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 December 26, 2018

Commission File Number 1-10275

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)



DELAWARE		75-1914582
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

	(972) 980-9917
	(Registrant’s telephone number, including area 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 every Interactive Data File required to be submitted 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 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	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 January 28, 2019
Common Stock, $0.10 par value	37.5 million shares

BRINKER INTERNATIONAL, INC.

TABLE OF CONTENTS



	Page
Part I. Financial Information	3
Item 1. Financial Statements	3
Consolidated Balance Sheets — December 26, 2018 (Unaudited) and June 27, 2018	3
Consolidated Statements of Comprehensive Income (Unaudited) — Thirteen Week and Twenty-Six Week Periods Ended December 26, 2018 and December 27, 2017	4
Consolidated Statements of Cash Flows (Unaudited) — Twenty-Six Week Periods Ended December 26, 2018 and December 27, 2017	5
Notes to Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	44
Item 4. Controls and Procedures	45
Part II. Other Information	46
Item 1. Legal Proceedings	46
Item 1A. Risk Factors	46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 5. Other Information	46
Item 6. Exhibits	47
Signatures	47

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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
	December 26, 2018			June 27, 2018
ASSETS
Current assets
Cash and cash equivalents	$	16.2		$	10.9
Accounts receivable, net	81.5			53.7
Inventories	24.0			24.2
Restaurant supplies	46.8			46.7
Prepaid expenses	23.1			20.8
Income taxes receivable	4.4			—
Total current assets	196.0			156.3
Property and equipment, at cost
Land	47.2			154.0
Buildings and leasehold improvements	1,465.9			1,673.3
Furniture and equipment	725.9			722.0
Construction-in-progress	38.2			22.1
	2,277.2			2,571.4
Less accumulated depreciation and amortization	(1,507.9		)	(1,632.5		)
Net property and equipment	769.3			938.9
Other assets
Goodwill	163.7			163.8
Deferred income taxes, net	113.9			33.6
Intangibles, net	23.0			24.0
Other	28.9			30.7
Total other assets	329.5			252.1
Total assets	$	1,294.8		$	1,347.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Current installments of long-term debt	$	8.1		$	7.1
Accounts payable	112.2			104.7
Gift card liability	153.0			119.1
Accrued payroll	66.5			74.5
Other accrued liabilities	148.2			127.2
Income taxes payable	—			1.7
Total current liabilities	488.0			434.3
Long-term debt, less current installments	1,263.9			1,499.6
Deferred gain on sale leaseback transactions	252.2			—
Other liabilities	145.9			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 37.4 million shares outstanding at December 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	514.2			511.6
Accumulated other comprehensive loss	(6.1		)	(5.8		)
Retained earnings	2,704.0			2,683.0
	3,229.7			3,206.4
Less treasury stock, at cost (138.8 million shares at December 26, 2018, and 135.4 million shares at June 27, 2018)	(4,084.9		)	(3,924.7		)
Total shareholders’ deficit	(855.2		)	(718.3		)
Total liabilities and shareholders’ deficit	$	1,294.8		$	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 Periods Ended						Twenty-Six Week Periods Ended
	December 26, 2018			December 27, 2017			December 26, 2018			December 27, 2017
Revenues
Company sales	$	761.5		$	742.7		$	1,489.8		$	1,459.6
Franchise and other revenues (Note 2)	29.2			23.7			54.7			46.2
Total revenues	790.7			766.4			1,544.5			1,505.8
Operating costs and expenses
Company restaurants (excluding depreciation and amortization)
Cost of sales	200.9			192.9			392.8			380.5
Restaurant labor	260.8			250.4			517.1			501.5
Restaurant expenses (Note 2)	205.7			188.6			404.7			376.7
Company restaurant expenses	667.4			631.9			1,314.6			1,258.7
Depreciation and amortization	36.1			37.7			73.1			76.2
General and administrative	35.4			33.1			69.2			65.4
Other (gains) and charges	2.2			9.3			(8.9		)	22.5
Total operating costs and expenses	741.1			712.0			1,448.0			1,422.8
Operating income	49.6			54.4			96.5			83.0
Interest expense	15.4			14.3			31.0			28.2
Other (income), net	(0.8		)	(1.0		)	(1.6		)	(1.5		)
Income before provision for income taxes	35.0			41.1			67.1			56.3
Provision for income taxes	3.0			15.8			8.7			21.1
Net income	$	32.0		$	25.3		$	58.4		$	35.2

Basic net income per share	$	0.84		$	0.55		$	1.49		$	0.74

Diluted net income per share	$	0.83		$	0.54		$	1.46		$	0.74

Basic weighted average shares outstanding	38.1			46.4			39.2			47.4

Diluted weighted average shares outstanding	38.8			46.9			39.9			47.8

Other comprehensive income (loss)
Foreign currency translation adjustment	$	(0.6	)	$	(0.2	)	$	(0.3	)	$	0.8
Other comprehensive income (loss)	(0.6		)	(0.2		)	(0.3		)	0.8
Comprehensive income	$	31.4		$	25.1		$	58.1		$	36.0

See accompanying Notes to the Consolidated Financial Statements (Unaudited)

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)



	Twenty-Six Week Periods Ended
	December 26, 2018			December 27, 2017
Cash flows from operating activities
Net income	$	58.4		$	35.2
Adjustments to reconcile Net income to Net cash provided by operating activities:
Depreciation and amortization	73.1			76.2
Stock-based compensation	7.2			6.3
Restructure charges and other impairments	8.4			14.5
Net (gain) loss on disposal of assets	(18.3		)	1.3
Undistributed loss on equity investments	—			0.3
Other	1.3			1.7
Changes in assets and liabilities:
Accounts receivable, net	(32.3		)	(37.2		)
Inventories	0.1			(0.5		)
Restaurant supplies	(0.2		)	(1.1		)
Prepaid expenses	(2.4		)	2.0
Deferred income taxes, net	(77.8		)	10.5
Other assets	(0.2		)	(0.2		)
Accounts payable	4.7			(4.3		)
Gift card liability	42.1			40.3
Accrued payroll	(8.0		)	(7.4		)
Other accrued liabilities	(2.6		)	5.0
Current income taxes	3.4			(20.4		)
Other liabilities	(0.7		)	(2.5		)
Net cash provided by operating activities	56.2			119.7
Cash flows from investing activities
Payments for property and equipment	(78.7		)	(48.6		)
Proceeds from sale of assets	1.2			0.3
Proceeds from note receivable	1.3			0.5
Insurance recoveries	1.4			1.0
Proceeds from sale leaseback transactions, net of related expenses	458.0			—
Net cash provided by (used in) investing activities	383.2			(46.8		)
Cash flows from financing activities
Borrowings on revolving credit facility	479.0			320.0
Payments on revolving credit facility	(713.0		)	(276.0		)
Purchases of treasury stock	(167.6		)	(71.8		)
Payments of dividends	(31.6		)	(35.4		)
Payments on long-term debt	(3.7		)	(5.1		)
Proceeds from issuances of treasury stock	2.8			1.0
Net cash used in financing activities	(434.1		)	(67.3		)
Net change in cash and cash equivalents	5.3			5.6
Cash and cash equivalents at beginning of period	10.9			9.1
Cash and cash equivalents at end of period	$	16.2		$	14.7

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 December 26, 2018 and June 27, 2018, and for the thirteen and twenty-six week periods ended December 26, 2018 and December 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 December 26, 2018, we owned, operated or franchised 1,685 restaurants, consisting of 995 company-owned restaurants and 690 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, see Note 11 - Shareholders’ Deficit for more details) 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 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. These updates are 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 was applied on a retrospective basis. The adoption of this guidance did not have an impact on our Consolidated Financial Statements or debt covenants.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment - In January 2017, the FASB issued ASU 2017-04, this update eliminates step two of the goodwill impairment analysis. Companies will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, they will measure impairment as the difference between the carrying amount and the fair value of the reporting unit. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed with measurement dates after January 1, 2017. We elected to early adopt this guidance as of September 27, 2018. The guidance was adopted prospectively. The adoption of this guidance did not have an impact on our Consolidated Financial Statements. Refer to Note 10 - Fair Value Measurements for disclosure about goodwill impairment.

The impact of additional accounting standards updates that have not yet been adopted can be found at Note 14 - Effect of New Accounting Standards.

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 second quarter and year-to-date periods 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 include royalties, advertising fees (effective first quarter of fiscal 2019), Maggiano’s banquet service charge income, gift card breakage, service fees and discount costs from third-party gift card sales, digital entertainment revenues, delivery fee income, franchise fees, development fees 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 revenues 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 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.- 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

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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.

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 revenues 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 revenues in the Gift card liability in the Consolidated Balance Sheets and recognized as Company sales when the gift card is redeemed by the holder.

Gift card 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 party 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 by third party businesses and distributors. These initial direct costs are deferred and amortized against revenues 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 revenues, retail royalty revenues 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 specific revenue transactions and collected from a customer have been excluded from revenues under both Legacy GAAP and ASC 606.

Disaggregation of Total Revenues

The following tables disaggregate revenues by operating segment and major source:



	Thirteen Weeks Ended December 26, 2018
	Chili’s		Maggiano’s		Total
Company sales	$	640.6	$	120.9	$	761.5
Royalties	13.2		—		13.2
Franchise fees and other revenues	8.5		7.5		16.0
Total revenues	$	662.3	$	128.4	$	790.7

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	Twenty Six Weeks Ended December 26, 2018
	Chili’s		Maggiano’s		Total
Company sales	$	1,280.9	$	208.9	$	1,489.8
Royalties	26.1		—		26.1
Franchise fees and other revenues	17.1		11.5		28.6
Total revenues	$	1,324.1	$	220.4	$	1,544.5

Franchise fees and other revenues primarily includes advertising fees, gift card breakage income, 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.

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 two quarters of fiscal 2019 is presented below, along with the revenues 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	0.4
Amount recognized to Franchise and other revenue	(1.3		)
Balance at December 26, 2018	$	17.2



Fiscal Year	Development and Franchise Fees Revenue Recognition
2019	$	0.7
2020	1.4
2021	1.4
2022	1.4
2023	1.4
Thereafter	10.9
	$	17.2

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 ^{(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 decrease in Shareholders’ deficit.


⁽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 increase to Shareholders’ deficit at June 28, 2018.

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 for the thirteen and twenty-six week periods ended December 26, 2018, Cash flows from operating activities for the twenty-six week period ended December 26, 2018, and the unaudited Condensed Consolidated Balance Sheet at December 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 December 26, 2018.

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Condensed Consolidated Statement of Income (Unaudited)



	Thirteen Week Period Ended December 26, 2018									Twenty-Six Week Period Ended December 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts			As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
Revenues
Company sales	$	761.5		$	—		$	761.5		$	1,489.8		$	—		$	1,489.8
Franchise and other revenues	29.2			(5.8		)	23.4			54.7			(10.6		)	44.1
Total revenues	790.7			(5.8		)	784.9			1,544.5			(10.6		)	1,533.9
Operating costs and expenses
Company restaurants (excluding depreciation and amortization)
Cost of sales	200.9			—			200.9			392.8			—			392.8
Restaurant labor	260.8			—			260.8			517.1			—			517.1
Restaurant expenses	205.7			(5.2		)	200.5			404.7			(10.3		)	394.4
Company restaurant expenses	667.4			(5.2		)	662.2			1,314.6			(10.3		)	1,304.3
Depreciation and amortization	36.1			—			36.1			73.1			—			73.1
General and administrative	35.4			—			35.4			69.2			—			69.2
Other (gains) and charges	2.2			—			2.2			(8.9		)	—			(8.9		)
Total operating costs and expenses	741.1			(5.2		)	735.9			1,448.0			(10.3		)	1,437.7
Operating income	49.6			(0.6		)	49.0			96.5			(0.3		)	96.2
Interest expense	15.4			—			15.4			31.0			—			31.0
Other (income), net	(0.8		)	—			(0.8		)	(1.6		)	—			(1.6		)
Income before provision for income taxes	35.0			(0.6		)	34.4			67.1			(0.3		)	66.8
Provision for income taxes	3.0			(0.1		)	2.9			8.7			—			8.7
Net income	$	32.0		$	(0.5	)	$	31.5		$	58.4		$	(0.3	)	$	58.1

Basic net income per share	$	0.84		$	(0.01	)	$	0.83		$	1.49		$	(0.01	)	$	1.48

Diluted net income per share	$	0.83		$	(0.02	)	$	0.81		$	1.46		$	0.00		$	1.46

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Cash flows from operating activities (Unaudited)



	Twenty-Six Week Period Ended December 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
Net income	$	58.4		$	(0.3	)	$	58.1
Adjustments to reconcile Net income to Net cash provided by operating activities:
Depreciation and amortization	73.1			—			73.1
Stock-based compensation	7.2			—			7.2
Restructure charges and other impairments	8.4			—			8.4
Net (gain) loss on disposal of assets	(18.3		)	—			(18.3		)
Other	1.3			—			1.3
Changes in assets and liabilities:
Accounts receivable, net	(32.3		)	—			(32.3		)
Inventories	0.1			—			0.1
Restaurant supplies	(0.2		)	—			(0.2		)
Prepaid expenses	(2.4		)	—			(2.4		)
Deferred income taxes, net	(77.8		)	—			(77.8		)
Other assets	(0.2		)	—			(0.2		)
Accounts payable	4.7			—			4.7
Gift card liability	42.1			(0.3		)	41.8
Accrued payroll	(8.0		)	—			(8.0		)
Other accrued liabilities	(2.6		)	0.6			(2.0		)
Current income taxes	3.4			—			3.4
Other liabilities	(0.7		)	—			(0.7		)
Net cash provided by operating activities	$	56.2		$	—		$	56.2

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Condensed Consolidated Balance Sheet (Unaudited)



	December 26, 2018
	As Reported ASC 606 Amounts			Adjustments			Legacy GAAP Amounts
ASSETS
Current assets
Total current assets	$	196.0		$	—		$	196.0
Property and equipment, at cost
Net property and equipment	769.3			—			769.3
Other assets
Goodwill	163.7			—			163.7
Deferred income taxes, net	113.9			(2.5		)	111.4
Intangibles, net	23.0			—			23.0
Other	28.9			—			28.9
Total other assets	329.5			(2.5		)	327.0
Total assets	$	1,294.8		$	(2.5	)	$	1,292.3
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Current installments of long-term debt	$	8.1		$	—		$	8.1
Accounts payable	112.2			—			112.2
Gift card liability	153.0			7.9			160.9
Accrued payroll	66.5			—			66.5
Other accrued liabilities	148.2			(0.9		)	147.3
Total current liabilities	488.0			7.0			495.0
Long-term debt, less current installments	1,263.9			—			1,263.9
Deferred gain on sale leaseback transactions	252.2			—			252.2
Other liabilities	145.9			(16.6		)	129.3
Shareholders’ deficit
Common stock	17.6			—			17.6
Additional paid-in capital	514.2			—			514.2
Accumulated other comprehensive loss	(6.1		)	—			(6.1		)
Retained earnings	2,704.0			7.1			2,711.1
Less treasury stock, at cost	(4,084.9		)	—			(4,084.9		)
Total shareholders’ deficit	(855.2		)	7.1			(848.1		)
Total liabilities and shareholders’ deficit	$	1,294.8		$	(2.5	)	$	1,292.3

3. SALE LEASEBACK TRANSACTIONS

Restaurant Properties Sale Leaseback Transactions

In the first quarter of fiscal 2019, we 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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In the second quarter of fiscal 2019, we completed sale leaseback transactions of an additional four restaurant properties sold for aggregate consideration of $10.6 million. The balances attributable to the restaurant assets sold include Land of $2.9 million, Buildings and leasehold improvements of $6.8 million, certain fixtures included in Furniture and equipment of $0.3 million, and Accumulated depreciation of $5.7 million. The total gain was $6.3 million and the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility.

Lease Details

The initial terms of all leases 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 expenses associated with these operating leases are being recognized on a straight-line basis over the lease terms. As of December 26, 2018, $1.2 million of straight-line rent accrual 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 and twenty-six week periods ended December 26, 2018, $4.4 million and $17.7 million of the net gain was recognized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income, respectively. The remaining balance of the deferred gain of $270.6 million as of December 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 leasehold improvements associated with our current corporate headquarters was recorded to Other (gains) and charges in the Consolidated Statements of Comprehensive Income of $0.5 million and $1.0 million during the thirteen and twenty-six week periods ended December 26, 2018, respectively, and $0.5 million and $1.0 million during the thirteen and twenty-six week periods ended December 27, 2017, respectively. As of December 26, 2018, Land of $5.9 million, and additional Net property and equipment of $2.0 million were recorded on our Consolidated Balance Sheets related to the sold property.

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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 Periods Ended		Twenty-Six Week Periods Ended
	December 26, 2018	December 27, 2017	December 26, 2018	December 27, 2017
Basic weighted average shares outstanding	38.1	46.4	39.2	47.4
Dilutive stock options	0.2	0.1	0.2	0.1
Dilutive restricted shares	0.5	0.4	0.5	0.3
	0.7	0.5	0.7	0.4
Diluted weighted average shares outstanding	38.8	46.9	39.9	47.8

Awards excluded due to anti-dilutive effect on diluted net income per share	0.8	1.4	0.9	1.4

5. INCOME TAXES

Fiscal 2019

The effective income tax rate in the thirteen and twenty-six week periods ended December 26, 2018 decreased to 8.6% and 13.0% compared to 38.3% and 37.4% for the thirteen and twenty-six week periods ended December 27, 2017, respectively, 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.

During the twenty-six week period ended December 26, 2018, the taxes on the gains related to the sale leaseback transactions, as described in Note 3 - Sale Leaseback Transactions, of $75.0 million were recognized for tax purposes when the transactions were completed. Also during the twenty-six week period ended December 26, 2018 we paid $67.1 million of the taxes, with a remaining $7.9 million included as a payable net within Income taxes receivable in the Consolidated Balance Sheets as of December 26, 2018. This liability is expected to be paid during the third quarter of fiscal 2019.

Fiscal 2018

The thirteen and twenty-six week periods ended December 27, 2017 consider the Tax Act that was enacted prior to the end of the second quarter of fiscal 2018 and therefore the federal statutory tax rate changes stipulated by the Tax Act were reflected in the second quarter of fiscal 2018. Our federal statutory tax rate for fiscal 2018 was 28.1% representing a blended tax rate for fiscal 2018 based on the number of days in fiscal 2018 before and after the effective date. In accordance with ASC 740, we re-measured our deferred tax accounts as of the enactment date using the new federal statutory tax rate and recognized the change as a discrete item in the provision for income taxes. The Company’s deferred tax position was a net asset and as a result, the reduction in the federal statutory tax rate resulted in a one-time non-cash adjustment to our net deferred tax balance of $8.7 million with a corresponding increase to the provision for income taxes in the second quarter of fiscal 2018.

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6. OTHER GAINS AND CHARGES

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



	Thirteen Week Periods Ended						Twenty-Six Week Periods Ended
	December 26, 2018			December 27, 2017			December 26, 2018			December 27, 2017
Sale leaseback (gain), net of transaction charges	$	(4.4	)	$	—		$	(17.7	)	$	—
Gain on sale of assets, net	(0.8		)	(0.3		)	(0.8		)	(0.3		)
Remodel-related costs	2.6			—			3.1			—
Restaurant closure charges	2.1			4.3			3.8			4.5
Restaurant impairment charges	1.0			2.0			1.0			9.2
Foreign currency transaction (gain)/loss	0.7			0.9			(0.1		)	0.9
Accelerated depreciation	0.5			0.5			1.0			1.0
Property damages, net of (insurance recoveries)	0.2			0.5			(0.6		)	5.1
Lease guarantee charges	—			1.4			—			1.4
Cyber security incident charges	—			—			0.4			—
Other	0.3			—			1.0			0.7
Total	$	2.2		$	9.3		$	(8.9	)	$	22.5

Fiscal 2019

Sale leaseback (gain), net of transaction charges during the thirteen and twenty-six week periods ended December 26, 2018 includes a gain of $4.6 million and $24.7 million, respectively, associated with the transactions, less transaction costs incurred of $0.2 million and $7.0 million, respectively, related to professional services, legal and accounting fees. Please see Note 3 - Sale Leaseback Transactions for further details on this transaction.

Gain on sale of assets, net during the thirteen and twenty-six week periods ended December 26, 2018 includes $0.8 million of gain recognized on the sale of land in Scottsdale, AZ and Pensacola, FL.

Remodel-related costs during the thirteen and twenty-six week periods ended December 26, 2018 totaling $2.6 million and $3.1 million, respectively, were recorded related to existing fixed asset write-offs associated with the Chili’s remodel project.

Restaurant closure charges during the thirteen and twenty-six week periods ended December 26, 2018 includes $2.1 million and $3.8 million, respectively, which were primarily related to Chili’s lease termination charges and certain Chili’s restaurant closure costs.

Restaurant impairment charges during the thirteen and twenty-six week periods ended December 26, 2018 includes $1.0 million primarily related to the long-lived assets of two underperforming Chili’s restaurants.

Foreign currency transaction (gain)/loss during the thirteen and twenty-six week periods ended December 26, 2018 includes a $0.7 million loss and $0.1 million gain, respectively, resulting from the change in value of the Mexican peso as compared to that of the U.S. dollar on our Mexican peso denominated note receivable that we received as consideration from the sale of our equity interest in our Mexico joint venture during the second quarter of fiscal 2018.

Accelerated depreciation during the thirteen and twenty-six week periods ended December 26, 2018 includes $0.5 million and $1.0 million, respectively, of 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.

Property damages, net of (insurance recoveries) during the thirteen week period ended December 26, 2018 primarily includes of $0.2 million of expenses incurred associated with storm damages at certain restaurant locations. Property damages, net of (insurance recoveries) during the twenty-six week period ended December 26, 2018 includes $0.6 million of insurance proceeds received related to a previously filed fire claim, partially offset by expenses incurred associated with storm damages at certain restaurant locations.

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Cyber security incident charges during the twenty-six week period ended December 26, 2018 of $0.4 million was 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 second quarter of fiscal 2018, we recorded restaurant closure charges of $4.3 million primarily related to lease termination charges and other costs associated with the closure of nine underperforming Chili’s restaurants in the second quarter of fiscal 2018 located in Alberta, Canada. Alberta has an oil dependent economy and has experienced an economic recession in recent years related to lower oil production. The slower economy has 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. 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. These restaurants were closed in the second quarter of fiscal 2018.

During the second quarter of fiscal 2018, we recorded asset impairment charges of $2.0 million primarily related to the long-lived assets of certain underperforming Maggiano’s and Chili’s restaurants that continue to operate. For further details refer to Note 10 - Fair Value Measurements. We also recorded lease guarantee charges of $1.4 million related to leases that were assigned to a divested brand. For additional lease guarantee disclosures, see Note 13 - Commitments and Contingencies.

In October 2017, we sold our Dutch subsidiary that held our equity interest in our Chili’s joint venture in Mexico to the franchise partner in the joint venture, CMR, S.A.B. de C.V. for $18.0 million. We recorded a gain of $0.2 million which includes the recognition of $5.4 million of foreign currency translation losses reclassified from AOCL consisting of $5.9 million of foreign currency translation losses from previous years, partially offset by $0.5 million of current year foreign currency translation gains. We received a note as consideration for the sale to be paid in 72 equal installments, with one installment payment made at closing and the other payments to be made over 71 months pursuant to the note. The note is denominated in pesos and is re-measured at the end of each period resulting in a gain or loss from foreign currency exchange rate changes. We recorded a $0.9 million foreign currency transaction loss in the second quarter due to the decline in the exchange rate for the Mexican peso relative to the U.S. dollar. The current portion of the note which represents the cash payments to be received over the next 12 months is included within accounts receivable, net while the long-term portion of the note is included within other assets.

Additionally, we incurred $0.5 million