Jack In The Box 2014 Annual Report Download - page 36

assumptions including volatility and expected option life. If any of the assumptions used in the model change significantly, share-based compensation
expense may differ materially in the future from that recorded in the current period.
Goodwill and Other Intangibles — We evaluate goodwill and non-amortizing intangible assets annually, or more frequently if indicators of
impairment are present. Our impairment analyses first include a qualitative assessment to determine whether events 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. We performed our annual assessment of impairment over all of our goodwill and other intangibles
assets during the fourth quarter of 2014, and qualitatively determined that no impairment existed as of September 28, 2014. As of the impairment testing date,
the fair value of our reporting units significantly exceeded their carrying values.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to risks relating to financial instruments is changes in interest rates. Our credit facility is 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 28, 2014, the applicable margin for the LIBOR-based revolving loans and term loan was set at 1.75%.
We use interest rate swap agreements to reduce exposure to interest rate fluctuations. In April 2014, we entered into nine forward-starting interest rate swap
agreements that effectively convert $300.0 million of our variable rate borrowings to a fixed rate basis from October 2014 through October 2018. Based on
the applicable margin in effect as of September 28, 2014, these nine interest rate swaps would yield average fixed rates of 2.59%, 3.13%, 3.80% and 4.28% in
years one through four, respectively. For additional information related to our interest rate swaps, refer to Note 6, Derivative Instruments, of the notes to the
consolidated financial statements.
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 28, 2014, would result in an estimated increase of $2.1 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
increased costs for commodities and utilities through higher prices is limited by the competitive environment in which we operate. From time to time, we
enter into futures and option contracts to manage these fluctuations. At September 28, 2014, we had no such contracts in place.
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