ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our Company, our operations and our current operating environment. For an understanding of the significant factors that influenced our performance, the MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in Part II, Item 8 - Financial Statements and Supplementary Data of our Annual Report. Our MD&A consists of the following sections:
•Overview - a brief description of our business and a discussion on the financial impact of the COVID-19 pandemic
•Results of Operations - an analysis of the Consolidated Statements of Comprehensive Income included in the Consolidated Financial Statements
•Liquidity and Capital Resources - an analysis of cash flows, including capital expenditures, aggregate contractual obligations, share issuance and repurchase activity, and known trends that may impact liquidity
•Impact of Inflation - a discussion of the effect of inflation on our business
•Off-Balance Sheet Arrangements - a discussion of the off-balance sheet arrangements entered into by us
•Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates including recent accounting pronouncements
The following MD&A includes a discussion comparing our results in fiscal 2021 to fiscal 2020. For a discussion comparing our results from fiscal 2020 to fiscal 2019, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 24, 2020, filed with the SEC on August 24, 2020.
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of Brinker International, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We have a 52 or 53 week fiscal year ending on the last Wednesday in June. We utilize a 13 week accounting period for quarterly reporting purposes, except in years containing 53 weeks when the fourth quarter contains 14 weeks. Fiscal 2021 ended on June 30, 2021 and contained 53 weeks. Fiscal 2020 and 2019, which ended on June 24, 2020 and June 26, 2019, respectively, each contained 52 weeks. All amounts within the MD&A are presented in millions unless otherwise specified.
OVERVIEW
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, as well as virtual brands including It’s Just Wings® and Maggiano’s Italian Classics. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units. Refer to Part I, Item 1 - Business of this document for additional information about our business and operational strategies.
Impact of COVID-19 Pandemic
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic and a National Public Health Emergency. Beginning in March 2020, our restaurants experienced a significant decrease in guest traffic and sales due to the spread of COVID-19, which prompted changes in consumer behavior and social distancing preferences as well as dining room closures and dining room capacity restrictions mandated or encouraged by federal, state and local governments.
In March 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms, transitioned to an off-premise business model and temporarily delayed our expansion plans. Beginning on April 27, 2020, we reopened certain dining room locations as permitted by state and local mandates. For the remainder of fiscal 2020 and throughout fiscal 2021, the number of open dining rooms, and the dining room capacity restrictions fluctuated based on state and local mandates. The following table shows the percentages of our Company-owned restaurant dining rooms or patios that were open in at least a limited capacity at the end of each fiscal quarter since the beginning of the pandemic:
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Fiscal quarters ended on
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June 30, 2021
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March 24, 2021
|
|
December 23, 2020
|
|
September 23, 2020
|
|
June 24, 2020
|
|
March 25, 2020
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Open dining rooms or patios
|
100.0
|
%
|
|
99.7
|
%
|
|
84.3
|
%
|
|
98.2
|
%
|
|
94.9
|
%
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|
—
|
%
|
Chili’s and Maggiano’s ability to continue serving guests during the COVID-19 pandemic is the result of our strategic decision to invest in technology, virtual brands, and off-premise capabilities including online ordering,
mobile app ordering, curbside service and third-party delivery. Our off-premise sales grew significantly during the COVID-19 pandemic and partially offset the lost dining room sales due to the capacity restrictions and closures. During fiscal 2021, off-premise sales represented approximately 42.2% of Company sales compared to 26.4% in fiscal 2020.
During the COVID-19 pandemic, our franchise partners also experienced regulated closures both domestically and internationally, which negatively impacted our franchise royalties.
COVID-19 Impact to Results of Operations, Liquidity and Capital Resources in Fiscal 2021
We incurred $3.3 million of net charges in Other (gains) and charges which are recorded in the Consolidated Statements of Comprehensive Income in fiscal 2021, including the following:
•employee assistance and related payroll taxes for certain team members,
•conversion of certain parking lots into dining areas, and
•initial purchases of restaurant and personal protective supplies such as face masks and hand sanitizers required to maintain open dining rooms.
We also took the following proactive precautionary measures in fiscal 2021 to preserve liquidity, reduce costs and pause non-critical projects that did not significantly impact our current operations:
•Amended our revolving credit facility in the first quarter of fiscal 2021 to extend the maturity date and provide additional borrowing flexibility.
•Temporarily reduced capital expenditures, although we have begun to strategically resume the Chili’s remodel program and construction of certain new restaurants.
•Reduced marketing, general and administrative and restaurant expenses.
•Continued the suspension of the quarterly cash dividend and the share repurchase program;
•Amended our fiscal 2018 and fiscal 2019 U.S. Income Tax Returns in order to claim additional depreciation deductions related to qualified improvement property of $4.6 million in accordance with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). We also were able to include a benefit in our fiscal 2020 U.S. Income Tax Return related to the additional depreciation on qualified improvement property of approximately $2.0 million.
•Deferred the employer portion of certain payroll taxes, totaling $54.5 million, in accordance with the CARES Act. These taxes will be repaid in two equal installments on December 31, 2021, and December 31, 2022.
Impact on Financial Outlook
The ultimate impact of the COVID-19 pandemic cannot be reasonably estimated due to the uncertainty about the extent and duration of the spread of the virus, the availability, acceptance and efficacy of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently. We will continue to closely monitor and adapt to the evolving situation.
RESULTS OF OPERATIONS
The following table sets forth selected operating data:
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Fiscal Years Ended
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June 30, 2021
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June 24, 2020
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Dollars
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As a percentage(1)
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Dollars
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|
As a percentage(1)
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Revenues
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Company sales
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$
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3,279.0
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98.2
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%
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|
$
|
3,004.9
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|
97.6
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%
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Franchise and other revenues
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58.8
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|
1.8
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%
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|
73.6
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|
2.4
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%
|
Total revenues
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3,337.8
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|
100.0
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%
|
|
3,078.5
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|
100.0
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%
|
Operating costs and expenses
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Food and beverage costs
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867.8
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26.4
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%
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|
798.6
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|
26.6
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%
|
Restaurant labor
|
1,108.2
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|
33.8
|
%
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|
1,045.5
|
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|
34.8
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%
|
Restaurant expenses
|
858.5
|
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|
26.2
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%
|
|
825.8
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|
27.5
|
%
|
Depreciation and amortization
|
150.2
|
|
|
4.5
|
%
|
|
162.3
|
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|
5.3
|
%
|
General and administrative
|
134.8
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|
4.0
|
%
|
|
136.3
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|
4.4
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%
|
Other (gains) and charges
|
19.0
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|
0.6
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%
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|
47.4
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|
1.5
|
%
|
Total operating costs and expenses
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3,138.5
|
|
|
94.0
|
%
|
|
3,015.9
|
|
|
98.0
|
%
|
Operating income
|
199.3
|
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|
6.0
|
%
|
|
62.6
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|
2.0
|
%
|
Interest expenses
|
56.2
|
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|
1.7
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%
|
|
59.6
|
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|
1.9
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%
|
Other income, net
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(2.1)
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|
(0.1)
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%
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|
(1.9)
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|
(0.1)
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%
|
Income before income taxes
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145.2
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|
4.4
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%
|
|
4.9
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|
0.2
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%
|
Provision (benefit) for income taxes
|
13.6
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|
0.5
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%
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|
(19.5)
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|
(0.6)
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%
|
Net income
|
$
|
131.6
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|
3.9
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%
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|
$
|
24.4
|
|
|
0.8
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%
|
(1)Food and beverage costs, Restaurant labor and Restaurant expenses are calculated based on a percentage of Company sales. All others are calculated as a percentage of Total revenues.
Revenues
Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income to provide more clarity around Company-owned restaurant revenues and operating expenses trends:
•Company sales include revenues generated by the operation of Company-owned restaurants including sales from gift card redemptions and virtual brands.
•Franchise and other revenues include franchise royalties, delivery fee income, gift card breakage, digital entertainment revenues, Maggiano’s banquet service charge income, franchise advertising fees, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales.
The following is a summary of the change in Total revenues:
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Total Revenues
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Chili’s
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Maggiano’s
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Total Revenues
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Fiscal year ended June 24, 2020
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$
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2,731.7
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|
$
|
346.8
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$
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3,078.5
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|
Change from:
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Comparable restaurant sales(1)
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215.1
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(65.0)
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150.1
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53rd week in Fiscal 2021
|
62.5
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|
6.9
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|
69.4
|
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Restaurant openings
|
21.4
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|
—
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21.4
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Restaurant relocations
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2.8
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—
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2.8
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|
Restaurant closures(2)
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(19.3)
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—
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(19.3)
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Restaurant acquisitions(3)
|
49.7
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|
—
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|
49.7
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Company sales
|
332.2
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(58.1)
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|
274.1
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Royalties(4)
|
(3.4)
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|
—
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(3.4)
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Franchise fees and other revenues
|
(0.6)
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|
(10.8)
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|
(11.4)
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Franchise and other revenues
|
(4.0)
|
|
|
(10.8)
|
|
|
(14.8)
|
|
Fiscal year ended June 30, 2021
|
$
|
3,059.9
|
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|
$
|
277.9
|
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|
$
|
3,337.8
|
|
(1)Comparable restaurant sales increased due to higher off-premise sales and higher dining room guest sales and traffic during the fourth quarter of fiscal 2021. These increases were partially offset by lower dining room guest traffic during the first three quarters of fiscal 2021 resulting from temporary dining room closures, capacity limitations and our guests’ personal safety preferences related to the pandemic.
(2)Restaurant closures include the impact of permanently closed locations and temporary closures longer than 14 consecutive days.
(3)We acquired 116 Chili’s restaurants from a franchisee effective September 5, 2019. Restaurant acquisitions include the change in Company sales attributed to these restaurants over the first ten weeks of fiscal 2021. For the remainder of fiscal 2021, the change in Company sales attributed to these restaurants is included in Comparable restaurant sales.
(4)Lower royalties in fiscal 2021 were primarily due to lower dining room sales by our domestic and global franchisees due to the impacts of the COVID-19 pandemic. Royalties are based on franchise sales and our franchisees generated sales of approximately $780.7 million in fiscal 2021 including $18.1 million from the additional operating week, and $833.7 million in fiscal 2020.
The table below presents the percentage change in comparable restaurant sales and restaurant capacity for fiscal 2021 compared to fiscal 2020:
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Comparable
Sales(1)(2)
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Price Impact
|
|
Mix-Shift Impact(3)
|
|
Traffic Impact
|
|
Restaurant Capacity(4)
|
Company-owned
|
5.1
|
%
|
|
0.6
|
%
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|
(4.3)
|
%
|
|
8.8
|
%
|
|
2.2
|
%
|
Chili’s
|
8.3
|
%
|
|
0.4
|
%
|
|
(2.6)
|
%
|
|
10.5
|
%
|
|
2.3
|
%
|
Maggiano’s
|
(19.8)
|
%
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|
2.3
|
%
|
|
(7.7)
|
%
|
|
(14.4)
|
%
|
|
0.0
|
%
|
Chili’s franchise(5)
|
12.5
|
%
|
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|
|
|
|
|
|
|
U.S.(4)
|
13.8
|
%
|
|
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|
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|
International
|
9.7
|
%
|
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|
|
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|
|
Chili’s domestic(6)
|
8.9
|
%
|
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|
|
|
|
|
|
System-wide(7)
|
6.0
|
%
|
|
|
|
|
|
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|
|
(1)Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after 12 months of ownership. Restaurants temporarily
closed 14 days or more are excluded from comparable restaurant sales. Percentage amounts are calculated based on the comparable periods year-over-year.
(2)Comparable Restaurant Sales for Chili’s and Maggiano’s include the results of It’s Just Wings, which was launched nationally in June 2020.
(3)Mix-Shift is calculated as the year-over-year percentage change in Company sales resulting from the change in menu items ordered by guests.
(4)Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year. No adjustments have been made to capacity for temporary closures.
(5)Chili’s franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income; however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe presenting Chili’s franchise comparable restaurant sales provides investors relevant information regarding total brand performance.
(6)Chili’s domestic Comparable Restaurant Sales percentages are derived from sales generated by Company-owned and franchise-operated Chili’s restaurants in the United States.
(7)System-wide Comparable Restaurant Sales are derived from sales generated by Company-owned Chili’s and Maggiano’s restaurants and sales generated at franchise-operated Chili’s restaurants.
Costs and Expenses
The following is a summary of the changes in Costs and Expenses:
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|
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|
|
|
|
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|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
Food and beverage costs
|
$
|
867.8
|
|
|
26.4
|
%
|
|
$
|
798.6
|
|
|
26.6
|
%
|
|
$
|
(69.2)
|
|
|
0.2
|
%
|
Restaurant labor
|
1,108.2
|
|
|
33.8
|
%
|
|
1,045.5
|
|
|
34.8
|
%
|
|
(62.7)
|
|
|
1.0
|
%
|
Restaurant expenses
|
858.5
|
|
|
26.2
|
%
|
|
825.8
|
|
|
27.5
|
%
|
|
(32.7)
|
|
|
1.3
|
%
|
Depreciation and amortization
|
150.2
|
|
|
|
|
162.3
|
|
|
|
|
12.1
|
|
|
|
General and administrative
|
134.8
|
|
|
|
|
136.3
|
|
|
|
|
1.5
|
|
|
|
Other (gains) and charges
|
19.0
|
|
|
|
|
47.4
|
|
|
|
|
28.4
|
|
|
|
Interest expenses
|
56.2
|
|
|
|
|
59.6
|
|
|
|
|
3.4
|
|
|
|
Other income, net
|
(2.1)
|
|
|
|
|
(1.9)
|
|
|
|
|
0.2
|
|
|
|
As a percentage of Company sales:
•Food and beverage costs decreased 0.2%, consisting of 0.3% of favorable menu item mix and 0.1% of increased menu pricing, partially offset by 0.2% of unfavorable commodity pricing primarily related to cheese and poultry.
•Restaurant labor decreased 1.0%, consisting of 0.6% of lower hourly labor expenses due to reduced staffing requirements, 0.6% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.1% of lower other labor expenses, partially offset by 0.3% of higher manager bonus expenses resulting from improved operational performance metrics compared to targets.
•Restaurant expenses decreased 1.3%, consisting of 2.0% of lower advertising expenses, 1.5% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.3% of lower repairs and maintenance expenses, partially offset by 2.5% of higher delivery fees and supplies driven by the growth in off-premise sales.
Depreciation and amortization decreased $12.1 million as follows:
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|
|
|
|
|
Depreciation and Amortization
|
Fiscal year ended June 24, 2020
|
$
|
162.3
|
|
Change from:
|
|
Retirements and fully depreciated restaurant assets
|
(21.8)
|
|
Finance leases
|
(4.3)
|
|
Additions for existing and new restaurant assets
|
8.3
|
|
Acquisition of franchise restaurants(1)
|
3.3
|
|
Corporate assets
|
1.6
|
|
Other
|
0.8
|
|
Fiscal year ended June 30, 2021
|
$
|
150.2
|
|
(1)Acquisition of franchise restaurants represents the incremental depreciation and amortization of the assets and finance leases of the 116 Chili’s restaurants acquired on September 5, 2019.
General and administrative expenses decreased $1.5 million as follows:
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|
|
|
|
|
|
General and Administrative
|
Fiscal year ended June 24, 2020
|
$
|
136.3
|
|
Change from:
|
|
Defined contribution plan employer expenses(1)
|
(5.3)
|
|
Payroll-related expenses
|
(1.6)
|
|
Travel and entertainment expenses
|
(1.6)
|
|
Professional fees
|
(0.6)
|
|
Performance-based compensation(2)
|
4.5
|
|
Stock-based compensation
|
1.6
|
|
Other
|
1.5
|
|
Fiscal year ended June 30, 2021
|
$
|
134.8
|
|
(1) Defined contribution plan employer expenses decreased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021.
(2) Performance-based compensation increased in fiscal 2021 due to improved business performance metrics compared to targets.
Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):
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|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
COVID-19 related charges
|
$
|
3.3
|
|
|
$
|
12.2
|
|
Restaurant impairment charges
|
3.0
|
|
|
19.1
|
|
Loss from natural disasters, net of (insurance recoveries)
|
2.9
|
|
|
(0.7)
|
|
Restaurant closure charges
|
2.4
|
|
|
3.8
|
|
Remodel-related costs
|
2.3
|
|
|
3.2
|
|
Loss on lease contingencies
|
2.2
|
|
|
—
|
|
Severance and other benefit charges
|
0.5
|
|
|
3.2
|
|
Foreign currency transaction (gain) loss
|
(0.6)
|
|
|
1.4
|
|
Other
|
3.0
|
|
|
5.2
|
|
|
$
|
19.0
|
|
|
$
|
47.4
|
|
Interest expenses decreased $3.4 million due to lower average borrowing balances on our revolving credit facility, partially offset by higher interest rates on our revolving credit facility and finance leases in fiscal 2021.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Effective income tax rate
|
9.4
|
%
|
|
(398.0)
|
%
|
|
|
The federal statutory tax rate was 21.0% for both fiscal 2021 and 2020. Our fiscal 2021 effective income tax rate of 9.4% was lower than the federal statutory tax rate primarily due to the leverage of the FICA tip tax credit relative to Income before income taxes in fiscal 2021. Our fiscal 2020 effective income tax rate benefit of 398.0% was lower than the federal statutory tax rate primarily due to near break-even Income before income taxes and a tax benefit driven by leverage of the FICA tip tax credit.
Segment Results
Chili’s Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Dollars
|
|
%
|
Company sales
|
$
|
3,005.7
|
|
|
$
|
2,673.5
|
|
|
$
|
332.2
|
|
|
12.4
|
%
|
Royalties
|
30.3
|
|
|
33.7
|
|
|
(3.4)
|
|
|
(10.1)
|
%
|
Franchise fees and other revenues
|
23.9
|
|
|
24.5
|
|
|
(0.6)
|
|
|
(2.4)
|
%
|
Franchise and other revenues
|
54.2
|
|
|
58.2
|
|
|
(4.0)
|
|
|
(6.9)
|
%
|
Total revenues
|
$
|
3,059.9
|
|
|
$
|
2,731.7
|
|
|
$
|
328.2
|
|
|
12.0
|
%
|
(1)Company restaurant expenses include Food and beverage costs, Restaurant labor, and Restaurant expenses, including advertising.
Chili’s Total revenues increased 12.0% primarily due to higher off-premise sales and higher dining room guest sales and traffic during the fourth quarter of fiscal 2021. These increases were partially offset by lower dining room guest traffic during the first three quarters of fiscal 2021 resulting from temporary dining room closures, capacity limitations and our guests’ personal safety preferences related to the pandemic. Refer to the “Revenues” section above for further details about Chili’s revenues changes.
The following is a summary of the changes in Chili’s operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
Food and beverage costs
|
$
|
803.5
|
|
|
26.7
|
%
|
|
$
|
718.7
|
|
|
26.9
|
%
|
|
$
|
(84.8)
|
|
|
0.2
|
%
|
Restaurant labor
|
1,014.2
|
|
|
33.7
|
%
|
|
920.8
|
|
|
34.4
|
%
|
|
(93.4)
|
|
|
0.7
|
%
|
Restaurant expenses
|
765.6
|
|
|
25.5
|
%
|
|
723.7
|
|
|
27.1
|
%
|
|
(41.9)
|
|
|
1.6
|
%
|
Depreciation and amortization
|
124.3
|
|
|
|
|
133.9
|
|
|
|
|
9.6
|
|
|
|
General and administrative
|
27.4
|
|
|
|
|
32.1
|
|
|
|
|
4.7
|
|
|
|
Other (gains) and charges
|
12.7
|
|
|
|
|
35.3
|
|
|
|
|
22.6
|
|
|
|
As a percentage of Company sales:
•Chili’s Food and beverage costs decreased 0.2%, including 0.2% of favorable menu item mix and 0.1% of increased menu pricing, partially offset by 0.1% of unfavorable commodity pricing.
•Chili’s Restaurant labor decreased 0.7%, including 0.9% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.2% of lower other labor expenses, partially offset by 0.2% of higher manager expenses and 0.2% of higher manager bonus expenses due to improved operational performance metrics compared to targets.
•Chili’s Restaurant expenses decreased 1.6%, including 2.2% of lower advertising expenses, 2.1% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.2% of lower repairs and maintenance expenses, partially offset by 2.6% of higher delivery fees and supplies driven by the growth in off-premise sales and 0.3% of higher other restaurant expenses.
Chili’s Depreciation and amortization decreased $9.6 million as follows:
|
|
|
|
|
|
|
Depreciation and Amortization
|
Fiscal year ended June 24, 2020
|
$
|
133.9
|
|
Change from:
|
|
Retirements and fully depreciated restaurant assets
|
(17.2)
|
|
Finance leases
|
(4.2)
|
|
Additions for new and existing restaurant assets
|
7.9
|
|
Acquisition of franchise restaurants(1)
|
3.3
|
|
Other
|
0.6
|
|
Fiscal year ended June 30, 2021
|
$
|
124.3
|
|
(1) Acquisition of Chili’s restaurants represents the incremental depreciation and amortization of the assets and finance leases of the 116 Chili’s restaurants acquired on September 5, 2019.
Chili’s General and administrative decreased $4.7 million as follows:
|
|
|
|
|
|
|
General and Administrative
|
Fiscal year ended June 24, 2020
|
$
|
32.1
|
|
Change from:
|
|
Defined contribution plan employer expenses(1)
|
(3.7)
|
|
Payroll-related expenses
|
(1.5)
|
|
Travel and entertainment expenses
|
(0.7)
|
|
Performance-based compensation
|
1.0
|
|
Professional fees
|
0.2
|
|
Stock-based compensation
|
0.1
|
|
Other
|
(0.1)
|
|
Fiscal year ended June 30, 2021
|
$
|
27.4
|
|
(1) Defined contribution plan employer expenses decreased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021.
Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
COVID-19 related charges
|
$
|
2.7
|
|
|
$
|
10.1
|
|
Restaurant impairment charges
|
2.6
|
|
|
15.4
|
|
Remodel-related costs
|
2.3
|
|
|
3.2
|
|
Restaurant closure charges
|
2.2
|
|
|
3.7
|
|
Loss from natural disasters, net of (insurance recoveries)
|
1.5
|
|
|
(0.8)
|
|
Acquisition of franchise restaurants-related costs
|
—
|
|
|
2.9
|
|
Other
|
1.4
|
|
|
0.8
|
|
|
$
|
12.7
|
|
|
$
|
35.3
|
|
Maggiano’s Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Dollars
|
|
%
|
Company sales
|
$
|
273.3
|
|
|
$
|
331.4
|
|
|
$
|
(58.1)
|
|
|
(17.5)
|
%
|
Royalties
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
%
|
Franchise fees and other revenues
|
4.4
|
|
|
15.2
|
|
|
(10.8)
|
|
|
(71.1)
|
%
|
Franchise and other revenues
|
4.6
|
|
|
15.4
|
|
|
(10.8)
|
|
|
(70.1)
|
%
|
Total revenues
|
$
|
277.9
|
|
|
$
|
346.8
|
|
|
$
|
(68.9)
|
|
|
(19.9)
|
%
|
Maggiano’s Total revenues decreased 19.9% primarily driven by reduced dining room traffic in the first three quarters of fiscal 2021 and reduced banquet room traffic due to the COVID-19 pandemic. These declines were partially offset by higher off-premise sales and higher dining room traffic during the fourth quarter of fiscal 2021. Refer to the “Revenues” section above for further details about Maggiano’s revenues changes.
The following is a summary of the changes in Maggiano’s operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
|
Dollars
|
|
% of Company Sales
|
Food and beverage costs
|
$
|
64.3
|
|
|
23.5
|
%
|
|
$
|
79.9
|
|
|
24.1
|
%
|
|
$
|
15.6
|
|
|
0.6
|
%
|
Restaurant labor
|
94.0
|
|
|
34.4
|
%
|
|
124.7
|
|
|
37.7
|
%
|
|
30.7
|
|
|
3.3
|
%
|
Restaurant expenses
|
92.1
|
|
|
33.7
|
%
|
|
101.5
|
|
|
30.6
|
%
|
|
9.4
|
|
|
(3.1)
|
%
|
Depreciation and amortization
|
13.8
|
|
|
|
|
15.4
|
|
|
|
|
1.6
|
|
|
|
General and administrative
|
5.8
|
|
|
|
|
5.7
|
|
|
|
|
(0.1)
|
|
|
|
Other (gains) and charges
|
1.4
|
|
|
|
|
6.8
|
|
|
|
|
5.4
|
|
|
|
As a percentage of Company sales:
•Maggiano’s Food and beverage costs decreased 0.6%, including 0.4% of favorable menu item mix and 0.3% of increased menu pricing, partially offset by 0.1% of unfavorable commodity pricing.
•Maggiano’s Restaurant labor decreased 3.3%, including 4.9% of favorable hourly labor expenses and 0.4% of favorable manager expenses both due to reduced staffing requirements, partially offset by 1.7% of sales deleverage and 0.3% of higher manager bonus expenses.
•Maggiano’s Restaurant expenses increased 3.1%, including 4.0% of sales deleverage and 1.5% of higher delivery fees and supplies driven by the growth in off-premise sales. These increases were partially offset by 0.7% of lower repairs and maintenance expenses, 0.5% of lower credit card fees, 0.4% of lower utilities, 0.2% of lower banquet expenses, 0.2% of lower property tax expenses and 0.4% of lower other restaurant expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Net cash provided by operating activities
|
$
|
369.7
|
|
|
$
|
245.0
|
|
|
$
|
124.7
|
|
Net cash from operating activities increased primarily due to an increase in Net income and the deferral of payroll tax payments as allowed under the CARES Act in fiscal 2021. These increases were partially offset by an increase in operating lease payments due to the payment of rent from fiscal 2020 that was deferred to fiscal 2021 and rent that was prepaid at the end of fiscal 2021.
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Cash flows from investing activities
|
|
|
|
|
|
Payments for property and equipment
|
$
|
(94.0)
|
|
|
$
|
(104.5)
|
|
|
$
|
10.5
|
|
Payments for franchise restaurant acquisitions
|
—
|
|
|
(94.6)
|
|
|
94.6
|
|
Proceeds from sale of assets
|
1.6
|
|
|
1.2
|
|
|
0.4
|
|
Insurance recoveries
|
—
|
|
|
1.1
|
|
|
(1.1)
|
|
Proceeds from note receivable
|
1.5
|
|
|
2.8
|
|
|
(1.3)
|
|
Net cash used in investing activities
|
$
|
(90.9)
|
|
|
$
|
(194.0)
|
|
|
$
|
103.1
|
|
Net cash used in investing activities decreased primarily due to cash outflows related to the acquisition of 116 Chili’s restaurants from a franchisee in fiscal 2020. Additionally, capital expenditures decreased in fiscal 2021 primarily due to lower spending on new restaurant construction, a decline in the pace of the Chili’s remodel initiative and a reduction in spend for routine capital purchases.
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
Favorable (Unfavorable) Variance
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings on revolving credit facility
|
$
|
43.4
|
|
|
$
|
808.4
|
|
|
$
|
(765.0)
|
|
Payments on revolving credit facility
|
(345.0)
|
|
|
(858.8)
|
|
|
513.8
|
|
Purchases of treasury stock
|
(4.2)
|
|
|
(32.4)
|
|
|
28.2
|
|
Payments on long-term debt
|
(20.0)
|
|
|
(17.8)
|
|
|
(2.2)
|
|
Payments of dividends
|
(1.5)
|
|
|
(57.4)
|
|
|
55.9
|
|
Proceeds from issuance of common stock
|
—
|
|
|
146.9
|
|
|
(146.9)
|
|
Proceeds from issuance of treasury stock
|
30.7
|
|
|
1.6
|
|
|
29.1
|
|
Payments for common stock issuance costs
|
—
|
|
|
(7.8)
|
|
|
7.8
|
|
Payments for debt issuance costs
|
(2.2)
|
|
|
(3.2)
|
|
|
1.0
|
|
Net cash used in financing activities
|
$
|
(298.8)
|
|
|
$
|
(20.5)
|
|
|
$
|
(278.3)
|
|
Net cash from financing activities decreased primarily due to higher net repayment activity on the revolving credit facility in fiscal 2021 and the absence of cash proceeds from the issuance of common stock in fiscal 2020. Partial
offsets included the impact of suspending the quarterly cash dividend payments and the share repurchase program, and an increase in proceeds from stock option exercises.
Revolving Credit Facility
Net repayments of $301.6 million were made during fiscal 2021 on the $1.0 billion revolving credit facility. As of June 30, 2021, $828.7 million was available under the revolving credit facility. As of June 30, 2021, our interest rate was 3.250% consisting of the LIBOR floor of 0.750% plus the applicable margin of 2.500%.
In fiscal 2021, we executed the seventh amendment to our revolving credit facility, extending the maturity date to December 12, 2022. This amendment included a capacity reduction to $900.0 million from $1.0 billion which will occur on September 12, 2021. Under the terms of the amendment, the issuance of certain debt or preferred equity interests will result in an immediate capacity reduction, an interest rate reduction of 0.250% on the spread and 0.100% reduction on the undrawn fee if the issuance exceeds $250.0 million. During fiscal 2021, we incurred $2.2 million of debt issuance costs, associated with this amendment, which are included in Other assets in the Consolidated Balance Sheets.
As of June 30, 2021, we were in compliance with our covenants pursuant to the amended revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes. Refer to Note 10 - Debt within Part II, Item 8 - Financial Statements and Supplementary Data for further information about our notes and revolving credit facility.
On August 18, 2021, we replaced our existing $1.0 billion revolving credit facility with an $800.0 million revolving credit facility that matures on August 18, 2026. The new facility is guaranteed by certain of our subsidiaries, includes covenant restrictions relating to leverage that are similar to our prior arrangement, and contains customary events of default terms. As of August 18, 2021, $211.3 million was drawn from the new revolver.
Share Repurchase Program
In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the business downturn caused by the COVID-19 pandemic. In fiscal 2021, we repurchased 0.1 million shares of our common stock for $4.2 million to satisfy team member tax withholding obligations on the vesting of restricted shares. Before the suspension of our share repurchase program, in fiscal 2020, we repurchased 0.8 million shares of our common stock for $32.4 million.
Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets. Our share repurchase program has been used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. At June 30, 2021, we had $166.8 million of authorized repurchases remaining under the suspended share repurchase program.
Subsequent to fiscal 2021 year-end, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $300 million.
Dividend Program
In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19. Before this suspension, we paid dividends of $57.4 million in fiscal 2020 to common stock shareholders. Refer to Note 13 - Shareholders’ Deficit included within Part II, Item 8 - Financial Statements and Supplementary Data for details.
Cash Flow Outlook
We believe that our various sources of capital, including future cash flows from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations within the next year. We continue to serve guests at all of our locations through our dining rooms and off-premise offerings, and have resumed normal business operations in accordance with state and local mandates.
In the fourth quarter of fiscal 2021, S&P upgraded our corporate credit rating to BB- with stable outlook. Moody’s affirmed our B1 corporate family rating and changed the outlook to positive. Refer to Part I, Item 1A. Risk Factors for further details.
We are not aware of any other event or trend that would potentially materially 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.
Future Commitments and Contractual Obligations
Payments due under our contractual obligations for outstanding indebtedness, leases and purchase obligations as defined by the Securities and Exchange Commission (“SEC”) as of June 30, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
|
Total
|
Long-term debt(1)
|
$
|
—
|
|
|
$
|
471.3
|
|
|
$
|
350.0
|
|
|
$
|
—
|
|
|
$
|
821.3
|
|
Interest(2)
|
34.7
|
|
|
49.1
|
|
|
8.8
|
|
|
—
|
|
|
92.6
|
|
Finance leases(3)
|
27.4
|
|
|
43.6
|
|
|
25.7
|
|
|
56.3
|
|
|
153.0
|
|
Operating leases(3)
|
155.9
|
|
|
317.1
|
|
|
274.2
|
|
|
770.5
|
|
|
1,517.7
|
|
Purchase obligations(4)
|
27.9
|
|
|
44.2
|
|
|
33.8
|
|
|
—
|
|
|
105.9
|
|
(1)Long-term debt consists of principal amounts owed on the revolving credit facility, 3.875% and 5.000% notes. As of June 30, 2021, $828.7 million of credit is available under the revolving credit facility. The revolving credit facility is due in December 2022. The impact of the new revolving credit facility entered into in August 2021 is not reflected in the table because it occurred after June 30, 2021.
(2)Interest consists of remaining interest payments on the 3.875% and 5.000% notes totaling $84.5 million and remaining interest payments on the revolver totaling $8.1 million. The interest rates on the notes are fixed whereas the interest rate on the revolver is variable based on LIBOR and our applicable margin. We have assumed that the revolver balance carried will be $171.3 million in fiscal 2022 and fiscal 2023 until the maturity date of December 12, 2022 using the interest rate of 3.250%, which is the total of LIBOR plus our applicable margin as of June 30, 2021. The impact of the new revolving credit facility entered into in August 2021 is not reflected in the table because it occurred after June 30, 2021.
(3)Finance leases and Operating leases total future lease payments represent the contractual obligations due under the lease agreements, including cancellable option periods where we are reasonably assured to exercise the options. As of June 30, 2021, these total future lease payments included non-cancelable lease commitments of $132.7 million for finance leases and $1,044.9 million for operating leases.
(4)Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages, software, and professional services contracts and exclude agreements that are cancellable without significant penalty.
IMPACT OF INFLATION
From time to time, we experience the impacts of inflation, which cause increased food, labor and benefits costs and higher operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and reviewing, then implementing, alternative products or processes, or by implementing other cost reduction procedures.
OFF-BALANCE SHEET ARRANGEMENTS
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the Company has: (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.
We have entered into certain pre-commencement leases as disclosed in Note 9 - Leases and have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 16 - Commitments and Contingencies included within Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements of this Annual Report on Form 10-K. Other than these items, we do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are disclosed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements. The following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results, and that require significant judgment.
Gift Card Revenues Recognition
Proceeds from the sale of gift cards are recorded as deferred revenues and recognized as revenues when the gift cards are redeemed by the holders. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Breakage revenues are recognized proportionate to the pattern of related gift card redemptions. We recognize breakage income in Franchise and other revenues in the Consolidated Statements of Comprehensive Income.
We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenues balance accordingly. If actual redemption patterns vary from our estimate, actual gift card breakage income may differ from the amounts recorded. Changing our breakage-rate assumption used to record fiscal 2021 breakage by 25 basis points would result in an impact to the Consolidated Statements of Comprehensive Income of approximately $0.3 million.
Valuation of Goodwill
We assess the recoverability of goodwill related to our restaurant brands on an annual basis or more often if circumstances or events indicate impairment may exist. We may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. In considering the qualitative approach, we evaluate factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability and the overall financial performance of the reporting units.
If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated. We determine fair value based on a combination of market-based values and discounted projected future operating cash flows of the reporting units using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. We make assumptions regarding future revenues and cash flows, expected growth rates, terminal values and other factors which could significantly impact the fair value calculations. The carrying value of the reporting unit is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an indicator of impairment. In the event that these assumptions change in the future, we may be required to record impairment charges related to goodwill.
We consider our restaurants brands, Chili’s and Maggiano’s, to be both our operating segments and reporting units. The carrying value of goodwill as of June 30, 2021 was $188.2 million, which related to both of our reporting units. We performed our annual impairment test in the second quarter of fiscal 2021 by utilizing the qualitative approach
and determined that there were no events or circumstances to indicate that it was more likely than not that the fair value of our reporting units was less than their carrying values. Additionally, no indicators of impairment were identified through the end of fiscal 2021.
During the third quarter of fiscal 2020, we performed a quantitative assessment of our goodwill due to the impact of the COVID-19 pandemic on our operations and on the market. Based on our assessment as of March 25, 2020, we determined that our goodwill and indefinite-lived intangible assets were not impaired. Additionally, we updated the assessment during the fourth quarter of fiscal 2020 and determined no triggering event existed based on improved market value and actual results compared to projections in the quantitative assessment prepared in the third quarter. This assessment is predicated on our ability to continue to operate dining and banquet rooms, and generate off-premise sales at our restaurants. Management’s judgment about the short and long term impacts of the pandemic could change as additional facts become known and therefore affect these conclusions. We will continue to monitor and evaluate our results and evaluate the likelihood of any potential impairment charges at our restaurants and reporting units. Sales declines at our restaurants, unplanned increases in commodity or labor costs, deterioration in overall economic conditions and challenges in the restaurant industry may result in future impairment charges. It is possible that changes in circumstances or changes in our judgments, assumptions and estimates could result in an impairment charge of a portion or all of our goodwill or other intangible assets.
Valuation of Long-Lived Assets
We review the carrying amount of property, equipment and lease assets semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. The impairment test is a two-step process. Step one includes comparing the operating cash flows of each restaurant over its remaining service life to the carrying value of the asset group. If the cash flows exceed the carrying value, then the asset group is not impaired and no further evaluation is required. If the carrying value of the asset group exceeds its cash flows, impairment may exist and performing step two is necessary to determine the impairment loss. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value of the asset group. We determine fair value based on discounted projected future operating cash flows of each restaurant over its remaining service life using a risk adjusted discount rate. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment.
Leases
At the inception of each lease, we evaluate the lease agreement to determine whether it is an operating or finance lease. The evaluation requires significant judgments in determining the fair value of the leased asset and the lease liability and the appropriate reasonably certain lease term. Given that our lease agreements generally do not provide an implicit interest rate, we estimate our fully collateralized incremental borrowing rate corresponding with the lease terms for the purposes of determining the fair value of initial liability for each lease.
We also estimate the reasonably certain lease term at inception. The lease term commences on the date when the lessor makes the underlying property available, irrespective of the contractual lease payments schedule. When determining the length of the lease term at commencement, we consider both termination and renewal option periods available. The renewal periods included in the lease term at the inception are those during which failure to renew the lease imposes a significant penalty on us.
Lease accounting requires the application of significant judgements by management. Variation in judgements applied could result in a change of lease classification and materially different:
•Expenses such as rent, depreciation and amortization in a given reporting period
•Fair value of leased asset and lease liability at inception
•Reasonably certain lease term at inception
Income Taxes
We make certain estimates and judgments in the calculation of tax expenses, the resulting tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement carrying amounts of existing assets and liabilities and their respective tax bases. When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.
We have recorded deferred tax assets reflecting the benefit of income tax credits and state loss carryforwards, which expire in varying amounts. Realization is dependent on generating sufficient taxable income in the relevant jurisdiction prior to expiration of the income tax credits and state loss carryforwards. Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income in the carryforward period are reduced.
We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return. We recognize any interest and penalties related to unrecognized tax benefits in Provision (benefit) for income taxes. Significant judgment is required in assessing, among other factors, the timing and amounts of deductible and taxable items. Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions.
In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in forward-looking statements is based on current tax law. Any significant changes in the tax laws could affect these estimates.
Insurance Reserves
We are self-insured for certain losses related to health, general liability and workers’ compensation. We maintain stop loss coverage with third-party insurers to limit our total exposure. We record a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost that falls below our specified retention levels or per-claim deductible amounts. This liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date.
In establishing our reserves, we consider certain actuarial assumptions and judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates and is reviewed on a quarterly basis to ensure that the liability is appropriate. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Legal Contingencies
We are subject to various lawsuits, administrative proceedings, audits and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty. An estimated loss from a loss contingency such as a legal proceeding or claim is accrued if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact our consolidated financial statements.
Effect of New Accounting Standards
The impact of new accounting pronouncements can be found at Note 2 - Effect of New Accounting Standards in Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BRINKER INTERNATIONAL, INC.
Consolidated Financial Statements
Table of Contents
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Comprehensive Income
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Revenues
|
|
|
|
|
|
Company sales
|
$
|
3,279.0
|
|
|
$
|
3,004.9
|
|
|
$
|
3,106.2
|
|
Franchise and other revenues
|
58.8
|
|
|
73.6
|
|
|
111.7
|
|
Total revenues
|
3,337.8
|
|
|
3,078.5
|
|
|
3,217.9
|
|
Operating costs and expenses
|
|
|
|
|
|
Food and beverage costs
|
867.8
|
|
|
798.6
|
|
|
823.0
|
|
Restaurant labor
|
1,108.2
|
|
|
1,045.5
|
|
|
1,059.7
|
|
Restaurant expenses
|
858.5
|
|
|
825.8
|
|
|
812.3
|
|
Depreciation and amortization
|
150.2
|
|
|
162.3
|
|
|
147.6
|
|
General and administrative
|
134.8
|
|
|
136.3
|
|
|
149.1
|
|
Other (gains) and charges
|
19.0
|
|
|
47.4
|
|
|
(4.5)
|
|
Total operating costs and expenses
|
3,138.5
|
|
|
3,015.9
|
|
|
2,987.2
|
|
Operating income
|
199.3
|
|
|
62.6
|
|
|
230.7
|
|
Interest expenses
|
56.2
|
|
|
59.6
|
|
|
61.6
|
|
Other income, net
|
(2.1)
|
|
|
(1.9)
|
|
|
(2.7)
|
|
Income before income taxes
|
145.2
|
|
|
4.9
|
|
|
171.8
|
|
Provision (benefit) for income taxes
|
13.6
|
|
|
(19.5)
|
|
|
16.9
|
|
Net income
|
$
|
131.6
|
|
|
$
|
24.4
|
|
|
$
|
154.9
|
|
|
|
|
|
|
|
Basic net income per share
|
$
|
2.89
|
|
|
$
|
0.64
|
|
|
$
|
4.04
|
|
|
|
|
|
|
|
Diluted net income per share
|
$
|
2.83
|
|
|
$
|
0.63
|
|
|
$
|
3.96
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
45.5
|
|
|
38.2
|
|
|
38.3
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
46.6
|
|
|
38.9
|
|
|
39.1
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
Foreign currency translation adjustment
|
$
|
1.5
|
|
|
$
|
(0.6)
|
|
|
$
|
0.2
|
|
Other comprehensive income (loss)
|
1.5
|
|
|
(0.6)
|
|
|
0.2
|
|
Comprehensive income
|
$
|
133.1
|
|
|
$
|
23.8
|
|
|
$
|
155.1
|
|
See accompanying Notes to Consolidated Financial Statements
44
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
ASSETS
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
23.9
|
|
|
$
|
43.9
|
|
Accounts receivable, net
|
65.2
|
|
|
52.3
|
|
Inventories
|
28.9
|
|
|
27.3
|
|
Restaurant supplies
|
52.6
|
|
|
51.6
|
|
Prepaid expenses
|
13.6
|
|
|
13.9
|
|
Income taxes receivable, net
|
23.0
|
|
|
35.4
|
|
Total current assets
|
207.2
|
|
|
224.4
|
|
Property and equipment, at cost
|
|
|
|
Land
|
33.1
|
|
|
34.2
|
|
Buildings and leasehold improvements
|
1,595.2
|
|
|
1,534.4
|
|
Furniture and equipment
|
818.1
|
|
|
785.7
|
|
Construction-in-progress
|
14.9
|
|
|
24.4
|
|
|
2,461.3
|
|
|
2,378.7
|
|
Less accumulated depreciation and amortization
|
(1,686.5)
|
|
|
(1,573.4)
|
|
Net property and equipment
|
774.8
|
|
|
805.3
|
|
Other assets
|
|
|
|
Operating lease assets
|
1,007.4
|
|
|
1,054.6
|
|
Goodwill
|
188.2
|
|
|
187.6
|
|
Deferred income taxes, net
|
50.9
|
|
|
38.2
|
|
Intangibles, net
|
21.1
|
|
|
23.0
|
|
Other
|
25.3
|
|
|
22.9
|
|
Total other assets
|
1,292.9
|
|
|
1,326.3
|
|
Total assets
|
$
|
2,274.9
|
|
|
$
|
2,356.0
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
127.7
|
|
|
$
|
104.9
|
|
Gift card liability
|
106.4
|
|
|
109.9
|
|
Accrued payroll
|
122.4
|
|
|
65.2
|
|
Operating lease liabilities
|
97.7
|
|
|
117.3
|
|
Other accrued liabilities
|
117.4
|
|
|
100.6
|
|
Total current liabilities
|
571.6
|
|
|
497.9
|
|
Long-term debt and finance leases, less current installments
|
917.9
|
|
|
1,208.5
|
|
Long-term operating lease liabilities, less current portion
|
1,006.7
|
|
|
1,061.6
|
|
Other liabilities
|
82.0
|
|
|
67.1
|
|
Commitments and contingencies (Note 16)
|
|
|
|
Shareholders’ deficit
|
|
|
|
Common stock (250.0 million authorized shares; $0.10 par value; 70.3 million shares issued and 45.9 million shares outstanding at June 30, 2021, and 70.3 million shares issued and 45.0 million shares outstanding at June 24, 2020)
|
7.0
|
|
|
7.0
|
|
Additional paid-in capital
|
685.4
|
|
|
669.4
|
|
Accumulated other comprehensive loss
|
(4.7)
|
|
|
(6.2)
|
|
Accumulated deficit
|
(266.1)
|
|
|
(397.5)
|
|
Treasury stock, at cost (24.4 million shares at June 30, 2021, and 25.3 million shares at June 24, 2020)
|
(724.9)
|
|
|
(751.8)
|
|
Total shareholders’ deficit
|
(303.3)
|
|
|
(479.1)
|
|
Total liabilities and shareholders’ deficit
|
$
|
2,274.9
|
|
|
$
|
2,356.0
|
|
See accompanying Notes to Consolidated Financial Statements
45
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Cash flows from operating activities
|
|
|
|
|
|
Net income
|
$
|
131.6
|
|
|
$
|
24.4
|
|
|
$
|
154.9
|
|
Adjustments to reconcile Net income to Net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
150.2
|
|
|
162.3
|
|
|
147.6
|
|
Stock-based compensation
|
16.4
|
|
|
14.8
|
|
|
16.4
|
|
Restructure and impairment charges
|
9.8
|
|
|
28.9
|
|
|
26.5
|
|
Net loss (gain) on disposal of assets
|
1.8
|
|
|
1.2
|
|
|
(33.1)
|
|
Other
|
3.7
|
|
|
2.8
|
|
|
3.0
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable, net
|
(9.9)
|
|
|
4.1
|
|
|
(3.0)
|
|
Inventories
|
(2.2)
|
|
|
(2.8)
|
|
|
1.0
|
|
Restaurant supplies
|
(1.0)
|
|
|
(1.2)
|
|
|
(0.6)
|
|
Prepaid expenses
|
0.3
|
|
|
7.2
|
|
|
(3.0)
|
|
Operating lease assets, net of liabilities
|
(27.6)
|
|
|
3.6
|
|
|
—
|
|
Deferred income taxes, net
|
(12.5)
|
|
|
8.6
|
|
|
(75.8)
|
|
Other assets
|
(0.5)
|
|
|
0.1
|
|
|
0.9
|
|
Accounts payable
|
21.1
|
|
|
9.8
|
|
|
(4.1)
|
|
Gift card liability
|
(3.5)
|
|
|
6.3
|
|
|
(10.1)
|
|
Accrued payroll
|
57.2
|
|
|
(17.8)
|
|
|
6.8
|
|
Other accrued liabilities
|
6.3
|
|
|
4.0
|
|
|
(7.7)
|
|
Current income taxes
|
14.7
|
|
|
(20.7)
|
|
|
(12.7)
|
|
Other liabilities
|
13.8
|
|
|
9.4
|
|
|
5.7
|
|
Net cash provided by operating activities
|
369.7
|
|
|
245.0
|
|
|
212.7
|
|
Cash flows from investing activities
|
|
|
|
|
|
Payments for property and equipment
|
(94.0)
|
|
|
(104.5)
|
|
|
(167.6)
|
|
Proceeds from sale of assets
|
1.6
|
|
|
1.2
|
|
|
1.6
|
|
Proceeds from note receivable
|
1.5
|
|
|
2.8
|
|
|
2.8
|
|
Payments for franchise restaurant acquisitions
|
—
|
|
|
(94.6)
|
|
|
(3.1)
|
|
Insurance recoveries
|
—
|
|
|
1.1
|
|
|
1.7
|
|
Proceeds from sale leaseback transactions, net of related expenses
|
—
|
|
|
—
|
|
|
485.9
|
|
Net cash (used in) provided by investing activities
|
(90.9)
|
|
|
(194.0)
|
|
|
321.3
|
|
Cash flows from financing activities
|
|
|
|
|
|
Payments on revolving credit facility
|
(345.0)
|
|
|
(858.8)
|
|
|
(1,150.0)
|
|
Borrowings on revolving credit facility
|
43.4
|
|
|
808.4
|
|
|
853.0
|
|
Payments on long-term debt
|
(20.0)
|
|
|
(17.8)
|
|
|
(9.5)
|
|
Purchases of treasury stock
|
(4.2)
|
|
|
(32.4)
|
|
|
(167.7)
|
|
Payments for debt issuance costs
|
(2.2)
|
|
|
(3.2)
|
|
|
—
|
|
Payments of dividends
|
(1.5)
|
|
|
(57.4)
|
|
|
(60.3)
|
|
Proceeds from issuance of treasury stock
|
30.7
|
|
|
1.6
|
|
|
3.0
|
|
Proceeds from issuance of common stock
|
—
|
|
|
146.9
|
|
|
—
|
|
Payments for common stock issuance costs
|
—
|
|
|
(7.8)
|
|
|
—
|
|
Net cash used in financing activities
|
(298.8)
|
|
|
(20.5)
|
|
|
(531.5)
|
|
Net change in cash and cash equivalents
|
(20.0)
|
|
|
30.5
|
|
|
2.5
|
|
Cash and cash equivalents at beginning of period
|
43.9
|
|
|
13.4
|
|
|
10.9
|
|
Cash and cash equivalents at end of period
|
$
|
23.9
|
|
|
$
|
43.9
|
|
|
$
|
13.4
|
|
See accompanying Notes to Consolidated Financial Statements
46
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Shareholders’ Deficit
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained Earnings (Accumulated Deficit)
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Total
|
Shares
|
|
Amount
|
Balances at June 27, 2018
|
40.8
|
|
|
$
|
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
|
—
|
|
|
—
|
|
|
—
|
|
|
154.9
|
|
|
—
|
|
|
—
|
|
|
154.9
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
Dividends ($1.52 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(59.3)
|
|
|
—
|
|
|
—
|
|
|
(59.3)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
16.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.4
|
|
Purchases of treasury stock
|
(3.6)
|
|
|
—
|
|
|
(0.6)
|
|
|
—
|
|
|
(167.1)
|
|
|
—
|
|
|
(167.7)
|
|
Issuances of common stock
|
0.3
|
|
|
—
|
|
|
(5.4)
|
|
|
—
|
|
|
8.4
|
|
|
—
|
|
|
3.0
|
|
Balances at June 26, 2019
|
37.5
|
|
|
17.6
|
|
|
522.0
|
|
|
2,771.2
|
|
|
(4,083.4)
|
|
|
(5.6)
|
|
|
(778.2)
|
|
Effect of ASC 842 adoption
|
—
|
|
|
—
|
|
|
—
|
|
|
195.9
|
|
|
—
|
|
|
—
|
|
|
195.9
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
24.4
|
|
|
—
|
|
|
—
|
|
|
24.4
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6)
|
|
|
(0.6)
|
|
Dividends ($1.14 per share)
|
—
|
|
|
—
|
|
|
—
|
|
|
(43.6)
|
|
|
—
|
|
|
—
|
|
|
(43.6)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14.7
|
|
Purchases of treasury stock
|
(0.8)
|
|
|
—
|
|
|
(0.3)
|
|
|
—
|
|
|
(32.1)
|
|
|
—
|
|
|
(32.4)
|
|
Issuances of common stock
|
8.3
|
|
|
0.8
|
|
|
133.0
|
|
|
—
|
|
|
6.9
|
|
|
—
|
|
|
140.7
|
|
Retirement of treasury stock
|
—
|
|
|
(11.4)
|
|
|
—
|
|
|
(3,345.4)
|
|
|
3,356.8
|
|
|
—
|
|
|
—
|
|
Balances at June 24, 2020
|
45.0
|
|
|
7.0
|
|
|
669.4
|
|
|
(397.5)
|
|
|
(751.8)
|
|
|
(6.2)
|
|
|
(479.1)
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
131.6
|
|
|
—
|
|
|
—
|
|
|
131.6
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.5
|
|
|
1.5
|
|
Dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2)
|
|
|
—
|
|
|
—
|
|
|
(0.2)
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
16.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16.4
|
|
Purchases of treasury stock
|
(0.1)
|
|
|
—
|
|
|
(1.2)
|
|
|
—
|
|
|
(3.0)
|
|
|
—
|
|
|
(4.2)
|
|
Issuances of common stock
|
1.0
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
29.9
|
|
|
—
|
|
|
30.7
|
|
Balances at June 30, 2021
|
45.9
|
|
|
$
|
7.0
|
|
|
$
|
685.4
|
|
|
$
|
(266.1)
|
|
|
$
|
(724.9)
|
|
|
$
|
(4.7)
|
|
|
$
|
(303.3)
|
|
See accompanying Notes to Consolidated Financial Statements
47
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Footnote Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note #
|
|
Description
|
|
Page
|
|
|
Nature of Operations and Summary of Significant Accounting Policies
|
|
|
|
|
Effect of New Accounting Standards
|
|
|
|
|
Revenue Recognition
|
|
|
|
|
Defined Contribution Plan
|
|
|
|
|
Other Gains and Charges
|
|
|
|
|
Income Taxes
|
|
|
|
|
Segment Information
|
|
|
|
|
Goodwill and Intangibles
|
|
|
|
|
Leases
|
|
|
|
|
Debt
|
|
|
|
|
Accrued and Other Liabilities
|
|
|
|
|
Stock-based Compensation
|
|
|
|
|
Shareholders’ Deficit
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
Fiscal 2020 Chili's Restaurant Acquisition
|
|
|
|
|
Subsequent Events
|
|
|
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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, as well as virtual brands including It’s Just Wings®. At June 30, 2021, we owned, operated or franchised 1,648 restaurants, consisting of 1,121 Company-owned restaurants and 527 franchised restaurants, located in the United States, 27 countries and two United States territories.
Basis of Presentation
Principles of Consolidation - The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Brinker International, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts within the Notes to Consolidated Financial Statements are presented in millions unless otherwise specified.
Fiscal Year - We have a 52 or 53 week fiscal year ending on the last Wednesday in June. We utilize a 13 week accounting period for quarterly reporting purposes, except in years containing 53 weeks when the fourth quarter contains 14 weeks. Fiscal 2021 ended on June 30, 2021 and contained 53 weeks. Fiscal 2020 and 2019, which ended on June 24, 2020 and June 26, 2019, respectively, each contained 52 weeks. The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues in comparison to fiscal 2020. While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.
Use of Estimates - The preparation of the Consolidated Financial Statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, 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 in the reporting periods. Actual results could differ from those estimates.
Impact of COVID-19 Pandemic
In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic and a National Public Health Emergency. Beginning in March 2020, our restaurants experienced a significant decrease in guest traffic and sales due to the spread of COVID-19, which prompted changes in consumer behavior and social distancing preferences as well as dining room closures and dining room capacity restrictions mandated or encouraged by federal, state and local governments.
In March 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms, transitioned to an off-premise business model and temporarily delayed our expansion plans. Beginning on April 27, 2020, we reopened certain dining room locations as permitted by state and local mandates. For the remainder of fiscal 2020 and throughout fiscal 2021, the number of open dining rooms, and the dining room capacity restrictions fluctuated based on state and local mandates. As of June 30, 2021, 100.0% of our Company-owned restaurant dining rooms or patios were open in at least a limited capacity.
We have not experienced material shortages or service disruptions in our supply chain or the availability of labor to operate restaurants. Chili’s and Maggiano’s ability to continue serving guests during the COVID-19 pandemic is the result of our strategic decision to invest in technology, virtual brands, and off-premise capabilities including online ordering, mobile app ordering, curbside service and third-party delivery. We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve. At this time, the ultimate impact of COVID-19 cannot be reasonably estimated due to the uncertainty about the extent and the duration of the spread of the virus and could lead to further reduced sales, capacity restrictions, restaurant closures, delays in our supply chain or impair our ability to staff accordingly which could adversely impact our financial results.
New Accounting Standards Implemented
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments - In June 2013, the FASB issued ASU 2016-13, creating ASC Topic 326 – Financial Instruments – Credit Losses. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on financial assets measured at amortized cost basis (including, but not limited to loans), net investments in leases recognized as lessor and off-balance sheet credit exposures. ASU 2016-13 eliminates the probable initial recognition threshold under the current incurred loss methodology for recognizing credit losses. Instead, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The new guidance is effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, which required us to adopt these provisions in the first quarter of fiscal 2021. The update was applied on a prospective basis. The adoption of this guidance did not 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 required us to adopt these provisions in the first quarter of fiscal 2021. The update was applied on a prospective basis. The adoption of this guidance did not have an impact on our Consolidated Financial Statements.
ASU No. 2019-12, Simplifying the Accounting for Income Taxes - In December 2019, the FASB issued ASU 2019-12, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The new guidance is effective for public entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2022 and early adoption is permitted. We elected to early adopt this update in the first quarter of fiscal 2021. The adoption of this guidance did not have a material impact on our Consolidated Financial Statements.
Significant Accounting Policies
Revenues - Revenues are presented in the Company sales and Franchise and other revenues captions in the Consolidated Statements of Comprehensive Income.
Company Sales - Company sales include revenues generated by the operation of Company-owned restaurants including sales from gift card redemptions and virtual brands. We record the revenues from the sale of food, beverages and alcohol, net of discounts, upon delivery to the customer.
Franchise and Other Revenues - Franchise and other revenues include royalties, delivery fee income, gift card breakage, digital entertainment revenues, Maggiano’s banquet service charge income, franchise advertising fees, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales.
Royalties - Franchise royalties are based on a percentage of the sales generated by our franchise-operated restaurants. The performance obligation related to franchise sales is considered complete upon the sale of food, beverages and alcohol, therefore royalty revenues are recognized in the same period the sales are generated at the franchise-operated restaurants.
Advertising Fee Income - Domestic franchisees are contractually obligated to contribute into certain advertising and marketing funds. Advertising fees are presented on a gross basis within Franchise and other revenues.
Initial Franchise and Development Fees - We receive franchise fees for new restaurant openings and development fees from franchisees for territory development arrangements. The performance obligation related to these arrangements are 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.
Gift Card Breakage Income - Breakage revenues represent the monetary value associated with outstanding gift card balances that will not be redeemed. 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 within the Gift card liability in the Consolidated Balance Sheets. Breakage revenues are recognized proportionate to the pattern of related gift card redemptions. We do not charge dormancy or any other fees related to monitoring or administering the gift card program to cardholders. Additionally, proceeds from the sale of gift cards are 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 Discount Costs - Our gift cards are sold through various outlets such as in-restaurant, Chili’s and Maggiano’s websites, directly to other businesses and through third-party distributors that sell our gift cards at retail locations. We incur incremental direct costs, 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 redemptions.
Advertising Expenses - Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. In the fiscal years ended June 30, 2021, June 24, 2020 and June 26, 2019, advertising expenses of $26.4 million, $87.0 million and $108.8 million, respectively, were included in Restaurant expenses, and advertising contributions from franchisees of $2.8 million, $9.7 million and $20.3 million, respectively, were recorded in Franchise and other revenues in the Consolidated Statements of Comprehensive Income.
Restaurant Labor Expenses - We report certain labor and related expenses in a separate caption in the Consolidated Statements of Comprehensive Income titled Restaurant labor. Restaurant labor includes all compensation-related expenses, including benefits and incentive compensation, for restaurant team members at the general manager level and below. Labor-related expenses attributable to multi-restaurant (or above-restaurant) supervision is included in Restaurant expenses in the Consolidated Statements of Comprehensive Income.
Fair Value Measurements - Fair value is the price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. Fair value measurements are categorized in three levels based on the types of significant inputs used, as follows:
|
|
|
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Observable inputs available at measurement date other than quote prices included in Level 1
|
Level 3
|
Unobservable inputs that cannot be corroborated by observable market data
|
Cash and Cash Equivalents - Our policy is to invest cash in excess of operating requirements in income-producing investments. Income-producing investments with original maturities of three months or less are reflected as cash equivalents.
Accounts Receivable - Accounts receivable, net of the allowance for credit losses, represents the estimated net realizable value. Our primary accounts receivable are due from third-party gift card sales, vendor rebates, restaurant sales made with credit cards, insurance recoveries and franchisees. Provisions for credit losses are recorded based
on management’s judgment regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible.
Inventories - Inventories consist of food, beverages and supplies and are valued at the lower of cost (using the first-in, first-out method) or net realizable value.
Property and Equipment - Property and equipment is recorded at cost, and depreciated using the straight-line method over the lesser of the remaining term of the lease, including certain renewal options, or the estimated useful lives of the assets. Typical useful lives of our Buildings and leasehold improvements range from 5 to 20 years, and Furniture and equipment range from 3 to 7 years.
Depreciation expenses related to property and equipment for the fiscal years ended June 30, 2021, June 24, 2020, and June 26, 2019 of $148.2 million, $160.4 million, and $146.5 million, respectively, were recorded in Depreciation and amortization in the Consolidated Statements of Comprehensive Income. Routine repair and maintenance costs are expensed when incurred. Major replacements and improvements are capitalized.
We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. We have determined the restaurant level is the lowest level of identifiable cash flows. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on discounted projected future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the inherent risk that is considered Level 3 (refer to Fair Value Measurements policy above for definition of levels). Impairment charges are included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income.
Leases - Effective June 27, 2019, the first day of fiscal 2020, we adopted FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from the previous guidance ASC Topic 840, Leases. We adopted ASC 842 using the alternative transition method, such that our fiscal 2020 Consolidated Financial Statements reflect ASC 842, while our prior period Consolidated Financial Statements were prepared under Legacy GAAP and have not been restated.
We recognize the lease assets and related lease liabilities for the rights and obligations created by operating and finance leases with lease terms of more than 12 months on the balance sheet at lease commencement. The lease term commences on the date the lessor makes the underlying asset or assets available, irrespective of when lease payments begin under the contract. When determining the lease term at commencement, we consider both termination and renewal option periods available, and only include the period for which failure to renew the lease imposes a penalty on us in such an amount that renewal, or termination options, appear to be reasonably certain.
Our lease liability is generally based on the present value of the lease payments, consisting of fixed costs and certain rent escalations, using our incremental borrowing rate applicable to the lease term. The lease asset is generally based on the lease liability, adjusted for amounts related to other lease-related assets and liabilities. Our adjustments typically include prepaid rent, straight-line rent for timing differences between payment streams and lease term, landlord contributions that are recorded when received as a reduction to the asset and favorable or unfavorable lease purchase price adjustments. Additionally, upon adoption of the new lease accounting standard in fiscal 2020, we also recorded partial impairments of certain lease assets with an adjustment to Retained earnings related to previously impaired properties.
The interest rates used in our lease contracts are not implicit. We have derived our incremental borrowing rate using the interest rate we would pay on our existing borrowings, adjusted for the effect of designating collateral and the lease terms using market data as well as publicly available data for instruments with similar characteristics. The reasonably certain lease term and incremental borrowing rate for each lease requires judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the lease asset and lease liability.
Lease asset carrying amounts are assessed for impairment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable, in accordance with our long-lived asset impairment policy. We
monitor for events or changes in circumstances that require reassessment of lease classification. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the lease asset.
Variable lease costs are expensed as incurred in Restaurant expenses related to restaurant properties and General and administrative for our corporate headquarters in the Consolidated Statements of Comprehensive Income, and are not included in lease liabilities in the Consolidated Balance Sheets. Contingent rent represents payment of variable lease obligations based on a percentage of sales, as defined by the terms of the applicable lease, for certain restaurant facilities and is recorded at the point in time we determine that it is probable that such sales levels will be achieved. Additionally, we have certain leases which periodically reset to a specified index, such leases are initially recorded using the index that existed at lease commencement. Subsequent index changes are recorded as variable rental payments. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs.
Operating lease expenses are recognized on a straight-line basis over the lease term in Restaurant expenses for restaurant properties and General and administrative for our corporate headquarters, in the Consolidated Statements of Comprehensive Income.
Finance lease expenses are recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term and the expenses are recognized in Depreciation and amortization in the Consolidated Statements of Comprehensive Income. Interest on each finance lease liability is recorded to Interest expenses in the Consolidated Statements of Comprehensive Income.
Definite-lived Intangible Assets - Definite-lived intangible assets primarily include the reacquired franchise rights resulting from our acquisitions and included in Intangibles, net in the Consolidated Balance Sheets. These assets are amortized using the straight-line method over the remaining term of the related franchise agreement. We determine the fair value of reacquired franchise rights based on discounted projected future operating cash flows of the restaurants associated with these franchise rights. We review the carrying amount semi-annually or whenever events or changes in 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. Impairment charges are included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income.
Indefinite-lived Intangible Assets - The costs of obtaining non-transferable liquor licenses from local government agencies are expensed over the specified term of the license to Restaurant expenses in the Consolidated Statements of Comprehensive Income. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in Intangibles, net in the Consolidated Balance Sheets.
Transferable liquor licenses are tested for impairment semi-annually or more frequently if events or circumstances indicate that the asset might be impaired. Impairment charges are recognized based on the excess of carrying value over fair value. We determine fair value based on prices in the open market for licenses in same or similar jurisdictions. Impairment charges are included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate for purposes of impairment testing. Goodwill is tested for impairment annually, as of the first day of the second quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.
We may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated. The carrying value of the reporting unit is compared to its estimated fair value, and if the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value.
Insurance Reserves - We are self-insured for certain losses related to health, general liability and workers’ compensation. We maintain stop loss coverage with third-party insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed on a quarterly basis to ensure that the liability is appropriate. The estimated incurred but unreported costs to settle unpaid claims are included in Other accrued liabilities and Other liabilities, depending on their current or long-term nature, in the Consolidated Balance Sheets.
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. The obligation is included in Other accrued liabilities in the Consolidated Balance Sheets until the taxes are remitted to the appropriate taxing authorities.
Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return that is not more-likely-than-not to be realized. We recognize any interest and penalties related to unrecognized tax benefits in Provision (benefit) for income taxes in the Consolidated Statements of Comprehensive Income. Additionally, Income taxes are computed on a consolidated legal jurisdiction basis with no regard to brand.
Stock-Based Compensation - We measure and recognize compensation costs at fair value for all share-based payments. We record compensation expenses using a graded-vesting schedule or on a straight-line basis, as applicable, over the vesting period, or the date on which retirement eligibility is achieved, if earlier. We recognize compensation expenses for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
Certain employees are eligible to receive stock options, performance stock options, performance shares, restricted stock and restricted stock units, while non-employee members of the Board of Directors are eligible to receive stock options, restricted stock and restricted stock units. Awards granted to the Board of Directors are non-forfeitable and are fully expensed upon grant. Awards to eligible employees may vest over a specified period of time or service period and may also contain performance-based conditions. The fair value of restricted stock and restricted stock units that do not contain a performance condition are based on our closing stock price on the date of grant, while the fair value of stock options is estimated using the Black-Scholes option-pricing model on the date of grant.
Performance shares represent a right to receive shares of common stock upon satisfaction of Company performance goals usually at the end of a three-fiscal-year cycle. Vesting of performance shares granted are generally contingent upon meeting Company performance goals based on a specified rate of earnings growth at the end of the three-fiscal-year period. Compensation expenses for the performance shares is recorded to Restaurant expenses and General and administrative expenses based on management’s periodic estimates of the number of shares that will ultimately be issued and the fair value of the shares as determined by our closing stock price on the date of grant. A cumulative expenses adjustment is recognized when that estimate changes.
Preferred Stock - Our Board of Directors is authorized to provide for the issuance of 1.0 million preferred shares with a par value of $1.00 per share, in one or more series, and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights, and terms, including sinking fund provisions, and certain other rights and preferences. As of June 30, 2021, no preferred shares were issued.
Comprehensive Income - Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the fiscal years ended June 30, 2021, June 24, 2020 and June 26, 2019, Comprehensive income (loss) consists of Net income and Foreign currency translation adjustment. The Foreign currency translation adjustment for all three fiscal years presented
related to the unrealized impact of translating the financial statements from Canadian dollars to United States dollars of the Canadian restaurants. The Accumulated other comprehensive loss is presented in the Consolidated Balance Sheets.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Basic weighted average shares outstanding
|
45.5
|
|
|
38.2
|
|
|
38.3
|
|
Dilutive stock options
|
0.4
|
|
|
0.1
|
|
|
0.2
|
|
Dilutive restricted shares
|
0.7
|
|
|
0.6
|
|
|
0.6
|
|
Total dilutive impact
|
1.1
|
|
|
0.7
|
|
|
0.8
|
|
Diluted weighted average shares outstanding
|
46.6
|
|
|
38.9
|
|
|
39.1
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect
|
0.5
|
|
|
1.5
|
|
|
0.9
|
|
Segment Reporting - Operating segments are components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. We manage our business on the basis of two operating segments, Chili’s and Maggiano’s.
2. EFFECT OF NEW ACCOUNTING STANDARDS
We reviewed all recently issued accounting pronouncements and determined that they were either not applicable or are not expected to have a material impact on the Consolidated Financial Statements.
3. REVENUE RECOGNITION
Deferred Franchise and Development Fees
Our deferred franchise and development fees consist of the unrecognized fees received from franchisees. Recognition of these fees in subsequent periods is based on satisfaction of the contractual performance obligations of the active contracts with franchisees. The weighted average remaining term of the current franchise agreements, including certain renewal periods expected to be exercised, was approximately 21 years as of June 30, 2021. We also expect to earn subsequent period royalties and advertising fees related to our franchise contracts; however, due to the variability and uncertainty of these future revenues based upon a sales-based measure, these future revenues are not yet estimable as the performance obligations remain unsatisfied.
The following table reflects the changes in deferred franchise and development fees for the fiscal years ended on June 30, 2021 and June 24, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Beginning balance
|
$
|
12.7
|
|
|
$
|
16.2
|
|
Additions
|
0.3
|
|
|
0.8
|
|
Amount recognized for Chili's restaurant acquisition(1)
|
—
|
|
|
(2.6)
|
|
Amount recognized to Franchise and other revenues
|
(1.8)
|
|
|
(1.7)
|
|
Other
|
0.2
|
|
|
—
|
|
Ending balance
|
$
|
11.4
|
|
|
$
|
12.7
|
|
(1)The remaining balances of deferred franchise and development fees associated with the 116 Chili’s restaurants acquired from a franchisee at the September 5, 2019 acquisition date were recognized in Other (gains) and charges in the Consolidated Statements of Comprehensive Income.
The following table illustrates franchise and development fees expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of June 30, 2021:
|
|
|
|
|
|
Fiscal Year
|
Franchise and Development Fees Revenue Recognition
|
2022
|
$
|
1.0
|
|
2023
|
1.0
|
|
2024
|
0.9
|
|
2025
|
0.9
|
|
2026
|
0.8
|
|
Thereafter
|
6.8
|
|
|
$
|
11.4
|
|
Deferred Gift Card Revenues
Total deferred revenues related to our gift cards include the full value of unredeemed gift card balances less recognized breakage and the unamortized portion of third-party fees. The following table reflects the changes in the Gift card liability for fiscal years ended on June 30, 2021 and June 24, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Beginning balance
|
$
|
109.9
|
|
|
$
|
100.9
|
|
Gift card sales
|
118.8
|
|
|
164.4
|
|
Gift card redemptions recognized to Company sales
|
(109.5)
|
|
|
(139.2)
|
|
Gift card breakage recognized to Franchise and other revenues
|
(13.0)
|
|
|
(15.8)
|
|
Other
|
0.2
|
|
|
(0.4)
|
|
Ending balance
|
$
|
106.4
|
|
|
$
|
109.9
|
|
4. DEFINED CONTRIBUTION PLAN
We sponsor a qualified defined contribution retirement plan. The plan covers all employees who have attained the age of 21 and have completed 90 days of eligible service.
Eligible employees are allowed to contribute, subject to IRS limitations on total annual contributions, up to 50% of their base compensation and 100% of their eligible bonuses, as defined in the plan, to various investment funds. In May 2020, the plan was amended to suspend the employer matching contributions to reduce corporate expenses in response to the business downturn caused by the COVID-19 impact. This resulted in the loss of safe harbor status and required the plan to complete the average deferral percentage non-discrimination testing each plan year. Prior to
this amendment, we matched, in cash, what an employee contributes at a rate of 100% of the first 3% and 50% of the next 2% with immediate vesting.
Effective January 1, 2021, the Plan was amended and restated in its entirety primarily for the purpose of reinstating the safe harbor matching employer contributions, incorporating previous Plan amendments, and implementing an updated plan document. As a result of this amendment and restatement, the Plan subsequently restored its safe harbor status. Additionally, in June 2021, the Plan was amended and restated to adopt a new pre-approved plan document as required by the IRS.
We contributed employer matching contributions in each fiscal year which is recorded to General and administrative in the Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Employer contributions match expenses
|
$
|
4.6
|
|
|
$
|
9.3
|
|
|
$
|
9.6
|
|
5. OTHER GAINS AND CHARGES
Other (gains) and charges in the Consolidated Statements of Comprehensive Income consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
COVID-19 related charges
|
$
|
3.3
|
|
|
$
|
12.2
|
|
|
$
|
—
|
|
Restaurant impairment charges
|
3.0
|
|
|
19.1
|
|
|
10.8
|
|
Loss from natural disasters, net of (insurance recoveries)
|
2.9
|
|
|
(0.7)
|
|
|
(0.7)
|
|
Restaurant closure charges
|
2.4
|
|
|
3.8
|
|
|
4.3
|
|
Remodel-related costs
|
2.3
|
|
|
3.2
|
|
|
7.7
|
|
Loss on lease contingencies
|
2.2
|
|
|
—
|
|
|
—
|
|
Severance and other benefit charges
|
0.5
|
|
|
3.2
|
|
|
0.9
|
|
Foreign currency transaction (gain) loss
|
(0.6)
|
|
|
1.4
|
|
|
(0.7)
|
|
Sale leaseback (gain), net of transaction charges
|
—
|
|
|
—
|
|
|
(27.3)
|
|
Other
|
3.0
|
|
|
5.2
|
|
|
0.5
|
|
|
$
|
19.0
|
|
|
$
|
47.4
|
|
|
$
|
(4.5)
|
|
Fiscal 2021
•COVID-19 related charges consists of following costs related to both Chili’s and Maggiano’s:
–employee assistance and related payroll taxes for certain team members,
–conversion of certain parking lots into dining areas, and
–initial purchases of restaurant and personal protective supplies such as face masks and hand sanitizers required to maintain open dining rooms.
•Restaurant impairment charges primarily consisted of the long-lived assets of 11 underperforming Chili’s and three underperforming Maggiano’s restaurants.
•Loss from natural disasters, net of (insurance recoveries) primarily consists of costs incurred related to Winter Storm Uri in February 2021.
•Restaurant closure charges primarily consisted of Chili’s lease termination charges and certain Chili’s restaurant closure costs.
•Remodel-related costs related to existing fixed asset write-offs associated with the Chili’s remodel project.
•Loss on lease contingencies were recorded for estimated lease defaults on certain secondarily liable lease guarantees and subleases. Refer to Note 16 - Commitments and Contingencies for additional information about our secondarily liable lease guarantees.
•Severance and other benefit charges primarily related to the elimination of certain Maggiano’s banquet manager positions.
•Foreign currency transaction (gain) loss resulted from the change in the value of our Mexican peso denominated note receivable received as consideration from the sale of our equity interest in our Mexico joint venture in fiscal 2018.
Fiscal 2020
•COVID-19 related charges were recorded related to the initial impact and our efforts to address the pandemic beginning in the third quarter of fiscal 2020. The charges consisted of following costs related to both Chili’s and Maggiano’s:
–employee assistance payments and related payroll taxes expenses of $17.3 million for team members that experienced reduced shifts during the pandemic, who would have otherwise not received such payment under our normal compensation practices,
–other COVID-19 related expenses of $1.5 million for restaurant supplies such as face masks and hand sanitizer required to reopen dining rooms, as well as costs related to canceled projects due to the pandemic, and $1.1 million of expenses related to spoiled inventory due to the unexpected decline in sales and dining room closures,
–employee retention credit of $7.9 million for certain payroll taxes was received as part of the CARES Act relief package.
•Restaurant impairment charges primarily consisted of the long-lived assets of 25 underperforming Chili’s and three underperforming Maggiano’s restaurants.
•Loss from natural disasters, net of (insurance recoveries) primarily consisted of proceeds related to a previously filed fire claim, partially offset by costs incurred for damages from Tropical Storm Imelda.
•Restaurant closure charges primarily consisted of Chili’s lease termination charges and certain Chili’s restaurant closure costs.
•Remodel-related costs related to existing fixed asset write-offs associated with the Chili’s remodel project.
•Severance and other benefit charges primarily consisted of $2.7 million of expenses incurred for a corporate reorganization related to the elimination of 44 corporate positions to align and support our current operating model in the fourth quarter of fiscal 2020.
•Foreign currency transaction (gain) loss resulted from the change in the value of our Mexican peso denominated note receivable received as consideration from the sale of our equity interest in our Mexico joint venture in the second quarter of fiscal 2018.
Fiscal 2019
•Restaurant impairment charges primarily consisted of the long-lived assets of 11 underperforming Chili’s restaurants.
•Loss from natural disasters, net of (insurance recoveries) primarily consisted of insurance proceeds received related to a previously filed fire claim and final proceeds received from the Hurricane Harvey claim, partially offset by expenses associated with storm damages at certain restaurant locations.
•Restaurant closure charges primarily consisted of Chili’s lease termination charges and certain Chili’s restaurant closure costs.
•Remodel-related costs related to existing fixed asset write-offs associated with the Chili’s remodel project.
•Severance and other benefit charges primarily consisted of the restructuring of certain Maggiano’s back-office positions.
•Foreign currency transaction (gain) loss resulted from the change in the value of our Mexican peso denominated note receivable received as consideration from the sale of our equity interest in our Mexico joint venture in the second quarter of fiscal 2018.
•Sale leaseback (gain), net of transaction charges were recorded related to the fiscal 2019 sale leaseback transactions, refer to Note 9 - Leases for further details on this transaction.
6. INCOME TAXES
Income before income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Domestic
|
$
|
146.7
|
|
|
$
|
5.0
|
|
|
$
|
168.1
|
|
Foreign
|
(1.5)
|
|
|
(0.1)
|
|
|
3.7
|
|
Income before income taxes
|
$
|
145.2
|
|
|
$
|
4.9
|
|
|
$
|
171.8
|
|
The Provision (benefit) for income taxes and effective tax rate consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Current income tax (benefit) expenses:
|
|
|
|
|
|
Federal
|
$
|
11.6
|
|
|
$
|
(32.9)
|
|
|
$
|
63.3
|
|
State
|
14.4
|
|
|
4.8
|
|
|
28.8
|
|
Foreign
|
—
|
|
|
0.0
|
|
|
0.6
|
|
Total current income tax (benefit) expenses
|
26.0
|
|
|
(28.1)
|
|
|
92.7
|
|
Deferred income tax (benefit) expenses:
|
|
|
|
|
|
Federal
|
(9.4)
|
|
|
8.8
|
|
|
(58.5)
|
|
State
|
(3.0)
|
|
|
(0.2)
|
|
|
(18.0)
|
|
Foreign
|
—
|
|
|
0.0
|
|
|
0.7
|
|
Total deferred income tax (benefit) expenses
|
(12.4)
|
|
|
8.6
|
|
|
(75.8)
|
|
Provision (benefit) for income taxes
|
$
|
13.6
|
|
|
$
|
(19.5)
|
|
|
$
|
16.9
|
|
|
|
|
|
|
|
Effective tax rate
|
9.4
|
%
|
|
(398.0)
|
%
|
|
9.8
|
%
|
A reconciliation between the reported Provision (benefit) for income taxes and the amount computed by applying the statutory Federal income tax rate to Income before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Income tax expense at statutory rate
|
$
|
30.5
|
|
|
$
|
1.0
|
|
|
$
|
36.1
|
|
FICA and other tax credits
|
(24.7)
|
|
|
(24.8)
|
|
|
(28.2)
|
|
State income taxes, net of Federal benefit
|
7.8
|
|
|
3.6
|
|
|
8.5
|
|
Stock based compensation tax shortfall (windfall)
|
(2.3)
|
|
|
0.5
|
|
|
0.5
|
|
Other
|
2.3
|
|
|
0.2
|
|
|
—
|
|
Provision (benefit) for income taxes
|
$
|
13.6
|
|
|
$
|
(19.5)
|
|
|
$
|
16.9
|
|
Our federal statutory tax rate for fiscal 2021, fiscal 2020 and fiscal 2019 was 21.0%.
Deferred Tax and Allowances
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Deferred income tax assets:
|
|
|
|
Lease liabilities
|
$
|
305.1
|
|
|
$
|
313.7
|
|
Gift cards
|
17.0
|
|
|
13.7
|
|
Insurance reserves
|
11.5
|
|
|
12.2
|
|
Stock-based compensation
|
10.9
|
|
|
11.0
|
|
Federal credit carryover
|
6.8
|
|
|
7.3
|
|
|
|
|
|
Net operating losses
|
4.1
|
|
|
3.2
|
|
State credit carryover
|
2.5
|
|
|
2.8
|
|
Restructure charges and impairments
|
1.5
|
|
|
1.4
|
|
Payroll tax deferral
|
13.6
|
|
|
3.2
|
|
Other, net
|
10.6
|
|
|
7.1
|
|
Less: Valuation allowance
|
(6.1)
|
|
|
(5.6)
|
|
Total deferred income tax assets
|
377.5
|
|
|
370.0
|
|
Deferred income tax liabilities:
|
|
|
|
Lease assets
|
275.7
|
|
|
275.5
|
|
Goodwill and other amortization
|
22.6
|
|
|
21.6
|
|
Depreciation and capitalized interest on property and equipment
|
11.8
|
|
|
19.8
|
|
Prepaid expenses
|
16.0
|
|
|
14.4
|
|
Other, net
|
0.5
|
|
|
0.5
|
|
Total deferred income tax liabilities
|
326.6
|
|
|
331.8
|
|
Deferred income taxes, net
|
$
|
50.9
|
|
|
$
|
38.2
|
|
As of June 30, 2021, we have deferred tax assets of $4.4 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2026 and fiscal 2041. We have deferred tax assets of $6.8 million of federal and $3.2 million of state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2024 and fiscal 2035. The recognized deferred tax asset for the state loss carryforwards is $1.6 million and the federal tax credits is $6.8 million. The federal credit carryover is limited by Section 382 of the Internal Revenue Code.
The valuation allowance increased by $0.5 million in fiscal 2021 to recognize certain state net operating loss benefits and state tax credits management believes are not more-likely-than-not to be realized. In assessing whether
a deferred tax asset will be realized, we consider the likelihood of the realization, and the reversal of existing taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, as of June 30, 2021, we believe it is more-likely-than-not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowances.
CARES Act Impact
In the fourth quarter of fiscal 2020, the United States government passed a $2.0 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) designed primarily to help keep businesses running during and after the pandemic. The CARES Act included provisions for certain deductions and tax credits, filing deadline extensions, filing payment deadlines and making available certain grant money to assist in this pandemic. As of June 30, 2021, this legislation has allowed us to:
•Reduce our payroll tax liability by utilizing employee retention credits to assist with employee payroll costs during the pandemic of $7.9 million in fiscal 2020.
•Amend our 2018 and 2019 U.S. Income Tax Returns in order to claim additional depreciation deductions related to qualified improvement property of $4.6 million. We also were able to include a benefit in our fiscal 2020 U.S. Income Tax Return related to the additional depreciation on qualified improvement property of approximately $2.0 million
•Defer the employer portion of certain payroll taxes, totaling $54.5 million which will be repaid in two equal installments on December 31, 2021, and December 31, 2022
Unrecognized Tax Benefits
A reconciliation of unrecognized tax benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Balance at beginning of year
|
$
|
3.0
|
|
|
$
|
3.5
|
|
Additions based on tax positions related to the current year
|
0.3
|
|
|
0.3
|
|
Additions based on tax positions related to prior years
|
1.4
|
|
|
—
|
|
Settlements with tax authorities
|
—
|
|
|
0.0
|
|
Expiration of statute of limitations
|
(0.4)
|
|
|
(0.8)
|
|
Balance at end of year
|
$
|
4.3
|
|
|
$
|
3.0
|
|
The total amount of unrecognized tax benefits, excluding interest and penalties, that would affect income tax expenses if resolved in our favor was $3.4 million and $2.4 million as of June 30, 2021 and June 24, 2020, respectively. We do not expect any material changes to our liability for uncertain tax positions in the next 12 months.
We recognize accrued interest and penalties related to unrecognized tax benefits in Provision (benefit) for income taxes in the Consolidated Statements of Comprehensive Income. As of June 30, 2021, we had $0.4 million ($0.3 million net of a $0.1 million Federal deferred tax benefit) of interest and penalties accrued, compared to $0.3 million ($0.2 million net of a $0.1 million Federal deferred tax benefit) at June 24, 2020.
Our income tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate. The periods subject to examination for our federal return are fiscal 2021 to fiscal 2022, and fiscal 2018 to fiscal 2020 for our Canadian returns. State income tax returns are generally subject to examination for a period of three to five years from date return is filed. We have various state income tax returns in the process of examination or settlements. Our federal returns for fiscal 2021 and 2022 are currently under examination through the Internal Revenue Service: Compliance Assurance Process (CAP) program. There are no unrecorded liabilities associated with these examinations.
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, which are principally located in the United States, within the full-service casual dining segment of the industry. The Chili’s segment also has Company-owned restaurants in Canada, and franchised locations in the United States, 27 countries and two United States territories. The Maggiano’s segment includes the results of our Company-owned Maggiano’s restaurants in the United States as well as the results from our domestic franchise business. The Other segment includes costs related to our restaurant support teams for the Chili’s and Maggiano’s brands, including operations, finance, franchise, marketing, human resources and culinary innovation. The Other segment also includes costs related to the common and shared infrastructure, including accounting, information technology, purchasing, guest relations, legal and restaurant development.
Company sales for each operating segment include revenues generated by the operation of Company-owned restaurants including gift card redemptions and virtual brand revenues. Franchise and other revenues for each operating segment include royalties, delivery fee income, gift card breakage, digital entertainment revenues, Maggiano’s banquet service charge income, franchise advertising fees, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales.
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 located in the United States. There were no material transactions amongst our operating segments.
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. Restaurant expenses during the years presented primarily included restaurant rent, delivery fees, property and equipment maintenance, utilities, supplies, property taxes and credit card processing fees.
The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, 2021
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
3,005.7
|
|
|
$
|
273.3
|
|
|
$
|
—
|
|
|
$
|
3,279.0
|
|
Royalties
|
30.3
|
|
|
0.2
|
|
|
—
|
|
|
30.5
|
|
Franchise fees and other revenues
|
23.9
|
|
|
4.4
|
|
|
—
|
|
|
28.3
|
|
Franchise and other revenues
|
54.2
|
|
|
4.6
|
|
|
—
|
|
|
58.8
|
|
Total revenues
|
3,059.9
|
|
|
277.9
|
|
|
—
|
|
|
3,337.8
|
|
|
|
|
|
|
|
|
|
Food and beverage costs
|
803.5
|
|
|
64.3
|
|
|
—
|
|
|
867.8
|
|
Restaurant labor
|
1,014.2
|
|
|
94.0
|
|
|
—
|
|
|
1,108.2
|
|
Restaurant expenses
|
765.6
|
|
|
92.1
|
|
|
0.8
|
|
|
858.5
|
|
Depreciation and amortization
|
124.3
|
|
|
13.8
|
|
|
12.1
|
|
|
150.2
|
|
General and administrative
|
27.4
|
|
|
5.8
|
|
|
101.6
|
|
|
134.8
|
|
Other (gains) and charges
|
12.7
|
|
|
1.4
|
|
|
4.9
|
|
|
19.0
|
|
Total operating costs and expenses
|
2,747.7
|
|
|
271.4
|
|
|
119.4
|
|
|
3,138.5
|
|
Operating income (loss)
|
312.2
|
|
|
6.5
|
|
|
(119.4)
|
|
|
199.3
|
|
Interest expenses
|
5.6
|
|
|
0.2
|
|
|
50.4
|
|
|
56.2
|
|
Other income, net
|
(0.5)
|
|
|
—
|
|
|
(1.6)
|
|
|
(2.1)
|
|
Income (loss) before income taxes
|
$
|
307.1
|
|
|
$
|
6.3
|
|
|
$
|
(168.2)
|
|
|
$
|
145.2
|
|
|
|
|
|
|
|
|
|
Segment assets
|
$
|
1,911.8
|
|
|
$
|
223.2
|
|
|
$
|
139.9
|
|
|
$
|
2,274.9
|
|
Payments for property and equipment
|
82.9
|
|
|
2.6
|
|
|
8.5
|
|
|
94.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 24, 2020
|
|
Chili’s(1)
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
2,673.5
|
|
|
$
|
331.4
|
|
|
$
|
—
|
|
|
$
|
3,004.9
|
|
Royalties
|
33.7
|
|
|
0.2
|
|
|
—
|
|
|
33.9
|
|
Franchise fees and other revenues
|
24.5
|
|
|
15.2
|
|
|
—
|
|
|
39.7
|
|
Franchise and other revenues
|
58.2
|
|
|
15.4
|
|
|
—
|
|
|
73.6
|
|
Total revenues
|
2,731.7
|
|
|
346.8
|
|
|
—
|
|
|
3,078.5
|
|
|
|
|
|
|
|
|
|
Food and beverage costs
|
718.7
|
|
|
79.9
|
|
|
—
|
|
|
798.6
|
|
Restaurant labor
|
920.8
|
|
|
124.7
|
|
|
—
|
|
|
1,045.5
|
|
Restaurant expenses
|
723.7
|
|
|
101.5
|
|
|
0.6
|
|
|
825.8
|
|
Depreciation and amortization
|
133.9
|
|
|
15.4
|
|
|
13.0
|
|
|
162.3
|
|
General and administrative
|
32.1
|
|
|
5.7
|
|
|
98.5
|
|
|
136.3
|
|
Other (gains) and charges
|
35.3
|
|
|
6.8
|
|
|
5.3
|
|
|
47.4
|
|
Total operating costs and expenses
|
2,564.5
|
|
|
334.0
|
|
|
117.4
|
|
|
3,015.9
|
|
Operating income (loss)
|
167.2
|
|
|
12.8
|
|
|
(117.4)
|
|
|
62.6
|
|
Interest expenses
|
4.6
|
|
|
—
|
|
|
55.0
|
|
|
59.6
|
|
Other income, net
|
(0.6)
|
|
|
—
|
|
|
(1.3)
|
|
|
(1.9)
|
|
Income (loss) before income taxes
|
$
|
163.2
|
|
|
$
|
12.8
|
|
|
$
|
(171.1)
|
|
|
$
|
4.9
|
|
|
|
|
|
|
|
|
|
Segment assets
|
$
|
1,967.3
|
|
|
$
|
228.2
|
|
|
$
|
160.5
|
|
|
$
|
2,356.0
|
|
Payments for property and equipment
|
88.2
|
|
|
8.1
|
|
|
8.2
|
|
|
104.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 26, 2019
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
Company sales
|
$
|
2,692.6
|
|
|
$
|
413.6
|
|
|
$
|
—
|
|
|
$
|
3,106.2
|
|
Royalties
|
52.8
|
|
|
0.3
|
|
|
—
|
|
|
53.1
|
|
Franchise fees and other revenues
|
36.8
|
|
|
21.8
|
|
|
—
|
|
|
58.6
|
|
Franchise and other revenues
|
89.6
|
|
|
22.1
|
|
|
—
|
|
|
111.7
|
|
Total revenues
|
2,782.2
|
|
|
435.7
|
|
|
—
|
|
|
3,217.9
|
|
|
|
|
|
|
|
|
|
Food and beverage costs
|
723.3
|
|
|
99.7
|
|
|
—
|
|
|
823.0
|
|
Restaurant labor
|
907.2
|
|
|
152.5
|
|
|
—
|
|
|
1,059.7
|
|
Restaurant expenses
|
699.1
|
|
|
112.6
|
|
|
0.6
|
|
|
812.3
|
|
Depreciation and amortization
|
120.1
|
|
|
16.2
|
|
|
11.3
|
|
|
147.6
|
|
General and administrative
|
38.7
|
|
|
6.1
|
|
|
104.3
|
|
|
149.1
|
|
Other (gains) and charges(2)
|
(6.4)
|
|
|
1.0
|
|
|
0.9
|
|
|
(4.5)
|
|
Total operating costs and expenses
|
2,482.0
|
|
|
388.1
|
|
|
117.1
|
|
|
2,987.2
|
|
Operating income (loss)
|
300.2
|
|
|
47.6
|
|
|
(117.1)
|
|
|
230.7
|
|
Interest expenses
|
3.2
|
|
|
0.3
|
|
|
58.1
|
|
|
61.6
|
|
Other income, net
|
—
|
|
|
—
|
|
|
(2.7)
|
|
|
(2.7)
|
|
Income (loss) before income taxes
|
$
|
297.0
|
|
|
$
|
47.3
|
|
|
$
|
(172.5)
|
|
|
$
|
171.8
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
$
|
129.1
|
|
|
$
|
10.8
|
|
|
$
|
27.7
|
|
|
$
|
167.6
|
|
(1)Chili’s segment information for fiscal 2020 includes the results of operations related to the 116 restaurants purchased from a former franchisee subsequent to the September 5, 2019 acquisition date. Refer to Note 17 - Fiscal 2020 Chili's Restaurant Acquisition for further details.
(2)Other (gains) and charges in fiscal 2019 included the net impact from our completed sale leaseback transactions of 151 Company-owned Chili’s restaurant properties and one Maggiano’s property. Chili’s recognized a $26.8 million, and Maggiano’s recognized a $0.5 million 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. Refer to Note 9 - Leases for further details.
8. GOODWILL AND INTANGIBLES
We performed a detailed quantitative assessment in the third quarter of fiscal 2020 of our goodwill balances associated with both reporting units. This assessment was performed in response to observed declines in operating cash flows and market capitalization that were primarily driven by the impact of the COVID-19 pandemic on our business. Based on this assessment, we concluded that our goodwill and indefinite-lived intangible assets were not impaired at that time. We updated this assessment in the fourth quarter of fiscal 2020 and again concluded no impairment triggering event existed based on improved market capitalization and operating results compared to projections in the quantitative assessment prepared in the third quarter of fiscal 2020.
Our operating results and operating cash flows for fiscal 2021 outperformed our initial quantitative assessment. Our stock price and market capitalization also increased to levels greater than before the COVID-19 pandemic began in the United States. We performed our annual goodwill impairment analysis in the second quarter of fiscal 2021 using a qualitative approach based on these factors and no indicators of impairment were identified. Additionally, no indicators of impairment were identified through the end of fiscal 2021.
Our ability to operate dining and banquet rooms and generate off-premise sales at our restaurants is critical to avoiding a future triggering event as the impact of the COVID-19 pandemic continues. Management’s judgments about the impact of the pandemic could change as additional developments occur. We will continue to monitor and evaluate our results in future periods to determine if a more detailed assessment is necessary.
There have been no impairments of Goodwill for the fiscal years ended June 30, 2021, June 24, 2020 and June 26, 2019. The changes in the carrying amount of Goodwill by segment are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Chili’s
|
|
Maggiano’s
|
|
Consolidated
|
|
Chili’s
|
|
Maggiano’s
|
|
Consolidated
|
Balance at beginning of year
|
$
|
149.2
|
|
|
$
|
38.4
|
|
|
$
|
187.6
|
|
|
$
|
127.1
|
|
|
$
|
38.4
|
|
|
$
|
165.5
|
|
Changes in goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
Additions(1)
|
—
|
|
|
—
|
|
|
—
|
|
|
22.4
|
|
|
—
|
|
|
22.4
|
|
Foreign currency translation adjustment
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
(0.3)
|
|
|
—
|
|
|
(0.3)
|
|
Balance at end of year
|
$
|
149.8
|
|
|
$
|
38.4
|
|
|
$
|
188.2
|
|
|
$
|
149.2
|
|
|
$
|
38.4
|
|
|
$
|
187.6
|
|
(1)In the fiscal year ended June 24, 2020, we acquired 116 domestic Chili’s restaurants previously owned by a franchise partner. Refer to Note 17 - Fiscal 2020 Chili's Restaurant Acquisition for further information.
Intangible assets, net are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Definite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Chili’s reacquired franchise rights(1)
|
$
|
20.0
|
|
|
$
|
(9.2)
|
|
|
$
|
10.8
|
|
|
$
|
19.8
|
|
|
$
|
(7.1)
|
|
|
$
|
12.7
|
|
Chili’s other
|
0.4
|
|
|
(0.4)
|
|
|
—
|
|
|
0.4
|
|
|
(0.4)
|
|
|
0.0
|
|
|
$
|
20.4
|
|
|
$
|
(9.6)
|
|
|
$
|
10.8
|
|
|
$
|
20.2
|
|
|
$
|
(7.5)
|
|
|
$
|
12.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Chili’s liquor licenses
|
$
|
9.4
|
|
|
|
|
|
|
$
|
9.4
|
|
|
|
|
|
Maggiano’s liquor licenses
|
0.9
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
$
|
10.3
|
|
|
|
|
|
|
$
|
10.3
|
|
|
|
|
|
(1)We recorded impairment charges of $0.1 million in fiscal 2021, and $0.2 million in fiscal 2020, in Other (gains) and charges in the Consolidated Statements of Comprehensive Income. Refer to Note 14 - Fair Value Measurements for additional disclosures.
Foreign currency translation impact is included in the gross carrying amount and accumulated amortization, and was a gain of $0.3 million and loss of $0.1 million for fiscal 2021 and fiscal 2020, respectively.
Amortization expenses for all definite-lived intangible assets were recorded in Depreciation and amortization in the Consolidated Statements of Comprehensive Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Definite-lived intangible amortization expense
|
$
|
2.0
|
|
|
$
|
1.9
|
|
|
$
|
1.2
|
|
Annual amortization expenses for definite-lived intangible assets are estimated to be $2.0 million for each of the next three fiscal years, and $1.6 million for fiscal 2025 and fiscal 2026.
9. LEASES
As of June 30, 2021, 1,079 of our 1,121 Company-owned restaurant facilities were leased. We typically lease our restaurant facilities through ground leases (where we lease land only, but construct the building and leasehold improvements) or retail leases (where we lease the land/retail space and building, but construct the leasehold improvements). As of June 30, 2021, the restaurant leases have cumulative renewal clauses of 2 to 40 years at our option. Our leased restaurants typically have an initial lease term of 10 to 20 years, with one or more renewal terms typically ranging from 1 to 10 years. The leases typically provide for a fixed rental or a fixed rental plus percentage rentals based on sales volume. In addition to our restaurant facilities, we also lease our corporate headquarters location and certain equipment. Our lease agreements do not contain any material residual value guarantees or material covenant restrictions.
Consolidated Balance Sheet Disclosure of Lease Amounts
The following table includes a detail of lease assets and liabilities included in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Finance
Leases(1)
|
|
Operating
Leases(2)
|
|
Total Leases
|
Lease assets
|
$
|
98.2
|
|
|
$
|
1,007.4
|
|
|
$
|
1,105.6
|
|
|
|
|
|
|
|
Current lease liabilities
|
21.5
|
|
|
97.7
|
|
|
119.2
|
|
Long-term lease liabilities
|
99.8
|
|
|
1,006.7
|
|
|
1,106.5
|
|
Total lease liabilities
|
$
|
121.3
|
|
|
$
|
1,104.4
|
|
|
$
|
1,225.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 24, 2020
|
|
Finance
Leases(1)
|
|
Operating
Leases(2)
|
|
Total Leases
|
Lease assets
|
$
|
81.6
|
|
|
$
|
1,054.6
|
|
|
$
|
1,136.2
|
|
|
|
|
|
|
|
Current lease liabilities
|
12.2
|
|
|
117.3
|
|
|
129.5
|
|
Long-term lease liabilities
|
89.9
|
|
|
1,061.6
|
|
|
1,151.5
|
|
Total lease liabilities
|
$
|
102.1
|
|
|
$
|
1,178.9
|
|
|
$
|
1,281.0
|
|
(1)Finance lease assets are recorded in Property and equipment, at cost, and the related current and long-term lease liabilities are recorded within Other accrued liabilities and Long-term debt and finance leases, less current installments, respectively.
(2)Operating lease assets are recorded in Operating lease assets and the related current and long-term lease liabilities are recorded within Operating lease liabilities and Long-term operating lease liabilities, less current portion, respectively.
Consolidated Statement of Comprehensive Income Disclosure of Lease Amounts
The components of lease expenses, including variable lease costs primarily consisting of rent based on a percentage of sales, common area maintenance and real estate tax charges, and short-term lease expenses for leases with lease terms less than twelve months are included in the Consolidated Statements of Comprehensive Income as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
Operating lease cost
|
$
|
167.2
|
|
|
$
|
162.8
|
|
Finance lease amortization
|
17.3
|
|
|
20.9
|
|
Finance lease interest
|
5.9
|
|
|
4.6
|
|
Short-term lease cost
|
0.5
|
|
|
1.4
|
|
Variable lease cost
|
57.9
|
|
|
57.7
|
|
Sublease income
|
(4.4)
|
|
|
(4.6)
|
|
Total lease costs, net
|
$
|
244.4
|
|
|
$
|
242.8
|
|
Consolidated Statement of Cash Flows Disclosure of Lease Amounts
Supplemental cash flow information related to leases recorded in the Consolidated Statements of Cash Flows is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
Cash flows from operating activities
|
|
|
|
Cash paid related to lease liabilities
|
|
|
|
Operating leases(1)
|
$
|
195.5
|
|
|
$
|
159.6
|
|
Finance leases
|
5.9
|
|
|
4.6
|
|
Cash flows from financing activities
|
|
|
|
Cash paid related to lease liabilities
|
|
|
|
Finance leases
|
20.0
|
|
|
17.8
|
|
Non-cash lease assets obtained in exchange for lease liabilities(2)
|
|
|
|
Operating leases
|
60.6
|
|
|
224.0
|
|
Finance leases
|
29.8
|
|
|
73.2
|
|
(1)Cash paid related to lease liabilities for Operating leases increased in fiscal 2021 primarily due to the prepayment of July 2021 lease payments and lease payments made during fiscal 2021 for rents that were deferred in fiscal 2020 due to the impacts of the COVID-19 pandemic. Refer to “Significant Changes in Leases in Fiscal 2020” section below for more information.
(2)Non-cash lease assets obtained in exchange for lease liabilities were higher in fiscal 2020 primarily due to the new and assumed operating and finance leases from the Chili’s restaurant acquisition and the new Chili’s finance lease for table-top devices. Refer to Note 17 - Fiscal 2020 Chili's Restaurant Acquisition and “Significant Changes in Leases in the Period” section below for more information.
Weighted Average Lease Term and Discount Rate
Other information related to leases is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
Finance Leases
|
|
Operating Leases
|
|
Finance Leases
|
|
Operating Leases
|
Weighted average remaining lease term
|
8.5 years
|
|
11.0 years
|
|
9.4 years
|
|
11.5 years
|
Weighted average discount rate
|
5.4
|
%
|
|
5.6
|
%
|
|
5.9
|
%
|
|
5.7
|
%
|
Lease Maturity Analysis
Finance leases and Operating leases total future lease payments represent the contractual obligations due under the lease agreements, including cancellable option periods where we are reasonably assured to exercise the options. As of June 30, 2021, the future minimum lease payments on finance and operating leases, as well as sublease income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
Fiscal Year
|
Finance Leases
|
|
Operating Leases
|
|
Sublease Income
|
2022
|
$
|
27.4
|
|
|
$
|
155.9
|
|
|
$
|
(3.2)
|
|
2023
|
26.6
|
|
|
163.3
|
|
|
(2.6)
|
|
2024
|
17.0
|
|
|
153.8
|
|
|
(1.8)
|
|
2025
|
14.2
|
|
|
144.1
|
|
|
(1.8)
|
|
2026
|
11.5
|
|
|
130.1
|
|
|
(1.3)
|
|
Thereafter
|
56.3
|
|
|
770.5
|
|
|
(3.5)
|
|
Total future lease payments(1)
|
153.0
|
|
|
1,517.7
|
|
|
$
|
(14.2)
|
|
Less: Imputed interest
|
31.7
|
|
|
413.3
|
|
|
|
Present value of lease liability
|
$
|
121.3
|
|
|
$
|
1,104.4
|
|
|
|
(1)Total future lease payments as of June 30, 2021 included non-cancelable lease commitments of $132.7 million for finance leases and $1,044.9 million for operating leases.
Pre-Commencement Leases
In fiscal 2021, we executed six leases for new Chili’s locations with undiscounted fixed payments over the initial term of $20.8 million. These leases are expected to commence in the next 12 months and are expected to have an economic lease term of 20 years. These leases will commence when the landlords make the property available to us for new restaurant construction. We will assess the reasonably certain lease term at the lease commencement date.
Significant Changes in Leases in Fiscal 2020
In the first quarter of fiscal 2020, as part of the Chili’s restaurant acquisition, we assumed and entered into 90 new operating leases. The leases were recorded net of purchase price accounting adjustments and prepaid rent. Additionally related to this transaction, we entered into 12 new finance leases with the initial terms of approximately 11 years, plus renewal options. Refer to Note 17 - Fiscal 2020 Chili's Restaurant Acquisition for more information.
In the first quarter of fiscal 2020, we executed one finance lease for Chili’s table-top devices with an initial term of 3 years, beginning once all devices had been received, plus one 3-year renewal option. We received all the table-top devices by the end of the fourth quarter of fiscal 2020.
In response to the COVID-19 pandemic, during the fourth quarter of fiscal 2020, certain landlords provided temporary rent concessions primarily resulting in the deferral of rent payments until future periods. We accounted for these rent deferrals as modifications under ASC 842 which were included in our June 24, 2020 lease balances.
Fiscal 2019 Sale Leaseback Transactions
Restaurant Properties Sale Leaseback Transactions
In fiscal 2019, we completed sale leaseback transactions of 152 restaurant properties which were sold for aggregate consideration of $495.0 million. Of the transactions completed, 151 were Chili’s properties, and one was a Maggiano’s property. The total gain was $309.7 million and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.
Gain and Deferred Gain Recognition
In fiscal 2019, under the previous lease standard ASC 840, we 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. In the fiscal year ended June 26, 2019, $35.2 million of the gain, less transaction costs incurred of $7.9 million related to professional services, legal and accounting fees, was recognized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income. The deferred gain balance was eliminated through the cumulative effect adjustment to Retained earnings effective June 27, 2019, the first day of fiscal 2020, upon the adoption of ASC 842.
10. DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Revolving credit facility
|
$
|
171.3
|
|
|
$
|
472.9
|
|
5.000% notes
|
350.0
|
|
|
350.0
|
|
3.875% notes
|
300.0
|
|
|
300.0
|
|
Finance lease obligations
|
121.3
|
|
|
102.1
|
|
Total long-term debt and finance leases
|
942.6
|
|
|
1,225.0
|
|
Less: unamortized debt issuance costs and discounts
|
(3.2)
|
|
|
(4.3)
|
|
Total long-term debt, less unamortized debt issuance costs and discounts
|
939.4
|
|
|
1,220.7
|
|
Less: current installments of long-term debt(1)
|
(21.5)
|
|
|
(12.2)
|
|
Long-term debt and finance leases, less current installments
|
$
|
917.9
|
|
|
$
|
1,208.5
|
|
(1)Current installments of long-term debt consist of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets. Refer to Note 11 - Accrued and Other Liabilities for further details.
Excluding finance lease obligations and interest, our long-term debt maturities for the five fiscal years following June 30, 2021 and thereafter are as follows:
|
|
|
|
|
|
Fiscal Year
|
Long-Term Debt
|
2022
|
$
|
—
|
|
2023
|
471.3
|
|
2024
|
—
|
|
2025
|
350.0
|
|
2026
|
—
|
|
Thereafter
|
—
|
|
|
$
|
821.3
|
|
Revolving Credit Facility, as Amended
During fiscal 2021, net repayments of $301.6 million were made on the $1.0 billion revolving credit facility. As of June 30, 2021, $828.7 million of credit was available under the revolving credit facility.
The revolving credit facility generally bears interest of LIBOR plus an applicable margin of 2.250% to 3.000% and an undrawn commitment fee of 0.350% to 0.500%, both based on a function of our debt-to-cash-flow ratio. As of June 30, 2021, our interest rate was 3.250% consisting of the LIBOR floor of 0.750% plus the applicable margin of 2.500%.
In fiscal 2021, we executed the seventh amendment to our revolving credit facility, extending the maturity date to December 12, 2022. This amendment included a capacity reduction to $900.0 million from $1.0 billion which will occur on September 12, 2021. The issuance of certain debt or preferred equity interests will result in an immediate
capacity reduction, an interest rate reduction of 0.250% on the spread and 0.100% reduction on the undrawn fee if the issuance exceeds $250.0 million pursuant to the terms of the agreement. We incurred $2.2 million of debt issuance costs, associated with this revolver amendment, which are included in Other assets in the Consolidated Balance Sheets.
5.000% Notes
In fiscal 2017, we issued $350.0 million of 5.000% senior notes due October 2024 (the “2024 Notes”). The notes require semi-annual interest payments which began on April 1, 2017.
The indenture for the 2024 Notes contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to (i) create liens on Principal Property (as defined in the Indenture) and (ii) merge, consolidate or amalgamate with or into any other person or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of their property. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations.
3.875% Notes
In fiscal 2013, we issued $300.0 million of 3.875% notes due in May 2023 (the “2023 Notes”). The 2023 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. As of June 30, 2021, we were in compliance with our covenants pursuant to the amended revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes. We expect to remain in compliance with our covenants throughout fiscal 2022.
11. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Sales tax
|
$
|
23.2
|
|
|
$
|
13.3
|
|
Property tax
|
22.4
|
|
|
22.9
|
|
Insurance
|
21.7
|
|
|
20.7
|
|
Current installments of finance leases
|
21.5
|
|
|
12.2
|
|
Utilities and services
|
8.4
|
|
|
8.3
|
|
Interest
|
6.9
|
|
|
7.5
|
|
State income tax payable
|
1.1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cyber security incident
|
—
|
|
|
3.4
|
|
Other(1)
|
12.2
|
|
|
12.3
|
|
|
$
|
117.4
|
|
|
$
|
100.6
|
|
(1)Other primarily consisted of accruals for rent-related expenses, certain exit-related lease accruals, charitable donations, deferred franchise and development fees, banquet deposits for Maggiano’s events and other various accruals.
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
June 24, 2020
|
Insurance
|
$
|
35.0
|
|
|
$
|
33.7
|
|
Deferred payroll taxes(1)
|
27.2
|
|
|
12.9
|
|
Deferred franchise and development fees
|
10.4
|
|
|
11.6
|
|
Unrecognized tax benefits
|
3.5
|
|
|
2.1
|
|
Other
|
5.9
|
|
|
6.8
|
|
|
$
|
82.0
|
|
|
$
|
67.1
|
|
(1)Deferred payroll taxes consist of the second installment of the deferral of the employer portion of certain payroll related taxes as allowed under the CARES Act which is due on December 31, 2022. The first installment of $27.2 million, which is due on December 31, 2021, is recorded within Accrued payroll in the Consolidated Balance Sheets.
12. STOCK-BASED COMPENSATION
Our shareholder approved stock-based compensation plans include the Stock Option and Incentive Plan for employees (“Employee Plan”) and the Stock Option and Incentive Plan for Non-Employee Directors and Consultants (collectively, the “Plans”). The Plans provide for grants of options to purchase our common stock, performance shares, restricted stock, restricted stock units, and stock appreciation rights. Additionally, grants to eligible employees may vest over a specified period of time or service period, or may contain performance-based conditions.
In fiscal 2019, our shareholders approved and we registered an additional 1.4 million shares of common stock of Brinker International, Inc. available for issuance under the Employee Plan. As of June 30, 2021, the total number of shares authorized for issuance to employees and non-employee directors and consultants under the Plans was 38.7 million shares.
Presented below is total stock-based compensation expenses, and the related total income tax benefit recognized in the Consolidated Statements of Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Stock-based compensation expenses
|
$
|
16.4
|
|
|
$
|
14.7
|
|
|
$
|
16.4
|
|
Tax benefit related to stock-based compensation expenses
|
3.0
|
|
|
2.5
|
|
|
3.0
|
|
Stock Options
In fiscal 2019 and fiscal 2018, certain eligible employees under the Plans were granted performance stock options whose vesting is contingent upon meeting Company performance goals based on our annual earnings at the end of fiscal 2021 and fiscal 2022. Expenses for performance stock options are recognized using a graded-vesting schedule over the vesting period based upon management’s periodic estimates of the number of stock options that ultimately will vest. At the end of fiscal 2021, one of the performance goals was met, resulting in the vesting of 0.4 million, or one-half, of the outstanding performance stock options. The options have a contractual term to exercise of no later than August 31, 2025.
Stock options that do not contain a performance condition were also granted to eligible employees in fiscal 2020 and fiscal 2019, consistent with prior year grants. No stock options were granted in fiscal 2021. Expenses related to these stock options are recognized using a graded-vesting schedule over the vesting period or to the date on which retirement eligibility is achieved, if shorter. Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 years. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination.
Stock option transactions during fiscal 2021 were as follows (option prices in dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
Aggregate
Intrinsic
Value
|
Stock options outstanding at June 24, 2020
|
2.7
|
|
|
$
|
40.68
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Exercised
|
(0.7)
|
|
|
46.61
|
|
|
|
|
|
Forfeited or canceled
|
0.0
|
|
|
38.03
|
|
|
|
|
|
Stock options outstanding at June 30, 2021
|
2.0
|
|
|
$
|
38.74
|
|
|
4.4
|
|
$
|
45.1
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at June 30, 2021
|
0.7
|
|
|
$
|
41.44
|
|
|
3.8
|
|
$
|
14.4
|
|
During fiscal 2019, we 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 was no incremental compensation cost as a result of this modification.
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, and the weighted average fair value of option grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021 (1)
|
|
June 24, 2020
|
|
June 26, 2019
|
Weighted average fair values of option grants
|
n/a
|
|
$
|
6.92
|
|
|
$
|
8.25
|
|
Expected volatility
|
n/a
|
|
33.4
|
%
|
|
27.2
|
%
|
Risk-free interest rate
|
n/a
|
|
1.3
|
%
|
|
2.9
|
%
|
Expected lives
|
n/a
|
|
5 years
|
|
5 years
|
Dividend yield
|
n/a
|
|
3.2
|
%
|
|
3.5
|
%
|
(1) No stock option awards were granted in fiscal 2021
Expected volatility and the expected life of stock options are based on historical experience. The risk-free rate is based on the yield of a United States Treasury Note with a term equal to the expected life of the stock options. The dividend yield is based on the most recent quarterly dividend per share declared and the closing stock price on the declaration date.
At June 30, 2021, unrecognized compensation expenses related to stock options totaled approximately $0.6 million and will be recognized over a weighted average period of 1.3 years. The intrinsic value and related tax benefit of options exercised is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Intrinsic value of options exercised
|
$
|
9.8
|
|
|
$
|
0.6
|
|
|
$
|
1.8
|
|
Tax benefit realized on options exercised
|
2.4
|
|
|
0.1
|
|
|
0.4
|
|
Restricted Share Awards
Restricted share awards consist of performance shares, restricted stock and restricted stock units. In fiscal 2021, certain eligible employees under the Plans were granted performance shares whose vesting is contingent upon the Company exceeding a specified level of annual earnings in any of fiscal 2022, fiscal 2023 or fiscal 2024. The number of shares that will vest varies depending on the fiscal year that the performance criteria is first met. In fiscal 2020 and fiscal 2019, eligible employees under the Plans were granted performance shares whose vesting is
contingent upon meeting Company performance goals based on our rate of earnings growth at the end of a three-fiscal-year period. The number of shares that will vest varies depending on the rate of earnings growth achieved as compared to the target rate. Expenses are recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter, based upon management’s periodic estimates of the number of shares that ultimately will be issued.
Restricted stock units granted to eligible employees under the Plans generally vest in full on the third anniversary of the date of grant. Restricted stock units issued to eligible employees under our career equity plan generally vest upon each employee’s retirement from the Company. Expenses are recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination.
Restricted share awards and restricted stock units granted to non-employee directors under the Plans are non-forfeitable and are expensed upon grant. Non-employee directors’ awards have variable distribution dates ranging from four years after grant to two years following departure from the Board.
Restricted share awards, including performance shares reflected at target, during fiscal 2021 were as follows (fair value per award in dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Restricted
Share
Awards
|
|
Weighted
Average
Grant Date
Fair Value
Per Award
|
Restricted share awards outstanding at June 24, 2020
|
1.1
|
|
|
$
|
37.17
|
|
Granted
|
0.5
|
|
|
41.17
|
|
Vested
|
(0.3)
|
|
|
32.58
|
|
Forfeited
|
(0.1)
|
|
|
38.70
|
|
Restricted share awards outstanding at June 30, 2021
|
1.2
|
|
|
$
|
40.07
|
|
At June 30, 2021, unrecognized compensation expenses related to restricted share awards totaled approximately $14.0 million and will be recognized over a weighted average period of 2.0 years. The fair value of shares that vested is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended
|
|
June 30, 2021
|
|
June 24, 2020
|
|
June 26, 2019
|
Fair value of restricted share awards vested
|
$
|
14.9
|
|
|
$
|
6.6
|
|
|
$
|
8.6
|
|
13. SHAREHOLDERS’ DEFICIT
Common Stock Issuance
In fiscal 2020, we sold 8.1 million shares of our common stock at a price to the public of $18.25 per share. Total net proceeds raised from the offering were $139.1 million, after deducting the professional expenses. This common stock issuance was executed to provide additional capital through the course of the COVID-19 pandemic and for general corporate purposes.
In fiscal 2021, employee stock option exercises resulted in the issuance of 1.0 million shares of our common stock for proceeds of $30.7 million.
Share Repurchases
In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the business downturn caused by the COVID-19 pandemic. Additionally, the amended revolving credit facility restricted our ability to repurchase shares in fiscal 2021 through the third quarter of fiscal 2021. Following the expiration of these restrictions under our amended revolving credit facility, we did not repurchase any shares under publicly announced
share repurchase programs for the remainder of fiscal 2021. Future decisions to repurchase shares will be dependent on our operating performance, financial condition and other such factors that we consider relevant.
Prior to the suspension, our share repurchase program was used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluated 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. Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets.
In fiscal 2021, we repurchased 0.1 million shares from team members to satisfy tax withholding obligations on the vesting of restricted shares. Before the suspension, we repurchased approximately 0.8 million shares of our common stock for $32.4 million in fiscal 2020. In fiscal 2019, our Board of Directors authorized a $300.0 million increase to our existing share repurchase program resulting in total authorizations of $4.9 billion. As of June 30, 2021, approximately $166.8 million was available in the suspended share repurchase program.
Dividends
In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19. Before this suspension, our Board of Directors approved quarterly dividends of $0.38 per share paid each quarter. During fiscal 2020, we paid dividends of $57.4 million to common stock shareholders.
In fiscal 2021, dividends paid were solely related to the previously accrued dividends for restricted share awards that vested in the period. Restricted share award dividends were recorded in Other accrued liabilities for the current portion to vest within 12 months, and Other liabilities for the portion that will vest after one year.
Retirement of Treasury Stock
In fiscal 2020, the Board of Directors approved the retirement of 114.0 million shares of Treasury stock for a weighted average price per share of $29.45. As of June 30, 2021, 24.4 million shares remain in treasury.
Effect of Accounting Standards Adoption
In fiscal 2020, we adopted the lease accounting standard, ASC 842, and recorded a $195.9 million cumulative effect adjustment increase to Retained earnings for the change in accounting principle. In fiscal 2019, we adopted the revenue recognition standard, ASC 606, and recorded a $7.4 million cumulative effect adjustment decrease to Retained earnings for the change in accounting principle.
14. FAIR VALUE MEASUREMENTS
Non-Financial Assets Measured on a Non-Recurring Basis
We review the carrying amounts of long-lived property and equipment including finance lease assets, operating lease assets, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not substantially 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. Refer to Note 5 - Other Gains and Charges for more information.
Intangibles, net in the Consolidated Balance Sheets includes both indefinite-lived intangible assets such as transferable liquor licenses and definite-lived intangible assets such as reacquired franchise rights and trademarks.
Definite Lived Assets Impairment
Definite lived assets include property and equipment including finance lease assets, operating lease assets and reacquired franchise rights. During fiscal 2021, we impaired certain long-lived assets and operating lease assets primarily related to 11 underperforming Chili’s and three underperforming Maggiano’s restaurants. During fiscal
2020, we impaired certain long-lived property and equipment including finance lease assets, reacquired franchise rights and operating lease assets primarily related to 25 underperforming Chili’s and three underperforming Maggiano’s restaurants. Additionally, we impaired certain finance and operating lease assets related to closed Chili’s restaurants.
We determined the fair value of these assets based on Level 3 fair value measurements. The table below presents the carrying values and related impairment charges recorded on these impaired restaurants for the periods presented:
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Impairment Charges
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Pre-Impairment Carrying Value
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Fiscal Years Ended
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June 30, 2021
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June 24, 2020
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June 30, 2021
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June 24, 2020
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Underperforming restaurants
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Long-lived assets
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$
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2.6
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$
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16.7
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$
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2.6
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$
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16.7
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Reacquired franchise rights assets
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0.1
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0.2
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0.1
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0.2
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Operating lease assets
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1.2
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18.5
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0.3
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2.1
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Finance lease assets
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—
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0.1
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—
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0.1
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Total underperforming restaurants
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$
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3.9
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$
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35.5
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$
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3.0
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$
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19.1
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Closed restaurants
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Operating lease assets
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$
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—
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$
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6.4
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$
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—
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$
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1.8
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Finance lease assets
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—
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5.8
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—
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1.4
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Total closed restaurants
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$
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—
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$
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12.2
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$
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—
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$
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3.2
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Indefinite Lived Assets Impairment
The fair values of transferable liquor licenses are based on prices in the open market for licenses in the same or similar jurisdictions, and are categorized as Level 2. Based on our semi-annual reviews in fiscal 2021 and fiscal 2020, we determined there was no impairment.
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.
Long-Term Debt
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 3.875% and 5.000% notes are based on quoted market prices and are considered Level 2 fair value measurements.
The 3.875% notes and 5.000% notes carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values are as follows, refer to Note 10 - Debt for further details:
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June 30, 2021
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June 24, 2020
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Carrying Amount
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Fair Value
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Carrying Amount
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Fair Value
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3.875% notes
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$
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299.3
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$
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309.0
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$
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299.0
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$
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282.8
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5.000% notes
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347.5
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369.3
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346.7
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330.8
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Note Receivable
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. In fiscal 2021, the note was amended to defer certain scheduled payments from calendar year 2021 to calendar years 2022 and 2023. We determined the fair value of the amended note based on an internally developed analysis relying on Level 3 inputs using a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments. As a result of this
analysis, we believe the fair value continues to approximate the note receivable carrying value of $6.9 million as of June 30, 2021. The current portion of the note represents cash payments to be received over the next 12 months and is included within Accounts receivable, net while the long-term portion of the note is included within Other assets in the Consolidated Balance Sheets.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest is as follows:
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Fiscal Years Ended
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June 30, 2021
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June 24, 2020
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June 26, 2019
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Income taxes, net of (refunds)(1)
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$
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9.7
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$
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(7.2)
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$
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106.2
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Interest, net of amounts capitalized
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49.5
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53.1
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55.5
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(1)Income taxes, net of (refunds) for the fiscal year ended June 24, 2020 included the receipt of a refund in fiscal 2020, partially offset by payments. Income taxes, net of (refunds) for the fiscal year ended June 26, 2019 included payments made for income tax liabilities resulting from sale leaseback transactions completed in fiscal 2019. Refer to Note 9 - Leases for further details.
Non-cash investing and financing activities are as follows:
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Fiscal Years Ended
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June 30, 2021
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June 24, 2020
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June 26, 2019
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Retirement of fully depreciated assets
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$
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22.4
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$
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32.3
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$
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28.9
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Accrued capital expenditures
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8.8
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7.1
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9.3
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Dividends declared but not paid
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—
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1.2
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15.6
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Capital lease additions(1)
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—
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—
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15.1
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(1)Capital lease additions for the fiscal years ended June 30, 2021 and June 24, 2020 are now disclosed as part of the finance lease disclosures in Note 9 - Leases, “Consolidated Statement of Cash Flows Disclosure of Lease Amounts” section.
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments and Guarantees
We have, in certain cases, divested brands or sold restaurants to franchisees and have not been released from lease guarantees for the related restaurants. As of June 30, 2021 and June 24, 2020, we have outstanding lease guarantees or are secondarily liable for $29.2 million and $39.7 million, respectively. These amounts represent the known potential liability of future rent 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 2022 through fiscal 2027. 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.
We have received notices of default and have been named a party in lawsuits pertaining to some of these leases in circumstances where the current lessee did not pay its rent obligations. These lessees are in communication with the landlords to defer or resolve payments. We recorded a $1.5 million contingent loss, which represents the low end of our estimated range of losses, in fiscal 2021 in Other (gains) and charges in the Consolidated Statements of Comprehensive Income related to these leases and lawsuits. We will continue to closely monitor this situation.
Letters of Credit
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of June 30, 2021, we had $6.8 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next 4 to 12 months.
Cyber Security Incident
In fiscal 2018, we discovered malware at certain Chili’s restaurants that may have resulted in unauthorized access or acquisition of customer payment card data.
Cyber Security Related Charges
To limit our exposure to cyber security events, we maintain cyber liability insurance coverage. Our cyber liability insurance policy contains a $2.0 million insurance retention that was fully accrued during fiscal 2018. Since the incident, through June 30, 2021, we have incurred total cumulative costs of $9.2 million related to the cyber security incident. This includes the $2.0 million retention recorded, $2.6 million in costs that have been reimbursed by our insurance carriers, $4.1 million of receivables for costs incurred that we believe are reimbursable and probable of recovery under our insurance coverage and $0.5 million of costs not reimbursable by our insurance carriers. We have settled claims from three payment card companies, and the settlement amounts are included in these costs. We do not expect material claims from payment card companies in the future.
Cyber Security Litigation
The Company was named as a defendant in a putative class action lawsuit in the United States District Court for the Middle District of Florida styled In re: Brinker Data Incident Litigation, Case No. 18-cv-00686-TJC-MCR (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.
On April 14, 2021, the district court issued an order granting in part and deferring in part Plaintiffs’ motion for class certification. The court certified a class on Plaintiffs’ negligence claim and a separate class on Plaintiffs’ California state Unfair Competition Law claims. On April 28, 2021, Brinker filed a Rule 23(f) petition in the Eleventh Circuit Court of Appeals seeking immediate discretionary review of the district court’s certification orders.
We believe we have defenses and intend to continue defending the Litigation. As such, as of June 30, 2021, we have concluded that a loss, or range of 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 the consolidated financial condition or results of operations.
17. FISCAL 2020 CHILI'S RESTAURANT ACQUISITION
On September 5, 2019, we completed the acquisition of certain assets and liabilities related to 116 previously franchised Chili’s restaurants located in the Midwest United States. Pro-forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements.
Total cash consideration of $96.0 million, including post-closing adjustments, was funded with borrowings from our existing credit facility. We accounted for this acquisition as a business combination. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements from the date of acquisition. The assets and liabilities of these restaurants are recorded at their fair values.
Net acquisition-related charges of $2.9 million were recorded during fiscal 2020 to Other (gains) and charges in the Consolidated Statements of Comprehensive Income. In fiscal 2020, the net charges consisted of $4.5 million of professional services, transaction and transition related costs associated with the purchase, and $1.0 million of related franchise straight-line rent balances, net of market leasehold improvement adjustments that were fully recognized at the date of the acquisition, partially offset by $2.6 million of franchise deferred revenues balance that were fully recognized at date of acquisition.
The final amounts recorded for the fair value of acquired assets and liabilities at the acquisition date are as follows:
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Fair Value September 5, 2019
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Current assets(1)
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$
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7.3
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Property and equipment
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60.3
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Operating lease assets
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163.5
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Reacquired franchise rights(2)
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6.9
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Goodwill(3)
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22.4
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Total assets acquired
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260.4
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Current liabilities(4)
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9.1
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Operating lease liabilities, less current portion
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158.3
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Total liabilities assumed
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167.4
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Net assets acquired(5)
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$
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93.0
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(1)Current assets included petty cash, inventory, and restaurant supplies.
(2)Reacquired franchise rights have a weighted average amortization period of approximately 8 years.
(3)Goodwill is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities, and the benefit of the assembled workforce of the acquired restaurants.
(4)Current liabilities included current portion of operating lease liabilities, gift card liability and accrued property tax.
(5)Net assets acquired at fair value are equal to the total purchase price of $99.0 million, less $3.2 million of closing adjustments and $2.8 million allocated to prepayment of leases entered into between us and the franchisee.
18. SUBSEQUENT EVENTS
Revolver Amendment & Net Borrowings
On August 18, 2021, we replaced our existing $1.0 billion revolving credit facility with an $800.0 million revolving credit facility that matures on August 18, 2026. The new facility is guaranteed by certain of our subsidiaries, includes covenant restrictions relating to leverage that are similar to our prior arrangement, and contains customary events of default terms. As of August 18, 2021, $211.3 million was drawn from the new revolver.
Share Repurchases
In August 2021, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $300 million.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Brinker International, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Brinker International, Inc. and subsidiaries (the Company) as of June 30, 2021 and June 24, 2020, the related consolidated statements of comprehensive income, shareholders’ deficit, and cash flows for each of the fiscal years in the three-year period ended June 30, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2021 and June 24, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended June 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of June 27, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the gift card breakage revenue
As discussed in Notes 1 and 3 to the consolidated financial statements, gift card breakage revenue represents the monetary value associated with outstanding gift card balances that will not be redeemed. The Company estimates this amount based on the historical gift card redemption patterns and recognizes the estimated breakage as revenue in proportion to the pattern of related gift card redemptions. The gift card breakage revenue recognized for the year ended June 30, 2021 was approximately $13.0 million.
We identified the assessment of gift card breakage revenue as a critical audit matter. Subjective auditor judgment was required to evaluate the Company’s assessment of the trends in historical and expected future redemption patterns used to recognize breakage revenue.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s gift card breakage revenue process. This included controls related to the Company’s estimation of the breakage rate and the timing of breakage revenue recognition. We assessed breakage revenue by comparing the Company’s estimated breakage rate to rates derived from historical redemption data. We evaluated the timing of breakage revenue recognition by analyzing historical redemption patterns and assessing the volume of redemptions subsequent to the period of breakage revenue recognition.
/S/ KPMG LLP
We have served as the Company’s auditor since 1984.
Dallas, Texas
August 26, 2021
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Brinker International, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Brinker International, Inc. and subsidiaries' (the Company) internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of June 30, 2021 and June 24, 2020, the related consolidated statements of comprehensive income, shareholders’ deficit, and cash flows for each of the fiscal years in the three-year period ended June 30, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated August 26, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ KPMG LLP
Dallas, Texas
August 26, 2021
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
We have assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that our internal control over financial reporting was effective as of June 30, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of our internal control over financial reporting as of June 30, 2021 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its attestation report which is included herein.