Brinker International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2011, the 13 weeks ended September 29, 2010; compared with the 13 weeks ended September 23, 2009. Brinker operated, owned or franchised 1,555 restaurants, primarily Chili’s and Maggiano’s. On The Border was sold in June 2010 and is presented as discontinued operations in the prior-year comparison.
Financial performance and position
| Metric | Q1 FY2011 | Prior comparable period / reference |
|---|---|---|
| Revenue | $654.9 million | $696.5 million; down 6.0% |
| Operating income | $32.4 million; 4.9% of revenue | $18.2 million; 2.6% of revenue |
| Income from continuing operations | $21.4 million | $10.3 million |
| Net income | $21.4 million | $15.8 million, including $5.5 million from discontinued operations |
| Diluted net income per share | $0.21 | $0.15 |
| Operating cash flow | $(6.6) million | $55.3 million |
| Capital expenditures | $15.6 million | $11.3 million |
| Cash and cash equivalents | $215.1 million | $344.6 million at June 30, 2010 |
| Total debt | $540.9 million, including $21.9 million current | $541.4 million at June 30, 2010 |
| Working capital | $(13.0) million | $51.2 million surplus at June 30, 2010 |
Comparable restaurant sales fell 4.2% overall: Chili’s declined 5.0%, while Maggiano’s rose 1.4%. Traffic was down 6.7% across the company; capacity was down 3.3%. Cost of sales improved to 26.6% of revenue from 28.7%, while restaurant labor remained 33.2%. Restaurant expenses rose to 25.2% from 25.0%; general and administrative expense fell to $30.0 million from $35.1 million.
The effective tax rate was 20.4%, benefiting from resolution of certain state tax positions; excluding discrete items, the rate was 27.9%, versus 25.8% a year earlier. Interest expense was $7.2 million, compared with $6.9 million.
Material changes and capital allocation
- Revenue was lower principally because of weaker comparable sales and reduced company-owned capacity, including restaurant closures and the sale of 21 Chili’s restaurants to a franchisee. Royalty and franchise revenue increased 3.4% to $15.4 million.
- Operating income improved despite lower revenue, supported by lower food costs and reduced G&A. Management attributed the food-cost benefit to lower meat, seafood and poultry commodity costs and changes in menu promotions.
- Operating cash flow deteriorated to an outflow, reflecting working-capital movements, settlement of liabilities and transaction costs associated with the On The Border divestiture, and higher tax payments. The company paid $29.5 million in income taxes, compared with $0.2 million in the prior-year quarter.
- Brinker repurchased approximately 5.3 million shares for $92.7 million and paid $14.6 million in dividends. The quarterly dividend increased 27%, from $0.11 to $0.14 per share. Approximately $197 million remained authorized for repurchases at quarter-end.
- Shareholders’ equity declined to $645.9 million from $728.7 million at June 30, 2010, largely in the context of share repurchases and dividends.
Outlook, risks and contingencies
- Management described the economy and casual-dining environment as challenging, with consumers expected to remain cautious. It emphasized operational efficiency, guest experience, menu value and innovation, Chili’s kitchen and technology upgrades, and restaurant remodeling.
- Fiscal 2011 capital expenditures were estimated at $115–$120 million, expected to be funded entirely from operating cash flow. Planned fiscal 2011 openings were 45–53, predominantly international franchise restaurants; no company-owned openings were projected in the schedule.
- The company reported a $200 million term loan due June 2015 and an undrawn $200 million revolving facility also due June 2015. The term loan rate was 3.01% at quarter-end; Brinker said it was in compliance with its debt covenants. A required $5 million term-loan repayment occurred September 30, after quarter-end.
- Management said available cash, operating cash flow and the revolving facility should be adequate for operations and debt obligations. It also reported ratings of BBB- with stable outlook from S&P and Ba1/Ba2 ratings with stable outlook from Moody’s.
- Brinker remains secondarily liable for lease payments of up to $200.1 million relating to restaurants transferred to franchisees or in brand divestitures; no material liability was recorded. A California employee meal-and-rest-break class action remains unresolved, and the potential loss could not be reasonably estimated. Management said other pending or threatened matters were not expected to have a material adverse effect.
- Other cited risks include competition, weak consumer spending, inflation and commodity or energy costs, supply interruptions, regulation, franchisee performance, information-technology and data-security issues, and potential asset impairments. The filing reported no material change in market risks or risk factors from the prior annual report.
- Unusual or notable items included $2.8 million of severance and benefits from organizational changes, $1.0 million of lease-termination charges, and a tax benefit from state tax-position resolutions. No impairment charges were recorded in the quarter.
Important facts for investors to verify
- Whether comparable-sales and traffic trends, particularly at Chili’s, improve, and whether planned remodeling and operating initiatives support recovery.
- Whether operating cash flow rebounds enough to fund the $115–$120 million capital-spending plan while supporting dividends, repurchases and debt reduction.
- The drivers and sustainability of the quarter’s margin improvement, including commodity costs, labor efficiencies and lower G&A.
- The impact of continued repurchases and dividends on liquidity, leverage and the company’s stated goal of improving its credit profile.
- Developments in the California employee lawsuit and any exposure under the $200.1 million of lease guarantees.