The following table summarizes the changes in the number of company-operated and franchised Jack inthefranchise Jack in the Box restaurants sinceover the beginning of fiscal 2003:past five years:
maintaining any required permits, licensing or approval could result in closures of existing restaurants or delays or cancellations in the opening of new restaurants.
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We are also subject to federal and state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises, and may also apply substantive standards to the relationship between franchisor and franchisee, including limitations on the ability of franchisors to terminate franchises and alter franchise arrangements. We believe we are operating in compliance with applicable laws and regulations governing our operations.
We are subject to the federal Fair Labor Standards Act and various state laws governing such matters as minimum wages, exempt status classification, overtime, breaks and other working conditions. A significant number of our food service personnel are paid at rates related tobased on the federal and state minimum wage and, accordingly, increases in the minimum wage increase our labor costs. Federal and state laws may also require us to provide paid and unpaid leave to our employees, which could result in significant additional expense to us.
We are subject to certain guidelines under the Americans with Disabilities Act of 1990 and various state codes and regulations, which require restaurants to provide full and equal access to persons with physical disabilities. To comply with such laws and regulations, the cost of remodeling and developing restaurants has increased, principally due to the need to provide certain older restaurants with ramps, wider doors, larger restrooms and other conveniences.increased.
We are also subject to various federal, state and local laws regulating the discharge of materials into the environment. The cost of complying with these laws increases the cost of operating existing restaurants and developing new restaurants. Additional costs relate primarily to the necessity of obtaining more land, landscaping, and below surface storm drainage control and the cost of more expensive equipment necessary to decrease the amount of effluent emitted into the air, ground and ground.surface waters.
OurMany of our Qdoba restaurants andQuick Stuff convenience stores sell alcoholic beverages, which require licensing. The regulations governing licensing may impose requirements on licensees including minimum age of employees, hours of operation, advertising and handling of alcoholic beverages. The failure of aQuick Stuff convenience store Qdoba Mexican Grill restaurant to obtain or retain a license could adversely affect the store’s results of operations.
We have processes in place to monitor compliance with applicable laws and regulations governing alcoholic beverages.
Company Website
The Company’s primary website can be found at www.jackinthebox.com. We make available free of charge at this website (under the caption “Investors — SEC Filings — SEC Filings by Jack in the Box Inc.”) all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including our Annual Report onForm 10-K, our Quarterly Reports onForm 10-Q and our Current Reports onForm 8-K and amendments to those reports. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.operations.
Forward-Looking Statements
From time to time, we make oral and written forward-looking statements that reflect our current expectations regarding future results of operations, economic performance, financial condition and achievements of the Company. A forward-looking statement is neither a prediction nor a guarantee of future events. Whenever possible, we try to identify these forward-looking statements by using words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would,” and similar expressions. Certain forward-looking statements are included in thisForm 10-K, principally in the sections captioned “Business,” “Legal Proceedings,” the “Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including statements regarding our strategic plans and operating strategies. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, such expectations may prove to be materially incorrect due to known and unknown risks and uncertainties.
In some cases, information regarding certain important factors that could cause actual results to differ materially from any forward-looking statement appears together with such statement. In addition, the factors described under “Risk Factors” and “Critical Accounting Estimates”,Estimates,” as well as other possible factors not listed, could cause actual resultsand/or goals to differ materially from those expressed in forward-looking statements. As a result, investors should not place undue reliance on such forward-looking statements, which speak only as of the date of this report. The Company is under no obligation to update forward-looking statements, whether as a result of new information or otherwise.
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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 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 (“SEC”), 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.
Risks Related to the Food Service Industry. Food service businesses may be materially and adversely affected by changes in consumer tastes, national and regional economic and political conditions, and the impact onchanges in consumer eating habits, ofwhether based on new information regarding diet, nutrition and health.health, or otherwise. Recessionary economic conditions, including higher levels of unemployment, lower levels of consumer confidence and decreased consumer spending can reduce restaurant traffic and sales and impose practical limits on pricing. If recessionary economic conditions persist for an extended period of time, consumers may make long-lasting changes to their spending behavior. The performance of individual restaurants may be adversely affected by factors such as traffic patterns, demographics and the type, number and location of competing restaurants, as well as local regulatory, economic and political conditions, terrorist acts or government responses, weather conditions and catastrophic events such as earthquakes fires, floods or other natural disasters.
Multi-unit food service businesses such as ours can also be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality, fatnutritional content, illness or public health issues (such as epidemics or the prospect of a pandemic such as avian flu)pandemic), obesity, safety, injury or other health concerns with respectconcerns. Adverse publicity in these areas could damage the trust customers place in our brand. We have taken steps to certain foods.mitigate each of these risks. To minimize the risk of food-bornefoodborne illness, we have implemented a HACCP system for managing food safety and quality. Nevertheless, the risk of food-borne illnessthese risks cannot be completely eliminated. Any outbreak of such illness attributed to our restaurants or within the food service industry or any widespread negative publicity regarding our brands or the restaurant industry in general could cause a decline in our sales and have a material adverse effect on our financial condition and results of operations.
Dependence on frequent deliveries of fresh produce and groceries subjects food service businesses, such as ours, to the risk that shortages or interruptions in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality and cost of ingredients. In addition, unfavorableUnfavorable trends or developments concerning factors such as inflation, increased cost of food, labor, fuel, utilities, technology, insurance and employee benefits (including increases in hourly wages, workers’ compensation and other insurance costs and premiums), increases in the number and locations of competing restaurants, regional weather conditions and the availability of qualified, experienced management and hourly employees, may also adversely affect the food service industry in general. Because a significant number of our restaurants are predominantly company-operated, we may have greater exposure to operating cost issues than chains that are primarilymore heavily franchised. Exposure to these fluctuating costs, including anticipated increases in commodity costs, could negatively impact our margins. Changes in economic conditions affecting our customers could reduce traffic in some or all of our restaurants or impose practical limits on pricing, either of which could negatively impact profitability and have a material adverse effect on our financial condition and results of operations. Our continued success will depend in part on our ability to anticipate, identify and respond to changing conditions.
Restaurant sales and profitability are traditionally higher in the spring and summer months due to increased travel, improved weather conditions and other factors which affect the public’s dining habits. We cannot assure that our operating results will not be impacted by seasonal fluctuations in sales.
Risks Associated with Severe Weather and Climate Conditions. Foodservice businesses such as ours can be materially and adversely affected by severe weather conditions. Severe storms, hurricanes, prolonged drought or protracted heat waves and their aftermath, including flooding, mudslides or wildfires, can result in (i) lost restaurant sales when consumers stay home or are physically prevented from reaching the restaurants; (ii) property damage and lost sales when locations are forced to close for extended periods of time; (iii) interruptions in supply when vendors suffer damages or transportation is affected and (iv) increased costs if agricultural capacity is diminished or if insurance recoveries do not cover all our losses. If systemic or widespread adverse changes in climate or weather patterns occur, we could experience more of these losses, and such losses could have a material effect on our results of operations and financial condition.
Risks Associated with Suppliers. Dependence on frequent deliveries of fresh produce and other food products subjects food service businesses such as ours to the risk that shortages or interruptions in supply could adversely affect the availability, quality and cost of ingredients or require us to incur additional costs to obtain adequate
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supplies. Our deliveries of supplies may be affected by adverse weather conditions, natural disasters, supplier financial or solvency issues, product recalls, failure to meet our high standards for quality or other issues.
Reliance on Certain Geographic Markets. Because approximately 57% of all of our restaurants are located in the states of California and Texas, the economic conditions, state and local laws, government regulations, weather conditions and natural disasters affecting those states may have a material impact upon our results. While there are reports pointing towards U.S. economic recovery, many of our largest markets continue to experience adverse economic conditions, including higher levels of unemployment, lower levels of consumer confidence and decreased consumer spending. If economic recovery is slower and unemployment rates remain elevated, our sales results may be adversely affected.
Risks Associated with Development. We intend to grow by developing additional company-owned restaurants and through new restaurant development by franchisees. Development involves substantial risks, including the risk of (i)(i) the availability of financing for the Company and for franchisees at acceptable rates and terms, (ii) development costs exceeding budgeted or contracted amounts, (iii) delays in completion of construction, (iv) the inability to identify, or the unavailability of suitable sites on acceptable leasing or purchase terms, (v) developed properties not achieving desired revenue or cash flow levels once opened, (vi) the unpredicted negative impact of a new restaurant upon sales at nearby existing restaurants, (vii) competition for suitable development sites; (vii)sites, (viii) incurring substantial unrecoverable costs in the event a development project is abandoned prior to completion, (viii)(ix) the inability to obtain all required governmental permits, including, in appropriate cases, liquor licenses; (ix)licenses, (x) changes in governmental rules, regulations and interpretations (including interpretations of the requirements of the Americans with Disabilities Act,Act), and (x)(xi) general economic and business conditions.
Although we intend to manage our development activities to reduce such risks, we cannot assure you that present or future development will perform in accordance with our expectations. We cannot assure you that we will complete the development and construction of the facilities, or that any such development will be completed in a timely manner or within budget, or that any restaurants will generate our expected returns on investment. Our inability to expand in accordance with our plans or to manage our growth could have a material adverse effect on our results of operations and financial condition.
Reliance on Certain Geographic Markets. Because our business is regional, with approximately 60% of our restaurants located in the states of California and Texas, the economic conditions, state and local laws and government regulations and weather conditions affecting those states may have a material impact upon our results.
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Risks Related to Entering New Markets. Our growth strategy includes opening restaurants in markets where we have no existing locations. We cannot assure you that we will be able to successfully expand or acquire critical market presence for our brands in new geographicalgeographic markets, as we may encounter well-established competitors with substantially greater financial resources. We may be unable to find attractive locations, acquire name recognition, successfully market our products andor attract new customers. Competitive circumstances and consumer characteristics in new market segments and new geographicalgeographic markets may differ substantially from those in the market segments and geographicalgeographic markets in which we have substantial experience. It may also be difficult for us to recruit and retain qualified personnel to manage restaurants. We cannot assure you that we willcompany or franchise restaurants can be able tooperated profitably operate new company-operated or franchised restaurants in new geographicalgeographic markets. Management decisions to curtail or cease investment in certain locations or markets may result in impairment charges.
Competition. The restaurant industry is highly competitive with respect to price, service, location, personnel, advertising, brand identification and the type and quality of food,and therefood. There are many well-established competitors. Each of our restaurants competes directly and indirectly with a large number of national and regional restaurant chains, as well as with locally-ownedand/or independent quick-service restaurants, fast-casual restaurants, sandwich shops and similar types of businesses. The trend toward convergence in grocery, deli and restaurant services may increase the number of our competitors. Such increased competition could decrease the demand for our products and negatively affect our sales and profitability. Some of our competitors have substantially greater financial, marketing, operating and other resources than we have, which may give them a competitive advantage. Certain of our competitors have introduced a variety of new products and engaged in substantial price discounting in the past, and may adopt similar strategies in the future. Our promotional strategies or other actions during unfavorable competitive conditions may adversely affect our margins. We plan to take various steps in connection with our on-going “brand re-invention” strategy, including making improvements to the facility image at our restaurants, introducing new, higher-quality products, discontinuing certain menu items and implementing new service and training initiatives. However, there can be no assurance (i) that our facility improvements will foster increases in sales and yield the desired return on investment,investment; (ii) of the success of our new products, initiatives or our overall strategiesstrategies; or (iii) that competitive product offerings, pricing and promotions will not have an adverse effect upon our sales results and financial condition. We have an on-going “profit improvement program” which seeks to
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improve efficiencies and lower costs in all aspects of operations. Although we have been successful in improving efficiencies and reducing costs in the past, there is no assurance that we will be able to continue to do so in the future.
Risks Related to Increased Labor Costs. We have a substantial number of employees who are paid wage rates at or slightly above the minimum wage. As federal, state and statelocal minimum wage rates increase, our labor costs will increase. If competitive pressures or other factors prevent us from offsetting the increased costs by increases in prices, our profitability may decline. In addition, various proposals that would require employers to provide health insurance for all of their employees are currently being considered inthe Patient Protection and Affordable Care Act (the healthcare reform act) passed by Congress and various states. We offer access to healthcare benefits to our restaurant crew members. The imposition of anysigned into law in early 2010 imposes several new and costly mandates upon us, including the requirement that we provideoffer health insurance to all full time employees on terms materially different frombeginning in 2014. It is our existing programs would have a material adverse impact onbelief that our expenses incurred in providing such insurance will be substantially higher than our current expenses and could negatively affect our results of operations and financial condition.operations.
Risks Related to Advertising. Some of our competitors have greater financial resources, which enable them to purchase significantly more television and radio advertising than we are able to purchase. Should our competitors increase spending on advertising and promotion, should the cost of television or radio advertising increase or our advertising funds decrease for any reason, including implementation of reduced spending strategies, or should our advertising and promotion be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition. TheAlso, the trend toward fragmentation in the media favored by our target consumers may dilute the effectiveness ofposes challenges and risks for our marketing and advertising dollars.strategies. Failure to effectively tackle these challenges and risks could also have a materially adverse effect on our results.
Taxes. Our income tax provision is sensitive to expected earnings and, as those expectations change, our income tax provisions may vary fromquarter-to-quarter andyear-to-year. In addition, from time to time, we may take positions for filing our tax returns whichthat differ from the treatment for financial reporting purposes. The ultimate outcome of such positions could have an adverse impact on our effective tax rate.
Risks Related to Achieving Increased Franchise Ownership and to Franchise Operations.Reducing Operating Costs. At September 30, 2007,October 3, 2010, approximately 33%57% of theJack in the Box restaurants were franchised. Our plan to increase the percentage of franchisedfranchise restaurants by approximately 5% annually and to move towards a rangelevel of franchise ownership more
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closely aligned with that of the QSRquick service restaurant industry is subject to risks and uncertainties. We may not be able to identify franchisee candidates with appropriate experience and financial resources or to negotiate mutually acceptable agreements with them. Our franchisee candidates may not be able to obtain financing at acceptable rates and terms. Current credit market conditions may slow the rate at which we are able to refranchise. We may not be able to increase the percentage of franchisedfranchise restaurants at the annual rate we desire or achieve the ownership mix of franchise to company-operated restaurants that we desire. Our ability to sell franchises and to realize gains from such sales is uncertain. Sales of our franchises and the realization of gains from franchising may vary fromquarter-to-quarter andyear-to-year, and may not meet expectations. We anticipate that our operating costs will be reduced as the number of company-operated restaurants decreases. The ability to reduce our operating costs through increased franchise ownership is subject to risks and uncertainties, and we may not achieve reductions in costs at the rate we desire.
Risks Related to Franchise Operations.The opening and success of franchisedfranchise restaurants depends on various factors, including the demand for our franchises, and the selection of appropriate franchisee candidates, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the availability of financing and the financial and other capabilities of our franchisees and developers. See “Risks Associated with Our Development” and “Risks Related to Achieving Increased Franchise Ownership and Reducing Operating Costs” above. We cannot assure you that developers planning the opening of franchisedfranchise restaurants will have the business abilities or sufficient access to financial resources necessary to open the restaurants required by their agreements. As the number of franchisees increases, our revenues derived from royalties and rents at franchise restaurants will increase, as will the risk that earnings could be negatively impacted by defaults in the payment of royalties and rents. In addition, franchisee business obligations may not be limited to the operation of Jack in the Box restaurants, making them subject to business and financial risks unrelated to the operation of our restaurants. These unrelated risks could adversely affect a franchisee’s ability to make payments to us or to make payments on a timely basis. We cannot assure you that franchisees will successfully participate in our strategic initiatives or operate their restaurants in a manner consistent with our concept and standards. There are significant risks to our business if a franchisee, particularly one who
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operates a large number of restaurants, fails to adhere to our standards and projects an image inconsistent with our brand.
Risks Related to Loss of Key Personnel. We believe that our success will depend, in part, on our ability to attract and retain the services of skilled personnel, including key executives. The loss of services of any such personnel could have a material adverse effect on our business.
Risks Related to Government Regulations. See “Businessalso “Item 1. Business — Regulation”.Regulation.” The restaurant industry is subject to extensive federal, state and local governmental regulations. The increasing amount and complexity of regulations including those relating to the preparation, labeling, advertising and salemay increase both our costs of food and those relating to building and zoning requirements. The Company and its franchisees are also subject to licensing and regulation by state and local departments relating to health, sanitation and safety standards, and liquor licenses and to laws governing our relationships with employees, including minimum wage requirements, overtime, working conditions and work eligibility requirements. See “Risks Related to Increased Labor Costs” above. The inability to obtain or maintain such licenses or publicity resulting from actual or alleged violations of such laws could have an adverse effect on our results of operations. We are also subject to federal regulation and certain state laws, which govern the offer and sale, termination and renewal of franchises. Many state franchise laws impose substantive requirements on franchise agreements, including limitations on noncompetition provisions and on provisions concerning the termination or nonrenewal of a franchise. Some states require that certain materials be registered before franchises can be offered or sold in that state. The failure to obtain or retain licenses or approvals to sell franchises could adversely affect uscompliance and our franchisees.exposure to regulatory claims. We are subject to consumerregulations including but not limited to those related to:
| | |
| • | The preparation, labeling, advertising and sale of food; |
| • | Building and zoning requirements; |
| • | Employee healthcare (we are currently assessing the potential costs of new federal healthcare legislation); |
| • | Health, sanitation and safety standards; |
| • | Liquor licenses; |
| • | Labor and employment, including our relationships with employees and work eligibility requirements; |
| • | The registration, offer, sale, termination and renewal of franchises; |
| • | Consumer protection and the security of information. The costs of compliance, including increased investment in technology in order to protect such information, may negatively impact our margins; |
| • | Climate change, including the potential impact of greenhouse gases, water consumption, or a tax on carbon emissions. |
Risks Related to Computer Systems and other lawsInformation Technology. We rely on computer systems and regulations governing theinformation technology to conduct our business. A material failure or interruption of service or a breach in security of information. The costsour computer systems could cause reduced efficiency in operations, loss of compliance, including increaseddata and business interruptions. Significant capital investment in technology in ordercould be required to protect such information, may negatively impact our margins. Anyrectify these problems. In addition, any security breach involving our point of sale or other systems could result in loss of consumer confidence and potential costs associated with consumer fraud. Changes in, and the cost of compliance with, government regulations could have a material adverse effect on our operations.
Risks Related to Interest Rates. We have exposure to changes in interest rates based on our financing, investing and cash management activities. Changes in interest rates could materially impact our profitability.
Risks Related to Availability of Credit. To the extent that banks in our revolving credit facility become insolvent, this could limit our ability to borrow to the full level of our facility.
Risks Related to the Failure of Internal Controls. We maintain a documented system of internal controls, which is reviewed and monitored by an Internal ControlsControl Committee and tested by the Company’s full time Internal Audit Department. The Internal Audit Department reports to the Audit Committee of the Board of Directors. We believe we have a well-designed system to maintain adequate internal controls on the business,business; however, we cannot be certain that our controls will be adequate in the future or that adequate controls will be effective in preventing errors or fraud. If our internal controls are ineffective, we may not be able to accurately report our financial results or prevent fraud. Any failures in the effectiveness of our internal controls could have a material adverse effect on our operating results or cause us to fail to meet reporting obligations.
Environmental Risks and Regulations. As is the case with any owner or operator of real property, we are subject to a variety of federal, state and local governmental regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations. We have limited environmental liability insurance only covering sites on which we operate fuel stations. In all other areas, we do not have environmental liability insurance; nor do we maintain a reserve to cover such events. We have engaged and may engage in real estate development projects and own or lease
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several parcels of real estate on which our restaurants are located. We are unaware of any significant hazards on properties we own or have owned, or operate or have operated, the remediation of which would result in material liability for the Company. Accordingly, we do not have environmental liability insurance, nor do we maintain a reserve to cover such events. In the event of the determination of contamination on such properties, the Company, as owner or operator, could be held liable for severe penalties and costs of remediation. We also operate motor vehicles and
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warehouses and handle various petroleum substances and hazardous substances, and we are not aware of any current material liability related thereto.
Risks Related to Leverage. The Company has a $565.0$600 million credit facility, which is comprised of a $150.0$400 million revolving credit facility and a $415.0$200 million term loan. Increased leverage resulting from borrowings under the credit facility could have certain material adverse effects on the Company, including but not limited to the following: (i) our credit rating may be reduced; (ii) 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; (iii)(ii) a substantial portion of our cash flows could be required for debt service and, as a result, might not be available for our operations or other purposes; (iv)(iii) 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; (v)(iv) our ability to withstand competitive pressures may be decreased; and (vi)(v) our level of indebtedness may make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business, regulatory and economic conditions. Our ability to repay expected borrowings under our credit facility and to meet our other debt or contractual obligations (including compliance with applicable financial covenants) will depend upon our future performance and our cash flows from operations, both of which are subject to prevailing economic conditions and financial, business and other known and unknown risks and uncertainties, certain of which are beyond our control.
Risks of Market Volatility. Many factors affect the trading price of our stock, including factors over which we have no control, such as reports on the economy or the price of commodities, as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business. In addition to investor expectations about our prospects, trading activity in our stock can reflect the portfolio strategies and investment allocation changes of institutional holders and non-operating initiatives such as a share repurchase program. Any failure to meet market expectations whether for sales, growth rates, refranchising goals, earnings per share or other metrics could cause our share price to drop.
Risks of Changes in Accounting Policies and Assumptions. Changes in accounting standards, policies or related interpretations by auditors or regulatory entities may negatively impact our results. Many accounting standards require management to make subjective assumptions and estimates, such as those required for stock compensation, tax matters, pension costs, litigation, insurance accruals and asset impairment calculations. Changes in those underlying assumptions and estimates could significantly change our results.
Litigation. Litigation trends and potential class actions by consumers and shareholders, and the costs and other effectsLike any public company, we are subject to a wide variety of legal claims by employees, consumers, franchisees, customers, vendors, stockholdersshareholders and others including potential class action claims. The costs associated with the defense, settlement of thoseand/or potential judgments related to such claims may negatively impactcould adversely affect our results.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
AsThe following table sets forth information regarding our Jack in the Box and Qdoba restaurant properties as of September 30, 2007, of our 2,132 Jack inthe Box and 395 Qdoba restaurants, we owned 817 restaurant buildings, including 606 located on leased land. In addition, we leased both the land and building for 1,291 restaurants, including 358 restaurants operated by franchisees. Also at that date, franchisees directly owned or leased 419 restaurants.October 3, 2010:
| | | | | | | | | | | | | |
| | Number of Restaurants at September 30, 2007 | | |
| | Company-
| | | | | | | | | | | | | | | | | |
| | Operated | | Franchised | | Total | | | Company-Operated | | Franchised | | Total | |
|
Company-owned restaurant buildings: | | | | | | | | | | | | | | | | | | | | | | | | |
On Company-owned land | | | 140 | | | | 71 | | | | 211 | | |
On company-owned land | | | | 101 | | | | 131 | | | | 232 | |
On leased land | | | 453 | | | | 153 | | | | 606 | | | | 500 | | | | 330 | | | | 830 | |
| | | | | | | | | | | | | | |
Subtotal | | | 593 | | | | 224 | | | | 817 | | | | 601 | | | | 461 | | | | 1,062 | |
Company-leased restaurant buildings on leased land | | | 933 | | | | 358 | | | | 1,291 | | | | 543 | | | | 637 | | | | 1,180 | |
Franchise directly-owned or directly-leased restaurant buildings | | | — | | | | 419 | | | | 419 | | | | - | | | | 489 | | | | 489 | |
| | | | | | | | | | | | | | |
Total restaurant buildings | | | 1,526 | | | | 1,001 | | | | 2,527 | | | | 1,144 | | | | 1,587 | | | | 2,731 | |
| | | | | | | | | | | | | | |
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Our leases generally provide for fixed rental payments (withcost-of-living index adjustments) plus real estate
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taxes, insurance and other expenses. In addition, less than 20% of the leases provide for contingent rental payments of between 1% and 10%11% of the restaurant’s gross sales once certain thresholds are met. We have generally been able to renew our restaurant leases as they expire at then-current market rates. The remaining terms of ground leases range from approximately one year to 4758 years, including optional renewal periods. The remaining lease terms of our other leases range from approximately one year to 5047 years, including optional renewal periods. At September 30, 2007,October 3, 2010, our restaurant leases had initial terms expiring as follows:
| | | | | | | | |
| | Number of Restaurants | |
| | Ground
| | | Land and
| |
| | Leases | | | Building Leases | |
|
2008 – 2012 | | | 198 | | | | 352 | |
2013 – 2017 | | | 67 | | | | 382 | |
2018 – 2022 | | | 191 | | | | 451 | |
2023 and later | | | 150 | | | | 106 | |
| | | | | | | | |
| | Number of Restaurants | |
| | | | | Land and
| |
| | Ground
| | | Building
| |
Fiscal Year | | Leases | | | Leases | |
|
2011 – 2015 | | | 157 | | | | 377 | |
2016 – 2020 | | | 176 | | | | 580 | |
2021 – 2025 | | | 176 | | | | 306 | |
2026 and later | | | 133 | | | | 105 | |
Our principal executive offices are located in San Diego, California in an owned facility of approximately 150,000 square feet. We also own our 70,000 square foot Innovation Center and approximately four acres of undeveloped land directly adjacent to it. Qdoba’s corporate support center is located in a leased facility in Wheat Ridge, Colorado. We also lease seven distribution centers, with remaining terms ranging from fourseven to 1815 years, including optional renewal periods.
Certain of our personal property is pledged as collateral under our credit agreement and certain of our real property may be pledged as collateral in the event of a ratings downgrade as defined in the credit agreement.
The Company is subject to normal and routine litigation. In the opinion of management, based in part on the advice of legal counsel, the ultimate liability from all pending legal proceedings, asserted legal claims and known potential legal claims should not materially affect our operating results, financial position or liquidity.
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ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
A special meeting of stockholders was held September 21, 2007, at which the following matter was voted as indicated:
| | | | | | | | | | | | |
| | For | | Against | | Abstain |
1. To approve an amendment to Jack in the Box Inc.’s Restated Certificate of Incorporation, as amended, to increase the total number of shares of capital stock that Jack in the Box Inc. is authorized to issue from 90,000,000 to 190,000,000 by increasing the total number of shares of common stock from 75,000,000 to 175,000,000. | | | 28,184,027 | | | | 995,607 | | | | 16,943 | |
The above numbers have not been adjusted to reflect the two-for-one stock split effected on October 15, 2007.
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information. Our common stock is traded on the Nasdaq Global Select Market under the symbol “JACK.” The following table sets forth the high and low sales prices for our common stock during the fiscal quarters indicated, as reported on the New York Stock Exchange and NASDAQ — Composite Transactions and
15
has been adjusted to reflect the two-for-one split of our common stock, that was effected in the form of a 100% stock dividend on October 15, 2007:Transactions:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12 Weeks Ended | | 16 Weeks Ended
| | | 13 Weeks Ended
| | 12 Weeks Ended | | 16 Weeks Ended
|
| | Sept. 30, 2007 | | July 8, 2007 | | Apr. 15, 2007 | | Jan. 21, 2007 | | | Oct. 3, 2010 | | July 4, 2010 | | Apr. 11, 2010 | | Jan. 17, 2010 |
|
High | | $ | 36.85 | | | $ | 39.77 | | | $ | 36.07 | | | $ | 32.30 | | | $ | 22.54 | | | $ | 26.37 | | | $ | 25.04 | | | $ | 21.04 | |
Low | | | 26.50 | | | | 32.60 | | | | 30.03 | | | | 25.83 | | | | 18.42 | | | | 19.05 | | | | 19.50 | | | | 17.84 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 12 Weeks Ended | | 16 Weeks Ended
| | | 12 Weeks Ended | | 16 Weeks Ended
|
| | Oct. 1, 2006 | | July 9, 2006 | | Apr. 16, 2006 | | Jan. 22, 2006 | | | Sept. 27, 2009 | | July 5, 2009 | | Apr. 12, 2009 | | Jan. 18, 2009 |
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High | | $ | 26.99 | | | $ | 23.16 | | | $ | 22.12 | | | $ | 18.42 | | | $ | 23.87 | | | $ | 28.35 | | | $ | 25.78 | | | $ | 23.09 | |
Low | | | 18.93 | | | | 18.99 | | | | 17.40 | | | | 14.00 | | | | 19.87 | | | | 21.82 | | | | 16.59 | | | | 11.82 | |
Dividends. We did not pay any cash or other dividends during the last two fiscal years. Effective October 15, 2007, a stock split was effected in the form of a stock dividend, with shareholders receiving an additional share of stock for each share held. Weyears and do not anticipate paying any other dividends in the foreseeable future. Our credit agreement provides for a remaining aggregate amount of $197.0 million for the repurchase of our common stock and $50.0$500 million for the potential payment of cash dividends.dividends and stock repurchases, subject to certain limitations based on our leverage ratio as defined in our credit agreement.
Stock Repurchases. On September 16, 2005,In November 2007, the Board approved a program to repurchase up to $200 million in shares of Directorsour common stock over three years expiring November 9, 2010. As of October 3, 2010, the aggregate remaining amount authorized and available under this program for repurchase was $3.0 million. During fiscal 2010, we repurchased 4.9 million shares for a $150.0 million stock repurchase program through the endtotal of fiscal year 2008, which was announced September 21, 2005.$97.0 million. The following table summarizes shares repurchased pursuant to this program during the quarter ended September 30, 2007:October 3, 2010:
| | | | | | | | | | | | | | | | |
| | | | | | | | (c)
| | | | |
| | | | | | | | Total Number of
| | | (d)
| |
| | (a)
| | | (b)
| | | Shares Purchased
| | | Maximum Dollar
| |
| | Total Number
| | | Average
| | | as Part of Publicly
| | | Value That may
| |
| | of Shares
| | | Price Paid
| | | Announced
| | | yet be Purchased
| |
| | Purchased | | | per Share | | | Programs | | | Under the Programs | |
|
July 9, 2007 — August 8, 2007 | | | — | | | $ | — | | | | — | | | $ | 100,000,000 | |
August 9, 2007 — September 8, 2007 | | | 1,582,881 | | | | 63.15 | | | | 1,582,881 | | | | — | |
September 9, 2007 — September 30, 2007 | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | | 1,582,881 | | | $ | 63.15 | | | | 1,582,881 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | (c)
| | | | |
| | | | | | | | Total number
| | | (d)
| |
| | | | | | | | of shares
| | | Maximum dollar
| |
| | (a)
| | | (b)
| | | purchased as
| | | value that may
| |
| | Total number
| | | Average
| | | part of publicly
| | | yet be purchased
| |
| | of shares
| | | price paid
| | | announced
| | | under
| |
| | purchased | | | per share | | | programs | | | these programs | |
|
| | | | | | | | | | | | | | $ | 50,000,479 | |
July 5, 2010 – August 1, 2010 | | | - | | | | - | | | | - | | | | 50,000,479 | |
August 2, 2010 – August 29, 2010 | | | 1,979,287 | | | $ | 19.82 | | | | 1,979,287 | | | | 10,718,098 | |
August 30, 2010 – October 3, 2010 | | | 366,368 | | | | 21.04 | | | | 366,368 | | | | 3,000,485 | |
| | | | | | | | | | | | | | | | |
Total | | | 2,345,655 | | | $ | 20.01 | | | | 2,345,655 | | | | | |
| | | | | | | | | | | | | | | | |
Shares purchased and the average price paid per share have not been adjusted for the stock split noted above as no stock dividend was paid with respect to such treasury shares.
OnIn November 9, 2007,2010, the Board of Directors authorizedapproved a new $200.0 million program to repurchase, within the next year, up to $100.0 million in shares of our common stock at prevailing market prices, in the open market or in private transactions, from time to time at management’s discretion, over the next three years.stock.
Holders.Stockholders. As of September 30, 2007,October 3, 2010, there were 537638 stockholders of record.
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Securities Authorized for Issuance Under Equity Compensation Plans. The following table summarizes the
17
equity compensation plans under which Company common stock may be issued as of September 30, 2007.October 3, 2010. Stockholders of the Company approved all plans.
| | | | | | | | | | | | |
| | | | | | | | (c)
| |
| | | | | (b)
| | | Number of Securities
| |
| | (a)
| | | Weighted-
| | | Remaining for Future
| |
| | Number of Securities to be
| | | Average
| | | Issuance Under Equity
| |
| | Issued Upon Exercise of
| | | Exercise Price
| | | Compensation Plans
| |
| | Outstanding Options,
| | | of Outstanding
| | | (Excluding Securities
| |
| | Warrants and Rights(1) | | | Options(1) | | | Reflected in Column (a))(2) | |
|
Equity compensation plans approved by security holders | | | 5,594,333 | | | $ | 18.19 | | | | 2,982,400 | |
| | | | | | | | | | | | |
| | | | (b) Weighted-
| | |
| | | | average
| | (c) Number of securities
|
| | (a) Number of securities to
| | exercise price
| | remaining for future issuance
|
| | be issued upon exercise of
| | of
| | under equity compensation
|
| | outstanding options, warrants
| | outstanding
| | plans (excluding securities
|
| | and rights (1) | | options (1) | | reflected in column (a))(2) |
|
Equity compensation plans approved by security holders (3) | | | 5,503,369 | | | $ | 21.81 | | | | 2,371,672 | |
| | |
(1) | | Includes shares issuable in connection with our outstanding stock options, performance-vested stock awards, nonvested stock awards and units, and non-management director deferred stock equivalents. The weighted-average exercise price in column (b) includes the weighted-average exercise price of stock options only. |
|
(2) | | Includes 188,752143,072 shares that are reserved for issuance under our Employee Stock Purchase Plan. |
|
(3) | | For a description of our equity compensation plans, refer to Note 12,Share-Based Employee Compensation, of the notes to the consolidated financial statements. |
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Performance Graph. The following graph compares the cumulative return to holders of the Company’s common stock at September 30th of each year (except 20042010 when the comparison date is October 3 due to the fifty-third week in fiscal year 2004)2010) to the yearly weighted cumulative return of a Restaurant Peer Group Index and to the Standard & Poor’s (“S&P”) 500 Index for the same period. In 2007, we changed the companies comprising our Restaurant Peer Group Index to account for changes in the industry and our business. The table below includes the cumulative returns for both our old and new restaurant peer groups.
The below comparison assumes $100 was invested on September 30, 20022005 in the Company’s common stock and in each of the comparison groups,group and assumes reinvestment of dividends. The Company paid no dividends during these periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2002 | | | | 2003 | | | | 2004 | | | | 2005 | | | | 2006 | | | | 2007 | |
Jack in the Box Inc. | | | $ | 100 | | | | $ | 78 | | | | $ | 139 | | | | $ | 131 | | | | $ | 229 | | | | $ | 284 | |
S & P 500 Index | | | $ | 100 | | | | $ | 124 | | | | $ | 142 | | | | $ | 159 | | | | $ | 176 | | | | $ | 205 | |
Restaurant Peer Group(1) | | | $ | 100 | | | | $ | 128 | | | | $ | 145 | | | | $ | 148 | | | | $ | 176 | | | | $ | 171 | |
Restaurant Peer Group(2) | | | $ | 100 | | | | $ | 104 | | | | $ | 107 | | | | $ | 111 | | | | $ | 118 | | | | $ | 117 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005 | | | | 2006 | | | | 2007 | | | | 2008 | | | | 2009 | | | | 2010 | |
Jack in the Box Inc. | | | $ | 100 | | | | $ | 174 | | | | $ | 217 | | | | $ | 141 | | | | $ | 137 | | | | $ | 144 | |
S&P 500 Index | | | $ | 100 | | | | $ | 111 | | | | $ | 129 | | | | $ | 101 | | | | $ | 94 | | | | $ | 103 | |
Restaurant Peer Group (1) | | | $ | 100 | | | | $ | 121 | | | | $ | 141 | | | | $ | 138 | | | | $ | 143 | | | | $ | 193 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | The old Restaurant Peer Group Index is comprised ofJack in the following companies: Applebee’s International,Box Inc.; Bob Evans Farms, Inc.; Brinker International, Inc.; CBRL Group, Inc.; CKE Restaurants, Inc.; Luby’s, Inc.; Papa John’s International, Inc.; Ruby Tuesday, Inc.; Ryan’s Family Steakhouse, Inc. and Sonic Corp. |
|
(2) | | The new Restaurant Peer Group Index is comprised of the following companies: Brinker International, Inc.; CBRL Group, Inc.; Cheesecake Factory Inc.; CKE Restaurants,Cracker Barrel Old Country Store, Inc.; Darden Restaurants Inc.; DineEquity, Inc.; McDonalds Corp.; Panera Bread Company; PF ChangChang’s China Bistro Inc.; Ruby Tuesday, Inc.; Sonic Corp.; Starbucks Corp.; The Cheesecake Factory Inc.; and Wendy’s InternationalYum! Brands Inc. |
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| |
ITEM 6. | SELECTED FINANCIAL DATA |
Our fiscal year is 52 or 53 weeks, ending the Sunday closest to September 30. Fiscal year 2004All years presented include 52 weeks, except for 2010 which includes 53 weeks; all otherweeks. The selected financial data reflects Quick Stuff as discontinued operations for fiscal years include 52 weeks.2006 through 2009. The following selected financial data of Jack in the Box Inc. for each fiscal year was extracted or derived from our audited financial statements.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | |
| | 2007 | | | 2006 | | | 2005 | | | 2004(1) | | | 2003 | |
| | (In thousands, except per share data) | |
|
Statements of Earnings Data: | | | | | | | | | | | | | | | | | | | | |
Total revenues(2) | | $ | 2,875,978 | | | $ | 2,723,603 | | | $ | 2,480,214 | | | $ | 2,302,547 | | | $ | 2,030,236 | |
| | | | | | | | | | | | | | | | | | | | |
Costs of revenues | | | 2,401,673 | | | | 2,283,135 | | | | 2,078,121 | | | | 1,913,285 | | | | 1,695,709 | |
Selling, general and administrative expenses | | | 293,881 | | | | 300,819 | | | | 273,821 | | | | 264,257 | | | | 228,141 | |
Gains on sale of company-operated restaurants(2) | | | (39,261 | ) | | | (42,046 | ) | | | (23,334 | ) | | | (17,918 | ) | | | (26,562 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total operating costs and expenses | | | 2,656,293 | | | | 2,541,908 | | | | 2,328,608 | | | | 2,159,624 | | | | 1,897,288 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from operations | | | 219,685 | | | | 181,695 | | | | 151,606 | | | | 142,923 | | | | 132,948 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense, net(3) | | | 23,354 | | | | 12,075 | | | | 13,402 | | | | 25,419 | | | | 23,346 | |
Income taxes | | | 70,027 | | | | 60,545 | | | | 46,667 | | | | 42,820 | | | | 39,518 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings before cumulative effect of accounting change | | $ | 126,304 | | | $ | 109,075 | | | $ | 91,537 | | | $ | 74,684 | | | $ | 70,084 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings per Share and Share Data(4): | | | | | | | | | | | | | | | | | | | | |
Earnings per share before cumulative effect of accounting change: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.93 | | | $ | 1.57 | | | $ | 1.28 | | | $ | 1.03 | | | $ | 0.96 | |
Diluted | | $ | 1.88 | | | $ | 1.52 | | | $ | 1.24 | | | $ | 1.01 | | | $ | 0.95 | |
Weighted-average shares outstanding — Diluted(5) | | | 67,263 | | | | 71,834 | | | | 73,876 | | | | 73,923 | | | | 73,936 | |
Market price at year-end | | $ | 32.42 | | | $ | 26.09 | | | $ | 14.95 | | | $ | 16.16 | | | $ | 8.53 | |
Other Operating Data: | | | | | | | | | | | | | | | | | | | | |
Jack in the Box change in same-store sales | | | 6.1 | % | | | 4.8 | % | | | 2.4 | % | | | 4.6 | % | | | (1.7 | )% |
Restaurant operating margin | | | 17.9 | % | | | 17.5 | % | | | 16.9 | % | | | 17.0 | % | | | 16.1 | % |
SG&A rate | | | 10.2 | % | | | 11.0 | % | | | 11.0 | % | | | 11.5 | % | | | 11.2 | % |
Capital expenditures | | $ | 154,182 | | | $ | 150,032 | | | $ | 126,134 | | | $ | 120,065 | | | $ | 111,872 | |
Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,382,822 | | | $ | 1,520,461 | | | $ | 1,337,986 | | | $ | 1,324,666 | | | $ | 1,142,481 | |
Long-term debt(6) | | | 427,516 | | | | 254,231 | | | | 290,213 | | | | 297,092 | | | | 290,746 | |
Stockholders’ equity(7) | | | 414,557 | | | | 710,885 | | | | 565,372 | | | | 553,399 | | | | 450,434 | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | |
| | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | |
| | (in thousands, except per share data) | |
|
Statements of Earnings Data: | | | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 2,297,531 | | | $ | 2,471,096 | | | $ | 2,539,561 | | | $ | 2,513,431 | | | $ | 2,381,244 | |
Total operating costs and expenses | | | 2,230,609 | | | | 2,318,470 | | | | 2,390,022 | | | | 2,334,526 | | | | 2,244,383 | |
Gains on the sale of company-operated restaurants, net | | | (54,988 | ) | | | (78,642 | ) | | | (66,349 | ) | | | (38,091 | ) | | | (40,464 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total operating costs and expenses, net | | | 2,175,621 | | | | 2,239,828 | | | | 2,323,673 | | | | 2,296,435 | | | | 2,203,919 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from operations | | | 121,910 | | | | 231,268 | | | | 215,888 | | | | 216,996 | | | | 177,325 | |
| | | | | | | | | | | | | | | | | | | | |
Interest expense, net | | | 15,894 | | | | 20,767 | | | | 27,428 | | | | 23,335 | | | | 12,056 | |
Income taxes | | | 35,806 | | | | 79,455 | | | | 70,251 | | | | 68,982 | | | | 58,845 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 70,210 | | | $ | 131,046 | | | $ | 118,209 | | | $ | 124,679 | | | $ | 106,424 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings per Share and Share Data: | | | | | | | | | | | | | | | | | | | | |
Earnings per share from continuing operations: | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 1.27 | | | $ | 2.31 | | | $ | 2.03 | | | $ | 1.91 | | | $ | 1.52 | |
Diluted | | $ | 1.26 | | | $ | 2.27 | | | $ | 1.99 | | | $ | 1.85 | | | $ | 1.48 | |
Weighted-average shares outstanding – Diluted (1) | | | 55,843 | | | | 57,733 | | | | 59,445 | | | | 67,263 | | | | 71,834 | |
Market price at year-end | | $ | 21.47 | | | $ | 20.07 | | | $ | 22.06 | | | $ | 32.42 | | | $ | 26.09 | |
Other Operating Data: | | | | | | | | | | | | | | | | | | | | |
Jack in the Box restaurants: | | | | | | | | | | | | | | | | | | | | |
Company-operated average unit volume (3) | | $ | 1,297 | | | $ | 1,420 | | | $ | 1,439 | | | $ | 1,430 | | | $ | 1,358 | |
Change in company-operated same-store sales (4) | | | (8.6 | )% | | | (1.2 | )% | | | 0.2% | | | | 6.1% | | | | 4.8% | |
Change in franchise-operated same-store sales (4) | | | (7.8 | )% | | | (1.3 | )% | | | 0.1% | | | | 5.3% | | | | 3.5% | |
Change in system same-store sales (4) | | | (8.2 | )% | | | (1.3 | )% | | | 0.2% | | | | 5.8% | | | | 4.5% | |
Qdoba restaurants: | | | | | | | | | | | | | | | | | | | | |
System average unit volume (3) | | $ | 923 | | | $ | 905 | | | $ | 946 | | | $ | 953 | | | $ | 933 | |
Change in system same-store sales(4) | | | 2.8% | | | | (2.3 | )% | | | 1.6% | | | | 4.6% | | | | 5.9% | |
SG&A rate | | | 10.6% | | | | 10.5% | | | | 10.4% | | | | 11.6% | | | | 12.5% | |
Capital expenditures related to continuing operations | | $ | 95,610 | | | $ | 153,500 | | | $ | 178,605 | | | $ | 148,508 | | | $ | 135,022 | |
Balance Sheet Data (at end of period): | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 1,407,092 | | | $ | 1,455,910 | | | $ | 1,498,418 | | | $ | 1,374,690 | | | $ | 1,513,499 | |
Long-term debt | | | 352,630 | | | | 357,270 | | | | 516,250 | | | | 427,516 | | | | 254,231 | |
Stockholders’ equity (2) | | | 520,463 | | | | 524,489 | | | | 457,111 | | | | 409,585 | | | | 706,633 | |
| | |
(1) | | Fiscal 2004 includes 53 weeks. All other periods presented include 52 weeks. The additional week in fiscal 2004 added approximately $0.01 per diluted share to net earnings.Weighted-average shares reflect the impact of common stock repurchases under Board-approved programs. |
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| | |
(2) | | Effective fiscal 2007, we are reporting gains as a discrete line item within operating costs and expenses, rather than within revenues, as previously presented. Prior year’s gains on sale of company-operated restaurants to franchisees have been reclassified to conform with the current year presentation. |
|
(3) | | Fiscal year 2004 includes a $9.2 million charge related to the refinancing of our term loan and the early redemption of our senior subordinated notes. |
|
(4) | | Earnings per share data reflects a two-for-one stock split effected in October 2007. |
|
(5) | | Fiscal year 2007 includes the weighted impact of 7.1 million shares repurchased through our tender offer and share repurchase programs. The 7.1 million shares repurchased has not been adjusted for the stock split as treasury shares were not subject to the two-for-one split. |
|
(6) | | Fiscal year 2007 reflects higher bank borrowings associated with our new credit facility entered into in the first quarter. |
|
(7) | | Fiscal year 2007 includes a reduction in stockholders’ equity of $363.4 million related to shares repurchased and retired during the year. |
|
(3) | | 2010 average unit volume is adjusted to exclude the 53rd week for the purpose of comparison to prior years. |
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(4) | | Same-store sales, sales growth and average unit volume presented on a system-wide basis include company and franchise restaurants. Franchise sales represent sales at all franchise restaurants and are revenues to our franchisees. We do not record franchise sales as revenues; however, our royalty revenues are calculated based on a percentage of franchise sales. We believe franchise and system sales growth information is useful to investors as a significant indicator of the overall strength of our business as it incorporates our significant revenue drivers which are company and franchise same-store sales as well as net unit development. Company, franchise and system same-store sales growth includes the results of all restaurants that have been open more than one year. |
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| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
For an understanding of the significant factors that influenced our performance during the past three fiscal years, we believe our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and related Notes included in this Annual Report as indexed onpage F-1.
All comparisonsComparisons under this heading among 2007, 2006 and 2005 refer to the 53-week period ended October 3, 2010 and the 52-week periods ended September 30, 2007, October 1, 2006,27, 2009 and October 2, 2005,September 28, 2008 for 2010, 2009 and 2008, respectively, unless otherwise indicated.
Our MD&A consists of the following sections:
| | |
| • | Overview — a general description of our business, the quick-service dining segment of the restaurant industry and fiscal 20072010 highlights. |
|
| • | Financial reporting changes— a summarydiscussion of significant financial statement reclassifications, adjustments and new accounting pronouncements adopted.changes in presentation. |
|
| • | Results of operations— an analysis of our consolidated statements of earnings for the three years presented in our consolidated financial statements. |
|
| • | Liquidity and capital resources— an analysis of cash flows including capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity, and the impact of inflation. |
|
| • | Discussion of critical accounting estimates— a discussion of accounting policies that require critical judgments and estimates. |
|
| • | NewFuture application of accounting pronouncementsprinciples— a discussion of new accounting pronouncements, dates of implementation and impact on our consolidated financial position or results of operations, if any. |
OVERVIEW
As of September 30, 2007, Jack in the Box Inc. (the “Company”) owned, operated, and franchised 2,132 Jack inthe Box quick-service restaurants and 395 Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants, primarily in the western and southern United States.
Our primary source of revenue is from retail sales at Jack in the Box and Qdoba company-operated restaurants. We also derive revenue from Jack in the Box and Qdoba franchise restaurants, including royalties (based upon a percent of sales), rents, franchise fees and distribution sales of food and packaging to Jack inthe Box and Qdoba franchises, retail sales from fuel and convenience stores (“Quick Stuff”),and revenue from franchisees including royalties, based upon a percent of sales, franchise
20
fees and rents.commodities. In addition, we recognize gains from the sale of company-operated restaurants to franchisees, which are presented as a reduction of operating costs and expenses, net in the accompanying consolidated statements of earnings.
The quick-service restaurant industry is complex and challenging. Challenges presentlycurrently facing the sector include higher levels of consumer expectations, intense competition with respect to market share, restaurant locations, labor, menu and product development, changes in the economy, including the current recessionary environment, high rates of unemployment, costs of commodities and trends for healthier eating.
To address these challenges and others, management has developed a strategic plan focused on four key initiatives. The first initiative is a growth strategy that includes opening new restaurants and increasing same-store sales. The second initiative is a holistic reinvention of theJack in the Box brand through menu innovation, upgrading guest service and re-imagingJack in the Box restaurant facilities to reflect the personality of Jack — the chain’s fictional founder and popular spokesman. The third strategic initiative is to expand franchising — through new restaurant development and the sales of company-operated restaurants to franchisees — to generate higher returns and higher margins, while mitigating business-cost and investment risks. The fourth initiative is to improve our business model as we transition to becoming a predominantly franchised restaurant chain.
The following summarizes the most significant events occurring in fiscal year 2007:2010 and certain trends compared to prior years:
| | |
| • | Increase in Restaurant Sales. Progress made Sales at Jack in reinventing the Jack inthe Box brand through menu upgrades, programs aimed at improving the guest experience through service initiatives and enhancements to the restaurant environment contributed to sales growth at Jack inthe Box restaurants increasing both the average check and number of transactions. This positive sales momentum resulted in increases in “same-store” sales (thoseBox company-operated restaurants open more than one year)year (“same-store sales”) decreased 8.6% in fiscal 2010 and 1.2% in 2009. Same-store sales at franchise-operated restaurants decreased 7.8% in fiscal 2010 and 1.3% in 2009. System same-store sales at Qdoba increased 2.8% versus a decrease of 6.1%2.3% last fiscal year. Sales at Jack inthe Box company-operated restaurants.Jack in the Box restaurants continue to be impacted by high unemployment rates in our major markets for our key customer demographics. |
|
| • | Re-Image Program.Commodity Costs. Pressures from higher commodity costs, which negatively impacted our business in fiscal 2009, moderated somewhat in 2010. Overall commodity costs at Jack in the Box restaurants decreased approximately 1.4% after increasing approximately 2.0% in 2009, as lower costs for beef, shortening, poultry and bakery were partially offset by higher costs for produce and pork. |
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| | |
| • | Restaurant Closures. In 2007,the fourth quarter, we continuedclosed 40 underperforming Jack in the Box restaurants located primarily in the Southeast and Texas resulting in a charge of $18.5 million, net of taxes, or $0.33 per diluted share. These closures are expected to re-image our Jack inthe Box restaurants. In fiscal 2007, we re-imaged 187 restaurantshave a positive impact on future earnings and franchisees re-imaged another 13 locations with a comprehensive program that includes a complete redesign of the dining room and common areas bringing the total number of re-imaged restaurants to approximately 350 at September 30, 2007. According to a proprietary brand image and loyalty study, the newly re-imaged restaurants are expanding their customer base, generating more guest visits and gaining more loyal guests.cash flows. |
|
| • | Franchising Program.New Unit Development. We continued to make progress ongrow our strategic initiative to expand franchising throughbrands with the opening of new restaurant developmentcompany-operated and sales of company-operated restaurants to franchisees.franchise restaurants. In 2007,2010, we refranchised 76 Jack inthe Box restaurantsopened 46 Jack in the Box locations, including several in our newer markets, and franchisees opened 16 new restaurants. At September 30, 2007, approximately 33% of our Jack inthe Box restaurants were franchised. Additionally, we signed franchise development agreements to expand the Jack inthe Box brand into three new contiguous markets.36 Qdoba locations. |
|
| • | Stock Repurchases.Franchising Program. Pursuant We refranchised 219 Jack in the Box restaurants, while Qdoba and Jack in the Box franchisees opened 37 restaurants in 2010. We remain on track to a modified “Dutch Auction” tender offer (“Tender Offer”)achieve our goal to increase the percentage of franchise ownership in the Jack in the Box system to70-80% by the end of fiscal year 2013, and stock repurchase programs authorized by our Board of Directors, we repurchased shares of our common stock for $463.4 million.ended fiscal 2010 at 57% franchised. |
|
| • | Credit Facility. In the first quarter, During 2010, we entered into a new credit agreement consisting of a $400 million revolving credit facility of $150.0and a $200 million term loan, both with a five-year maturity and a term loan facility of $475.0 million with a six-year maturity. Using our available cash resources, in the second quarter we prepaid without penalty $60.0 million of our term loan which is expected to result in annualized interest savings of approximately $2.0 million. |
|
| • | Interest Rate Swaps.Share Repurchases. To reduce exposure Pursuant to rising interest rates,a share repurchase program authorized by our Board of Directors, we converted $200.0repurchased 4.9 million shares of our term loancommon stock at floating rates to a fixed interest rate for the next three years by entering into two interest rate swap contracts.an average price of $19.71 per share. |
FINANCIAL REPORTING CHANGES
At the beginningIn 2010, we separated impairment and other charges, net from selling, general and administrative expenses in our consolidated statements of fiscalearnings. Prior year 2006, we adopted Statementamounts have been reclassified to conform to this new presentation.
The results of Financial Accounting Standards (“SFAS”) 123 (revised 2004),Share-Based Payment(123R),operations and cash flows for Quick Stuff, which requires thatwas sold in 2009, are reflected as discontinued operations for all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial
21
statements. In accordance with the modified prospective method of adoption, results for fiscal 2005 and prior periods were not restated.presented. Refer to Note 8,2,Share-Based Employee CompensationDiscontinued Operations, in the notes to theour consolidated financial statements for additionalmore information.
Historical share and per share data in our Annual Report onForm 10-K has been restated to give retroactive recognition of our two-for-one stock split that was effected in the form of a 100% stock dividend on October 15, 2007, with the exception of treasury share data as no stock dividend was paid with respect to treasury shares. In the consolidated statements of stockholders’ equity, for all periods presented, the par value of the additional shares was reclassified from capital in excess of par value to common stock. Refer to Note 9,Stockholders’ Equity, in the notes to the consolidated financial statements for additional information regarding the stock split.
Effective fiscal 2007, we are reporting gains as a discrete line item within operating costs and expenses, rather than within revenues, as previously presented. Prior year’s gains on sale of company-operated restaurants to franchisees have been reclassified to conform with the current-year presentation. This reclassification had no effect on previously reported earnings from operations, net earnings or shareholders’ equity.
Effective September 30, 2007, we adopted the recognition and measurement provision of SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS 158 requires companies to recognize the over or under funded status of their plans as an asset or liability as measured by the difference between the fair value of the plan assets and the projected benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income (loss). The adoption of SFAS 158 resulted in an after-tax adjustment to accumulated other comprehensive income (loss) of $20.2 million related to a reclassification of unrecognized actuarial gains and losses from assets and liabilities to a component of accumulated other comprehensive income (loss), as well as a requirement to recognize over and under funding of our pension and post-retirement health plans. See Note 7,Retirement Plans,in the notes to the consolidated financial statements for additional information.
RESULTS OF OPERATIONS
The following table sets forth, unless otherwise indicated, the percentage relationship to total revenues ofpresents certain income and expense items included in our consolidated statements of earnings.earnings as a percentage of total revenues, unless otherwise indicated:
CONSOLIDATED STATEMENTS OF EARNINGS DATA
| | | | | | | | | | | | |
| | Fiscal Year | |
| | Sept. 30,
| | | Oct. 1,
| | | Oct. 2,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
Revenues: | | | | | | | | | | | | |
Restaurant sales | | | 74.8 | % | | | 77.1 | % | | | 82.5 | % |
Distribution and other sales | | | 20.3 | | | | 18.9 | | | | 14.0 | |
Franchised restaurant revenues | | | 4.9 | | | | 4.0 | | | | 3.5 | |
| | | | | | | | | | | | |
| | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Restaurant costs of sales(1) | | | 31.8 | % | | | 31.2 | % | | | 31.7 | % |
Restaurant operating costs(1) | | | 50.3 | | | | 51.3 | | | | 51.4 | |
Distribution and other costs of sales(1) | | | 99.0 | | | | 98.7 | | | | 98.7 | |
Franchised restaurant costs(1) | | | 40.4 | | | | 40.5 | | | | 40.9 | |
Selling, general and administrative expenses | | | 10.2 | | | | 11.0 | | | | 11.0 | |
Gains on sale of company-operated restaurants | | | (1.4 | ) | | | (1.5 | ) | | | (0.9 | ) |
Earnings from operations | | | 7.6 | | | | 6.7 | | | | 6.1 | |
| | | | | | | | | | | | |
| | Fiscal Year | |
| | 2010 | | | 2009 | | | 2008 | |
|
Revenues: | | | | | | | | | | | | |
Company restaurant sales | | | 72.6% | | | | 80.0% | | | | 82.8% | |
Distribution sales | | | 17.3% | | | | 12.2% | | | | 10.8% | |
Franchise revenues | | | 10.1% | | | | 7.8% | | | | 6.4% | |
| | | | | | | | | | | | |
Total revenues | | | 100.0% | | | | 100.0% | | | | 100.0% | |
| | | | | | | | | | | | |
Total operating costs and expenses, net: | | | | | | | | | | | | |
Company restaurant costs: | | | | | | | | | | | | |
Food and packaging (1) | | | 31.8% | | | | 32.4% | | | | 33.3% | |
Payroll and employee benefits(1) | | | 30.3% | | | | 29.7% | | | | 29.7% | |
Occupancy and other (1) | | | 23.9% | | | | 21.7% | | | | 20.9% | |
Total company restaurant costs (1) | | | 85.9% | | | | 83.8% | | | | 83.9% | |
Distribution costs (1) | | | 100.4% | | | | 99.6% | | | | 99.3% | |
Franchise costs (1) | | | 45.4% | | | | 40.6% | | | | 39.9% | |
Selling, general and administrative expenses | | | 10.6% | | | | 10.5% | | | | 10.4% | |
Impairment and other charges, net | | | 2.1% | | | | 0.9% | | | | 0.9% | |
Gains on the sale of company-operated restaurants, net | | | (2.4)% | | | | (3.2)% | | | | (2.6)% | |
Earnings from operations | | | 5.3% | | | | 9.4% | | | | 8.5% | |
| | | | | | | | | | | | |
Income tax rate (2) | | | 33.8% | | | | 37.7% | | | | 37.3% | |
| | |
(1) | | As a percentage of the related sales and/or revenues. |
(2) | | As a percentage of earnings from continuing operations and before income taxes. |
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Revenues
As we execute our refranchising strategy, which includes the sale of restaurants to franchisees, we expect the number of company-operated restaurants and the related sales to continually decrease while revenues from franchise restaurants increase. Company restaurant sales decreased $307.3 million in 2010 and $125.7 million in 2009 compared with the prior years. The decrease in restaurant sales in both years is due primarily to decreases in the average number of Jack in the Box company-operated restaurants and declines in same-store sales at Jack in the Box restaurants, partially offset by an increase in the number of Qdoba company-operated restaurants and, in 2010, additional sales of $28.9 million from a 53rd week. The following table presents the approximate impact of these increases and decreases on restaurant sales (dollars in millions):
| | | | | | | | |
| | Increase/(Decrease) | |
| | 2010 vs 2009 | | | 2009 vs 2008 | |
|
Reduction in the average number of company-operated restaurants | | $ | (176.6) | | | $ | (85.5) | |
Jack in the Box same-store sales declines | | | (156.1) | | | | (27.4) | |
53rd week | | | 28.9 | | | | - | |
Other | | | (3.5) | | | | (12.8) | |
| | | | | | | | |
Total change in restaurant sales | | $ | (307.3) | | | $ | (125.7) | |
| | | | | | | | |
Same-store sales at Jack in the Box restaurants declined 8.6% in 2010 and 1.2% in 2009. The average check decreased 1.5% in 2010 and increased 1.8% in 2009, including the impact of price increases of approximately 1.7% and 2.8%, respectively. The 2010 decline reflects unfavorable product mix changes, promotions and discounting. Sales continue to be impacted by high unemployment rates in our major markets.
Distribution sales to Jack in the Box and Qdoba franchisees grew $95.8 million in 2010 and $26.9 million in 2009 compared with the prior year. The increase in distribution sales in both years primarily relates to an increase in the number of Jack in the Box and Qdoba franchise restaurants serviced by our distribution centers, which contributed additional sales of approximately $108.4 million and $39.6 million in 2010 and 2009, respectively, and were partially offset by lower per store average (“PSA”) volumes in both years. The increase in 2010 also includes sales of approximately $11.2 million from the 53rd week.
Franchise revenues increased $37.9 million and $30.4 million in 2010 and 2009, respectively, primarily reflecting an increase in the average number of Jack in the Box franchise restaurants and, in 2010, additional revenues of $4.6 million from a 53rd week, offset in part by a decline in same-store sales at Jack in the Box franchise restaurants. The increase in the average number of restaurants due to refranchising activity contributed additional royalties, rents and fees of approximately $39.0 million and $31.2 million in 2010 and 2009, respectively. The following table reflects the detail of our franchise revenues in each year and other information we believe is useful in analyzing the change in franchise revenues (dollars in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Royalties | | $ | 91,216 | | | $ | 79,690 | | | $ | 68,811 | |
Rents | | | 128,143 | | | | 103,784 | | | | 86,310 | |
Re-image contributions to franchisees | | | (1,455) | | | | (3,700) | | | | (2,100) | |
Franchise fees and other | | | 13,123 | | | | 13,345 | | | | 9,739 | |
| | | | | | | | | | | | |
Franchise revenues | | $ | 231,027 | | | $ | 193,119 | | | $ | 162,760 | |
| | | | | | | | | | | | |
% change | | | 19.6% | | | | 18.7% | | | | 16.4% | |
Average number of franchised restaurants | | | 1,424 | | | | 1,215 | | | | 1,068 | |
% change | | | 17.2% | | | | 13.8% | | | | | |
| | | | | | | | | | | | |
Change in Jack in the Box franchise-operated same-store sales | | | (7.8)% | | | | (1.3)% | | | | 0.1% | |
| | | | | | | | | | | | |
Royalties as a percentage of estimated franchised restaurant sales: | | | | | | | | | | | | |
Jack in the Box | | | 5.3% | | | | 5.3% | | | | 5.1% | |
Qdoba | | | 5.0% | | | | 5.0% | | | | 5.0% | |
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The following table summarizes the number of systemwide restaurants:
SYSTEMWIDE RESTAURANT UNITS
| | | | | | | | | | | | |
| | Sept. 30,
| | | Oct. 1,
| | | Oct. 2,
| |
| | 2007 | | | 2006 | | | 2005 | |
|
Jack in the Box: | | | | | | | | | | | | |
Company-operated | | | 1,436 | | | | 1,475 | | | | 1,534 | |
Franchised | | | 696 | | | | 604 | | | | 515 | |
| | | | | | | | | | | | |
Total system | | | 2,132 | | | | 2,079 | | | | 2,049 | |
| | | | | | | | | | | | |
Qdoba: | | | | | | | | | | | | |
Company-operated | | | 90 | | | | 70 | | | | 57 | |
Franchised | | | 305 | | | | 248 | | | | 193 | |
| | | | | | | | | | | | |
Total system | | | 395 | | | | 318 | | | | 250 | |
| | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | | |
Company-operated | | | 1,526 | | | | 1,545 | | | | 1,591 | |
Franchised | | | 1,001 | | | | 852 | | | | 708 | |
| | | | | | | | | | | | |
Total system | | | 2,527 | | | | 2,397 | | | | 2,299 | |
| | | | | | | | | | | | |
In 2007 and 2006, we opened 42 and 29 company-operated Jack inthe Box restaurants, along with 5 and 11 newQuick Stuffconvenience stores, and franchisees opened 16 and 7 restaurants, respectively. In addition, we sold 76 and 82 Jack inthe Box company-operated restaurants to franchisees. Qdoba opened 87 and 71 company and franchise-operated restaurants during 2007 and 2006, respectively.
Revenues
Company-operated restaurant sales were $2,151.0 million, $2,101.0 million, and $2,045.4 million, in 2007, 2006, and 2005, respectively. The sales growth primarily reflects increases in per store average (“PSA”) sales at Jack inthe Box and Qdoba company-operated restaurants, as well as increases in the number of Qdoba company-operated restaurants. Same-store sales at Jack inthe Box company-operated restaurants increased 6.1% in 2007 on top of 4.8% in 2006 and 2.4% in 2005, reflecting an increase in both average check and transactions primarily due to the success of new product introductions and continued focus on our brand reinvention initiatives. The PSA sales growth in each year was partially offset by a decrease in the number of Jack inthe Box company-operated restaurants primarily reflecting the sale of company-operated restaurants to franchisees.
Distribution and other sales, representing distribution sales to Jack inthe Box and Qdoba franchisees, as well asQuick Stuff fuel and convenience store sales, grew to $585.1 million in 2007 from $512.9 million in 2006 and $348.5 million in 2005. Distribution sales grew primarily due to an increase in the number ofJack in the Box and Qdoba franchised restaurants serviced by our distribution centers and PSA sales growth at our franchised restaurants. Sales from ourQuick Stuff locations increased primarily due to an increase in the number of locations to 60 at the end of the fiscal year from 55 in 2006 and 44 in 2005, offset in part by a decrease in PSA fuel sales.
Franchised restaurant revenues, which include rents, royalties and fees from restaurants operated by franchisees, increased to $139.9 million in 2007 from $109.7 million in 2006 and $86.3 million in 2005, primarily reflecting an increase in the number of franchised restaurants and PSA sales growth. The number of franchised restaurants increased to 1,001 at the end of the fiscal year from 852 in 2006 and 708 in 2005, reflecting the franchising ofJack in the Box company-operated restaurants and new restaurant development by Qdoba andJack in the Boxfranchisees.
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Operating Costs and Expenses
Restaurant costs of sales, which include foodFood and packaging costs increaseddecreased to $683.9 million in 2007 from $654.7 million in 2006, and $647.6 million in 2005. As a percentage31.8% of company restaurant sales in 2010 from 32.4% in 2009 and 33.3% in 2008. In 2010, lower commodity costs (including beef, shortening, poultry and bakery), margin improvement initiatives and modest selling price increases more than offset the impact of unfavorable product mix and promotions. The decline in 2009 included the benefit of selling price increases, favorable product mix changes and margin improvement initiatives, offset in part by commodity cost increases of approximately 2.0%.
Payroll and employee benefit costs were 30.3% of company restaurant sales in 2010 and 29.7% in 2009 and 2008. The increase in 2010 reflects the impact of same-store sales deleverage and higher workers’ compensation costs of approximately 50 basis points, which more than offset the benefits derived from our labor productivity initiatives. Workers’ compensation costs have increased as the cost per claim is trending higher although the number of claims is lower. In 2009 labor productivity initiatives offset minimum wage increases.
Occupancy and other costs were 23.9% of company restaurant sales were 31.8% in 2007, 31.2%2010, 21.7% in 2006,2009 and 31.7%20.9% in 2005. In 2007,2008. The higher commodity costs,percentage in 2010 is due primarily cheese, eggs, beefto sales deleverage and shorteninghigher depreciation from the ongoing re-image program at Jack in the Box, which were partially offset by lower packaging costs. In 2006, lower commodity costs, principally beef, cheese and pork, as well as favorable product mix changes contributedutilities expense. The increase in 2009 was due primarily to higher depreciation expense related to the lower rate. In 2006, beef costs were approximately 5% lower than fiscal 2005. In fiscal 2005, beef costs were high, unfavorably impacted byJack in the closing ofBox re-image program and a kitchen enhancement project completed in 2008, higher rent and depreciation related to new restaurant development at Qdoba and sales deleverage at Jack in the U.S. border to Canadian cattle,Box and produce costs were up approximately 9%. The cost increases in all yearsQdoba restaurants, which were partially offset in part by modest selling price increases.lower utility costs.
Restaurant operatingDistribution costs were $1,082.2increased to $399.7 million in 2007, $1,078.02010 from $300.9 million in 2006,2009 and $1,051.4$273.4 million in 2005 and, as a percentage of restaurant sales, were 50.3%, 51.3%, and 51.4%, respectively. In 2007, the percentage improvement compared with 2006 is primarily due to fixed cost leverage on same-store sales and lower costs for workers’ compensation insurance, utilities, and profit improvement initiatives, partially offset by higher costs related to brand re-invention initiatives. In 2006, the lower rate is due primarily to fixed-cost leverage on same-store sales, lower costs for workers’ compensation insurance and profit improvement program initiatives, partially offset by higher costs for utilities.
Costs of distribution and other sales increased to $579.1 million in 2007 from $506.0 million in 2006 and $343.8 million in 2005,2008, primarily reflecting an increaseincreases in the related sales. These costs were 99.0%increased to 100.4% of distribution and other sales in 2007, and 98.7% in 2006 and 2005. The percentage increase in 20072010, compared with 200699.6% in 2009 and 99.3% in 2008, due primarily relates to higher retail prices per gallon of fuel, which have proportionately higher costs, but yield stable penny profits. The percentage in 2006 remained consistent with 2005 as increases in distribution volumes related to strongdeleverage from lower PSA sales atJack in the Box restaurants offset the impact of higher retail prices per gallon of fuel at ourQuick Stuff locations. franchise restaurants.
Franchised restaurantFranchise costs, principally rents and depreciation on properties leased to Jack inthe BoxJack in the Box franchisees, increased to $56.5$26.4 million in 2007 from $44.52010 and $13.4 million in 2006 and $35.3 million in 2005,2009, due primarily to an increase in the number of franchise restaurants that sublease property from us as a result of our refranchising activities. Franchise costs increased to 45.4% of the related revenues in 2010 from 40.6% in 2009 and 39.9% in 2008 primarily due to revenue deleverage from lower sales at franchised restaurants. As a percentage of franchised restaurant revenues, franchise restaurant costs decreased to 40.4% in 2007 from 40.5% in 2006restaurants and 40.9% in 2005 benefiting from the leverage provided by higher franchise revenues.PSA rent and depreciation expense.
Selling,The following table presents the change in selling, general and administrative (“SG&A”) expenses were $293.9 million, $300.8 million, and $273.8 million in 2007, 2006, and 2005, respectively. SG&A expenses decreased to approximately 10.2% of revenues in 2007 from 11.0% of revenues in 2006 and 2005. In 2007, increased leverage from higher revenues, lower pension costs and insurance recoveries contributed to the percent of revenue declineeach period compared with 2006. In 2006, SG&Athe prior year (in thousands):
| | | | | | | | |
| | Increase/(Decrease) | |
| | 2010 vs 2009 | | | 2009 vs 2008 | |
|
Advertising | | $ | (11,689 | ) | | $ | (6,807 | ) |
Refranchising strategy | | | (14,818 | ) | | | 4,217 | |
Severance | | | (1,366 | ) | | | 2,079 | |
Incentive compensation | | | (6,062 | ) | | | (25 | ) |
Cash surrender value of COLI policies, net | | | (2,954 | ) | | | (2,731 | ) |
Pension and postretirement benefits | | | 17,632 | | | | (2,190 | ) |
Hurricane Ike insurance proceeds | | | (4,223 | ) | | | - | |
Pre-opening | | | (1,540 | ) | | | 1,861 | |
53rd week | | | 3,597 | | | | - | |
Other | | | 4,114 | | | | (540 | ) |
| | | | | | | | |
| | $ | (17,309 | ) | | $ | (4,136 | ) |
| | | | | | | | |
Our refranchising strategy has resulted in a decrease in the number of company-operated restaurants and the related overhead expenses to manage and support those restaurants. Advertising costs, primarily contributions to our marketing fund that are generally determined as a percentpercentage of revenues remained flat compared with 2005 as thecompany restaurant sales, leverage benefit was offset by the inclusion of stock option expense of $7.3 million upon the adoption of SFAS 123R, higher pension costsdecreased reflecting our refranchising strategy and charges related to certain restaurant closures and the impairment of 8lower PSA sales at Jack in the Boxrestaurants. company-operated restaurants, and were partially offset by incremental Company contributions of approximately $6.5 million in 2010. The decrease in incentive compensation in 2010 reflects the decrease in the Company’s performance. Changes in the cash surrender value of our COLI policies, net of changes in our non-qualified deferred compensation obligation supported by these policies are subject to market fluctuations. The market adjustments of the investments include a net benefit of
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$2.7 million in 2010 compared with negative impacts of $0.3 million in 2009 and $3.0 million in 2008. The increase in pension and postretirement benefits expense in 2010 principally relates to a decrease in our discount rate. The fluctuations in pre-opening costs primarily relate to changes in the number of new Jack in the Box restaurants opened which decreased to 30 locations in 2010, compared with 43 in 2009 and 23 in 2008.
Impairment and other charges, net is comprised of the following(in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Impairment | | $ | 12,970 | | | $ | 6,586 | | | $ | 3,507 | |
Losses on disposition of property and equipment, net | | | 10,757 | | | | 11,418 | | | | 17,373 | |
Costs of closed restaurants (primarily lease obligations) | | | 22,262 | | | | 2,080 | | | | (21 | ) |
Other | | | 2,898 | | | | 1,930 | | | | 1,898 | |
| | | | | | | | | | | | |
| | $ | 48,887 | | | $ | 22,014 | | | $ | 22,757 | |
| | | | | | | | | | | | |
Impairment and other charges, net increased $26.9 million in 2010 and decreased slightly in 2009 compared to the prior years. The increase in 2010 is due primarily to the closure of 40 underperforming Jack in the Box restaurants in the fourth quarter of the fiscal year. The decision to close these restaurants was based on a comprehensive analysis performed that took into consideration levels of return on investment and other key operating performance metrics. In connection with these closures, we recorded a total charge of $28.0 million which included property and equipment impairment charges of $8.4 million and $19.0 million related to future lease commitments.
Gains on the sale of company-operated restaurants to franchisees, net are detailed in the following table (dollars in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
| |
|
Number of restaurants sold to franchisees | | | 219 | | | | 194 | | | | 109 | |
Gains on the sale of company-operated restaurants | | $ | 54,988 | | | $ | 81,013 | | | $ | 66,349 | |
Loss on expected sale of underperforming market | | | - | | | | (2,371 | ) | | | - | |
| | | | | | | | | | | | |
Gains on the sale of company-operated restaurants, net | | $ | 54,988 | | | $ | 78,642 | | | $ | 66,349 | |
| | | | | | | | | | | | |
Average gain on restaurants sold | | $ | 251 | | | $ | 418 | | | $ | 609 | |
Gains were $39.3 million, $42.0 million and $23.3 million in 2007, 2006 and 2005, respectively. The change in gains relates toimpacted by the number of restaurants sold and changes in average gains recognized, which relate to the specific sales and cash flows of those restaurants. In 2007, we sold 76Jack in the Box restaurants, compared with 82 in 2006, which included all 25 company-operated restaurants in Hawaii, and 58 in 2005. The Hawaii transaction represented the first sale of an entire market since we announced our intent to increase franchising activities in 2002 and contributed approximately $15.0 million to2009, gains on the sale of company-operated restaurants to franchisees, net included a loss of $2.4 million relating to the anticipated sale of a lower performing Jack in 2006.the Box market.
Interest Expense, Net
Interest expense, net was $23.4 million, $12.1 million, and $13.4is comprised of the following (in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
| |
|
Interest expense | | $ | 17,011 | | | $ | 22,155 | | | $ | 28,070 | |
Interest income | | | (1,117 | ) | | | (1,388 | ) | | | (642 | ) |
| | | | | | | | | | | | |
Interest expense, net | | $ | 15,894 | | | $ | 20,767 | | | $ | 27,428 | |
| | | | | | | | | | | | |
Interest expense, net decreased $4.9 million in 2007, 20062010 and 2005, respectively, and includes$6.7 million in 2009 due primarily to lower average interest expenserates. In 2010, lower average borrowings, partially offset by a $0.5 million charge to write off deferred financing fees in connection with the refinancing of $32.2 million, $19.6 million and $17.1 million, respectively, and interest income of $8.8 million, $7.5 million, and $3.7 million, respectively. The increase in interest income in each year reflectsour credit facility, also contributed to the decrease. In 2009, higher average cash balances and higher interest rates on invested cash. In 2007, interest expense increased compared with 2006 primarily due to higher average bank borrowings and increased interest rates incurred on our
24
credit facility. In 2006, interest expense increased compared with 2005 due topartially offset the impact of higher averagelower interest rates incurred on our credit facility.rates.
Income Taxes
The income tax provisions reflect effective tax rates of 35.7%33.8%, 35.7%,37.7% and 33.8%37.3% of pretax earnings before income taxesfrom continuing operations in 2010, 2009 and cumulative effect of an accounting change in 2007, 2006 and 2005,2008, respectively. The lower tax rate in 2005 relates primarily2010 is largely attributable to the resolutionimpact of a prior year’simpairment and other charges, higher work opportunity tax position.credits and the market performance of insurance investment products used to fund certain non-qualified retirement plans. Changes in the cash value of the insurance products are not included in taxable income.
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Cumulative Effect of Accounting ChangeEarnings from Continuing Operations
In fiscal 2006, we adopted Financial Accounting Standards Board Interpretation (“FIN”) 47 which requires that we record a liability for an asset retirement obligation at the end of a lease if the amount can be reasonably estimated. As a result of adopting FIN 47, we recorded an after-tax cumulative effectEarnings from this accounting change of $1.0 million related to the depreciation and interest expense that would have been charged prior to the adoption.
Net Earnings
Net earningscontinuing operations were $126.3$70.2 million, or $1.88$1.26 per diluted share, in 2007; $108.02010; $131.0 million, or $1.50$2.27 per diluted share, in 2006;2009; and $91.5$118.2 million, or $1.24$1.99 per diluted share, in 2005.2008. We estimate that the extra 53rd week benefitted net earnings by approximately $1.8 million, or $0.03 per diluted share, in fiscal 2010.
Earnings from Discontinued Operations, Net
As described in the “Financial Reporting” section, Quick Stuff’s results of operations have been reported as discontinued operations. In 2009, the loss from discontinued operations, net was $12.6 million, reflecting the $15.0 million net of tax loss from the sale of Quick Stuff in the fourth quarter. Earnings from discontinued operations, net were $1.1 million in 2008.
LIQUIDITY AND CAPITAL RESOURCES
General. Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations, the revolving bank credit facility, the sale of company-operated restaurants to franchisees and the sale and leaseback of certain restaurant properties.
Our cash requirements consist principally of:
| | |
| • | working capital; |
|
| • | capital expenditures for new restaurant construction and restaurant renovations and upgrades of our management information systems;renovations; |
|
| • | income tax payments; |
|
| • | debt service requirements; |
|
| • | working capital; |
|
| • | income tax payments; and |
|
| • | obligations related to our benefit plans. |
Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditure, working capital and debt service requirements.requirements for the foreseeable future.
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets.assets and not as part of working capital. As a result, we typically maintain current liabilities in excess of current assets, which results in a working capital deficit.
Cash and cash equivalents decreased $218.2$42.4 million to $15.7$10.6 million at September 30, 2007October 3, 2010 from $233.9$53.0 million at the beginning of the fiscal year. This decrease is primarily due to the userepurchases of cash to repurchasecommon stock, net repayments under our common stock,credit facility, and property and equipment expenditures, whichexpenditures. These uses of cash were offset in part by borrowings under our new credit facility,proceeds from the sale and leaseback of restaurant properties, cash flows provided by operating activities, and proceeds from the issuanceand collections of common stock andnotes receivable from the sale of restaurants to franchisees. We generally reinvest available cash flows from operations to develop new restaurants or enhance existing restaurants, to reduce debt and to repurchase shares of our common stock and to reduce debt.stock.
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Cash Flows. The following table below summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years(in thousands):.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Total cash provided by (used in): | | | | | | | | | | | | | | | | | | | | | | | | |
Operating activities | | $ | 179,809 | | | $ | 205,139 | | | $ | 157,888 | | |
Investing activities | | | (131,341 | ) | | | (63,827 | ) | | | (114,521 | ) | |
Operating activities: | | | | | | | | | | | | | |
Continuing operations | | | $ | 64,038 | | | $ | 147,324 | | | $ | 167,035 | |
Discontinued operations | | | | (2,172 | ) | | | 1,426 | | | | 5,349 | |
Investing activities: | | | | | | | | | | | | | |
Continuing operations | | | | 19,173 | | | | (71,607 | ) | | | (132,406 | ) |
Discontinued operations | | | | - | | | | 30,648 | | | | (1,964 | ) |
Financing activities | | | (266,672 | ) | | | (11,114 | ) | | | (71,359 | ) | | | (123,434 | ) | | | (102,673 | ) | | | (5,832 | ) |
| | | | | | | | | | | | | | |
Increase (decrease) in cash and cash equivalents | | $ | (218,204 | ) | | $ | 130,198 | | | $ | (27,992 | ) | | $ | (42,395 | ) | | $ | 5,118 | | | $ | 32,182 | |
| | | | | | | | | | | | | | |
Operating Activities. Operating cash flows from continuing operations decreased $83.3 million in 2010 compared with 2009 due primarily to the timing of working capital receipts and disbursements and a decrease in cash flows related to higher company restaurant costs, our refranchising strategy and same-store sales declines at our Jack in the Box restaurants. In 2007, operating2009, cash flowflows from continuing operations decreased $25.3 million to $179.8$19.7 million compared with 2008 due to a year agodecrease in earnings from continuing operations adjusted for non-cash items, partially offset by fluctuations due to the timing of working capital receipts and disbursements. Operating cash flows from our discontinued operations were not material to our consolidated statements of cash flows for all fiscal years presented.
Investing Activities. Investing activity cash flows from continuing operations increased $90.8 million in 2010 compared with 2009. This increase is primarily due to an increase in income tax payments.
Investing Activities. Cashthe number of sites that we sold and leased back and lower spending for purchases of property and equipment, partially offset by decreases in proceeds from and collections of notes receivable related to the sale of restaurants to franchisees. In 2009, cash flows used in investing activities were $131.3from continuing operations decreased $60.8 million in 2007 compared to $63.8 million in 2006 increasingwith 2008. This decrease was primarily due to a decreasean increase in cash proceeds from the sale of company-operated restaurants to franchisees, lower spending for purchases of property and equipment and an increase in collections on notes receivable, offset in part by an increase in spending related to assets held for sale and leaseback higher capital expenditures and cash used in 20072009 to acquire nine Qdoba franchise-operated restaurants.
In 2009, cash flows provided by discontinued operations increased $32.6 million compared with 2008 due primarily to proceeds received in 2009 of $34.4 million related to the sale of our Quick Stuff convenience and fuel stores.
Assets Held for Sale and Leaseback. We use sale and leaseback financing to lower the initial cash investment in our Jack in the Box restaurants previously operated by franchisees.to the cost of the equipment, whenever possible. In 2010, 20 of our new Jack in the Box restaurants were developed as sale and leaseback properties, compared with 18 in 2009 and 9 in 2008. In 2010, we sold and leased back 25 restaurants compared with four in 2009 and 7 in 2008. As of October 3, 2010, we had cash investments of $59.9 million in approximately 56 operating and under-construction restaurant properties that we expect to sell and lease back during fiscal 2011.
Capital Expenditures. The composition of capital expenditures used in continuing operations in each year follows (in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Jack in the Box: | | | | | | | | | | | | |
New restaurants | | $ | 20,867 | | | $ | 46,078 | | | $ | 35,751 | |
Restaurant facility improvements | | | 50,724 | | | | 69,856 | | | | 116,670 | |
Other, including corporate | | | 10,447 | | | | 18,377 | | | | 10,943 | |
Qdoba | | | 13,572 | | | | 19,189 | | | | 15,241 | |
| | | | | | | | | | | | |
Total capital expenditures used in continuing operations | | $ | 95,610 | | | $ | 153,500 | | | $ | 178,605 | |
| | | | | | | | | | | | |
Our capital expenditure program includes, among other things, investments in new locations, restaurant remodeling, new equipment and information technology enhancements. We used cashIn 2010, capital expenditures decreased
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due primarily to a decline in the number of $154.2 millionnew Jack in the Box and Qdoba restaurants developed and the number of existing restaurants rebuilt, and lower spending related to our re-image program and network and system upgrades. In 2010, we continued reimaging our restaurants, focusing on the interiors as we substantially completed reimaging the restaurant exteriors in 2009. The reimage program, which began in 2006, is an important part of the chain’s brand-reinvention initiative and is intended to create a warm and inviting dining experience for purchasesJack in the Box guests. As of propertyOctober 3, 2010, approximately 68% of all Jack in the Box company-operated restaurants feature all interior and exterior elements of the reimage program; we expect completion by the end of fiscal year 2011. In 2009, capital expenditures decreased due to lower spending related to our reimage program as well as the inclusion of a kitchen enhancement project and the purchase of our smoothie equipment in 2007 compared with $150.0 million in 2006 and $126.1 million in 2005.2008. The kitchen enhancements were designed to increase in capital expenditures in each year primarily relates to our on-going comprehensive re-image program.restaurant capacity for new product introductions while reducing utility expense using energy-efficient equipment.
In fiscal year 2008,2011, capital expenditures are expected to be approximately $175 – $185$135-$145 million, including investment costs related to the JackJack in theBox Box restaurant re-image program and kitchen enhancements.the continued rollout of our new logo. We plan to open approximately 22 – 2825 new JackJack in theBox Box and 25 new Qdoba company-operated restaurants in 2008, and under our brand reinvention strategy, plan to re-image approximately 250 restaurants.2011.
Sale of Company-Operated Restaurants. We have continued our strategy of selectively sellingto expand franchise ownership in the Jack in the Box company-operated restaurants to franchisees, selling 76, 82, and 58 restaurants in 2007, 2006 and 2005, respectively. Proceeds from system primarily through the sale of company-operated restaurants to franchisees. The following table details proceeds received in connection with our refranchising activities(in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Number of restaurants sold to franchisees | | | 219 | | | | 194 | | | | 109 | |
| | | | | | | | | | | | |
Cash proceeds from the sale of company-operated restaurants | | $ | 66,152 | | | $ | 94,927 | | | $ | 57,117 | |
Notes receivable | | | 25,809 | | | | 21,575 | | | | 27,928 | |
| | | | | | | | | | | | |
Total proceeds | | $ | 91,961 | | | $ | 116,502 | | | $ | 85,045 | |
| | | | | | | | | | | | |
Average proceeds | | $ | 420 | | | $ | 601 | | | $ | 780 | |
All fiscal years presented include financing provided to facilitate the closing of certain transactions. As of October 3, 2010, notes receivable related to refranchisings were $51.3$29.8 million, $54.4of which $18.7 million and $33.5has been repaid since the end of the fiscal year. We expect total proceeds of $85-$95 million respectively.from the sale of175-225 Jack in the Box restaurants in 2011.
Acquisition of Franchise-Operated Restaurants. In 2010, we acquired 16 Qdoba franchise-operated restaurants in the third quarterBoston market for approximately $8.1 million. The purchase price was allocated to property and equipment, goodwill and reacquired franchise rights. For additional information, refer to Note 3,Initial Franchise Fees, Refranchisings and Acquisitions, of 2007,the notes to the consolidated financial statements.
In 2009, we acquired 22 Qdoba acquired nine franchise-operated restaurants for approximately $7.0$6.8 million, in cash.net of cash received. The primary assets acquired include $2.5 million in nettotal purchase price was allocated to property and equipment, goodwill and $4.5 millionother income. The restaurants acquired are located in goodwill.Michigan and California, which we believe provide good long-term growth potential consistent with our strategic goals.
Financing Activities. Cash used in financing activities increased $255.6$20.8 million to $266.7in 2010 and $96.8 million in 2009 compared with a year ago, duethe previous year. These increases were primarily attributable to an increasepurchases of our common stock in stock repurchases2010 and term loan principal payments, offsetthe repayment of borrowings under our revolving credit facility in part by proceeds received related to our new credit facility.2009.
New Financing.Credit Facility. On December 15, 2006,June 29, 2010, we replaced our existing credit facility with a new credit facility intended to provide a more flexible capital structure and facilitate the execution of our strategic plan.structure. The new credit facility wasis comprised of (i) a $150.0$400.0 million revolving credit facility maturing on December 15, 2011 and (ii) a $200.0 million term loan maturing on December 15, 2012,with a five-year maturity, initially both with London Interbank Offered Rate (“LIBOR”) plus 1.3752.50%.At inception, we borrowed $475.0 million In connection with the refinancing, borrowings under the term loan and $169.0 million of borrowings under the revolving credit facility andwere used the proceeds to repay all borrowings under the prior credit facility to payand related transaction fees and expenses, including those associated with the new credit facility. Loan origination costs associated with the new credit facility were $9.5 million and to repurchase a portion of our outstanding stock. We subsequently elected to make, without penalty, a $60.0 million optional prepayment of our term loan, which will be applied to the remaining scheduled principal installmentsare included as deferred costs in other assets, net in the direct orderaccompanying consolidated balance sheet as of maturity. The prepayment reduced the interest rate on the credit facility by 25 basis points to LIBOR plus 1.125%, which is expected to result in an annualized interest savings of approximately $2.0 million. At September 30, 2007, we had no borrowings under the revolving credit facility, $415.0 million outstanding under the term loan and had letters of credit outstanding of $37.1 million.October 3, 2010.
As part of the new credit agreement, we may also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the agreement. The new credit facility
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requires the payment of an annual commitment fee based on the unused portion of the credit facility. The credit facility’s interest rates and the annual commitment rate are based on a financial leverage ratio, as defined in the credit agreement. Our obligationsWe may make voluntary prepayments of the loans under the newrevolving credit facility are secured by first priority liens and security interests in the capital stock, partnership,term loan at any time without premium or penalty. Specific events, such as asset sales, certain issuances of debt and membership interests owned by usinsurance and (or) our subsidiaries, and any proceeds thereof, subject to certain restrictions set forth in the credit agreement. Additionally, the credit agreement includescondemnation recoveries, may trigger a negative pledge on all tangible and intangible assets (including all real and personal property) with customary exceptions.mandatory prepayment.
Loan origination costs associated with the new credit facility were $7.4 million and are included as deferred costs in other assets, net in the consolidated balance sheet as of September 30, 2007. Deferred financing fees of $1.9 million related to the prior credit facility were written-off in the first quarter and are included in interest expense, net in the consolidated statement of earnings for the year ended September 30, 2007.
Interest Rate Swaps. Concurrent with the termination of our prior credit facility, we liquidated three swap agreements and reversed the fair value of the swaps recorded as a component of accumulated other comprehensive loss, net. We realized a net gain of $0.4 million, included in interest expense, net in the accompanying consolidated statement of earnings for the year ended September 30, 2007. To reduce our exposure to rising interest rates under our new credit facility, in March 2007, we entered into two interest rate swap agreements that will effectively convert $200.0 million of our variable rate term loan borrowings to a fixed rate basis for three years.
Debt Covenants.We are subject to a number of customary covenants under our various debt instruments,credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases, and dividend payments as well asand requirements to maintain certain financial ratios, cash flowsratios.
At October 3, 2010, we had $197.5 million outstanding under the term loan, borrowings under the revolving credit facility of $160.0 million and net worth. Asletters of September 30, 2007, we complied with all debt covenants.credit outstanding of $34.9 million. For additional information related to our credit facility, refer to Note 7,Indebtedness, of the notes to the consolidated financial statements.
Debt Outstanding.Interest Rate Swaps. Total debt outstanding increasedTo reduce our exposure to $433.3rising interest rates under our credit facility, we consider interest rate swaps. In August 2010, we entered into two forward looking swaps that will effectively convert $100.0 million atof our variable rate term loan to a fixed-rate basis beginning September 30,2011 through September 2014. Based on the term loan’s applicable margin of 2.50% as of October 3, 2010, these agreements would have an average pay rate of 1.54%, yielding a fixed rate of 4.04%. Previously, we held two interest rate swaps that effectively converted $200.0 million of our variable rate term loan borrowings to a fixed-rate basis from March 2007 from $291.8 million at the beginningto April 1, 2010. For additional information related to our interest rate swaps, refer to Note 6,Derivative Instruments, of the fiscal year. Current maturities of long-term debt decreased $31.8 million and long-term debt, net of current maturities increased $173.3 million duenotes to borrowings under the new credit facility. At October 1, 2006, $29.1 million was classified as current under the prior credit facility related to a clause in the agreement requiring prepayments based on an excess cash flow calculation.consolidated financial statements.
Repurchases of Common Stock. OnIn November 21, 2006, we announced the commencement of a Tender Offer for up to 5.5 million shares of our common stock at a price per share not less than $55.00 and not greater than $61.00, for a maximum aggregate purchase price of $335.5 million. On December 19, 2006, we accepted for purchase approximately 2.3 million shares of common stock at a purchase price of $61.00 per share, for a total cost of $143.3 million.
On December 20, 2006,2007, the Board of Directors authorizedapproved a program to repurchase up to 3.3$200.0 million shares in calendar year 2007 to complete the repurchase of the total shares authorized in the Tender Offer. In the second quarter of 2007, under a 10b5-1 plan, we repurchased 3.2 million shares for $220.1 million.
The Tender Offer and the additional repurchase program were funded through the new credit facility and available cash, and all shares repurchased were subsequently retired.
In September 2005, the Board of Directors authorized the repurchase of $150.0 million of our outstanding common stock in the open market. Pursuant to this authorization, we repurchased 1,582,881 shares of our common stock in 2007over three years expiring November 9, 2010. During fiscal 2010, we repurchased 4.9 million shares at aan aggregate cost of $97.0 million. During fiscal 2008, we repurchased 3.9 million shares at an aggregate cost of $100.0 millionmillion. As of October 3, 2010, the aggregate remaining amount authorized and 1,444,700 shares of common stock in 2006 at a cost of $50.0available under our credit agreement for repurchase was $3.0 million. TheIn November 2010, the Board of Directors also approved a sharenew program to repurchase, programwithin the next year, up to $100.0 million in fiscal year 2004. Under this authorization, we repurchased 2,578,801 shares of our common stock in 2005 at a cost of $92.9 million.stock.
Off-balance sheet arrangements. Other than operating leases, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
We finance a portion of our new restaurant development through sale-leaseback transactions. These transactions involve selling restaurants to unrelated parties and leasing the restaurants back. Additional information regarding our operating leases is available in Item 2.2,Properties,and Note 4,8,Leases,of the notes to the consolidated financial statements.
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Contractual obligations and commitments. The following is a summary of our contractual obligations and commercial commitments as of September 30, 2007:October 3, 2010 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period | |
| | | | | Less Than
| | | | | | | | | After
| |
| | Total | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 Years | |
| | (In thousands) | |
|
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
Credit facility term loan(1) | | $ | 535,268 | | | $ | 27,050 | | | $ | 99,844 | | | $ | 334,802 | | | $ | 73,572 | |
Revolving credit facility | | | — | | | | — | | | | — | | | | — | | | | — | |
Capital lease obligations(1) | | | 25,270 | | | | 7,040 | | | | 5,704 | | | | 3,941 | | | | 8,585 | |
Other long-term debt obligations(1) | | | 177 | | | | 150 | | | | 27 | | | | — | | | | — | |
Operating lease obligations | | | 1,813,413 | | | | 188,191 | | | | 341,635 | | | | 300,074 | | | | 983,513 | |
Guarantee(2) | | | 1,675 | | | | 1,257 | | | | 262 | | | | 156 | | | | — | |
Benefit obligations(3) | | | 117,305 | | | | 9,847 | | | | 16,805 | | | | 19,632 | | | | 71,021 | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 2,493,108 | | | $ | 233,535 | | | $ | 464,277 | | | $ | 658,605 | | | $ | 1,136,691 | |
| | | | | | | | | | | | | | | | | | | | |
Other Commercial Commitments: | | | | | | | | | | | | | | | | | | | | |
Stand-by letters of credit(4) | | $ | 37,094 | | | $ | 37,094 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Year | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | After 5 years | |
|
Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
Credit facility term loan (1) | | $ | 217,240 | | | $ | 17,925 | | | $ | 51,880 | | | $ | 147,435 | | | $ | - | |
Revolving credit facility (1) | | | 181,180 | | | | 4,459 | | | | 8,918 | | | | 167,803 | | | | - | |
Capital lease obligations | | | 12,824 | | | | 2,101 | | | | 3,424 | | | | 2,735 | | | | 4,564 | |
Operating lease obligations | | | 1,901,022 | | | | 219,414 | | | | 405,462 | | | | 356,770 | | | | 919,376 | |
Purchase commitments (2) | | | 740,786 | | | | 482,871 | | | | 254,794 | | | | 3,121 | | | | - | |
Benefit obligations (3) | | | 61,465 | | | | 16,428 | | | | 9,091 | | | | 9,111 | | | | 26,835 | |
| | | | | | | | | | | | | | | | | | | | |
Total contractual obligations | | $ | 3,114,517 | | | $ | 743,198 | | | $ | 733,569 | | | $ | 686,975 | | | $ | 950,775 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Other Commercial Commitments: | | | | | | | | | | | | | | | | | | | | |
Stand-by letters of credit (4) | | $ | 34,941 | | | $ | 34,941 | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | |
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| | |
(1) | | Obligations related to our credit facility term loan, capital lease obligations, and other long-term debt obligations include interest expense estimated at interest rates in effect on September 30, 2007.October 3, 2010. |
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(2) | | Consists of a guarantee associated with one Chi-Chi’s property. Due to the bankruptcy of the Chi-Chi’s restaurant chain, previously owned by us, we are obligated to perform in accordance with the terms of the guarantee agreement.Includes purchase commitments for food, beverage, packaging items and certain utilities. |
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(3) | | Includes expected payments associated with our defined benefit plans, postretirement benefit plans and our non-qualified deferred compensation plan through fiscal 2017.2020. |
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(4) | | Consists primarily of letters of credit for workers’ compensation and general liability insurance. |
We maintain a noncontributory defined benefit pension plan (“qualified plan”) covering substantially all full-time employees. Our policy is to fund our qualified plan at amounts necessary to satisfy the minimum amount required by law, plus additional amounts as determined by management to improve the plan’s funded status. Based on the funding status of our qualified plan as of our last measurement date, we are not required to make a minimum contribution in 2011. However, we expect to make discretionary contributions of $10.0 million which have been included in the table above. Effective September 2010, we amended our qualified plan whereby participants will no longer accrue benefits after December 31, 2015. As a result, our discretionary contributions will likely be lower in the future when compared with recent years. Contributions beyond fiscal 2011 will depend on pension asset performance, future interest rates, future tax law changes, and future changes in regulatory funding requirements. For additional information related to our pension plans, refer to Note 11,Retirement Plans, of the notes to the consolidated financial statements.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1 to our consolidated financial statements.
Share-based CompensationLong-lived Assets —We account Property, equipment and certain other assets, including amortized intangible assets, are reviewed for share-based compensationimpairment when indicators of impairment are present. This review generally includes a restaurant-level analysis, except when we are actively selling a group of restaurants, in accordance with SFAS 123R. Under the provisions of SFAS 123R, share-based compensation cost is estimatedwhich case we perform our impairment evaluations at the grant dategroup level. Impairment evaluations for individual restaurants take into consideration a restaurant’s operating cash flows, the period of time since a restaurant has been opened or remodeled, refranchising expectations, and the maturity of the related market. Impairment evaluations for a group of restaurants take into consideration the group’s expected future cash flows and sales proceeds from bids received, if any, or fair market value based on, among other considerations, the award’s fair-valuespecific sales and cash flows of those restaurants. If the assets of a restaurant or group of restaurants subject to our impairment evaluation are not recoverable based upon the forecasted, undiscounted cash flows, we recognize an impairment loss as calculatedthe amount by an option pricing model and is recognized as expense ratably overwhich the requisite service period. The option pricing models require various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If anycarrying value of the assumptionsassets exceeds fair value. Our estimates of cash flows used in the model change significantly, share-based compensation expenseto assess impairment are subject to a high degree of judgment and may differ materiallyfrom actual cash flows due to, among other things, economic conditions or changes in the future from thatoperating performance. During fiscal year 2010, we recorded in the current period.impairment charges totaling $13.0 million to write down certain assets to their estimated fair value.
Retirement Benefits — We sponsor pensionOur defined benefit and other retirement plans in various forms covering those employees who meet certain eligibility requirements. Severalpostretirement plans’ costs and liabilities are determined using several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans, including assumptions about the discount rate and expected return on plan assetsassets. Our discount rate is set annually by us, with assistance from our actuaries, and is determined by considering the average of pension yield curves constructed of a population of high-quality bonds with a Moody’s or Standard and Poor’s rating of “AA” or better meeting certain other criteria. As of October 3, 2010, our discount rate was 5.82% for our defined benefit and postretirement benefit plans. Our expected long-term rate of increase in compensation levels, asreturn on assets is determined by us using specified guidelines. In addition,taking into consideration our outsideprojected asset allocation and economic forecasts prepared with the assistance of our actuarial consultants also use certain statistical factors such as turnover, retirement and mortality rates to estimateconsultants. As of October 3, 2010, our futureassumed expected long-term rate of return was 7.75% for our qualified defined benefit obligations.plan. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. These differences may affect the amount of pension expense we record. A hypothetical 25 basis point reduction in the assumed discount rate and expected long-term rate of return on plan assets would have resulted in an estimated increase of $2.7 million and $0.7 million, respectively, in our fiscal 2011 pension and postretirement plan expense. We expect our pension and
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postretirement expense to decrease in fiscal 2011 principally due to the curtailment of our qualified plan which will be partially offset by a decrease in our discount rate from 6.16% to 5.82%.
Self Insurance — We are self-insured for a portion of our losses related to workers’ compensation, general liability, automotive, medical and dental programs.health benefits. In estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analysis of historical data. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater amount of claims occur compared to what was estimated or medical costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Long-lived AssetsRestaurant Closing Costs — Property, equipmentRestaurant closing costs consist of future lease commitments, net of anticipated sublease rentals and certain other assets, including amortized intangible assets,expected ancillary costs. We record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date we cease using a property. Subsequent adjustments to the liability as a result of changes in estimates of sublease income or lease cancellations are reviewed for impairment when indicators of impairment are present. This review includes a restaurant-level analysis that takes into consideration a restaurant’s operating cash flows,recorded in the period incurred. The estimates we make related to sublease income are subject to a high degree of time since a restaurant has been opened or remodeled,judgment and the maturity of the related market. When indicators of impairment are present, we perform an impairment analysis on arestaurant-by-restaurant basis. If the sum of undiscounted future cash flows is less than the net carrying value of the asset, we recognize an impairment loss by the amount which the carrying value exceeds the fair value of the asset. Our estimates of future cash flows may differ from actual cash flowssublease income due to among other things,changes in economic conditions, or changesdesirability of the sites and other factors.
Share-based Compensation —We offer share-based compensation plans to attract, retain and motivate key officers, non-employee directors and employees to work toward the financial success of the Company. Share-based compensation cost for our stock option grants is estimated at the grant date based on the award’s fair-value as calculated by an option pricing model and is recognized as expense ratably over the requisite service period. The option pricing models require various highly judgmental assumptions including volatility, forfeiture rates and expected option life. If any of the assumptions used in operating performance.the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.
Goodwill and Other Intangibles — We also evaluate goodwill andnon-amortizable intangible assets not subject to amortization annually, or more frequently if indicators of impairment are present. If the determined fair values of these assets are less than the related carrying amounts, an impairment loss is recognized. The methods we use to estimate fair value include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. During the fourth quarter of fiscal 2007,2010, we reviewed the carrying value of our goodwill and indefinite life intangible assets and determined that no impairment existed as of September 30, 2007.October 3, 2010.
Allowances for Doubtful Accounts — Our trade receivables consist primarily of amounts due from franchisees for rents on subleased sites, royalties and distribution sales. We continually monitor amounts due from franchisees and maintain an allowance for doubtful accounts for estimated losses. This estimate is based on our assessment of the collectibilitycollectability of specific franchisee accounts, as well as a general allowance based on historical trends, the financial condition of our franchisees, consideration of the general economy and the aging of such receivables. We have good relationships with our franchisees and high collection rates; however, if the future financial condition of our franchisees were to deteriorate, resulting in their inability to make specific required payments, we may be required to increase the allowance for doubtful accounts.
Legal Accruals —The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts, as we deem appropriate.
Income Taxes —We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our effective income tax rate as additional information on outcomes or events becomes available. Our estimates are based on the best available information at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
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FUTURE APPLICATION OF ACCOUNTING PRINCIPLES
In June 2006,2009, the Financial Accounting Standards Board (“FASB”)FASB issued Interpretation No. 48 (“FIN 48”),Accountingauthoritative guidance for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,consolidation, which clarifieschanges the accountingapproach for uncertainty in income taxes recognized in thedetermining which enterprise has a controlling financial statements in accordance with SFAS 109,Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be takeninterest in a tax return. FIN 48 also providesvariable interest entity and requires more frequent reassessments of whether an enterprise is a primary beneficiary. This guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. We are currently evaluating the impact of FIN 48 on our consolidated financial statements, which is effective for fiscal years beginning after December 15, 2006.
In September 2006, the FASB issued SFAS 157,Fair Value Measurements. SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective for fiscal yearsannual periods beginning after November 15, 2007.2009. We are currently in the process of assessing the impact that SFAS 157 willthis guidance may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). Effective
29
September 30, 2007, we implemented the recognition provisions of SFAS 158. SFAS 158 requires companies to recognize the over or under funded status of their plans as an asset or liability as measured by the difference between the fair value of the plan assets and the benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income (loss). Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than as of the end of their fiscal year. However, this provision is not effective until fiscal years ending after December 15, 2008. We will not be able to determine the impact of adopting the measurement provision of SFAS 158 until the end of the fiscal year when such valuation is completed. See Note 7,Retirement Plans,in the notes to the consolidated financial statements for additional information regarding our retirement plans and SFAS 158.
In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to voluntarily choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently in the process of determining whether to elect the fair value measurement options available under this standard.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our primary exposure to risks relating to financial instruments is changes in interest rates. Our credit facility, which is comprised of a revolving credit facility and a term loan, bears interest at an annual rate equal to the prime rate or LIBOR plus an applicable margin based on a financial leverage ratio. As of September 30, 2007,October 3, 2010, the applicable margin for the LIBOR-based revolving loans and term loan was set at 1.125%2.50%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. At September 30, 2007,In August 2010, we hadentered into two interest rate swap agreements having an aggregate notional amount of $200.0 million expiring April 1, 2010. These agreementsthat will effectively convert a portion$100.0 million of our variable rate bank debtterm loan borrowings to a fixed-rate debt andbasis beginning September 2011 through September 2014. Based on the term loan’s applicable margin of 2.50% as of October 3, 2010, these agreements would have an average pay rate of 4.87%1.54%, yielding a fixed-ratefixed rate of 6.00% including the term loan’s applicable margin of 1.125%4.04%.
A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding unhedged balance of our revolving credit facility and term loan at September 30, 2007October 3, 2010, would result in an estimated increase of $2.2$3.6 million in annual interest expense.
Changes in interest rates also impact our pension expense, as do changes in the expected long-term rate of return on our pension plan assets. An assumed discount rate is used in determining the present value of future cash outflows currently expected to be required to satisfy the pension benefit obligation when due. Additionally, an assumed long-term rate of return on plan assets is used in determining the average rate of earnings expected on the funds invested or to be invested to provide the benefits to meet our projected benefit obligation. A hypothetical 25 basis point reduction in the assumed discount rate and expected long-term rate of return on plan assets would result in an estimated increase of $2.2 million and $0.6 million, respectively, in our future annual pension expense.
We are also exposed to the impact of commodity and utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs through higher prices is limited by the competitive environment in which we operate. From time to time, we enter into futures and option contracts to manage these fluctuations. There were no open commodity futures and option contracts at September 30, 2007.
At September 30, 2007,October 3, 2010, we had no other material financial instruments subject to significant market exposure.such contracts in place.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements and related financial information required to be filed are indexed onpage F-1 and are incorporated herein.
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ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
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ITEM 9A. | CONTROLS AND PROCEDURES |
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13(a) —– 15(e) and 15(d) —– 15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s fiscal year ended September 30, 2007,October 3, 2010, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in the Company’s internal control over financial reporting that occurred
31
during the Company’s fiscal quarter ended September 30, 2007October 3, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined inRule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007.October 3, 2010. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management has concluded that, as of September 30, 2007,October 3, 2010, the Company’s internal control over financial reporting was effective based on these criteria.
The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which follows.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Jack in the Box Inc.:
We have audited Jack in the Box Inc.’s (the Company’s) internal control over financial reporting as of September 30, 2007,October 3, 2010, based on criteria established inInternal Control —– Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Jack in the Box Inc.’sThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’s Report on Internal Control Overover Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Jack in the Box Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007,October 3, 2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Jack in the Box Inc. and subsidiaries as of October 3, 2010 and September 30, 2007 and October 1, 2006,27, 2009, and the related consolidated statements of earnings, cash flows, and stockholders’ equity for the fifty-three weeks ended October 3, 2010, and the fifty-two weeks ended September 30, 2007, October 1, 2006,27, 2009 and October 2, 2005,September 28, 2008, and our report dated November 16, 200723, 2010, expressed an unqualified opinion on those consolidated financial statements.
San Diego, California
November 16, 200723, 2010
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ITEM 9B. | OTHER INFORMATION |
Not applicable.
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ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
That portion of our definitive Proxy Statement appearing under the captions “Election of Directors — Committee– Committees of the Board of Directors Member Qualifications” and “Section 16(a) Beneficial Ownership Reporting Compliance” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 30, 2007October 3, 2010 and to be used in connection with our 20082011 Annual Meeting of Stockholders is hereby incorporated by reference.
Information regarding executive officers is set forth in Item 1 of Part I of this Report under the caption “Executive Officers.”
That portion of our definitive Proxy Statement appearing under the caption “Audit Committee,” relating to the members of the Company’s Audit Committee and the Audit Committee financial expert, is also incorporated herein by reference.
That portion of our definitive Proxy Statement appearing under the caption “Other Business,” relating to the procedures by which stockholders may recommend candidates for director to the Nominating and Governance Committee of the Board of Directors, is also incorporated herein by reference.
We have adopted a Code of Ethics, which applies to all Jack in the Box Inc. directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, Controller and all of the financial team. The Code of Ethics is posted on the Company’s website, www.jackinthebox.com (under the “Investors —– Corporate Governance – Code of Conduct” caption.)caption). We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Ethics for the Chief Executive Officer, Chief Financial Officer and Controller or persons performing similar functions, by posting such information on our website. No such waivers have been issued during fiscal year 2007.2010.
We have also adopted a set of Corporate Governance Principles and Practices and charters for all of our Board Committees, including the Audit, Compensation, and Nominating and Governance Committees. The Corporate Governance Principles and Practices and committee charters are available on our website at www.jackinthebox.com and in print free of charge to any shareholder who requests them. Written requests for our Code of Business Conduct and Ethics, Corporate Governance Principles and Practices and committee charters should be addressed to Jack in the Box Inc., 9330 Balboa Avenue, San Diego, CA 92123, Attention: Corporate Secretary.
The Company’s primary website can be found at www.jackinthebox.com. We make available free of charge at this website (under the caption “Investors — SEC Filings”) all of our reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, including our Annual Report onForm 10-K, our Quarterly Reports onForm 10-Q and our Current Reports onForm 8-K, and amendments to those reports. These reports are made available on the website as soon as reasonably practicable after their filing with, or furnishing to, the Securities and Exchange Commission.
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ITEM 11. | EXECUTIVE COMPENSATION |
That portion of our definitive Proxy Statement appearing under the caption “Executive Compensation”Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 30, 2007October 3, 2010 and to be used in connection with our 20082011 Annual Meeting of Stockholders is hereby incorporated by reference.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
That portion of our definitive Proxy Statement appearing under the caption “Security Ownership of Certain Beneficial Owners and Management” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 30, 2007October 3, 2010 and to be used in connection with our 20082011 Annual Meeting of Stockholders is hereby
34
incorporated by reference. Information regarding equity compensation plans under which Companycompany common stock may be issued as of September 30, 2007October 3, 2010 is set forth in Item 5 of this Report.
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ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
That portion of our definitive Proxy Statement appearing under the caption “Certain Transactions,” if any, to be filed with the Commission pursuant to Regulation 14A within 120 days after September 30, 2007October 3, 2010 and to be used in connection with our 20082011 Annual Meeting of Stockholders is hereby incorporated by reference.
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ITEM 14. | PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES |
That portion of our definitive Proxy Statement appearing under the caption “Independent Registered Public Accountant Fees and Services” to be filed with the Commission pursuant to Regulation 14A within 120 days after September 30, 2007October 3, 2010 and to be used in connection with our 20082011 Annual Meeting of Stockholders is hereby incorporated by reference.
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
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ITEM 15(a) | (1)Financial Statements.Statements. See Index to Consolidated Financial Statements onpage F-1 of this report.Report. |
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ITEM 15(a) | (2)Financial Statement Schedules.Schedules. Not applicable. |
| | | | |
Number | | Description |
|
| 3 | .1 | | Restated Certificate of Incorporation, as amended, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the fiscal year ended October 3, 1999. |
| 3 | .1.1 | | Certificate of Amendment of Restated Certificate of Incorporation, which is incorporated herein by reference from the registrant’s Current Report onForm 10-K dated September 21, 2007. |
| 3 | .2 | | Amended and Restated Bylaws, which are incorporated herein by reference from the registrant’s Current Report onForm 8-K dated August 7, 2007. |
| 10 | .1 | | Credit Agreement dated as of December 15, 2006 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated December 15, 2006. |
| 10 | .2 | | Collateral Agreement dated as of December 15, 2006 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated December 15, 2006. |
| 10 | .3 | | Guaranty Agreement dated as of December 15, 2006 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated December 15, 2006. |
| 10 | .4* | | Amended and Restated 1992 Employee Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Registration Statement onForm S-8(No. 333-26781) filed May 9, 1997. |
| 10 | .5* | | Jack in the Box Inc. 2002 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Definitive Proxy Statement dated January 18, 2002 for the Annual Meeting of Stockholders’ on February 22, 2002. |
| 10 | .5.1* | | Form of Restricted Stock Award for certain executives under the 2002 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended January 19, 2003. |
| 10 | .6* | | Supplemental Executive Retirement Plan, which is incorporated herein by reference from registrant’s Annual Report onForm 10-K for the fiscal year ended September 30, 2001. |
| 10 | .6.1* | | First Amendment dated as of August 2, 2002 to the Supplemental Executive Retirement Plan, which is incorporated herein by reference from registrant’s Annual Report onForm 10-K for the fiscal year ended September 29, 2002. |
3435
ITEM 15(a) (3)Exhibits.
| | | | |
Number | | Description |
3.1 | | DescriptionRestated Certificate of Incorporation, as amended, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated September 21, 2007.
|
|
| 10 | .6.2*3.1.1 | | Certificate of Amendment of Restated Certificate of Incorporation, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated September 21, 2007. |
3.2 | | Amended and Restated Bylaws, which are incorporated herein by reference from the registrant’s Current Report onForm 8-K dated May 11, 2010. |
10.1 | | Credit Agreement dated as of June 29, 2010 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated July 1, 2010. |
10.2 | | Collateral Agreement dated as of June 29, 2010 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated July 1, 2010. |
10.3 | | Guaranty Agreement dated as of June 29, 2010 by and among Jack in the Box Inc. and the lenders named therein, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated July 1, 2010. |
10.4* | | Amended and Restated 1992 Employee Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Registration Statement onForm S-8(No. 333-26781) filed May 9, 1997. |
10.5* | | Jack in the Box Inc. 2002 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Definitive Proxy Statement dated January 18, 2002 for the Annual Meeting of Stockholders on February 22, 2002. |
10.5.1* | | Form of Restricted Stock Award for certain executives under the 2002 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended January 19, 2003. |
10.6* | | Amended and Restated Supplemental Executive Retirement Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended January 18, 2009. |
10.6.1* | | First Amendment dated as of August 2, 2002 to the Supplemental Executive Retirement Plan, which is incorporated herein by reference from registrant’s Annual Report onForm 10-K for the fiscal year ended September 29, 2002. |
10.6.2* | | Second Amendment dated as of November 9, 2006 to the Supplemental Executive Retirement Plan, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended October 1, 2006. |
| 10 | .6.3*10.6.3* | | Third Amendment dated as of February 15, 2007 to the Supplemental Executive Retirement Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended April 15, 2007. |
| 10 | .6.4*10.6.4* | | Fourth and Fifth Amendments dated as of September 14, 2007 and November 8, 2007, respectively, to the Supplemental Executive Retirement Plan, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended September 30, 2007. |
| 10 | .7*10.7* | | Amended and Restated Performance Bonus Plan effective October 2, 2000, which is incorporated herein by reference from the registrant’s Definitive Proxy Statement dated January 13, 2006 for the Annual Meeting of Stockholders on February 17, 2006. |
| 10 | .7.1*10.8* | | Bonus Program for Fiscal 2007 Under the Performance Bonus Plan, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated September 18, 2006. |
| 10 | .8* | | Deferred Compensation Plan for Non-Management Directors, which is incorporated herein by reference from the registrant’s Definitive Proxy Statement dated January 17, 1995 for the Annual Meeting of Stockholders on February 17, 1995. |
| 10 | .8.1* | | Amended and Restated Deferred Compensation Plan for Non-Management Directors effective November 9, 2006, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended October 1, 2006. |
36
| 10 | .9* |
Number | | Description |
10.9* | | Amended and Restated Non-Employee Director Stock Option Plan, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the fiscal year ended October 3, 1999. |
| 10 | .10*10.10* | | Form of Compensation and Benefits Assurance Agreement for Executives, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended July 9, 2006.January 20, 2008. |
| 10 | .11*10.10.1* | | Revised Form of Compensation and Benefits Assurance Agreement for Executives, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated November 16, 2009. |
10.11* | | Form of Indemnification Agreement between Jack in the Box Inc. and certain officers and directors, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the fiscal year ended September 29, 2002. |
| 10 | .13*10.13* | | Amended and Restated Executive Deferred Compensation Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended January 19, 2003.18, 2009. |
| 10 | .13.1*10.13.1* | | First amendment dated September 14, 2007 to the Executive Deferred Compensation Plan, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended September 30, 2007. |
| 10 | .14(a)10.14(a)* | | Schedule of Restricted Stock Awards, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended October 1, 2006. |
| 10 | .15*10.15* | | Executive Retention Agreement between Jack in the Box Inc. and Gary J. Beisler, President and Chief Executive Officer of Qdoba Restaurant Corporation, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended April 13, 2003. |
| 10 | .16*10.16* | | Amended and Restated 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s CurrentQuarterly Report onForm 8-K10-Q dated February 24, 2005.April 11, 2010. |
| 10 | .16.1*10.16.1* | | Form of Restricted Stock Award for officers and certain members of management under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended July 8, 2007.5, 2009. |
| 10 | .16.1*10.16.1(a)* | | Form of Restricted Stock Award for certain executives of Qdoba Restaurant Corporation under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended July 8, 2007.5, 2009. |
| 10 | .16.2*10.16.2* | | Form of Stock Option Awards under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended July 8, 2007.5, 2009. |
| 10 | .16.3*10.16.2(a)* | | Form of Stock Option Award for officers of Qdoba Restaurant Corporation under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended July 5, 2009. |
10.16.3* | | Jack in the Box Inc. Non-Employee Director Stock Option Award Agreement under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Current Report onForm 8-K dated November 10, 2005. |
10.16.4* | | Form of Restricted Stock Unit Award Agreement for officers and certain members of management under the 2004 Stock Incentive Plan, which is incorporated herein by reference from the registrant’s Quarterly Report onForm 10-Q for the quarter ended April 12, 2009. |
10.16.4(a)* | | Form of Restricted Stock Unit Award Agreement for Non-Employee Director under the 2004 Stock Incentive Plan, which is incorporated by reference from the registrant’s Annual Report on Form 10-K for the year ended September 27, 2009. |
37
| 10 | .21* |
Number | | ExecutiveDescription |
10.16.4(b)* | | Form of Time-Vested Restricted Stock Unit Award Agreement for officers under the 2004 Stock Incentive Plan. |
10.16.5* | | Form of Award Agreement under the 2004 Stock Incentive Plan, which is incorporated by reference from the registrant’s Annual Report on Form10-K for the year ended September 27, 2009. |
10.16.6* | | Form of Qdoba Unit Award Agreement |
10.22* | | Dr. David M. Theno’s Retirement and Release Agreement, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended September 28, 2008. |
10.23* | | Summary of Director Compensation — Base Salaries effective October 2, 2006,fiscal 2007, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended October 1, 2006. |
23.1 | | Consent of Independent Registered Public Accounting Firm. |
31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101.INSλ | | XBRL Instance Document |
101.SCHλ | | XBRL Taxonomy Extension Schema Document |
101.CALλ | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LABλ | | XBRL Taxonomy Extension Label Linkbase Document |
101.PREλ | | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEFλ | | XBRL Taxonomy Extension Definition Linkbase Document |
35
| | | | |
Number | | Description |
|
| 10 | .23* | | Summary of Director Compensation effective fiscal 2007, which is incorporated herein by reference from the registrant’s Annual Report onForm 10-K for the year ended October 1, 2006. |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm |
| 31 | .1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31 | .2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | .1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32 | .2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
* | | Management contract or compensatory plan. |
λ | | In accordance withRegulation S-T, the XBRL-related information in Exhibit 101 to this Annual Report onForm 10-K shall be deemed to be “furnished” and not “filed.” |
| | | | |
| ITEM 15(b) | | | All required exhibits are filed herein or incorporated by reference as described in Item 15(a)(3). |
| |
ITEM 15(c) | | | All supplemental schedules are omitted as inapplicable or because the required information is included in the consolidated financial statements or notes thereto. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JACK IN THE BOX INC.
| | |
| By: | /s/ S/ JERRY P. REBEL |
Jerry P. Rebel
Executive Vice President and Chief Financial Officer (principal
(principal financial officer)
(Duly Authorized Signatory)
Date: November 20, 200724, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | |
Signature | | Title | | Date |
|
| | | | |
/s/S/ LINDA A. LANG Linda A. Lang | | Chairman of the Board, and Chief Executive Officer (principaland President (principal executive officer) | | November 20, 200724, 2010 |
| | | | |
/s/S/ JERRY P. REBEL Jerry P. Rebel | | Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) | | November 20, 200724, 2010 |
| | | | |
/s/S/ MICHAEL E. ALPERT Michael E. Alpert | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ ANNE B. GUST S/ DAVID L. GOEBEL
Anne B. GustDavid L. Goebel | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ GEORGE FELLOWS S/ MURRAY H. HUTCHISON
George FellowsMurray H. Hutchison | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ ALICE B. HAYES S/ MICHAEL W. MURPHY
Alice B. HayesMichael W. Murphy | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ MURRAY H. HUTCHISON S/ DAVID M. TEHLE
Murray H. HutchisonDavid M. Tehle | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ MICHAEL W. MURPHY S/ WINIFRED M. WEBB
Michael W. MurphyWinifred M. Webb | | Director | | November 20, 200724, 2010 |
| | | | |
/s/ DAVID M. TEHLE S/ JOHN T. WYATT
David M. TehleJohn T. Wyatt | | Director | | November 20, 200724, 2010 |
3739
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | |
| | Page |
|
| | | F-2 | |
| | | F-3 | |
| | | F-4 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
Schedules not filed: All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Jack in the Box Inc.:
We have audited the accompanying consolidated balance sheets of Jack in the Box Inc. and subsidiaries (the Company) as of October 3, 2010 and September 30, 2007 and October 1, 2006,27, 2009, and the related consolidated statements of earnings, cash flows, and stockholders’ equity for the fifty-three weeks ended October 3, 2010, and the fifty-two weeks ended September 30, 2007, October 1, 200627, 2009 and October 2, 2005.September 28, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jack in the Box Inc. and subsidiaries as of October 3, 2010 and September 30, 2007 and October 1, 2006,27, 2009, and the results of their operations and their cash flows for the fifty-three weeks ended October 3, 2010, and the fifty-two weeks ended September 30, 2007, October 1, 200627, 2009 and October 2, 2005,September 28, 2008, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment, and Financial Accounting Standards Board Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations, in fiscal year 2006. The Company adopted the provisions of Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R), and changed its method of quantifying errors in fiscal year 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jack in the Box Inc.’s internal control over financial reporting as of September 30, 2007,October 3, 2010, based on criteria established inInternal Control —– Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated November 16, 2007,23, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
San Diego, California
CA
November 16, 200723, 2010
F-2
JACK IN THE BOX INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
| | | | | | | | | | | | | | | | |
| | September 30,
| | October 1,
| | | October 3,
| | September 27,
| |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents (includes restricted cash of $47,655 at October 1, 2006) | | $ | 15,702 | | | $ | 233,906 | | |
Cash and cash equivalents | | | $ | 10,607 | | | $ | 53,002 | |
Accounts and other receivables, net | | | 41,091 | | | | 30,874 | | | | 81,150 | | | | 49,036 | |
Inventories | | | 46,933 | | | | 41,202 | | | | 37,391 | | | | 37,675 | |
Prepaid expenses | | | 29,311 | | | | 23,489 | | | | 33,563 | | | | 8,958 | |
Deferred income taxes | | | 47,063 | | | | 43,889 | | | | 46,185 | | | | 44,614 | |
Assets held for sale and leaseback | | | 42,583 | | | | 23,059 | | |
Assets held for sale | | | | 59,897 | | | | 99,612 | |
Other current assets | | | 5,383 | | | | 6,711 | | | | 6,129 | | | | 7,152 | |
| | | | | | | | | | |
Total current assets | | | 228,066 | | | | 403,130 | | | | 274,922 | | | | 300,049 | |
| | | | | | | | | | |
Property and equipment, at cost: | | | | | | | | | | | | | | | | |
Land | | | 98,962 | | | | 98,962 | | | | 101,206 | | | | 101,576 | |
Buildings | | | 836,878 | | | | 759,459 | | | | 965,312 | | | | 936,351 | |
Restaurant and other equipment | | | 582,931 | | | | 574,630 | | | | 437,547 | | | | 506,185 | |
Construction in progress | | | 67,806 | | | | 72,255 | | | | 58,664 | | | | 58,135 | |
| | | | | | | | | | |
| | | 1,586,577 | | | | 1,505,306 | | | | 1,562,729 | | | | 1,602,247 | |
Less accumulated depreciation and amortization | | | (634,409 | ) | | | (590,530 | ) | | | (684,690 | ) | | | (665,957 | ) |
| | | | | | | | | | |
Property and equipment, net | | | 952,168 | | | | 914,776 | | | | 878,039 | | | | 936,290 | |
| | | | | | | | | | |
Intangible assets, net | | | 20,057 | | | | 21,021 | | | | 17,986 | | | | 18,434 | |
Goodwill | | | 96,665 | | | | 92,187 | | | | 85,041 | | | | 85,843 | |
Other assets, net | | | 85,866 | | | | 89,347 | | | | 151,104 | | | | 115,294 | |
| | | | | | | | �� | | | |
| | $ | 1,382,822 | | | $ | 1,520,461 | | | $ | 1,407,092 | | | $ | 1,455,910 | |
| | | | | | | | | | |
| | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | Current liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 5,787 | | | $ | 37,539 | | | $ | 13,781 | | | $ | 67,977 | |
Accounts payable | | | 97,489 | | | | 61,059 | | | | 101,216 | | | | 63,620 | |
Accrued liabilities | | | 223,540 | | | | 240,320 | | | | 168,186 | | | | 206,100 | |
| | | | | | | | | | |
Total current liabilities | | | 326,816 | | | | 338,918 | | | | 283,183 | | | | 337,697 | |
| | | | | | | | | | |
Long-term debt, net of current maturities | | | 427,516 | | | | 254,231 | | | | 352,630 | | | | 357,270 | |
Other long-term liabilities | | | 168,722 | | | | 145,587 | | | | 250,440 | | | | 234,190 | |
Deferred income taxes | | | 45,211 | | | | 70,840 | | | | 376 | | | | 2,264 | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
Preferred stock $.01 par value, 15,000,000 authorized, none issued | | | — | | | | — | | |
Common stock $.01 par value, 175,000,000 shares authorized, 72,515,171 and 75,640,701 issued, respectively | | | 725 | | | | 756 | | |
Preferred stock $.01 par value, 15,000,000 shares authorized, none issued | | | | - | | | | - | |
Common stock $.01 par value, 175,000,000 shares authorized, 74,461,632 and 73,987,070 issued, respectively | | | | 745 | | | | 740 | |
Capital in excess of par value | | | 132,081 | | | | 431,338 | | | | 187,544 | | | | 169,440 | |
Retained earnings | | | 681,350 | | | | 555,046 | | | | 982,420 | | | | 912,210 | |
Accumulated other comprehensive loss, net | | | (25,140 | ) | | | (1,796 | ) | | | (78,787 | ) | | | (83,442 | ) |
Treasury stock, at cost, 12,779,609 and 11,196,728 shares, respectively | | | (374,459 | ) | | | (274,459 | ) | |
Treasury stock, at cost, 21,640,400 and 16,726,032 shares, respectively | | | | (571,459 | ) | | | (474,459 | ) |
| | | | | | | | | | |
Total stockholders’ equity | | | 414,557 | | | | 710,885 | | | | 520,463 | | | | 524,489 | |
| | | | | | | | | | |
| | $ | 1,382,822 | | | $ | 1,520,461 | | | $ | 1,407,092 | | | $ | 1,455,910 | |
| | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-3
JACK IN THE BOX INC. AND SUBSIDIARIES
(Dollars inIn thousands, except per share data)
| | | | | | | | | | | | |
| | Fiscal Year | |
| | 2007 | | | 2006 | | | 2005 | |
|
Revenues: | | | | | | | | | | | | |
Restaurant sales | | $ | 2,150,985 | | | $ | 2,100,955 | | | $ | 2,045,400 | |
Distribution and other sales | | | 585,107 | | | | 512,907 | | | | 348,482 | |
Franchised restaurant revenues | | | 139,886 | | | | 109,741 | | | | 86,332 | |
| | | | | | | | | | | | |
| | | 2,875,978 | | | | 2,723,603 | | | | 2,480,214 | |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Restaurant costs of sales | | | 683,872 | | | | 654,659 | | | | 647,567 | |
Restaurant operating costs | | | 1,082,178 | | | | 1,078,029 | | | | 1,051,400 | |
Distribution and other costs of sales | | | 579,132 | | | | 505,991 | | | | 343,836 | |
Franchised restaurant costs | | | 56,491 | | | | 44,456 | | | | 35,318 | |
Selling, general and administrative expenses | | | 293,881 | | | | 300,819 | | | | 273,821 | |
Gains on sale of company-operated restaurants | | | (39,261 | ) | | | (42,046 | ) | | | (23,334 | ) |
| | | | | | | | | | | | |
| | | 2,656,293 | | | | 2,541,908 | | | | 2,328,608 | |
| | | | | | | | | | | | |
Earnings from operations | | | 219,685 | | | | 181,695 | | | | 151,606 | |
Interest expense, net | | | 23,354 | | | | 12,075 | | | | 13,402 | |
| | | | | | | | | | | | |
Earnings before income taxes and cumulative effect of accounting change | | | 196,331 | | | | 169,620 | | | | 138,204 | |
Income taxes | | | 70,027 | | | | 60,545 | | | | 46,667 | |
| | | | | | | | | | | | |
Earnings before cumulative effect of accounting change | | | 126,304 | | | | 109,075 | | | | 91,537 | |
Cumulative effect of accounting change, net | | | — | | | | (1,044 | ) | | | — | |
| | | | | | | | | | | | |
Net earnings | | $ | 126,304 | | | $ | 108,031 | | | $ | 91,537 | |
| | | | | | | | | | | | |
Net earnings per share — basic: | | | | | | | | | | | | |
Earnings before cumulative effect of accounting change | | $ | 1.93 | | | $ | 1.57 | | | $ | 1.28 | |
Cumulative effect of accounting change, net | | | — | | | | (0.02 | ) | | | — | |
| | | | | | | | | | | | |
Net earnings per share | | $ | 1.93 | | | $ | 1.55 | | | $ | 1.28 | |
| | | | | | | | | | | | |
Net earnings per share — diluted: | | | | | | | | | | | | |
Earnings before cumulative effect of accounting change | | $ | 1.88 | | | $ | 1.52 | | | $ | 1.24 | |
Cumulative effect of accounting change, net | | | — | | | | (0.02 | ) | | | — | |
| | | | | | | | | | | | |
Net earnings per share | | $ | 1.88 | | | $ | 1.50 | | | $ | 1.24 | |
| | | | | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | | | | | |
Basic | | | 65,314 | | | | 69,888 | | | | 71,250 | |
Diluted | | | 67,263 | | | | 71,834 | | | | 73,876 | |
| | | | | | | | | | | | |
| | Fiscal Year | |
| | 2010 | | | 2009 | | | 2008 | |
|
Revenues: | | | | | | | | | | | | |
Company restaurant sales | | $ | 1,668,527 | | | $ | 1,975,842 | | | $ | 2,101,576 | |
Distribution sales | | | 397,977 | | | | 302,135 | | | | 275,225 | |
Franchise revenues | | | 231,027 | | | | 193,119 | | | | 162,760 | |
| | | | | | | | | | | | |
| | | 2,297,531 | | | | 2,471,096 | | | | 2,539,561 | |
| | | | | | | | | | | | |
Operating costs and expenses, net: | | | | | | | | | | | | |
Company restaurant costs: | | | | | | | | | | | | |
Food and packaging | | | 530,613 | | | | 639,916 | | | | 700,755 | |
Payroll and employee benefits | | | 505,138 | | | | 587,551 | | | | 624,600 | |
Occupancy and other | | | 398,066 | | | | 428,979 | | | | 438,788 | |
| | | | | | | | | | | | |
Total company restaurant costs | | | 1,433,817 | | | | 1,656,446 | | | | 1,764,143 | |
Distribution costs | | | 399,707 | | | | 300,934 | | | | 273,369 | |
Franchise costs | | | 104,845 | | | | 78,414 | | | | 64,955 | |
Selling, general and administrative expenses | | | 243,353 | | | | 260,662 | | | | 264,798 | |
Impairment and other charges, net | | | 48,887 | | | | 22,014 | | | | 22,757 | |
Gains on the sale of company-operated restaurants, net | | | (54,988 | ) | | | (78,642 | ) | | | (66,349 | ) |
| | | | | | | | | | | | |
| | | 2,175,621 | | | | 2,239,828 | | | | 2,323,673 | |
| | | | | | | | | | | | |
Earnings from operations | | | 121,910 | | | | 231,268 | | | | 215,888 | |
| | | | | | | | | | | | |
Interest expense, net | | | 15,894 | | | | 20,767 | | | | 27,428 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Earnings from continuing operations and before income taxes | | | 106,016 | | | | 210,501 | | | | 188,460 | |
| | | | | | | | | | | | |
Income taxes | | | 35,806 | | | | 79,455 | | | | 70,251 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Earnings from continuing operations | | | 70,210 | | | | 131,046 | | | | 118,209 | |
| | | | | | | | | | | | |
Earnings (losses) from discontinued operations, net | | | - | | | | (12,638 | ) | | | 1,070 | |
| | | | | | | | | | | | |
Net earnings | | $ | 70,210 | | | $ | 118,408 | | | $ | 119,279 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net earnings per share – basic: | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.27 | | | $ | 2.31 | | | $ | 2.03 | |
Earnings (losses) from discontinued operations, net | | | - | | | | (0.23 | ) | | | 0.02 | |
| | | | | | | | | | | | |
Net earnings per share | | $ | 1.27 | | | $ | 2.08 | | | $ | 2.05 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net earnings per share – diluted: | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.26 | | | $ | 2.27 | | | $ | 1.99 | |
Earnings (losses) from discontinued operations, net | | | - | | | | (0.22 | ) | | | 0.02 | |
| | | | | | | | | | | | |
Net earnings per share | | $ | 1.26 | | | $ | 2.05 | | | $ | 2.01 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Weighted-average shares outstanding: | | | | | | | | | | | | |
Basic | | | 55,070 | | | | 56,795 | | | | 58,249 | |
Diluted | | | 55,843 | | | | 57,733 | | | | 59,445 | |
See accompanying notes to consolidated financial statements.
F-4
JACK IN THE BOX INC. AND SUBSIDIARIES
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year | | | Fiscal Year | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | $ | 126,304 | | | $ | 108,031 | | | $ | 91,537 | | | $ | 70,210 | | | $ | 118,408 | | | $ | 119,279 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
Losses (earnings) from discontinued operations, net | | | | - | | | | 12,638 | | | | (1,070 | ) |
| | | | | | | | |
Net earnings from continuing operations | | | | 70,210 | | | | 131,046 | | | | 118,209 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | | | | |
Depreciation and amortization | | | 94,306 | | | | 88,295 | | | | 86,156 | | | | 101,514 | | | | 100,830 | | | | 96,943 | |
Deferred finance cost amortization | | | 1,443 | | | | 1,132 | | | | 982 | | | | 1,658 | | | | 1,461 | | | | 1,462 | |
Provision for deferred income taxes | | | (14,239 | ) | | | (11,186 | ) | | | (3,237 | ) | |
Share-based compensation expense for equity classified awards | | | 12,640 | | | | 9,285 | | | | 1,396 | | |
Deferred income taxes | | | | (27,554 | ) | | | (15,331 | ) | | | 6,643 | |
Share-based compensation expense | | | | 10,605 | | | | 9,341 | | | | 10,566 | |
Pension and postretirement expense | | | 15,777 | | | | 25,860 | | | | 18,321 | | | | 29,140 | | | | 12,243 | | | | 14,433 | |
Gains on cash surrender value of company-owned life insurance | | | (7,639 | ) | | | (3,265 | ) | | | (4,127 | ) | |
Gains on the sale of company-operated restaurants | | | (39,261 | ) | | | (42,046 | ) | | | (23,334 | ) | |
Losses (gains) on cash surrender value of company-owned life insurance | | | | (6,199 | ) | | | 1,910 | | | | 8,172 | |
Gains on the sale of company-operated restaurants, net | | | | (54,988 | ) | | | (78,642 | ) | | | (66,349 | ) |
Gains on the acquisition of franchise-operated restaurants | | | | - | | | | (958 | ) | | | - | |
Losses on the disposition of property and equipment, net | | | 15,898 | | | | 9,095 | | | | 6,615 | | | | 10,757 | | | | 11,418 | | | | 17,373 | |
Impairment charges and other | | | | 12,970 | | | | 6,586 | | | | 3,507 | |
Loss on early retirement of debt | | | 1,939 | | | | — | | | | — | | | | 513 | | | | - | | | | - | |
Impairment charges and other | | | 1,347 | | | | 4,126 | | | | 3,375 | | |
Cumulative effect of change in accounting principle | | | — | | | | 1,044 | | | | — | | |
Changes in assets and liabilities: | | | | | | | | | | | | | |
Decrease (increase) in receivables | | | (10,277 | ) | | | (10,765 | ) | | | 162 | | |
Increase in inventories | | | (5,731 | ) | | | (1,195 | ) | | | (5,964 | ) | |
Increase in prepaid expenses and other current assets | | | (5,923 | ) | | | (4,436 | ) | | | (2,570 | ) | |
Increase in accounts payable | | | 13,075 | | | | 4,995 | | | | 2,561 | | |
Changes in assets and liabilities, excluding acquisitions and dispositions: | | | | | | | | | | | | | |
Accounts and other receivables | | | | (8,174 | ) | | | 3,519 | | | | (9,172 | ) |
Inventories | | | | 284 | | | | 7,596 | | | | (4,452 | ) |
Prepaid expenses and other current assets | | | | (22,967 | ) | | | 11,496 | | | | 7,026 | |
Accounts payable | | | | (2,219 | ) | | | (14,975 | ) | | | 4,167 | |
Pension and postretirement contributions | | | (14,795 | ) | | | (16,465 | ) | | | (23,658 | ) | | | (24,072 | ) | | | (26,233 | ) | | | (25,012 | ) |
Increase (decrease) in other liabilities | | | (5,055 | ) | | | 42,634 | | | | 9,673 | | |
Other | | | | (27,440 | ) | | | (13,983 | ) | | | (16,481 | ) |
| | | | | | | | |
Cash flows provided by operating activities from continuing operations | | | | 64,038 | | | | 147,324 | | | | 167,035 | |
Cash flows provided by (used in) operating activities from discontinued operations | | | | (2,172 | ) | | | 1,426 | | | | 5,349 | |
| | | | | | | | | | | | | | |
Cash flows provided by operating activities | | | 179,809 | | | | 205,139 | | | | 157,888 | | | | 61,866 | | | | 148,750 | | | | 172,384 | |
| | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (154,182 | ) | | | (150,032 | ) | | | (126,134 | ) | | | (95,610 | ) | | | (153,500 | ) | | | (178,605 | ) |
Proceeds from the sale of property and equipment | | | 1,204 | | | | 1,899 | | | | 2,094 | | |
Proceeds from the sale of company-operated restaurants | | | 51,256 | | | | 54,389 | | | | 33,517 | | | | 66,152 | | | | 94,927 | | | | 57,117 | |
Proceeds from (purchase of) assets held for sale and leaseback, net | | | (15,396 | ) | | | 32,891 | | | | (15,751 | ) | |
Proceeds from (purchases of) assets held for sale and leaseback, net | | | | 45,348 | | | | (36,824 | ) | | | (14,003 | ) |
Collections on notes receivable | | | 122 | | | | 5,389 | | | | 895 | | | | 8,322 | | | | 31,539 | | | | 7,942 | |
Purchase of investments | | | (6,097 | ) | | | (7,325 | ) | | | (6,284 | ) | |
Acquisition of franchise-operated restaurants | | | (6,960 | ) | | | — | | | | — | | | | (8,115 | ) | | | (6,760 | ) | | | - | |
Other | | | (1,288 | ) | | | (1,038 | ) | | | (2,858 | ) | | | 3,076 | | | | (989 | ) | | | (4,857 | ) |
| | | | | | | | | | | | | | |
Cash flows used in investing activities | | | (131,341 | ) | | | (63,827 | ) | | | (114,521 | ) | |
Cash flows provided by (used in) investing activities from continuing operations | | | | 19,173 | | | | (71,607 | ) | | | (132,406 | ) |
Cash flows provided by (used in) investing activities from discontinued operations | | | | - | | | | 30,648 | | | | (1,964 | ) |
| | | | | | | | |
Cash flows provided by (used in) investing activities | | | | 19,173 | | | | (40,959 | ) | | | (134,370 | ) |
| | | | | | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings under term loan | | | 475,000 | | | | — | | | | — | | |
Principal payments on debt | | | (333,931 | ) | | | (8,049 | ) | | | (8,204 | ) | |
Payment of debt costs | | | (7,357 | ) | | | (260 | ) | | | (343 | ) | |
Borrowings on revolving credit facility | | | | 881,000 | | | | 541,000 | | | | 650,000 | |
Repayments of borrowings on revolving credit facility | | | | (721,000 | ) | | | (632,000 | ) | | | (559,000 | ) |
Proceeds from issuance of debt | | | | 200,000 | | | | - | | | | - | |
Principal repayments on debt | | | | (418,836 | ) | | | (2,334 | ) | | | (5,722 | ) |
Debt issuance costs | | | | (9,548 | ) | | | - | | | | - | |
Proceeds from issuance of common stock | | | | 5,186 | | | | 4,574 | | | | 8,642 | |
Repurchase of common stock | | | (463,402 | ) | | | (49,997 | ) | | | (92,861 | ) | | | (97,000 | ) | | | - | | | | (100,000 | ) |
Excess tax benefits from share-based compensation arrangements | | | | 2,037 | | | | 664 | | | | 3,346 | |
Change in book overdraft | | | 17,676 | | | | — | | | | — | | | | 34,727 | | | | (14,577 | ) | | | (3,098 | ) |
Excess tax benefits from share-based compensation arrangements | | | 17,533 | | | | 12,327 | | | | — | | |
Proceeds from issuance of common stock | | | 27,809 | | | | 34,865 | | | | 30,049 | | |
| | | | | | | | | | | | | | |
Cash flows used in financing activities | | | (266,672 | ) | | | (11,114 | ) | | | (71,359 | ) | | | (123,434 | ) | | | (102,673 | ) | | | (5,832 | ) |
| | | | | �� | | | | | | | | | | |
| | |
Net increase (decrease) in cash and cash equivalents | | $ | (218,204 | ) | | $ | 130,198 | | | $ | (27,992 | ) | | | (42,395 | ) | | | 5,118 | | | | 32,182 | |
Cash and cash equivalents at beginning of period | | | | 53,002 | | | | 47,884 | | | | 15,702 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | | $ | 10,607 | | | $ | 53,002 | | | $ | 47,884 | |
| | | | | | | | |
See accompanying notes to consolidated financial statements.
F-5
JACK IN THE BOX INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | | | Accumulated
| | | | | |
| | Common Stock | | Capital in
| | | | Other
| | | | | | | | | | | | | Capital in
| | | | other
| | | | | |
| | Number
| | | | Excess of
| | Retained
| | Comprehensive
| | Unearned
| | Treasury
| | | | | Number
| | | | excess of
| | Retained
| | comprehensive
| | Treasury
| | | |
| | of Shares | | Amount | | par Value | | Earnings | | Income (Loss) | | Compensation | | Stock | | Total | | | of shares | | Amount | | par value | | earnings | | loss, net | | stock | | Total | |
| | | |
Balance at October 3, 2004 | | | 69,413,415 | | | $ | 694 | | | $ | 338,070 | | | $ | 355,478 | | | $ | (1,254 | ) | | $ | (7,988 | ) | | $ | (131,601 | ) | | $ | 553,399 | | |
| |
Balance at September 30, 2007 | | | | 72,515,171 | | | $ | 725 | | | $ | 132,081 | | | $ | 676,378 | | | $ | (25,140 | ) | | $ | (374,459 | ) | | $ | 409,585 | |
Shares issued under stock plans, including tax benefit | | | 3,090,678 | | | | 31 | | | | 41,820 | | | | — | | | | — | | | | (2,031 | ) | | | — | | | | 39,820 | | | | 990,878 | | | | 10 | | | | 12,376 | | | | - | | | | - | | | | - | | | | 12,386 | |
Amortization of unearned compensation, forfeitures and change in value of common stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,786 | | | | — | | | | 1,786 | | |
Share-based compensation | | | | - | | | | - | | | | 10,566 | | | | - | | | | - | | | | - | | | | 10,566 | |
Purchase of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (92,861 | ) | | | (92,861 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (100,000 | ) | | | (100,000 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | — | | | | — | | | | — | | | | 91,537 | | | | — | | | | — | | | | — | | | | 91,537 | | | | - | | | | - | | | | - | | | | 119,279 | | | | - | | | | - | | | | 119,279 | |
Unrealized gains on interest rate swaps, net of taxes | | | — | | | | — | | | | — | | | | — | | | | 417 | | | | — | | | | — | | | | 417 | | |
Additional minimum pension liability, net of taxes | | | — | | | | — | | | | — | | | | — | | | | (28,726 | ) | | | — | | | | — | | | | (28,726 | ) | |
Unrealized losses on interest rate swaps, net | | | | - | | | | - | | | | - | | | | - | | | | (1,984 | ) | | | - | | | | (1,984 | ) |
Amortization of unrecognized actuarial gain and prior service cost, net | | | | - | | | | - | | | | - | | | | - | | | | 7,279 | | | | - | | | | 7,279 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income (loss) | | | — | | | | — | | | | — | | | | 91,537 | | | | (28,309 | ) | | | — | | | | — | | | | 63,228 | | |
Total comprehensive income | | | | - | | | | - | | | | - | | | | 119,279 | | | | 5,295 | | | | - | | | | 124,574 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at October 2, 2005 | | | 72,504,093 | | | | 725 | | | | 379,890 | | | | 447,015 | | | | (29,563 | ) | | | (8,233 | ) | | | (224,462 | ) | | | 565,372 | | |
Balance at September 28, 2008 | | | | 73,506,049 | | | | 735 | | | | 155,023 | | | | 795,657 | | | | (19,845 | ) | | | (474,459 | ) | | | 457,111 | |
Shares issued under stock plans, including tax benefit | | | 3,136,608 | | | | 31 | | | | 50,396 | | | | — | | | | — | | | | — | | | | — | | | | 50,427 | | | | 481,021 | | | | 5 | | | | 5,076 | | | | - | | | | - | | | | - | | | | 5,081 | |
Share-based compensation | | | — | | | | — | | | | 9,285 | | | | — | | | | — | | | | — | | | | — | | | | 9,285 | | | | - | | | | - | | | | 9,341 | | | | - | | | | - | | | | - | | | | 9,341 | |
Reclass of unearned compensation upon adoption of SFAS 123R | | | — | | | | — | | | | (8,233 | ) | | | — | | | | — | | | | 8,233 | | | | — | | | | — | | |
Change in pension and postretirement plans’ measurement date, net | | | | - | | | | - | | | | - | | | | (1,855 | ) | | | 40 | | | | - | | | | (1,815 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | | - | | | | - | | | | - | | | | 118,408 | | | | - | | | | - | | | | 118,408 | |
Unrealized gains on interest rate swaps, net | | | | - | | | | - | | | | - | | | | - | | | | 21 | | | | - | | | | 21 | |
Amortization of unrecognized actuarial loss and prior service cost, net | | | | - | | | | - | | | | - | | | | - | | | | (63,658 | ) | | | - | | | | (63,658 | ) |
| | | | | | | | | | | | | | | | |
Total comprehensive income | | | | - | | | | - | | | | - | | | | 118,408 | | | | (63,637 | ) | | | - | | | | 54,771 | |
| | | | | | | | | | | | | | | | |
Balance at September 27, 2009 | | | | 73,987,070 | | | | 740 | | | | 169,440 | | | | 912,210 | | | | (83,442 | ) | | | (474,459 | ) | | | 524,489 | |
Shares issued under stock plans, including tax benefit | | | | 474,562 | | | | 5 | | | | 7,499 | | | | - | | | | - | | | | - | | | | 7,504 | |
Share-based compensation | | | | - | | | | - | | | | 10,605 | | | | - | | | | - | | | | - | | | | 10,605 | |
Purchase of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (49,997 | ) | | | (49,997 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (97,000 | ) | | | (97,000 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | — | | | | — | | | | — | | | | 108,031 | | | | — | | | | — | | | | — | | | | 108,031 | | | | - | | | | - | | | | - | | | | 70,210 | | | | - | | | | - | | | | 70,210 | |
Unrealized gains on interest rate swaps, net of taxes | | | — | | | | — | | | | — | | | | — | | | | 180 | | | | — | | | | — | | | | 180 | | |
Additional minimum pension liability, net of taxes | | | — | | | | — | | | | — | | | | — | | | | 27,587 | | | | — | | | | — | | | | 27,587 | | |
Unrealized gains on interest rate swaps, net | | | | - | | | | - | | | | - | | | | - | | | | 2,401 | | | | - | | | | 2,401 | |
Amortization of unrecognized actuarial loss and prior service cost, net | | | | - | | | | - | | | | - | | | | - | | | | 2,254 | | | | - | | | | 2,254 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | — | | | | — | | | | — | | | | 108,031 | | | | 27,767 | | | | — | | | | — | | | | 135,798 | | | | - | | | | - | | | | - | | | | 70,210 | | | | 4,655 | | | | - | | | | 74,865 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at October 1, 2006 | | | 75,640,701 | | | | 756 | | | | 431,338 | | | | 555,046 | | | | (1,796 | ) | | | — | | | | (274,459 | ) | | | 710,885 | | |
Shares issued under stock plans, including tax benefit | | | 2,374,470 | | | | 24 | | | | 45,685 | | | | — | | | | — | | | | — | | | | — | | | | 45,709 | | |
Share-based compensation | | | — | | | | — | | | | 12,640 | | | | — | | | | — | | | | — | | | | — | | | | 12,640 | | |
Reclass of non-management director stock equivalents as equity-based awards | | | — | | | | — | | | | 5,765 | | | | — | | | | — | | | | — | | | | — | | | | 5,765 | | |
Purchase of treasury stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (100,000 | ) | | | (100,000 | ) | |
Repurchase and retirement of common stock | | | (5,500,000 | ) | | | (55 | ) | | | (363,347 | ) | | | — | | | | — | | | | — | | | | — | | | | (363,402 | ) | |
Retirement plans’ adjustment in connection with the adoption of SFAS 158, net | | | — | | | | — | | | | — | | | | — | | | | (24,249 | ) | | | — | | | | — | | | | (24,249 | ) | |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net earnings | | | — | | | | — | | | | — | | | | 126,304 | | | | — | | | | — | | | | — | | | | 126,304 | | |
Net unrealized/realized losses on interest rate swaps, net of taxes | | | — | | | | — | | | | — | | | | — | | | | (1,488 | ) | | | — | | | | — | | | | (1,488 | ) | |
Additional minimum pension liability, net of taxes | | | — | | | | — | | | | — | | | | — | | | | 2,393 | | | | — | | | | — | | | | 2,393 | | |
Balance at October 3, 2010 | | | | 74,461,632 | | | $ | 745 | | | $ | 187,544 | | | $ | 982,420 | | | $ | (78,787 | ) | | $ | (571,459 | ) | | $ | 520,463 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | — | | | | — | | | | — | | | | 126,304 | | | | 905 | | | | — | | | | — | | | | 127,209 | | |
| | | | | | | | | | | | | | | | | | |
Balance at September 30, 2007 | | | 72,515,171 | | | $ | 725 | | | $ | 132,081 | | | $ | 681,350 | | | $ | (25,140 | ) | | $ | — | | | $ | (374,459 | ) | | $ | 414,557 | | |
| | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
F-6
JACK IN THE BOX INC. AND SUBSIDIARIES
| |
1. | ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of operations— Founded in 1951, Jack in the Box Inc. (the “Company”) owns, operates and franchisesJack in the Box® quick-service restaurants and Qdoba Mexican Grill® (“Qdoba”) fast-casual restaurants in 4245 states. The Company also operates 60 proprietary convenience stores called Quick Stuff®, which include a major-branded fuel station developed adjacent to a full-sizeJack infollowing summarizes the Box restaurant.number of restaurants:
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Jack in the Box: | | | | | | | | | | | | |
Company-operated | | | 956 | | | | 1,190 | | | | 1,346 | |
Franchised | | | 1,250 | | | | 1,022 | | | | 812 | |
| | | | | | | | | | | | |
Total system | | | 2,206 | | | | 2,212 | | | | 2,158 | |
| | | | | | | | | | | | |
Qdoba: | | | | | | | | | | | | |
Company-operated | | | 188 | | | | 157 | | | | 111 | |
Franchised | | | 337 | | | | 353 | | | | 343 | |
| | | | | | | | | | | | |
Total system | | | 525 | | | | 510 | | | | 454 | |
| | | | | | | | | | | | |
References to the Company throughout these notes to the consolidated financial statements are made using the first person notations of “we,” “us” and “our.”
Basis of presentation— The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (“SEC”). During fiscal 2009, we sold all of our Quick Stuff® convenience stores and fuel stations. These stores and their related activities have been presented as discontinued operations for all periods presented. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate to our continuing operations.
Principles of consolidation— The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities where we are deemed the primary beneficiary. All significant intercompany transactions are eliminated.
Reclassifications and adjustments— Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the fiscal 2007 presentation, including the reclassification of gains on the sale of company-operated restaurants as a reduction of operating costs2010 presentation. In 2010, we separated impairment and expensesother charges, net from revenues. Additionally, all historical shareselling, general and per share data, except for treasury stock,administrative expenses in our consolidated financial statements and notes thereto have been restated to give retroactive recognition of our two-for-one stock split. In the consolidated statements of stockholders’ equity, for all periods presented, the par value ofearnings. We believe the additional shares was reclassified from capital in excessdetail provided is useful when analyzing our results of par value to common stock. Refer to Note 9,Stockholders’ Equity, for additional information regarding the stock split.operations.
Fiscal year— Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2007, 20062010 includes 53 weeks while fiscal 2009 and 20052008 include 52 weeks.
Use of estimates— In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain assumptions and estimates that affect reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual amounts could differ materially from these estimates.
Cash and cash equivalents— We invest cash in excess of operating requirements in short-term, highly liquid investments with original maturities of three months or less, which are considered cash equivalents.
Restricted cash— To reduce our letter of credit fees incurred under our credit facility, we entered into a cash-collateralized letter of credit agreement in October 2004. At October 1, 2006, we had letters of credit outstanding under this agreement of $40.2 million, which were collateralized by approximately $47.7 million of cash and cash equivalents. Effective July 2007, we elected to terminate this arrangement. Thus, there are no restrictions on our cash and cash equivalents at September 30, 2007.
Accounts and other receivables, netis primarily comprised of receivables from franchisees, tenants and tenants.credit card processors. Franchisee receivables primarily include rents, royalties, and marketing fees associated with the franchise agreements, and receivables arising from distribution services provided to most franchisees. Tenant receivables relate to subleased properties where we are on the master lease agreement. We charge interest on past due accounts receivable and accrue interest on notes receivable based on the contractual terms. The allowance for doubtful accounts is based on historical experience and a review of existing receivables. Changes in accounts and other receivables are classified as operating activity in the consolidated statements of cash flows.
Inventoriesare valued at the lower of cost on afirst-in, first-out basis, or market. Changes in inventories are classified as operating activity in the consolidated statements of cash flows.
Assets held for sale and leasebacktypically represent the costs for new sites that we plan to sell and lease back when construction is completed. Gains or losses realized on sale-leaseback transactions are deferred and amortized to income over the lease terms.
F-7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in accounts and other receivables are classified as an operating activity in the consolidated statements of cash flows.
Inventoriesare valued at the lower of cost or market on afirst-in, first-out basis. Changes in inventories are classified as an operating activity in the consolidated statements of cash flows.
Assets held for saletypically represent the costs for new sites and existing sites that we plan to sell and lease back within the next year. Gains or losses realized on sale-leaseback transactions are deferred and amortized to income over the lease terms. Assets held for sale also includes the net book value of equipment we plan to sell to franchisees. Assets are not depreciated when classified as held for sale. Assets held for sale consisted of the following at each year-end:
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Sites held for sale and leaseback | | $ | 55,224 | | | $ | 99,612 | |
Assets held for sale | | | 4,673 | | | | - | |
| | | | | | | | |
| | $ | 59,897 | | | $ | 99,612 | |
| | | | | | | | |
Property and equipment, at cost— Expenditures for new facilities and equipment, and those that substantially increase the useful lives of the property, are capitalized. Facilities leased under capital leases are stated at the present value of minimum lease payments at the beginning of the lease term, not to exceed fair value. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and gains or losses on the dispositions are reflected in results of operations.
Buildings, equipment, and leasehold improvements are generally depreciated using the straight-line method based on the estimated useful lives of the assets, over the initial lease term for certain assets acquired in conjunction with the lease commencement for leased properties, or the remaining lease term for certain assets acquired after the commencement of the lease for leased properties. In certain situations, one or more option periods may be used in determining the depreciable life of assets related to leased properties if we deem that an economic penalty would be incurred otherwise. In either circumstance, our policy requires lease term consistency when calculating the depreciation period, in classifying the lease and in computing straight-line rent expense. Building and leasehold improvement assets are assigned lives that range from 3three to 35 years;years, and equipment assets are assigned lives that range from 2two to 35 years. Depreciation and amortization expense related to property and equipment was $101.0 million, $100.5 million and $96.7 million in 2010, 2009 and 2008, respectively.
Impairment of long-lived assets— We evaluate our long-lived assets, such as property and equipment, for impairment whenever indicators of impairment are present. This review generally includes a restaurant-level analysis, that takesexcept when we are actively selling a group of restaurants in which case we perform our impairment evaluations at the group level. Impairment evaluations for individual restaurants take into consideration a restaurant’s operating cash flows, the period of time since a restaurant has been opened or remodeled, refranchising expectations, and the maturity of the related market. When indicatorsImpairment evaluations for a group of impairment are present, we perform an impairment analysis on arestaurant-by-restaurant basis. Ifrestaurants takes into consideration the sum of undiscountedgroup’s expected future cash flows is less thanand sales proceeds from bids received, if any, or fair market value based on, among other considerations, the net carrying valuespecific sales and cash flows of those restaurants. If the asset,assets of a restaurant or group of restaurants subject to our impairment evaluation are not recoverable based upon the forecasted, undiscounted cash flows, we recognize an impairment loss by the amount which the carrying value exceeds the fair value of the asset.assets exceeds fair value. Long-lived assets that are held for disposal are reported at the lower of their carrying value or fair value, less estimated costs to sell.
Goodwill and intangible assets— Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired. The following table summarizes goodwill by operating segment(in thousands):
| | | | | | | | |
| | Sept. 30,
| | | Oct. 1,
| |
Fiscal Year Ended | | 2007 | | | 2006 | |
|
Jack in the Box | | $ | 67,868 | | | $ | 67,868 | |
Qdoba | | | 28,797 | | | | 24,319 | |
| | | | | | | | |
Total | | $ | 96,665 | | | $ | 92,187 | |
| | | | | | | | |
During fiscal year 2007, aggregate goodwill of $4.5 million was recorded in connection with the acquisition of nine Qdoba restaurants previously operated by franchisees.
Intangible assets, net is comprised primarily of lease acquisition costs, acquired franchise contract costs and our Qdoba trademark. Lease acquisition costs primarily represent the fair
F-8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
values of acquired lease contracts having contractual rents lower than fair market rents and are amortized on a straight-line basis over the remaining initial lease term, generally 18 years.term. Acquired franchise contract costs, which represent the acquired value of franchise contracts, are amortized over the term of the franchise agreements, generally 10 years, based on the projected royalty revenue stream. Our trademark asset, recorded in connection with our acquisition of Qdoba Restaurant Corporation in fiscal year 2003, has an indefinite life and is not amortized.
Goodwill andnon-amortizable intangible assets not subject to amortization are evaluated for impairment annually, or more frequently if indicators of impairment are present. If the determined fair values of these assets are less than the related carrying amounts, an impairment loss is recognized. We performed our annual impairment tests of goodwill andnon-amortized intangible assets in the fourth quarter of fiscal year 20072010 and determined there was no impairment.
F-8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred financing costs — We capitalize costs incurred in connection with borrowings or establishment of credit facilities. These costs are amortized as an adjustment to interest expense over the life of the borrowing or life of the credit facility using the interest method. In the case of early debt principal repayments, we adjust the value of the corresponding deferred financing costs with a charge to interest expense, net and similarly adjust the future amortization expense. Deferred financing costs are included in other assets, net in the accompanying consolidated balance sheets.
Company-owned life insurance— We have elected to purchasepurchased company-owned life insurance (“COLI”) policies to support our non-qualified benefit plans. The cash surrender values of these policies were $66.8$75.8 million and $54.4$66.9 million as of October 3, 2010 and September 30, 2007 and October 1, 2006,27, 2009, respectively, and are included in other assets, net in the accompanying consolidated balance sheets. Changes in cash surrender values are included in selling, general and administrative expenses in the accompanying consolidated statements of earnings. These policies reside in an umbrella trust for use only to pay plan benefits to participants or to pay creditors if the Company becomes insolvent. As of October 3, 2010 and September 30, 2007 and October 1, 2006,27, 2009, the trust also included cash of $0.7$0.5 million and $0.8 million, respectively, and death benefits receivable of $1.4 million, at September 30, 2007.respectively.
Leases— We review all leases for capital or operating classification at their inception under the guidance of Statement of Financial Accounting StandardStandards Board (“SFAS”FASB”) 13,Accountingauthoritative guidance for Leases.leases. Our operations are primarily conducted under operating leases. Within the provisions of certain leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. Differences between amounts paid and amounts expensed are recorded as deferred rent. The lease term commences on the date when we have the right to control the use of the leased property. Certain leases also include contingent rent provisions based on sales levels, which are accrued at the point in time we determine that it is probable such sales levels will be achieved.
Asset retirement obligations — Effective the last day of fiscal 2006, we adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143(“FIN 47”), which clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timingand/or method of settling the obligation are contingent on a future event that may or may not be within the control of the entity.
This interpretation only applied to legal obligations associated with the removal of improvements in surrendering our leased properties. The impact of adopting FIN 47 was the recognition of an additional asset of $0.5 million (net of accumulated amortization of $0.4 million), an asset retirement obligation of $2.2 million, and a charge of $1.7 million ($1.0 million, net of tax), which was recorded as a cumulative effect of change in accounting principle in the consolidated statement of earnings for the fiscal year ended October 1, 2006.
Fair value of financial instruments — The fair values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities approximate their carrying amounts due to their short maturities. COLI policies are recorded at their cash surrender values. The fair values of each of our long-term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our long-term debt at September 30, 2007 and October 1, 2006 approximate their carrying values. Our derivative instruments are carried at their fair values based upon quoted market prices.
Revenue recognition— Revenue from company restaurant and fuel and convenience store sales areis recognized when the food beverage, convenience store and fuelbeverage products are sold.sold and are presented net of sales taxes.
We provide purchasing, warehouse and distribution services for most of our franchise-operated restaurants. Revenue from these services, included in distribution sales in the accompanying consolidated statements of earnings, is recognized at the time of physical delivery of the inventory.
F-9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
FranchiseOur franchise arrangements generally provide for initial franchise fees and continuing royalty payments to usfees based onupon a percentage of sales.sales (“royalties”). In order to renew a franchise agreement upon expiration, a franchisee must obtain the Company’s approval and pay then current fees. Franchise fees are recorded as revenue when we have substantially performed all of our contractual obligations. Franchise royalties are recorded in revenues on an accrual basis. Among other things, a franchisee may be provided the use of land and building, generally for a period of 20 years, and is required to pay negotiated rent, property taxes, insurance and maintenance. Franchise fees are recorded as revenue when we have substantially performed all of our contractual obligations. Expenses associated with the issuance of the franchise are expensed as incurred. Franchise royalties are recorded in revenues on an accrual basis. Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is met. Gains on the sale of restaurant businesses to franchisees are recorded when the sales are consummated and certain other gain recognition criteria are met.
Gift cards— We sell gift cards to our customers in our restaurants and through selected third parties. The gift cards sold to our customers have no stated expiration dates and are subject to actualand/or potential escheatment rights in variousseveral of the jurisdictions in which we operate. We recognize income from gift cards when redeemed by the customer redeems the gift card. We have not recognized breakage oncustomer.
F-9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
While we will continue to honor all gift cards pending,presented for payment, we may determine the likelihood of redemption to be remote for certain card balances due to, among other things, sufficientlong periods of inactivity. In these circumstances, to the extent we determine there is no requirement for remitting balances to government agencies under unclaimed property laws, card balances may be recognized as a reduction to selling, general and administrative expenses in the accompanying consolidated statements of earnings.
Income recognized on unredeemed gift card history necessary to estimate our potential breakage. We do not believe gift card breakage will have a material impact on our future operations.balances was $0.7 million in fiscal 2010 and 2009 and $1.0 million in fiscal 2008.
Pre-opening costsassociated with the opening of a new restaurant consist primarily of employee training costs and are expensed as incurred.incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of earnings.
Restaurant closure costs— All costs associated with exit or disposal activities are recognized when they are incurred. Restaurant closure costs, which are included in selling, generalimpairment and administrative expenses,other charges, net in the accompanying consolidated statements of earnings, consist of future lease commitments, net of anticipated sublease rentals, and expected ancillary costs.
Self-insurance— We are self-insured for a portion of our workers’ compensation, general liability, automotive, and employee medical and dental claims. We utilize a paid-loss plan for our workers’ compensation, general liability and automotive programs, which have predetermined loss limits per occurrence and in the aggregate. We establish our insurance liability and reserves using independent actuarial estimates of expected losses for determining reported claims and as the basis for estimating claims incurred but not reported.
Advertising costs— We maintainadminister marketing funds which includeincluded contractual contributions of approximately 5% and 1% of sales at all franchise and company-operatedJack in the Box and Qdoba restaurants, respectively,respectively. We record contributions from franchisees as wella liability included in accrued expenses in the accompanying consolidated balance sheets until such funds are expended. As the contributions to the marketing funds are designated for advertising, we act as contractual marketing fees paid monthly by franchisees. an agent for the franchisees with regard to these contributions. Therefore, we do not reflect franchisee contributions to the funds in our consolidated statements of earnings or cash flows.
Production costs of commercials, programming and other marketing activities are charged to the marketing funds when the advertising is first used for its intended purpose, and the costs of advertising are charged to operations as incurred. OurTotal contributions to the marketing funds and other marketing expenses, which are included in selling, general, and administrative expenses in the accompanying consolidated statements of earnings, were $109.5$89.8 million, $107.5$100.1 million and $104.6$106.9 million in 2007, 20062010, 2009 and 2005,2008, respectively.
Share-based compensation— AtWe account for our share-based compensation as required by the beginning of fiscal year 2006, we adopted the fair value recognition provisions of SFAS 123 (revised 2004),Share-Based Payment(“123R”)FASB authoritative guidance on stock compensation,which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. We selected the modified prospective method of adoption. Under this method, compensation expense in 2006 included: (a) all share-based payments granted prior to, but not yet vested as of, October 3, 2005, estimated in accordance with the original provisions of SFAS 123,Accounting for Stock-Based Compensation,and (b) all share-based payments granted on or after October 3, 2005, estimated in accordance with the provisions of SFAS 123R. Results for prior periods were not restated.
SFAS 123R also required companies to calculate an initial “pool” of excess tax benefits available at the adoption date to absorb any tax deficiencies that may be recognized under SFAS 123R. We elected to calculate the pool of excess tax benefits under the alternative transition method described in FASB Staff Position (“FSP”)123-3,Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards, which also specifies the method we must use to calculate excess tax benefits reported on the statement of cash flows.
F-10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Compensation expense for our share-based compensation awards is generally recognized on a straight-line basis during the service period of the respective grant. Certain awards accelerate vesting upon the recipient’s retirement from the Company. In these cases, for awards granted prior to October 3, 2005, we recognize compensation costs over the service period and accelerate any remaining unrecognized compensation when the employee retires. For awards granted after October 2, 2005, we recognize compensation costs over the shorter of the vesting period or the period from the date of grant to the date the employee becomes eligible to retire. For awards granted prior to October 3, 2005, had we recognized compensation cost over the shorter of the vesting period or the period from the date of grant to becoming retirement eligible, compensation costs recognized under SFAS 123R would not have been materially different.
F-10
Prior to fiscal year 2006, stock awards were accounted for under Accounting Principles Board Opinion (“APB”) 25,Accounting for Stock Issued to Employees, using the intrinsic method, whereby compensation expense was recognized for the excess, if any, of the quoted market price of our stock at the date of grant over the exercise price. We applied the disclosure provisions of SFAS 123 as if the fair value based method had been applied in measuring compensation expense.JACK IN THE BOX INC. AND SUBSIDIARIES
Had compensation expense been recognized for our stock-based compensation plans by applying the fair value recognition provisions of SFAS 123,we would have recorded net earnings and earnings per share amounts as follows (in thousands, except per share data):
| | | | |
| | 2005 | |
|
Net earnings, as reported | | $ | 91,537 | |
Add: Stock-based employee compensation included in reported net income, net of taxes | | | 1,056 | |
Deduct: Total stock-based employee compensation expense determined under fair-value- based method for all awards, net of taxes | | | (7,869 | ) |
| | | | |
Pro forma net earnings | | $ | 84,724 | |
| | | | |
Net earnings per share: | | | | |
Basic — as reported | | $ | 1.28 | |
Basic — pro forma | | $ | 1.19 | |
Diluted — as reported | | $ | 1.24 | |
Diluted — pro forma | | $ | 1.15 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the pro forma disclosures, the estimated fair values of the options were amortized on a straight-line basis over their vesting periods of up to five years. Refer to Note 8,Share-Based Employee Compensation, for information regarding the assumptions used by us to value our stock options.
Income taxes— Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as tax loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We recognize interest and, when applicable, penalties related to unrecognized tax benefits as a component of our income tax provision.
Authoritative guidance issued by the FASB prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Refer to Note 10,Income Taxes, for additional information.
Derivative instruments— From time to time, we use commodity derivatives to reduce the risk of price fluctuations related to raw material requirements for commodities such as beef and pork, and we use utility derivatives to reduce the risk of price fluctuations related to natural gas. We also use interest rate swap agreements to manage interest rate exposure. We do not speculate using derivative instruments, and weinstruments. We purchase derivative instruments only for the purpose of risk management.
All derivatives are recognized on the consolidated balance sheets at fair value based upon quoted market prices. Changes in the fair values of derivatives are recorded in earnings or other comprehensive income, based on whether the instrument is designated as a hedge transaction. Gains or losses on derivative instruments reported in
F-11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other comprehensive income are classified to earnings in the period the hedged item affects earnings. If the underlying hedge transaction ceases to exist, any associated amounts reported in other comprehensive income are reclassified to earnings at that time. Any ineffectiveness is recognized in earnings in the current period. At September 30, 2007, we had two interest rate swaps in effect and no outstanding commodity or utility derivatives. Refer to Note 3,5,Indebtedness,Fair Value Measurements, and Note 6,Derivative Instruments, for additional discussioninformation regarding our interest rate swaps.derivative instruments.
Contingencies— We recognize liabilities for contingencies when we have an exposure that indicates it is probable that an asset has been impaired or that a liability has been incurred and the amount of impairment or loss can be reasonably estimated. Our ultimate legal and financial liability with respect to such matters cannot be estimated with certainty and requires the use of estimates. When the reasonable estimate is a range, the recorded loss will be the best estimate within the range. We record legal settlement costs as those costs are incurred.
Variable interest entities— The FASB issued Interpretation No. 46 (revised 2003),Consolidation of Variable Interest Entitiesauthoritative guidance on consolidation requires the primary beneficiary of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, because of ownership, contractual or other financial interests in the entity.
The primary entities in which we possess a variable interest are franchise entities, which operate our franchisedfranchise restaurants. We do not possess any ownership interests in franchise entities and we do not generally provide financial support to our franchisees.entities. We have reviewed these franchise entities and determined that we are not the primary beneficiary of the entities and therefore, these entities have not been consolidated.
We use two advertising funds to administer our advertising programs. These funds are consolidated into the Company’s financial statements as they are deemed variable interest entities for which we are the primary beneficiary. Contributions to these funds are designed for advertising, and the Company administers the funds’ contributions. In accordance with SFAS 45,Accounting for Franchise Fee Revenue, contributions from franchisees, when received, are recorded as offsets to advertising expense in the accompanying consolidated statements of earnings.
Segment reporting— An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by our chief operating decision makers in deciding how to allocate resources. Similar operating segments can be aggregated into a single operating segment if the businesses are similar. We operate our business in two operating segments, Jack inthe BoxJack in the Box and Qdoba. Refer to Note 12,16,Segment Reporting, for additional discussion regarding our segments.
Effect of new accounting pronouncements — In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 became effective during the fourth quarter of fiscal year 2007 but had no impact on our results of operations or financial position.
In September 2006, the FASB issued SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). Effective September 30, 2007, we implemented the recognition and measurement provisions of SFAS 158. SFAS 158 requires companies to recognize the over or under funded status of their plans as an asset or liability as measured by the difference between the fair value of the plan assets and the projected benefit obligation and requires any unrecognized prior service costs and actuarial gains and losses to be recognized as a component of accumulated other comprehensive income (loss). Additionally, SFAS 158 no longer allows companies to measure their plans as of any date other than as of the end of their fiscal year. However, this provision is not effective until fiscal years ending after December 15, 2008. The adoption of SFAS 158 resulted in an after-tax adjustment to accumulated other comprehensive income (loss) of $20.2 million related to a reclassification of unrecognized actuarial gains and losses from assets and liabilities to a component of accumulated other comprehensive income (loss), as well as a
F-12F-11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
requirement to recognize over and under fundingEffect of ournew accounting pronouncements— In December 2008, the FASB issued authoritative guidance which expands the disclosure requirements about fair value measurements of plan assets for pension and post-retirement health plans. SeeWe adopted with guidance in the fourth quarter of fiscal 2010. The additional disclosures are included in Note 7,11,Retirement Plansfor additional information..
Subsequent events— The Company has evaluated subsequent events through the time of filing thisForm 10-K with the SEC, and determined there were no other items to disclose.
| |
2. | DISCONTINUED OPERATIONS |
In 2009, we completed the sale of all 61 of our Quick Stuff convenience stores, which included a major-branded fuel station developed adjacent to a full-size Jack in the Box restaurant. We received cash proceeds of $34.4 million and recorded a loss on disposition of $24.3 million, or $15.0 million net of taxes, included in earnings (losses) from discontinued operations, net in the accompanying consolidated statement of earnings for fiscal 2009. The loss on disposition includes an impairment charge of $22.4 million related to building assets retained by us and leased to the buyers as part of the sale agreements. The net assets sold totaled approximately $25.7 million and consisted primarily of property and equipment of $24.8 million.
Revenue and operating income from discontinued operations for fiscal 2009 (through the date of sale) and 2008 were as follows(in thousands):
| | | | | | | | |
| | 2009 | | | 2008 | |
|
Revenue | | $ | 272,202 | | | $ | 461,888 | |
Operating (losses) income | | | (20,439 | ) | | | 1,749 | |
| | | | | | | | |
| |
3. | INITIAL FRANCHISE FEES, REFRANCHISINGS AND ACQUISITIONS |
Initial franchise fees and refranchisings— The following is a summary of initial franchise fees received and gains recognized on the sale of restaurants to franchisees (dollars in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Number of restaurants sold to franchisees | | | 219 | | | | 194 | | | | 109 | |
Number of new restaurants opened by franchisees | | | 37 | | | | 59 | | | | 71 | |
| | | | | | | | | | | | |
Initial franchise fees received | | $ | 10,218 | | | $ | 10,538 | | | $ | 7,303 | |
| | | | | | | | | | | | |
Cash proceeds from the sale of company-operated restaurants | | $ | 66,152 | | | $ | 94,927 | | | $ | 57,117 | |
Notes receivable | | | 25,809 | | | | 21,575 | | | | 27,928 | |
| | | | | | | | | | | | |
Total proceeds | | | 91,961 | | | | 116,502 | | | | 85,045 | |
Net assets sold (primarily property and equipment) | | | (35,113 | ) | | | (33,007 | ) | | | (16,864 | ) |
Goodwill related to the sale of company-operated restaurants | | | (1,860 | ) | | | (2,482 | ) | | | (1,832 | ) |
| | | | | | | | | | | | |
Gains on the sale of company-operated restaurants | | $ | 54,988 | | | $ | 81,013 | | | $ | 66,349 | |
| | | | | | | | | | | | |
In 2009, we recognized a loss of $2.4 million related to the anticipated sale of a lower performing Jack in the Box company-operated market. This loss was included in gains on the sale of company-operated restaurants, net in the accompanying consolidated statement of earnings.
Franchise acquisitions— We account for the acquisition of franchise restaurants using the purchase method of accounting for business combinations. In 2010, we acquired 16 Qdoba restaurants from a franchisee for net consideration of $8.1 million. The purchase price allocation was based on fair value estimates determined
F-12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
using significant unobservable inputs (Level 3). The following table provides detail of the allocation (in thousands):
| | | | |
Property and equipment | | $ | 6,756 | |
Reacquired franchise rights | | | 301 | |
Goodwill | | | 1,058 | |
| | | | |
Total consideration | | $ | 8,115 | |
| | | | |
| | | | |
In 2009, we acquired 22 Qdoba restaurants from franchisees for net consideration of $6.8 million. The purchase price was allocated to property and equipment, goodwill and other income (included in selling, general and administrative expenses in the accompanying consolidated statement of earnings).
| |
4. | GOODWILL AND INTANGIBLE ASSETS, NET |
The changes in the carrying amount of goodwill during 2010 and 2009 by operating segment were as follows(in thousands):
| | | | | | | | | | | | |
| | Jack in the Box | | | Qdoba | | | Total | |
|
Balance at September 28, 2008 | | $ | 56,992 | | | $ | 28,797 | | | $ | 85,789 | |
Acquisition of franchised restaurants | | | - | | | | 2,536 | | | | 2,536 | |
Sale of company-operated restaurants to franchisees | | | (2,482 | ) | | | - | | | | (2,482 | ) |
| | | | | | | | | | | | |
Balance at September 27, 2009 | | | 54,510 | | | | 31,333 | | | | 85,843 | |
Acquisition of franchised restaurants | | | - | | | | 1,058 | | | | 1,058 | |
Sale of company-operated restaurants to franchisees | | | (1,860 | ) | | | - | | | | (1,860 | ) |
| | | | | | | | | | | | |
Balance at October 3, 2010 | | $ | 52,650 | | | $ | 32,391 | | | $ | 85,041 | |
| | | | | | | | | | | | |
Intangible assets, net consist of the following as of October 3, 2010 and September 30, 2007 and October 1, 200627, 2009(in thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Amortized intangible assets: | | | | | | | | | | | | | | | | |
Gross carrying amount | | $ | 58,237 | | | $ | 59,151 | | | $ | 17,035 | | | $ | 17,679 | |
Less accumulated amortization | | | (46,980 | ) | | | (46,930 | ) | | | (7,849 | ) | | | (8,045 | ) |
| | | | | | | | | | |
Net carrying amount | | | 11,257 | | | | 12,221 | | | | 9,186 | | | | 9,634 | |
| | | | | | | | | | |
Unamortized intangible assets: | | | | | | | | | |
Non-amortized intangible assets: | | | | | | | | | |
Trademark | | | 8,800 | | | | 8,800 | | | | 8,800 | | | | 8,800 | |
| | | | | | | | | | |
Total intangible assets, net | | $ | 20,057 | | | $ | 21,021 | | |
Net carrying amount | | | $ | 17,986 | | | $ | 18,434 | |
| | | | | | | | | | |
Amortized intangible assets include lease acquisition costs and acquired franchise contracts. The weighted-average life of the amortized intangible assets is approximately 2520 years. Total amortization expense related to intangible assets was $0.9 million, $1.0 million and $1.2$0.7 million in fiscal years 2007, 20062010 and 2005, respectively.$0.8 million in fiscal 2009 and 2008.
The following table summarizes, as of September 30, 2007,October 3, 2010, the estimated amortization expense for each of the next five fiscal years(in thousands):
| | | | |
Fiscal Year | | | |
|
2008 | | $ | 788 | |
2009 | | | 757 | |
2010 | | | 742 | |
2011 | | | 741 | |
2012 | | | 722 | |
| | | | |
Total | | $ | 3,750 | |
| | | | |
The detail of long-term debt at each year-end follows(in thousands):
| | | | | | | | |
| | 2007 | | | 2006 | |
|
Term loan, variable interest rate based on an applicable margin plus LIBOR, 6.52% at September 30, 2007, quarterly payments of 1.25%, 2.50%, 3.75% and 15.00% of the outstanding principal amount in calendar years 2008,2009-2010, 2011 and 2012, respectively | | $ | 415,000 | | | $ | — | |
Term loan, replaced in fiscal 2007 | | | — | | | | 268,125 | |
Capital lease obligations, 8.74% weighted average interest rate | | | 18,053 | | | | 23,175 | |
Other notes, principally unsecured, 9.54% weighted average interest rate | | | 250 | | | | 470 | |
| | | | | | | | |
| | | 433,303 | | | | 291,770 | |
Less current portion | | | (5,787 | ) | | | (37,539 | ) |
| | | | | | | | |
| | $ | 427,516 | | | $ | 254,231 | |
| | | | | | | | |
| | | | |
Fiscal Year | | | |
|
2011 | | $ | 780 | |
2012 | | | 769 | |
2013 | | | 735 | |
2014 | | | 702 | |
2015 | | | 688 | |
| | | | |
Total | | $ | 3,674 | |
| | | | |
F-13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
5. | FAIR VALUE MEASUREMENTS |
Financial assets and liabilities— (Continued)The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of October 3, 2010 (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements | |
| | | | | Quoted Prices
| | | | | | | |
| | | | | in Active
| | | Significant
| | | | |
| | | | | Markets for
| | | Other
| | | | |
| | | | | Identical
| | | Observable
| | | Significant
| |
| | | | | Assets
| | | Inputs
| | | Unobservable Inputs
| |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
|
Non-qualified deferred compensation plan (1) | | $ | 36,011 | | | $ | 36,011 | | | $ | - | | | $ | - | |
Interest rate swaps (Note 6) (2) | | | 733 | | | | - | | | | 733 | | | | - | |
| | | | | | | | | | | | | | | | |
Total liabilities at fair value | | $ | 36,744 | | | $ | 36,011 | | | $ | 733 | | | $ | - | |
| | | | | | | | | | | | | | | | |
| | |
(1) | | We maintain an unfunded defined contribution plan for key executives and other members of management excluded from participation in our qualified savings plan. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. |
|
(2) | | We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable debt. The fair value of our interest rate swaps are based upon valuation models as reported by our counterparties. |
The fair values of each of our long-term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our term loan and capital lease obligations approximated their carrying values as of October 3, 2010.
Non-financial assets and liabilities— The Company’s non-financial instruments, which primarily consist of goodwill, intangible assets and property and equipment, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable (at least annually for goodwill and semi-annually for property and equipment), non-financial instruments are assessed for impairment and, if applicable, written down to fair value.
In connection with our semi-annual property and equipment impairment reviews and the closure of 40 Jack in the Box company-operated restaurants prior to the end of the fiscal 2010, long-lived assets having a carrying value of $13.8 million were written down to fair value using significant unobservable inputs (Level 3). The resulting impairment charge of $13.0 million was included in impairment and other charges, net in the accompanying consolidated statement of earnings for the fiscal year ended October 3, 2010.
| |
6. | DERIVATIVE INSTRUMENTS |
Objectives and strategies— We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that will effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis beginning September 2011 through September 2014. Previously, we held two interest rate swaps that effectively converted $200.0 million of our variable rate term loan borrowings to a fixed-rate basis from March 2007 to April 1, 2010. These agreements have been designated as cash flow hedges under the terms of the FASB authoritative guidance for derivatives and hedging and to the extent that they are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in earnings but are included in other comprehensive income (loss).
We are also exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs through higher
F-14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prices is limited by the competitive environment in which we operate. Therefore, from time to time, we enter into futures and option contracts to manage these fluctuations. These contracts have not been designated as hedging instruments under the FASB authoritative guidance for derivatives and hedging.
Financial position— The following derivative instruments were outstanding as of the end of each period(in thousands):
| | | | | | | | | | | | | | | | |
| | October 3, 2010 | | | September 27, 2009 | |
| | | |
| | Balance
| | | | | | Balance
| | | | |
| | Sheet
| | | Fair
| | | Sheet
| | | Fair
| |
| | Location | | | Value | | | Location | | | Value | |
| |
|
Derivatives designated hedging instruments: | | | | | | | | | | | | | | | | |
Interest rate swaps (Note 5) | | | Accrued liabilities | | | $ | 733 | | | | Accrued liabilities | | | $ | 4,615 | |
| | | | | | | | | | | | | | | | |
Total derivatives | | | | | | $ | 733 | | | | | | | $ | 4,615 | |
| | | | | | | | | | | | | | | | |
Financial performance— The following is a summary of the gains or losses recognized on our derivative instruments(in thousands):
| | | | | | | | | | | | |
| | Amount of Gain/(Loss)
| |
| | Recognized in OCI | |
| | 2010 | | | 2009 | | | 2008 | |
| |
|
Derivatives in cash flow hedging relationship: | | | | | | | | | | | | |
Interest rate swaps (Note 13) | | $ | 3,882 | | | $ | 42 | | | $ | (3,210 | ) |
| | | | | | | | | | | | | | | | |
| | Location of
| | | Amount of Loss
| |
| | Gain/(Loss)
| | | Recognized in Income | |
| | in Income | | | 2010 | | | 2009 | | | 2008 | |
| |
|
Derivatives not designated hedging instruments: | | | | | | | | | | | | | | | | |
Natural gas contracts | | | Occupancy and other | | | $ | - | | | $ | (544 | ) | | $ | (840 | ) |
Approximately $4.7 million, $6.2 million, and $2.0 million was reclassified from accumulated other comprehensive income (loss) to interest expense during fiscal years 2010, 2009, and 2008, respectively. These amounts represent payments made to the counterparty for the effective portions of the interest rate swaps that were recognized in accumulated other comprehensive income (loss) and reclassified into earnings as an increase to interest expense for the periods presented. During 2010, 2009 and 2008, our interest rate swaps had no hedge ineffectiveness and no gains or losses were reclassified into net earnings.
The detail of long-term debt at each year-end is as follows(in thousands):
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Revolver, variable interest rate based on an applicable margin plus LIBOR, 2.79% at October 3, 2010 | | $ | 160,000 | | | $ | - | |
Term loan, variable interest rate based on an applicable margin plus LIBOR, 2.80% at October 3, 2010 | | | 197,500 | | | | 415,000 | |
Capital lease obligations, 10.14% weighted average interest rate | | | 8,911 | | | | 10,247 | |
| | | | | | | | |
| | | 366,411 | | | | 425,247 | |
Less current portion | | | (13,781 | ) | | | (67,977 | ) |
| | | | | | | | |
| | $ | 352,630 | | | $ | 357,270 | |
| | | | | | | | |
New Credit facilityFacility— On December 15, 2006, weJune 29, 2010, the Company replaced ourits existing credit facility with a new credit facility intended to provide a more flexible capital structure and facilitate the execution of our strategic plan.structure. The new credit facility wasis comprised of (i) a $150.0
F-15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$400.0 million revolving credit facility maturing on December 15, 2011 and (ii) a $200.0 million term loan maturing on December 15, 2012,with a five-year maturity, initially both with London Interbank Offered Rate (“LIBOR”) plus 1.375%2.50%. At inception, we borrowed $475.0 million under the term loan facility and used the proceeds to repay all borrowings under the prior credit facility, to pay related transaction fees and expenses and to repurchase a portion of our outstanding stock. We subsequently elected to make, without penalty, a $60.0 million optional prepayment of our term loan, which will be applied to the remaining scheduled principal installments in the direct order of maturity. The prepayment reduced the interest rate on the credit facility by 25 basis points to LIBOR plus 1.125%. At September 30, 2007, we had no borrowings under the revolving credit facility, $415.0 million outstanding under the term loan and letters of credit outstanding of $37.1 million.
As part of the credit agreement, we may also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the agreement. The new credit facility requires the payment of an annual commitment fee based on the unused portion of the credit facility. The credit facility’s interest rates and the annual commitment rate are based on a financial leverage ratio, as defined in the credit agreement. OurAt October 3, 2010, we had borrowings under the revolving credit facility of $160.0 million, $197.5 million outstanding under the term loan and letters of credit outstanding of $34.9 million. Loan origination costs associated with the new credit facility were $9.5 million and are included as deferred costs in other assets, net in the accompanying consolidated balance sheet as of October 3, 2010. Deferred financing fees of $0.5 million related to the prior credit facility were written off and are included in interest expense, net in the accompanying consolidated statements of earnings.
Collateral— The Company’s obligations under the new credit facility are secured by first priority liens and security interests in the capital stock, partnership and membership interests owned by usthe Company and (or) ourits subsidiaries, and any proceeds thereof, subject to certain restrictions set forth in the credit agreement. Additionally, the credit agreement includesthere is a negative pledge on all tangible and intangible assets (including all real and personal property) with customary exceptions.exceptions as reflected in the credit agreement.
Loan origination costs associated with the new credit facility were $7.4 million and are included as deferred costs in other assets, net in the accompanying consolidated balance sheet as of September 30, 2007. Deferred financing fees of $1.9 million related to the prior credit facility were written-off and are included in interest expense, net in the accompanying consolidated statement of earnings in fiscal 2007.
Concurrent with the termination of our prior credit facility, we liquidated our then existing interest rate swap agreements. In connection with the liquidation, the fair value of the interest rate swaps recorded as a component of accumulated other comprehensive loss was reversed and we realized a net gain of $0.4 million, included in interest expense, net in the accompanying consolidated statement of earnings in fiscal 2007.
New interest rate swaps — We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in March 2007, we entered into two interest rate swap agreements that will effectively convert $200.0 million of our variable rate term loan borrowings to a fixed rate basis for three years. These agreements have been designated as cash flow hedges under the terms of SFAS 133,Accounting for Derivative Instruments and Hedging Activities, with effectiveness assessed based on changes in the present value of interest payments on the term loan. As such, the gains or losses on these derivatives will be reported in other comprehensive income.
Covenants— We are subject to a number of customary covenants under our credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases, and dividend payments and requirements to maintain certain financial ratios and prepay term loans with a portion of our excess cash flows, as defined therein. As of September 30, 2007, we compliedratios. We were in compliance with all debt covenants.
F-14
JACK IN THE BOX INC. AND SUBSIDIARIES
covenants at October 3, 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future cash payments— Scheduled principal payments on our long-term debt for each of the next five fiscal years are as follows(in thousands):
| | | | | | | | |
Fiscal Year | | | | | | |
|
2008 | | $ | 5,787 | | |
2009 | | | 2,390 | | |
2010 | | | 48,169 | | |
2011 | | | 66,605 | | | $ | 13,781 | |
2012 | | | 232,679 | | | | 21,137 | |
2013 | | | | 23,478 | |
2014 | | | | 53,430 | |
2015 | | | | 250,901 | |
| | | | | | |
Total principal payments | | $ | 355,630 | | | $ | 362,727 | |
| | | | | | |
We may make voluntary prepayments of the loans under the revolving credit facility and term loan at any time without premium or penalty. Certain events such as asset sales, certain issuances of debt and insurance and condemnation recoveries may trigger a mandatory prepayment.
Capitalized interest— We capitalize interest in connection with the construction of our restaurants and other facilities. Interest capitalized in 2007, 20062010, 2009 and 20052008 was $1.4$0.3 million, $1.4$0.7 million and $1.1$0.9 million, respectively.
Leases Of Lessee Disclosure
As lessee— We lease restaurants and other facilities, which generally have renewal clauses of 5 to 20 years exercisable at our option. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our leases also have rent escalation clauses and require the payment of property taxes, insurance and maintenance costs. We also lease certain restaurant, office and warehouse equipment, as well as various transportation equipment. Minimum rental obligations are accounted for on a straight-line basis over the term of the initial lease.
F-16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of rent expense were as follows in each fiscal year(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Minimum rentals | | $ | 194,889 | | | $ | 191,772 | | | $ | 184,277 | | | $ | 222,600 | | | $ | 208,091 | | | $ | 199,903 | |
Contingent rentals | | | 3,942 | | | | 3,765 | | | | 3,157 | | | | 1,804 | | | | 2,954 | | | | 3,444 | |
| | | | | | | | | | | | | | |
Total rent expense | | | 198,831 | | | | 195,537 | | | | 187,434 | | | | 224,404 | | | | 211,045 | | | | 203,347 | |
Less sublease rentals | | | (41,147 | ) | | | (33,202 | ) | | | (26,087 | ) | | | (83,340 | ) | | | (61,529 | ) | | | (50,004 | ) |
| | | | | | | | | | | | | | |
Net rent expense | | $ | 157,684 | | | $ | 162,335 | | | $ | 161,347 | | | $ | 141,064 | | | $ | 149,516 | | | $ | 153,343 | |
| | | | | | | | | | | | | | |
Future minimum lease payments under capital and operating leases are as follows(in thousands):
| | | | | | | | | | | | | | | | |
| | Capital
| | Operating
| | | Capital
| | Operating
| |
Fiscal Year | | Leases | | Leases | | | Leases | | Leases | |
|
2008 | | $ | 7,040 | | | $ | 188,191 | | |
2009 | | | 3,420 | | | | 178,141 | | |
2010 | | | 2,284 | | | | 163,494 | | |
2011 | | | 2,120 | | | | 155,025 | | | $ | 2,101 | | | $ | 219,414 | |
2012 | | | 1,821 | | | | 145,049 | | | | 1,841 | | | | 209,939 | |
2013 | | | | 1,583 | | | | 195,523 | |
2014 | | | | 1,426 | | | | 185,697 | |
2015 | | | | 1,309 | | | | 171,073 | |
Thereafter | | | 8,585 | | | | 983,513 | | | | 4,564 | | | | 919,376 | |
| | | | | | | | | | |
Total minimum lease payments | | | 25,270 | | | $ | 1,813,413 | | | | 12,824 | | | $ | 1,901,022 | |
| | | | | | |
Less amount representing interest, 8.74% weighted average interest rate | | | (7,217 | ) | | | | | |
Less amount representing interest, 10.14% weighted average interest rate | | | | (3,913 | ) | | | | |
| | | | | | |
Present value of obligations under capital leases | | | 18,053 | | | | | | | | 8,911 | | | | | |
Less current portion | | | (5,620 | ) | | | | | | | (1,281 | ) | | | | |
| | | | | | |
Long-term capital lease obligations | | $ | 12,433 | | | | | | | $ | 7,630 | | | | | |
| | | | | | |
F-15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total future minimum lease payments have not been reduced by minimum sublease rents of $841.0 million$1.2 billion expected to be recovered under our operating subleases.
Assets recorded under capital leases are included in property and equipment and consisted of the following at each year-end(in thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Buildings | | $ | 23,112 | | | $ | 23,165 | | | $ | 22,733 | | | $ | 22,733 | |
Equipment | | | 20,247 | | | | 19,783 | | | | 16 | | | | 499 | |
| | | | | | | | | | |
| | | 43,359 | | | | 42,948 | | | | 22,749 | | | | 23,232 | |
Less accumulated amortization | | | (29,431 | ) | | | (24,104 | ) | | | (15,340 | ) | | | (15,048 | ) |
| | | | | | | | | | |
| | $ | 13,928 | | | $ | 18,844 | | | $ | 7,409 | | | $ | 8,184 | |
| | | | | | | | | | |
Amortization of assets under capital leases is included in depreciation and amortization expense.
Leases Of Lessor Disclosure
As lessor— We lease or sublease restaurants to certain franchisees and others under agreements that generally provide for the payment of percentage rentals in excess of stipulated minimum rentals, usually for a period of 20 years. Most of our leases have rent escalation clauses and renewal clauses of 5 to 20 years. Total rental revenueincome was $74.4$133.8 million, $58.8$105.5 million and $46.8$88.6 million, including contingent rentals of $13.9$7.7 million, $11.7$13.0 million and $10.3$13.8 million, in 2007, 20062010, 2009 and 2005,2008, respectively.
F-17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The minimum rents receivable expected to be received under these non-cancelable operating leases, excluding contingent rentals, are as follows(in thousands):
| | | | | | | | |
Fiscal Year | | | | | | |
|
2008 | | $ | 63,268 | | |
2009 | | | 60,595 | | |
2010 | | | 57,765 | | |
2011 | | | 56,250 | | | $ | 122,577 | |
2012 | | | 54,464 | | | | 120,393 | |
2013 | | | | 117,872 | |
2014 | | | | 117,010 | |
2015 | | | | 116,238 | |
Thereafter | | | 614,837 | | | | 1,199,605 | |
| | | | | | |
Total minimum future rentals | | $ | 907,179 | | | $ | 1,793,695 | |
| | | | | | |
Assets held for lease consisted of the following at each year-end(in thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Land | | $ | 29,716 | | | $ | 25,981 | | | $ | 49,913 | | | $ | 36,507 | |
Buildings | | | 160,858 | | | | 131,810 | | | | 410,823 | | | | 256,858 | |
Equipment | | | 4,172 | | | | 3,109 | | | | 373 | | | | - | |
| | | | | | | | | | |
| | | 194,746 | | | | 160,900 | | | | 461,109 | | | | 293,365 | |
Less accumulated amortization | | | (89,535 | ) | | | (70,554 | ) | |
Less accumulated depreciation | | | | (207,616 | ) | | | (140,870 | ) |
| | | | | | | | | | |
| | $ | 105,211 | | | $ | 90,346 | | | $ | 253,493 | | | $ | 152,495 | |
| | | | | | | | | | |
| |
5.9. | IMPAIRMENT, DISPOSAL OF PROPERTY AND EQUIPMENT, AND RESTAURANT CLOSING IMPAIRMENT CHARGES AND OTHERCOSTS |
In 2007,Impairment— When events and circumstances indicate that our long-lived assets might be impaired and their carrying amount is greater than the undiscounted cash flows we closed fiveJack inexpect to generate from such assets, we recognize an impairment loss as the Box restaurants and recognized impairmentamount by which the carrying value exceeds the fair value of the assets. We typically estimate fair value based on the estimated discounted cash flows of the related asset using marketplace participant assumptions. Impairment charges of $1.1 million. We also recorded impairment charges of $0.2 millionprimarily relate to the write-down of the carrying value of onecertain underperforming Jack in the Box restaurant which restaurants we continue to operate.operate and restaurants we have closed.
Disposal of property and equipment— We also recognize accelerated depreciation and other costs on the disposition of property and equipment. When we decide to dispose of a long-lived asset, depreciable lives are adjusted based on the estimated disposal date and accelerated depreciation is recorded. Other disposal costs primarily relate to gains or losses recognized upon the sale of closed restaurant properties and normal ongoing capital maintenance activities.
The following impairment and disposal costs are included in impairment and other charges, net in the accompanying consolidated statements of earnings (in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Impairment charges | | $ | 12,970 | | | $ | 6,586 | | | $ | 3,507 | |
Losses on the disposition of property and equipment, net | | $ | 10,757 | | | $ | 11,418 | | | $ | 17,373 | |
F-16F-18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2006, we recorded impairment charges of $1.6 million related to sevenJack in the Box restaurants which we closed or the lease expired. In 2006, based upon our estimatesRestaurant closing costsconsist of future cash flows, we also recorded impairment chargeslease commitments, net of $2.5 million to write-down the carrying value of eightJack in the Box restaurants.
In fiscal 2005, we incurredanticipated sublease rentals and expected ancillary costs, of approximately $3.0 million related to the cancellation of the Company’s test of a fast-casual concept called JBX Grill.
Impairment chargesand are included in selling, generalimpairment and administrative expenses in the consolidated statements of earnings in each year.
other charges, net. Total accrued restaurant closing costs, included in accrued expensesliabilities and other long-term liabilities, changed as follows during 2007 and 2006((in thousands)thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Balance at beginning of year | | $ | 5,084 | | | $ | 5,495 | | | $ | 4,234 | | | $ | 4,712 | |
Additions and adjustments | | | 1,298 | | | | 454 | | | | 22,362 | | | | 834 | |
Cash payments | | | (931 | ) | | | (865 | ) | | | (1,576 | ) | | | (1,312 | ) |
| | | | | | | | | | |
Balance at end of year | | $ | 5,451 | | | $ | 5,084 | | | $ | 25,020 | | | $ | 4,234 | |
| | | | | | | | | | |
Additions and adjustments primarily relate to revisions to certain sublease assumptions and the closureclosures of threecertain Jack in the Box restaurants restaurants. Additions in 2007 and2010 principally relate to the closure of two region offices40 restaurants at the end of the fiscal year which resulted in 2006.future lease commitment charges of $20.3 million.
The fiscal year income taxes consist of the following(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | $ | 72,781 | | | $ | 62,257 | | | $ | 44,007 | | | $ | 55,046 | | | $ | 91,088 | | | $ | 54,967 | |
State | | | 11,485 | | | | 8,828 | | | | 5,897 | | | | 8,314 | | | | 13,442 | | | | 9,061 | |
| | | | | | | | | | | | | | |
| | | 84,266 | | | | 71,085 | | | | 49,904 | | | | 63,360 | | | | 104,530 | | | | 64,028 | |
| | | | | | | | | | | | | | |
Deferred: | | | | | | | | | | | | | | | | | | | | | | | | |
Federal | | | (11,875 | ) | | | (9,973 | ) | | | (2,948 | ) | | | (24,070 | ) | | | (21,846 | ) | | | 5,202 | |
State | | | (2,364 | ) | | | (1,213 | ) | | | (289 | ) | | | (3,484 | ) | | | (3,229 | ) | | | 1,021 | |
| | | | | | | | | | | | | | |
| | | (14,239 | ) | | | (11,186 | ) | | | (3,237 | ) | | | (27,554 | ) | | | (25,075 | ) | | | 6,223 | |
| | | | | | | | | | | | | | |
Subtotal income tax | | | 70,027 | | | | 59,899 | | | | 46,667 | | |
Income tax benefit related to cumulative effect of accounting change | | | — | | | | 646 | | | | — | | |
Income tax expense from continuing operations | | | $ | 35,806 | | | $ | 79,455 | | | $ | 70,251 | |
| | | | | | | | | | | | | | |
Total income tax expense | | $ | 70,027 | | | $ | 60,545 | | | $ | 46,667 | | |
Income tax expense (benefit) from discontinued operations | | | $ | - | | | $ | (7,465 | ) | | $ | 679 | |
| | | | | | | | | | | | | | |
F-17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A reconciliation of the federal statutory income tax rate to our effective tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Computed at federal statutory rate | | | 35.0 | % | | | 35.0 | % | | | 35.0 | % | | | 35.0% | | | | 35.0% | | | | 35.0% | |
State income taxes, net of federal tax benefit | | | 3.5 | | | | 3.2 | | | | 3.0 | | | | 3.2 | | | | 3.2 | | | | 3.3 | |
Benefit of jobs tax credits | | | (1.1 | ) | | | (.8 | ) | | | (1.4 | ) | | | (1.8 | ) | | | (0.7 | ) | | | (2.5 | ) |
Benefit of research and experimentation credits | | | (.2 | ) | | | (.8 | ) | | | — | | |
Adjustment to estimated tax accruals | | | — | | | | — | | | | (1.9 | ) | |
Other, net | | | (1.5 | ) | | | (.9 | ) | | | (.9 | ) | |
Benefit of cash surrender value | | | | (2.3 | ) | | | - | | | | (0.1 | ) |
Others, net | | | | (0.3 | ) | | | 0.2 | | | | 1.6 | |
| | | | | | | | | | | | | | |
| | | 35.7 | % | | | 35.7 | % | | | 33.8 | % | | | 33.8% | | | | 37.7% | | | | 37.3% | |
| | | | | | | | | | | | | | |
F-19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at each year-end are presented below(in thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 | |
|
Deferred tax assets: | | | | | | | | | | | | | | | | |
Accrued pension and postretirement benefits | | $ | 34,721 | | | $ | 18,455 | | | $ | 57,817 | | | $ | 58,256 | |
Accrued insurance | | | 17,806 | | | | 18,714 | | | | 13,603 | | | | 12,676 | |
Leasing transactions | | | 14,476 | | | | 14,377 | | | | 11,290 | | | | 13,304 | |
Accrued vacation pay expense | | | 12,322 | | | | 12,539 | | | | 8,528 | | | | 11,835 | |
Deferred income | | | 3,535 | | | | 4,614 | | | | 2,436 | | | | 2,660 | |
Other reserves and allowances | | | 9,313 | | | | 9,072 | | | | 33,893 | | | | 21,955 | |
Tax loss and tax credit carryforwards | | | 3,195 | | | | 2,736 | | | | 4,087 | | | | 3,924 | |
Share-based compensation | | | 8,584 | | | | 5,418 | | | | 16,708 | | | | 12,172 | |
Other, net | | | 3,085 | | | | 2,147 | | | | 4,515 | | | | 3,922 | |
| | | | | | | | | | |
Total gross deferred tax assets | | | 107,037 | | | | 88,072 | | | | 152,877 | | | | 140,704 | |
Valuation allowance | | | (3,158 | ) | | | (2,560 | ) | | | (4,087 | ) | | | (3,924 | ) |
| | | | | | | | | | |
Total net deferred tax assets | | | 103,879 | | | | 85,512 | | | | 148,790 | | | | 136,780 | |
| | | | | | |
Deferred tax liabilities: | | | | | | | | | | | | | | | | |
Property and equipment, principally due to differences in depreciation | | | (77,243 | ) | | | (89,172 | ) | | | (38,250 | ) | | | (51,734 | ) |
Intangible assets | | | (24,784 | ) | | | (23,291 | ) | | | (23,394 | ) | | | (22,737 | ) |
| | | | | | | | | | |
Total gross deferred tax liabilities | | | (102,027 | ) | | | (112,463 | ) | | | (61,644 | ) | | | (74,471 | ) |
| | | | | | | | | | |
Net deferred tax assets (liabilities) | | $ | 1,852 | | | $ | (26,951 | ) | |
Net deferred tax assets | | | $ | 87,146 | | | $ | 62,309 | |
| | | | | | | | | | |
Deferred tax assets at September 30, 2007October 3, 2010 include state net operating loss carryforwards of approximately $48.0$63.5 million expiring at various times between 2011 and 2028. At October 3, 2010 and 2027. At September 30, 2007 and October 1, 2006,27, 2009, we recorded a valuation allowance related to state net operating losses of $3.2$4.1 million for October 3, 2010 and $2.6$3.9 million respectively.for September 27, 2009. The current year change in the valuation allowance of $0.6$0.2 million relatedrelates to state net operating losses. We believe that it is more likely than not that these loss carryforwards will not be realized and that the remaining deferred tax assets will be realized through future taxable income or alternative tax strategies.
At September 27, 2009, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.6 million, which if recognized, would favorably affect the effective income tax rate. As of October 3, 2010, the gross unrecognized tax benefits remain unchanged. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows (in thousands):
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Balance beginning of year | | $ | 608 | | | $ | 4,172 | |
Increases to tax positions recorded during current years | | | 200 | | | | 195 | |
Reductions to tax positions due to settlements with taxing authorities | | | (179 | ) | | | (3,759 | ) |
| | | | | | | | |
Balance at end of year | | $ | 629 | | | $ | 608 | |
| | | | | | | | |
From time to time, we may take positions for filing our tax returns which may differ from the treatment of the same item for financial reporting purposes. The ultimate outcome of these items will not be known until the Internal Revenue ServiceIRS has completed its examination or until the statute of limitations has expired.
It is reasonably possible that changes of approximately $0.4 million to the gross unrecognized tax benefits will be required within the next twelve months. These changes relate to the possible settlement of state tax audits.
The major jurisdictions in which the Company files income tax returns include the United States and states in which we operate that impose an income tax. The federal statutes of limitations have not expired for tax years 2007 and forward. The statutes of limitations for California and Texas, which constitute the Company’s major
F-18F-20
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
state tax jurisdictions, have not expired for tax years 2000 and 2006, respectively, and forward. Generally, the statutes of limitations for the other state jurisdictions have not expired for tax years 2007 and forward.
We sponsor programs that provide retirement benefits to most of our employees. These programs include defined benefit contribution plans, defined benefit pension plans and postretirement healthcare plans.
Defined contribution plans— We maintain savings plans pursuant to Section 401(k) of the Internal Revenue Code, which allow administrative and clerical employees who have satisfied the service requirements and reached age 21 to defer a percentage of their pay on a pre-tax basis. We match 50% of the first 4% of compensation deferred by the participant. Our contributions under these plans were $1.9$1.5 million, $1.9 million and $1.8$2.0 million in 2007, 20062010, 2009 and 2005,2008, respectively. We also maintain an unfunded, non-qualified deferred compensation plan for key executives and other members of management who are excluded from participation in the qualified savings plan. This plan allows participants to defer up to 50% of their salary and 100% of their bonus, on a pre-tax basis. We match 100% of the first 3% contributed by the participant. Effective January 1, 2007, to compensate for changes made to our supplemental executive retirement plan (“SERP”), was closed to new participants. To compensate executives no longer eligible to participate in the SERP, we also contribute a supplemental amount equal to 4% of an eligible employee’s salary and bonus for a period of ten years in such eligible position. Our contributions under the non-qualified deferred compensation plan were $1.0 million, $1.2 million, and $1.1 million and $1.3 million in 2007, 20062010, 2009 and 2005,2008, respectively. In each plan, a participant’s right to Company contributions vests at a rate of 25% per year of service.
Defined benefit pension plans— We sponsor a defined benefit pension plansplan (“qualified pension plans”plan”) covering substantially all full-time employees. In September 2010, the Board of Directors approved changes to our qualified plan whereby participants will no longer accrue benefits effective December 31, 2015 and the plan will be closed to new participants effective January 1, 2011. This change was accounted for as a plan “curtailment” in accordance with the authoritative guidance issued by the FASB. As a result of the curtailment, our qualified plan benefit obligation decreased by approximately $16.5 million representing the effect of estimated future pay increases which cease to be a part of the benefit obligation as of December 31, 2015. The curtailment impact to net earnings in fiscal 2010 was immaterial. We also sponsor an unfunded supplemental executive retirement plan (“non-qualified plan”) which provides certain employees additional pension benefits. Effectivebenefits and has been closed to new participants since January 1, 2007,2007. In connection with the SERP was closed to any new participants.curtailment of the qualified plan, our non-qualified plan benefit obligation increased $0.2 million in 2010. Benefits under allboth plans are based on the employees’ years of service and compensation over defined periods of employment.
Postretirement healthcare plans— We also sponsor healthcare plans that provide postretirement medical benefits to certain employees who meet minimum age and service requirements. The plans are contributory;contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance.
New accounting policy — As discussed in Note 1,Organization and Summary of Significant Accounting Policies, effective September 30, 2007, we adopted the recognition and disclosure provisions of SFAS 158, which required us to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of our pension and postretirement plans in our September 30, 2007 consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income (“AOCI”), net of tax. The adjustment to AOCI at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs, and unrecognized transition obligations remaining from the initial adoption of SFAS 87,Employers’ Accounting for Pensions. These amounts will be subsequently recognized as net periodic benefit costs pursuant to our historical accounting policy for amortizing such amounts.
F-19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The adoption of SFAS 158 had no impact on the consolidated statements of earnings. The incremental effects of adopting the provisions of SFAS 158 on the consolidated balance sheet at September 30, 2007 are presented in the following table(in thousands):
| | | | | | | | | | | | |
| | Before Application
| | | SFAS 158
| | | After Application
| |
| | of SFAS 158 | | | Adjustments | | | of SFAS 158 | |
|
Deferred income taxes | | $ | 2,500 | | | $ | 15,450 | | | $ | 17,950 | |
Pension asset | | | 29,032 | | | | (27,394 | ) | | | 1,638 | |
| | | | | | | | | | | | |
Total assets | | | 1,394,766 | | | | (11,944 | ) | | | 1,382,822 | |
| | | | | | | | | | | | |
Current liability for pension and postretirement benefits | | | — | | | | (2,985 | ) | | | (2,985 | ) |
Deferred income taxes | | | — | | | | (2,802 | ) | | | (2,802 | ) |
Long-term liability for pension and postretirement benefits | | | (59,467 | ) | | | (2,517 | ) | | | (61,984 | ) |
| | | | | | | | | | | | |
Total liabilities | | | (959,961 | ) | | | (8,304 | ) | | | (968,265 | ) |
| | | | | | | | | | | | |
AOCI, net | | | 4,001 | | | | 20,248 | | | | 24,249 | |
| | | | | | | | | | | | |
Total stockholders’ equity | | $ | (434,805 | ) | | $ | 20,248 | | | $ | (414,557 | ) |
| | | | | | | | | | | | |
SFAS 158 will also require measurement of the funded status of pension and postretirement plans as of the date of a company’s fiscal year end. Our pension and postretirement plans have June 30 measurement dates which do not coincide with our fiscal year end. We will change our measurement dates to coincide with our fiscal year end in fiscal 2009, or earlier, as allowed by SFAS 158.
F-20
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Obligations and funded status— The following table provides a reconciliation of the changes in benefit obligations, plan assets and funded status of our retirement plans as of June 30, 2007October 3, 2010 and June 30, 2006.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Pension Plans | | | Non-Qualified Pension Plan | | | Postretirement Health Plans | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| | (In thousands) | |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | |
Obligation at beginning of year | | $ | 196,031 | | | $ | 210,363 | | | $ | 36,753 | | | $ | 37,544 | | | $ | 16,683 | | | $ | 18,822 | |
Service cost | | | 9,846 | | | | 12,042 | | | | 734 | | | | 771 | | | | 213 | | | | 272 | |
Interest cost | | | 13,201 | | | | 12,258 | | | | 2,401 | | | | 2,067 | | | | 1,081 | | | | 1,023 | |
Participant contributions | | | — | | | | — | | | | — | | | | — | | | | 115 | | | | 102 | |
Actuarial loss (gain) | | | 9,924 | | | | (35,351 | ) | | | 1,852 | | | | (2,326 | ) | | | 1,169 | | | | (2,973 | ) |
Benefits paid | | | (4,107 | ) | | | (3,281 | ) | | | (2,112 | ) | | | (1,828 | ) | | | (774 | ) | | | (563 | ) |
Plan amendment and other | | | — | | | | — | | | | — | | | | 525 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Obligation at end of year | | $ | 224,895 | | | $ | 196,031 | | | $ | 39,628 | | | $ | 36,753 | | | $ | 18,487 | | | $ | 16,683 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value at beginning of year | | $ | 185,540 | | | $ | 158,928 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Actual return on plan assets | | | 26,246 | | | | 15,893 | | | | — | | | | — | | | | — | | | | — | |
Participant contributions | | | — | | | | — | | | | — | | | | — | | | | 115 | | | | 102 | |
Employer contributions | | | 9,000 | | | | 14,000 | | | | 2,112 | | | | 1,828 | | | | 659 | | | | 461 | |
Benefits paid | | | (4,107 | ) | | | (3,281 | ) | | | (2,112 | ) | | | (1,828 | ) | | | (774 | ) | | | (563 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value at end of year | | $ | 216,679 | | | $ | 185,540 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Reconciliation of funded status: | | | | | | | | | | | | | | | | | | | | | | | | |
Funded status | | $ | (8,216 | ) | | $ | (10,491 | ) | | $ | (39,628 | ) | | $ | (36,753 | ) | | $ | (18,487 | ) | | $ | (16,683 | ) |
Unrecognized net loss (gain) | | | — | | | | 34,376 | | | | — | | | | 7,308 | | | | — | | | | (6,338 | ) |
Unrecognized prior service cost | | | — | | | | 584 | | | | — | | | | 4,110 | | | | — | | | | 816 | |
Unrecognized net transition obligation | | | — | | | | — | | | | — | | | | 142 | | | | — | | | | — | |
Employer contributions after measurement date | | | 3,000 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (5,216 | ) | | $ | 24,469 | | | $ | (39,628 | ) | | $ | (25,193 | ) | | $ | (18,487 | ) | | $ | (22,205 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized prior to the adoption of SFAS 158: | | | | | | | | | | | | | | | | | | | | | | | | |
Accrued benefit liability | | | | | | $ | — | | | | | | | $ | (33,362 | ) | | | | | | $ | (22,205 | ) |
Prepaid benefit cost | | | | | | | 24,469 | | | | | | | | — | | | | | | | | — | |
Minimum pension liability | | | | | | | — | | | | | | | | 3,917 | | | | | | | | — | |
Intangible assets | | | | | | | — | | | | | | | | 4,252 | | | | | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net amount recognized | | | | | | $ | 24,469 | | | | | | | $ | (25,193 | ) | | | | | | $ | (22,205 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized after the adoption of SFAS 158: | | | | | | | | | | | | | | | | | | | | | | | | |
Noncurrent assets | | $ | 1,638 | | | | | | | $ | — | | | | | | | $ | — | | | | | |
Current liabilities | | | — | | | | | | | | (2,195 | ) | | | | | | | (790 | ) | | | | |
Noncurrent liabilities | | | (6,854 | ) | | | | | | | (37,433 | ) | | | | | | | (17,697 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (5,216 | ) | | | | | | $ | (39,628 | ) | | | | | | $ | (18,487 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts in AOCI not yet reflected in net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 30,339 | | | | | | | $ | 8,756 | | | | | | | $ | (4,238 | ) | | | | |
Prior service cost | | | 459 | | | | | | | | 3,450 | | | | | | | | 631 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 30,798 | | | | | | | $ | 12,206 | | | | | | | $ | (3,607 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts in AOCI expected to be amortized in fiscal 2008 net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 868 | | | | | | | $ | 533 | | | | | | | $ | (821 | ) | | | | |
Prior service cost | | | 124 | | | | | | | | 780 | | | | | | | | 185 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 992 | | | | | | | $ | 1,313 | | | | | | | $ | (636 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
September 27, 2009. In fiscal 2009, we adopted the measurement date provisions of the FASB guidance for retirement
F-21
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefits, which require the measurement date to be consistent with our fiscal year end. Previously, we used a June 30 measurement date.(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Qualified Pension Plans | | | Non-Qualified Pension Plan | | | Postretirement Health Plans | |
| | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | |
Obligation at beginning of year | | $ | 290,469 | | | $ | 212,027 | | | $ | 49,445 | | | $ | 40,634 | | | $ | 23,828 | | | $ | 16,979 | |
Service cost | | | 11,726 | | | | 9,045 | | | | 829 | | | | 641 | | | | 106 | | | | 99 | |
Interest cost | | | 17,704 | | | | 15,334 | | | | 3,003 | | | | 2,907 | | | | 1,435 | | | | 1,199 | |
Participant contributions | | | - | | | | - | | | | - | | | | - | | | | 142 | | | | 138 | |
Actuarial loss | | | 26,594 | | | | 55,779 | | | | 3,053 | | | | 7,717 | | | | 4,677 | | | | 6,185 | |
Benefits paid | | | (8,061) | | | | (7,810) | | | | (3,001) | | | | (3,341) | | | | (2,369) | | | | (1,097) | |
Elimination of early measurement date | | | - | | | | 6,094 | | | | - | | | | 887 | | | | - | | | | 325 | |
Plan amendment | | | - | | | | - | | | | 176 | | | | - | | | | - | | | | - | |
Net gain arising due to curtailment | | | (16,491) | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Obligation at end of year | | $ | 321,941 | | | $ | 290,469 | | | $ | 53,505 | | | $ | 49,445 | | | $ | 27,819 | | | $ | 23,828 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fair value at beginning of year | | $ | 231,584 | | | $ | 228,772 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Actual return on plan assets | | | 27,296 | | | | (11,878) | | | | - | | | | - | | | | - | | | | - | |
Participant contributions | | | - | | | | - | | | | - | | | | - | | | | 142 | | | | 138 | |
Employer contributions | | | 20,000 | | | | 22,500 | | | | 3,001 | | | | 3,341 | | | | 2,227 | | | | 959 | |
Benefits paid | | | (8,061) | | | | (7,810) | | | | (3,001) | | | | (3,341) | | | | (2,369) | | | | (1,097) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair value at end of year | | $ | 270,819 | | | $ | 231,584 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Funded status at end of year | | $ | (51,122) | | | $ | (58,885) | | | $ | (53,505) | | | $ | (49,445) | | | $ | (27,819) | | | $ | (23,828) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts recognized on the balance sheet: | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | $ | - | | | $ | - | | | $ | (3,184) | | | $ | (2,827) | | | $ | (1,193) | | | $ | (1,053) | |
Noncurrent liabilities | | | (51,122) | | | | (58,885) | | | | (50,321) | | | | (46,618) | | | | (26,626) | | | | (22,775) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total liability recognized | | $ | (51,122) | | | $ | (58,885) | | | $ | (53,505) | | | $ | (49,445) | | | $ | (27,819) | | | $ | (23,828) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts in AOCI not yet reflected in net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Unamortized actuarial loss, net | | $ | 101,447 | | | $ | 110,895 | | | $ | 16,316 | | | $ | 14,452 | | | $ | 6,381 | | | $ | 1,768 | |
Unamortized prior service cost | | | - | | | | 180 | | | | 2,538 | | | | 2,827 | | | | 31 | | | | 216 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 101,447 | | | $ | 111,075 | | | $ | 18,854 | | | $ | 17,279 | | | $ | 6,412 | | | $ | 1,984 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other changes in plan assets and benefit obligations recognized in OCI: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss | | $ | 17,012 | | | $ | 89,513 | | | $ | 3,053 | | | $ | 7,717 | | | $ | 4,677 | | | $ | 6,185 | |
Amortization of actuarial gain (loss) | | | (9,969) | | | | (55) | | | | (1,189) | | | | (396) | | | | (64) | | | | 964 | |
Amortization of prior service cost | | | (124) | | | | (124) | | | | (465) | | | | (707) | | | | (184) | | | | (185) | |
Prior service cost due to curtailment | | | (56) | | | | - | | | | 176 | | | | - | | | | - | | | | - | |
Net gain arising due to curtailment | | | (16,491) | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in OCI | | | (9,628) | | | | 89,334 | | | | 1,575 | | | | 6,614 | | | | 4,429 | | | | 6,964 | |
Net periodic benefit cost and other losses | | | 21,865 | | | | 7,073 | | | | 5,486 | | | | 4,651 | | | | 1,789 | | | | 519 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total recognized in comprehensive income | | $ | 12,237 | | | $ | 96,407 | | | $ | 7,061 | | | $ | 11,265 | | | $ | 6,218 | | | $ | 7,483 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Amounts in AOCI expected to be amortized in fiscal 2011 net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Net actuarial loss | | $ | 8,518 | | | | | | | $ | 1,305 | | | | | | | $ | 202 | | | | | |
Prior service cost | | | - | | | | | | | | 488 | | | | | | | | 31 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 8,518 | | | | | | | $ | 1,793 | | | | | | | $ | 233 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
F-22
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional year-end pension plan information— The pension benefit obligation (“PBO”) is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated future pay increases. The accumulated benefit obligation (“ABO”) also reflects the actuarial present value of benefits attributable to employee service rendered to date but does not include the effects of estimated future pay increases. Therefore, the ABO as compared to plan assets is an indication of the assets currently available to fund vested and nonvested benefits accrued through the end of the fiscal year.
Prior to SFAS 158, the measure of whether a pension plan was underfunded for recognition of a liability under financial accounting requirements was based on a comparison of the ABO to the fair value of plan assets and amounts accrued for such benefits in the balance sheets. With the adoption of SFAS 158, the The funded status is measured as the difference between the fair value of a plan’s assets and its PBO.
As of June 30, 2007October 3, 2010 and 2006,September 27, 2009, the qualified plans’plan’s ABO exceeded the fair market value of its plan assets exceeded the respective accumulated benefit obligations.assets. The non-qualified plan is an unfunded plan and, as such, had no plan assets as of June 30, 2007October 3, 2010 and 2006.September 27, 2009. The following sets forth the PBO, ABO and fair value of plan assets of our pension plans as of the measurement date in each year(in thousands):
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 |
|
Qualified plans: | | | | | | | | | |
Qualified plan: | | | | | | | |
Projected benefit obligation | | $ | 224,895 | | | $ | 196,031 | | | $ | 321,941 | | | $ | 290,469 | |
Accumulated benefit obligation | | | 190,866 | | | | 164,548 | | | | 302,982 | | | | 254,470 | |
Fair value of plan assets | | | 216,679 | | | | 185,540 | | | | 270,819 | | | | 231,584 | |
| | |
Non-qualified plan: | | | | | | | | | | | | | | |
Projected benefit obligation | | $ | 39,628 | | | $ | 36,753 | | | $ | 53,505 | | | $ | 49,445 | |
Accumulated benefit obligation | | | 37,373 | | | | 33,362 | | | | 53,282 | | | | 46,875 | |
Fair value of plan assets | | | — | | | | — | | | | - | | | | - | |
Since our nonqualified defined benefit pension plan is not funded, we were required to recognized a minimum pension liability in our balance sheets prior to adopting SFAS 158. This minimum liability was $3.9 million at October 1, 2006.
At the end of 2007 and prior to our adoption of SFAS 158, we recorded a minimum pension liability for our non-qualified defined benefit pension plan for the amount by which the ABO exceeded the fair value of the plan assets, after adjusting for the plan’s previously recorded accrued cost. We subsequently eliminated the minimum pension liability balance related to our plan that had been recorded prior to adoption. The minimum liability eliminated at September 30, 2007 was $6.5 million.
F-22
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net periodic benefit cost— The components of the fiscal year net periodic benefit cost were as follows:follows(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Amort. of
| | | Amort. of
| | | | |
| | | | | | | | Expected
| | | Actuarial
| | | Unrecognized
| | | Unrecognized
| | | | |
| | Service
| | | Interest
| | | Return on
| | | (Gain)
| | | Prior
| | | Net Transition
| | | Net Periodic
| |
| | Cost | | | Cost | | | Plan Assets | | | Loss | | | Service Cost | | | Obligation | | | Benefit Cost | |
| | (In thousands) | |
|
Qualified pension plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | | $ | 9,846 | | | $ | 13,201 | | | $ | (14,541 | ) | | $ | 2,257 | | | $ | 124 | | | $ | — | | | $ | 10,887 | |
2006 | | | 12,042 | | | | 12,258 | | | | (12,428 | ) | | | 8,416 | | | | 124 | | | | — | | | | 20,412 | |
2005 | | | 8,393 | | | | 10,053 | | | | (9,438 | ) | | | 4,072 | | | | 124 | | | | — | | | | 13,204 | |
Non-qualified pension plan: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | | $ | 734 | | | $ | 2,401 | | | $ | — | | | $ | 404 | | | $ | 707 | | | $ | 95 | | | $ | 4,341 | |
2006 | | | 771 | | | | 2,067 | | | | — | | | | 735 | | | | 671 | | | | 95 | | | | 4,339 | |
2005 | | | 644 | | | | 2,043 | | | | — | | | | 442 | | | | 652 | | | | 95 | | | | 3,876 | |
Postretirement health plans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | | $ | 213 | | | $ | 1,081 | | | $ | — | | | $ | (930 | ) | | $ | 185 | | | $ | — | | | $ | 549 | |
2006 | | | 272 | | | | 1,023 | | | | — | | | | (371 | ) | | | 185 | | | | — | | | | 1,109 | |
2005 | | | 292 | | | | 1,127 | | | | — | | | | (372 | ) | | | 185 | | | | — | | | | 1,232 | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Qualified defined pension plan: | | | | | | | | | | | | |
Service cost | | $ | 11,726 | | | $ | 9,045 | | | $ | 10,427 | |
Interest cost | | | 17,704 | | | | 15,334 | | | | 14,539 | |
Expected return on plan assets | | | (17,714) | | | | (17,485) | | | | (17,010) | |
Actuarial loss | | | 9,969 | | | | 55 | | | | 971 | |
Amortization of unrecognized prior service cost | | | 124 | | | | 124 | | | | 124 | |
Prior service cost due to curtailment | | | 56 | | | | - | | | | - | |
| | | | | | | | | | | | |
Net periodic benefit cost | | $ | 21,865 | | | $ | 7,073 | | | $ | 9,051 | |
| | | | | | | | | | | | |
Non-qualified pension plan: | | | | | | | | | | | | |
Service cost | | $ | 829 | | | $ | 641 | | | $ | 802 | |
Interest cost | | | 3,003 | | | | 2,907 | | | | 2,552 | |
Actuarial loss | | | 1,189 | | | | 396 | | | | 533 | |
Amortization of unrecognized prior service cost | | | 465 | | | | 707 | | | | 733 | |
| | | | | | | | | | | | |
Net periodic benefit cost | | $ | 5,486 | | | $ | 4,651 | | | $ | 4,620 | |
| | | | | | | | | | | | |
Postretirement health plans: | | | | | | | | | | | | |
Service cost | | $ | 106 | | | $ | 99 | | | $ | 222 | |
Interest cost | | | 1,435 | | | | 1,199 | | | | 1,176 | |
Actuarial loss (gain) | | | 64 | | | | (964) | | | | (821) | |
Amortization of unrecognized prior service cost | | | 184 | | | | 185 | | | | 185 | |
| | | | | | | | | | | | |
Net periodic benefit cost | | $ | 1,789 | | | $ | 519 | | | $ | 762 | |
| | | | | | | | | | | | |
Assumptions— We determine our actuarial assumptions on an annual basis. In determining the present values of our benefit obligations and net periodic benefit costs as of and for the fiscal years ended October 3, 2010,
F-23
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007, October 1, 200627, 2009 and October 2, 2005,September 28, 2008, respectively, we used the following weighted-average assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Assumptions used to determine benefit obligations(1): | | | | | | | | | | | | | |
Qualified pension plans: | | | | | | | | | | | | | |
Assumptions used to determine benefit obligations (1): | | | | | | | | | | | | | |
Qualified pension plan: | | | | | | | | | | | | | |
Discount rate | | | 6.50 | % | | | 6.60 | % | | | 5.50 | % | | | 5.82% | | | | 6.16% | | | | 7.30% | |
Rate of future compensation increases | | | 3.50 | | | | 3.50 | | | | 3.50 | | |
Rate of future pay increases | | | | 3.50 | | | | 3.50 | | | | 3.50 | |
Non-qualified pension plan: | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.50 | % | | | 6.60 | % | | | 5.50 | % | | | 5.82% | | | | 6.16% | | | | 7.30% | |
Rate of future compensation increases | | | 5.00 | | | | 5.00 | | | | 5.00 | | |
Rate of future pay increases | | | | 3.50 | | | | 5.00 | | | | 5.00 | |
Postretirement health plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.50 | % | | | 6.60 | % | | | 5.50 | % | | | 5.82% | | | | 6.16% | | | | 7.30% | |
Assumptions used to determine net periodic benefit cost(2): | | | | | | | | | | | | | |
Assumptions used to determine net periodic benefit cost (2): | | | | | | | | | | | | | |
Qualified pension plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.60 | % | | | 5.50 | % | | | 6.45 | % | | | 6.16% | | | | 7.30% | | | | 6.50% | |
Long-term rate of return on assets | | | 7.75 | | | | 7.75 | | | | 7.50 | | | | 7.75 | | | | 7.75 | | | | 7.75 | |
Rate of future compensation increases | | | 3.50 | | | | 3.50 | | | | 3.50 | | |
Rate of future pay increases | | | | 3.50 | | | | 3.50 | | | | 3.50 | |
Non-qualified pension plan: | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.60 | % | | | 5.50 | % | | | 6.45 | % | | | 6.16% | | | | 7.30% | | | | 6.50% | |
Rate of future compensation increases | | | 5.00 | | | | 5.00 | | | | 5.00 | | |
Rate of future pay increases | | | | 5.00 | | | | 5.00 | | | | 5.00 | |
Postretirement health plans: | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.60 | % | | | 5.50 | % | | | 6.45 | % | | | 6.16% | | | | 7.30% | | | | 6.50% | |
| | |
(1) | | Determined as of end of year. |
|
(2) | | Determined as of beginning of year. |
F-23
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The assumed discount rate was determined by considering the average of pension yield curves constructed of a population of high-quality bonds with a Moody’s or Standard and Poor’s rating of “AA” or better meeting certain other criteria. The resulting discount rate reflectswhose cash flow from coupons and maturities match the matchingyear-by year projected benefit payments from the plans. Since benefit payments typically extend beyond the date of plan liabilitythe longest maturing bond, cash flows beyond 30 years were discounted back to the yield curves.30th year and then matched like any other payment.
The assumed expected long-term rate of return on assets is the weighted average rate of earnings expected on the funds invested or to be invested to provide for the pension obligations. The long-term rate of return on assets was determined taking into consideration our projected asset allocation and economic forecasts prepared with the assistance of our actuarial consultants.
The assumed discount rate and expected long-term rate of return on assets have a significant effect on amounts reported for our pension and postretirement plans. A quarter percentage point decrease in the discount rate and long-term rate of return used would decrease earnings before income taxes by $2.7 million and $0.7 million, respectively.
The assumed average rate of compensation increase is the average annual compensation increase expected over the remaining employment periods for the participating employees.
For measurement purposes, the weighted-average assumed health care cost trend rates for our postretirement health plans were as follows for each fiscal year:
| | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | | 2010 | | 2009 |
|
Health care cost trend rate for next year: | | | | | | | | | | | | | | |
Participants under age 65 | | | 8.33 | % | | | 9.12 | % | | | 7.75% | | | | 8.00% | |
Participants age 65 or older | | | 8.50 | % | | | 9.50 | % | | | 7.25% | | | | 7.50% | |
Rate to which the cost trend rate is assumed to decline | | | 4.92 | % | | | 4.94 | % | | | 4.50% | | | | 5.00% | |
Year the rate reaches the ultimate trend rate | | | 2013 | | | | 2014 | | | | 2028 | | | | 2021 | |
F-24
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumed health care cost trend rate represents our estimate of the annual rates of change in the costs of the health care benefits currently provided by our postretirement plans. The health care cost trend rate implicitly considers estimates of health care inflation, changes in health care utilization and delivery patterns, technological advances and changes in the health status of the plan participants. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasinga 1.0% change in the assumed health care cost trend rates by 1.0% rate would have the following effect(in each year would increasethousands):
| | | | | | | | |
| | 1% Point
| | 1% Point
|
| | Increase | | Decrease |
|
Total interest and service cost | | $ | 211 | | | $ | (178) | |
Postretirement benefit obligation | | $ | 3,727 | | | $ | (3,155) | |
Plan assets— Our investment philosophy is to (1) protect the postretirement benefit obligation as of September 30, 2007 by $2.4 million and the aggregatecorpus of the service and interest cost components of net periodic benefit cost for 2007 by $0.2 million. Iffund; (2) establish investment objectives that will allow the assumed health care cost trend rates decreased by 1.0% in each year,market value to exceed the postretirement benefit obligation would decrease by $2.0 million as of September 30, 2007, and the aggregatepresent value of the servicevested and interest components of net periodic benefit cost for 2007 would decrease by $0.2 million.
Plan assets —unvested liabilities over time; while (3) obtaining adequate investment returns to protect benefits promised to the participants and their beneficiaries. Our asset allocation strategy utilizes multiple investment managers in order to maximize the plan’s return while minimizing risk. We regularly monitor our asset allocation, and senior financial management and the Finance Committee of the Board of Directors review performance results at least semi-annually. In May 2007, we adjusted our targetOur plan asset allocation for our qualified pension plans toat the following: 40% U.S. equities, 30% debt securities, 15% international equities, 5% balanced fundend of 2010 and 10% real estate. We plan to reallocate our plan assets over a period of time,target allocations are as deemed appropriate by senior financial management, to achieve our new target asset allocation. The qualified pension plans had the following asset allocations at June 30, 2007 and June 30, 2006:follows:
| | | | | | | | |
| | 2007 | | | 2006 | |
|
U.S. equities | | | 42 | % | | | 41 | % |
Debt securities | | | 37 | | | | 38 | |
International equities | | | 15 | | | | 15 | |
Balanced fund | | | 6 | | | | 6 | |
| | | | | | | | |
| | | 100 | % | | | 100 | % |
| | | | | | | | |
| | | | | | | | | | | | |
| | Percentage of
| | |
| | Plan Assets | | Asset Allocation |
| | 2010 | | Target | | Minimum | | Maximum |
|
Large cap equity | | | 26% | | | 25% | | | 15% | | | 35% |
Small cap equity | | | 15% | | | 15% | | | 5% | | | 25% |
International equity | | | 17% | | | 15% | | | 5% | | | 25% |
Core fixed funds | | | 27% | | | 25% | | | 15% | | | 35% |
Real return bonds | | | 6% | | | 5% | | | 0% | | | 10% |
Alternative investments | | | 6% | | | 5% | | | 0% | | | 10% |
Real estate | | | 3% | | | 10% | | | 0% | | | 10% |
| | | | | | | | | | | | |
| | | 100% | | | 100% | | | | | | |
| | | | | | | | | | | | |
F-24F-25
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the qualified plan’s assets at October 3, 2010 by asset category are as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements | |
| | | | | | | | Quoted Prices
| | | Significant
| | | | |
| | | | | | | | in Active
| | | Other
| | | Significant
| |
| | | | | | | | Markets for
| | | Observable
| | | Unobservable
| |
| | | | | | | | Identical
| | | Inputs
| | | Inputs
| |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| |
|
Asset Category: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | | (1 | ) | | $ | 5,311 | | | $ | 5,311 | | | $ | - | | | $ | - | |
Equity: | | | | | | | | | | | | | | | | | | | | |
U.S. | | | (2 | ) | | | 74,240 | | | | 74,240 | | | | - | | | | - | |
Commingled | | | (3 | ) | | | 82,065 | | | | 82,065 | | | | - | | | | - | |
Fixed income: | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities | | | (4 | ) | | | 4,679 | | | | - | | | | 4,679 | | | | - | |
Corporate bonds | | | (5 | ) | | | 44,557 | | | | 36,123 | | | | 8,365 | | | | 69 | |
Non-government-backed C.M.O.’s | | | (6 | ) | | | 5,778 | | | | - | | | | 5,778 | | | | - | |
Government and mortgage securities | | | (7 | ) | | | 31,136 | | | | 16,075 | | | | 15,061 | | | | - | |
Other | | | (8 | ) | | | 15,945 | | | | 15,945 | | | | - | | | | - | |
Interest rate swaps | | | (9 | ) | | | 54 | | | | - | | | | 54 | | | | - | |
Real estate | | | (10 | ) | | | 7,054 | | | | - | | | | - | | | | 7,054 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | 270,819 | | | $ | 229,759 | | | $ | 33,937 | | | $ | 7,123 | |
| | | | | | | | | | | | | | | | | | | | |
| | |
(1) | | Cash and cash equivalents are comprised of commercial paper, short-term bills and notes, and short-term investment funds, which are valued at unadjusted quoted market prices. |
|
(2) | | U.S. equity securities are comprised of investments in common stock of U.S. andnon-U.S. companies for total return purposes. These investments are valued by the trustee at closing prices from national exchanges on the valuation date. |
|
(3) | | Commingled equity securities are comprised of investments in mutual funds, the fair value of which is determined by reference to the fund’s underlying assets, which are primarily marketable equity securities that are traded on national exchanges and valued at unadjusted quoted market prices. |
|
(4) | | Asset-backed securities are comprised of collateralized obligations and mortgage-backed securities, which are valued by the trustee using observable, market-based inputs. |
|
(5) | | Corporate bonds are comprised of mutual funds traded on national securities exchanges, valued at unadjusted quoted market prices, as well as securities traded in markets that are not considered active, which are valued based on quoted market prices, broker/dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Securities that trade infrequently and therefore have little or no price transparency are valued using the investment manager’s best estimate. |
|
(6) | | Non-government backed securities are comprised of collateralized obligations and mortgage-back securities, which the trustee values using observable, market-based inputs. |
|
(7) | | Government and mortgage securities are comprised of government and municipal bonds, including treasury bills, notes and index linked bonds which are valued using an unadjusted quoted price in an active market or observable, market-based inputs. |
|
(8) | | Other fixed income securities are comprised of other commingled funds invested in registered securities which are valued at the unadjusted quoted price in an active market or exchange. |
|
(9) | | Interest rate swaps are derivative instruments used to reduce exposure to the impact of changing interest rates and are valued using observable, market-based inputs. |
|
(10) | | Real estate is investments in a real estate investment trust for purposes of total return. These investments are valued at unit values provided by the investment managers and their consultants. |
F-26
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the changes in Level 3 investments for the qualified plan(in thousands):
| | | | | | | | | | | | | | | |
| | Fair Value Measurements Using
|
| | Significant Unobservable Inputs (Level 3) |
| | Corporate
| | Commercial
| | Non-Government
| | | | |
| | Bonds | | Mortgage-Backed | | Backed C.M.O.’s | | Real Estate | | Total |
|
|
Beginning balance at September 27, 2009 | | $ | 96 | | $ | 542 | | $ | 192 | | $ | 6,872 | | $ | 7,702 |
Actual return on plan assets: | | | | | | | | | | | | | | | |
Relating to assets still held at the reporting date | | | 13 | | | 104 | | | 24 | | | 331 | | | 472 |
Relating to assets sold during the period | | | - | | | 7 | | | - | | | (40) | | | (33) |
Purchases, sales, and settlements | | | - | | | (242) | | | (21) | | | (109) | | | (372) |
Transfers in and/or out of Level 3 | | | (40) | | | (411) | | | (195) | | | - | | | (646) |
| | | | | | | | | | | | | | | |
Ending balance at October 3, 2010 | | $ | 69 | | $ | - | | $ | - | | $ | 7,054 | | | 7,123 |
| | | | | | | | | | | | | | | |
Future cash flows— Our policy is to fund our plans at or above the minimum required by law. Contributions expected to be paid in the next fiscal year and the projected benefit payments for each of the next five fiscal years and the total aggregate amount for the subsequent five fiscal years are as follows(in thousands):
| | | | | | | | |
| | Defined Benefit
| | | Postretirement
| |
| | Pension Plans | | | Health Plans(1) | |
|
Estimated net contributions during fiscal 2008 | | $ | 15,195 | | | $ | 790 | |
Estimated future year benefit payments during fiscal years: | | | | | | | | |
2008 | | $ | 6,355 | | | $ | 790 | |
2009 | | | 7,237 | | | | 873 | |
2010 | | | 7,766 | | | | 929 | |
2011 | | | 8,405 | | | | 980 | |
2012 | | | 9,199 | | | | 1,048 | |
2013-2017 | | | 64,914 | | | | 6,107 | |
| | | | | | | | |
| | Defined
| | | | |
| | Benefit
| | | Postretirement
| |
| | Pension | | | Health Plans | |
|
Estimated net contributions during fiscal 2011 | | $ | 13,184 | | | $ | 1,193 | |
Estimated future year benefit payments during fiscal years: | | | | | | | | |
2011 | | $ | 9,802 | | | $ | 1,193 | |
2012 | | | 10,187 | | | | 1,249 | |
2013 | | | 10,639 | | | | 1,305 | |
2014 | | | 11,207 | | | | 1,384 | |
2015 | | | 11,889 | | | | 1,443 | |
2016-2020 | | | 79,280 | | | | 8,893 | |
| | |
(1) | | Net of Medicare Part D Subsidy. |
We will continue to evaluate contributions to our defined benefit plans based on changes in pension assets as a result of asset performance in the current market and economic environment. Expected benefit payments are based on the same assumptions used to measure our benefit obligation at September 30, 2007October 3, 2010 and include estimated future employee service.
| |
8.12. | SHARE-BASED EMPLOYEE COMPENSATION |
Stock incentive plans— We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors and employees to work toward the financial success of the Company.
Our stock incentive plans are administered by the Compensation Committee of the Board of Directors and have been approved by the stockholders of the Company. The terms and conditions of our share-based awards are determined by the Compensation Committee on each award date and may include provisions for the exercise price, expirations, vesting, restriction on sales and forfeitures, as applicable. We issue new shares to satisfy stock issuances under our stock incentive plans.
Our Amended and Restated 2004 Stock Incentive Plan authorizes the issuance of up to 6,500,0007,900,000 common shares in connection with the granting of stock options, stock appreciation rights, restricted stock purchase rights, restricted stock bonuses, restricted stock units or performance units to key employees and directors. No more than 1,300,000 shares may be granted under this Plan as restricted stock or performance-based awards. As of September 30, 2007, 2,593,648October 3, 2010, 1,965,176 shares of common stock were available for future issuance under this Plan.plan.
There are four other plans under which we can no longer issue awards, although awards outstanding under these plans may still vest and be exercised: the 1992 Employee Stock Incentive Plan;Plan, the 1993 Stock Option Plan;Plan, the 2002 Stock Incentive Plan and the Non-Employee Director Stock Option Plan.
F-27
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also maintain a deferred compensation plan for non-management directors under which those who are eligible to receive fees or retainers may choose to defer receipt of their compensation. The deferred amounts deferred are converted intoto stock equivalents at the then current market price of our common stock. Effective November 9, 2006, the deferred compensationequivalents. The plan was amended to eliminate a 25% company match of such deferred amounts and requirerequires settlement in shares of our common stock based on the number of stock equivalents at the time of a participant’s separation from the Board of Directors. As a result of changing the method of settlement from cash to stock, the deferred compensation obligation has been reclassified from accrued liabilities to capital in excess of par value in the accompanying consolidated balance sheet as of September 30 2007. This plan provides for the issuance of up to 200,000350,000 shares of common sharesstock in connection with the crediting of stock equivalents. NoAs of October 3, 2010, 263,424 shares have been issued in connection withof common stock were available for future issuance under this plan, as amended, as of September 30, 2007.
F-25
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)plan.
In February 2006, the stockholders of the Company approved an employee stock purchase plan (“ESPP”) for all eligible employees to purchase shares of common stock at 95% of the fair market value on the date of purchase. Employees may authorize us to withhold up to 15% of their base compensation during any offering period, subject to certain limitations. A maximum of 200,000 shares of common stock may be issued under the plan. As of September 30, 2007, 188,752October 3, 2010, 143,072 shares of common stock were available for future issuance under this Plan.plan.
Compensation expense— The components of share-based compensation expense recognized in each year are as follows(in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Stock options | | $ | 8,602 | | | $ | 7,270 | | | $ | — | | | $ | 7,234 | | | $ | 8,952 | | | $ | 7,880 | |
Performance-vested stock awards | | | 2,416 | | | | 1,210 | | | | 838 | | | | 1,145 | | | | (1,429 | ) | | | 1,381 | |
Nonvested stock awards | | | 1,246 | | | | 805 | | | | 558 | | | | 923 | | | | 704 | | | | 1,034 | |
Deferred compensation for directors — liability classified | | | 324 | | | | 2,885 | | | | 280 | | |
Deferred compensation for directors — equity classified | | | 376 | | | | — | | | | — | | |
Nonvested stock units | | | | 1,024 | | | | 830 | | | | - | |
Deferred compensation for directors | | | | 279 | | | | 284 | | | | 271 | |
| | | | | | | | | | | | | | |
Total share-based compensation expense | | $ | 12,964 | | | $ | 12,170 | | | $ | 1,676 | | | $ | 10,605 | | | $ | 9,341 | | | $ | 10,566 | |
| | | | | | | | | | | | | | |
In November 2008, we modified the performance periods and goals of our outstanding performance-vested stock awards to address challenges associated with establishing long-term performance measures. The modifications and changes to expectations regarding achievement levels resulted in a $2.2 million reduction in our expense.
Stock options— Prior to fiscal 2007, options granted had contractual terms of 10 or 11 years and employee options generally vested over a four-year period. Beginning fiscal 2007, option grants have contractual terms of 7 years and employee options vest over a three-year period. Options may vest sooner for employees meeting certain age and years of service thresholds. Options granted to non-management directors vest at six months. All option grants provide for an option exercise price equal to the closing market value of the common stock on the date of grant.
The following is a summary of stock option activity for fiscal year 2007:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted-
| | | | | | | | | Weighted
| | | |
| | | | Weighted-
| | Average
| | | | | | | Weighted
| | Average
| | Aggregate
| |
| | | | Average
| | Remaining
| | Aggregate
| | | | | Average
| | Remaining
| | Intrinsic
| |
| | | | Exercise
| | Contractual
| | Intrinsic
| | | | | Exercise
| | Contractual
| | Value (in
| |
| | Shares | | Price | | Term (Years) | | Value | | | Shares | | Price | | Term (Years) | | thousands) | |
| | | | | | | | (In thousands) | |
| |
Options outstanding at October 1, 2006 | | | 6,235,034 | | | $ | 13.78 | | | | | | | | | | |
Options outstanding at September 27, 2009 | | | | 4,788,326 | | | $ | 21.31 | | | | | | | | | |
Granted | | | 1,008,800 | | | | 30.28 | | | | | | | | | | | | 550,000 | | | | 19.26 | | | | | | | | | |
Exercised | | | (2,362,436 | ) | | | 11.77 | | | | | | | | | | | | (407,452 | ) | | | 12.73 | | | | | | | | | |
Forfeited | | | (13,111 | ) | | | 20.71 | | | | | | | | | | | | (33,417 | ) | | | 22.16 | | | | | | | | | |
Expired | | | (19,930 | ) | | | 10.91 | | | | | | | | | | | | (12,511 | ) | | | 13.05 | | | | | | | | | |
| | | | | | |
Options outstanding at September 30, 2007 | | | 4,848,357 | | | $ | 18.19 | | | | 6.32 | | | $ | 68,990 | | |
Options outstanding at October 3, 2010 | | | | 4,884,946 | | | $ | 21.81 | | | | 4.47 | | | $ | 25,606 | |
| | | | | | |
Options exercisable at September 30, 2007 | | | 2,926,501 | | | $ | 14.57 | | | | 5.59 | | | $ | 52,234 | | |
Options exercisable at October 3, 2010 | | | | 4,068,523 | | | $ | 21.95 | | | | 4.22 | | | $ | 21,483 | |
| | | | | | |
Options exercisable and expected to vest at September 30, 2007 | | | 4,753,657 | | | $ | 18.11 | | | | 6.29 | | | $ | 68,008 | | |
Options exercisable and expected to vest at October 3, 2010 | | | | 4,853,860 | | | $ | 21.83 | | | | 4.45 | | | $ | 25,411 | |
| | | | | | |
Effective in the fourth quarter of fiscal 2005, we began utilizing a binomial-based model to determine the fair value of options granted. The fair value of all prior options granted has been estimated on the date of grant using the Black-Scholes option-pricing model. Valuation models require the input of highly subjective assumptions,
F-26F-28
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We use a binomial-based model to determine the fair value of options granted. Valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. The following weighted-average assumptions were used for stock option grants in each year:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2007 | | 2006 | | 2005 | | | 2010 | | 2009 | | 2008 | |
|
Risk-free interest rate | | | 4.20 | % | | | 4.12 | % | | | 4.10 | % | | | 1.97% | | | | 3.01% | | | | 2.85% | |
Expected dividends yield | | | 0.00 | % | | | 0.00 | % | | | 0.00 | % | | | 0.00% | | | | 0.00% | | | | 0.00% | |
Expected stock price volatility | | | 37.85 | % | | | 34.88 | % | | | 35.50 | % | | | 38.65% | | | | 45.62% | | | | 45.74% | |
Expected life of options (in years) | | | 4.65 | | | | 5.92 | | | | 6.00 | | | | 4.46 | | | | 5.23 | | | | 4.38 | |
In 2007, 20062010, 2009 and the fourth quarter of fiscal 2005,2008, the risk-free interest rate was determined by a yield curve of risk-free rates based on published U.S. Treasury spot rates in effect at the time of grant and has a term equal to the expected life. Inlife of the first three quarters of 2005, the risk-free rates were based on the grant date rate for zero coupon U.S. government issues with a remaining term similar to the expected life.related options.
The dividend yield assumption is based on the Company’s history and expectations of dividend payouts.
The expected stock price volatility in 2007, 2006 and the fourth quarter of 2005,all years represents an average of the implied volatility and the Company’s historical volatility. In 2005, prior to using a binomial-based model, the expected stock price volatility was based on the historical volatility of the Company’s stock for a period approximating the expected life.
The expected life of the options represents the period of time the options are expected to be outstanding and is based on historical trends.
The weighted-average grant-date fair value of options granted was $11.20, $10.21,$6.54, $10.27 and $6.86$9.82 in 2007, 2006,2010, 2009 and 2005,2008, respectively. The intrinsic value of stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of stock options exercised was $47.6$4.0 million, $33.7$4.4 million and $25.5$12.5 million in 2007, 2006,2010, 2009 and 2005,2008, respectively.
As of September 30, 2007,October 3, 2010, there was approximately $13.7$4.1 million of total unrecognized compensation cost related to stock options granted under our stock incentive plans. That cost is expected to be recognized over a weighted-average period of 1.61.72 years.
Performance-vested stock awards — We began granting performance-vested stock awards to certain employees in fiscal year 2005. Performance awards represent a right to receive a certain number of shares of common stock upon achievement of performance goals at the end of a three-year period. The expected cost of the shares is being reflected over the performance period and is reduced for estimated forfeitures. The expected cost for all awards granted is based on the fair value of our stock on the date of grant reducedand is reflected over the performance period with a reduction for estimated forfeitures, as itforfeitures. It is our intent to settle these awards with shares of common stock.
The following is a summary of performance-vested stock award activity for fiscal year 2007:2010:
| | | | | | | | | | | | | | | | |
| | | | Weighted-
| | | | | Weighted-
| |
| | | | Average
| | | | | Average Grant
| |
| | | | Grant Date
| | | | | Date Fair
| |
| | Shares | | Fair Value | | | Shares | | Value | |
|
Performance-vested stock awards outstanding at October 1, 2006 | | | 427,612 | | | $ | 19.60 | | |
Performance-vested stock awards outstanding at September 27, 2009 | | | | 323,975 | | | $ | 15.53 | |
Granted | | | 112,320 | | | | 30.69 | | | | 225,440 | | | | 19.19 | |
Issued | | | (1,244 | ) | | | 14.96 | | | | (47,545 | ) | | | 15.56 | |
Canceled | | | | (161,560 | ) | | | 15.56 | |
Forfeited | | | (14,840 | ) | | | 19.77 | | | | (46,008 | ) | | | 16.40 | |
| | | | | | |
Performance-vested stock awards outstanding at September 30, 2007 | | | 523,848 | | | $ | 22.02 | | |
Performance-vested stock awards outstanding at October 3, 2010 | | | | 294,302 | | | $ | 18.18 | |
| | | | | | |
Vested and subject to release at September 30, 2007 | | | 146,116 | | | $ | 14.96 | | |
Vested and subject to release at October 3, 2010 | | | | 40,017 | | | $ | 15.32 | |
| | | | | | |
F-27
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of September 30, 2007,October 3, 2010, there was approximately $5.2$1.8 million of total unrecognized compensation cost related to performance-vested stock awards. That cost is expected to be recognized over a weighted-average period of 1.971.8 years. The weighted-average grant date fair value of awards granted was $19.19, $15.56 and $15.56 in 2010, 2009 and 2008, respectively. The total fair value of awards that vested as of September 30, 2007,during 2010, 2009 and 2008 was
F-29
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$0.6 million, $0.7 million and $0.9 million, respectively. In 2010, 2009 and 2008, the end of the first three-year period, was $4.7 million. We expect to issue the stock associated with these awards in November 2007. In 2006, 1,244 awards vested with atotal grant date fair value of $0.02 million. No awards vested in 2005.shares issued was $0.7 million, $1.0 million and $2.0 million, respectively.
Nonvested stock awards— We generally issueissued nonvested stock awards (“RSAs”) to certain executives under our share ownership guidelines. OurEffective February 2008, we no longer issue these awards which have been replaced by grants of nonvested stock awardsunits. Our RSAs vest, subject to the discretion of our Board of Directors in certain circumstances, upon retirement or termination based upon years of service or ratably over a three-year period for non-ownership grants as provided in the award agreements. These awards are amortized to compensation expense over the estimated vesting period based upon the fair value of our common stock on the award date.
The following is a summary of nonvested stockRSA activity for fiscal year 2007:2010:
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average
| |
| | | | | Grant Date
| |
| | Shares | | | Fair Value | |
|
Nonvested stock outstanding at October 1, 2006 | | | 591,940 | | | $ | 12.28 | |
Granted | | | — | | | | — | |
Released | | | (102,000 | ) | | | 10.64 | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Nonvested stock outstanding at September 30, 2007 | | | 489,940 | | | $ | 12.62 | |
| | | | | | | | |
Vested at September 30, 2007 | | | 322,200 | | | $ | 10.64 | |
| | | | | | | | |
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average Grant
| |
| | | | | Date Fair
| |
| | Shares | | | Value | |
|
Nonvested stock awards outstanding at September 27, 2009 | | | 426,285 | | | $ | 15.04 | |
Released | | | (31,168 | ) | | | 17.75 | |
| | | | | | | | |
Nonvested stock awards outstanding at October 3, 2010 | | | 395,117 | | | $ | 14.82 | |
| | | | | | | | |
Vested at October 3, 2010 | | | 104,645 | | | $ | 12.19 | |
| | | | | | | | |
As of September 30, 2007,October 3, 2010, there was approximately $3.7$2.7 million of total unrecognized compensation cost related to nonvested stock awards,RSAs, which is expected to be recognized over a weighted-average period of 5.55.4 years. NoDuring 2008, we granted 64,545 shares of nonvested stock were granted in 2007. During 2006 and 2005, we granted 11,000 and 115,740 shares of nonvested stock, respectively,RSAs with a grant date fair value of $26.35. No shares of RSAs were granted in 2010 or 2009. The total fair value of RSAs that vested was $0.2 million during 2010 and $2.02009 and $0.4 million respectively.during 2008. In 20072010, 2009 and 2006,2008, the total grant date fair value of shares released was $1.1$0.6 million, $1.3 million and $0.2$0.04 million, respectively.
Nonvested stock units— In February 2009, the Board of Directors approved the issuance of a new type of stock award, nonvested stock units (“RSUs”). RSUs replace RSAs previously issued to certain executives under our share ownership guidelines and annual option grants previously granted to our non-management directors. Our RSUs vest, subject to the discretion of our Board of Directors in certain circumstances, upon retirement or termination based upon years of service. No such units were vested as of October 3, 2010. These awards are amortized to compensation expense over the estimated vesting period based upon the fair value of our common stock on the award date.
The following is a summary of RSU activity for fiscal 2010:
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average Grant
| |
| | | | | Date Fair
| |
| | Shares | | | Value | |
|
Nonvested stock units outstanding at September 27, 2009 | | | 61,854 | | | $ | 21.46 | |
Granted | | | 96,949 | | | | 21.05 | |
Released | | | (5,000 | ) | | | 20.07 | |
| | | | | | | | |
Nonvested stock units outstanding at October 3, 2010 | | | 153,803 | | | $ | 21.25 | |
| | | | | | | | |
As of October 3, 2010, there was approximately $1.5 million of total unrecognized compensation cost related to RSUs, which is expected to be recognized over a weighted-average period of 7.0 years. During 2009, we granted 61,854 shares of RSUs with a grant date fair value of $21.46. The total fair value of RSUs that vested and were released during 2010 was $0.1 million. No such awards vested or were released in 2005.2009.
Non-management directors’ deferred compensation— Effective November 9, 2006, allAll awards outstanding under our directors’ deferred compensation plan are accounted for as equity-based awards per the provisions of SFAS 123R and deferred amounts are converted into stock equivalents at the then current market price of our common stock. Prior to November 9, 2006, these awards were accounted for as liability-based awards, and in addition to converting deferrals into stock equivalents at the then current market price of our stock, our liability was adjusted at the end of each reporting period to reflect the value of the directors’ stock equivalents at the then market price of our common stock. Cash used to settle directors’ deferred compensation upon a director’s retirement from the Board in fiscal 2006 was $1.1 million. No deferrals were settled in 2007 and 2005.
The following is a summary of the stock equivalent activity for fiscal year 2007:
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average
| |
| | Stocks
| | | Grant Date
| |
| | Equivalents | | | Fair Value | |
|
Stock equivalents outstanding at October 1, 2006 | | | 212,208 | | | $ | 10.65 | |
Deferred directors’ compensation | | | 9,920 | | | | 33.17 | |
Stock distribution | | | — | | | | — | |
| | | | | | | | |
Stock equivalents outstanding at September 30, 2007 | | | 222,128 | | | $ | 11.66 | |
| | | | | | | | |
F-28F-30
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
equivalents at the then-current market price of our common stock. During fiscal 2009 and 2008, 59,949 and 26,627 shares of common stock were issued in connection with director retirements having a grant date fair value of $1.6 million and $0.4 million, respectively. No deferrals were settled in 2010.
The following is a summary of the stock equivalent activity for fiscal 2010:
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average Grant
| |
| | Stock
| | | Date Fair
| |
| | Equivalents | | | Value | |
|
Stock equivalents outstanding at September 27, 2009 | | | 162,404 | | | $ | 14.16 | |
Deferred directors’ compensation | | | 7,914 | | | | 20.85 | |
| | | | | | | | |
Stock equivalents outstanding at October 3, 2010 | | | 170,318 | | | $ | 14.47 | |
| | | | | | | | |
Employee stock purchase plan— In fiscal year 2007, 11,2482010, 2009 and 2008, 14,565, 15,548 and 15,567 shares, respectively, were purchased through the ESPP at an average price of $32.51. The first offering period concluded in the first quarter of 2007, therefore no shares were issued under this plan in 2006$19.32, $19.99 and 2005.$25.65, respectively.
| |
9.13. | STOCKHOLDERS’ EQUITY |
Preferred stock— We have 15,000,000 shares of preferred stock authorized for issuance at a par value of $.01$0.01 per share. No preferred shares have been issued.
Stock split — On August 3, 2007, our Board of Directors approved a2-for-1 split of our common stock, that was effected in the form of a 100% stock dividend on October 15, 2007. In connection with the stock split, our shareholders approved, on September 21, 2007, an amendment to our Certificate of Incorporation to increase the number of authorized common shares from 75.0 million to 175.0 million.
Repurchases of common stock— OnIn November 21, 2006, we announced the commencement of a modified “Dutch Auction” tender offer (“Tender Offer”) for up to 5.5 million shares of our common stock at a price per share not less than $55.00 and not greater than $61.00, for a maximum aggregate purchase price of $335.5 million. On December 19, 2006, we accepted for purchase approximately 2.3 million shares of common stock at a purchase price of $61.00 per share, for a total cost of $143.3 million.
On December 20, 2006,2007, the Board of Directors authorizedapproved a program to repurchase up to 3.3$200.0 million shares in calendar year 2007 to complete the repurchase of the total shares authorized in the Tender Offer. In the second quarter of 2007, under a 10b5-1 plan, we repurchased 3.2 million shares for $220.1 million.
The Tender Offer and the additional repurchase program were funded through the new credit facility and available cash, and all shares repurchased were subsequently retired.
Pursuant to other stock repurchase programs authorized by the Board of Directors in 2005 and 2004, we repurchased 1,582,881, 1,444,700 and 2,578,801 shares of our common stock for $100.0over three years expiring November 9, 2010. During 2010, we repurchased approximately 4.9 million $50.0 million, and $92.9 million during 2007, 2006, and 2005, respectively. These stock repurchases were recorded as treasury stockshares at cost.an aggregate cost of $97.0 million. As of September 30, 2007, we had noOctober 3, 2010, the aggregate remaining amount authorized for repurchase availability remaining.
Onwas $3.0 million. In November 9, 2007,2010, the Board of Directors authorizedapproved a new $200.0 million program to repurchase, within the next year, up to $100.0 million in shares of our common stock at prevailing market prices, in the open market or in private transactions, from time to time at management’s discretion, over the next three years.stock.
Comprehensive income— Our total comprehensive income, net of taxes, was as follows(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Net earnings | | $ | 126,304 | | | $ | 108,031 | | | $ | 91,537 | |
Net unrealized gains (losses) related to cash flow hedges, net of taxes of ($801), $117 and $266, respectively | | | (1,254 | ) | | | 180 | | | | 417 | |
Net realized gains reclassified into net earnings on liquidation of interest rate swaps, net of taxes of ($137) | | | (234 | ) | | | — | | | | — | |
Minimum pension liability, net of taxes of $1,524, $17,563, and ($18,289), respectively | | | 2,393 | | | | 27,587 | | | | (28,726 | ) |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 127,209 | | | $ | 135,798 | | | $ | 63,228 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Net earnings | | $ | 70,210 | | | $ | 118,408 | | | $ | 119,279 | |
Cash flow hedges: | | | | | | | | | | | | |
Net change in fair value of derivatives | | | (837 | ) | | | (6,147 | ) | | | (5,223 | ) |
Amount of net loss reclassified to earnings during the year | | | 4,719 | | | | 6,189 | | | | 2,013 | |
| | | | | | | | | | | | |
Total cash flow hedges | | | 3,882 | | | | 42 | | | | (3,210 | ) |
Tax effect | | | (1,481 | ) | | | (21 | ) | | | 1,226 | |
| | | | | | | | | | | | |
| | | 2,401 | | | | 21 | | | | (1,984 | ) |
Unrecognized periodic benefit costs | | | | | | | | | | | | |
Effect of unrecognized net actuarial gains (losses) and prior service cost | | | 3,625 | | | | (102,912 | ) | | | 11,907 | |
Tax effect | | | (1,371 | ) | | | 39,254 | | | | (4,628 | ) |
| | | | | | | | | | | | |
| | | 2,254 | | | | (63,658 | ) | | | 7,279 | |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 74,865 | | | $ | 54,771 | | | $ | 124,574 | |
| | | | | | | | | | | | |
F-29F-31
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of accumulated other comprehensive loss, net of taxes, were as follows as of October 3, 2010 and September 30, 2007 and October 1, 200627, 2009(in thousands):
| | | | | | | | |
| | 2007 | | | 2006 | |
|
Additional minimum pension liability adjustment net of taxes of ($1,524) | | $ | — | | | $ | (2,393 | ) |
Adoption of SFAS 158, net of taxes of ($15,148) | | | (24,249 | ) | | | — | |
Net unrealized gains (losses) related to cash flow hedges, net of taxes of ($556) and $382, respectively | | | (891 | ) | | | 597 | |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (25,140 | ) | | $ | (1,796 | ) |
| | | | | | | | |
| | | | | | | | |
| | 2010 | | | 2009 | |
|
Unrecognized periodic benefit costs, net of tax benefits of $48,379 and $49,750, respectively | | $ | (78,334 | ) | | $ | (80,588 | ) |
Net unrealized losses related to cash flow hedges, net of tax benefits of $280 and $1,761, respectively | | | (453 | ) | | | (2,854 | ) |
| | | | | | | | |
Accumulated other comprehensive loss | | $ | (78,787 | ) | | $ | (83,442 | ) |
| | | | | | | | |
| |
10.14. | AVERAGE SHARES OUTSTANDING |
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our ESPP.employee stock purchase plan. Performance-vested stock awards are included in the average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Weighted-average shares outstanding — basic | | | 65,314 | | | | 69,888 | | | | 71,250 | |
Assumed additional shares issued upon exercise of stock options, net of shares reacquired at the average market price | | | 1,533 | | | | 1,814 | | | | 2,316 | |
Assumed vesting of nonvested stock, net of shares reacquired at the average market price | | | 270 | | | | 132 | | | | 310 | |
Performance based awards issuable at the end of the period | | | 146 | | | | — | | | | — | |
| | | | | | | | | | | | |
Weighted-average shares outstanding — diluted | | | 67,263 | | | | 71,834 | | | | 73,876 | |
| | | | | | | | | | | | |
Stock options excluded(1) | | | 557 | | | | 674 | | | | — | |
Performance based awards excluded(2) | | | 378 | | | | 434 | | | | 312 | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Weighted-average shares outstanding – basic | | | 55,070 | | | | 56,795 | | | | 58,249 | |
Effect of potentially dilutive securities: | | | | | | | | | | | | |
Stock options | | | 512 | | | | 619 | | | | 879 | |
Nonvested stock awards and units | | | 182 | | | | 169 | | | | 248 | |
Performance-vested stock awards | | | 79 | | | | 150 | | | | 69 | |
| | | | | | | | | | | | |
Weighted-average shares outstanding – diluted | | | 55,843 | | | | 57,733 | | | | 59,445 | |
| | | | | | | | | | | | |
Excluded from diluted weighted-average shares outstanding: | | | | | | | | | | | | |
Antidilutive | | | 3,266 | | | | 2,763 | | | | 1,611 | |
Performance conditions not satisfied at the end of the period | | | 160 | | | | 179 | | | | 261 | |
| | |
(1) | | Excluded from diluted weighted-average shares outstanding because their exercise prices, unamortized compensation and tax benefits exceeded the average market price of common stock for the period. |
|
(2) | | Excluded from diluted weighted-average shares outstanding because the number of shares issued is contingent on achievement of performance goals at the end of a three-year performance period. |
| |
11.15. | COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS |
Commitments— We are principally liable for lease obligations on various properties subleased to third parties. We are also obligated under a lease guarantee agreement associated with a Chi-Chi’s restaurant property. Due to the bankruptcy of the Chi-Chi’s restaurant chain in 2003, previously owned by us, we are obligated to perform in accordance with the terms of a guarantee agreement, as well as fourthree other lease agreements, which expire at various dates in 2010 andduring the second quarter of fiscal 2011. During fiscal year 2003, we established an accrual for these lease obligations and do not anticipate incurring any additional charges in future years related to the Chi-Chi’s bankruptcy.
As of September 30, 2007, our accrualOctober 3, 2010, we had unconditional purchase obligations of $740.8 million, which primarily includes contracts for the lease guarantee was $1.0 million and the maximum potential amount of future payments was $1.7 million.
F-30
JACK IN THE BOX INC. AND SUBSIDIARIES
goods related to restaurant operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Legal Mattersmatters— We are subject to normal and routine litigation. In the opinion of management, based in part on the advice of legal counsel, the ultimate liability from all pending legal proceedings, asserted legal claims and known potential legal claims should not materially affect our operating results, financial position or liquidity.
We operate our business in two operating segments, Jack inthe Box and Qdoba, based on our management structure and internal method of reporting. Based upon certain quantitative thresholds, only Jack in theBox is considered a reportable segment.
Summarized financial information concerning our reportable segment is shown in the following table(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Revenues | | $ | 2,781,505 | | | $ | 2,648,659 | | | $ | 2,421,815 | |
Earnings from operations | | | 208,680 | | | | 172,485 | | | | 147,188 | |
Cash flows used for purchases of property and equipment | | | 145,299 | | | | 142,075 | | | | 117,951 | |
Total assets | | | 1,341,417 | | | | 1,490,536 | | | | 1,319,171 | |
Interest expense and income taxes are not reported on an operating segment basis in accordance with our method of internal reporting.
A reconciliation of reportable segment revenues to consolidated revenues follows(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Revenues | | $ | 2,781,505 | | | $ | 2,648,659 | | | $ | 2,421,815 | |
Qdoba revenues | | | 94,473 | | | | 74,944 | | | | 58,399 | |
| | | | | | | | | | | | |
Consolidated revenues | | $ | 2,875,978 | | | $ | 2,723,603 | | | $ | 2,480,214 | |
| | | | | | | | | | | | |
A reconciliation of reportable segment earnings from operations to consolidated earnings from operations follows(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Earnings from operations | | $ | 208,680 | | | $ | 172,485 | | | $ | 147,188 | |
Qdoba earnings from operations | | | 11,005 | | | | 9,210 | | | | 4,418 | |
| | | | | | | | | | | | |
Consolidated earnings from operations | | $ | 219,685 | | | $ | 181,695 | | | $ | 151,606 | |
| | | | | | | | | | | | |
A reconciliation of reportable segment total assets to consolidated total assets follows(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Total assets | | $ | 1,341,417 | | | $ | 1,490,536 | | | $ | 1,319,171 | |
Qdoba total assets | | | 86,867 | | | | 74,132 | | | | 67,989 | |
Investment in Qdoba and other | | | (45,462 | ) | | | (44,207 | ) | | | (49,174 | ) |
| | | | | | | | | | | | |
Consolidated total assets | | $ | 1,382,822 | | | $ | 1,520,461 | | | $ | 1,337,986 | |
| | | | | | | | | | | | |
F-31F-32
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Reflecting the information currently being used in managing the Company as a two-branded restaurant operations business, our segments comprise results related to system restaurant operations for our Jack in the Box and Qdoba brands. This segment reporting structure reflects the Company’s current management structure, internal reporting method and financial information used in deciding how to allocate Company resources. Based upon certain quantitative thresholds, both operating segments are considered reportable segments.
We measure and evaluate our segments based on segment earnings from operations. Summarized financial information concerning our reportable segments is shown in the following table(in thousands):
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Revenues by Segment: | | | | | | | | | | | | |
Jack in the Box restaurant operations segment | | $ | 1,731,130 | | | $ | 2,025,755 | | | $ | 2,146,596 | |
Qdoba restaurant operations segment | | | 168,424 | | | | 143,206 | | | | 117,740 | |
Distribution operations | | | 397,977 | | | | 302,135 | | | | 275,225 | |
| | | | | | | | | | | | |
Consolidated revenues | | $ | 2,297,531 | | | $ | 2,471,096 | | | $ | 2,539,561 | |
| | | | | | | | | | | | |
Earnings from Operations by Segment: | | | | | | | | | | | | |
Jack in the Box restaurant operations segment | | $ | 111,983 | | | $ | 218,740 | | | $ | 202,054 | |
Qdoba restaurant operations segment | | | 11,580 | | | | 10,690 | | | | 11,481 | |
Distribution operations | | | (1,653 | ) | | | 1,838 | | | | 2,353 | |
| | | | | | | | | | | | |
Consolidated earnings from operations | | $ | 121,910 | | | $ | 231,268 | | | $ | 215,888 | |
| | | | | | | | | | | | |
Total Expenditures for Long-Lived Assets by Segment: | | | | | | | | | | | | |
Jack in the Box restaurant operations segment | | $ | 80,855 | | | $ | 133,353 | | | $ | 161,803 | |
Qdoba restaurant operations segment | | | 13,572 | | | | 19,189 | | | | 15,241 | |
Distribution operations | | | 1,183 | | | | 958 | | | | 1,561 | |
| | | | | | | | | | | | |
Consolidated expenditures for long-lived assets (from continuing operations) | | $ | 95,610 | | | $ | 153,500 | | | $ | 178,605 | |
| | | | | | | | | | | | |
Interest income and expense, income taxes and total assets are not reported for our segments, in accordance with our method of internal reporting.
| |
17. | SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION |
Additional information related to cash flows is as follows(in thousands):
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
|
Cash paid during the year for: | | | | | | | | | | | | |
Interest, net of amounts capitalized | | $ | 28,247 | | | $ | 20,234 | | | $ | 15,654 | |
Income tax payments | | | 90,709 | | | | 44,285 | | | | 43,678 | |
Capital lease obligations incurred | | | 464 | | | | 1,818 | | | | 911 | |
| |
14. | SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION |
| | | | | | | | |
| | Sept. 30,
| | | Oct. 1,
| |
| | 2007 | | | 2006 | |
| | (In thousands) | |
|
Accounts and other receivables, net: | | | | | | | | |
Trade | | $ | 35,149 | | | $ | 24,234 | |
Notes receivable and other | | | 6,209 | | | | 6,955 | |
Allowances for doubtful accounts | | | (267 | ) | | | (315 | ) |
| | | | | | | | |
| | $ | 41,091 | | | $ | 30,874 | |
| | | | | | | | |
Accrued liabilities: | | | | | | | | |
Payroll and related taxes | | $ | 75,212 | | | $ | 76,822 | |
Sales and property taxes | | | 23,106 | | | | 23,377 | |
Insurance | | | 46,377 | | | | 49,035 | |
Income taxes | | | 1,522 | | | | 19,188 | |
Advertising | | | 22,337 | | | | 19,976 | |
Other | | | 54,986 | | | | 51,922 | |
| | | | | | | | |
| | $ | 223,540 | | | $ | 240,320 | |
| | | | | | | | |
Other long-term liabilities: | | | | | | | | |
Pension and postretirement benefits | | $ | 61,762 | | | $ | 51,116 | |
Non-qualified deferred compensation | | | 39,249 | | | | 31,096 | |
Deferred rent | | | 45,144 | | | | 41,594 | |
Other | | | 22,567 | | | | 21,781 | |
| | | | | | | | |
| | $ | 168,722 | | | $ | 145,587 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | 2007 | | | 2006 | | | 2005 | |
| | (In thousands) | |
|
Interest expense, net: | | | | | | | | | | | | |
Interest expense | | $ | 32,146 | | | $ | 19,593 | | | $ | 17,093 | |
Interest income | | | (8,792 | ) | | | (7,518 | ) | | | (3,691 | ) |
| | | | | | | | | | | | |
| | $ | 23,354 | | | $ | 12,075 | | | $ | 13,402 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | 2010 | | | 2009 | | | 2008 | |
|
Cash paid during the year for: | | | | | | | | | | | | |
Interest, net of amounts capitalized | | $ | 17,719 | | | $ | 23,008 | | | $ | 25,732 | |
Income tax payments | | $ | 80,719 | | | $ | 79,392 | | | $ | 68,454 | |
F-32F-33
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
15.18. | SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENT INFORMATION(in thousands) |
| | | | | | | | |
| | Oct. 3,
| | | Sept. 27,
| |
| | 2010 | | | 2009 | |
|
Accounts and other receivables, net: | | | | | | | | |
Trade | | $ | 48,006 | | | $ | 38,820 | |
Notes receivable | | | 29,949 | | | | 4,533 | |
Other | | | 4,386 | | | | 6,142 | |
Allowances for doubtful accounts | | | (1,191 | ) | | | (459 | ) |
| | | | | | | | |
| | $ | 81,150 | | | $ | 49,036 | |
| | | | | | | | |
Other assets, net: | | | | | | | | |
Company-owned life insurance policies | | $ | 76,296 | | | $ | 68,234 | |
Deferred rent receivable | | | 19,664 | | | | 14,407 | |
Other | | | 55,144 | | | | 32,653 | |
| | | | | | | | |
| | $ | 151,104 | | | $ | 115,294 | |
| | | | | | | | |
Accrued liabilities: | | | | | | | | |
Payroll and related taxes | | $ | 31,259 | | | $ | 59,900 | |
Sales and property taxes | | | 21,141 | | | | 20,603 | |
Insurance | | | 37,655 | | | | 37,505 | |
Advertising | | | 15,686 | | | | 21,242 | |
Gift card liability | | | 3,171 | | | | 3,684 | |
Deferred franchise fees | | | 2,541 | | | | 2,190 | |
Other | | | 56,733 | | | | 60,976 | |
| | | | | | | | |
| | $ | 168,186 | | | $ | 206,100 | |
| | | | | | | | |
Other long-term liabilities: | | | | | | | | |
Pension | | $ | 101,443 | | | $ | 105,503 | |
Straight-line rent accrual | | | 52,661 | | | | 52,506 | |
Deferred franchise fees | | | 1,532 | | | | 1,741 | |
Other | | | 94,804 | | | | 74,440 | |
| | | | | | | | |
| | $ | 250,440 | | | $ | 234,190 | |
| | | | | | | | |
Notes receivable as of October 3, 2010 consists primarily of temporary financing provided to franchisees to facilitate the closing of certain refranchising transactions.
| |
19. | UNAUDITED QUARTERLY RESULTS OF OPERATIONS (in(in thousands, except per share data) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 16 Weeks
| | | | | | | | | 16 Weeks
| | | | 13 Weeks
| |
| | Ended
| | 12 Weeks Ended | | | Ended | | 12 Weeks Ended | | Ended | |
Fiscal Year 2007 | | Jan. 21, 2007 | | Apr. 15, 2007 | | July 8, 2007 | | Sept. 30, 2007 | | |
Fiscal Year 2010 | | | Jan. 17, 2010 | | Apr. 11, 2010 | | July 4, 2010 | | Oct. 3, 2010 | |
|
Revenues | | $ | 856,692 | | | $ | 660,667 | | | $ | 680,203 | | | $ | 678,416 | | | $ | 681,318 | | | $ | 529,706 | | | $ | 523,294 | | | $ | 563,213 | |
Earnings from operations | | | 63,518 | | | | 48,122 | | | | 59,771 | | | | 48,274 | | | | 43,730 | | | | 31,150 | | | | 41,848 | | | | 5,182 | |
Net earnings | | | 37,354 | | | | 27,209 | | | | 34,743 | | | | 26,998 | | | | 24,247 | | | | 17,680 | | | | 24,242 | | | | 4,041 | |
Net earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.53 | | | $ | 0.41 | | | $ | 0.56 | | | $ | 0.44 | | | $ | 0.43 | | | $ | 0.32 | | | $ | 0.44 | | | $ | 0.08 | |
Diluted | | | 0.52 | | | | 0.40 | | | | 0.54 | | | | 0.43 | | | $ | 0.43 | | | $ | 0.32 | | | $ | 0.44 | | | $ | 0.07 | |
| | | | | | | | | | | | | | | | |
| | 16 Weeks
| | | | | | | | | | |
| | Ended
| | | 12 Weeks Ended | |
Fiscal Year 2006 | | Jan. 22, 2006 | | | Apr. 16, 2006 | | | July 9, 2006 | | | Oct. 1, 2006 | |
|
Revenues | | $ | 813,003 | | | $ | 618,763 | | | $ | 643,346 | | | $ | 648,491 | |
Earnings from operations | | | 44,049 | | | | 38,000 | | | | 44,901 | | | | 54,745 | |
Earnings before cumulative effect of accounting change | | | 25,223 | | | | 21,787 | | | | 27,841 | | | | 34,224 | |
Net earnings | | | 25,223 | | | | 21,787 | | | | 27,841 | | | | 33,180 | |
Earnings before cumulative effect of accounting change: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.36 | | | $ | 0.32 | | | $ | 0.40 | | | $ | 0.49 | |
Diluted | | | 0.35 | | | | 0.31 | | | | 0.39 | | | | 0.47 | |
Net earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.36 | | | $ | 0.32 | | | $ | 0.40 | | | $ | 0.48 | |
Diluted | | | 0.35 | | | | 0.31 | | | | 0.39 | | | | 0.46 | |
| |
16. | NEW ACCOUNTING PRONOUNCEMENTS |
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement No. 109, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109,Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. We are currently evaluating the impact of FIN 48 on our consolidated financial statements, which is effective for fiscal years beginning after December 15, 2006.
In September 2006, the FASB issued SFAS 157,Fair Value Measurements. SFAS 157 clarifies the definition of fair value, describes methods used to appropriately measure fair value, and expands fair value disclosure requirements. This statement applies under other accounting pronouncements that currently require or permit fair value measurements and is effective for fiscal years beginning after November 15, 2007. We are currently in the process of assessing the impact that SFAS 157 will have on our consolidated financial statements.
In September 2006, the FASB issued SFAS 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R). We adopted the recognition provisions of SFAS 158 which requires recognition of the overfunded or underfunded status of a defined benefit plan as an asset or liability. SFAS 158 also requires that companies measure their plan assets and benefit
F-33F-34
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | 16 Weeks
| | | | |
| | Ended | | | 12 Weeks Ended | |
Fiscal Year 2009 | | Jan. 18, 2009 | | | Apr. 12, 2009 | | | July 5, 2009 | | | Sept. 27, 2009 | |
|
Revenues | | $ | 776,673 | | | $ | 578,411 | | | $ | 575,722 | | | $ | 540,290 | |
Earnings from operations | | | 54,376 | | | | 53,110 | | | | 57,119 | | | | 66,663 | |
Net earnings | | | 28,397 | | | | 29,861 | | | | 19,558 | | | | 40,592 | |
Net earnings per share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.50 | | | $ | 0.53 | | | $ | 0.34 | | | $ | 0.71 | |
Diluted | | $ | 0.49 | | | $ | 0.52 | | | $ | 0.34 | | | $ | 0.70 | |
obligations at
The results of operations for the endquarter ending October 3, 2010 includes a charge related to the closure of their fiscal year. 40 Jack in the Box restaurants of $18.5 million, net of taxes, or $0.34 per basic and diluted share. Refer to Note 9,Impairment, Disposal of Property and Equipment, and Restaurants Closing Costs,for additional information.
The measurement provisionresults of SFAS 158operations for the quarter ending July 5, 2009 includes a charge of $14.1 million, net of taxes, or $0.25 and $0.24 per basic and diluted share, respectively, related to the sale of our Quick Stuff convenience stores. Refer to Note 2,Discontinued Operations,for additional information.
| |
20. | FUTURE APPLICATION OF ACCOUNTING PRINCIPLES |
In June 2009, the FASB issued authoritative guidance for consolidation, which changes the approach for determining which enterprise has a controlling financial interest in variable interest entity and requires more frequent reassessments of whether an enterprise is a primary beneficiary. This guidance is effective for fiscal years ending after December 15, 2008.
In February 2007, the FASB issued SFAS 159,The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to voluntarily choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for fiscal yearsannual periods beginning after November 15, 2007.2009. We are currently in the process of determining whether to electassessing the fair value measurement options available underimpact this standard.guidance may have on our consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
F-34F-35