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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-02-22 · 161 added, 161 removed, 199 unchanged (62% of the section changed)

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), which contains forward-looking statements, should be read in conjunction with our audited consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), which contains forward-looking statements, should be read in conjunction with our audited consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

The inclusion of supplementary analytical and related information herein may require us to make estimates and assumptions to enable us to fairly present, in all material respects, our analysis of trends and expectations with respect to our results of operations and financial position.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes.

Fiscal year 2022 consisted of 53 weeks, while fiscal year 2021 consisted of 52 weeks.

Fiscal year 2023 will consist of 52 weeks.

The following MD&A includes a discussion comparing our results in fiscal 2022 to fiscal 2021.

For a discussion comparing our results from fiscal 2021 to fiscal 2020, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2021, filed with the SEC on February 22, 2022.

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.

During fiscal 2020, we implemented the following measures to preserve liquidity and enhance financial flexibility in response to the impacts of COVID-19 on our business:

● Eliminated non-essential capital expenditures and expenses, suspended new unit development and reduced board, executive and corporate support staff compensation for approximately two quarters;

● Furloughed approximately 41,000 hourly staff members, a majority of whom we called back to work in the third quarter of fiscal 2020;

● Engaged in discussions with our landlords regarding ongoing rent obligations, including the potential deferral, abatement and/or restructuring of rent otherwise payable during the period of the COVID-19 pandemic related closure;

● Increased borrowings under our credit facility, which were repaid during fiscal 2020;

● Issued convertible preferred stock, which was either repurchased or converted into common stock during fiscal 2021;

● Suspended the dividend on our common stock and share repurchases with such suspensions continuing through fiscal 2021.

We may take additional mitigation actions in the future such as raising additional financing, not declaring future dividends, further suspending capital spending, implementing additional furloughs or modifying our operating strategies.

Some of these measures may have an adverse impact on our business.

See Item 1A - Risk Factors - Risks Related to the COVID-19 Pandemic.

COVID-19 Pandemic , Geopolitical and Other Macroeconomic Impacts to our Operating Environment

We have experienced significant disruptions to our business as federal, state and local restrictions have fluctuated over time to mitigate the spread of the COVID-19 virus.

While most of our restaurants operated with no restrictions on indoor dining during fiscal years 2021 and 2022, our revenues were negatively impacted during periods of accelerating case counts during which we incurred increased restaurant staff absenteeism and temporary shifts in consumer behavior, such as changes in customer traffic or the mix between on-premise and off-premise channels.

We have incurred and may continue to incur additional costs to address government regulations and the safety of our staff members and customers.

In addition, we experienced labor shortfalls relative to our sales levels in certain parts of our workforce and/or geographies as we reopened our dining rooms after the lifting of mandatory social-distancing regulations related to the COVID-19 pandemic.

During fiscal 2021, we also began to experience certain supply shortages and transportation delays largely attributable to impacts of the COVID-19 pandemic.

These shortages continued in fiscal 2022 and were exacerbated by geopolitical unrest.

The aggregate impact of these and other geopolitical and macroeconomic factors contributed to significantly increased commodity and wage inflation and other increased costs.

We have also encountered delays in opening new restaurants due to supply chain challenges, as well as to longer lead times in obtaining licenses and permits and in the timeline required to complete the overall leasing process with landlords.

The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events could lead to further government mandates, including but not limited to capacity restrictions, shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation, disruptions in the supply chain and delay in new restaurant openings.

If these factors significantly impact our cash flow in the future, we may again implement mitigation actions such as suspending share repurchases, not declaring future dividends, increasing borrowings under our credit facility or modifying our operating strategies.

Any of these measures may have an adverse impact on our business and materially adversely affect our financial performance.

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 under brands including 208 The Cheesecake Factory ® , 29 North Italia ® and a collection within our Fox Restaurant Concepts business.

We currently own and operate 318 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® (210 locations), North Italia ® (33 locations), Flower Child ® (30 locations) and a collection of other FRC brands (35 locations).

Internationally, 30 The Cheesecake Factory ® restaurants operate under licensing agreements.

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Investing in new Company-owned restaurant development is our top long-term capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets.

We expect our acquisition of North Italia and FRC to further accelerate and diversify our growth opportunities.

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

We plan to continue expanding The Cheesecake Factory and North Italia concepts, and in addition, our FRC subsidiary serves as an incubation engine, creating additional concepts for potential future growth.

For The Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level, calculated by dividing restaurant-level profit (earnings before interest, taxes, depreciation and amortization and preopening costs) by our cash investment.

We target an average cash-on-cash return on investment of approximately 35% for the North Italia concept and 25% to 30% for the FRC concepts.

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

Changes in comparable restaurant sales come from variations in customer traffic as well as in average check.

For The Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and stabilizing customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value, (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining, as we believe there is opportunity for a longer-term elevation of our off-premise mix compared to pre-COVID-19 pandemic levels.

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

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

We generally update The Cheesecake Factory menus twice each year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances protecting both our margins and customer traffic levels.

We have historically targeted menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies.

Due to the cost pressures we are currently experiencing, particularly in commodities, in the first quarter of fiscal 2022, we implemented price increases above our historical levels to protect margins.

We will continue to consider the cost environment when evaluating future menu price increases.

For The Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and maintaining customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value, (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining, as we believe there is opportunity for a longer-term elevation of our off-premise mix compared to pre-COVID-19 pandemic levels.

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

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

We generally update The Cheesecake Factory menus twice each year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances supporting both our margin objectives and customer traffic levels.

In prior years, we have targeted menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies.

Due to the inflationary cost pressures we are experiencing, we implemented menu price increases above our historical levels in the first and third quarters of fiscal 2022 and also implemented an incremental price increase in the fourth quarter of fiscal 2022 to support our longer-term restaurant-level margin objectives.

Future near-term pricing actions are likely to be at levels above historical norms to keep pace with any significant cost increases.

In addition, on a regular basis, we carefully consider opportunities to adjust our menu offerings or ingredients to help manage product availability and cost.

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

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

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

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

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

Our Board is actively evaluating capital distribution strategies for fiscal 2022.

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

Future decisions to pay or to increase or decrease dividends or to repurchase shares are at the discretion of the Board and will be dependent on a number of factors, including limitations pursuant to the terms and conditions of the Loan Agreement and applicable law.

Longer-term, we believe our domestic revenue growth (comprised of our targeted annual unit growth of 7%, in aggregate across concepts, and comparable sales growth), combined with margin expansion, planned debt repayments and an anticipated capital return program will support our long-term financial objective of 13% to 14% total return to shareholders, on average.

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Costs and expenses:

Cost of sales

Food and beverage costs

Labor expenses

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Impairment of assets and lease termination expenses

Acquisition-related costs

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

Acquisition-related contingent consideration, compensation and amortization expense

Preopening costs

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Income/(loss) from operations

Gain on investments in unconsolidated affiliates

Interest and other expense, net

Income/(loss) before income taxes

Income tax (benefit)/provision

Income tax benefit

Net income/(loss)

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance cost

Undistributed earnings allocated to Series A preferred stock

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Fiscal 2022 Compared to Fiscal 2021

Revenues increased 47.6% to $2,927.5 million for fiscal 2021 compared to $1,983.2 million for fiscal 2020, primarily due to a increase in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic in fiscal 2020, as well as additional revenue related to the acquired restaurants and new restaurant openings.

Revenues increased 12.8% to $3,303.2 million for fiscal 2022, including approximately $78.4 million contributed by the 53rd week, compared to $2,927.5 million for fiscal 2021, primarily due to an increase in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic in fiscal 2021, as well as additional revenue related to new restaurant openings.

The Cheesecake Factory comparable sales increased by 7.0%, or $162.5 million, from fiscal 2021 and increased 10.6% from fiscal 2019.

The increase from fiscal 2021 was primarily driven by increased customer traffic of 6.8% primarily due to the impact of the COVID-19 pandemic in the prior year, and an increase in average check of 0.2% (based on an increase of 5.9% in menu pricing, partially offset by a 5.7% negative change in mix).

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

Sales through the off-premise channel comprised approximately 32% of our restaurant sales during fiscal 2021 as compared to 43% in fiscal 2020 as many customers have returned to on-premise dining, whereas consumer behavior had shifted towards the off-premise channel during the prior year period due to the pandemic.

However, off-premise sales mix remains higher than the pre-pandemic level of 16% during fiscal 2019.

Sales through the off-premise channel comprised approximately 25% of our restaurant sales during fiscal 2022 as compared to 32% in fiscal 2021.

However, off-premise sales mix remains elevated versus the pre-pandemic level of 16% during fiscal 2019, even as customers continue to return to on-premise dining.

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

Therefore, average check is generally higher for off-premise orders as most of these orders are for more than one customer.

In turn, the lower mix of sales in the off-premise channel in fiscal 2021 was the primary driver of the negative change in mix and also contributed to the increase in traffic, along with the broader impact of the COVID-19 pandemic.

In turn, the lower mix of sales in the off-premise channel during fiscal 2022 compared to fiscal 2021 comprised approximately 2% of the negative change in mix with a positive correlative impact to traffic.

We implemented effective menu price increases of approximately 3.25%, 4.25% and 2.8% in the first, third and fourth quarters of fiscal 2022, respectively.

The Cheesecake Factory average sales per restaurant operating week increased 7.3% to $228,741 in fiscal 2022 from $213,165 in fiscal 2021.

Total operating weeks at The Cheesecake Factory restaurants increased 1.1% to 10,758 in fiscal 2021 compared to 10,642 in the prior year.

Total operating weeks at The Cheesecake Factory restaurants increased 2.7% to 11,052 in fiscal 2022 compared to 10,758 in the comparable prior year period.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 0.8% to 10,841.

North Italia comparable sales increased approximately 15% from fiscal 2021 and increased approximately 22% compared to fiscal 2019.

The increase from fiscal 2020 was primarily driven by increased customer traffic of 45% primarily due to the impact of the COVID-19 pandemic in the prior year, and an increase in average check of 3.0% (based on an increase of 3.5% in menu pricing, partially offset by a 0.5% negative change in mix).

The increase from fiscal 2021 was primarily driven by increased customer traffic of 11% primarily due to the impact of the COVID-19 pandemic in the prior year, and an increase in average check of 4.0% (based on an increase of 5.5% in menu pricing, partially offset by a 1.5% negative impact from mix).

North Italia average sales per restaurant operating week increased 12.1% to $142,532 in fiscal 2022 from $127,146 in fiscal 2021.

Total operating weeks at North Italia increased 18.6% to 1,604 in fiscal 2022 compared to 1,352 in the prior year.

Revenues for North Italia, Flower Child and the other FRC brands totaled $444.0 million in fiscal 2021.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 16.2% to 1,571.

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

At December 28, 2021, there were three The Cheesecake Factory restaurants and six North Italia restaurants not yet in the comparable sales base.

At January 3, 2023, there were four The Cheesecake Factory restaurants and eight North Italia restaurants not yet in the comparable sales base.

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

External bakery sales were $66.2 million in fiscal 2021 compared to $66.6 million in the comparable prior year period.

Cost of Sales

Cost of sales consists of food, beverage and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses.

As a percentage of revenues, cost of sales was 22.3% for fiscal 2021 compared to 23.1% for fiscal 2020, primarily reflecting a shift in sales mix within the restaurants and a lower proportion of third-party bakery revenues (0.4%) and pricing leverage (0.7%).

These factors were partially offset by increased costs related to buying in the spot market to meet volume needs that exceeded our contracted levels (0.2%).

Food and Beverage Costs

Food and beverage costs consist of raw materials and ingredients used in the food and beverage products sold in our restaurants and to our third-party bakery customers.

As a percentage of revenues, food and beverage costs were 24.6% for fiscal 2022 compared to 22.3% for fiscal 2021, primarily due to inflation across most categories in excess of menu price increases (1.9%).

Beginning in the fourth quarter of fiscal 2022, we retitled this income statement line item from “Cost of Sales” to “Food and Beverage Costs.” This is a title change only, and there is no difference in the classification of items within this category of costs.

The Cheesecake Factory restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities.

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(See the discussion of our contracting activities in Part II, Item 7A — “Quantitative and Qualitative Disclosures About Market Risk.”)

For new restaurants, cost of sales is typically higher for a period of time after opening until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at these restaurants.

For new restaurants, food and beverage costs are typically higher for a period of time after opening until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at these restaurants.

Labor Expenses

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 36.6% and 39.3% in fiscal 2021 and fiscal 2020, respectively.

This decrease was primarily due to deleverage in the prior year when costs associated with the COVID-19 pandemic, including maintaining our full restaurant management team and healthcare benefits for our furloughed staff members, were incurred in the reduced sales environment, as well as pricing leverage (3.6%).

These factors were partially offset by higher training costs (0.2%), wage rates and overtime (0.7%) in fiscal 2021.

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery production labor, including associated fringe benefits, were 36.7% and 36.6% in fiscal 2022 and fiscal 2021, respectively.

This increase was primarily due to wage rate inflation in excess of menu price increases (0.8%), offset by a decrease in group medical insurance costs due to lower claim activity (0.8%) in fiscal 2022.

For new restaurants, labor expenses are typically higher for a period of time after opening while our management team becomes more accustomed to predicting and managing the sales volumes at the new restaurants.

Other Operating Costs and Expenses

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), marketing, including delivery commissions, and other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead and distribution expenses.

Other operating costs and expenses consist of all other restaurant-level operating costs, the major components of which are occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), dining room and to-go supplies, repairs and maintenance, janitorial expenses, credit card processing fees, marketing including delivery commissions, and incentive compensation, as well as bakery production overhead.

As a percentage of revenues, other operating costs and expenses were 26.7% and 27.0% in fiscal 2022 and fiscal 2021, respectively.

This variance was primarily driven by sales leverage within occupancy and building costs (3.7%) and pricing leverage (0.8%), partially offset by increased restaurant-level incentive compensation expense (0.6%).

This variance was primarily driven by sales leverage within occupancy and building costs (0.2%) and increased restaurant-level incentive compensation expense (0.2%).

G&A expenses consist of the restaurant management recruiting and training program, restaurant field supervision, corporate support and bakery administrative organizations, as well as gift card commissions to third-party distributors.

As a percentage of revenues, G&A expenses were 6.2% and 6.4% for fiscal 2022 and fiscal 2021, respectively.

This variance was primarily driven by sales leverage and expense management (2.1%), partially offset by higher corporate incentive compensation expense (0.4%).

This variance was primarily driven by lower corporate incentive compensation expense (0.2%).

Depreciation and Amortization Expenses

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Impairment of Assets and Lease Termination Expenses

During fiscal 2022, we recorded impairment of assets and lease terminations expense of $31.4 million primarily related to the impairment of long-lived assets for three The Cheesecake Factory, one Other FRC and three Other restaurants that are primarily located in areas which have not fully recovered from the pandemic.

During fiscal 2021, we recorded impairment of assets and lease terminations expense of $18.1 million primarily related to the impairment of long-lived assets for three The Cheesecake Factory and two Other restaurants.

During fiscal 2020, we recorded $219.3 million of impairment of assets and lease termination expenses primarily related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisition and long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for one The Cheesecake Factory and seven Other restaurants.

See Notes 7 and 8 of Notes to Consolidated Financial Statements in Part 1V, Item 15 of this report for further discussion of our long-lived and intangible assets, respectively.

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

In fiscal 2021, we recorded $19.5 million of acquisition-related contingent consideration, compensation and amortization expenses, 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.

In fiscal 2020, we recorded a benefit of $3.9 million in acquisition-related contingent consideration, compensation and amortization (benefit)/expenses, reflecting a $5.7 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to the impact of the COVID-19 pandemic, partially offset by an increase of $1.4 million in the Acquisition-related deferred consideration liability and $0.4 million in amortization of acquired definite-lived licensing agreements.

See Notes 1 and 6 of Notes to Consolidated Financial Statements in Part 1V, Item 15 of this report for further discussion of our long-lived and intangible assets.

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

We recorded a $13.4 million and $19.5 million of expense during fiscal 2022 and 2021, respectively, of acquisition-related contingent consideration, compensation and amortization.

In fiscal 2022, the fair value of the contingent consideration and compensation liability increased by $4.7 million due to a $8.3 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2022 revenues and estimated future revenues utilized in the calculation and amortization, partially offset by a payment of $7.2 million per the FRC acquisition agreement.

In fiscal 2021, we recorded a $15.3 million increase in the contingent consideration and compensation liability due to the impact of an amendment to the FRC 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.

Preopening Costs

Preopening costs were $16.8 million for fiscal 2022 compared to $13.7 million for fiscal 2021.

We opened 14 restaurants in fiscal 2021 comprised of two The Cheesecake Factory, six North Italia, four Other FRC and two Other locations compared to seven restaurants in fiscal 2020 comprised of one The Cheesecake Factory, one North Italia, two Other FRC and three Other locations.

Preopening costs include all costs to relocate and compensate restaurant management staff members during the preopening period, costs to recruit and train hourly restaurant staff members, and wages, travel and lodging costs for our opening training team and other support staff members.

Also included are expenses for maintaining a roster of trained managers for pending openings, the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs, and corporate travel and support activities.

We opened 13 restaurants in fiscal 2022 comprised of three The Cheesecake Factory, four North Italia, three Other FRC and three Other locations compared to 14 restaurants in fiscal 2021 comprised of two The Cheesecake Factory, six North Italia, four Other FRC and two Other locations.

Restaurant-level 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 in preopening costs 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.

Preopening costs can fluctuate significantly from period to period based on the number, mix and timing of restaurant openings and the specific preopening costs incurred for each restaurant.

The increase in preopening costs from fiscal 2020 primarily relates to the increased number of openings, partially offset by the mix toward concepts with lower preopening costs and a lower number of managers in reserve for pending openings.

The increase in preopening cost from fiscal 2021 primarily relates to a higher number of managers in reserve for pending openings, partially offset by decreased number of openings.

Interest and Other Expense, Net

Interest and other expense, net was $6.0 million in fiscal 2022 compared to $10.7 million in fiscal 2021.

This increase was primarily due to the termination of the interest rate swap ($2.5 million), as well as favorability across several categories, partially offset by lower borrowings outstanding on our Amended Facility ($1.7 million).

Income Tax (Benefit)/Provision

This decrease was primarily due to higher interest expense in the prior year ($3.5 million), mainly related to our interest rate swap, which was terminated in June 2021.

Income Tax Benefit

In fiscal 2022, we had an income tax benefit of $10.2 million, an effective tax rate of (31.1%), compared to an income tax benefit of $0.8 million, an effective tax rate of (1.1%), in fiscal 2021.

The significant change was due primarily to the fact that we had $71.6 million in income before income taxes in fiscal 2021 compared to a loss before income taxes of $356.0 million in fiscal 2020.

The variance was also driven by a higher proportion of employment credits and non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan in relation to income/(loss) before income taxes, as well as a benefit arising from our decision to pay all FICA taxes deferred under the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) earlier than required, which increased the amount of our 2020 loss carryback to prior years when the federal statutory rate was 35%.

These favorable factors were partially offset by a higher proportion of state taxes expense as compared to state taxes benefit in relation to income/(loss) before income taxes, the benefit in the prior year of our fiscal 2020 loss carryback and a reserve for uncertain tax positions in fiscal 2021.

The change was due primarily to a higher proportion of employment credits in relation to income before income taxes (48.7%) and our reserve for uncertain tax positions in fiscal 2021 (12.6%).

These favorable factors were partially offset by a higher proportion of non-deductible losses as compared to non-taxable gains in fiscal 2021 on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan (“Non-Qualified Plans”) in relation to income before income taxes (12.6%), the benefit to our net operating loss carryback recorded in fiscal 2021 of our decision to accelerate payment of certain FICA taxes deferred pursuant to the CARES Act (6.3%), a tax shortfall in fiscal 2022 related to equity compensation (5.5%) and a higher proportion of state taxes expense in relation to income before income taxes (4.7%).

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

Non-GAAP Measures

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

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

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

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

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

To reflect the potential impact of the conversion of our Series A preferred stock into common stock for the period that it was outstanding prior to the conversion on June 15, 2021, we exclude the preferred dividend and assume all convertible preferred shares have been converted into common stock.

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

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

Net income/(loss) available to common stockholders

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

Net income available to common stockholders

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

Net income attributed to Series A preferred stock to apply if-converted method

Net income attributed to Series A preferred stock

COVID-19 related costs (1)

Impairment of assets and lease termination expenses

Acquisition-related costs

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

Acquisition-related contingent consideration, compensation and amortization expenses

Termination of interest rate swap

Uncertain tax positions

Gain on investments in unconsolidated affiliates

Tax effect of adjustments (2)

Adjusted net income/(loss)

Diluted net income/(loss) per common share

Adjusted net income

Diluted net income per common share

Dividends on Series A preferred stock

Direct and incremental Series A preferred stock issuance costs

Net income attributable to Series A preferred stock to apply if-converted method

Net income attributable to Series A preferred stock

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

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Impairment of assets and lease termination expenses

Acquisition-related costs

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

Acquisition-related contingent consideration, compensation and amortization expenses

Termination of interest rate swap

Uncertain tax positions

Gain on investments in unconsolidated affiliates

Tax effect of adjustments (2)

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

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

Adjusted net income per share (4)

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

During fiscal 2021, we recorded $4.9 million for these costs with approximately $4.6 million reflected in labor expenses and $0.3 million in other operating expenses.

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

(2) Based on the federal statutory rate and an estimated blended state tax rate, the tax effect on all adjustments assumes a 26% tax rate.

(3) Represents the impact of assuming the conversion of Series A preferred stock into common stock (0 and 4,431,140 shares for fiscal 2022 and fiscal 2021, respectively), resulting in an assumption of 50,414,160 and 51,959,879 weighted-average common shares outstanding for fiscal 2022 and fiscal 2021, respectively.

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

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

Fiscal 2023 Outlook

This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act, and Section 21E of the Exchange Act and should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

Based on extrapolating recent trends and assuming no material disruptions from COVID-19 or other factors, we anticipate total revenue for fiscal 2022 to be approximately $3.3 billion to $3.4 billion, with The Cheesecake Factory average sales per location reaching just over $12 million, including the impact of the 53 rd operating week.

We remain committed to protecting our longer-term restaurant-level margins and will take appropriate actions, including additional menu pricing to offset structural and permanent costs, as needed.

However, we will likely continue to absorb short-term cost fluctuations driven by the current environment.

Including the February 2022 price increase, we currently have 4.75% pricing in The Cheesecake Factory menu and depending on inflationary trends will evaluate our pricing needs for the fall menu.

During fiscal 2022, we expect commodity inflation of low double digits and anticipate net labor inflation of approximately 5% when factoring in wage rates and channel mix, among other components such as payroll taxes and benefits.

We also anticipate other operating costs and expenses as a percentage of revenues to range from 25.0% to 25.5% and G&A expenses to be approximately $210 million.

We estimate preopening costs of approximately $19 million and depreciation and amortization expenses of approximately $90 million and are utilizing a tax rate of approximately 13% for modeling purposes.

We plan to open as many as 17 to 19 new restaurants in fiscal 2022, including five The Cheesecake Factory restaurants, five to seven North Italia restaurants and seven restaurants within our FRC business, which includes three Flower Child locations.

We anticipate approximately $150 million in cash capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

We expect our first quarter restaurant-level margins to be at their lowest level of the fiscal 2022 primarily due to the timing of the first quarter price increase and the projected cadence of commodity inflation we expense to lessen over the course of the fiscal year.

Based on recent trends and assuming no material operating or consumer disruptions, we anticipate total revenue for fiscal 2023 to be approximately $3.5 billion to $3.6 billion, with The Cheesecake Factory average sales per location reaching approximately $13 million.

Including the 3.5% February 2023 price increase, we will have 10.5% pricing in The Cheesecake Factory menu, and we will evaluate the level of pricing for the summer menu based on inflationary trends.

During fiscal 2023, we currently estimate total inflation across our commodities, total labor (factoring in the latest trends in wage rates and channel mix, as well as in other components such as payroll taxes and benefits) and other operating costs and expenses to be in the mid-single digit range.

However, there remains measurable risk associated with cost fluctuations driven by the current environment.

We estimate preopening costs of approximately $24 million.

Based on these factors, we expect fiscal 2023 net income margin of approximately 4% at the mid-point of the estimated revenue range.

We plan to open as many as 20 to 22 new restaurants in fiscal 2023, including five to six The Cheesecake Factory restaurants, five to six North Italia restaurants and 10 restaurants within our FRC business, which includes three to four Flower Child locations.

We anticipate approximately $165 to $175 million in cash capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

Restaurant opening dates may be impacted by supply chain challenges and permit approval delays.

Total revenue for the first quarter of fiscal 2023 are expected to be approximately $850 million to $880 million.

We anticipate commodity inflation of approximately 10% to 12% and expect labor inflation of approximately 6%.

Based on these factors, we expect first quarter fiscal 2023 net income margin of approximately 3% to 3.5%.

Liquidity and Capital Resources

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Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance our restaurant expansion plans, ongoing maintenance of our restaurants and bakery facilities and investment in our corporate and information technology infrastructures.

However, given the impact of the COVID-19 pandemic on our operations, during fiscal 2020 we increased borrowings under our credit facility and issued convertible preferred stock to increase our liquidity.

However, given the impact of the COVID-19 pandemic on our operations, during fiscal 2020 we increased borrowings under our then-existing credit facility and issued convertible preferred stock to increase our liquidity.

During fiscal 2021, we used net proceeds from issuing convertible senior notes and additional common stock to fund the repurchase of the majority of our Series A preferred stock and the conversion of the remaining Series A preferred stock into common stock, simplifying our capital structure and eliminating future convertible preferred stock dividends.

We also utilized a portion of the net proceeds to reduce borrowings under our credit facility.

We also utilized a portion of the net proceeds to reduce borrowings under our then-existing credit facility.

Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for all of our restaurant locations.

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

During fiscal 2021, our cash and cash equivalents increased by $35.5 million to $189.6 million.

During fiscal 2022, our cash and cash equivalents decreased by $74.9 million to $114.8 million.

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

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Additions to property and equipment

Acquisition-related deferred consideration and compensation

Convertible debt issuance, net of issuance cost

Common stock issuance, net of issuance cost

Net repayments on credit facility

Series A preferred stock issuance, net of issuance costs

Borrowings on credit facility

Repayments on credit facility

Series A preferred stock cash-settled conversion

Series A preferred stock dividends paid

Acquisition-related deferred consideration

Proceeds from exercises of stock options

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Cash Provided by Operating Activities

Cash flows from operations increased by $210.1 million from fiscal 2020 primarily due to a lesser impact of the COVID-19 pandemic, partially offset by the payback of $36.5 million of payroll taxes that were deferred in fiscal 2020 under the CARES Act.

Cash flows from operations decreased by $51.1 million from fiscal 2021 primarily due to lower net income, the timing of payroll disbursements in relation to the fiscal 2022 versus 2021 year-end dates, higher gift card redemptions and lower accrued incentive compensation.

These factors were partially offset by collection of our fiscal 2020 net operating loss carryback refund in fiscal 2022, the payback in fiscal 2021 of payroll taxes that were deferred in fiscal 2020 under the CARES Act and higher non-cash impairment expense in fiscal 2022.

Typically, our requirement for working capital has not been significant since our restaurant customers pay for their food and beverage purchases in cash or cash equivalents at the time of sale, and we are able to sell many of our restaurant inventory items before payment is due to the suppliers of such items.

This dynamic shifted in fiscal 2020 in the reduced sales environment but returned to the historical pattern in fiscal 2021.

Property and Equipment

Capital expenditures for new restaurants, including locations under development as of each fiscal year-end, were $31.7 million, $31.7 million and $40.5 million for fiscal 2021, 2020 and 2019, respectively.

Capital expenditures also included $30.1 million, $16.6 million and $29.4 million for our existing restaurants and $5.1 million, $2.0 million and $3.9 million for bakery and corporate capacity and infrastructure investments in fiscal 2021, 2020 and 2019, respectively.

Capital expenditures for new restaurants, including locations under development as of each fiscal year-end, were $55.1 million and $31.7 million for fiscal 2022 and 2021, respectively.

Capital expenditures also included $51.8 million and $30.1 million for our existing restaurants and $5.6 million and $5.1 million for bakery and corporate capacity and infrastructure investments in fiscal 2022 and 2021, respectively.

We expect to open as many as 20 to 22 new restaurants in fiscal 2023 across our portfolio of concepts.

We anticipate approximately $150 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

We anticipate approximately $165 to $175 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

Acquisition-Related Deferred Consideration and Compensation

During fiscal 2022 and 2021, we made payments of $11.1 million and $17.0 million, respectively, for deferred consideration related to the FRC acquisition.

During fiscal 2022, we also made a payment of $7.2 million for deferred consideration and contingent consideration related to the FRC acquisition.

Convertible Senior Notes

On June 15, 2021, we issued $345.0 million in aggregate principal amount Notes.

The initial conversion rate for the Notes was 12.7551 shares of common stock per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $78.40 per share of common stock.

On June 15, 2021, we issued $345.0 million in aggregate principal amount of convertible senior notes (“Notes”), which will mature on June 15, 2026, unless earlier repurchased, redeemed or converted.

The net proceeds from the sale of the Notes were approximately $334.9 million after deducting issuance costs related to the Notes.

At January 3, 2023, the conversion rate for the Notes was 13.0675 shares of common stock per $1,000 principal amount of the Notes, which represents a conversion price of approximately $76.53 per share of common stock.

In connection with the cash dividend that was declared by our Board on February 16, 2023, on March 21, 2023 we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to

decrease) of the Notes in accordance with the terms.

(See Note 10 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Notes.)

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In connection with the issuance, we incurred direct and incremental costs of $8.0 million.

Revolving Facility

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

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

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

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

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

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

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

As of December 28, 2021, we were in compliance with the covenants set forth in the Revolving Facility.

Credit Facility

On October 6, 2022, we entered into a Fourth Amended and Restated Loan Agreement (the “Loan Agreement” and the revolving credit facility provided thereunder, the “Revolver Facility”).

The Loan Agreement amends and restates in its entirety our prior credit agreement.

The Revolver Facility, which terminates on October 6, 2027, provides us with revolving loan commitments that total $400 million, of which $50 million may be used for issuances of letters of credit.

The Revolver Facility contains a commitment increase feature that, subject to certain conditions precedent, could provide for an additional $200 million in revolving loan commitments.

Our obligations under the Revolver Facility are unsecured.

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

During fiscal 2021, we utilized a portion of the net proceeds from our Notes and common share offerings to reduce the balance on our then-existing credit facility by $150.0 million.

On October 6, 2022, we repaid the outstanding balance under the prior credit facility and borrowed the same amount on the Revolver Facility.

As of January 3, 2023, we had net availability for borrowings of $238.5 million, based on a $130.0 million outstanding debt balance and $31.5 million in standby letters of credit under the Revolver Facility.

Under the Revolver Facility, we are subject to financial covenants, as well as to customary events of default that, if triggered, could result in acceleration of the maturity of the Revolver Facility.

Subject to certain exceptions, the Revolver Facility also limits distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

At January 3, 2023, we were in compliance with all covenants in effect at that date.

(See Note 10 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt.)

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

In the second quarter of fiscal 2021, we utilized a portion of the net proceeds from our Notes and common share offerings to reduce the balance on our Revolving Facility, such that 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.

Series A Preferred Stock

During the second quarter of fiscal 2020, we issued 200,000 shares of Series A preferred stock for an aggregate purchase price of $200.0 million to increase our liquidity given the impact of the COVID-19 pandemic on our operations.

In connection with the issuance, we incurred direct and incremental costs of $10.3 million.

During the first quarter of fiscal 2021, we declared a cash dividend of $25.35 per share on the Series A preferred stock.

During the second quarter of fiscal 2021, we paid $457.3 million in connection with the cash-settled conversion of 150,000 shares of our outstanding Series A preferred stock (effected through a repurchase agreement), and the share-settled conversion of the remaining 50,000 shares of our outstanding Series A preferred stock into 2,400,864 shares of our common stock, of which $13.6 million was deemed to be a dividend.

During the second quarter of fiscal 2021, we paid a cash dividend on our Series A preferred stock of $5.1 million.

Additionally, during the second quarter of fiscal 2021, we paid $457.3 million in connection with the cash-settled conversion of 150,000 shares of our outstanding Series A preferred stock (effected through a repurchase agreement), and the share-settled conversion of the remaining 50,000 shares of our outstanding Series A preferred stock into 2,400,864 shares of our common stock, of which $13.6 million was deemed to be a dividend.

(See Note 15 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our preferred stock.)

Common Stock Dividends

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of the Amended Credit Agreement, in March 2020, our Board suspended the quarterly dividend on our common stock.

Prior to this suspension, our Board declared cash dividends of $0.36 per common share for the first quarter of fiscal 2020.

Cash dividends of $0.3 million paid in the first quarter of fiscal 2021 represent dividends previously accrued on restricted stock awards that vested during the quarter.

Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the Amended Credit Agreement and applicable law, and other such factors that the Board considers relevant.

Our Board is considering the reinstatement of our dividend program in fiscal 2022.

However, the decision to reinstate the dividend as well as the amount of any dividend have yet to be determined.

Common stock dividends of $42.3 million and $0.3 million were paid in fiscal 2022 and 2021, respectively.

The increase is primarily due to the resumption of our quarterly dividend in the second quarter of fiscal 2022 after the suspension that began in fiscal 2020 due to the impact of COVID-19 on our business and in conjunction with the terms of our Loan Agreement.

As further discussed in Note 15 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report, in February 2023, our Board declared a quarterly dividend to be paid in March 2023.

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 Loan Agreement and applicable law, and other such factors that the Board considers relevant.

Share Repurchases

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.1 million shares at a total cost of $1,702.5 million through December 28, 2021.

During fiscal 2021 and 2020, we repurchased 0.1 million and 0.1 million shares of our common stock at a cost of $5.8 million and $3.6 million, respectively, in conjunction with satisfying tax withholding obligations on vested restricted share awards.

On October 26, 2022, our Board increased the authorization to repurchase our common stock by 5.0 million shares to 61.0 million shares.

Under this authorization, we have cumulatively repurchased 55.1 million shares at a total cost of $1,765.6 million through January 3, 2023.

We repurchased 2.0 million shares at a cost of $63.1 million during fiscal 2022 compared to 0.1 million shares at a cost of $5.8 million fiscal 2021.

This increase is primarily due to the resumption of our share repurchase program in the

second quarter of fiscal 2022 after the suspension that began in fiscal 2020 due to the impact of COVID-19 on our business and in conjunction with the terms of our Loan Agreement.

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

Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Credit Agreement, in March 2020, our Board suspended share repurchases.

Future decisions to repurchase shares are at the discretion of the Board and are based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the Acquisition, our share price and current market conditions.

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

Our Board is actively evaluating share repurchase strategies for fiscal 2022.

Our share repurchase program 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.

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 FRC 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 our credit facility that limit share repurchases based on a defined ratio.

(See Note 15 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our repurchase authorization and methods.)

Contractual Obligations and Commercial Commitments

The following table summarizes our undiscounted contractual obligations and commercial commitments as of December 28, 2021 (amounts in millions):

The following table summarizes our undiscounted contractual obligations and commercial commitments as of January 3, 2023 (amounts in millions):

Payment Due by Period

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Amounts exclude agreements that are cancelable without significant penalty.

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.

The FRC 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 $28.6 million at January 3, 2023.

See Note 2 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for discussion of the fair value measurement for this liability.

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Cash Flow Outlook

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

As of December 28, 2021, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

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

As of January 3, 2023, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

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The fair value of the contingent consideration and compensation liability is determined utilizing a Monte Carlo model based on estimated future revenues, margins, volatility factors and discount rates, 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.

The fair value of the contingent consideration and compensation liabilities increased $16.4 million during fiscal 2021 primarily due 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 undiscounted range of outcomes per the Monte Carlo model was $0 to $276.0 million at January 3, 2023 and $0 to $204.0 million at December 28, 2021.

During fiscal 2022, the fair value of the contingent consideration and compensation liability increased by $4.7 million to $28.6 million due to an $8.3 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2022 revenues and estimated future revenues utilized in the calculation and amortization, partially offset by a payment of $7.2 million per the FRC acquisition agreement.

The fair value of the contingent consideration and compensation liability is highly subjective, and results could change materially if different estimates and assumptions were used.

Indefinite-Lived Intangible Assets

Goodwill and other indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment.

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, including assumptions related to the COVID-19 pandemic, unanticipated competition, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment.

Factors considered include, but are not limited to, historical financial performance, assumptions related to the COVID-19 pandemic, wage, product and services inflation, competitive environment, macroeconomic and industry conditions, results of prior impairment tests and share price performance.

Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed.

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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.

The fair value of the trade names and trademarks is estimated using the relief from royalty method.

Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment.

Estimates of revenue growth and operating expenses are based on internal projections and consider historical performance and forecasted growth, including assumptions related to the COVID-19 pandemic, industry economics and the business environment.

The discount rate is based on the estimated cost of capital that reflects the risk profile of the related business.

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These fair value assessments could change materially if different estimates and assumptions were used.

We recorded impairment charges of $1.3 million and $183.1 million in fiscal 2021 and 2020, respectively.

The fiscal 2021 charges primarily related to impairment of licensing agreements, while the fiscal 2020 charges related primarily to impairment of our goodwill, trade names and trademarks.

(See Note 8 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our intangible assets.)

We did not record any impairment charges related to indefinite-lived intangible assets in fiscal 2022 or 2021.

We recorded impairment charges related to indefinite-lived intangible assets of $180.8 million in fiscal 2020.

(See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of these impairments.)

Long-Lived Assets

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Factors considered include, but are not limited to, negative cash flow, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends.

Assessing whether impairment testing is warranted and, if so, determining the amount of expense require the use of estimates and assumptions regarding future cash flows, including assumptions related to the COVID-19 pandemic, and asset fair values.

Assessing whether impairment testing is warranted and, if so, determining the amount of expense require the use of estimates and assumptions regarding future cash flows and asset fair values.

Key assumptions include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate.

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These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as changes in economic conditions and operating performance.

In fiscal 2022, we recorded $31.4 million of expense primarily related to the impairment of three The Cheesecake Factory, one Other FRC and three Other restaurants.

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.

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(See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion related to long-lived asset impairment.)

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.

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis