Jack In The Box 2012 Annual Report Download - page 32

or circumstances indicate the carrying amount may not be recoverable. If this assessment results in a less-than 50% likelihood that impairment exists, then
further analysis is not required. If the results of these analyses indicate otherwise, then we compare the fair value of the reporting unit for goodwill and the fair
value of the intangible asset to their respective carrying values. If the determined fair values of the respective assets are less than the related carrying amounts,
an impairment loss is recognized. The methods we use to estimate fair value include future cash flow assumptions, which may differ from actual cash flows
due to, among other things, economic conditions or changes in operating performance. During the fourth quarter of fiscal 2012, we reviewed our goodwill and
indefinite life intangible assets and determined that no impairment existed as of September 30, 2012.
Legal Accruals — The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if
any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts as we
deem appropriate. Because lawsuits are inherently unpredictable, and unfavorable resolutions could occur, assessing contingencies is highly subjective and
requires judgment about future events. As a result, the amount of ultimate loss may differ from those estimates.
Income Taxes — We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and
amortization expense allowable for tax purposes, allowable tax credits, effective rates for state and local income taxes and the tax deductibility of certain other
items. We adjust our effective income tax rate as additional information on outcomes or events becomes available. Our estimates are based on the best available
information at the time that we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end.
Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to
material adjustments or differing interpretations of the tax laws.
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In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, which was issued to enhance comparability between entities
that report under U.S. GAAP and International Financial Reporting Standards, and to provide a more consistent method of presenting non-owner transactions
that affect an entity’s equity. ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in
stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other
comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. Early adoption of the new guidance is permitted, and full retrospective application
is required. This pronouncement is not expected to have a material impact on our consolidated financial statements upon adoption.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on our consolidated financial statements upon adoption.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to risks relating to financial instruments is changes in interest rates. Our previous credit facility was comprised of a revolving credit
facility and a term loan, bearing interest at an annual rate equal to the prime rate or LIBOR plus an applicable margin based on a financial leverage ratio. As of
September 30, 2012, the applicable margin for the LIBOR-based revolving loans and term loan was set at 2.50%. As a result of the refinancing of our credit
facility, the applicable margin for our LIBOR-based revolving loans and term loan was reduced to 2.00%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. In August 2010, we entered into two interest rate swap agreements that
effectively convert $100.0 million of our variable rate term loan borrowings to a fixed-rate basis beginning September 2011 through September 2014. Based on
the term loan’s applicable margin of 2.50% as of September 30, 2012, these agreements would have an average pay rate of 1.54%, yielding a fixed rate of
4.04%. Subsequent to the refinancing, our fixed rate of 4.04% was reduced to 3.54% reflecting the lower applicable margin under the new credit facility.
A hypothetical 100 basis point increase in short-term interest rates, based on the outstanding unhedged balance of our revolving credit facility and term loan
at September 30, 2012, would result in an estimated increase of $3.2 million in annual interest expense.
We are also exposed to the impact of commodity and utility price fluctuations. Many of the ingredients we use are commodities or ingredients that are
affected by the price of other commodities, weather, seasonality, production, availability and various other factors outside our control. In order to minimize the
impact of fluctuations in price and availability, we monitor the primary commodities we purchase and may enter into purchasing contracts and pricing
arrangements when considered to be advantageous. However, certain commodities remain subject to price fluctuations. We are exposed to the impact of utility
price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover in
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