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Discontinued Operations
 9 Months Ended
Jul. 07, 2019
Discontinued Operations and Disposal Groups [Abstract]  
Discontinued Operations
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. We are still providing accounting and information technology services under the Agreement and currently estimate these services will be performed up to, but no later than, September 21, 2019. In 2019 and 2018, we recorded $0.9 million and $3.6 million in the quarter, respectively, and $6.5 million and $4.7 million year-to-date, respectively, in income related to the Services as a reduction of selling, general and administrative expenses in the condensed consolidated statements of earnings.
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):
 
Quarter
 
Year-to-date
 
July 7,
2019
 
July 8,
2018
 
July 7,
2019
 
July 8,
2018
Company restaurant sales
$
—

 
$
—

 
$
—

 
$
192,620

Franchise revenues
—

 
—

 
—

 
9,337

Company restaurant costs (excluding depreciation and amortization)
—

 
—

 
—

 
(166,122
)
Franchise costs (excluding depreciation and amortization)
—

 
—

 
—

 
(2,338
)
Selling, general and administrative expenses
(120
)
 
(202
)
 
123

 
(18,314
)
Depreciation and amortization
—

 
—

 
—

 
(5,012
)
Impairment and other charges, net
(262
)
 
(123
)
 
(262
)
 
(2,386
)
Interest expense, net
—

 
—

 
—

 
(4,787
)
Operating (losses) earnings from discontinued operations before income taxes
(382
)
 
(325
)
 
(139
)
 
2,998

Gain (loss) on Qdoba Sale
—

 
(3,648
)
 
(85
)
 
32,081

(Losses) earnings from discontinued operations before income taxes
(382
)
 
(3,973
)
 
(224
)
 
35,079

Income tax benefit (expense)
98

 
1,097

 
2,876

 
(15,927
)
(Losses) earnings from discontinued operations, net of income taxes
$
(284
)
 
$
(2,876
)
 
$
2,652

 
$
19,152

 
 
 
 
 
 
 
 
Net earnings per share from discontinued operations:
 
 
 
 
 
 
 
Basic
$
(0.01
)
 
$
(0.10
)
 
$
0.10

 
$
0.66

Diluted
$
(0.01
)
 
$
(0.10
)
 
$
0.10

 
$
0.65


Selling, general and administrative expenses presented in the table above include corporate costs directly in support of Qdoba operations, as well as resolutions of certain matters that existed prior to the Qdoba sale. 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.
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 $33.8 million as of July 7, 2019. The lease terms extend for a maximum of approximately 16 more years as of July 7, 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.