2017
Delaware |
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(State or other jurisdiction of incorporation or organization) | 73-1371046 (I.R.S.Employer Identification No.) | |||
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300 Johnny Bench Drive |
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Oklahoma City, Oklahoma (Address ofprincipalexecutiveoffices) | 73104 (Zip Code) | |
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| Large accelerated filer ☒ | Accelerated filer ☐ | |
Non-accelerated filer ☐ (Do | Smaller reporting company ☐ | |
| Emerging growth 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 methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is effective for fiscal year 2021, with early adoption permitted for fiscal years beginning after December 15, 2018. The update should be adopted using a modified-retrospective approach. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures. outstanding borrowings on the As of May 31, 2017, there was $9.9 million of unamortized debt issuance costs related to the Company's fixed rate notes included within long-term debt, net, on the Company's condensed consolidated balance sheet. 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) ————————— Three months ended Nine months ended May 31, May 31, 2016 2015 2016 2015 Provision for income taxes $ $ $ $ Effective income tax rate % % % % $0.7 million and $0.1 million in the second and third quarters of fiscal year 2017, respectively. Please refer to the "Recently Adopted Accounting Pronouncements" section of note 1 - Summary of Significant Accounting Policies for details regarding the adoption of this standard. The decrease in tax rate for the first nine months of fiscal year 2017 was partially offset by the favorable impact of the retroactive reinstatement of the Work Opportunity Tax Credit in the second quarter of fiscal year 2016. 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 Brand Technology Fund. the Company would purchase the franchisee loan from the bank, thereby becoming the note holder and providing an avenue of recourse with the franchisee. The Company recorded a liability for this guarantee which was based on the Company’s estimate of fair value. As of May 31, At May 31, 2017 and August 31, 2016, the fair value of the Company’s 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) August 31, 2016. The table below outlines our use of cash in millions for investments in property and equipment for the first nine months of fiscal year 2016. $127.7 million, resulting in an average price per share of $25.95. 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) May 31,
2017 August 31,
2016ASSETS Current assets: Cash and cash equivalents $ 52,050 $ 72,092 Restricted cash 11,136 15,873 Accounts and notes receivable, net 40,361 35,437 Prepaid expenses and other current assets 14,409 14,255 Total current assets 117,956 137,657 Noncurrent restricted cash 124 140 Investment in direct financing lease 11,611 9,859 Notes receivable, net 10,077 12,562 Property, equipment and capital leases 632,092 766,522 Less accumulated depreciation and amortization (304,565 ) (374,142 ) Property, equipment and capital leases, net 327,527 392,380 Goodwill 75,761 76,734 Debt origination costs, net 2,603 3,093 Other assets, net 18,175 16,236 Total assets $ 563,834 $ 648,661 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 11,142 $ 14,372 Franchisee deposits 934 720 Accrued liabilities 40,296 51,913 Income taxes payable 1,479 2,568 Current maturities of long-term debt and capital leases 3,707 5,090 Total current liabilities 57,558 74,663 Obligations under capital leases due after one year 15,413 17,391 Long-term debt, net 601,631 566,187 Deferred income taxes 41,547 42,530 Other non-current liabilities 20,783 23,533 Total non-current liabilities 679,374 649,641 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 236,341 234,956 Retained earnings 918,774 894,442 Treasury stock, at cost; 76,328 shares (71,670 shares at August 31, 2016) (1,329,396 ) (1,206,224 ) Total stockholders’ deficit (173,098 ) (75,643 ) Total liabilities and stockholders’ deficit $ 563,834 $ 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
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Revenues: Company Drive-In sales $ 72,062 $ 115,143 $ 223,500 $ 314,339 Franchise Drive-Ins: Franchise royalties and fees 48,220 46,687 122,687 122,656 Lease revenue 2,418 2,141 5,474 5,132 Other 1,290 1,268 2,038 2,075 Total revenues 123,990 165,239 353,699 444,202 Costs and expenses: Company Drive-Ins: Food and packaging 19,380 32,089 61,112 87,248 Payroll and other employee benefits 25,590 39,912 82,688 111,635 Other operating expenses, exclusive of depreciation and amortization included below 13,836 22,442 47,540 65,450 Total cost of Company Drive-In sales 58,806 94,443 191,340 264,333 Selling, general and administrative 20,763 20,617 58,813 62,342 Depreciation and amortization 9,520 11,405 29,531 33,461 Other operating income, net (540 ) (106 ) (11,105 ) (3,071 ) Total costs and expenses 88,549 126,359 268,579 357,065 Income from operations 35,441 38,880 85,120 87,137 Interest expense 7,318 6,776 21,734 19,465 Interest income (291 ) (121 ) (1,047 ) (326 ) Debt extinguishment costs — 8,750 — 8,750 Net interest expense 7,027 15,405 20,687 27,889 Income before income taxes 28,414 23,475 64,433 59,248 Provision for income taxes 9,663 8,122 21,601 20,618 Net income $ 18,751 $ 15,353 $ 42,832 $ 38,630 Basic income per share $ 0.44 $ 0.32 $ 0.97 $ 0.79 Diluted income per share $ 0.44 $ 0.31 $ 0.96 $ 0.77 Cash dividends declared per common share $ 0.14 $ 0.11 $ 0.42 $ 0.33 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) Nine months ended
May 31, 2017 2016 Cash flows from operating activities: Net income $ 42,832 $ 38,630 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,531 33,461 Stock-based compensation expense 2,906 2,688 Loss from early extinguishment of debt — 8,750 Provision for deferred income taxes (1,354 ) 964 (Gain) loss on disposition of assets, net (12,097 ) (3,149 ) Other 1,388 (3,759 ) (Increase) decrease in operating assets: Restricted cash 4,549 2,351 Accounts receivable and other assets (2,124 ) (4,545 ) Increase (decrease) in operating liabilities: Accounts payable (2,894 ) 4,632 Accrued and other liabilities (12,701 ) (3,261 ) Income taxes 44 1,470 Total adjustments 7,248 39,602 Net cash provided by operating activities 50,080 78,232 Cash flows from investing activities: Purchases of property and equipment (37,146 ) (26,467 ) Proceeds from sale of assets 62,393 12,701 Proceeds from sale of investment in refranchised drive-in operations 8,354 — Other 10,574 (1,678 ) Net cash provided by (used in) investing activities 44,175 (15,444 ) Cash flows from financing activities: Payments on debt (10,417 ) (421,020 ) Proceeds from borrowings 43,000 563,000 Restricted cash for securitization obligations 203 6,393 Purchases of treasury stock (128,180 ) (111,406 ) Proceeds from exercise of stock options 2,528 5,878 Payment of dividends (18,485 ) (16,154 ) Debt issuance and extinguishment costs (10 ) (18,339 ) Other (2,936 ) 1,031 Net cash provided by (used in) financing activities (114,297 ) 9,383 Net increase (decrease) in cash and cash equivalents (20,042 ) 72,171 Cash and cash equivalents at beginning of period 72,092 27,191 Cash and cash equivalents at end of period $ 52,050 $ 99,362 Supplemental cash flow information Cash paid during the period for: Interest $ 20,210 $ 17,983 Income taxes (net of refunds) 22,985 18,258 Non-cash investing and financing activities: Net additions to capital lease obligations 1,433 645 Change in obligation to acquire treasury stock $ (516 ) $ (578 ) The accompanying notes are an integral part of the consolidated financial statements.66SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICALFINANCIAL STATEMENTS(In thousands, expectexcept 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.New 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 has issued clarifying guidance with 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. 2014-092016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." ASU No. 2016-08 provides guidance for evaluating when another party, along with the entity, is involved in providing a good or service to a customer. 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 withinASU No. 2016-20 provides corrections or improvements to issues that reporting period, which requiresaffect narrow aspects of the guidance.The Company plans to adopt the standardstandards 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.method. 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 arefranchisees, nor will it have a material impact to the recognition of gift card breakage. The Company expects the pronouncement will impact the recognition of the initial franchise fee, which is currently evaluatingrecognized upon the opening of a Franchise Drive-In. The impact on these fees has not yet been estimated, and no transition method has been selected. The Company continues to evaluate the effect that this pronouncement will have on the recognition of other transactions, on the financial statements and related disclosures.7SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)In February 2016, the FASB issued ASU No. 2016-02, “Leases.” The new standard, which replaces existing lease guidance, requires lessees to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. Accounting guidance for lessors is largely unchanged. The standard is effective for fiscal year 2020, with early application permitted. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.In March 2016, the FASB issued ASU No. 2016-04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored-value product liability in a way that aligns with the new revenue recognition guidance. The update is effective for fiscal year 2019; however, early adoption is permitted. The adoption of the update will not yet selectedhave an impact on the Company’s financial statements.In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses.” The update was issued to provide more decision-useful information about the expected credit losses on financial instruments. The update replaces the incurred loss impairment methodology in current GAAP with a transition method. In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments.” The update is intended to reduce diversity in practice in how certain transactions are classified and will make eight targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The update is effective for fiscal year 2019. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the amendments will apply prospectively as of the earliest date practicable. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its financial statements and related disclosures.In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory," as part of its simplification initiatives. The update requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than deferring the recognition until the asset has been sold to an outside party as is required under current GAAP. The update is effective for fiscal year 2019. The new standard will require adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings, and early adoption is permitted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows - Restricted Cash." The update requires that restricted cash be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for fiscal year 2019. The amendments should be adopted on a retrospective basis to each period presented, and early adoption is permitted. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment." To simplify the subsequent measurement of goodwill, the update requires only a single-step quantitative test to identify and measure impairment based on the excess of a reporting unit's carrying amount over its fair value. A qualitative assessment may still be completed first for an entity to determine if a quantitative impairment test is necessary. The update is effective for fiscal year 2021 and is to be adopted on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company plans to adopt this standard in fiscal year 2017. The adoption of this standard will have no impact on the Company's consolidated financial statements.8SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. The update is effective for fiscal year 2019. The update is to be adopted prospectively to an award modified on or after the adoption date. Early adoption is permitted. The Company is currently evaluating the effect of this update but does not believe it will have a material impact on its financial statements and related disclosures.The Company has reviewed all other recently issued accounting pronouncements and concluded they are not applicable or not expected to be significant to our operations.Recently Adopted Accounting 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 No. 2015-15, which addresses the SEC’s comments related to the absence of authoritative guidance within ASU No. 2015-03 related to line-of-credit arrangements. The SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any7SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICAL STATEMENTS(In thousands, expect per share data)(Unaudited)line of creditline-of-credit arrangement. The Company retrospectively adopted this guidance in the first quarter of fiscal year 2017, which resulted in a reclassification of unamortized debt issuance costs of $11.3 million related to the Company's fixed rate notes from non-current assets to long-term debt, net, within the Company's consolidated balance sheet, resulting in a corresponding reduction in total assets and total long-term liabilities as of August 31, 2016. Other than this reclassification, the adoption of these 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 share-based payments in the 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 half 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. classified as a financing activity. The Company is currently evaluating the effect that this update will have on its financial statements and related disclosures.stock compensation expense continues to reflect estimated forfeitures.89SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICALFINANCIAL STATEMENTS(In thousands, expectexcept per share data)(Unaudited)2.Earnings Per Share2. Earnings Per Share The 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)Anti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive.3.Share Repurchase Program Three months ended
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Numerator: Net income $ 18,751 $ 15,353 $ 42,832 $ 38,630 Denominator: Weighted average common shares outstanding– basic 42,402 48,377 43,972 49,192 Effect of dilutive employee stock options and unvested restricted stock units 691 949 757 1,021 Weighted average common shares outstanding – diluted 43,093 49,326 44,729 50,213 Net income per common share – basic $ 0.44 $ 0.32 $ 0.97 $ 0.79 Net income per common share – diluted $ 0.44 $ 0.31 $ 0.96 $ 0.77 Anti-dilutive securities excluded (1) 1,362 686 1,095 550 __________________(1) Anti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive. 3. Share Repurchase Program In August 2015, the Company’s Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $145$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 nine months of fiscal year 2017, approximately 4.9 million shares were repurchased for a total cost of $127.7 million, resulting in an average price per share of $25.95. The total remaining amount authorized under the share repurchase program as of May 31, 2017 was $45.2 million.Share repurchases may be made from time to time in the open market or otherwise, including through an accelerated share repurchase program, under terms of a Rule 10b5-1 plan, in privately negotiated transactions or in round lot or block transactions. The share repurchase program may be extended, modified, suspended or discontinued at any time.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.910SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANICALFINANCIAL STATEMENTS(In thousands, expectexcept per share data)(Unaudited)4.Income Taxes4. Income Taxes The 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
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Provision for income taxes $ 9,663 $ 8,122 $ 21,601 $ 20,618 Effective income tax rate 34.0 % 34.6 % 33.5 % 34.8 % The higher effective income tax rate in bothduring the third quarter andof fiscal year 2017 was comparable to the same period in the prior fiscal year. The lower effective income tax rate for the first nine months of fiscal year 20162017 was due primarily attributable to the fiscal year 2015 effective rate being favorably impacted by the recognition of prior years’ federalexcess tax deductions. 5.Accountsbenefits related to stock option exercises due to the early adoption of ASU No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” in the first quarter of 2017. Excess tax benefits recognized as a component of the provision for income taxes in the condensed consolidated statements of income were negligible in the first quarter of fiscal year 2017 and 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 May 31,
2017 August 31,
2016Current Accounts and Notes Receivable: Royalties and other trade receivables $ 21,301 $ 19,994 Notes receivable from franchisees 985 5,531 Receivables from system funds 2,458 4,372 Other 16,712 6,507 Accounts and notes receivable, gross 41,456 36,404 Allowance for doubtful accounts and notes receivable (1,095 ) (967 ) Current accounts and notes receivable, net $ 40,361 $ 35,437 Noncurrent Notes Receivable: Receivables from franchisees $ 6,884 $ 7,170 Receivables from system funds 3,233 5,466 Allowance for doubtful notes receivable (40 ) (74 ) Noncurrent notes receivable, net $ 10,077 $ 12,562 The Company’s receivables are primarily due from franchisees, all of whom are in the restaurant business. Substantially all of the notes receivable from franchisees are collateralized by real estate or equipment. The receivables from system funds represent transactions in the normal course of business. The decrease in current notes receivable from franchisees is due to short-term financing for refranchised drive-ins and newly constructed drive-ins sold to franchisees that were established in fiscal year 2016 and were repaid in the first and third quarters of fiscal year 2017. Of the increase in other current accounts and notes receivable, $7.0 million is due to a franchisee exercise of an option to purchase real estate, which was collected immediately following the timingthird fiscal quarter. The decrease in noncurrent receivables from system funds is due to payment on notes extended in fiscal year 2016 related to the establishment of various receipts and disbursements. 6.Contingencies11SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)6. 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)2016,2017, the balance of the franchisee’s loan was $5.8$5.6 million.The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees. Under these agreements, which expire through 2029, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of May 31, 2016,2017, the amount remaining under these guaranteed lease obligations totaled $7.9$6.8 million. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, nozero liability has been provided.7.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$58.0 million at May 31, 20162017 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)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 value, including accrued interest, of $580.8$578.2 million and $579.6 million, respectively. At May 31, 2017 the fair value of the Company's Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the “2016 Variable Funding Notes” and, together with the Fixed Rate Notes, the “Notes”) approximated the carrying value of $34.1 million, including accrued interest. At August 31, 2016 the 2016 Variable Funding Notes had no balance. The fair value of the 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.12SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)8. Other Operating Income During the first quarter of fiscal year 2017, the Company recorded a gain of $3.8 million on the sale of minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. The gain is reflected in other operating income, net, on the condensed consolidated statement of income.9. Refranchising Initiative Refranchising 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 fiscal year 2016, the Company refranchised the operations of 38 Company Drive-Ins. Of the Company Drive-Ins refranchised in fiscal year 2016, 29 were completed as part of the refranchising initiative announced in June 2016. The Company retained a non-controlling minority investment in the franchise operations of 25 of these refranchised drive-ins.During the first half of fiscal year 2017, the Company completed transactions to refranchise the operations of 110 Company Drive-Ins and9.retained a non-controlling minority investment in 106 of these refranchised drive-ins. The Company completed the refranchising initiative in the second quarter of fiscal year 2017. All subsequent sales of Company Drive-Ins are considered sales in the normal course of business.Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below associated with refranchised drive-ins are recorded in other operating income, net, on the condensed consolidated statement of income. The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins): Three months ended
May 31, 2017 Nine months ended
May 31, 2017Number of refranchised Company Drive-Ins — 110 Proceeds from sales of Company Drive-Ins $ — $ 20,036 Proceeds from sale of real estate (1)4,749 4,749 Proceeds receivable from sale of real estate (1)6,977 6,977 Real estate assets sold (1)(12,095 ) (12,095 ) Assets sold, net of retained minority investment (2)847 (7,891 ) Initial and subsequent lease payments for real estate option (1)195 (3,201 ) Goodwill related to sales of Company Drive-Ins — (966 ) Deferred gain for real estate option (3)141 (899 ) Gain (loss) on assets held for sale — (65 ) Refranchising initiative gains (losses), net $ 814 $ 6,645 _______________(1) During the first quarter of fiscal year 2017, as part of a 53 drive-in refranchising transaction, the Company entered into a direct financing lease which included an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, because the exercise of this option could occur at any time within 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option was applied as the initial minimum lease payment for the real estate. The franchisee initiated exercise of a portion of the option during the third fiscal quarter, resulting in a loss of $0.4 million. A portion of the proceeds were received subsequent to the end of the quarter. Until the option is fully exercised, the franchisee is making monthly lease payments which totaled $0.2 million for the third fiscal quarter, net of sub-lease expense, and is included in other operating income. (2) Net assets sold consisted primarily of equipment. During the third quarter of fiscal year 2017, the Company made an adjustment to retained minority investment. (3) The deferred gain of $0.9 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable. 13SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited) Refranchising Initiative
Fiscal Year 2016Number of refranchised Company Drive-Ins (1)29 Proceeds from sales of Company Drive-Ins $ 3,568 Assets sold, net of retained minority investment (2)(2,402 ) Goodwill related to sales of Company Drive-Ins (194 ) Refranchising initiative gains (losses), net $ 972 _______________(1) Company Drive-Ins refranchised as part of the refranchising initiative announced in June 2016. (2) Net assets sold consisted primarily of equipment. Direct Financing LeasesAs part of the refranchising initiative, the Company entered into direct franchising leases in fiscal year 2016 and the first half of fiscal year 2017. Components of net investment in direct financing leases as of May 31, 2017 are as follows: May 31,
2017 August 31,
2016Minimum lease payments receivable $ 18,043 $ 15,108 Less unearned income (6,115 ) (5,134 ) Net investment in direct financing lease 11,928 9,974 Less amount due within one year (317 ) (115 ) Amount due after one year $ 11,611 $ 9,859 Future minimum rental payments receivable as of May 31, 2017 are as follows: Direct Financing Lease Years ended August 31: 2017 $ 257 2018 1,048 2019 1,117 2020 1,230 2021 1,326 Thereafter 13,065 18,043 Less unearned income (6,115 ) $ 11,928 Initial direct costs incurred in the negotiation and consummation of direct financing lease transactions have not been material. Accordingly, no portion of unearned income has been recognized to offset those costs.14SONIC CORP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except per share data)(Unaudited)Assets Held for SaleAssets held for sale as of May 31, 2017 totaled $7.5 million and consist of Company Drive-Insreal estate that areis expected to sell within one year as part of the real estate options extended to franchisees in connection with the Company’s plan to move toward an approximately 95%-franchised system.refranchising initiatives. Such assets are classified as assets held for sale upon meeting the requirements of ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets.”Assets” and are included in prepaid and other current assets on the Company's condensed consolidated balance sheet. These assets are recorded at the lower of the carrying amounts or fair values less costs to sell. Assets are no longer depreciated once classified as held for sale. The following table sets forthsale totaled $5.3 million at August 31, 2016 and consisted of Company Drive-In operations included in the components of assets held for sale:refranchising initiative.12,925 501 13,426 1513Item 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 in the third 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-wideSystemwide same-store sales increased 2.0%decreased 1.2% during the third quarter and increased 4.4%decreased 3.3% for the first nine months of fiscal year 20162017 as compared to an increase of 6.1%2.0% and 8.3%4.4%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins increased 0.9%decreased 3.2% during the third quarter and 3.6%4.7% for the first nine months of fiscal year 20162017 as compared to an increase of 5.5%0.9% and 8.0%3.6%, respectively, for the same periods last year. Our continued positiveThe same-store sales aredecreases reflect a result ofdecline in traffic, driven by sluggish consumer spending in the successful implementation ofrestaurant industry and 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$124.0 million for the third quarter and $444.2$353.7 million for the first nine months of fiscal year 20162017 from $164.7$165.2 million and $430.8$444.2 million, respectively, for the same periods last year.year, due to a decrease in Company Drive-In sales. The increasedecrease in Company Drive-In sales was a result of refranchising certain Company Drive-Ins during the fourth quarter of fiscal year 2016 and the first half of fiscal year 2017, as part of our initiative to move toward an approximately 95%-franchised system. To a lesser degree the decline in revenues was primarily attributableis also attributed to decreased same-store sales growth at Company and Franchise Drive-Ins.sales. Restaurant margins at Company Drive-Ins were unfavorablefavorable by 40 basis points during the third quarter of fiscal year 2017 and favorableunfavorable by 40150 basis points for the first nine months of fiscal year 2016,2017, reflecting positive same-storethe de-leveraging impact of same-stores sales decreases, partially offset by moderate commodity cost improvement and the year-to-date 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.Third quarter results for fiscal year 20162017 reflected net income of $18.8 million or $0.44 per diluted share as compared to net income of $15.4 million or $0.31 per diluted share as compared to net income of $20.4 million or $0.38 per diluted share for the same periodperiods last year. Excluding the non-GAAP adjustments further described below, net income 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 20162017 were $38.6$42.8 million and $0.77,$0.96, respectively, as compared to net income of $38.2$38.6 million and $0.70or $0.77 per diluted share for the same period last year. Adjustments to net income are detailed below in Results of Operations.In 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 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.During the first half of fiscal year 2017, we completed transactions to refranchise the operations of 110 Company Drive-Ins and retained a non-controlling minority investment in 106 of these refranchised drive-ins. We completed the refranchising initiative in the second quarter of fiscal year 2017. All subsequent sales of Company Drive-Ins are considered sales in the normal course of business.16Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below associated with refranchised drive-ins are recorded in other operating income, net, on the condensed consolidated statement of income. The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins): Three months ended
May 31, 2017 Nine months ended
May 31, 2017Number of refranchised Company Drive-Ins — 110 Proceeds from sales of Company Drive-Ins $ — $ 20,036 Proceeds from sale of real estate (1)4,749 4,749 Proceeds receivable from sale of real estate (1)6,977 6,977 Real estate assets sold (1)(12,095 ) (12,095 ) Assets sold, net of retained minority investment (2)847 (7,891 ) Initial and subsequent lease payments for real estate option (1)195 (3,201 ) Goodwill related to sales of Company Drive-Ins — (966 ) Deferred gain for real estate option (3)141 (899 ) Gain (loss) on assets held for sale — (65 ) Refranchising initiative gains (losses), net $ 814 $ 6,645 _______________(1) During the first quarter of fiscal year 2017, as part of a 53 drive-in refranchising transaction, the Company entered into a direct financing lease which included an option for the franchisee to purchase the real estate within the next 24 months. In accordance with lease accounting requirements, because the exercise of this option could occur at any time within 24 months, the portion of the proceeds from the refranchising attributable to the fair value of the option was applied as the initial minimum lease payment for the real estate. The franchisee initiated exercise of a portion of the option during the third fiscal quarter, resulting in a loss of $0.4 million. A portion of the proceeds were received subsequent to the end of the quarter. Until the option is fully exercised, the franchisee is making monthly lease payments which totaled $0.2 million for the third fiscal quarter, net of sub-lease expense, and is included in other operating income. (2) Net assets sold consisted primarily of equipment. During the third quarter of fiscal year 2017, the Company made an adjustment to retained minority investment. (3) The deferred gain of $0.9 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable. Refranchising Initiative
Fiscal Year 2016Number of refranchised Company Drive-Ins (1)29 Proceeds from sales of Company Drive-Ins $ 3,568 Assets sold, net of retained minority investment (2)(2,402 ) Goodwill related to sales of Company Drive-Ins (194 ) Refranchising initiative gains (losses), net $ 972 _______________(1) Company Drive-Ins refranchised as part of the refranchising initiative announced in June 2016. (2) Net assets sold consisted primarily of equipment. 17The 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 systemwide change in sales and average unit volume. Systemwide 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.Systemwide Performance($ in thousands) Three months ended
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Increase (decrease) in total sales (0.5 )% 3.3 % (2.5 )% 5.3 % Systemwide drive-ins in operation(1): Total at beginning of period 3,562 3,528 3,557 3,526 Opened 15 16 39 34 Closed (net of re-openings) (6 ) (1 ) (25 ) (17 ) Total at end of period 3,571 3,543 3,571 3,543 Average sales per drive-in $ 346 $ 347 $ 907 $ 933 Change in same-store sales(2) (1.2 )% 2.0 % (3.3 )% 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. 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) Three months ended
May 31, Increase
(Decrease) Percent
Increase
(Decrease) 2017 2016 Company Drive-In sales $ 72,062 $ 115,143 $ (43,081 ) (37.4 )% Franchise Drive-Ins: Franchise royalties 47,890 46,296 1,594 3.4 % Franchise fees 330 391 (61 ) (15.6 )% Lease revenue 2,418 2,141 277 12.9 % Other 1,290 1,268 22 1.7 % Total revenues $ 123,990 $ 165,239 $ (41,249 ) (25.0 )% 18 Nine months ended
May 31, Increase
(Decrease) Percent
Increase
(Decrease) 2017 2016 Company Drive-In sales $ 223,500 $ 314,339 $ (90,839 ) (28.9 )% Franchise Drive-Ins: Franchise royalties 121,910 121,565 345 0.3 % Franchise fees 777 1,091 (314 ) (28.8 )% Lease revenue 5,474 5,132 342 6.7 % Other 2,038 2,075 (37 ) (1.8 )% Total revenues $ 353,699 $ 444,202 $ (90,503 ) (20.4 )% The 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.Company Drive-In Sales($ in thousands) Three months ended
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Company Drive-In sales $ 72,062 $ 115,143 $ 223,500 $ 314,339 Percentage increase (decrease) (37.4 )% (2.7 )% (28.9 )% 1.1 % Company Drive-Ins in operation(1): Total at beginning of period 233 375 345 387 Opened 2 — 3 — Sold to franchisees (5 ) — (115 ) (9 ) Closed (net of re-openings) — — (3 ) (3 ) Total at end of period 230 375 230 375 Average sales per Company Drive-In $ 312 $ 307 $ 818 $ 829 Change in same-store sales(2) (3.2 )% 0.9 % (4.7 )% 3.6 % __________________(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 decreased 3.2% for the third quarter and 4.7% for the first nine months of fiscal year 2017, as compared to an increase of 0.9% and 3.6%, respectively, for the same periods last year, reflecting a decrease in traffic due to sluggish consumer spending in the restaurant industry and aggressive competitive activity. We continue to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness. Company Drive-In sales decreased $43.1 million during the third quarter and $90.8 million during the first nine months of fiscal year 2017 as compared to the same periods last year. The decrease in Company Drive-In sales in the third quarter and first nine months of fiscal year 2017 is primarily due to the decrease of more than 130 Company Drive-Ins resulting from their sale to franchisees under the refranchising initiative. Associated sales declines related to those divestitures for the third quarter and first nine months of fiscal year 2017 are $40.6 million and $77.7 million, respectively. The decrease in same-store sales resulted in sales declines for those same periods of $2.3 million and $10.9 million, respectively.19The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.Franchise Information($ in thousands) Three months ended
May 31, Nine months ended
May 31, 2017 2016 2017 2016 Franchise Drive-In sales $ 1,145,042 $ 1,107,725 $ 2,971,775 $ 2,963,155 Percentage increase 3.4 % 4.0 % 0.3 % 5.7 % Franchise Drive-Ins in operation(1): Total at beginning of period 3,329 3,153 3,212 3,139 Opened 13 16 36 34 Acquired from the company 5 — 115 9 Closed (net of re-openings) (6 ) (1 ) (22 ) (14 ) Total at end of period 3,341 3,168 3,341 3,168 Average sales per Franchise Drive-In 348 352 915 945 Change in same-store sales(2) (1.1 )% 2.1 % (3.2 )% 4.5 % Franchising revenues(3) $ 50,638 $ 48,828 $ 128,161 $ 127,788 Percentage increase 3.7 % 7.9 % 0.3 % 8.3 % Effective royalty rate(4) 4.18 % 4.18 % 4.10 % 4.10 % __________________(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 decreased 1.1% for the third quarter and 3.2% for the first nine months of fiscal year 2017 as compared to an increase of 2.1% and 4.5%, respectively, for the same periods last year, reflecting a decrease in traffic due to sluggish consumer spending in the restaurant industry and aggressive competitive activity. We continue to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness. Franchising revenues increased $1.8 million, or 3.7%, for the third quarter and $0.4 million, or 0.3%, for the first nine months of fiscal year 2017, compared to the same periods last year. Franchise royalties were positively impacted by an increase in royalties related to franchisee acquisitions of Company Drive-ins and net new unit growth, partially offset by the decrease in same-store sales.20Operating 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.Company Drive-In Margins Three months ended
May 31, Percentage Points
Increase (Decrease) 2017 2016 Costs and expenses Company Drive-Ins: Food and packaging 26.9 % 27.9 % (1.0) Payroll and other employee benefits 35.5 34.7 0.8 Other operating expenses 19.2 19.4 (0.2) Cost of Company Drive-In sales 81.6 % 82.0 % (0.4) Nine months ended
May 31, Percentage Points
Increase (Decrease) 2017 2016 Costs and expenses Company Drive-Ins: Food and packaging 27.3 % 27.8 % (0.5) Payroll and other employee benefits 37.0 35.5 1.5 Other operating expenses 21.3 20.8 0.5 Cost of Company Drive-In sales 85.6 % 84.1 % 1.5 Drive-in level margins at Company Drive-Ins were favorable by 40 basis points during the third quarter and unfavorable by 150 basis points during the first nine months of fiscal year 2017, primarily driven by the de-leveraging impact of same-store sales to payroll and other employee benefits and other operating expenses. Food and packaging costs were favorable by 100 basis points during the third quarter and 50 basis points during the first nine months of fiscal year 2017 as a result of a favorable commodity cost environment. Payroll and other employee benefits were unfavorable by 80 basis points for the third quarter and 150 basis points during the first nine months of fiscal year 2017, reflecting the de-leveraging impact of same-store sales. Other operating expenses were favorable by 20 basis points during the third quarter and unfavorable by 50 basis points during the first nine months of fiscal year 2017, driven by the de-leveraging impact of same-store sales and the year-to-date impact of fees paid to the BTF. Selling, General and Administrative (“SG&A”). SG&A expenses increased $0.1 million, or 0.7%, to $20.8 million for the third quarter and decreased $3.5 million, or 5.7%, to $58.8 million for the first nine months of fiscal year 2017, as compared to the same periods last year. The decrease is primarily related to lower variable compensation related to operating performance. Depreciation and Amortization. Depreciation and amortization decreased $1.9 million, or 16.5%, in the third quarter to $9.5 million and $3.9 million, or 11.7%, to $29.5 million for the first nine months of fiscal year 2017, as compared to the same periods last year. This decrease is primarily attributable to assets that fully depreciated in the prior fiscal 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 half of fiscal year 2017.Net Interest Expense. Net interest expense decreased $8.4 million, or 54.4%, to $7.0 million for the third quarter and $7.2 million, or 25.8%, to $20.7 million for the first nine months of fiscal year 2017, as compared to the same periods last year. The decrease is due to the $8.8 million loss from the early extinguishment of debt that occurred in the third quarter of fiscal year 2016, attributable to our 2016 debt financing transaction, and a lower weighted-average interest rate, partially offset by an increased interest expense related to the increase in the long-term debt balance. For additional information on long-term debt, see our Annual Report on Form 10-K for the year ended August 31, 2016.21Income Taxes. The provision for income taxes reflects an effective tax rate of 34.0% for the third quarter of fiscal 2017 as compared to 34.6% for the same period in fiscal year 2016. The provision for income taxes reflects an effective tax rate of 33.5% for the first nine months of fiscal year 2017 compared to 34.8% for the same period in 2016. The lower effective income tax rate for the first nine months of fiscal year 2017 was due primarily to the recognition of excess tax benefits related to stock option exercises due to the early adoption of Accounting Standards Update (“ASU”) No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” in the first quarter of fiscal year 2017. Excess tax benefits recognized as a component of the provision for income taxes in our condensed consolidated statements of income were negligible in the first quarter of fiscal year 2017 and $0.7 million and $0.1 million in the second and third quarters of fiscal year 2017, respectively. Please refer to the "Recently Adopted Accounting Pronouncements" section of note 1 - Summary of Significant Accounting Policies of the notes to the condensed consolidated financial statements for details regarding the adoption of this standard. The decrease in tax rate for the first nine months of fiscal year 2017 was partially offset by the favorable impact of the retroactive reinstatement of the Work Opportunity Tax Credit in the second quarter of fiscal year 2016. Our tax rate may continue to vary from quarter to quarter depending on the timing of stock option dispositions by option-holders and as circumstances on other tax matters change.Non-GAAP Adjustments. Excluding the non-GAAP adjustments further described below, net income for the third quarter of fiscal year 2017 would have decreased 13% and diluted earnings per share for the quarter would have been flat. Excluding the non-GAAP adjustments further described below, net income and diluted earnings per share for the first nine months of fiscal year 20162017 would have increased 17%decreased 15% and 27%5%, respectively.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%15 Three months ended
May 31, 2017 Three months ended
May 31, 2016 Net
Income Diluted
EPS Net
Income Diluted
EPSReported – GAAP $ 18,751 $ 0.44 $ 15,353 $ 0.31 Net gain on refranchising transactions (1) (814 ) (0.02 ) — — Tax impact on refranchising transactions (2) 396 0.01 — — Loss from early extinguishment of debt — — 8,750 0.18 Tax impact on debt extinguishment (3) — — (3,027 ) (0.06 ) Adjusted - Non-GAAP $ 18,333 $ 0.43 $ 21,076 $ 0.43 ________________(1) During the third quarter of fiscal year 2017, we made adjustments of $0.8 million to the retained minority investment related to the refranchising transactions that occurred in the first six months of the fiscal year. Additionally, we recorded a net loss as a franchisee initiated exercise of an option to purchase real estate related to a first quarter refranchising transaction, which was offset by amortization of the deferred gain recorded for a second quarter refranchising transaction. (2) Tax impact during the period at an adjusted effective tax rate of 48.7%. (3) Tax impact during the period at an effective tax rate of 34.6%. 22The 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.16 Nine months ended
May 31, 2017 Nine months ended
May 31, 2016 Net
Income Diluted
EPS Net
Income Diluted
EPSReported – GAAP $ 42,832 $ 0.96 $ 38,630 $ 0.77 Net gain on refranchising transactions (1) (6,645 ) (0.15 ) — — Tax impact on refranchising transactions (2) 2,501 0.05 — — 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 (4) 1,350 0.03 — — Loss from early extinguishment of debt — — 8,750 0.18 Tax impact on debt extinguishment (5) — — (3,027 ) (0.06 ) Gain on sale of real estate — — (1,875 ) (0.04 ) Tax impact on real estate sale (6) — — 664 0.01 Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters — — (585 ) (0.01 ) Adjusted - Non-GAAP $ 36,243 $ 0.81 $ 42,557 $ 0.85 ________________(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 was applied as the initial lease payment for an option to purchase the real estate within 24 months. The franchisee initiated exercise of a portion of the option during the third fiscal quarter, resulting in a loss of $0.4 million. Until the option is fully exercised, the franchisee is making monthly lease payments which totaled $0.6 million for the fiscal year-to-date, net of sub-lease expense. During the second quarter of fiscal year 2017, we completed transactions to refranchise the operations of 54 Company Drive-Ins, one of which resulted in a gain of $7.8 million and another in a loss of $1.4 million. The loss transaction reflects a deferred gain of $0.9 million as a result of a real estate purchase option extended to the franchisee. The deferred gain is being amortized into income through January 2020 when the option becomes exercisable. During the third quarter of fiscal year 2017, we made adjustments of $0.8 million to the retained minority investment related to the refranchising transactions that occurred in the first six months of the fiscal year. (2) Combined tax impact at an effective tax rate of 35.6% during the first quarter of fiscal year 2017 and at adjusted effective tax rates of 36.0% and 48.7% during the second and third quarters of fiscal year 2017, respectively. (3) Gain on sale of investment in refranchised drive-in operations is related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. Income from minority investments is included in other revenue on the condensed consolidated statements of income. (4) Tax impact during the period at an adjusted effective tax rate of 35.6%. (5) Tax impact during the period at an effective tax rate of 34.6%. (6) Tax impact during the period at an adjusted effective tax rate of 35.4%. Results of OperationsRevenues. The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.115,143 118,369 (3,226) (2.7) 46,296 43,541 2,755 6.3 391 163 228 139.9 2,141 1,569 572 36.5 1,268 1,106 162 14.6 165,239 164,748 491 0.3 314,339 310,816 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.Same-store sales for Company Drive-Ins increased 0.9% for the third quarter and 3.6% for the first nine months of fiscal year 2016, as compared to an increase of 5.5% and 8.0%, respectively, for the same periods last year, reflecting the impact of declining consumer spending in the restaurant industry and modestly unfavorable weather during the quarter. 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. Company Drive-In salesTotal assets decreased $3.2 million during the third quarter of fiscal year 2016 as compared to the same period last year, mainly due to a decrease of $3.8 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 million in same-store sales, partially offset by a decrease related to stores sold to franchisees of $8.0 million. 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.Same-store sales for Franchise Drive-Ins increased 2.1% for the third quarter and 4.5% for the first nine months of fiscal year 2016, as compared to an increase of 6.1% and 8.3%, respectively, for the same periods last year. Franchising revenues increased $3.6$84.9 million, or 7.9%, for the third quarter and increased $9.8 million, or 8.3%, for the first nine months of fiscal year 2016, compared to the same periods last year. The increase in franchise revenues was primarily attributable to increases in royalties related to the growth of same-store sales and new unit growth. 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 Drive-in level margins at Company Drive-Ins were unfavorable by 40 basis points during the third quarter and favorable by 40 basis points in the first nine months of fiscal year 2016. The margin results for the quarter primarily reflect the impact of the new BTF, which was established March 1, 2016. Food and packaging costs were unfavorable by 30 basis points during the third 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, as a result of the new technology fee 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 million, or 0.4%13.1%, to $20.6 million for the third quarter and increased $4.7 million, or 8.2%, to $62.3 million for the first nine months of fiscal year 2016, as compared to the same periods last year. The increase for the first nine months is primarily related to the costs of additional headcount in support of the Company’s technology initiatives and higher variable compensation due to strong operating performance. Depreciation and Amortization. Depreciation and amortization was flat in the third quarter and decreased $1.2 million, or 3.4%, to $33.5 million for the first nine months of fiscal year 2016, as compared to the same periods last year. This decrease is primarily attributable to assets that fully depreciated in the prior fiscal year.Net Interest Expense. Net interest expense increased $9.1 million, or 144.9%, to $15.4 million for the third quarter and $9.2 million, or 49.2%, to $27.9 million for the first nine months of fiscal year 2016, as compared to last year. The increase reflects the $8.8 million loss from the early extinguishment of debt related to the 2016 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 for20additional information on our 2016 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% for the third quarter of fiscal 2016 compared to 32.0% for the same period in fiscal year 2015. The provision for income taxes reflects an effective tax rate of 34.8% for the first nine months of fiscal year 2016 compared to 33.2% for the same period in fiscal year 2015. The change was primarily due to the recognition of prior years’ federal tax deductions in fiscal 2015. Our tax rate may continue to vary from quarter to quarter depending on the timing of stock option dispositions by option-holders and as circumstances on other tax matters change.Financial PositionTotal assets increased $59.6 million, or 9.6%, to $679.7$563.8 million during the first nine 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 increasedriven by a decrease in cash and cash equivalents, resultingwhich reflects 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,primarily driven by refranchising transactions, as well as depreciation asset retirements and sales, and assets reclassifiedsold that were recorded as held for sale at the end of fiscal year 2016. These were partially offset by purchases of property, equipment and technology.Total liabilities increased $135.5$12.7 million, or 22.5%1.8%, to $738.1$737.0 million during the first nine months of fiscal year 20162017 from $602.6$724.3 million at the end of fiscal year 2015.2016. The increase was primarily attributable to an increase in long term debt of $149.3the $34.0 million balance from borrowing on the Company's Series 2016-1 Senior Secured Variable Funding Notes, Class A-1 (the "2016 Variable Funding Notes"). This was partially offset by a $7.3decrease of $11.6 million decrease in current maturities of long-term debt and capital leases, allaccrued liabilities, which is mainly related to the 2016 debt financing transaction, detailed below in “Liquiditypayment of wages and Sourcesincentive compensation and other tax liabilities that were accrued as of Capital.” Total stockholders’ equity (deficit) decreased $75.9deficit increased $97.5 million, or 435.3%128.8%, to a deficit of $58.5$173.1 million during the first nine 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$127.7 million in purchases of common stock during the first sixnine months of the fiscal year and the payment of $16.2$18.5 million in dividends, partially offset by current-year earnings of $38.6 million and $9.8 million from the issuance$42.8 million.23Liquidity and Sources of CapitalOperating Cash Flows. Net cash provided by operating activities decreased $22.3$28.1 million to $78.2$50.1 million for the first nine months of fiscal year 20162017 as compared to $100.5$78.2 million for the same period in fiscal year 2015.2016. The decreasechange was driven by changesa decrease of $13.5 million in working capital duringnet income excluding the non-cash items for gain on disposition of assets and loss from early extinguishment of debt. Operating cash flow was also impacted by the timing of payments for operational, payroll and tax transactions, as well as higher incentive compensation paid this fiscal year compared to the prior year.InvestingCash Flows. Net cash provided by investing activities was $44.2 million for the first nine months of fiscal year 2016 related2017 as compared to the timing of payments and receipts for both operational and tax transactions. Investing Cash Flows. Netnet cash 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 million for the same period in fiscal year 2015. Proceeds2016. The increase in cash provided by investing activities was driven by an increase of $49.7 million in proceeds from the sale of assets increased $8.6assets. This increase was partially a result of $24.8 million primarily related to storesin proceeds for store operations and real estate sold to franchisees duringas part of the first nine monthscurrent refranchising initiative. We also received $23.7 million in proceeds from the sale of real estate and $8.4 million in proceeds from the sale of a minority investment, both related to previous refranchising initiatives. In addition, we received $4.9 million from franchisees on short-term financing notes and $2.5 million in repayment of notes extended in fiscal year 2016. Additionally,2016 related to the establishment of the Brand Technology Fund. These proceeds were offset by increased investments in property and equipment decreased compared to the same period last year, mainly due to acquisitionsan $8.8 million increase in 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.212016: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 $ 14.3 Brand technology investments 11.1 Newly constructed drive-ins leased or sold to franchisees 4.5 Newly constructed Company Drive-Ins 3.4 Purchase and replacement of equipment and technology 3.8 Total investments in property and equipment $ 37.1 Financing Cash Flows. Net cash provided byused in financing activities increased $100.0$123.7 million to $9.4$114.3 million for the first nine months of fiscal year 2016,2017, as compared to net cash used in financing activitiesprovided of $90.6$9.4 million for the same period in fiscal year 2015. In May2016. The prior-year period included net borrowings of $142.0 million, offset by debt extinguishment costs of $18.3 million related to the debt financing transaction that occurred in the third quarter of fiscal year 2016, we completed a debt financing transaction as described below, which is the primary drivercompared to net borrowings of the increase. 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$32.6 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. 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 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 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. 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 ratecurrent-year period. Additionally, purchases of at least 5% per annum. In addition, principal payments will acceleratetreasury stock increased 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.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.$16.8 million. 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 nine months of fiscal year 2016,2017, approximately 3.94.9 million shares were repurchased for a total cost of $110.8 million.As of May 31, 2016,2017, our total cash balance of $110.4$63.3 million ($99.452.1 million of unrestricted and $11.0$11.2 million of restricted cash balances) reflected the impact of the cash generated from operating activities, stock option exerciserefranchising proceeds, 2016 debt transactionVariable Funding Notes borrowing proceeds, cash used for share repurchases, dividends, debt payments, dividends and capital expenditures mentioned above. We believe that existing cash, funds generated from operations and the amount available under our 2016 Variable Funding Notes, will meet our needs for the foreseeable future.24Critical 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’sour 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, 2016,2017, 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, 2015.2524Item 2. Unregistered Sales of Equity Securities and Use of Proceeds(c) Issuer Purchases of Equity SecuritiesShares repurchased during the third 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)March 1, 2017 through March 31, 2017 722 $ 23.86 722 $ 58,157 April 1, 2017 through April 30, 2017 227 25.57 227 52,351 May 1, 2017 through May 31, 2017 249 28.54 249 45,249 Total 1,198 1,198 __________________(1) In August 2015, the Company’s Board of Directors extended the Company’s share repurchase program, authorizing the Company to purchase up to $145.0 million of its outstanding shares of common stock through August 31, 2016. The Board of Directors further extended the share repurchase program effective May 2016, authorizing the purchase of up to an additional $155.0 million of our outstanding shares of common stock through August 31, 2017. In October 2016, the Board of Directors increased the authorization by $40.0 million. Share repurchases may be made from time to time in the open market or otherwise, including through an accelerated share repurchase program, under terms of a Rule 10b5-1 plan, in privately negotiated transactions or in round lot or block transactions. The share repurchase program may be extended, modified, suspended or discontinued at any time. Please refer to note 3 – Share Repurchase Program of the notes to the condensed consolidated financial statements for additional information. 26Item 6. ExhibitsExhibits.31.01 Exhibits. 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14 2627SIGNATURESPursuant 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, 2016June 30, 201728EXHIBIT INDEXExhibit Number and Description31.01 31.01 Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14 29