FY15 10-Q Q3

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
 _______________________________________________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 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 July 31, 2015, 36,577,272 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)
 
July 5,
2015
 
September 28,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,706

 
$
10,578

Accounts and other receivables, net
54,784

 
50,014

Inventories
7,448

 
7,481

Prepaid expenses
40,467

 
36,314

Deferred income taxes
37,377

 
36,810

Assets held for sale
13,440

 
4,766

Other current assets
1,494

 
597

Total current assets
172,716

 
146,560

Property and equipment, at cost
1,530,709

 
1,519,947

Less accumulated depreciation and amortization
(826,691
)
 
(797,818
)
Property and equipment, net
704,018

 
722,129

Intangible assets, net
14,955

 
15,604

Goodwill
149,042

 
149,074

Other assets, net
234,883

 
237,298

 
$
1,275,614

 
$
1,270,665

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
18,483

 
$
10,871

Accounts payable
26,064

 
31,810

Accrued liabilities
172,484

 
163,626

Total current liabilities
217,031

 
206,307

Long-term debt, net of current maturities
640,076

 
497,012

Other long-term liabilities
312,309

 
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, 81,070,256 and 80,127,387 issued, respectively
811

 
801

Capital in excess of par value
399,180

 
356,727

Retained earnings
1,303,892

 
1,244,897

Accumulated other comprehensive loss
(91,747
)
 
(90,132
)
Treasury stock, at cost, 44,517,922 and 41,571,752 shares, respectively
(1,505,938
)
 
(1,254,382
)
Total stockholders’ equity
106,198

 
257,911

 
$
1,275,614

 
$
1,270,665

See accompanying notes to condensed consolidated financial statements.

2


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
$
270,655

 
$
264,398

 
$
891,455

 
$
861,000

Franchise revenues
88,851

 
84,094

 
294,794

 
278,444

 
359,506

 
348,492

 
1,186,249

 
1,139,444

Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
82,649

 
84,459

 
279,790

 
274,119

Payroll and employee benefits
72,896

 
71,733

 
241,648

 
237,165

Occupancy and other
56,103

 
57,671

 
187,602

 
189,378

Total company restaurant costs
211,648

 
213,863

 
709,040

 
700,662

Franchise costs
42,536

 
42,563

 
142,736

 
140,070

Selling, general and administrative expenses
50,986

 
47,422

 
166,553

 
155,238

Impairment and other charges, net
3,758

 
1,668

 
8,068

 
12,633

Losses (gains) on the sale of company-operated restaurants
183

 
(24
)
 
4,353

 
(2,242
)
 
309,111

 
305,492

 
1,030,750

 
1,006,361

Earnings from operations
50,395

 
43,000

 
155,499

 
133,083

Interest expense, net
4,504

 
3,535

 
13,937

 
12,388

Earnings from continuing operations and before income taxes
45,891

 
39,465

 
141,562

 
120,695

Income taxes
17,528

 
13,338

 
52,739

 
43,294

Earnings from continuing operations
28,363

 
26,127

 
88,823

 
77,401

Losses from discontinued operations, net of income tax benefit
(1,532
)
 
(1,424
)
 
(3,152
)
 
(4,611
)
Net earnings
$
26,831

 
$
24,703

 
$
85,671

 
$
72,790

 
 
 
 
 
 
 
 
Net earnings per share - basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.76

 
$
0.66

 
$
2.34

 
$
1.87

Losses from discontinued operations
(0.04
)
 
(0.04
)
 
(0.08
)
 
(0.11
)
Net earnings per share (1)
$
0.72

 
$
0.62

 
$
2.26

 
$
1.76

Net earnings per share - diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.75

 
$
0.64

 
$
2.30

 
$
1.82

Losses from discontinued operations
(0.04
)
 
(0.03
)
 
(0.08
)
 
(0.11
)
Net earnings per share (1)
$
0.71

 
$
0.61

 
$
2.22

 
$
1.71

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
37,106

 
39,692

 
37,980

 
41,320

Diluted
37,661

 
40,787

 
38,630

 
42,605

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.30

 
$
0.20

 
$
0.70

 
$
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)
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Net earnings
$
26,831

 
$
24,703

 
$
85,671

 
$
72,790

Cash flow hedges:
 
 
 
 
 
 
 
Net change in fair value of derivatives
(5,027
)
 
(14
)
 
(11,699
)
 
(99
)
Net loss reclassified to earnings
461

 
324

 
1,556

 
1,072

 
(4,566
)
 
310

 
(10,143
)
 
973

Tax effect
1,748

 
(119
)
 
3,883

 
(373
)
 
(2,818
)
 
191

 
(6,260
)
 
600

Unrecognized periodic benefit costs:
 
 
 
 
 
 
 
Actuarial losses and prior service costs reclassified to earnings
2,276

 
1,210

 
7,587

 
4,035

Tax effect
(872
)
 
(464
)
 
(2,905
)
 
(1,548
)
 
1,404

 
746

 
4,682

 
2,487

Other:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(72
)
 
(2
)
 
(56
)
 
5

Tax effect
24

 
1

 
19

 
(2
)
 
(48
)
 
(1
)
 
(37
)
 
3

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
(1,462
)
 
936

 
(1,615
)
 
3,090

 
 
 
 
 
 
 
 
Comprehensive income
$
25,369

 
$
25,639

 
$
84,056

 
$
75,880

See accompanying notes to condensed consolidated financial statements.


4


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
85,671

 
$
72,790

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
68,205

 
70,585

Deferred finance cost amortization
1,690

 
1,677

Excess tax benefits from share-based compensation arrangements
(17,781
)
 
(15,167
)
Deferred income taxes
(4,046
)
 
(84
)
Share-based compensation expense
10,041

 
8,128

Pension and postretirement expense
14,423

 
10,585

Gains on cash surrender value of company-owned life insurance
(1,960
)
 
(8,312
)
Losses (gains) on the sale of company-operated restaurants
4,353

 
(2,242
)
Losses on the disposition of property and equipment
1,074

 
1,051

Impairment charges and other
4,813

 
8,543

Loss on early retirement of debt

 
789

Changes in assets and liabilities, excluding acquisitions and dispositions:
 
 
 
Accounts and other receivables
(6,895
)
 
(9,376
)
Inventories
33

 
(516
)
Prepaid expenses and other current assets
20,760

 
(4,647
)
Accounts payable
690

 
(3,035
)
Accrued liabilities
4,215

 
6,950

Pension and postretirement contributions
(14,359
)
 
(14,107
)
Other
(5,782
)
 
(9,689
)
Cash flows provided by operating activities
165,145

 
113,923

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(54,832
)
 
(43,825
)
Purchases of assets intended for sale and leaseback
(8,323
)
 
(19
)
Proceeds from the sale of assets

 
5,698

Proceeds from the sale of company-operated restaurants
2,651

 
8,199

Collections on notes receivable
5,648

 
2,555

Acquisitions of franchise-operated restaurants

 
(1,750
)
Other
1,888

 
2,838

Cash flows used in investing activities
(52,968
)
 
(26,304
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
742,000

 
618,000

Repayments of borrowings on revolving credit facilities
(698,000
)
 
(460,000
)
Proceeds from issuance of debt
300,000

 
200,000

Principal repayments on debt
(198,217
)
 
(193,262
)
Debt issuance costs
(1,942
)
 
(3,607
)
Dividends paid on common stock
(26,556
)
 
(7,990
)
Proceeds from issuance of common stock
14,590

 
27,069

Repurchases of common stock
(254,668
)
 
(284,258
)
Excess tax benefits from share-based compensation arrangements
17,781

 
15,167

Change in book overdraft

 
1,507

Cash flows used in financing activities
(105,012
)
 
(87,374
)
Effect of exchange rate changes on cash and cash equivalents
(37
)
 
3

Net increase in cash and cash equivalents
7,128

 
248

Cash and cash equivalents at beginning of period
10,578

 
9,644

Cash and cash equivalents at end of period
$
17,706

 
$
9,892


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:
 
July 5,
2015
 
July 6,
2014
Jack in the Box:
 
 
 
Company-operated
413

 
455

Franchise
1,835

 
1,797

Total system
2,248

 
2,252

Qdoba:
 
 
 
Company-operated
314

 
308

Franchise
334

 
324

Total system
648

 
632

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 13, 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 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 5, 2015 and July 6, 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 May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a comprehensive new revenue recognition model that requires a company to recognize revenue in an amount that reflects the consideration it expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This ASU is effective for annual periods and interim periods beginning after December 15, 2016. The ASU is to be applied retrospectively or using a cumulative effect transition method and early adoption is not permitted. In July 2015, the FASB affirmed its proposal to defer this ASU's effective date by one year, to December 15, 2017. The deferral allows early adoption at the original effective date. We are currently evaluating the effect that this pronouncement will have on our consolidated financial statements and related disclosures.
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.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under this ASU, an entity presents such costs on the balance sheet as a direct deduction from the related debt liability rather than as an asset. This new standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. We do not plan to adopt this standard early and do not expect that it will have a material impact on our consolidated financial statements or disclosures upon adoption.
In April 2015, the FASB issued ASU 2015-04, Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets, which provides a practical expedient that permits a company to measure defined benefit plan assets and obligations using the month-end date that is closest to the company's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if the company has more than one plan. This ASU is effective prospectively for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. We do not expect this standard to have a material impact our consolidated financial statements upon adoption.
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 ASC 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.
In 2015 and 2014, we recognized operating losses before taxes of $0.3 million and $0.6 million, respectively, in the quarter, and $0.5 million and $1.3 million, respectively, year-to-date. In the year-to-date period, operating losses before taxes include $0.3 million and $0.9 million in 2015 and 2014, respectively, related to insurance and other settlements, and $0.2 million and $0.3 million, respectively, related to our lease commitments.
Our liability for lease commitments related to our distribution centers is included in accrued liabilities and other long-term liabilities, and was $0.3 million and $0.5 million as of July 5, 2015 and September 28, 2014, respectively. The lease commitment balance as of July 5, 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. In the quarter and year-to-date periods, we recognized operating losses before income taxes of $2.2 million and $4.6 million, respectively, in 2015, and $1.7 million and $6.1 million, respectively, in 2014.

7

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



In 2015, the year-to-date operating losses include $3.9 million of unfavorable lease commitment adjustments, $0.3 million of bad debt expense related to a subtenant, $0.2 million of ongoing facility related costs and $0.2 million of broker commissions. In 2014, the year-to-date operating losses include $4.2 million of unfavorable lease commitment adjustments, $0.4 million for asset impairments, $0.7 million of ongoing facility related costs and $0.5 million of broker commissions. We do not expect the remaining costs to be incurred related to these closures to be material; however, the estimates we make related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.
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 2015 (in thousands):
Balance as of September 28, 2014
 
$
5,737

Adjustments
 
3,853

Cash payments
 
(5,225
)
Balance as of July 5, 2015
 
$
4,365

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

3.    INDEBTEDNESS
Amended credit facility — On July 1, 2015, the Company amended its credit facility to increase our overall borrowing capacity. The amended credit facility was increased to $1.2 billion, consisting of (i) a $900.0 million revolving credit facility and (ii) a $300.0 million term loan facility. The interest rate did not change as a result of the amendment and continues to be based on the Company’s leverage ratio and can range from London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.00%. Both the revolving credit facility and the term loan facility maturity dates of March 19, 2019 did not change as part of the amendment. As part of the existing credit agreement, we may also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces our net borrowing capacity under the agreement. The amendment also, among other things, amended certain covenants already contained in the credit agreement.
Use of proceeds — The Company borrowed $300.0 million under the amended term loan and approximately $360.0 million under the amended revolving credit facility. The proceeds from the amendment were used to repay all borrowings under the credit facility prior to the amendment and pay related transaction fees and expenses associated with amending the credit facility, and will also be available for permitted share repurchases, permitted dividends, permitted acquisitions, ongoing working capital requirements and other general corporate purposes. At July 5, 2015, we had borrowings under the revolving credit facility of $350.0 million, $300.0 million outstanding under the term loan and letters of credit outstanding of $22.1 million.
Collateral — The Company’s obligations under the credit facility are secured by first priority liens and security interests in the capital stock, partnership, and membership interests owned by the Company and/or its subsidiaries, and any proceeds thereof, subject to certain restrictions. Additionally, there is a negative pledge on all tangible and intangible assets (including all real and personal property), with customary exceptions.
Covenants — We are subject to a number of customary covenants under our credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, lease commitments, stock repurchases and dividend payments, and requirements to maintain certain financial ratios defined in the credit agreement.
Repayments — The amended term loan requires amortization in the form of quarterly installments of $3.91 million from September 2015 through March 2016, $5.86 million million from June 2016 through March 2018, and $7.81 million from June 2018 through December 2018 with the remainder due at the expiration of the term loan agreement in March 2019. We are required to make certain mandatory prepayments under certain circumstances and we have the option to make certain prepayments without premium or penalty. The credit facility includes events of default (and related remedies, including acceleration and increased interest rates following an event of default) that are customary for facilities and transactions of this type.


8

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



4.
SUMMARY OF REFRANCHISINGS, 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 or losses and fees recognized (dollars in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Restaurants sold to Jack in the Box franchisees

 

 
21

 
14

New restaurants opened by franchisees:
 
 
 
 
 
 
 
Jack in the Box
1

 
3

 
12

 
10

Qdoba
4

 
5

 
15

 
17

 
 
 
 
 
 
 
 
Initial franchise fees
$
130

 
$
207

 
$
1,113

 
$
1,361

 
 
 
 
 
 
 
 
Proceeds from the sale of company-operated restaurants (1)
$
21

 
$
357

 
$
2,651

 
$
8,199

Net assets sold (primarily property and equipment)
(204
)
 
(7
)
 
(2,638
)
 
(2,247
)
Goodwill related to the sale of company-operated restaurants

 
(5
)
 
(32
)
 
(134
)
Other (2)

 
1

 
(4,334
)
 
(139
)
(Losses) gains on the sale of company-operated restaurants
$
(183
)
 
$
346

 
$
(4,353
)
 
$
5,679

 
 
 
 
 
 
 
 
Losses on expected sale of Jack in the Box company-operated markets (3)

 
(322
)
 

 
(3,437
)
 
 
 
 
 
 
 
 
Total (losses) gains on the sale of company-operated restaurants
$
(183
)
 
$
24

 
$
(4,353
)
 
$
2,242

____________________________
(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 $0.4 million, respectively, in the quarter, and $0.2 million and $1.5 million, respectively, year-to-date.
(2)
Amounts in 2015 include lease commitment charges related to restaurants closed in connection with the sale of the related market, and charges for operating restaurant leases with lease commitments in excess of our sublease rental income.
(3)
Amounts in 2014 relate to losses on the expected sale of approximately 43 company-operated restaurants in three Jack in the Box markets sold in the fourth quarter of 2014 and the second quarter of 2015.
Franchise acquisitions — In 2015, we acquired seven Jack in the Box franchise restaurants in two markets, and during 2014, we repurchased four Jack in the Box franchise restaurants in another market. 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). Acquisitions were not material to our condensed consolidated financial statements in either year.


9

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



5.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities — The following table presents the financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Total      
 
Quoted Prices
in Active
Markets for
Identical
Assets (3)
(Level 1)
 
Significant
Other
Observable
Inputs (3)
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Fair value measurements as of July 5, 2015:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(37,182
)
 
$
(37,182
)
 
$

 
$

Interest rate swaps (Note 6) (2) 
(11,932
)
 

 
(11,932
)
 

Total liabilities at fair value
$
(49,114
)
 
$
(37,182
)
 
$
(11,932
)
 
$

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

 
$

Interest rate swaps (Note 6) (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, 2 or 3.
The fair values of our debt instruments are based on the amount of future cash flows associated with each instrument discounted using our borrowing rate. At July 5, 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 July 5, 2015.
Non-financial assets and liabilities — Our 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 an annual basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, non-financial instruments are assessed for impairment. If applicable, the carrying values are written down to fair value.
In connection with our impairment reviews performed during 2015, no material fair value adjustments were required. Refer to Note 7, Impairment and Other Charges, Net for additional information regarding impairment charges.


10

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



6.
DERIVATIVE INSTRUMENTS
Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that effectively 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. In June 2015, we entered into 11 forward-starting interest rate swap agreements that effectively convert an additional $200.0 million of our variable rate borrowings to a fixed rate from October 2015 through October 2018, and $500.0 million from October 2018 through October 2022. 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):
 
July 5, 2015
 
September 28, 2014
 
Balance
Sheet
Location
 
Fair
Value
 
Balance
Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps (Note 5)
Accrued
liabilities
 
$
(2,341
)
 
Accrued
liabilities
 
$
(1,789
)
Interest rate swaps (Note 5)
Other long-term liabilities
 
$
(9,591
)
 
Other long-term liabilities
 
$

Total derivatives
 
 
$
(11,932
)
 
 
 
$
(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
 
Quarter
 
Year-to-date
 
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Gain (loss) recognized in OCI
N/A
 
$
(5,027
)
 
$
(14
)
 
$
(11,699
)
 
$
(99
)
Loss reclassified from accumulated OCI into net earnings
Interest
expense, 
net
 
$
461

 
$
324

 
$
1,556

 
$
1,072

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.

7.
IMPAIRMENT AND OTHER CHARGES, NET
Impairment and other charges, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Accelerated depreciation
$
2,610

 
$
152

 
$
4,749

 
$
1,302

Restaurant impairment charges
24

 
146

 
65

 
326

Losses on the disposition of property and equipment, net
228

 
491

 
580

 
1,042

Costs of closed restaurants (primarily lease obligations) and other
886

 
318

 
2,645

 
1,613

Restructuring costs
10

 
561

 
29

 
8,350

 
$
3,758

 
$
1,668

 
$
8,068

 
$
12,633


11

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



Accelerated depreciation — When a long-lived asset will be replaced or otherwise disposed of prior to the end of its estimated useful life, the useful life of the asset is adjusted based on the estimated disposal date and accelerated depreciation is recognized. Accelerated depreciation primarily relates to expenses at our Jack in the Box company restaurants for the replacement of technology and beverage equipment in 2015 and restaurant facility enhancement programs in 2014. In the third quarter of 2015, we recognized a $2.2 million charge related to the replacement of our beverage equipment at Jack in the Box restaurants.
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 all periods were not material and primarily relate to charges for restaurants we intend to or have closed.
Disposition of property and equipment — Disposal costs primarily relate to gains or losses recognized upon the sale of closed restaurant properties. In 2015, losses on the disposition of property and equipment includes a gain of $0.9 million from the resolution of one eminent domain matter involving a Jack in the Box restaurant.
Costs of closed restaurants — Costs of closed restaurants primarily consist of future lease commitments, net of anticipated sublease rentals and expected ancillary costs related to our Jack in the Box restaurant operations. Accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows in 2015 (in thousands):
Balance as of September 28, 2014
 
$
13,173

Adjustments (1)
 
2,141

Cash payments
 
(4,760
)
Balance as of July 5, 2015
 
$
10,554

___________________________
(1)    Adjustments relate primarily to revisions to certain sublease and cost assumptions. The estimates we make related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.
Restructuring costs — Since the beginning of 2012, we have been engaged in efforts to improve our cost structure and identify opportunities to reduce general and administrative expenses as well as improve profitability across both brands. The following is a summary of the costs incurred in connection with these activities (in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Severance costs
$
10

 
$
468

 
$
29

 
$
1,864

Other

 
93

 

 
6,486

 
$
10

 
$
561

 
$
29

 
$
8,350

In 2014, other costs represents an impairment charge recognized in the second quarter of fiscal 2014 related to a restaurant software asset we no longer planned to place in service as we integrate certain systems across both of our brands. We may incur additional charges related to our restructuring activities; however, we are unable to make a reasonable estimate at this time.
8.
INCOME TAXES
The income tax provisions reflect tax rates of 38.2% in the quarter and 37.3% year-to-date in 2015, compared with 33.8% and 35.9%, respectively, a year ago. The major component of the year-over-year change in tax rates was an increase in operating earnings before income taxes 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 quarter tax rate reflects the conclusion of a state audit and the impact of the completion of the federal income tax return completed during the quarter. 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 July 5, 2015, the Company no longer has any gross unrecognized tax benefits associated with uncertain income tax positions. During the quarter, the Company concluded an audit regarding a specific claim with California. The conclusion of this audit eliminated our unrecognized tax benefits associated with uncertain income tax positions. The Company’s gross unrecognized tax benefits associated with uncertain tax positions were $0.4 million before the conclusion of this audit.

12

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



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 2012 and forward. The Company’s federal statute of limitations for fiscal years 2009 and 2011 were extended and remain 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.
 
9.
RETIREMENT PLANS
Defined benefit pension plans — We sponsor two defined benefit pension plans: a qualified plan covering substantially all full-time Jack in the Box employees hired prior to January 1, 2011, and an unfunded supplemental executive plan which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. In fiscal 2011, the Board of Directors approved changes to our qualified plan whereby participants will no longer accrue benefits effective December 31, 2015. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.
Postretirement healthcare plans — We also sponsor two healthcare plans, closed to new participants, that provide postretirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance.
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands): 
  
Quarter
 
Year-to-date
  
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Defined benefit pension plans:
 
 
 
 
 
 
 
Service cost
$
1,908

 
$
1,875

 
$
6,360

 
$
6,249

Interest cost
5,237

 
5,364

 
17,457

 
17,880

Expected return on plan assets
(5,370
)
 
(5,652
)
 
(17,901
)
 
(18,840
)
Actuarial loss (1)
2,172

 
1,023

 
7,240

 
3,411

Amortization of unrecognized prior service costs (1)
62

 
62

 
207

 
207

Net periodic benefit cost
$
4,009

 
$
2,672

 
$
13,363

 
$
8,907

Postretirement healthcare plans:
 
 
 
 
 
 
 
Interest cost
$
276

 
$
379

 
$
920

 
$
1,261

Actuarial loss (1)
42

 
125

 
140

 
417

Net periodic benefit cost
$
318

 
$
504

 
$
1,060

 
$
1,678

___________________________
(1)    Amounts were reclassified from accumulated OCI into net earnings as a component of selling, general and administrative expenses.
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
$
13,707

 
$
652

Remaining estimated net contributions during fiscal 2015
$
11,000

 
$
600

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

13

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



10.
SHARE-BASED COMPENSATION
We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors to work toward the financial success of the Company. In fiscal 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
93,570

The components of share-based compensation expense recognized in each period are as follows (in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Stock options
$
585

 
$
347

 
$
2,139

 
$
2,125

Performance share awards
1,335

 
891

 
3,407

 
3,386

Nonvested stock awards
31

 
46

 
127

 
264

Nonvested stock units
723

 
497

 
4,105

 
2,135

Deferred compensation for non-management directors

 

 
263

 
218

Total share-based compensation expense
$
2,674

 
$
1,781

 
$
10,041

 
$
8,128


11.    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 and May 2015, the Board of Directors approved two $100.0 million stock buyback programs that expire in November 2016. During fiscal 2015, we repurchased 2.95 million shares at an aggregate cost of $251.6 million and fully utilized the February, July and November 2014 authorizations. As of July 5, 2015, there was $65.5 million remaining under our May 2015 stock-buyback program which 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 two cash dividends of $0.20 per share each, and one cash dividend of $0.30 per share, which were paid to shareholders of record as of December 1, 2014, March 6, 2015, and June 1, 2015, respectively, and totaled $26.7 million. Future dividends are subject to approval by our Board of Directors.

12.
AVERAGE SHARES OUTSTANDING
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our employee stock purchase plan. Performance share awards are included in the average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.


14

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



The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Weighted-average shares outstanding – basic
37,106

 
39,692

 
37,980

 
41,320

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
213

 
576

 
301

 
684

Nonvested stock awards and units
196

 
247

 
197

 
327

Performance share awards
146

 
272

 
152

 
274

Weighted-average shares outstanding – diluted
37,661

 
40,787

 
38,630

 
42,605

Excluded from diluted weighted-average shares outstanding:
 
 
 
 
 
 
 
Antidilutive
99

 
178

 
85

 
145

Performance conditions not satisfied at the end of the period
23

 
31

 
17

 
29


13.
VARIABLE INTEREST ENTITIES
In January 2011, we formed Jack in the Box Franchise Finance, LLC (“FFE”) for the purpose of operating a franchisee lending program to assist Jack in the Box franchisees in re-imaging their restaurants. We are the sole equity investor in FFE. The lending program was comprised of a $20.0 million commitment from the Company in the form of a capital note and an $80.0 million Senior Secured Revolving Securitization Facility entered into with a third party. The lending period and the revolving period expired in June 2012. At July 5, 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 we are the primary beneficiary. We considered a variety of factors in identifying the primary beneficiary of FFE including, but not limited to, who holds the power to direct matters that most significantly impact FFE’s economic performance (such as determining the underwriting standards and credit management policies), as well as what party has the obligation to absorb the losses of FFE. Based on these considerations, we have determined that we are the primary beneficiary and the entity is reflected in the accompanying condensed consolidated financial statements.
FFE’s assets consolidated by us represent assets that can be used only to settle obligations of the consolidated VIE. Likewise, FFE’s liabilities consolidated by us do not represent additional claims on our general assets; rather they represent claims against the specific assets of FFE. The impacts of FFE’s results were not material to our condensed consolidated statements of earnings.
The FFE’s balance sheet consisted of the following at the end of each period (in thousands):
 
July 5,
2015
 
September 28,
2014
Cash
$
159

 
$

Other current assets (1) 
1,041

 
2,494

Other assets, net (1) 
2,216

 
5,776

Total assets
$
3,416

 
$
8,270

 
 
 
 
Current liabilities (2)
$
1,153

 
$
2,833

Other long-term liabilities (2) 
2,127

 
5,367

Retained earnings
136

 
70

Total liabilities and stockholders’ equity
$
3,416

 
$
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.
In 2015, we received $3.9 million of early prepayments on notes receivable due from franchisees, which increased our cash flows from investing activities in the year-to-date period.
Our maximum exposure to loss is equal to its outstanding contributions as of July 5, 2015. This amount represents estimated losses that would be incurred should all franchisees default on their loans without any consideration of recovery.

15

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



To offset the credit risk associated with our variable interest in FFE, we hold a security interest in the assets of FFE subordinate and junior to all other obligations of FFE.

14.    CONTINGENCIES AND LEGAL MATTERS 
Legal matters — The Company assesses contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates. 
Gessele v. Jack in the Box Inc. — In August 2010, five former employees instituted litigation alleging claims under the federal Fair Labor Standards Act and Oregon wage and hour laws. The plaintiffs alleged that the Company failed to pay non-exempt employees for certain meal breaks and improperly made payroll deductions for shoe purchases and for workers’ compensation expenses, and later added additional claims relating to timing of final pay and related wage and hour claims involving employees of a franchisee. 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.
Other legal matters — In addition to the matter described above, we are subject to normal and routine litigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others, whether individually, collectively or on behalf of a proposed class. We intend to defend ourselves in any such matters. Some of these matters may be covered, at least in part, by insurance. Our insurance liability (undiscounted) and reserves are established in part by using independent actuarial estimates of expected losses for reported claims and for estimating claims incurred but not reported. As of July 5, 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 we currently believe that the ultimate determination of liability in connection with legal claims pending against the company, if any, in excess of amounts already provided for such matters in the consolidated financial statements, will not have a material adverse effect on our business, our annual results of operations, liquidity or financial position, 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 matters or contingencies during such period.
Lease guarantees In connection with the sale of the Jack in the Box distribution business, we have assigned the lease at one distribution center to a third party. Under this agreement, which expires in 2017, we remain secondarily liable for the lease payments for which we were responsible under the original lease. As of July 5, 2015, the amount remaining under the lease guarantee totaled $1.4 million. We have not recorded a liability for the guarantee as the likelihood of the third party defaulting on the assignment agreements was deemed to be less than probable.

15.
SEGMENT REPORTING
Our principal business consists of developing, operating and franchising our Jack in the Box and Qdoba restaurant concepts, each of which we consider reportable operating segments. This segment reporting structure reflects our current management structure, internal reporting method and financial information used in deciding how to allocate our resources. Based upon certain quantitative thresholds, each operating segment is considered a reportable segment.

16

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



We measure and evaluate our segments based on segment revenues and earnings from operations. The reportable segments do not include an allocation of the costs related to shared service functions, such as accounting/finance, human resources, audit services, legal, tax and treasury; nor do they include unallocated costs such as pension expense and share-based compensation. These costs are reflected in the caption “Shared services and unallocated costs,” and therefore, the measure of segment profit or loss is before such items. The following table provides information related to our segments in each period (in thousands):
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Revenues by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
263,339

 
$
259,737

 
$
884,734

 
$
869,650

Qdoba restaurant operations
96,167

 
88,755

 
301,515

 
269,794

Consolidated revenues
$
359,506

 
$
348,492

 
$
1,186,249

 
$
1,139,444

Earnings from operations by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
62,355

 
$
54,413

 
$
207,523

 
$
184,333

Qdoba restaurant operations
13,805

 
9,641

 
37,265

 
26,354

Shared services and unallocated costs
(25,582
)
 
(21,078
)
 
(84,936
)
 
(79,846
)
(Losses) gains on the sale of company-operated restaurants
(183
)
 
24

 
(4,353
)
 
2,242

Consolidated earnings from operations
50,395

 
43,000

 
155,499

 
133,083

Interest expense, net
4,504

 
3,535

 
13,937

 
12,388

Consolidated earnings from continuing operations and before income taxes
$
45,891

 
$
39,465

 
$
141,562

 
$
120,695

Total depreciation expense by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
14,737

 
$
15,110

 
$
49,051

 
$
51,379

Qdoba restaurant operations
3,864

 
3,893

 
13,179

 
13,029

Shared services and unallocated costs
1,573

 
1,688

 
5,445

 
5,612

Consolidated depreciation expense
$
20,174

 
$
20,691

 
$
67,675

 
$
70,020

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

The following table provides detail of the change in the balance of goodwill for each of our reportable segments (in thousands):
 
Qdoba
 
Jack in the Box
 
Total
Balance at September 28, 2014
$
100,597

 
$
48,477

 
$
149,074

Disposals

 
(32
)
 
(32
)
Balance at July 5, 2015
$
100,597

 
$
48,445

 
$
149,042

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

16.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
$
13,433

 
$
12,100

Income tax payments
$
18,685

 
$
28,913

Non-cash transactions:
 
 
 
Equipment capital lease obligations incurred
$
4,894

 
$

Increase in dividends accrued at period end
$
121

 
$
34

Change in obligation for purchases of property and equipment
$
(53
)
 
$
6,183



17

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



17.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
July 5,
2015
 
September 28,
2014
Prepaid expenses:
 
 
 
Prepaid income taxes
$
17,720

 
$
27,956

Prepaid rent
13,591

 
178

Other
9,156

 
8,180

 
$
40,467

 
$
36,314

Other assets, net:
 
 
 
Company-owned life insurance policies
$
102,713

 
$
100,753

Deferred tax assets
46,986

 
50,807

Other
85,184

 
85,738

 
$
234,883

 
$
237,298

Accrued liabilities:
 
 
 
Payroll and related taxes
$
54,014

 
$
54,905

Insurance
34,588

 
34,834

Advertising
14,147

 
21,452

Deferred rent income
15,418

 
2,432

Lease commitments related to closed or refranchised locations
10,188

 
10,258

Sales and property taxes
10,805

 
11,760

Other
33,324

 
27,985

 
$
172,484

 
$
163,626

Other long-term liabilities:
 
 
 
Pension plans
$
136,047

 
$
143,838

Straight-line rent accrual
46,955

 
48,835

Other
129,307

 
116,762

 
$
312,309

 
$
309,435


18.
SUBSEQUENT EVENTS

Declaration of dividend — On July 30, 2015, the Board of Directors declared a cash dividend of $0.30 per share, to be paid on September 9, 2015 to shareholders of record as of the close of business on August 26, 2015. Future dividends will be subject to approval by our Board of Directors.


18


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2015 and 2014 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 5, 2015 and July 6, 2014, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during the quarterly periods ended July 5, 2015 and July 6, 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, if applicable.
Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates.
New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations.
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 sales at restaurants open more than one year (“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 AUV information is useful to investors as a significant indicator of the overall strength of our business.
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 July 5, 2015, we operated and franchised 2,248 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 648 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 restaurants to franchisees, which are included as a line item within operating costs and expenses, net in the accompanying condensed consolidated statements of earnings.

19


The following summarizes the most significant events occurring in 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 5.4% year-to-date at company-operated Jack in the Box restaurants driven by favorable product mix changes, transaction growth and price increases. Qdoba’s year-to-date same-store sales increase of 9.1% at company-operated restaurants was driven primarily by our new simplified pricing structure and catering.
Commodity Costs Commodity costs increased approximately 2.0% and 2.4% year-to-date 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 1.5% - 2.0% in fiscal 2015. 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 10% - 15%.
Restaurant Margin Expansion Our year-to-date consolidated company-operated restaurant margin increased 190 basis points in 2015 to 20.5%. Jack in the Box’s company-operated restaurant margin improved 200 basis points to 20.8% due primarily to leverage from same-store sales increases and benefits from refranchising activities. Company-operated restaurant margins at our Qdoba restaurants improved 150 basis points to 19.8% primarily reflecting benefits from the new simplified pricing structure and leverage from same-store sales growth.
Jack in the Box Franchising Program We essentially completed our Jack in the Box refranchising strategy with the sale of 20 company-operated restaurants in the Southeast during the second quarter. Year-to-date, franchisees opened a total of 12 restaurants. In fiscal 2015, we expect franchisees to open 13-18 Jack in the Box restaurants. Our Jack in the Box system was 82% franchised at the end of the third 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 eight company-operated restaurants and franchisees opened 15 restaurants. Of the new restaurants, seven were in non-traditional locations such as airports and college campuses. In fiscal 2015, we plan to open 40-45 Qdoba restaurants, of which approximately 15-20 are expected to be company-operated restaurants. We expect the majority of our franchise new unit development to be in non-traditional locations.
Credit Facility In July 2015, we completed an amendment to our existing credit agreement to increase overall borrowing capacity to $1.2 billion, consisting of a $900.0 million revolving credit facility and a $300.0 million term loan, both maturing in March 2019.
Return of Cash to Shareholders During 2015 we returned cash to shareholders in the form of share repurchases and cash dividends. We repurchased 2.95 million shares of our common stock at an average price of $85.38 per share, totaling $251.6 million, including the costs of brokerage fees. We also declared dividends of $0.70 per share totaling $26.7 million, and raised the quarterly dividend by 50% in the third quarter.
FINANCIAL REPORTING
The condensed consolidated statements of earnings for all periods presented have been prepared reflecting the results of operations for the 62 Qdoba restaurants we closed in the third quarter of fiscal 2013 (the “2013 Qdoba Closures”) and charges incurred as a result of closing these restaurants as discontinued operations. During fiscal 2012, we entered into an agreement to outsource our Jack in the Box distribution business, 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.


20


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
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
75.3
%
 
75.9
 %
 
75.1
%
 
75.6
 %
Franchise revenues
24.7
%
 
24.1
 %
 
24.9
%
 
24.4
 %
Total revenues
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging (1)
30.5
%
 
31.9
 %
 
31.4
%
 
31.8
 %
Payroll and employee benefits (1)
26.9
%
 
27.1
 %
 
27.1
%
 
27.5
 %
Occupancy and other (1)
20.7
%
 
21.8
 %
 
21.0
%
 
22.0
 %
Total company restaurant costs (1)
78.2
%
 
80.9
 %
 
79.5
%
 
81.4
 %
Franchise costs (1) 
47.9
%
 
50.6
 %
 
48.4
%
 
50.3
 %
Selling, general and administrative expenses
14.2
%
 
13.6
 %
 
14.0
%
 
13.6
 %
Impairment and other charges, net
1.0
%
 
0.5
 %
 
0.7
%
 
1.1
 %
Losses (gains) on the sale of company-operated restaurants
0.1
%
 
 %
 
0.4
%
 
(0.2
)%
Earnings from operations
14.0
%
 
12.3
 %
 
13.1
%
 
11.7
 %
Income tax rate (2) 
38.2
%
 
33.8
 %
 
37.3
%
 
35.9
 %
____________________________
(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
 
Quarter
 
Year-to-date
 
July 5,
2015
 
July 6,
2014
 
July 5,
2015
 
July 6,
2014
Jack in the Box:
 
 
 
 
 
 
 
Company
5.5%
 
2.4%
 
5.4%
 
1.8%
Franchise
7.9%
 
2.4%
 
7.0%
 
1.7%
System
7.3%
 
2.4%
 
6.6%
 
1.7%
Qdoba:
 
 
 
 
 
 
 
Company
6.6%
 
7.2%
 
9.1%
 
5.2%
Franchise
9.0%
 
7.7%
 
11.4%
 
5.6%
System
7.7%
 
7.5%
 
10.2%
 
5.4%


21


The following table summarizes the changes in the number and mix of Jack in the Box (“JIB”) and Qdoba company and franchise restaurants:
 
July 5, 2015
 
July 6, 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
2

 
12

 
14

 

 
10

 
10

Refranchised
(21
)
 
21

 

 
(14
)
 
14

 

Acquired from franchisees
7

 
(7
)
 

 
4

 
(4
)
 

Closed
(6
)
 
(10
)
 
(16
)
 

 
(9
)
 
(9
)
End of period
413

 
1,835

 
2,248

 
455

 
1,797

 
2,252

% of JIB system
18
%
 
82
%
 
100
%
 
20
%
 
80
%
 
100
%
              % of consolidated system
57
%
 
85
%
 
78
%
 
60
%
 
85
%
 
78
%
Qdoba:
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
310

 
328

 
638

 
296

 
319

 
615

New
8

 
15

 
23

 
13

 
17

 
30

Closed
(4
)
 
(9
)
 
(13
)
 
(1
)
 
(12
)
 
(13
)
End of period
314

 
334

 
648

 
308

 
324

 
632

% of Qdoba system
48
%
 
52
%
 
100
%
 
49
%
 
51
%
 
100
%
              % of consolidated system
43
%
 
15
%
 
22
%
 
40
%
 
15
%
 
22
%
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
Total system
727

 
2,169

 
2,896

 
763

 
2,121

 
2,884

% of consolidated system
25
%
 
75
%
 
100
%
 
26
%
 
74
%
 
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 (dollars in thousands):
 
Quarter
 
Year-to-date
 
July 5, 2015
 
July 6, 2014
 
July 5, 2015
 
July 6, 2014
Company restaurant sales
$
179,451

 
 
 
$
180,129

 
 
 
$
605,786

 
 
 
$
605,206

 
 
Company restaurant costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Food and packaging
55,218

 
30.8
%
 
58,909

 
32.7
%
 
192,906

 
31.8
%
 
197,419

 
32.6
%
Payroll and employee benefits
49,599

 
27.6
%
 
49,860

 
27.7
%
 
167,227

 
27.6
%
 
168,313

 
27.8
%
Occupancy and other
35,115

 
19.6
%
 
38,147

 
21.2
%
 
119,797

 
19.8
%
 
125,965

 
20.8
%
Total company restaurant costs
139,932

 
78.0
%
 
146,916

 
81.6
%
 
479,930

 
79.2
%
 
491,697

 
81.2
%
Restaurant margin
$
39,519

 
22.0
%
 
$
33,213

 
18.4
%
 
$
125,856

 
20.8
%
 
$
113,509

 
18.8
%

Jack in the Box company restaurant sales decreased $0.7 million in the quarter and increased $0.6 million year-to-date as compared with the prior year. Higher AUV growth was more than offset in the quarter, and partially offset year-to-date by a decrease in sales attributable to a reduction in the average number of company-operated restaurants resulting from the execution of our refranchising strategy. The following table presents the approximate impact of these increases (decreases) on company restaurant sales (in thousands):

 
Quarter
 
Year-to-date
Jack in the Box AUV increase
$
18,300

 
$
55,000

Decrease in the average number of Jack in the Box company restaurants
(19,000
)
 
(54,400
)
Total (decrease) increase in company restaurant sales
$
(700
)
 
$
600


22



Same-store sales at Jack in the Box company-operated restaurants increased 5.5% in the quarter and 5.4% year-to-date, primarily driven by favorable product mix changes, transaction growth and price increases. The following table summarizes the change in company-operated same-store sales:
 
Quarter
 
Year-to-date
 
July 5, 2015
 
July 6, 2014
 
July 5, 2015
 
July 6, 2014
Transactions
1.6
%
 
(1.3
)%
 
1.5
%
 
(1.2
)%
Average check (1)
3.9
%
 
3.7
 %
 
3.9
%
 
3.0
 %
Change in same-store sales
5.5
%
 
2.4
 %
 
5.4
%
 
1.8
 %
____________________________
(1)
Amounts in 2015 and 2014 include price increases of approximately 2.0% and 2.9%, respectively, in the quarter, and 2.1% and 2.7%, respectively, year-to-date.
Food and packaging costs as a percentage of company restaurant sales decreased to 30.8% in the quarter and 31.8% year-to-date, compared with 32.7% and 32.6%, respectively, in 2014. In the quarter, menu price increases, lower costs for commodities and favorable product mix contributed to the decrease in food and packaging costs as a percentage of company restaurant sales. Year-to-date, the benefits of menu price increases and product mix changes more than offset higher commodity costs. In 2015, commodity costs decreased 1.1% in the quarter and increased 2.0% year-to-date as higher costs for beef, eggs and cheese, were more than offset in the quarter and partially offset year-to-date by lower costs for pork and shortening. Eggs and beef increased most significantly by approximately 58% and 6%, respectively, in the quarter and 32% and 17%, respectively, year-to-date. We expect commodity costs for fiscal 2015 to increase approximately 1.5% - 2.0%.
Payroll and employee benefit costs as a percentage of company restaurant sales decreased to 27.6% in both periods of 2015 compared with 27.7% in the quarter and 27.8% year-to-date last year. In 2015, sales leverage, the benefits of refranchising and lower costs for group insurance driven by favorable claim trends were partially offset by higher wages from minimum wage increases, an increase in incentive compensation driven by strong operating performance and in the quarter higher costs due to unfavorable development trends associated with workers’ compensation claims.
As a percentage of company restaurant sales, occupancy and other costs decreased to 19.6% in the quarter and 19.8% year-to-date, compared with 21.2% and 20.8%, respectively a year ago due to sales leverage and the benefits of refranchising. These benefits were partially offset by higher costs for credit card fees, maintenance and repair expenses, security, supplies and electricity.

23



Franchise Operations
The following table presents 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):
 
Quarter
 
Year-to-date
 
July 5, 2015
 
July 6, 2014