Brinker International, Inc. — Form 10-Q Summary
Period clarification: The filing covers the 13 and 39 weeks ended March 25, 2020 (fiscal 2020 Q3), not 2019 Q3 as indicated in the request metadata. Amounts are in millions except per-share data and percentages.
Business context and reporting period
Brinker owns and operates Chili’s and Maggiano’s, and franchises both brands. At March 25, 2020, it had 1,117 company-owned and 558 franchised restaurants. The quarter was sharply affected by COVID-19: dining and banquet rooms were closed by quarter-end and most locations shifted to off-premise service.
Financial results and key metrics
| Metric | 13 weeks ended Mar. 25, 2020 | 13 weeks ended Mar. 27, 2019 | 39 weeks ended Mar. 25, 2020 | 39 weeks ended Mar. 27, 2019 |
|---|---|---|---|---|
| Total revenue | $860.0 | $839.3 | $2,515.3 | $2,383.8 |
| Operating income | $41.1 | $70.2 | $115.8 | $166.7 |
| Operating margin | 4.8% | 8.4% | 4.6% | 7.0% |
| Net income | $30.8 | $49.8 | $73.6 | $108.2 |
| Diluted EPS | $0.81 | $1.31 | $1.94 | $2.75 |
| Operating cash flow | Not provided for the 13-week period | Not provided for the 13-week period | $237.8 | $150.6 |
- Quarterly revenue rose 2.5%, but included $72.0 million of sales from 116 Chili’s restaurants acquired in September 2019. Company-owned comparable sales fell 5.9%; system-wide comparable sales fell 6.2%. The filing says sales declines were driven by COVID-related traffic reductions and dining-room closures.
- Quarterly company sales increased to $840.4 million from $811.6 million, while franchise and other revenue declined to $19.6 million from $27.7 million. Quarterly restaurant costs increased as a share of company sales, and other charges included $16.1 million of COVID-related costs, chiefly employee assistance and inventory spoilage.
- Quarterly net income included a $3.6 million income tax benefit, versus $5.7 million of tax expense in the prior-year quarter. The 39-week tax provision was a $0.6 million benefit, primarily reflecting the FICA tax credit and the impact of lower profitability.
- For the 39 weeks, operating cash flow was $237.8 million; investing cash flow was negative $173.4 million and financing cash flow was positive $89.4 million. Ending cash was $167.2 million, versus $13.4 million at June 26, 2019. Prior-year operating cash flow was lower partly because of $75.0 million in sale-leaseback-related tax payments.
- At March 25, 2020, long-term debt and finance leases, less current installments, were $1,428.9 million; the revolving facility balance was $700.0 million. The company also reported $1,274.9 million of operating lease liabilities. Shareholders’ deficit was $574.7 million.
- Current assets were $315.3 million and current liabilities were $520.0 million. The filing does not provide a current ratio or a clear measure of immediately available liquidity at quarter-end.
Material changes versus the prior comparable period
- Quarterly operating income declined $29.1 million and net income declined $19.0 million year over year; diluted EPS fell from $1.31 to $0.81.
- For the 39-week period, revenue increased 5.5%, substantially reflecting the acquired Chili’s restaurants, while operating income fell $50.9 million and net income fell $34.6 million.
- Cash flow from investing activities shifted from positive $344.3 million to negative $173.4 million, mainly because the prior period included $468.8 million of net sale-leaseback proceeds and the current period included acquisition spending.
- Brinker adopted ASC 842 lease accounting in fiscal 2020. This added substantial operating lease assets and liabilities to the balance sheet; prior-year balance-sheet figures were not restated.
Outlook, management commentary, risks and unusual items
- Management expected a material adverse effect on revenue, results and cash flows in fiscal Q4 2020 and potentially fiscal 2021. It said the duration and extent of the pandemic’s impact could not be reasonably estimated.
- Management reported off-premise sales reached 57% of prior-year company sales for the week ended April 15, 2020, adjusted to exclude the acquired Midwest restaurants. It estimated average cash burn of about $5 million per week while primarily operating off-premise.
- As of April 24, 2020, management reported $175 million of total liquidity, consisting of cash and revolver availability. After quarter-end, the credit facility was amended: borrowing capacity was temporarily reduced to $800 million, financial-covenant compliance was waived through the end of fiscal Q1 2021, and restrictions on dividends, repurchases and investments applied. The amendment also increased borrowing costs and expanded collateral and guarantees.
- The quarterly dividend and share repurchases were suspended after quarter-end. The company had reduced capital spending to essential items, suspended Chili’s remodels, delayed new restaurant construction, reduced certain pay and expenses, and sought landlord and vendor concessions.
- Management stated that its March 25 impairment reviews found no impairment of goodwill, indefinite-lived intangibles or long-lived and operating lease assets related to the pandemic. It cautioned that assumptions could change as the duration of restrictions and reopening conditions become clearer.
- Other risks include credit-rating downgrades (S&P lowered the rating to B+ with negative outlook; Moody’s to Ba3), potential liquidity constraints, uncertain customer return and staffing, and possible supply interruptions. The company reported $41.7 million of maximum potential lease-guarantee exposure and $27.2 million in undrawn standby letters of credit.
- A putative class action relating to a 2018 payment-card data incident remained unresolved. The company said the potential loss was not determinable and had not accrued a liability. It also disclosed other legal proceedings, which management did not expect to have a material adverse effect individually or in aggregate.
Important facts for investors to verify
- Whether off-premise sales can sustain revenue and cash generation as dining-room restrictions change, and how reopening affects comparable sales and restaurant margins.
- Actual weekly cash burn, available revolver capacity, covenant conditions and compliance after the amended credit facility’s waiver period.
- The timing and terms of landlord rent concessions, deferred payments and any resulting cash obligations.
- Whether further restaurant, lease-asset or goodwill impairments become necessary as forecasts and reopening assumptions change.
- The status and potential financial exposure of the data-incident litigation and lease guarantees.
- The effects of the suspended dividend and repurchase program, and the company’s ability to resume them while managing debt and liquidity.