Company Quick10K Filing
Quick10K
Jack In The Box
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$77.79 26 $2,010
10-Q 2019-01-20 Quarter: 2019-01-20
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-07-08 Quarter: 2018-07-08
10-Q 2018-04-15 Quarter: 2018-04-15
10-Q 2018-01-21 Quarter: 2018-01-21
10-K 2017-10-01 Annual: 2017-10-01
10-Q 2017-07-09 Quarter: 2017-07-09
10-Q 2017-04-16 Quarter: 2017-04-16
10-Q 2017-01-22 Quarter: 2017-01-22
10-K 2016-10-02 Annual: 2016-10-02
10-Q 2016-07-03 Quarter: 2016-07-03
10-Q 2016-04-10 Quarter: 2016-04-10
10-Q 2016-01-17 Quarter: 2016-01-17
10-K 2015-09-27 Annual: 2015-09-27
10-Q 2015-07-05 Quarter: 2015-07-05
10-Q 2015-04-12 Quarter: 2015-04-12
10-Q 2015-01-18 Quarter: 2015-01-18
10-K 2014-09-28 Annual: 2014-09-28
10-Q 2014-07-06 Quarter: 2014-07-06
10-Q 2014-04-13 Quarter: 2014-04-13
10-Q 2014-01-19 Quarter: 2014-01-19
8-K 2019-02-20 Earnings, Exhibits
8-K 2019-02-13 Regulation FD, Exhibits
8-K 2019-01-04 Enter Agreement, Exhibits
8-K 2018-12-17 Other Events, Exhibits
8-K 2018-11-19 Earnings
8-K 2018-11-08 Regulation FD, Exhibits
8-K 2018-10-29 Enter Agreement, Exhibits
8-K 2018-10-25 Enter Agreement, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-08-01 Regulation FD, Exhibits
8-K 2018-05-30 Regulation FD, Exhibits
8-K 2018-05-16 Earnings
8-K 2018-05-09 Regulation FD, Exhibits
8-K 2018-03-21 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-03-01 Regulation FD, Exhibits
8-K 2018-02-27 Shareholder Vote
8-K 2018-02-21 Earnings, Exhibits
8-K 2018-02-14 Regulation FD, Exhibits
8-K 2018-01-23 Officers, Exhibits
8-K 2018-01-16 Officers, Exhibits
8-K 2018-01-02 Regulation FD, Exhibits
WCN Waste Connections 23,390
MXIM Maxim Integrated Products 16,370
AIV Apartment Investment & Management 7,350
AUTL Autolus Therapeutics 1,080
SENEA Seneca Foods 236
FTFT Future Fintech Group 48
EQS Equus Total Return 23
PULM Pulmatrix 12
VR Validus 0
ZVVT ZEV Ventures 0
JACK 2019-01-20
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 5.03. None.
Item 6. Exhibits
EX-10.8.16 ex10816.htm
EX-31.1 ex3113.htm
EX-31.2 ex3125.htm
EX-32.1 ex3215.htm
EX-32.2 ex3225.htm

Jack In The Box Earnings 2019-01-20

JACK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 fy201910-qq1.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________________________________
FORM 10-Q
 _______________________________________________________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 20, 2019
Commission File Number: 1-9390
jiblogo3cfinalcirclera03a02.jpg
 ____________________________________________________ 
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
 _______________________________________________________________________________________
DELAWARE
 
95-2698708
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
 
9330 BALBOA AVENUE, SAN DIEGO, CA
 
92123
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (858) 571-2121
   _______________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes  þ    No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨  
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ¨    No  þ
As of the close of business February 15, 2019, 25,806,804 shares of the registrant’s common stock were outstanding.



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

1


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

JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
January 20,
2019
 
September 30,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash
$
4,300

 
$
2,705

Accounts and other receivables, net
61,541

 
57,422

Inventories
2,090

 
1,858

Prepaid expenses
10,367

 
14,443

Current assets held for sale
12,556

 
13,947

Other current assets
5,692

 
4,598

Total current assets
96,546

 
94,973

Property and equipment:
 
 
 
Property and equipment, at cost
1,191,930

 
1,190,031

Less accumulated depreciation and amortization
(783,639
)
 
(770,362
)
Property and equipment, net
408,291

 
419,669

Other assets:
 
 
 
Intangible assets, net
511

 
600

Goodwill
46,747

 
46,749

Deferred tax assets
77,295

 
62,140

Other assets, net
199,462

 
199,266

Total other assets
324,015

 
308,755

 
$
828,852

 
$
823,397

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Current maturities of long-term debt
$
42,485

 
$
31,828

Accounts payable
44,742

 
44,970

Accrued liabilities
100,429

 
106,922

Total current liabilities
187,656

 
183,720

Long-term liabilities:
 
 
 
Long-term debt, net of current maturities
1,013,676

 
1,037,927

Other long-term liabilities
234,816

 
193,449

Total long-term liabilities
1,248,492

 
1,231,376

Stockholders’ deficit:
 
 
 
Preferred stock $0.01 par value, 15,000,000 shares authorized, none issued

 

Common stock $0.01 par value, 175,000,000 shares authorized, 82,132,436 and 82,061,661 issued, respectively
821

 
821

Capital in excess of par value
472,894

 
470,826

Retained earnings
1,547,759

 
1,561,353

Accumulated other comprehensive loss
(98,331
)
 
(94,260
)
Treasury stock, at cost, 56,325,632 shares
(2,530,439
)
 
(2,530,439
)
Total stockholders’ deficit
(607,296
)
 
(591,699
)
 
$
828,852

 
$
823,397

See accompanying notes to condensed consolidated financial statements.

2


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Revenues:
 
 
 
Company restaurant sales
$
102,832

 
$
169,637

Franchise rental revenues
83,890

 
77,217

Franchise royalties and other
52,250

 
47,609

Franchise contributions for advertising and other services
51,814



 
290,786

 
294,463

Operating costs and expenses, net:
 
 
 
Company restaurant costs (excluding depreciation and amortization):
 
 
 
Food and packaging
29,616

 
48,864

Payroll and employee benefits
30,274

 
48,940

Occupancy and other
16,013

 
27,750

Total company restaurant costs
75,903

 
125,554

Franchise occupancy expenses (excluding depreciation and amortization)
50,713

 
46,521

Franchise support and other costs
2,845

 
2,482

Franchise advertising and other services expenses
54,270



Selling, general and administrative expenses
24,083

 
34,061

Depreciation and amortization
17,169

 
19,157

Impairment and other charges, net
7,698

 
2,257

Gains on the sale of company-operated restaurants
(219
)
 
(8,940
)
 
232,462

 
221,092

Earnings from operations
58,324

 
73,371

Other pension and post-retirement expenses, net
456


564

Interest expense, net
17,374

 
12,780

Earnings from continuing operations and before income taxes
40,494

 
60,027

Income taxes
9,373

 
47,138

Earnings from continuing operations
31,121

 
12,889

Earnings (losses) from discontinued operations, net of income taxes
2,977

 
(699
)
Net earnings
$
34,098

 
$
12,190

 
 
 
 
Net earnings per share - basic:
 
 
 
Earnings from continuing operations
$
1.20

 
$
0.44

Earnings (losses) from discontinued operations
0.11

 
(0.02
)
Net earnings per share (1)
$
1.32

 
$
0.41

Net earnings per share - diluted:
 
 
 
Earnings from continuing operations
$
1.19

 
$
0.43

Earnings (losses) from discontinued operations
0.11

 
(0.02
)
Net earnings per share (1)
$
1.31

 
$
0.41

 
 
 
 
Cash dividends declared per common share
$
0.40

 
$
0.40

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

3


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Net earnings
$
34,098

 
$
12,190

Cash flow hedges:
 
 
 
Net change in fair value of derivatives
(7,167
)
 
10,291

Net loss reclassified to earnings
479

 
1,674

 
(6,688
)
 
11,965

Tax effect
1,723

 
(3,039
)
 
(4,965
)
 
8,926

Unrecognized periodic benefit costs:
 
 
 
Actuarial losses and prior service costs reclassified to earnings
1,205

 
1,535

Tax effect
(311
)
 
(542
)
 
894

 
993

 
 
 
 
Other comprehensive (loss) income, net of taxes
(4,071
)
 
9,919

 
 
 
 
Comprehensive income
$
30,027

 
$
22,109

See accompanying notes to condensed consolidated financial statements.


4


JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
34,098

 
$
12,190

Earnings (losses) from discontinued operations
2,977

 
(699
)
Earnings from continuing operations
31,121

 
12,889

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
17,169

 
19,157

Amortization of franchise tenant improvement allowances
530

 
147

Deferred finance cost amortization
704

 
1,031

Excess tax benefits from share-based compensation arrangements
(50
)
 
(802
)
Deferred income taxes
(783
)
 
33,542

Share-based compensation expense
1,909

 
2,937

Pension and postretirement expense
456

 
715

Losses (gains) on cash surrender value of company-owned life insurance
2,863

 
(2,163
)
Gains on the sale of company-operated restaurants
(219
)
 
(8,940
)
Losses on the disposition of property and equipment, net
635

 
183

Impairment charges and other
387

 
805

Changes in assets and liabilities, excluding dispositions:
 
 
 
Accounts and other receivables
(3,154
)
 
26,539

Inventories
(232
)
 
110

Prepaid expenses and other current assets
6,224

 
7,419

Accounts payable
6,365

 
(371
)
Accrued liabilities
(16,298
)
 
(32,667
)
Pension and postretirement contributions
(2,111
)
 
(1,710
)
Franchise tenant improvement allowance distributions
(3,247
)
 
(1,761
)
Other
(4,668
)
 
(3,330
)
Cash flows provided by operating activities
37,601

 
53,730

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(11,183
)
 
(10,793
)
Purchases of assets intended for sale and leaseback

 
(1,411
)
Proceeds from the sale and leaseback of assets

 
4,949

Proceeds from the sale of company-operated restaurants
133

 
5,591

Collections on notes receivable
6,517

 
9,410

Proceeds from the sale of property and equipment
270

 
589

Funding of intercompany operations

 
(13,122
)
Other

 
2,969

Cash flows used in investing activities
(4,263
)
 
(1,818
)
Cash flows from financing activities:
 
 
 
Borrowings on revolving credit facilities
114,298

 
106,200

Repayments of borrowings on revolving credit facilities
(117,300
)
 
(130,800
)
Principal repayments on debt
(10,907
)
 
(14,208
)
Debt issuance costs
(17
)
 

Dividends paid on common stock
(10,305
)
 
(11,736
)
Proceeds from issuance of common stock
114

 

Repurchases of common stock
(14,362
)
 

Change in book overdraft
9,234

 
(129
)
Payroll tax payments for equity award issuances
(2,498
)
 
(4,244
)
Cash flows used in financing activities
(31,743
)
 
(54,917
)
Cash flows provided by (used in) continuing operations
1,595

 
(3,005
)
Net cash provided by operating activities of discontinued operations

 
16,785

Net cash used in investing activities of discontinued operations

 
(13,648
)
Net cash used in financing activities of discontinued operations

 
(43
)
Net cash provided by discontinued operations

 
3,094

Cash at beginning of period
2,705

 
4,467

Cash at end of period
$
4,300

 
$
3,789

See accompanying notes to condensed consolidated financial statements.

5

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










1.    BASIS OF PRESENTATION
Nature of operations — Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. The following table summarizes the number of restaurants as of the end of each period:
 
January 20,
2019
 
January 21,
2018
Company-operated
137

 
255

Franchise
2,104

 
1,995

Total system
2,241

 
2,250

References to the Company throughout these notes to condensed consolidated financial statements are made using the first person notations of “we,” “us” and “our.”
Basis of presentation — The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (“2018 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2018 Form 10-K with the exception of two new accounting pronouncements adopted in fiscal 2019, which are described below.
On December 19, 2017, we entered into a definitive agreement to sell Qdoba Restaurant Corporation (“Qdoba”), a wholly owned subsidiary of the Company which operates and franchises more than 700 Qdoba Mexican Eats® fast-casual restaurants, to certain funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, the “Buyer”). The sale was completed on March 21, 2018. For all periods presented in our condensed consolidated statements of earnings, all sales, costs, expenses and income taxes attributable to Qdoba, except as related to the impact of the decrease in the federal statutory tax rate (see Note 8, Income Taxes), have been aggregated under the caption “Earnings (losses) from discontinued operations, net of income taxes.” Refer to Note 3, Discontinued Operations, for additional information.
Unless otherwise noted, amounts and disclosures throughout these notes to condensed consolidated financial statements relate to our continuing operations. In our opinion, all adjustments considered necessary for a fair presentation of financial condition and results of operations for these interim periods have been included. Operating results for one interim period are not necessarily indicative of the results for any other interim period or for the full year.
Segment reporting — As a result of our sale of Qdoba, which has been classified as discontinued operations, we now have one reporting segment.
Reclassifications and adjustments — We recorded certain adjustments in 2019 upon the adoption of a new accounting pronouncement; see details regarding the effects of the adoption on our condensed consolidated financial statements below.
Fiscal year — Our fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Fiscal years 2019 and 2018 include 52 weeks. Our first quarter includes 16-weeks and all other quarters include 12-weeks. All comparisons between 2019 and 2018 refer to the 16-weeks (“quarter”) ended January 20, 2019 and January 21, 2018, respectively, unless otherwise indicated.
Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of any variable interest entities (“VIEs”) where we are deemed the primary beneficiary. All significant intercompany accounts and transactions are eliminated. The financial results and position of our VIE are immaterial to our condensed consolidated financial statements.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make certain assumptions and estimates that affect reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual amounts could differ materially from these estimates.

6

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








Advertising costs — We administer a marketing fund which includes contractual contributions. In 2019, marketing fund contributions from franchise and company-operated restaurants were approximately 5.0% of gross revenues, and the Company made incremental contributions to the marketing fund of $2.0 million.
Production costs of commercials, programming and other marketing activities are charged to the marketing fund when the advertising is first used for its intended purpose, and the costs of advertising are charged to operations as incurred. Total contributions made by the Company, including incremental contributions, are included in “Selling, general, and administrative expenses” in the accompanying condensed consolidated statements of earnings and totaled $7.2 million and $8.9 million in 2019 and 2018, respectively.
Effect of new accounting pronouncements adopted in fiscal 2019 — In May 2014, the FASB issued ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which provides a comprehensive new revenue recognition model that requires an entity to recognize revenue in an amount that reflects the consideration the entity expects to receive for the transfer of promised goods or services to its customers. The standard also requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted the new standard on October 1, 2018 using the modified retrospective method, whereby the cumulative effect of this transition to applicable contracts with customers that were not completed as of October 1, 2018 was recorded as an adjustment to beginning retained earnings as of this date. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The new revenue recognition standard did not impact our recognition of restaurant sales, rental revenues, or royalty fees from franchisees. The new pronouncement changed the way initial fees from franchisees for new restaurant openings or new franchise terms are recognized. Under the previous revenue recognition guidance, initial franchise fees were recognized as revenue at the time when a new restaurant opened or at the start of a new franchise term. In accordance with the new guidance, the initial franchise services are not distinct from the continuing rights and services offered during the term of the franchise agreement and will therefore be treated as a single performance obligation together with the continuing rights and services. As such, initial fees received will be recognized over the franchise term and any unamortized portion will be recorded as deferred revenue in our condensed consolidated balance sheet. An adjustment to opening retained earnings and a corresponding contract liability of approximately $50.3 million (of which $5.0 million was current and $45.3 million was long-term) was established on the date of adoption. A deferred tax asset of approximately $13.0 million related to this contract liability was also established on the date of adoption.
The new standard also had an impact on transactions presented net and not included in our revenues and expenses such as franchisee contributions to and expenditures from our advertising fund, and sourcing and technology fee contributions from franchisees and the related expenses. We determined that we are the principal in these arrangements, and as such, contributions to and expenditures from the advertising fund, and sourcing and technology fees and expenditures are now reported on a gross basis within our consolidated statements of earnings. While this change materially impacted our gross amount of reported revenues and expenses, the impact will be largely offsetting with no material impact to our reported net earnings. However, any annual surplus or deficit in the marketing fund will impact income from operations and net income.

7

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









The following table summarizes the impacts of adopting ASC 606 on the Company’s condensed consolidated financial statement as of and for the 16-weeks ended January 20, 2019 (in thousands):
 
 
 
Adjustments
 
 
 
As Reported
 
Franchise Fees
 
Marketing and Sourcing Fees
 
Technology Support Fees
 
Balances without Adoption
Condensed Consolidated Statement of Earnings
 
 
 
 
 
 
 
 
 
Sixteen Weeks Ended January 20, 2019
 
 
 
 
 
 
 
 
 
Franchise royalties and other
$
52,250

 
$
(1,092
)
 
$

 
$

 
$
51,158

Franchise contributions for advertising and other services
$
51,814

 
$

 
$
(49,097
)
 
$
(2,717
)
 
$

Total revenues
$
290,786

 
$
(1,092
)
 
$
(49,097
)
 
$
(2,717
)
 
$
237,880

Franchise advertising and other services expenses
$
54,270

 
$

 
$
(49,097
)
 
$
(5,173
)
 
$

Selling, general and administrative expenses
$
24,083

 
$

 
$

 
$
2,456

 
$
26,539

Total operating costs and expenses, net
$
232,462

 
$

 
$
(49,097
)
 
$
(2,717
)
 
$
180,648

Earnings from operations
$
58,324

 
$
(1,092
)
 
$

 
$

 
$
57,232

Earnings from continuing operations and before income taxes
$
40,494

 
$
(1,092
)
 
$

 
$

 
$
39,402

Income taxes
$
9,373

 
$
(282
)
 
$

 
$

 
$
9,091

Earnings from continuing operations
$
31,121

 
$
(810
)
 
$

 
$

 
$
30,311

Net earnings
$
34,098

 
$
(810
)
 
$

 
$

 
$
33,288

 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
January 20, 2019
 
 
 
 
 
 
 
 
 
Prepaid expenses
$
10,367

 
$
282

 
$

 
$

 
$
10,649

Total current assets
$
96,546

 
$
282

 
$

 
$

 
$
96,828

Deferred tax assets
$
77,295

 
$
(12,958
)
 
$

 
$

 
$
64,337

Other assets, net
$
199,462

 
$
269

 
$

 
$

 
$
199,731

Total other assets
$
324,015

 
$
(12,689
)
 
$

 
$

 
$
311,326

Total assets
$
828,852

 
$
(12,407
)
 
$

 
$

 
$
816,445

Accrued liabilities
$
100,429

 
$
(4,963
)
 
$

 
$

 
$
95,466

Total current liabilities
$
187,656

 
$
(4,963
)
 
$

 
$

 
$
182,693

Other long-term liabilities
$
234,816

 
$
(43,962
)
 
$

 
$

 
$
190,854

Total long-term liabilities
$
1,248,492

 
$
(43,962
)
 
$

 
$

 
$
1,204,530

Retained earnings
$
1,547,759

 
$
36,518

 
$

 
$

 
$
1,584,277

Total stockholders’ deficit
$
(607,296
)
 
$
36,518

 
$

 
$

 
$
(570,778
)
Total liabilities and stockholders’ deficit
$
828,852

 
$
(12,407
)
 
$

 
$

 
$
816,445

The adoption of ASC 606 had no impact on the Company’s cash provided by or used in operating, investing or financing activities as previously reported in its condensed consolidated statement of cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This standard requires the presentation of the service cost component of net benefit cost to be in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. All other components of net benefit cost should be presented separately from the service cost component and outside of a subtotal of earnings from operations, or separately disclosed. We adopted this standard in the first quarter of fiscal 2019 applying the retrospective method. As a result of the adoption, $0.6 million of pension costs previously reported within “Selling, general, and administrative expenses” has been reclassified to a separate line under earnings from operations to conform to current year presentation.





8

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








Effect of new accounting pronouncements to be adopted in future periods — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize assets and liabilities on the balance sheet for those leases classified as operating leases under previous guidance. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which affects the guidance in ASU 2016-02. The standard permits the election of an optional transition practical expedient to not evaluate land easements that exist or expired before the adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), and ASU 2018-11, Leases (Topic 842), Targeted Improvements, which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional transition method to adopt the new standard, and (iii) lessors with a practical expedient for separating components of a contract. Based on a preliminary assessment, we expect that most of our operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on our consolidated balance sheets. We do not expect the adoption of this guidance to have a material impact on our consolidated statement of earnings and statement of cash flows. We will be required to adopt these standards in the first quarter of fiscal 2020 and are required to adopt using a modified retrospective transition approach. We are continuing our evaluation, which may identify additional impacts this standard and its amendments will have on our consolidated financial statements and related disclosures.

2.    REVENUE
Nature of products and services — We derive revenue from retail sales at Jack in the Box company-operated restaurants and rental revenue, royalties, advertising, and franchise fees from franchise-operated restaurants.
Our franchise arrangements generally provide for an initial franchise fee of $50,000 per restaurant and generally require that franchisees pay royalty and marketing fees at 5% of gross sales. The agreement also requires franchisees to pay sourcing, technology and other miscellaneous fees.
Significant accounting policy — “Company restaurant sales” include revenue recognized upon delivery of food and beverages to the customer at company-operated restaurants, which is when our obligation to perform is satisfied. Company restaurant sales exclude taxes collected from the Company’s customers. Company restaurant sales also include income for gift cards. Gift cards, upon customer purchase, are recorded as deferred income and are recognized in revenue as they are redeemed. The timing and amount of revenue recognized related to company restaurant sales was not impacted by the adoption of ASC 606.
“Franchise royalties and other” includes royalties fees and initial franchise fees received from franchisees. Royalties are based upon a percentage of sales of the franchised restaurant and are recognized as earned. Franchise royalties are billed on a monthly basis. Initial franchise fees when a new restaurant opens or at the start of a new franchise term are recorded as deferred revenue when received and recognized as revenue over the term of the franchise agreement.
“Franchise contributions for advertising and other services” includes franchisee contributions billed on a monthly basis to our marketing fund, and sourcing and technology fees, as required under the franchise agreements. Contributions to our marketing fund are based on a percentage of sales and recognized as earned. Sourcing and technology services are recognized when the goods or services are transferred to the franchisee. The adoption of the new revenue standard did not impact the timing of revenue recognition for these fees received; however, these arrangements are now presented on a gross basis because we believe we are the principal in the arrangement.
“Franchise rental revenues” received from franchised restaurants based on fixed rental payments are recognized as revenue over the term of the lease. Certain franchise rents, which are contingent upon sales levels, are recognized in the period in which the contingency is met. Rental revenues are accounted for in accordance with applicable guidance for leases and are excluded from the scope of the new revenue standard.

9

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








Disaggregation of revenue — The following table disaggregates revenue by primary source for the 16-weeks ended January 20, 2019 (in thousands):
Sources of revenue:
 
 
Company restaurant sales
 
$
102,832

Franchise rental income
 
83,890

Franchise royalties
 
49,507

Marketing fees
 
47,863

Technology and sourcing fees
 
3,951

Franchise fees and other services
 
2,743

Total revenue
 
$
290,786

Contract liabilities Our contract liabilities consist of deferred revenue resulting from initial fees received from franchisees for new restaurant openings or new franchise terms, which are generally recognized over the franchise term. We classify these contract liabilities as “Other long-term liabilities” and “Accrued liabilities” in our condensed consolidated balance sheets.
A summary of significant changes in our contract liabilities between the date of adoption (October 1, 2018) and January 20, 2019 is presented below (in thousands):
 
 
Deferred Franchise Fees
Deferred franchise fees at October 1, 2018
 
$
50,018

Revenue recognized during the period
 
(1,592
)
Additions during the period
 
500

Deferred franchise fees at January 20, 2019
 
$
48,926

The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied at the end of the period (in thousands):
2019 (1)
 
$
3,434

2020
 
4,860

2021
 
4,838

2022
 
4,639

2023
 
4,484

Thereafter
 
26,671

 
 
$
48,926

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

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

3.
DISCONTINUED OPERATIONS
Qdoba — In December 2017, we entered into a stock purchase agreement (the “Qdoba Purchase Agreement”) with the Buyer to sell all issued and outstanding shares of Qdoba. The Buyer completed the acquisition of Qdoba on March 21, 2018 (the “Qdoba Sale”).
We also entered into a Transition Services Agreement with the Buyer pursuant to which the Buyer is receiving certain services (the “Services”) to enable it to operate the Qdoba business after the closing of the Qdoba Sale. The Services include information technology, finance and accounting, human resources, supply chain and other corporate support services. Under the Agreement, the Services are being provided at cost for a period of up to 12 months, with two 3-month extensions available for certain services. Based on current discussions with the Buyer, we expect certain services will be extended past the original date as allowed for under the Agreement. In 2019, we recorded $3.7 million in income related to the Services in 2019 as a reduction of selling, general and administrative expenses in the condensed consolidated statements of earnings.

10

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








Further, in 2018, we entered into an Employee Agreement with the Buyer pursuant to which we continued to employ all Qdoba employees who work for the Buyer (the “Qdoba Employees”) from the date of closing of the Qdoba Sale through December 31, 2018. During the term of the Employee Agreement, we paid all wages and benefits of the Qdoba Employees and received reimbursement of these costs from the Buyer. From October 1, 2018 to December 31, 2018, we paid $35.4 million of Qdoba wages and benefits pursuant to the Employee Agreement.
As the Qdoba Sale represents a strategic shift that had a major effect on our operations and financial results, in accordance with the provisions of FASB authoritative guidance on the presentation of financial statements, Qdoba results are classified as discontinued operations in our condensed consolidated statements of earnings and our condensed consolidated statements of cash flows for all periods presented.
Income taxes — In fiscal 2019, the Company entered into a bilateral California election with Quidditch Acquisition, Inc. to retroactively treat the divestment of Qdoba Restaurant Corporation on March 21, 2018 as a sale of assets instead of a stock sale for income tax purposes. This election reduced the Company’s fiscal year 2018 California tax liability on the divestment by $2.8 million.
The following table summarizes the Qdoba related activity for each period in discontinued operations (in thousands, except per share data):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Company restaurant sales
$

 
$
125,770

Franchise revenues

 
5,986

Company restaurant costs (excluding depreciation and amortization)

 
(108,618
)
Franchise costs (excluding depreciation and amortization)

 
(1,408
)
Selling, general and administrative expenses
302

 
(12,264
)
Depreciation and amortization

 
(5,012
)
Impairment and other charges, net

 
(1,669
)
Interest expense, net

 
(3,212
)
Operating earnings from discontinued operations before income taxes
302

 
(427
)
Gain (loss) on Qdoba Sale
(85
)
 

Earnings (losses) from discontinued operations before income taxes
217

 
(427
)
Income tax benefit (expense)
2,760

 
(205
)
Earnings (losses) from discontinued operations, net of income taxes
$
2,977

 
$
(632
)
 
 
 
 
Net earnings (losses) per share from discontinued operations:
 
 
 
Basic
$
0.11

 
$
(0.02
)
Diluted
$
0.11

 
$
(0.02
)
Selling, general and administrative expenses presented in the table above include corporate costs directly in support of Qdoba operations. All other corporate costs were classified in results of continuing operations. Our credit facility required us to make a mandatory prepayment (“Qdoba Prepayment”) on our term loan upon the closing of the Qdoba Sale, which was $260.0 million. In accordance with authoritative guidance on financial statement presentation, interest expense associated with our credit facility was allocated to discontinued operations in the prior year based on our estimate of the mandatory prepayment that was made upon closing of the Qdoba Sale.








11

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








Lease guarantees — While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees (the “Guarantees”). In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees. Should we, as guarantor of the lease obligations, be required to make any lease payments due for the remaining term of the subject lease(s) subsequent to March 21, 2018, the maximum amount we may be required to pay is approximately $35.9 million as of January 20, 2019. The lease terms extend for a maximum of approximately 17 more years as of January 20, 2019, and we would remain a guarantor of the leases in the event the leases are extended for any established renewal periods. In the event that we are obligated to make payments under the Guarantees, we believe the exposure is limited due to contractual protections and recourse available in the lease agreements, as well as the Qdoba Purchase Agreement, including a requirement of the landlord to mitigate damages by re-letting the properties in default, and indemnity from the Buyer. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable.

4.    SUMMARY OF REFRANCHISINGS AND FRANCHISEE DEVELOPMENT
Refranchisings and franchisee development — The following table summarizes the number of restaurants sold to franchisees, the number of restaurants developed by franchisees, and gains recognized in each period (dollars in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Restaurants sold to franchisees

 
22

New restaurants opened by franchisees
9

 
5

 
 
 
 
Proceeds from the sale of company-operated restaurants:
 
 
 
       Cash (1)
$
133

 
$
5,591

       Notes receivable

 
9,084

 
133

 
14,675

 
 
 
 
Net assets sold (primarily property and equipment)

 
(3,637
)
Goodwill related to the sale of company-operated restaurants
(2
)
 
(153
)
Other (2)
88

 
(1,945
)
Gains on the sale of company-operated restaurants
$
219

 
$
8,940

____________________________
(1)
Amounts in 2019 and 2018 include additional proceeds of $0.1 million and $1.2 million, respectively, related to restaurants sold in prior years.
(2)
Amounts in 2018 primarily relate to $1.5 million of remodel credits.


12

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








5.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities — The following table presents our financial assets and liabilities measured at fair value on a recurring basis (in thousands):
 
Total      
 
Quoted Prices
in Active
Markets for
Identical
Assets (3)
(Level 1)
 
Significant
Other
Observable
Inputs (3)
(Level 2)
 
Significant
Unobservable
Inputs (3)
(Level 3)
Fair value measurements as of January 20, 2019:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
31,053

 
$
31,053

 
$

 
$

Interest rate swaps (Note 6) (2) 
7,391

 

 
7,391

 

Total liabilities at fair value
$
38,444

 
$
31,053

 
$
7,391

 
$

Fair value measurements as of September 30, 2018:
 
 
 
 
 
 
 
Non-qualified deferred compensation plan (1)
$
37,447

 
$
37,447

 
$

 
$

Interest rate swaps (Note 6) (2) 
703

 

 
703

 

Total liabilities at fair value
$
38,150

 
$
37,447

 
$
703

 
$

 
____________________________
(1)
We maintain an unfunded defined contribution plan for key executives and other members of management. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. The obligation is included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets.
(2)
We entered into interest rate swaps to reduce our exposure to rising interest rates on our variable rate debt. The fair values of our interest rate swaps are based upon Level 2 inputs which include valuation models as reported by our counterparties. These valuation models use a discounted cash flow analysis on the cash flows of each derivative. The key inputs for the valuation models are quoted market prices, discount rates and forward yield curves. The Company also considers its own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements.
(3)
We did not have any transfers in or out of Level 1, 2 or 3.

The fair values of our debt instruments are based on the amount of future cash flows associated with each instrument discounted using our borrowing rate. At January 20, 2019, the carrying value of all financial instruments was not materially different from fair value, as the borrowings are prepayable without penalty. The estimated fair values of our capital lease obligations approximated their carrying values as of January 20, 2019.
Non-financial assets and liabilities — Our non-financial instruments, which primarily consist of property and equipment, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on an annual basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, non-financial instruments are assessed for impairment. If applicable, the carrying values are written down to fair value.
In connection with our impairment reviews performed during 2019, no material fair value adjustments were required. Refer to Note 7, Impairment and Other Charges, Net, for additional information regarding impairment charges.


13

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








6.
DERIVATIVE INSTRUMENTS
Objectives and strategies — We are exposed to interest rate volatility with regard to our variable rate debt. In June 2015, we entered into forward-starting interest rate swap agreements that effectively converted $500.0 million of our variable rate borrowings to a fixed rate from October 2018 through October 2022.
These agreements have been designated as cash flow hedges under the terms of the FASB authoritative guidance for derivatives and hedging. To the extent that they are effective in offsetting the variability of the hedged cash flows, changes in the fair values of the derivatives are not included in earnings but are included in other comprehensive income (“OCI”). These changes in fair value are subsequently reclassified into net earnings as a component of interest expense as the hedged interest payments are made on our variable rate debt.
Financial position — The following derivative instruments were outstanding as of the end of each period (in thousands):
 
Balance
Sheet
Location
 
Fair Value
 
 
January 20,
2019
 
September 30, 2018
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate swaps
Accrued liabilities
 
$
(402
)
 
$
(26
)
Interest rate swaps
Other long-term liabilities
 
(6,989
)
 
(1,266
)
Interest rate swaps
Other assets, net
 

 
589

Total derivatives (Note 5)
 
 
$
(7,391
)
 
$
(703
)
Financial performance — The following table summarizes the OCI activity related to our interest rate swap derivative instruments (in thousands):
 
Location in Income
 
Sixteen Weeks Ended
 
 
January 20,
2019
 
January 21,
2018
(Loss) gain recognized in OCI
N/A
 
$
(7,167
)
 
$
10,291

Loss reclassified from accumulated OCI into net earnings
Interest expense, net
 
$
479

 
$
1,674

Amounts reclassified from accumulated OCI into interest expense represent payments made to the counterparties for the effective portions of the interest rate swaps. During the periods presented, our interest rate swaps had no hedge ineffectiveness.

7.
IMPAIRMENT AND OTHER CHARGES, NET
Impairment and other charges, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Restructuring costs
$
5,840


$
358

Costs of closed restaurants and other
866


1,447

Losses on disposition of property and equipment, net
576


184

Accelerated depreciation
416


57

Operating restaurant impairment charges (1)


211

 
$
7,698

 
$
2,257

____________________________
(1)
In 2018, impairment charges relate to our landlord’s sale of a restaurant property to a franchisee.
Restructuring costs — Restructuring charges include costs resulting from the exploration of strategic alternatives (the “Strategic Alternatives Evaluation”) in 2019 and a plan that management initiated to reduce our general and administrative costs. Restructuring charges in 2018 also include costs related to the evaluation of potential alternatives with respect to the Qdoba brand (the “Qdoba Evaluation”), which resulted in the Qdoba Sale. Refer to Note 3, Discontinued Operations, for information regarding the Qdoba Sale.


14

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








The following is a summary of our restructuring costs (in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Employee severance and related costs (1)
$
4,506

 
$
(456
)
Strategic Alternatives Evaluation (2)
1,334

 

Qdoba Evaluation (3)

 
813

Other

 
1

 
$
5,840

 
$
358

____________________________
(1)
2018 reflects a reduction in severance and related costs due to a change in the number of employees to be terminated in connection with our restructuring activities.
(2)
Strategic Alternative Evaluation costs are primarily related to third party advisory services.
(3)
Qdoba Evaluation costs are primarily related to retention compensation and third party advisory services.
We currently expect to recognize severance and related costs of approximately $1.6 million for the remainder of fiscal 2019 related to positions that have been identified for elimination. At this time, we are unable to estimate any additional charges to be incurred related to additional positions that may be identified for elimination or our other restructuring activities.
Total accrued severance costs related to our restructuring activities are included in “Accrued liabilities” on our condensed consolidated balance sheets, and changed as follows during 2019 (in thousands):
Balance as of September 30, 2018
 
$
5,309

Costs incurred
 
4,474

Cash payments
 
(4,200
)
Balance as of January 20, 2019
 
$
5,583

Costs of closed restaurants and other — Costs of closed restaurants in 2019 and 2018 include future lease commitment charges and expected ancillary costs, net of anticipated sublease rentals. Costs in 2018 also include also include $0.5 million of additional impairment charges resulting from changes in the market value of three closed restaurant properties held for sale.
Accrued restaurant closing costs, included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets, changed as follows during 2019 (in thousands):
Balance as of September 30, 2018
 
$
3,534

Additions
 

Adjustments (1)
 
146

Interest expense
 
460

Cash payments
 
(1,179
)
Balance as of January 20, 2019 (2) (3)
 
$
2,961

___________________________
(1)
Adjustments relate primarily to revisions of certain sublease and cost assumptions. Our estimates related to our future lease obligations, primarily the sublease income we anticipate, are subject to a high degree of judgment and may differ from actual sublease income due to changes in economic conditions, desirability of the sites and other factors.
(2)
The weighted average remaining lease term related to these commitments is approximately 4 years.
(3)
This balance excludes $2.1 million of restaurant closing costs that are included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets, which were initially recorded as losses on the sale of company-operated restaurants to franchisees.
Accelerated depreciation — When a long-lived asset will be replaced or otherwise disposed of prior to the end of its estimated useful life, the useful life of the asset is adjusted based on the estimated disposal date and accelerated depreciation is recognized.

15

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









8.
INCOME TAXES
Our tax rate for the quarter ended January 20, 2019 was impacted by the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law on December 22, 2017. As a fiscal year taxpayer, the corporate federal tax rate reduction from 35% to 21% was phased in, resulting in a statutory federal tax rate of 24.5% for our fiscal year ending September 30, 2018, and 21.0% for our fiscal year ending September 29, 2019 and subsequent fiscal years.
In 2019 and 2018 income tax provisions reflect tax rates of 23.1% and 78.5%, respectively. The major components of the year over year change in tax rates were the one-time, non-cash impact of the enactment of the Tax Act in fiscal year 2018, a decrease in the statutory tax rate, and an adjustment related to state taxes recorded in the first quarter of fiscal year 2019, partially offset by a decrease in the excess tax benefit on stock compensation. The final annual tax rate cannot be determined until the end of the fiscal year; therefore, the actual annual 2019 rate could differ from our current estimates.
The following is a summary of the components of each tax rate (dollars in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Income tax expense at statutory rate

$
10,434

 
25.8
 %
 
$
17,192

 
28.6
 %
One-time, non-cash impact of the Tax Act


 
 %
 
30,627

 
51.0
 %
Stock compensation excess tax benefit

(50
)
 
(0.1
)%
 
(802
)
 
(1.3
)%
Adjustment to state tax provision
(1,027
)
 
(2.6
)%
 

 
 %
Other
16

 
 %
 
121

 
0.2
 %
(1)
$
9,373

 
23.1
 %
 
$
47,138

 
78.5
 %
____________________________
(1)
Percentages may not add due to rounding.


16

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








9.    RETIREMENT PLANS
Defined benefit pension plans — We sponsor two defined benefit pension plans, a frozen “Qualified Plan” covering substantially all full-time employees hired prior to January 1, 2011, and an unfunded supplemental executive retirement plan (“SERP”) which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employee’s years of service and compensation over defined periods of employment.
Postretirement healthcare plans — We also sponsor two healthcare plans, closed to new participants, that provide postretirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory; with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance.
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands): 
  
Sixteen Weeks Ended
  
January 20,
2019
 
January 21,
2018
Defined benefit pension plans:
 
 
 
Interest cost
$
7,048

 
$
6,879

Service cost

 
151

Expected return on plan assets (1)
(8,104
)
 
(8,144
)
Actuarial loss (2)
1,219

 
1,498

Amortization of unrecognized prior service costs (2)
35

 
45

Net periodic benefit cost
$
198

 
$
429

Postretirement healthcare plans:
 
 
 
Interest cost
$
307

 
$
294

Actuarial gain (2)
(49
)
 
(8
)
Net periodic benefit cost
$
258

 
$
286

___________________________
(1)
Determined as of the beginning of the year based on a return on asset assumption of 6.2%.
(2)
Amounts were reclassified from accumulated OCI into net earnings as a component of “Other pension and post-retirement expenses, net.”
Changes in presentation —As discussed in Note 1, Basis in Presentation, we adopted ASU 2017-07 during the first quarter of 2019 using the retrospective method, which changed the financial statement presentation of service costs and the other components of net periodic benefit cost. The service cost component continues to be included in operating income; however, the other components are now presented in a separate line below earnings from operations captioned “Other pension and post-retirement expenses, net” in our condensed consolidated statement of earnings. Further, in connection with the adoption, plan administrative expenses historically presented as a component of service cost are now presented as a component of expected return on assets. The prior year components of net periodic benefit costs have been recast to conform to current year presentation.
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of January 1, 2018, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement. Details regarding 2019 contributions are as follows (in thousands):
 
SERP
 
Postretirement
Healthcare Plans
Net year-to-date contributions
$
1,763

 
$
348

Remaining estimated net contributions during fiscal 2019
$
3,300

 
$
1,000

We continue to evaluate contributions to our Qualified Plan based on changes in pension assets as a result of asset performance in the current market and the economic environment. We do not anticipate making any contributions to our Qualified Plan in fiscal 2019.


17

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








10.
STOCKHOLDERS’ DEFICIT
Summary of changes in stockholders’ deficit A reconciliation of the beginning and ending amounts of deficit is presented below (in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Balance at beginning of period
$
(591,699
)
 
$
(388,130
)
Shares issued under stock plans, including tax benefit
115

 

Share-based compensation
1,909

 
3,385

Dividends declared

(10,318
)
 
(11,773
)
Net earnings

34,098

 
12,190

Other comprehensive (loss) income, net of taxes

(4,071
)
 
9,919

Cumulative-effect from a change in accounting principle
(37,330
)
 
(151
)
Balance at end of period
$
(607,296
)
 
$
(374,560
)
Repurchases of common stock In 2019, we have not repurchased any common shares. In November 2018, the Board of Directors approved an additional $60.0 million stock-buyback program that expires in November 2019. As of January 20, 2019, there was approximately $101.0 million remaining under the Board-authorized stock buyback program which expire November 2019.
Repurchases of common stock included in our condensed consolidated statement of cash flows for fiscal 2019 includes $14.4 million related to repurchase transactions traded in the prior fiscal year that settled in 2019.
Dividends — In November 2018, the Board of Directors declared a cash dividend of $0.40 per common share which was paid on December 18, 2018 to shareholders of record as of the close of business on December 5, 2018 and totaled $10.3 million. Future dividends are subject to approval by our Board of Directors.

11.
AVERAGE SHARES OUTSTANDING
Our basic earnings per share calculation is computed based on the weighted-average number of common shares outstanding. Our diluted earnings per share calculation is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive common shares include stock options, nonvested stock awards and units, and non-management director stock equivalents. Performance share awards are included in the average diluted shares outstanding each period if the performance criteria have been met at the end of the respective periods.

The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Weighted-average shares outstanding – basic
25,907

 
29,551

Effect of potentially dilutive securities:
 
 
 
Nonvested stock awards and units
208

 
229

Stock options
11

 
64

Performance share awards
2

 
9

Weighted-average shares outstanding – diluted
26,128

 
29,853

Excluded from diluted weighted-average shares outstanding:
 
 
 
Antidilutive
186

 
90

Performance conditions not satisfied at the end of the period
89

 
74



18

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








12.    CONTINGENCIES AND LEGAL MATTERS 
Legal matters — We assess contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates.  
Gessele v. Jack in the Box Inc. — In August 2010, five former employees instituted litigation in federal court in Oregon alleging claims under the federal Fair Labor Standards Act and Oregon wage and hour laws. The plaintiffs alleged that the Company failed to pay non-exempt employees for certain meal breaks and improperly made payroll deductions for shoe purchases and for workers’ compensation expenses, and later added additional claims relating to timing of final pay and related wage and hour claims involving employees of a franchisee. In 2016, the court dismissed the federal claims and those relating to franchise employees. In June 2017, the court granted class certification with respect to state law claims of improper deductions and late payment of final wages. In fiscal 2012, we accrued for a single claim for which we believe a loss is both probable and estimable; this accrued loss contingency did not have a material effect on our results of operations. In October 11, 2018, Plaintiff’s counsel alleged that the total potential damages were approximately $62 million, without providing a specific basis for that amount. We continue to believe that no additional losses are probable beyond this accrual and we cannot estimate a possible loss contingency or range of reasonably possible loss contingencies beyond the accrual. We plan to vigorously defend against this lawsuit. Nonetheless, an unfavorable resolution of this matter in excess of our current accrued loss contingencies could have a material adverse effect on our business, results of operations, liquidity, or financial condition.
Other legal matters — In addition to the matter described above, we are subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords, shareholders or others. We intend to defend ourselves in any such matters. Some of these matters may be covered, at least in part, by insurance or other third party indemnity obligation. Our insurance liability (undiscounted) and reserves are established in part by using independent actuarial estimates of expected losses for reported claims and for estimating claims incurred but not reported. We believe that the ultimate determination of liability in connection with legal claims pending against us, if any, in excess of amounts already provided for such matters in the consolidated financial statements, will not have a material adverse effect on our business, our annual results of operations, liquidity or financial position; however, it is possible that our business, results of operations, liquidity, or financial condition could be materially affected in a particular future reporting period by the unfavorable resolution of one or more matters or contingencies during such period.
Lease guarantees — While all operating leases held in the name of Qdoba were part of the Qdoba Sale, some of the leases remain guaranteed by the Company pursuant to one or more written guarantees. In the event Qdoba fails to meet its payment and performance obligations under such guaranteed leases, we may be required to make rent and other payments to the landlord under the requirements of the Guarantees. Qdoba continues to meet its obligations under these leases and there have not been any events that would indicate that Qdoba will not continue to meet the obligations of the leases. As such, we have not recorded a liability for the Guarantees as the likelihood of Qdoba defaulting on the assigned agreements was deemed to be less than probable. Refer to Note 3, Discontinued Operations, for additional information regarding the Guarantees.


19

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








13.
SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Non-cash investing and financing transactions:
 
 
 
Decrease in obligations for treasury stock repurchases
$
14,362

 
$

Decrease in obligations for purchases of property and equipment
$
4,927

 
$
4,201

Increase in dividends accrued or converted to common stock equivalents
$
58

 
$
78

Decrease in capital lease obligations from the termination of equipment and building leases

$
7

 
$
685

Increase in notes receivable from the sale of company-operated restaurants
$

 
$
9,084

Equipment capital lease obligations incurred
$

 
$
39



20

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








14.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)

 
January 20,
2019
 
September 30,
2018
Accounts and other receivables, net:
 
 
 
Trade
$
34,989

 
$
35,877

Due from marketing fund
13,774

 

Notes receivable
10,666

 
11,480

Income tax receivable
1,132

 
5,637

Other
2,513

 
6,123

Allowance for doubtful accounts
(1,533
)
 
(1,695
)
 
$
61,541

 
$
57,422

Prepaid expenses:
 
 
 
Prepaid rent
$
4,763

 
$

Prepaid income taxes
868

 
4,837

Prepaid advertising

 
4,318

Other
4,736

 
5,288

 
$
10,367

 
$
14,443

Other assets, net:
 
 
 
Company-owned life insurance policies
$
107,045

 
$
109,908

Deferred rent receivable
48,844

 
48,372

Other
43,573

 
40,986

 
$
199,462

 
$
199,266

Accrued liabilities:
 
 
 
Insurance
$
35,829

 
$
35,405

Payroll and related taxes
19,161

 
29,498

Deferred franchise fees
4,963

 
375

Sales and property taxes
2,830

 
4,555

Gift card liability
2,467

 
2,081

Other
35,179

 
35,008

 
$
100,429

 
$
106,922

Other long-term liabilities:
 
 
 
Defined benefit pension plans
$
67,214

 
$
69,012

Deferred franchise fees
43,963

 

Straight-line rent accrual
30,731

 
31,762

Other
92,908

 
92,675

 
$
234,816

 
$
193,449


15.
SUBSEQUENT EVENTS

On February 18, 2019, the Board of Directors declared a cash dividend of $0.40 per common share, to be paid on March 19, 2019 to shareholders of record as of the close of business on March 4, 2019.



21


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2019 and 2018 refer to the 16-weeks (“quarter”) ended January 20, 2019 and January 21, 2018, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during 2019 and 2018, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
Our MD&A consists of the following sections:
Overview — a general description of our business and 2019 highlights.
Financial reporting — a discussion of changes in presentation, if any.
Results of operations — an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements.
Liquidity and capital resources — an analysis of our cash flows including pension and postretirement health contributions, capital expenditures, sale of company-operated restaurants, franchise tenant improvement allowance distributions, our credit facility, share repurchase activity, dividends, known trends that may impact liquidity and the impact of inflation, if applicable.
Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates.
New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any.
Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management.
We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include:
Changes in sales at restaurants open more than one year (“same-store sales”), system restaurant sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
Adjusted EBITDA, which represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding gains or losses from discontinued operations, income taxes, interest expense, net, gains on the sale of company-operated restaurants, impairment and other charges, depreciation and amortization, and the amortization of tenant improvement allowances. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.
Same-store sales, system restaurant sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.


22


OVERVIEW
As of January 20, 2019, we operated and franchised 2,241 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam.
The following summarizes the most significant events occurring year-to-date in fiscal 2019, and certain trends compared to a year ago:
Same-store and system sales System same-store sales decreased 0.1%, and system sales decreased $5.9 million, or 0.6%, compared with a year ago. Menu price increases and favorable product mix were partially offset at company-operated restaurants and more than offset at franchise-operated restaurants by a decrease in traffic.
Company restaurant operations Company restaurant costs as a percentage of company restaurant sales decreased in 2019 to 73.8% from 74.0% a year ago primarily due to the benefit of refranchising units that had lower AUVs than the average for all company restaurants, partially offset by higher costs for labor and other operating expenses.
Franchise operations Excluding the impacts of the adoption of ASC 606 further described below, franchise costs as a percentage of franchise revenues were largely flat compared to prior year.
Restructuring costs In 2019, we have continued with our plan to reduce our general and administrative costs by revamping our organization and cost structures. Additionally, in the first quarter of fiscal 2019, we began an evaluation of strategic alternatives for the Company (the “Strategic Alternatives Evaluation”). In connection with these activities, we have recorded $5.8 million of restructuring charges in 2019, which includes $4.5 million primarily related to severance costs, and $1.3 million related to the Strategic Alternatives Evaluation. These costs are included in “Impairment and other costs, net” in the accompanying condensed consolidated statements of earnings.
Return of cash to shareholders We returned cash to shareholders in the form of cash dividends. We declared a cash dividend of $0.40 per share totaling $10.3 million.
Adjusted EBITDA Adjusted EBITDA decreased in 2019 to $83.0 million from $85.4 million in 2018.

FINANCIAL REPORTING
In fiscal 2019, we adopted ASU 2014-09, Revenue Recognition - Revenue from Contracts with Customers (Topic 606) (“ASC 606”), using the modified retrospective method, whereby the cumulative effect of initially adopting the guidance was recognized as an adjustment to beginning retained earnings at October 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The most significant effects of this transition that affect comparability of our results of operations between 2019 and 2018 include the following:
Franchise fee revenue for initial franchise services will be recognized over the franchise term beginning in 2019 compared to upfront recognition under the previous revenue guidance.
Franchise contribution for advertising and other services are reflected on a gross basis in 2019 compared to a net basis in 2018. Newly created captions “Franchise contribution for advertising and other services” and “Franchise advertising and other services expenses” include the gross-up of respective revenues and expenses; however, the 2018 results have not been restated to conform to current year presentation.
In fiscal 2018, we completed the sale of Qdoba on March 21, 2018. Qdoba results are included in discontinued operations for all periods presented.



23


RESULTS OF OPERATIONS
The following table presents certain income and expense items included in our condensed consolidated statements of earnings as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS DATA
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Revenues:
 
 
 
Company restaurant sales
35.4
%
 
57.6
%
Franchise rental revenues
28.8
%
 
26.2
%
Franchise royalties and other
18.0
%
 
16.2
%
Franchise contributions for advertising and other services
17.8
%
 
%
Total revenues
100.0
%
 
100.0
%
Operating costs and expenses, net:
 
 
 
Company restaurant costs (excluding depreciation and amortization):
 
 
 
Food and packaging (1)
28.8
%
 
28.8
%
Payroll and employee benefits (1)
29.4
%
 
28.8
%
Occupancy and other (1)
15.6
%
 
16.4
%
Total company restaurant costs (1)
73.8
%
 
74.0
%
Franchise occupancy expenses (excluding depreciation and amortization) (2)
60.5
%
 
60.2
%
Franchise support and other costs (3)
5.4
%
 
5.2
%
Franchise advertising and other services expenses (4)
104.7
%
 
%
Selling, general and administrative expenses
8.3
%
 
11.6
%
Depreciation and amortization
5.9
%

6.5
%
Impairment and other charges, net
2.6
%
 
0.8
%
Gains on the sale of company-operated restaurants
(0.1
)%
 
(3.0
)%
Earnings from operations
20.1
%
 
24.9
%
Income tax rate (5)
23.1
%
 
78.5
%
____________________________
(1)
As a percentage of company restaurant sales.
(2)
As a percentage of franchise rental revenues.
(3)
As a percentage of franchise royalties and other.
(4)
As a percentage of franchise contributions for advertising and other services.
(5)
As a percentage of earnings from continuing operations and before income taxes.


24


CHANGES IN SAME-STORE SALES
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Company
0.5
 %
 
0.2
 %
Franchise
(0.1
)%
 
(0.3
)%
System
(0.1
)%
 
(0.2
)%
The following table summarizes the changes in the number and mix of company and franchise restaurants:
 
2019
 
2018
 
Company
 
Franchise
 
Total
 
Company
 
Franchise
 
Total
Beginning of year
137


2,100


2,237


276


1,975


2,251

New


9


9


1


5


6

Refranchised






(22
)

22



Closed


(5
)

(5
)



(7
)

(7
)
End of period
137


2,104


2,241


255


1,995


2,250

% of system
6
%
 
94
%
 
100
%
 
11
%
 
89
%
 
100
%
The following table summarizes the restaurant sales for company-owned, franchised, and total system sales (in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Company-owned restaurant sales
$
102,832

 
$
169,637

Franchised restaurant sales
959,960

 
899,062

System sales
$
1,062,792

 
$
1,068,699

Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
ADJUSTED EBITDA
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
 Net earnings - GAAP
$
34,098


$
12,190

(Earnings) losses from discontinued operations, net of taxes
(2,977
)

699

 Income taxes
9,373


47,138

 Interest expense, net
17,374


12,780

 Gains on the sale of company-operated restaurants
(219
)

(8,940
)
 Impairment and other charges, net
7,698


2,257

 Depreciation and amortization
17,169


19,157

Amortization of franchise tenant improvement allowances
530


147

 Adjusted EBITDA - Non-GAAP
$
83,046

 
$
85,428



25


Company Restaurant Operations
The following table presents company restaurant sales and costs, and restaurant costs as a percentage of the related sales. Percentages may not add due to rounding (dollars in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Company restaurant sales
$
102,832

 
 
 
$
169,637

 
 
Company restaurant costs:
 
 
 
 
 
 
 
Food and packaging
29,616

 
28.8
%
 
48,864

 
28.8
%
Payroll and employee benefits
30,274

 
29.4
%
 
48,940

 
28.8
%
Occupancy and other
16,013

 
15.6
%
 
27,750

 
16.4
%
Total company restaurant costs
$
75,903

 
73.8
%
 
$
125,554

 
74.0
%

Company restaurant sales decreased $66.8 million in 2019 as compared with the prior year primarily driven by a decrease in the number of company restaurants resulting from the execution of our refranchising strategy and, to a lesser extent, by a decrease in traffic, which was more than offset by menu price increases and favorable product mix. The following table presents the approximate impact of these (decreases) increases on company restaurant sales in 2019 (in millions):
 
Sixteen Weeks Ended
Decrease in the average number of restaurants
$
(67.8
)
AUV increase
1.0

Total change in company restaurant sales
$
(66.8
)
Same-store sales at company-operated restaurants increased 0.5% in 2019 as compared with the prior year primarily due to menu price increases and favorable product mix, partially offset by a decline in transactions. The following table summarizes the change in company-operated same-store sales versus a year ago:
 
Sixteen Weeks Ended
 
January 20,
2019
 
January 21,
2018
Average check (1)
3.8
 %
 
2.6
 %
Transactions
(3.3
)%
 
(2.4
)%
Change in same-store sales
0.5
 %
 
0.2
 %
____________________________
(1)
Amounts in 2019 and 2018 include price increases of approximately 2.6% and 1.6%, respectively.
Food and packaging costs as a percentage of company restaurant sales remained consistent at 28.8% in 2019 and 2018 primarily due to menu price increases and favorable product mix, partially offset by higher commodity costs. Commodity costs increased 0.8% compared to a year ago due primarily to higher costs for potatoes and beverages, partially offset by lower costs for beef and pork. Potatoes increased most significantly by 7% in the quarter while beef, our most significant commodity, decreased approximately 5% in 2019 compared with the prior year. For fiscal 2019, we currently expect commodity costs to increase approximately 2% compared with fiscal 2018.
Payroll and employee benefit costs as a percentage of company restaurant sales increased to 29.4% in 2019 compared with 28.8% in 2018 due primarily to higher average wages resulting from a change in the mix of restaurants due to refranchising, wage inflation, and a highly competitive labor market.
Occupancy and other costs decreased $11.7 million in 2019 compared to the prior year, primarily due to a decrease in the average number of restaurants, impacting occupancy and other costs by approximately $13 million, partially offset by higher costs for maintenance and repairs, uniforms, utilities, information technology and property rent. The decrease in occupancy and other costs as a percentage of company restaurant sales in 2019 compared to 2018 was primarily due to the benefit of refranchising units that had lower AUVs than the average for all company restaurants.

26


Franchise Operations
The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Franchise rental revenues
$
83,890

 
$
77,217

 
 
 
 
Royalties
49,507

 
46,293

Franchise fees and other
2,743

 
1,316

Franchise royalties and other
52,250

 
47,609

Franchise contributions for advertising and other services
51,814

 

Total franchise revenues
$
187,954

 
$
124,826

 
 
 
 
Franchise occupancy expenses (excluding depreciation and amortization)
$
50,713

 
$
46,521

Franchise support and other costs
2,845

 
2,482

Franchise advertising and other services expenses
54,270

 

Total franchise costs
$
107,828

 
$
49,003

Franchise costs as a % of total franchise revenues
57.4
 %
 
39.3
 %
 
 
 
 
Average number of franchise restaurants
2,084

 
1,975

% increase
5.5
 %
 
 
Decrease in franchise-operated same-store sales
(0.1
)%
 
(0.3
)%
Franchised restaurant sales
$
959,960

 
$
899,062

Franchised restaurant AUVs
$
461

 
$
455

Royalties as a percentage of total franchised restaurant sales
5.2
 %
 
5.1
 %
Franchise rental revenues increased $6.7 million, or 8.6%, in 2019 as compared with the prior year. This increase is primarily due to additional rental revenues in 2019 of $7.0 million resulting from an increase in the number of restaurants leased or subleased from the Company due to our refranchising strategy.
Franchise royalties and other increased $4.6 million, or 9.7%, in 2019 versus a year ago primarily due to an increase in the number of franchise restaurants.
In years prior to 2019, franchise contributions for advertising and other services were shown net with the related disbursements within “Selling, general, and administrative expenses” in our condensed consolidated statement of earnings. In the first quarter of 2019, we adopted ASC 606, which requires these revenues and expenses to be presented gross on our condensed consolidated statement of earnings. Refer to Note 2, Revenue, for additional information related to the adoption of this new accounting standard.
Franchise occupancy expenses, principally rents, increased $4.2 million in 2019 versus a year ago due primarily to a net increase in the average number of franchise-operated restaurants resulting from our refranchising strategy, contributing additional costs of approximately $4.0 million.
Franchise support and other costs increased $0.4 million in 2019 compared with a year ago due primarily to an increase in costs associated with franchise remodels in 2019.
Depreciation and Amortization
Depreciation and amortization decreased by $2.0 million in 2019 as compared with the prior year, primarily due to a decrease in equipment depreciation driven by a decrease in the average number of company-operated restaurants resulting from our refranchising activities in 2018. To a lesser extent, a decline in depreciation resulting from our franchise building assets becoming fully depreciated also contributed to the decrease.

27


Selling, General and Administrative (“SG&A”) Expenses
The following table presents the change in 2019 SG&A expenses compared with the prior year (in thousands):
 
Increase / (Decrease)
Incentive compensation (including share-based compensation and related payroll taxes)
$
(4,526
)
Advertising
(1,650
)
Technology fees
(1,470
)
Region administration
(964
)
Legal fees
857

Cash surrender value of COLI policies, net
1,712

Other (includes transition services income and savings related to our restructuring plan)
(3,937
)
 
$
(9,978
)
Incentive compensation decreased in 2019 primarily due to lower levels of performance in 2019 versus the prior year as compared to target bonus levels and a decrease of $1.0 million in share-based compensation primarily related to the elimination of retiree eligible accelerated vesting provisions in our fiscal 2019 restricted stock unit grants.
Advertising costs are primarily contributions to our marketing fund and are determined as a percentage of gross restaurant sales. Advertising costs decreased due to a decrease in the number of company-operated restaurants resulting from our refranchising efforts. These decreases were partially offset by incremental contributions to the marketing fund of $2.0 million in 2019 for additional system-wide promotional activity.
Upon adoption of ASC 606 in 2019, technology fees and costs are recorded on a gross basis within our condensed consolidated statements of earnings within “Franchise contributions from advertising and other services” and “Franchise advertising and other services expenses.”
Region administration costs decreased in 2019 as compared to 2018 due primarily to workforce reductions related to our refranchising efforts.
The cash surrender value of our Company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $1.4 million in 2019, compared with a positive impact of $0.3 million in the prior year.
Impairment and Other Charges, Net
Impairment and other charges, net is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Restructuring costs
$
5,840

 
$
358

Costs of closed restaurants and other
866

 
1,447

Losses on disposition of property and equipment, net
576

 
184

Accelerated depreciation
416

 
57

Operating restaurant impairment charges (1)

 
211

 
$
7,698

 
$
2,257

____________________________
(1)
In 2018, impairment charges relate to our landlord’s sale of a restaurant property to a franchisee.
 
Impairment and other charges, net increased $5.4 million in 2019 compared with a year ago. The increase was primarily driven by a $5.5 million increase in restructuring costs, primarily relating to severance and the Strategic Alternatives Evaluation. This increase was partially offset by a decrease of $0.6 million in costs of closed restaurants primarily related to changes in the market value of three closed restaurant properties held for sale in the first quarter of 2018. Refer to Note 7, Impairment and Other Charges, Net, of the notes to the condensed consolidated financial statements for additional information regarding these charges.

28



Gains on the Sale of Company-Operated Restaurants
Gains on the sale of company-operated restaurants, net are detailed in the following table (dollars in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Number of restaurants sold to franchisees

 
22

Gains on the sale of company-operated restaurants
$
219

 
$
8,940

Gains are impacted by the number of restaurants sold and changes in average gains or losses recognized, which primarily relate to the specific sales and cash flows of those restaurants. Gains in 2019 primarily relate to escrow funds released on restaurants sold in prior years. Refer to Note 4, Summary of Refranchisings and Franchisee Development, of the notes to the condensed consolidated financial statements for additional information regarding these gains.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
 
Sixteen Weeks Ended
 
January 20, 2019
 
January 21, 2018
Interest expense
$
17,612

 
$
12,811

Interest income
(238
)
 
(31
)
Interest expense, net
$
17,374

 
$
12,780