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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 March 30, 2010
		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)

 

 

Registrant’s telephone number, including area code:  (818) 871-3000

 

 

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 o No o

 

* The registrant has not yet been phased into the interactive data requirements.

 

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.

 

 

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 April 30, 2010, 60,405,916 shares of the registrant’s Common Stock, $.01 par value, were outstanding.

 

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

INDEX

 

			Page Number
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Consolidated Balance Sheets	1
		Consolidated Statements of Operations	2
		Consolidated Statement of Stockholders’ Equity	3
		Consolidated Statements of Cash Flows	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
	Item 4.	Controls and Procedures	18
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	19
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 6.	Exhibits	20
Signatures			22

 

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PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		March 30, 2010			December 29, 2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	106,736		$	73,715
Accounts receivable		6,995			11,352
Income tax receivable		1,241			1,875
Other receivables		14,156			27,475
Inventories		24,399			22,202
Prepaid expenses		27,121			27,871
Deferred income taxes		9,118			7,737
Total current assets		189,766			172,227
Property and equipment, net		777,286			788,402
Other assets:
Trademarks		4,386			4,338
Prepaid rent		53,251			54,243
Other		28,983			27,541
Total other assets		86,620			86,122
Total assets		$	1,053,672		$	1,046,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	32,068		$	33,948
Other accrued expenses		156,219			166,513
Total current liabilities		188,287			200,461
Deferred income taxes		88,871			87,048
Deferred rent		64,869			64,209
Deemed landlord financing liability		51,405			51,802
Long-term debt		100,000			100,000
Other noncurrent liabilities		28,332			27,118
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; 83,796,057 and 83,377,092 issued at March 30, 2010 and December 29, 2009, respectively		838			834
Additional paid-in capital		396,085			386,562
Retained earnings		658,210			639,544
Accumulated other comprehensive loss		(4,515		)	(4,619		)
Treasury stock, 23,587,147 and 23,100,079 shares at cost at March 30, 2010 and December 29, 2009, respectively		(518,710		)	(506,208		)
Total stockholders’ equity		531,908			516,113
Total liabilities and stockholders’ equity		$	1,053,672		$	1,046,751

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
Revenues		$	405,433		$	392,794
Costs and expenses:
Cost of sales		98,603			98,086
Labor expenses		135,169			133,240
Other operating costs and expenses		99,311			101,754
General and administrative expenses		23,424			21,410
Depreciation and amortization expenses		18,155			18,603
Preopening costs		2,094			1,720
Total costs and expenses		376,756			374,813
Income from operations		28,677			17,981
Interest expense		(3,009		)	(5,030		)
Interest income		151			208
Other income/(expense), net		346			(175		)
Income before income taxes		26,165			12,984
Income tax provision		7,499			2,965
Net income		$	18,666		$	10,019
Net income per share:
Basic		$	0.31		$	0.17
Diluted		$	0.31		$	0.17
Weighted average shares outstanding:
Basic		59,506			59,315
Diluted		60,811			59,520

 

See the accompanying notes to the consolidated financial statements.

 

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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			Accumulated Other Comprehensive Income/(Loss)			Treasury Stock			Total
Balance, December 29, 2009		83,377		$	834		$	386,562		$	639,544		$	(4,619	)	$	(506,208	)	$	516,113
Comprehensive income:
Net income		—		—			—			18,666			—			—			18,666
Net unrealized income on derivative financial instruments		—		—			—			—			104			—			104
Total comprehensive income																			18,770
Issuance of common stock from stock options exercised		315		3			5,627			—			—			—			5,630
Tax impact of stock options exercised, net of cancellations		—		—			201			—			—			—			201
Stock-based compensation		—		—			3,695			—			—			—			3,695
Issuance of restricted stock, net of forfeitures		104		1			—			—			—			—			1
Purchase of treasury stock		—		—			—			—			—			(12,502		)	(12,502		)
Balance, March 30, 2010		83,796		$	838		$	396,085		$	658,210		$	(4,515	)	$	(518,710	)	$	531,908

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
Cash flows from operating activities:
Net income		$	18,666		$	10,019
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		18,155			18,603
Deferred income taxes		378			(636		)
Stock-based compensation		3,643			3,347
Tax impact of stock options exercised, net of cancellations		201			(600		)
Excess tax benefit related to stock options exercised		(729		)	—
Other		45			864
Changes in assets and liabilities:
Accounts receivable		4,357			5,925
Other receivables		13,319			13,929
Inventories		(2,197		)	(3,256		)
Prepaid expenses		750			(2,595		)
Other assets		(588		)	6,713
Accounts payable		(1,880		)	(4,193		)
Income taxes payable		634			4,149
Other accrued expenses		(8,304		)	(11,703		)
Cash provided by operating activities		46,450			40,566
Cash flows from investing activities:
Additions to property and equipment		(6,912		)	(10,588		)
Sales of available-for-sale securities		—			1,000
Cash used in investing activities		(6,912		)	(9,588		)
Cash flows from financing activities:
Deemed landlord financing proceeds		—			2,481
Deemed landlord financing payments		(374		)	(347		)
Proceeds from exercise of employee stock options		5,630			173
Excess tax benefit related to stock options exercised		729			—
Repayment on credit facility		—			(25,000		)
Purchase of treasury stock		(12,502		)	—
Cash used in financing activities		(6,517		)	(22,693		)
Net change in cash and cash equivalents		33,021			8,285
Cash and cash equivalents at beginning of period		73,715			80,365
Cash and cash equivalents at end of period		$	106,736		$	88,650
Supplemental disclosures:
Interest paid		$	2,771		$	4,301
Income taxes paid		$	752		$	224

 

See the accompanying notes to the consolidated financial statements.

 

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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” or in the first person notations “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 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.  The preparation of financial statements in conformity with GAAP requires us to make certain 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 amounts could differ from these estimates.

 

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 December 29, 2009 filed with the SEC on February 26, 2010.

 

Subsequent Event Review

 

We performed a review for subsequent events that occurred after March 30, 2010, the fiscal 2010 first quarter balance sheet date, through May 6, 2010, the date of this Quarterly Report on Form 10-Q.  No recognized or non-recognized subsequent events were noted.

 

Recent Accounting Pronouncements

 

In October 2009, the Financial Accounting Standards Board issued guidance on revenue arrangements with multiple deliverables effective for us in fiscal 2011, although early adoption is permitted.  The guidance revises the criteria for measuring and allocating consideration to each component of a multiple element arrangement.  The guidance requires companies to allocate revenue using the relative selling price of each deliverable, which must be estimated if the company does not have either a history of selling the deliverable on a stand alone basis or third-party evidence of selling price.  For our company, this guidance will only impact the pattern of revenue recognition for our marketing programs that include multiple elements.  As the timing and content of future promotions is not determinable at this time, we are unable to estimate the impact of this guidance on our financial statements.

 

2.  Inventories

 

Inventories consisted of (in thousands):

 

		March 30, 2010			December 29, 2009
Restaurant food and supplies		$	12,494		$	12,619
Bakery finished goods		7,328			5,530
Bakery raw materials and supplies		4,577			4,053
Total		$	24,399		$	22,202

 

3.  Long-Term Debt

 

Long-term debt consisted of (in thousands):

 

		March 30, 2010			December 29, 2009
Credit facility		$	100,000		$	100,000

 

In April 2007, we entered into a five-year revolving credit facility (“Facility”) with a maximum available borrowing commitment of $200 million.  In March 2008, we amended the Facility to increase the maximum available borrowing commitment to

 

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$300 million.  In January 2009, we entered into a second amendment, which reset our financial covenants and pricing, and also limited cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a liquidity threshold.  Borrowings under the amended Facility bear interest at a floating rate based on the London Interbank Offering Rate (LIBOR) plus a spread ranging from 2.50% to 2.75%, depending on our ratio of debt to trailing 12-month earnings before interest, taxes, depreciation, amortization and noncash stock option expense (“EBITDA”), as defined in the agreement.  In addition, we pay a commitment fee ranging from 0.40% to 0.45%, also depending on our ratio of debt to EBITDA, calculated on the average unused portion of the Facility.  The amended Facility restricts unsecured borrowings to $15 million and includes a pledge of our outstanding equity interests in The Cheesecake Factory Bakery Incorporated and The Cheesecake Factory Assets Co. LLC, which had carrying values of $85.6 million and $65.3 million, respectively, at March 30, 2010.

 

We are obligated to maintain certain financial covenants, which include a maximum debt to EBITDA ratio of 1.75 as of the fiscal quarter ending March 31, 2009 or 1.50 as of the end of any fiscal quarter thereafter, as well as a minimum EBITDAR (EBITDA plus rental expense), as defined in the Facility, to interest and rental expense ratio of 1.90 as of any of the fiscal quarters ending March 31, 2009 through September 28, 2010 or 2.00 as of the end of any fiscal quarter thereafter.  At March 30, 2010, our EBITDA and EBITDAR ratios were 0.49 and 2.41, 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 March 30, 2010, we had net availability for borrowings of $184 million, based on outstanding debt of $100 million and $16 million in standby letters of credit.  Since we have the contractual ability to maintain the outstanding balance on our Facility, the debt is classified as long-term on our consolidated balance sheets.

 

4.        Derivative Financial Instruments

 

At March 30, 2010, we held one zero-cost interest rate collar that hedged interest rate variability on the outstanding balance on our Facility.  This instrument consists of a combination of a purchased cap option with a three-month LIBOR cap rate of 5.35% and a sold floor option with a three-month LIBOR floor rate of 4.69%, and has a maturity date of April 3, 2012.  See Note 3 for further discussion of our credit facility.

 

This derivative qualifies for hedge accounting as a cash flow hedge and, accordingly, is recognized at fair value as either an asset or liability on the consolidated balance sheets.  Changes in fair value are recorded in accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings when the related interest expense on the underlying borrowing is recognized.  We do not hold any derivative financial instruments for trading or speculative purposes.

 

Changes in the fair value of our interest rate collar are expected to be perfectly effective in offsetting the variability in interest payments attributable to fluctuations in three-month LIBOR rates above the cap rate and below the floor rate specified in the derivative agreement.  If, at any time, our interest rate collar is determined to be ineffective, in whole or in part, due to modifications in the derivative instrument or the underlying credit facility, prospective changes in fair value of the portion of the derivative determined to be ineffective will be recognized as a gain or loss in the consolidated statements of operations.

 

The fair value and balance sheet locations of our derivative are as follows (in thousands):

 

				Fair Value of Liability Derivatives
		Balance Sheet Location		March 30, 2010			December 29, 2009
Interest rate contracts		Other accrued expenses		$	4,298		$	4,299
Interest rate contracts		Other noncurrent liabilities		3,804			3,945
Total				$	8,102		$	8,244

 

We had no derivative financial instruments in asset positions as of March 30, 2010 or December 29, 2009.  See Note 5 for discussion of the methods used to determine fair value of our derivative financial instruments.

 

The effects of derivative instruments on our consolidated statements of operations are as follows (in thousands):

 

		Gain/(Loss) Recognized in AOCI on Derivative						Location of Gain/(Loss) Reclassified from AOCI into Income		Gain/(Loss) Reclassified from AOCI into Income
		Thirteen Weeks Ended								Thirteen Weeks Ended
		March 30, 2010			March 31, 2009					March 30, 2010			March 31, 2009
Interest rate contracts		$	104		$	(203	)	Interest expense		$	(1,140	)	$	(1,049	)

 

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We expect to reclassify approximately $4.3 million of these balances against earnings during the next 12 months as the related hedged interest expense is recognized.

 

5.  Fair Value Measurement

 

The following table presents our financial assets and liabilities that were accounted for at fair value as of March 30, 2010 (in thousands):

 

		Fair Value Measurements Using
		Quoted Prices in Active Markets			Significant Other Observable Inputs			Significant Unobservable Inputs
Assets:
Cash invested in money market fund		$	61,195		$	—		$	—
Liabilities:
Derivative financial instruments		$	—		$	8,102		$	—

 

For assets that are measured using quoted prices in active markets, fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs.  At March 30, 2010, we had $61.2 million of cash invested in a tax-exempt money market fund.  The fund purchases only first-tier securities, and we have not experienced any losses in these accounts.  Therefore, we believe we are not exposed to significant risk on these investments.

 

The fair value of our derivative financial instruments is estimated using the net present value of a series of cash flows on both the cap and floor components of the interest rate collars.  These cash flows are based on yield curves which take into account the contractual terms of the derivatives, including the period to maturity and market-based parameters such as interest rates and volatility.  We incorporated nonperformance risk by adjusting the present value of each liability position utilizing an estimation of our credit risk.

 

6. Commitments and Contingencies

 

The Internal Revenue Service (“IRS”) audited our tax returns for fiscal years 2003 through 2006 with respect to the deductibility, under the provisions of Internal Revenue Code Section 162(m), of certain compensation in excess of $1 million per year paid to three current executive officers and one former executive officer resulting from their respective exercises of stock options later determined to be misdated.  On May 1, 2008, the IRS issued a Notice of Proposed Adjustment to us disallowing the deduction of approximately $5.1 million of compensation expense with respect to the exercise of stock options by such executive officers.  We believe that such stock option compensation qualifies as performance-based compensation that is not subject to the limitations on deductibility under Internal Revenue Code Section 162(m).  We received a Statutory Notice of Deficiency from the IRS for fiscal 2005 only and have petitioned for redetermination of this notice with the United States Tax Court.  With respect to all other tax years, we intend to continue discussions with the IRS in an effort to reach a favorable resolution and, if such resolution is not reached, to pursue all available administrative and legal remedies.  While we believe that such stock option compensation qualified as performance-based compensation that is not subject to the limitations on deductibility, we have reserved $2.4 million for estimated taxes and interest due through March 30, 2010.  This reserve does not include penalties.

 

On November 18, 2009, one former hourly restaurant employee in the State of Illinois filed a lawsuit in the U.S. District Court for the Northern District of Illinois (Morales v. The Cheesecake Factory, Inc.; Case No. 09 CV 7005) against us alleging violations of the Fair Labor Standards Act and Illinois Minimum Wage Law for alleged failure to pay overtime and minimum wages, among other claims.  This lawsuit seeks unspecified amounts of penalties and other monetary payments on behalf of the respective plaintiff and other purported class members.  The plaintiff also seeks attorneys’ fees.  We intend to vigorously defend this action.  Based on the current status of this matter, we have not reserved for any potential future payments.

 

On August 5, 2009, two former hourly restaurant employees in the State of California filed a class action lawsuit in the Los Angeles County Superior Court (Luque v. The Cheesecake Factory Restaurants, Inc.; Case No. BC415640) against us alleging violations of California’s wage and hour laws with respect to alleged failure to pay proper vacation wages at termination, failure to furnish wage statements, and violations of the California Business and Professions Code, among others claim. This lawsuit seeks 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 this action.  Based on the current status of this matter, we have not reserved for any potential future payments.

 

On January 20, 2009, one former hourly restaurant employee in the State of California filed a lawsuit in the San Diego County Superior Court (Giradin v. The Cheesecake Factory, Inc.; Case No. 37-2009-00081696-CU-OE-CTL) against us alleging

 

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violations of California’s wage and hour laws with respect to alleged failure to pay proper wages, failure to furnish accurate wage statements and violations of the California reporting time laws, among other claims.  This lawsuit seeks unspecified amounts of penalties and other monetary payments on behalf of the respective plaintiff and other purported class members.  The plaintiff also seeks attorneys’ fees.  On January 8, 2010, the plaintiff filed a First Amended Complaint naming a new class representative and asserting additional claims under the California Labor Code Private Attorneys General Act of 2004.  We intend to vigorously defend this action.  Based on the current status of this matter, we have not reserved for any potential future payments.

 

On July 2, 2008, the Equal Employment Opportunity Commission (EEOC) for the Cleveland District Office issued determination letters in Charges 532-2006-01040, -01030, -01042 in favor of three former employees alleging that we engaged in a pattern and practice of sex discrimination, and in the case of one claimant, racial discrimination, in violation of Title VII of the Civil Rights Act of 1964 (Title VII).  The determination alleges that our actions resulted in females as a class being denied entry and progression into upper ranks of management at our restaurants.  We deny these allegations.  The EEOC is seeking payment of actual damages incurred by the claimants as well as compensatory and/or punitive monetary costs and remedial actions.  The parties failed to reach a conciliated settlement in 2008 and, to date, no further action has been taken by the EEOC with respect to these charges.  On July 30, 2008, the EEOC Cleveland District Office also filed a Commissioner’s Charge 532-2008-01856 alleging we violated Title VII for failing or refusing to select females for management positions because of their sex.  This Charge arises out of the facts alleged in EEOC Charges 532-2006-01040, -01030, -01042.  The EEOC is currently conducting its investigation into this Commissioner’s Charge.  While we are cooperating with the EEOC’s investigation, we deny these allegations and intend to vigorously defend against this charge.  Based upon the current status of these matters, we have not reserved for any potential future payments.

 

On January 9, 2007, two former hourly restaurant employees in the State of California filed a lawsuit in the Los Angeles County Superior Court against us alleging violations of California’s wage and hour laws with respect to alleged failure to pay proper wages, improper payroll deductions, and violations of the California meal and break period laws, among other claims (Guardado v. The Cheesecake Factory Restaurants, Inc. et al; Case No. BC360426).  This case was previously stayed by the parties through December 2008, pending the California Supreme Court’s decision to review Brinker Restaurant Corp. v. Superior Court of San Diego County (No. S166350, 2008). Subsequently, the parties entered into mediation proceedings that, to date, have not been successful. On February 23, 2009, an additional lawsuit with similar allegations was filed by another hourly restaurant employee in Santa Clara County Superior Court (Benitez v. The Cheesecake Factory Restaurants, Inc., et al; Case No. 109CV135687). In April, 2009, we gave notice to the respective courts in Case No. 109CV135687 and Case No. BC360426 that such cases may be related matters.  In March, 2010, we settled Case No. 109CV135687 for a nominal amount. On March 30, 2010, the Court set a trial date in Case No. BC360426.  The parties have resumed discovery and will continue settlement discussions as part of ongoing mediation efforts in Case No. BC360426 before the scheduled trial date.   The remaining lawsuit seeks unspecified amounts of penalties and other monetary payments on behalf of the plaintiffs and other purported class members.  The plaintiffs also seek attorneys’ fees.  We intend to vigorously defend against this action.  Based on the current status of this matter, we have not reserved for any potential future payments.

 

On August 29, 2006, five present and former hourly restaurant employees in the States of Tennessee, Texas and Arizona filed a lawsuit in the U.S. District Court for the Middle District of Tennessee against us alleging violations of the Fair Labor Standards Act with respect to alleged minimum wage violations, improper payroll deductions and requiring work “off the clock,” among other claims (Smith v. The Cheesecake Factory Restaurants, Inc. et al; Case No. 3 06 0829).  The lawsuit seeks unspecified amounts of penalties and other monetary payments on behalf of the plaintiffs and other purported class members. The plaintiffs also seek attorneys’ fees.  On February 4, 2010, the Court granted our motion to compel arbitration and issued an order dismissing all individual defendants in the case.  The plaintiffs filed their demand for arbitration on April 19, 2010.  We intend to vigorously defend this action.  Based on the current status of this matter, we have not reserved for any potential future payments.

 

We are also subject to other private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business.  These claims 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 employee claims may be pled as class actions.  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 determined to be liable.  From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks.  At this time, we believe that the final disposition of these lawsuits, proceedings and claims will not have a material adverse effect 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.

 

7. Stockholders’ Equity

 

We have an outstanding authorization from our Board of Directors to repurchase 31 million shares of our common stock.  Under this authorization, we have cumulatively repurchased a total of 23.6 million shares at a total cost of $518.7 million through

 

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March 30, 2010; we repurchased 0.5 million of these shares at a total cost of $12.5 million during the first quarter of fiscal 2010.  The 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.

 

In October 2008, we suspended our share repurchase program in order to maintain maximum flexibility in our capital decisions in light of the unprecedented crisis in the global financial markets and the indeterminate future impact it could have on the overall economy and on our business.  On February 25, 2010, our Board of Directors reinstated our stock repurchase program and approved the adoption of a trading plan under Rule 10b5-1 (“10b5-1Plan”) under the Securities Exchange Act of 1934, as amended from time to time (“Act”), which became effective on March 27, 2010.  In addition, we may also make purchases in the open market in compliance with Rule 10b-18 under the Act.

 

The timing and number of shares repurchased pursuant to the share repurchase authorization are subject to a number of factors, including current market conditions, legal constraints, available cash or other sources of funding and financial covenants under our credit facility that limit share repurchases based on a liquidity threshold.  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, and our share price.

 

8.  Stock-Based Compensation

 

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

 

		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
Stock-based compensation expense		$	3,643		$	3,347
Income tax benefit		1,382			749
Capitalized stock-based compensation (1)		53			179

 

(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 2010 and 2009 was $9.42 and $4.71 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 2010 and 2009, respectively: (a) no dividend yield on our stock, (b) expected stock price volatility of 41.0% and 56.2%, (c) a risk-free interest rate of 2.5% and 1.9%, and (d) an expected option term of 5.8 and 5.4 years.

 

Stock option activity during the thirteen weeks ended March 30, 2010 was as follows:

 

		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
		(In thousands)		(Per share)			(In years)		(In thousands)
Outstanding at December 29, 2009		10,254		$	22.40
Granted		493		$	22.23
Exercised		(315	)	$	17.86
Cancelled		(140	)	$	21.30
Outstanding at March 30, 2010		10,292		$	22.54		5.8		$	61,304
Exercisable at March 30, 2010		4,838		$	25.94		4.2		$	14,840

 

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The total intrinsic value of options exercised for the thirteen weeks ended March 30, 2010 and March 31, 2009 was $2.1 million and $0.1 million, respectively.  As of March 30, 2010, the total unrecognized stock-based compensation expense related to nonvested stock options was $22.2 million, which we expect to recognize over a weighted average period of approximately 3.1 years.

 

Restricted Shares

 

Restricted share activity during the thirteen weeks ended March 30, 2010 was as follows:

 

		Shares		Weighted Average Fair Value
		(In thousands)		(Per share)
Outstanding at December 29, 2009		623		$	16.32
Granted		107		22.94
Vested		(136	)	25.21
Forfeited		(4	)	9.20
Outstanding at March 30, 2010		590		$	15.53

 

Fair value of our restricted shares is based on our closing stock price on the date of grant.  The weighted average fair value at the grant date for restricted shares issued during the first quarter of fiscal 2010 and 2009 was $22.94 and $9.17, respectively.  As of March 30, 2010, total unrecognized stock-based compensation expense related to nonvested restricted shares was $5.9 million, which we expect to recognize over a weighted average period of approximately 3.6 years.  The fair value of shares that vested during the first quarter of fiscal 2010 totaled $3.4 million.  No restricted shares vested during the first quarter of fiscal 2009.

 

9.  Net Income Per Share

 

At March 30, 2010 and March 31, 2009, 0.6 million and 0.8 million shares, respectively, of restricted stock issued to employees were unvested, and therefore excluded from the calculation of basic earnings per share for each of the fiscal quarters ended on those dates.  Diluted net income per share includes the dilutive effect of both outstanding stock options and restricted shares, 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 Financial Accounting Standards Codification 718, “Compensation — Stock Option Compensation.”

 

		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
		(In thousands, except per share data)
Net income		$	18,666		$	10,019
Basic weighted average shares outstanding		59,506			59,315
Dilutive effect of stock options and restricted shares		1,305			205
Diluted weighted average shares outstanding		60,811			59,520
Basic net income per share		$	0.31		$	0.17
Diluted net income per share		$	0.31		$	0.17

 

Shares of common stock equivalents of 5.9 million and 10.1 million for the thirteen weeks ended March 30, 2010 and March 31, 2009, respectively, were not included in the diluted calculation due to their anti-dilutive effect.

 

10.  Comprehensive Income

 

Comprehensive income consisted of (in thousands):

 

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		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
Net income		$	18,666		$	10,019
Net unrealized gain on available-for-sale securities		—			1
Unrealized gain/(loss) on derivative financial instruments		104			(203		)
Total		$	18,770		$	9,817

 

11.  Segment Information

 

We operate in two business segments, restaurants and bakery.  Restaurants consist of The Cheesecake Factory®, Grand Lux Cafe® and RockSugar Pan Asian Kitchen®.  The bakery segment produces baked desserts and other products for our restaurants and for other foodservice operators, retailers and distributors.  Bakery sales to the restaurants are recorded at prices similar to third-party national accounts.  Unallocated corporate expenses, which include all stock-based compensation, 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 March 30, 2010			Thirteen Weeks Ended March 31, 2009
Revenue:
Restaurants		$	393,672		$	379,659
Bakery		25,348			24,934
Intercompany bakery sales		(13,587		)	(11,799		)
Total		$	405,433		$	392,794
Income from operations:
Restaurants		$	49,340		$	37,060
Bakery		2,515			2,304
Corporate		(23,178		)	(21,383		)
Total		$	28,677		$	17,981
Depreciation and amortization:
Restaurants		$	16,031		$	16,238
Bakery		767			757
Corporate		1,357			1,608
Total		$	18,155		$	18,603
Capital expenditures:
Restaurants		$	6,274		$	9,775
Bakery		125			172
Corporate		513			641
Total		$	6,912		$	10,588

 

		March 30, 2010			December 29, 2009
Total assets:
Restaurants		$	888,756		$	881,545
Bakery		51,056			53,607
Corporate		113,860			111,599
Total		$	1,053,672		$	1,046,751

 

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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 and Section 21E of the Act.

 

In connection with the “safe harbor” provisions of the Act, 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 on our behalf (see Part II, Item 1A of this report and Part I, Item 1A, “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2009).  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 and the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2009.  The inclusion of supplementary analytical and related information herein may require us to make appropriate 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 6, 2010, we operated 162 upscale, casual, full-service dining restaurants: 148 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 and licensed two limited menu bakery cafes under The Cheesecake Factory Bakery Cafe® mark to another foodservice operator.

 

The Cheesecake Factory is an upscale casual dining concept that offers approximately 200 menu items including appetizers, pizza, seafood, steaks, chicken, burgers, pasta, specialty items, salads, sandwiches, omelets 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 currently range in size from 5,400 to 21,000 interior square feet, provide full liquor service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch.

 

Overview

 

In addition to being highly competitive, the restaurant industry is affected by changes in consumer tastes and discretionary spending patterns; changes in general economic conditions; public safety conditions; demographic trends; weather conditions; the cost and availability of food products, labor and energy; purchasing power; 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 brand.

 

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

 

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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 our restaurants is our top capital allocation priority with a focus on continuing to develop our concepts in premier locations within both existing and new markets.  Near-term, we plan to deploy our excess capital on hand to either reduce the outstanding balance on our credit facility, repurchase some of our outstanding shares, or a combination of both.

 

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 changes 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 plan to continue focusing 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.  Prior to the economic downturn, menu mix generally had a neutral effect on our average check, allowing us to retain the impact of our menu price increases.  As the economy strengthens, we would expect this pattern to resume as guests focus less on check management.

 

Comparable restaurant sales growth, in addition to revenue from new restaurant openings and increases in third-party bakery sales, drive our overall 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, 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 cost management initiatives that have been implemented.

 

In addition, by efficiently scaling our restaurant and bakery support infrastructure and improving our internal processes, we strive to grow general and administrative 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 strict 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, our consolidated statements of operations 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 the full fiscal year.

 

		Thirteen Weeks Ended March 30, 2010		Thirteen Weeks Ended March 31, 2009
Revenues		100.0	%	100.0	%
Costs and expenses:
Cost of sales		24.3		25.0
Labor expenses		33.3		33.9
Other operating costs and expenses		24.5		25.9
General and administrative expenses		5.8		5.5
Depreciation and amortization expenses		4.5		4.7
Preopening costs		0.5		0.4
Total costs and expenses		92.9		95.4
Income from operations		7.1		4.6
Interest expense		(0.7	)	(1.3	)
Interest income		0.0		0.0
Other income/(expense), net		0.0		0.0
Income before income taxes		6.4		3.3
Income tax provision		1.8		0.7
Net income		4.6	%	2.6	%

 

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Thirteen Weeks Ended March 30, 2010 Compared to Thirteen Weeks Ended March 31, 2009

 

Revenues

 

Revenues increased 3.2% to $405.4 million for the thirteen weeks ended March 30, 2010 compared to $392.8 million for the thirteen weeks ended March 31, 2009.

 

Restaurant sales increased 3.7% to $393.7 million compared to $379.7 million in the prior year first quarter.  The resulting sales increase of $14.0 million consisted of a $10.3 million increase in The Cheesecake Factory and Grand Lux Cafe comparable restaurant sales and a $3.7 million increase from restaurants not in the comparable sales base, including RockSugar Pan Asian Kitchen.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.8% from the first quarter of fiscal 2009 to the first quarter of fiscal 2010, marking the fifth consecutive quarter of comparable sales improvement.  At March 30, 2010, there were five The Cheesecake Factory and Grand Lux Cafe restaurants not included in the comparable sales base.  The Cheesecake Factory and Grand Lux Cafe restaurants become eligible to enter our comparable sales calculations in their 19th month of operation.

 

Comparable sales at The Cheesecake Factory restaurants increased 2.7% from the prior year first quarter driven by improved guest traffic.  We realized an effective menu price increase of approximately 0.6% during the first quarter of fiscal 2010, and an approximate 0.8% effective menu price increase during the third quarter of fiscal 2009, giving us 1.4% of pricing in The Cheesecake Factory menu as of March 30, 2010.

 

Comparable sales at our Grand Lux Cafe restaurants increased 4.0% from the prior year first quarter, also driven by improved guest traffic.  We realized effective menu price increases of approximately 0.3% and 0.6% in the second and fourth quarters of 2009, respectively, giving us 0.9% of pricing in the Grand Lux Cafe menu as of March 30, 2010.

 

We generally update and reprint the menus in our restaurants twice a year.  As part of these menu updates, we evaluate the need for price increases based on those operating cost and expense increases that we are aware of or 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 the Annual Report on Form 10-K for the year ended December 29, 2009, can impact comparable sales.

 

Total restaurant operating weeks increased 1% to 2,090 for the thirteen weeks ended March 30, 2010 due to the opening of three new restaurants during the trailing 15-month period.  In addition, average sales per restaurant operating week increased 2.9% to $188,400 compared to the first quarter of fiscal 2009 due principally to the improvement in guest traffic.

 

Bakery sales to other foodservice operators, retailers and distributors decreased 11% to $11.7 million for the thirteen weeks ended March 30, 2010 compared to $13.1 million for the comparable period of last year. This decrease is due primarily to lower sales to the warehouse clubs.

 

We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 37-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 may fluctuate.  Due to the highly competitive nature of the bakery business, we are unable to enter into long-term contracts with our large-account bakery customers, who may discontinue purchasing our products without advance notice at any time for any reason.

 

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.

 

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As a percentage of revenues, cost of sales decreased to 24.3% in the first quarter of fiscal 2010 compared to 25.0% in the comparable period of last year.  Approximately one-half of this decrease was attributable to savings associated with our cost of sales initiatives, including the development of new menu items with lower food costs, negotiation of more favorable pricing for commodities and improvements in our supply chain.  The majority of the remaining decrease stemmed primarily from menu pricing leverage on commodity costs.

 

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 are often, but not always, counterbalanced by cost changes in other commodity categories.  The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread and general grocery items.

 

Currently we are able to contract for the majority of the food commodities used in our operations for periods of up to one year.  However, with the exception of cream cheese used in our bakery operations, we are currently not able to contract for some commodities, such as fish, dairy and certain produce products for periods longer than 30 days in most cases.  As a result, these commodities can be subject to unforeseen supply and cost fluctuations due principally to weather, fuel costs and agricultural conditions.  Cream cheese is the most significant commodity used in our bakery products.  We have contracted for a majority of our fiscal 2010 cream cheese requirements and will also 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 expected cost increases for key commodities and other goods and services utilized by our operations.  While we have been successful in the past in reacting to inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, coupled with more efficient purchasing practices, varying menu mix, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future.

 

While 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, 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 90 to 120 days of operations until our management team at each new restaurant becomes more 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, decreased to 33.3% in the first quarter of fiscal 2010 compared to 33.9% in the comparable period of last year.  This decrease was primarily due to direct labor savings as a result of our operational initiatives and leverage from positive comparable sales.  Stock-based compensation included in labor was $1.5 million in the first quarter of fiscal 2010 compared to $1.3 million in the first quarter of fiscal 2009.

 

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 24.5% for the thirteen weeks ended March 30, 2010 from 25.9% for the comparable period of last year.  This decrease was primarily due to lower self-insurance expense for workers’ compensation and general liability claims, savings from our cost management initiatives, favorability from timing in marketing expenses and leverage of fixed costs due to positive comparable sales.

 

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 5.8% for the thirteen weeks ended March 30, 2010 versus 5.5% for the comparable period of fiscal 2009.  This increase was primarily due to a higher accrual for corporate bonuses in the first quarter of fiscal 2010 than was required in the comparable prior year period.  G&A expenses included $2.1 million and $1.9 million of stock-based compensation expense in the first quarter of fiscal 2010 and fiscal 2009, respectively.

 

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Depreciation and Amortization Expenses

 

As a percentage of revenues, depreciation and amortization decreased to 4.5% for the thirteen weeks ended March 30, 2010 compared to 4.7% for the same period of last year.  The decrease is primarily attributable to lower depreciation expense resulting from the impairment charge we recorded in the fourth quarter of fiscal 2009, as well as leverage from positive comparable sales.

 

Preopening Costs

 

Preopening costs increased to $2.1 million for the thirteen weeks ended March 30, 2010 compared to $1.7 million in the comparable period of the prior year.  We incurred preopening costs to open two The Cheesecake Factory restaurants in the first quarter of fiscal 2010 compared to opening one The Cheesecake Factory restaurant during the first quarter of fiscal 2009.  In addition, preopening costs were incurred in both years for restaurant openings in progress, maintaining a roster of trained managers for pending openings, and the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs.

 

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 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 Expense, Interest Income and Other Income/(Expense), Net

 

Interest expense decreased to $3.0 million for the first quarter of fiscal 2010 compared to $5.0 million for the comparable period last year, due primarily to a lower average outstanding debt balance during the first quarter of fiscal 2010 as compared to the prior year.  Interest expense also included $0.9 million for both fiscal 2010 and fiscal 2009 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

 

Interest income was $0.2 million for both the first quarter of fiscal 2010 and fiscal 2009.

 

We recorded net other income of $0.3 million for the thirteen weeks ended March 30, 2010 compared to net expense of $0.2 million for the comparable prior year period.  This variance primarily relates 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.

 

Income Tax Provision

 

Our effective income tax rate was 28.7% for the first quarter of fiscal 2010 compared to 22.8% for the comparable prior year period.  This increase was primarily attributable to a lower proportion of employment-related tax credits in relation to pretax income, partially offset by non-taxable gains in the first quarter of fiscal 2010 compared to non-deductible losses in the comparable prior year period on our investments in variable life insurance contracts used to support our ESP.

 

Fiscal 2010 Outlook

 

In fiscal 2010, we plan to open as many as three new The Cheesecake Factory restaurants, two of which opened in the first quarter.  We estimate diluted earnings per share for fiscal 2010 will be between $1.28 and $1.34 based on an assumption that comparable restaurant sales will be in a range of between flat and 1%.  We expect cash capital expenditures in fiscal 2010 to range between $45 million and $50 million, of which approximately $18 million to $20 million will be used to fund new restaurant openings, approximately $20 million to $22 million will be used for maintenance and capacity addition expenditures to our existing restaurants and $7 million to $8 million for bakery and corporate infrastructure investments.  We expect to generate free cash flow, defined as cash flow provided by operating activities less capital expenditures, of approximately $115 million to $125 million and plan to utilize a portion of our free cash flow to reduce the outstanding balance on our credit facility, repurchase outstanding shares of our common stock, or a combination of both.

 

Liquidity and Capital Resources

 

The following tables present, for the periods indicated, a summary of our key liquidity measurements (dollar amounts in millions):

 

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		March 30, 2010			December 29, 2009
Cash on hand		$	106.7		$	73.7
Net working capital		$	1.4		$	(28.2	)
Current ratio		1.0:1			0.9:1
Long-term debt and deemed landlord financing liability, including current portion (1)		$	153.0		$	153.3

 

		Thirteen Weeks Ended March 30, 2010			Thirteen Weeks Ended March 31, 2009
Cash provided by operating activities		$	46.5		$	40.6
Capital expenditures		$	(6.9	)	$	(10.6	)
Repayment on credit facility		$	¾		$	(25.0	)
Purchase of treasury stock		$	(12.5	)	$	¾

 

 

During the thirteen weeks ended March 30, 2010, our cash on hand increased by $33.0 million to $106.7 million from the period ended December 29, 2009.  This increase was primarily attributable to cash provided by operating activities and proceeds from exercise of employee stock options, partially offset by purchases of treasury stock and capital expenditures.  At March 30, 2010, we had $61.2 million of cash invested in a tax-exempt money market fund.  The fund purchases only first-tier securities, and we have not experienced any losses in these accounts.  Therefore, we believe we are not exposed to significant risk on these investments.

 

For fiscal 2010, we currently estimate our cash outlays for capital expenditures to range between $45 million and $50 million, net of agreed-upon up-front cash landlord construction contributions and excluding $5 million of expected noncapitalizable preopening costs for new restaurants.  Our estimate for capital expenditures for fiscal 2010 contemplates a net outlay of $18 million to $20 million for as many as three The Cheesecake Factory restaurants to be opened during fiscal 2010 and estimated construction-in-progress disbursements for anticipated fiscal 2011 openings.  These amounts are net of estimated collections of up-front cash landlord construction contributions.  Two locations were opened during the first quarter of fiscal 2010.  Expected capital expenditures for fiscal 2010 also include approximately $20 million to $22 million for maintenance and capacity addition expenditures to our existing restaurants and $7 million to $8 million for bakery and corporate infrastructure investments.

 

At March 30, 2010, we had $100 million of borrowings outstanding under our $300 million Facility.  Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of March 30, 2010, we had net availability for borrowings of $184 million, based on outstanding debt of $100 million and $16 million in standby letters of credit.  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.

 

At March 30, 2010, we held one zero-cost interest rate collar that hedged interest rate variability on the outstanding balance on our Facility.  This instrument consists of a combination of a purchased cap option with a three-month LIBOR cap rate of 5.35% and a sold floor option with a three-month LIBOR floor rate of 4.69%, and has a maturity date of April 3, 2012.  See Note 4 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our derivative financial instruments.

 

We have an outstanding authorization from our Board of Directors to repurchase 31 million shares of our common stock.  Under this authorization, we have cumulatively repurchased a total of 23.6 million shares at a total cost of $518.7 million through March 30, 2010; we repurchased 0.5 million of these shares at a total cost of $12.5 million during the first quarter of fiscal 2010.  The 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 7 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our share repurchases.

 

Based on our current expansion objectives, we believe that 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 planned capital expenditures and other operating activities during fiscal 2010.

 

As of March 30, 2010, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.  Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

 

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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 funded debt.  This exposure relates to the component of the interest rate on our $300 million Facility that is indexed to three-month LIBOR.  At March 30, 2010, we had $100 million in debt outstanding under the Facility.  Since all of this debt is hedged, a hypothetical 1% interest rate increase would have no impact on income from operations.  See Notes 3 and 4 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt and derivative financial instruments, respectively.

 

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 March 30, 2010, a hypothetical 10% decline in the market value of our deferred compensation assets and related liabilities would not impact income from operations; however net income would decrease by $0.7 million.

 

We purchase food and other commodities for use in our operations based on market prices established with our suppliers.  Many of the commodities we purchase can be subject to volatility due to market supply and demand factors outside of our control.  To manage this risk in part, we attempt to enter into fixed price purchase commitments, with terms typically up to one year, for many of our commodity requirements.  However, we are currently unable to contract for some commodities such as many fish, produce and dairy items (except for cream cheese used in our bakery operations) for periods longer than 30 days.  Dairy costs can also fluctuate due to government regulation.  Substantially all of our food and supplies are available from several sources, 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.  Some of our commodity purchase arrangements may contain contractual features that limit the price paid by establishing certain price floors or caps.  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 March 30, 2010.

 

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 March 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

See Note 6 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 December 29, 2009 (the “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 purchase during the thirteen weeks ended March 30, 2010 of our common stock:

 

Period		Total Number of Shares Purchased		Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
December 30, 2009 — February 2, 2010		¾		$	¾		¾		7,896,171
February 3 — March 2, 2010		¾		¾			¾		7,896,171
March 3 — March 30, 2010		487,068		25.67			487,068		7,409,103
Total		487,068					487,068

 

We have an outstanding authorization from our Board of Directors to repurchase 31 million shares of our common stock.  Under this authorization, we have cumulatively repurchased a total of 23.6 million shares at a total cost of $518.7 million through March 30, 2010; we repurchased 0.5 million of these shares at a total cost of $12.5 million during the first quarter of fiscal 2010.  The 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 7 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our share repurchases.

 

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Item 6.  Exhibits

 

Exhibit No.		Item		Form		File Number		Incorporated by Reference from Exhibit Number		Filed with SEC
Exhibit 2.1		Form of Reorganization Agreement		Amend. No. 1 to Form S-1		33-47936		2.1		8/17/92
Exhibit 3.1		Certificate of Incorporation		10-Q		000-20574		3.1		7/26/05
Exhibit 3.2		Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock, $.01 Par Value		10-Q		000-20574		3.2		7/26/05
Exhibit 3.3		Certificate of Amendment of Certificate of Incorporation		10-Q		000-20574		3.3		7/26/05
Exhibit 3.4		Amendments to Certificate of Incorporation		8-K		000-20574		3.1		5/28/08
Exhibit 3.5		Amended and Restated Bylaws, as of May 20, 2009		8-K		000-20574		3.8		5/27/09
Exhibit 4.1		Form of Rights Agreement dated as of August 4, 1998 between The Cheesecake Factory Incorporated and U.S. Stock Transfer Corporation		Form 8-A		000-20574		1		8/19/08
Exhibit 4.2		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
Exhibit 4.3		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
Exhibit 10.1		Employment Agreement between the Company and Michael E. Jannini dated February 11, 2010*		8-K		000-20574		10.1		2/17/10
Exhibit 10.2		Second Amendment to Amended and Restated Executive Savings Plan*		—		—		—		Filed herewith
Exhibit 31.1		Rule 13a-14(a) Certification of Principal Executive Officer		—		—		—		Filed herewith
Exhibit 31.2		Rule 13a-14(a) Certification of Principal Financial Officer		—		—		—		Filed herewith
Exhibit 32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002		—		—		—		Filed herewith

 

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