Notes to the 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., its subsidiaries, and any predecessor companies of Brinker International, Inc.
Nature of Operations
Our
Consolidated Financial Statements
as of
December 26, 2018
and
June 27, 2018
, and for the thirteen and
twenty-six week periods ended December 26, 2018
and
December 27, 2017
, 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 Chili’s
®
Grill & Bar (“Chili’s”) and Maggiano’s Little Italy
®
(“Maggiano’s”) restaurant brands. At
December 26, 2018
, we owned, operated or franchised
1,685
restaurants, consisting of
995
company-owned restaurants and
690
franchised restaurants, located in the United States and
30
countries and
two
United States territories.
Basis of Presentation
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) 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 periods. Actual results could differ from those estimates.
The foreign currency translation adjustment included in
Comprehensive income
in the
Consolidated Statements of Comprehensive Income
represents the unrealized impact of translating the financial statements of our Canadian restaurants and our Mexican joint venture (prior to divestiture in the second quarter of fiscal 2018, see
Note 11 - Shareholders’ Deficit
for more details) from their respective functional currencies to U.S. dollars. This amount is not included in
Net income
and would only be realized upon disposition of the businesses. The
Accumulated other comprehensive loss
(“AOCL”) is presented in the
Consolidated Balance Sheets
.
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, financial position and cash flows 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 GAAP have been omitted pursuant to SEC rules and regulations. The
Notes to the Consolidated Financial Statements
should be read in conjunction with the
Notes to the Consolidated Financial Statements
contained in the Company’s
June 27, 2018
Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes. All amounts within the
Notes to the Consolidated Financial Statements
are presented in millions unless otherwise specified.
New Accounting Standards Implemented
ASU 2014-09, Revenue from Contracts with Customers (Topic 606)
- In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, and subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. These updates also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. These updates are effective for annual and interim periods for fiscal years beginning after December 15, 2017, which required us to adopt these provisions in the first quarter of fiscal 2019. Please refer to
Note 2 - Revenue Recognition
for disclosures about our adoption.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230)
- In August 2016, the FASB issued ASU 2016-15, this update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2017, which required us to adopt these provisions in the first quarter of fiscal 2019. The update was applied on a retrospective basis. The adoption of this guidance did not have an impact on our
Consolidated Financial Statements
or debt covenants.
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
- In January 2017, the FASB issued ASU 2017-04, this update eliminates step two of the goodwill impairment analysis. Companies will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, they will measure impairment as the difference between the carrying amount and the fair value of the reporting unit. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed with measurement dates after January 1, 2017. We elected to early adopt this guidance as of September 27, 2018. The guidance was adopted prospectively. The adoption of this guidance did not have an impact on our
Consolidated Financial Statements
. Refer to
Note 10 - Fair Value Measurements
for disclosure about goodwill impairment.
The impact of additional accounting standards updates that have not yet been adopted can be found at
Note 14 - Effect of New Accounting Standards
.
2. REVENUE RECOGNITION
Effective June 28, 2018, our first quarter of fiscal 2019, we adopted FASB Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with Customers
(“ASC 606”), from the previous guidance ASC Topic 605,
Revenue Recognition
and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, “Legacy GAAP”). Our transition to ASC 606 represents a change in accounting principle. Our
Consolidated Financial Statements
for the second quarter and year-to-date periods of fiscal 2019 reflect the application of ASC 606 guidance using the modified retrospective transition method, while our
Consolidated Financial Statements
for prior periods were prepared under Legacy GAAP.
Significant Accounting Policy
Revenues are presented in
Company sales
and
Franchise and other revenues
captions in the
Consolidated Statements of Comprehensive Income
.
Company sales
include revenues generated by the operation of company-owned restaurants including gift card redemptions.
Franchise and other revenues
include royalties, advertising fees (effective first quarter of fiscal 2019), Maggiano’s banquet service charge income, gift card breakage, service fees and discount costs from third-party gift card sales, digital entertainment revenues, delivery fee income, franchise fees, development fees and retail royalty revenues.
Company Sales
The adoption of ASC 606 did not i
mpact revenue recognition related to
Company sales
. We will continue to record revenues from the sale of food, beverages and alcohol as products are sold.
Franchise and Other Revenues
Royalties
- Franchise royalties are based on a percentage of the sales generated by our franchised restaurants. The provisions of ASC 606 did not impact the recognition of these royalties, as the performance obligation related to franchise sales is considered complete upon the sale of food, beverages and alcohol. Royalty revenues attributable to franchise restaurants will continue to be recognized in the same period the sales are generated at the franchise restaurants.
Advertising Fees
Franchise and other revenues
. Under Legacy GAAP, the advertising funds received from franchisees were considered a reimbursement of advertising expenses and were presented on a net basis as a reduction to advertising expenses in
Restaurant expenses
in the
Consolidated Statements of Comprehensive Income
.
- Domestic franchisees are contractually obligated to contribute into certain advertising and marketing funds. The adoption of ASC 606 did not impact the timing of revenue recognition of the advertising fees received; however, effective first quarter of fiscal 2019, advertising fees are now presented on a gross basis within
Franchise and other revenues
. Under Legacy GAAP, the advertising funds received from franchisees were considered a reimbursement of
advertising expenses and were presented on a net basis as a reduction to advertising expenses in
Restaurant expenses
in the
Consolidated Statements of Comprehensive Income
.
Initial Development and Franchise Fees
- We receive development fees from franchisees for territory development arrangements and franchise fees for a new restaurant opening. Under ASC 606 these arrangements will be collectively deferred as a contract liability and recognized on a straight-line basis into
Franchise and other revenues
in the
Consolidated Statements of Comprehensive Income
over the term of the underlying agreements.
Deferred franchise and development fees
are classified within
Other accrued liabilities
for the current portion expected to be recognized within the next 12 months, and
Other liabilities
for the long-term portion in the
Consolidated Balance Sheets
.
Under Legacy GAAP, development fees were recognized as income upon the execution of the agreement, when development rights were conveyed to the franchisee. Franchise fees were recognized as income when the obligations under the franchise agreement were satisfied, generally upon the opening of the new franchise restaurant.
Gift Card Breakage Income -
Breakage revenues represent the monetary value associated with outstanding gift card balances for which redemption is considered remote. We estimate this amount based on our historical gift card redemption patterns and update the breakage rate estimate periodically and if necessary, adjust the deferred revenues balance accordingly. In accordance with ASC 606, breakage revenues will be recognized proportionate to the pattern of related gift card redemptions. Under Legacy GAAP, breakage revenues were recognized when redemption was considered remote. We do not charge dormancy or any other fees related to monitoring or administering the gift card program.
Additionally, proceeds from the sale of gift cards will continue to be recorded as deferred revenues in the
Gift card liability
in the
Consolidated Balance Sheets
and recognized as
Company sales
when the gift card is redeemed by the holder.
Gift card Service Fees and Discount Costs -
Our gift cards are sold through various outlets such as in-store, Chili’s and Maggiano’s websites, directly to other businesses, and through third party distributors that sell our gift cards at various retail locations. We incur incremental direct costs related to gift card sales, such as commissions and activation fees, for gift cards sold by third party businesses and distributors. These initial direct costs are deferred and amortized against revenues proportionate to the pattern of related gift card redemption.
Other Revenues
- Other revenues not described above, such as Maggiano’s banquet service charge income, digital entertainment revenues, retail royalty revenues and delivery fee income had no change in recognition from the adoption of ASC 606.
Sales Taxes
Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue transactions and collected from a customer have been excluded from revenues under both Legacy GAAP and ASC 606.
Disaggregation of Total Revenues
The following tables disaggregate revenues by operating segment and major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended December 26, 2018
|
|
Chili’s
|
|
Maggiano’s
|
|
Total
|
Company sales
|
$
|
640.6
|
|
|
$
|
120.9
|
|
|
$
|
761.5
|
|
Royalties
|
13.2
|
|
|
—
|
|
|
13.2
|
|
Franchise fees and other revenues
|
8.5
|
|
|
7.5
|
|
|
16.0
|
|
Total revenues
|
$
|
662.3
|
|
|
$
|
128.4
|
|
|
$
|
790.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty Six Weeks Ended December 26, 2018
|
|
Chili’s
|
|
Maggiano’s
|
|
Total
|
Company sales
|
$
|
1,280.9
|
|
|
$
|
208.9
|
|
|
$
|
1,489.8
|
|
Royalties
|
26.1
|
|
|
—
|
|
|
26.1
|
|
Franchise fees and other revenues
|
17.1
|
|
|
11.5
|
|
|
28.6
|
|
Total revenues
|
$
|
1,324.1
|
|
|
$
|
220.4
|
|
|
$
|
1,544.5
|
|
Franchise fees and other revenues
primarily includes advertising fees, gift card breakage income, Maggiano’s banquet service charge income, digital entertainment revenues, delivery fee income, initial development and franchise fees from franchisees, service fees and discount costs from third-party gift card sales, and other revenues.
Deferred Development and Franchise Fees
Our deferred development and franchise fees consist of the unrecognized fees received from franchisees. A summary of significant changes to the related deferred balance during the first two quarters of fiscal 2019 is presented below, along with the revenues to be recognized in the subsequent periods.
|
|
|
|
|
|
Deferred Development and Franchise Fees
|
Balance at June 27, 2018
|
$
|
—
|
|
Cumulative effect adjustment from adoption of ASC 606
|
18.1
|
|
Additions
|
0.4
|
|
Amount recognized to Franchise and other revenue
|
(1.3
|
)
|
Balance at December 26, 2018
|
$
|
17.2
|
|
|
|
|
|
|
Fiscal Year
|
Development and Franchise Fees Revenue Recognition
|
2019
|
$
|
0.7
|
|
2020
|
1.4
|
|
2021
|
1.4
|
|
2022
|
1.4
|
|
2023
|
1.4
|
|
Thereafter
|
10.9
|
|
|
$
|
17.2
|
|
The development and franchise fees that will be recognized in future years are based on active contracts with franchisees. These amounts represent the amount that will be recognized pursuant to the satisfaction of the contractual performance obligations. We also expect to have future year royalties and advertising fees related to our franchise contracts, however under ASC 606, these future year revenues are not yet determinable due to unsatisfied performance obligations based upon a sales-based royalty.
Financial Statement Impact of Transition to ASC 606
ASC 606 was applied to all contracts with customers as of the first day of fiscal 2019, June 28, 2018. The cumulative effect was applied using the modified retrospective approach. Below our
Consolidated Balance Sheets
reflects the transition to ASC 606 as an adjustment at June 28, 2018 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 27,
2018
|
|
ASC 606 Cumulative Effect Adjustments
|
|
June 28,
2018
|
ASSETS
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
Deferred income taxes, net
(1)
|
$
|
33.6
|
|
|
$
|
2.5
|
|
|
$
|
36.1
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Gift card liability
(2)
|
119.1
|
|
|
(8.2
|
)
|
|
110.9
|
|
Other accrued liabilities
(3)
|
127.2
|
|
|
1.5
|
|
|
128.7
|
|
Other liabilities
(3)
|
131.7
|
|
|
16.6
|
|
|
148.3
|
|
Shareholders’ deficit
(2) (3)
|
(718.3
|
)
|
|
(7.4
|
)
|
|
(725.7
|
)
|
|
|
(1)
|
Deferred income taxes, net adjustment relates to the net change in liabilities and equity as a result of the adoption of ASC 606 described in notes
(2)
and
(3)
below.
|
|
|
(2)
|
Gift card liability is adjusted for the ASC 606 adoption impact of the change to recognize gift card breakage proportionate to the pattern of related gift card redemption. Under Legacy GAAP, gift card breakage was recognized when the likelihood of redemption was deemed remote. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at June 28, 2018 resulted in an
$8.2 million
decrease in Gift card liability due to the change in timing of recognition between ASC 606 and Legacy GAAP, and a corresponding
$2.0 million
decrease in Deferred income taxes, net, and a
$6.2 million
decrease in Shareholders’ deficit.
|
|
|
(3)
|
Other liabilities
$16.6 million
and Other accrued liabilities
$1.5 million
adjustments relate to the deferral of previously recognized franchise and development fees received from franchisees, with a corresponding
$4.5 million
increase in Deferred income taxes, and a
$13.6 million
increase to Shareholders’ deficit at June 28, 2018.
|
Comparison of Fiscal 2019 Periods if Legacy GAAP Had Been in Effect
The following tables reflect the impact to our
Condensed Consolidated Statement of Income (Unaudited)
and for the
thirteen and
twenty-six week periods ended December 26, 2018
,
Cash flows from operating activities
for the
twenty-six week period ended December 26, 2018
, and the unaudited
Condensed
Consolidated Balance Sheet
at
December 26, 2018
as if the Legacy GAAP was still in effect.
The adjustments presented below in the
Condensed Consolidated Statement of Income (Unaudited)
include under ASC 606, advertising fees now presented on a gross basis as a component of
Franchise and other revenues
. Under Legacy GAAP, the advertising fees were recorded as a reduction to advertising expenses within
Restaurant expenses
in the
Consolidated Statements of Comprehensive Income
. Additionally, the recognition timing change for franchise related fees and gift card breakage are included within
Franchise and other revenues
.
The adjustments presented below in the
Condensed
Consolidated Balance Sheet
relate to the cumulative effect impact described above in the “Financial Statement Impact of Transition to ASC 606” section, as well as the impact from the change in the gift card breakage, deferred development and franchise fees, and corresponding deferred tax and retained earnings balances as of
December 26, 2018
.
Condensed Consolidated Statement of Income (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 26, 2018
|
|
Twenty-Six Week Period Ended December 26, 2018
|
|
As Reported
ASC 606
Amounts
|
|
Adjustments
|
|
Legacy GAAP Amounts
|
|
As Reported
ASC 606
Amounts
|
|
Adjustments
|
|
Legacy GAAP Amounts
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
Company sales
|
$
|
761.5
|
|
|
$
|
—
|
|
|
$
|
761.5
|
|
|
$
|
1,489.8
|
|
|
$
|
—
|
|
|
$
|
1,489.8
|
|
Franchise and other revenues
|
29.2
|
|
|
(5.8
|
)
|
|
23.4
|
|
|
54.7
|
|
|
(10.6
|
)
|
|
44.1
|
|
Total revenues
|
790.7
|
|
|
(5.8
|
)
|
|
784.9
|
|
|
1,544.5
|
|
|
(10.6
|
)
|
|
1,533.9
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurants (excluding depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
200.9
|
|
|
—
|
|
|
200.9
|
|
|
392.8
|
|
|
—
|
|
|
392.8
|
|
Restaurant labor
|
260.8
|
|
|
—
|
|
|
260.8
|
|
|
517.1
|
|
|
—
|
|
|
517.1
|
|
Restaurant expenses
|
205.7
|
|
|
(5.2
|
)
|
|
200.5
|
|
|
404.7
|
|
|
(10.3
|
)
|
|
394.4
|
|
Company restaurant expenses
|
667.4
|
|
|
(5.2
|
)
|
|
662.2
|
|
|
1,314.6
|
|
|
(10.3
|
)
|
|
1,304.3
|
|
Depreciation and amortization
|
36.1
|
|
|
—
|
|
|
36.1
|
|
|
73.1
|
|
|
—
|
|
|
73.1
|
|
General and administrative
|
35.4
|
|
|
—
|
|
|
35.4
|
|
|
69.2
|
|
|
—
|
|
|
69.2
|
|
Other (gains) and charges
|
2.2
|
|
|
—
|
|
|
2.2
|
|
|
(8.9
|
)
|
|
—
|
|
|
(8.9
|
)
|
Total operating costs and expenses
|
741.1
|
|
|
(5.2
|
)
|
|
735.9
|
|
|
1,448.0
|
|
|
(10.3
|
)
|
|
1,437.7
|
|
Operating income
|
49.6
|
|
|
(0.6
|
)
|
|
49.0
|
|
|
96.5
|
|
|
(0.3
|
)
|
|
96.2
|
|
Interest expense
|
15.4
|
|
|
—
|
|
|
15.4
|
|
|
31.0
|
|
|
—
|
|
|
31.0
|
|
Other (income), net
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
(1.6
|
)
|
|
—
|
|
|
(1.6
|
)
|
Income before provision for income taxes
|
35.0
|
|
|
(0.6
|
)
|
|
34.4
|
|
|
67.1
|
|
|
(0.3
|
)
|
|
66.8
|
|
Provision for income taxes
|
3.0
|
|
|
(0.1
|
)
|
|
2.9
|
|
|
8.7
|
|
|
—
|
|
|
8.7
|
|
Net income
|
$
|
32.0
|
|
|
$
|
(0.5
|
)
|
|
$
|
31.5
|
|
|
$
|
58.4
|
|
|
$
|
(0.3
|
)
|
|
$
|
58.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
0.84
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.83
|
|
|
$
|
1.49
|
|
|
$
|
(0.01
|
)
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
$
|
0.83
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.81
|
|
|
$
|
1.46
|
|
|
$
|
0.00
|
|
|
$
|
1.46
|
|
Cash flows from operating activities
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 26, 2018
|
|
As Reported
ASC 606
Amounts
|
|
Adjustments
|
|
Legacy GAAP Amounts
|
Net income
|
$
|
58.4
|
|
|
$
|
(0.3
|
)
|
|
$
|
58.1
|
|
Adjustments to reconcile Net income to Net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
73.1
|
|
|
—
|
|
|
73.1
|
|
Stock-based compensation
|
7.2
|
|
|
—
|
|
|
7.2
|
|
Restructure charges and other impairments
|
8.4
|
|
|
—
|
|
|
8.4
|
|
Net (gain) loss on disposal of assets
|
(18.3
|
)
|
|
—
|
|
|
(18.3
|
)
|
Other
|
1.3
|
|
|
—
|
|
|
1.3
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable, net
|
(32.3
|
)
|
|
—
|
|
|
(32.3
|
)
|
Inventories
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Restaurant supplies
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Prepaid expenses
|
(2.4
|
)
|
|
—
|
|
|
(2.4
|
)
|
Deferred income taxes, net
|
(77.8
|
)
|
|
—
|
|
|
(77.8
|
)
|
Other assets
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Accounts payable
|
4.7
|
|
|
—
|
|
|
4.7
|
|
Gift card liability
|
42.1
|
|
|
(0.3
|
)
|
|
41.8
|
|
Accrued payroll
|
(8.0
|
)
|
|
—
|
|
|
(8.0
|
)
|
Other accrued liabilities
|
(2.6
|
)
|
|
0.6
|
|
|
(2.0
|
)
|
Current income taxes
|
3.4
|
|
|
—
|
|
|
3.4
|
|
Other liabilities
|
(0.7
|
)
|
|
—
|
|
|
(0.7
|
)
|
Net cash provided by operating activities
|
$
|
56.2
|
|
|
$
|
—
|
|
|
$
|
56.2
|
|
Condensed
Consolidated Balance Sheet (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2018
|
|
As Reported
ASC 606
Amounts
|
|
Adjustments
|
|
Legacy GAAP Amounts
|
ASSETS
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
Total current assets
|
$
|
196.0
|
|
|
$
|
—
|
|
|
$
|
196.0
|
|
Property and equipment, at cost
|
|
|
|
|
|
Net property and equipment
|
769.3
|
|
|
—
|
|
|
769.3
|
|
Other assets
|
|
|
|
|
|
Goodwill
|
163.7
|
|
|
—
|
|
|
163.7
|
|
Deferred income taxes, net
|
113.9
|
|
|
(2.5
|
)
|
|
111.4
|
|
Intangibles, net
|
23.0
|
|
|
—
|
|
|
23.0
|
|
Other
|
28.9
|
|
|
—
|
|
|
28.9
|
|
Total other assets
|
329.5
|
|
|
(2.5
|
)
|
|
327.0
|
|
Total assets
|
$
|
1,294.8
|
|
|
$
|
(2.5
|
)
|
|
$
|
1,292.3
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Current installments of long-term debt
|
$
|
8.1
|
|
|
$
|
—
|
|
|
$
|
8.1
|
|
Accounts payable
|
112.2
|
|
|
—
|
|
|
112.2
|
|
Gift card liability
|
153.0
|
|
|
7.9
|
|
|
160.9
|
|
Accrued payroll
|
66.5
|
|
|
—
|
|
|
66.5
|
|
Other accrued liabilities
|
148.2
|
|
|
(0.9
|
)
|
|
147.3
|
|
Total current liabilities
|
488.0
|
|
|
7.0
|
|
|
495.0
|
|
Long-term debt, less current installments
|
1,263.9
|
|
|
—
|
|
|
1,263.9
|
|
Deferred gain on sale leaseback transactions
|
252.2
|
|
|
—
|
|
|
252.2
|
|
Other liabilities
|
145.9
|
|
|
(16.6
|
)
|
|
129.3
|
|
Shareholders’ deficit
|
|
|
|
|
|
Common stock
|
17.6
|
|
|
—
|
|
|
17.6
|
|
Additional paid-in capital
|
514.2
|
|
|
—
|
|
|
514.2
|
|
Accumulated other comprehensive loss
|
(6.1
|
)
|
|
—
|
|
|
(6.1
|
)
|
Retained earnings
|
2,704.0
|
|
|
7.1
|
|
|
2,711.1
|
|
Less treasury stock, at cost
|
(4,084.9
|
)
|
|
—
|
|
|
(4,084.9
|
)
|
Total shareholders’ deficit
|
(855.2
|
)
|
|
7.1
|
|
|
(848.1
|
)
|
Total liabilities and shareholders’ deficit
|
$
|
1,294.8
|
|
|
$
|
(2.5
|
)
|
|
$
|
1,292.3
|
|
3. SALE LEASEBACK TRANSACTIONS
Restaurant Properties Sale Leaseback Transactions
In the
first quarter of fiscal 2019
, we completed sale leaseback transactions of
141
restaurant properties for aggregate consideration of
$455.7 million
. The balances attributable to the restaurant assets sold include
Land
of
$103.6 million
,
Buildings and leasehold improvements
of
$217.6 million
, certain fixtures included in
Furniture and equipment
of
$9.3 million
,
and
Accumulated depreciation
of
$163.9 million
. The total gain was
$289.1 million
and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.
In the
second quarter of fiscal 2019
, we completed sale leaseback transactions of an additional
four
restaurant properties sold for aggregate consideration of
$10.6 million
. The balances attributable to the restaurant assets sold include
Land
of
$2.9 million
,
Buildings and leasehold improvements
of
$6.8 million
, certain fixtures included in
Furniture and equipment
of
$0.3 million
,
and
Accumulated depreciation
of
$5.7 million
. The total gain was
$6.3 million
and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.
Lease Details
The initial terms of all leases are for 15 years, plus renewal options at our discretion, which contain scheduled rent increases
,
all of the leases were determined to be operating leases
. Rent expenses associated with these operating leases are being recognized on a straight-line basis over the lease terms. As of
December 26, 2018
,
$1.2 million
of straight-line rent accrual has been recorded for these operating leases in
Other liabilities
in the
Consolidated Balance Sheets
.
Gain and Deferred Gain Recognition
In line with the applicable accounting guidance, we immediately recognized the portion of the gross gain in excess of the present value of the future minimum lease payments, and deferred the remainder of the gain to be recognized straight-line in proportion to the operating lease terms. During the thirteen and
twenty-six week periods ended December 26, 2018
,
$4.4 million
and
$17.7 million
of the net gain was recognized to
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
, respectively. The remaining balance of the deferred gain of
$270.6 million
as of
December 26, 2018
was recorded in
Other accrued liabilities
(current portion) and
Deferred gain on sale leaseback transactions
(long-term portion) in the
Consolidated Balance Sheets
.
Corporate Headquarters Relocation
During the third quarter of fiscal 2018, we sold the portion of our current headquarters property that we owned for net proceeds of
$13.7 million
that have been deferred in
Other accrued liabilities
in the
Consolidated Balance Sheets
until we have fully relinquished possession of the sold property and our involvement has been terminated. We plan to relocate during the third quarter of fiscal 2019, and once our possession of the existing headquarters has terminated, we will recognize the sale, and record a gain related to the transaction.
Accelerated depreciation
for certain leasehold improvements associated with our current corporate headquarters was recorded to
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
of
$0.5 million
and
$1.0 million
during the thirteen and
twenty-six week periods ended December 26, 2018
, respectively, and
$0.5 million
and
$1.0 million
during the thirteen and
twenty-six week periods ended December 27, 2017
, respectively. As of
December 26, 2018
,
Land
of
$5.9 million
, and additional
Net property and equipment
of
$2.0 million
were recorded on our
Consolidated Balance Sheets
related to the sold property.
4. NET INCOME PER SHARE
Basic net income per share
is computed by dividing
Net income
by the
Basic weighted average shares outstanding
for the reporting period.
Diluted net income 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 per share
, the
Basic weighted average shares outstanding
is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the
Diluted net income per share
calculation.
Basic weighted average shares outstanding
are reconciled to
Diluted weighted average shares outstanding
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 26,
2018
|
|
December 27,
2017
|
|
December 26,
2018
|
|
December 27,
2017
|
Basic weighted average shares outstanding
|
38.1
|
|
|
46.4
|
|
|
39.2
|
|
|
47.4
|
|
Dilutive stock options
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
Dilutive restricted shares
|
0.5
|
|
|
0.4
|
|
|
0.5
|
|
|
0.3
|
|
|
0.7
|
|
|
0.5
|
|
|
0.7
|
|
|
0.4
|
|
Diluted weighted average shares outstanding
|
38.8
|
|
|
46.9
|
|
|
39.9
|
|
|
47.8
|
|
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect on diluted net income per share
|
0.8
|
|
|
1.4
|
|
|
0.9
|
|
|
1.4
|
|
5. INCOME TAXES
Fiscal 2019
The effective income tax rate in the
thirteen and
twenty-six week periods ended December 26, 2018
decreased
to
8.6%
and
13.0%
compared to
38.3%
and
37.4%
for the thirteen and
twenty-six week periods ended December 27, 2017
, respectively,
primarily due to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) that was enacted on December 22, 2017. The Tax Act lowered the federal statutory tax rate from 35.0% to 21.0% effective January 1, 2018. Our fiscal 2019 effective income tax rate is further lowered due to an increase in the FICA tax credit benefit, partially offset by the impact of the sale leaseback transactions.
During the twenty-six week period ended December 26, 2018, the taxes on the gains related to the sale leaseback transactions, as described in
Note 3 - Sale Leaseback Transactions
, of
$75.0 million
were recognized for tax purposes when the transactions were completed. Also during the
twenty-six week period ended December 26, 2018
we paid
$67.1 million
of the taxes, with a remaining
$7.9 million
included as a payable net within
Income taxes receivable
in the
Consolidated Balance Sheets
as of
December 26, 2018
. This liability is expected to be paid during the third quarter of fiscal 2019.
Fiscal 2018
The thirteen and
twenty-six week periods ended December 27, 2017
consider the Tax Act that was enacted prior to the end of the second quarter of fiscal 2018 and therefore the federal statutory tax rate changes stipulated by the Tax Act were reflected in the second quarter of fiscal 2018. Our federal statutory tax rate for fiscal 2018 was
28.1%
representing a blended tax rate for fiscal 2018 based on the number of days in fiscal 2018 before and after the effective date. In accordance with ASC 740, we re-measured our deferred tax accounts as of the enactment date using the new federal statutory tax rate and recognized the change as a discrete item in the provision for income taxes. The Company’s deferred tax position was a net asset and as a result, the reduction in the federal statutory tax rate resulted in a one-time non-cash adjustment to our net deferred tax balance of
$8.7
million with a corresponding increase to the provision for income taxes in the second quarter of fiscal 2018.
6. OTHER GAINS AND CHARGES
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 26,
2018
|
|
December 27,
2017
|
|
December 26,
2018
|
|
December 27,
2017
|
Sale leaseback (gain), net of transaction charges
|
$
|
(4.4
|
)
|
|
$
|
—
|
|
|
$
|
(17.7
|
)
|
|
$
|
—
|
|
Gain on sale of assets, net
|
(0.8
|
)
|
|
(0.3
|
)
|
|
(0.8
|
)
|
|
(0.3
|
)
|
Remodel-related costs
|
2.6
|
|
|
—
|
|
|
3.1
|
|
|
—
|
|
Restaurant closure charges
|
2.1
|
|
|
4.3
|
|
|
3.8
|
|
|
4.5
|
|
Restaurant impairment charges
|
1.0
|
|
|
2.0
|
|
|
1.0
|
|
|
9.2
|
|
Foreign currency transaction (gain)/loss
|
0.7
|
|
|
0.9
|
|
|
(0.1
|
)
|
|
0.9
|
|
Accelerated depreciation
|
0.5
|
|
|
0.5
|
|
|
1.0
|
|
|
1.0
|
|
Property damages, net of (insurance recoveries)
|
0.2
|
|
|
0.5
|
|
|
(0.6
|
)
|
|
5.1
|
|
Lease guarantee charges
|
—
|
|
|
1.4
|
|
|
—
|
|
|
1.4
|
|
Cyber security incident charges
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
Other
|
0.3
|
|
|
—
|
|
|
1.0
|
|
|
0.7
|
|
Total
|
$
|
2.2
|
|
|
$
|
9.3
|
|
|
$
|
(8.9
|
)
|
|
$
|
22.5
|
|
Fiscal 2019
Sale leaseback (gain), net of transaction charges
during the thirteen and
twenty-six week periods ended December 26, 2018
includes a gain of
$4.6 million
and
$24.7 million
, respectively, associated with the transactions, less transaction costs incurred of
$0.2 million
and
$7.0 million
, respectively, related to professional services, legal and accounting fees. Please see
Note 3 - Sale Leaseback Transactions
for further details on this transaction.
Gain on sale of assets, net
during the thirteen and
twenty-six week periods ended December 26, 2018
includes
$0.8 million
of gain recognized on the sale of land in Scottsdale, AZ and Pensacola, FL.
Remodel-related costs
during the thirteen and
twenty-six week periods ended December 26, 2018
totaling
$2.6 million
and
$3.1 million
, respectively, were recorded related to existing fixed asset write-offs associated with the Chili’s remodel project.
Restaurant closure charges
during the thirteen and
twenty-six week periods ended December 26, 2018
includes
$2.1 million
and
$3.8 million
, respectively, which were primarily related to Chili’s lease termination charges and certain Chili’s restaurant closure costs.
Restaurant impairment charges
during the thirteen and
twenty-six week periods ended December 26, 2018
includes
$1.0 million
primarily related to the long-lived assets of two underperforming Chili’s restaurants.
Foreign currency transaction (gain)/loss
during the thirteen and
twenty-six week periods ended December 26, 2018
includes a
$0.7 million
loss and
$0.1 million
gain, respectively, resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable that we received as consideration from the sale of our equity interest in our Mexico joint venture during the second quarter of fiscal 2018.
Accelerated depreciation
during the thirteen and
twenty-six week periods ended December 26, 2018
includes
$0.5 million
and
$1.0 million
, respectively, of depreciation on certain leasehold improvements at the corporate headquarters property. Please see
Note 3 - Sale Leaseback Transactions
for more details on the corporate headquarters relocation.
Property damages, net of (insurance recoveries)
during the
thirteen week period ended December 26, 2018
primarily includes of
$0.2 million
of expenses incurred associated with storm damages at certain restaurant locations.
Property damages, net of (insurance recoveries)
during the
twenty-six week period ended December 26, 2018
includes
$0.6 million
of insurance proceeds received related to a previously filed fire claim, partially offset by expenses incurred associated with storm damages at certain restaurant locations.
Cyber security incident charges
during the
twenty-six week period ended December 26, 2018
of
$0.4 million
was recorded related to professional services associated with our response to the incident. We first reported the incident during the fourth quarter of fiscal 2018.
For further details refer to
Note 13 - Commitments and Contingencies
.
Fiscal 2018
During the second quarter of fiscal 2018, we recorded restaurant closure charges of
$4.3 million
primarily related to lease termination charges and other costs associated with the closure of nine underperforming Chili’s restaurants in the second quarter of fiscal 2018 located in Alberta, Canada. Alberta has an oil dependent economy and has experienced an economic recession in recent years related to lower oil production. The slower economy has negatively affected traffic at the restaurants. The decision to close these restaurants was driven by management’s belief that the long-term profitability of these restaurants would not meet our required level of return. During the first quarter of fiscal 2018, we recorded asset impairment charges of
$7.2 million
primarily related to the long-lived assets and reacquired franchise rights of nine underperforming Chili’s restaurants located in Alberta, Canada. These restaurants were closed in the second quarter of fiscal 2018.
During the second quarter of fiscal 2018, we recorded asset impairment charges of
$2.0 million
primarily related to the long-lived assets of certain underperforming Maggiano’s and Chili’s restaurants that continue to operate.
For further details refer to
Note 10 - Fair Value Measurements
. We also recorded lease guarantee charges of
$1.4 million
related to leases that were assigned to a divested brand. For additional lease guarantee disclosures, see
Note 13 - Commitments and Contingencies
.
In October 2017, we sold our Dutch subsidiary that held our equity interest in our Chili’s joint venture in Mexico to the franchise partner in the joint venture, CMR, S.A.B. de C.V. for
$18.0 million
. We recorded a gain of
$0.2 million
which includes the recognition of
$5.4 million
of foreign currency translation losses reclassified from AOCL consisting of
$5.9 million
of foreign currency translation losses from previous years, partially offset by
$0.5 million
of current year foreign currency translation gains. We received a note as consideration for the sale to be paid in 72 equal installments, with one installment payment made at closing and the other payments to be made over 71 months pursuant to the note. The note is denominated in pesos and is re-measured at the end of each period resulting in a gain or loss from foreign currency exchange rate changes. We recorded a
$0.9 million
foreign currency transaction loss in the second quarter due to the decline in the exchange rate for the Mexican peso relative to the U.S. dollar. The current portion of the note which represents the cash payments to be received over the next 12 months is included within accounts receivable, net while the long-term portion of the note is included within other assets.
Additionally, we incurred
$0.5 million
of expenses associated with Hurricanes Harvey and Irma primarily related to employee relief payments and inventory spoilage. Our restaurants were closed in the areas affected by these disasters and our team members were unable to work. These payments were made to assist our team members during these crises and to promote retention. We carry insurance coverage for these types of natural disasters.
7. SEGMENT INFORMATION
Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our company-owned Chili’s restaurants in the United States and Canada as well as the results from our domestic and international franchise business. The Maggiano’s segment includes the results of our company-owned Maggiano’s restaurants.
Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions.
Franchise and other revenues
include
Royalties
and
Franchise fees and other revenues
.
Franchise fees and other revenues
include Maggiano’s banquet service charge income, advertising fees, gift card breakage income, service fees and discount costs from third-party gift card sales, digital entertainment revenues, delivery fee income, development and franchise fees, and retail royalty revenues. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly in the United States. There were no material transactions amongst our operating segments.
Effective the first quarter of fiscal 2019, we transitioned to ASC 606, from the previous Legacy GAAP guidance. Our
Consolidated Financial Statements
for the second quarter and year-to-date periods of fiscal 2019 reflect the application of ASC 606 guidance using the modified retrospective transition method, while our
Consolidated Financial Statements
for prior periods were prepared under Legacy GAAP.
Please see
Note 2 - Revenue Recognition
for more details on the adoption of ASC 606.
Our chief operating decision maker uses operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations.
Company restaurant expenses
include food and beverage costs, restaurant labor costs and restaurant expenses, including advertising expenses. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 26, 2018
|
|
ASC 606
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
640.6
|
|
|
$
|
120.9
|
|
|
$
|
—
|
|
|
$
|
761.5
|
|
Royalties
|
13.2
|
|
|
—
|
|
|
—
|
|
|
13.2
|
|
Franchise fees and other revenues
|
8.5
|
|
|
7.5
|
|
|
—
|
|
|
16.0
|
|
Total revenues
|
662.3
|
|
|
128.4
|
|
|
—
|
|
|
790.7
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
(1)
|
567.1
|
|
|
100.1
|
|
|
0.2
|
|
|
667.4
|
|
Depreciation and amortization
|
29.5
|
|
|
3.9
|
|
|
2.7
|
|
|
36.1
|
|
General and administrative
|
9.1
|
|
|
1.5
|
|
|
24.8
|
|
|
35.4
|
|
Other gains and charges
|
1.4
|
|
|
—
|
|
|
0.8
|
|
|
2.2
|
|
Total operating costs and expenses
|
607.1
|
|
|
105.5
|
|
|
28.5
|
|
|
741.1
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
55.2
|
|
|
22.9
|
|
|
(28.5
|
)
|
|
49.6
|
|
Interest expense
|
0.7
|
|
|
0.1
|
|
|
14.6
|
|
|
15.4
|
|
Other, net
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
Income (loss) before provision for income taxes
|
$
|
54.5
|
|
|
$
|
22.8
|
|
|
$
|
(42.3
|
)
|
|
$
|
35.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 27, 2017
|
|
Legacy GAAP
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
623.6
|
|
|
$
|
119.1
|
|
|
$
|
—
|
|
|
$
|
742.7
|
|
Franchise and other revenues
|
16.5
|
|
|
7.2
|
|
|
—
|
|
|
23.7
|
|
Total revenues
|
640.1
|
|
|
126.3
|
|
|
—
|
|
|
766.4
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
(1)
|
533.9
|
|
|
97.9
|
|
|
0.1
|
|
|
631.9
|
|
Depreciation and amortization
|
31.0
|
|
|
4.0
|
|
|
2.7
|
|
|
37.7
|
|
General and administrative
|
9.3
|
|
|
1.5
|
|
|
22.3
|
|
|
33.1
|
|
Other gains and charges
|
5.9
|
|
|
1.0
|
|
|
2.4
|
|
|
9.3
|
|
Total operating costs and expenses
|
580.1
|
|
|
104.4
|
|
|
27.5
|
|
|
712.0
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
60.0
|
|
|
21.9
|
|
|
(27.5
|
)
|
|
54.4
|
|
Interest expense
|
—
|
|
|
—
|
|
|
14.3
|
|
|
14.3
|
|
Other, net
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
Income (loss) before provision for income taxes
|
$
|
60.0
|
|
|
$
|
21.9
|
|
|
$
|
(40.8
|
)
|
|
$
|
41.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 26, 2018
|
|
ASC 606
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
1,280.9
|
|
|
$
|
208.9
|
|
|
$
|
—
|
|
|
$
|
1,489.8
|
|
Royalties
|
26.1
|
|
|
—
|
|
|
—
|
|
|
26.1
|
|
Franchise fees and other revenues
|
17.1
|
|
|
11.5
|
|
|
—
|
|
|
28.6
|
|
Total revenues
|
1,324.1
|
|
|
220.4
|
|
|
—
|
|
|
1,544.5
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
(1)
|
1,130.2
|
|
|
184.0
|
|
|
0.4
|
|
|
1,314.6
|
|
Depreciation and amortization
|
60.0
|
|
|
7.9
|
|
|
5.2
|
|
|
73.1
|
|
General and administrative
|
17.9
|
|
|
3.2
|
|
|
48.1
|
|
|
69.2
|
|
Other gains and charges
(2)
|
(10.9
|
)
|
|
—
|
|
|
2.0
|
|
|
(8.9
|
)
|
Total operating costs and expenses
|
1,197.2
|
|
|
195.1
|
|
|
55.7
|
|
|
1,448.0
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
126.9
|
|
|
25.3
|
|
|
(55.7
|
)
|
|
96.5
|
|
Interest expense
|
1.7
|
|
|
0.2
|
|
|
29.1
|
|
|
31.0
|
|
Other, net
|
—
|
|
|
—
|
|
|
(1.6
|
)
|
|
(1.6
|
)
|
Income (loss) before provision for income taxes
|
$
|
125.2
|
|
|
$
|
25.1
|
|
|
$
|
(83.2
|
)
|
|
$
|
67.1
|
|
|
|
|
|
|
|
|
|
Segment assets
(2)
|
$
|
1,047.8
|
|
|
$
|
148.9
|
|
|
$
|
98.1
|
|
|
$
|
1,294.8
|
|
Segment goodwill
|
$
|
125.3
|
|
|
$
|
38.4
|
|
|
$
|
—
|
|
|
$
|
163.7
|
|
Payments for property and equipment
|
$
|
58.8
|
|
|
$
|
6.4
|
|
|
$
|
13.5
|
|
|
$
|
78.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 27, 2017
|
|
Legacy GAAP
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
1,251.2
|
|
|
$
|
208.4
|
|
|
$
|
—
|
|
|
$
|
1,459.6
|
|
Franchise and other revenues
|
34.8
|
|
|
11.4
|
|
|
—
|
|
|
46.2
|
|
Total revenues
|
1,286.0
|
|
|
219.8
|
|
|
—
|
|
|
1,505.8
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
(1)
|
1,075.3
|
|
|
183.2
|
|
|
0.2
|
|
|
1,258.7
|
|
Depreciation and amortization
|
62.8
|
|
|
8.0
|
|
|
5.4
|
|
|
76.2
|
|
General and administrative
|
18.9
|
|
|
2.8
|
|
|
43.7
|
|
|
65.4
|
|
Other gains and charges
|
18.0
|
|
|
0.8
|
|
|
3.7
|
|
|
22.5
|
|
Total operating costs and expenses
|
1,175.0
|
|
|
194.8
|
|
|
53.0
|
|
|
1,422.8
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
111.0
|
|
|
25.0
|
|
|
(53.0
|
)
|
|
83.0
|
|
Interest expense
|
—
|
|
|
—
|
|
|
28.2
|
|
|
28.2
|
|
Other, net
|
—
|
|
|
—
|
|
|
(1.5
|
)
|
|
(1.5
|
)
|
Income (loss) before provision for income taxes
|
$
|
111.0
|
|
|
$
|
25.0
|
|
|
$
|
(79.7
|
)
|
|
$
|
56.3
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
$
|
40.8
|
|
|
$
|
4.2
|
|
|
$
|
3.6
|
|
|
$
|
48.6
|
|
|
|
(1)
|
Company restaurant expenses include
Cost of sales
,
Restaurant labor
, and
Restaurant expenses
including advertising expenses. With the adoption of ASC 606, for the thirteen and
twenty-six week periods ended December 26, 2018
, advertising contributions received from Chili’s franchisees are recorded as
Franchise fees and other revenues
within
Total revenues
, which differs from the thirteen and
twenty-six week periods
|
ended December 27, 2017
that includes Chili’s franchise advertising contributions recorded on a net basis within Company restaurant expenses.
|
|
(2)
|
During the
twenty-six week period ended December 26, 2018
we completed sale leaseback transactions of
145
company-owned Chili’s restaurant properties. As part of this transaction, we sold the related restaurant fixed assets totaling
$170.9 million
, net of accumulated depreciation. Additionally, Chili’s recognized
$17.7 million
of gain on the sale, including a certain portion of the deferred gain, net of related transaction costs incurred in
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
. Please see
Note 3 - Sale Leaseback Transactions
for further details.
|
8. DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
December 26,
2018
|
|
June 27,
2018
|
Revolving credit facility
|
$
|
586.3
|
|
|
$
|
820.3
|
|
5.00% notes
|
350.0
|
|
|
350.0
|
|
3.88% notes
|
300.0
|
|
|
300.0
|
|
Capital lease obligations
|
41.7
|
|
|
43.0
|
|
Total long-term debt
|
1,278.0
|
|
|
1,513.3
|
|
Less unamortized debt issuance costs and discounts
|
(6.0
|
)
|
|
(6.6
|
)
|
Total long-term debt less unamortized debt issuance costs and discounts
|
1,272.0
|
|
|
1,506.7
|
|
Less current installments
|
(8.1
|
)
|
|
(7.1
|
)
|
|
$
|
1,263.9
|
|
|
$
|
1,499.6
|
|
Revolving Credit Facility
During the
twenty-six week period ended December 26, 2018
, net
repayments
of
$234.0 million
were
made
on the
$1.0 billion
revolving credit facility
primarily from proceeds received from the sale leaseback transactions
, partially offset by share repurchases. As of
December 26, 2018
,
$413.7 million
of credit was available under the revolving credit facility.
Under the amended
$1.0 billion
revolving credit facility, the maturity date for
$890.0 million
of the facility was extended from March 12, 2020 to
September 12, 2021
and the remaining
$110.0 million
remains due on
March 12, 2020
. The amended revolving credit facility generally bears 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
2.00%
. For a period of 180 days following the third amendment to the revolving credit facility that occurred in May 2018, we paid interest at a rate of LIBOR plus
1.70%
. Effective October 2018, we resumed paying interest at a rate of LIBOR plus
1.38%
for a total of
3.89%
.
One month LIBOR
at
December 26, 2018
was approximately
2.51%
.
5.00% Notes
In September 2016, we completed the private offering of
$350.0 million
of our
5.00%
senior notes due October 2024 (the “2024 Notes”). We received proceeds of
$350.0 million
and utilized the proceeds to fund a
$300.0 million
accelerated share repurchase agreement and to repay
$50.0 million
on the amended
$1.0 billion
revolving credit facility. The notes require semi-annual interest payments which began on April 1, 2017.
3.88% Notes
In May 2013, we issued
$300.0 million
of
3.88%
notes due in May 2023. The notes require semi-annual interest payments which began in the second quarter of fiscal 2014.
Financial Covenants
Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios.
We are currently in compliance with all financial covenants
.
9. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities
consist of the following:
|
|
|
|
|
|
|
|
|
|
December 26,
2018
|
|
June 27,
2018
|
Deferred liabilities and sale leaseback gains
(1)
|
$
|
32.1
|
|
|
$
|
15.5
|
|
Property tax
|
19.6
|
|
|
17.4
|
|
Insurance
|
18.3
|
|
|
17.8
|
|
Dividends
|
14.8
|
|
|
16.3
|
|
Sales tax
|
14.4
|
|
|
14.2
|
|
Interest
|
7.5
|
|
|
7.8
|
|
Straight-line rent
(2)
|
4.9
|
|
|
5.2
|
|
Landlord contributions
|
2.7
|
|
|
2.7
|
|
Deferred franchise and development fees
(3)
|
1.4
|
|
|
—
|
|
Cyber security incident
(4)
|
1.5
|
|
|
1.4
|
|
Other
(5)
|
31.0
|
|
|
28.9
|
|
|
$
|
148.2
|
|
|
$
|
127.2
|
|
|
|
(1)
|
Deferred liabilities and sale leaseback gains
primarily relate to
$18.4 million
for the current portion of the deferred gain related to the sale leaseback transactions executed during the first two quarters of fiscal 2019, and net proceeds of
$13.7 million
that have been deferred related to the sale of our current corporate headquarters property. P
lease see
Note 3 - Sale Leaseback Transactions
for further details
.
|
|
|
(2)
|
Straight-line rent
includes the current portion of the straight-line rent of operating leases. During the
thirteen week periods ended December 26, 2018
and
December 27, 2017
,
$0.4 million
of expenses and
$0.2 million
of credit related to straight-line rent expenses were recognized into
Restaurant expenses
in the
Consolidated Statements of Comprehensive Income
, respectively.
During the
twenty-six week periods ended December 26, 2018
and
December 27, 2017
,
$0.5 million
of expenses and
0.4 million
of credit related to straight-line rent expenses were recognized into
Restaurant expenses
in the
Consolidated Statements of Comprehensive Income
, respectively.
|
|
|
(3)
|
Deferred franchise and development fees
relates to the current portion of upfront initial franchise and development fees recorded as part of adoption of ASC 606
, please see
Note 2 - Revenue Recognition
for further details, and the Other liabilities table below for the long-term accrued amount.
|
|
|
(4)
|
Cyber security incident
accrual relates to the fiscal 2018 event, please see
Note 13 - Contingencies
for further details.
|
|
|
(5)
|
Other
primarily consists of accruals for utilities and services, certain lease reserves, state income tax payable, banquet deposits for Maggiano’s events, rent-related expenses and other various accruals.
|
Other liabilities
consist of the following:
|
|
|
|
|
|
|
|
|
|
December 26,
2018
|
|
June 27,
2018
|
Straight-line rent
(1)
|
$
|
56.6
|
|
|
$
|
55.6
|
|
Insurance
|
37.4
|
|
|
40.1
|
|
Landlord contributions
|
24.1
|
|
|
23.3
|
|
Deferred franchise and development fees
(2)
|
15.8
|
|
|
—
|
|
Unfavorable leases
|
3.1
|
|
|
3.8
|
|
Unrecognized tax benefits
|
2.9
|
|
|
2.9
|
|
Other
|
6.0
|
|
|
6.0
|
|
|
$
|
145.9
|
|
|
$
|
131.7
|
|
|
|
(1)
|
Straight-line rent
is the long-term portion of the straight-line rent, and for the
second quarter of fiscal 2019
this balance also includes
$1.2 million
for the straight-line rent accrued for
145
restaurants sold as part of the sale leaseback transactions. Please see
Note 3 - Sale Leaseback Transactions
for more details, and the above
Other accrued liabilities
table for the current portion of straight-line rent recorded to be recognized within the next twelve months.
|
|
|
(2)
|
Deferred franchise and development fees
relates to the long-term portion of upfront initial franchise and development fees recorded as part of adoption of ASC 606, please see
Note 2 - Revenue Recognition
for further details, and the
Other accrued liabilities
table above for the current accrued amount.
|
10. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid 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.
|
Non-Financial Assets Measured On a Non-Recurring Basis
We review the carrying amounts of property and equipment, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value. All impairment charges were included in
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
for the periods presented.
During the
thirteen week period ended
September 26, 2018, no indicators of impairment existed. During the
thirteen week period ended December 26, 2018
, we impaired long-lived assets with carrying values of
$1.0 million
primarily related to
two
underperforming Chili’s restaurants that we determined the leasehold improvements and other assets associated with the impaired restaurants had
no
fair value, based on Level 3 fair value measurements.
During the
twenty-six week period ended December 27, 2017
, we impaired long-lived assets and reacquired franchise rights with carrying values of
$8.3 million
and
$1.2 million
, respectively, primarily related to
nine
underperforming Chili’s restaurants located in Alberta, Canada. Please see
Note 6 - Other Gains and Charges
for further details. We determined the long lived assets associated with the underperforming restaurants had a fair value of
$0.3 million
, based on Level 3 fair value measurements, resulting in an impairment charge of
$9.2 million
.
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions. During the
thirteen week periods ended December 26, 2018
and
December 27, 2017
, no indicators of impairment were identified.
Intangibles, net
in the
Consolidated Balance Sheets
includes indefinite-lived intangible assets such as the transferable liquor licenses and definite-lived intangible assets that include reacquired franchise rights and other items such as trademarks. Accumulated amortization of
Intangibles, net
at
December 26, 2018
and
June 27, 2018
, was
$6.3 million
and
$5.7 million
, respectively.
Goodwill
We review the carrying amounts of goodwill annually 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 implied fair value of the goodwill. During the thirteen and
twenty-six week periods ended December 26, 2018
and
December 27, 2017
, no indicators of impairment were identified.
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items. The carrying amount of debt outstanding related to the amended revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the
3.88%
and
5.00%
notes are based on quoted market prices and are considered Level 2 fair value measurements.
The carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values of the
3.88%
notes and
5.00%
notes are as follows, please see further details at
Note 8 - Debt
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26, 2018
|
|
June 27, 2018
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
3.88% Notes
|
$
|
298.4
|
|
|
$
|
283.2
|
|
|
$
|
298.2
|
|
|
$
|
285.3
|
|
5.00% Notes
|
345.6
|
|
|
326.9
|
|
|
345.2
|
|
|
342.3
|
|
During fiscal
2018
, we received an
$18.0 million
long-term note receivable as consideration related to the sale of our equity interest in the Chili’s joint venture in Mexico. We determined the fair value of this note based on an internally developed analysis relying on Level 3 inputs at inception. This analysis was based on a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments observed in the market. As a result of the initial analysis, we determined the fair value of this note was approximately
$16.0 million
and recorded this fair value as its initial carrying value. We believe the fair value of the note receivable continues to approximate the carrying value, which at
December 26, 2018
was
$11.9 million
. The current portion of the note, which represents the cash payments to be received over the next 12 months, is included within
Accounts receivable, net
while the long-term portion of the note is included within
Other
assets in the
Consolidated Balance Sheets
. Please refer to
Note 6 - Other Gains and Charges
for further details about this note receivable.
We have recorded certain lease obligations related to the previously divested Romano’s Macaroni Grill restaurants. These lease obligations are based on Level 3 fair value measurements based on an estimate of the obligation associated with the lease locations, stated rent and other factors such as ability and probability of the landlord to mitigate damages by leasing to new tenants. Please refer to
Note 13 - Contingencies
for further details.
11. SHAREHOLDERS’ DEFICIT
Changes in Shareholders’ Deficit
The changes by quarter in
Total shareholders’ deficit
during the
twenty-six week periods ended
December 26, 2018
and
December 27, 2017
, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 26, 2018
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
Balance at June 27, 2018
|
$
|
17.6
|
|
|
$
|
511.6
|
|
|
$
|
2,683.0
|
|
|
$
|
(3,924.7
|
)
|
|
$
|
(5.8
|
)
|
|
$
|
(718.3
|
)
|
Effect of ASC 606 adoption
|
—
|
|
|
—
|
|
|
(7.4
|
)
|
|
—
|
|
|
—
|
|
|
(7.4
|
)
|
Net income
|
—
|
|
|
—
|
|
|
26.4
|
|
|
—
|
|
|
—
|
|
|
26.4
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(15.5
|
)
|
|
—
|
|
|
—
|
|
|
(15.5
|
)
|
Stock-based compensation
|
—
|
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
Purchases of treasury stock
|
—
|
|
|
(7.5
|
)
|
|
—
|
|
|
(98.0
|
)
|
|
—
|
|
|
(105.5
|
)
|
Issuances of common stock
|
—
|
|
|
(3.8
|
)
|
|
—
|
|
|
4.3
|
|
|
—
|
|
|
0.5
|
|
Balance at September 26, 2018
|
17.6
|
|
|
503.9
|
|
|
2,686.5
|
|
|
(4,018.4
|
)
|
|
(5.5
|
)
|
|
(815.9
|
)
|
Net income
|
—
|
|
|
—
|
|
|
32.0
|
|
|
—
|
|
|
—
|
|
|
32.0
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.5
|
)
|
|
—
|
|
|
—
|
|
|
(14.5
|
)
|
Stock-based compensation
|
—
|
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
Purchases of treasury stock
|
—
|
|
|
6.9
|
|
|
—
|
|
|
(69.0
|
)
|
|
—
|
|
|
(62.1
|
)
|
Issuances of common stock
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
2.3
|
|
Balance at December 26, 2018
|
$
|
17.6
|
|
|
$
|
514.2
|
|
|
$
|
2,704.0
|
|
|
$
|
(4,084.9
|
)
|
|
$
|
(6.1
|
)
|
|
$
|
(855.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 27, 2017
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
Balances at June 28, 2017
|
$
|
17.6
|
|
|
$
|
502.1
|
|
|
$
|
2,627.1
|
|
|
$
|
(3,628.5
|
)
|
|
$
|
(11.9
|
)
|
|
$
|
(493.6
|
)
|
Net income
|
—
|
|
|
—
|
|
|
9.9
|
|
|
—
|
|
|
—
|
|
|
9.9
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
|
1.5
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(18.8
|
)
|
|
—
|
|
|
—
|
|
|
(18.8
|
)
|
Stock-based compensation
|
—
|
|
|
3.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.5
|
|
Purchases of treasury stock
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(41.6
|
)
|
|
—
|
|
|
(41.7
|
)
|
Issuances of common stock
|
—
|
|
|
(2.4
|
)
|
|
—
|
|
|
2.6
|
|
|
—
|
|
|
0.2
|
|
Balance at September 27, 2017
|
17.6
|
|
|
503.1
|
|
|
2,618.2
|
|
|
(3,667.5
|
)
|
|
(10.4
|
)
|
|
(539.0
|
)
|
Realized foreign currency translation
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.4
|
|
|
5.4
|
|
Net income
|
—
|
|
|
—
|
|
|
25.3
|
|
|
—
|
|
|
—
|
|
|
25.3
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(17.9
|
)
|
|
—
|
|
|
—
|
|
|
(17.9
|
)
|
Stock-based compensation
|
—
|
|
|
2.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.8
|
|
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(30.1
|
)
|
|
—
|
|
|
(30.1
|
)
|
Issuances of common stock
|
—
|
|
|
(0.8
|
)
|
|
—
|
|
|
1.6
|
|
|
—
|
|
|
0.8
|
|
Balance at December 27, 2017
|
$
|
17.6
|
|
|
$
|
505.1
|
|
|
$
|
2,625.6
|
|
|
$
|
(3,696.0
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(552.9
|
)
|
Share Repurchases
Our share 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, borrowings, and planned investment and financing needs. Shares that have been paid for but not yet delivered are reflected as a reduction of Additional paid in capital while other repurchased shares are reflected as an increase in Treasury stock within
Shareholders’ deficit
in the
Consolidated Balance Sheets
. The repurchased shares during the
twenty-six week periods ended
December 26, 2018
and
December 27, 2017
included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares.
Twenty-Six Week Periods Ended
December 26, 2018
In August 2018, our Board of Directors authorized a
$300.0 million
increase to our existing share repurchase program resulting in total authorizations of
$4.9 billion
. During the
thirteen week period ended September 26, 2018
, we repurchased approximately
2.1 million
shares of our common stock for
$105.5 million
.
During the
thirteen week period ended December 26, 2018
, we repurchased approximately
1.5 million
shares of our common stock for
$62.1 million
.
As of
December 26, 2018
, approximately
$197.8 million
was available under our share repurchase authorizations.
Twenty-Six Week Periods Ended
December 27, 2017
During the
thirteen week period ended September 27, 2017
, we repurchased approximately
1.3 million
shares of our common stock for
$41.7 million
. During the
thirteen week period ended December 27, 2017
, we repurchased approximately
1.0 million
shares of our common stock for
$30.1 million
.
Stock-based Compensation
The following table presents the stock options and restricted share awards granted, and related weighted average exercise price and fair value per share amounts for the
twenty-six week periods ended
December 26, 2018
and
December 27, 2017
:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Periods Ended
|
|
December 26,
2018
|
|
December 27,
2017
|
Stock options
|
|
|
|
Stock options granted
|
0.7
|
|
|
1.2
|
|
Weighted average exercise price per share
|
$
|
43.63
|
|
|
$
|
31.22
|
|
Weighted average fair value per share
|
$
|
8.25
|
|
|
$
|
4.45
|
|
Restricted share awards
|
|
|
|
Restricted share awards granted
|
0.3
|
|
|
0.4
|
|
Weighted average fair value per share
|
$
|
43.35
|
|
|
$
|
31.23
|
|
During the
thirteen week period ended December 26, 2018
, we modified certain fiscal 2018 performance-based stock option awards and
0.2 million
options were canceled. We subsequently granted fiscal 2019 performance-based stock option awards of
0.4 million
options with a grant date fair value equivalent to the fair value of the canceled fiscal 2018 options as of the modification date. Vesting of the fiscal 2019 performance-based options is conditioned on achievement of the same performance targets and vest on the same schedule as the fiscal 2018 performance-based stock options. There is
no
incremental compensation cost as a result of this modification. The fiscal 2019 performance-based stock option awards are included in the above stock options granted table.
Dividends
During the
twenty-six week periods ended
December 26, 2018
and
December 27, 2017
, we paid dividends of
$31.6 million
and
$35.4 million
to common stock shareholders, respectively.
We also declared a quarterly dividend on
October 29, 2018
, that was paid subsequent to the second quarter of fiscal 2019, on
December 27, 2018
, in the amount
of
$0.38
per share.
As of
December 26, 2018
, we have accrued
$14.2 million
for this dividend in
Other accrued liabilities
on our
Consolidated Balance Sheets
, see
Note 9 - Accrued and Other Liabilities
.
Effect of Adoption of ASC 606
During the
thirteen week period ended September 26, 2018
, we adopted ASC 606 and recorded a
$7.4 million
cumulative effect adjustment decrease to
Retained earnings
for the change in accounting principle. Please refer to
Note 2 - Revenue Recognition
for more details.
Realized Foreign Currency Translation
During the
thirteen week period ended December 27, 2017
, we divested our Mexican joint venture and realized
$5.4 million
of foreign currency translation losses that were reclassified from
Accumulated other comprehensive loss
into
Net income
. Please refer to
Note 10 - Fair Value Measurements
for further details on the divestiture and related consideration received.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest is as follows:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Periods Ended
|
|
December 26,
2018
|
|
December 27,
2017
|
Income taxes, net of refunds
(1)
|
$
|
83.4
|
|
|
$
|
30.5
|
|
Interest, net of amounts capitalized
|
28.2
|
|
|
25.3
|
|
|
|
(1)
|
Income taxes, net of refunds
increased for the
twenty-six week period ended December 26, 2018
as compared to the
twenty-six week period ended December 27, 2017
primarily due to payments made for income tax liabilities resulting from the sale leaseback transactions completed in the
first quarter of fiscal 2019
. Please refer to
Note 3 - Sale Leaseback Transactions
and
Note 5 - Income Taxes
for further details
.
|
Non-cash investing and financing activities are as follows:
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Periods Ended
|
|
December 26,
2018
|
|
December 27,
2017
|
Retirement of fully depreciated assets
|
$
|
16.6
|
|
|
$
|
22.4
|
|
Dividends declared but not paid
|
14.8
|
|
|
18.2
|
|
Accrued capital expenditures
|
14.2
|
|
|
4.7
|
|
Capital lease additions
|
2.5
|
|
|
4.3
|
|
13. CONTINGENCIES
Lease Commitments
We have, in certain cases, divested brands or sold restaurants to franchisees and have not been released from lease guarantees or lease liability for the related restaurants. As of
December 26, 2018
and
June 27, 2018
, we have outstanding lease guarantees or are secondarily liable for
$57.5 million
and
$58.2 million
, respectively. These amounts represent the maximum potential liability of future payments under the leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal
2019
through fiscal
2028
. In the event of default under a lease by a franchisee or owner of a divested brand, the indemnity and default clauses in our agreements with such third parties and applicable laws govern our ability to pursue and recover amounts we may pay on behalf of such parties.
During fiscal 2018, Mac Acquisition LLC, the owner of Romano’s Macaroni Grill restaurants, filed for Chapter 11 bankruptcy protection. We have outstanding lease guarantees or are secondarily liable for certain of its leases rejected in the bankruptcy. As of
December 26, 2018
and
June 27, 2018
, balances of
$0.6 million
and
$1.4 million
, respectively, were recorded in
Other accrued liabilities
in our
Consolidated Balance Sheets
based on our analysis of the potential obligations and are inclusive of the fiscal 2019 activity detailed below.
We paid
$0.7 million
during the
twenty-six week period ended December 26, 2018
to settle obligations of
two
of the leases rejected in the Mac Acquisition, LLC bankruptcy proceeding. We do not expect additional leases to be rejected because the period for doing so in the bankruptcy proceeding concluded and Mac Acquisition, LLC’s plan for reorganization in the bankruptcy proceeding was confirmed. We will continue to monitor leases for which we have outstanding guarantees or are secondarily liable to assess the likelihood of any incremental losses. We have not been informed by landlords of Mac Acquisition LLC of any lease defaults other than those detailed in the previous bankruptcy filings.
No other liabilities related to this matter have been recorded
as of
December 26, 2018
.
Letters Of Credit
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of
December 26, 2018
, we had
$29.0 million
in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next
4
to
10
months.
Cyber Security Incident
On May 12, 2018,
we issued a public statement that malware had been discovered at certain Chili’s restaurants that resulted in unauthorized access or acquisition of customer payment card data.
We engaged third-party forensic firms and cooperated with law enforcement to investigate the matter.
Based on the investigation of our third-party forensic experts, we believe most company-owned Chili’s restaurants were impacted by the malware during time frames that vary by restaurant, but we believe in each case began no earlier than March 21, 2018 and ended no later than April 22, 2018.
We expect to incur significant legal and professional services expenses associated with the cyber security incident in future periods. We will recognize these expenses as services are received. Related to this incident, payment card companies and associations may request us to reimburse them for unauthorized card charges and costs to replace cards and may also impose fines or penalties in connection with the cyber security incident, and regulatory authorities may also impose fines or other remedies against us. While we do not acknowledge responsibility to pay any such amounts imposed by any third parties, we may become obligated to pay such amounts or incur significant related settlement costs. We will record an estimate for losses at the time when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
To limit our exposure to cyber security events, we maintain cyber liability insurance coverage. This coverage and certain other insurance coverage may reduce our exposure for this incident. Our cyber liability insurance policy contains a
$2.0 million
retention. Since the incident through
December 26, 2018
, we have incurred expenses of
$3.2 million
related to the cyber security incident which includes the
$2.0 million
retention recorded in fiscal 2018, an additional
$0.4 million
recorded to
Other (gains) and charges
in the
Consolidated Statements of Comprehensive Income
during the
twenty-six week period ended December 26, 2018
, and
$0.8 million
of receivable for costs we believe are reimbursable and probable of recovery under our insurance coverage.
The Company was named as a defendant in putative class action lawsuits in the United States District Court for the Middle District of Florida, the United States District Court for the District of Nevada, and two in the United States District Court for the Central District of California, filed on
May 24, 2018
,
May 30, 2018
,
June 14, 2018
, and
June 28, 2018
, respectively (collectively, the “Litigation”) relating to the cyber security incident described above. In the Litigation, plaintiffs assert various claims stemming from the cyber security incident at the Company’s Chili’s restaurants involving customer payment card information and seek monetary damages in excess of
$5.0 million
, injunctive and declaratory relief and attorney’s fees and costs. Since the initial filing of these cases, the Nevada plaintiff voluntarily dismissed this case and joined the Florida lawsuit. Counsel for all parties subsequently agreed to the transfer of the California cases to Florida, and they have been consolidated into a single matter with the case already pending there. We believe we have defenses and intend to defend the Litigation. As such, as of
December 26, 2018
, we have
concluded that a loss from this matter is not determinable, therefore, we have not recorded a liability related to the Litigation. We will continue to evaluate this matter based on new information as it becomes available.
Legal Proceedings
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Consolidated Financial Statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities 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.
14. EFFECT OF NEW ACCOUNTING STANDARDS
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract -
In August 2018, the FASB issued ASU 2018-15, this update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for annual and interim periods in fiscal years beginning after December 15, 2019, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted and we plan to adopt this guidance during the second half of fiscal 2019, using a prospective approach. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement -
In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments under ASU 2018-13 add an incremental requirement, among others, for entities to disclose (1) the range and weighted average used to develop significant unobservable inputs and (2) how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy. Entities may disclose other quantitative information in lieu of the weighted average if they determine that such information embodies a more reasonable and rational method of reflecting the distribution of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
ASU 2016-02, Leases (Topic 842)
- In February 2016, the FASB issued ASU 2016-02, and has subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates require a lessee to recognize in the balance sheet a liability to make lease payments and a corresponding right-of-use asset for virtually all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. The update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. The updates are effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. Early adoption is permitted for financial statements that have not been previously issued. In July 2018, the FASB issued ASU 2018-11 that provided either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements (cumulative effect transition method).
We currently expect to implement the standard using the alternative cumulative effect transition method and elect the package of practical expedients under which we will not reassess the classification of our existing leases, reevaluate whether any expired or existing contracts are or contain leases or reassess initial direct costs under the new guidance. Additionally, we expect to elect lessee and lessor practical expedients to not separate non-lease components, such as common area maintenance and property taxes, from lease components. We also anticipate electing the short-term lease exemption from balance sheet recognition for all leases that qualify, and the land easement practical expedient that allows entities to elect not to assess whether existing land easements are, or contain, leases in accordance with ASC 842 when transitioning to the new leasing standard. We do not expect to elect the practical expedient that permits a reassessment of lease terms for existing leases. We are currently evaluating other practical expedients and elections specified in the guidelines.
We have commenced an analysis of the impact of the new lease guidance and developed a comprehensive plan for our implementation of the new guidance. The project plan includes analyzing the impact of the new guidance on our current lease contracts, reviewing the completeness of our existing lease portfolio, comparing our accounting policies under current accounting guidance to the new accounting guidance and identifying potential differences from applying the requirements of the new guidance to our lease contracts, and the evaluation of lease accounting tools to assist with the adoption and ongoing disclosures related to this new standard.
Under current accounting guidance for leases, we do not recognize an asset or liability created by operating leases where we are the lessee. We expect a material increase to our assets and liabilities on our consolidated balance sheet as a result of recognizing assets and liabilities for operating leases where we are the lessee on the date of initial application of the new guidance. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. We had operating leases with undiscounted remaining rental payments of approximately
$1,025.6 million
as of December 26, 2018. Additionally, we expect to derecognize the deferred gain from the sale leaseback transactions through an opening retained earnings adjustment upon adoption using the cumulative effect transition method, and as of December 26, 2018, we had
$270.6 million
recorded in
Other accrued liabilities
(current portion) and
Deferred gain on sale leaseback transactions
(long-term portion) in the
Consolidated Balance Sheets
.
We are continuing to evaluate the impact of the new guidance on capital leases, as well as the impact of transition provisions under the new guidance on amounts recognized in connection with our previous application of acquisition accounting. We are also continuing to evaluate the impact that adoption of this guidance will have on our consolidated statements of operations. We do not expect the adoption of this new guidance to have a material impact on the amount or timing of our cash flows and liquidity.
15. SUBSEQUENT EVENTS
Revolver Net Payments
Net borrowings of
$10.0 million
were drawn on the revolving credit facility subsequent to the end of the second quarter of fiscal 2019.
Dividend Declaration
On
January 28, 2019
, our Board of Directors declared a quarterly dividend of
$0.38
per share to be paid on
March 28, 2019
to shareholders of record as of
March 8, 2019
.