ) (17,808 ) Proceeds from sale of assets 27,073 9,490 Proceeds from sale of investment in refranchised drive-in operations 8,354 — Other 11,579 3,201 Net cash provided by (used in) investing activities 19,234 (5,117 ) Cash flows from financing activities: Payments on debt (4,416 ) (59,397 ) Proceeds from borrowings 29,000 116,000 Purchases of treasury stock (97,318 ) (74,326 ) Proceeds from exercise of stock options 1,792 3,754 Payment of dividends (12,431 ) (10,852 ) Other (1,638 ) 95 Net cash used in financing activities (85,011 ) (24,726 ) Net increase (decrease) in cash and cash equivalents (38,202 ) 8,915 Cash and cash equivalents at beginning of period 72,092 27,191 Cash and cash equivalents at end of period $ 33,890 $ 36,106 Supplemental cash flow information Cash paid during the period for: Interest $ 13,410 $ 11,831 Income taxes (net of refunds) 15,857 14,645 Non-cash investing and financing activities: Additions to direct financing leases from property, equipment and capital leases $ 21,652 $ — Net additions to capital lease obligations 1,433 645 Change in obligation to acquire treasury stock 215 (2,632 ) 61.BasisofPresentation1. Commission.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, 2015,2016, 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. The second fiscal quarter is typically the most volatile for the Companycompany due to seasonality and weather.entitiesan entity to recognize revenue in an amount that reflects the way itconsideration 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. This pronouncementFurther, 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 effective for fiscal years beginning afterinvolved 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. In December 15, 2017, including interim periods within2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers," which provides corrections or improvements to issues that reporting period, which requiresaffect narrow aspects of the guidance issued in ASU No. 2014-09.2019. Early application in fiscal year 2018 is permitted.2019, which aligns with the required adoption date. The update permits the use of either the retrospectivestandards 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 the recognition of sales from Company Drive-Ins or the recognition of royalty fees from franchisees. 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 is currently evaluating the effect that this pronouncement will have on the recognition of other transactions, the financial statements and related disclosures.disclosuresdisclosures.yet selected a transition method. pronouncementupdate 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 2015-15, which addresses the SEC’s comments related to the absence of authoritative guidance within ASU 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 creditline-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 these standards isthis ASU did not expected to have a materialany other impact on the Company’sCompany's consolidated financial statements.guidanceupdate 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 is currently evaluating the effect that this pronouncement will have on its financial statements and related disclosures.7SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)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 2016.2017 on a prospective basis. The adoption did not have a material impact on the Company’s current deferredconsolidated financial statements.asset balancebenefits, an accounting policy election for forfeitures, statutory tax withholding requirements and classification in the statements of $2.2 million wascash 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 noncurrent and netted with noncurrent deferred tax liabilities asan operating activity in the Company's condensed consolidated statements of November 30, 2015, and all future deferred tax asset balances will be recorded as such. No prior periods were retrospectively adjusted. In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new guidance requires lessees to recognize the assets and liabilities arising from leasescash flows. These prospective changes did not have a material impact on the balance sheet. Accounting guidance for lessors is largely unchanged. The amendment is effective for fiscal years beginning after December 15, 2018 with early application permitted. The Company is currently evaluating the effect that this pronouncement will have on itsCompany's financial statements andfor the first half of fiscal year 2017. Cash paid on employees’ behalf related disclosures.2.Earnings Per Share2. Earnings Per Share 10,819 7,662 23,277 17,747
outstanding– basic48,977 53,171 49,599 53,226 1,011 1,489 1,057 1,518
outstanding – diluted49,988 54,660 50,656 54,744 0.22 0.14 0.47 0.33 0.22 0.14 0.46 0.32 552 173 482 313 (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 Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Numerator: Net income $ 10,963 $ 10,819 $ 24,081 $ 23,277 Denominator: Weighted average common shares outstanding– basic 43,794 48,977 44,757 49,599 Effect of dilutive employee stock options and unvested restricted stock units 756 1,011 790 1,057 Weighted average common shares outstanding – diluted 44,550 49,988 45,547 50,656 Net income per common share – basic $ 0.25 $ 0.22 $ 0.54 $ 0.47 Net income per common share – diluted $ 0.25 $ 0.22 $ 0.53 $ 0.46 1,100 552 961 482 (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 $145$145.0 million of its outstanding shares of common stock to be repurchased 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 $28.48.8During the first six months of fiscal year 2016, approximately 2.7 million shares were repurchased for a total cost of $71.7 million, resulting in an average price per share of $26.81. The total remaining amount authorized under the share repurchase program as of February 29, 2016 was $54.6 million.4.Income Taxes4. Income Taxes 5,031 3,108 12,496 9,382 31.7 28.9 34.9 34.6 Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Provision for income taxes $ 4,699 $ 5,031 $ 11,938 $ 12,496 Effective income tax rate 30.0 % 31.7 % 33.1 % 34.9 % forduring the second quarter of fiscal 2016year 2017 and fiscal 2015 reflect tax credits, primarily the Work Opportunity Tax Credit (“WOTC”), that were retroactively extended in calendar years 2014 and 2015. The tax credit amounts are fixed amounts, and as a result impact the effective tax rate for the quarters. Thefirst six months of fiscal year 2017 was due primarily to the recognition of excess tax credit amountsbenefits 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 in the condensed consolidated statements of income were negligible in the first quarter of fiscal year 2017 and $0.7 million in the second quarter of fiscal year 2016 were less than2017 as a component of the same period in the prior year, resultingprovision for income taxes. The early adoption of ASU No. 2016-09 resulted in a higherfavorable effective tax rate forimpact of 4.7% in the second quarter of fiscal year 2017. Please refer to "Recently Adopted Accounting Pronouncements" section of note 1 - Summary of Significant Accounting Policies for details regarding the adoption of this standard. This decrease 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 February 28,
2017 August 31,
2016Current Accounts and Notes Receivable: Royalties and other trade receivables $ 15,749 $ 19,994 Notes receivable from franchisees 2,717 5,531 Receivables from system funds 2,458 4,372 Other 8,241 6,507 Accounts and notes receivable, gross 29,165 36,404 Allowance for doubtful accounts and notes receivable (1,101 ) (967 ) Current accounts and notes receivable, net $ 28,064 $ 35,437 Noncurrent Notes Receivable: Receivables from franchisees $ 6,984 $ 7,170 Receivables from system funds 3,305 5,466 Allowance for doubtful notes receivable (53 ) (74 ) Noncurrent notes receivable, net $ 10,236 $ 12,562 comparedand were repaid in the first quarter of fiscal year 2017. The increase in other current accounts and notes receivable is due to the same period fortiming of various receipts and disbursements. The decrease in noncurrent receivables from system funds is due to payment on notes extended in fiscal 2015. 5.Contingencies6. Contingencies 29, 2016,28, 2017, the balance of the franchisee’s loan was $5.9$5.7 million.29, 2016,28, 2017, the amount remaining under these guaranteed lease obligations totaled $8.5$6.8 million. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, nozero liability has been provided.7. Fair Value of Financial Instruments SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)6.Fair Value of Financial Instrumentsuponon the following fair value hierarchy established by the FASB:•••$43.6$27.3 million at February 29, 201628, 2017 and $41.1$59.2 million at August 31, 2015.2016. This fair value is estimated using Level 1 inputs.29,28, 2017 and August 31, 2016, the fair value of the Company’s Series 2011-12016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011“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 February 28, 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 $423.2$26.1 million, including accrued interest. At February 29,August 31, 2016 the fair value of the Company’s Series 2011-1 Senior Secured2016 Variable Funding Notes Class A‑1 (the “2011 Variable Funding Notes”) approximated the carrying value of $72.1 million, including accrued interest.had no balance. The fair value of the 2011 Fixed Rate Notes, 2013 Fixed Rate Notes and 2011 Variable Funding 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.7.Subsequent EventsSubsequent to the end of the second fiscal quarter of 2016, the Company announced that certain of its subsidiaries intend to complete a financing transaction, which will include prepaying the 2011 Fixed Rate Notes with proceeds from the sale of a new series of securitized debt, as well as refinancing the 2011 Variable Funding Notes. The Company’s subsidiaries intend to issue approximately $425.0 million of new fixed rate notes (the “2016 Notes”) and enter into a new $150.0 million variable funding note facility. As of February 29, 2016, the Company had $3.4 million in unamortized deferred loan costs associated with the 2011 Fixed Rate Notes and 2011 Variable Funding Notes of which all or a portion could be written off in conjunction with this transaction. The deferred loan costs are included in other assets, net in the accompanying condensed consolidated balance sheet.The net proceeds from the sale of the 2016 Notes will be used to retire the 2011 Fixed Rate Notes and pay down the existing 2011 Variable Funding Notes, which had a balance of $267.6 million and $72.0 million, respectively, as of February 29, 2016. The new variable funding note facility will replace the existing 2011Variable Funding Notes.10The consummation of8. Other Operating Income offering is subject to market and other conditions and is anticipated to close in the fiscal thirdfirst quarter of 2016. However, there can be no assurance thatfiscal year 2017, the Company will be able to successfully complete the financing transaction,recorded a gain of $3.8 million on the terms described or at all.9. Refranchising Initiative Effective March 1,In June 2016, the Company establishedannounced plans to refranchise Company Drive-Ins as part of a refranchising initiative to move toward an approximately 95%-franchised system. During the Brand Technology Fund (“BTF”). Bothfirst quarter of fiscal year 2017, the Company completed transactions to refranchise the operations of 56 Company Drive-Ins andretained a non-controlling minority investment in the franchise operations. In the second quarter of fiscal year 2017, the Company completed additional transactions to refranchise the operations of 54 Company Drive-Ins and Franchiseretained a non-controlling minority investment in 50 of these refranchised drive-ins.will payrefranchised in fiscal year 2016, 29 were completed as part of the refranchising initiative announced in June 2016. The Company retained a set technology feenon-controlling minority investment in the franchise operations of 25 of these refranchised drive-ins. Three months ended Six months ended February 28, 2017 February 28, 2017 Number of refranchised Company Drive-Ins 54 110 Proceeds from sales of Company Drive-Ins $ 11,086 $ 20,036 (3,277 ) (8,738 ) Goodwill related to sales of Company Drive-Ins (589 ) (966 ) 414 (3,396 ) (1,040 ) (1,040 ) Gain (loss) on assets held for sale 194 (65 ) Refranchising initiative gains (losses), net $ 6,788 $ 5,831 (1) Net assets sold consisted primarily of equipment. (2) 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 includes an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, since the exercise of this option can occur at any time within the next 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option represents the initial minimum lease payment for the real estate. Unless and until the option is exercised or expires, the franchisee will make monthly lease payments of $0.3 million through November 2017 and $0.1 million thereafter, through November 2018, which will be included in other operating income. We are including lease payments received, net of sub-lease expenses, to quantify the net refranchising gain (loss). (3) The deferred gain of $1.0 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023. Refranchising Initiative
Fiscal Year 201629 Proceeds from sales of Company Drive-Ins $ 3,568 (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. BTF, which will administer cybersecurity and other technology programs. The BTF funds do not constitute assetsoption included in the 53 drive-in refranchising transaction in the first quarter of fiscal year 2017. In March 2017, the franchisee initiated exercise of the Companyoption by purchasing a portion of the real estate, and the Company acts with limited agencyexpects the remainder of the real estate to be purchased within the next 12 months. February 28,
2017 August 31,
2016Minimum lease payments receivable $ 33,988 $ 15,108 Less unearned income (6,300 ) (5,134 ) Net investment in direct financing lease 27,688 9,974 Less amount due within one year (16,001 ) (115 ) Amount due after one year $ 11,687 $ 9,859 Direct Financing Lease Years ended August 31: 2017 $ 16,202 2018 1,048 2019 1,117 2020 1,230 2021 1,326 Thereafter 13,065 33,988 Less unearned income (6,300 ) $ 27,688 administrationnegotiation and consummation of these funds.direct financing lease transactions have not been material. Accordingly, neither the revenuesand expenses nor the assets and liabilitiesno portion of the BTF will be included in the Company’s consolidated financial statements. However, technology fees paid by Company Drive-Ins will be recorded as an expense on the Company’s financial statements, and the BTF will pay the Company a feeunearned income has been recognized to offset administrative services provided by the Company on behalf of the BTF.those costs.11System-wideincreased 6.5%decreased 7.4% during the second quarter and increased 5.9%decreased 4.6% for the first six months of fiscal year 20162017 as compared to an increase of 11.5%6.5% and 9.8%5.9%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins increased 6.3%decreased 8.9% during the second quarter and 5.3%5.5% for the first six months of fiscal year 20162017 as compared to an increase of 11.2%6.3% and 9.5%5.3%, respectively, for the same periods last year. Approximately one percentage point of the increasedecrease in sales for the second quarter and approximately one-half percentage point of the increasedecrease for the first six months of fiscal year 20162017 are attributable to one additional day of operations in February 2016 versus February 2015,2017, due to leap year. Our continued positiveThe same-store sales aredecrease reflects a result ofdecline in traffic, driven by lower consumer spending in the successful implementation ofrestaurant industry, aggressive competitive activity and strong performance in the prior-year periods. We continue to execute on our long-term strategies, including new technology, people initiatives, including product quality improvements and innovation, a greater emphasis on personalized service, new technology, a tiered pricing strategytargeted value promotions and aour fully integrated media strategy that have set a solid foundation for growth.strategy. All of these initiatives drive Sonic’s multi-layered growth strategy, which incorporates same-store sales growth, operating leverage, deployment of cash, an ascending royalty rate and new drive-in development. Same-store sales growth is the most important layer and drives operating leverage and increased operating cash flows.increaseddecreased to $133.2$100.2 million for the second quarter and $279.0$229.7 million for the first six months of fiscal year 20162017 from $126.2$133.2 million and $266.1$279.0 million, respectively, for the same periods last year.year, primarily due to a decrease in Company Drive-In sales. The increasedecrease in revenuesCompany Drive-In sales was primarily attributablea result of refranchising certain Company Drive-Ins during the fourth quarter of fiscal year 2016 and the first half of fiscal year 2017, as part of our initiative to move toward an approximately 95%-franchised system, as well as decreased same-store sales growth at Company and Franchise Drive-Ins.sales. Restaurant margins at Company Drive-Ins improvedwere unfavorable by 60330 basis points during the second quarter of fiscal year 2017 and 100220 basis points for the first six months of fiscal year 2016,2017, reflecting the leveragede-leveraging impact of positive same-storesame-stores sales decreases and continued improvementthe impact of fees paid to the Brand Technology Fund (“BTF”) that was established in commodity costs. 20162017 reflected net income of $11.0 million or $0.25 per diluted share as compared to net income of $10.8 million or $0.22 per diluted share for the same periods last year. Net income and diluted earnings per share for the first six months of fiscal year 2017 were $24.1 million and $0.53, respectively, as compared to net income of $7.7$23.3 million or $0.14$0.46 per diluted share for the same period last year. Adjustments to net income are detailed below in Results of Operations. Three months ended Six months ended February 28, 2017 February 28, 2017 Number of refranchised Company Drive-Ins 54 110 Proceeds from sales of Company Drive-Ins $ 11,086 $ 20,036 (3,277 ) (8,738 ) Goodwill related to sales of Company Drive-Ins (589 ) (966 ) 414 (3,396 ) (1,040 ) (1,040 ) Gain (loss) on assets held for sale 194 (65 ) Refranchising initiative gains (losses), net $ 6,788 $ 5,831 (1) Net assets sold consisted primarily of equipment. (2) 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 includes an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, since the exercise of this option can occur at any time within the next 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option represents the initial minimum lease payment for the real estate. Unless and until the option is exercised or expires, the franchisee will make monthly lease payments of $0.3 million through November 2017 and $0.1 million thereafter, through November 2018, which will be included in other operating income. We are including lease payments received, net of sub-lease expenses, to quantify the net refranchising gain (loss). We anticipate the franchisee will exercise the option within the next 12 months. (3) The deferred gain of $1.0 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023. Refranchising Initiative
Fiscal Year 201629 Proceeds from sales of Company Drive-Ins $ 3,568 (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. Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Increase (decrease) in total sales (6.2 )% 7.8 % (3.5 )% 6.7 % Total at beginning of period 3,559 3,529 3,557 3,526 Opened 10 5 24 18 Closed (net of re-openings) (7 ) (6 ) (19 ) (16 ) Total at end of period 3,562 3,528 3,562 3,528 Average sales per drive-in $ 260 $ 280 $ 561 $ 585 (7.4 )% 6.5 % (4.6 )% 5.9 % (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time. (2) Represents percentage change for drive-ins open for a minimum of 15 months. Three months ended Increase
(Decrease) Percent
Increase
(Decrease) February 28, 2017 February 29, 2016 Company Drive-In sales $ 64,286 $ 95,313 $ (31,027 ) (32.6 )% Franchise Drive-Ins: Franchise royalties 34,138 35,807 (1,669 ) (4.7 )% Franchise fees 190 240 (50 ) (20.8 )% Lease revenue 1,675 1,399 276 19.7 % Other (131 ) 401 (532 ) (132.7 )% Total revenues $ 100,158 $ 133,160 $ (33,002 ) (24.8 )% Six months ended Increase
(Decrease) Percent
Increase
(Decrease) February 28, 2017 February 29, 2016 Revenues: Company Drive-In sales $ 151,438 $ 199,196 $ (47,758 ) (24.0 )% Franchise Drive-Ins: Franchise royalties 74,021 75,269 (1,248 ) (1.7 )% Franchise fees 446 700 (254 ) (36.3 )% Lease revenue 3,056 2,991 65 2.2 % Other 748 807 (59 ) (7.3 )% Total revenues $ 229,709 $ 278,963 $ (49,254 ) (17.7 )% Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Company Drive-In sales $ 64,286 $ 95,313 $ 151,438 $ 199,196 Percentage increase (decrease) (32.6 )% 3.3 % (24.0 )% 3.5 % Total at beginning of period 286 382 345 387 Opened 1 — 1 — Sold to franchisees (54 ) (7 ) (110 ) (9 ) Closed (net of re-openings) — — (3 ) (3 ) Total at end of period 233 375 233 375 Average sales per Company Drive-In $ 236 $ 253 $ 506 $ 522 (8.9 )% 6.3 % (5.5 )% 5.3 % (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time. (2) Represents percentage change for drive-ins open for a minimum of 15 months. Three months ended Six months ended February 28, 2017 February 29, 2016 February 28, 2017 February 29, 2016 Franchise Drive-In sales $ 856,514 $ 886,313 $ 1,830,399 $ 1,854,828 Percentage increase (3.4 )% 8.3 % (1.3 )% 7.1 % Total at beginning of period 3,273 3,147 3,212 3,139 Opened 9 5 23 18 Acquired from the company 54 7 110 9 Closed (net of re-openings) (7 ) (6 ) (16 ) (13 ) Total at end of period 3,329 3,153 3,329 3,153 Average sales per Franchise Drive-In 262 283 566 593 (7.3 )% 6.5 % (4.5 )% 5.9 % $ 36,003 $ 37,446 $ 77,523 $ 78,960 Percentage increase (decrease) (3.9 )% 12.2 % (1.8 )% 8.6 % 3.99 % 4.04 % 4.04 % 4.06 % (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time. (2) Represents percentage change for drive-ins open for a minimum of 15 months. (3) (4) Represents franchise royalties as a percentage of Franchise Drive-In sales. Company Drive-In Margins Three months ended Percentage Points
Increase (Decrease) February 28, 2017 February 29, 2016 Costs and expenses Company Drive-Ins: Food and packaging 27.4 % 27.5 % (0.1) Payroll and other employee benefits 39.4 37.1 2.3 Other operating expenses 22.2 21.1 1.1 Cost of Company Drive-In sales 89.0 % 85.7 % 3.3 Six months ended Percentage Points
Increase (Decrease) February 28, 2017 February 29, 2016 Costs and expenses Company Drive-Ins: Food and packaging 27.6 % 27.7 % (0.1) Payroll and other employee benefits 37.7 36.0 1.7 Other operating expenses 22.2 21.6 0.6 Cost of Company Drive-In sales 87.5 % 85.3 % 2.2 2016 increased 29%2017 would have decreased 27% and 38%17%, respectively. Net income and diluted earnings per share for the first six months of fiscal year 2016 were $23.3 million and $0.46, respectively, as compared to net income to $17.7 million and $0.32 per diluted share for the same period last year. Excluding the non-GAAP adjustments further described below, net income and diluted earnings per share for the first half of fiscal year 20162017 would have increased 26%decreased 17% and 35%7%, respectively.12 Three months ended February 28, 2017 February 29, 2016 Net
Income Diluted
EPS Net
Income Diluted
EPSReported – GAAP $ 10,963 $ 0.25 $ 10,819 $ 0.22 (6,788 ) (0.15 ) — — 2,445 0.05 — — Gain on sale of real estate — — (1,875 ) (0.04 ) — — 664 0.01 Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters — — (585 ) (0.01 ) Adjusted - Non-GAAP $ 6,620 $ 0.15 $ 9,023 $ 0.18 (1) During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 drive-ins, one of which resulted in a gain of $7.8 million and another in a loss of $1.4 million. The loss transaction included a deferred gain of $1.0 million, which is recorded in other non-current liabilities, as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023. Additionally, we received net lease payments of $0.4 million related to the first quarter transaction detailed in footnote 1 to the table below. (2) Tax impact during the period at an adjusted effective tax rate of 36.0%. (3) Tax impact during the period at an adjusted effective tax rate of 35.4%. 10,819 0.22 7,662 0.14 (1,211) (0.03) (585) (0.01) (666) (0.01) 9,023 0.18 6,996 0.13 23,277 0.46 17,747 0.32 (1,211) (0.03) (585) (0.01) (666) (0.01) 21,481 0.42 17,081 0.31 The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the periods indicated as well as the system-wide change in sales and average unit volume. System-wide information includes both Company Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company’s revenues since franchisees pay royalties based on a percentage of sales.7.8 12.8 6.7 10.9 3,529 3,517 3,526 3,518 5 4 18 17 (6) (13) (16) (27) 3,528 3,508 3,528 3,508 280 264 585 554 6.5 11.5 5.9 9.8 (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely Six months ended February 28, 2017 February 29, 2016 Net
Income Diluted
EPS Net
Income Diluted
EPSReported – GAAP $ 24,081 $ 0.53 $ 23,277 $ 0.46 (5,831 ) (0.13 ) — — 2,105 0.04 — — (3,795 ) (0.08 ) — — 1,350 0.03 — — Gain on sale of real estate — — (1,875 ) (0.04 ) — — 664 0.01 Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters — — (585 ) (0.01 ) Adjusted - Non-GAAP $ 17,910 $ 0.39 $ 21,481 $ 0.42 (1) During the first quarter of fiscal year 2017, we completed transactions to refranchise the operations of 56 Company Drive-Ins. Of the proceeds, $3.8 million represents the initial lease payment for a real estate purchase option that will be exercised or expire within 24 months, which resulted in a net loss of $1.0 million. Unless and until the option is exercised or expires, the franchisee will make monthly lease payments of $0.3 million through November 2017 and $0.1 million thereafter, through November 2018, which will be included in other operating income. We are including lease payments received, net of sub-lease expenses, to quantify the net refranchising gain (loss). Net payments received during the second quarter totaled $0.4 million. During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 drive-ins, one of which resulted in a gain of $7.8 million and another in a loss of $1.4 million. The loss transaction also included a deferred gain of $1.0 million, which is recorded in other non-current liabilities, as a result of a real estate purchase option extended to the franchisee that will be exercised or expire between January 2020 and December 2023. (2) Combined tax impact at effective tax rates of 35.6% and 36.0% during the first and second quarters of fiscal year 2017, respectively. (3) Gain on sale of investment in refranchised drive-ins is related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. Income from minority investments is included in other revenue on the condensed consolidated statements of income. (4) Tax impact during the period at an adjusted effective tax rate of 35.6%. (5) Tax impact during the period at an adjusted effective tax rate of 35.4%. reopen within a reasonable time.(2) Represents percentage change for drive-ins open for a minimum of 15 months.13Results of OperationsRevenues. The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.95,313 92,309 3,004 3.3 35,807 32,236 3,571 11.1 240 171 69 40.4 1,399 979 420 42.9 401 524 (123) (23.5) 133,160 126,219 6,941 5.5 199,196 192,447 6,749 3.5 75,269 69,012 6,257 9.1 700 1,659 (959) (57.8) 2,991 2,044 947 46.3 807 913 (106) (11.6) 278,963 266,075 12,888 4.8 14The following table reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.95,313 92,309 199,196 192,447 3.3 12.8 3.5 9.8 382 389 387 391 1 (7) 3 (9) 1 (3) (1) 375 392 375 392 253 237 522 496 6.3 11.2 5.3 9.5 (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.(2) Represents percentage change for drive-ins open for a minimum of 15 months.Same-store sales for Company Drive-Ins increased 6.3% for the second quarter and 5.3% for the first six months of fiscal year 2016, as compared to an increase of 11.2% and 9.5%, respectively, for the same periods last year, showing continued momentum from the Company’s successful implementation of initiatives to improve product quality, service and value perception. Furthermore, we continued to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness while benefitting from the implementation of new technology initiatives. Company Drive-In sales increased $3.0 million during the second quarter and $6.7$571.7 million during the first six months of fiscal year 2016, as compared to2017 from $648.7 million at the same periods last year. The increase in the second quarter and the first six months of fiscal year 2016 is primarily due to an increase in same-store sales of $5.7 million and $9.9 million, respectively, partially offset by a decrease related to stores sold to franchisees of $2.5 million and $4.2 million, respectively. 15The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.886,313 818,601 1,854,828 1,732,254 8.3 12.9 7.1 11.1 3,147 3,128 3,139 3,127 5 4 18 16 7 (3) 9 (1) (6) (13) (13) (26) 3,153 3,116 3,153 3,116 283 267 593 561 6.5 11.5 5.9 9.8 37,446 33,386 78,960 72,715 12.2 22.3 8.6 22.4 4.04 3.94 4.06 3.98 (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.(2) Represents percentage change for drive-ins open for a minimum of 15 months.(3) Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2015.(4) Represents franchise royalties as a percentage of Franchise Drive-In sales.Same-store sales for Franchise Drive-Ins increased 6.5% for the second quarter and 5.9% for the first six months of fiscal year 2016, as compared to an increase of 11.5% and 9.8%, respectively, for the same periods last year. Franchising revenues increased $4.1 million, or 12.2%, for the second quarter and increased $6.2 million, or 8.6%, for the first six months of fiscal year 2016, compared to the same periods last year. The increase in franchise revenues was primarily attributable to increases in royalties related to the growth of same-store sales. 16Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and maintenance, rent, property tax and other controllable expenses.27.5 28.0 37.1 36.7 21.1 21.6 85.7 86.3 27.7 28.3 36.0 35.9 21.6 22.1 85.3 86.3 Drive-in level margins improved by 60 basis points during the second quarter and 100 basis points in the first six monthsend of fiscal year 2016. The margin improvement fordecrease in total assets was driven by a decrease in cash and cash equivalents, which reflects the quarter is attributable to the leveragepurchases of positive same-store salescommon stock and continued commodity cost improvement. Food and packaging costs were favorable by 50 basis pointspayment of dividends during the second quarterperiod, offset by cash generated from operating activities and 60 basis points duringproceeds from refranchising transactions. Total assets were further impacted by a decrease in net property, equipment and capital leases, driven by depreciation, asset retirements and refranchising transactions, as well as assets sold that were recorded as held for sale at the first halfend of fiscal year 2016. Continued commodity cost improvement resulted in the favorable impact to foodThese were partially offset by purchases of property, equipment and packaging costs for the first six months of fiscal year 2016. Payroll and other employee benefits were unfavorable by 40 basis points for the second quarter and 10 basis points for the first six months of fiscal year 2016 reflecting initiatives intended to attract and retain employees at the drive-in level. Other operating expenses improved 50 basis points during the second quarter and the first half of fiscal year 2016 mainly as a result of leveraging improved sales. Other operating expenses are expected to rise over the second half of the fiscal year as Company Drive-Ins will pay an ongoing technology fee effective March 1, 2016, as a result of the newly established Brand Technology Fund. The fee will be a set fee of 0.25% of calendar year 2015 sales. The impact to other operating expenses for fiscal year 2016 is expected to be an increase of approximately 13 basis points. For more information, see note 7-Subsequent Events, included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q.Selling, General and Administrative (“SG&A”). SG&A expensestechnology.$2.6$5.1 million, or 14.6%0.7%, to $20.8 million for the second quarter and $4.8 million, or 13.0%, to $41.7 million for the first six months of fiscal year 2016, as compared to the same period last year. This increase is primarily related to the costs of additional headcount in support of the Company’s technology initiatives and higher variable compensation due to strong operating performance. Depreciation and Amortization. Depreciation and amortization decreased $0.5 million, or 4.2%, to $11.1 million for the second quarter and $1.1 million, or 4.9%, to $22.1 million for the first six months of fiscal year 2016, as compared to the same period last year. This decrease is primarily attributable to assets that fully depreciated in the prior fiscal year.17Net Interest Expense. Net interest expense was flat in the second quarter and first half of fiscal year 2016. For additional information on long-term debt, see our Annual Report on Form 10-K for the year ended August 31, 2015. Income Taxes. The provision for income taxes reflects an effective tax rate of 31.7% for the second quarter of fiscal 2016 as compared to 28.9% for the same period in fiscal year 2015. The effective tax rate for both quarters reflects the retroactive extension of certain tax credits, primarily the Work Opportunity Tax Credit (“WOTC”). The tax credit amounts are fixed amounts and as a result impact the effective tax rate for the quarters. The tax credit amounts in the second quarter of fiscal year 2016 were less than the same period in the prior year, resulting in a higher effective tax rate for the second quarter of fiscal 2016 compared to the same period for fiscal year 2015. Excluding the retroactive portion of WOTC attributable to the prior fiscal year, the effective tax rates would have been 35.4% for the second quarter of fiscal year 2016 and 35.1% for the second quarter of fiscal year 2015. The provision for income taxes reflects an effective tax rate of 34.9% for the first six months of fiscal year 2016 compared to 34.6% for the same period in fiscal year 2015. Our tax rate may continue to vary from quarter to quarter depending on the timing of stock option dispositions by option-holders and as circumstances on other tax matters change.Financial PositionTotal assets decreased $13.3 million, or 2.1%, to $606.7$729.4 million during the first six months of fiscal year 20162017 from $620.0$724.3 million at the end of fiscal year 2015.2016. The decrease in total assetsincrease was primarily attributable to the $26.0 million balance from borrowing on the Company's Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the "2016 Variable Funding Notes"). This was partially offset by a decrease of $12.8 million in accrued liabilities, which are mainly related to payment of wages and incentive compensation and other tax liabilities that were accrued as of August 31, 2016 as well as a decrease in net property, equipmentaccounts payable and capital leases of $10.2 million, driven by depreciation as well as asset retirements and sales, partially offset by purchases of property and equipment. Additionally, there was a $3.2 million decrease in prepaid expenses and other current assets primarilyincomes taxes payable, both related to the adoptiontiming of Accounting Standards Update No. 2015-17, “Balance Sheet Classification of Deferred Taxes.” This update required the current deferred tax asset be classified as noncurrent and netted with noncurrent deferred tax liabilities. There was also a $3.2 million decrease in royalty receivables due to the seasonality of the business. The decreases were offset by an increase in cash and restricted cash of $4.2 million. liabilitiesstockholders’ deficit increased $37.4$82.1 million, or 6.2%108.5%, to $640.0a deficit of $157.7 million during the first six months of fiscal year 20162017 from $602.6a deficit of $75.6 million at the end of fiscal year 2015. The2016. This increase was primarily attributable to $61.5 million net borrowing on the Company’s Series 2011-1 Senior Secured Variable Funding Notes, Class A-1 (the "2011 Variable Funding Notes") offset by $4.9 million in scheduled principal payments on the Company’s Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2. This was partially offset by a decrease of $10.7 million in accrued liabilities, primarily driven by payment of bonuses and other liabilities that were accrued as of August 31, 2015, as well as a decrease in income taxes payable of $8.9 million mainly from tax payments during the first six months of fiscal year 2016.Total stockholders’ equity (deficit) decreased $50.6 million, or 290.6%, to a deficit of $33.2 million during fiscal year 2016 from equity of $17.4 million at the end of fiscal year 2015. This decrease was primarily attributable to $71.7$97.5 million in purchases of common stock during the first six months of the fiscal year and the payment of $10.9$12.5 million in dividends, partially offset by current-year earnings of $23.3 million and $6.4 million from the issuance of stock related to stock option exercises and the related tax benefits.$18.0$11.2 million to $38.8$27.6 million for the first six months of fiscal year 20162017 as compared to $56.8$38.8 million for the same period in fiscal year 2015.2016. The decreasechange was driven by changes in working capital during the first six months of fiscal year 2016 relatedhigher incentive compensation payments compared to the pay-out of increased incentive compensation due to improved business performance when compared tosame period in the prior year, as well as the timing of payments and receipts for both operationalpayroll and tax transactions. The decrease was partially offsetalso driven by increased netthe decrease in operating income.used inprovided by investing activities duringwas $19.2 million for the first six months of fiscal year 2016 decreased $12.8 million to $5.1 million2017 as compared to $17.9net cash used in investing activities of $5.1 million for the same period in fiscal year 2015.182016:2017:Purchase and replacement of equipment and technology$6.2 Brand technology investments5.6 Rebuilds, relocations and remodels of existing drive-ins3.8 Newly constructed drive-ins leased or sold to franchisees2.1 Newly constructed Company Drive-Ins0.1 Total investments in property and equipment$17.8 These investments decreased $5.5 million compared to the same period last year mainly due to decreased spending for technology initiatives and from acquisitions of drive-in real estate of $3.8 million that occurred in the second quarter of fiscal year 2015. Additionally, proceeds from the sale of assets increased $7.2 million, primarily related to stores sold to franchisees during the first six months of fiscal year 2016. Rebuilds, relocations and remodels of existing drive-ins $ 12.3 Brand technology investments 7.8 Newly constructed drive-ins leased or sold to franchisees 2.9 Newly constructed Company Drive-Ins 2.1 Purchase and replacement of equipment and technology 2.0 Total investments in property and equipment $ 27.1 decreased $22.6increased $60.3 million to $24.7$85.0 million for the first six months of fiscal year 20162017, as compared to $47.3$24.7 million for the same period in fiscal year 2015. This decrease primarily relates2016. The prior-year period included net borrowings of $61.5 million on the Series 2011-1 Senior Secured Variable Funding Notes, Class A-1, compared to a decreasenet borrowings of $26.0 million on the 2016 Variable Funding Notes in stock option exercise proceeds of $10.6 million and a decrease inthe current-year period. Additionally, purchases of treasury stock of $21.3increased by $22.3 million. This is partially offset by an increase of $13.0 million in net proceeds related to changes in funding fromFor additional information on long-term debt, see our Annual Report on Form 10-K for the 2011 Variable Funding Notes.year ended August 31, 2016.the Company’sour share repurchase program, authorizing the purchase of up to $145.0 million of our 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. In October 2016, our Board of Directors increased the authorization under the share repurchase program by $40.0 million.2016,2017, approximately 2.73.7 million shares were repurchased for a total cost of $71.7 million.29, 2016,28, 2017, our total cash balance of $51.1$42.4 million ($36.133.9 million of unrestricted and $15.0$8.5 million of restricted cash balances) reflected the impact of the cash generated from operating activities, stock option exercise proceeds, 2011 Variable Funding Notes borrowingrefranchising proceeds, cash used for share repurchases, dividends debt payments and capital expenditures mentioned above. We believe that existing cash, funds generated from operations and the amount available under our 20112016 Variable Funding Notes, will meet our needs for the foreseeable future.the Company’sour Annual Report on Form 10-K for the fiscal year ended August 31, 2015. 2016.2015.2016.1929, 2016,28, 2017, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.2015.2016.secondfirst quarter of fiscal year 20162017 are as follows (in thousands, except per share amounts):268 30.75 268 70,892 240 29.77 240 63,765 335 27.46 335 54,564 843 843 (1) In August 2015, the Company’s Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $145 million of its outstanding shares of common stock to be repurchased through August31,2016. 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. Please refer to note 3 – Share Repurchase Program of the notes to the Condensed Consolidated Financial Statements for additional information.20Period Total
Number of
Shares
Purchased Average
Price
Paid per
Share Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Value that May
Yet Be
Purchased
Under the
Program(1)December 1, 2016 through December 31, 2016 756 $ 27.22 756 $ 101,771 January 1, 2017 through January 31, 2017 584 26.26 584 86,447 February 1, 2017 through February 28, 2017 428 25.87 428 75,379 Total 1,768 1,768 (1) 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. In October 2016, the Board of Directors increased the authorization by $40.0 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. Please refer to note 3 – Share Repurchase Program of the notes to the condensed consolidated financial statements for additional information. Exhibits.31.01 Exhibits. 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14 21SONIC CORP.SONIC CORP. By:/s/By: By: /s/ Claudia S. San Pedro March 31, 2016April 4, 201731.01 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14