Item 1. FINANCIAL STATEMENTS
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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September 26,
2012
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June 27,
2012
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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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64,310
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$
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59,103
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Accounts receivable
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34,742
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43,387
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Inventories
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25,616
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25,360
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Prepaid expenses and other
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59,626
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63,023
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Income taxes receivable
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6,345
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1,055
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Deferred income taxes
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0
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2,918
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Total current assets
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190,639
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194,846
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Property and Equipment:
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Land
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151,919
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152,382
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Buildings and leasehold improvements
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1,408,451
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1,399,905
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Furniture and equipment
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567,360
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556,304
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Construction-in-progress
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13,540
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11,211
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2,141,270
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2,119,802
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Less accumulated depreciation and amortization
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(1,097,317
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)
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(1,076,238
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)
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Net property and equipment
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1,043,953
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1,043,564
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Other Assets:
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Goodwill
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125,604
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125,604
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Deferred income taxes
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20,033
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20,231
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Other
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51,627
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51,827
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Total other assets
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197,264
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197,662
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Total assets
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$
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1,431,856
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$
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1,436,072
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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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27,397
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$
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27,334
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Accounts payable
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78,113
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100,531
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Accrued liabilities
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247,767
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273,884
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Deferred income taxes
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3,359
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0
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Total current liabilities
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356,636
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401,749
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Long-term debt, less current installments
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671,031
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587,890
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Other liabilities
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136,100
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136,560
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Commitments and Contingencies (Note 7)
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Shareholders Equity:
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Common stock250,000,000 authorized shares; $0.10 par value; 176,246,649 shares issued and 73,117,489 shares outstanding at
September 26, 2012, and 176,246,649 shares issued and 74,342,115 shares outstanding at June 27, 2012
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17,625
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17,625
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Additional paid-in capital
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467,239
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466,781
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Retained earnings
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2,125,357
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2,112,858
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2,610,221
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2,597,264
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Less treasury stock, at cost (103,129,160 shares at September 26, 2012 and 101,904,534 shares at June 27,
2012)
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(2,342,132
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)
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(2,287,391
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)
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Total shareholders equity
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268,089
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309,873
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Total liabilities and shareholders equity
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$
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1,431,856
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$
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1,436,072
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See accompanying notes to consolidated financial statements.
3
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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September 26,
2012
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September 28,
2011
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Revenues:
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Company sales
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$
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663,668
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$
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647,755
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Franchise and other revenues
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19,839
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20,647
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Total revenues
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683,507
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668,402
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Operating Costs and Expenses:
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Company restaurants
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Cost of sales
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184,695
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181,618
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Restaurant labor
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218,866
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215,945
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Restaurant expenses
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163,053
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165,565
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Company restaurant expenses
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566,614
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563,128
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Depreciation and amortization
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32,629
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31,183
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General and administrative
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37,273
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32,819
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Other gains and charges
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447
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1,685
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Total operating costs and expenses
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636,963
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628,815
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Operating income
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46,544
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39,587
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Interest expense
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6,889
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7,048
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Other, net
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(797
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)
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(1,092
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)
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Income before provision for income taxes
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40,452
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33,631
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Provision for income taxes
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12,588
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10,010
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Net income
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$
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27,864
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$
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23,621
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Basic net income per share
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$
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0.38
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$
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0.29
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Diluted net income per share
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$
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0.36
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$
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0.28
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Basic weighted average shares outstanding
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73,903
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81,744
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Diluted weighted average shares outstanding
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76,558
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83,583
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Dividends per share
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$
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0.20
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$
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0.16
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See accompanying notes to consolidated financial statements.
4
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Thirteen Week Periods Ended
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September 26,
2012
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September 28,
2011
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Cash Flows from Operating Activities:
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Net income
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$
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27,864
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$
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23,621
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization
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32,629
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31,183
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Stock-based compensation
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6,521
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3,918
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Deferred income taxes
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3,404
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9,285
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Restructure charges and other impairments
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447
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3,029
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Net loss (gain) on disposal of assets
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945
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(364
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)
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Loss on equity investments
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648
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135
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Other
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68
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|
509
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Changes in assets and liabilities:
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Accounts receivable
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8,697
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9,498
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Inventories
|
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(256
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)
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(801
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)
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Prepaid expenses and other
|
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2,672
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|
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3,773
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Current income taxes
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|
546
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(8,484
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)
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Other assets
|
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(997
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)
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1,556
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Accounts payable
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(20,666
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)
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(9,394
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)
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Accrued liabilities
|
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|
(29,891
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)
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|
(35,454
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)
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Other liabilities
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|
309
|
|
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(1,157
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)
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Net cash provided by operating activities
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32,940
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30,853
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Cash Flows from Investing Activities:
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Payments for property and equipment
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(37,001
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)
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(27,662
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)
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Proceeds from sale of assets
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|
649
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|
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|
2,523
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|
Investment in equity method investees
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0
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(729
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)
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Net cash used in investing activities
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(36,352
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)
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(25,868
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)
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Cash Flows from Financing Activities:
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Borrowings on revolving credit facility
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90,000
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0
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Purchases of treasury stock
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|
(86,331
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)
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(77,822
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)
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Proceeds from issuances of treasury stock
|
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17,855
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|
3,449
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|
Payments of dividends
|
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|
(12,803
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)
|
|
|
(12,222
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)
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Payments on long-term debt
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|
(6,595
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)
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|
|
(5,312
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)
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Excess tax benefits from stock-based compensation
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|
6,493
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|
662
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|
Proceeds from issuance of long-term debt
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0
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70,000
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|
Payments for deferred financing costs
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|
0
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(1,620
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)
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|
|
|
|
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Net cash provided by (used in) financing activities
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|
8,619
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|
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(22,865
|
)
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Net change in cash and cash equivalents
|
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|
5,207
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|
|
|
(17,880
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
59,103
|
|
|
|
81,988
|
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period
|
|
$
|
64,310
|
|
|
$
|
64,108
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|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
5
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 September 26, 2012 and June 27, 2012 and for the thirteen week periods ended September 26, 2012 and September 28, 2011 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) and Maggianos Little Italy (Maggianos) restaurant brands. At September 26, 2012, we owned, operated, or franchised 1,585 restaurants in the United States and 32 countries and two territories
outside of the United States.
Beginning in fiscal 2013, revenues are presented in two separate captions on the consolidated
statements of income in an effort to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales includes revenues generated by the operation of company-owned restaurants and gift card redemptions.
Franchise and other revenues includes royalties, development fees, franchise fees, Maggianos banquet service charge income and certain gift card activity (breakage and discounts). Prior year revenue amounts have been reclassified to conform to
the fiscal 2013 presentation. These reclassifications have no effect on total revenue or net income previously reported.
The
preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those
estimates.
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 27, 2012 Form 10-K. We believe the disclosures are sufficient for interim
financial reporting purposes.
6
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number
of common shares outstanding for the reporting period. Diluted earnings 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 earnings 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 724,000 stock
options and restricted share awards outstanding at September 26, 2012 and 2.2 million stock options and restricted share awards outstanding at September 28, 2011 that were not included in the dilutive earnings per share calculation
because the effect would have been anti-dilutive.
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 26,
2012
|
|
|
June 27,
2012
|
|
Term loan
|
|
$
|
231,250
|
|
|
$
|
237,500
|
|
5.75% notes
|
|
|
289,747
|
|
|
|
289,709
|
|
Revolving credit facility
|
|
|
130,000
|
|
|
|
40,000
|
|
Capital lease obligations
|
|
|
47,431
|
|
|
|
48,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698,428
|
|
|
|
615,224
|
|
Less current installments
|
|
|
(27,397
|
)
|
|
|
(27,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
671,031
|
|
|
$
|
587,890
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2013, an additional $90 million was drawn on the revolver primarily to
fund share repurchases. As of September 26, 2012, $120 million of credit was available under the revolver.
The term loan
and revolving credit facility bear interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.50%. Based on our current credit rating, we are paying
interest at a rate of LIBOR plus 1.63%. One month LIBOR at September 26, 2012 was approximately 0.22%.
4. SHAREHOLDERS EQUITY
In August 2012, our Board of Directors authorized a $500.0 million increase to our existing share repurchase program.
We repurchased approximately 2.5 million shares of our common stock for $86.3 million during the first quarter of fiscal 2013. As of September 26, 2012, approximately $579 million was available under our share repurchase authorizations.
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 evaluate potential share repurchases under our plan based on several factors,
including our cash position, share price, operational liquidity, proceeds from divestitures, borrowing and planned investment and financing needs. Repurchased common stock is reflected as a reduction of shareholders equity. During the first
quarter of fiscal 2013, we made an annual grant of approximately 223,000 stock options with an exercise price of $34.82 and a fair value of $13.69, and approximately 504,000 restricted share awards with a weighted average fair value of $35.60.
Additionally, approximately 806,000 stock options were exercised resulting in cash proceeds of $17.9 million.
7
In the first quarter of fiscal 2013, we paid dividends of $12.8 million to common stock
shareholders, compared to $12.2 million in the prior year. Our Board of Directors approved a 25 percent increase in the quarterly dividend from $0.16 to $0.20 per share effective with the dividend declared in August 2012 of $14.8 million paid on
September 27, 2012.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest for the first quarter of fiscal 2013 and 2012 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 26,
2012
|
|
|
September 28,
2011
|
|
Income taxes, net of refunds
|
|
$
|
1,215
|
|
|
$
|
8,376
|
|
Interest, net of amounts capitalized
|
|
|
2,393
|
|
|
|
2,023
|
|
Non-cash investing activities for the first quarter of fiscal 2013 and 2012 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 26,
2012
|
|
|
September 28,
2011
|
|
Retirement of fully depreciated assets
|
|
$
|
11,508
|
|
|
$
|
37,138
|
|
6. FAIR VALUE DISCLOSURES
Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly
transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
|
Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar
assets or liabilities.
|
|
|
|
Level 3 inputs are unobservable and reflect our own assumptions.
|
(a)
|
Non-Financial Assets Measured on a Non-Recurring Basis
|
We review the carrying amount of property and equipment and liquor licenses in the second and fourth quarters or when events or circumstances indicate that the carrying amount may not be recoverable. If
the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. No impairment charges were recorded in the first quarters of fiscal 2013 and fiscal 2012.
8
(b)
|
Other Financial Instruments
|
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair value of cash and cash equivalents, accounts receivable and accounts
payable approximates their carrying amounts. The fair value of the revolving credit facility borrowing approximates carrying value as the interest rates are adjusted based on LIBOR and the companys credit rating. The fair value of the 5.75%
notes is based on quoted market prices. At September 26, 2012, the 5.75% notes had a carrying value of $289.7 million and a fair value of $310.0 million. At June 27, 2012, the 5.75% notes had a carrying value of $289.7 million and a fair
value of $310.2 million.
7. CONTINGENCIES
In connection with the sale of restaurants to franchisees and brand divestitures, we have, in certain cases, guaranteed
lease payments. As of September 26, 2012 and June 27, 2012, we have outstanding lease guarantees or are secondarily liable for $140.7 million and $142.6 million, respectively. 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 2013 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 September 26, 2012.
In August 2004, certain current and former hourly restaurant team members filed a putative class action lawsuit against us in California Superior Court alleging violations of California labor laws with
respect to meal periods and rest breaks. The lawsuit sought penalties and attorneys fees and was certified as a class action by the trial court in July 2006. In July 2008, the California Court of Appeal decertified the class action on all
claims with prejudice. In October 2008, the California Supreme Court granted a writ to review the decision of the Court of Appeal and oral arguments were heard by the California Supreme Court on November 8, 2011. In April 2012, the California
Supreme Court issued an opinion affirming in part, reversing in part, and remanding in part for further proceedings. The California Supreme Courts opinion resolved many of the legal standards for meal periods and rest breaks in our California
restaurants and we intend to vigorously defend our position on the remaining issues upon remand to the trial court. 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. Reserves have been established based on our
best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, Management 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.
9
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 (unless
otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
September 26,
2012
|
|
|
September 28,
2011
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Company sales
|
|
|
97.1
|
%
|
|
|
96.9
|
%
|
Franchise and other revenues
|
|
|
2.9
|
%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Operating Costs and Expenses:
|
|
|
|
|
|
|
|
|
Company restaurants
|
|
|
|
|
|
|
|
|
Cost of sales (1)
|
|
|
27.8
|
%
|
|
|
28.0
|
%
|
Restaurant labor (1)
|
|
|
33.0
|
%
|
|
|
33.3
|
%
|
Restaurant expense (1)
|
|
|
24.6
|
%
|
|
|
25.6
|
%
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses (1)
|
|
|
85.4
|
%
|
|
|
86.9
|
%
|
Depreciation and amortization
|
|
|
4.8
|
%
|
|
|
4.7
|
%
|
General and administrative
|
|
|
5.5
|
%
|
|
|
4.9
|
%
|
Other gains and charges
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
93.2
|
%
|
|
|
94.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
6.8
|
%
|
|
|
5.9
|
%
|
Interest expense
|
|
|
1.0
|
%
|
|
|
1.1
|
%
|
Other, net
|
|
|
(0.1
|
)%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
5.9
|
%
|
|
|
5.0
|
%
|
Provision for income taxes
|
|
|
1.8
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4.1
|
%
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
As a percentage of company sales.
|
10
The following table details the number of restaurant openings during the first quarter,
total restaurants open at the end of the first quarter, and total projected openings in fiscal 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
Openings
|
|
|
Total Open at End
Of First Quarter
|
|
|
Projected
Openings
|
|
|
|
Fiscal
2013
|
|
|
Fiscal
2012
|
|
|
Fiscal
2013
|
|
|
Fiscal
2012
|
|
|
Fiscal
2013
|
|
Chilis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
0
|
|
|
|
0
|
|
|
|
821
|
|
|
|
823
|
|
|
|
0
|
|
Domestic franchised
|
|
|
0
|
|
|
|
0
|
|
|
|
453
|
|
|
|
470
|
|
|
|
2-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
0
|
|
|
|
0
|
|
|
|
1,274
|
|
|
|
1,293
|
|
|
|
2-3
|
|
Maggianos
|
|
|
0
|
|
|
|
0
|
|
|
|
44
|
|
|
|
44
|
|
|
|
0
|
|
|
|
|
|
|
|
International:(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Franchised
|
|
|
9
|
|
|
|
7
|
|
|
|
267
|
|
|
|
241
|
|
|
|
30-35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9
|
|
|
|
7
|
|
|
|
267
|
|
|
|
241
|
|
|
|
30-35
|
|
Grand total
|
|
|
9
|
|
|
|
7
|
|
|
|
1,585
|
|
|
|
1,578
|
|
|
|
32-38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
At the end of the first quarter of fiscal 2013, international franchised restaurants by brand included 266 Chilis and one Maggianos restaurant.
|
At September 26, 2012, we owned the land and buildings for 188 of the 865 company-owned restaurants. The
net book values of the land and buildings associated with these restaurants totaled $141.0 million and $121.2 million, respectively.
11
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 September 26, 2012 and September 28, 2011, the MD&A should be read in
conjunction with the consolidated financial statements and related notes included in this quarterly report.
OVERVIEW
We are committed to strategies and initiatives that are centered on long-term sales and profit growth, enhancing the guest experience and
team member engagement. These strategies are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants and establish a strong presence for our brands in key markets around the world.
Key economic indicators such as total employment, consumer confidence and spending levels were somewhat stable in the first
half of this quarter; however, slowing industry sales suggest that consumers grew more cautious in the latter half of the quarter. This economic environment has continued to challenge the industry; however, we believe that our strategies and
initiatives will provide a solid foundation for earnings growth going forward and are appropriate for all operating conditions.
Our current initiatives are designed to drive profitable sales growth and improve the guest experience in our restaurants. We are
investing in new kitchen equipment, operations software and remodel initiatives as the core pieces of our current strategy. We expect to complete the installation of new kitchen equipment in all of our company-owned Chilis restaurants by the
end of the calendar year. The upgraded equipment will consistently provide a high quality product at a faster pace, enhancing both profitability and guest satisfaction. Based on the installations completed to date and our robust testing process, we
believe the usability and efficiency of the equipment will allow for significant labor savings over time. Also, the flexibility of our equipment will allow for the development of new menu categories that we believe will result in increased sales and
guest traffic.
The majority of our restaurants are now operating with an integrated point of sale and back office software
system that was designed to enhance the efficiency of our restaurant operations and reporting capabilities. Timely and more detailed reporting in our restaurants will result in improved inventory and labor management while reducing software
maintenance costs. Additionally, our management team will have timely visibility into operating performance and trends which will enhance decision making and improve profitability. We expect to complete the system installation in all company-owned
Chilis restaurants by the end of the calendar year.
We have remodeled a significant number of our company-owned
Chilis restaurants and plan to continue the initiative at a brisk pace. The remodel design is intended to revitalize Chilis in a way which enhances the relevance of the brand and raises guest expectations regarding the quality of the
experience. The design is contemporary while staying true to the Chilis brand heritage. We believe that these updates will positively impact the guest perception of the restaurant in both the dining room and bar areas and provide a long-term
positive impact to traffic and sales.
12
We continually evaluate our menu at Chilis to improve quality, freshness and value by
introducing new items and improving existing favorites. Recently, we refreshed our two for twenty and lunch combo offerings and added new menu items including Chipotle Chicken Fajitas and Santa Cruz steak that reflect our southwest positioning. Our
enhanced steak selection introduced last year also continues to have a high guest preference. An emphasis on new products, training and our reimaged bar also resulted in improved bar sales over last year. We believe these changes as well as our
ability to develop new and innovative items will further enhance sales and drive incremental traffic. We are committed to offering a compelling everyday menu that provides items our guests prefer at a solid value.
Improvements at Chilis will have the most significant impact on the business; however, our results will also benefit through
additional contributions from Maggianos and our global business. Maggianos continues to offer a compelling menu and great value with Classic Pasta and Marcos Meal. Additionally, Maggianos has implemented initiatives around
kitchen efficiency and inventory control to further enhance profitability.
Global expansion allows further diversification
which will enable us to build strength in a variety of markets and economic conditions. This expansion will come through franchise relationships, joint venture arrangements and equity investments, taking advantage of demographic and eating trends
which we believe will accelerate in the international market over the next decade. Our growing franchise operations both domestically and internationally enable us to improve margins as royalty payments impact the bottom line.
The casual dining industry is a competitive business which is sensitive to changes in economic conditions, trends in lifestyles and
fluctuating costs. Our priority remains increasing profitable growth over time in all operating environments. We have designed both operational and financial strategies to achieve this goal and in our opinion, improve shareholder value. Success with
our initiatives to improve sales trends and operational effectiveness will enhance the profitability of our restaurants and strengthen our competitive position. The effective execution of our financial strategies, including repurchasing shares of
our common stock, payment of quarterly dividends, disciplined use of capital and efficient management of operating expenses, will further enhance our profitability and return value to our shareholders. We remain confident in the financial health of
our company, the long-term prospects of the industry as well as our ability to perform effectively in a competitive marketplace and a variety of economic environments.
REVENUES
Beginning in fiscal 2013, revenues are presented in two separate
captions on the consolidated statements of income in an effort to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales includes revenues generated by the operation of company-owned restaurants and
gift card redemptions. Franchise and other revenues includes royalties, development fees and franchise fees, Maggianos banquet service charge income, and certain gift card activity (breakage and discounts). Prior year revenue amounts have been
reclassified to conform to the fiscal 2013 presentation. These reclassifications have no effect on total revenue or net income previously reported.
13
Total revenues for the first quarter of fiscal 2013 increased to $683.5 million, a 2.3%
increase from the $668.4 million generated for the same quarter of fiscal 2012. The increase in revenue was primarily attributable to an increase in comparable restaurant sales as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended September 26, 2012
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix
Shift
|
|
Traffic
|
|
Capacity
|
Company-owned
|
|
2.6%
|
|
1.6%
|
|
0.9%
|
|
0.1%
|
|
(0.3)%
|
Chilis
|
|
2.8%
|
|
1.4%
|
|
1.0%
|
|
0.4%
|
|
(0.3)%
|
Maggianos
|
|
0.9%
|
|
2.6%
|
|
0.8%
|
|
(2.5)%
|
|
0.0%
|
|
|
|
|
|
|
Franchise (1)
|
|
2.9%
|
|
|
|
|
|
|
|
|
Domestic
|
|
3.7%
|
|
|
|
|
|
|
|
|
International
|
|
1.1%
|
|
|
|
|
|
|
|
|
System-wide (2)
|
|
2.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended September 28, 2011
|
|
|
Comparable
Sales
|
|
Price
Increase
|
|
Mix
Shift
|
|
Traffic
|
|
Capacity
|
Company-owned
|
|
1.9%
|
|
1.4%
|
|
(1.4)%
|
|
1.9%
|
|
(0.4)%
|
Chilis
|
|
1.7%
|
|
1.3%
|
|
(1.5)%
|
|
1.9%
|
|
(0.4)%
|
Maggianos
|
|
3.5%
|
|
1.8%
|
|
(0.4)%
|
|
2.1%
|
|
0.0%
|
|
|
|
|
|
|
Franchise (1)
|
|
2.0%
|
|
|
|
|
|
|
|
|
Domestic
|
|
0.2%
|
|
|
|
|
|
|
|
|
International
|
|
7.5%
|
|
|
|
|
|
|
|
|
System-wide (2)
|
|
2.0%
|
|
|
|
|
|
|
|
|
(1)
|
Revenues generated by franchisees are not included in revenues on the consolidated statements of income; however, we generate royalty revenue and advertising fees based
on franchise revenues, where applicable. We believe including franchise comparable restaurant revenues provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.
|
(2)
|
System-wide comparable restaurant sales are derived from sales generated by company-owned Chilis and Maggianos restaurants in addition to the sales
generated at franchisee operated restaurants.
|
Chilis company sales increased to $581.3 million for the
first quarter of fiscal 2013, a 2.7% increase from $566.1 million in the prior year driven by increased menu prices, favorable product mix shifts and improved guest traffic.
Maggianos company sales increased to $82.4 million in the first quarter of fiscal 2013, a 0.9% increase from $81.7 million in the prior year driven primarily by menu pricing and favorable product
mix shifts, partially offset by lower guest traffic.
14
Franchise and other revenues decreased 3.9% to $19.8 million in the first quarter of fiscal
2013 compared to $20.6 million in the first quarter of fiscal 2012. The decrease is primarily due to lower gift card breakage income due to increased gift card usage, partially offset by an increase in royalty revenues related to the net addition of
9 franchised restaurants since the first quarter of fiscal 2012. Royalty revenues are recognized based on the sales generated by our franchisees and reported to us. Our franchisees generated approximately $399 million in sales.
COSTS AND EXPENSES
Cost
of sales, as a percent of company sales, decreased to 27.8% for the first quarter of fiscal 2013 from 28.0% in the prior year. Cost of sales was favorably impacted in the current quarter by increased menu pricing and a decrease in commodity pricing
on produce, dairy and poultry. These changes were partially offset by unfavorable commodity pricing and product mix related to meat.
Restaurant labor, as a percent of company sales, decreased to 33.0% for the first quarter of fiscal 2013 as compared to 33.3% in the prior year driven by sales leverage on fixed costs related to higher
revenue and improved labor productivity from the installation of new kitchen equipment, partially offset by increased overtime incurred to support these installations.
Restaurant expenses, as a percent of company sales, decreased to 24.6% for the first quarter of fiscal 2013 as compared to 25.6% in the same period of the prior year primarily driven by lower repair and
maintenance expense, credit card fees and utilities expense, and sales leverage on fixed costs.
Depreciation and amortization
increased $1.4 million for the first quarter of fiscal 2013 as compared to the prior year primarily due to investments in existing restaurants and asset replacements, partially offset by an increase in fully depreciated assets.
General and administrative expense increased $4.5 million, or 13.6%, for the first quarter of fiscal 2013 as compared to the prior year
primarily due to an increase in stock-based and other compensation.
Other gains and charges in the first quarter of fiscal
2013 included $0.4 million in lease termination charges related to previously closed restaurants.
Other gains and charges in
the first quarter of fiscal 2012 included a $2.5 million charge related to litigation and $0.7 million in lease termination charges related to previously closed restaurants, partially offset by a $1.3 million gain on the sale of land.
Interest expense remained flat for the first quarter of fiscal 2013 compared to the first quarter of the prior year.
INCOME TAXES
The
effective income tax rate increased to 31.1% for the first quarter of fiscal 2013 compared to 29.8% for the same quarter of last year primarily due to increased earnings in the current quarter.
15
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flow from Operating Activities
During the first quarter of fiscal 2013, net cash flow provided by operating activities was $32.9 million compared to $30.9 million in the
prior year. The increase was driven by an increase in earnings in the current year, partially offset by changes in working capital during the first quarter of fiscal 2013.
The working capital deficit decreased to $166.0 million at September 26, 2012 from $206.9 million at June 27, 2012 primarily due to disbursements timing and the impact of the seasonal sales
decline in the first quarter.
Cash Flow from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
September 26,
2012
|
|
|
September 28,
2011
|
|
Net cash used in investing activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
|
$
|
(37,001
|
)
|
|
$
|
(27,662
|
)
|
Proceeds from sale of assets
|
|
|
649
|
|
|
|
2,523
|
|
Investment in equity method investee
|
|
|
0
|
|
|
|
(729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(36,352
|
)
|
|
$
|
(25,868
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities for the first quarter of fiscal 2013 increased to $36.4 million
compared to $25.9 million in the prior year. Capital expenditures increased to $37.0 million for the first quarter of fiscal 2013 compared to $27.7 million for the prior year driven primarily by increased investments in new equipment related to our
kitchen retrofit initiative, the ongoing Chilis reimage program and purchases of new and replacement restaurant furniture and equipment. We estimate that our capital expenditures during fiscal 2013 will be approximately $130 million to $140
million and will be funded entirely by cash from operations.
Cash Flow from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
|
|
September 26,
2012
|
|
|
September 28,
2011
|
|
Net cash provided by (used in) financing activities (in thousands):
|
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility
|
|
|
90,000
|
|
|
|
0
|
|
Purchases of treasury stock
|
|
$
|
(86,331
|
)
|
|
$
|
(77,822
|
)
|
Proceeds from issuances of treasury stock
|
|
|
17,855
|
|
|
|
3,449
|
|
Payments of dividends
|
|
|
(12,803
|
)
|
|
|
(12,222
|
)
|
Payments on long-term debt
|
|
|
(6,595
|
)
|
|
|
(5,312
|
)
|
Excess tax benefits from stock based compensation
|
|
|
6,493
|
|
|
|
662
|
|
Proceeds from issuance of long-term debt
|
|
|
0
|
|
|
|
70,000
|
|
Other
|
|
|
0
|
|
|
|
(1,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,619
|
|
|
$
|
(22,865
|
)
|
|
|
|
|
|
|
|
|
|
16
Net cash provided by financing activities for the first quarter of fiscal 2013 increased to
approximately $8.6 million compared to net cash used in financing activities of $22.9 million in the prior year primarily due to higher proceeds from the use of credit facilities and increased proceeds from issuances of treasury stock, partially
offset by increased spending on share repurchases.
In the first quarter of fiscal 2013, $90 million was drawn from the
revolver primarily to fund share repurchases, none of which was repaid by the end of the quarter. As of September 26, 2012, we had $120 million of credit available under the revolver. In October 2012, an additional $20 million was borrowed from
the revolver primarily to fund share repurchases.
The term loan and revolving credit facility bear interest of LIBOR plus an
applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.50%. Based on our current credit rating, we are paying interest at a rate of LIBOR plus 1.63%. One month LIBOR at
September 26, 2012 was approximately 0.22%. As of September 26, 2012, we were in compliance with all financial debt covenants.
As of September 26, 2012, our credit rating by Standard and Poors (S&P) was BBB- (investment grade) with a stable outlook. Our corporate family rating by Moodys was Ba1
(non-investment grade) and our senior unsecured rating was Ba2 (non-investment grade) with a stable outlook. Our goal is to retain our investment grade rating from S&P and ultimately regain our investment grade rating from Moodys.
We repurchased approximately 2.5 million shares of our common stock for $86.3 million during the first quarter of fiscal
2013. Subsequent to the end of the quarter, we repurchased approximately 750,000 shares for approximately $23.1 million.
In
the first quarter of fiscal 2013, we paid dividends of $12.8 million to common stock shareholders, compared to $12.2 million in the prior year. The quarterly dividend payment increased due to a 14 percent increase in the dividend per share,
partially offset by the impact of share repurchase activity. Our Board of Directors approved a 25 percent increase in the quarterly dividend from $0.16 to $0.20 per share effective with the dividend declared in August 2012 of $14.8 million paid on
September 27, 2012. We will continue to target a 40 percent dividend payout ratio to provide additional return to shareholders through dividend payments.
In August 2012, our Board of Directors authorized a $500.0 million increase to our existing share repurchase program. As of September 26, 2012, approximately $579 million was available under our
share repurchase authorizations. 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. Repurchased common stock is reflected as a
reduction of shareholders equity.
During the first quarter of fiscal 2013, approximately 806,000 stock options were
exercised resulting in cash proceeds of $17.9 million. We received an excess tax benefit from stock-based compensation of $6.5 million during the current quarter primarily as a result of the normally scheduled distribution of restricted stock grants
and increased stock option exercises.
We have evaluated ways to monetize the value of our owned real estate and determined
that the alternatives considered are more costly than other financing options currently available due to a combination of the income tax impact and higher effective borrowing rates.
17
Cash Flow Outlook
We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, the Financial Accounting
Standards Board (FASB) updated its guidance on testing indefinite-lived intangible assets for impairment to allow companies the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative
impairment test. Companies electing to perform a qualitative assessment are no longer required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on a qualitative assessment, that it is
more likely than not that the asset is impaired. The updated guidance is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012, which requires that we adopt these provisions
beginning in the first quarter of fiscal 2014; however, early adoption is permitted. We do not expect the adoption of this updated guidance to have a significant impact on our consolidated financial statements.
In September 2011, the FASB updated its guidance on the annual testing of goodwill for impairment to allow companies to first assess
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required
under current accounting standards. The updated guidance is applicable to goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our consolidated
financial statements.
In June 2011 and as updated in December 2011, the FASB updated its guidance regarding comprehensive
income to require companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. The updated guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity. This updated guidance is applicable for fiscal years beginning after
December
15, 2011. The adoption of this guidance will not have a material impact on our consolidated financial statements.