Notes to the Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
References to “Brinker,” the “Company,” “we,” “us,” and “our” in this Form 10-Q refer to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc.
Nature of Operations
Our Consolidated Financial Statements (Unaudited) as of March 25, 2020 and June 26, 2019, and for the thirteen and thirty-nine week periods ended March 25, 2020 and March 27, 2019, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We are principally engaged in the ownership, operation, development, and franchising of the Chili’s® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy® (“Maggiano’s”) restaurant brands. At March 25, 2020, we owned, operated or franchised 1,675 restaurants, consisting of 1,117 Company-owned restaurants and 558 franchised restaurants, located in the United States, 29 countries and two United States territories.
Basis of Presentation
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 during the reporting periods. Actual results could differ from those estimates.
The foreign currency translation adjustment included in Comprehensive income in the Consolidated Statements of Comprehensive Income (Unaudited) represents the unrealized impact of translating the financial statements of our Canadian restaurants from Canadian dollars to United States dollars. This amount is not included in Net income and would only be realized upon disposition of our Canadian restaurants. The related Accumulated other comprehensive loss (“AOCL”) is presented in the Consolidated Balance Sheets (Unaudited).
The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, necessary to fairly state the interim operating results, financial position and cash flows for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been omitted pursuant to SEC rules and regulations. The Notes to the Consolidated Financial Statements (Unaudited) should be read in conjunction with the Notes to the Consolidated Financial Statements contained in our June 26, 2019 Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes. All amounts in the Notes to the Consolidated Financial Statements (Unaudited) are presented in millions unless otherwise specified.
New Accounting Standards Adopted
ASU 2016-02, Leases (Topic 842) - In February 2016, the FASB issued ASU 2016-02, and subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates require a lessee to recognize in the balance sheet a liability to make lease payments and a corresponding right-of-use asset for virtually all leases, other than leases with a term of 12 months or less if the short-term lease exclusion expedient is elected. The updates also require additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. These updates were effective for annual and interim periods for fiscal years beginning after December 15, 2018, which required us to adopt these provisions in the first quarter of fiscal 2020. Refer to Note 4 - Leases for disclosures about our adoption.
The impact of additional accounting standard updates that have not yet been adopted can be found at Note 16 - Effect of New Accounting Standards.
2. NOVEL CORONAVIRUS PANDEMIC
In March 2020, the impact from the spreading of a novel strain of coronavirus (“COVID-19”) pandemic was declared a National Public Health Emergency and resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions as have been mandated or encouraged by federal, state and local governments. As of March 25, 2020, we have closed all of our dining and banquet rooms and have moved to an off-premise model. We have not experienced any shortages or service disruptions in our supply chain or the availability of labor to operate restaurants.
Our third quarter of fiscal 2020 results included the impact from the COVID-19 pandemic. Both Chili’s and Maggiano’s are able to serve our guests in this current off-premise model due to our strategic decision to enhance off-premise business over the last three years including online ordering, mobile app, 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. In the third quarter of fiscal 2020, we experienced a decline in Company sales compared to the third quarter of fiscal 2019 primarily due to decreased restaurant traffic as a result of the COVID-19 pandemic.
We expect the decreased traffic and temporary dining and banquet room closures to continue through most of the fourth quarter of fiscal 2020 for the majority of our Company-owned restaurants. Where dining and banquet rooms are closed, we expect our restaurants will continue offering off-premise options, except for 10 restaurants that have been temporarily closed due to their location within a closed structure or other local regulations. Our strategic decision to enhance our off-premise business has enabled us to conveniently serve a significantly higher volume of off-premise guests during this pandemic. In response to this impact, due to the uncertainty in the economy and to preserve liquidity, we have taken proactive measures to reduce costs and paused non-critical projects that do not significantly impact our current operations. These measures included:
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•
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Significantly reduced capital expenditures to essential spend only, including suspending the Chili’s remodel program and delaying construction of new restaurants;
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•
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Reduced pay for corporate leadership and team members, as well as above-restaurant level leadership;
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•
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Reduced marketing, general and administrative and restaurant expenses not related to supporting the off-premise only business model;
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•
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Suspended the quarterly cash dividend and all share repurchase activity; and
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•
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Engaged in discussions with our landlords, vendors and other business partners to reduce or defer our lease and other contractual payments and obtain other concessions.
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At this time, the duration and extent of COVID-19’s impact is not reasonably possible to estimate due to the uncertainty about the spread of the virus. This could lead to lower sales, further restaurant closures, delays in our supply chain, or ability to staff accordingly which could adversely impact our financial results.
Valuation of Goodwill and Indefinite-Lived Intangibles
Despite the significant excess fair value identified in our goodwill impairment assessment performed at the end of the second quarter of fiscal 2020, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic could indicate that an impairment loss may have been incurred. Therefore, we evaluated the US GAAP Accounting Standards Codifications (“ASC”) 350-20-35 - Intangible Assets - Goodwill and Other - Goodwill and assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of March 25, 2020. We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our restaurants from the COVID-19 pandemic, (2) current discount rates, (3) the reduction in our market capitalization, (4) observable market transactions, and (5) changes to the regulatory environment.
Based on our interim impairment assessment as of March 25, 2020, we have determined that our goodwill and indefinite-lived intangible assets are not impaired. These analyses are predicated on our ability to operate dining and banquet
rooms 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 to rigorously evaluate the likelihood of any potential impairment charges at our restaurants and reporting units.
Valuation of Long-lived Assets
Our Net property and equipment and Operating lease assets have recorded values of $832.1 million and $1,159.9 million, respectively, as of March 25, 2020 in the Consolidated Balance Sheets (Unaudited). We review these assets for impairment losses semi-annually, which was last regularly performed at the end of the second quarter of fiscal 2020. As part of the negative effect on our business from the COVID-19 pandemic, as described above, we evaluated ASC 360-10-40 - Property, Plant, and Equipment - Impairment or Disposal of Long-Lived Assets, and determined as of March 25, 2020, there was no impairment related to long-lived and operating lease assets.
As we obtain greater clarity about the duration and extent of regulatory requirements related to the COVID-19 pandemic, including when our dining rooms will reopen, what operational restrictions may be imposed, our ability to staff reopened dining rooms, and whether customers will re-engage with our brands, we will continue to evaluate our long-lived assets for potential impairment.
Rent Concessions
In response to the pandemic, subsequent to the third quarter of fiscal 2020, certain landlords have provided temporary rent concessions. These concessions primarily relate to the deferral of certain fourth quarter of fiscal 2020 rent payments until future periods. We intend to consider recent FASB staff guidance to account for these lease agreements. Additionally, for locations that rent concessions have not yet been received, we have taken measures to reduce rent payments and are in the process of contacting these landlords for further discussion on the remaining payable due.
COVID-19 Related Charges
Certain charges related to the COVID-19 pandemic were recorded in Other (gains) and charges in the Consolidated Statements of Comprehensive Income for the periods presented. In the thirteen and thirty-nine week periods ended March 25, 2020, these charges included:
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•
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Employee assistance - $15.5 million related to both Chili’s and Maggiano’s employee assistance payments for the team members that experienced reduced shifts during this pandemic, who would have otherwise not received such payment under our normal compensation practices; and
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•
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Inventory spoilage - $0.6 million due to the unexpected decline in traffic and dining room closures.
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3. 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 (Unaudited).
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 (Unaudited) from the date of acquisition. The final purchase price allocation was completed in the third quarter of fiscal 2020. The assets and liabilities of these restaurants are recorded at their fair values.
The acquired restaurants in the normal course of business are expected to generate approximately $300.0 million of annualized revenues which will be partially offset by the loss of average annualized royalty and advertising revenues of approximately $22.0 million. During the thirteen and thirty-nine week periods ended March 25, 2020, since the acquisition date, these restaurants generated Company sales of $72.0 million and $158.2 million, respectively, these
results included a decrease in normal operations in the third quarter of fiscal 2020 from the COVID-19 pandemic. Refer to Note 2 - Novel Coronavirus Pandemic for further details.
Net acquisition-related charges of $1.0 million and $2.5 million were recorded during the thirteen and thirty-nine week periods ended March 25, 2020, respectively, to Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited). In the thirteen week period ended March 25, 2020, the net charges consisted of $1.0 million of professional services, transaction and transition related costs. In the thirty-nine week period ended March 25, 2020, the net charges consisted of $4.1 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)
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Current assets included petty cash, inventory, and restaurant supplies.
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(2)
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Reacquired franchise rights have a weighted average amortization period of approximately 8 years.
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(3)
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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.
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(4)
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Current liabilities included current portion of operating lease liabilities, gift card liability and accrued property tax.
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(5)
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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 (refer to Note 4 - Leases for more information).
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4. LEASES
As of March 25, 2020, 1,074 of our 1,117 Company-owned restaurant facilities were leased. We typically lease our restaurant facilities through ground leases (where we lease land only, but own the building) or retail leases (where we lease the land/retail space and building). 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 technology and other restaurant equipment. Our lease agreements do not contain any material residual value guarantees or material covenant restrictions.
Adoption of ASC 842
Transition and Practical Expedient Elections
We adopted FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from the previous guidance ASC Topic 840, Leases (“Legacy GAAP”) effective June 27, 2019, the first day of fiscal 2020. We adopted ASC 842 using the alternative transition method, such that our fiscal 2020 Consolidated Financial Statements (Unaudited) reflect ASC 842, while our prior period Consolidated Financial Statements (Unaudited) were prepared under Legacy GAAP and have not been restated. In connection with the adoption of ASC 842, we elected the following practical expedients and policies:
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Package of practical expedients - the election of this package allowed us to carry forward our historical lease classification and our assessment of whether a contract is or contains a lease for any leases that existed prior to the adoption of ASC 842.
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•
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Combine lease and non-lease components policy - we elected for all classes of underlying leased assets to account for lease and non-lease components (such as common area maintenance) and include executory costs (such as property taxes and insurance) to combine as a single lease component.
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Short-term lease policy - we elected the short-term lease exemption from balance sheet recognition for all classes of underlying assets with an initial term of 12 months or less and that do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Short-term leases are expensed as incurred in Restaurant expenses in the Consolidated Statements of Comprehensive Income (Unaudited)
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We did not elect the hindsight practical expedient that permitted a reassessment of lease terms for existing leases.
Lease Accounting Policy under ASC 842
ASC 842 requires lessees to recognize on the balance sheet at lease commencement 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. The lease term commences on the date the lessor makes the underlying property 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 will generally be 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 right-of-use lease asset will generally be 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, 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. 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 liability.
The 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 or General and administrative for our corporate headquarters, respectively, in the Consolidated Statements of Comprehensive Income
(Unaudited), and are not included in lease liabilities in the Consolidated Balance Sheets (Unaudited). 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, or General and administrative for our corporate headquarters, in the Consolidated Statements of Comprehensive Income (Unaudited), respectively.
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 (Unaudited). Interest on each finance lease liability is recorded to Interest expenses in the Consolidated Statements of Comprehensive Income (Unaudited).
Financial Statement Impact of ASC 842 Adoption
The adoption of ASC 842 represents a change in accounting principle. The adoption did not have a significant impact in the Consolidated Statements of Comprehensive Income (Unaudited) or Consolidated Statements of Cash Flows (Unaudited). Upon adoption, there was a material increase in Total assets and Total liabilities in the Consolidated Balance Sheets (Unaudited) primarily due to the recognition of operating lease assets and related lease liabilities where we are the lessee. The table below reflects the balance sheet adoption impact related to ASC 842 as an adjustment at June 27, 2019, the first day of fiscal 2020 (condensed, unaudited):
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Legacy GAAP
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ASC 842 Cumulative Adjustments
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ASC 842
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June 26, 2019
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June 27, 2019
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ASSETS
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Current assets(1)
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$
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177.0
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$
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0.3
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$
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177.3
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Other assets
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Operating lease assets(2)
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—
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1,034.3
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1,034.3
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Deferred income taxes, net(3)
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112.0
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(65.1
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)
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46.9
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Intangibles, net(1)
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22.3
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(4.1
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)
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18.2
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LIABILITIES AND SHAREHOLDERS’ DEFICIT
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Current liabilities
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Operating lease liabilities(4)
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—
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110.8
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110.8
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Other accrued liabilities(1)(5)
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141.1
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(38.3
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)
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102.8
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Long-term operating lease liabilities, less current portion(4)
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—
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1,044.9
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1,044.9
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Deferred gain on sale leaseback transactions(5)
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255.3
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(255.3
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)
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—
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Other liabilities(1)
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153.0
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(92.6
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)
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60.4
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Retained earnings
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2,771.2
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195.9
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2,967.1
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(1)
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The following prior lease balances were reclassified into Operating lease assets upon adoption of ASC 842:
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–
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Current assets adjustment related to the prepaid rent.
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–
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Intangibles, net adjustment related to the favorable lease asset position.
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–
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Other accrued liabilities and Other liabilities balances adjustments related to the current and long-term portions of straight-line rent balances, unfavorable lease liability positions, exit-related lease accruals, and landlord contributions.
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Additionally, Other accrued liabilities included $19.3 million of deferred gain on sale leaseback transactions that was eliminated as a cumulative effect adjustment to Retained earnings upon adoption, refer to (5) below for further details. Refer to Note 11 - Accrued and Other Liabilities for June 26, 2019 balance details.
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(2)
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Operating lease assets represents the capitalization of operating lease assets equal to the amount of recognized operating lease liability as described in (4) below, adjusted by the net carrying amounts described in (1) above, and $15.5 million related to the impairment of certain operating lease assets for restaurant facilities previously fully impaired under our long-lived asset impairment policy that were recorded to Retained earnings.
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(3)
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Deferred income taxes, net was reduced by $68.6 million related to the elimination of the deferred gain on sale leaseback transactions as described in (5) below, partially offset by $3.5 million related to the impact of adopting ASC 842 and recording the operating lease assets and liabilities.
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(4)
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Operating lease liabilities, both current and long-term, represents the liabilities 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 upon date of adoption.
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(5)
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Deferred gain on sale leaseback transactions balance of $255.3 million, the related short-term deferred gain balance recorded within Other accrued liabilities of $19.3 million, and the associated Deferred income taxes, net of $68.6 million as described in (3) above, were eliminated upon ASC 842 adoption into Retained earnings as required by ASC 842 using the alternative transition method. No further gain will be amortized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income effective fiscal 2020.
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Lease Amounts Included in the Thirteen and Thirty-Nine Week Periods Ended March 25, 2020
Consolidated Balance Sheet Disclosure of Lease Amounts
The following table includes a detail of lease asset and liabilities included in the Consolidated Balance Sheets (Unaudited):
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March 25, 2020
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Finance
Leases(1)
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Operating
Leases(2)
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Total Leases
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Lease assets
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$
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77.5
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$
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1,159.9
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$
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1,237.4
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Current lease liabilities
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13.0
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120.7
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133.7
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Long-term lease liabilities
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83.5
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1,154.2
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1,237.7
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Total lease liabilities
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$
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96.5
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$
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1,274.9
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$
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1,371.4
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(1)
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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.
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(2)
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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.
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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 (Unaudited) as follows:
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Thirteen Week Period Ended March 25, 2020
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Thirty-Nine Week Period Ended March 25, 2020
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Operating lease cost
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$
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41.8
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$
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121.0
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Finance lease amortization
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8.0
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13.7
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Finance lease interest
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1.2
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3.2
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Short-term lease cost
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0.5
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1.2
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Variable lease cost
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15.6
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43.9
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Sublease (income)
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(1.2
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)
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(3.5
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)
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Total lease costs, net
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$
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65.9
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$
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179.5
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Consolidated Statement of Cash Flows Disclosure of Lease Amounts
Supplemental cash flow information related to leases recorded in the Consolidated Statements of Cash Flows (Unaudited) is as follows:
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Thirty-Nine Week Period Ended March 25, 2020
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Cash flows from operating activities
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Cash paid related to lease liabilities
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Operating leases
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$
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126.0
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Finance leases
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3.2
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Cash flows from financing activities
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Cash paid related to lease liabilities
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Finance leases
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12.4
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Non-cash lease assets obtained in exchange for lease liabilities
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Operating leases(1)
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216.4
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Finance leases(1)
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60.5
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(1)
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New lease assets obtained, net of lease liabilities primarily related to the new and assumed operating and finance leases from the Chili’s restaurant acquisition. Refer to Note 3 - Chili’s Restaurant Acquisition and “Significant Changes in Leases during the Period” section below for more information.
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Weighted Average Lease Term and Discount Rate
Other information related to leases is as follows:
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March 25, 2020
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Finance Leases
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Operating Leases
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Weighted average remaining lease term
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10.1 years
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11.8 years
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Weighted average discount rate
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5.0
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%
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4.3
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%
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Lease Maturity Analysis
As of March 25, 2020, accounted for and presented under ASC 842 guidance, the discounted future minimum lease payments on finance and operating leases, as well as sublease income were as follows:
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|
|
|
March 25, 2020
|
|
Fiscal Year
|
Finance Leases
|
|
Operating Leases
|
|
Sublease (Income)
|
|
Remainder of 2020
|
$
|
6.7
|
|
|
$
|
43.5
|
|
|
$
|
(0.8
|
)
|
|
2021
|
15.1
|
|
|
171.0
|
|
|
(3.4
|
)
|
|
2022
|
17.1
|
|
|
165.0
|
|
|
(3.3
|
)
|
|
2023
|
15.3
|
|
|
154.2
|
|
|
(2.6
|
)
|
|
2024
|
10.3
|
|
|
144.2
|
|
|
(1.9
|
)
|
|
Thereafter
|
61.3
|
|
|
986.9
|
|
|
(6.7
|
)
|
|
Total future lease payments(1)
|
125.8
|
|
|
1,664.8
|
|
|
$
|
(18.7
|
)
|
|
Less: Imputed interest
|
29.3
|
|
|
389.9
|
|
|
|
|
Present value of lease liability
|
$
|
96.5
|
|
|
$
|
1,274.9
|
|
|
|
|
|
|
|
(1)
|
Total future lease payments as of March 25, 2020 included non-cancelable lease commitments of $104.5 million for finance leases, and $1,094.1 million for operating leases.
|
As of June 26, 2019, as previously disclosed in our fiscal 2019 Form 10-K under Legacy GAAP, undiscounted future minimum lease payments on both capital and operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 26, 2019
|
|
Fiscal Year
|
Capital Leases
|
|
Operating Leases(2)
|
|
2020
|
$
|
12.3
|
|
|
$
|
156.8
|
|
|
2021
|
10.1
|
|
|
154.5
|
|
|
2022
|
8.2
|
|
|
148.6
|
|
|
2023
|
6.7
|
|
|
137.7
|
|
|
2024
|
6.0
|
|
|
127.6
|
|
|
Thereafter
|
17.4
|
|
|
771.7
|
|
|
Total minimum lease payments(1)
|
60.7
|
|
|
$
|
1,496.9
|
|
|
Imputed interest (average rate of 6.18%)
|
(12.3
|
)
|
|
|
|
Present value of minimum lease payments
|
48.4
|
|
|
|
|
Less current capital lease obligations
|
(9.7
|
)
|
|
|
|
Long-term capital lease obligations
|
$
|
38.7
|
|
|
|
|
|
|
|
(1)
|
Total minimum lease payments were not reduced by minimum sublease rentals to be received in the future under non-cancelable subleases. The total of undiscounted future sublease rentals was approximately $22.0 million and $14.6 million for capital and operating subleases, respectively, as of June 26, 2019.
|
|
|
|
|
(2)
|
Operating lease expenses for the fifty-two weeks ended June 26, 2019, recorded under Legacy GAAP, totaled $158.6 million, which included $141.7 million for straight-lined minimum rent, $3.3 million for contingent rent, and $13.6 million of other rent-related expenses.
|
Significant Changes in Leases during the Period
In the first quarter of fiscal 2020, as part of the Chili’s restaurant acquisition, we assumed and entered into 90 new operating leases included in the balances at March 25, 2020. The leases were recorded net of purchase price accounting adjustments and prepaid rent. At March 25, 2020, the balances associated with these new leases in the Consolidated
Balance Sheets (Unaudited) include Operating lease assets of $167.1 million, Operating lease liabilities of $5.2 million, and Long-term operating lease liabilities, less current portion of $160.1 million.
Additionally related to this transaction, we entered into 12 new finance leases with the initial terms of approximately 11 years, plus renewal options. At March 25, 2020, the balances associated with these finance leases in the Consolidated Balance Sheets (Unaudited) include Buildings and leasehold improvements of $25.1 million, Other accrued liabilities of $0.6 million, and Long-term debt and finance leases, less current installments of $24.6 million. Refer to Note 3 - Chili’s Restaurant Acquisition for information about the acquisition.
Pre-Commencement Leases
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 have been received, plus one 3-year renewal option. We began receiving the table-top devices in the second quarter of fiscal 2020 and will continue over the remaining course of fiscal 2020. The lease balances at March 25, 2020 related to the devices received through end of the third quarter of fiscal 2020 are included in the finance lease balances in the Consolidated Balance Sheets (Unaudited). The undiscounted fixed payments over the initial term of the lease, net of lease incentives for the remaining devices not received by March 25, 2020 is $12.2 million.
Additionally, we have executed two leases for new Chili’s locations with undiscounted fixed payments over the initial term of $7.2 million. These leases are expected to commence during 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.
Fiscal 2019 Sale Leaseback Transactions
Restaurant Properties Sale Leaseback Transactions
In the thirteen week period ended March 27, 2019, we completed sale leaseback transactions of four restaurant properties which were sold for aggregate consideration of $11.1 million. The balances attributable to the restaurant assets sold included Land of $3.9 million, Buildings and leasehold improvements of $6.7 million, certain fixtures included in Furniture and equipment of $0.2 million, and Accumulated depreciation of $3.1 million. The total gain was $3.4 million.
In the thirty-nine week period ended March 27, 2019, we completed sale leaseback transactions of 149 restaurant properties which were sold for aggregate consideration of $477.4 million. The balances attributable to the restaurant assets sold included Land of $110.4 million, Buildings and leasehold improvements of $231.1 million, certain fixtures included in Furniture and equipment of $9.8 million, and Accumulated depreciation of $172.7 million. The total gain was $298.8 million and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.
Lease Details
The initial terms of all leases included in the sale leaseback transactions were for 15 years, plus renewal options at our discretion. All of these leases were determined to be operating leases under legacy GAAP. Rent expenses associated with these operating leases were recognized on a straight-line basis over the lease terms under Legacy GAAP during fiscal 2019. As of June 26, 2019, the straight-line rent accrual balance of $62.3 million was included in Other accrued liabilities (current portion) and Other liabilities (long-term portion) in the Consolidated Balance Sheets (Unaudited) which included $2.8 million associated with these operating leases that were reclassified into the Operating lease assets balance upon adoption of ASC 842 effective June 27, 2019, the first day of fiscal 2020.
Gain and Deferred Gain Recognition
In fiscal 2019, under legacy GAAP, 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. During the thirteen and thirty-nine week periods ended March 27, 2019, $4.7 million and $29.4 million of the gain, less transaction costs incurred of $0.4 million and $7.4 million, respectively, related to professional services, legal and accounting fees, was recognized to Other (gains) and charges in the Consolidated
Statements of Comprehensive Income (Unaudited), respectively. As of June 26, 2019, the remaining balance of the deferred gain of $274.6 million was recorded in Other accrued liabilities (current portion) and Deferred gain on sale leaseback transactions (long-term portion) in the Consolidated Balance Sheets (Unaudited). 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. Refer above for ASC 842 adoption details. For any future sale leaseback transactions under the ASC 842 guidance, the gain, adjusted for any off-market terms, will be recognized immediately in most cases.
5. REVENUE RECOGNITION
Deferred Development and Franchise Fees
Our deferred development and franchise 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. We also expect to earn subsequent period royalties and advertising fees related to our franchise contracts; however, these future revenues are not yet determinable due to unsatisfied performance obligations based upon a sales-based measure.
The unrecognized fees received from franchisees are classified within Other accrued liabilities (current portion) and Other liabilities (long-term portion) in the Consolidated Balance Sheets (Unaudited). A summary of significant changes to the related deferred balance during the thirty-nine week period ended March 25, 2020 is presented below, followed by the revenues expected to be recognized in the subsequent periods based on current information.
|
|
|
|
|
|
|
|
|
Deferred Development and Franchise Fees
|
|
Balance at June 26, 2019
|
$
|
16.2
|
|
|
Additions
|
0.8
|
|
|
Amount recognized for Chili’s restaurant acquisition(1)
|
(2.6
|
)
|
|
Amount recognized to Franchise and other revenues
|
(1.3
|
)
|
|
Balance at March 25, 2020
|
$
|
13.1
|
|
|
|
|
|
(1)
|
Deferred development and franchise fees remaining balances 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 (Unaudited).
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Development and Franchise Fees Revenue Recognition
|
|
Remainder of 2020
|
$
|
0.3
|
|
|
2021
|
1.1
|
|
|
2022
|
1.0
|
|
|
2023
|
1.0
|
|
|
2024
|
1.0
|
|
|
Thereafter
|
8.7
|
|
|
|
$
|
13.1
|
|
6. OTHER GAINS AND CHARGES
Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
March 25,
2020
|
|
March 27,
2019
|
|
COVID-19 related charges
|
$
|
16.1
|
|
|
$
|
—
|
|
|
$
|
16.1
|
|
|
$
|
—
|
|
|
Foreign currency transaction (gain) loss
|
2.3
|
|
|
(0.5
|
)
|
|
2.2
|
|
|
(0.6
|
)
|
|
Acquisition of franchise restaurants costs, net of (gains)
|
1.1
|
|
|
—
|
|
|
2.6
|
|
|
—
|
|
|
Remodel-related costs
|
0.6
|
|
|
1.7
|
|
|
2.1
|
|
|
4.8
|
|
|
Restaurant closure charges
|
0.3
|
|
|
0.2
|
|
|
3.4
|
|
|
4.0
|
|
|
Corporate headquarters relocation charges
|
0.2
|
|
|
5.2
|
|
|
0.9
|
|
|
6.2
|
|
|
Loss (gain) on sale of assets, net
|
0.1
|
|
|
(6.0
|
)
|
|
—
|
|
|
(6.8
|
)
|
|
Restaurant impairment charges
|
—
|
|
|
—
|
|
|
4.6
|
|
|
1.0
|
|
|
Lease modification net (gain)
|
—
|
|
|
—
|
|
|
(3.1
|
)
|
|
—
|
|
|
Sale leaseback (gain), net of transaction charges
|
—
|
|
|
(4.3
|
)
|
|
—
|
|
|
(22.0
|
)
|
|
Other
|
(1.4
|
)
|
|
0.2
|
|
|
1.9
|
|
|
1.0
|
|
|
|
$
|
19.3
|
|
|
$
|
(3.5
|
)
|
|
$
|
30.7
|
|
|
$
|
(12.4
|
)
|
Fiscal 2020
|
|
|
|
•
|
COVID-19 related charges during the thirteen and thirty-nine week periods ended March 25, 2020 were incurred from the initial impact and our efforts to address the COVID-19 pandemic beginning in the third quarter of fiscal 2020, refer to Note 2 - Novel Coronavirus Pandemic for further details.
|
|
|
|
|
•
|
Foreign currency transaction (gain) loss resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable that we received as consideration from the sale of our equity interest in our Mexico joint venture in the second quarter of fiscal 2018.
|
|
|
|
|
•
|
Acquisition of franchise restaurants costs, net of (gains) during the thirteen and thirty-nine week periods ended March 25, 2020 primarily related to the 116 restaurants acquired from a franchisee, refer to Note 3 - Chili’s Restaurant Acquisition for further details.
|
|
|
|
|
•
|
Remodel-related costs during the thirteen and thirty-nine week periods ended March 25, 2020 were recorded related to existing fixed asset write-offs associated with the Chili’s remodel project.
|
|
|
|
|
•
|
Restaurant closure charges during the thirteen and thirty-nine week periods ended March 25, 2020 primarily related to leases on certain closed Chili’s restaurant locations.
|
|
|
|
|
•
|
Corporate headquarters relocation charges during the thirteen and thirty-nine week periods ended March 25, 2020 related to costs associated with the previous corporate headquarters location.
|
|
|
|
|
•
|
Restaurant impairment charges during the thirty-nine week period ended March 25, 2020 primarily related to the long-lived and operating lease assets of 10 underperforming Chili’s restaurants.
|
Fiscal 2019
|
|
|
|
•
|
Foreign currency transaction (gain) loss resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable.
|
|
|
|
|
•
|
Remodel-related costs during the thirteen and thirty-nine week periods ended March 27, 2019 were recorded related to existing fixed asset write-offs associated with the Chili’s remodel project.
|
|
|
|
|
•
|
Restaurant closure charges during the thirteen and thirty-nine week periods ended March 27, 2019 were primarily related to Chili’s lease termination charges and certain Chili’s restaurant closure costs.
|
|
|
|
|
•
|
Corporate headquarters relocation charges during the thirteen and thirty-nine week periods ended March 27, 2019 included costs associated with the previous corporate headquarters location and accelerated depreciation on certain leasehold improvements associated with the leased portion of our previous corporate headquarters property which closed in the third quarter of fiscal 2019.
|
|
|
|
|
•
|
Loss (gain) on sale of assets, net during the thirteen and thirty-nine week periods ended March 27, 2019 primarily included $5.8 million for the net gain recognized on the sale of the owned portion of our previous corporate headquarters building, and additionally included in the thirty-nine week period ended March 27, 2019 is $0.8 million of gain recognized on the sale of land in Scottsdale, AZ and Pensacola, FL.
|
|
|
|
|
•
|
Restaurant impairment charges during the thirty-nine week period ended March 27, 2019 were primarily related to the long-lived assets of two underperforming Chili’s restaurants.
|
|
|
|
|
•
|
Sale leaseback (gain), net of transaction charges during the thirteen and thirty-nine week periods ended March 27, 2019 related to the fiscal 2019 sale leaseback transactions, refer to Note 4 - Leases for further details on this transaction.
|
7. INCOME TAXES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Effective income tax rate
|
(13.2
|
)%
|
|
10.3
|
%
|
|
(0.8
|
)%
|
|
11.7
|
%
|
The federal statutory tax rate for all periods presented was 21.0%.
Fiscal 2020
Our fiscal 2020 effective income tax rates for the thirteen and thirty-nine week periods ended March 25, 2020 were lower than the federal statutory rate primarily due to reduced profitability related to the COVID-19 pandemic in the third quarter of fiscal 2020, and the FICA tax credit in fiscal 2020. The provision for income taxes includes a significant reduction in the third quarter of fiscal 2020 necessary to align the year-to-date provision for income taxes to the year-to-date income.
A reconciliation between the reported provision for income taxes and the amount computed by applying the statutory Federal income tax rate to Provision (benefit) for income taxes is as follows for the thirty-nine week period ended March 25, 2020:
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended
|
|
|
March 25,
2020
|
|
Income tax expense at statutory rate
|
$
|
15.3
|
|
|
FICA tax credit
|
(22.1
|
)
|
|
State income taxes, net of Federal benefit
|
5.2
|
|
|
Other
|
1.0
|
|
|
Provision (benefit) for income taxes
|
$
|
(0.6
|
)
|
Fiscal 2019
Our fiscal 2019 effective income tax rates for the thirteen and thirty-nine week periods ended March 27, 2019 were lower than the federal statutory rate due to the favorable impact from the FICA tax credit, partially offset by the impact of the sale leaseback transactions.
The sale leaseback transactions gains, as described in Note 4 - Leases, were recognized for tax purposes when each transaction was completed during fiscal 2019, and as such, related taxes of $76.0 million were recognized during the thirty-nine week period ended March 27, 2019. We paid $75.0 million of these taxes in the thirty-nine week period ended March 27, 2019, with the remaining $1.0 million paid in the fourth quarter of fiscal 2019.
8. NET INCOME PER SHARE
Basic net income per share is computed by dividing Net income by the Basic weighted average shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of Diluted net income per share, the Basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the Diluted net income per share calculation. Basic weighted average shares outstanding are reconciled to Diluted weighted average shares outstanding as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Basic weighted average shares outstanding
|
37.2
|
|
|
37.5
|
|
|
37.3
|
|
|
38.6
|
|
|
Dilutive stock options
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
|
Dilutive restricted shares
|
0.5
|
|
|
0.5
|
|
|
0.6
|
|
|
0.5
|
|
|
Total dilutive impact
|
0.6
|
|
|
0.6
|
|
|
0.7
|
|
|
0.7
|
|
|
Diluted weighted average shares outstanding
|
37.8
|
|
|
38.1
|
|
|
38.0
|
|
|
39.3
|
|
|
|
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect
|
1.4
|
|
|
0.8
|
|
|
1.3
|
|
|
0.9
|
|
9. SEGMENT INFORMATION
Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our Company-owned Chili’s restaurants in the United States and Canada as well as the results from our domestic and international franchise businesses. 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.
Company sales include revenues generated by the operation of Company-owned restaurants including gift card redemptions. Franchise and other revenues include Royalties and Franchise fees and other revenues. Franchise fees and other revenues include Maggiano’s banquet service charge income, gift card breakage, gift card equalization, gift card discount costs from third-party gift card sales, advertising fees, digital entertainment revenues, delivery fee income, franchise and development fees, merchandise income, and retail royalty revenues. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly in the United States. There were no material transactions amongst our operating segments.
Our chief operating decision maker uses Operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Company restaurant expenses include Food and beverage costs, Restaurant labor, and Restaurant expenses that primarily included restaurant rent, supplies, property and equipment maintenance, advertising expenses, utilities, credit card processing fees and property taxes. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended March 25, 2020
|
|
|
Chili’s(1)
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
|
Company sales
|
$
|
748.7
|
|
|
$
|
91.7
|
|
|
$
|
—
|
|
|
$
|
840.4
|
|
|
Royalties
|
9.4
|
|
|
0.1
|
|
|
—
|
|
|
9.5
|
|
|
Franchise fees and other revenues
|
6.3
|
|
|
3.8
|
|
|
—
|
|
|
10.1
|
|
|
Franchise and other revenues
|
15.7
|
|
|
3.9
|
|
|
—
|
|
|
19.6
|
|
|
Total revenues
|
764.4
|
|
|
95.6
|
|
|
—
|
|
|
860.0
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
648.4
|
|
|
84.3
|
|
|
0.1
|
|
|
732.8
|
|
|
Depreciation and amortization
|
36.5
|
|
|
3.8
|
|
|
3.2
|
|
|
43.5
|
|
|
General and administrative
|
5.9
|
|
|
1.1
|
|
|
16.3
|
|
|
23.3
|
|
|
Other (gains) and charges
|
14.9
|
|
|
2.4
|
|
|
2.0
|
|
|
19.3
|
|
|
Total operating costs and expenses
|
705.7
|
|
|
91.6
|
|
|
21.6
|
|
|
818.9
|
|
|
Operating income (loss)
|
58.7
|
|
|
4.0
|
|
|
(21.6
|
)
|
|
41.1
|
|
|
Interest expenses
|
1.1
|
|
|
—
|
|
|
13.2
|
|
|
14.3
|
|
|
Other (income), net
|
(0.1
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
(0.4
|
)
|
|
Income (loss) before provision for income taxes
|
$
|
57.7
|
|
|
$
|
4.0
|
|
|
$
|
(34.5
|
)
|
|
$
|
27.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended March 27, 2019
|
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
|
Company sales
|
$
|
709.8
|
|
|
$
|
101.8
|
|
|
$
|
—
|
|
|
$
|
811.6
|
|
|
Royalties
|
13.4
|
|
|
0.1
|
|
|
—
|
|
|
13.5
|
|
|
Franchise fees and other revenues
|
9.5
|
|
|
4.7
|
|
|
—
|
|
|
14.2
|
|
|
Franchise and other revenues
|
22.9
|
|
|
4.8
|
|
|
—
|
|
|
27.7
|
|
|
Total revenues
|
732.7
|
|
|
106.6
|
|
|
—
|
|
|
839.3
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
604.1
|
|
|
91.2
|
|
|
0.1
|
|
|
695.4
|
|
|
Depreciation and amortization
|
29.8
|
|
|
3.9
|
|
|
2.7
|
|
|
36.4
|
|
|
General and administrative
|
10.5
|
|
|
1.3
|
|
|
29.0
|
|
|
40.8
|
|
|
Other (gains) and charges
|
(3.0
|
)
|
|
—
|
|
|
(0.5
|
)
|
|
(3.5
|
)
|
|
Total operating costs and expenses
|
641.4
|
|
|
96.4
|
|
|
31.3
|
|
|
769.1
|
|
|
Operating income (loss)
|
91.3
|
|
|
10.2
|
|
|
(31.3
|
)
|
|
70.2
|
|
|
Interest expenses
|
0.6
|
|
|
—
|
|
|
14.7
|
|
|
15.3
|
|
|
Other (income), net
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
Income (loss) before provision for income taxes
|
$
|
90.7
|
|
|
$
|
10.2
|
|
|
$
|
(45.4
|
)
|
|
$
|
55.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended March 25, 2020
|
|
|
Chili’s(1)
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
|
Company sales
|
$
|
2,154.6
|
|
|
$
|
297.2
|
|
|
$
|
—
|
|
|
$
|
2,451.8
|
|
|
Royalties
|
31.1
|
|
|
0.2
|
|
|
—
|
|
|
31.3
|
|
|
Franchise fees and other revenues
|
17.4
|
|
|
14.8
|
|
|
—
|
|
|
32.2
|
|
|
Franchise and other revenues
|
48.5
|
|
|
15.0
|
|
|
—
|
|
|
63.5
|
|
|
Total revenues
|
2,203.1
|
|
|
312.2
|
|
|
—
|
|
|
2,515.3
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
1,885.0
|
|
|
266.6
|
|
|
0.4
|
|
|
2,152.0
|
|
|
Depreciation and amortization
|
99.3
|
|
|
11.8
|
|
|
9.8
|
|
|
120.9
|
|
|
General and administrative
|
23.5
|
|
|
4.3
|
|
|
68.1
|
|
|
95.9
|
|
|
Other (gains) and charges
|
23.9
|
|
|
2.5
|
|
|
4.3
|
|
|
30.7
|
|
|
Total operating costs and expenses
|
2,031.7
|
|
|
285.2
|
|
|
82.6
|
|
|
2,399.5
|
|
|
Operating income (loss)
|
171.4
|
|
|
27.0
|
|
|
(82.6
|
)
|
|
115.8
|
|
|
Interest expenses
|
3.1
|
|
|
—
|
|
|
41.1
|
|
|
44.2
|
|
|
Other (income), net
|
(0.4
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
(1.4
|
)
|
|
Income (loss) before provision for income taxes
|
$
|
168.7
|
|
|
$
|
27.0
|
|
|
$
|
(122.7
|
)
|
|
$
|
73.0
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets(2)
|
$
|
2,081.7
|
|
|
$
|
245.1
|
|
|
$
|
258.6
|
|
|
$
|
2,585.4
|
|
|
Segment goodwill
|
149.0
|
|
|
38.4
|
|
|
—
|
|
|
187.4
|
|
|
Payments for property and equipment
|
68.9
|
|
|
6.2
|
|
|
6.9
|
|
|
82.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended March 27, 2019
|
|
|
Chili’s
|
|
Maggiano’s
|
|
Other
|
|
Consolidated
|
|
Company sales
|
$
|
1,990.7
|
|
|
$
|
310.7
|
|
|
$
|
—
|
|
|
$
|
2,301.4
|
|
|
Royalties
|
39.5
|
|
|
0.1
|
|
|
—
|
|
|
39.6
|
|
|
Franchise fees and other revenues
|
26.6
|
|
|
16.2
|
|
|
—
|
|
|
42.8
|
|
|
Franchise and other revenues
|
66.1
|
|
|
16.3
|
|
|
—
|
|
|
82.4
|
|
|
Total revenues
|
2,056.8
|
|
|
327.0
|
|
|
—
|
|
|
2,383.8
|
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses
|
1,734.3
|
|
|
275.2
|
|
|
0.5
|
|
|
2,010.0
|
|
|
Depreciation and amortization
|
89.8
|
|
|
11.8
|
|
|
7.9
|
|
|
109.5
|
|
|
General and administrative
|
28.4
|
|
|
4.5
|
|
|
77.1
|
|
|
110.0
|
|
|
Other (gains) and charges(3)
|
(13.9
|
)
|
|
—
|
|
|
1.5
|
|
|
(12.4
|
)
|
|
Total operating costs and expenses
|
1,838.6
|
|
|
291.5
|
|
|
87.0
|
|
|
2,217.1
|
|
|
Operating income (loss)
|
218.2
|
|
|
35.5
|
|
|
(87.0
|
)
|
|
166.7
|
|
|
Interest expenses
|
2.3
|
|
|
0.2
|
|
|
43.8
|
|
|
46.3
|
|
|
Other (income), net
|
—
|
|
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
Income (loss) before provision for income taxes
|
$
|
215.9
|
|
|
$
|
35.3
|
|
|
$
|
(128.6
|
)
|
|
$
|
122.6
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
$
|
96.1
|
|
|
$
|
8.1
|
|
|
$
|
23.8
|
|
|
$
|
128.0
|
|
|
|
|
|
(1)
|
Chili’s segment information for fiscal 2020 includes the results of operations and fair value of assets and goodwill related to the 116 restaurants since the September 5, 2019 acquisition date. Refer to Note 3 - Chili’s Restaurant Acquisition for further details.
|
|
|
|
|
(2)
|
Segment assets for fiscal 2020 are presented in accordance with the newly adopted ASC 842 that now include Operating lease assets. Refer to Note 4 - Leases for further details.
|
|
|
|
|
(3)
|
Other (gains) and charges during the thirty-nine week period ended March 27, 2019 included the net impact from our completed sale leaseback transactions of 149 Company-owned Chili’s restaurant properties. Chili’s recognized a $22.0 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 (Unaudited). Refer to Note 4 - Leases for further details.
|
10. DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 25,
2020
|
|
June 26,
2019
|
|
Revolving credit facility
|
$
|
700.0
|
|
|
$
|
523.3
|
|
|
5.000% notes
|
350.0
|
|
|
350.0
|
|
|
3.875% notes
|
300.0
|
|
|
300.0
|
|
|
Finance lease obligations (Note 4)
|
96.5
|
|
|
48.4
|
|
|
Total long-term debt
|
1,446.5
|
|
|
1,221.7
|
|
|
Less: unamortized debt issuance costs and discounts
|
(4.6
|
)
|
|
(5.4
|
)
|
|
Total long-term debt, less unamortized debt issuance costs and discounts
|
1,441.9
|
|
|
1,216.3
|
|
|
Less: current installments of long-term debt and finance leases(1)
|
(13.0
|
)
|
|
(9.7
|
)
|
|
Long-term debt less current installments
|
$
|
1,428.9
|
|
|
$
|
1,206.6
|
|
|
|
|
|
(1)
|
Current installments of long-term debt consist only of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets (Unaudited). Refer to Note 11 - Accrued and Other Liabilities for further details.
|
Revolving Credit Facility
During the thirty-nine week period ended March 25, 2020, net borrowings of $176.7 million were drawn on the $1.0 billion revolving credit facility primarily to fund ongoing business operations, the acquisition of Chili’s restaurants (refer to Note 3 - Chili’s Restaurant Acquisition) and share repurchases. As of March 25, 2020, $300.0 million of credit was available under the revolving credit facility that was subsequently amended as described below.
The revolving credit facility generally bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.000%. At March 25, 2020 the revolver interest rate was 2.334% that consisted of one month LIBOR of 0.959% plus the related applicable revolver margin of 1.375%. LIBOR is set to terminate in December 2021, however our revolver will expire before this date and we anticipate any new financings will be at the applicable interest rates.
Under the revolving credit facility, the maturity date for $890.0 million of the facility is due on September 12, 2021. In the second quarter of fiscal 2020, we modified the $110.0 million portion of the revolving credit facility to extend the maturity date from March 12, 2020 to September 12, 2021, which coincides with the maturity date for the $890.0 million. We capitalized debt issuance costs of $1.0 million associated with this amendment, which are included in Other assets in the Consolidated Balance Sheets (Unaudited) at March 25, 2020.
Subsequent to the third quarter of fiscal 2020, we amended the revolving credit facility to provide additional liquidity and financial flexibility during the COVID-19 pandemic. The amendment provides a waiver of compliance with financial covenants until the end of the first quarter of fiscal 2021. As a result of this amendment, for a limited time our borrowing capacity has been reduced to $800.0 million, and the interest rate shall be increased to LIBOR plus 1.95%, with a maximum of LIBOR plus 2.25%. Additionally, the LIBOR floor was permanently increased to 0.75%. During this period, we have supplemental reporting obligations to the banks and will be prohibited from making dividends, stock repurchases and investments. Following this waiver period, we will return to $1.0 billion borrowing capacity, and also be subject to a $50.0 million aggregate limitation on dividends, stock repurchases and investments. This amendment also expanded the collateral securing the revolving credit facility, including intellectual property, among other things, and requires additional subsidiary guarantees. We have incurred certain debt issuance costs
associated with this amendment, which will be included in Other assets in the Consolidated Balance Sheets (Unaudited) in the fourth quarter of fiscal 2020.
5.000% Notes
In fiscal 2017, we completed the private offering of $350.0 million of our 5.000% senior notes due October 2024 (the “2024 Notes”). We received proceeds of $350.0 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The 2024 Notes require semi-annual interest payments which began in the fourth quarter of fiscal 2017.
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 revolving credit facility contains various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. As of March 25, 2020, pursuant to the amendment to the revolving credit facility described above, compliance with the financial covenants is waived until the end of the first quarter of fiscal 2021.
11. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 25,
2020
|
|
June 26,
2019
|
|
Insurance
|
$
|
21.0
|
|
|
$
|
17.9
|
|
|
Property tax
|
18.6
|
|
|
17.3
|
|
|
COVID-19-related costs(1)
|
15.4
|
|
|
—
|
|
|
Dividends(2)
|
15.1
|
|
|
14.9
|
|
|
Interest
|
14.6
|
|
|
7.5
|
|
|
Current installments of finance leases
|
13.0
|
|
|
9.7
|
|
|
Sales tax
|
12.6
|
|
|
14.6
|
|
|
Deferred franchise and development fees
|
1.4
|
|
|
1.4
|
|
|
Deferred sale leaseback gains(3)
|
—
|
|
|
19.3
|
|
|
Straight-line rent(3)
|
—
|
|
|
5.1
|
|
|
Landlord contributions(3)
|
—
|
|
|
2.7
|
|
|
Cyber security incident
|
—
|
|
|
0.8
|
|
|
Other(4)
|
22.2
|
|
|
29.9
|
|
|
|
$
|
133.9
|
|
|
$
|
141.1
|
|
|
|
|
|
(1)
|
COVID-19 related costs accrued at March 25, 2020 relate to employee relief payments. Refer to Note 2 - Novel Coronavirus Pandemic for further details.
|
|
|
|
|
(2)
|
Dividends included the current dividend payable on shares outstanding and current dividends previously accrued related to restricted share awards that will vest in the next year. Other liabilities contain the dividends accrued related to restricted shares that will vest after one year period. Refer to Note 12 - Shareholders’ Deficit for further details.
|
|
|
|
|
(3)
|
Upon the adoption of ASC 842, the Deferred sale leaseback gains were eliminated as a cumulative effect adjustment to Retained earnings. Additionally, Straight-line rent and Landlord contributions balances were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details.
|
|
|
|
|
(4)
|
Other primarily consisted of accruals for utilities and services, charitable donations, banquet deposits for Maggiano’s events, rent-related expenses, certain exit-related lease accruals and other various accruals. Accrual balances for certain exit-related lease accruals and rent-related expenses were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details.
|
Other liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 25,
2020
|
|
June 26,
2019
|
|
Insurance
|
$
|
36.7
|
|
|
$
|
36.8
|
|
|
Deferred franchise fees
|
11.7
|
|
|
14.8
|
|
|
Unrecognized tax benefits
|
2.3
|
|
|
2.1
|
|
|
Straight-line rent(1)
|
—
|
|
|
57.2
|
|
|
Landlord contributions(1)
|
—
|
|
|
32.9
|
|
|
Unfavorable leases(1)
|
—
|
|
|
2.8
|
|
|
Other
|
6.3
|
|
|
6.4
|
|
|
|
$
|
57.0
|
|
|
$
|
153.0
|
|
|
|
|
|
(1)
|
Straight-line rent, Landlord contributions, and Unfavorable leases balances were reclassified as a decrease to Operating lease assets upon the adoption of ASC 842. Refer to Note 4 - Leases for further details.
|
12. SHAREHOLDERS’ DEFICIT
The changes in Total shareholders’ deficit during the thirty-nine week periods ended March 25, 2020 and March 27, 2019, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended March 25, 2020
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings (Deficit)
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Total
|
|
Balance at June 26, 2019
|
$
|
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
|
—
|
|
|
—
|
|
|
14.9
|
|
|
—
|
|
|
—
|
|
|
14.9
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.6
|
)
|
|
—
|
|
|
—
|
|
|
(14.6
|
)
|
|
Stock-based compensation
|
—
|
|
|
7.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7.1
|
|
|
Purchases of treasury stock
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(11.0
|
)
|
|
—
|
|
|
(11.3
|
)
|
|
Issuances of common stock
|
—
|
|
|
(3.7
|
)
|
|
—
|
|
|
5.0
|
|
|
—
|
|
|
1.3
|
|
|
Balance at September 25, 2019
|
17.6
|
|
|
525.1
|
|
|
2,967.4
|
|
|
(4,089.4
|
)
|
|
(5.8
|
)
|
|
(585.1
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
27.9
|
|
|
—
|
|
|
—
|
|
|
27.9
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.6
|
)
|
|
—
|
|
|
—
|
|
|
(14.6
|
)
|
|
Stock-based compensation
|
—
|
|
|
2.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.6
|
|
|
Purchases of treasury stock
|
—
|
|
|
0.0
|
|
|
—
|
|
|
0.0
|
|
|
—
|
|
|
0.0
|
|
|
Issuances of common stock
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.2
|
|
|
Retirement of treasury stock
|
(11.4
|
)
|
|
—
|
|
|
(3,345.4
|
)
|
|
3,356.8
|
|
|
—
|
|
|
—
|
|
|
Balance at December 25, 2019
|
6.2
|
|
|
527.3
|
|
|
(364.7
|
)
|
|
(732.0
|
)
|
|
(5.7
|
)
|
|
(568.9
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
30.8
|
|
|
—
|
|
|
—
|
|
|
30.8
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.0
|
)
|
|
—
|
|
|
—
|
|
|
(14.0
|
)
|
|
Stock-based compensation
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
Purchases of treasury stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.0
|
)
|
|
—
|
|
|
(21.0
|
)
|
|
Issuances of common stock
|
—
|
|
|
(0.5
|
)
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.1
|
|
|
Balance at March 25, 2020
|
$
|
6.2
|
|
|
$
|
526.1
|
|
|
$
|
(347.9
|
)
|
|
$
|
(752.4
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
(574.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Period Ended March 27, 2019
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings (Deficit)
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
Total
|
|
Balance at June 27, 2018
|
$
|
17.6
|
|
|
$
|
511.6
|
|
|
$
|
2,683.0
|
|
|
$
|
(3,924.7
|
)
|
|
$
|
(5.8
|
)
|
|
$
|
(718.3
|
)
|
|
Effect of ASC 606 adoption
|
—
|
|
|
—
|
|
|
(7.4
|
)
|
|
—
|
|
|
—
|
|
|
(7.4
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
26.4
|
|
|
—
|
|
|
—
|
|
|
26.4
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(15.5
|
)
|
|
—
|
|
|
—
|
|
|
(15.5
|
)
|
|
Stock-based compensation
|
—
|
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
|
Purchases of treasury stock
|
—
|
|
|
(7.5
|
)
|
|
—
|
|
|
(98.0
|
)
|
|
—
|
|
|
(105.5
|
)
|
|
Issuances of common stock
|
—
|
|
|
(3.8
|
)
|
|
—
|
|
|
4.3
|
|
|
—
|
|
|
0.5
|
|
|
Balance at September 26, 2018
|
17.6
|
|
|
503.9
|
|
|
2,686.5
|
|
|
(4,018.4
|
)
|
|
(5.5
|
)
|
|
(815.9
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
32.0
|
|
|
—
|
|
|
—
|
|
|
32.0
|
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.6
|
)
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.5
|
)
|
|
—
|
|
|
—
|
|
|
(14.5
|
)
|
|
Stock-based compensation
|
—
|
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.6
|
|
|
Purchases of treasury stock
|
—
|
|
|
6.9
|
|
|
—
|
|
|
(69.0
|
)
|
|
—
|
|
|
(62.1
|
)
|
|
Issuances of common stock
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
2.5
|
|
|
—
|
|
|
2.3
|
|
|
Balance at December 26, 2018
|
17.6
|
|
|
514.2
|
|
|
2,704.0
|
|
|
(4,084.9
|
)
|
|
(6.1
|
)
|
|
(855.2
|
)
|
|
Net income
|
—
|
|
|
—
|
|
|
49.8
|
|
|
—
|
|
|
—
|
|
|
49.8
|
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Dividends ($0.38 per share)
|
—
|
|
|
—
|
|
|
(14.7
|
)
|
|
—
|
|
|
—
|
|
|
(14.7
|
)
|
|
Stock-based compensation
|
—
|
|
|
5.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
|
Purchases of treasury stock
|
—
|
|
|
0.0
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
Issuances of common stock
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
Balance at March 27, 2019
|
$
|
17.6
|
|
|
$
|
519.1
|
|
|
$
|
2,739.1
|
|
|
$
|
(4,084.1
|
)
|
|
$
|
(5.9
|
)
|
|
$
|
(814.2
|
)
|
Retirement of Treasury Stock
In the second quarter of 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 March 25, 2020, 25.3 million shares remain in treasury.
Effect of Adoption of ASC 842
In the first quarter of fiscal 2020, we adopted the lease accounting standard, ASC 842, and recorded a $195.9 million cumulative effect adjustment increase to Retained (deficit) earnings for the change in accounting principle. Refer to Note 4 - Leases for further details.
Effect of Adoption of ASC 606
In the first quarter of fiscal 2019, we adopted the revenue recognition standard, ASC 606, and recorded a $7.4 million cumulative effect adjustment decrease to Retained (deficit) earnings for the change in accounting principle.
Dividends
During the thirty-nine week periods ended March 25, 2020 and March 27, 2019, we paid dividends of $43.3 million and $46.0 million to common stock shareholders, respectively. We also declared a quarterly dividend on January 27, 2020, that was paid subsequent to the third quarter of fiscal 2020, on March 26, 2020, in the amount of $0.38 per share. As of March 25, 2020, we have accrued dividends of $14.0 million for shares outstanding in Other accrued liabilities in the Consolidated Balance Sheets (Unaudited), refer to Note 11 - Accrued and Other Liabilities for further details.
Subsequent to quarter end, 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. The Board of Directors will reevaluate the suspension as developments surrounding the COVID-19 pandemic mature. There is significant uncertainty regarding the future impact of the pandemic on the restaurant industry and the broader US economy.
Stock-based Compensation
The following table presents the stock options and restricted share awards granted, and related weighted average exercise price and fair value per share amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Stock options
|
|
|
|
|
Stock options granted
|
0.3
|
|
|
0.7
|
|
|
Weighted average exercise price per share
|
$
|
38.51
|
|
|
$
|
43.63
|
|
|
Weighted average fair value per share
|
$
|
6.83
|
|
|
$
|
8.25
|
|
|
Restricted share awards
|
|
|
|
|
Restricted share awards granted
|
0.3
|
|
|
0.3
|
|
|
Weighted average fair value per share
|
$
|
38.68
|
|
|
$
|
43.52
|
|
Share Repurchases
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. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings, and planned investment and financing needs. The repurchased shares during the thirty-nine week periods ended March 25, 2020 and March 27, 2019, respectively, included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares.
Thirty-Nine Week Period Ended March 25, 2020
During the thirty-nine week period ended March 25, 2020, we repurchased 0.8 million shares of our common stock for $32.3 million. As of March 25, 2020, approximately $166.8 million was available under our share repurchase authorizations. Subsequent to the third quarter of fiscal 2020, our Board of Directors has suspended our share repurchase program as a result of the COVID-19 impact.
Thirty-Nine Week Period Ended March 27, 2019
In August 2018, our Board of Directors authorized a $300.0 million increase to our existing share repurchase program resulting in total authorizations of $4.9 billion. During the thirty-nine week period ended March 27, 2019, we repurchased 3.6 million shares of our common stock for $167.7 million.
13. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
|
|
•
|
Level 1 - inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
•
|
Level 2 - inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
|
|
|
|
|
•
|
Level 3 - inputs are unobservable and reflect our own assumptions.
|
Non-Financial Assets Measured on a Non-Recurring Basis
We review the carrying amounts of property and equipment, 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 6 - Other Gains and Charges for more information. Refer to Note 2 - Novel Coronavirus Pandemic for further details on the analysis of the COVID-19 pandemic as a potential triggering event for impairment in the third quarter of fiscal 2020.
During the thirty-nine week period ended March 25, 2020, we impaired certain long-lived and lease assets primarily related to 10 underperforming Chili’s restaurants. Additionally, we impaired certain finance and operating lease assets related to previously closed Chili’s restaurants. During the thirty-nine week period ended March 27, 2019, we impaired certain long-lived assets primarily related to two underperforming 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 expenses recorded on these impaired restaurants for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Charges
|
|
|
Pre-Impairment Carrying Value
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Underperforming restaurants
|
|
|
|
|
|
|
|
|
Long-lived assets
|
$
|
4.5
|
|
|
$
|
1.0
|
|
|
$
|
4.5
|
|
|
$
|
1.0
|
|
|
Finance lease assets
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
Total underperforming restaurants
|
$
|
4.6
|
|
|
$
|
1.0
|
|
|
$
|
4.6
|
|
|
$
|
1.0
|
|
|
Closed restaurants
|
|
|
|
|
|
|
|
|
Operating lease assets
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
1.8
|
|
|
$
|
—
|
|
|
Finance lease assets
|
5.8
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
Total closed restaurants
|
$
|
12.2
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
—
|
|
Intangibles, net in the Consolidated Balance Sheets (Unaudited) includes indefinite-lived intangible assets such as the transferable liquor licenses and definite-lived intangible assets that include reacquired franchise rights and other items such as trademarks. Intangibles, net included accumulated amortization associated with definite-lived intangible assets at March 25, 2020 and June 26, 2019, of $7.1 million and $7.0 million, respectively.
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions that is considered Level 2. During the thirteen and thirty-nine week periods ended March 25, 2020 and March 27, 2019, no indicators of impairment were identified.
Goodwill
We review the carrying amounts of goodwill annually or when events or circumstances indicate that the carrying amount may not be recoverable. We may elect to perform a qualitative assessment for our reporting units to determine whether it is more likely than not that the fair value of the reporting unit is greater than its carrying value. If a qualitative assessment is not performed, or if the result of the qualitative assessment indicates a potential impairment, then the reporting unit’s fair value is compared to its carrying value. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the implied fair value of the goodwill.
Related to the qualitative assessment, changes in circumstances existing at the measurement date or at other times in the future, such as declines in our market capitalization, as well as in the market capitalization of other companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes in the operating environment for the restaurant industry could result in an impairment loss of all or a portion of our goodwill.
We performed our goodwill impairment tests at the end of the second quarter of fiscal 2019 and fiscal 2020 in accordance with our policy and no indicators of impairment were identified. Refer to Note 2 - Novel Coronavirus Pandemic for further details on the updated analysis of the COVID-19 pandemic as a triggering event for impairment in the third quarter of fiscal 2020.
Chili’s Restaurant Acquisition
In the first quarter of fiscal 2020, we completed the acquisition of 116 Chili’s restaurants. The fair value of assets acquired, including goodwill, and liabilities assumed for these restaurants utilized Level 3 inputs. The fair values of intangible assets acquired were primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows, and discount rates. Refer to Note 3 - Chili’s Restaurant Acquisition for further details.
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items. The carrying amount of debt outstanding related to the amended revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the 3.875% and 5.000% notes are based on quoted market prices and are considered Level 2 fair value measurements.
The carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values of the 3.875% notes and 5.000% notes are as follows, refer to Note 10 - Debt for further details:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 25, 2020
|
|
June 26, 2019
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
3.875% notes
|
$
|
298.9
|
|
|
$
|
194.3
|
|
|
$
|
298.6
|
|
|
$
|
296.3
|
|
|
5.000% notes
|
346.5
|
|
|
213.5
|
|
|
345.9
|
|
|
356.2
|
|
The decrease in fair value of the 3.875% notes and 5.000% notes from June 26, 2019 to March 25, 2020 was due to the impact of the COVID-19 pandemic, refer to Note 2 - Novel Coronavirus Pandemic for further details.
Long-Term 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. We determined the fair value of this note based on an internally developed analysis relying on Level 3 inputs at inception. This analysis was based on a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments observed in the market. As a result of the initial analysis, we determined the fair value of this note was approximately $16.0 million and recorded this fair value as its initial carrying value. We believe the fair value of the note receivable continues to approximate the carrying value, which at March 25, 2020 was $7.0 million. The current portion of the note, which represents the cash payments to be received over the next 12 months, is included within Accounts receivable, net while the long-term portion of the note is included in Other assets in the Consolidated Balance Sheets (Unaudited). Refer to Note 6 - Other Gains and Charges for further details about this note receivable.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Income taxes, net of refunds(1)
|
$
|
(4.7
|
)
|
|
$
|
97.2
|
|
|
Interest, net of amounts capitalized
|
32.6
|
|
|
34.7
|
|
|
|
|
|
(1)
|
Income taxes, net of refunds decreased for the thirty-nine week period ended March 25, 2020 as compared to the thirty-nine week period ended March 27, 2019 primarily due to payments made for income tax liabilities resulting from the sale leaseback transactions completed in the first quarter of fiscal 2019 and receipt of a refund in the first quarter of fiscal 2020, partially offset by current year payments. Refer to Note 4 - Leases and Note 7 - Income Taxes for further details.
|
Non-cash investing and financing activities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty-Nine Week Periods Ended
|
|
|
March 25,
2020
|
|
March 27,
2019
|
|
Retirement of fully depreciated assets
|
$
|
14.0
|
|
|
$
|
23.2
|
|
|
Dividends declared but not paid
|
14.8
|
|
|
15.2
|
|
|
Accrued capital expenditures
|
14.7
|
|
|
10.7
|
|
|
Capital lease additions(1)
|
—
|
|
|
2.5
|
|
|
|
|
|
(1)
|
Capital lease additions for the thirty-nine week period ended March 25, 2020 are now disclosed as part of the finance lease disclosures in Note 4 - Leases, “Consolidated Statement of Cash Flows Disclosure of Lease Amounts” section.
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15. CONTINGENCIES
Lease Commitments
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 March 25, 2020 and June 26, 2019, we have outstanding lease guarantees or are secondarily liable for $41.7 million and $55.3 million, respectively. These amounts represent the maximum potential liability of future payments under the leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2021 through fiscal 2028. Our secondary liability position was reduced approximately $9.3 million in the thirty-nine week period ended March 25, 2020 due to certain leases associated with the acquisition of 116 restaurants from a franchisee, refer to Note 3 - Chili’s Restaurant Acquisition for further details. 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 are monitoring our lease guarantees during the COVID-19 pandemic, and at this time we believe the pandemic will be temporary and, as of the third quarter of fiscal 2020, there have been no notices of default pertaining to these leases. Therefore we believe the loss is not probable at this time, and 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 March 25, 2020, we had $27.2 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next 1 to 13 months.
Cyber Security Incident
On May 12, 2018, we issued a public statement that malware had been discovered at certain Chili’s restaurants that resulted in unauthorized access or acquisition of customer payment card data. We engaged third-party forensic firms and cooperated with law enforcement to investigate the matter. Based on the investigation of our third-party forensic experts, we believe most Company-owned Chili’s restaurants were impacted by the malware during time frames that vary by restaurant, but we believe in each case began no earlier than March 21, 2018 and ended no later than April 22, 2018.
We expect to incur legal and professional services expenses associated with the cyber security incident in future periods, which could be material. We will recognize these expenses as services are received. Related to this incident, payment card companies and associations may request us to reimburse them for unauthorized card charges and costs to replace cards and may also impose fines or penalties in connection with the cyber security incident, and regulatory authorities may also impose fines or other remedies against us. While we do not acknowledge responsibility to pay any such amounts imposed by any third parties, we may become obligated to pay such amounts or incur significant related settlement costs. We have settled claims from two payment card companies, and the settlement amounts are included in the costs described in the following paragraph. We will record an estimate for any additional losses at the time when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.
To limit our exposure to cyber security events, we maintain cyber liability insurance coverage. This coverage and certain other insurance coverage may reduce our exposure for this incident. Our cyber liability insurance policy contains a $2.0 million retention that was fully accrued during fiscal 2018. Since the incident, through March 25, 2020, we have incurred cumulative costs of $4.4 million related to the cyber security incident. This includes the $2.0 million retention recorded in fiscal 2018, $1.7 million in costs that have been reimbursed by our insurance carriers, and $0.2 million of receivable for costs incurred that we believe are reimbursable and probable of recovery under our insurance coverage, and an additional $0.4 million during fiscal 2019 and $0.1 million during fiscal 2020 for expenses not believed to be covered by our insurance coverage recorded to Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited).
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 January 4, 2019, we filed a Motion to Dismiss all of plaintiffs’ claims asserting that plaintiffs do not have standing to bring the lawsuit and that plaintiffs have failed to state a claim on which relief can be granted.
Following completion of briefing by the parties, the court conducted a hearing on our motion on June 24, 2019. On August 1, 2019, the court granted our Motion to Dismiss for lack of standing as to two plaintiffs and denied the motion as to the remaining plaintiffs. On January 28, 2020, the court granted in part and denied in part the remaining portion of our Motion to Dismiss, and ordered the Plaintiffs to file their third amended complaint by February 28, 2020 and the parties to file a revised case management report on March 27, 2020. The parties complied with each of these deadlines. On March 5, 2020, the court granted our Motion for Protection in its entirety. Discovery remains stayed pending entry of a new case management and scheduling order. We believe we have defenses and intend to continue defending the Litigation. As such, as of March 25, 2020, we have concluded that a loss from this matter is not determinable, therefore, we have not recorded a liability related to the Litigation. We will continue to evaluate this matter based on new information as it becomes available.
Legal Proceedings
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Consolidated Financial Statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on the consolidated financial condition or results of operations.
16. EFFECT OF NEW ACCOUNTING STANDARDS
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 will require us to adopt these provisions in the first quarter of fiscal 2021. We expect to adopt this update in the first quarter of fiscal 2021 and do not expect the adoption of this guidance to have a material impact in the Consolidated Financial Statements.
ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement - In August 2018, the FASB issued ASU 2018-13, which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments under ASU 2018-13 add an incremental requirement, among others, for entities to disclose (1) the range and weighted average used to develop significant unobservable inputs and (2) how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy. Entities may disclose other quantitative information in lieu of the weighted average if they determine that such information embodies a more reasonable and rational method of reflecting the distribution of significant unobservable inputs used to develop Level 3 fair value measurements. The new guidance is effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted. We expect to adopt this update in the first quarter of fiscal 2021 and do not expect the adoption of this guidance to have a material impact in the 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. Early adoption is permitted. We anticipate to adopt this update in the first quarter of fiscal 2021 and do not expect the adoption of this guidance to have a material impact in the Consolidated Financial Statements.
17. SUBSEQUENT EVENTS
Revolver Net Borrowings
Subsequent to the quarter end, we amended the revolving credit facility to provide additional liquidity and financial flexibility during the COVID-19 pandemic. Refer to Note 10 - Debt for further details. No borrowings were drawn on the revolving credit facility subsequent to the end of the third quarter of fiscal 2020.
Dividend Suspension
Subsequent to quarter end, 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. The Board of Directors will reevaluate the suspension as developments surrounding the
COVID-19 pandemic mature. There is significant uncertainty regarding the future impact of the pandemic on the restaurant industry and the broader US economy.
CARES Act
On March 27, 2020, subsequent to quarter end, President Trump signed the $2.2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other things, the CARES Act provides for deferrals of employer payroll tax liabilities coupled with an employee retention tax credit, in addition to a variety of other tax measures.
At this time, we plan to amend our U.S. Income Tax Return for the 2018 and 2019 fiscal years in order to claim additional depreciation related to qualified improvement property that will allow us to generate refunds. In addition, the CARES Act allows employers to defer paying their employer portion of the social security payroll tax (6.2 percent) otherwise due. The deferral period started on March 27, 2020 and runs through December 31, 2020. The amounts will ultimately be paid over to Treasury in two installments 1) half of the deferred amount of payroll taxes from 2020 will be due December 31, 2021, and 2) the remaining half due December 31, 2022. We are continuing to evaluate other tax provisions and opportunities this act may provide.