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 April 15, 2018
Commission File Number: 1-9390
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12263672&doc=13
 ____________________________________________________ 
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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 May 11, 2018, 28,438,227 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)
 
April 15,
2018
 
October 1,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
1,154

 
$
4,467

Accounts and other receivables, net
102,404

 
59,609

Inventories
2,559

 
3,445

Prepaid expenses
11,947

 
27,532

Current assets held for sale
23,495

 
42,732

Other current assets
3,582

 
1,493

Total current assets
145,141

 
139,278

Property and equipment:
 
 
 
Property and equipment, at cost
1,224,738

 
1,262,117

Less accumulated depreciation and amortization
(781,389
)
 
(777,841
)
Property and equipment, net
443,349

 
484,276

Other Assets:
 
 
 
Intangible assets, net
710

 
1,413

Goodwill
47,414

 
51,412

Non-current assets held for sale

 
280,796

Other assets, net
238,424

 
277,570

Total other assets
286,548

 
611,191

 
$
875,038

 
$
1,234,745

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
42,854

 
$
64,225

Accounts payable
24,500

 
28,366

Accrued liabilities
100,181

 
135,054

Current liabilities held for sale

 
34,345

Total current liabilities
167,535

 
261,990

Long-term liabilities:
 
 
 
Long-term debt, net of current maturities
900,402

 
1,079,982

Non-current liabilities held for sale

 
32,078

Other long-term liabilities
238,011

 
248,825

Total long-term liabilities
1,138,413

 
1,360,885

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

 

Common stock $0.01 par value, 175,000,000 shares authorized, 81,945,792 and 81,843,483 issued, respectively
819

 
818

Capital in excess of par value
459,821

 
453,432

Retained earnings
1,521,934

 
1,485,820

Accumulated other comprehensive loss
(123,045
)
 
(137,761
)
Treasury stock, at cost, 53,522,782 and 52,411,407 shares, respectively
(2,290,439
)
 
(2,190,439
)
Total stockholders’ deficit
(430,910
)
 
(388,130
)
 
$
875,038

 
$
1,234,745

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
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
$
113,938

 
$
180,275

 
$
283,575

 
$
418,846

Franchise rental revenues
57,843

 
51,295

 
135,060

 
122,731

Franchise royalties and other
37,991

 
34,314

 
85,600

 
77,488

 
209,772

 
265,884

 
504,235

 
619,065

Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs (excluding depreciation and amortization):
 
 
 
 
 
 
 
Food and packaging
32,638

 
52,042

 
81,502

 
120,031

Payroll and employee benefits
33,096

 
54,529

 
82,036

 
124,712

Occupancy and other
18,143

 
30,704

 
45,893

 
69,645

Total company restaurant costs (excluding depreciation and amortization)
83,877

 
137,275

 
209,431

 
314,388

Franchise occupancy expenses (excluding depreciation and amortization)
36,065

 
31,543

 
82,586

 
73,733

Franchise support and other costs
2,583

 
1,734

 
5,065

 
4,271

Selling, general and administrative expenses
27,017

 
25,862

 
61,642

 
66,634

Depreciation and amortization
13,955

 
16,122

 
33,112

 
37,385

Impairment and other charges, net
4,927

 
1,367

 
7,184

 
4,021

Gains on the sale of company-operated restaurants
(5,472
)
 
(7,779
)
 
(14,412
)
 
(7,916
)
 
162,952

 
206,124

 
384,608

 
492,516

Earnings from operations
46,820

 
59,760

 
119,627

 
126,549

Interest expense, net
10,413

 
9,037

 
23,193

 
19,446

Earnings from continuing operations and before income taxes
36,407

 
50,723

 
96,434

 
107,103

Income taxes
11,426

 
19,333

 
58,564

 
41,164

Earnings from continuing operations
24,981

 
31,390

 
37,870

 
65,939

Earnings from discontinued operations, net of taxes
22,624

 
1,704

 
21,925

 
3,084

Net earnings
$
47,605

 
$
33,094

 
$
59,795

 
$
69,023

 
 
 
 
 
 
 
 
Net earnings per share - basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.86

 
$
1.02

 
$
1.29

 
$
2.09

Earnings from discontinued operations
0.78

 
0.06

 
0.75

 
0.10

Net earnings per share (1)
$
1.64

 
$
1.07

 
$
2.04

 
$
2.18

Net earnings per share - diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.85

 
$
1.01

 
$
1.27

 
$
2.07

Earnings from discontinued operations
0.77

 
0.05

 
0.74

 
0.10

Net earnings per share (1)
$
1.62

 
$
1.06

 
$
2.01

 
$
2.16

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
29,040

 
30,895

 
29,332

 
31,622

Diluted
29,356

 
31,126

 
29,705

 
31,883

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
0.80

 
$
0.80

____________________________
(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
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Net earnings
$
47,605

 
$
33,094

 
$
59,795

 
$
69,023

Cash flow hedges:
 
 
 
 
 
 
 
Net change in fair value of derivatives
4,295

 
(3,981
)
 
14,586

 
19,105

Net loss reclassified to earnings
876

 
1,219

 
2,550

 
3,285

 
5,171

 
(2,762
)
 
17,136

 
22,390

Tax effect
(1,313
)
 
1,069

 
(4,352
)
 
(8,663
)
 
3,858

 
(1,693
)
 
12,784

 
13,727

Unrecognized periodic benefit costs:
 
 
 
 
 
 
 
Actuarial losses and prior service costs reclassified to earnings
1,151

 
1,483

 
2,686

 
3,461

Tax effect
(292
)
 
(574
)
 
(834
)
 
(1,339
)
 
859

 
909

 
1,852

 
2,122

Other:
 
 
 
 
 
 
 
Foreign currency translation adjustments
6

 

 
6

 

Tax effect
(2
)
 

 
(2
)
 

 
4

 

 
4

 

Derecognition of foreign currency translation adjustments due to sale
76

 

 
76

 

 
80

 

 
80

 

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
4,797

 
(784
)
 
14,716

 
15,849

 
 
 
 
 
 
 
 
Comprehensive income
$
52,402

 
$
32,310

 
$
74,511

 
$
84,872

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
 
April 15,
2018
 
April 16,
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
59,795

 
$
69,023

Earnings from discontinued operations
21,925

 
3,084

Income from continuing operations
37,870

 
65,939

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
33,112

 
37,385

Amortization of franchise tenant improvement allowances
265

 
48

Deferred finance cost amortization
1,725

 
1,919

Excess tax benefits from share-based compensation arrangements
(816
)
 
(4,034
)
Deferred income taxes
34,726

 
2,428

Share-based compensation expense
6,148

 
6,270

Pension and postretirement expense
1,252

 
2,269

Gains on cash surrender value of company-owned life insurance
(312
)
 
(73
)
Gains on the sale of company-operated restaurants
(14,412
)
 
(7,916
)
Losses on the disposition of property and equipment, net
481

 
957

Impairment charges and other
1,502

 
745

Changes in assets and liabilities, excluding dispositions:
 
 
 
Accounts and other receivables
(13,876
)
 
30,666

Inventories
886

 
528

Prepaid expenses and other current assets
(5,458
)
 
18,560

Accounts payable
(3,742
)
 
(1,637
)
Accrued liabilities
(35,959
)
 
(30,003
)
Pension and postretirement contributions
(3,077
)
 
(2,773
)
Franchise tenant improvement allowance distributions
(3,487
)
 

Other
(7,551
)
 
(6,111
)
Cash flows provided by operating activities
29,277

 
115,167

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(18,347
)
 
(15,596
)
Purchases of assets intended for sale and leaseback
(5,491
)
 
(1,752
)
Proceeds from the sale and leaseback of assets
4,949

 
2,466

Proceeds from the sale of company-operated restaurants
16,844

 
31,389

Collections on notes receivable
9,722


1,121

Proceeds from the sale of property and equipment
600

 
2,082

Other
2,969

 
(172
)
Cash flows provided by investing activities
11,246

 
19,538

Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
283,200

 
534,500

Repayments of borrowings on revolving credit facilities
(199,100
)
 
(305,000
)
Principal repayments on debt
(282,626
)
 
(28,738
)
Debt issuance costs
(1,367
)
 

Dividends paid on common stock
(23,370
)
 
(25,462
)
Proceeds from issuance of common stock
39

 
4,840

Repurchases of common stock
(100,000
)
 
(322,687
)
Excess tax benefits from share-based compensation arrangements

 
4,034

Change in book overdraft
1,397

 

Payroll tax payments for equity award issuances
(4,268
)
 
(5,706
)
Cash flows used in financing activities
(326,095
)
 
(144,219
)
Cash flows used in continuing operations
(285,572
)
 
(9,514
)
Net cash provided by operating activities of discontinued operations
5,503

 
16,692

Net cash provided by (used in) investing activities of discontinued operations
273,653

 
(17,788
)
Net cash used in financing activities of discontinued operations
(78
)
 
(62
)
Net cash provided by (used in) discontinued operations
279,078


(1,158
)
Effect of exchange rate changes on cash
6



Cash at beginning of period, including discontinued operations cash
7,642

 
17,030

Cash at end of period, including discontinued operations cash
$
1,154

 
$
6,358

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. The following table summarizes the number of restaurants as of the end of each period:
 
April 15,
2018
 
April 16,
2017
Company-operated
188

 
371

Franchise
2,057

 
1,889

Total system
2,245

 
2,260

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 (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
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 October 1, 2017 (“2017 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2017 Form 10-K with the exception of two new accounting pronouncements adopted in fiscal 2018, which are described below.
On December 19, 2017, we entered into a definitive agreement to sell Qdoba Restaurant Corporation (“Qdoba”), a wholly owned subsidiary of the Company which operates and franchises more than 700 Qdoba Mexican Eats® fast-casual restaurants, to certain funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, the “Buyer”) which was completed on March 21, 2018. For all periods presented in our condensed consolidated statements of earnings, all sales, costs, expenses and income taxes attributable to Qdoba, except as related to the impact of the decrease in the federal statutory tax rate (see Note 8, Income Taxes), have been aggregated under the caption “earnings from discontinued operations, net of income taxes.” Cash flows used in or provided by Qdoba operations have been aggregated in the condensed consolidated statement of cash flows as part of discontinued operations. Prior year results have been recast to conform with the current presentation. Refer to Note 2, Discontinued Operations, for additional information.
During fiscal 2012, we entered into an agreement to outsource our Jack in the Box distribution business and the related results of operations for this business are also 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.
Segment reporting — As a result of our sale of Qdoba, which has been classified as discontinued operations, we now have one reporting segment.
Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated financial statements have been reclassified due to the sale of Qdoba. See Note 2, Discontinued Operations, for further information regarding this sale and the resulting prior year reclassifications. We recorded certain adjustments in 2018 upon the adoption of a new accounting pronouncement; see details regarding the effects of the adoption on our condensed consolidated financial statements below. Further, in 2018, we began presenting depreciation and amortization as a separate line item on our condensed consolidated statements of earnings to better align with similar presentation made by many of our peers and to provide additional disclosure that is meaningful for our investors. The prior year condensed consolidated statements of earnings were adjusted to conform with this new presentation. Depreciation and amortization were previously presented within company restaurant costs, franchise occupancy expenses, selling, general and administrative expenses, and impairment and other charges, net on our condensed consolidated statements of earnings.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2018 and 2017 include 52 weeks. Our first quarter includes 16-weeks and all other quarters include 12-weeks. All comparisons between 2018 and 2017 refer to the 12-weeks (“quarter”) and 28-weeks (“year-to-date”) ended April 15, 2018 and April 16, 2017, respectively, unless otherwise indicated.

6

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








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.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, 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.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law, or if in certain cases, the U.S. Treasury is expected to issue further guidance on the application of certain provisions of the U.S. legislation. See Note 8, Income Taxes, for additional details on the provisional tax expense recognized in accordance with SAB 118.
Advertising costs — We administer a marketing fund which includes contractual contributions. In 2018, the marketing fund contributions from franchise and company-operated restaurants were approximately 5.0% of gross revenues, and the Company made incremental contributions to the marketing fund of $1.5 million in the quarter and $1.8 million year-to-date. To the extent contributions exceed marketing fund expenditures, the excess contributions are recorded as a liability in accrued liabilities on our consolidated balance sheet. To the extent expenditures temporarily exceed contributions, the difference is recorded as a receivable of the fund in accounts and other receivable, net on our consolidated balance sheet. The contributions to the marketing fund are designated for sales driving and marketing-related initiatives and advertising, and we act as an agent for the franchisees with regard to these contributions. Therefore, we do not reflect franchisee contributions to the funds in our condensed consolidated statements of earnings.
Production costs of commercials, programming and other marketing activities are charged to the marketing fund when the advertising is first used for its intended purpose, and the costs of advertising are charged to operations as incurred. Total contributions and other marketing expenses are included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of earnings. Advertising and promotions for the quarter and year-to-date in 2018 were $7.3 million and $16.1 million, respectively, and in 2017, were $9.1 million and $21.1 million, respectively.
Effect of new accounting pronouncements adopted in fiscal 2018 — In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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. As such, we adopted this standard in the first quarter of fiscal 2018. Due to the adoption of the standard, we prospectively reclassified excess tax benefits from share-based compensation arrangements of $0.8 million year-to-date and an immaterial amount in the quarter, as a discrete item within income tax expense on the condensed consolidated statements of earnings, rather than recognizing such excess income tax benefits in capital in excess of par value on the condensed consolidated balance sheet. This also impacted the related classification on our condensed consolidated statements of cash flows, as excess tax benefits from share-based compensation arrangements is only reported in cash flows from operating activities on a prospective basis, rather than as previously reported in cash flows from operating activities and cash flows used in financing activities. Upon adoption of the standard, we also began reporting cash paid to a taxing authority on an employee’s behalf when we directly withhold equivalent shares for taxes as cash flows used in financing activities, with the related tax withholding classified as a change in accounts and other receivables in cash flows from operating activities on our condensed consolidated statements of cash flows. We retrospectively applied this new reporting of tax payments for equity award issuances on our condensed consolidated statements of cash flows. The standard also impacted our earnings per share calculation on a prospective basis as the estimate of dilutive common share equivalents under the treasury stock method no longer assumes that the estimated tax benefits realized when an award is settled are used to repurchase shares. Lastly, the Company elected to account for forfeitures as they occur, and a cumulative-effect adjustment was made in the amount of $0.2 million and recorded in retained earnings as of October 2, 2017 on the condensed consolidated balance sheet.
In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements. This standard contains amendments that affect a wide variety of topics in the Accounting Standards Codification (“ASC”). The amendments include differences between original FASB guidance and the ASC, guidance clarification and reference corrections, simplifications, and minor improvements. This standard is effective for annual reporting periods beginning after December

7

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








15, 2016, and interim periods within that reporting period. As such, we adopted this standard in the first quarter of fiscal 2018. This standard did not have a significant effect on our accounting policies or on our condensed consolidated financial statements and related disclosures.
Effect of new accounting pronouncements to be adopted in future periods — In May 2014, the FASB issued ASU 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 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the guidance in ASU 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 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the guidance in ASU 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. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Revenue from Contracts with Customers (Topic 606). This ASU clarifies the guidance in ASU 2014-09, providing technical corrections and improvements to clarify guidance and correct unintended applications of the guidance. 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 do not believe the new revenue recognition standard will impact our recognition of restaurant sales, rental revenues or royalty fees from franchisees. However, we are still evaluating the impact that this pronouncement will have on the recognition of certain transactions in our consolidated financial statements, including the initial franchise fees currently recognized upon the opening of a franchise restaurant, and our advertising arrangements with franchisees currently reported on a net versus gross basis in our consolidated statements of earnings, as well as the effect this new standard will have on our disclosures. We have not yet selected a transition method.
In February 2016, the FASB issued ASU 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. As such, we will be required to adopt this standard in the first quarter of fiscal 2020. This standard requires adoption based upon a modified retrospective transition approach, with early adoption permitted. Based on a preliminary assessment, we expect that most of our operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheets. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which affects the guidance in ASU 2016-02. The standard permits the election of an optional transition practical expedient to not evaluate land easements that exist or expired before the adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. The effective date and transition requirements are the same as ASU 2016-02. We are continuing our evaluation, which may identify additional impacts this standard will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 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. As such, we will be required to adopt this standard in the first quarter of fiscal 2019. 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 August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This standard is intended to address eight classification issues related to the statement of cash flows to reduce diversity in practice in how certain transactions are classified. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. As such, we will be required to adopt this standard in the first quarter of fiscal 2019. This standard requires adoption based upon a retrospective transition method. We are currently evaluating this standard, but do not believe it will have a material impact on the classification of cash flows within our statement of cash flows.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than deferring the recognition until the asset has been sold to

8

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








an outside party. This standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. As such, we will be required to adopt this standard in the first quarter of fiscal 2019. The standard requires adoption on a modified retrospective basis through a cumulative-effect adjustment to retained earnings. We are currently evaluating this standard, but do not believe it will have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The standard provides clarification about the term “in substance nonfinancial asset” and guidance for recognizing gains and losses from the transfer of nonfinancial assets and for partial sales of nonfinancial assets. The standard is required to be adopted retrospectively, in conjunction with ASU 2014-09. As such, we will be required to adopt this standard in the first quarter of fiscal 2019. This standard is not expected to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires the presentation of the service cost component of net benefit cost to be in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. All other components of net benefit cost should be presented separately from the service cost component and outside of a subtotal of earnings from operations, or separately disclosed. The standard is effective for annual and interim periods beginning after December 15, 2017 and must be adopted retrospectively. Early adoption is permitted as of the beginning of an annual period, but we plan to adopt this standard in the first quarter of fiscal 2019. Upon adoption of this standard, we will separately present the components of net periodic benefit cost, excluding the service cost component, outside of earnings from operations. In 2018 and 2017, net periodic benefit cost, excluding the service cost component, was approximately $21,000 and $0.5 million during the quarter, respectively, and approximately $49,000 and $1.1 million year-to-date, respectively.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This standard provides guidance that clarifies when changes to the terms or conditions of a share-based payment award require the application of modification accounting under ASC 718. This new guidance will allow for certain changes to be made to awards without accounting for them as modifications. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The standard is required to be applied prospectively to awards modified on or after the adoption date. We will be required to adopt this standard in the first quarter of fiscal 2019. This standard is not expected to have a material impact on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which amends the previous guidance to allow for certain tax effects “stranded” in accumulated other comprehensive income, which are impacted by the Tax Cuts and Jobs Act (the “Tax Act”), to be reclassified from accumulated other comprehensive income into retained earnings. This amendment pertains only to those items impacted by the new tax law and will not apply to any future tax effects stranded in accumulated other comprehensive income. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We will be required to adopt this standard in the first quarter of fiscal 2020. We are currently evaluating this standard.

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 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 2018 and 2017, the results of discontinued operations related to our distribution business were immaterial to our condensed consolidated results of operations.
Qdoba — On December 19, 2017, we entered into a stock purchase agreement (the “Qdoba Purchase Agreement”) with the Buyer to sell all issued and outstanding shares of Qdoba (the “Shares”). The Buyer completed the acquisition of Qdoba on March 21, 2018 for an aggregate purchase price of approximately $305.0 million in cash, subject to customary closing conditions and adjustments set forth in the Qdoba Purchase Agreement (the “Qdoba Sale”).

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We also entered into a Transition Services Agreement with the Buyer pursuant to which the Buyer is receiving certain services (the “Services”) to enable it to operate the Qdoba business after the closing of the Qdoba Sale. The Services include information technology, finance and accounting, human resources, supply chain and other corporate support services. Under the Agreement, the Services are being provided at cost for a period of up to 12 months, with two 3-month extensions available for certain services. We recorded $1.1 million related to the Services in 2018 as a reduction of selling, general and administrative expenses in the condensed consolidated statements of earnings.
Further, we entered into an Employee Agreement with the Buyer pursuant to which we will continue to employ all Qdoba employees who work for the Buyer (the “Qdoba Employees”) from the date of closing of the Qdoba Sale through the earlier of: (a) following 30 days written notice from the Buyer of termination of the Employee Agreement, or (b) nine months following the closing of the Qdoba Sale. Upon termination of the Employee Agreement, the Qdoba Employees will become employees of the Buyer. During the term of the Employee Agreement, we will pay all wages and benefits of the Qdoba Employees and will receive reimbursement of these costs from the Buyer. In 2018, we’ve paid $10.5 million of Qdoba wages and benefits pursuant to the Employee Agreement.
As the Qdoba Sale represents a strategic shift that will have a major effect on our operations and financial results, in accordance with the provisions of FASB authoritative guidance on the presentation of financial statements, Qdoba results are classified as discontinued operations in our condensed consolidated statements of earnings and our condensed consolidated statements of cash flows for all periods presented. Prior year results have been recast to conform with the current presentation.
The following table summarizes the Qdoba results for each period prior to sale (in thousands, except per share data):
 
Quarter
 
Year-to-date
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Company restaurant sales
$
66,850

 
$
98,793

 
$
192,620

 
$
227,492

Franchise revenues
3,351

 
4,711

 
9,337

 
10,764

Company restaurant costs (excluding depreciation and amortization)
(57,504
)
 
(80,713
)
 
(166,122
)
 
(186,429
)
Franchise costs (excluding depreciation and amortization)
(930
)
 
(910
)
 
(2,338
)
 
(2,083
)
Selling, general and administrative expenses
(5,848
)
 
(7,956
)
 
(18,112
)
 
(20,385
)
Depreciation and amortization

 
(5,057
)
 
(5,012
)
 
(11,752
)
Impairment and other charges, net
(594
)
 
(3,811
)
 
(2,263
)
 
(7,715
)
Interest expense, net
(1,575
)
 
(2,044
)
 
(4,787
)
 
(4,559
)
Operating earnings from discontinued operations before income taxes
3,750

 
3,013

 
3,323

 
5,333

Gain on Qdoba Sale
35,729

 

 
35,729

 

Earnings from discontinued operations before income taxes
39,479

 
3,013

 
39,052

 
5,333

Income taxes
(16,819
)
 
(1,181
)
 
(17,024
)
 
(2,057
)
Earnings from discontinued operations, net of income taxes
$
22,660

 
$
1,832

 
$
22,028

 
$
3,276

 
 
 
 
 
 
 
 
Net earnings per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
0.78

 
$
0.06

 
$
0.75

 
$
0.10

Diluted
$
0.77

 
$
0.06

 
$
0.74

 
$
0.10

Selling, general and administrative expenses include corporate costs directly in support of Qdoba operations. All other corporate costs are classified in results of continuing operations. Our credit facility required us to make a mandatory prepayment (“Qdoba Prepayment”) on our term loan upon the closing of the Qdoba Sale, which was $260.0 million. In accordance with FASB authoritative guidance on financial statement presentation, interest expense associated with our credit facility has been allocated to discontinued operations based on our estimate of the mandatory prepayment that was made upon closing of the Qdoba Sale. See Note 3, Indebtedness, in the notes to condensed consolidated financial statements for additional information regarding the mandatory prepayment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








The following is a reconciliation of the gain recorded for the Qdoba sale (in thousands):
Net proceeds received from the Qdoba Sale (1)
 
$
301,904

 
 
 
Qdoba assets:
 
 
Cash
 
3,113

Accounts receivable, net
 
9,461

Inventories
 
3,112

Prepaid expenses and other current assets
 
5,007

Property and equipment, net
 
163,404

Intangible assets, net
 
12,518

Goodwill
 
117,636

Other assets, net
 
2,604

Total Qdoba assets
 
316,855

 
 
 
Qdoba liabilities:
 
 
Accounts payable
 
7,847

Accrued liabilities
 
20,265

Current maturities of long-term debt
 
180

Straight-line rent accrual
 
14,595

Deferred income tax liability
 
8,676

Other long-term liabilities
 
11,144

Total Qdoba liabilities
 
62,707

 
 
 
Other transaction costs incurred as part of the Qdoba Sale (2)
 
12,027

 
 
 
Gain on Qdoba Sale before income taxes
 
$
35,729

____________________________
(1)
The proceeds received from the Qdoba Sale are net of working capital adjustments outlined in the Qdoba Purchase Agreement, which must be finalized within 90 days after the closing date of the Qdoba Sale, and the derecognition of foreign currency translation adjustments recorded in accumulated other comprehensive income of $0.1 million.
(2)
Costs directly incurred as a result of the Qdoba Sale, including investment bank fees, legal fees, professional fees, employee transaction awards, transfer taxes and other administrative costs.
Prior to the closing of the Qdoba Sale, the assets being sold and liabilities being assumed by the Buyer were classified as held-for-sale on our condensed consolidated balance sheet. Prior year balances have been recast to conform with this presentation. Upon classification of the Qdoba assets as held for sale, in accordance with the FASB authoritative guidance on financial statement presentation, the assets were no longer depreciated. Proceeds from the Qdoba Sale have been presented in the condensed consolidated statement of cash flows within cash provided by discontinued operations in investing activities.

Lease guarantees — While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees (the “Guarantee(s)”). In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees. Should we, as guarantor of the lease obligations, be required to make any lease payments due for the remaining term of the subject lease(s) subsequent to March 21, 2018, the maximum amount we may be required to pay is the sum of the annual rent payments due for the remainder of the subject lease terms. The annual rent on these leases in the first year subsequent to the Qdoba Sale is approximately $6.2 million, and will increase an average of 1.8% annually based on the provisions of the subject leases. The lease terms extend for a maximum of approximately 18 more years as of April 15, 2018, and we would remain a guarantor of the leases in the event the leases are extended for any established renewal periods. In the event that we are obligated to make payments under the Guarantees, we believe the exposure is limited due to contractual protections and recourse available in the lease agreements, as well as the Qdoba Purchase Agreement,

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








including a requirement of the landlord to mitigate damages by re-letting the properties in default, and indemnity from the Buyer. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as of April 15, 2018 as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable.

3.
INDEBTEDNESS

Amended credit facility — On March 21, 2018, we amended our credit facility. The amendment extends the maturity date of both our term loan and revolving credit facility from March 19, 2019 to March 19, 2020.  The interest rate range on our credit facility did not change as a result of the amendment and continues to be based on our leverage ratio. This interest rate can range from the London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.25% with a 0% floor on LIBOR. As a result of the amendment, the interest rate was reset to LIBOR plus 2.00% for the period from the effective date of the amendment to the first calculation date thereafter. As of April 15, 2018, we had $357.7 million outstanding under the term loan, and $581.1 million outstanding under the $900.0 million revolving credit facility. In addition, letters of credit of $31.4 million were outstanding.

Collateral — Under the amendment, we and certain of our subsidiaries reaffirmed our guarantees and the security interests in substantially all of our tangible and intangible property, with certain exceptions (including deposit accounts), to secure our obligations under the credit facility.

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. The amendment raises the maximum leverage ratio from 4.0 times to 4.5 times, and permits unlimited cash dividends and share repurchases if pro forma leverage is less than 4.0 times, subject also to pro forma fixed charge covenant compliance.

Repayments — Our credit facility requires us 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. Pursuant to the credit facility and amendment, we repaid $260.0 million on the term loan facility upon closing of the Qdoba Sale. Refer to Note 2, Discontinued Operations, for additional information regarding the Qdoba Sale and related prepayment. The payment schedule for the term loan facility was amended to reflect this payment and the extended maturity. The amended term loan facility requires amortization in the form of quarterly installments of $10.7 million from June 2018 through December 2019 with the remainder due at the expiration of the term loan agreement in March 2020.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








4.    SUMMARY OF REFRANCHISINGS AND FRANCHISEE DEVELOPMENT
Refranchisings and franchisee development — The following table summarizes the number of restaurants sold to franchisees, the number of restaurants developed by franchisees, and the related fees and gains recognized in each period (dollars in thousands):
 
Quarter
 
Year-to-date
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Restaurants sold to franchisees
63

 
60

 
85

 
60

New restaurants opened by franchisees
3

 
6

 
8

 
13

 
 
 
 
 
 
 
 
Initial franchise fees
$
2,735

 
$
2,538

 
$
3,730

 
$
2,828

 
 
 
 
 
 
 
 
Proceeds from the sale of company-operated restaurants:
 
 
 
 
 
 
 
       Cash (1)
$
11,253

 
$
31,251

 
$
16,844

 
$
31,389

       Short-term notes receivable (2)
22,422

 

 
31,506

 

 
33,675

 
31,251

 
48,350

 
31,389

 
 
 
 
 
 
 
 
Net assets sold (primarily property and equipment)
(9,509
)
 
(10,306
)
 
(13,146
)
 
(10,306
)
Lease commitment charges (3)
(863
)
 
(7,651
)
 
(863
)
 
(7,651
)
Goodwill related to the sale of company-operated restaurants
(3,807
)
 
(341
)
 
(3,960
)
 
(342
)
Other (4)
(14,024
)
 
(5,174
)
 
(15,969
)
 
(5,174
)
Gains on the sale of company-operated restaurants
$
5,472

 
$
7,779

 
$
14,412

 
$
7,916

____________________________
(1)
Year-to-date, amounts in 2018 and 2017 include additional proceeds of $1.2 million and $0.1 million, respectively, related to restaurants sold in prior years. There were no additional proceeds and an immaterial amount of additional proceeds recognized during the quarter in 2018 and 2017, respectively.
(2)
We collected payments of $9.1 million related to notes due from franchisees in the first quarter of 2018.
(3)
Charges are for operating restaurant leases with lease commitments in excess of our sublease rental income from franchisees.
(4)
Amounts in 2018 include an $8.8 million reduction of gains related to the modification of certain 2017 refranchising transactions. The quarter and year-to-date amounts in 2018 also include $3.7 million and $5.2 million, respectively, of costs related to franchise remodel incentives. Amounts in 2017 primarily represent impairment of $3.1 million and equipment write-offs of $1.4 million related to restaurants closed in connection with the sale of the related markets.
As of the end of the second 2018 quarter, we had signed non-binding letters of intent with franchisees to sell an additional 21 company-operated restaurants. Pre-tax gross proceeds related to these sales are estimated at $16.0 million to $18.0 million. Equipment of $3.3 million related to these sales has been classified as assets held for sale on our April 15, 2018 condensed consolidated balance sheet.


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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 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 April 15, 2018:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(36,534
)
 
$
(36,534
)
 
$

 
$

Interest rate swaps (Note 6) (2) 
(5,791
)
 

 
(5,791
)
 

Total liabilities at fair value
$
(42,325
)
 
$
(36,534
)
 
$
(5,791
)
 
$

Fair value measurements as of October 1, 2017:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
(37,219
)
 
$
(37,219
)
 
$

 
$

Interest rate swaps (Note 6) (2) 
(22,927
)
 

 
(22,927
)
 

Total liabilities at fair value
$
(60,146
)
 
$
(37,219
)
 
$
(22,927
)
 
$

 
____________________________
(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. The obligation is included in accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets.
(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 April 15, 2018, 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 April 15, 2018.
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 2018, we recorded $0.7 million of impairment charges resulting from the closure of four franchise and one company restaurant, $0.2 million of charges resulting from changes in the market value of closed restaurant properties held for sale and $0.2 million in charges related to our landlord’s sale of a restaurant property to a franchisee in the first quarter of 2018. Refer to Note 7, Impairment and Other Charges, Net, for additional information regarding impairment charges.


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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. In April 2014, to reduce our exposure to rising interest rates, we entered into nine forward-starting interest rate swap agreements that effectively converted $300.0 million of our variable rate borrowings to a fixed-rate basis from October 2014 through October 2018. Additionally, in June 2015, we entered into eleven forward-starting interest rate swap agreements that effectively converted 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 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
 
 
April 15,
2018
 
October 1, 2017
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
Interest rate swaps
Accrued liabilities
 
$
(1,153
)
 
$
(4,777
)
Interest rate swaps
Other long-term liabilities
 
(4,638
)
 
(18,150
)
Total derivatives (Note 5)
 
 
$
(5,791
)
 
$
(22,927
)
Financial performance — The following table summarizes the OCI activity related to our interest rate swap derivative instruments (in thousands):
 
Location in Income
 
Quarter
 
Year-to-date
 
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Gain (loss) recognized in OCI
N/A
 
$
4,295

 
$
(3,981
)
 
$
14,586

 
$
19,105

Loss reclassified from accumulated OCI into net earnings
Interest expense, net
 
$
876

 
$
1,219

 
$
2,550

 
$
3,285

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
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Restructuring costs
$
2,575

 
$
247

 
$
2,933

 
$
430

Costs of closed restaurants and other
1,730

 
417

 
3,105

 
2,256

Accelerated depreciation
324

 
276

 
374

 
378

Losses on disposition of property and equipment, net
298

 
427

 
481

 
957

Operating restaurant impairment charges (1)

 

 
291

 

 
$
4,927

 
$
1,367

 
$
7,184

 
$
4,021

____________________________
(1)
Impairment charges are primarily resulting from our landlord’s sale of a restaurant property to a franchisee.


15

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








Restructuring costs — Restructuring charges in 2018 and 2017 include costs resulting from a plan that management initiated in fiscal 2016 to reduce our general and administrative costs. This plan includes cost saving initiatives from workforce reductions and refranchising initiatives. Restructuring charges in 2018 also include costs related to the evaluation of potential alternatives with respect to the Qdoba brand (the “Qdoba Evaluation”), which resulted in the Qdoba Sale. Refer to Note 2, Discounted Operations, for information regarding the Qdoba Sale.

The following is a summary of our restructuring costs (in thousands):
 
Quarter
 
Year-to-date
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Employee severance and related costs (1)
$
1,808

 
$
163

 
$
1,352

 
$
256

Qdoba Evaluation consulting costs (2)
542

 

 
768

 

Qdoba Evaluation retention bonus
225

 

 
812

 

Other

 
84

 
1

 
174

 
$
2,575

 
$
247

 
$
2,933

 
$
430

____________________________
(1)
Year-to-date 2018 includes a reduction in severance and related costs due to a change in the number of employees to be terminated in connection with our restructuring activities.
(2)
Qdoba Evaluation consulting costs are primarily related to third party advisory services.
Total accrued severance costs related to our restructuring activities are included in accrued liabilities and changed as follows during 2018 (in thousands):
Balance as of October 1, 2017
 
$
648

Additions/adjustments
 
1,352

Cash payments
 
(1,484
)
Balance as of April 15, 2018
 
$
516


Costs of closed restaurants and other — Costs of closed restaurants in 2018 and 2017 include future lease commitment charges and expected ancillary costs, net of anticipated sublease rentals. Costs in 2018 also include $0.7 million of impairment charges resulting from the closure of four franchise and one company restaurant, and $0.2 million of charges resulting from changes in the market value of closed properties held for sale.
Accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets, changed as follows during 2018 (in thousands):
Balance as of October 1, 2017
 
$
6,175

Additions
 
135

Adjustments (1)
 
549

Interest expense
 
957

Cash payments
 
(3,253
)
Balance as of April 15, 2018 (2) (3)
 
$
4,563

___________________________
(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 4 years.
(3)
This balance excludes $3.2 million of restaurant closing costs that are included in accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets, which were initially recorded as losses on the sale of company-operated restaurants to Jack in the Box franchisees.
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 2018, accelerated depreciation was primarily related to exterior enhancements at our company-operated restaurants. In 2017, accelerated depreciation primarily related to the anticipated closure of two restaurants.


16

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








8.
INCOME TAXES

Our tax rates for the quarter and year-to-date periods ended April 15, 2018 were impacted by the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law on December 22, 2017. As a fiscal year taxpayer, certain provisions of the Tax Act impacted us in fiscal year 2018, including a reduction in the U.S. federal statutory corporate income tax rate (the “Tax Rate”), while other provisions will be effective starting at the beginning of fiscal year 2019. The Tax Rate reduction was effective as of January 1, 2018, and will be phased in, resulting in a statutory federal tax rate of 24.5% for our fiscal year ending September 30, 2018, and 21.0% for subsequent fiscal years.

As of April 15, 2018, we provisionally accounted for the results of the Tax Act. The provision for income taxes is based on a reasonable estimate of the effects on our existing deferred tax balances. Tax expense of $0.6 million in the quarter and $31.2 million year-to-date, including a immaterial tax benefit in the quarter and $2.3 million year-to-date related to Qdoba, was recognized and is included as a component of income taxes from continuing operations. This tax expense consists primarily of a $30.3 million re-measurement of our deferred tax assets and liabilities due to the enactment of the Tax Act. The impact of the Tax Act is based upon estimates and interpretations which may be refined as further authoritative guidance is issued and is expected to be completed by the first quarter of fiscal year 2019.

The 2018 income tax provisions reflect tax rates of 31.4% in the quarter and 60.7% year-to-date, compared with 38.1% and 38.4%, respectively, in 2017. The major components of the year-over-year change in tax rates were the non-cash impact of the enactment of the Tax Act, including the revaluation of all deferred tax assets and liabilities at the reduced federal statutory tax rate, partially offset by the decrease in the federal statutory tax rate and the excess tax benefit on 2018 stock compensation. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual annual 2018 rate could differ from our current estimates.

The following is a summary of the components of each tax rate (in thousands):
 
Quarter
 
Year-to-date

 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Income tax expense at statutory rate
$
10,717

 
29.4
%
 
$
19,221

 
37.9
%
 
$
28,037

 
29.1
 %
 
$
40,961

 
38.2
%
Non-cash impact of the Tax Act
577

 
1.6
%
 

 
%
 
31,204

 
32.4
 %
 

 
%
Stock compensation excess tax benefit
(14
)
 
%
 

 
%
 
(816
)
 
(0.9
)%
 

 
%
Other
146

 
0.4
%
 
112

 
0.2
%
 
139

 
0.1
 %
 
203

 
0.2
%
(1)
$
11,426

 
31.4
%
 
$
19,333

 
38.1
%
 
$
58,564

 
60.7
 %
 
$
41,164

 
38.4
%
____________________________
(1)
Percentages may not add due to rounding.


17

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








9.
RETIREMENT PLANS
Defined benefit pension plans — We sponsor two defined benefit pension plans, a “Qualified Plan” covering substantially all full-time employees hired prior to January 1, 2011, and an unfunded supplemental executive retirement plan (“SERP”) 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 employee’s 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
  
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Defined benefit pension plans:
 
 
 
 
 
 
 
Interest cost
$
5,160

 
$
5,248

 
$
12,039

 
$
12,244

Service cost
516

 
504

 
1,203

 
1,177

Expected return on plan assets
(6,510
)
 
(6,494
)
 
(15,190
)
 
(15,153
)
Actuarial loss (1)
1,123

 
1,411

 
2,621

 
3,292

Amortization of unrecognized prior service costs (1)
34

 
35

 
79

 
82

Net periodic benefit cost
$
323

 
$
704

 
$
752

 
$
1,642

Postretirement healthcare plans:
 
 
 
 
 
 
 
Interest cost
$
220

 
$
231

 
$
514

 
$
540

Actuarial (gain) loss (1)
(6
)
 
37

 
(14
)
 
87

Net periodic benefit cost
$
214

 
$
268

 
$
500

 
$
627

___________________________
(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, 2017, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement. Details regarding 2018 contributions are as follows (in thousands):
 
SERP
 
Postretirement
Healthcare Plans
Net year-to-date contributions
$
2,200

 
$
877

Remaining estimated net contributions during fiscal 2018
$
2,200

 
$
500

We continue to evaluate contributions to our Qualified Plan based on changes in pension assets as a result of asset performance in the current market and the economic environment. We do not anticipate making any contributions to our Qualified Plan in fiscal 2018.


18

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 towards the financial success of the Company. During 2018, we granted the following shares related to our share-based compensation awards:
Nonvested stock units
60,965

Stock options
113,447

Performance share awards
22,735

The components of share-based compensation expense recognized in each period are as follows (in thousands):
 
Quarter
 
Year-to-date
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Nonvested stock units
$
2,082

 
$
1,584

 
$
3,860

 
$
3,653

Stock options
697

 
312

 
1,179

 
1,113

Nonvested stock awards
7

 
20

 
21

 
47

Performance share awards
75

 
397

 
738

 
1,187

Deferred compensation for non-management directors
350

 
270

 
350

 
270

Total share-based compensation expense
$
3,211

 
$
2,583

 
$
6,148

 
$
6,270


11.
STOCKHOLDERS’ EQUITY
Repurchases of common stock During year-to-date 2018, we repurchased approximately 1.1 million common shares at an aggregate cost of $100.0 million. As of April 15, 2018, there was approximately $81.0 million remaining under a Board-authorized stock-buyback program which expires in November 2018.
Dividends — During year-to-date 2018, the Board of Directors declared two cash dividends of $0.40 per common share which were paid on March 16, 2018 and December 15, 2017 to shareholders of record as of the close of business on March 5, 2018 and December 4, 2017, respectively and totaled $23.5 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, 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
 
April 15,
2018
 
April 16,
2017
 
April 15,
2018
 
April 16,
2017
Weighted-average shares outstanding – basic
29,040

 
30,895

 
29,332

 
31,622

Effect of potentially dilutive securities:
 
 
 
 
 
 
 
Nonvested stock awards and units
268

 
163

 
311

 
178

Stock options
41

 
52

 
55

 
66

Performance share awards
7

 
16

 
7

 
17

Weighted-average shares outstanding – diluted
29,356

 
31,126

 
29,705

 
31,883

Excluded from diluted weighted-average shares outstanding:
 
 
 
 
 
 
 
Antidilutive
150

 
90

 
116

 
64

Performance conditions not satisfied at the end of the period
67

 
79

 
67

 
79



19

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








13.    CONTINGENCIES AND LEGAL MATTERS 
Legal matters — We assess contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in our 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. In 2016, the court dismissed the federal claims and those relating to franchise employees. In June 2017, the court granted class certification with respect to state law claims of improper deductions and late payment of final wages. 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 continue to believe that no additional losses are probable beyond this accrual and cannot estimate a possible loss contingency or range of reasonably possible loss contingencies beyond the accrual. 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 or other third party indemnity obligation. 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. 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.
Lease guarantees — While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees. In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as of April 15, 2018 as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable. Refer to Note 2, Discontinued Operations, for additional information regarding the Guarantees.


20

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








14.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
Year-to-date
 
April 15,
2018
 
April 16,
2017
Cash paid during the year for:
 
 
 
Interest, net of amounts capitalized
$
23,522

 
$
18,460

Income tax payments
$
12,706

 
$
27,356

Decrease in obligations for purchases of property and equipment
$
3,465

 
$
1,998

Non-cash transactions:
 
 
 
Increase in notes receivable from the sale of company-operated restaurants
$
31,506

 
$

Increase in accrued franchise tenant improvement allowances
$
5,132

 
$
1,398

Increase in dividends accrued or converted to common stock equivalents
$
160

 
$
151

Increase in obligations for treasury stock repurchases
$

 
$
4,466

Decrease in equipment capital lease obligations from the sale of company-operated restaurants, closure of stores and termination of equipment leases
$
2,330

 
$
2,031

Decrease in capital lease obligations from the termination of building leases
$
233

 
$
87

Equipment capital lease obligations incurred
$
59

 
$
59



21

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








15.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
April 15,
2018
 
October 1,
2017
Accounts and other receivables, net:
 
 
 
Trade
$
51,876

 
$
55,108

Due from marketing fund
19,634

 

Notes receivable
22,970

 
988

Other
9,440

 
5,672

Allowance for doubtful accounts
(1,516
)
 
(2,159
)
 
$
102,404

 
$
59,609

Prepaid expenses:
 
 
 
Prepaid rent
$
8,301

 
$

Prepaid income taxes

 
16,928

Other
3,646

 
10,604

 
$
11,947

 
$
27,532

Other assets, net:
 
 
 
Company-owned life insurance policies
$
107,940

 
$
110,057

Deferred tax assets
62,889

 
105,117

Deferred rent receivable
47,562

 
46,962

Other
20,033

 
15,434

 
$
238,424

 
$
277,570

Accrued liabilities:
 
 
 
Insurance
$
35,945

 
$
39,011

Payroll and related taxes
25,416

 
23,361

Deferred rent income
10,646


18,961

Advertising

 
18,493

Sales and property taxes
3,034

 
7,275

Gift card liability
2,243

 
2,237

Deferred franchise fees
425

 
450

Other
22,472

 
25,266

 
$
100,181

 
$
135,054

Other long-term liabilities:
 
 
 
Defined benefit pension plans
$
102,864

 
$
107,011

Straight-line rent accrual
32,511

 
33,749

Other
102,636

 
108,065

 
$
238,011

 
$
248,825


16.
SUBSEQUENT EVENTS

On May 11, 2018, the Board of Directors declared a cash dividend of $0.40 per common share, to be paid on June 11, 2018 to shareholders of record as of the close of business on May 29, 2018.

On May 11, 2018, the Board of Directors approved an additional $200.0 million stock-buyback program that expires in November 2019.

Subsequent to the end of the second quarter of 2018, we signed non-binding letters of intent with franchisees to sell approximately 25 company-operated restaurants in several markets. Pre-tax gross proceeds related to these sales are estimated at $21.0 million to $23.0 million.



22


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2018 and 2017 refer to the 12-weeks (“quarter”) and 28-weeks (“year-to-date”) ended April 15, 2018 and April 16, 2017, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during 2018 and 2017, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended October 1, 2017.
Our MD&A consists of the following sections:
Overview — a general description of our business and 2018 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 pension and postretirement health contributions, capital expenditures, sale of company-operated restaurants, franchise tenant improvement allowance distributions, our credit facility, 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:
Changes in sales at restaurants open more than one year (“same-store sales”), system restaurant sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and 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, franchised and system restaurant sales, and AUV information is useful to investors as they have a direct effect on the Company’s profitability.
Adjusted EBITDA, which represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding gains or losses from discontinued operations, income taxes, interest expense, net, gains on the sale of company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of tenant improvement allowances. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
Same-store sales, system restaurant sales, franchised restaurant sales, AUVs and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.

23


OVERVIEW
As of April 15, 2018, we operated and franchised 2,245 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam.
Our primary source of revenue is from retail sales at Jack in the Box company-operated restaurants. We also derive revenue from Jack in the Box 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 year-to-date in fiscal 2018, and certain trends compared to a year ago:
Same-store and System Sales Same-store sales decreased 0.2% year-to-date in 2018 system wide compared with a year ago, and system sales decreased $5.8 million, or 0.3%, year-to-date in 2018 compared with a year ago. These decreases were primarily due to a decrease in traffic at both company-operated and franchise-operated restaurants, partially offset by menu price increases and favorable mix.
Company Restaurant Operations Jack in the Box company restaurant costs as a percentage of company restaurant sales decreased in 2018 to 73.9% from 75.1% a year ago primarily due to the benefit of refranchising units that had lower AUVs than the average for all company restaurants.
Franchise Operations Jack in the Box franchise costs as a percentage of franchise revenues increased in 2018 to 39.7%, from 39.0% in the prior year, primarily due to a 0.3% decrease in same-store sales at franchised restaurants and reduced royalties for certain restaurants sold to franchisees in 2017.
Jack in the Box Franchising Program Franchisees opened a total of 8 restaurants. As part of our refranchising strategy, we sold 85 company-operated restaurants to franchisees in several different markets during 2018 resulting in proceeds of approximately $48.4 million. In fiscal year 2018, we expect approximately 25 Jack in the Box restaurants to open system-wide, the majority of which will be franchise locations. Our Jack in the Box system was 92% franchised as of April 15, 2018. We plan to increase franchise ownership of the Jack in the Box system to approximately 95% by the end of the fiscal year. Prior and subsequent to the end of the second quarter of 2018, we signed non-binding letters of intent with franchisees to sell approximately 46 company-operated restaurants in several markets. Pre-tax gross proceeds related to these sales are estimated at $37.0 million to $41.0 million, and we have classified $3.3 million of equipment, related to sales under letters executed prior to quarter-end, as assets held for sale in our April 15, 2018 condensed consolidated balance sheet.
Restructuring Costs (including costs related to the Qdoba Evaluation) In 2016, we announced a plan to reduce our general and administrative costs, and in the third quarter of 2017, we began an evaluation of potential alternatives with respect to the Qdoba brand (the “Qdoba Evaluation”), which ultimately resulted in the sale of Qdoba (the “Qdoba Sale”). In connection with these activities, we have recorded $2.9 million of restructuring charges in 2018, which includes $1.6 million related to the Qdoba Evaluation, and $1.3 million primarily related to severance costs. These costs are included in impairment and other costs, net in the accompanying condensed consolidated statements of earnings.
Return of Cash to Shareholders We returned cash to shareholders in the form of share repurchases and cash dividends. We repurchased approximately 1.1 million shares of our common stock in 2018 at an average price of $89.98 per share, totaling $100.0 million, including the costs of brokerage fees. We also declared two cash dividends of $0.40 per share totaling $23.5 million.
Adjusted EBITDA Adjusted EBITDA decreased in 2018 to $145.8 million from $160.1 million in 2017 due primarily to the execution of our refranchising strategy.
Tax Reform The Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law on December 22, 2017, resulting in an estimated annual statutory federal tax rate of 24.5% for fiscal 2018, and 21.0% for subsequent fiscal years. Due to the Tax Act, a tax expense of $31.2 million was recognized and is included as a component of income taxes from continuing operations in 2018.
The Qdoba Sale During the second quarter of 2018, we completed the sale of Qdoba Restaurant Corporation ("Qdoba"), a wholly owned subsidiary of the company, to certain funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, "Apollo"). The transaction closed on March 21, 2018. As a result of the sale, operating results for Qdoba are included in discontinued operations for all periods presented.
Credit Facility Pursuant to the Qdoba Sale and amendment of our credit facility, we made a payment of $260.0 million on our term loan. We also extended the maturity date of our credit facility one year to March 19, 2020, and raised the maximum leverage ratio from 4.0 times to 4.5 times.

24



FINANCIAL REPORTING
During fiscal 2012, we entered into an agreement to outsource our Jack in the Box distribution business. In fiscal 2018, the Board of Directors approved, and we entered into, a Stock Purchase Agreement to sell all issued and outstanding shares of the Qdoba as the result of the Qdoba Evaluation. All results related to our distribution business and Qdoba operations are reported as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, in the notes to the condensed consolidated financial statements for additional information. Unless otherwise noted, amounts and disclosures throughout our MD&A relate to our continuing operations.
In the first quarter of fiscal 2018, we prospectively adopted an Accounting Standards Update (“ASU”) which 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. Upon adoption, we reclassified the excess tax benefits from share-based compensation arrangements of $0.8 million as a discrete item within income tax expense on the condensed consolidated statements of earnings, rather than recognizing such excess income tax benefits in capital in excess of par value on the condensed consolidated balance sheet. This reclassification also impacted the related classification on our condensed consolidated statements of cash flows as excess tax benefits from share-based compensation arrangements is only reported in cash flows from operating activities rather than as previously reported in cash flows from operating activities and cash flows used in investing activities. Upon adoption of the standard, we also began reporting cash paid to a taxing authority on an employee’s behalf when we directly withhold equivalent shares for taxes as cash flows used in financing activities. The standard also impacts the Company’s earnings per share calculation as the estimate of dilutive common share equivalents under the treasury stock method no longer assumes that the estimated tax benefits realized when an award is settled are used to repurchase shares. Lastly, the Company elected to account for forfeitures as they occur. A cumulative-effect adjustment was made in the amount of $0.2 million and recorded in 2018 retained earnings on the condensed consolidated balance sheet. Refer to Note 1, Basis of Presentation, in the notes to condensed consolidated financial statements for more information.


25


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
 
April 15, 2018
 
April 16, 2017
 
April 15, 2018
 
April 16, 2017
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
54.3
%
 
67.8
%
 
56.2
%
 
67.7
%
Franchise rental revenues
27.6
%
 
19.3
%
 
26.8
%
 
19.8
%
Franchise royalties and other
18.1
%
 
12.9
%
 
17.0
%
 
12.5
%
Total revenues
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs (excluding depreciation and amortization):
 
 
 
 
 
 
 
Food and packaging (1)
28.6
%
 
28.9
%
 
28.7
%
 
28.7
%
Payroll and employee benefits (1)
29.0
%
 
30.2
%
 
28.9
%
 
29.8
%
Occupancy and other (1)
15.9
%
 
17.0
%
 
16.2
%
 
16.6
%
Total company restaurant costs (excluding depreciation and amortization) (1)
73.6
%
 
76.1
%
 
73.9
%
 
75.1
%
Franchise occupancy expenses (excluding depreciation and amortization) (2)
62.3
%
 
61.5
%
 
61.1
%
 
60.1
%
Franchise support and other costs (3)
6.8
%
 
5.1
%
 
5.9
%
 
5.5
%
Selling, general and administrative expenses
12.9
%
 
9.7
%
 
12.2
%
 
10.8
%
Depreciation and amortization
6.7
%

6.1
%

6.6
%

6.0
%
Impairment and other charges, net
2.3
%
 
0.5
%
 
1.4
%
 
0.6
%
Gains on the sale of company-operated restaurants
(2.6
)%
 
(2.9
)%
 
(2.9
)%
 
(1.3
)%
Earnings from operations
22.3
%
 
22.5
%
 
23.7
%
 
20.4
%
Income tax rate (4) 
31.4
%
 
38.1
%
 
60.7
%
 
38.4
%
____________________________
(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.


26


CHANGES IN SAME-STORE SALES
 
Quarter
 
Year-to-date
 
Fiscal Basis
 
Calendar Basis (1)
 
Fiscal Basis
 
Calendar Basis (1)
 
April 15, 2018
 
April 16, 2017
 
April 16, 2017
 
April 15, 2018
 
April 16, 2017
 
April 16, 2017
Company
0.9
 %
 
(1.7
)%
 
(2.4
)%
 
0.5
 %
 
(0.7
)%
 
(0.7
)%
Franchise
(0.2
)%
 
0.4
 %
 
(0.4
)%
 
(0.3
)%
 
2.1
 %
 
2.0
 %
System
(0.1
)%
 
(0.1
)%
 
(0.8
)%
 
(0.2
)%
 
1.4
 %
 
1.4
 %
____________________________
(1)
Due to the transition from a 53-week year in fiscal 2016 to a 52-week year in fiscal 2017, year-over-year fiscal period comparisons are off by one week. The change in same-store sales presented in the Calendar Basis column uses comparable calendar periods to balance the one-week shift from fiscal 2016 and to provide a clearer year-over-year comparison.
The following table summarizes the changes in Jack in the Box company-operated same-store sales:
 
Quarter
 
Year-to-date
 
Fiscal Basis
 
Calendar Basis
 
Fiscal Basis
 
Calendar Basis
 
April 15, 2018
 
April 16, 2017
 
April 16, 2017
 
April 15, 2018
 
April 16, 2017
 
April 16, 2017
Average check (1)
2.6
 %
 
5.2
 %
 
4.7
 %
 
2.6
 %
 
4.9
 %
 
4.8
 %