Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 28, 2021.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States (“GAAP”) and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
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Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 28, 2021 based on the criteria in “Internal Control - Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 28, 2021.
The effectiveness of our internal control over financial reporting as of December 28, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which appears in Part IV, Item 15 of this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months ended December 28, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a code of ethics which applies to our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, who are the Company’s principal executive, financial and accounting officers, respectively, and the Company’s other executive officers and members of the Board of Directors, entitled “Code of Ethics for Executive Officers, Senior Financial Officers and Directors.” We have also adopted a code of ethics which applies to other employees entitled “Code of Ethics and Code of Business Conduct.” The codes of ethics are available on our corporate website at www.thecheesecakefactory .com in the “Governance” section of our “Investors” page. The contents of our website are not incorporated by reference into this report. We intend to satisfy disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics for Executive Officers, Senior Financial Officers and Directors by posting such information on our website, at the address and location specified above, or as otherwise required by the Nasdaq Global Market.
Information with respect to our executive officers is included in Part I, Item 1 of this report. Other information required by this item is hereby incorporated by reference from the sections entitled “Election of Directors,” “The Board and Corporate Governance,” and “Delinquent Section 16(a) Reports” in our definitive proxy statement for the annual meeting of stockholders to be held on May 19, 2022 (the “Proxy Statement”).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference to the sections entitled “Directors Compensation,” “Executive Compensation,” “Compensation of Named Executive Officers” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is hereby incorporated by reference to the section entitled “Beneficial Ownership of Principal Stockholders and Management” and “Equity Compensation Plan Information” in the Proxy Statement.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is hereby incorporated by reference to the sections entitled “Policies Regarding Review, Approval or Ratification of Transactions with Related Persons” and “The Board and Corporate Governance” in the Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is hereby incorporated by reference to the section entitled “Independent Registered Public Accounting Firm Fees and Services” (in the proposal entitled “Ratification of Selection of Independent Registered Public Accounting Firm”) in the Proxy Statement.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
(a) 1. Financial statements:
The consolidated financial statements required to be filed hereunder are listed in the Index to Consolidated Financial Statements on page 58 of this report.
2. Financial statement schedules:
All schedules have been omitted because they are not applicable, not required or the information has been otherwise supplied in the financial statements or notes to the financial statements.
3. Exhibits:
The Exhibits required to be filed hereunder are listed in the exhibit index included herein at page 96.
ITEM 16. FORM 10-K SUMMARY
None.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (KPMG, LLP, Los Angeles, CA, Auditor Firm ID: 185 )
59
Consolidated Balance Sheets
61
Consolidated Statements of Income/(Loss)
62
Consolidated Statements of Comprehensive Income/(Loss)
63
Consolidated Statements of Stockholders’ Equity and Series A Convertible Preferred Stock
64
Consolidated Statements of Cash Flows
65
Notes to Consolidated Financial Statements
66
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors
The Cheesecake Factory Incorporated:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Cheesecake Factory Incorporated and subsidiaries (the Company) as of December 28, 2021 and December 29, 2020, the related consolidated statements of income/(loss), comprehensive income/(loss), stockholders’ equity and series A convertible preferred stock, and cash flows for each of the years in the three-year period ended December 28, 2021, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 28, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 28, 2021 and December 29, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 28, 2021, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of long-lived assets for impairment
As discussed in Notes 1, 7 and 13 to the consolidated financial statements, the Company assesses the potential impairment of long-lived assets on an annual basis or whenever events or changes in circumstances indicate the carrying value of the asset or asset group may not be recoverable. If the carrying amount of an asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. The property and equipment, net, and operating lease asset balances as of December 28, 2021 were $741.7 million and $1,241.2 million, respectively. Based upon the analyses performed, the Company recognized pre-tax impairment charges for long-lived assets of $16.3 million in fiscal 2021.
We identified the evaluation of long-lived assets for impairment as a critical audit matter. The evaluation of the assumptions used in the undiscounted cash flow analysis and determination of fair value of certain long-lived assets resulted in the application of challenging auditor judgment. These assumptions include revenue and the operating margin.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s long-lived asset impairment assessment process. This included controls related to the determination of the undiscounted cash flow and fair value of the restaurant asset groups, and the related revenue and operating margin assumptions. We performed sensitivity analyses over the revenue and operating margin assumptions to assess the impact of changes in those assumptions on the Company’s determination of the undiscounted cash flow and fair value of the restaurant asset groups. We compared the Company’s prior year revenue and operating margin assumptions to current year actual results to assess the Company’s ability to accurately forecast. We evaluated the Company’s revenue and operating margin assumptions for the restaurant asset groups by comparing the assumptions to the restaurant asset groups’ historical and peer group performance.
/s/ KPMG LLP
We have served as the Company’s auditor since 2018.
Los Angeles, California
February 22, 2022
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THE CHEESECAKE FACTORY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 28,
December 29,
2021
2020
ASSETS
Current assets:
Cash and cash equivalents
$
189,627
$
154,085
Accounts and other receivable
100,504
75,787
Income taxes receivable
36,173
36,889
Inventories
42,839
39,288
Prepaid expenses
36,446
35,310
Total current assets
405,589
341,359
Property and equipment, net
741,746
774,137
Other assets:
Intangible assets, net
251,701
253,160
Operating lease assets
1,241,237
1,251,027
Other
157,852
127,371
Total other assets
1,650,790
1,631,558
Total assets
$
2,798,125
$
2,747,054
LIABILITIES, SERIES A CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$
54,086
$
58,432
Gift card liabilities
211,182
184,655
Operating lease liabilities
131,818
132,519
Other accrued expenses
239,187
210,461
Total current liabilities
636,273
586,067
Long-term debt
466,017
280,000
Operating lease liabilities
1,218,269
1,224,321
Other noncurrent liabilities
147,400
149,725
Commitments and contingencies (Note 16)
Series A convertible preferred stock, $ .01 par value, 200,000 shares authorized; 0 and 200,000 shares issued and outstanding at December 28, 2021 and December 29, 2020, respectively
—
218,248
Stockholders’ equity:
Preferred stock, $ .01 par value, other than Series A convertible preferred stock, 4,800,000 shares authorized; none issued
—
—
Common stock, $ .01 par value, 250,000,000 shares authorized; 105,365,678 and 98,645,147 shares issued at December 28, 2021 and December 29, 2020, respectively
1,054
986
Additional paid-in capital
862,758
878,148
Retained earnings
1,169,150
1,110,087
Treasury stock, 53,139,172 and 53,026,409 shares at cost at December 28, 2021 and December 29, 2020, respectively
( 1,702,509 )
( 1,696,743 )
Accumulated other comprehensive loss
( 287 )
( 3,785 )
Total stockholders’ equity
330,166
288,693
Total liabilities, Series A convertible preferred stock and stockholders’ equity
$
2,798,125
$
2,747,054
See the accompanying notes to the consolidated financial statements.
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THE CHEESECAKE FACTORY INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(In thousands, except per share data)
Fiscal Year
2021
2020
2019
Revenues
$
2,927,540
$
1,983,225
$
2,482,692
Costs and expenses:
Cost of sales
653,133
458,332
561,783
Labor expenses
1,072,628
778,586
899,667
Other operating costs and expenses
792,311
616,069
631,613
General and administrative expenses
186,136
157,644
160,199
Depreciation and amortization expenses
89,654
91,415
88,133
Impairment of assets and lease termination expenses
18,139
219,333
18,247
Acquisition-related costs
—
2,699
5,270
Acquisition-related contingent consideration, compensation and amortization expenses/(benefit)
19,510
( 3,872 )
1,033
Preopening costs
13,711
10,456
13,149
Total costs and expenses
2,845,222
2,330,662
2,379,094
Income/(loss) from operations
82,318
( 347,437 )
103,598
Gain on investments in unconsolidated affiliates
—
—
39,233
Interest and other expense, net
( 10,698 )
( 8,599 )
( 2,497 )
Income/(loss) before income taxes
71,620
( 356,036 )
140,334
Income tax (benefit)/ provision
( 753 )
( 102,671 )
13,041
Net income/(loss)
72,373
( 253,365 )
127,293
Dividends on Series A preferred stock
( 18,661 )
( 13,485 )
—
Direct and incremental Series A preferred stock issuance costs
—
( 10,257 )
—
Undistributed earnings allocated to Series A preferred stock
( 4,581 )
—
—
Net income/(loss) available to common stockholders
$
49,131
$
( 277,107 )
$
127,293
Net income/(loss) per common share:
Basic
$
1.03
$
( 6.32 )
$
2.90
Diluted (Note 1)
$
1.01
$
( 6.32 )
$
2.86
Weighted-average common shares outstanding:
Basic
47,529
43,869
43,949
Diluted
48,510
43,869
44,545
See the accompanying notes to the consolidated financial statements.
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THE CHEESECAKE FACTORY INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
Fiscal Year
2021
2020
2019
Net income/(loss)
$
72,373
$
( 253,365 )
$
127,293
Other comprehensive gain/(loss):
Foreign currency translation adjustment
34
114
503
Unrealized gain/(loss) on derivative, net of tax
3,464
( 3,464 )
—
Other comprehensive gain/(loss)
3,498
( 3,350 )
503
Total comprehensive income/(loss)
75,871
( 256,715 )
127,796
Comprehensive income attributable to Series A preferred stockholders
( 23,540 )
( 23,742 )
—
Total comprehensive income/(loss) available to common stockholders
$
52,331
$
( 280,457 )
$
127,796
See the accompanying notes to the consolidated financial statements.
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THE CHEESECAKE FACTORY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND SERIES A CONVERTIBLE PREFERRED STOCK
(In thousands)
Accumulated
Series A Convertible
Additional
Other
Preferred Stock
Common Stock
Paid-in
Retained
Treasury
Comprehensive
Shares
Amount
Shares
Amount
Capital
Earnings
Stock
Loss
Total
Balance, January 1, 2019
—
$
—
96,622
$
967
$
828,676
$
1,384,494
$
( 1,642,140 )
$
( 938 )
$
571,059
Cumulative effect of adopting the pronouncement related to lease accounting, net of tax
—
—
—
—
—
( 41,466 )
—
—
( 41,466 )
Balance, January 1, 2019, as adjusted
—
—
96,622
967
828,676
1,343,028
( 1,642,140 )
( 938 )
529,593
Net income
—
—
—
—
—
127,293
—
—
127,293
Foreign currency translation adjustment
—
—
—
—
—
—
—
503
503
Cash dividends declared Common stock, $ 1.38 per share
—
—
—
—
—
( 61,988 )
—
—
( 61,988 )
Stock-based compensation
—
—
476
4
19,595
—
—
—
19,599
Common stock issued under stock-based compensation plans
—
—
587
6
7,718
—
—
—
7,724
Treasury stock purchases
—
—
—
—
—
—
( 50,982 )
—
( 50,982 )
Balance, December 31, 2019
—
—
97,685
977
855,989
1,408,333
( 1,693,122 )
( 435 )
571,742
Net loss
—
—
—
—
—
( 253,365 )
—
—
( 253,365 )
Foreign currency translation adjustment
—
—
—
—
—
—
—
114
114
Change in derivative, net of tax
—
—
—
—
—
—
—
( 3,464 )
( 3,464 )
Cash dividends declared Common stock, $ 0.36 per share
—
—
—
—
—
( 16,376 )
—
—
( 16,376 )
Stock-based compensation
—
—
637
7
21,550
—
—
—
21,557
Common stock issued under stock-based compensation plans
—
—
323
2
609
—
—
—
611
Treasury stock purchases
—
—
—
—
—
—
( 3,621 )
—
( 3,621 )
Series A preferred stock issuance
200
189,743
—
—
—
—
—
—
—
Series A preferred stock direct costs
—
10,257
—
—
—
( 10,257 )
—
—
( 10,257 )
Paid-in-kind Series A preferred stock dividend, including beneficial conversion feature
—
18,248
—
—
—
( 18,248 )
—
—
( 18,248 )
Balance, December 29, 2020
200
218,248
98,645
986
878,148
1,110,087
( 1,696,743 )
( 3,785 )
288,693
Cumulative effect of adopting ASU 2020-06
—
( 4,763 )
—
—
—
4,763
—
—
4,763
Balance, December 29, 2020, as adjusted
200
213,485
98,645
986
878,148
1,114,850
( 1,696,743 )
( 3,785 )
293,456
Net income
—
—
—
—
—
72,373
—
—
72,373
Foreign currency translation adjustment
—
—
—
—
—
—
—
34
34
Change in derivative, net of tax
—
—
—
—
—
—
—
3,464
3,464
Cash dividends declared Common stock, net of forfeitures
—
—
—
—
—
588
—
—
588
Stock-based compensation
—
—
759
8
24,778
—
—
—
24,786
Common stock issued under stock-based compensation plans
—
—
436
5
23,177
—
—
—
23,182
Common stock issuance
—
—
3,125
31
167,019
—
—
—
167,050
Treasury stock purchases
—
—
—
—
—
—
( 5,766 )
—
( 5,766 )
Series A preferred stock cash-settled conversion
( 150 )
( 160,114 )
—
—
( 283,637 )
—
—
—
( 283,637 )
Series A preferred stock conversion to common stock
( 50 )
( 53,371 )
2,401
24
53,273
—
—
—
53,297
Deemed dividends on Series A preferred stock
—
—
—
—
—
( 13,591 )
—
—
( 13,591 )
Cash dividends declared Series A preferred stock, $ 25.35 per share
—
—
—
—
—
( 5,070 )
—
—
( 5,070 )
Balance, December 28, 2021
—
$
—
105,366
$
1,054
$
862,758
$
1,169,150
$
( 1,702,509 )
$
( 287 )
$
330,166
See the accompanying notes to the consolidated financial statements.
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THE CHEESECAKE FACTORY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Year
2021
2020
2019
Cash flows from operating activities:
Net income/(loss)
$
72,373
$
( 253,365 )
$
127,293
Adjustments to reconcile net income/(loss) to cash provided by operating activities:
Depreciation and amortization expenses
89,654
91,415
88,133
Impairment of assets and lease termination expenses
17,937
208,066
16,223
Deferred income taxes
( 20,849 )
( 67,228 )
( 2,197 )
Stock-based compensation
22,988
21,350
19,373
Gain from investments in unconsolidated affiliates
—
—
( 39,233 )
Changes in assets and liabilities, net of acquired amounts:
Accounts and other receivables
( 24,816 )
15,148
3,777
Income taxes receivable/payable
715
( 32,263 )
( 5,338 )
Inventories
( 3,478 )
7,921
( 5,766 )
Prepaid expenses
( 1,137 )
8,563
( 4,133 )
Operating lease assets/liabilities
( 4,106 )
22,958
5,019
Other assets
( 9,227 )
( 6,019 )
( 11,989 )
Accounts payable
( 3,678 )
( 2,005 )
2,326
Gift card liabilities
26,527
( 3,324 )
9,695
Other accrued expenses
50,103
( 8,309 )
15,578
Cash provided by operating activities
213,006
2,908
218,761
Cash flows from investing activities:
Additions to property and equipment
( 66,943 )
( 50,329 )
( 73,765 )
Additions to intangible assets
( 606 )
( 585 )
( 2,100 )
Acquisition, net of cash acquired
—
—
( 261,695 )
Investments in unconsolidated affiliates
—
—
( 3,000 )
Loans made to unconsolidated affiliates
—
—
( 22,500 )
Other
( 1,061 )
—
—
Cash used in investing activities
( 68,610 )
( 50,914 )
( 363,060 )
Cash flows from financing activities:
Acquisition-related deferred consideration
( 17,000 )
( 17,250 )
—
Borrowings on credit facility
—
90,000
335,000
Repayments on credit facility
( 150,000 )
( 100,000 )
( 55,000 )
Convertible debt issuance
345,000
—
—
Convertible debt direct and incremental costs
( 10,074 )
—
—
Series A preferred stock issuance
—
200,000
—
Series A preferred stock direct and incremental costs
—
( 10,257 )
—
Series A preferred stock cash-settled conversion
( 443,751 )
—
—
Series A preferred stock conversion direct and incremental costs
( 74 )
—
—
Series A preferred stock dividend paid
( 18,661 )
—
—
Common stock issuance
175,000
—
—
Common stock issuance direct and incremental costs
( 7,950 )
—
—
Proceeds from exercise of stock options
24,786
611
7,724
Common stock dividends paid
( 337 )
( 15,791 )
( 60,722 )
Treasury stock purchases
( 5,766 )
( 3,621 )
( 50,982 )
Cash (used in)/provided by financing activities
( 108,827 )
143,692
176,020
Foreign currency translation adjustment
( 27 )
( 17 )
117
Net change in cash and cash equivalents
35,542
95,669
31,838
Cash and cash equivalents at beginning of period
154,085
58,416
26,578
Cash and cash equivalents at end of period
$
189,627
$
154,085
$
58,416
Supplemental disclosures:
Interest paid
$
9,586
$
13,045
$
1,646
Income taxes paid
$
13,031
$
2,968
$
20,778
Construction payable
$
4,343
$
5,007
$
6,504
Non-cash investing:
Acquisition-related deferred consideration and compensation
$
—
$
—
$
( 66,257 )
Fair value of previously-held equity investments
$
—
$
—
$
( 122,000 )
Loans repaid by unconsolidated affiliates as a reduction of acquisition cash
$
—
$
—
$
12,500
Loan to unconsolidated affiliate assumed in acquisition
$
—
$
—
$
10,000
Non-cash financing:
Series A preferred stock conversion to common stock
$
53,297
$
—
$
—
See the accompanying notes to the consolidated financial statements.
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THE CHEESECAKE FACTORY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
The Cheesecake Factory Incorporated is a leader in experiential dining. We are culinary forward and relentlessly focused on hospitality. We currently own and operate 306 restaurants throughout the United States and Canada, including 208 The Cheesecake Factory ® restaurants, 29 North Italia ® restaurants and a collection within our Fox Restaurant Concepts (“FRC”) business. Internationally, 29 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.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated and its wholly owned subsidiaries (referred to herein collectively as the “Company,” “we,” “us” and “our”) and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions for the periods presented have been eliminated in consolidation.
On October 2, 2019, we completed the acquisition of North Italia and the remaining business of 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.
We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal years 2021, 2020 and 2019 each consisted of 52 weeks and fiscal year 2022 will consist of 53 weeks.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates.
COVID-19 Pandemic
Beginning in March 2020, COVID-19 and measures to prevent its spread led to 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 our remaining locations shifted to an off-premise only operating model on an interim basis. Reopening of restaurant dining rooms resumed, generally at reduced capacity, at various points since May 2020. While restrictions on the type of permitted operating model and occupancy capacity may continue to change, currently nearly all of our restaurants are operating with no capacity restrictions on indoor dining. The ongoing effects of COVID-19 and its variants, including, but not limited to, consumer behavior, capacity restrictions, mask and vaccination mandates, wage inflation, our ability to continue to staff our restaurants and disruptions in the supply chain, will determine the impact to our operating results and financial position. The impact to our operations has been most notable during the periods of greatest accelerating COVID-19 case counts. We have incurred and will continue to incur additional costs to address government regulations and the safety of our staff members and customers.
Cash and Cash Equivalents
Amounts receivable from credit card processors, totaling $ 17.5 million and $ 9.1 million at December 28, 2021 and December 29, 2020, respectively, are considered cash equivalents because they are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. During the last week of fiscal 2020, almost all of our restaurants were operating under capacity restrictions or in an off-premise-only model. Therefore, we processed less sales through credit cards causing a lower receivable in fiscal 2020. Our cash management system provides for the funding of all major bank disbursement accounts on a daily basis as checks are presented for payment. Under this system, outstanding checks are in excess of the cash balances at certain banks, which creates book overdrafts. Book overdrafts are presented as a current liability in other accrued expenses on our consolidated balance sheet.
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Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are cash and cash equivalents and receivables. We maintain our day-to-day operating cash balances in non-interest-bearing transaction accounts, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 . We invest our excess cash in a money market deposit account, which is insured by the FDIC up to $ 250,000 . Although we maintain balances that exceed the federally insured limit, we have not experienced any losses related to this balance, and we believe credit risk to be minimal.
We consider the concentration of credit risk for accounts receivable from our bakery customers to be minimal due to the payment histories and general financial condition of our larger bakery accounts. Concentration of credit risk related to other receivables is limited as this balance is comprised primarily of amounts due from our gift card distributors, insurance providers and delivery partner.
Inventories
Inventories consist of restaurant food and other supplies, bakery raw materials and bakery finished goods and are stated at the lower of cost or net realizable value on an average cost basis at the restaurants and on a first-in, first-out basis at the bakeries.
Property and Equipment
We record property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the assets or the reasonably certain lease term, whichever is shorter. Leasehold improvements include the cost of our internal development and construction department. Depreciation and amortization periods are as follows:
Buildings and land improvements
30 years
Leasehold improvements
10 to 30 years
Furnishings, fixtures and equipment
3 to 15 years
(1)
Computer software and equipment
5 years
(1) Other than certain types of restaurant equipment with estimated useful lives that equal or exceed the reasonably certain lease term, in which case the reasonably certain lease term is utilized.
Gains and losses related to property and equipment disposals are recorded in depreciation and amortization expenses.
Impairment of Long-Lived Assets and Lease Termination Expenses
We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate 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. At any given time, we may be monitoring a number of locations, and future impairment charges could be required if individual restaurant performance does not improve or we make the decision to close or relocate a restaurant.
Long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Impairment testing is performed at the individual restaurant asset group level, which is inclusive of property and equipment and lease right-of-use assets. Recoverability is assessed by comparing the carrying value of the assets to the undiscounted cash flows expected to be generated by those assets. Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair value, which is determined based on discounted future net cash flows expected to be generated by the assets.
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In fiscal 2021, we recorded $ 16.3 million of expense primarily related to the impairment of long-lived assets for three The Cheesecake Factory and two Other restaurants. In fiscal 2020, we recorded $ 36.2 million of expense primarily related to the impairment of 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. In fiscal 2019, we recorded $ 18.2 million of expense related to the impairment of two The Cheesecake Factory and two Other restaurants, as well as lease termination costs and accelerated depreciation for two Other restaurants. These amounts are recorded in impairment of assets and lease terminations on the consolidated statements of income.
Intangible Assets
Our intangible assets consist of goodwill, indefinite-lived trade names, trademarks and transferable alcoholic beverage licenses and definite-lived licensing agreements and non-transferable alcoholic beverage licenses.
Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable based on estimated undiscounted future cash flows. If impaired, the asset or asset group is written down to fair value based on discounted future cash flows.
Goodwill and other indefinite-lived intangible assets are not amortized and are tested for impairment annually as of the first day of our fiscal fourth quarter or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists. Factors considered include, but are not limited to, historical financial performance, a significant decline in expected future cash flows, unanticipated competition, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. The quantitative assessments require the use of estimates and assumptions regarding future cash flows and asset fair values. For the goodwill impairment test, the estimated fair value of the reporting units is determined using a blend of the income approach using a discounted cash flow analysis and the market capitalization approach. The fair value of the trade names, trademarks and licensing agreements is estimated using the relief from royalty method. These fair value assessments could change materially if different estimates and assumptions were used.
We evaluate the useful lives of our intangible assets, other than goodwill, at each reporting period to determine if they are definite or indefinite-lived. A determination on useful life requires judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets. (See Note 8 for further discussion of our intangible assets.)
Investments in Unconsolidated Affiliates
From fiscal 2016 until the Acquisition on October 2, 2019, we held minority equity investments in two restaurant concepts, North Italia and Flower Child, with our percentage of ownership growing to 49 % in each concept immediately prior to the Acquisition. Since we held a number of rights with regard to participation in policy-making processes, but did not control these entities prior to the Acquisition, we accounted for these investments under the equity method. Accordingly, we recognized our proportionate share of the reported earnings or losses of these entities on the consolidated statements of income and as an adjustment to our investments on the consolidated balance sheets. We assessed the potential impairment of these equity investments whenever events or changes in circumstances indicated that a decrease in value of the investment had occurred that was other than temporary, in which case we would have recognized the decrease even though it was in excess of what would otherwise be recognized by application of the equity method. No impairment losses were recorded for these assets during fiscal 2019.
Revenue Recognition
Our revenues consist of sales at our Company-owned restaurants, sales from our bakery operations to our licensees and other third-party customers, royalties from our licensees’ restaurant sales and from consumer packaged goods sales, and licensee development and site fees. Revenues are presented net of sales taxes. Sales tax collected is included in other accrued expenses until the taxes are remitted to the appropriate taxing authorities.
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Revenues from restaurant sales are recognized when payment is tendered at the point of sale. Revenues from bakery sales are recognized upon transfer of title and risk to customers. Royalty revenues are recognized in the period the related sales occur, utilizing the sale-based royalty exception available under current accounting guidance. Our consumer packaged goods minimum guarantees do not require distinct performance obligations. Therefore, related revenue is recognized on a straight-line basis over the life of the applicable agreements, ranging from one to three years . As our development and site fee agreements do not contain distinct performance obligations, related revenue is recognized on a straight-line basis over the life of the applicable agreements, ranging from eight to 30 years . Deferred and recognized revenue for new minimum guarantees for consumer packaged goods and for new site and development agreements were immaterial in all periods presented.
We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants. Based on our historical redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” Breakage is recognized over a three-year period in proportion to historical redemption trends and is classified as revenues in our consolidated statements of income. We recognized $ 6.8 million, $ 7.6 million and $ 8.0 million of gift card breakage in fiscal years 2021, 2020 and 2019, respectively. Incremental direct costs related to gift card sales, including commissions and credit card fees, are deferred and recognized in earnings in the same pattern as the related gift card revenue. There were no changes to our accounting for gift card revenue and related costs upon adoption of the new revenue recognition standard.
Certain of our promotional programs include multiple element arrangements that incorporate various performance obligations. We allocate revenue using the relative selling price of each performance obligation considering the likelihood of redemption and recognize revenue upon satisfaction of each performance obligation. During fiscal 2021, we deferred revenue of $ 27.5 million related to promotional programs and recognized $ 15.2 million of previously deferred revenue related to promotional programs. During fiscal 2020, we deferred revenue of $ 11.6 million related to promotional programs and recognized $ 11.2 million of previously deferred revenue related to promotional programs.
Leases
We currently lease all of our restaurant locations, generally with initial terms of 10 to 20 years plus two five-year renewal options. Our leases typically require contingent rent above the minimum base rent payments based on a percentage of revenues ranging from 2 % to 10 %, have escalating minimum rent requirements over the term of the lease and require payment for various expenses incidental to the use of the property. A majority of our leases provide for a reduced level of overall rent obligation should specified co-tenancy requirements not be satisfied. We expend cash for leasehold improvements and furniture, fixtures, and equipment to build out and equip our leased premises. We may also expend cash for structural additions that we make to leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against our future minimum or percentage rents, or a combination thereof. We do not meet any of the accounting criteria under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 842, Leases, for being the owner of the asset under construction. Many of our leases provide early termination rights permitting us to terminate the lease prior to expiration in the event our revenues are below a stated level for a period of time, generally conditioned upon repayment of the unamortized landlord contributions.
In addition to leases for our restaurant locations, we also lease automobiles and certain equipment that is used in the restaurants, bakeries and corporate office. The leases for our restaurant locations, automobiles and certain restaurant equipment are included in our operating lease assets and liabilities. All other leases are immaterial or qualify for the short-term lease exclusion.
The assessment of whether a contract is or contains a lease is performed at contract inception. A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as having both the right to obtain substantially all the economic benefits from the use of the asset and to direct how and for what purpose the asset is used.
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At lease commencement, we evaluate each material lease and those that don’t qualify for the short-term exclusion to determine its appropriate classification as an operating or finance lease. All of the leases evaluated meet the criteria for classification as operating leases. For restaurant leases that existed as of the adoption of ASC 842, we continued to apply our historical practice of excluding executory costs, and only minimum base rent was factored into the initial operating lease liability and corresponding lease asset. For restaurant leases beginning after adoption of ASC 842, we have elected the single lease component practical expedient. Operating lease assets and liabilities are recorded on the balance sheet at lease commencement based on the present value of minimum base rent and other fixed payments over the reasonably certain lease term. The difference between the amounts we expend for structural costs and the construction contributions received from our landlords is recorded as an adjustment to the operating lease asset. Lease terms include the build-out period for our leases where no rent payments are typically due under the terms of the lease, as well as options to renew when we deem we have significant economic incentive to exercise the extension. When determining if we have a significant economic incentive, we consider relevant factors, such as contractual, asset, entity and market-based considerations. Option periods are included in the lease term for the majority of our leases. Termination rights have not been factored into the lease terms since based on our probability assessment we are reasonably certain we will not terminate our leases.
We cannot determine the interest rate implicit in our leases because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we use our incremental borrowing rate as the discount rate for our leases. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease.
We monitor for events or changes in circumstances that require reassessment of our leases. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. We also assess the potential impairment of our operating lease assets under long-lived asset impairment guidance in ASC 360, Property, Plant, and Equipment: Impairment or disposal on long-lived assets.
Rent expense included in our operating lease assets is recognized on a straight-line basis. Contingent rent expense is recorded as incurred to the extent it exceeds minimum base rent per the lease agreement. Variable lease payments, which primarily consist of real estate taxes, common area maintenance charges, insurance cost and other operating expenses, are not included in the operating lease right-of-use asset or operating lease liability balances and are recognized as incurred. The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the operating lease asset and liability. These judgments may produce materially different amounts of rent expense than would be reported if different assumptions were used. Rent expense is included in other operating costs and expenses in the consolidated statements of income.
In April 2020, the FASB staff issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract) rather than as a lease modification. Lessees may make the election for any lessor-provided lease concession related to the impact of the COVID-19 pandemic if the concession does not result in a substantial increase in the rights of the lessor or in the obligations of the lessee.
During fiscal 2020, we received a number of lease concessions, primarily in the form of rent deferrals or reduction over the period of time when our restaurant business was adversely impacted and have elected to apply the interpretive guidance. This election did not have a material impact on our consolidated financial statements. Three concession agreements did not qualify for this accounting election and were treated as lease modifications. During fiscal 2020, we deferred rent payments of $ 7.6 million, of which $ 7.3 million was paid in fiscal 2021.
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Self-Insurance Liabilities
We retain 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 and are recorded in other accrued expenses. Our estimated liabilities, which are not discounted, 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.
Stock-Based Compensation
We maintain stock-based incentive plans under which equity awards may be granted to staff members, consultants and non-employee directors. We account for the awards based on fair value measurement guidance and amortize to expense over the vesting period using a straight-line or graded-vesting schedule, as applicable. (See Note 18 for further discussion of our stock-based compensation.)
Advertising Costs
We expense advertising production costs at the time the advertising first takes place. All other advertising costs are expensed as incurred. Most of our advertising costs are included in other operating costs and expenses and were $ 18.3 million, $ 16.0 million and $ 10.6 million in fiscal 2021, 2020 and 2019, respectively.
Preopening Costs
Preopening costs include all costs to relocate and compensate restaurant management staff members during the preopening period, costs to recruit and train hourly restaurant staff members, and wages, travel and lodging costs for our opening training team and other support staff members. Also included are expenses for maintaining a roster of trained managers for pending openings, the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs, and corporate travel and support activities. We expense preopening costs as incurred.
Income Taxes
We provide for federal, state and foreign income taxes currently payable and for deferred taxes that result from differences between financial accounting rules and tax laws governing the timing of recognition of various income and expense items. We recognize deferred income tax assets and liabilities for the future tax effects of such temporary differences based on the difference between the financial statement and tax bases of existing assets and liabilities using the statutory rates expected in the years in which the differences are expected to reverse. The effect on deferred taxes of any enacted change in tax rates is recognized in income in the period that includes the enactment date. Income tax credits are recorded as a reduction of tax expense.
We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies (when applicable) and results of recent operations. If we later determine that we would be able to realize our deferred tax assets in excess of their net recorded amount, we adjust the deferred tax asset valuation allowance and reduce income tax expense.
We evaluate our exposures associated with our various tax filing positions and recognize a tax benefit from an uncertain tax position only if it is more-likely-than-not that the position will be sustained upon examination by the relevant taxing authorities based solely on its technical merits, taking into account available administrative remedies and litigation. If this threshold is met, we recognize only the portion of the tax benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. We record a liability for any portion of the tax benefit that does not meet these recognition and measurement criteria and we adjust this liability through income tax expense in the period in which the uncertain tax position is effectively settled, when the statute of limitations expires for the relevant taxing authority to examine the tax position or when new information becomes available. We recognize interest and penalties related to uncertain tax positions in income tax expense.
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Net Income/(Loss) per Share
Basic net income/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted-average number of common shares outstanding during the period, reduced by unvested restricted stock awards. At December 28, 2021, December 29, 2020 and December 31, 2019, 2.1 million shares, 2.0 million shares and 1.8 million shares, respectively, of restricted stock issued were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal years ended on those dates.
Diluted net income/(loss) per share is computed by dividing net income/(loss) available to common stockholders by the weighted-average number of common stock equivalents outstanding for the period. Common stock equivalents for our convertible senior notes due 2026 (“Notes”)are determined by application of the if-converted method, and common stock equivalents for outstanding stock options and restricted stock are determined by the application of the treasury stock method.
Holders of our Series A Convertible Preferred Stock, par value $ 0.01 per share (the “Series A preferred stock”) participated in dividends on an as-converted basis when declared on common stock. As a result, our Series A preferred stock met the definition of a participating security which requires us to apply the two-class method to compute both basic and diluted net income per share. The two-class method is an earnings allocation formula that treats participating securities as having rights to earnings that would otherwise have been available to common stockholders. In addition, as our Series A preferred stock was a participating security, we are required to calculate diluted net income per share under the if-converted method in addition to the two-class method and utilize the most dilutive result. In periods where there is a net loss, no allocation of undistributed net loss to preferred stockholders was performed as the holders of our Series A preferred stock were not contractually obligated to participate in our losses.
Fiscal Year
2021
2020
2019
(In thousands, except per share data)
Basic net income/(loss) per common share:
Net income/(loss)
$
72,373
$
( 253,365 )
$
127,293
Dividends on Series A preferred stock
( 18,661 )
( 13,485 )
—
Direct and incremental Series A preferred stock issuance costs
—
( 10,257 )
—
Undistributed earnings allocated to Series A preferred stock
( 4,581 )
—
—
Net income/(loss) available to common stockholders
49,131
( 277,107 )
127,293
Basic weighted-average shares outstanding
47,529
43,869
43,949
Basic net income/(loss) per common share
$
1.03
$
( 6.32 )
$
2.90
Diluted net income/(loss) per common share:
Net income/(loss) available to common stockholders
49,131
( 277,107 )
127,293
Reallocation of undistributed earnings to Series A preferred stock
85
—
—
Net income/(loss) available to common stockholders for diluted EPS
49,216
( 277,107 )
127,293
Basic weighted-average shares outstanding
47,529
43,869
43,949
Dilutive effect of equity awards (1)
981
—
596
Diluted weighted-average shares outstanding (2)
48,510
43,869
44,545
Diluted net income/(loss) per common share
$
1.01
$
( 6.32 )
$
2.86
(1) Shares of common stock equivalents of 1.9 million, 4.0 million and 2.3 million for fiscal 2021, 2020 and 2019, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.
(2) Our Notes of $ 345 million were excluded from the diluted calculation due to their anti-dilutive effect.
Comprehensive Income/(Loss)
Comprehensive income/(loss) includes all changes in equity during a period except those resulting from investment by and distribution to owners. Our comprehensive income consists of net income/(loss), unrealized losses on our interest rate swap and translation gains and losses related to our Canadian restaurant operations.
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Foreign Currency
The Canadian dollar is the functional currency for our Canadian restaurant operations. Revenue and expense accounts are translated into U.S. dollars using the average exchange rates during the reporting period. Assets and liabilities are translated using the exchange rates in effect at the reporting period end date. Equity accounts are translated at historical rates, except for the change in retained earnings which is the result of the income statement translation process. Translation gains and losses are reported as a separate component in our consolidated statements of comprehensive income and would only be realized upon the sale or upon complete or substantially complete liquidation of the business. Gains and losses from foreign currency transactions are recognized in our consolidated statements of income in interest and other expense, net.
Recent Accounting Pronouncements
In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity’s own equity. This pronouncement is effective for fiscal years beginning after December 15, 2021 and early adoption is permitted. The guidance allows for either full retrospective adoption or modified retrospective adoption. We adopted this guidance in the first quarter of fiscal 2021 utilizing the modified retrospective method and, accordingly, recorded a $ 4.8 million cumulative adjustment to retained earnings to reverse previously recorded beneficial conversion features.
As further discussed in Note 12, we issued certain Notes during the second quarter of fiscal 2021, and the accounting for these instruments was based on the guidance in ASU 2020-06. Additionally, the impact on diluted earnings per share of the Notes was calculated based on the if-converted method, as further described in Note 1.
2. Acquisition Pro Forma Results of Operations (unaudited)
The following pro forma results of operations for fiscal 2019 give effect to the Acquisition as if it had occurred on January 1, 2019 (in thousands):
Revenues
$
2,732,901
Net income
74,949
Net income per share:
Basic
1.71
Diluted
$
1.68
The above pro forma information includes combined North Italia and FRC actual revenues and net loss of $ 92.0 million and $ 1.5 million, respectively, contributed post acquisition in fiscal 2019. The most significant adjustments included in the pro forma financial information are the elimination of the gain/(loss) on our previously-held equity interests in North Italia and Flower Child, elimination of transaction costs, increased interest expense associated with debt incurred to fund the Acquisition, elimination of historical FRC interest expense and corresponding income tax effects.
In the opinion of the Company’s management, the unaudited pro forma financial information includes all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisition and related transactions. The unaudited pro forma financial information is provided for informational purposes only and is not necessarily indicative of what our actual results of operations would have been had the Acquisition and related transactions been completed as of January 1, 2019 or that may be achieved in the future.
3. Fair Value Measurements
Fair value measurements are estimated based on valuation techniques and inputs categorized as follows:
● Level 1: Quoted prices in active markets for identical assets or liabilities
● Level 2: Observable inputs other than quoted prices in active markets for identical assets and liabilities
● Level 3: Unobservable inputs in which little or no market activity exists, therefore requiring the Company to develop its own assumptions
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The following tables present the components and classification of our assets and liabilities that are measured at fair value on a recurring basis (in thousands):
December 28, 2021
Level 1
Level 2
Level 3
Assets/(Liabilities)
Non-qualified deferred compensation assets
$
92,588
$
—
$
—
Non-qualified deferred compensation liabilities
( 92,012 )
—
—
Acquisition-related deferred consideration
—
( 21,642 )
—
Acquisition-related contingent consideration and compensation liabilities
—
—
( 23,894 )
December 29, 2020
Level 1
Level 2
Level 3
Assets/(Liabilities)
Non-qualified deferred compensation assets
$
83,485
$
—
$
—
Non-qualified deferred compensation liabilities
( 83,702 )
—
—
Interest rate swap
—
( 4,591 )
—
Acquisition-related deferred consideration
—
( 38,119 )
—
Acquisition-related contingent consideration and compensation liabilities
—
—
( 7,465 )
Changes in the fair value of non-qualified deferred compensation assets and liabilities are recognized in interest and other expense, net in our consolidated statements of income. Changes in the fair value of the acquisition-related deferred and contingent consideration and compensation liabilities are recognized in acquisition-related contingent consideration, compensation and amortization expense/(benefit) in our consolidated statements of income. See Note 14 for information regarding the financial statement classification of fair value changes in our interest rate swap.
The following table presents a reconciliation of the beginning and ending amounts of the fair value of the acquisition-related contingent consideration and compensation liabilities categorized as Level 3 (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Beginning balance
$
7,465
$
13,218
Change in fair value
16,429
( 5,753 )
Ending balance
$
23,894
$
7,465
The fair value of the Acquisition-related contingent consideration and compensation liabilities was determined utilizing a Monte Carlo model based on estimated future revenues, margins and volatility factors, among other variables and estimates and has no minimum or maximum payment. The undiscounted range of outcomes per the Monte Carlo model was $ 0 to $ 204.0 million at December 28, 2021 and $ 0 to $ 32.0 million at December 29, 2020. Results could change materially if different estimates and assumptions were used. The significant increase in the fair value of the contingent consideration and compensation liabilities during fiscal 2021 primarily related to the impact of an amendment to the Acquisition agreement that, among other things, extended the measurement period through fiscal 2026, as well as to an increase in fiscal 2021 revenues and estimated future revenues utilized in the fair value calculation.
The fair values of our cash and cash equivalents, accounts receivable, income taxes receivable, other receivables, prepaid expenses, accounts payable, income taxes payable and other accrued expenses approximate their carrying amounts due to their short duration.
As of December 28, 2021, we had $ 345.0 million aggregate principal amount of Notes outstanding. The estimated fair value of the Notes based on a market approach as of December 28, 2021 was approximately $ 309.8 million and determined based on the estimated or actual bids and offers of the Notes in an over-the-counter market on the last business day of the reporting period. See Note 12 for further discussion of the Notes.
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4. Accounts and Other Receivables
Accounts and other receivables consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Gift card distributors (1)
$
38,564
$
26,046
Bakery customers
18,457
16,176
Insurance providers
9,193
8,991
Delivery partner
6,873
8,449
Other (2)
27,417
16,125
Total
$
100,504
$
75,787
(1) The increase stems from the impact of the COVID-19 pandemic on our business in the prior year .
(2) The increase primarily relates to an Employee Retention Credit receivable associated with the CARES Act, as well as timing of tenant improvement and vendor rebate collections.
5. Inventories
Inventories consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Restaurant food and supplies
$
27,877
$
24,282
Bakery finished goods and work in progress
7,951
7,861
Bakery raw materials and supplies
7,011
7,145
Total
$
42,839
$
39,288
6. Prepaid Expenses
Prepaid expenses consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Gift card contract assets
$
18,468
$
17,955
Other
17,978
17,355
Total
$
36,446
$
35,310
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7. Property and Equipment
Property and equipment consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Land and related improvements
$
15,852
$
15,852
Buildings
44,049
44,049
Leasehold improvements
1,188,848
1,154,400
Furnishings, fixtures and equipment
550,416
530,614
Computer software and equipment
54,853
51,678
Restaurant smallwares
35,285
34,009
Construction in progress
35,071
46,486
Property and equipment, total
1,924,374
1,877,088
Less: Accumulated depreciation
( 1,182,628 )
( 1,102,951 )
Property and equipment, net
$
741,746
$
774,137
Depreciation expenses related to property and equipment for fiscal 2021, 2020 and 2019 were $ 89.4 million, $ 91.1 million and $ 88.0 million, respectively. Repair and maintenance expenses for fiscal 2021, 2020 and 2019 were $ 71.1 million, $ 56.6 million and $ 56.3 million, respectively. Net expense for property and equipment disposals was $ 1.1 million, $ 0.6 million and $ 0.9 million, in fiscal 2021, 2020 and 2019, respectively.
8. Intangible Assets, net
The following table presents components of intangible assets, net (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Indefinite-lived intangible assets:
Goodwill
$
1,451
$
1,451
Trade names and trademarks
233,767
233,676
Transferable alcoholic beverage licenses
7,446
7,753
Total indefinite-lived intangible assets
242,664
242,880
Definite-lived intangible assets, net:
Licensing agreements
5,690
7,320
Non-transferable alcoholic beverage licenses
3,347
2,960
Total definite-lived intangible assets
9,037
10,280
Total intangible assets, net
$
251,701
$
253,160
Amortization expenses related to our definite-lived intangible assets were $ 0.7 million, $ 0.7 million and $ 0.3 million for fiscal 2021, 2020 and 2019, respectively. Definite-lived intangible assets will be amortized over one to 54 years .
We performed our annual assessment of indefinite-lived intangible assets as of the first day of our fiscal fourth quarter of fiscal 2021 and concluded there was a $ 1.3 million impairment of our licensing agreements.
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. For the goodwill impairment test, the estimated fair value of the reporting units was 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 was estimated using the relief from royalty method. There were a number of estimates and significant judgments made by management in performing these evaluations, such as future unit growth, average unit volumes, cash flows, discount rates and royalty rates. Accordingly, actual results could vary significantly from such estimates.
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Based on the results of this assessment, we recorded goodwill impairment expense related to the Other FRC, North Italia and Flower Child operating segments of $ 33.8 million, $ 27.7 million and $ 17.9 million, respectively. In addition, we recorded impairment expense of $ 101.0 million and $ 2.3 million related to trade names and trademarks, and licensing agreements, respectively. 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. The reduced projections stemmed primarily from our decision to delay fiscal 2020 unit development, thereby moving our expected unit growth trajectory out by one year. The cash flow estimates assumed that average unit volumes and margins would substantially return to pre-COVID-19 levels by mid-fiscal 2021. We performed our annual assessment of indefinite-lived intangible assets as of the first day of our fiscal fourth quarter of fiscal year 2020 and concluded there was no further impairment of these assets, other than $ 0.4 million of expense related to transferable alcoholic beverage licenses.
9. Other Assets
Other assets consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Non-qualified deferred compensation assets
$
92,588
$
83,485
Deferred income taxes
57,634
37,885
Other
7,630
6,001
Total
$
157,852
$
127,371
10. Gift Cards
The following tables present information related to gift cards (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Gift card liabilities:
Beginning balance
$
184,655
$
187,978
Activations
144,892
110,670
Redemptions and breakage
( 118,365 )
( 113,993 )
Ending balance
$
211,182
$
184,655
Fiscal year ended
December 28, 2021
December 29, 2020
Gift card contract assets: (1)
Beginning balance
$
17,955
$
23,172
Deferrals
15,852
12,348
Amortization
( 15,339 )
( 17,565 )
Ending balance
$
18,468
$
17,955
(1) Included in prepaid expenses on the consolidated balance sheets.
The significant increases in activations, redemptions and breakage during fiscal 2021 compared to fiscal 2020 stem from the impact of the COVID-19 pandemic on our business in the prior year.
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11. Other Accrued Expenses
Other accrued expenses consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Self-insurance
$
67,649
$
62,567
Salaries and wages (1)
67,489
37,124
Staff member benefits
28,489
26,686
Payroll and sales taxes (2)
22,944
24,316
Deferred consideration (3)
11,250
16,740
Other
41,366
43,028
Total
$
239,187
$
210,461
(1) The increase in accrued salaries and wages is primarily due to lower labor expenses in the prior year due to impact of the COVID-19 pandemic.
(2) The decrease in accrued payroll and sales taxes represents the repayment of certain payroll taxes that were deferred in fiscal 2020 under the CARES Act, partially offset by increased payroll and sales tax accruals due to lower labor and revenues, respectively, in fiscal 2020 due to the impact of the COVID-19 pandemic.
(3) The decrease during fiscal 2021 represents payment of deferred consideration per the Acquisition agreement.
12. Long-Term Debt
Revolving Credit Facility
On March 30, 2021, we entered into a Second Amendment (the “Second Amendment”) to our existing Third Amended and Restated Loan Agreement, dated July 30, 2019 (as amended by that certain First Amendment, dated as of May 1, 2020 and by the Second Amendment, collectively, the “Amended Credit Agreement”). The Amended Credit Agreement, which terminates on July 30, 2024, 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.
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The Second Amendment, among other things, (i) extended the prior covenant relief period during which the testing of the net adjusted debt to EBITDAR ratio covenant (the “Net Adjusted Leverage Ratio”) and the EBITDAR to interest and rent expense ratio covenant (the “EBITDAR Ratio”) was suspended until the quarter ending December 28, 2021 (the “Covenant Relief Period”), (ii) continued to impose a monthly Liquidity covenant of $ 100 million (with Liquidity being the sum of (a) unrestricted cash and cash equivalents and (b) the unused portion of the Revolving Facility) until the Company demonstrated compliance with the financial covenants as of the quarter ending December 28, 2021, (iii) provided that the obligations thereunder be secured by a first priority security interest in substantially all of our and any guarantor’s property, with such property to be released upon (a) the termination of the Covenant Relief Period, (b) the Company’s compliance with the Net Adjusted Leverage Ratio and the EBITDAR Ratio as of the quarter ending on March 29, 2022, (c) neither the Company nor any of the guarantors having incurred unsecured debt using certain debt baskets under the Revolving Facility unless such debt is convertible debt or subordinated on customary debt subordination terms reasonably acceptable to the administrative agent and (d) no default or event of default having occurred or continuing, (iv) amended certain negative covenants during the Covenant Relief Period, including certain restrictions on capital expenditures, restricted payments, investments and indebtedness, and (v) permitted the payment of cash dividends with respect to our Series A Convertible Preferred Stock, par value $ 0.01 per share (“Series A preferred stock”) for each fiscal quarter of 2021 in an amount not to exceed $ 5.25 million per quarter. Subsequent to the Covenant Relief Period, we are required to maintain (i) a maximum Net Adjusted Leverage Ratio of 4.75 and (ii) a minimum EBITDAR Ratio of 1.9 .
Borrowings under the Amended Credit Agreement during the Covenant Relief Period bear interest, at our option, at a rate equal to either: (i) the adjusted LIBO Rate (as customarily defined, the “Adjusted LIBO Rate”) plus 2.5 %, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5 %, and (3) the one-month Adjusted LIBO Rate plus 1.0 %, plus (b) 1.5 %. During the Covenant Relief Period, we also incurred a fee of 0.4 % on the daily amount of unused commitments.
Subsequent to the Covenant Relief Period, borrowings under the Amended Credit Agreement will bear interest, at our option, at a rate equal to either: (i) the Adjusted LIBO Rate plus a margin that is based on our net adjusted leverage ratio, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5 %, and (3) the one-month Adjusted LIBO Rate plus 1.0 %, plus (b) a margin that is based on our net adjusted leverage ratio. Subsequent to the Covenant Relief Period, we will also incur a fee of 0.1 % to 0.2 % on the daily amount of unused commitments.
Letters of credit bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted LIBO Rate plus other customary fees charged by the issuing bank. We paid certain customary loan origination fees in conjunction with the Amended Credit Agreement. At December 28, 2021, we had net availability for borrowings of $ 240.1 million, based on a $ 130.0 million outstanding debt balance and $ 29.9 million in standby letters of credit. Our Liquidity balance at December 28, 2021 was $ 443.7 million, and we were in compliance with all covenants under the Amended Credit Agreement in effect at that date.
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.
Convertible Senior Notes
On June 15, 2021, we issued $ 345.0 million aggregate principal amount of convertible senior notes due 2026 (“Notes”). The net proceeds from the sale of the Notes were approximately $ 334.9 million after deducting issuance costs related to the Notes.
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The Notes are senior, unsecured obligations and are (i) equal in right of payment with our existing and future senior, unsecured indebtedness; (ii) senior in right of payment to our existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to our existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent we are not a holder thereof) preferred equity, if any, of our subsidiaries. The Notes were issued pursuant to, and are governed by, an indenture (the “Base Indenture”) between us and a trustee (“Trustee”), dated as of June 15, 2021, as supplemented by a first supplemental indenture (the “Supplemental Indenture,” and the Base Indenture, as supplemented by the Supplemental Indenture, the “Indenture”), dated as of June 15, 2021, between the Company and the Trustee.
The Notes accrue interest at a rate of 0.375 % per annum, payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2021. The Notes will mature on June 15, 2026, unless earlier repurchased, redeemed or converted. Before February 17, 2026, noteholders will have the right to convert their Notes only upon the occurrence of certain events. From and after February 17, 2026, noteholders may convert their Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. We will have the right to elect to settle conversions either entirely in cash or in a combination of cash and shares of our common stock. However, upon conversion of any Notes, the conversion value, which will be determined over an “Observation Period” (as defined in the Indenture) consisting of 30 trading days, will be paid in cash up to at least the principal amount of the Notes being converted. The initial conversion rate is 12.7551 shares of common stock per $ 1,000 principal amount of Notes, which represents an initial conversion price of approximately $ 78.40 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Notes are redeemable, in whole or in part (subject to certain limitations described below), at our option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of our common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date we send the related redemption notice; and (ii) the trading day immediately before the date we send such notice. However, we may not redeem less than all of the outstanding Notes unless at least $ 150.0 million aggregate principal amount of Notes are outstanding and not called for redemption as of the time we send the related redemption notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
If certain corporate events that constitute a “Fundamental Change” (as defined in the Indenture) occur, then, subject to a limited exception for certain cash mergers, noteholders may require us to repurchase their Notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving us and certain de-listing events with respect to our common stock.
The Notes will have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture), which include the following: (i) certain payment defaults on the Notes (which, in the case of a default in the payment of interest on the Notes, will be subject to a 30-day cure period); (ii) our failure to send certain notices under the Indenture within specified periods of time; (iii) our failure to comply with certain covenants in the Indenture relating to our ability to consolidate with or merge with or into, or sell, lease or otherwise transfer, in one transaction or a series of transactions, all or substantially all of our assets and our subsidiaries, taken as a whole, to another person; (iv) a default by us in our other obligations or agreements under the Indenture or the Notes if such default is not cured or waived within 60 days after notice is given in accordance with the Indenture; (v) certain defaults by us or any of our significant subsidiaries with respect to indebtedness for borrowed money of at least $ 20,000,000 ; (vi) the rendering of certain judgments against us or any of our significant subsidiaries for the payment of at least $ 25,000,000 , where such judgments are not discharged or stayed within 60 days after the date on which the right to appeal has expired or on which all rights to appeal have been extinguished; and (vii) certain events of bankruptcy, insolvency and reorganization involving us or any of our significant subsidiaries.
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If an Event of Default involving bankruptcy, insolvency or reorganization events with respect to us (and not solely with respect to a significant subsidiary of ours) occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding will immediately become due and payable without any further action or notice by any person. If any other Event of Default occurs and is continuing, then, the Trustee, by notice to us, or noteholders of at least 25 % of the aggregate principal amount of Notes then outstanding, by notice to us and the Trustee, may declare the principal amount of, and all accrued and unpaid interest on, all of the Notes then outstanding to become due and payable immediately. However, notwithstanding the foregoing, we may elect, at our option, that the sole remedy for an Event of Default relating to certain failures by us to comply with certain reporting covenants in the Indenture consists exclusively of the right of the noteholders to receive special interest on the Notes for up to 180 days at a specified rate per annum not exceeding 0.50 % on the principal amount of the Notes.
As of December 28, 2021, the Notes had a gross principal balance of $ 345.0 million and a balance of $ 336.0 million, net of unamortized issuance costs of $ 9.0 million. The unamortized balance of issuance costs was recorded as a contra-liability and netted with long-term debt on our condensed consolidated balance sheets. Total amortization expense was $ 1.1 million fiscal 2021 and was included in interest expense in the consolidated statements of income/(loss). The effective interest rate for the Notes was 0.96 % as of December 28, 2021.
13. Leases
Components of lease expense were as follows (in thousands):
Fiscal year
2021
2020
2019
Operating
$
131,834
$
129,431
$
112,048
Variable
73,909
58,863
66,689
Short-term
283
414
368
Total
$
206,026
$
188,708
$
179,105
Supplemental information related to leases (in thousands, except percentages):
Fiscal Year
2021
2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
138,715
$
115,273
Right-of-use assets obtained in exchange for new operating lease liabilities
50,953
46,068
Weighted-average remaining lease term — operating leases (in years)
15.6
16.2
Weighted-average discount rate — operating leases
5.1
%
5.1
%
As of December 28, 2021, the maturities of our operating lease liabilities were as follows (in thousands):
2022
$
135,191
2023
134,044
2024
131,861
2025
131,286
2026
129,088
Thereafter
1,343,279
Total future lease payments
2,004,749
Less: Interest
( 654,662 )
Present value of lease liabilities
$
1,350,087
Operating lease liabilities include $ 816.0 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $ 151.6 million of legally binding minimum lease payments for leases signed but not yet commenced.
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14. Derivative
On June 22, 2021, we terminated our interest rate swap agreement at a cost of $ 2.4 million. This interest rate swap, which would have matured on April 1, 2025, was established to manage our exposure to interest rate movements on our Revolving Facility. The interest rate swap entitled us to receive a variable rate of interest based on the one-month LIBO rate in exchange for the payment of a fixed interest rate of 0.802 %. The notional amount of the swap agreement was $ 280.0 million through March 31, 2023 and $ 140.0 million from April 1, 2023 through April 1, 2025. The differences between the variable LIBO rate and the interest rate swap rate were settled monthly. Prior to termination, the interest rate swap was determined to be an effective hedging agreement.
Our only derivative is the aforementioned interest rate swap, which is designated as a cash flow hedge. Therefore, changes in fair value are initially included as a component of accumulated other comprehensive loss (AOCL) and subsequently reclassified to earnings as interest expense when the hedged forecasted transaction occurs. Any ineffective portion of changes in the fair value are immediately recognized in earnings as interest expense. We classify cash inflows and outflows from derivatives within operating activities on the consolidated statements of cash flows. No gains or losses representing amounts excluded from the assessment of effectiveness were recognized in earnings in fiscal 2021 or fiscal 2020.
The following table summarizes the changes in AOCL, net of tax, related to the interest rate swap (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Beginning balance
$
( 3,464 )
$
—
Other comprehensive loss before reclassifications
2,514
( 4,612 )
Amounts reclassified from AOCI
950
1,148
Other comprehensive loss, net of tax
3,464
( 3,464 )
Ending balance
$
—
$
( 3,464 )
We classified this interest rate swap within Level 2 of the valuation hierarchy described in Note 3. Our counterparty under this arrangement provided monthly statements of the market values of this instrument based on significant inputs that were observable or could be derived principally from, or corroborated by, observable market data for substantially the full term of the asset or liability. The impact on the derivative liability for our and the counterparty’s non-performance risk to the derivative trade was considered when measuring the fair value of derivative liability.
15. Other Noncurrent Liabilities
Other noncurrent liabilities consisted of (in thousands):
Fiscal year ended
December 28, 2021
December 29, 2020
Non-qualified deferred compensation liabilities
$
92,012
$
83,702
Deferred consideration (1)
10,392
21,379
Contingent consideration and compensation liabilities (2)
23,894
7,465
Payroll taxes (3)
—
18,308
Other
21,102
18,871
Total
$
147,400
$
149,725
(1) The decrease during fiscal 2021 represents payment of deferred consideration per the Acquisition agreement.
(2) The increase during fiscal 2021 primarily relates to the impact of an amendment to the Acquisition agreement, as well as to an increase in revenues utilized in the fair value calculation.
(3) The decrease represents the repayment in fiscal 2021 of certain payroll taxes that were deferred in fiscal 2020 under the CARES Act.
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16. Commitments and Contingencies
Purchase obligations, which include inventory purchases, equipment purchases, information technology and other miscellaneous commitments, were $ 139.5 million and $ 91.6 million at December 28, 2021 and December 29, 2020, respectively. These purchase obligations are primarily due within three years and recorded as liabilities when goods are received or services rendered. Real estate obligations, which include construction commitments, net of up-front landlord construction contributions, and legally binding minimum lease payments for leases signed but not yet commenced, were $ 151.6 million and $ 130.5 million at December 28, 2021 and December 29, 2020, respectively.
The Acquisition agreement included a deferred consideration provision, of which the remaining balance is due in two equal payments of $ 11.3 million during fiscal 2022 and 2023. This balance includes an indemnity escrow amount of $ 13.0 million specifically related to the acquired businesses other than North Italia. The Acquisition agreement also included a contingent consideration provision which is payable annually from 2022 through 2027 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) during the five years after Closing. The liability for this contingent consideration provision was $ 23.9 million at December 28, 2021. See Note 3 for discussion of the fair value measurement of this liability. 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.
As credit guarantees to insurers, we had $ 29.9 million and $ 23.4 million at December 28, 2021 and December 29, 2020, respectively, in standby letters of credit related to our self-insurance liabilities. All standby letters of credit are renewable annually.
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. The total accrued liability for our self-insured plans was $ 67.6 million and $ 62.6 million at December 28, 2021 and December 29, 2020, respectively.
On June 7, 2018, the California Department of Industrial Relations issued a $ 4.2 million wage citation jointly against the Company and our vendor that provides janitorial services to eight of our Southern California restaurants, alleging that the janitorial vendor or its subcontractor failed to comply with various provisions of the California Labor Code (Wage Citation Case No. 35-CM-188798-16). The wage citation seeks to recover penalties and other monetary payments on behalf of the employees that worked for this vendor or its subcontractor. On June 28, 2018, we filed an appeal of the wage citation. On June 11, 2020, the DLSE postponed the hearing on the Company’s appeal due to safety concerns related to the COVID-19 pandemic. It is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter and, accordingly, we have not reserved for any potential future payments.
On June 22, 2018, the Internal Revenue Service issued a Notice of Deficiency in which they disallowed $ 8.0 million of our §199 Domestic Production Activities Deduction for tax years 2010, 2011 and 2012. On September 11, 2018 we petitioned the United States Tax Court for a redetermination of the deficiency. The tax court has assigned docket number 18150-18 to our case. On June 30, 2021, the judge issued a ruling on certain procedural motions filed by the parties and set a timeline to conclude discovery and determine if the matter will proceed to trial. The parties have entered into discussions to resolve the matter without trial, and we have reserved an immaterial amount in anticipation of settlement.
Within the ordinary course of our business, we are subject to private lawsuits, government audits and investigations, administrative proceedings and other claims. These matters typically involve claims from customers, staff members and others related to operational and employment issues common to the foodservice industry. A number of these claims may exist at any given time, and some of the claims may be pled as class actions. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks and other intellectual property, both domestically and abroad. We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether they are valid or whether we are legally determined to be liable.
At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any pending lawsuits, audits, investigations, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims. Legal costs related to such claims are expensed as incurred.
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We have employment agreements with certain of our executive officers that provide for payments to those officers in the event of an actual or constructive termination of their employment, including in the event of a termination without cause, an acquirer failure to assume or continue equity awards following a change in control of the Company or, otherwise, in the event of death or disability as defined in those agreements. Aggregate payments totaling approximately $ 3.2 million, excluding accrued potential bonuses of $ 3.0 million, which are subject to approval by the Compensation Committee, would have been required by those agreements had all such officers terminated their employment for reasons requiring such payments as of December 28, 2021. In addition, the employment agreement with our Chief Executive Officer specifies an annual founder’s retirement benefit of $ 650,000 for ten years , commencing six months after termination of his full-time employment.
17. Stockholders’ Equity and Series A Convertible Preferred Stock
Common Stock Issuance
On June 15, 2021, we issued 3.125 million shares of our common stock for $ 175.0 million. In connection with the issuance, we incurred direct and incremental costs of $ 8.0 million.
Common Stock - Dividends and Share Repurchases
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 the quarterly dividend on our common stock, as well as share repurchases. 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 Credit Agreement and applicable law, and such other factors that the Board considers relevant. (See Note 12 for further discussion of our long-term debt.)
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 $ 1,702.5 million through December 28, 2021. During fiscal 2021, 2020 and 2019, we repurchased 0.1 million, 0.1 million and 1.1 million shares of our common stock at a cost of $ 5.8 million, $ 3.6 million and $ 51.0 million, respectively. The share repurchases in fiscal 2021 and 2020 were solely in conjunction with satisfying 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. Repurchased common stock is reflected as a reduction of stockholders’ equity in treasury stock.
Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. 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 12 for further discussion of our long-term debt.)
Series A Convertible Preferred Stock
On April 20, 2020, we issued 200,000 shares of Series A Convertible Preferred Stock, par value $ 0.01 per share (the “Series A preferred stock”) for an aggregate purchase price of $ 200 million, or $ 1,000 per share. 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. These direct and incremental costs reduced the Series A preferred stock balance at the issuance date and were recognized through retained earnings on June 30, 2020, the first measurement date. Upon adoption of ASU 2020-06 in the first quarter of fiscal 2021, we recorded a $ 4.8 million cumulative adjustment to retained earnings to reverse beneficial conversion features recorded during fiscal 2020.
The Series A preferred stock ranked senior to our common stock with respect to dividends and distributions on liquidation, winding-up and dissolution upon which each share of Series A preferred stock would be entitled to receive an amount per share equal to the greater of (i) the purchase price (without giving effect to the commitment fee), plus all accrued and unpaid dividends (the “Liquidation Preference”) and (ii) the amount that the holder of the Series A preferred stock would have been entitled to receive at such time if the Series A preferred stock were converted into common stock.
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On June 15, 2021, we paid $ 443.8 million in connection with the cash-settled conversion of 150,000 shares of our outstanding Series A preferred stock (effected through a repurchase agreement), which was recognized through additional paid in capital. We also share-settled the conversion of the remaining 50,000 shares of our outstanding Series A convertible preferred stock into 2,400,864 shares of our common stock. These are both based on the then current Liquidation Preference per share of $ 1,067.42 and conversion price of $ 22.23 .
During the first quarter of fiscal 2021, we declared a cash dividend of $ 5.1 million, or $ 25.35 per share, on the Series A preferred stock. During the second quarter of fiscal 2021, $ 13.6 million in payments were made in connection with the conversion of the Series A preferred stock, consisting of $ 3.9 million, or $ 19.72 per share of accrued dividends and $ 9.7 million of an inducement, which is also deemed to be a dividend.
18. Stock-Based Compensation
We maintain stock-based incentive plans under which incentive stock options, non-qualified stock options, stock appreciation rights, restricted shares and restricted share units may be granted to staff members, consultants and non-employee directors. Our current practice is to issue new shares, rather than treasury shares, upon stock option exercises, for restricted share grants and upon vesting of restricted share units. To date, we have only granted non-qualified stock options, restricted shares and restricted share units of common stock under these plans.
On April 5, 2017, our Board approved an amendment to our 2010 Stock Incentive Plan to increase the number of shares of common stock reserved for grant under the plan to 12.7 million shares from 9.2 million shares. This amendment was approved by our stockholders at our annual meeting held on June 8, 2017. On April 4, 2019, our Board adopted The Cheesecake Factory Incorporated Stock Incentive Plan. This plan was approved by our stockholders at our annual meeting held on May 30, 2019. The maximum number of shares of common stock available for grant under this plan is 4.8 million shares plus 1.8 million shares, which, as of May 30, 2019, were available for issuance under our 2010 Stock Incentive Plan, plus 1.9 million shares which may become available for issuance under The Cheesecake Factory Incorporated Stock Incentive Plan due to forfeiture or lapse of awards under our 2010 Stock Incentive Plan following May 30, 2019. Approximately 4.0 million of these shares were available for grant as of December 28, 2021.
Stock options generally vest at 20 % per year and expire eight to ten years from the date of grant. Restricted shares and restricted share units generally vest between three to five years from the date of grant and require that the staff member remains employed in good standing with the Company as of the vesting date. Certain restricted share units granted to executive officers contain performance-based vesting conditions. Performance goals are determined by the Board of Directors. The quantity of units that will vest ranges from 0 % to 150 % based on the level of achievement of the performance conditions. Equity awards for certain executive officers may vest earlier in the event of a change of control in which the acquirer fails to assume or continue such awards, as defined in the plan, or under certain circumstances described in such executive officers’ respective employment agreements. Compensation expense is recognized only for those options, restricted shares and restricted share units expected to vest, with forfeitures estimated based on our historical experience and future expectations.
The following table presents information related to stock-based compensation, net of forfeitures (in thousands):
Fiscal Year
2021
2020
2019
Labor expenses
$
8,856
$
7,753
$
6,233
Other operating costs and expenses
311
309
274
General and administrative expenses
13,821
13,288
12,866
Total stock-based compensation
22,988
21,350
19,373
Income tax benefit
5,646
5,245
4,760
Total stock-based compensation, net of taxes
$
17,342
$
16,105
$
14,613
Capitalized stock-based compensation (1)
$
194
$
207
$
226
(1) It is our policy to capitalize the portion of stock-based compensation costs for our internal development department that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations and equipment installation. Capitalized stock-based compensation is included in property and equipment, net on the consolidated balance sheets.
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Stock Options
We did not issue any stock options during fiscal 2021. The weighted-average fair value at the grant date for options issued during fiscal 2020 and 2019 was $ 6.66 and $ 9.84 per share, respectively. The fair value of options was estimated utilizing the Black-Scholes valuation model with the following weighted-average assumptions for fiscal 2020 and 2019, respectively: (a) an expected option term of 6.9 years in all fiscal years presented, (b) expected stock price volatility of 25.7 % and 26.3 %, (c) a risk-free interest rate of 1.5 % and 2.6 %, and (d) a dividend yield on our stock of 3.6 % and 2.9 %.
The expected option term represents the estimated period of time until exercise and is based on historical experience of similar options, giving consideration to the contractual terms, vesting schedules and expectations of future staff member behavior. Expected stock price volatility is based on a combination of the historical volatility of our stock and the implied volatility of actively traded options on our common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant with an equivalent remaining term. The dividend yield is based on anticipated cash dividend payouts.
Stock option activity during fiscal 2021 was as follows:
Weighted-
Average
Weighted-
Remaining
Average
Contractual
Aggregate
Shares
Exercise Price
Term
Intrinsic Value (1)
(In thousands)
(Per share)
(In years)
(In thousands)
Outstanding at beginning of year
2,294
$
45.35
5.0
$
307
Granted
—
$
—
Exercised
( 577 )
$
42.97
Forfeited or cancelled
( 1 )
$
61.50
Outstanding at end of year
1,716
$
46.14
5.1
$
—
Exercisable at end of year
864
$
48.97
3.5
$
—
(1) Aggregate intrinsic value is calculated as the difference between our closing stock price at fiscal year end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised their options on the fiscal year-end date.
The total intrinsic value of options exercised during fiscal 2021, 2020 and 2019 was $ 7.1 million, $ 0.1 million and $ 4.3 million, respectively. As of December 28, 2021, total unrecognized stock-based compensation expense related to unvested stock options was $ 4.7 million, which we expect to recognize over a weighted-average period of approximately 2.5 years.
Restricted Shares and Restricted Share Units
Restricted share and restricted share unit activity during fiscal 2021 was as follows:
Weighted-
Average
Shares
Fair Value
(In thousands)
(Per share)
Outstanding at beginning of year
2,008
$
43.70
Granted
661
$
49.57
Vested
( 320 )
$
48.12
Forfeited
( 226 )
$
44.06
Outstanding at end of year
2,123
$
44.82
Fair value of our restricted shares and restricted share units is based on our closing stock price on the date of grant. The weighted-average fair value for restricted shares and restricted share units issued during fiscal 2021, 2020 and 2019 was $ 49.57 , $ 37.94 and $ 45.02 , respectively. The fair value of shares that vested during fiscal 2021, 2020 and 2019 was $ 15.4 million, $ 15.6 million and $ 15.8 million, respectively. As of December 28, 2021, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $ 44.0 million, which we expect to recognize over a weighted-average period of approximately 2.9 years.
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19. Employee Benefit Plans
We have defined contribution benefit plans in accordance with section 401(k) of the Internal Revenue Code (“401(k) Plans”) that are open to our staff members who meet certain compensation and eligibility requirements. Participation in the 401(k) Plans is currently open to staff members from our restaurant concepts, bakery facilities, corporate office and FRC headquarters. The 401(k) Plans allow participating staff members to defer the receipt of a portion of their compensation and contribute such amount to one or more investment options. Our executive officers and a select group of management and/or highly compensated staff members are not eligible to participate in the 401(k) Plans. We currently match in cash a certain percentage of the staff member contributions to the 401(k) Plans and also pay a portion of the administrative costs. Expense recognized in fiscal 2021, 2020 and 2019 was $ 2.1 million, $ 1.8 million and $ 1.2 million, respectively.
We have also established non-qualified deferred compensation plans (“Non-Qualified Plans”) for our executive officers and a select group of management and/or highly compensated staff members. The Non-Qualified Plans allow participating staff members to defer the receipt of a portion of their base compensation and bonuses. Non-employee directors may also participate in the Non-Qualified Plans and defer the receipt of their earned director fees. We currently match in cash a certain percentage of the staff member contributions to the Non-Qualified Plans and also pay for the administrative costs. We do not match any contributions made by non-employee directors. Expense recognized in fiscal 2021, 2020 and 2019 was $ 1.2 million, $ 1.3 million and $ 1.2 million, respectively.
While we are under no obligation to fund Non-Qualified Plan liabilities (in whole or in part), our current practice is to maintain company-owned life insurance contracts and other investments that are specifically designed to informally fund savings plans of this nature. These contracts are recorded at their cash surrender value as determined by the insurance carrier. Our consolidated balance sheets reflect investments in other assets and our obligation to participants in the Non-Qualified Plans in other noncurrent liabilities. All gains and losses related to our non-qualified deferred compensation assets and liabilities are reflected in interest and other expense, net in our consolidated statements of income.
We maintain self-insured medical and dental benefit plans for our staff members. 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 as of the balance sheet date. The accrued liability for our self-insured benefit plans, which is included in other accrued expenses, was $ 15.3 million and $ 14.8 million as of December 28, 2021 and December 29, 2020, respectively. (See Note 1 for further discussion of accounting for our self-insurance liabilities.)
20. Income Taxes
The provision for income taxes consisted of the following (in thousands):
Fiscal Year
2021
2020
2019
Income/(Loss) before income taxes
$
71,620
$
( 356,036 )
$
140,334
Income tax (benefit)/provision:
Current:
Federal
$
15,746
$
( 38,414 )
$
8,211
State
4,350
2,971
7,027
Total current
20,096
( 35,443 )
15,238
Deferred:
Federal
( 20,434 )
( 52,607 )
( 3,695 )
State
( 415 )
( 14,621 )
1,498
Total deferred
( 20,849 )
( 67,228 )
( 2,197 )
Total (benefit)/provision
$
( 753 )
$
( 102,671 )
$
13,041
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The following reconciles the U.S. federal statutory rate to the effective tax rate:
Fiscal Year
2021
2020
2019
U.S. federal statutory rate
21.0
%
21.0
%
21.0
%
State and district income taxes, net of federal benefit
4.2
2.6
4.9
Credit for FICA taxes paid on tips
( 24.2 )
2.1
( 12.8 )
Other credits and incentives
( 4.2 )
0.3
( 1.4 )
Impact of net operating loss carryback
( 6.3 )
3.4
—
Deferred compensation
( 2.9 )
0.6
( 1.7 )
Equity compensation
0.0
( 0.4 )
( 0.2 )
Uncertain tax positions
10.3
0.0
0.0
Other
1.0
( 0.8 )
( 0.5 )
Effective tax rate
( 1.1 )
%
28.8
%
9.3
%
On March 27, 2020, the CARES Act was signed into law. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions allowing for the carryback of net operating losses generated in fiscal years 2018, 2019 and 2020 and technical amendments regarding the expensing of qualified improvement property (“QIP”). During fiscal 2021, we filed a refund claim in the amount of $ 18.4 million for our fiscal 2020 net operating loss carryback and in January 2022, we filed amended returns for tax years 2018 and 2019 requesting total refunds of $ 21.3 million for credits released by our fiscal 2020 loss carryback. The effects of these claims were primarily included in our fiscal 2020 provision for income taxes, using estimates based on the best information available at the time we prepared our fiscal 2020 consolidated financial statements, and were adjusted to as-filed actual amounts in our fiscal 2021 provision for income taxes. Except for the increase to our loss carryback resulting from the remittance of all of our deferred FICA taxes as discussed below, these adjustments had a minor effect on our fiscal 2021 provision for income taxes.
The CARES Act also allowed eligible employers to defer the remittance of certain FICA taxes otherwise payable during calendar year 2020 and remit half of such deferred amounts on or before December 31, 2021 and half on or before December 31, 2022. We deferred approximately $ 36.6 million of FICA tax remittances under this provision. We previously planned to remit the first half of the deferred FICA taxes within 8.5 months of year-end 2020 to secure a fiscal 2020 tax deduction and we recorded the effects of that planned remittance in our fiscal 2020 provision for income taxes. Prior to filing our 2020 federal tax return and within 8.5 months of year-end 2020, we remitted all of the deferred FICA taxes, which increased the value of our fiscal 2020 loss carryback by $ 4.3 million. We recorded the effects of this increased remittance in our fiscal 2021 provision for income taxes.
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Following are the temporary differences that created our deferred tax assets and liabilities (in thousands):
December 28, 2021
December 29, 2020
Deferred tax assets:
Staff member benefits
$
36,295
$
33,419
Insurance reserves
12,897
11,460
Operating lease liability
315,403
319,274
Deferred income
33,075
31,119
Tax credit carryforwards
34,871
37,107
Goodwill
19,103
15,632
Stock-based compensation
10,122
9,937
State and foreign net operating loss carryforwards
3,005
3,536
Derivative asset
—
1,409
Other
1,063
1,466
Subtotal
465,834
464,359
Less: Valuation allowance
( 1,036 )
( 1,041 )
Total
$
464,798
$
463,318
Deferred tax liabilities:
Property and equipment
$
( 109,019 )
$
( 124,634 )
Prepaid expenses
( 7,312 )
( 7,027 )
Inventory
( 7,802 )
( 7,766 )
Accrued rent
( 5,087 )
( 4,947 )
Operating lease asset
( 277,220 )
( 280,845 )
Other
( 724 )
( 214 )
Total
$
( 407,164 )
$
( 425,433 )
Net deferred tax asset/(liability)
$
57,634
$
37,885
At December 28, 2021 and December 29, 2020, we had $ 33.6 million and $ 35.6 million, respectively of U.S. federal credit carryforwards which begin to expire in 2038 and $ 64.6 million and $ 79.5 million, respectively, of state net operating loss carryforwards with statutory carryforward periods ranging from 5 years to no expiration period. The earliest year that a material state net operating loss will expire is 2032. At December 28, 2021 and December 29, 2020, we had $ 1.7 million and $ 1.9 million, respectively, of state hiring and investment credits which begin to expire in 2024. At both December 28, 2021 and December 29, 2020, we had $ 2.7 million of foreign net operating loss carryforwards which begin to expire in 2038.
We assess the available evidence to estimate if these carryforwards and our other deferred tax assets will be realized. We concluded that a substantial portion of our deferred tax assets are more likely than not to be realized by reversals of existing taxable temporary differences and that forecasted future taxable income, exclusive of reversing temporary differences, will result in realization of a substantial portion of the remainder. We did not need to consider tax planning strategies in this analysis. Based on this evaluation, at both December 28, 2021 and December 29, 2020 we carried a valuation allowance of $ 1.0 million to reflect the amount that we will likely not realize. This assessment could change if estimates of future taxable income during the carryforward period are revised. The earliest tax year still subject to examination by a significant taxing jurisdiction is 2010.
At December 28, 2021, we had a reserve of $ 4.8 million for uncertain tax positions, all of which would favorably impact our effective income tax rate if resolved in our favor. A reconciliation of the beginning and ending amount of our uncertain tax positions is as follows (in thousands):
Fiscal Year
2021
2020
2019
Balance at beginning of year
$
655
$
704
$
830
Additions related to prior year tax positions
4,157
—
—
Additions related to current period tax positions
( 13 )
( 49 )
13
Reductions related to settlements with taxing authorities and lapses of statutes of limitations
—
—
( 139 )
Balance at end of year
$
4,799
$
655
$
704
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At December 28, 2021 and December 29, 2020, we had $ 3.6 million and $ 0.3 million, respectively of accrued interest and penalties related to uncertain tax positions. We believe it is reasonably possible that the balance of uncertain tax positions at December 28, 2021 will decrease by $ 1.8 million during the next twelve months as a result of an anticipated settlement of our litigation regarding Section 199 deductions.
21. Segment Information
Our operating segments, the businesses for which our management reviews discrete financial information for decision-making purposes, are comprised of The Cheesecake Factory, North Italia, Flower Child, the other FRC brands, our bakery division and Grand Lux Cafe. Based on quantitative thresholds set forth in ASC 280, “Segment Reporting,” The Cheesecake Factory, North Italia and the other FRC brands are the only businesses that meet the criteria of a reportable operating segment. The remaining operating segments (Flower Child, our bakery division and Grand Lux Cafe) along with our businesses that don’t qualify as operating segments (RockSugar Southeast Asian Kitchen and Social Monk Asian Kitchen) are combined in Other. Unallocated corporate expenses, capital expenditures and assets are also combined in Other.
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Segment information is presented below (in thousands):
Fiscal Year (1)
2021
2020
2019
Revenues:
The Cheesecake Factory restaurants
$
2,293,225
$
1,585,008
$
2,180,882
North Italia
171,901
102,585
35,268
Other FRC
182,175
96,856
39,335
Other
280,239
198,776
227,207
Total
$
2,927,540
$
1,983,225
$
2,482,692
Income/(loss) from operations:
The Cheesecake Factory restaurants
$
242,599
$
45,540
$
258,374
North Italia
8,624
( 77,371 )
1,608
Other FRC
16,323
( 77,026 )
5,309
Other (2)
( 185,228 )
( 238,580 )
( 161,693 )
Total
$
82,318
$
( 347,437 )
$
103,598
Depreciation and amortization:
The Cheesecake Factory restaurants
$
65,987
$
67,514
$
70,971
North Italia
4,078
3,608
829
Other FRC
4,802
4,090
1,037
Other
14,787
16,203
15,296
Total
$
89,654
$
91,415
$
88,133
Impairment of assets and lease termination expenses:
The Cheesecake Factory restaurants
$
11,904
$
3,261
$
8,888
North Italia
—
71,782
—
Other FRC
1,305
73,049
—
Other
4,930
71,241
9,359
Total
$
18,139
$
219,333
$
18,247
Preopening costs:
The Cheesecake Factory restaurants
$
4,868
$
4,206
$
9,967
North Italia
4,510
2,578
1,297
Other FRC
3,188
1,324
49
Other
1,145
2,348
1,836
Total
$
13,711
$
10,456
$
13,149
Capital expenditures:
The Cheesecake Factory restaurants
$
31,832
$
33,154
$
59,045
North Italia
12,539
8,436
2,318
Other FRC
13,524
3,754
5,072
Other
9,048
4,985
7,330
Total
$
66,943
$
50,329
$
73,765
Total assets:
The Cheesecake Factory restaurants
$
1,653,161
$
1,671,733
$
1,701,418
North Italia
270,029
270,218
297,840
Other FRC
276,369
308,866
310,414
Other
598,566
496,237
530,921
Total
$
2,798,125
$
2,747,054
$
2,840,593
(1) We completed the acquisition of North Italia and the remaining business of FRC on October 2, 2019. The results of the acquired businesses are included in our consolidated financial statements as of the acquisition date.
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(2) Fiscal 2021, 2020 and fiscal 2019 include $ 19.5 million, ($ 1.2 ) million and $ 6.3 million, respectively, of acquisition-related expense/(benefit). These amounts were recorded in acquisition-related costs and acquisition-related contingent consideration, compensation and amortization expense/(benefit) in the consolidated statements of income.
22. Subsequent Events
None.
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EXHIBIT INDEX
Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
2.1
Form of Reorganization Agreement(P)
Amend. No. 1
to Form S-1
33-479336
2.1
8/17/92
2.2
Purchase Agreement, dated as of November 14, 2016, as amended by Amendment & Option Exercise Agreement, dated as of July 30, 2019, by and among The Cheesecake Factory Incorporated and the other Parties thereto #
10-Q
000-20574
2.1
11/8/19
2.3
First Amendment to Option Exercise Agreement and Second Amendment to Purchase Agreement and Operating Agreement, dated as of October 2, 2019, by and among The Cheesecake Factory Incorporated and the other Parties thereto #
10-Q
000-20574
2.2
11/8/19
2.4
Membership Interest Purchase Agreement, dated as of July 30, 2019, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, the Sellers party thereto, SWF Posse LLC, as Seller’s representative, and, solely for limited purposes set forth therein, The Cheesecake Factory Incorporated #†
10-Q
000-20574
2.3
11/8/19
2.5
First Amendment to Membership Interest Purchase Agreement, dated as of October 2, 2019, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative #
10-Q
000-20574
2.4
11/8/19
2.6
Second Amendment to Membership Interest Purchase Agreement, dated as of June 1, 2021, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative # †
10-Q
000-20574
2.1
8/4/21
2.7
Third Amendment to Membership Interest Purchase Agreement, dated as of January 7, 2022, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative # †
-
-
-
Filed herewith
3.1
Restated Certificate of Incorporation of The Cheesecake Factory Incorporated
10-Q
000-20574
3.2
8/6/18
3.2
Bylaws of The Cheesecake Factory Incorporated (Amended and Restated on May 20, 2009)
8-K
000-20574
3.8
5/27/09
3.3
Certificate of Elimination of Series A Junior Participating Cumulative Preferred Stock of The Cheesecake Factory Incorporated
10-Q
000-20574
3.1
8/6/18
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Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
3.4
Certificate of Designations of The Cheesecake Factory Incorporated, dated April 20, 2020
8-K
000-20574
3.1
4/20/20
4.1
Description of The Cheesecake Factory Incorporated’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act
10-K
000-20574
4.1
3/11/20
4.2
Indenture, dated as of June 15, 2021, between The Cheesecake Factory Incorporated and U.S. Bank National Association, as trustee
8-K
000-20574
4.1
6/15/21
4.3
First Supplemental Indenture, dated as of June 15, 2021, between The Cheesecake Factory Incorporated and U.S. Bank National Association, as trustee
8-K
000-20574
4.2
6/15/21
4.4
Form of certificate representing the 0.375% Convertible Senior Notes due 2026 (included as Exhibit A to Exhibit 4.3)
8-K
000-20574
4.2
6/15/21
10.1.1
Employment Agreement, effective as of April 1, 2017, between The Cheesecake Factory Incorporated and David M. Overton*
8-K
000-20574
99.2
2/22/17
10.1.2
First Amendment to Employment Agreement, effective as of April 1, 2018, between The Cheesecake Factory Incorporated and David M. Overton*
8-K
000-20574
99.2
2/21/18
10.2
Employment Agreement, effective as of March 3, 2016, between The Cheesecake Factory Incorporated and David M. Gordon*
10-K
000-20574
10.6
3/2/17
10.3
Employment Agreement, effective as of July 7, 2017, between The Cheesecake Factory Incorporated and Matthew E. Clark*
8-K
000-25074
99.1
6/13/17
10.4
Employment Agreement, effective as of May 14, 2018, between The Cheesecake Factory Incorporated and Scarlett May*
10-Q
000-25074
10.10
5/11/18
10.5
Employment Agreement, effective as of February 13, 2019, between The Cheesecake Factory Incorporated and Keith T. Carango*
10-K
000-20574
10.8
3/4/19
10.6.1
Amended and Restated The Cheesecake Factory Incorporated Executive Savings Plan*
10-K
000-25074
10.20
3/2/17
10.6.2
First Amendment to The Cheesecake Factory Incorporated Executive Savings Plan as amended and restated November 7, 2016*
10-K
000-25074
10.11.1
2/28/18
10.7.1
Form of Indemnification Agreement*
8-K
000-25074
99.1
12/14/07
10.7.2
Indemnification Agreement, dates as of April 20, 2020, between The Cheesecake Factory Incorporated and Paul D. Ginsberg*
10-Q
000-25074
10.2
6/22/20
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Table of Contents
Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
10.8.1
Inducement Agreement dated as of July 27, 2005
8-K
000-25074
99.3
8/2/05
10.8.2
First Amendment to Inducement Agreement dated as of March 1, 2010
10-K
000-25074
10.36
2/23/11
10.8.3
Second Amendment to Inducement Agreement dated as of May 7, 2015
10-K
000-25704
10.24
3/2/17
10.9.1
The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended April 7, 2011*
DEF 14A
000-20574
Appendix A
4/21/11
10.9.2
The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended effective as of February 27, 2013*
DEF 14A
000-20574
Appendix A
04/19/13
10.9.3
The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended April 3, 2014*
DEF 14A
000-20574
Appendix A
4/17/14
10.9.4
The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended May 28, 2015*
DEF 14A
000-20574
Appendix A
4/17/15
10.9.5
The Cheesecake Factory Incorporated 2010 Stock Incentive Plan as amended April 5, 2017*
DEF 14A
000-20574
Appendix A
4/25/17
10.10
Form of Grant Agreement for Executive Officers under 2010 Stock Incentive Plan*
10-Q
000-20574
10.1
11/4/10
10.11
Form of Grant Agreement for Executive Officers under the 2010 Stock Incentive Plan, for equity grants made after August 2, 2012*
10-Q
000-20574
10.1
8/10/12
10.12
Form of Notice of Stock Option Grant and Agreement and/or Restricted Stock Grant Agreement for Executive Officers under the 2010 Stock Incentive Plan, for equity grants made after March 6, 2014*
8-K
000-20574
99.1
3/7/14
10.13
Form of Notice of Grant and Stock Option Agreement and/or Stock Unit Agreement under the 2010 Stock Incentive Plan, for equity grants made after March 3, 2016*
8-K
000-20574
99.2
3/4/16
10.14.1
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP I under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.1
2/28/18
10.14.2
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP II under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.2
2/28/18
10.14.3
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP III under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.3
2/28/18
95
Table of Contents
Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
10.14.4
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP IV under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.4
2/28/18
10.14.5
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for MEP V under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.5
2/28/18
10.14.6
Form of Standard Notice of Grant and Restricted Share Agreement I under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
10-K
000-25074
10.24.6
2/28/18
10.14.7
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for Senior Executive under the 2010 Stock Incentive Plan, for equity grants made after February 15, 2018*
8-K
000-20574
99.3
2/21/18
10.14.8
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement under the 2010 Stock Incentive Plan, for equity grants made on or after February 13, 2019*
10-Q
000-20574
10.2
5/6/19
10.15.1
The Cheesecake Factory Incorporated Stock Incentive Plan*
8-K
000-20574
10.1
6/5/19
10.15.2
Form of Notice of Grant and Stock Unit Grant Agreement for Directors under The Cheesecake Factory Incorporated Stock Incentive Plan*
10-Q
000-20574
10.1
6/22/20
10.15.3
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for Executive Officers under The Cheesecake Factory Incorporated Stock Incentive Plan*
—
—
—
Filed herewith
10.15.4
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement under The Cheesecake Factory Incorporated Stock Incentive Plan*
—
—
—
Filed herewith
10.15.5
Form of Notice of Grant and Restricted Share Agreement for MEP I under The Cheesecake Factory Incorporated Stock Incentive Plan*
—
—
—
Filed herewith
10.16
2015 Amended and Restated Performance Incentive Plan (Amended and Restated on September 2, 2020)*
8-K
000-20574
10.1
9/8/20
10.17.1
Third Amended and Restated Loan Agreement with JPMorgan Chase Bank, National Association dated as of July 30, 2019
10-Q
000-20574
10.1
11/8/19
96
Table of Contents
Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
10.17.2
First Amendment, dated as of May 1, 2020, to the Third Amended and Restated Loan Agreement, dated as of July 30, 2019, between The Cheesecake Factory Incorporated, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time part thereto
8-K
000-20574
10.1
5/5/20
10.17.3
Second Amendment to the Third Amended and Restated Loan Agreement, dated as of March 30, 2021, among The Cheesecake Factory Incorporated, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto
8-K
000-20574
10.1
4/5/21
10.18.1
Registration Rights Agreement, dated April 20, 2020, by and between The Cheesecake Factory Incorporated and RC Cake Holdings LLC
8-K
000-20574
10.2
4/20/20
10.19
Form of Notice of Grant and Stock Option Agreement and/or Restricted Share Agreement for Executive Officers under The Cheesecake Factory Incorporated Stock Incentive Plan
10-Q
000-20574
10.02
5/3/21
10.20
Repurchase Agreement, dated as of June 10, 2021 among The Cheesecake Factory Incorporated and RC Cake 1 LLC, RC Cake 2 LLC and RC Cake 3 LLC
8-K
000-20574
10.1
6/15/21
10.21
Conversion Agreement, dated as of June 10, 2021 among The Cheesecake Factory Incorporated and RC Cake Holdings LLC
8-K
000-20574
10.2
6/15/21
21.1
List of Subsidiaries
—
—
—
Filed herewith
23.1
Consent of Independent Registered Public Accounting Firm — KPMG LLP
—
—
—
Filed herewith
31.1
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer
—
—
—
Filed herewith
31.2
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer
—
—
—
Filed herewith
32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Principal Executive Officer
—
—
—
Filed herewith
32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Principal Financial Officer
—
—
—
Filed herewith
97
Table of Contents
Exhibit
No.
Item
Form
File Number
Incorporated by
Reference from
Exhibit Number
Filed with
SEC
101.1
The following materials from The Cheesecake Factory Incorporated’s Annual Report on Form 10-K for the year ended December 28, 2021, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statement of stockholders’ equity, (v) consolidated statements of cash flows, and (vi) the notes to the consolidated financial statements
—
—
—
Filed herewith
104.1
The cover page of The Cheesecake Factory Incorporated’s Annual Report on Form 10-K for the year ended December 28, 2021, formatted in iXBRL (included with Exhibit 101.1)
—
—
—
Filed herewith
* Management contract or compensatory plan or arrangement required to be filed as an exhibit.
# The schedules (or similar attachments) to this exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules or similar attachments to the SEC upon request.
† Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.
(P) This exhibit has been paper filed and is not subject to the hyperlinking requirements of Item 601 of Regulation S-K.
98
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 22nd day of February, 2022.
THE CHEESECAKE FACTORY INCORPORATED
/s/ DAVID OVERTON
By:
David Overton
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
99
Table of Contents
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David Overton and Matthew E. Clark, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
Date
/s/ DAVID OVERTON
Chairman of the Board and
February 22, 2022
David Overton
Chief Executive Officer
(Principal Executive Officer)
/s/ MATTHEW E. CLARK
Executive Vice President and
February 22, 2022
Matthew E. Clark
Chief Financial Officer
(Principal Financial Officer)
/s/ CHERYL M. SLOMANN
Senior Vice President, Controller and
February 22, 2022
Cheryl M. Slomann
Chief Accounting Officer
(Principal Accounting Officer)
/s/ EDIE A. AMES
Director
February 22, 2022
Edie A. Ames
/s/ ALEXANDER L. CAPPELLO
Director
February 22, 2022
Alexander L. Cappello
/s/ KHANH COLLINS
Director
February 22, 2022
Khanh Collins
/s/ PAUL D. GINSBERG
Director
February 22, 2022
Paul D. Ginsberg
/s/ JEROME I. KRANSDORF
Director
February 22, 2022
Jerome I. Kransdorf
/s/ JANICE MEYER
Director
February 22, 2022
Janice Meyer
/s/ LAURENCE B. MINDEL
Director
February 22, 2022
Laurence B. Mindel
/s/ DAVID B. PITTAWAY
Director
February 22, 2022
David B. Pittaway
/s/ HERBERT SIMON
Director
February 22, 2022
Herbert Simon
100