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EAT > SEC Filings for EAT > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for BRINKER INTERNATIONAL INC

Form 10-Q for BRINKER INTERNATIONAL INC


5-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income.

                                                             Thirteen Week Periods Ended
                                                      September 26,               September 28,
                                                          2012                        2011
Revenues:
Company sales                                                   97.1 %                      96.9 %
Franchise and other revenues                                     2.9 %                       3.1 %

Total revenues                                                 100.0 %                     100.0 %

Operating Costs and Expenses:
Company restaurants
Cost of sales (1)                                               27.8 %                      28.0 %
Restaurant labor (1)                                            33.0 %                      33.3 %
Restaurant expense (1)                                          24.6 %                      25.6 %

Company restaurant expenses (1)                                 85.4 %                      86.9 %
Depreciation and amortization                                    4.8 %                       4.7 %
General and administrative                                       5.5 %                       4.9 %
Other gains and charges                                          0.1 %                       0.2 %

Total operating costs and expenses                              93.2 %                      94.1 %


Operating income                                                 6.8 %                       5.9 %
Interest expense                                                 1.0 %                       1.1 %
Other, net                                                      (0.1 )%                     (0.2 )%

Income before provision for income taxes                         5.9 %                       5.0 %
Provision for income taxes                                       1.8 %                       1.5 %

Net income                                                       4.1 %                       3.5 %

(1) As a percentage of company sales.


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The following table details the number of restaurant openings during the first quarter, total restaurants open at the end of the first quarter, and total projected openings in fiscal 2013.

                                First Quarter            Total Open at End         Projected
                                  Openings                Of First Quarter         Openings
                           Fiscal          Fiscal        Fiscal       Fiscal        Fiscal
                            2013            2012          2013         2012          2013
     Chili's:
     Company-owned               0               0            821         823               0
     Domestic franchised         0               0            453         470             2-3

     Total                       0               0          1,274       1,293             2-3
     Maggiano's                  0               0             44          44               0

     International:(a)
     Company-owned               0               0              0           0               0
     Franchised                  9               7            267         241           30-35

     Total                       9               7            267         241           30-35
     Grand total                 9               7          1,585       1,578           32-38

(a) At the end of the first quarter of fiscal 2013, international franchised restaurants by brand included 266 Chili's and one Maggiano's restaurant.

At September 26, 2012, we owned the land and buildings for 188 of the 865 company-owned restaurants. The net book values of the land and buildings associated with these restaurants totaled $141.0 million and $121.2 million, respectively.


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GENERAL

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Brinker International, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the quarters ended September 26, 2012 and September 28, 2011, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this quarterly report.

OVERVIEW

We are committed to strategies and initiatives that are centered on long-term sales and profit growth, enhancing the guest experience and team member engagement. These strategies are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants and establish a strong presence for our brands in key markets around the world.

Key economic indicators such as total employment, consumer confidence and spending levels were somewhat stable in the first half of this quarter; however, slowing industry sales suggest that consumers grew more cautious in the latter half of the quarter. This economic environment has continued to challenge the industry; however, we believe that our strategies and initiatives will provide a solid foundation for earnings growth going forward and are appropriate for all operating conditions.

Our current initiatives are designed to drive profitable sales growth and improve the guest experience in our restaurants. We are investing in new kitchen equipment, operations software and remodel initiatives as the core pieces of our current strategy. We expect to complete the installation of new kitchen equipment in all of our company-owned Chili's restaurants by the end of the calendar year. The upgraded equipment will consistently provide a high quality product at a faster pace, enhancing both profitability and guest satisfaction. Based on the installations completed to date and our robust testing process, we believe the usability and efficiency of the equipment will allow for significant labor savings over time. Also, the flexibility of our equipment will allow for the development of new menu categories that we believe will result in increased sales and guest traffic.

The majority of our restaurants are now operating with an integrated point of sale and back office software system that was designed to enhance the efficiency of our restaurant operations and reporting capabilities. Timely and more detailed reporting in our restaurants will result in improved inventory and labor management while reducing software maintenance costs. Additionally, our management team will have timely visibility into operating performance and trends which will enhance decision making and improve profitability. We expect to complete the system installation in all company-owned Chili's restaurants by the end of the calendar year.

We have remodeled a significant number of our company-owned Chili's restaurants and plan to continue the initiative at a brisk pace. The remodel design is intended to revitalize Chili's in a way which enhances the relevance of the brand and raises guest expectations regarding the quality of the experience. The design is contemporary while staying true to the Chili's brand heritage. We believe that these updates will positively impact the guest perception of the restaurant in both the dining room and bar areas and provide a long-term positive impact to traffic and sales.


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We continually evaluate our menu at Chili's to improve quality, freshness and value by introducing new items and improving existing favorites. Recently, we refreshed our two for twenty and lunch combo offerings and added new menu items including Chipotle Chicken Fajitas and Santa Cruz steak that reflect our southwest positioning. Our enhanced steak selection introduced last year also continues to have a high guest preference. An emphasis on new products, training and our reimaged bar also resulted in improved bar sales over last year. We believe these changes as well as our ability to develop new and innovative items will further enhance sales and drive incremental traffic. We are committed to offering a compelling everyday menu that provides items our guests prefer at a solid value.

Improvements at Chili's will have the most significant impact on the business; however, our results will also benefit through additional contributions from Maggiano's and our global business. Maggiano's continues to offer a compelling menu and great value with Classic Pasta and Marco's Meal. Additionally, Maggiano's has implemented initiatives around kitchen efficiency and inventory control to further enhance profitability.

Global expansion allows further diversification which will enable us to build strength in a variety of markets and economic conditions. This expansion will come through franchise relationships, joint venture arrangements and equity investments, taking advantage of demographic and eating trends which we believe will accelerate in the international market over the next decade. Our growing franchise operations both domestically and internationally enable us to improve margins as royalty payments impact the bottom line.

The casual dining industry is a competitive business which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. Our priority remains increasing profitable growth over time in all operating environments. We have designed both operational and financial strategies to achieve this goal and in our opinion, improve shareholder value. Success with our initiatives to improve sales trends and operational effectiveness will enhance the profitability of our restaurants and strengthen our competitive position. The effective execution of our financial strategies, including repurchasing shares of our common stock, payment of quarterly dividends, disciplined use of capital and efficient management of operating expenses, will further enhance our profitability and return value to our shareholders. We remain confident in the financial health of our company, the long-term prospects of the industry as well as our ability to perform effectively in a competitive marketplace and a variety of economic environments.

REVENUES

Beginning in fiscal 2013, revenues are presented in two separate captions on the consolidated statements of income in an effort to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales includes revenues generated by the operation of company-owned restaurants and gift card redemptions. Franchise and other revenues includes royalties, development fees and franchise fees, Maggiano's banquet service charge income, and certain gift card activity (breakage and discounts). Prior year revenue amounts have been reclassified to conform to the fiscal 2013 presentation. These reclassifications have no effect on total revenue or net income previously reported.


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Total revenues for the first quarter of fiscal 2013 increased to $683.5 million, a 2.3% increase from the $668.4 million generated for the same quarter of fiscal 2012. The increase in revenue was primarily attributable to an increase in comparable restaurant sales as follows:

                               Thirteen Week Period Ended September 26, 2012
                           Comparable       Price      Mix
                              Sales       Increase    Shift   Traffic   Capacity
         Company-owned        2.6%          1.6%      0.9%     0.1%      (0.3)%
         Chili's              2.8%          1.4%      1.0%     0.4%      (0.3)%
         Maggiano's           0.9%          2.6%      0.8%    (2.5)%      0.0%

         Franchise (1)        2.9%
         Domestic             3.7%
         International        1.1%
         System-wide (2)      2.7%




                               Thirteen Week Period Ended September 28, 2011
                           Comparable      Price      Mix
                              Sales       Increase   Shift    Traffic   Capacity
         Company-owned        1.9%          1.4%     (1.4)%    1.9%      (0.4)%
         Chili's              1.7%          1.3%     (1.5)%    1.9%      (0.4)%
         Maggiano's           3.5%          1.8%     (0.4)%    2.1%       0.0%

         Franchise (1)        2.0%
         Domestic             0.2%
         International        7.5%
         System-wide (2)      2.0%

(1) Revenues generated by franchisees are not included in revenues on the consolidated statements of income; however, we generate royalty revenue and advertising fees based on franchise revenues, where applicable. We believe including franchise comparable restaurant revenues provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.

(2) System-wide comparable restaurant sales are derived from sales generated by company-owned Chili's and Maggiano's restaurants in addition to the sales generated at franchisee operated restaurants.

Chili's company sales increased to $581.3 million for the first quarter of fiscal 2013, a 2.7% increase from $566.1 million in the prior year driven by increased menu prices, favorable product mix shifts and improved guest traffic.

Maggiano's company sales increased to $82.4 million in the first quarter of fiscal 2013, a 0.9% increase from $81.7 million in the prior year driven primarily by menu pricing and favorable product mix shifts, partially offset by lower guest traffic.


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Franchise and other revenues decreased 3.9% to $19.8 million in the first quarter of fiscal 2013 compared to $20.6 million in the first quarter of fiscal 2012. The decrease is primarily due to lower gift card breakage income due to increased gift card usage, partially offset by an increase in royalty revenues related to the net addition of 9 franchised restaurants since the first quarter of fiscal 2012. Royalty revenues are recognized based on the sales generated by our franchisees and reported to us. Our franchisees generated approximately $399 million in sales.

COSTS AND EXPENSES

Cost of sales, as a percent of company sales, decreased to 27.8% for the first quarter of fiscal 2013 from 28.0% in the prior year. Cost of sales was favorably impacted in the current quarter by increased menu pricing and a decrease in commodity pricing on produce, dairy and poultry. These changes were partially offset by unfavorable commodity pricing and product mix related to meat.

Restaurant labor, as a percent of company sales, decreased to 33.0% for the first quarter of fiscal 2013 as compared to 33.3% in the prior year driven by sales leverage on fixed costs related to higher revenue and improved labor productivity from the installation of new kitchen equipment, partially offset by increased overtime incurred to support these installations.

Restaurant expenses, as a percent of company sales, decreased to 24.6% for the first quarter of fiscal 2013 as compared to 25.6% in the same period of the prior year primarily driven by lower repair and maintenance expense, credit card fees and utilities expense, and sales leverage on fixed costs.

Depreciation and amortization increased $1.4 million for the first quarter of fiscal 2013 as compared to the prior year primarily due to investments in existing restaurants and asset replacements, partially offset by an increase in fully depreciated assets.

General and administrative expense increased $4.5 million, or 13.6%, for the first quarter of fiscal 2013 as compared to the prior year primarily due to an increase in stock-based and other compensation.

Other gains and charges in the first quarter of fiscal 2013 included $0.4 million in lease termination charges related to previously closed restaurants.

Other gains and charges in the first quarter of fiscal 2012 included a $2.5 million charge related to litigation and $0.7 million in lease termination charges related to previously closed restaurants, partially offset by a $1.3 million gain on the sale of land.

Interest expense remained flat for the first quarter of fiscal 2013 compared to the first quarter of the prior year.

INCOME TAXES

The effective income tax rate increased to 31.1% for the first quarter of fiscal 2013 compared to 29.8% for the same quarter of last year primarily due to increased earnings in the current quarter.


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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Cash Flow from Operating Activities

During the first quarter of fiscal 2013, net cash flow provided by operating activities was $32.9 million compared to $30.9 million in the prior year. The increase was driven by an increase in earnings in the current year, partially offset by changes in working capital during the first quarter of fiscal 2013.

The working capital deficit decreased to $166.0 million at September 26, 2012 from $206.9 million at June 27, 2012 primarily due to disbursements timing and the impact of the seasonal sales decline in the first quarter.

Cash Flow from Investing Activities



                                                               Thirteen Week Periods Ended
                                                          September 26,          September 28,
                                                               2012                   2011
Net cash used in investing activities (in thousands):

Payments for property and equipment                       $      (37,001 )       $      (27,662 )
Proceeds from sale of assets                                         649                  2,523
Investment in equity method investee                                   0                   (729 )

                                                          $      (36,352 )       $      (25,868 )

Net cash used in investing activities for the first quarter of fiscal 2013 increased to $36.4 million compared to $25.9 million in the prior year. Capital expenditures increased to $37.0 million for the first quarter of fiscal 2013 compared to $27.7 million for the prior year driven primarily by increased investments in new equipment related to our kitchen retrofit initiative, the ongoing Chili's reimage program and purchases of new and replacement restaurant furniture and equipment. We estimate that our capital expenditures during fiscal 2013 will be approximately $130 million to $140 million and will be funded entirely by cash from operations.

Cash Flow from Financing Activities



                                                             Thirteen Week Periods Ended
                                                       September 26,            September 28,
                                                            2012                     2011
Net cash provided by (used in) financing
activities (in thousands):
Borrowings on revolving credit facility                         90,000                        0
Purchases of treasury stock                           $        (86,331 )       $        (77,822 )
Proceeds from issuances of treasury stock                       17,855                    3,449
Payments of dividends                                          (12,803 )                (12,222 )
Payments on long-term debt                                      (6,595 )                 (5,312 )
Excess tax benefits from stock based compensation                6,493                      662
Proceeds from issuance of long-term debt                             0                   70,000
Other                                                                0                   (1,620 )

                                                      $          8,619         $        (22,865 )


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Net cash provided by financing activities for the first quarter of fiscal 2013 increased to approximately $8.6 million compared to net cash used in financing activities of $22.9 million in the prior year primarily due to higher proceeds from the use of credit facilities and increased proceeds from issuances of treasury stock, partially offset by increased spending on share repurchases.

In the first quarter of fiscal 2013, $90 million was drawn from the revolver primarily to fund share repurchases, none of which was repaid by the end of the quarter. As of September 26, 2012, we had $120 million of credit available under the revolver. In October 2012, an additional $20 million was borrowed from the revolver primarily to fund share repurchases.

The term loan and revolving credit facility bear interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.50%. Based on our current credit rating, we are paying interest at a rate of LIBOR plus 1.63%. One month LIBOR at September 26, 2012 was approximately 0.22%. As of September 26, 2012, we were in compliance with all financial debt covenants.

As of September 26, 2012, our credit rating by Standard and Poor's ("S&P") was BBB- (investment grade) with a stable outlook. Our corporate family rating by Moody's was Ba1 (non-investment grade) and our senior unsecured rating was Ba2 (non-investment grade) with a stable outlook. Our goal is to retain our investment grade rating from S&P and ultimately regain our investment grade rating from Moody's.

We repurchased approximately 2.5 million shares of our common stock for $86.3 million during the first quarter of fiscal 2013. Subsequent to the end of the quarter, we repurchased approximately 750,000 shares for approximately $23.1 million.

In the first quarter of fiscal 2013, we paid dividends of $12.8 million to common stock shareholders, compared to $12.2 million in the prior year. The quarterly dividend payment increased due to a 14 percent increase in the dividend per share, partially offset by the impact of share repurchase activity. Our Board of Directors approved a 25 percent increase in the quarterly dividend from $0.16 to $0.20 per share effective with the dividend declared in August 2012 of $14.8 million paid on September 27, 2012. We will continue to target a 40 percent dividend payout ratio to provide additional return to shareholders through dividend payments.

In August 2012, our Board of Directors authorized a $500.0 million increase to our existing share repurchase program. As of September 26, 2012, approximately $579 million was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. Repurchased common stock is reflected as a reduction of shareholders' equity.

During the first quarter of fiscal 2013, approximately 806,000 stock options were exercised resulting in cash proceeds of $17.9 million. We received an excess tax benefit from stock-based compensation of $6.5 million during the current quarter primarily as a result of the normally scheduled distribution of restricted stock grants and increased stock option exercises.

We have evaluated ways to monetize the value of our owned real estate and determined that the alternatives considered are more costly than other financing options currently available due to a combination of the income tax impact and higher effective borrowing rates.


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Cash Flow Outlook

We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would potentially affect our liquidity. In the event such a trend develops, we believe that there are sufficient funds available under our credit facility and from our internal cash generating capabilities to adequately manage our ongoing business.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2012, the Financial Accounting Standards Board ("FASB") updated its guidance on testing indefinite-lived intangible assets for impairment to allow companies the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Companies electing to perform a qualitative assessment are no longer required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on a qualitative assessment, that it is "more likely than not" that the asset is impaired. The updated guidance is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012, which requires that we adopt these provisions beginning in the first quarter of fiscal 2014; however, early adoption is permitted. We do not expect the adoption of this updated guidance to have a significant impact on our consolidated financial statements.

In September 2011, the FASB updated its guidance on the annual testing of goodwill for impairment to allow companies to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. The updated guidance is applicable to goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our consolidated financial statements.

In June 2011 and as updated in December 2011, the FASB updated its guidance regarding comprehensive income to require companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The updated guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity. This updated guidance is applicable for fiscal years beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our consolidated financial statements.

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