FY13 10-Q Q3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-Q
_______________________________________________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 7, 2013
Commission File Number: 1-9390
____________________________________________________
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________
|
| | |
DELAWARE | | 95-2698708 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
| | |
9330 BALBOA AVENUE, SAN DIEGO, CA | | 92123 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code (858) 571-2121
_______________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | |
Large accelerated filer | þ | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
As of the close of business August 2, 2013, 43,301,720 shares of the registrant’s common stock were outstanding.
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
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| PART I – FINANCIAL INFORMATION | |
Item 1. | | |
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| | |
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| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II – OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
|
| | | | | | | |
| July 7, 2013 | | September 30, 2012 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 9,783 |
| | $ | 8,469 |
|
Accounts and other receivables, net | 41,972 |
| | 78,798 |
|
Inventories | 8,203 |
| | 7,752 |
|
Prepaid expenses | 56,816 |
| | 32,821 |
|
Deferred income taxes | 26,931 |
| | 26,932 |
|
Assets held for sale | 31,253 |
| | 45,443 |
|
Assets of discontinued operations held for sale | — |
| | 30,591 |
|
Other current assets | 471 |
| | 375 |
|
Total current assets | 175,429 |
| | 231,181 |
|
Property and equipment, at cost | 1,489,407 |
| | 1,529,650 |
|
Less accumulated depreciation and amortization | (726,552 | ) | | (708,858 | ) |
Property and equipment, net | 762,855 |
| | 820,792 |
|
Goodwill | 148,632 |
| | 140,622 |
|
Other assets, net | 273,502 |
| | 271,130 |
|
| $ | 1,360,418 |
| | $ | 1,463,725 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current maturities of long-term debt | $ | 20,931 |
| | $ | 15,952 |
|
Accounts payable | 26,594 |
| | 94,713 |
|
Accrued liabilities | 169,792 |
| | 164,637 |
|
Total current liabilities | 217,317 |
| | 275,302 |
|
Long-term debt, net of current maturities | 359,514 |
| | 405,276 |
|
Other long-term liabilities | 366,356 |
| | 371,202 |
|
Stockholders’ equity: | | | |
Preferred stock $0.01 par value, 15,000,000 shares authorized, none issued | — |
| | — |
|
Common stock $0.01 par value, 175,000,000 shares authorized, 77,991,876 and 75,827,894 issued, respectively | 780 |
| | 758 |
|
Capital in excess of par value | 280,600 |
| | 221,100 |
|
Retained earnings | 1,148,995 |
| | 1,120,671 |
|
Accumulated other comprehensive loss | (126,421 | ) | | (136,013 | ) |
Treasury stock, at cost, 34,728,194 and 31,955,606 shares, respectively | (886,723 | ) | | (794,571 | ) |
Total stockholders’ equity | 417,231 |
| | 411,945 |
|
| $ | 1,360,418 |
| | $ | 1,463,725 |
|
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Revenues: | | | | | | | |
Company restaurant sales | $ | 270,863 |
| | $ | 276,447 |
| | $ | 888,565 |
| | $ | 913,292 |
|
Franchise revenues | 79,466 |
| | 77,605 |
| | 263,321 |
| | 247,105 |
|
| 350,329 |
| | 354,052 |
| | 1,151,886 |
| | 1,160,397 |
|
Operating costs and expenses, net: | | | | | | | |
Company restaurant costs: | | | | | | | |
Food and packaging | 88,712 |
| | 89,456 |
| | 289,259 |
| | 301,067 |
|
Payroll and employee benefits | 74,242 |
| | 78,055 |
| | 250,006 |
| | 262,670 |
|
Occupancy and other | 59,360 |
| | 60,691 |
| | 195,372 |
| | 203,679 |
|
Total company restaurant costs | 222,314 |
| | 228,202 |
| | 734,637 |
| | 767,416 |
|
Franchise costs | 40,116 |
| | 38,604 |
| | 132,265 |
| | 126,459 |
|
Selling, general and administrative expenses | 52,078 |
| | 52,090 |
| | 171,246 |
| | 171,195 |
|
Impairment and other charges, net | 3,428 |
| | 15,161 |
| | 9,053 |
| | 24,556 |
|
Losses (gains) on the sale of company-operated restaurants | 1,509 |
| | (3,733 | ) | | 3,179 |
| | (18,933 | ) |
| 319,445 |
| | 330,324 |
| | 1,050,380 |
| | 1,070,693 |
|
Earnings from operations | 30,884 |
| | 23,728 |
| | 101,506 |
| | 89,704 |
|
Interest expense, net | 3,270 |
| | 4,371 |
| | 12,061 |
| | 14,962 |
|
Earnings from continuing operations and before income taxes | 27,614 |
| | 19,357 |
| | 89,445 |
| | 74,742 |
|
Income taxes | 10,318 |
| | 6,753 |
| | 30,954 |
| | 25,854 |
|
Earnings from continuing operations | 17,296 |
| | 12,604 |
| | 58,491 |
| | 48,888 |
|
Losses from discontinued operations, net of income tax benefit | (22,952 | ) | | (1,012 | ) | | (30,167 | ) | | (3,714 | ) |
Net earnings (losses) | $ | (5,656 | ) | | $ | 11,592 |
| | $ | 28,324 |
| | $ | 45,174 |
|
| | | | | | | |
Net earnings (losses) per share - basic: | | | | | | | |
Earnings from continuing operations | $ | 0.40 |
| | $ | 0.29 |
| | $ | 1.35 |
| | $ | 1.11 |
|
Losses from discontinued operations | (0.52 | ) | | (0.02 | ) | | (0.69 | ) | | (0.08 | ) |
Net earnings (losses) per share (1) | $ | (0.13 | ) | | $ | 0.26 |
| | $ | 0.65 |
| | $ | 1.03 |
|
Net earnings (losses) per share - diluted: | | | | | | | |
Earnings from continuing operations | $ | 0.38 |
| | $ | 0.28 |
| | $ | 1.30 |
| | $ | 1.09 |
|
Losses from discontinued operations | (0.51 | ) | | (0.02 | ) | | (0.67 | ) | | (0.08 | ) |
Net earnings (losses) per share (1) | $ | (0.12 | ) | | $ | 0.26 |
| | $ | 0.63 |
| | $ | 1.01 |
|
| | | | | | | |
Weighted-average shares outstanding: | | | | | | | |
Basic | 43,772 |
| | 44,156 |
| | 43,435 |
| | 43,975 |
|
Diluted | 45,247 |
| | 45,153 |
| | 44,978 |
| | 44,892 |
|
____________________________
| |
(1) | Earnings per share may not add due to rounding. |
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
| | | | | | | |
Net earnings (losses) | $ | (5,656 | ) | | $ | 11,592 |
| | $ | 28,324 |
| | $ | 45,174 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments, net of tax expense of $2, $0, $3 and $0, respectively. | 5 |
| | — |
| | 9 |
| | — |
|
Actuarial losses and prior service cost reclassified to earnings, net of tax benefit of $1,672, $1,188, $5,571 and $3,861, respectively | 2,689 |
| | 1,906 |
| | 8,963 |
| | 6,197 |
|
Actuarial losses arising during the period, net of tax benefit of $0, $16,266, $0, $16,266, respectively. | — |
| | (26,105 | ) | | — |
| | (26,105 | ) |
Cash flow hedges: | | | | | | | |
Change in fair value of derivatives, net of tax (expense)/benefit of ($23), $101, $12 and $338, respectively | 36 |
| | (163 | ) | | (19 | ) | | (545 | ) |
Net loss reclassified to earnings, net of tax benefit of $120, $116, $398 and $384, respectively | 193 |
| | 188 |
| | 639 |
| | 617 |
|
Other comprehensive income (loss) | 2,923 |
| | (24,174 | ) | | 9,592 |
| | (19,836 | ) |
| | | | | | | |
Comprehensive income (loss) | $ | (2,733 | ) | | $ | (12,582 | ) | | $ | 37,916 |
| | $ | 25,338 |
|
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Cash flows from operating activities: | | | |
Net earnings | $ | 28,324 |
| | $ | 45,174 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 74,870 |
| | 74,210 |
|
Deferred finance cost amortization | 1,764 |
| | 2,068 |
|
Deferred income taxes | 2,523 |
| | (2,314 | ) |
Share-based compensation expense | 10,049 |
| | 5,001 |
|
Pension and postretirement expense | 23,959 |
| | 26,853 |
|
Gains on cash surrender value of company-owned life insurance | (5,209 | ) | | (8,781 | ) |
Losses (gains) on the sale of company-operated restaurants | 3,179 |
| | (18,933 | ) |
Losses on the disposition of property and equipment | 2,525 |
| | 3,762 |
|
Impairment charges and other | 28,237 |
| | 2,765 |
|
Loss on early retirement of debt | 939 |
| | — |
|
Changes in assets and liabilities, excluding acquisitions and dispositions: | | | |
Accounts and other receivables | 33,776 |
| | (2,891 | ) |
Inventories | 26,393 |
| | 1,934 |
|
Prepaid expenses and other current assets | (24,091 | ) | | (12,346 | ) |
Accounts payable | (27,857 | ) | | (5,395 | ) |
Accrued liabilities | 7,196 |
| | 13,210 |
|
Pension and postretirement contributions | (13,168 | ) | | (9,998 | ) |
Other | (6,121 | ) | | (2,737 | ) |
Cash flows provided by operating activities | 167,288 |
| | 111,582 |
|
Cash flows from investing activities: | | | |
Purchases of property and equipment | (57,971 | ) | | (56,205 | ) |
Purchases of assets intended for sale and leaseback | (25,198 | ) | | (31,565 | ) |
Proceeds from sale and leaseback of assets | 36,553 |
| | 18,457 |
|
Proceeds from the sale of company-operated restaurants | 8,415 |
| | 29,253 |
|
Collections on notes receivable | 5,837 |
| | 10,198 |
|
Disbursements for loans to franchisees | — |
| | (3,976 | ) |
Acquisitions of franchise-operated restaurants | (11,014 | ) | | (48,262 | ) |
Other | 4,054 |
| | 315 |
|
Cash flows used in investing activities | (39,324 | ) | | (81,785 | ) |
Cash flows from financing activities: | | | |
Borrowings on revolving credit facilities | 554,000 |
| | 444,380 |
|
Repayments of borrowings on revolving credit facilities | (619,000 | ) | | (445,104 | ) |
Proceeds from issuance of debt | 200,000 |
| | — |
|
Principal repayments on debt | (175,783 | ) | | (15,933 | ) |
Debt issuance costs | (4,392 | ) | | (741 | ) |
Proceeds from issuance of common stock | 48,000 |
| | 7,096 |
|
Repurchases of common stock | (92,152 | ) | | (6,901 | ) |
Excess tax benefits from share-based compensation arrangements | 1,261 |
| | 525 |
|
Change in book overdraft | (38,584 | ) | | (13,728 | ) |
Cash flows used in financing activities | (126,650 | ) | | (30,406 | ) |
Net increase (decrease) in cash and cash equivalents | 1,314 |
| | (609 | ) |
Cash and cash equivalents at beginning of period | 8,469 |
| | 11,424 |
|
Cash and cash equivalents at end of period | $ | 9,783 |
| | $ | 10,815 |
|
See accompanying notes to condensed consolidated financial statements.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Nature of operations — Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants and Qdoba Mexican Grill® (“Qdoba”) fast-casual restaurants. The following table summarizes the number of restaurants as of the end of each period:
|
| | | | | |
| July 7, 2013 | | July 8, 2012 |
Jack in the Box: | | | |
Company-operated | 526 |
| | 586 |
|
Franchise | 1,729 |
| | 1,661 |
|
Total system | 2,255 |
| | 2,247 |
|
Qdoba: | | | |
Company-operated | 284 |
| | 304 |
|
Franchise | 308 |
| | 310 |
|
Total system | 592 |
| | 614 |
|
References to the Company throughout these Notes to Condensed Consolidated Financial Statements are made using the first person notations of “we,” “us” and “our.”
Basis of presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (“SEC”). During fiscal 2012, we entered into an agreement to outsource our Jack in the Box distribution business. In the third quarter of fiscal 2013, we closed 62 Qdoba restaurants as part of a comprehensive market performance review of Qdoba. The results of operations for our distribution business and for the 62 closed Qdoba restaurants are reported as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, for additional information. Unless otherwise noted, amounts and disclosures throughout these Notes to the Condensed Consolidated Financial Statements relate to our continuing operations. In our opinion, all adjustments considered necessary for a fair presentation of financial condition and results of operations for these interim periods have been included. Operating results for one interim period are not necessarily indicative of the results for any other interim period or for the full year.
These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our Form 10-K.
Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities (“VIEs”) where we are deemed the primary beneficiary. All significant intercompany accounts and transactions are eliminated. For information related to the VIE included in our condensed consolidated financial statements, refer to Note 13, Variable Interest Entities.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2013 and 2012 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks. All comparisons between 2013 and 2012 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 7, 2013 and July 8, 2012, respectively, unless otherwise indicated.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to make certain assumptions and estimates that affect reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual amounts could differ materially from these estimates.
| |
2. | DISCONTINUED OPERATIONS |
Distribution business — During fiscal 2012, we entered into an agreement with a third party distribution service provider pursuant to a plan approved by our board of directors to sell our Jack in the Box distribution business. During the first quarter of fiscal 2013, we completed the transition of our distribution centers. The distribution business assets sold in the transaction are classified as assets of discontinued operations held for sale in the condensed consolidated balance sheet as of September 30, 2012. The operations and cash flows of the business have been eliminated and in accordance with the provisions of the Accounting Standards Codification (“ASC”) 205, Presentation of Financial Statements, the results are reported as discontinued operations for all periods presented.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of July 7, 2013, there were no assets or liabilities classified as held for sale related to our distribution business. The following is a summary of our distribution business assets held for sale as of September 30, 2012 (in thousands):
|
| | | |
Inventories | $ | 26,844 |
|
Property and equipment, net | 3,747 |
|
Total assets of discontinued operations | $ | 30,591 |
|
The following is a summary of our distribution business operating results, which are included in discontinued operations for each period (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Revenue | $ | — |
| | $ | 138,839 |
| | $ | 37,743 |
| | $ | 473,779 |
|
Operating loss before income tax benefit | $ | (557 | ) | | $ | — |
| | $ | (6,030 | ) | | $ | — |
|
The loss on the sale of the distribution business was not material to our results of operations. The operating loss year-to-date includes $1.9 million for accelerated depreciation of a long-lived asset disposed of upon completion of the transaction, $1.8 million for future lease commitments and $1.2 million primarily related to costs incurred to exit certain vendor contracts. Our liability for lease commitments related to our distribution centers is included in other long-term liabilities and has changed during 2013 as follows (in thousands):
|
| | | | | | | |
| Quarter | | Year-to-Date |
Balance at beginning of period | $ | 2,116 |
| | $ | 697 |
|
Additions | — |
| | 1,846 |
|
Adjustments | 29 |
| | 237 |
|
Cash payments | (349 | ) | | (984 | ) |
Balance at end of quarter | $ | 1,796 |
| | $ | 1,796 |
|
Qdoba restaurant closures — During the third quarter of fiscal 2013, we closed 62 Qdoba restaurants (the “2013 Qdoba Closures”). The decision to close these restaurants was based on a comprehensive analysis that took into consideration levels of return on investment and other key operating performance metrics.
Given the proximity of the closed locations to those remaining in operation, we do not expect the majority of cash flows and sales lost from these closures to be recovered. In addition, there will not be any ongoing involvement or significant direct cash flows from the closed stores. Therefore, in accordance with the provisions of ASC 205, Presentation of Financial Statements, the results of operations for the 2013 Qdoba Closures are reported as discontinued operations for all periods presented.
The following is a summary of the unaudited quarterly results of operations for fiscal years 2013 and 2012 related to the 2013 Qdoba Closures (in thousands, except per share data):
|
| | | | | | | | | | | |
| 16 Weeks Ended | | 12 Weeks Ended |
| January 20, 2013 | | April 14, 2013 | | July 7, 2013 |
Company restaurant sales | $ | 11,188 |
| | $ | 8,400 |
| | $ | 8,448 |
|
Operating loss before income tax benefit | $ | (3,510 | ) | | $ | (2,717 | ) | | $ | (36,660 | ) |
Net losses | $ | (2,165 | ) | | $ | (1,675 | ) | | $ | (22,608 | ) |
Net losses per share: | | | | | |
Basic | $ | (0.05 | ) | | $ | (0.04 | ) | | $ | (0.52 | ) |
Diluted | $ | (0.05 | ) | | $ | (0.04 | ) | | $ | (0.50 | ) |
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| 16 Weeks Ended | | 12 Weeks Ended | | 52 Weeks Ended |
| January 22, 2012 | | April 15, 2012 | | July 8, 2012 | | September 30, 2012 | | September 30, 2012 |
Company restaurant sales | $ | 9,831 |
| | $ | 8,228 |
| | $ | 8,930 |
| | $ | 8,743 |
| | $ | 35,732 |
|
Operating loss before income tax benefit | $ | (2,547 | ) | | $ | (1,838 | ) | | $ | (1,643 | ) | | $ | (2,299 | ) | | $ | (8,327 | ) |
Net losses | $ | (1,569 | ) | | $ | (1,133 | ) | | $ | (1,012 | ) | | $ | (1,418 | ) | | $ | (5,132 | ) |
Net losses per share: | | | | | | | | | |
Basic | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.12 | ) |
Diluted | $ | (0.04 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.11 | ) |
In 2013, the operating loss recognized includes $22.7 million for asset impairments, $9.8 million for future lease commitments, net of reversals for deferred rent and tenant improvement allowances of $4.3 million, $1.6 million of other exits costs (primarily severance and inventory write-offs) and a $2.6 million net loss from operations in the quarter and $8.8 million year-to-date. We do not expect the remaining costs to be incurred related to this transaction to be material. Our liability for lease commitments related to the 2013 Qdoba closures is included in other long-term liabilities and has changed as follows during the quarter and year-to-date periods ended July 7, 2013 (in thousands):
|
| | | | | |
Balance at beginning of period | | | $ | — |
|
Additions | | | 14,072 |
|
Cash payments | | | (928 | ) |
Balance at end of quarter | | | $ | 13,144 |
|
New Credit Facility — On November 5, 2012, the Company refinanced its former credit facility and entered into an amended and restated credit agreement. The new credit facility is comprised of (i) a $400.0 million revolving credit facility and (ii) a $200.0 million term loan facility. The interest rate on the new credit facility is based on the Company’s leverage ratio and can range from London Interbank Offered Rate (“LIBOR”) plus 1.75% to 2.25% with no floor. The initial interest rate was LIBOR plus 2.00%. The revolving credit facility and the term loan facility both have maturity dates of November 5, 2017. As part of the credit agreement, we could also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces our net borrowing capacity under the agreement.
Use of proceeds — The Company borrowed $200.0 million under the new term loan and approximately $220.0 million under the new revolving credit facility. The proceeds from the refinancing transaction were used to repay all borrowings under the former facility and to pay related transaction fees and expenses associated with the refinance of the facility, and will also be available for permitted share repurchases, permitted dividends, permitted acquisitions, ongoing working capital requirements and other general corporate purposes. At July 7, 2013, we had borrowings under the revolving credit facility of $185.0 million, $190.0 million outstanding under the term loan and letters of credit outstanding of $29.1 million.
Collateral — The Company’s obligations under the new credit facility are secured by first priority liens and security interests in the capital stock, partnership, and membership interests owned by the Company and/or its subsidiaries, and any proceeds thereof, subject to certain restrictions. Additionally, there is a negative pledge on all tangible and intangible assets (including all real and personal property), with customary exceptions.
Covenants — We are subject to a number of customary covenants under our new credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases and dividend payments, and requirements to maintain certain financial ratios defined in the credit agreement.
Repayments — The term loan requires amortization in the form of quarterly installments of $5.0 million that began in March 2013. We are required to make certain mandatory prepayments under certain circumstances and we have the option to make certain prepayments without premium or penalty. The new 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.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
4. | SUMMARY OF REFRANCHISINGS, FRANCHISE DEVELOPMENT AND ACQUISITIONS |
Refranchisings and franchise development — The following is a summary of the number of Jack in the Box restaurants sold to franchisees, the number of restaurants developed by franchisees and the related gains (losses) and fees recognized (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Restaurants sold to franchisees | 18 |
| | 18 |
| | 22 |
| | 55 |
|
New restaurants opened by franchisees | 6 |
| | 7 |
| | 35 |
| | 36 |
|
| | | | | | | |
Initial franchise fees | $ | 1,005 |
| | $ | 933 |
| | $ | 2,040 |
| | $ | 3,423 |
|
| | | | | | | |
Proceeds from the sale of company-operated restaurants (1) | $ | 5,549 |
| | $ | 7,289 |
| | $ | 8,415 |
| | $ | 29,253 |
|
Net assets sold (primarily property and equipment) | (3,554 | ) | | (2,586 | ) | | (5,274 | ) | | (8,419 | ) |
Goodwill related to the sale of company-operated restaurants | (129 | ) | | (199 | ) | | (196 | ) | | (851 | ) |
Other (2) | (2,292 | ) | | (771 | ) | | (2,292 | ) | | (1,050 | ) |
Gains (losses) on the sale of company-operated restaurants | (426 | ) | | 3,733 |
| | 653 |
| | 18,933 |
|
| | | | | | | |
Loss on anticipated sale of Jack in the Box company-operated market | — |
| | — |
| | (2,749 | ) | | — |
|
Loss on anticipated sale of Qdoba company-operated market | (1,083 | ) | | — |
| | (1,083 | ) | | — |
|
Total gains (losses) on the sale of company-operated restaurants | $ | (1,509 | ) | | $ | 3,733 |
| | $ | (3,179 | ) | | $ | 18,933 |
|
____________________________
| |
(1) | Amounts in 2013 and 2012 include additional proceeds recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold in a prior year of $0.8 million and $0.2 million, respectively, in the quarter and $1.9 million and $2.3 million, respectively, year-to-date. |
| |
(2) | Amounts in both years primarily represent impairment and lease commitment charges related to restaurants closed in connection with the sale of the related market. |
Franchise acquisitions — During 2013 and 2012, we acquired 12 and 45 Qdoba franchise restaurants, respectively, in select markets where we believe there is continued opportunity for restaurant development. Additionally, in 2013 we exercised our right of first refusal and acquired one Jack in the Box franchise restaurant. We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). The goodwill recorded primarily relates to the sales growth potential of the locations acquired and is expected to be deductible for tax purposes. The following table provides detail of the combined allocations in each year-to-date period (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| July 7, 2013 | | July 8, 2012 |
| Qdoba | | Jack in the Box | | Total | | Qdoba |
Restaurants acquired from franchisees | 12 |
| | 1 |
| | 13 |
| | 45 |
|
| | | | | | | |
Property and equipment | $ | 2,632 |
| | $ | 145 |
| | $ | 2,777 |
| | $ | 12,330 |
|
Reacquired franchise rights | 106 |
| | 34 |
| | 140 |
| | 604 |
|
Liabilities assumed | (281 | ) | | (2 | ) | | (283 | ) | | (121 | ) |
Goodwill | 7,207 |
| | 1,173 |
| | 8,380 |
| | 35,449 |
|
Total consideration | $ | 9,664 |
| | $ | 1,350 |
| | $ | 11,014 |
| | $ | 48,262 |
|
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
5. | FAIR VALUE MEASUREMENTS |
Financial assets and liabilities — The following table presents the financial assets and liabilities measured at fair value on a recurring basis at the end of each period (in thousands):
|
| | | | | | | | | | | | | | | |
| Total | | Quoted Prices in Active Markets for Identical Assets (3) (Level 1) | | Significant Other Observable Inputs (3) (Level 2) | | Significant Unobservable Inputs (Level 3) |
Fair value measurements as of July 7, 2013: | | | | | | | |
Non-qualified deferred compensation plan (1) | $ | (37,997 | ) | | $ | (37,997 | ) | | $ | — |
| | $ | — |
|
Interest rate swaps (Note 6) (2) | (1,427 | ) | | — |
| | (1,427 | ) | | — |
|
Total liabilities at fair value | $ | (39,424 | ) | | $ | (37,997 | ) | | $ | (1,427 | ) | | $ | — |
|
Fair value measurements as of September 30, 2012: | | | | | | | |
Non-qualified deferred compensation plan (1) | $ | (38,537 | ) | | $ | (38,537 | ) | | $ | — |
| | $ | — |
|
Interest rate swaps (Note 6) (2) | (2,433 | ) | | — |
| | (2,433 | ) | | — |
|
Total liabilities at fair value | $ | (40,970 | ) | | $ | (38,537 | ) | | $ | (2,433 | ) | | $ | — |
|
____________________________
| |
(1) | We maintain an unfunded defined contribution plan for key executives and other members of management excluded from participation in our qualified savings plan. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. |
| |
(2) | We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable debt. The fair values of our interest rate swaps are based upon Level 2 inputs which include valuation models as reported by our counterparties. The key inputs for the valuation models are quoted market prices, interest rates and forward yield curves. |
| |
(3) | We did not have any transfers in or out of Level 1 or Level 2. |
The fair values of the Company’s debt instruments are based on the amount of future cash flows associated with each instrument discounted using the Company’s borrowing rate. At July 7, 2013, the carrying values of the credit facility obligations were not materially different from fair value, as the borrowings are prepayable without penalty. The estimated fair values of our capital lease obligations approximated their carrying values as of July 7, 2013.
Non-financial assets and liabilities — The Company’s non-financial instruments, which primarily consist of property and equipment, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on a periodic basis (at least annually for goodwill and semi-annually for property and equipment) or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, non-financial instruments are assessed for impairment. If applicable, the carrying values are written down to fair value.
The following table presents non-financial assets and liabilities measured at fair value on a non-reoccurring basis during fiscal 2013 (in thousands):
|
| | | | | | | | |
| | Fair Value Measurement | | Impairment Charges |
Long-lived assets held and used | | $ | 705 |
| | $ | 3,385 |
|
Long-lived assets held for sale | | $ | 625 |
| | $ | 4,821 |
|
Long-lived assets held and used consist primarily of Jack in the Box restaurants determined to be underperforming or which we intend to close. To determine fair value, we used the income approach, which assumes that the future cash flows reflect current market expectations. The future cash flows are generally based on the assumption that the highest and best use of the asset is to sell the store to a franchisee (market participant). These fair value measurements require significant judgment using Level 3 inputs, such as discounted cash flows, which are not observable from the market, directly or indirectly. Refer to Note 7, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, for additional information regarding impairment charges.
Long-lived assets held for sale were written down to fair value less costs to sell and relate to the anticipated sales of Jack in the Box and Qdoba company-operated restaurants.
During the third quarter, due to the magnitude of the 2013 Qdoba Closures, we evaluated Qdoba’s goodwill and trademark assets for impairment. To evaluate goodwill for impairment, we estimated the fair value of the Qdoba reporting unit and compared it to its carrying value. We engaged an independent valuation firm to assist us in the fair value analysis. To determine fair value, we used a multiple valuation technique approach, the results of which were weighted based on the technique that was assessed to be most representative of fair value. Based upon the independent fair value analysis, the
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
estimated fair value of the Qdoba reporting unit was substantially in excess of its carrying value as of July 7, 2013. To evaluate the Qdoba trademark for impairment, we engaged an independent valuation firm who assisted us in our estimation of the fair value of the trademark. To determine fair value, we used the relief from royalty method and compared the estimated fair value to its carrying value. The estimated fair value of the Qdoba trademark was substantially in excess of its carrying value. Refer to Note 2, Discontinued Operations, for additional information regarding the 2013 Qdoba Closures.
Objectives and strategies — We are exposed to interest rate volatility related to our variable rate debt. To reduce our exposure to rising interest rates, in August 2010, we entered into two interest rate swap agreements that effectively convert the first $100.0 million of our variable rate term loan borrowings to a fixed-rate basis from September 2011 through September 2014. These agreements have been designated as cash flow hedges.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):
|
| | | | | | | | | | | |
| July 7, 2013 | | September 30, 2012 |
| Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments: | | | | | | | |
Interest rate swaps (Note 5) | Accrued liabilities | | $ | (1,427 | ) | | Accrued liabilities | | $ | (2,433 | ) |
Total derivatives | | | $ | (1,427 | ) | | | | $ | (2,433 | ) |
Financial performance — The following is a summary of the accumulated other comprehensive income (“OCI”) gain or loss activity related to our interest rate swap derivative instruments (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Location of Loss in Income | | Quarter | | Year-to-Date |
| | July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Gain (loss) recognized in OCI | N/A | | $ | 59 |
| | $ | (264 | ) | | $ | (31 | ) | | $ | (883 | ) |
Loss reclassified from accumulated OCI into income | Interest expense, net | | $ | (313 | ) | | $ | (304 | ) | | $ | (1,037 | ) | | $ | (1,001 | ) |
Amounts reclassified from accumulated OCI into interest expense represent payments made to the counterparty for the effective portions of the interest rate swaps. During the periods presented, our interest rate swaps had no hedge ineffectiveness.
| |
7. | IMPAIRMENT, DISPOSITION OF PROPERTY AND EQUIPMENT, RESTAURANT CLOSING COSTS AND RESTRUCTURING |
Impairment and other charges, net in the accompanying condensed consolidated statements of operations is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Impairment charges | $ | 501 |
| | $ | 656 |
| | $ | 3,385 |
| | $ | 2,765 |
|
Losses on the disposition of property and equipment, net | 2,055 |
| | 884 |
| | 2,525 |
| | 3,712 |
|
Costs of closed restaurants (primarily lease obligations) and other | 733 |
| | 2,337 |
| | 1,849 |
| | 5,270 |
|
Restructuring costs | 139 |
| | 11,284 |
| | 1,294 |
| | 12,809 |
|
| $ | 3,428 |
| | $ | 15,161 |
| | $ | 9,053 |
| | $ | 24,556 |
|
Impairment — When events and circumstances indicate that our long-lived assets might be impaired and their carrying amount is greater than the undiscounted cash flows we expect to generate from such assets, we recognize an impairment loss as the amount by which the carrying value exceeds the fair value of the assets. Impairment charges in 2013 and in 2012 primarily represent charges to write down the carrying value of underperforming Jack in the Box restaurants and Jack in the Box restaurants we intend to or have closed.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Disposition of property and equipment — We also recognize accelerated depreciation and other costs on the disposition of property and equipment. When we decide to dispose of a long-lived asset, depreciable lives are adjusted based on the estimated disposal date and accelerated depreciation is recorded. Other disposal costs primarily relate to gains or losses recognized upon the sale of closed restaurant properties, and charges from our ongoing re-image and logo program and normal capital maintenance activities. Losses on the disposition of property and equipment, net for the year-to-date period ended July 7, 2013 includes income of $2.4 million from the resolution of two eminent domain matters involving Jack in the Box restaurants.
Restaurant closing costs consist of future lease commitments, net of anticipated sublease rentals and expected ancillary costs, and are included in impairment and other charges, net in the accompanying condensed consolidated statements of operations. Total accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Balance at beginning of period | $ | 18,437 |
| | $ | 20,167 |
| | $ | 20,677 |
| | $ | 21,657 |
|
Additions | 1,285 |
| | 119 |
| | 1,285 |
| | 546 |
|
Adjustments | 367 |
| | 1,682 |
| | 1,105 |
| | 3,167 |
|
Cash payments | (1,480 | ) | | (1,649 | ) | | (4,458 | ) | | (5,051 | ) |
Balance at end of quarter | $ | 18,609 |
| | $ | 20,319 |
| | $ | 18,609 |
| | $ | 20,319 |
|
In fiscal 2013, additions in the quarter and year-to-date periods primarily relate to two Jack in the Box restaurants which were closed in connection with the sale of a market. Refer to Note 4, Summary of Refranchisings, Franchise Development and Acquisitions, for additional information. In fiscal 2012, adjustments primarily relate to revisions to certain sublease and cost assumptions.
Restructuring costs — Since the beginning of 2012, we have been engaged in a comprehensive review of our organization structure, including evaluating opportunities for outsourcing, restructuring of certain functions and workforce reductions. The following is a summary of these costs (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Enhanced pension benefits | $ | — |
| | $ | 6,167 |
| | $ | — |
| | $ | 6,167 |
|
Severance costs | 4 |
| | 3,972 |
| | 674 |
| | 5,497 |
|
Other | 135 |
| | 1,145 |
| | 620 |
| | 1,145 |
|
| $ | 139 |
| | $ | 11,284 |
| | $ | 1,294 |
| | $ | 12,809 |
|
Total accrued severance costs related to our restructuring activities are included in accrued liabilities and changed as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Balance at beginning of period | $ | 39 |
| | $ | 1,525 |
| | $ | 1,758 |
| | $ | — |
|
Additions | 4 |
| | 3,972 |
| | 674 |
| | 5,497 |
|
Cash payments | (15 | ) | | (2,826 | ) | | (2,404 | ) | | (2,826 | ) |
Balance at end of quarter | $ | 28 |
| | $ | 2,671 |
| | $ | 28 |
| | $ | 2,671 |
|
As part of the ongoing review of our organization structure, we expect to incur additional charges related to our restructuring activities; however, we are unable to make a reasonable estimate of the additional costs at this time. Our continuing efforts to lower our cost structure include identifying opportunities to reduce general and administrative costs as well as improve restaurant profitability across both brands.
The income tax provisions reflect year-to-date effective tax rates of 34.6% in both years. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual 2013 rate could differ from our current estimates.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
At July 7, 2013, our gross unrecognized tax benefits associated with uncertain income tax positions were $0.6 million, which if recognized would favorably impact the effective income tax rate. The gross unrecognized tax benefits decreased $0.3 million from the end of fiscal year 2012 based on the settlement of a state income tax audit. It is reasonably possible that changes to the gross unrecognized tax benefits will be required within the next twelve months due to the possible settlement of state tax audits.
The major jurisdictions in which the Company files income tax returns include the United States and states in which we operate that impose an income tax. The federal statutes of limitations have not expired for fiscal years 2010 and forward. The Company also has refund claims related to fiscal years 2006, 2008, and 2009 that allow the statute to remain open for the specific claim. The statutes of limitations for California and Texas, which constitute the Company’s major state tax jurisdictions, have not expired for fiscal years 2001 and 2007, respectively, and forward. Generally, the statutes of limitations for the other state jurisdictions have not expired for fiscal years 2009 and forward.
Defined benefit pension plans — We sponsor a qualified defined benefit pension plan covering substantially all full-time employees hired prior to January 1, 2011. Participants will no longer accrue benefits under this plan effective December 31, 2015. We also sponsor an unfunded supplemental executive retirement plan, which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.
Postretirement healthcare plans — We also sponsor healthcare plans that provide postretirement medical benefits to certain employees who meet minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance.
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Defined benefit pension plans: | | | | | | | |
Service cost | $ | 2,481 |
| | $ | 2,229 |
| | $ | 8,271 |
| | $ | 7,304 |
|
Interest cost | 5,222 |
| | 5,347 |
| | 17,406 |
| | 17,538 |
|
Expected return on plan assets | (5,242 | ) | | (4,743 | ) | | (17,472 | ) | | (15,504 | ) |
Actuarial loss | 4,116 |
| | 2,974 |
| | 13,719 |
| | 9,657 |
|
Amortization of unrecognized prior service cost | 62 |
| | 99 |
| | 207 |
| | 332 |
|
Net periodic benefit cost | $ | 6,639 |
| | $ | 5,906 |
| | $ | 22,131 |
| | $ | 19,327 |
|
Postretirement healthcare plans: | | | | | | | |
Service cost | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | 47 |
|
Interest cost | 366 |
| | 374 |
| | 1,220 |
| | 1,244 |
|
Actuarial loss | 183 |
| | 21 |
| | 608 |
| | 69 |
|
Net periodic benefit cost | $ | 549 |
| | $ | 409 |
| | $ | 1,828 |
| | $ | 1,360 |
|
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of the date of our last actuarial funding valuation, there was no minimum contribution funding requirement. Details regarding fiscal 2013 contributions are as follows (in thousands):
|
| | | | | | | |
| Defined Benefit Pension Plans | | Postretirement Healthcare Plans |
Net year-to-date contributions | $ | 12,850 |
| | $ | 889 |
|
Remaining estimated net contributions during fiscal 2013 | $ | 10,600 |
| | $ | 551 |
|
We will continue to evaluate contributions to our funded defined benefit pension plan based on changes in pension assets as a result of asset performance in the current market and economic environment.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
10. | SHARE-BASED COMPENSATION |
We offer share-based compensation plans to attract, retain and motivate key officers, employees and non-employee directors to work toward the financial success of the Company. In 2013, we granted the following shares related to our share-based compensation awards:
|
| | |
| Year-to-Date |
Stock options | 376,793 |
|
Performance share awards | 89,236 |
|
Nonvested stock units | 121,491 |
|
The components of share-based compensation expense recognized in each period are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Stock options | $ | 1,321 |
| | $ | 788 |
| | $ | 4,480 |
| | $ | 2,763 |
|
Performance share awards | 421 |
| | 222 |
| | 2,085 |
| | 724 |
|
Nonvested stock awards | 82 |
| | 134 |
| | 301 |
| | 449 |
|
Nonvested stock units | 626 |
| | 295 |
| | 2,963 |
| | 910 |
|
Deferred compensation for non-management directors | — |
| | — |
| | 220 |
| | 155 |
|
Total share-based compensation expense | $ | 2,450 |
| | $ | 1,439 |
| | $ | 10,049 |
| | $ | 5,001 |
|
11. STOCKHOLDERS’ EQUITY
Repurchases of common stock — In November 2011, the Board of Directors approved a program, expiring November 2013, to repurchase $100.0 million in shares of our common stock. In November 2012, the Board of Directors approved a new program to repurchase up to an additional $100.0 million in shares of our common stock through November 2014. During 2013, we repurchased approximately 2.8 million shares at an aggregate cost of $92.2 million. As of July 7, 2013, there were no amounts remaining under the November 2011 authorization and $84.7 million remaining under the November 2012 authorization.
Accumulated other comprehensive loss — The components of accumulated other comprehensive loss, net of taxes, were as follows at the end of each period (in thousands):
|
| | | | | | | |
| July 7, 2013 | | September 30, 2012 |
Unrecognized periodic benefit costs, net of tax benefits of $78,034 and $83,605, respectively | $ | (125,550 | ) | | $ | (134,513 | ) |
Net unrealized losses related to cash flow hedges, net of tax benefits of $547 and $933, respectively | (880 | ) | | (1,500 | ) |
Foreign currency translation adjustment, net of tax expense of $3 and $0, respectively | 9 |
| | — |
|
Accumulated other comprehensive loss | $ | (126,421 | ) | | $ | (136,013 | ) |
| |
12. | AVERAGE SHARES OUTSTANDING |
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, non-management director stock equivalents and shares issuable under our employee stock purchase plan. Performance share awards are included in the weighted-average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
|
| | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Weighted-average shares outstanding – basic | 43,772 |
| | 44,156 |
| | 43,435 |
| | 43,975 |
|
Effect of potentially dilutive securities: | | | | | | | |
Stock options | 895 |
| | 505 |
| | 957 |
| | 431 |
|
Nonvested stock awards and units | 375 |
| | 264 |
| | 366 |
| | 267 |
|
Performance share awards | 205 |
| | 228 |
| | 220 |
| | 219 |
|
Weighted-average shares outstanding – diluted | 45,247 |
| | 45,153 |
| | 44,978 |
| | 44,892 |
|
Excluded from diluted weighted-average shares outstanding: | | | | | | | |
Antidilutive | — |
| | 2,583 |
| | 172 |
| | 3,006 |
|
Performance conditions not satisfied at the end of the period | 220 |
| | 343 |
| | 220 |
| | 343 |
|
| |
13. | VARIABLE INTEREST ENTITIES |
In January 2011, we formed Jack in the Box Franchise Finance, LLC (“FFE”) for the purpose of operating a franchisee lending program to assist Jack in the Box franchisees in re-imaging their restaurants. We are the sole equity investor in FFE. The lending program was comprised of a $20.0 million commitment from the Company in the form of a capital note and an $80.0 million Senior Secured Revolving Securitization Facility entered into with a third party. The lending period and the revolving period expired in June 2012 and the third party facility repayments were completed in August 2012.
We have determined that FFE is a VIE. We considered a variety of factors in identifying the primary beneficiary of FFE including, but not limited to, who holds the power to direct matters that most significantly impact FFE’s economic performance (such as determining the underwriting standards and credit management policies), as well as what party has the obligation to absorb the losses of FFE. Based on these considerations, we have determined that the Company is the primary beneficiary and have reflected the entity in the accompanying condensed consolidated financial statements.
FFE’s assets consolidated by the Company represent assets that can be used only to settle obligations of the consolidated VIE. Likewise, FFE’s liabilities consolidated by the Company do not represent additional claims on the Company’s general assets; rather they represent claims against the specific assets of FFE. The impacts of FFE’s results were not material to the Company’s condensed consolidated statements of operations or cash flows. The FFE’s balance sheet consisted of the following at the end of each period (in thousands):
|
| | | | | | | |
| July 7, 2013 | | September 30, 2012 |
Cash | $ | 246 |
| | $ | 444 |
|
Other current assets (1) | 2,329 |
| | 2,536 |
|
Other assets, net (1) | 9,012 |
| | 11,051 |
|
Total assets | $ | 11,587 |
| | $ | 14,031 |
|
| | | |
Current liabilities | $ | 129 |
| | $ | 14 |
|
Other long-term liabilities (2) | 11,639 |
| | 14,428 |
|
Retained earnings | (181 | ) | | (411 | ) |
Total liabilities and stockholders’ equity | $ | 11,587 |
| | $ | 14,031 |
|
____________________________
| |
(1) | Consists primarily of amounts due from franchisees. |
| |
(2) | Consists primarily of the capital note contributions from Jack in the Box which are eliminated in consolidation. |
The Company’s maximum exposure to loss is equal to its outstanding contributions as of July 7, 2013. This amount represents estimated losses that would be incurred should all franchisees default on their loans without any consideration of recovery. To offset the credit risk associated with the Company’s variable interest in FFE, the Company holds a security interest in the assets of FFE subordinate and junior to all other obligations of FFE.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14. CONTINGENCIES AND LEGAL MATTERS
The Company assesses contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in its financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the 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. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates.
Gessele v. Jack in the Box Inc. — In August 2010, five former employees instituted litigation in federal court in Oregon alleging claims under the federal Fair Labor Standards Act (“FLSA”) and Oregon wage and hour laws. The plaintiffs allege that the Company failed to pay non-exempt employees for certain meal breaks and improperly recorded payroll deductions for shoe purchases and for workers’ compensation expenses. In April 2013, the district court: (i) granted certification of the Oregon state law claims with respect to payroll deductions for shoe purchases and workers’ compensation expenses, (ii) granted conditional certification for these same claims under the FLSA, and (iii) denied certification for meal break claims under both federal and Oregon law. We intend to vigorously defend against this lawsuit. We have made an accrual 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. Due to the procedural status of the other claims in this case, we have not established a loss contingency accrual for these claims as the liability with respect to these claims is not probable and we are currently unable to estimate a range of loss. Nonetheless, an unfavorable resolution of this matter 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, the Company is subject to normal and routine litigation brought by former, current or prospective employees, customers, franchisees, vendors, landlords, shareholders or others. We intend to defend ourselves in any such matters. Although we currently believe that the ultimate outcome of these matters will not have a material adverse effect on our business, results of operations, liquidity or financial position of the Company, it is possible that our business, results of operations, liquidity, or financial position could be materially affected in any particular future reporting period by the unfavorable resolution of one or more of these matters or contingencies.
Lease Guarantees — In connection with the sale of the distribution business, we have assigned the leases at two of our distribution centers to third parties. Under these agreements, which expire in 2015 and 2017, the Company remains secondarily liable for the lease payments for which we were responsible under the original lease. As of July 7, 2013, the amount remaining under these lease guarantees totaled $3.1 million. We have not recorded a liability for the guarantees as the likelihood of the third party defaulting on the assignment agreements was deemed to be less than probable.
We are principally engaged in developing, operating and franchising our Jack in the Box and Qdoba quick-service restaurant concepts, both of which we consider reportable operating segments. This segment reporting structure reflects the Company’s current management structure, internal reporting method and financial information used in deciding how to allocate Company resources. Based upon certain quantitative thresholds, both operating segments are considered reportable segments.
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We measure and evaluate our segments based on segment earnings from operations. Summarized financial information concerning our reportable segments is shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Revenues by segment: | | | | | | | |
Jack in the Box restaurant operations segment | $ | 272,755 |
| | $ | 288,178 |
| | $ | 918,246 |
| | $ | 970,254 |
|
Qdoba restaurant operations segment | 77,574 |
| | 65,874 |
| | 233,640 |
| | 190,143 |
|
Consolidated revenues | $ | 350,329 |
| | $ | 354,052 |
| | $ | 1,151,886 |
| | $ | 1,160,397 |
|
Earnings from operations by segment: | | | | | | | |
Jack in the Box restaurant operations segment | $ | 23,485 |
| | $ | 15,439 |
| | $ | 83,002 |
| | $ | 71,085 |
|
Qdoba restaurant operations segment | 7,410 |
| | 8,347 |
| | 18,602 |
| | 18,776 |
|
FFE operations | (11 | ) | | (58 | ) | | (98 | ) | | (157 | ) |
Consolidated earnings from operations | $ | 30,884 |
| | $ | 23,728 |
| | $ | 101,506 |
| | $ | 89,704 |
|
Total depreciation expense by segment: | | | | | | | |
Jack in the Box restaurant operations segment | $ | 17,350 |
| | $ | 17,873 |
| | $ | 58,783 |
| | $ | 60,199 |
|
Qdoba restaurant operations segment | 3,741 |
| | 3,190 |
| | 12,054 |
| | 9,933 |
|
Consolidated depreciation expense | $ | 21,091 |
| | $ | 21,063 |
| | $ | 70,837 |
| | $ | 70,132 |
|
Interest income and expense, income taxes and total assets are not reported for our segments, in accordance with our method of internal reporting.
The following table provides detail of the change in the balance of goodwill for each of our reportable segments (in thousands):
|
| | | | | | | | | | | |
| Qdoba | | Jack in the Box | | Total |
Balance at September 30, 2012 | $ | 92,775 |
| | $ | 47,847 |
| | $ | 140,622 |
|
Additions | 7,207 |
| | 1,173 |
| | 8,380 |
|
Disposals | (174 | ) | | (196 | ) | | (370 | ) |
Balance at July 7, 2013 | $ | 99,808 |
| | $ | 48,824 |
| | $ | 148,632 |
|
Refer to Note 4, Summary of Refranchisings, Franchise Development and Acquisitions, for information regarding the changes in goodwill during 2013.
| |
16. | SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands) |
|
| | | | | | | |
| July 7, 2013 | | July 8, 2012 |
Cash paid during the year for: | | | |
Interest, net of amounts capitalized | $ | 11,392 |
| | $ | 16,812 |
|
Income tax payments | $ | 36,692 |
| | $ | 31,852 |
|
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
17. | SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands) |
|
| | | | | | | |
| July 7, 2013 | | September 30, 2012 |
Other assets, net: | | | |
Company-owned life insurance policies | $ | 90,915 |
| | $ | 86,276 |
|
Deferred tax assets | 107,056 |
| | 115,537 |
|
Other | 75,531 |
| | 69,317 |
|
| $ | 273,502 |
| | $ | 271,130 |
|
Accrued liabilities: | | | |
Payroll and related taxes | $ | 46,173 |
| | $ | 58,503 |
|
Sales and property taxes | 10,551 |
| | 13,055 |
|
Advertising | 19,407 |
| | 21,400 |
|
Insurance | 34,162 |
| | 33,391 |
|
Lease commitments related to closed locations | 13,561 |
| | 5,387 |
|
Deferred rent income | 12,661 |
| | 132 |
|
Deferred beverage allowance | 10,244 |
| | 4,583 |
|
Other | 23,033 |
| | 28,186 |
|
| $ | 169,792 |
| | $ | 164,637 |
|
Other long-term liabilities: | | | |
Pension plans | $ | 209,210 |
| | $ | 213,854 |
|
Straight-line rent accrual | 51,568 |
| | 54,288 |
|
Other | 105,578 |
| | 103,060 |
|
| $ | 366,356 |
| | $ | 371,202 |
|
Sale of Company-Operated Restaurants — Subsequent to the end of the third quarter, we completed the sale of 27 Jack in the Box company-operated restaurants to two franchisees for $13.7 million.
Authorization for Repurchase of Common Stock — In August 2013, the Board of Directors approved a new program to repurchase up to an additional $100.0 million in shares of our common stock through November 2015.
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL
All comparisons between 2013 and 2012 refer to the 12-weeks (“quarter”) and 40-weeks (“year-to-date”) ended July 7, 2013 and July 8, 2012, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during the quarterly and year-to-date periods ended July 7, 2013 and July 8, 2012, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Condensed Consolidated Financial Statements and related Notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
Our MD&A consists of the following sections:
| |
• | Overview — a general description of our business and fiscal 2013 highlights. |
| |
• | Financial reporting — a discussion of changes in presentation. |
| |
• | Results of operations — an analysis of our consolidated statements of operations for the periods presented in our condensed consolidated financial statements. |
| |
• | Liquidity and capital resources — an analysis of our cash flows including capital expenditures, share repurchase activity, known trends that may impact liquidity and the impact of inflation. |
| |
• | Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates. |
| |
• | New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any. |
| |
• | Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management. |
OVERVIEW
As of July 7, 2013, we operated and franchised 2,255 Jack in the Box quick-service restaurants, primarily in the western and southern United States, and 592 Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants throughout the United States and including two in Canada.
Our primary source of revenue is from retail sales at Jack in the Box and Qdoba company-operated restaurants. We also derive revenue from Jack in the Box and Qdoba franchise restaurants, including royalties (based upon a percent of sales), franchise fees and rents from Jack in the Box franchisees. Historically, we also generated revenue from distribution sales of food and packaging commodities to franchisees. We completed the outsourcing of this function in the first quarter of fiscal 2013, and franchisees who previously utilized our distribution services now purchase product directly from our distribution service providers or other approved suppliers. In addition, we recognize gains from the sale of company-operated restaurants to franchisees. These gains are presented as a reduction of operating costs and expenses, net in the accompanying condensed consolidated statements of operations.
The following summarizes the most significant events occurring in fiscal 2013 and certain trends compared to a year ago:
| |
• | Restaurant Sales — Sales at restaurants open more than one year (“same-store sales”) changed as follows: |
|
| | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Jack in the Box: | | | | | | | |
Company | 1.2% | | 3.4% | | 1.4% | | 4.9% |
Franchise | (0.3)% | | 2.6% | | 0.6% | | 3.0% |
System | 0.1% | | 2.8% | | 0.8% | | 3.5% |
Qdoba: | | | | | | | |
Company (1) | 0.5% | | 3.8% | | 0.3% | | 3.9% |
Franchise | 2.1% | | 0.9% | | 0.6% | | 2.5% |
System (1) | 1.3% | | 2.2% | | 0.4% | | 3.1% |
____________________________ | |
(1) | Same-store sales for all periods presented have been restated to exclude sales for restaurants reported as discontinued operations. |
| |
• | Commodity Costs — Commodity costs increased approximately 3.0% and 1.9% at our Jack in the Box and Qdoba restaurants, respectively, in the quarter and 1.6% and 1.5%, respectively, year-to-date compared to a year ago. We expect our overall commodity costs to increase approximately 2.0% in fiscal 2013. |
| |
• | New Unit Development — Year-to-date, we opened 15 Jack in the Box locations and 43 Qdoba locations system-wide. |
| |
• | Franchising Program — Qdoba and Jack in the Box franchisees opened a total of 35 restaurants year-to-date, including two Qdoba franchise locations in Canada. Our Jack in the Box system was approximately 77% franchised at the end of the third quarter and we plan to ultimately increase franchise ownership to be between 80% to 85%. |
| |
• | Credit Facility — In November 2012, we entered into a new credit agreement consisting of a $400.0 million revolving credit facility and a $200.0 million term loan, both with a five-year maturity. |
| |
• | Discontinued Operations — During the first quarter of 2013, we completed the outsourcing of our Jack in the Box distribution business. Additionally, during the third quarter of fiscal 2013, we closed 62 Qdoba company-operated restaurants (the “2013 Qdoba Closures”). These closures are expected to have a positive impact on future earnings and cash flows. As a result of these two transactions, we recognized after-tax losses in the third quarter totaling $23.0 million, or $0.51 per diluted share, and $30.2 million, or $0.67 per diluted share, year-to-date. |
| |
• | Share Repurchases — Pursuant to a share repurchase program authorized by our Board of Directors, we repurchased approximately 2.8 million shares of our common stock at an average price of $33.24 per share year-to-date, including the cost of brokerage fees. |
FINANCIAL REPORTING
The condensed consolidated statements of operations for all periods presented have been prepared reflecting the results of operations for the 2013 Qdoba Closures and charges incurred as a result of closing these restaurants as discontinued operations. Refer to Note 2, Discontinued Operations, in the notes to our condensed consolidated financial statements for more information.
RESULTS OF OPERATIONS
The following table presents certain income and expense items included in our condensed consolidated statements of operations as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
|
| | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Revenues: | | | | | | | |
Company restaurant sales | 77.3 | % | | 78.1 | % | | 77.1 | % | | 78.7 | % |
Franchise revenues | 22.7 | % | | 21.9 | % | | 22.9 | % | | 21.3 | % |
Total revenues | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Operating costs and expenses, net: | | | | | | | |
Company restaurant costs: | | | | | | | |
Food and packaging (1) | 32.8 | % | | 32.4 | % | | 32.6 | % | | 33.0 | % |
Payroll and employee benefits (1) | 27.4 | % | | 28.2 | % | | 28.1 | % | | 28.8 | % |
Occupancy and other (1) | 21.9 | % | | 22.0 | % | | 22.0 | % | | 22.3 | % |
Total company restaurant costs (1) | 82.1 | % | | 82.5 | % | | 82.7 | % | | 84.0 | % |
Franchise costs (1) | 50.5 | % | | 49.7 | % | | 50.2 | % | | 51.2 | % |
Selling, general and administrative expenses | 14.9 | % | | 14.7 | % | | 14.9 | % | | 14.8 | % |
Impairment and other charges, net | 1.0 | % | | 4.3 | % | | 0.8 | % | | 2.1 | % |
Losses (gains) on the sale of company-operated restaurants | 0.4 | % | | (1.1 | )% | | 0.3 | % | | (1.6 | )% |
Earnings from operations | 8.8 | % | | 6.7 | % | | 8.8 | % | | 7.7 | % |
Income tax rate (2) | 37.4 | % | | 34.9 | % | | 34.6 | % | | 34.6 | % |
____________________________
| |
(1) | As a percentage of the related sales and/or revenues. |
| |
(2) | As a percentage of earnings from continuing operations and before income taxes. |
The following table presents Jack in the Box and Qdoba company restaurant sales, costs and costs as a percentage of the related sales. Percentages may not add due to rounding.
SUPPLEMENTAL COMPANY-OPERATED RESTAURANTS STATEMENTS OF OPERATIONS DATA
(dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Jack in the Box: | | | | | | | | | | | | | | | |
Company restaurant sales | $ | 197,239 |
| | | | $ | 214,679 |
| | | | $ | 667,854 |
| | | | $ | 736,860 |
| | |
Company restaurant costs: | | | | | | | | | | | | | | | |
Food and packaging | 66,552 |
| | 33.7 | % | | 71,582 |
| | 33.3 | % | | 222,545 |
| | 33.3 | % | | 249,681 |
| | 33.9 | % |
Payroll and employee benefits | 55,019 |
| | 27.9 | % | | 62,772 |
| | 29.2 | % | | 190,129 |
| | 28.5 | % | | 216,470 |
| | 29.4 | % |
Occupancy and other | 42,258 |
| | 21.4 | % | | 46,442 |
| | 21.6 | % | | 141,267 |
| | 21.2 | % | | 160,632 |
| | 21.8 | % |
Total company restaurant costs | $ | 163,829 |
| | 83.1 | % | | $ | 180,796 |
| | 84.2 | % | | $ | 553,941 |
| | 82.9 | % | | $ | 626,783 |
| | 85.1 | % |
Qdoba: | | | | | | | | | | | | | | | |
Company restaurant sales | $ | 73,624 |
| | | | $ | 61,768 |
| | | | $ | 220,711 |
| | | | $ | 176,432 |
| | |
Company restaurant costs: | | | | | | | | | | | | | | | |
Food and packaging | 22,160 |
| | 30.1 | % | | 17,874 |
| | 28.9 | % | | 66,714 |
| | 30.2 | % | | 51,386 |
| | 29.1 | % |
Payroll and employee benefits | 19,223 |
| | 26.1 | % | | 15,283 |
| | 24.7 | % | | 59,877 |
| | 27.1 | % | | 46,200 |
| | 26.2 | % |
Occupancy and other | 17,102 |
| | 23.2 | % | | 14,249 |
| | 23.1 | % | | 54,105 |
| | 24.5 | % | | 43,047 |
| | 24.4 | % |
Total company restaurant costs | $ | 58,485 |
| | 79.4 | % | | $ | 47,406 |
| | 76.7 | % | | $ | 180,696 |
| | 81.9 | % | | $ | 140,633 |
| | 79.7 | % |
The following table summarizes the year-to-date changes in the number of Jack in the Box (“JIB”) and Qdoba company and franchise restaurants:
|
| | | | | | | | | | | | | | | | | |
| July 7, 2013 | | July 8, 2012 |
| Company | | Franchise | | Total | | Company | | Franchise | | Total |
Jack in the Box: | | | | | | | | | | | |
Beginning of year | 547 |
| | 1,703 |
| | 2,250 |
| | 629 |
| | 1,592 |
| | 2,221 |
|
New | 4 |
| | 11 |
| | 15 |
| | 14 |
| | 16 |
| | 30 |
|
Refranchised | (22 | ) | | 22 |
| | — |
| | (55 | ) | | 55 |
| | — |
|
Acquired from franchisees | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Closed | (4 | ) | | (6 | ) | | (10 | ) | | (2 | ) | | (2 | ) | | (4 | ) |
End of period | 526 |
| | 1,729 |
| | 2,255 |
| | 586 |
| | 1,661 |
| | 2,247 |
|
% of JIB system | 23 | % | | 77 | % | | 100 | % | | 26 | % | | 74 | % | | 100 | % |
% of consolidated system | 65 | % | | 85 | % | | 79 | % | | 66 | % | | 84 | % | | 79 | % |
Qdoba: | | | | | | | | | | | |
Beginning of year | 316 |
| | 311 |
| | 627 |
| | 245 |
| | 338 |
| | 583 |
|
New | 19 |
| | 24 |
| | 43 |
| | 14 |
| | 20 |
| | 34 |
|
Acquired from franchisees | 12 |
| | (12 | ) | | — |
| | 45 |
| | (45 | ) | | — |
|
Closed | (63 | ) | | (15 | ) | | (78 | ) | | — |
| | (3 | ) | | (3 | ) |
End of period | 284 |
| | 308 |
| | 592 |
| | 304 |
| | 310 |
| | 614 |
|
% of Qdoba system | 48 | % | | 52 | % | | 100 | % | | 50 | % | | 50 | % | | 100 | % |
% of consolidated system | 35 | % | | 15 | % | | 21 | % | | 34 | % | | 16 | % | | 21 | % |
Consolidated: | | | | | | | | | | | |
Total system | 810 |
| | 2,037 |
| | 2,847 |
| | 890 |
| | 1,971 |
| | 2,861 |
|
% of consolidated system | 28 | % | | 72 | % | | 100 | % | | 31 | % | | 69 | % | | 100 | % |
Revenues
As we execute our refranchising strategy for Jack in the Box, which includes the sale of restaurants to franchisees, we expect the number of company-operated restaurants and the related sales to decrease while revenues from franchise restaurants increase. As such, company restaurant sales decreased $5.6 million, or 2.0%, in the quarter and $24.7 million, or 2.7%, year-to-date compared with the prior year. The decreases in restaurant sales are due primarily to decreases in the average number of Jack in the Box company-operated restaurants, partially offset by increases in the number of Qdoba company-operated restaurants and increases in average unit sales volumes (“AUVs”) at our Jack in the Box and Qdoba restaurants.
The following table presents the approximate impact of these increases (decreases) on company restaurant sales (in thousands):
|
| | | | | | | |
| Quarter | | Year-to-Date |
Decrease in the average number of Jack in the Box restaurants | $ | (23,200 | ) | | $ | (93,400 | ) |
Jack in the Box AUV increase | 5,700 |
| | 24,400 |
|
Increase in the average number of Qdoba restaurants | 11,800 |
| | 39,800 |
|
Qdoba AUV increase | 100 |
| | 4,500 |
|
Total decrease in company restaurant sales | $ | (5,600 | ) | | $ | (24,700 | ) |
Same-store sales at Jack in the Box company-operated restaurants increased 1.2% in the quarter and 1.4% year-to-date primarily driven by price increases. Same-store sales at Qdoba company-operated restaurants increased 0.5% in the quarter and 0.3% year-to-date primarily driven by a combination of price increases and higher catering sales partially offset by transaction declines and the impact of greater promotional activity year-to-date. The following table summarizes the change in company-operated same-store sales:
|
| | | |
| Quarter | | Year-to-Date |
Jack in the Box: | | | |
Transactions | (0.1)% | | (0.3)% |
Average check (1) | 1.3% | | 1.8% |
Change in same-store sales | 1.2% | | 1.4% |
Qdoba: | | | |
Change in same-store sales (2) | 0.5% | | 0.3% |
____________________________
| |
(1) | Includes price increases of approximately 2.2% and 2.5%, in the quarter and year-to-date, respectively. |
| |
(2) | Includes price increases of approximately 0.3% and 1.3%, in the quarter and year-to-date, respectively. |
Franchise revenues increased $1.9 million in the quarter and $16.2 million year-to-date primarily reflecting an increase in the average number of Jack in the Box franchise restaurants, which contributed additional royalties and rents of approximately $3.1 million and $13.7 million, respectively. In the quarter, this increase was offset by an increase in re-image contributions to franchisees, which are recorded as a reduction of franchise revenues, and lower AUVs at franchised Jack in the Box restaurants. Year-to-date, a reduction in re-image contributions to franchisees also contributed to the increase in franchise revenues, partially offset by a decrease in revenues from initial franchise fees. The following table reflects the detail of our franchise revenues in each period and other information we believe is useful in analyzing the change in franchise revenues (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Royalties | $ | 30,785 |
| | $ | 29,988 |
| | $ | 101,578 |
| | $ | 97,499 |
|
Rents | 47,828 |
| | 45,982 |
| | 158,879 |
| | 150,076 |
|
Re-image contributions to franchisees | (902 | ) | | (189 | ) | | (2,030 | ) | | (6,723 | ) |
Franchise fees and other | 1,755 |
| | 1,824 |
| | 4,894 |
| | 6,253 |
|
Franchise revenues | $ | 79,466 |
| | $ | 77,605 |
| | $ | 263,321 |
| | $ | 247,105 |
|
% increase | 2.4 | % | |
|
| | 6.6 | % | |
|
|
Average number of franchise restaurants | 2,031 |
| | 1,968 |
| | 2,020 |
| | 1,943 |
|
% increase | 3.2 | % | | | | 4.0 | % | | |
Changes in franchise-operated same-store sales: | | | | | | | |
Jack in the Box | (0.3 | )% | | 2.6 | % | | 0.6 | % | | 3.0 | % |
Qdoba | 2.1 | % | | 0.9 | % | | 0.6 | % | | 2.5 | % |
Royalties as a percentage of estimated franchise restaurant sales: | | | | | | | |
Jack in the Box | 5.2 | % | | 5.3 | % | | 5.2 | % | | 5.3 | % |
Qdoba | 5.0 | % | | 5.0 | % | | 5.0 | % | | 5.0 | % |
Operating Costs and Expenses
Food and packaging costs were 32.8% of company restaurant sales in the quarter and 32.6% year-to-date compared with 32.4% and 33.0%, respectively, a year ago. Higher commodity costs in both periods and greater promotional activity at our Qdoba restaurants year-to-date were partially offset in the quarter and more than offset year-to-date by the benefit of selling price increases, favorable product mix at our Jack in the Box restaurants, and a greater proportion of Qdoba company restaurants which generally have lower food and packaging costs than our Jack in the Box restaurants.
Commodity costs increased as follows compared with the prior year:
|
| | | |
| Quarter | | Year-to-Date |
Jack in the Box | 3.0% | | 1.6% |
Qdoba | 1.9% | | 1.5% |
Costs were higher for most commodities other than bakery and beans in both periods and dairy year-to-date. We expect overall commodity costs for fiscal 2013 to increase approximately 2.0%. Beef represents the largest portion, or approximately 20%, of the Company’s overall commodity spend. We typically do not enter into fixed price contracts for our beef needs. For the full year, we currently expect beef costs to increase approximately 2.0%, and most other major commodities to be higher in 2013 compared with last year.
Payroll and employee benefit costs decreased to 27.4% of company restaurant sales in the quarter and 28.1% year-to-date from 28.2% and 28.8%, respectively, in 2012, reflecting leverage from Jack in the Box same-store sales increases, lower levels of incentive compensation at our Jack in the Box locations, the modest benefits of refranchising Jack in the Box restaurants and the favorable impact of acquisitions of Qdoba franchised restaurants, partially offset by higher staffing levels at our Qdoba restaurants.
Occupancy and other costs were 21.9% of company restaurant sales in the quarter and 22.0% year-to-date, compared with 22.0% and 22.3%, respectively, last year. The lower percentage in 2013 is due primarily to leverage from Jack in the Box same-store sales increases and the favorable impact of acquisitions of Qdoba franchised restaurants, partially offset by a greater proportion of Qdoba company restaurants which generally have higher occupancy and other costs than our Jack in the Box restaurants.
Franchise costs, principally rents and depreciation on properties leased to Jack in the Box franchisees, increased $1.5 million in the quarter and $5.8 million year-to-date, due primarily to an increase in the number of franchised restaurants, partially offset by cost savings associated with our restructuring initiatives. As a percentage of the related revenues, franchise costs in the quarter increased to 50.5% in 2013 from 49.7% in 2012 and decreased to 50.2% from 51.2%, respectively, year-to-date. The franchise cost percentages are impacted by changes in franchise fees, re-image contributions to franchisees, which are recorded as a reduction of franchise revenues, and same-store sales. The higher percentage in the quarter is primarily attributable to an increase in re-image contributions while the lower percentage year-to-date primarily relates to a reduction in re-image contributions to franchisees which more than offset the impact of lower franchise fees.
The following table presents the change in selling, general and administrative (“SG&A”) expenses compared with the prior year (in thousands):
|
| | | | | | | |
| Increase / (Decrease) |
| Quarter | | Year-to-Date |
Advertising | $ | 191 |
| | $ | (79 | ) |
Refranchising strategy | (332 | ) | | (1,385 | ) |
Incentive compensation (including share-based compensation) | (643 | ) | | 2,617 |
|
Cash surrender value of COLI policies, net | 107 |
| | 1,693 |
|
Pension and postretirement benefits | 873 |
| | 3,272 |
|
Pre-opening costs | (586 | ) | | (2,091 | ) |
Other, including savings from restructuring initiatives | 378 |
| | (3,976 | ) |
| $ | (12 | ) | | $ | 51 |
|
Our refranchising strategy has resulted in a decrease in the number of Jack in the Box company-operated restaurants and the related overhead expenses to manage and support those restaurants, including advertising costs, which are primarily contributions to our marketing fund determined as a percentage of restaurant sales. As such, advertising and region administration costs decreased at Jack in the Box but were higher at Qdoba.
In 2013 incentive compensation declined due to a decrease in Qdoba’s results compared with performance goals and was partially offset in the quarter and more than offset year-to-date by increases in share-based compensation expense due to changes in the attribution period over which certain share-based compensation awards are recognized and a change in the timing of share-based compensation grants to non-management directors from the fourth quarter last year to the second quarter of 2013. The cash surrender value of our company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $0.2 million in the quarter compared with $0.1 million last year and positively impacted SG&A by $2.5 million year-to-date compared with $4.2 million a year ago. The increase in pension and postretirement benefits expense principally relates to a decrease in the discount rate as compared with the prior year. Pre-opening costs decreased primarily due to higher expenses incurred in the prior year related to restaurant openings in new Jack in the Box markets.
Impairment and other charges, net is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Impairment charges | $ | 501 |
| | $ | 656 |
| | $ | 3,385 |
| | $ | 2,765 |
|
Losses on the disposition of property and equipment, net | 2,055 |
| | 884 |
| | 2,525 |
| | 3,712 |
|
Costs of closed restaurants (primarily lease obligations) and other | 733 |
| | 2,337 |
| | 1,849 |
| | 5,270 |
|
Restructuring costs | 139 |
| | 11,284 |
| | 1,294 |
| | 12,809 |
|
| $ | 3,428 |
| | $ | 15,161 |
| | $ | 9,053 |
| | $ | 24,556 |
|
Impairment and other charges, net decreased $11.7 million in the quarter and $15.5 million year-to-date compared to a year ago reflecting decreases in restructuring costs incurred in connection with the comprehensive review of our organizational structure and declines in lease obligation costs associated with closed restaurants. Year-to-date, income of $2.4 million recognized on the disposition of property and equipment in 2013 from the resolution of two eminent domain matters involving Jack in the Box restaurants, partially offset by higher impairment charges related to Jack in the Box restaurants we intend to close or have closed, also contributed to the decrease. Refer to Note 7, Impairment, Disposition of Property and Equipment, Restaurant Closing Costs and Restructuring, of the notes to the condensed consolidated financial statements for additional information regarding costs associated with closed restaurants.
Gains (losses) on the sale of company-operated restaurants to franchisees, net are detailed in the following table (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Number of restaurants sold to franchisees | 18 |
| | 18 |
| | 22 |
| | 55 |
|
| | | | | | | |
Gains (losses) on the sale of company-operated restaurants | $ | (426 | ) | | $ | 3,733 |
| | $ | 653 |
| | $ | 18,933 |
|
Loss on expected sale of company-operated restaurants | (1,083 | ) | | — |
| | (3,832 | ) | | — |
|
Gains (losses) on the sale of company-operated restaurants, net | $ | (1,509 | ) | | $ | 3,733 |
| | $ | (3,179 | ) | | $ | 18,933 |
|
Gains are impacted by the number of restaurants sold and changes in average gains recognized, which relate to the specific sales and cash flows of those restaurants. In 2013 and 2012, gains (losses) on the sale of company-operated restaurants include additional gains recognized upon the extension of the underlying franchise and lease agreements related to restaurants sold in a prior year of $0.8 million and $0.2 million, respectively, in the quarter and $1.9 million and $2.3 million, respectively, year-to-date. In 2013, gains (losses) on the sale of company-operated restaurants, net also includes a loss of $2.7 million recognized in the second quarter relating to the anticipated sale of a Jack in the Box market and $1.1 million recognized in the third quarter relating to the anticipated sale of three Qdoba company-operated restaurants.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Interest expense | $ | 3,501 |
| | $ | 4,794 |
| | $ | 13,015 |
| | $ | 16,550 |
|
Interest income | (231 | ) | | (423 | ) | | (954 | ) | | (1,588 | ) |
Interest expense, net | $ | 3,270 |
| | $ | 4,371 |
| | $ | 12,061 |
| | $ | 14,962 |
|
Interest expense, net decreased $1.1 million in the quarter and $2.9 million year-to-date compared with a year ago primarily due to lower average borrowings and average interest rates, partially offset year-to-date by a $0.9 million charge in 2013 to write-off deferred financing fees in connection with the refinancing of our credit facility.
Income Taxes
The tax rate in 2013 was 37.4% in the quarter and 34.6% year-to-date, compared with 34.9% and 34.6%, respectively, in the prior year. The tax rate in the third quarter of fiscal 2013 was affected by discontinued operations as a result of Qdoba’s restaurant closures. The tax benefit attributed to the discontinued operations is separately presented in losses from discontinued operations, net of income tax benefit in the accompanying condensed consolidated statements of operations. The tax rates in all periods were impacted by the market performance of insurance investment products used to fund certain non-qualified retirement
plans. Changes in the cash value of the insurance products are not included in taxable income. We expect the fiscal year tax rate to be approximately 35%. The annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.
Earnings from Continuing Operations
Earnings from continuing operations were $17.3 million, or $0.38 per diluted share, in the quarter compared with $12.6 million, or $0.28 per diluted share, a year ago. Year-to-date earnings from continuing operations were $58.5 million, or $1.30 per diluted share, compared with $48.9 million or $1.09 per diluted share, a year ago.
Losses from Discontinued Operations, Net
As described in Note 2, Discontinued Operations, in the notes to the condensed consolidated financial statements, the results of operations from our distribution business and the 2013 Qdoba Closures have been reported as discontinued operations for all periods presented.
Losses from discontinued operations net of tax, are as follows for each discontinued operation (in thousands):
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Distribution business | $ | (344 | ) | | $ | — |
| | $ | (3,719 | ) | | $ | — |
|
2013 Qdoba Closures | (22,608 | ) | | (1,012 | ) | | (26,448 | ) | | (3,714 | ) |
| $ | (22,952 | ) | | $ | (1,012 | ) | | $ | (30,167 | ) | | $ | (3,714 | ) |
In 2013, the year-to-date loss from discontinued operations related to our distribution business includes pre-tax charges of $1.9 million for accelerated depreciation of a long-lived asset disposed of upon completion of the transaction, $1.8 million for future lease commitments and $1.2 million primarily related to costs incurred to exit certain vendor contracts. In 2013, the loss from discontinued operations related to the 2013 Qdoba Closures includes $22.7 million for asset impairments, $9.8 million for future lease commitments, net of reversals for deferred rent and tenant improvement allowances of $4.3 million, $1.6 million of other exits costs (primarily severance and inventory write-offs) and a $2.6 million net loss from operations in the quarter and $8.8 million year-to-date.
These losses reduced diluted earnings per share by approximately the following:
|
| | | | | | | | | | | | | | | |
| Quarter | | Year-to-Date |
| July 7, 2013 | | July 8, 2012 | | July 7, 2013 | | July 8, 2012 |
Distribution business | $ | (0.01 | ) | | $ | — |
| | $ | (0.08 | ) | | $ | — |
|
2013 Qdoba Closures | (0.50 | ) | | (0.02 | ) | | (0.59 | ) | | (0.08 | ) |
| $ | (0.51 | ) | | $ | (0.02 | ) | | $ | (0.67 | ) | | $ | (0.08 | ) |
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations, our revolving bank credit facility and the sale and leaseback of certain restaurant properties.
We generally reinvest available cash flows from operations to improve our restaurant facilities and develop new restaurants, to reduce debt and to repurchase shares of our common stock. Our cash requirements consist principally of:
| |
• | capital expenditures for new restaurant construction and restaurant renovations; |
| |
• | debt service requirements; and |
| |
• | obligations related to our benefit plans. |
Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with other financing alternatives in place or available, will be sufficient to meet our capital expenditure, working capital and debt service requirements for the foreseeable future.
As is common in the restaurant industry, we maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit.
Cash Flows
The table below summarizes our cash flows from operating, investing and financing activities (in thousands):
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Total cash provided by (used in): | | | |
Operating activities | $ | 167,288 |
| | $ | 111,582 |
|
Investing activities | (39,324 | ) | | (81,785 | ) |
Financing activities | (126,650 | ) | | (30,406 | ) |
Net increase (decrease) in cash and cash equivalents | $ | 1,314 |
| | $ | (609 | ) |
Operating Activities. Operating cash flows increased $55.7 million compared with a year ago due primarily to the outsourcing of our distribution business which freed up working capital previously tied up in franchise receivables and distribution inventory. Additionally, a $41.4 million increase in net income adjusted for non-cash items excluded from cash flows and timing differences associated with rent payments for the month of October also contributed to the increase in operating cash flows. The impact of these increases in cash flows were partially offset by an increase in incentive compensation payments in the first quarter of 2013 compared with the same period a year ago.
Investing Activities. Cash used in investing activities decreased $42.5 million compared with a year ago due primarily to a decrease in cash used to acquire franchise-operated Qdoba restaurants as well as an increase in proceeds from assets held for sale and leaseback. The impact of these changes in cash outflows were partially offset by a decrease in proceeds from the sale of Jack in the Box company-operated restaurants.
Capital Expenditures — The composition of capital expenditures in each period follows (in thousands):
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Jack in the Box: | | | |
New restaurants | $ | 3,327 |
| | $ | 10,736 |
|
Restaurant facility improvements | 28,035 |
| | 22,052 |
|
Other, including corporate | 5,332 |
| | 8,417 |
|
| 36,694 |
| | 41,205 |
|
Qdoba: | | | |
New restaurants | 16,684 |
| | 10,788 |
|
Other, including corporate | 4,593 |
| | 4,212 |
|
| 21,277 |
| | 15,000 |
|
| | | |
Consolidated capital expenditures | $ | 57,971 |
| | $ | 56,205 |
|
Our capital expenditure program includes, among other things, investments in new locations, restaurant remodeling, new equipment and information technology enhancements. Capital expenditures increased compared to a year ago due primarily to an increase in spending related to the exteriors of Jack in the Box restaurants as well as new Qdoba restaurants partially offset by a decrease in spending related to new Jack in the Box restaurants. We expect fiscal 2013 capital expenditures to be approximately $90-$95 million. We plan to open approximately 6 Jack in the Box and 35 Qdoba company-operated restaurants in 2013.
Sale of Company-Operated Restaurants — We continue to expand franchise ownership in the Jack in the Box system primarily through the sale of company-operated restaurants to franchisees. The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands):
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Number of restaurants sold to franchisees | 22 |
| | 55 |
|
| | | |
Total proceeds | $ | 8,415 |
| | $ | 29,253 |
|
In certain instances, we may provide financing to facilitate the closing of certain transactions. As of July 7, 2013, notes receivable related to prior year refranchisings were $1.2 million. As of July 7, 2013, we classified as assets held for sale $9.2 million relating to Jack in the Box operating restaurant properties that we expect to sell to franchisees during the next 12 months and for which we have a signed letter of intent.
Assets Held for Sale and Leaseback — We use sale and leaseback financing to lower the initial cash investment in our Jack in the Box restaurants to the cost of the equipment, whenever possible. The following table summarizes the cash flow activity related to sale and leaseback transactions in each period (dollars in thousands):
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Number of restaurants sold and leased back | 19 |
| | 10 |
|
| | | |
Proceeds from sale and leaseback of assets | $ | 36,553 |
| | $ | 18,457 |
|
Purchases of assets intended for sale and leaseback | (25,198 | ) | | (31,565 | ) |
Net cash flows related to assets held for sale and leaseback | $ | 11,355 |
| | $ | (13,108 | ) |
As of July 7, 2013, we had investments of $22.1 million in 11 operating and under construction restaurant properties that we expect to sell and leaseback during the next 12 months.
Acquisition of Franchise-Operated Restaurants — In each period, we acquired Qdoba franchise restaurants in select markets where we believe there is continued opportunity for restaurant development. Additionally, in 2013 we exercised our right of first refusal and acquired one Jack in the Box franchise restaurant. The following table details franchise-operated restaurant acquisition activity (dollars in thousands):
|
| | | | | | | |
| Year-to-Date |
| July 7, 2013 | | July 8, 2012 |
Number of Jack in the Box restaurants acquired from franchisees | 1 |
| | — |
|
Number of Qdoba restaurants acquired from franchisees | 12 |
| | 45 |
|
Cash used to acquire franchise-operated restaurants | $ | 11,014 |
| | $ | 48,262 |
|
The purchase prices were primarily allocated to property and equipment, goodwill and reacquired franchise rights. For additional information, refer to Note 4, Summary of Refranchisings, Franchise Development and Acquisitions, of the notes to the condensed consolidated financial statements.
Financing Activities. Cash flows used in financing activities increased $96.2 million compared with a year ago primarily attributable to an increase in cash used to repurchase shares of our common stock, an increase in payments made under our credit facility, and the change in our book overdraft related to the timing of working capital receipts and disbursements. These increases in cash outflows were partially offset by an increase in proceeds from the issuance of common stock related to stock option exercises.
New Credit Facility — In November 2012, we replaced our existing credit facility with a new credit facility intended to provide a more flexible capital structure and take advantage of lower interest rates. The new facility is comprised of (i) a $400.0 million revolving credit facility and (ii) a $200.0 million term loan, both maturing on November 5, 2017, and both bearing interest at London Interbank Offered Rate (“LIBOR”) plus 2.00%, as of July 7, 2013. As part of the credit agreement, we may also request the issuance of up to $75.0 million in letters of credit, the outstanding amount of which reduces the net borrowing capacity under the agreement. The credit facility requires the payment of an annual commitment fee based on the unused portion of the credit facility. The credit facility’s interest rate is based on the Company’s financial leverage ratio, as defined in the credit agreement, and can range from LIBOR plus 1.75% to 2.25% with no floor. We may make voluntary prepayments of the loans under the revolving credit facility and term loan at any time without premium or penalty. Specific events, such as asset sales, certain issuances of debt, and insurance and condemnation recoveries, could trigger a mandatory prepayment.
The Company borrowed approximately $220.0 million under the revolving credit facility and $200.0 million under the term loan. The proceeds were used to repay all borrowings under the prior credit facility and the related transaction fees and expenses, including those associated with the new credit facility. Loan origination costs associated with the new credit facility were $4.4 million and are included as deferred costs in other assets, net in the accompanying condensed consolidated balance sheet as of July 7, 2013. At July 7, 2013, we had $190.0 million outstanding under the term loan, borrowings under the revolving credit facility of $185.0 million and letters of credit outstanding of $29.1 million.
We are subject to a number of customary covenants under our new credit facility, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments, stock repurchases, dividend payments and requirements to maintain certain financial ratios defined in our credit agreement. We were in compliance with all covenants as of July 7, 2013.
Interest Rate Swaps — To reduce our exposure to rising interest rates under our variable rate debt, we consider interest rate swaps. In August 2010, we entered into two forward-looking swaps that effectively convert the first $100.0 million of our variable rate term loan to a fixed-rate basis from September 2011 through September 2014. Based on the term loan’s applicable margin of 2.00% as of July 7, 2013, these agreements would have an average pay rate of 1.54%, yielding an “all-in” fixed rate of 3.54%. For additional information related to our interest rate swaps, refer to Note 6, Derivative Instruments, of the notes to the condensed consolidated financial statements.
Repurchases of Common Stock — In November 2011, the Board of Directors approved a program, expiring November 2013, to repurchase $100.0 million in shares of our common stock. In November 2012, the Board of Directors approved a new program to repurchase up to an additional $100.0 million in shares of our common stock through November 2014. During 2013, we repurchased approximately 2.8 million shares at an aggregate cost of $92.2 million. As of July 7, 2013, there were no amounts remaining under the November 2011 authorization and $84.7 million remaining under the November 2012 authorization. In August 2013, the Board of Directors approved a new program to repurchase up to an additional $100.0 million in shares of our common stock through November 2015.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those the Company believes are most important for the portrayal of the Company’s financial condition and results and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our condensed consolidated financial statements upon adoption.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to, the important factors described in the “Discussion of Critical Accounting Estimates,” and in other sections in this Form 10-Q and in our most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (“Form 10-K”) and other Securities and Exchange Commission filings, including:
| |
• | Food service businesses such as ours may be materially and adversely affected by changes in consumer preferences or dining habits, and economic, political and socioeconomic conditions. Adverse economic conditions such as unemployment and decreased discretionary spending may result in reduced restaurant traffic and sales and impose practical limits on pricing. |
| |
• | Our profitability depends in part on food and commodity costs and availability, including animal feed costs and fuel costs and other supply and distribution costs. The risks of increased commodities costs and volatility in costs could adversely affect our profitability and results of operations. |
| |
• | Multi-unit food service businesses such as ours can be materially and adversely affected by widespread negative publicity of any type, particularly regarding food quality or public health issues. Negative publicity regarding our brands or the restaurant industry in general could cause a decline in system restaurant sales and could have a material adverse effect on our financial condition and results of operations. |
| |
• | Similarly, food service businesses such as ours are subject to the risk that shortages or interruptions in supply could adversely affect the availability, quality and cost of ingredients. |
| |
• | Our business can be materially and adversely affected by severe weather conditions, which can result in lost restaurant sales, supply chain interruptions and increased costs. |
| |
• | Growth and new restaurant development involve substantial risks, including risks associated with unavailability of suitable franchisees, limited financing availability, cost overruns and the inability to secure suitable sites on acceptable terms. In addition, our growth strategy includes opening restaurants in new markets where we cannot assure that we will be able to successfully expand or acquire critical market presence, attract customers or otherwise operate profitably. |
| |
• | The restaurant industry is highly competitive with respect to price, service, location, brand identification and menu quality and innovation. We cannot assure that we will be able to effectively respond to aggressive competitors (including competitors with significantly greater financial resources); that our facility improvements and related strategies will increase our same-store sales and AUVs; or that our new products, service initiatives or our overall strategies will be successful. |
| |
• | Should our advertising and promotions be less effective than our competitors, there could be a material adverse effect on our results of operations and financial condition. |
| |
• | The cost-saving initiatives taken in recent years, including the outsourcing of our distribution business, are subject to risk and uncertainties, and we cannot assure that these activities, or any other activities we undertake in the future, will achieve the desired savings and efficiencies. |
| |
• | The loss of key personnel could have a material adverse effect on our business. |
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• | The costs of compliance with government regulations, including those resulting in increased labor costs, could negatively affect our results of operations and financial condition. |
| |
• | A material failure or interruption of service or a breach in security of our information technology systems or databases could cause reduced efficiency in operations, loss or misappropriation of data or business interruptions. |
| |
• | We maintain a documented system of internal controls, which is reviewed and monitored by an Internal Controls Committee and tested by the Company’s full-time internal audit department. Any failures in the effectiveness of our internal controls could have a material adverse effect on our operating results or cause us to fail to meet reporting obligations. |
| |
• | Failure to comply with environmental laws could result in the imposition of severe penalties or restrictions on operations by governmental agencies or courts of law, which could adversely affect operations. |
| |
• | Our ability to repay expected borrowings under our credit facility and to meet our other debt or contractual obligations will depend upon our future performance and our cash flows from operations, both of which are subject to prevailing economic conditions and financial, business and other known and unknown risks and uncertainties, certain of which are beyond our control. |
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• | Changes in accounting standards, policies or related interpretations by accountants or regulatory entities may negatively impact our results. |
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• | We are subject to litigation which is inherently unpredictable and can result in unfavorable resolutions where the amount of ultimate loss may exceed our estimated loss contingencies, or impose other costs in defense of claims or distract management from our operations. |
Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to risks relating to our financial instruments are changes in interest rates. Our credit facility, which is comprised of a revolving credit facility and a term loan, bears interest at an annual rate equal to the prime rate of LIBOR plus an applicable margin based on a financial leverage ratio. As of July 7, 2013, the applicable margin for the LIBOR-based revolving loans and term loan was set at 2.00%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. In August 2010, we entered into two interest rate swap agreements that effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis beginning September 2011 through September 2014. Based on the term loan’s applicable margin of 2.00% as of July 7, 2013, these agreements would have an average pay rate of 1.54%, yielding a fixed rate of 3.54%.
A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding unhedged balance of our revolving credit facility and term loan at July 7, 2013, would result in an estimated increase of $2.8 million in annual interest expense.
We are also exposed to the impact of commodity and utility price fluctuations. Many of the ingredients we use are commodities or ingredients that are affected by the price of other commodities, weather, seasonality, production, availability and various other factors outside our control. In order to minimize the impact of fluctuations in price and availability, we monitor the primary commodities we purchase and may enter into purchasing contracts and pricing arrangements when considered to be advantageous. However, certain commodities remain subject to price fluctuations. We are exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs for commodities and utilities through higher prices is limited by the competitive environment in which we operate. From time to time, we enter into futures and option contracts to manage these fluctuations. At July 7, 2013, we had no such contracts in place.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a - 15 and 15d - 15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended July 7, 2013, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended July 7, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part II, except as follows:
ITEM 1. LEGAL PROCEEDINGS
See Note 14, Contingencies and Legal Matters, of the notes to the unaudited condensed consolidated financial statements for a discussion of our contingencies and legal matters.
ITEM 1A. RISK FACTORS
You should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, which we filed with the SEC on November 21, 2012, together with the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q when evaluating our business and our prospects. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, including our financial statements and the related notes. There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occurs, our business and financial results could be harmed. In that case, the market price of our common stock could decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our credit agreement provides for up to $500.0 million for the potential payment of cash dividends and stock repurchases, subject to certain limitations based on our leverage ratio as defined in our credit agreement, of which $434.7 million remained as of July 7, 2013.
Dividends — We did not pay any cash or other dividends during the last two fiscal years and do not anticipate paying dividends in the foreseeable future.
Stock Repurchases — In November 2011, the Board of Directors approved a program, expiring November 2013, to repurchase $100.0 million in shares of our common stock. In November 2012, the Board of Directors approved a new program to repurchase up to an additional $100.0 million in shares of our common stock through November 2014. During 2013, we repurchased approximately 2.8 million shares at an aggregate cost of $92.2 million. As of July 7, 2013, there were no amounts remaining under the November 2011 authorization, and $84.7 million remaining under the November 2012 authorization. The following table summarizes shares repurchased during the quarter ended July 7, 2013:
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| (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares purchased as part of publicly announced programs | | (d) Maximum dollar value that may yet be purchased under these programs |
| | | | | | | $ | 135,554,862 |
|
April 15, 2013 - May 12, 2013 | 23,390 |
| | $ | 35.00 |
| | 23,390 |
| | $ | 134,736,146 |
|
May 13, 2013 - June 9, 2013 | 936,498 |
| | $ | 36.90 |
| | 936,498 |
| | $ | 100,180,506 |
|
June 10, 2013 - July 7, 2013 | 406,144 |
| | $ | 38.03 |
| | 406,144 |
| | $ | 84,736,173 |
|
Total | 1,366,032 |
| | $ | 37.20 |
| | 1,366,032 |
| | |
Subsequent to the end of the third quarter, in August 2013, the Board of Directors approved an additional program to repurchase up to $100.0 million in shares of our common stock through November 2015.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.
Effective August 7, 2013, the Board of Jack in the Box Inc., upon the recommendation of the Nominating & Governance Committee of the Board, amended and restated the By-Laws of the Company (the “By-Laws”) to make clarifying changes. Among the changes to the By-Laws, the Board:
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• | Amended Article II, Sections 2.02, to provide for the Chief Executive Officer, rather than the President, to call special meetings of stockholders, along with the Board; |
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• | Amended Article III, Section 3.09 to provide for the Chief Executive Officer, rather than the President, to call special meetings of the Board, along with a majority of the authorized directors; |
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• | Amended Article III, Section 3.11, to provide that written consent of the Board or any committee thereof may be delivered by electronic transmission; and |
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• | Amended Article V, Section 5.03 to provide that the Chief Executive Officer, in addition to the President or any Vice-President, may endorse checks and other orders of payment payable to the Company. |
The foregoing is a summary of the amendments made to the By-Laws. This summary is qualified in its entirety by reference to the By-Laws, as amended and restated and filed as Exhibit 3.2, attached hereto and incorporated herein by reference.
ITEM 6. EXHIBITS
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| | | |
Number | Description | Form | Filed with SEC |
3.1 | Restated Certificate of Incorporation, as amended, dated September 21, 2007 | 10-K | 11/20/2009 |
3.1.1 | Certificate of Amendment of Restated Certificate of Incorporation, dated September 21, 2007 | 8-K | 9/24/2007 |
3.2 | Amended and Restated Bylaws, dated August 7, 2013 | 10-Q | Filed herewith |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | — | Filed herewith |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | — | Filed herewith |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | — | Filed herewith |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | — | Filed herewith |
101.INS* | XBRL Instance Document | | |
101.SCH* | XBRL Taxonomy Extension Schema Document | | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | | |
____________________________
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* | In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.” |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | |
| JACK IN THE BOX INC. |
| | |
| By: | /S/ JERRY P. REBEL |
| | Jerry P. Rebel |
| | Executive Vice President and Chief Financial Officer (principal financial officer) (Duly Authorized Signatory) |
Date: August 8, 2013