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 August 3, 2023, 20,107,964 shares of the registrant’s common stock were outstanding.
Long-term operating lease liabilities, net of current portion
1,220,968
1,165,097
Deferred tax liabilities
41,113
37,684
Other long-term liabilities
139,675
134,694
Total long-term liabilities
3,133,162
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, 82,645,814 and 82,580,599 issued, respectively
826
826
Capital in excess of par value
516,789
508,323
Retained earnings
1,924,466
1,842,947
Accumulated other comprehensive loss
(52,761)
(53,982)
Treasury stock, at cost, 62,538,138 and 61,799,221 shares, respectively
(3,094,737)
(3,034,306)
Total stockholders’ deficit
(705,417)
(736,192)
$
2,951,779
$
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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Revenues:
Company restaurant sales
$
198,516
$
215,231
$
671,311
$
486,596
Franchise rental revenues
86,248
80,068
278,598
259,723
Franchise royalties and other
54,970
52,059
185,342
159,915
Franchise contributions for advertising and other services
57,208
50,947
184,531
159,076
396,942
398,305
1,319,782
1,065,310
Operating costs and expenses, net:
Food and packaging
58,556
65,755
199,799
150,163
Payroll and employee benefits
63,871
71,366
217,547
162,001
Occupancy and other
37,274
42,054
127,920
92,102
Franchise occupancy expenses
53,930
50,971
173,803
164,198
Franchise support and other costs
4,079
3,768
8,623
12,694
Franchise advertising and other services expenses
59,569
52,398
192,875
164,964
Selling, general and administrative expenses
39,617
40,032
129,164
93,274
Depreciation and amortization
14,460
16,713
48,460
40,754
Pre-opening costs
182
54
667
630
Other operating expenses, net
7,656
4,129
5,135
22,339
Gains on the sale of company-operated restaurants
(5,794)
(802)
(10,323)
(1,660)
333,400
346,438
1,093,670
901,459
Earnings from operations
63,542
51,867
226,112
163,851
Other pension and post-retirement expenses, net
1,608
70
5,359
233
Interest expense, net
18,662
19,703
64,167
66,371
Earnings before income taxes
43,272
32,094
156,586
97,247
Income taxes
14,104
9,237
47,657
27,324
Net earnings
$
29,168
$
22,857
$
108,929
$
69,923
Earnings per share:
Basic
$
1.42
$
1.08
$
5.25
$
3.29
Diluted
$
1.41
$
1.08
$
5.22
$
3.29
Cash dividends declared per common share
$
0.44
$
0.44
$
1.32
$
1.32
See accompanying notes to condensed consolidated financial statements.
3
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Net earnings
$
29,168
$
22,857
$
108,929
$
69,923
Other comprehensive income:
Actuarial losses and prior service costs reclassified to earnings
498
748
1,657
2,491
498
748
1,657
2,491
Tax effect
(132)
(195)
(436)
(647)
Other comprehensive income, net of taxes
366
553
1,221
1,844
Comprehensive income
$
29,534
$
23,410
$
110,150
$
71,767
See accompanying notes to condensed consolidated financial statements.
4
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Year-to-date
July 9, 2023
July 10, 2022
Cash flows from operating activities:
Net earnings
$
108,929
$
69,923
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
48,460
40,754
Amortization of franchise tenant improvement allowances and incentives
3,295
3,046
Deferred finance cost amortization
3,915
4,280
Loss on extinguishment of debt
—
7,700
Tax deficiency from share-based compensation arrangements
71
123
Deferred income taxes
1,648
8,058
Share-based compensation expense
7,991
5,541
Pension and post-retirement expense
5,359
233
(Gains) losses on cash surrender value of company-owned life insurance
(8,331)
9,024
Gains on the sale of company-operated restaurants
(10,323)
(1,660)
Gains on the disposition of property and equipment, net
(9,155)
(1,746)
Impairment charges and other
6,232
3,863
Changes in assets and liabilities, excluding acquisitions:
Accounts and other receivables
12,902
571
Inventories
658
(137)
Prepaid expenses and other current assets
5,714
(3,261)
Operating lease right-of-use assets and lease liabilities
5,357
6,074
Accounts payable
(28,068)
2,627
Accrued liabilities
32,525
(42,701)
Pension and post-retirement contributions
(4,674)
(5,109)
Franchise tenant improvement allowance and incentive disbursements
(2,745)
(2,206)
Other
2,311
(1,185)
Cash flows provided by operating activities
182,071
103,812
Cash flows from investing activities:
Purchases of property and equipment
(56,669)
(34,349)
Acquisition of Del Taco, net of cash acquired
—
(580,792)
Proceeds from the sale of property and equipment
25,174
4,691
Proceeds from the sale and leaseback of assets
3,673
5,968
Proceeds from the sale of company-operated restaurants
51,845
1,402
Other
1,465
(1,315)
Cash flows provided by (used in) investing activities
25,488
(604,395)
Cash flows from financing activities:
Borrowings on revolving credit facilities
—
68,000
Repayments of borrowings on revolving credit facilities
(50,000)
(18,000)
Proceeds from the issuance of debt
—
1,100,000
Principal repayments on debt
(22,620)
(580,518)
Payment of debt issuance and extinguishment costs
—
(20,599)
Dividends paid on common stock
(27,198)
(27,789)
Proceeds from issuance of common stock
263
51
Repurchases of common stock
(60,431)
—
Payroll tax payments for equity award issuances
(1,593)
(1,215)
Cash flows (used in) provided by financing activities
(161,579)
519,930
Net increase in cash and restricted cash
45,980
19,347
Cash and restricted cash at beginning of period
136,040
73,568
Cash and restricted cash at end of period
$
182,020
$
92,915
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 July 9, 2023, there were 140 company-operated and 2,051 franchise-operated Jack in the Box restaurants and 221 company-operated and 373 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 40 weeks (year-to-date”) ended July 9, 2023 and July 10, 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 $9.0 million and $30.3 million, respectively, in 2023 and $9.8 million and $22.9 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
July 9, 2023
July 10, 2022
Balance as of beginning of period
$
(5,975)
$
(6,292)
Reversal (provision) for expected credit losses
1,833
(4,162)
Write-offs charged against the allowance
41
5,226
Balance as of end of period
$
(4,101)
$
(5,228)
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.
Goodwill and trademarks — Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired, if any. We generally record goodwill in connection with the acquisition of restaurants from franchisees or the acquisition of another business. Likewise, upon the sale of restaurants to franchisees, goodwill is decremented. The amount of goodwill written-off is determined as the fair value of the business disposed of as a percentage of the fair value of the reporting unit prior to the disposal. If the business disposed of was never fully integrated into the reporting unit after its acquisition, and thus the benefits of the acquired goodwill were never realized, the current carrying amount of the acquired goodwill is written off.
Goodwill is not amortized and has been assigned to reporting units for purposes of impairment testing. The Company’s two restaurant brands, Jack in the Box and Del Taco, are both operating segments and reporting units. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values.
The Company tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if events and circumstances warrant. Historically, this testing has been performed as of at the end of the fourth quarter of each fiscal year; however, the Company determined that the testing date should be moved up to be performed during the third quarter of each fiscal year. The Company does not consider this change to be material and believes the timing of assessment is preferable as it better aligns with its planning and forecasting process and also provides additional time to complete the annual assessment in advance of quarterly reporting deadlines. The change in assessment date did not delay, accelerate, or cause avoidance of a potential impairment charge.
Our impairment analyses first include a qualitative assessment to determine whether events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall financial performance, and results of past impairment tests. If the qualitative factors indicate that it is more likely than not that the fair value is less than the carrying value, we perform a quantitative impairment test.
In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of the reporting unit. Significant assumptions made by management to estimate fair value under the discounted cash flow method include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions, or changes in operating performance. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risk and uncertainty inherent in the forecasted cash flows. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied.
In the process of a quantitative test, if necessary, of the Del Taco trademark intangible asset, we primarily use the relief from royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate, an estimated income tax rate, and a discount rate to be applied to the forecast revenue stream.
During the third quarter of 2023, we performed a qualitative test for the fair value of the Jack in the Box reporting unit, noting that the fair value was substantially in excess of its respective carrying value. We performed quantitative tests over the Del Taco reporting unit using the approaches described above. The fair value of the Del Taco reporting unit and of the Del Taco indefinite-lived trademarks were in excess of their carrying values by approximately 9% and 13%, respectively, as of the testing date.
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 July 9, 2023 (in thousands):
Quarter
Year-to-date
Jack in the Box
Del Taco
Total
Jack in the Box
Del Taco
Total
Company restaurant sales
$
96,820
$
101,696
$
198,516
$
318,451
$
352,860
$
671,311
Franchise rental revenues
83,271
2,977
86,248
270,277
8,321
278,598
Franchise royalties
47,373
6,130
53,503
161,343
18,721
180,064
Marketing fees
47,323
5,004
52,327
154,153
15,268
169,421
Technology and sourcing fees
4,037
844
4,881
12,881
2,230
15,111
Franchise fees and other services
1,387
80
1,467
4,855
422
5,277
Total revenue
$
280,211
$
116,731
$
396,942
$
921,960
$
397,822
$
1,319,782
The following table disaggregates revenue by segment and primary source for the quarter ended July 10, 2022 (in thousands):
Quarter
Year-to-date
Jack in the Box
Del Taco
Total
Jack in the Box
Del Taco
Total
Company restaurant sales
$
100,899
$
114,332
$
215,231
$
315,205
$
171,391
$
486,596
Franchise rental revenues
78,278
1,790
80,068
257,069
2,654
259,723
Franchise royalties
44,291
5,361
49,652
144,872
8,006
152,878
Marketing fees
42,620
4,359
46,979
139,811
6,517
146,328
Technology and sourcing fees
3,548
420
3,968
12,123
625
12,748
Franchise fees and other services
2,340
67
2,407
6,944
93
7,037
Total revenue
$
271,976
$
126,329
$
398,305
$
876,024
$
189,286
$
1,065,310
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.
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of significant changes in contract liabilities is presented below (in thousands):
Year-to-date
July 9, 2023
July 10, 2022
Deferred franchise and development fees at beginning of period
$
46,449
$
41,520
Changes due to business combinations
—
6,193
Revenue recognized
(4,140)
(4,238)
Additions
6,665
3,023
Deferred franchise and development fees at end of period
$
48,974
$
46,498
As of July 9, 2023, approximately $7.4 million of development fees related to unopened restaurants are included in deferred revenue. Timing of revenue recognition for development fees related to unopened restaurants is dependent upon the timing of restaurant openings and are recognized over the franchise term at the date of opening.
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied as of July 9, 2023 (in thousands):
Remainder of 2023
$
1,206
2024
5,074
2025
4,840
2026
4,513
2027
4,158
Thereafter
21,775
$
41,566
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):
Year-to-date
July 10, 2022
Total revenue
$
1,283,387
Net earnings
$
74,711
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited pro forma financial information for the period 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 year-to-date period in 2022, Del Taco had total revenues of $189.3 million and net earnings of $5.2 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
July 9, 2023
July 10, 2022 (1)
July 9, 2023
July 10, 2022 (1)
Restaurants sold to Jack in the Box franchisees
—
—
5
—
Restaurants sold to Del Taco franchisees
50
—
66
—
Proceeds from the sale of company-operated restaurants
$
33,428
$
802
$
51,845
$
1,402
Broker commissions
(1,014)
—
(1,014)
—
Net assets sold (primarily property and equipment)
(6,705)
—
(10,798)
—
Goodwill related to the sale of company-operated restaurants
(14,194)
—
(21,503)
—
Franchise fees
(1,385)
—
(1,962)
—
Sublease liabilities, net
(3,580)
—
(4,777)
—
Lease termination
—
—
(393)
—
Other(2)
(756)
—
(1,075)
258
Gains on the sale of company-operated restaurants
$
5,794
$
802
$
10,323
$
1,660
____________________________
(1)Amounts in periods presented for 2022 primarily relate to additional proceeds received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
(2)The quarter and year-to-date amounts include $0.3 million relating to impairment on two restaurants that will be refranchised in the fourth quarter of 2023.
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 July 9, 2023 and October 2, 2022 have carrying amounts of $10.0 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.
10
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
—
(21,431)
(21,431)
Sale of Jack in the Box company-operated restaurants to franchisees
(72)
—
(72)
Reclassified to assets held for sale
—
(5,929)
(5,929)
Balance at July 9, 2023
$
136,027
$
203,362
$
339,389
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows (in thousands):
July 9, 2023
October 2, 2022
Gross Amount
Accumulated Amortization
Net Amount
Gross Amount
Accumulated Amortization
Net Amount
Definite-lived intangible assets:
Sublease assets
$
2,671
$
(325)
$
2,346
$
2,671
$
(139)
$
2,532
Franchise contracts
9,700
(725)
8,975
9,700
(311)
9,389
Reacquired franchise rights
297
(103)
194
530
(127)
403
$
12,668
$
(1,153)
$
11,515
$
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 July 9, 2023, the estimated amortization expense for each of the next five fiscal years (in thousands):
Remainder of 2023
$
213
2024
901
2025
901
2026
901
2027
901
Thereafter
7,698
$
11,515
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.”
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JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents rental income (in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Operating lease income - franchise
$
56,052
$
53,703
$
185,285
$
178,048
Variable lease income - franchise
29,857
26,274
92,836
81,556
Amortization of favorable and unfavorable sublease contracts, net
339
91
477
119
Franchise rental revenues
$
86,248
$
80,068
$
278,598
$
259,723
Operating lease income - closed restaurants and other (1)
$
1,692
$
1,663
$
5,717
$
4,728
____________________________
(1)Primarily relates to closed restaurant properties included in “Other operating 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 July 9, 2023:
Non-qualified deferred compensation plan (1)
$
15,259
$
15,259
$
—
$
—
Total liabilities at fair value
$
15,259
$
15,259
$
—
$
—
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 July 9, 2023 and October 2, 2022 (in thousands):
July 9, 2023
October 2, 2022
Carrying Amount
Fair Value
Carrying Amount
Fair Value
Series 2019 Class A-2 Notes
$
708,688
$
634,271
$
714,125
$
641,851
Series 2022 Class A-2 Notes
$
1,072,500
$
901,704
$
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, the Company impaired certain under-performing Del Taco restaurants. For further information, see Note 8, Other operating expenses, net, below in the notes to the condensed consolidated financial statements.
12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.OTHER OPERATING EXPENSES, NET
Other operating expenses, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Acquisition, integration, and restructuring costs (1)
$
2,463
$
2,753
$
5,359
$
18,864
Costs of closed restaurants and other (2)
1,272
837
4,017
2,559
Operating restaurant impairment charges (3)
4,395
1,653
4,395
1,653
Accelerated depreciation
66
346
519
1,009
Gains on disposition of property and equipment, net (4)
(540)
(1,460)
(9,155)
(1,746)
$
7,656
$
4,129
$
5,135
$
22,339
____________________________
(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)In 2023, restaurant impairment charges related to the impairment of under-performing Del Taco restaurants currently held for use, whereas in 2022, the charges related to the impairment of under-performing Jack in the Box company-operated restaurants currently held for use.
(4)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.
13
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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Revenues by segment:
Jack in the Box
$
280,211
$
271,976
$
921,960
$
876,024
Del Taco
116,731
126,329
397,822
189,286
Consolidated revenues
$
396,942
$
398,305
$
1,319,782
$
1,065,310
Segment operating profit:
Jack in the Box
$
72,067
$
64,951
$
246,779
$
216,935
Del Taco
4,167
12,209
25,131
18,265
Total segment operating profit
$
76,234
$
77,160
$
271,910
$
235,200
Depreciation and amortization
14,460
16,713
48,460
40,754
Acquisition, integration, and restructuring costs
2,463
2,753
5,359
18,864
Share-based compensation
2,059
1,607
7,991
5,541
Net COLI (gains) losses
(579)
4,585
(7,147)
7,165
Gains on the sale of company-operated restaurants
(5,794)
(802)
(10,323)
(1,660)
Amortization of favorable and unfavorable leases and subleases, net
83
437
1,458
685
Earnings from operations
$
63,542
$
51,867
$
226,112
$
163,851
Total capital expenditures by segment:
Jack in the Box
$
24,588
$
7,603
$
39,844
$
24,933
Del Taco
8,053
5,965
16,825
9,416
Total capital expenditures
$
32,641
$
13,568
$
56,669
$
34,349
Total depreciation and amortization by segment:
Jack in the Box
$
8,319
$
9,202
$
27,631
$
31,038
Del Taco
6,141
7,511
20,829
9,716
Total depreciation and amortization
$
14,460
$
16,713
$
48,460
$
40,754
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 32.6% in the third quarter of 2023 as compared to 28.8% in the third quarter of 2022, as well as 30.4% for the year-to-date period in 2023, compared with 28.1% in the same period in fiscal year 2022. The major components of the year-over-year increase in tax rates were the annual impact of both actual and 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.
14
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
Net periodic benefit cost (credit) — The components of net periodic benefit cost in each period were as follows (in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Defined benefit pension plans:
Interest cost
$
4,434
$
3,388
$
14,782
$
11,292
Expected return on plan assets
(3,486)
(4,179)
(11,619)
(13,926)
Actuarial losses (1)
708
890
2,359
2,968
Amortization of unrecognized prior service costs (1)
5
5
15
15
Net periodic benefit cost
$
1,661
$
104
$
5,537
$
349
Post-retirement healthcare plans:
Interest cost
$
162
$
113
$
539
$
376
Actuarial gains (1)
(215)
(147)
(717)
(492)
Net periodic benefit credit
$
(53)
$
(34)
$
(178)
$
(116)
____________________________
(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
$
3,930
$
744
Remaining estimated net contributions during fiscal 2023
$
1,283
$
368
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.
15
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)
Shares issued under stock plans, including tax benefit
17
—
263
—
—
—
263
Share-based compensation
—
—
2,059
—
—
—
2,059
Dividends declared
—
—
72
(9,050)
—
—
(8,978)
Purchases of treasury stock
—
—
—
—
—
(26,852)
(26,852)
Net earnings
—
—
—
29,168
—
—
29,168
Other comprehensive income
—
—
—
—
366
—
366
Balance at July 9, 2023
82,646
$
826
$
516,789
$
1,924,466
$
(52,761)
$
(3,094,737)
$
(705,417)
16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Number of Shares
Amount
Capital in Excess of Par Value
Retained Earnings
Accumulated Other Comprehensive Loss
Treasury Stock
Total
Balance at 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)
Shares issued under stock plans, including tax benefit
11
—
—
—
—
—
—
Share-based compensation
—
—
1,607
—
—
—
1,607
Dividends declared
—
—
65
(9,329)
—
—
(9,264)
Net earnings
—
—
—
22,857
—
—
22,857
Other comprehensive income
—
—
—
—
553
—
553
Balance at July 10, 2022
82,580
$
826
$
506,674
$
1,806,352
$
(72,410)
$
(3,009,306)
$
(767,864)
Repurchases of common stock— The Company repurchased 0.7 million shares of its common stock in fiscal 2023 for an aggregate cost of $60.4 million, including applicable excise tax. As of July 9, 2023, there was $115.0 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends— Through July 9, 2023, the Board of Directors declared three cash dividends of $0.44 per common share totaling $27.4 million. Future dividends are subject to approval by our Board of Directors.
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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Weighted-average shares outstanding – basic
20,487
21,236
20,738
21,221
Effect of potentially dilutive securities:
Nonvested stock awards and units
161
24
122
42
Stock options
1
—
1
1
Performance share awards
—
—
—
—
Weighted-average shares outstanding – diluted
20,649
21,260
20,861
21,264
Excluded from diluted weighted-average shares outstanding:
Antidilutive
15
32
26
23
Performance conditions not satisfied at the end of the period
105
63
105
63
17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 July 9, 2023, the Company has accrued the verdict amount as well as estimated pre-judgment and post-judgment interest of $6.6 million, and included it within “Accrued liabilities” on our condensed consolidated balance sheet. The Company will continue to accrue for post-judgment interest until the matter is settled.
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 voluntary mediation on May 24, 2022 and June 3, 2022. On June 4, 2022, we entered into a Settlement Memorandum of Understanding (the “Agreement”) which obligates the Company to pay a gross settlement amount of $50.0 million, for which in exchange we will be released from all claims by the parties. The Agreement contains no admission of wrongdoing and is contingent upon various conditions, including, but not limited to, court approvals. There can be no assurance that the Agreement will be approved by the court nor upheld if challenged on appeal. As of July 9, 2023, the Company has accrued the settlement amount, and included it within “Accrued liabilities” on our condensed consolidated balance sheet.
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 July 9, 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.
18
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 July 9, 2023, the maximum potential liability of future undiscounted payments under these leases is approximately $22.9 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
July 9, 2023
July 10, 2022
Non-cash investing and financing transactions:
Decrease in obligations for purchases of property and equipment
$
2,472
$
3,371
Increase in dividends accrued or converted to common stock equivalents
$
212
$
193
Right-of use assets obtained in exchange for operating lease obligations
$
181,874
$
179,726
Right-of use assets obtained in exchange for finance lease obligations
$
870
$
45
19
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16.SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
July 9, 2023
October 2, 2022
Accounts and other receivables, net:
Trade
$
74,988
$
90,105
Notes receivable, current portion
1,974
8,643
Income tax receivable
997
878
Other
8,918
10,152
Allowance for doubtful accounts
(4,101)
(5,975)
$
82,776
$
103,803
Property and equipment, net
Land
$
95,517
$
86,134
Buildings
963,375
960,984
Restaurant and other equipment
165,643
163,527
Construction in progress
25,083
18,271
1,249,618
1,228,916
Less accumulated depreciation and amortization
(834,669)
(810,752)
$
414,949
$
418,164
Other assets, net:
Company-owned life insurance policies
$
115,790
$
108,924
Deferred rent receivable
42,193
43,891
Franchise tenant improvement allowance
40,968
32,429
Notes receivable, less current portion
10,040
11,624
Other
29,766
29,701
$
238,757
$
226,569
Accrued liabilities:
Legal accruals
$
64,171
$
59,165
Payroll and related taxes
43,972
43,837
Insurance
32,359
32,272
Sales and property taxes
21,716
30,947
Deferred rent income
14,499
18,525
Advertising
19,375
11,028
Deferred franchise and development fees
6,019
5,647
Other
79,670
52,511
$
281,781
$
253,932
Other long-term liabilities:
Defined benefit pension plans
$
50,170
$
51,679
Deferred franchise and development fees
42,955
40,802
Other
46,550
42,213
$
139,675
$
134,694
17.SUBSEQUENT EVENTS
Refranchising — Subsequent to the end of the third quarter of 2023, the Company closed on the sale of 23 Del Taco company-operated restaurants to two franchisees for $13.8 million.
Dividends — On August 4, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on September 18, 2023, to shareholders of record as of the close of business on September 6, 2023.
20
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 40 weeks (“year-to-date”) ended July 9, 2023 and July 10, 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.
21
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 July 9, 2023, we operated and franchised 2,191 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 594 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:
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Company
6.9
%
3.5
%
10.3
%
1.5
%
Franchise
8.0
%
(1.0)
%
8.2
%
(0.1)
%
System
7.9
%
(0.6)
%
8.4
%
0.0
%
Quarter
Year-to-date
Del Taco:
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022 (1)
Company
1.7
%
2.3
%
2.8
%
2.5
%
Franchise
1.8
%
4.8
%
2.5
%
4.6
%
System
1.7
%
3.5
%
2.6
%
3.5
%
____________________________
(1)Fiscal 2022 full year-to-date same store sales figures are shown for information purposes only.
The following tables summarize year-to-date 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
—
14
14
—
10
10
Acquired from franchisees
—
—
—
13
(13)
—
Refranchised
(5)
5
—
—
—
—
Closed
(1)
(3)
(4)
(5)
(16)
(21)
End of period
140
2,051
2,191
171
2,036
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
—
7
7
1
2
3
Refranchised
(66)
66
—
—
—
—
Closed
(3)
(1)
(4)
(6)
(5)
(11)
End of period
221
373
594
291
303
594
% of system
37
%
63
%
100
%
49
%
51
%
100
%
____________________________
(1)Fiscal 2022 full year-to-date restaurant activity figures are shown for information purposes only.
22
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:
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Company-operated restaurant sales
$
96,820
$
100,899
$
318,451
$
315,205
Franchised restaurant sales (1)
948,457
867,210
3,088,697
2,825,353
Systemwide sales (1)
$
1,045,277
$
968,109
$
3,407,148
$
3,140,558
Quarter
Year-to-date
Del Taco:
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022 (2)
Company-operated restaurant sales
$
101,696
$
114,333
$
352,860
$
368,893
Franchised restaurant sales (1)
129,112
112,774
394,105
359,243
Systemwide sales (1)
$
230,808
$
227,107
$
746,965
$
728,136
____________________________
(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 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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Company restaurant sales
$
96,820
$
100,899
$
318,451
$
315,205
Company restaurant costs:
Food and packaging
$
30,384
31.4
%
$
33,319
33.0
%
$
101,551
31.9
%
$
101,543
32.2
%
Payroll and employee benefits
$
29,292
30.3
%
$
33,699
33.4
%
$
97,930
30.8
%
$
105,431
33.4
%
Occupancy and other
$
16,021
16.5
%
$
17,959
17.8
%
$
52,397
16.5
%
$
56,220
17.8
%
Company restaurant sales decreased $4.1 million or 4.0% in the quarter and increased $3.2 million or 1.0% year-to-date compared to the prior year. In the quarter, the decrease is primarily due to a decline in the number of company-operated restaurants, partially offset by average check and traffic growth. Year-to-date, the increase is primarily due to higher same-store sales driven by average check and traffic growth, partially offset by a decrease 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
$
5.6
$
29.5
Decrease in the average number of restaurants
(9.7)
(26.3)
Total change in company restaurant sales
$
(4.1)
$
3.2
Same-store sales at company-operated restaurants increased 6.9% in the quarter and 10.3% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:
23
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Average check (1)
5.8
%
5.6
%
7.1
%
4.2
%
Transactions
1.1
%
(2.1)
%
3.2
%
(2.7)
%
Change in same-store sales
6.9
%
3.5
%
10.3
%
1.5
%
____________________________
(1)Includes price increases of approximately 7.3% in the quarter and 9.0% year-to-date.
Food and packaging costs as a percentage of company restaurant sales decreased 1.6% in the quarter and decreased 0.3% year-to-date compared to the prior year primarily due to increased menu pricing and favorable menu item mix, partially offset by higher commodity costs.
Commodity costs increased in the quarter and year-to-date by approximately 5.2% and 10.0%, 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 and beverages. For fiscal 2023, we expect annual commodity cost inflation to be up 8% to 10% compared with fiscal 2022.
Payroll and employee benefit costs as a percentage of company restaurant sales decreased 3.1% in the quarter and decreased 2.6% 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 4.2% and 6.5%, 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 1.3% in both the quarter and 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 other operating costs including utilities, delivery fees and security as compared with fiscal 2022.
24
Jack in the Box Franchise Operations
The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Franchise rental revenues
$
83,271
$
78,278
$
270,277
$
257,069
Royalties
47,373
44,291
161,343
144,872
Franchise fees and other
1,387
2,340
4,855
6,944
Franchise royalties and other
48,760
46,631
166,198
151,816
Franchise contributions for advertising and other services
51,360
46,168
167,034
151,934
Total franchise revenues
$
183,391
$
171,077
$
603,509
$
560,819
Franchise occupancy expenses
$
51,012
$
49,216
$
165,575
$
161,602
Franchise support and other costs
3,528
3,422
7,086
12,161
Franchise advertising and other services expenses
53,519
47,622
174,730
157,779
Total franchise costs
$
108,059
$
100,260
$
347,391
$
331,542
Franchise costs as a percentage of total franchise revenues
58.9%
58.6%
57.6%
59.1%
Average number of franchise restaurants
2,035
2,028
2,035
2,032
% increase
0.3%
0.1%
Franchised restaurant sales
$
948,457
$
867,210
$
3,088,697
$
2,825,353
Franchised restaurant AUVs
$
466
$
428
$
1,518
$
1,391
Royalties as a percentage of total franchised restaurant sales (1)
5.0%
5.1%
5.2%
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 July 9, 2023.
Franchise rental revenues increased $5.0 million, or 6.4% in the quarter, and $13.2 million, or 5.1% year-to-date, as compared to the prior year, primarily due to higher percentage rent of $2.9 million in the quarter and $10.1 million year-to-date driven by higher franchise restaurant sales as well as higher minimum rent of $1.8 million and $3.5 million, respectively.
Franchise royalties and other increased $2.1 million, or 4.6% in the quarter, and increased $14.4 million, or 9.5% 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 $5.2 million, or 11.2% in the quarter, and increased $15.1 million, or 9.9% 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 $1.8 million, or 3.6% in the quarter, and increased $4.0 million, or 2.5% year-to-date, compared to the prior year primarily due to ongoing rent increases and to a lesser extent, higher property tax assessments in the current year.
Franchise support and other costs increased $0.1 million in the quarter, and decreased $5.1 million year-to-date, compared to the prior year. In the quarter, the increase is primarily due to higher costs for technology fees, overhead relating to new and remodeled restaurants and franchise business conferences, partially offset by lower bad debt expense. Year-to-date the decrease is primarily due to a decrease in bad debt expense of $6.0 million, partially offset with higher technology fees.
Franchise advertising and other service expenses increased $5.9 million, or 12.4% in the quarter, and increased $17.0 million, or 10.7% year-to-date, compared to the prior year primarily driven by higher franchise sales.
25
Del Taco Brand
Jack in the Box Inc. acquired Del Taco on March 8, 2022. Fiscal 2022 results include 12 and approximately 18 weeks of operating results, compared with 12 and 40 weeks in the current year quarter and year-to-date periods, respectively.
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Company restaurant sales
$
101,696
$
114,332
$
352,860
$
171,391
Company restaurant costs:
Food and packaging
$
28,171
27.7
%
$
32,435
28.4
%
$
98,247
27.8
%
$
48,619
28.4
%
Payroll and employee benefits
$
34,579
34.0
%
$
37,666
32.9
%
$
119,617
33.9
%
$
56,570
33.0
%
Occupancy and other
$
21,254
20.9
%
$
24,094
21.1
%
$
75,523
21.4
%
$
35,882
20.9
%
Company restaurant sales decreased $12.6 million or 11.1% in the quarter compared to the prior year. The year-to-date period for 2022 only includes 18 weeks of operating results versus the full 40 weeks due to the timing of the Del Taco acquisition. As a result, the comments below are focused on the quarter-over-quarter comparisons.
The following table presents the approximate impact of these items on company restaurant sales (in millions):
Quarter
AUV increase
$
1.4
Decrease in the average number of restaurants
(14.0)
Total change in company restaurant sales
$
(12.6)
Same-store sales at company-operated restaurants increased 1.7% in the quarter and 2.8% year-to-date compared to a year ago. The following table summarizes the change for the current quarter versus a year ago:
Quarter
July 9, 2023
July 10, 2022
Average check (1)
4.1
%
8.9
%
Transactions
(2.4)
%
(6.6)
%
Change in same-store sales
1.7
%
2.3
%
________________________
(1)Includes price increases of approximately 8.1% in the third quarter of 2023.
Food and packaging costs as a percentage of company restaurant sales, decreased 0.7% in the quarter as compared to the prior year. This decrease as a percentage was primarily due to menu price increases, partially offset by commodity inflation.
Commodity costs inflation was 2.1% in the third quarter of 2023 and was 20.1% in the third quarter of 2022. The largest sources of inflation in the current quarter were due to tortillas, shells and potatoes, and partially offset by favorability in chicken, cheese and produce. For fiscal 2023, we expect annual commodity cost inflation to be up 8% to 10% compared with fiscal 2022.
Payroll and employee benefit costs as a percentage of company restaurant sales, increased 1.1% in the quarter as compared to the prior year. This increase was primarily due to labor inflation, which was 4.8% in the third quarter of 2023 and was 9.7% in the third quarter of 2022.
Occupancy and other costs, as a percentage of company restaurant sales, decreased 0.2% in the quarter as compared to the prior year. The decrease in the quarter was primarily due to lower common area maintenance costs, partially offset by higher maintenance and repair costs.
26
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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Franchise rental revenues
$
2,977
$
1,790
$
8,321
$
2,654
Royalties
6,129
5,361
18,721
8,006
Franchise fees and other
79
65
422
93
Franchise royalties and other
6,208
5,426
19,143
8,099
Franchise contributions for advertising and other services
5,849
4,781
17,497
7,142
Total franchise revenues
$
15,034
$
11,997
$
44,961
$
17,895
Franchise occupancy expenses
$
2,918
$
1,755
$
8,228
$
2,596
Franchise support and other costs
553
346
1,540
532
Franchise advertising and other services expenses
6,050
4,776
18,145
7,185
Total franchise costs
$
9,521
$
6,877
$
27,913
$
10,313
Franchise costs as a percentage of total franchise revenues
63.3%
57.3%
62.1%
57.6%
Number of franchise restaurants at end of period
373
303
373
303
% increase
23.1%
23.1%
Franchised restaurant sales
$
129,112
$
112,774
$
394,105
$
168,494
Franchised restaurant AUVs
$
346
$
372
$
1,057
$
556
Royalties as a percentage of total franchised restaurant sales
4.7%
4.8%
4.8%
4.8%
Franchise rental revenues increased $1.2 million, or 66.3% in the quarter as compared to the prior year, primarily due to higher rental income resulting from new subleases related to the 66 restaurants refranchised in 2023.
Franchise royalties and other increased $0.8 million, or 14.4% in the quarter as compared to the prior year, primarily due to higher franchise restaurant sales resulting from the 66 restaurants refranchised in 2023.
Franchise contributions for advertising and other services revenues increased $1.1 million, or 22.3% in the quarter as compared to the prior year, primarily driven by higher marketing contribution related to higher franchise restaurant sales resulting from the 66 restaurants refranchised in 2023.
Franchise occupancy expenses, primarily rent, increased $1.2 million, or 66.3% in the quarter as compared to the prior year, primarily due to higher rent related to franchise subleases for the 66 restaurants refranchised in 2023.
Franchise support and other costs increased $0.2 million, or 59.8% in the quarter as compared to the prior year, primarily due to higher franchise development support costs.
Franchise advertising and other service expenses increased $1.3 million, or 26.7% in the quarter as compared to the prior year, primarily driven by higher franchise sales resulting from the 66 restaurants refranchised in 2023.
Company-Wide Results
Depreciation and Amortization
Depreciation and amortization decreased $2.3 million in the quarter and increased $7.7 million year-to-date compared to the prior year. Certain franchise buildings becoming fully depreciated in the current year resulted in the decrease in the quarter and was more than offset year-to-date by the acquisition of Del Taco in the second quarter of 2022.
27
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
$
(773)
$
7,411
Incentive compensation (including share-based compensation and related payroll taxes)
2,761
15,312
Cash surrender value of COLI policies, net
(5,166)
(14,313)
Litigation matters
(1,138)
3,746
Insurance
1,085
3,913
Other
2,816
19,821
$
(415)
$
35,890
Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs decreased $0.8 million in the quarter compared to the prior year, and increased $7.4 million year-to-date compared to the prior year. In the quarter, the decrease is primarily due to a decrease in the number of company-operated restaurants, partially offset with higher company-operated restaurant sales. Year-to-date, the increase is primarily due to the acquisition of Del Taco in the second quarter of 2022 and therefore only includes 18 weeks of Del Taco operating results in 2022, versus 40 weeks of Del Taco operations in 2023.
Incentive compensation increased $2.8 million in the quarter compared to the prior year, and $15.3 million year-to-date compared to the prior year. In the quarter, the increase is primarily due to a $2.3 million increase in the annual incentives as a result of higher achievement levels compared to the prior year as well as a $0.5 million increase in share-based compensation. Year-to-date, the increase is primarily due to a $12.4 million increase in the annual incentives as a result of higher achievement levels compared to the prior year, a $2.5 million increase in share-based compensation due to the likelihood of achieving certain performance targets on awards, and other minor increases in payroll taxes.
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 $5.2 million in the quarter compared to the prior year and $14.3 million year-to-date versus the prior year.
Litigation matters decreased $1.1 million in the quarter compared to the prior year, due to the timing of when we accrued for the J&D Restaurant Group legal matter in the third quarter of 2022. Litigation matters increased by $3.7 million year-to-date compared to the prior year due to the timing of litigation developments in the current year. In 2023, we recorded a litigation charge of $6.6 million for Gessele vs. Jack in the Box Inc, which was partially offset by a $1.6 million net reversal of litigation charges in connection with the J&D Restaurant Group legal matter based on the Court’s final ruling. Refer also to Note 14, Commitments and Contingencies, in the condensed consolidated financial statements for additional information related to the legal matters.
Insurance increased $1.1 million in the quarter and $3.9 million year-to-date compared to a year ago due to specific claim reserves, as well as a prior year benefit from a favorable change in the loss development factors related to our worker’s compensation liabilities.
The increase in the other balance within SG&A of $2.8 million for the quarter as compared to the prior year is primarily due to additional consulting costs in the period. The year-to-date increase is mainly due to the timing of the acquisition of Del Taco in the second quarter of 2022 and therefore only includes 18 weeks of Del Taco operating results in 2022, versus 40 weeks of Del Taco operations in 2023.
28
Other Operating Expenses, Net
Other operating expenses, net is comprised of the following (in thousands):
Quarter
Year-to-date
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Acquisition, integration, and restructuring costs
$
2,463
$
2,753
$
5,359
$
18,864
Costs of closed restaurants and other
1,272
837
4,017
2,559
Operating restaurant impairment charges
4,395
1,653
4,395
1,653
Accelerated depreciation
66
346
519
1,009
(Gains) losses on disposition of property and equipment, net
(540)
(1,460)
(9,155)
(1,746)
$
7,656
$
4,129
$
5,135
$
22,339
Other operating expenses, net increased $3.5 million in the quarter and decreased $17.2 million year-to-date compared to the prior year. In the quarter, the increase is primarily due to the impairment of certain underperforming Del Taco restaurants currently held for use. Year-to-date, the decrease is primarily due to the acquisition of Del Taco in the prior year resulting in acquisition, integration and restructuring costs of $18.9 million as well as $9.5 million of gains 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.
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 66 Del Taco company-operated restaurants to franchisees and recognized a net gain of $10.3 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
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Interest expense
$
19,201
$
19,792
$
65,462
$
66,627
Interest income
(539)
(89)
(1,295)
(256)
Interest expense, net
$
18,662
$
19,703
$
64,167
$
66,371
Interest expense, net decreased $1.0 million in the quarter and $2.2 million year-to-date compared to a year ago. In the quarter, the decrease is primarily due to lower average borrowings, partially offset by higher average borrowing rates. Year-to-date, the decrease is 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 effective tax rate of 32.6% in the third quarter of 2023 as compared to 28.8% in the third quarter of 2022, as well as 30.4% for the year-to-date period in 2023, compared with 28.1% in the same period in fiscal year 2022. The major components of the year-over-year increase in tax rates were the annual impact of both actual and 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.
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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:
July 9, 2023
July 10, 2022
July 9, 2023
July 10, 2022
Net earnings - GAAP
$
29,168
$
22,857
$
108,929
$
69,923
Income tax expense
14,104
9,237
47,657
27,324
Interest expense, net
18,662
19,703
64,167
66,371
Gains on the sale of company-operated restaurants
(5,794)
(802)
(10,323)
(1,660)
Other operating expenses, net
7,656
4,129
5,135
22,339
Depreciation and amortization
14,460
16,713
48,460
40,754
Amortization of favorable and unfavorable leases and subleases, net
83
437
1,458
685
Amortization of franchise tenant improvement allowances and incentives
1,057
919
3,295
3,046
Adjusted EBITDA - Non-GAAP
$
79,396
$
73,193
$
268,778
$
228,782
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 July 9, 2023, the Company had $182.0 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
July 9, 2023
July 10, 2022
Total cash provided by (used in):
Operating activities
$
182,071
$
103,812
Investing activities
25,488
(604,395)
Financing activities
(161,579)
519,930
Net cash flows
$
45,980
$
19,347
Operating Activities. Operating cash flows increased $78.3 million compared with a year ago. This is primarily due to higher net income, when adjusted for non-cash items, of $9.0 million, as well as a favorable change in working capital of $69.3 million. The change in working capital is primarily a result of higher income tax accruals of $28.2 million due to timing of tax payments, higher advertising accruals of $21.3 million due to the timing of media payments, higher bonus accrual of $15.2 million, a decrease in receivables of $12.3 million which included the timing of minimum rent collected, partially offset by a decrease in accounts payable of $30.7 million which included the timing the rent payments.
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Investing Activities. Cash flows from investing activities increased by $629.9 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 $20.5 million and higher proceeds from the sale of company-operated restaurants of $50.4 million. These increases are partially offset by higher purchases of property and equipment of $22.3 million.
Capital Expenditures— The composition of capital expenditures in each period follows (in thousands):
Year-to-date
July 9, 2023
July 10, 2022
Restaurants:
Remodel / refresh programs
$
6,222
$
7,406
Restaurant facility expenditures
21,924
14,962
Purchases of assets intended for sale and leaseback
13,241
1,877
Restaurant information technology
10,463
6,016
51,850
30,261
Corporate Services:
Information technology
4,559
2,863
Corporate facilities
260
1,225
4,819
4,088
Total capital expenditures
$
56,669
$
34,349
The increase in restaurant facility expenditures includes amounts spent on capital maintenance, our digital menu board efforts and other operational initiatives. The increase for the purchases of assets intended for sale and leaseback includes amounts spent on exercising our right of first refusal to purchase land and building during 2023 which we intend to sell and leaseback. The increase for information technology includes amounts capitalized for our enterprise resource planning system and digital workflow platform.
Sale of Company-Operated Restaurants— The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands).
Year-to-date
July 9, 2023
July 10, 2022
Number of Jack in the Box restaurants sold to franchisees
5
—
Number of Del Taco restaurants sold to franchisees
66
—
Total proceeds (1)
$
51,845
$
1,402
(1) The proceeds in fiscal 2022 were received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
For further information, see Note 4, Summary of refranchisings and franchise acquisitions, in the notes to the condensed consolidated financial statements.
Financing Activities. Cash flows used in financing activities increased by $681.5 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 $60.4 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 0.7 million shares of its common stock in fiscal 2023 for an aggregate cost of $60.4 million. As of July 9, 2023, there was $115.0 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends — Up through July 9, 2023, the Board of Directors declared three cash dividends of $0.44 per common share totaling $27.4 million. On August 4, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on September 18, 2023, to shareholders of record as of the close of business on September 6, 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
31
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.
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 July 9, 2023, we did not have any outstanding borrowings and had available borrowing capacity of $109.8 million under our Variable Funding Notes, net of letters of credits issued of $40.2 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 July 9, 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 July 9, 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, which matures on March 1, 2024. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of July 9, 2023, we had no outstanding borrowings and available borrowing capacity of $62.2 million under the facility, net of letters of credit of $12.8 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.
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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.
33
•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.
•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.
34
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 July 9, 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 July 9, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
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 third quarter of 2023, we repurchased 0.3 million shares of our common stock for an aggregate cost of $26.9 million, including the applicable excise tax. As of July 9, 2023, this leaves $115.0 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)
$
141,571
April 17, 2023 - May 14, 2023
—
$
—
—
$
141,571
May 15, 2023 - June 11, 2023
258,045
$
89.02
258,045
$
118,601
June 12, 2023 - July 9, 2023
39,932
$
90.91
39,932
$
114,971
Total
297,977
297,977
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the three months ended July 9, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term in defined in Item 408(a) of Regulation S-K.
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.
