What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-02-24 compared with 2020-03-12 · 220 added, 150 removed, 144 unchanged (72% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Mangagement'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.

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 2018 to fiscal 2017, 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 January 1, 2019, filed with the SEC on March 4, 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 on March 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;

● Suspended the dividend on our common stock and share repurchases.

In late April 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 of February 17, 2021:

The Cheesecake

Indoor dining with limited capacity

Outdoor dining only

Off-premise only

Currently closed

(1) On average, The Cheesecake Factory restaurants with reopened dining rooms were operating at 50% capacity.

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.

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 throughout the United States and Canada under brands including The Cheesecake Factory®, North Italia® and a collection within our FRC subsidiary.

We currently own and operate 294 restaurants throughout the United States and Canada under brands including The Cheesecake Factory®, North Italia® and a collection within our Fox 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.

On October 2, 2019, we completed the acquistion of North Italia and the remaining business of Fox Restaurant Concepts LLC (“FRC”), including Flower Child and all other FRC brands (the “Acquisition”).

The results of operations, financial position and cash flows of the acquired businesses are included in our consolidated financial statements as of the acquisition date.

(See Note 2 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisition.)

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 , FRC headquarters 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 capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets .

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.

For The Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level.

2 unchanged sentences

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.

For The 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.

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.

1 unchanged sentence

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 pandemic operating environment.

On October 2, 2019, we completed the acquisition of North Italia and FRC, including Flower Child (the "Acquisition"), which we expect will further accelerate and diversify our revenue following the COVID-19 pandemic.

The results of operations, financial position and cash flows of the acquired businesses are included in our consolidated financial statements as of the closing date of the Acquisition.

(See Note 2 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.)

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 stabilize our 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.

We plan to maintain a balanced capital allocation strategy, comprised of:

investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under the New Facility and continuing our dividend and share repurchase program, the latter of which offsets dilution from our equity compensation program and supports our earnings per share growth.

Our ability to declare dividends and repurchase shares is subject to financial covenants under the New Facility.

Our domestic revenue growth (comprised of our annual unit growth and comparable sales growth), combined with international expansion, planned debt repayment, our share repurchase program and our dividend supports our long-term financial objective of 13% to 14% total return to shareholders, on average.

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 — “Our stock price could be adversely affected if our performance falls short of our financial guidance and/or market expectations.”)

(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.”)

Results of Operations

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

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

Costs and expenses:

4 unchanged sentences

Depreciation and amortization expenses

Impairment of assets and lease terminations

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses

Acquisition-related contingent consideration, compensation and amortization (benefit)/expenses

Preopening costs

Total costs and expenses

Income from operations

(Loss)/income from operations

Gain/(loss) on investments in unconsolidated affiliates

Interest and other expense, net

Income before income taxes

Income tax provision/(benefit)

(Loss)/income before income taxes

Income tax (benefit)/provision

Net (loss)/income

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance cost

Net (loss)/income available to common stockholders

Fiscal 2020 Compared to Fiscal 2019

Revenues increased 6.5% to $2, 482.7 million for fiscal 2019 compared to $2,332.3 million for fiscal 2018, primarily due to additional revenue related to the acquired restaurants, new restaurant openings and positive comparable restaurant sales.

Revenue contribution from the acquired concepts in the fourth quarter of fiscal 2019, including comparable restaurant sales growth of approximately 4% for North Italia, totaled $92.0 million.

Comparable sales at The Cheesecake Factory restaurants increased by 0.8%, or $17.5 million, from fiscal 2018.

This compares to the casual dining industry which had approximately flat comparable sales, as measured by Knapp Track.

The Cheesecake Factory comparable sales growth was driven by average check growth of 4.0% (based on an increase of 3.1% in menu pricing and a 0.9% positive change in mix), partially offset by a decline in customer traffic of 3.2%.

Revenues decreased 20.1% to $1,983.2 million for fiscal 2020 compared to $2,482.7 million for fiscal 2019, primarily due to 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.

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.

The Cheesecake Factory average sales per restaurant operating week increased 0.8% to $207,310 in fiscal 2019 from $205,660 in fiscal 2018.

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 at The Cheesecake Factory restaurants increased 1.2% to 10,642 in fiscal 2020 compared to 10,520 in the prior year.

North Italia average sales per restaurant operating week for the fourth quarter was $125,960 based on 280 operating weeks.

Restaurants become eligible to enter our comparable sales base in their 19th month of operation.

At December 31, 2019, there were nine The Cheesecake Factory restaurants not yet in our comparable sales base.

International licensed locations and restaurants that are no longer in operation, including those which we have relocated, are excluded from our comparable sales calculations.

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.

Restaurants become eligible to enter the comparable sales base in their 19th month of operation.

At December 29, 2020, there were six The 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 the October 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.

1 unchanged sentence

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 22.6% for fiscal 2019 compared to 22.8% for fiscal 2018.

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.

6 unchanged sentences

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 variance was driven primarily by higher hourly wage rates.

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), 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 increased to 25.5% for fiscal 2019 from 24.3% for fiscal 2018.

This increase was primarily driven by increased rent expense related to our adoption of the new lease accounting standard and higher marketing costs, partially offset by lower general liability costs.

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 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 decreased to 6.5% for fiscal 2019 versus 6.6% for fiscal 2018.

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.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 3.5% in fiscal 2019 compared to 4.1% in fiscal 2018.

This decrease was primarily due to our adoption of the new lease accounting standard.

(See Note 1 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our adoption of the new lease accounting standard.)

Impairment of Assets and Lease Terminations

In fiscal 2019, we recorded $18.2 million of impairment of assets and lease termination expense related to the impairment of two The Cheesecake Factory restaurants, one Grand Lux Cafe and Social Monk Asian Kitchen and the closure of one Grand Lux Cafe and one RockSugar Southeast Asian Kitchen.

In fiscal 2018, we recorded $17.9 million of impairment of assets and lease termination expense related to the impairment of one The Cheesecake Factory restaurant, one Grand Lux Cafe and one RockSugar Southeast Asian Kitchen and the closure of two The Cheesecake Factory restaurants.

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 one The Cheesecake Factory, one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for one The 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 two The 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

In fiscal 2019, we recorded $5.3 million of costs to effect and integrate the Acquisition.

Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses

We recorded $2.7 million and $5.3 million of costs in fiscal 2020 and fiscal 2019, respectively, to effect and integrate the Acquisition.

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.

1 unchanged sentence

Preopening costs were $10.5 million for fiscal 2020 compared to $13.1 million for fiscal 2019.

We opened nine restaurants in fiscal 2019 comprised of five The Cheesecake Factory restaurants, one Social Monk Asian Kitchen, one North Italia and two Flower Child locations, compared to five restaurants in fiscal 2018 comprised of four The Cheesecake Factory restaurants and one Grand Lux Cafe.

We opened seven restaurants in fiscal 2020 comprised of one The Cheesecake Factory, one North Italia, two Other FRC and three Other locations compared to nine restaurants in fiscal 2019 comprised of five The 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.

2 unchanged sentences

Gain/(loss) on Investments in Unconsolidated Affiliates

We recorded a $39.2 million gain on investments in unconsolidated affiliates in fiscal 2019 compared to a $4.8 million loss in fiscal 2018.

This variance was primarily driven by the fiscal 2019 gain of $52.7 million on our investments in North Italia and Flower Child upon acquisition of the remaining equity interests in these concepts, partially offset by an increase in our share of pre-acquisition losses incurred by these concepts which were driven primarily by impairment of assets and acquisition-related expenses.

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 and Flower 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.

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 our adoption of the new lease accounting standard under which we no longer have deemed landlord financing liabilities and associated interest expense, partially offset by increased interest expense related to higher outstanding debt.

Income Tax Provision/(Benefit)

Our effective income tax rate was 9.3% in fiscal 2019 compared to 7.8% in fiscal 2018.

This variance was driven primarily by a lower proportion of FICA tip credit in relation to pre-tax income partially offset by non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan as compared to non-deductible losses in fiscal 2018.

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 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 (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 income and diluted net income per share the impact of items we do not consider indicative of our ongoing operations.

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.

1 unchanged sentence

In the future, we may incur expenses or generate income similar to the adjusted items.

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

Impairment of assets and lease terminations (1)

Loss on investment in unconsolidated affiliates (2)

Gain on investment in unconsolidated affiliates (3)

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):

Net (loss)/income available to common stockholders

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

COVID-19 related costs (1)

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses (5)

Acquisition-related contingent consideration, compensation and amortization (benefit)/expenses

(Gain)/loss on investments in unconsolidated affiliates

Tax effect of adjustments (2)

One-time tax benefit items (7)

Adjusted net income

Diluted net income per share

Impairment of assets and lease terminations (1)

Loss on investment in unconsolidated affiliates (2)

Gain on investment in unconsolidated affiliates (3)

Adjusted net (loss)/income

Diluted net (loss)/income per common share

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

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

COVID-19 related costs (1)

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses (5)

Acquisition-related contingent consideration, compensation and amortization (benefit)/expenses

(Gain)/loss on investments in unconsolidated affiliates

Tax effect of adjustments (2)

One-time tax benefit items (7)

Adjusted diluted net income per share (8)

(1) See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of impairment of long-lived assets and lease terminations expense.

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

(3) Represents gain related to the acquisition of the remaining equity interests in North Italia and Flower Child.

(See Note 2 and Note 18 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition and income taxes, respectively.)

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

(See Note 2 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.)

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

(See Note 2 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.)

(6) Based on the federal statutory rate and an estimated blended state tax rate, the tax effect on all adjustments other than the gain on investment in unconsolidated affiliates assumes a 26% tax rate for fiscal 2019 and 2018 and a 40% tax rate for fiscal 2017.

(7) Represents a benefit to our income tax provision related to the Tax Act in fiscal 2017.

(See Note 18 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of income taxes.)

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

Adjusted net (loss)/income per share (4)

(1) Represents incremental costs associated with the COVID-19 pandemic such as additional sanitation, personal protective equipment, and healthcare benefits and other expenses associated with furloughed staff members.

During fiscal 2020, we recorded $23.0 million for these costs with approximately $2.2 million in cost of sales, $11.9 million reflected in labor expenses, $8.8 million in other operating expenses and $0.1 million in G&A expenses.

(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.

(3) Represents the impact of assuming the conversion of Series A preferred stock 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 codifed in Section 27A of the Securities Act, and Section 21E of the Echange 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 2020, we estimate adjusted diluted net income per share will be between $2.70 and $2.86 based on an assumed comparable sales range of 1% to 2% at The Cheesecake Factory restaurants and approximately $425 million in revenue contributed by North Italia and FRC.

This adjusted diluted net income per share range excludes acquisition-related costs and contingent consideration, compensation and amortization, which we expect will be approximately $8 million and $4 million, respectively.

For fiscal 2020, we estimate food inflation of about 2%, wage rate inflation of approximately 5.5% and an effective tax rate of approximately 9%.

In fiscal 2020, we plan new unit growth to accelerate with as many as 20 new restaurants.

This includes six The Cheesecake Factory restaurants, six North Italia restaurants and eight restaurants within the FRC subsidiary, which includes as many as four Flower Child locations.

We also expect as many as four locations to open internationally under licensing agreements.

We expect fiscal 2020 net capital expenditures to range between $130 million and $140 million to support anticipated new unit growth and ongoing maintenance needs.

We will also have a $17.3 million cash outflow for acquisition-related deferred consideration.

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 three The Cheesecake Factory restaurants, six North Italia restaurants and four to six restaurants within our FRC business, which includes as many as two Flower Child locations.

We also expect as many as three locations to open internationally under licensing agreements.

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.

Our ongoing capital requirements are principally related to our restaurant expansion plans, ongoing maintenance of our restaurants and bakery facilities, and investment in our corporate and information technology infrastructures.

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.

We believe our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner.

However, we are not limited to the use of lease arrangements as our only method of opening new restaurants.

Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure.

Historically, we have obtained capital from our ongoing operations, public stock offerings, credit facilities, stock option exercises and construction contributions from our landlords.

Our requirement for working capital is not 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 .

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):

1 unchanged sentence

Additions to property and equipment

Growth capital provided to unconsolidated affiliates

Investments in and loans to unconsolidated affiliates

Acquisition, net of cash acquired

Acquisition-related deferred consideration

Net borrowings on credit facility

Deemed landlord financing proceeds

Proceeds from exercise of stock options

Series A preferred stock issuance, net of issuance costs

Cash dividends paid

Treasury stock purchases

During fiscal 2019, our cash and cash equivalents increased by $31.8 million to $58.4 million.

This increase was primarily attributable to cash provided by operating activities and borrowings on our credit facility, partially offset by cash paid for the Acquisition, additions to property and equipment, dividend payments and treasury stock purchases.

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 our California bakery in 2018.

As of December 31, 2019, we maintained a $400 million unsecured revolving credit facility (the “New Facility”), $40 million of which could be used for issuances of letters of credit.

The New 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 subject to the satisfaction of certain conditions.

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

During fiscal 2019, we utilized the New Facility to fund the Acquisition.

During fiscal 2019, 2018 and 2017, we utilized our previous credit facility to fund a portion of our stock repurchases.

At December 31, 2019, we had net availability for borrowings of $90.6 million, based on a $290.0 million outstanding debt balance and $19.4 million in standby letters of credit.

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

As of December 31, 2019, we were in compliance with the covenants set forth in the New 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 .)

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.

On October 2, 2019 (“Closing” or “Closing Date”), we acquired North Italia and FRC, including Flower Child and all other FRC brands.

The Acquisition was completed for consideration consisting of the following components:

$286 million in cash at Closing, which was primarily funded by drawing on the New Facility;

$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 million indemnity escrow amount specifically related to North Italia due ratably over the next two years;

and $45 million of deferred consideration due ratably over the next four years (including a $13 million indemnity escrow amount specifically related to the remaining FRC business).

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 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).

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.

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.)

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

Cash dividends have been declared every quarter since initiation.

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 New 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 52.9 million shares at a total cost of $1,693.1 million through December 31, 2019, including 9,690 shares at a cost of $0.4 million during the fourth quarter of fiscal 2019.

During fiscal 2019, 2018 and 2017, we repurchased 1.1 million, 2.3 million and 2.6 million shares of our common stock at a cost of $51.0 million, $109.3 million and $123.0 million, respectively.

Credit Facility

On July 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 of December 22, 2015.

The Facility, which terminates on July 30, 2024, provides us with revolving loan commitments that total $400 million (of which $40 million may be used for issuances of letters of credit).

The Facility contains a commitment increase feature that could provide for 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, on May 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 at December 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 of December 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.)

Cash Dividends

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, in March 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 through December 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.

We make the determination to repurchase shares based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the 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 New Facility that limit share repurchases based on a defined ratio.

(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.) Our objectives with regard to share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, in March 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.)

Based on our current expansion objectives, we believe that during the upcoming 12 months our cash and cash equivalents, combined with expected cash flows provided by operations, available borrowings under the New Facility and expected landlord construction contributions should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures, continuation of our dividend and share repurchase program, potential debt repayments and obligations associated with the Acquisition.

As of December 31, 2019, 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.

Contractual Obligations and Commercial Commitments

24 unchanged sentences

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 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Acquisition.)

We expect to fund our contractual obligations primarily with operating cash flows generated in the normal course of business.

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 of December 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

9 unchanged sentences

Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates.

We expect minor adjustments to our purchase accounting in the first quarter of fiscal 2020 as we finalize our valuation of the acquired intangible assets.

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 also included a contingent consideration provision which is payable on the fifth anniversary of the Closing Date.

The fair value of the contingent consideration was determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates, and has no maximum payment.

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 a Monte 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.

Intangible Assets

(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.)

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 assessment requires an analysis of several best estimates and assumptions, including future sales and operating results, and other factors that could affect fair value or otherwise indicate potential impairment.

The goodwill impairment assessment involves valuing our reporting units that carry goodwill and considers their projected ability to generate income from operations and positive cash flow in future periods.

The fair value assessment could change materially if different estimates and assumptions were used.

Impairment of Long-Lived Assets

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, which are subject to a significant degree of judgment based on our experience and knowledge.

These estimates can be significantly impacted by changes in the economic environment, real estate market conditions and capital spending decisions.

The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the operating lease asset and liability.

These judgments may produce materially different amounts of rent expense than would be reported if different assumptions were used.

Self-Insurance Liabilities

We retain the financial responsibility for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, staff member health benefits, employment practices and other insurable risks.

The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims, as well as claims incurred but not yet reported to us (“IBNR”) as of the balance sheet date.

Our estimated liabilities are based on information provided by our insurance brokers and insurers, combined with our judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices.

Significant judgment is required to estimate IBNR amounts, as parties have yet to assert such claims.

If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

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 for U.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.)

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.

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 and applicable valuation allowances on deferred tax assets.

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.

1 unchanged sentence

As these developments evolve, we update our estimates, which, in turn, may result in adjustments to our effective tax rate.

We generally file our income tax returns within ten months after our fiscal year-end.

All tax returns are subject to audit by the applicable taxing authorities, usually years after the returns are filed, and could be subject to differing interpretations of the tax laws.

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 (i.e., a likelihood of more than 50%) that the position would be sustained on its technical merits upon examination by tax authorities, taking into account available administrative remedies and litigation.

A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution.

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.

Our actual results could differ materially from these estimates.

Recent Accounting Pronouncements

4 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis