Notes to 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. and its subsidiaries and any predecessor companies of Brinker International, Inc.
Our unaudited consolidated financial statements as of
December 27, 2017
and
June 28, 2017
and for the thirteen and
twenty-six week
periods ended
December 27, 2017
and
December 28, 2016
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 27, 2017
, we owned, operated or franchised
1,682
restaurants in the United States and
31
countries and
two
territories outside of the United States.
The foreign currency translation adjustment included in comprehensive income on 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) 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 on the consolidated balance sheets. Additionally, certain prior year balances in the consolidated balance sheets have been reclassified to conform with fiscal 2018 presentation. These reclassifications have no effect on our net income as previously reported and an immaterial impact on our prior year consolidated balance sheets.
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.
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update changed the recognition of excess tax benefits and tax deficiencies resulting from the settlement of share-based awards from an adjustment to additional paid-in capital on the consolidated balance sheets to an adjustment to the provision for income taxes on the consolidated statements of comprehensive income and is applied on a prospective basis. This update also changed the classification of excess tax benefits from cash flows from financing activities to cash flows from operating activities on the consolidated statements of cash flows and is applied retrospectively. This update was effective for annual and interim periods for fiscal years beginning after December 15, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. Accordingly, we recognized a discrete tax benefit of
$0.4 million
in the provision for income taxes, which resulted in an increase in diluted net income per share of
$0.01
in the consolidated statements of comprehensive income for the thirteen week period ended December 27, 2017. We recognized a discrete tax expense of
$1.2 million
in the provision for income taxes, which resulted in a decrease in diluted net income per share of
$0.03
, in the consolidated statements of comprehensive income for the twenty-six week period ended
December 27, 2017
. The inclusion of excess tax benefits and tax deficiencies within our provision for income taxes will increase its volatility as the amount of excess tax benefits or tax deficiencies from share-based compensation awards depends on our stock price at the date the awards vest. In addition, we reclassified
$1.7 million
of excess tax benefits received in the first six months of fiscal 2017 from cash flows from financing activities to cash flows from operating activities on our consolidated statement of cash flows for the twenty-six week period ended
December 28, 2016
. The adoption of the other provisions in this update, including the accounting policy election for accounting for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows, had no impact on our consolidated financial statements. We will continue to estimate forfeitures of share-based awards.
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 accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the
June 28, 2017
Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes.
2. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number of common 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 number of shares 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 dilutive net income per share calculation.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 27, 2017
|
|
December 28, 2016
|
|
December 27, 2017
|
|
December 28, 2016
|
Basic weighted average shares outstanding
|
46,432
|
|
|
49,833
|
|
|
47,362
|
|
|
52,339
|
|
Dilutive stock options
|
95
|
|
|
223
|
|
|
89
|
|
|
235
|
|
Dilutive restricted shares
|
353
|
|
|
424
|
|
|
355
|
|
|
454
|
|
|
448
|
|
|
647
|
|
|
444
|
|
|
689
|
|
Diluted weighted average shares outstanding
|
46,880
|
|
|
50,480
|
|
|
47,806
|
|
|
53,028
|
|
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect on diluted net income per share
|
1,393
|
|
|
890
|
|
|
1,403
|
|
|
959
|
|
3. INCOME TAXES
The Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted on December 22, 2017 with an effective date of January 1, 2018. The enactment date occurred 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 current quarter. The Tax Act lowered the federal statutory tax rate from 35% to 21% effective January 1, 2018. Brinker’s federal statutory tax rate for fiscal 2018 is now
28%
representing a blended tax rate for the current fiscal year based on the number of days in the fiscal year before and after the effective date. For subsequent years, our federal statutory tax rate will be
21%
. 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 is 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. Our accumulated foreign earnings and profits are in a loss position and therefore no taxes are applicable related to a deemed repatriation.
A reconciliation between the reported provision for income taxes and the amount computed by applying our federal statutory income tax rate of
28%
to income before provision for income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 27, 2017
|
|
Twenty-six Week Period Ended December 27, 2017
|
Income tax expense at statutory rate
|
$
|
11,520
|
|
|
$
|
15,761
|
|
FICA tax credit
|
(4,555
|
)
|
|
(6,232
|
)
|
State income taxes, net of federal benefit
|
1,362
|
|
|
1,863
|
|
Stock based compensation excess tax (windfall) shortfall
|
(400
|
)
|
|
1,170
|
|
Revaluation of deferred taxes
|
8,738
|
|
|
8,738
|
|
Other
|
(889
|
)
|
|
(252
|
)
|
|
$
|
15,776
|
|
|
$
|
21,048
|
|
4. OTHER GAINS AND CHARGES
Other gains and charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 27,
2017
|
|
December 28,
2016
|
|
December 27,
2017
|
|
December 28,
2016
|
Restaurant closure charges
|
$
|
4,306
|
|
|
$
|
321
|
|
|
$
|
4,544
|
|
|
$
|
2,827
|
|
Restaurant impairment charges
|
1,974
|
|
|
1,851
|
|
|
9,133
|
|
|
1,851
|
|
Lease guarantee charges
|
1,433
|
|
|
—
|
|
|
1,433
|
|
|
—
|
|
Foreign currency transaction loss
|
882
|
|
|
—
|
|
|
882
|
|
|
—
|
|
Hurricane-related costs
|
572
|
|
|
—
|
|
|
5,220
|
|
|
—
|
|
Accelerated depreciation
|
483
|
|
|
—
|
|
|
966
|
|
|
—
|
|
Gain on the sale of assets, net
|
(348
|
)
|
|
(2,569
|
)
|
|
(303
|
)
|
|
(2,569
|
)
|
Information technology restructuring
|
—
|
|
|
209
|
|
|
—
|
|
|
2,700
|
|
Severance
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
Other
|
(41
|
)
|
|
1,494
|
|
|
540
|
|
|
2,282
|
|
|
$
|
9,261
|
|
|
$
|
1,306
|
|
|
$
|
22,415
|
|
|
$
|
7,384
|
|
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 restaurant impairment charges of
$2.0 million
primarily related to the long-lived assets of certain underperforming Maggiano's and Chili's restaurants that will continue to operate. See Note 8 for fair value disclosures. 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 11 - Contingencies.
On October 13, 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. The consideration for the shares will 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 a promissory 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.
We incurred 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 and are working closely with our insurance provider to determine what, if any, costs are recoverable related to the losses recorded as well as our loss of revenues.
Fiscal 2017
During the second quarter of fiscal 2017, we recorded a
$2.6 million
gain on the sale of property, partially offset by restaurant impairment charges of
$1.9 million
primarily related to the long-lived assets and reacquired franchise rights of six underperforming Chili's restaurants which continue to operate. See Note 8 for fair value disclosures.
During the first quarter of fiscal 2017, we recorded restaurant closure charges of
$2.5 million
primarily related to lease termination charges for restaurants closed during the quarter. Additionally, we incurred
$2.5 million
of professional fees and severance associated with our information technology restructuring.
5. 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 U.S. 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 are derived principally from the sales of food and beverages. Franchise and other revenues primarily includes royalties, development fees, franchise fees, banquet service charge income, gift card breakage and 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 U.S. There were no material transactions amongst our operating segments.
Our chief operating decision maker uses operating income as the measure for assessing performance of our operating 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. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 27, 2017
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
623,593
|
|
|
$
|
119,095
|
|
|
$
|
—
|
|
|
$
|
742,688
|
|
Franchise and other revenues
|
|
16,523
|
|
|
7,189
|
|
|
—
|
|
|
23,712
|
|
Total revenues
|
|
640,116
|
|
|
126,284
|
|
|
—
|
|
|
766,400
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses (a)
|
|
533,936
|
|
|
97,888
|
|
|
124
|
|
|
631,948
|
|
Depreciation and amortization
|
|
31,003
|
|
|
4,022
|
|
|
2,630
|
|
|
37,655
|
|
General and administrative
|
|
9,264
|
|
|
1,469
|
|
|
22,355
|
|
|
33,088
|
|
Other gains and charges
|
|
5,920
|
|
|
983
|
|
|
2,358
|
|
|
9,261
|
|
Total operating costs and expenses
|
|
580,123
|
|
|
104,362
|
|
|
27,467
|
|
|
711,952
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
59,993
|
|
|
$
|
21,922
|
|
|
$
|
(27,467
|
)
|
|
$
|
54,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 28, 2016
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
632,085
|
|
|
$
|
116,624
|
|
|
$
|
—
|
|
|
$
|
748,709
|
|
Franchise and other revenues
|
|
15,278
|
|
|
7,056
|
|
|
—
|
|
|
22,334
|
|
Total revenues
|
|
647,363
|
|
|
123,680
|
|
|
—
|
|
|
771,043
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses (a)
|
|
537,170
|
|
|
98,098
|
|
|
92
|
|
|
635,360
|
|
Depreciation and amortization
|
|
32,643
|
|
|
4,055
|
|
|
2,607
|
|
|
39,305
|
|
General and administrative
|
|
9,414
|
|
|
1,688
|
|
|
22,444
|
|
|
33,546
|
|
Other gains and charges
|
|
2,943
|
|
|
12
|
|
|
(1,649
|
)
|
|
1,306
|
|
Total operating costs and expenses
|
|
582,170
|
|
|
103,853
|
|
|
23,494
|
|
|
709,517
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
65,193
|
|
|
$
|
19,827
|
|
|
$
|
(23,494
|
)
|
|
$
|
61,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 27, 2017
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
1,251,197
|
|
|
$
|
208,433
|
|
|
$
|
—
|
|
|
$
|
1,459,630
|
|
Franchise and other revenues
|
|
34,788
|
|
|
11,372
|
|
|
—
|
|
|
46,160
|
|
Total revenues
|
|
1,285,985
|
|
|
219,805
|
|
|
—
|
|
|
1,505,790
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses (a)
|
|
1,075,282
|
|
|
183,196
|
|
|
271
|
|
|
1,258,749
|
|
Depreciation and amortization
|
|
62,807
|
|
|
8,072
|
|
|
5,296
|
|
|
76,175
|
|
General and administrative
|
|
18,842
|
|
|
2,782
|
|
|
43,822
|
|
|
65,446
|
|
Other gains and charges
|
|
18,069
|
|
|
771
|
|
|
3,575
|
|
|
22,415
|
|
Total operating costs and expenses
|
|
1,175,000
|
|
|
194,821
|
|
|
52,964
|
|
|
1,422,785
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
110,985
|
|
|
$
|
24,984
|
|
|
$
|
(52,964
|
)
|
|
$
|
83,005
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,136,225
|
|
|
$
|
155,525
|
|
|
$
|
108,795
|
|
|
$
|
1,400,545
|
|
Payments for property and equipment
|
|
40,785
|
|
|
4,208
|
|
|
3,566
|
|
|
48,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 28, 2016
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
1,280,728
|
|
|
$
|
205,391
|
|
|
$
|
—
|
|
|
$
|
1,486,119
|
|
Franchise and other revenues
|
|
32,193
|
|
|
11,223
|
|
|
—
|
|
|
43,416
|
|
Total revenues
|
|
1,312,921
|
|
|
216,614
|
|
|
—
|
|
|
1,529,535
|
|
|
|
|
|
|
|
|
|
|
Company restaurant expenses (a)
|
|
1,092,740
|
|
|
181,683
|
|
|
452
|
|
|
1,274,875
|
|
Depreciation and amortization
|
|
65,244
|
|
|
7,941
|
|
|
5,006
|
|
|
78,191
|
|
General and administrative
|
|
19,344
|
|
|
3,212
|
|
|
43,527
|
|
|
66,083
|
|
Other gains and charges
|
|
4,869
|
|
|
746
|
|
|
1,769
|
|
|
7,384
|
|
Total operating costs and expenses
|
|
1,182,197
|
|
|
193,582
|
|
|
50,754
|
|
|
1,426,533
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
130,724
|
|
|
$
|
23,032
|
|
|
$
|
(50,754
|
)
|
|
$
|
103,002
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment
|
|
$
|
45,618
|
|
|
$
|
8,116
|
|
|
$
|
6,321
|
|
|
$
|
60,055
|
|
___________________________________________________________________
|
|
(a)
|
Company restaurant expenses includes cost of sales, restaurant labor and restaurant expenses, including advertising.
|
Reconciliation of operating income to income before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 27, 2017
|
|
December 28, 2016
|
|
December 27, 2017
|
|
December 28, 2016
|
Operating income
|
$
|
54,448
|
|
|
$
|
61,526
|
|
|
$
|
83,005
|
|
|
$
|
103,002
|
|
Less interest expense
|
(14,321
|
)
|
|
(13,641
|
)
|
|
(28,205
|
)
|
|
(22,450
|
)
|
Plus other, net
|
1,015
|
|
|
383
|
|
|
1,491
|
|
|
682
|
|
Income before provision for income taxes
|
$
|
41,142
|
|
|
$
|
48,268
|
|
|
$
|
56,291
|
|
|
$
|
81,234
|
|
6. DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2017
|
|
June 28,
2017
|
Revolving credit facility
|
$
|
436,250
|
|
|
$
|
392,250
|
|
5.00% notes
|
350,000
|
|
|
350,000
|
|
3.88% notes
|
300,000
|
|
|
300,000
|
|
2.60% notes
|
250,000
|
|
|
250,000
|
|
Capital lease obligations
|
44,607
|
|
|
45,417
|
|
Total long-term debt
|
1,380,857
|
|
|
1,337,667
|
|
Less unamortized debt issuance costs and discounts
|
(7,337
|
)
|
|
(8,189
|
)
|
Total long-term debt less unamortized debt issuance costs and discounts
|
1,373,520
|
|
|
1,329,478
|
|
Less current installments
|
(8,265
|
)
|
|
(9,649
|
)
|
|
$
|
1,365,255
|
|
|
$
|
1,319,829
|
|
During the twenty-six week period ended December 27, 2017, net borrowings of
$44.0 million
were drawn on the
$1 billion
revolving credit facility primarily to fund share repurchases.
Under the revolving credit facility,
$890.0 million
of the facility is due on
September 12, 2021
and the remaining
$110.0
million is due on
March 12, 2020
. The revolving credit facility 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%
. Based on our current credit rating, we are paying interest at a rate of LIBOR plus
1.38%
for a total of
2.95%
.
One month LIBOR
at
December 27, 2017
was approximately
1.57%
.
As of
December 27, 2017
,
$563.8 million
of credit is available under the revolving credit facility. Obligations under our 2.60% notes, which will mature in May 2018, have been classified as long-term, reflecting our ability to refinance these notes through our existing revolving credit facility.
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.
7. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2017
|
|
June 28,
2017
|
Insurance
|
19,898
|
|
|
17,484
|
|
Property tax
|
19,015
|
|
|
16,566
|
|
Dividends
|
17,609
|
|
|
16,649
|
|
Sales tax
|
16,183
|
|
|
12,494
|
|
Interest
|
7,726
|
|
|
7,696
|
|
Other
|
41,359
|
|
|
40,626
|
|
|
$
|
121,790
|
|
|
$
|
111,515
|
|
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2017
|
|
June 28,
2017
|
Straight-line rent
|
$
|
56,174
|
|
|
$
|
57,464
|
|
Insurance
|
42,273
|
|
|
42,532
|
|
Landlord contributions
|
24,034
|
|
|
26,402
|
|
Unfavorable leases
|
4,149
|
|
|
5,398
|
|
Unrecognized tax benefits
|
3,576
|
|
|
3,116
|
|
Other
|
6,068
|
|
|
6,212
|
|
|
$
|
136,274
|
|
|
$
|
141,124
|
|
8. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
•
|
Level 1 – inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
|
|
|
•
|
Level 3 – inputs are unobservable and reflect our own assumptions.
|
|
|
(a)
|
Non-Financial Assets Measured on a Non-Recurring Basis
|
We review the carrying amounts of property and equipment, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value. Based on our semi-annual review, during the twenty-six week period ended December 27, 2017, we impaired long-lived assets with carrying values of
$2.3 million
, primarily related to one underperforming Maggiano's restaurant and one underperforming Chili's restaurant which will continue to operate. We determined the leasehold improvements associated with the impaired restaurants had a fair value of
$0.3 million
, based on Level 3 fair value measurements, resulting in an impairment charge of
$2.0 million
. During the first quarter of fiscal 2018, we impaired long-lived assets and reacquired franchise rights with carrying values of
$6.0 million
and
$1.2 million
, respectively, primarily related to nine underperforming Chili's restaurants located in Alberta, Canada which were identified for closure by management. We determined the leasehold improvements and other assets associated with these restaurants had no fair value, based on Level 3 fair value measurements, resulting in an impairment charge of
$7.2 million
. The restaurant assets were assigned a
zero
fair value as the decision to close the restaurants in the second quarter of fiscal 2018 will result in substantially all of the assets reverting to the landlords. During the twenty-six week period ended December 28, 2016, long-lived assets and reacquired franchise rights with carrying values of
$1.2 million
and
$0.8 million
, respectively, primarily related to
six
underperforming restaurants, were determined to have a total fair value of
$0.2 million
resulting in an impairment charge of
$1.8 million
.
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions. Based on our semi-annual review, during the second quarter of fiscal 2018 and fiscal 2017, we determined there was no impairment.
We review the carrying amounts of goodwill annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the implied fair value of the goodwill. We determined that there was no impairment of goodwill during our annual test in the second quarter of fiscal 2018 and fiscal 2017 as the fair value of our reporting units was substantially in excess of the carrying value. No indicators of impairment were identified through the end of the second quarter of fiscal 2018.
All impairment charges were included in other gains and charges in the consolidated statements of comprehensive income for the periods presented.
|
|
(b)
|
Other Financial Instruments
|
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, a long-term note receivable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items.
On October 13, 2017, we received an
$18.0 million
long-term note as consideration related to the sale of our equity interest in the Chili’s joint venture in Mexico. We determined the fair value of this note based on an internally developed analysis relying on Level 3 inputs. This analysis was based on a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments observed in the market. As a result of this analysis, we determined the fair value of this note was approximately
$16.0 million
and recorded this fair value as its initial carrying value. The current portion of the note represents the cash payments to be received over the next 12 months and is included within accounts receivable, net, while the long-term portion of the note is included within other assets.
The carrying amount of debt outstanding related to our revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the
2.60%
notes,
3.88%
notes and
5.00%
notes are based on quoted market prices and are considered Level 2 fair value measurements.
The carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values of the
2.60%
notes,
3.88%
notes and
5.00%
notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2017
|
|
June 28, 2017
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
2.60% Notes
|
$
|
249,784
|
|
|
$
|
249,843
|
|
|
$
|
249,495
|
|
|
$
|
250,480
|
|
3.88% Notes
|
$
|
298,090
|
|
|
$
|
294,816
|
|
|
$
|
297,912
|
|
|
$
|
286,077
|
|
5.00% Notes
|
$
|
344,790
|
|
|
$
|
352,524
|
|
|
$
|
344,405
|
|
|
$
|
347,956
|
|
9. SHAREHOLDERS’ DEFICIT
In August 2017, our Board of Directors authorized a
$250.0 million
increase to our existing share repurchase program resulting in total authorizations of
$4.6 billion
. We repurchased approximately
2.2 million
shares of our common stock for
$71.8 million
during the
first two quarters
of fiscal
2018
. The repurchased shares included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares. Repurchased common stock is reflected as an increase in treasury stock within shareholders’ deficit. As of
December 27, 2017
, approximately
$294.9 million
was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings, and planned investment and financing needs.
During the
first two quarters
of fiscal
2018
, we granted approximately
1.2 million
stock options with a weighted average exercise price per share of
$31.22
and a weighted average fair value per share of
$4.45
, and approximately
417,000
restricted share awards with a weighted average fair value per share of
$31.23
.
During the
first two quarters
of fiscal
2018
, we paid dividends of
$35.4 million
to common stock shareholders, compared to
$36.9 million
in the prior year. Our Board of Directors approved a
12%
increase in the quarterly dividend from
$0.34
to
$0.38
per share effective with the dividend declared in August 2017. We also declared a quarterly dividend in November 2017, which was paid on December 28, 2017 in the amount of
$17.6 million
. The dividend accrual was included in other accrued liabilities on our consolidated balance sheet as of
December 27, 2017
.
On October 13, 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. The changes in AOCL for the first two quarters of fiscal 2018 are as follows (in thousands):
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
Balance at June 28, 2017
|
$
|
(11,921
|
)
|
Cumulative losses as of June 28, 2017 reclassified from AOCL due to disposition
|
5,899
|
|
Current period other comprehensive income before reclassifications
|
1,339
|
|
Current period reclassifications from AOCL due to disposition
|
(519
|
)
|
Net current period other comprehensive income
|
820
|
|
Balance at December 27, 2017
|
$
|
(5,202
|
)
|
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest in the
first two quarters
of fiscal
2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2017
|
|
December 28,
2016
|
Income taxes, net of refunds
|
$
|
30,520
|
|
|
$
|
41,605
|
|
Interest, net of amounts capitalized
|
25,271
|
|
|
15,117
|
|
Non-cash investing and financing activities for the
first two quarters
of fiscal
2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 27,
2017
|
|
December 28,
2016
|
Retirement of fully depreciated assets
|
$
|
22,414
|
|
|
$
|
13,157
|
|
Dividends declared but not paid
|
18,245
|
|
|
17,527
|
|
Accrued capital expenditures
|
4,672
|
|
|
4,311
|
|
Capital lease additions
|
4,281
|
|
|
1,147
|
|
11. CONTINGENCIES
In connection with the sale of restaurants to franchisees and brand divestitures, we have, in certain cases, guaranteed lease payments. As of
December 27, 2017
and
June 28, 2017
, we have outstanding lease guarantees or are secondarily liable for
$65.0 million
and
$69.0 million
, respectively. These amounts represent the maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2018 through fiscal 2027. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred.
In July 2017, we were notified that Mac Acquisition LLC, the owner of Romano’s Macaroni Grill restaurants, closed certain of its properties for which we are secondarily liable. Based on management’s belief that Mac Acquisition LLC would default on the leases for these closed locations, a liability was established based on an estimate of the obligation associated with these locations of approximately
$1.1 million
in fiscal 2017.
In October 2017, Mac Acquisition LLC filed for Chapter 11 bankruptcy protection and we were made aware that additional leases were rejected in the bankruptcy process. Based on the additional information obtained from the bankruptcy proceedings and in discussions with the landlords of the restaurants, we recorded an incremental charge of
$1.4 million
to increase our estimated liability pertaining to our obligations under these leases. We paid
$0.5 million
to settle the remaining obligations of two restaurants and believe our current liability of
$2.0 million
is appropriate based on our analysis of the potential settlements. We will continue to monitor the bankruptcy proceedings to assess the likelihood of any incremental losses. We have not been informed by landlords of Mac Acquisition LLC of any lease defaults other than those detailed in the bankruptcy filings.
No other liabilities related to this matter have been recorded
as of
December 27, 2017
.
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of
December 27, 2017
, we had
$31.0 million
in undrawn standby letters of credit outstanding. All standby letters of credit are renewable annually.
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are
no
matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations.
12. SUBSEQUENT EVENTS
Subsequent to the end of the quarter, net borrowings of
$5.0 million
were drawn on the revolving credit facility. Additionally, we repurchased approximately
500,000
shares of our common stock for
$18.0 million
. The number of shares is an estimate as settlement has not yet occurred.
13. EFFECT OF NEW ACCOUNTING STANDARDS
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. 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 not to exceed the carrying amount of goodwill. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2019, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed with measurement dates after January 1, 2017. The update will be applied on a prospective basis. We do not expect the adoption of this guidance to have any impact on our consolidated financial statements as the fair value of our reporting units is substantially in excess of the carrying values.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). 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 will require us to adopt these provisions in the first quarter of fiscal 2019. Early adoption is permitted for financial statements that have not been previously issued. The update will be applied on a retrospective basis. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements or debt covenants.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset for virtually all leases, other than leases with a term of 12 months or less. The update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. Early adoption is permitted for financial statements that have not been previously issued. This update will be applied on a modified retrospective basis. We anticipate implementing the standard by taking advantage of the practical expedient option. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. We had operating leases with remaining rental payments of approximately
$606.9 million
at the end of fiscal 2017. We expect that adoption of the new guidance will have a material impact on our consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to our current operating leases. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in fiscal 2018.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB 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 will require us to adopt these provisions in the first quarter of fiscal 2019. Early application in fiscal 2018 is permitted. These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe these updates will impact our recognition of revenue from sales generated at company-owned restaurants or our recognition of royalty fees from franchisees. We are continuing to evaluate the impact the adoption of these updates will have on the recognition of revenue related to our gift card and loyalty programs and our franchise agreements, as well as which adoption method will be used. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in the third quarter of fiscal 2018.