For the quarterly period ended May 31, 20172018

For the transition period from _______________ to ________________

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(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ☒  No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of June 23, 2017,27, 2018, approximately 41,809,31536,085,715 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

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PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”).  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of Sonic Corp. (the “Company”).  In the opinion of management, these financial statements reflect all adjustments of a normal recurring nature, including recurring accruals, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP.  In certain situations, recurring accruals, including franchise royalties, are based on more limited information at interim reporting dates than at the Company’s fiscal year end due to the abbreviated reporting period.  Actual results may differ from these estimates.  These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended August 31, 2016,2017, included in the Company’s Annual Report on Form 10-K.  Interim results are not necessarily indicative of the results that may be expected for a full year or any other interim period.

The 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.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled for the transfer of promised goods or services to customers.  The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  The ASU will replace most of the existing revenue recognition requirements in U.S. GAAP when it becomes effective.  Further, the FASB has issued clarifying guidance with ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU No. 2016-20, "Technical“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers."” ASU No. 2016-08 provides guidance for evaluating when another party, along with the entity, is involved in providing a good or service to a customer.  ASU No. 2016-10 clarifies assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use or right to access the entity's intellectual property. ASU No. 2016-20 provides corrections or improvements to issues that affect narrow aspects of the guidance.

The Company plans to adopt the standards in the first quarter of fiscal year 2019 which aligns withusing the required adoption date.  The standards are to be applied retrospectively or using a cumulative effect transition method.  The Company does not believe the new revenue recognition standard will impact the recognition of sales from Company Drive-Ins or the recognition of royalty fees from franchisees, nor will it have a material impact to the recognition of gift card breakage. The Company expects the pronouncement will impact the recognition of the initial franchise fee, which is currently recognized upon the opening of a Franchise Drive-In. The impact on these fees hasis not yet been estimated, and no transition method has been selected.expected to be material to total revenue. The Company is finalizing the impact of the required cumulative effect adjustment to be recorded to the balance sheet on the date of initial application and continues to evaluate the effect that this pronouncement will have on principal versus agent considerations, other transactions, the financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.”  The new standard, which replaces existing lease guidance, requires lessees to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases. Accounting guidance for lessors is largely unchanged. In January 2018, the FASB issued ASU No. 2018-01. ASU 2018-01 permits an entity to elect an optional transition practical expedient to forgo the evaluation of land easements that existed or expired before the entity’s adoption of 2016-02 and that were not accounted for as leases under previous lease guidance. The standard is effective for fiscal year 2020, with early application permitted. This standard requires adoption based upon a modified retrospective transition approach for leases existing at, or entered into after,

the beginning of the earliest comparative period presented in the financial statements, with optional practical expedients. Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on the consolidated balance sheet. The Company is continuing its assessment, which may identify additional impacts this standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-04, “Liabilities – Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products,” which is intended to eliminate current and future diversity in practice related to derecognition of prepaid stored-value product liability in a way that aligns with the new revenue recognition guidance.  The update is effective for fiscal year 2019; however, early adoption is permitted.  The adoption of the update will not have an impact on the Company’s financial statements.

In 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 November 2016, the FASB issued ASU No. 2016-18, "Statement“Statement of Cash Flows - Restricted Cash."” The update requires that restricted cash balances be included within the beginning and ending cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown onbalance within the statement of cash flows. The update is effective for fiscal year 2019. The amendments should be adopted on a retrospective basis tofor each period presented, and early adoption is permitted. The adoption will increase the beginning and ending cash balance within the Company's statement of cash flows by its restricted cash balances and will require a new disclosure to reconcile the cash balances within the statement of cash flows to the balance sheets. The Company is currently evaluating the effect that this update will have ondoes not expect any other material impacts to its financial statements and related disclosures.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation“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 following table sets forth the computation of basic and diluted earnings per share:

During fiscal year 2017, approximately 6.7 million shares were repurchased under the Company's share repurchase program for a total cost of $172.9 million, resulting in an average price per share of $25.71.  In August 2015,2017, the Company’s Board of Directors extended the Company’sapproved an incremental $160.0 million share repurchase program, authorizingauthorization of the Company to purchase up to $145.0 million of itsCompany's outstanding shares of common stock through August 31, 2016.  The Board2018.

During the first nine months of Directors further extended the share repurchase program effective May 2016, authorizing the purchase of up to an additional $155.0 million of our outstanding shares of common stock through August 31, 2017.  During fiscal year 2016,2018, approximately 5.24.3 million shares were repurchased for a total cost of $148.3$109.1 million, resulting in an average price per share of $28.48.

Subsequent to the end of the quarter, the Board of Directors authorized a $500.0 million share repurchase program through August 31, 2021, replacing the Company’s previous fiscal year 2018 authorization. Including amounts purchased during the first nine months of the fiscal year, the total remaining authorized under the share repurchase program is $390.9 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.

Accounts and notes receivable consist of the following:

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

As reported in the first and third quarters of fiscalAnnual Report on Form 10-K for the year 2017. Ofended August 31, 2017, the increaseCompany was named as a defendant in other current accounts and notes receivable, $7.0 million is duefive purported class action complaints related to a franchisee exercisepayment card breach at certain Sonic Drive-Ins. The Company has since been named as a defendant in four additional purported class action complaints filed on October 9, 2017, in the United States District Court for the Northern District of an option to purchase real estate, which was collected immediately followingOhio, on November 3, 2017, in the third fiscal quarter. The decreaseUnited States District Court for the Northern District of Texas, on November 13, 2017, in noncurrent receivables from system funds is due to paymentthe United States District Court for the District of Arizona, and on notes extendedDecember 17, 2017, in fiscal year 2016the Northern District of Illinois. Each of these complaints asserted various claims related to the establishmentCompany’s alleged failure to safeguard customer credit card information, and the plaintiffs sought monetary damages, injunctive and declaratory relief and attorneys’ fees and costs. The cases were centralized in the Northern District of Ohio for coordinated or consolidated pretrial proceedings, and a consolidated complaint was filed. The Company believes it has meritorious defenses to the litigation and intends to vigorously oppose the claims asserted in the complaint. We cannot reasonably estimate the range of potential losses that may be associated with the litigation because of the Brand Technology Fund.early stage of the lawsuit. We also cannot provide assurance we will not become subject to other inquiries or claims relating to the payment card breach in the future. Although we maintain cyber liability insurance, we currently believe it is possible the ultimate amount paid by us, if we are unsuccessful in defending the litigation, will be in excess of our cyber liability insurance coverage applicable to claims of this nature. We are unable to estimate the amount of any such excess.

On December 20, 2013, the Company extended a note purchase agreement to a bank that serves to guarantee the repayment of a franchisee loan, with a term through 2018.  In the event of default by the franchisee, the Company would purchase the franchisee loan from the bank, thereby becoming the note holder and providing an avenue of recourse with the franchisee.  The Company recorded a liability for this guarantee which was based on the Company’s estimate of fair value.  As of May 31, 2017,2018, the balance of the franchisee’s loan was $5.6$5.2 million.

The Company has obligations under various operating lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees.  Under these agreements, which expire through 2029, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee.  As of May 31, 2017,2018, the amount remaining under these guaranteed lease obligations totaled $6.8$15.4 million.  At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, zero liability has been provided.

The fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties.  The Company has no financial liabilities that are required to be measured at fair value on a recurring basis.

The Company categorizes its assets and liabilities recorded at fair value based on the following fair value hierarchy established by the FASB:

The Company’s cash equivalents, some of which are included in restricted cash, are carried at cost which approximates fair value and totaled $58.0$63.8 million at May 31, 20172018 and $59.2$73.9 million at August 31, 2016.2017.  This fair value is estimated using Level 1 inputs.

At May 31, 2017 and August 31, 2016,2018, the fair value of the Company’s Series 2018-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2018 Fixed Rate Notes”), the Series 2016-1 Senior Secured Fixed Rate Notes, Class A-2 (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 2018 Fixed Rate Notes and 2016 Fixed Rate Notes, the “Fixed Rate Notes”) approximated the carrying value, including accrued interest, of $578.2 million and $579.6 million, respectively.$720.4 million. At MayAugust 31, 2017, the fair value of the Company's 2016 Fixed Rate Notes and 2013 Fixed Rate Notes approximated the carrying value, including accrued interest, of $578.2 million.  At May 31, 2018, there was no balance on 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”). At August 31, 2017 the fair value of the 2016 Variable Funding Notes approximated the carrying value of $34.1$60.1 million, including accrued interest. At August 31, 2016 the 2016 Variable Funding Notes had no balance. The fair value of the Notes is estimated using Level 2 inputs from market information available for public debt transactions for companies with ratings that are similar to the Company’s ratings and from information gathered from brokers who trade in the Company’s notes.

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.

Income from minority investments is included in other revenue on the condensed consolidated statements of income. The gains and losses below associated withrelated to refranchised drive-ins are recorded in other operating income, net, on the condensed consolidated statement of income. Income from minority investments is included in other revenue on the condensed consolidated statements of income.

The following is a summary of the pretax activity recorded as a result of the refranchising initiative transactions in fiscal year 2017 (in thousands, except number of refranchised Company Drive-Ins):

In 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.

SystemwideSystem same-store sales decreased 1.2%0.2% during the third quarter and decreased 3.3%1.5% for the first nine months of fiscal year 20172018 as compared to an increasea decrease of 2.0%1.2% and 4.4%3.3%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins decreased 3.2%increased 0.2% during the third quarter and 4.7%decreased 2.1% for the first nine months of fiscal year 20172018 as compared to an increasea decrease of 0.9%3.2% and 3.6%4.7%, respectively, for the same periods last year.  The same-store sales decreases reflect a decline in traffic, drivenwhich was impacted by sluggish consumer spending in the restaurant industryadverse weather and aggressive competitive activity.activity in the first half of the fiscal year, partially offset by positive momentum from Company initiatives seen during the third fiscal quarter. We continue to execute on our long-term strategies, including new technology, people initiatives, product innovation, a greater emphasis on personalized service, targetedbrand-appropriate value promotions and our fully integrated media strategy.  All of these initiatives fuel Sonic’s strategy to drive Sonic’s multi-layered growth strategy, which incorporatesthrough improvement in same-store sales growth, operating leverage,and new drive-in development, and to enhance returns through the deployment of cash an ascending royalty rate and new drive-in development.to shareholders.  Same-store sales growth is the most important layer and drivescomponent to driving brand value as it generates operating leverage, and increased operating cash flows.flows and improved return on investment.

Revenues decreased to $124.0$118.3 million for the third quarter and $353.7$311.8 million for the first nine months of fiscal year 20172018 from $165.2$124.0 million and $444.2$353.7 million, respectively, for the same periods last year, due to a decrease in Company Drive-In sales. The decrease in Company Drive-In sales was a result of refranchising certain Company Drive-Ins 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 is also attributed to decreased same-store sales. Restaurant margins at Company Drive-Ins were favorableunfavorable by 4010 basis points during the third quarter of fiscal year 2017 and unfavorablefavorable by 15030 basis points for the first nine months of fiscal year 2017,2018 as compared to the same periods last year, reflecting the impact of refranchising underperforming drive-ins, commodity cost inflation and the 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 Brand Technology Fund (“BTF”) that was established in the third quarter of fiscal year 2016.decreases.

Third quarter results for fiscal year 20172018 reflected net income of $21.6 million or $0.58 per diluted share as compared to 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 for the same periodsperiod last year.  Net income and diluted earnings per share for the first nine months of fiscal year 20172018 were $42.8$52.6 million and $0.96,$1.36, respectively, as compared to net income of $38.6$42.8 million or $0.77and diluted earnings per diluted share of $0.96 for the same period last year. Adjustments to net income are detailed below in Results of Operations.

In June 2016, we announced plansDecember 2017, Congress enacted comprehensive amendments to refranchise Company Drive-Ins as partthe Internal Revenue Code of a refranchising initiative1986 with the passage of the Tax Cuts and Jobs Act (“TCJA”). Based on the amendments, our U.S. federal statutory tax rate decreased to move toward an approximately 95%-franchised system. During25.7% for fiscal year 2016,2018, and we recorded a discrete net provisional benefit of approximately $14.1 million for the revaluation of deferred tax assets and liabilities in the second quarter of fiscal year 2018.

During the third quarter of fiscal year 2018, we recognized a net gain of $3.2 million related to the 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. We41 drive-ins and retained a non-controlling minority investment in the franchise operationsoperations. These transactions represent additional markets identified after completion of 25 refranchised drive-ins.the refranchising initiative in fiscal year 2017 and bring the Company to a 95% franchised system.

We completed a previously announced refranchising initiative in fiscal year 2017. During the first halfsix months of fiscal year 2017, we completed transactions to refranchise the operations of 110 Company Drive-Ins were refranchised, and we retained a non-controlling minority investment in 106most of the franchise operations. The Company recorded a gain of $6.6 million on these transactions.

In addition to the refranchised drive-ins. We completed the refranchising initiativedrive-ins discussed above in which we retained a non-controlling minority investment in the secondoperations, we also refranchised the operations of two drive-ins during the third quarter and eight drive-ins during the first nine months of fiscal year 2018, respectively, compared to five drive-ins refranchised during the third quarter and first nine months of fiscal year 2017. All subsequent sales of Company Drive-Ins are considered salesThese refranchising transactions all occurred in the normal course of business.business and did not result in any retained interests.

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the periods indicated as well as the systemwidesystem change in sales and average unit volume.  SystemwideSystem 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.

Same-store sales for Company Drive-Ins decreased 3.2%increased 0.2% for the third quarter and 4.7%decreased 2.1% for the first nine months of fiscal year 2017,2018, as compared to an increasea decrease of 0.9%3.2% and 3.6%, respectively,4.7% for the same periods last year, reflecting a decrease in traffic due to sluggish consumer spendingadverse weather as well as aggressive competitive activity in the restaurant industry and aggressive competitive activity.first half of the fiscal year, partially offset by positive momentum from Company initiatives in the third fiscal quarter. We continue to focus on our innovative product pipeline, multi-day-part promotions and increased media effectiveness.  Company Drive-In sales decreased $43.1$5.5 million during the third quarter and $90.8$41.3 million during the first nine months of fiscal year 20172018 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 20172018 is primarily due to the decreasesale of more than 130certain Company Drive-Ins resulting from their sale to franchisees under the refranchising initiative.franchisees. Associated sales declines related to those divestitures were $5.3 million and $38.8 million 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,2018, respectively.

The 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.