Jack in the Box Inc: Form 10-Q for the period ended Apr 17, 2022

GENERAL

All comparisons between 2022 and 2021 refer to the 12 weeks (“quarter”) and 28 weeks (“year-to-date”) ended April 17, 2022 and April 11, 2021, respectively, unless otherwise indicated.

For an understanding of the significant factors that influenced our performance during 2022 and 2021, our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the condensed consolidated financial statements and related notes included in this Quarterly Report and our Annual Report on Form 10-K for the fiscal year ended October 3, 2021.

Our MD&A consists of the following sections:

• Overview — a general description of our business.
• Results of operations — an analysis of our condensed consolidated statements of earnings for the periods presented in our condensed consolidated financial statements.
• Liquidity and capital resources — an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known known trends that may impact liquidity.
• Discussion of critical accounting estimates — a discussion of accounting policies that require critical judgments and estimates.
• New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any.
• Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management.

We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include:

• Changes in sales at restaurants open more than one year (“same-store sales”), systemwide sales, franchised restaurant sales, and average unit volumes (“AUVs”). Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants and on a system-wide basis, which includes company and franchise restaurants. Franchise sales represent sales at franchise restaurants and are revenues of our franchisees. We do not record franchise sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchise sales. We believe franchise and system same-store sales, franchised and system restaurant sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability.
• Adjusted EBITDA represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding income taxes, interest expense, net, gains on the sale of company-operated restaurants, other operating expenses, net, depreciation and amortization, amortization of favorable and unfavorable leases and subleases, net, and amortization of tenant improvement allowances and incentives. We are presenting Adjusted EBITDA because we believe that it provides a meaningful supplement to net earnings of the Company's core business operating results, as well as a comparison to those of other similar companies. Management believes that Adjusted EBITDA, when viewed with the Company's results of operations in accordance with GAAP and the accompanying reconciliations within MD&A, provides useful information about operating performance and period-over-period change, and provides additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Additionally, management believes that Adjusted EBITDA permits investors to gain an understanding of the factors and trends affecting our ongoing cash earnings, from which capital investments are made and debt is serviced.

Same-store sales, systemwide sales, franchised restaurant sales, AUVs, and Adjusted EBITDA are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies.

OVERVIEW

Our Business

Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. As of April 17, 2022, we operated and franchised 2,207 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam. On March 8, 2022, we completed the acquisition of Del Taco Restaurants, Inc. (“Del Taco”), the nation’s second largest Mexican quick service restaurant chain by number of restaurants and has approximately 599 restaurants across 16 states, including one in Guam.

We derive revenue from retail sales at company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees.

Impact of COVID-19

The COVID-19 pandemic has continued to have varying degrees of disruption on our business. Throughout the pandemic substantially all of our restaurants have remained open, with the majority of our dining rooms closed and locations operating in an off-premise capacity, leveraging our drive-thru, carryout and delivery capabilities. We have continued to follow the guidance of expert health authorities to ensure precautionary steps are taken to protect the health and safety of our employees and guests.

Our business has continued to be challenged by availability and cost of labor resulting in a number of our restaurants across regions to reduce operating hours during the quarter. We have continued to have limited shortages in our supply chain; however, inflationary pressures have continued to have a significant impact on our business.

We expect these operating margin pressures due to labor and supply chain challenges to continue for the remainder of fiscal 2022.

Other Developments

As previously announced, a franchisee that operated 68 restaurants in Missouri and Illinois filed for chapter 11 bankruptcy in February 2021. Of the 68 restaurants, we sublease 50 of the locations to the franchisee and own the land and building for the remaining 18 locations. Through the bankruptcy proceedings, the franchisee may reject the franchise agreements and leases for a number of these locations, resulting in potential impairment costs related to future lease obligations.

Since the inception of the bankruptcy proceedings, the franchisee has filed motions to reject 11 locations, which the court has authorized. No material impairment costs were recorded in the financial statements as a result of these locations being rejected near the expiration of our master lease agreements. We currently do not anticipate any additional locations being rejected.

During the second quarter of 2022, we agreed to the franchisee’s reorganization plan, which has been submitted to the bankruptcy court and is scheduled for a confirmation hearing in mid-July. The reorganization plan includes a waiver of a portion of damages associated with the rejected locations, reduced royalties following plan confirmation, and the settlement of the remaining cure costs via a secured note upon emergence from bankruptcy, in addition to deferring all amounts owed under the franchise agreements starting in February through the bankruptcy resolution date. The secured note provides for repayment based on a calculation of net free cash flows generated from the franchisee’s restaurants. To the extent future net free cash flows are insufficient to satisfy the secured note at a future specified date, then we agreed to waive any remaining balance due to the Company.

Based on the events above, we concluded that the collectability of the deferrals starting in February were doubtful and therefore no revenue has been recognized. Furthermore, we increased our bad debt reserve related to this matter to fully reserve the $3.5 million owed to the Company.

RESULTS OF OPERATIONS

The following table summarizes changes in same-store sales for Jack in the Box company-operated, franchised, and system restaurants:

(1) Due to the transition from a 53-week year to a 52-week year, year-over-year fiscal period comparisons are off by one week. The change in same store sales uses comparable calendar periods to balance with one week shift and to provide a clearer year over year comparison.

The following table summarizes changes in the number and mix of Jack in the Box company and franchise restaurants:

The following table summarizes restaurant sales for Jack in the Box company-operated, franchised, and systemwide sales (in thousands):

(1) Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. System sales include company and franchised restaurant sales. We do not record franchised sales as revenues; however, our royalty revenues, marketing fees and percentage rent revenues are calculated based on a percentage of franchised sales. We believe franchised and system restaurant sales information is useful to investors as they have a direct effect on the Company's profitability.

Below is a reconciliation of Non-GAAP Adjusted EBITDA to the most directly comparable GAAP measure, net earnings (in thousands):

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):

Company restaurant sales increased $8.3 million or 9.6% in the quarter and $14.1 million or 7.0% year-to-date compared to the prior year, primarily due to an increase in the number of company-operated restaurants, average check growth and partially offset by a decline in traffic. The following table presents the approximate impact of these items on company restaurant sales (in millions):

Same-store sales at company-operated restaurants increased 1.7% in the quarter and 0.6% year-to-date compared to a year ago. The following table summarizes the change versus a year ago:

(1) Includes price increases of approximately 8.2% in the quarter and 6.7% year-to-date.

Food and packaging costs as a percentage of company restaurant sales increased 4.8% in the quarter, including 4.0% of higher commodity costs, and 3.5% of unfavorable menu item mix and other, partially offset by 2.7% of increased menu pricing. Food and packaging costs as a percentage of company restaurant sales increased 3.7% year-to-date, including 3.2% of higher commodity costs, and 2.4% of unfavorable menu item mix and other, partially offset by 1.9% of increased menu pricing.

Commodity costs increased in the quarter and year-to-date by approximately 16.4% and 13.1%, respectively, primarily due to higher beef, pork, sauces and oil costs, due to supply chain and inflationary pressures. For fiscal 2022, we expect annual commodity cost inflation to be up 12% to 14% compared with fiscal 2021.

Payroll and employee benefit costs as a percentage of company restaurant sales increased 3.2% in the quarter and 2.9% year-to-date, primarily due to labor inflation, a change in the mix of restaurants due to franchisee acquisitions, partially offset by lower incentive compensation. Labor inflation was approximately 14.2% in the quarter and 12.5% year-to-date for the current fiscal year. For fiscal 2022, we expect annual wage inflation to be up 12% to 13% compared with fiscal 2021.

Occupancy and other costs, as a percentage of company restaurant sales, increased 2.9% in the quarter and 2.3% year-to-date, primarily due to the acquisition of 29 restaurants since a year ago with lower than average sales volumes, and higher costs for maintenance and repair and utilities.

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):

Franchise rental revenues decreased $2.2 million, or 2.8% in the quarter and $2.9 million, or 1.6% year-to-date, driven by a reduction in the number of franchise subleases compared to prior year, in addition to the impact of deferring $1.2 million in connection with a franchisee currently in bankruptcy proceedings for which revenue will be recognized upon payment.

Franchise royalties and other decreased $2.8 million, or 5.9% in the quarter and $1.7 million, or 1.6% year-to-date, primarily due to lower fees received in connection with the early termination of franchise agreements of $2.1 million and $1.3 million, respectively, the deferral of $0.8 million in connection with the franchisee bankruptcy matter and to a lesser extent a reduction in the number of franchise restaurants.

Franchise contributions for advertising and other services revenues decreased $1.2 million, or 2.5% in the quarter and $1.2 million, or 1.1% year-to-date compared to the prior year, primarily due to lower marketing contributions of $0.9 million driven by a decrease in the number of franchise restaurants and deferrals in connection with the franchisee bankruptcy matter.

Franchise occupancy expenses, primarily rent, decreased $0.5 million, or 1.0% in the quarter and $1.7 million, or 1.5% year-to-date compared to the prior year, primarily due to a reduction in the number of franchise subleases compared to prior year.

Franchise support and other costs increased $1.5 million in the quarter and $2.1 million year-to-date compared to the prior year, primarily due to an increase in franchisee bad debt expense as a result of developments in a franchisee’s ongoing bankruptcy proceedings.

Franchise advertising and other service expenses decreased $0.3 million, or 0.5% in the quarter and increased $0.4 million, or 0.3% year-to-date compared to the prior year. In the quarter, the decrease is primarily due to a reduction in the number of franchise restaurants. Year-to-date, the increase is due to higher technology costs in the current year and partially offset by a reduction in the number of franchise restaurants.

Del Taco Brand

As of April 17, 2022, there were 293 company-operated and 306 franchise-operated Del Taco restaurants. System same-store sales increased 1.3% for the period from March 8, 2022 through April 17, 2022 and total revenues and segment operating profit were $63.0 million and $6.1 million, respectively.

Depreciation and Amortization

Depreciation and amortization increased by $0.8 million in the quarter and decreased $1.2 million year-to-date. The acquisition of Del Taco in the quarter resulted in an increase of $2.2 million, which was partially offset in the quarter and more than offset year-to-date by a decrease in Jack in the Box depreciation and amortization primarily due to certain franchise building assets 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):

Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $2.7 million in the quarter and $3.0 million year-to-date compared to the prior year primarily due to the acquisition of Del Taco which resulted in higher advertising costs of $2.3 million as well as an increase in the number of Jack in the Box company-operated restaurants.

Incentive compensation decreased by $1.4 million in the quarter and $4.2 million year-to-date compared to the prior year. In the quarter, the decrease is due to a $2.7 million decrease in the annual incentives mainly as a result of lower achievement levels compared to the prior year, partially offset by a $1.3 million increase in stock-based compensation mainly from timing of annual grants compared to the prior year. Year-to-date, the decrease is due to a $5.3 million decrease in the annual incentives, partially offset by a $1.1 million increase in stock-based compensation mainly from timing of annual grants compared to the prior year.

The cash surrender value of our company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $3.7 million in the quarter and $8.9 million year-to-date versus the prior year.

Insurance costs increased by $1.0 million in the quarter and $1.2 million year-to-date compared to the prior year due to a more favorable change in the loss development factors related to our worker’s compensation liabilities a year ago.

The acquisition of Del Taco resulted in an increase of additional general and administrative costs of $4.3 million in both the quarter and year-to-date compared to the prior year.

Other Operating Expenses, Net

Other operating expenses, net is comprised of the following (in thousands):

Other operating expenses, net increased by $13.1 million in the quarter and $17.4 million year-to-date compared to the prior year, primarily due to $13.1 million, and $16.1 million of costs incurred in the quarter and year-to-date, respectively relating to the Del Taco acquisition.

Gains on the Sale of Company-Operated Restaurants

In 2022 and 2021, no company-operated restaurants were sold to franchisees. Amounts included in “Gains on the sale of company-operated restaurants” in both periods related to resolutions of certain contingencies from the sale of Jack in the Box restaurants in prior years.

Interest Expense, Net

Interest expense, net is comprised of the following (in thousands):

Interest expense, net increased by $11.3 million in the quarter and $10.7 million year-to-date compared to the prior year, primarily due to a loss on early extinguishment of debt of $7.7 million during the quarter as well as higher average borrowings in the current quarter and year-to-date resulting in higher interest expense of $3.5 million and $2.8 million, respectively.

Income Tax Expense

The income tax provisions reflect tax rates of 33.3% in the second quarter and 27.8% year-to-date, compared with 27.3% and 26.1%, respectively, in fiscal year 2021. The major components of the year-over-year increase in tax rates were non-deductibles losses in the current year versus non-taxable gains in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans, a decrease in the impact of excess tax benefit on share-based compensation, and an increase in non-deductible transaction costs resulting from the Del Taco acquisition, partially offset by an adjustment related to state taxes recorded in the second quarter of fiscal year 2021.

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock.

Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our credit facilities. As of April 17, 2022, the Company had $84.6 million of cash and restricted cash on its consolidated balance sheet. The Company continually assesses the optimal sources and uses of cash for our business. Since closing the Del Taco acquisition, we have undertaken a process to review our balance sheet for any undervalued assets, and pursue opportunities for capital sources, including leasebacks for our owned Jack in the Box properties, and refranchising, primarily for Del Taco in the near term.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future.

Cash Flows

The table below summarizes our cash flows from continuing operations (in thousands):

Operating Activities. Operating cash flows decreased $10.7 million compared with a year ago, primarily due to lower net income adjusted for non-cash items of $8.4 million and an unfavorable change in working capital of $2.3 million.

Pension and post-retirement contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2021, the date of our last actuarial funding valuation, there was no minimum contribution funding requirement for our qualified pension plan. In 2022, we contributed $3.7 million to our non-qualified pension plan and post-retirement plans.

Investing Activities. Cash used in investing activities increased by $582.5 million compared with a year ago, primarily due to $580.8 million paid for the acquisition of Del Taco, net of cash acquired.

Capital Expenditures — The composition of capital expenditures in each period follows (in thousands):

Financing Activities. Cash flows from financing activities increased by $732.4 million compared with a year ago, primarily as a result of an increase in net borrowings of $669.1 million, driven by the issuance of the 2022 Notes, and an increase of $65.0 million from lower share repurchases compared to prior year.

Repurchases of common stock — The Company did not repurchase any shares in 2022. On November 19, 2021, the Board of Directors authorized a $200.0 million stock buy-back program that expires on November 20, 2023.

Dividends — During 2022, the Board of Directors declared two cash dividends of $0.44 per common share totaling $18.6 million. On May 13, 2022, the Board of Directors declared a cash dividend of 0.44 per common share, to be paid on June 22, 2022, to shareholders of record as of the close of business on June 7, 2022.

Securitized Refinancing Transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted under the indenture that will govern the 2022 Notes.

The Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. The Company’s existing revolving financing facility of Series 2019-1 Class A-1 Notes was terminated in connection with the transaction. As of April 17, 2022, we had outstanding borrowings of $50.0 million and available borrowing capacity of $58.0 million under our 2022 Variable Funding Notes, net of letters of credits issued of $42.0 million.

The net proceeds of the sale of the 2022 Notes were used to repay in full of $570.7 million in aggregate outstanding principal amount of the Company’s Series 2019-1 Class A-2-I Notes, together with the applicable make-whole premium and unpaid interest, and was used to fund a portion of the Company’s acquisition of Del Taco Restaurants, Inc.

The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes.

The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. Subsequent to closing the issuance of the 2022 Notes, the Company has 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 in the second quarter of 2022.

Restricted cash — In accordance with the terms of the Indenture, certain cash accounts have been established with the Indenture trustee for the benefit of the note holders and are restricted in their use. As of April 17, 2022, the Company had restricted cash of $28.9 million, which primarily represented cash collections and cash reserves held by the trustee to be used for payments of interest and commitment fees required for the Class A-1 and A-2 Notes.

Covenants and restrictions — The Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Notes are in stated ways defective or ineffective and (iv) covenants relating to recordkeeping, access to information and similar matters. The Notes are also subject to customary rapid amortization events provided for in the Indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Class A-2 Notes on the applicable scheduled maturity date. The Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments. As of April 17, 2022, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.

Revolving credit facility — In connection with the Del Taco acquisition, Del Taco’s existing debt of $115.2 million related to a Syndicated Credit Facility dated August 5, 2015, was repaid and extinguished on the Closing Date. On the Closing Date, Del Taco entered into a new syndicated credit facility with an aggregate principal amount of up to $75.0 million, maturing on March 7, 2023. The revolving credit facility, as amended, includes a limit of $20.0 million for letters of credit. As of April 17, 2022, we had outstanding borrowings of $4.0 million and available borrowing capacity of $58.2 million of under the facility, net of letters of credit of $12.8 million.

Bridge commitment letter — In connection with the Merger Agreement, the Company secured commitments for a bridge financing facility in an amount of up to $600.0 million (the “Bridge Facility”). No amounts were drawn under the Bridge Facility, which was terminated as a result of our securitization refinancing transaction.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates are those that we believe are most important for the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. In addition to the critical accounting policies and estimates previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2021, due to recent transactions and events, we also consider the following to be part of our critical accounting policies and estimates due to the high degree of judgment and complexity in its application:

Business Combinations — The Del Taco Acquisition was accounted for using the acquisition method of accounting, or acquisition accounting, in accordance with ASC Topic 805, Business Combinations. The acquisition method of accounting involved the allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed. This allocation process involves the use of estimates and assumptions made in connection with estimating the fair value of assets acquired and liabilities assumed including cash flows expected to be derived from the use of the asset, the timing of such cash flows, the remaining useful life of assets and applicable discount rates. Acquisition accounting allows for up to one year to obtain the information necessary to finalize the fair value of all assets acquired and liabilities assumed at March 8, 2022. As of April 17, 2022, we have recorded a preliminary allocation of consideration to net tangible and intangible assets acquired, which is subject to revision as we obtain additional information necessary to complete the fair value studies and acquisition accounting.

In the event that actual results vary from the estimates or assumptions used in the valuation or allocation process, we may be required to record an impairment charge or an increase in depreciation or amortization in future periods, or both. Refer to Note 3, Business Combination, to the accompanying condensed consolidated financial statements for additional information about accounting for the Del Taco Acquisition.

NEW ACCOUNTING PRONOUNCEMENTS

Refer to Note 1, Basis of Presentation, of the notes to condensed consolidated financial statements.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws, including further impacts that COVID-19 pandemic may have on our future operations. Any statements contained herein that are not historical facts may be deemed to be forward-looking statements. Forward-looking statements may be identified by words such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “forecast,” “goals,” “guidance,” “intend,” “plan,” “project,” “may,” “will,” “would”, “should” and similar expressions. These statements are based on management’s current expectations, estimates, forecasts and projections about our business and the industry in which we operate. These estimates and assumptions involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Factors that may cause our actual results to differ materially from any forward-looking statements include, but are not limited to:

• The COVID-19 pandemic has disrupted and may continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition, and results of operations for an extended period of time.
• We face significant competition in the food service industry and our inability to compete may adversely affect our business.
• Changes in demographic trends and in customer tastes and preferences could cause sales and the royalties we receive from franchisees to decline.
• Changes in consumer confidence and declines in general economic conditions could negatively impact our financial results.
• Increases in food and commodity costs could decrease our profit margins or result in a modified menu, which could adversely affect our financial results.
• Failure to receive scheduled deliveries of high-quality food ingredients and other supplies could harm our operations and reputation.
• We have a limited number of suppliers for our major products and rely on a distribution network with a limited number of distribution partners for the majority of our national distribution program. If our suppliers or distributors are unable to fulfill their obligations under their contracts, it could harm our operations.
• Food safety and food-borne illness concerns may have an adverse effect on our business by reducing demand and increasing costs.
• Negative publicity relating to our business or industry could adversely impact our reputation.
• Changes in the availability of and the cost of labor could adversely affect our business.
• Inability to attract, train and retain top-performing personnel could adversely impact our financial results or business.
• We may not have the same resources as our competitors for marketing, advertising and promotion.
• We may be adversely impacted by severe weather conditions, natural disasters, terrorist acts or civil unrest that could result in property damage, injury to employees and staff, and lost restaurant sales.
• We may not achieve our development goals.
• Our highly franchised business model presents a number of risks, and the failure of our franchisees to operate successful and profitable restaurants could negatively impact our business.
• We are subject to financial and regulatory risks associated with our owned and leased properties and real estate development projects.
• We are subject to the risk of cybersecurity breaches, intrusions, data loss, or other data security incidents.
• We are subject to risks associated with our increasing dependence on digital commerce platforms and technologies to maintain and grow sales, and we cannot predict the impact that these digital commerce platforms and technologies, other new or improved technologies or alternative methods of delivery may have on consumer behavior and our financial results.
• We are dependent on information technology and digital service providers and any material failure, misuse or interruption of our computer systems, supporting infrastructure, consumer-facing digital capabilities or social media platforms could adversely affect our business.
• If we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which would harm our business and the value of the Company’s common shares.
• We may not be able to adequately protect our intellectual property, which could harm the value of our brand and adversely affect our business.
• Jack in the Box may be subject to risk associated with disagreements with key stakeholders, such as franchisees.
• The securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.
• We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.
• The securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.
• We are subject to increasing legal complexity and may be subject to claims or lawsuits that are costly to defend and could result in our payment of substantial damages or settlement costs.
• Unionization activities or labor disputes may disrupt our operations and affect our profitability.
• Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
• Our insurance may not provide adequate levels of coverage against claims.
• Changes in tax laws, interpretations of existing tax law, or adverse determinations by tax authorities could adversely affect our income tax expense and income tax payments.
• Increasing regulatory and legal complexity may adversely affect restaurant operations and our financial results.
• Governmental regulation may adversely affect our existing and future operations and results, including by harming our ability to profitably operate our restaurants.
• The proliferation of federal, state, and local regulations increases our compliance risks, which in turn could adversely affect our business.
• Legislation and regulations regarding our products and ingredients, including the nutritional content of our products, could impact customer preferences and negatively impact our financial results.
• Our quarterly results and, as a result, the price of our common stock, may fluctuate significantly and could fall below the expectations of securities analysts and investors due to various factors.
• Actions of activist stockholders could cause us to incur substantial costs, divert management’s attention and resources, and have an adverse effect on our business.
• Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruptions, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.

These and other factors are identified and described in more detail in our filings with the Securities and Exchange Commission, including, but not limited to: the “Discussion of Critical Accounting Estimates,” and other sections in this Form 10-Q and the “Risk Factors” section of our most recent Annual Report on Form 10-K for the fiscal year ended October 3, 2021 (“Form 10-K”). These documents may be read free of charge on the SEC’s website at www.sec.gov (http://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.

We are exposed to interest rate risk on borrowings under our $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. As of April 17, 2022, we had outstanding variable rate borrowings of $54.0 million. A 100 basis point increase in the effective interest rate applied to these borrowings would result in additional interest expense of approximately $0.5 million on an annualized basis.

The Company is also exposed to the impact of commodity and utility price fluctuations. Many of the ingredients we use are commodities or ingredients that are affected by the price of other commodities, weather, seasonality, production, availability, and various other factors outside our control. In order to minimize the impact of fluctuations in price and availability, we monitor the primary commodities we purchase and may enter into purchasing contracts and pricing arrangements when considered to be advantageous. However, certain commodities remain subject to price fluctuations. We are exposed to the impact of utility price fluctuations related to unpredictable factors such as weather and various other market conditions outside our control. Our ability to recover increased costs for commodities and utilities through higher prices is limited by the competitive environment in which we operate.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Based on an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended), as of the end of the Company’s quarter ended April 17, 2022, the Company’s Chief Executive Officer and Chief Financial Officer (its principal executive officer and principal financial officer, respectively) have concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

On March 8, 2022, we completed our acquisition of Del Taco and have implemented new processes and internal controls to assist us in the preparation and disclosure of financial information. Given the significance of the Del Taco acquisition and the complexity of systems and business processes, we intend to exclude the acquired Del Taco business from our assessment and report on internal control over financial reporting for the year ended October 2, 2022. Other than discussed above, there have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended April 17, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

There is no information required to be reported for any items under Part II, except as follows:

The risk factors set forth below contain material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021, which we filed with the SEC on November 23, 2021, as updated in this Item 1A. You should also consider the risks and uncertainties discussed under the heading “Cautionary Statements Regarding Forward-Looking Statements” in Item 2 of this Quarterly Report on Form 10-Q. You should also refer to the other information set forth in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended October 3, 2021, including our financial statements and the related notes. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the risks or uncertainties actually occurs, our business and financial results could be harmed. In that case, the market price of our common stock could decline.

Our business and Del Taco’s business may not be integrated successfully, or such integration may be more difficult, time consuming, or costly than expected. Operating costs, customer loss, and business disruption, including difficulties maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected.

The combination of two independent businesses can be complex, costly, and time-consuming, and it may divert significant management attention and resources to combining ours and Del Taco’s business practices and operations. This process may disrupt our business or otherwise impact our ability to compete. The failure to meet the challenges involved in combining ours and Del Taco’s business and to realize the anticipated benefits of the acquisition could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.

The overall combination of ours and Del Taco’s business may also result in material unanticipated problems, expenses, liabilities, competitive responses and impacts, and loss of customer and other business relationships. The difficulties of combining the operations of the companies, include, among others:

• diversion of management attention to integration matters;
• difficulties in integrating operations and systems, including intellectual property and communications systems, administrative and information technology infrastructure, supplier and vendor arrangements and financial reporting and internal control systems;
• challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
• differences in control environments and cultures, and the potential identification of material weaknesses while we work to integrate and align policies, principles and practices;
• alignment of key performance measurements may result in a greater need to communicate and manage clear expectations while we work to integrate and align policies and practices;
• difficulties in integrating employees and attracting and retaining key personnel;
• the transition to a combined management team, and the need to address possible differences in corporate cultures and management philosophies;
• challenges in retaining existing customers and obtaining new customers;
• difficulties in achieving anticipated cost savings, synergies, accretion targets, business opportunities, financing plans and growth prospects from the combination; and
• difficulties in managing the expanded operations of a significantly larger and more complex company.

Additionally, uncertainties over the integration process could cause customers, suppliers, distributors, and others to seek to change or cancel our existing business relationships or to refuse to renew existing relationships. Competitors may also target our existing customers by highlighting potential uncertainties and integration difficulties.

Some of these factors are outside our control, and any one of them could result in lower revenues, higher costs, and diversion of management time and energy, which could materially impact our business, financial condition and results of operations.

Similar to our Series 2019-1 Class A-2-I Notes, the new securitized debt instruments issued by certain of our wholly-owned subsidiaries have restrictive terms, and any failure to comply with such terms could result in default, which could harm the value of our brand and adversely affect our business.

The Series 2022-1 Senior Notes are subject to a series of covenants and restrictions customary for transactions of this type, including (i) that the Master Issuer maintains specified reserve accounts to be used to make required payments in respect of the Series 2022-1 Senior Notes, (ii) provisions relating to optional and mandatory prepayments and the related payment of specified amounts, including specified make-whole payments in the case of the Series 2022-1 Class A-2 Notes under certain circumstances, (iii) certain indemnification payments in the event, among other things, the assets pledged as collateral for the Series 2022-1 Senior Notes are in stated ways defective or ineffective and (iv) covenants relating to record keeping, access to information and similar matters. The Series 2022-1 Senior Notes are also subject to customary rapid amortization events provided for in the indenture, including events tied to failure to maintain stated debt service coverage ratios, the sum of gross sales for specified restaurants being below certain levels on certain measurement dates, certain manager termination events, an event of default, and the failure to repay or refinance the Series 2022-1 Class A-2 Notes on the applicable scheduled maturity date. The Series 2022-1 Senior Notes are also subject to certain customary events of default, including events relating to non-payment of required interest, principal, or other amounts due on or with respect to the Series 2022-1 Senior Notes, failure to comply with covenants within certain time frames, certain bankruptcy events, breaches of specified representations and warranties, failure of security interests to be effective, and certain judgments.

In the event that a rapid amortization event occurs under the indenture (including, without limitation, upon an event of default under the indenture or the failure to repay the securitized debt at the end of the applicable term) which would require repayment of the Series 2022-1 Senior Notes, the funds available to us would be reduced or eliminated, which would in turn reduce our ability to operate and/or grow our business. If our subsidiaries are not able to generate sufficient cash flow to service their debt obligations, they may need to refinance or restructure debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. If our subsidiaries are unable to implement one or more of these alternatives, they may not be able to meet debt payment and other obligations which could have a material adverse effect on our financial condition.

We have a significant amount of debt outstanding. Such indebtedness, along with the other contractual commitments of our Company or its subsidiaries, could adversely affect our business, financial condition and results of operations, as well as the ability of certain of our subsidiaries to meet debt payment obligations.

As of April 17, 2022, the Company has debt outstanding of $1.87 billion. This level of debt could have certain material adverse effects on the Company, including but not limited to:

• our available cash flow in the future to fund working capital, capital expenditures, acquisitions, and general corporate or other purposes could be impaired, and our ability to obtain additional financing for such purposes is limited;
• a substantial portion of our cash flows could be required for debt service and, as a result, might not be available for our operations or other purposes;
• any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or could force us to modify our operations or sell assets;
• our ability to operate our business and our ability to repurchase stock or pay cash dividends to our stockholders may be restricted by the financial and other covenants set forth in the indenture;
• our ability to withstand competitive pressures may be decreased; and
• our level of indebtedness may make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business, regulatory, and economic conditions.

In addition, we may incur additional indebtedness in the future. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that it now faces could intensify.

Similar to the Series 2019-1 Class A-2-I Notes, the securitization transaction documents impose certain restrictions on our activities or the activities of our subsidiaries, and the failure to comply with such restrictions could adversely affect our business.

The indenture and the management agreement entered into between certain of our subsidiaries and the indenture trustee (the “Management Agreement”) contain various covenants that limit our and our subsidiaries’ ability to engage in specified types of transactions. For example, the indenture and the Management Agreement contain covenants that, among other things, restrict, subject to certain exceptions, the ability of certain subsidiaries to:

• incur or guarantee additional indebtedness;
• sell certain assets;
• alter the business conducted by our subsidiaries;
• create or incur liens on certain assets; or
• consolidate, merge, sell or otherwise dispose of all or substantially all of the assets held within the securitization entities.

As a result of these restrictions, we may not have adequate resources or the flexibility to continue to manage the business and provide for growth of the Jack in the Box system, including product development and marketing for the Jack in the Box brand, which could adversely affect our future growth prospects, financial condition, results of operations and liquidity.

Changes in the availability of and the cost of labor could adversely affect our business.

Our business could be adversely impacted by increases in labor costs, including those increases triggered by regulatory actions regarding wages, scheduling and benefits; increased health care and workers’ compensation insurance costs; increased wages and costs of other benefits necessary to attract and retain high quality employees with the right skill sets and increased wages, benefits and costs related to the COVID-19 pandemic and inflationary and other pressure on wages now being experienced. The growth of our business can make it increasingly difficult to locate and hire sufficient numbers of employees, to maintain an effective system of internal controls, and to train employees to deliver a consistently high-quality product and customer experience, which could materially harm our business and results of operations. Furthermore, we have experienced, and could continue to experience, a shortage of labor for restaurant positions, including due to concerns around and illnesses arising from COVID-19 and its various novel variants and other factors, which could decrease the pool of available qualified talent for key functions and require restaurants to operate on reduced hours. Such labor shortages could be further exacerbated by expanded federal, state and local COVID-19 vaccination requirements. In addition, our wages and benefits programs may be insufficient to attract and retain the top performing employees especially in a rising wage market.