Edgar Filing: BRINKER INTERNATIONAL INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 26, 2018

Commission File Number 1-10275

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



DELAWARE	(972) 980-9917	75-1914582
(State or other jurisdiction of incorporation or organization)	(Registrant’s telephone number, including area code)	(I.R.S. Employer Identification No.)

6820 LBJ FREEWAY, DALLAS, TEXAS		75240
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	o
			Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.



Class	Outstanding at October 29, 2018
Common Stock, $0.10 par value	38.6 million shares

BRINKER INTERNATIONAL, INC.

INDEX



	Page
Part I. Financial Information	3
Item 1. Financial Statements	3
Consolidated Balance Sheets — September 26, 2018 (Unaudited) and June 27, 2018	3
Consolidated Statements of Comprehensive Income (Unaudited) — Thirteen week periods ended September 26, 2018 and September 27, 2017	4
Consolidated Statements of Cash Flows (Unaudited) — Thirteen week periods ended September 26, 2018 and September 27, 2017	5
Notes to Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3. Quantitative and Qualitative Disclosures About Market Risk	40
Item 4. Controls and Procedures	40
Part II. Other Information	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	43
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 5. Other Information	43
Item 6. Exhibits	44
Signatures	44

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BRINKER INTERNATIONAL, INC.

Consolidated Balance Sheets

(In millions, except per share amounts)



	Unaudited
	September 26, 2018			June 27, 2018
ASSETS
Current assets
Cash and cash equivalents	$	11.0		$	10.9
Accounts receivable, net	42.7			53.7
Inventories	23.4			24.2
Restaurant supplies	46.8			46.7
Prepaid expenses	27.1			20.8
Total current assets	151.0			156.3
Property and equipment, at cost
Land	50.4			154.0
Buildings and leasehold improvements	1,463.9			1,673.3
Furniture and equipment	717.0			722.0
Construction-in-progress	25.2			22.1
	2,256.5			2,571.4
Less accumulated depreciation and amortization	(1,494.3		)	(1,632.5		)
Net property and equipment	762.2			938.9
Other assets
Goodwill	164.0			163.8
Deferred income taxes, net	112.1			33.6
Intangibles, net	23.6			24.0
Other	31.1			30.7
Total other assets	330.8			252.1
Total assets	$	1,244.0		$	1,347.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Current installments of long-term debt	$	7.4		$	7.1
Accounts payable	97.2			104.7
Gift card liability	106.3			119.1
Accrued payroll	62.6			74.5
Other accrued liabilities	159.5			127.2
Income taxes payable	74.6			1.7
Total current liabilities	507.6			434.3
Long-term debt, less current installments	1,153.0			1,499.6
Deferred gain on sale leaseback transactions	251.0			—
Other liabilities	148.3			131.7
Commitments and Contingencies (Note 13)
Shareholders’ deficit
Common stock (250.0 million authorized shares; $0.10 par value; 176.2 million shares issued and 38.8 million shares outstanding at September 26, 2018, and 176.2 million shares issued and 40.8 million shares outstanding at June 27, 2018)	17.6			17.6
Additional paid-in capital	503.9			511.6
Accumulated other comprehensive loss	(5.5		)	(5.8		)
Retained earnings	2,686.5			2,683.0
	3,202.5			3,206.4
Less treasury stock, at cost (137.4 million shares at September 26, 2018 and 135.4 million shares at June 27, 2018)	(4,018.4		)	(3,924.7		)
Total shareholders’ deficit	(815.9		)	(718.3		)
Total liabilities and shareholders’ deficit	$	1,244.0		$	1,347.3

See accompanying Notes to the Consolidated Financial Statements (Unaudited)

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions, except per share amounts)



	Thirteen Week Period Ended
	September 26, 2018			September 27, 2017
Revenues
Company sales	$	728.3		$	716.9
Franchise and other revenues (Note 2)	25.5			22.5
Total revenues	753.8			739.4
Operating costs and expenses
Company restaurants (excluding depreciation and amortization)
Cost of sales	191.9			187.6
Restaurant labor	256.3			251.1
Restaurant expenses (Note 2)	199.0			188.1
Company restaurant expenses	647.2			626.8
Depreciation and amortization	37.0			38.5
General and administrative	33.8			32.3
Other (gains) and charges	(11.1		)	13.2
Total operating costs and expenses	706.9			710.8
Operating income	46.9			28.6
Interest expense	15.6			13.9
Other (income), net	(0.8		)	(0.5		)
Income before provision for income taxes	32.1			15.2
Provision for income taxes	5.7			5.3
Net income	$	26.4		$	9.9

Basic net income per share	$	0.65		$	0.20

Diluted net income per share	$	0.64		$	0.20

Basic weighted average shares outstanding	40.4			48.3

Diluted weighted average shares outstanding	41.1			48.7

Other comprehensive income (loss)
Foreign currency translation adjustment	$	0.3		$	1.5
Other comprehensive income	0.3			1.5
Comprehensive income	$	26.7		$	11.4

Dividends per share	$	0.38		$	0.38

See accompanying Notes to the Consolidated Financial Statements (Unaudited)

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Thirteen Week Period Ended
	September 26, 2018			September 27, 2017
Cash flows from operating activities
Net income	$	26.4		$	9.9
Adjustments to reconcile Net income to net cash from operating activities:
Depreciation and amortization	37.0			38.5
Stock-based compensation	3.6			3.5
Deferred income taxes, net	(76.1		)	4.6
Restructure charges and other impairments	1.9			9.0
Net (gain) loss on disposal of assets	(13.6		)	0.4
Undistributed loss on equity investments	—			0.2
Other	0.8			1.0
Changes in assets and liabilities:
Accounts receivable, net	7.9			6.4
Inventories	0.8			0.2
Restaurant supplies	—			(0.8		)
Prepaid expenses	(6.3		)	—
Other assets	(0.5		)	(0.1		)
Accounts payable	(5.1		)	(5.0		)
Gift card liability	(4.6		)	(8.5		)
Accrued payroll	(11.9		)	(6.5		)
Other accrued liabilities	12.5			15.2
Current income taxes	77.5			(18.2		)
Other liabilities	(0.7		)	0.4
Net cash provided by operating activities	49.6			50.2
Cash flows from investing activities
Payments for property and equipment	(31.2		)	(22.4		)
Proceeds from sale of assets	—			0.1
Proceeds from note receivable	0.7			—
Insurance recoveries	1.4			—
Proceeds from sale leaseback transactions, net of related expenses	447.6			—
Net cash provided by (used in) investing activities	418.5			(22.3		)
Cash flows from financing activities
Borrowings on revolving credit facility	204.0			110.0
Payments on revolving credit facility	(549.0		)	(77.0		)
Purchases of treasury stock	(105.5		)	(41.7		)
Payments on long-term debt	(1.8		)	(2.5		)
Payments of dividends	(16.2		)	(17.0		)
Proceeds from issuances of treasury stock	0.5			0.2
Net cash used in financing activities	(468.0		)	(28.0		)
Net change in cash and cash equivalents	0.1			(0.1		)
Cash and cash equivalents at beginning of period	10.9			9.1
Cash and cash equivalents at end of period	$	11.0		$	9.0

See accompanying Notes to the Consolidated Financial Statements (Unaudited)

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BRINKER INTERNATIONAL, INC.

Notes to the Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

References to “Brinker,” the “Company,” “we,” “us” and “our” in this Form 10-Q are references to Brinker International, Inc., its subsidiaries, and any predecessor companies of Brinker International, Inc.

Nature of Operations

Our Consolidated Financial Statements as of September 26, 2018 and June 27, 2018 and for the thirteen week periods ended September 26, 2018 and September 27, 2017 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We are principally engaged in the ownership, operation, development, and franchising of the Chili’s^® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy^® (“Maggiano’s”) restaurant brands. At September 26, 2018, we owned, operated or franchised 1,686 restaurants, consisting of 997 company-owned restaurants and 689 franchised restaurants, located in the United States and 30 countries and two United States territories.

Basis of Presentation

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. Actual results could differ from those estimates.

The foreign currency translation adjustment included in Comprehensive income in the Consolidated Statements of Comprehensive Income represents the unrealized impact of translating the financial statements of our Canadian restaurants and our Mexican joint venture (prior to divestiture in the second quarter of fiscal 2018) from their respective functional currencies to U.S. dollars. This amount is not included in Net income and would only be realized upon disposition of the businesses. The Accumulated other comprehensive loss (“AOCL”) is presented in the Consolidated Balance Sheets.

The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, necessary to fairly state the interim operating results, financial position and cash flows for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to SEC rules and regulations. The Notes to the Consolidated Financial Statements should be read in conjunction with the Notes to the Consolidated Financial Statements contained in the Company’s June 27, 2018 Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes. All amounts within the Notes to the Consolidated Financial Statements are presented in millions unless otherwise specified.

New Accounting Standards Implemented

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) - In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, and has subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. These updates also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14 delaying the effective date of adoption. These updates are now effective for annual and interim periods for fiscal years beginning after December 15, 2017, which required us to adopt these provisions in the first quarter of fiscal 2019. Please refer to Note 2 - Revenue Recognition for disclosures about our adoption.

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ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) - In August 2016, the FASB issued ASU 2016-15, this update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2017, which required us to adopt these provisions in the first quarter of fiscal 2019. The update will be applied on a retrospective basis. The adoption of this guidance did not have an impact to our Consolidated Financial Statements or debt covenants.

2. REVENUE RECOGNITION

Effective June 28, 2018, our first quarter of fiscal 2019, we adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), from the previous guidance ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, “Legacy GAAP”). Our transition to ASC 606 represents a change in accounting principle. Our Consolidated Financial Statements for the first quarter of fiscal 2019 reflect the application of ASC 606 guidance using the modified retrospective transition method, while our Consolidated Financial Statements for prior periods were prepared under Legacy GAAP.

Significant Accounting Policy

Revenues are presented in Company sales and Franchise and other revenues captions in the Consolidated Statements of Comprehensive Income. Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions. Franchise and other revenues includes royalties, advertising fees (effective first quarter of fiscal 2019), development fees, franchise fees, Maggiano’s banquet service charge income, gift card breakage, service fees and discount costs from third-party gift card sales, digital entertainment revenue, delivery fee income, and retail royalty revenues.

Company sales

The adoption of ASC 606 did not impact revenue recognition related to Company sales. We will continue to record revenue from the sale of food, beverages and alcohol as products are sold.

Franchise and other revenues

Royalties - Franchise royalties are based on a percentage of the sales generated by our franchised restaurants. The provisions of ASC 606 did not impact the recognition of these royalties, as the performance obligation related to franchise sales is considered complete upon the sale of food, beverages and alcohol. Royalty revenues attributable to franchise restaurants will continue to be recognized in the same period the sales are generated at the franchise restaurants.

Advertising fees - Domestic franchisees are contractually obligated to contribute into certain advertising and marketing funds. The adoption of ASC 606 did not impact the timing of revenue recognition of the advertising fees received; however, effective first quarter of fiscal 2019, advertising fees are now presented on a gross basis within Franchise and other revenues. Under Legacy GAAP, the advertising funds received from franchisees were considered a reimbursement of advertising expenses and were presented on a net basis as a reduction to advertising expenses in Restaurant expenses in the Consolidated Statements of Comprehensive Income.

Initial development and franchise fees - We receive development fees from franchisees for territory development arrangements and franchise fees for a new restaurant opening. Under ASC 606 these arrangements will be collectively deferred as a contract liability and recognized on a straight-line basis into Franchise and other revenues in the Consolidated Statements of Comprehensive Income over the term of the underlying agreements. Deferred franchise and development fees are classified within Other accrued liabilities for the current portion expected to be recognized within the next 12 months, and Other liabilities for the long-term portion in the Consolidated Balance Sheets.

Under Legacy GAAP, development fees were recognized as income upon the execution of the agreement, when development rights were conveyed to the franchisee. Franchise fees were recognized as income when the obligations under the franchise agreement were satisfied, generally upon the opening of the new franchise restaurant.

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Gift card breakage income - Breakage revenues represent the monetary value associated with outstanding gift card balances for which redemption is considered remote. We estimate this amount based on our historical gift card redemption patterns and update the breakage rate estimate periodically and if necessary, adjust the deferred revenue balance accordingly. In accordance with ASC 606, breakage revenues will be recognized proportionate to the pattern of related gift card redemptions. Under Legacy GAAP, breakage revenues were recognized when redemption was considered remote. We do not charge dormancy or any other fees related to monitoring or administering the gift card program.

Additionally, proceeds from the sale of gift cards will continue to be recorded as deferred revenue in Gift card liability in the Consolidated Balance Sheets and recognized as Company sales when the gift card is redeemed by the holder.

Gift card service fees and discount costs - Our gift cards are sold through various outlets such as in-store, Chili’s and Maggiano’s websites, directly to other businesses, and through third parties distributors that sell our gift cards at various retail locations. We incur incremental direct costs related to gift card sales, such as commissions and activation fees, for gift cards sold to third party businesses and distributors. These initial direct costs are deferred and amortized against revenue proportionate to the pattern of related gift card redemption.

Other revenues - Other revenues not described above, such as Maggiano’s banquet service charge income, digital entertainment revenue, Chili’s retail food product royalties and delivery fee income had no change in recognition from the adoption of ASC 606.

Sales taxes

Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue transaction and collected from a customer have been excluded from revenue under both Legacy GAAP and ASC 606.

Disaggregation of Total Revenues

The following table disaggregates revenue by operating segment and major source:



	Thirteen Weeks Ended September 26, 2018
	Chili's		Maggiano's		Total
Company sales	$	640.3	$	88.0	$	728.3
Royalties	12.9		—		12.9
Advertising fees	5.1		—		5.1
Franchise fees and other revenues	3.5		4.0		7.5
Total revenues	$	661.8	$	92.0	$	753.8

Franchise fees and other revenues primarily includes gift card breakage revenue, Maggiano’s banquet service charge income, digital entertainment revenues, delivery fee income, initial development and franchise fees from franchisees, service fees and discount costs from third-party gift card sales, and other revenues.

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Deferred Development and Franchise Fees

Our deferred development and franchise fees consist of the unrecognized fees received from franchisees. A summary of significant changes to the related deferred balance during the first quarter of fiscal 2019 is presented below, along with the revenue to be recognized in the subsequent periods.



	Deferred Development and Franchise Fees
Balance at June 27, 2018	$	—
Cumulative effect adjustment from adoption of ASC 606	18.1
Additions	0.2
Amount recognized to Franchise and other revenue	(0.5		)
Balance at September 26, 2018	$	17.8



Fiscal Year	Development and Franchise Fees Revenue Recognition
2019	$	1.2
2020	1.4
2021	1.4
2022	1.4
2023	1.4
Thereafter	11.0
	$	17.8

The development and franchise fees that will be recognized in future years are based on active contracts with franchisees. These amounts represent the amount that will be recognized pursuant to the satisfaction of the contractual performance obligations. We also expect to have future year royalties and advertising fees related to our franchise contracts, however under ASC 606, these future year revenues are not yet determinable due to unsatisfied performance obligations based upon a sales-based royalty.

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Financial Statement Impact of Transition to ASC 606

ASC 606 was applied to all contracts with customers as of the first day of fiscal 2019, June 28, 2018. The cumulative effect was applied using the modified retrospective approach. Below our Consolidated Balance Sheets reflects the transition to ASC 606 as an adjustment at June 28, 2018 as follows:



	June 27, 2018			ASC 606 Cumulative Effect Adjustments			June 28, 2018
ASSETS
Other assets
Deferred income taxes, net ⁽¹⁾	$	33.6		$	2.5		$	36.1
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Gift card liability ⁽²⁾	119.1			(8.2		)	110.9
Other accrued liabilities ⁽³⁾	127.2			1.5			128.7
Other liabilities ⁽³⁾	131.7			16.6			148.3
Shareholders’ deficit
Retained earnings ^{(2) (3)}	(718.3		)	(7.4		)	(725.7		)


⁽¹⁾	Deferred income taxes, net adjustment relates to the net change in liabilities and equity as a result of the adoption of ASC 606 described in notes ⁽²⁾ and ⁽³⁾below.

⁽²⁾

Gift card liability is adjusted for the ASC 606 adoption impact of the change to recognize gift card breakage proportionate to the pattern of related gift card redemption. Under Legacy GAAP, gift card breakage was recognized when the likelihood of redemption was deemed remote. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at June 28, 2018 resulted in an $8.2 million decrease in Gift card liability due to the change in timing of recognition between ASC 606 and Legacy GAAP, and a corresponding $2.0 million decrease in Deferred income taxes, net, and a $6.2 million increase in Retained earnings.


⁽³⁾	Other liabilities $16.6 million and Other accrued liabilities $1.5 million adjustments relate to the deferral of previously recognized franchise and development fees received from franchisees, with a corresponding $4.5 million increase in Deferred income taxes, and a $13.6 million decrease to Retained earnings at June 28, 2018.

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Comparison of Fiscal 2019 Periods if Legacy GAAP had been in Effect

The following tables reflect the impact to our Condensed Consolidated Statement of Income (Unaudited) and Cash flows from operating activities for the thirteen week period ended September 26, 2018, and the unaudited Condensed Consolidated Balance Sheet at September 26, 2018 as if the Legacy GAAP was still in effect.

The adjustments presented below in the Condensed Consolidated Statement of Income (Unaudited) include under ASC 606, advertising fees now presented on a gross basis as a component of Franchise and other revenues. Under Legacy GAAP, the advertising fees were recorded as a reduction to advertising expenses within Restaurant expenses in the Consolidated Statements of Comprehensive Income. Additionally, the recognition timing change for franchise related fees and gift card breakage are included within Franchise and other revenues.

The adjustments presented below in the Condensed Consolidated Balance Sheet relate to the cumulative effect impact described above in the “Financial Statement Impact of Transition to ASC 606” section, as well as the impact from the change in the gift card breakage, deferred development and franchise fees, and corresponding deferred tax and retained earnings balances as of September 26, 2018.

Condensed Consolidated Statement of Income (Unaudited)



	Thirteen Week Period Ended September 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
Revenues
Company sales	$	728.3		$	—		$	728.3
Franchise and other revenues	25.5			(4.8		)	20.7
Total revenues	753.8			(4.8		)	749.0
Operating costs and expenses
Company restaurants (excluding depreciation and amortization)
Cost of sales	191.9			—			191.9
Restaurant labor	256.3			—			256.3
Restaurant expenses	199.0			(5.1		)	193.9
Company restaurant expenses	647.2			(5.1		)	642.1
Depreciation and amortization	37.0			—			37.0
General and administrative	33.8			—			33.8
Other (gains) and charges	(11.1		)	—			(11.1		)
Total operating costs and expenses	706.9			(5.1		)	701.8
Operating income	46.9			0.3			47.2
Interest expense	15.6			—			15.6
Other (income), net	(0.8		)	—			(0.8		)
Income before provision for income taxes	32.1			0.3			32.4
Provision for income taxes	5.7			0.1			5.8
Net income	$	26.4		$	0.2		$	26.6

Basic net income per share	$	0.65		$	0.01		$	0.66

Diluted net income per share	$	0.64		$	0.01		$	0.65

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Cash flows from operating activities (Unaudited)



	Thirteen Week Period Ended September 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
Net income	$	26.4		$	0.2		$	26.6
Adjustments to reconcile Net income to net cash from operating activities:
Depreciation and amortization	37.0			—			37.0
Stock-based compensation	3.6			—			3.6
Deferred income taxes, net	(76.1		)	0.1			(76.0		)
Restructure charges and other impairments	1.9			—			1.9
Net (gain) loss on disposal of assets	(13.6		)	—			(13.6		)
Other	0.8			—			0.8
Changes in assets and liabilities:
Accounts receivable, net	7.9			—			7.9
Inventories	0.8			—			0.8
Prepaid expenses	(6.3		)	—			(6.3		)
Other assets	(0.5		)	—			(0.5		)
Accounts payable	(5.1		)	—			(5.1		)
Gift card liability	(4.6		)	(0.6		)	(5.2		)
Accrued payroll	(11.9		)	—			(11.9		)
Other accrued liabilities	12.5			0.3			12.8
Current income taxes	77.5			—			77.5
Other liabilities	(0.7		)	—			(0.7		)
Net cash provided by operating activities	$	49.6		$	—		$	49.6

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Condensed Consolidated Balance Sheet



	September 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
ASSETS
Current assets
Total current assets	$	151.0		$	—		$	151.0
Property and equipment, at cost
Net property and equipment	762.2			—			762.2
Other assets
Goodwill	164.0			—			164.0
Deferred income taxes, net	112.1			(2.6		)	109.5
Intangibles, net	23.6			—			23.6
Other	31.1			—			31.1
Total other assets	330.8			(2.6		)	328.2
Total assets	$	1,244.0		$	(2.6	)	$	1,241.4
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Current installments of long-term debt	$	7.4		$	—		$	7.4
Accounts payable	97.2			—			97.2
Gift card liability	106.3			7.6			113.9
Accrued payroll	62.6			—			62.6
Other accrued liabilities	159.5			(1.2		)	158.3
Income taxes payable	74.6			—			74.6
Total current liabilities	507.6			6.4			514.0
Long-term debt, less current installments	1,153.0			—			1,153.0
Deferred gain on sale leaseback transactions	251.0			—			251.0
Other liabilities	148.3			(16.6		)	131.7
Shareholders’ deficit
Common stock	17.6			—			17.6
Additional paid-in capital	503.9			—			503.9
Accumulated other comprehensive loss	(5.5		)	—			(5.5		)
Retained earnings	2,686.5			7.6			2,694.1
Less treasury stock, at cost	(4,018.4		)	—			(4,018.4		)
Total shareholders’ deficit	(815.9		)	7.6			(808.3		)
Total liabilities and shareholders’ deficit	$	1,244.0		$	(2.6	)	$	1,241.4

3. SALE LEASEBACK TRANSACTIONS

Restaurant Properties Sale Leaseback Transactions

In the first quarter of fiscal 2019, we have completed sale leaseback transactions of 141 restaurant properties for aggregate consideration of $455.7 million. The balances attributable to the restaurant assets sold include Land of $103.6 million, Buildings and leasehold improvements of $217.6 million, certain fixtures included in Furniture and equipment of $9.3 million, and Accumulated depreciation of $163.9 million. The total gain was $289.1 million and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.

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Lease details

The initial terms of the leases are for 15 years, plus renewal options at our discretion, which contain scheduled rent increases, all of the leases were determined to be operating leases. Rent expense associated with these operating leases is being recognized on a straight-line basis over the lease terms. As of September 26, 2018, $0.4 million of straight-line rent has been recorded for these operating leases in Other liabilities in the Consolidated Balance Sheets.

Gain and deferred gain recognition

In line with the applicable accounting guidance, we immediately recognized the portion of the gross gain in excess of the present value of the future minimum lease payments, and deferred the remainder of the gain to be recognized straight-line in proportion to the operating lease terms. During the thirteen week period ended September 26, 2018, $20.1 million of the $289.1 million gross gain was recognized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income. The remaining balance of the deferred gain of $269.0 million as of September 26, 2018 was recorded in Other accrued liabilities (current portion) and Deferred gain on sale leaseback transactions (long-term portion) in the Consolidated Balance Sheets.

Corporate Headquarters Relocation

During the third quarter of fiscal 2018, we sold the portion of our current headquarters property that we owned for net proceeds of $13.7 million that have been deferred in Other accrued liabilities in the Consolidated Balance Sheets until we have fully relinquished possession of the sold property and our involvement has been terminated. We plan to relocate during the third quarter of fiscal 2019, and once our possession of the existing headquarters has terminated, we will recognize the sale, and record a gain related to the transaction.

Accelerated depreciation for certain corporate headquarters leasehold improvements of $0.5 million was recorded to Other (gains) and charges in the Consolidated Statements of Comprehensive Income during the thirteen week period ended September 26, 2018. As of September 26, 2018, Land of $5.9 million, and additional Net property and equipment of $2.1 million were recorded on our Consolidated Balance Sheets related to the sold property.

4. NET INCOME PER SHARE

Basic net income per share is computed by dividing Net income by the Basic weighted average shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of Diluted net income per share, the Basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the Diluted net income per share calculation. Basic weighted average shares outstanding are reconciled to Diluted weighted average shares outstanding as follows:



	Thirteen Week Period Ended
	September 26, 2018	September 27, 2017
Basic weighted average shares outstanding	40.4	48.3
Dilutive stock options	0.2	0.1
Dilutive restricted shares	0.5	0.3
	0.7	0.4
Diluted weighted average shares outstanding	41.1	48.7

Awards excluded due to anti-dilutive effect on diluted net income per share	1.0	1.4

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5. INCOME TAXES

The effective income tax rate in the thirteen week period ended September 26, 2018 decreased to 17.9% compared to 34.8% for the thirteen week period ended September 27, 2017 primarily due to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) that was enacted on December 22, 2017. The Tax Act lowered the federal statutory tax rate from 35.0% to 21.0% effective January 1, 2018. Our fiscal 2019 effective income tax rate is further lowered due to an increase in the FICA tax credit benefit, partially offset by the impact of the sale leaseback transactions.

The tax gains related to the sale leaseback transactions, as described in Note 3 - Sale Leaseback Transactions, were recognized for tax purposes when the transaction was completed. A tax liability of approximately $73.6 million related to the gain was included in Income taxes payable in the Consolidated Balance Sheets as of September 26, 2018. This liability will be subsequently paid in the second quarter of fiscal 2019.

6. OTHER GAINS AND CHARGES

Other (gains) and charges in the Consolidated Statements of Comprehensive Income consist of the following:



	Thirteen Week Period Ended
	September 26, 2018			September 27, 2017
Sale leaseback (gain), net of transaction charges	$	(13.3	)	$	—
Property damages, net of (insurance recoveries)	(0.8		)	4.6
Foreign currency transaction gain	(0.8		)	—
Restaurant closure charges	1.7			0.2
Accelerated depreciation	0.5			0.5
Remodel-related costs	0.5			—
Cyber security incident charges	0.4			—
Restaurant impairment charges	—			7.2
Other	0.7			0.7
Total	$	(11.1	)	$	13.2

Fiscal 2019


•	Sale leaseback (gain), net of transaction charges during the thirteen week period ended September 26, 2018 includes a gain of $20.1 million associated with the transactions, net of transaction costs incurred of $6.8 million related to professional services, legal and accounting fees. Please see Note 3 - Sale Leaseback Transactions for further details on this transaction.


•	Property damages, net of (insurance recoveries) primarily includes $0.9 million of insurance proceeds received during thirteen week period ended September 26, 2018 related to a previously filed fire claim.


•	Foreign currency transaction gain includes an $0.8 million gain recognized for the thirteen week period ended September 26, 2018 resulting from the value of the Mexican peso as compared to the U.S. dollar on our Mexican peso denominated note receivable that we received as consideration from the sale of our equity interest in our Mexico joint venture during the second quarter of fiscal 2018.


•	Restaurant closure charges during the thirteen week period ended September 26, 2018 were $1.7 million which were primarily related to Chili’s lease termination charges and certain Chili’s restaurant closure costs.


•	Accelerated depreciation of $0.5 million was recorded during the thirteen week period ended September 26, 2018, related to depreciation on certain leasehold improvements at the corporate headquarters property. Please see Note 3 - Sale Leaseback Transactions for more details on the corporate headquarters relocation.

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•	Remodel-related costs during the during the thirteen week period ended September 26, 2018 totaling $0.5 million were recorded related to existing fixed asset write-offs associated with the Chili’s reimaging project.


•	Cyber security incident charges during the thirteen week period ended September 26, 2018 totaling $0.4 million were recorded related to professional services associated with our response to the incident. We first reported the incident during the fourth quarter of fiscal 2018. For further details refer to Note 13 - Commitments and Contingencies.

Fiscal 2018

During the first quarter of fiscal 2018, we recorded asset impairment charges of $7.2 million primarily related to the long-lived assets and reacquired franchise rights of nine underperforming Chili’s restaurants located in Alberta, Canada which closed during the second quarter of fiscal 2018. Alberta has an oil dependent economy and has experienced an economic recession in recent years related to lower oil production. The slower economy negatively affected traffic at the restaurants. The decision to close these restaurants was driven by management’s belief that the long-term profitability of these restaurants would not meet our required level of return.

Additionally, we incurred $4.6 million of expenses associated with Hurricanes Harvey and Irma primarily related to employee relief payments and inventory spoilage. Our restaurants were closed in the areas affected by these disasters and our team members were unable to work. These payments were made to assist our team members during these crises and to promote retention. We carry insurance coverage for these types of natural disasters.

7. SEGMENT INFORMATION

Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our company-owned Chili’s restaurants in the United States and Canada as well as the results from our domestic and international franchise business. The Maggiano’s segment includes the results of our company-owned Maggiano’s restaurants.

Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions. Franchise and other revenues includes Royalties, Advertising fees, and Franchise fees and other revenues which contains development fees, franchise fees, banquet service charge income, gift card breakage and related discounts, digital entertainment revenue, Chili’s retail food product royalties and delivery fee income. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly in the United States. There were no material transactions amongst our operating segments.

Effective the first quarter of fiscal 2019, we transitioned to ASC 606, from the previous Legacy GAAP guidance. Our Consolidated Financial Statements for the first quarter of fiscal 2019 reflect the application of ASC 606 guidance using the modified retrospective transition method, while our Consolidated Financial Statements for prior periods were prepared under Legacy GAAP. Please see Note 2 - Revenue Recognition for more details on the adoption of ASC 606.

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Our chief operating decision maker uses operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Company restaurant expenses include food and beverage costs, restaurant labor costs and restaurant expenses, including advertising. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:



	Thirteen Week Period Ended September 26, 2018
	ASC 606
	Chili’s			Maggiano’s		Other			Consolidated
Company sales	$	640.3		$	88.0	$	—		$	728.3
Royalties	12.9			—		—			12.9
Advertising fees	5.1			—		—			5.1
Franchise fees and other revenues	3.5			4.0		—			7.5
Total revenues	661.8			92.0		—			753.8

Company restaurant expenses ⁽¹⁾	563.1			83.9		0.2			647.2
Depreciation and amortization	30.5			4.0		2.5			37.0
General and administrative	8.8			1.7		23.3			33.8
Other gains and charges ⁽²⁾	(12.3		)	—		1.2			(11.1		)
Total operating costs and expenses	590.1			89.6		27.2			706.9

Operating income (loss)	71.7			2.4		(27.2		)	46.9
Interest expense	1.0			0.1		14.5			15.6
Other, net	—			—		(0.8		)	(0.8		)
Income (loss) before provision for income taxes	$	70.7		$	2.3	$	(40.9	)	$	32.1

Segment assets ⁽²⁾	$	1,002.8		$	149.4	$	91.8		$	1,244.0
Segment goodwill	125.6			38.4		—			164.0
Payments for property and equipment	22.7			3.2		5.3			31.2

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	Thirteen Week Period Ended September 27, 2017
	Legacy GAAP
	Chili’s		Maggiano’s			Other			Consolidated
Company sales	$	627.6	$	89.3		$	—		$	716.9
Franchise and other revenues	18.3		4.2			—			22.5
Total revenues	645.9		93.5			—			739.4

Company restaurant expenses⁽¹⁾	541.4		85.3			0.1			626.8
Depreciation and amortization	31.8		4.0			2.7			38.5
General and administrative	9.6		1.3			21.4			32.3
Other gains and charges	12.1		(0.2		)	1.3			13.2
Total operating costs and expenses	594.9		90.4			25.5			710.8

Operating income (loss)	51.0		3.1			(25.5		)	28.6
Interest expense	—		—			13.9			13.9
Other, net	—		—			(0.5		)	(0.5		)
Income (loss) before provision for income taxes	$	51.0	$	3.1		$	(38.9	)	$	15.2

Equity method investment ⁽³⁾	$	10.5	$	—		$	—		$	10.5
Payments for property and equipment	$	18.6	$	2.4		$	1.4		$	22.4

⁽¹⁾

Company restaurant expenses include Cost of sales, Restaurant labor, and Restaurant expenses including advertising. With the adoption of ASC 606, for the thirteen week period ended September 26, 2018 advertising contributions received from Chili’s franchisees are recorded as Advertising fees within Total revenues, which differs from the thirteen week period ended September 27, 2017 that includes Chili’s franchise advertising contributions recorded on a net basis within Company restaurant expenses.

⁽²⁾

During the thirteen week period ended September 26, 2018 we completed sale leaseback transactions of 141 company-owned Chili’s restaurant properties. As part of this transaction, we sold the related restaurant fixed assets totaling $166.6 million, net of accumulated depreciation. Additionally, Chili’s recognized $20.1 million of gain on the sale, including a certain portion of the deferred gain, as well as transaction related costs incurred totaling $6.8 million in Other (gains) and charges on Consolidated Statements of Comprehensive Income. Please see Note 3 - Sale Leaseback Transactions for further details.


⁽³⁾	During the second quarter of fiscal 2018, we sold our equity interest in the Mexico joint venture.

8. DEBT

Long-term debt consists of the following:



	September 26, 2018			June 27, 2018
Revolving credit facility	$	475.3		$	820.3
5.00% notes	350.0			350.0
3.88% notes	300.0			300.0
Capital lease obligations	41.4			43.0
Total long-term debt	1,166.7			1,513.3
Less unamortized debt issuance costs and discounts	(6.3		)	(6.6		)
Total long-term debt less unamortized debt issuance costs and discounts	1,160.4			1,506.7
Less current installments	(7.4		)	(7.1		)
	$	1,153.0		$	1,499.6

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Revolving Credit Facility

During the thirteen week period ended September 26, 2018, net repayments of $345.0 million were made on the $1.0 billion revolving credit facility primarily from proceeds received from the sale leaseback transactions, partially offset by share repurchases. As of September 26, 2018, $524.7 million of credit was available under the revolving credit facility.

Under the amended $1.0 billion revolving credit facility, the maturity date for $890.0 million of the facility was extended from March 12, 2020 to September 12, 2021 and the remaining $110.0 million remains due on March 12, 2020. The amended revolving credit facility generally bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.00%. For a period of 180 days following the third amendment to the revolving credit facility that occurred in May 2018, we are paying interest at a rate of LIBOR plus 1.70% for a total of 3.94%. One month LIBOR at September 26, 2018 was approximately 2.24%.

5.00% Notes

In September 2016, we completed the private offering of $350.0 million of our 5.00% senior notes due October 2024 (the “2024 Notes”). We received proceeds of $350.0 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The notes require semi-annual interest payments which began on April 1, 2017.

3.88% Notes

In May 2013, we issued $300.0 million of 3.88% notes due in May 2023. The notes require semi-annual interest payments which began in the second quarter of fiscal 2014.

Financial Covenants

Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. We are currently in compliance with all financial covenants.

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9. ACCRUED AND OTHER LIABILITIES

Other accrued liabilities consist of the following:



	September 26, 2018		June 27, 2018
Deferred liabilities and sale leaseback gains ⁽¹⁾	$	33.6	$	15.5
Property tax	21.9		17.4
Insurance	19.5		17.8
Dividends	15.9		16.3
Sales tax	15.2		14.2
Interest	14.6		7.8
Straight-line rent ⁽²⁾	4.9		5.2
Landlord contributions	2.7		2.7
Deferred franchise fees ⁽³⁾	1.4		—
Cyber security incident ⁽⁴⁾	1.0		1.4
Other ⁽⁵⁾	28.8		28.9
	$	159.5	$	127.2


⁽¹⁾	Deferred sale proceeds primarily relate to $18.0 million for the current portion of the deferred gain related to the sale leaseback transactions executed during the first quarter of fiscal 2019, and net proceeds of $13.7 million that have been deferred related to the sale of our corporate headquarters property. Please see Note 3 - Sale Leaseback Transactions for further details.


⁽²⁾	Straight-line rent includes the current portion of the straight-line rent of operating leases. During the thirteen week periods ended September 26, 2018 and September 27, 2017, $1.0 million of expense and $2.0 million of credit related to straight-line rent expense was recognized into Restaurant expenses in the Consolidated Statements of Comprehensive Income, respectively.


⁽³⁾	Deferred franchise and development fees relates to the current portion of upfront initial franchise and development fees received recorded as part of adoption of ASC 606, please see Note 2 - Revenue Recognition for further details, and the Other liabilities table below for the long-term accrued amount.


⁽⁴⁾	Cyber security incident accrual relates the fiscal 2018 event, please see Note 13 - Contingencies for further details.


⁽⁵⁾	Other primarily consists of accruals for utilities and services, certain lease reserves (see Note 13 - Contingencies for details), banquet deposits for Maggiano’s events, the current portion of certain lease-related reserves, and rent-related expenses, and other various accruals.

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Other liabilities consist of the following:



	September 26, 2018		June 27, 2018
Straight-line rent ⁽¹⁾	$	56.1	$	55.6
Insurance	39.3		40.1
Landlord contributions	24.6		23.3
Deferred franchise fees ⁽²⁾	16.4		—
Unfavorable leases	3.3		3.8
Unrecognized tax benefits	2.9		2.9
Other	5.7		6.0
	$