10-Q 1 cake-20231003x10q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2023

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-20574

THE CHEESECAKE FACTORY INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware

51-0340466

(State or other jurisdiction

(I.R.S. Employer

of incorporation or organization)

Identification No.)

26901 Malibu Hills Road

Calabasas Hills, California

91301

(Address of principal executive offices)

(Zip Code)

(818) 871-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of Each Class

    

Trading Symbol

    

Name of Each Exchange on which Registered

Common Stock, par value $.01 per share

CAKE

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of October 30, 2023, 50,773,123 shares of the registrant’s Common Stock, $.01 par value per share, were outstanding.

THE CHEESECAKE FACTORY INCORPORATED

INDEX

 

Page
Number

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements:

Condensed Consolidated Balance Sheets (Unaudited)

1

Condensed Consolidated Statements of Income/(Loss) (Unaudited)

2

Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited)

3

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

4

Condensed Consolidated Statements of Cash Flows (Unaudited)

6

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.

Controls and Procedures

29

PART II

OTHER INFORMATION

29

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 5.

Other Items

30

Item 6.

Exhibits

31

Signatures

32

PART I — FINANCIAL INFORMATION

Item 1.        Financial Statements.

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

October 3,

January 3,

    

2023

    

2023

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

63,987

$

114,777

Accounts and other receivables

70,236

105,511

Income taxes receivable

 

23,923

 

21,522

Inventories

 

58,672

 

55,559

Prepaid expenses

 

55,558

 

48,399

Total current assets

 

272,376

 

345,768

Property and equipment, net

 

777,669

 

746,051

Other assets:

Intangible assets, net

 

251,529

 

251,524

Operating lease assets

 

1,307,345

 

1,268,986

Other

167,971

162,891

Total other assets

1,726,845

1,683,401

Total assets

$

2,776,890

$

2,775,220

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

53,392

$

66,638

Gift card liabilities

 

180,200

 

219,808

Operating lease liabilities

144,488

139,099

Other accrued expenses

240,440

231,133

Total current liabilities

618,520

656,678

Long-term debt

 

469,543

 

468,032

Operating lease liabilities

 

1,246,819

 

1,233,497

Other noncurrent liabilities

120,364

125,010

Commitments and contingencies (Note 7)

Stockholders’ equity:

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued and outstanding

Common stock, $.01 par value, 250,000,000 shares authorized; 107,097,507 shares issued and 50,872,707 shares outstanding at October 3, 2023 and 106,323,117 shares issued and 51,173,597 shares outstanding at January 3, 2023

1,071

1,063

Additional paid-in capital

 

906,458

 

887,485

Retained earnings

 

1,217,271

 

1,170,078

Treasury stock inclusive of excise tax, 56,224,800 and 55,149,520 shares at cost at October 3, 2023 and January 3, 2023, respectively

 

(1,802,090)

 

(1,765,641)

Accumulated other comprehensive loss

 

(1,066)

 

(982)

Total stockholders’ equity

 

321,644

 

292,003

Total liabilities and stockholders’ equity

$

2,776,890

$

2,775,220

See the accompanying notes to the condensed consolidated financial statements.

1

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS)

(In thousands, except per share data)

(Unaudited)

Thirteen

Thirteen

Thirty-Nine

Thirty-Nine

    

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

October 3, 2023

    

September 27, 2022

    

October 3, 2023

    

September 27, 2022

Revenues

$

830,210

$

784,001

$

2,562,494

$

2,410,354

Costs and expenses:

Food and beverage costs

 

194,733

 

197,774

 

602,051

 

590,457

Labor expenses

 

301,663

 

293,040

 

919,340

 

893,322

Other operating costs and expenses

 

229,534

 

217,009

 

687,459

 

643,844

General and administrative expenses

 

54,209

 

50,324

 

162,766

 

149,638

Depreciation and amortization expenses

 

22,837

 

22,651

 

69,124

 

66,764

Impairment of assets and lease termination expenses

48

1,637

313

Acquisition-related contingent consideration, compensation and amortization expenses

1,414

1,081

3,890

2,920

Preopening costs

 

6,742

 

4,327

 

15,800

 

9,038

Total costs and expenses

 

811,180

 

786,206

 

2,462,067

 

2,356,296

Income/(loss) from operations

 

19,030

 

(2,205)

 

100,427

 

54,058

Interest and other expense, net

 

(2,027)

 

(1,315)

 

(6,069)

 

(3,906)

Income/(loss) before income taxes

 

17,003

 

(3,520)

 

94,358

 

50,152

Income tax (benefit)/provision

 

(942)

 

(1,122)

 

5,688

 

3,731

Net income/(loss)

$

17,945

$

(2,398)

$

88,670

$

46,421

Net income/(loss) per share:

Basic

$

0.37

$

(0.05)

$

1.83

$

0.93

Diluted (Note 10)

$

0.37

$

(0.05)

$

1.80

$

0.92

Weighted-average shares outstanding:

Basic

 

48,281

 

49,653

 

48,489

 

50,124

Diluted

 

48,985

 

49,653

 

49,197

 

50,708

See the accompanying notes to the condensed consolidated financial statements.

2

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

Thirteen

Thirteen

Thirty-Nine

Thirty-Nine

   

Weeks Ended

   

Weeks Ended

   

Weeks Ended

   

Weeks Ended

October 3, 2023

September 27, 2022

October 3, 2023

September 27, 2022

Net income/(loss)

$

17,945

$

(2,398)

$

88,670

$

46,421

Other comprehensive loss:

 

 

 

 

Foreign currency translation adjustment

 

(411)

 

(724)

 

(84)

 

(769)

Other comprehensive loss

 

(411)

 

(724)

 

(84)

 

(769)

Total comprehensive income/(loss)

$

17,534

$

(3,122)

$

88,586

$

45,652

See the accompanying notes to the condensed consolidated financial statements.

3

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the thirty-nine weeks ended October 3, 2023:

    

    

    

    

    

    

Accumulated

    

Additional

Other

Common Stock

Paid-in

Retained

Treasury

Comprehensive

  

Shares

  

Amount

  

Capital

  

Earnings

  

Stock

  

Loss/(Income)

  

Total

Balance, January 3, 2023

106,323

$

1,063

$

887,485

$

1,170,078

$

(1,765,641)

$

(982)

$

292,003

Net income

28,050

28,050

Foreign currency translation adjustment

147

147

Cash dividends declared common stock, net of forfeitures, $0.27 per share

(13,929)

(13,929)

Stock-based compensation

628

6

5,938

5,944

Treasury stock purchases

(12,376)

(12,376)

Balance, April 4, 2023

106,951

$

1,069

$

893,423

$

1,184,199

$

(1,778,017)

$

(835)

$

299,839

Net income

42,675

42,675

Foreign currency translation adjustment

180

180

Cash dividends declared common stock, net of forfeitures, $0.27 per share

(13,759)

(13,759)

Stock-based compensation

92

1

6,369

6,370

Treasury stock purchases, inclusive of excise tax

(9,402)

(9,402)

Balance, July 4, 2023

107,043

$

1,070

$

899,792

$

1,213,115

$

(1,787,419)

$

(655)

$

325,903

Net income

17,945

17,945

Foreign currency translation adjustment

(411)

(411)

Cash dividends declared common stock, net of forfeitures, $0.27 per share

(13,789)

(13,789)

Stock-based compensation

55

1

6,666

6,667

Treasury stock purchases, inclusive of excise tax

(14,671)

(14,671)

Balance, October 3, 2023

107,098

$

1,071

$

906,458

$

1,217,271

$

(1,802,090)

$

(1,066)

$

(321,644)

4

For the thirty-nine weeks ended September 27, 2022:

 

    

    

    

    

    

Accumulated

    

Additional

Other

Common Stock

Paid-in

Retained

Treasury

Comprehensive

Shares

Amount

Capital

Earnings

Stock

(Loss)/Income

Total

Balance, December 28, 2021

105,366

$

1,054

$

862,758

$

1,169,150

$

(1,702,509)

$

(287)

$

330,166

Net income

23,163

23,163

Foreign currency translation adjustment

255

255

Cash dividends declared common stock, net of forfeitures

22

22

Stock-based compensation

608

6

5,569

5,575

Common stock issued under stock-based compensation plans

55

83

83

Treasury stock purchases

(3,938)

(3,938)

Balance, March 29, 2022

106,029

$

1,060

$

868,410

$

1,192,335

$

(1,706,447)

$

(32)

$

355,326

Net income

25,656

25,656

Foreign currency translation adjustment

(300)

(300)

Cash dividends declared common stock, net of forfeitures, $0.27 per share

(14,260)

(14,260)

Stock-based compensation

(40)

6,141

6,141

Common stock issued under stock-based compensation plans

41

Treasury stock purchases

(10,879)

(10,879)

Balance, June 28, 2022

106,030

$

1,060

$

874,551

$

1,203,731

$

(1,717,326)

$

(332)

$

361,684

Net loss

(2,398)

(2,398)

Foreign currency translation adjustment

(724)

(724)

Cash dividends declared common stock, net of forfeitures, $0.27 per share

(14,053)

(14,053)

Stock-based compensation

94

1

5,664

5,665

Common stock issued under stock-based compensation plans

32

1

1

Treasury stock purchases

(26,679)

(26,679)

Balance, September 27, 2022

106,156

$

1,062

$

880,215

$

1,187,280

$

(1,744,005)

$

(1,056)

$

323,496

See the accompanying notes to the condensed consolidated financial statements.

5

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Thirty-Nine

Thirty-Nine

Weeks Ended

Weeks Ended

    

October 3, 2023

    

September 27, 2022

Cash flows from operating activities:

Net income

$

88,670

$

46,421

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization expenses

69,124

66,764

Impairment of assets and lease termination (income)/expense

 

(753)

 

250

Deferred income taxes

1,613

(2,633)

Stock-based compensation

 

18,850

 

17,220

Changes in assets and liabilities:

Accounts and other receivables

32,107

23,835

Income taxes receivable/payable

 

(2,401)

 

12,481

Inventories

 

(3,113)

 

(19,442)

Prepaid expenses

 

(7,159)

 

5,487

Operating lease assets/liabilities

 

(18,572)

 

(13,758)

Other assets

(6,086)

18,447

Accounts payable

 

(10,985)

 

11,177

Gift card liabilities

 

(39,608)

 

(36,448)

Other accrued expenses

28,859

(30,904)

Cash provided by operating activities

 

150,546

 

98,897

Cash flows from investing activities:

Additions to property and equipment

 

(99,923)

 

(78,053)

Additions to intangible assets

 

(567)

 

(489)

Other

(158)

485

Cash used in investing activities

 

(100,648)

 

(78,057)

Cash flows from financing activities:

Acquisition-related deferred consideration and compensation

(24,243)

(7,187)

Proceeds from exercise of stock options

84

Common stock dividends paid

 

(40,126)

 

(28,350)

Treasury stock purchases

 

(36,260)

 

(41,496)

Cash used in financing activities

 

(100,629)

 

(76,949)

Foreign currency translation adjustment

 

(59)

 

(361)

Net change in cash and cash equivalents

(50,790)

(56,470)

Cash and cash equivalents at beginning of period

 

114,777

 

189,627

Cash and cash equivalents at end of period

$

63,987

$

133,157

Supplemental disclosures:

Interest paid

$

6,386

$

4,706

Income taxes paid

$

7,068

$

13,603

Construction payable

$

7,086

$

10,545

See the accompanying notes to the condensed consolidated financial statements.

6

THE CHEESECAKE FACTORY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.   Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of The Cheesecake Factory Incorporated and its wholly owned subsidiaries (referred to herein collectively as the “Company,” “we,” “us” and “our”) and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions for the periods presented have been eliminated in consolidation. The unaudited financial statements presented herein include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the financial condition, results of operations and cash flows for the period. However, these results are not necessarily indicative of results that may be achieved for any other interim period or for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2023 filed with the SEC on February 27, 2023.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal year 2023 consists of 52 weeks and will end on January 2, 2024. Fiscal year 2022, which ended on January 3, 2023 was a 53-week year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates.

COVID-19 Pandemic and Other Impacts to our Operating Environment

During fiscal 2022, the COVID-19 pandemic continued to affect our business during periods of accelerated case counts in which we experienced increased restaurant staff absenteeism and temporary shifts in consumer behavior, such as changes in customer traffic or the mix between on-premise and off-premise channels. Along with the COVID-19 pandemic, our operating results were impacted by geopolitical and macroeconomic events, causing supply chain challenges and significantly increased commodity and wage inflation. Some of these factors have continued to impact our operating results in fiscal 2023, contributing to significantly increased commodity and other costs. We have also encountered delays in opening new restaurants primarily due to delays in permitting and landlord readiness, as well as supply chain challenges.

The ongoing impact of geopolitical and macroeconomic events could lead to further shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation, disruptions in the supply chain and delays in new restaurant openings. For more information regarding the risks to our business relating to the COVID-19 pandemic and other geopolitical and macroeconomic events, see “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2023.

Recent Accounting Pronouncements

We reviewed all recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to the consolidated financial statements.

7

2.  Fair Value Measurements

Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions

The following tables present the components and classification of our assets and liabilities that are measured at fair value on a recurring basis (in thousands):

    

October 3, 2023

    

Level 1

    

Level 2

    

Level 3

Assets/(Liabilities)

 

Non-qualified deferred compensation assets

$

84,960

$

$

Non-qualified deferred compensation liabilities

(84,786)

Acquisition-related deferred consideration

Acquisition-related contingent consideration and compensation liabilities

(18,015)

    

January 3, 2023

    

Level 1

    

Level 2

    

Level 3

Assets/(Liabilities)

Non-qualified deferred compensation assets

$

78,542

$

$

Non-qualified deferred compensation liabilities

(78,286)

Acquisition-related deferred consideration

(10,751)

Acquisition-related contingent consideration and compensation liabilities

(28,565)

The following table presents a reconciliation of the beginning and ending amounts of the fair value of the acquisition-related contingent consideration and compensation liabilities categorized as Level 3 (in thousands):

    

Thirty-Nine

    

Thirty-Nine

Weeks Ended

Weeks Ended

    

October 3, 2023

    

September 27, 2022

Beginning balance

$

28,565

$

23,894

Payment

(12,994)

(7,187)

Change in fair value

 

2,444

 

1,707

Ending balance

$

18,015

$

18,414

The fair value of the acquisition-related contingent consideration and compensation liabilities was determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates and has no minimum or maximum payment. The undiscounted range of outcomes per the Monte Carlo model utilized to determine the fair value of the acquisition-related contingent consideration and compensation liabilities at October 3, 2023 was $0 to $276.0 million. Results could change materially if different estimates and assumptions were used. During the first nine months of fiscal 2023 and fiscal 2022, we made payments of $13.0 million and $7.2 million, respectively, per the Fox Restaurant Concept LLC (“FRC”) acquisition agreement.

The fair values of our cash and cash equivalents, accounts and other receivables, income taxes receivable, prepaid expenses, accounts payable, income taxes payable and other accrued liabilities approximate their carrying amounts due to their short duration.

8

As of October 3, 2023, we had $345.0 million aggregate principal amount of Notes outstanding. The estimated fair value of the Notes based on a market approach as of October 3, 2023 was $279.8 million and was determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on the last business day of the reporting period. The decrease in the fair value of the Notes was primarily due to a decline in our stock price from the date of the issuance of the Notes. See Note 5 for further discussion of the Notes.

3.  Inventories

Inventories consisted of (in thousands):

    

October 3, 2023

    

January 3, 2023

Restaurant food and supplies

$

30,567

$

30,783

Bakery finished goods and work in progress

 

18,883

 

17,250

Bakery raw materials and supplies

 

9,222

 

7,526

Total

$

58,672

$

55,559

4.  Gift Cards

The following tables present information related to gift cards (in thousands):

    

Thirteen

Thirteen

Thirty-Nine

Thirty-Nine

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

October 3, 2023

    

September 27, 2022

    

October 3, 2023

    

September 27, 2022

Gift card liabilities:

Beginning balance

 

$

187,483

 

$

182,295

$

219,808

 

$

211,182

Activations

17,968

20,650

63,284

69,847

Redemptions and breakage

(25,251)

(28,220)

(102,892)

(106,304)

Ending balance

 

$

180,200

 

$

174,725

$

180,200

 

$

174,725

    

Thirteen

Thirteen

Thirty-Nine

Thirty-Nine

Weeks Ended

Weeks Ended

Weeks Ended

Weeks Ended

    

October 3, 2023

    

September 27, 2022

    

October 3, 2023

    

September 27, 2022

Gift card contract assets:

Beginning balance

 

$

17,369

 

$

17,061

$

19,886

 

$

18,468

Deferrals

2,509

2,268

7,823

8,159

Amortization

(3,914)

(3,674)

(11,745)

(10,972)

Ending balance

 

$

15,964

 

$

15,655

$

15,964

 

$

15,655

5.  Long-Term Debt

Revolving Credit Facility

On October 6, 2022, we entered into a Fourth Amended and Restated Loan Agreement (the “Loan Agreement” and the revolving credit facility provided thereunder, the “Revolver Facility”). The Loan Agreement amends and restates in its entirety our prior credit agreement. The Revolver Facility, which terminates on October 6, 2027, provides us with revolving loan commitments that total $400 million, of which $50 million may be used for issuances of letters of credit. The Revolver Facility contains a commitment increase feature that, subject to certain conditions precedent, could provide for an additional $200 million in revolving loan commitments. Our obligations under the Revolver Facility are unsecured. Certain of our material subsidiaries have guaranteed our obligations under the Revolver Facility.

On October 6, 2022, we repaid the outstanding balance under the then-existing credit agreement and borrowed the same amount on the Revolver Facility. As of October 3, 2023, we had net availability for borrowings of $236.5 million, based on a $130.0 million outstanding debt balance and $33.5 million in standby letters of credit under the Revolver Facility.

9

Under the Revolver Facility, we are subject to the following financial covenants as of the last day of each fiscal quarter: (i) a maximum ratio of net adjusted debt to EBITDAR (the “Amended Net Adjusted Leverage Ratio”) of 4.25 and (ii) a minimum ratio of EBITDAR to interest and rent expense (“EBITDAR Ratio”) of 1.90. The Amended Net Adjusted Leverage Ratio includes a rental expense multiplier of six. As of October 3, 2023, we were in compliance with all the foregoing covenants in effect at that date.

Borrowings under the Loan Agreement bear interest, at the Company’s election, at a rate equal to either: (i) the sum of (A) adjusted term SOFR (as defined in the Loan Agreement, the “Term SOFR Rate”) plus (B) a rate variable based on the Amended Net Adjusted Leverage Ratio, ranging from 1.00% to 1.75%, or (ii) the sum of (A) the highest of (x) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (y) the greater of the rate calculated by the Federal Reserve Bank of New York as the federal funds effective rate or the rate that is published by the Federal Reserve Bank of New York as the overnight bank funding rate, in either case, plus 0.50%, and (z) the one-month Term SOFR Rate plus 1.00%, plus (B) a rate variable based on the Net Adjusted Leverage Ratio, ranging from 0.00% to 0.75%. The Company will also pay a fee variable based on the Net Adjusted Leverage Ratio, ranging from 0.125% to 0.25%, on the daily amount of unused commitments under the Loan Agreement. Letters of credit bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted SOFR plus other customary fees charged by the issuing bank. We paid certain customary loan origination fees in conjunction with the Loan Agreement.

We are also subject to customary events of default that, if triggered, could result in acceleration of the maturity of the Revolver Facility. Subject to certain exceptions, the Revolver Facility also limits distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

Convertible Senior Notes

On June 15, 2021, we issued $345.0 million aggregate principal amount of convertible senior notes due 2026 (“Notes”). The net proceeds from the sale of the Notes were approximately $334.9 million after deducting issuance costs related to the Notes.

The Notes are senior, unsecured obligations and are (i) equal in right of payment with our existing and future senior, unsecured indebtedness; (ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Notes were issued pursuant to, and are governed by, an indenture (the “Base Indenture”) between us and a trustee (“Trustee”), dated as of June 15, 2021, as supplemented by a first supplemental indenture (the “Supplemental Indenture,” and the Base Indenture, as supplemented by the Supplemental Indenture, the “Indenture”), dated as of June 15, 2021, between the Company and the Trustee.

The Notes accrue interest at a rate of 0.375% per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021. The Notes will mature on June 15, 2026, unless earlier repurchased, redeemed or converted. Before February 17, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events. From and after February 17, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will have the right to elect to settle conversions either entirely in cash or in a combination of cash and shares of our common stock. However, upon conversion of any Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted. The initial conversion rate is 12.7551 shares of common stock per $1,000 principal amount of Notes, which represents an initial conversion price of approximately $78.40 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. As of October 3, 2023, the conversion rate for the Notes was 13.3775 shares of common stock per $1,000 principal amount of the Notes, which represents a conversion price of approximately $74.75 per share of common stock. In connection with the cash dividend that was declared by our Board on October 26, 2023, on November 14, 2023 we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms.

10

The Notes are redeemable, in whole or in part (subject to certain limitations described below), at our option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. However, we may not redeem less than all of the outstanding Notes unless at least $150.0 million aggregate principal amount of Notes are outstanding and not called for redemption as of the time we send the related redemption notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.

If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving us and certain de-listing events with respect to our common stock.

The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) our failure to send certain notices under the Indenture within specified periods of time; (iii) our failure to comply with certain covenants in the Indenture relating to our ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of our assets and our subsidiaries, taken as a whole, to another person; (iv) a default by us in our other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by us or any of our significant subsidiaries with respect to indebtedness for borrowed money of at least $20,000,000; (vi) the rendering of certain judgments against us or any of our significant subsidiaries for the payment of at least $25,000,000, where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; and (vii) certain events of bankruptcy, insolvency and reorganization involving us or any of our significant subsidiaries.

If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to us (and not solely with respect to a significant subsidiary of ours) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to us, or noteholders of at least 25% of the aggregate principal amount of Notes then outstanding, by notice to us and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, we may elect, at our option, that the sole remedy for an Event of Default relating to certain failures by us to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50% on the principal amount of the Notes.