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Item 2. Management’s Discussion and Analysis

2021-05-03 compared with 2020-11-06 · 151 added, 233 removed, 129 unchanged (75% 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, including our expectation with respect to our ability to reopen and keep open our restaurants, 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;

This includes, without limitation, statements regarding corporate social responsibility and in our corporate social responsibility (CSR) report, the effects of the COVID-19 pandemic on our financial condition and our results of operation, including our expectation with respect to our ability to reopen and keep open our restaurants, 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, sales, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business;

and our ability to:

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profitably expand our concepts domestically and in Canada, and work with our licensees to expand our concept internationally;

support the growth of North Italia and other FRC restaurants;

operate Social Monk Asian Kitchen;

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

support the growth of North Italia and the FRC brands;

and utilize our capital effectively.

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

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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;

acceptance and success of North Italia, the FRC brands and our other concepts;

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

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compliance with debt covenants;

strategic capital allocation decisions including share repurchases and dividends;

strategic capital allocation decisions including any share repurchases or dividends;

the ability to achieve projected financial results;

economic and political conditions that impact consumer confidence and spending;

impact of tax reform legislation;

the resolutions of uncertain tax positions with the Internal Revenue Service and the impact of tax reform legislation;

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

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COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic which was declared a National Public Health Emergency on March 13, 2020.

We have experienced significant disruptions to our business due to suggested and mandated social distancing and shelter-in-place orders, which resulted in the temporary closure of a number of restaurants across our portfolio while the remaining locations shifted to an off-premise only operating model on an interim basis.

In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms , and we began to reopen dining rooms across our concepts the second week of May.

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

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

The Cheesecake

Indoor dining with limited capacity

Outdoor only with social distancing

Off-premise only

Currently closed

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

In our initial response to the pandemic, the Company and its Board 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.

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 as more clarity on the restaurant industry operating environment emerges.

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 full-service segment of the restaurant industry.

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

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 Acquisitions.

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

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

See Note 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 Company is subject to continued 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 in March 2020.

We experienced significant disruptions to our business as suggested and mandated social distancing and shelter-in-place orders led to 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 the second quarter of fiscal 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms, and we began to reopen dining rooms across our concepts.

While restrictions on the type of permitted operating model and occupancy capacity continue to change, as of April 27, 2021, nearly all of the Company’s restaurants were operating with limited indoor dining capacity with The Cheesecake Factory restaurants with reopened dining rooms operating on average at 60% indoor capacity.

As of April 27, 2021, one The Cheesecake Factory location was operating an off-premise only model and two Other FRC locations were temporarily closed and plan to reopen in the second quarter of fiscal 2021.

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.

The Cheesecake Factory Incorporated is a leader in experiential dining.

We are culinary forward and relentlessly focused on hospitality.

We currently own and operate 295 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 298 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® , North Italia ® and a collection within our FRC business.

Internationally, 28 The Cheesecake Factory ® restaurants operate under licensing agreements.

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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.

In light of the COVID-19 pandemic, we will continue to evaluate the pace and quantity of new unit development as 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.

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.

We are continuing our efforts on a number of initiatives, including a greater focus on increasing customer throughput in our restaurants, leveraging our gift card program, working with a third party to provide delivery services for our restaurants, increasing customer awareness of our online ordering capabilities, augmenting our marketing programs, enhancing our training programs and leveraging our customer satisfaction measurement platform.

Average check is driven by menu price increases and/or changes in menu mix.

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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 as once the restaurant operating environment stabilizes following the COVID-19 pandemic.

We will continue to evaluate future pricing decisions in light of the COVID-19 pandemic operating environment.

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

Margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative (“G&A”) expenses and preopening expenses.

Our objective is to recapture our pre-COVID-19 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, we generated $2.9 million of positive cash flow from operating activities during the third quarter of fiscal 2020.

Our future cash flow performance will depend on the evolving COVID-19 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 impact.

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 “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.

investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under our Revolving Facility (as defined below) 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 annual unit growth 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.

Our ability to declare common dividends and repurchase shares in the future will be subject to financial covenants under the Amended Credit Agreement (as defined below), 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.

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 condensed consolidated statements of income/(loss) 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.

September 29, 2020

October 1, 2019

September 29, 2020

October 1, 2019

March 30, 2021

March 31, 2020

Costs and expenses:

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Depreciation and amortization expenses

Impairment of assets and lease expiration

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration and amortization

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

Preopening costs

Total costs and expenses

(Loss)/income from operations

Loss on investments in unconsolidated affiliates

Income/(loss) from operations

Interest and other expense, net

(Loss)/income before income taxes

Income tax (benefit)/provision

Net (loss)/income

Thirteen Weeks Ended September 29, 2020 Compared to Thirteen Weeks Ended October 1, 2019

Revenues decreased 11.7% to $517.7 million for the fiscal quarter ended September 29, 2020 compared to $586.5 million for the comparable prior year period, primarily due to a decrease in comparable restaurant sales, reflecting the effect 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 third quarter of fiscal 2020 totaled $63.9 million.

The Cheesecake Factory comparable sales declined by 23.3%, or $122.7 million, from the third quarter of fiscal 2019 driven by a decline in customer traffic of 40.4%, partially offset by average check growth of 17.1% (based on an increase of 3.0% in menu pricing and a 14.1% positive change in mix).

Sales through the off-premise channel comprised approximately 45% of our restaurant sales during the third quarter of fiscal 2020 given the impact of COVID-19.

Income/(loss) before income taxes

Income tax provision/(benefit)

Net income/(loss)

Dividends on Series A preferred stock

Net loss available to common stockholders

Thirteen Weeks Ended March 30, 2021 Compared to Thirteen Weeks Ended March 31, 2020

Revenues increased 2.0% to $627.4 million for the fiscal quarter ended March 30, 2021 compared to $615.1 million for the comparable prior year period, primarily due to an increase in comparable restaurant sales, new restaurant openings and third-party bakery sales, partially offset by permanent and temporary restaurant closures.

The Cheesecake Factory comparable sales increased by 2.8%, or $13.0 million, from the first quarter of fiscal 2020 and decreased 10.4% from the first quarter of fiscal 2019.

The increase from fiscal 2020 was primarily driven by average check growth of 19.6% (based on an increase of 3.0% in menu pricing and a 16.6% positive change in mix), partially offset by decline in customer traffic of 16.8% primarily due to the COVID-19 pandemic.

We implemented effective menu price increases of approximately 1.5% in both the first quarter of fiscal 2021 and third quarter of fiscal 2020.

Sales through the off-premise channel comprised approximately 43% of our restaurant sales during the first quarter of fiscal 2021 as compared to 22% in the first quarter of fiscal 2020 as consumer behavior shifted towards off-premise dining throughout the pandemic.

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% in both the first and third quarters of fiscal 2020, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 23.2% to $156,643 in the third quarter of fiscal 2020 from $203,996 in the third quarter of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.3% to 2,662 in the third quarter of fiscal 2020 compared to 2,628 in the prior year.

North Italia comparable sales declined approximately 22% during the third quarter of fiscal 2020.

North Italia average sales per restaurant operating week for the third quarter of fiscal 2020 was $94,561 based on 296 operating weeks.

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

At September 29, 2020, there were five The Cheesecake Factory restaurants not yet in the comparable sales base.

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 had a corresponding impact on the in the reported traffic.

The Cheesecake Factory average sales per restaurant operating week increased 2.1% to $186,478 in the first quarter of fiscal 2021 from $182,674 in the first quarter of fiscal 2020.

Total operating weeks at The Cheesecake Factory restaurants increased 0.1% to 2,678 in the first quarter of fiscal 2021 compared to 2,674 in the prior year.

North Italia comparable sales increased approximately 5% from the first quarter of fiscal 2020 and decreased approximately 5% compared to the first quarter of fiscal 2019.

North Italia average sales per restaurant operating week increased 3.0% to $108,327 in the first quarter of fiscal 2021 from $105,214 in the first quarter of fiscal 2020.

Total operating weeks at North Italia increased 4.5% to 303 in the first quarter of fiscal 2021 compared to 290 in the prior year.

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

At March 30, 2021, there were four The Cheesecake Factory restaurants and three 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.

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

At September 29, 2020 there were six North Italia restaurants not yet in the comparable sales base.

External bakery sales were $17.8 million for the third quarter of fiscal 2020 compared to $13.8 million in the comparable prior year period.

External bakery sales were $16.7 million for the first quarter of fiscal 2021 compared to $13.8 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 22.8% and 22.7% in the third quarters of fiscal 2020 and 2019, respectively, reflecting a shift in sales mix.

Cost of sales consists of food, beverage 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 21.7% and 22.9% in the first quarters of fiscal 2021 and 2020, respectively, reflecting a shift in sales mix within the restaurants, a higher proportion of third-party bakery revenues and pricing leverage.

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 38.7% and 36.4% in the third quarters of fiscal 2020 and 2019, respectively.

This increase was primarily due to the cost of maintaining our full restaurant management team and group medical benefits in the reduced sales environment, partially offset by lower hourly labor.

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 36.6% and 38.6% in the first quarters of fiscal 2021 and 2020, respectively.

This decrease was primarily due to deleverage in the prior year when costs associated with the COVID-19 pandemic, including maintaining our full restaurant management team and healthcare benefits for our furloughed staff members, were incurred in the reduced sales environment.

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 30.7% and 25.5% in the third 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 sanitation and personal protective equipment.

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 28.9% and 27.3% in the first quarters of fiscal 2021 and 2020, respectively.

This variance was primarily driven by increased restaurant-level incentive compensation expense, costs associated with COVID-19, such as additional sanitation and personal protective equipment, and marketing expenses, partially offset by decreased occupancy costs.

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 7.3% and 6.2% in the third quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage.

As a percentage of revenues, G&A expenses were 7.1% in both the first quarters of fiscal 2021 and 2020 as higher corporate incentive compensation expense was offset by cost management efforts.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses increased to 4.4% in the third quarter of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

As a percentage of revenues, depreciation and amortization expenses decreased to 3.5% in the first quarter of fiscal 2021 from 3.8% in the comparable prior year period.

Impairment of Assets and Lease Terminations

During the third quarter of fiscal 2020, we recorded impairment of assets and lease terminations expense of $10.4 million related to lease termination costs and accelerated depreciation for two Grand Lux Cafe locations, one that discontinued operations during the quarter and another that is expected to close by the end of the year, RockSugar Southeast Asian Kitchen, which is scheduled to discontinue operations at the end of the year and one Flower Child location that will not reopen following its COVID-related closure.

Acquisition-Related Costs

In the third quarter of fiscal 2020 and fiscal 2019, we recorded $39,307 and $3.2 million, respectively, of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the third quarter of fiscal 2020, we recorded $1.4 million of acquisition-related contingent consideration, compensation and amortization, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities and amortization of acquired definite-lived licensing agreements.

During the first quarter of fiscal 2021, we recorded impairment of assets and lease terminations expense of $0.6 million related to lease termination costs for two Other restaurants, one of which closed during the fourth quarter of fiscal 2020 and one that closed at the beginning of the first quarter of fiscal 2021.

In the first quarter of fiscal 2020, we recorded $8.9 million of impairment of assets and lease terminations expense primarily related to the impairment of one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants.

In addition, during the first quarter of fiscal 2020, we determined it was necessary to perform an interim assessment of our goodwill, trade names, trademarks and licensing agreements due to the decrease in our stock price coupled with the dining room closures related to the COVID-19 pandemic and significant decline to the equity value of our peers and overall U.S.

stock market.

Based on the results of this assessment, we recorded $191.9 million of impairment expense.

More than half of the total impairment amount was driven by the impact on our market capitalization, with the balance related to lower future cash flow estimates.

Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses/(Benefit)

In the first quarter of fiscal 2021, we recorded $0.6 million of acquisition-related contingent consideration, compensation and amortization, primarily reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities.

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

Preopening Costs

Preopening costs were $2.4 million and $2.5 million in the third quarters of fiscal 2020 and 2019, respectively.

We opened two Flower Child restaurants in the third quarter of fiscal 2020 compared to one The Cheesecake Factory restaurant in the comparable prior year period.

Preopening costs were $3.9 million and $3.1 million in the first quarters of fiscal 2021 and 2020, respectively.

We opened one The Cheesecake Factory, one North Italia and one Other FRC location in the first quarter of fiscal 2021 compared to one North Italia and one Flower Child location 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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Preopening costs can fluctuate significantly from period to period based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant.

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 $10.3 million in the third quarter of fiscal 2019.

There was no corresponding amount for the third 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)/Income, Net

Interest and other expense, net was $2.9 million of expense for the third quarter of fiscal 2020 compared to $6,051 of income in the comparable prior year period.

This variance was primarily due to increased borrowings to effect the Acquisitions 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 25.0% and 3.2% for the third 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%.

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%.

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.

Thirty-Nine Weeks Ended September 29, 2020 Compared to Thirty-Nine Weeks Ended October 1, 2019

Revenues decreased 20.1% to $1,428.7 million for the first three quarters of fiscal 2020 compared to $1,788.7 million for the comparable prior year period, 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.

Revenue contribution from the acquired concepts in the first three quarters of fiscal 2020 totaled $185.1 million.

The Cheesecake Factory comparable sales declined by 31.1%, or $498.4 million, from the first three quarters of fiscal 2019 driven by a decline in customer traffic of 43.5%, partially offset by average check growth of 12.4% (based on an increase of 3.1% in menu pricing and a 9.3% positive change in mix).

Sales through the off-premise channel comprised approximately 43% of our restaurant sales during the first three quarters of fiscal 2020 given the impact of COVID-19.

The Cheesecake Factory average sales per restaurant operating week decreased 30.9% to $143,747 in the first three quarters of fiscal 2020 from $208,042 in the first three quarters of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.4% to 7,976 in the first three quarters of fiscal 2020 compared to 7,865 in the prior year.

North Italia comparable sales declined approximately 32% during the first three quarters of fiscal 2020.

North Italia average sales per restaurant operating week for the first three quarters of fiscal 2020 was $85,315 based on 847 operating weeks.

External bakery sales were $46.3 million for the first three quarters of fiscal 2020 compared to $39.1 million in the comparable prior year period.

Cost of Sales

As a percentage of revenues, cost of sales was 23.2% and 22.6% in the first three quarters of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher dairy costs.

Labor Expenses

As a percentage of revenues, labor expenses were 39.2% and 36.3% in the first three 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

As a percentage of revenues, other operating costs and expenses were 31.4% and 25.2% in the first three 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 sanitation and personal protective equipment, partially offset by lower restaurant incentive compensation costs.

As a percentage of revenues, G&A expenses were 8.2% and 6.3% in the first three 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 increased to 4.8% in the first three quarters 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 three quarters of fiscal 2020, we recorded $204.7 million of impairment of assets and lease terminations 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 termination costs and accelerated depreciation for one The Cheesecake Factory restaurant, two Grand Lux Cafe locations, RockSugar Southeast Asian Kitchen and one Flower Child location.

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 three quarters of fiscal 2019.

Acquisition-Related Costs

In the first three quarters of fiscal 2020 and fiscal 2019, we recorded $2.3 million and $3.2 million, respectively, of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the first three quarters of fiscal 2020, we recorded a benefit of $4.0 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $5.6 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 $1.2 million in the deferred consideration liability and $0.4 million in amortization of acquired definite-lived licensing agreements.

Preopening Costs

Preopening costs were $7.6 million and $6.9 million in the first three quarters of fiscal 2020 and 2019, respectively.

We opened one North Italia and three Flower Child locations in the first three quarters of fiscal 2020 compared to two The Cheesecake Factory restaurants 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 $13.4 million in the first three quarters of fiscal 2019.

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

Interest and Other (Expense)/Income, Net

Interest and other expense, net was $7.0 million of expense for the first three quarters of fiscal 2020 compared to $16,986 in the comparable prior year period.

This variance was primarily due to increased borrowings on our Facility to effect the Acquisitions and enhance our financial flexibility in response to the COVID-19 pandemic.

Income Tax (Benefit)/Provision

Our effective income tax rate was 30.0% and 6.2% for the first three quarters 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%.

Interest and Other Expense, Net

Interest and other expense, net was $2.7 million and $1.5 million for the first quarters of fiscal 2021 and 2020, respectively.

This variance was primarily due to lower gains on our investments used to support our non-qualified executive deferred compensation plan.

Income Tax Provision/(Benefit)

Our effective income tax rate was 37.1% and 28.9% for the first quarters of fiscal 2021 and 2020, respectively.

The increase resulted primarily from a reserve for an uncertain tax position recorded in the first quarter of fiscal 2021 related to tenant improvement allowances, partially offset by a higher proportion of employment credits in relation to pre-tax income/(loss) in the first quarter of fiscal 2021 and a benefit in the prior year arising from the expected carryback of our anticipated fiscal 2020 loss to prior years when the federal statutory rate was 35%.

Non-GAAP Measures

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These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

We calculate these non-GAAP measures by eliminating from net (loss)/income and diluted net (loss)/income per common share the impact of items we do not consider indicative of our ongoing operations.

To reflect the potential impact of the conversion of our 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 calculate these non-GAAP measures by eliminating from net loss and diluted net loss 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 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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In the future, we may incur expenses or generate income similar to the adjusted items.

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):

September 29, 2020

October 1, 2019

September 29, 2020

October 1, 2019

Net (loss)/income available to common stockholders

Dividends on preferred stock

Direct and incremental preferred stock issuance costs

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

March 30, 2021

March 31, 2020

Net loss available to common stockholders

Dividends on Series A preferred stock

COVID-19 related costs (1)

Impairment of assets and lease terminations

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses

Loss on investments in unconsolidated affiliates

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

Uncertain tax position related to tenant improvement allowances

Tax effect of adjustments (2)

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)

Adjusted net income

Diluted net loss per common share

Dividends on Series A preferred stock

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

COVID-19 related costs (1)

Impairment of assets and lease terminations

Impairment of assets and lease termination expenses

Acquisition-related costs

Acquisition-related contingent consideration, compensation and amortization expenses

Loss on investments in unconsolidated affiliates

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

Uncertain tax position related to tenant improvement allowances

Tax effect of adjustments (2)

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.

For the thirteen weeks ended September 29, 2020, the Company recorded $2.6 million for these costs with approximately $0.4 million reflected in labor expenses, $2.1 million in other operating expenses and $0.1 million in G&A expenses.

For the thirty-nine weeks ended September 29, 2020, the Company recorded $17.6 million for these costs with approximately $2.2 million in cost of sales, $9.9 million reflected in labor expenses, $5.1 million in other operating expenses and $0.4 million in G&A expenses.

Adjusted net income per share (4)

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

For the thirteen weeks ended March 30, 2021, we recorded $4.9 million for these costs with approximately $4.6 million reflected in other operating expenses and $0.3 million in labor expenses.

For the thirteen weeks ended March 31, 2020, we recorded $3.3 million for these costs with approximately $2.3 million reflected in labor expenses and $1.0 million in other operating 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 preferred stock into common stock (9,163,043 shares and 5,394,188 shares for the thirteen weeks and thirty-nine weeks ended September 29, 2020, respectively), resulting in an assumption of 53,062,945.

and 49,243,370 weighted-average common shares outstanding for the third quarter and first three quarters of fiscal 2020, respectively.

Beginning in the third quarter of fiscal 2020, we revised the method used to calculate the potential impact of the conversion of the Company's preferred stock to common stock for purposes of determining adjusted net (loss)/income per share (non-GAAP).

Instead of assuming preferred shares are converted to common shares as of the beginning of each period presented, we now utilize a weighted average shares outstanding approach to be consistent with the approach used for outstanding common shares.

Under this methodology, the revised adjusted net loss per share for the second quarter of fiscal 2020 was $0.90.

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

Fourth Quarter Fiscal 2020 Outlook

With the number of indoor dining rooms we currently have open and should we continue to generate comparable sales levels under continued capacity restrictions at The Cheesecake Factory restaurants at approximately the quarter-to-date through October 27th level of negative 7%, we anticipate generating positive operating profit and earnings per share for the fourth quarter of fiscal 2020.

Based on the above assumptions, we expect to generate positive cash flow from operating activities and anticipate $10 million to $15 million in capital expenditures for the fourth quarter.

A debt repayment of $96.0 million and a $17.3 million acquisition installment payment to FRC were both made in October 2020.

(3) Represents the impact of assuming the conversion of preferred stock into common stock (9,598,559 shares), resulting in an assumption of 53,787,314 weighted-average common shares outstanding for the first quarter of fiscal 2021.

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

Second Quarter Fiscal 2021 Update

Second quarter-to-date through April 27, 2021, The Cheesecake Factory restaurant comparable sales increased approximately 220% and 7% compared to the comparable period in fiscal 2020 and fiscal 2019, respectively.

Second quarter-to-date

through April 27, 2021, North Italia comparable sales increased approximately 336% and 8% compared to the comparable period in fiscal 2020 and fiscal 2019, respectively.

Fiscal 2021 Outlook

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 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.

We are in the early stages of developing our initial capital deployment plans for fiscal 2021.

Depending on the course of the pandemic, we could open as many as 12 to 14 new restaurants in fiscal 2021 across our portfolio of concepts.

We anticipate approximately $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.

We will also make a $17.3 million acquisition installment payment to FRC.

For fiscal 2021, we currently estimate commodity cost inflation of approximately 2% and continue to expect government-mandated minimum wage impacts to be more favorable than in recent years.

However, there is some uncertainty to overall hourly wage rate inflation given the more competitive current industry labor environment.

In addition, we estimate G&A of approximately $47 million per quarter for the remainder of fiscal 2021.

We plan to open as many as 14 new restaurants in fiscal 2021, including two The Cheesecake Factory restaurants, six North Italia restaurants and six restaurants within our FRC business, which includes two Flower Child locations.

Internationally, we expect to open as many as three The Cheesecake Factory restaurants under licensing agreements.

We currently estimate fiscal 2021 cash capital expenditures to be approximately $100 million.

This estimate contemplates a net outlay of approximately $47 million for restaurants expected to open during fiscal 2021, approximately $43 million for replacements, enhancements and capacity additions to our existing restaurants and approximately $10 million for bakery and corporate infrastructure investments.

Liquidity and Capital Resources

During the first quarter of fiscal 2021, our cash and cash equivalents increased by $27.3 million to $181.3 million.

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

September 29, 2020

October 1, 2019

Cash (used in)/provided by operating activities

March 30, 2021

March 31, 2020

Cash provided by/(used in) operating activities

Additions to property and equipment

Growth capital provided to unconsolidated affiliates

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 thirty-nine weeks ended September 29, 2020, our cash and cash equivalents increased by $185.4 million to $243.8 million.

This increase was primarily attributable to issuance of preferred stock and borrowings on the Amended Facility, partially offset by additions to property and equipment, cash used in operating activities and dividend payments.

Cash flows from operations decreased by $148.9 million from the first three quarters of 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 during the second quarter of fiscal 2020 as all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic.

At the Company level, we generated $2.9 million of positive cash flow from operating activities during the third quarter of fiscal 2020.

Our future cash flow performance will depend on the evolving COVID-19 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 impact.

Capital expenditures were $38.3 million in the first three quarters of fiscal 2020 compared to $46.7 million in the comparable prior year period.

We currently have six 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 will continue to evaluate the pace and quantity of new unit development as more clarity on the restaurant industry operating environment emerges.

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

We expect one The Cheesecake Factory location and two restaurants within our FRC subsidiary to open in the fourth quarter of fiscal 2020.

As of September 29, 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 three quarters of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility.

At September 29, 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 September 29, 2020, we were in compliance with the covenants set forth in the Amended Facility.

Cash Provided by/(Used in) Operating Activities

Cash flows from operations increased by $54.6 million from the first quarter of fiscal 2020 primarily due to a lesser impact from the COVID-19 pandemic during the first quarter of fiscal 2021.

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 were $7.2 million and $15.8 million in the first quarter of fiscal 2021 and 2020, respectively.

We opened three restaurants in fiscal 2021 comprised of one The Cheesecake Factory, one North Italia and one Other FRC location, of which a significant amount of the development was completed in fiscal 2020, compared to one North Italia and one Flower Child restaurant during the comparable prior year period.

We currently estimate fiscal 2021 cash capital expenditures to be approximately $100 million.

Revolving Facility

On March 30, 2021, we entered into an Amended Credit Agreement, which terminates on July 30, 2024, and consists of a $400 million revolving loan facility (the “Revolving Facility”), including a $40 million sublimit for letters of credit.

The Amended Credit Agreement also provides the ability to increase the Revolving Facility in an amount not to exceed (a) during the Covenant Relief Period (as defined below) $125 million and (b) thereafter, $200 million.

The funding of any such increases are subject to receipt of lender commitments and satisfaction of customary conditions precedent.

Certain of our material subsidiaries have guaranteed our obligations under the Amended Credit Agreement.

The Amended Credit Agreement contains customary affirmative and negative covenants, including limits on cash dividends and share repurchases with respect to our equity interests, and restrictions on indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

The Amended Credit Agreement also contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgements, cross defaults to material indebtedness and events constituting a change of control.

The occurrence of an event of default could result in the termination of commitments under the Revolving Facility, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement of cash collateral deposits in respect of outstanding letters of credit.

As of March 30, 2021, we were in compliance with the covenants set forth in the Revolving Facility.

(See Note 5 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 $200.0 million less issuance costs of $10.3 million.

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

Future decisions to pay or to increase or decrease dividends on our common stock 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 $1,696.4 million through September 29, 2020 with 12,567 repurchased at a cost of $0.4 million during the third quarter of fiscal 2020 to satisfy tax withholding obligations on vested restricted share awards.

During the first quarter of fiscal 2020, we increased our borrowings under the Revolving Facility by $90.0 million to bolster our cash position and enhance financial flexibility given the impact of the COVID-19 pandemic on our operations.

During the third and fourth quarters of fiscal 2020, we repaid $100.0 million of the outstanding balance on the Revolving Facility such that at March 30, 2021, 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.

Series A Preferred Stock Issuance

During the second quarter of fiscal 2020, we issued 200,000 shares of Series A 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.

(See Note 9 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 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 the Amended Credit Agreement, 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 $2.2 million paid in the first quarter of fiscal 2021 represent dividends previously accrued on restricted stock awards that vested during the quarter.

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 Credit Agreement 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 53.1 million shares at a total cost of $1,700.7 million through March 30, 2021 with 0.1 million shares repurchased at a cost of $4.0 million during the first quarter of fiscal 2021 to satisfy tax withholding obligations on vested restricted share awards.

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 Acquisitions, our share price and current market conditions.

The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Facility that limit share repurchases based on a defined ratio.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Credit Agreement, 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 Credit Agreement that limit share repurchases based on a defined ratio.

(See Note 9 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 Amended Facility, our Board 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 September 29, 2020, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

Cash Flow Outlook

We believe that our cash and cash equivalents, combined with expected cash flows provided by operations and available borrowings under the Revolving Facility, will provide us with adequate liquidity for the next 12 months.

As of March 30, 2021, 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.

Based on our current projections, we believe that during the upcoming 12 months 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, should be sufficient in the aggregate to meet our short-term obligations.

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