THE CHEESECAKE FACTORY INCORPORATED
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), which contains forward-looking statements, should be read
in conjunction with our audited consolidated financial statements and related
notes in Part IV, Item 15 of this report, the "Risk Factors" included in
Part I, Item 1A of this report and the cautionary statements included throughout
this report. The inclusion of supplementary analytical and related information
herein may require us to make estimates and assumptions to enable us to fairly
present, in all material respects, our analysis of trends and expectations with
respect to our results of operations and financial position.
The following MD&A includes a discussion comparing our results in fiscal 2020 to
fiscal 2019. For a discussion comparing our results from fiscal 2019 to fiscal
2018, refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2019 , filed with the SEC on March 11, 2020 .
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 onMarch 13, 2020 . We 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 our initial response to the COVID-19 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;
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.
In lateApril 2020 , certain jurisdictions began allowing the reopening of restaurant dining rooms, and we began to reopen dining rooms across our concepts the second week of May. During the third quarter of fiscal 2020, we called back to work a majority of our staff members who were previously furloughed, and restored Board, executive and corporate support staff compensation. In addition, we resumed new unit development on a limited basis and will continue to evaluate the pace and quantity of new unit development. Restrictions on the type of operating model and occupancy capacity continue to change, and these restrictions increased in many of our markets during the fourth quarter of fiscal 2020 with the surge in COVID-19 cases. The following table presents the number of restaurants and their operating model as ofFebruary 17, 2021 : The Cheesecake Factory North Italia Other FRC Other Total
Indoor dining with limited capacity 166 (1) 18
24 32 240
Outdoor dining only 39 5 2 3 49
Off-premise only 1 - - 1 2
Currently closed - - 1 2 3
Total 206 23 27 38 294
(1) On average,
were operating at 50% capacity.
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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 restaurant
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.
These considerable developments triggered the need to perform interim impairment
assessments of our long-lived assets, goodwill and other intangible assets and a
revaluation of contingent consideration associated with the acquisition of FRC
in addition to our annual impairment testing. Future changes in estimates could
further impact the carrying value of these items. (See Notes 7 and 8 for further
discussion of impairment of long-lived and intangible assets, respectively. See
Note 3 for further discussion of the revaluation of contingent consideration.)
See Item 1A - Risk Factors - Risks Related to the COVID-19 Pandemic.
General
The Cheesecake Factory Incorporated is a leader in experiential dining. We are culinary forward and relentlessly focused on hospitality. We currently own and operate 294 restaurants throughoutthe United States andCanada under brands including The Cheesecake Factory®, North Italia® and a collection within ourFox Restaurant Concepts business. Internationally, 27 The Cheesecake Factory® restaurants operate under licensing agreements. Our bakery division operates two facilities that produce quality cheesecakes and other baked products for our restaurants, international licensees and third-party bakery customers.
Overview
Our strategy is driven by our commitment to customer satisfaction and is focused primarily on menu innovation, service and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as to drive competitively strong performance that is sustainable. Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center, and leveraging our size to make the best use of our purchasing power. Investing in new Company-owned restaurant development is our top long-term capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets. ForThe Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level. We target an average cash-on-cash return on investment of about 35% for the North Italia concept and 25% to 30% for the FRC concepts. Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants. Investing in new restaurant development that meets our return on investment criteria is expected to support achieving mid-teens Company-level return on invested capital. In light of the COVID-19 pandemic, we will continue to evaluate the pace and quantity of new unit development. Our overall revenue growth is primarily driven by revenues from new restaurant openings and increases in comparable restaurant sales. Changes in comparable restaurant sales come from variations in customer traffic, as well as in average check. ForThe Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and stabilizing customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining, as we believe there is opportunity for a longer-term increase in our off-premise mix as we emerge from the COVID-19 pandemic. We are continuing our efforts on a number of initiatives, including a greater focus on increasing customer throughput in our restaurants, leveraging the success of our gift card program, working with a third party to provide delivery services for our restaurants, increasing customer awareness of our online ordering capabilities, augmenting our marketing programs, enhancing our training programs and leveraging our customer satisfaction measurement platform. Average check is driven by menu price increases and/or changes in menu mix. We generally updateThe Cheesecake Factory restaurant menus twice a year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances protecting both our margins and customer traffic levels. We have targeted menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies. Currently, our menu pricing is at the higher end of this range. We will continue to evaluate future pricing decisions in light of the COVID-19 pandemic operating environment. 41 Table of Contents
On
Margins are subject to fluctuations in commodity costs, labor, restaurant-level
occupancy expenses, general and administrative ("G&A") expenses and preopening
expenses. Our objective is to recapture our pre-COVID-19 pandemic margins, and
longer-term to drive margin expansion, by maintaining flat restaurant-level
margins at The Cheesecake Factory concept, leveraging our bakery operations,
international and consumer packaged goods royalty revenue streams and G&A
expense over time, and optimizing our restaurant portfolio.
Our future cash flow performance will depend on the evolving COVID-19 pandemic
regulatory landscape, as well as economic conditions and consumer behavior. We
would expect cash generation to increase as the operating environment for the
full-service segment of the restaurant industry normalizes from the COVID-19
pandemic impact. Longer-term, we plan to employ a balanced capital allocation
strategy, comprised of: investing in new restaurants that are expected to meet
our targeted returns, repaying borrowings under our $400 million unsecured
revolving credit facility (the "Amended Facility") and reinstating our dividend
and share repurchase program, the latter of which offsets dilution from our
equity compensation program and supports our earnings per share growth. At
present, our dividends on our common stock and share repurchases are suspended.
Our ability to declare dividends and repurchase shares in the future will be
subject to financial covenants under the Amended Facility, among other factors.
Longer-term, we believe our domestic revenue growth (comprised of our targeted
annual unit growth of 7%, in aggregate across concepts, and comparable sales
growth), combined with international expansion, planned debt repayment and an
anticipated capital return program will support our long-term financial
objective of 13% to 14% total return to shareholders, on average. We define our
total return as earnings per share growth plus our dividend yield. (See
Item 1A - Risk Factors - Risks Related to Owning Our Stock - "Our stock price
could be adversely affected if our performance falls short of our financial
guidance and/or market expectations.")
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Results of Operations
The following table presents, for the periods indicated, information from our
consolidated statements of (loss)/income expressed as percentages of revenues.
Fiscal Year
2020 2019 2018
Revenues 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of sales 23.1 22.6 22.8
Labor expenses 39.3 36.3 35.8Other operating costs and expenses 31.1 25.5
24.3
General and administrative expenses 7.9 6.5
6.6
Depreciation and amortization expenses 4.6 3.5
4.1
Impairment of assets and lease termination expenses 11.1 0.7
0.8
Acquisition-related costs 0.1 0.2
-
Acquisition-related contingent consideration, compensation and amortization (benefit)/expenses (0.2) 0.0
-
Preopening costs 0.5 0.5 0.5
Total costs and expenses 117.5 95.8 94.9
(Loss)/income from operations (17.5) 4.2
5.1
Gain/(loss) on investments in unconsolidated affiliates - 1.6
(0.3)
Interest and other expense, net (0.5) (0.1)
(0.2)
(Loss)/income before income taxes (18.0) 5.7
4.6
Income tax (benefit)/provision (5.2) 0.6
0.4
Net (loss)/income (12.8) 5.1
4.2
Dividends on Series A preferred stock (0.7) -
-
Direct and incremental Series A preferred stock issuance cost (0.5) -
-
Net (loss)/income available to common stockholders (14.0) % 5.1 %
4.2 %
Fiscal 2020 Compared to Fiscal 2019
Revenues
Revenues decreased 20.1% to
The Cheesecake Factory comparable sales declined by 28.2%, or$601.9 million , from fiscal 2019, driven by a decline in customer traffic of 41.5%, partially offset by average check growth of 13.3% (based on an increase of 3.1% in menu pricing and a 10.2% positive change in mix). We implemented effective menu price increases of approximately 1.5% in both the first and third quarters of fiscal 2020. Sales through the off-premise channel comprised approximately 43% of our restaurant sales during fiscal 2020 as compared to 16% in fiscal 2019 as most of our restaurants shifted to an off-premise-only model at the beginning of the COVID-19 pandemic and consumer behavior shifted toward off-premise dining throughout the pandemic. We account for each off-premise order as one customer for traffic measurement purposes. Therefore, average check is higher as most off-premise orders are for more than one customer. In turn, the high mix of sales in the off-premise channel was the primary driver of the positive change in mix and also contributed to the decline in traffic, along with the broader impact of the COVID-19 pandemic.The Cheesecake Factory average sales per restaurant operating week decreased 28.2% to$148,939 in fiscal 2020 from$207,310 in fiscal 2019. Total operating weeks atThe Cheesecake Factory restaurants increased 1.2% to 10,642 in fiscal 2020 compared to 10,520 in the prior year. North Italia comparable sales declined approximately 28% during fiscal 2020. North Italia average sales per restaurant operating week for fiscal 2020 was$89,515 based on 1,146 operating weeks. 43 Table of Contents Restaurants become eligible to enter the comparable sales base in their 19th month of operation. AtDecember 29, 2020 , there were sixThe Cheesecake Factory restaurants and four North Italia restaurants not yet in the comparable sales base. International licensed locations and restaurants that are no longer in operation, including those which we have relocated, are excluded from comparable sales calculations. Revenue contribution from the acquired concepts in fiscal 2020 totaled$259.9 million compared to$92.0 million in the fourth quarter of fiscal 2019, representing the period subsequent to theOctober 2, 2019 closing date of the Acquisition. External bakery sales were$66.6 million for fiscal 2020 compared to$58.4 million for fiscal 2019.
Cost of Sales
Cost of sales consists of food, beverage, retail and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses. As a percentage of revenues, cost of sales was 23.1% for fiscal 2020 compared to 22.6% for fiscal 2019, reflecting a shift in sales mix between restaurant and third-party bakery revenues, as well as a full year of revenues from the acquired concepts.The Cheesecake Factory restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities. Changes in costs for one commodity sometimes can be offset by cost changes in other commodity categories. The principal commodity categories for our restaurants include general grocery items, dairy, produce, seafood, poultry, meat and bread. (See the discussion of our contracting activities in Part II, Item 7A - "Quantitative and Qualitative Disclosures About Market Risk.") As has been our past practice, we will carefully consider opportunities to introduce new menu items and implement selected menu price increases to help offset any expected cost increases for key commodities and other goods and services. For new restaurants, cost of sales will typically be higher for a period of time after opening until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at these restaurants.
Labor Expenses
As a percentage of revenues, labor expenses, which include restaurant-level
labor costs and bakery direct production labor, including associated fringe
benefits, were 39.3% and 36.3% in fiscal 2020 and fiscal 2019, respectively.
This increase was primarily due to the cost of maintaining our full restaurant
management team in the reduced sales environment, as well as higher group
medical insurance costs, reflecting both higher large claims activity and the
costs associated with healthcare benefits for our furloughed staff members,
partially offset by a benefit from the Employee Retention Credit in the
Coronavirus Aid, Relief and Economic Security Act ("the CARES Act") and less
hourly labor.
For new restaurants, labor expenses will typically be higher for a period of time after opening while our management team becomes more accustomed to predicting and managing the sales volumes at the new restaurants.
Other Operating Costs and Expenses
Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), marketing, including delivery commissions, and other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead and distribution expenses. As a percentage of revenues, other operating costs and expenses were 31.1% and 25.5% in fiscal 2020 and fiscal 2019, respectively. This increase was primarily driven by sales deleverage, increased marketing expenses and costs associated with the COVID-19 pandemic such as additional sanitation and personal protective equipment.
G&A Expenses
G&A expenses consist of the restaurant management recruiting and training
program, restaurant field supervision, corporate support and bakery
administrative organizations, as well as gift card commissions to third-party
distributors. As a percentage of revenues, G&A expenses were 7.9% and 6.5% for
fiscal 2020 and fiscal 2019, respectively. This variance was primarily due to
sales deleverage, partially offset by lower corporate incentive compensation
costs.
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Depreciation and Amortization Expenses
As a percentage of revenues, depreciation and amortization expenses were 4.6% in fiscal 2020 compared to 3.5% in fiscal 2019 primarily due to sales deleverage.
Impairment of Assets and Lease Termination Expenses
During fiscal 2020, we recorded$219.3 million of impairment of assets and lease termination expenses primarily related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisition and long-lived assets for oneThe Cheesecake Factory , one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for oneThe Cheesecake Factory and seven Other restaurants, of which one closed in fiscal 2019, four closed in fiscal 2020, one closed in early fiscal 2021 and two are anticipated to close in fiscal 2021 and 2022. In fiscal 2019, we recorded$18.2 million of impairment of assets and lease termination expenses related to the impairment of long-lived assets for twoThe Cheesecake Factory and two Other restaurants, as well as lease termination costs and accelerated depreciation for two Other restaurants.
See Notes 7 and 8 of Notes to Consolidated Financial Statements in Part 1V, Item 15 of this report for further discussion of our long-lived and intangible assets, respectively.
Acquisition-Related Costs
We recorded
Acquisition-Related Contingent Consideration, Compensation and Amortization (Benefit)/Expenses
In fiscal 2020, we recorded a benefit of$3.9 million in acquisition-related contingent consideration, compensation and amortization (benefit)/expenses, reflecting a$5.7 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to the impact of the COVID-19 pandemic, partially offset by an increase of$1.4 million in the deferred consideration liability and$0.4 million in amortization of acquired definite-lived licensing agreements. In fiscal 2019, we recorded$1.0 million of acquisition-related expenses related to changes in the fair value of the deferred and contingent consideration and compensation liabilities, as well as amortization of acquired definite-lived licensing agreements. Preopening Costs Preopening costs were$10.5 million for fiscal 2020 compared to$13.1 million for fiscal 2019. We opened seven restaurants in fiscal 2020 comprised of oneThe Cheesecake Factory , one North Italia, two Other FRC and three Other locations compared to nine restaurants in fiscal 2019 comprised of fiveThe Cheesecake Factory , one North Italia and three Other locations. Preopening costs include all costs to relocate and compensate restaurant management staff members during the preopening period, costs to recruit and train hourly restaurant staff members, and wages, travel and lodging costs for our opening training team and other support staff members. Also included are expenses for maintaining a roster of trained managers for pending openings, the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs, and corporate travel and support activities. Preopening costs can fluctuate significantly from period to period based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant.
Gain/(loss) on Investments in Unconsolidated Affiliates
We recorded a$39.2 million net gain on investments in unconsolidated affiliates in fiscal 2019 comprised of a$52.7 million gain on our investments in North Italia andFlower Child upon acquisition of the remaining equity interests in these concepts, partially offset by our share of pre-acquisition losses incurred by these concepts which were driven primarily by impairment of assets and acquisition-related expenses. There was no corresponding amount in fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019. 45 Table of Contents
Interest and Other Expense, Net
Interest and other expense, net was$8.6 million in fiscal 2020 compared to$2.5 million in fiscal 2019. This variance was primarily due to increased borrowings on our credit facility to effect the Acquisition and enhance our financial flexibility in response to the COVID-19 pandemic.
Income Tax (Benefit)/Provision
Our effective income tax rate was 28.8% and 9.3% in fiscal 2020 and fiscal 2019, respectively. The increase resulted primarily from a lower proportion of employment credits and non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan in relation to pre-tax (loss)/income, as well as a benefit arising from the expected carryback of our anticipated fiscal 2020 loss to prior years when the federal statutory rate was 35%. These factors were partially offset by a lower proportion of state taxes benefit as compared to state taxes expense in relation to pre-tax (loss)/income. (See Note 20 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of income taxes.) Non-GAAP Measures
Adjusted net (loss)/income and adjusted diluted net (loss)/income per share are
supplemental measures of our performance that are not required by or presented
in accordance with GAAP. These non-GAAP measures may not be comparable to
similarly titled measures used by other companies and should not be considered
in isolation or as a substitute for measures of performance prepared in
accordance with GAAP. We calculate these non-GAAP measures by eliminating from
net (loss)/income and diluted net (loss)/income per common share the impact of
items we do not consider indicative of our ongoing operations. To reflect the
potential impact of the conversion of our Series A preferred stock into common
stock, we exclude the preferred dividend and direct and incremental preferred
stock issuance costs, and assume all shares of Series A preferred stock convert
to common stock. We use these non-GAAP financial measures for financial and
operational decision-making and as a means to evaluate period-to-period
comparisons. Our inclusion of these adjusted measures should not be construed as
an indication that our future results will be unaffected by unusual or
infrequent items. In the future, we may incur expenses or generate income
similar to the adjusted items.
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Following is a reconciliation from net (loss)/income and diluted net (loss)/income per common share to the corresponding adjusted measures (in thousands, except per share data):
Fiscal Year
2020 2019 2018Net (loss)/income available to common stockholders$ (277,107) $ 127,293 $ 99,035 Dividends on Series A preferred stock 13,485 - - Direct and incremental Series A preferred stock issuance costs 10,257 - - COVID-19 related costs (1) 22,963 - -
Impairment of assets and lease termination expenses 219,333 18,247 17,861 Acquisition-related costs
2,699 5,270 -
Acquisition-related contingent consideration,
compensation and amortization (benefit)/expenses (3,872) 1,033 -
(Gain)/loss on investments in unconsolidated
affiliates - (39,233) 4,754
Tax effect of adjustments (2) (62,692) 3,818 (5,880)
Adjusted net (loss)/income $ (74,934) $
116,428
Diluted net (loss)/income per common share$ (6.32) $ 2.86 $ 2.14 Dividends on Series A preferred stock 0.27 - - Direct and incremental Series A preferred stock issuance costs 0.20 - -
Assumed impact of potential conversion of Series A preferred stock into common stock (3)
0.80 - -
COVID-19 related costs (1) 0.46 - -
Impairment of assets and lease termination expenses 4.36 0.41 0.39
Acquisition-related costs 0.05 0.12 -
Acquisition-related contingent consideration,
compensation and amortization (benefit)/expenses (0.08) 0.02 -
(Gain)/loss on investments in unconsolidated
affiliates - (0.88) 0.10
Tax effect of adjustments (2) (1.25) 0.09 (0.13)
Adjusted net (loss)/income per share (4) $ (1.49) $
2.61
Represents incremental costs associated with the COVID-19 pandemic such as
additional sanitation, personal protective equipment, and healthcare benefits
(1) and other expenses associated with furloughed staff members. During fiscal
2020, we recorded
million in cost of sales,
million in other operating expenses and
(2) Based on the federal statutory rate and an estimated blended state tax rate,
the tax effect on all adjustments assumes a 26% tax rate.
Represents the impact of assuming the conversion of Series A preferred stock
(3) into common stock utilizing a weighted-average shares outstanding approach
(6,390,210 shares), resulting in an assumption of 50,258,815 weighted-average
common shares outstanding for fiscal 2020.
(4) Adjusted net (loss)/ income per share may not add due to rounding.
Fiscal 2021 Outlook
This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act, and Section 21E of the Exchange Act and should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this report, the "Risk Factors" included in Part I, Item 1A of this report and the cautionary statements included throughout this report. For fiscal 2021, we are currently estimating commodity cost inflation of approximately 2%, and while we are still evaluating the potential effects of COVID-19 pandemic on the labor environment, we expect hourly wage rate inflation to be slightly more favorable in fiscal 2021 versus recent years based on current governmental roadmaps for minimum wage. Depending on the course of the pandemic, we expect to open as many as 12 to 15 new restaurants in fiscal 2021, including two to threeThe Cheesecake Factory restaurants, six North Italia restaurants and four to six restaurants within our FRC business, which includes as many as twoFlower Child locations. We also expect as many as three locations to open internationally under licensing agreements. 47 Table of Contents We expect fiscal 2021 net capital expenditures to range between$100 million and$105 million to support anticipated unit growth, ongoing maintenance needs and bakery and corporate infrastructure investments. We will also pay$17.3 million of deferred consideration to the sellers of FRC.
Liquidity and Capital Resources
Our corporate financial objectives are to maintain a sufficiently strong and conservative balance sheet to support our operating initiatives and unit growth while maintaining financial flexibility to provide the financial resources necessary to protect and enhance the competitiveness of our restaurant and bakery brands and to provide a prudent level of financial capacity to manage the risks and uncertainties of conducting our business operations under various economic and industry cycles. Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance our restaurant expansion plans, ongoing maintenance of our restaurants and bakery facilities and investment in our corporate and information technology infrastructures. However, given the impact of the COVID-19 pandemic on our operations, during fiscal 2020 we increased borrowings under our Facility (as defined below) and raised additional equity capital to increase our liquidity. Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for all of our restaurant locations. Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure. We are not limited to the use of lease arrangements as our only method of opening new restaurants. However, we believe our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner. During fiscal 2020, our cash and cash equivalents increased by$95.7 million to$154.1 million . The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions): Fiscal Year 2020 2019
Cash provided by operating activities$ 2.9 $
218.8
Additions to property and equipment (50.3)
(73.8)
Investments in and loans to unconsolidated affiliates -
(25.5)
Acquisition, net of cash acquired -
(261.7)
Acquisition-related deferred consideration (17.3)
-
Net borrowings on credit facility (10.0)
280.0
Series A preferred stock issuance, net of issuance costs 189.7
-
Cash dividends paid (15.8) (60.7)
Treasury stock purchases (3.6) (51.0)
Cash Provided by Operating Activities
Cash flows from operations decreased by$215.9 million from fiscal 2019 primarily due to the impact of the COVID-19 pandemic. Typically, our requirement for working capital has not been significant since our restaurant customers pay for their food and beverage purchases in cash or cash equivalents at the time of sale and we are able to sell many of our restaurant inventory items before payment is due to the suppliers of such items. However, this dynamic shifted in fiscal 2020 as all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic. Our future cash flow performance will depend on the evolving COVID-19 pandemic regulatory landscape, as well as economic conditions and consumer behavior. We would expect cash generation to increase as the operating environment for the full-service segment of the restaurant industry normalizes from the COVID-19 pandemic impact.
Property and Equipment
Capital expenditures for new restaurants, including locations under development as of each fiscal year-end, were$31.7 million ,$40.5 million and$58.6 million for fiscal 2020, 2019 and 2018, respectively. Capital expenditures also included$16.6 million ,$29.4 million and$26.9 million for our existing restaurants and$2.0 million ,$3.9 million and$17.4 million for bakery and corporate capacity and infrastructure investments in fiscal 2020, 2019 and 2018, respectively, including an infrastructure upgrade of ourCalifornia bakery in 2018. 48 Table of Contents
We opened seven restaurants in fiscal 2020 comprised of oneThe Cheesecake Factory , one North Italia, two Other FRC and three Other locations compared to nine restaurants in fiscal 2019 comprised of fiveThe Cheesecake Factory , one North Italia and three Other locations. Depending on the course of the pandemic, we expect to open as many as 12 to 15 new restaurants in fiscal 2021 across our portfolio of concepts. We anticipate approximately$100 million to$105 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants. We will refine these assumptions as more clarity on the operating environment emerges.
Acquisition
OnOctober 2, 2019 ("Closing" or "Closing Date"), we acquired North Italia and FRC, includingFlower Child and all other FRC brands. The Acquisition was completed for consideration consisting of the following components:$288.1 million in cash at Closing, which was primarily funded by drawing on the Facility (as defined below); assumption of$10.0 million in debt previously owed by FRC to us; a$12.0 million indemnity escrow amount specifically related to North Italia due ratably over two years; and$45.0 million of deferred consideration due ratably over four years (including a$13.0 million indemnity escrow amount specifically related to the remaining FRC businesses). Deferred consideration of$17.3 million was paid in fiscal 2020. The acquisition agreement also included a contingent consideration provision which is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia andFlower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia andFlower Child ) during the five years after Closing. We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing. (See Note 2 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.) Credit Facility OnJuly 30, 2019 , we entered into a Third Amended and Restated Loan Agreement (the "Facility") which amended and restated in its entirety our prior Second Amended and Restated Loan Agreement dated as ofDecember 22, 2015 . The Facility, which terminates onJuly 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 additional 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 material subsidiaries have guaranteed our obligations under the Amended Facility. During fiscal 2019, we utilized the Facility to fund the Acquisition. 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. To provide additional financial flexibility, onMay 1, 2020 , we entered into a First Amendment (the "Amendment") to the Facility (as amended by the Amendment, the "Amended Facility"). During the fourth quarter of fiscal 2020, we repaid a portion of the outstanding balance on the Amended Facility such that atDecember 29, 2020 , we had net availability for borrowings of$96.6 million , based on a$280.0 million outstanding debt balance and$23.4 million in standby letters of credit. The Amended Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, and sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters. As ofDecember 29, 2020 , we were in compliance with the covenants set forth in the Amended Facility. (See Note 12 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt.)
Series A Preferred Stock Issuance
During fiscal 2020, we issued 200,000 shares of Series A Convertible Preferred Stock for an aggregate purchase price of$200 million to increase our liquidity given the impact of the COVID-19 pandemic on our operations. In connection with the issuance, we incurred direct and incremental costs of$10.3 million , including financial advisory fees, closing costs, legal expenses, a commitment fee and other offering-related expenses. (See Note 17 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our preferred stock.) 49 Table of Contents Cash Dividends
To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, inMarch 2020 , our Board suspended the quarterly dividend on our common stock. Prior to this suspension, our Board declared cash dividends of$0.36 per common share for the first quarter of fiscal 2020. Cash dividends of$1.38 per common share were declared during fiscal 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 Amended Facility and applicable law, and other such factors that the Board considers relevant.
Share Repurchases
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$1,696.7 million throughDecember 29, 2020 . During fiscal 2020 and 2019, we repurchased 0.1 million and 1.1 million shares of our common stock at a cost of$3.6 million and$51.0 million , respectively. Our objectives with regard to share repurchases have been 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. To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, inMarch 2020 , our Board suspended share repurchases. Future decisions to repurchase shares are at the discretion of the Board and are 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 Acquisition, 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 Amended Facility that limit share repurchases based on a defined ratio. (See Note 17 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our repurchase authorization and methods.)
Contractual Obligations and Commercial Commitments
The following table summarizes our undiscounted contractual obligations and
commercial commitments as of
Payment Due by Period
Less than More than
Total 1 Year 13 Years 45 Years 5 Years
Contractual obligations
Recorded contractual obligations:
Operating leases liabilities (1) $ 2,040.2 $ 135.8 $ 255.6 $ 253.7 $ 1,395.1
Long-term debt 280.0 - - 280.0 -
Deferred consideration (2) 39.8 17.3 22.5 - -
Uncertain tax positions (3) 0.7 - 0.7 - -
Unrecorded contractual obligations:
Purchase obligations (4) 91.6 65.4 22.3 3.8 0.1
Real estate obligations (5) 130.5 27.1 6.6 6.7 90.1
Total $ 2,582.8 $ 245.6 Other commercial commitments Standby letters of credit$ 23.4 $ 23.4
$ - $ - $ -
Includes
(1) reasonably certain of being exercised. (See Note 13 in Notes to Consolidated
Financial Statements in Part IV, Item 15 of this report for discussion of
leases.)
Represents acquisition-related deferred consideration. (See Note 2 of Notes
(2) to Consolidated Financial Statements in Part IV, Item 15 of this report for
further discussion of the Acquisition.)
Represents liability for uncertain tax positions. (See Note 20 of Notes to
(3) Consolidated Financial Statements in Part IV, Item 15 of this report for
further discussion of income taxes.)
Includes obligations for inventory purchases, equipment purchases,
(4) information technology and other miscellaneous commitments. Amounts exclude
agreements that are cancelable without significant penalty.
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Real estate obligations include construction commitments, net of up-front
(5) landlord construction contributions, and legally binding minimum lease
payments for leases signed but not yet commenced. Amounts exclude agreements
that are cancelable without significant penalty.
The acquisition agreement also included a contingent consideration provision which is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia andFlower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia andFlower Child ) during the five years after Closing. We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.
Cash Flow Outlook
We believe that our cash and cash equivalents, combined with expected cash flows provided by operations, anticipated cash refunds from our net operating loss carryback claims and available borrowings under the Amended Facility, will provide us with adequate liquidity for the next 12 months. (See Note 20 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for discussion of our income taxes and Part II, Item 1A - Risk Factors for further discussion of risks associated with the COVID-19 pandemic.) As ofDecember 29, 2020 , we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.
Critical Accounting Policies
Critical accounting policies are those we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our consolidated financial statements.
Business Combination
OnOctober 2, 2019 , we completed the acquisition of North Italia and the remaining business ofFox Restaurant Concepts LLC . In accordance with the acquisition method of accounting for business combinations, we allocated the purchase price of acquired businesses to the tangible and intangible assets acquired and liabilities assumed based on preliminary estimated fair values. Our purchase price allocation methodology contains uncertainties because it requires us to make certain assumptions and to apply judgment to estimate the fair value of acquired assets and liabilities, including, but not limited to, property and equipment and intangible assets. We estimated the fair value of assets and liabilities based upon widely-accepted valuation techniques, including discounted cash flow, relief from royalty andMonte Carlo methods, depending on the nature of the assets acquired or liabilities assumed. The process for estimating fair values in many cases requires the use of significant estimates, assumptions and judgments, including determining the timing and estimates of future cash flows and developing appropriate discount rates. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates. We made minor adjustments to our purchase accounting in the first quarter of fiscal 2020 as we finalized our valuation of the acquired intangible assets. (See Note 2 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.)
Contingent Consideration
The acquisition agreement included a contingent consideration provision which is payable on the fifth anniversary of the Closing Date. The fair value of the contingent consideration is determined utilizing aMonte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates, and has no maximum payment. The fair value of the contingent consideration is highly subjective, and results could change materially if different estimates and assumptions were used. (See Note 3 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our fair value measurements.) 51 Table of Contents
Indefinite-Lived Intangible Assets
Goodwill and other indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include, but are not limited to historical financial performance, a significant decline in expected future cash flows, unanticipated competition, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessments require the use of estimates and assumptions regarding future cash flows and asset fair values. For the goodwill impairment test, the estimated fair value of the reporting units is determined using a blend of the income approach using a discounted cash flow analysis and the market capitalization approach. The fair value of the trade names, trademarks and licensing agreements is estimated using the relief from royalty method. Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment. Estimates of revenue growth and operating expenses are based on internal projections and consider historical performance and forecasted growth, including assumptions regarding business recovery after the COVID-19 pandemic, industry economics and the business environment. The discount rate is based on the estimated cost of capital that reflects the risk profile of the related business. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches, are subjective, and our ability to realize future cash flows and asset fair values is affected by factors such as changes in economic conditions and operating performance. These fair value assessments could change materially if different estimates and assumptions were used. The impact of the COVID-19 pandemic necessitated a quantitative assessment of our goodwill, trade names, trademarks and licensing agreements during the first quarter of fiscal 2020, resulting in a significant reduction in the balances of these assets. (See Note 8 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our intangible assets.)
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 that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, negative cash flow, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends. Assessing whether impairment testing is warranted and, if so, determining the amount of expense require the use of estimates and assumptions regarding future cash flows and asset fair values. Key assumptions include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections and consider the restaurant's historical performance, the local market economics and the business environment. The discount rate is based on the yield curve rate forU.S. Treasury securities with a duration that coincides with the period covered by the cash flows. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as changes in economic conditions and operating performance. (See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion related to long-lived asset impairment.)
Leases
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, the value of
the operating lease asset and liability and the term over which leasehold
improvements for each restaurant are depreciated. These judgments may produce
materially different amounts of operating lease assets and liabilities, rent
expense and interest expense than would be reported if different assumptions
were used.
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Income Taxes
We compute income taxes based on estimates of our federal, state and foreign tax
liabilities. Our estimates include, but are not limited to, effective state and
local income tax rates, allowable tax credits, depreciation expense allowable
for tax purposes, the tax deductibility of certain other items and applicable
valuation allowances on deferred tax assets. Our estimates are made based on the
best available information at the time we prepare our consolidated financial
statements. In making our estimates, we consider the impact of legislative and
judicial developments. As these developments evolve, we update our estimates,
which, in turn, may result in adjustments to our effective tax rate.
We anticipate realization of a significant portion of our deferred tax assets
through the reversal of existing deferred tax liabilities. Realization of some
of our deferred tax assets, in particular those which have statutorily limited
time periods within which they must be used, is dependent on generating
sufficient taxable income in the relevant jurisdictions prior to expiration of
these time periods. Although realization is not assured, management believes it
is more likely than not that our deferred tax assets, net of valuation
allowances, will be realized. The amount of deferred tax assets considered
realizable could be reduced, however, if estimates of future earnings and
taxable income in the carryforward periods are reduced.
Uncertain tax positions taken or expected to be taken in a tax return are
recognized (or derecognized) in the financial statements when it is more likely
than not that the position would be sustained on its technical merits upon
examination by tax authorities, taking into account available administrative
remedies and litigation. Assessment of uncertain tax positions requires
significant judgments relating to the amounts, timing and likelihood of
resolution.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for a summary of new accounting standards.
Impact of Inflation
The impact of inflation on food costs, labor, and other supplies and services can adversely impact our financial results. While we attempt to at least partially offset increases in the costs of key operating resources by gradually raising prices for our menu items and bakery products and employing more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be effective in doing so.
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