Brinker International, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half of fiscal 2019, ended December 26, 2018. The quarter covered 13 weeks; year-to-date covered 26 weeks. Brinker operated or franchised 1,685 Chili’s and Maggiano’s restaurants.
Financial performance
| Metric | 13 weeks ended Dec. 26, 2018 | Prior-year quarter | 26 weeks ended Dec. 26, 2018 | Prior-year first half |
|---|---|---|---|---|
| Total revenue | $790.7 million | $766.4 million | $1,544.5 million | $1,505.8 million |
| Operating income | $49.6 million | $54.4 million | $96.5 million | $83.0 million |
| Net income | $32.0 million | $25.3 million | $58.4 million | $35.2 million |
| Diluted EPS | $0.83 | $0.54 | $1.46 | $0.74 |
| Operating margin | 6.3% | 7.1% | 6.2% | 5.5% |
| Net margin | 4.0% | 3.3% | 3.8% | 2.3% |
- Quarterly comparable sales rose 2.7% at company-owned restaurants (Chili’s 2.9%; Maggiano’s 1.8%); company-owned traffic increased 2.8%. System-wide comparable sales increased 1.8%.
- Quarterly company restaurant expenses increased to 87.6% of company sales from 85.1%. Management cited higher wages and health insurance, menu mix, advertising and lease expense, including costs from sale-leasebacks.
- First-half operating income included an $17.7 million net sale-leaseback gain in other gains and charges; without that and other unusual items, reported year-over-year operating comparisons require care.
Cash flow, balance sheet and capital allocation
- First-half operating cash flow was $56.2 million, down from $119.7 million, primarily reflecting $67.1 million of taxes paid on sale-leaseback gains. Capital expenditures were $78.7 million, versus $48.6 million.
- Investing cash flow was $383.2 million, including $458.0 million net proceeds from sale-leasebacks. Financing cash outflow was $434.1 million, including $234.0 million net revolver repayments, $167.6 million of treasury-stock purchases and $31.6 million of dividends.
- At December 26, cash was $16.2 million; total debt was approximately $1.28 billion, including $586.3 million outstanding on the revolver. Revolver availability was $413.7 million. The company reported compliance with debt covenants.
- Current assets were $196.0 million and current liabilities $488.0 million. Shareholders’ deficit was $855.2 million. Credit ratings were S&P BB+ (stable outlook) and Moody’s Ba1 (negative outlook).
- The company repurchased about 3.6 million shares for $167.6 million in the first half and paid dividends of $0.38 per share per quarter. A further $0.38 quarterly dividend was declared for payment in March 2019.
Outlook, management commentary and risks
- Management said operating cash flow and revolver availability should be adequate for operations and current debt obligations; it also said it would continue evaluating monetization of remaining owned real estate. No numerical earnings or revenue guidance was provided.
- Fiscal 2019 plans included 34–40 restaurant openings, mainly franchise locations, with 26–30 expected internationally for Chili’s. Management highlighted value offers, digital engagement and To Go: Chili’s To Go sales grew 20.3% year over year in the quarter and were about 12.3% of Chili’s To Go and dine-in sales; Maggiano’s carryout grew 17.6%.
- Sale-leaseback transactions covered 145 Chili’s restaurant properties and generated $466.3 million gross consideration. Leases have initial 15-year terms; rent expense and lease obligations are ongoing. The company had $270.6 million of deferred gain at quarter-end.
- ASC 606 adoption changed presentation of franchise advertising fees to gross revenue and altered timing for gift-card breakage and franchise/development fees. The company reported that the timing changes had no significant operating-results impact in the first half; reported revenue comparisons are nevertheless affected by gross presentation.
- The company expected ASC 842 lease adoption in fiscal 2020 to materially increase reported assets and liabilities; undiscounted remaining operating-lease payments were approximately $1.03 billion. It did not expect a material effect on cash flows or liquidity.
- Cybersecurity incident at Chili’s in spring 2018: customer payment-card data was affected at most company-owned locations, according to the company’s investigation. Putative class actions were consolidated in Florida; the company had not recorded a litigation liability because the loss was not determinable. Potential card-company, regulatory and legal costs remain uncertain; the company maintains cyber insurance with a $2.0 million retention.
- Other disclosed exposures include $57.5 million of maximum potential lease-guarantee obligations and $29.0 million of undrawn standby letters of credit. Management said it did not expect pending legal matters, individually or collectively, to materially adversely affect results or financial condition.
Key facts for investors to verify
- Separate underlying restaurant performance from ASC 606 gross presentation and the sale-leaseback gain when assessing revenue, margins and operating-income trends.
- Track whether traffic and comparable sales gains persist and whether wage, food, marketing and new rent costs pressure restaurant-level margins.
- Assess cash generation after taxes, remodel and headquarters spending, dividends and share repurchases, alongside debt, revolver availability and credit ratings.
- Monitor the eventual costs and insurance recovery associated with the cybersecurity incident and related litigation.
- Review the effects of sale-leaseback rent commitments and the expected balance-sheet recognition of leases under ASC 842.