Jack in the Box - 10-Q quarterly report FY

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 in 45 states. References to the Company throughout these notes to the 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”). 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.

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and any variable interest entities where the Company is deemed the primary beneficiary. All significant intercompany transactions are eliminated.

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 28, 2008. The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our Form 10-K, with the exception of new accounting pronouncements adopted in fiscal 2009.

Reclassifications and adjustments — Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the fiscal 2009 presentation. In the fourth quarter of 2008, our Board of Directors approved plans to sell our Quick Stuff^®convenience and fuel stores. As such, in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets, Quick Stuff operations have been presented as discontinued operations for all periods presented. Refer to Note 2, Discontinued Operations, for additional information.

Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2009 and 2008 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks.

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.

Company-owned life insurance — We have purchased company-owned life insurance (“COLI”) policies to support our non-qualified benefit plans. The cash surrender values of these policies were $60.3 million and $65.3 million as of July 5, 2009 and September 28, 2008, respectively, and are included in other assets, net in the accompanying condensed consolidated balance sheets. These policies reside in an umbrella trust for use only to pay plan benefits to participants or to pay creditors if the Company becomes insolvent. As of July 5, 2009 and September 28, 2008, the trust also included cash of $1.4 million. During the 40-weeks ended July 5, 2009, we incurred losses on our COLI policies of $7.6 million due to continued declines in the stock market, which were offset in part by a $4.7 million fair value adjustment to our non-qualified deferred compensation plan obligation.

Assets held for sale — Assets held for sale, which typically represent the costs for sites that we plan to sell and lease back, also include assets expected to be sold upon our disposition of Quick Stuff and the net book value of equipment we plan to sell to franchisees. Assets held for sale were as follows at the end of each period (in thousands):

Franchise arrangements — Franchise arrangements generally provide for initial franchise fees, which are included in franchised restaurant revenues in the accompanying condensed consolidated statements of earnings. We also recognize gains on the sale of company-operated restaurants to franchisees, which are recorded when the sales are consummated and certain other gain recognition criteria are met. The following is a summary of these transactions (dollars in thousands):

In the third quarter, we recognized a loss of $2.4 million relating to the expected sale of a lower-performing Jack in the Box company-operated market. This transaction is anticipated to close by the end of the calendar year and is included in gains on the sale of company-operated restaurants, net in the accompanying condensed consolidated statements of earnings.

New accounting pronouncements adopted — In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 165, Subsequent Events. SFAS 165 establishes general standards of accounting for and disclosure of certain events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the provisions of SFAS 165 on April 13, 2009. The adoption of this statement did not have a material impact on our condensed consolidated financial statements. Subsequent events have been evaluated through August 3, 2009, the date our financial statements were available to be issued.

In April 2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, (“FSP 107-1”) which enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP 107-1 requires disclosures about fair value of financial instruments for interim reporting periods and amends APB Opinion 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of FSP 107-1 did not have a material impact on our condensed consolidated financial statements (refer to Note 4).

We operate a proprietary chain of convenience stores called Quick Stuff, with 61 locations, each built adjacent to a full-size Jack in the Box restaurant and including a major-brand fuel station. In the fourth quarter of 2008, our Board of Directors approved a plan to sell Quick Stuff to maximize the potential of the Jack in the Box and Qdoba brands. During the quarter, we have agreed to sell all 61 Quick Stuff locations in multiple transactions which are expected to be completed in the fourth quarter. In connection with these transactions, we recorded a charge of $22.9 million or $14.1 million, net of taxes, in discontinued operations in the accompanying condensed consolidated financial statements.

The major classes of Quick Stuff assets held for sale were as follows at the end of each period (in thousands):

Revenue and operating income from discontinued operations in each period are as follows (in thousands):

Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. To reduce our exposure to rising interest rates, in March 2007, we entered into two interest rate swap agreements that effectively converted $200.0 million of our variable rate term loan borrowings to a fixed rate basis until April 1, 2010. These 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 the term loan interest payments. As such, the gains or losses on these derivatives are reported in other comprehensive income (“OCI”).

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. Therefore, from time to time, we enter into futures and option contracts to manage these fluctuations. These contracts have not been designated as hedging instruments under SFAS 133.

Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):

Financial performance — The following is a summary of the gains or losses recognized on our derivative instruments (in thousands):

During 2009 and 2008, our interest rate swaps had no hedge ineffectiveness and no gains or losses were reclassified into net earnings.

On September 29, 2008, we adopted the fair value provisions of SFAS 157, Fair Value Measurements, for our financial assets and liabilities and elected the deferral option for our nonfinancial assets and liabilities. The adoption of this Statement did not have a material impact on our condensed consolidated financial statements.

The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of July 5, 2009 summarized by SFAS 157 valuation hierarchy (in thousands):

The fair values of cash and cash equivalents, accounts and other receivables, accounts payable and accrued liabilities approximate their carrying amounts due to their short maturities. The fair values of each of our long-term debt instruments are based on quoted market values, where available, or on the amount of future cash flows associated with each instrument, discounted using our current borrowing rate for similar debt instruments of comparable maturity. The estimated fair values of our long-term debt at July 5, 2009 and September 28, 2008 approximate their carrying values.

We account for the acquisition of franchised restaurants using the purchase method of accounting pursuant to SFAS 141, Business Combinations. During the quarter ended January 18, 2009, we acquired 22 Qdoba restaurants from franchisees for net consideration of $6.8 million. The total purchase was allocated to property and equipment, goodwill and other income.

When events and circumstances indicate that our long-lived assets might be impaired, we recognize an impairment loss as the amount by which the carrying value exceeds the fair value of the assets. We typically estimate fair value based on the estimated discounted cash flows of the related asset. In 2009 and 2008, we recorded impairment charges of $6.2 million and $1.8 million, respectively, primarily related to the write-down of the carrying value of certainJack in the Box and Qdoba restaurants we continue to operate. We also recognized accelerated depreciation and other costs on the disposition of property and equipment of $9.3 million and $13.0 million, respectively, primarily related to our restaurant re-image program, which includes a major renovation of our restaurant facilities, normal ongoing capital maintenance activities and, in 2008, a kitchen enhancement project.

These impairment charges, accelerated depreciation and other costs on the disposition of property and equipment are included in selling, general and administrative expenses in the accompanying condensed consolidated statements of earnings.

Total accrued restaurant closing costs, included in accrued liabilities and other long-term liabilities, changed as follows during 2009 and 2008 (in thousands):

Additions and adjustments primarily relate to revisions to certain sublease assumptions in 2009 and 2008, and the closure of one Jack in the Box restaurant in 2009 and two in 2008.

The income tax provisions reflect effective tax rates of 38.9% in 2009 and 37.8% in 2008. 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.

At September 28, 2008, our gross unrecognized tax benefits associated with uncertain income tax positions were $4.2 million, of which $4.0 million, if recognized, would favorably affect the effective income tax rate. As of July 5, 2009, the gross unrecognized tax benefits decreased to $0.7 million, of which $0.6 million, if recognized, would favorably affect the effective income tax rate. The decrease in unrecognized tax benefit was due to the disallowance of a refund claim.

It is reasonably possible that material changes to the gross unrecognized tax benefits will be required within the next twelve months during which the state of California is expected to complete its audit of requested claims for refund. The statute of limitations in various state taxing jurisdictions will also expire within the next year. Although the Company expects these items may result in a net reduction of its unrecognized tax benefits, an estimate of the expected change cannot be made at this time.

The federal statute of limitations for all tax years beginning with 2005 remain open at this time. The statutes of limitations for the states of California and Texas, where there could be a material impact, have not expired for tax years 1999 and forward and 2005 and forward, respectively. Generally, the statutes of limitations for the other state jurisdictions have not expired for tax years 2004 and forward.

Defined benefit pension plans — We sponsor a defined benefit pension plan covering substantially all full-time employees. We also sponsor an unfunded supplemental executive retirement plan that is closed to new participants and provides certain employees additional pension benefits. Benefits under all 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.

Measurement date — On September 29, 2008, we adopted the measurement date provisions of SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R), using the alternative transition method based on a 15-month projection derived from plan asset and benefit obligation measurements as of June 30, 2008. Adoption of the measurement date provision will result in a reduction of $3.0 million to beginning retained earnings at the end of the fiscal year representing 3/15ths of the periodic benefit costs for the period June 30, 2008 to September 27, 2009. The remaining 12/15ths of the periodic benefit costs is being recognized during fiscal 2009.

Net periodic benefit cost — The components of net periodic benefit cost were as follows (in thousands):

Cash flows — Our policy is to fund our plans at or above the minimum required by law. Details regarding 2009 contributions are as follows (in thousands):

Compensation expense — We offer share-based compensation plans to attract, retain, and motivate key officers, non-employee directors, and employees to work toward the financial success of the Company. The components of share-based compensation expense recognized in each period are as follows (in thousands):

Performance-vested stock awards — In November 2008, we granted 117,840 performance-vested stock awards to certain non-officer employees at a grant date price of $15.56. The awards represent the right to receive shares of common stock at the end of a three-year service period based on the achievement of performance goals for fiscal 2009. Also in November 2008, we modified the performance periods and goals of our outstanding performance-vested stock awards to address challenges associated with establishing long-term performance measures. The modifications and changes to expectations regarding achievement levels resulted in a $2.2 million reduction in our expense.

Nonvested stock units — In February 2009, the Board of Directors approved the issuance of a new type of stock award, nonvested stock units. Nonvested stock units will replace nonvested stock awards previously issued to certain executives under our share ownership guidelines. Our nonvested stock units vest upon retirement or termination based upon years of service as provided in the award agreements. These awards are amortized as compensation expense over the estimated vesting period based upon the fair value of our common stock on the award date. In February 2009, we granted 26,854 nonvested stock units at a grant date price of $23.27.