Cheesecake Factory Earnings 2019-07-02

CAKE 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Table of Contents

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 July 2, 2019


☐	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 July 29, 2019, 44,631,522 shares of the registrant’s Common Stock, $.01 par value per share, were outstanding.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

INDEX


			Page Number

PART I	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:	3
		Condensed Consolidated Balance Sheets	3
		Condensed Consolidated Statements of Income	4
		Condensed Consolidated Statements of Comprehensive Income	5
		Condensed Consolidated Statement of Stockholders’ Equity	6
		Condensed Consolidated Statements of Cash Flows	8
		Notes to Condensed Consolidated Financial Statements	9
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
	Item 4.	Controls and Procedures	33

PART II	OTHER INFORMATION		33
	Item 1.	Legal Proceedings	33
	Item 1A.	Risk Factors	33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
	Item 5.	Other Information
	Item 6.	Exhibits	38

Signatures			39

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	July 2,		January 1,
	2019		2019
ASSETS
Current assets:
Cash and cash equivalents	$	22,604	$	26,578
Accounts receivable		16,874		20,928
Income taxes receivable		2,382		—
Other receivables		30,797		68,193
Inventories		46,011		38,886
Prepaid expenses		39,524		40,645
Total current assets		158,192		195,230
Property and equipment, net		758,496		913,275
Other assets:
Intangible assets, net		20,157		26,209
Prepaid rent		—		34,961
Operating lease assets		963,724		—
Investments in unconsolidated affiliates		79,674		79,767
Other		93,547		64,691
Total other assets		1,157,102		205,628
Total assets	$	2,073,790	$	1,314,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	35,960	$	49,071
Income taxes payable		—		712
Gift card liabilities		142,361		172,336
Operating lease liabilities		85,669		—
Other accrued expenses		172,973		194,381
Total current liabilities		436,963		416,500

Deferred income taxes		38,902		52,123
Deferred rent liabilities		—		79,697
Deemed landlord financing liabilities		—		113,095
Long-term debt		35,000		10,000
Operating lease liabilities		942,586		—
Other noncurrent liabilities		80,060		71,659
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—		—
Common stock, $.01 par value, 250,000,000 shares authorized; 97,480,423 and 96,621,990 issued at July 2, 2019 and January 1, 2019, respectively		975		967
Additional paid-in capital		845,461		828,676
Retained earnings		1,375,671		1,384,494
Treasury stock, 52,643,252 and 51,791,941 shares at cost at July 2, 2019 and January 1, 2019, respectively		(1,681,304)		(1,642,140)
Accumulated other comprehensive loss		(524)		(938)
Total stockholders’ equity		540,279		571,059
Total liabilities and stockholders’ equity	$	2,073,790	$	1,314,133

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Thirteen		Thirteen		Twenty-Six		Twenty-Six
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018

Revenues	$	602,645	$	587,319	$	1,202,126	$	1,172,016

Costs and expenses:
Cost of sales		134,438		131,671		270,625		265,891
Labor expenses		217,921		211,408		435,231		420,983
Other operating costs and expenses		149,106		140,515		302,327		285,491
General and administrative expenses		37,247		41,423		76,370		80,697
Depreciation and amortization expenses		21,659		23,727		43,021		47,729
Impairment of assets and lease terminations		—		2,583		—		2,583
Preopening costs		2,175		1,449		4,305		2,548
Total costs and expenses		562,546		552,776		1,131,879		1,105,922
Income from operations		40,099		34,543		70,247		66,094
Loss on investment in unconsolidated affiliates		(1,644)		(1,039)		(3,094)		(1,128)
Interest and other expense, net		(25)		(1,869)		(23)		(3,286)
Income before income taxes		38,430		31,635		67,130		61,680
Income tax provision		2,920		3,282		4,636		7,298
Net income	$	35,510	$	28,353	$	62,494	$	54,382

Net income per share:
Basic	$	0.80	$	0.62	$	1.41	$	1.20
Diluted	$	0.79	$	0.61	$	1.39	$	1.17

Weighted average shares outstanding:
Basic		44,165		45,383		44,210		45,467
Diluted		44,786		46,426		44,871		46,469

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Thirteen		Thirteen		Twenty-Six		Twenty-Six
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018

Net income	$	35,510	$	28,353	$	62,494	$	54,382
Other comprehensive gain/(loss):
Foreign currency translation adjustment		175		(249)		414		(495)
Other comprehensive gain/(loss)		175		(249)		414		(495)
Total comprehensive income	$	35,685	$	28,104	$	62,908	$	53,887

See the accompanying notes to the condensed consolidated financial statements

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the twenty-six weeks ended July 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
Net income	—		—		—		35,510		—		—		35,510
Foreign currency translation adjustment	—		—		—		—		—		175		175
Cash dividends declared Common stock, $0.33 per share	—		—		—		(14,899)		—		—		(14,899)
Stock-based compensation	47		1		4,691		—		—		—		4,692
Common stock issued under stock-based compensation plans	49		0		650		—		—		—		650
Treasury stock purchases	—		—		—		—		(28,093)		—		(28,093)
Balance, July 2, 2019	97,480	$	975	$	845,461	$	1,375,671	$	(1,681,304)	$	(524)	$	540,279

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the twenty-six weeks ended July 3, 2018:


										Accumulated
	Shares of			Additional						Other
	Common	Common		Paid-in		Retained		Treasury		Comprehensive
	Stock	Stock		Capital		Earnings		Stock		Loss		Total
Balance, January 2, 2018	95,412	$	954	$	799,862	$	1,345,666	$	(1,532,864)	$	(88)	$	613,530
Cumulative effect of adopting the pronouncement related to revenue recognition, net of tax	—		—		—		(3,560)		—		—		(3,560)
Balance, January 2, 2018, as adjusted	95,412		954		799,862		1,342,106		(1,532,864)		(88)		609,970
Net income	—		—		—		26,029		—		—		26,029
Foreign currency translation adjustment	—		—		—		—		—		(246)		(246)
Cash dividends declared Common stock, $0.29 per share	—		—		—		(13,280)		—		—		(13,280)
Stock-based compensation	334		4		6,079		—		—		—		6,083
Common stock issued under stock-based compensation plans	211		2		538		—		—		—		540
Treasury stock purchases	—		—		—		—		(34,903)		—		(34,903)
Balance, April 3, 2018	95,957	$	960	$	806,479	$	1,354,855	$	(1,567,767)	$	(334)	$	594,193
Net income	—		—		—		28,353		—		—		28,353
Foreign currency translation adjustment	—		—		—		—		—		(249)		(249)
Cash dividends declared Common stock, $0.29 per share	—		—		—		(13,296)		—		—		(13,296)
Stock-based compensation	45		—		5,130		—		—		—		5,130
Common stock issued under stock-based compensation plans	227		2		5,775		—		—		—		5,777
Treasury stock purchases	—		—		—		—		(7,126)		—		(7,126)
Balance, July 3, 2018	96,229	$	962	$	817,384	$	1,369,912	$	(1,574,893)	$	(583)	$	612,782

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Twenty-Six		Twenty-Six
	Weeks Ended		Weeks Ended
	July 2, 2019		July 3, 2018

Cash flows from operating activities:
Net income	$	62,494	$	54,382
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expenses		43,021		47,729
Deferred income taxes		(2,289)		805
Impairment of assets and lease terminations		—		2,493
Stock-based compensation		10,488		11,075
Loss from investments in unconsolidated affiliates		3,094		1,128
Changes in assets and liabilities:
Accounts and other receivable		43,123		37,750
Income taxes receivable/payable		(3,095)		12,583
Inventories		(7,122)		7,865
Prepaid expenses		(3,372)		4,717
Operating lease assets/liabilities		(5,504)		—
Other assets		(7,984)		1,089
Accounts payable		(13,417)		(4,839)
Gift card liabilities		(29,980)		(30,328)
Other accrued expenses		(5,688)		(5,901)
Cash provided by operating activities		83,769		140,548
Cash flows from investing activities:
Additions to property and equipment		(29,371)		(51,870)
Additions to intangible assets		(198)		(735)
Investments in unconsolidated affiliates		(3,000)		(14,000)
Loans made to unconsolidated affiliates		(18,000)		—
Proceeds from variable life insurance contract		—		540
Cash used in investing activities		(50,569)		(66,065)
Cash flows from financing activities:
Deemed landlord financing proceeds		—		3,631
Deemed landlord financing payments		—		(2,509)
Borrowings on credit facility		35,000		30,000
Repayments on credit facility		(10,000)		(20,000)
Proceeds from exercise of stock options		6,191		6,317
Cash dividends paid		(29,287)		(26,521)
Treasury stock purchases		(39,164)		(42,029)
Cash used in financing activities		(37,260)		(51,111)
Foreign currency translation adjustment		86		(11)
Net change in cash and cash equivalents		(3,974)		23,361
Cash and cash equivalents at beginning of period		26,578		6,008
Cash and cash equivalents at end of period	$	22,604	$	29,369

Supplemental disclosures:
Interest paid	$	636	$	4,145
Income taxes paid	$	9,939	$	5,291
Construction payable	$	4,023	$	4,250
Non-cash operating:
Settlement of sale-leaseback accounting	$	—	$	471
Non-cash investing:
Settlement of landlord sale-leaseback accounting	$	—	$	(4,056)
Non-cash financing:
Settlement of landlord financing obligation for sale-leaseback leases	$	—	$	3,585
Deemed landlord financing proceeds	$	—	$	3,756

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

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 1, 2019 filed with the SEC on March 4, 2019 (“fiscal 2018 10-K”).

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2019 consists of 52 weeks and will end on December 31, 2019. Fiscal 2018, which ended on January 1, 2019, was also a 52-week year.

Beginning with our fiscal 2018 10-K, we separately disclosed our investments in unconsolidated affiliates on the consolidated balance sheet and our related share of losses on the consolidated statement of income and statement of cash flow. Corresponding balances for the thirteen and twenty-six weeks ended July 2, 2018 were reclassified to conform to the current presentation.

Beginning with our fiscal 2018 10-K, we corrected an error in our consolidated statements of income by reclassifying complimentary meals out of revenue and other operating expenses. We also reclassified the associated cost of complimentary meals from other operating expenses to cost of sales and labor. The reclassifications had no impact on previously reported income from operations or net income. Corresponding balances for the first two fiscal quarters of 2018 were reclassified to conform to the current presentation.

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.

Table of Contents

Recent Accounting Pronouncements

We adopted FASB Accounting Standards Codification (“ASC”) Topic 842, “Leases,” as of January 2, 2019, using the alternative transition method and recorded a cumulative effect adjustment to beginning retained earnings without restating prior periods. We elected the package of practical expedients which allowed us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that existed prior to adoption of the new standard. In addition, we elected the hindsight practical expedient, which lengthened the lease term for certain of our leases to include renewal options, and the short-term lease exclusion. Adoption of the new standard resulted in the recognition of operating lease assets and liabilities of $975.1 million and $1,045.4 million, respectively, and a reduction to retained earnings of $41.5 million, net of tax. All prior lease-related balances of $39.2 million of prepaid rent, $140.2 million in property and equipment, net, $6.2 million of intangible assets, net, $82.1 million of deferred rent liabilities and $118.7 million of deemed landlord financing have been reclassified into operating lease assets or eliminated upon ASC 842 adoption.

Leases

We currently lease all our restaurant locations, generally with initial terms of 20 years plus two five-year renewal options. Our leases typically require contingent rent above the minimum base rent payments based on a percentage of revenues, have escalating minimum rent requirements over the term of the lease and require payment for various expenses incidental to the use of the property. A majority of our leases provide for a reduced level of overall rent obligation should specified co-tenancy requirements not be satisfied. We expend cash for leasehold improvements and furniture, fixtures, and equipment to build out and equip our leased premises. We may also expend cash for structural additions that we make to leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against our future minimum or percentage rents, or a combination thereof. We do not meet any of the accounting criteria for being the owner of the asset under construction. Many of our leases provide early termination rights permitting us to terminate the lease prior to expiration in the event our revenues are below a stated level for a period of time, generally conditioned upon repayment of the unamortized landlord contributions.

In addition to leases for our restaurant locations, we also lease automobiles and certain equipment that is used in the restaurants, bakeries and corporate office. The automobile leases are the only non-real estate leases included in our operating lease assets and liabilities. All other leases are immaterial or qualify for the short-term lease exclusion.

The assessment of whether a contract is or contains a lease is performed at contract inception. A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as having both the right to obtain substantially all the economic benefits from the use of the asset and to direct how and for what purpose the asset is used.

At lease commencement, we evaluate each lease to determine its appropriate classification as an operating or finance lease. All our restaurant and automobile leases are classified as operating leases. For restaurant leases existing at transition, we will continue to apply our historical practice of excluding executory costs, and only minimum base rent will be factored into the initial operating lease liability and corresponding lease asset. For restaurant leases beginning after adoption of ASC 842, we have elected the single lease component practical expedient. Operating lease assets and liabilities are recorded on the balance sheet at lease commencement based on the present value of minimum base rent and other fixed payments over the reasonably certain lease term. The difference between the amounts we expend for structural costs and the construction contributions received from our landlords is recorded as an adjustment to the operating lease asset. Lease terms include the build-out period for our leases where no rent payments are typically due under the terms of the lease, as well as options to renew when we deem we have significant economic incentive to exercise the extension. When determining if we have a significant economic incentive, we consider relevant factors, such as contractual, asset, entity and market-based considerations. Option periods are included in the lease term for the majority of our leases. Termination rights have not been factored into the lease terms since based on our probability assessment we are reasonably certain we will not terminate our leases.

Table of Contents

We cannot determine the interest rate implicit in our leases because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we use our incremental borrowing rate as the discount rate for our leases. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

We monitor for events or changes in circumstances that require reassessment of our leases. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. We also assess the potential impairment of our operating lease assets under long-lived asset impairment guidance in ASC 360.

Rent expense included in our operating lease assets is recognized on a straight-line basis. Contingent rent expense is recorded as incurred to the extent it exceeds minimum base rent per the lease agreement. Other variable rent expense is recognized as incurred. The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the operating lease asset and liability. These judgments may produce materially different amounts of rent expense than would be reported if different assumptions were used.

2. Inventories

Inventories consisted of (in thousands):


	July 2, 2019		January 1, 2019
Restaurant food and supplies	$	19,881	$	18,362
Bakery finished goods and work in progress		20,125		13,845
Bakery raw materials and supplies		6,005		6,679
Total	$	46,011	$	38,886

3. Gift Cards

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

Gift card liabilities:


	Thirteen		Thirteen		Twenty-Six		Twenty-Six
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018

Beginning balance	$	145,745	$	138,134	$	172,336	$	163,951
Activations		28,999		28,451		49,372		50,195
Redemptions and breakage		(32,383)		(32,968)		(79,347)		(80,529)
Ending balance	$	142,361	$	133,617	$	142,361	$	133,617

Table of Contents

Gift card contract assets: ⁽¹⁾


	Thirteen		Thirteen		Twenty-Six		Twenty-Six
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	July 2, 2019		July 3, 2018		July 2, 2019		July 3, 2018

Beginning balance	$	21,273	$	21,718	$	23,388	$	23,814
Deferrals		3,468		3,680		6,064		6,402
Amortization		(4,649)		(4,779)		(9,360)		(9,597)
Ending balance	$	20,092	$	20,619	$	20,092	$	20,619

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

4. Other Assets

Other assets consisted of (in thousands):


	July 2, 2019		January 1, 2019
Executive Savings Plan trust assets	$	65,885	$	57,605
Loans receivable from unconsolidated affiliates		18,000		—
Deposits		5,466		5,489
Deferred income taxes		4,196		1,597
Total	$	93,547	$	64,691

5. Leases

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


	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 2, 2019		July 2, 2019
Operating	$	25,842	$	51,604
Variable		16,426		32,761
Short-term		76		153
Total	$	42,344	$	84,518

Rent expense on all operating leases (under ASC 840) was as follows (in thousands):


	Thirteen Weeks Ended		Twenty-Six Weeks Ended
	July 3, 2018		July 3, 2018
Straight-lined minimum base rent	$	20,514	$	41,261
Contingent rent		5,113		10,207
Common area maintenance and taxes		9,909		19,838
Total	$	35,536	$	71,306

Table of Contents

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


	Twenty-Six Weeks Ended
	July 2, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	48,634
Right-of-use assets obtained in exchange for new operating lease liabilities		8,580
Weighted-average remaining lease term — operating leases (in years)		17.1
Weighted-average discount rate — operating leases		5.2	%

As of July 2, 2019, the maturities of our operating lease liabilities are as follows (in thousands):


2019	$	42,258
2020		97,994
2021		95,964
2022		94,896
2023		93,815
Thereafter		1,182,989
Total future lease payments	$	1,607,916
Less: Interest		579,661
Present value of lease liabilities	$	1,028,255

As of January 1, 2019, the aggregate minimum annual lease payments under operating leases (under ASC 840), including amounts characterized as deemed landlord financing payments, were as follows (in thousands):


2019	$	93,792
2020		91,808
2021		88,829
2022		86,925
2023		81,929
Thereafter		495,091
Total	$	938,374

During the first two quarters of fiscal 2019, four leases were executed; three have initial terms of 20 years plus two five-year renewal options and one has an initial term of 10 years and four five-year renewal options. All but one include allowances for tenant improvements. The leases are expected to commence in the fourth quarter of fiscal 2019. The undiscounted fixed payments over the initial terms are $30.5 million. We will assess the reasonably certain lease term at lease commencement date.

6. Long-Term Debt

As of July 2, 2019, we maintained a $200 million unsecured revolving credit facility (the “Facility”), $50 million of which could be used for issuances of letters of credit. Availability under the Facility was reduced by outstanding letters of credit, which are used to support our self-insurance programs. The Facility, which was scheduled to mature on December 22, 2020, contained a commitment increase feature that could provide for an additional $100 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. Certain of our significant subsidiaries guaranteed our obligations under the Facility. During the second quarter of fiscal 2019, we utilized the Facility to fund a portion of our stock repurchases. At July 2, 2019, we had net availability for borrowings of $145.6 million, based on a $35.0 million outstanding debt balance and $19.4 million in standby letters of credit.

We were subject to certain financial covenants under the Facility requiring us to maintain (i) a maximum “Net Adjusted Leverage Ratio” of 4.0 and (ii) a minimum EBITDAR (earnings before interest, taxes, depreciation and

Table of Contents

amortization, and rent) to interest and rental expense ratio (“EBITDAR Ratio”) of 1.9, with each of the capitalized terms in this Note 6 having the same meaning as defined in the Facility. The Facility limited cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also set forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters. Our Net Adjusted Leverage and EBITDAR Ratios were 3.2 and 2.5, respectively, at July 2, 2019, and we were in compliance with all covenants in effect at that date.

Borrowings under the Facility bore interest, at our option, at a rate per annum equal to either (i) the Adjusted LIBO Rate plus a margin ranging from 1.00% to 1.75% based on our Net Adjusted Leverage Ratio or (ii) the sum of (a) the highest of (1) the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect, (2) the greater of the Federal Funds Effective Rate or the 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 ranging from 0.00% to 0.75% based on our Net Adjusted Leverage Ratio. We also paid customary fees on the unused portion of the Facility and on our outstanding letters of credit.

(See Note 12 for discussion of our New Facility.)

7. Commitments and Contingencies

On December 10, 2015, a former restaurant management employee filed a class action lawsuit in the Los Angeles County Superior Court, alleging that the Company improperly classified its managerial employees, failed to pay overtime, and failed to provide accurate wage statements, in addition to other claims. The lawsuit seeks unspecified penalties under the California Labor Code Private Attorney General Act in addition to other monetary payments (Tagalogon v. The Cheesecake Factory Restaurants, Inc.; Case No. BC603620). On July 29, 2016, we filed a response to the complaint. On March 7, 2019, the parties participated in voluntary mediation, which concluded without the parties reaching a resolution. On June 4, 2019, the parties notified the Court that they reached a tentative agreement to settle this case. The settlement agreement is subject to documentation and court approval. Based on the current status of this matter, we have reserved an immaterial amount in anticipation of settlement.

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. We intend to vigorously defend this action. However, 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.

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

Table of Contents

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.

8. Stockholders’ Equity

On April 25, 2019, our Board of Directors (“Board”) approved a quarterly cash dividend of $0.33 per share that was paid on May 29, 2019 to the stockholders of record at the close of business on May 16, 2019. 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. (See Note 6 for further discussion of the Facility.)

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 52.6 million shares at a total cost of $1,681.3 million through July 2, 2019, including 0.6 million shares at a cost of $28.1 million repurchased during the second quarter of fiscal 2019. Repurchased common stock is reflected as a reduction of stockholders’ equity in treasury stock.

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 an evaluation of current and future capital needs associated with new restaurant development, current and forecasted cash flows, including dividend payments, growth capital contributions to North Italia^® and Flower Child^® and pending acquisitions, a review of our capital structure and cost of capital, our share price and current market conditions. (See Note 12 for future discussion of our pending acquisitions.) 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. (See Note 6 for further discussion of our long-term debt.) 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.

9. 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 available 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.

Table of Contents

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

Thirteen

Twenty-Six

Weeks Ended

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$47.71	45	$2,160

10-Q	2019-07-02	Quarter: 2019-07-02
10-Q	2019-04-02	Quarter: 2019-04-02
10-K	2019-01-01	Annual: 2019-01-01
10-Q	2018-10-02	Quarter: 2018-10-02
10-Q	2018-07-03	Quarter: 2018-07-03
10-Q	2018-04-03	Quarter: 2018-04-03
10-K	2018-01-02	Annual: 2018-01-02
10-Q	2017-10-03	Quarter: 2017-10-03
10-Q	2017-07-04	Quarter: 2017-07-04
10-Q	2017-04-04	Quarter: 2017-04-04
10-K	2017-01-03	Annual: 2017-01-03
10-Q	2016-09-27	Quarter: 2016-09-27
10-Q	2016-06-28	Quarter: 2016-06-28
10-Q	2016-03-29	Quarter: 2016-03-29
10-K	2015-12-29	Annual: 2015-12-29
10-Q	2015-09-29	Quarter: 2015-09-29
10-Q	2015-06-30	Quarter: 2015-06-30
10-Q	2015-03-31	Quarter: 2015-03-31
10-K	2014-12-30	Annual: 2014-12-30
10-Q	2014-09-30	Quarter: 2014-09-30
10-Q	2014-07-01	Quarter: 2014-07-01
10-Q	2014-04-01	Quarter: 2014-04-01
10-K	2013-12-31	Annual: 2013-12-31

8-K	2019-07-25	Earnings, Regulation FD, Other Events, Exhibits
8-K	2019-07-03	Other Events, Exhibits
8-K	2019-05-30	Officers, Shareholder Vote, Other Events, Exhibits
8-K	2019-05-22	Regulation FD, Exhibits
8-K	2019-04-25	Earnings, Other Events, Exhibits
8-K	2019-04-02	Other Events, Exhibits
8-K	2019-03-05	Other Events, Exhibits
8-K	2019-02-13	Earnings, Officers, Regulation FD, Other Events, Exhibits
8-K	2019-01-22	Other Events, Exhibits
8-K	2018-11-06	Other Events, Exhibits
8-K	2018-10-25	Earnings, Other Events, Exhibits
8-K	2018-10-02	Other Events, Exhibits
8-K	2018-07-26	Earnings, Other Events, Exhibits
8-K	2018-07-09	Other Events, Exhibits
8-K	2018-06-12	Other Events, Exhibits
8-K	2018-05-31	Shareholder Vote, Other Events, Exhibits
8-K	2018-04-23	Earnings, Other Events, Exhibits
8-K	2018-03-28	Other Events, Exhibits
8-K	2018-03-06	Other Events, Exhibits
8-K	2018-03-01	Accountant, Exhibits
8-K	2018-02-20	Other Events, Exhibits
8-K	2018-02-15	Earnings, Officers, Other Events, Exhibits
8-K	2018-01-24	Other Events, Exhibits
8-K	2018-01-04	Officers

FCX	Freeport-McMoran	16,360
VIA	Viacom	13,660
EQC	Equity Commonwealth	3,890
CWT	California Water Service Group	2,360
CMC	Commercial Metals	1,980
NVRO	Nevro	1,910
AGS	PlayAGS	746
CSLT	Castlight Health	546
PTN	Palatin Technologies	284
SREV	ServiceSource	98

EX-31.1	cake-20190702ex31131ab36.htm
EX-31.2	cake-20190702ex3127ada4f.htm
EX-32.1	cake-20190702ex32168b1c0.htm
EX-32.2	cake-20190702ex322d0fee8.htm