Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 24, 2008
Commission File Number 1-10275
BRINKER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
|
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75-1914582
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(State or other jurisdiction of
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|
(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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6820 LBJ FREEWAY, DALLAS, TEXAS
75240
(Address of principal executive offices)
(Zip Code)
(972) 980-9917
(Registrants 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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(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
Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date.
Class
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Outstanding
at January 26, 2009
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Common Stock, $0.10 par value
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|
101,889,318 shares
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Table
of Contents
PART I.
FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
BRINKER INTERNATIONAL, INC.
Consolidated
Balance Sheets
(In thousands, except share and per share
amounts)
|
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December 24,
2008
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June 25,
2008
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(Unaudited)
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ASSETS
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Current Assets:
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Cash and cash equivalents
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$
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73,275
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$
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54,714
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Accounts receivable
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98,671
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52,304
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Inventories
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41,496
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35,377
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|
Prepaid expenses and other
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106,487
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106,183
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Income taxes receivable
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32,277
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|
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|
Deferred income taxes
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33,101
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71,595
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Assets held for sale
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135,850
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Total current assets
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385,307
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456,023
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Property and Equipment at Cost:
|
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Land
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207,366
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198,554
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Buildings and leasehold improvements
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1,578,269
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1,571,601
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Furniture and equipment
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635,755
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665,271
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Construction-in-progress
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24,145
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35,104
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|
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2,445,535
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2,470,530
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Less accumulated depreciation and
amortization
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(979,563
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)
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(940,815
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)
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Net property and equipment
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1,465,972
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1,529,715
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|
|
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Other Assets:
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Goodwill
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137,907
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140,371
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Deferred income taxes
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58,191
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23,160
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Other
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52,274
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43,853
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|
Total other assets
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248,372
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207,384
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Total assets
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$
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2,099,651
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$
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2,193,122
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LIABILITIES AND SHAREHOLDERS EQUITY
|
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Current Liabilities:
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Current installments of long-term debt
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$
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91,703
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$
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1,973
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Accounts payable
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122,847
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168,619
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|
Accrued liabilities
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370,314
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331,878
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Income taxes payable
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|
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5,946
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Liabilities associated with assets held for
sale
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7,875
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18,408
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Total current liabilities
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592,739
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526,824
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Long-term debt, less current installments
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748,223
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901,604
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Other liabilities
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178,645
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169,605
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Commitments and Contingencies (Note 8)
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Shareholders Equity:
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Common stock - 250,000,000 authorized
shares; $0.10 par value; 176,246,649 shares issued and 101,841,153 shares
outstanding at December 24, 2008, and 176,246,649 shares issued and 101,316,461
shares outstanding at June 25, 2008
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17,625
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17,625
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Additional paid-in capital
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460,389
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464,666
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Accumulated other comprehensive loss
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(2,616
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)
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(168
|
)
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Retained earnings
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1,780,108
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1,800,300
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|
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2,255,506
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2,282,423
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Less treasury stock, at cost (74,405,496
shares at December 24, 2008 and 74,930,188 shares at June 25, 2008)
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(1,675,462
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)
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(1,687,334
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)
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Total shareholders equity
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|
580,044
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595,089
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Total liabilities and shareholders equity
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$
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2,099,651
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$
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2,193,122
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|
See accompanying notes to
consolidated financial statements.
3
Table
of Contents
BRINKER INTERNATIONAL, INC.
Consolidated
Statements of Income
(In thousands, except per share amounts)
(Unaudited)
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Thirteen Week Periods Ended
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Twenty-Six Week Periods Ended
|
|
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December 24,
2008
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December 26,
2007
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December 24,
2008
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December 26,
2007
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|
|
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|
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Revenues
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$
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949,425
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$
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1,029,785
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$
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1,933,832
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$
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2,084,471
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|
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|
|
|
|
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Operating Costs and Expenses:
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|
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Cost of sales
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268,001
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291,339
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546,968
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583,077
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Restaurant expenses
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550,696
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584,567
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1,129,823
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1,186,445
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Depreciation and amortization
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40,647
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39,089
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81,803
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83,996
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|
General and administrative
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39,088
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41,396
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78,852
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84,447
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|
Other gains and charges
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85,149
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|
(16,343
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)
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90,102
|
|
(7,752
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)
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Total operating costs and expenses
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983,581
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|
940,048
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1,927,548
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1,930,213
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|
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|
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Operating income (loss)
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|
(34,156
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)
|
89,737
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|
6,284
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|
154,258
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|
|
|
|
|
|
|
|
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Interest expense
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10,535
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|
12,476
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|
19,992
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|
25,391
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|
Other, net
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|
(193
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)
|
(845
|
)
|
(1,565
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)
|
(2,102
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)
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|
|
|
|
|
|
|
|
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Income (loss) before tax expense (benefit)
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|
(44,498
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)
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78,106
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|
(12,143
|
)
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130,969
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|
|
|
|
|
|
|
|
|
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Income tax expense (benefit)
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|
(22,734
|
)
|
23,626
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|
(14,160
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)
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38,889
|
|
|
|
|
|
|
|
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|
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Net income (loss)
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|
$
|
(21,764
|
)
|
$
|
54,480
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|
$
|
2,017
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$
|
92,080
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|
|
|
|
|
|
|
|
|
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Basic net income (loss) per share
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|
$
|
(0.21
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)
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$
|
0.53
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$
|
0.02
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$
|
0.88
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|
|
|
|
|
|
|
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Diluted net income (loss) per share
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$
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(0.21
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)
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$
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0.52
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$
|
0.02
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$
|
0.86
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|
|
|
|
|
|
|
|
|
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|
Basic weighted average shares outstanding
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|
101,841
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|
103,498
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|
101,735
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104,981
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|
|
|
|
|
|
|
|
|
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Diluted weighted average shares outstanding
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|
101,841
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|
105,339
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|
102,520
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107,247
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|
|
|
|
|
|
|
|
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Cash dividends per share
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$
|
0.11
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$
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0.11
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$
|
0.22
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$
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0.20
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|
See accompanying notes to
consolidated financial statements.
4
Table
of Contents
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash
Flows
(In thousands)
(Unaudited)
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|
Twenty-six Week Periods Ended_
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|
|
|
December 24,
2008
|
|
December 26,
2007
|
|
|
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income
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|
$
|
2,017
|
|
$
|
92,080
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
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|
81,803
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|
83,996
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|
Restructure charges and other impairments
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|
50,732
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|
21,482
|
|
Loss (gain) on sale of assets
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|
39,692
|
|
(29,234
|
)
|
Stock-based compensation
|
|
9,152
|
|
6,989
|
|
Deferred income taxes
|
|
3,463
|
|
(14,052
|
)
|
Earnings on equity investments
|
|
(489
|
)
|
|
|
Changes in assets and liabilities,
excluding effects of dispositions:
|
|
|
|
|
|
Accounts receivable
|
|
(47,437
|
)
|
(39,709
|
)
|
Inventories
|
|
(6,665
|
)
|
(33
|
)
|
Prepaid expenses and other
|
|
4,880
|
|
5,230
|
|
Other assets
|
|
478
|
|
(663
|
)
|
Accounts payable
|
|
(40,393
|
)
|
25,577
|
|
Accrued liabilities
|
|
28,470
|
|
55,022
|
|
Income taxes payable
|
|
(38,384
|
)
|
30,113
|
|
Other liabilities
|
|
7,499
|
|
4,268
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
94,818
|
|
241,066
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
Payments for property and equipment
|
|
(59,597
|
)
|
(159,217
|
)
|
Proceeds from sale of assets
|
|
89,026
|
|
123,511
|
|
Investment in equity method investee
|
|
(8,171
|
)
|
(6,425
|
)
|
Increase in restricted cash
|
|
(4,700
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
16,558
|
|
(42,131
|
)
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
399,287
|
|
Net payments on credit facilities
|
|
(68,000
|
)
|
(341,686
|
)
|
Payments of dividends
|
|
(22,906
|
)
|
(20,637
|
)
|
Purchases of treasury stock
|
|
(3,631
|
)
|
(240,744
|
)
|
Payments on long-term debt
|
|
(592
|
)
|
(531
|
)
|
Proceeds from issuances of treasury stock
|
|
2,074
|
|
2,469
|
|
Excess tax benefits from stock-based
compensation
|
|
240
|
|
259
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(92,815
|
)
|
(201,583
|
)
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
18,561
|
|
(2,648
|
)
|
Cash and cash equivalents at beginning of
period
|
|
54,714
|
|
84,823
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
73,275
|
|
$
|
82,175
|
|
See accompanying notes to
consolidated financial statements.
5
Table of Contents
BRINKER INTERNATIONAL, INC.
Notes to
Consolidated Financial Statements
(Unaudited)
1. BASIS OF
PRESENTATION
References to Brinker, the Company, we, us, and
our in this Form 10-Q are references to Brinker International, Inc.
and its subsidiaries and any predecessor companies of Brinker International, Inc.
Our consolidated financial statements as of December 24,
2008 and June 25, 2008 and for the thirteen week and twenty-six week
periods ended December 24, 2008 and December 26, 2007 have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). We are
principally engaged in the ownership, operation, development, and franchising
of the Chilis Grill & Bar (Chilis), On The Border Mexican Grill &
Cantina (On The Border) and Maggianos Little Italy (Maggianos) restaurant
brands. We also hold a minority investment in Romanos Macaroni Grill (Macaroni
Grill) after completion of the sale of a majority interest in the brand to Mac
Acquisition LLC (Mac Acquisition), an affiliate of San Francisco-based Golden
Gate Capital, in December 2008. See Note 4 for additional disclosures.
The information furnished herein reflects all
adjustments (consisting only of normal recurring accruals and adjustments)
which are, in our opinion, necessary to fairly state the interim operating
results for the respective periods.
However, these operating results are not necessarily indicative of the
results expected for the full fiscal year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant
to SEC rules and regulations. The notes to the consolidated financial
statements (unaudited) should be read in conjunction with the notes to the
consolidated financial statements contained in the June 25, 2008 Form 10-K.
We believe the disclosures are sufficient for interim financial reporting
purposes.
Certain prior year amounts in the accompanying
consolidated financial statements have been reclassified to conform to fiscal
2009 presentation. These reclassifications have no effect on our net income or
financial position as previously reported.
2. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the reporting period. Diluted earnings (loss) per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. For the calculation of diluted net income
(loss) per share, the basic weighted average number of shares is increased by
the dilutive effect of stock options and restricted share awards determined
using the treasury stock method. We had
approximately 9.2 million stock options and restricted share awards outstanding
at December 24, 2008 and 2.3 million stock options and restricted share
awards outstanding at December 26, 2007 that were not included in the
dilutive earnings (loss) per share calculation because the effect would have
been antidilutive.
6
Table
of Contents
3. OTHER GAINS AND CHARGES
Other gains and charges consist of the following (in
thousands):
|
|
Thirteen Week Periods
Ended
|
|
Twenty-six Week Periods
Ended
|
|
|
|
December 24,
2008
|
|
December 26,
2007
|
|
December 24,
2008
|
|
December 26,
2007
|
|
Restaurant closures and impairments
|
|
$
|
45,701
|
|
$
|
11,420
|
|
$
|
48,126
|
|
$
|
12,242
|
|
Charges related to the sale of Macaroni
Grill
|
|
43,254
|
|
1,902
|
|
44,548
|
|
9,671
|
|
Gains on the sale of assets, net
|
|
(3,562
|
)
|
(29,234
|
)
|
(3,814
|
)
|
(29,234
|
)
|
Other gains and charges, net
|
|
(244
|
)
|
(431
|
)
|
1,242
|
|
(431
|
)
|
|
|
$
|
85,149
|
|
$
|
(16,343
|
)
|
$
|
90,102
|
|
$
|
(7,752
|
)
|
In the second quarter of fiscal 2009, we recorded a $45.7
million charge primarily related to long-lived asset impairments of $44.2
million resulting from the decision to close or decline lease renewals for 35
underperforming restaurants. The decision
to close the restaurants and decline lease renewals was based on a
comprehensive analysis that examined restaurants not performing at required
levels of return. In December 2008,
we completed the sale of a majority interest in Macaroni Grill to Mac
Acquisition and recorded a loss on the sale of $43.3 million. See Note 4 for
additional disclosures. We also recorded gains of $3.6 million related to the
sale of nine restaurants to a franchisee and land sales.
In the first quarter of fiscal 2009, we recorded
$2.0 million in lease termination charges, a $1.7 million charge related to
uninsured hurricane damage and a $1.3 million charge for expenses associated
with the sale of Macaroni Grill.
During the second quarter of fiscal 2008, we
recorded a $29.2 million gain on the sale of 76 company-owned Chilis
restaurants to ERJ Dining IV LLC. The sale was completed in November 2007.
We also recorded $11.4 million in charges primarily related to long-lived asset
impairments. The charges include a $5.5 million impairment related to two
restaurants which were impaired based on an analysis of projected operating
performance and operating cash flows as well as a $4.0 million asset impairment
charge associated with restaurant closures. Also included is a $1.0 million
charge related to the decrease in estimated sales value of land associated with
previously closed restaurants.
Additionally, we recorded a $1.9 million charge for expenses associated
with the sale of Macaroni Grill during the second quarter of fiscal 2008.
I
n
the first quarter of fiscal 2008, other gains and charges consisted primarily
of a $9.2 million impairment
charge to write-down the net assets of certain Macaroni Grill restaurants to
their fair value less costs to sell to a franchisee.
4.
SALE OF MACARONI GRILL
In August 2008, we
entered into an agreement with Mac Acquisition for the sale of a majority
interest in Macaroni Grill. The assets and liabilities associated with these
restaurants were classified as held for sale in the consolidated balance sheet
for the fiscal year ended June 25, 2008. The sale was completed on December 18,
2008. We received cash proceeds of approximately $88.0 million and recorded a
loss of $43.3 million in other gains and charges in the consolidated statements
of income.
The net assets
sold totaled approximately $110 million and consisted primarily of property and
equipment of $105 million. Assets previously held for sale of $19.5 million
were retained by us and included in property, plant and equipment as of December 24,
2008. The land and buildings related to
these locations were leased to Mac Acquisition as part of the sale agreement.
Liabilities associated with assets held for sale at
7
Table of Contents
December 24,
2008 totaled approximately $7.9 million and consisted primarily of remaining
transaction costs from the sale of
Macaroni Grill which are expected to be paid in the third quarter of fiscal
2009.
On December 18, 2008,
we contributed $6.0 million to Mac Acquisition for a 19.9% ownership interest
in the new entity.
We account for the investment under the equity method
of accounting and record our share of the net income or loss from the investee
within operating income since the operations of Macaroni Grill are similar to
our ongoing operations. This amount has been included in restaurant expense in
our consolidated statements of income due to the immaterial nature.
In accordance with
the reporting provisions of SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we have classified the results of Macaroni
Grill in continuing operations for fiscal 2009 and prior years as we will have
continuing involvement in the ongoing operations of Macaroni Grill.
As part of the sale, we entered into an
agreement with Mac Acquisition
whereby we have provided a three-year $10.0 million unsecured standby letter of
credit. Certain conditions must be met in order for Mac Acquisition to draw
upon the letter of credit. No amount was outstanding as of December 24,
2008. We will also provide corporate support services for the new entity for
one year with an option for one additional year.
5. LONG-TERM DEBT
Long-term debt consists of the following (in
thousands):
|
|
December 24,
2008
|
|
June 25,
2008
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
400,000
|
|
$
|
400,000
|
|
Revolving credit facility
|
|
90,000
|
|
|
|
Uncommitted credit facilities
|
|
|
|
158,000
|
|
5.75% notes
|
|
299,149
|
|
299,070
|
|
Capital lease obligations
|
|
50,777
|
|
46,507
|
|
|
|
839,926
|
|
903,577
|
|
Less current installments
|
|
(91,703
|
)
|
(1,973
|
)
|
|
|
$
|
748,223
|
|
$
|
901,604
|
|
As of June 25, 2008, we had credit facilities
aggregating $550 million, consisting of a revolving credit facility of $300
million and uncommitted credit facilities of $250 million. During the second quarter of fiscal 2009,
Standard and Poors (S&P) reaffirmed our debt rating of BBB- (investment
grade) with a stable outlook. However,
Moodys downgraded our corporate family rating to Ba1 (non-investment grade)
and our senior unsecured note rating to Ba2 (non-investment grade) with a
stable outlook. As a result of our split
rating, our borrowing costs will increase due to increased spreads over LIBOR
on our term loan (LIBOR plus 0.95%) and revolving credit facility (LIBOR plus
1.25%). Additionally, under the terms and conditions of our uncommitted credit
facility agreements, we have to maintain an investment grade rating with both
S&P and Moodys in order to utilize the credit facilities. Therefore, our
uncommitted credit facilities totaling $250 million are no longer available. We
manage total borrowings under all of our credit facilities to never exceed
total capacity under the revolving credit facility. As a result, outstanding
balances on the uncommitted credit facilities were repaid with funds drawn on
the revolving credit facility. As of December 24, 2008, we have $90 million
outstanding and $210 million available to us under our revolving credit
facility. Subsequent to December 24,
2008, we paid down the outstanding balance on the revolving credit facility by approximately
$20 million.
Our revolving credit facility expires in
October 2009. As a result, the $90
million outstanding under this facility has been classified as current in our
consolidated balance sheet as of December 24, 2008. We are in the final stages
of renewing this credit facility for a three-year term with a syndicate of
banks and, based on the levels of commitment provided in discussions to date
with lenders, we expect to complete the transaction in February 2009. Under the new revolving credit facility, the
spreads over LIBOR will increase due to market conditions as well as a change
in our credit rating. Due to the divestiture of Macaroni Grill, the reduction
in new company-owned restaurant development and our focus on debt repayment, we
anticipate that our future borrowing needs will be reduced and, therefore, we
have elected to reduce the size of the revolving credit facility to a level
that still provides us with adequate liquidity.
8
Table
of Contents
6. SHAREHOLDERS
EQUITY
The Board of Directors
has authorized a total of $2,060.0 million of share repurchases. As of December 24, 2008, approximately
$60 million was available under our share repurchase authorizations. We did not
repurchase any common shares under our share repurchase plan during the first
two quarters of fiscal 2009. Our stock repurchase plan has been and will be used
to return capital to shareholders and to minimize the dilutive impact of stock
options and other share-based awards. We have currently placed a moratorium on
share repurchases but, in the future, we may consider additional share
repurchases under our plan based on several factors, including our cash
position, share price, operational liquidity, and planned investment and
financing needs. During the first two quarters of fiscal 2009, approximately
642,000 restricted share awards vested with a fair value of $12.3 million. Approximately 190,000 of these shares were
repurchased from employees upon vesting for $3.6 million to satisfy minimum tax
withholding obligations. Repurchased
common stock is reflected as a reduction of shareholders equity. We paid dividends of $11.2 million, or $0.11
per share, to common stock shareholders in December 2008 and a total of
$22.9 million, or $0.22 per share, to common stock shareholders year-to-date.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and
interest for the first two quarters of fiscal 2009 and 2008 are as follows (in
thousands):
|
|
December 24,
2008
|
|
December 26,
2007
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$
|
19,306
|
|
$
|
20,079
|
|
Interest, net of amounts capitalized
|
|
15,370
|
|
28,043
|
|
|
|
|
|
|
|
|
|
Non-cash investing for the first
two quarters of fiscal 2009 and 2008 are as follows (in thousands):
|
|
December 24,
2008
|
|
December 26,
2007
|
|
|
|
|
|
|
|
Retirement of fully depreciated assets
|
|
$
|
43,951
|
|
$
|
21,070
|
|
|
|
|
|
|
|
|
|
8. CONTINGENCIES
As of December 24, 2008, we remain secondarily liable
for lease payments totaling $228.9 million as a result of the sale of a
majority interest in Macaroni Grill and the sale of other brands and
restaurants to franchisees in previous periods. This amount represents the
maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers
and expire at the end of the respective lease terms, which range from fiscal
2009 through fiscal 2023. In the event
of default, the indemnity and default clauses in our assignment agreements
govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as
of December 24, 2008.
Certain current and former hourly restaurant employees filed
a lawsuit against us in California Superior Court alleging violations of
California labor laws with
9
Table
of Contents
respect
to meal and rest breaks. The lawsuit
seeks penalties and attorneys fees and was certified as a class action in July 2006. On July 22, 2008, the California Court
of Appeal decertified the class action on all claims with prejudice. On October 22,
2008, the California Supreme Court granted a writ to review the decision of the
Court of Appeal. We intend to vigorously
defend our position. It is not possible at this time to reasonably estimate the
possible loss or range of loss, if any.
We are engaged in various other legal proceedings and have
certain unresolved claims pending. The ultimate liability, if any, for the
aggregate amounts claimed cannot be determined at this time. However,
management, based upon consultation with legal counsel, is of the opinion that
there are no matters pending or threatened which are expected to have a
material adverse effect, individually or in the aggregate, on our consolidated
financial condition or results of operations.
Item 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets
forth selected operating data as a percentage of total revenues for the periods
indicated. All information is derived from the accompanying consolidated
statements of income.
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
|
|
December 24,
2008
|
|
December 26,
2007
|
|
December 24,
2008
|
|
December 26,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
28.2
|
%
|
28.3
|
%
|
28.3
|
%
|
28.0
|
%
|
Restaurant expenses
|
|
58.0
|
%
|
56.8
|
%
|
58.4
|
%
|
56.9
|
%
|
Depreciation and amortization
|
|
4.3
|
%
|
3.8
|
%
|
4.2
|
%
|
4.0
|
%
|
General and administrative
|
|
4.1
|
%
|
4.0
|
%
|
4.1
|
%
|
4.1
|
%
|
Other gains and charges
|
|
9.0
|
%
|
(1.6
|
)%
|
4.7
|
%
|
(0.4
|
)%
|
Total operating costs and expenses
|
|
103.6
|
%
|
91.3
|
%
|
99.7
|
%
|
92.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
(3.6
|
)%
|
8.7
|
%
|
0.3
|
%
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
1.1
|
%
|
1.2
|
%
|
1.0
|
%
|
1.2
|
%
|
Other, net
|
|
0.0
|
%
|
(0.1
|
)%
|
(0.1
|
)%
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before tax expense (benefit)
|
|
(4.7
|
)%
|
7.6
|
%
|
(0.6
|
)%
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
(2.4
|
)%
|
2.3
|
%
|
(0.7
|
)%
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
(2.3
|
)%
|
5.3
|
%
|
0.1
|
%
|
4.4
|
%
|
10
Table of Contents
The following
table details the number of restaurant openings during the second quarter,
year-to-date, total restaurants open at the end of the second quarter, and
total projected openings in fiscal 2009 (excluding Macaroni Grill).
|
|
Second Quarter
|
|
Year-to-Date
|
|
Total Open at End
|
|
Projected
|
|
|
|
Openings
|
|
Openings
|
|
Of Second Quarter
|
|
Openings
|
|
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
Fiscal
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
Chilis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
0
|
|
14
|
|
7
|
|
28
|
|
885
|
|
865
|
|
9
|
|
Domestic Franchised
|
|
10
|
|
11
|
|
20
|
|
16
|
|
427
|
|
395
|
|
25-30
|
|
Total
|
|
10
|
|
25
|
|
27
|
|
44
|
|
1,312
|
|
1,260
|
|
34-39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On The Border:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
0
|
|
3
|
|
0
|
|
5
|
|
129
|
|
137
|
|
0
|
|
Domestic Franchised
|
|
2
|
|
1
|
|
5
|
|
3
|
|
31
|
|
29
|
|
6-8
|
|
Total
|
|
2
|
|
4
|
|
5
|
|
8
|
|
160
|
|
166
|
|
6-8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
1
|
|
0
|
|
1
|
|
0
|
|
43
|
|
41
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
1
|
|
1
|
|
2
|
|
1
|
|
7
|
|
5
|
|
2
|
|
Franchised
|
|
13
|
|
15
|
|
23
|
|
19
|
|
182
|
|
155
|
|
34-39
|
|
Total
|
|
14
|
|
16
|
|
25
|
|
20
|
|
189
|
|
160
|
|
36-41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total (b)
|
|
27
|
|
45
|
|
58
|
|
72
|
|
1,704
|
|
1,627
|
|
78-90
|
|
a)
At
the end of the second quarter of fiscal year 2009, international company-owned
restaurants by brand included six Chilis and one Maggianos. International
franchise restaurants by brand included 177 Chilis and five On The Borders.
b)
As
of December 24, 2008, we continue to own two Macaroni Grill restaurants
which have been excluded from the total restaurants. Per terms of the sale to Mac Acquisition, we
have a limited period of time to close the restaurants or change to an existing
Brinker brand.
At December 24,
2008, we owned the land and buildings for 228 of the 1,064 company-owned
restaurants. The net book values of the
land and buildings associated with these restaurants totaled $180.6 million and
$186.1 million, respectively.
11
Table of Contents
GENERAL
The following Managements Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) is intended to
help the reader understand Brinker International, our operations, and our
current operating environment. For an understanding of the significant factors
that influenced our performance during the quarters ended December 24,
2008 and December 26, 2007, the MD&A should be read in conjunction
with the consolidated financial statements and related notes included in this
quarterly report.
OVERVIEW
We are principally engaged in the ownership,
operation, development, and franchising of the Chilis Grill & Bar (Chilis),
On The Border Mexican Grill & Cantina (On The Border) and Maggianos
Little Italy (Maggianos) restaurant brands.
At December 24, 2008, we owned, operated, or franchised 1,704
restaurants. We also hold a minority
investment in Romanos Macaroni Grill (Macaroni Grill) after completion of
the sale of a majority interest in the brand to Mac Acquisition LLC (Mac
Acquisition), an affiliate of San Francisco-based Golden Gate Capital, in December 2008.
We will also provide corporate support services for the new entity for one year
with an option for one additional year.
We will account for our interest in the ongoing operations of the brand
through an equity method investment.
Our second quarter of
fiscal 2009 was marked by many of the same challenges we faced in the first
three months of the fiscal year.
External factors such as the volatile financial market, rising
unemployment and the housing crisis continued to put significant pressure on
consumer spending in the U.S and overseas.
The holiday season brought little relief as consumers remained cautious
about discretionary spending. As a
result, our traffic trends indicated the guests choice to limit restaurant
dining occasions or scale back on check totals during their visits. We also experienced a decline in our gift
card sales of approximately 15% compared to the prior year which will
negatively impact third quarter revenue when the majority of these cards are
expected to be redeemed.
Despite these challenging
times, we are still committed to our long term strategies and initiatives
centered around our five areas of focus - hospitality; food and beverage
excellence; restaurant atmosphere; pace and convenience; and international
expansion. These strategic priorities
are designed to strengthen Brinker brands and build on the long-term health of
the company by engaging and delighting our guests, differentiating our brands
from the competition, reducing the costs associated with managing our restaurants
and establishing a strong presence in key markets around the world. However, we will monitor the results closely
as well as the current business environment in order to pace the implementation
of our initiatives appropriately.
We strongly believe
investments in these five strategic priorities will strengthen our brands and
allow us to emerge from these tough economic times in a better competitive
position to deliver profitable growth over the long term for our shareholders. For example, with growing economic pressures
in the United States, international expansion allows further diversification of
our portfolio, enabling Brinker to build strength in a variety of markets and
economic conditions. Our growth will be
driven by cultivating relationships with equity investors, joint venture
partners and franchisees. Our growing
percentage of franchise operations both domestically and internationally enable
us to improve margins as royalty payments flow through to the bottom line. Another top area of focus remains creating a
culture of hospitality that will differentiate Brinker brands from all others
in the industry. Through our investments
in team member training and guest measurement programs, we are gaining
significant traction in this area and providing guests a reason to make Brinker
brands their preferred choice when dining out.
We also believe that the unique and craveable food and beverages as well
as the new flavors and offerings we continue to create at each of our brands,
the warm, welcoming and
12
Table
of Contents
revitalized atmospheres, and technologies and
process improvements related to pace and convenience will give customers new
reasons to dine with us more often.
This difficult operating
environment highlights the need to be disciplined with our capital allocation
and maintain the health of our balance sheet in order to provide a stable
financial base to weather these uncertain times. Generating strong cash flows has long been a
hallmark of Brinker and in the second quarter we have taken further steps to
shore up our cash flows to provide the necessary flexibility to address current
challenges and help drive the business forward.
In the second quarter, we completed an annual evaluation of our
restaurant base which led to the decision to close 35 underperforming
restaurants. We also made the decision
to further reduce our fiscal 2009 capital expenditures by $30 million,
eliminate virtually all company-owned restaurant development in fiscal 2010 and
place a moratorium on all share repurchase activity
. This
financial discipline designed to improve free cash flow combined with the
Macaroni Grill proceeds will allow us to reduce our debt levels and survive in
the current economic environment.
The casual dining industry
is a highly competitive business which is sensitive to changes in economic
conditions, trends in lifestyles and fluctuating costs. Our top priority remains increasing
profitable traffic over time. We believe
that this focus, combined with discipline around the use of capital and
efficient management of operating expenses, will enable Brinker to emerge from
the current economic recession as an industry leader. Despite the disappointing results for the
first half of fiscal 2009 and an uncertain outlook for the remainder of fiscal
2009, we remain confident in the financial health of our company, the long-term
prospects of the industry as well as in our ability to perform effectively in
an extremely competitive marketplace and a variety of economic environments.
REVENUES
Revenues
for the second quarter of fiscal 2009 decreased to $949.4 million, a 7.8%
decrease from the $1,029.8 million generated for the same quarter of fiscal
2008. Revenues for the twenty-six week period ended December 24, 2008 were
$1,933.8 million, a 7.2% decrease from the $2,084.5 million generated for the
same period in fiscal 2008. The decrease in revenue was primarily attributable
to a decrease in comparable restaurant sales across all brands as well as net
declines in capacity at company-owned restaurants primarily due to 47
restaurant closures and the sale of 198 restaurants since the second quarter of
fiscal 2008 as well as the sale of 76 restaurants during the second quarter of
fiscal 2008.
|
|
Thirteen Week Period Ended December 24, 2008
|
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker
International
|
|
(5.4
|
)%
|
2.9
|
%
|
(1.7
|
)%
|
(3.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(4.2
|
)%
|
3.3
|
%
|
(1.7
|
)%
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(3.7
|
)%
|
2.6
|
%
|
(1.5
|
)%
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
(6.9
|
)%
|
1.6
|
%
|
(2.3
|
)%
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Macaroni Grill
|
|
(10.6
|
)%
|
2.7
|
%
|
(1.0
|
)%
|
(18.1
|
)%
|
13
Table
of Contents
|
|
Thirteen Week Period Ended December 26, 2007
|
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker
International
|
|
(2.4
|
)%
|
2.7
|
%
|
0.5
|
%
|
(3.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(2.4
|
)%
|
2.8
|
%
|
0.9
|
%
|
(4.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(4.3
|
)%
|
2.2
|
%
|
0.1
|
%
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
1.7
|
%
|
3.1
|
%
|
(2.7
|
)%
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Macaroni Grill
|
|
(4.0
|
)%
|
2.2
|
%
|
1.4
|
%
|
(3.4
|
)%
|
|
|
Twenty-Six Week Period Ended December 24, 2008
|
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker
International
|
|
(4.7
|
)%
|
3.1
|
%
|
(1.4
|
)%
|
(3.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(3.6
|
)%
|
3.3
|
%
|
(1.2
|
)%
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(3.5
|
)%
|
3.5
|
%
|
(1.2
|
)%
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
(5.3
|
)%
|
2.0
|
%
|
(2.3
|
)%
|
3.0
|
%
|
|
|
|
|
|
|
|
|
|
|
Macaroni Grill
|
|
(9.8
|
)%
|
2.8
|
%
|
(1.1
|
)%
|
(14.6
|
)%
|
|
|
Twenty-Six Week Period Ended December 26, 2007
|
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix Shift
|
|
Capacity
|
|
|
|
|
|
|
|
|
|
|
|
Brinker
International
|
|
(1.7
|
)%
|
2.3
|
%
|
0.7
|
%
|
(0.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
Chilis
|
|
(1.0
|
)%
|
2.5
|
%
|
1.1
|
%
|
(1.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
On The Border
|
|
(4.8
|
)%
|
1.7
|
%
|
(0.4
|
)%
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
Maggianos
|
|
1.2
|
%
|
2.6
|
%
|
(2.3
|
)%
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
Macaroni Grill
|
|
(4.5
|
)%
|
2.2
|
%
|
1.1
|
%
|
(3.0
|
)%
|
Comparable restaurant sales
for the second quarter of fiscal 2009 decreased 5.4% compared to the same
quarter of the prior year. The decrease in comparable restaurant sales resulted
from a decline in customer traffic and unfavorable product mix shifts at all
brands. These decreases were partially offset by an increase in menu prices at
all brands.
Our capacity decreased 3.3%
for the second quarter of fiscal 2009 (as measured by average-weighted sales
weeks) compared to the respective prior year period. The reduction in capacity
is primarily due to the sale of 198 restaurants and 47 restaurant closures
since the second quarter of fiscal 2008 as well as the sale of 76 restaurants
during the second quarter of fiscal 2008, partially offset by the development
of new company-owned restaurants. Including the impact of restaurant sales to
franchisees, we experienced a net decrease of 199 company-owned restaurants
14
Table
of Contents
since
December 26, 2007. Excluding the impact of the sale of Macaroni Grill, the
capacity decline was 0.3%.
Royalty revenues from franchisees increased
approximately 9.7% to $15.8 million in the second quarter of fiscal 2009
compared to $14.4 million in the prior year. For the year-to-date period,
royalty revenues from franchisees increased 19.6% to $32.4 million compared to
$27.1 million in fiscal 2008. Excluding
the impact of the sale of Macaroni Grill, the increase is primarily due to the
net addition of 61 franchise restaurants since December 26, 2007.
Franchise and development fee revenues decreased to approximately $1.3 million
for the second quarter of fiscal 2009 and $1.7 million for the year-to-date as
compared to $6.5 million and $7.9 million in the respective prior year periods,
primarily due to the sale of 76 restaurants to a franchisee in the prior year.
COSTS AND EXPENSES
Cost of sales, as a percent of revenues, decreased
to 28.2% for the second quarter of fiscal 2009 from 28.3% in the prior
year. Cost of sales was positively
impacted in the current quarter by favorable menu price increases, partially
offset by unfavorable commodity price changes primarily in chicken, produce and
oils and sauces. Cost of sales, as a percent
of revenues, increased to 28.3% for the year-to-date period from 28.0% in the
prior year. Cost of sales was negatively impacted by unfavorable commodity
prices primarily in beef, ribs, chicken and produce, partially offset by
favorable menu price changes and product mix shifts.
Restaurant expenses, as a percent of revenues,
increased to 58.0% for the second quarter of fiscal 2009 as compared to 56.8%
in the same period of the prior year. Restaurant expenses, as a percent of
revenues increased to 58.4% for the year-to-date period from 56.9% in the prior
year. The increase was primarily driven by sales deleverage on fixed costs and
increased utility and labor expenses. These increases were partially offset by
lower pre-opening expenses since the same quarter of last year due to fewer
restaurant openings.
Depreciation and amortization increased $1.6 million
for the second quarter as compared to the same period of the prior year primarily
due to additional depreciation on new restaurants and remodel investments,
partially offset by restaurant closures. Depreciation and amortization
decreased $2.2 million for the year-to-date period of fiscal 2009 compared to
the same period of the prior year primarily driven by restaurant closures, the
classification of Macaroni Grill as held for sale and assets which became fully
depreciated, partially offset by an increase in depreciation due to the
addition of new restaurants and remodel investments.
General and administrative expenses decreased $2.3 million,
or 5.6%, for the second quarter of fiscal 2009 as compared to the same period
of fiscal 2008. General and administrative expenses decreased $5.6 million, or
6.6%, for the year-to-date period of fiscal 2009 as compared to the same period
of fiscal 2008. The decreases were primarily due to reduced salary expenses and
overall cost management in light of the difficult environment.
Other gains and charges consist of net charges of $85.1 million
and $90.1 million for the second quarter and year-to-date periods of fiscal
2009, respectively, compared to net gains of $16.3 million and $7.8 million for
the second quarter and year-to-date periods of fiscal 2008, respectively. Other
gains and charges in fiscal 2009 include a $45.7 million charge primarily
related to long-lived asset impairments of $44.2 million resulting from the
decision to close or decline lease renewals for 35 underperforming restaurants
based on a comprehensive analysis that examined restaurants not performing at
required levels of return. In December 2008,
we completed the sale of a majority interest in Macaroni Grill to Mac
Acquisition and recorded a loss on the sale of $43.3 million. We also recorded
gains of $3.6 million related to the sale of nine restaurants to a franchisee
and land sales during the
15
Table
of Contents
quarter. In
the first quarter of fiscal 2009, we recorded $2.0 million in lease termination
charges, a $1.7 million charge related to uninsured hurricane damage and a $1.3
million charge for expenses associated with the sale of Macaroni Grill. Other
gains and charges in the second quarter of fiscal 2008 include a $29.2 million
gain related to the sale of 76 Chilis restaurants to a franchisee, partially
offset by an $11.4 million charge related to restaurant closures and
impairments and a $1.9 million charge for expenses associated with the sale of
Macaroni Grill. Additionally, in the first quarter of fiscal 2008, we incurred
a $9.2 million impairment charge to write-down the net assets of certain
Macaroni Grill restaurants to their fair value less costs to sell to a
franchisee.
Interest expense was $10.5 million for the second quarter of fiscal 2009
and $20.0 million for the year-to-date period of fiscal 2009 compared to $12.5
million for the second quarter and $25.4 million for the year-to-date period of
the prior year. The decrease in interest
expense is primarily due to lower interest rates and lower average borrowing
balances in fiscal 2009.
INCOME TAXES
The
effective income tax rate decreased to a benefit of 51.1% and 116.6% for the
second quarter and year-to-date periods of fiscal 2009, respectively, compared
to an expense of 30.2% and 29.7% for the second quarter and year-to-date
periods of fiscal 2008. The change in the tax rate was primarily due to the
loss on the sale of Macaroni Grill and charges for long-lived asset
impairments.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash flows
generated from our restaurant operations.
We expect our ability to generate solid cash flows from operations to
continue into the future. Net cash
provided by operating activities for the first two quarters of fiscal 2009
decreased to approximately $94.8 million compared to $241.1 million for the
first two quarters in the prior year primarily due to a decline in operating
profitability, a reduction in gift card sales and the timing of income tax
payments as well as operational payments and receipts.
Capital expenditures consist of purchases of
land for future restaurant sites, new restaurants under construction, purchases
of new and replacement restaurant furniture and equipment, investments in
information technology infrastructure and ongoing remodel investments. Capital expenditures were $59.6 million for
the first two quarters of fiscal 2009 compared to $159.2 million for the same
period of fiscal 2008. The reduction in capital expenditures is primarily due
to a decrease in company-owned restaurants developed in the first two quarters
of fiscal 2009 compared to the same period of prior year. We estimate that our capital expenditures
during fiscal 2009, excluding Macaroni Grill, will be approximately $110
million and
will be funded entirely by cash from
operations.
Excluding the impact of assets held for sale, the working
capital deficit increased to $199.6 million at December 24, 2008 from
$188.2 million at June 25, 2008 primarily due to the reclassification of
$90 million of long-term debt to current liabilities, partially offset by an
increase in third party gift card receivables due to sales during the holiday
season and timing of operational payments and receipts.
We paid dividends of
$11.2 million, or $0.11 per share, to common stock shareholders in December 2008
and a total of $22.9 million, or $0.22 per share, to common stock shareholders
year-to-date. We plan to keep future quarterly dividend payouts stable at $0.11
per share.
The Board of Directors has authorized a total of $2,060.0
million in share repurchases, which has been and will be used to return capital
to shareholders and to minimize the dilutive impact of stock options and other
share-based awards. As of December 24, 2008, approximately $60 million was
available under our share repurchase authorizations. We did not repurchase any
common shares under our share repurchase
16
Table
of Contents
plan
during the first two quarters of fiscal 2009. We have currently placed a
moratorium on share repurchases but, in the future, we may consider additional
share repurchases under our plan based on several factors, including our cash
position, share price, operational liquidity, and planned investment and
financing needs. During the first two quarters of fiscal 2009, approximately
642,000 restricted share awards vested with a fair value of $12.3 million. Approximately 190,000 of these shares were
repurchased from employees upon vesting for $3.6 million to satisfy minimum tax
withholding obligations. The repurchased
common stock is reflected as a reduction of shareholders equity.
During the second quarter of fiscal 2009, Standard and
Poors (S&P) reaffirmed our debt rating of BBB- (investment grade) with a
stable outlook. However, Moodys
downgraded our corporate family rating to Ba1 (non-investment grade) and our
senior unsecured note rating to Ba2 (non-investment grade) with a stable
outlook. As a result of our split
rating, our borrowing costs will increase due to increased spreads over LIBOR
on our term loan (LIBOR plus 0.95%) and revolving credit facility (LIBOR plus
1.25%). Additionally, under the terms and conditions of our uncommitted credit
facility agreements, we have to maintain an investment grade rating with both
S&P and Moodys in order to utilize the credit facilities. Therefore, our
uncommitted credit facilities totaling $250 million are no longer available. We
manage total borrowings under all of our credit facilities to never exceed
total capacity under the revolving credit facility. As a result, outstanding
balances on the uncommitted credit facilities were repaid with funds drawn on
the revolving credit facility. As of December 24, 2008, we have $90 million
outstanding and $210 million available to us under our revolving credit
facility. Subsequent to December 24, 2008, we paid down the outstanding balance
on the revolving credit facility by approximately $20 million.
Our revolving credit facility of $300 million expires in
October 2009. As a result, the $90
million outstanding under this facility has been classified as current in our
consolidated balance sheet as of December 24, 2008. We are in the final stages
of renewing this credit facility for a three-year term with a syndicate of
banks and, based on the levels of commitment provided in discussions to date
with lenders, we expect to complete the transaction in February 2009. Under the new revolving credit facility, the
spreads over LIBOR will increase due to market conditions as well as a change
in our credit rating. Due to the divestiture of Macaroni Grill, the reduction
in new company-owned restaurant development and our focus on debt repayment, we
anticipate that our future borrowing needs will be reduced and, therefore, we
have elected to reduce the size of the revolving credit facility to a level
that still provides us with adequate liquidity. As of December 24, 2008, we are
in compliance with all financial debt covenants.
Our balance sheet is a primary focus as we have committed to
reducing our leverage allowing us to retain the investment grade rating from
S&P and ultimately regain our investment grade rating from Moodys. To accomplish this goal, we used cash
proceeds from the sale of Macaroni Grill as well as free cash flow to pay down
our credit facilities by $60 million in the second quarter, leaving the
remainder of the Macaroni Grill cash proceeds to fund our short term working
capital needs. We currently plan to
continue utilizing available free cash flow to pay down debt in fiscal 2009 and
2010. We have also reduced capital expenditures for fiscal 2009, eliminated virtually
all company-owned restaurant development in fiscal 2010 and placed a moratorium
on all share repurchase activity to ensure we maintain adequate cash flow to
meet our current obligations and continue to pay down debt.
We believe that our various sources of
capital, including cash flow from operating activities and availability under
our existing and future credit facility are adequate to finance operations as
well as the repayment of current debt obligations. We are not aware of any other event or trend
that would potentially affect our liquidity. In the event such a trend
develops, we believe that there are sufficient funds available under our credit
facility and from our internal cash generating capabilities to adequately
manage our ongoing business.
17
Table
of Contents
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2006, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements, (SFAS 157). SFAS
157 clarifies the definition of fair value, describes methods used to
appropriately measure fair value, and expands fair value disclosure
requirements, but does not change existing guidance as to whether or not an
instrument is carried at fair value. For financial assets and liabilities, SFAS
157 is effective for fiscal years beginning after November 15, 2007, which
required that we adopt these provisions in first quarter fiscal 2009. The adoption of SFAS 157 did not have an
impact on our consolidated financial statements. For nonfinancial assets and
liabilities, SFAS 157 is effective for fiscal years beginning after November 15,
2008, which will require us to adopt these provisions in fiscal 2010. We are currently evaluating the impact, if
any, that an adoption of the deferred provisions of this statement will have on
our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R,
Business Combinations, (SFAS 141R).
Under SFAS 141R, all business combinations will be accounted for by
applying the acquisition method. SFAS 141R requires most identifiable assets,
liabilities, noncontrolling interests, and goodwill acquired in a business
combination to be recorded at full fair value. SFAS 141R is effective for
annual reporting periods beginning on or after December 15, 2008 and will
be effective for us beginning in the first quarter of fiscal 2010 for business
combinations occurring on or after the effective date.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB No. 51,
(SFAS 160). SFAS 160 will require noncontrolling interests (previously
referred to as minority interests) to be treated as a separate component of
equity, not as a liability or other item outside of permanent equity. The
Statement applies to the accounting for noncontrolling interests and
transactions with noncontrolling interest holders in consolidated financial statements.
SFAS 160 is effective for periods beginning on or after December 15, 2008
and will be effective for us beginning in the third quarter of fiscal
2009. We do not expect that SFAS 160 will have a material impact on our
financial statements.
In June 2008, the FASB issued FASB Staff
Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities. FSP EITF 03-6-1
provides that unvested share-based payment awards that contain nonforfeitable
rights to dividends that are paid or unpaid are participating securities and
shall be included in the computation of earnings per share based on the
two-class method. The two-class method is an earnings allocation method for
computing earnings per share when an entitys capital structure includes either
two or more classes of common stock or common stock and participating
securities. FSP EITF 03-6-1 is effective for fiscal years beginning after December 15,
2008, which will require us to adopt these provisions in fiscal 2010. We do not
expect that FSP EITF 03-6-1 will have a material impact on our financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no
material changes in our quantitative and qualitative market risks since the
prior reporting period.
Item 4. CONTROLS AND PROCEDURES
Based on their
evaluation of our disclosure controls and procedures (as defined in Rules 13a-15
and 15d-15 under the Securities Exchange Act of 1934 [the Exchange Act]), as
of the end of the period covered by this report, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures are effective.
18
Table
of Contents
There were no changes in our internal control
over financial reporting during our second quarter ended December 24,
2008, that have materially affected or are reasonably likely to materially
affect, our internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
We wish to
caution you that our business and operations are subject to a number of risks
and uncertainties. We have identified
certain factors in Part I, Item IA Risk Factors in our Annual Report on Form 10-K
for the year ended June 25, 2008 and below in Part II, Item 1A Risk
Factors in this report on Form 10-Q, that could cause actual results to
differ materially from our historical results and from those projected in
forward-looking statements contained in this report, in our other filings with
the SEC, in our news releases, written or electronic communications, and verbal
statements by our representatives. We
further caution that it is not possible to see all such factors, and you should
not consider the identified factors as a complete list of all risks and
uncertainties.
You should be
aware that forward-looking statements involve risks and uncertainties. These risks and uncertainties may cause our
or our industrys actual results, performance or achievements to be materially
different from any future results, performances or achievements contained in or
implied by these forward-looking statements.
Forward-looking statements are generally accompanied by words like believes,
anticipates, estimates, predicts, expects, and other similar
expressions that convey uncertainty about future events or outcomes.
The risks related to our business include:
·
|
|
The affect
of competition on our operations and financial results.
|
|
|
|
·
|
|
The general decrease in sales volumes
during winter months.
|
|
|
|
·
|
|
The affect of potential changes in
governmental regulation on our ability to open new restaurants and to maintain
our existing and future operations.
|
|
|
|
·
|
|
The risk inflation may increase our
operating expenses.
|
|
|
|
·
|
|
Increases in energy costs and the impact on
our profitability.
|
|
|
|
·
|
|
Increased costs or reduced revenues from
shortages or interruptions in the availability and delivery of food and other
supplies.
|
|
|
|
·
|
|
Our ability to consummate successful
mergers, acquisitions, divestitures and other strategic transactions that are
important to our future growth and profitability.
|
|
|
|
·
|
|
If we are unable to meet our growth plan,
our profitability in the future may be adversely affected.
|
|
|
|
·
|
|
Disruptions in the financial markets may
adversely impact the availability and cost of credit and consumer spending
patterns.
|
|
|
|
·
|
|
Declines in the market price of our common
stock or changes in other circumstances that may indicate an impairment of
goodwill could adversely affect our financial position and results of
operation.
|
|
|
|
·
|
|
Unfavorable publicity relating to one or
more of our restaurants in a particular brand may taint public perception of
the brand.
|
|
|
|
·
|
|
Identification of material weakness in
internal control may adversely affect our financial results.
|
19
Table
of Contents
·
|
|
Other risk factors may adversely affect our
financial performance, including, pricing, consumer spending and consumer
confidence, changes in economic conditions and financial and credit markets,
credit availability, increased costs of food commodities, increased fuel
costs and availability for our team members, customers and suppliers, health
epidemics or pandemics or the prospects of these events, consumer perceptions
of food safety, changes in consumer tastes and behaviors, governmental
monetary policies, changes in demographic trends, availability of employees,
terrorist acts, energy shortages and rolling blackouts, and weather and other
acts of God.
|
PART II. OTHER INFORMATION
Item 1.
|
LEGAL PROCEEDINGS
|
Information
regarding legal proceedings is incorporated by reference from Note 8 to our
consolidated financial statements set forth in Part I of this report.
Item 1A. RISK FACTORS
There
has been no material change in the risk factors set forth in Part I, Item
1A, Risk Factors in our Annual Report on Form 10-K for the year ended June 25,
2008, except the addition of the following risk factors to read in their
entirety as follows:
Disruptions in the financial
markets may adversely impact the availability and cost of credit and consumer spending
patterns.
The subprime mortgage crisis, subsequent disruptions
to the financial markets, and continuing economic downturn may adversely impact
the availability of credit already arranged and the availability and cost of
credit in the future. The disruptions in the financial markets may also have an
adverse effect on the U.S. and world economy, which may negatively impact
consumer spending patterns. There can be no assurance that various U.S. and
world government responses to the disruptions in the financial markets in the
near future will restore consumer confidence, stabilize the markets, or
increase liquidity or the availability of credit.
Declines in the market price of
our common stock or changes in other circumstances that may indicate an
impairment of goodwill could adversely affect our financial position and
results of operations.
We perform our annual goodwill impairment test in
the second quarter of each fiscal year in accordance with the Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. Interim goodwill impairment tests are also required when events or
circumstances change between annual tests that would more likely than not
reduce the fair value of our reporting units below their carrying value. It is possible that a change in circumstances
such as the decline in the market price of our common stock or changes in consumer
spending levels, or in the numerous variables associated with the judgments,
assumptions and estimates made in assessing the appropriate valuation of our
goodwill, could negatively impact the valuation of our brands and create the
potential for a non-cash charge to recognize impairment losses on some or all
of our goodwill. If we were required to
write down a portion of our goodwill and record related non-cash impairment
charges, our financial position and results of operations would be adversely
affected.
The above risks and other risks described in this
report and our other filings with the SEC could have a material impact on our
business, financial condition or results of operations. It is not possible to predict or identify all
risk factors. Additional risks and
uncertainties not presently known to us or that we currently
20
Table of Contents
believe
to be immaterial may also impair our operations. Therefore, the risks identified are not
intended to be a complete discussion of all potential risks or uncertainties.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Shares
repurchased
during the second quarter of fiscal 2009 are as follows (in thousands, except
share and per share amounts):
|
|
Total Number
of Shares
Purchased (a)
|
|
Average
Price
Paid per
Share
|
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Program
|
|
Approximate
Dollar Value
that May Yet
be Purchased
Under the
Program
|
|
September 25, 2008 through
October 29, 2008
|
|
189
|
|
$
|
14.87
|
|
|
|
$
|
59,797
|
|
October 30, 2008 through
November 26, 2008
|
|
120
|
|
$
|
17.42
|
|
|
|
$
|
59,797
|
|
November 27, 2008 through
December 24, 2008
|
|
149
|
|
$
|
6.91
|
|
|
|
$
|
59,797
|
|
|
|
458
|
|
$
|
12.95
|
|
|
|
|
|
(a)
|
These amounts represent shares owned and tendered by
employees to satisfy tax withholding obligations on the vesting of restricted
share awards, which are not deducted from shares available to be purchased
under publicly announced programs. Unless otherwise indicated, shares owned
and tendered by employees to satisfy tax withholding obligations were
purchased at the average of the high and low prices of the Companys shares
on the date of vesting.
|
|
|
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our
Proxy Statement dated September 11, 2008 for the Annual Meeting of Shareholders
held on October 30, 2008, as filed with the Securities and Exchange
Commission on September 11, 2008, is incorporated herein by reference.
(a)
|
The Annual Meeting of Shareholders of the
Company was held on October 30, 2008.
|
|
|
(b)
|
Each of the managements nominees, as
described in the Proxy Statement referenced above, was elected a director to
hold office until the next Annual Meeting of Shareholders or until his or her
successor is elected and qualified.
|
|
|
Number of Shares Voted
|
|
|
|
For
|
|
Withheld
|
|
|
|
|
|
|
|
Douglas H. Brooks
|
|
90,371,445
|
|
6,270,556
|
|
Harriet Edelman
|
|
95,300,467
|
|
1,341,534
|
|
Marvin J. Girouard
|
|
94,839,930
|
|
1,802,071
|
|
Ronald Kirk
|
|
90,404,627
|
|
6,237,374
|
|
John W. Mims
|
|
94,864,025
|
|
1,777,977
|
|
George R. Mrkonic
|
|
94,862,369
|
|
1,779,633
|
|
Erle Nye
|
|
95,296,500
|
|
1,345,502
|
|
James E. Oesterreicher
|
|
90,008,913
|
|
6,633,088
|
|
Rosendo G. Parra
|
|
94,863,379
|
|
1,778,623
|
|
Cece Smith
|
|
95,305,756
|
|
1,336,245
|
|
21
Table of Contents
(c)
|
The following matter was also voted upon at
the meeting and approved by the shareholders:
|
(i)
|
proposal to ratify the appointment of KPMG
LLP as Independent Auditors for Fiscal 2009
|
For
|
|
Against
|
|
Abstain
|
|
91,215,133
|
|
5,369,034
|
|
57,834
|
|
(d)
|
The following matter was also voted upon at
the meeting and approved by the shareholders:
|
(i)
|
proposal to approve an Amendment to the
Companys Stock Option and Incentive Plan
|
For
|
|
Against
|
|
Abstain
|
|
72,667,595
|
|
16,557,115
|
|
95,173
|
|
(e)
|
The following matter was also voted upon at
the meeting and rejected by the shareholders:
|
(i)
|
shareholder proposal submitted by PETA
|
For
|
|
Against
|
|
Abstain
|
|
1,850,396
|
|
62,092,974
|
|
25,371,213
|
|
22
Table
of Contents
Item 6.
EXHIBITS
10(a)
|
|
Stock Option and Incentive Plan, filed as Appendix A to the Proxy
Statement of Registrant dated September 11, 2008, and incorporated by
reference herein.
|
|
|
|
31(a)
|
|
Certification by Douglas H. Brooks, Chairman of the Board, President
and Chief Executive Officer of the Registrant, pursuant to 17 CFR 240.13a -
14(a) or 17 CFR 240.15d - 14(a).
|
|
|
|
31(b)
|
|
Certification by Charles M. Sonsteby, Executive Vice President and
Chief Financial Officer of the Registrant, pursuant to 17 CFR 240.13a -
14(a) or 17 CFR 240.15d - 14(a).
|
|
|
|
32(a)
|
|
Certification by Douglas H. Brooks, Chairman of the Board, President
and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32(b)
|
|
Certification by Charles M. Sonsteby, Executive Vice President and
Chief Financial Officer of the Registrant, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
23
Table of Contents
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, we have duly caused
this report to be signed on our behalf by the undersigned thereunto duly
authorized.
|
BRINKER
INTERNATIONAL, INC.
|
|
|
|
|
Date:
February 2, 2009
|
By:
|
/s/
Douglas H. Brooks
|
|
|
Douglas
H. Brooks,
|
|
|
Chairman
of the Board,
|
|
|
President
and Chief Executive Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date:
February 2, 2009
|
By:
|
/s/
Charles M. Sonsteby
|
|
|
Charles
M. Sonsteby,
|
|
|
Executive
Vice President and
|
|
|
Chief
Financial Officer
|
|
|
(Principal
Financial Officer)
|
24
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