XNAS:CAKE Cheesecake Factory, Inc. Quarterly Report 10-Q Filing - 4/3/2012

Effective Date 4/3/2012

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Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 3, 2012

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-20574

 

THE CHEESECAKE FACTORY INCORPORATED

(Exact name of registrant as specified in its charter)

 

Delaware

 

51-0340466

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

26901 Malibu Hills Road

 

 

Calabasas Hills, California

 

91301

(Address of principal executive offices)

 

(Zip Code)

 

(818) 871-3000

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of May 3, 2012, 54,010,378 shares of the registrant’s Common Stock, $.01 par value, were outstanding.

 

 

 



Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

INDEX

 

 

 

 

Page
Number

PART I.

FINANCIAL INFORMATION

 

 

Item 1.

Unaudited Financial Statements:

 

 

 

Consolidated Balance Sheets

3

 

 

Consolidated Statements of Comprehensive Income

4

 

 

Consolidated Statement of Stockholders’ Equity

5

 

 

Consolidated Statements of Cash Flows

6

 

 

Notes to Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

10

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

 

Item 4.

Controls and Procedures

17

 

 

 

 

PART II.

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

17

 

Item 1A.

Risk Factors

17

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

17

 

Item 6.

Exhibits

19

 

 

 

 

Signatures

 

 

20

 

2



Table of Contents

 

PART I.         FINANCIAL INFORMATION

Item 1.           Financial Statements

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

 

 

April 3,
2012

 

January 3,
2012

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

41,300

 

$

48,211

 

Accounts receivable

 

8,880

 

11,334

 

Income tax receivable

 

2,542

 

5,472

 

Other receivables

 

18,792

 

32,096

 

Inventories

 

33,252

 

28,210

 

Prepaid expenses

 

36,372

 

36,498

 

Deferred income taxes

 

11,450

 

14,574

 

Total current assets

 

152,588

 

176,395

 

Property and equipment, net

 

756,533

 

758,503

 

Other assets:

 

 

 

 

 

Intangible assets, net

 

15,789

 

14,674

 

Prepaid rent

 

49,571

 

49,490

 

Other

 

25,866

 

23,508

 

Total other assets

 

91,226

 

87,672

 

Total assets

 

$

1,000,347

 

$

1,022,570

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

36,765

 

$

36,159

 

Other accrued expenses

 

166,195

 

187,081

 

Total current liabilities

 

202,960

 

223,240

 

Deferred income taxes

 

103,725

 

103,927

 

Deferred rent

 

70,887

 

69,742

 

Deemed landlord financing liability

 

54,676

 

55,086

 

Other noncurrent liabilities

 

31,216

 

27,822

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued

 

¾

 

¾

 

Junior participating cumulative preferred stock, $.01 par value, 150,000 shares authorized; none issued

 

¾

 

¾

 

Common stock, $.01 par value, 250,000,000 shares authorized; 86,568,139 and 85,863,313 issued at April 3, 2012 and January 3, 2012, respectively

 

866

 

859

 

Additional paid-in capital

 

469,590

 

455,339

 

Retained earnings

 

837,699

 

816,977

 

Treasury stock, 32,552,275 and 31,196,128 shares at cost at April 3, 2012 and January 3, 2012, respectively

 

(771,272

)

(730,422

)

Total stockholders’ equity

 

536,883

 

542,753

 

Total liabilities and stockholders’ equity

 

$

1,000,347

 

$

1,022,570

 

 

See the accompanying notes to the consolidated financial statements.

 

3



Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

 

 

 

 

 

 

Revenues

 

$

435,754

 

$

418,765

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of sales

 

107,598

 

104,664

 

Labor expenses

 

142,980

 

137,498

 

Other operating costs and expenses

 

105,888

 

103,274

 

General and administrative expenses

 

28,665

 

24,265

 

Depreciation and amortization expenses

 

18,298

 

17,453

 

Preopening costs

 

2,106

 

1,760

 

Total costs and expenses

 

405,535

 

388,914

 

Income from operations

 

30,219

 

29,851

 

Interest and other income/(expense), net

 

(1,148

)

(1,402

)

Income before income taxes

 

29,071

 

28,449

 

Income tax provision

 

8,349

 

7,993

 

Net income

 

20,722

 

20,456

 

Other comprehensive income, net

 

¾

 

¾

 

Comprehensive income

 

$

20,722

 

$

20,456

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.39

 

$

0.35

 

Diluted

 

$

0.37

 

$

0.34

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

53,680

 

58,480

 

Diluted

 

55,699

 

60,499

 

 

See the accompanying notes to the consolidated financial statements.

 

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Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Shares of
Common
Stock

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Treasury
Stock

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 3, 2012

 

85,863

 

$

859

 

$

455,339

 

$

816,977

 

$

(730,422

)

$

542,753

 

Net income

 

 

 

 

20,722

 

 

20,722

 

Issuance of common stock from stock options exercised

 

452

 

5

 

9,309

 

 

 

9,314

 

Tax impact of stock options exercised, net of cancellations

 

 

 

1,492

 

 

 

1,492

 

Stock-based compensation

 

 

 

3,450

 

 

 

3,450

 

Issuance of restricted stock, net of forfeitures

 

253

 

2

 

 

 

 

2

 

Purchase of treasury stock

 

 

 

 

 

(40,850

)

(40,850

)

Balance, April 3, 2012

 

86,568

 

$

866

 

$

469,590

 

$

837,699

 

$

(771,272

)

$

536,883

 

 

See the accompanying notes to the consolidated financial statements.

 

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Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

20,722

 

$

20,456

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

18,298

 

17,453

 

Deferred income taxes

 

2,923

 

1,549

 

Stock-based compensation

 

3,364

 

2,981

 

Tax impact of stock options exercised, net of cancellations

 

1,492

 

225

 

Excess tax benefit related to stock options exercised

 

(1,210

)

(241

)

Other

 

200

 

173

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

2,454

 

9,507

 

Other receivables

 

13,304

 

9,617

 

Inventories

 

(5,042

)

(3,962

)

Prepaid expenses

 

126

 

864

 

Other assets

 

(2,412

)

(706

)

Accounts payable

 

606

 

3,862

 

Income taxes receivable/payable

 

2,929

 

5,505

 

Other accrued expenses

 

(16,378

)

(14,532

)

Cash provided by operating activities

 

41,376

 

52,751

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(16,349

)

(10,505

)

Additions to intangible assets

 

(1,235

)

(224

)

Cash used in investing activities

 

(17,584

)

(10,729

)

Cash flows from financing activities:

 

 

 

 

 

Deemed landlord financing proceeds

 

82

 

629

 

Deemed landlord financing payments

 

(459

)

(405

)

Proceeds from exercise of employee stock options

 

9,314

 

2,740

 

Excess tax benefit related to stock options exercised

 

1,210

 

241

 

Purchase of treasury stock

 

(40,850

)

(50,612

)

Cash used in financing activities

 

(30,703

)

(47,407

)

Net change in cash and cash equivalents

 

(6,911

)

(5,385

)

Cash and cash equivalents at beginning of period

 

48,211

 

81,619

 

Cash and cash equivalents at end of period

 

$

41,300

 

$

76,234

 

 

 

 

 

 

 

Supplemental disclosures:

 

 

 

 

 

Interest paid

 

$

1,118

 

$

1,170

 

Income taxes paid

 

$

1,044

 

$

686

 

 

See the accompanying notes to the consolidated financial statements.

 

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Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Basis of Presentation and Significant Accounting Policies

 

The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated (referred to herein as the “Company,” “we,” “us” and “our”) and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements presented herein have not been audited by an independent registered public accounting firm, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the financial condition, results of operations and cash flows for the period.  However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year.  Certain information and footnote disclosures normally included in financial statements in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”).  The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012 filed with the SEC on February 29, 2012.

 

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.

 

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31st for financial reporting purposes.  Fiscal 2012 consists of 52 weeks and will end on January 1, 2013.  Fiscal 2011, which ended on January 3, 2012, was a 53-week year, with an additional week in the fourth quarter.

 

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity.  Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  There are no changes to the accounting for items within comprehensive income.  This standard impacts presentation only and became effective for us in the first quarter of fiscal 2012.

 

2.  Inventories

 

Inventories consisted of (in thousands):

 

 

 

April 3, 2012

 

January 3, 2012

 

 

 

 

 

 

 

Restaurant food and supplies

 

$

12,520

 

$

12,717

 

Bakery finished goods and work in progress

 

15,520

 

9,991

 

Bakery raw materials and supplies

 

5,212

 

5,502

 

Total

 

$

33,252

 

$

28,210

 

 

3.  Long-Term Debt

 

In December 2010, we entered into a five-year credit agreement (“Facility”) that provides us with revolving loan commitments totaling $200 million, including letter of credit subfacility commitments that total $35 million.  The Facility contains a commitment increase feature that could provide for an additional $50 million in available credit upon our request and the satisfaction of certain conditions.  In conjunction with the entry into the new Facility, we terminated our prior credit facility dated April 2007, as amended March 2008 and January 2009.  We had no outstanding borrowings under the Facility at April 3, 2012 or January 3, 2012.

 

Borrowings under the Facility bear interest at a floating rate based on LIBOR, plus a spread ranging from 1.75% to 2.25%, depending on our ratio of debt plus eight times rent (“Adjusted Debt”) to trailing 12-month earnings before interest, taxes, depreciation, amortization, rent and noncash stock option expense (“EBITDAR”), as defined in the agreement.  In addition, we pay a

 

7



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commitment fee ranging from 0.3% to 0.4%, also depending on our ratio of Adjusted Debt to EBITDAR, calculated on the average unused portion of the Facility.

 

We are obligated to maintain certain financial covenants, which include a maximum Adjusted Debt to trailing 12-month EBITDAR ratio (“Adjusted Debt Ratio”) of 4.0, as well as a trailing 12-month minimum EBITDAR to interest and rental expense ratio (“EBITDAR Ratio”) of 1.9.  At April 3, 2012, our Adjusted Debt and EBITDAR Ratios were 2.7 and 2.8, respectively.  Therefore, we were in compliance with the financial covenants in effect under the Facility at that date.

 

Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of April 3, 2012, we had net availability for borrowings of $182 million, based upon a zero outstanding debt balance and $18 million in standby letters of credit.  In addition, our Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio.

 

4. Commitments and Contingencies

 

Within the ordinary course of our business, we are subject to private lawsuits, administrative proceedings and claims.  These matters typically involve claims from guests, staff members and others related to operational 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.  We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether these allegations are valid or whether we are legally determined to be liable. At this time, we believe that the final disposition of these lawsuits, 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, proceedings or claims.

 

5.  Stock-Based Compensation

 

The following table presents information related to stock-based compensation (in thousands):

 

 

 

Thirteen Weeks
Ended April 3,
2012

 

Thirteen Weeks
Ended March 29,
2011

 

 

 

 

 

 

 

Labor expenses

 

$

893

 

$

968

 

Other operating costs and expenses

 

47

 

47

 

General and administrative expenses

 

2,424

 

1,966

 

Stock-based compensation

 

3,364

 

2,981

 

Income tax benefit

 

1,287

 

1,140

 

Total stock-based compensation, net of taxes

 

$

2,077

 

$

1,841

 

 

 

 

 

 

 

Capitalized stock-based compensation (1) 

 

88

 

72

 

 


(1)         It is our policy to capitalize the portion of stock-based compensation costs for our internal development and construction, legal, and facilities departments that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations, lease, intellectual property and liquor license acquisition activities and equipment installation.  Capitalized stock-based compensation is included in property and equipment, net and other assets on the consolidated balance sheets.

 

Stock Options

 

The weighted average fair value at the grant date for options issued during the first quarter of fiscal 2012 and 2011 was $12.02 and $12.91 per option, respectively.  The fair value of options at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the first quarter of fiscal 2012 and 2011, respectively: (a) an expected option term of 6.1 and 6.0 years, (b) expected stock price volatility of 40.6% and 40.1%, (c) a risk-free interest rate of 1.4% and 2.1%, and (d) no dividend yield on our stock.

 

Stock option activity during the thirteen weeks ended April 3, 2012 was as follows:

 

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Shares

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic Value

 

 

 

(In thousands)

 

(Per share)

 

(In years)

 

(In thousands)

 

Outstanding at January 3, 2012

 

8,827

 

$

23.51

 

4.8

 

$

58,857

 

Granted

 

480

 

$

29.29

 

 

 

 

 

Exercised

 

(452

)

$

20.62

 

 

 

 

 

Forfeited or cancelled

 

(82

)

$

21.16

 

 

 

 

 

Outstanding at April 3, 2012

 

8,773

 

$

24.00

 

4.8

 

$

56,121

 

 

 

 

 

 

 

 

 

 

 

Exercisable at April 3, 2012

 

4,523

 

$

27.00

 

3.7

 

$

17,670

 

 

The total intrinsic value of options exercised during the thirteen weeks ended April 3, 2012 and March 29, 2011 was $4.5 million and $1.4 million, respectively.  As of April 3, 2012, the total unrecognized stock-based compensation expense related to unvested stock options was $20.9 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 the thirteen weeks ended April 3, 2012 was as follows:

 

 

 

Shares

 

Weighted
Average
Fair Value

 

 

 

(In thousands)

 

(Per share)

 

 

 

 

 

 

 

Outstanding at January 3, 2012

 

826

 

$

20.40

 

Granted

 

299

 

28.98

 

Vested

 

(111

)

11.41

 

Forfeited

 

(7

)

19.59

 

Outstanding at April 3, 2012

 

1,007

 

$

23.94

 

 

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 at the grant date for restricted shares and restricted units issued during the first quarter of fiscal 2012 and fiscal 2011 was $28.98 and $30.99, respectively.  The fair value of shares that vested during the thirteen weeks ended April 3, 2012 and March 29, 2011 was $1.3 million and $0.2 million, respectively.  As of April 3, 2012, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $18.0 million, which we expect to recognize over a weighted average period of approximately 3.6 years.

 

6.  Net Income Per Share

 

At April 3, 2012 and March 29, 2011, 1.0 million and 0.7 million shares, respectively, of restricted stock issued to employees were unvested, and therefore excluded from the calculation of basic earnings per share for the fiscal quarters ended on those dates. Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method.  Assumed proceeds from in-the-money options include windfall tax benefits, net of shortfalls, calculated under the “as-if” method as prescribed by FASB Accounting Standards Codification 718, “Compensation — Stock Option Compensation.” 

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

 

 

(In thousands, except per share data)

 

Net income

 

$

20,722

 

$

20,456

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

53,680

 

58,480

 

Dilutive effect of equity awards

 

2,019

 

2,019

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

55,699

 

60,499

 

 

 

 

 

 

 

Basic net income per share

 

$

0.39

 

$

0.35

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.37

 

$

0.34

 

 

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Shares of common stock equivalents of 2.8 million and 2.5 million for the thirteen weeks ended April 3, 2012 and March 29, 2011, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

 

7.  Segment Information

 

Our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe, RockSugar Pan Asian Kitchen and the bakery for decision-making purposes.  However, based on quantitative thresholds set forth in ASC 280, Segment Reporting, The Cheesecake Factory is our only business that meets the criteria of a reportable operating segment.  Although not required, we present segment information for the bakery separately from our restaurant concepts because the bakery is a distinctively different business, and we believe information regarding this segment is useful to readers.  The bakery segment produces baked desserts and other products for our restaurants and for other foodservice operators, retailers and distributors.  Bakery sales to our restaurants are recorded at prices similar to third-party national accounts.  Unallocated corporate expenses, assets and capital expenditures are presented below as reconciling items to the amounts presented in the consolidated financial statements.

 

Segment information is presented below (in thousands):

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

Revenue:

 

 

 

 

 

Restaurants

 

$

425,002

 

$

406,903

 

Bakery

 

26,173

 

25,837

 

Intercompany bakery sales

 

(15,421

)

(13,975

)

Total

 

$

435,754

 

$

418,765

 

 

 

 

 

 

 

Income from operations:

 

 

 

 

 

Restaurants

 

$

55,524

 

$

51,897

 

Bakery

 

1,810

 

1,000

 

Corporate

 

(27,115

)

(23,046

)

Total

 

$

30,219

 

$

29,851

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

Restaurants

 

$

16,608

 

$

15,778

 

Bakery

 

645

 

651

 

Corporate

 

1,045

 

1,024

 

Total

 

$

18,298

 

$

17,453

 

 

 

 

 

 

 

Capital expenditures:

 

 

 

 

 

Restaurants

 

$

11,590

 

$

8,424

 

Bakery

 

3,108

 

121

 

Corporate

 

1,651

 

1,960

 

Total

 

$

16,349

 

$

10,505

 

 

 

 

April 3, 2012

 

January 3, 2012

 

Total assets:

 

 

 

 

 

Restaurants

 

$

803,075

 

$

835,393

 

Bakery

 

66,647

 

61,382

 

Corporate

 

130,625

 

125,795

 

Total

 

$

1,000,347

 

$

1,022,570

 

 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the SEC, as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters.  These statements may be contained in our filings with the SEC, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers.  Words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should,” and similar expressions are intended to identify forward-looking statements.  These statements, and any other statements that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Acts”).

 

In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or

 

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on our behalf (see Part II, Item 1A of this report, “Risk Factors,” and Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012).  These cautionary statements are to be used as a reference in connection with any forward-looking statements.  The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.  Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements.  Although we believe that the assumptions underlying forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that forward-looking statements will prove to be accurate.  Forward-looking statements speak only as of the date on which they are made.  Except as may be required by law, we do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events or circumstances arising after the date that the forward-looking statement was made.

 

General

 

This discussion and analysis should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in this Form 10-Q in Part I, Item 1, and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012: the audited consolidated financial statements and related notes in Part IV, Item 15, the “Risk Factors” included in Part I, Item 1A and the cautionary statements included throughout the 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 taken as a whole.

 

As of May 3, 2012, we operated 171 upscale, casual, full-service dining restaurants: 157 under The Cheesecake Factory® mark, 13 under the Grand Lux Cafe® mark and one under the RockSugar Pan Asian Kitchen® mark.  We also operated two bakery production facilities.

 

The Cheesecake Factory is an upscale, casual dining concept that offers more than 200 menu items including appetizers, pizza, seafood, steaks, chicken, burgers, pasta, specialty items, salads, sandwiches, omelettes and desserts, including approximately 40 varieties of cheesecake and other baked desserts.  Grand Lux Cafe and RockSugar Pan Asian Kitchen are also upscale, casual dining concepts offering approximately 200 and 80 menu items, respectively.  In contrast to many chain restaurant operations, substantially all of our menu items (except certain desserts manufactured at our bakery production facilities) are prepared on the restaurant premises using high quality, fresh ingredients based on innovative and proprietary recipes.  We believe our restaurants are recognized by consumers for offering value with generous food portions at moderate prices.  Our restaurants’ distinctive, contemporary design and decor create a high-energy ambiance in a casual setting.  Our restaurants typically range in size from 7,000 to 15,000 interior square feet, provide full liquor service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch.

 

In January 2011, we announced our initial expansion plans outside of the United States. We entered into an exclusive licensing agreement with a Kuwait-based company to build and operate The Cheesecake Factory restaurants in the Middle East. The agreement provides for the development of 22 restaurants over five years in the United Arab Emirates, Kuwait, Bahrain, Qatar and the Kingdom of Saudi Arabia, with the opportunity to expand the agreement to include other markets in the Middle East and North Africa, Central and Eastern Europe, Russia and Turkey. This licensing agreement includes an initial development fee, site and design fees and ongoing royalties on our licensee’s restaurant sales. The transaction also includes an agreement to supply bakery products branded under The Cheesecake Factory trademark to such restaurants.  We expect to open as many as three locations in the Middle East in fiscal 2012, but do not expect these openings to have a material impact on our financial results in fiscal 2012.

 

Overview

 

In addition to being highly competitive, the restaurant industry is affected by changes in consumer tastes and discretionary spending; changes in general economic conditions; public safety conditions; demographic trends; weather conditions; the cost and availability of food products, labor and energy; and government regulations.  Accordingly, as part of our strategy we must constantly evolve and refine the critical elements of our restaurant concepts to protect our competitiveness and to maintain and enhance the strength of our brands.

 

Our strategy is driven by our commitment to guest satisfaction and is focused primarily on menu innovation and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as drive competitively strong performance that is sustainable.  Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center.  We are also committed to allocating capital in a manner that will maximize profitability and returns.  Investing in new restaurant development that meets our return on investment criteria is our top capital allocation priority with a focus on opening our restaurant concepts in premier locations within both existing and new markets.

 

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In evaluating and assessing the performance of our business, we believe the following are key performance indicators that should be taken into consideration:

 

·                   Comparable Restaurant Sales and Overall Revenue Growth.  Changes in comparable restaurant sales come from variations in guest traffic, as well as in check average (as a result of menu price increases and/or changes in menu mix).  Our strategy is to grow guest traffic by continuing to offer innovative, high quality menu items that offer guests a wide range of options in terms of flavor, price and value.  In addition, we focus on service and hospitality with the goal of delivering an exceptional guest experience.

 

Our philosophy with regard to menu pricing is to use price increases to help offset key operating costs in a manner that balances protecting both our margins and guest traffic levels.  With regard to our menu mix, it has been influenced by a couple of factors, including a slight reduction in the number of guests ordering non-alcoholic beverages.  Additionally, with our menu continually evolving, we experience some shifting of menu preferences as our guests try new items.  This shifting can also have an impact on menu mix, and, therefore, on our check average.  Over time, and as the economy strengthens, we expect menu mix to stabilize, allowing us to capture more of the menu price increases we implement.

 

Comparable restaurant sales growth, in addition to revenue from new restaurant openings and increases in third-party bakery sales, drive our overall revenue growth.  In the future, we expect royalties from international locations also to contribute to our revenue growth.

 

·                  Income from Operations Expressed as a Percentage of Revenues (“Operating Margins”).  Operating margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative expenses (“G&A”), and preopening expenses.  Our objective is to gradually increase our operating margins by capturing fixed cost leverage from comparable restaurant sales increases; maximizing our purchasing power as our business grows; and operating our restaurants as productively as possible by retaining the efficiencies we gained through the implementation of cost management initiatives.

 

By efficiently scaling our restaurant and bakery support infrastructure and improving our internal processes, we work toward growing G&A expenses at a slower rate than revenue growth over the long-term, which should also contribute to operating margin expansion.

 

·                  Return on Investment.  Return on investment measures our ability to make the best decisions regarding our allocation of capital.  Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants through operational execution and disciplined cost management.  Our objective is to deploy capital in a manner that will maximize our return on investment.

 

Results of Operations

 

The following table sets forth, for the periods indicated, information from our consolidated statements of comprehensive income expressed as percentages of revenues.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

 

 

 

 

 

 

Revenues

 

100.0

%

100.0

%

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of sales

 

24.7

 

25.0

 

Labor expenses

 

32.8

 

32.8

 

Other operating costs and expenses

 

24.3

 

24.7

 

General and administrative expenses

 

6.6

 

5.8

 

Depreciation and amortization expenses

 

4.2

 

4.2

 

Preopening costs

 

0.5

 

0.4

 

Total costs and expenses

 

93.1

 

92.9

 

Income from operations

 

6.9

 

7.1

 

Interest and other income/(expense), net

 

(0.2

)

(0.3

)

Income before income taxes

 

6.7

 

6.8

 

Income tax provision

 

1.9

 

1.9

 

Net income

 

4.8

%

4.9

%

 

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Thirteen Weeks Ended April 3, 2012 Compared to Thirteen Weeks Ended March 29, 2011

 

Revenues

 

Revenues increased 4.1% to $435.8 million for the thirteen weeks ended April 3, 2012 compared to $418.8 million for the thirteen weeks ended March 29, 2011.

 

Restaurant sales increased 4.4% to $425.0 million compared to $406.9 million in the prior year first quarter.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.4%, or $9.4 million, from the first quarter of fiscal 2011, driven significantly by an increase in guest traffic of 1.9%.  The Cheesecake Factory and Grand Lux Cafe restaurants become eligible to enter our comparable sales calculations in their 19th month of operation.  At April 3, 2012, there were eight The Cheesecake Factory restaurants excluded from our comparable sales base.

 

Comparable sales at The Cheesecake Factory restaurants increased 2.6% from the prior year first quarter driven primarily by improved guest traffic, as well as average check growth.  We implemented effective menu price increases of approximately 1.0% and 1.3% during the first quarter of fiscal 2012 and third quarter of fiscal 2011, respectively.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 1.8% increase in pricing for the thirteen weeks ended April 3, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try newer items.  Inclusive of our summer 2011 and winter 2012 menu changes, we are targeting an effective price increase of approximately 2.0% for the first half of fiscal 2012.

 

Comparable sales at our Grand Lux Cafe restaurants increased 0.3% from the prior year first quarter driven by improved guest traffic, partially offset by a decrease in average check.  During the second quarter of fiscal 2011, we implemented an effective menu price increase of approximately 1.4%.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, the Grand Lux Cafe menu included a 1.4% increase in pricing for the thirteen weeks ended April 3, 2012. This increase in menu pricing was offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try newer items.  We currently anticipate taking a menu price increase of between 0.8% and 1.0% in our spring Grand Lux Cafe menu change.

 

We generally update and reprint our menus twice a year.  As part of these menu updates, we evaluate the need for price increases based on those operating cost and expense increases of which we are aware or that we can reasonably expect.  While menu price increases can facilitate increased comparable restaurant sales in addition to offsetting margin pressure, we carefully consider all potential price increases in light of the extent to which we believe they will be accepted by our restaurant guests.

 

Additionally, other factors outside of our control, such as general economic conditions, inclement weather, timing of holidays, and competitive and other factors, including those referenced in Part I, Item lA, “Risk Factors,” of our Annual Report on Form 10-K for the year ended January 3, 2012, can impact comparable sales.

 

Total restaurant operating weeks increased 4.0% to 2,212 for the thirteen weeks ended April 3, 2012 due to the opening of eight new restaurants during the trailing 15-month period.  Average sales per restaurant operating week increased approximately 0.7% to $192,100 in the first quarter of fiscal 2012 compared to the first quarter of fiscal 2011.  A busy holiday week that usually falls in the first fiscal quarter was captured as the 53rd week of fiscal 2011, thereby shifting a high-volume sales week out of the first quarter of fiscal 2012 and replacing it with an average sales week.  This negatively impacted our average weekly sales in the first quarter of fiscal 2012 by approximately 1.9% and was partially offset by strong performance at our newer restaurants not yet in our comparable sales base.

 

Bakery sales to other foodservice operators, retailers and distributors decreased 9.2% to $10.8 million for the thirteen weeks ended April 3, 2012 compared to $11.9 million for the comparable period of last year due primarily to a decline in sales to our warehouse club accounts.  We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 39-year reputation for producing high quality and creative baked desserts.  However, it is difficult to predict the timing of bakery product shipments and contribution margins on a quarterly basis, as the purchasing plans of our large-account customers, who constitute a majority of our bakery sales, may fluctuate.

 

Cost of Sales

 

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

 

As a percentage of revenues, cost of sales decreased to 24.7% in the first quarter of fiscal 2012 compared to 25.0% in the comparable period of last year.  This improvement was primarily due to lower dairy and produce costs.

 

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Table of Contents

 

Our restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities.  Changes in costs for one commodity can sometimes be counterbalanced by cost changes in other commodity categories.  The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, dairy, bread and general grocery items.

 

We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for some of our commodities such as many dairy and certain fish and grocery items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Cream cheese is the most significant commodity used in our bakery products.  We have contracted for a substantial portion of our fiscal 2012 cream cheese requirements and plan to purchase cream cheese on the spot market as necessary to supplement our contracted amounts.

 

As has been our past practice, we will carefully consider opportunities to introduce new menu items and implement selected menu price increases to help offset any expected cost increases for key commodities and other goods and services utilized by our operations.

 

We have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our restaurant and bakery operations.  However, there can be no assurance that future supplies and costs for these commodities will not fluctuate due to weather and other market conditions outside of our control.  For new restaurants, cost of sales will typically be higher during the first three to four months of operations until our management team becomes accustomed to optimally predicting, managing and servicing the sales volumes at the new restaurant.

 

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 32.8% in both the first quarter of fiscal 2012 and the first quarter of fiscal 2011.  Lower group medical insurance costs were offset by deleveraging from the high-volume sales week shift to fiscal 2011 discussed in the Revenues section above.

 

Other Operating Costs and Expenses

 

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead, selling and distribution expenses.  As a percentage of revenues, other operating costs and expenses decreased to 24.3% for the thirteen weeks ended April 3, 2012 from 24.7% for the thirteen weeks ended March 29, 2011. This decrease was primarily due to lower comparative debit card transaction fees, utilities and general liability costs, partially offset by higher incentive compensation expense.

 

General and Administrative Expenses

 

General and administrative (“G&A”) expenses consist of the restaurant management recruiting and training program, as well as the restaurant field supervision, bakery administrative, and corporate support organizations.  As a percentage of revenues, G&A expenses increased to 6.6% for the thirteen weeks ended April 3, 2012 versus 5.8% for the comparable period of fiscal 2011 due primarily to an increase in our Chief Executive Officer’s retirement benefit in connection with the extension of his employment agreement, a higher fiscal 2012 accrual for corporate performance bonuses, increased stock-based compensation expense and deleveraging from the high-volume sales week shift to fiscal 2011 discussed in the Revenues section above.

 

Depreciation and Amortization Expenses

 

As a percentage of revenues, depreciation and amortization expenses were 4.2% for both the thirteen weeks ended April 3, 2012 and the comparable period of last year.

 

Preopening Costs

 

Preopening costs were $2.1 million for the thirteen weeks ended April 3, 2012 compared to $1.8 million in the comparable period of the prior year.  We incurred preopening costs to open one The Cheesecake Factory restaurant in both the first quarter of fiscal 2012 and the first quarter of fiscal 2011.

 

Preopening costs include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and straight-line minimum base rent during the build-out and in-restaurant training periods.  Also included in

 

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Table of Contents

 

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

 

Interest and Other Income/(Expense), Net

 

Interest and other expense, net decreased slightly to $1.1 million for the first quarter of fiscal 2012 compared to $1.4 million for the comparable period last year.  Interest expense included $0.9 million for both the first quarter of fiscal 2012 and fiscal 2011 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

 

Income Tax Provision

 

Our effective income tax rate was 28.7% for the first quarter of fiscal 2012 compared to 28.1% for the comparable prior year period.  This increase was attributable to a lower proportion of employment credits in relation to pretax income primarily due to the expiration of the Hiring Incentives to Restore Employment (HIRE) Act retention credit at the end of fiscal 2011, partially offset by changes in the value of our investments in variable life insurance contracts used to support our Executive Savings Plan (“ESP”), a non-qualified deferred compensation plan.

 

Fiscal 2012 Outlook

 

In fiscal 2012, we plan to open as many as seven to eight new restaurants, including one Grand Lux Cafe.  In addition to these domestic locations, our licensee plans to open as many as three The Cheesecake Factory restaurants in the Middle East.  We estimate diluted earnings per share for fiscal 2012 will be between $1.83 and $1.91 based on the assumption that comparable restaurant sales will increase in a range of between 1.5% and 2.5%.  We currently expect food cost inflation of between 2.0% and 2.5% and a corporate tax rate of between 28.5% and 29.5%.  We expect cash capital expenditures in fiscal 2012 to range between $100 million and $110 million.  We also plan to repurchase up to $100 million of our common stock, depending on Company performance and market conditions.

 

For the second quarter of fiscal 2012, we estimate diluted earnings per share will be between $0.47 and $0.49 based on the assumption that comparable restaurant sales will increase in a range between 1.5% and 2.5%.

 

Liquidity and Capital Resources

 

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

 

 

 

Thirteen
Weeks Ended
April 3, 2012

 

Thirteen
Weeks Ended
March 29, 2011

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

41.4

 

$

52.8

 

Capital expenditures

 

$

(16.3

)

$

(10.5

)

Proceeds from exercise of employee stock options

 

$

9.3

 

$

2.7

 

Purchase of treasury stock

 

$

(40.9

)

$

(50.6

)

 

During the thirteen weeks ended April 3, 2012, our cash and cash equivalents decreased by $6.9 million to $41.3 million.  This decrease was primarily attributable to treasury stock purchases and capital expenditures, partially offset by cash provided by operating activities and proceeds from exercises of employee stock options.

 

For fiscal 2012, we currently estimate our cash outlays for capital expenditures to range between $100 million and $110 million, net of agreed-upon up-front cash landlord construction contributions and excluding $11 million of expected noncapitalizable preopening costs for new restaurants.  The amount reflected as additions to property and equipment in the consolidated statements of cash flows may vary from this estimate based on the accounting treatment of each lease.  Our estimate for capital expenditures for fiscal 2012 contemplates a net outlay of $52 million to $57 million for as many as seven to eight restaurants expected to be opened during fiscal 2012 and estimated construction-in-progress disbursements for anticipated fiscal 2013 openings.  These amounts are net of estimated collections of up-front cash landlord construction contributions.  Expected capital expenditures for fiscal 2012 also include $31 million to $32 million for maintenance and capacity additions to our existing restaurants and $17 million to $21 million for bakery and corporate capacity and infrastructure investments.

 

At April 3, 2012, we had no borrowings outstanding under our $200 million revolving credit facility (“Facility”).  Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance

 

15



Table of Contents

 

programs.  As of April 3, 2012, we had net availability for borrowings of $182 million, based upon a zero outstanding debt balance and $18 million in standby letters of credit.  In addition, our Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

 

On October 17, 2011, our Board of Directors increased the authorization to repurchase our common stock by 10.0 million shares to 41.0 million shares.  Under this and previous authorizations, we have cumulatively repurchased a total of 32.6 million shares at a total cost of $771.3 million through April 3, 2012, including 1.4 million shares of our common stock at a cost for $40.9 million during the first quarter of 2012.  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.  Repurchased common stock is reflected as a reduction of stockholder’s equity.

 

On November 1, 2011, our Board of Directors approved the adoption of a 10b5-1 trading plan under Rule 10b5-1 of the Securities Exchange Act (the “Act”), which is effective from December 5, 2011 through July 3, 2012.  Purchases under the 10b5-1 plan may be made in the open market or through privately negotiated transactions in support of the Company’s stock repurchase plan.  Purchases in the open market will be made in compliance with Rule 10b-18 under the Act.  On March 1, 2012, our Board of Directors approved the terms of a share repurchase plan (“10b-18 Plan”) under which we were authorized to repurchase shares of our common stock in open market transactions in accordance with Rule 10b-18 of the Act, effective from March 6, 2012 through March 9, 2012. This 10b-18 Plan terminated on March 9, 2012, in accordance with its terms.

 

The timing and number of shares repurchased pursuant to the share repurchase authorization are subject to a number of factors, including legal constraints and financial covenants under our Facility that limit share repurchases based on a defined leverage ratio.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)  Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us.  We make the determination to repurchase shares based on several factors, including an evaluation of current and future capital needs associated with new restaurant development, current and forecasted cash flows, a review of our capital structure and cost of capital, our share price and current market conditions.  Our objectives with regard to share repurchases are to offset the dilution to our shares outstanding that results from equity compensation and to supplement our earnings per share growth.

 

Based on our current expansion objectives, we believe that during the upcoming 12 months our cash and cash equivalents, combined with expected cash flows provided by operations, available borrowings under our credit facility and expected landlord construction contributions should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures and share repurchases and allow us to consider additional possible capital allocation strategies, such as the initiation of a dividend or the acquisition of other growth vehicles.

 

As of April 3, 2012, 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.

 

Recent Accounting Pronouncements

 

See Note 1 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a summary of new accounting standards.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The following discussion of market risks contains forward-looking statements.  Actual results may differ materially from the following discussion based on general conditions in the financial and commodity markets.

 

We are exposed to market risk from interest rate changes on our funded debt.  This exposure relates to the component of the interest rate on our $200 million Facility that is indexed to three-month LIBOR.  As of April 3, 2012, we had no debt outstanding under the Facility.  Therefore, we had no exposure to interest rate fluctuations on funded debt at that date.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

 

We are also subject to market risk related to our investments in variable life insurance contracts used to support our ESP to the extent these investments are not equivalent to the related liability.  In addition, because changes in these investments are not taxable, the full impact of gains or losses affects net income.  Based on balances at April 3, 2012 and January 3, 2012, a hypothetical 10% decline in the market value of our deferred compensation asset and related liability would not have impacted income before income taxes.  However, net income would have declined by $1.0 million and $0.9 million, respectively.

 

We purchase food and other commodities for use in our operations, based on market prices established with our suppliers.  Many of the commodities purchased by us can be subject to volatility due to market supply and demand factors outside of our control.  We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements,

 

16



Table of Contents

 

depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for some of our commodities such as many dairy and certain fish and grocery items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Substantially all of our food and supplies are available from multiple qualified suppliers, which helps to diversify our overall commodity cost risk.  In addition, we may have the ability to increase menu prices, or vary menu items, in response to food commodity price increases.  We do not use financial instruments to hedge commodity prices, since our purchase arrangements with suppliers, to the extent that we can enter into such arrangements, help control the ultimate cost that we pay.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company and our subsidiaries 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 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 April 3, 2012.

 

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 fiscal quarter ended April 3, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

See Note 4 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report.

 

Item 1A.  Risk Factors

 

A description of the risk factors associated with our business is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2012 (“Annual Report”), and there have been no material changes thereto since the filing of our Annual Report.  These cautionary statements are to be used as a reference in connection with any forward-looking statements.  The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

The following provides information regarding our purchases of our common stock during the thirteen weeks ended April 3, 2012 (in thousands, except per share amounts):

 

Period

 

Total Number
of
Shares
Purchased (1)

 

Average
Price Paid
per Share (1)

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (2)

 

Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs (2)

 

January 4 — February 7, 2012

 

348

 

$

29.66

 

310

 

9,452

 

February 8 — March 6, 2012

 

178

 

30.25

 

173

 

9,274

 

March 7 — April 3, 2012

 

830

 

30.29

 

830

 

8,444

 

Total

 

1,356

 

 

 

1,313

 

 

 

 

17



Table of Contents

 


(1)         The total number of shares purchased includes shares withheld upon vesting of restricted share awards to satisfy tax withholding obligations.

(2)         On October 17, 2011, our Board of Directors increased the authorization to repurchase our common stock by 10.0 million shares to a total of 41.0 million shares.  Under this and previous authorizations, we have cumulatively repurchased a total of 32.6 million shares at a total cost of $771.3 million through April 3, 2012, including 1.4 million shares at a total cost of $40.9 million during the first quarter of fiscal 2012.  Our current stock purchase 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.

 

See “Liquidity and Capital Resources” in Part I, Item 2 of this report for further discussion of our share repurchases.

 

Our Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio.  See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.

 

18



Table of Contents

 

Item 6.  Exhibits

 

Exhibit
No.

 

Item

 

Form

 

File Number

 

Incorporated by
Reference from
Exhibit Number

 

Filed with SEC

2.1

 

Form of Reorganization Agreement

 

Amend. No. 1 to Form S-1

 

33-479336

 

2.1

 

8/17/92

3.1

 

Restated Certificate of Incorporation including Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock

 

10-K

 

000-20574

 

3.1

 

2/23/11

3.2

 

Amended and Restated Bylaws as of May 20, 2009

 

8-K

 

000-20574

 

3.8

 

5/27/09

3.3

 

Rights Agreement dated as of August 4, 1998 between The Cheesecake Factory Incorporated and U.S. Stock Transfer Corporation

 

8-A

 

000-20574

 

1

 

8/18/98

3.4

 

Amendment No. 1 to Rights Agreement dated as of November 4, 2003 between The Cheesecake Factory Incorporated and U.S. Stock Transfer Corporation

 

Amend. No. 1 to Form 8-A

 

000-20574

 

2

 

11/13/03

3.5

 

Amendment No. 2 to Rights Agreement dated as of August 1, 2008 between The Cheesecake Factory Incorporated and Computershare Trust Company

 

Amend. No 2 to Form 8-A

 

000-20574

 

3

 

8/1/08

10.1

 

Form of First Amendment to Employment Agreement between The Cheesecake Factory Incorporated and David M. Overton, dated February 29, 2012

 

8-K

 

000-20574

 

10.1

 

3/6/12

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

Exhibit 101

 

XBRL (Extensible Business Reporting Language) The following materials from The Cheesecake Factory Incorporated’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2012, formatted in Extensive Business Reporting Language (XBRL), (i) consolidated balance sheets, (ii) consolidated statements of comprehensive income, (iii) consolidated statement of stockholders’ equity, (iv) consolidated statements of cash flows, and (v) the notes to the consolidated financial statements.

 

 

 

 

Filed herewith

 

19



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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.

 

Date: May 11, 2012

THE CHEESECAKE FACTORY INCORPORATED

 

 

 

 

 

 

 

By:

/s/ DAVID OVERTON

 

 

David Overton

 

 

Chairman of the Board and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By:

/s/ W. DOUGLAS BENN

 

 

W. Douglas Benn

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

By:

/s/ CHERYL M. SLOMANN

 

 

Cheryl M. Slomann

 

 

Vice President, Controller and Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

20


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