What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-11-23 compared with 2020-11-18 · 139 added, 174 removed, 169 unchanged (65% of the section changed)

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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.

Comparisons under this heading refer to the 53-week period ended October 3, 2021 and 52-week period ended September 27, 2020 for fiscal 2021 and fiscal 2020, respectively.

A comparison of our results of operations and cash flows for fiscal 2020 compared to fiscal 2019 can be found under Part II, “Item 7.

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• Overview — a general description of our business and fiscal 2021 highlights.

• Financial reporting — a discussion of changes in presentation, if any.

• Results of Operations — an analysis of our consolidated statements of earnings for fiscal 2021 compared to fiscal 2020.

• 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.

• Liquidity and Capital Resources — an analysis of our cash flows, including capital expenditures, share repurchase activity, dividends, and known trends that may impact liquidity.

• Critical Accounting Estimates — a discussion of accounting policies that require critical judgments and estimates.

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.

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• 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.

Same-store sales, restaurant sales, and AUVs are presented for franchised restaurants.

Franchise sales represent sales at franchise restaurants and are revenues of our franchisees.

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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 believe franchise and system same-store sales, franchised and system-wide 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 gains or losses from discontinued operations, income taxes, interest expense, net, gains on the sale of company-operated restaurants, impairment and other (gains) charges, net, depreciation and amortization, 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.

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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.

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.

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.

As of October 3, 2021, we operated and franchised 2,218 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.

• 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.

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 drive-thru, carryout, and delivery capabilities have positioned us to continue our strong systemwide sales growth in 2021;

however, our business has been challenged by COVID-19 related labor availability and wage inflation.

As a result of labor challenges, we and our franchisees have had to reduce hours of operations and keep dining rooms closed at certain locations.

While we have not had significant disruptions in our supply chain, we have experienced some product shortages and higher costs and inflationary pressures.

The pandemic has affected consumer behavior with increased focus on digital sales.

We have seen significant growth in our digital sales and continue to support enhancements of our digital ordering and off-premise channels, such as delivery.

While we do not know the future impact COVID-19 will have on our business, we expect labor and supply chain challenges and inflation to continue into at least fiscal 2022.

Other Developments

As previously announced, a franchisee that operated 68 restaurants in the Midwest 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.

On May 5, 2021 the franchisee filed a motion with the court rejecting three of the locations, two of which were permanently closed in fiscal 2020.

On August 26, 2021, in response to a subsequent motion to reject two additional locations, the court authorized such rejections as of the dates previously agreed upon by the parties.

On November 15, 2021, the franchisee filed an additional motion with the court rejected a total of 5 more locations.

The franchisee’s remaining restaurants continue to operate with the franchisee remaining current with their obligations to us.

The Company does not expect to acquire and operate any restaurants as part of the sale of these restaurants and our current expectation is the remaining restaurants will be transferred to one or more other franchise partners.

Financial Highlights for Fiscal 2021

• Systemwide sales for the year increased 13.1% as compared to 2020.

The increase is inclusive of the favorable 53rd week in the fourth quarter of 2021, which resulted in incremental systemwide sales of $77.9 million.

Excluding the 53rd week, systemwide sales in fiscal 2021 increased 11.0%.

• System same-store sales for the year increased 10.3%.

• Total revenues for the year increased 12.0%.

The increase is inclusive of the favorable 53rd week in the fourth quarter of 2021, which resulted in incremental revenue of approximately $21.3 million.

• Earnings from operations for the year increased 25.7%.

• Net earnings and Diluted EPS increased 84.7% and 90.9%, respectively.

• Adjusted EBITDA increased in 2021 to $331.4 million from $274.2 million, or 21%.

The increase is inclusive of the favorable 53rd week in the fourth quarter of 2021, which resulted in incremental Adjusted EBITDA of $5.6 million.

• Net units down 1.0% with 37 closures and 14 store openings during the year.

RESULTS OF OPERATIONS FOR FISCAL 2021 AND 2020

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Occupancy and other (1) 15.9 % 15.5 %

Franchise occupancy expenses (excluding depreciation and amortization) (2) 65.5 % 61.1 %

Franchise occupancy expenses (2) 62.0 % 65.5 %

Franchise support and other costs (3) 6.4 % 7.3 %

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Depreciation and amortization 4.1 % 5.2 %

Impairment and other charges, net (0.6) % 1.3 %

Impairment and other gains, net (0.3) % (0.6) %

Gains on the sale of company-operated restaurants (0.4) % (0.3) %

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(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:

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

Company 6.1 % 3.1 %

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System 10.3 % 4.0 %

The following table summarizes the changes in the number and mix of company and franchise restaurants in each fiscal year:

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

Company Franchise Total Company Franchise Total

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% of system 7 % 93 % 100 % 6 % 94 % 100 %

The following table summarizes the restaurant sales for company-owned, franchised, and total system-wide restaurants (in thousands) :

Company-owned restaurant sales $ 348,987 $ 336,807

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

Company-operated restaurant sales $ 387,766 $ 348,987

Franchised restaurant sales (1) 3,767,574 3,323,745

System sales (1) $ 3,672,732 $ 3,504,727

Systemwide sales (1) $ 4,155,340 $ 3,672,732

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Gains on the sale of company-operated restaurants (4,203) (3,261)

Impairment and other charges, net (6,493) 12,455

Impairment and other gains, net (3,382) (6,493)

Depreciation and amortization 46,500 52,798

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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) :

The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands) :

Company restaurant sales $ 387,766 $ 348,987

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Occupancy and other $ 61,743 15.9 % $ 54,157 15.5 %

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.

Company restaurant sales increased $38.8 million, or 11.1%, in 2021 as compared with the prior year.

In 2021, the increase was primarily driven by average check growth, menu price increases, an increase in the average number of restaurants and the impact of the 53rd week, partially offset by a decline in traffic.

The following table presents the approximate impact of these items on company restaurant sales in 2021 ( in millions ):

AUV increase $ 24.0

Increase in the average number of restaurants 7.5

53rd week 7.3

Total change in company restaurant sales $ 38.8

Same-store sales at company-operated restaurants increased 6.1% in 2021 compared to a year ago.

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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.

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;

(1) Includes price increases of 3.5% in 2021.

Food and packaging costs as a percentage of company restaurant sales decreased by 0.3% to 29.1% in 2021 from 29.4% a year ago, primarily due to favorable sales mix of 0.8% and menu price increases of 0.9%, partially offset by a 1.3% increase in commodities.

Commodity costs increased in the current fiscal year by approximately 5.1% primarily due to increases in pork and beverages.

For fiscal 2022, we expect annual commodity cost inflation to be up 6% to 7% compared with fiscal 2021.

Payroll and employee benefit costs as a percentage of company restaurant sales increased to 30.7% in 2021 compared with 30.5% a year ago primarily due to labor inflation, higher incentive compensation costs and a change in the mix of restaurants due to franchisee acquisitions.

Labor inflation was approximately 7.2% in the current fiscal year.

For fiscal 2022, we expect annual wage inflation to be up 8% to 10% compared with fiscal 2021.

Occupancy and other costs as a percentage of company restaurant sales increased to 15.9% in 2021 from 15.5% a year ago due primarily to higher costs for delivery fees as we grow our delivery sales mix, higher costs for utilities and the acquisition of 20 restaurants with lower than average sales volumes;

partially offset by leverage from higher same-store sales.

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Franchise restaurant AUV (1) $ 1,790 $ 1,595

Increase in franchise-operated same-store sales 4.0 % 1.3 %

Royalties as a percentage of total franchise restaurant sales 5.1 % 5.2 %

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.

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(1) 2021 AUV is adjusted to exclude the 53rd week for the purpose of comparison to prior year.

Franchise rental revenues increased $26.0 million, or 8.1%, in 2021 compared to the prior year, primarily due to higher AUVs resulting in an increase in revenues from percentage rent.

In 2021, additional rent revenue of approximately $6.5 million from a 53rd week also contributed to the increase.

Franchise royalties and other increased $26.4 million, or 14.8%, primarily due to higher royalties of $22.5 million as a result of higher AUVs and additional royalties of approximately $3.6 million from a 53rd week.

Additionally, fees received in connection with the early termination of franchise agreements increased by $3.3 million.

Franchise contributions for advertising and other services increased $31.0 million, or 17.9%, primarily due to higher marketing contributions of $29.9 million, as a result of higher AUVs, additional contributions of approximately $3.5 million from a 53rd week, and a reduction in contribution percentages for March 2020 and April 2020 marketing fees in response to the pandemic which contributed to lower fees of $7.9 million in the prior year.

Franchise occupancy expenses, primarily rent, increased $4.9 million in 2021, primarily due to additional costs of approximately $4.0 million from a 53rd week.

Franchise support and other costs remained flat in 2021, primarily to lower bad debt expense of $1.7 million related to specific franchise situations that occurred in the prior year, offset by higher costs related to a franchise business conference and brand standard audits.

Franchise advertising and other service expenses increased $29.5 million, or 16.3% in 2021 primarily due to an increase in marketing contributions of $29.9 million.

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.

Depreciation and amortization decreased $6.3 million in 2021 as compared with the prior year, primarily due to certain of our franchise building assets becoming fully depreciated.

Selling, General and Administrative (“SG&A”) Expenses

The following table presents the increase (decrease) in SG&A expenses in 2021 compared with the prior year ( in thousands ):

Advertising $ (1,888)

Advertising (excluding 53rd week) $ 2,083

Incentive compensation (including share-based compensation and related payroll taxes) 2,585

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Insurance (1,351)

Other (includes transition services income and savings related to our restructuring plan) 4,533

53rd week 1,844

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.

Advertising costs, on a comparable 52-week basis, increased $2.1 million primarily due to higher company-operated restaurant sales and a decrease in the contribution percentage in the prior year.

Incentive compensation increased by $2.6 million in 2021 primarily due to higher achievement levels compared to the prior year for the Company’s annual incentive plan, partially offset by a $0.3 million decrease in stock-based compensation as a result of turnover at the executive level in 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 $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 ):

Restructuring costs $ 1,168 $ 8,455

Costs of closed restaurants and other 1,872 8,628

The changes in market values had a positive impact of $6.2 million versus the prior year as a result of $9.1 million of gains recognized in the year compared to $2.9 million of gains in the prior year.

Litigation matters increased by $1.2 million in 2021 primarily due to a $3.8 million favorable settlement received in the prior year from a class action lawsuit related to credit card interchange fees, partially offset by $2.6 million lower costs on certain employee and other litigation matters.

Refer to Note 16, Commitments and Contingencies , of the notes to the consolidated financial statements for additional information.

Insurance costs decreased $1.4 million in 2021 versus the prior year primarily due to more favorable trends in the current year related to expected losses associated with workers’ compensation claims.

Impairment and Other Gains, Net

Impairment and other gains, net is comprised of the following ( in thousands ):

Gains on disposition of property and equipment, net (6,888) (9,768)

Costs of closed restaurants and other 1,907 1,872

Accelerated depreciation 1,592 235

Restructuring costs 7 1,168

$ (3,382) $ (6,493)

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.

Impairment and other gains, net decreased $3.1 million in 2021 versus the prior year primarily due to lower gains on the disposition of property and equipment of $2.9 million.

In 2021, gains related to the sale of restaurant properties versus a gain on the sale of one of our corporate office buildings in the prior year.

Refer to Note 9, Impairment and Other (Gains) Charges, Net, of the notes to the consolidated financial statements for additional information.

Gains on the Sale of Company-Operated Restaurants

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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.

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.

Other pension and post-retirement expenses, net decreased by $40.8 million in 2021 versus the prior year, primarily due to non-cash pension settlement charges of $39.2 million in the prior year.

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 ):

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

Interest expense $ 67,600 $ 67,273

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Interest expense, net $ 67,458 $ 66,743

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.

Interest expense, net, increased $0.7 million in 2021 primarily due to interest from the 53rd contributing an additional $1.2 million and lower interest income of $0.4 million;

partially offset by lower average borrowings as a result of paying down our Variable Funding Notes in 2021.

The income tax provisions reflect effective tax rates of 25.2% and 26.8% in fiscal years 2021 and 2020, 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.

The major components of the year-over-year change in tax rates were a decrease in the impact of non-deductible compensation for certain officers, a decrease in nondeductible costs resulting from a California Private Attorney General Act lawsuit settled in the prior year, and an increase in non-taxable gains from the market performance of insurance products used to fund certain non-qualified retirement plans, partially offset by an adjustment to state taxes recorded in the second quarter of fiscal year 2021.

LIQUIDITY AND CAPITAL RESOURCES

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.

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 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 Variable Funding Notes.

As of October 3, 2021, the Company had $73.6 million of cash and restricted cash on its balance sheet and $110.5 million of borrowing availability under its Variable Funding Notes.

Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, combined with our securitized financing facility including our Variable Funding Notes, 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.

The table below summarizes our cash flows from continuing operations activities for each of the last two fiscal years ( in thousands ):

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Financing activities (343,545) (87,289)

Net increase in cash from continuing operations $ 85,359 $ 148,856

Net cash flows $ (163,352) $ 85,359

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.

Operating cash flows increased $57.6 million compared with a year ago, primarily due to an increase in net income adjusted for non-cash items of $27.4 million and favorable changes in working capital of $30.2 million, primarily due to a favorable change in accounts receivable of $32.9 million, as a result of the repayment of franchise marketing and rent deferrals provided in the prior year, a favorable change in accrued liabilities of $24.8 million mainly from an increase in deferred rent income driven by collections of October rent in the 53rd week in fiscal 2021;

partially offset by an unfavorable change in operating lease right-of-use assets and lease liabilities of $25.3 million due to payment of October rent in the 53rd week and the repayment of deferrals we received from our landlords in the prior year.

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.

As of the date of our last actuarial funding valuation for our qualified pension plan, there was no minimum contribution funding requirement.

In 2021 and 2020, we contributed $6.1 million and $6.2 million, respectively, to our pension and postretirement plans.

We do not anticipate making any contributions to our qualified defined benefit pension plan in fiscal 2022.

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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.

Cash flows used in investing activities increased $50.1 million in 2021 compared to 2020, primarily due to $21.5 million higher capital expenditures, $15.9 million lower proceeds on sale and leaseback transactions, and $11.0 million lower proceeds received on the sale of property and equipment, primarily due to proceeds received on the sale of a corporate office building in the prior year.

Capital Expenditures — The composition of capital expenditures in each fiscal year is summarized in the table below ( in thousands ):

Remodel / refresh programs $ 9,018 $ 6,000

Restaurant facility expenditures 7,491 3,495

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

Purchases of assets intended for sale and leaseback 15,538 440

Restaurant information technology 3,503 4,417

35,550 14,352

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Information technology 1,485 3,506

Other, including facility improvements 1,670 2,404

Corporate facilities 3,973 1,670

Total capital expenditures $ 41,008 $ 19,528

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.

In 2021, capital expenditures increased by $21.5 million compared to a year ago primarily due to a $15.1 million increase in purchases of assets intended for sale and leaseback.

In 2021 and 2020, we exercised our right of first refusal related to six and one leased restaurant properties, respectively.

We use sale and leaseback financing to lower the initial cash investment in our restaurants to the cost of the equipment, whenever possible.

The following table summarizes the cash flow activity related to these transactions in each fiscal year ( dollars in thousands ):

Number of restaurants sold and leased back 2 2

Proceeds from sale and leaseback of assets $ 3,884 $ 19,828

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.

Cash flows used in financing activities increased by $256.3 million compared with a year ago, primarily due to our repayment during the second quarter of $107.9 million of 2020 borrowings on our Variable Funding Notes and an increase in stock repurchases of $44.4 million.

Repurchases of Common Stock — In fiscal 2021, the Company purchased 1.9 million shares of its common stock for an aggregate cost of $200.0 million.

As of October 3, 2021, there was no remaining amount under share repurchase programs authorized by the Board of Directors.

On November 19, 2021, the Board of Directors authorized an additional $200.0 million stock buy-back program that expires on November 20, 2023.

Dividends — In fiscal 2021, the Board of Directors declared four quarterly cash dividends of $0.40 per share in the first and second quarter and $0.44 per share in the third and fourth quarter, totaling $37.6 million.

Future dividends are subject to approval by our Board of Directors.

Long-Term Debt — As of October 3, 2021, our long-term debt consists of $1,290.3 million of total principal outstanding on the Class A-2 Notes (as defined below).

Given the uncertainty arising from COVID-19, we took a precautionary measure and borrowed $107.9 under the Variable Funding Notes during the second quarter of 2020, which was fully repaid in the second quarter of 2021.

As of October 3, 2021, we had no outstanding borrowings and $110.5 million of available borrowing capacity under our Variable Funding Notes, net of letters of credit issued of $39.5 million.

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.

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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.

In 2021, the Company’s actual leverage ratio was under 5.0x, and as a result, quarterly principal payments were 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.

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 October 3, 2021, the Master Issuer had restricted cash of $18.2 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 September 27, 2020, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.

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

As of October 3, 2021, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events.

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 $ — $ — $ —

________________________

(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.

Our cash requirements greater than twelve months from contractual obligations and commitments include:

Debt Obligations and Interest Payments — Refer to Note 7, Indebtedness , of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Operating and Finance Leases — Refer to Note 8, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Purchase Commitments — Purchase obligations includes non-cancelable purchase commitments related to information technology agreements and volume commitments for beverage products.

Refer to Note 16, Commitments and Contingencies , for further detail of our obligations and the timing of expected future payments.

Benefit Obligations — Refer to Note 12, Retirement Plans , of the notes to the consolidated financial statements for further information regarding our obligations and the timing of expected payments under our non-qualified defined benefit plan and postretirement healthcare plans.

DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

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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.

Long-lived Assets — We review our 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.

The impairment test for long-lived assets requires us to assess the recoverability of long-lived asset groups by comparing their net carrying value to the sum of undiscounted estimated future cash flows expected to be generated through leases and/or subleases or by our individual company-operated restaurants.

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.

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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.

In estimating our self-insurance accruals, we utilize independent actuarial estimates of expected losses and assumptions related to the loss development factors, which are based on statistical analysis of historical data.

These assumptions are closely monitored and adjusted when warranted by changing circumstances.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis