Edgar Filing: SONIC CORP

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FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

LOGO

(Mark One)

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

For the quarterly period ended February 29, 2012

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

For the transition period from to

Commission File Number 0-18859

SONIC CORP.

(Exact name of registrant as specified in its charter)


Delaware		73-1371046
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Johnny Bench Drive Oklahoma City, Oklahoma		73104
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

As of April 2, 2012, approximately 60,618,728 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

SONIC CORP.

Index


		Page Number
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at February 29, 2012 and August 31, 2011		4

	Condensed Consolidated Statements of Income for the three and six months ended February 29, 2012 and February 28, 2011		5

	Condensed Consolidated Statements of Cash Flows for the six months ended February 29, 2012 and February 28, 2011		6

	Notes to Condensed Consolidated Financial Statements		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

Item 4.	Controls and Procedures		18

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		18

Item 1A.	Risk Factors		18

Item 6.	Exhibits		19


PART I – FINANCIAL INFORMATION Item 1. Financial Statements SONIC CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts) (Unaudited)
	February 29, 2012			August 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	33,949		$	29,509
Restricted cash		7,215			12,850
Accounts and notes receivable, net		21,090			24,558
Income taxes receivable		17,026			12,776
Prepaid expenses and other current assets		11,929			13,764

Total current assets		91,209			93,457
Noncurrent restricted cash		8,011			8,108
Notes receivable, net		10,805			11,086
Property, equipment and capital leases		756,837			760,778
Less accumulated depreciation and amortization		(306,429	)		(295,903	)

Property, equipment and capital leases, net		450,408			464,875

Goodwill		77,184			81,625
Debt origination costs, net		11,855			13,124
Other assets, net		12,774			7,467

Total assets	$	662,246		$	679,742


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,078		$	11,135
Deposits from franchisees		2,356			2,897
Accrued liabilities		25,698			33,532
Income taxes payable		4,043			4,775
Current maturities of long-term debt and capital leases		19,401			18,940

Total current liabilities		61,576			71,279
Obligations under capital leases due after one year		29,689			30,302
Long-term debt due after one year		474,318			481,835
Deferred income taxes		30,176			27,228
Other noncurrent liabilities		17,501			17,402

Total non-current liabilities		551,684			556,767
Stockholders’ equity:
Preferred stock, par value $.01; 1,000 shares authorized; none outstanding		—			—
Common stock, par value $.01; 245,000 shares authorized; 118,309 shares issued (118,309 shares issued at August 31, 2011)		1,183			1,183
Paid-in capital		229,220			229,399
Retained earnings		693,988			687,431

		924,391			918,013
Treasury stock, at cost; 57,699 common shares (56,316 shares at August 31, 2011)		(875,405	)		(866,317	)

Total stockholders’ equity		48,986			51,696

Total liabilities and stockholders’ equity	$	662,246		$	679,742

The accompanying notes are an integral part of the consolidated financial statements.


SONIC CORP. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) (Unaudited)
	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Revenues:
Company Drive-In sales	$	87,185		$	86,435		$	183,967		$	183,709
Franchise Drive-Ins:
Franchise royalties		25,590			24,813			54,381			53,825
Franchise fees		364			517			649			886
Lease revenue		1,261			1,152			2,549			2,519
Other		684			606			1,817			1,730

		115,084			113,523			243,363			242,669
Costs and expenses:
Company Drive-Ins:
Food and packaging		24,686			24,564			52,411			51,563
Payroll and other employee benefits		32,740			32,718			67,824			68,275
Other operating expenses, exclusive of depreciation and amortization included below		20,727			20,810			43,638			43,216

		78,153			78,092			163,873			163,054
Selling, general and administrative		16,084			15,285			31,501			31,566
Depreciation and amortization		10,510			10,367			20,976			20,667
Provision for impairment of long-lived assets		173			176			173			264

		104,920			103,920			216,523			215,551

Other operating income (expense), net		384			(2	)		462			275


Income from operations		10,548			9,601			27,302			27,393
Interest expense		7,930			8,141			15,971			16,423
Interest income		(139	)		(149	)		(303	)		(352	)
Gain from early extinguishment of debt		—			(5,205	)		—			(5,205	)

Net interest expense		7,791			2,787			15,668			10,866

Income before income taxes		2,757			6,814			11,634			16,527
Provision for income taxes		1,080			2,466			4,458			4,937

Net income	$	1,677		$	4,348		$	7,176		$	11,590


Basic income per share	$	0.03		$	0.07		$	0.12		$	0.19


Diluted income per share	$	0.03		$	0.07		$	0.12		$	0.19

The accompanying notes are an integral part of the consolidated financial statements.


SONIC CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
	Six months ended
	February 29,			February 28,
	2012			2011
Cash flows from operating activities:
Net income	$	7,176		$	11,590
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		20,976			20,667
Stock-based compensation expense		2,134			3,130
Gain from early extinguishment of debt		—			(5,205	)
Amortization of debt costs to interest expense		1,351			1,625
Other		(2,095	)		(572	)
Decrease in operating assets:
Restricted cash		5,611			2,443
Accounts receivable and other assets		5,480			54
Decrease in operating liabilities:
Accounts payable		(1,157	)		(87	)
Accrued and other liabilities		(6,656	)		(1,928	)
Income taxes		(4,981	)		(4,202	)

Total adjustments		20,663			15,925

Net cash provided by operating activities		27,839			27,515

Cash flows from investing activities:
Purchases of property and equipment		(7,822	)		(9,550	)
Proceeds from sale of assets		7,993			2,060
Other		(3,759	)		3,879

Net cash used in investing activities		(3,588	)		(3,611	)


Cash flows from financing activities:
Payments on and purchases of debt		(7,516	)		(82,847	)
Purchases of treasury stock		(10,451	)		—
Other		(1,844	)		2,585

Net cash used in financing activities		(19,811	)		(80,262	)


Net increase (decrease) in cash and cash equivalents		4,440			(56,358	)
Cash and cash equivalents at beginning of period		29,509			86,036

Cash and cash equivalents at end of period	$	33,949		$	29,678

Supplemental cash flow information:
Additions to capital lease obligations	$	1,856		$	—

The accompanying notes are an integral part of the consolidated financial statements.

SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements of Sonic Corp. (the “Company”). In the opinion of management, these financial statements reflect all adjustments of a normal recurring nature, including recurring accruals, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented in conformity with GAAP. In certain situations, recurring accruals, including franchise royalties, are based on more limited information at interim reporting dates than at the Company’s fiscal year end due to the abbreviated reporting period. Actual results may differ from these estimates. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended August 31, 2011 included in the Company’s Annual Report on Form 10-K. Interim results are not necessarily indicative of the results that may be expected for a full year or any other interim period. The second fiscal quarter is typically the most volatile for the Company due to seasonality and weather.

Principles of Consolidation

The accompanying financial statements include the accounts of the Company, its wholly owned subsidiaries and its Company Drive-Ins. All significant intercompany accounts and transactions have been eliminated.

Reclassifications

Certain amounts reported in previous years, which are not material, have been combined and reclassified to conform to the current year presentation. Effective April 1, 2010, the Company revised its compensation program at the Company Drive-In level. As a result of these changes, noncontrolling interests are immaterial for the periods presented and have been included in “payroll and other employee benefits” on the Condensed Consolidated Statements of Income and in “other noncurrent liabilities” on the Condensed Consolidated Balance Sheets.

2. Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share:


	Three months ended				Six months ended
	February 29,		February 28,		February 29,		February 28,
	2012		2011		2012		2011
Numerator:
Net income	$	1,677	$	4,348	$	7,176	$	11,590
Denominator:
Weighted average common shares outstanding – basic		60,579		61,687		61,136		61,663
Effect of dilutive employee stock options and unvested restricted stock units		23		178		34		146

Weighted average common shares – diluted		60,602		61,865		61,170		61,809

Net income per common share – basic	$	0.03	$	0.07	$	0.12	$	0.19

Net income per common share – diluted	$	0.03	$	0.07	$	0.12	$	0.19

Anti-dilutive securities excluded⁽¹⁾		7,279		6,363		7,212		6,703

(1)

Anti-dilutive securities consist of stock options and unvested restricted stock units that were not included in the computation of diluted earnings per share because either the exercise price of the options was greater than the average market price of the common stock or the total assumed proceeds under the treasury stock method resulted in negative incremental shares and thus the inclusion would have been anti-dilutive.

SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(In thousands, except per share data)

(Unaudited)

3. Stock Repurchase Program

On October 13, 2011, the Company’s Board of Directors approved a stock repurchase program. Under the stock repurchase program, the Company is authorized to purchase up to $30.0 million of its outstanding shares of common stock through August 31, 2012. During the first quarter of fiscal year 2012, approximately 1.5 million shares were acquired pursuant to this program for a total cost of $10.5 million. As of February 29, 2012, the total remaining amount authorized for repurchase was $19.5 million. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. The Company’s Board of Directors may extend, modify, suspend or discontinue the stock repurchase program at any time.

4. Income Taxes

The following table presents the Company’s provision for income taxes and effective income tax rate for the periods below:


	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Provision for income taxes	$	1,080		$	2,466		$	4,458		$	4,937
Effective income tax rate		39.2	%		36.2	%		38.3	%		29.9	%

The increase in the Company’s effective income tax rate during the second quarter of fiscal year 2012 was primarily due to tax credit programs that expired during the second quarter of fiscal year 2012. The higher effective income tax rate for the first half of fiscal year 2012 was primarily attributable to a $1.1 million decrease in the Company’s liability for unrecognized tax benefits resulting from the settlement of state tax audits during the first quarter of fiscal year 2011 and the expiration of tax credit programs.

5. Impairment of Long-Lived Assets and Goodwill

Long-Lived Assets

The Company assesses long-lived assets used in operations for possible impairment when events and circumstances indicate that such assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. No material impairment charges for long-lived assets were recorded during the first six months of fiscal year 2012 or in the same period last year. Projecting the cash flows for the impairment analysis involves significant estimates with regard to the performance of each drive-in, and it is reasonably possible that the estimates of cash flows may change in the near term resulting in the need to write down operating assets to fair value.

Goodwill

The Company evaluated goodwill for impairment in conjunction with the sale of 34 Company Drive-Ins to franchisees during the second quarter of fiscal year 2012. As of the date of the evaluation, the fair value of the Company’s reporting units exceeded their book value. The Company is required to test goodwill for impairment on an annual basis and between annual tests as a result of allocating goodwill to Company Drive-Ins that are sold or whenever indications of impairment arise including, but not limited to, a significant decline in cash flows from store operations. Such tests could result in impairment charges. As of February 29, 2012, the Company had $77.2 million of goodwill, of which $71.2 million was attributable to the Company Drive-Ins segment and $6.0 million was attributable to the Franchise Operations segment. For more information regarding the Company’s goodwill and other intangible assets information, see note 1—Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended August 31, 2011.

SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(In thousands, except per share data)

(Unaudited)

6. Contingencies

The Company is involved in various legal proceedings and has certain unresolved claims pending. Based on the information currently available, management believes that all claims currently pending are either covered by insurance or would not have a material adverse effect on the Company’s business, operating results or financial condition.

The Company has obligations under various lease agreements with third-party lessors related to the real estate for certain Company Drive-In operations that were sold to franchisees. Under these agreements, which expire through 2024, the Company remains secondarily liable for the lease payments for which it was responsible as the original lessee. As of February 29, 2012, the amount remaining under these guaranteed lease obligations totaled $8.9 million. At this time, the Company does not anticipate any material defaults under the foregoing leases; therefore, no liability has been provided. In addition, capital lease obligations totaling $1.2 million are still reflected as liabilities as of February 29, 2012 for properties sold to franchisees and for which the Company remains secondarily liable through 2021. At this time, the Company also does not anticipate any material defaults under these capital leases.

7. Fair Value of Financial Instruments

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

The Company categorizes its assets and liabilities recorded at fair value based upon the following fair value hierarchy established by the Financial Accounting Standards Board:

•

Level 1 valuations use quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. An active market is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

•

Level 2 valuations use inputs other than actively quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical or similar assets or liabilities in markets that are not active, (c) inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves observable at commonly quoted intervals and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3 valuations use unobservable inputs for the asset or liability. Unobservable inputs are used to the extent observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The table below sets forth our fair value hierarchy for financial assets measured at fair value on a recurring basis as of February 29, 2012 (in thousands):

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Total

Assets:

Cash equivalents

12,703

—

12,703

Restricted cash (current)

7,215

—

7,215

Restricted cash (noncurrent)

8,011

—

8,011

Total

27,929

—

27,929

SONIC CORP.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(continued)

(In thousands, except per share data)

(Unaudited)

The table below sets forth our fair value hierarchy for financial assets measured at fair value on a recurring basis as of August 31, 2011 (in thousands):


	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Cash equivalents	$	11,338	$	—	$	—	$	11,338
Restricted cash (current)		12,850		—		—		12,850
Restricted cash (noncurrent)		8,108		—		—		8,108

Total	$	32,296	$	—	$	—	$	32,296

At February 29, 2012 and August 31, 2011, the fair value of the Company’s Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) approximated the carrying value, including accrued interest, of $489.5 million and $497.0 million, respectively.

8. Segment Information

Operating segments are generally defined as components of an enterprise for which separate discrete financial information is available as the basis for management to allocate resources and assess performance.

Based on internal reporting and management structure, the Company has two reportable segments: Company Drive-Ins and Franchise Operations. The Company Drive-Ins segment consists of the drive-in operations in which the Company owns a controlling ownership interest and derives its revenues from operating drive-in restaurants. The Franchise Operations segment consists of franchising activities and derives its revenues from royalties, initial franchise fees and lease revenues received from franchisees. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in our most recent Annual Report on Form 10-K. Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources between segments.

The following table presents the revenues and income from operations for each reportable segment, along with reconciliation to reported revenue and income from operations:


	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Revenues:
Company Drive-Ins	$	87,185		$	86,435		$	183,967		$	183,709
Franchise Operations		27,215			26,482			57,579			57,230
Unallocated revenues		684			606			1,817			1,730

	$	115,084		$	113,523		$	243,363		$	242,669

Income from Operations:
Company Drive-Ins	$	9,032		$	8,343		$	20,094		$	20,655
Franchise Operations		27,215			26,482			57,579			57,230
Unallocated income		1,068			604			2,279			2,005
Unallocated expenses:
Selling, general and administrative		(16,084	)		(15,285	)		(31,501	)		(31,566	)
Depreciation and amortization		(10,510	)		(10,367	)		(20,976	)		(20,667	)
Provision for impairment of long-lived assets		(173	)		(176	)		(173	)		(264	)

Income from Operations	$	10,548		$	9,601		$	27,302		$	27,393

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In the Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “Sonic Corp.,” “the Company,” “we,” “us,” and “our” refer to Sonic Corp. and its subsidiaries.

Overview

System-wide same-store sales increased 3.5% during the second quarter and 1.7% during the first six months of fiscal year 2012, an improving trend as compared to an increase of 1.2% and a decline of 0.8%, respectively, for the same periods last year. Same-store sales at Company Drive-Ins increased by 3.1% for the second quarter and 1.4% for the first six months of fiscal year 2012 as compared to an increase of 2.2% and flat sales, respectively, for the same periods last year. Approximately one percentage point of the increase in sales for the second quarter and one-half percentage point of the increase for the first six months of fiscal year 2012 are attributable to one additional day of operations in February 2012 versus February 2011, due to leap year. The second quarter is typically the most volatile for us due to seasonality and weather. Weather was generally favorable during the second fiscal quarter of 2012 as compared to the prior year. Notwithstanding these benefits, we believe the initiatives we have implemented, including product quality improvements and a greater emphasis on personalized service, have set a solid foundation for future growth. We continue to refine our promotional and creative strategies to drive a more consistent and sustained same-store sales growth going forward.

Revenues increased to $115.1 million for the second quarter of fiscal year 2012 from $113.5 million for the same period last year and increased to $243.4 million for the first six months of fiscal year 2012 from $242.7 million for the same period last year. The increase in revenues was primarily related to an increase in same-store sales, partially offset by a decline from the refranchising of 31 Company Drive-Ins on January 31, 2012. Three additional Company Drive-Ins were refranchised on the last day of the current quarter which had no impact on sales during the period. Restaurant margins at Company Drive-Ins improved by 70 basis points during the second quarter of fiscal year 2012, reflecting the leverage of positive same-store sales as well as a favorable shift in product mix, and declined slightly for the first half of fiscal year 2012 primarily due to higher commodity costs.

Second quarter results for fiscal year 2012 reflected net income of $1.7 million or $0.03 per diluted share as compared to net income of $4.3 million or $0.07 per diluted share for the same period last year, which included a $3.3 million after-tax gain or $0.05 per diluted share from early extinguishment of debt. Net income and diluted earnings per share for the first six months of fiscal year 2012 were $7.2 million and $0.12, respectively, as compared to net income of $11.6 million and $0.19 per diluted share for the same period last year. Excluding a $1.1 million tax benefit recognized during the first quarter of fiscal year 2011 relating to the favorable settlement of state tax matters and the $3.3 million after-tax gain on the early extinguishment of debt recognized during the second quarter of fiscal year 2011, net income and diluted earnings per share for the first six months of fiscal years 2011 and 2012 remained steady at $7.2 million and $0.12, respectively.

The following non-GAAP adjustments are intended to supplement the presentation of the Company’s financial results in accordance with GAAP. We believe the exclusion of these items in evaluating the change in net income and diluted earnings per share for the periods below provides useful information to investors and management regarding the underlying business trends and the performance of our ongoing operations and is helpful for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the financial results for the Company and predicting future performance.


	Three Months Ended February 29, 2012				Three Months Ended February 28, 2011
	Net Income		Diluted EPS		Net Income			Diluted EPS
Reported – GAAP	$	1,677	$	0.03	$	4,348		$	0.07
After-tax impact of gain from early extinguishment of debt		—		—		(3,321	)		(0.05	)

Adjusted - Non-GAAP	$	1,677	$	0.03	$	1,027		$	0.02


	Six Months Ended February 29, 2012				Six Months Ended February 28, 2011
	Net Income		Diluted EPS		Net Income			Diluted EPS
Reported – GAAP	$	7,176	$	0.12	$	11,590		$	0.19
After-tax impact of gain from early extinguishment of debt		—		—		(3,321	)		(0.05	)
Tax benefit from favorable tax settlement		—		—		(1,073	)		(0.02	)

Adjusted - Non-GAAP	$	7,176	$	0.12	$	7,196		$	0.12

The following table provides information regarding the number of Company Drive-Ins and Franchise Drive-Ins operating as of the end of the periods indicated as well as the system-wide change in sales and average unit volume. System-wide information includes both Company Drive-In and Franchise Drive-In information, which we believe is useful in analyzing the growth of the brand as well as the Company’s revenues, since franchisees pay royalties based on a percentage of sales.

System-wide Performance

($ in thousands)


	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Percentage increase (decrease) in sales		3.6	%		1.5	%		2.0	%		(0.3	%)
System-wide drive-ins in operation⁽¹⁾:
Total at beginning of period		3,555			3,558			3,561			3,572
Opened		10			5			12			14
Closed (net of re-openings)		(15	)		(8	)		(23	)		(31	)

Total at end of period		3,550			3,555			3,550			3,555


Average sales per drive-in:	$	225		$	218		$	472		$	462

Change in same-store sales⁽²⁾:		3.5	%		1.2	%		1.7	%		(0.8	%)

(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 provides information regarding drive-in development across the system.


	Three months ended				Six months ended
	February 29,		February 28,		February 29,		February 28,
	2012		2011		2012		2011
New drive-ins:
Company		—		—		—		—
Franchise		10		5		12		14

System-wide		10		5		12		14

Rebuilds/relocations:
Company		—		1		—		2
Franchise		4		4		10		7

System-wide		4		5		10		9

Results of Operations

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

Revenues

($ in thousands)


	Three months ended							Percent
	February 29,		February 28,		Increase			Increase
	2012		2011		(Decrease)			(Decrease)
Revenues:
Company Drive-In sales	$	87,185	$	86,435	$	750			0.9	%
Franchise Drive-Ins:
Franchise royalties		25,590		24,813		777			3.1
Franchise fees		364		517		(153	)		(29.6	)
Lease revenue		1,261		1,152		109			9.5
Other		684		606		78			12.9

Total revenues	$	115,084	$	113,523	$	1,561			1.4	%


	Six months ended							Percent
	February 29,		February 28,		Increase			Increase
	2012		2011		(Decrease)			(Decrease)
Revenues:
Company Drive-In sales	$	183,967	$	183,709	$	258			0.1	%
Franchise Drive-Ins:
Franchise royalties		54,381		53,825		556			1.0
Franchise fees		649		886		(237	)		(26.7	)
Lease revenue		2,549		2,519		30			1.2
Other		1,817		1,730		87			5.0

Total revenues	$	243,363	$	242,669	$	694			0.3	%

The following table reflects the changes in sales and same-store sales at Company Drive-Ins. It also presents information about average unit volumes and the number of Company Drive-Ins, which is useful in analyzing the growth of Company Drive-In sales.

Company Drive-In Sales

($ in thousands)


	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Company Drive-In sales	$	87,185		$	86,435		$	183,967		$	183,709
Percentage increase (decrease)		0.9	%		(0.2	%)		0.1	%		(3.4	%)

Company Drive-Ins in operation⁽¹⁾:
Total at beginning of period		446			452			446			455
Sold to franchisees		(34	)		—			(34	)		(2	)
Closed (net of re-openings)		—			(1	)		—			(2	)

Total at end of period		412			451			412			451


Average sales per Company Drive-in	$	201		$	193		$	419		$	409
Percentage increase		4.1	%		3.8	%		2.4	%		1.2	%
Change in same-store sales⁽²⁾		3.1	%		2.2	%		1.4	%		0.0	%

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

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

Same-store sales for Company Drive-Ins increased 3.1% for the second quarter of fiscal year 2012 and increased 1.4% for the first six months of fiscal year 2012, as compared to an increase of 2.2% and flat sales, respectively, for the same periods last year, which represents an improving trend that we attribute to the initiatives we have implemented. Company Drive-In sales increased $0.8 million, or 0.9%, during the second quarter of fiscal year 2012 as compared to the same period last year. This increase was primarily driven by a $2.9 million improvement in same-store sales partially offset by a $2.3 million decrease in sales caused by the refranchising of drive-ins during the second quarter of fiscal year 2012 and during fiscal year 2011. Company Drive-In sales increased $0.3 million for the first six months of fiscal year 2012 as compared to the same period last year. An improvement in same-store sales and, to a lesser extent, new drive-in openings during fiscal year 2011 resulted in a $4.6 million increase in sales which was partially offset by a $2.9 million decrease in sales caused by the refranchising of drive-ins discussed earlier and a $1.4 million decrease related to drive-ins that were closed during or subsequent to the first half of fiscal year 2011.

The following table reflects the change in franchising revenues (franchise royalties, franchise fees and lease revenues) as well as franchise sales, average unit volumes and the number of Franchise Drive-Ins. While we do not record Franchise Drive-In sales as revenues, we believe this information is important in understanding our financial performance since these sales are the basis on which we calculate and record franchise royalties. This information is also indicative of the financial health of our franchisees.

Franchise Information

($ in thousands)


	Three months ended						Six months ended
	February 29,			February 28,			February 29,			February 28,
	2012			2011			2012			2011
Franchising revenues⁽¹⁾	$	27,215		$	26,482		$	57,579		$	57,230
Percentage increase (decrease)		2.8	%		1.9	%		0.6	%		(0.8	%)

Franchise Drive-Ins in operation⁽²⁾:
Total at beginning of period		3,109			3,106			3,115			3,117
Opened		10			5			12			14
Acquired from company		34			—			34			2
Closed (net of re-openings)		(15	)		(7	)		(23	)		(29	)

Total at end of period		3,138			3,104			3,138			3,104


Franchise Drive-In sales	$	712,903		$	685,659		$	1,494,126		$	1,461,951
Percentage change		4.0	%		1.7	%		2.2	%		0.1	%

Effective royalty rate		3.59	%		3.62	%		3.64	%		3.68	%

Average sales per Franchise Drive-In	$	229		$	222		$	480		$	470
Change in same-store sales⁽³⁾		3.6	%		1.0	%		1.7	%		(0.9	%)

(1)

Consists of revenues derived from franchising activities, including royalties, franchise fees and lease revenues. See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2011.

(2)	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.

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

Same-store sales for Franchise Drive-Ins increased 3.6% for the second quarter of fiscal year 2012 and 1.7% for the first half of fiscal year 2012, as compared to an increase of 1.0% and a decline of 0.9%, respectively, for the same periods last year, which represents an improving trend that we attribute to the initiatives we have implemented. Overall franchising revenues increased $0.7 million, or 2.8%, for the second quarter of fiscal year 2012 and $0.3 million, or 0.6%, for the first half of fiscal year 2012. The increase in franchising revenues was primarily driven by an increase in franchise royalties, partially offset by a decrease in franchise fees. The increase in franchise royalties was primarily attributable to an increase in same-store sales, partially offset by a lower effective royalty rate stemming from a temporary reduction in royalty rates from various development incentives and certain franchisee restructuring efforts.

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

Three months ended

Percentage points

February 29,

February 28,

2012

2011

(Decrease)

Costs and expenses⁽¹⁾:

Company Drive-Ins:

Food and packaging

28.3

28.4

(0.1

)

Payroll and other employee benefits⁽²⁾

37.5

37.8

(0.3

)

Other operating expenses

23.8

24.1

(0.3

)

Cost of sales

89.6

90.3

(0.7

)

Six months ended

Percentage points

February 29,

February 28,

Increase

2012

2011

(Decrease)

Costs and expenses⁽¹⁾:

Company Drive-Ins:

Food and packaging

28.5

28.1

0.4

Payroll and other employee benefits⁽²⁾

36.9

37.2

(0.3

)

Other operating expenses

23.7

23.5

0.2

Cost of sales

89.1

88.8

0.3

(1)	Calculated as a percentage of Company Drive-In Sales.

(2)	Effective April 1, 2010, we revised our compensation program at the Company Drive-In level. As a result of these changes, noncontrolling interests are immaterial for the periods presented and have been included in payroll and other employee benefits.

Restaurant-level margins improved by 70 basis points during the second quarter of fiscal year 2012, reflecting leverage from improved same-store sales, and declined slightly for the first six months of fiscal year 2012, primarily due to higher commodity costs, as compared to the same periods last year. Food and packaging costs remained relatively flat during the second quarter of fiscal year 2012 as a result of favorable product mix and improved inventory management, partially offset by higher commodity costs. Payroll and other employee benefits as well as other operating expenses improved by a combined 60 basis points during the second quarter of fiscal year 2012 primarily as a result of leverage from improved sales.

Selling, General and Administrative (“SG&A”). SG&A expenses increased $0.8 million, or 5.2%, to $16.1 million for the second quarter of fiscal year 2012 and remained relatively flat decreasing by 0.2% for the first six months of fiscal year 2012 as compared to the same periods last year. The increase in SG&A expense during the second quarter of fiscal year 2012 was largely attributable to an increase in variable compensation costs and an increase in severance, recruiting and relocation expenses.

Depreciation and Amortization. Depreciation and amortization expense remained relatively flat for the second quarter of fiscal year 2012 increasing by $0.1 million to $10.5 million and increased by $0.3 million to $21.0 million for the first six months of fiscal year 2012 as compared to the same periods last year. Capital expenditures during the first six months of fiscal year 2012 were $7.8 million.

Net Interest Expense. Net interest expense increased in the second quarter and first six months of fiscal year 2012 as compared to the same periods last year as a result of a $5.2 million gain from the early extinguishment of debt in the second quarter of fiscal year 2011. Excluding this gain, net interest expense decreased $0.2 million for the second quarter of fiscal year 2012 and $0.4 million for the first six months of fiscal year 2012. The decrease in net interest expense relates to a decline in debt partially offset by a higher weighted average interest rate. See “Liquidity and Sources of Capital” and “Item 3. 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 39.2% for the second quarter of fiscal year 2012 as compared to 36.2% for the same period in 2011. This increase was primarily due to tax credit programs that expired during the second quarter of fiscal year 2012. Our effective income tax rate increased to 38.3% for the first half of fiscal year 2012 from 29.9% for the first half of fiscal year 2011. The higher effective income tax rate for the first half of fiscal year 2012 was primarily attributable to a $1.1 million decrease in our liability for unrecognized tax benefits resulting from the settlement of state tax audits during the first quarter of fiscal year 2011 and the expiration of tax credit programs. Our tax rate may continue to vary significantly from quarter to quarter depending on the timing of stock option exercises and dispositions by option-holders, changes in tax credit legislation, changes to uncertain tax positions and as circumstances on other tax matters change.

Financial Position

Total assets decreased $17.5 million, or 2.6%, to $662.2 million during the first half of fiscal year 2012 from $679.7 million at the end of fiscal year 2011. This decrease was primarily attributable to a $14.5 million decrease in net property, equipment and capital leases resulting primarily from depreciation during the year partially offset by capital additions.

Total liabilities decreased $14.8 million, or 2.4%, to $613.3 million during the first half of fiscal year 2012

from $628.0 million at the end of fiscal year 2011. This decrease was primarily attributable to a $7.8 million decrease in accrued liabilities relating to the payment of bonuses and other liabilities that were accrued as of August 31, 2011. The overall decrease in total liabilities was also a result of scheduled debt principal repayments of $7.5 million during the first half of fiscal year 2012.

Total stockholders’ equity decreased $2.7 million, or 5.2%, to $49.0 million during the first half of fiscal year 2012 from $51.7 million at the end of fiscal year 2011. This decrease was attributable to $10.5 million in purchases of common stock under our stock repurchase program during the first quarter of fiscal year 2012. These purchases were partially offset by current year earnings of $7.2 million.

Liquidity and Sources of Capital

Operating Cash Flows. Net cash provided by operating activities remained relatively flat at $27.8 million for the first six months of fiscal year 2012 as compared to $27.5 million for the same period in fiscal year 2011.

Investing Cash Flows. Cash used in investing activities during the first six months of fiscal years 2012 and 2011 remained steady at $3.6 million. During the first six months of fiscal year 2012, we used $7.8 million of cash for purchases of property and equipment and $3.4 million of cash to purchase intellectual property related to a point-of-sale system that is used by a majority of the Sonic system. These cash outflows were partially offset by $8.0 million in proceeds primarily related to the sale of operations and a portion of the real estate for 34 Company Drive-Ins. The following table sets forth the components of our investments in capital additions for the first six months of fiscal year 2012 (in millions):


Replacement equipment and technology for existing drive-ins and other	$	3.7
Corporate technology investments		2.8
Rebuilds, relocations and remodels of existing drive-ins		0.8
New Company Drive-Ins, including drive-ins under construction		0.5

Total investing cash flows for capital additions	$	7.8

Financing Cash Flows. Net cash used in financing activities decreased $60.5 million to $19.8 million for the first six months of fiscal year 2012 from $80.3 million for the same period in fiscal year 2011. This decrease primarily relates to the use of $57.1 million in cash during the second quarter of fiscal year 2011 to repurchase a portion of our Series 2006-1 Senior Secured Variable Funding Notes, Class A-1 (the “2006 Variable Funding Notes”) and lower scheduled principal payments on our debt during the first half of fiscal year 2012 as a result of refinancing our 2006 debt, which occurred during fiscal year 2011. These decreases were partially offset by the use of $10.5 million of cash during the first quarter of fiscal year 2012 to purchase outstanding common stock under our stock repurchase program as discussed below.

During the second quarter of fiscal year 2011, we repurchased $62.5 million of our 2006 Variable Funding Notes and recognized a $5.2 million gain.

On October 13, 2011, our Board of Directors approved a stock repurchase program. Under the stock repurchase program, we are authorized to purchase up to $30.0 million of our outstanding shares of common stock through August 31, 2012. During the first quarter of fiscal year 2012, approximately 1.5 million shares were acquired pursuant to this program for a total cost of $10.5 million. As of February 29, 2012, the total remaining amount authorized for repurchase was $19.5 million. Share repurchases may be made from time to time in the open market or in negotiated transactions, depending on share price, market conditions and other factors. Our Board of Directors may extend, modify, suspend or discontinue the stock repurchase program at any time.

As of February 29, 2012, our total cash balance of $49.2 million ($33.9 million of unrestricted and $15.2 million of restricted cash balances) reflected the impact of the cash generated from operating activities, cash used for stock repurchases and capital expenditures mentioned above. In addition, we expect refunds from amended tax returns of approximately $11.8 million to be received during fiscal year 2012 or 2013. We believe that existing cash, funds generated from operations and the undrawn availability of $100 million under our Series 2011-1 Senior Secured Variable Funding Notes, Class A-1, will meet our needs for the foreseeable future.

Critical Accounting Policies and Estimates

Critical accounting policies are those the Company believes are most important to portraying its financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially

different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2011.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Sonic’s use of debt directly exposes the Company to interest rate risk. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to changes in market interest rates reflected in the fair value of the debt and to the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Sonic manages its debt portfolio to achieve an overall desired position of fixed and floating rates. Sonic is also exposed to market risk from changes in commodity prices. Sonic does not utilize financial instruments for trading purposes.

Interest Rate Risk. Our exposure to interest rate risk at February 29, 2012 is primarily based on the Series 2011-1 Senior Secured Fixed Rate Notes, Class A-2 (the “2011 Fixed Rate Notes”) with an effective rate of 5.4%, before amortization of debt-related costs. At February 29, 2012, the fair value of the 2011 Fixed Rate Notes approximated the carrying value of $489.5 million (including accrued interest). To derive the fair value, management used market information available for public debt transactions for companies with ratings that are similar to our ratings. Management believes this fair value is a reasonable estimate. Should interest rates and/or credit spreads increase or decrease by one percentage point, the estimated fair value of the 2011 Fixed Rate Notes would decrease or increase by approximately $24.0 million, respectively. The fair value estimate required significant assumptions by management as there are few restaurant securitized loan transactions occurring in the current market.

For further discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2011.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-14 under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were designed at the reasonable assurance level. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

There has been no material change in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2011.

Item 6. Exhibits


Exhibits.
31.01		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14

31.02		Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14

32.01		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.02		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101.INS		XBRL Instance Document⁽¹⁾

101.SCH		XBRL Taxonomy Extension Schema Document⁽¹⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾

101.LAB		XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾

⁽¹⁾

XBRL (Extensible Business Reporting Language) information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SONIC CORP.

By:		/s/ Stephen C. Vaughan
		Stephen C. Vaughan, Executive Vice President
		and Chief Financial Officer

Date: April 6, 2012

EXHIBIT INDEX

Exhibit Number and Description


31.01		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14

31.02		Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14

32.01		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.02		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101.INS		XBRL Instance Document⁽¹⁾

101.SCH		XBRL Taxonomy Extension Schema Document⁽¹⁾

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document⁽¹⁾

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document⁽¹⁾

101.LAB		XBRL Taxonomy Extension Label Linkbase Document⁽¹⁾

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document⁽¹⁾

⁽¹⁾

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company