Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For an understanding of the significant factors that influenced our performance during the fiscal year, we believe our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements and related notes included in this annual report as indexed on page F-1.
Comparisons under this heading refer to the 52-week periods ended September 27, 2020 and September 29, 2019 for fiscal years 2020 and 2019, respectively. A comparison of our results of operations and cash flows for fiscal 2019 compared to fiscal 2018 can be found under Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 29, 2019.
Our MD&A consists of the following sections:
• Overview — a general description of our business and fiscal 2020 highlights.
• Financial reporting — a discussion of changes in presentation, if any.
• Results of operations — an analysis of our consolidated statements of earnings for fiscal 2020 compared to fiscal 2019.
• Liquidity and capital resources — an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known trends that may impact liquidity, and the impact of inflation, if applicable.
• 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.
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”), system restaurant 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 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, which represents net earnings on a generally accepted accounting principles (“GAAP”) basis excluding gains or losses from discontinued operations, income taxes, interest expense, net, gains on the sale of company-operated restaurants, impairment and other charges, net, depreciation and amortization, and the amortization of tenant improvement allowances and other, and pension settlement charges. 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, system restaurant 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.
IMPACT OF COVID-19
Throughout the pandemic, substantially all of our restaurants have remained open, with dining rooms closed and all locations operating in an off-premise capacity, which has historically represented close to 90% of the Company’s business, including drive-thru, third-party delivery, and carry-out. While we navigate through this time of uncertainty, Jack in the Box remains committed to operating our restaurants with integrity, providing great guest service, and most importantly, protecting the health and safety of our employees and guests.
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In the last five weeks of the second quarter, upon the rise in “shelter-in-place” mandates and “social distancing” requirements across the country, system same-store sales decreased by 17.0%; however, starting in our third quarter and continuing into our fourth quarter we have seen an acceleration of system same-store sales. The acceleration of sales during the pandemic has been largely driven by average check growth while we have continued to experience a significant reduction in restaurant traffic. Given the uncertainty associated with the COVID-19 pandemic, the Company has not provided any guidance for fiscal 2021 at this time, but will evaluate on a quarterly basis, with the intent to return to providing guidance once the visibility into sustained trends becomes more clear.
To mitigate the impact of COVID-19 on the Company, operations, franchisees and our employees, we have undertaken the following actions:
• Implemented a short-term cash preservation strategy (refer to the Liquidity and Capital Resources section for further information).
• Provided financial support to our franchisees in the form of a reduction and payment deferral of marketing fees, postponement of rent, and extended deadlines for remodel requirements and development agreements.
• Instituted a new emergency paid sick leave program at company-operated restaurants and have procured protective masks, gloves, sneeze guards and thermometers at all company-owned and franchised locations.
OVERVIEW
As of September 27, 2020, we operated and franchised 2,241 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including one in Guam.
We derive revenue from retail sales at Jack in the Box company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees. In addition, we recognize gains or losses from the sale of company-operated restaurants to franchisees, which are included as a line item within operating costs and expenses, net, in the accompanying consolidated statements of earnings.
The following summarizes the most significant events occurring in fiscal 2020, and certain trends compared to fiscal 2019:
• System same-store sales — System same-store sales increased 4.0% in fiscal 2020 as a result of strong sales momentum in the second half of our fiscal year.
• Company restaurant operations — Company restaurant costs including food and packaging, payroll and employee benefits, and occupancy and other operating costs, as a percentage of sales increased to 75.4% from 73.8% in the prior year primarily due to wage inflation and increases in other operating costs.
• Franchise operations — Franchise restaurant sales increased 4.9% for the year, resulting in higher royalties and percentage rent for the Company.
• Corporate initiatives — During 2020, we executed on previously announced corporate initiatives, which included the sale of one of our corporate office buildings as we consolidated our corporate facilities, as well as completing a lump sum payment option in connection with the Company’s pension plan de-risking strategy.
• Return of cash to shareholders — We returned cash to shareholders in the form of share repurchases and quarterly cash dividends. We repurchased 1.9 million shares of our common stock during fiscal 2020 at an aggregate cost of $153.5 million. We declared dividends of $1.20 per share totaling $27.7 million.
• Adjusted EBITDA — Adjusted EBITDA increased in 2020 to $274.2 million from $269.0 million in 2019.
FINANCIAL REPORTING
In fiscal 2020, we adopted Accounting Standards Codification Topic 842, Leases (“ASC 842”), effective at the beginning of our fiscal year on a modified retrospective basis using the effective date transition method. Our consolidated financial statements reflect the application of ASC 842 guidance beginning in 2020, while our consolidated financial statements for prior periods were prepared under the guidance of a previously applicable accounting standard.
The most significant effects of this transition that affect comparability of our results of operations between 2020 and 2019 include the following:
• Our transition to ASC 842 resulted in the gross presentation of property tax and maintenance expenses and related lessee reimbursements as “Franchise occupancy expenses” and “Franchise rental revenues”, respectively. These expenses and reimbursements were presented on a net basis under the previous accounting standard. Although there was no net impact to our consolidated statement of earnings from this change, the presentation resulted in total increases in “Franchise rental revenues” and “Franchise occupancy expenses” of $37.4 million.
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• ASC 842 also changed how lessees account for leases subleased at a loss. Under ASC 842, sublease income and lessee rent expense are recorded as franchise rent revenue and franchise occupancy costs as earned or incurred. As a result of this change, franchise revenues and franchise occupancy expenses increased by $4.2 million and $4.8 million, respectively.
RESULTS OF OPERATIONS FOR FISCAL 2020 AND 2019
The following table presents certain income and expense items included in our consolidated statements of earnings as a percentage of total revenues, unless otherwise indicated. Percentages may not add due to rounding.
2020 2019
Revenues:
Company restaurant sales 34.2 % 35.4 %
Franchise rental revenues 31.4 % 28.7 %
Franchise royalties and other 17.5 % 17.9 %
Franchise contributions for advertising and other services 17.0 % 18.0 %
100.0 % 100.0 %
Operating costs and expenses, net:
Food and packaging (1) 29.4 % 29.0 %
Payroll and employee benefits (1) 30.5 % 29.7 %
Occupancy and other (1) 15.5 % 15.0 %
Franchise occupancy expenses (excluding depreciation and amortization) (2) 65.5 % 61.1 %
Franchise support and other costs (3) 7.3 % 7.1 %
Franchise advertising and other services expenses (4) 104.2 % 104.3 %
Selling, general and administrative expenses 7.9 % 8.0 %
Depreciation and amortization 5.2 % 5.8 %
Impairment and other charges, net (0.6) % 1.3 %
Gains on the sale of company-operated restaurants (0.3) % (0.1) %
Earnings from operations 22.6 % 21.3 %
Income tax rate (5) 26.8 % 20.8 %
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(1) As a percentage of company restaurant sales.
(2) As a percentage of franchise rental revenues.
(3) As a percentage of franchise royalties and other.
(4) As a percentage of franchise contributions for advertising and other services.
(5) As a percentage of earnings from continuing operations and before income taxes.
The following table summarizes changes in same-store sales for company-owned, franchised, and system-wide restaurants:
2020 2019
Company 3.1 % 1.7 %
Franchise 4.0 % 1.3 %
System 4.0 % 1.3 %
The following table summarizes the changes in the number and mix of company and franchise restaurants in each fiscal year:
2020 2019
Company Franchise Total Company Franchise Total
Beginning of year 137 2,106 2,243 137 2,100 2,237
New — 27 27 — 19 19
Acquired from franchisees 8 (8) — — — —
Closed (1) (28) (29) — (13) (13)
End of year 144 2,097 2,241 137 2,106 2,243
% of system 6 % 94 % 100 % 6 % 94 % 100 %
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The following table summarizes the restaurant sales for company-owned, franchised, and total system-wide restaurants (in thousands) :
2020 2019
Company-owned restaurant sales $ 348,987 $ 336,807
Franchised restaurant sales (1) 3,323,745 3,167,920
System sales (1) $ 3,672,732 $ 3,504,727
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(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) :
2020 2019
Net earnings - GAAP $ 89,764 $ 94,437
Earnings from discontinued operations, net of income taxes (370) (2,690)
Income taxes 32,727 24,025
Interest expense, net 66,743 84,967
Pension settlement charges 39,218 —
Gains on the sale of company-operated restaurants (3,261) (1,366)
Impairment and other charges, net (6,493) 12,455
Depreciation and amortization 52,798 55,181
Amortization of franchise tenant improvement allowances and other 3,028 1,983
Adjusted EBITDA - Non-GAAP $ 274,154 $ 268,992
Company Restaurant Operations
The following table presents company restaurant sales and costs as a percentage of the related sales in each fiscal year. Percentages may not add due to rounding (dollars in thousands) :
2020 2019
Company restaurant sales $ 348,987 $ 336,807
Company restaurant costs:
Food and packaging $ 102,449 29.4 % $ 97,699 29.0 %
Payroll and employee benefits $ 106,540 30.5 % $ 100,158 29.7 %
Occupancy and other $ 54,157 15.5 % $ 50,613 15.0 %
Company restaurant sales increased $12.2 million in 2020 as compared with the prior year. In 2020, the increase was primarily driven by an increase in the number of company-operated restaurants related to the acquisition of eight restaurants from a franchisee during the year which resulted in additional sales of $6.1 million, average check growth, and menu price increases, and were partially offset by a decline in traffic during COVID-19 impacted weeks.
Same-store sales at company-operated restaurants increased 3.1% in 2020 compared to a year ago. The following table summarizes the increases (decreases) in company-operated same-store sales:
2020 vs. 2019
Transactions (8.9) %
Average check (1) 12.0 %
Change in same-store sales 3.1 %
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(1) Includes price increases of approximately 2.6% in 2020.
Food and packaging costs as a percentage of company restaurant sales increased to 29.4% in 2020 from 29.0% a year ago due primarily to higher costs for ingredients and changes in product mix, partially offset by menu price increases. Commodity costs increased by 3.5% for the year due primarily to increases in beef and cheese. Beef, our most significant commodity, increased 14.9% compared to a year ago.
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Payroll and employee benefit costs as a percentage of company restaurant sales increased to 30.5% in 2020 compared with 29.7% a year ago due primarily to higher average wages resulting from wage inflation and a highly competitive labor market, and higher incentive compensation costs during the year; partially offset by higher sales leverage.
Occupancy and other costs as a percentage of company restaurant sales increased to 15.5% in 2020 from 15.0% a year ago due primarily to higher costs for delivery fees as we grow our delivery sales mix, supplies primarily related to COVID-19, and the acquisition in 2020 of eight restaurants with lower than average sales volumes; partially offset by leverage from higher same-store sales.
Franchise Operations
The following table presents franchise revenues and costs in each fiscal year and other information we believe is useful in analyzing the change in franchise operating results ( dollars in thousands ):
2020 2019
Franchise rental revenues $ 320,647 $ 272,815
Royalties 171,407 163,047
Franchise fees and other 6,912 6,764
Franchise royalties and other 178,319 169,811
Franchise contributions for advertising and other services 173,553 170,674
Total franchise revenues $ 672,519 $ 613,300
Franchise occupancy expenses $ 210,038 $ 166,584
Franchise support and other costs 13,059 12,110
Franchise advertising and other services expenses 180,794 178,093
Total franchise costs $ 403,891 $ 356,787
Franchise costs as a percentage of total franchise revenues 60.1 % 58.2 %
Average number of franchise restaurants 2,084 2,081
Franchised restaurant sales $ 3,323,745 $ 3,167,920
Franchise restaurant AUV $ 1,595 $ 1,523
Increase in franchise-operated same-store sales 4.0 % 1.3 %
Royalties as a percentage of total franchise restaurant sales 5.2 % 5.1 %
Franchise rental revenues increased $47.8 million, or 17.5%, in 2020 versus a year ago due primarily to our adoption of ASC 842, which increased our rental revenues $41.6 million for the year, as well as higher percentage rent driven by higher franchise restaurant sales.
Franchise royalties and other increased $8.5 million, or 5.0%, in 2020 compared with the prior year due primarily to an increase in franchise restaurant sales driving royalties higher.
Franchise contributions for advertising and other services increased $2.9 million, or 1.7% in 2020 versus a year ago primarily due to a $2.6 million increase in technology and sourcing fees primarily as a result of an increase in technology fees in July 2019. Marketing contributions were $0.3 million higher than last year due to higher franchise restaurant sales which more than offset the impact of a $7.9 million decrease in marketing fee contribution percentages for March and April.
Franchise occupancy expenses increased $43.5 million in 2020 versus a year ago due primarily to the adoption of ASC 842, which increased franchise occupancy expenses by $42.2 million for the year.
Franchise support and other costs increased $0.9 million in 2020 versus a year ago due primarily to an increase in franchisee bad debt expense related to specific franchise situations that occurred in the first quarter of 2020.
Franchise advertising and other service expenses increased $2.7 million, or 1.5% in 2020 versus a year ago primarily as a result of higher technology and sourcing costs of $2.4 million for the year.
Depreciation and Amortization
Depreciation and amortization decreased $2.4 million in 2020 as compared with the prior year, primarily due to certain of our franchise building assets becoming fully depreciated in the current fiscal year.
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Selling, General and Administrative (“SG&A”) Expenses
The following table presents the increase (decrease) in SG&A expenses in 2020 compared with the prior year ( in thousands ):
2020 vs. 2019
Advertising $ (1,888)
Incentive compensation (including share-based compensation and related payroll taxes) (2,277)
Cash surrender value of COLI policies, net 401
Litigation matters 1,500
Insurance 2,216
Other (includes transition services income and savings related to our restructuring plan) 4,533
$ 4,485
Advertising costs represent company contributions to our marketing fund and are generally determined as a percentage of company-operated restaurant sales. Advertising costs in 2020 decreased $1.9 million versus a year ago primarily due to a $2.0 million discretionary marketing fund contribution made by the Company in 2019 that was not made in 2020.
Incentive compensation decreased by $2.3 million in 2020 versus a year ago primarily due to a decrease in share-based compensation of $3.7 million, resulting from the departures of our former Chief Executive Officer and Chief Financial Officer in 2020, partially offset by an increase in annual incentives of $1.4 million as a result of higher achievement levels.
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 $0.4 million versus the prior year.
Litigation matters increased by $1.5 million in 2020 versus a year ago primarily due to a California Private Attorney General Act lawsuit settled for $3.8 million in the current year and litigation costs accrued for various other pending legal matters, partially offset by a $3.8 million settlement in our favor from a class action lawsuit related to credit card interchange fees.
Insurance costs increased $2.2 million in 2020 versus the prior year primarily due to less favorable development factors related to workers’ compensation and general liability claims compared to the prior year.
Impairment and Other Charges, Net
The following table presents the components of impairment and other charges, net, in each fiscal year ( in thousands ):
2020 2019
Restructuring costs $ 1,168 $ 8,455
Costs of closed restaurants and other 1,872 8,628
Gains on disposition of property and equipment, net (9,768) (6,244)
Accelerated depreciation 235 1,616
$ (6,493) $ 12,455
Impairment and other charges, net decreased $18.9 million in 2020 versus the prior year primarily from higher gains on the sale of property and equipment of $3.5 million, primarily due to a $10.8 million gain recognized on the sale of one of our corporate office buildings in fiscal 2020 compared to a $5.7 million gain on the sale of a restaurant property in the prior year, and from lower restructuring costs of $7.3 million, as our general and administrative cost reduction initiative came to its conclusion as planned. Additionally, costs of closed restaurants and other decreased by $6.8 million due primarily to the write-off of software development costs associated with a discontinued technology project in the prior year and higher canceled project costs for the prior year.
Refer to Note 9, Impairment and Other Charges, Net, of the notes to the consolidated financial statements for additional information regarding these charges.
Gains on the Sale of Company-Operated Restaurants
In 2020 and 2019, no company-operated restaurants were sold to franchisees. Gains on the sale of company-operated restaurants in both periods pertain to meeting certain contingent consideration provisions included in restaurants sold in previous years. Refer to Note 3, S ummary of Refranchisings and Franchise Acquisitions , of the notes to our consolidated financial statements for further information regarding these gains.
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Other Pension and Post-Retirement Expenses, Net
Other pension and post-retirement expenses, net increased by $40.2 million in 2020 versus the prior year, primarily due to non-cash pension settlement charges of $39.2 million in fiscal 2020. Refer to Note 12, Retirement Plans , of the notes to the consolidated financial statements for additional information regarding these charges.
Interest Expense, Net
Interest expense, net, is comprised of the following in each fiscal year ( in thousands ):
2020 2019
Interest expense $ 67,273 $ 86,027
Interest income (530) (1,060)
Interest expense, net $ 66,743 $ 84,967
Interest expense, net, decreased $18.2 million in 2020 as compared to a year ago primarily due to a charge of $23.6 million from the early termination of our interest rate swaps in the prior year. Excluding this impact, interest expense increased by $5.3 million, primarily as a result of higher average debt balances.
Income Taxes
The income tax provisions reflect effective tax rates of 26.8% and 20.8% in fiscal years 2020 and 2019, respectively. The major components of the year-over-year change in tax rates were the impact of nonrecurring activities in fiscal year 2019 including the termination of interest rate swap agreements and the release of a federal tax liability due to expiration of statute of limitations, and a current year increase in deduction limitations on officers' compensation and nondeductible costs resulting from a California Private Attorney General Act lawsuit settled in the current year.
Earnings from Discontinued Operations, Net
As described in Note 10, Discontinued Operations , in the notes to our consolidated financial statements, the results of operations from Qdoba have been reported as discontinued operations for all periods presented. Refer to Note 10 for additional information regarding discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
General
As is common in the restaurant industry, we generally maintain relatively low levels of accounts receivable and inventories, and our vendors grant trade credit for purchases such as food and supplies. We also continually invest in our business through the addition of new units and refurbishment of existing units, which are reflected as long-term assets and not as part of working capital. As a result, we may at times maintain current liabilities in excess of current assets, which results in a working capital deficit. We generally reinvest available cash flows from operations to enhance existing restaurants, to reduce debt, to repurchase shares of our common stock, and to pay cash dividends. Our cash requirements consist principally of working capital, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance distributions, dividend payments, and obligations related to our benefit plans.
Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available financing in place. On July 8, 2019, we completed a refinancing of our existing senior credit facility with a new securitized financing facility, comprised of $1.3 billion of senior fixed-rate term notes and $150.0 million of variable funding notes. During the second quarter of fiscal 2020, to enhance our liquidity position and provide financial flexibility given the uncertain market conditions, we fully drew down on our Variable Funding Notes, which provided us $107.9 million of unrestricted cash. As of September 27, 2020, the Company had $236.9 million of cash and restricted cash on its balance sheet.
In the context of an unprecedented global pandemic, we believe it is prudent to maintain maximum financial flexibility by preserving our capital and maintaining the Company’s healthy liquidity position. As a result, beginning in the second quarter, we temporarily suspended all repurchase activity and significantly reduced capital expenditures to essential spend only. The Company also temporarily suspended its dividend payments for the second quarter, which were reinstated the following quarter. The reinstatement of the dividend reflects the strong financial health of the Company and our continued commitment to shareholders.
We believe that our cash on hand, cash flow from operations, and the actions taken to mitigate the effects of the COVID-19 pandemic discussed above will provide us with adequate liquidity for the next twelve months and the foreseeable future.
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Cash Flows
The table below summarizes our cash flows from continuing operations activities for each of the last two fiscal years ( in thousands ):
2020 2019
Total cash provided by (used in):
Operating activities $ 143,525 $ 168,405
Investing activities 29,123 (13,819)
Financing activities (87,289) (5,730)
Net increase in cash from continuing operations $ 85,359 $ 148,856
Operating Activities . Operating cash flows decreased $24.9 million in 2020 compared to prior year primarily due to lower collections of $19.0 million from rent and marketing deferrals we provided to our franchisees and an increase in cash paid for interest and income taxes of $22.4 million and $14.5 million, respectively. These unfavorable changes were partially offset by lower rent payments of $7.2 million from payment deferrals we received from our landlords, lower marketing payments due to timing and an increase in our marketing fund surplus of $8.0 million, and lower severance payments of $7.0 million.
Pension and Postretirement Contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of January 1, 2020, the date of our last actuarial funding valuation for our qualified pension plan, there was no minimum contribution funding requirement. In both 2020 and 2019, we contributed $6.2 million to our pension and postretirement plans. We do not anticipate making any contributions to our qualified defined benefit pension plan in fiscal 2021. For additional information, refer to Note 12, Retirement Plans , of the notes to the consolidated financial statements.
Investing Activities . Cash flows provided by investing activities increased $42.9 million in 2020 compared to 2019, primarily due to a decrease of $28.1 million in capital expenditures, an increase of $28.4 million in proceeds received on the sale or sale and leaseback of property and equipment; partially offset by a decrease of $16.8 million in repayments of notes receivable issued in connection with 2018 refranchising transactions.
Capital Expenditures — The composition of capital expenditures in each fiscal year is summarized in the table below ( in thousands ):
2020 2019
Restaurants:
Restaurant facility expenditures $ 9,056 $ 9,202
Purchases of assets intended for sale or sale and leaseback 440 21,660
New restaurants — 1,381
Other, including information technology 4,857 3,597
14,353 35,840
Corporate Services:
Information technology 3,505 9,405
Other, including facility improvements 1,670 2,404
5,175 11,809
Total capital expenditures $ 19,528 $ 47,649
Our capital expenditure program includes, among other things, restaurant remodeling, information technology enhancements, and investments in new locations and equipment. In 2020, capital expenditures decreased compared to a year ago primarily due to the Company reducing capital expenditures to essential spend only to provide additional liquidity and financial flexibility given this year’s uncertainty surrounding the pandemic. In addition, purchases of assets intended for sale and leaseback decreased by $21.2 million, primarily due to the Company’s purchase of a $17.3 million multi-tenant commercial property during the fourth quarter of 2019. The Company completed the sale and leaseback of the company-operated restaurant parcel during the first quarter of 2020 and received net proceeds of $17.4 million.
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Financing Activities . Cash flows used in financing activities increased by $81.6 million in 2020 compared to 2019, mainly due to lower net borrowings of $101.2 million as a result of net proceeds received in the prior year from our refinancing transaction, partially offset by borrowings on our variable funding notes in the current year, and an increase in stock repurchases of $17.9 million. These unfavorable changes were partially offset by a lower cash used for dividends payments of $13.6 million as a result of temporarily suspending our quarterly dividend for the second quarter of fiscal 2020 which we reinstated the following quarter, and interest rate swap termination payments of $23.6 million made in the prior year a result of the retirement of our senior credit facility.
Long-Term Debt
As of September 27, 2020, our long-term debt consists of $1,290.3 million of total principal outstanding on the Class A-2 Notes (as defined below). During the second quarter of 2020, the Company borrowed $107.9 million under our $150.0 million Variable Funding Notes (as defined below) as a precautionary measure given the uncertainty surrounding the pandemic. As of September 27, 2020, borrowing availability under our Variable Funding Notes was $2.7 million and $39.5 million of letters of credit were outstanding.
On July 8, 2019, Jack in the Box Funding, LLC (the “Master Issuer”), a limited-purpose, bankruptcy-remote, wholly owned indirect subsidiary of the Company, completed its securitization transaction and issued $575.0 million of its Series 2019-1 3.982% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”), $275.0 million of its Series 2019-1 4.476% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II Notes”) and $450.0 million of its Series 2019-1 4.970% Fixed Rate Senior Secured Notes, Class A-2-III (the “Class A-2-III Notes”) and together with the Class A-2-I Notes and the Class A-2-II Notes, (the “Class A-2 Notes”), in an offering exempt from registration under the Securities Act of 1933, as amended. In connection with the issuance of the Class A-2 Notes, the Master Issuer also entered into a revolving financing facility of Series 2019-1 Variable Funding Senior Secured Notes, Class A-1 (the “Variable Funding Notes”), which allows for the drawing of up to $150.0 million under the Variable Funding Notes and the issuance of letters of credit. The Class A-2 Notes and the Variable Funding Notes are referred to collectively as the “Notes.”
Interest and principal payments on the Class A-2 Notes are payable on a quarterly basis. The quarterly principal payment of $3.25 million 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. We made three principal payments of $3.25 million each during 2020. As of September 27, 2020, the Company’s actual leverage ratio was under 5.0x, and as a result, quarterly principal payments are not required.
The legal final maturity date of the Class A-2 Notes is in August 2049, but it is expected that, unless earlier prepaid to the extent permitted under the Indenture, the anticipated repayment dates of the Class A-2-I Notes, the Class A-2-II Notes and the Class A-2-III Notes will be August 2023, August 2026 and August 2029, respectively (the “Anticipated Repayment Dates”). If the Master Issuer has not repaid or refinanced the Class A-2 Notes prior to the respective anticipated repayment date, additional interest will accrue pursuant to the Indenture.
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 September 27, 2020, the Master Issuer had restricted cash of $37.3 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. During fiscal 2020, with uncertainty surrounding COVID-19 events, and as a cautionary measure, we voluntarily elected to fund quarterly interest payments due in February 2021.
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 September 27, 2020, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.
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Capital Allocation
Repurchases of Common Stock — During fiscal 2020, we repurchased 1.9 million shares at an aggregate cost of $153.5 million. Repurchases of common stock included in our consolidated statement of cash flows for fiscal 2020 include $2.0 million related to repurchase transactions traded in fiscal 2019 but settled in fiscal 2020. As of September 27, 2020, there was approximately $122.2 million remaining under Board-authorized stock buyback programs, consisting of $22.2 million which expires in November 2020 and $100.0 million that expires in November 2021.
On November 13, 2020, the Board of Directors authorized an additional $100.0 million share repurchase program to more than offset the $22.2 million authorization that was set to expire at the end of November 2020. This brings the total remaining under share repurchase programs to $200.0 million, consisting of $100.0 million which expires in November 2021 and $100.0 million which expires in November 2022.
Dividends — In fiscal 2020, the Board of Directors declared three cash dividends of $0.40 per share totaling $27.7 million. In fiscal 2019, the Board of Directors declared four cash dividends of $0.40 per share totaling $41.4 million. Future dividends are subject to approval by our Board of Directors.
Off-Balance Sheet Arrangements
We have entered into certain off-balance sheet contractual obligations and commitments in the ordinary course of business, which are recognized in our consolidated financial statements in accordance with U.S. generally accepted accounting principles. We are not a party to any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
The following is a summary of our contractual obligations and commercial commitments as of September 27, 2020 ( in thousands ):
Payments Due by Fiscal Year
Total Less than
1 year 1-3 years 3-5 years After 5 years
Contractual Obligations:
Long-term debt obligations (1) $ 1,398,127 $ — $ 570,688 $ — $ 827,439
Interest payments on debt obligations 355,624 59,566 119,132 73,682 103,244
Finance lease obligations 3,171 917 1,810 424 20
Operating lease obligations 1,149,301 215,039 308,502 207,910 417,850
Purchase commitments (2) 73,378 16,452 32,100 24,826 —
Benefit obligations (3) 72,496 16,942 12,857 12,678 30,019
Total contractual obligations $ 3,052,097 $ 308,916 $ 1,045,089 $ 319,520 $ 1,378,572
Other Commercial Commitments:
Stand-by letters of credit (4) $ 39,500 $ 39,500 $ — $ — $ —
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(1) Includes mandatory principal payments on our Class A-1 and Class A-2 Notes. Amounts are reflected through the anticipated repayment dates as described further above in “Liquidity and capital resources.”
(2) Includes non-cancelable purchase commitments related to information technology agreements and volume commitments for beverage products.
(3) Includes expected payments associated with our non-qualified defined benefit plan, postretirement healthcare plans and our non-qualified deferred compensation plan through fiscal 2029.
(4) Consists primarily of letters of credit for interest reserves required under the Indenture and insurance.
We maintain a noncontributory defined benefit pension plan (“Qualified Plan”) covering substantially all full-time employees hired before January 1, 2011. Our policy is to fund our Qualified Plan at amounts necessary to satisfy the minimum amount required by law, plus additional amounts as determined by management to improve the plan’s funded status. Contributions beyond fiscal 2020 will depend on pension asset performance, future interest rates, future tax law changes, and future changes in regulatory funding requirements. Based on the funding status of our Qualified Plan as of our last measurement date, there was no minimum contribution required in 2020. For additional information related to our pension plans, refer to Note 12, Retirement Plans , of the notes to the consolidated financial statements.
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DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1, Nature of Operations and Summary of Significant Accounting Policies , of the notes to the consolidated financial statements.
Long-lived Assets — We evaluate long-lived assets, such as property and equipment and operating lease right-of-use assets, for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Factors that we consider important individually or in combination trigger an impairment review include, but are not limited to, bankruptcy proceedings or other significant financial distress of a lessee, significant underperformance relative to historical or projected operating results, significant changes in our business and/or negative industry or economic trends, or our expectation to dispose of long-lived assets before the end of their estimated useful lives. Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. For company-operated restaurants, the impairment test is performed at the individual-restaurant level. The impairment test for long-lived assets requires us to assess the recoverability of long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the carrying amount of a long-lived asset group exceeds the sum of related undiscounted future cash flows, we recognize an impairment loss by the amount that the carrying value of the assets exceeds fair value. Our estimates of cash flows used to assess impairment are subject to a high degree of judgment and may differ from actual cash flows due to, among other things, changes in our business plans, operating performance, and economic conditions.
Self-Insurance — We are self-insured for a portion of our losses related to workers’ compensation, general liability and other legal claims, and health benefits. In estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses, which are based on statistical analysis of historical data. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater number of claims occur compared to what was estimated, or should medical costs increase beyond what was expected, accruals might not be sufficient, and additional expense may be recorded.
Legal Accruals — The Company is subject to claims and lawsuits in the ordinary course of its business. A determination of the amount accrued, if any, for these contingencies is made after analysis of each matter. We continually evaluate such accruals and may increase or decrease accrued amounts as we deem appropriate. Because lawsuits are inherently unpredictable, and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgment about future events. As a result, the amount of ultimate loss may differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1, Nature of Operations and Summary of Significant Accounting Policies , of the notes to the consolidated financial statements for a discussion of the impact of new accounting pronouncements on our consolidated financial statements.