EAT

Brinker International, Inc. - 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended December 25, 2002 (Fiscal Q2 2003) and the twenty-six week period ended on the same date. Brinker International, Inc. operates and franchises restaurant concepts including Chili's Grill & Bar, Romano's Macaroni Grill, On The Border, Maggiano's Little Italy, Corner Bakery Cafe, Big Bowl, and Cozymel's. The Company also holds a 43% interest in the Rockfish Partnership.

Key Financial Metrics

Note: Working capital deficit calculated as Current Assets ($150,851) minus Current Liabilities ($335,952).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 15.9% for the quarter and 15.5% year-to-date compared to the prior year. This was driven by a net increase of 115 company-owned restaurants and comparable store sales growth of 2.1% (quarter) and 1.5% (year-to-date).
• Profitability: Net income rose 7.5% for the quarter and 10.7% year-to-date. However, operating margins compressed slightly due to one-time charges.
• Impairment Charges: The Company recorded a $5.4 million charge for closing nine restaurants and writing down one under-performing unit, plus a $4.1 million impairment charge for the PIZZAAHHH! concept intellectual property. These $9.5 million in charges significantly impacted restaurant expenses.
• Capital Expenditures: Investing cash outflows increased to $155.9 million (26 weeks) from $115.2 million in the prior year, reflecting aggressive new store openings and the elimination of equipment leasing facilities.
• Stock Repurchases: The Company repurchased 1.44 million shares for $40.7 million during the period, bringing the total repurchased under the $410 million program to 17.5 million shares.

Guidance, Outlook, and Risks

• Outlook: Management estimates capital expenditures for the third quarter of fiscal 2003 will approximate $85 million, funded by operations and credit facilities.
• Liquidity: Despite a working capital deficit of $185.1 million, management believes cash flow from operations and existing credit facilities (including $375 million in total commitments) are adequate to finance operations and debt obligations.
• Unusual Items: The Company recorded a $1.3 million gain from life insurance proceeds in the quarter. Additionally, a $4.0 million promissory note received from the divestiture of Eatzi's Corporation has been fully reserved due to collection uncertainty.
• Risks: Key risks include intense competition, seasonal sales fluctuations (lower in winter), rising commodity and labor costs, and the ability to secure real estate locations for expansion. The Company also faces potential impacts from new accounting interpretations (FIN 45) regarding guarantees, though no material impact is currently expected.

Investor Verification Checklist

• Excluding One-Time Charges: Verify the "adjusted" net income growth of 25.7% (quarter) and 19.2% (year-to-date) by excluding the $9.5 million in impairment and closing costs to assess core operational performance.
• Debt Structure: Review the $258.5 million convertible debt balance, which will accrete to $431.7 million by maturity in 2021, and the $100 million portion of credit facilities expiring in less than one year (uncommitted).
• PIZZAAHHH! Exit: Confirm the full write-off of the PIZZAAHHH! concept and the cessation of all future development plans for this brand.
• Rockfish Partnership: Monitor the $1.4 million outstanding note to the Rockfish Partnership and the Company's 43% equity interest, including the uncertainty of the Eatzi's promissory note.
• Comparable Store Sales: Validate the 2.1% comparable store sales increase in the quarter to ensure it is not solely driven by menu price increases (which were 1.5% aggregate).