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 July 2, 2013
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 July 31, 2013, 53,838,117 shares of the registrant’s Common Stock, $.01 par value, were outstanding.
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
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
21
Item 4.
Controls and Procedures
22
PART II.
OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
23
Signatures
24
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
July 2, 2013
January 1, 2013
ASSETS
Current assets:
Cash and cash equivalents
$
130,623
83,569
Accounts receivable
10,944
14,558
Income tax receivable
1,897
¾
Other receivables
27,849
48,100
Inventories
35,690
28,836
Prepaid expenses
38,122
39,887
Deferred income taxes
16,577
15,257
Total current assets
261,702
230,207
Property and equipment, net
765,620
764,418
Other assets:
Intangible assets, net
18,429
17,829
Prepaid rent
46,933
50,793
Other
32,203
28,920
Total other assets
97,565
97,542
Total assets
1,124,887
1,092,167
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
35,635
46,998
Income tax payable
1,213
Other accrued expenses
182,723
204,823
Total current liabilities
218,358
253,034
97,890
91,852
Deferred rent
75,130
76,144
Deemed landlord financing liability
59,594
55,123
Other noncurrent liabilities
39,619
36,288
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued; inclusive of Series A junior participating cumulative preferred stock, $.01 par value, 150,000 shares authorized; none issued
Common stock, $.01 par value, 250,000,000 shares authorized; 89,659,216 and 87,812,022 issued and outstanding at July 2, 2013 and January 1, 2013, respectively
897
878
Additional paid-in capital
566,805
508,130
Retained earnings
943,691
902,532
Treasury stock, 35,742,652 and 34,414,222 shares at cost at July 2, 2013 and January 1, 2013, respectively
(877,097
)
(831,814
Total stockholders’ equity
634,296
579,726
Total liabilities and stockholders’ equity
See the accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
Thirteen Weeks Ended July 2, 2013
Thirteen Weeks Ended July 3, 2012
Twenty-Six Weeks Ended July 2, 2013
Twenty-Six Weeks Ended July 3, 2012
Revenues
470,118
454,749
933,136
890,503
Costs and expenses:
Cost of sales
112,947
111,019
227,240
218,617
Labor expenses
151,162
146,086
302,145
289,066
Other operating costs and expenses
113,805
108,870
224,783
214,758
General and administrative expenses
27,811
26,278
56,600
54,943
Depreciation and amortization expenses
19,215
18,509
38,445
36,807
Impairment of assets and lease terminations
1,505
2,149
Preopening costs
2,503
3,017
3,817
5,123
Total costs and expenses
428,948
413,779
855,179
819,314
Income from operations
41,170
40,970
77,957
71,189
Interest and other expense, net
(1,271
(838
(2,581
(1,986
Income before income taxes
39,899
40,132
75,376
69,203
Income tax provision
11,316
11,733
21,501
20,082
Net income
28,583
28,399
53,875
49,121
Net income per share:
Basic
0.54
0.53
1.02
0.92
Diluted
0.52
0.99
0.89
Weighted average shares outstanding:
52,892
53,155
52,574
53,417
55,073
55,091
54,692
55,376
Cash dividends declared per common share
0.12
0.24
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
Shares of Common Stock
Common Stock
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Total
Balance, January 1, 2013
87,812
—
Cash dividends declared
(12,716
Issuance of common stock from stock options exercised
1,819
19
49,402
49,421
Tax impact of stock options exercised, net of cancellations
2,372
Stock-based compensation
6,901
Issuance of restricted stock, net of forfeitures
28
Purchase of treasury stock
(45,283
Balance, July 2, 2013
89,659
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
Impairment of assets
4,718
5,637
6,813
6,274
2,095
Excess tax benefit related to stock options exercised
(3,265
(2,008
(713
391
Changes in assets and liabilities:
3,614
1,086
20,251
6,875
(6,854
(3,266
1,765
918
Other assets
614
(2,727
(11,363
(14,022
Income taxes (payable)/receivable
(3,110
1,528
(20,021
(14,450
Cash provided by operating activities
88,646
74,259
Cash flows from investing activities:
Additions to property and equipment
(37,517
(34,419
Additions to intangible assets
(811
(1,285
Cash used in investing activities
(38,328
(35,704
Cash flows from financing activities:
Deemed landlord financing proceeds
2,947
201
Deemed landlord financing payments
(1,009
(925
Proceeds from exercise of stock options
17,907
3,265
2,008
Cash dividends paid
(12,605
Treasury stock purchases
(57,541
Cash used in financing activities
(3,264
(38,350
Net change in cash and cash equivalents
47,054
205
Cash and cash equivalents at beginning of period
48,211
Cash and cash equivalents at end of period
48,416
Supplemental disclosures:
Interest paid
2,253
2,245
Income taxes paid
17,515
12,669
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated and its wholly owned subsidiaries (referred to herein collectively as the “Company,” “we,” “us” and “our”) 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 prepared 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 1, 2013 filed with the SEC on February 28, 2013.
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 2013 consists of 52 weeks and will end on December 31, 2013. Fiscal 2012, which ended on January 1, 2013, was a 52-week year.
We determined that the three Grand Lux Cafe locations that we closed in March 2013 do not meet the requirements for discontinued operations reporting. Although we discontinued cash flows at these restaurants, we have significant continuing involvement with respect to operations, based on our expectation of guest transfer (an increase in guests at another location as a result of the closure of a location).
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board (“FASB”) issued guidance that provides entities with an option to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary. If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative testing is not required. This standard became effective for us in the first quarter of fiscal 2013. The adoption of this standard did not have a material impact on our financial statements.
In June 2011, the FASB issued guidance that eliminated the previous 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. In February 2013, the FASB issued additional guidance that requires companies to present information about reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This standard also impacts presentation only and became effective for us in the first quarter of fiscal 2013.
2. Inventories
Inventories consisted of (in thousands):
Restaurant food and supplies
12,801
13,243
Bakery finished goods and work in progress
17,580
10,070
Bakery raw materials and supplies
5,309
5,523
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. We had no outstanding borrowings under the Facility at July 2, 2013 or January 1, 2013, and we did not withdraw or repay any amounts under this Facility during the first half of fiscal 2013 or 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 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 July 2, 2013, our Adjusted Debt and EBITDAR Ratios were 2.7 and 2.9, respectively. Therefore, we were in compliance with the financial covenants in effect under the Facility at that date. The Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on these ratios.
Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs. As of July 2, 2013, we had net availability for borrowings of $179 million, based on a zero outstanding debt balance and $21 million in standby letters of credit.
4. Commitments and Contingencies
On April 11, 2013, a current restaurant hourly employee filed a class action lawsuit in the California Superior Court, Placer County, alleging that the Company violated the California Labor Code and California Business and Professions Code, by requiring employees to purchase uniforms for work. (Sikora v. The Cheesecake Factory Restaurants, Inc., et al; Case No SCV0032820). A similar lawsuit covering a different period of time is also pending in Placer County. (Reed v. The Cheesecake Factory Restaurants, Inc. et al; Case No. S CV 27073). We are also arbitrating similar uniform and related issues under federal law in separate collective actions in Alabama, Colorado, Ohio, Tennessee, and Texas. (Smith v. The Cheesecake Factory Restaurants, Inc. et al; Case No. 3 06 0829). These lawsuits and arbitrations seek unspecified amounts of penalties and other monetary payments on behalf of the respective plaintiffs and other purported class members. The plaintiffs also seek attorneys’ fees. We intend to vigorously defend these actions. Based on the current status of these matters, we have not reserved for any potential future payments.
Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other 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 any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims.
8
5. Stockholders’ Equity
On July 23, 2012, our Board of Directors (“Board”) approved the initiation of a cash dividend to our stockholders which is subject to quarterly Board approval. A cash dividend of $0.12 per common share was declared during the third quarter of fiscal 2012 and in each fiscal quarter since then through the second quarter of 2013. On July 22, 2013, our Board increased the dividend to $0.14 per common share for the third quarter of fiscal 2013, equating to a 17% increase. There can be no assurance that dividends will be declared in the future or that the Board will approve further increases in dividend levels.
On July 22, 2013, our Board increased the authorization to repurchase our common stock by 7.5 million shares to 48.5 million shares. Under this and previous authorizations, we cumulatively repurchased 35.7 million shares at a total cost of $877.1 million through July 2, 2013, including 0.1 million shares of our common stock at a cost of $3.3 million during the second quarter of fiscal 2013. 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.
On November 6, 2012, our Board approved the adoption of a trading plan under Rule 10b5-1 (“10b5-1 Plan”) of the Securities Exchange Act of 1934 (the “Act”), which was effective from December 6, 2012 through July 3, 2013. This 10b5-1 Plan terminated on July 3, 2013, in accordance with its terms. On May 29, 2013, our Board approved the adoption of a new 10b5-1 Plan, which is effective from July 5, 2013 through December 31, 2013.
On July 22, 2013, our Board approved the terms of a share repurchase plan (“10b-18 Plan”) under which we are authorized to repurchase shares of our common stock in open market transactions in accordance with Rule 10b-18 of the Act, effective from July 29, 2013 through August 15, 2013.
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 defined ratios. See Note 3 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. Purchases in the open market are made in compliance with Rule 10b-18 of the Act. 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, including dividend payments, 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 grants and to supplement our earnings per share growth.
6. Stock-Based Compensation
The following table presents information related to stock-based compensation (in thousands):
1,049
940
2,093
1,833
52
48
98
95
2,307
1,922
4,622
4,346
Total stock-based compensation
3,408
2,910
Income tax benefit
1,304
1,113
2,606
2,400
Total stock-based compensation, net of taxes
2,104
1,797
4,207
3,874
Capitalized stock-based compensation (1)
41
62
88
150
(1) It is our policy to capitalize the portion of stock-based compensation costs for our internal development, construction, and legal departments that relates to 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.
9
Stock Options
We did not issue any stock options during the second quarter of fiscal 2013. The weighted average fair value at the grant date for options issued during the second quarter of fiscal 2012 was $12.34 per option and was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions: (a) an expected option term of 6.1 years, (b) expected stock price volatility of 39.8%, (c) a risk-free interest rate of 1.1%, and (d) a dividend yield on our stock of 0.0%.
Stock option activity during the twenty-six weeks ended July 2, 2013 was as follows:
Shares
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term
Aggregate Intrinsic Value
(Per share)
(In years)
Outstanding at January 1, 2013
7,414
23.98
4.2
66,682
Granted
386
35.62
Exercised
(1,819
27.17
Forfeited or cancelled
(154
23.56
Outstanding at July 2, 2013
5,827
23.77
4.4
108,392
Exercisable at July 2, 2013
2,935
25.80
3.5
48,630
The total intrinsic value of options exercised during the thirteen and twenty-six weeks ended July 2, 2013 was $11.7 million and $19.8 million, respectively. The total intrinsic value of options exercised during the thirteen and twenty-six weeks ended July 3, 2012 was $3.7 million and $8.1 million, respectively. As of July 2, 2013, the total unrecognized stock-based compensation expense related to unvested stock options was $14.8 million, which we expect to recognize over a weighted average period of approximately 2.2 years.
Restricted Shares and Restricted Share Units
Restricted share and restricted share unit activity during the twenty-six weeks ended July 2, 2013 was as follows:
Weighted Average Fair Value
1,316
26.91
406
36.23
Vested
(168
14.46
Forfeited
(76
29.00
1,478
30.77
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 share units issued during the second quarter of fiscal 2013 and fiscal 2012 was $39.75 and $31.08, respectively. The fair value of shares that vested during the thirteen and twenty-six weeks ended July 2, 2013 was $6 thousand and $2.4 million, respectively. The fair value of shares that vested during the thirteen and twenty-six weeks ended July 3, 2012 was $1.2 million and $2.4 million, respectively. As of July 2, 2013, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $28.1 million, which we expect to recognize over a weighted average period of approximately 3.7 years.
7. Net Income Per Share
At July 2, 2013 and July 3, 2012, 1.5 million and 1.1 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 (“ASC”) 718, “Compensation — Stock Option Compensation.”
10
Basic weighted average shares outstanding
Dilutive effect of equity awards
2,181
1,936
2,118
1,959
Diluted weighted average shares outstanding
Basic net income per share
Diluted net income per share
Shares of common stock equivalents of 0.5 million and 1.1 million for the thirteen and twenty-six weeks ended July 2, 2013, respectively, and 2.7 million and 2.9 million for the thirteen and twenty-six weeks ended July 3, 2012, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.
Certain of our restricted stock awards are considered participating securities as these awards include non-forfeitable rights to dividends with respect to unvested shares. As such, they must be included in the computation of earnings per share pursuant to the two-class method. Under the two-class method, a portion of net income is allocated to participating securities, and therefore is excluded from the calculation of earnings per share allocated to common shares. For the thirteen and twenty-six weeks ended July 2, 2013, the calculation of basic and diluted earnings per share pursuant to the two-class method resulted in an immaterial difference from the amounts displayed in the consolidated statements of comprehensive income.
8. Segment Information
For decision-making purposes, our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe and RockSugar Pan Asian Kitchen restaurants, our bakery division and our international licensing operations. 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. We formerly disclosed segment information for our bakery operations. However, as we expanded our domestic restaurants and international licensing arrangements, our bakery segment became a smaller proportion of our operations and now falls below the thresholds of a reportable segment. Therefore, we are no longer reporting this component separately. Grand Lux Cafe, RockSugar Pan Asian Kitchen and international licensing were previously combined with The Cheesecake Factory in a segment named Restaurants. These components are now combined with our bakery operations in Other. 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):
Revenues:
The Cheesecake Factory restaurants
424,845
408,933
837,396
799,680
45,273
45,816
95,740
90,823
Income from operations:
The Cheesecake Factory restaurants (1)
62,718
64,820
121,955
118,631
Other (2)
5,106
3,218
9,606
6,729
Corporate
(26,654
(27,068
(53,604
(54,171
11
Depreciation and amortization:
15,551
15,119
31,066
30,045
2,605
2,329
5,225
4,656
1,059
1,061
2,154
2,106
Capital expenditures:
20,721
11,489
33,995
20,800
1,305
4,730
1,483
10,117
910
1,851
2,039
3,502
22,936
18,070
37,517
34,419
Total assets:
763,313
764,208
161,590
165,274
199,984
162,685
(1) Includes $1.5 million of pre-tax impairment expense in the second quarter of fiscal 2013 related to the planned relocation of two of our restaurants. This item was recorded in impairment of assets and lease terminations.
(2) Includes $0.6 million in future rent and other closing costs in the first quarter of fiscal 2013 for three Grand Lux Cafe locations where we discontinued operations in March 2013. This item was recorded in impairment of assets and lease terminations.
9. Subsequent Events
On August 8, 2013, we executed an agreement waiving our right to exercise lease renewal options at one of our The Cheesecake Factory locations. In consideration, the landlord has agreed to pay us $4,875,000.
12
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 contained in forward-looking statements made by us or 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 1, 2013). 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 1, 2013: 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 August 9, 2013, we operated 175 upscale, casual, full-service dining restaurants: 163 under The Cheesecake Factory® mark; 11 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 50 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 those desserts manufactured at our bakery production facilities, are prepared from scratch daily at our restaurants with 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 17,000 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 2011, we announced our initial expansion plans outside of the United States. We entered into an exclusive licensing agreement to build and operate The Cheesecake Factory restaurants in the Middle East. In the second quarter of fiscal 2013, we expanded this arrangement to include the country of Lebanon. This licensee opened its first three locations in fiscal 2012. In February 2013, we entered into an exclusive licensing agreement to build and operate The Cheesecake Factory restaurants in Latin America.
These licensing agreements include initial development fees, site and design fees and ongoing royalties on our licensee’s restaurant sales. In addition, our licensees will purchase bakery products branded under The Cheesecake Factory trademark from us. We continue to review additional opportunities to expand in markets outside of the United States.
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. 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 new and existing markets in the United States and new markets internationally.
In evaluating and assessing the performance of our business, we believe the following are the key performance indicators that should be taken into consideration:
· Comparable Restaurant Sales and Overall Revenue Growth. Our overall revenue growth is primarily driven by increases in comparable restaurant sales, revenue from new restaurant openings, and royalties and bakery sales related to additional licensed international locations.
Changes in comparable restaurant sales come from variations in guest traffic, as well as in check average. 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. Check average is impacted by menu price increases and/or changes in menu mix. 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. In fiscal 2012, our menu mix was influenced by check management by our guests and a shifting of menu preferences as we evolve our menu and our guests try new items. 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.
· 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 to return to peak levels by capturing fixed cost leverage from increases in comparable restaurant sales, growth in international royalties, maximizing our purchasing power as our business grows, and operating our restaurants as productively as possible.
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 also should contribute to operating margin expansion. However, G&A as a percentage of revenues may vary from quarter to quarter and may increase on a year-over-year comparative basis in the near term as we ramp up our infrastructure to support our international growth.
· 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.
14
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.
100.0
%
24.0
24.4
24.3
24.5
32.2
32.1
32.4
32.5
24.2
23.9
24.1
5.9
5.8
6.1
6.2
4.1
0.3
0.2
0.5
0.7
0.4
0.6
91.2
91.0
91.6
92.0
8.8
9.0
8.4
8.0
(0.3
(0.2
8.5
8.1
7.8
2.4
2.6
2.3
5.5
Thirteen Weeks Ended July 2, 2013 Compared to Thirteen Weeks Ended July 3, 2012
Revenues increased 3.4% to $470.1 million for the thirteen weeks ended July 2, 2013 compared to $454.7 million for the thirteen weeks ended July 3, 2012.
Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 0.8%, or $3.5 million, from the second quarter of fiscal 2012, driven by an increase in average check of 1.7% and menu mix of 0.1%, partially offset by a decrease in guest traffic of 1.0%. Comparable sales in the first quarter of fiscal 2013 benefitted from a timing shift due to spring break and Easter holidays taking place earlier than in the prior year, moving approximately $2 million in sales forward into our first quarter from the second quarter of fiscal 2013 on a year-over-year basis.
Comparable sales at The Cheesecake Factory restaurants increased by 0.9% from the prior year second quarter driven by an increase in average check growth, partially offset by a decrease in guest traffic. We implemented effective menu price increases of approximately 1.0% and 0.8% during the first quarter of fiscal 2013 and third quarter of fiscal 2012, 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 July 2, 2013. We currently anticipate taking a menu price increase of approximately 1.0% in our summer The Cheesecake Factory menu change.
Comparable sales at our Grand Lux Cafe restaurants increased by 0.1% from the prior year second quarter driven by an increase in average check growth, partially offset by a decrease in guest traffic. With fewer restaurants in operation than The Cheesecake Factory and a number of locations that are proportionately larger in size, Grand Lux Cafe can experience greater variability in its comparable sales from quarter to quarter. We implemented effective menu price increases of approximately 0.7% and 0.8% during the second quarter of fiscal 2013 and fourth quarter of fiscal 2012, respectively. On a weighted average basis, based on the timing of our menu roll outs within each quarter, Grand Lux Cafe menu included a 1.7% increase in pricing for the thirteen weeks ended July 2, 2013.
Restaurants become eligible to enter our comparable sales base in their 19th month of operation. At July 2, 2013, there were eight The Cheesecake Factory restaurants and one Grand Lux Cafe not yet in our comparable sales base. International licensed locations and restaurants that are no longer in operation are excluded from our comparable sales calculations.
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.
15
While menu price increases can contribute to higher 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 impact guest traffic.
Other factors outside of our control, such as general economic conditions, inclement weather, timing of holidays, competition 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 1, 2013, can impact comparable sales.
Total restaurant operating weeks increased 1.7% to 2,263 for the thirteen weeks ended July 2, 2013 compared to the prior year period. Average sales per restaurant operating week increased approximately 1.5% to $202,000 in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012.
Our external bakery sales were $11.7 million for the thirteen weeks ended July 2, 2013 compared to $11.8 million for the comparable period of last year. It is difficult to predict the timing of bakery product shipments 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 was 24.0% for the second quarter of fiscal 2013 compared to 24.4% for the comparable period of fiscal 2012. This variance was driven primarily by lower grocery costs, with wheat and corn prices down from their year-ago highs, benefitting items such as pastas and oils.
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 offset 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 certain of our commodities such as some fish and many dairy items. Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.
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. For new restaurants, cost of sales will typically be higher during the first three to four months of operations until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at the new 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, increased to 32.2% in the second quarter of fiscal 2013 compared to 32.1% in the second quarter of fiscal 2012, primarily due to higher payroll taxes and other labor-related costs, partially offset by lower group medical expenses.
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 increased to 24.2% for the thirteen weeks ended July 2, 2013 from 23.9% for the thirteen weeks ended July 3, 2012. This increase was primarily due to higher natural gas rates and the timing of marketing costs and restaurant management bonuses. These factors were partially offset by higher bakery overhead absorption due to increased production versus the second quarter of fiscal 2012.
16
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, corporate support and bakery administrative organizations. As a percentage of revenues, G&A expenses increased to 5.9% for the thirteen weeks ended July 2, 2013 versus 5.8% for the comparable period of fiscal 2012 due to higher labor and legal fees, partially offset by a higher prior year accrual for corporate performance bonuses.
Depreciation and Amortization Expenses
As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the thirteen weeks ended July 2, 2013 and the comparable period of last year.
Impairment of Assets and Lease Terminations
In the second quarter of fiscal 2013, we incurred $1.5 million of impairment expense related to the planned relocation of two of our restaurants. We expect to incur an additional $0.4 million during the second half of fiscal 2013 related to the relocation of these restaurants.
Preopening Costs
Preopening costs were $2.5 million for the thirteen weeks ended July 2, 2013 compared to $3.0 million in the comparable period of the prior year. We opened one The Cheesecake Factory restaurant in the second quarter of both fiscal 2013 and 2012.
Preopening costs include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; 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; 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 Expense, Net
Interest and other expense, net increased to $1.3 million of expense for the second quarter of fiscal 2013 compared to $0.8 million of expense for the comparable period last year. This increase was primarily due to 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. Interest expense included $0.9 million in the second quarter of fiscal 2013 compared to $0.8 million in the second quarter of fiscal 2012 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.
Income Tax Provision
Our effective income tax rate was 28.4% for the second quarter of fiscal 2013 compared to 29.2% for the comparable prior year period. This decrease was attributable to higher Work Opportunity Tax Credits due to the reinstatement of the program in 2013 and decreased state taxes in relation to pre-tax income, partially offset by a lower proportion of FICA tip credits in relation to pre-tax income.
Twenty-Six Weeks Ended July 2, 2013 Compared to Twenty-Six Weeks Ended July 3, 2012
Revenues increased 4.8% to $933.1 million for the twenty-six weeks ended July 2, 2013 compared to $890.5 million for the twenty-six weeks ended July 3, 2012.
Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 1.1%, or $9.2 million, from the first half of fiscal 2012, driven by an increase in average check of 1.8%, partially offset by a decrease in guest traffic of 0.7%. Storms in the Northeast during the first quarter of fiscal 2013 negatively impacted comparable sales for the first half of the year by approximately 0.3%.
Comparable sales at The Cheesecake Factory restaurants increased by 1.2% from the prior year driven by an increase in average check, partially offset by a decrease in guest traffic. 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 twenty-six weeks ended July 2, 2013. In the first quarter of fiscal 2013, our The Cheesecake Factory location in Hawaii was closed for approximately four weeks for repairs due to fire damage. This restaurant also was excluded from our comparable sales calculations for the time period it was closed.
17
Comparable sales at our Grand Lux Cafe restaurants decreased by 0.4% from the prior year first half driven by a decrease in guest traffic, partially offset by an increase in average check. On a weighted average basis, based on the timing of our menu roll outs within each quarter, Grand Lux Cafe menu included a 1.7% increase in pricing for the twenty-six weeks ended July 2, 2013.
Total restaurant operating weeks increased 2.6% to 4,554 for the twenty-six weeks ended July 2, 2013. Average sales per restaurant operating week increased approximately 1.6% to $198,750 in the first half of fiscal 2013 compared to the first half of fiscal 2012.
Our external bakery sales increased to $26.0 million for the twenty-six weeks ended July 2, 2013 compared to $22.6 million for the comparable period of last year due primarily to the timing of sales to our Middle Eastern licensee and to distributors who sell our bakery products to third party accounts.
As a percentage of revenues, cost of sales decreased to 24.3% for the twenty-six weeks ended July 2, 2013 from 24.5% for the comparable period of fiscal 2012. Lower grocery costs were partially offset by an increase in higher-cost desserts sold in our restaurants.
As a percentage of revenues, labor expenses for the twenty-six weeks ended July 2, 2013 decreased to 32.4% from 32.5% in the comparable period of last year, primarily due to lower group medical costs.
As a percentage of revenues, other operating costs and expenses were 24.1% for both the twenty-six weeks ended July 2, 2013 and July 3, 2012.
As a percentage of revenues, G&A expenses decreased to 6.1% for the twenty-six weeks ended July 2, 2013 versus 6.2% for the comparable period of fiscal 2012 due primarily to a higher prior year accrual for corporate performance bonuses and a $0.8 million charge in the prior year, reflecting an increase in the value of our Chief Executive Officer’s retirement benefit in connection with the extension of his employment agreement.
As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the twenty-six weeks ended July 2, 2013 and the comparable period of last year.
In fiscal 2012, we made the business decision to discontinue operations of three of our Grand Lux Cafe restaurants, each of which was previously fully impaired, because they were not delivering the necessary sales volumes to drive our required returns. We incurred $4.0 million in the fourth quarter of fiscal 2012 for partial reimbursement to the landlords of tenant improvement allowances and broker fees on these leases. We incurred an additional $0.6 million in the first quarter of fiscal 2013 for future rent and other closing costs associated with these locations. We do not expect to incur further charges in connection with these locations.
18
Preopening costs were $3.8 million for the twenty-six weeks ended July 2, 2013 compared to $5.1 million in the comparable period of the prior year. We opened one The Cheesecake Factory restaurant in the first half of both fiscal 2013 and 2012.
Interest and other expense, net increased to $2.6 million of expense for the first half of fiscal 2013 compared to $2.0 million of expense for the comparable period last year. This increase was primarily due to changes in the value of our investments in variable life insurance contracts used to support our ESP. Interest expense included $1.8 million and $1.7 million in the first half of fiscal 2013 and fiscal 2012, respectively, associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.
Our effective income tax rate was 28.5% for the first half of fiscal 2013 compared to 29.0% for the comparable prior year period. This decrease was attributable to higher Work Opportunity Tax Credits due to the reinstatement of the program in 2013 and decreased state taxes in relation to pre-tax income, partially offset by a lower proportion of FICA tip credits in relation to pre-tax income.
Non-GAAP Measures
Adjusted net income and adjusted diluted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
We calculate these non-GAAP measures by eliminating from net income and diluted net income per share the impact of items we do not consider indicative of our ongoing operations. We believe these adjusted measures provide additional information to facilitate the comparison of our past and present financial results. We utilize results that both include and exclude the identified items in evaluating business performance. However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. In the future, we may incur expenses or generate income similar to the adjusted items.
Following is a reconciliation from net income and diluted net income per share to the corresponding adjusted measures (in thousands, except per share data):
After-tax impact from:
Impairment of assets and lease terminations (1)
903
1,289
Proceeds from variable life insurance contract (2)
(419
Adjusted net income
29,486
27,980
55,164
48,702
0.02
(0.01
Adjusted diluted net income per share
0.51
1.01
0.88
(1) The amount recorded in the second quarter of fiscal 2013 represents impairment expense related to the planned relocation of two of our restaurants. The year-to-date amount also includes future rent and other closing costs recorded in the first quarter of fiscal 2013 for three Grand Lux Cafe locations where we discontinued operations in March 2013. The pre-tax amounts associated with these items are $1,505 and $644, respectively, and were recorded in impairment of assets and lease terminations.
(2) Represents the realization of proceeds from one of our variable life insurance contracts used to support our ESP. This item is non-taxable and was recorded in interest and other (expense)/income.
Fiscal 2013 Outlook
We estimate adjusted diluted earnings per share for fiscal 2013 will be between $2.10 and $2.15 based on an assumed increase in comparable restaurant sales of between 1.0% and 1.5%. This earnings per share estimate does not include any charges recorded or anticipated to be recorded in impairment of assets and lease terminations. For further discussion of the excluded items, see “Impairment of Assets and Lease Terminations” above.
We expect to increase our operating margin by approximately 50 basis points in fiscal 2013. International growth accounts for a large portion of this improvement, as we gain a full year of royalties from the initial three Middle East locations opened in fiscal 2012, with one additional location expected to open in fiscal 2013. We should also see some benefits to cost of sales from efficiency gains and a more profitable mix of bakery sales to external customers. We currently expect food cost inflation of approximately 2% and a corporate tax rate of approximately 29%.
In fiscal 2013, we plan to open as many as eight to ten new restaurants, one of which was opened as of the date of this filing. This includes the relocation of two to three restaurants as we take the opportunity to optimize the location of our restaurants in certain trade areas. In addition to these Company-owned locations, we expect one licensed The Cheesecake Factory restaurant to open internationally in fiscal 2013.
We anticipate fiscal 2013 cash capital expenditures to range between $100 million and $110 million and expect to generate free cash flow (defined as cash flow from operations less capital expenditures) of $100 million to $115 million. We plan to return as much as $200 million to shareholders during fiscal 2013 in the form of dividends and share repurchases, funded by our free cash flow and the proceeds from stock option exercises.
For the third quarter of fiscal 2013, we estimate diluted earnings per share will be between $0.51 and $0.53, based on assumed comparable restaurant sales in a range of between flat and 1.0% versus the prior year third quarter.
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):
88.6
74.3
Capital expenditures
(37.5
(34.4
49.4
17.9
(12.6
(45.3
(57.5
During the twenty-six weeks ended July 2, 2013, our cash and cash equivalents increased by $47.1 million to $130.6 million. This increase was primarily attributable to cash provided by operating activities and proceeds from exercises of stock options, partially offset by treasury stock purchases, capital expenditures and dividend payments.
For fiscal 2013, 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 $11.5 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 2013 contemplates a net outlay of $65 million to $71 million for eight to ten restaurants expected to be opened during fiscal 2013 and estimated construction-in-progress disbursements for anticipated early fiscal 2014 openings. Expected fiscal 2013 capital expenditures also include $26 million to $27 million for maintenance, enhancements and capacity additions to our existing restaurants and $9 million to $12 million for bakery and corporate infrastructure investments.
At July 2, 2013, we had no borrowings outstanding under our $200 million revolving credit facility (“Facility”), and we did not withdraw or repay any amounts under this Facility during the second quarter of fiscal 2013 or 2012. Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs. As of July 2, 2013, we had net availability for borrowings of $179 million, based on a zero outstanding debt balance and $21 million in standby letters of credit. In addition, the Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases. We were in compliance with the financial covenants in effect under the Facility at July 2, 2013. 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.
20
On July 23, 2012, our Board approved the initiation of a cash dividend to our stockholders, which is subject to quarterly Board approval. A cash dividend of $0.12 per common share was declared during the third quarter of fiscal 2012 and in each fiscal quarter since then through the second quarter of 2013. On July 22, 2013, our Board increased the dividend to $0.14 per common share for the third quarter of fiscal 2013, equating to a 17% increase. There can be no assurance that dividends will be declared in the future or that the Board will approve further increases in dividend levels.
On July 22, 2013, our Board increased the authorization to repurchase our common stock by 7.5 million shares to 48.5 million shares. Under this and previous authorizations, we have cumulatively repurchased 35.7 million shares at a total cost of $877.1 million through July 2, 2013, including 0.1 million shares of our common stock at a cost of $3.3 million during the second quarter of fiscal 2013. 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. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods.
Based on our current expansion objectives, we believe that during the upcoming 12 months our cash and cash equivalents, combined with expected cash flows provided by operations, available borrowings under our Facility and expected landlord construction contributions, should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures, share repurchases and cash dividends, and allow us to consider additional possible capital allocation strategies, such as the acquisition of other growth vehicles. We continue to plan to return the majority of our free cash flow to shareholders in the form of dividends and share repurchases.
As of July 2, 2013, 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.
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. We had no debt outstanding under the Facility at July 2, 2013 or July 3, 2012. Therefore, we had no exposure to interest rate fluctuations on funded debt at those dates. 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 Executive Savings Plan, a non-qualified deferred compensation plan, 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 July 2, 2013 and January 1, 2013, 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 $1.3 million and $1.0 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, depending on market conditions and expected demand. However, we are currently unable to contract for extended periods of time for certain of our commodities such as some fish and many dairy items. 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 July 2, 2013.
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 July 2, 2013 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 1, 2013 (“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 July 2, 2013 (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)
April 3 — May 7, 2013
87
37.78
5,254
May 8 — June 4, 2013
June 5 — July 2, 2013
(1) The total number of shares purchased includes shares withheld upon vesting of restricted share awards to satisfy tax withholding obligations.
(2) On July 22, 2013, our Board increased the authorization to repurchase our common stock by 7.5 million shares to 48.5 million shares. Under this and previous authorizations, we have cumulatively repurchased 35.7 million shares at a total cost of $877.1 million through July 2, 2013, including 0.1 million shares of our common stock at a cost of $3.3 million during the second quarter of fiscal 2013. 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. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods.
Our Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases. 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.
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
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
2/23/11
3.2
Amended and Restated Bylaws as of May 20, 2009
8-K
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
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
11/13/03
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
8/1/08
10.1*
2010 Stock Incentive Plan as Amended May 30, 2013
DEF 14A
Appendix A
04/19/13
10.2*
Employment Agreement between the Company and David M. Gordon executed April 18, 2013
10.1
4/19/13
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
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
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
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 July 2, 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.
* Management contract or compensatory plan or arrangement required to be filed as an exhibit
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: August 9, 2013
By:
/s/ DAVID OVERTON
David Overton
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ W. DOUGLAS BENN
W. Douglas Benn
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ CHERYL M. SLOMANN
Cheryl M. Slomann
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)