What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-03 compared with 2020-06-22 · 160 added, 97 removed, 180 unchanged (59% of the section changed)

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These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (together with the Securities Act, the “Acts”).

This includes, without limitation, the effects of the COVID-19 pandemic on our financial condition and our results of operation, financial guidance and projections and statements with respect to the acquisition of North Italia and Fox Restaurant Concepts LLC (“FRC”) and expectations regarding accelerated and diversified revenue growth as a result of the acquisition of North Italia and FRC, as well as expectations of our future financial condition, results of operations, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business;

This includes, without limitation, the effects of the COVID-19 pandemic on our financial condition and our results of operation, financial guidance and projections and statements with respect to the acquisition of North Italia and Fox Restaurant Concepts LLC and expectations regarding accelerated and diversified revenue growth as a result of the acquisition of North Italia and FRC, as well as expectations of our future financial condition, results of operations, sales, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business;

and our ability to:

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and utilize our capital effectively and continue to increase cash dividends and repurchase our shares.

These forward-looking statements may be affected by factors outside of our control including:

These forward-looking statements may be affected by various factors including:

the rapidly evolving nature of the COVID-19 pandemic and related containment measures, including the potential for a complete shutdown of our restaurants, international licensee restaurants and our bakery operations;

demonstrations, political unrest, potential damage to or closure of the Company's restaurants and potential reputational damage to the Company or any of its brands;

economic, public health and political conditions that impact consumer confidence and spending, including the impact of the COVID-19 pandemic and other health epidemics or pandemics on the global economy;

changes in laws impacting our business, including laws and regulations related to the COVID-19 pandemic impacting restaurant operations and customer access to off- and on-premise dining, and increases in minimum wages and benefit costs;

the economic health of our landlords and other tenants in retail centers in which its restaurants are located, and our ability to successfully continue its lease arrangements with landlords;

acceptance and success of The Cheesecake Factory in international markets;

acceptance and success of North Italia and the FRC concepts, Social Monk Asian Kitchen and other concepts;

the risks of doing business abroad through Company-owned restaurants and/or licensees;

foreign exchange rates, tariffs and cross border taxation;

changes in unemployment rates;

changes in laws impacting our business, including laws and regulations related to COVID-19 impacting restaurant operations and customer access to off- and on-premises dining;

increases in minimum wages and benefit costs;

the economic health of our landlords and other tenants in retail centers in which our restaurants are located, and our ability to successfully manage our lease arrangements with landlords;

unanticipated costs that may arise in connection with a return to normal course of business, including potential negative impacts from furlough actions;

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impact of tax reform legislation;

acceptance and success of The Cheesecake Factory in international markets;

acceptance and success of North Italia and the FRC concepts, Social Monk Asian Kitchen and other concepts;

the risks of doing business abroad through Company-owned restaurants and/or licensees;

foreign exchange rates, tariffs and cross border taxation;

changes in unemployment rates;

changes in laws impacting our business, including increases in minimum wages and benefit costs;

adverse weather conditions in regions in which our restaurants are located;

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In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms.

As of June 22, 2020, we have reopened dining rooms in 194 locations across our concepts, however we will be operating under capacity restrictions for some time as social distancing protocols remain in place.

As of March 31, 2020 and June 22, 2020 respectively, 33 and 19 of our restaurants were temporarily closed and 261 and 81 restaurants were operating in an off-premise only model.

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

However, restrictions on the type of operating model and occupancy capacity continue to change.

We began to reopen dining rooms across our concepts the second week of May.

The following table presents the number of restaurants and their operating model as of July 29, 2020:

The Cheesecake

Indoor dining with limited capacity

Outdoor only with social distancing

Off-premise only

Currently closed

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

● Eliminated non-essential capital expenditures and expenses;

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The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on consumer spending behavior, will determine the significance of the impact to our operating results and financial position.

In addition, these considerable developments have triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC.

In the first quarter of fiscal 2020, these considerable developments triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC.

Future changes in estimates could further impact the carrying value of these items.

(See Notes 3 and 4 of Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of impairment of long-lived and intangible assets, respectively.

See Note 9 of Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of the revaluation of contingent consideration.)

(See Notes 3 and 4 for further discussion of impairment of long-lived and intangible assets, respectively.

See Note 9 for further discussion of the revaluation of contingent consideration.)

See "Risk Factors"

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

The Cheesecake Factory Incorporated is a leader in experiential dining.

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We currently own and operate 293 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® , North Italia ® and a collection within the FRC subsidiary.

As of March 31, 2020 and June 22, 2020 respectively, 33 and 19 of our restaurants were temporarily closed and 261 and 81 locations were operating in an off-premise only model due to the COVID-19 pandemic.

Internationally, 26 The Cheesecake Factory ® restaurants operate under licensing agreements.

As of March 31, 2020 and June 22, 2020 respectively, six and one were temporarily closed.

Our bakery division operates two facilities that produce quality cheesecakes and other baked products for our restaurants, international licensees and third-party bakery customers.

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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.

Due to the COVID-19 pandemic, we have suspended new unit development until more clarity on the restaurant industry operating environment emerges.

We currently have 7 locations under development.

However, we are monitoring operating conditions in their respective markets to determine when to move forward with these new unit openings.

In light of the COVID-19 pandemic, we will continue to evaluate the pace and quantity of new unit development until more clarity on the restaurant industry operating environment emerges.

Our overall revenue growth is primarily driven by revenues from new restaurant openings and increases in comparable restaurant sales.

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We generally update The 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 plan to continue targeting menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies, and expect near-term increases to be at the higher end of this range.

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 operating environment.

On October 2, 2019, we completed the acquisitions of North Italia and FRC, including Flower Child (the “Acquisitions”), which we expect will accelerate and diversify our revenue growth once the restaurant operating environment stabilizes following the COVID-19 pandemic.

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Our objective is to recapture our pre-COVID-19 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.

At the Company level, with the current sales trends and our reduced G&A structure, we are approximately breakeven at the operating cash flow level.

When the restaurant industry operating environment normalizes from the COVID-19 impact, we expect the Company to return to positive cash flow generation.

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Results of Operations

The following table presents, for the periods indicated, information from our condensed consolidated statements of income expressed as percentages of revenues.

The following table presents, for the periods indicated, information from our consolidated statements of income expressed as percentages of revenues.

The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.

March 31, 2020

April 2, 2019

June 30, 2020

Costs and expenses:

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Depreciation and amortization expenses

Impairment of assets and lease terminations

Impairment of assets and lease expiration

Acquisition-related costs

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Net (loss)/income

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

Revenues increased 2.6% to $615.1 million for the thirteen weeks ended March 31, 2020 compared to $599.5 million for the thirteen weeks ended April 2, 2019, primarily due to additional revenue related to the acquired restaurants and new restaurant openings, partially offset by a decline in comparable restaurant sales, reflecting the March 2020 impact of the COVID-19 pandemic.

Revenue contribution from the acquired concepts in the first quarter of fiscal 2020 totaled $84.1 million.

The Cheesecake Factory comparable sales declined by 12.9%, or $68.8 million, from the first quarter of fiscal 2019, reflecting 3.3% growth through February, offset by a 46.4% decline in March due to the impact of the COVID-19 pandemic.

The Cheesecake Factory comparable sales decline was driven by a decline in customer traffic of 18%, partially offset by average check growth of 5.1% (based on an increase of 3.2% in menu pricing and a 1.9% positive change in mix).

Thirteen Weeks Ended June 30, 2020 Compared to Thirteen Weeks Ended July 2, 2019

Revenues decreased 50.9% to $295.9 million for the fiscal quarter ended June 30, 2020 compared to $602.6 million for the comparable prior year period, primarily due to a decrease in comparable restaurant sales, reflecting the effect of the COVID-19 pandemic.

This decline included the impact of 29 locations across our concepts, of which three were The Cheesecake Factory restaurants, that were closed for much of the quarter, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the second quarter of fiscal 2020 totaled $37.2 million.

The Cheesecake Factory comparable sales declined by 56.9%, or $306.9 million, from the second quarter of fiscal 2019 driven by a decline in customer traffic of 71.7%, partially offset by average check growth of 14.8% (based on an increase of 3.1% in menu pricing and a 11.7% positive change in mix).

Sales through the off-premise channel comprised approximately 79% of our restaurant sales during the second quarter of fiscal 2020 given the impact of COVID-19.

We account for each off-premise order as one guest for traffic measurement purposes.

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.

We implemented effective menu price increases of approximately 1.5% and 1.6% in the first quarter of fiscal 2020 and third quarter of fiscal 2019, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 13.0% to $182,674 in the first quarter of fiscal 2020 from $209,963 in the first quarter of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 2.3% to 2,674 in the first quarter of fiscal 2020 compared to 2,613 in the prior year.

North Italia comparable sales declined approximately 12% during the first quarter of fiscal 2020, reflecting 5% growth through February, offset by a 48% decline in March due to the impact of the COVID-19 pandemic.

North Italia average sales per restaurant operating week for the first quarter of fiscal 2020 was $105,214 based on 290 operating weeks.

The Cheesecake Factory average sales per restaurant operating week decreased 56.6% to $91,314 in the second quarter of fiscal 2020 from $210,183 in the second quarter of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 0.6% to 2,640 in the second quarter of fiscal 2020 compared to 2,624 in the prior year.

North Italia comparable sales declined approximately 59% during the second quarter of fiscal 2020.

North Italia average sales per restaurant operating week for the second quarter of fiscal 2020 was $52,718 based on 261 operating weeks.

The Cheesecake Factory restaurants become eligible to enter the comparable sales base in their 19 th month of operation.

At March 31, 2020, there were eight The Cheesecake Factory restaurants not yet in the comparable sales base.

At June 30, 2020, there were five The Cheesecake Factory 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.

North Italia restaurants become eligible to enter the comparable sales base in their 13 th month of operations.

At March 31, 2020 there were 10 North Italia restaurants not yet in the comparable sales base.

External bakery sales were $13.8 million for the first quarter of fiscal 2020 compared to $12.9 million in the comparable prior year period.

At June 30, 2020 there were eight North Italia restaurants not yet in the comparable sales base.

External bakery sales were $14.7 million for the second quarter of fiscal 2020 compared to $12.4 million in the comparable prior year period.

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 22.9% for the first quarter of fiscal 2020 compared to 22.7% for the comparable period of fiscal 2019.

Higher produce costs were partially offset by a slight change in mix associated with the Acquisitions.

As a percentage of revenues, cost of sales was 24.4% and 22.3% in the second quarters of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher meat and dairy costs, partially due to a variance between the spot market and our contracted pricing.

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 38.6% and 36.2% in the first quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to costs associated with the COVID-19 pandemic, including 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.

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 41.5% and 36.2% in the second quarters of fiscal 2020 and 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 CARES Act.

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), 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 27.3% and 25.6% for the thirteen weeks ended March 31, 2020 and April 2, 2019, respectively.

This variance was primarily driven by sales deleverage, partially offset by lower restaurant incentive compensation costs.

As a percentage of revenues, other operating costs and expenses were 41.1% and 24.7% in the second quarters of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional cleaning and personal protective equipment.

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 7.1% and 6.5% for the first quarters of fiscal 2020 and 2019, respectively.

As a percentage of revenues, G&A expenses were 12.1% and 6.2% in the second quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage, partially offset by lower corporate incentive compensation costs.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 3.8% and 3.6% for the first quarters of fiscal 2020 and 2019, respectively.

As a percentage of revenues, depreciation and amortization expenses increased to 7.6% in the second quarter of fiscal 2020 from 3.5% in the comparable prior year period due primarily to sales deleverage.

Impairment of Assets and Lease Terminations

In the first quarter of fiscal 2020, we recorded $191.9 million of impairment of assets and lease termination expense primarily related to goodwill, trade names, trademarks and licensing agreements associated with the Acquisitions, as well as to long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants.

See Notes 3 and 4 of Notes Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of our long-lived and intangible assets, respectively.

We recorded no impairment of assets and lease terminations expense in the first quarter of fiscal 2019.

During the second quarter of fiscal 2020, we recorded impairment of assets and lease terminations expense of $2.4 million related to lease termination costs for one The Cheesecake Factory restaurant which closed in July 2020.

Acquisition-Related Costs

In the first quarter of fiscal 2020, we recorded $1.2 million of costs to effect and integrate the Acquisitions.

In the second quarter of fiscal 2020, we recorded $1.1 million of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the first quarter of fiscal 2020, we recorded a benefit of $4.5 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $6.0 million decrease in the fair value of the contingent consideration and compensation liabilities related to impact of the COVID-19 pandemic, partially offset by an increase of $1.5 million in the deferred consideration liability.

In the second quarter of fiscal 2020, we recorded a benefit of $0.9 million of acquisition-related contingent consideration, compensation and amortization, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities, partially offset by amortization of acquired definite-lived licensing agreements.

Preopening Costs

Preopening costs were $3.1 million for the thirteen weeks ended March 31, 2020 compared to $2.1 million in the comparable period of fiscal 2019.

We opened one North Italia and one Flower Child in the first quarter of fiscal 2020 compared to one Social Monk Asian Kitchen in the comparable prior year period.

Preopening costs were $2.1 million and $2.2 million in the second quarters of fiscal 2020 and 2019, respectively.

We opened no restaurants in the second quarter of fiscal 2020 compared to one The Cheesecake Factory restaurant in the comparable prior year period.

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.

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Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $1.5 million in the first quarter of fiscal 2019.

There was no corresponding amount for the first quarter of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net was $1.5 million of expense for the first quarter of fiscal 2020 compared to $1,651 of income for the comparable prior year period.

This variance was primarily due to increased borrowings on our Facility to effect the Acquisition.

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $1.6 million in the second quarter of fiscal 2019.

There was no corresponding amount for the second quarter of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other Expense, Net

Interest and other expense, net was $2.6 million of expense for the second quarter of fiscal 2020 compared to $24,688 in the comparable prior year period.

This variance was primarily due to increased borrowings to effect the Acquisition and to enhance our financial flexibility in response to the COVID-19 pandemic, as well as a higher interest rate on our Amended Facility.

Income Tax (Benefit)/Provision

Our effective income tax rate was 28.9% and 6.0% for the first quarters of fiscal 2020 and 2019, respectively.

Our effective income tax rate was 34.5% and 7.6% for the second quarters of fiscal 2020 and 2019, respectively.

The increase resulted primarily from a lower proportion of employment credits in relation to pre-tax (loss)/income and a benefit arising from the expected carryback of our anticipated fiscal 2020 loss to prior years when the federal statutory rate was 35%.

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The 14% rate benefit is reflected primarily in the annual effective tax rate, although the portion representing prior year temporary differences that are estimated to reverse in fiscal 2020 and become part of the fiscal 2020 loss carryback was recognized as a discrete item in the first quarter of fiscal 2020.

Twenty-Six Weeks Ended June 30, 2020 Compared to Twenty-Six Weeks Ended July 2, 2019

Revenues decreased 24.3% to $911.0 million for the first half of fiscal 2020 compared to $1,202.1 million for the comparable prior year period, primarily due a decline in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the first half of fiscal 2020 totaled $121.3 million.

The Cheesecake Factory comparable sales declined by 35%, or $375.7 million, from the first half of fiscal 2019 driven by a decline in customer traffic of 45%, partially offset by average check growth of 10% (based on an increase of 3.1% in menu pricing and a 6.9% positive change in mix).

Sales through the off-premise channel comprised approximately 41% of our restaurant sales during the first half of fiscal 2020 given the impact of COVID-19.

We account for each off-premise order as one guest for traffic measurement purposes.

We implemented effective menu price increases of approximately 1.5% and 1.6% in the first quarter of fiscal 2020 and third quarter of fiscal 2019, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 34.6% to $137,286 in the first half of fiscal 2020 from $210,073 in the first half of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.5% to 5,314 in the first half of fiscal 2020 compared to 5,237 in the prior year.

North Italia comparable sales declined approximately 17% during the first half of fiscal 2020.

North Italia average sales per restaurant operating week for the first half of fiscal 2020 was $80,348 based on 551 operating weeks.

External bakery sales were $28.5 million for the first half of fiscal 2020 compared to $25.3 million in the comparable prior year period.

Cost of Sales

As a percentage of revenues, cost of sales was 23.4% and 22.5% in the first half of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher meat, produce and dairy costs, partially due to a variance between the spot market and our contracted pricing.

Labor Expenses

As a percentage of revenues, labor expenses were 39.5% and 36.2% in the first half of fiscal 2020 and 2019, respectively.

Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses were 31.8% and 25.1% in the first half of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional cleaning and personal protective equipment, partially offset by lower restaurant incentive compensation costs.

As a percentage of revenues, G&A expenses were 8.7% and 6.4% in the first half of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage, partially offset by lower corporate incentive compensation costs.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses increased to 5.1% in the first half of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

Impairment of Assets and Lease Terminations

During the first half of fiscal 2020, we recorded $194.3 million of impairment of assets and lease termination expense related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisitions and long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants, as well as lease terminations costs for one The Cheesecake Factory restaurant which closed in July 2020.

See Notes 3 and 4 of Notes Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of our long-lived and intangible assets, respectively.

We recorded no impairment of assets and lease terminations expense in the first half of fiscal 2019.

Acquisition-Related Costs

In the first half of fiscal 2020, we recorded $2.3 million of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the first half of fiscal 2020, we recorded a benefit of $5.4 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $5.8 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to impact of the COVID-19 pandemic, partially offset by an increase of $0.1 million in the deferred consideration liability and $0.3 million in amortization of acquired definite-lived licensing agreements.

Preopening Costs

Preopening costs were $5.2 million and $4.3 million in the first half of fiscal 2020 and 2019, respectively.

We opened one North Italia and one Flower Child in the first half of fiscal 2020 compared to one The Cheesecake Factory restaurant and our initial location of Social Monk Asian Kitchen in the comparable prior year period.

Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $3.1 million in the first half of fiscal 2019.

There was no corresponding amount for the first half of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other Expense, Net

Interest and other expense, net was $4.1 million of expense for the first half of fiscal 2020 compared to $23,037 in the comparable prior year period.

This variance was primarily due to increased borrowings on our 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 30.6% and 6.9% for the first half of fiscal 2020 and 2019, respectively.

Without the carryback provisions of the CARES Act, we would expect the fiscal 2020 loss to provide a tax benefit at the statutory rate of 21%.

Non-GAAP Measures

Adjusted net income and adjusted diluted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

Adjusted net income and adjusted if-converted net 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 share the impact of items we do not consider indicative of our ongoing operations.

To reflect the potential impact of the conversion of our convertible preferred stock into common stock, we exclude the preferred dividend and direct and incremental preferred stock issuance costs, and assume all convertible preferred shares 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.

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Following is a reconciliation from net (loss)/income and diluted net (loss)/income per share to the corresponding adjusted measures (in thousands, except per share data):

March 31, 2020

April 2, 2019

Net (loss)/income

June 30, 2020

Net (loss)/income available to common stockholders

Dividends on preferred stock

Direct and incremental preferred stock issuance costs

COVID-19 related costs (1)

Impairment of assets and lease terminations

Loss on investments in unconsolidated affiliates (3)

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses

Loss on investments in unconsolidated affiliates

Tax effect of adjustments (2)

Adjusted net income

Diluted net (loss)/income per share

Adjusted net (loss)/income

Diluted net (loss)/income per common share

Dividends on preferred stock

Direct and incremental preferred stock issuance costs

Assumed impact of potential conversion of preferred stock into common stock (3)

COVID-19 related costs (1)

Impairment of assets and lease terminations

Loss on investments in unconsolidated affiliates (3)

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses

Loss on investments in unconsolidated affiliates

Tax effect of adjustments (2)

Adjusted diluted net income per share (7)

(1) Represents incremental costs associated with the COVID-19 pandemic primarily related to healthcare and meal benefits for furloughed staff members.

These costs were recorded in labor expenses and other operating costs and expenses on the consolidated statements of income.

(2) Primarily represents impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisitions, as well as impairment of long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants.

(3) Represents our share of pre-acquisition losses incurred by North Italia and Flower Child.

(4) Represents costs incurred to effect and integrate the Acquisitions.

(5) Represents changes in the fair value of the acquisition-related deferred consideration and contingent consideration and compensation liabilities, as well as amortization of definite-lived licensing agreements.

Adjusted if-converted net (loss)/income per share (4)

(1) Represents incremental costs associated with the COVID-19 pandemic including healthcare benefits and other expenses associated with furloughed staff members.

These costs were primarily recorded in cost of sales, labor expenses and other operating costs and expenses on the consolidated statements of income.

(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.

(7) Adjusted diluted net income per share may not add due to rounding.

(3) Represents the impact of assuming the conversion of preferred stock into common stock (8,996,851 shares), resulting in an assumption of 52,871,297 and 52,820,673 weighted-average shares outstanding on an if-converted basis for the second quarter and first half of fiscal 2020, respectively.

(4) Adjusted if-converted net (loss)/ income per share may not add due to rounding.

Liquidity and Capital Resources

The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions):

March 31, 2020

April 2, 2019

June 30, 2020

Cash (used in)/provided by operating activities

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Net borrowings on credit facility

Preferred stock issuance, net of issuance costs

Proceeds from exercise of stock options

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Treasury stock purchases

During the thirteen weeks ended March 31, 2020, our cash and cash equivalents increased by $22.6 million to $81.0 million.This increase was primarily attributable to borrowings on the Amended Facility, partially offset by cash used in operating activities, additions to property and equipment and dividend payments.

Cash flows from operations decreased by $66.5 million from the first quarter of fiscal 2020 primarily due the impact of the COVID-19 pandemic.

During the twenty-six weeks ended June 30, 2020, our cash and cash equivalents increased by $191.7 million to $250.2 million.This increase was primarily attributable to issuance of preferred stock and borrowings on the Amended Facility, partially offset by cash used in operating activities, additions to property and equipment and dividend payments.

Cash flows from operations decreased by $35.7 million from the first half of fiscal 2020 primarily due 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, as previously discussed, all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic, and we may not be able to generate sufficient cash to cover all of our operations until they can reopen at full capacity.

In addition, we cannot predict how quickly our guests will return to our restaurants once such restrictions have been lifted or the impact this will have on consumer spending habits.

Capital expenditures were $15.8 million and $13.4 million in the first quarter of fiscal 2020 and 2019, respectively.

Due to the COVID-19 pandemic, we have suspended new unit development until more clarity on the restaurant industry operating environment emerges.

We currently have 7 locations under development.

However, we are monitoring operating conditions in their respective markets to determine when to move forward with these new unit openings.

We currently estimate cash capital expenditures to be approximately $5 million per quarter for the remainder of fiscal 2020 for necessary maintenance on our existing restaurants.

As of March 31, 2020, we maintained the Facility, a $400 million unsecured revolving credit facility, $40 million of which could be used for issuances of letters of credit.

The Facility, which terminates on July 30, 2024, contains a commitment increase feature that could provide for an additional $200 million in available credit upon our request and the satisfaction of certain conditions.

However, this dynamic shifted during the period as all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic.

At the Company level, with the current sales trends and our reduced G&A structure, we are approximately breakeven at the operating cash flow level.

However, the evolving COVID-19 regulatory landscape may impact our restaurant operating models.

We may not be able to generate sufficient cash to cover all of our operations until they can reopen at approximately 50% capacity, and subject to economic conditions and consumer behavior.

Capital expenditures were $29.4 million in the first half of fiscal 2020 and 2019.

We currently have eight locations under development, and we are monitoring operating conditions in their respective markets to determine when to move forward with these new unit openings.

We are continuing to evaluate the pace and quantity of new unit development until more clarity on the restaurant industry operating environment emerges.

We currently estimate cash capital expenditures to be approximately $10 million to $15 million per quarter for the remainder of fiscal 2020 for completion of construction of the units under development and for necessary maintenance on our existing restaurants.

As of June 30, 2020, we maintained the Amended Facility, a $400 million unsecured revolving credit facility, $40 million of which can be used for issuances of letters of credit.

The Amended Facility, which terminates on July 30, 2024, contains a commitment increase feature that could provide for an additional $125 million in available credit upon our request and the satisfaction of certain conditions.

Certain of our material subsidiaries have guaranteed our obligations under the Facility.

During the first quarter of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility.

At March 31, 2020, we had net availability for borrowings of $0.6 million, based on a $380.0 million outstanding debt balance and $19.4 million in standby letters of credit.

The Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio.

As of March 31, 2020, we were in compliance with the covenants set forth in the Facility.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.) As further discussed in Note 15 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, on May 1, 2020, we amended the Facility to provide additional financial flexibility.

During the first half of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility.

At June 30, 2020, we had net availability for borrowings of $0.6 million, based on a $376.0 million outstanding debt balance and $23.4 million in standby letters of credit.

The 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 of June 30, 2020, we were in compliance with the covenants set forth in the Amended Facility.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

In addition, as further discussed in Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we issued 200,000 shares of Series A Convertible Preferred Stock on April 20, 2020 for an aggregate purchase price of $200 million.

In fiscal 2012, our Board approved the initiation of a cash dividend to our stockholders, which is subject to quarterly Board approval.

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 other such factors that the Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $1,695.7 million through March 31, 2020, including 0.1 million shares at a cost of $2.6 million repurchased during the first quarter of fiscal 2020.

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 $1,696.0 million through June 30, 2020 with 12,413 repurchased during the second quarter of fiscal 2020 to satisfy tax withholding obligations on vested restricted share awards.

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.

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(See Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods.)

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Facility, as amended on May 1, 2020, our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

(See Notes 7 and 15 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our Facility.) In addition, as further discussed in Note 15 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we sold 200,000 shares of Series A Convertible Preferred Stock on April 20, 2020 for an aggregate purchase price of $200 million.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our Facility.)

The Acquisitions included a provision for contingent consideration which is payable on October 2, 2024 and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child, with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child).

We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years ending October 2, 2024.

As of March 31, 2020, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

As of June 30, 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.

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See Note 13 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for discussion of our income taxes.

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

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis