UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
_______________________________________________________________________________________
☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 19, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Forfor the quarterlytransition period ended January 20, 2019from ________to________.
Commission File Number: 1-9390
____________________________________________________
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________
| | | | | | | | | | | | | | |
Delaware | | | | 95-2698708 |
(State of Incorporation) | | | | (I.R.S. Employer Identification No.) |
| | |
DELAWARE | | 95-2698708 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | |
9330 BALBOA AVENUE, SAN DIEGO, CA | | 92123 |
(Address of principal executive offices) | | (Zip Code) |
9330 Balboa Avenue
San Diego, California 92123
(Address of principal executive offices)
Registrant’s telephone number, including area code (858) 571-2121
_______________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | JACK | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | | |
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨
| Smaller reporting company | ¨☐ |
Accelerated filer | ☐ | Emerging growth company | ¨☐ |
Non-accelerated filer | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨☐ No þ
As of the close of business February 15, 2019, 25,806,80414, 2020, 22,630,771 shares of the registrant’s common stock were outstanding.
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
|
| | | | | | | |
| | Page |
| PART I – FINANCIAL INFORMATION | |
Item 1. | | |
| | |
| Condensed Consolidated Statements of Earnings | |
| | |
| | |
| | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. | | |
Item 4. | | |
| PART II – OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | Defaults of Senior Securities | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| | | January 20, 2019 | | September 30, 2018 | | January 19, 2020 | | September 29, 2019 |
ASSETS | | | | ASSETS | |
Current assets: | | | | Current assets: | |
Cash | $ | 4,300 |
| | $ | 2,705 |
| Cash | $ | 19,914 | | | $ | 125,536 | |
Restricted cash | | Restricted cash | 18,372 | | | 26,025 | |
Accounts and other receivables, net | 61,541 |
| | 57,422 |
| Accounts and other receivables, net | 53,576 | | | 45,235 | |
Inventories | 2,090 |
| | 1,858 |
| Inventories | 2,029 | | | 1,776 | |
Prepaid expenses | 10,367 |
| | 14,443 |
| Prepaid expenses | 13,665 | | | 9,015 | |
Current assets held for sale | 12,556 |
| | 13,947 |
| Current assets held for sale | 7,760 | | | 16,823 | |
Other current assets | 5,692 |
| | 4,598 |
| Other current assets | 3,037 | | | 2,718 | |
Total current assets | 96,546 |
| | 94,973 |
| Total current assets | 118,353 | | | 227,128 | |
Property and equipment: | | | | Property and equipment: | | | |
Property and equipment, at cost | 1,191,930 |
| | 1,190,031 |
| Property and equipment, at cost | 1,155,356 | | | 1,176,241 | |
Less accumulated depreciation and amortization | (783,639 | ) | | (770,362 | ) | Less accumulated depreciation and amortization | (793,851) | | | (784,307) | |
Property and equipment, net | 408,291 |
| | 419,669 |
| Property and equipment, net | 361,505 | | | 391,934 | |
Other assets: | | | | Other assets: | | | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 884,213 | | | — | |
Intangible assets, net | 511 |
| | 600 |
| Intangible assets, net | 37 | | | 425 | |
Goodwill | 46,747 |
| | 46,749 |
| Goodwill | 46,747 | | | 46,747 | |
Deferred tax assets | 77,295 |
| | 62,140 |
| Deferred tax assets | 66,675 | | | 85,564 | |
Other assets, net | 199,462 |
| | 199,266 |
| Other assets, net | 212,783 | | | 206,685 | |
Total other assets | 324,015 |
| | 308,755 |
| Total other assets | 1,210,455 | | | 339,421 | |
| $ | 828,852 |
| | $ | 823,397 |
| | $ | 1,690,313 | | | $ | 958,483 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | LIABILITIES AND STOCKHOLDERS’ DEFICIT | |
Current liabilities: | | | | Current liabilities: | |
Current maturities of long-term debt | $ | 42,485 |
| | $ | 31,828 |
| Current maturities of long-term debt | $ | 13,786 | | | $ | 774 | |
Current operating lease liabilities | | Current operating lease liabilities | 158,779 | | | — | |
Accounts payable | 44,742 |
| | 44,970 |
| Accounts payable | 23,467 | | | 37,066 | |
Accrued liabilities | 100,429 |
| | 106,922 |
| Accrued liabilities | 118,289 | | | 120,083 | |
Total current liabilities | 187,656 |
| | 183,720 |
| Total current liabilities | 314,321 | | | 157,923 | |
Long-term liabilities: | | | | Long-term liabilities: | | | |
Long-term debt, net of current maturities | 1,013,676 |
| | 1,037,927 |
| Long-term debt, net of current maturities | 1,262,737 | | | 1,274,374 | |
Long-term operating lease liabilities, net of current portion | | Long-term operating lease liabilities, net of current portion | 767,819 | | | — | |
Other long-term liabilities | 234,816 |
| | 193,449 |
| Other long-term liabilities | 186,589 | | | 263,770 | |
Total long-term liabilities | 1,248,492 |
| | 1,231,376 |
| Total long-term liabilities | 2,217,145 | | | 1,538,144 | |
Stockholders’ deficit: | | | | Stockholders’ deficit: | | | |
Preferred stock $0.01 par value, 15,000,000 shares authorized, none issued | — |
| | — |
| |
Common stock $0.01 par value, 175,000,000 shares authorized, 82,132,436 and 82,061,661 issued, respectively | 821 |
| | 821 |
| |
Preferred stock $0.01 par value, 15,000,000 shares authorized, NaN issued | | Preferred stock $0.01 par value, 15,000,000 shares authorized, NaN issued | — | | | — | |
Common stock $0.01 par value, 175,000,000 shares authorized, 82,255,912 and 82,159,002 issued, respectively | | Common stock $0.01 par value, 175,000,000 shares authorized, 82,255,912 and 82,159,002 issued, respectively | 823 | | | 822 | |
Capital in excess of par value | 472,894 |
| | 470,826 |
| Capital in excess of par value | 483,739 | | | 480,322 | |
Retained earnings | 1,547,759 |
| | 1,561,353 |
| Retained earnings | 1,572,586 | | | 1,577,034 | |
Accumulated other comprehensive loss | (98,331 | ) | | (94,260 | ) | Accumulated other comprehensive loss | (88,995) | | | (140,006) | |
Treasury stock, at cost, 56,325,632 shares | (2,530,439 | ) | | (2,530,439 | ) | |
Treasury stock, at cost, 59,646,773 and 57,760,573 shares, respectively | | Treasury stock, at cost, 59,646,773 and 57,760,573 shares, respectively | (2,809,306) | | | (2,655,756) | |
Total stockholders’ deficit | (607,296 | ) | | (591,699 | ) | Total stockholders’ deficit | (841,153) | | | (737,584) | |
| $ | 828,852 |
| | $ | 823,397 |
| | $ | 1,690,313 | | | $ | 958,483 | |
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
| | | Sixteen Weeks Ended | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | January 19, 2020 | | January 20, 2019 |
Revenues: | | | | Revenues: | | | |
Company restaurant sales | $ | 102,832 |
| | $ | 169,637 |
| Company restaurant sales | $ | 105,364 | | | $ | 102,832 | |
Franchise rental revenues | 83,890 |
| | 77,217 |
| Franchise rental revenues | 96,084 | | | 83,890 | |
Franchise royalties and other | 52,250 |
| | 47,609 |
| Franchise royalties and other | 52,466 | | | 52,250 | |
Franchise contributions for advertising and other services | 51,814 |
|
| — |
| Franchise contributions for advertising and other services | 53,759 | | | 51,814 | |
| 290,786 |
| | 294,463 |
| | 307,673 | | | 290,786 | |
Operating costs and expenses, net: | | | | Operating costs and expenses, net: | | | |
Company restaurant costs (excluding depreciation and amortization): | | | | Company restaurant costs (excluding depreciation and amortization): | |
Food and packaging | 29,616 |
| | 48,864 |
| Food and packaging | 31,348 | | | 29,616 | |
Payroll and employee benefits | 30,274 |
| | 48,940 |
| Payroll and employee benefits | 31,890 | | | 30,274 | |
Occupancy and other | 16,013 |
| | 27,750 |
| Occupancy and other | 15,958 | | | 16,013 | |
Total company restaurant costs | 75,903 |
| | 125,554 |
| Total company restaurant costs | 79,196 | | | 75,903 | |
Franchise occupancy expenses (excluding depreciation and amortization) | 50,713 |
| | 46,521 |
| Franchise occupancy expenses (excluding depreciation and amortization) | 64,517 | | | 50,713 | |
Franchise support and other costs | 2,845 |
| | 2,482 |
| Franchise support and other costs | 4,676 | | | 2,845 | |
Franchise advertising and other services expenses | 54,270 |
|
| — |
| Franchise advertising and other services expenses | 55,224 | | | 54,270 | |
Selling, general and administrative expenses | 24,083 |
| | 34,061 |
| Selling, general and administrative expenses | 28,248 | | | 24,083 | |
Depreciation and amortization | 17,169 |
| | 19,157 |
| Depreciation and amortization | 16,728 | | | 17,169 | |
Impairment and other charges, net | 7,698 |
| | 2,257 |
| Impairment and other charges, net | (9,291) | | | 7,698 | |
Gains on the sale of company-operated restaurants | (219 | ) | | (8,940 | ) | Gains on the sale of company-operated restaurants | (1,575) | | | (219) | |
| 232,462 |
| | 221,092 |
| | 237,723 | | | 232,462 | |
Earnings from operations | 58,324 |
| | 73,371 |
| Earnings from operations | 69,950 | | | 58,324 | |
Other pension and post-retirement expenses, net | 456 |
|
| 564 |
| Other pension and post-retirement expenses, net | 38,978 | | | | 456 | |
Interest expense, net | 17,374 |
| | 12,780 |
| Interest expense, net | 19,942 | | | 17,374 | |
Earnings from continuing operations and before income taxes | 40,494 |
| | 60,027 |
| Earnings from continuing operations and before income taxes | 11,030 | | | 40,494 | |
Income taxes | 9,373 |
| | 47,138 |
| |
Income tax expense | | Income tax expense | 3,133 | | | 9,373 | |
Earnings from continuing operations | 31,121 |
| | 12,889 |
| Earnings from continuing operations | 7,897 | | | 31,121 | |
Earnings (losses) from discontinued operations, net of income taxes | 2,977 |
| | (699 | ) | |
Earnings from discontinued operations, net of income taxes | | Earnings from discontinued operations, net of income taxes | — | | | 2,977 | |
Net earnings | $ | 34,098 |
| | $ | 12,190 |
| Net earnings | $ | 7,897 | | | $ | 34,098 | |
| | | | | | | |
Net earnings per share - basic: | | | | Net earnings per share - basic: | | |
Earnings from continuing operations | $ | 1.20 |
| | $ | 0.44 |
| Earnings from continuing operations | $ | 0.33 | | | $ | 1.20 | |
Earnings (losses) from discontinued operations | 0.11 |
| | (0.02 | ) | |
Earnings from discontinued operations | | Earnings from discontinued operations | — | | | 0.11 | |
Net earnings per share (1) | $ | 1.32 |
| | $ | 0.41 |
| Net earnings per share (1) | $ | 0.33 | | | $ | 1.32 | |
Net earnings per share - diluted: | | | | Net earnings per share - diluted: | | | |
Earnings from continuing operations | $ | 1.19 |
| | $ | 0.43 |
| Earnings from continuing operations | $ | 0.33 | | | $ | 1.19 | |
Earnings (losses) from discontinued operations | 0.11 |
| | (0.02 | ) | |
Earnings from discontinued operations | | Earnings from discontinued operations | — | | | 0.11 | |
Net earnings per share (1) | $ | 1.31 |
| | $ | 0.41 |
| Net earnings per share (1) | $ | 0.33 | | | $ | 1.31 | |
| | | | | | | |
Cash dividends declared per common share | $ | 0.40 |
| | $ | 0.40 |
| Cash dividends declared per common share | $ | 0.40 | | | $ | 0.40 | |
____________________________
| |
(1) | Earnings per share may not add due to rounding. |
(1)Earnings per share may not add due to rounding.
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | | Sixteen Weeks Ended | | | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | | | January 19, 2020 | | January 20, 2019 |
Net earnings | $ | 34,098 |
| | $ | 12,190 |
| Net earnings | | | $ | 7,897 | | | $ | 34,098 | |
Cash flow hedges: | | | | Cash flow hedges: | | |
Net change in fair value of derivatives | (7,167 | ) | | 10,291 |
| Net change in fair value of derivatives | | | — | | | (7,167) | |
Net loss reclassified to earnings | 479 |
| | 1,674 |
| Net loss reclassified to earnings | | | — | | | 479 | |
| (6,688 | ) | | 11,965 |
| | | | — | | | (6,688) | |
Tax effect | 1,723 |
| | (3,039 | ) | Tax effect | | | — | | | 1,723 | |
| (4,965 | ) | | 8,926 |
| | | | — | | | (4,965) | |
Unrecognized periodic benefit costs: | | | | Unrecognized periodic benefit costs: | | |
Actuarial gains arising during the period | | Actuarial gains arising during the period | | | 28,583 | | | — | |
Actuarial losses and prior service costs reclassified to earnings | 1,205 |
| | 1,535 |
| Actuarial losses and prior service costs reclassified to earnings | | | 40,310 | | | 1,205 | |
| | | | | 68,893 | | | 1,205 | |
Tax effect | (311 | ) | | (542 | ) | Tax effect | | | (17,882) | | | (311) | |
| 894 |
| | 993 |
| | | | 51,011 | | | 894 | |
| | | | | | |
Other comprehensive (loss) income, net of taxes | (4,071 | ) | | 9,919 |
| |
Other comprehensive income (loss), net of taxes | | Other comprehensive income (loss), net of taxes | | | 51,011 | | | (4,071) | |
| | | | | | |
Comprehensive income | $ | 30,027 |
| | $ | 22,109 |
| Comprehensive income | | | $ | 58,908 | | | $ | 30,027 | |
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | Sixteen Weeks Ended | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | January 19, 2020 | | January 20, 2019 |
Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net earnings | $ | 34,098 |
| | $ | 12,190 |
| Net earnings | $ | 7,897 | | | $ | 34,098 | |
Earnings (losses) from discontinued operations | 2,977 |
| | (699 | ) | |
Earnings from discontinued operations | | Earnings from discontinued operations | — | | | 2,977 | |
Earnings from continuing operations | 31,121 |
| | 12,889 |
| Earnings from continuing operations | 7,897 | | | 31,121 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | Adjustments to reconcile net earnings to net cash provided by operating activities: | |
Depreciation and amortization | 17,169 |
| | 19,157 |
| Depreciation and amortization | 16,728 | | | 17,169 | |
Amortization of franchise tenant improvement allowances | 530 |
| | 147 |
| |
Amortization of franchise tenant improvement allowances and other | | Amortization of franchise tenant improvement allowances and other | 1,151 | | | 530 | |
Deferred finance cost amortization | 704 |
| | 1,031 |
| Deferred finance cost amortization | 1,755 | | | 704 | |
Excess tax benefits from share-based compensation arrangements | (50 | ) | | (802 | ) | |
Tax deficiency (excess tax benefit) from share-based compensation arrangements | | Tax deficiency (excess tax benefit) from share-based compensation arrangements | 196 | | | (50) | |
Deferred income taxes | (783 | ) | | 33,542 |
| Deferred income taxes | 2,010 | | | (783) | |
Share-based compensation expense | 1,909 |
| | 2,937 |
| Share-based compensation expense | 3,184 | | | 1,909 | |
Pension and postretirement expense | 456 |
| | 715 |
| Pension and postretirement expense | 38,978 | | | 456 | |
Losses (gains) on cash surrender value of company-owned life insurance | 2,863 |
| | (2,163 | ) | |
(Gains) losses on cash surrender value of company-owned life insurance | | (Gains) losses on cash surrender value of company-owned life insurance | (3,374) | | | 2,863 | |
Gains on the sale of company-operated restaurants | (219 | ) | | (8,940 | ) | Gains on the sale of company-operated restaurants | (1,575) | | | (219) | |
Losses on the disposition of property and equipment, net | 635 |
| | 183 |
| |
(Gains) losses on the disposition of property and equipment, net | | (Gains) losses on the disposition of property and equipment, net | (10,437) | | | 635 | |
Non-cash operating lease costs | | Non-cash operating lease costs | (7,668) | | | — | |
Impairment charges and other | 387 |
| | 805 |
| Impairment charges and other | — | | | 387 | |
Changes in assets and liabilities, excluding dispositions: | | | | Changes in assets and liabilities, excluding dispositions: | |
Accounts and other receivables | (3,154 | ) | | 26,539 |
| Accounts and other receivables | (5,619) | | | (3,154) | |
Inventories | (232 | ) | | 110 |
| Inventories | (253) | | | (232) | |
Prepaid expenses and other current assets | 6,224 |
| | 7,419 |
| Prepaid expenses and other current assets | (4,957) | | | 6,224 | |
Accounts payable | 6,365 |
| | (371 | ) | Accounts payable | (7,984) | | | 6,365 | |
Accrued liabilities | (16,298 | ) | | (32,667 | ) | Accrued liabilities | (1,558) | | | (16,298) | |
Pension and postretirement contributions | (2,111 | ) | | (1,710 | ) | Pension and postretirement contributions | (2,025) | | | (2,111) | |
Franchise tenant improvement allowance distributions | (3,247 | ) | | (1,761 | ) | Franchise tenant improvement allowance distributions | (3,682) | | | (3,247) | |
Other | (4,668 | ) | | (3,330 | ) | Other | (80) | | | (4,668) | |
Cash flows provided by operating activities | 37,601 |
| | 53,730 |
| Cash flows provided by operating activities | 22,687 | | | 37,601 | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | | | |
Purchases of property and equipment | (11,183 | ) | | (10,793 | ) | Purchases of property and equipment | (7,202) | | | (11,183) | |
Purchases of assets intended for sale and leaseback | — |
| | (1,411 | ) | |
Proceeds from the sale of property and equipment | | Proceeds from the sale of property and equipment | 20,618 | | | 270 | |
Proceeds from the sale and leaseback of assets | — |
| | 4,949 |
| Proceeds from the sale and leaseback of assets | 17,373 | | | — | |
Proceeds from the sale of company-operated restaurants | 133 |
| | 5,591 |
| Proceeds from the sale of company-operated restaurants | 1,575 | | | 133 | |
Collections on notes receivable | 6,517 |
| | 9,410 |
| Collections on notes receivable | — | | | 6,517 | |
Proceeds from the sale of property and equipment | 270 |
| | 589 |
| |
Funding of intercompany operations | — |
| | (13,122 | ) | |
Other | — |
| | 2,969 |
| |
Cash flows used in investing activities | (4,263 | ) | | (1,818 | ) | |
| Cash flows provided by (used in) investing activities | | Cash flows provided by (used in) investing activities | 32,364 | | | (4,263) | |
Cash flows from financing activities: | | | | Cash flows from financing activities: | | | |
Borrowings on revolving credit facilities | 114,298 |
| | 106,200 |
| Borrowings on revolving credit facilities | — | | | 114,298 | |
Repayments of borrowings on revolving credit facilities | (117,300 | ) | | (130,800 | ) | Repayments of borrowings on revolving credit facilities | — | | | (117,300) | |
Principal repayments on debt | (10,907 | ) | | (14,208 | ) | Principal repayments on debt | (198) | | | (10,907) | |
Debt issuance costs | (17 | ) | | — |
| Debt issuance costs | (216) | | | (17) | |
Dividends paid on common stock | (10,305 | ) | | (11,736 | ) | Dividends paid on common stock | (9,412) | | | (10,305) | |
Proceeds from issuance of common stock | 114 |
| | — |
| Proceeds from issuance of common stock | 184 | | | 114 | |
Repurchases of common stock | (14,362 | ) | | — |
| Repurchases of common stock | (155,576) | | | (14,362) | |
Change in book overdraft | 9,234 |
| | (129 | ) | Change in book overdraft | — | | | 9,234 | |
Payroll tax payments for equity award issuances | (2,498 | ) | | (4,244 | ) | Payroll tax payments for equity award issuances | (3,108) | | | (2,498) | |
Cash flows used in financing activities | (31,743 | ) | | (54,917 | ) | Cash flows used in financing activities | (168,326) | | | (31,743) | |
Cash flows provided by (used in) continuing operations | 1,595 |
| | (3,005 | ) | |
Net cash provided by operating activities of discontinued operations | — |
| | 16,785 |
| |
Net cash used in investing activities of discontinued operations | — |
| | (13,648 | ) | |
Net cash used in financing activities of discontinued operations | — |
| | (43 | ) | |
Net cash provided by discontinued operations | — |
| | 3,094 |
| |
Cash at beginning of period | 2,705 |
| | 4,467 |
| |
Cash at end of period | $ | 4,300 |
| | $ | 3,789 |
| |
Net (decrease) increase in cash and restricted cash | | Net (decrease) increase in cash and restricted cash | (113,275) | | | 1,595 | |
Cash and restricted cash at beginning of period | | Cash and restricted cash at beginning of period | 151,561 | | | 2,705 | |
Cash and restricted cash at end of period | | Cash and restricted cash at end of period | $ | 38,286 | | | $ | 4,300 | |
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.BASIS OF PRESENTATION
Nature of operations — Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. The following table summarizes the number of restaurants as of the end of each period:
| | | January 20, 2019 | | January 21, 2018 | | January 19, 2020 | | January 20, 2019 |
Company-operated | 137 |
| | 255 |
| Company-operated | 137 | | | 137 | |
Franchise | 2,104 |
| | 1,995 |
| Franchise | 2,107 | | | 2,104 | |
Total system | 2,241 |
| | 2,250 |
| Total system | 2,244 | | | 2,241 | |
References to the Company throughout these notes to condensed consolidated financial statements are made using the first person notations of “we,” “us” and “our.”
Basis of presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 201829, 2019 (“20182019 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 20182019 Form 10-K with the exception of twothe new lease accounting pronouncementsstandard adopted in fiscal 2019,2020, which areis described below.
On December 19, 2017, we entered into a definitive agreement to sell Qdoba Restaurant Corporation (“Qdoba”), a wholly owned subsidiary of the Company which operates and franchises more than 700 Qdoba Mexican Eats® fast-casual restaurants, to certain funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, the “Buyer”). The sale was completed on March 21, 2018. For all periods presented in our condensed consolidated statements of earnings, all sales, costs, expenses and income taxes attributable to Qdoba, except as related to the impact of the decrease in the federal statutory tax rate (see Note 8, Income Taxes), have been aggregated under the caption “Earnings (losses) from discontinued operations, net of income taxes.” Refer to Note 3, Discontinued Operations, for additional information.
Unless otherwise noted, amounts and disclosures throughout these notes to condensed consolidated financial statements relate to our continuing operations. In our opinion, all adjustments considered necessary for a fair presentation of financial condition and results of operations for these interim periods have been included. Operating results for one interim period are not necessarily indicative of the results for any other interim period or for the full year.
Segment reporting — As a resultThe Company is comprised of our sale of Qdoba, which has been classified as discontinued operations, we now have one reporting1 operating segment.
Reclassifications and adjustments — We recorded certain adjustments in 2019 upon the adoption of a new accounting pronouncement; see details regarding the effects of the adoption on our condensed consolidated financial statements below.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 20192020 and 20182019 include 52 weeks. Our first quarter includes 16-weeks and all other quarters include 12-weeks. All comparisons between 20192020 and 20182019 refer to the 16-weeks (“quarter”) ended January 20, 201919, 2020 and January 21, 2018,20, 2019, respectively, unless otherwise indicated.
Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities (“VIEs”) where we are deemed the primary beneficiary. All significant intercompany accounts and transactions are eliminated. The financial results and position of our VIE are immaterial to our condensed consolidated financial statements.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, 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.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Advertising costs — We administer a marketing fund which includes contractual contributions. In 2020 and 2019, marketing fund contributions from franchise and company-operated restaurants were approximately 5.0% of gross revenues, andrevenues. In 2019, incremental contributions made by the Company madewere $2.0 million. There have been no incremental contributions to the marketing fund of $2.0 million.made in 2020.
Production costs of commercials, programming and other marketing activities are charged to the marketing fund when the advertising is first used for its intended purpose, and the costs of advertising are charged to operations as incurred. Total contributions made by the Company, including incremental contributions, are included in “Selling, general, and administrative expenses” in the accompanying condensed consolidated statements of earnings and totaled $5.3 million and $7.2 million in 2020 and $8.9 million in 2019, and 2018, respectively.
Effect of new accounting pronouncements adopted in fiscal 20192020 — In May 2014,We adopted ASU 2016-02, Leases (Topic 842) (“ASC 842”) in the FASB issued ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which providesfirst quarter of 2020. The new guidance requires the recognition of lease liabilities, representing future minimum lease payments on a comprehensive new revenue recognition model that requires an entity to recognize revenue in an amount that reflectsdiscounted basis, and corresponding right-of-use (“ROU”) assets on the consideration the entity expects to receivebalance sheet for the transfer of promised goods or services to its customers.most leases. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. WeCompany adopted the new standard on October 1, 2018guidance in the first quarter of 2020 using the modified retrospective method, wherebyalternative transition method; therefore, the cumulative effect of this transition to applicable contracts with customers that were not completed as of October 1, 2018 was recorded as an adjustment to beginning retained earnings as of this date. The comparative informationperiod has not been restated and continues to be reported under the accounting standards in effect for those periods.previous lease guidance.
The new revenue recognition standard didWe elected the transition package of three practical expedients, which, among other items, permitted us not impact our recognition of restaurant sales, rental revenues, or royalty fees from franchisees. The new pronouncement changed the way initial fees from franchisees for new restaurant openings or new franchise terms are recognized. Under the previous revenue recognition guidance, initial franchise fees were recognized as revenue at the time when a new restaurant opened or at the start of a new franchise term. In accordance withto reassess under the new guidance,standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected the initial franchise services areshort-term lease recognition exemption for all leases that qualify, permitting us to not distinct fromapply the continuing rights and services offered during therecognition requirements of this standard to leases with a term of the franchise agreement12 months or less, and will therefore be treatedan accounting policy to not separate lease and non-lease components for underlying assets subject to real estate leases. As lessor, we elected for all classes of underlying leased assets to account for lease and non-lease components, primarily property taxes and maintenance, as a single performance obligation together withlease component. We did not elect the continuing rightsuse-of-hindsight practical expedient, and services. As such, initial fees received will be recognized overtherefore continued to utilize lease terms determined under the franchise term and any unamortized portion will be recorded as deferred revenue in our condensed consolidated balance sheet. An adjustment to opening retained earnings and a corresponding contract liability of approximately $50.3 million (of which $5.0 million was current and $45.3 million was long-term) was established on the date of adoption. A deferred tax asset of approximately $13.0 million related to this contract liability was also established on the date of adoption.existing lease guidance.
The new standard also had an impact on transactions presented net and not included in our revenues and expenses such as franchisee contributions to and expenditures from our advertising fund, and sourcing and technology fee contributions from franchisees and the related expenses. We determined that we are the principal in these arrangements, and as such, contributions to and expenditures from the advertising fund, and sourcing and technology fees and expenditures are now reported on a gross basis within our consolidated statements of earnings. While this change materially impacted our gross amount of reported revenues and expenses, the impact will be largely offsetting with no material impact to our reported net earnings. However, any annual surplus or deficit in the marketing fund will impact income from operations and net income.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the impacts of adopting ASC 606 on the Company’s condensed consolidated financial statement as of and for the 16-weeks ended January 20, 2019 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | | Adjustments | | |
| As Reported | | Franchise Fees | | Marketing and Sourcing Fees | | Technology Support Fees | | Balances without Adoption |
Condensed Consolidated Statement of Earnings | | | | | | | | | |
Sixteen Weeks Ended January 20, 2019 | | | | | | | | | |
Franchise royalties and other | $ | 52,250 |
| | $ | (1,092 | ) | | $ | — |
| | $ | — |
| | $ | 51,158 |
|
Franchise contributions for advertising and other services | $ | 51,814 |
| | $ | — |
| | $ | (49,097 | ) | | $ | (2,717 | ) | | $ | — |
|
Total revenues | $ | 290,786 |
| | $ | (1,092 | ) | | $ | (49,097 | ) | | $ | (2,717 | ) | | $ | 237,880 |
|
Franchise advertising and other services expenses | $ | 54,270 |
| | $ | — |
| | $ | (49,097 | ) | | $ | (5,173 | ) | | $ | — |
|
Selling, general and administrative expenses | $ | 24,083 |
| | $ | — |
| | $ | — |
| | $ | 2,456 |
| | $ | 26,539 |
|
Total operating costs and expenses, net | $ | 232,462 |
| | $ | — |
| | $ | (49,097 | ) | | $ | (2,717 | ) | | $ | 180,648 |
|
Earnings from operations | $ | 58,324 |
| | $ | (1,092 | ) | | $ | — |
| | $ | — |
| | $ | 57,232 |
|
Earnings from continuing operations and before income taxes | $ | 40,494 |
| | $ | (1,092 | ) | | $ | — |
| | $ | — |
| | $ | 39,402 |
|
Income taxes | $ | 9,373 |
| | $ | (282 | ) | | $ | — |
| | $ | — |
| | $ | 9,091 |
|
Earnings from continuing operations | $ | 31,121 |
| | $ | (810 | ) | | $ | — |
| | $ | — |
| | $ | 30,311 |
|
Net earnings | $ | 34,098 |
| | $ | (810 | ) | | $ | — |
| | $ | — |
| | $ | 33,288 |
|
| | | | | | | | | |
Condensed Consolidated Balance Sheet | | | | | | | | | |
January 20, 2019 | | | | | | | | | |
Prepaid expenses | $ | 10,367 |
| | $ | 282 |
| | $ | — |
| | $ | — |
| | $ | 10,649 |
|
Total current assets | $ | 96,546 |
| | $ | 282 |
| | $ | — |
| | $ | — |
| | $ | 96,828 |
|
Deferred tax assets | $ | 77,295 |
| | $ | (12,958 | ) | | $ | — |
| | $ | — |
| | $ | 64,337 |
|
Other assets, net | $ | 199,462 |
| | $ | 269 |
| | $ | — |
| | $ | — |
| | $ | 199,731 |
|
Total other assets | $ | 324,015 |
| | $ | (12,689 | ) | | $ | — |
| | $ | — |
| | $ | 311,326 |
|
Total assets | $ | 828,852 |
| | $ | (12,407 | ) | | $ | — |
| | $ | — |
| | $ | 816,445 |
|
Accrued liabilities | $ | 100,429 |
| | $ | (4,963 | ) | | $ | — |
| | $ | — |
| | $ | 95,466 |
|
Total current liabilities | $ | 187,656 |
| | $ | (4,963 | ) | | $ | — |
| | $ | — |
| | $ | 182,693 |
|
Other long-term liabilities | $ | 234,816 |
| | $ | (43,962 | ) | | $ | — |
| | $ | — |
| | $ | 190,854 |
|
Total long-term liabilities | $ | 1,248,492 |
| | $ | (43,962 | ) | | $ | — |
| | $ | — |
| | $ | 1,204,530 |
|
Retained earnings | $ | 1,547,759 |
| | $ | 36,518 |
| | $ | — |
| | $ | — |
| | $ | 1,584,277 |
|
Total stockholders’ deficit | $ | (607,296 | ) | | $ | 36,518 |
| | $ | — |
| | $ | — |
| | $ | (570,778 | ) |
Total liabilities and stockholders’ deficit | $ | 828,852 |
| | $ | (12,407 | ) | | $ | — |
| | $ | — |
| | $ | 816,445 |
|
The adoption of ASC 606 had noa material impact on the Company’s cash provided by or used in operating, investing or financing activities as previously reported in its condensedour consolidated statement of cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires the presentation of the service cost component of net benefit cost to be in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. All other components of net benefit cost should be presented separately from the service cost component and outside of a subtotal of earnings from operations, or separately disclosed. We adopted this standard in the first quarter of fiscal 2019 applying the retrospective method.balance sheet. As a result of the adoption, $0.6we recognized operating lease assets and liabilities of $881 million and $931 million, respectively, at the date of pension costsadoption. The ROU assets were adjusted for certain lease-related assets and liabilities at adoption, primarily comprised of straight-line rent accruals of $29.0 million, incentives and unfavorable lease liabilities of $2.1 million, sublease loss and exit-related lease liabilities of $19.4 million, which were previously reported within “Selling, general,in “Accrued liabilities” and administrative“Other long-term liabilities”, as well as favorable lease assets of $0.4 million, which were previously reported in “Intangible assets, net” in our condensed consolidated balance sheet. We also recorded a cumulative adjustment to opening retained earnings of $2.9 million, net of tax, as a result of the impairment of certain newly recognized ROU assets and derecognition of deferred gains and losses on sale-leaseback transactions upon transition to the new guidance.
The effects of the changes made to the Company's condensed consolidated balance sheet as of September 29, 2019 for the adoption of the new lease guidance were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance at September 29, 2019 | | Adjustments due to ASC 842 adoption | | Balance at September 30, 2019 |
Assets | | | | | |
Other assets: | | | | | |
Operating lease ROU assets | $ | — | | | | $ | 880,564 | | | $ | 880,564 | |
Intangible assets, net | $ | 425 | | | | $ | (386) | | | $ | 39 | |
Deferred income taxes | $ | 85,564 | | | | $ | 1,006 | | | $ | 86,570 | |
Liabilities and Stockholders’ Deficit | | | | | |
Current liabilities: | | | | | |
Current operating lease liabilities | $ | — | | | | $ | 159,821 | | | $ | 159,821 | |
Accrued liabilities | $ | 120,083 | | | | $ | (4,702) | | | $ | 115,381 | |
Long-term liabilities: | | | | | |
Long-term operating lease liabilities, net of current portion | $ | — | | | | $ | 770,818 | | | $ | 770,818 | |
Other long-term liabilities | $ | 263,770 | | | | $ | (41,883) | | | $ | 221,887 | |
Stockholders’ deficit: | | | | | |
Retained earnings | $ | 1,577,034 | | | | $ | (2,870) | | | $ | 1,574,164 | |
The accounting guidance for lessors remains largely unchanged from previous guidance, except for the presentation of certain lease costs that the Company passes through to lessees, including but not limited to, property taxes and maintenance. These costs are generally paid by the Company and reimbursed by the lessee. Historically, these costs have been recorded on a net basis in our condensed consolidated statements of earnings but are now presented gross upon adoption of the new guidance. As a result, we expect annual revenues and expenses reported in “Franchise rental revenues” and “Franchise occupancy expenses” has been reclassified to a separate line under earnings from operationsincrease by approximately $37 million in fiscal 2020. Refer to conform to current year presentation.Note 4, Leases, for further information on our leases and the impact on the Company’s accounting policies.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Effect of new accounting pronouncements to be adopted in future periods — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize assets and liabilities on the balance sheet for those leases classified as operating leases under previous guidance. In JanuaryAugust 2018, the FASB issued ASU 2018-01, Leases (Topic 842)2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Land Easement Practical ExpedientCustomer’s Accounting for Transition to Topic 842Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which affectsaligns the guidancerequirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2016-02. The standard permits the election of an optional transition practical expedient to not evaluate land easements that exist or expired before the2018-15 is effective for interim and annual periods beginning after December 15, 2019, with early adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional transition methodpermitted. Companies can choose to adopt the new standard, and (iii) lessors with a practical expedient for separating components of a contract. Based on a preliminary assessment, we expect that most of our operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increaseprospectively or retrospectively. We are currently in the assets and liabilities on our consolidated balance sheets. We do not expectprocess of evaluating the adoptioneffects of this guidance to have a material impact on our consolidated statement of earnings and statement of cash flows. We will be required to adopt these standards in the first quarter of fiscal 2020 and are required to adopt using a modified retrospective transition approach. We are continuing our evaluation, which may identify additional impacts this standard and its amendments will havepronouncement on our consolidated financial statements and related disclosures.do not expect there to be a material impact upon adoption.
2.REVENUE
Nature of products and services — We derive revenue from retail sales at Jack in the Box company-operated restaurants and rental revenue, royalties, advertising, and franchise and other fees from franchise-operated restaurants.
Our franchise arrangements generally provide for an initial franchise fee of $50,000 per restaurant and generally require that franchisees pay royalty and marketing fees at 5% of gross sales. The agreement also requires franchisees to pay sourcing, technology and other miscellaneous fees.
Significant accounting policy — “Company restaurant sales” include revenue recognized upon delivery of food and beverages to the customer at company-operated restaurants, which is when our obligation to perform is satisfied. Company restaurant sales exclude taxes collected from the Company’s customers. Company restaurant sales also include income for gift cards. Gift cards, upon customer purchase, are recorded as deferred income and are recognized in revenue as they are redeemed. The timing and amount of revenue recognized related to company restaurant sales was not impacted by the adoption of ASC 606.7
“Franchise royalties and other” includes royalties fees and initial franchise fees received from franchisees. Royalties are based upon a percentage of sales of the franchised restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement.
“Franchise contributions for advertising and other services” includes franchisee contributions billed on a monthly basis to our marketing fund, and sourcing and technology fees, as required under the franchise agreements. Contributions to our marketing fund are based on a percentage of sales and recognized as earned. Sourcing and technology services are recognized when the goods or services are transferred to the franchisee. The adoption of the new revenue standard did not impact the timing of revenue recognition for these fees received; however, these arrangements are now presented on a gross basis because we believe we are the principal in the arrangement.
“Franchise rental revenues” received from franchised restaurants based on fixed rental payments are recognized as revenue over the term of the lease. Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is met. Rental revenues are accounted for in accordance with applicable guidance for leases and are excluded from the scope of the new revenue standard.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Disaggregation of revenue — The following table disaggregates revenue by primary source for the 16-weeks ended January 20, 2019 (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Sources of revenue: | | | |
Company restaurant sales | $ | 105,364 | | | $ | 102,832 | |
Franchise rental revenues | 96,084 | | | 83,890 | |
Franchise royalties | 50,243 | | | 49,507 | |
Marketing fees | 48,835 | | | 47,863 | |
Technology and sourcing fees | 4,924 | | | 3,951 | |
Franchise fees and other services | 2,223 | | | 2,743 | |
Total revenue | $ | 307,673 | | | $ | 290,786 | |
|
| | | | |
Sources of revenue: | | |
Company restaurant sales | | $ | 102,832 |
|
Franchise rental income | | 83,890 |
|
Franchise royalties | | 49,507 |
|
Marketing fees | | 47,863 |
|
Technology and sourcing fees | | 3,951 |
|
Franchise fees and other services | | 2,743 |
|
Total revenue | | $ | 290,786 |
|
Contract liabilities — Our contract liabilities consist of deferred revenue resulting from initial fees received from franchisees for new restaurant openings or new franchise terms, which are generally recognized over the franchise term. We classify these contract liabilities as “Other long-term“Accrued liabilities” and “Accrued“Other long-term liabilities” in our condensed consolidated balance sheets.
A summary of significant changes in our contract liabilities between the date of adoption (October 1, 2018) and January 20, 2019 is presented below (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Deferred franchise fees at beginning of period | $ | 46,273 | | | $ | 50,018 | |
Revenue recognized during the period | (1,632) | | | (1,592) | |
Additions during the period | 895 | | | 500 | |
Deferred franchise fees at end of period | $ | 45,536 | | | $ | 48,926 | |
|
| | | | |
| | Deferred Franchise Fees |
Deferred franchise fees at October 1, 2018 | | $ | 50,018 |
|
Revenue recognized during the period | | (1,592 | ) |
Additions during the period | | 500 |
|
Deferred franchise fees at January 20, 2019 | | $ | 48,926 |
|
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the endas of the period January 19, 2020 (in thousands):
| | | | | | | | |
Remainder of 2020 | | $ | 3,411 | |
2021 | | 4,926 | |
2022 | | 4,726 | |
2023 | | 4,572 | |
2024 | | 4,379 | |
Thereafter | | 23,522 | |
| | $ | 45,536 | |
|
| | | | |
2019 (1) | | $ | 3,434 |
|
2020 | | 4,860 |
|
2021 | | 4,838 |
|
2022 | | 4,639 |
|
2023 | | 4,484 |
|
Thereafter | | 26,671 |
|
| | $ | 48,926 |
|
____________________________
(1) Represents the estimate for remainder of fiscal year 2019.
We have applied the optional exemption, as provided for under ASCAccounting Standards Codification Topic 606,Revenue from Contracts with Customers, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.
| |
3. | DISCONTINUED OPERATIONS |
Qdoba 3.SUMMARY OF REFRANCHISINGS AND FRANCHISEE DEVELOPMENT
Refranchisings and franchisee development— In December 2017, we entered into a stock purchase agreement (the “Qdoba Purchase Agreement”) with the BuyerFranchisees opened 11 new restaurants in 2020, compared to sell all issued and outstanding shares of Qdoba. The Buyer completed the acquisition of Qdoba on March 21, 2018 (the “Qdoba Sale”).
We also entered into a Transition Services Agreement with the Buyer pursuant to which the Buyer is receiving certain services (the “Services”) to enable it to operate the Qdoba business after the closing of the Qdoba Sale. The Services include information technology, finance and accounting, human resources, supply chain and other corporate support services. Under the Agreement, the Services are being provided at cost for a period of up to 12 months, with two 3-month extensions available for certain services. Based on current discussions with the Buyer, we expect certain services will be extended past the original date as allowed for under the Agreement. In 2019, we recorded $3.7 million in income related to the Services in 2019 as a reduction of selling, general and administrative expenses9 in the condensed consolidated statementsprior year, and closed 10 restaurants in fiscal 2020, compared to 5 in 2019. In both comparative periods 0 company-operated restaurants were sold to franchisees. In 2020 and 2019, amounts presented in “Gains on the sale of earnings.company-operated restaurants” of $1.6 million and $0.2 million, respectively, pertain to meeting certain contingent consideration provisions included in the sale of restaurants in previous years.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.LEASES
Further, in 2018,Nature of leases — We own restaurant sites and we entered into an Employee Agreement withalso lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the Buyer pursuant topayment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance and common area maintenance, which we continued to employ all Qdoba employees who work for the Buyer (the “Qdoba Employees”)are excluded from the date of closingmeasurement of the Qdoba Sale through December 31, 2018. During the term of the Employee Agreement, we paid all wageslease liability. We also lease certain restaurant and benefits of the Qdoba Employees and received reimbursement of these costsoffice equipment with initial terms generally ranging from the Buyer. From October 1, 20183 to December 31, 2018, we paid $35.4 million of Qdoba wages and benefits pursuant to the Employee Agreement.8 years. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees subsequent to refranchising transactions. The lease descriptions, terms, variable lease payments and renewal options are generally the Qdoba Sale represents a strategic shift that had a major effect onsame as the lessee leases described above. Revenues from leasing arrangements with our operations and financial results,franchisees are presented in accordance with“Franchise rental revenues” in the provisions of FASB authoritative guidance on the presentation of financial statements, Qdoba results are classified as discontinued operations in ouraccompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”
Significant assumptions and judgements — We evaluate the contracts entered into by the Company to determine whether such contracts contain leases. A contract contains a lease if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. At commencement, contracts containing a lease are further evaluated for classification as an operating or finance lease where the Company is a lessee, or as an operating, sales-type or direct financing lease where the Company is a lessor, based on their terms.
The lease term and incremental borrowing rate for each lease requires judgement by management and can impact the classification of our leases as well as the value of our lease assets and liabilities. When determining the lease term, we consider option periods available, and include option periods in the measurement of the lease ROU asset and lease liability where the exercise is reasonably certain to occur. As our leases do not provide an implicit discount rate, we have determined it is appropriate to use our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, in calculating our lease liabilities.
Company as Lessee
Leased assets and liabilities consisted of the following as of January 19, 2020 (in thousands):
| | | | | |
| January 19, 2020 |
Assets: | | |
Operating lease ROU assets | | $ | 884,213 | |
Finance lease ROU assets (1) | | 2,742 | |
Total ROU assets | | $ | 886,955 | |
Liabilities: | | |
Current operating lease liabilities | | $ | 158,779 | |
Current finance lease liabilities (2) | | 786 | |
Long term operating lease liabilities | | 767,819 | |
Long-term finance lease liabilities (2) | | 2,609 | |
Total lease liabilities | | $ | 929,993 | |
____________________________
(1)Included in “Property and equipment, net” on our condensed consolidated statementsbalance sheet.
(2)Included in “Current maturities of cash flows for all periods presented.
Income taxes — In fiscal 2019, the Company entered into a bilateral California election with Quidditch Acquisition, Inc. to retroactively treat the divestmentlong-term debt” and “Long-term debt, net of Qdoba Restaurant Corporation on March 21, 2018 as a sale of assets instead of a stock sale for income tax purposes. This election reduced the Company’s fiscal year 2018 California tax liability on the divestment by $2.8 million.
The following table summarizes the Qdoba related activity for each period in discontinued operations (in thousands, except per share data):
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Company restaurant sales | $ | — |
| | $ | 125,770 |
|
Franchise revenues | — |
| | 5,986 |
|
Company restaurant costs (excluding depreciation and amortization) | — |
| | (108,618 | ) |
Franchise costs (excluding depreciation and amortization) | — |
| | (1,408 | ) |
Selling, general and administrative expenses | 302 |
| | (12,264 | ) |
Depreciation and amortization | — |
| | (5,012 | ) |
Impairment and other charges, net | — |
| | (1,669 | ) |
Interest expense, net | — |
| | (3,212 | ) |
Operating earnings from discontinued operations before income taxes | 302 |
| | (427 | ) |
Gain (loss) on Qdoba Sale | (85 | ) | | — |
|
Earnings (losses) from discontinued operations before income taxes | 217 |
| | (427 | ) |
Income tax benefit (expense) | 2,760 |
| | (205 | ) |
Earnings (losses) from discontinued operations, net of income taxes | $ | 2,977 |
| | $ | (632 | ) |
| | | |
Net earnings (losses) per share from discontinued operations: | | | |
Basic | $ | 0.11 |
| | $ | (0.02 | ) |
Diluted | $ | 0.11 |
| | $ | (0.02 | ) |
Selling, general and administrative expenses presented in the table above include corporate costs directly in support of Qdoba operations. All other corporate costs were classified in results of continuing operations. Our credit facility required us to make a mandatory prepayment (“Qdoba Prepayment”)current maturities” on our term loan upon the closing of the Qdoba Sale, which was $260.0 million. In accordance with authoritative guidance on financial statement presentation, interest expense associated with our credit facility was allocated to discontinued operations in the prior year based on our estimate of the mandatory prepayment that was made upon closing of the Qdoba Sale.condensed consolidated balance sheet.
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Lease guarantees — While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees (the “Guarantees”). In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rentThe following table presents our lease cost components and other paymentssupplemental information related to the landlord under the requirementsour leases (dollars in thousands):
| | | | | | |
| Sixteen Weeks Ended | |
| January 19, 2020 | |
Lease costs: | | | |
Finance lease cost: | | | | |
Amortization of ROU assets (1) | | $ | 234 | | |
Interest on lease liabilities (2) | | 33 | | |
Operating lease cost (3) | | 58,512 | | |
Short-term lease cost (3) | | 1 | | |
Variable lease cost (3)(4) | | 12,507 | | |
| $ | 71,287 | | |
Weighted-average remaining lease term (in years): | | | |
Finance leases | | 3.9 | |
Operating leases | | 8.0 | |
Weighted-average discount rate: | | | | |
Finance leases | | 3.4 | % | |
Operating leases | | 3.9 | % | |
____________________________
(1)Included in “Depreciation and amortization” in our condensed consolidated statement of the Guarantees. Should we, as guarantorearnings.
(2)Included in “Interest expense, net” in our condensed consolidated statement of theearnings.
(3)Operating lease, obligations, be required to make anyshort-term and variable lease payments due for the remaining termcosts associated with franchisees and company-operated restaurants are included in “Franchise occupancy expenses” and “Occupancy and other”, respectively in our condensed consolidated statement of the subject lease(s) subsequent to March 21, 2018, the maximum amount we may be required to pay is approximately $35.9earnings. For our closed restaurants, these costs are included in “Impairment and other, net” and all other costs are included in “Selling, general and administrative expenses”.
(4)Includes $11.6 million of property taxes and common area maintenance costs which are reimbursed by sub-lessees.
The following table presents as of January 20, 2019. The19, 2020, future minimum lease terms extendpayments for a maximum of approximately 17 more years as of January 20, 2019, and we would remain a guarantor of thenon-cancellable leases in the event the leases are extended for any established renewal periods. In the event that we are obligated to make payments under the Guarantees, we believe the exposure is limited due to contractual protections and recourse available in the lease agreements, as well as the Qdoba Purchase Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default, and indemnity from the Buyer. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable.
4. SUMMARY OF REFRANCHISINGS AND FRANCHISEE DEVELOPMENT
Refranchisings and franchisee development — The following table summarizes the number of restaurants sold to franchisees, the number of restaurants developed by franchisees, and gains recognized in each period (dollars in thousands):
| | | | | | | | | | | | | | |
| | Finance Leases | | Operating Leases |
Fiscal year: | | | | |
Remainder of 2020 | | $ | 647 | | | $ | 130,553 | |
2021 | | 879 | | | 193,874 | |
2022 | | 879 | | | 153,011 | |
2023 | | 866 | | | 124,843 | |
2024 | | 390 | | | 94,034 | |
Thereafter | | 40 | | | 386,822 | |
Total minimum lease payments | | $ | 3,701 | | | $ | 1,083,137 | |
Less: imputed interest | | (306) | | | (156,539) | |
Present value of lease liability | | $ | 3,395 | | | $ | 926,598 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Restaurants sold to franchisees | — |
| | 22 |
|
New restaurants opened by franchisees | 9 |
| | 5 |
|
| | | |
Proceeds from the sale of company-operated restaurants: | | | |
Cash (1) | $ | 133 |
| | $ | 5,591 |
|
Notes receivable | — |
| | 9,084 |
|
| 133 |
| | 14,675 |
|
| | | |
Net assets sold (primarily property and equipment) | — |
| | (3,637 | ) |
Goodwill related to the sale of company-operated restaurants | (2 | ) | | (153 | ) |
Other (2) | 88 |
| | (1,945 | ) |
Gains on the sale of company-operated restaurants | $ | 219 |
| | $ | 8,940 |
|
____________________________
| |
(1) | Amounts in 2019 and 2018 include additional proceeds of $0.1 million and $1.2 million, respectively, related to restaurants sold in prior years. |
| |
(2) | Amounts in 2018 primarily relate to $1.5 million of remodel credits. |
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents as of September 29, 2019, future minimum lease payments for non-cancellable leases (in thousands):
| | | | | | | | | | | | | | |
| | Capital Leases | | Operating Leases |
Fiscal year: | | | | |
2020 | | $ | 879 | | | $ | 193,313 | |
2021 | | 879 | | | 186,226 | |
2022 | | 879 | | | 145,794 | |
2023 | | 864 | | | 117,753 | |
2024 | | 396 | | | 87,420 | |
Thereafter | | 40 | | | 363,505 | |
Total minimum lease payments | | $ | 3,937 | | | $ | 1,094,011 | |
Less: imputed interest | | (343) | | | |
Present value of lease liability | | $ | 3,594 | | | |
The following table includes supplemental cash flow and non-cash information related to our lessee leases (in thousands):
| | | | | | |
5. | FAIR VALUE MEASUREMENTSSixteen Weeks Ended | |
| January 19, 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | | $ | 65,996 | | |
Operating cash flows from financing leases | | $ | 33 | | |
Financing cash flows from financing leases | | $ | 198 | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 51,311 | | |
Financing leases | | $ | — | | |
Sale leaseback transactions — In 2020, we completed a sale leaseback transaction of a multi-tenant commercial property in Los Angeles, California and leased back the parcel on which a company-operated restaurant is located. The Company received net proceeds of $17.4 million and recognized a $0.2 million loss on the sale. The initial term on the lease is 20 years and has been accounted for as an operating lease.
In 2020, we completed the sale of one of our corporate office buildings as we move forward with our previously announced consolidation of our headquarters. We entered into a lease with the buyer to leaseback the property for up to 18 months with an option to terminate earlier without penalty, upon providing a 90-day notice. The net proceeds received on the sale was $20.6 million and the lease has been accounted for as an operating lease. A gain on the sale of $10.8 million was recognized during the quarter, and is presented within “Impairment and other charges, net” in our condensed consolidated statement of earnings.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Company as Lessor
The following table presents rental income (in thousands):
| | | | | | | | | | | | | | | | | |
| Sixteen Weeks Ended | | | | |
| January 19, 2020 | | | | |
| Owned Properties | | Leased Properties | | Total |
Operating lease income - franchise | | $ | 6,095 | | | $ | 66,568 | | | $ | 72,663 | |
Variable lease income - franchise | | 2,716 | | | 20,704 | | | 23,420 | |
Franchise rental revenues | | $ | 8,811 | | | $ | 87,272 | | | $ | 96,083 | |
Operating lease income - closed restaurants and other (1) | | $ | — | | | $ | 2,057 | | | $ | 2,057 | |
____________________________
(1)Primarily relates to closed restaurant properties included in “Impairment and other, net” in our condensed consolidated statement of earnings.
The following table presents as of January 19, 2020, future minimum rental receipts for non-cancellable leases and subleases (in thousands):
| | | | | |
| January 19, 2020 |
Fiscal year: | |
Remainder of 2020 | $ | 159,654 | |
2021 | 256,052 | |
2022 | 232,129 | |
2023 | 225,488 | |
2024 | 200,425 | |
Thereafter | 1,237,167 | |
Total minimum rental receipts | | $ | 2,310,915 | |
The following table presents as of September 29, 2019, future minimum rental receipts for non-cancellable leases and subleases (in thousands):
| | | | | |
| September 29, 2019 |
Fiscal year: | |
2020 | $ | 239,219 | |
2021 | 255,315 | |
2022 | 231,394 | |
2023 | 224,605 | |
2024 | 199,442 | |
Thereafter | 1,215,811 | |
Total minimum rental receipts | | $ | 2,365,786 | |
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.FAIR VALUE MEASUREMENTS
Financial assets and liabilities — The following table presents our financial assets and liabilities measured at fair value on a recurring basis (in thousands):
| | | | | | | | | | | | Total | | Quoted Prices in Active Markets for Identical Assets (2) (Level 1) | | Significant Other Observable Inputs (2) (Level 2) | | Significant Unobservable Inputs (2) (Level 3) |
| Total | | Quoted Prices in Active Markets for Identical Assets (3) (Level 1) | | Significant Other Observable Inputs (3) (Level 2) | | Significant Unobservable Inputs (3) (Level 3) | |
Fair value measurements as of January 20, 2019: | | | | | | | | |
Fair value measurements as of January 19, 2020: | | Fair value measurements as of January 19, 2020: | | | | | | | |
Non-qualified deferred compensation plan (1) | $ | 31,053 |
| | $ | 31,053 |
| | $ | — |
| | $ | — |
| Non-qualified deferred compensation plan (1) | $ | 29,857 | | | $ | 29,857 | | | $ | — | | | $ | — | |
Interest rate swaps (Note 6) (2) | 7,391 |
| | — |
| | 7,391 |
| | — |
| |
Total liabilities at fair value | $ | 38,444 |
| | $ | 31,053 |
| | $ | 7,391 |
| | $ | — |
| Total liabilities at fair value | $ | 29,857 | | | $ | 29,857 | | | $ | — | | | $ | — | |
Fair value measurements as of September 30, 2018: | | | | | | | | |
Fair value measurements as of September 29, 2019: | | Fair value measurements as of September 29, 2019: | | | | | | | |
Non-qualified deferred compensation plan (1) | $ | 37,447 |
| | $ | 37,447 |
| | $ | — |
| | $ | — |
| Non-qualified deferred compensation plan (1) | $ | 30,104 | | | $ | 30,104 | | | $ | — | | | $ | — | |
Interest rate swaps (Note 6) (2) | 703 |
| | — |
| | 703 |
| | — |
| |
Total liabilities at fair value | $ | 38,150 |
| | $ | 37,447 |
| | $ | 703 |
| | $ | — |
| Total liabilities at fair value | $ | 30,104 | | | $ | 30,104 | | | $ | — | | | $ | — | |
____________________________
| |
(1) | (1)We maintain an unfunded defined contribution plan for key executives and other members of management. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. The obligation is included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets. |
| |
(2) | We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable rate debt. The fair values of our interest rate swaps are based upon Level 2 inputs which include valuation models as reported by our counterparties. These valuation models use a discounted cash flow analysis on the cash flows of each derivative. The key inputs for the valuation models are quoted market prices, discount rates and forward yield curves. The Company also considers its own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. |
| |
(3) | We did not have any transfers in or out of Level 1, 2 or 3. |
The fair values of our debt instruments are based on the amountclosing market prices of future cash flows associated with each instrument discounted usingthe participants’ elected investments. The obligation is included in “Accrued liabilities” and “Other long-term liabilities” on our borrowing rate. condensed consolidated balance sheets.
(2)We did not have any transfers in or out of Level 1, 2 or 3.
At January 20, 2019,19, 2020, the carrying value of all financial instrumentsour Class A-2 Notes was not materially different from$1,300.0 million and fair value aswas $1,332.0 million. The fair value of the borrowingsClass A-2 Notes was estimated using Level 2 inputs based on quoted market prices in markets that are prepayable without penalty.not considered active markets. The estimated fair values of our capitalfinance lease obligations approximated their carrying values as of January 20, 2019.19, 2020.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Non-financial assets and liabilities — Our non-financial instruments, which primarily consist of property and equipment, operating lease right-of-use assets, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on an annual basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, non-financial instruments are assessed for impairment. If applicable, the carrying values are written down to fair value.
In connection with our impairment reviews performed during 2019,2020, no material fair value adjustments were required. Refer to Note 7, Impairment and Other Charges, Net, for additional information regarding impairment charges.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6.DERIVATIVE INSTRUMENTS
Objectives and strategiesInterest rate swaps — We are exposedhave used interest rate swaps to mitigate interest rate volatility with regard to our variable rate debt.borrowings under our senior credit facility. In June 2015, we entered into forward-starting interest rate swap agreements that effectively converted $500.0 million of our variable rate borrowings to a fixed rate from October 2018 through October 2022.
These agreements have beenwere designated as cash flow hedges under the terms of the FASB authoritative guidance for derivatives and hedging. To the extent thatSince they arewere effective in offsetting the variability of the hedged cash flows, changes in the fair values of the derivatives arewere not included in earnings, but arewere included in other comprehensive income (“OCI”). These changes in fair value arewere subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments arewere made on our variable rate debt.
Financial position — The following derivative instruments were outstanding asEffective July 2, 2019, the Company terminated all interest rate swap agreements in anticipation of the endsecuritization transaction and related retirement of each period (our senior credit facility in thousands):the fourth quarter of 2019. During fiscal 2019, our interest rate swaps had no hedge ineffectiveness.
|
| | | | | | | | | |
| Balance Sheet Location | | Fair Value |
| | January 20, 2019 | | September 30, 2018 |
Derivatives designated as hedging instruments: | | | | | |
Interest rate swaps | Accrued liabilities | | $ | (402 | ) | | $ | (26 | ) |
Interest rate swaps | Other long-term liabilities | | (6,989 | ) | | (1,266 | ) |
Interest rate swaps | Other assets, net | | — |
| | 589 |
|
Total derivatives (Note 5) | | | $ | (7,391 | ) | | $ | (703 | ) |
Financial performance — The following table summarizes the OCI activity related to our interest rate swap derivative instruments (in thousands):
|
| | | | | | | | | |
| Location in Income | | Sixteen Weeks Ended |
| | January 20, 2019 | | January 21, 2018 |
(Loss) gain recognized in OCI | N/A | | $ | (7,167 | ) | | $ | 10,291 |
|
Loss reclassified from accumulated OCI into net earnings | Interest expense, net | | $ | 479 |
| | $ | 1,674 |
|
Amountsand the amounts reclassified from accumulated OCI into interest expense represent payments made to the counterparties for the effective portions of the interest rate swaps. During the periods presented, our interest rate swaps had no hedge ineffectiveness.(in thousands):
| | | | | | | | | | | | | | | | |
7. | IMPAIRMENT AND OTHER CHARGES, NETLocation in Income | | | | | | Sixteen Weeks Ended | |
| | | | | | | | January 20, 2019 |
Loss recognized in OCI | N/A | | | | | | | $ | (7,167) | |
Loss reclassified from accumulated OCI into net earnings | Interest expense, net | | | | | | | $ | 479 | |
7.IMPAIRMENT AND OTHER CHARGES, NET
Impairment and other charges, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
| | | Sixteen Weeks Ended | | | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | | | January 19, 2020 | | January 20, 2019 |
Restructuring costs | $ | 5,840 |
|
| $ | 358 |
| Restructuring costs | | | $ | 1,045 | | | $ | 5,840 | |
Costs of closed restaurants and other | 866 |
|
| 1,447 |
| Costs of closed restaurants and other | | | 101 | | | 866 | |
Losses on disposition of property and equipment, net | 576 |
|
| 184 |
| |
Accelerated depreciation | 416 |
|
| 57 |
| Accelerated depreciation | | | — | | | 416 | |
Operating restaurant impairment charges (1) | — |
|
| 211 |
| |
(Gains) losses on disposition of property and equipment, net (1) | | (Gains) losses on disposition of property and equipment, net (1) | | | (10,437) | | | 576 | |
| $ | 7,698 |
| | $ | 2,257 |
| | | | $ | (9,291) | | | $ | 7,698 | |
____________________________
| |
(1) | In 2018, impairment charges relate to our landlord’s sale of a restaurant property to a franchisee. |
(1)In 2020, includes a $10.8 million gain related to the sale of one of our corporate office buildings. Refer to Note 4, Leases, for further information.
Restructuring costs — Restructuring charges include costs resulting from the exploration of strategic alternatives (the “Strategic Alternatives Evaluation”) in 2019, which was concluded in the third quarter of 2019, and a plan that management initiated to reduce our general and administrative costs. Restructuring charges in 2018 also include costs related to the evaluation of potential alternatives with respect to the Qdoba brand (the “Qdoba Evaluation”), which resulted in the Qdoba Sale. Refer to Note 3, Discontinued Operations, for information regarding the Qdoba Sale.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following is a summary of our restructuring costs (in thousands):
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Employee severance and related costs (1) | $ | 4,506 |
| | $ | (456 | ) |
Strategic Alternatives Evaluation (2) | 1,334 |
| | — |
|
Qdoba Evaluation (3) | — |
| | 813 |
|
Other | — |
| | 1 |
|
| $ | 5,840 |
| | $ | 358 |
|
| | | | | | | | | | | | | | | | | |
| | | | | Sixteen Weeks Ended | | |
| | | | | January 19, 2020 | | January 20, 2019 |
Employee severance and related costs | | | | | $ | 1,045 | | | $ | 4,506 | |
Strategic Alternatives Evaluation (1) | | | | | — | | | 1,334 | |
| | | | | $ | 1,045 | | | $ | 5,840 | |
____________________________
| |
(1) | 2018 reflects a reduction in severance and related costs due to a change in the number of employees to be terminated in connection with our restructuring activities. |
| |
(2) | Strategic Alternative Evaluation costs are primarily related to third party advisory services. |
| |
(3) | Qdoba Evaluation costs are primarily related to retention compensation and third party advisory services. |
(1) Strategic Alternative Evaluation costs primarily relate to third party advisory services.
We currentlydo not expect to recognizeany significant severance and related costs of approximately $1.6 million for the remainder of fiscal 20192020 related to positions that have been identified for elimination. At this time, we are unable to estimate any additional charges to be incurred related to additional positions that may be identified for elimination or our other restructuring activities.these initiatives.
Total accrued severance costs related to our restructuring activities are included in “Accrued liabilities” on our condensed consolidated balance sheets, and changed as follows during 2019 2020 (in thousands):
|
| | | | |
Balance as of September 30, 2018 | | $ | 5,309 |
|
Costs incurred | | 4,474 |
|
Cash payments | | (4,200 | ) |
Balance as of January 20, 2019 | | $ | 5,583 |
|
Costs of closed restaurants and other — Costs of closed restaurants in 2019 and 2018 include future lease commitment charges and expected ancillary costs, net of anticipated sublease rentals. Costs in 2018 also include also include $0.5 million of additional impairment charges resulting from changes in the market value of three closed restaurant properties held for sale.
Accrued restaurant closing costs, included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets, changed as follows during 2019 (in thousands):
|
| | | | |
Balance as of September 30, 2018 | | $ | 3,534 |
|
Additions | | — |
|
Adjustments (1) | | 146 |
|
Interest expense | | 460 |
|
Cash payments | | (1,179 | ) |
Balance as of January 20, 2019 (2) (3) | | $ | 2,961 |
|
___________________________ | | | | | | | | |
(1)Balance as of September 29, 2019 | Adjustments relate primarily to revisions of certain sublease and cost assumptions. Our estimates related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors. | $ | 2,100 | |
Costs incurred | | 1,019 | |
| | |
(2)Cash payments | The weighted average remaining lease term related to these commitments is approximately 4 years. |
| (2,134) | |
(3)Balance as of January 19, 2020 | This balance excludes $2.1 million of restaurant closing costs that are included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets, which were initially recorded as losses on the sale of company-operated restaurants to franchisees. | $ | 985 | |
Accelerated depreciation — When a long-lived asset will be replaced or otherwise disposed of prior to the end of its estimated useful life, the useful life of the asset is adjusted based on the estimated disposal date and accelerated depreciation is recognized.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.INCOME TAXES
Our tax rate for the quarter ended January 20, 2019 was impacted by the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law on December 22, 2017. As a fiscal year taxpayer, the corporate federal tax rate reduction from 35% to 21% was phased in, resulting in a statutory federal tax rate of 24.5% for our fiscal year ending September 30, 2018, and 21.0% for our fiscal year ending September 29, 2019 and subsequent fiscal years.
In 2019 and 2018The income tax provisions reflect tax rates of 28.4% in 2020 and 23.1% and 78.5%, respectively.in 2019. The major components of the year over yearyear- over-year change in tax rates were the one-time, non-cash impact of the enactment of the Tax Act in fiscal year 2018, a decrease in the statutoryoperating earnings before income tax, rate, and an adjustment related to state taxes recorded in the first quarter of fiscal year 2019, an increase in the tax deficiency on stock compensation, partially offset by a decreasean increase in gains from the excess tax benefit on stock compensation.market performance of insurance products used to fund certain non-qualified retirement plans which are excluded from taxable income. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual annual 20192020 rate could differ from our current estimates.
The following is a summary of the components of each tax rate (dollars in thousands):
| | | Sixteen Weeks Ended | | | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | | | January 19, 2020 | | | January 20, 2019 | |
Income tax expense at statutory rate
| $ | 10,434 |
| | 25.8 | % | | $ | 17,192 |
| | 28.6 | % | Income tax expense at statutory rate | | | $ | 2,868 | | | 26.0 | % | | $ | 10,434 | | | 25.8 | % |
One-time, non-cash impact of the Tax Act
| — |
| | — | % | | 30,627 |
| | 51.0 | % | |
Stock compensation excess tax benefit
| (50 | ) | | (0.1 | )% | | (802 | ) | | (1.3 | )% | |
Stock compensation tax deficiency (excess tax benefit) | | Stock compensation tax deficiency (excess tax benefit) | | | 196 | | | 1.8 | % | | (50) | | | (0.1) | % |
Company-owned life insurance policies | | Company-owned life insurance policies | | | (99) | | | (0.9) | % | | 231 | | | 0.6 | % |
Adjustment to state tax provision | (1,027 | ) | | (2.6 | )% | | — |
| | — | % | Adjustment to state tax provision | | | — | | | — | % | | (1,027) | | | (2.6) | % |
Other | 16 |
| | — | % | | 121 |
| | 0.2 | % | Other | | | 168 | | | 1.5 | % | | (215) | | | (0.5) | % |
(1) | $ | 9,373 |
| | 23.1 | % | | $ | 47,138 |
| | 78.5 | % | (1) | | | $ | 3,133 | | | 28.4 | % | | $ | 9,373 | | | 23.1 | % |
____________________________
| |
(1) | Percentages may not add due to rounding. |
JACK IN THE BOX INC. AND SUBSIDIARIES(1)Percentages may not add due to rounding.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9.RETIREMENT PLANS
Defined benefit pension plans — We sponsor two2 defined benefit pension plans, a frozen “Qualified Plan” covering substantially all full-time employees hired prior to January 1, 2011, and an unfunded supplemental executive retirement plan (“SERP”) which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employee’s years of service and compensation over defined periods of employment.
In the fourth quarter of 2019, the Company amended its Qualified Plan to add a limited lump sum payment window whereby certain terminated participants with a vested pension benefit could elect to receive either an immediate lump sum or a monthly annuity payment of their accrued benefit. The offering period began September 16, 2019 and ended October 31, 2019. The participants that elected a lump sum benefit under the program were paid in December 2019, which triggered settlement accounting. As a result of the offering, the Company’s Qualified Plan paid $122.3 million from its plan assets to those who accepted the offer, thereby reducing the plan’s pension benefit obligation (“PBO”). The transaction had no cash impact to the Company but did result in a non-cash settlement charge of $38.6 million in the first quarter of fiscal 2020.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Postretirement healthcare plans — We also sponsor two2 healthcare plans, closed to new participants, that provide postretirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory;contributory, with retiree contributions adjusted annually, and they contain other cost-sharing features such as deductibles and coinsurance.
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands):
| | | Sixteen Weeks Ended | | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | | January 19, 2020 | | January 20, 2019 |
Defined benefit pension plans: | | | | Defined benefit pension plans: | | | | |
Interest cost | $ | 7,048 |
| | $ | 6,879 |
| Interest cost | | $ | 5,076 | | | $ | 7,048 | |
Service cost | — |
| | 151 |
| |
Expected return on plan assets (1) | (8,104 | ) | | (8,144 | ) | Expected return on plan assets (1) | | (6,656) | | | (8,104) | |
Pension settlement (2) | | Pension settlement (2) | | 38,606 | | | — | |
Actuarial loss (2) | 1,219 |
| | 1,498 |
| Actuarial loss (2) | | 1,672 | | | 1,219 | |
Amortization of unrecognized prior service costs (2) | 35 |
| | 45 |
| Amortization of unrecognized prior service costs (2) | | 26 | | | 35 | |
Net periodic benefit cost | $ | 198 |
| | $ | 429 |
| Net periodic benefit cost | | $ | 38,724 | | | $ | 198 | |
Postretirement healthcare plans: | | | | Postretirement healthcare plans: | | | | |
Interest cost | $ | 307 |
| | $ | 294 |
| Interest cost | | $ | 248 | | | $ | 307 | |
Actuarial gain (2) | (49 | ) | | (8 | ) | |
Actuarial loss (gain) (2) | | Actuarial loss (gain) (2) | | 6 | | | (49) | |
Net periodic benefit cost | $ | 258 |
| | $ | 286 |
| Net periodic benefit cost | | $ | 254 | | | $ | 258 | |
___________________________
| |
(1) | Determined as of the beginning of the year based on a return on asset assumption of 6.2%. |
| |
(2) | (1)Based on a return on asset, net of administrative expenses, assumption of 5.8% determined at the end of fiscal 2019, subsequently updated to 5.9% as of December 31, 2019 upon remeasurement of the Qualified Plan’s assets and PBO as required by settlement accounting. (2)Amounts were reclassified from accumulated OCI into net earnings as a component of “Other pension and post-retirement expenses, net.” |
Changes in presentation—As discussed in Note 1, Basis in Presentation, we adopted ASU 2017-07 during the first quarter of 2019 using the retrospective method, which changed the financial statement presentation of service costs and the other components of net periodic benefit cost. The service cost component continues to be included in operating income; however, the other components are now presented in a separate line below earnings from operations captioned “Other pension and post-retirement expenses, net” in our condensed consolidated statement of earnings. Further, in connection with the adoption, plan administrative expenses historically presented as a component of service cost are now presented as a component of expected return on assets. The prior year components of net periodic benefit costs have been recast to conform to current year presentation.net.”
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of January 1, 2018,2019, the date of our last actuarial funding valuation, there was no0 minimum contribution funding requirement. Details regarding 20192020 contributions are as follows (in thousands):
| | | | | | | | | | | |
| SERP | | Postretirement Healthcare Plans |
Net year-to-date contributions | $ | 1,639 | | | | $ | 386 | |
Remaining estimated net contributions during fiscal 2020 | $ | 3,732 | | | $ | 1,011 | |
|
| | | | | | | |
| SERP | | Postretirement Healthcare Plans |
Net year-to-date contributions | $ | 1,763 |
| | $ | 348 |
|
Remaining estimated net contributions during fiscal 2019 | $ | 3,300 |
| | $ | 1,000 |
|
We continue to evaluate contributions to our Qualified Plan based on changes in pension assets as a result of asset performance in the current market and the economic environment. We do not anticipate making any contributions to our Qualified Plan in fiscal 2019.2020.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10.STOCKHOLDERS’ DEFICIT
Summary of changes in stockholders’ deficit— A reconciliation of the beginning and ending amounts of stockholders’ deficit is presented below (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Sixteen Weeks Ended | | |
| | | | | January 19, 2020 | | January 20, 2019 |
Balance at beginning of period | | | | | $ | (737,584) | | | $ | (591,699) | |
Shares issued under stock plans, including tax benefit | | | | | 184 | | | 115 | |
Share-based compensation | | | | | 3,184 | | | 1,909 | |
Dividends declared | | | | | (9,425) | | | (10,318) | |
Purchases of treasury stock | | | | | (153,550) | | | — | |
Net earnings | | | | | 7,897 | | | 34,098 | |
Other comprehensive income (loss), net of taxes | | | | | 51,011 | | | (4,071) | |
Cumulative-effect from a change in accounting principle | | | | | (2,870) | | | (37,330) | |
Balance at end of period | | | | | $ | (841,153) | | | $ | (607,296) | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Balance at beginning of period | $ | (591,699 | ) | | $ | (388,130 | ) |
Shares issued under stock plans, including tax benefit | 115 |
| | — |
|
Share-based compensation | 1,909 |
| | 3,385 |
|
Dividends declared
| (10,318 | ) | | (11,773 | ) |
Net earnings
| 34,098 |
| | 12,190 |
|
Other comprehensive (loss) income, net of taxes
| (4,071 | ) | | 9,919 |
|
Cumulative-effect from a change in accounting principle | (37,330 | ) | | (151 | ) |
Balance at end of period | $ | (607,296 | ) | | $ | (374,560 | ) |
Repurchases of common stock— In 2019, we have not The Company repurchased any1.9 million shares of its common shares. In November 2018,stock in the first quarter of fiscal 2020 at an average price of $81.41 per share for an aggregate cost of $153.5 million. As of January 19, 2020, this leaves approximately $122.2 million remaining under share repurchase programs authorized by the Board of Directors, approved an additional $60.0consisting of $22.2 million stock-buyback program that expires in November 2019. As of January 20, 2019, there was approximately $101.02020 and $100.0 million remaining under the Board-authorized stock buyback program which expirethat expires in November 2019.2021.
Repurchases of common stock included in our condensed consolidated statement of cash flows for fiscal 2019 includes $14.42020 include $2.0 million related to repurchase transactions traded in the prior fiscal year thatbut settled in 2019.2020.
Dividends— In November 2018,During 2020, the Board of Directors declared a cash dividend of $0.40 per common share which was paid on December 18, 2018 to shareholders of record as of the close of business on December 5, 2018 and totaled $10.3totaling $9.4 million. Future dividends are subject to approval by our Board of Directors.
| |
11. | 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, and non-management director stock equivalents. Performance share 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.
11.AVERAGE SHARES OUTSTANDING
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Sixteen Weeks Ended | | |
| | | | | January 19, 2020 | | January 20, 2019 |
Weighted-average shares outstanding – basic | | | | | 23,741 | | | 25,907 | |
Effect of potentially dilutive securities: | | | | | | | |
Nonvested stock awards and units | | | | | 181 | | | 208 | |
Stock options | | | | | 7 | | | 11 | |
Performance share awards | | | | | 7 | | | 2 | |
Weighted-average shares outstanding – diluted | | | | | 23,936 | | | 26,128 | |
Excluded from diluted weighted-average shares outstanding: | | | | | | | |
Antidilutive | | | | | 224 | | | 186 | |
Performance conditions not satisfied at the end of the period | | | | | 80 | | | 89 | |
|
| | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Weighted-average shares outstanding – basic | 25,907 |
| | 29,551 |
|
Effect of potentially dilutive securities: | | | |
Nonvested stock awards and units | 208 |
| | 229 |
|
Stock options | 11 |
| | 64 |
|
Performance share awards | 2 |
| | 9 |
|
Weighted-average shares outstanding – diluted | 26,128 |
| | 29,853 |
|
Excluded from diluted weighted-average shares outstanding: | | | |
Antidilutive | 186 |
| | 90 |
|
Performance conditions not satisfied at the end of the period | 89 |
| | 74 |
|
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.CONTINGENCIES AND LEGAL MATTERS
Legal matters— We assess contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurredis adverse to the Company and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates.
Gessele v. Jack in the Box Inc.— In August 2010, five former employees instituted litigation in federal court in Oregon alleging claims under the federal Fair Labor Standards Act and Oregon wage and hour laws. The plaintiffs alleged that the Company failed to pay non-exempt employees for certain meal breaks and improperly made payroll deductions for shoe purchases and for workers’ compensation expenses, and later added additional claims relating to timing of final pay and related wage and hour claims involving employees of a franchisee. In 2016, the court dismissed the federal claims and those relating to franchise employees. In June 2017, the court granted class certification with respect to state law claims of improper deductions and late payment of final wages. In fiscal 2012, weFebruary 2019, plaintiff’s counsel reduced their earlier demand from $62.0 million to $42.0 million. In November 2019, the court issued a ruling on various dispositive motions, disallowing approximately $25.0 million in claimed damages. We have accrued for a single claiman amount that is not material to our consolidated financial statements relating to claims for which we believe a loss is both probable and estimable; this accrued loss contingency did not have a material effect on our results of operations. In October 11, 2018, Plaintiff’s counsel alleged that the total potential damages were approximately $62 million, without providing a specific basis for that amount. We continue toestimable. While we believe that no additional losses are probable beyond this accrual andare reasonably possible, we cannot estimate a possible loss contingency or range of reasonably possible loss contingencies beyond this accrual. The parties are participating in a voluntary mediation on March 16, 2020. If the accrual. We plancase does not resolve at mediation, we will continue to vigorously defend against this lawsuit. Nonetheless,
Marquez v. Jack in the Box Inc. — In August 2017, a former employee filed a class action lawsuit in California state court and as a Private Attorney General Act (“PAGA”) representative suit alleging that the Company failed to provide all non-exempt California employees with compliant rest and meal breaks, overtime pay, accurate wage statements, and final pay upon termination of employment. On January 29, 2020, the parties participated in voluntary mediation and reached a tentative agreement to settle the case. The settlement agreement is subject to documentation and court approval. During the first quarter of 2020, commensurate with the anticipated settlement, we recorded an accrual for legal settlement of $3.8 million.
Ramirez v. Jack in the Box Inc. — On June 11, 2019, an unfavorable resolutionjury verdict was delivered in a wrongful termination lawsuit against the Company in Los Angeles Superior Court. Plaintiff in the case was a restaurant employee who was terminated in 2013. The jury’s verdict included $5.4 million in compensatory damages and $10.0 million in punitive damages. The Company filed post-trial motions with the trial judge for the purpose of this mattersetting aside or significantly reducing damages. These motions were granted, resulting in excessa reduction of damages from $15.4 million to $3.2 million. The plaintiff accepted the reduction. In October 2019, the plaintiff’s counsel filed a motion for attorney’s fees in the amount of $5.1 million. On January 9, 2020, the court issued its ruling awarding $3.9 million in attorney fees. As of January 19, 2020, we have recorded an accrual for legal settlement of $7.3 million within “Accrued liabilities” and a litigation insurance recovery receivable of $7.3 million, which represents the expected payment of the settlement by the Company’s insurance carriers, within “Accounts and other receivable, net” in our current accrued loss contingencies could have a material adverse effect on our business, results of operations, liquidity, or financial condition.condensed consolidated balance sheet.
Other legal matters— In addition to the matter described above, we are subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords, shareholders or others. We intend to defend ourselves in any such matters. Some of these matters may be covered, at least in part, by insurance or other third party indemnity obligation. Our insurance liability (undiscounted) and reserves are established in part by using independent actuarial estimates of expected losses for reported claims and for estimating claims incurred but not reported.We record receivables from third party insurers when recovery has been determined to be probable. We believe that the ultimate determination of liability in connection with legal claims pending against us, if any, in excess of amounts already provided for such matters in the consolidated financial statements, will not have a material adverse effect on our business, our annual results of operations, liquidity or financial position; however, it is possible that our business, results of operations, liquidity, or financial condition could be materially affected in a particular future reporting period by the unfavorable resolution of one or more matters or contingencies during such period.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.DISCONTINUED OPERATIONS
Qdoba — In December 2017, we entered into a stock purchase agreement (the “Qdoba Purchase Agreement”) with the Buyer to sell all issued and outstanding shares of Qdoba. The Buyer completed the acquisition of Qdoba on March 21, 2018 (the “Qdoba Sale”).
We also entered into a Transition Services Agreement with the Buyer pursuant to which the Buyer received certain services (the “Services”) to enable it to operate the Qdoba business after the closing of the Qdoba Sale. The Services included information technology, finance and accounting, human resources, supply chain and other corporate support services. Under the Agreement, the Services were provided at cost for a period of up to 12 months, with 2 3-month extensions available for certain services. As of September 21, 2019, we are no longer providing transition services to Qdoba. In 2019, we recorded $3.7 million in the quarter in income related to the Services as a reduction of “Selling, general and administrative expenses” in the condensed consolidated statements of earnings.
The following table presents Qdoba’s results of operations in periods which have been included in discontinued operations (in thousands, except per share data):
| | | | | | | | |
| | Sixteen Weeks Ended |
| | January 20, 2019 |
Selling, general and administrative expenses | | $ | (302) | |
Loss on Qdoba Sale | | 85 | |
Earnings from discontinued operations before income taxes | | 217 | |
Income tax benefit (1) | | 2,760 | |
Earnings from discontinued operations, net of income taxes | | $ | 2,977 | |
| | |
Basic and diluted earnings per share from discontinued operations: | | $ | 0.11 | |
____________________________
(1)In fiscal 2019, the Company entered into a bilateral California election with Quidditch Acquisition, Inc. to retroactively treat the divestment of Qdoba Restaurant Corporation on March 21, 2018 as a sale of assets instead of a stock sale for income tax purposes. This election reduced the Company’s fiscal year 2018 California tax liability on the divestment by $2.8 million.
Lease guarantees— While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees.guarantees (the “Guarantees”). In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees. Should we, as guarantor of the lease obligations, be required to make any lease payments due for the remaining term of the subject leases, the maximum amount we may be required to pay is approximately $31.2 million as of January 19, 2020. The lease terms extend for a maximum of approximately 16 more years as of January 19, 2020, and we would remain a guarantor of the leases in the event the leases are extended for any established renewal periods. In the event that we are obligated to make payments under the Guarantees, we believe the exposure is limited due to contractual protections and recourse available in the lease agreements, as well as the Qdoba Purchase Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default, and indemnity from the Buyer. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable. Refer to Note 3, Discontinued Operations, for additional information regarding the Guarantees.
14.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Non-cash investing and financing transactions: | | | |
Decrease in obligations for treasury stock repurchases | $ | 2,025 | | | $ | 14,362 | |
Decrease in obligations for purchases of property and equipment | $ | 2,377 | | | $ | 4,927 | |
Increase in dividends accrued or converted to common stock equivalents | $ | 63 | | | $ | 58 | |
Decrease in finance lease obligations from the termination of equipment and building leases | $ | — | | | $ | 7 | |
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
15.SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
| | | | | | | | | | | |
| January 19, 2020 | | September 29, 2019 |
Accounts and other receivables, net: | | | |
Trade | $ | 29,361 | | | $ | 36,907 | |
Notes receivable | 375 | | | 278 | |
Income tax receivable | 1,279 | | | 160 | |
Property taxes receivable | 17,713 | | | 32 | |
Other | 9,970 | | | 10,823 | |
Allowance for doubtful accounts | (5,122) | | | (2,965) | |
| $ | 53,576 | | | $ | 45,235 | |
Prepaid expenses: | | | |
Prepaid income taxes | $ | 7,470 | | | $ | 579 | |
Prepaid advertising | 32 | | | 1,838 | |
Other | 6,163 | | | 6,598 | |
| $ | 13,665 | | | $ | 9,015 | |
Other assets, net: | | | |
Company-owned life insurance policies | $ | 116,127 | | | $ | 112,753 | |
Deferred rent receivable | 49,419 | | | 49,333 | |
Franchise tenant improvement allowance | 28,702 | | | 26,925 | |
Other | 18,535 | | | 17,674 | |
| $ | 212,783 | | | $ | 206,685 | |
Accrued liabilities: | | | |
Insurance | $ | 27,852 | | | $ | 27,888 | |
Payroll and related taxes | 24,375 | | | 31,095 | |
Deferred franchise fees | 4,970 | | | 4,978 | |
Sales and property taxes | 8,731 | | | 4,268 | |
Gift card liability | 2,443 | | | 2,036 | |
Other | 49,918 | | | 49,818 | |
| $ | 118,289 | | | $ | 120,083 | |
Other long-term liabilities: | | | |
Defined benefit pension plans | $ | 88,455 | | | $ | 120,260 | |
Deferred franchise fees | 40,566 | | | 41,295 | |
Straight-line rent accrual | — | | | 29,537 | |
Other | 57,568 | | | 72,678 | |
| $ | 186,589 | | | $ | 263,770 | |
16.SUBSEQUENT EVENTS
| |
13. | SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
|
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Non-cash investing and financing transactions: | | | |
Decrease in obligations for treasury stock repurchases | $ | 14,362 |
| | $ | — |
|
Decrease in obligations for purchases of property and equipment | $ | 4,927 |
| | $ | 4,201 |
|
Increase in dividends accrued or converted to common stock equivalents | $ | 58 |
| | $ | 78 |
|
Decrease in capital lease obligations from the termination of equipment and building leases
| $ | 7 |
| | $ | 685 |
|
Increase in notes receivable from the sale of company-operated restaurants | $ | — |
| | $ | 9,084 |
|
Equipment capital lease obligations incurred | $ | — |
| | $ | 39 |
|
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
14. | SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
|
|
| | | | | | | |
| January 20, 2019 | | September 30, 2018 |
Accounts and other receivables, net: | | | |
Trade | $ | 34,989 |
| | $ | 35,877 |
|
Due from marketing fund | 13,774 |
| | — |
|
Notes receivable | 10,666 |
| | 11,480 |
|
Income tax receivable | 1,132 |
| | 5,637 |
|
Other | 2,513 |
| | 6,123 |
|
Allowance for doubtful accounts | (1,533 | ) | | (1,695 | ) |
| $ | 61,541 |
| | $ | 57,422 |
|
Prepaid expenses: | | | |
Prepaid rent | $ | 4,763 |
| | $ | — |
|
Prepaid income taxes | 868 |
| | 4,837 |
|
Prepaid advertising | — |
| | 4,318 |
|
Other | 4,736 |
| | 5,288 |
|
| $ | 10,367 |
| | $ | 14,443 |
|
Other assets, net: | | | |
Company-owned life insurance policies | $ | 107,045 |
| | $ | 109,908 |
|
Deferred rent receivable | 48,844 |
| | 48,372 |
|
Other | 43,573 |
| | 40,986 |
|
| $ | 199,462 |
| | $ | 199,266 |
|
Accrued liabilities: | | | |
Insurance | $ | 35,829 |
| | $ | 35,405 |
|
Payroll and related taxes | 19,161 |
| | 29,498 |
|
Deferred franchise fees | 4,963 |
| | 375 |
|
Sales and property taxes | 2,830 |
| | 4,555 |
|
Gift card liability | 2,467 |
| | 2,081 |
|
Other | 35,179 |
| | 35,008 |
|
| $ | 100,429 |
| | $ | 106,922 |
|
Other long-term liabilities: | | | |
Defined benefit pension plans | $ | 67,214 |
| | $ | 69,012 |
|
Deferred franchise fees | 43,963 |
| | — |
|
Straight-line rent accrual | 30,731 |
| | 31,762 |
|
Other | 92,908 |
| | 92,675 |
|
| $ | 234,816 |
| | $ | 193,449 |
|
Dividends—On February 18, 2019,2020, the Board of Directors declared a cash dividend of $0.40 per common share, to be paid on March 19, 201917, 2020 to shareholders of record as of the close of business on March 4, 2019.3, 2020.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 20192020 and 20182019 refer to the 16-weeks (“quarter”) ended January 20, 201919, 2020 and January 21, 2018,20, 2019, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during 20192020 and 2018,2019, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.29, 2019.
Our MD&A consists of the following sections:
•Overview — a general description of our business and 20192020 highlights.
•Financial reporting — a discussion of changes in presentation, if any.
•Results of operations — an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements.
•Liquidity and capital resources — an analysis of our cash flows including pension and postretirement health contributions, capital expenditures, sale of company-operated restaurants, franchise tenant improvement allowance distributions, our credit facility, share repurchase activity, dividends, known trends that may impact liquidity and the impact of inflation, if applicable.
•Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates.
•New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any.
•Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management.
We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include:
•Changes in sales at restaurants open more than one year (“same-store sales”), system restaurant sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales,and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
•Adjusted EBITDA, which represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding gainsearnings or losses from discontinued operations, income taxes, interest expense, net, gains or losses on the sale of company-operated restaurants, impairment and other charges, net, depreciation and amortization, and the amortization of tenant improvement allowances.allowances and other, and pension settlement charges.We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
Same-store sales, system restaurant sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.
OVERVIEW
As of January 20, 2019,19, 2020, we operated and franchised 2,2412,244 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam.
The following summarizes the most significant events occurring year-to-date in fiscal 2019,2020, and certain trends compared to a year ago:
Same-store and system sales —•System same-store sales decreased 0.1%, and system— System same-store sales decreased $5.9 million, or 0.6%,are up 1.7% year-to-date as compared with athe prior year ago. Menuprimarily due to menu price increases, and favorablepartially offset by changes in product mix were partially offset at company-operated restaurants and more than offset at franchise-operated restaurants by a decreasedecline in traffic.
transactions.•Company restaurant operations — Company restaurant costs as a percentage of company restaurant sales decreasedincreased in 20192020 to 73.8%75.2% from 74.0%73.8% a year ago primarily due to the benefit of refranchising units that had lower AUVs than the average for all company restaurants, partially offset by higher costs for labor and other operating expenses.
commodities.Franchise operations •Pension settlement — ExcludingAs previously announced, in connection with the impacts ofCompany’s pension plan de-risking strategy, the adoption of ASC 606 further described below, franchise costs as a percentage of franchise revenues were largely flat compared to prior year.
Restructuring costs — In 2019, we have continued with ourCompany amended its pension plan to reduceoffer a limited time lump sum payment option to certain eligible participants. The transaction resulted in a non-cash settlement charge of $38.6 million presented within “Other Pension and Post-Retirement Expenses” in our general and administrative costs by revampingcondensed consolidated statement of earnings.
•Sale of corporate office building —During the quarter, we executed on our organization and cost structures. Additionally, inpreviously announced planned sale of one our corporate office buildings as we move forward with consolidating our corporate facilities. We recognized a $10.8 million gain on the first quarter of fiscal 2019, we began an evaluation of strategic alternatives for the Company (the “Strategic Alternatives Evaluation”). In connection with these activities, we have recorded $5.8 million of restructuring charges in 2019,sale which includes $4.5 million primarily related to severance costs, and $1.3 million related to the Strategic Alternatives Evaluation. These costs are includedis presented in “Impairment and other costs, net”Other Costs” in the accompanyingour condensed consolidated statementsstatement of earnings.
•Return of cash to shareholders— We returned cash to shareholders in the form of share repurchases and cash dividends. We repurchased 1.9 million shares of our common stock at an average price of $81.41, totaling $153.5 million. We also declared a quarterly cash dividend of $0.40 per common share totaling $10.3$9.4 million.
•Adjusted EBITDA — Adjusted EBITDA decreased in 20192020 to $76.6 million from $83.0 million from $85.4 million in 2018.
2019.
FINANCIAL REPORTING
In fiscal 2019,2020, we adopted ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606) Accounting Standards Codification Topic 842, Leases (“ASC 606”842”), effective at the beginning of our fiscal year on a modified retrospective basis using the modified retrospective method, wherebyeffective date transition method. Our consolidated financial statements reflect the cumulative effectapplication of initially adoptingASC 842 guidance beginning in 2020, while our consolidated financial statements for prior periods were prepared under the guidance was recognized as an adjustment to beginning retained earnings at October 1, 2018. The comparative information has not been restated and continues to be reported under theof a previously applicable accounting standards in effect for those periods. standard.
The most significant effects of this transition that affect comparability of our results of operations between 20192020 and 20182019 include the following:
Franchise fee revenue for initial franchise services will be recognized over•Our transition to ASC 842 resulted in the franchise term beginning in 2019 compared to upfront recognitiongross presentation of property tax and maintenance expenses and related lessee reimbursements as “Franchise occupancy expenses” and “Franchise rental revenues”, respectively. These expenses and reimbursements were presented on a net basis under the previous revenue guidance.
Franchise contribution for advertising and other services are reflected on a gross basisaccounting standard. Although there was no net impact to our consolidated statement of earnings from this change, the presentation resulted in 2019 compared to a net basistotal increases in 2018. Newly created captions “Franchise contribution for advertising and other services”rental revenues” and “Franchise advertisingoccupancy expenses” of $11.6 million.
•ASC 842 also changed how lessees account for leases subleased at a loss. Under ASC 842, sublease income and other services expenses” include the gross-uplessee rent expense are recorded as franchise rent revenue and franchise occupancy costs as earned or incurred. As a result of respectivethis change, franchise revenues and expenses; however, the 2018 results have not been restated to conform to current year presentation.franchise occupancy expenses increased $1.2 million and $1.7 million, respectively in 2020.
In fiscal 2018, we completed the sale of Qdoba on March 21, 2018. Qdoba results are included in discontinued operations for all periods presented.
RESULTS OF OPERATIONS
Thefollowing table presents certain income and expense items included in our condensed consolidated statements of earnings as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS DATA
| | | Sixteen Weeks Ended | | Sixteen Weeks Ended | |
| January 20, 2019 | | January 21, 2018 | | January 19, 2020 | | January 20, 2019 | |
Revenues: | | | | Revenues: | | | | |
Company restaurant sales | 35.4 | % | | 57.6 | % | Company restaurant sales | 34.2 | % | | 35.4 | % | |
Franchise rental revenues | 28.8 | % | | 26.2 | % | Franchise rental revenues | 31.2 | % | | 28.8 | % | |
Franchise royalties and other | 18.0 | % | | 16.2 | % | Franchise royalties and other | 17.1 | % | | 18.0 | % | |
Franchise contributions for advertising and other services | 17.8 | % | | — | % | Franchise contributions for advertising and other services | 17.5 | % | | 17.8 | % | |
Total revenues | 100.0 | % | | 100.0 | % | Total revenues | 100.0 | % | | 100.0 | % | |
Operating costs and expenses, net: | | | | Operating costs and expenses, net: | | | | |
Company restaurant costs (excluding depreciation and amortization): | | | | Company restaurant costs (excluding depreciation and amortization): | | |
Food and packaging (1) | 28.8 | % | | 28.8 | % | Food and packaging (1) | 29.8 | % | | 28.8 | % | |
Payroll and employee benefits (1) | 29.4 | % | | 28.8 | % | Payroll and employee benefits (1) | 30.3 | % | | 29.4 | % | |
Occupancy and other (1) | 15.6 | % | | 16.4 | % | Occupancy and other (1) | 15.1 | % | | 15.6 | % | |
Total company restaurant costs (1) | 73.8 | % | | 74.0 | % | Total company restaurant costs (1) | 75.2 | % | | 73.8 | % | |
Franchise occupancy expenses (excluding depreciation and amortization) (2) | 60.5 | % | | 60.2 | % | Franchise occupancy expenses (excluding depreciation and amortization) (2) | 67.1 | % | | 60.5 | % | |
Franchise support and other costs (3) | 5.4 | % | | 5.2 | % | Franchise support and other costs (3) | 8.9 | % | | 5.4 | % | |
Franchise advertising and other services expenses (4) | 104.7 | % | | — | % | Franchise advertising and other services expenses (4) | 102.7 | % | | 104.7 | % | |
Selling, general and administrative expenses | 8.3 | % | | 11.6 | % | Selling, general and administrative expenses | 9.2 | % | | 8.3 | % | |
Depreciation and amortization | 5.9 | % |
| 6.5 | % | Depreciation and amortization | 5.4 | % | | | 5.9 | % | |
Impairment and other charges, net | 2.6 | % | | 0.8 | % | Impairment and other charges, net | (3.0) | % | | 2.6 | % | |
Gains on the sale of company-operated restaurants | (0.1 | )% | | (3.0 | )% | Gains on the sale of company-operated restaurants | (0.5) | % | | (0.1) | % | |
| Earnings from operations | 20.1 | % | | 24.9 | % | Earnings from operations | 22.7 | % | | 20.1 | % | |
Income tax rate (5) | 23.1 | % | | 78.5 | % | Income tax rate (5) | 28.4 | % | | 23.1 | % | |
____________________________
| |
(1) | As a percentage of company restaurant sales. |
| |
(2) | As a percentage of franchise rental revenues. |
| |
(3) | As a percentage of franchise royalties and other. |
| |
(4) | As a percentage of franchise contributions for advertising and other services. |
| |
(5) | As a percentage of earnings from continuing operations and before income taxes. |
(1)As a percentage of company restaurant sales.
(2)As a percentage of franchise rental revenues.
CHANGES IN SAME-STORE SALES(3)As a percentage of franchise royalties and other.
(4)As a percentage of franchise contributions for advertising and other services.
(5)As a percentage of earnings from continuing operations and before income taxes.
|
| | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Company | 0.5 | % | | 0.2 | % |
Franchise | (0.1 | )% | | (0.3 | )% |
System | (0.1 | )% | | (0.2 | )% |
The following table summarizes thechanges in same-store sales for company-owned, franchised, and system-wide restaurants:
| | | | | | | | | | | | | |
| Sixteen Weeks Ended | | | | |
| January 19, 2020 | | January 20, 2019 | | |
Company | 2.9 | % | | 0.5 | % | | |
Franchise | 1.6 | % | | (0.1) | % | | |
System | 1.7 | % | | (0.1) | % | | |
The following table summarizes changes in the number and mix of company and franchise restaurants:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | | | | | 2019 | | | | |
| Company | | Franchise | | Total | | Company | | Franchise | | Total |
Beginning of year | 137 | | | 2,106 | | | 2,243 | | | 137 | | | 2,100 | | | 2,237 | |
New | — | | | 11 | | | 11 | | | — | | | 9 | | | 9 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Closed | — | | | (10) | | | (10) | | | — | | | (5) | | | (5) | |
End of period | 137 | | | 2,107 | | | 2,244 | | | 137 | | | 2,104 | | | 2,241 | |
% of system | 6 | % | | 94 | % | | 100 | % | | 6 | % | | 94 | % | | 100 | % |
|
| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 |
| Company | | Franchise | | Total | | Company | | Franchise | | Total |
Beginning of year | 137 |
|
| 2,100 |
|
| 2,237 |
|
| 276 |
|
| 1,975 |
|
| 2,251 |
|
New | — |
|
| 9 |
|
| 9 |
|
| 1 |
|
| 5 |
|
| 6 |
|
Refranchised | — |
|
| — |
|
| — |
|
| (22 | ) |
| 22 |
|
| — |
|
Closed | — |
|
| (5 | ) |
| (5 | ) |
| — |
|
| (7 | ) |
| (7 | ) |
End of period | 137 |
|
| 2,104 |
|
| 2,241 |
|
| 255 |
|
| 1,995 |
|
| 2,250 |
|
% of system | 6 | % | | 94 | % | | 100 | % | | 11 | % | | 89 | % | | 100 | % |
The following table summarizes the restaurant sales for company-owned, franchised, and total system sales (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Company-owned restaurant sales | $ | 105,364 | | | $ | 102,832 | |
Franchised restaurant sales (1) | 979,345 | | | 959,960 | |
System sales (1) | $ | 1,084,709 | | | $ | 1,062,792 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Company-owned restaurant sales | $ | 102,832 |
| | $ | 169,637 |
|
Franchised restaurant sales | 959,960 |
| | 899,062 |
|
System sales | $ | 1,062,792 |
| | $ | 1,068,699 |
|
____________________________(1)Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. System sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and system restaurant sales information is useful to investors as they have a direct effect on the Company's profitability.
Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
ADJUSTED EBITDA | | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Net earnings - GAAP | $ | 7,897 | | | $ | 34,098 | |
Earnings from discontinued operations, net of taxes | — | | | (2,977) | |
Income tax expense | 3,133 | | | 9,373 | |
Interest expense, net | 19,942 | | | 17,374 | |
Pension settlement charge | 38,606 | | | | — | |
Gains on the sale of company-operated restaurants | (1,575) | | | (219) | |
Impairment and other charges, net | (9,291) | | | 7,698 | |
Depreciation and amortization | 16,728 | | | 17,169 | |
Amortization of franchise tenant improvement allowances and other | 1,151 | | | 530 | |
Adjusted EBITDA - Non-GAAP | $ | 76,591 | | | $ | 83,046 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Net earnings - GAAP | $ | 34,098 |
|
| $ | 12,190 |
|
(Earnings) losses from discontinued operations, net of taxes | (2,977 | ) |
| 699 |
|
Income taxes | 9,373 |
|
| 47,138 |
|
Interest expense, net | 17,374 |
|
| 12,780 |
|
Gains on the sale of company-operated restaurants | (219 | ) |
| (8,940 | ) |
Impairment and other charges, net | 7,698 |
|
| 2,257 |
|
Depreciation and amortization | 17,169 |
|
| 19,157 |
|
Amortization of franchise tenant improvement allowances | 530 |
|
| 147 |
|
Adjusted EBITDA - Non-GAAP | $ | 83,046 |
| | $ | 85,428 |
|
Company Restaurant Operations
The following table presents company restaurant sales and costs, and restaurant costs as a percentage of the related sales. Percentages may not add due to rounding (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Sixteen Weeks Ended | | | | | | |
| January 19, 2020 | | | | January 20, 2019 | | |
Company restaurant sales | $ | 105,364 | | | | | $ | 102,832 | | | |
Company restaurant costs: | | | | | | | |
Food and packaging | 31,348 | | | 29.8 | % | | 29,616 | | | 28.8 | % |
Payroll and employee benefits | 31,890 | | | 30.3 | % | | 30,274 | | | 29.4 | % |
Occupancy and other | 15,958 | | | 15.1 | % | | 16,013 | | | 15.6 | % |
Total company restaurant costs | $ | 79,196 | | | 75.2 | % | | $ | 75,903 | | | 73.8 | % |
|
| | | | | | | | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Company restaurant sales | $ | 102,832 |
| | | | $ | 169,637 |
| | |
Company restaurant costs: | | | | | | | |
Food and packaging | 29,616 |
| | 28.8 | % | | 48,864 |
| | 28.8 | % |
Payroll and employee benefits | 30,274 |
| | 29.4 | % | | 48,940 |
| | 28.8 | % |
Occupancy and other | 16,013 |
| | 15.6 | % | | 27,750 |
| | 16.4 | % |
Total company restaurant costs | $ | 75,903 |
| | 73.8 | % | | $ | 125,554 |
| | 74.0 | % |
Company restaurant sales decreased $66.8increased $2.5 million in 2019 as compared with the prior year primarily driven by a decrease in the number of company restaurants resulting from the execution of our refranchising strategy and, to a lesser extent, by a decrease in traffic, which was more than offset by menu price increases and favorable product mix. The following table presents the approximate impact of these (decreases) increases on company restaurant sales in 2019 (in millions):
|
| | | |
| Sixteen Weeks Ended |
Decrease in the average number of restaurants | $ | (67.8 | ) |
AUV increase | 1.0 |
|
Total change in company restaurant sales | $ | (66.8 | ) |
Same-store sales at company-operated restaurants increased 0.5% in 2019 as compared with2020 versus the prior year primarily due to menu price increases and favorable product mix, partially offset byan increase in traffic.
Same-store sales at company-operated restaurants increased 2.9% compared to a decline in transactions.year ago. The following table summarizes the change in company-operated same-store salessame store-sales versus a year ago:
|
| | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Average check (1) | 3.8 | % | | 2.6 | % |
Transactions | (3.3 | )% | | (2.4 | )% |
Change in same-store sales | 0.5 | % | | 0.2 | % |
____________________________
| | | | | | |
(1) | AmountsSixteen Weeks Ended | |
| January 19, 2020 | |
Average check (1) | 2.6 | % | |
Transactions | 0.3 | % | |
Change in 2019 and 2018 include price increases of approximately 2.6% and 1.6%, respectively.same-store sales | 2.9 | % | |
____________________________
(1)Includes price increases of approximately 2.6%.
Food and packaging costs as a percentage of company restaurant sales remained consistent atincreased to 29.8% in 2020 from 28.8% in 2019 and 2018 primarily due to menu price increases and favorable product mix, partially offset by higher commodity costs. Commodity costs increased 0.8% compared to a year ago due primarily to higher costs for potatoesingredients and beverages,changes in product mix, partially offset by lowermenu price increases. Commodity costs forwere up approximately 4.9% due primarily to increases in beef and pork. Potatoescheese. Cheese increased most significantly by 7% in the quarter whileapproximately 33% and beef, our most significant commodity, decreasedincreased approximately 5% in 2019 compared with the prior year. For fiscal 2019, we currently expect commodity costs to increase approximately 2% compared with fiscal 2018.15% versus a year ago.
Payroll and employee benefit costs as a percentage of company restaurant sales increased to 29.4%30.3% in 20192020 compared with 28.8% in 201829.4% a year ago due primarily to higher average wages resulting from a change in the mix of restaurants due to refranchising, wage inflation and a highly competitive labor market.
Occupancy and other costs decreased $11.7 million in 2019 compared to the prior year, primarily due to a decrease in the average number of restaurants, impacting occupancy and other costs by approximately $13 million, partially offset by higher costs for maintenance and repairs, uniforms, utilities, information technology and property rent. The decrease in occupancy and other costs as a percentage of company restaurant sales, in 2019 compareddecreased to 2018 was15.1% from 15.6% a year ago due primarily due to the benefit of refranchising units that had lower AUVs than the averagecosts for all company restaurants.maintenance and repair expenses, partially offset by higher costs for delivery fees and utilities.
Franchise Operations
The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Franchise rental revenues | $ | 96,084 | | | $ | 83,890 | |
| | | |
Royalties | 50,243 | | | 49,507 | |
Franchise fees and other | 2,223 | | | 2,743 | |
Franchise royalties and other | 52,466 | | | 52,250 | |
Franchise contributions for advertising and other services | 53,759 | | | 51,814 | |
Total franchise revenues | $ | 202,309 | | | $ | 187,954 | |
| | | |
Franchise occupancy expenses (excluding depreciation and amortization) | $ | 64,517 | | | $ | 50,713 | |
Franchise support and other costs | 4,676 | | | 2,845 | |
Franchise advertising and other services expenses | 55,224 | | | 54,270 | |
Total franchise costs | $ | 124,416 | | | $ | 107,828 | |
Franchise costs as a percentage of total franchise revenues | 61.5 | % | | 57.4 | % |
| | | |
Average number of franchise restaurants | 2,087 | | | 2,084 | |
Increase (decrease) in franchise-operated same-store sales | 1.6 | % | | (0.1) | % |
Franchised restaurant sales | $ | 979,345 | | | $ | 959,960 | |
Franchised restaurant AUVs | $ | 469 | | | $ | 461 | |
Royalties as a percentage of total franchised restaurant sales | 5.1 | % | | 5.2 | % |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Franchise rental revenues | $ | 83,890 |
| | $ | 77,217 |
|
| | | |
Royalties | 49,507 |
| | 46,293 |
|
Franchise fees and other | 2,743 |
| | 1,316 |
|
Franchise royalties and other | 52,250 |
| | 47,609 |
|
Franchise contributions for advertising and other services | 51,814 |
| | — |
|
Total franchise revenues | $ | 187,954 |
| | $ | 124,826 |
|
| | | |
Franchise occupancy expenses (excluding depreciation and amortization) | $ | 50,713 |
| | $ | 46,521 |
|
Franchise support and other costs | 2,845 |
| | 2,482 |
|
Franchise advertising and other services expenses | 54,270 |
| | — |
|
Total franchise costs | $ | 107,828 |
| | $ | 49,003 |
|
Franchise costs as a % of total franchise revenues | 57.4 | % | | 39.3 | % |
| | | |
Average number of franchise restaurants | 2,084 |
| | 1,975 |
|
% increase | 5.5 | % | | |
Decrease in franchise-operated same-store sales | (0.1 | )% | | (0.3 | )% |
Franchised restaurant sales | $ | 959,960 |
| | $ | 899,062 |
|
Franchised restaurant AUVs | $ | 461 |
| | $ | 455 |
|
Royalties as a percentage of total franchised restaurant sales | 5.2 | % | | 5.1 | % |
Franchise rental revenues increased $6.7$12.2 million, or 8.6%14.5%, in 2019 as2020 compared withto the prior year. This increase isyear, primarily due to additionalfrom our adoption of ASC 842, which increased rental revenues in 2019 of $7.0 million resulting from an increase in the number of restaurants leased or subleased from the Company due to our refranchising strategy.$12.8 million.
Franchise royalties and other increased $4.6$0.2 million or 9.7%, in 2019 versus a2020 compared to the prior year, ago primarily due to an increase in the numberfranchise same-store sales driving royalties higher by approximately $1.7 million, partially offset by a $0.8 million increase in franchise incentives recorded as a reduction of franchise restaurants.royalties and a $0.5 million decrease in franchise fees and other.
In years prior to 2019, franchiseFranchise contributions for advertising and other services were shown net with the related disbursements within “Selling, general, and administrative expenses” in our condensed consolidated statement of earnings. In the first quarter of 2019, we adopted ASC 606, which requires these revenues and expenses to be presented gross on our condensed consolidated statement of earnings. Refer to Note 2, Revenue, for additional information relatedincreased $1.9 million compared to the adoptionprior year, due to an increase in technology fees charged to our franchisees and an increase in franchisee contributions to our marketing fund which are based on a percentage of this new accounting standard.their restaurant sales.
Franchise occupancy expenses, principally rents, increased $4.2$13.8 million in 2019 versus a2020 compared to the prior year, ago due primarily to a net increase in the average numberadoption of franchise-operated restaurants resulting from our refranchising strategy, contributing additional costs of approximately $4.0ASC 842 which increased franchise occupancy expenses by $13.3 million.
Franchise support and other costs increased $0.4$1.8 million in 20192020 compared with ato the prior year, ago due primarily to ana $1.9 million increase in costs associated with franchise remodelsfranchisee bad debt expense.
Franchise advertising and other service expenses increased $1.0 million compared to the prior year, due to a $0.9 million increase in 2019.marketing fund contributions from our franchisees.
Depreciation and Amortization
Depreciation and amortization decreased by $2.0$0.4 million in 20192020 as compared with the prior year, primarily due to a decrease in equipment depreciation driven by a decrease in the average number of company-operated restaurants resulting from our refranchising activities in 2018. To a lesser extent, a decline in depreciation resulting from our franchise building assets becoming fully depreciated also contributed toin the decrease.current fiscal year.
Selling, General and Administrative (“SG&A”) Expenses
The following table presents the change in 20192020 SG&A expenses compared with the prior year (in thousands):
| | | | | |
| Sixteen Weeks Ended |
| January 19, 2020 |
Advertising | $ | (1,873) | |
Incentive compensation (including share-based compensation and related payroll taxes) | 3,014 | |
Cash surrender value of COLI policies, net | (3,506) | |
Litigation matters | 3,756 | |
Other (includes transition services income and savings related to our restructuring plan) | 2,774 | |
| $ | 4,165 | |
|
| | | |
| Increase / (Decrease) |
Incentive compensation (including share-based compensation and related payroll taxes) | $ | (4,526 | ) |
Advertising | (1,650 | ) |
Technology fees | (1,470 | ) |
Region administration | (964 | ) |
Legal fees | 857 |
|
Cash surrender value of COLI policies, net | 1,712 |
|
Other (includes transition services income and savings related to our restructuring plan) | (3,937 | ) |
| $ | (9,978 | ) |
Incentive compensation decreased in 2019 primarily due to lower levels of performance in 2019 versus the prior year as compared to target bonus levels and a decrease of $1.0 million in share-based compensation primarily related to the elimination of retiree eligible accelerated vesting provisions in our fiscal 2019 restricted stock unit grants.
Advertising costs are primarilyrepresent company contributions to our marketing fund and are generally determined as a percentage of grosscompany-operated restaurant sales. Advertising costs decreased $1.9 million in 2020 compared to the prior year, primarily due to a decrease in the number of company-operated restaurants resulting from our refranchising efforts. These decreases were partially offset by incremental contributions to the$2.0 million discretionary marketing fund of $2.0contribution made by the Company in 2019.
Incentive compensation increased by $3.0 million in 2019 for additional system-wide promotional activity.
Upon adoption2020 primarily due to an increase in performance-based stock compensation and annual incentives, mainly as a result of ASC 606 in 2019, technology fees and costs are recorded on a gross basis within our condensed consolidated statements of earnings within “Franchise contributions from advertising and other services” and “Franchise advertising and other services expenses.”
Region administration costs decreased in 2019 ashigher achievement levels compared to 2018 due primarily to workforce reductions related to our refranchising efforts.prior year.
The cash surrender value of our Company-ownedcompany-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a positive impact of $2.1 million in 2020, compared to a negative impact of $1.4 million in 2019, compared with a positive impact of $0.3 million in the prior year.
Impairment and Other Charges, Net
Impairment and other charges, net is comprisedLitigation matters increased by $3.8 million, primarily due to costs accrued in 2020 on the expected settlement of the following (in thousands):
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Restructuring costs | $ | 5,840 |
| | $ | 358 |
|
Costs of closed restaurants and other | 866 |
| | 1,447 |
|
Losses on disposition of property and equipment, net | 576 |
| | 184 |
|
Accelerated depreciation | 416 |
| | 57 |
|
Operating restaurant impairment charges (1) | — |
| | 211 |
|
| $ | 7,698 |
| | $ | 2,257 |
|
____________________________
| |
(1) | In 2018, impairment charges relate to our landlord’s sale of a restaurant property to a franchisee. |
Impairment and other charges, net increased $5.4 million in 2019 compared with a year ago. The increase was primarily driven by a $5.5 million increase in restructuring costs, primarily relating to severance and the Strategic Alternatives Evaluation. This increase was partially offset by a decrease of $0.6 million in costs of closed restaurants primarily related to changes in the market value of three closed restaurant properties held for sale in the first quarter of 2018.an employee litigation matter. Refer to Note 7, Impairment12, Contingencies and Other Charges, Net,Legal Matters, of the notes to the condensed consolidated financial statements for additional information regarding these charges.
Impairment and Other Charges, Net
Impairment and other charges, net is comprised of the following (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Restructuring costs | $ | 1,045 | | | $ | 5,840 | |
Costs of closed restaurants and other | 101 | | | 866 | |
Accelerated depreciation | — | | | 416 | |
(Gains) losses on disposition of property and equipment, net | (10,437) | | | 576 | |
| $ | (9,291) | | | $ | 7,698 | |
Restructuring costs decreased by $4.8 million in 2020 compared to the prior year, primarily as a result of lower severance expenses of $3.5 million, as well as $1.3 million lower costs related to the strategic alternative evaluation that was concluded on in the third quarter of 2019.
Gains on disposition of property and equipment, net, increased by $11.0 million, primarily due to a $10.8 million gain related to the sale of one of our corporate office buildings in 2020.
Gains on the Sale of Company-Operated Restaurants
Gains on the sale of company-operated restaurants net are detailedwere $1.6 million in 2020 versus $0.2 million in the following table (dollarsprior year. In both comparative periods, the gains recognized pertain to meeting certain contingent consideration provisions included in thousands):
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Number of restaurants sold to franchisees | — |
| | 22 |
|
Gains on the sale of company-operated restaurants | $ | 219 |
| | $ | 8,940 |
|
Gains are impacted by the number of restaurants sold and changes in average gains or losses recognized, which primarily relate to the specific sales and cash flows of those restaurants. Gains in 2019 primarily relate to escrow funds released on restaurants sold in priorprevious years.
Other Pension and Post-Retirement Expenses, Net
Other pension and post-retirement expenses, net increased by $38.5 million in 2020 versus a year ago, primarily due to a non-cash pension settlement charge of $38.6 million in 2020. Refer to Note 4, Summary of Refranchisings and Franchisee Development9, Retirement Plans, of the notes to the condensed consolidated financial statements for additional information regarding these gains.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
| | | | | | | | | | | | | | |
| | Sixteen Weeks Ended | | |
| | January 19, 2020 | | January 20, 2019 |
Interest expense | | $ | 20,419 | | | $ | 17,612 | |
Interest income | | (477) | | | (238) | |
Interest expense, net | | $ | 19,942 | | | $ | 17,374 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Interest expense | $ | 17,612 |
| | $ | 12,811 |
|
Interest income | (238 | ) | | (31 | ) |
Interest expense, net | $ | 17,374 |
| | $ | 12,780 |
|
Interest expense, net increased $4.6$2.6 million in 2019 compared with2020 versus a year ago, primarily due to a higher average interest rates on average borrowings. As described in Note 3, Discontinued Operations, a portion of interest costs was allocatedborrowings compared to discontinued operations in the prior year, based on our estimateas well an increase in loan fee amortization of the mandatory prepayment that was made upon closing of the Qdoba Sale.$1.1 million.
Income Taxes
The tax rate in 20192020 was 23.1% in the quarter28.4% compared with 78.5%23.1% a year ago. The major components of the change in tax rates were the non-cash impact of the enactment of the Tax Act in fiscal year 2018, a decrease in the statutoryoperating earnings before income tax, rate, and an adjustment related to state taxes recorded in the first quarter of fiscal year 2019, an increase in the tax deficiency on 2020 stock compensation, partially offset by a decreasean increase in gains from the excess tax benefit on stock compensation. We expect the fiscal year tax ratemarket performance of insurance products used to be approximately 26.0% to 27.0%.fund certain non-qualified retirement plans which are excluded from taxable income. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 20192020 rate could differ from our current estimates. Refer to Note 8,Income Taxes, of the notes to the condensed consolidated financial statements for additional information regarding income taxes.
Earnings (Losses) from Discontinued Operations, Net
As described in Note 3, Discontinued Operations, in the notes to condensed consolidated financial statements, the results of operations from our distribution business and Qdoba have been reported as discontinued operations for all periods presented. Refer to Note 3 for additional information regarding discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available financing in place. On July 8, 2019, we completed a refinancing of our revolving bankexisting senior credit facility.facility with a new securitized financing facility, comprised of $1.3 billion of senior fixed-rate term notes and $150.0 million of variable funding notes as further described below.
We generally reinvest available cash flows from operations to enhance existing restaurants, to reduce debt, to repurchase shares of our common stock, and to pay cash dividends, and to develop new restaurants.dividends. Our cash requirements consist principally of:
•working capital;
•capital expenditures for restaurant renovations and new restaurant construction;expenditures;
•income tax payments;
•debt service requirements;
•franchise tenant improvement allowance distributions; 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 otherour securitized financing alternatives in place or available,facility including our variable funding notes, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and 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 and not as part of working capital. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit.
Cash Flows
The table below summarizes our cash flows from continuing operations (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Total cash provided by (used in): | | | |
Operating activities | $ | 22,687 | | | $ | 37,601 | |
Investing activities | 32,364 | | | (4,263) | |
Financing activities | (168,326) | | | (31,743) | |
Net cash flows | $ | (113,275) | | | $ | 1,595 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Total cash provided by (used in): | | | |
Operating activities | $ | 37,601 |
| | $ | 53,730 |
|
Investing activities | (4,263 | ) | | (1,818 | ) |
Financing activities | (31,743 | ) | | (54,917 | ) |
Net cash flows | $ | 1,595 |
| | $ | (3,005 | ) |
Operating Activities. Operating cash flows in 2019the quarter decreased $16.1$14.9 million compared with a year ago, primarily due to unfavorable changes in working capital of $11.4$9.0 million mainly attributable to higher incentive compensation paid in the current fiscal period and timing of receipts and expenditures, as well as lower net income adjusted for non-cash items of $4.8$5.9 million.
Pension and Postretirement Contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2018,2019, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. We continue to evaluate contributions to our Qualified Plan based on changes in pension assets as a result of asset performance in the current market and the economic environment. We do not anticipate making any contributions to our Qualified Plan in fiscal 2019.2020. In 2019,2020, we contributed $2.1$2.0 million to our non-qualified pension plan and postretirement plans.
Investing Activities. Cash used inprovided by investing activities increased $2.4by $36.6 million compared with a year ago, primarily due to $8.4 million lower proceeds received in connection with the sale of company-owned restaurants, including collections on notes issued in connection with the 2018 refranchising, as well as $4.9 million lowerhigher proceeds from the sale and leaseback of assets in 2018. These decreases wereof $17.4 million, higher proceeds from the sale of property and equipment of $20.3 million, and $4.0 million lower capital expenditure spending, partially offset by a $13.1$6.5 million increaseof lower repayments received on notes issued in Qdoba inter-company transfers in 2018.connection with 2018 refranchising transactions.
Capital Expenditures— The composition of capital expenditures in each period follows (in thousands):
| | | | | | | | | | | |
| Sixteen Weeks Ended | | |
| January 19, 2020 | | January 20, 2019 |
Jack in the Box: | | | |
Restaurant facility expenditures | $ | 3,500 | | | $ | 7,346 | |
New restaurants | — | | | 1,301 | |
Other, including information technology | 1,552 | | | 2,525 | |
| 5,052 | | | 11,172 | |
Corporate Services: | | | |
Information technology | 1,760 | | | 11 | |
Other, including facility improvements | 390 | | | — | |
| 2,150 | | | 11 | |
| | | |
Total capital expenditures | $ | 7,202 | | | $ | 11,183 | |
|
| | | | | | | |
| Sixteen Weeks Ended |
| January 20, 2019 | | January 21, 2018 |
Jack in the Box: | | | |
Restaurant facility expenditures | $ | 7,346 |
| | $ | 8,554 |
|
New restaurants | 1,301 |
| | 555 |
|
Other, including information technology | 2,525 |
| | 657 |
|
| 11,172 |
| | 9,766 |
|
Corporate Services: | | | |
Information technology | 11 |
| | 1,017 |
|
Other, including facility improvements | — |
| | 10 |
|
| 11 |
| | 1,027 |
|
| | | |
Total capital expenditures | $ | 11,183 |
| | $ | 10,793 |
|
Our capital expenditure program includes, among other things, investments in new equipment, restaurant remodeling, information technology enhancements, and investments in new locations.locations and equipment. Capital expenditures increased $0.4decreased by $4.0 million compared to a year ago primarily resultingdue to lower facility expenditures from a $0.9 million increase in spending related to restaurant remodels and corporate services information technology and a $0.7 million increase in spending related to building new Jack in the Box restaurants,initiatives; partially offset by higher spending on certain corporate technology initiatives in 2020.
Sale leaseback transactions — We use sale and leaseback financing to lower the initial cash investment in our restaurants to the cost of the equipment, whenever possible. In 2020, we completed a $1.2sale leaseback transaction of a multi-tenant commercial property in Los Angeles, California and leased back the parcel on which a company-operated restaurant is located. We received net proceeds on the transaction of $17.4 million decrease in spending relatedduring the quarter.
In 2020, we also completed the sale of one of our corporate office buildings as we move forward with our previously announced consolidation of our corporate facilities We entered into a lease with the buyer to restaurant facility expenditures.leaseback the property up to a period of 18 months with an option of the Company to terminate the lease, without penalty, upon providing a 90-day notice. We expect fiscal 2019 capital expenditures to be approximately $30.0received net proceeds on the sale of $20.6 million to $35.0 million.during the quarter.
Financing Activities. Cash flows used in financing activities decreased $23.2increased by $136.6 million in 2019 compared with a year ago, primarily due to lower net repayments of $24.9 million borrowings under our credit facility and an increase in stock repurchases of $9.4$141.2 million inand lower cash book overdrafts resulting from timing differences on checks issued but not yet endorsed,of $9.2 million, partially offset by an increaselower debt repayments of $14.4 million$13.7 million.
Class A-2 Notes — Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. In general, no principal payments will be required if a specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in cash usedthe Indenture), is less than or equal to repurchase common stock.5.0x. At January 19, 2020, the Company’s actual leverage ratio exceeded 5.0x, and as a result, we will be required to make quarterly principal payments of $3.25 million. The Company anticipates that we will be required to make quarterly principal payments on the Class A-2 Notes for the foreseeable future.
Credit Facility — Our credit facility was amended on March 21, 2018, which extendedThe legal final maturity date of the revolving credit agreementClass A-2 Notes is in August 2049, but it is expected that, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment dates of the Class A-2-I Notes, the Class A-2-II Notes and the term loan maturity datesClass A-2-III Notes will be August 2023, August 2026 and August 2029, respectively (the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to March 19, 2020.the respective anticipated repayment date, additional interest will accrue pursuant to the Indenture. As of January 20, 2019, we had $325.719, 2020, $1,300.0 million of borrowings were outstanding on the Class A-2 Notes.
Variable Funding Notes — The Variable Funding Notes were issued under the term loan, borrowingsIndenture and allow for drawings of up to $150.0 million on a revolving basis and the issuance of letters of credit. Depending on the type of borrowing under the revolving credit agreementVariable Funding Notes, interest on the Variable Funding Notes will be based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate for U.S. Dollars or (iv) the lenders’ commercial paper funding rate plus any applicable margin, as set forth in the Variable Funding Note Purchase Agreement. There is a scaled commitment fee on the unused portion of $727.4the Variable Funding Notes facility of between 50 and 100 basis points. It is anticipated that the principal and interest on the Variable Funding Notes will be repaid in full on or prior to August 2024, subject to two one-year extensions at the option of the Company. Following the anticipated repayment date (and any extensions thereof), additional interest will accrue equal to 5.00% per annum. As of January 19, 2020, $42.1 million andof letters of credit were outstanding of $31.4 million. As ofagainst the
Variable Funding Notes, which relate primarily to interest reserves required under the Indenture. The Variable Funding Notes were undrawn at January 20, 2019, our unused borrowing capacity was $141.2 million.19, 2020.
Covenants and restrictions —The interest rate on our credit facility is based on our leverage ratio and can range from the London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.25% with a 0% floor on LIBOR. The interest rate as of January 20, 2019 was LIBOR plus 2.25%.
WeNotes are subject to a numberseries of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants under our credit facility,relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including limitations on additional borrowings, acquisitions, loansevents tied to franchisees, lease commitments, stock repurchases and dividend payments, and requirementsfailure to maintain stated debt service coverage ratios, the sum of global gross sales for specified restaurants being below certain financial ratios as defined inlevels on certain measurement dates, certain manager termination events, an event of default, and the credit agreement.failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The amendment raised our maximum leverage ratio from 4.0 timesNotes are also subject to 4.5 timescertain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and permits unlimited cash dividendswarranties, failure of security interests to be effective, and share repurchases if pro forma leverage is less than 4.0 times, subject also to pro forma fixed charge covenant compliance.
Wecertain judgments. As of January 19, 2020, we were in compliance with all covenants asof our debt covenant requirements and were not subject to any rapid amortization events.
In accordance with the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders, and are restricted in their use. As of January 20, 2019.19, 2020, the Master Issuer had restricted cash of $18.4 million, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of principal, interest and commitment fees required for the Notes.
Interest Rate Swaps— To reduce our exposure to fluctuating interest rates under our credit facility, we consider interest rate swaps. In June 2015, we entered into forward-starting interest rate swap agreements that effectively converted $500.0 million of our variable rate borrowings to a fixed-rate from October 2018 through October 2022. For additional information, refer to Note 6, Derivative Instruments, of the notes to our condensed consolidated financial statements.
Repurchases of Common Stock— We did not The Company repurchased approximately 1.9 million shares of its common stock in the first quarter of fiscal 2020 at an average price of $81.41 per share for an aggregate cost of $153.5 million. This leaves approximately $122.2 million remaining under share repurchase any common shares during 2019 or 2018. In November 2018, theprograms authorized by its Board of Directors, approved a stock buyback program for up to $60.0 million in sharesconsisting of our common stock, expiring in November 2019. As of January 20, 2019, there was approximately $101.0$22.2 million remaining under Board-authorized stock-buyback programs whichthat expire in November 2019. 2020 and approximately $100.0 million remaining that expire in November 2021.
Repurchases of common stock included in our condensed consolidated statement of cash flows for fiscal 20192020 includes $14.4$2.0 million related to repurchase transactions traded in the prior fiscal year that settled in 2019.2020.
Dividends — During 2019,2020, the Board of Directors declared a quarterly cash dividenddividends of $0.40 per common share totaling $10.3$9.4 million. Future dividends are subject to approval by our Board of Directors.
Off-Balance Sheet Arrangements
We have entered into certain off-balance sheet contractual obligations and commitments in the ordinary course of business, which are recognized in our condensed consolidated financial statements in accordance with U.S. generally accepted accounting principles. There has been no material change in these arrangements as disclosed in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.29, 2019. We are not a party to any other 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.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.29, 2019.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Basis of Presentation, of the notes to condensed consolidated financial statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:
•We face significant competition in the food service industry and our inability to compete may adversely affect our business.
•Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties we receive from franchisees to decline.
•Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
•Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
•Failure to receive scheduled deliveries of high quality food ingredients and other supplies could harm our operations and reputation.
•We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program in the United States. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
•Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
•Negative publicity relating to our business or industry could adversely impact our reputation.
•Our business could be adversely affected by increased labor costscosts.
•Inability to attract, train and retain top-performing personnel could adversely impact our financial results or difficulties in finding and retaining top-performing personnel.business.
•We may not have the same resources as our competitors for marketing, advertising and promotion.
•We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
Our business is subject to seasonal fluctuations.
•We may not achieve our development goals.
•Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
•We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
•Changes to estimates related to our property, fixtures, and equipment or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment charges on certain long-lived assets, which may adversely affect our results of operations.
•Our tax provision may fluctuate due to changes in expected earnings.
•Activities related to our sale of Qdoba, and our refranchising, restructuring, and cost savings initiatives entail various risks and may negatively impact our financial results.
•We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
•If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which would harm our business and the value of the Company’s common shares.
•We may not be able to adequately protect our intellectual property, which could harm the value of our brands and adversely affect our business.
•Jack in the Box may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
•The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
•We adjusthave a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our capital structure from timeCompany or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to timemeet debt payment obligations.
•The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and we may increasethe failure to comply with such restrictions could adversely affect our debt leverage which would make us more sensitive to the effects of economic downturns.business.
•Changes in accounting standards may negatively impact our results of operations.
•We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
•Unionization activities or labor disputes may disrupt our operations and affect our profitability.
•Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
•Our insurance may not provide adequate levels of coverage against claims.
•Our quarterly results and, as a result, the price of our common stock, may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.
•Activities of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
•Governmental regulation may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
•The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
•Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
•Failure to obtain and maintain required licenses and permits or to comply with food control regulations could lead to the loss of our food service licenses and, thereby, harm our business.
Jack in the Box may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates,” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 201829, 2019 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov. Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.29, 2019.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluationManagement, under the oversight of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended January 20, 2019, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13-1-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by the Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective.
not effective due to a material weakness in internal control over financial reporting that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended January 20, 2019, the Company19, 2020, we adopted new guidance for lease accounting. We implemented internal controls to ensure we adequately evaluated our contractsleasing arrangements and properly assessed the impact of the new revenue guidance related to revenue recognition on our financial statements to facilitate the adoptionadoption. Additionally, we implemented new business processes, internal controls, and modified information technology systems to assist in the ongoing application of the new standard on October 1, 2018.guidance. There have been no other changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended January 20, 201919, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Remediation of Material Weakness
As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended September 29, 2019, we began implementing a remediation plan to address the material weakness mentioned above. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part II, except as follows:
ITEM 1. LEGAL PROCEEDINGS
See Note 12, Contingencies and Legal Matters, of the notes to the condensed consolidated financial statements for a discussion of our contingencies and legal matters.
ITEM 1A. RISK FACTORS
The risk factors set forth below contain material changes to the risk factors previously disclosed and included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.29, 2019. When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,29, 2019, which we filed with the SEC on November 21, 2018,2019, as updated in this Item 1A. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018,29, 2019, including our financial statements and the related notes. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occurs, our business and financial results could be harmed. In that case, the market price of our common stock could decline.
JackInability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
We believe that our continued success will depend, in part, on our ability to attract and retain the Box may be subjectservices of skilled personnel, from our senior management to risk associated with disagreements with key stakeholders, such as franchisees.
In addition to its shareholders, Jack in the Box has several key stakeholders, including its independent franchise operators. Third parties such as franchisees are not subject to the controlour restaurant employees. The loss of the Companyservices of, or our inability to attract and may take actions or behave in ways that are adverse to the Company. Because the ultimate interests of franchisees and the Company are largely aligned around maximizing restaurant profits, the Company does not believe that any areas of disagreement between the company and franchisees are likely to create material risk to the Company or its shareholders. Nevertheless, it is possible that conflict and disagreements with these or other critical stakeholdersretain, such personnel could have a material adverse effect on our business. We believe good managers and crew are a key part of our success, and we devote significant resources to recruiting and training our restaurant managers and crew. We aim to reduce turnover among our restaurant crews and managers in an effort to retain top performing employees and better realize our investment in training new employees. Any failure to do so may adversely impact our operating results by increasing training costs and making it more difficult to deliver outstanding customer service, which could have a material adverse effect on our financial results.
On December 11, 2019, we announced that Lenny Comma, our Chief Executive Officer, intends to leave the Company’sCompany and our Board has retained Spencer Stuart to assist us in identifying an individual to succeed Mr. Comma as Chairman and Chief Executive Officer. While our Board is confident in its ability to identify and attract a successor, there can be no assurances of when we will be able to successfully attract and retain a qualified candidate to serve as Chief Executive Officer. Our inability to identify, attract and retain such a qualified candidate could impede the further implementation of our business strategy, which could have a material adverse effect on our business. In addition, we previously announced that other key members of executive management have left and will be leaving the Company in early 2020. The loss of these key executives or any additional members of our executive management team or an inability to effectively plan for and implement a succession plan for key management could negatively impact our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our credit agreement provides for the potential payment of cash dividends and stock repurchases, subject to certain limitations based on our leverage ratio as defined in our credit agreement.
Stock Repurchases— We have notIn the first quarter of 2020 we repurchased any1.9 million shares at an aggregate cost of our common stock in 2019.$153.5 million. As of January 20, 2019,19, 2020, there was approximately $101.0$22.2 million remaining under the Board-authorized stock-buyback programsstock buyback program which expireexpires in November 2019.2020 and approximately $100.0 million which expires in November 2021.
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| | (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares purchased as part of publicly announced programs | | (d) Maximum dollar value that may yet be purchased under these programs |
| | | | | | | | $ | 275,702,860 | |
September 30, 2019 - October 27, 2019 | | 338,792 | | $ | 88.47 | | | 338,792 | | $ | 246,164,247 | |
October 28, 2019 - November 24, 2019 | | 978,035 | | $ | 82.97 | | | 978,035 | | $ | 166,866,944 | |
November 25, 2019 - December 22, 2019 | | 569,373 | | $ | 78.45 | | | 569,373 | | $ | 122,153,031 | |
December 23, 2019 - January 19, 2020 | | — | | $ | — | | | — | | $ | 122,153,031 | |
Total | | 1,886,200 | | | | 1,886,200 | | |
ITEM 3. DEFAULTS UPONOF SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Item 5.03. None.
ITEM 6. EXHIBITS
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| | | | | | | | | | |
Number | Description | Form | Filed with SEC |
10.1.1410.2.11* | | | 10-Q | Filed herewith |
10.2.12* | | | 10-Q | Filed herewith |
10.2.13* | | | 10-Q | Filed herewith |
10.8.17* | |
| 8-K | 10/26/2018 |
10.1.15 | | 8-K | 10/29/2018 |
10.1.16 | | 8-K | 1/4/2019 |
10.8.16 |
| 10-Q | Filed herewith |
31.1 | | | — | Filed herewith |
31.2 | | | — | Filed herewith |
32.1 | | | — | Filed herewith |
32.2 | | | — | Filed herewith |
101.INS | | XBRL Instance Document | | |
101.SCH | | XBRL Taxonomy Extension Schema Document | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | |
*Management contract or compensatory plan | | | |
* Management contract or compensatory plan.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| JACK IN THE BOX INC. | |
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| JACK IN THE BOX INC. |
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| By: | /S/ LANCE TUCKER |
| | Lance Tucker |
| | Executive Vice President and Chief Financial Officer (principal financial officer) (Duly Authorized Signatory)
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Date: February 21, 201920, 2020