Document

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 3, 2016
Commission File Number: 1-9390
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 29, 2016, 32,678,688 shares of the registrant’s common stock were outstanding.



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

1


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

JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
July 3,
2016
 
September 27,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,647

 
$
17,743

Accounts and other receivables, net
61,990

 
47,975

Inventories
7,933

 
7,376

Prepaid expenses
38,064

 
16,240

Assets held for sale
19,546

 
15,516

Other current assets
2,073

 
3,106

Total current assets
136,253

 
107,956

Property and equipment, at cost
1,592,049

 
1,563,377

Less accumulated depreciation and amortization
(874,562
)
 
(835,114
)
Property and equipment, net
717,487

 
728,263

Intangible assets, net
14,177

 
14,765

Goodwill
149,007

 
149,027

Other assets, net
274,590

 
303,968

 
$
1,291,514

 
$
1,303,979

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
26,286

 
$
26,677

Accounts payable
21,289

 
32,137

Accrued liabilities
173,764

 
170,575

Total current liabilities
221,339

 
229,389

Long-term debt, net of current maturities
869,982

 
688,579

Other long-term liabilities
367,668

 
370,058

Stockholders’ (deficit) 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, 81,428,150 and 81,096,156 issued, respectively
814

 
811

Capital in excess of par value
421,195

 
402,986

Retained earnings
1,377,565

 
1,316,119

Accumulated other comprehensive loss
(145,616
)
 
(132,530
)
Treasury stock, at cost, 48,765,738 and 45,314,529 shares, respectively
(1,821,433
)
 
(1,571,433
)
Total stockholders’ (deficit) equity
(167,475
)
 
15,953

 
$
1,291,514

 
$
1,303,979

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 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
$
278,829

 
$
270,655

 
$
903,842

 
$
891,455

Franchise rental revenues
52,878

 
52,375

 
175,218

 
174,036

Franchise royalties and other
37,231

 
36,476

 
121,852

 
120,758

 
368,938

 
359,506

 
1,200,912

 
1,186,249

Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
81,825

 
82,649

 
272,802

 
279,790

Payroll and employee benefits
76,910

 
72,896

 
250,954

 
241,648

Occupancy and other
59,118

 
56,103

 
196,344

 
187,602

Total company restaurant costs
217,853

 
211,648

 
720,100

 
709,040

Franchise occupancy expenses
38,848

 
39,087

 
128,475

 
130,821

Franchise support and other costs
3,654

 
3,449

 
12,423

 
11,915

Selling, general and administrative expenses
42,768

 
50,986

 
155,535

 
166,553

Impairment and other charges, net
10,519

 
3,758

 
14,598

 
8,068

(Gains) losses on the sale of company-operated restaurants
(409
)
 
183

 
(1,224
)
 
4,353

 
313,233

 
309,111

 
1,029,907

 
1,030,750

Earnings from operations
55,705

 
50,395

 
171,005

 
155,499

Interest expense, net
7,613

 
4,504

 
22,699

 
13,937

Earnings from continuing operations and before income taxes
48,092

 
45,891

 
148,306

 
141,562

Income taxes
17,308

 
17,528

 
54,597

 
52,739

Earnings from continuing operations
30,784

 
28,363

 
93,709

 
88,823

Losses from discontinued operations, net of income tax benefit
(595
)
 
(1,532
)
 
(1,617
)
 
(3,152
)
Net earnings
$
30,189

 
$
26,831

 
$
92,092

 
$
85,671

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

 
$
0.76

 
$
2.75

 
$
2.34

Losses from discontinued operations
(0.02
)
 
(0.04
)
 
(0.05
)
 
(0.08
)
Net earnings per share (1)
$
0.92

 
$
0.72

 
$
2.70

 
$
2.26

Net earnings per share - diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.93

 
$
0.75

 
$
2.72

 
$
2.30

Losses from discontinued operations
(0.02
)
 
(0.04
)
 
(0.05
)
 
(0.08
)
Net earnings per share (1)
$
0.91

 
$
0.71

 
$
2.67

 
$
2.22

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,642

 
37,106

 
34,073

 
37,980

Diluted
33,016

 
37,661

 
34,469

 
38,630

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.30

 
$
0.30

 
$
0.90

 
$
0.70

____________________________
(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
(In thousands)
(Unaudited)
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Net earnings
$
30,189

 
$
26,831

 
$
92,092

 
$
85,671

Cash flow hedges:
 
 
 
 
 
 
 
Net change in fair value of derivatives
(7,825
)
 
(5,027
)
 
(28,008
)
 
(11,699
)
Net loss reclassified to earnings
860

 
461

 
3,180

 
1,556

 
(6,965
)
 
(4,566
)
 
(24,828
)
 
(10,143
)
Tax effect
2,696

 
1,748

 
9,610

 
3,883

 
(4,269
)
 
(2,818
)
 
(15,218
)
 
(6,260
)
Unrecognized periodic benefit costs:
 
 
 
 
 
 
 
Actuarial losses and prior service costs reclassified to earnings
1,050

 
2,276

 
3,498

 
7,587

Tax effect
(408
)
 
(872
)
 
(1,355
)
 
(2,905
)
 
642

 
1,404

 
2,143

 
4,682

Other:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2

 
(72
)
 
(19
)
 
(56
)
Tax effect

 
24

 
8

 
19

 
2

 
(48
)
 
(11
)
 
(37
)
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax
(3,625
)
 
(1,462
)
 
(13,086
)
 
(1,615
)
 
 
 
 
 
 
 
 
Comprehensive income
$
26,564

 
$
25,369

 
$
79,006

 
$
84,056

See accompanying notes to condensed consolidated financial statements.


4


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
Cash flows from operating activities:
 
 
 
Net earnings
$
92,092

 
$
85,671

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
70,314

 
68,205

Deferred finance cost amortization
2,049

 
1,690

Excess tax benefits from share-based compensation arrangements
(3,822
)
 
(17,781
)
Deferred income taxes
15,672

 
(4,046
)
Share-based compensation expense
9,220

 
10,041

Pension and postretirement expense
10,374

 
14,423

Gains on cash surrender value of company-owned life insurance
(5,008
)
 
(1,960
)
(Gains) losses on the sale of company-operated restaurants
(1,224
)
 
4,353

Losses on the disposition of property and equipment
2,295

 
1,074

Impairment charges and other
2,928

 
4,813

Changes in assets and liabilities:
 
 
 
Accounts and other receivables
(16,333
)
 
(6,895
)
Inventories
(557
)
 
33

Prepaid expenses and other current assets
(7,677
)
 
20,760

Accounts payable
(7,466
)
 
690

Accrued liabilities
1,534

 
4,215

Pension and postretirement contributions
(14,700
)
 
(14,359
)
Other
(2,992
)
 
(5,782
)
Cash flows provided by operating activities
146,699

 
165,145

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(74,971
)
 
(54,832
)
Purchases of assets intended for sale and leaseback
(5,593
)
 
(8,323
)
Proceeds from the sale and leaseback of assets
7,748

 

Proceeds from the sale of company-operated restaurants
1,434

 
2,651

Collections on notes receivable
3,237

 
5,648

Acquisition of franchise-operated restaurants
324

 

Other
51

 
1,888

Cash flows used in investing activities
(67,770
)
 
(52,968
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
576,000

 
742,000

Repayments of borrowings on revolving credit facilities
(376,000
)
 
(698,000
)
Proceeds from issuance of debt

 
300,000

Principal repayments on debt
(19,651
)
 
(198,217
)
Debt issuance costs

 
(1,942
)
Dividends paid on common stock
(30,513
)
 
(26,556
)
Proceeds from issuance of common stock
5,093

 
14,590

Repurchases of common stock
(250,000
)
 
(254,668
)
Excess tax benefits from share-based compensation arrangements
3,822

 
17,781

Change in book overdraft
1,213

 

Cash flows used in financing activities
(90,036
)
 
(105,012
)
Effect of exchange rate changes on cash and cash equivalents
11

 
(37
)
Net (decrease) increase in cash and cash equivalents
(11,096
)
 
7,128

Cash and cash equivalents at beginning of period
17,743

 
10,578

Cash and cash equivalents at end of period
$
6,647

 
$
17,706


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 Eats® (“Qdoba”) fast-casual restaurants. The following table summarizes the number of restaurants as of the end of each period:
 
July 3,
2016
 
July 5,
2015
Jack in the Box:
 
 
 
Company-operated
415

 
413

Franchise
1,839

 
1,835

Total system
2,254

 
2,248

Qdoba:
 
 
 
Company-operated
344

 
314

Franchise
344

 
334

Total system
688

 
648

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 27, 2015 (“2015 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2015 Form 10-K with the exception of a new accounting pronouncement adopted in fiscal 2016 which is 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. The financial results and position of our VIE are immaterial to our condensed consolidated financial statements.
Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the fiscal 2016 presentation.
In our 2015 Form 10-K, on our consolidated statements of earnings, we began to separately state our franchise revenues derived from rentals and those derived from royalties and other. To provide clarity, we additionally separately stated the associated rental expense, and depreciation and amortization related to the rental income received from franchisees. For comparison purposes, we have reclassified prior year franchise revenue and franchise costs line items to reflect the new method of presentation in our accompanying condensed consolidated statements of earnings.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal year 2016 includes 53 weeks, while fiscal year 2015 includes 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks, with the exception of the fourth quarter of fiscal 2016, which includes 13 weeks. All comparisons between 2016 and 2015 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 3, 2016 and July 5, 2015, respectively, unless otherwise indicated.

6

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




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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606), which provides a comprehensive new revenue recognition model that requires an entity to recognize revenue in an amount that reflects the consideration the entity 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. Further, in March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the guidance in ASU No. 2014-09 when evaluating when another party, along with the entity, is involved in providing a good or service to a customer. In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU No. 2014-09 regarding assessing whether promises to transfer goods or services are distinct, and whether an entity's promise to grant a license provides a customer with a right to use, or right to access the entity's intellectual property. All standards are effective for annual periods beginning after December 15, 2017, and interim periods within that reporting period. As such, we will be required to adopt these standards in the first quarter of fiscal 2019. These standards are to be applied retrospectively or using a cumulative effect transition method, and early adoption is not permitted. We are currently evaluating which transition method to use and the effect that these standards will have on our consolidated financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. This standard requires deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. This standard is effective prospectively or retrospectively for all periods presented for annual and interim periods beginning after December 15, 2017, with early adoption permitted. We early adopted this standard in the first quarter of 2016 and the prior period was retrospectively adjusted, resulting in a $40.0 million reclassification of current deferred income taxes to other assets, net on our September 27, 2015 condensed consolidated balance sheet.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires a lessee to recognize assets and liabilities on the balance sheet for those leases classified as operating leases under previous guidance. This standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This standard requires adoption based upon a modified retrospective transition approach, with early adoption permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities-Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which is designed to provide guidance and eliminate diversity in the accounting for the derecognition of financial liabilities related to certain prepaid stored-value products using a revenue-like breakage model. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. This standard is to be applied retrospectively or using a cumulative effect transition method as of the date of adoption. We are currently evaluating which transition method to use, but believe the impact this standard will have on our consolidated financial statements and related disclosures will be immaterial upon adoption.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard is intended to simplify various aspects of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period, with early adoption permitted. We are currently evaluating the impact of the standard on our consolidated financial statements and related disclosures.




7

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



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 FASB authoritative guidance on the presentation of financial statements, the results are reported as discontinued operations for all periods presented.
In 2016 and 2015, results of discontinued operations were immaterial for both periods. Our liability for lease commitments related to our distribution centers is included in accrued liabilities and other long-term liabilities, and was $0.1 million and $0.2 million as of July 3, 2016 and September 27, 2015, respectively. The lease commitment balances relate to one distribution center lease that expires in fiscal 2017 and is currently 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 the FASB authoritative guidance on the presentation of financial statements, the results of operations for these restaurants are reported as discontinued operations for all periods presented.
The following table summarizes the results related to the 2013 Qdoba Closures for each period (in thousands):
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Unfavorable lease commitment adjustments
$
(675
)
 
$
(1,749
)
 
$
(2,143
)
 
$
(3,945
)
Bad debt expense related to subtenants
(225
)
 
(311
)
 
(349
)
 
(311
)
Ongoing facility related costs
(2
)
 
(37
)
 
(72
)
 
(164
)
Broker commissions

 
(58
)
 
(21
)
 
(200
)
Loss before income tax benefit
$
(902
)
 
$
(2,155
)
 
$
(2,585
)
 
$
(4,620
)
We do not expect the remaining costs to be incurred related to these closures to be material; however, our estimates related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.
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 2016 (in thousands):
Balance as of September 27, 2015
$
4,256

Adjustments (1)
2,143

Cash payments
(2,965
)
Balance as of July 3, 2016 (2)
$
3,434

____________________________
(1)
Adjustments relate to revisions to certain sublease and cost assumptions due to changes in market conditions, as well as a charge to terminate one lease agreement, and includes interest expense.
(2)
The weighted average remaining lease term related to these commitments is approximately three years.

8

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



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, the number of restaurants developed by franchisees, and the related fees and gains (losses) recognized (dollars in thousands):
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Restaurants sold to Jack in the Box franchisees

 

 
1

 
21

New restaurants opened by franchisees:
 
 
 
 
 
 
 
Jack in the Box
4

 
1

 
9

 
12

Qdoba
1

 
4

 
11

 
15

 
 
 
 
 
 
 
 
Initial franchise fees
$
205

 
$
130

 
$
710

 
$
1,113

 
 
 
 
 
 
 
 
Proceeds from the sale of company-operated restaurants (1)
$
413

 
$
21

 
$
1,434

 
$
2,651

Net assets sold (primarily property and equipment)

 
(204
)
 
(196
)
 
(2,638
)
Goodwill related to the sale of company-operated restaurants
(5
)
 

 
(15
)
 
(32
)
Other (2)
1

 

 
1

 
(4,334
)
Gains (losses) on the sale of company-operated restaurants
$
409

 
$
(183
)
 
$
1,224

 
$
(4,353
)
____________________________
(1)
Amounts in 2016 and 2015 include additional proceeds recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold in a prior year of $0.4 million and $0.1 million, respectively, in the quarter, and $1.4 million and $0.2 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.
Franchise acquisitions — During year-to-date 2016 and 2015, we acquired one and seven Jack in the Box franchise restaurants, respectively. 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). In all periods presented, acquisitions were not material to our condensed consolidated financial statements.


9

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 our 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 (3)
(Level 3)
Fair value measurements as of July 3, 2016:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(37,287
)
 
$
(37,287
)
 
$

 
$

Interest rate swaps (Note 5) (2) 
(51,202
)
 

 
(51,202
)
 

Total liabilities at fair value
$
(88,489
)
 
$
(37,287
)
 
$
(51,202
)
 
$

Fair value measurements as of September 27, 2015:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(35,003
)
 
$
(35,003
)
 
$

 
$

Interest rate swaps (Note 5) (2) 
(26,374
)
 

 
(26,374
)
 

Total liabilities at fair value
$
(61,377
)
 
$
(35,003
)
 
$
(26,374
)
 
$

 
____________________________
(1)
We maintain an unfunded defined contribution plan for key executives and other members of management. The fair value of this obligation is based on the closing market prices of the participants’ elected investments.
(2)
We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable rate debt. The fair values of our interest rate swaps are based upon Level 2 inputs which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, discount 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 3, 2016, 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 3, 2016.
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 2016, we recorded an impairment charge of $0.6 million related to one underperforming Qdoba restaurant which is currently held for use. No other fair value adjustments were required. Refer to Note 6, 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)



5.
DERIVATIVE INSTRUMENTS
Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. In April 2014, to reduce our exposure to rising interest rates, 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, and future expected 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 in accordance with the provisions 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 variable rate debt.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):
 
Balance
Sheet
Location
 
Fair Value
 
 
July 3,
2016
 
September 27, 2015
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Interest rate swaps (Note 4)
Accrued liabilities
 
$
(5,237
)
 
$
(3,379
)
Interest rate swaps (Note 4)
Other long-term liabilities
 
(45,965
)
 
(22,995
)
Total derivatives
 
 
$
(51,202
)
 
$
(26,374
)
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 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Loss recognized in OCI
N/A
 
$
(7,825
)
 
$
(5,027
)
 
$
(28,008
)
 
$
(11,699
)
Loss reclassified from accumulated OCI into net earnings
Interest expense, net
 
$
860

 
$
461

 
$
3,180

 
$
1,556

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 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 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Restructuring costs
$
7,744

 
$
10

 
$
7,744

 
$
29

Costs of closed restaurants (primarily lease obligations) and other
914

 
886

 
2,489

 
2,645

Accelerated depreciation
673

 
2,610

 
1,531

 
4,749

Losses on the disposition of property and equipment, net
637

 
228

 
2,283

 
580

Restaurant impairment charges
551

 
24

 
551

 
65

 
$
10,519

 
$
3,758

 
$
14,598

 
$
8,068

Restructuring costs — Restructuring charges in the third quarter of 2016 are the result of a plan to reduce our general and administrative costs. This plan includes a comprehensive review of our organizational structure, with management identifying cost saving initiatives from workforce reductions, relocation of our Qdoba corporate support center, refranchising initiatives, and information technology consolidation across both brands. Charges consist primarily of employee severance pay and facility closing costs.


11

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



The following is a summary of our restructuring costs in both periods of 2016 (in thousands):
Employee severance and related costs
$
6,487

Facility closing costs
847

Other
410

 
$
7,744

Approximately $1.8 million and $4.4 million of the 2016 restructuring costs are related to our Jack in the Box and Qdoba restaurant operating segments, respectively, and approximately $1.5 million is related to shared services functions. We currently expect to incur $10.0 million to $13.0 million in pre-tax charges in connection with our restructuring plan during fiscal 2016. At this time, we are unable to estimate additional charges to be incurred subsequent to 2016.
As of July 3, 2016, $4.6 million in accrued severance costs are included in accrued liabilities.
Restaurant closing costs — Costs of closed restaurants primarily consist of future lease commitments and expected ancillary costs, net of anticipated sublease rentals. Accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows during 2016 (in thousands):
Balance as of September 27, 2015
 
$
9,707

Additions
 
310

Adjustments (1)
 
707

Interest expense
 
1,084

Cash payments
 
(4,044
)
Balance as of July 3, 2016 (2)
 
$
7,764

___________________________
(1)
Adjustments relate primarily to revisions of certain sublease and cost assumptions. Our estimates related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.

(2)
The weighted average remaining lease term related to these commitments is approximately five years.
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. In 2016 and 2015, accelerated depreciation primarily relates to expenses at our Jack in the Box company-operated restaurants for exterior facility enhancements and the replacement of technology equipment, and in 2015, the replacement of beverage equipment. 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.
Disposition of property and equipment — Disposal costs primarily relate to gains or losses recognized upon the sale of closed restaurant properties. In the second quarter of 2015, losses on the disposition of property and equipment included a gain of $0.9 million from the resolution of one eminent domain matter involving a Jack in the Box restaurant.
Restaurant 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 2016 and 2015 were not material to our condensed consolidated financial statements.
7.
INCOME TAXES
The 2016 income tax provisions reflect tax rates of 36.0% in the quarter and 36.8% year-to-date, compared with 38.2% and 37.3%, respectively, in 2015. In the quarter and year-to-date periods, the major components of the change in tax rates were the timing and amounts of gains or losses on insurance products used to fund certain non-qualified retirement plans which are excluded from taxable income, the impact of which was partially offset by an increase in the Company’s state tax rate. The quarter tax rates additionally reflect the completion of the federal and state income tax returns filed during their respective quarters and the conclusion of a state audit during the prior year quarter. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2016 rate could differ from our current estimates.
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 statute of limitations has not expired for fiscal years 2013 and forward. The statutes of limitations for California and Texas, which constitute the Company’s major state tax jurisdictions, have not expired for fiscal years 2011 and forward.
 

12

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



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 the sunset of our qualified plan whereby participants 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 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Defined benefit pension plans:
 
 
 
 
 
 
 
Interest cost
$
5,579

 
$
5,237

 
$
18,599

 
$
17,457

Service cost
1,212

 
1,908

 
4,040

 
6,360

Expected return on plan assets
(5,020
)
 
(5,370
)
 
(16,735
)
 
(17,901
)
Actuarial loss (1)
943

 
2,172

 
3,144

 
7,240

Amortization of unrecognized prior service costs (1)
56

 
62

 
185

 
207

Net periodic benefit cost
$
2,770

 
$
4,009

 
$
9,233

 
$
13,363

Postretirement healthcare plans:
 
 
 
 
 
 
 
Interest cost
$
292

 
$
276

 
$
972

 
$
920

Actuarial loss (1)
51

 
42

 
169

 
140

Net periodic benefit cost
$
343

 
$
318

 
$
1,141

 
$
1,060

___________________________
(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 January 1, 2015, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement. Details regarding 2016 contributions are as follows (in thousands):
 
Defined Benefit
Pension Plans
 
Postretirement
Healthcare Plans
Net year-to-date contributions
$
13,738

 
$
962

Remaining estimated net contributions during fiscal 2016
$ 65,700 to 85,700

 
$
400

We 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, the economic environment and regulatory fees. Based on our evaluations, we plan to accelerate $60.0 million to $80.0 million in pension plan contributions in the fourth quarter of 2016 to reduce our exposure to Pension Benefit Guaranty Corporation variable-rate premiums that are paid on the unfunded portion of our qualified pension plan liability.
 

13

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



9.
SHARE-BASED COMPENSATION
We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors. During year-to-date 2016, we granted the following shares related to our share-based compensation awards:
Nonvested stock units
140,794

Stock options
99,923

Performance share awards
32,970

The components of share-based compensation expense recognized in each period are as follows (in thousands):
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Nonvested stock units
$
745

 
$
723

 
$
4,472

 
$
4,105

Stock options
316

 
585

 
2,039

 
2,139

Performance share awards
238

 
1,335

 
2,372

 
3,407

Nonvested stock awards
20

 
31

 
67

 
127

Deferred compensation for non-management directors

 

 
270

 
263

Total share-based compensation expense
$
1,319

 
$
2,674

 
$
9,220

 
$
10,041


10.
STOCKHOLDERS’ EQUITY
Repurchases of common stock During year-to-date 2016, we repurchased 3.5 million common shares at an aggregate cost of $250.0 million. As of July 3, 2016, there was $150.0 million remaining under stock-buyback programs which expire in November 2017.
Dividends During year-to-date 2016, the Board of Directors declared three cash dividends of $0.30 per common share which were paid on June 7, 2016, March 14, 2016 and December 22, 2015 to shareholders of record as of the close of business on May 24, 2016, March 1, 2016 and December 9, 2015, respectively, and totaled $30.7 million. Future dividends are subject to approval by our Board of Directors.

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

The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Weighted-average shares outstanding – basic
32,642

 
37,106

 
34,073

 
37,980

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Stock options
145

 
213

 
161

 
301

Nonvested stock awards and units
176

 
196

 
182

 
197

Performance share awards
53

 
146

 
53

 
152

Weighted-average shares outstanding – diluted
33,016

 
37,661

 
34,469

 
38,630

Excluded from diluted weighted-average shares outstanding:
 
 
 
 
 
 
 
Antidilutive
170

 
99

 
176

 
85

Performance conditions not satisfied at the end of the period
61

 
23

 
61

 
17



14

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



12.
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 in federal court in Oregon alleging claims under the federal Fair Labor Standards Act and Oregon wage and hour laws. The plaintiffs alleged that the Company failed to pay non-exempt employees for certain meal breaks and improperly made payroll deductions for shoe purchases and for workers’ compensation expenses, and later added additional claims relating to timing of final pay and related wage and hour claims involving employees of a franchisee. The most recent 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. 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. Our estimated liability for general liability and workers’ compensation claims, which exceeded our self-insurance retention limits by $25.8 million as of September 27, 2015, was reduced by $21.7 million in 2016 due to a judgment paid by our insurance providers. We expect to be fully covered by our insurance providers for any amounts that may exceed our self-insurance retention limits during fiscal 2016. We believe that the ultimate determination of liability in connection with legal claims pending against us, if any, in excess of amounts already provided for such matters in the condensed consolidated financial statements, will not have a material adverse effect on our business, our annual results of operations, liquidity or financial position; however, it is possible that our business, results of operations, liquidity, or financial condition could be materially affected in a particular future reporting period by the unfavorable resolution of one or more matters or contingencies during such period.

13.
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 a reportable operating segment. 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.

15

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 services functions, such as accounting/finance, human resources, audit services, legal, tax and treasury; nor do they include unallocated costs such as pension expense, share-based compensation and restructuring expense. These costs are reflected in the caption “Shared services and unallocated costs.” The following table provides information related to our operating segments in each period (in thousands):
 
Quarter
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
 
July 3,
2016
 
July 5,
2015
Revenues by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
264,493

 
$
263,339

 
$
876,138

 
$
884,734

Qdoba restaurant operations
104,445

 
96,167

 
324,774

 
301,515

Consolidated revenues
$
368,938

 
$
359,506

 
$
1,200,912

 
$
1,186,249

Earnings from operations by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
69,528

 
$
62,355

 
$
218,364

 
$
207,523

Qdoba restaurant operations
14,172

 
13,805

 
33,532

 
37,265

Shared services and unallocated costs
(28,404
)
 
(25,582
)
 
(82,115
)
 
(84,936
)
Gains (losses) on the sale of company-operated restaurants
409

 
(183
)
 
1,224

 
(4,353
)
Consolidated earnings from operations
55,705

 
50,395

 
171,005

 
155,499

Interest expense, net
7,613

 
4,504

 
22,699

 
13,937

Consolidated earnings from continuing operations and before income taxes
$
48,092

 
$
45,891

 
$
148,306

 
$
141,562

Total depreciation expense by segment:
 
 
 
 
 
 
 
Jack in the Box restaurant operations
$
14,877

 
$
14,737

 
$
50,409

 
$
49,051

Qdoba restaurant operations
4,536

 
3,864

 
14,403

 
13,179

Shared services and unallocated costs
1,401

 
1,573

 
4,936

 
5,445

Consolidated depreciation expense
$
20,814

 
$
20,174

 
$
69,748

 
$
67,675

We do not evaluate, manage or measure performance of segments using asset, interest income and expense, or income tax information; accordingly, this information by segment is not prepared or disclosed.
The following table provides detail of the change in the balance of goodwill for each of our reportable segments (in thousands):
 
Jack in the Box
 
Qdoba
 
Total
Balance at September 27, 2015
$
48,430

 
$
100,597

 
$
149,027

Disposals
(20
)
 

 
(20
)
Balance at July 3, 2016
$
48,410

 
$
100,597

 
$
149,007

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


16

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



14.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
Year-to-date
 
July 3,
2016
 
July 5,
2015
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
$
(22,919
)
 
$
(13,433
)
Income tax payments
$
(33,453
)
 
$
(18,685
)
Non-cash transactions:
 
 
 
Equipment capital lease obligations incurred
$
702

 
$
4,894

Decrease in accrued treasury stock repurchases
$

 
$
(3,112
)
Increase in dividends accrued or converted to common stock equivalents
$
163

 
$
121

(Decrease) increase in obligations for purchases of property and equipment
$
(4,882
)
 
$
53



17

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



15.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
July 3,
2016
 
September 27,
2015
Accounts and other receivables, net:
 
 
 
Trade
$
49,261

 
$
36,990

Notes receivable
1,526

 
1,726

Other
13,980

 
10,814

Allowance for doubtful accounts
(2,777
)
 
(1,555
)
 
$
61,990

 
$
47,975

Prepaid expenses:
 
 
 
Prepaid income taxes
$
16,431

 
$
7,645

Prepaid rent
14,404

 
318

Other
7,229

 
8,277

 
$
38,064

 
$
16,240

Other assets, net:
 
 
 
Company-owned life insurance policies
$
104,521

 
$
99,513

Deferred tax assets
101,253

 
118,184

Deferred rent receivable
47,205

 
45,330

Other
21,611

 
40,941

 
$
274,590

 
$
303,968

Accrued liabilities:
 
 
 
Payroll and related taxes
$
46,002

 
$
56,223

Insurance
38,237

 
35,370

Deferred rent
15,580

 
1,806

Advertising
12,024

 
20,692

Sales and property taxes
11,096

 
11,574

Deferred beverage funding
10,482

 
5,176

Gift card liability
5,273

 
4,608

Deferred franchise fees
1,165

 
1,198

Other
33,905

 
33,928

 
$
173,764

 
$
170,575

Other long-term liabilities:
 
 
 
Defined benefit pension plans
$
172,641

 
$
180,476

Straight-line rent accrual
46,875

 
46,807

Other
148,152

 
142,775

 
$
367,668

 
$
370,058


16.
SUBSEQUENT EVENTS

On July 28, 2016, the Board of Directors declared a cash dividend of $0.30 per common share, to be paid on August 29, 2016 to shareholders of record as of the close of business on August 16, 2016.

18


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2016 and 2015 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 3, 2016 and July 5, 2015, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during the quarterly and year-to-date periods ended July 3, 2016 and July 5, 2015, 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 27, 2015.
Our MD&A consists of the following sections:
Overview — a general description of our business and 2016 highlights.
Financial reporting — a discussion of changes in presentation, if any.
Results of operations — an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements.
Liquidity and capital resources — an analysis of our cash flows including 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, 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 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 same-store 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 rental revenues and franchise royalties and other, less franchise occupancy expenses, and franchise support and other costs, and is also presented as a percentage of franchise revenues.
Same-store sales, AUVs, 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.

19


OVERVIEW
As of July 3, 2016, we operated and franchised 2,254 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 688 Qdoba fast-casual restaurants operating primarily throughout the United States as well as the District of Columbia and 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 rental revenue, royalties (based upon a percent of sales) and franchise fees. 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.
The following summarizes the most significant events occurring in 2016, and certain trends compared to a year ago:
Same-Store Sales Same-store sales declined 0.2% year-to-date at company-operated Jack in the Box restaurants compared with a year ago primarily driven by a decrease in traffic. Qdoba’s year-to-date same-store sales increase of 1.8% at company-operated restaurants compared with a year ago, was driven primarily by an increase in transactions, menu price increases, and catering growth.
Commodity Costs Commodity costs decreased approximately 2.5% and 4.7% year-to-date at our Jack in the Box and Qdoba restaurants, respectively, in 2016 compared with a year ago. We expect our overall commodity costs in fiscal 2016 to decrease approximately 2-3% and 5% at our Jack in the Box and Qdoba restaurants, respectively. 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 decrease approximately 15-20%.
Restaurant Margins Our year-to-date consolidated company-operated restaurant margin decreased slightly in 2016 to 20.3% from 20.5% a year ago. Jack in the Box’s company-operated restaurant margin improved to 21.3% in 2016 from 20.8% in the prior year due primarily to lower costs for food and packaging and benefits of refranchising, partially offset by minimum wage increases in California that went into effect in January 2016, and by higher costs for equipment upgrades. Company-operated restaurant margins at our Qdoba restaurants decreased to 18.4% in 2016 from 19.8% a year ago primarily reflecting an increase in new restaurant activity and higher costs for equipment upgrades.
Jack in the Box Franchising Program Year-to-date, franchisees opened a total of nine restaurants. In fiscal 2016, we expect to open approximately 20 Jack in the Box restaurants, the majority of which will be franchise locations. Our Jack in the Box system was 82% franchised as of July 3, 2016. We plan to increase franchise ownership of the Jack in the Box system to 90-95% by the end of the first quarter of fiscal 2018.
Qdoba New Unit Growth Year-to-date, we opened 26 company-operated restaurants, and franchisees opened eleven restaurants. In fiscal 2016, we plan for the opening of 50 to 60 Qdoba restaurants, of which approximately 35 are expected to be company-operated restaurants.
Restructuring Costs In 2016, we announced a plan to reduce our general and administrative costs. In connection with this plan, we have recorded $7.7 million of restructuring charges which are included in impairment and other costs, net in the accompanying Condensed Consolidated Statements of Earnings.
Return of Cash to Shareholders Year-to-date, we returned cash to shareholders in the form of share repurchases and cash dividends. We repurchased 3.5 million shares of our common stock at an average price of $72.44 per share, totaling $250.0 million, including the costs of brokerage fees. We also declared dividends of $0.90 per common share totaling $30.7 million.
FINANCIAL REPORTING
The Condensed Consolidated Statements of Earnings for all periods presented reflect 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, and 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 Condensed Consolidated Financial Statements for more information.
In 2016, we adopted an Accounting Standards Update which simplifies the presentation of deferred income taxes and requires deferred tax liabilities and assets to be classified as non-current in a classified statement of financial position. Upon adoption, we retrospectively applied the new standard which resulted in a $40.0 million reclassification of current deferred income taxes to other assets, net on our September 27, 2015 Condensed Consolidated Balance Sheet. Refer to Note 1, Basis of Presentation, in the Notes to 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.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS DATA
 
Quarter
 
Year-to-date
 
July 3, 2016
 
July 5, 2015
 
July 3, 2016
 
July 5, 2015
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
75.6
%
 
75.3
%
 
75.3
%
 
75.1
%
Franchise rental revenues
14.3
%
 
14.6
%
 
14.6
%
 
14.7
%
Franchise royalties and other
10.1
%
 
10.1
%
 
10.1
%
 
10.2
%
Total revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging (1)
29.3
%
 
30.5
%
 
30.2
%
 
31.4
%
Payroll and employee benefits (1)
27.6
%
 
26.9
%
 
27.8
%
 
27.1
%
Occupancy and other (1)
21.2
%
 
20.7
%
 
21.7
%
 
21.0
%
Total company restaurant costs (1)
78.1
%
 
78.2
%
 
79.7
%
 
79.5
%
Franchise occupancy expenses (2)
73.5
%
 
74.6
%
 
73.3
%
 
75.2
%
Franchise support and other costs (3)
9.8
%
 
9.5
%
 
10.2
%
 
9.9
%
Selling, general and administrative expenses
11.6
%
 
14.2
%
 
13.0
%
 
14.0
%
Impairment and other charges, net
2.9
%
 
1.0
%
 
1.2
%
 
0.7
%
(Gains) losses on the sale of company-operated restaurants
(0.1
)%
 
0.1
%
 
(0.1
)%
 
0.4
%
Earnings from operations
15.1
%
 
14.0
%
 
14.2
%
 
13.1
%
Income tax rate (4) 
36.0
%
 
38.2
%
 
36.8
%
 
37.3
%
____________________________
(1)
As a percentage of company restaurant sales.
(2)
As a percentage of franchise rental revenues.
(3)
As a percentage of franchise royalties and other.
(4)
As a percentage of earnings from continuing operations and before income taxes.


CHANGES IN SAME-STORE SALES
 
Quarter
 
Year-to-date
 
July 3, 2016
 
July 5, 2015
 
July 3, 2016
 
July 5, 2015
Jack in the Box:
 
 
 
 
 
 
 
Company
(0.2)%
 
5.5%
 
(0.2)%
 
5.4%
Franchise
1.5%
 
7.9%
 
1.3%
 
7.0%
System
1.1%
 
7.3%
 
0.9%
 
6.6%
Qdoba:
 
 
 
 
 
 
 
Company
1.0%
 
6.6%
 
1.8%
 
9.1%
Franchise
0.1%
 
9.0%
 
1.3%
 
11.4%
System
0.6%
 
7.7%
 
1.6%
 
10.2%


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 3, 2016
 
July 5, 2015
 
Company
 
Franchise
 
Total
 
Company
 
Franchise
 
Total
Jack in the Box:
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
413

 
1,836

 
2,249

 
431

 
1,819

 
2,250

New
2

 
9

 
11

 
2

 
12

 
14

Refranchised
(1
)
 
1

 

 
(21
)
 
21

 

Acquired from franchisees
1

 
(1
)
 

 
7

 
(7
)
 

Closed

 
(6
)
 
(6
)
 
(6
)
 
(10
)
 
(16
)
End of period
415

 
1,839

 
2,254

 
413

 
1,835

 
2,248

% of JIB system
18
%
 
82
%
 
100
%
 
18
%
 
82
%
 
100
%
Qdoba:
 
 
 
 
 
 
 
 
 
 
 
Beginning of year
322

 
339

 
661

 
310

 
328

 
638

New
26

 
11

 
37

 
8

 
15

 
23

Closed
(4
)
 
(6
)
 
(10
)
 
(4
)
 
(9
)
 
(13
)
End of period
344

 
344

 
688

 
314

 
334

 
648

% of Qdoba system
50
%
 
50
%
 
100
%
 
48
%
 
52
%
 
100
%
Consolidated:
 
 
 
 
 
 
 
 
 
 
 
Total system end of period
759

 
2,183

 
2,942

 
727

 
2,169

 
2,896

% of consolidated system
26
%
 
74
%
 
100
%
 
25
%
 
75
%
 
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 3, 2016
 
July 5, 2015
 
July 3, 2016
 
July 5, 2015
Company restaurant sales
$
179,458

 
 
 
$
179,451

 
 
 
$
595,401

 
 
 
$
605,786

 
 
Company restaurant costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Food and packaging
51,893

 
28.9
%
 
55,218

 
30.8
%
 
179,142

 
30.1
%
 
192,906

 
31.8
%
Payroll and employee benefits
50,654

 
28.2
%
 
49,599

 
27.6
%
 
167,744

 
28.2
%
 
167,227

 
27.6
%
Occupancy and other
36,446

 
20.3
%
 
35,115

 
19.6
%
 
121,522

 
20.4
%
 
119,797

 
19.8
%
Total company restaurant costs
138,993

 
77.5
%
 
139,932

 
78.0
%
 
468,408

 
78.7
%
 
479,930

 
79.2
%
Restaurant margin
$
40,465

 
22.5
%
 
$
39,519

 
22.0
%
 
$
126,993

 
21.3
%
 
$
125,856

 
20.8
%

Jack in the Box company restaurant sales were flat in the quarter, and decreased $10.4 million year-to-date as compared with the prior year. In the quarter, the impact of lower AUVs was offset by an increase in the number of company restaurants compared with a year ago. Year-to-date, a decrease in the sales attributable to the execution of our refranchising strategy which includes the sale of restaurants to franchisees was partially offset by higher AUVs. The following table presents the approximate impact of these increases (decreases) on company restaurant sales (in thousands):

 
Quarter
 
Year-to-date
Increase (decrease) in the average number of Jack in the Box company restaurants
$
1,100

 
$
(15,500
)
Jack in the Box AUV (decrease) increase
(1,100
)
 
5,100

Total change in company restaurant sales
$

 
$
(10,400
)


22


Same-store sales at Jack in the Box company-operated restaurants decreased 0.2% in the quarter and year-to-date, primarily driven by a decline in transactions, partially offset by menu price increases. The following table summarizes the change in company-operated same-store sales:
 
Quarter
 
Year-to-date
 
July 3, 2016
 
July 5, 2015
 
July 3, 2016
 
July 5, 2015
Average check (1)
3.5
 %
 
3.9
%
 
2.8
 %
 
3.9
%
Transactions
(3.7
)%
 
1.6
%
 
(3.0
)%
 
1.5
%
Change in same-store sales
(0.2
)%
 
5.5
%
 
(0.2
)%
 
5.4
%
____________________________
(1)
Amounts in 2016 and 2015 include price increases of approximately 3.3% and 2.0%, respectively, in the quarter, and 3.1% and 2.1%, respectively, year-to-date.
Food and packaging costs as a percentage of company restaurant sales decreased to 28.9% in the quarter and 30.1% year-to-date in 2016, compared with 30.8% and 31.8%, respectively, in 2015, due to lower commodity costs, favorable product mix changes, and menu price increases. Commodity costs decreased 2.7% in the quarter, and 2.5% year-to-date due to lower costs for beef, and in the quarter, eggs, partially offset by higher costs for pork, produce, and year-to-date, eggs. Beef, our most significant commodity, decreased approximately 20% in both periods of 2016 versus last year while pork in the quarter, and eggs year-to-date, increased most significantly by approximately 28% and 20%, respectively. For fiscal 2016, we currently expect commodity costs to decrease approximately 2-3% at our Jack in the Box restaurants compared with fiscal 2015.
Payroll and employee benefit costs as a percentage of company restaurant sales increased to 28.2% in the quarter and year-to-date compared with 27.6% in both periods of 2015. In 2016, higher wages from minimum wage increases were partially offset by lower levels of incentive compensation driven by operating results, and the benefits of refranchising year-to-date.
As a percentage of company restaurant sales, occupancy and other costs increased to 20.3% in the quarter and 20.4% year-to-date in 2016, from 19.6% and 19.8%, respectively, a year ago due to higher costs for equipment upgrades, and maintenance and repair expenses, partially offset by lower costs for utilities and the benefits of refranchising year-to-date.
Franchise Operations
The following table presents Jack in the Box franchise revenues, costs and margin in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
 
Quarter
 
Year-to-date
 
July 3, 2016
 
July 5, 2015
 
July 3, 2016
 
July 5, 2015
Franchise rental revenues
$
52,849

 
$
52,325

 
$
175,126

 
$
173,874

 
 
 
 
 
 
 
 
Royalties
31,770

 
31,377

 
104,190

 
103,158

Franchise fees and other
416

 
186