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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
 _______________________________________________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 7, 2019
Commission File Number: 1-9390
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=13051419&doc=12
 ____________________________________________________ 
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, California 92123
(Address of principal executive offices)
Registrant’s telephone number, including area code (858571-2121
   _______________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
JACK
NASDAQ Global Select Market
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 every Interactive Data File required to be submitted 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 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
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 August 2, 2019, 25,824,470 shares of the registrant’s common stock were outstanding.



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

1


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

JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
July 7,
2019
 
September 30,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
12,447

 
$
2,705

Accounts and other receivables, net
57,647

 
57,422

Inventories
1,937

 
1,858

Prepaid expenses
17,484

 
14,443

Current assets held for sale
13,236

 
13,947

Other current assets
3,246

 
4,598

Total current assets
105,997

 
94,973

Property and equipment:
 
 
 
Property and equipment, at cost
1,178,894

 
1,190,031

Less accumulated depreciation and amortization
(788,956
)
 
(770,362
)
Property and equipment, net
389,938

 
419,669

Other assets:
 
 
 
Intangible assets, net
451

 
600

Goodwill
46,747

 
46,749

Deferred tax assets
72,903

 
62,140

Other assets, net
215,234

 
199,266

Total other assets
335,335

 
308,755

 
$
831,270

 
$
823,397

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
42,895

 
$
31,828

Accounts payable
51,131

 
44,970

Accrued liabilities
124,823

 
106,922

Total current liabilities
218,849

 
183,720

Long-term liabilities:
 
 
 
Long-term debt, net of current maturities
971,763

 
1,037,927

Other long-term liabilities
221,219

 
193,449

Total long-term liabilities
1,192,982

 
1,231,376

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, 82,146,917 and 82,061,661 issued, respectively
821

 
821

Capital in excess of par value
478,256

 
470,826

Retained earnings
1,565,287

 
1,561,353

Accumulated other comprehensive loss
(94,486
)
 
(94,260
)
Treasury stock, at cost, 56,325,632 shares
(2,530,439
)
 
(2,530,439
)
Total stockholders’ deficit
(580,561
)
 
(591,699
)
 
$
831,270

 
$
823,397

See accompanying notes to condensed consolidated financial statements.

2


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
 
Quarter
 
Year-to-date
 
July 7,
2019
 
July 8,
2018
 
July 7,
2019
 
July 8,
2018
Revenues:
 
 
 
 
 
 
 
Company restaurant sales
$
78,434

 
$
87,574

 
$
257,948

 
$
371,149

Franchise rental revenues
63,359

 
61,622

 
208,895

 
196,682

Franchise royalties and other
40,180

 
38,787

 
130,840

 
124,387

Franchise contributions for advertising and other services
40,386




131,189



 
222,359

 
187,983

 
728,872

 
692,218

Operating costs and expenses, net:
 
 
 
 
 
 
 
Company restaurant costs (excluding depreciation and amortization):
 
 
 
 
 
 
 
Food and packaging
23,058

 
24,946

 
74,350

 
106,448

Payroll and employee benefits
23,121

 
24,875

 
76,163

 
106,911

Occupancy and other
11,052

 
13,715

 
38,165

 
59,608

Total company restaurant costs
57,231

 
63,536

 
188,678

 
272,967

Franchise occupancy expenses (excluding depreciation and amortization)
38,371

 
37,401

 
127,702

 
119,987

Franchise support and other costs
2,695

 
2,829

 
8,337

 
7,894

Franchise advertising and other services expenses
41,882




136,397



Selling, general and administrative expenses
24,389

 
19,671

 
66,057

 
80,326

Depreciation and amortization
12,786

 
13,194

 
42,645

 
46,306

Impairment and other charges, net
(3,256
)
 
3,265

 
5,567

 
10,449

Gains on the sale of company-operated restaurants

 
(28,676
)
 
(219
)
 
(43,088
)
 
174,098

 
111,220

 
575,164

 
494,841

Earnings from operations
48,261

 
76,763

 
153,708

 
197,377

Other pension and post-retirement expenses, net
342


423


1,141


1,410

Interest expense, net
36,494

 
10,873

 
67,144

 
34,066

Earnings from continuing operations and before income taxes
11,425

 
65,467

 
85,423

 
161,901

Income tax (benefit) expense
(2,048
)
 
17,334

 
15,699

 
75,898

Earnings from continuing operations
13,473

 
48,133

 
69,724

 
86,003

(Losses) earnings from discontinued operations, net of income taxes
(284
)
 
(2,826
)
 
2,652

 
19,099

Net earnings
$
13,189

 
$
45,307

 
$
72,376

 
$
105,102

 
 
 
 
 
 
 
 
Net earnings per share - basic:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.52

 
$
1.72

 
$
2.69

 
$
2.97

(Losses) earnings from discontinued operations
(0.01
)
 
(0.10
)
 
0.10

 
0.66

Net earnings per share (1)
$
0.51

 
$
1.62

 
$
2.79

 
$
3.63

Net earnings per share - diluted:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.51

 
$
1.70

 
$
2.67

 
$
2.94

(Losses) earnings from discontinued operations
(0.01
)
 
(0.10
)
 
0.10

 
0.65

Net earnings per share (1)
$
0.50

 
$
1.60

 
$
2.77

 
$
3.59

 
 
 
 
 
 
 
 
Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
1.20

 
$
1.20

____________________________
(1)
Earnings per share may not add due to rounding.
See accompanying notes to condensed consolidated financial statements.

3


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Quarter
 
Year-to-date
 
July 7,
2019
 
July 8,
2018
 
July 7,
2019
 
July 8,
2018
Net earnings
$
13,189

 
$
45,307

 
$
72,376

 
$
105,102

Cash flow hedges:
 
 
 
 
 
 
 
Net change in fair value of derivatives
(11,499
)
 
1,494

 
(23,625
)
 
16,080

Net loss reclassified to earnings
23,715

 
539

 
24,328

 
3,089

 
12,216

 
2,033

 
703

 
19,169

Tax effect
(6,132
)
 
(517
)
 
(3,165
)
 
(4,868
)
 
6,084

 
1,516

 
(2,462
)
 
14,301

Unrecognized periodic benefit costs:
 
 
 
 
 
 
 
Actuarial losses and prior service costs reclassified to earnings
904

 
1,152

 
3,013

 
3,838

Tax effect
(232
)
 
(292
)
 
(777
)
 
(1,126
)
 
672

 
860

 
2,236

 
2,712

Other:
 
 
 
 
 
 
 
Foreign currency translation adjustments

 

 

 
6

Tax effect

 

 

 
(2
)
 

 

 

 
4

Derecognition of foreign currency translation adjustments due to sale

 

 

 
76

 

 

 

 
80

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of taxes
6,756

 
2,376

 
(226
)
 
17,093

 
 
 
 
 
 
 
 
Comprehensive income
$
19,945

 
$
47,683

 
$
72,150

 
$
122,195

See accompanying notes to condensed consolidated financial statements.


4


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Year-to-date
 
July 7,
2019
 
July 8,
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
72,376

 
$
105,102

Earnings from discontinued operations
2,652

 
19,099

Earnings from continuing operations
69,724

 
86,003

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,645

 
46,306

Amortization of franchise tenant improvement allowances and other
1,524

 
497

Deferred finance cost amortization
1,903

 
2,268

Excess tax benefits from share-based compensation arrangements
(66
)
 
(2,084
)
Deferred income taxes
(1,745
)
 
38,544

Share-based compensation expense
6,589

 
7,830

Pension and postretirement expense
1,141

 
1,789

Gains on cash surrender value of company-owned life insurance
(3,117
)
 
(1,335
)
Gains on the sale of company-operated restaurants
(219
)
 
(43,088
)
(Gains) losses on the disposition of property and equipment, net
(5,756
)
 
958

Impairment charges and other
1,624

 
2,205

Changes in assets and liabilities, excluding dispositions:
 
 
 
Accounts and other receivables
(3,555
)
 
945

Inventories
(79
)
 
1,330

Prepaid expenses and other current assets
1,509

 
(27,448
)
Accounts payable
24,321

 
3,135

Accrued liabilities
9,363

 
(34,653
)
Pension and postretirement contributions
(5,126
)
 
(4,384
)
Franchise tenant improvement allowance distributions
(7,875
)
 
(9,099
)
Other
(16,012
)
 
(10,351
)
Cash flows provided by operating activities
116,793

 
59,368

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(25,041
)
 
(25,730
)
Purchases of assets intended for sale and leaseback

 
(5,491
)
Proceeds from the sale and leaseback of assets
3,056

 
7,571

Proceeds from the sale of company-operated restaurants
133

 
23,666

Collections on notes receivable
15,239

 
34,057

Proceeds from the sale of property and equipment
7,563

 
3,799

Other

 
2,921

Cash flows provided by investing activities
950

 
40,793

Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
229,798

 
560,800

Repayments of borrowings on revolving credit facilities
(252,800
)
 
(412,100
)
Principal repayments on debt
(32,611
)
 
(293,671
)
Debt issuance costs
(5,088
)
 
(1,367
)
Dividends paid on common stock
(30,929
)
 
(34,609
)
Proceeds from issuance of common stock
696

 
2,365

Repurchases of common stock
(14,362
)
 
(200,000
)
Change in book overdraft

 
(573
)
Payroll tax payments for equity award issuances
(2,705
)
 
(7,250
)
Cash flows used in financing activities
(108,001
)
 
(386,405
)
Cash flows provided by (used in) continuing operations
9,742

 
(286,244
)
Net cash provided by operating activities of discontinued operations

 
5,159

Net cash provided by investing activities of discontinued operations

 
273,653

Net cash used in financing activities of discontinued operations

 
(78
)
Net cash provided by discontinued operations

 
278,734

Effect of exchange rate changes on cash

 
6

Cash at beginning of period
2,705

 
7,642

Cash at end of period
$
12,447

 
$
138

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:
 
July 7,
2019
 
July 8,
2018
Company-operated
137

 
146

Franchise
2,105

 
2,095

Total system
2,242

 
2,241


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 September 30, 2018 (“2018 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2018 Form 10-K with the exception of two new accounting pronouncements adopted in fiscal 2019, 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”). The sale 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 9, Income Taxes), have been aggregated under the caption “(Losses) earnings from discontinued operations, net of income taxes.” Refer to Note 3, 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 — We recorded certain adjustments in fiscal 2019 upon the adoption of a new accounting pronouncement; see details regarding the effects of the adoption on our condensed consolidated financial statements below.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2019 and 2018 include 52 weeks. Our first quarter includes 16-weeks and all other quarters include 12-weeks. All comparisons between 2019 and 2018 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 7, 2019 and July 8, 2018, respectively, unless otherwise indicated.
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.

6

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








Advertising costs — We administer a marketing fund which includes contractual contributions. In 2019 and 2018, marketing fund contributions from franchise and company-operated restaurants were approximately 5.0% of gross revenues, and year-to-date incremental contributions made by the Company were $2.0 million and $3.3 million, respectively.
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 made by the Company, including incremental contributions, are included in “Selling, general, and administrative expenses” in the accompanying condensed consolidated statements of earnings. Advertising costs for the quarter and year-to-date in 2019 were $4.0 million and $15.0 million, respectively, and in 2018 were $5.9 million and $22.0 million, respectively.
Effect of new accounting pronouncements adopted in fiscal 2019In May 2014, the FASB issued ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606) (“ASC 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. We adopted the new standard on October 1, 2018 using the modified retrospective method, whereby the cumulative effect of this transition to applicable contracts with customers that were not completed as of October 1, 2018 was recorded as an adjustment to beginning retained earnings as of this date. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The new revenue recognition standard did not impact our recognition of restaurant sales, rental revenues, or royalty fees from franchisees. The new pronouncement changed the way initial fees from franchisees for new restaurant openings or new franchise terms are recognized. Under the previous revenue recognition guidance, initial franchise fees were recognized as revenue at the time when a new restaurant opened or at the start of a new franchise term. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights and services offered during the term of the franchise agreement and will therefore be treated as a single performance obligation together with the continuing rights and services. As such, initial fees received will be recognized over the franchise term and any unamortized portion will be recorded as deferred revenue in our condensed consolidated balance sheet. An adjustment to opening retained earnings and a corresponding contract liability of approximately $50.3 million (of which $5.0 million was current and $45.3 million was long-term) was established on the date of adoption. A deferred tax asset of approximately $13.0 million related to this contract liability was also established on the date of adoption.
The new standard also had an impact on transactions presented net and not included in our revenues and expenses such as franchisee contributions to and expenditures from our advertising fund, and sourcing and technology fee contributions from franchisees and the related expenses. We determined that we are the principal in these arrangements, and as such, contributions to and expenditures from the advertising fund, and sourcing and technology fees and expenditures are now reported on a gross basis within our consolidated statements of earnings. While this change materially impacted our gross amount of reported revenues and expenses, the impact will be largely offsetting with no material impact to our reported net earnings. However, any annual surplus or deficit in the marketing fund will impact income from operations and net income.

7

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









The following table summarizes the impacts of adopting ASC 606 on the Company’s condensed consolidated financial statements as of and for the 12-weeks and 40-weeks ended July 7, 2019 (in thousands):
 
 
 
Adjustments
 
 
 
As Reported
 
Franchise Fees
 
Marketing and Sourcing Fees
 
Technology Support Fees
 
Balances without Adoption
Condensed Consolidated Statements of Earnings
 
 
 
 
 
 
 
 
 
12-Weeks Ended July 7, 2019
 
 
 
 
 
 
 
 
 
Franchise royalties and other
$
40,180

 
$
(918
)
 
$

 
$

 
$
39,262

Franchise contributions for advertising and other services
$
40,386

 
$

 
$
(38,133
)
 
$
(2,253
)
 
$

Total revenues
$
222,359

 
$
(918
)
 
$
(38,133
)
 
$
(2,253
)
 
$
181,055

Franchise advertising and other services expenses
$
41,882

 
$

 
$
(38,133
)
 
$
(3,749
)
 
$

Selling, general and administrative expenses
$
24,389

 
$

 
$

 
$
1,496

 
$
25,885

Total operating costs and expenses, net
$
174,098

 
$

 
$
(38,133
)
 
$
(2,253
)
 
$
133,712

Earnings from operations
$
48,261

 
$
(918
)
 
$

 
$

 
$
47,343

Earnings from continuing operations and before income taxes
$
11,425

 
$
(918
)
 
$

 
$

 
$
10,507

Income tax (benefit) expense
$
(2,048
)
 
$
(237
)
 
$

 
$

 
$
(2,285
)
Earnings from continuing operations
$
13,473

 
$
(681
)
 
$

 
$

 
$
12,792

Net earnings
$
13,189

 
$
(681
)
 
$

 
$

 
$
12,508

 
 
 
 
 
 
 
 
 
 
40-Weeks Ended July 7, 2019
 
 
 
 
 
 
 
 
 
Franchise royalties and other
$
130,840

 
$
(2,983
)
 
$

 
$

 
$
127,857

Franchise contributions for advertising and other services
$
131,189

 
$

 
$
(124,187
)
 
$
(7,002
)
 
$

Total revenues
$
728,872

 
$
(2,983
)
 
$
(124,187
)
 
$
(7,002
)
 
$
594,700

Franchise advertising and other services expenses
$
136,397

 
$

 
$
(124,187
)
 
$
(12,210
)
 
$

Selling, general and administrative expenses
$
66,057

 
$

 
$

 
$
5,208

 
$
71,265

Total operating costs and expenses, net
$
575,164

 
$

 
$
(124,187
)
 
$
(7,002
)
 
$
443,975

Earnings from operations
$
153,708

 
$
(2,983
)
 
$

 
$

 
$
150,725

Earnings from continuing operations and before income taxes
$
85,423

 
$
(2,983
)
 
$

 
$

 
$
82,440

Income tax (benefit) expense
$
15,699

 
$
(769
)
 
$

 
$

 
$
14,930

Earnings from continuing operations
$
69,724

 
$
(2,214
)
 
$

 
$

 
$
67,510

Net earnings
$
72,376

 
$
(2,214
)
 
$

 
$

 
$
70,162

 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
July 7, 2019
 
 
 
 
 
 
 
 
 
Prepaid expenses
$
17,484

 
$
769

 
$

 
$

 
$
18,253

Total current assets
$
105,997

 
$
769

 
$

 
$

 
$
106,766

Deferred tax assets
$
72,903

 
$
(12,958
)
 
$

 
$

 
$
59,945

Other assets, net
$
215,234

 
$
269

 
$

 
$

 
$
215,503

Total other assets
$
335,335

 
$
(12,689
)
 
$

 
$

 
$
322,646

Total assets
$
831,270

 
$
(11,920
)
 
$

 
$

 
$
819,350

Accrued liabilities
$
124,823

 
$
(4,968
)
 
$

 
$

 
$
119,855

Total current liabilities
$
218,849

 
$
(4,968
)
 
$

 
$

 
$
213,881

Other long-term liabilities
$
221,219

 
$
(42,067
)
 
$

 
$

 
$
179,152

Total long-term liabilities
$
1,192,982

 
$
(42,067
)
 
$

 
$

 
$
1,150,915

Retained earnings
$
1,565,287

 
$
35,114

 
$

 
$

 
$
1,600,401

Total stockholders’ deficit
$
(580,561
)
 
$
35,114

 
$

 
$

 
$
(545,447
)
Total liabilities and stockholders’ deficit
$
831,270

 
$
(11,921
)
 
$

 
$

 
$
819,349


The adoption of ASC 606 had no impact on the Company’s cash provided by or used in operating, investing or financing activities as previously reported in its condensed consolidated statement of cash flows.

8

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








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 costs 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 costs should be presented separately from the service cost component and outside of a subtotal of earnings from operations, or separately disclosed. We adopted this standard in the first quarter of fiscal 2019 applying the retrospective method. As a result of the adoption, 2018 quarter and year-to-date amounts of $0.4 million and $1.4 million, respectively, previously reported within “Selling, general, and administrative expenses” have been reclassified to a separate line under earnings from operations to conform to current year presentation.
Effect of new accounting pronouncements to be adopted in future periods — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (as subsequently amended by ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01) which requires a lessee to recognize assets and liabilities on the balance sheet for those leases classified as operating leases under previous guidance. 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. The accounting guidance for lessors will remain largely unchanged from previous guidance, with the exception of the presentation of certain lease costs that the Company passes through to lessees, including but not limited to, property taxes and maintenance. These costs are generally paid by the Company and reimbursed by the lessee. Historically, these costs have been recorded on a net basis in the consolidated statements of operations, but will be presented gross upon adoption of the new guidance. While we are unable to quantify the impact at this time, we do not expect the adoption of this guidance to have a material impact on our consolidated statement of earnings and statement of cash flows.
We will be required to adopt this standard in the first quarter of fiscal 2020 and plan to utilize the alternative transition method, whereby an entity records a cumulative adjustment to opening retained earnings in the year of adoption without restating prior periods. The new standard also provides a number of optional practical expedients in transition. We expect to elect the transition package of three practical expedients, which, among other items, permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also expect to elect the short-term lease recognition exemption for all leases that qualify, permitting us to not apply the recognition requirements of this standard to leases with a term of 12 months or less. We also expect to elect the practical expedient to not separate lease and non-lease components for all of our leases. We do not expect to elect the use-of-hindsight practical expedient, and therefore expect to continue to utilize lease terms determined under the existing lease guidance.
We are continuing our evaluation, which may identify additional impacts this standard and its amendments will have on our consolidated financial statements and related disclosures.

2.
REVENUE
Nature of products and services — We derive revenue from retail sales at Jack in the Box company-operated restaurants and rental revenue, royalties, advertising, and franchise and other fees from franchise-operated restaurants.
Our franchise arrangements generally provide for an initial franchise fee of $50,000 per restaurant and generally require that franchisees pay royalty and marketing fees at 5% of gross sales. The agreement also requires franchisees to pay sourcing, technology and other miscellaneous fees.
Significant accounting policy — “Company restaurant sales” include revenue recognized upon delivery of food and beverages to the customer at company-operated restaurants, which is when our obligation to perform is satisfied. Company restaurant sales exclude taxes collected from the Company’s customers. Company restaurant sales also include income for gift cards. Gift cards, upon customer purchase, are recorded as deferred income and are recognized in revenue as they are redeemed. The timing and amount of revenue recognized related to company restaurant sales was not impacted by the adoption of ASC 606.
“Franchise royalties and other” includes royalties fees and franchise and other fees received from franchisees. Royalties are based upon a percentage of sales of the franchised restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement.

9

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








“Franchise contributions for advertising and other services” includes franchisee contributions to our marketing fund billed on a monthly basis and sourcing and technology fees, as required under the franchise agreements. Contributions to our marketing fund are based on a percentage of sales and recognized as earned. Sourcing and technology services are recognized when the goods or services are transferred to the franchisee. The adoption of the new revenue standard did not impact the timing of revenue recognition for these fees received; however, these arrangements are now presented on a gross basis because we believe we are the principal in the arrangement.
“Franchise rental revenues” received from franchised restaurants based on fixed rental payments are recognized as revenue over the term of the lease. Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is met. Rental revenues are accounted for in accordance with applicable guidance for leases and are excluded from the scope of the new revenue standard.
Disaggregation of revenue — The following table disaggregates revenue by primary source for the 12-weeks and 40-weeks ended July 7, 2019 (in thousands):
 
Quarter
 
Year-to-date
Sources of revenue:
 
 
 
Company restaurant sales
$
78,434

 
$
257,948

Franchise rental revenues
63,359

 
208,895

Franchise royalties
38,752

 
125,407

Marketing fees
37,269

 
121,078

Technology and sourcing fees
3,117

 
10,111

Franchise fees and other services
1,428

 
5,433

Total revenue
$
222,359

 
$
728,872


Contract liabilities — Our contract liabilities consist of deferred revenue resulting from initial fees received from franchisees for new restaurant openings or new franchise terms, which are generally recognized over the franchise term. We classify these contract liabilities as “Other long-term liabilities” and “Accrued liabilities” in our condensed consolidated balance sheets.
A summary of significant changes in our contract liabilities between the date of adoption (October 1, 2018) and July 7, 2019 is presented below (in thousands):
 
 
Deferred Franchise Fees
Deferred franchise fees at October 1, 2018
 
$
50,018

Revenue recognized during the period
 
(3,953
)
Additions during the period
 
970

Deferred franchise fees at July 7, 2019
 
$
47,035


The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands):
2019 (1)
 
$
1,145

2020
 
4,878

2021
 
4,856

2022
 
4,656

2023
 
4,501

Thereafter
 
26,999

 
 
$
47,035

____________________________
(1)     Represents the estimate for remainder of fiscal year 2019.

We have applied the optional exemption, as provided for under ASC 606, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.


10

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








3.
DISCONTINUED OPERATIONS
Qdoba — In December 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 Buyer completed the acquisition of Qdoba on March 21, 2018 (the “Qdoba Sale”).
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 are still providing accounting and information technology services under the Agreement and currently estimate these services will be performed up to, but no later than, September 21, 2019. In 2019 and 2018, we recorded $0.9 million and $3.6 million in the quarter, respectively, and $6.5 million and $4.7 million year-to-date, respectively, in income related to the Services as a reduction of selling, general and administrative expenses in the condensed consolidated statements of earnings.
Further, in 2018, we entered into an Employee Agreement with the Buyer pursuant to which we continued to employ all Qdoba employees who work for the Buyer (the “Qdoba Employees”) from the date of closing of the Qdoba Sale through December 31, 2018. During the term of the Employee Agreement, we paid all wages and benefits of the Qdoba Employees and received reimbursement of these costs from the Buyer. From October 1, 2018 to December 31, 2018, we paid $35.4 million of Qdoba wages and benefits pursuant to the Employee Agreement.
As the Qdoba Sale represents a strategic shift that had 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.
Income taxes — In fiscal 2019, the Company entered into a bilateral California election with Quidditch Acquisition, Inc. to retroactively treat the divestment of Qdoba Restaurant Corporation on March 21, 2018 as a sale of assets instead of a stock sale for income tax purposes. This election reduced the Company’s fiscal year 2018 California tax liability on the divestment by $2.8 million.
The following table summarizes the Qdoba-related activity for each period in discontinued operations (in thousands, except per share data):
 
Quarter
 
Year-to-date
 
July 7,
2019
 
July 8,
2018
 
July 7,
2019
 
July 8,
2018
Company restaurant sales
$

 
$

 
$

 
$
192,620

Franchise revenues

 

 

 
9,337

Company restaurant costs (excluding depreciation and amortization)

 

 

 
(166,122
)
Franchise costs (excluding depreciation and amortization)

 

 

 
(2,338
)
Selling, general and administrative expenses
(120
)
 
(202
)
 
123

 
(18,314
)
Depreciation and amortization

 

 

 
(5,012
)
Impairment and other charges, net
(262
)
 
(123
)
 
(262
)
 
(2,386
)
Interest expense, net

 

 

 
(4,787
)
Operating (losses) earnings from discontinued operations before income taxes
(382
)
 
(325
)
 
(139
)
 
2,998

Gain (loss) on Qdoba Sale

 
(3,648
)
 
(85
)
 
32,081

(Losses) earnings from discontinued operations before income taxes
(382
)
 
(3,973
)
 
(224
)
 
35,079

Income tax benefit (expense)
98

 
1,097

 
2,876

 
(15,927
)
(Losses) earnings from discontinued operations, net of income taxes
$
(284
)
 
$
(2,876
)
 
$
2,652

 
$
19,152

 
 
 
 
 
 
 
 
Net earnings per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
(0.10
)
 
$
0.10

 
$
0.66

Diluted
$
(0.01
)
 
$
(0.10
)
 
$
0.10

 
$
0.65



11

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








Selling, general and administrative expenses presented in the table above include corporate costs directly in support of Qdoba operations, as well as resolutions of certain matters that existed prior to the Qdoba sale. All other corporate costs were 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 authoritative guidance on financial statement presentation, interest expense associated with our credit facility was allocated to discontinued operations in the prior year based on our estimate of the mandatory prepayment that was made upon closing of the Qdoba Sale.
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 “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. Should we, as guarantor of the lease obligations,