UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 17, 2005
Commission file no. 1-9390
JACK IN THE BOX INC.
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Number of shares of common stock, $.01 par value, outstanding as of the close of business May 23, 2005 35,153,844.
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
See accompanying notes to consolidated financial statements.
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JACK IN THE BOX INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except per share data)
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Results of Operations
All comparisons under this heading between 2005 and 2004 refer to the 12-week (“quarter”) and 28-week (“year-to-date”) periods ended April 17, 2005 and April 11, 2004, respectively, unless otherwise indicated.
Restatement of Prior Financial Information
On December 17, 2004, the Company filed its Annual Report on Form 10-K. In that report, the Company restated its financial statements for fiscal years 2003 and 2002, and the first three quarters of fiscal year 2004. Accordingly, the prior year financial results for the quarter and year-to-date periods ended April 11, 2004 reflect the impact of that restatement.
The issue requiring restatement related to the Company’s historical accounting practice of depreciating its buildings on leased land, leasehold improvements, and certain intangible assets, over a period that included both the initial term of the lease and its option periods (or the useful life of the asset, if shorter). Concurrently, the Company had used the initial lease term in determining whether each of its leases was an operating lease or a capital lease and in calculating its straight-line rent expense. Management concluded that the Company should use the same lease term for depreciating buildings on leased land, leasehold improvements and certain intangible assets as it uses in determining capital versus operating leases and calculating straight-line rent expense. Accordingly, the Company adopted the following policy: The depreciable lives for its buildings on leased land, leasehold improvements and certain intangible assets, which are subject to a lease, will generally be limited to the initial lease term. However, in circumstances where the Company would incur an economic penalty by not exercising one or more option periods, the Company may include one or more option periods when determining the depreciation period. In either circumstance, the Company’s policy requires consistency when calculating the depreciation period, in classifying the lease, and in computing straight-line rent expense.
As a result of this change, the Company’s financial results have been restated as follows (dollars in thousands, except per share data):
The following management’s discussion and analysis takes into account the effects of these restatements.
Overview
Jack in the Box Inc. (the “Company”) owns, operates and franchises Jack inthe Box® quick-service restaurants and Qdoba Mexican Grill (“Qdoba”) fast-casual restaurants, primarily in the western and southern United States. As of April 17, 2005, the Company owned, operated and franchised 2,024 Jack in the Box quick-service restaurants and 215 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 franchises, retail sales from fuel and convenience stores (“Quick Stuff®”),royalties from franchised restaurants, rents from real estate leased to certain franchisees, initial franchise fees and development fees, and the sale of company-operated restaurants to franchisees.
The quick-serve restaurant industry has become more 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 a new fast-casual restaurant segment, changes in the economy and trends for healthier eating.
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To address these challenges and others, and support our goal of transitioning to a national restaurant company, management has developed a strategic plan centered around reinvention of the Jack in the Box brand and multifaceted growth. Brand reinvention initiatives include product innovations with a focus on high-quality products, enhancements to the quality of service and renovations to the restaurant facilities. Our multifaceted growth strategy includes growing our restaurant base, increasing our franchising activities, continuing to grow Qdoba and the testing of our new fast-casual concept, JBX GrillTM. We believe that brand reinvention will differentiate us from our competition and that our growth strategy will support us in our objective to become a national restaurant company.
The following summarizes the most significant events occurring in fiscal year 2005:
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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.
STATEMENTS OF EARNINGS DATA
The following table summarizes the number of systemwide restaurants:
SYSTEMWIDE RESTAURANT UNITS
Revenues
Restaurant sales increased $18.3 million and $32.7 million, respectively, to $478.0 million and $1,090.1 in 2005 from $459.7 million and $1,057.4 million in 2004. This growth primarily reflects an increase in per store average (“PSA”) sales at Jack in theBox and Qdoba company-operated restaurants, as well as an increase in the number of Qdoba company-operated restaurants. Same-store sales at Jack in the Boxcompany-operated restaurants increased 3.1% in the quarter and 2.6% year-to-date compared with a year ago, primarily due to the success of new product introductions and strong sales of premium products. Same-store sales at Qdoba company-operated restaurants increased in the double-digit range on top of a double-digit increase in 2004, extending to 23 its string of consecutive quarters with same-stores higher than the prior year.
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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 $34.4 million and $83.8 million, respectively, to $73.9 million and $166.9 million in 2005 compared with 2004. Sales from our Quick Stuff locations increased primarily due to an increase in the number of locations to 35 at the end of the quarter from 21 a year ago, as well as higher fuel sales. Increases in fuel sales reflect higher retail prices per gallon of fuel and additional gallons sold. 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 $3.6 million and $7.0 million, respectively, to $16.6 million and $41.3 million in 2005 compared with 2004, due primarily to an increase in the number of franchised restaurants. The number of franchised restaurants at the end of the quarter grew to 643 from 517 a year ago, reflecting the sale of 53 company-operated restaurants to franchisees since a year ago and new restaurant development by franchisees.
Other revenues include gains and fees from the sale of company-operated restaurants to franchisees, as well as interest income from investments and notes receivable. Other revenues increased to $8.6 million and $17.3 million, respectively, in 2005 from $5.0 million and $12.3 million in 2004, primarily due to an increase in gains and fees from the sale of company-operated restaurants to franchisees. We continued our strategy of selectively selling Jack inthe 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 the quarter, we sold 13 Jack in theBox restaurants compared with 7 a year ago. Year-to-date, we sold 26 Jack inthe Box restaurants, the same as a year ago with the difference in the average selling price per restaurant related to the specific sales and cash flows of the restaurants sold. In the third quarter, we expect other revenues to be approximately $6-7 million, primarily from the sale of 18-20 restaurants, and for fiscal 2005, other revenues are expected to be approximately $31 million, primarily from the sale of 57 restaurants.
Costs and Expenses
Restaurant costs of sales, which include food and packaging costs, increased to $150.3 million and $342.6 million, respectively, in 2005 from $139.4 million and $327.8 million in 2004, primarily due to sales growth. Restaurant costs of sales increased to 31.4% of sales in both periods of 2005 from 30.3% and 31.0%, respectively, in 2004, as a result of higher ingredient costs, primarily beef, as well as cheese and produce. In the second quarter of fiscal 2005, beef costs were approximately 18 percent higher compared with a year ago.
Restaurant operating costs grew with the addition of company-operated restaurants to $245.8 million and $565.7 million, respectively, in 2005. As a percentage of restaurant sales, operating costs improved to 51.4% and 51.9%, respectively, in 2005 from 52.2% and 52.5% in 2004. The percentage improvement in 2005 is primarily due to effective labor management and lower occupancy costs, which were related to continued Profit Improvement Program initiatives, as well as to increased leverage provided by higher sales in 2005 compared with a year ago. A non-recurring expense associated with an arbitration award in connection with the cancellation of a utility contract partially offset these improvements. The restatement, as previously discussed, did not have a material impact on the change in percent of sales year-to-year.
Costs of distribution and other sales increased to $73.0 million and $165.1 million, respectively, in 2005 from $38.8 million and $81.8 million in 2004, primarily reflecting an increase in the related sales. As a percent of the related sales, these costs have increased since a year ago, due primarily to higher distribution delivery costs compared with 2004, as well as 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 $8.2 million and $18.5 million, respectively, in 2005 from $7.2 million and $16.1 million in 2004, due primarily to an increase in the number of franchised restaurants. As a percentage of franchise rents and royalties, franchise restaurant costs decreased to 49.3% and 44.9%, respectively, in 2005 compared with 55.4% and 47.1% in 2004. The percentage decrease in 2005 is primarily due to the leverage provided by higher royalties. The restatement, as previously discussed, did not have a material impact on the change in percent of franchise rents and royalties year-to-year.
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Selling, general and administrative expenses (“SG&A”) increased to $64.0 million and $143.6 million, respectively, in 2005 from $58.6 million and $134.2 million in 2004. As a percentage of revenues, SG&A expenses improved to 11.1% and 10.9%, respectively, in 2005 compared with 11.3% in both periods in 2004, primarily due to increased leverage from higher distribution and Quick Stuff sales, which offset higher incentive accruals based on the Company’s improved performance and higher costs associated with Sarbanes-Oxley compliance. The restatement, as previously discussed, did not have a material impact on the change in percent of revenues year-to-year.
Interest expense was $3.5 million and $8.4 million, respectively, in 2005 compared with $4.1 million and $20.0 million in 2004, which included a charge of $9.2 million in the first quarter for the payment of a call premium and the write-off of deferred finance fees related to the refinancing of the Company’s term loan and the early redemption of its senior subordinated notes. Lower interest rates from the Company’s refinancing and subsequent two repricings of its credit facility also contributed to the decrease in interest expense compared with 2004.
The income tax provisions reflect year-to-date tax rates of 35.8% in 2005 and 36.9% in 2004, as restated. The lower tax rate in 2005 relates primarily to the retroactive reinstatement of the Work Opportunity Tax Credit and continued tax-planning strategies. We expect the annual tax rate for fiscal year 2005 to be approximately 36.4%. 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
Net earnings were $20.7 million in the quarter, or $.55 per diluted share, in 2005 compared to $18.7 million, or $.51 per diluted share, in 2004. Year-to-date net earnings were $46.1 million, or $1.23 per diluted share, in 2005 compared to $33.0 million, or $.90 per diluted share, in 2004. In 2004, year-to-date net earnings includes a loss on early retirement of debt of $5.7 million, net of income taxes, or $.15 per diluted share.
Liquidity and Capital Resources
General. Cash and cash equivalents decreased $11.0 million to $120.7 million at April 17, 2005 from $131.7 million at the beginning of the fiscal year due primarily to the Company’s stock repurchase program which partially offset cash flows provided by operating activities. We generally reinvest available cash flows from operations to develop new or enhance existing restaurants, to reduce borrowings under the revolving credit agreement, as well as to repurchase shares of our common stock.
Financial Condition. The Company, and the restaurant industry in general, maintain 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 and not as part of working capital. As a result, we typically maintain a working capital deficit, which was $19.7 million at April 17, 2005. Our current ratio remained at .9 to 1 at April 17, 2005, as it had been at the beginning of the fiscal year.
Credit Facility. Our credit facility is comprised of (i) a $200 million revolving credit facility maturing on January 8, 2008 with a rate of London Interbank Offered Rate (“LIBOR”) plus 2.25% and (ii) a $272.3 million term loan maturing on January 8, 2011 with a rate of LIBOR plus 1.75%. 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 April 17, 2005, we had no borrowings under our revolving credit facility and had letters of credit outstanding against our credit facility of $.2 million.
To reduce the Company’s letter of credit fees, the Company decided to utilize a portion of its excess cash and enter into a cash-collateralized letters of credit agreement. At April 17, 2005, the Company had letters of credit outstanding under this agreement of $38.3 million, which were collateralized by approximately $41.7 million of cash. Although the Company has no present intention to do so, it has the ability to terminate the cash-collateralized letter of credit agreement thereby eliminating restrictions on the $41.7 million restricted cash and cash equivalent balance.
On January 31, 2005, we amended the term loan portion of our credit facility to achieve a reduced borrowing rate of LIBOR plus 1.75%, which is expected to reduce interest expense by approximately $1.2 million annually. Fees paid in connection with the repricing were customary for such arrangements of this type and were not material.
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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 convert $130,000 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. Accordingly, changes in the fair value of the interest rate swap contracts are recorded as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheet as of April 17, 2005. 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 6.03% including the term loan’s 1.75% applicable margin.
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 April 17, 2005, we were in compliance with all debt covenants.
Total debt outstanding decreased to $301.1 million at April 17, 2005 from $305.3 million at the beginning of the fiscal year, 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 converting company-operated restaurants to franchises, converting 26 restaurants in 2005, the same as a year ago. Year-to-date, proceeds from the conversion of company-operated restaurants and collections on notes receivable, primarily related to conversions, were $17.8 million and $21.7 million in 2005 and 2004, respectively.
Common Stock Repurchase Programs. Pursuant to a $35 million stock repurchase program authorized by our Board of Directors in September 2004, the Company repurchased 849,095 shares of its common stock for approximately $27.9 million during the first quarter of 2005, fully utilizing the remaining repurchase availability under this authorization.
On February 18, 2005, the Board of Directors authorized an additional $65 million stock repurchase program for fiscal year 2005. In connection with this authorization, the Company repurchased 965,400 shares of its common stock for approximately $36.3 million during the second quarter. The $28.7 million authorization remaining as of April 17, 2005 has been fully utilized as of May 6, 2005 under a 10b5-1 plan executed by the Company on March 18, 2005.
Contractual Obligations and Commitments. The following is a summary of the Company’s contractual obligations and commercial commitments as of April 17, 2005:
Capital Expenditures. Cash flows used for additions to property and equipment decreased to $50.2 million in 2005 from $61.3 million in 2004, primarily due to a decision in 2004 to finance the new Innovation Center utilizing the Company’s operating cash flows instead of through a sale and leaseback transaction. In 2005 and 2004, we also incurred capital lease obligations of $.4 million and $7.9 million, respectively.
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In the third quarter of fiscal year 2005 and for the full year, we expect capital expenditures and lease commitments to be $30-35 million and $125-135 million, respectively. Our capital projections include spending related to new Jack in the Box restaurants, brand re-invention initiatives and our plan to upgrade approximately 50 of our Jack inthe Box restaurants, as part of our re-image program, at a cost of approximately $100,000 per restaurant.
Pension Funding. During fiscal year 2005, we currently anticipate contributing approximately $11 million to our defined benefit pension plans.
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.
Discussion of Critical Accounting Policies
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 SEC.
Pension 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. These 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. Due principally to fiscal 2004 company contributions, as well as increases in interest rates and in the return on plan assets, pension expense in fiscal year 2005 is expected to approximate fiscal year 2004 pension expense.
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 reserves, we utilize 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 medical costs increase beyond what was expected, reserves might not be sufficient, and additional expense may be recorded. While medical and dental costs are anticipated to increase modestly in fiscal year 2005, related to the new health care coverage being offered to all crew members, we expect such cost increases to be offset by savings realized from reduced crew turnover.
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 market-level analysis and evaluations of restaurant operating performance from operations and marketing management. 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 asset, we recognize an impairment loss by the amount which the carrying value exceeds the fair value of the asset. Our estimates of future cash flows may differ from actual cash flows due to, among other things, economic conditions or changes in operating performance. During 2005, we noted no 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
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conditions or changes in operating performance. During the fourth quarter of 2004, we reviewed the carrying value of our goodwill and indefinite life intangible assets and determined that no impairment existed as of October 3, 2004.
Allowances for Doubtful Accounts – Our trade receivables consist primarily of amounts due from franchisees for rents on subleased sites, royalties and distribution sales. We also have receivables related to short-term financing provided on the sale of company-operated restaurants to a limited number of 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 the collectibility of 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.
Future Application of Accounting Principles
In December 2004, the Financial Accounting Standards Board issued SFAS 123R, Share-Based Payment. SFAS 123R revises SFAS 123, Accounting for Stock-Based Compensation, and generally requires, among other things, that all employee stock-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. SFAS 123R also provides guidance on how to determine the grant-date fair value for awards of equity instruments, as well as alternative methods of adopting its requirements. On April 14, 2005, the Securities and Exchange Commission delayed the effective date of required adoption of SFAS 123R to the beginning of the first annual period after June 15, 2005. We plan to adopt the provisions of SFAS 123R in the first quarter of fiscal year 2006. The Company is currently evaluating the impact of adoption.
Cautionary Statements Regarding Forward-Looking Statements
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 Unaudited Consolidated Financial Statements and Liquidity and Capital Resources. 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. The following is a discussion of some of those factors.
There is intense competition in the quick service restaurant industry with respect to market share, restaurant locations, labor, menu and product development. The Company competes primarily on the basis of quality, variety and innovation of menu items, service, brand, convenience and price against several larger national and international chains with potentially significantly greater financial resources. The Company’s results depend upon the effectiveness of its strategies as compared to its competitors, and can be adversely affected by new concepts and aggressive competition from numerous and varied competitors in all areas of business, including new product introductions, promotions and discounting. In addition, restaurant sales can be affected by factors, including but not limited to, demographic changes, consumer preferences, tastes and spending patterns, perceptions about the health and safety of food products and adverse weather conditions. With approximately 65% of its restaurants in California and Texas, demographic changes, adverse weather, economic and political conditions and other significant events in those states can significantly affect restaurant sales and expenses. The quick service restaurant industry is mature, with significant chain penetration. There can be no assurances that the Company’s Jack intheBox and Qdoba growth objectives in the regional domestic markets in which it operates restaurants and convenience stores will be met or that the new facilities will be profitable. Anticipated and unanticipated delays in development, sales softness and restaurant closures may have a material adverse effect on the Company’s results of operations. The development and profitability of restaurants can be adversely affected by many factors including the ability of the Company and its franchisees to select and secure suitable sites on satisfactory terms, costs of construction, including costs related to Jack in the Box restaurant remodels and conversions of Jack in the Box restaurants to JBX Grill restaurants, the availability of financing and
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general business and economic conditions. The realization of gains from our program of selective sales of Company-operated restaurants to existing and new franchisees depends upon various factors, including sales trends at Jack intheBox and Qdoba restaurants and the financing market and economic conditions referred to above. Our results of operations can also be adversely affected by increases in the cost of commodities, particularly increases in beef, cheese and produce, as well as fuel, utilities and labor costs, increases in interest rates, inflation, recession and other factors over which the Company has no control, including the possibility of increased pension expense and contributions resulting from changes in actuarial assumptions and declines in discount rates and stock market returns. In January 2003, the Company completed its acquisition of Qdoba Restaurant Corporation, a fast-casual restaurant chain. The Company may not fully realize the potential benefits or synergies of this or other acquisition transactions. Other factors that can cause actual results to differ materially from expectations include the unpredictable nature of litigation, including strategies, ultimate liabilities and settlement costs; changes in accounting standards, policies and practices; the effects of potential weakness in or failure of internal controls; new legislation and governmental regulation; potential variances between estimated and actual liabilities; terrorist acts, acts of God and the possibility of unforeseen events affecting the industry in general.
Our income tax provision is sensitive to expected earnings and, as expectations change, our income tax provision may vary from quarter-to-quarter and year-to-year. In addition, from time-to-time, we may take positions for filing our tax returns, which differ, from the treatment for financial reporting purposes.
This discussion of uncertainties is not exhaustive. Additional risk factors associated with our business are mentioned in Management’s Discussion and Analysis in this Form 10-Q and detailed in our Annual Report on Form 10-K for fiscal year 2004 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 are changes in interest rates. The Company uses interest rate swap agreements to reduce exposure to interest rate fluctuations. At April 17, 2005, 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 6.03% including the term loan’s 1.75% 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 17, 2005, the applicable margin for the LIBOR-based revolving loans and term loan were set at 2.25% and 1.75%, respectively. A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding balance of our revolving credit facility and term loan at April 17, 2005, would result in an estimated increase of $1.4 million in annual interest expense. The estimated increase is based on holding the unhedged portion of bank debt at its April 17, 2005 level.
Changes in interest rates also impact 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 commodity and 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 commodity futures and option contracts were not significant at April 17, 2005.
At April 17, 2005, we had no other material financial instruments subject to significant market exposure.
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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 controls 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 18, 2005, the Board of Directors authorized a $65 million stock repurchase program through October 2, 2005. This authorization has been fully utilized as of May 6, 2005. The following table summarizes treasury stock purchases made by the Company under this authorization during the quarter ended April 17, 2005:
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information on matters submitted to a vote of stockholders at our annual meeting held on February 14, 2005, can be found in our Quarterly Report on Form 10-Q for the Quarter ended January 23, 2005 previously filed with the SEC.
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. Our credit agreements prohibit our right to declare or pay dividends or make other distributions with respect to shares of our capital stock.
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ITEM 6. EXHIBITS
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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 and in the capacities indicated.
Date: May 27, 2005
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