Brinker International, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended March 28, 2018, Brinker’s fiscal 2018 third quarter and year to date, respectively. This differs from the “2017 Q3” period in the request metadata. Comparisons are to periods ended March 29, 2017. Brinker owns, operates and franchises Chili’s and Maggiano’s; it reported 1,686 restaurants at quarter-end.
Financial performance
| Metric | Fiscal Q3 2018 | Prior-year Q3 | 39 weeks 2018 | Prior-year 39 weeks |
|---|---|---|---|---|
| Total revenue | $812.5m | $810.6m | $2,318.3m | $2,340.2m |
| Operating income | $72.7m | $72.9m | $155.7m | $175.9m |
| Net income | $46.9m | $42.4m | $82.2m | $100.2m |
| Diluted EPS | $1.02 | $0.86 | $1.74 | $1.93 |
| Operating margin | 8.9% | 9.0% | 6.7% | 7.5% |
| Net margin | 5.8% | 5.2% | 3.5% | 4.3% |
| Operating cash flow | — | — | $237.7m | $245.7m |
Fiscal Q3 revenue was nearly flat: company sales were $790.5m, while franchise and other revenue grew 10.1% to $22.0m. Year-to-date revenue fell 0.9%, mainly because company sales declined 1.2%. Quarterly net income and EPS rose despite slightly lower operating income, primarily reflecting lower income tax expense following federal tax reform. Year-to-date operating income and net income declined.
- Comparable sales: Company-operated comparable sales decreased 0.3% in Q3 and 1.5% year to date. Chili’s company-operated comparable sales fell 0.4% and 1.7%, respectively; Maggiano’s increased 0.5% and 0.1%. System-wide comparable sales declined 0.8% in Q3 and 1.8% year to date. Traffic remained negative.
- Costs and margins: Q3 food cost rose to 26.2% of company sales from 25.5%; labor rose to 33.6% from 33.1%. Management cited product mix, commodity costs, wage rates and health insurance. Year-to-date company restaurant expenses were 85.4% of revenue, versus 84.8% a year earlier.
- Cash flow and investment: Year-to-date investing cash outflow was $51.7m, including $69.5m of capital expenditures and $14.8m of asset-sale proceeds. Financing cash outflow was $181.6m. Cash ended at $13.4m, compared with $9.1m at fiscal year-end.
- Debt and liquidity: Long-term debt, including current installments, was $1,369.0m, versus $1,329.5m at June 28, 2017. Revolver borrowings were $432.3m, with $567.8m available on the $1.0bn facility. The $250m 2.60% notes matured in May 2018; management intended to refinance them through the revolver. The company reported compliance with debt covenants.
- Shareholder returns: Brinker repurchased about 4.8m shares for $162.0m and paid $53.1m in dividends year to date. The quarterly dividend was increased 12% to $0.38 per share. Approximately $204.7m remained under repurchase authorizations at quarter-end.
Material changes, outlook and risks
- Tax reform: The Tax Act reduced the federal statutory rate to 21% effective January 1, 2018; Brinker used a blended 28.1% statutory rate for fiscal 2018. Year-to-date tax expense included an $8.4m deferred-tax remeasurement benefit/adjustment as reported in the tax reconciliation. Management expects the lower rate to benefit the effective tax rate and cash taxes.
- Unusual charges and transactions: Year-to-date other gains and charges were $25.2m, including $9.1m of restaurant impairment charges, $7.3m of restaurant closure charges, $5.5m of hurricane-related costs and $1.9m of lease-guarantee charges. Nine Alberta Chili’s restaurants were closed amid a weak local economy. Brinker sold its Mexico joint-venture interest for $18.0m, received as a note payable over 72 installments. The sale of part of its headquarters generated $13.7m of proceeds, but the gain was deferred pending vacating the property.
- Operations and plans: Management described casual-dining traffic as challenging amid competition, discounting and constrained discretionary spending. Chili’s initiatives included menu simplification, investment in core menu items, digital ordering and curbside service, and a restaurant reimage program planned over three fiscal years. Fiscal 2018 projected openings were 47–51 total restaurants, including 41–44 franchise locations. The filing provides no earnings or revenue guidance.
- Liquidity and contingencies: Management said operating cash generation and revolver availability should be adequate for operations and debt repayment. Lease guarantees or secondary lease exposure totaled $62.6m; the recorded liability for the bankrupt Romano’s Macaroni Grill-related matter was $2.0m. Undrawn standby letters of credit were $31.0m. Management did not expect pending litigation to have a material adverse effect.
- Credit agreement amendment: After quarter-end, an amendment allowed up to approximately $450m of sale-leaseback transactions, limited scheduled dividends to $82.5m annually while permitting specified additional dividends and buybacks up to a $250m lifetime aggregate, and added collateral and a subsidiary guarantor. Brinker also drew $26m net on the revolver after quarter-end.
- Controls and accounting: Disclosure controls were deemed ineffective because a previously identified material weakness in deferred income-tax reporting had not yet been fully remediated. Management expected remediation after year-end testing. Adoption of the new lease standard is expected to materially increase reported assets and liabilities; operating lease payments were approximately $606.9m at fiscal 2017 year-end.
Most important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly at Chili’s, and whether the stated menu, digital and reimage initiatives deliver results.
- Whether food, labor and other restaurant cost pressures persist and continue to weigh on operating margins.
- How the May 2018 notes were refinanced and the effect of borrowing costs, leverage and the amended credit agreement’s dividend, repurchase and collateral terms.
- Progress in remediating the deferred-tax control weakness and the eventual balance-sheet impact of lease accounting adoption.
- Actual cash collections and foreign-exchange exposure on the Mexico joint-venture note, and any additional liabilities from lease guarantees, restaurant closures or other contingencies.