# JACK IN THE BOX INC (JACK) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from JACK IN THE BOX INC's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/807882/000080788223000020/jack-20231001.htm Accession: 0000807882-23-000020 Filing date: 2023-11-21 Report date: 2023-10-01 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/JACK/ All MD&A years: /company/JACK/mda/ Previous year: /company/JACK/mda/fy2022/ (FY 2022) Next year: /company/JACK/mda/fy2024/ (FY 2024) 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 October 1, 2023 and October 2, 2022, respectively. A comparison of our results of operations and cash flows for fiscal 2022 compared to fiscal 2021 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 October 2, 2022. Our MD&A consists of the following sections: •Overview — a general description of our business. •Results of Operations — an analysis of our consolidated statements of earnings for fiscal 2023 compared to fiscal 2022. •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. •New accounting pronouncements — a discussion of new accounting pronouncements, dates of implementation and the impact on our consolidated financial position or results of operations, if any. •Cautionary statements regarding forward-looking statements — a discussion of the risks and uncertainties that may cause our actual results to differ materially from any forward-looking statements made by management. We have included in our MD&A certain performance metrics that management uses to assess company performance and which we believe will be useful in analyzing and understanding our results of operations. These metrics include: •Changes in sales at restaurants open more than one year (“same-store sales”), system restaurant sales, franchised restaurant sales, and average unit volumes (“AUVs”). 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. 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-wide sales, and AUV information are useful to investors as they have a direct effect on the Company’s profitability. Same-store sales, system restaurant sales, franchised restaurant sales and AUVs are not measurements determined in accordance with GAAP and should not be considered in isolation, or as an alternative to earnings from operations, or other similarly titled measures of other companies. OVERVIEW Our Business Founded in 1951, Jack in the Box Inc. (the “Company”) operates and franchises Jack in the Box® quick-service restaurants. As of October 1, 2023, we operated and franchised 2,186 Jack in the Box quick-service restaurants, primarily in the western and southern United States, including two in Guam. On March 8, 2022, we completed the acquisition of Del Taco Restaurants, Inc. (“Del Taco”), the nation’s second largest Mexican quick service restaurant chain by number of restaurants and as of October 1, 2023 has 592 restaurants across 16 states. We derive revenue from retail sales at company-operated restaurants and rental revenue, royalties (based upon a percent of sales), franchise fees and contributions for advertising and other services from franchisees. Refranchising of Del Taco In fiscal year 2023, we embarked on our refranchising strategy with three main intentions. First, to create a company-wide asset-light model that will benefit from mitigating exposure to macroeconomic pressures; second, to generate incremental development agreements throughout the refranchising process that provide a more robust unit growth pipeline than otherwise achievable; and third, to provide a more efficient capital structure. Our objective is to be asset-light as we navigate market forces. We refranchised 111 Del Taco restaurants in fiscal year 2023, and added 109 new development commitments as a result of the refranchising effort. 27 RESULTS OF OPERATIONS FOR FISCAL 2023 AND 2022 The following tables summarize changes in same-store sales for Jack in the Box and Del Taco company-operated, franchised, and system restaurants: [[GREPCENT_TABLE]] [["Jack in the Box:","","2023","","2022"],["Company","","8.8","%","","3.7","%"],["Franchise","","7.1","%","","0.6","%"],["System","","7.3","%","","0.9","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Del Taco:","","2023","","2022 (1)"],["Company","","2.0","%","","2.9","%"],["Franchise","","1.4","%","","5.0","%"],["System","","1.7","%","","3.9","%"]] [[/GREPCENT_TABLE]] ________________________ (1)    Fiscal 2022 full year same store sales figures are shown for information purposes only. The following tables summarize changes in the number and mix of company and franchise restaurants for our two brands: [[GREPCENT_TABLE]] [["","","2023","","2022"],["Jack in the Box:","","Company","","Franchise","","Total","","Company","","Franchise","","Total"],["Beginning of year","","146","","","2,035","","","2,181","","","163","","","2,055","","","2,218"],["New","","2","","","18","","","20","","","\u2014","","","17","","","17"],["Acquired from franchisees","","\u2014","","","\u2014","","","\u2014","","","13","","","(13)","","","\u2014"],["Refranchised","","(5)","","","5","","","\u2014","","","(15)","","","15","","","\u2014"],["Closed","","(1)","","","(14)","","","(15)","","","(15)","","","(39)","","","(54)"],["End of year","","142","","","2,044","","","2,186","","","146","","","2,035","","","2,181"],["% of system","","6","%","","94","%","","100","%","","7","%","","93","%","","100","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","2023","","2022 (1)"],["Del Taco:","","Company","","Franchise","","Total","","Company","","Franchise","","Total"],["Beginning of year","","290","","","301","","","591","","","296","","","306","","","602"],["New","","\u2014","","","14","","","14","","","1","","","2","","","3"],["Refranchised","","(111)","","","111","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Closed","","(8)","","","(5)","","","(13)","","","(7)","","","(7)","","","(14)"],["End of year","","171","","","421","","","592","","","290","","","301","","","591"],["% of system","","29","%","","71","%","","100","%","","49","%","","51","%","","100","%"]] [[/GREPCENT_TABLE]] ________________________ (1)    Fiscal 2022 full year restaurant activity figures are shown for information purposes only. 28 The following tables summarize restaurant sales for company-operated, franchised, and systemwide sales for our two brands (in thousands): [[GREPCENT_TABLE]] [["Jack in the Box:","2023","","2022"],["Company-operated restaurant sales","$","413,748","","","$","414,225"],["Franchised restaurant sales (1)","4,005,985","","","3,696,817"],["Systemwide sales (1)","$","4,419,733","","","$","4,111,042"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["Del Taco:","2023","","2022 (2)"],["Company-operated restaurant sales","$","432,530","","","$","484,347"],["Franchised restaurant sales (1)","541,913","","","472,682"],["Systemwide sales (1)","$","974,443","","","$","957,029"]] [[/GREPCENT_TABLE]] ________________________ (1)Franchised restaurant sales represent sales at franchised restaurants and are revenues of our franchisees. Systemwide 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 systemwide sales information is useful to investors as they have a direct effect on the Company's profitability. (2)Fiscal 2022 full year systemwide sales figures are shown for information purposes only. Jack in the Box Brand Company Restaurant Operations The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Company restaurant sales","","$","413,748","","","","","$","414,225"],["Company restaurant costs:"],["Food and packaging","","$","130,904","","","31.6","%","","$","133,815","","","32.3","%"],["Payroll and employee benefits","","$","127,357","","","30.8","%","","$","138,038","","","33.3","%"],["Occupancy and other","","$","69,215","","","16.7","%","","$","74,337","","","17.9","%"]] [[/GREPCENT_TABLE]] Company restaurant sales decreased $0.5 million, or 0.1%, in 2023 as compared with the prior year due to a decrease in the average number of restaurants, partially offset by an increase in traffic and average check. The following table presents the approximate impact of these items on company restaurant sales in 2023 (in millions): [[GREPCENT_TABLE]] [["","","2023 vs. 2022"],["AUV increase","","$","32.4"],["Decrease in the average number of restaurants","","(32.9)"],["Total change in company restaurant sales","","$","(0.5)"]] [[/GREPCENT_TABLE]] Same-store sales at company-operated restaurants increased 8.8% in 2023 compared to a year ago. The following table summarizes the changes in company-operated same-store sales:  [[GREPCENT_TABLE]] [["","","2023 vs. 2022"],["Transactions","","2.5","%"],["Average check (1)","","6.3","%"],["Change in same-store sales","","8.8","%"]] [[/GREPCENT_TABLE]] ________________________ (1)Includes price increases of 8.5% in 2023. Food and packaging costs, as a percentage of company restaurant sales, decreased to 31.6% in 2023 from 32.3% a year ago, primarily due to a 2.4% impact from pricing leverage and 0.6% from favorable menu item mix, partially offset by 2.3% from commodity inflation. Commodity costs increased in the current fiscal year by approximately 8.4%. The inflation we have experienced is across all categories with the greatest impact seen in potatoes, produce, sauces, and beverages. 29 Payroll and employee benefit costs, as a percentage of company restaurant sales, decreased to 30.8% in 2023 compared with 33.3% a year ago primarily due to a change in the mix of restaurants and sales leverage, partially offset by labor inflation of approximately 5.8% in the current fiscal year. For fiscal 2024, we expect annual wage inflation to be approximately 10% to 12% compared with fiscal 2023. New regulations, such as AB 1228, which goes into effect April 2024, are expected to increase labor costs, especially considering our concentration of restaurants in California. Occupancy and other costs, as a percentage of company restaurant sales, decreased to 16.7% in 2023 from 17.9% a year ago primarily due to sales leverage and a change in the mix of restaurants, partially offset by higher other operating costs including utilities, delivery fees and security. Jack in the Box 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): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Franchise rental revenues","","$","351,283","","$","335,936"],["Royalties","","207,064","","188,902"],["Franchise fees and other","","7,226","","14,309"],["Franchise royalties and other","","214,290","","203,211"],["Franchise contributions for advertising and other services","","215,990","","197,816"],["Total franchise revenues","","$","781,563","","$","736,963"],["Franchise occupancy expenses","","$","216,452","","$","211,260"],["Franchise support and other costs","","10,072","","15,622"],["Franchise advertising and other services expenses","","227,868","","206,192"],["Total franchise costs","","$","454,392","","$","433,074"],["Franchise costs as a percentage of total franchise revenues","","58.1","%","","58.8","%"],["Average number of franchise restaurants","","2,035","","2,031"],["Franchised restaurant sales","","$","4,005,985","","$","3,696,817"],["Franchise restaurant AUV","","$","1,968","","$","1,820"],["Royalties as a percentage of total franchise restaurant sales (1)","","5.2","%","","5.1","%"]] [[/GREPCENT_TABLE]] ________________________ (1)    Excluding the impact of the $7.3 million termination fee in the first quarter of the current year, royalties as a percentage of total franchised restaurant sales would be 5.0% year-to-date for the period ended October 1, 2023. Franchise rental revenues increased $15.3 million, or 4.6%, in 2023 compared to the prior year, primarily due to an increase in percentage rent of $10.6 million, driven by higher sales, and higher minimum rent of $4.8 million. Franchise royalties and other increased $11.1 million, or 5.5%, mainly in connection with higher franchise restaurant sales driving royalties higher by approximately $10.7 million. Additionally, a $7.3 million termination fee paid by a franchise operator who sold his restaurants to a new franchisee in the current year also contributed to the increase. These increases were partially offset by a decrease in early termination fees of $6.5 million as compared to the prior year. Franchise contributions for advertising and other services increased $18.2 million, or 9.2%, primarily due to higher marketing contributions of $16.8 million in connection with higher franchise same store sales of 7.1%. Franchise occupancy expenses, primarily rent, increased $5.2 million, or 2.5% in 2023, primarily due to higher operating lease costs. Franchise support and other costs decreased $5.6 million, or 35.5% in 2023, mainly in connection with lower bad debt expense of $6.6 million as a result of rolling over bad debt expense associated with two specific franchise matters last year. Franchise advertising and other service expenses increased $21.7 million, or 10.5% in 2023 primarily due to higher marketing contributions resulting from an increase in franchise sales. Del Taco Brand Jack in the Box Inc. acquired Del Taco on March 8, 2022. Fiscal 2022 results include approximately 30 weeks of operating results compared with 52 weeks in fiscal 2023. 30 Company Restaurant Operations The following table presents company restaurant sales and costs as a percentage of the related sales (dollars in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Company restaurant sales","","$","432,530","","","","","$","286,845"],["Company restaurant costs:"],["Food and packaging","","$","119,931","","","27.7","%","","$","82,531","","","28.8","%"],["Payroll and employee benefits","","$","147,241","","","34.0","%","","$","94,212","","","32.8","%"],["Occupancy and other","","$","94,057","","","21.7","%","","$","61,465","","","21.4","%"]] [[/GREPCENT_TABLE]] Company restaurant sales increased $145.7 million or 50.8%, in 2023 as compared with the prior year primarily due to 52 weeks of operating results in 2023 versus 30 weeks last year and an increase in average check, partially offset by a decrease in sales in connection with current year refranchising activity and a decline in transactions. The following table presents the approximate impact of these items on company restaurant sales (in millions): [[GREPCENT_TABLE]] [["","","2023 vs. 2022"],["Increase in number of operating weeks","","$","158.9"],["AUV increase","","0.4"],["Decrease in the average number of restaurants","","(13.6)"],["Total change in company restaurant sales","","$","145.7"]] [[/GREPCENT_TABLE]] Same-store sales at company-operated restaurants increased 2.0% in 2023 compared to a year ago. The following table summarizes the increases (decreases) in company-operated same-store sales: [[GREPCENT_TABLE]] [["","","2023 vs. 2022"],["Average check (1)","","6.0","%"],["Transactions","","(4.0)","%"],["Change in same-store sales","","2.0","%"]] [[/GREPCENT_TABLE]] ________________________ (1)Includes price increases of approximately 9.6% in 2023. Food and packaging costs, as a percentage of company restaurant sales, decreased to 27.7% in 2023 from 28.8% a year ago primarily due to a 2.5% benefit from pricing leverage, partially offset by 1.6% from commodity inflation. Commodity costs inflation was 5.9% in 2023. The largest sources of inflation in the current year were due to tortillas, shells and potatoes, and was partially offset by favorability in chicken, cheese and produce. Payroll and employee benefit costs, as a percentage of company restaurant sales, increased to 34.0% in 2023 compared with 32.8% a year ago primarily due to labor inflation. Labor inflation was 3.8% in the current year. For fiscal 2024, we expect annual wage inflation to be approximately 10% to 12% compared with fiscal 2023. Additional regulations, such as AB 1228, which will go into effect April 2024, are expected to increase labor costs for employees, especially considering our concentration of restaurants in California. Occupancy and other costs, as a percentage of company restaurant sales, increased to 21.7% in 2023 from 21.4% a year ago primarily due to higher operating expenses including utilities, rent, insurance, and delivery fees, partially offset by pricing leverage. 31 Del Taco Franchise Operations The following table presents franchise revenues and costs in each period and other information we believe is useful in analyzing the change in franchise operating results (dollars in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Franchise rental revenues","","$","13,308","","$","4,455"],["Royalties","","25,669","","13,414"],["Franchise fees and other","","556","","196"],["Franchise royalties and other","","26,225","","13,610"],["Franchise contributions for advertising and other services","","24,933","","11,985"],["Total franchise revenues","","$","64,466","","$","30,050"],["Franchise occupancy expenses","","$","13,150","","$","4,349"],["Franchise support and other costs","","2,259","","868"],["Franchise advertising and other services expenses","","25,666","","12,081"],["Total franchise costs","","$","41,075","","$","17,298"],["Franchise costs as a percentage of total franchise revenues","","63.7","%","","57.6","%"],["Number of franchise restaurants at end of period","","421","","301"],["Franchised restaurant sales","","$","541,913","","$","281,933"],["Franchised restaurant AUVs","","$","1,287","","$","937"],["Royalties as a percentage of total franchised restaurant sales","","4.7","%","","4.8","%"]] [[/GREPCENT_TABLE]] Franchise rental revenues increased $8.9 million, or 198.7% in 2023 compared to the prior year, primarily due to higher rental income of $5.1 million resulting from new subleases in connection with the 111 restaurants refranchised in 2023, as well as prior year only including 30 weeks of operating results versus 52 weeks in 2023. Franchise royalties and other increased $12.6 million, or 92.7% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as $2.9 million related to the increase in the number of franchise restaurants due to our refranchising strategy. Franchise contributions for advertising and other services revenues increased $12.9 million, or 108.0% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as $2.6 million related to the increase in the number of franchise restaurants due to our refranchising strategy. Franchise occupancy expenses, primarily rent, increased $8.8 million, or 202.4% in 2023 compared to the prior year, primarily due higher franchise rent expense of $5.1 million related to the restaurants refranchised in 2023, as well as the increase in operating weeks. Franchise support and other costs increased $1.4 million, or 160.3% in 2023 compared to the prior year, primarily due to the increase in operating weeks. Franchise advertising and other service expenses increased $13.6 million, or 112.4% in 2023 compared to the prior year, primarily due to the increase in operating weeks, as well as higher marketing contributions of $2.4 million related to the increase in the number of franchise restaurants due to our refranchising strategy. Company-Wide Results Depreciation and Amortization Depreciation and amortization increased $6.2 million in 2023 as compared with the prior year, primarily due to the timing of the acquisition of Del Taco in the second quarter of 2022 resulting in an increase of $10.1 million, partially offset by a decrease in Jack in the Box franchise assets depreciation of $3.9 million as these assets become fully depreciated. 32 Selling, General and Administrative (“SG&A”) Expenses The following table presents the amounts for each fiscal period as well as the increase (decrease) in SG&A expenses in 2023 compared with the prior year (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022"],["Advertising","$","38,753","","","$","32,557"],["Incentive compensation (including share-based compensation and related payroll taxes)","31,756","","","14,014"],["Cash surrender value of COLI policies, net","(5,953)","","","9,911"],["Litigation matters","7,001","","","(995)"],["Insurance","5,991","","","2,049"],["Other","95,324","","","73,287"],["","$","172,872","","","$","130,823"]] [[/GREPCENT_TABLE]] Advertising costs represent company contributions to our marketing funds and are generally determined as a percentage of company-operated restaurant sales. Advertising costs increased $6.2 million compared to the prior year primarily due to the increase in Del Taco operating weeks from 30 to 52 in the current year. Incentive compensation increased by $17.7 million in 2023 primarily due to a $13.7 million increase from higher achievement levels compared to the prior year for the Company’s annual incentive plan, as well as an increase in stock-based compensation of $4.1 million due to a higher number of executive stock awards outstanding compared to the prior year. The cash surrender value of our Company-owned life insurance (“COLI”) policies, net of changes in our non-qualified deferred compensation obligation supported by these policies, are subject to market fluctuations. The changes in market values had a negative impact of $15.9 million versus the prior year. Litigation matters increased by $8.0 million in 2023 primarily due to litigation developments mainly in connection with one litigation matter in the current year, and rolling over a $2.6 million favorable settlement received in the prior year. In fiscal 2023, we recorded litigation charges of $8.3 million for Gessele vs. Jack in the Box Inc., partially offset by a $1.6 million reversal in connection with the J&D Restaurant Group legal matter based on the Court’s final ruling. Refer to Note 16, Commitments and Contingencies, of the notes to the consolidated financial statements for additional information. Insurance costs increased $3.9 million in 2023 versus the prior year primarily due to more favorable trends in the prior year related to expected losses associated with workers’ compensation claims. The increase in other is primarily due to the timing of the Del Taco acquisition in the second quarter of 2022 and therefore prior year only included 30 weeks of operating results versus 52 weeks in 2023. Other Operating Expense (Income), Net Other operating expense (income), net is comprised of the following (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Acquisition, integration and strategic initiatives","","9,112","","","20,081"],["Costs of closed restaurants and other","","4,786","","","4,290"],["Restaurant impairment charges","","4,569","","","5,927"],["Accelerated depreciation","","541","","","1,124"],["Gains on disposition of property and equipment, net","","$","(8,171)","","","$","(30,533)"],["Other operating expense (income), net","","$","10,837","","","$","889"]] [[/GREPCENT_TABLE]] Other operating expense (income), net increased $9.9 million in 2023 versus the prior year primarily due to the lower gains on disposition of property and equipment of $22.4 million in connection with the sale of restaurant properties to franchisees, partially offset by a decrease in Del Taco acquisition and integration costs. Refer to Note 9, Other Operating Expense (Income), Net, of the notes to the consolidated financial statements for additional information. Gains on the Sale of Company-Operated Restaurants In 2023, gains on the sale of company-operated restaurants totaled $18.0 million and were related to the refranchising of 111 Del Taco restaurants and five Jack in the Box restaurants. In the prior year, gains on the sale of company-operated restaurants totaled $3.9 million and were related to the refranchising of 15 Jack in the Box restaurants. Refer to Note 4, Summary of Refranchisings and Franchise Acquisitions, of the notes to the consolidated financial statements for additional information. 33 Interest Expense, Net Interest expense, net, is comprised of the following (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Interest expense","","$","84,627","","","$","86,524"],["Interest income","","(2,181)","","","(449)"],["Interest expense, net","","$","82,446","","","$","86,075"]] [[/GREPCENT_TABLE]] Interest expense, net, decreased $3.6 million in 2023. Interest expense decreased $1.9 million due in part to the prior year $7.7 million loss on early extinguishment of debt not recurring in the current year, partially offset by increased expense of $6.2 million due to higher average debt levels year-over-year. Additionally, interest income increased in the current year primarily due to the higher cash balances throughout the year. Income Taxes The income tax provisions reflect effective tax rates of 30.9% and 28.5%, in fiscal years 2023 and 2022, respectively. The major components of the year-over-year increase in tax rates were the impact of non-deductible goodwill related to the sale of company-operated restaurants, partially offset by non-taxable gains in the current year as opposed to non-deductible losses in the prior year from the market performance of insurance products used to fund certain non-qualified retirement plans. LIQUIDITY AND CAPITAL RESOURCES General Our primary sources of liquidity and capital resources are cash flows from operations and borrowings available under our securitized financing facility. Our cash requirements consist principally of working capital, general corporate needs, capital expenditures, income tax payments, debt service requirements, franchise tenant improvement allowance and incentive distributions, dividend payments, and obligations related to our benefit plans. We generally reinvest available cash flows from operations to invest in our business, service our debt obligations, pay dividends and repurchase shares of our common stock. Our primary sources of short-term and long-term liquidity are expected to be cash flows from operations and available borrowings under our credit facilities. As of October 1, 2023, the Company had $185.9 million of cash and restricted cash on its consolidated balance sheet and available borrowings of $175.5 million under both the $150.0 million Variable Funding Notes and our $75.0 million revolving credit facility. The Company continually assesses the optimal sources and uses of cash for our business. Since the Del Taco acquisition, we have undertaken a process to review our balance sheet for any undervalued assets, and to pursue opportunities for capital sources, including sales of Jack in the Box real estate assets identified in its portfolio, and refranchising, primarily for Del Taco in the near term. The Company intends to use the net proceeds from these transactions to pay down debt, provide additional liquidity and for other corporate purposes including investments in growth initiatives and potential share repurchases. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations, borrowings available under our Variable Funding Notes and revolving credit facility, will be sufficient to meet our capital expenditure, working capital and debt service requirements for at least the next twelve months and the foreseeable future. Cash Flows The table below summarizes our cash flows for each of the last two fiscal years (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Total cash provided by (used in):"],["Operating activities","","$","215,006","","","$","162,882"],["Investing activities","","42,219","","","(578,588)"],["Financing activities","","(207,358)","","","478,178"],["Net cash flows","","$","49,867","","","$","62,472"]] [[/GREPCENT_TABLE]] 34 Operating Activities. Cash flows provided by operating activities increased $52.1 million compared with a year ago, primarily due to favorable change in working capital of $61.8 million. The favorable change in working capital primarily relates to the deferral of 2023 income taxes in connection with the southern California winter storm disaster area declaration of $50.3 million, lower payments for incentive compensation of $17.1 million, timing of collections of $14.0 million primarily due to the Jack segment rent billings for October, and lower marketing payments of $11.4 million. These benefits were partially offset by a $25.5 million payment made in the fourth quarter connection with our Torrez litigation as well as $17.8 million due to the timing of accounts payable, including the Jack segment October rent payments. Cash flows provided by operating activities was also impacted by a lower net income, after adjusting for non-cash items, of $9.6 million. In addition to continuing operations, other known uses of cash flow in the first quarter of fiscal year 2024 include the $50.3 million for fiscal 2023 deferred income tax payments, as well as $25.5 million for Torrez, a previously announced litigation settlement. For additional information related to Torrez, refer to Note 16, Commitments and Contingencies, of the notes to the consolidated financial statements. Pension and Postretirement Contributions — Our policy is to fund our pension plans at or above the minimum required by law. As of the date of our last actuarial funding valuation for our qualified pension plan, there was no minimum contribution funding requirement. In 2023 and 2022, we contributed $6.2 million and $6.7 million, respectively, to our pension and postretirement plans. We do not anticipate making any contributions to our qualified defined benefit pension plan in fiscal 2024. 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 $620.8 million from 2023 compared to 2022. This increase was primarily due to $580.8 million of cash that was used in the prior year for the acquisition of Del Taco, coupled with $78.8 million of additional cash received in 2023 from the sale of Del Taco company-owned restaurants to franchisees. These increases in cash were partially offset by an increase of $28.5 million for amounts used for the purchase of property and equipment as well as a $7.1 million decrease in proceeds from the sale and leaseback of assets. Capital Expenditures — The composition of capital expenditures in each fiscal year is summarized in the table below (in thousands): [[GREPCENT_TABLE]] [["","","2023","","2022"],["Restaurants:"],["Remodel / refresh programs","","$","9,159","","","$","8,823"],["New restaurants","","8,159","","","2,887"],["Restaurant facility expenditures","","22,592","","","21,469"],["Purchases of assets intended for sale and leaseback","","14,960","","","1,986"],["Restaurant information technology","","13,037","","","6,350"],["","","67,907","","","41,515"],["Corporate Services:"],["Information technology","","6,752","","","3,524"],["Corporate facilities","","295","","","1,436"],["","","7,047","","","4,960"],["Total capital expenditures","","$","74,954","","","$","46,475"]] [[/GREPCENT_TABLE]] In 2023, capital expenditures increased by $28.5 million compared to a year ago, primarily due to an increase in the purchases of Jack in the Box restaurant properties intended for sale and leaseback of $13.0 million, an increase in information technology for both restaurant and corporate of $9.9 million, as well as new restaurant openings of $5.3 million. Sale and Sale-leaseback Transactions — To optimize our balance sheet and capital structure, we use sales and leaseback financing and provide our franchisees the opportunity to purchase the property that we currently lease to them. In 2023, we completed one sales-leaseback transaction involving a restaurant property with proceeds of $3.7 million and completed the sale of properties to franchisees and other third parties during the year with proceeds of $25.2 million. Financing Activities. Cash flows used in financing activities increased by $685.5 million compared with a year ago, primarily as a result of a decrease in net borrowings of $621.4 million and a $65.0 million increase in share repurchases compared with a year ago. Repurchases of Common Stock — In fiscal 2023, the Company repurchased 1.1 million shares of its common stock for an aggregate cost of $90.7 million, including the applicable excise tax. As of October 1, 2023, there was $85.0 million remaining under share repurchase programs authorized by the Board of Directors which expired on November 20, 2023. 35 Dividends — In fiscal 2023, the Board of Directors declared four quarterly cash dividends of $0.44 per share, totaling $36.2 million. Future dividends are subject to approval by our Board of Directors. Securitized Refinancing Transaction — On February 11, 2022, the Company completed the sale of $550.0 million of its Series 2022-1 3.445% Fixed Rate Senior Secured Notes, Class A-2-I (the “Class A-2-I Notes”) and $550.0 million of its Series 2022-1 4.136% Fixed Rate Senior Secured Notes, Class A-2-II (the “Class A-2-II” and, together with the Class A-2-I Notes, the “2022 Notes”). Interest payments on the 2022 Notes are payable on a quarterly basis. The anticipated repayment dates of the Class A-2-I Notes and the Class A-2-II Notes will be February 2027 and February 2032, respectively, unless earlier prepaid to the extent permitted. In 2022, the Company also entered into a revolving financing facility of Series 2022-1 Variable Funding Senior Secured Notes (the “Variable Funding Notes”), which permits borrowings up to a maximum of $150.0 million, subject to certain borrowing conditions, a portion of which may be used to issue letters of credit. As of October 1, 2023, we did not have any outstanding borrowings and had available borrowing capacity of $100.5 million under our 2022 Variable Funding Notes, net of letters of credits issued of $49.5 million. The net proceeds from the sale of the 2022 Notes were used to repay in full $570.7 million in aggregate outstanding principal amount of the Company’s Series 2019-1 Class A-2-I Notes, together with the applicable make-whole premium and unpaid interest, and was used to fund a portion of the Company’s acquisition of Del Taco Restaurants, Inc. The 2022 Notes were issued in a privately placed securitization transaction pursuant to which certain of the Company’s revenue-generating assets, consisting principally of franchise-related agreements, real estate assets, and intellectual property and license agreements for the use of intellectual property, are held by the Master Issuer and certain other limited-purpose, bankruptcy remote, wholly owned indirect subsidiaries of the Company that act as Guarantors of the Notes and that have pledged substantially all of their assets, excluding certain real estate assets and subject to certain limitations, to secure the Notes. The 2022 Notes are subject to the same covenants and restrictions as the Series 2019-1 Notes. The quarterly principal payment on the Class A-2 Notes may be suspended when the specified leverage ratio, which is a measure of outstanding debt to earnings before interest, taxes, depreciation, and amortization, adjusted for certain items (as defined in the Indenture), is less than or equal to 5.0x. Exceeding the leverage ratio of 5.0x does not violate any covenant related to the Class A-2 Notes. 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 1, 2023, the Master Issuer had restricted cash of $28.3 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-2 Notes and Variable Funding 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 October 1, 2023, we were in compliance with all of our debt covenant requirements and were not subject to any rapid amortization events. 36 Contractual Obligations 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. 37 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 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. 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. 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. 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. Goodwill and Indefinite-Lived Intangible Assets — We evaluate goodwill and indefinite-lived intangibles for impairment in the third quarter of each year, or more frequently, if indicators of impairment are present. Goodwill is evaluated for impairment by determining whether the fair value of our reporting units exceed their carrying values. Our reporting units are our two restaurant brands, Jack in the Box and Del Taco. Our impairment analyses first include a qualitative assessment to determine whether events or circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying value. Significant factors considered in this assessment include, but are not limited to, macro-economic conditions, market and industry conditions, cost considerations, the competitive environment, share price fluctuations, overall financial performance, and results of past impairment tests. If the qualitative factors indicate that it is more likely than not that the fair value is less than the carrying value, we perform a quantitative impairment test. In performing a quantitative test for impairment of goodwill, we primarily use the income approach method of valuation that includes the discounted cash flow method and the market approach that includes the guideline public company method to determine the fair value of the reporting unit. Significant assumptions made by management to estimate fair value under the discounted cash flow method include future cash flow assumptions, which may differ from actual cash flows due to, among other things, economic conditions, or changes in operating performance. The discount rate is our estimate of the required rate of return that a third-party buyer would expect to receive when purchasing a business from us that constitutes a reporting unit. We believe the discount rate is commensurate with the risk and uncertainty inherent in the forecasted cash flows. Significant assumptions used to determine fair value under the guideline public company method include the selection of guideline companies and the valuation multiples applied. In the process of a quantitative test, if necessary, of the Del Taco trademark intangible asset, we primarily use the relief from royalty method under the income approach method of valuation. Significant assumptions used to determine fair value under the relief from royalty method include future trends in sales, a royalty rate, an estimated income tax rate, and a discount rate to be applied to the forecast revenue stream. In the third quarter of 2023, we performed quantitative tests using the approaches described above. The fair value of our Jack in the Box reporting unit was substantially in excess of its respective carrying value as of the testing date. The fair value of our Del Taco reporting unit and indefinite-lived trademarks were in excess of their carrying values by approximately 9% and 13%, respectively, as of the testing date. 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 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. 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. 38 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.