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EAT > SEC Filings for EAT > Form 10-Q on 3-Feb-2014All Recent SEC Filings

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Form 10-Q for BRINKER INTERNATIONAL INC


3-Feb-2014

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        Twenty-Six Week Periods Ended
                                         December 25,      December 26,     December 25,       December 26,
                                             2013              2012             2013               2012
Revenues:
Company sales                                97.2  %           97.0  %           97.2  %            97.1  %
Franchise and other revenues                  2.8  %            3.0  %            2.8  %             2.9  %
Total revenues                              100.0  %          100.0  %          100.0  %           100.0  %
Operating costs and expenses:
Company restaurants (excluding
depreciation and amortization)
Cost of sales (1)                            27.1  %           27.6  %           27.1  %            27.7  %
Restaurant labor (1)                         32.1  %           32.5  %           32.5  %            32.7  %
Restaurant expenses (1)                      24.8  %           24.2  %           25.0  %            24.4  %
Company restaurant expenses (1)              84.0  %           84.3  %           84.6  %            84.8  %
Depreciation and amortization                 4.8  %            4.8  %            4.8  %             4.8  %
General and administrative                    4.3  %            4.5  %            4.7  %             5.0  %
Other gains and charges                       0.2  %            0.0  %            0.2  %             0.0  %
Total operating costs and expenses           90.9  %           91.1  %           91.8  %            92.1  %
Operating income                              9.1  %            8.9  %            8.2  %             7.9  %
Interest expense                              1.0  %            1.0  %            1.0  %             1.0  %
Other, net                                   (0.1 )%           (0.1 )%           (0.1 )%            (0.1 )%
Income before provision for income
taxes                                         8.2  %            8.0  %            7.2  %             7.0  %
Provision for income taxes                    2.6  %            2.6  %            2.2  %             2.3  %
Net income                                    5.6  %            5.4  %            5.0  %             4.7  %

(1) As a percentage of company sales.


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The following table details the number of restaurant openings during the second quarter, total restaurants open at the end of the second quarter, and total projected openings in fiscal 2014:

                                                                                         Total Open at
                                                                                         End Of Second      Projected
                                 Second Quarter Openings      Year-to-Date Openings         Quarter         Openings
                                                                                        Fiscal    Fiscal
                                Fiscal 2014   Fiscal 2013   Fiscal 2014   Fiscal 2013    2014      2013    Fiscal 2014
Company-owned restaurants:
Chili's domestic                          0             2             3             2      824       823           6-8
Chili's international                     1             0             1             0       12         0           2-4
Maggiano's                                1             0             1             0       45        44           1-2
Total company-owned                       2             2             5             2      881       867          9-14
Franchise restaurants:
Chili's domestic                          0             1             1             2      442       452           4-5
Chili's international                     6            10            11            19      279       274         32-35
Total franchise                           6            11            12            21      721       726         36-40
Total restaurants:
Chili's domestic                          0             3             4             4    1,266     1,275         10-13
Chili's international                     7            10            12            19      291       274         34-39
Maggiano's                                1             0             1             0       45        44           1-2
Grand total                               8            13            17            23    1,602     1,593         45-54

At December 25, 2013, we owned the land and buildings for 189 of the 881 company-owned restaurants. The net book values of the land and buildings associated with these restaurants totaled approximately $141.5 million and $118.4 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 December 25, 2013 and December 26, 2012, 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 customer 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, spending levels and consumer confidence continued to improve slightly this year; however, the casual dining industry has experienced soft sales and traffic. Consumers have shifted spending to housing and large ticket items in part due to historically low interest rates. Slow economic growth has challenged the industry for several years and as a result, our strategies and initiatives have been developed to 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 and traffic growth and improve the customer experience in our restaurants. We are investing in new kitchen equipment, operations software and reimage initiatives as the core pieces of our strategy. We have completed the installation of new kitchen equipment in our company-owned Chili's restaurants and are now expanding the project to include additional equipment. We anticipate that the upgraded kitchen equipment will consistently provide a higher quality product at a faster pace, enhancing both profitability and customer satisfaction. Based on our robust testing process, we believe the usability and efficiency of the equipment results in significant labor savings over time. Also, the flexibility of our equipment allows for the development of new menu categories that we believe results in increased sales and customer traffic.
All company-owned Chili's and Maggiano's 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 more timely visibility into operating performance and trends which will enhance decision making and improve profitability.
We have reimaged a significant number of our company-owned Chili's restaurants and are on track to complete a total of approximately 75 percent of company-owned restaurants by the end of fiscal 2014. The reimage design is intended to revitalize Chili's in a way which enhances the relevance of the brand and raises customer 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 customer perception of the restaurant in both the dining room and bar areas and provide a long-term positive impact to traffic and sales. In addition to our reimage initiative, we intend to grow our brands by opening restaurants in strategically desirable markets. We anticipate opening approximately eight to twelve Chili's restaurants this year.
We continually evaluate our menu at Chili's to improve quality, freshness and value by introducing new items and improving existing favorites. The upgraded kitchen equipment at Chili's has allowed for the development of successful new menu items this year, including the Santa Fe Quesadillas and the Bacon Avocado Chicken sandwich, which has quickly become the best-selling sandwich on our menu. Other recent menu innovations such as flatbreads continue to perform well. Our two for twenty dollars and lunch combo offerings, which continue to drive traffic and provide our customers an excellent value, have been refreshed with new menu items including Bacon Jack Chicken and Chipotle Garlic Steak. In January 2014, we introduced our new Fresh Mex platform upgrading some of our current offerings and introducing a variety of new entrees. We will continually seek opportunities to reinforce value and create interest with new and varied offerings to further enhance sales and drive incremental traffic. We are committed to offering a compelling everyday menu that provides items our customers 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 deliver sales growth and improvements in costs of sales margins. Maggiano's offers a compelling menu and great value with On the House Classic Pasta and Marco's Meal. Menu innovations this year include the Stuffed Pasta entrees. Kitchen efficiency and inventory controls continue to enhance profitability and strengthen the business model. We opened our newest Maggiano's in Annapolis in October 2013.


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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 acquisitions, 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. We completed the acquisition of 11 Chili's restaurants in Alberta, Canada last fiscal year and are excited about the potential growth for the Chili's brand in Canada. During the second quarter of fiscal 2014, seven new international Chili's restaurants were opened, including one company-owned restaurant in Mexico. 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
Total revenues for the second quarter of fiscal 2014 increased to $704.4 million, a 2.1% increase from the $689.8 million generated for the same quarter of fiscal 2013 driven by a 2.3% increase in company sales attributable to higher capacity and positive comparable restaurant sales (see table below). Total revenues for the twenty-six week period ended December 25, 2013 were $1,388.3 million, a 1.1% increase from the $1,373.3 million generated for the same period in fiscal 2013 driven by a 1.2% increase in company sales attributable to higher capacity, partially offset by a decrease in comparable restaurant sales (see table below).

                         Thirteen Week Period Ended December 25, 2013
                Comparable       Price         Mix
                   Sales       Increase       Shift        Traffic    Capacity
Company-owned       0.8  %        1.5 %        0.8  %       (1.5 )%      1.6 %
Chili's (1)         0.7  %        1.5 %        1.1  %       (1.9 )%      1.5 %
Maggiano's          0.9  %        1.5 %       (0.5 )%       (0.1 )%      1.9 %
Franchise (2)       0.0  %
U.S.               (0.7 )%
International       1.4  %
Domestic (3)        0.3  %
System-wide (4)     0.5  %



                         Thirteen Week Period Ended December 26, 2012
                Comparable       Price         Mix
                   Sales       Increase       Shift       Traffic     Capacity
Company-owned        0.9 %        1.8 %        1.2 %        (2.1 )%      0.0 %
Chili's (1)          1.0 %        1.6 %        1.3 %        (1.9 )%      0.0 %
Maggiano's           0.6 %        2.3 %        0.7 %        (2.4 )%      0.0 %
Franchise (2)        2.4 %
U.S.                 2.2 %
International        2.7 %
Domestic (3)         1.4 %
System-wide (4)      1.5 %


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                         Twenty-Six Week Period Ended December 25, 2013
                 Comparable       Price        Mix
                   Sales        Increase      Shift        Traffic      Capacity
Company-owned      (0.3 )%         1.2 %       0.8 %        (2.3 )%        1.5 %
Chili's (1)        (0.5 )%         1.2 %       1.0 %        (2.7 )%        1.5 %
Maggiano's          0.7  %         1.1 %       0.1 %        (0.5 )%        1.0 %
Franchise (2)      (0.5 )%
U.S.               (1.5 )%
International       1.9  %
Domestic (3)       (0.8 )%
System-wide (4)    (0.4 )%



                         Twenty-Six Week Period Ended December 26, 2012
                Comparable       Price        Mix
                   Sales       Increase      Shift        Traffic       Capacity
Company-owned        1.8 %        1.7 %       1.0 %        (0.9 )%        (0.1 )%
Chili's (1)          1.9 %        1.5 %       1.0 %        (0.6 )%        (0.1 )%
Maggiano's           0.7 %        2.5 %       0.7 %        (2.5 )%         0.0  %
Franchise (2)        2.6 %
U.S.                 2.8 %
International        2.1 %
Domestic (3)         2.2 %
System-wide (4)      2.1 %

(1) Chili's company-owned comparable restaurant sales do not include sales generated by the 11 restaurants acquired in Canada in June 2013. Acquired or newly opened restaurants are not included in this calculation until 18 months of operations are completed. Chili's capacity for the second quarter and year-to-date periods of fiscal 2014 includes the impact of the Canada restaurants.

(2) 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 sales, where applicable. We believe including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.

(3) Domestic comparable restaurant sales percentages are derived from sales generated by company-owned and franchise operated Chili's restaurants in the United States.

(4) 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 2.4% to $576.7 million in the second quarter of fiscal 2014 from $563.3 million in the prior year primarily driven by increased restaurant capacity and comparable restaurant sales. For the year-to-date period, Chili's company sales increased 1.2% to $1,158.3 million compared to $1,144.6 million in fiscal 2013 due to increased restaurant capacity, partially offset by a decrease in comparable restaurant sales. Chili's capacity increased 1.5% for the second quarter and year-to-date period of fiscal 2014 (as measured by average-weighted sales weeks) compared to the respective prior year periods due to the acquisition of 11 restaurants in Canada in June 2013 and two net restaurant openings since the second quarter of fiscal 2013.
Maggiano's company sales increased 1.8% to $107.7 million in the second quarter of fiscal 2014 from $105.8 million in the same quarter of fiscal 2013. For the year-to-date period, Maggiano's company sales increased 1.3% to $190.6 million compared to $188.2 million in fiscal 2013. The increases were primarily driven by increases in menu pricing and restaurant capacity. Maggiano's capacity increased 1.9% for the second quarter and 1.0% for the year-to-date period of fiscal 2014 (as measured by average-weighted sales weeks) compared to the respective prior year periods due to one restaurant opening since the second quarter of fiscal 2013.


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Franchise and other revenues decreased 2.9% to $20.0 million in the second quarter of fiscal 2014 compared to $20.6 million in the prior year. For the year-to-date period, franchise and other revenues decreased 2.7% to $39.4 million compared to $40.5 million. The decreases were primarily driven by lower domestic royalty income primarily due to closures, as well as lower international franchise and development fees. Our franchisees generated approximately $390 million and $779 million in sales for the second quarter and year-to-date period of fiscal 2014.
COSTS AND EXPENSES
Cost of sales, as a percent of company sales, decreased to 27.1% for the second quarter and year-to-date period of fiscal 2014 from 27.6% and 27.7% for the quarter and year-to-date prior year periods. Cost of sales was favorably impacted in the current year by mix changes related to the introduction of new menu items, improved waste control and increased menu pricing, partially offset by unfavorable commodity pricing primarily related to meat and poultry. Restaurant labor, as a percent of company sales, decreased to 32.1% for the second quarter and 32.5% for the year-to-date period of fiscal 2014 from 32.5% and 32.7% for the respective prior year periods primarily due to improved labor productivity related to the installation of new kitchen equipment. Server initiatives also favorably impacted the second quarter of fiscal 2014, partially offset by higher restaurant manager bonuses.
Restaurant expenses, as a percent of company sales, increased to 24.8% for the second quarter and 25.0% for the year-to-date period of fiscal 2014 from 24.2% and 24.4% for the respective prior year periods. The increases are primarily due to higher advertising accruals, worker's compensation insurance expenses and costs associated with strategic initiatives, including new restaurant development.
Depreciation and amortization expense increased $0.6 million for the second quarter and $1.1 million for the year-to-date period of fiscal 2014 compared to the same period of the prior year primarily due to investments in existing restaurants as well as the acquisition of 11 restaurants in Canada, partially offset by an increase in fully depreciated assets.
General and administrative expenses decreased $0.7 million for the second quarter of fiscal 2014 as compared to the same period in the prior year primarily due to lower performance-based and other compensation costs partially offset by an increase in professional fees and higher stock-based compensation costs. For the year-to-date period, general and administrative expenses decreased $3.5 million as compared to the same period in the prior year primarily due to lower stock-based compensation, performance-based and other compensation costs, partially offset by an increase in professional fees. In the second quarter of fiscal 2014, we recorded restaurant impairment charges of $1.3 million related to underperforming restaurants that either continue to operate or are scheduled to close. We also recorded $0.3 million of restaurant closure charges consisting primarily of lease termination charges and a $0.6 million gain primarily related to land sales in the second quarter. Restaurant closure charges for the first six months of fiscal 2014 are $1.1 million and consist primarily of lease termination charges and other costs associated with closed restaurants.
In the second quarter of fiscal 2013, we recorded restaurant impairment charges of $0.7 million related to underperforming restaurants that continue to operate. We also recorded $2.1 million in restaurant closure charges, consisting primarily of $1.1 million in lease termination charges and $0.9 million primarily related to the write-down of land associated with a closed facility. Additionally, we recorded net gains of $2.3 million primarily related to land sales. Restaurant closure charges for the first six months of fiscal 2013 were $2.6 million consisting primarily of $1.5 million in lease termination charges and $0.9 million primarily related to the write-down of land associated with a closed facility.
Interest expense remained flat for the second quarter and year-to-date periods of fiscal 2014 compared to the same prior year periods resulting from lower interest rates offset by higher borrowing balances.
INCOME TAXES
Excluding the impact of other gains and charges, the effective income tax rate decreased to 31.3% and 31.4% for the second quarter and year-to-date periods of fiscal 2014 compared to 32.7% and 32.1% in the prior year primarily due to the impact of tax credits for workforce programs and deductions related to increased stock option exercises.


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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flow from Operating Activities
During the first six months of fiscal 2014, net cash flow provided by operating activities was $147.3 million compared to $131.3 million in the prior year. The increase was driven by higher earnings in the current year and favorable changes in working capital during the first six months of fiscal 2014 driven by lower performance based compensation, partially offset by the timing of operational receipts.
The working capital deficit decreased to $181.8 million at December 25, 2013 from $191.6 million at June 26, 2013 primarily due to an increase in third party gift card sales during the holiday season and timing of operational payments, partially offset by the seasonal increase in the gift card liability and increased income taxes payable in the first six months of fiscal 2014.

Cash Flow used in Investing Activities

                                                                   Twenty-Six Week Periods Ended
                                                              December 25,         December 26,
                                                                  2013                 2012
Net cash used in investing activities (in thousands):
Payments for property and equipment                        $       (69,692 )     $       (69,752 )
Proceeds from sale of assets                                           833                 5,335
                                                           $       (68,859 )     $       (64,417 )

Net cash used in investing activities for the first six months of fiscal 2014 increased to approximately $68.9 million compared to $64.4 million in the prior year. Capital expenditures remained flat at approximately $69.7 million for the first six months of fiscal 2014 compared to $69.8 million for the prior year. New restaurant construction and purchases for the ongoing Chili's reimage program increased in fiscal 2014 compared to the prior year. Capital expenditures in fiscal 2013 included purchases related to our kitchen retrofit initiative, which was completed in the second quarter of fiscal 2013. We estimate that our capital expenditures during fiscal 2014 will be approximately $150 million to $160 million and will be funded entirely by cash from operations.

Cash Flow used in Financing Activities

                                                                   Twenty-Six Week Periods Ended
                                                             December 25,          December 26,
                                                                 2013                  2012
Net cash used in financing activities (in thousands):
Purchases of treasury stock                                $      (93,101 )     $       (131,445 )
Borrowings on revolving credit facility                            80,000                110,000
Payments on revolving credit facility                             (40,000 )                    0
Payments of dividends                                             (31,345 )              (27,677 )
Excess tax benefits from stock-based compensation                  14,569                  6,939
Payments on long-term debt                                        (13,260 )              (13,190 )
Proceeds from issuances of treasury stock                           7,963                 22,515
                                                           $      (75,174 )     $        (32,858 )

Net cash used in financing activities for the first six months of fiscal 2014 increased to $75.2 million from $32.9 million in the prior year primarily due to lower net borrowings on the credit facility and proceeds from issuances of treasury stock related to stock option exercises, partially offset by decreased spending on share repurchases and an increase in excess tax benefits from stock-based compensation.
We repurchased approximately 0.6 million shares of our common stock for $26.8 million in the second quarter and a total of 2.2 million shares for $93.1 million year-to-date. Subsequent to the end of the quarter, we repurchased approximately 374,000 shares for $18 million.
During fiscal 2014, $60 million was drawn from the revolver in the first quarter and an additional $20 million was drawn in the second quarter primarily to fund share repurchases. We repaid $20 million in the first quarter and an additional $20 million


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in the second quarter. As of December 25, 2013, we had $210 million of credit available under the revolver. In January 2014, an additional $18 million was . . .

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