Jack in the Box - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ                                                        Accelerated filer o                                                         Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Number of shares of common stock, $.01 par value, outstanding as of the close of business August 4, 2006 - 35,423,411.

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

JACK IN THE BOX INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements

JACK IN THE BOX INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to consolidated financial statements.

JACK IN THE BOX INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

JACK IN THE BOX INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except per share data)

     All comparisons under this heading between 2006 and 2005 refer to the 12-week (“quarter”) and 40-week (“year-to-date”) periods ended July 9, 2006 and July 10, 2005, respectively, unless otherwise indicated.

     Jack in the Box Inc. (the “Company”) owns, operates and franchises Jack intheBox® quick-service restaurants and Qdoba Mexican Grill® (“Qdoba”) fast-casual restaurants, primarily in the western and southern United States. As of July 9, 2006, the Company owned, operated and franchised 2,065 Jack in the Box quick-service restaurants and 298 Qdoba fast-casual restaurants.

     The Company’s primary source of revenue is from company-operated restaurants. The Company also derives revenue from distribution sales to Jack in the Box and Qdoba franchisees, retail sales from fuel and convenience stores (“Quick Stuff®”),royalties from franchised restaurants, rents from real estate leased to certain franchisees, and initial franchise fees and development fees. The Company also recognizes gains from the sale of company-operated restaurants to franchisees.

     The quick-serve restaurant industry has remained complex and challenging in recent years. Challenges presently facing the sector include higher levels of consumer expectations, intense competition with respect to market share, restaurant locations, labor, menu and product development, the emergence of the fast-casual restaurant segment, changes in the economy, including rising oil and gas prices, and trends for healthier eating.

     To address these challenges and others, and to support our goal of becoming a national restaurant company, management has developed a strategic plan focused on three key initiatives. The first initiative is a holistic reinvention of the Jack in the Boxbrand through menu innovation, upgrading guest service and re-imaging Jack in theBox restaurant facilities to reflect the personality of Jack — the chain’s fictional founder and popular spokesman. The second initiative is a multifaceted growth strategy that includes opening new locations and improving the unit economics of each concept. The third strategic initiative is to expand franchising — through new restaurant development and the sale of company restaurants to franchisees — to generate higher returns and higher margins, while mitigating business-cost and investment risks.

     The following summarizes the most significant events occurring in fiscal year 2006:

The following table sets forth, unless otherwise indicated, the percentage relationship to total revenues of certain items included in the Company’s consolidated statements of earnings.

     Effective October 3, 2005, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) 123R, Share-Based Payment, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. The Company selected the modified prospective method of adoption. Under this method, compensation expense that we recognized in 2006 included: (a) compensation expense for all share-based payments granted prior to, but not yet vested as of, October 3, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, Accounting for Stock-Based Compensation, and (b) compensation expense for all share-based payments granted on or after October 3, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated. The following tables summarize the impact of adopting SFAS 123R in 2006.

     The following table summarizes the number of system wide restaurants:

     Ten company and franchised Jack in the Box restaurants opened in the third quarter, along with three new Quick Stuff convenience stores, and the Company sold 17 company-operated restaurants to franchisees. Qdoba opened 14 company and franchised restaurants during the third quarter. Year-to-date, 19 company and franchised Jack inthe Box restaurants opened, along with six new Quick Stuff convenience stores, and the Company sold 47 company-operated restaurants to franchisees. Qdoba opened 50 company and franchised restaurants to date in 2006.

     Restaurant sales increased $4.7 million and $42.3 million, respectively, to $488.1 million and $1,615.8 million in 2006 from $483.4 million and $1,573.5 million in 2005. This growth primarily reflects an increase in per store average (“PSA”) sales at Jack in theBox and Qdoba company-operated restaurants, partially offset by a decrease in the number of Jack in the Box company-operated restaurants. Same-store sales at Jack in the Box company-operated restaurants increased 2.9% in the quarter reflecting an increase in average check partially offset by a slight decrease in transactions. Year-to-date same-store sales increased 4.3% compared with a year ago, with an increase in both average check and transactions. The increase in same-store sales is primarily due to the success of new product introductions and continued focus on our brand reinvention initiatives.

     Distribution and other sales, representing distribution sales to Jack in the Box and Qdoba franchisees, as well as Quick Stuff fuel and convenience store sales, increased $48.8 million and $129.9 million, respectively, to $130.1 million and $378.2 million in 2006 compared with 2005. This increase is primarily attributable to higher fuel and convenience store sales from growth in the number of Quick Stuff locations to 50 at the end of the

quarter from 39 a year ago and higher retail prices per gallon of fuel. Distribution sales grew primarily due to an increase in the number of Jack in the Box and Qdoba franchised restaurants serviced by our distribution centers.

     Franchise rents and royalties increased $5.0 million and $15.9 million, respectively, to $23.3 million and $75.4 million in 2006 compared with 2005, due primarily to an increase in the number of franchised restaurants. The number of franchised restaurants at the end of the quarter grew to 798 from 673 a year ago, reflecting the franchising of Jack in the Boxcompany-operated restaurants and new restaurant development by Qdoba and Jack inthe Box franchisees.

     Gains on sale of company-operated restaurants and other revenues increased to $7.6 million and $25.6 million, respectively, in 2006 from $6.4 million and $21.8 million in 2005. The increase in 2006 reflects an increase in gains and fees from the sale of 17 and 47 Jack inthe Box restaurants to franchisees, respectively, compared with 20 and 46 restaurants a year ago. The average gain per restaurant increased in 2006 compared with 2005 and is related to the specific sales and cash flows of restaurants sold. Franchise fees related to development agreements and renewed franchise agreements also contributed to the increase. We continued our strategy of selectively selling Jack in the Box company-operated restaurants to franchisees with the goal of improving operating margins and accelerating cash flows, which enables us to develop new restaurants, reinvest in our restaurant re-image program and repurchase the Company’s common stock without incurring additional debt or diluting equity. In fiscal 2006, we expect gains on sale of company-operated restaurants and other revenues to be approximately $34 – $35 million, primarily from the sale of 57 restaurants, excluding the expected sale of 25 company-operated restaurants in Hawaii as discussed in Note 12, Subsequent Event.

     Restaurant costs of sales, which include food and packaging costs were $149.4 million and $504.9 million, respectively, in 2006 compared with $156.1 million and $499.5 million in 2005. As a percentage of restaurant sales, restaurant costs of sales decreased to 30.6% and 31.2%, respectively, in 2006 from 32.3% and 31.7% in 2005. In 2006, lower commodity costs, principally beef, cheese and pork and favorable product mix changes contributed to the lower rates. In fiscal 2005, beef costs were unfavorably impacted by the closing of the U.S. border to Canadian cattle.

     Restaurant operating costs increased to $247.6 million and $829.2 million, respectively, in 2006 from $244.1 million and $809.1 million in 2005. As a percentage of restaurant sales, operating costs were 50.7% and 51.3%, respectively, in 2006 compared with 50.5% and 51.4% in 2005. In the quarter, the percent of sales increase is primarily due to higher costs for utilities. Year-to-date, operating costs as a percent of sales declined slightly as the higher costs for utilities were more than offset by the fixed cost leverage on same-store sales growth, lower workers’ compensation insurance costs and other profit improvement initiatives.

     Costs of distribution and other sales increased to $128.2 million and $373.5 million, respectively, in 2006 from $79.9 million and $244.9 million in 2005, primarily reflecting an increase in the related sales. These costs increased as a percent of the related sales, due primarily to higher retail prices per gallon of fuel at our Quick Stuff locations, which have proportionately higher costs, but yield stable penny profits.

     Franchise restaurant costs, principally rents and depreciation on properties leased to Jack in the Box franchisees, increased to $10.7 million and $33.5 million, respectively, in 2006 from $8.7 million and $27.1 million in 2005, due primarily to an increase in the number of franchised restaurants. As a percentage of franchise rents and royalties, franchise restaurant costs decreased to 45.9% and 44.5%, respectively, in 2006 compared with 47.8% and 45.6% in 2005, due primarily to the leverage provided by higher royalties.

     Selling, general and administrative expenses (“SG&A”) increased to $68.2 million and $226.9 million, respectively, in 2006 from $62.3 million and $205.9 million in 2005. As a percentage of revenues, SG&A expenses decreased in the quarter to 10.5% in 2006 compared with 10.6% in 2005 and year-to-date remained consistent at 10.8% of revenues in both years. In 2006, the leverage provided from higher revenues was offset by the inclusion of stock option expense of $1.2 million in the quarter and $5.0 million year-to-date, higher pension costs, a charge in the third quarter of $1.7 million related to certain restaurant closures and to write-down the carrying value of two Jack in the Box restaurants, which we continue to operate, and a $2.4 million charge in the first quarter for a legal settlement related to a labor matter in California.

     Interest expense, net was $2.7 million and $10.1 million, respectively, in 2006 compared with $3.6 million and $10.0 million in 2005. Interest expense, net includes interest income, which was $2.0 million and $4.9 million, respectively, in 2006 compared with $.9 million and $2.8 million in 2005, reflecting higher cash balances and increased interest rates on invested cash. The increase in interest income was offset by an increase in the average interest rates incurred on the Company’s credit facility compared with a year ago.

     The income tax provisions reflect year-to-date tax rates of 35.9% in 2006 and 34.2% in 2005. The tax rate in 2006 reflects continuing tax planning strategies. The lower tax rate in 2005 relates primarily to the resolution of a prior year’s tax position, the retroactive reinstatement of the Work Opportunity Tax Credit and continued tax-planning strategies. We expect the annual tax rate for fiscal year 2006 to be 36.0% – 36.5%. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual rate could differ from our current estimates.

     Net earnings were $27.8 million in the quarter, or $0.77 per diluted share, in 2006 compared to $23.9 million, or $0.66 per diluted share, in 2005. Year-to-date net earnings were $74.9 million, or $2.09 per diluted share, in 2006 compared to $70.0 million, or $1.89 per diluted share, in 2005. Qdoba was accretive to earnings as anticipated.

     General. Cash and cash equivalents increased $87.8 million to $191.5 million at July 9, 2006 from $103.7 million at the beginning of the fiscal year. This increase is due primarily to cash flows provided by operating activities, proceeds from the sale of company-operated restaurants, assets held for sale and leaseback and the issuance of common stock, which offset the Company’s stock repurchase program and property and equipment expenditures. We generally reinvest available cash flows from operations to develop new or enhance existing restaurants and to repurchase shares of our common stock.

     Financial Condition. The Company, and the restaurant industry in general, maintains relatively low levels of accounts receivable and inventories and 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.

     Credit Facility. Our credit facility is comprised of (i) a $200 million revolving credit facility maturing on January 8, 2008 with an interest rate of London Interbank Offered Rate (“LIBOR”) plus 2.25% and (ii) a $268.8 million term loan maturing on January 8, 2011 with a rate of LIBOR plus 1.50%. The credit facility requires the payment of an annual commitment fee based on the unused portion of the credit facility. The annual commitment rate and the credit facility’s interest rates are based on a financial leverage ratio, as defined in the credit agreement. The Company and certain of its subsidiaries granted liens in substantially all personal property assets to secure our respective obligations under the credit facility. Under certain circumstances, the Company and each of its certain subsidiaries may be required to grant liens in certain real property assets to secure their respective obligations under the credit facility. Additionally, certain of our real and personal property secure other indebtedness of the Company. At July 9, 2006, we had no borrowings under our revolving credit facility and had letters of credit outstanding against our credit facility of $0.3 million.

     Effective October 6, 2005, we amended our credit facility to achieve a 25 basis points reduction in the term loan’s applicable margin, to expand the categories of investments allowable under the credit agreement, and to provide for an aggregate amount of $200 million for the acquisition of our common stock or the potential payment of cash dividends. Fees paid in connection with the re-pricing were customary for such arrangements of this type and were not material.

     Letter of Credit Agreement. To reduce the Company’s letter of credit fees, the Company entered into a separate cash-collateralized letter of credit agreement in October 2004. At July 9, 2006, the Company had letters of credit outstanding under this agreement of $38.5 million, which were collateralized by approximately $45.7 million of cash and cash equivalents. Although the Company intends to continue this arrangement, it has the ability to terminate the cash-collateralized letter of credit agreement thereby eliminating restrictions on the cash and cash equivalents balance.

     Interest Rate Swaps. To reduce the Company’s exposure to rising interest rates, in March 2005, the Company entered into two interest rate swap agreements that effectively converted $130 million of its variable rate term loan borrowings to a fixed rate basis through March 2008. The agreements have been designated as cash flow hedges under the terms of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, with effectiveness assessed based on changes in the present value of interest payments on the term loan. Accordingly, changes in the fair value of the interest rate swap contracts are recorded, net of taxes, as a component of accumulated other comprehensive loss, net in the accompanying condensed consolidated balance sheets. These agreements effectively convert a portion of the Company’s variable rate bank debt to fixed rate debt and have an average pay rate of 4.28%, yielding a fixed rate of 5.78% including the term loan’s 1.50% applicable margin.

     To further reduce our exposure, on April 24, 2006, we entered into an interest rate swap agreement that will effectively convert $60 million of our variable rate term loan borrowings to a fixed rate basis beginning March 2008, concurrent with the end our existing $60 million interest rate swap, through April 2010. This agreement has also been designated as a cash flow hedge under the terms of SFAS 133.

     We are subject to a number of covenants under our various debt instruments, including limitations on additional borrowings, acquisitions, loans to franchisees, capital expenditures, lease commitments and dividend payments, as well as requirements to maintain certain financial ratios, cash flows and net worth. As of July 9, 2006, we were in compliance with all debt covenants.

     Total debt outstanding decreased to $292.0 million at July 9, 2006 from $298.0 million at October 2, 2005, due to scheduled debt repayments made during the year, including payments made on capital leases.

     Sale of Company-Operated Restaurants. We have continued our strategy of selectively franchising Jack in the Box company-operated restaurants, selling 17 and 47 restaurants, respectively, in 2006 compared with 20 and 46 in 2005. Year-to-date proceeds from the sale of company-operated restaurants were $27.1 million in 2006 and $25.6 million in 2005.

     Common Stock Repurchase Program. Pursuant to a $150 million stock repurchase program authorized by our Board of Directors in September 2005, the Company repurchased 1,444,700 shares of its common stock for approximately $50 million during the first quarter of 2006. This stock repurchase program is intended to increase shareholder value and offset the dilutive effect of stock option exercises.

     Capital Expenditures. Cash flows used for additions to property and equipment increased to $89.8 million in 2006 from $76.4 million in 2005, due primarily to investments associated with the Company’s re-image program. In 2006 and 2005, we also incurred capital lease obligations of $0.2 million and $0.9 million, respectively. We expect capital expenditures to be approximately $150 million in fiscal 2006.

     Future Liquidity. We require capital principally to grow the business through new restaurant construction, as well as to maintain, improve and refurbish existing restaurants, and for general operating purposes. Our primary short-term and long-term sources of liquidity are expected to be cash flows from operations, the revolving bank credit facility, and the sale and leaseback of certain restaurant properties. Additional sources of liquidity include the sale of company-operated restaurants to franchisees as part of our franchising strategy. 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 debt service, capital expenditure and working capital requirements.

     We have identified the following as the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results and require management’s most subjective and complex judgments. Information regarding the Company’s other significant accounting policies are disclosed in Note 1 of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

     Share-based Compensation — The Company accounts for share-based compensation in accordance with SFAS 123R. Under the provisions of SFAS 123R, share-based compensation cost is estimated at the grant date based on the award’s fair-value as calculated by a binomial-based option pricing model and is recognized as expense ratably over the requisite service period. The binomial model requires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.

     Retirement Benefits — The Company sponsors pension and other retirement plans in various forms covering those employees who meet certain eligibility requirements. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans, including assumptions about the discount rate, expected return on plan assets and the rate of increase in compensation levels, as determined by the Company using specified guidelines. In addition, our outside actuarial consultants also use certain statistical factors such as turnover, retirement and mortality rates to estimate the Company’s future benefit obligations. The actuarial assumptions used may differ materially from actual results due to changing market and economic conditions, higher or lower turnover and retirement rates or longer or shorter life spans of participants. These differences may impact the amount of pension expense recorded by the Company. The net periodic pension and postretirement benefit cost in fiscal year 2006 is expected to be approximately $7.5 million higher than fiscal year 2005 due principally to decreases in discount rates.

     Self Insurance — The Company is self-insured for a portion of its current and prior years’ losses related to its workers’ compensation, general liability, automotive, medical and dental programs. In estimating the Company’s self-insurance accruals, we use independent actuarial estimates of expected losses, which are based on statistical analyses of historical data. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater amount of claims occur compared to what was estimated or costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.

     Long-lived Assets — Property, equipment and certain other assets, including amortized intangible assets, are reviewed for impairment when indicators of impairment are present. This review includes a restaurant-level analysis that takes into consideration a restaurant’s operating cash flows, the period of time since a restaurant has been opened or remodeled, and the maturity of the related market. When indicators of impairment are present, we perform an impairment analysis on a restaurant-by-restaurant basis. If the sum of undiscounted future cash flows is less than the net carrying value of the assets, we recognize an impairment loss by the amount which the carrying value exceeds the fair value of the assets. Our estimates of future cash flows may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. In fiscal 2006, we recorded impairment charges primarily related to certain restaurant closures and to write down the carrying value of two Jack in theBox restaurants, which we continue to operate. We noted no other indicators of impairment of our long-lived assets.

     Goodwill and Other Intangibles — We also evaluate goodwill and intangible assets not subject to amortization annually or more frequently if indicators of impairment are present. If the determined fair values of these assets are less than the related carrying amounts, an impairment loss is recognized. The methods we use to estimate fair value include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. During the fourth quarter of fiscal 2005, we reviewed the carrying value of our goodwill and indefinite life intangible assets and determined that no impairment existed as of October 2, 2005.

     Allowances for Doubtful Accounts — Our trade receivables consist primarily of amounts due from franchisees for rents on leased sites, royalties and distribution sales. In certain circumstances, we may also have receivables related to financing provided on the sale of company-operated restaurants to certain qualified franchisees. We continually monitor amounts due from franchisees and maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our franchisees to make required payments. This estimate is based on our assessment of our ability to collect specific franchisee accounts, as well as a general allowance based on historical trends, the financial condition of our franchisees, consideration of the general economy and the aging of such receivables. The Company has good relationships with its franchisees and high collection rates; however, if the future financial condition of our franchisees were to deteriorate, resulting in their inability to make specific required payments, additions to the allowance for doubtful accounts may be required.

     Legal Accruals — The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts, as we deem appropriate.

     In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 (“FIN 47”). FIN 47 clarifies the term conditional asset retirement obligation and requires a liability to be recorded if the fair value of the obligation can be reasonably estimated. The types of asset retirement obligations that are covered by FIN 47 are those for which an entity has a legal obligation to perform an asset retirement activity; however, the timing and/or method of settling the obligation are contingent on a future event that may or may not be within the control of the entity. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. We expect the adoption of FIN 47 will not have a material impact on our consolidated financial position, results of operations or cash flows.

     On June 1, 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS 154 applies to all voluntary changes in accounting principle, and changes the requirements of accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impractical. APB 20 previously required that most voluntary changes in accounting principle be recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. SFAS 154 is effective for accounting changes made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes made in fiscal years beginning after June 1, 2005. We expect the adoption of this standard will not have a material impact on our consolidated financial position, results of operations or cash flows.

     In June 2006, the FASB ratified the consensuses of Emerging Issues Task Force (“EITF”) Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”). EITF 06-3 indicates that the income statement presentation on either a gross basis or a net basis of the taxes within the scope of the Issue is an accounting policy decision. The Company’s accounting policy is to present the taxes within the scope of EITF 06-3 on a net basis. The guidance is effective for interim and annual periods beginning after December 15, 2006.

     In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB No. 109, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. We are currently evaluating the impact of FIN 48 on our consolidated financial statements, which is effective for fiscal years beginning after December 15, 2006.

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities law. These forward-looking statements are principally contained in the sections captioned, Notes to Consolidated Financial Statements and Management’s Discussion and Analysis. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “assume,” “believe,” “strategy,” “estimate,” “seek,” “expect,” “intend,” “plan,” “project,” “may,” “will,” “would,” and similar expressions. Forward-looking statements are based on management’s current plans and assumptions and are subject to known and unknown risks and uncertainties, which may cause actual results to differ materially from expectations. You should not place undue reliance on forward-looking statements. The following are some of the considerations and factors that could materially affect our results.

     This discussion of uncertainties is not exclusive. Additional risk factors associated with our business are mentioned earlier in Management’s Discussion and Analysis in this Form 10-Q, detailed in our Annual Report on Form 10-K for fiscal year 2005 filed with the SEC and will be described from time to time in our future reports filed with the SEC. Jack in the Box Inc. assumes no obligation and does not intend to update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     Our primary exposure relating to financial instruments is changes in interest rates. The Company uses interest rate swap agreements to reduce exposure to interest rate fluctuations. At July 9, 2006, the Company had two interest rate swap agreements having an aggregate notional amount of $130 million expiring March 2008. These agreements effectively convert a portion of the Company’s variable rate bank debt to fixed rate debt and have an average pay rate of 4.28%, yielding a fixed rate of 5.78% including the term loan’s 1.50% applicable margin.

     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 or LIBOR plus an applicable margin based on a financial leverage ratio. As of April 16, 2006, the applicable margin for the LIBOR-based revolving loans and term loan were set at 2.25% and

1.50%, respectively. A hypothetical 100 basis point increase in short-term interest rates, based on the unhedged outstanding balance of our revolving credit facility and term loan at July 9, 2006, would result in an estimated increase of $1.4 million in annual interest expense.

     Changes in interest rates also affect our pension expense, as do changes in the expected long-term rate of return on our pension plan assets. An assumed discount rate is used in determining the present value of future cash outflows currently expected to be required to satisfy the pension benefit obligation when due. Additionally, an assumed long-term rate of return on plan assets is used in determining the average rate of earnings expected on the funds invested or to be invested to provide the benefits to meet our projected benefit obligation. A hypothetical 25 basis point reduction in the assumed discount rate and expected long-term rate of return on plan assets would result in an estimated increase of $1.6 million and $0.3 million, respectively, in our future annual pension expense.

     We are also 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 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. Open futures and option contracts at July 9, 2006 were not significant.

     At July 9, 2006, we had no other material financial instruments subject to significant market exposure.

ITEM 4. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

     There were no changes in the Company’s internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that have materially affected or are reasonably likely to materially affect our 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

     The Company is subject to normal and routine litigation. In the opinion of management, based in part on the advice of legal counsel, the ultimate liability from all pending legal proceedings, asserted legal claims and known potential legal claims should not materially affect our operating results, financial position and liquidity.

ITEM 1A. RISK FACTORS

     There have been no material changes to the risk factors previously disclosed in the Company’s Form 10-K for the year ended October 2, 2005. You should review the brief discussion of some of those risk factors appearing under the heading “Cautionary Statements Regarding Forward-Looking Statements” and throughout Management’s Discussion and Analysis in this Form 10-Q.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     On September 16, 2005, the Board of Directors authorized a $150 million stock repurchase program through the end of fiscal year 2008, which was announced September 21, 2005. No treasury stock purchases were made by the Company under this authorization during the quarter, and $100 million of repurchase availability remains as of July 9, 2006.

     We did not pay any cash or other dividends during the last two fiscal years. Our credit agreement provides for an aggregate amount of $200 million for the acquisition of our common stock or the potential payment of cash dividends. However, we do not anticipate paying dividends in the foreseeable future.

ITEM 6. EXHIBITS