Cheesecake Factory Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

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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 March 31, 2020


☐	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	Nasdaq Global Select Market

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 June 15, 2020, 45,462,133 shares of the registrant’s Common Stock, $.01 par value per share, were outstanding.

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EXPLANATORY NOTE

As previously disclosed in the Current Report on Form 8-K filed by The Cheesecake Factory Incorporated (the “Company”) with the Securities and Exchange Commission (the “SEC”) on May 5, 2020, the Company was unable to file this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”) by the original deadline of May 11, 2020 due to the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic.

These considerable developments triggered the need to perform impairment assessments of the Company’s long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC. Future changes in estimates could further impact the carrying value of these items.

On March 4, 2020, the SEC issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as amended by Release No. 34-88465 issued on March 25, 2020 (collectively, the “Order”). In light of the significant impact of the COVID-19 pandemic, the Company was unable to complete the analyses described above in time to file its Quarterly Report by the original filing deadline without unreasonable effort or expense. Accordingly, the Company relied on the Order to postpone the filing of this Quarterly Report to provide it with additional time to finalize these assessments as well as prepare additional required disclosures related to the COVID-19 pandemic.

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THE CHEESECAKE FACTORY INCORPORATED

INDEX

			Page Number

PART I	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statements of Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
	Item 4.	Controls and Procedures	28

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 6.	Exhibits	32

Signatures			34

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	March 31,		December 31,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	81,023	$	58,416
Accounts receivable		22,862		25,619
Income taxes receivable		49,179		4,626
Other receivables		27,283		64,683
Inventories		47,822		47,225
Prepaid expenses		42,489		43,946
Total current assets		270,658		244,515
Property and equipment, net		818,283		831,599
Other assets:
Intangible assets, net		254,401		437,207
Operating lease assets		1,257,428		1,240,976
Other		75,012		86,296
Total other assets		1,586,841		1,764,479
Total assets	$	2,675,782	$	2,840,593
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	55,894	$	61,946
Gift card liabilities		161,215		187,978
Operating lease liabilities		123,189		128,081
Other accrued expenses		166,828		236,582
Total current liabilities		507,126		614,587

Deferred income taxes		23,838		33,847
Long-term debt		380,000		290,000
Operating lease liabilities		1,217,582		1,189,869
Other noncurrent liabilities		128,265		140,548
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—		—
Common stock, $.01 par value, 250,000,000 shares authorized; 98,452,351 and 97,685,178 shares issued at March 31, 2020 and December 31, 2019, respectively		985		977
Additional paid-in capital		861,641		855,989
Retained earnings		1,255,794		1,408,333
Treasury stock, 52,991,015 and 52,916,434 shares at cost at March 31, 2020 and December 31, 2019, respectively		(1,695,708)		(1,693,122)
Accumulated other comprehensive loss		(3,741)		(435)
Total stockholders’ equity		418,971		571,742
Total liabilities and stockholders’ equity	$	2,675,782	$	2,840,593

See the accompanying notes to the condensed consolidated financial statements

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
	March 31, 2020		April 2, 2019

Revenues	$	615,106	$	599,481

Costs and expenses:
Cost of sales		140,905		136,187
Labor expenses		236,982		217,310
Other operating costs and expenses		167,970		153,221
General and administrative expenses		43,960		39,123
Depreciation and amortization expenses		23,562		21,362
Impairment of assets and lease terminations		191,896		—
Acquisition-related costs		1,236		—
Acquisition-related contingent consideration, compensation and amortization		(4,466)		—
Preopening costs		3,119		2,130
Total costs and expenses		805,164		569,333
(Loss)/income from operations		(190,058)		30,148
Loss on investment in unconsolidated affiliates		—		(1,450)
Interest and other income/(expense), net		(1,518)		2
(Loss)/Income before income taxes		(191,576)		28,700
Income tax (benefit)/provision		(55,413)		1,716
Net (loss)/income	$	(136,163)	$	26,984

Net (loss)/income per share:
Basic	$	(3.11)	$	0.61
Diluted	$	(3.11)	$	0.60

Weighted average shares outstanding:
Basic		43,773		44,255
Diluted		43,773		44,984

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
	March 31, 2020		April 2, 2019

Net (loss)/income	$	(136,163)	$	26,984
Other comprehensive (loss)/gain:
Foreign currency translation adjustment		(936)		239
Unrealized loss on derivative, net of tax		(2,370)		—
Other comprehensive (loss)/gain		(3,306)		239
Total comprehensive (loss)/income	$	(139,469)	$	27,223

See the accompanying notes to the condensed consolidated financial statements

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the thirteen weeks ended March 31, 2020:


										Accumulated
	Shares of			Additional						Other
	Common	Common		Paid-in		Retained		Treasury		Comprehensive
	Stock	Stock		Capital		Earnings		Stock		Loss		Total
Balance, December 31, 2019	97,685	$	977	$	855,989	$	1,408,333	$	(1,693,122)	$	(435)	$	571,742
Net loss	—		—		—		(136,163)		—		—		(136,163)
Foreign currency translation adjustment	—		—		—		—		—		(936)		(936)
Change in derivative, net of tax	—		—		—		—		—		(2,370)		(2,370)
Cash dividends declared Common stock, $0.36 per share	—		—		—		(16,376)		—		—		(16,376)
Stock-based compensation	566		6		5,541		—		—		—		5,547
Common stock issued under stock-based compensation plans	203		2		111		—		—		—		113
Treasury stock purchases	—		—		—		—		(2,586)		—		(2,586)
Balance, March 31, 2020	98,454	$	985	$	861,641	$	1,255,794	$	(1,695,708)	$	(3,741)	$	418,971

For the thirteen weeks ended April 2, 2019:


										Accumulated
	Shares of			Additional						Other
	Common	Common		Paid-in		Retained		Treasury		Comprehensive
	Stock	Stock		Capital		Earnings		Stock		Loss		Total
Balance, January 1, 2019	96,622	$	967	$	828,676	$	1,384,494	$	(1,642,140)	$	(938)	$	571,059
Cumulative effect of adopting the pronouncement related to lease accounting, net of tax	—		—		—		(41,466)		—		—		(41,466)
Balance, January 1, 2019, as adjusted	96,622		967		828,676		1,343,028		(1,642,140)		(938)		529,593
Net income	—		—		—		26,984		—		—		26,984
Foreign currency translation adjustment	—		—		—		—		—		239		239
Cash dividends declared Common stock, $0.33 per share	—		—		—		(14,952)		—		—		(14,952)
Stock-based compensation	350		3		5,907		—		—		—		5,910
Common stock issued under stock-based compensation plans	412		4		5,537		—		—		—		5,541
Treasury stock purchases	—		—		—		—		(11,071)		—		(11,071)
Balance, April 2, 2019	97,384	$	974	$	840,120	$	1,355,060	$	(1,653,211)	$	(699)	$	542,244

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
	March 31, 2020		April 2, 2019

Cash flows from operating activities:
Net (loss)/income	$	(136,163)	$	26,984
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expenses		23,562		21,362
Impairment of assets and lease terminations		191,571		—
Deferred income taxes		(11,231)		1,792
Stock-based compensation		5,507		5,847
Loss from investments in unconsolidated affiliates		—		1,450
Changes in assets and liabilities:
Accounts and other receivable		38,312		43,295
Income taxes receivable/payable		(44,553)		(681)
Inventories		(605)		(3,142)
Prepaid expenses		1,452		(10,621)
Operating lease assets/liabilities		1,851		1,130
Other assets		13,279		(5,896)
Accounts payable		(3,464)		(11,623)
Gift card liabilities		(26,753)		(26,594)
Other accrued expenses		(85,745)		(9,787)
Cash (used in)/provided by operating activities		(32,980)		33,516
Cash flows from investing activities:
Additions to property and equipment		(15,775)		(13,351)
Additions to intangible assets		(128)		(96)
Investments in unconsolidated affiliates		—		(3,000)
Loans made to unconsolidated affiliates		—		(11,000)
Cash used in investing activities		(15,903)		(27,447)
Cash flows from financing activities:
Borrowings on credit facility		90,000		20,000
Repayments on credit facility		—		(10,000)
Proceeds from exercise of stock options		113		5,541
Cash dividends paid		(15,791)		(14,628)
Treasury stock purchases		(2,586)		(11,071)
Cash provided by/(used in) financing activities		71,736		(10,158)
Foreign currency translation adjustment		(246)		40
Net change in cash and cash equivalents		22,607		(4,049)
Cash and cash equivalents at beginning of period		58,416		26,578
Cash and cash equivalents at end of period	$	81,023	$	22,529

Supplemental disclosures:
Interest paid	$	253	$	316
Income taxes paid	$	352	$	566
Construction payable	$	3,945	$	2,670

See the accompanying notes to the condensed consolidated financial statements.

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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 December 31, 2019 filed with the SEC on March 11, 2020 (“fiscal 2019 10-K”).

On October 2, 2019, we completed the acquisition of North Italia and the remaining business of Fox Restaurant Concepts LLC, including Flower Child and all other FRC brands (the "Acquisitions"). The results of operations, financial position and cash flows of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2020 consists of 52 weeks and will end on December 29, 2020. Fiscal 2019, which ended on December 31, 2019, was also a 52-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

The Company is subject to risks and uncertainties as a result of the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic which was declared a National Public Health Emergency on March 13, 2020. We have experienced significant disruptions to our business due to suggested and mandated social distancing and shelter-in-place orders, which resulted in the temporary closure of a number of restaurants across our portfolio, while the remaining locations shifted to an off-premise only operating model on an interim basis. In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms. As of June 22, 2020, we have reopened dining rooms in 194 locations across our concepts, however we will be operating under capacity restrictions for some time as social distancing protocols remain in place. As of March 31, 2020 and June 22, 2020 respectively, 33 and 19 of our restaurants were temporarily closed and 261 and 81 restaurants were operating in an off-premise only model.

In response to the pandemic, the Company and its Board of Directors implemented the following measures to preserve liquidity and enhance financial flexibility:

●

Eliminated non-essential capital expenditures and expenses;

●

Suspended new unit development;

●

Reduced board, executive and corporate support staff compensation;

●

Furloughed approximately 41,000 hourly staff members;

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●

Engaged in discussions with our landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of the COVID-19 pandemic related closure;

●

Increased borrowings under our revolving credit facility;

●

Raised additional equity capital; and

●

Suspended the dividend on our common stock and share repurchases.

We cannot predict how long the COVID-19 pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent we can maintain off-premise sales volumes or if individuals will be comfortable returning to our dining rooms during or following social distancing protocols, and what long-lasting effects the COVID-19 pandemic may have on the restaurants industry as a whole. The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on consumer spending behavior, will determine the significance of the impact to our operating results and financial position.

In addition, these considerable developments have triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC. Future changes in estimates could further impact the carrying value of these items. (See Notes 3 and 4 for further discussion of impairment of long-lived and intangible assets, respectively. See Note 8 for further discussion of the revaluation of contingent consideration.)

See “Risk Factors” included in Part II, Item 1A for further discussion of risks associated with the COVID-19 pandemic.

Derivative Financial Instruments

We recognize derivative financial instruments on the balance sheet at fair value under a Level 2 categorization. Our only derivative is an interest rate swap which is designated as a cash flow hedge. Therefore, the effective portion of the changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings, and the ineffective portion of changes in the fair value are immediately recognized in earnings as interest expense. We classify cash inflows and outflows from derivatives within operating activities on the consolidated statements of cash flows. See Note 7 for further discussion of this interest rate swap.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update eliminates, adds and modifies certain disclosure requirements for fair value measurements. We adopted this standard as of the beginning of fiscal 2020 and such adoption did not have a significant impact on our consolidated financial statements.

2. Inventories

Inventories consisted of (in thousands):


	March 31, 2020		December 31, 2019
Restaurant food and supplies	$	23,131	$	25,057
Bakery finished goods and work in progress		18,247		16,000
Bakery raw materials and supplies		6,444		6,168
Total	$	47,822	$	47,225

3. Impairment of Long-Lived Assets

We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the assets or asset group may not be recoverable. Due to the significant impact of the COVID-19 pandemic on our operations, we determined it was necessary to perform an interim test of our long-lived assets during the first quarter of fiscal 2020. Based on the results of these assessments, we recorded $8.9 million of expense primarily related to the impairment of one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants. These amounts are recorded in impairment of assets and lease terminations on the consolidated statements of income.

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4. Intangible Assets, net

The following table presents the components of our intangible assets, net (in thousands):


	March 31, 2020		December 31, 2019
Indefinite-lived intangible assets:
Goodwill	$	1,451	$	78,355
Trade names and trademarks		233,567		337,027
Transferable alcoholic beverage licenses		8,545		8,575
Total indefinite-lived intangible assets		243,563		423,957
Definite-lived intangible assets, net:
Licensing agreements		7,627		10,060
Non-transferable alcoholic beverage licenses		3,211		3,190
Total definite-lived intangible assets		10,838		13,250
Total intangible assets, net	$	254,401	$	437,207

During the first quarter of fiscal 2020, we finalized our purchase accounting for the Acquisitions, increasing goodwill by $2.5 million with an offsetting decrease in trade names and trademarks.

Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of the first day of our fiscal fourth quarter or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. Definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows.

Due to the decrease in our stock price coupled with the dining room closures related to the COVID-19 pandemic and significant decline to the equity value of our peers and overall U.S. stock market, we determined it was necessary to perform an interim assessment of our indefinite and definite-lived intangible assets during the first quarter of fiscal 2020. For the goodwill impairment test, the estimated fair value of the reporting units was determined using a blend of the income and market capitalization approaches. For the income approach, we performed a discounted cash flow analysis. The fair value of the other indefinite-lived assets was estimated using the relief from royalty method. There were a number of estimates and significant judgments made by management in performing these evaluations, such as future unit growth, average unit volumes, cash flows and discount rates. Accordingly, actual results could vary significantly from such estimates. Based on the results of these assessments, we recorded impairment expense of $79.4 million, $101.0 million and $2.3 million related to goodwill, trade names and trademarks, and licensing agreements, respectively. More than half of the total impairment amount was driven by the impact on our market capitalization, with the balance related to lower future cash flow estimates. The reduced projections stemmed primarily from our decision to delay fiscal 2020 unit development, thereby moving our expected unit growth trajectory out by one year. The cash flow estimates assumed that average unit volumes and margins would substantially return to pre-COVID-19 levels by mid-fiscal 2021.

5. Gift Cards

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


	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
Gift card liabilities:	March 31, 2020		April 2, 2019
Beginning balance	$	187,978	$	172,336
Activations		17,340		20,373
Redemptions and breakage		(44,103)		(46,964)
Ending balance	$	161,215	$	145,745

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	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
	March 31, 2020		April 2, 2019
Gift card contract assets: ⁽¹⁾
Beginning balance	$	23,172	$	23,388
Deferrals		2,203		2,596
Amortization		(4,690)		(4,711)
Ending balance	$	20,685	$	21,273

(1)	Included in prepaid expenses on the condensed consolidated balance sheets.

6. Leases

Components of lease expense were as follows (in thousands):


	Thirteen Weeks Ended		Thirteen Weeks Ended
	March 31, 2020		April 2, 2019
Operating	$	33,041	$	26,427
Variable		15,828		16,335
Short-term		129		77
Total	$	48,998	$	42,839

Supplemental information related to leases (in thousands, except percentages):


	Thirteen Weeks Ended		Thirteen Weeks Ended
Cash paid for amounts included in the measurement of lease liabilities:	March 31, 2020		April 2, 2019
Operating cash flows from operating leases	$	30,760	$	24,213
Right-of-use assets obtained in exchange for new operating lease liabilities		14,929		5,768

7. Long-Term Debt

On July 30, 2019, we entered into a Third Amended and Restated Loan Agreement (the “Facility”), which amends and restates in its entirety our prior Second Amended and Restated Loan Agreement dated as of December 22, 2015. The Facility, which terminates on July 30, 2024, provides us with revolving loan commitments that total $400 million (of which $40 million may be used for issuances of letters of credit). The Facility contains a commitment increase feature that could provide for an additional $200 million in available credit upon our request and subject to the participating lenders electing to increase their commitments or new lenders being added to the Facility. At March 31, 2020, we had net availability for borrowings of $0.6 million, based on a $380.0 million outstanding debt balance and $19.4 million in standby letters of credit. During the first quarter of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility given the impact of the COVID-19 pandemic on our operations.

At March 31, 2020, we were subject to certain financial covenants under the Facility requiring us to maintain (i) a maximum "Net Adjusted Leverage Ratio" of 4.75 and (ii) a minimum ratio of EBITDAR to interest and rent expense of 1.9 ("EBITDAR Ratio"), as well as customary events of default that, if triggered, could result in acceleration of the maturity of the Facility. The Facility also limits cash 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.

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At March 31, 2020. borrowings under the Facility bore interest, at our option, at a rate equal to either: (i) the adjusted LIBO Rate (as customarily defined) (the “Adjusted LIBO Rate”) plus a margin that is based on our net adjusted leverage ratio, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5%, and (3) the one-month Adjusted LIBO Rate plus 1.0%, plus (b) a margin that is based on our net adjusted leverage ratio. Letters of credit issued under the Facility bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted LIBO Rate plus other customary fees charged by the issuing bank. Under the Facility, we paid certain customary loan origination fees and will pay an unused fee on the unused portion of the Facility that is also based on our Net Adjusted Leverage Ratio. Our Net Adjusted Leverage and EBITDAR Ratios were 4.3 and 2.3, respectively, at March 31, 2020, and we were in compliance with all covenants in effect at that date.

Our obligations under the Facility are unsecured. Certain of our material subsidiaries have guaranteed our obligations under the Facility. The Facility will be used for our general corporate purposes, including for the issuance of standby letters of credit to support our self-insurance programs, and to fund dividends, stock repurchases and permitted acquisitions.

As further discussed in Note 15, on May 1, 2020, we amended the Facility to provide additional financial flexibility, including relief of certain of the covenants discussed above.

On March 13, 2020, we entered into an interest rate swap agreement to manage our exposure to interest rate movements on our Facility. The agreement became effective on April 1, 2020 and matures on April 1, 2025. The interest rate swap entitles us to receive a variable rate of interest based on the one-month LIBO rate in exchange for the payment of a fixed interest rate of 0.802%. The notional amount of the swap agreement is $280.0 million through March 31, 2023 and $140.0 million from April 1, 2023 through April 1, 2025. The differences between the variable LIBO rate and the interest rate swap rate are settled monthly. We did not make any payments to settle the interest rate swap during the three months ended March 31, 2020. At March 31, 2020, the fair value of our interest rate swap was a liability of $3.1 million and was included in long-term other liabilities in the condensed consolidated balance sheet. Changes in the valuation of the interest rate swap were included as a component of other comprehensive income and will be reclassified to earnings as realized.

We classified this interest rate swap within Level 2 of the valuation hierarchy described in Note 8. Our counterparty under this arrangement provided monthly statements of the market values of these instruments based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability. The impact on the derivative liabilities for the Company’s and the counterparty’s non-performance risk to the derivative trades was considered when measuring the fair value of derivative liabilities.

8. 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

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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):


	March 31, 2020
	Level 1		Level 2		Level 3
Assets (Liabilities)
Non-qualified deferred compensation assets	$	63,836	$	—	$	—
Non-qualified deferred compensation liabilities		(64,679)		—		—
Interest rate swap		—		(3,141)		—
Acquisition-related deferred consideration		—		(55,405)		—
Acquisition-related contingent consideration and compensation liabilities		—		—		(7,280)


	December 31, 2019
	Level 1		Level 2		Level 3
Assets (Liabilities)
Non-qualified deferred compensation assets	$	77,228	$	—	$	—
Non-qualified deferred compensation liabilities		(76,255)		—		—
Acquisition-related deferred consideration		—		(53,933)		—
Acquisition-related contingent consideration and compensation liabilities		—		—		(13,218)

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 was $ 0 to $ 35.6 million. Results could change materially if different estimates and assumptions were used. 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):


Balance, December 31, 2019	$	13,218
Change in fair value		(5,938)
Balance, March 31, 2020	$	7,280

The significant change in the fair value of the contingent consideration during the first quarter of fiscal 2020 related to the impact of the COVID-19 pandemic on the estimated cash flows used in the valuation, primarily stemming from the delay of future new restaurant openings.

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

9. Commitments and Contingencies

On June 7, 2018, the California Department of Industrial Relations issued a $4.2 million wage citation jointly against the Company and our vendor that provides janitorial services to eight of our Southern California restaurants, alleging that the janitorial vendor or its subcontractor failed to comply with various provisions of the California Labor Code (Wage Citation Case No. 35-CM-188798-16). The wage citation seeks to recover penalties and other monetary payments on behalf of the employees that worked for this vendor or its subcontractor. On June 28, 2018, we filed an appeal of the wage citation. On June 11, 2020, the DLSE postponed the hearing on the Company’s appeal due to safety concerns related to the COVID-19 pandemic. It is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter and, accordingly, we have not reserved for any potential future payments.

On June 22, 2018, the Internal Revenue Service issued a Notice of Deficiency in which they disallowed $8.0 million of our §199 Domestic Production Activities Deduction for tax years 2010, 2011 and 2012. On September 11, 2018 we petitioned the United States Tax Court for a redetermination of the deficiency. The tax court has assigned docket number 18150-18 to our case. We intend to vigorously defend our position in litigation and based on our analysis of the law, regulations and relevant facts, we have not reserved for any potential future payments.

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Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other claims. These matters typically involve claims from customers, staff members and others related to operational and employment issues common to the foodservice industry. A number of these claims may exist at any given time, and some of the claims may be pled as class actions. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks and other intellectual property, both domestically and abroad. We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether they are valid or whether we are legally determined to be liable.

At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims. Legal costs related to such claims are expensed as incurred.

10. Stockholders’ Equity

On February 18, 2020, our Board of Directors (“Board”) approved a quarterly cash dividend of $0.36 per share that was paid on March 20, 2020 to the stockholders of record at the close of business on March 9, 2020. Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the Facility and applicable law, and such other factors that our Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $1,695.7 million through March 31, 2020, including 0.1 million shares at a cost of $2.6 million repurchased during the first quarter of fiscal 2020. Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth. Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. We make the determination to repurchase shares based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the Acquisitions, our share price and current market conditions. The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Facility that limit share repurchases based on a defined ratio.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Facility, as amended on May 1, 2020, our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases. (See Notes 7 and 15 for further discussion of our Facility.) As further discussed in Note 15, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we sold 200,000 shares of Series A Convertible Preferred Stock on April 20, 2020 for an aggregate purchase price of $200 million.

11. Stock-Based Compensation

On April 5, 2017, our Board approved an amendment to our 2010 Stock Incentive Plan to increase the number of shares of common stock reserved for grant under the plan to 12.7 million shares from 9.2 million shares. This amendment was approved by our stockholders at our annual meeting held on June 8, 2017. On April 4, 2019, our Board adopted The Cheesecake Factory Incorporated Stock Incentive Plan. This plan was approved by our stockholders at our annual meeting held on May 30, 2019. The maximum number of shares of common stock available for grant under this plan is 4.8 million shares plus 1.8 million shares, which, as of May 30, 2019, were available for issuance under our 2010 Stock Incentive Plan plus 1.9 million shares which may become available for issuance under The Cheesecake Factory Incorporated Stock Incentive Plan due to forfeiture or lapse of awards under our 2010 Stock Incentive Plan following May 30, 2019. Approximately 4.8 million of these shares were available for grant as of March 31, 2020.

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The following table presents information related to stock-based compensation, net of forfeitures (in thousands):


	Thirteen		Thirteen
	Weeks Ended		Weeks Ended
	March 31, 2020		April 2, 2019

Labor expenses	$	1,966	$	1,720
Other operating costs and expenses		70		69
General and administrative expenses		3,471		4,058
Total stock-based compensation		5,507		5,847
Income tax benefit		1,353		1,438
Total stock-based compensation, net of taxes	$	4,154	$	4,409

Capitalized stock-based compensation⁽¹⁾	$	40	$	63

(1)

It is our policy to capitalize the portion of stock-based compensation costs for our internal development department that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations and equipment installation. Capitalized stock-based compensation is included in property and equipment, net on the condensed consolidated balance sheets.

Stock Options

The weighted-average fair value at the grant date for options issued during the first quarter of fiscal 2020 and 2019 was $6.66 and $9.90 per share, respectively. The fair value of options was estimated utilizing the Black-Scholes valuation model with the following weighted-average assumptions for the first quarter of fiscal 2020 and 2019, respectively: (a) an expected option term of 6.9 years in both periods, (b) expected stock price volatility of 25.7% and 26.3%, (c) a risk-free interest rate of 1.5% and 2.6%, and (d) a dividend yield on our stock of 3.6% and 2.9%.

Stock option activity during the thirteen weeks ended March 31, 2020 was as follows:


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
	Shares	Exercise Price		Term	Intrinsic Value ⁽¹⁾
	(In thousands)	(Per share)		(In years)	(In thousands)
Outstanding at December 31, 2019	1,829	$	47.32	4.3	$	844
Granted	654		40.16
Exercised	(4)		29.79
Forfeited or cancelled	—		—
Outstanding at March 31, 2020	2,479	$	45.46	5.5	$	10,687

Exercisable at March 31, 2020	1,239	$	46.79	3.0	$	6,380

(1)

Aggregate intrinsic value is calculated as the difference between our closing stock price at fiscal period end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised their options on the fiscal period end date.

The total intrinsic value of options exercised during the thirteen weeks ended March 31, 2020 and April 2, 2019 was $35.6 million and $3.4 million, respectively. As of March 31, 2020, total unrecognized stock-based compensation expense related to unvested stock options was $10.5 million, which we expect to recognize over a weighted-average period of approximately 4.0 years.

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Restricted Shares and Restricted Share Units

Restricted share and restricted share unit activity during the thirteen weeks ended March 31, 2020 was as follows:


		Weighted
		Average
	Shares	Fair Value
	(In thousands)	(Per share)
Outstanding at December 31, 2019	1,764	$	47.76
Granted	579		40.01
Vested	(208)		51.38
Forfeited	(70)		55.70

Price	38.84	EPS	2
Shares	45	P/E	20
MCap	1,730	P/FCF	8
Net Debt	232	EBIT	101
TEV	1,962	TEV/EBIT	19
TTM 2019-12-31, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-06-22
10-K	2019-12-31	Filed 2020-03-12
10-Q	2019-10-01	Filed 2019-11-08
10-Q	2019-07-02	Filed 2019-08-05
10-Q	2019-04-02	Filed 2019-05-06
10-K	2019-01-01	Filed 2019-03-04
10-Q	2018-10-02	Filed 2018-11-09
10-Q	2018-07-03	Filed 2018-08-06
10-Q	2018-04-03	Filed 2018-05-11
10-K	2018-01-02	Filed 2018-02-28
10-Q	2017-10-03	Filed 2017-11-08
10-Q	2017-07-04	Filed 2017-08-09
10-Q	2017-04-04	Filed 2017-05-11
10-K	2017-01-03	Filed 2017-03-02
10-Q	2016-09-27	Filed 2016-11-03
10-Q	2016-06-28	Filed 2016-08-04
10-Q	2016-03-29	Filed 2016-05-05
10-K	2015-12-29	Filed 2016-02-25
10-Q	2015-09-29	Filed 2015-11-05
10-Q	2015-06-30	Filed 2015-08-06
10-Q	2015-03-31	Filed 2015-05-08
10-K	2014-12-30	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-07
10-Q	2014-07-01	Filed 2014-08-08
10-Q	2014-04-01	Filed 2014-05-09
10-K	2013-12-31	Filed 2014-02-27
10-Q	2013-10-01	Filed 2013-11-08
10-Q	2013-07-02	Filed 2013-08-09
10-Q	2013-04-02	Filed 2013-05-10
10-K	2013-01-01	Filed 2013-02-28
10-Q	2012-10-02	Filed 2012-11-09
10-Q	2012-07-03	Filed 2012-08-10
10-Q	2012-04-03	Filed 2012-05-11
10-K	2012-01-03	Filed 2012-02-29
10-Q	2011-09-27	Filed 2011-11-04
10-Q	2011-06-28	Filed 2011-08-05
10-Q	2011-03-29	Filed 2011-05-06
10-K	2010-12-28	Filed 2011-02-23
10-Q	2010-09-28	Filed 2010-11-04
10-Q	2010-06-29	Filed 2010-08-05
10-Q	2010-03-30	Filed 2010-05-06
10-K	2009-12-29	Filed 2010-02-26

EX-10.1	cake-20200331xex10d1.htm
EX-10.2	cake-20200331xex10d2.htm
EX-31.1	cake-20200331xex31d1.htm
EX-31.2	cake-20200331xex31d2.htm
EX-32.1	cake-20200331xex32d1.htm
EX-32.2	cake-20200331xex32d2.htm

8-K	2020-05-27
8-K	2020-05-13
8-K	2020-05-01
8-K	2020-04-22
8-K	2020-04-20
8-K	2020-04-02
8-K	2020-03-25
8-K	2020-03-23
8-K	2020-02-25
8-K	2020-02-18
8-K	2020-01-22
8-K	2019-11-04
8-K	2019-10-23
8-K	2019-10-01
8-K	2019-07-25
8-K	2019-07-03
8-K	2019-05-30
8-K	2019-05-22
8-K	2019-04-25
8-K	2019-04-02
8-K	2019-03-05
8-K	2019-02-13
8-K	2019-01-22
8-K	2018-11-06
8-K	2018-10-25
8-K	2018-10-02
8-K	2018-07-26
8-K	2018-07-09
8-K	2018-06-12
8-K	2018-05-31
8-K	2018-05-11
8-K	2018-04-23
8-K	2018-03-28
8-K	2018-03-06
8-K	2018-03-01
8-K	2018-02-20
8-K	2018-02-15
8-K	2018-01-24
8-K	2018-01-04

CAKE 10Q Quarterly Report

Cheesecake Factory Earnings 2020-03-31