JACK IN THE BOX INC - Quarter Report: 2023 January (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 22, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ________to________.
Commission File Number: 1-9390
____________________________________________________
JACK IN THE BOX INC.
(Exact name of registrant as specified in its charter)
_______________________________________________________________________________________
| Delaware | 95-2698708 | |||||||||||||
| (State of Incorporation) | (I.R.S. Employer Identification No.) | |||||||||||||
9357 Spectrum Center Blvd.
San Diego, California 92123
(Address of principal executive offices)
Registrant’s telephone number, including area code (858) 571-2121
_______________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| 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.
Yes þ 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).
Yes þ 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 February 23, 2023, 20,600,388 shares of the registrant’s common stock were outstanding.
JACK IN THE BOX INC. AND SUBSIDIARIES
INDEX
| Page | ||||||||
| PART I – FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II – OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JACK IN THE BOX INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
| January 22, 2023 | October 2, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash | $ | 153,846 | $ | 108,890 | |||||||
| Restricted cash | 27,772 | 27,150 | |||||||||
| Accounts and other receivables, net | 56,987 | 103,803 | |||||||||
| Inventories | 5,070 | 5,264 | |||||||||
| Prepaid expenses | 11,247 | 16,095 | |||||||||
| Current assets held for sale | 4,600 | 17,019 | |||||||||
| Other current assets | 4,828 | 4,772 | |||||||||
| Total current assets | 264,350 | 282,993 | |||||||||
| Property and equipment: | |||||||||||
| Property and equipment, at cost | 1,251,566 | 1,228,916 | |||||||||
| Less accumulated depreciation and amortization | (826,928) | (810,752) | |||||||||
| Property and equipment, net | 424,638 | 418,164 | |||||||||
| Other assets: | |||||||||||
| Operating lease right-of-use assets | 1,327,654 | 1,332,135 | |||||||||
| Intangible assets, net | 11,951 | 12,324 | |||||||||
| Trademarks | 283,500 | 283,500 | |||||||||
| Goodwill | 359,511 | 366,821 | |||||||||
| Other assets, net | 235,414 | 226,569 | |||||||||
| Total other assets | 2,218,030 | 2,221,349 | |||||||||
| $ | 2,907,018 | $ | 2,922,506 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt | $ | 30,110 | $ | 30,169 | |||||||
| Current operating lease liabilities | 168,946 | 171,311 | |||||||||
| Accounts payable | 37,519 | 66,271 | |||||||||
| Accrued liabilities | 224,740 | 253,932 | |||||||||
| Total current liabilities | 461,315 | 521,683 | |||||||||
| Long-term liabilities: | |||||||||||
| Long-term debt, net of current maturities | 1,793,395 | 1,799,540 | |||||||||
| Long-term operating lease liabilities, net of current portion | 1,177,309 | 1,165,097 | |||||||||
| Deferred tax liabilities | 42,084 | 37,684 | |||||||||
| Other long-term liabilities | 135,983 | 134,694 | |||||||||
| Total long-term liabilities | 3,148,771 | 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, 82,617,362 and 82,580,599 issued, respectively | 826 | 826 | |||||||||
| Capital in excess of par value | 511,924 | 508,323 | |||||||||
| Retained earnings | 1,886,980 | 1,842,947 | |||||||||
| Accumulated other comprehensive loss | (53,493) | (53,982) | |||||||||
Treasury stock, at cost, 62,019,871 and 61,799,221 shares, respectively | (3,049,305) | (3,034,306) | |||||||||
| Total stockholders’ deficit | (703,068) | (736,192) | |||||||||
| $ | 2,907,018 | $ | 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)
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Revenues: | |||||||||||
| Company restaurant sales | $ | 270,191 | $ | 120,056 | |||||||
| Franchise rental revenues | 108,830 | 103,099 | |||||||||
| Franchise royalties and other | 76,390 | 60,755 | |||||||||
| Franchise contributions for advertising and other services | 71,685 | 60,801 | |||||||||
| 527,096 | 344,711 | ||||||||||
| Operating costs and expenses, net: | |||||||||||
| Food and packaging | 81,933 | 37,537 | |||||||||
| Payroll and employee benefits | 88,641 | 39,725 | |||||||||
| Occupancy and other | 51,371 | 20,877 | |||||||||
| Franchise occupancy expenses | 67,224 | 63,983 | |||||||||
| Franchise support and other costs | 1,877 | 3,911 | |||||||||
| Franchise advertising and other services expenses | 74,570 | 63,308 | |||||||||
| Selling, general and administrative expenses | 50,142 | 25,029 | |||||||||
| Depreciation and amortization | 19,402 | 12,496 | |||||||||
| Pre-opening costs | 331 | 310 | |||||||||
| Other operating (income) expenses, net | (5,501) | 3,843 | |||||||||
| Gains on the sale of company-operated restaurants | (3,825) | (48) | |||||||||
| 426,165 | 270,971 | ||||||||||
| Earnings from operations | 100,931 | 73,740 | |||||||||
| Other pension and post-retirement expenses, net | 2,144 | 93 | |||||||||
| Interest expense, net | 26,148 | 20,187 | |||||||||
| Earnings before income taxes | 72,639 | 53,460 | |||||||||
| Income taxes | 19,385 | 14,190 | |||||||||
| Net earnings | $ | 53,254 | $ | 39,270 | |||||||
| Earnings per share: | |||||||||||
| Basic | $ | 2.55 | $ | 1.85 | |||||||
| Diluted | $ | 2.54 | $ | 1.85 | |||||||
Cash dividends declared per common share | $ | 0.44 | $ | 0.44 | |||||||
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)
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Net earnings | $ | 53,254 | $ | 39,270 | |||||||
| Other comprehensive income: | |||||||||||
| Actuarial losses and prior service costs reclassified to earnings | 664 | 996 | |||||||||
| 664 | 996 | ||||||||||
| Tax effect | (175) | (258) | |||||||||
| Other comprehensive income, net of taxes | 489 | 738 | |||||||||
| Comprehensive income | $ | 53,743 | $ | 40,008 | |||||||
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)
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 53,254 | $ | 39,270 | |||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 19,402 | 12,496 | |||||||||
| Amortization of franchise tenant improvement allowances and incentives | 1,215 | 1,234 | |||||||||
| Deferred finance cost amortization | 1,616 | 1,722 | |||||||||
| Tax deficiency from share-based compensation arrangements | 143 | 38 | |||||||||
| Deferred income taxes | 3,385 | 2,317 | |||||||||
| Share-based compensation expense | 3,534 | 1,018 | |||||||||
| Pension and post-retirement expense | 2,144 | 93 | |||||||||
| (Gains) losses on cash surrender value of company-owned life insurance | (6,631) | 579 | |||||||||
| Gains on the sale of company-operated restaurants | (3,825) | (48) | |||||||||
| Gains on the disposition of property and equipment, net | (10,009) | (617) | |||||||||
| Impairment charges and other | 483 | 919 | |||||||||
| Changes in assets and liabilities, excluding acquisitions: | |||||||||||
| Accounts and other receivables | 37,813 | 19,910 | |||||||||
| Inventories | 194 | (351) | |||||||||
| Prepaid expenses and other current assets | 6,953 | 2,720 | |||||||||
| Operating lease right-of-use assets and lease liabilities | 11,281 | 10,218 | |||||||||
| Accounts payable | (31,285) | (5,218) | |||||||||
| Accrued liabilities | (24,677) | (47,849) | |||||||||
| Pension and post-retirement contributions | (1,688) | (2,075) | |||||||||
| Franchise tenant improvement allowance and incentive disbursements | (527) | (1,166) | |||||||||
| Other | (303) | (1,159) | |||||||||
| Cash flows provided by operating activities | 62,472 | 34,051 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of property and equipment | (24,028) | (9,401) | |||||||||
| Proceeds from the sale of property and equipment | 22,103 | 2,245 | |||||||||
| Proceeds from the sale and leaseback of assets | — | 1,576 | |||||||||
| Proceeds from the sale of company-operated restaurants | 17,609 | 48 | |||||||||
| Other | — | (1,305) | |||||||||
| Cash flows provided by (used in) investing activities | 15,684 | (6,837) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Principal repayments on debt | (7,557) | (223) | |||||||||
| Payment of debt issuance costs | — | (2,090) | |||||||||
| Dividends paid on common stock | (9,154) | (9,257) | |||||||||
| Proceeds from issuance of common stock | — | 49 | |||||||||
| Repurchases of common stock | (14,999) | — | |||||||||
| Payroll tax payments for equity award issuances | (868) | (795) | |||||||||
| Cash flows used in financing activities | (32,578) | (12,316) | |||||||||
| Net increase in cash and restricted cash | 45,578 | 14,898 | |||||||||
| Cash and restricted cash at beginning of period | 136,040 | 73,568 | |||||||||
| Cash and restricted cash at end of period | $ | 181,618 | $ | 88,466 | |||||||
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 January 22, 2023, there were 140 company-operated and 2,046 franchise-operated Jack in the Box restaurants and 273 company-operated and 319 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 our 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 16 weeks (“quarter”) ended January 22, 2023 and January 23, 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 — We administer marketing funds at each of our 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 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 totaled $12.2 million and $6.1 million in 2023 and 2022, respectively.
Allowance for credit losses — The Company closely monitors the financial condition of our franchisees and estimates the allowance for credit losses based on the lifetime expected loss on receivables. These estimates are based on historical collection experience with our franchisees as well as other factors, including current market conditions and events. Credit quality is monitored through the timing of payments compared to predefined aging criteria and known facts regarding the financial condition of the franchisee or customer. Account balances are charged off against the allowance after recovery efforts have ceased.
The following table summarizes the activity in our allowance for doubtful accounts (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Balance as of beginning of period | $ | (5,975) | $ | (6,292) | |||||||
| Provision for expected credit losses | 1,445 | (1,036) | |||||||||
| Balance as of end of period | $ | (4,530) | $ | (7,328) | |||||||
6
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Business combinations — We account for acquisitions using the acquisition method of accounting. Accordingly, assets acquired and liabilities assumed are recorded at their estimated fair values at the acquisition date. The excess of purchase price over fair value of net assets acquired, including the amount assigned to identifiable intangible assets, is recorded as goodwill.
Recent accounting pronouncements — The Company reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact on our condensed consolidated financial statements.
2.REVENUE
Nature of products and services — We derive revenue from retail sales at Jack in the Box and Del Taco company-operated restaurants and rental revenue, royalties, advertising, and franchise and other fees from franchise-operated restaurants.
Our franchise arrangements generally provide for an initial franchise fee per restaurant for a 20-year term, and generally require that franchisees pay royalty and marketing fees based upon a percentage of gross sales. The agreements also require franchisees to pay technology fees, as well as sourcing fees for Jack in the Box franchise agreements.
Disaggregation of revenue — The following table disaggregates revenue by segment and primary source for the quarter ended January 22, 2023 (in thousands):
| Sixteen Weeks Ended | |||||||||||||||||
| Jack in the Box | Del Taco | Total | |||||||||||||||
| Company restaurant sales | $ | 126,142 | $ | 144,049 | $ | 270,191 | |||||||||||
| Franchise rental revenues | 106,096 | 2,734 | 108,830 | ||||||||||||||
| Franchise royalties | 67,569 | 6,934 | 74,503 | ||||||||||||||
| Marketing fees | 60,344 | 5,654 | 65,998 | ||||||||||||||
| Technology and sourcing fees | 4,969 | 718 | 5,687 | ||||||||||||||
| Franchise fees and other services | 1,797 | 90 | 1,887 | ||||||||||||||
| Total revenue | $ | 366,917 | $ | 160,179 | $ | 527,096 | |||||||||||
The following table disaggregates revenue by segment and primary source for the quarter ended January 23, 2022 (in thousands):
| Sixteen Weeks Ended | |||||||||||||||||
| Jack in the Box | Del Taco | Total | |||||||||||||||
| Company restaurant sales | $ | 120,056 | $ | — | $ | 120,056 | |||||||||||
| Franchise rental revenues | 103,099 | — | 103,099 | ||||||||||||||
| Franchise royalties | 57,648 | — | 57,648 | ||||||||||||||
| Marketing fees | 55,801 | — | 55,801 | ||||||||||||||
| Technology and sourcing fees | 5,000 | — | 5,000 | ||||||||||||||
| Franchise fees and other services | 3,107 | — | 3,107 | ||||||||||||||
| Total revenue | $ | 344,711 | $ | — | $ | 344,711 | |||||||||||
In October 2022, a 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 — Our contract liabilities consist of deferred revenue resulting from initial franchise and development fees received from franchisees for new restaurant openings or new franchise terms, which are recognized over the franchise term. We classify these contract liabilities as “Accrued liabilities” and “Other long-term liabilities” in our condensed consolidated balance sheets.
7
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A summary of significant changes in our contract liabilities is presented below (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Deferred franchise and development fees at beginning of period | $ | 46,449 | $ | 40,435 | |||||||
| Revenue recognized | (1,639) | (1,742) | |||||||||
| Additions | 2,240 | 680 | |||||||||
| Deferred franchise and development fees at end of period | $ | 47,050 | $ | 39,373 | |||||||
As of January 22, 2023, approximately $6.1 million of development fees related to unopened stores are included in deferred revenue. Timing of revenue recognition is dependent upon the timing of store openings and are recognized over the franchise term at the date of opening.
The following table reflects the estimated franchise fees to be recognized in the future related to performance obligations that are unsatisfied as of January 22, 2023 (in thousands):
| Remainder of 2023 | $ | 3,508 | ||||||
| 2024 | 4,897 | |||||||
| 2025 | 4,661 | |||||||
| 2026 | 4,334 | |||||||
| 2027 | 3,976 | |||||||
| Thereafter | 19,583 | |||||||
| $ | 40,959 | |||||||
We have applied the optional exemption, as provided for under ASC Topic 606, Revenue from Contracts with Customers, which allows us to not disclose the transaction price allocated to unsatisfied performance obligations when the transaction price is a sales-based royalty.
3.BUSINESS COMBINATION
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 our 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 (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
Total revenue | $ | 527,096 | $ | 503,036 | |||||||
Net earnings | $ | 53,254 | $ | 28,866 | |||||||
8
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The unaudited pro forma financial information for all periods presented includes the business combination accounting effects resulting from the acquisition, mainly including adjustments to reflect additional amortization expense from acquired intangibles, incremental depreciation expense from the fair value property and equipment, elimination of historical interest expense associated with both Del Taco’s and the Company’s historical indebtedness, additional interest expense associated with the new Del Taco revolving credit facility and the Company’s new borrowings as part of the refinancing to fund the acquisition, adjusted rent expense reflecting the acquired right-of-use assets and liabilities to their estimated acquisition-date values based upon valuation of related lease intangibles and remaining payments, as well as the fair value adjustments made to leasehold improvements, certain material non-recurring adjustments and the tax-related effects as though Del Taco was combined as of the beginning of fiscal 2021. The unaudited pro forma financial information as presented above is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
For the sixteen weeks ended January 22, 2023, Del Taco had total revenues of $160.2 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):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 (2) | ||||||||||
| Restaurants sold to Jack in the Box franchisees | 5 | — | |||||||||
| Restaurants sold to Del Taco franchisees | 16 | — | |||||||||
| Proceeds from the sale of company-operated restaurants | $ | 17,609 | $ | 48 | |||||||
| Net assets sold (primarily property and equipment) | (4,093) | — | |||||||||
| Goodwill related to the sale of company-operated restaurants | (7,310) | — | |||||||||
| Franchise fees | (577) | — | |||||||||
| Sublease liabilities | (1,197) | — | |||||||||
| Lease termination | (393) | — | |||||||||
| Other (1) | (214) | — | |||||||||
| Gains on the sale of company-operated restaurants | $ | 3,825 | $ | 48 | |||||||
________________________
(1)Amount in 2023 includes $0.2 million related to prior year refranchising transactions.
(2)Amount in 2022 relates to additional proceeds received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
Franchise acquisitions — In 2023, we did not acquire any franchise restaurants. In 2022, we acquired four Jack in the Box franchise restaurants. 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 January 22, 2023 and January 23, 2022, primarily relate to closed restaurant properties and owned properties which we are actively marketing for sale and/or sales and leaseback within the next 12 months with carrying amounts of $4.6 million and $17.0 million, respectively.
9
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.GOODWILL AND INTANGIBLE ASSETS, NET
The changes in the carrying amount of goodwill during fiscal 2023 and 2022 were as follows (in thousands):
| Jack in the Box | Del Taco | Total | |||||||||||||||
| Balance at October 2, 2022 | $ | 136,099 | $ | 230,722 | $ | 366,821 | |||||||||||
| Sale of Del Taco company-operated restaurants to franchisees | — | (7,238) | (7,238) | ||||||||||||||
| Sale of Jack in the Box company-operated restaurants to franchisees | (72) | — | (72) | ||||||||||||||
| Balance at January 22, 2023 | $ | 136,027 | $ | 223,484 | $ | 359,511 | |||||||||||
The net carrying amounts of intangible assets other than goodwill with definite lives are as follows (in thousands):
| January 22, 2023 | October 2, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||||||||||||||
| Definite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
| Sublease assets | $ | 2,671 | $ | (214) | $ | 2,457 | $ | 2,671 | $ | (139) | $ | 2,532 | |||||||||||||||||||||||
| Franchise contracts | 9,700 | (476) | 9,224 | 9,700 | (311) | 9,389 | |||||||||||||||||||||||||||||
| Reacquired franchise rights | 376 | (106) | 270 | 530 | (127) | 403 | |||||||||||||||||||||||||||||
| $ | 12,747 | $ | (796) | $ | 11,951 | $ | 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 January 22, 2023, the estimated amortization expense for each of the next five fiscal years (in thousands):
| Remainder of 2023 | $ | 556 | |||
| 2024 | $ | 804 | |||
| 2025 | $ | 804 | |||
| 2026 | $ | 804 | |||
| 2027 | $ | 804 | |||
6.LEASES
Nature of leases — We own restaurant sites and we also lease restaurant sites from third parties. Some of these owned or leased sites are leased and/or subleased to franchisees. Initial terms of our real estate leases are generally 20 years, exclusive of options to renew, which are generally exercisable at our sole discretion for 1 to 20 years. In some instances, our leases have provisions for contingent rentals based upon a percentage of defined revenues. Many of our restaurants also have rent escalation clauses and require the payment of property taxes, insurance, and maintenance costs. Variable lease costs include contingent rent, cost-of-living index adjustments, and payments for additional rent such as real estate taxes, insurance, and common area maintenance, which are excluded from the measurement of the lease liability.
As lessor, our leases and subleases primarily consist of restaurants that have been leased to franchisees in connection with refranchising transactions. Revenues from leasing arrangements with our franchisees are presented in “Franchise rental revenues” in the accompanying condensed consolidated statements of earnings, and the related expenses are presented in “Franchise occupancy expenses.”
10
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table presents rental income (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Operating lease income - franchise | $ | 73,520 | $ | 71,357 | |||||||
| Variable lease income - franchise | 35,235 | 31,742 | |||||||||
| Amortization of favorable and unfavorable sublease contracts, net | 75 | — | |||||||||
| Franchise rental revenues | $ | 108,830 | $ | 103,099 | |||||||
| Operating lease income - closed restaurants and other (1) | $ | 2,240 | $ | 1,658 | |||||||
____________________________
(1)Primarily relates to closed restaurant properties included in “Other operating (income) expenses, net” in our condensed consolidated statements of earnings.
7.FAIR VALUE MEASUREMENTS
Financial assets and liabilities — The following table presents our financial assets and liabilities measured at fair value on a recurring basis (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (2) (Level 1) | Significant Other Observable Inputs (2) (Level 2) | Significant Unobservable Inputs (2) (Level 3) | ||||||||||||||||||||
| Fair value measurements as of January 22, 2023: | |||||||||||||||||||||||
| Non-qualified deferred compensation plan (1) | $ | 15,992 | $ | 15,992 | $ | — | $ | — | |||||||||||||||
| Total liabilities at fair value | $ | 15,992 | $ | 15,992 | $ | — | $ | — | |||||||||||||||
| 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)We maintain an unfunded defined contribution plan for key executives and other members of management. The fair value of this obligation is based on the closing market prices of the participants’ elected investments. The obligation is included in “Accrued liabilities” and “Other long-term liabilities” on our condensed consolidated balance sheets.
(2)We did not have any transfers in or out of Level 1, 2 or 3.
The following table presents the carrying value and estimated fair value of our Class A-2 Notes as of January 22, 2023 and October 2, 2022 (in thousands):
| January 22, 2023 | October 2, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Series 2019 Class A-2 Notes | $ | 712,313 | $ | 652,923 | $ | 714,125 | $ | 641,851 | |||||||||||||||
| Series 2022 Class A-2 Notes | $ | 1,083,500 | $ | 930,347 | $ | 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. As of January 22, 2023, we had $50.0 million of outstanding borrowings under our Variable Funding Notes. The fair value of these loans approximates their carrying value due to the variable rate nature of these borrowings.
Non-financial assets and liabilities — Our non-financial instruments, which primarily consist of property and equipment, operating lease right-of-use assets, goodwill and intangible assets, are reported at carrying value and are not required to be measured at fair value on a recurring basis. However, on an annual basis, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable, non-financial instruments are assessed for impairment. If applicable, the carrying values are written down to fair value.
In connection with our impairment reviews performed during 2023, no material fair value adjustments were required.
11
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8.OTHER OPERATING (INCOME) EXPENSES, NET
Other operating (income) expenses, net in the accompanying condensed consolidated statements of earnings is comprised of the following (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Acquisition, integration, and restructuring costs (1) | $ | 1,651 | $ | 3,013 | |||||||
| Costs of closed restaurants and other (2) | 2,589 | 1,072 | |||||||||
| Accelerated depreciation | 268 | 375 | |||||||||
| Gains on disposition of property and equipment, net (3) | (10,009) | (617) | |||||||||
| $ | (5,501) | $ | 3,843 | ||||||||
________________________
(1)Acquisition, integration, and restructuring costs are related to the acquisition and integration of Del Taco.
(2)Costs of closed restaurants primarily include impairment charges as a result of our decision to close restaurants, ongoing costs associated with closed restaurants, and canceled project costs.
(3)In 2023, gains on disposition of property and equipment 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
Our principal business consists of developing, operating and franchising our Jack in the Box and Del Taco restaurant brands, each of which we consider a reportable operating segment. This segment reporting structure reflects our current management structure, internal reporting method and financial information used in deciding how to allocate our resources. Based upon certain quantitative thresholds, each operating segment is considered a reportable segment.
We measure and evaluate our segments based on segment revenues and segment profit. Our measure of segment profit excludes depreciation and amortization, share-based compensation, company-owned life insurance (“COLI”) gains/losses, net of changes in our non-qualified deferred compensation obligation supported by these policies, acquisition, integration, and restructuring costs, gains on the sale of company-operated restaurants, and amortization of favorable and unfavorable leases and subleases, net. The following table provides information related to our operating segments in each period (in thousands):
12
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Revenues by segment: | |||||||||||
| Jack in the Box | $ | 366,917 | $ | 344,711 | |||||||
| Del Taco | 160,179 | — | |||||||||
| Consolidated revenues | $ | 527,096 | $ | 344,711 | |||||||
| Segment operating profit: | |||||||||||
| Jack in the Box | $ | 104,426 | $ | 90,664 | |||||||
| Del Taco | 12,084 | — | |||||||||
| Total segment operating profit | $ | 116,510 | $ | 90,664 | |||||||
| Depreciation and amortization | 19,402 | 12,496 | |||||||||
| Acquisition, integration, and restructuring costs | 1,651 | 3,013 | |||||||||
| Share-based compensation | 3,534 | 1,018 | |||||||||
| Net COLI (gains) losses | (5,724) | 445 | |||||||||
| Gains on the sale of company-operated restaurants | (3,825) | (48) | |||||||||
| Amortization of favorable and unfavorable leases and subleases, net | 541 | — | |||||||||
| Earnings from operations | $ | 100,931 | $ | 73,740 | |||||||
| Total capital expenditures by segment: | |||||||||||
| Jack in the Box | $ | 15,256 | $ | 9,401 | |||||||
| Del Taco | 8,772 | — | |||||||||
| Total capital expenditures | $ | 24,028 | $ | 9,401 | |||||||
| Total depreciation and amortization by segment: | |||||||||||
| Jack in the Box | $ | 11,029 | $ | 12,496 | |||||||
| Del Taco | 8,373 | — | |||||||||
| Total depreciation and amortization | $ | 19,402 | $ | 12,496 | |||||||
We do not evaluate, manage or measure performance of segments using asset, interest income and expense, or income tax information; accordingly, this information by segment is not prepared or disclosed.
10.INCOME TAXES
The income tax provisions reflect year-to-date effective tax rate of 26.7%, compared with 26.5% in fiscal year 2022. The major components of the increase in tax rate were non-deductible goodwill decrements in the current year offset by non-taxable gains in the current year versus non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans.
11.RETIREMENT PLANS
Defined benefit pension plans — We sponsor two defined benefit pension plans, a frozen “Qualified Plan” covering substantially all full-time employees hired prior to January 1, 2011, and an unfunded supplemental executive retirement plan (“SERP”) which provides certain employees additional pension benefits and was closed to new participants effective January 1, 2007. Benefits under both plans are based on the employee’s years of service and compensation over defined periods of employment.
Post-retirement healthcare plans — We also sponsor two healthcare plans, closed to new participants, that provide post-retirement medical benefits to certain employees who have met minimum age and service requirements. The plans are contributory, with retiree contributions adjusted annually, and they contain other cost-sharing features such as deductibles and coinsurance.
13
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net periodic benefit cost — The components of net periodic benefit cost in each period were as follows (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Defined benefit pension plans: | |||||||||||
| Interest cost | $ | 5,913 | $ | 4,517 | |||||||
| Expected return on plan assets | (4,648) | (5,570) | |||||||||
| Actuarial losses (1) | 944 | 1,187 | |||||||||
| Amortization of unrecognized prior service costs (1) | 6 | 6 | |||||||||
| Net periodic benefit cost | $ | 2,215 | $ | 140 | |||||||
| Post-retirement healthcare plans: | |||||||||||
| Interest cost | $ | 215 | $ | 150 | |||||||
| Actuarial gains (1) | (286) | (197) | |||||||||
| Net periodic benefit cost | $ | (71) | $ | (47) | |||||||
________________________
(1)Amounts were reclassified from accumulated other comprehensive income into net earnings as a component of “Other pension and post-retirement expenses, net.”
Future cash flows — Our policy is to fund our plans at or above the minimum required by law. As of January 1, 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 | $ | 1,311 | $ | 377 | |||||||
| Remaining estimated net contributions during fiscal 2023 | $ | 3,902 | $ | 735 | |||||||
We continue to evaluate contributions to our Qualified Plan based on changes in pension assets as a result of asset performance in the current market and the economic environment. We do not anticipate making any contributions to our Qualified Plan in fiscal 2023.
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) | |||||||||||||||||||||||||||||||
14
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) | |||||||||||||||||||||||||||||||
Repurchases of common stock — The Company repurchased 0.2 million shares of its common stock in the first quarter of fiscal 2023 for an aggregate cost of $15.0 million. As of January 22, 2023, there was $160.0 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends — During the first quarter of 2023, the Board of Directors declared a cash dividend of $0.44 per common share totaling $9.2 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):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Weighted-average shares outstanding – basic | 20,921 | 21,205 | |||||||||
| Effect of potentially dilutive securities: | |||||||||||
| Nonvested stock awards and units | 79 | 40 | |||||||||
| Stock options | — | 2 | |||||||||
| Performance share awards | — | — | |||||||||
| Weighted-average shares outstanding – diluted | 21,000 | 21,247 | |||||||||
| Excluded from diluted weighted-average shares outstanding: | |||||||||||
| Antidilutive | 23 | 15 | |||||||||
| Performance conditions not satisfied at the end of the period | 112 | 25 | |||||||||
14.COMMITMENTS AND CONTINGENCIES
Legal matters — We assess contingencies, including litigation contingencies, to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable, assessing contingencies is highly subjective and requires judgments about future events. When evaluating litigation contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the availability of appellate remedies, insurance coverage related to the claim or claims in question, the presence of complex or novel legal theories, and the ongoing discovery and development of information important to the matter. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to possible outcomes, and as such are not meaningful indicators of our potential liability or financial exposure. We regularly review contingencies to determine the adequacy of the accruals and related disclosures. The ultimate amount of loss may differ from these estimates. 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.
15
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. The parties participated in a voluntary mediation on March 16, 2020, but the matter did not settle. On October 24, 2022, a jury awarded plaintiffs approximately $6.4 million in damages and penalties, in addition to interest and attorney fees to be determined by the court at a later date. 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 January 22, 2023, the Company has accrued the settlement amount, and included it within “Accrued liabilities” on our condensed consolidated balance sheet.
Torrez — In March 2014, a former Del Taco employee filed a purported Private Attorneys General Act claim and class action alleging various causes of action under California’s labor, wage, and hour laws. The plaintiff generally alleges Del Taco did not appropriately provide meal and rest breaks and failed to pay wages and reimburse business expenses to its California non-exempt employees. On November 12, 2021, the court granted, in part, the plaintiff's motion for class certification. The parties participated in a voluntary mediation on May 24, 2022 and June 3, 2022. On June 4, 2022, we entered into a Settlement Memorandum of Understanding (the “Agreement”) which obligates the Company to pay a gross settlement amount of $50.0 million, for which in exchange we will be released from all claims by the parties. The Agreement contains no admission of wrongdoing and is contingent upon various conditions, including, but not limited to, court approvals. There can be no assurance that the Agreement will be approved by the court nor upheld if challenged on appeal. As of January 22, 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 seeking to recover assets in the form of actual and exemplary damages for the bankruptcy trust and generally alleging the Company wrongfully terminated the franchise agreements and unreasonably denied two perspective purchasers that the former franchisee presented. The parties participated in a mediation in April 2021, and again in December 2022, but the matter did not settle. Trial in this matter commenced on January 9, 2023. On February 8, 2023, the jury returned a verdict finding that the Company had not breached any contracts in terminating the franchise agreements or denying the proposed buyers. While the jury also found that the Company had not violated the California Unfair Practices Act, it found for the plaintiff on the breach of implied covenant of good faith and fair dealing claim, and awarded $8.0 million in damages. 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 January 22, 2023, the Company has accrued the verdict, and included it within “Accrued liabilities” on our 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. We intend to defend ourselves in any such matters. Some of these matters may be covered, at least in part, by insurance or other third-party indemnity obligation. We record receivables from third party insurers when recovery has been determined to be probable.
Lease guarantees — We remain contingently liable for certain leases relating to our former Qdoba business which we sold in fiscal 2018. Under the Qdoba Purchase Agreement, the buyer has indemnified the Company of all claims related to these guarantees. As of January 22, 2023, the maximum potential liability of future undiscounted payments under these leases is approximately $23.0 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.
16
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
15.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION (in thousands)
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Non-cash investing and financing transactions: | |||||||||||
| Decrease in obligations for purchases of property and equipment | $ | 4,147 | $ | 952 | |||||||
| Increase in accrued debt issuance costs | $ | — | $ | 3,955 | |||||||
| Increase in dividends accrued or converted to common stock equivalents | $ | 68 | $ | 63 | |||||||
| Right-of use assets obtained in exchange for operating lease obligations | $ | 54,246 | $ | 69,789 | |||||||
| Right-of use assets obtained in exchange for finance lease obligations | $ | — | $ | 20 | |||||||
17
JACK IN THE BOX INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
16.SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION (in thousands)
| January 22, 2023 | October 2, 2022 | ||||||||||
| Accounts and other receivables, net: | |||||||||||
| Trade | $ | 51,178 | $ | 90,105 | |||||||
| Notes receivable, current portion | 1,702 | 8,643 | |||||||||
| Income tax receivable | 871 | 878 | |||||||||
| Other | 7,766 | 10,152 | |||||||||
| Allowance for doubtful accounts | (4,530) | (5,975) | |||||||||
| $ | 56,987 | $ | 103,803 | ||||||||
| Property and equipment, net | |||||||||||
| Land | $ | 92,860 | $ | 86,134 | |||||||
| Buildings | 971,935 | 960,984 | |||||||||
| Restaurant and other equipment | 168,865 | 163,527 | |||||||||
| Construction in progress | 17,906 | 18,271 | |||||||||
| 1,251,566 | 1,228,916 | ||||||||||
| Less accumulated depreciation and amortization | (826,928) | (810,752) | |||||||||
| $ | 424,638 | $ | 418,164 | ||||||||
| Other assets, net: | |||||||||||
| Company-owned life insurance policies | $ | 115,556 | $ | 108,924 | |||||||
| Deferred rent receivable | 43,114 | 43,891 | |||||||||
| Franchise tenant improvement allowance | 35,456 | 32,429 | |||||||||
| Notes receivable, less current portion | 11,099 | 11,624 | |||||||||
| Other | 30,189 | 29,701 | |||||||||
| $ | 235,414 | $ | 226,569 | ||||||||
| Accrued liabilities: | |||||||||||
| Legal accruals | $ | 65,115 | $ | 59,165 | |||||||
| Payroll and related taxes | 35,032 | 43,837 | |||||||||
| Insurance | 32,580 | 32,272 | |||||||||
| Sales and property taxes | 18,676 | 30,947 | |||||||||
| Deferred rent income | 4,722 | 18,525 | |||||||||
| Advertising | 13,267 | 11,028 | |||||||||
| Deferred franchise and development fees | 5,775 | 5,647 | |||||||||
| Other | 49,573 | 52,511 | |||||||||
| $ | 224,740 | $ | 253,932 | ||||||||
| Other long-term liabilities: | |||||||||||
| Defined benefit pension plans | $ | 51,337 | $ | 51,679 | |||||||
| Deferred franchise and development fees | 41,275 | 40,802 | |||||||||
| Other | 43,371 | 42,213 | |||||||||
| $ | 135,983 | $ | 134,694 | ||||||||
17.SUBSEQUENT EVENTS
Dividends — On February 24, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on March 28, 2023, to shareholders of record as of the close of business on March 15, 2023.
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
All comparisons between 2023 and 2022 refer to the 16 weeks (“quarter”) ended January 22, 2023 and January 23, 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.
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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 January 22, 2023, we operated and franchised 2,186 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam, and 592 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 table summarizes changes in same-store sales for Jack in the Box company-operated, franchised, and system restaurants:
| Sixteen Weeks Ended | |||||||||||
| Jack in the Box: | January 22, 2023 | January 23, 2022 | |||||||||
| Company | 12.6 | % | (0.3) | % | |||||||
| Franchise | 7.4 | % | 1.4 | % | |||||||
| System | 7.8 | % | 1.2 | % | |||||||
The following table summarizes changes in the number and mix of Jack in the Box company and franchise restaurants:
| 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 | — | 6 | 6 | — | 2 | 2 | |||||||||||||||||||||||||||||
| Acquired from franchisees | — | — | — | 4 | (4) | — | |||||||||||||||||||||||||||||
| Refranchised | (5) | 5 | — | — | — | — | |||||||||||||||||||||||||||||
| Closed | (1) | — | (1) | (2) | (10) | (12) | |||||||||||||||||||||||||||||
| End of period | 140 | 2,046 | 2,186 | 165 | 2,043 | 2,208 | |||||||||||||||||||||||||||||
| % of system | 6 | % | 94 | % | 100 | % | 7 | % | 93 | % | 100 | % | |||||||||||||||||||||||
The following table summarizes restaurant sales for Jack in the Box company-operated, franchised, and systemwide sales (in thousands):
| Sixteen Weeks Ended | |||||||||||
| Jack in the Box: | January 22, 2023 | January 23, 2022 | |||||||||
| Company-operated restaurant sales | $ | 126,142 | $ | 120,056 | |||||||
| Franchised restaurant sales (1) | 1,208,983 | 1,117,676 | |||||||||
| Systemwide sales (1) | $ | 1,335,125 | $ | 1,237,732 | |||||||
________________________
(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.
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Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):
| Sixteen Weeks Ended | |||||||||||
| Consolidated: | January 22, 2023 | January 23, 2022 | |||||||||
| Net earnings - GAAP | $ | 53,254 | $ | 39,270 | |||||||
| Income tax expense | 19,385 | 14,190 | |||||||||
| Interest expense, net | 26,148 | 20,187 | |||||||||
| Gains on the sale of company-operated restaurants | (3,825) | (48) | |||||||||
| Other operating (income) expenses, net | (5,501) | 3,843 | |||||||||
| Depreciation and amortization | 19,402 | 12,496 | |||||||||
| Amortization of favorable and unfavorable leases and subleases, net | 541 | — | |||||||||
| Amortization of franchise tenant improvement allowances and incentives | 1,215 | 1,234 | |||||||||
| Adjusted EBITDA - Non-GAAP | $ | 110,619 | $ | 91,172 | |||||||
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):
| Sixteen Weeks Ended | |||||||||||||||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||||||||||||||
| Company restaurant sales | $ | 126,142 | $ | 120,056 | |||||||||||||||||||
| Company restaurant costs: | |||||||||||||||||||||||
| Food and packaging | $ | 41,326 | 32.8 | % | $ | 37,537 | 31.3 | % | |||||||||||||||
| Payroll and employee benefits | $ | 39,438 | 31.3 | % | $ | 39,725 | 33.1 | % | |||||||||||||||
| Occupancy and other | $ | 20,377 | 16.2 | % | $ | 20,877 | 17.4 | % | |||||||||||||||
Company restaurant sales increased $6.1 million or 5.1% compared to the prior year, primarily due to average check and traffic growth, partially offset by a decline in the number of company-operated restaurants. The following table presents the approximate impact of these items on company restaurant sales (in millions):
| Sixteen Weeks Ended | |||||
| January 22, 2023 | |||||
| AUV increase | $ | 14.0 | |||
| Decrease in the average number of restaurants | (7.9) | ||||
| Total change in company restaurant sales | $ | 6.1 | |||
Same-store sales at company-operated restaurants increased 12.6% compared to a year ago. The following table summarizes the change versus a year ago:
| Sixteen Weeks Ended | |||||
| January 22, 2023 | |||||
| Average check (1) | 7.7 | % | |||
| Transactions | 4.9 | % | |||
| Change in same-store sales | 12.6 | % | |||
________________________
(1)Includes price increases of approximately 10.3% compared to the prior year.
Food and packaging costs as a percentage of company restaurant sales increased 1.5% compared to the prior year primarily due to higher commodity costs and unfavorable menu item mix, partially offset by an increase in menu pricing.
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Commodity costs increased by approximately 15.5% compared to the prior year. The inflation we have experienced is across nearly all categories with the greatest impact seen in produce, sauce and potatoes. For fiscal 2023, we expect annual commodity cost inflation to be up 9% to 11% compared with fiscal 2022.
Payroll and employee benefit costs as a percentage of company restaurant sales decreased 1.8% compared to the prior year primarily due to higher average restaurant sales as a result of a change in restaurant mix and menu price increases, as well as a reduction in workers’ compensation and group insurance. Labor inflation was approximately 9.9% for the current fiscal year. 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 1.2% compared to the prior year primarily due to higher average restaurant sales as a result of a change in restaurant mix and menu price increases, partially offset by higher utilities costs as well as maintenance and repair costs compared with fiscal 2022.
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):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Franchise rental revenues | $ | 106,096 | $ | 103,099 | |||||||
| Royalties | 67,569 | 57,648 | |||||||||
| Franchise fees and other | 1,797 | 3,107 | |||||||||
| Franchise royalties and other | 69,366 | 60,755 | |||||||||
| Franchise contributions for advertising and other services | 65,313 | 60,801 | |||||||||
| Total franchise revenues | $ | 240,775 | $ | 224,655 | |||||||
| Franchise occupancy expenses | $ | 64,555 | $ | 63,983 | |||||||
| Franchise support and other costs | 1,416 | 3,911 | |||||||||
| Franchise advertising and other services expenses | 67,958 | 63,308 | |||||||||
| Total franchise costs | $ | 133,929 | $ | 131,202 | |||||||
| Franchise costs as a percentage of total franchise revenues | 55.6% | 58.4% | |||||||||
| Average number of franchise restaurants | 2,033 | 2,039 | |||||||||
| % decrease | (0.3)% | ||||||||||
| Franchised restaurant sales | $ | 1,208,983 | $ | 1,117,676 | |||||||
| Franchised restaurant AUVs | $ | 595 | $ | 548 | |||||||
| Royalties as a percentage of total franchised restaurant sales | 5.6% | (1) | 5.2% | ||||||||
________________________
(1)Excluding the impact of the $7.3 million termination fee discussed below, royalties as a percentage of total franchised restaurant sales would be 5.0% for the sixteen weeks ended January 22, 2023.
Franchise rental revenues increased $3.0 million, or 2.9% compared to the prior year primarily due to higher percentage rent of $2.4 million driven by higher franchise restaurant sales.
Franchise royalties and other increased $8.6 million, or 14.2% compared to the prior year primarily due to a $7.3 million termination fee paid by a franchise operator who sold his restaurants to a new franchisee, as well as higher royalties driven by higher franchise restaurant sales. 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 $4.5 million, or 7.4% compared to the prior year primarily driven by higher franchise restaurant sales.
Franchise occupancy expenses, primarily rent, increased $0.6 million, or 0.9% compared to the prior year primarily due to rent increases, partially offset by lower real estate taxes.
22
Franchise support and other costs decreased $2.5 million compared to the prior year primarily due to a decrease in franchisee bad debt expense.
Franchise advertising and other service expenses increased $4.7 million, or 7.3% compared to the prior year primarily driven by higher franchise sales.
Del Taco Brand
As of January 22, 2023, there were 273 company-operated and 319 franchise-operated Del Taco restaurants. System same-store sales increased 3.0% and total revenues and segment operating profit were $160.2 million and $12.1 million, respectively, during the quarter.
Company-Wide Results
Depreciation and Amortization
Depreciation and amortization increased $6.9 million compared to the prior year primarily due to the acquisition of Del Taco, contributing an additional $8.4 million of depreciation; more than offsetting lower Jack in the Box depreciation as a result of certain franchise buildings becoming fully depreciated.
Selling, General and Administrative (“SG&A”) Expenses
The following table presents the change in SG&A expenses compared with the prior year (in thousands):
| Increase/(Decrease) | |||||
| Sixteen Weeks Ended | |||||
| January 22, 2023 | |||||
| Advertising | $ | 6,086 | |||
| Incentive compensation (including share-based compensation and related payroll taxes) | 5,381 | ||||
| Cash surrender value of COLI policies, net | (6,168) | ||||
| Litigation matters | 5,987 | ||||
| Other | 13,827 | ||||
| $ | 25,113 | ||||
Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $6.1 million compared to the prior year primarily due to the acquisition of Del Taco which resulted in higher advertising costs of $5.8 million.
Incentive compensation increased $5.4 million compared to the prior year primarily due to a $2.9 million increase in the annual incentives mainly as a result of higher achievement levels compared to the prior year, as well as a $2.5 million increase in share-based compensation mainly from the timing of annual grants compared to the prior year.
The cash surrender value of our company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a positive impact of $6.2 million versus the prior year.
Litigation matters increased $6.0 million primarily related to the J&D Restaurant Group litigation. Refer to Note 14, Commitments and Contingencies, of the notes to the condensed consolidated financial statements for additional information.
The increase in other is primarily due to the acquisition of Del Taco in the prior year which resulted in an increase of additional general and administrative costs of $12.0 million.
23
Other Operating Expenses, Net
Other operating expenses, net is comprised of the following (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Acquisition, integration, and restructuring costs | $ | 1,651 | $ | 3,013 | |||||||
| Costs of closed restaurants and other | 2,589 | 1,072 | |||||||||
| Accelerated depreciation | 268 | 375 | |||||||||
| Gains on disposition of property and equipment, net | (10,009) | (617) | |||||||||
| $ | (5,501) | $ | 3,843 | ||||||||
Other operating expenses, net decreased $9.3 million compared to the prior year, primarily due to $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
In fiscal 2023, the Company sold five Jack in the Box company-operated restaurants and 16 Del Taco company-operated restaurants to franchisees and recognized a net gain of $3.8 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):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Interest expense | $ | 26,537 | $ | 20,273 | |||||||
| Interest income | (389) | (86) | |||||||||
| Interest expense, net | $ | 26,148 | $ | 20,187 | |||||||
Interest expense, net increased $6.0 million compared to the prior year primarily due to higher average borrowings resulting in higher interest expense of $7.3 million, partially offset by lower average borrowing rates.
Income Tax Expense
The income tax provisions reflect year-to-date effective tax rate of 26.7%, compared with 26.5% in fiscal year 2022. The major components of the increase in tax rate were non-deductible goodwill decrements in the current year offset by non-taxable gains in the current year versus non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans.
LIQUIDITY AND CAPITAL RESOURCES
General
Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.
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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 January 22, 2023, the Company had $181.6 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $122.0 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):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 62,472 | $ | 34,051 | |||||||
| Investing activities | 15,684 | (6,837) | |||||||||
| Financing activities | (32,578) | (12,316) | |||||||||
| Net cash flows | $ | 45,578 | $ | 14,898 | |||||||
Operating Activities. Operating cash flows increased $28.4 million compared with a year ago, primarily due to a favorable change in working capital of $22.7 million as a result of the timing of minimum rent collections, lower bonus payments and timing of media payments, partially offset by timing of minimum rent payments.
Pension and post-retirement contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2022, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. In 2023, we contributed $1.7 million to our non-qualified pension plan and post-retirement plans.
Investing Activities. Cash flows from investing activities increased by $22.5 million compared with a year ago, primarily due to higher proceeds from the sale of property and equipment of $19.9 million, which resulted from the sale of Jack in the Box restaurant properties to franchisees and $10.0 million received in the current year related to a prior year transaction, as well as higher proceeds from the sale of company-operated restaurants of $17.6 million, partially offset by higher purchases of property and equipment of $14.6 million.
Capital Expenditures — The composition of capital expenditures in each period follows (in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Restaurants: | |||||||||||
| Remodel / refresh programs | $ | 3,473 | $ | 921 | |||||||
| Restaurant facility expenditures | 9,046 | 4,374 | |||||||||
| Purchases of assets intended for sale and leaseback | 3,497 | 1,877 | |||||||||
| Restaurant information technology | 5,906 | 968 | |||||||||
| 21,922 | 8,140 | ||||||||||
| Corporate Services: | |||||||||||
| Information technology | 1,877 | 52 | |||||||||
| Corporate facilities | 229 | 1,209 | |||||||||
| 2,106 | 1,261 | ||||||||||
| Total capital expenditures | $ | 24,028 | $ | 9,401 | |||||||
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Sale of Company-Operated Restaurants — We have continued to expand franchise ownership primarily through the sale of company-operated restaurants to franchisees. The following table details proceeds received in connection with our refranchising activities in each period (dollars in thousands):
| Sixteen Weeks Ended | |||||||||||
| January 22, 2023 | January 23, 2022 | ||||||||||
| Number of Jack in the Box restaurants sold to franchisees | 5 | — | |||||||||
| Number of Del Taco restaurants sold to franchisees | 16 | — | |||||||||
| Total proceeds | $ | 17,609 | $ | 48 | |||||||
In the first quarter of fiscal 2023, proceeds include $0.2 million related to prior year refranchising transactions. Proceeds in the first quarter of fiscal 2022 were received in connection with the extension of franchise and lease agreements from the sale of restaurants in prior years.
Financing Activities. Cash flows used in financing activities increased by $20.3 million compared with a year ago, primarily as a result of share repurchases of $15.0 million.
Repurchases of common stock — The Company repurchased 0.2 million shares of its common stock in the first quarter of fiscal 2023 for an aggregate cost of $15.0 million. As of January 22, 2023, there was $160.0 million remaining under share repurchase programs authorized by the Board of Directors which expire in November 2023.
Dividends — During the first quarter of 2023, the Board of Directors declared a cash dividend of $0.44 per common share totaling $9.2 million. On February 24, 2023, the Board of Directors declared a cash dividend of $0.44 per common share, to be paid on March 28, 2023, to shareholders of record as of the close of business on March 15, 2023.
Securitized Refinancing Transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the 2022 Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted under the indenture that governs the 2022 Notes. The anticipated repayment dates of the existing 2019-1 Class A-2-II Notes and the Class A-2-III Notes are August 2026 and August 2029, respectively.
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 January 22, 2023, we had outstanding borrowings of $50.0 million and available borrowing capacity of $60.0 million under our Variable Funding Notes, net of letters of credits issued of $40.0 million.
The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes.
The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. Subsequent to closing the issuance of the 2022 Notes, the Company has had a leverage ratio of greater than 5.0x and, accordingly, the Company resumed making the scheduled amortization payments on its 2022 Notes and Series 2019-1 Notes beginning in the second quarter of 2022.
Restricted cash — In accordance with the terms of the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders and are restricted in their use. As of January 22, 2023, the Company had restricted cash of $27.8 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.
26
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 January 22, 2023, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.
Revolving credit facility — In connection with the Del Taco acquisition, Del Taco’s existing debt of $115.2 million related to a Syndicated Credit Facility dated August 5, 2015, was repaid and extinguished on the Closing Date. On the Closing Date, Del Taco entered into a new syndicated credit facility with an aggregate principal amount of up to $75.0 million, maturing on March 7, 2023. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of January 22, 2023, we had no outstanding borrowings and available borrowing capacity of $61.9 million under the facility, net of letters of credit of $13.1 million.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical accounting policies and estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies and estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 2, 2022.
NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 1, Basis of Presentation, of the notes to condensed consolidated financial statements.
27
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the federal securities laws, including further impacts that COVID-19 pandemic may have on our future operations. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:
•The COVID-19 pandemic has disrupted and may continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition, and results of operations for an extended period of time.
•Changes in the availability of and the cost of labor could adversely affect our business.
•Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
•Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
•Failure to receive scheduled deliveries of high-quality food ingredients and other supplies could harm our operations and reputation.
•Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
•Our business could be adversely affected by increased labor costs.
•Unionization activities or labor disputes may disrupt our operations and affect our profitability.
•Our insurance may not provide adequate levels of coverage against claims.
•We face significant competition in the food service industry and our inability to compete may adversely affect our business.
•Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties we receive from franchisees to decline.
•Negative publicity relating to our business or industry could adversely impact our reputation.
•We may not have the same resources as our competitors for marketing, advertising and promotion.
•We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
•Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
•We may not achieve our development goals.
•Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruptions, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.
•Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
•We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
•We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
•Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
•Governmental regulation may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
•The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
•Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
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•We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
•We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
•If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which would harm our business and the value of the Company’s common shares.
•Changes in tax laws, interpretations of existing tax law, or adverse determinations by tax authorities could adversely affect our income tax expense and income tax payments.
•We may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
•Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
•We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
•We are subject to risks associated with our increasing dependence on digital commerce platforms and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
•We are dependent on information technology and digital service providers and any material failure, misuse or interruption of our computer systems, supporting infrastructure, consumer-facing digital capabilities or social media platforms could adversely affect our business.
•The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
•We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
•The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.
These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates,” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended October 2, 2022 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov. Potential investors are urged to consider these factors, more fully described in our Form 10-K, carefully in evaluating any forward-looking statements, and are cautioned not to place undue reliance on the forward-looking statements. All forward-looking statements are made only as of the date issued, and we do not undertake any obligation to update any forward-looking statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended January 22, 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 January 22, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
There is no information required to be reported for any items under Part II, except as follows:
ITEM 1. LEGAL PROCEEDINGS
See Note 14, Commitments and Contingencies, of the notes to the condensed consolidated financial statements for a discussion of our contingencies and legal matters.
ITEM 1A. RISK FACTORS
When evaluating our business and our prospects, you should consider the risks and uncertainties described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, which we filed with the SEC on November 22, 2022, as updated in this Item 1A. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended October 2, 2022, including our financial statements and the related notes. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occur, our business and financial results could be harmed. In that case, the market price of our common stock could decline.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchases — In the first quarter of 2023, we repurchased 0.2 million shares of our common stock for an aggregate cost of $15.0 million. As of January 22, 2023, this leaves $160.0 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) | |||||||||||||||||||||||
| $ | 175,000 | |||||||||||||||||||||||||
| October 3, 2022 - October 30, 2022 | — | $ | — | — | $ | 175,000 | ||||||||||||||||||||
| October 31, 2022 - November 27, 2022 | — | $ | — | — | $ | 175,000 | ||||||||||||||||||||
| November 28, 2022 - December 25, 2022 | 220,650 | $ | 67.98 | 220,650 | $ | 160,000 | ||||||||||||||||||||
| December 26, 2023 - January 22, 2023 | — | $ | — | — | $ | 160,000 | ||||||||||||||||||||
| Total | 220,650 | 220,650 | ||||||||||||||||||||||||
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Item 5.03. None.
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ITEM 6. EXHIBITS
| Number | Description | Form | Filed with SEC | ||||||||
| 10.2.28* | 10-Q | Filed herewith | |||||||||
| 31.1 | — | Filed herewith | |||||||||
| 31.2 | — | Filed herewith | |||||||||
| 32.1 | — | Filed herewith | |||||||||
| 32.2 | — | Filed herewith | |||||||||
| 101.INS | iXBRL Instance Document | ||||||||||
| 101.SCH | iXBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | iXBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | iXBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | iXBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | iXBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
| 104 | Cover Page Interactive Data File formatted in iXBRL | ||||||||||
*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.
| JACK IN THE BOX INC. | ||||||||
| By: | /S/ DAWN HOOPER | |||||||
| Dawn Hooper | ||||||||
| Senior Vice President, Controller (principal financial officer) (Duly Authorized Signatory) | ||||||||
Date: March 1, 2023
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