Business Context and Reporting Period
Company: Brinker International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and twenty-six weeks ended December 23, 2009 (Fiscal 2010 Q2).
Operations: The company owns, operates, and franchises Chili's Grill & Bar, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy. As of December 23, 2009, the system included 1,712 restaurants globally. The company sold the Romano's Macaroni Grill brand in December 2008 and retains an 18.2% ownership interest in the new entity.
Key Financial Metrics
| Metric | 13 Weeks Ended Dec 23, 2009 | 26 Weeks Ended Dec 23, 2009 | 13 Weeks Ended Dec 24, 2008 | 26 Weeks Ended Dec 24, 2008 |
|---|---|---|---|---|
| Revenues | $781.9 million | $1,559.9 million | $949.4 million | $1,933.8 million |
| Operating Income | $27.9 million | $53.8 million | ($34.2 million) | $6.3 million |
| Net Income | $18.3 million | $34.1 million | ($21.8 million) | $2.0 million |
| Diluted EPS | $0.18 | $0.33 | ($0.21) | $0.02 |
| Operating Cash Flow (26 wks) | $156.3 million (vs. $94.8 million prior year) | |||
| Cash and Equivalents | $110.3 million (as of Dec 23, 2009) | |||
| Total Debt | $590.5 million (includes $251.9M current) |
Margins (13 Weeks 2009): Operating margin improved to 3.6% from a loss of 3.6% in the prior year. Net income margin was 2.3% compared to a loss of 2.3% in the prior year.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 17.6% in the quarter and 19.3% year-to-date. This was driven by a 17.7% reduction in capacity (due to the sale of Macaroni Grill and restaurant closures) and a 3.1% decline in comparable restaurant sales.
- Profitability Turnaround: The company returned to profitability, reporting net income of $18.3 million for the quarter compared to a net loss of $21.8 million in the prior year. This improvement is attributed to cost controls, lower interest expense, and the absence of the $43.3 million loss on the sale of Macaroni Grill recorded in the prior year.
- Debt Restructuring: The company repaid $140.0 million on its term loan. The remaining $250.0 million term loan balance is classified as current due to its October 2010 maturity, though management is evaluating refinancing options.
- Impairment Charges: The quarter included a $15.2 million impairment charge for 15 underperforming restaurants and $6.8 million in closure charges for 12 restaurants. This contrasts with the prior year which included significant charges related to the Macaroni Grill sale and 35 restaurant closures.
Guidance, Outlook, and Risks
Management Commentary: Management cites difficult economic conditions and reduced consumer discretionary spending as headwinds. However, they report positive progress in guest counts and menu initiatives. Capital allocation remains disciplined, with virtually all domestic company-owned new restaurant development curtailed for fiscal 2010 to preserve cash flow.
Liquidity and Capital Resources:
- Cash Flow: Operating cash flow increased significantly to $156.3 million year-to-date, aided by the timing of tax payments and operational efficiencies.
- Dividends: The company paid $0.11 per share in the quarter ($0.22 year-to-date).
- Share Repurchases: No shares were repurchased under the public program in the first two quarters of fiscal 2010. Approximately $60 million remains available under the $2.06 billion authorization.
- Refinancing: The company has $250 million available under its revolving credit facility (expiring Feb 2012) to potentially refinance the maturing term loan.
Risks and Contingencies:
- Legal: A class action lawsuit regarding California labor laws (meal/rest breaks) remains pending; the company cannot estimate potential loss.
- Guarantees: The company remains secondarily liable for $181.1 million in lease payments from sold restaurants.
- Economic: Risks include prolonged recession, inflation, and energy costs impacting the casual dining industry.
Investor Verification Checklist
- Debt Maturity: Verify the status of the $250 million term loan maturing in October 2010 and the company's refinancing strategy.
- Comparable Sales: Monitor the trend of comparable restaurant sales, which declined 3.1% in the quarter, to assess the effectiveness of new menu and marketing initiatives.
- Impairment Charges: Review future quarters for additional impairment charges related to underperforming locations, as the company continues to close units.
- Legal Exposure: Track the status of the California labor law class action lawsuit for potential financial impact.
- Capital Expenditures: Confirm adherence to the estimated $85 million capital expenditure budget for fiscal 2010, given the curtailment of domestic development.