FY15 10-Q Q1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
 _______________________________________________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 18, 2015
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 February 13, 2015, 38,069,087 shares of the registrant’s common stock were outstanding.



JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
 
 
 
Page
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
Condensed Consolidated Statements of Earnings
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Item 4.
 
PART II – OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 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)
 
January 18,
2015
 
September 28,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,808

 
$
10,578

Accounts and other receivables, net
43,874

 
50,014

Inventories
7,602

 
7,481

Prepaid expenses
37,866

 
36,314

Deferred income taxes
36,810

 
36,810

Assets held for sale
5,025

 
4,766

Other current assets
961

 
597

Total current assets
140,946

 
146,560

Property and equipment, at cost
1,511,711

 
1,519,947

Less accumulated depreciation and amortization
(806,866
)
 
(797,818
)
Property and equipment, net
704,845

 
722,129

Intangible assets, net
15,340

 
15,604

Goodwill
149,058

 
149,074

Other assets, net
231,440

 
237,298

 
$
1,241,629

 
$
1,270,665

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
10,886

 
$
10,871

Accounts payable
18,886

 
31,810

Accrued liabilities
147,373

 
163,626

Total current liabilities
177,145

 
206,307

Long-term debt, net of current maturities
547,718

 
497,012

Other long-term liabilities
304,576

 
309,435

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, 80,919,351 and 80,127,387 issued, respectively
809

 
801

Capital in excess of par value
386,452

 
356,727

Retained earnings
1,272,908

 
1,244,897

Accumulated other comprehensive loss
(92,040
)
 
(90,132
)
Treasury stock, at cost, 42,878,788 and 41,571,752 shares, respectively
(1,355,939
)
 
(1,254,382
)
Total stockholders’ equity
212,190

 
257,911

 
$
1,241,629

 
$
1,270,665

See accompanying notes to condensed consolidated financial statements.

2


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share data)
(Unaudited)
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Revenues:
 
 
 
Company restaurant sales
$
351,896

 
$
338,828

Franchise revenues
116,725

 
111,253

 
468,621

 
450,081

Operating costs and expenses, net:
 
 
 
Company restaurant costs:
 
 
 
Food and packaging
113,109

 
108,238

Payroll and employee benefits
95,679

 
93,816

Occupancy and other
75,031

 
74,709

Total company restaurant costs
283,819

 
276,763

Franchise costs
57,141

 
55,510

Selling, general and administrative expenses
63,095

 
59,156

Impairment and other charges, net
2,180

 
1,909

Gains on the sale of company-operated restaurants
(850
)
 
(461
)
 
405,385

 
392,877

Earnings from operations
63,236

 
57,204

Interest expense, net
5,213

 
4,542

Earnings from continuing operations and before income taxes
58,023

 
52,662

Income taxes
20,925

 
19,652

Earnings from continuing operations
37,098

 
33,010

Losses from discontinued operations, net of income tax benefit
(1,263
)
 
(724
)
Net earnings
$
35,835

 
$
32,286

 
 
 
 
Net earnings per share - basic:
 
 
 
Earnings from continuing operations
$
0.96

 
$
0.78

Losses from discontinued operations
(0.03
)
 
(0.02
)
Net earnings per share (1)
$
0.93

 
$
0.76

Net earnings per share - diluted:
 
 
 
Earnings from continuing operations
$
0.94

 
$
0.75

Losses from discontinued operations
(0.03
)
 
(0.02
)
Net earnings per share (1)
$
0.91

 
$
0.74

 
 
 
 
Weighted-average shares outstanding:
 
 
 
Basic
38,640

 
42,434

Diluted
39,384

 
43,838

 
 
 
 
Cash dividends declared per common share
$
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
(Dollars in thousands)
(Unaudited)
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Net earnings
$
35,835

 
$
32,286

Cash flow hedges:
 
 
 
Net change in fair value of derivatives
(6,758
)
 
(54
)
Net loss reclassified to earnings
627

 
426

 
(6,131
)
 
372

Tax effect
2,347

 
(142
)
 
(3,784
)
 
230

Unrecognized periodic benefit costs:
 
 
 
Actuarial losses and prior service costs reclassified to earnings
3,035

 
1,614

Tax effect
(1,162
)
 
(619
)
 
1,873

 
995

Other:
 
 
 
Foreign currency translation adjustments
6

 
7

Tax effect
(3
)
 
(2
)
 
3

 
5

 
 
 
 
Other comprehensive income (loss), net of tax
(1,908
)
 
1,230

 
 
 
 
Comprehensive income
$
33,927

 
$
33,516

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)
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
35,835

 
$
32,286

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
27,370

 
28,454

Deferred finance cost amortization
661

 
675

Excess tax benefits from share-based compensation arrangements
(14,533
)
 
(5,307
)
Deferred income taxes
973

 
(4,846
)
Share-based compensation expense
3,885

 
3,801

Pension and postretirement expense
5,769

 
4,233

Gains on cash surrender value of company-owned life insurance
(574
)
 
(3,117
)
Gains on the sale of company-operated restaurants
(850
)
 
(461
)
Losses on the disposition of property and equipment
1,243

 
992

Impairment charges and other
215

 
393

Changes in assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and other receivables
3,999

 
1,582

Inventories
(121
)
 
(682
)
Prepaid expenses and other current assets
16,683

 
622

Accounts payable
(4,623
)
 
(5,636
)
Accrued liabilities
(20,063
)
 
(16,781
)
Pension and postretirement contributions
(6,880
)
 
(6,558
)
Other
(1,642
)
 
(5,998
)
Cash flows provided by operating activities
47,347

 
23,652

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(19,885
)
 
(21,310
)
Proceeds from the sale of assets

 
2,105

Proceeds from the sale of company-operated restaurants
1,174

 
468

Collections on notes receivable
5,050

 
894

Acquisitions of franchise-operated restaurants

 
(1,750
)
Other
22

 
36

Cash flows used in investing activities
(13,639
)
 
(19,557
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
154,000

 
163,000

Repayments of borrowings on revolving credit facilities
(98,000
)
 
(103,000
)
Principal repayments on debt
(5,279
)
 
(10,330
)
Dividends paid on common stock
(7,791
)
 

Proceeds from issuance of common stock
11,302

 
17,650

Repurchases of common stock
(104,669
)
 
(84,318
)
Excess tax benefits from share-based compensation arrangements
14,533

 
5,307

Change in book overdraft
423

 
7,880

Cash flows used in financing activities
(35,481
)
 
(3,811
)
Effect of exchange rate changes on cash and cash equivalents
3

 
5

Net (decrease) increase in cash and cash equivalents
(1,770
)
 
289

Cash and cash equivalents at beginning of period
10,578

 
9,644

Cash and cash equivalents at end of period
$
8,808

 
$
9,933


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® quick-service restaurants and Qdoba Mexican Grill® (“Qdoba”) fast-casual restaurants. The following table summarizes the number of restaurants as of the end of each period:
 
January 18,
2015
 
January 19,
2014
Jack in the Box:
 
 
 
Company-operated
431

 
469

Franchise
1,822

 
1,785

Total system
2,253

 
2,254

Qdoba:
 
 
 
Company-operated
311

 
301

Franchise
330

 
319

Total system
641

 
620

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 2013 Qdoba Closures 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 28, 2014. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our Form 10-K with the exception of new accounting pronouncements adopted in fiscal 2015 which are described below.
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 12, Variable Interest Entities.
Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the fiscal 2015 presentation.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2015 and 2014 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks. All comparisons between 2015 and 2014 refer to the 16-weeks (“quarter”) ended January 18, 2015 and January 19, 2014, 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.
Effect of 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

6

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



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. We early adopted this standard on September 29, 2014. This pronouncement did not have a material impact on our condensed consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments when the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period, which requires a reporting entity to treat a performance target that affects vesting and that could be achieved after the requisite service period as a performance condition. This standard is to be applied prospectively for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We early adopted this standard on September 29, 2014. This pronouncement did not have a material impact on our condensed consolidated financial statements.

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.
During 2015 and 2014, we recognized operating losses before taxes of $0.1 million and $0.6 million, respectively, including $0.1 million in both years related to our lease commitments, and in 2014, $0.4 million related to insurance settlements. Our liability for lease commitments related to our distribution centers is included in accrued liabilities and other long-term liabilities, and was $0.5 million as of January 18, 2015 and September 28, 2014. The lease commitment balance as of January 18, 2015 relates to one distribution center subleased at a loss.
2013 Qdoba 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):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Operating loss before income tax benefit
$
(1,972
)
 
$
(588
)
In 2015, the operating loss includes $1.8 million of unfavorable lease commitment adjustments, $0.1 million of ongoing facility related costs and $0.1 million of broker commissions. In 2014, the operating loss includes $0.3 million for asset impairments, $0.3 million of ongoing facility related costs and $0.2 million of broker commissions, partially offset by favorable lease commitment adjustments of $0.3 million. We do not expect the remaining costs to be incurred related to these closures 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.
Our liability for lease commitments related to the 2013 Qdoba Closures is included in accrued liabilities and other long-term liabilities and changed as follows (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Balance at beginning of period
$
5,737

 
$
10,712

Adjustments
1,799

 
(286
)
Cash payments
(2,896
)
 
(3,395
)
Balance at end of period
$
4,640

 
$
7,031


7

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



In 2015 and 2014, adjustments primarily relate to revisions to certain sublease and cost assumptions due to changes in market conditions as well as charges to terminate three lease agreements in 2015. In 2015, these amounts were partially offset, and in 2014, these amounts were more than offset by favorable adjustments for locations that we have subleased.

3.
SUMMARY OF REFRANCHISINGS, FRANCHISEE DEVELOPMENT AND ACQUISITIONS
Refranchisings and franchisee development — The following is a summary of the number of restaurants sold to franchisees, number of restaurants developed by franchisees and the related gains and fees recognized (dollars in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Restaurants sold to Jack in the Box franchisees
1

 

New restaurants opened by franchisees
12

 
13

 
 
 
 
Initial franchise fees
$
375

 
$
399

 
 
 
 
Proceeds from the sale of company-operated restaurants (1)
$
1,174

 
$
468

Net assets sold (primarily property and equipment)
(489
)
 

Goodwill related to the sale of company-operated restaurants
(16
)
 
(9
)
Other
181

 
2

Gains on the sale of company-operated restaurants
$
850

 
$
461

____________________________
(1)
Amounts in 2015 and 2014 include additional proceeds recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold in a prior year of $0.1 million and $0.5 million, respectively.
Franchise acquisitions — In 2014, we repurchased four Jack in the Box franchise restaurants in one market. There was no acquisition activity in 2015. 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 purchase price allocation for the 2014 acquisition (in thousands):
Property and equipment
$
1,398

Reacquired franchise rights
96

Goodwill
256

Total consideration
$
1,750



8

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



4.
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 January 18, 2015:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(36,084
)
 
$
(36,084
)
 
$

 
$

Interest rate swaps (Note 5) (2) 
(7,920
)
 

 
(7,920
)
 

Total liabilities at fair value
$
(44,004
)
 
$
(36,084
)
 
$
(7,920
)
 
$

Fair value measurements as of September 28, 2014:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(35,602
)
 
$
(35,602
)
 
$

 
$

Interest rate swaps (Note 5) (2) 
(1,789
)
 

 
(1,789
)
 

Total liabilities at fair value
$
(37,391
)
 
$
(35,602
)
 
$
(1,789
)
 
$

 
____________________________
(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 January 18, 2015, 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 January 18, 2015.
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.
In connection with our impairment reviews performed during 2015 and 2014, no material fair value adjustments were required. Refer to Note 6, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, for additional information regarding impairment charges.


9

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



5.
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 converted $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 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 values of the derivatives are not included in 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.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):
 
January 18, 2015
 
September 28, 2014
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps (Note 4)
Accrued
liabilities
 
$
(7,920
)
 
Accrued
liabilities
 
$
(1,789
)
Total derivatives
 
 
$
(7,920
)
 
 
 
$
(1,789
)
Financial performance — The following is a summary of the OCI activity related to our interest rate swap derivative instruments (in thousands):
 
Location of Loss in Income
 
Sixteen Weeks Ended
 
 
January 18,
2015
 
January 19,
2014
Loss recognized in OCI
N/A
 
$
(6,758
)
 
$
(54
)
Loss reclassified from accumulated OCI into net earnings
Interest
expense, 
net
 
$
(627
)
 
$
(426
)
Amounts reclassified from accumulated OCI into interest expense represent payments made to the counterparties for the effective portions of the interest rate swaps. During the periods presented, our interest rate swaps had no hedge ineffectiveness.

6.
IMPAIRMENT, DISPOSITION OF PROPERTY AND EQUIPMENT, RESTAURANT CLOSING COSTS AND RESTRUCTURING
Impairment and other charges, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Restaurant impairment charges
$
215

 
$
95

Losses on the disposition of property and equipment, net
1,172

 
952

Restaurant closing costs and other
786

 
564

Restructuring costs
7

 
298

 
$
2,180

 
$
1,909

Impairment charges — 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 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 gains or losses

10

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



recognized upon the sale of closed restaurant properties, and charges from our ongoing restaurant upgrade programs, remodels and rebuilds, and other corporate initiatives.
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. Accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Balance at beginning of period
$
13,173

 
$
16,321

Adjustments
875

 
612

Cash payments
(1,665
)
 
(1,434
)
Balance at end of period
$
12,383

 
$
15,499

Adjustments in both years 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. Restructuring costs in both years relate to severance costs. We expect to incur additional charges related to our restructuring activities; however, we are unable to make a reasonable estimate at this time.
7.
INCOME TAXES
The income tax provisions reflect tax rates of 36.1% in 2015 and 37.3% in 2014. The major components of the year-over-year change in tax rates were an increase in operating earnings before income taxes, an increase in tax credits, and a decrease in the market performance of insurance products used to fund certain non-qualified retirement plans which are excluded from taxable income. The Company recognized the benefit from the retroactive reenactment of the Work Opportunity Tax Credit for calendar year 2014 during the first quarter of fiscal year 2015. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2015 rate could differ from our current estimates.
At January 18, 2015, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.4 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 2014. 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 a state tax audit.
We file income tax returns in the United States and all state and local jurisdictions 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 2010 and forward. However, the Company has a pending appeal for California (related to fiscal years 2001 to 2007) for a specific claim. 
 
8.
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 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.

11

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



Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands): 
  
Sixteen Weeks Ended
  
January 18,
2015
 
January 19,
2014
Defined benefit pension plans:
 
 
 
Service cost
$
2,544

 
$
2,499

Interest cost
6,983

 
7,152

Expected return on plan assets
(7,161
)
 
(7,536
)
Actuarial loss
2,896

 
1,364

Amortization of unrecognized prior service costs
83

 
83

Net periodic benefit cost
$
5,345

 
$
3,562

Postretirement healthcare plans:
 
 
 
Interest cost
$
368

 
$
504

Actuarial loss
56

 
167

Net periodic benefit cost
$
424

 
$
671

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 2015 contributions are as follows (in thousands):
 
Defined Benefit
Pension Plans
 
Postretirement
Healthcare Plans
Net year-to-date contributions
$
6,453

 
$
427

Remaining estimated net contributions during fiscal 2015
$
18,000

 
$
800

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.
 
9.
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 2015, we granted the following shares related to our share-based compensation awards:
Stock options
123,042

Performance share awards
40,594

Nonvested stock units
87,081

The components of share-based compensation expense recognized in each period are as follows (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Stock options
$
999

 
$
1,289

Performance share awards
1,081

 
1,497

Nonvested stock awards
61

 
173

Nonvested stock units
1,744

 
842

Total share-based compensation expense
$
3,885

 
$
3,801


12

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




10.    STOCKHOLDERS’ EQUITY
Repurchases of common stock In February 2014 and July 2014, the Board of Directors approved two programs, both expiring in November 2015, which provided repurchase authorizations for up to $200.0 million and $100.0 million, respectively, in shares of our common stock. Additionally, in November 2014, the Board of Directors approved another $100.0 million stock buyback program that expires in November 2016. During fiscal 2015, we repurchased 1.31 million shares at an aggregate cost of $101.6 million and fully utilized the February 2014 authorization. As of January 18, 2015, there was $115.5 million remaining under our stock-buyback programs, of which $15.5 million expires in November 2015 and $100.0 million expires in November 2016.
Repurchases of common stock included in our condensed consolidated statements of cash flows for 2015 and 2014, include $3.1 million and $7.3 million, respectively, related to repurchase transactions traded in the prior fiscal year and settled in the subsequent quarter.
Dividends During the third quarter of fiscal 2014, the Board of Directors approved the initiation of a regular quarterly cash dividend. In fiscal 2015, the Board of Directors declared a cash dividend of $0.20 per share which was paid on December 12, 2014 to shareholders of record as of December 1, 2014 and totaled $7.8 million. Future dividends are subject to approval by our Board of Directors.

11.
AVERAGE SHARES OUTSTANDING
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our employee stock purchase plan. Performance share awards are included in the average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.

The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Weighted-average shares outstanding – basic
38,640

 
42,434

Effect of potentially dilutive securities:
 
 
 
Stock options
397

 
765

Nonvested stock awards and units
198

 
372

Performance share awards
149

 
267

Weighted-average shares outstanding – diluted
39,384

 
43,838

Excluded from diluted weighted-average shares outstanding:
 
 
 
Antidilutive
60

 
151

Performance conditions not satisfied at the end of the period
20

 
52


12.
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 January 18, 2015, 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,

13

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



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 earnings or cash flows.
The FFE’s balance sheet consisted of the following at the end of each period (in thousands):
 
January 18,
2015
 
September 28,
2014
Cash
$

 
$

Other current assets (1) 
1,056

 
2,494

Other assets, net (1) 
2,849

 
5,776

Total assets
$
3,905

 
$
8,270

 
 
 
 
Current liabilities (2)
$
1,203

 
$
2,833

Other long-term liabilities (2) 
2,574

 
5,367

Retained earnings
128

 
70

Total liabilities and stockholders’ equity
$
3,905

 
$
8,270

____________________________
(1)
Consists primarily of amounts due from franchisees.
(2)
Consists primarily of the capital note contribution from Jack in the Box which is eliminated in consolidation.
The Company’s maximum exposure to loss is equal to its outstanding contributions as of January 18, 2015. 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.

13.    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 or financial exposure. 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 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. In July 2014, the plaintiffs 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. The amended complaint seeks damages of $45.0 million but does not provide a basis for that amount. In fiscal 2012, we accrued for a single claim for which we believe a loss is both probable and estimable; this accrued loss contingency did not have a material effect on our results of operations. We have not established a loss contingency accrual for those claims as to which we believe liability is not probable or estimable, 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.

14

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



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 January 18, 2015, our estimated liability for general liability and workers’ compensation claims exceeded our self-insurance retention limits by $24.6 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 two of our distribution centers to third parties. Under these agreements, which expire in 2015 and 2017, we remain secondarily liable for the lease payments for which we were responsible under the original lease. As of January 18, 2015, the amount remaining under these lease guarantees totaled $1.8 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.

14.
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. 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.
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. The following table provides information related to our segments in each period (in thousands):
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Revenues by segment:
 
 
 
Jack in the Box restaurant operations
$
351,951

 
$
349,824

Qdoba restaurant operations
116,670

 
100,257

Consolidated revenues
$
468,621

 
$
450,081

Earnings from operations by segment:
 
 
 
Jack in the Box restaurant operations
$
80,857

 
$
76,366

Qdoba restaurant operations
14,676

 
9,606

Shared services and unallocated costs
(33,147
)
 
(29,229
)
Gains on the sale of company-operated restaurants
850

 
461

Consolidated earnings from operations
63,236

 
57,204

Interest expense, net
5,213

 
4,542

Consolidated earnings from continuing operations and before income taxes
$
58,023

 
$
52,662

Total depreciation expense by segment:
 
 
 
Jack in the Box restaurant operations
$
19,615

 
$
20,851

Qdoba restaurant operations
5,280

 
5,230

Shared services and unallocated costs
2,260

 
2,139

Consolidated depreciation expense
$
27,155

 
$
28,220

Income taxes and total assets are not reported for our segments in accordance with our method of internal reporting.


15

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



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 28, 2014
$
100,597

 
$
48,477

 
$
149,074

Disposals

 
(16
)
 
(16
)
Balance at January 18, 2015
$
100,597

 
$
48,461

 
$
149,058

Refer to Note 3, Summary of Refranchisings, Franchisee Development and Acquisitions, for information regarding the transactions resulting in the changes in goodwill.

15.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
$
5,115

 
$
5,357

Income tax payments
$
152

 
$
16,684

Non-cash transactions:
 
 
 
Increase in dividends accrued at period end
$
35

 
$

Increase in property and equipment through accrued purchases at period end
$
7,829

 
$
8,248



16

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



16.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
January 18,
2015
 
September 28,
2014
Prepaid expenses:
 
 
 
Prepaid income taxes
$
27,322

 
$
27,956

Other
10,544

 
8,358

 
$
37,866

 
$
36,314

Other assets, net:
 
 
 
Company-owned life insurance policies
$
101,327

 
$
100,753

Deferred tax assets
46,950

 
50,807

Other
83,163

 
85,738

 
$
231,440

 
$
237,298

Accrued liabilities:
 
 
 
Payroll and related taxes
$
42,985

 
$
54,905

Sales and property taxes
10,633

 
11,760

Advertising
15,464

 
21,452

Insurance
34,417

 
34,834

Lease commitments related to closed or refranchised locations
9,472

 
10,258

Other
34,402

 
30,417

 
$
147,373

 
$
163,626

Other long-term liabilities:
 
 
 
Pension plans
$
139,751

 
$
143,838

Straight-line rent accrual
48,628

 
48,835

Other
116,197

 
116,762

 
$
304,576

 
$
309,435


17.
SUBSEQUENT EVENTS

Declaration of dividend — On February 12, 2015, the Board of Directors approved a cash dividend of $0.20 per share, to be paid on March 19, 2015 to shareholders of record as of the close of business on March 6, 2015. Future dividends will be subject to approval by our Board of Directors.

17


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2015 and 2014 refer to the 16-weeks (“quarter”) ended January 18, 2015 and January 19, 2014, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during the quarterly periods ended January 18, 2015 and January 19, 2014, 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 28, 2014.
Our MD&A consists of the following sections:
Overview — a general description of our business and 2015 highlights.
Financial reporting — a discussion of changes in presentation, if any.
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, 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.
We have included in our MD&A certain performance metrics that management uses to assess Company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include the following:
Changes in same-store sales and average unit volumes (“AUVs”) are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system sales and average unit volume information is useful to investors as a significant indicator of the overall strength of our business. Company, franchise and system changes in same-store sales include the results of all restaurants that have been open more than one year.
Company restaurant margin (“restaurant margin”) is defined as Company restaurant sales less expenses incurred directly by our restaurants in generating those sales (food and packaging costs, payroll and employee benefits, and occupancy and other costs). We also present restaurant margin as a percentage of Company restaurant sales.
Franchise margin is defined as franchise revenues less franchise costs and is also presented as a percentage of franchise revenues.
Restaurant margin and franchise margin are not measurements determined in accordance with generally accepted accounting principles (“GAAP”) and should not be considered in isolation, or as an alternative, to income from operations, or other similarly titled measures of other companies.
OVERVIEW
As of January 18, 2015, we operated and franchised 2,253 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 641 Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants throughout the United States, 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

18


restaurants to franchisees, which are included as a line item within operating costs and expenses, net in the accompanying condensed consolidated statements of earnings.
The following summarizes the most significant events occurring in the first quarter of fiscal 2015, and certain trends compared to a year ago:
Qdoba’s New Pricing Structure In October 2014, Qdoba restaurants rolled out a new simplified pricing structure system-wide where guests pay a set price per entrée based on the protein chosen and without being charged extra for additional items such as guacamole or queso. This resulted in an increase in the average check.
Same-Store Sales Growth Same-store sales grew 3.9% at company-operated Jack in the Box restaurants driven by increases in all day-parts, with the largest growth coming from breakfast, as well as transaction growth. Qdoba’s same-store sales increase of 12.9% at company-operated restaurants reflects growth primarily driven by our new simplified pricing structure as well as menu innovation, transaction growth, catering and less discounting.
Commodity Costs Commodity costs increased approximately 3.9% and 6.2% at our Jack in the Box and Qdoba restaurants, respectively, in 2015 compared with a year ago. We expect our overall commodity costs to increase approximately 3.0% in fiscal 2015, with higher inflation in the first half of the year. Beef represents the largest portion, or approximately 20%, of the Company’s overall commodity spend. We typically do not enter into fixed price contracts for our beef needs. For the full year, we currently expect beef costs to increase approximately 15-20%.
Restaurant Margin Expansion Our consolidated company-operated restaurant margin increased 100 basis points in 2015 to 19.3%. Jack in the Box’s company-operated restaurant margin improved 30 basis points to 19.4% due primarily to leverage from same-store sales increases and benefits from refranchising activities. Restaurant margins at our Qdoba company-operated restaurants improved 290 basis points to 19.3% primarily reflecting benefits from the new simplified pricing structure and leverage from same-store sales growth.
Jack in the Box Franchising Program Jack in the Box franchisees opened a total of six restaurants year-to-date and we have a signed letter of intent to sell approximately 20 restaurants in one market. Our Jack in the Box system was 81% franchised at the end of the first quarter and we plan to maintain franchise ownership in the Jack in the Box system at a level between 80% to 85%.
Qdoba New Unit Growth Year-to-date, we opened three company-operated locations and six franchised locations. Of the new locations, four were in non-traditional locations such as airports and college campuses. In fiscal 2015, we expect the majority of our franchise new unit development to be in non-traditional locations.
Tax Rate The tax rate was favorably impacted by the retroactive reenactment of the Work Opportunity Tax Credit (“WOTC”) for calendar year 2014 which resulted in higher tax credits in the quarter.
Return of Cash to Shareholders During 2015 we returned cash to shareholders in the form of share repurchases and a cash dividend. We repurchased 1.31 million shares of our common stock at an average price of $77.70 per share, totaling $101.6 million, including the costs of brokerage fees, and declared dividends of $0.20 per share totaling $7.8 million.
FINANCIAL REPORTING
The condensed consolidated statements of earnings 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.


19


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.
CONSOLIDATED STATEMENTS OF EARNINGS DATA
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Revenues:
 
 
 
Company restaurant sales
75.1
 %
 
75.3
 %
Franchise revenues
24.9
 %
 
24.7
 %
Total revenues
100.0
 %
 
100.0
 %
Operating costs and expenses, net:
 
 
 
Company restaurant costs:
 
 
 
Food and packaging (1)
32.1
 %
 
31.9
 %
Payroll and employee benefits (1)
27.2
 %
 
27.7
 %
Occupancy and other (1)
21.3
 %
 
22.0
 %
Total company restaurant costs (1)
80.7
 %
 
81.7
 %
Franchise costs (1) 
49.0
 %
 
49.9
 %
Selling, general and administrative expenses
13.5
 %
 
13.1
 %
Impairment and other charges, net
0.5
 %
 
0.4
 %
Gains on the sale of company-operated restaurants
(0.2
)%
 
(0.1
)%
Earnings from operations
13.5
 %
 
12.7
 %
Income tax rate (2) 
36.1
 %
 
37.3
 %
____________________________
(1)
As a percentage of the related sales and/or revenues.
(2)
As a percentage of earnings from continuing operations and before income taxes.


CHANGES IN SAME-STORE SALES
 
Sixteen Weeks Ended
 
January 18,
2015
 
January 19,
2014
Jack in the Box:
 
 
 
Company
3.9%
 
2.1%
Franchise
4.6%
 
1.8%
System
4.4%
 
1.9%
Qdoba:
 
 
 
Company
12.9%
 
2.0%
Franchise
15.1%
 
2.6%
System
14.0%
 
2.3%


20


The following table summarizes the changes in the number and mix of Jack in the Box (“JIB”) and Qdoba company and franchise restaurants:
 
January 18, 2015
 
January 19, 2014
 
Company
 
Franchise
 
Total
 
Company
 
Franchise
 
Total
Jack in the Box:
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
431

 
1,819

 
2,250

 
465

 
1,786

 
2,251

New
1

 
6

 
7

 

 
5

 
5

Refranchised
(1
)
 
1

 

 

 

 

Acquired from franchisees

 

 

 
4

 
(4
)
 

Closed

 
(4
)
 
(4
)
 

 
(2
)
 
(2
)
End of period
431

 
1,822

 
2,253

 
469

 
1,785

 
2,254

% of JIB system
19
%
 
81
%
 
100
%
 
21
%
 
79
%
 
100
%
              % of consolidated system
58
%
 
85
%
 
78
%
 
61
%
 
85
%
 
78
%
Qdoba:
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
310

 
328

 
638

 
296

 
319

 
615

New
3

 
6

 
9

 
6

 
8

 
14

Closed
(2
)
 
(4
)
 
(6
)
 
(1
)
 
(8
)
 
(9
)
End of period
311

 
330

 
641

 
301

 
319

 
620

% of Qdoba system
49
%
 
51
%
 
100
%
 
49
%
 
51
%
 
100
%
              % of consolidated system
42
%
 
15
%
 
22
%
 
39
%
 
15
%
 
22
%
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
Total system
742

 
2,152

 
2,894

 
770

 
2,104

 
2,874

% of consolidated system
26
%
 
74
%
 
100
%
 
27
%
 
73
%
 
100
%

Jack in the Box Brand
Company Restaurant Operations
The following table presents Jack in the Box company restaurant sales, costs and margin, and restaurant costs and margin as a percentage of the related sales. Percentages may not add due to rounding (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Company restaurant sales
$
241,343

 
 
 
$
243,871

 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
79,193

 
32.8
%
 
79,865

 
32.7
%
Payroll and employee benefits
66,743

 
27.7
%
 
67,482

 
27.7
%
Occupancy and other
48,631

 
20.2
%
 
49,987

 
20.5
%
Total company restaurant costs
194,567

 
80.6
%
 
197,334

 
80.9
%
Restaurant margin
$
46,776

 
19.4
%
 
$
46,537

 
19.1
%

As we have executed our Jack in the Box refranchising strategy, which includes the sale of restaurants to franchisees, we expect the number of company-operated restaurants and the related sales to decrease while revenues from franchise restaurants increase. As such, Jack in the Box company restaurant sales decreased $2.5 million as compared with the prior year due to a decrease in the average number of company-operated restaurants reducing sales by approximately $19.5 million, partially offset by an increase in AUVs which contributed approximately $17.0 million of additional sales.

21


Same-store sales at Jack in the Box company-operated restaurants increased 3.9% in 2015 primarily driven by price increases, favorable product mix changes, and an increase in transactions. The following table summarizes the change in company-operated same-store sales:
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Transactions
0.8
%
 
(0.7
)%
Average check (1)
3.1
%
 
2.8
 %
Change in same-store sales
3.9
%
 
2.1
 %
____________________________
(1)
Includes price increases of approximately 2.1% and 2.6% in 2015 and 2014, respectively.
Food and packaging costs as a percentage of company restaurant sales increased 10 basis points to 32.8% in 2015 from 32.7% in 2014 as increases in commodity costs were nearly offset by the benefit of selling price increases and product mix changes. Commodity costs increased 3.9% in 2015 compared with the prior year. Costs were higher for beef, produce, dairy and eggs, with beef increasing most significantly by 26%. We expect Jack in the Box commodity costs for fiscal 2015 to increase approximately 3.0% - 3.5%.
Payroll and employee benefit costs as a percentage company restaurant sales remained flat at 27.7% in both years. Sales leverage and the benefits of refranchising offset higher wages from minimum wage increases and higher levels of incentive compensation driven by improved operating performance.
As a percentage of company restaurant sales, occupancy and other costs improved to 20.2% from 20.5% a year ago due to sales leverage and the benefits of refranchising. These benefits were partially offset by higher costs for utilities, uniforms, credit card fees and maintenance and repair expenses.

Franchise Operations
The following table reflects the detail of our Jack in the Box franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operations (dollars in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Royalties
$
40,252

 
$
38,112

Rental income
69,382

 
66,975

Franchise fees and other
974

 
866

Total franchise revenues
$
110,608

 
$
105,953

 
 
 
 
Rental expense
$
42,140

 
$
41,127

Depreciation and amortization
10,221

 
10,490

Other franchise support costs
3,627

 
2,711

Total franchise costs
55,988

 
54,328

Franchise margin
$
54,620

 
$
51,625

Franchise margin as a % of franchise revenues
49.4
%
 
48.7
%
 
 
 
 
Average number of franchise restaurants
1,822

 
1,785

% increase
2.1
%
 
 
Franchise restaurant AUV’s
$
429

 
$
411

Increase in franchise-operated same-store sales
4.6
%
 
1.8
%
Royalties as a percentage of estimated franchise restaurant sales
5.2
%
 
5.2
%
Franchise revenues increased $4.7 million, or 4.4%, in 2015 as compared to a year ago, primarily reflecting higher AUV’s resulting in an increase in revenues from royalties and percentage rent. To a lesser extent, an increase in the average number of restaurants also contributed to the increase.

22


Franchise costs, principally including rents and depreciation on properties leased to Jack in the Box franchisees, increased $1.7 million in the quarter, driven by an increase in the number of franchised restaurants and bad debt expense recorded in the current year of $0.5 million.
Qdoba Brand
Company Restaurant Operations
The following table presents Qdoba company restaurant sales, costs and margin, and restaurant costs and margin as a percentage of the related sales (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Company restaurant sales
$
110,553

 
 
 
$
94,957

 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
33,916

 
30.7
%
 
28,373

 
29.9
%
Payroll and employee benefits
28,936

 
26.2
%
 
26,334

 
27.7
%
Occupancy and other
26,400

 
23.9
%
 
24,722

 
26.0
%
Total company restaurant costs
89,252

 
80.7
%
 
79,429

 
83.6
%
Restaurant margin
$
21,301

 
19.3
%
 
$
15,528

 
16.4
%
Company restaurant sales increased $15.6 million in 2015 as compared with the prior year. The increase in restaurant sales is due primarily to growth in AUVs which added approximately $11.1 million of sales and to a lesser extent an increase in the number of Qdoba company-operated restaurants.
Same-store sales at Qdoba company-operated restaurants increased 12.9% in 2015 primarily driven by the new simplified menu pricing structure. Transaction growth, catering, menu innovation and lower discounting also contributed to the same-store sales increase. The following table summarizes the change in company-operated same-store sales:
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Transactions
1.9
%
 
(2.3
)%
Average check (1)
9.8
%
 
3.7
 %
Catering
1.2
%
 
0.6
 %
Change in same-store sales
12.9
%
 
2.0
 %
____________________________
(1)
Includes price increases of approximately 0.6% and 0.4% in 2015 and 2014, respectively.
Food and packaging costs increased 80 basis points to 30.7% of company restaurant sales in 2015 from 29.9% a year ago primarily reflecting a 6.2% increase in commodity costs due to higher costs for beef, cheese and dairy and changes in product mix related to the new pricing structure. These increases were partially offset by selling price increases and the benefit of the new pricing structure which increased average check. We expect Qdoba commodity costs for fiscal 2015 to increase approximately 2.0% - 2.5%.
Payroll and employee benefit costs as a percentage of company restaurant sales improved 150 basis points to 26.2% in 2015 from 27.7% a year ago. Leverage from same-store sales increases and a change in our staffing mix made in the second quarter of last year that utilizes a more variable labor model were partially offset by higher levels of incentive compensation driven by improved operating performance.
Occupancy and other costs improved to 23.9% of company restaurant sales in 2015 compared with 26.0% a year ago, primarily due to sales leverage, partially offset by higher costs for utilities, smallwares, credit card fees and property taxes.


23


Franchise Operations
The following table reflects the detail of our Qdoba franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operations (dollars in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Royalties
$
5,577

 
$
4,589

Franchise fees and other
540

 
711

Total franchise revenues
6,117

 
5,300

 
 
 
 
Franchise support costs and other
1,153

 
1,182

Total franchise costs
$
1,153

 
$
1,182

Franchise margin
$
4,964

 
$
4,118

Franchise margin as a % of franchise revenues
81.2
%
 
77.7
%
 
 
 
 
Average number of franchise restaurants
331

 
319

% increase
3.8
%
 
 
Franchise restaurant AUV’s
$
336

 
$
291

Increase in franchise-operated same-store sales
15.1
%
 
2.6
%
Royalties as a percentage of estimated franchise restaurant sales
5.0
%
 
4.9
%
Franchise revenues increased $0.8 million, or 15.4%, in 2015 as compared to a year ago, primarily reflecting higher AUV’s at Qdoba franchise restaurants. To a lesser extent, an increase in the average number of Qdoba franchise restaurants also contributed to the increase in franchise revenues.
Franchise costs, principally support costs, decreased slightly quarter over quarter.
Selling, general and administrative (“SG&A”) expenses
The following table presents the change in SG&A expenses compared with the prior year (in thousands):
 
Increase / (Decrease)
Cash surrender value of COLI policies, net
 
$
1,607

Pension and postretirement benefits
 
1,535

Advertising
 
846

Employee relocation costs
 
(885
)
Other
 
836

 
 
$
3,939

The cash surrender value of our COLI policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $0.2 million compared with a positive impact of $1.4 million a year ago.
In 2015, pension and postretirement benefits increased, principally driven by the change in discount rates as compared with a year ago.
Advertising costs associated with our Qdoba locations were $1.0 million higher than a year ago due to an increased number of restaurants, and the timing of spending. These increases were partially offset by lower advertising costs related to our Jack in the Box company-operated restaurants due to a decrease in the number of restaurants.


24


Impairment and other charges, net
Impairment and other charges, net is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Restaurant impairment charges
$
215

 
$
95

Losses on the disposition of property and equipment, net
1,172

 
952

Costs of closed restaurants (primarily lease obligations) and other
786

 
564

Restructuring costs
7

 
298

 
$
2,180

 
$
1,909

Impairment and other charges, net increased $0.3 million in 2015 versus a year ago primarily due to an increase in charges associated with Jack in the Box restaurants that we have closed or intend to close, partially offset by income of $0.6 million recognized in 2015 related to an eminent domain matter and a reduction in restructuring costs. Restructuring costs were incurred in connection with a comprehensive review of our organizational structure and primarily relate to severance costs. Refer to Note 6, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, of the notes to the condensed consolidated financial statements for additional information regarding costs associated with closed restaurants.

Gains on the sale of company-operated restaurants

Gains on the sale of company-operated restaurants were $0.9 million and $0.5 million, in 2015 and 2014, respectively. We sold one Jack in the Box restaurant in 2015 and none in 2014. Gains are impacted by the number of restaurants sold and changes in average gains recognized, which relate to the specific sales and cash flows of those restaurants. In 2015 and 2014, gains on the sale of company operated restaurants include additional gains of $0.1 million and $0.5 million, respectively, recognized upon the extension of the underlying franchise and lease agreements related to Jack in the Box restaurants sold in previous years.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Interest expense
$
5,404

 
$
4,739

Interest income
(191
)
 
(197
)
Interest expense, net
$
5,213

 
$
4,542

Interest expense, net increased $0.7 million in 2015 versus 2014 driven by higher average borrowings partially offset by lower interest rates.
Income Taxes
The tax rate in 2015 was 36.1%, compared with 37.3% a year ago. The major components of the year-over-year change in tax rates were an increase in operating earnings before income taxes, an increase in tax credits due to the retroactive reenactment of the Work Opportunity Tax Credit for calendar year 2014, and a decrease in the market performance of insurance products used to fund certain non-qualified retirement plans which are excluded from taxable income.  We expect the fiscal year tax rate to be approximately 37.0%. The annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.
Earnings from Continuing Operations
Earnings from continuing operations were $37.1 million, or $0.94 per diluted share in 2015, versus $33.0 million, or $0.75 per diluted share, last year.
Losses from Discontinued Operations, Net
As described in Note 2, Discontinued Operations, in the notes to the condensed consolidated financial statements, the results of operations from our distribution business and the 2013 Qdoba Closures have been reported as discontinued operations for all periods presented.

25


Losses from discontinued operations, net of tax are as follows for each discontinued operation (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Distribution business
$
(36
)
 
$
(357
)
2013 Qdoba Closures
(1,227
)
 
(367
)
 
$
(1,263
)
 
$
(724
)
In both years, losses from discontinued operations related to our distribution business include lease commitment charges in addition to insurance settlement costs in 2014. In 2015 and 2014, the loss from discontinued operations related to the 2013 Qdoba Closures primarily includes unfavorable lease commitment adjustments, ongoing facility costs and broker commissions.
Losses from discontinued operations reduced diluted earnings per share by the following in each period (earnings per share may not add due to rounding):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Distribution business
$

 
$
(0.01
)
2013 Qdoba Closures
(0.03
)
 
(0.01
)
 
$
(0.03
)
 
$
(0.02
)

26


LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and our revolving bank credit facility.
We generally reinvest available cash flows from operations to improve our restaurant facilities and develop new restaurants, to reduce debt, to repurchase shares of our common stock and to pay cash dividends. 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.
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 at least the next twelve months and the foreseeable future.
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. As a result, current liabilities are in excess of current assets, which results in a working capital deficit.
Cash Flows
The table below summarizes our cash flows from operating, investing and financing activities (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Total cash provided by (used in):
 
 
 
Operating activities
$
47,347

 
$
23,652

Investing activities
(13,639
)
 
(19,557
)
Financing activities
(35,481
)
 
(3,811
)
Effect of exchange rate changes
3

 
5

Net (decrease) increase in cash and cash equivalents
$
(1,770
)
 
$
289

Operating Activities. Operating cash flows increased $23.7 million compared with a year ago due primarily to a decrease in prepayments for advertising compared to the same period a year ago, a decrease in payments for income taxes, and an increase in net earnings in fiscal 2015.
Investing Activities. Cash used in investing activities decreased $5.9 million compared with a year ago due primarily to an increase in collections on notes receivable and a decrease in cash used to purchase property and equipment and franchise-operated restaurants, partially offset by a decrease in proceeds from the sale of assets held for sale and leaseback.

27


Capital Expenditures The composition of capital expenditures in each period follows (in thousands):
 
Sixteen Weeks Ended
 
January 18, 2015
 
January 19, 2014
Jack in the Box:
 
 
 
New restaurants
$
2,771

 
$
482

Restaurant facility expenditures
6,135

 
9,861

Other, including information technology
1,959

 
909

 
10,865

 
11,252

Qdoba:
 
 
 
New restaurants
4,173

 
6,908

Restaurant facility expenditures
1,772

 
2,165

 
5,945

 
9,073

Shared Services:
 
 
 
Information technology
1,765

 
845

Other, including facility improvements
1,310

 
140

 
3,075

 
985

 
 
 
 
Consolidated capital expenditures
$
19,885

 
$
21,310

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 as a result of a decrease in spending related to building new Qdoba restaurants, remodels, and exterior re-images at our Jack in the Box restaurants, partially offset by an increase in spending related to new Jack in the Box restaurants and information technology infrastructure. We expect fiscal 2015 capital expenditures to be approximately $90 -$100 million. In 2015, we plan to open 50-60 Qdoba restaurants, of which approximately half are expected to be company-operated locations with the majority expected to open in the latter half of the fiscal year. Additionally, we plan to open 10-15 Jack in the Box restaurants in fiscal 2015, of which 2 are expected to be company-operated locations.
Sale of Company-Operated Restaurants In 2015, one Jack in the Box restaurant was sold to a franchisee for which we received $1.2 million in proceeds. No restaurants were sold to franchisees during the 16-weeks ended January 19, 2014. As of January 18, 2015, we classified as assets held for sale $1.3 million relating to Jack in the Box operating restaurant properties that we expect to sell to a franchisee during the next 12 months and for which we have a signed letter of intent.
Assets Held for Sale and Leaseback We use sale and leaseback financing to lower the initial cash investment in our restaurants to the cost of the equipment, whenever possible. There was no sale and leaseback activity in 2015. The following table summarizes the cash flow activity related to sale and leaseback transactions in 2014 (dollars in thousands):
Number of restaurants sold and leased back
1

 
 
Proceeds from sale and leaseback transactions
$
1,807

Purchases of assets intended for sale and leaseback
$

As of January 18, 2015, we had investments of $3.5 million in two operating restaurant properties that we expect to sell and leaseback during the next 12 months.
Acquisition of Franchise-Operated Restaurants There was no repurchase activity in 2015. The following table details franchise-operated restaurant acquisition activity in 2014 (dollars in thousands):
Number of Jack in the Box restaurants acquired from a franchisee in one market
4

Cash used to acquire franchise-operated restaurants
$
1,750

The purchase price was primarily allocated to property and equipment, goodwill and reacquired franchise rights. For additional information, refer to Note 3, Summary of Refranchisings, Franchisee Development and Acquisitions, of the notes to the condensed consolidated financial statements.

28


Financing Activities. Cash flows used in financing activities increased $31.7 million compared with a year ago primarily due to an increase in cash used to repurchase shares of our common stock and to pay dividends, and decreases in borrowings made under our revolving credit facility and proceeds from the issuance of our common stock, partially offset by an increase in excess tax benefits from share based compensation arrangements and a decrease in payments made on our revolving credit facility and term loan.
Credit Facility Our 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 current interest rate is LIBOR plus 1.75%. As part of the credit agreement, we may 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.
The revolving credit facility and the term loan facility both have maturity dates of March 19, 2019. 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 maturity date. 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 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.
As of January 18, 2015, we had $192.5 million outstanding under the term loan, borrowings under the revolving credit facility of $362.0 million and letters of credit outstanding of $22.2 million.
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 defined in our credit agreement. We were in compliance with all covenants as of January 18, 2015.
Interest Rate Swaps To reduce our exposure to rising interest rates, 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. For additional information, refer to Note 5, Derivative Instruments, of the notes to the condensed consolidated financial statements.
Repurchases of Common Stock In February 2014 and July 2014, the Board of Directors approved two programs, both expiring in November 2015, which provided repurchase authorizations for up to $200.0 million and $100.0 million, respectively, in shares of our common stock. Additionally, in November 2014, the Board of Directors approved another $100.0 million stock buyback program that expires in November 2016. During fiscal 2015, we repurchased 1.31 million shares at an aggregate cost of $101.6 million and fully utilized the February 2014 authorization. As of January 18, 2015, there was $115.5 million remaining under two stock-buyback programs, of which $15.5 million expires in November 2015 and $100.0 million expires in November 2016.
Repurchases of common stock included in our condensed consolidated statements of cash flows for 2015 and 2014, include $3.1 million and $7.3 million, respectively, related to repurchase transactions traded in the prior fiscal year and settled in the subsequent quarter.
Dividend — In fiscal 2015, the Board of Directors declared a cash dividend of $0.20 per share that was paid on December 12, 2014 to shareholders of record as of December 1, 2014 and totaled $7.8 million. Future dividends will be subject to approval by our Board of Directors.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those the Company believes are most important for the portrayal of the Company’s financial condition and results and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 28, 2014. 

29


CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:
Food service businesses such as ours may be materially and adversely affected by changes in consumer preferences or dining habits, and economic, political and socioeconomic conditions. Adverse economic conditions such as unemployment and decreased discretionary spending may result in reduced restaurant traffic and sales and impose practical limits on pricing. We are also subject to geographic concentration risks, with nearly 70% of system Jack in the Box restaurants located in California and Texas.
Our profitability depends in part on food and commodity costs and availability, including animal feed costs and fuel costs and other supply and distribution costs. The risks of increased commodities costs and volatility in costs could adversely affect our profitability and results of operations.
The success of our business strategy depends on the value and relevance of our brands. 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.
We are reliant on third party suppliers and distributors, and any 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 or natural disasters, which can result in lost restaurant sales, supply chain interruptions and increased costs.
Growth and new restaurant development involve substantial risks, including risks associated with unavailability of suitable franchisees, limited financing availability, cost overruns and the inability to secure suitable sites on acceptable terms. In addition, our growth strategy includes opening restaurants in new markets where we cannot assure that we will be able to successfully expand or acquire critical market presence, attract customers or otherwise operate profitably.
There are risks associated with our franchise business model, including the demand for our franchises, the selection of appropriate franchisees and whether our franchisees and new restaurant developers will have the capabilities to be effective operators and remain aligned with us on operating, promotional and capital-intensive initiatives, in an ever-changing competitive environment. Additionally, our franchisees and operators could experience operational, financial or other challenges that could affect payments to us of rents and/or royalties, or could damage our brand and reputation.
The restaurant and take-away food industry is highly competitive with respect to price, service, location, brand identification and menu quality and innovation. We cannot assure that we will be able to effectively respond to aggressive competitors (including competitors with significantly greater financial resources); or that our competitive strategies will increase our same-store sales and AUVs; or that our new products, service initiatives, overall strategies or execution of those strategies will be successful.
Should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition.
The cost-saving initiatives taken in recent years, including the outsourcing of our distribution business, are subject to risks and uncertainties, and we cannot assure that these activities, or any other activities we undertake in the future, will achieve the desired savings and efficiencies.
The loss of key personnel could have a material adverse effect on our business.
The costs of compliance with government regulations, including those resulting in increased labor costs, could negatively affect our results of operations and financial condition.
A material failure or interruption of service or a breach in security of our information technology systems or databases could cause reduced efficiency in operations, loss or misappropriation of data or business interruptions, which in turn could affect cash flows or our operating results. In addition, the costs of information security, regulatory compliance, investment in technology and risk mitigation measures may negatively affect our margins or financial results.

30


We maintain a documented system of internal controls, which is reviewed and monitored by an Internal Controls Committee and tested by the Company’s full-time internal audit department. Any failures in the effectiveness of our internal controls could have a material adverse effect on our operating results or cause us to fail to meet our reporting obligations.
We are subject to risks of owning, operating and leasing property, including but not limited to environmental risks, which could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations.
We have a significant amount of indebtedness, which could adversely affect our business and our ability to meet our obligations. 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 operations, both of which are subject to prevailing economic conditions and financial, business and other known and unknown risks and uncertainties, certain of which are beyond our control.
Changes in accounting standards, policies or related interpretations by accountants or regulatory entities may negatively impact our results.
We are subject to litigation which is inherently unpredictable and can result in unfavorable resolutions where the amount of ultimate loss may exceed our estimated loss contingencies, impose other costs related to defense of claims, or distract management from our operations.

These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended September 28, 2014 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov. Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to risks relating to our 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 of LIBOR plus an applicable margin based on a financial leverage ratio. As of January 18, 2015, the applicable margin for the LIBOR-based revolving loans and term loan was set at 1.75%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. 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. Based on the applicable margin in effect as of January 18, 2015, these nine interest rate swaps would yield average fixed rates of 2.60%, 3.13%, 3.80% and 4.28% in years one through four, respectively.
A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding unhedged balance of our revolving credit facility and term loan at January 18, 2015, would result in an estimated increase of $2.5 million in annual interest expense.
We are also exposed to the impact of commodity and utility price fluctuations. Many of the ingredients we use are commodities or ingredients that are affected by the price of other commodities, weather, seasonality, production, availability and various other factors outside our control. In order to minimize the impact of fluctuations in price and availability, we monitor the primary commodities we purchase and may enter into purchasing contracts and pricing arrangements when considered to be advantageous. However, certain commodities remain subject to price fluctuations. We are exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs for commodities and utilities through higher prices is limited by the competitive environment in which we operate.
ITEM 4.        CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a - 15 and 15d - 15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended January 18, 2015, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.


31


Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended January 18, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part II, except as follows:

ITEM 1.        LEGAL PROCEEDINGS
See Note 13, Contingencies and Legal Matters, of the notes to the unaudited condensed consolidated financial statements for a discussion of our contingencies and legal matters.

ITEM 1A.    RISK FACTORS
When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended September 28, 2014, which we filed with the SEC on November 20, 2014. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 28, 2014, including our financial statements and the related notes. 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 September 28, 2014. 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.

ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our credit agreement provides for the potential payment of cash dividends and stock repurchases, subject to certain limitations based on our leverage ratio as defined in our credit agreement.
Stock Repurchases — In February 2014 and July 2014, the Board of Directors approved two programs, both expiring in November 2015, which provided repurchase authorizations for up to $200.0 million and $100.0 million, respectively, in shares of our common stock. Additionally, in November 2014, the Board of Directors approved an additional $100.0 million stock buyback program that expires in November 2016. During fiscal 2015, we repurchased 1.31 million shares at an aggregate cost of $101.6 million and fully utilized the February 2014 authorization. As of January 18, 2015, there was $115.5 million remaining under two stock-buyback programs, of which $15.5 million expires in November 2015 and $100.0 million expires in November 2016.
The following table summarizes shares repurchased during the quarter ended January 18, 2015. The average price paid per share in column (b) below does not include the cost of brokerage fees.
 
(a)
Total number
of shares
purchased
 
(b)
Average
price paid
per share
 
(c)
Total number
of shares
purchased as
part of  publicly
announced
programs
 
(d)
Maximum dollar
value that may yet
be purchased under
these programs
 
 
 
 
 
 
 
$
217,077,119

September 29, 2014 - October 26, 2014
24,039

 
$
64.75

 
24,039

 
$
215,520,078

October 27, 2014 - November 23, 2014

 
$

 

 
$
215,520,078

November 24, 2014 - December 21, 2014
841,000

 
$
77.15

 
841,000

 
$
150,614,732

December 22, 2014 - January 18, 2015
441,997

 
$
79.38

 
441,997

 
$
115,520,148

Total
1,307,036

 
$
77.68

 
1,307,036

 
 
ITEM 4.        MINE SAFETY DISCLOSURES
Not applicable.

32


ITEM 5.              OTHER INFORMATION
None.
ITEM 6.    EXHIBITS
Number
Description
Form
Filed with SEC
3.1
Restated Certificate of Incorporation, as amended, dated September 21, 2007
10-K
11/20/2009
3.1.1
Certificate of Amendment of Restated Certificate of Incorporation, dated September 21, 2007
8-K
9/24/2007
3.2
Amended and Restated Bylaws, dated August 7, 2013
10-Q
8/8/2013
10.1
Form of Time-Vesting Restricted Stock Unit Award Agreement under the 2004 Stock Incentive Plan
10-Q
Filed herewith
10.2
Form of Stock Option and Performance Share Award Agreement under the 2004 Stock Incentive Plan
10-Q
Filed herewith
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed herewith
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 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
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
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
 
 



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.
 
 
 
 
By:
/S/    JERRY P. REBEL        
 
 
Jerry P. Rebel
 
 
Executive Vice President and Chief Financial Officer (principal financial officer)
(Duly Authorized Signatory)
Date: February 18, 2015

33
EX101


JACK IN THE BOX INC.
TIME-VESTING RESTRICTED STOCK UNIT AWARD AGREEMENT
UNDER THE 2004 STOCK INCENTIVE PLAN

This Time-Vesting Restricted Stock Unit Award Agreement (the “Agreement”) is made and entered into effective as of [Month Day, Year] (the “Grant Date”) by and between Jack in the Box Inc., a Delaware corporation (the “Company”), and [First Name Last Name] (the “Awardee”).
RECITALS
The Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”) which administers the Company’s 2004 Stock Incentive Plan, as amended from time to time (the “Plan”), has granted to the Awardee as of the Grant Date this award of Time-Vesting Restricted Stock Units (the “RSU Award”), on the terms and conditions set forth herein.
AGREEMENT
In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows:
1.    CONSIDERATION. The RSU Award has been granted in consideration of the Awardee’s continued employment with the Company or a Subsidiary Corporation and acceptance by the Awardee of the terms and conditions set forth below and in the Plan.
2.    TIME-VESTING RESTRICTED STOCK UNIT AWARD
(a)    RSU AWARD. The Committee hereby grants to the Awardee as of the Grant Date, pursuant to the terms of the Plan and this Agreement, an award (the “Award”) of [Total # Units Granted] RSUs representing the right to receive an equal number of shares of the Company’s Common Stock (“Stock”) upon vesting over a period of years. All of the RSUs are nonvested and forfeitable as of the Grant Date.
(b)    TIME-BASED VESTING. The RSUs will be subject to vesting over 5 years, subject to the provisions of this Agreement, and may be rounded in each case to avoid fractional shares:
<<Number of Units>> RSUs shall vest on [Month Day, Year – 1 year from grant date]
<<Number of Units>> RSUs shall vest on [Month Day, Year – 2 years from grant date]
<<Number of Units>> RSUs shall vest on [Month Day, Year – 3 years from grant date]
<<Number of Units>> RSUs shall vest on [Month Day, Year – 4 years from grant date]
<<Number of Units>> RSUs shall vest on [Month Day, Year – 5 years from grant date]
Each such date on which vesting is scheduled to occur shall be referred to as a “Vesting Date.” Vesting shall be contingent on the Awardee’s continued employment with the Company or a Subsidiary Corporation from the Grant Date through the applicable Vesting Date.
3.    TERMINATION OF EMPLOYMENT.

v2014-11



(a)    General. Except as set forth in paragraph (b) below, if the Awardee ceases to provide Service to the Company or a Subsidiary Corporation prior to the date that the RSUs vest in full, then the unvested RSUs as of the date of such cessation will be forfeited to the Company immediately and automatically upon such cessation without payment of any consideration for the RSUs, and the Awardee will have no further right, title or interest in or to such RSUs or the underlying shares of Stock.
(b)    Termination due to Death, Disability, or Retirement. If the Awardee ceases to provide Service to the Company or a Subsidiary Corporation prior to the date that the RSUs vest in full due to the Awardee’s death, Disability, or Retirement, then all unvested RSUs shall become 100% vested on the date of such cessation. For purposes of this Agreement: (i) “Disability” means a physical or mental condition that results in a total and permanent disability to such extent that the Awardee is eligible for disability benefits under the federal Social Security Act, and (ii) “Retirement” means the Awardee’s termination of employment other than “for cause” (as determined by the Board in its sole discretion) due to retirement at age 55 or older with 10 or more full years of continuous Service with the Company or a Subsidiary Corporation. Accelerated vesting in accordance with the foregoing will only occur if the Awardee’s cessation of employment is also a “separation from service” as defined in Section 409A of the Code.
4.    SETTLEMENT OF RSUs.
(a)    Subject to the provisions of this Agreement, including Sections 11 and 20(g), and the six-month delay of payment described in paragraph (b) below, the Company shall deliver to the Awardee through a Company-designated brokerage firm, within 30 days following the applicable RSU vesting date, a number of shares of Stock equal to the number of RSUs that became vested on such vesting date (the “Award Shares”), net of any tax withholding.
(b)    If the Awardee is, on the date of the Awardee’s cessation of employment, a “specified employee,” as described in Section 409A of the Code and determined by the Company, then payment of the RSUs that become vested in accordance with Section 3 due to Awardee’s cessation of employment due to Disability or Retirement will be made within 30 days after the six-month anniversary of the Awardee’s cessation of employment.
5.