| | Refranchisings and franchisee developmentRefranchisings and franchise development — The following is a summary of the number of Jack in the Box restaurants sold to franchisees, the number of restaurants developed by franchisees and the related gains and fees recognized (dollars in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Restaurants sold to franchisees | 37 |
| | 26 |
| | 37 |
| | 114 |
| New restaurants opened by franchisees | 9 |
| | 11 |
| | 29 |
| | 28 |
| | | | | | | | | Initial franchise fees | $ | 1,770 |
| | $ | 1,640 |
| | $ | 2,490 |
| | $ | 5,879 |
| | | | | | | | | Proceeds from the sale of company-operated restaurants (1) | $ | 20,715 |
| | $ | 5,505 |
| | $ | 21,964 |
| | $ | 49,588 |
| Net assets sold (primarily property and equipment) | (5,754 | ) | | (4,520 | ) | | (5,833 | ) | | (19,872 | ) | Goodwill related to the sale of company-operated restaurants | (604 | ) | | (107 | ) | | (652 | ) | | (966 | ) | Other | (279 | ) | | — |
| | (279 | ) | | — |
| Gains on the sale of company-operated restaurants (1) | $ | 14,078 |
| | $ | 878 |
| | $ | 15,200 |
| | $ | 28,750 |
|
____________________________ | | (1) | Amounts in 2012 include additional proceeds and gains of $0.9 million in the quarter and $2.1 million year-to-date recognized upon the extension of the number ofunderlying franchise and lease agreements related to restaurants sold and developed by franchisees and the related gains and fees recognized (dollars in thousands):a prior year. |
Franchise acquisitions — During fiscal 2012 and 2011, we acquired Qdoba franchise restaurants in select markets where we believe there is continued opportunity for restaurant development. We account for the acquisition of franchised restaurants using the purchase method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the sales growth potential of the markets acquired. The following table provides detail of the combined allocations in each period (dollars in thousands): | | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Number of restaurants sold to franchisees | | | 26 | | | | 30 | | | | 114 | | | | 53 | | Number of new restaurants opened by franchisees | | | 11 | | | | 7 | | | | 28 | | | | 19 | | | | | | | | | | | | | | | | | | | Initial franchise fees | | $ | 1,640 | | | $ | 1,562 | | | $ | 5,879 | | | $ | 2,975 | | | | | | | | | | | | | | | | | | | Cash | | $ | 5,505 | | | $ | 7,518 | | | $ | 49,588 | | | $ | 19,093 | | Notes receivable | | | — | | | | — | | | | — | | | | 2,730 | | | | | | | | | | | | | | | Total proceeds from the sale of company-operated restaurants | | | 5,505 | | | | 7,518 | | | | 49,588 | | | | 21,823 | | Net assets sold (primarily property and equipment) | | | (4,520 | ) | | | (4,375 | ) | | | (19,872 | ) | | | (9,012 | ) | Goodwill related to the sale of company-operated restaurants | | | (107 | ) | | | (156 | ) | | | (966 | ) | | | (444 | ) | | | | | | | | | | | | | | Gains on the sale of company-operated restaurants | | $ | 878 | | | $ | 2,987 | | | $ | 28,750 | | | $ | 12,367 | | | | | | | | | | | | | | |
| | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Restaurants acquired from franchisees | 36 |
| | 22 |
| Property and equipment | $ | 9,559 |
| | $ | 3,877 |
| Reacquired franchise rights | 461 |
| | 232 |
| Liabilities assumed | (108 | ) | | (71 | ) | Goodwill | 29,283 |
| | 17,439 |
| Total consideration | $ | 39,195 |
| | $ | 21,477 |
|
| | Franchise acquisitions— During the second quarter, we acquired 20 Qdoba franchise-operated restaurants in the Indianapolis market and two in Northern Florida, consistent with our strategy to opportunistically acquire franchise markets where we believe there is continued opportunity for restaurant development. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The following table provides detail of the allocations (in thousands): |
| | | | | |
Property and equipment | | $ | 3,877 | | Reacquired franchise rights | | | 232 | | Liabilities assumed | | | (71 | ) | Goodwill | | | 17,439 | | | | | | Total | | $ | 21,477 | | | | | |
| | The goodwill recorded relates primarily to the Indianapolis transaction and is largely attributable to the growth potential of the market. |
3. | | FAIR VALUE MEASUREMENTS |
| | Financial assets and liabilities— The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of April 17, 2011 (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements | | | | | | | | Quoted Prices in | | | Significant | | | | | | | | | | | Active Markets | | | Other | | | Significant | | | | | | | | for Identical | | | Observable | | | Unobservable | | | | | | | | Assets | | | Inputs | | | Inputs | | | | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Interest rate swaps (Note 4) (1) | | $ | 457 | | | $ | — | | | $ | 457 | | | $ | — | | Non-qualified deferred compensation plan (2) | | | (37,803 | ) | | | (37,803 | ) | | | — | | | | — | | | | | | | | | | | | | | | Total assets (liabilities) at fair value | | $ | (37,346 | ) | | $ | (37,803 | ) | | $ | 457 | | | $ | — | | | | | | | | | | | | | | |
Financial assets and liabilities — The following table presents the financial assets and liabilities measured at fair value on a recurring basis at the end of each period (in thousands): | | | | | | | | | | | | | | | | | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) (3) | | Significant Other Observable Inputs (Level 2) (3) | | Significant Unobservable Inputs (Level 3) | Fair value measurements as of April 15, 2012: | | | | | | | | Interest rate swaps (Note 4) (1) | $ | (2,604 | ) | | $ | — |
| | $ | (2,604 | ) | | $ | — |
| Non-qualified deferred compensation plan (2) | (38,107 | ) | | (38,107 | ) | | — |
| | — |
| Total liabilities at fair value | $ | (40,711 | ) | | $ | (38,107 | ) | | $ | (2,604 | ) | | $ | — |
| Fair value measurements as of October 2, 2011: | | | | | | | | Interest rate swaps (Note 4) (1) | $ | (2,682 | ) | | $ | — |
| | $ | (2,682 | ) | | $ | — |
| Non-qualified deferred compensation plan (2) | (34,288 | ) | | (34,288 | ) | | — |
| | — |
| Total liabilities at fair value | $ | (36,970 | ) | | $ | (34,288 | ) | | $ | (2,682 | ) | | $ | — |
|
____________________________ | | | (1) | | We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable debt. The fair valuevalues of our interest rate swaps isare based upon Level 2 inputs which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. |
| | (2) | | We maintain an unfunded defined contribution plan for key executives and other members of management excluded from participation in our qualified savings plan. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. |
| | (3) | The fair valuesWe did not have any transfers in or out of each of our long-term debt instruments are based on quoted market values, where available,Level 1 or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our term loan and capital lease obligations approximated their carrying values as of April 17, 2011.Level 2. |
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)The fair values of each of our long-term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our term loan and capital lease obligations approximated their carrying values as of April 15, 2012.
Non-financial assets and liabilities — The Company’s non-financial instruments, which primarily consist of property and equipment, 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 a periodic basis (at least annually for goodwill and semi-annually for property and equipment) 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 of the assets are written down to fair value. In connection with our property and equipment impairment reviews during the 28-weeks ended April 15, 2012, six Jack in the Box restaurants determined to be underperforming or which we intend to close having a carrying amount of $2.1 million were written down to their implied fair value of $0.3 million, resulting in an impairment charge of $1.8 million. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. The future cash flows are generally based on the assumption that the highest and best use of the asset is to sell the store to a franchisee (market participant). These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows, which are not observable from the market, directly or indirectly. Refer to Note 5, Impairment, Disposition of Property and Equipment, and Restaurant Closing Costs, for additional information regarding impairment charges. | | Non-financial assets and liabilities— The Company’s non-financial instruments, which primarily consist of property and equipment, 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 a periodic basis (at least annually for goodwill and semi-annually for property and equipment) 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 of the assets are written down to fair value. In connection with our impairment review during fiscal 2011, no material fair value adjustments were required. Refer to Note 5,Impairment, Disposition of Property and Equipment, and Restaurant Closing Costs,for additional information regarding impairment charges. |
Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis from September 2011 through September 2014.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands): | | | | | | | | | | | | | | April 15, 2012 | | October 2, 2011 | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | Derivatives designated as hedging instruments: | | | | | | | | Interest rate swaps (Note 3) | Accrued liabilities | | $ | (2,604 | ) | | Accrued liabilities | | $ | (2,682 | ) | Total derivatives | | | $ | (2,604 | ) | | | | $ | (2,682 | ) |
Financial performance — The following is a summary of the accumulated other comprehensive income (“OCI”) gain or loss activity related to our interest rate swap derivative instruments (in thousands): | | | | | | | | | | | | | | | | | | | | Location of Loss in Income | | Quarter | | Year-to-Date | | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Gain/(loss) recognized in OCI (Note 9) | N/A | | $ | (214 | ) | | $ | (247 | ) | | $ | (619 | ) | | $ | 1,190 |
| Loss reclassified from accumulated OCI into income (Note 9) | Interest expense, net | | $ | 299 |
| | $ | — |
| | $ | 697 |
| | $ | — |
|
Amounts reclassified from accumulated OCI into interest expense represent payments made to the counterparty for the effective portions of the interest rate swaps. During the periods presented, our interest rate swaps had no hedge ineffectiveness.
| | Objectives and strategies— We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that will effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis beginning September 2011 through September 2014. Previously, we held two interest rate swaps that effectively converted $200.0 million of our variable rate term loan borrowings to a fixed-rate basis from March 2007 to April 2010. These agreements have been designated as cash flow hedges under the terms of the Financial Accounting Standards Board (“FASB”) authoritative guidance for derivatives and hedging. To the extent that they are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the derivatives are not included in net earnings but are included in other comprehensive income (“OCI”). These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on our term debt. |
| | We are also exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. From time to time, we enter into futures and option contracts to manage these fluctuations. These contracts have not been designated as hedging instruments under the FASB authoritative guidance for derivative instruments and hedging. |
| | Financial position— The following derivative instruments were outstanding as of the end of each period(in thousands): |
| | | | | | | | | | | | | | | | | | | April 17, 2011 | | | October 3, 2010 | | | | Balance | | | | | | | Balance | | | | | | | Sheet | | | Fair | | | Sheet | | | Fair | | | | Location | | | Value | | | Location | | | Value | | | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | Interest rate swaps (Note 3) | | Other current assets | | $ | 457 | | | Accrued liabilities | | $ | (733 | ) | | | | | | | | | | | | | | | | Total derivatives | | | | | | $ | 457 | | | | | | | $ | (733 | ) | | | | | | | | | | | | | | | |
| | Financial performance— The following is a summary of the gains or losses recognized on our interest rate swap derivative instruments (Note 9) designated as cash flow hedges(in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | Location of | | | Quarter | | | Year-to-Date | | | | Loss | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | in Income | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Gain/(loss) recognized in OCI | | | N/A | | | $ | (247 | ) | | $ | (2 | ) | | $ | 1,190 | | | $ | (104 | ) | | Gain/(loss) reclassified from accumulated OCI into income | | Interest expense, net | | $ | — | | | $ | (1,871 | ) | | $ | — | | | $ | (4,719 | ) |
| | During 2011 and 2010, our interest rate swaps had no hedge ineffectiveness. |
| | The following is a summary of the gains or losses recognized in income related to our derivative instruments not designated as hedging instruments(in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | Location of | | | Quarter | | | Year-to-Date | | | | Loss | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | in Income | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Natural gas contracts | | Occupancy and other | | $ | — | | | $ | (40 | ) | | $ | — | | | $ | (99 | ) |
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. | | IMPAIRMENT, DISPOSITION OF PROPERTY AND EQUIPMENT, AND RESTAURANT CLOSING COSTS |
Impairment — When events and circumstances indicate that our long-lived assets might be impaired and their carrying amount is greater than the undiscounted cash flows we expect to generate from such assets, we recognize an impairment loss as the amount by which the carrying value exceeds the fair value of the assets. We typically estimate fair value based on the estimated discounted cash flows of the related asset using marketplace participant assumptions. Impairment charges in 2012 primarily represent charges to write down the carrying value of three underperforming Jack in the Box restaurants and three Jack in the Box restaurants we intend to or have closed. Disposition of property and equipment — We also recognize accelerated depreciation and other costs on the disposition of property and equipment. When we decide to dispose of a long-lived asset, depreciable lives are adjusted based on the estimated disposal date, and accelerated depreciation is recorded. Other disposal costs primarily relate to charges from our ongoing re-image and logo program and normal capital maintenance activities. The following impairment and disposal costs are included in impairment and other charges, net in the accompanying condensed consolidated statements of earnings (in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Impairment charges | $ | 910 |
| | $ | 878 |
| | $ | 2,109 |
| | $ | 1,167 |
| Losses on the disposition of property and equipment, net | $ | 1,775 |
| | $ | 2,628 |
| | $ | 2,858 |
| | $ | 5,424 |
|
Restaurant closing costs consist of future lease commitments, net of anticipated sublease rentals and expected ancillary costs, and are included in impairment and other charges, net in the accompanying condensed consolidated statements of earnings. Total accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows (in thousands):
| | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Balance at beginning of period | $ | 21,228 |
| | $ | 23,938 |
| | $ | 21,657 |
| | $ | 25,020 |
| Additions and adjustments | 666 |
| | (21 | ) | | 1,912 |
| | 784 |
| Cash payments | (1,727 | ) | | (1,754 | ) | | (3,402 | ) | | (3,641 | ) | Balance at end of quarter | $ | 20,167 |
| | $ | 22,163 |
| | $ | 20,167 |
| | $ | 22,163 |
|
Additions and adjustments in all periods primarily relate to revisions to certain sublease and cost assumptions.
| | Impairment— When events and circumstances indicate that our long-lived assets might be impaired and their carrying amount is greater than the undiscounted cash flows we expect to generate from such assets, we recognize an impairment loss as the amount by which the carrying value exceeds the fair value of the assets. We typically estimate fair value based on the estimated discounted cash flows of the related asset using marketplace participant assumptions. Impairment charges were not material in any period and primarily relate to certain excess Jack in the Box property and restaurants we have closed or plan to close. Additionally, these charges include the write-down of one underperforming Jack in the Box restaurant in the first quarter of 2010. |
| | Disposition of property and equipment— We also recognize accelerated depreciation and other costs on the disposition of property and equipment. When we decide to dispose of a long-lived asset, depreciable lives are adjusted based on the estimated disposal date, and accelerated depreciation is recorded. Other disposal costs primarily relate to charges from our ongoing re-image program and normal capital maintenance activities. |
| | The following impairment and disposal costs are included in impairment and other charges, net in the accompanying condensed consolidated statements of earnings (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Impairment charges | | $ | 878 | | | $ | 895 | | | $ | 1,167 | | | $ | 1,503 | | Losses on the disposition of property and equipment, net | | $ | 2,628 | | | $ | 1,178 | | | $ | 5,424 | | | $ | 2,360 | |
| | Restaurant closing costsconsist of future lease commitments, net of anticipated sublease rentals and expected ancillary costs, and are included in impairment and other charges, net. Total accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Balance at beginning of period | | $ | 23,938 | | | $ | 4,358 | | | $ | 25,020 | | | $ | 4,234 | | Additions and adjustments | | | (21 | ) | | | 1,204 | | | | 784 | | | | 1,624 | | Cash payments | | | (1,754 | ) | | | (332 | ) | | | (3,641 | ) | | | (628 | ) | | | | | | | | | | | | | | Balance at end of period | | $ | 22,163 | | | $ | 5,230 | | | $ | 22,163 | | | $ | 5,230 | | | | | | | | | | | | | | |
| | Additions and adjustments primarily relate to revisions to sublease and cost assumptions and, in 2010, the closure of two Jack in the Box restaurants in the quarter and three year-to-date. |
The income tax provisions reflect year-to-date effective tax rates of 34.2% in 2012 and 34.8% in 2011. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2012 rate could differ from our current estimates. At April 15, 2012, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.9 million, which if recognized would favorably impact the effective income tax rate. The gross unrecognized tax benefits increased by $0.3 million from the end of fiscal year 2011 based on a preliminary assessment of a state income tax audit. It is reasonably possible that changes to the gross unrecognized tax benefits will be required within the next twelve months due to the possible settlement of state tax audits. The major jurisdictions in which the Company files income tax returns include the United States and states in which we operate that impose an income tax. The federal statutes of limitations have not expired for fiscal years 2008 and forward. The statutes of limitations for California and Texas, which constitute the Company’s major state tax jurisdictions, have not expired for fiscal years 2001 and 2007, respectively, and forward. Generally, the statutes of limitations for the other state jurisdictions have not expired for fiscal years 2008 and forward. | | The income tax provisions reflect year-to-date effective tax rates of 34.8% in 2011 and 36.1% in 2010. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2011 rate could differ from our current estimates. |
| | At April 17, 2011, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.6 million, which if recognized would favorably impact the effective income tax rate. The gross unrecognized tax benefits remain unchanged from the beginning of the fiscal year. It is reasonably possible that changes to the gross unrecognized tax benefits will be required within the next twelve months. These changes relate to the possible settlement of state tax audits. |
| | The major jurisdictions in which the Company files income tax returns include the United States and states in which we operate that impose an income tax. The federal statutes of limitations have not expired for tax years 2006 and forward. The statutes of limitations for California and Texas, which constitute the Company’s major state tax jurisdictions, have not expired for tax years 2000 and 2006, respectively, and forward. Generally, the statutes of limitations for the other state jurisdictions have not expired for tax years 2006 and forward. |
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Defined benefit pension plans — We sponsor a defined benefit pension plan covering substantially all full-time employees which will no longer accrue benefits effective December 31, 2015, and was closed to new participants effective January 1, 2011. We also sponsor an unfunded supplemental executive retirement plan which provides certain employees additional pension benefits and which was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment. Postretirement healthcare plans — We sponsor healthcare plans that provide postretirement medical benefits to certain employees who meet minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. Net periodic benefit cost — The components of net periodic benefit cost were as follows in each period (in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Defined benefit pension plans: | | | | | | | | Service cost | $ | 2,175 |
| | $ | 2,490 |
| | $ | 5,075 |
| | $ | 5,809 |
| Interest cost | 5,225 |
| | 4,980 |
| | 12,191 |
| | 11,620 |
| Expected return on plan assets | (4,612 | ) | | (4,784 | ) | | (10,761 | ) | | (11,163 | ) | Actuarial loss | 2,864 |
| | 2,266 |
| | 6,683 |
| | 5,289 |
| Amortization of unrecognized prior service cost | 100 |
| | 113 |
| | 233 |
| | 263 |
| Net periodic benefit cost | $ | 5,752 |
| | $ | 5,065 |
| | $ | 13,421 |
| | $ | 11,818 |
| Postretirement healthcare plans: | | | | | | | | Service cost | $ | 14 |
| | $ | 18 |
| | $ | 33 |
| | $ | 42 |
| Interest cost | 373 |
| | 366 |
| | 870 |
| | 854 |
| Actuarial loss | 21 |
| | 47 |
| | 48 |
| | 109 |
| Amortization of unrecognized prior service cost | — |
| | 7 |
| | — |
| | 17 |
| Net periodic benefit cost | $ | 408 |
| | $ | 438 |
| | $ | 951 |
| | $ | 1,022 |
|
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of the date of our last actuarial funding valuation, there was no minimum requirement. Details regarding 2012 contributions are as follows (in thousands): | | | | | | | | | | Defined Benefit Pension Plans | | Postretirement Healthcare Plans | Net year-to-date contributions | $ | 6,626 |
| | $ | 801 |
| Remaining estimated net contributions during fiscal 2012 | $ | 6,800 |
| | $ | 600 |
|
We will continue to evaluate contributions to our funded defined benefit pension plan based on changes in pension assets as a result of asset performance in the current market and economic environment. | | 8. | SHARE-BASED COMPENSATION |
We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors to work toward the financial success of the Company. In fiscal 2012, we granted the following share-based compensation awards in connection with our annual award grants in November: | | | | | Defined benefit pension plans— We sponsor a defined benefit pension plan covering substantially all full-time employees. In September 2010, the Board of Directors approved changes to this plan whereby participants will no longer accrue benefits effective December 31, 2015, and the plan was closed to new participants effective January 1, 2011. This change was accounted for as a plan “curtailment” in accordance with the authoritative guidance issued by the FASB. We also sponsor an unfunded supplemental executive retirement plan which provides certain employees additional pension benefits and which was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.Shares | Stock options | 485,057 |
| Performance-vested stock awards | 234,258 |
| Nonvested stock units | 83,552 |
|
The components of share-based compensation expense recognized in each period are as follows (in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Stock options | $ | 785 |
| | $ | 1,174 |
| | $ | 1,975 |
| | $ | 2,686 |
| Performance-vested stock awards | 172 |
| | 471 |
| | 502 |
| | 1,209 |
| Nonvested stock awards | 135 |
| | 140 |
| | 315 |
| | 326 |
| Nonvested stock units | 293 |
| | 348 |
| | 615 |
| | 578 |
| Deferred compensation for non-mangement directors | 155 |
| | 173 |
| | 155 |
| | 173 |
| Total share-based compensation expense | $ | 1,540 |
| | $ | 2,306 |
| | $ | 3,562 |
| | $ | 4,972 |
|
9. STOCKHOLDERS’ EQUITY Repurchases of common stock— In May 2011, the Board of Directors approved a program to repurchase up to $100.0 million in shares of our common stock expiring November 2012. During the first quarter, we repurchased approximately 0.3 million shares at an aggregate cost of $6.4 million, completing the May 2011 authorization. In November 2011, the Board of Directors approved a new program to repurchase $100.0 million in shares of our common stock expiring November 2013. As of the end of the second quarter, $100.0 million remains available under this authorization.
Comprehensive income— Our total comprehensive income, net of taxes, was as follows (in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Net earnings | $ | 21,632 |
| | $ | 6,802 |
| | $ | 33,582 |
| | $ | 39,203 |
| Cash flow hedges: | | | | | | | | Net change in fair value of derivatives | (214 | ) | | (247 | ) | | (619 | ) | | 1,190 |
| Net loss reclassified to earnings | 299 |
| | — |
| | 697 |
| | — |
| Total | 85 |
| | (247 | ) | | 78 |
| | 1,190 |
| Tax effect | (33 | ) | | 95 |
| | (31 | ) | | (454 | ) | | 52 |
| | (152 | ) | | 47 |
| | 736 |
| Unrecognized periodic benefit costs: | | | | | | | | Actuarial losses and prior service cost reclassified to earnings | 2,985 |
| | 2,433 |
| | 6,964 |
| | 5,678 |
| Tax effect | (1,146 | ) | | (929 | ) | | (2,673 | ) | | (2,168 | ) | | 1,839 |
| | 1,504 |
| | 4,291 |
| | 3,510 |
| Total comprehensive income | $ | 23,523 |
| | $ | 8,154 |
| | $ | 37,920 |
| | $ | 43,449 |
|
Accumulated other comprehensive loss — The components of accumulated other comprehensive loss, net of taxes, were as follows at the end of each period (in thousands): | | | | | | | | | | April 15, 2012 | | October 2, 2011 | Unrecognized periodic benefit costs, net of tax benefits of $56,070 and $58,743, respectively | $ | (89,997 | ) | | $ | (94,288 | ) | Net unrealized losses related to cash flow hedges, net of tax benefits of $999 and $1,030, respectively | (1,605 | ) | | (1,652 | ) | Accumulated other comprehensive loss, net | $ | (91,602 | ) | | $ | (95,940 | ) |
| | Postretirement healthcare plans— We sponsor healthcare plans that provide postretirement medical benefits to certain employees who meet minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. |
| | Net periodic benefit cost— The components of net periodic benefit cost were as follows in each period (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Defined benefit pension plans: | | | | | | | | | | | | | | | | | Service cost | | $ | 2,490 | | | $ | 2,897 | | | $ | 5,809 | | | $ | 6,760 | | Interest cost | | | 4,980 | | | | 4,778 | | | | 11,620 | | | | 11,150 | | Expected return on plan assets | | | (4,784 | ) | | | (4,087 | ) | | | (11,163 | ) | | | (9,538 | ) | Actuarial loss | | | 2,266 | | | | 2,575 | | | | 5,289 | | | | 6,008 | | Amortization of unrecognized prior service cost | | | 113 | | | | 136 | | | | 263 | | | | 317 | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 5,065 | | | $ | 6,299 | | | $ | 11,818 | | | $ | 14,697 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Postretirement healthcare plans: | | | | | | | | | | | | | | | | | Service cost | | $ | 18 | | | $ | 24 | | | $ | 42 | | | $ | 57 | | Interest cost | | | 366 | | | | 331 | | | | 854 | | | | 773 | | Actuarial loss | | | 47 | | | | 43 | | | | 109 | | | | 100 | | Amortization of unrecognized prior service cost | | | 7 | | | | 15 | | | | 17 | | | | 34 | | | | | | | | | | | | | | | Net periodic benefit cost | | $ | 438 | | | $ | 413 | | | $ | 1,022 | | | $ | 964 | | | | | | | | | | | | | | |
| | Future cash flows— Our policy is to fund our plans at or above the minimum required by law. Details regarding 2011 contributions are as follows (in thousands): |
| | | | | | | | | | | Defined Benefit | | | Postretirement | | | | Pension Plans | | | Healthcare Plans | | | Net year-to-date contributions | | $ | 1,560 | | | $ | 912 | | Remaining estimated net contributions during fiscal 2011 | | $ | 1,400 | | | $ | 300 | |
| | We will continue to evaluate contributions to our defined benefit pension plans based on changes in pension assets as a result of asset performance in the current market and economic environment. |
10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. | | SHARE-BASED EMPLOYEE COMPENSATION |
| | We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors to work toward the financial success of the Company. In fiscal 2011, we granted share-based compensation awards in each period as follows: |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | | | | | Weighted- | | | | | | | Weighted- | | | | | | | | Average | | | | | | | Average | | | | | | | | Grant Date | | | | | | | Grant Date | | | | Shares | | | Fair Value | | | Shares | | | Fair Value | | | Stock options | | | — | | | $ | — | | | | 444,890 | | | $ | 8.25 | | Performance-vested stock awards | | | — | | | $ | — | | | | 220,343 | | | $ | 21.74 | | Nonvested stock units | | | 7,622 | | | $ | 24.02 | | | | 68,784 | | | $ | 20.49 | |
| | The components of share-based compensation expense recognized in each period are as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Stock options | | $ | 1,174 | | | $ | 1,667 | | | $ | 2,686 | | | $ | 3,743 | | Performance-vested stock awards | | | 471 | | | | 341 | | | | 1,209 | | | | 712 | | Nonvested stock awards | | | 140 | | | | 440 | | | | 326 | | | | 643 | | Nonvested stock units | | | 348 | | | | 59 | | | | 578 | | | | 123 | | Deferred compensation for non-management directors | | | 173 | | | | 188 | | | | 173 | | | | 279 | | | | | | | | | | | | | | | Total share-based compensation expense | | $ | 2,306 | | | $ | 2,695 | | | $ | 4,972 | | | $ | 5,500 | | | | | | | | | | | | | | |
| | Preferred stock—We have 15,000,000 shares of preferred stock authorized for issuance at a par value of $0.01 per share. No preferred shares have been issued. |
| | Repurchases of common stock—In November 2010, the Board of Directors approved a program to repurchase up to $100.0 million in shares of our common stock expiring November 2011. During 2011, we repurchased approximately 3.5 million shares at an aggregate cost of $75.0 million. As of April 17, 2011, the aggregate remaining amount authorized for repurchase was $25.0 million. In May 2011, the Board of Directors authorized a new program to repurchase up to $100.0 million in shares of our common stock expiring November 2012. |
| | Comprehensive income—Our total comprehensive income, net of taxes, was as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Net earnings | | $ | 6,802 | | | $ | 17,680 | | | $ | 39,203 | | | $ | 41,928 | | Cash flow hedges: | | | | | | | | | | | | | | | | | Net change in fair value of derivatives | | | (247 | ) | | | (2 | ) | | | 1,190 | | | | (104 | ) | Net loss reclassified to earnings | | | — | | | | 1,871 | | | | — | | | | 4,719 | | | | | | | | | | | | | | | Total | | | (247 | ) | | | 1,869 | | | | 1,190 | | | | 4,615 | | Tax effect | | | 95 | | | | (713 | ) | | | (454 | ) | | | (1,761 | ) | | | | | | | | | | | | | | | | | (152 | ) | | | 1,156 | | | | 736 | | | | 2,854 | | Unrecognized periodic benefit costs: | | | | | | | | | | | | | | | | | Actuarial losses and prior service cost reclassified to earnings | | | 2,433 | | | | 2,769 | | | | 5,678 | | | | 6,459 | | Tax effect | | | (929 | ) | | | (1,056 | ) | | | (2,168 | ) | | | (2,465 | ) | | | | | | | | | | | | | | | | | 1,504 | | | | 1,713 | | | | 3,510 | | | | 3,994 | | | | | | | | | | | | | | | Total comprehensive income | | $ | 8,154 | | | $ | 20,549 | | | $ | 43,449 | | | $ | 48,776 | | | | | | | | | | | | | | |
11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | The components of accumulated other comprehensive loss, net of taxes, were as follows at the end of each period (in thousands): |
| | | | | | | | | | | April 17, | | | October 3, | | | | 2011 | | | 2010 | | | Unrecognized periodic benefit costs, net of tax benefits of $46,211 and $48,379, respectively | | $ | (74,824 | ) | | $ | (78,334 | ) | Net unrealized gains (losses) related to cash flow hedges, net of tax benefit (expense) of ($174) and $280, respectively | | | 283 | | | | (453 | ) | | | | | | | | Accumulated other comprehensive loss, net | | $ | (74,541 | ) | | $ | (78,787 | ) | | | | | | | |
10. | | AVERAGE SHARES OUTSTANDING |
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our employee stock purchase plan. Performance-vested stock awards are included in the weighted-average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands): | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Weighted-average shares outstanding – basic | 43,937 |
| | 50,183 |
| | 43,896 |
| | 51,265 |
| Effect of potentially dilutive securities: | | | | | | | | Stock options | 470 |
| | 456 |
| | 403 |
| | 460 |
| Nonvested stock awards and units | 264 |
| | 214 |
| | 261 |
| | 210 |
| Performance-vested stock awards | 240 |
| | 131 |
| | 215 |
| | 134 |
| Weighted-average shares outstanding – diluted | 44,911 |
| | 50,984 |
| | 44,775 |
| | 52,069 |
| Excluded from diluted weighted-average shares outstanding: | | | | | | | | Antidilutive | 3,092 |
| | 3,054 |
| | 2,975 |
| | 2,968 |
| Performance conditions not satisfied at the end of the period | 351 |
| | 366 |
| | 351 |
| | 366 |
|
| | Our basic earnings per share calculations are computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculations are computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our employee stock purchase plan. Performance-vested stock awards are included in the weighted-average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods. |
| | The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | | April 17, | | April 11, | | April 17, | | April 11, | | | 2011 | | 2010 | | 2011 | | 2010 | | Weighted-average shares outstanding — basic | | | 50,183 | | | | 54,972 | | | | 51,265 | | | | 55,711 | | Effect of potentially dilutive securities: | | | | | | | | | | | | | | | | | Stock options | | | 456 | | | | 569 | | | | 460 | | | | 532 | | Nonvested stock awards and units | | | 214 | | | | 178 | | | | 210 | | | | 177 | | Performance-vested stock awards | | | 131 | | | | 78 | | | | 134 | | | | 79 | | | | | | | | | | | | | | | | | | | Weighted-average shares outstanding — diluted | | | 50,984 | | | | 55,797 | | | | 52,069 | | | | 56,499 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Excluded from diluted weighted-average shares outstanding: | | | | | | | | | | | | | | | | | Antidilutive | | | 3,054 | | | | 3,225 | | | | 2,968 | | | | 3,102 | | Performance conditions not satisfied at the end of the period | | | 366 | | | | 244 | | | | 366 | | | | 244 | |
11. | | VARIABLE INTEREST ENTITIES (“VIEs”) |
We formed Jack in the Box Franchise Finance, LLC (“FFE”) for the purpose of operating a franchisee lending program
which may provide up to $100.0 million to assist Jack in the Box franchisees in re-imaging their restaurants. We are the sole equity investor in FFE. The $100.0 million lending program is comprised of a $20.0 million commitment from the Company in the form of a capital note and an $80.0 million Senior Secured Revolving Securitization Facility (“FFE Facility”) entered into with a third party. The FFE Facility is a revolving loan and security agreement bearing a variable interest rate. The revolving period has been extended and is set to expire in June 2012. We may make additional contributions to FFE and FFE may incur additional borrowings under its credit facility during the extended lending period. | | In January 2011, we formed an entity, Jack in the Box Franchise Finance, LLC (“FFE”), for the purpose of operating a franchisee lending program which will provide up to $100.0 million to assist franchisees in reimaging their restaurants. We are the sole equity investor in FFE. The $100.0 million lending program is comprised of a $20.0 million commitment from the Company in the form of a capital note and an $80.0 million Senior Secured Revolving Securitization Facility (“FFE Facility”) entered into with a third party. The FFE Facility is a 12-month revolving loan and security agreement bearing a variable interest rate. As of April 17, 2011, we have contributed $8.0 million to FFE, $6.7 million of which has been used to assist franchisees in reimaging their restaurants, and FFE has not borrowed against its third party revolving credit facility. We expect to make additional contributions of $5.0 — $10.0 million to FFE during the remainder of fiscal 2011. | We have determined that FFE is a VIE and that the Company is its primary beneficiary. We considered a variety of factors in identifying the primary beneficiary of FFE including, but not limited to, who holds the power to direct matters that most significantly impact FFE’s economic performance (such as determining the underwriting standards and credit management policies), as well as what party has the obligation to absorb the losses of FFE. Based on these considerations, we have determined that the Company is the primary beneficiary and have reflected the entity in the accompanying condensed consolidated financial statements. | | We have determined that FFE is a variable interest entity (“VIE”) and that the Company is its primary beneficiary. The primary beneficiary of a VIE is an enterprise that has a controlling financial interest in the VIE. Controlling financial interest exists when an enterprise has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. We considered a variety of factors in identifying the primary beneficiary of FFE including, but not limited to, who holds the power to direct matters that most significantly impact FFE’s economic performance (such as determining the underwriting standards and credit management policies), as well as what party has the obligation to absorb the losses of FFE. Based on these considerations, we have determined that the Company is the primary beneficiary and have reflected the entity in the accompanying condensed consolidated financial statements. |
| | FFE’s assets consolidated by the Company represent assets that can be used only to settle obligations of the consolidated VIE. Likewise, FFE’s liabilities consolidated by the Company do not represent additional claims on |
12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | the Company’s general assets; rather they represent claims against the specific assets of FFE. The impact of FFE’s liabilities and net loss were not material to the Company’s condensed consolidated financial statements. The assets of FFE consisted of the following at April 17, 2011 (in thousands): |
| | | | | |
Cash | | $ | 192 | | Other current assets (1) | | | 804 | | Other assets, net (1) | | | 6,808 | | | | | | Total assets | | $ | 7,804 | | | | | |
FFE’s assets consolidated by the Company represent assets that can be used only to settle obligations of the consolidated VIE. Likewise, FFE’s liabilities consolidated by the Company do not represent additional claims on the Company’s general assets; rather they represent claims against the specific assets of FFE. The impacts of FFE’s results were not material to the Company’s condensed consolidated statements of earnings or cash flows. The FFE’s balance sheet consisted of the following at the end of each period (in thousands): | | | | | | | | | | April 15, 2012 | | October 2, 2011 | Cash | $ | 165 |
| | $ | 531 |
| Other current assets (1) | 2,330 |
| | 2,086 |
| Other assets, net (1) | 13,077 |
| | 12,292 |
| Total assets | $ | 15,572 |
| | $ | 14,909 |
| | | | | Current liabilities | $ | 470 |
| | $ | 140 |
| Revolving credit facility | — |
| | 1,160 |
| Other long-term liabilities (2) | 15,608 |
| | 14,046 |
| Retained earnings | (506 | ) | | (437 | ) | Total liabilities and stockholders’ equity | $ | 15,572 |
| | $ | 14,909 |
|
____________________________ | | | (1) | | Consists primarily of amounts due from franchisees and $1.0 millionfranchisees. |
| | (2) | Consists primarily of deferred finance fees includedthe capital note contributions from Jack in other assets, net.the Box which are eliminated in consolidation. |
The Company’s maximum exposure to loss is equal to its outstanding contributions that are expected to range from $15.0-$17.0 million and represents estimated losses that would be incurred should all franchisees default on their loans without any consideration of recovery. To offset the credit risk associated with the Company’s variable interest in FFE, the Company holds a security interest in the assets of FFE subordinate and junior to all other obligations of FFE.
| | The Company’s maximum exposure to loss is equal to its outstanding contributions that are expected to range from $10.0 — $20.0 million and represents estimated losses that would be incurred should all franchisees default on their loans without any consideration of recovery. To offset the credit risk associated with the Company’s variable interest in FFE, the Company holds a security interest in the assets of FFE subordinate and junior to all other obligations of FFE. |
The Company is subject to normal and routine litigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred 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. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates. Although the Company currently believes that the ultimate outcome of these matters will not have a material adverse effect on the results of operations, liquidity or financial position of the Company, it is possible that the results of operations, liquidity or financial position of the Company could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies. | | The Company is subject to normal and routine legal proceedings, including litigation. We have reserves for certain of these legal proceedings; however, the outcomes of such proceedings are subject to inherent uncertainties. Based on current information, including our reserves and insurance coverage, management believes that the ultimate liability from all pending legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s operating results, financial position or liquidity. |
Reflecting the information currently being used in managing the Company as a two-branded restaurant operations business, our segments comprise results related to system restaurant operations for our Jack in the Box and Qdoba brands. This segment reporting structure reflects the Company’s current management structure, internal reporting method and financial information used in deciding how to allocate Company resources. Based upon certain quantitative thresholds, both
operating segments are considered reportable segments. We measure and evaluate our segments based on segment earnings from operations. Summarized financial information concerning our reportable segments is shown in the following tables (in thousands): | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Revenues by segment: | | | | | | | | Jack in the Box restaurant operations segment | $ | 299,418 |
| | $ | 335,318 |
| | $ | 682,076 |
| | $ | 797,649 |
| Qdoba restaurant operations segment | 67,066 |
| | 48,455 |
| | 142,329 |
| | 104,155 |
| Distribution operations | 140,146 |
| | 121,362 |
| | 334,940 |
| | 268,049 |
| Consolidated revenues | $ | 506,630 |
| | $ | 505,135 |
| | $ | 1,159,345 |
| | $ | 1,169,853 |
| Earnings from operations by segment: | | | | | | | | Jack in the Box restaurant operations segment | $ | 33,510 |
| | $ | 12,973 |
| | $ | 55,647 |
| | $ | 67,175 |
| Qdoba restaurant operations segment | 3,869 |
| | 1,795 |
| | 6,043 |
| | 2,884 |
| Distribution operations | — |
| | (527 | ) | | — |
| | (1,182 | ) | FFE operations | (44 | ) | | (172 | ) | | (100 | ) | | (172 | ) | Consolidated earnings from operations | $ | 37,335 |
| | $ | 14,069 |
| | $ | 61,590 |
| | $ | 68,705 |
| Total depreciation expense by segment: | | | | | | | | Jack in the Box restaurant operations segment | $ | 18,035 |
| | $ | 19,005 |
| | $ | 42,328 |
| | $ | 44,667 |
| Qdoba restaurant operations segment | 3,970 |
| | 2,932 |
| | 8,752 |
| | 6,462 |
| Distribution operations | 155 |
| | 160 |
| | 398 |
| | 390 |
| Consolidated depreciation expense | $ | 22,160 |
| | $ | 22,097 |
| | $ | 51,478 |
| | $ | 51,519 |
|
Interest income and expense, income taxes and total assets are not reported for our segments, in accordance with our method of internal reporting. | | | | | | | | | | April 15, 2012 | | October 2, 2011 | Goodwill by segment: | | | | Jack in the Box | $ | 48,529 |
| | $ | 49,181 |
| Qdoba | 85,974 |
| | 56,691 |
| Consolidated goodwill | $ | 134,503 |
| | $ | 105,872 |
|
Refer to Note 2, Summary of Refranchisings, Franchise Development and Acquisitions, for information regarding the segment changes in goodwill during 2012.
| | Reflecting the information currently being used in managing the Company as a two-branded restaurant operations business, our segments comprise results related to system restaurant operations for our Jack in the Box and Qdoba brands. This segment reporting structure reflects the Company’s current management structure, internal reporting method and financial information used in deciding how to allocate Company resources. Based upon certain quantitative thresholds, both operating segments are considered reportable segments. |
| | We measure and evaluate our segments based on segment earnings from operations. Summarized financial information concerning our reportable segments is shown in the following table (in thousands): |
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Revenues by segment: | | | | | | | | | | | | | | | | | Jack in the Box restaurant operations segment | | $ | 335,318 | | | $ | 403,361 | | | $ | 797,649 | | | $ | 934,610 | | Qdoba restaurant operations segment | | | 48,455 | | | | 35,583 | | | | 104,155 | | | | 81,034 | | Distribution operations | | | 121,362 | | | | 90,762 | | | | 268,049 | | | | 195,380 | | | | | | | | | | | | | | | Consolidated revenues | | $ | 505,135 | | | $ | 529,706 | | | $ | 1,169,853 | | | $ | 1,211,024 | | | | | | | | | | | | | | | Earnings from operations by segment: | | | | | | | | | | | | | | | | | Jack in the Box restaurant operations segment | | $ | 12,973 | | | $ | 29,311 | | | $ | 67,175 | | | $ | 71,245 | | Qdoba restaurant operations segment | | | 1,795 | | | | 1,992 | | | | 2,884 | | | | 4,507 | | Distribution operations and other | | | (699 | ) | | | (153 | ) | | | (1,354 | ) | | | (871 | ) | | | | | | | | | | | | | | Consolidated earnings from operations | | $ | 14,069 | | | $ | 31,150 | | | $ | 68,705 | | | $ | 74,881 | | | | | | | | | | | | | | |
| | Interest income and expense, income taxes and total assets are not reported for our segments, in accordance with our method of internal reporting. |
13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14. | | SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION(in thousands) |
| | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Cash paid during the quarter for: | | | | Interest, net of amounts capitalized | $ | 11,089 |
| | $ | 7,068 |
| Income tax payments | $ | 24,125 |
| | $ | 22,601 |
|
| | Additional information related to cash flows is as follows (in thousands): |
| | | | | | | | | | | Year-to-Date | | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | Cash paid during the year for: | | | | | | | | | Interest, net of amounts capitalized | | $ | 7,068 | | | $ | 12,299 | | Income tax payments | | $ | 22,601 | | | $ | 46,305 | |
15. | | SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION(in thousands) |
| | | | | | | | | | | | April 17, | | October 3, | | | | | 2011 | | 2010 | | | | | | | | | April 15, 2012 | | October 2, 2011 | Other assets, net: | | | | | Goodwill | | $ | 101,514 | | $ | 85,041 | | | Company-owned life insurance policies | | 84,137 | | 76,296 | | $ | 83,629 |
| | $ | 75,202 |
| Other | | 108,341 | | 92,794 | | 141,639 |
| | 141,411 |
| | | | | | | $ | 225,268 |
| | $ | 216,613 |
| Accrued liabilities: | | | | | Payroll and related | | $ | 47,662 |
| | $ | 40,438 |
| Sales and property taxes | | 14,120 |
| | 13,963 |
| Advertising | | 18,405 |
| | 21,899 |
| Insurance | | 33,976 |
| | 37,987 |
| Other | | 55,068 |
| | 53,200 |
| | | $ | 293,992 | | $ | 254,131 | | $ | 169,231 |
| | $ | 167,487 |
| Other long-term liabilities: | | | | | Pension | | $ | 144,739 |
| | $ | 144,860 |
| Other | | 148,903 |
| | 145,863 |
| | | | | | | $ | 293,642 |
| | $ | 290,723 |
|
During fiscal 2012, the Company has been engaged in a comprehensive review of its overhead structure, including evaluating opportunities for outsourcing, restructuring of certain functions and workforce reductions. On April 23, 2012, the Company offered a voluntary early retirement program to eligible employees. The impact of the early retirement program on our condensed consolidated financial statements will depend on the number of employees that accept the early retirement offer.
| FUTURE APPLICATION OF | 17. | NEW ACCOUNTING PRINCIPLES |
In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which was issued to update the language used in existing guidance to better align U.S. GAAP and IFRS fair value measurement guidance. This update also requires increased disclosure of quantitative and qualitative information about unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy. Other than requiring additional disclosures, adoption of this new guidance in the second quarter did not have a significant impact on our consolidated financial statements. | | Any accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption. | In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which was issued to enhance comparability between entities that report under U.S. GAAP and IFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption of the new guidance is permitted, and full retrospective application is required.14
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
| | 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 OPERATIONSGENERAL
GENERAL
All comparisons between 20112012 and 20102011 refer to the 12-week12-weeks (“quarter”) and 28-week28-weeks (“year-to-date”) periods ended April 15, 2012 and April 17, 2011 and April 11, 2010,, respectively, unless otherwise indicated. For an understanding of the significant factors that influenced our performance during the quarterly periods ended April 15, 2012 and April 17, 2011 and April 11, 2010,, 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 October 3, 2010.2, 2011. Our MD&A consists of the following sections: | • | | Overview— a general description of our business and fiscal 2011 highlights. | | | • | | Financial reporting— a discussion of changes in presentation. | | | • | | Results of operations— an analysis of our 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 capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity and the impact of inflation. | | | • | | Discussion of critical accounting estimates— a discussion of accounting policies that require critical judgments and estimates. | | | • | | New accounting pronouncements— a discussion of new accounting pronouncements, dates of implementation and 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. |
Overview — a general description of our business and fiscal 2012 highlights. OVERVIEWResults of operations — an analysis of our 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 capital expenditures, share repurchase activity, known trends that may impact liquidity and the impact of inflation. Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates. 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. OVERVIEW As of April 17, 2011,15, 2012, we operated and franchised 2,2202,242 Jack in the Box quick-service restaurants, (“QSR”), primarily in the western and southern United States, and 549605 Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants throughout the United States. Our primary source of revenue is from retail sales at Jack in the Box and Qdoba company-operated restaurants. We also derive revenue from Jack in the Box and Qdoba franchise restaurants, including royalties (based upon a percent of sales), rents, franchise fees and distribution sales of food and packaging commodities. In addition, we recognize gains from the sale of company-operated restaurants to franchisees, which are presented as a reduction of operating costs and expenses, net in the accompanying condensed consolidated statements of earnings. The following summarizes the most significant events occurring in fiscal 20112012 and certain trends compared to a year ago: | • | | Restaurant Sales—Sales at restaurants open more than one year (“same-store sales”) increased (decreased) as follows: |
Restaurant Sales— Sales at restaurants open more than one year (“same-store sales”) increased (decreased) as follows: | | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | | April 17, | | April 11, | | April 17, | | April 11, | | | 2011 | | 2010 | | 2011 | | 2010 | | Jack in the Box: | | | | | | | | | | | | | | | | | Company | | | 0.8 | % | | | (8.6 | %) | | | 1.2 | % | | | (10.1 | %) | Franchise | | | (0.3 | %) | | | (7.3 | %) | | | 0.4 | % | | | (9.4 | %) | System | | | 0.1 | % | | | (8.1 | %) | | | 0.7 | % | | | (9.9 | %) | Qdoba system | | | 6.0 | % | | | 3.1 | % | | | 6.2 | % | | | 0.4 | % |
15
| | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Jack in the Box: | | | | | | | | Company | 5.6 | % | | 0.8 | % | | 5.5 | % | | 1.2 | % | Franchise | 3.6 | % | | (0.3 | )% | | 3.1 | % | | 0.4 | % | System | 4.2 | % | | 0.1 | % | | 3.8 | % | | 0.7 | % | Qdoba: | | | | | | | | Company | 3.8 | % | | 5.1 | % | | 3.7 | % | | 5.5 | % | Franchise | 2.2 | % | | 6.4 | % | | 3.2 | % | | 6.5 | % | System | 3.0 | % | | 6.0 | % | | 3.4 | % | | 6.2 | % |
| • | | Commodity Costs—Pressures from higher commodity costs continue to impact our business. Overall commodity costs at our Jack in the Box restaurants increased approximately 5.0% in the quarter and 3.4% year-to-date compared to a year ago. We expect our overall commodity costs to increase approximately 4.5-5.5% in fiscal 2011. | | | • | | New Unit Development—We continued to grow our brands with the opening of new company-operated and franchise restaurants. Year-to-date, we opened 16 Jack in the Box locations system-wide, including several in our newer markets, and 30 Qdoba locations. | | | • | | Franchising Program—We refranchised 114 Jack in the Box restaurants, while Qdoba and Jack in the Box franchisees opened a total of 28 restaurants year-to-date. We are ahead of our timeline to increase franchise ownership to 70-80% of the Jack in the Box system, and we were approximately 62%Commodity Costs— Commodity costs increased approximately 1.8% and 6.7%, at our Jack in the Box and Qdoba restaurants, respectively, in the quarter and 4.7% and 10.2%, respectively, year-to-date compared to a year ago. We expect our overall commodity costs to increase approximately 3%-4% in fiscal 2012.
New Unit Development— We continued to grow our brands with the opening of new company-operated and franchise-operated restaurants. Year-to-date, we opened 23 Jack in the Box locations and 23 Qdoba locations system-wide. Franchising Program— Qdoba and Jack in the Box franchisees opened a total of 29 restaurants year-to-date. Our Jack in the Box system was approximately 73% franchised at the end of the second quarter. | | | • | | Share Repurchases—Pursuant to a share repurchase program authorized by our Board of Directors, we repurchased approximately 3.5 million shares of our common stock at an average price of $21.58 per share year-to-date, including the cost of brokerage fees. | | | • | | Franchise Financing Entity—We formed an entity, Jack in the Box Franchise Finance, LLC, for the purpose of operating a franchisee lending program used primarily to assist franchisees in reimaging their restaurants. During the quarter, FFE provided $6.7 million to franchisees. The impact of this entity on the Company’s condensed consolidated financial statements as of and for the period ended April 17, 2011 was not material. |
FINANCIAL REPORTING
At the end of fiscal 2010,the second quarter and we separated impairment and other charges, net from selling, general and administrative expenses in our consolidated statementsplan to further increase franchise ownership to approximately 80% over the next couple of earnings. Prior year amounts have been reclassified to conform to this new presentation.years.
RESULTS OF OPERATIONS The following 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. | | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | | April 17, | | April 11, | | April 17, | | April 11, | | | 2011 | | 2010 | | 2011 | | 2010 | | Statement of Earnings Data: | | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | | | Company restaurant sales | | | 63.6 | % | | | 73.3 | % | | | 64.8 | % | | | 74.4 | % | Distribution sales | | | 24.0 | % | | | 17.1 | % | | | 22.9 | % | | | 16.1 | % | Franchise revenues | | | 12.4 | % | | | 9.6 | % | | | 12.3 | % | | | 9.5 | % | | | | | | | | | | | | | | | | | | | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating costs and expenses, net: | | | | | | | | | | | | | | | | | Company restaurant costs: | | | | | | | | | | | | | | | | | Food and packaging (1) | | | 33.4 | % | | | 31.5 | % | | | 32.9 | % | | | 31.6 | % | Payroll and employee benefits (1) | | | 30.5 | % | | | 30.2 | % | | | 30.7 | % | | | 30.4 | % | Occupancy and other (1) | | | 23.8 | % | | | 23.1 | % | | | 24.0 | % | | | 23.3 | % | | | | | | | | | | | | | | | | | | Total company restaurant costs (1) | | | 87.7 | % | | | 84.8 | % | | | 87.5 | % | | | 85.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Distribution costs (1) | | | 100.4 | % | | | 100.2 | % | | | 100.4 | % | | | 100.5 | % | Franchise costs (1) | | | 50.1 | % | | | 45.6 | % | | | 48.5 | % | | | 45.6 | % | Selling, general and administrative expenses | | | 10.4 | % | | | 10.3 | % | | | 10.2 | % | | | 10.4 | % | Impairment and other charges, net | | | 0.9 | % | | | 0.7 | % | | | 0.7 | % | | | 0.5 | % | Gains on the sale of company-operated restaurants | | | (0.2 | %) | | | (0.6 | %) | | | (2.5 | %) | | | (1.0 | %) | Earnings from operations | | | 2.8 | % | | | 5.9 | % | | | 5.9 | % | | | 6.2 | % | Income tax rate (2) | | | 32.8 | % | | | 35.2 | % | | | 34.8 | % | | | 36.1 | % |
CONSOLIDATED STATEMENTS OF EARNINGS DATA | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Revenues: | | | | | | | | Company restaurant sales | 57.4 | % | | 63.6 | % | | 56.5 | % | | 64.8 | % | Distribution sales | 27.7 | % | | 24.0 | % | | 28.9 | % | | 22.9 | % | Franchise revenues | 14.9 | % | | 12.4 | % | | 14.6 | % | | 12.3 | % | Total revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Operating costs and expenses, net: | | | | | | | | Company restaurant costs: | | | | | | | | Food and packaging (1) | 32.6 | % | | 33.4 | % | | 33.1 | % | | 32.9 | % | Payroll and employee benefits (1) | 29.3 | % | | 30.5 | % | | 29.5 | % | | 30.7 | % | Occupancy and other (1) | 22.5 | % | | 23.8 | % | | 23.0 | % | | 24.0 | % | Total company restaurant costs (1) | 84.5 | % | | 87.7 | % | | 85.6 | % | | 87.5 | % | Distribution costs (1) | 100.0 | % | | 100.4 | % | | 100.0 | % | | 100.4 | % | Franchise costs (1) | 50.2 | % | | 50.1 | % | | 51.8 | % | | 48.5 | % | Selling, general and administrative expenses | 10.8 | % | | 10.4 | % | | 10.4 | % | | 10.2 | % | Impairment and other charges, net | 1.0 | % | | 0.9 | % | | 0.8 | % | | 0.7 | % | Gains on the sale of company-operated restaurants | (2.8 | )% | | (0.2 | )% | | (1.3 | )% | | (2.5 | )% | Earnings from operations | 7.4 | % | | 2.8 | % | | 5.3 | % | | 5.9 | % | Income tax rate (2) | 34.1 | % | | 32.8 | % | | 34.2 | % | | 34.8 | % |
____________________________ | | | (1) | | As a percentage of the related sales and/or revenues. |
| | (2) | | As a percentage of earnings before income taxes. |
16
The following table presents Jack in the Box and Qdoba company restaurant sales, costs and costs as a percentage of the related sales. Percentages may not add due to rounding.
SUPPLEMENTAL COMPANY-OPERATED RESTAURANTS STATEMENTS OF EARNINGS DATA (dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Jack in the Box: | | | | | | | | | | | | | | | | Company restaurant sales | $ | 227,828 |
| | | | $ | 276,981 |
| | | | $ | 522,181 |
| | | | $ | 664,056 |
| | | Company restaurant costs: | | | | | | | | | | | | | | | | Food and packaging | 76,508 |
| | 33.6 | % | | 94,493 |
| | 34.1 | % | | 178,098 |
| | 34.1 | % | | 222,303 |
| | 33.5 | % | Payroll and employee benefits | 67,819 |
| | 29.8 | % | | 85,309 |
| | 30.8 | % | | 155,389 |
| | 29.8 | % | | 205,397 |
| | 30.9 | % | Occupancy and other | 48,209 |
| | 21.2 | % | | 63,205 |
| | 22.8 | % | | 112,499 |
| | 21.5 | % | | 152,935 |
| | 23.0 | % | Total company restaurant costs | $ | 192,536 |
| | 84.5 | % | | $ | 243,007 |
| | 87.7 | % | | $ | 445,986 |
| | 85.4 | % | | $ | 580,635 |
| | 87.4 | % | Qdoba: | | | | | | | | | | | | | | | | Company restaurant sales | $ | 62,975 |
| | | | $ | 44,261 |
| | | | $ | 132,724 |
| | | | $ | 94,096 |
| | | Company restaurant costs: | | | | | | | | | | | | | | | | Food and packaging | 18,402 |
| | 29.2 | % | | 12,782 |
| | 28.9 | % | | 38,919 |
| | 29.3 | % | | 26,827 |
| | 28.5 | % | Payroll and employee benefits | 17,438 |
| | 27.7 | % | | 12,689 |
| | 28.7 | % | | 37,680 |
| | 28.4 | % | | 27,117 |
| | 28.8 | % | Occupancy and other | 17,284 |
| | 27.4 | % | | 13,188 |
| | 29.8 | % | | 37,936 |
| | 28.6 | % | | 28,867 |
| | 30.7 | % | Total company restaurant costs | $ | 53,124 |
| | 84.4 | % | | $ | 38,659 |
| | 87.3 | % | | $ | 114,535 |
| | 86.3 | % | | $ | 82,811 |
| | 88.0 | % |
The following table summarizes the year-to-date changes in the number of Jack in the Box and Qdoba company-operatedcompany and franchise restaurants: | | | | | | | | | | | | | | | | | | | | | | | | | | | April 17, 2011 | | April 11, 2010 | | | Company | | Franchise | | Total | | Company | | Franchise | | Total | | Jack in the Box: | | | | | | | | | | | | | | | | | | | | | | | | | Beginning of period | | | 956 | | | | 1,250 | | | | 2,206 | | | | 1,190 | | | | 1,022 | | | | 2,212 | | New | | | 7 | | | | 9 | | | | 16 | | | | 16 | | | | 12 | | | | 28 | | Refranchised | | | (114 | ) | | | 114 | | | | — | | | | (53 | ) | | | 53 | | | | — | | Acquired from franchisees | | | — | | | | — | | | | — | | | | 1 | | | | (1 | ) | | | — | | Closed | | | (1 | ) | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | (6 | ) | | | (7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | End of period | | | 848 | | | | 1,372 | | | | 2,220 | | | | 1,153 | | | | 1,080 | | | | 2,233 | | | | | | | | | | | | | | | | | | | | | | | | | | | % of system | | | 38 | % | | | 62 | % | | | 100 | % | | | 52 | % | | | 48 | % | | | 100 | % | Qdoba: | | | | | | | | | | | | | | | | | | | | | | | | | Beginning of period | | | 188 | | | | 337 | | | | 525 | | | | 157 | | | | 353 | | | | 510 | | New | | | 11 | | | | 19 | | | | 30 | | | | 3 | | | | 7 | | | | 10 | | Acquired from franchisees | | | 22 | | | | (22 | ) | | | — | | | | — | | | | — | | | | — | | Closed | | | — | | | | (6 | ) | | | (6 | ) | | | — | | | | (15 | ) | | | (15 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | End of period | | | 221 | | | | 328 | | | | 549 | | | | 160 | | | | 345 | | | | 505 | | | | | | | | | | | | | | | | | | | | | | | | | | | % of system | | | 40 | % | | | 60 | % | | | 100 | % | | | 32 | % | | | 68 | % | | | 100 | % | Consolidated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total system | | | 1,069 | | | | 1,700 | | | | 2,769 | | | | 1,313 | | | | 1,425 | | | | 2,738 | | | | | | | | | | | | | | | | | | | | | | | | | | | % of system | | | 39 | % | | | 61 | % | | | 100 | % | | | 48 | % | | | 52 | % | | | 100 | % |
Revenues | | | | | | | | | | | | | | | | | | | | April 15, 2012 | | April 17, 2011 | | Company | | Franchise | | Total | | Company | | Franchise | | Total | Jack in the Box: | | | | | | | | | | | | Beginning of year | 629 |
| | 1,592 |
| | 2,221 |
| | 956 |
| | 1,250 |
| | 2,206 |
| New | 9 |
| | 14 |
| | 23 |
| | 7 |
| | 9 |
| | 16 |
| Refranchised | (37 | ) | | 37 |
| | — |
| | (114 | ) | | 114 |
| | — |
| Closed | — |
| | (2 | ) | | (2 | ) | | (1 | ) | | (1 | ) | | (2 | ) | End of period | 601 |
| | 1,641 |
| | 2,242 |
| | 848 |
| | 1,372 |
| | 2,220 |
| % of system | 27 | % | | 73 | % | | 100 | % | | 38 | % | | 62 | % | | 100 | % | Qdoba: | | | | | | | | | | | | Beginning of year | 245 |
| | 338 |
| | 583 |
| | 188 |
| | 337 |
| | 525 |
| New | 8 |
| | 15 |
| | 23 |
| | 11 |
| | 19 |
| | 30 |
| Acquired from franchisees | 36 |
| | (36 | ) | | — |
| | 22 |
| | (22 | ) | | — |
| Closed | — |
| | (1 | ) | | (1 | ) | | — |
| | (6 | ) | | (6 | ) | End of period | 289 |
| | 316 |
| | 605 |
| | 221 |
| | 328 |
| | 549 |
| % of system | 48 | % | | 52 | % | | 100 | % | | 40 | % | | 60 | % | | 100 | % | Consolidated: | | | | | | | | | | | | Total system | 890 |
| | 1,957 |
| | 2,847 |
| | 1,069 |
| | 1,700 |
| | 2,769 |
| % of system | 31 | % | | 69 | % | | 100 | % | | 39 | % | | 61 | % | | 100 | % |
Revenues As we continue to execute our refranchising strategy, which includes the sale of restaurants to franchisees, we expect the number of Jack in the Box company-operated restaurants and the related sales to continually decrease while revenues from franchise restaurants increase. As such, company restaurant sales decreased $67.1$30.4 million, or 17.3%9.5%, in the quarter and $142.2$103.2 million, or 15.8%13.6%, year-to-date, reflecting the declineyear-to-date. This decrease is due primarily to a decrease in the average number of Jack in the Box company-operated restaurants. This decrease wasrestaurants, partially offset by increases in same-store sales at Jack in the Box and Qdoba restaurants and an increase in the number of Qdoba company-operated restaurants and increases in per-store average sales (“PSA”) at our Jack in the Box and Qdoba company-operated restaurants.
The following table represents the approximate impact of these increases (decreases) on company restaurant sales(in thousands)thousands): | | | | | | | | | | | Quarter | | | Year-to-Date | | Reduction in the average number of Jack in the Box company-operated restaurants | | $ | (101,100 | ) | | $ | (209,000 | ) | Jack in the Box per-store average (“PSA”) sales increase | | | 21,200 | | | | 44,400 | | Qdoba | | | 12,800 | | | | 22,400 | | | | | | | | | Total decrease in restaurant sales | | $ | (67,100 | ) | | $ | (142,200 | ) | | | | | | | |
| | | | | | | | | | Quarter | | Year-to-Date | Reduction in the average number of Jack in the Box restaurants | $ | (83,500 | ) | | $ | (225,400 | ) | Jack in the Box PSA sales increase | 34,400 |
| | 83,500 |
| Increase in the average number of Qdoba restaurants | 15,400 |
| | 32,800 |
| Qdoba PSA sales increase | 3,300 |
| | 5,900 |
| Total decrease in company restaurant sales | $ | (30,400 | ) | | $ | (103,200 | ) |
Same-store sales at Jack in the Box company-operated restaurants grew 0.8%increased 5.6% in the quarter and 1.2%5.5% year-to-date as follows: | | | | | | | | | | | Quarter | | Year-to-Date | Increase in transactions | | | 0.1 | % | | | 0.7 | % | Average check growth (1) | | | 0.7 | % | | | 0.5 | % |
driven by a combination of price increases and transaction growth. Same-store sales at Qdoba company-operated restaurants increased 3.8% in the quarter and 3.7% year-to-date primarily driven by price increases. The following table summarizes the change in company-operated same-store sales: | | | | | | | | Quarter | | Year-to-Date | Jack in the Box transactions | 3.1 | % | | 3.0 | % | Jack in the Box average check (1) | 2.5 | % | | 2.5 | % | Jack in the Box change in same-store sales | 5.6 | % | | 5.5 | % | Qdoba change in same-store sales (2) | 3.8 | % | | 3.7 | % |
____________________________ | | | (1) | | Includes price increases of approximately 1.3%3.5% and 3.4% in the quarter and year-to-date, compared with a year ago.respectively. |
| | (2) | Includes price increases of approximately 4.2% and 4.1% in the quarter and year-to-date, respectively. |
Distribution sales to Jack in the Box and Qdoba franchisees grew $30.6$18.8 million in the quarter and $72.7$66.9 million year-to-date from a year ago. TheThis growth primarily reflects an increase reflects a higherin the number of Jack in the Box franchise restaurants that purchase ingredients and supplies from our distribution centers, which contributed additional sales of approximately $28.0$19.5 million and $64.2$55.2 million, respectively. HigherIncreases in PSA volumes and higher commodity prices year-to-date also contributed to the increase in distribution sales. During the second quarter, Qdoba restaurants ceased using our distribution services. Distribution sales in both periods.to Qdoba franchisees were not material to our results of operations for any period presented. Franchise revenues increased $11.9$13.2 million, or 23.5%21.0%, in the quarter and $28.4$25.8 million, or 24.6%18.0%, year-to-date due primarily to a 28.6% and 26.0%an increase in the average number of Jack in the Box franchise restaurants, which contributed additional royalties and rents of approximately $12.6$10.9 million and $26.4$29.4 million, respectively. In addition, 17
year-to-date increases in the number of restaurants sold to and developed by franchisees resulted in higher revenues from initial franchise fees. These increases wereYear-to-date, this increase was partially offset by an increase in re-image contributions to franchisees, which are recorded as a reduction of franchise revenues.revenues, and a decrease in revenues from franchise fees and other driven primarily by a decline in the number of restaurants sold to franchisees. The following table reflects the detail of our franchise revenues in each period and other information we believe is useful in analyzing the change in franchise revenues (dollars in thousands):
| | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Royalties | | $ | 25,120 | | | $ | 20,352 | | | $ | 56,345 | | | $ | 46,386 | | Rents | | | 36,643 | | | | 28,190 | | | | 82,726 | | | | 65,046 | | Re-image contributions to franchisees | | | (1,435 | ) | | | (95 | ) | | | (2,715 | ) | | | (650 | ) | Franchise fees and other | | | 2,203 | | | | 2,196 | | | | 7,296 | | | | 4,467 | | | | | | | | | | | | | | | Franchise revenues | | $ | 62,531 | | | $ | 50,643 | | | $ | 143,652 | | | $ | 115,249 | | | | | | | | | | | | | | | Increase (decrease) in Jack in the Box franchise-operated same-store sales | | | (0.3 | %) | | | (7.3 | %) | | | 0.4 | % | | | (9.4 | %) | | | | | | | | | | | | | | | | | | Royalties as a percentage of estimated franchise restaurant sales: | | | | | | | | | | | | | | | | | Jack in the Box | | | 5.3 | % | | | 5.3 | % | | | 5.3 | % | | | 5.3 | % | Qdoba | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % | | | 5.0 | % |
| | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Royalties | $ | 29,382 |
| | $ | 25,120 |
| | $ | 67,511 |
| | $ | 56,345 |
| Rents | 44,427 |
| | 36,643 |
| | 104,094 |
| | 82,726 |
| Re-image contributions to franchisees | (827 | ) | | (1,435 | ) | | (6,535 | ) | | (2,715 | ) | Franchise fees and other | 2,699 |
| | 2,203 |
| | 4,430 |
| | 7,296 |
| Franchise revenues | $ | 75,681 |
| | $ | 62,531 |
| | $ | 169,500 |
| | $ | 143,652 |
| % increase | 21.0 | % | |
|
| | 18.0 | % | |
|
| Average number of franchise restaurants | 1,929 |
| | 1,690 |
| | 1,933 |
| | 1,648 |
| % increase | 14.1 | % | | | | 17.3 | % | | | Increase (decrease) in franchise-operated same-store sales: | | | | | | | | Jack in the Box | 3.6 | % | | (0.3 | )% | | 3.1 | % | | 0.4 | % | Qdoba | 2.2 | % | | 6.4 | % | | 3.2 | % | | 6.5 | % | Royalties as a percentage of estimated franchise restaurant sales: | | | | | | | | Jack in the Box | 5.3 | % | | 5.3 | % | | 5.2 | % | | 5.3 | % | Qdoba | 5.0 | % | | 5.0 | % | | 5.0 | % | | 5.0 | % |
Operating Costs and Expenses Food and packaging costs increaseddecreased to 33.4%32.6% of company restaurant sales in the quarter and 32.9%increased to 33.1% year-to-date from 31.5%compared with 33.4% and 31.6%32.9%, respectively, a year ago. OverallIn 2012, higher commodity costs at our Jack in the Box restaurants increased approximately 5.0%were more than offset in the quarter and 3.4%partially offset year-to-date by the benefit of selling price increases, favorable product mix and a greater proportion of Qdoba company restaurants. Commodity costs increased as follows compared with the prior year: | | | | | | | | Quarter | | Year-to-Date | Jack in the Box | 1.8 | % | | 4.7 | % | Qdoba | 6.7 | % | | 10.2 | % |
Commodity cost increases were driven by higher costs for beef, cheese, pork, dairy, shorteningmost commodities other than produce and produce, partially offset by lowerpoultry. We expect overall commodity costs for poultryfiscal 2012 to increase approximately 3%-4%. Beef represents the largest portion, or approximately 21%, of the Company’s overall commodity spend, and bakery. Additionally,we typically do not enter into fixed price contracts for our beef needs. For the unfavorable impact of product mixfull year, we currently expect beef costs to increase approximately 5%-6%, and promotions was partially offset by the benefit ofmost other major commodities to be higher prices.in 2012 compared with last year. Payroll and employee benefit costs were 30.5%decreased to 29.3% of company restaurant sales in the quarter and 30.7%29.5% year-to-date, compared to 30.2%30.5% and 30.4%30.7%, respectively, in 2010,2011, reflecting the leverage from same-store sales increases and the benefits of refranchising. These decreases were offset in part by higher levels of staffing designed to improve the guest experience. In addition, increases in unemployment taxes in several states in which we operate negatively impacted these costs.incentive compensation. Occupancy and other costs were 23.8%decreased to 22.5% of company restaurant sales in the quarter and 24.0%23.0% year-to-date compared with 23.1%23.8% and 23.3%24.0%, respectively, last year. The higherlower percentage in 20112012 is due primarily relates to guest service initiativesthe leverage from same-store sales increases, the benefits of refranchising, and lower repair and maintenance costs. These benefits were partially offset by higher fees associated with debit card transactions, PSA depreciation expense related to the Jack in the Box re-image program and PSA rent expense as a percentage of sales resulting from a greater proportion of company-operated Qdoba restaurants compared with last year. These increases were partially offset by lower utilities expense. Distribution costs increased $30.9$18.3 million in the quarter and $72.9$65.8 million year-to-date, primarily reflecting an increase in the related sales. In the quarter, these costs were 100.4% ofThe 2012 supply chain agreement provides that any profits or losses related to our distribution sales in 2011 compared with 100.2% a year ago primarily reflecting lower PSA volumes. Year-to-date, these costs remained fairly consistent as a percentage of the related sales decreasing slightly to 100.4% from 100.5% last year.operations are shared by all company and franchise restaurants who utilize our distribution services. Franchise costs, principally rents and depreciation on properties leasedwe lease to Jack in the Box franchisees, increased $8.2$6.7 million to 50.1%50.2% of the related revenues in the quarter and $17.2$18.2 million to 48.5%51.8% year-to-date, from 45.6% of the related revenues in each period50.1% and 48.5%, respectively, a year ago. The percentage increase as a percent of revenues is primarily due to higher rent and depreciation and rent expense as a greater proportionresulting from an increase in the percentage of properties are leasedlocations that we lease to franchisees. Year-to-date, an increase in re-image contributions to franchisees and the impact of higher re-image contributions, which were partially offset year-to-date by leverage from higherlower franchise fee revenue.revenue also contributed to the percent of revenues increase. 18
The following table presents the change in selling, general and administrative (“SG&A”) expenses compared with the prior year (in thousands): | | | | | | | | | | | Increase/(Decrease) | | | | Quarter | | | Year-to-Date | | | Advertising | | $ | (4,221 | ) | | $ | (6,734 | ) | Refranchising strategy | | | (713 | ) | | | (5,058 | ) | Incentive compensation | | | 1,651 | | | | 3,717 | | Cash surrender value of COLI policies, net | | | (599 | ) | | | (1,613 | ) | Pension and postretirement benefits | | | (1,209 | ) | | | (2,821 | ) | Qdoba general and administrative | | | 1,642 | | | | 3,056 | | Hurricane Ike insurance proceeds in 2010 | | | — | | | | 1,004 | | Other | | | 1,326 | | | | 2,534 | | | | | | | | | | | $ | (2,123 | ) | | $ | (5,915 | ) | | | | | | | |
| | | | | | | | | | Increase / (Decrease) | | Quarter | | Year-to-Date | Advertising | $ | (2,533 | ) | | $ | (7,685 | ) | Refranchising strategy | (1,216 | ) | | (2,376 | ) | Incentive compensation | 1,869 |
| | 1,690 |
| Cash surrender value of COLI policies, net | 163 |
| | 81 |
| Pension and postretirement benefits | 657 |
| | 1,532 |
| Pre-opening costs | 398 |
| | 1,149 |
| Qdoba general and administrative | 1,200 |
| | 2,075 |
| Other | 1,340 |
| | 4,244 |
| | $ | 1,878 |
| | $ | 710 |
|
Our refranchising strategy has resulted in a decrease in the number of Jack in the Box company-operated restaurants and the related overhead expenses to manage and support those restaurants. As such,restaurants, including advertising costs, which are primarily contributions to our marketing fund determined as a percentage of restaurant sales, decreased at Jack in the Box and were partially offset bysales. The higher advertising expense at Qdoba due to sales growth and timing. The increase in ourlevels of incentive compensation accruals in 2011 reflects the expectedreflect an improvement in the Company’sCompany's results compared with performance goals. Changes in theThe cash surrender value of our company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations and positively impacted SG&A by $1.3fluctuations. The changes in market values had a positive impact of $1.1 million in the quarter and $4.4$4.3 million year-to-date year to date compared to $0.7$1.3 million and $2.8$4.4 million, respectively, a year ago. The decreaseincrease in pension and
postretirement benefits expense principally relates to changes toa decrease in the Company’s pension plan whereby participants will no longer accrue benefits after December 31, 2015.discount rate as compared with a year ago. The increase in pre-opening costs primarily relates to higher expenses associated with restaurant openings in new Jack in the Box markets. Qdoba general and administrative costs isincreased primarily due to higher pre-opening expenses and overhead to support our growing number of company-operated restaurant base.restaurants. Impairment and other charges, net is comprised of the following(in thousands)thousands): | | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Impairment charges | | $ | 878 | | | $ | 895 | | | $ | 1,167 | | | $ | 1,503 | | Losses on the disposition of property and equipment, net | | | 2,628 | | | | 1,178 | | | | 5,424 | | | | 2,360 | | Costs of closed restaurants (primarily lease obligations) and other | | | 988 | | | | 1,379 | | | | 1,499 | | | | 2,268 | | | | | | | | | | | | | | | | | $ | 4,494 | | | $ | 3,452 | | | $ | 8,090 | | | $ | 6,131 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Impairment charges | $ | 910 |
| | $ | 878 |
| | $ | 2,109 |
| | $ | 1,167 |
| Losses on the disposition of property and equipment, net | 1,775 |
| | 2,628 |
| | 2,858 |
| | 5,424 |
| Costs of closed restaurants (primarily lease obligations) and other | 864 |
| | 988 |
| | 2,933 |
| | 1,499 |
| Restructuring costs | 1,525 |
| | — |
| | 1,525 |
| | — |
| | $ | 5,074 |
| | $ | 4,494 |
| | $ | 9,425 |
| | $ | 8,090 |
|
Impairment and other charges, net increased $1.0$0.6 million in the quarter and $2.0$1.3 million year-to-date fromcompared to a year ago due primarily to losses associated with our ongoing re-image program, which is targeted to be completed byago. These increases include severance costs of $1.5 million recorded in the endsecond quarter of 2011, and the rollout of signagefiscal 2012 related to our restructuring activities. The year-to-date increase also includes higher costs associated with restaurants and facilities we have closed or plan to close and impairment charges related to under-performing Jack in the Box restaurants. These increases were partially offset by a decrease in costs in both periods related to our re-image and new logo.logo program which was substantially completed during the first quarter of fiscal 2012. Gains on the sale of company-operated restaurants to franchisees, net are detailed in the following table (dollars in thousands): | | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Number of restaurants sold to franchisees | | | 26 | | | | 30 | | | | 114 | | | | 53 | | | | | | | | | | | | | | | | | | | Gains on the sale of company-operated restaurants | | $ | 878 | | | $ | 2,987 | | | $ | 28,750 | | | $ | 12,367 | | | | | | | | | | | | | | | | | | | Average gain on restaurants sold | | $ | 34 | | | $ | 100 | | | $ | 252 | | | $ | 233 | |
Gains were impacted by | | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Number of restaurants sold to franchisees | 37 |
| | 26 |
| | 37 |
| | 114 |
| Gains on the sale of company-operated restaurants | $ | 14,078 |
| | $ | 878 |
| | $ | 15,200 |
| | $ | 28,750 |
| Average gain on restaurants sold | $ | 380 |
| | $ | 34 |
| | $ | 411 |
| | $ | 252 |
|
In 2012, gains on the numbersale of company-operated restaurants include additional gains of $0.9 million in the quarter and $2.1 million year-to-date recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold andin a prior year. The lower average gains in the specificprior year relate to the sale of a market with lower than average sales volumes and cash flows of those restaurants, which affectedin the changes in average gains recognized.second quarter. 19
Interest Expense, Net Interest expense, net is comprised of the following (in thousands): | | | | | | | | | | | | | | | | | | | Quarter | | | Year-to-Date | | | | April 17, | | | April 11, | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | Interest expense | | $ | 4,204 | | | $ | 4,125 | | | $ | 9,151 | | | $ | 9,897 | | Interest income | | | (259 | ) | | | (252 | ) | | | (595 | ) | | | (589 | ) | | | | | | | | | | | | | | Interest expense, net | | $ | 3,945 | | | $ | 3,873 | | | $ | 8,556 | | | $ | 9,308 | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Quarter | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | | April 15, 2012 | | April 17, 2011 | Interest expense | $ | 5,152 |
| | $ | 4,204 |
| | $ | 11,756 |
| | $ | 9,151 |
| Interest income | (618 | ) | | (259 | ) | | (1,165 | ) | | (595 | ) | Interest expense, net | $ | 4,534 |
| | $ | 3,945 |
| | $ | 10,591 |
| | $ | 8,556 |
|
Interest expense, net increased slightly$0.6 million in the quarter and decreased $0.7$2.0 million year-to-date compared with last year primarily reflecting lower average interest rates and borrowings compared to a year ago offset in the quarter by interest expense incurred in connection with FFE.primarily due to higher average borrowings. Income Taxes The tax rate decreased to 32.8%in 2012 was 34.1% in the quarter and 34.8%34.2% year-to-date, compared with 35.2%32.8% and 36.1%34.8%, respectively, in 2010.the prior year. The decreases are due primarily to the impact ofchanges in rates were impacted by the market performance of insurance investment products used to fund certain non-qualified retirement plans.plans and estimated earnings. Changes in the cash value of the insurance products are not included in taxable income. We expect the fiscal year tax rate to be approximately 35%-36%. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.
Net Earnings Net earnings were $6.8$21.6 million, or $0.13$0.48 per diluted share, in the quarter compared with $17.7$6.8 million, or $0.32$0.13 per diluted share, a year ago. Year-to-date net earnings were $39.2$33.6 million, or $0.75$0.75 per diluted share, compared with $41.9$39.2 million or $0.74$0.75 per diluted share, a year ago. LIQUIDITY AND CAPITAL RESOURCES General Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations, the revolving bank credit facility, the sale of company-operated restaurants to franchisees and the sale and leaseback of certain restaurant properties.properties and the sale of Jack in the Box company-operated restaurants to franchisees. We generally reinvest available cash flows from operations to improve our restaurant facilities and develop new restaurants, to reduce debt and to repurchase shares of our common stock. Our cash requirements consist principally of: | • | | working capital; | | | • | | capital expenditures for new restaurant construction and restaurant renovations; | | | • | | income tax payments; | | | • | | debt service requirements; and | | | • | | obligations related to our benefit plans. |
capital expenditures for new restaurant construction and restaurant renovations; income tax payments; debt service requirements; and obligations related to our benefit plans. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditure, working capital and debt service requirements for the foreseeable future. As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. As a result, we typically maintain current liabilities in excess of current assets, which results in a working capital deficit. Cash and cash equivalents increased $4.1 million to $14.7 million at the end of the quarter from $10.6 million at the beginning of the fiscal year. This increase is primarily due to cash flows provided by operating activities, proceeds and collections of notes receivable from the sale of restaurants to franchisees, and borrowings under our revolving credit facility, offset in part by cash used to repurchase common stock, purchase property and equipment and acquire Qdoba franchise-operated restaurants. We generally reinvest available cash flows from operations to improve our restaurant facilities and develop new restaurants, to reduce debt and to repurchase shares of our common stock.
20
Cash Flows The table below summarizes our cash flows from operating, investing and financing activities (in thousands): | | | | | | | | | | | Year-to-Date | | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | Total cash provided by (used in): | | | | | | | | | Operating activities: | | | | | | | | | Continuing operations | | $ | 81,844 | | | $ | 26,646 | | Discontinued operations | | | — | | | | (2,172 | ) | Investing activities | | | (26,905 | ) | | | (5,944 | ) | Financing activities | | | (50,834 | ) | | | (59,071 | ) | | | | | | | | Increase (decrease) in cash and cash equivalents | | $ | 4,105 | | | $ | (40,541 | ) | | | | | | | |
| | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Total cash provided by (used in): | | | | Operating activities | $ | 69,588 |
| | $ | 81,844 |
| Investing activities | (64,592 | ) | | (26,905 | ) | Financing activities | (5,112 | ) | | (50,834 | ) | Net increase (decrease) in cash and cash equivalents | $ | (116 | ) | | $ | 4,105 |
|
Operating Activities.Operating cash flows from continuing operations increased $55.2decreased $12.3 million compared with a year ago due primarily to increases in payments as follows: $9.5 million related to fluctuations in the timing of propertyOctober rent payments; $4.3 million for bonuses; $4.1 million in pension contributions; and $4.0 million for interest expense. The impact of these higher payments and a reductionwere partially offset by an $8.4 million increase in bonus and estimatednet income tax payments.adjusted for non-cash items. Investing Activities.Cash used in investing activities increased $21.0$37.7 million compared with a year ago due primarily to decreases in (1) proceeds from the sale of restaurants to franchisees, (2) proceeds from the sale and leaseback of restaurant properties and (3) collections of notes receivable related to prior years’ refranchising activities, as well as an increase in capital expenditures and cash used to acquire Qdoba franchise-operated restaurantsrestaurants. The impact of these decreases in 2011,cash flows were partially offset by an increasea decrease in capital expenditures.
Capital Expenditures— The composition of capital expenditures in each period follows (in thousands): | | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Jack in the Box: | | | | New restaurants | $ | 7,527 |
| | $ | 3,905 |
| Restaurant facility improvements | 16,748 |
| | 51,734 |
| Other, including corporate | 7,408 |
| | 5,868 |
| Qdoba | 8,926 |
| | 12,622 |
| Total capital expenditures | $ | 40,609 |
| | $ | 74,129 |
|
Our capital expenditure program includes, among other things, investments in new locations, restaurant remodeling, new equipment and information technology enhancements. Capital expenditures decreased compared to a year ago due primarily to a decrease in spending related to our Jack in the numberBox restaurant re-image and new logo program. We expect fiscal 2012 capital expenditures to be approximately $85-$95 million. We plan to open approximately 15 Jack in the Box and 25-30 Qdoba company-operated restaurants in 2012. Sale of Company-Operated Restaurants— The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands): | | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Number of restaurants sold to franchisees | 37 |
| | 114 |
| | | | | Total proceeds | $ | 21,964 |
| | $ | 49,588 |
| Average proceeds | $ | 594 |
| | $ | 435 |
|
We expect total proceeds of $40-$50 million from the sale of 80-120 Jack in the Box restaurants soldin 2012. In certain instances, we may provide financing to franchisees and collectionsfacilitate the closing of certain transactions. As of April 15, 2012, notes receivablesreceivable related to prior year refranchising activity.refranchisings were $6.3 million. Assets Held for Sale and Leaseback—We use sale and leaseback financing to lower the initial cash investment in our Jack in the Box restaurants to the cost of the equipment, whenever possible. In 2011 we soldThe following table summarizes the cash flow activity related to sale and leased back 12 restaurants, generating proceeds of $21.8 million compared with 19 restaurants and $36.0 million a year ago. leaseback transactions in each period (dollars in thousands): | | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Number of restaurants sold and leased back | 5 |
| | 12 |
| | | | | Proceeds from sale of assets | $ | 9,312 |
| | $ | 21,811 |
| Spending to acquire/purchase assets | (22,000 | ) | | (15,142 | ) | Net cash flows related to assets held for sale and leaseback | $ | (12,688 | ) | | $ | 6,669 |
|
As of April 17, 2011,15, 2012, we had cash investments of $51.3$62.5 million in 56approximately 44 operating and under-constructionor under construction restaurant properties that we expect to sell and leaseback during the next twelve12 months. Capital Expenditures —Our capital expenditure program includes, among other things, investments in new locations, restaurant remodeling, new equipment and information technology enhancements. The compositionAcquisition of capital expenditures in each period is as follows (in thousands):
| | | | | | | | | | | Year-to-Date | | | | April 17, | | | April 11, | | | | 2011 | | | 2010 | | | Jack in the Box: | | | | | | | | | New restaurants | | $ | 3,905 | | | $ | 15,901 | | Restaurant facility improvements | | | 51,734 | | | | 17,769 | | Other, including corporate | | | 5,868 | | | | 4,482 | | Qdoba | | | 12,622 | | | | 4,480 | | | | | | | | | Total capital expenditures | | $ | 74,129 | | | $ | 42,632 | | | | | | | | |
Capital expenditures increased compared to a year ago due primarily to an increase in spending related to our Jack in the Box re-image program and new logo rollout, as well as newFranchise-Operated Restaurants— During 2012, we acquired Qdoba restaurants, partially offset by a decrease in spending for new Jack in the Box locations. We expect fiscal 2011 capital expenditures to be approximately $125-$135 million, including investment costs related to the Jack in the Box restaurant re-image program. We plan to open approximately 18 Jack in the Box and 25 Qdoba company-operatedfranchise restaurants in 2011.
21
Sale of Company-Operated Restaurants —We haveselect markets where we believe there is continued to expand franchise ownership in the Jack in the Box system primarily through the sale of company-operated restaurants to franchisees.opportunity for restaurant development. The following table details proceeds received in connection with our refranchising activitiesfranchise-operated restaurant acquisition activity (dollars in thousands)thousands):
| | | | | | | | | | | Year-to-Date | | | April 17, | | April 11, | | | 2011 | | 2010 | | Number of restaurants sold to franchisees | | | 114 | | | | 53 | | | | | | | | | | | Cash | | $ | 49,588 | | | $ | 19,093 | | Notes receivable | | | — | | | | 2,730 | | | | | | | | | Total proceeds | | $ | 49,588 | | | $ | 21,823 | | | | | | | | | | | | | | | | | | Average proceeds | | $ | 435 | | | $ | 412 | |
In certain instances, we may provide financing to facilitate the closing of certain transactions. As of April 17, 2011, the notes receivable balance related to prior year refranchisings was $10.9 million, $4.3 million of which is expected to be fully repaid by the end of the fiscal year. We expect total proceeds of $85-$95 million from the sale of 175-225 Jack in the Box restaurants in 2011. | | | | | | | | | | Year-to-Date | | April 15, 2012 | | April 17, 2011 | Number of restaurants acquired from franchisees | 36 |
| | 22 |
| Cash used to acquire franchise-operated restaurants | $ | 39,195 |
| | $ | 21,477 |
|
Acquisition of Franchise-Operated Restaurants —In 2011, we acquired 20 Qdoba franchise-operated restaurants in the Indianapolis market and two in Northern Florida for approximately $21.5 million. The purchase price wasprices were primarily allocated primarily to goodwill, property and equipment, goodwill and reacquired franchise rights. For additional information, refer to Note 2,Summary of Refranchisings, FranchiseeFranchise Development and Acquisitions, of the notes to the condensed consolidated financial statements.Acquisitions.
Financing Activities.Cash flows used in financing activities decreased $8.2$45.7 million compared with a year ago primarily attributable to lower principal repayments on debt and an increase in borrowings under our revolving credit facility, offset in part by the change in our book overdraft related to the timing of working capital receipts and disbursements and an increasea decrease in cash used to repurchase shares of the Company’sour common stock.stock, partially offset by a decrease in borrowings under our credit facility. Credit Facility—Our credit facility is comprised of (i) a $400.0 million revolving credit facility and (ii) a $200.0 million term loan maturing on June 29, 2015, initially both withbearing interest at London Interbank Offered Rate (“LIBOR”) plus 2.502.75%., as of April 15, 2012. As part of the credit agreement, we may also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the agreement. The credit facility requires the payment of an annual commitment fee based on the unused portion of the credit facility. The credit facility’s interest rates and the annual commitment rate are based on a financial leverage ratio, as defined in the credit agreement. We may make voluntary prepayments of the loans under the revolving credit facility and term loan at any time without premium or penalty. Specific events, such as asset sales, certain issuances of debt, and insurance and condemnation recoveries, may trigger a mandatory prepayment. We are subject to a number of customary covenants under our credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases, dividend payments and requirements to maintain certain financial ratios. We were in compliance with all covenants as of April 17, 2011.15, 2012. Effective February 16, 2012, to provide additional financial flexibility due to the timing of refranchising transactions and the $33.0 million acquisition of Qdoba franchised restaurants completed in the second quarter of fiscal 2012, we amended our credit facility to temporarily increase the maximum financial leverage ratio to 2.50 to 1.00 from 2.25 to 1.00 through the third quarter of fiscal 2012. At April 17, 2011,15, 2012, we had $192.5$175.0 million outstanding under the term loan, borrowings under the revolving credit facility of $207.0$300.0 million and letters of credit outstanding of $35.8 million.$38.9 million. Franchise Financing EntityFFE Credit Facility—FFE has a $100.0 million lending program comprised of a $20.0 million commitment from the Company in the form of a capital note andentered into an $80.0 million Senior Secured Revolving Securitization Facility (“FFE Facility”) entered into with a third party.party to assist in funding our franchisee lending program. The FFE Facility is a 12-month revolving loan and security agreement bearing a variable interest rate. The revolving period has been extended and is set to expire in June 2012. As of April 17, 2011, we have contributed $8.015, 2012, FFE had borrowings outstanding of $0.9 million to FFE, $6.7 million of which has been used to assist franchisees in reimaging their restaurants, and FFE has not borrowed against its third party revolving creditthis facility.
Interest Rate Swaps—To reduce our exposure to rising interest rates under our credit facility, we consider interest rate swaps. In August 2010, we entered into two forward lookingforward-looking swaps that will effectively convert $100.0 million of our variable rate term loan to a fixed-rate basis beginningfrom September 2011 through September 2014. Based on the term loanloan’s applicable margin of 2.50%2.75% as of April 17, 2011,15, 2012, these agreements would have an average pay rate of 1.54%, yielding an “all-in” fixed rate of 4.04%4.29%. From March 2007 to April 2010, we held two interest rate swaps that 22
effectively converted $200.0 million of our variable rate term loan borrowings to a fixed-rate basis. For additional information related to our interest rate swaps, refer to Note 4,Derivative Instruments, of the notes to the condensed consolidated financial statements.
Repurchases of Common Stock—In November 2010,May 2011, the Board of Directors approved a program to repurchase up to $100.0 million in shares of our common stock expiring November 2011.2012. During 2011,the first quarter, we repurchased approximately 3.50.3 million shares at an aggregate cost of $75.0 million. As of April 17,$6.4 million, completing the May 2011 the aggregate remaining amount authorized for repurchase was $25.0 million.authorization. In MayNovember 2011, the Board of Directors authorizedapproved a new program to repurchase up to $100.0 million in shares of our common stock expiring November 2012.2013. As of the end of the second quarter, $100.0 million remains available under this authorization. Off-Balance Sheet Arrangements Other than operating leases, weWe are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources. We finance a portion of our new restaurant development through sale-leaseback transactions. These transactions involve selling restaurants to unrelated parties and leasing the restaurants back.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES We have identified the following as our most criticalCritical accounting estimates which are those thatthe Company believes are most important tofor the portrayal of the Company’s financial condition and results and that require management’s most subjective and complex judgments. InformationJudgments and uncertainties regarding our other significantthe 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 and policies ispreviously disclosed in Note 1 of our most recentthe Company’s Annual Report on Form 10-K filed withfor the SEC.fiscal year ended October 2, 2011.
Long-lived Assets— Property, equipmentNEW ACCOUNTING PRONOUNCEMENTS
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which was issued to enhance comparability between entities that report under U.S. GAAP and certainIFRS, and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. ASU 2011-05 eliminates the option to report other assets, including amortized intangible assets, are reviewed for impairment when indicators of impairment are present. This review generally includes a restaurant-level analysis, except when we are actively selling a group of restaurants, in which case we perform our impairment evaluations at the group level. Impairment evaluations for individual restaurants take into consideration a restaurant’s operating cash flows, the period of time since a restaurant has been opened or remodeled, refranchising expectationscomprehensive income and the maturity of the related market. Impairment evaluations for a group of restaurants take into consideration the group’s expected future cash flows and sales proceeds from bids received, if any, or fair market value based on, among other considerations, the specific sales and cash flows of those restaurants. If the assets of a restaurant or group of restaurants subject to our impairment evaluation are not recoverable based upon the forecasted, undiscounted cash flows, we recognize an impairment loss as the amount by which the carrying value of the assets exceeds fair value. Our estimates of cash flows used to assess impairment are subject to a high degree of judgment and may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. Retirement Benefits— Our defined benefit and other postretirement plans’ costs and liabilities are determined using several statistical and other factors, which attempt to anticipate future events, including assumptions about the discount rate and expected return on plan assets. We determine and set our discount rate annually, with assistance from our actuaries, by considering the average of pension yield curves constructed of a population of high-quality bonds with a Moody’s or Standard and Poor’s rating of “AA” or better meeting certain other criteria. As of October 3, 2010, our discount rate was 5.82% for our defined benefit and postretirement benefit plans. Our expected long-term rate of return on assets is determined taking into consideration our projected asset allocation and economic forecasts prepared with the assistance of our actuarial consultants. As of October 3, 2010, our assumed expected long-term rate of return was 7.75% for our qualified defined benefit plan. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. These differences may affect the amount of pension expense we record. A hypothetical 25 basis point reductionits components in the assumed discount rate and expected long-term rate of return on plan assets would have resulted in an estimated increase of $2.7 million and $0.7 million, respectively, in our fiscal 2011 pension and postretirement plan expense. We expect our pension and postretirement expense to decrease in fiscal 2011 principally due to the curtailment of our qualified plan, which will be partially offset by a decrease in our discount rate from 6.16% to 5.82%.
Self Insurance— We are self-insured for a portion of our losses related to workers’ compensation, general liability, automotive and health benefits. In estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analysis of historical data. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater amount of claims occur
23
compared to what was estimated or medical costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Restaurant Closing Costs— Restaurant closing costs consist of net future lease commitments and expected ancillary costs. We record a liability for the net present value of any remaining lease obligations, less estimated sublease income, at the date we cease using a property. Subsequent adjustments to the liability as a resultstatement of changes in estimatesstockholders’ equity and requires an entity to present the total of sublease comprehensive
income, the components of net income and the components of other comprehensive income either in a single continuous statement or lease cancellations are recorded in the period incurred. The estimates we make related to sublease income are subject to a high degree of judgmenttwo separate but consecutive statements. This pronouncement is effective for fiscal years, and may differ from actual sublease income due to changes in economic conditions, desirabilityinterim periods within those years, beginning after December 15, 2011. Early adoption of the sitesnew guidance is permitted, and other factors.full retrospective application is required. This pronouncement is not expected to have a material impact on our consolidated financial statements upon adoption. Share-based Compensation—We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors to work toward the financial success of the Company. Share-based compensation cost for our stock option grants is estimated at the grant date based on the award’s fair-value as calculated by an option pricing model and is recognized as expense ratably over the requisite service period. The option pricing models require various highly judgmental assumptions, including volatility, forfeiture rates and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.
Goodwill and Other Intangibles— We also evaluate goodwill and non-amortizable intangible assets annually, or more frequently if indicators of impairment are present. If the determined fair values of these assets are less than the related carrying amounts, an impairment loss is recognized. The methods we use to estimate fair value include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. During the fourth quarter of fiscal 2010, we reviewed the carrying value of our goodwill and indefinite life intangible assets and determined that no impairment existed as of October 3, 2010.
Legal Accruals—The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts, as we deem appropriate.
Income Taxes—We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our effective income tax rate as additional information on outcomes or events becomes available. Our estimates are based on the best available information at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.
NEW ACCOUNTING PRONOUNCEMENTS
Any accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
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 usemay be identified by words such words as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would” 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 subject to risks and uncertainties, whichin some cases beyond our control. Factors that may cause our actual results to differ materially from expectations. You should not rely unduly on forward-looking statements. Allany forward-looking statements include, but are made only as of the date issued. The estimates and assumptions underlying those forward-looking statements can and do change. We do not undertake any obligationlimited to, update any forward-looking statements. We caution the reader that the following important factors and the important factors described in the “Discussion of Critical Accounting Estimates,” and in other sections in this Form 10-Q and in our most recent Annual Report on Form 10-K and other Securities and Exchange Commission filings, including: Food service businesses such as ours may be materially and adversely affected by changes in consumer tastes or eating habits, and economic, political and socioeconomic conditions. Adverse economic conditions such as unemployment (particularly in California and Texas where our Jack in the Box restaurants are concentrated) may result in reduced restaurant traffic and sales and impose practical limits on pricing. Our profitability depends in part on our ability to anticipate and react to changes in food costs and availability, fuel costs and other supply and distribution costs. As discussed in our MD&A under the caption “Operating Costs and Expenses,” commodity costs have increased significantly in the past year. While prices appear to be moderating, the risks of increased costs and continued volatility remain, which factors could negatively impact our margins as well as franchisee margins. Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality or public health issues. Negative publicity regarding our brands or the restaurant industry in general could cause a decline in system restaurant sales and could have a material adverse effect on our financial condition and results of operations. Food service businesses such as ours are subject to the risk that shortages or interruptions in supply could adversely affect the availability, quality and cost of ingredients. Our business can be materially and adversely affected by severe weather conditions, which can result in lost restaurant sales and increased costs. New restaurant development, which is critical to our long-term success, involves substantial risks, including availability of acceptable financing, cost overruns and the inability to secure suitable sites on acceptable terms. Our growth strategy includes opening restaurants in new markets where we cannot assure that we will be able to successfully expand, attract customers or otherwise operate profitably. The restaurant industry is highly competitive with respect to price, service, location, brand identification and the quality of food. We cannot assure that we will be able to effectively respond to aggressive competitors (including competitors with significantly greater financial resources); that our facility improvements will yield the desired return on investment; or that our new products, service initiatives or our overall strategies will be successful. The cost of compliance with labor and other regulations could negatively affect our results of operations and financial condition. The increasing amount and complexity of federal, state and local governmental regulations applicable to vary materiallyour industry may increase both our costs of compliance and our exposure to regulatory claims. Should our advertising and promotion be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition. We may not be able to achieve or maintain the ownership mix of franchisee to company-operated restaurants that we desire. Additionally, our ability to reduce operating costs through increased franchise ownership is subject to risks and uncertainties. We cannot assure that franchisees and developers planning the opening of franchisee restaurants will have the ability or resources to open restaurants or be effective operators, remain aligned with our operations, promotional and capital-intensive initiatives, or successfully operate restaurants in a manner consistent with our standards. In addition, a
franchisee's unrelated business obligations could adversely affect a franchisee’s ability to make timely payments to us or adhere to our standards and project an image consistent with our brands. The loss of key personnel could have a material adverse effect on our business. A material failure or interruption of service or a breach in security of our computer systems could cause reduced efficiency in operations, loss of data or business interruptions. Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations. Our ability to repay expected borrowings under our credit facility and to meet our other debt or contractual obligations will depend upon our future performance and our cash flows from those expressedoperations, both of which are subject to prevailing economic conditions and financial, business and other known and unknown risks and uncertainties, certain of which are beyond our control. Changes in any forward-looking statement: 24
• | | Any widespread publicity, whether or not based in fact, about public health issues or pandemics, or the prospect of such events, which negatively affects consumer perceptions about the health, safety or quality of food and beverages served at our restaurants may adversely affect our results. | | • | | Food service businesses such as ours may be materially and adversely affected by changes in national and regional political and economic conditions. Unstable economic conditions, including inflation, lower levels of consumer confidence, low levels of employment, decreased consumer spending and changes in discretionary spending priorities may adversely impact our sales, operating results and profits. | | • | | Costs may exceed projections, including costs for food ingredients, labor (including increases in minimum wage, workers’ compensation, healthcare and other insurance), fuel, utilities, real estate, insurance, equipment, technology and construction of new and remodeled restaurants. Inflationary pressures affecting the cost of commodities may adversely affect our food costs and our operating margins. Because a significant number of our restaurants are company-operated, we may have greater exposure to operating cost issues than if we were more heavily franchised. | | • | | Regulatory changes, such as the federal healthcare legislation or possible changes to labor or other laws and regulations, could result in increased operating costs. | | • | | There can be no assurances that new interior and exterior designs, kitchen enhancements or new equipment will foster increases in sales at remodeled restaurants and yield the desired return on investment. | | • | | There can be no assurances that our growth objectives in the regional markets in which we operate restaurants will be met or that new facilities will be profitable. Development delays, sales softness and restaurant closures may have a material adverse effect on our results of operations. The development and profitability of restaurants can be adversely affected by many factors, including the ability of the Company and its franchisees to select and secure suitable sites on satisfactory terms, costs of construction, and general business and economic conditions. In addition, tight credit marketsaccounting standards, policies or related interpretations by accountants or regulatory entities may negatively impact the ability of franchisees to fulfill their restaurant development commitments. | | • | | There can be no assurances that we will be able to effectively respond to aggressive competition from numerous and varied competitors (some with significantly greater financial resources) in all areas of business, including new concepts, facility design, competition for labor, new product introductions, customer service initiatives, promotions (including value promotions) and discounting. Additionally, the trend toward convergence in grocery, deli, convenience store and other types of food services may increase the number of our competitors. Such increased competition could decrease the demand for our products and negatively affect our sales and profitability. Moreover, there can be no assurance of the success of any new products, initiatives or overall strategies that we choose to pursue. | | • | | The realization of gains from the sale of company-operated restaurants to existing and new franchisees depends upon various factors, including sales trends, cost trends and economic conditions. The financing market, including the cost and availability of borrowed funds and the terms required by lenders, can impact the ability of franchisee candidates to purchase franchises and can potentially impact the sales prices and number of franchises sold. The number of franchises sold and the amount of gain realized from the sale of an on-going business may not be consistent from quarter to quarter and may not meet expectations. | | • | | As the number of franchisees increases, our revenues derived from rents and royalties at franchise restaurants will increase, as well as the risk that revenues could be negatively impacted by defaults in payment of rents and royalties. | | • | | Franchisee business obligations may not be limited to the operation of Jack in the Box or Qdoba restaurants, making them subject to business and financial risks unrelated to the operation of their restaurants. These unrelated risks could adversely affect a franchisee’s ability to make full or timely payments to us. | | • | | The costs related to legal claims such as class actions involving employees, franchisees, shareholders or consumers, including costs related to potential settlement or judgments, may adversely affect our results. | | • | | Changes in accounting standards, policies or practices or related interpretations by auditors or regulatory entities, including changes in tax accounting or tax laws, may adversely affect our results. |
25
• | | The costs or exposures associated with maintaining the security of information and the use of cashless payments may exceed expectations. Such risks include increased investment in technology and costs of compliance with consumer protection and other laws. | | • | | Many factors affect the trading price of our stock, including factors over which we have no control, such as the current financial environment, government actions, reports on the economy as well as negative or positive announcements by competitors, regardless of whether the report relates directly to our business. | | • | | Significant demographic changes, adverse weather, political conditions such as terrorist activity or the effects of war, other significant events (particularly in California and Texas where nearly 70% of our Jack in the Box system restaurants are located), new legislation, governmental regulation, the possibility of unforeseen events affecting the food service industry in general and other factors over which we have no control can each adversely affect our results of operation. |
This discussion of uncertainties is by no means exhaustive but is intended to highlight some important factors that may materially affect our results.
We are subject to litigation which is inherently unpredictable and can result in unfavorable resolutions where the amount of ultimate loss may differ from our estimated loss contingencies, or impose other costs in defense of claims. Potential investors are urged to consider these factors 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.QUANTITATIVEQUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary exposure to risks relating to financial instruments is changes in interest rates. Our credit facility, which is comprised of a revolving credit facility and a term loan, bears interest at an annual rate equal to the prime rate or LIBOR plus an applicable margin based on a financial leverage ratio. As of April 17, 2011,15, 2012, the applicable margin for the LIBOR-based revolving loans and term loan was set at 2.50%2.75%. We use interest rate swap agreements to reduce exposure to interest rate fluctuations. In August 2010, we entered into two interest rate swap agreements that will effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis beginning September 2011 through September 2014. Based on the term loan’s applicable margin of 2.50%2.75% as of April 17, 2011,15, 2012, these agreements would have an average pay rate of 1.54%, yielding an “all-in” fixed rate of 4.04%4.29%. A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding balance of our revolving credit facility and term loan at April 17, 2011,15, 2012, would result in an estimated increase of $4.0$3.8 million in annual interest expense. We are also exposed to the impact of commodity and utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs through higher prices is limited by the competitive environment in which we operate. From time to time, we enter into futures and option contracts to manage these fluctuations. At April 17, 2011,15, 2012, we had no such contracts in place.
ITEM 4.CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures We maintainBased on an evaluation of the Company’s disclosure controls and procedures that are designed to ensure that information required to be disclosed(as defined in the reports that we file or submit underRules 13a - 15 and 15d - 15 of the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rulesamended), as of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including ourend of the Company’s quarter ended April 15, 2012, the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision(its principal executive officer and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act Rules 13a-15(e). Based on this evaluation, our Chief Executive Officer and Chief Financial Officerprincipal financial officer, respectively) have concluded that ourthe Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.effective.
Changes in Internal Control Over Financial Reporting There have been no significant changes in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QCompany’s fiscal quarter ended April 15, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 26
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 The Company is subject to normal and routine legal proceedings, including litigation. We have reserveslitigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others. The Company assesses contingencies to determine the degree of probability and range of possible loss for certainpotential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred 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. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these legal proceedings; however,estimates. Although the outcomes of such proceedings are subject to inherent uncertainties. Based on current information, including our reserves and insurance coverage, managementCompany currently believes that the ultimate liability from all pending legal proceedings, individually and in the aggregate,outcome of these matters will not have a material adverse effect on the Company’s operating results of operations, liquidity or financial position of the Company, it is possible that the results of operations, liquidity, or liquidity.financial position of the Company could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies. ITEM 1A.RISK FACTORS 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 October 3, 2010,2, 2011, which we filed with the SEC on November 24, 2010,23, 2011, together with 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 when evaluating our business and our prospects. There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 2, 2011. 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. 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 October 3, 2010,2, 2011, including our financial statements and the related notes. ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our credit agreement provides for $500.0 million for ITEM 5. OTHER INFORMATION Item 5.02(e) Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers: Compensatory Arrangements of Certain Officers The Compensation Committee (the “Committee”) of the potential payment of cash dividends and stock repurchases, subject to certain limitations based on our leverage ratio as defined in our credit agreement. As of April 17, 2011, the aggregate remaining amount authorized and available under our credit agreement was $378.0 million. Dividends.We did not pay any cash or other dividends during the last two fiscal years and do not anticipate paying dividends in the foreseeable future.
Stock Repurchases.In November 2010, theCompany’s Board of Directors has approved an amendment to the Company’s form of Revised Compensation and Benefits Assurance Agreement (the “Amended CIC Agreement”). The Committee had previously approved the Revised Compensation and Benefits Assurance Agreement in November 2009 (the “Prior CIC Agreement”), and had authorized the Company to enter into the Prior CIC Agreement with three of its executive officers, including Leonard A. Comma, President and Chief Operating Officer; Philip H. Rudolph, Executive Vice President, General Counsel and Secretary; and Mark H. Blankenship, Senior Vice President and Chief Administrative Officer. In connection with approving the form of Amended CIC Agreement, the Committee has authorized the Company to enter into the Amended CIC Agreement with Messrs. Comma, Rudolph and Blankenship, effective as of May 15, 2012.
Similar to the Prior CIC Agreement, the Amended CIC Agreement provides for compensation to the executive in the form of a programlump sum payment and other benefits in the event of a qualifying termination of the executive within 24 months of the effective date of a “change in control” of the Company, as that term is defined in the agreement. The Amended CIC Agreement has a term of two years, which automatically renews for an additional two years unless either party to repurchase upthe agreement gives notice of an intent not to $100.0 million in sharesrenew the agreement. The Prior CIC Agreement provided that any payments to the executive that constituted “parachute payments” within the meaning of our common stock expiring November 2011. AsSection 280G of April 17, 2011,the Internal Revenue Code (the “Code”) would be aggregated and reduced, if necessary, to the maximum amount of payments that could be paid to executive without giving rise to excise tax payments under Section 4999 of the Code (the “Excise Tax”). Under the Amended CIC Agreement, the executive will automatically receive the greater of (i) the aggregate remainingparachute payments reduced to the maximum amount authorized for repurchase was $25.0 million. The following table summarizes shares repurchased pursuantthat would not subject the executive to the Excise Tax or (ii) the aggregate parachute payments, with the executive paying the Excise Tax and such other applicable federal, state and local income and employment taxes. This summary of the Amended CIC Agreement is qualified in its entirety by reference to the form of Amended CIC Agreement attached as Exhibit 10.2.1 to this program during the quarter ended April 17, 2011:report. | | | | | | | | | | | | | | | | | | | | | | | | | | | (c) | | | | | | | | | | | | | Total number | | | | | | | | | | | | | of shares | | (d) | | | (a) | | (b) | | purchased as | | Maximum dollar | | | Total number | | Average | | part of publicly | | value that may yet | | | of shares | | price paid | | announced | | be purchased under | | | purchased | | per share | | programs | | these programs | | | | | | | | | | | | | | | $ | 50,000,012 | | January 24, 2011 - February 20, 2011 | | | — | | | | — | | | | — | | | $ | 50,000,012 | | February 21, 2011 - March 20, 2011 | | | 696,800 | | | $ | 22.19 | | | | 696,800 | | | $ | 34,523,720 | | March 21, 2011 - April 17, 2011 | | | 427,712 | | | $ | 22.24 | | | | 427,712 | | | $ | 25,000,022 | | | | | | | | | | | | | | | | | | | Total | | | 1,124,512 | | | $ | 22.21 | | | | 1,124,512 | | | | | | | | | | | | | | | | | | | | | | |
In May 2011, the Board of Directors authorized a new program to repurchase up to $100.0 million in shares of our common stock expiring November 2012.
27
ITEM 6.EXHIBITS | | | | | Number | Description | DescriptionForm | Filed with SEC | 3.1 | | Restated Certificate of Incorporation, as amended, which is incorporated herein by reference from the registrant’s Annual Report on Form 10-K for the fiscal year ended October 3, 1999. | | | | 3.1.1 | | Certificate of Amendment of Restated Certificate of Incorporation, which is incorporated herein by reference from the registrant’s Current Report on Form 8-K dated September 21, 2007. | 2007 | 10-K | 11/20/2009 | 3.2 | | Amended and Restated Bylaws, which are incorporated herein by reference from the registrant’s Current Report on Form 8-K dated May 11, 2010.April 9, 2012 | 8-K | 4/10/2012 | 10.2.1 ~ | Form of Revised Compensation and Benefits Assurance Agreement for certain officers | | 10.15(a)— | | Memorandum of Understanding clarifying date of employment with Qdoba Restaurant Corporation, which is incorporated herein by reference from the registrant’s Quarterly Report on Form 10-Q for the quarter ended January 23, 2011. | | | Filed herewith | 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 2002 | — | Filed herewith | 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | 2002 | — | Filed herewith | 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 2002 | — | Filed herewith | 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | 2002 | — | 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 |
| | * | | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
28
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. | | | | | | JACK IN THE BOX INC. | | | | | JACK IN THE BOX INC. By: | | | By: | /S/ JERRYS/ JERRY P. REBEL | REBEL | | | Jerry P. Rebel | | | | Executive Vice President and Chief Financial Officer
(principal (principal financial officer)
(Duly Authorized Signatory) | | |
Date: May 19, 201117, 2012
|