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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Non-accelerated filer ☐ (Do | Smaller reporting company ☐ | |
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SONIC CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited) May 31, August 31, 2016 2015 ASSETS Current assets: Cash and cash equivalents $ $ Restricted cash Accounts and notes receivable, net Income taxes receivable Assets held for sale - 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 Debt origination costs, net 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; 70,441 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 Nine months ended May 31, May 31, 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 Debt extinguishment costs - - 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) Nine months ended May 31, 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 Loss from early extinguishment of debt - Provision for deferred income taxes Other (Increase) 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 Restricted cash for securitization obligations Purchases of treasury stock Proceeds from exercise of stock options Payment of dividends Debt issuance and extinguishment costs Other Net cash provided by (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 period for: Income taxes (net of refunds) $ $ Non-cash investing and financing activities: Change in obligation to acquire treasury stock material impact on the Company’s financial statements. As of November 30, 2016, there was $10.8 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. Three months ended Nine months ended May 31, May 31, 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) ————————— data) Three months ended Nine months ended May 31, May 31, 2016 2015 2016 2015 Provision for income taxes $ $ $ $ Effective income tax rate % % % % credits due to expired credit provisions. May 31, August 31, 2016 2015 Current Accounts and Notes Receivable: Royalties and other trade receivables $ $ Notes receivable from franchisees Receivables from system funds Other Accounts and notes receivable, gross Allowance for doubtful accounts and notes receivable Accounts and notes receivable, net $ $ Noncurrent Notes Receivable: Receivables from franchisees $ $ Receivables from system funds Allowance for doubtful notes receivable Notes receivable, net $ $ 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 At May 31, August 31, 2016 2015 Assets Property, equipment and capital leases $ $ - Goodwill, net - Total assets held for sale $ $ - The following analysis of non-GAAP adjustments is intended to supplement the presentation of the Company’s financial results in accordance with GAAP. We believe the exclusion of these items in evaluating the change in net income and diluted earnings per share for the periods below provides useful information to investors and management regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results for the Company and predicting future performance. Three months ended Three months ended May 31, 2016 May 31, 2015 Net Diluted Net Diluted Income EPS Income EPS Reported – GAAP $ $ $ $ Loss from early extinguishment of debt - - Tax impact on debt extinguishment (1) - - Federal tax benefit of prior-year statutory tax deduction - - Retroactive effect of federal tax law change - - Adjusted - Non-GAAP $ $ $ $ Nine months ended Nine months ended May 31, 2016 May 31, 2015 Net Diluted Net Diluted Income EPS Income EPS Reported – GAAP $ $ $ $ Loss from early extinguishment of debt - - Tax impact on debt extinguishment (1) - - Gain on sale of real estate - - Tax impact on real estate sale (2) - - Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters Federal tax benefit of prior-year statutory tax deduction - - Retroactive effect of federal tax law change - - Adjusted - Non-GAAP $ $ $ $ ————————— System-wide Performance ($ in thousands) Three months ended Nine months ended May 31, May 31, 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 May 31, Increase Increase 2016 2015 (Decrease) (Decrease) Revenues Company Drive-In sales $ $ $ % Franchise Drive-Ins: Franchise royalties Franchise fees Lease revenue Other Total revenues $ $ $ % Nine months ended Percent May 31, 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 Nine months ended May 31, May 31, 2016 2015 2016 2015 Company Drive-In sales $ $ $ $ Percentage increase (decrease) % % % % Company Drive-Ins in operation(1): Total at beginning of period Opened - - 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 Nine months ended May 31, May 31, 2016 2015 2016 2015 Franchise Drive-In sales $ $ $ $ Percentage increase % % % % Franchise Drive-Ins in operation(1): Total at beginning of period Opened Acquired from 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 (decrease) % % % % Effective royalty rate(4) % % % % ————————— Company Drive-In Margins Three months ended May 31, Percentage Points 2016 2015 Increase (Decrease) Costs and expenses Company Drive-Ins: Food and packaging % % 0.3 Payroll and other employee benefits 0.1 Other operating expenses - Cost of Company Drive-In sales % % 0.4 Nine months ended May 31, Percentage Points 2016 2015 Increase (Decrease) Costs and expenses Company Drive-Ins: Food and packaging % % (0.2) Payroll and other employee benefits 0.1 Other operating expenses (0.3) Cost of Company Drive-In sales % % (0.4) partially offset by a lower weighted-average interest rate. For additional information on long-term debt, see our Annual Report on Form 10-K for the year ended August 31, 2016. technology and an increase in investment in direct financing leases related to the refranchising transactions completed in the first quarter of fiscal year 2017. payments. $13.1 million. The table below outlines our use of cash in millions for investments in property and equipment for the first 2016. $50.6 million, resulting in an average price per share of $25.87. 2016. 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) March 1, 2016 through March 31, 2016 $ $ April 1, 2016 through April 30, 2016 May 1, 2016 through May 31, 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 DocumentItem 1. Financial Statements99,362 27,191 10,875 13,246 38,162 31,577 818 1,741 13,426 8,922 11,683 171,565 85,438 151 6,524 9,888 7,216 759,366 781,857 (367,737) (360,451) 391,629 421,406 76,436 77,076 14,996 7,056 15,001 15,308 679,666 620,024 17,873 13,860 833 870 47,296 50,714 772 8,910 6,126 13,467 72,900 87,821 18,545 20,763 577,521 428,238 43,816 43,549 25,344 22,220 665,226 514,770 1,183 1,183 234,863 232,550 874,169 851,715 (1,168,675) (1,068,015) (58,460) 17,433 679,666 620,024 CONDENSED CONSOLIDATED BALANCE SHEETS(In thousands, except per share amounts)(Unaudited) November 30,
2016 August 31,
2016ASSETS Current assets: Cash and cash equivalents $ 41,090 $ 72,092 Restricted cash 8,406 15,873 Accounts and notes receivable, net 31,445 35,437 Prepaid expenses and other current assets 18,191 14,255 Total current assets 99,132 137,657 Noncurrent restricted cash 128 140 Investment in direct financing lease 23,830 9,859 Notes receivable, net 12,569 12,562 Property, equipment and capital leases 711,311 766,522 Less accumulated depreciation and amortization (347,252 ) (374,142 ) Property, equipment and capital leases, net 364,059 392,380 Goodwill 76,266 76,734 Debt origination costs, net 2,928 3,093 Other assets, net 14,404 16,236 Total assets $ 593,316 $ 648,661 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 18,062 $ 14,372 Franchisee deposits 850 720 Accrued liabilities 35,590 51,913 Income taxes payable 6,825 2,568 Current maturities of long-term debt and capital leases 4,192 5,090 Total current liabilities 65,519 74,663 Obligations under capital leases due after one year 17,216 17,391 Long-term debt, net 566,672 566,187 Deferred income taxes 42,247 42,530 Other non-current liabilities 19,855 23,533 Total non-current liabilities 645,990 649,641 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 236,050 234,956 Retained earnings 901,201 894,442 Treasury stock, at cost; 73,615 shares (71,670 shares at August 31, 2016) (1,256,627 ) (1,206,224 ) Total stockholders’ deficit (118,193 ) (75,643 ) Total liabilities and stockholders’ deficit $ 593,316 $ 648,661 The accompanying notes are an integral part of the consolidated financial statements.4115,143 118,369 314,339 310,816 46,687 43,704 122,656 114,375 2,141 1,569 5,132 3,613 1,268 1,106 2,075 2,019 165,239 164,748 444,202 430,823 32,089 32,727 87,248 87,128 39,912 40,898 111,635 110,049 22,442 22,955 65,450 65,484 94,443 96,580 264,333 262,661 20,617 20,699 62,342 57,625 11,405 11,435 33,461 34,634 (106) (336) (3,071) 4 126,359 128,378 357,065 354,924 38,880 36,370 87,137 75,899 6,776 6,382 19,465 18,981 (121) (91) (326) (290) 8,750 8,750 15,405 6,291 27,889 18,691 23,475 30,079 59,248 57,208 8,122 9,637 20,618 19,019 15,353 20,442 38,630 38,189 0.32 0.39 0.79 0.72 0.31 0.38 0.77 0.70 0.11 0.09 0.33 0.27 SONIC CORP.CONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share amounts)(Unaudited) Three months ended November 30, 2016 2015 Revenues: Company Drive-In sales $ 87,152 $ 103,883 Franchise Drive-Ins: Franchise royalties and fees 40,139 39,922 Lease revenue 1,381 1,592 Other 879 406 Total revenues 129,551 145,803 Costs and expenses: Company Drive-Ins: Food and packaging 24,116 28,946 Payroll and other employee benefits 31,766 36,364 Other operating expenses, exclusive of depreciation and amortization included below 19,426 22,908 Total cost of Company Drive-In sales 75,308 88,218 Selling, general and administrative 19,754 20,940 Depreciation and amortization 10,277 10,999 Other operating income, net (2,840 ) (399 ) Total costs and expenses 102,499 119,758 Income from operations 27,052 26,045 Interest expense 7,189 6,222 Interest income (494 ) (100 ) Net interest expense 6,695 6,122 Income before income taxes 20,357 19,923 Provision for income taxes 7,239 7,465 Net income $ 13,118 $ 12,458 Basic income per share $ 0.29 $ 0.25 Diluted income per share $ 0.28 $ 0.24 Cash dividends declared per common share $ 0.14 $ 0.11 The accompanying notes are an integral part of the consolidated financial statements.538,630 38,189 33,461 34,634 2,688 2,572 8,750 964 10,088 (6,908) (3,644) 2,351 3,312 (4,545) (931) 4,632 2,105 (3,261) 8,098 1,470 6,079 39,602 62,313 78,232 100,502 (26,467) (30,867) 12,701 4,089 (1,678) 4,148 (15,444) (22,630) (421,020) (63,842) 563,000 67,500 6,393 21 (111,406) (95,597) 5,878 15,763 (16,154) (14,153) (18,339) (12) 1,031 (324) 9,383 (90,644) 72,171 (12,772) 27,191 35,694 99,362 22,922 18,258 2,927 (578) (259) SONIC CORP.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited) Three months ended November 30, 2016 2015 Cash flows from operating activities: Net income $ 13,118 $ 12,458 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,277 10,999 Stock-based compensation expense 1,073 956 Other (3,028 ) (722 ) (Increase) decrease in operating assets: Restricted cash 7,472 5,355 Accounts receivable and other assets 1,391 (105 ) Increase (decrease) in operating liabilities: Accounts payable 3,284 6,282 Accrued and other liabilities (19,361 ) (11,962 ) Income taxes 5,005 2,507 Total adjustments 6,113 13,310 Net cash provided by operating activities 19,231 25,768 Cash flows from investing activities: Purchases of property and equipment (14,845 ) (8,458 ) Proceeds from sale of assets 10,826 1,615 Proceeds from sale of investment in refranchised drive-in operations 6,958 — Other 4,278 1,238 Net cash provided by (used in) investing activities 7,217 (5,605 ) Cash flows from financing activities: Payments on debt (1,062 ) (32,948 ) Proceeds from borrowings — 78,000 Purchases of treasury stock (49,096 ) (49,572 ) Proceeds from exercise of stock options 29 597 Payment of dividends (6,345 ) (5,448 ) Other (976 ) (1,162 ) Net cash used in financing activities (57,450 ) (10,533 ) Net increase (decrease) in cash and cash equivalents (31,002 ) 9,630 Cash and cash equivalents at beginning of period 72,092 27,191 Cash and cash equivalents at end of period $ 41,090 $ 36,821 Supplemental cash flow information Cash paid during the period for: Interest $ 6,700 $ 5,748 Income taxes (net of refunds) $ 2,514 $ 5,092 Non-cash investing and financing activities: Additions to direct financing leases from property, equipment and capital leases 21,082 — Net additions to capital lease obligations 1,433 — Change in obligation to acquire treasury stock 1,458 (2,457 ) The accompanying notes are an integral part of the consolidated financial statements.66SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)1.BasisofPresentation1. BasisofPresentationThe 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.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. Principles of ConsolidationThe 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.ReclassificationsCertain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current-year presentation.Accounting PronouncementsIn 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, in March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” which clarifies the guidance in ASU No. 2014-09 for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” which clarifies the guidance in ASU No. 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. All standards are effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period, which requires theThe Company plans to adopt the standard in the first quarter of fiscal year 2019.2019, which aligns with the required adoption date. The standards are to be applied retrospectively or using a cumulative effect transition method, with early application not permitted.permitted; however, we have not yet decided on a method of transition upon adoption. The Company does not believe the new revenue recognition standard will impact ourthe recognition of sales from Company Drive-Ins and ouror the recognition of royalty fees from franchisees. We areThe 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, on the financial statements and related disclosures.In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new standard, which replaces existing lease guidance, requires lessees to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. Accounting guidance for lessors is largely unchanged. The standard is effective for fiscal years beginning after December 15, 2018, which will require the Company to adopt the provisions in the first quarter7SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)of fiscal 2020, with early application permitted. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.In March 2016, the FASB issued ASU No. 2016-04, “Liabilities – 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 years beginning after December 15, 2017; however, early application is permitted. The adoption of the update is not yet selectedexpected to have a transition method. 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 years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The update should be adopted using a modified-retrospective approach. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” The update is intended to reduce diversity in practice in how certain transactions are classified and will make eight targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The update is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the amendments will apply prospectively as of the earliest date practicable. The Company is currently evaluating the effect 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 years beginning after December 15, 2017. 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.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 PronouncementsIn 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 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-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 reclassificat78SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)outstanding borrowings onion, the line of credit arrangement. The adoption of these updates isthis ASU did not expected to have a materialany other impact on the Company’sCompany's consolidated financial statements.In April 2015, the FASB issued ASU No. 2015-05, “Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.” The update provides clarification on whether a cloud computing arrangement includes a software license. If a software license is included, the customer should account for the license consistent with its accounting of other software licenses. If a software license is not included, the arrangement should be accounted for as a service contract. The update is effective for fiscal years beginning after December 15, 2015. The adoption of the update is not expected to have a material impact on the Company’s financial statements.In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes” as part of its simplification initiatives. The update requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. The Company adopted this standard in the first quarter of fiscal year 2016. The Company’s current deferred tax asset balance of $2.2 million was classified as noncurrent and netted with noncurrent deferred tax liabilities as of November 30, 2015, and all future deferred tax asset balances will be recorded as such. No prior periods were retrospectively adjusted. In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new standard requires lessees to recognize the assets and liabilities arising from leases2017 on the balance sheet. Accounting guidance for lessors is largely unchanged. The standard is effective for fiscal years beginning after December 15, 2018 with early application permitted. The Company is currently evaluating the effect that this standard will have on its financial statements and related disclosures.In March 2016, the FASB issued ASU No. 2016-04, “Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored-value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal years beginning after December 15, 2017; however, early application is permitted. prospective basis. The adoption of the update isdid not expected to have a material impact on the Company’s consolidated financial statements.In March 2016,During the FASB issuedfirst quarter of fiscal 2017, the Company early adopted ASU No. 2016-09, “Compensation—Stock“Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of accounting for share-based payment transactions, including excess tax benefits, an accounting policy election for forfeitures, statutory tax withholding requirements and classification in the statements of cash flows. Upon adoption, any futureAs required by the update, on a prospective basis, the Company recognized excess tax benefits or deficiencies will be recordedrelated to theshare-based payments in our provision for income taxes in the condensed consolidated statements of operations, instead ofincome. These items were historically recorded in additional paid-in capitalcapital. 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 balance sheets. The update is effectivestatements of cash flows. These prospective changes did not have a material impact on the Company's financial statements for the first quarter of fiscal years beginning after December 15, 2016, however early application is permitted. The transition methodyear 2017. Cash paid on employees’ behalf related to shares withheld for tax purposes continues to be applied varies depending on the area of update being adopted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.classified as a financing activity. Our stock compensation expense continues to reflect estimated forfeitures.2. Earnings Per Share SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)2.Earnings Per ShareThe following table sets forth the computation of basic and diluted earnings per share:15,353 20,442 38,630 38,189
outstanding– basic48,377 52,022 49,192 52,851 949 1,369 1,021 1,442
outstanding – diluted49,326 53,391 50,213 54,293 0.32 0.39 0.79 0.72 0.31 0.38 0.77 0.70 686 379 550 335 (1) Three months ended November 30, 2016 2015 Numerator: Net income $ 13,118 $ 12,458 Denominator: Weighted average common shares outstanding– basic 45,720 50,221 Effect of dilutive employee stock options and unvested restricted stock units 823 1,104 Weighted average common shares outstanding – diluted 46,543 51,325 Net income per common share – basic $ 0.29 $ 0.25 Net income per common share – diluted $ 0.28 $ 0.24 Anti-dilutive securities excluded (1) 821 412 __________________(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. 9SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect 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(Unaudited)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$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$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 three months of fiscal year 2017, approximately 2.0 million shares were repurchased for a total cost of $50.6 million, resulting in an average price per share of $25.87. The total remaining amount authorized under the share repurchase program as of November 30, 2016 was $122.4 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.During the first nine months of fiscal year 2016, approximately 3.9 million shares were repurchased for a total cost of $110.8 million, resulting in an average price per share of $28.56. The total remaining amount authorized under the share repurchase program as of May 31, 2016 was $170.4 million.4. Income Taxes SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)4.Income TaxesThe following table presents the Company’s provision for income taxes and effective income tax rate for the periods below:8,122 9,637 20,618 19,019 34.6 32.0 34.8 33.2 Three months ended November 30, 2016 2015 Provision for income taxes $ 7,239 $ 7,465 Effective income tax rate 35.6 % 37.5 % The higher effective tax rate in both the third quarter and the first nine monthsquarter of fiscal year 2016 was primarily attributable to the fiscal year 2015 effective rate being favorably impacted by the recognition of prior years’ federala decrease in employment tax deductions. 5.Accounts and Notes Receivable5. Accounts and Notes Receivable Accounts and notes receivable consist of the following:20,401 19,713 1,304 996 6,066 4,965 11,398 6,977 39,169 32,651 (1,007) (1,074) 38,162 31,577 6,069 5,676 3,852 1,571 (33) (31) 9,888 7,216 November 30,
2016 August 31,
2016Current Accounts and Notes Receivable: Royalties and other trade receivables $ 16,873 $ 19,994 Notes receivable from franchisees 2,270 5,531 Receivables from system funds 4,207 4,372 Other 9,077 6,507 Accounts and notes receivable, gross 32,427 36,404 Allowance for doubtful accounts and notes receivable (982 ) (967 ) Current accounts and notes receivable, net $ 31,445 $ 35,437 Noncurrent Notes Receivable: Receivables from franchisees $ 7,070 $ 7,170 Receivables from system funds 5,558 5,466 Allowance for doubtful notes receivable (59 ) (74 ) Noncurrent notes receivable, net $ 12,569 $ 12,562 10SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)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 quarter of fiscal year 2017. The increase in other current accounts and notes receivable is due to the timing of various receipts and disbursements. 6.Contingencies6. Contingencies 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,10SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)May 31,November 30, 2016, the balance of the franchisee’s loan was $5.8$5.7 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,November 30, 2016, the amount remaining under these guaranteed lease obligations totaled $7.9$6.9 million. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, nozero liability has been provided.7.DebtOn May 17, 2016, various subsidiaries of the Company (the “Co-Issuers”) issued $425.0 million of Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”) in a private transaction which bears interest at 4.47% per annum. The 2016 Fixed Rate Notes have an expected life of seven years with an anticipated repayment date in May 2023. At May 31, 2016, the balance outstanding under the 2016 Fixed Rate Notes including accrued interest totaled $425.7 million and carried a weighted-average interest cost of 4.79%, including the effect of the loan origination costs described below.The Co-Issuers also entered into a securitized financing facility of Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the 2016 Fixed Rate Notes, the “2016 Notes”). This revolving credit facility allows for the issuance of up to $150.0 million of 2016 Variable Funding Notes and certain other credit instruments, including letters of credit. Interest on the 2016 Variable Funding Notes is based on the one-month London Interbank Offered Rate or Commercial Paper, depending on the funding source, plus 2.0%, per annum. An annual commitment fee of 0.5% is payable monthly on the unused portion of the 2016 Variable Funding Notes facility. The 2016 Variable Funding Notes have an expected life of five years with an anticipated repayment date in May 2021 with two one-year options available upon certain conditions including meeting a minimum debt service coverage ratio threshold. At May 31, 2016, there was no balance outstanding under the 2016 Variable Funding Notes.Sonic used a portion of the net proceeds from the issuance of the 2016 Fixed Rate Notes to repay its existing Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) and Series 2011‑1 Senior Secured Variable Funding Notes, Class A-1 (the “2011 Variable Funding Notes” and, together with the 2011 Fixed Rate Notes, the “2011 Notes”) in full and to pay the costs associated with the securitized financing transaction, including prepayment premiums. Loan origination costs associated with the Company’s 2016 transaction totaled $12.6 million and were allocated among the 2016 Notes. Loan costs are being amortized over each note’s expected life, and the unamortized balance is categorized as “debt origination costs, net” on the Condensed Consolidated Balance Sheets.While the 2016 Fixed Rate Notes and the 2016 Variable Rate Notes are structured to provide for seven-year and five-year lives, respectively, they have a legal final maturity date of May 2046. The Company intends to repay or refinance the 2016 Notes on or before the end of their respective expected lives. In the event the 2016 Notes are not paid in full by the end of their expected lives, the Notes are subject to an upward adjustment in the annual interest rate of at least 5%. In addition, principal payments will accelerate by applying all of the royalties, lease revenues and other fees securing the debt, after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2016 Variable Funding Notes will become unavailable.The Co-Issuers and Sonic Franchising LLC (the “Guarantor”) are existing special purpose, bankruptcy remote, indirect subsidiaries of Sonic Corp. that hold substantially all of Sonic’s franchising assets and real estate. As of May 31, 2016, assets for these combined indirect subsidiaries totaled $315.4 million, including receivables for royalties, certain Company and Franchise Drive-In real estate, intangible assets and restricted cash balances of7. Fair Value of Financial Instruments SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)$11.0 million. The 2016 Notes are secured by franchise fees, royalty payments and lease payments, and the repayment of the 2016 Notes is expected to be made solely from the income derived from the Co-Issuer’s assets. In addition, the Guarantor, a Sonic Corp. subsidiary that acts as a franchisor, has guaranteed the obligations of the Co-Issuers under the 2016 Notes and pledged substantially all of its assets to secure those obligations.Neither Sonic Corp., the ultimate parent of the Co-Issuers and the Guarantor, nor any other subsidiary of Sonic, guarantees or in any way is liable for the obligations of the Co-Issuers under the 2016 Notes. The Company has, however, agreed to cause the performance of certain obligations of its subsidiaries, principally related to managing the assets included as collateral for the 2016 Notes and certain indemnity obligations relating to the transfer of the collateral assets to the Co-Issuers.The 2016 Notes are subject to a series of covenants and restrictions similar to the Company’s 2011 Notes and customary for transactions of this type. If certain covenants or restrictions are not met, the 2016 Notes are subject to customary accelerated repayment events and events of default. Although management does not anticipate an event of default or any other event of noncompliance with the provisions of the debt, if such event occurred, the unpaid amounts outstanding could become immediately due and payable.In connection with the 2016 transaction described above, the Company recognized an $8.8 million loss from the early extinguishment of debt during the third quarter of fiscal year 2016, which primarily consisted of a $5.9 million prepayment premium and the $2.9 million write-off of unamortized deferred loan fees remaining from the refinanced debt.8.Fair Value of Financial InstrumentsThe 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 $85.1$28.1 million at May 31,November 30, 2016 and $41.1$59.2 million at August 31, 2015.2016. This fair value is estimated using Level 1 inputs.12SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)MayNovember 30, 2016 and August 31, 2016, the fair value of the Company’s 2016Series 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 value11SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)value, including accrued interest.interest, of $578.6 million, and $579.6 million, respectively. The fair value of the Fixed Rate Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s notes.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 TransactionsIn 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 the first quarter of fiscal year 2017, the Company completed two transactions to refranchise the operations of 56 Company Drive-Ins and9.retained a non-controlling minority investment in the franchise operations.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.Income from minority investments is included in other revenue on the condensed consolidated statements of income. Gains and losses 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: Three months ended November 30, 2016 Number of Company Drive-Ins sold to franchisees 56 Proceeds from sales of Company Drive-Ins $ 8,950 Assets sold, net of retained minority investment (1)(5,461 ) Goodwill related to sales of Company Drive-Ins (377 ) Initial lease payment for real estate option (2)(3,810 ) Loss on assets held for sale (259 ) Refranchising initiative gains (losses), net $ (957 ) _______________(1) Net assets sold consisted primarily of equipment. (2) 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. 12SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited) Refranchising Initiative
Fiscal Year 2016Number of Company Drive-Ins sold to franchisees (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 LeasesAs part of the refranchising initiative, the Company entered into direct franchising leases ("DFLs") in fiscal year 2016 and the first quarter of fiscal year 2017.Components of net investment in direct financing leases are as follows at November 30: November 30,
2016 August 31,
2016Minimum lease payments receivable $ 33,490 $ 15,108 Less unearned income (6,483 ) (5,134 ) Net investment in direct financing lease 27,007 9,974 Less amount due within one year (3,177 ) (115 ) Amount due after one year $ 23,830 $ 9,859 Future minimum rental payments receivable as of November 30, 2016 are as follows: Direct Financing Lease Years ended August 31: 2017 $ 744 2018 3,948 2019 13,132 2020 1,230 2021 1,325 Thereafter 13,111 33,490 Less unearned income (6,483 ) $ 27,007 Initial direct costs incurred in the negotiations and consummations of direct financing lease transactions have not been material. Accordingly, no portion of unearned income has been recognized to offset those costs.13SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)Assets Held for SaleAssets held for sale consist of Company Drive-Ins that are expected to sell within one year as part of the Company’s plan to move toward an approximately 95%-franchised system.refranchising initiative. 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.”Assets” and are included in other assets, net 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 are no longer depreciated once classified as held for sale. The following table sets forth the components of assets held for sale:12,925 501 13,426 November 30,
2016 August 31,
2016Property and equipment, net (1) $ 7,558 $ 5,299 Goodwill, net 90 — Total assets held for sale $ 7,648 $ 5,299 ________________(1) Includes loss on anticipated sale of $0.3 million to reflect assets at fair value.In the first quarter of fiscal year 2017, a $0.3 million loss on the anticipated sale of 19 Company Drive-Ins was recorded. Property, equipment and goodwill associated with these locations was included in assets held for sale as of November 30, 2016. Subsequent to the end of the first quarter, the anticipated transaction was completed and the Company maintained a non-controlling minority investment in all of the drive-ins.1413Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsIn the Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Sonic Corp.,” “the Company,” “we,” “us” and “our” refer to Sonic Corp. and its subsidiaries.OverviewSales momentum continued inSystem-wide same-store sales decreased 2.0% during the thirdfirst quarter and first nine months of fiscal year 2016 despite declining consumer spending in the restaurant industry and modestly unfavorable weather during the period. System-wide same-store sales increased 2.0% during the third quarter and increased 4.4% for the first nine months of fiscal year 20162017 as compared to an increase of 6.1% and 8.3%, respectively,5.3% for the same periodsperiod last year. Same-store sales at Company Drive-Ins increased 0.9%decreased 2.4% during the thirdfirst quarter and 3.6% for the first nine months of fiscal year 20162017 as compared to an increase of 5.5% and 8.0%, respectively,4.4% for the same periodsperiod last 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 as well as aggressive competitive activity. 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.Revenues increaseddecreased to $165.2 million for the third quarter and $444.2$129.6 million for the first nine monthsquarter of fiscal year 2017 from $145.8 million for the same period last year, primarily due to a decrease in Company Drive-In sales. The decrease in Company Drive-In sales was a result of refranchising certain Company Drive-Ins in the fourth quarter of fiscal year 2016 from $164.7 million and $430.8 million, respectively, for the same periods last year. The increase in revenues was primarily attributablefirst quarter 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 were unfavorable by 40150 basis points during the thirdfirst quarter and favorable by 40 basis points for the first nine months of fiscal year 2016,2017, reflecting positive same-storethe de-leveraging impact of same-stores sales partially offset bydecreases, increased investments in employees’ compensation and benefits to attract and retain employees at the drive-in level and the impact of fees paid to the newly established Brand Technology Fund (“BTF”) that became effective March 1,was established in the third quarter of fiscal year 2016.ThirdFirst quarter results for fiscal year 20162017 reflected net income of $15.4$13.1 million or $0.31$0.28 per diluted share as compared to net income of $20.4$12.5 million or $0.38$0.24 per diluted share for the same period last year. Excluding the non-GAAP adjustments further described below, net income for the first quarter of fiscal year 2017 decreased 9.4% and diluted earnings per share for the third quarter of fiscal year 2016 increased 9% and 19%, respectively. Net income and diluted earnings per share for the first nine months of fiscal year 2016 were $38.6 million and $0.77, respectively, as compared to net income of $38.2 million and $0.70 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 nine months of fiscal year 2016 would have increased 17% and 27%, respectively. was flat. 1415,353 0.31 20,442 0.38 8,750 0.18 (3,027) (0.06) (1,722) (0.03) 612 0.01 21,076 0.43 19,332 0.36 38,630 0.77 38,189 0.70 8,750 0.18 (3,027) (0.06) (1,875) (0.04) 664 0.01 (585) (0.01) (666) (0.01) (1,722) (0.03) 612 0.01 42,557 0.85 36,413 0.67 (1) Tax impact during the period at an effective tax rate of 34.6%(2) Tax impact during the period at an adjusted effective tax rate of 35.43% Three months ended November 30, 2016 Three months ended November 30, 2015 Net
Income Diluted
EPS Net
Income Diluted
EPSReported – GAAP $ 13,118 $ 0.28 $ 12,458 $ 0.24 Loss on refranchising transactions (1) 957 0.02 — — Tax impact on refranchising transactions (2) (340 ) (0.01 ) — — Gain on sale of investment in refranchised drive-in operations (3) (3,795 ) (0.08 ) — — Tax impact on sale of investment in refranchised drive-in operations (2) 1,350 0.03 — — Adjusted - Non-GAAP $ 11,290 $ 0.24 $ 12,458 $ 0.24 ________________(1) During the first quarter of fiscal year 2017, we completed two 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, resulting in a loss on the transactions. Additional information regarding the refranchising initiative is detailed below. (2) Tax impact during the period at an effective tax rate of 35.6%. (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. 15In June 2016, we announced plans to refranchise Company Drive-Ins as part of a refranchising initiative to move toward an approximately 95%-franchised system. During the first quarter of fiscal year 2017, we completed two transactions to refranchise the operations of 56 Company Drive-Ins and retained a non-controlling minority investment in the franchise operations.During fiscal year 2016, we 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. We retained a non-controlling minority investment in the franchise operations of 25 refranchised drive-ins.Income from minority investments is included in other revenue on the condensed consolidated statements of income. Gains and losses 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: Three months ended November 30, 2016 Number of Company Drive-Ins sold to franchisees 56 Proceeds from sales of Company Drive-Ins $ 8,950 Assets sold, net of retained minority investment (1)(5,461 ) Goodwill related to sales of Company Drive-Ins (377 ) Initial lease payment for real estate option (2)(3,810 ) Loss on assets held for sale (259 ) Refranchising initiative gains (losses), net $ (957 ) _______________(1) Net assets sold consisted primarily of equipment.(2) 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. Lease payments will be combined with the initial refranchising transaction above to quantify the net refranchising gain (loss) once the option is exercised or expires. Refranchising Initiative
Fiscal Year 2016Number of Company Drive-Ins sold to franchisees (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. 16The 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.3.3 7.0 5.3 9.4 3,528 3,508 3,526 3,518 16 6 34 23 (1) (2) (17) (29) 3,543 3,512 3,543 3,512 347 341 933 894 2.0 6.1 4.4 8.3 (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.16System-wide Performance($ in thousands) Three months ended November 30, 2016 2015 Increase (decrease) in total sales (0.9 )% 6.4 % System-wide drive-ins in operation(1): Total at beginning of period 3,557 3,526 Opened 14 13 Closed (net of re-openings) (12 ) (10 ) Total at end of period 3,559 3,529 Average sales per drive-in $ 301 $ 305 Change in same-store sales(2) (2.0 )% 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. Results of OperationsRevenues. The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.Revenues($ in thousands)Revenues($ in thousands) Three months ended November 30, Increase
(Decrease) Percent
Increase
(Decrease) 2016 2015 115,143 118,369 (3,226) (2.7) $ 87,152 $ 103,883 $ (16,731 ) (16.1 )% 46,296 43,541 2,755 6.3 39,882 39,462 420 1.1 % 391 163 228 139.9 257 460 (203 ) (44.1 )% 2,141 1,569 572 36.5 1,381 1,592 (211 ) (13.3 )% 1,268 1,106 162 14.6 879 406 473 116.5 % 165,239 164,748 491 0.3 $ 129,551 $ 145,803 $ (16,252 ) (11.1 )% 314,339 310,816 3,523 1.1 121,565 112,553 9,012 8.0 1,091 1,822 (731) (40.1) 5,132 3,613 1,519 42.0 2,075 2,019 56 2.8 444,202 430,823 13,379 3.1 17The 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.115,143 118,369 314,339 310,816 (2.7) 6.6 1.1 8.5 375 392 387 391 2 3 (9) 1 (3) (1) 375 394 375 394 307 301 829 797 0.9 5.5 3.6 8.0 (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.Company Drive-In Sales($ in thousands) Three months ended November 30, 2016 2015 Company Drive-In sales $ 87,152 $ 103,883 Percentage increase (decrease) (16.1 )% 3.7 % Company Drive-Ins in operation(1): Total at beginning of period 345 387 Opened — — Sold to franchisees (56 ) (2 ) Closed (net of re-openings) (3 ) (3 ) Total at end of period 286 382 Average sales per Company Drive-In $ 270 $ 270 Change in same-store sales(2) (2.4 )% 4.4 % __________________(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 0.9% for the third quarter and 3.6%decreased 2.4% for the first nine monthsquarter of fiscal year 2016,2017, as compared to an increase of 5.5% and 8.0%, respectively,4.4% for the same periodsperiod last year, reflecting the impact of declininga decrease in traffic due to lower consumer spending in the restaurant industry and modestly unfavorable weather during the quarter.as well as aggressive competitive activity. We continue to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness while benefitting from the implementation of new technology initiatives.effectiveness. Company Drive-In sales decreased $3.2$16.7 million during the thirdfirst quarter of fiscal year 20162017 as compared to the same period last year, mainly due to a decreasedecreased sales of $3.8$13.2 million related to stores sold to franchisees, in the prior year, partially offset by an increase of $0.9 million in same-store sales. For the first nine months of fiscal year 2016, Company Drive-In sales increased $3.5 million as compared to the same period last year. The increase in the first nine months of fiscal year 2016 is primarily due to an increase of $10.9 milliona decrease in same-store sales partially offset byof $2.2 million and a decrease of $1.7 million related to stores sold to franchisees of $8.0 million. that were permanently or temporarily closed during the period.18The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.1,107,725 1,065,109 2,963,155 2,803,391 4.0 7.0 5.7 9.5 3,153 3,116 3,139 3,127 16 4 34 20 9 (1) (1) (2) (14) (28) 3,168 3,118 3,168 3,118 352 346 945 906 2.1 6.1 4.5 8.3 48,828 45,273 127,788 117,988 7.9 13.5 8.3 18.8 4.18 4.09 4.10 4.01 (1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.(2) Represents percentage change for drive-ins open for a minimum of 15 months.(3) Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2015.(4) Represents franchise royalties as a percentage of Franchise Drive-In sales.Franchise Information($ in thousands) Three months ended November 30, 2016 2015 Franchise Drive-In sales $ 975,782 $ 968,956 Percentage increase 0.7 % 6.7 % Franchise Drive-Ins in operation(1): Total at beginning of period 3,212 3,139 Opened 14 13 Acquired from the company 56 2 Closed (net of re-openings) (9 ) (7 ) Total at end of period 3,273 3,147 Average sales per Franchise Drive-In 304 310 Change in same-store sales(2) (2.0 )% 5.4 % Franchising revenues(3) $ 41,520 $ 41,514 Percentage increase (decrease) — % 5.6 % Effective royalty rate(4) 4.09 % 4.07 % __________________(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, 2016.(4) Represents franchise royalties as a percentage of Franchise Drive-In sales. Same-store sales for Franchise Drive-Ins increased 2.1% for the third quarter and 4.5%decreased 2.0% for the first nine monthsquarter of fiscal year 2016,2017 as compared to an increase of 6.1% and 8.3%, respectively,5.4% for the same periodsperiod last year.year, reflecting a decrease in traffic due to lower consumer spending in the restaurant industry as well as aggressive competitive activity. We continue to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness. Franchising revenues increased $3.6 million, or 7.9%, for the third quarter and increased $9.8 million, or 8.3%,were flat for the first nine monthsquarter of fiscal year 2016,2017, compared to the same periodsperiod last year. TheFranchise royalties were negatively impacted by the decrease in same-store sales, but were offset by an increase in franchise revenues was primarily attributable to increases in royalties related to the growth of same-store sales andnet new unit growth. growth and franchisee acquisitions of Company Drive-ins.19Operating 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.27.9 27.6 34.7 34.6 19.4 19.4 82.0 81.6 27.8 28.0 35.5 35.4 20.8 21.1 84.1 84.5 Company Drive-In Margins Three months ended November 30, Percentage Points
Increase (Decrease) 2016 2015 Costs and expenses Company Drive-Ins: Food and packaging 27.7 % 27.9 % (0.2) Payroll and other employee benefits 36.4 % 35.0 % 1.4 Other operating expenses 22.3 % 22.0 % 0.3 Cost of Company Drive-In sales 86.4 % 84.9 % 1.5 Drive-in level margins at Company Drive-Ins were unfavorable by 40150 basis points during the thirdfirst quarter and favorable by 40 basis points in the first nine months of fiscal year 2016. The margin results for2017, driven by the de-leveraging impact of same-store sales, payroll and other employee benefits and other operating expenses. Food and packaging costs were favorable by 20 basis points during the first quarter primarily reflectof fiscal year 2017 as a result of moderate commodity cost improvement, partially offset by the impact of fees paid to the new BTF, which was established March 1, 2016. FoodBTF. Payroll and packaging costsother employee benefits were unfavorable by 140 basis points for the first quarter of fiscal year 2017, reflecting investments in improved employee compensation and benefits to attract and retain employees at the drive-in level. Other operating expenses were unfavorable by 30 basis points during the thirdfirst quarter as a result of vendor contributions that were previously credited against food and paper costs for Company Drive-Ins that are now being remitted to the BTF. Other operating expenses were flat during the third quarter,fiscal year 2017, mainly as a result of the new technology feefees paid to the BTF, offset by favorable repair and maintenance costs related to technology as well as favorable utility costs. Food and packaging and other operating expenses for the first nine months of fiscal year 2016 improved by 20 basis points and 30 basis points, respectively, reflecting positive same-store sales, partially offset by the impact of the BTF.Selling, General and Administrative (“SG&A”). SG&A expenses decreased $0.1$1.2 million, or 0.4%5.7%, to $20.6 million for the third quarter and increased $4.7 million, or 8.2%, to $62.3$19.8 million for the first nine monthsquarter of fiscal year 2016,2017, as compared to the same periodsperiod last year. The increasedecrease for the first ninethree months is primarily related to the costs of additional headcount in support of the Company’s technology initiatives and higherlower variable compensation due to strong operating performance.compensation. Depreciation and Amortization. Depreciation and amortization was flatdecreased $0.7 million, or 6.6%, in the thirdfirst quarter and decreased $1.2 million, or 3.4%, to $33.5 million for the first nine months of fiscal year 2016,2017, as compared to the same periodsperiod last year. This decrease is primarily attributable to assets that fully depreciated in the prior fiscal year.year and a decrease in company assets related to the refranchising of certain Company Drive-Ins in the fourth quarter of fiscal year 2016 and the first quarter of fiscal year 2017.Net Interest Expense. Net interest expense increased $9.1$0.6 million, or 144.9%9.4%, to $15.4 million for the third quarter and $9.2 million, or 49.2%, to $27.9$6.7 million for the first nine monthsquarter of fiscal year 2016,2017, as compared to the same period last year. The increase reflectswas due to an increase in the $8.8 million loss from the early extinguishment oflong-term debt relatedbalance attributable to the 2016our debt financing transaction that occurred in May of fiscal year 2016. Excluding the early extinguishment of debt, net interest expense increased $0.4 million, or 5.8%, to $6.7 million for the third quarter and $0.4 million, or 2.4%, to $19.1 million for the first nine months of fiscal year 2016, as compared to the same periods last year. See “Liquidity and Sources of Capital” and “Item 3. Quantitative and Qualitative Disclosures About Market Risk” below for202016 debt financing transaction and factors that could impact interest expense.Income Taxes. The provision for income taxes reflects an effective tax rate of 34.6%35.6% for the thirdfirst quarter of fiscal 2016year 2017, as compared to 32.0%37.5% for the same period in fiscal year 2015.last year. The provision forhigher effective income taxes reflects an effective tax rate of 34.8% forduring the first nine monthsquarter of fiscal year 2016 compared to 33.2% for the same period in fiscal year 2015. The change was primarily attributable to a decrease in employment tax credits due to the recognition of prior years’ federal tax deductions in fiscal 2015.expired credit provisions. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by option-holdersoption holders and as circumstances on other tax matters change.Financial PositionTotal assets increased $59.6decreased $55.4 million, or 9.6%8.5%, to $679.7$593.3 million during the first ninethree months of fiscal year 20162017 from $620.0$648.7 million at the end of fiscal year 2015.2016. The increasedecrease in total assets was primarily attributable to an increasea decrease in cash and cash equivalents, resultingwhich reflect the purchases of common stock and payment of dividends during the period, offset by cash generated from the netoperating activities and proceeds of $74.5 million from the 2016 debt financing transaction as well as a $7.9 million increase in debt origination costs, net, also related to the transaction, detailed below in “Liquidity and Sources of Capital.” Additionally,refranchising transactions. Total assets held for sale increased $13.4 million consisting of Company Drive-Ins expected to be sold within one year as part of the Company’s plan to move toward an approximately 95%-franchised system. These increases were further impacted by a decrease in net property, equipment and capital leases, of $29.8 million, driven by depreciation, asset retirements and sales, andrefranchising transactions, as well as assets reclassified as held for sale,sale. These were partially offset by purchases of property, equipment and technology. 20Total liabilities increased $135.5decreased $12.8 million, or 22.5%1.8%, to $738.1$711.5 million during the first ninethree months of fiscal year 20162017 from $602.6$724.3 million at the end of fiscal year 2015.2016. The increasedecrease was primarily attributable to a decrease of $16.3 million in accrued liabilities, which are mainly related to payment of incentive compensation and other liabilities that were accrued as of August 31, 2016 and was offset by an increase in long term debt of $149.3 million, offset by a $7.3 million decrease in current maturities of long-term debtaccounts payable and capital leases, allincomes taxes payable, both related to the 2016 debt financing transaction, detailed below in “Liquidity and Sourcestiming of Capital.” Total stockholders’ equity (deficit) decreased $75.9deficit increased $42.6 million, or 435.3%56.3%, to a deficit of $58.5$118.2 million during the first three months of fiscal year 20162017 from $17.4a deficit of $75.6 million at the end of fiscal year 2015.2016. This decreaseincrease was primarily attributable to $110.8$50.6 million in purchases of common stock during the first sixthree months of the fiscal year and the payment of $16.2$6.4 million in dividends, partially offset by current-year earnings of $38.6 million and $9.8 million from the issuance of stock related to stock option exercises and the related tax benefits.Liquidity and Sources of CapitalOperating Cash Flows. Net cash provided by operating activities decreased $22.3$6.6 million to $78.2$19.2 million for the first ninethree months of fiscal year 20162017 as compared to $100.5$25.8 million for the same period in fiscal year 2015.2016. The decreasechange was driven by changeshigher incentive compensation payments compared to the same period in working capital during the first nine months of fiscalprior year, 2016 related toas well as the timing of payments and receipts for both operationalpayroll and tax transactions.InvestingCash Flows. Net cash provided by investing activities was $7.2 million as compared to net cashed used in investing activities during the first nine months of fiscal year 2016 decreased $7.2 million to $15.4 million compared to $22.6$5.6 million for the same period in fiscal year 2015. Proceeds from2016. The majority of the $17.8 million in proceeds was a result of the sale of assets increased $8.6 million, primarily related to stores sold to franchisees duringas part of the first nine monthsrefranchising initiative and the sale of fiscal year 2016. Additionally,investment in refranchised drive-in operations. In addition, franchisees paid $3.2 million on short-term financing notes. These proceeds were offset by increased investments in property and equipment decreased compared to the same period last year mainly due to acquisitionsincreased investment in rebuilds, relocations and remodels of drive-in real estate of $3.8 million that occurred in the second quarter of fiscal year 2015. The change was also affected by the timing of payments and borrowings on receivables from system funds. existing drive-ins.21ninethree months of fiscal year 2016:Purchase and replacement of equipment and technology$9.3 Brand technology investments8.0 Rebuilds, relocations and remodels of existing drive-ins5.5 Newly constructed drive-ins leased or sold to franchisees2.8 Newly constructed Company Drive-Ins0.9 Total investments in property and equipment$26.5 Rebuilds, relocations and remodels of existing drive-ins $ 7.0 Brand technology investments 4.0 Newly constructed drive-ins leased or sold to franchisees 2.5 Purchase and replacement of equipment and technology 0.9 Newly constructed Company Drive-Ins 0.4 Total investments in property and equipment $ 14.8 Financing Cash Flows. Net cash provided by financing activities increased $100.0decreased $47.0 million to $9.4$57.5 million for the first ninethree months of fiscal year 2016,2017, as compared to cash used in financing activities of $90.6$10.5 million for the same period in fiscal year 2015. In May of fiscal year 2016 we completed a2016. The decrease is primarily due to the reduction in regularly scheduled principal payments related to the debt financing transaction as described below, which is the primary driver of the increase.that occurred in fiscal year 2016. Additionally, the overall increase in cash provided in financing activities was impacted by a decrease in restricted cash related to our new debt obligations. The increase was partially offset by a decrease in stock option exercise proceeds of $9.9 million and an increase in purchases of treasury stock of $15.8 million. On May 17, 2016, various subsidiaries of ours (the “Co-Issuers”) issued $425.0 million of Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2016 Fixed Rate Notes”) in a private transaction which bears interest at 4.47% per annum. The 2016 Fixed Rate Notes have an expected life of seven years with an anticipated repayment date in May 2023. At May 31, 2016, the balance outstanding under the 2016 Fixed Rate Notes including accrued interest totaled $425.7 million and carried a weighted-average interest cost of 4.79%, including the effect of the loan origination costs described below.The Co-Issuers also entered into a securitized financing facility of Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the 2016 Fixed Rate Notes, the “2016 Notes”). This revolving credit facility allows for the issuance of up to $150.0 million of 2016 Variable Funding Notes and certain other credit instruments, including letters of credit. Interestprior-year period included advances on the 2016 Variable Funding Notes is based on the one-month London Interbank Offered Rate or Commercial Paper, depending on the funding source, plus 2.0%, per annum. An annual commitment fee of 0.5% is payable monthly on the unused portion of the 2016 Variable Funding Notes facility. The 2016 Variable Funding Notes has an expected life of five years with an anticipated repayment date in May 2021 with two one-year extension options available upon certain conditions including meeting a minimum debt service coverage ratio threshold. At May 31, 2016, there was no balance outstanding under the 2016 Variable Funding Notes.We used $350.5 million of the net proceeds from the issuance of the 2016 Fixed Rate Notes to repay our existing Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) and Series 2011-1 Senior Secured Variable Funding Notes, Class A-1, (the “2011 Variable Funding Notes” and, together with the 2011 Fixed Rate Notes, the “2011 Notes”) in full and to pay the costs associated with the securitized financing transaction, including prepayment premiums. Loan origination costs associated with our 2016 transaction totaled $12.6 million andwhich were allocated among the 2016 Notes. Loan costs are being amortized over each note’s expected life, and the unamortized balance is categorizedsubsequently repaid as “debt origination costs, net” on the Condensed Consolidated Balance Sheets.While the 2016 Fixed Rate Notes and the 2016 Variable Rate Notes are structured to provide for seven-year and five-year lives, respectively, they have a legal final maturity date of May 2046. We intend to repay or refinance the 2016 Notes on or before the end of their respective expected lives. In the event the 2016 Notes are not paid in full by the end of their expected lives, the Notes are subject to an upward adjustment in the interest rate of at least 5% per annum. In addition, principal payments will accelerate by applying allpart of the royalties, lease revenues and other fees securing the debt after deducting certain expenses, until the debt is paid in full. Also, any unfunded amount under the 2016 Variable Funding Notes will become unavailable.22We anticipate fiscal year 2016 interest expense from the 2016 Fixed Rate Notes and the 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”), including the amortization of loan origination costs, to be approximately $26.0 million annually. We are scheduled to make principal payments on our 2016 Fixed Rate Notes of approximately $1.1 million over the remainder of fiscal year 2016. Under the new financing mandatory principal payments of $2.5 million in total are due through December 2017 with no principal payments required after. There are no required principal payments for the 2013 Fixed Rate Notes. The elimination of mandatory principal payments of $10 million annually under our retired debt will increase the amount of our available free cash flow.transaction. For additional information on our May 2016 transactionlong-term debt, see note 7 – Debt, included in Part I, Item 1, “Financial Statements” in this Quarterly Report on Form 10-Q.See note 10 – Long-Term Debt in the Notes to Consolidated Financial Statements in the Company’sour Annual Report on Form 10-K for the fiscal year ended August 31, 2015 for additional information regarding our long-term debt.In August 2015, our Board of Directors extended 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.Share repurchases may be made from time to time in the open market or otherwise. The share repurchase program may be extended, modified, suspended or discontinued at any time. During the first ninethree months of fiscal year 2016,2017, approximately 3.92.0 million shares were repurchased for a total cost of $110.8 million.As of May 31,November 30, 2016, our total cash balance of $110.4$49.6 million ($99.441.1 million of unrestricted and $11.0$8.5 million of restricted cash balances) reflected the impact of the cash generated from operating activities, stock option exercise proceeds, 2016 debt transactionrefranchising 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 2016Series 2016-1 Senior Secured Variable Funding Notes, Class A-1, will meet our needs for the foreseeable future.21Critical Accounting Policies and EstimatesCritical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2015. 2016.New Accounting PronouncementsFor a description of new accounting pronouncements, see note 1 - Basis of Presentation, included in Part I, Item 1, "Financial Statements", in this Quarterly Report on Form 10-Q. Item 3. Quantitative and Qualitative Disclosures About Market Risk Sonic’s use of debt directly exposes the Company to interest rate risk. Floating rate debt, where the interest rate fluctuates periodically, exposes the Company to short-term changes in market interest rates. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to changes in market interest rates reflectedThere has been no material change in the fair value of the debtquantitative and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Sonic is also exposed toqualitative market risk from changesrisks set forth in commodity prices. Sonic does not utilize financial instruments for trading purposes. Sonic manages its debt portfolio to achieve an overall desired position of fixed and floating rates.Interest Rate Risk. Our exposure to interest rate risk at May 31, 2016 is primarily based on the 2016 Fixed Rate Notes and the 2013 Fixed Rate Notes with an effective rate of 4.47% and 3.75%, respectively, before amortization of debt-related costs. At May 31, 2016, the fair value of the Fixed Rate Notes approximated the carrying value of $580.8 million, including accrued interest. Management used market information available for public debt transactions for companies with ratings that are at or below our ratings. Management believes this fair value is a reasonable estimate with the information that is available. Should interest rates and/or credit spreads increase or decrease by one percentage point, the estimated fair value of the Fixed Rate Notes would decrease or23increase by approximately $15 million, respectively. The fair value estimate required significant assumptions by management as there are few, if any, securitized loan transactions occurring in the current market.For further discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2015.Item 4. Controls and ProceduresAs of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive 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.There were no significant changes in the Company’s internal control over financial reporting during the quarter ended May 31,November 30, 2016, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.PART II – OTHER INFORMATIONItem 1. Legal ProceedingsThe 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.Item 1A. Risk FactorsThere has been no material change in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2015.2224Item 2. Unregistered Sales of Equity Securities and Use of Proceeds(c) Issuer Purchases of Equity SecuritiesShares repurchased during thirdfirst quarter of fiscal year 20162017 are as follows (in thousands, except per share amounts):405 31.53 405 41,774 347 35.21 347 29,564 455 31.07 455 170,431 1,207 1,207 (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 through August31,2016. 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. 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.25Period Total
Number of
Shares
Purchased Average
Price
Paid per
Share Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs Maximum Dollar
Value that May
Yet Be
Purchased
Under the
Program(1)September 1, 2016 through September 30, 2016 594 $ 26.54 594 $ 117,140 October 1, 2016 through October 31, 2016 559 25.40 559 142,946 November 1, 2016 through November 30, 2016 801 25.71 801 122,359 Total 1,954 1,954 __________________(1) In August 2015, the Company’s Board of Directors ("the Board") 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 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 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. 23Item 6. ExhibitsThe Company has marked all management contracts and compensatory plans or arrangements with an asterisk (*).Exhibits.31.01 Exhibits. 10.01 Form of Chief Executive Officer Amended and Restated Employment Agreement dated January 1, 2017* 10.02 Form of Executive Officer Amended and Restated Employment Agreement dated January 1, 2017* 10.03 Amended and Restated Executive Severance Plan dated January 1, 2017* 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14 2624SIGNATURESPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.SONIC CORP.SONIC CORP. By:By: /s/ Claudia S. San Pedro Claudia S. San PedroExecutive Vice President andChief Financial OfficerDate: July 1, 2016January 6, 201725EXHIBIT INDEXExhibit Number and Description31.01 10.01 Form of Chief Executive Officer Amended and Restated Employment Agreement dated January 1, 2017* 10.02 Form of Executive Officer Amended and Restated Employment Agreement dated January 1, 2017* 10.03 Amended and Restated Executive Severance Plan dated January 1, 2017* 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14 26