Jack in the Box Inc. — Q1 FY2020 Form 10-Q
Business context and period. Jack in the Box operates and franchises quick-service restaurants. This quarter covers 16 weeks ended January 19, 2020, compared with 16 weeks ended January 20, 2019. At quarter-end, the system had 2,244 restaurants: 137 company-operated and 2,107 franchised.
Financial performance and liquidity
| Metric | Q1 FY2020 | Prior period | Change / context |
|---|---|---|---|
| Total revenue | $307.7 million | $290.8 million | Up 5.8%; franchise rent revenue growth includes lease-accounting presentation changes. |
| Operating earnings | $70.0 million | $58.3 million | Operating margin 22.7%, versus 20.1%; current period benefited from a $10.8 million office-building sale gain. |
| Net earnings | $7.9 million | $34.1 million | Basic and diluted EPS were $0.33, versus $1.32 and $1.31, respectively. Current earnings include a $38.6 million non-cash pension settlement charge; prior period included $3.0 million from discontinued operations. |
| Adjusted EBITDA | $76.6 million | $83.0 million | Down 7.8%; non-GAAP measure. |
| Operating cash flow | $22.7 million | $37.6 million | Down $14.9 million, attributed mainly to working-capital changes and lower earnings adjusted for non-cash items. |
| Cash and restricted cash | $38.3 million | $151.6 million at fiscal year-end | Quarter-end cash was $19.9 million and restricted cash $18.4 million. |
System same-store sales increased 1.7% (company-operated 2.9%; franchise 1.6%). Management attributed system growth primarily to menu price increases, partly offset by lower transactions and product-mix changes. Company restaurant costs rose to 75.2% of company sales from 73.8%, including higher food and labor costs. Commodity costs increased about 4.9%, with cheese up about 33% and beef about 15% year over year.
Long-term debt, net of current maturities, was $1.263 billion; current maturities were $13.8 million. The company had $1.3 billion outstanding on Class A-2 Notes and an undrawn $150 million variable funding facility, against which $42.1 million of letters of credit were outstanding. Because the defined leverage ratio exceeded 5.0x, quarterly principal payments of $3.25 million are required. The company reported compliance with debt covenants and no rapid-amortization event. Operating lease liabilities totaled about $926.6 million, recognized following adoption of ASC 842. Stockholders’ deficit was $841.2 million.
Financing cash outflow was $168.3 million, including $155.6 million of share repurchases and $9.4 million of dividends paid. The company repurchased 1.9 million shares for $153.5 million at an average $81.41 per share. A $0.40-per-share dividend was declared; a further $0.40 dividend was declared on February 18, 2020.
Material changes, outlook and risks
- Lease accounting: ASC 842 adoption added operating lease assets and liabilities to the balance sheet. Gross presentation of reimbursed property taxes and maintenance increased reported franchise rental revenue and occupancy expense without a net earnings effect. Management expected about $37 million of annual increases in those revenue and expense lines; reported quarter comparisons are therefore not fully comparable.
- Unusual items: The $38.6 million pension settlement charge followed a lump-sum benefit offer; the pension paid $122.3 million from plan assets, with no company cash impact. The office-building sale generated a $10.8 million gain. The company also accrued $3.8 million for a tentative employee-litigation settlement.
- Management outlook: Management expected operating cash flows and the securitized financing facility, including variable funding notes, to meet capital expenditure, working-capital and debt-service needs for at least the next 12 months. No specific earnings or sales guidance was provided. Management did not anticipate qualified pension-plan contributions in FY2020.
- Legal and contingent exposures: The Gessele wage-and-hour case remained unresolved; mediation was scheduled for March 2020, and possible losses beyond the recorded immaterial accrual could not be estimated. For the Ramirez matter, the company accrued $7.3 million and recorded an equal expected insurance recovery. The company also guarantees certain former Qdoba leases, with maximum potential payments of about $31.2 million; no liability was recorded because default was considered less than probable.
- Governance and controls: Disclosure controls were deemed ineffective due to a previously reported material weakness in internal control over financial reporting; remediation was ongoing. The CEO had announced plans to leave, and the board was seeking a successor. The filing also cites executive departures and risks including labor costs, commodity inflation, competition, franchisee performance, debt restrictions and litigation.
Key facts for investors to verify
- Separate underlying operating trends from the $10.8 million property-sale gain, pension settlement charge and ASC 842 gross-presentation effects.
- Assess cash generation and liquidity after substantial repurchases, restricted cash, required note amortization and lease obligations.
- Review debt leverage, the 5.0x payment trigger, covenant requirements and the timing and terms of anticipated note repayment.
- Monitor whether the internal-control material weakness is remediated and the CEO succession process is completed.
- Track litigation outcomes, expected insurance recoveries and the continuing Qdoba lease guarantees.