falsedesktopSONC2018-08-31000086861118000055{"tbl_sim": "https://q10k.com/tbl-sim", "search": "https://q10k.com/search"}{"q10k_tbl_0": "Large accelerated filer ☒\tAccelerated filer ☐\nNon-accelerated filer ☐ (Do no check if a smaller reporting company)\tSmaller reporting company ☐\nEmerging growth company ☐\t\n", "q10k_tbl_1": "PART I\t\t\nItem 1.\tBusiness\t1\nItem 1A.\tRisk Factors\t5\nItem 1B.\tUnresolved Staff Comments\t11\nItem 2.\tProperties\t11\nItem 3.\tLegal Proceedings\t11\nItem 4.\tMine Safety Disclosures\t11\nItem 4A.\tExecutive Officers of the Company\t12\nPART II\t\t\nItem 5.\tMarket for the Company's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities\t14\nItem 6.\tSelected Financial Data\t15\nItem 7.\tManagement's Discussion and Analysis of Financial Condition and Results of Operations\t16\nItem 7A.\tQuantitative and Qualitative Disclosures About Market Risk\t29\nItem 8.\tFinancial Statements and Supplementary Data\t30\nItem 9.\tChanges in and Disagreements with Accountants on Accounting and Financial Disclosure\t30\nItem 9A.\tControls and Procedures\t30\nItem 9B.\tOther Information\t33\nPART III\t\t\nItem 10.\tDirectors Executive Officers and Corporate Governance\t33\nItem 11.\tExecutive Compensation\t33\nItem 12.\tSecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters\t33\nItem 13.\tCertain Relationships and Related Transactions and Director Independence\t33\nItem 14.\tPrincipal Accounting Fees and Services\t33\nPART IV\t\t\nItem 15.\tExhibits and Financial Statement Schedules\t33\n", "q10k_tbl_2": "\t2018\t2017\t2016\t2015\t2014\nAverage sales per Franchise Drive-In\t1260\t1260\t1301\t1261\t1170\n(In thousands)\t\t\t\t\t\nNumber of Franchise Drive-Ins:\t\t\t\t\t\nTotal open at beginning of year\t3365\t3212\t3139\t3127\t3126\nNew Franchise Drive-Ins\t41\t63\t52\t38\t37\nSold to the Company\t0\t0\t0\t(3)\t0\nPurchased from the Company\t49\t117\t38\t9\t7\nClosed (net of re-openings)\t(28)\t(27)\t(17)\t(32)\t(43)\nTotal open at end of year\t3427\t3365\t3212\t3139\t3127\n", "q10k_tbl_3": "\t2018\t2017\t2016\t2015\t2014\nAverage sales per Company Drive-In\t1155\t1134\t1142\t1116\t1043\n(In thousands)\t\t\t\t\t\nNumber of Company Drive-Ins:\t\t\t\t\t\nTotal open at beginning of year\t228\t345\t387\t391\t396\nNew Company Drive-Ins\t0\t3\t1\t3\t3\nPurchased from franchisees\t0\t0\t0\t3\t0\nSold to franchisees\t(49)\t(117)\t(38)\t(9)\t(7)\nClosed (net of re-openings)\t0\t(3)\t(5)\t(1)\t(1)\nTotal open at end of year\t179\t228\t345\t387\t391\n", "q10k_tbl_4": "Name\tAge\tPosition\tExecutive Officer Since\nClifford Hudson\t63\tChairman of the Board of Directors and Chief Executive Officer\t1985\n\t\t\t\nClaudia S. San Pedro\t49\tPresident\t2007\n\t\t\t\nJohn H. Budd III\t51\tExecutive Vice President and Chief Strategy and Business Development Officer\t2013\n\t\t\t\nJose A. Dueñas\t46\tExecutive Vice President and Chief Brand Officer\t2017\n\t\t\t\nChristina D. Vaughan\t43\tPresident of Sonic Restaurants Inc.\t2017\n\t\t\t\nPaige S. Bass\t49\tSenior Vice President General Counsel and Assistant Corporate Secretary\t2007\nE. Edward Saroch\t61\tSenior Vice President of Franchise Relations\t2017\nCorey R. Horsch\t40\tVice President Chief Financial Officer and Treasurer\t2015\nLori Abou Habib\t38\tVice President and Chief Marketing Officer\t2017\n\t\t\t\nMichelle E. Britten\t51\tVice President and Chief Accounting Officer\t2012\n\t\t\t\nCarolyn C. Cummins\t60\tVice President of Compliance and Corporate Secretary\t2004\n", "q10k_tbl_5": "\tSales Price\t\t\t\tDividends Declared and Paid\t\n\tFiscal year ended\t\tFiscal year ended\t\tFiscal year ended\t\n\tAugust 31 2018\t\tAugust 31 2017\t\tAugust 31\t\n\tHigh\tLow\tHigh\tLow\t2018\t2017\nFirst Quarter\t27.00\t22.11\t28.87\t21.12\t0.16\t0.14\nSecond Quarter\t29.62\t23.22\t28.60\t24.57\t0.16\t0.14\nThird Quarter\t27.52\t23.51\t29.44\t22.50\t0.16\t0.14\nFourth Quarter\t37.44\t24.29\t30.05\t22.66\t0.16\t0.14\n", "q10k_tbl_6": "Period\tTotal Number of Shares Purchased\tAverage Price Paid per Share\tTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs\tMaximum Dollar Value that May Yet Be Purchased Under the Program (1)\nJune 1 2018 through June 30 2018\t318\t31.43\t318\t380914\nJuly 1 2018 through July 31 2018\t268\t35.76\t268\t371325\nAugust 1 2018 through August 31 2018\t304\t34.49\t304\t360822\nTotal\t890\t\t890\t\n", "q10k_tbl_7": "Selected Financial Data (In thousands except per share data)\t\t\t\t\t\n\tFiscal year ended August 31\t\t\t\t\n\t2018\t2017\t2016\t2015\t2014\nIncome Statement Data:\t\t\t\t\t\nCompany Drive-In sales\t240722\t296101\t425795\t436031\t405363\nFranchise Drive-Ins:\t\t\t\t\t\nFranchise royalties and fees\t172443\t170527\t170319\t161342\t138416\nLease revenue\t7804\t7436\t7459\t5583\t4291\nOther\t2621\t3203\t2747\t3133\t4279\nTotal revenues\t423590\t477267\t606320\t606089\t552349\nCost of Company Drive-In sales\t203177\t249911\t356820\t363938\t342109\nSelling general and administrative\t80077\t78687\t82089\t79336\t69415\nDepreciation and amortization\t38355\t39248\t44418\t45892\t42210\nProvision for impairment of long-lived assets\t664\t1140\t232\t1440\t114\nOther operating (income) expense net\t(5086)\t(14994)\t(4691)\t(945)\t(176)\nTotal expenses\t317187\t353992\t478868\t489661\t453672\nIncome from operations\t106403\t123275\t127452\t116428\t98677\nInterest expense net (1)\t32464\t27808\t34948\t24706\t24913\nIncome before income taxes\t73939\t95467\t92504\t91722\t73764\nNet income (2)\t71205\t63663\t64067\t64485\t47916\n\t\t\t\t\t\nIncome per share:\t\t\t\t\t\nBasic\t1.89\t1.47\t1.32\t1.23\t0.87\nDiluted\t1.87\t1.45\t1.29\t1.20\t0.85\nWeighted average shares used in calculation:\t\t\t\t\t\nBasic\t37618\t43306\t48703\t52572\t55164\nDiluted\t38086\t44043\t49669\t53953\t56619\n\t\t\t\t\t\nCash dividends declared per common share (3)\t0.64\t0.56\t0.44\t0.27\t0.09\n\t\t\t\t\t\nBalance Sheet Data:\t\t\t\t\t\nWorking capital\t42350\t30568\t62994\t(2383)\t16201\nProperty equipment and capital leases net\t298222\t312380\t392380\t421406\t441969\nTotal assets\t531134\t561744\t648661\t620024\t650972\nObligations under capital leases (including current portion)\t15457\t19631\t21064\t24440\t26743\nLong-term debt (including current portion)\t717396\t637521\t578938\t438028\t437318\nStockholders' equity (deficit)\t(288846)\t(201758)\t(75643)\t17433\t62675\n", "q10k_tbl_8": "\tFiscal year ended August 31\t\n\t2017\t2016\nNumber of refranchised Company Drive-Ins\t110\t29\nProceeds from sales of Company Drive-Ins\t20036\t3568\nProceeds from sale of real estate (1)\t11726\t0\nReal estate assets sold (1)\t(12095)\t(2402)\nAssets sold net of retained minority investment (2)\t(7891)\t0\nInitial and subsequent lease payments for real estate option (1)\t(3178)\t0\nGoodwill related to sales of Company Drive-Ins\t(966)\t(194)\nDeferred gain for real estate option (3)\t(809)\t0\nLoss on assets held for sale\t(65)\t0\nRefranchising initiative gains net\t6758\t972\n", "q10k_tbl_9": "System Performance ($ in thousands)\t\t\t\n\t\t\t\n\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nIncrease (decrease) in total sales\t0.9%\t(2.4)%\t3.5%\n\t\t\t\nSystem drive-ins in operation (1):\t\t\t\nTotal at beginning of year\t3593\t3557\t3526\nOpened\t41\t66\t53\nClosed (net of re-openings)\t(28)\t(30)\t(22)\nTotal at end of year\t3606\t3593\t3557\n\t\t\t\nAverage sales per drive-in\t1253\t1250\t1284\n\t\t\t\nChange in same-store sales (2)\t(0.3)%\t(3.3)%\t2.6%\n", "q10k_tbl_10": "Revenues ($ in thousands)\t\t\t\t\n\t\t\t\t\n\tFiscal year ended August 31\t\tIncrease (Decrease)\tPercent Increase (Decrease)\n\t2018\t2017\t\nCompany Drive-In sales\t240722\t296101\t(55379)\t(18.7)%\nFranchise Drive-Ins:\t\t\t\t\nFranchise royalties\t171489\t169344\t2145\t1.3%\nFranchise fees\t954\t1183\t(229)\t(19.4)%\nLease revenue\t7804\t7436\t368\t4.9%\nOther\t2621\t3203\t(582)\t(18.2)%\nTotal revenues\t423590\t477267\t(53677)\t(11.2)%\n\t\t\t\t\n\tFiscal year ended August 31\t\tIncrease (Decrease)\tPercent Increase (Decrease)\n\t2017\t2016\t\nCompany Drive-In sales\t296101\t425795\t(129694)\t(30.5)%\nFranchise Drive-Ins:\t\t\t\t\nFranchise royalties\t169344\t168691\t653\t0.4%\nFranchise fees\t1183\t1628\t(445)\t(27.3)%\nLease revenue\t7436\t7459\t(23)\t(0.3)%\nOther\t3203\t2747\t456\t16.6%\nTotal revenues\t477267\t606320\t(129053)\t(21.3)%\n", "q10k_tbl_11": "Company Drive-In Sales ($ in thousands)\t\t\t\n\t\t\t\n\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nCompany Drive-In sales\t240722\t296101\t425795\nPercentage decrease\t(18.7)%\t(30.5)%\t(2.3)%\n\t\t\t\nCompany Drive-Ins in operation (1):\t\t\t\nTotal at beginning of year\t228\t345\t387\nOpened\t0\t3\t1\nSold to franchisees\t(49)\t(117)\t(38)\nClosed (net of re-openings)\t0\t(3)\t(5)\nTotal at end of year\t179\t228\t345\n\t\t\t\nAverage sales per Company Drive-In\t1155\t1134\t1142\n\t\t\t\nChange in same-store sales (2)\t(0.8)%\t(4.7)%\t1.7%\n", "q10k_tbl_12": "Franchise Information ($ in thousands)\t\t\t\n\t\t\t\n\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nFranchise Drive-In sales\t4205782\t4112062\t4092303\nPercentage increase\t2.3%\t0.5%\t4.1%\n\t\t\t\nFranchise Drive-Ins in operation (1):\t\t\t\nTotal at beginning of year\t3365\t3212\t3139\nOpened\t41\t63\t52\nAcquired from the Company\t49\t117\t38\nClosed (net of re-openings)\t(28)\t(27)\t(17)\nTotal at end of year\t3427\t3365\t3212\n\t\t\t\nAverage sales per Franchise Drive-In\t1260\t1260\t1301\n\t\t\t\nChange in same-store sales (2)\t(0.3)%\t(3.2)%\t2.7%\n\t\t\t\nFranchising revenues (3)\t180247\t177963\t177778\nPercentage increase\t1.3%\t0.1%\t6.5%\n\t\t\t\nEffective royalty rate (4)\t4.08%\t4.12%\t4.12%\n", "q10k_tbl_13": "Company Drive-In Margins\t\t\t\n\t\t\t\n\tFiscal year ended August 31\t\tPercentage Points Increase (Decrease)\n\t2018\t2017\nCosts and expenses:\t\t\t\nCompany Drive-Ins:\t\t\t\nFood and packaging\t27.7%\t27.3%\t0.4%\nPayroll and other employee benefits\t36.5%\t36.3%\t0.2%\nOther operating expenses\t20.2%\t20.8%\t(0.6)%\nCost of Company Drive-In sales\t84.4%\t84.4%\t-%\n\t\t\t\n\tFiscal year ended August 31\t\tPercentage Points Increase (Decrease)\n\t2017\t2016\nCosts and expenses:\t\t\t\nCompany Drive-Ins:\t\t\t\nFood and packaging\t27.3%\t27.7%\t(0.4)%\nPayroll and other employee benefits\t36.3%\t35.3%\t1.0%\nOther operating expenses\t20.8%\t20.8%\t0.0%\nCost of Company Drive-In sales\t84.4%\t83.8%\t0.6%\n", "q10k_tbl_14": "\tFiscal year ended August 31 2018\t\tFiscal year ended August 31 2017\t\n\tNet Income\tDiluted EPS\tNet Income\tDiluted EPS\nReported - GAAP\t71205\t1.87\t63663\t1.45\nPayment card breach expense (1)\t1676\t0.04\t0\t0\nTax impact on payment card breach expense (2)\t(548)\t(0.01)\t0\t0\nLoss from debt transaction (3)\t1310\t0.03\t0\t0\nTax impact on debt transaction (4)\t(384)\t(0.01)\t0\t0\nDiscrete impact of the Tax Cuts and Jobs Act\t(14120)\t(0.37)\t0\t0\nNet gain on refranchising transactions (5)\t(3153)\t(0.08)\t(6758)\t(0.15)\nTax impact on refranchising transactions (6)\t924\t0.02\t2542\t0.06\nGain on sale of investment in refranchised drive-in operations (7)\t0\t0\t(3795)\t(0.09)\nTax impact on sale of investment in refranchised drive-in operations (8)\t0\t0\t1350\t0.03\nRestructuring charges (9)\t0\t0\t1819\t0.04\nTax impact of restructuring charges (10)\t0\t0\t(672)\t(0.02)\nGain on sale of real estate\t0\t0\t(4702)\t(0.11)\nTax impact on real estate sale (10)\t0\t0\t1738\t0.04\nAdjusted - Non-GAAP\t56910\t1.49\t55185\t1.25\n", "q10k_tbl_15": "\tFiscal year ended August 31 2017\t\tFiscal year ended August 31 2016\t\n\tNet Income\tDiluted EPS\tNet Income\tDiluted EPS\nReported - GAAP\t63663\t1.45\t64067\t1.29\nNet gain on refranchising transactions (1)\t(6758)\t(0.15)\t(972)\t(0.02)\nTax impact on refranchising transactions (2)\t2542\t0.06\t317\t0.00\nGain on sale of investment in refranchised drive-in operations (3)\t(3795)\t(0.09)\t0\t0\nTax impact on sale of investment in refranchised drive-in operations (4)\t1350\t0.03\t0\t0\nRestructuring charges (5)\t1819\t0.04\t0\t0\nTax impact of restructuring charges (6)\t(672)\t(0.02)\t0\t0\nGain on sale of real estate\t(4702)\t(0.11)\t(1875)\t(0.04)\nTax impact on real estate sale (7)\t1738\t0.04\t664\t0.01\nFIN 48 release of income tax credits and deductions\t0\t0\t(3038)\t(0.06)\nLoss from early extinguishment of debt\t0\t0\t8750\t0.18\nTax impact on debt extinguishment (8)\t0\t0\t(3027)\t(0.06)\nRetroactive benefit of Work Opportunity Tax Credit and resolution of tax matters\t0\t0\t(585)\t(0.01)\nAdjusted - Non-GAAP\t55185\t1.25\t64301\t1.29\n", "q10k_tbl_16": "\t\tPayments Due by Fiscal Year\t\t\t\n\tTotal\tLess than 1 Year (2019)\t1 - 3 Years (2020-2021)\t3 - 5 Years (2022-2023)\tMore than 5 Years (2024 and thereafter)\nLong-term debt (1)\t856279\t35079\t210734\t430390\t180076\nCapital leases\t19345\t3489\t6303\t5012\t4541\nOperating leases\t80754\t8198\t15709\t12830\t44017\nPurchase obligations (2)\t113178\t17301\t24858\t26275\t44744\nOther (3)\t21139\t\t\t\t\nTotal\t1090695\t64067\t257604\t474507\t273378\n", "q10k_tbl_17": "\tPage\nReport of Independent Registered Public Accounting Firm\tF-1\nConsolidated Balance Sheets at August 31 2018 and 2017\tF-2\nConsolidated Statements of Income for each of the years in the three-year period ended August 31 2018\tF-3\nConsolidated Statements of Stockholders' Equity (Deficit) for each of the years in the three-year period ended August 31 2018\tF-4\nConsolidated Statements of Cash Flows for each of the years in the three-year period ended August 31 2018\tF-5\nNotes to Consolidated Financial Statements\tF-7\n", "q10k_tbl_18": "2.01.\tAgreement and Plan of Merger dated as of September 24 2018 among Inspire Brands Inc. SSK Merger Sub Inc. and Sonic Corp. which the Company incorporates by reference from Exhibit 2.1 to the Company's Form S-8 filed on September 27 2018.\n3.01.\tCertificate of Incorporation of the Company which the Company incorporates by reference from Exhibit 3.1 to the Company's Form S-1 Registration Statement No. 33-37158 filed on October 3 1990.\n3.02.\tCertificate of Amendment of Certificate of Incorporation of the Company March 4 1996 which the Company incorporates by reference from Exhibit 3.05 to the Company's Form 10-K for the fiscal year ended August 31 2000.\n3.03.\tCertificate of Amendment of Certificate of Incorporation of the Company January 22 2002 which the Company incorporates by reference from Exhibit 3.06 to the Company's Form 10-K for the fiscal year ended August 31 2002.\n", "q10k_tbl_19": "3.04.\tCertificate of Amendment of Certificate of Incorporation of the Company January 31 2006 which the Company incorporates by reference from Exhibit 3.04 to the Company's Form 10-K for the fiscal year ended August 31 2006.\n4.01.\tBylaws of the Company as amended and restated January 27 2016 which the Company incorporates by reference from Exhibit 3.1 to the Company's Form 8-K filed on February 1 2016.\n4.02.\tCertificate of Designations of Series A Junior Preferred Stock which the Company incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on June 17 1997.\n4.03.\tSpecimen Certificate for Common Stock which the Company incorporates by reference from Exhibit 4.01 to the Company's Form 10-K for the fiscal year ended August 31 1999.\n10.01.\tForm of Sonic License Agreement which the Company incorporates by reference from Exhibit No. 10.01 to the Company's Form 10-K for the fiscal year ended August 31 2016.\n10.02.\tForm of Sonic Development Agreement which the Company incorporates by reference from Exhibit No. 10.13 to the Company's Form 10-K for the fiscal year ended August 31 2007.\n10.03.\tSonic Corp. Stock Purchase Plan as amended and restated effective April 20 2011 which the Company incorporates by reference from Exhibit 10.07 to the Company's Form 10-K for the fiscal year ended August 31 2012.*\n10.04.\tSonic Corp. Savings and Profit-Sharing Plan as amended and restated effective January 1 2013 which the Company incorporates by reference from Exhibit 10.1 to the Company's Form 10-Q filed on July 3 2013.*\n10.05.\tSonic Corp. Nonqualified Deferred Compensation Plan as amended and restated April 10 2013 which the Company incorporates by reference from Exhibit 10.06 to the Company's Form 10-K for the fiscal year ended August 31 2013.*\n10.06.\tForm of Indemnification Agreement for Directors which the Company incorporates by reference from Exhibit 10.7 to the Company's Form S-1 Registration Statement No. 33-37158 filed on October 3 1990.*\n10.07.\tForm of Indemnification Agreement for Officers which the Company incorporates by reference from Exhibit 10.14 to the Company's Form 10-K for the fiscal year ended August 31 1995.*\n10.08.\tForm of Chief Executive Officer Amended and Restated Employment Agreement dated January 1 2017 which the Company incorporates by reference from Exhibit 10.01 to the Company's Form 10-Q filed January 6 2017.*\n10.09.\tForm of Executive Officer Amended and Restated Employment Agreement dated January 1 2017 which the Company incorporates by reference from Exhibit 10.02 to the Company's Form 10-Q filed January 6 2017.*\n10.10.\tAmended and Restated Sonic Corp. Executive Severance Plan dated January 1 2017 which the Company incorporates by reference from Exhibit 10.03 to the Company's Form 10-Q filed January 6 2017.*\n10.11.\tAmendment to Sonic Corp. Executive Severance Plan (as amended and restated effective January 1 2017) dated September 24 2018*\n10.12.\tSonic Corp. Non-Executive Severance Plan dated September 24 2018*\n10.13.\tSonic Corp. 2006 Long-Term Incentive Plan as amended and restated effective January 16 2014 which the Company incorporates by reference from Exhibit 4.1 to the Company's Form S-8 filed on April 4 2014.*\n10.14.\tForm of Restricted Stock Unit Award Agreement under Sonic Corp. 2006 Long-Term Incentive Plan which the Company incorporates by reference from Exhibit No. 10.13 to the Company's Form 10-K for the fiscal year ended August 31 2016.*\n10.15.\tForm of Director Restricted Stock Unit Award Agreement under Sonic Corp. 2006 Long-Term Incentive Plan which the Company incorporates by reference from Exhibit No. 10.15 to the Company's Form 10-K for the fiscal year ended August 31 2016.*\n", "q10k_tbl_20": "10.16.\tSonic Corp. Senior Executive Cash Incentive Plan dated January 19 2017 which the Company incorporates by reference from Appendix B to the Company's Proxy Statement filed December 8 2016.*\n10.17.\tSonic Corp. Employee Cash Incentive Plan dated January 6 2011 which the Company incorporates by reference from Exhibit 10.02 to the Company's Form 10-Q filed on April 8 2011.*\n10.18.\tForm of Long-Term Award Agreement under Sonic Corp. Senior Executive Cash Incentive Plan which the Company incorporates by reference from Exhibit No. 10.18 to the Company's Form 10-K for the fiscal year ended August 31 2016.*\n10.19.\tForm of Short-Term Award Agreement under Sonic Corp. Senior Executive Cash Incentive Plan which the Company incorporates by reference from Exhibit No. 10.19 to the Company's Form 10-K for the fiscal year ended August 31 2016.*\n10.20.\tCompensation Recoupment Policy dated October 19 2016 which the Company incorporates by reference from Exhibit No. 10.20 to the Company's Form 10-K for the fiscal year ended August 31 2016.*\n10.21.\tBase Indenture dated May 20 2011 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference from Exhibit 99.1 to the Company's Form 8-K filed on May 26 2011.\n10.22.\tSupplemental Indenture dated May 20 2011 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and the Series 2011-1 Securities Intermediary which the Company incorporates by reference from Exhibit 99.2 to the Company's Form 8-K filed on May 26 2011.\n10.23.\tGuarantee and Collateral Support Agreement dated May 20 2011 made by Sonic Franchising LLC as Guarantor in favor of Citibank N.A. as Trustee which the Company incorporates by reference from Exhibit 99.4 to the Company's Form 8-K filed on May 26 2011.\n10.24.\tParent Company Support Agreement dated May 20 2011 made by Sonic Corp. in favor of Citibank N.A. as Trustee which the Company incorporates by reference from Exhibit 99.5 to the Company's Form 8-K filed on May 26 2011.\n10.25.\tSupplemental Indenture dated July 18 2013 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Series 2013-1 Notes and Citibank N.A. as Trustee and Series 2013-1 Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on July 24 2013.\n10.26.\tFirst Supplement to the Base Indenture dated as of July 21 2012 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n10.27.\tSecond Supplement to the Base Indenture dated as of April 12 2016 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n10.28.\tThird Supplement to the Base Indenture dated as of May 17 2016 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n", "q10k_tbl_21": "10.29.\tSupplemental Indenture dated May 17 2016 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Series 2016-1 Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n10.30.\tPurchase Agreement dated April 12 2016 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer Sonic Franchising LLC as Guarantor Sonic Industries Services Inc. as Manager Sonic Corp. Sonic Restaurants Inc. and Guggenheim Securities LLC as Initial Purchaser and as representative to the Initial Purchasers named therein which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n10.31.\tClass A-1 Note Purchase Agreement dated April 12 2016 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer and Sonic Industries Services Inc. as Manager certain private conduit investors committed note purchasers and funding agents and Coöperatieve Rabobank U.A. New York Branch as provider of letters of credit swingline lender and Administrative Agent which the Company incorporates by reference to the Company's Form 8‑K filed on May 19 2016.\n10.32.\tPurchase Agreement dated January 23 2018 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer Sonic Franchising LLC as Guarantor Sonic Industries Services Inc. as Manager Sonic Corp. Sonic Restaurants Inc. and Guggenheim Securities LLC as Initial Purchaser and as representative to the Initial Purchasers named therein which the Company incorporates by reference to the Company's Form 8‑K filed on January 24 2018.\n10.33.\tFourth Supplement to the Base Indenture dated as of February 1 2018 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on February 1 2018.\n10.34.\tFifth Supplement to the Base Indenture dated as of February 1 2018 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on February 1 2018.\n10.35.\tSupplemental Indenture dated February 1 2018 among Sonic Capital LLC Sonic Industries LLC America's Drive-In Brand Properties LLC America's Drive-In Restaurants LLC SRI Real Estate Holding LLC and SRI Real Estate Properties LLC each as Co-Issuer of the Fixed Rate Notes and Citibank N.A. as Trustee and Series 2018-1 Securities Intermediary which the Company incorporates by reference to the Company's Form 8‑K filed on February 1 2018.\n10.36.\tStock Option Award Agreement under Sonic Corp. 2006 Long-Term Incentive Plan which the Company incorporates by reference from Exhibit No. 10.01 to the Company's Form 10-Q filed on April 3 2018.*\n10.37.\tDirector Stock Option Award Agreement under Sonic Corp. 2006 Long-Term Incentive Plan which the Company incorporates by reference from Exhibit No. 10.02 to the Company's Form 10-Q filed on April 3 2018.*\n21.01.\tSubsidiaries of the Company.\n23.01.\tConsent of Independent Registered Public Accounting Firm.\n31.01.\tCertification of Chief Executive Officer pursuant to S.E.C. Rule 13a-14.\n31.02.\tCertification of Chief Financial Officer pursuant to S.E.C. Rule 13a-14.\n32.01.\tCertification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.\n32.02.\tCertification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.\n", "q10k_tbl_22": "\tAugust 31\t\n\t2018\t2017\nASSETS\t\t\nCurrent assets:\t\t\nCash and cash equivalents\t39835\t22340\nRestricted cash\t19598\t19736\nAccounts and notes receivable net\t34967\t33758\nInventories\t1774\t2343\nPrepaid expenses\t6481\t5455\nProperty held for sale\t1310\t5150\nOther current assets\t464\t402\nTotal current assets\t104429\t89184\nNoncurrent restricted cash\t7909\t42120\nInvestment in direct financing leases\t11391\t11853\nNotes receivable net\t10932\t9801\nProperty equipment and capital leases net\t298222\t312380\nGoodwill\t75344\t75756\nDebt origination costs net\t1191\t2439\nOther assets net\t21716\t18211\nTotal assets\t531134\t561744\n\t\t\nLIABILITIES AND STOCKHOLDERS' DEFICIT\t\t\nCurrent liabilities:\t\t\nAccounts payable\t10338\t9213\nFranchisee deposits\t723\t1093\nAccrued liabilities\t44314\t44846\nCurrent maturities of long-term debt and capital leases\t6704\t3464\nTotal current liabilities\t62079\t58616\nObligations under capital leases due after one year\t13003\t16167\nLong-term debt net\t701478\t628116\nDeferred income taxes\t24226\t40101\nOther non-current liabilities\t19194\t20502\nCommitments and contingencies (Notes 7 8 14 15)\t\t\nStockholders' deficit:\t\t\nPreferred stock par value $.01; 1000 shares authorized; none outstanding\t0\t0\nCommon stock par value $.01; 245000 shares authorized; 118309 shares\t\t\nissued in 2018 and in 2017\t1183\t1183\nPaid-in capital\t238369\t236895\nRetained earnings\t981251\t934017\nTreasury stock at cost; 82734 shares in 2018 and 78081 shares in 2017\t(1509649)\t(1373853)\nTotal stockholders' deficit\t(288846)\t(201758)\nTotal liabilities and stockholders' deficit\t531134\t561744\n", "q10k_tbl_23": "\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nRevenues:\t\t\t\nCompany Drive-In sales\t240722\t296101\t425795\nFranchise Drive-Ins:\t\t\t\nFranchise royalties and fees\t172443\t170527\t170319\nLease revenue\t7804\t7436\t7459\nOther\t2621\t3203\t2747\nTotal revenues\t423590\t477267\t606320\n\t\t\t\nCosts and expenses:\t\t\t\nCompany Drive-Ins:\t\t\t\nFood and packaging\t66583\t80971\t118136\nPayroll and other employee benefits\t88008\t107477\t150260\nOther operating expenses exclusive of depreciation and amortization included below\t48586\t61463\t88424\nTotal cost of Company Drive-In sales\t203177\t249911\t356820\n\t\t\t\nSelling general and administrative\t80077\t78687\t82089\nDepreciation and amortization\t38355\t39248\t44418\nProvision for impairment of long-lived assets\t664\t1140\t232\nOther operating income net\t(5086)\t(14994)\t(4691)\nTotal costs and expenses\t317187\t353992\t478868\nIncome from operations\t106403\t123275\t127452\n\t\t\t\nInterest expense\t33058\t29206\t26714\nInterest income\t(1904)\t(1398)\t(516)\nLoss from debt transactions\t1310\t0\t8750\nNet interest expense\t32464\t27808\t34948\nIncome before income taxes\t73939\t95467\t92504\nProvision for income taxes\t2734\t31804\t28437\nNet income\t71205\t63663\t64067\n\t\t\t\nBasic income per share\t1.89\t1.47\t1.32\nDiluted income per share\t1.87\t1.45\t1.29\n\t\t\t\nCash dividends declared per common share\t0.64\t0.56\t0.44\n", "q10k_tbl_24": "\tCommon Stock\tPaid-in Capital\t\tRetained Earnings\tTreasury Stock\t\tTotal Stockholders' Equity (Deficit)\n\t\tShares\tAmount\t\nBalance at August 31 2015\t1183\t232550\t\t851715\t67249\t(1068015)\t17433\nNet income\t0\t0\t\t64067\t0\t0\t64067\nCash dividends\t0\t0\t\t(21340)\t0\t0\t(21340)\nStock-based compensation expense\t0\t3766\t\t0\t0\t0\t3766\nPurchase of treasury stock\t0\t0\t\t0\t5209\t(148345)\t(148345)\nExercise of stock options and issuance of restricted stock\t0\t(5941)\t\t0\t(767)\t9783\t3842\nOther\t0\t4581\t\t0\t(21)\t353\t4934\nBalance at August 31 2016\t1183\t234956\t\t894442\t71670\t(1206224)\t(75643)\nNet income\t0\t0\t\t63663\t0\t0\t63663\nCash dividends\t0\t0\t\t(24088)\t0\t0\t(24088)\nStock-based compensation expense\t0\t3942\t\t0\t0\t0\t3942\nPurchase of treasury stock\t0\t0\t\t0\t6726\t(172913)\t(172913)\nExercise of stock options and issuance of restricted stock\t0\t(2203)\t\t0\t(293)\t4885\t2682\nOther\t0\t200\t\t0\t(22)\t399\t599\nBalance at August 31 2017\t1183\t236895\t\t934017\t78081\t(1373853)\t(201758)\nNet income\t0\t0\t\t71205\t0\t0\t71205\nCash dividends\t0\t0\t\t(23971)\t0\t0\t(23971)\nStock-based compensation expense\t0\t4556\t\t0\t0\t0\t4556\nPurchase of treasury stock\t0\t0\t\t0\t5215\t(139178)\t(139178)\nExercise of stock options and issuance of restricted stock\t0\t(3140)\t\t0\t(542)\t3022\t(118)\nOther\t0\t58\t\t0\t(20)\t360\t418\nBalance at August 31 2018\t1183\t238369\t\t981251\t82734\t(1509649)\t(288846)\n", "q10k_tbl_25": "\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nCash flows from operating activities:\t\t\t\nNet income\t71205\t63663\t64067\nAdjustments to reconcile net income to net cash provided by operating activities:\t\t\t\nDepreciation and amortization\t38355\t39248\t44418\nStock-based compensation expense\t4556\t3942\t3766\nLoss from debt transactions\t1310\t0\t8750\nProvision (benefit) for deferred income taxes\t(15812)\t(2469)\t4509\nGain on disposition of assets\t(5086)\t(14994)\t(4691)\nOther\t3276\t1265\t452\n(Increase) decrease in operating assets:\t\t\t\nRestricted cash\t889\t886\t(2829)\nAccounts receivable and other assets\t(4354)\t1918\t2109\nIncrease (decrease) in operating liabilities:\t\t\t\nAccounts payable\t(2507)\t(4404)\t380\nAccrued and other liabilities\t(151)\t(10884)\t4520\nIncome taxes\t(135)\t(3299)\t(9242)\nTotal adjustments\t20341\t11209\t52142\nNet cash provided by operating activities\t91546\t74872\t116209\nCash flows from investing activities:\t\t\t\nPurchases of property and equipment\t(36690)\t(46528)\t(46553)\nProceeds from sale of assets\t21646\t91741\t16206\nProceeds from the sale of investments in refranchised drive-in operations\t0\t8357\t0\nIssuance of notes receivable\t(15779)\t(7338)\t(12705)\nCollections on notes receivable\t16232\t11911\t7229\nOther\t530\t2345\t1763\nNet cash provided by (used in) investing activities\t(14061)\t60488\t(34060)\n", "q10k_tbl_26": "Cash flows from financing activities:\t\t\t\nPurchases of treasury stock\t(141095)\t(171562)\t(150444)\nPayment of dividends\t(23914)\t(24062)\t(21309)\nPayments on debt\t(173125)\t(24416)\t(422090)\nDebt issuance and extinguishment costs\t(5145)\t(10)\t(18420)\nProceeds from borrowings\t253000\t83000\t563000\nRestricted cash for securitization obligations\t33460\t(46730)\t6587\nProceeds from exercise of stock options\t4147\t2682\t3842\nOther\t(7318)\t(4014)\t1586\nNet cash used in financing activities\t(59990)\t(185112)\t(37248)\nNet increase (decrease) in cash and cash equivalents\t17495\t(49752)\t44901\nCash and cash equivalents at beginning of year\t22340\t72092\t27191\nCash and cash equivalents at end of year\t39835\t22340\t72092\nSupplemental cash flow information\t\t\t\nCash paid during the year for:\t\t\t\nInterest\t30581\t27082\t24883\nIncome taxes (net of refunds)\t18764\t37642\t27821\nNon-cash investing and financing activities:\t\t\t\nChange in obligation to acquire treasury stock\t(1917)\t1350\t(2099)\nStock options exercised by stock swap\t12375\t451\t6396\nAccrued PP&E at year end\t4783\t1577\t3471\n", "q10k_tbl_27": "\tFiscal year ended August 31\t\t\n\t2018\t2017\t2016\nNumerator:\t\t\t\nNet income\t71205\t63663\t64067\n\t\t\t\nDenominator:\t\t\t\nWeighted average common shares outstanding- basic\t37618\t43306\t48703\nEffect of dilutive employee stock options and unvested RSUs\t468\t737\t966\nWeighted average common shares outstanding - diluted\t38086\t44043\t49669\n\t\t\t\nNet income per common share - basic\t1.89\t1.47\t1.32\nNet income per common share - diluted\t1.87\t1.45\t1.29\n\t\t\t\nAnti-dilutive securities excluded (1)\t1157\t1154\t615\n", "q10k_tbl_28": "\tAugust 31\t\n\t2018\t2017\nCurrent Accounts and Notes Receivable:\t\t\nRoyalties and other trade receivables\t20177\t19571\nNotes receivable from franchisees\t2006\t1441\nReceivables from system funds\t2480\t6360\nOther\t11080\t7475\nAccounts and notes receivable gross\t35743\t34847\nAllowance for doubtful accounts and notes receivable\t(776)\t(1089)\nCurrent accounts and notes receivable net\t34967\t33758\n\t\t\nNoncurrent Notes Receivable:\t\t\nReceivables from franchisees\t7597\t6810\nReceivables from system funds\t5143\t3033\nAllowance for doubtful notes receivable\t(1808)\t(42)\nNoncurrent notes receivable net\t10932\t9801\n", "q10k_tbl_29": "\tAugust 31\t\n\t2018\t2017\nBalance at beginning of year\t75756\t76734\nGoodwill disposed of related to the sale of Company Drive-Ins\t(412)\t(978)\nBalance at end of year\t75344\t75756\n", "q10k_tbl_30": "\tFiscal year ended August 31\t\n\t2017\t2016\nNumber of refranchised Company Drive-Ins\t110\t29\nProceeds from sales of Company Drive-Ins\t20036\t3568\nProceeds from sale of real estate (1)\t11726\t0\nReal estate assets sold (1)\t(12095)\t(2402)\nAssets sold net of retained minority investment (2)\t(7891)\t0\nInitial and subsequent lease payments for real estate option (1)\t(3178)\t0\nGoodwill related to sales of Company Drive-Ins\t(966)\t(194)\nDeferred gain for real estate option (3)\t(809)\t0\nLoss on assets held for sale\t(65)\t0\nRefranchising initiative gains net\t6758\t972\n", "q10k_tbl_31": "\t2018\t2017\nMinimum lease payments receivable\t17068\t18156\nLess unearned income\t(5217)\t(5932)\nNet investment in direct financing leases\t11851\t12224\nLess amount due within one year\t(460)\t(371)\nAmount due after one year\t11391\t11853\n", "q10k_tbl_32": "\tOperating\tDirect Financing\nYears ended August 31:\t\t\n2019\t7124\t1156\n2020\t7544\t1269\n2021\t7787\t1365\n2022\t7804\t1362\n2023\t7884\t1362\nThereafter\t60331\t10554\n\t98474\t17068\nLess unearned income\t\t(5217)\n\t\t11851\n", "q10k_tbl_33": "\tOperating\tCapital\nYears ended August 31:\t\t\n2019\t8198\t3489\n2020\t8173\t3194\n2021\t7536\t3109\n2022\t6393\t2597\n2023\t6437\t2415\nThereafter\t44017\t4541\nTotal minimum lease payments (1)\t80754\t19345\nLess amount representing interest averaging 5.4%\t\t(3888)\nPresent value of net minimum lease payments\t\t15457\nLess amount due within one year\t\t(2454)\nAmount due after one year\t\t13003\n", "q10k_tbl_34": "\t2018\t2017\t2016\nMinimum rentals\t8039\t11224\t12441\nContingent rentals\t140\t283\t284\nTotal rent expense\t8179\t11507\t12725\nLess sublease rentals\t(3464)\t(2513)\t(2372)\nNet rent expense\t4715\t8994\t10353\n", "q10k_tbl_35": "\tEstimated Useful Life\t2018\t2017\nProperty equipment and capital leases:\t\t\t\nLand\t\t120352\t117402\nBuildings and improvements\t8 - 25 yrs\t243434\t251695\nDrive-In equipment\t5 - 7 yrs\t62679\t75410\nBrand technology development and other equipment\t2 - 5 yrs\t133020\t126179\nProperty and equipment at cost\t\t559485\t570686\nAccumulated depreciation\t\t(271940)\t(272233)\nProperty and equipment net\t\t287545\t298453\n\t\t\t\nCapital leases\tLife of lease\t39204\t45315\nAccumulated amortization\t\t(28527)\t(31388)\nCapital leases net\t\t10677\t13927\nProperty equipment and capital leases net\t\t298222\t312380\n", "q10k_tbl_36": "\t2018\t2017\nWages and employee benefit costs\t16338\t17705\nProperty taxes sales and use taxes and employment taxes\t4677\t5634\nUnredeemed gift cards\t13184\t11319\nOther\t10115\t10188\n\t44314\t44846\n", "q10k_tbl_37": "\t2018\t2017\nClass A-2 2018-1 senior secured fixed rate notes\t170000\t0\nClass A-2 2016-1 senior secured fixed rate notes\t399911\t422521\nClass A-1 2016-1 senior secured variable funding notes\t0\t60000\nClass A-2 2013-1 senior secured fixed rate notes\t147485\t155000\n\t717396\t637521\nLess unamortized debt issuance costs\t(11668)\t(9405)\nLess long-term debt due within one year\t(4250)\t0\nLong-term debt net\t701478\t628116\n", "q10k_tbl_38": "\t2018\t2017\t2016\nCurrent:\t\t\t\nFederal\t15597\t30352\t20137\nState\t2949\t3921\t3791\n\t18546\t34273\t23928\n\t\t\t\nDeferred:\t\t\t\nFederal\t(16460)\t(2378)\t4372\nState\t648\t(91)\t137\n\t(15812)\t(2469)\t4509\nProvision for income taxes\t2734\t31804\t28437\n", "q10k_tbl_39": "\t2018\t2017\t2016\nAmount computed by applying the statutory federal tax rate\t25.7%\t35.0%\t35.0%\nState income taxes (net of federal income tax benefit)\t3.8\t2.6\t2.8\nEmployment related and other tax credits net\t(1.8)\t(1.9)\t(2.5)\nChange in uncertain tax positions\t0.2\t0\t(3.3)\nFederal tax benefit of statutory tax deduction\t(1.3)\t(1.6)\t(1.4)\nStock option excess tax benefit\t(2.9)\t(1.0)\t0\nDeferred tax revaluation\t(19.1)\t0\t0\nOther\t(0.9)\t0.2\t0.1\nProvision for income taxes\t3.7%\t33.3%\t30.7%\n", "q10k_tbl_40": "\t2018\t2017\nDeferred tax assets:\t\t\nAllowance for doubtful accounts and notes receivable\t661\t419\nLeasing transactions\t1928\t3083\nDeferred income\t1846\t3011\nAccrued liabilities\t2292\t4339\nStock compensation\t1553\t3156\nOther\t59\t929\nState net operating losses\t18659\t18031\nTotal deferred tax assets\t26998\t32968\nValuation allowance\t(17117)\t(16254)\nTotal deferred tax assets after valuation allowance\t9881\t16714\n\t\t\nDeferred tax liabilities:\t\t\nPrepaid expenses\t(798)\t(956)\nInvestment in partnerships including differences in capitalization\t\t\ndepreciation and direct financing leases\t(3083)\t(4026)\nProperty equipment and capital leases\t(12603)\t(23756)\nIntangibles and other assets\t(14837)\t(22983)\nDebt extinguishment\t0\t(838)\nDirect financing leases\t(2786)\t(4256)\nTotal deferred tax liabilities\t(34107)\t(56815)\nNet deferred tax liabilities (noncurrent)\t(24226)\t(40101)\n", "q10k_tbl_41": "\t2018\t2017\nBalance at beginning of year\t643\t625\nAdditions for tax positions of prior years\t147\t18\nBalance at end of year\t790\t643\n", "q10k_tbl_42": "\t2018\t2017\t2016\nExpected term (years)\t5.2\t5.3\t5.3\nExpected volatility\t31%\t34%\t34%\nRisk-free interest rate\t2.5%\t2.0%\t1.4%\nExpected dividend yield\t2.5%\t2.2%\t1.5%\n", "q10k_tbl_43": "\tOptions\tWeighted Average Exercise Price\tWeighted Average Remaining Contractual Life (Yrs.)\tAggregate Intrinsic Value\nOutstanding September 1 2017\t2536\t20.42\t\t\nGranted\t713\t25.84\t\t\nExercised\t(1055)\t15.59\t\t\nForfeited or expired\t(101)\t27.93\t\t\nOutstanding at August 31 2018\t2093\t24.34\t4.68\t24117\n\t\t\t\t\nExercisable at August 31 2018\t968\t22.42\t3.18\t13013\n", "q10k_tbl_44": "\tRestricted Stock Units\tWeighted Average Grant Date Fair Value\nOutstanding September 1 2017\t95\t26.64\nGranted\t34\t25.82\nVested\t(39)\t27.20\nForfeited\t(7)\t29.26\nOutstanding at August 31 2018\t83\t25.75\n", "q10k_tbl_45": "\tDividend per share\tTotal amount\tPayment date\nFiscal year 2018\t\t\t\nFirst Quarter\t0.16\t6243\tNovember 17 2017\nSecond Quarter\t0.16\t6103\tFebruary 16 2018\nThird Quarter\t0.16\t5879\tMay 18 2018\nFourth Quarter\t0.16\t5746\tAugust 17 2018\nFiscal year 2017\t\t\t\nFirst Quarter\t0.14\t6359\tNovember 18 2016\nSecond Quarter\t0.14\t6100\tFebruary 17 2017\nThird Quarter\t0.14\t6041\tMay 19 2017\nFourth Quarter\t0.14\t5588\tAugust 18 2017\n", "q10k_tbl_46": "\tFirst Quarter\t\tSecond Quarter\t\tThird Quarter\t\tFourth Quarter\t\n\t2018\t2017\t2018\t2017\t2018\t2017\t2018\t2017\nTotal revenues\t105428\t129551\t88102\t100158\t118306\t123990\t111754\t123568\nIncome from operations\t22448\t27052\t14914\t22627\t37261\t35441\t31780\t38155\nNet income (1)\t11430\t13118\t19607\t10963\t21576\t18751\t18592\t20831\n\t\t\t\t\t\t\t\t\nBasic income per share (2)\t0.29\t0.29\t0.51\t0.25\t0.58\t0.44\t0.52\t0.50\nDiluted income per share (2)\t0.29\t0.28\t0.51\t0.25\t0.58\t0.44\t0.51\t0.50\n", "q10k_tbl_47": "Description\tBalance at Beginning of Year\tAdditions Charged to Costs and Expenses\tAmounts Written Off Against the Allowance\t(Transfers) Recoveries\tBalance at End of Year\n\t(In thousands)\t\t\t\t\nAllowance for doubtful accounts and notes receivable\t\t\t\t\t\nFiscal years ended:\t\t\t\t\t\nAugust 31 2018\t1131\t1825\t(374)\t2\t2584\nAugust 31 2017\t1041\t113\t(23)\t0\t1131\nAugust 31 2016\t1105\t(53)\t(13)\t2\t1041\n\t\t\t\t\t\nAccrued liability for drive-in closings and disposals\t\t\t\t\t\nFiscal years ended:\t\t\t\t\t\nAugust 31 2018\t532\t222\t(241)\t(18)\t495\nAugust 31 2017\t611\t178\t(243)\t(14)\t532\nAugust 31 2016\t807\t208\t(376)\t(28)\t611\n", "q10k_tbl_48": "Signature\tTitle Date\n\t\n/s/ J. Clifford Hudson\tChairman of the Board of Directors and Chief Executive Officer October 23 2018\nJ. Clifford Hudson Principal Executive Officer\n\t\n/s/ Corey R. Horsch\tVice President and Chief Financial Officer October 23 2018\nCorey R. Horsch Principal Financial Officer\n\t\n/s/ Michelle E. Britten\tVice President and Chief Accounting Officer October 23 2018\nMichelle E. Britten Principal Accounting Officer\n\t\n/s/ Tony D. Bartel\tDirector October 23 2018\nTony D. Bartel\n\t\n/s/ R. Neal Black\tDirector October 23 2018\nR. Neal Black\n\t\n/s/ Steven A. Davis\tDirector October 23 2018\nSteven A. Davis\n\t\n/s/ Lauren R. Hobart\tDirector October 23 2018\nLauren R. Hobart\n\t\n/s/ S. Kirk Kinsell\tDirector October 23 2018\nS. Kirk Kinsell\n/s/ Kate S. Lavelle\tDirector October 23 2018\nKate S. Lavelle\n\t\n/s/ Federico F. Peña\tDirector October 23 2018\nFederico F. Peña\n\t\n/s/ Jeffrey H. Schutz\tDirector October 23 2018\nJeffrey H. Schutz\n\t\n/s/ Kathryn L. Taylor\tDirector October 23 2018\nKathryn L. Taylor\n\t\n/s/ Susan E. Thronson\tDirector October 23 2018\nSusan E. Thronson\n", "q10k_tbl_49": "10.11\tAmendment to Sonic Corp. Executive Severance Plan (as amended and restated effective January 1 2017) dated September 24 2018\n10.12\tSonic Corp. Non-Executive Severance Plan dated September 24 2018\n21.01\tSubsidiaries of the Company\n23.01\tConsent of Independent Registered Public Accounting Firm\n31.01\tCertification of Chief Executive Officer pursuant to SEC Rule 13a-14\n31.02\tCertification of Chief Financial Officer pursuant to SEC Rule 13a-14\n32.01\tCertification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350\n32.02\tCertification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350\n101. INS\tXBRL Instance Document\n101. SCH\tXBRL Taxonomy Extension Schema Document\n101. CAL\tXBRL Taxonomy Extension Calculation Linkbase Document\n101. DEF\tXBRL Taxonomy Extension Definition Linkbase Document\n101. LAB\tXBRL Taxonomy Extension Label Linkbase Document\n101. PRE\tXBRL Taxonomy Extension Presentation Linkbase Document\n"}{"bs": "q10k_tbl_22", "is": "q10k_tbl_23", "cf": "q10k_tbl_25"}None
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 ☐
Emerging growth company ☐
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 Act). Yes ☐ No ☒
As of February 28, 2018, the aggregate market value of the 36,866,336 shares of common stock of the Company held by non-affiliates of the Company equaled $926,082,360 based on the closing sales price for the common stock as reported for that date.
As of October 12, 2018, the Registrant had 35,687,663 shares of common stock issued and outstanding.
Sonic Corp., through its subsidiaries, 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, 2018, the Sonic system included 3,606 Sonic Drive-Ins in 45 states of which 3,427 were owned and operated by franchisees (“Franchise Drive-Ins”) and 179 were owned and operated by Sonic Restaurants, Inc., the Company’s operating subsidiary (“Company 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 cheeseburgers, chicken entrees ranging from sandwiches to boneless wings, 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.
Strategy
Sonic’s strategy is to deliver 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 and innovative technology;
•
A commitment to customer service featuring the quick delivery of food by friendly carhops;
•
Integrated national marketing programs across media channels, including broadcast, digital and mobile; and
•
A commitment to strong franchisee relationships.
Sonic’s brand growth strategies include the following:
•
Same-store sales growth;
•
Improved performance of Company Drive-Ins, including consistent operations execution and restaurant-level margins; and
During fiscal year 2018, we opened 41 Sonic Drive-Ins, all of which were Franchise Drive-Ins. Expansion plans for fiscal year 2019 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 opportunities 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 3 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, digital media, sponsorship and brand enhancement opportunities. The Sonic Brand Fund supports national creative and content production as well as other programs designed to promote or enhance the Sonic brand. Our license agreements require advertising contributions of up to 5.9% of sales to these marketing funds and local advertising cooperatives.
Purchasing
We negotiate with suppliers for primary food products and packaging supplies for the system and seek competitive bids from suppliers on many of our food and packaging items. Approved suppliers of those products are required 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. All Sonic Drive-Ins are required 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 audits by independent third parties. All Sonic Drive-In employees are required to receive food safety 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.
Information Systems
Sonic Drive-Ins are equipped with information technology systems including point-of-sale systems and 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 application and electronic payment at the stall and off-premises to enhance the customer’s experience and drive sales. We have further invested in new point-of-sale systems. Our license agreements require a
technology contribution of approximately 0.25% of sales to the Brand Technology Fund (“BTF”), which was established in the third quarter of fiscal year 2016 and administers cybersecurity and other technology programs for the Sonic system.
Franchise Program
General. As of August 31, 2018, we had 3,427 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 41 drive-ins during fiscal year 2018. We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.
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 sales on a graduated percentage basis and a 20-year term. For fiscal year 2018, Sonic’s average royalty rate was 4.08%. The franchisee also pays advertising fees of up to 5.9% of sales and a technology fee of approximately 0.25% of sales.
Development Agreements. We use single- and multiple-unit development agreements for opening new drive-ins. During fiscal year 2018, 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. Franchisees who enter into development agreements typically 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 issues impacting the business, such as marketing and promotions, new products, operations, profitability, technology and training. The Franchise Advisory Council currently consists of 26 members selected by Sonic. We have seven executive committee members who are selected at large and 19 regional members representing all regions of the country. We also have four Franchise Advisory Council task groups comprised of 55 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.
2018
2017
2016
2015
2014
Average sales per Franchise Drive-In
$
1,260
$
1,260
$
1,301
$
1,261
$
1,170
(In thousands)
Number of Franchise Drive-Ins:
Total open at beginning of year
3,365
3,212
3,139
3,127
3,126
New Franchise Drive-Ins
41
63
52
38
37
Sold to the Company
—
—
—
(3
)
—
Purchased from the Company
49
117
38
9
7
Closed (net of re-openings)
(28
)
(27
)
(17
)
(32
)
(43
)
Total open at end of year
3,427
3,365
3,212
3,139
3,127
Company Operations
Management Structure. A typical Company Drive-In is operated by a manager, two to four assistant managers and approximately 25 hourly employees, some 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 customer satisfaction, employee staffing and training and drive-in level financial 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.
2018
2017
2016
2015
2014
Average sales per Company Drive-In
$
1,155
$
1,134
$
1,142
$
1,116
$
1,043
(In thousands)
Number of Company Drive-Ins:
Total open at beginning of year
228
345
387
391
396
New Company Drive-Ins
—
3
1
3
3
Purchased from franchisees
—
—
—
3
—
Sold to franchisees
(49
)
(117
)
(38
)
(9
)
(7
)
Closed (net of re-openings)
—
(3
)
(5
)
(1
)
(1
)
Total open at end of year
179
228
345
387
391
Competition
We compete in the restaurant industry, specifically in the segment known as quick-service restaurants (“QSR”), which is highly competitive in terms of price, service, location and food quality. The restaurant industry is often affected by changes in consumer trends, economic conditions, demographics and traffic patterns. 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). Our drive-in format, combined with the quality of service featuring Sonic carhops, constitute a primary marketable point 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 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, 2018, we had 391 full-time corporate employees and approximately 4,650 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.
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 2018, there were no material capital expenditures for environmental control facilities and no such material expenditures are anticipated.
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 minimizes food safety risks. 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 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 development by us and our competitors. We cannot ensure that we will compete successfully in the restaurant industry on these factors. In addition, some of our competitors have substantially larger marketing budgets, which may provide them with a competitive advantage. Our 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 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 large proportion of Sonic Drive-Ins are owned and operated by our franchisees. A significant 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 we 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. 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 drive-ins 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 drive-ins. 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 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;
•
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 depends 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 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.
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, 2018, we had three outstanding series of fixed rate notes: 1) $147.6 million in debt including accrued interest at an interest rate of 3.75%, with an anticipated repayment date of July 2020, and 2) $400.4 million in debt including accrued interest at an interest rate of 4.47%, with an anticipated repayment date of May 2023, and 3) $170.2 million in debt including accrued interest at an interest rate of 4.03%, with an anticipated repayment date of February 2025. In addition, as of August 31, 2018, we had no outstanding balance under the variable rate notes. Interest on the variable notes is based on the one-month London Interbank Offered Rate or Commercial Paper, depending on the funding source, plus 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:
•
Our 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 or our franchisees fail to comply with any of these laws, we or they 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 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 Affordable Care Act in our business, and the law or other related requirements may change. 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. In fact, as further described below, in 2017 the Company discovered that payment card numbers were acquired without authorization as part of a malware attack experienced at certain Sonic Drive-In locations. 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. While we take precautions to avoid security breaches, 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, or the reporting of such incidents whether accurate or not, could result in adverse publicity, loss of consumer confidence, increased costs, reduced sales and profits and criminal penalties or civil liabilities.
We have incurred and in the future may incur costs resulting from breaches of security of confidential consumer information related to our electronic processing of credit and debit card transactions.
A significant portion of our restaurant sales are by credit or debit cards. As previously announced, in 2017 the Company discovered that payment card numbers were acquired without authorization as part of a malware attack experienced at certain Sonic Drive-In locations. The Company was named as a defendant in nine purported class action complaints related to the breach. The cases were consolidated in the Northern District of Ohio (the “Litigation”). The plaintiffs in the Litigation assert various claims related to the Company’s alleged failure to safeguard customer credit card information and seek monetary damages, injunctive and declaratory relief and attorneys’ fees and costs. The Company believes it has meritorious defenses to the Litigation and intends to vigorously oppose the claims asserted by the plaintiffs. On October 10, 2018, the parties to the Litigation filed a joint motion seeking preliminary approval of a class settlement. Based on the terms of class settlement, which is subject to final court approval, we do not believe any payments made in connection with the class settlement or the Litigation more generally would be in excess of our cyber liability insurance coverage. The Company has since been named as a defendant in one additional purported class action complaint filed on October 16, 2018, in the United States District Court for the Eastern District of Arkansas. We cannot provide assurance that we will not become subject to other inquiries or claims relating to the payment card breach. We may be subject to losses associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs, as well as fines and penalties issued by payment card companies in connection with the payment card breach. We may also be subject to fines and penalties imposed by state and/or federal regulators relating to or arising out of the payment card breach. It is possible that losses associated with the payment card breach, including losses associated with the Litigation, could have a material adverse effect on our results of operations in future periods.
We may in the future become subject to additional claims for purportedly fraudulent transactions arising out of the actual or alleged theft of credit or debit card information, and we may also be subject to further lawsuits or other proceedings relating to these types of incidents. Any such claim or proceeding arising from the payment card breach could cause us to incur significant unplanned expenses, which could have an adverse impact on our financial condition and results of operations. Further, adverse publicity resulting from these allegations may have a material adverse effect on us and our restaurants.
Unreliable or inefficient drive-in technology, 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 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.
Of the 179 Company Drive-Ins operating as of August 31, 2018, we operated 83 of them on property leased from third parties and 96 of them on property we own. The leases expire on dates ranging from 2019 to 2037, 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 third-party leases require Sonic to maintain the property and pay the cost of insurance and taxes.
We also own and lease 162 properties and sublease 48 properties to franchisees and other parties. These leases with franchisees and other parties expire on dates ranging from 2018 to 2037, with the majority of the leases providing for renewal options. The majority of the leases and subleases 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 100,433 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 was named as a defendant in nine purported class action complaints related to a 2017 payment card breach at certain Sonic Drive-Ins. The cases were consolidated in the Northern District of Ohio (the “Litigation”). The plaintiffs in the Litigation assert various claims related to the Company’s alleged failure to safeguard customer credit card information and seek monetary damages, injunctive and declaratory relief and attorneys’ fees and costs. The Company believes it has meritorious defenses to the Litigation and intends to vigorously oppose the claims asserted by the plaintiffs. On October 10, 2018, the parties to the Litigation filed a joint motion seeking preliminary approval of a class settlement. Based on the terms of the class settlement, which is subject to final court approval, we do not believe any payments made in connection with the class settlement or the Litigation more generally would be in excess of our cyber liability insurance coverage. The Company has since been named as a defendant in one additional purported class action complaint filed on October 16, 2018, in the United States District Court for the Eastern District of Arkansas. We cannot provide assurance that 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, it is possible the ultimate amount paid by us relating to the payment card breach may 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.
The Company is involved in various other legal proceedings and has certain unresolved claims pending. Based on the information currently available, management believes that all such other claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business or financial condition.
The following table identifies the executive officers of the Company:
Name
Age
Position
Executive
Officer Since
Clifford Hudson
63
Chairman of the Board of Directors and Chief Executive Officer
1985
Claudia S. San Pedro
49
President
2007
John H. Budd III
51
Executive Vice President and Chief Strategy and Business Development Officer
2013
Jose A. Dueñas
46
Executive Vice President and Chief Brand Officer
2017
Christina D. Vaughan
43
President of Sonic Restaurants, Inc.
2017
Paige S. Bass
49
Senior Vice President, General Counsel and Assistant Corporate Secretary
2007
E. Edward Saroch
61
Senior Vice President of Franchise Relations
2017
Corey R. Horsch
40
Vice President, Chief Financial Officer and Treasurer
2015
Lori Abou Habib
38
Vice President and Chief Marketing Officer
2017
Michelle E. Britten
51
Vice President and Chief Accounting Officer
2012
Carolyn C. Cummins
60
Vice President of Compliance and Corporate Secretary
2004
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. He also served as President from April 1995 to January 2000, reassumed that position from November 2004 until May 2008, April 2013 to January 2016 and again March 2017 to February 2018. He has served in various other offices with the Company since 1984. Mr. Hudson has served as a Director of the Company since 1993.
Claudia S. San Pedro has served as the Company’s President since February 2018. She served as Executive Vice President and Chief Financial Officer from August 2015 to February 2018 and 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. 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 Strategy and Business Development Officer of the Company since January 2018. He served as Executive Vice President and Chief Development and Strategy Officer from January 2016 to January 2018, and 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.
Jose A. Duen͂as has served as Executive Vice President and Chief Brand Officer since August 2017. Mr. Duen͂as served as Executive Vice President and Chief Marketing Officer for Olive Garden, Darden Restaurants, Inc., from November 2014 to August 2017, and was its Senior Vice President of Brand Marketing from June 2012 to October 2014. Mr. Duen͂as served in several progressive positions with Kellogg Company from September 1995 to May 2012, the most recent of which was Vice President and General Manager of the toaster pastries business.
Christina D. Vaughan has served as President of Sonic Restaurants, Inc. since January 2017. She served as Vice President of Market Strategies for the Company from November 2012 until July 2015, and Vice President of Franchise Operations for the Company from August 2015 to December 2016. Ms. Vaughan held various positions of increasing responsibility from the time she first joined the Company as a field marketing representative in September 2002 until November 2012.
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.
E. Edward Saroch has served as Senior Vice President of Franchise Relations since January 2013 and was Senior Vice President of Field Services - West Region from November 2011 until January 2013. Mr. Saroch was the Senior Vice President of East Markets from September 2010 until November 2011. Mr. Saroch joined the Company in October 1995.
Corey R. Horsch has served as Vice President, Chief Financial Officer and Treasurer of the Company since February 2018. He served as Vice President of Investor Relations and Treasurer of the Company from October 2015 to February 2018. 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.
Lori I. Abou Habib has served as Vice President and Chief Marketing Officer since August 2017 and served as a Vice President in marketing roles for the Company from January 2016 until August 2017. She held various marketing roles of increasing responsibility from 2007 when she joined Sonic until she became Vice President of Local Relationship Marketing in January 2016.
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.
Item 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividends
The Company’s common stock trades on NASDAQ under the symbol “SONC.” In August 2014, the Company initiated a quarterly cash dividend program with respect to shares of our common stock. A quarterly cash dividend has been paid in each subsequent quarter. The following table sets forth the high and low sales price for the Company’s common stock as reported on NASDAQ and the dividends declared and paid during the period indicated.
Sales Price
Dividends Declared and Paid
Fiscal year ended
Fiscal year ended
Fiscal year ended
August 31, 2018
August 31, 2017
August 31,
High
Low
High
Low
2018
2017
First Quarter
$
27.00
$
22.11
$
28.87
$
21.12
$
0.16
$
0.14
Second Quarter
29.62
23.22
28.60
24.57
0.16
0.14
Third Quarter
27.52
23.51
29.44
22.50
0.16
0.14
Fourth Quarter
37.44
24.29
30.05
22.66
0.16
0.14
Subsequent to the end of fiscal year 2018, the Company and Inspire Brands, Inc. ("Inspire") entered into a definitive merger agreement under which Inspire will acquire Sonic. The agreement remains subject to shareholder approval, and the Company is not permitted to pay a dividend prior to the closing of the acquisition. For more information regarding the agreement, see note 16 - Subsequent events, included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Stockholders
As of October 12, 2018, the Company had 497 record holders of its common stock.
Issuer Purchases of Equity Securities
Shares repurchased during the fourth quarter of fiscal year 2018 are as follows (in thousands, except per share amounts):
Period
Total
Number of
Shares
Purchased
Average
Price
Paid per
Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum Dollar
Value that May
Yet Be
Purchased
Under the
Program (1)
June 1, 2018 through June 30, 2018
318
$
31.43
318
$
380,914
July 1, 2018 through July 31, 2018
268
35.76
268
371,325
August 1, 2018 through August 31, 2018
304
34.49
304
360,822
Total
890
890
_______________
(1)
In August 2017, the Board of Directors extended the share repurchase program, authorizing the purchase of up to $160 million of the Company’s outstanding shares of common stock through August 31, 2018. In June 2018, 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.
The following 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,
2018
2017
2016
2015
2014
Income Statement Data:
Company Drive-In sales
$
240,722
$
296,101
$
425,795
$
436,031
$
405,363
Franchise Drive-Ins:
Franchise royalties and fees
172,443
170,527
170,319
161,342
138,416
Lease revenue
7,804
7,436
7,459
5,583
4,291
Other
2,621
3,203
2,747
3,133
4,279
Total revenues
423,590
477,267
606,320
606,089
552,349
Cost of Company Drive-In sales
203,177
249,911
356,820
363,938
342,109
Selling, general and administrative
80,077
78,687
82,089
79,336
69,415
Depreciation and amortization
38,355
39,248
44,418
45,892
42,210
Provision for impairment of long-lived assets
664
1,140
232
1,440
114
Other operating (income) expense, net
(5,086
)
(14,994
)
(4,691
)
(945
)
(176
)
Total expenses
317,187
353,992
478,868
489,661
453,672
Income from operations
106,403
123,275
127,452
116,428
98,677
Interest expense, net (1)
32,464
27,808
34,948
24,706
24,913
Income before income taxes
73,939
95,467
92,504
91,722
73,764
Net income (2)
$
71,205
$
63,663
$
64,067
$
64,485
$
47,916
Income per share:
Basic
$
1.89
$
1.47
$
1.32
$
1.23
$
0.87
Diluted
$
1.87
$
1.45
$
1.29
$
1.20
$
0.85
Weighted average shares used in calculation:
Basic
37,618
43,306
48,703
52,572
55,164
Diluted
38,086
44,043
49,669
53,953
56,619
Cash dividends declared per common share (3)
$
0.64
$
0.56
$
0.44
$
0.27
$
0.09
Balance Sheet Data:
Working capital
$
42,350
$
30,568
$
62,994
$
(2,383
)
$
16,201
Property, equipment and capital leases, net
298,222
312,380
392,380
421,406
441,969
Total assets
531,134
561,744
648,661
620,024
650,972
Obligations under capital leases (including current portion)
15,457
19,631
21,064
24,440
26,743
Long-term debt (including current portion)
717,396
637,521
578,938
438,028
437,318
Stockholders’ equity (deficit)
(288,846
)
(201,758
)
(75,643
)
17,433
62,675
_______________
(1)
Includes net loss from early extinguishment of debt of $1.3 million and $8.8 million in fiscal years 2018 and 2016, respectively.
(2)
Includes the benefit from the Tax Cuts and Job Act of $19.8 million, or $0.52 per diluted share, primarily from the deferred tax remeasurement in the second quarter of fiscal year 2018 of $14.1 million and the impact of the change in tax rate from 35% to the Company’s blended statutory federal tax rate of 25.7%.
(3)
The first quarter dividend for fiscal year 2015 was declared in the fourth quarter of fiscal year 2014.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
On September 24, 2018, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Inspire Brands, Inc. (“Parent”), a multi-brand restaurant company whose portfolio includes more than 4,700 Arby’s, Buffalo Wild Wings and Rusty Taco locations worldwide, and SSK Merger Sub, Inc. (the “Merger Sub”), a wholly owned subsidiary of Parent. The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge with and into the Company (the “Merger” and, together with the other transactions contemplated by the Merger Agreement, the “Transactions”), with the Company continuing as the surviving corporation and as a wholly owned, privately held subsidiary of Parent. Under the terms of the Merger Agreement, at the effective time of the Merger, each share of Common Stock issued and outstanding as of immediately prior to the effective time of the Merger (other than shares of Common Stock (i) held in treasury by the Company or owned by any direct or indirect wholly owned subsidiary of the Company, (ii) owned by Parent or Merger Sub or any direct or indirect wholly owned subsidiary of Parent or (iii) for which appraisal rights have been properly demanded in accordance with the General Corporation Law of the State of Delaware) will be cancelled and automatically converted into the right to receive $43.50 in cash. The Board of Directors of the Company unanimously has (i) determined that the Merger Agreement and the Transactions are in the best interests of the Company and its stockholders, (ii) declared it advisable to enter into the Merger Agreement, (iii) authorized and approved the Merger Agreement and the consummation of the Transactions, (iv) resolved to recommend that the Company’s stockholders vote in favor of adoption of the Merger Agreement and (v) directed that the Merger Agreement be submitted to a vote of the Company’s stockholders. Consummation of the Merger is subject to certain conditions, including (i) the adoption of the Merger Agreement by the Company’s stockholders, (ii) the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. Each of Parent’s and the Company’s obligation to consummate the Merger is also subject to certain additional conditions, including (i) subject to specific standards, the accuracy of the representations and warranties of the other party, (ii) performance in all material respects by the other party of its obligations under the Merger Agreement and (iii) with respect to Parent’s obligations to consummate the Merger, the absence of a material adverse effect with respect to the Company. The Merger Agreement provides that consummation of the Merger will occur on the later of two business days after (a) satisfaction or waiver of such closing conditions and (b) December 21, 2018, subject to certain exceptions to extend the consummation of the Merger. For more information, see Note 16 - Subsequent events included in Part II, Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K.
Overview
Description of the Business. Sonic operates and franchises the largest chain of drive-in restaurants in the United States. As of August 31, 2018, the Sonic system was comprised of 3,606 drive-ins, of which 5% were Company Drive-Ins and 95% were Franchise Drive-Ins. Sonic’s signature food items include specialty drinks (such as cherry limeades and slushes), ice cream desserts, made-to-order cheeseburgers, chicken entrees ranging from sandwiches to boneless wings, 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. Our Company Drive-In revenues and cost of sales, as well as franchise royalties and fees, are directly affected by the number and sales volume of drive-ins and new drive-in openings.
Overview of Business Performance. System same-store sales decreased 0.3% during fiscal year 2018 as compared to a decrease of 3.3% for fiscal year 2017. Same-store sales at Company Drive-Ins decreased by 0.8% during fiscal year 2018 as compared to a decrease of 4.7% for fiscal year 2017. The same-store sales decreases reflect a decline in traffic, which was impacted by adverse weather and aggressive competitive activity in the first half of the fiscal year, partially offset by positive momentum from Company initiatives seen during the remainder of the fiscal year. We continue to execute on our long-term strategies, including new technology, product innovation, personalized service, brand-appropriate value promotions and our fully integrated media strategy. All of these initiatives fuel Sonic’s strategy to drive growth through improvement in same-store sales and new drive-in development, and to enhance returns through the deployment of cash to shareholders. Same-store sales growth is the most important component to driving brand value as it generates operating leverage, increased operating cash flows and improved return on investment.
Revenues decreased to $423.6 million for fiscal year 2018 from $477.3 million for fiscal year 2017, which was primarily due to a decrease in Company Drive-In sales of $55.4 million. The decrease in Company Drive-In sales was primarily a result of refranchising Company Drive-Ins during fiscal year 2018 and 2017. Restaurant margins at Company Drive-Ins during fiscal year 2018 were flat when compared to the prior year, reflecting the impact of refranchising lower-margin drive-ins, partially
offset by commodity cost and labor inflation. Additionally, improving sales in the later portion of the fiscal year resulted in less de-leveraging on overall drive-in level margins.
Net income and diluted earnings per share for fiscal year 2018 were $71.2 million and $1.87, respectively, as compared to net income of $63.7 million or $1.45 per diluted share for fiscal year 2017.
In June 2016, the Company announced plans to refranchise Company Drive-Ins as part of an initiative to move toward an approximately 95%‑franchised system. During fiscal year 2016, the Company refranchised the operations of 29 Company Drive-Ins and retained a non-controlling minority investment in the franchise operations of 25 of these refranchised drive-ins.
The Company completed the previously announced refranchising initiative during fiscal year 2017. During the first six months of fiscal year 2017, 110 Company Drive-Ins were refranchised and the Company retained a non-controlling minority investment in 106 of the franchise operations.
The following is a summary of the pretax activity recorded as a result of the refranchising initiative (in thousands, except number of refranchised Company Drive-Ins):
Fiscal year ended August 31,
2017
2016
Number of refranchised Company Drive-Ins
110
29
Proceeds from sales of Company Drive-Ins
$
20,036
$
3,568
Proceeds from sale of real estate (1)
11,726
—
Real estate assets sold (1)
(12,095
)
(2,402
)
Assets sold, net of retained minority investment (2)
(7,891
)
—
Initial and subsequent lease payments for real estate option (1)
(3,178
)
—
Goodwill related to sales of Company Drive-Ins
(966
)
(194
)
Deferred gain for real estate option (3)
(809
)
—
Loss on assets held for sale
(65
)
—
Refranchising initiative gains, net
$
6,758
$
972
_______________
(1)
During the first quarter of fiscal year 2017, as part of a 53 drive-in refranchising transaction, a portion of the proceeds was applied as the initial payment for an option to purchase the real estate within the next 24 months. The franchisee exercised the option in the last six months of the fiscal year. Until the option was fully exercised, the franchisee made monthly lease payments which are included in other operating income, net of sub-lease expense.
(2)
Net assets sold consisted primarily of equipment.
(3)
The deferred gain of $0.8 million is recorded in other non-current liabilities as a result of a real estate purchase option extended to the franchisee in the second quarter of fiscal year 2017. The deferred gain will continue to be amortized into income through January 2020 when the option becomes exercisable.
During fiscal year 2018, the Company recognized a net gain of $3.2 million related to the refranchised operations of 41 drive-ins and retained a non-controlling minority investment in the franchise operations. These transactions represent additional markets identified after completion of the refranchising initiative in fiscal year 2017 and bring the brand to a 95% franchised system.
In addition to the refranchised drive-ins discussed above in which the Company retained a non-controlling minority investment in the operations, the Company also refranchised the operations of eight drive-ins during fiscal year 2018, five during fiscal year 2017 and nine during fiscal year 2016. These refranchising transactions all occurred in the normal course of business and did not result in any retained interests.
Income from minority investments is included in other revenue on the consolidated statements of income. The gains and losses related to refranchised drive-ins are recorded in other operating income, net, on the consolidated statement of income.
The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the years indicated as well as the change in sales and average unit volume for the system. System information includes both Company Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company’s revenues, since franchisees pay royalties based on a percentage of sales.
System Performance
($ in thousands)
Fiscal year ended August 31,
2018
2017
2016
Increase (decrease) in total sales
0.9
%
(2.4
)%
3.5
%
System drive-ins in operation (1):
Total at beginning of year
3,593
3,557
3,526
Opened
41
66
53
Closed (net of re-openings)
(28
)
(30
)
(22
)
Total at end of year
3,606
3,593
3,557
Average sales per drive-in
$
1,253
$
1,250
$
1,284
Change in same-store sales (2)
(0.3
)%
(3.3
)%
2.6
%
_______________
(1)
Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2)
Represents percentage change for drive-ins open for a minimum of 15 months.
The following table reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.
Company Drive-In Sales
($ in thousands)
Fiscal year ended August 31,
2018
2017
2016
Company Drive-In sales
$
240,722
$
296,101
$
425,795
Percentage decrease
(18.7
)%
(30.5
)%
(2.3
)%
Company Drive-Ins in operation (1):
Total at beginning of year
228
345
387
Opened
—
3
1
Sold to franchisees
(49
)
(117
)
(38
)
Closed (net of re-openings)
—
(3
)
(5
)
Total at end of year
179
228
345
Average sales per Company Drive-In
$
1,155
$
1,134
$
1,142
Change in same-store sales (2)
(0.8
)%
(4.7
)%
1.7
%
_______________
(1)
Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2)
Represents percentage change for drive-ins open for a minimum of 15 months.
Same-store sales for Company Drive-Ins decreased 0.8% for fiscal year 2018 and decreased 4.7% for fiscal year 2017. The decrease in fiscal year 2018 reflects a decline in traffic, which was impacted by adverse weather and aggressive competitive activity in the first half of the fiscal year, partially offset by positive momentum from Company initiatives seen during the remainder of the fiscal year. Company Drive-In sales decreased $55.4 million, or 18.7%, during fiscal year 2018 compared to fiscal year 2017. The change was driven by a $53.5 million decrease related to drive-ins that were refranchised during the fiscal year and a decrease of $2.7 million in same-store sales.
For fiscal year 2017, Company Drive-In sales decreased $129.7 million, or 30.5%, as compared to 2016. The change was driven by $113.8 million decrease related to drive-ins that were refranchised during the fiscal year and a decrease of $14.3 million in same-store sales.
The following table reflects the change in franchise sales, the number of Franchise Drive-Ins, average unit volumes and franchising revenues. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.
Franchise Information
($ in thousands)
Fiscal year ended August 31,
2018
2017
2016
Franchise Drive-In sales
$
4,205,782
$
4,112,062
$
4,092,303
Percentage increase
2.3
%
0.5
%
4.1
%
Franchise Drive-Ins in operation (1):
Total at beginning of year
3,365
3,212
3,139
Opened
41
63
52
Acquired from the Company
49
117
38
Closed (net of re-openings)
(28
)
(27
)
(17
)
Total at end of year
3,427
3,365
3,212
Average sales per Franchise Drive-In
$
1,260
$
1,260
$
1,301
Change in same-store sales (2)
(0.3
)%
(3.2
)%
2.7
%
Franchising revenues (3)
$
180,247
$
177,963
$
177,778
Percentage increase
1.3
%
0.1
%
6.5
%
Effective royalty rate (4)
4.08
%
4.12
%
4.12
%
_______________
(1)
Drive-ins that are temporarily closed for various reasons (repairs, remodeling, relocations, etc.) are not considered closed unless the Company determines that they are unlikely to reopen within a reasonable time.
(2)
Represents percentage change for drive-ins open for a minimum of 15 months.
(3)
Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition in the Critical Accounting Policies and Estimates section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K.
(4)
Represents franchise royalties as a percentage of Franchise Drive-In sales.
Same-store sales for Franchise Drive-Ins decreased 0.3% for fiscal year 2018 and decreased 3.2% for fiscal year 2017. The current fiscal year reflects a decline in traffic, which was impacted by adverse weather and aggressive competitive activity in the first half of the fiscal year, partially offset by positive momentum from Company initiatives seen during the remainder of the fiscal year. Franchising revenues increased $2.3 million, or 1.3%, for fiscal year 2018 compared to fiscal year 2017, reflecting an increase in royalties related to franchisee acquisitions of Company Drive-Ins and net new unit growth, offset by a decline in royalties related to incentives offered to franchisees and the impact of lower same-store sales. These factors also impacted the effective royalty rate compared to fiscal year 2017. Lease revenues increased by $0.4 million compared to the prior year.
Franchising revenues increased $0.2 million, or 0.1%, for fiscal year 2017 compared to fiscal year 2016, reflecting an increase in royalties related to franchisee acquisitions of Company Drive-Ins, as well as net new unit growth, offset by the decline in royalties related to same-store sales. These factors also impacted the effective royalty rate compared to fiscal year 2016. Lease revenues were flat compared to the prior year.
Other revenues decreased $0.6 million to $2.6 million in fiscal year 2018 and increased $0.5 million to $3.2 million in fiscal year 2017 as compared to the prior year. The decrease in fiscal year 2018 was primarily due to a decline in minority income related to performance during the fiscal year, partially offset by new investments in franchise operations related to Company Drive-Ins refranchised during fiscal year 2018. The increase in fiscal year 2017 was primarily due to increased
minority income, driven by new investments in franchise operations related to refranchised Company Drive-Ins, partially offset by the sale of certain minority investments that occurred in the first quarter of fiscal year 2017.
Operating Expenses. The following table presents the overall costs of drive-in operations as a percentage of Company Drive-In sales. Other operating expenses include direct operating costs such as marketing, telephone and utilities, repair and maintenance, rent, property tax and other controllable expenses.
Company Drive-In Margins
Fiscal year ended August 31,
Percentage Points
Increase (Decrease)
2018
2017
Costs and expenses:
Company Drive-Ins:
Food and packaging
27.7
%
27.3
%
0.4%
Payroll and other employee benefits
36.5
%
36.3
%
0.2%
Other operating expenses
20.2
%
20.8
%
(0.6)%
Cost of Company Drive-In sales
84.4
%
84.4
%
—%
Fiscal year ended August 31,
Percentage Points
Increase (Decrease)
2017
2016
Costs and expenses:
Company Drive-Ins:
Food and packaging
27.3
%
27.7
%
(0.4)%
Payroll and other employee benefits
36.3
%
35.3
%
1.0%
Other operating expenses
20.8
%
20.8
%
0.0%
Cost of Company Drive-In sales
84.4
%
83.8
%
0.6%
Drive-in level margins were flat during fiscal year 2018. Food and packaging costs were unfavorable by 40 basis points, which reflected commodity cost inflation and a higher level of discounting as compared to the prior year, partially offset by the impact of refranchising lower-margin drive-ins and leverage from a same-store sales increase during the later portion of the fiscal year. Payroll and other employee benefits were unfavorable by 20 basis points reflecting labor inflation, partially offset by the impact of refranchising lower-margin drive-ins. Other operating expenses improved 60 basis points due to the benefit of refranchising lower-margin Company Drive-Ins and more effective management of operating expenses.
Drive-in level margins were unfavorable by 60 basis points during fiscal year 2017. Food and packaging costs were favorable by 40 basis points, which reflected a favorable commodity costs environment. Payroll and other employee benefits were unfavorable by 100 basis points reflecting the de-leveraging impact of same-store sales and rising labor costs, partially offset by lower variable compensation. Other operating expenses were flat as a result of the de-leveraging impact of same-store sales, offset by the benefit of refranchising lower-margin Company Drive-Ins.
Selling, General and Administrative (“SG&A”). SG&A expenses increased 1.8% to $80.1 million for fiscal year 2018 and decreased 4.1% to $78.7 million during fiscal year 2017 as compared to fiscal year 2016. The increase for fiscal year 2018 is primarily related to costs incurred in connection with the payment card breach, an increase in bad debt expense related to a note receivable and higher variable compensation related to operating performance, partially offset by a decrease in salary expense related to the elimination of certain corporate positions that occurred in the fourth quarter of fiscal year 2017. The decrease in SG&A expense for fiscal year 2017 was primarily related to lower variable compensation related to operating performance.
Depreciation and Amortization. Depreciation and amortization expense decreased 2.3% to $38.4 million in fiscal year 2018 and 11.6% to $39.2 million in fiscal year 2017. The decreases during fiscal year 2018 is primarily attributable to a decrease in Company assets related to the refranchising of certain Company Drive-Ins in the first half of fiscal year 2017 and the third quarter of fiscal year 2018, disposition of real estate in the last quarter of fiscal year 2017 and assets that fully depreciated in the prior fiscal year, partially offset by an increase in technology assets. The decrease in fiscal year 2017 was primarily attributable to assets that fully depreciated in the prior fiscal year and a decrease in Company assets related to the refranchising of Company Drive-Ins.
Provision for Impairment of Long-Lived Assets. Provision for impairment of long-lived assets decreased $0.5 million to $0.7 million in fiscal year 2018 compared to $1.1 million for fiscal year 2017 and $0.2 million for 2016. The increase in fiscal year 2017 was primarily the result of impairment charges for the write-off of assets associated with some lower performing drive-ins.
Other Operating Income and Expense, Net. Fiscal year 2018 reflected $5.1 million in other operating income compared to $15.0 million for fiscal year 2017 and $4.7 million for fiscal year 2016. The $9.9 million change for fiscal year 2018 was primarily the result of the net refranchising gains of $3.2 million in fiscal year 2018 compared to the net refranchising gains of $6.8 million in fiscal year 2017, as well as a gain on sale of real estate of $4.7 million and a gain on the sale of minority investments in franchise operations of $3.8 million, partially offset by $1.8 million in severance costs related to the elimination of certain corporate positions, all recorded during fiscal year 2017.
Net Interest Expense. Net interest expense increased $4.7 million in fiscal year 2018 compared to a decrease of $7.1 million in fiscal year 2017 and an increase of $10.2 million in fiscal year 2016. The increase in fiscal years 2018 and 2016 is driven by the loss from debt transactions completed in the second quarter of fiscal year 2018 and the third quarter of fiscal year 2016 and the related increase in our long-term debt balance. See “Liquidity and Sources of Capital” and “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” below for additional information on factors that could impact interest expense.
Income Taxes. The provision for income taxes reflects an effective tax rate of 3.7% for fiscal year 2018 compared with 33.3% for fiscal year 2017 and 30.7% for fiscal year 2016. The lower effective income tax rate for fiscal year 2018 was primarily due to the impacts of the Tax Cuts and Jobs Act (“TCJA”). Please refer to Note 12 - Income Taxes included in Part II, Item 8, Financial Statements and Supplementary Data in this Annual Report on Form 10-K for a discussion of the impacts of the TCJA. The effective income tax rate for fiscal year 2017 was favorably impacted by the recognition of excess tax benefits related to stock option exercises due to the early adoption of Accounting Standards Update (“ASU”) No. 2016-09, “Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting.” The lower effective income tax rate for fiscal year 2016 was primarily attributable to the recognition of tax benefits related to a change in uncertain tax positions from prior years and legislation that reinstated and extended the Work Opportunity Tax Credit ("WOTC"). Our tax rate may continue to vary from quarter to quarter depending on the timing of stock option dispositions by option-holders and as circumstances on other tax matters change.
Non-GAAP Adjustments. Excluding the non‑GAAP adjustments further described below, net income per diluted share was $1.49 for fiscal year 2018, compared to $1.25 per diluted share in fiscal year 2017.
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 August 31, 2018
Fiscal year ended August 31, 2017
Net
Income
Diluted
EPS
Net
Income
Diluted
EPS
Reported – GAAP
$
71,205
$
1.87
$
63,663
$
1.45
Payment card breach expense (1)
1,676
0.04
—
—
Tax impact on payment card breach expense (2)
(548
)
(0.01
)
—
—
Loss from debt transaction (3)
1,310
0.03
—
—
Tax impact on debt transaction (4)
(384
)
(0.01
)
—
—
Discrete impact of the Tax Cuts and Jobs Act
(14,120
)
(0.37
)
—
—
Net gain on refranchising transactions (5)
(3,153
)
(0.08
)
(6,758
)
(0.15
)
Tax impact on refranchising transactions (6)
924
0.02
2,542
0.06
Gain on sale of investment in refranchised drive-in operations (7)
—
—
(3,795
)
(0.09
)
Tax impact on sale of investment in refranchised drive-in operations (8)
—
—
1,350
0.03
Restructuring charges (9)
—
—
1,819
0.04
Tax impact of restructuring charges (10)
—
—
(672
)
(0.02
)
Gain on sale of real estate
—
—
(4,702
)
(0.11
)
Tax impact on real estate sale (10)
$
—
$
—
$
1,738
$
0.04
Adjusted - Non-GAAP
$
56,910
$
1.49
$
55,185
$
1.25
_______________
(1)
Costs include legal fees, investigative fees and costs related to customer response.
(2)
Combined tax impact at consolidated blended statutory tax rates of 38.2% during the first quarter of fiscal year 2018 and 29.3% during the second, third and fourth quarters of fiscal year 2018.
(3)
Includes a $0.7 million write-off of unamortized deferred loan fees related to the reduction of the company's variable funding note commitments, as well as a $0.4 million write-off of unamortized deferred loan fees related to the prepayment on the Company's 2013 and 2016 fixed rate notes. Additionally, as required by the terms of the 2016 fixed rate notes, we paid a $0.2 million prepayment premium.
(4)
Tax impact during the period at a consolidated blended statutory tax rate of 29.3%.
(5)
During fiscal year 2018 and 2017, we completed transactions to refranchise the operations of Company Drive-Ins. Refer to Note 6 - Refranchising Initiative, included in Part II, Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for more information
(6)
Tax impact at a consolidated blended statutory tax rate of 29.3% during fiscal year 2018; a combined tax impact at an effective tax rate of 35.6% during the first quarter of fiscal year 2017 and at adjusted effective tax rates of 36.0%, 48.7% and 37.0% during the second, third and fourth quarters of fiscal year 2017, respectively.
(7)
We recorded a gain related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009.
(8)
Tax impact during the period at an adjusted effective tax rate of 35.6%.
(9)
During the fourth quarter of fiscal year 2017 the company incurred severance costs related to the elimination of certain corporate positions.
(10)
Tax impact during the period at an adjusted effective tax rate of 37.0%.
Gain on sale of investment in refranchised drive-in operations (3)
(3,795
)
(0.09
)
—
—
Tax impact on sale of investment in refranchised drive-in operations (4)
1,350
0.03
—
—
Restructuring charges (5)
1,819
0.04
—
—
Tax impact of restructuring charges (6)
(672
)
(0.02
)
—
—
Gain on sale of real estate
(4,702
)
(0.11
)
(1,875
)
(0.04
)
Tax impact on real estate sale (7)
1,738
0.04
664
0.01
FIN 48 release of income tax credits and deductions
—
—
(3,038
)
(0.06
)
Loss from early extinguishment of debt
—
—
8,750
0.18
Tax impact on debt extinguishment (8)
—
—
(3,027
)
(0.06
)
Retroactive benefit of Work Opportunity Tax Credit and resolution of tax matters
$
—
$
—
$
(585
)
$
(0.01
)
Adjusted - Non-GAAP
$
55,185
$
1.25
$
64,301
$
1.29
_______________
(1)
During fiscal year 2017 and fiscal year 2016, we completed transactions to refranchise the operations of Company Drive-Ins. Refer to Note 6 - Refranchising of Company Drive-Ins, included in Part II, Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K for more information.
(2)
Combined tax impact at an effective tax rate of 35.6% during the first quarter of fiscal year 2017 and at adjusted effective tax rates of 36.0%, 48.7% and 37.0% during the second, third and fourth quarters of fiscal year 2017, respectively; tax impact during fiscal year 2016 at an adjusted effective tax rate of 32.6%.
(3)
We recorded a gain related to minority investments in franchise operations retained as part of a refranchising transaction that occurred in fiscal year 2009. Income from minority investments is included in other revenue on the consolidated statements of income.
(4)
Tax impact during the period at an effective tax rate of 35.6%.
(5)
During the fourth quarter of fiscal year 2017, the Company incurred severance costs related to the elimination of certain corporate positions.
(6)
Tax impact during the period at an adjusted effective tax rate of 37.0%.
(7)
Tax impact during fiscal year 2017 at an adjusted effective tax rate of 37.0%; tax impact during fiscal year 2016 at an adjusted effective tax rate of 35.4%.
(8)
Tax impact during the period at an effective tax rate of 34.6%.
Financial Position
Total assets decreased $30.6 million, or 5.4%, to $531.1 million during fiscal year 2018 from $561.7 million at the end of fiscal year 2017. The change during the year was driven by a decrease in net property, equipment and capital leases of $14.2 million, primarily related to refranchising transactions and the related accumulated depreciation, and real estate sold during the fiscal year. These were partially offset by purchases of property, equipment and technology.
Total liabilities increased $56.5 million, or 7.4%, to $820.0 million during fiscal year 2018 from $763.5 million at the end of fiscal year 2017. The increase was primarily attributable to the debt transactions that occurred in fiscal year 2018, detailed below in "Liquidity and Sources of Capital." This was partially offset by a decrease of $15.9 million in deferred income taxes as a result of the TCJA.
Total stockholders’ deficit increased $87.1 million, or 43.2%, to a deficit of $288.8 million during fiscal year 2018 from $201.8 million at the end of fiscal year 2017. This increase was primarily attributable to $139.2 million in purchases of common stock under our stock repurchase program and the payment of $24.0 million in dividends, partially offset by current-year earnings of $71.2 million.
Liquidity and Sources of Capital
Operating Cash Flows. Net cash provided by operating activities decreased $16.6 million to $91.5 million for fiscal year 2018 as compared to $74.9 million in fiscal year 2017. The change was driven by an increase in net income, the timing of
payments for operational and payroll transactions, a decrease in tax related payments, primarily due to refranchised Company Drive-ins and the impact of the TCJA, as well as higher incentive compensation paid in the prior fiscal year period.
Investing Cash Flows. Cash used in investing activities was $14.1 million for fiscal year 2018 compared to cash provided by investing activities of $60.5 million for fiscal year 2017. The change in cash from investing activities was driven by a decrease of $70.1 million in proceeds from the sale of assets compared to fiscal year 2017. During fiscal year 2018, we received $9.6 million in proceeds for store operations and real estate sold to franchisees and $10.7 million from real estate sales. During fiscal year 2017, we received $41.3 million in proceeds from the sale of real estate related to previous refranchising transactions and $31.8 million in proceeds for store operations and real estate sold to franchisees as part of the refranchising initiative. Additionally, we received $8.4 million in proceeds from the sale of a minority investment related to previous refranchising transactions.
Investments in property and equipment compared to the same period last year saw a decrease in additions to rebuilds, relocations and remodels of existing drive-ins and newly constructed drive-ins, offset by an increase in cash used for the acquisition of underlying real estate for drive-ins.
Brand technology investments
$
14.1
Acquisition of underlying real estate for drive-ins
7.6
Purchase and replacement of equipment and technology