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EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - JACK IN THE BOX INC /NEW/fy1410-qq3ex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - JACK IN THE BOX INC /NEW/fy1410-qq3ex321.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - JACK IN THE BOX INC /NEW/fy1410-qq3ex322.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - JACK IN THE BOX INC /NEW/fy1410-qq3ex312.htm
EXCEL - IDEA: XBRL DOCUMENT - JACK IN THE BOX INC /NEW/Financial_Report.xls

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
 _______________________________________________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 6, 2014
Commission File Number: 1-9390
 ____________________________________________________ 
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________________ 
DELAWARE
 
95-2698708
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
9330 BALBOA AVENUE, SAN DIEGO, CA
 
92123
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (858) 571-2121
   _______________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  þ    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  þ
As of the close of business August 1, 2014, 39,029,566 shares of the registrant’s common stock were outstanding.



JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
 
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
Condensed Consolidated Statements of Operations
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
PART II – OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 4.
Item 5.
Item 6.
 

1


PART I. FINANCIAL INFORMATION
 
ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
 
July 6,
2014
 
September 29,
2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,892

 
$
9,644

Accounts and other receivables, net
75,720

 
41,749

Inventories
7,697

 
7,181

Prepaid expenses
54,669

 
19,970

Deferred income taxes
31,008

 
26,685

Assets held for sale
3,490

 
11,875

Other current assets
1,925

 
108

Total current assets
184,401

 
117,212

Property and equipment, at cost
1,506,372

 
1,516,913

Less accumulated depreciation and amortization
(781,730
)
 
(746,054
)
Property and equipment, net
724,642

 
770,859

Intangible assets, net
15,805

 
16,390

Goodwill
149,110

 
148,988

Other assets, net
228,531

 
265,760

 
$
1,302,489

 
$
1,319,209

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
10,860

 
$
20,889

Accounts payable
24,646

 
36,899

Accrued liabilities
156,791

 
153,886

Total current liabilities
192,297

 
211,674

Long-term debt, net of current maturities
524,160

 
349,393

Other long-term liabilities
272,591

 
286,124

Stockholders’ equity:
 
 
 
Preferred stock $0.01 par value, 15,000,000 shares authorized, none issued

 

Common stock $0.01 par value, 175,000,000 shares authorized, 79,904,208 and 78,515,171 issued, respectively
799

 
785

Capital in excess of par value
347,328

 
296,764

Retained earnings
1,236,609

 
1,171,823

Accumulated other comprehensive loss
(59,572
)
 
(62,662
)
Treasury stock, at cost, 40,874,642 and 35,926,269 shares, respectively
(1,211,723
)
 
(934,692
)
Total stockholders’ equity
313,441

 
472,018

 
$
1,302,489

 
$
1,319,209

See accompanying notes to condensed consolidated financial statements.

2


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
$
264,398

 
$
270,863

 
$
861,000

 
$
888,565

Franchise revenues
84,094

 
79,466

 
278,444

 
263,321

 
348,492

 
350,329

 
1,139,444

 
1,151,886

Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
84,459

 
88,712

 
274,119

 
289,259

Payroll and employee benefits
71,733

 
74,242

 
237,165

 
250,006

Occupancy and other
57,671

 
59,360

 
189,378

 
195,372

Total company restaurant costs
213,863

 
222,314

 
700,662

 
734,637

Franchise costs
42,563

 
40,116

 
140,070

 
132,265

Selling, general and administrative expenses
47,422

 
52,078

 
155,238

 
171,246

Impairment and other charges, net
1,668

 
3,428

 
12,633

 
9,053

(Gains) losses on the sale of company-operated restaurants
(24
)
 
1,509

 
(2,242
)
 
3,179

 
305,492

 
319,445

 
1,006,361

 
1,050,380

Earnings from operations
43,000

 
30,884

 
133,083

 
101,506

Interest expense, net
3,535

 
3,270

 
12,388

 
12,061

Earnings from continuing operations and before income taxes
39,465

 
27,614

 
120,695

 
89,445

Income taxes
13,338

 
10,318

 
43,294

 
30,954

Earnings from continuing operations
26,127

 
17,296

 
77,401

 
58,491

Losses from discontinued operations, net of income tax benefit
(1,424
)
 
(22,952
)
 
(4,611
)
 
(30,167
)
Net earnings (losses)
$
24,703

 
$
(5,656
)
 
$
72,790

 
$
28,324

 
 
 
 
 
 
 
 
Net earnings (losses) per share - basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.66

 
$
0.40

 
$
1.87

 
$
1.35

Losses from discontinued operations
(0.04
)
 
(0.52
)
 
(0.11
)
 
(0.69
)
Net earnings (losses) per share (1)
$
0.62

 
$
(0.13
)
 
$
1.76

 
$
0.65

Net earnings (losses) per share - diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.64

 
$
0.38

 
$
1.82

 
$
1.30

Losses from discontinued operations
(0.03
)
 
(0.51
)
 
(0.11
)
 
(0.67
)
Net earnings (losses) per share (1)
$
0.61

 
$
(0.12
)
 
$
1.71

 
$
0.63

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
39,692

 
43,772

 
41,320

 
43,435

Diluted
40,787

 
45,247

 
42,605

 
44,978

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.20

 
$

 
$
0.20

 
$

____________________________
(1)
Earnings per share may not add due to rounding.

See accompanying notes to condensed consolidated financial statements.

3


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
 
 
 
 
 
 
 
 
Net earnings (losses)
$
24,703

 
$
(5,656
)
 
$
72,790

 
$
28,324

Cash flow hedges:
 
 
 
 
 
 
 
Net change in fair value of derivatives
(14
)
 
59

 
(99
)
 
(31
)
Net loss reclassified to earnings
324

 
313

 
1,072

 
1,037

 
310

 
372

 
973

 
1,006

Tax effect
(119
)
 
(143
)
 
(373
)
 
(386
)
 
191

 
229

 
600

 
620

Unrecognized periodic benefit costs:
 
 
 
 
 
 
 
Actuarial losses and prior service costs reclassified to earnings
1,210

 
4,361

 
4,035

 
14,534

Tax effect
(464
)
 
(1,672
)
 
(1,548
)
 
(5,571
)
 
746

 
2,689

 
2,487

 
8,963

Other:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(2
)
 
7

 
5

 
12

Tax effect
1

 
(2
)
 
(2
)
 
(3
)
 
(1
)
 
5

 
3

 
9

 
 
 
 
 
 
 
 
Other comprehensive income
936

 
2,923

 
3,090

 
9,592

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
25,639

 
$
(2,733
)
 
$
75,880

 
$
37,916

See accompanying notes to condensed consolidated financial statements.


4


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
72,790

 
$
28,324

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
70,585

 
74,870

Deferred finance cost amortization
1,677

 
1,764

Deferred income taxes
6,951

 
2,523

Share-based compensation expense
8,128

 
10,049

Pension and postretirement expense
10,585

 
23,959

Gains on cash surrender value of company-owned life insurance
(8,312
)
 
(5,209
)
(Gains) losses on the sale of company-operated restaurants
(2,242
)
 
3,179

Losses on the disposition of property and equipment
2,353

 
2,525

Impairment charges and other
7,241

 
28,237

Loss on early retirement of debt
789

 
939

Changes in assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and other receivables
(9,376
)
 
33,776

Inventories
(516
)
 
26,393

Prepaid expenses and other current assets
(36,514
)
 
(24,091
)
Accounts payable
(3,035
)
 
(27,857
)
Accrued liabilities
16,615

 
7,196

Pension and postretirement contributions
(14,107
)
 
(13,168
)
Other
(9,689
)
 
(6,121
)
Cash flows provided by operating activities
113,923

 
167,288

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(43,825
)
 
(57,971
)
Purchases of assets intended for sale and leaseback
(19
)
 
(25,198
)
Proceeds from the sale of assets
5,698

 
36,553

Proceeds from the sale of company-operated restaurants
8,199

 
8,415

Collections on notes receivable
2,555

 
5,837

Acquisitions of franchise-operated restaurants
(1,750
)
 
(11,014
)
Other
2,838

 
4,054

Cash flows used in investing activities
(26,304
)
 
(39,324
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
618,000

 
554,000

Repayments of borrowings on revolving credit facilities
(460,000
)
 
(619,000
)
Proceeds from issuance of debt
200,000

 
200,000

Principal repayments on debt
(193,262
)
 
(175,783
)
Debt issuance costs
(3,607
)
 
(4,392
)
Dividends paid on common stock
(7,990
)
 

Proceeds from issuance of common stock
27,069

 
48,000

Repurchases of common stock
(284,258
)
 
(92,152
)
Excess tax benefits from share-based compensation arrangements
15,167

 
1,261

Change in book overdraft
1,507

 
(38,584
)
Cash flows used in financing activities
(87,374
)
 
(126,650
)
Effect of exchange rate changes on cash and cash equivalents
3

 

Net increase in cash and cash equivalents
248

 
1,314

Cash and cash equivalents at beginning of period
9,644

 
8,469

Cash and cash equivalents at end of period
$
9,892

 
$
9,783


See accompanying notes to condensed consolidated financial statements.

5

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




1.
BASIS OF PRESENTATION
Nature of operations — Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® brand quick-service restaurants and Qdoba Mexican Grill® (“Qdoba”) brand fast-casual restaurants. The following table summarizes the number of restaurants as of the end of each period:
 
July 6,
2014
 
July 7,
2013
Jack in the Box:
 
 
 
Company-operated
455

 
526

Franchise
1,797

 
1,729

Total system
2,252

 
2,255

Qdoba:
 
 
 
Company-operated
308

 
284

Franchise
324

 
308

Total system
632

 
592

References to the Company throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”
Basis of presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (“SEC”). During fiscal 2012, we entered into an agreement to outsource our Jack in the Box distribution business. In the third quarter of fiscal 2013, we closed 62 Qdoba restaurants (the “2013 Qdoba Closures”) as part of a comprehensive Qdoba market performance review. The results of operations for our distribution business and for the 62 closed Qdoba restaurants are reported as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, for additional information. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to our continuing operations. In our opinion, all adjustments considered necessary for a fair presentation of financial condition and results of operations for these interim periods have been included. Operating results for one interim period are not necessarily indicative of the results for any other interim period or for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 29, 2013. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our Form 10-K.
Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities (“VIEs”) where we are deemed the primary beneficiary. All significant intercompany accounts and transactions are eliminated. For information related to the VIE included in our condensed consolidated financial statements, refer to Note 13, Variable Interest Entities.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2014 and 2013 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks. All comparisons between 2014 and 2013 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 6, 2014 and July 7, 2013, respectively, unless otherwise indicated.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain assumptions and estimates that affect reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual amounts could differ materially from these estimates.

2.
DISCONTINUED OPERATIONS
Distribution business — During fiscal 2012, we entered into an agreement with a third party distribution service provider pursuant to a plan approved by our board of directors to sell our Jack in the Box distribution business. During the first quarter of fiscal 2013, we completed the transition of our distribution centers. The operations and cash flows of the business have been eliminated and in accordance with the provisions of the Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.

6

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




The following is a summary of our distribution business operating results, which are included in discontinued operations for each period (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Revenue
$

 
$

 
$

 
$
37,743

Operating loss before income tax benefit
$
(557
)
 
$
(557
)
 
$
(1,253
)
 
$
(6,030
)
The loss on the sale of the distribution business was not material to our results of operations in 2013. The year-to-date operating loss in 2014 includes $0.9 million related to insurance settlements and $0.3 million for lease commitment adjustments. Our liability for lease commitments related to our distribution centers is included in accrued liabilities and other long-term liabilities and has changed as follows during 2014 (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Balance at beginning of period
$
743

 
$
2,116

 
$
1,318

 
$
697

Additions

 

 

 
1,846

Adjustments
55

 
29

 
253

 
237

Cash payments
(173
)
 
(349
)
 
(946
)
 
(984
)
Balance at end of period
$
625

 
$
1,796

 
$
625

 
$
1,796

Adjustments in 2014 relate to the termination of a lease agreement and the execution of a sublease agreement. Adjustments in 2013 primarily represent revisions to certain sublease and cost assumptions due to changes in market conditions. The balance at July 6, 2014 relates to one distribution center subleased at a loss.
Qdoba restaurant closures — During the third quarter of fiscal 2013, we closed 62 Qdoba restaurants. The decision to close these restaurants was based on a comprehensive analysis that took into consideration levels of return on investment and other key operating performance metrics.
Since the closed locations were not predominantly located near those remaining in operation, we did not expect the majority of cash flows and sales lost from these closures to be recovered. In addition, we did not anticipate any ongoing involvement or significant direct cash flows from the closed stores. Therefore, in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results of operations for these restaurants are reported as discontinued operations for all periods presented.
The following is a summary of the results of operations related to the 2013 Qdoba Closures for each period (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Company restaurant sales
$

 
$
8,448

 
$

 
$
28,036

Operating loss before income tax benefit
$
(1,675
)
 
$
(36,660
)
 
$
(6,091
)
 
$
(42,887
)
In 2014, the operating loss recognized in the quarter is primarily comprised of unfavorable lease adjustments and related broker commissions. The year-to-date operating loss includes $4.2 million of unfavorable lease commitment adjustments, $0.4 million for asset impairments, $0.7 million of ongoing facility related costs and $0.5 million of broker commissions. We do not expect the remaining costs to be incurred related to this transaction to be material, however the estimates we make related to our future lease obligations, primarily sublease income, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.

7

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



Our liability for lease commitments related to the 2013 Qdoba closures is included in accrued liabilities and other long-term liabilities and has changed as follows during 2014 (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Balance at beginning of period
$
7,131

 
$

 
$
10,712

 
$

Additions

 
14,072

 

 
14,072

Adjustments
1,256

 

 
4,235

 

Cash payments
(1,845
)
 
(928
)
 
(8,405
)
 
(928
)
Balance at end of period
$
6,542

 
$
13,144

 
$
6,542

 
$
13,144

In 2014, adjustments primarily relate to revisions to certain sublease and cost assumptions due to changes in market conditions as well as charges to terminate 16 lease agreements. These amounts were partially offset by favorable adjustments for locations that we have subleased.

3.
INDEBTEDNESS
New credit facility — On March 19, 2014, the Company refinanced its former credit facility and entered into an amended and restated credit agreement. The new credit facility is comprised of (i) a $600.0 million revolving credit facility and (ii) a $200.0 million term loan facility. The interest rate on the new credit facility is based on the Company’s leverage ratio and can range from London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.00% with no floor. The initial interest rate was LIBOR plus 1.75%. The revolving credit facility and the term loan facility both have maturity dates of March 19, 2019. 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 our net borrowing capacity under the agreement.
Use of proceeds — The Company borrowed $200.0 million under the new term loan and approximately $220.0 million under the new revolving credit facility. The proceeds from the refinancing transaction were used to repay all borrowings under the former facility and to pay related transaction fees and expenses associated with the refinance of the facility, and will also be available for permitted share repurchases, permitted dividends, permitted acquisitions, ongoing working capital requirements and other general corporate purposes. At July 6, 2014, we had borrowings under the revolving credit facility of $333.0 million, $197.5 million outstanding under the term loan and letters of credit outstanding of $22.2 million.
Collateral — The Company’s obligations under the new credit facility are secured by first priority liens and security interests in the capital stock, partnership, and membership interests owned by the Company and/or its subsidiaries, and any proceeds thereof, subject to certain restrictions. Additionally, there is a negative pledge on all tangible and intangible assets (including all real and personal property), with customary exceptions.
Covenants — We are subject to a number of customary covenants under our new credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases and dividend payments, and requirements to maintain certain financial ratios defined in the credit agreement.
Repayments — The term loan requires amortization in the form of quarterly installments of $2.5 million from June 2014 through March 2016, $3.75 million from June 2016 through March 2018, and $5.0 million from June through December 2018 with the remainder due at the expiration of the term loan agreement in March 2019. We are required to make certain mandatory prepayments under certain circumstances and we have the option to make certain prepayments without premium or penalty. The new credit facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are customary for facilities and transactions of this type.


8

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



4.
SUMMARY OF REFRANCHISINGS, FRANCHISE DEVELOPMENT AND ACQUISITIONS
Refranchisings and franchise development — The following is a summary of the number of restaurants sold to franchisees, number of restaurants developed by franchisees and the related gains (losses) and fees recognized (dollars in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Restaurants sold to franchisees

 
18

 
14

 
22

New restaurants opened by franchisees
8

 
6

 
27

 
35

 
 
 
 
 
 
 
 
Initial franchise fees
$
207

 
$
1,005

 
$
1,361

 
$
2,040

 
 
 
 
 
 
 
 
Net proceeds (1)
$
357

 
$
5,549

 
$
8,199

 
$
8,415

Net assets sold (primarily property and equipment)
(7
)
 
(3,554
)
 
(2,247
)
 
(5,274
)
Goodwill related to the sale of company-operated restaurants
(5
)
 
(129
)
 
(134
)
 
(196
)
Other
1

 
(2,292
)
 
(139
)
 
(2,292
)
Gains (losses) on the sale of company-operated restaurants
346

 
(426
)
 
5,679

 
653

 
 
 
 
 
 
 
 
Losses on anticipated sale of Jack in the Box company-operated markets
(322
)
 

 
(3,437
)
 
(2,749
)
Loss on anticipated sale of Qdoba company-operated market

 
(1,083
)
 

 
(1,083
)
 
 
 
 
 
 
 
 
Total gains (losses) on the sale of company-operated restaurants
$
24

 
$
(1,509
)
 
$
2,242

 
$
(3,179
)
____________________________
(1)
Amounts in 2014 and 2013 include additional proceeds recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold in a prior year of $0.4 million and $0.8 million, respectively, in the quarter and $1.5 million and $1.9 million, respectively, year-to-date.
In 2014, losses on the anticipated sale of Jack in the Box company-operated markets relate to restaurants held for sale for which we have signed letters of intent. Refer to Note 5, Fair Value Measurements, for additional information regarding the losses recorded.
Franchise acquisitions — During 2014, we repurchased four Jack in the Box franchise restaurants. In 2013, we acquired 12 Qdoba franchise restaurants and one Jack in the Box franchise restaurant. We account for the acquisition of franchised restaurants using the acquisition 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 locations acquired and is expected to be deductible for tax purposes. The following table provides detail of the combined acquisitions in each year-to-date period (dollars in thousands):
 
July 6, 2014
 
July 7, 2013
 
Jack in the Box
 
Qdoba
 
Jack in the Box
 
Total
Restaurants acquired from franchisees
4

 
12

 
1

 
13

 
 
 
 
 
 
 
 
Property and equipment
$
1,398

 
$
2,632

 
$
145

 
$
2,777

Reacquired franchise rights
96

 
106

 
34

 
140

Liabilities assumed

 
(281
)
 
(2
)
 
(283
)
Goodwill
256

 
7,207

 
1,173

 
8,380

Total consideration
$
1,750

 
$
9,664

 
$
1,350

 
$
11,014



9

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



5.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities — The following table presents the financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Total      
 
Quoted Prices
in Active
Markets for
Identical
Assets (3)
(Level 1)
 
Significant
Other
Observable
Inputs (3)
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Fair value measurements as of July 6, 2014:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(39,716
)
 
$
(39,716
)
 
$

 
$

Interest rate swaps (Note 6) (2) 
(217
)
 

 
(217
)
 

Total liabilities at fair value
$
(39,933
)
 
$
(39,716
)
 
$
(217
)
 
$

Fair value measurements as of September 29, 2013:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(39,135
)
 
$
(39,135
)
 
$

 
$

Interest rate swaps (Note 6) (2) 
(1,190
)
 

 
(1,190
)
 

Total liabilities at fair value
$
(40,325
)
 
$
(39,135
)
 
$
(1,190
)
 
$

 
____________________________
(1)
We maintain an unfunded defined contribution plan for key executives and other members of management excluded from participation in our qualified savings plan. The fair value of this obligation is based on the closing market prices of the participants’ elected investments.
(2)
We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable debt. The fair values of our interest rate swaps are 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.
(3)
We did not have any transfers in or out of Level 1 or Level 2.
The fair values of the Company’s debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company’s borrowing rate. At July 6, 2014, the carrying value of all financial instruments was not materially different from fair value, as the borrowings are prepayable without penalty. The estimated fair values of our capital lease obligations approximated their carrying values as of July 6, 2014.
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 intangible assets, 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 are written down to fair value.
The following table presents non-financial assets and liabilities measured at fair value on a nonrecurring basis during fiscal 2014 (in thousands):
 
Fair Value Measurement
 
Impairment Charges
Long-lived assets held and used
$
619

 
$
326

Long-lived assets held for sale
$
3,494

 
$
3,437

Long-lived asset abandoned
$

 
$
6,486

Long-lived assets held and used consist primarily of Jack in the Box restaurants determined to be underperforming or which we intend to close. To determine fair value, we use 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 7, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, for additional information regarding these impairment charges.
Long-lived assets held for sale were written down to fair value less costs to sell and relate to the anticipated sale of three Jack in the Box company-operated markets. We have signed letters of intent related to the sale of all three markets and fair value was determined based on the terms contained therein. These impairment charges are included in gains (losses) on the sale of company-operated restaurants in the accompanying condensed consolidated statements of operations.

10

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The abandoned long-lived asset relates to the impairment of a restaurant software asset we no longer plan to place in service, and for which we have determined fair value to be zero. Refer to Note 7, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, for additional information regarding this impairment charge.

6.
DERIVATIVE INSTRUMENTS
Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis from September 2011 through September 2014. In April 2014, we entered into nine forward-starting interest rate swap agreements that effectively convert $300.0 million of our variable rate borrowings to a fixed rate basis from October 2014 through October 2018. These agreements have been designated as cash flow hedges under the terms of the Financial Accounting Standards Board authoritative guidance for derivatives and hedging.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):
 
July 6, 2014
 
September 29, 2013
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps (Note 5)
Accrued
liabilities
 
$
(217
)
 
Accrued
liabilities
 
$
(1,190
)
Total derivatives
 
 
$
(217
)
 
 
 
$
(1,190
)
Financial performance — The following is a summary of the accumulated other comprehensive income (“OCI”) activity related to our interest rate swap derivative instruments (in thousands):
 
Location of Loss in Income
 
Quarter
 
Year-to-Date
 
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Gains (losses) recognized in OCI
N/A
 
$
(14
)
 
$
59

 
$
(99
)
 
$
(31
)
Losses reclassified from accumulated OCI into income
Interest
expense, 
net
 
$
(324
)
 
$
(313
)
 
$
(1,072
)
 
$
(1,037
)
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.

7.
IMPAIRMENT, DISPOSITION OF PROPERTY AND EQUIPMENT, RESTAURANT CLOSING COSTS AND RESTRUCTURING
Impairment and other charges, net in the accompanying condensed consolidated statements of operations is comprised of the following (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Restaurant impairment charges
$
146

 
$
501

 
$
326

 
$
3,385

Losses on the disposition of property and equipment, net
643

 
2,055

 
2,344

 
2,525

Costs of closed restaurants (primarily lease obligations) and other
318

 
733

 
1,613

 
1,849

Restructuring costs
561

 
139

 
8,350

 
1,294

 
$
1,668

 
$
3,428

 
$
12,633

 
$
9,053

Restaurant 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. Impairment charges in both periods include charges for restaurants we have closed, and additionally in 2013, charges for underperforming Jack in the Box restaurants.
Disposition of property and equipment — We also recognize accelerated depreciation and other costs on the disposition

11

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



of property and equipment. When we decide to dispose of a long-lived asset, depreciable lives are adjusted based on the estimated disposal date and accelerated depreciation is recorded. Other disposal costs primarily relate to gains or losses recognized upon the sale of closed restaurant properties, and charges from our ongoing restaurant upgrade programs, remodels and rebuilds, and other corporate initiatives. Losses on the disposition of property and equipment for the year-to-date period ended July 7, 2013 include income of $2.4 million from the resolution of two eminent domain matters involving Jack in the Box restaurants.
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 operations. Accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Balance at beginning of period
$
14,596

 
$
18,437

 
$
16,321

 
$
20,677

Adjustments
332

 
367

 
1,594

 
1,105

Cash payments
(1,302
)
 
(1,439
)
 
(4,289
)
 
(4,417
)
Balance at end of quarter
$
13,626

 
$
17,365

 
$
13,626

 
$
17,365

In 2014 and 2013, adjustments primarily relate to revisions to certain sublease and cost assumptions due to changes in market conditions.
Restructuring costs — Since the beginning of 2012, we have been engaged in efforts to improve our cost structure and identify opportunities to reduce general and administrative expenses as well as improve profitability across both brands. The following is a summary of the costs incurred in connection with these activities (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Severance costs
$
468

 
$
4

 
$
1,864

 
$
674

Other
93

 
135

 
6,486

 
620

 
$
561

 
$
139

 
$
8,350

 
$
1,294

In 2014, other relates to the impairment of a restaurant software asset we no longer plan to place in service as a result of our efforts to integrate certain systems across both of our brands and lower costs.
Total accrued severance costs related to our restructuring activities are included in accrued liabilities and changed as follows (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Balance at beginning of period
$

 
$
39

 
$
253

 
$
1,758

Additions
468

 
4

 
1,864

 
674

Cash payments
(11
)
 
(15
)
 
(1,660
)
 
(2,404
)
Balance at end of quarter
$
457

 
$
28

 
$
457

 
$
28

We expect to incur additional charges related to our restructuring activities; however, we are unable to make a reasonable estimate at this time.
8.
INCOME TAXES
The income tax provisions reflect tax rates of 33.8% in the quarter and 35.9% year-to-date in 2014, compared with 37.4% and 34.6%, respectively, a year ago. The major components of the year-over-year change in tax rates were an increase in operating earnings before income taxes, a decrease in tax credits and an increase in the market performance of insurance products used to fund certain non-qualified retirement plans which are excluded from taxable income. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2014 rate could differ from our current estimates.
During the quarter ended July 6, 2014, the Company completed a fixed asset cost segregation study. The study resulted in a $4.3 million increase in current deferred tax assets, a $38.8 million decrease in non-current deferred tax assets, a

12

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



$9.9 million decrease in income taxes payable, a $24.3 million increase in income tax refunds receivable and $0.3 million of income tax expense.
At July 6, 2014, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.8 million, which if recognized would favorably impact the effective income tax rate. There was no significant change in our gross unrecognized tax benefits from the end of fiscal year 2013. 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 2011 and forward.  The Company’s federal statute of limitations for fiscal year 2009 was extended and remains open. The statutes of limitations for California and Texas, which constitute the Company’s major state tax jurisdictions, have not expired for fiscal years 2009 and forward. However, the Company has pending appeals for California (related to fiscal years 2001 to 2007) and Texas (related to fiscal year 2007) for specific claims. 
 
9.
RETIREMENT PLANS
Defined benefit pension plans — We sponsor two defined benefit pension plans: a qualified plan covering substantially all full-time Jack in the Box employees hired prior to January 1, 2011, and an unfunded supplemental executive plan which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. In fiscal 2011, the Board of Directors approved changes to our qualified plan whereby participants will no longer accrue benefits under this plan effective December 31, 2015. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.
Postretirement healthcare plans — We also sponsor two healthcare plans, closed to new participants, that provide postretirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory, 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 in each period were as follows (in thousands): 
  
Quarter
 
Year-to-Date
  
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Defined benefit pension plans:
 
 
 
 
 
 
 
Service cost
$
1,875

 
$
2,481

 
$
6,249

 
$
8,271

Interest cost
5,364

 
5,222

 
17,880

 
17,406

Expected return on plan assets
(5,652
)
 
(5,242
)
 
(18,840
)
 
(17,472
)
Actuarial loss
1,023

 
4,116

 
3,411

 
13,719

Amortization of unrecognized prior service cost
62

 
62

 
207

 
207

Net periodic benefit cost
$
2,672

 
$
6,639

 
$
8,907

 
$
22,131

Postretirement healthcare plans:
 
 
 
 
 
 
 
Interest cost
$
379

 
$
366

 
$
1,261

 
$
1,220

Actuarial loss
125

 
183

 
417

 
608

Net periodic benefit cost
$
504

 
$
549

 
$
1,678

 
$
1,828

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 contribution funding requirement. Details regarding fiscal 2014 contributions are as follows (in thousands):
 
Defined Benefit
Pension Plans
 
Postretirement
Healthcare Plans
Net year-to-date contributions
$
13,065

 
$
1,042

Remaining estimated net contributions during fiscal 2014
$
11,300

 
$
400

We will continue to evaluate contributions to our qualified defined benefit pension plan based on changes in pension assets as a result of asset performance in the current market and economic environment.
 

13

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



10.
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 2014, we granted the following shares related to our share-based compensation awards:
Stock options
215,248

Performance share awards
55,668

Nonvested stock units
112,908

The components of share-based compensation expense recognized in each period are as follows (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Stock options
$
347

 
$
1,321

 
$
2,125

 
$
4,480

Performance share awards
891

 
421

 
3,386

 
2,085

Nonvested stock awards
46

 
82

 
264

 
301

Nonvested stock units
497

 
626

 
2,135

 
2,963

Deferred compensation for non-management directors

 

 
218

 
220

Total share-based compensation expense
$
1,781

 
$
2,450

 
$
8,128

 
$
10,049


11.    STOCKHOLDERS’ EQUITY
Repurchases of common stock In November 2012 and August 2013, the Board of Directors approved two programs, each of which provided for repurchase authorizations for up to $100.0 million in shares of our common stock, expiring November 2014 and November 2015, respectively. Additionally, in February 2014, the Board of Directors approved a program which provides repurchase authorization for up to an additional $200.0 million in shares of our common stock, expiring November 2015. During fiscal 2014, we repurchased 4.95 million shares at an aggregate cost of $277.0 million and fully utilized the November 2012 and August 2013 authorizations. As of July 6, 2014, there was $59.7 million remaining under the February 2014 authorization.
Repurchases of common stock included in our condensed consolidated statements of cash flows for the year-to-date period ended July 6, 2014 includes $7.3 million related to repurchase transactions traded in fiscal 2013 and settled in 2014.
Dividend During the third quarter, the Board of Directors approved the initiation of a regular quarterly cash dividend. The initial cash dividend of $0.20 per share was paid on June 9, 2014 to shareholders of record as of May 27, 2014 and totaled $8.0 million.

12.
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 share 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.


14

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Weighted-average shares outstanding – basic
39,692

 
43,772

 
41,320

 
43,435

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
576

 
895

 
684

 
957

Nonvested stock awards and units
247

 
375

 
327

 
366

Performance share awards
272

 
205

 
274

 
220

Weighted-average shares outstanding – diluted
40,787

 
45,247

 
42,605

 
44,978

Excluded from diluted weighted-average shares outstanding:
 
 
 
 
 
 
 
Antidilutive
178

 

 
145

 
172

Performance conditions not satisfied at the end of the period
31

 
220

 
29

 
220


13.
VARIABLE INTEREST ENTITIES
In January 2011, we formed Jack in the Box Franchise Finance, LLC (“FFE”) for the purpose of operating a franchisee lending program to assist Jack in the Box franchisees in re-imaging their restaurants. We are the sole equity investor in FFE. The lending program was 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 entered into with a third party. The lending period and the revolving period expired in June 2012. At July 6, 2014, we had no borrowings under the FFE Facility and we do not plan to make any further contributions.
We have determined that FFE is a VIE, and that the Company is the 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 the entity is reflected 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 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 operations or cash flows.
The FFE’s balance sheet consisted of the following at the end of each period (in thousands):
 
July 6,
2014
 
September 29,
2013
Cash
$
335

 
$
250

Other current assets (1) 
2,467

 
2,368

Other assets, net (1) 
6,238

 
8,367

Total assets
$
9,040

 
$
10,985

 
 
 
 
Current liabilities
$
3,066

 
$
3,010

Other long-term liabilities (2) 
5,920

 
8,076

Retained earnings
54

 
(101
)
Total liabilities and stockholders’ equity
$
9,040

 
$
10,985

____________________________
(1)
Consists primarily of amounts due from franchisees.
(2)
Consists primarily of the capital note contributions from Jack in the Box which are eliminated in consolidation.
The Company’s maximum exposure to loss is equal to its outstanding contributions as of July 6, 2014. This amount 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.


15

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



14.    CONTINGENCIES AND LEGAL MATTERS 
Legal Matters — The Company assesses contingencies, including litigation 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. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matter.  In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability. 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. 
Gessele v. Jack in the Box Inc. —  In August 2010, five former employees instituted litigation in federal court in Oregon alleging claims under the federal Fair Labor Standards Act (“FLSA”) and Oregon wage and hour laws.  The plaintiffs alleged that the Company failed to pay non-exempt employees for certain meal breaks and improperly made payroll deductions for shoe purchases and for workers’ compensation expenses.  In April 2014, the district court granted our motion for summary judgment, and dismissed all claims without prejudice to re-filing in state court. The plaintiffs recently re-filed similar claims, and additional claims relating to timing of final pay and related wage and hour claims involving employees of a franchisee, in Oregon state court.  We removed the action to federal court in July 2014. In light of the procedural status of the case, (1) we continue to accrue for a single claim for which we believe a loss is both probable and estimable; and (2)  we have not established a loss contingency accrual for those claims as to which we believe liability is not probable or for which we are currently unable to estimate a range of loss. Our accrued loss contingency did not have a material effect on our results of operations, and we plan to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter in excess of our current accrued loss contingencies could have a material adverse effect on our business, results of operations, liquidity or financial condition.
Other Legal Matters — In addition to the matter described above, the Company is subject to normal and routine litigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others.  We intend to defend ourselves in any such matters.  Some of these matters may be covered, at least in part, by insurance. Our insurance liability (undiscounted) and reserves are established in part by using independent actuarial estimates of expected losses for reported claims and for estimating claims incurred but not reported. As of July 6, 2014, our estimated liability for general liability and workers’ compensation claims exceeded our self-insurance retention limits by $22.9 million. We expect to be fully covered for these amounts by surety bond issuers or our insurance providers. Although the Company currently believes that the ultimate determination of liability in connection with legal claims pending against it, if any, in excess of amounts already provided for these matters in the consolidated financial statements will not have a material adverse effect on our business, the Company’s annual results of operations, liquidity or financial position, it is possible that our results of operations, liquidity, or financial position could be materially affected in a particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies during such period.
Lease Guarantees In connection with the sale of the distribution business, we have assigned the leases at three of our distribution centers to third parties. Under these agreements, which expire in 2014, 2015 and 2017, we remain secondarily liable for the lease payments for which we were responsible under the original lease. As of July 6, 2014, the amount remaining under these lease guarantees totaled $2.8 million. We have not recorded a liability for the guarantees as the likelihood of the third party defaulting on the assignment agreements was deemed to be less than probable.

15.
SEGMENT REPORTING
Our principal business consists of developing, operating and franchising our Jack in the Box and Qdoba restaurant concepts, each of which we consider reportable operating segments. Since the beginning of 2012, we have been engaged in restructuring activities related to our internal organization and have now instituted a shared-services model (refer also to Note 7, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring). As a result, in fiscal 2014, our chief operating decision makers, which consist of a collective group of executive leadership, revised the method by which they determine performance and strategy for our segments. This change was made to reflect a shared-services model whereby each brand’s results of operations are assessed separately and do not include costs related to certain corporate functions which support both 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, each operating segment is considered a reportable segment. This change to our segment reporting did not change our reporting units for goodwill.

16

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



We measure and evaluate our segments based on segment revenues and earnings from operations. The reportable segments do not include an allocation of the costs related to shared service functions, such as accounting/finance, human resources, audit services, legal, tax and treasury; nor do they include unallocated costs such as pension expense and share-based compensation. These costs are reflected in the caption “Shared services and unallocated costs,” and therefore, the measure of segment profit or loss is before such items. As it was impractical to recast prior period information, 2014 segment information is reported under both the old basis and new basis of segmentation (in thousands):
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 6,
2014
 
July 7,
2013
 
(New)
 
(Old)
 
 
(New)
 
(Old)
 
Revenues by segment:
 
 
 
 
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
259,737

 
$
259,737

 
$
272,755

 
$
869,650

 
$
869,650

 
$
918,246

Qdoba restaurant operations
88,755

 
88,755

 
77,574

 
269,794

 
269,794

 
233,640

Consolidated revenues
$
348,492

 
$
348,492

 
$
350,329

 
$
1,139,444

 
$
1,139,444

 
$
1,151,886

Earnings from operations by segment:
 
 
 
 
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
54,413

 
$
33,692

 
$
23,485

 
$
184,333

 
$
108,607

 
$
83,002

Qdoba restaurant operations
9,641

 
9,326

 
7,410

 
26,354

 
24,567

 
18,602

FFE operations (1)

 
(18
)
 
(11
)
 

 
(91
)
 
(98
)
Shared services and unallocated costs
(21,078
)
 

 

 
(79,846
)
 

 

Gains on the sale of company-operated restaurants
24

 

 

 
2,242

 

 

Consolidated earnings from operations
43,000

 
43,000

 
30,884

 
133,083

 
133,083

 
101,506

Interest expense, net
3,535

 
3,535

 
3,270

 
12,388

 
12,388

 
12,061

Consolidated earnings from continuing operations and before income taxes
$
39,465

 
$
39,465

 
$
27,614

 
$
120,695

 
$
120,695

 
$
89,445

Total depreciation expense by segment:
 
 
 
 
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
15,110

 
$
16,798

 
$
17,350

 
$
51,379

 
$
56,991

 
$
58,783

Qdoba restaurant operations
3,893

 
3,893

 
3,741

 
13,029

 
13,029

 
12,054

Shared services and unallocated costs
1,688

 

 

 
5,612

 

 

Consolidated depreciation expense
$
20,691

 
$
20,691

 
$
21,091

 
$
70,020

 
$
70,020

 
$
70,837

____________________________
(1)    FFE operations are included in the Jack in the Box operations segment under the new basis of segmentation.
Income taxes and total assets are not reported for our segments, in accordance with our method of internal reporting.

The following table provides detail of the change in the balance of goodwill for each of our reportable segments (in thousands):
 
Qdoba
 
Jack in the Box
 
Total
Balance at September 29, 2013
$
100,597

 
$
48,391

 
$
148,988

Additions

 
256

 
256

Disposals

 
(134
)
 
(134
)
Balance at July 6, 2014
$
100,597

 
$
48,513

 
$
149,110

Refer to Note 4, Summary of Refranchisings, Franchise Development and Acquisitions, for information regarding the transactions resulting in the changes in goodwill.

16.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
July 6,
2014
 
July 7,
2013
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
$
12,100

 
$
11,392

Income tax payments
$
28,913

 
$
36,692


17

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)




17.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
July 6,
2014
 
September 29,
2013
Other assets, net:
 
 
 
Company-owned life insurance policies
$
103,016

 
$
94,704

Deferred tax assets
41,505

 
88,833

Other
84,010

 
82,223

 
$
228,531

 
$
265,760

Accrued liabilities:
 
 
 
Payroll and related taxes
$
49,252

 
$
46,970

Sales and property taxes
11,045

 
11,386

Insurance
35,301

 
35,209

Lease commitments related to closed or refranchised locations
9,556

 
12,737

Deferred rent income
14,744

 
9,385

Deferred beverage allowance
14,173

 
5,670

Other
22,720

 
32,529

 
$
156,791

 
$
153,886

Other long-term liabilities:
 
 
 
Pension plans
$
98,193

 
$
105,968

Straight-line rent accrual
50,064

 
50,726

Other
124,334

 
129,430

 
$
272,591

 
$
286,124


18.
SUBSEQUENT EVENTS

Declaration of dividend — On July 31, 2014, the Board of Directors approved a cash dividend of $0.20 per share, to be paid on September 2, 2014 to shareholders of record as of the close of business on August 18, 2014. Future dividends will be subject to approval by our Board of Directors.

On July 31, 2014, the Board of Directors authorized an additional $100.0 million stock-buyback program that expires in November 2015.


18

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



19.
NEW ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which modifies the definition of discontinued operations to include only disposals of an entity that represent strategic shifts that have or will have a major effect on an entity's operations and financial results. This ASU also expands the disclosure requirements for disposals which meet the definition of a discontinued operation and requires entities to disclose information about disposals of individually significant components that do not meet the definition of discontinued operations. The standard is effective prospectively for annual and interim periods beginning after December 15, 2014, with early adoption permitted. This pronouncement is not expected to have a material impact on our consolidated financial statements upon adoption.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for annual periods and interim periods beginning after December 15, 2016. The ASU is to be applied retrospectively or using a cumulative effect transition method and early adoption is not permitted. We are currently evaluating the effect that this pronouncement will have on our consolidated financial statements and related disclosures.


19


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2014 and 2013 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 6, 2014 and July 7, 2013, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during the quarterly and year-to-date periods ended July 6, 2014 and July 7, 2013, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended September 29, 2013.
Our MD&A consists of the following sections:
Overview — a general description of our business and 2014 highlights.
Financial reporting — a discussion of changes in presentation.
Results of operations — an analysis of our consolidated statements of operations 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, dividends, 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 July 6, 2014, we operated and franchised 2,252 Jack in the Box quick-service restaurants, primarily in the western and southern United States, and 632 Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants throughout the United States and including four in Canada.
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), franchise fees and rents from Jack in the Box franchisees. In addition, we recognize gains or losses from the sale of company-operated restaurants to franchisees. These gains or losses are included as a line item within operating costs and expenses, net in the accompanying condensed consolidated statements of operations.

20


The following summarizes the most significant events occurring in 2014 and certain trends compared to a year ago:
Restaurant Sales Sales at restaurants open more than one year (“same-store sales”) changed as follows:
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Jack in the Box:
 
 
 
 
 
 
 
Company
2.4%
 
1.2%
 
1.8%
 
1.4%
Franchise
2.4%
 
(0.3)%
 
1.7%
 
0.6%
System
2.4%
 
0.1%
 
1.7%
 
0.8%
Qdoba:
 
 
 
 
 
 
 
Company
7.2%
 
0.5%
 
5.2%
 
0.3%
Franchise
7.7%
 
2.1%
 
5.6%
 
0.6%
System
7.5%
 
1.3%
 
5.4%
 
0.4%

Commodity Costs Commodity costs at both our Jack in the Box and Qdoba restaurants increased approximately 2.6% in the quarter and 1.5% and 0.6% at our Jack in the Box and Qdoba restaurants, respectively, year-to-date compared to a year ago. We expect our overall commodity costs to increase approximately 1.5% to 2.0% in fiscal 2014.
New Unit Development Year-to-date, we opened 10 Jack in the Box locations and 30 Qdoba locations system-wide.
Franchising Program Qdoba and Jack in the Box franchisees opened a total of 27 restaurants year-to-date and we have signed letters of intent to sell approximately 44 Jack in the Box restaurants in three markets. Our Jack in the Box system was 80% franchised at the end of the third quarter. We plan to maintain franchise ownership in the Jack in the Box system at a level between 80% to 85%.
Credit Facility In March 2014, we entered into a new credit agreement consisting of a $600.0 million revolving credit facility and a $200.0 million term loan, both with a five-year maturity.
Share Repurchases Pursuant to a share repurchase program authorized by our Board of Directors, we repurchased 4.95 million shares of our common stock at an average price of $55.98 per share during the year, including the cost of brokerage fees.
Dividend During the third quarter, the Board of Directors approved the initiation of a regular quarterly cash dividend. The initial quarterly cash dividend of $0.20 per share was paid on June 9, 2014 to shareholders of record as of May 27, 2014 and totaled $8.0 million.
FINANCIAL REPORTING
The condensed consolidated statements of operations for all periods presented have been prepared reflecting the results of operations for the 2013 Qdoba Closures and charges incurred as a result of closing these restaurants as discontinued operations. The results of operations and costs incurred to outsource our distribution business are also reflected as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, in the notes to our condensed consolidated financial statements for more information.


21


RESULTS OF OPERATIONS
The following table presents certain income and expense items included in our condensed consolidated statements of operations as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
 
Quarter
 
Year-to-Date
 
July 6,
2014
 
July 7,
2013
 
July 6,
2014
 
July 7,
2013
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
75.9
 %
 
77.3
%
 
75.6
 %
 
77.1
%
Franchise revenues
24.1
 %
 
22.7
%
 
24.4
 %
 
22.9
%
Total revenues
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging (1)
31.9
 %
 
32.8
%
 
31.8
 %
 
32.6
%
Payroll and employee benefits (1)
27.1
 %
 
27.4
%
 
27.5
 %
 
28.1
%
Occupancy and other (1)
21.8
 %
 
21.9
%
 
22.0
 %
 
22.0
%
Total company restaurant costs (1)
80.9
 %
 
82.1
%
 
81.4
 %
 
82.7
%
Franchise costs (1) 
50.6
 %
 
50.5
%
 
50.3
 %
 
50.2
%
Selling, general and administrative expenses
13.6
 %
 
14.9
%
 
13.6
 %
 
14.9
%
Impairment and other charges, net
0.5
 %
 
1.0
%
 
1.1
 %
 
0.8
%
(Gains) losses on the sale of company-operated restaurants
 %
 
0.4
%
 
(0.2
)%
 
0.3
%
Earnings from operations
12.3
 %
 
8.8
%
 
11.7
 %
 
8.8
%
Income tax rate (2) 
33.8
 %
 
37.4
%
 
35.9
 %
 
34.6