Jack In The Box Inc 10-Q for FY2022 Q3
Jack In The Box Inc (JACK)
10-Q
2022-08-10
For: 2022-07-10
View Original
Added on
April 06, 2026
About this 10-Q
Jack In The Box Inc filed this 10-Q on August 10, 2022, covering the quarter ended July 10, 2022 (FY2022 Q3).
Headline figures
Quarter ended July 10, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $398.31M
- up 47.8% from $269.46M a year earlier
- Net income
- $22.86M
- down 42.9% from net income of $40.03M a year earlier
- Diluted EPS
- $1.08
- down 39.7% from $1.79 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended July 10, 2022
or
for the transition period from ________to________.
Commission File Number: 1-9390
____________________________________________________
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||||
(Address of principal executive offices)
Registrant’s telephone number, including area code (858 ) 571-2121
_______________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| þ | Smaller reporting company | ||||||||||
| Accelerated filer | ☐ | Emerging growth company | |||||||||
| Non-accelerated filer | ☐ | ||||||||||
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 August 4, 2022, 21,057,109 shares of the registrant’s common stock were outstanding.
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
| Page | ||||||||
| PART I – FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II – OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| 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)
| July 10, 2022 | October 3, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Accounts and other receivables, net | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses | |||||||||||
| Current assets held for sale | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment: | |||||||||||
| Property and equipment, at cost | |||||||||||
| Less accumulated depreciation and amortization | ( | ( | |||||||||
| Property and equipment, net | |||||||||||
| Other assets: | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Intangible assets, net | |||||||||||
| Trademarks | |||||||||||
| Goodwill | |||||||||||
| Deferred tax assets | |||||||||||
| Other assets, net | |||||||||||
| Total other assets | |||||||||||
| $ | $ | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | $ | |||||||||
| Current operating lease liabilities | |||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net of current maturities | |||||||||||
| Long-term operating lease liabilities, net of current portion | |||||||||||
| Deferred tax liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total long-term liabilities | |||||||||||
| Stockholders’ deficit: | |||||||||||
Preferred stock $ | |||||||||||
Common stock $ | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost, | ( | ( | |||||||||
| Total stockholders’ deficit | ( | ( | |||||||||
| $ | $ | ||||||||||
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)
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Company restaurant sales | $ | $ | $ | $ | |||||||||||||||||||
| Franchise rental revenues | |||||||||||||||||||||||
| Franchise royalties and other | |||||||||||||||||||||||
| Franchise contributions for advertising and other services | |||||||||||||||||||||||
| Operating costs and expenses, net: | |||||||||||||||||||||||
| Food and packaging | |||||||||||||||||||||||
| Payroll and employee benefits | |||||||||||||||||||||||
| Occupancy and other | |||||||||||||||||||||||
| Franchise occupancy expenses | |||||||||||||||||||||||
| Franchise support and other costs | |||||||||||||||||||||||
| Franchise advertising and other services expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Other operating expenses, net | |||||||||||||||||||||||
| Gains on the sale of company-operated restaurants | ( | ( | ( | ( | |||||||||||||||||||
| Earnings from operations | |||||||||||||||||||||||
| Other pension and post-retirement expenses, net | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Earnings before income taxes | |||||||||||||||||||||||
| Income taxes | |||||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
Cash dividends declared per common share | $ | $ | $ | $ | |||||||||||||||||||
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)
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Net earnings | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income: | |||||||||||||||||||||||
| Actuarial losses and prior service costs reclassified to earnings | |||||||||||||||||||||||
| Tax effect | ( | ( | ( | ( | |||||||||||||||||||
| Other comprehensive income, net of taxes | |||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
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)
| Year-to-date | |||||||||||
| July 10, 2022 | July 4, 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | $ | |||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of franchise tenant improvement allowances and incentives | |||||||||||
| Deferred finance cost amortization | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Tax deficiency (excess tax benefit) from share-based compensation arrangements | ( | ||||||||||
| Deferred income taxes | ( | ||||||||||
| Share-based compensation expense | |||||||||||
| Pension and post-retirement expense | |||||||||||
| Losses (gains) on cash surrender value of company-owned life insurance | ( | ||||||||||
| Gains on the sale of company-operated restaurants | ( | ( | |||||||||
| Gains on the disposition of property and equipment, net | ( | ( | |||||||||
| Impairment charges and other | |||||||||||
| Changes in assets and liabilities, excluding acquisitions: | |||||||||||
| Accounts and other receivables | |||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Operating lease right-of-use assets and lease liabilities | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued liabilities | ( | ||||||||||
| Pension and post-retirement contributions | ( | ( | |||||||||
| Franchise tenant improvement allowance and incentive disbursements | ( | ( | |||||||||
| Other | ( | ( | |||||||||
| Cash flows provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Acquisition of Del Taco, net of cash acquired | ( | ||||||||||
| Proceeds from the sale of property and equipment | |||||||||||
| Proceeds from the sale and leaseback of assets | |||||||||||
| Proceeds from the sale of company-operated restaurants | |||||||||||
| Other | ( | ||||||||||
| Cash flows used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings on revolving credit facilities | |||||||||||
| Repayments of borrowings on revolving credit facilities | ( | ( | |||||||||
| Proceeds from the issuance of debt | |||||||||||
| Principal repayments on debt | ( | ( | |||||||||
| Payment of debt issuance and extinguishment costs | ( | ||||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Proceeds from issuance of common stock | |||||||||||
| Repurchases of common stock | ( | ||||||||||
| Payroll tax payments for equity award issuances | ( | ( | |||||||||
| Cash flows provided by (used in) financing activities | ( | ||||||||||
| Net increase (decrease) in cash and restricted cash | ( | ||||||||||
| Cash and restricted cash at beginning of period | |||||||||||
| Cash and restricted cash at end of period | $ | $ | |||||||||
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
On March 8, 2022, the Company acquired Del Taco Restaurants, Inc. (“Del Taco”) for cash according to the terms and conditions of the Agreement and Plan of Merger, dated as of December 5, 2021. Del Taco is a nationwide operator and franchisor of restaurants featuring fresh and fast Mexican and American inspired cuisines. Refer to Note 3, Business Combination, for further details.
As of July 10, 2022, there were 171 company-operated and 2,036 franchise-operated Jack in the Box restaurants and 291 company-operated and 303 franchise-operated Del Taco restaurants.
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”).
Certain reclassifications have been made to the prior year presentation to conform to the current year presentation.
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 October 3, 2021 (“2021 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2021 Form 10-K, with the exception of the significant accounting policies below that were adopted or applied upon the acquisition of Del Taco.
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.
Advertising costs — We administer marketing funds at each of our restaurant brands that include contractual contributions. In 2022 and 2021, marketing fund contributions from Jack in the Box franchise and company-operated restaurants were approximately 5.0 4.0 % of sales.
Total contributions made by the Company are included in “Selling, general, and administrative expenses” in the accompanying condensed consolidated statements of earnings and for the quarter and year-to-date totaled $9.8 million and $22.9 million, respectively, in 2022 and $4.6 million and $14.8 million, respectively, in 2021.
Allowance for credit losses — The Company closely monitors the financial condition of our franchisees and estimates the allowance for credit losses based on the lifetime expected loss on receivables. These estimates are based on historical collection experience with our franchisees as well as other factors, including current market conditions and events. Credit quality is monitored through the timing of payments compared to predefined aging criteria and known facts regarding the financial condition of the franchisee or customer. Account balances are charged off against the allowance after recovery efforts have ceased.
6
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table summarizes the activity in our allowance for doubtful accounts (in thousands):
| Year-to-date | |||||||||||
| July 10, 2022 | July 4, 2021 | ||||||||||
| Balance as of beginning of period | $ | ( | $ | ( | |||||||
| Provision for expected credit losses | ( | ( | |||||||||
| Write-offs charged against the allowance | |||||||||||
| Balance as of end of period | $ | ( | $ | ( | |||||||
Business combinations — We account for acquisitions using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values at the acquisition date. The excess of purchase price over fair value of net assets acquired, including the amount assigned to identifiable intangible assets, is recorded as goodwill.
Recent accounting pronouncements — In October 2021 the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, “Business Combinations - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805).” This standard requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance under Accounting Standards Codification (“ASC”) Topic 606 in order to align the recognition of a contract liability with the definition of a performance obligation. This approach differs from the current requirement to measure contract assets and contract liabilities acquired in a business combination at fair value. We elected to early adopt this standard in the second quarter of 2022. The adoption of ASU 2021-08 did not have a material impact on our condensed consolidated financial statements.
The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our condensed consolidated financial statements.
2.REVENUE
Nature of products and services — We derive revenue from retail sales at Jack in the Box and Del Taco company-operated restaurants and rental revenue, royalties, advertising, and franchise and other fees from franchise-operated restaurants.
Our franchise arrangements generally provide for an initial franchise fee per restaurant for a 20-year term, and generally require that franchisees pay royalty and marketing fees based upon a percentage of gross sales. The agreements also require franchisees to pay technology fees, as well as sourcing fees for Jack in the Box franchise agreements.
Disaggregation of revenue — The following table disaggregates revenue by segment and primary source for the period ended July 10, 2022 (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||
| Jack in the Box | Del Taco | Total | Jack in the Box | Del Taco | Total | ||||||||||||||||||||||||||||||
| Company restaurant sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Franchise rental revenues | |||||||||||||||||||||||||||||||||||
| Franchise royalties | |||||||||||||||||||||||||||||||||||
| Marketing fees | |||||||||||||||||||||||||||||||||||
| Technology and sourcing fees | |||||||||||||||||||||||||||||||||||
| Franchise fees and other services | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table disaggregates revenue by segment and primary source for the period ended July 4, 2021 (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||
| Jack in the Box | Del Taco | Total | Jack in the Box | Del Taco | Total | ||||||||||||||||||||||||||||||
| Company restaurant sales | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Franchise rental revenues | |||||||||||||||||||||||||||||||||||
| Franchise royalties | |||||||||||||||||||||||||||||||||||
| Marketing fees | |||||||||||||||||||||||||||||||||||
| Technology and sourcing fees | |||||||||||||||||||||||||||||||||||
| Franchise fees and other services | |||||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Contract liabilities — Our contract liabilities consist of deferred revenue resulting from initial franchise and development fees received from franchisees for new restaurant openings or new franchise terms, which are recognized over the franchise term. We classify these contract liabilities as “Accrued liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets.
A summary of significant changes in our contract liabilities is presented below (in thousands):
| Year-to-date | ||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | |||||||||||||||||||
| Deferred franchise and development fees at beginning of period | $ | $ | ||||||||||||||||||
| Changes due to business combinations | ||||||||||||||||||||
| Revenue recognized | ( | ( | ||||||||||||||||||
| Additions | ||||||||||||||||||||
| Deferred franchise and development fees at end of period | $ | $ | ||||||||||||||||||
As of July 10, 2022, approximately $5.2 million of development fees related to unopened stores are included in deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and are recognized over the franchise term at the date of opening.
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied as of July 10, 2022 (in thousands):
| Remainder of 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| $ | ||||||||
We have applied the optional exemption, as provided for under ASC Topic 606, Revenue from Contracts with Customers, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.
3.BUSINESS COMBINATION
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In connection with the transaction, the Company repaid Del Taco's existing debt of $115.2 million related to a syndicated credit facility and Del Taco entered into a new syndicated credit facility.
The total purchase consideration for Del Taco was $593.3 million. Each share of Del Taco common stock issued and outstanding was converted into the right to receive $12.51 in cash without interest, less any applicable withholding taxes (“Merger Consideration”). Additionally, in connection with the transaction, each Del Taco equity award granted under Del Taco’s equity compensation plans was either (i) converted into the right to receive Merger Consideration or (ii) converted into equity awards with respect to Jack in the Box common stock. Other components of purchase consideration include cash paid to settle Del Taco’s existing debt and $7.1 million of seller transaction costs funded by Jack in the Box.
As part of the Merger Agreement, on the Closing Date, the Company assumed Del Taco’s historical equity compensation plans. The awards under Del Taco’s historical equity compensation plans that were not subject to accelerated vesting were exchanged for replacement awards of the Company, which included Del Taco’s non-accelerating restricted stock awards (“non-accelerating RSAs”). Immediately following the Merger, these replacement awards were modified to accelerate the remaining vesting period to be one year following the Closing Date, other than the awards already scheduled to vest on June 30, 2022. The portion of the fair value of the replacement awards associated with pre-acquisition service of Del Taco’s employees represented a component of the total purchase consideration. The remaining fair value of these replacement awards are subject to the recipients’ continued service and thus were excluded from the purchase price. The awards which are subject to continued service will be recognized ratably as stock-based compensation expense over the requisite service period.
The acquisition of Del Taco was funded by cash on hand and borrowings under our 2022 Class A-2 Notes and 2022 Variable Funding Notes. The Company recognized transaction costs of $1.2 million and $12.4 million in the quarter and year-to-date of 2022, respectively. These costs were associated with advisory, legal, and consulting services and are presented in “Other operating expenses, net” in the condensed consolidated statement of earnings.
The acquisition of Del Taco has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with the Company treated as the accounting acquirer, which requires, among other things, that the assets acquired, and liabilities assumed be recognized at their acquisition date fair value.
Purchase consideration — The following summarizes the purchase consideration paid to Del Taco shareholders (in thousands, except per share data):
| Amount | |||||
| Del Taco shares outstanding as of March 8, 2022 | |||||
| Del Taco RSAs subject to accelerated vesting | |||||
| Del Taco RSUs subject to accelerated vesting | |||||
| Del Taco options subject to accelerated vesting | |||||
| Total Del Taco shares outstanding | |||||
| Merger Consideration (per Del Taco share) | $ | ||||
| Total cash consideration paid to selling shareholders | $ | ||||
| Del Taco transaction costs paid by Jack in the Box (1) | |||||
| Del Taco closing indebtedness settled by Jack in the Box (2) | |||||
| Replacement share-based payment awards pre-combination vesting expense | |||||
| Preliminary aggregate purchase consideration | $ | ||||
____________________________
(1)Represents the portion of Del Taco merger-related transaction costs that were paid at the Closing Date by the Company.
(2)Represents the closing indebtedness of Del Taco’s existing debt that was paid at the Closing Date by the Company.
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Purchase price allocation — The preliminary allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed is based on the estimated fair values and is as follows (in thousands):
| Initial Allocation of Consideration | Measurement Period Adjustments (1) | July 10, 2022 | |||||||||||||||
Total preliminary aggregate purchase consideration, net of $ | $ | $ | $ | ||||||||||||||
| Assets: | |||||||||||||||||
| Accounts and other receivables | |||||||||||||||||
| Inventories | |||||||||||||||||
| Prepaid expenses | |||||||||||||||||
| Other current assets | |||||||||||||||||
| Property and equipment | ( | ||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||
| Intangible assets | |||||||||||||||||
| Trademarks | |||||||||||||||||
| Other assets | |||||||||||||||||
| Liabilities: | |||||||||||||||||
| Current maturities of long-term debt | |||||||||||||||||
| Current operating lease liabilities | |||||||||||||||||
| Accounts payable | |||||||||||||||||
| Accrued liabilities | |||||||||||||||||
| Long-term debt, net of current maturities | |||||||||||||||||
| Long-term operating lease liabilities, net of current portion | |||||||||||||||||
| Deferred tax liabilities | ( | ||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Net assets acquired, excluding goodwill | $ | $ | ( | $ | |||||||||||||
| Goodwill | $ | $ | $ | ||||||||||||||
____________________________
The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, loss contingencies, and goodwill are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. The goodwill of $319.5 million arising from the acquisition is primarily attributable to the market position and future growth potential of Del Taco for both company-operated and franchised restaurants related to future store openings, expansion into new markets, and expected synergies. None of the goodwill resulting from the acquisition is deductible for tax purposes. We have not yet allocated goodwill related to the Del Taco acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period.
Identifiable intangible assets — The identifiable intangible assets acquired consist of trademarks, franchise and development agreements, and favorable subleases. The Company amortizes the fair value of the franchise and development agreements and favorable and unfavorable sublease assets and liabilities on a straight-line basis over their respective useful lives.
The trademarks were valued using the relief from royalty method of the income approach, which was applied by discounting the after-tax royalties avoided by owning the trade name to present value. The key inputs and assumptions included the Company's estimates of the projected system wide sales, royalty rate and discount rate applicable to the trade name.
The franchise and development agreements were valued using the income approach, which was applied by discounting the projected after-tax cash flows associated with the agreements to present value. The key inputs and assumptions included the
10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Company's estimates of the projected royalties received under the existing franchise and development agreements (including the impact of franchise churn) and the applicable discount rate.
The favorable and unfavorable sublease assets and liabilities were valued using the income approach, which was applied by discounting the differential between the market rent and contract rent to present value. The key inputs and assumptions included the Company's estimates of the market rent, contract rent and discount rate applicable to the favorable and unfavorable subleases.
The preliminary values allocated to intangible assets and the useful lives are as follows (in thousands):
| Amount | Useful life (Years) | |||||||||||||
| Trademarks | $ | Indefinite | ||||||||||||
| Franchise contracts | ||||||||||||||
| Sublease assets | ||||||||||||||
| Estimated fair value of acquired intangible assets | $ | |||||||||||||
Taxes — The preliminary allocation of the purchase price is based on preliminary valuations performed to determine the fair value of the net assets as of the Closing Date. The Company has conducted a preliminary assessment of the valuations, and has recognized provisional deferred income tax amounts in its preliminary allocation for the identified assets and liabilities. However, the Company is continuing its procedures to identify information pertaining to these matters during the measurement period. If new information is obtained about facts and circumstances that existed at the Closing Date, the Company will either adjust its measurement of provisional deferred income tax amounts or recognize and measure assets and liabilities not previously identified.
Unaudited pro forma results — The following unaudited pro forma combined financial information presents the Company’s results as though Del Taco and the Company had been combined as the beginning of fiscal year 2021 (in thousands):
| Quarter | Year-to-date | |||||||||||||||||||
| July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||
Total revenue | $ | $ | $ | |||||||||||||||||
Net earnings | $ | $ | $ | |||||||||||||||||
The unaudited pro forma financial information for all periods presented includes the business combination accounting effects resulting from this acquisition, mainly including adjustments to reflect additional amortization expense from acquired intangibles, incremental depreciation expense from the fair value property and equipment, elimination of historical interest expense associated with both Del Taco’s and the Company’s historical indebtedness, additional interest expense associated with the new Del Taco revolving credit facility and the Company’s new borrowings as part of the refinancing to fund the acquisition, adjusted rent expense reflecting the acquired right-of-use assets and liabilities to their estimated acquisition-date values based upon preliminary valuation of related lease intangibles and remaining payments, as well as the fair value adjustments made to leasehold improvements, certain material non-recurring adjustments and the tax-related effects as though Del Taco was combined as of the beginning of fiscal 2021. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
For the periods subsequent to the acquisition that are included in the quarter and year-to-date of 2022, Del Taco had total revenues of $189.3 million and net earnings of $5.2 million.
4.SUMMARY OF REFRANCHISINGS AND FRANCHISE ACQUISITIONS
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JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.GOODWILL AND INTANGIBLE ASSETS, NET
The changes in the carrying amount of goodwill during fiscal 2022 and 2021 were as follows (in thousands):
| Balance at September 27, 2020 | $ | ||||
| Acquisition of Jack in the Box franchise-operated restaurants | |||||
| Balance at October 3, 2021 | |||||
| Acquisition of Del Taco Restaurants, Inc. | |||||
| Acquisition of Jack in the Box franchise-operated restaurants | |||||
| Balance at July 10, 2022 | $ | ||||
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows (in thousands):
| July 10, 2022 | October 3, 2021 | ||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||||||||||||
| Sublease assets | $ | $ | ( | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Franchise contracts | ( | ||||||||||||||||||||||||||||||||||
| Reacquired franchise rights | ( | ( | |||||||||||||||||||||||||||||||||
| Total | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
The following table summarizes, as of July 10, 2022, the estimated amortization expense for each of the next five fiscal years (in thousands):
| Remainder of 2022 | $ | ||||
| 2023 | $ | ||||
| 2024 | $ | ||||
| 2025 | $ | ||||
| 2026 | $ | ||||
6.LEASES
Nature of leases — We own restaurant sites and we also lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the payment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance, and common area maintenance, which are excluded from the measurement of the lease liability.
As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees in connection with refranchising transactions. Revenues from leasing arrangements with our franchisees are presented in “Franchise rental revenues” in the accompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”
12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents rental income (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Operating lease income - franchise | $ | $ | $ | $ | |||||||||||||||||||
| Variable lease income - franchise | |||||||||||||||||||||||
| Amortization of favorable and unfavorable lease contracts, net | |||||||||||||||||||||||
| Franchise rental revenues | $ | $ | $ | $ | |||||||||||||||||||
| Operating lease income - closed restaurants and other (1) | $ | $ | $ | $ | |||||||||||||||||||
____________________________
(1)Primarily relates to closed restaurant properties included in “Other operating expenses, net” in our condensed consolidated statements of earnings.
The following table presents as of July 10, 2022, the annual maturities of our lease liabilities (in thousands):
| Finance Leases | Operating Leases | ||||||||||
| Fiscal year: | |||||||||||
| Remainder of 2022 | $ | $ | |||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| Thereafter | |||||||||||
| Total future lease payments (1) | $ | $ | |||||||||
| Less imputed interest | ( | ( | |||||||||
| Present value of lease liabilities | $ | $ | |||||||||
| Less current portion | ( | ( | |||||||||
| Long-term lease obligations | $ | $ | |||||||||
____________________________
(1)Total future lease payments include non-cancellable commitments of $1.7 million for finance leases and $1,468.4 million for operating leases.
7.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 (2) (Level 1) | Significant Other Observable Inputs (2) (Level 2) | Significant Unobservable Inputs (2) (Level 3) | ||||||||||||||||||||
| Fair value measurements as of July 10, 2022: | |||||||||||||||||||||||
| Non-qualified deferred compensation plan (1) | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Fair value measurements as of October 3, 2021: | |||||||||||||||||||||||
| Non-qualified deferred compensation plan (1) | $ | $ | $ | $ | |||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
____________________________
(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 did not have any transfers in or out of Level 1, 2 or 3.
13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents the carrying value and estimated fair value of our Class A-2 Notes as of July 10, 2022 and October 3, 2021 (in thousands):
| July 10, 2022 | October 3, 2021 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Series 2019 Class A-2 Notes | $ | $ | $ | $ | |||||||||||||||||||
| Series 2022 Class A-2 Notes | $ | $ | $ | $ | |||||||||||||||||||
The fair value of the Class A-2 Notes was estimated using Level 2 inputs based on quoted market prices in markets that are not considered active markets. As of July 10, 2022, we had $50.0 million of outstanding borrowings under our Variable Funding Notes. The fair value of these loans approximates their carrying value due to the variable rate nature of these borrowings.
Non-financial assets and liabilities — Our non-financial instruments, which primarily consist of property and equipment, operating lease right-of-use assets, 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 2022, no material fair value adjustments were required.
8.INDEBTEDNESS
Our long-term debt obligations consist of the following (in thousands):
| July 10, 2022 | October 3, 2021 | ||||||||||
| Series 2019-1 Class A-2-I Notes | $ | $ | |||||||||
| Series 2019-1 Class A-2-II Notes | |||||||||||
| Series 2019-1 Class A-2-III Notes | |||||||||||
| Series 2022-1 Class A-2-I Notes | |||||||||||
| Series 2022-1 Class A-2-II Notes | |||||||||||
| Series 2022-1 Class A-2-I Variable Funding Notes | |||||||||||
| Revolving Credit Facility | |||||||||||
| Finance lease obligations and other debt | |||||||||||
| Total debt | |||||||||||
| Less current maturities of long-term debt | ( | ( | |||||||||
| Less unamortized debt issuance costs | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Securitization refinancing transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445 % Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136 % Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively (the “Anticipated Repayment Dates”), unless earlier prepaid to the extent permitted under the indenture that will govern the 2022 Notes.
The Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The Company’s existing revolving financing facility of Series 2019-1 Class A-1 Notes was terminated in connection with the transaction. As of July 10, 2022, we had outstanding borrowings of $50.0 million and available borrowing capacity of $58.0 million under our 2022 Variable Funding Notes, net of letters of credits issued of $42.0 million.
14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The net proceeds of the sale of the 2022 Notes were used to repay in full of $570.7 million in aggregate outstanding principal amount of the Company’s Series 2019-1 Class A-2-I Notes, together with the applicable make-whole premium and unpaid interest, and was used to fund a portion of the Company’s acquisition of Del Taco Restaurants, Inc. As a result, the Company recorded a loss on early extinguishment of debt of $5.6 million during the second quarter of 2022, which was comprised of the write-off of certain deferred financing costs and a specified make-whole premium payment, and is presented in “Interest expense, net” in the condensed consolidated statement of earnings. Additionally, in connection with the 2022 Notes, the Company capitalized $17.4 million of debt issuance costs, which are being amortized into interest expense over the Anticipated Repayment Dates, utilizing the effective interest rate method. The costs related to our Variable Funding Notes are presented within “Other assets, net” and are being amortized over the Anticipated Repayment Date of February 2027 using the straight-line method.
The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes.
The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0 x. Exceeding the leverage ratio of 5.0 x does not violate any covenant related to the Class A-2 Notes. Subsequent to closing the issuance of the 2022 Notes, the Company has had a leverage ratio of greater than 5.0 x and, accordingly, the Company resumed making the scheduled amortization payments on its 2022 Notes and Series 2019-1 Notes beginning in the second quarter of 2022.
Revolving credit facility — In connection with the Del Taco acquisition, Del Taco’s existing debt of $115.2 million related to a Syndicated Credit Facility dated August 5, 2015, was repaid and extinguished on the Closing Date. On the Closing Date, Del Taco entered into a new syndicated credit facility with an aggregate principal amount of up to $75.0 million, maturing on March 7, 2023. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of July 10, 2022, we had no outstanding borrowings and available borrowing capacity of $61.9 million under the facility, net of letters of credit of $13.1 million. The Company capitalized $0.3 million of debt issuance costs, which are being amortized into interest expense over the expected term of the credit facility.
Bridge commitment letter — In connection with the Merger Agreement, the Company secured commitments for a bridge financing facility in an amount of up to $600.0 million (the “Bridge Facility”). No amounts were drawn under the Bridge Facility, which was terminated as a result of our securitization refinancing transaction. The Company expensed approximately $2.1 million for the unamortized issuance costs associated with this commitment which is presented in “Interest expense, net” in the condensed consolidated statement of earnings.
Maturities of long-term debt — Assuming repayment by the Anticipated Repayment Dates and based on the leverage ratio as of July 10, 2022, principal payments on our long-term debt outstanding at July 10, 2022 for each of the next five fiscal years and thereafter are as follows (in thousands):
| Remainder of 2022 | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| $ | |||||
15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9.OTHER OPERATING EXPENSE, NET
Other operating expenses, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Acquisition, integration, and restructuring costs (1) | $ | $ | $ | $ | |||||||||||||||||||
| Costs of closed restaurants and other (2) | |||||||||||||||||||||||
| Operating restaurant impairment charges (3) | |||||||||||||||||||||||
| Accelerated depreciation | |||||||||||||||||||||||
| (Gains) losses on disposition of property and equipment, net | ( | ( | ( | ||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
____________________________
(1)Acquisition, integration, and restructuring costs include costs incurred by the Company, including integration costs and fees related to advisory, legal, investment banking, and other professional services, all of which are directly attributable to the Del Taco acquisition.
(2)Costs of closed restaurants primarily include impairment charges as a result of our decision to close restaurants, ongoing costs associated with closed restaurants, and canceled project costs.
(3)In 2022, restaurant impairment charges included $1.7 million related to the impairment of five under-performing Jack in the Box company-operated restaurants which are currently held for use.
10.SEGMENT REPORTING
Our principal business consists of developing, operating and franchising our Jack in the Box and Del Taco restaurant brands, each of which we consider a reportable operating segment. This segment reporting structure reflects our current management structure, internal reporting method and financial information used in deciding how to allocate our resources. Based upon certain quantitative thresholds, each operating segment is considered a reportable segment.
We measure and evaluate our segments based on segment revenues and segment profit. Our measure of segment profit excludes depreciation and amortization, share-based compensation, company-owned life insurance (“COLI”) gains/losses, net of changes in our non-qualified deferred compensation obligation supported by these policies, acquisition, integration, and restructuring expenses, gains on the sale of company-operated restaurants, and amortization of favorable and unfavorable leases and subleases, net. The following table provides information related to our operating segments in each period ( in thousands):
16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Revenues by segment: | |||||||||||||||||||||||
| Jack in the Box | $ | $ | $ | $ | |||||||||||||||||||
| Del Taco | |||||||||||||||||||||||
| Consolidated revenues | $ | $ | $ | $ | |||||||||||||||||||
| Segment operating profit: | |||||||||||||||||||||||
| Jack in the Box | $ | $ | $ | $ | |||||||||||||||||||
| Del Taco | |||||||||||||||||||||||
| Total segment operating profit | $ | $ | $ | $ | |||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Acquisition, integration, and restructuring costs | |||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||
| Net COLI losses (gains) | ( | ( | |||||||||||||||||||||
| Gains on the sale of company-operated restaurants | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of favorable and unfavorable leases and subleases, net | |||||||||||||||||||||||
| Earnings from operations | $ | $ | $ | $ | |||||||||||||||||||
| Total capital expenditures by segment: | |||||||||||||||||||||||
| Jack in the Box | $ | $ | $ | $ | |||||||||||||||||||
| Del Taco | |||||||||||||||||||||||
| Total capital expenditures | $ | $ | $ | $ | |||||||||||||||||||
| Total depreciation and amortization by segment: | |||||||||||||||||||||||
| Jack in the Box | $ | $ | $ | $ | |||||||||||||||||||
| Del Taco | |||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | |||||||||||||||||||
We do not evaluate, manage or measure performance of segments using asset, interest income and expense, or income tax information; accordingly, this information by segment is not prepared or disclosed.
11.INCOME TAXES
12.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.
Post-retirement healthcare plans — We also sponsor two healthcare plans, closed to new participants, that provide post-retirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and they contain other cost-sharing features such as deductibles and coinsurance.
17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows ( in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Defined benefit pension plans: | |||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | |||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Actuarial losses (1) | |||||||||||||||||||||||
| Amortization of unrecognized prior service costs (1) | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
| Post-retirement healthcare plans: | |||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | |||||||||||||||||||
| Actuarial gains (1) | ( | ( | ( | ( | |||||||||||||||||||
| Net periodic benefit cost | $ | ( | $ | $ | ( | $ | |||||||||||||||||
____________________________
(1)Amounts were reclassified from accumulated other comprehensive income into net earnings as a component of “Other pension and post-retirement expenses, net .”
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of January 1, 2021, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for the Qualified Plan. Details regarding 2022 contributions are as follows ( in thousands):
| SERP | Post-Retirement Healthcare Plans | ||||||||||
| Net year-to-date contributions | $ | $ | |||||||||
| Remaining estimated net contributions during fiscal 2022 | $ | $ | |||||||||
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 2022.
18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.STOCKHOLDERS’ DEFICIT
Summary of changes in stockholders’ deficit — A reconciliation of the beginning and ending amounts of stockholders’ deficit is presented below (in thousands):
| Number of Shares | Amount | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||
| Balance at October 3, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at January 23, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Fair value of assumed Del Taco RSAs attributable to pre-combination service | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at April 17, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at July 10, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Number of Shares | Amount | Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | ||||||||||||||||||||||||||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at January 17, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at April 11, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
| Shares issued under stock plans, including tax benefit | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Dividends declared | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Purchases of treasury stock | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||
| Net earnings | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Balance at July 4, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||
Repurchases of common stock — There were no repurchases of common stock in fiscal 2022. As of July 10, 2022, there was $200.0 million remaining under share repurchase programs authorized by the Board of Directors which expires in November 2023.
Dividends — During 2022, the Board of Directors declared three cash dividends of $0.44 28.0 million. Future dividends are subject to approval by our Board of Directors.
14.AVERAGE SHARES OUTSTANDING
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Weighted-average shares outstanding – basic | |||||||||||||||||||||||
| Effect of potentially dilutive securities: | |||||||||||||||||||||||
| Nonvested stock awards and units | |||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||
| Performance share awards | |||||||||||||||||||||||
| Weighted-average shares outstanding – diluted | |||||||||||||||||||||||
| Excluded from diluted weighted-average shares outstanding: | |||||||||||||||||||||||
| Antidilutive | |||||||||||||||||||||||
| Performance conditions not satisfied at the end of the period | |||||||||||||||||||||||
20
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
15.COMMITMENTS AND CONTINGENCIES
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. As of July 10, 2022, we estimate the aggregate range of reasonably possible losses, in excess of amounts accrued for these matters as of such date, to be up to approximately $10 million, excluding interest and attorney fees. Any estimate is not an indication of expected loss, if any, or of the Company’s maximum possible loss exposure and the ultimate amount of loss may differ materially from these estimates in the near term.
In August 2010, five former Jack in the Box 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 Jack in the Box 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. The parties participated in a voluntary mediation on March 16, 2020, but the matter did not settle. The Company continues to dispute liability and the plaintiffs’ damages calculations and will continue to vigorously defend against the lawsuit.
In March 2014, a former Del Taco employee filed a purported Private Attorneys General Act claim and class action alleging various causes of action under California’s labor, wage, and hour laws. The plaintiff generally alleges Del Taco did not appropriately provide meal and rest breaks and failed to pay wages and reimburse business expenses to its California non-exempt employees. On November 12, 2021, the court granted, in part, the plaintiff's motion for class certification. The parties participated in a voluntary mediation on May 24, 2022 and June 3, 2022. On June 4, 2022, we entered into a Settlement Memorandum of Understanding (the “Agreement”) which obligates the Company to pay a gross settlement amount of $50.0 million, for which in exchange we will be released from all claims by the parties. The Agreement contains no admission of wrongdoing and is contingent upon various conditions, including, but not limited to, court approvals. There can be no assurance that the Agreement will be approved by the court nor upheld if challenged on appeal. As of July 10, 2022, the Company has accrued the settlement amount, included within “Accrued liabilities” on our condensed consolidated balance sheet.
On April 17, 2019, the trustee for a bankrupt former franchisee filed a complaint seeking to recover assets in the form of actual and exemplary damages for the bankruptcy trust and generally alleging the Company wrongfully terminated the franchise agreements and unreasonably denied two perspective purchasers that the former franchisee presented. The parties participated in a mediation in April 2021, but the matter did not settle. Trial in this matter is currently set for January 2023, with the court ordering the parties to participate in another mediation.
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. We record receivables from third party insurers when recovery has been determined to be probable.
Lease guarantees — We remain contingently liable for certain leases relating to our former Qdoba business which we sold in fiscal 2018. Under the Qdoba Purchase Agreement, the buyer has indemnified the Company of all claims related to these guarantees. As of July 10, 2022, the maximum potential liability of future undiscounted payments under these leases is approximately $24.8 million. The lease terms extend for a maximum of approximately 16 more years and we would remain a guarantor of the leases in the event the leases are extended for any established renewal periods. In the event of default, 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. The Company has not recorded a liability for these guarantees as we believe the likelihood of making any future payments is remote.
21
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
| Year-to-date | |||||||||||
| July 10, 2022 | July 4, 2021 | ||||||||||
| Non-cash investing and financing transactions: | |||||||||||
| Increase in obligations for treasury stock repurchases | $ | $ | |||||||||
| Increase (decrease) in obligations for purchases of property and equipment | $ | ( | $ | ||||||||
| Increase in dividends accrued or converted to common stock equivalents | $ | $ | |||||||||
| Right-of use assets obtained in exchange for operating lease obligations | $ | $ | |||||||||
| Right-of use assets obtained in exchange for finance lease obligations | $ | $ | |||||||||
22
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
17.SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
| July 10, 2022 | October 3, 2021 | ||||||||||
| Accounts and other receivables, net: | |||||||||||
| Trade | $ | $ | |||||||||
| Notes receivable, current portion | |||||||||||
| Income tax receivable | |||||||||||
| Other | |||||||||||
| Allowance for doubtful accounts | ( | ( | |||||||||
| $ | $ | ||||||||||
| Prepaid expenses: | |||||||||||
| Prepaid income taxes | $ | $ | |||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
| Property and equipment, net | |||||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Restaurant and other equipment | |||||||||||
| Construction in progress | |||||||||||
| Less accumulated depreciation and amortization | ( | ( | |||||||||
| $ | $ | ||||||||||
| Other assets, net: | |||||||||||
| Company-owned life insurance policies | $ | $ | |||||||||
| Deferred rent receivable | |||||||||||
| Franchise tenant improvement allowance | |||||||||||
| Notes receivable, less current portion | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
| Accrued liabilities: | |||||||||||
| Legal accruals | $ | $ | |||||||||
| Payroll and related taxes | |||||||||||
| Insurance | |||||||||||
| Sales and property taxes | |||||||||||
| Deferred rent income | |||||||||||
| Advertising | |||||||||||
| Deferred franchise and development fees | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
| Other long-term liabilities: | |||||||||||
| Defined benefit pension plans | $ | $ | |||||||||
| Deferred franchise and development fees | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
18.SUBSEQUENT EVENTS
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2022 and 2021 refer to the 12 weeks (“quarter”) and 40 weeks (“year-to-date”) ended July 10, 2022 and July 4, 2021, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during 2022 and 2021, 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 October 3, 2021.
Our MD&A consists of the following sections:
•Overview — a general description of our business.
•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 capital expenditures, share repurchase activity, dividends, and known known trends that may impact liquidity.
•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”), systemwide 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, marketing fees 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 represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding income taxes, interest expense, net, gains on the sale of company-operated restaurants, other operating expenses, net, depreciation and amortization, amortization of favorable and unfavorable leases and subleases, net, and amortization of tenant improvement allowances and incentives. 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, systemwide 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.
24
OVERVIEW
Our Business
Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. As of July 10, 2022, we operated and franchised 2,207 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam. On March 8, 2022, we completed the acquisition of Del Taco Restaurants, Inc. (“Del Taco”), the nation’s second largest Mexican quick service restaurant chain by number of restaurants and has approximately 594 restaurants across 16 states, including one in Guam.
We derive revenue from retail sales at company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees.
Impact of COVID-19
The COVID-19 pandemic has continued to have varying degrees of disruption on our business. Our business has continued to be challenged by availability and cost of labor resulting in occasional temporarily closed restaurants and reduced operating hours. We have continued to have limited shortages in our supply chain; however, inflationary pressures have continued to have a significant impact on our business.
We expect these operating margin pressures due to labor and supply chain challenges to continue for the remainder of fiscal 2022.
Other Developments
As previously announced, a franchisee that operated 68 restaurants in Missouri and Illinois filed for chapter 11 bankruptcy in February 2021. Of the 68 restaurants, we sublease 50 of the locations to the franchisee and own the land and building for the remaining 18 locations. Since the inception of the bankruptcy proceedings, the franchisee has filed motions to reject 11 locations, which the court has authorized. No material impairment costs were recorded in the financial statements as a result of these locations being rejected near the expiration of our master lease agreements. We currently do not anticipate any additional locations being rejected.
On July 18, 2022, the Court approved the franchisee’s plan of reorganization with the same terms we previously agreed to in May 2022. The reorganization plan includes a waiver of a portion of damages associated with the rejected locations, reduced royalties following plan confirmation, and the settlement of the remaining cure costs via a secured note upon emergence from bankruptcy, in addition to deferring all amounts owed under the franchise agreements starting in February through the bankruptcy resolution date. The secured note provides for repayment based on a calculation of net free cash flows generated from the franchisee’s restaurants. To the extent future net free cash flows are insufficient to satisfy the secured note at a future specified date, then we agreed to waive any remaining balance due to the Company.
Based on the events above, we concluded that the collectability of the deferrals starting in February 2022 were doubtful and therefore no revenue has been recognized. Furthermore, we increased our bad debt reserve related to this matter to fully reserve the $3.8 million owed to the Company.
RESULTS OF OPERATIONS
The following table summarizes changes in same-store sales for Jack in the Box company-operated, franchised, and system restaurants:
| Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||
| Jack in the Box: | July 10, 2022 (1) | July 4, 2021 | July 10, 2022 (1) | July 4, 2021 | |||||||||||||||||||||||||||||||
| Company | 3.5 | % | 9.0 | % | 1.5 | % | 10.0 | % | |||||||||||||||||||||||||||
| Franchise | (1.0) | % | 10.3 | % | (0.1) | % | 14.5 | % | |||||||||||||||||||||||||||
| System | (0.6) | % | 10.2 | % | — | % | 14.0 | % | |||||||||||||||||||||||||||
(1)Due to the transition from a 53-week year to a 52-week year, year-over-year fiscal period comparisons are off by one week. The change in same store sales uses comparable calendar periods to balance a one week shift and to provide a clearer year over year comparison.
25
The following table summarizes changes in the number and mix of Jack in the Box company and franchise restaurants:
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Jack in the Box: | Company | Franchise | Total | Company | Franchise | Total | |||||||||||||||||||||||||||||
| Beginning of year | 163 | 2,055 | 2,218 | 144 | 2,097 | 2,241 | |||||||||||||||||||||||||||||
| New | — | 10 | 10 | — | 10 | 10 | |||||||||||||||||||||||||||||
| Acquired from franchisees | 13 | (13) | — | 4 | (4) | — | |||||||||||||||||||||||||||||
| Closed | (5) | (16) | (21) | — | (32) | (32) | |||||||||||||||||||||||||||||
| End of period | 171 | 2,036 | 2,207 | 148 | 2,071 | 2,219 | |||||||||||||||||||||||||||||
| % of system | 8 | % | 92 | % | 100 | % | 7 | % | 93 | % | 100 | % | |||||||||||||||||||||||
The following table summarizes restaurant sales for Jack in the Box company-operated, franchised, and systemwide sales (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| Jack in the Box: | July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | |||||||||||||||||||
| Company-operated restaurant sales | $ | 100,899 | $ | 91,892 | $ | 315,205 | $ | 292,132 | |||||||||||||||
| Franchised restaurant sales (1) | 867,210 | 889,558 | 2,825,353 | 2,852,746 | |||||||||||||||||||
| Systemwide sales (1) | $ | 968,109 | $ | 981,450 | $ | 3,140,558 | $ | 3,144,878 | |||||||||||||||
____________________________
(1)Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. System sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and system restaurant sales information is useful to investors as they have a direct effect on the Company's profitability.
Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| Consolidated: | July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | |||||||||||||||||||
| Net earnings - GAAP | $ | 22,857 | $ | 40,028 | $ | 69,923 | $ | 126,821 | |||||||||||||||
| Income tax expense | 9,237 | 11,991 | 27,324 | 42,576 | |||||||||||||||||||
| Interest expense, net | 19,703 | 15,158 | 66,371 | 51,120 | |||||||||||||||||||
| Gains on the sale of company-operated restaurants | (802) | (264) | (1,660) | (3,079) | |||||||||||||||||||
| Other operating expenses, net | 4,129 | 922 | 22,339 | 1,698 | |||||||||||||||||||
| Depreciation and amortization | 16,713 | 10,389 | 40,754 | 35,656 | |||||||||||||||||||
| Amortization of favorable and unfavorable leases and subleases, net | 437 | — | 685 | — | |||||||||||||||||||
| Amortization of franchise tenant improvement allowances and incentives | 919 | 796 | 3,046 | 2,330 | |||||||||||||||||||
| Adjusted EBITDA - Non-GAAP | $ | 73,193 | $ | 79,020 | $ | 228,782 | $ | 257,122 | |||||||||||||||
26
Jack in the Box Brand
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Company restaurant sales | $ | 100,899 | $ | 91,892 | $ | 315,205 | $ | 292,132 | |||||||||||||||||||||||||||||||||||||||
| Company restaurant costs: | |||||||||||||||||||||||||||||||||||||||||||||||
| Food and packaging | $ | 33,319 | 33.0 | % | $ | 27,061 | 29.4 | % | $ | 101,543 | 32.2 | % | $ | 83,376 | 28.5 | % | |||||||||||||||||||||||||||||||
| Payroll and employee benefits | $ | 33,699 | 33.4 | % | $ | 27,356 | 29.8 | % | $ | 105,431 | 33.4 | % | $ | 88,727 | 30.4 | % | |||||||||||||||||||||||||||||||
| Occupancy and other | $ | 17,959 | 17.8 | % | $ | 14,103 | 15.3 | % | $ | 56,220 | 17.8 | % | $ | 45,287 | 15.5 | % | |||||||||||||||||||||||||||||||
Company restaurant sales increased $9.0 million or 9.8% in the quarter and $23.1 million or 7.9% year-to-date compared to the prior year, primarily due to an increase in the number of company-operated restaurants, average check growth and partially offset by a decline in traffic. The following table presents the approximate impact of these items on company restaurant sales (in millions):
| Quarter | Year-to-date | ||||||||||||||||||||||
| Increase in the average number of restaurants | $ | 4.3 | $ | 11.4 | |||||||||||||||||||
| AUV increase | 4.7 | 11.7 | |||||||||||||||||||||
| Total change in company restaurant sales | $ | 9.0 | $ | 23.1 | |||||||||||||||||||
Same-store sales at company-operated restaurants increased 3.5% in the quarter and 1.5% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:
| Quarter | Year-to-date | ||||||||||||||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||||||||||||||
| Average check (1) | 5.6 | % | 4.8 | % | 4.2 | % | 16.4 | % | |||||||||||||||||||||||||||
| Transactions | (2.1) | % | 4.2 | % | (2.7) | % | (6.4) | % | |||||||||||||||||||||||||||
| Change in same-store sales | 3.5 | % | 9.0 | % | 1.5 | % | 10.0 | % | |||||||||||||||||||||||||||
____________________________
(1)Includes price increases of approximately 9.7% in the quarter and 7.6% year-to-date.
Food and packaging costs as a percentage of company restaurant sales increased 3.6% in the quarter, including 4.0% of higher commodity costs, and 2.5% of unfavorable menu item mix and other, partially offset by 2.9% of increased menu pricing. Food and packaging costs as a percentage of company restaurant sales increased 3.7% year-to-date, including 3.5% of higher commodity costs, and 2.4% of unfavorable menu item mix and other, partially offset by 2.2% of increased menu pricing.
Commodity costs increased in the quarter and year-to-date by approximately 16.8% and 14.2%, respectively. The inflation we have experienced is across all categories with the greatest impact seen in proteins, sauces, oils, and beverages. For fiscal 2022, we expect annual commodity cost inflation to be up 12% to 14% compared with fiscal 2021.
Payroll and employee benefit costs as a percentage of company restaurant sales increased 3.6% in the quarter and 3.0% year-to-date, primarily due to labor inflation, a change in the mix of restaurants due to franchisee acquisitions, partially offset by lower incentive compensation. Labor inflation was approximately 13.2% in the quarter and 12.8% year-to-date for the current fiscal year. For fiscal 2022, we expect annual wage inflation to be up 12% to 13% compared with fiscal 2021.
Occupancy and other costs, as a percentage of company restaurant sales, increased 2.5% in the quarter and 2.3% year-to-date, primarily due to the acquisition of 29 restaurants since a year ago with lower than average sales volumes, and higher costs for maintenance and repair and utilities.
27
Jack in the Box 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):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Franchise rental revenues | $ | 78,278 | $ | 80,598 | $ | 257,069 | $ | 262,248 | |||||||||||||||
| Royalties | 44,291 | 45,950 | 144,872 | 146,913 | |||||||||||||||||||
| Franchise fees and other | 2,340 | 2,632 | 6,944 | 8,548 | |||||||||||||||||||
| Franchise royalties and other | 46,631 | 48,582 | 151,816 | 155,461 | |||||||||||||||||||
| Franchise contributions for advertising and other services | 46,168 | 48,386 | 151,934 | 155,375 | |||||||||||||||||||
| Total franchise revenues | $ | 171,077 | $ | 177,566 | $ | 560,819 | $ | 573,084 | |||||||||||||||
| Franchise occupancy expenses | $ | 49,216 | $ | 48,824 | $ | 161,602 | $ | 162,897 | |||||||||||||||
| Franchise support and other costs | 3,422 | 2,722 | 12,161 | 9,336 | |||||||||||||||||||
| Franchise advertising and other services expenses | 47,622 | 49,168 | 157,779 | 158,967 | |||||||||||||||||||
| Total franchise costs | $ | 100,260 | $ | 100,714 | $ | 331,542 | $ | 331,200 | |||||||||||||||
| Franchise costs as a percentage of total franchise revenues | 58.6% | 56.7% | 59.1% | 57.8% | |||||||||||||||||||
| Average number of franchise restaurants | 2,028 | 2,063 | 2,032 | 2,072 | |||||||||||||||||||
| % decrease | (1.7)% | (1.9)% | |||||||||||||||||||||
| Franchised restaurant sales | $ | 867,210 | $ | 889,558 | $ | 2,825,353 | $ | 2,852,746 | |||||||||||||||
| Franchised restaurant AUVs | $ | 428 | $ | 431 | $ | 1,391 | $ | 1,377 | |||||||||||||||
| Royalties as a percentage of total franchised restaurant sales | 5.1% | 5.2% | 5.1% | 5.1% | |||||||||||||||||||
Franchise rental revenues decreased $2.3 million, or 2.9% in the quarter and $5.2 million, or 2.0% year-to-date, driven by a reduction in the number of franchise subleases compared to prior year in addition to the impact of deferring $1.4 million and $2.6 million respectively, in connection with a franchisee currently in bankruptcy proceedings for which revenue will be recognized upon payment.
Franchise royalties and other decreased $2.0 million, or 4.0% in the quarter and $3.6 million, or 2.3% year-to-date, primarily due to lower fees received in connection with the early termination of franchise agreements as well as the deferral of $0.9 million and $1.7 million respectively, in connection with the franchisee bankruptcy matter.
Franchise contributions for advertising and other services revenues decreased $2.2 million, or 4.6% in the quarter and $3.4 million, or 2.2% year-to-date compared to the prior year, primarily due to lower marketing contributions of $1.7 million and $2.6 million respectively, driven by a decrease in the number of franchise restaurants as well as deferrals in connection with the franchisee bankruptcy matter.
Franchise occupancy expenses, primarily rent, increased $0.4 million, or 0.8% in the quarter and decreased $1.3 million, or 0.8% year-to-date compared to the prior year. In the quarter, the increase is due to higher property tax assessments in the current year. Year-to-date, the decrease is primarily due to a reduction in the number of franchise subleases compared to prior year.
Franchise support and other costs increased $0.7 million in the quarter and $2.8 million year-to-date compared to the prior year, primarily due to an increase in franchisee bad debt expense as a result of developments in a franchisee’s ongoing bankruptcy proceedings.
Franchise advertising and other service expenses decreased $1.5 million, or 3.1% in the quarter and $1.2 million, or 0.7% year-to-date compared to the prior year primarily due to a reduction in the number of franchise restaurants.
Del Taco Brand
As of July 10, 2022, there were 291 company-operated and 303 franchise-operated Del Taco restaurants. System same-store sales increased 3.5% and total revenues and segment operating profit were $126.3 million and $12.2 million in the quarter and $189.3 million and $18.3 million year-to-date.
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Company-Wide Results
Depreciation and Amortization
Depreciation and amortization increased by $6.3 million in the quarter and $5.1 million year-to-date primarily due to the acquisition of Del Taco, contributing an additional $7.5 million and $9.7 million of depreciation in the quarter and year-to-date; more than offsetting lower Jack in the Box depreciation as a result of certain franchise buildings becoming fully depreciated.
Selling, General and Administrative (“SG&A”) Expenses
The following table presents the change in SG&A expenses compared with the prior year (in thousands):
| Increase/(Decrease) | |||||||||||
| Quarter | Year-to-date | ||||||||||
| Advertising | $ | 5,123 | $ | 8,145 | |||||||
| Incentive compensation (including share-based compensation and related payroll taxes) | (150) | (4,335) | |||||||||
| Cash surrender value of COLI policies, net | 7,198 | 16,117 | |||||||||
| Litigation matters | (2,125) | (2,141) | |||||||||
| Insurance | 465 | 1,665 | |||||||||
| Other | 7,779 | 13,297 | |||||||||
| $ | 18,290 | $ | 32,748 | ||||||||
Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $5.1 million in the quarter and $8.1 million year-to-date compared to the prior year primarily due to the acquisition of Del Taco which resulted in higher advertising costs of $4.7 million in the quarter and $7.0 million year-to-date.
Incentive compensation decreased by $0.2 million in the quarter and $4.3 million year-to-date compared to the prior year. Year-to-date, the decrease is primarily due to a $6.2 million decrease in the annual incentives, partially offset by a $2.2 million increase in stock-based compensation mainly from timing of annual grants compared to the prior year.
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 $7.2 million in the quarter and $16.1 million year-to-date versus the prior year.
Insurance costs increased by $0.5 million in the quarter and $1.7 million year-to-date compared to the prior year due to a more favorable change in the loss development factors related to our worker’s compensation liabilities a year ago.
The increase in other is primarily due to the acquisition of Del Taco in the second quarter which resulted in an increase of additional general and administrative costs of $8.5 million in the quarter and $12.8 million year-to-date compared to the prior year.
Other Operating Expenses, Net
Other operating expenses, net is comprised of the following (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Acquisition, integration, and restructuring costs | $ | 2,753 | $ | — | $ | 18,864 | $ | 4 | |||||||||||||||
| Costs of closed restaurants and other | 837 | 622 | 2,559 | 2,086 | |||||||||||||||||||
| Operating restaurant impairment charges | 1,653 | — | 1,653 | — | |||||||||||||||||||
| Accelerated depreciation | 346 | 123 | 1,009 | 1,362 | |||||||||||||||||||
| (Gains) losses on disposition of property and equipment, net | (1,460) | 177 | (1,746) | (1,754) | |||||||||||||||||||
| $ | 4,129 | $ | 922 | $ | 22,339 | $ | 1,698 | ||||||||||||||||
Other operating expenses, net increased by $3.2 million in the quarter and $20.6 million year-to-date compared to the prior year, primarily due to $2.8 million, and $18.9 million of costs incurred in the quarter and year-to-date, respectively, relating to the acquisition and integration of Del Taco.
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Gains on the Sale of Company-Operated Restaurants
In 2022 and 2021, no company-operated restaurants were sold to franchisees. Amounts included in “Gains on the sale of company-operated restaurants” in both periods related to resolutions of certain contingencies from the sale of Jack in the Box restaurants in prior years.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
| Quarter | Year-to-date | ||||||||||||||||||||||
| July 10, 2022 | July 4, 2021 | July 10, 2022 | July 4, 2021 | ||||||||||||||||||||
| Interest expense | $ | 19,792 | $ | 15,206 | $ | 66,627 | $ | 51,186 | |||||||||||||||
| Interest income | (89) | (48) | (256) | (66) | |||||||||||||||||||
| Interest expense, net | $ | 19,703 | $ | 15,158 | $ | 66,371 | $ | 51,120 | |||||||||||||||
Interest expense, net increased by $4.5 million in the quarter and $15.3 million year-to-date compared to the prior year. In the quarter, the increase is due to higher average borrowings resulting in higher interest expense of $5.5 million, partially offset by lower average borrowing rates. Year-to-date, the increase is primarily due to a loss on early extinguishment of debt of $7.7 million during the second quarter as well as higher average borrowings resulting in higher interest expense of $8.6 million.
Income Tax Expense
The income tax provisions reflect tax rates of 28.8% in the third quarter and 28.1% year-to-date, compared with 23.1% and 25.1%, respectively, in fiscal year 2021. The major components of the year-over-year increase in tax rates were non-deductibles losses in the current year versus non-taxable gains in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans, a decrease in the impact of excess tax benefit on share-based compensation, and an increase in non-deductible transaction costs resulting from the Del Taco acquisition, partially offset by an adjustment related to state taxes recorded in the second quarter of fiscal year 2021.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our credit facilities. As of July 10, 2022, the Company had $92.9 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $120.0 million under our $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. The Company continually assesses the optimal sources and uses of cash for our business. Since closing the Del Taco acquisition, we have undertaken a process to review our balance sheet for any undervalued assets, and pursue opportunities for capital sources, including leasebacks for our owned Jack in the Box properties, and refranchising, primarily for Del Taco in the near term.
Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.
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Cash Flows
The table below summarizes our cash flows from continuing operations (in thousands):
| Year-to-date | |||||||||||
| July 10, 2022 | July 4, 2021 | ||||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 103,812 | $ | 149,881 | |||||||
| Investing activities | (604,395) | (26,040) | |||||||||
| Financing activities | 519,930 | (258,320) | |||||||||
| Net cash flows | $ | 19,347 | $ | (134,479) | |||||||
Operating Activities. Operating cash flows decreased $46.1 million compared with a year ago, primarily due to an unfavorable change in working capital of $41.3 million as a result of higher advertising spend compared to prior year, timing of deferred rent driven by collections of October rent in the 53rd week in fiscal 2021, and higher annual incentive payments compared to the prior year.
Pension and post-retirement contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2021, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. In 2022, we contributed $5.1 million to our non-qualified pension plan and post-retirement plans.
Investing Activities. Cash used in investing activities increased by $578.4 million compared with a year ago, primarily due to $580.8 million paid for the acquisition of Del Taco, net of cash acquired.
Capital Expenditures — The composition of capital expenditures in each period follows (in thousands):
| Year-to-date | |||||||||||
| July 10, 2022 | July 4, 2021 | ||||||||||
| Restaurants: | |||||||||||
| Remodel / refresh programs | $ | 7,406 | $ | 7,877 | |||||||
| Restaurant facility expenditures | 14,962 | 4,984 | |||||||||
| Purchases of assets intended for sale and leaseback | 1,877 | 15,528 | |||||||||
| Restaurant information technology | 6,016 | 2,482 | |||||||||
| 30,261 | 30,871 | ||||||||||
| Corporate Services: | |||||||||||
| Information technology | 2,863 | 1,250 | |||||||||
| Corporate facilities | 1,225 | 3,036 | |||||||||
| 4,088 | 4,286 | ||||||||||
| Total capital expenditures | $ | 34,349 | $ | 35,157 | |||||||
Financing Activities. Cash flows from financing activities increased by $778.3 million compared with a year ago, primarily as a result of an increase in net borrowings of $657.4 million, driven by the issuance of the 2022 Notes, and an increase of $124.4 million from lower share repurchases compared to prior year.
Repurchases of common stock — The Company did not repurchase any shares in 2022. On November 19, 2021, the Board of Directors authorized a $200.0 million stock buy-back program that expires on November 20, 2023.
Dividends — During 2022, the Board of Directors declared three cash dividends of $0.44 per common share totaling $28.0 million. On August 5, 2022, the Board of Directors declared a cash dividend of 0.44 per common share, to be paid on September 9, 2022, to shareholders of record as of the close of business on August 24, 2022.
Securitized Refinancing Transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the
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Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted under the indenture that will govern the 2022 Notes.
The Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The Company’s existing revolving financing facility of Series 2019-1 Class A-1 Notes was terminated in connection with the transaction. As of July 10, 2022, we had outstanding borrowings of $50.0 million and available borrowing capacity of $58.0 million under our 2022 Variable Funding Notes, net of letters of credits issued of $42.0 million.
The net proceeds of the sale of the 2022 Notes were used to repay in full of $570.7 million in aggregate outstanding principal amount of the Company’s Series 2019-1 Class A-2-I Notes, together with the applicable make-whole premium and unpaid interest, and was used to fund a portion of the Company’s acquisition of Del Taco Restaurants, Inc.
The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes.
The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. Subsequent to closing the issuance of the 2022 Notes, the Company has had a leverage ratio of greater than 5.0x and, accordingly, the Company resumed making the scheduled amortization payments on its 2022 Notes and Series 2019-1 Notes beginning in the second quarter of 2022.
Restricted cash — In accordance with the terms of the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders and are restricted in their use. As of July 10, 2022, the Company had restricted cash of $27.1 million, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of interest and commitment fees required for the Class A-1 and A-2 Notes.
Covenants and restrictions — The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of July 10, 2022, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.
Revolving credit facility — In connection with the Del Taco acquisition, Del Taco’s existing debt of $115.2 million related to a Syndicated Credit Facility dated August 5, 2015, was repaid and extinguished on the Closing Date. On the Closing Date, Del Taco entered into a new syndicated credit facility with an aggregate principal amount of up to $75.0 million, maturing on March 7, 2023. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of July 10, 2022, we had no outstanding borrowings and available borrowing capacity of $61.9 million of under the facility, net of letters of credit of $13.1 million.
Bridge commitment letter — In connection with the Merger Agreement, the Company secured commitments for a bridge financing facility in an amount of up to $600.0 million (the “Bridge Facility”). No amounts were drawn under the Bridge Facility, which was terminated as a result of our securitization refinancing transaction.
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DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies and estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. In addition to the critical accounting policies and estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2021, due to recent transactions and events, we also consider the following to be part of our critical accounting policies and estimates due to the high degree of judgment and complexity in its application:
Business Combinations — The Del Taco Acquisition was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with ASC Topic 805, Business Combinations. The acquisition method of accounting involved the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset, the timing of such cash flows, the remaining useful life of assets and applicable discount rates. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at March 8, 2022. As of July 10, 2022, we have recorded a preliminary allocation of consideration to net tangible and intangible assets acquired, which is subject to revision as we obtain additional information necessary to complete the fair value studies and acquisition accounting.
In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. Refer to Note 3, Business Combination, to the accompanying condensed consolidated financial statements for additional information about accounting for the Del Taco Acquisition.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Basis of Presentation, of the notes to condensed consolidated financial statements.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws, including further impacts that COVID-19 pandemic may have on our future operations. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:
•The COVID-19 pandemic has disrupted and may continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition, and results of operations for an extended period of time.
•We face significant competition in the food service industry and our inability to compete may adversely affect our business.
•Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties we receive from franchisees to decline.
•Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
•Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
•Failure to receive scheduled deliveries of high-quality food ingredients and other supplies could harm our operations and reputation.
•We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
•Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
•Negative publicity relating to our business or industry could adversely impact our reputation.
•Changes in the availability of and the cost of labor could adversely affect our business.
•Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
•We may not have the same resources as our competitors for marketing, advertising and promotion.
•We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
•We may not achieve our development goals.
•Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
•We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
•We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
•We are subject to risks associated with our increasing dependence on digital commerce platforms and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
•We are dependent on information technology and digital service providers and any material failure, misuse or interruption of our computer systems, supporting infrastructure, consumer-facing digital capabilities or social media platforms could adversely affect our business.
•If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which would harm our business and the value of the Company’s common shares.
•We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
•Jack in the Box may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
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•The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
•We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
•The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.
•We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
•Unionization activities or labor disputes may disrupt our operations and affect our profitability.
•Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
•Our insurance may not provide adequate levels of coverage against claims.
•Changes in tax laws, interpretations of existing tax law, or adverse determinations by tax authorities could adversely affect our income tax expense and income tax payments.
•Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
•Governmental regulation may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
•The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
•Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
•Our quarterly results and, as a result, the price of our common stock, may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.
•Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
•Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruptions, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates,” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended October 3, 2021 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov. Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk on borrowings under our $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. As of July 10, 2022, we had outstanding variable rate borrowings of $50.0 million. A 100 basis point increase in the effective interest rate applied to these borrowings would result in additional interest expense of approximately $0.5 million on an annualized basis.
The Company is 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.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended July 10, 2022, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended July 10, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part II, except as follows:
ITEM 1. LEGAL PROCEEDINGS
See Note 15, Commitments and Contingencies, of the notes to the condensed consolidated financial statements for a discussion of our contingencies and legal matters.
ITEM 1A. RISK FACTORS
The risk factors set forth below contain material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021, which we filed with the SEC on November 23, 2021, as updated in this Item 1A. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021, including our financial statements and the related notes. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occurs, our business and financial results could be harmed. In that case, the market price of our common stock could decline.
Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruption, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
The combination of two independent businesses can be complex, costly, and time-consuming, and it may divert significant management attention and resources to combining ours and Del Taco’s business practices and operations. This process may disrupt our business or otherwise impact our ability to compete. The failure to meet the challenges involved in combining ours and Del Taco’s business and to realize the anticipated benefits of the acquisition could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.
The overall combination of ours and Del Taco’s business may also result in material unanticipated problems, expenses, liabilities, competitive responses and impacts, and loss of customer and other business relationships. The difficulties of combining the operations of the companies, include, among others:
•diversion of management attention to integration matters;
•difficulties in integrating operations and systems, including intellectual property and communications systems, administrative and information technology infrastructure, supplier and vendor arrangements and financial reporting and internal control systems;
•challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
•differences in control environments and cultures, and the potential identification of material weaknesses while we work to integrate and align policies, principles and practices;
•alignment of key performance measurements may result in a greater need to communicate and manage clear expectations while we work to integrate and align policies and practices;
•difficulties in integrating employees and attracting and retaining key personnel;
•the transition to a combined management team, and the need to address possible differences in corporate cultures and management philosophies;
•challenges in retaining existing customers and obtaining new customers;
•difficulties in achieving anticipated cost savings, synergies, accretion targets, business opportunities, financing plans and growth prospects from the combination; and
•difficulties in managing the expanded operations of a significantly larger and more complex company.
Additionally, uncertainties over the integration process could cause customers, suppliers, distributors, and others to seek to change or cancel our existing business relationships or to refuse to renew existing relationships. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties.
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Some of these factors are outside our control, and any one of them could result in lower revenues, higher costs, and diversion of management time and energy, which could materially impact our business, financial condition and results of operations.
Similar to our Series 2019-1 Class A-2-I Notes, the new securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
The Series 2022-1 Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2022-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Series 2022-1 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2022-1 Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to record keeping, access to information and similar matters. The Series 2022-1 Senior Notes are also subject to customary rapid amortization events provided for in the indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Series 2022-1 Class A-2 Notes on the applicable scheduled maturity date. The Series 2022-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2022-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.
In the event that a rapid amortization event occurs under the indenture (including, without limitation, upon an event of default under the indenture or the failure to repay the securitized debt at the end of the applicable term) which would require repayment of the Series 2022-1 Senior Notes, the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate and/or grow our business. If our subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If our subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations which could have a material adverse effect on our financial condition.
We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
As of July 10, 2022, the Company has debt outstanding of $1.86 billion. This level of debt could have certain material adverse effects on the Company, including but not limited to:
•our available cash flow in the future to fund working capital, capital expenditures, acquisitions, and general corporate or other purposes could be impaired, and our ability to obtain additional financing for such purposes is limited;
•a substantial portion of our cash flows could be required for debt service and, as a result, might not be available for our operations or other purposes;
•any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or could force us to modify our operations or sell assets;
•our ability to operate our business and our ability to repurchase stock or pay cash dividends to our stockholders may be restricted by the financial and other covenants set forth in the indenture;
•our ability to withstand competitive pressures may be decreased; and
•our level of indebtedness may make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business, regulatory, and economic conditions.
In addition, we may incur additional indebtedness in the future. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that it now faces could intensify.
Similar to the Series 2019-1 Class A-2-I Notes, the securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.
The indenture and the management agreement entered into between certain of our subsidiaries and the indenture trustee (the “Management Agreement”) contain various covenants that limit our and our subsidiaries’ ability to engage in specified types of transactions. For example, the indenture and the Management Agreement contain covenants that, among other things, restrict, subject to certain exceptions, the ability of certain subsidiaries to:
38
•incur or guarantee additional indebtedness;
•sell certain assets;
•alter the business conducted by our subsidiaries;
•create or incur liens on certain assets; or
•consolidate, merge, sell or otherwise dispose of all or substantially all of the assets held within the securitization entities.
As a result of these restrictions, we may not have adequate resources or the flexibility to continue to manage the business and provide for growth of the Jack in the Box system, including product development and marketing for the Jack in the Box brand, which could adversely affect our future growth prospects, financial condition, results of operations and liquidity.
Changes in the availability of and the cost of labor could adversely affect our business.
Our business could be adversely impacted by increases in labor costs, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets and increased wages, benefits and costs related to the COVID-19 pandemic and inflationary and other pressure on wages now being experienced. The growth of our business can make it increasingly difficult to locate and hire sufficient numbers of employees, to maintain an effective system of internal controls, and to train employees to deliver a consistently high-quality product and customer experience, which could materially harm our business and results of operations. Furthermore, we have experienced, and could continue to experience, a shortage of labor for restaurant positions, including due to concerns around and illnesses arising from COVID-19 and its various novel variants and other factors, which could decrease the pool of available qualified talent for key functions and require restaurants to operate on reduced hours. Such labor shortages could be further exacerbated by expanded federal, state and local COVID-19 vaccination requirements. In addition, our wages and benefits programs may be insufficient to attract and retain the top performing employees especially in a rising wage market.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases — We did not repurchase any shares of our common stock in the third quarter of 2022. As of July 10, 2022, there was $200.0 million remaining under the Board-authorized stock buyback program which expires in November 2023.
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Item 5.03. None.
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ITEM 6. EXHIBITS
| Number | Description | Form | Filed with SEC | ||||||||
| 31.1 | — | Filed herewith | |||||||||
| 31.2 | — | Filed herewith | |||||||||
| 32.1 | — | Filed herewith | |||||||||
| 32.2 | — | Filed herewith | |||||||||
| 101.INS | iXBRL Instance Document | ||||||||||
| 101.SCH | iXBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | iXBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | iXBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | iXBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | iXBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| 104 | Cover Page Interactive Data File formatted in iXBRL | ||||||||||
40
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| JACK IN THE BOX INC. | ||||||||
| By: | /S/ TIM MULLANY | |||||||
| Tim Mullany | ||||||||
| Executive Vice President and Chief Financial Officer (principal financial officer) (Duly Authorized Signatory) | ||||||||
Date: August 10, 2022
41
Exhibit 31.1
CERTIFICATION
I, Darin Harris, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Jack in the Box Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Dated: | August 10, 2022 | /S/ DARIN HARRIS | ||||||
| Darin Harris | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 31.2
CERTIFICATION
I, Tim Mullany, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Jack in the Box Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions)
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Dated: | August 10, 2022 | /S/ TIM MULLANY | ||||||
| Tim Mullany | ||||||||
| Chief Financial Officer | ||||||||
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Darin Harris, Chief Executive Officer of Jack in the Box Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)the quarterly report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Dated: | August 10, 2022 | /S/ DARIN HARRIS | ||||||
| Darin Harris | ||||||||
| Chief Executive Officer | ||||||||
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Tim Mullany, Chief Financial Officer of Jack in the Box Inc. (the “Registrant”), do hereby certify in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)the quarterly report on Form 10-Q of the Registrant, to which this certification is attached as an exhibit (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Dated: | August 10, 2022 | /S/ TIM MULLANY | ||||||
| Tim Mullany | ||||||||
| Chief Financial Officer | ||||||||