Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
JACK
NASDAQ Global Select Market
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.
Yesþ No ¨
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).
Yesþ No ¨
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.
Large accelerated filer
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 May 11, 2023, 20,389,243 shares of the registrant’s common stock were outstanding.
Long-term operating lease liabilities, net of current portion
1,195,644
1,165,097
Deferred tax liabilities
40,544
37,684
Other long-term liabilities
132,841
134,694
Total long-term liabilities
3,106,061
3,137,015
Stockholders’ deficit:
Preferred stock $0.01 par value, 15,000,000 shares authorized, none issued
—
—
Common stock $0.01 par value, 175,000,000 shares authorized, 82,628,545 and 82,580,599 issued, respectively
826
826
Capital in excess of par value
514,395
508,323
Retained earnings
1,904,348
1,842,947
Accumulated other comprehensive loss
(53,127)
(53,982)
Treasury stock, at cost, 62,230,963 and 61,799,221 shares, respectively
(3,067,885)
(3,034,306)
Total stockholders’ deficit
(701,443)
(736,192)
$
2,903,381
$
2,922,506
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Revenues:
Company restaurant sales
$
202,604
$
151,309
$
472,795
$
271,365
Franchise rental revenues
83,520
76,556
192,350
179,655
Franchise royalties and other
53,982
47,101
130,372
107,856
Franchise contributions for advertising and other services
55,638
47,328
127,323
108,129
395,744
322,294
922,840
667,005
Operating costs and expenses, net:
Food and packaging
59,310
46,871
141,243
84,408
Payroll and employee benefits
65,035
50,910
153,676
90,635
Occupancy and other
39,275
29,171
90,646
50,048
Franchise occupancy expenses
52,649
49,244
119,873
113,227
Franchise support and other costs
3,260
5,015
5,137
8,926
Franchise advertising and other services expenses
58,143
49,258
132,713
112,566
Selling, general and administrative expenses
39,405
28,213
89,547
53,242
Depreciation and amortization
14,598
11,545
34,000
24,041
Pre-opening costs
154
266
485
576
Other operating expenses (income), net
2,980
14,367
(2,521)
18,210
Gains on the sale of company-operated restaurants
(704)
(810)
(4,529)
(858)
334,105
284,050
760,270
555,021
Earnings from operations
61,639
38,244
162,570
111,984
Other pension and post-retirement expenses, net
1,607
70
3,751
163
Interest expense, net
19,357
26,481
45,505
46,668
Earnings before income taxes
40,675
11,693
113,314
65,153
Income taxes
14,168
3,897
33,553
18,087
Net earnings
$
26,507
$
7,796
$
79,761
$
47,066
Earnings per share:
Basic
$
1.28
$
0.37
$
3.83
$
2.22
Diluted
$
1.27
$
0.37
$
3.81
$
2.21
Cash dividends declared per common share
$
0.44
$
0.44
$
0.88
$
0.88
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Net earnings
$
26,507
$
7,796
$
79,761
$
47,066
Other comprehensive income:
Actuarial losses and prior service costs reclassified to earnings
495
746
1,159
1,743
495
746
1,159
1,743
Tax effect
(129)
(193)
(304)
(452)
Other comprehensive income, net of taxes
366
553
855
1,291
Comprehensive income
$
26,873
$
8,349
$
80,616
$
48,357
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
April 16, 2023
April 17, 2022
Cash flows from operating activities:
Net earnings
$
79,761
$
47,066
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
34,000
24,041
Amortization of franchise tenant improvement allowances and incentives
2,237
2,127
Deferred finance cost amortization
2,787
3,060
Loss on extinguishment of debt
—
7,700
Tax deficiency from share-based compensation arrangements
142
49
Deferred income taxes
1,496
5,529
Share-based compensation expense
5,932
3,934
Pension and post-retirement expense
3,751
163
(Gains) losses on cash surrender value of company-owned life insurance
(8,007)
3,163
Gains on the sale of company-operated restaurants
(4,529)
(858)
Gains on the disposition of property and equipment, net
(8,615)
(286)
Impairment charges and other
549
1,109
Changes in assets and liabilities, excluding acquisitions:
Accounts and other receivables
(1,456)
26,257
Inventories
(23)
(277)
Prepaid expenses and other current assets
6,344
(6,716)
Operating lease right-of-use assets and lease liabilities
8,561
9,155
Accounts payable
(15,994)
1,297
Accrued liabilities
(7,043)
(52,286)
Pension and post-retirement contributions
(3,234)
(3,693)
Franchise tenant improvement allowance and incentive disbursements
(2,052)
(1,629)
Other
(499)
(1,077)
Cash flows provided by operating activities
94,108
67,828
Cash flows from investing activities:
Purchases of property and equipment
(37,196)
(20,781)
Acquisition of Del Taco, net of cash acquired
—
(580,792)
Proceeds from the sale of property and equipment
23,371
2,245
Proceeds from the sale and leaseback of assets
3,673
1,861
Proceeds from the sale of company-operated restaurants
18,417
600
Other
1,465
(1,315)
Cash flows provided by (used in) investing activities
9,730
(598,182)
Cash flows from financing activities:
Borrowings on revolving credit facilities
—
63,000
Repayments of borrowings on revolving credit facilities
(50,000)
(9,000)
Proceeds from the issuance of debt
—
1,100,000
Principal repayments on debt
(15,088)
(572,958)
Payment of debt issuance costs
—
(20,274)
Dividends paid on common stock
(18,218)
(18,526)
Proceeds from issuance of common stock
—
51
Repurchases of common stock
(32,621)
—
Payroll tax payments for equity award issuances
(1,115)
(874)
Cash flows (used in) provided by financing activities
(117,042)
541,419
Net (decrease) increase in cash and restricted cash
(13,204)
11,065
Cash and restricted cash at beginning of period
136,040
73,568
Cash and restricted cash at end of period
$
122,836
$
84,633
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
Nature of operations — Jack in the Box Inc. (the “Company”), together with its consolidated subsidiaries, develops, operates, and franchises quick-service restaurants under the Jack in the Box® and Del Taco® restaurant brands.
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.
As of April 16, 2023, there were 140 company-operated and 2,047 franchise-operated Jack in the Box restaurants and 273 company-operated and 322 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”).
These financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2022 (“2022 Form 10-K”). The accounting policies used in preparing these condensed consolidated financial statements are the same as those described in our 2022 Form 10-K.
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.
Fiscal year — The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to September 30. Our Del Taco subsidiary operates on a fiscal year ending the Tuesday closest to September 30. Fiscal years 2023 and 2022 include 52 weeks. Our first quarter includes 16 weeks and all other quarters include 12 weeks. All comparisons between 2023 and 2022 refer to the 12 weeks (“quarter”) and 28 weeks (year-to-date”) ended April 16, 2023 and April 17, 2022, respectively, unless otherwise indicated.
Use of estimates — In preparing the condensed consolidated financial statements in conformity with U.S. GAAP, management is required to make certain assumptions and estimates that affect reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. In making these assumptions and estimates, management may from time to time seek advice and consider information provided by actuaries and other experts in a particular area. Actual amounts could differ materially from these estimates.
Advertising costs — The Company administers marketing funds at each of its restaurant brands that include contractual contributions. In 2023 and 2022, marketing fund contributions from Jack in the Box franchise and company-operated restaurants were approximately 5.0% of sales, and marketing fund contributions from Del Taco franchise and company-operated restaurants were approximately 4.0% of sales. Year-to-date incremental contributions made by the Company for Jack in the Box brand were less than $0.1 million in 2023. No incremental contributions were made in 2022.
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 $9.2 million and $21.3 million, respectively, in 2023 and $7.1 million and $13.1 million, respectively, in 2022.
Allowance for credit losses — The Company closely monitors the financial condition of its 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 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 the allowance for doubtful accounts (in thousands):
Year-to-date
April 16, 2023
April 17, 2022
Balance as of beginning of period
$
(5,975)
$
(6,292)
Reversal (provision) for expected credit losses
1,911
(3,445)
Write-offs charged against the allowance
—
3,993
Balance as of end of period
$
(4,064)
$
(5,744)
Business combinations — The Company accounts 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 — 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 its condensed consolidated financial statements.
2.REVENUE
Nature of products and services — The Company derives 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 quarter ended April 16, 2023 (in thousands):
Quarter
Year-to-date
Jack in the Box
Del Taco
Total
Jack in the Box
Del Taco
Total
Company restaurant sales
$
95,489
$
107,115
$
202,604
$
221,631
$
251,164
$
472,795
Franchise rental revenues
80,910
2,610
83,520
187,006
5,344
192,350
Franchise royalties
46,401
5,657
52,058
113,970
12,591
126,561
Marketing fees
46,486
4,609
51,095
106,830
10,263
117,093
Technology and sourcing fees
3,875
668
4,543
8,844
1,386
10,230
Franchise fees and other services
1,671
253
1,924
3,468
343
3,811
Total revenue
$
274,832
$
120,912
$
395,744
$
641,749
$
281,091
$
922,840
The following table disaggregates revenue by segment and primary source for the quarter ended April 17, 2022 (in thousands):
Quarter
Year-to-date
Jack in the Box
Del Taco
Total
Jack in the Box
Del Taco
Total
Company restaurant sales
$
94,250
$
57,059
$
151,309
$
214,306
$
57,059
$
271,365
Franchise rental revenues
75,692
864
76,556
178,791
864
179,655
Franchise royalties
42,933
2,645
45,578
100,581
2,645
103,226
Marketing fees
41,390
2,158
43,548
97,191
2,158
99,349
Technology and sourcing fees
3,575
205
3,780
8,575
205
8,780
Franchise fees and other services
1,497
26
1,523
4,604
26
4,630
Total revenue
$
259,337
$
62,957
$
322,294
$
604,048
$
62,957
$
667,005
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In October 2022, a Jack in the Box franchise operator paid the Company $7.3 million in order to sell his restaurants to a new franchisee at the current standard royalty rate, which is lower than the royalty rate in the existing franchise agreements. The payment represented the difference between the existing royalty rate and the new royalty rate based on projected future sales for the remaining term of the existing agreements. The payment is non-refundable and not subject to any adjustments based on actual future sales. The Company determined the transaction represented the termination of the existing agreement rather than the transfer of an agreement between franchisees. As such, the $7.3 million was recognized in franchise royalty revenue during the first quarter of 2023.
Contract liabilities — 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. The Company classifies these contract liabilities as “Accrued liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets.
A summary of significant changes in contract liabilities is presented below (in thousands):
Year-to-date
April 16, 2023
April 17, 2022
Deferred franchise and development fees at beginning of period
$
46,449
$
41,520
Changes due to business combinations
—
6,193
Revenue recognized
(2,934)
(2,995)
Additions
3,332
2,379
Deferred franchise and development fees at end of period
$
46,847
$
47,097
As of April 16, 2023, approximately $6.6 million of development fees related to unopened stores are included in deferred revenue. Timing of revenue recognition for development fees related to unopened stores 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 April 16, 2023 (in thousands):
Remainder of 2023
$
2,359
2024
4,924
2025
4,688
2026
4,361
2027
4,004
Thereafter
19,892
$
40,228
The Company has 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
On March 8, 2022, the Company acquired 100% of the outstanding equity interest of Del Taco for cash according to the terms and conditions of the Agreement and Plan of Merger, dated as of December 5, 2021. Jack in the Box acquired Del Taco as a part of the Company’s goal to gain greater scale and accelerate growth. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2022 for further discussion regarding the acquisition, including the purchase consideration, purchase price allocation, goodwill and identifiable intangible assets.
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 of the beginning of fiscal year 2021 (inthousands):
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quarter
Year-to-date
April 17, 2022
April 17, 2022
Total revenue
$
382,051
$
885,082
Net earnings
$
21,830
$
50,696
The unaudited pro forma financial information for all periods presented includes the business combination accounting effects resulting from the 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 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 above 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 $63.0 million and net earnings of $2.5 million.
4.SUMMARY OF REFRANCHISINGS AND FRANCHISE ACQUISITIONS
Refranchisings — The following table summarizes the number of restaurants sold to franchisees and gains recognized (dollars in thousands):
Quarter
Year-to-date
April 16, 2023 (1)
April 17, 2022 (1)
April 16, 2023
April 17, 2022 (1)
Restaurants sold to Jack in the Box franchisees
—
—
5
—
Restaurants sold to Del Taco franchisees
—
—
16
—
Proceeds from the sale of company-operated restaurants
$
808
$
552
$
18,417
$
600
Net assets sold (primarily property and equipment)
—
—
(4,093)
—
Goodwill related to the sale of company-operated restaurants
—
—
(7,310)
—
Franchise fees
—
—
(577)
—
Sublease liabilities
—
—
(1,197)
—
Lease termination
—
—
(393)
—
Other
(104)
258
(318)
258
Gains on the sale of company-operated restaurants
$
704
$
810
$
4,529
$
858
________________________
(1)Amounts in periods presented for 2022 and the second quarter of 2023 primarily relate to additional proceeds received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
Franchise acquisitions — In 2023, the Company did not acquire any franchise restaurants. In 2022, the Company acquired thirteen Jack in the Box franchise restaurants in two markets. We account for the acquisition of franchised restaurants using the acquisition method of accounting for business combinations. The purchase price allocations were based on fair value estimates determined using significant unobservable inputs (Level 3). These acquisitions were not material to our condensed consolidated financial statements.
Assets held for sale — Assets classified as held for sale on our condensed consolidated balance sheets as of April 16, 2023 and October 2, 2022 have carrying amounts of $9.0 million and $17.0 million, respectively. These amounts relate to i) company-owned restaurants to be refranchised, ii) operating restaurant properties which we intend to sell to franchisees and/or sell and leaseback with a third party and iii) closed restaurant properties which we are marketing for sale.
9
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 2023 and 2022 were as follows (in thousands):
Jack in the Box
Del Taco
Total
Balance at October 2, 2022
$
136,099
$
230,722
$
366,821
Sale of Del Taco company-operated restaurants to franchisees
—
(7,238)
(7,238)
Sale of Jack in the Box company-operated restaurants to franchisees
(72)
—
(72)
Reclassified to assets held for sale
—
(5,900)
(5,900)
Balance at April 16, 2023
$
136,027
$
217,584
$
353,611
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows (in thousands):
April 16, 2023
October 2, 2022
Gross Amount
Accumulated Amortization
Net Amount
Gross Amount
Accumulated Amortization
Net Amount
Definite-lived intangible assets:
Sublease assets
$
2,671
$
(270)
$
2,401
$
2,671
$
(139)
$
2,532
Franchise contracts
9,700
(601)
9,099
9,700
(311)
9,389
Reacquired franchise rights
297
(98)
199
530
(127)
403
$
12,668
$
(969)
$
11,699
$
12,901
$
(577)
$
12,324
Indefinite-lived intangible assets:
Del Taco trademark
$
283,500
$
—
$
283,500
$
283,500
$
—
$
283,500
$
283,500
$
—
$
283,500
$
283,500
$
—
$
283,500
The following table summarizes, as of April 16, 2023, the estimated amortization expense for each of the next five fiscal years (in thousands):
Remainder of 2023
$
369
2024
801
2025
801
2026
801
2027
801
Thereafter
8,126
$
11,699
6.LEASES
Nature of leases — The Company owns restaurant sites and also leases 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.”
10
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Operating lease income - franchise
$
55,713
$
52,988
$
129,233
$
124,345
Variable lease income - franchise
27,744
23,540
62,979
55,282
Amortization of favorable and unfavorable sublease contracts, net
63
28
138
28
Franchise rental revenues
$
83,520
$
76,556
$
192,350
$
179,655
Operating lease income - closed restaurants and other (1)
$
1,785
$
1,407
$
4,025
$
3,065
____________________________
(1)Primarily relates to closed restaurant properties included in “Other operating (income) expenses, net” in our condensed consolidated statements of earnings.
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 April 16, 2023:
Non-qualified deferred compensation plan (1)
$
14,853
$
14,853
$
—
$
—
Total liabilities at fair value
$
14,853
$
14,853
$
—
$
—
Fair value measurements as of October 2, 2022:
Non-qualified deferred compensation plan (1)
$
13,820
$
13,820
$
—
$
—
Total liabilities at fair value
$
13,820
$
13,820
$
—
$
—
____________________________
(1)The Company maintains 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)The Company did not have any transfers in or out of Level 1, 2 or 3.
The following table presents the carrying value and estimated fair value of our Class A-2 Notes as of April 16, 2023 and October 2, 2022 (in thousands):
April 16, 2023
October 2, 2022
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Series 2019 Class A-2 Notes
$
710,500
$
656,556
$
714,125
$
641,851
Series 2022 Class A-2 Notes
$
1,078,000
$
935,920
$
1,089,000
$
917,428
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.
Non-financial assets and liabilities — The Company’s 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 2023, no material fair value adjustments were required.
11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.OTHER OPERATING EXPENSES (INCOME), NET
Other operating expenses (income), net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Acquisition, integration, and restructuring costs (1)
$
1,259
$
13,098
$
2,896
$
16,111
Costs of closed restaurants and other (2)
560
650
2,745
1,722
Accelerated depreciation
185
288
453
663
(Gains) losses on disposition of property and equipment, net (3)
976
331
(8,615)
(286)
$
2,980
$
14,367
$
(2,521)
$
18,210
____________________________
(1)Acquisition, integration, and restructuring costs are related to the acquisition and integration of Del Taco.
(2)Costs of closed restaurants and other primarily include impairment charges as a result of our decision to close restaurants, ongoing costs associated with closed restaurants, and canceled project costs.
(3)The 2023 year-to-date gains on disposition of property and equipment primarily relate to the sale of Jack in the Box restaurant properties to franchisees who were leasing the properties from us prior to the sale.
9.SEGMENT REPORTING
The Company’s principal business consists of developing, operating and franchising our Jack in the Box and Del Taco restaurant brands, each of which is considered 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.
The Company measures and evaluates 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 costs, gains on the sale of company-operated restaurants, and amortization of favorable and unfavorable leases and subleases, net.
12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides information related to our operating segments in each period (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Revenues by segment:
Jack in the Box
$
274,832
$
259,337
$
641,749
$
604,048
Del Taco
120,912
62,957
281,091
62,957
Consolidated revenues
$
395,744
$
322,294
$
922,840
$
667,005
Segment operating profit:
Jack in the Box
$
70,286
$
61,321
$
174,712
$
151,984
Del Taco
8,893
6,056
20,964
6,056
Total segment operating profit
$
79,179
$
67,377
$
195,676
$
158,040
Depreciation and amortization
14,598
11,545
34,000
24,041
Acquisition, integration, and restructuring costs
1,259
13,098
2,896
16,111
Share-based compensation
2,398
2,916
5,932
3,934
Net COLI (gains) losses
(844)
2,136
(6,568)
2,580
Gains on the sale of company-operated restaurants
(704)
(810)
(4,529)
(858)
Amortization of favorable and unfavorable leases and subleases, net
833
248
1,375
248
Earnings from operations
$
61,639
$
38,244
$
162,570
$
111,984
Total capital expenditures by segment:
Jack in the Box
$
8,606
$
7,929
$
23,862
$
17,330
Del Taco
4,562
3,451
13,334
3,451
Total capital expenditures
$
13,168
$
11,380
$
37,196
$
20,781
Total depreciation and amortization by segment:
Jack in the Box
$
8,283
$
9,340
$
19,312
$
21,836
Del Taco
6,315
2,205
14,688
2,205
Total depreciation and amortization
$
14,598
$
11,545
$
34,000
$
24,041
The Company does 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.
10.INCOME TAXES
The income tax provisions reflect effective tax rate of 34.8% in the second quarter of 2023 as compared to 33.3% in the prior year, and 29.6% for the year-to-date period, compared with 27.8% in the same period in fiscal year 2022. The major components of the year-over-year increase in tax rates were the impact of estimated disposals of non-deductible goodwill attributable to refranchising transactions, partially offset by non-taxable gains in the current year as opposed to non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans and non-deductible transaction costs resulting from the Del Taco acquisition recorded in the prior year.
11.RETIREMENT PLANS
Defined benefit pension plans — The Company sponsors 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 — The Company also sponsors 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.
13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net periodic benefit cost (credit) — The components of net periodic benefit cost in each period were as follows (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Defined benefit pension plans:
Interest cost
$
4,435
$
3,389
$
10,348
$
7,904
Expected return on plan assets
(3,485)
(4,178)
(8,133)
(9,747)
Actuarial losses (1)
707
890
1,651
2,078
Amortization of unrecognized prior service costs (1)
4
4
10
10
Net periodic benefit cost
$
1,661
$
105
$
3,876
$
245
Post-retirement healthcare plans:
Interest cost
$
162
$
113
$
377
$
263
Actuarial gains (1)
(216)
(148)
(502)
(345)
Net periodic benefit credit
$
(54)
$
(35)
$
(125)
$
(82)
____________________________
(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 — The Company’s policy is to fund our plans at or above the minimum required by law. As of January 1, 2022, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for the Qualified Plan. Details regarding 2023 contributions are as follows (in thousands):
SERP
Post-Retirement Healthcare Plans
Net year-to-date contributions
$
2,620
$
614
Remaining estimated net contributions during fiscal 2023
$
2,593
$
498
The Company continues 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. The Company does not anticipate making any contributions to our Qualified Plan in fiscal 2023.
14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.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 2, 2022
82,581
$
826
$
508,323
$
1,842,947
$
(53,982)
$
(3,034,306)
$
(736,192)
Shares issued under stock plans, including tax benefit
36
—
—
—
—
—
—
Share-based compensation
—
—
3,534
—
—
—
3,534
Dividends declared
—
—
67
(9,221)
—
—
(9,154)
Purchases of treasury stock
—
—
—
—
—
(14,999)
(14,999)
Net earnings
—
—
—
53,254
—
—
53,254
Other comprehensive income
—
—
—
—
489
—
489
Balance at January 22, 2023
82,617
$
826
$
511,924
$
1,886,980
$
(53,493)
$
(3,049,305)
$
(703,068)
Shares issued under stock plans, including tax benefit
12
—
—
—
—
—
—
Share-based compensation
—
—
2,398
—
—
—
2,398
Dividends declared
—
—
73
(9,139)
—
—
(9,066)
Purchases of treasury stock
—
—
—
—
—
(18,580)
(18,580)
Net earnings
—
—
—
26,507
—
—
26,507
Other comprehensive income
—
—
—
—
366
—
366
Balance at April 16, 2023
82,629
$
826
$
514,395
$
1,904,348
$
(53,127)
$
(3,067,885)
$
(701,443)
Number of Shares
Amount
Capital in Excess of Par Value
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at October 3, 2021
82,536
$
825
$
500,441
$
1,764,412
$
(74,254)
$
(3,009,306)
$
(817,882)
Shares issued under stock plans, including tax benefit
28
1
48
—
—
—
49
Share-based compensation
—
—
1,018
—
—
—
1,018
Dividends declared
—
—
63
(9,320)
—
—
(9,257)
Net earnings
—
—
—
39,270
—
—
39,270
Other comprehensive income
—
—
—
—
738
—
738
Balance at January 23, 2022
82,564
$
826
$
501,570
$
1,794,362
$
(73,516)
$
(3,009,306)
$
(786,064)
Shares issued under stock plans, including tax benefit
5
—
2
—
—
—
2
Share-based compensation
—
—
2,916
—
—
—
2,916
Dividends declared
—
—
65
(9,334)
—
—
(9,269)
Fair value of assumed Del Taco RSAs attributable to pre-combination service
—
—
449
—
—
—
449
Net earnings
—
—
—
7,796
—
—
7,796
Other comprehensive income
—
—
—
—
553
—
553
Balance at April 17, 2022
82,569
$
826
$
505,002
$
1,792,824
$
(72,963)
$
(3,009,306)
$
(783,617)
Repurchases of common stock— The Company repurchased 0.4 million shares of its common stock in fiscal 2023 for an aggregate cost of $33.6 million, including applicable excise tax. Repurchases of common stock included in our consolidated statements of cash flows for fiscal 2023 excludes $1.0 million, related to repurchase transactions traded in the second quarter that settled in the next quarter. As of April 16, 2023, there was $141.6 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends— Through April 16, 2023, the Board of Directors declared two cash dividends of $0.44 per common share totaling $18.4 million. Future dividends are subject to approval by our Board of Directors.
15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.AVERAGE SHARES OUTSTANDING
The following table reconciles basic weighted-average shares outstanding to diluted weighted-average shares outstanding (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Weighted-average shares outstanding – basic
20,744
21,227
20,845
21,215
Effect of potentially dilutive securities:
Nonvested stock awards and units
119
34
101
39
Stock options
1
1
—
1
Performance share awards
—
—
—
—
Weighted-average shares outstanding – diluted
20,864
21,262
20,946
21,255
Excluded from diluted weighted-average shares outstanding:
Antidilutive
27
23
26
15
Performance conditions not satisfied at the end of the period
105
63
105
63
14.COMMITMENTS AND CONTINGENCIES
Legal matters— The Company assesses 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. The Company regularly reviews contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates. 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.
Gessele v. Jack in the Box Inc.— 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. On October 24, 2022, a jury awarded the plaintiffs approximately $6.4 million in damages and penalties. The Company continues to dispute liability and the damage award and will defend against both through post-trial motions and all other available appellate remedies. As of April 16, 2023, the Company has accrued the verdict amount as well as estimated pre-judgment interest of $6.6 million, and included it within “Accrued liabilities” on our condensed consolidated balance sheet.
Torrez — 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 April 16, 2023, the Company has accrued the settlement amount, and included it within “Accrued liabilities” on our condensed consolidated balance sheet.
16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
J&D Restaurant Group — On April 17, 2019, the trustee for a bankrupt former franchisee filed a complaint generally alleging the Company wrongfully terminated the franchise agreements and unreasonably denied two perspective purchasers the former franchisee presented. The parties participated in a mediation in April 2021, and again in December 2022, but the matter did not settle. Trial commenced on January 9, 2023. On February 8, 2023, the jury returned a verdict finding the Company had not breached any contracts in terminating the franchise agreements or denying the proposed buyers. While the jury also found the Company had not violated the California Unfair Practices Act, it found for the plaintiff on the claim for breach of implied covenant of good faith and fair dealing, and awarded $8.0 million in damages. On May 9, 2023, the court granted the Company’s post-trial motion, overturning the jury verdict and ordering the plaintiff take nothing on its claims. As a result, the Company reversed the prior $8.0 million accrual, and as of April 16, 2023, the Company has no amounts accrued for this case on its condensed consolidated balance sheet.
Other legal matters — In addition to the matters described above, we are subject to normal and routine litigation brought by former or current employees, customers, franchisees, vendors, landlords, shareholders, or others. The Company intends 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. The Company records receivables from third party insurers when recovery has been determined to be probable.
Lease guarantees — The Company remains 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 April 16, 2023, the maximum potential liability of future undiscounted payments under these leases is approximately $21.8 million. The lease terms extend for a maximum of approximately 15 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.
15.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
Year-to-date
April 16, 2023
April 17, 2022
Non-cash investing and financing transactions:
Increase in obligations for treasury stock repurchases
$
958
$
—
Decrease in obligations for purchases of property and equipment
$
3,603
$
1,009
Increase in dividends accrued or converted to common stock equivalents
$
140
$
128
Right-of use assets obtained in exchange for operating lease obligations
$
115,368
$
141,143
Right-of use assets obtained in exchange for finance lease obligations
$
—
$
45
17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16.SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
April 16, 2023
October 2, 2022
Accounts and other receivables, net:
Trade
$
90,062
$
90,105
Notes receivable, current portion
1,788
8,643
Income tax receivable
917
878
Other
7,954
10,152
Allowance for doubtful accounts
(4,064)
(5,975)
$
96,657
$
103,803
Property and equipment, net
Land
$
94,307
$
86,134
Buildings
968,108
960,984
Restaurant and other equipment
171,711
163,527
Construction in progress
17,843
18,271
1,251,969
1,228,916
Less accumulated depreciation and amortization
(832,065)
(810,752)
$
419,904
$
418,164
Other assets, net:
Company-owned life insurance policies
$
115,466
$
108,924
Deferred rent receivable
42,592
43,891
Franchise tenant improvement allowance
39,173
32,429
Notes receivable, less current portion
10,571
11,624
Other
29,841
29,701
$
237,643
$
226,569
Accrued liabilities:
Legal accruals
$
63,917
$
59,165
Payroll and related taxes
40,293
43,837
Insurance
32,764
32,272
Sales and property taxes
14,787
30,947
Deferred rent income
9,591
18,525
Advertising
7,653
11,028
Deferred franchise and development fees
5,783
5,647
Other
68,747
52,511
$
243,535
$
253,932
Other long-term liabilities:
Defined benefit pension plans
$
50,754
$
51,679
Deferred franchise and development fees
41,064
40,802
Other
41,023
42,213
$
132,841
$
134,694
17.SUBSEQUENT EVENTS
Refranchising — Subsequent to the end of the second quarter of 2023, the Company closed on the sale of 17 Del Taco company-operated restaurants to one franchisee for $13.7 million.
Additionally, subsequent to the end of the second quarter of 2023, the Company executed Asset Purchase Agreements for the sale of 39 additional Del Taco company-operated restaurants to three franchisees for $17.5 million.
18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Legal matters — On May 9, 2023, the court granted the Company’s post-trial motion, overturning the jury’s verdict in the J&D Restaurant Group matter. Refer to Note 14, Commitments and Contingencies, of the notes to these condensed consolidated financial statements for additional information regarding the case and the related reversal of a previous accrual.
Dividends — On May 12, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on June 13, 2023, to shareholders of record as of the close of business on May 31, 2023.
19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2023 and 2022 refer to the 12 weeks (“quarter”) and 28 weeks (“year-to-date”) ended April 16, 2023 and April 17, 2022, respectively, unless otherwise indicated.
For an understanding of the significant factors that influenced our performance during 2023 and 2022, 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 2, 2022.
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 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.
20
OVERVIEW
Our Business
Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® and Del Taco® quick-service restaurants. As of April 16, 2023, we operated and franchised 2,187 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 595 Del Taco quick-service 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.
RESULTS OF OPERATIONS
The following tables summarize changes in same-store sales for Jack in the Box and Del Taco company-operated, franchised, and system restaurants:
Quarter
Year-to-date
Jack in the Box:
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Company
10.8
%
1.7
%
11.8
%
0.6
%
Franchise
9.4
%
(1.1)
%
8.2
%
0.3
%
System
9.5
%
(0.8)
%
8.6
%
0.3
%
Quarter
Year-to-date
Del Taco:
April 16, 2023
April 17, 2022 (1)
April 16, 2023
April 17, 2022 (1)
Company
3.5
%
1.6
%
3.3
%
2.6
%
Franchise
2.8
%
3.4
%
2.8
%
4.5
%
System
3.2
%
2.5
%
3.0
%
3.6
%
____________________________
(1)Fiscal 2022 full quarter and year-to-date same store sales figures are shown for information purposes only.
The following tables summarize changes in the number and mix of company and franchise restaurants for our two brands:
2023
2022
Jack in the Box:
Company
Franchise
Total
Company
Franchise
Total
Beginning of year
146
2,035
2,181
163
2,055
2,218
New
—
8
8
—
7
7
Acquired from franchisees
—
—
—
13
(13)
—
Refranchised
(5)
5
—
—
—
—
Closed
(1)
(1)
(2)
(4)
(14)
(18)
End of period
140
2,047
2,187
172
2,035
2,207
% of system
6
%
94
%
100
%
8
%
92
%
100
%
2023
2022 (1)
Del Taco:
Company
Franchise
Total
Company
Franchise
Total
Beginning of year
290
301
591
296
306
602
New
—
5
5
1
1
2
Refranchised
(16)
16
—
—
—
—
Closed
(1)
—
(1)
(4)
(1)
(5)
End of period
273
322
595
293
306
599
% of system
46
%
54
%
100
%
49
%
51
%
100
%
____________________________
(1)Fiscal 2022 full year-to-date restaurant activity figures are shown for information purposes only.
21
The following tables summarize restaurant sales for company-operated, franchised, and systemwide sales for our two brands (in thousands):
Quarter
Year-to-date
Jack in the Box:
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Company-operated restaurant sales
$
95,489
$
94,250
$
221,631
$
214,306
Franchised restaurant sales (1)
931,257
840,468
2,140,239
1,958,144
Systemwide sales (1)
$
1,026,746
$
934,718
$
2,361,870
$
2,172,450
Quarter
Year-to-date
Del Taco:
April 16, 2023
April 17, 2022 (2)
April 16, 2023
April 17, 2022 (2)
Company-operated restaurant sales
$
107,115
$
111,143
$
251,164
$
254,561
Franchised restaurant sales (1)
118,896
107,966
264,994
246,469
Systemwide sales (1)
$
226,011
$
219,109
$
516,158
$
501,030
____________________________
(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.
(2)Fiscal 2022 full quarter and year-to-date systemwide sales figures are shown for information purposes only.
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Company restaurant sales
$
95,489
$
94,250
$
221,631
$
214,306
Company restaurant costs:
Food and packaging
$
29,841
31.3
%
$
30,687
32.6
%
$
71,167
32.1
%
$
68,224
31.8
%
Payroll and employee benefits
$
29,200
30.6
%
$
32,007
34.0
%
$
68,638
31.0
%
$
71,732
33.5
%
Occupancy and other
$
15,999
16.8
%
$
17,384
18.4
%
$
36,376
16.4
%
$
38,261
17.9
%
Company restaurant sales increased $1.2 million or 1.3% in the quarter and $7.3 million or 3.4% year-to-date compared to the prior year, primarily due to average check and traffic growth, partially offset by a decline in the number of company-operated restaurants. The following table presents the approximate impact of these items on company restaurant sales (in millions):
Quarter
Year-to-date
AUV increase
$
10.0
$
23.9
Decrease in the average number of restaurants
(8.8)
(16.6)
Total change in company restaurant sales
$
1.2
$
7.3
Same-store sales at company-operated restaurants increased 10.8% in the quarter and 11.8% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:
22
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Average check (1)
7.6
%
3.7
%
7.6
%
3.6
%
Transactions
3.2
%
(2.0)
%
4.2
%
(3.0)
%
Change in same-store sales
10.8
%
1.7
%
11.8
%
0.6
%
____________________________
(1)Includes price increases of approximately 8.9% in the quarter and 9.7% year-to-date.
Food and packaging costs as a percentage of company restaurant sales decreased 1.3% in the quarter compared to the prior year, but increased 0.3% year-to-date compared to the prior year. Increased menu pricing and favorable menu item mix was partially offset in the quarter and more than offset year-to-date by higher commodity costs.
Commodity costs increased in the quarter and year-to-date by approximately 7.7% and 12.1%, respectively, compared to the prior year. The inflation we have experienced is across nearly all categories with the greatest impact on a year-to-date basis seen in produce, sauces, potatoes, oil, beverages and bakery. For fiscal 2023, we expect annual commodity cost inflation to be up 7% to 9% compared with fiscal 2022.
Payroll and employee benefit costs as a percentage of company restaurant sales decreased 3.4% in the quarter and 2.5% year-to-date compared to the prior year primarily due to sales leverage and a change in the mix of restaurants in connection with refranchising transactions, partially offset by higher incentive compensation. Labor inflation in the quarter and year-to-date was approximately 4.8% and 7.6%, respectively. For fiscal 2023, we expect annual wage inflation to be up 3% to 6% compared with fiscal 2022.
Occupancy and other costs, as a percentage of company restaurant sales, decreased 1.6% in the quarter and 1.5% year-to-date compared to the prior year primarily due to higher average restaurant sales as a result of a change in restaurant mix as well as sales leverage, partially offset by higher costs for utilities, maintenance and repair, delivery fees and other operating expenses as compared with fiscal 2022.
23
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Franchise rental revenues
$
80,910
$
75,692
$
187,006
$
178,791
Royalties
46,401
42,933
113,970
100,581
Franchise fees and other
1,671
1,497
3,468
4,604
Franchise royalties and other
48,072
44,430
117,438
105,185
Franchise contributions for advertising and other services
50,361
44,965
115,674
105,766
Total franchise revenues
$
179,343
$
165,087
$
420,118
$
389,742
Franchise occupancy expenses
$
50,008
$
48,403
$
114,563
$
112,386
Franchise support and other costs
2,735
4,828
4,151
8,739
Franchise advertising and other services expenses
52,660
46,849
120,618
110,157
Total franchise costs
$
105,403
$
100,080
$
239,332
$
231,282
Franchise costs as a percentage of total franchise revenues
58.8%
60.6%
57.0%
59.3%
Average number of franchise restaurants
2,037
2,027
2,035
2,034
% increase
0.5%
—%
Franchised restaurant sales
$
931,257
$
840,468
$
2,140,239
$
1,958,144
Franchised restaurant AUVs
$
457
$
415
$
1,052
$
963
Royalties as a percentage of total franchised restaurant sales (1)
5.0%
5.1%
5.3%
5.1%
____________________________
(1)Excluding the impact of the $7.3 million termination fee in the first quarter of the current year, royalties as a percentage of total franchised restaurant sales would be 5.0% year-to-date for the period ended April 16, 2023.
Franchise rental revenues increased $5.2 million, or 6.9% in the quarter, and $8.2 million, or 4.6% year-to-date, as compared to the prior year, primarily due to higher percentage rent of $3.6 million in the quarter and $7.2 million year-to-date driven by higher franchise restaurant sales.
Franchise royalties and other increased $3.6 million, or 8.2% in the quarter, and increased $12.3 million, or 11.6% year-to-date, as compared to the prior year. Higher franchise restaurant sales drove royalties higher in both the quarter and year-to-date periods. Additionally, in the year-to-date period, a $7.3 million termination fee paid by a franchise operator who sold his restaurants to a new franchisee, also contributed to the increase versus a year ago. Refer to Note 2, Revenue, of the notes to the condensed consolidated financial statements for additional information related to the $7.3 million termination fee.
Franchise contributions for advertising and other services revenues increased $5.4 million, or 12.0% in the quarter, and increased $9.9 million, or 9.4% year-to-date, compared to the prior year primarily driven by higher marketing contribution in connection with higher franchise restaurant sales.
Franchise occupancy expenses, primarily rent, increased $1.6 million, or 3.3% in the quarter, and increased $2.2 million, or 1.9% year-to-date, compared to the prior year primarily due to ongoing rent increases.
Franchise support and other costs decreased $2.1 million in the quarter, and $4.6 million year-to-date, compared to the prior year primarily due to a decrease in franchisee bad debt expense.
Franchise advertising and other service expenses increased $5.8 million, or 12.4% in the quarter, and increased $10.5 million, or 9.5% year-to-date, compared to the prior year primarily driven by higher franchise sales.
Del Taco Brand
Jack in the Box Inc. acquired Del Taco on March 8, 2022. Fiscal 2022 results include approximately 6 weeks of operating results compared with 12 and 28 weeks in the current year quarter and year-to-date periods, respectively.
24
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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Company restaurant sales
$
107,115
$
57,059
$
251,164
$
57,059
Company restaurant costs:
Food and packaging
$
29,468
27.5
%
$
16,184
28.4
%
$
70,076
27.9
%
$
16,184
28.4
%
Payroll and employee benefits
$
35,835
33.5
%
$
18,904
33.1
%
$
85,038
33.9
%
$
18,904
33.1
%
Occupancy and other
$
23,276
21.7
%
$
11,788
20.7
%
$
54,269
21.6
%
$
11,788
20.7
%
Company restaurant sales increased $50.1 million or 87.7% in the quarter compared to the prior year, primarily due to the current year including a full 12-week quarter of operating results versus approximately 6 weeks last year due to the timing of the Del Taco acquisition. As a result, the comments below are focused on the quarter-over-quarter comparisons.
Food and packaging costs, as a percentage of company restaurant sales, decreased 0.9% in the quarter as compared to the prior year. This decrease as a percentage was primarily due to the increased menu pricing which more than offset the higher commodity costs in the period.
Payroll and employee benefit costs, as a percentage of company restaurant sales, increased 0.4% in the quarter as compared to the prior year. This increase was primarily due to labor inflation.
Occupancy and other costs, as a percentage of company restaurant sales, increased 1.0% in the quarter as compared to the prior year. This increase was primarily due to utility inflation, increases in maintenance and repair costs, and higher rent expense.
Del Taco 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
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Total franchise revenues (1)
$
13,797
$
5,898
$
29,927
$
5,898
Total franchise costs (2)
$
8,650
$
3,436
$
18,392
$
3,436
Franchise costs as a percentage of total franchise revenues
62.7%
58.3%
61.5%
58.3%
Number of franchise restaurants at end of period
322
306
322
306
% increase
5.2%
5.2%
Franchised restaurant sales
$
118,896
$
55,720
$
264,994
$
55,720
Franchised restaurant AUVs
$
369
$
182
$
823
$
182
Royalties as a percentage of total franchised restaurant sales
4.8%
4.7%
4.8%
4.7%
____________________________
(1)Includes franchise rental revenues, franchise royalties and other, and franchise contributions for advertising and other services.
(2)Includes franchise occupancy expenses, franchise support and other costs, and franchise advertising and other services expenses.
Company-Wide Results
Depreciation and Amortization
Depreciation and amortization increased $3.1 million in the quarter and $10.0 million year-to-date compared to the prior year primarily due to the acquisition of Del Taco, contributing an additional $4.1 million of depreciation and amortization in the quarter and $12.5 million year-to-date; more than offsetting lower Jack in the Box depreciation as a result of certain franchise buildings becoming fully depreciated.
25
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
$
2,098
$
8,183
Incentive compensation (including share-based compensation and related payroll taxes)
4,100
9,480
Cash surrender value of COLI policies, net
(2,980)
(9,147)
Litigation matters
(1,333)
4,654
Insurance
1,565
1,508
Other
7,742
21,627
$
11,192
$
36,305
Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $2.1 million in the quarter and $8.2 million year-to-date compared to the prior year primarily due to the acquisition of Del Taco which resulted in higher advertising costs of $2.0 million and $7.8 million, respectively.
Incentive compensation increased $4.1 million in the quarter and $9.5 million year-to-date compared to the prior year. In the quarter, the increase is primarily due to a $4.6 million increase in the annual incentives mainly as a result of higher achievement levels compared to the prior year, partially offset by a $0.5 million decrease in share-based compensation. Year-to-date, the increase is due to a $7.5 million increase in the annual incentives as well as a $2.0 million increase in share-based compensation mainly from the 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 positive impact of $3.0 million in the quarter and $9.1 million year-to-date versus the prior year.
Litigation matters decreased $1.3 million in the quarter and increased by $4.7 million year-to-date compared to a year ago mainly due to litigation developments in the current year. In the first quarter of 2023, in connection with the J&D Restaurant Group legal matter we recorded a charge of $6.4 million based on a jury verdict. In the second quarter of 2023, we reversed the total $8.0 million we had accrued for the J&D Restaurant Group litigation based on the Court’s final ruling overturning the jury verdict. Additionally, in the second quarter of fiscal 2023, we recorded a litigation charge of $6.6 million for Gessele vs. Jack in the Box Inc.. Refer to Note 14, Commitments and Contingencies, of the notes to the condensed consolidated financial statements for additional information related to these two legal matters.
Insurance increased $1.6 million in the quarter and $1.5 million year-to-date compared to a year ago due to a benefit in the prior year from a favorable change in the loss development factors related to our worker’s compensation liabilities.
The increase in the other SG&A is primarily due to the acquisition of Del Taco in the prior year which resulted in an increase of additional general and administrative costs of $5.9 million and $17.9 million in the quarter and year-to-date periods, respectively.
Other Operating Expenses, Net
Other operating expenses, net is comprised of the following (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Acquisition, integration, and restructuring costs
$
1,259
$
13,098
$
2,896
$
16,111
Costs of closed restaurants and other
560
650
2,745
1,722
Accelerated depreciation
185
288
453
663
(Gains) losses on disposition of property and equipment, net
976
331
(8,615)
(286)
$
2,980
$
14,367
$
(2,521)
$
18,210
26
Other operating expenses, net decreased $11.4 million in the quarter and $20.7 million year-to-date compared to the prior year, primarily due to the acquisition of Del Taco in the prior year resulting in acquisition, integration and restructuring costs of $13.1 million and $16.1 million, respectively. Year-to-date, $9.5 million of gains were recognized in the current year from the sale of Jack in the Box restaurant properties to franchisees who were leasing the properties from us prior to the sale also contributed to the decrease.
Gains on the Sale of Company-Operated Restaurants
For the year-to-date period 2023, the Company sold five Jack in the Box company-operated restaurants and 16 Del Taco company-operated restaurants to franchisees and recognized a net gain of $4.5 million. Refer to Note 4, Summary of Refranchisings and Franchise Acquisitions, of the notes to the condensed consolidated financial statements for additional information regarding these transactions. In fiscal 2022, no company-operated restaurants were sold to franchisees. Amounts included in “Gains on the sale of company-operated restaurants” in 2022 related to additional proceeds received in connection with the extension of franchise and lease agreements form the sale of restaurants in prior years.
Interest Expense, Net
Interest expense, net is comprised of the following (in thousands):
Quarter
Year-to-date
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Interest expense
$
19,724
$
26,562
$
46,261
$
46,835
Interest income
(367)
(81)
(756)
(167)
Interest expense, net
$
19,357
$
26,481
$
45,505
$
46,668
Interest expense, net decreased $7.1 million in the quarter and $1.2 million year-to-date compared to a year ago primarily due to a loss on early extinguishment of debt of $7.7 million in the prior year and lower average borrowing rates, partially offset by higher average borrowings.
Income Tax Expense
The income tax provisions reflect tax rates of 34.8% in the second quarter of 2023 as compared to 33.3% in the prior year, and 29.6% for the year-to-date period, compared with 27.8% in the same period in fiscal year 2022. The major components of the year-over-year increase in tax rates were the impact of estimated disposals of non-deductible goodwill attributable to refranchising transactions, partially offset by non-taxable gains in the current year as opposed to non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans and non-deductible transaction costs resulting from the Del Taco acquisition recorded in the prior year.
Non-GAAP Adjusted EBITDA
Below is a consolidated reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
Quarter
Year-to-date
Consolidated:
April 16, 2023
April 17, 2022
April 16, 2023
April 17, 2022
Net earnings - GAAP
$
26,507
$
7,796
$
79,761
$
47,066
Income tax expense
14,168
3,897
33,553
18,087
Interest expense, net
19,357
26,481
45,505
46,668
Gains on the sale of company-operated restaurants
(704)
(810)
(4,529)
(858)
Other operating expenses (income), net
2,980
14,367
(2,521)
18,210
Depreciation and amortization
14,598
11,545
34,000
24,041
Amortization of favorable and unfavorable leases and subleases, net
833
248
1,375
248
Amortization of franchise tenant improvement allowances and incentives
1,022
893
2,237
2,127
Adjusted EBITDA - Non-GAAP
$
78,761
$
64,417
$
189,381
$
155,589
27
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 use 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 April 16, 2023, the Company had $122.8 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $172.0 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 the sale of 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 and revolving credit 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.
Cash Flows
The table below summarizes our cash flows from continuing operations (in thousands):
Year-to-date
April 16, 2023
April 17, 2022
Total cash provided by (used in):
Operating activities
$
94,108
$
67,828
Investing activities
9,730
(598,182)
Financing activities
(117,042)
541,419
Net cash flows
$
(13,204)
$
11,065
Operating Activities. Operating cash flows increased $26.3 million compared with a year ago. This is primarily due the change in higher net income, when adjusted for non-cash items, of $12.7 million, as well as due to a favorable change in working capital of $13.6 million. The change in working capital is primarily a result of higher income tax accruals versus tax payments, lower bonus payments and the timing of media payments, partially offset by the timing of collections for royalties, marketing and percentage rent and the timing of minimum rent payments.
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, 2022, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. In 2023, we contributed $3.2 million to our non-qualified pension plan and post-retirement plans.
Investing Activities. Cash flows from investing activities increased by $607.9 million compared with a year ago due to the Del Taco acquisition in the prior year of $580.8 million, and higher proceeds in the current year from the sale of Jack in the Box restaurant properties to franchisees of $21.1 million and the sale of company-operated restaurants of $17.8 million. These increases are partially offset by higher purchases of property and equipment of $16.4 million.
28
Capital Expenditures— The composition of capital expenditures in each period follows (in thousands):
Year-to-date
April 16, 2023
April 17, 2022
Restaurants:
Remodel / refresh programs
$
4,863
$
4,935
Restaurant facility expenditures
15,058
8,689
Purchases of assets intended for sale and leaseback
5,801
1,877
Restaurant information technology
8,607
3,262
34,329
18,763
Corporate Services:
Information technology
2,625
855
Corporate facilities
242
1,163
2,867
2,018
Total capital expenditures
$
37,196
$
20,781
Sale of Company-Operated Restaurants— We have continued to expand franchise ownership primarily through the sale of company-operated restaurants to franchisees. The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands):
Year-to-date
April 16, 2023
April 17, 2022
Number of Jack in the Box restaurants sold to franchisees
5
—
Number of Del Taco restaurants sold to franchisees
16
—
Total proceeds
$
18,417
$
600
Proceeds fiscal 2022 were received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
Financing Activities. Cash flows used in financing activities increased by $658.5 million compared with a year ago. The primary change is due an increase in net borrowings in the prior year driven by the issuance of the 2022 Notes as further detailed below. The repayment of $50.0 million of borrowings outstanding under our Variable Funding Notes and $32.6 million of stock repurchases in the current year also contributed to the increase in cash flows used in financing activities versus the prior year.
Repurchases of common stock— The Company repurchased 0.4 million shares of its common stock in fiscal 2023 for an aggregate cost of $33.6 million, which includes amounts settled after the end of the quarter. As of April 16, 2023, there was $141.6 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends — Up through April 16, 2023, the Board of Directors declared two cash dividends of $0.44 per common share totaling $18.4 million. On May 12, 2023, the Board of Directors declared a cash dividend of 0.44 per common share, to be paid on June 13, 2023, to shareholders of record as of the close of business on May 31, 2023.
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 Notes” 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 2022 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 governs the 2022 Notes. The anticipated repayment dates of the existing 2019-1 Class A-2-II Notes and the Class A-2-III Notes are August 2026 and August 2029, respectively.
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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. As of April 16, 2023, we did not have any outstanding borrowings and had available borrowing capacity of $110.0 million under our Variable Funding Notes, net of letters of credits issued of $40.0 million.
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 April 16, 2023, the Company had restricted cash of $27.9 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 April 16, 2023, 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 1, 2024. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of April 16, 2023, 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.
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. There have been no material changes 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 2, 2022.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Basis of Presentation, of the notes to condensed consolidated financial 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.
•Changes in the availability of and the cost of labor could adversely affect our business.
•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.
•Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
•Our business could be adversely affected by increased labor costs.
•Unionization activities or labor disputes may disrupt our operations and affect our profitability.
•Our insurance may not provide adequate levels of coverage against claims.
•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.
•Negative publicity relating to our business or industry could adversely impact our reputation.
•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.
•Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
•We may not achieve our development goals.
•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.
•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 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.
•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.
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•We may not be able to adequately protect our intellectual property, which could harm the value of our brand and 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.
•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.
•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.
•We may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
•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.
•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.
•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.
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 2, 2022 (“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
There have been no material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022.
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 April 16, 2023, 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 April 16, 2023 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 14, 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
When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, which we filed with the SEC on November 22, 2022, 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 2, 2022, 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 occur, our business and financial results could be harmed. In that case, the market price of our common stock could decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases — In the second quarter of 2023, we repurchased 0.2 million shares of our common stock for an aggregate cost of $18.6 million, including the applicable excise tax. As of April 16, 2023, this leaves $141.6 million remaining under share repurchase programs authorized by the Board of Directors that expire in November 2023.
(a) Total number of shares purchased
(b) Average price paid per share
(c) Total number of shares purchased as part of publicly announced programs
(d) Maximum dollar value that may yet be purchased under these programs (in thousands)
Cover Page Interactive Data File formatted in iXBRL
*Management contract or compensatory plan
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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.
