Sonic Corp.
SONIC CORP (Form: 10-K, Received: 10/31/2016 16:01:02)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K

PICTURE 1

[X ]        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended:  August 31, 2016



OR



  ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from _______________   to ________________



Commission File Number 0-18859  



SONIC CORP.

(Exact name of registrant as specified in its charter)





 

 



 

 



 

 

Delaware

 

73-1371046

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 







 

 



 

 



 

 

300 Johnny Bench Drive

 

73104

Oklahoma City, Oklahoma

 

(Zip Code)

(Address of principal executive offices)

 

 



Registrant’s telephone number, including area code :   (405) 225-5000



Securities registered pursuant to section 12(b) of the Act:



None



Securities registered pursuant to section 12(g) of the Act:



Common Stock, Par Value $.01 (Title of class)

(Facing Sheet Continued)


 

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act .  Yes   No 



Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act .   Yes   No 



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 the reports), and (2) has been subject to the filing requirements for the past 90 days.  Yes   No 



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.



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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):





 

Large accelerated filer

Accelerated filer                 

Non-accelerated filer   (Do no check if a smaller reporting company)

Smaller reporting company



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



As of February 2 9 ,   2016 , the aggregate market value of the 4 6 , 712 , 695 shares of common stock of the Company held by non-affiliates of the Company equaled $1, 371 , 9 51 , 852 based on the closing sales price for the common stock as reported for that date.



As of October 1 4 ,   2016 , the Registrant had 4 5 , 758,995   sh ares of common stock issued and outstanding.



Documents Incorporated by Reference



Part III of this report incorporates by reference certain portions of the definitive proxy statement which the Registrant will file with the Securities and Exchange Commission no later than 120 days after August 31, 2016 .


 

Table of Contents

FORM 10-K OF SONIC CORP.



TABLE OF CONTENTS





 

 

 PART I



 

 

Item 1.

Business



 

 

Item   1A.

Risk Factors



 

 

Item 1B.

Unresolved Staff Comments

11 



 

 

Item 2.

Properties

11 



 

 

Item 3.

Legal Proceedings

11 



 

 

Item 4.

Mine Safety Disclosures

12 



 

 

Item 4A.

Executive Officers of the Company

12 



 PART II



 

 

Item 5.

Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14 



 

 

Item 6.

Selected Financial Data

16 



 

 

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

17 



 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

29 



 

 

Item 8.

Financial Statements and Supplementary Data

30 



 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

30 



 

 

Item 9A.

Controls and Procedures

30 



 

 

Item 9B.

Other Information

33 



 PART III



 

 

Item 10.

Directors, Executive Officers and Corporate Governance

33 



 

 

Item 11.

Executive Compensation

33 



 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

33 



 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

33 



 

 

Item 14.

Principal Accounting Fees and Services

33 



 PART IV



 

 

Item 15.

Exhibits and Financial Statement Schedules

34 

 


 

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FORM 10-K



SONIC CORP.



PART I



Item 1.  Business



Overview



Sonic Corp. operates and franchises the largest chain of drive-in restaurants (“Sonic Drive-Ins”) in the United States.  References to “Sonic Corp.,” “Sonic,” “the Company,” “we,” “us” and “our” in this Form 10-K are references to Sonic Corp. and its subsidiaries. 



The first Sonic Drive-In restaurant opened in 1953.  As of the end of our fiscal year on August 31, 2016 , the Sonic system included 3, 557 Sonic Drive-Ins in 4 5 states of which 34 5   were owned and operated by Sonic Restaurants, Inc., the Company’s operating subsidiary (“Company Drive-Ins”), and 3, 2 1 2   were owned and operated by franchisees (“Franchise Drive-Ins”).



Sonic Corp. was incorporated in the State of Delaware in 1990 in connection with its 1991 initial public offering of common stock.  Sonic is publicly traded on the NASDAQ National Market Stock Exchange (“NASDAQ”) (Ticker: SONC).



Restaurant Design and Construction



The typical Sonic Drive-In consists of a kitchen housed in a one-story building, which is approximately 1,500 square feet, flanked by canopy-covered rows of 16 to 24 parking spaces, with each space having its own payment terminal, intercom speaker system and menu board.  At a typical Sonic Drive-In , a customer drives into one of the parking spaces, orders through the intercom speaker system and has the food delivered by a carhop.  Many Sonic Drive ‑Ins also include a drive-thru lane and patio seating to provide customers with alternative dining options.



Menu



Sonic maintains a highly diverse menu.  The menu strategy is to provide a broad range of items that appeal to target customer segments across different day-parts.  The menu includes a variety of traditional and healthier choices as well as creative and fun items.  Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order chicken sandwiches and hamburgers , a variety of hot dogs including   six-inch premium beef hot dogs and f ootlong quarter - pound coneys, hand- made onion rings and tater tots .  Sonic Drive-Ins also offer breakfast items that include a variety of breakfast   burritos and serve the full menu all day.  



Strategy



Sonic ’s strategy is to grow the Sonic brand with increased same-store sales and new unit growth by delivering a differentiated and high quality customer service experience. The key elements of our strategy are:



·

A distinctive drive-in concept focusing on a unique menu of quality, made-to-order food products including several signature items ;

·

A commitment to customer service featuring the quick delivery of food by friendly carhops ; and

·

A commitment to strong franchisee relationships.



Sonic’s growth strategies include the following:



·

S ame-store sales growth fueled by Sonic’s core brand strengths, including consistent drive-in execution, high-quality products, new product news and service differentiation with friendly carhops ,  complemented by increased media effectiveness and the use of innovative technology to enhance the customer experience;

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·

Improved performance of Company Drive-Ins, including consistent operations execution, speed of service, cleanliness of drive-ins and drive-in margins with the use of the Sonic system’s point-of-sale technology ; and

·

Expansion of Sonic Drive-Ins.



Restaurant Locations



As of August 31, 2016 , 3, 557   Sonic Drive-Ins were in operation from coast to coast in 4 5 states , consisting of 3 45   Company Drive-Ins and   3, 212 Franchise Drive-Ins .  

 

Expansion



During fiscal year 2016 , we opened 53 Sonic Drive-Ins, which consisted of one Company Drive-In and 52  Franchise Drive-Ins.  Expansion plans for fiscal year 201 7 involve the opening of multiple Sonic Drive-Ins under development agreements, as well as single-store development by   new and existing franchisees.  We believe that our   existing , as well as newly opened markets , offer significant growth opportun ities for both Company Drive-In and Franchise Drive-In expansion over the long term.

   

Marketing



We have a fully integrated marketing strategy that includes a national advertising campaign.  We have designed this marketing program to differentiate Sonic Drive-Ins from our competitors by emphasizing high-quality, distinctive, made-to-order menu items and personalized service featuring friendly carhops.  We support promotions with television, radio, digital media, point-of-sale materials and other communications as appropriate.  Those promotions generally highlight limited-time products and signature menu items.



Each year, Sonic develops a marketing plan with the involvement of the Sonic Franchise Advisory Council.  (Information concerning the Sonic Franchise Advisory Council is set forth on page 4 under Franchise Program - Franchise Advisory Council .)  Funding for our marketing plan is provided by the System Marketing Fund, the Sonic Brand Fund   and local advertising expenditures.  The System Marketing Fund primarily focuses on purchasing advertising on national cable and broadcast networks and other national media, sponsorship and brand enhancement opportunities.  The Sonic Brand Fund supports national media production as well as other programs designed to promote or enhance the Sonic brand.   Franchisees also may be required to spend additional amounts on local advertising, typically through participation in the local advertising cooperative.  Our franchise agreements require advertising contributions by franchisees of up to 5.9% of gross sales to these marketing funds and local advertising cooperatives .  



Purchasing



We negotiate with suppliers for the Sonic Drive-Ins’ primary food products and packaging supplies to obtain competitive prices and ensure adequate quantities of food and supplies.  We seek competitive bids from suppliers on many of our food and packaging items.  We approve suppliers of those products and require them to adhere to our established product and food safety specifications.  Suppliers manufacture several key products for Sonic under private label and sell them to authorized distributors for resale to Sonic Drive-Ins.  We require all Sonic Drive-Ins to purchase from approved distributors.



Food Safety and Quality Assurance



To ensure the consistent delivery of safe, high-quality food, we created a food safety and quality assurance program.  Sonic’s food safety program promotes the quality and safety of all products and procedures utilized by all Sonic Drive-Ins and provides certain requirements that must be adhered to by all suppliers, distributors and Sonic Drive-Ins.  Our comprehensive, restaurant-based food safety program is called Sonic Safe.  Sonic Safe is a risk-based system that utilizes Hazard Analysis & Critical Control Points (“HACCP”) principles for managing food safety and quality.  Our food safety program includes components to monitor and ensure the safety and quality of Sonic’s products and procedures at every stage of the food preparation and production cycle including, but not limited to, employee training, supplier product inspections and testing and unannounced drive-in food safety

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auditing by independent third parties.  All Sonic Drive-In employees are required to be trained in food safety in their first stage of training, utilizing an internal training program.  This program includes specific training on food safety information and requirements for every station in the drive-in.  We also require our drive-in managers and assistant managers to pass and maintain the ServSafe® certification.  ServSafe® is the most recognized food safety training certification in the restaurant industry.



I nformation Systems  



Sonic Drive-Ins are equipped with information technology systems that are designed to provide operational tools for sales , labor and inventory.   This technology includes industry- specific, off-the-shelf systems as well as proprietary software that assist in managing food and beverage costs.   These solutions are integrated with our point-of-sale systems to provide information that is important for managers to run efficient and effective operations.  We have centralized financial and accounting systems for Company Drive-Ins .  We also have systems that receive transaction-level data from Franchise Drive-Ins.  We believe these systems are important in analyzing and improving sales and profit margins and accumulating marketing information.  We are also making strategic investments in customer facing digital technologies, including interactive menu boards, a multi-functional mobile app lication and electronic payment at the stall to enhance the customer’s experience and drive sales.  We are further investing in new point-of-sale systems to improve drive-in level operations and profits. 

 

Company Operations



Management Structure.  A typical Company Drive-In is operated by a manager, two to four assistant managers and approximately 25 hourly employees, many of whom work part-time.  The manager has responsibility for the day-to-day operations of the Company Drive-In.  Supervisors oversee several Company Drive -Ins   and supervise the managers of those drive-ins.  The employee compensation program at Company Drive-Ins for managers and supervisors is comprised of a guaranteed base compensation with additional incentive compensation based on drive-in level performance.    



Company Drive-In Data .  The following table provides certain financial information relating to Company Drive-Ins and the number of Company Drive-Ins opened, purchased from or sold to franchisees and closed during the past five fiscal years and should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014

 

2013

 

2012

Average sales per Company Drive-In

 

$

1,142 

 

$

1,116 

 

$

1,043 

 

$

990 

 

$

958 

( In thousands )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Company Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total open at beginning of year

 

 

387 

 

 

391 

 

 

396 

 

 

409 

 

 

446 

New Company Drive-Ins

 

 

 

 

 

 

 

 

 

 

Purchased from franchisees

 

 

 -

 

 

 

 

 -

 

 

 

 

 -

Sold to franchisees

 

 

(38)

 

 

(9)

 

 

(7)

 

 

 -

 

 

(35)

Closed (net of re-openings)

 

 

(5)

 

 

(1)

 

 

(1)

 

 

(16)

 

 

(3)

Total open at end of year

 

 

345 

 

 

387 

 

 

391 

 

 

396 

 

 

409 



Franchise Program



General .  As of August 31, 2016 , we had 3, 212   Franchise Drive-Ins in operation.  A large number of successful multi-unit franchise groups have developed during the Sonic system’s more than 60 years of operation.  Those franchisees continue to develop new Franchise Drive-Ins either through development agreements or single-site development.  Our franchisees opened 52   drive-ins during fiscal year 2016 .  We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.



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Franchise Agreements .  For traditional drive-ins, the current franchise agreement provides for a franchise fee of $45,000 per drive-in, a royalty fee of up to 5% of gross sales on a graduated percentage basis and a 20-year term.  For fiscal year 2016 , Sonic’s average royalty rate was 4. 12 %.  The franchisee also pays advertising fees of up to 5.9% of gross sales and a technology fee of approximately 0.25% of gross sales .    



Development Agreements .  We use development agreements to facilitate the planned expansion of the Sonic Drive-In restaurant chain through single and multiple unit development.  During fiscal year 201 6 , almost all of our new Franchise Drive-In openings occurred as a result of existing development agreements .  Each development agreement gives a developer the exclusive right to construct, own and operate Sonic Drive-Ins within a defined area.  In exchange, each developer agrees to open a minimum number of Sonic Drive-Ins in the area within a prescribed time period.   F ranchisees who enter into development agreements are required to pay a fee, which is credited against franchise fees due when Sonic Drive-Ins are opened in the future.   Franchisees may forfeit such fees and lose their rights to future development if they do not maintain the required schedule of openings. 



Franchise Drive-In Development .  We assist each franchisee in selecting sites and developing Sonic Drive Ins.  Each franchisee has responsibility for selecting the franchisee’s drive-in location but must obtain our approval of each Sonic Drive-In design and each location based on accessibility and visibility of the site and targeted demographic factors, including population density, income, age and traffic.  We provide our franchisees with the physical specifications for the typical Sonic Drive-In. 



Franchise Advisory Council .  Our Franchise Advisory Council provides advice, counsel and input to Sonic on important i ssues impacting the business, such as marketing and promotions, operations, purchasing, building design, technology and new products.  The Franchise Advisory Council currently consists of 26   members selected by Sonic .  We have seven executive committee members who are selected at large and 1 9   regional members representing all regions of the country.  We also have four Franchise Advisory Council task groups comprised of 59   members who generally serve three-year terms and provide support on individual key priorities.  



Franchise Drive-In Data .  The following table provides certain financial information relating to Franchise Drive-Ins and the number of Franchise Drive-Ins opened, purchased from or sold to Sonic and closed during Sonic’s last five fiscal years.  The table should be read in conjunction with the information in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

2016

 

2015

 

2014

 

2013

 

2012

Average sales per Franchise Drive-In

 

$

1,301 

 

$

1,261 

 

$

1,170 

 

$

1,125 

 

$

1,081 

( In thousands )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total open at beginning of year

 

 

3,139 

 

 

3,127 

 

 

3,126 

 

 

3,147 

 

 

3,115 

New Franchise Drive-Ins

 

 

52 

 

 

38 

 

 

37 

 

 

25 

 

 

36 

Sold to the Company

 

 

 -

 

 

(3)

 

 

 -

 

 

(1)

 

 

 -

Purchased from the Company

 

 

38 

 

 

 

 

 

 

 -

 

 

35 

Closed (net of re-openings)

 

 

(17)

 

 

(32)

 

 

(43)

 

 

(45)

 

 

(39)

Total open at end of year

 

 

3,212 

 

 

3,139 

 

 

3,127 

 

 

3,126 

 

 

3,147 



Competition



We compete in the restaurant industry, specifically in the segment known as the quick-service restaurant (“QSR”) segment, a highly competitive industry in terms of price, service, location and food quality.  The restaurant industry is often affected by changes in consumer trends, economic conditions, demographics, traffic patterns and concerns about the nutritional content of quick-service foods.  We compete on the basis of distinctive food and service with signature food items, friendly carhops and   the method of food preparation (made-to-order and personalized ).  The quality of service, featuring Sonic carhops, constitutes one of our primary marketable points of difference from the competition.  There are many well-established competitors with substantially greater financial and other resources.  These competitors include a large number of national, regional and local food service establishments , including QSRs, casual - dining restaurants and convenience stores A significant change in market conditions or in pricing or other marketing strategies by one or more of Sonic’s competitors could have an adverse impact on Sonic’s sales, earnings

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and growth.  Furthermore, the restaurant industry has few barriers to entry, and new competitors may emerge at any time.  In selling franchises, we compete with many franchisors of QSR and other restaurants , in addition to franchisors of other business opportunities.  



Seasonality



Our sales and earnings results during Sonic’s second fiscal quarter (the months of December, January and February) generally are lower than other quarters because of colder and more volatile weather in the locations of a number of Sonic Drive-Ins.  



Employees



As of August 31, 2016 , we had 420   full-time corporate employees and approximately 9 , 2 00 full -time and part-time employees at Company Drive-Ins .     None of our employees are subject to a collective bargaining agreement.  We believe that we have good labor relations with our employees. 



Intellectual Property



Sonic owns or is licensed to use valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information, including the “Sonic” logo and trademark, which are of material importance to our business.  Depending on the jurisdiction, trademarks and service marks generally are valid as long as they are used and/or registered.   Patents, copyrights and licenses are of varying durations.



Customers



Our business is not dependent upon either a single customer or a small group of customers.



Government Contracts



No portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.



Government Regulation



Our restaurants are subject to licensing and regulation by state and local health, safety, fire and other authorities, including licensing requirements and regulations for the sale of food.  The development and construction of new restaurants is subject also to compliance with applicable zoning, land use and environmental regulations.  We are also subject to federal regulation and state laws that regulate the offer and sale of franchises and substantive aspects of the franchisor-franchisee relationship.  Various federal and state labor laws govern our relationship with our employees and affect operating costs.  These laws govern minimum wage requirements, overtime pay, meal and rest breaks, unemployment tax rates, health care and benefits, workers' compensation rates, citizenship or residency requirements, child labor regulations and discriminatory conduct.  Federal, state and local government agencies have established regulations requiring that we disclose to our customers nutritional information regarding our menu items.  We have processes in place to monitor compliance with applicable laws and regulations governing our operations.



Environmental Matters



We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures.  However, we cannot predict the effect on operations of possible future environmental legislation or regulations.  During fiscal year 2016 , there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.



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Available Information



We maintain a website with the address of   www.sonicdrivein.com .  Copies of the Company’s reports filed with, or furnished to, the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K and any amendments to such reports are available for viewing and copying at such website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the Securities and Exchange Commission.  In addition, copies of Sonic’s corporate governance materials, including the Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating and Corporate Governance Committee Charter, Code of Ethics for Financial Officers and Code of Business Conduct and Ethics are available for viewing and copying at the website, free of charge.



Forward-Looking Information



This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, principally in the sections captioned “Business,” “Legal Proceedings” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.  In some cases, forward-looking statements can be identified by words such as “anticipate,” “estimate,” “expect,”  “goals,” “guidance,”  “plan,”  “may,” “will,”  “would” and similar expressions.  Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.  Our actual future results and trends may differ materially depending on a variety of factors including, but not limited to, the risks and uncertainties discussed below.  We undertake no obligation to publicly update or revise them, except as may be required by law.



Item 1A.  Risk Factors



We caution you that our business and operations are subject to a number of risks and uncertainties.  The factors listed below are important factors that could cause our actual results to differ materially from our historical results and from projections in forward-looking statements contained in this report, in our other filings with the Securities and Exchange Commission, in our news releases and in oral statements by our representatives.  However, other factors that we do not anticipate or that we do not consider significant based on currently available information may also have an adverse effect on our results.



Events reported in the media, including social media, such as incidents involving food-borne illnesses , food contamination or food tampering, whether or not accurate, can cause damage to our reputation and rapidly affect sales and profitability.



Reports, whether true or not, of food-borne illnesses , food contamination   or food tampering have in the past severely injured the reputations of participants in the restaurant industry and could affect us in the future.  The potential for terrorism affecting our nation’s food supply also exists and, if such an event occurs, it could have a negative impact on our brand’s reputation and could severely hurt sales, revenues and profits.  Our ability to remain a trusted brand and increase sales and profits depends on our ability to manage the potential impact on Sonic of actual or reports of food safety issues.     Our food safety and quality assurance program minimize s   food safety risk s .  Nevertheless, these risks cannot be completely eliminated.  Any food safety incident attributed to our restaurants or within the food service industry, or any widespread negative publicity regarding our brand or the restaurant industry in general, could materially harm our brand, including sales and profitability.



The restaurant industry is highly competitive, and that competition could lower our revenues, margins and market share.



The restaurant industry is intensely competitive with respect to price, service, location, personnel, dietary trends, including nutritional content of quick-service foods, and quality of food and is often affected by changes in consumer tastes and preferences, economic conditions, population and traffic patterns.  We compete with international, regional and local restaurants, some of which operate more restaurants and have greater financial resources.  We compete primarily through the quality, price, variety and value of food products offered and our

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distinctive service experience.   Other key competitive factors include the number and location of restaurants, speed of service, attractiveness of facilities, effectiveness of advertising and marketing programs and new product develo pment by us and our competitors.  We cannot ensure that we will compete successfully in the restaurant industry on these factors.  In addition, s ome of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage.  O ur system also competes within the QSR industry not only for customers but also for management and hourly employees, suitable real estate sites, and qualified franchisees.

Changing dietary preferences may cause consumers to avoid our products in favor of alternative foods.



The restaurant industry is affected by consumer preferences and perceptions.  Although we monitor these changing preferences and strive to adapt to meet changing consumer needs, the growth of our brand and, ultimately, system-wide sales depend on the sustained demand for our products.  If dietary preferences and perceptions cause consumers to avoid certain products offered by Sonic Drive-Ins in favor of different foods, demand for our products may be reduced and our business could be harmed.



Our earnings and business growth strategy depends in large part on the success of our franchisees, who exercise independent control of their businesses.



A significant percentage of restaurants are owned and operated by our franchisees.  A portion of our earnings comes from royalties, rents and other amounts paid by our franchisees.  Franchisees are independent businesses , and their employees are not our employees.  To help ensure compliance with brand standards w e provide appropriate training and support to, and monitor the operations of, our franchisees, but the quality of their drive-in operations may be diminished by any number of factors beyond our control.  Franchisees may not successfully operate drive-ins in a manner consistent with our high standards and requirements, and they may not invest in facilities and initiatives as necessary to compete successfully in the restaurant industry.  Franchisees also may fail to properly implement the requirements of the Patient Protection and Affordable Care Act (the “ACA”) enacted in 2010 or may respond to the ACA in a manner that is viewed negatively by employees or consumers.  In addition, franchisees may not hire and train qualified managers and other restaurant personnel and may not adequately plan for and train their own successors.  Consumers could perceive an operational shortcoming of a Franchise Drive-In as a reflection of the entire Sonic brand, thus damaging our reputation and potentially affecting revenues and profitability.



Changes in economic, market and other conditions could adversely affect Sonic and its franchisees, and thereby Sonic’s operating results.



The QSR industry is affected by changes in economic conditions, consumer tastes and preferences , spending patterns, demographic trends, consumer perceptions of food safety, weather, traffic patterns, the type, number and location of competing restaurants and the effects of war or terrorist activities and any governmental responses thereto.  We are also affected by these factors, and the concentration of approximately 35% of our d rive- i ns in Texas and Oklahoma further subjects us to risk particularly if these factors impact those states.  Factors such as interest rates, inflation, gasoline prices, energy costs, food and packaging costs, labor and benefit costs, legal claims and the availability of management and hourly employees also affect restaurant operations and administrative expenses for all d rive- i ns .  Economic conditions, including disruptions in the financial markets, interest rates and other government policies impacting land and construction costs and the cost and availability of borrowed funds, affect our ability and our franchisees’ ability to finance new restaurant development, improvements and additions to existing restaurants, and the acquisition of restaurants from, and sale of restaurants to, franchisees.  Inflation can cause increased food, labor and benefits costs and can increase our operating expenses.  As operating expenses increase, we recover increased costs by increasing menu prices, to the extent permitted by competition and the consumer environment, or by implementing alternative products or processes, or by implementing other cost reduction procedures.  We cannot ensure, however, that we will be able to recover increases in operating expenses in this manner.

Our financial results may fluctuate depending on various factors, many of which are beyond our control.



Our sales and operating results can vary from quarter to quarter and year to year depending on various factors, many of which are beyond our control.  Certain events and factors may directly and immediately decrease

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demand for our products , and we cannot ensure that we will be able to respond to or address the events and factors sufficiently .  If customer demand decreases rapidly, our results of operations , including store-level sales and profits, would also decline precipitously.  These events and factors include:



·

sales promotions and product offerings by Sonic and its competitors;

·

changes in average same-store sales and customer visits;

·

the inability to purchase sufficient levels of media;

·

variations in the price, availability and shipping costs of supplies such as food products;

·

seasonal effects on demand for Sonic’s products;

·

unexpected slowdowns in new drive-in development or franchise agreement renewals ;

·

changes in competitive conditions;

·

changes in economic conditions generally, including consumer spending ;

·

consumer sensitivity to price and value ;

·

changes in consumer tastes and preferences ;

·

changes in the cost of labor; and

·

weather and other acts of God .



Shortages or interruptions in the supply or delivery of perishable food products or rapid price increases could adversely affect our operating results.

 

We are dependent on frequent deliveries of perishable food products that meet certain specifications.  Shortages or interruptions in the supply of perishable food products may be caused by unanticipated demand, problems in production or distribution, acts of terrorism, financial or other difficulties of suppliers, disease or food-borne illnesses, droughts, inclement weather or other conditions.  We source large quantities of food and supplies, which can be subject to significant price fluctuations due to seasonal shifts, climate conditions, industry demand, energy costs, changes in international commodity markets and other factors.  These shortages or rapid price increases could adversely affect the availability, quality and cost of ingredients, which would likely lower revenues and reduce our profitability.



Failure to successfully implement our growth strategy could reduce, or reduce the growth of, our revenue and net income.



We plan to continue to increase the number of Sonic Drive-Ins, but may not be able to achieve our growth objectives, and new drive-ins may not be profitable or provide a sufficient return on investment .  The opening and success of drive-ins depend s on various factors, including:



·

competition from other restaurants in current and future markets;

·

the degree of saturation in existing markets;

·

consumer interest in and acceptance of the Sonic brand in existing and new markets ;

·

the identification and availability of suitable and economically viable locations;

·

sales and profit levels at existing drive-ins;

·

the negotiation of acceptable lease or purchase terms for new locations;

·

permitting and regulatory requirements ;

·

the cost and availability of construction resources and financing ;

·

the ability to meet construction schedules;

·

the availability of qualified franchisees and their financial and other development capabilities , including their desire and ability to access and commit capital ;

·

the ability to hire and train qualified management personnel; 

·

sufficient marketing efforts;

·

weather; and

·

general economic and business conditions.



If we are unable to open as many new drive-ins as planned, if the drive-ins are less profitable than anticipated or if we are otherwise unable to successfully implement our growth strategy, revenue and profitability may grow more slowly or even decrease.



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Our outstanding and future leverage could have an effect on our operations.



The Company employs securitized financing in the form of fixed rate notes and variable rate notes.  As of August 31, 2016, we had outstanding two series of fixed rate notes :  1) $ 155.2  million in debt including accrued interest at an interest rate of 3.75%, with an anticipated repayment date of July 2020, and 2) $ 424.5  million in debt including accrued interest at an interest rate of 4.47%, with an anticipated repayment date of May 2023.  In addition, as of August 31, 2016, we had no outstanding balance under the variable rate notes.  Interest on the variable notes is based on the funding cost or index plus a base spread of 2.0%, per annum.  The variable rate notes have an anticipated repayment date of May 2021, with two one-year options available under certain conditions.  We believe our current leverage ratio is moderate.  We have historically generated net operating cash flows significantly in excess of our debt service requirements.  In the event that we default on our debt obligations, the following consequences could apply:



·

O ur flexibility may be reduced in responding to changes in business , industry ,   regulatory or economic conditions.

·

Our ability to obtain additional financing in the future for acquisitions, working capital, capital expenditures and general corporate or other purposes could be impaired or any such financing may not be available on terms favorable to us.

·

Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations or sell assets; as a result a substantial portion of our cash flows could be required for debt service and might not be available for our operations or other purposes.

·

Unpaid amounts outstanding could become immediately due and payable. 



Sonic Drive-Ins are subject to health, employment, environmental and other government regulations, and failure to comply with existing or future government regulations could expose us to litigation, damage to our reputation and lower profits.



Sonic and its franchisees are subject to various federal, state and local laws affecting their businesses.  The successful development and operation of restaurants depends to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use (including the placement of drive-thru windows), environmental (including litter), traffic and other regulations.  More stringent requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay, prevent or make cost prohibitive the continuing operations of an existing restaurant or the development of new restaurants in particular locations.  Restaurant operations are also subject to licensing and regulation by state and local departments relating to health, food preparation, sanitation and safety standards, federal and state labor and immigration laws (including applicable minimum wage requirements, overtime, working and safety conditions and work authorization requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act.  If we fail to comply with any of these laws, we may be subject to governmental action or litigation, and our reputation could be accordingly harmed.  Injury to our reputation would, in turn, likely reduce revenues and profits.



In recent years, there has been an increased legislative, regulatory and consumer focus on nutrition and advertising practices in the food industry, particularly among restaurants.  As a result, we have and will become subject to regulatory initiatives in the area of nutritional content, disclosure and advertising, such as requirements to provide information about the nutritional content of our food products, which could increase expenses.  The operation of our franchise system is also subject to franchise laws and regulations enacted by a number of states and rules promulgated by the U.S. Federal Trade Commission.  Any future legislation or legal changes regarding franchise relationships may negatively affect our operations, particularly our relationship with our franchisees and may increase our potential liability for franchisee practices and our costs.  Failure to comply with new or existing franchise laws and regulations in any jurisdiction or to obtain required government approvals could result in a ban or temporary suspension on future franchise sales.  Changes in applicable accounting rules imposed by governmental regulators or private governing bodies could also affect our reported results of operations.



We are subject to the Fair Labor Standards Act, which governs such matters as minimum wage, overtime and other working conditions, along with the Americans with Disabilities Act, various family leave mandates and a

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variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters.  We have experienced and expect further increases in payroll expenses as a result of government-mandated increases in the minimum wage and future increases may be material .  Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular area or across the United States.  In addition, our vendors may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us. 



We have implemented various aspects of the ACA in our business .   There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance.  



Litigation from customers, franchisees, employees and others could harm our reputation and impact operating results.



Our legal and regulatory environment exposes us to complex compliance and litigation risk.  Claims of illness or injury relating to food content, food quality or food handling are common in the QSR industry , as are intellectual property claims (including often aggressive or opportunistic attempts to enforce patents used in information technology systems).  In addition, class action lawsuits have been filed, and may continue to be filed, against various QSRs alleging, among other things, that QSRs have failed to disclose the health risks associated with foods we serve and that QSR marketing practices have encouraged obesity and other health issues.  There are also litigation and compliance risks and costs associated with privacy, consumer data protection and similar laws, particularly as they apply to children, as well as laws related to the collection and use of consumer, employee and franchisee data.  We additionally may be subject to employee, franchisee and other claims in the future based on, among other things, discrimination, harassment, wrongful termination and wage, rest break and meal break issues, including those relating to overtime compensation.  Litigation, as well as regulatory and legal changes, involving our relationship with our franchisees and the legal distinction between our franchisees and us for employment law purposes, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions.  In addition to decreasing our sales and profitability and diverting management resources, adverse publicity or a substantial judgment against us could negatively impact our reputation, hindering the ability to attract and retain qualified franchisees and grow the business.



We may not be able to adequately protect our intellectual property, which could decrease the value of our brand and products.



The success of our business depends on the continued ability to use existing trademarks, service marks and other components of our brand in order to increase brand awareness and further develop branded products.  All of the steps we have taken to protect our intellectual property may not be adequate. 



Our reputation and business could be materially harmed as a result of security   breaches.  



Security breaches involving our systems or those of our franchisees or third party providers may occur, such as unauthorized access, denial of service, computer viruses and other disruptive problems caused by hackers and other bad actors. Our technology systems contain personal, financial and other information that is entrusted to us by our customers and employees as well as financial, proprietary and other confidential information related to our business. An actual or alleged security breach could result in system disruptions, shutdowns, theft or unauthorized disclosure of confidential information. The occurrence of any of these incidents could result in adverse publicity, loss of consumer confidence, increased costs, reduced sales and profits and criminal penalties or civil liabilities.



Unreliable or inefficient drive-in tech nology, lack of support for drive-in technology and failure to successfully implement technology initiatives could adversely impact operating results.



We rely on proprietary and commercially available technologies at our drive-ins, including point-of-sale , digital point-of-purchase and payment card systems.  We rely on this technology not only to efficiently operate our drive-ins but also to drive sales growth and margin improvement.  Our strategic technology initiatives may not be timely or effectively implemented or adequately resourced .  Certain technology networks and systems may also be unreliable or inefficient, and our technology vendors may limit or terminate product support and maintenance or be

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unwilling or unable to provide products and services needed to execute our technology initiatives .  Additionally, replacement parts and support and maintenance skills may become scarce, cost prohibitive or non-existent.  Any such risks could disrupt drive-in operations, render us unable to achieve desired strategic results and impact sales and profitability.



Ownership and leasing of significant amounts of real estate exposes us to possible liabilities and losses.



We own or lease the land and building for all Company Drive-Ins.  Accordingly, we are subject to all of the risks associated with owning and leasing real estate.  In particular, the value of our assets could decrease and our costs could increase because of changes in the investment climate for real estate, demographic trends and supply or demand for the use of our drive-ins, which may result from competition from similar restaurants in the area, as well as liability for environmental conditions.  We generally cannot cancel the leases, so if an existing or future Sonic Drive-In is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying rent for the balance of the lease term.  In addition, as each of the leases expires, we may fail to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close drive-ins in desirable locations.



Catastrophic events may disrupt our business.



Unforeseen events, or the prospect of such events, including war, terrorism and other domestic or international conflicts, public health issues , including health epidemics or pandemics, and natural disasters such as hurricanes, earthquakes or other adverse weather and climate conditions, whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of franchisees, suppliers or customers, or result in political or economic instability.  These events could reduce demand for our products or make it difficult or impossible to receive products from suppliers.  



Item 1B.  Unresolved Staff Comments



None.



Item 2.  Properties



Of the 345 Company Drive-Ins operating as of August 31, 2016 , we operated 161   of them on property leased from third parties and   184   of them on property we own.  The leases expire on dates ranging from 2 016   to 203 1 , with the majority of the third-party leases providing for renewal options.  All third-party leases provide for specified monthly rental payments and/or rentals based on sales volume.  Most leases require Sonic to maintain the property and pay the cost of insurance and taxes.  We also own and lease 174   properties and sublease 4 3   properties to franchisees and other parties.  These leases with franchisees and other parties expire on dates ranging from 201 6 to 203 1 , with the majority of the leases providing for renewal options.  The majority of the leases for Franchise Drive-Ins provide for percentage rent based on sales volume, with a minimum base rent.  These leases generally require the franchisee to maintain the property and pay the costs of insurance and taxes.  Virtually all of our owned properties are pledged as collateral under the terms of our securitized financing facility, as described under “Liquidity and Sources of Capital” in Part II, Item 7.



Our corporate headquarters is located in Oklahoma City.  We have an existing lease to occupy approximately 96 , 300   square feet.  This lease expires in November 2023 and has two five-year renewal options.  Sonic believes its properties are suitable for the purposes for which they are being used.



Item 3.  Legal Proceedings



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 or financial condition.



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Item 4.  Mine Safety Disclosures



Not applicable .



Item 4A.  Executive Officers of the Company



Identification of Executive Officers



The following table identifies the executive officers of the Company:





 

 

 

Name

Age

Position

Executive

Officer Since

Clifford Hudson

61

Chairma n of the Board of Directors and   Chief Executive Officer

1985



 

 

 

Todd W. Smith

3 9

President and Chief Marketing Officer

2014



 

 

 

Claudia S. San Pedro

47

Executive Vice President and Chief Financial Officer

2007



 

 

 

John H. Budd III

4 9

Executive Vice President and Chief Development and Strategy Officer

2013



 

 

 

Harold A. Ceron

41

President of Sonic Restaurants, Inc.

2015



 

 

 

Paige S. Bass

4 7

Senior Vice President, General Counsel and Assistant Corporate Secretary

2007



 

 

 

Michelle E. Britten

4 9

Vice President and Chief Accounting Officer

2012



 

 

 

Carolyn C. Cummins

5 8

Vice President of Compliance and Corporate Secretary

2004



 

 

 

Corey R. Horsch

3 8

Vice President of Investor Relations and Treasurer

2015



Business Experience



The following sets forth the business experience of the executive officers of the Company for at least the past five years:



Clifford Hudson has served as the Company’s Chairman of the Board since January 2000 and Chief Executive Officer since April 1995.  Mr. Hudson served as President of the Company from April 1995 to January 2000 and reassumed that position from November 2004 until May 2008 and again in April 2013 to January 2016 .  He has served in various other offices with the Company since 1984.  Mr. Hudson has served as a Director of the Company since 1993.  Mr. Hudson has served on the Board of Trustees of the Ford Foundation since January 2006.  



Todd W. Smith has served as President and Chief Marketing Officer since January 2016 He served as Senior Vice President and Chief Marketing Officer from April 2015 to January 2016.  Mr. Smith served as Vice President and Chief Marketing Officer of the Company from April 2014 to April 2015 and was Vice President of Marketing from April 2012 until April 2014.  Mr. Smith was director of marketing and menu innovation for Wendy’s International from December 2009 to April 2012.  He was employed by Yum! Brands (KFC) in various brand marketing roles from January 2006 to November 2009 .  



Claudia S. San Pedro has served as the Company’s Executive Vice President and Chief Financial Officer since August 2015.  She served as Senior Vice President and Chief Financial Officer from April 2015 until August 2015.  Ms. San Pedro served as Vice President of Investor Relations and Communications of the Company from January 2013 until April 2015 and was its Vice President of Investor Relations from July 2010 until January 2013.  She served as Vice President of Investor Relations and Brand Strategies from October 2009 until July 2010. 

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Ms. San Pedro has also served as Treasurer of the Company from January 2007 until October 2015 .  She served as the Director of the Oklahoma Office of State Finance from June 2005 through November 2006.  From July 2003 to May 2005, Ms. San Pedro served as the Budget Division Director for the Oklahoma Office of State Finance.



John H. Budd III has served as Executive Vice President and Chief Development and Strategy Officer from January 2016 to present.  He served as Senior Vice President and Chief Development and Strategy Officer from August 2013 until January 2016 .  Mr. Budd served in several progressive positions for Boston Consulting Group from 1997 until joining Sonic in August 2013 .  His most recent position with Boston Consulting Group was Partner and Managing Director.  



Harold A. Ceron has served as President of Sonic Restaurants, Inc. since September 2015.  Mr. Ceron served as Senior Vice President of Operations of Sonic Restaurants, Inc. from July 2014 until September 2015.  Prior to joining the Company, Mr. Ceron served as the Managing Director, Europe and Latin America, of 7-Eleven from April 2013 until June 2014 and as the Director of Global Business Development for 7-Eleven from August 2012 until June 2014.  He served as the Director of Global Operations, KFC for Yum! Brands from August 2010 until June 2012.  Prior to August 2010, Mr. Ceron worked for an additional 17 years with Yum! Brands in its Pizza Hut operations in various positions of increasing responsibility, lastly as Franchise Business Leader, Caribbean and Latin America.  



Paige S. Bass has served as Senior Vice President and General Counsel of the Company since October 2014 and served as Vice President and General Counsel of the Company from January 2007 until October 2014.   She has also served as Assistant Corporate Secretary since October 2008.  Ms. Bass joined the Company as Associate General Counsel in 2004.  Prior to joining the Company, Ms. Bass was employed as an associate with the law firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.



Michelle E. Britten has served as Vice President and Chief Accounting Officer since January 2016 and as Vice President and Controller of the Company from November 2012 until January 2016 .  She served as Senior Director of Corporate Accounting from April 2009 until November 2012 and as Senior Director of SEC Reporting from January 2007 until April 2009.  Ms. Britten joined the Company in 2005 as its Director of SEC Reporting.



Carolyn C. Cummins has served as the Company’s Corporate Secretary since January 2007 and as the Company’s Vice President of Compliance since April 2004.  Ms. Cummins joined the Company as Assistant General Counsel in 1999. 



Corey R. Horsch has served as Vice President of Investor Relations and Treasurer of the Company since October 2015.  Mr. Horsch served as a Portfolio Manager with Surveyor Capital from May 2011 until September 2015.  He served as a Senior Research Analyst with Luther King Capital Management from June 2006 until April 2011.  Prior to June 2006, Mr. Horsch worked for almost six years with Credit Suisse in various positions of increasing responsibility, the most recent of which was Vice President, Senior U.S. Equity Research Analyst.



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PART II



Item 5.  Market for the Company’s   Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Market Information



The Company’s common stock trades on NASDAQ under the symbol “SONC.”   The following table sets forth the high and low sales price for the Company’s common stock during each fiscal quarter within the two most recent fiscal years as reported on NASDAQ. 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

 

 

 

August 31, 2016

 

High

 

Low

 

August 31, 2015

 

High

 

Low

First Quarter

 

$

29.99 

 

$

22.72 

 

First Quarter

 

$

27.88 

 

$

21.10 

Second Quarter

 

$

33.18 

 

$

24.91 

 

Second Quarter

 

$

33.15 

 

$

25.91 

Third Quarter

 

$

36.34 

 

$

28.80 

 

Third Quarter

 

$

36.73 

 

$

28.53 

Fourth Quarter

 

$

30.91 

 

$

26.17 

 

Fourth Quarter

 

$

34.23 

 

$

24.86 



Stockholders



As of October 1 4 ,   2016 , the Company had 6 2 5   record holders of its common stock .  



Dividends



In August 2014 , t he Company initiated a quarterly cash dividend program and paid a quarterly dividend of $0.09 per share of common stock , totaling $18.8 million , for fiscal year 2015 and paid a quarterly dividend of $0.11 per share , totaling $ 21.3  million , for fiscal year 2016.  Subsequent to the end of fiscal year 2016, the Company declared a quarterly dividend of $0.14 per share of common stock to be paid to stockholders of record as of the close of business on November 9 , 201 6 , with a payment date of November 18 , 201 6 .   The future declaration of quarterly dividends and the establishment of future record and payment dates are subject to the final determination of the Company’s Board of Directors.      

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Issuer Purchases of Equity Securities



Shares repurchased during the fourth quarter of fiscal 2016   are as follows (in thousands, except per share amounts): 







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

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)

June 1, 2016 through June 30, 2016

 

372 

 

$

29.21 

 

372 

 

$

159,564 

July 1, 2016 through July 31, 2016

 

507 

 

 

27.45 

 

507 

 

 

145,655 

August 1, 2016 through August 31, 2016

 

449 

 

 

28.34 

 

449 

 

 

132,913 

Total

 

1,328 

 

 

 

 

1,328 

 

 

 

—————

(1)    In August 201 5 , the Company’s Board of Directors extended the Company’s share repurchase program , authorizing the Company to purchase up to $1 4 5   million of its outstanding shares of common stock through   fiscal year 2016 The Board of Directors further extended the share repurchase program effective May 2016, authorizing the purchase of up to an additional $155 million of the Company’s outstanding shares of common stock through August 2017. S hare repurchases will be made from time to time i n the open market or otherwise, including through an accelerated share repurchase program (“ASR”) , 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 .



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Item 6.  Selected Financial Data



The follo w ing table sets forth selected financial data regarding the Company’s financial condition and operating results.  One should read the following information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below in Part II, Item 7 , and the Company’s Consolidated Financial Statements included elsewhere in this report.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected Financial Data

(In thousands, except per share data)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Fiscal year ended August 31,



 

2016

 

2015

 

2014

 

2013

 

2012

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Drive-In sales

 

$

425,795 

 

$

436,031 

 

$

405,363 

 

$

402,296 

 

$

404,443 

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties and fees

 

 

170,319 

 

 

161,342 

 

 

138,416 

 

 

130,737 

 

 

128,013 

Lease revenue

 

 

7,459 

 

 

5,583 

 

 

4,291 

 

 

4,785 

 

 

6,575 

Other

 

 

2,747 

 

 

3,133 

 

 

4,279 

 

 

4,767 

 

 

4,699 

Total revenues

 

 

606,320 

 

 

606,089 

 

 

552,349 

 

 

542,585 

 

 

543,730 

Cost of Company Drive-In sales

 

 

356,820 

 

 

363,938 

 

 

342,109 

 

 

343,209 

 

 

347,470 

Selling, general and administrative

 

 

82,089 

 

 

79,336 

 

 

69,415 

 

 

66,022 

 

 

65,173 

Depreciation and amortization

 

 

44,418 

 

 

45,892 

 

 

42,210 

 

 

40,387 

 

 

41,914 

Provision for impairment of long-lived assets

 

 

232 

 

 

1,440 

 

 

114 

 

 

1,776 

 

 

764 

Other operating (income) expense, net

 

 

(4,691)

 

 

(945)

 

 

(176)

 

 

1,943 

 

 

(531)

Total expenses

 

 

478,868 

 

 

489,661 

 

 

453,672 

 

 

453,337 

 

 

454,790 

Income from operations

 

 

127,452 

 

 

116,428 

 

 

98,677 

 

 

89,248 

 

 

88,940 

Interest expense, net (1)

 

 

34,948 

 

 

24,706 

 

 

24,913 

 

 

32,949 

 

 

30,978 

Income before income taxes

 

 

92,504 

 

 

91,722 

 

 

73,764 

 

 

56,299 

 

 

57,962 

Net income-attributable to Sonic Corp.

 

$

64,067 

 

$

64,485 

 

$

47,916 

 

$

36,701 

 

$

36,085 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.32 

 

$

1.23 

 

$

0.87 

 

$

0.65 

 

$

0.60 

Diluted

 

$

1.29 

 

$

1.20 

 

$

0.85 

 

$

0.64 

 

$

0.60 

Weighted average shares used in calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

48,703 

 

 

52,572 

 

 

55,164 

 

 

56,384 

 

 

60,078 

Diluted

 

 

49,669 

 

 

53,953 

 

 

56,619 

 

 

57,191 

 

 

60,172 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share (2)

 

$

0.44 

 

$

0.27 

 

$

0.09 

 

$

 -

 

$

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

62,994 

 

$

(2,383)

 

$

16,201 

 

$

67,792 

 

$

26,635 

Property, equipment and capital leases, net

 

 

402,162 

 

 

421,406 

 

 

441,969 

 

 

399,661 

 

 

443,008 

Total assets

 

 

659,995 

 

 

620,024 

 

 

650,972 

 

 

660,794 

 

 

680,760 

Obligations under capital leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(including current portion)

 

 

21,064 

 

 

24,440 

 

 

26,743 

 

 

26,864 

 

 

31,676 

Long-term debt (including current portion)

 

 

578,938 

 

 

438,028 

 

 

437,318 

 

 

447,294 

 

 

481,793 

Stockholders’ equity   (deficit)

 

 

(75,643)

 

 

17,433 

 

 

62,675 

 

 

77,464 

 

 

59,247 

—————————

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)  Includes net loss from early extinguishment of debt of $8.8 millio n and $4.4 million   for fiscal years 2016 and   2013 , respectively.

(2)  The first quarter dividend for fiscal year 2015 was declared in the fourth quarter of fiscal year 2014.



16

 


 

Table of Contents

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations



Overview



Description of the Business Sonic operates and franchises the largest chain of drive-in restaurants in the United States .  As of August 31, 201 6 , the Sonic system was comprised of 3, 557 drive-ins, of which 1 0 % were Company Drive-Ins and 90 % were Franchise Drive-Ins.  As announced in the third quarter of fiscal year 2016, w e plan to move toward an approximately 95% ‑franchised system as part of a refranchising initiative.  Sonic ’s signature food items include s pecialty drinks (such as cherry limeades and slushes), ice cream desserts, made -to-order   chicken sandwiches and hamburgers, a variety of hot dogs including six-inch premium beef hot dogs and footlong quarter pound coneys, hand- made onion rings and tater tots Sonic Drive-Ins also offer breakfast items that include a variety of breakfast   burritos and serve the full menu all day.  We derive our revenues primarily from Company Drive-In sales and royalties from franchisees.  We also receive revenues from leasing real estate to franchisees, franchise fees , earnings from minority investments in franchise operations and other miscellaneous revenues.  



Our Company Drive-In revenues and expenses are directly affected by the number and sales volumes of Company Drive-Ins .  Our franchising revenues and other expenses such as depreciation, amortization and   selling, general and administrative   expenses are affected by the number and sales volumes of Franchise Drive-Ins.  Lease revenues are generated primarily by the leasing of land and buildings for Company Drive-In operations that have been sold to franchisees.



Overview of Business Performance .     System-wide same-store sales increased 2.6 % during fiscal year 2 0 16 as compared to an increase of 7.3 % for fiscal year 2 0 15 .  Same-store sales at Company Drive-Ins increased by 1.7 % during fiscal year 2016 as compared to an increase of 6.9 % for fiscal year 2015 .  Our continued positive same-store sales are a result of the successful implementation of initiatives, including product quality improvements and innovation , a greater emphasis on personalized service ,   new technology, a tiered pricing strategy and a media strategy , that have set a solid foundation for growth.  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.  S ame-store sales growth is the most important layer and drives operating leverage and increased operating cash flows.



Revenues increased to $606. 3  million for fiscal year 2016   from $ 606.1  million for fiscal year 2015 , which was primarily due to an increase in Franchise Drive-In royalties of $ 9 .9 million , partially offset by a decrease in Company Drive-In sales of $10.2 million The decrease in Company Drive-In sales was a result of refranchising certain Company Drive- I ns, offset by an increase in sales from increased same-store sales.  Restaurant margins at Company Drive-Ins were unfavorable by 30 basis points during fiscal year 2 0 16 ,   reflecting increased investments in employees’ compensation and benefits to attract and retain employees at the drive-in level and the impact of the newly established Brand Technology Fund (“BTF”), partially offset by leverage from sales growth .



Net income and diluted earnings per share for fiscal year 2016 were $64. 1  million and $1.2 9 , respectively, as compared to net income of $ 64.5  million or $ 1.20  per diluted share for fiscal year 2015 .  Excluding the non ‑GAAP adjustments further described below, net income per diluted share was $1. 29 for fiscal year 2016 , compared to $ 1.10 per diluted share in fiscal year 2015 .  



17

 


 

Table of Contents

 

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.  Numbers below are stated in thousands, except per share amounts.









 

 

 

 

 

 

 

 

 

 

 

 



 

Fiscal Year Ended

 

Fiscal Year Ended



 

August 31, 2016

 

August 31, 2015



 

Net

 

Diluted

 

Net

 

Diluted



 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

64,067 

 

$

1.29 

 

$

64,485 

 

$

1.20 

Gain on sale of Company Drive-Ins

 

 

(972)

 

 

(0.02)

 

 

 -

 

 

 -

Tax impact on Company Drive-Ins sale (1)

 

 

317 

 

 

0.00 

 

 

 -

 

 

 -

FIN   48 release o f income tax credits and deductions

 

 

(3,038)

 

 

(0.06)

 

 

 

 

 

 

Loss from early extinguishment of debt

 

 

8,750 

 

 

0.18 

 

 

 -

 

 

 -

Tax impact on debt extinguishment (2)

 

 

(3,027)

 

 

(0.06)

 

 

 -

 

 

 -

Gain on sale of real estate

 

 

(1,875)

 

 

(0.04)

 

 

 -

 

 

 -

Tax impact on real estate sale (3)

 

 

664 

 

 

0.01 

 

 

 -

 

 

 -

Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters

 

 

(585)

 

 

(0.01)

 

 

(666)

 

 

(0.01)

Federal tax benefit of prior-year statutory tax deduction

 

 

 -

 

 

 -

 

 

(3,199)

 

 

(0.06)

Change in deferred tax valuation allowance

 

 

 -

 

 

 -

 

 

(1,701)

 

 

(0.04)

Retroactive effect of federal tax law change

 

 

 -

 

 

 -

 

 

612 

 

 

0.01 

Adjusted - Non-GAAP

 

$

64,301 

 

$

1.29 

 

$

59,531 

 

$

1.10 

—————————

 

 

 

 

 

 

 

 

 

 

 

 







 

 

 

 

 

 

 

 

 

 

 

 



 

Fiscal year ended

 

Fiscal year ended



 

August 31, 2015

 

August 31, 2014



 

Net

 

Diluted

 

Net

 

Diluted



 

Income

 

EPS

 

Income

 

EPS

Reported – GAAP

 

$

64,485 

 

$

1.20 

 

$

47,916 

 

$

0.85 

Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters

 

 

(666)

 

 

(0.01)

 

 

 -

 

 

 -

Federal tax benefit of prior-year statutory tax deduction

 

 

(3,199)

 

 

(0.06)

 

 

 -

 

 

 -

Change in deferred tax valuation allowance

 

 

(1,701)

 

 

(0.04)

 

 

 -

 

 

 -

Retroactive effect of federal tax law change

 

 

612 

 

 

0.01 

 

 

 -

 

 

 -

Benefit from the IRS's acceptance of a federal tax method change

 

 

 -

 

 

 -

 

 

(484)

 

 

(0.01)

Adjusted - Non-GAAP

 

$

59,531 

 

$

1.10 

 

$

47,432 

 

$

0.84 

—————————

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Tax impact during the period at an adjusted effective tax rate of 3 2 .6% .

(2)   Tax impact during the period at an effective tax rate of 3 4 . 6 % .

(3)  Tax impact during the period at an adjusted effective tax rate of 35.4 % .



18

 


 

Table of Contents

 

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the years 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.







 

 

 

 

 

 

 

 

 

 

 

 

System-wide Performance

($ in thousands)



 

 

 

 

 

 

 

 

 

 

 

 



 

Fiscal Year Ended August 31,



 

2016

 

2015

 

2014

Increase in total sales

 

 

3.5 

%

 

 

8.3 

%

 

 

3.9 

%



 

 

 

 

 

 

 

 

 

 

 

 

System-wide drive-ins in operation (1) :

 

 

 

 

 

 

 

 

 

 

 

 

Total at beginning of year

 

 

3,526 

 

 

 

3,518 

 

 

 

3,522 

 

Opened

 

 

53 

 

 

 

41 

 

 

 

40 

 

Closed (net of re-openings)

 

 

(22)

 

 

 

(33)

 

 

 

(44)

 

Total at end of year

 

 

3,557 

 

 

 

3,526 

 

 

 

3,518 

 



 

 

 

 

 

 

 

 

 

 

 

 

Average sales per drive-in

 

$

1,284 

 

 

$

1,244 

 

 

$

1,153 

 



 

 

 

 

 

 

 

 

 

 

 

 

Change in same-store sales (2)

 

 

2.6 

%

 

 

7.3 

%

 

 

3.5 

%

—————————

 

 

 

 

 

(1)   Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.

(2)   Represents percentage change for drive-ins open for a minimum of 15 months.



19

 


 

Table of Contents

 

Results of Operations



Revenues .  The following table sets forth the components of revenue for the reported periods and the relative change between the comparable periods.







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

($ in thousands)



 

 

 

 

 

 

 

 

 



 

Fiscal Year Ended

 

 

 

Percent



 

August 31,

 

Increase

 

Increase



 

2016

 

2015

 

(Decrease)

 

(Decrease)

Company Drive-In sales

 

$

425,795 

 

$

436,031 

 

$

(10,236)

 

 

(2.3)

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

168,691 

 

 

158,813 

 

 

9,878 

 

 

6.2 

 

Franchise fees

 

 

1,628 

 

 

2,529 

 

 

(901)

 

 

(35.6)

 

Lease revenue

 

 

7,459 

 

 

5,583 

 

 

1,876 

 

 

33.6 

 

Other

 

 

2,747 

 

 

3,133 

 

 

(386)

 

 

(12.3)

 

Total revenues

 

$

606,320 

 

$

606,089 

 

$

231 

 

 

0.0 

%



 

 

 

 

 

 

 

 

 

 

 

 

 



 

Fiscal Year Ended

 

 

 

 

 

Percent



 

August 31,

 

Increase

 

 

Increase



 

2015

 

 

2014

 

(Decrease)

 

 

(Decrease)

Company Drive-In sales

 

$

436,031 

 

$

405,363 

 

$

30,668 

 

 

7.6 

%

Franchise Drive-Ins:

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise royalties

 

 

158,813 

 

 

137,125 

 

 

21,688 

 

 

15.8 

 

Franchise fees

 

 

2,529 

 

 

1,291 

 

 

1,238 

 

 

95.9 

 

Lease revenue

 

 

5,583 

 

 

4,291 

 

 

1,292 

 

 

30.1 

 

Other

 

 

3,133 

 

 

4,279 

 

 

(1,146)

 

 

(26.8)

 

Total revenues

 

$

606,089 

 

$

552,349 

 

$

53,740