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BUSINESS COMBINATION | 9 Months Ended
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Jul. 10, 2022
Business Combinations [Abstract] |
BUSINESS COMBINATION | BUSINESS COMBINATIONOn March 8, 2022 (the “Closing Date”), the Company acquired 100% of the outstanding equity interest of Del Taco Restaurants, Inc. (“Del Taco”) for cash according to the terms and conditions of the Agreement and Plan of Merger, dated as of December 5, 2021 (the “Merger Agreement”). Del Taco is a nationwide operator and franchisor of restaurants featuring fresh and fast Mexican and American inspired cuisines. Jack in the Box acquired Del Taco as a part of the Company’s goal to gain greater scale and accelerate growth. In connection with the transaction, the Company repaid Del Taco's existing debt of $115.2 million related to a syndicated credit facility and Del Taco entered into a new syndicated credit facility. The total purchase consideration for Del Taco was $593.3 million. Each share of Del Taco common stock issued and outstanding was converted into the right to receive $12.51 in cash without interest, less any applicable withholding taxes (“Merger Consideration”). Additionally, in connection with the transaction, each Del Taco equity award granted under Del Taco’s equity compensation plans was either (i) converted into the right to receive Merger Consideration or (ii) converted into equity awards with respect to Jack in the Box common stock. Other components of purchase consideration include cash paid to settle Del Taco’s existing debt and $7.1 million of seller transaction costs funded by Jack in the Box. As part of the Merger Agreement, on the Closing Date, the Company assumed Del Taco’s historical equity compensation plans. The awards under Del Taco’s historical equity compensation plans that were not subject to accelerated vesting were exchanged for replacement awards of the Company, which included Del Taco’s non-accelerating restricted stock awards (“non-accelerating RSAs”). Immediately following the Merger, these replacement awards were modified to accelerate the remaining vesting period to be one year following the Closing Date, other than the awards already scheduled to vest on June 30, 2022. The portion of the fair value of the replacement awards associated with pre-acquisition service of Del Taco’s employees represented a component of the total purchase consideration. The remaining fair value of these replacement awards are subject to the recipients’ continued service and thus were excluded from the purchase price. The awards which are subject to continued service will be recognized ratably as stock-based compensation expense over the requisite service period. The acquisition of Del Taco was funded by cash on hand and borrowings under our 2022 Class A-2 Notes and 2022 Variable Funding Notes. The Company recognized transaction costs of $1.2 million and $12.4 million in the quarter and year-to-date of 2022, respectively. These costs were associated with advisory, legal, and consulting services and are presented in “Other operating expenses, net” in the condensed consolidated statement of earnings. The acquisition of Del Taco has been accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, with the Company treated as the accounting acquirer, which requires, among other things, that the assets acquired, and liabilities assumed be recognized at their acquisition date fair value. Purchase consideration — The following summarizes the purchase consideration paid to Del Taco shareholders (in thousands, except per share data):
| Amount
Del Taco shares outstanding as of March 8, 2022 | 36,442
Del Taco RSAs subject to accelerated vesting | 805
Del Taco RSUs subject to accelerated vesting | 70
Del Taco options subject to accelerated vesting | 292
Total Del Taco shares outstanding | 37,610
Merger Consideration (per Del Taco share) | $ | 12.51 |
Total cash consideration paid to selling shareholders | $ | 470,500 |
Del Taco transaction costs paid by Jack in the Box (1) | 7,141 |
Del Taco closing indebtedness settled by Jack in the Box (2) | 115,219 |
Replacement share-based payment awards pre-combination vesting expense | 449 |
Preliminary aggregate purchase consideration | $ | 593,309 |
____________________________ (1)Represents the portion of Del Taco merger-related transaction costs that were paid at the Closing Date by the Company. (2)Represents the closing indebtedness of Del Taco’s existing debt that was paid at the Closing Date by the Company. Purchase price allocation — The preliminary allocation of the purchase consideration to tangible and intangible assets acquired and liabilities assumed is based on the estimated fair values and is as follows (in thousands):
| Initial Allocation of Consideration |  | Measurement Period Adjustments (1) |  | July 10, 2022
Total preliminary aggregate purchase consideration, net of $12,068 cash acquired | $ | 581,241 |  |  | $ | — |  |  | $ | 581,241 |
Assets: |  |  |  |  |
Accounts and other receivables | 3,809 |  |  | — |  |  | 3,809 |
Inventories | 3,233 |  |  | — |  |  | 3,233 |
Prepaid expenses | 2,950 |  |  | — |  |  | 2,950 |
Other current assets | 105 |  |  | — |  |  | 105 |
Property and equipment | 150,826 |  |  | (5,341) |  |  | 145,485 |
Operating lease right-of-use assets | 349,489 |  |  | — |  |  | 349,489 |
Intangible assets | 12,371 |  |  | — |  |  | 12,371 |
Trademarks | 283,500 |  |  | — |  |  | 283,500 |
Other assets | 5,128 |  |  | — |  |  | 5,128 |
Liabilities: |  |  |  |  |
Current maturities of long-term debt | 22 |  |  | — |  |  | 22 |
Current operating lease liabilities | 21,991 |  |  | — |  |  | 21,991 |
Accounts payable | 18,808 |  |  | — |  |  | 18,808 |
Accrued liabilities | 66,739 |  |  | 45,076 |  |  | 111,815 |
Long-term debt, net of current maturities | 349 |  |  | — |  |  | 349 |
Long-term operating lease liabilities, net of current portion | 302,688 |  |  | — |  |  | 302,688 |
Deferred tax liabilities | 88,203 |  |  | (12,668) |  |  | 75,535 |
Other long-term liabilities | 13,080 |  |  | — |  |  | 13,080 |
Net assets acquired, excluding goodwill | $ | 299,531 |  |  | $ | (37,749) |  |  | $ | 261,782 |
Goodwill | $ | 281,710 |  |  | $ | 37,749 |  |  | $ | 319,459 |
____________________________ (1)The Company recorded measurement period adjustments in the third quarter of fiscal 2022 attributable to the Company’s review of inputs and assumptions utilized in valuation models, in addition to new information obtained during the quarter surrounding the settlement of a litigation matter which existed at the date of acquisition. Refer to Note 15, Commitments and Contingencies, for further details regarding the litigation matter. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, loss contingencies, and goodwill are subject to change as the Company obtains additional information during the measurement period (up to one year from the acquisition date). The excess of the total consideration over the tangible assets, identifiable intangible assets, and assumed liabilities is recorded as goodwill. The goodwill of $319.5 million arising from the acquisition is primarily attributable to the market position and future growth potential of Del Taco for both company-operated and franchised restaurants related to future store openings, expansion into new markets, and expected synergies. None of the goodwill resulting from the acquisition is deductible for tax purposes. We have not yet allocated goodwill related to the Del Taco acquisition to reporting units for goodwill impairment testing purposes. Goodwill will be allocated to reporting units when the purchase price allocation is finalized during the measurement period. Identifiable intangible assets — The identifiable intangible assets acquired consist of trademarks, franchise and development agreements, and favorable subleases. The Company amortizes the fair value of the franchise and development agreements and favorable and unfavorable sublease assets and liabilities on a straight-line basis over their respective useful lives. The trademarks were valued using the relief from royalty method of the income approach, which was applied by discounting the after-tax royalties avoided by owning the trade name to present value. The key inputs and assumptions included the Company's estimates of the projected system wide sales, royalty rate and discount rate applicable to the trade name. The franchise and development agreements were valued using the income approach, which was applied by discounting the projected after-tax cash flows associated with the agreements to present value. The key inputs and assumptions included the Company's estimates of the projected royalties received under the existing franchise and development agreements (including the impact of franchise churn) and the applicable discount rate. The favorable and unfavorable sublease assets and liabilities were valued using the income approach, which was applied by discounting the differential between the market rent and contract rent to present value. The key inputs and assumptions included the Company's estimates of the market rent, contract rent and discount rate applicable to the favorable and unfavorable subleases. The preliminary values allocated to intangible assets and the useful lives are as follows (in thousands):
|  | Amount |  | Useful life (Years)
Trademarks |  | $ | 283,500 |  |  | Indefinite
Franchise contracts |  | 9,700 |  |  | 18
Sublease assets |  | 2,671 |  |  | 13
Estimated fair value of acquired intangible assets |  | $ | 295,871 |  |  |
Taxes — The preliminary allocation of the purchase price is based on preliminary valuations performed to determine the fair value of the net assets as of the Closing Date. The Company has conducted a preliminary assessment of the valuations, and has recognized provisional deferred income tax amounts in its preliminary allocation for the identified assets and liabilities. However, the Company is continuing its procedures to identify information pertaining to these matters during the measurement period. If new information is obtained about facts and circumstances that existed at the Closing Date, the Company will either adjust its measurement of provisional deferred income tax amounts or recognize and measure assets and liabilities not previously identified. Unaudited pro forma results — The following unaudited pro forma combined financial information presents the Company’s results as though Del Taco and the Company had been combined as the beginning of fiscal year 2021 (in thousands):
|  | Quarter |  | Year-to-date
|  | July 4, 2021 |  | July 10, 2022 |  | July 4, 2021
Total revenue |  | $ | 393,521 |  |  | $ | 1,283,387 |  |  | $ | 1,263,299 |
Net earnings |  | $ | 42,491 |  |  | $ | 74,711 |  |  | $ | 102,305 |
The unaudited pro forma financial information for all periods presented includes the business combination accounting effects resulting from this acquisition, mainly including adjustments to reflect additional amortization expense from acquired intangibles, incremental depreciation expense from the fair value property and equipment, elimination of historical interest expense associated with both Del Taco’s and the Company’s historical indebtedness, additional interest expense associated with the new Del Taco revolving credit facility and the Company’s new borrowings as part of the refinancing to fund the acquisition, adjusted rent expense reflecting the acquired right-of-use assets and liabilities to their estimated acquisition-date values based upon preliminary valuation of related lease intangibles and remaining payments, as well as the fair value adjustments made to leasehold improvements, certain material non-recurring adjustments and the tax-related effects as though Del Taco was combined as of the beginning of fiscal 2021. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2021, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses. For the periods subsequent to the acquisition that are included in the quarter and year-to-date of 2022, Del Taco had total revenues of $189.3 million and net earnings of $5.2 million.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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