Brinker International, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 24, 2020 (52 weeks), compared primarily with the year ended June 26, 2019. The request metadata says “2019 Q4,” but the supplied filing is the fiscal 2020 annual report; its fourth-quarter results are separately noted below.
Business context
Brinker owns, operates and franchises Chili’s Grill & Bar and Maggiano’s Little Italy. At year-end, it had 1,663 system-wide restaurants: 1,116 company-owned and 547 franchised. COVID-19 sharply curtailed dine-in and banquet business; the company shifted toward off-premise sales and reopened dining rooms at limited capacity where permitted.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $3,078.5 million | $3,217.9 million |
| Operating income | $62.6 million | $230.7 million |
| Operating margin | 2.0% | 7.2% |
| Net income | $24.4 million | $154.9 million |
| Diluted earnings per share | $0.63 | $3.96 |
| Cash from operations | $245.0 million | $212.7 million |
| Capital expenditures | $104.5 million | $167.6 million |
| Cash and cash equivalents at year-end | $43.9 million | $13.4 million |
Annual revenue declined 4.3%, while operating income and net income fell substantially, primarily reflecting pandemic-related sales declines, fixed-cost deleverage and increased charges. The fourth quarter alone produced revenue of $563.2 million versus $834.1 million a year earlier, and a net loss of $49.2 million versus net income of $46.7 million. Fourth-quarter comparable sales fell 36.7% overall: Chili’s 32.2% and Maggiano’s 66.7%.
Company-owned comparable sales declined 10.1% for the year; Chili’s declined 8.6% and Maggiano’s 19.9%. Results also reflect the acquisition of 116 previously franchised Chili’s restaurants in September 2019, which contributed $203.3 million of company sales after acquisition.
Debt and liquidity
At June 24, 2020, total debt and finance lease obligations were $1,225.0 million, including $472.9 million drawn on a $1.0 billion revolving facility, $650.0 million of notes, and $102.1 million of finance leases. The company reported $527.1 million of revolver availability and $43.9 million of cash at year-end. Total liquidity was $576.2 million as of July 29, 2020. Working capital was negative $273.5 million. Operating lease liabilities were an additional $1,178.9 million, recognized following adoption of the new lease standard.
Material changes and unusual items
- COVID-19 related charges, net of credits, were $12.2 million; the filing also reports $14.5 million of fourth-quarter long-lived and lease-asset impairments. Total other gains and charges were $47.4 million, versus a $4.5 million net gain in FY2019.
- The company issued 8.1 million shares in the fourth quarter for net proceeds of $139.1 million to bolster liquidity. It suspended dividends and share repurchases; the amended credit facility restricted these and investments through the third quarter of FY2021, with a $50 million aggregate cap thereafter.
- Cash from operations increased year over year, partly because FY2019 included $78.6 million in taxes paid on sale-leaseback transactions and FY2020 benefited from CARES Act relief and higher net gift-card sales. Investing cash flow included $94.6 million for the restaurant acquisition; capital spending was reduced.
- Adoption of lease accounting added $1,054.6 million of operating lease assets and $1,178.9 million of operating lease liabilities at year-end. Comparisons of balance-sheet amounts with prior periods are affected by this accounting change.
Outlook, management commentary and risks
Management said pandemic impacts would continue into FY2021 and that the duration, capacity restrictions, consumer response and pace of recovery could not be reliably estimated. It expected decreased sales at most company-owned restaurants and emphasized safe reopening, off-premise sales, cost reduction and liquidity preservation. Off-premise sales were approximately 50% of revenue in the first fiscal period of FY2021, ended July 29, 2020. The company reported $576.2 million of total liquidity at that date and said it believed available capital and expected cash flow would cover obligations for the next 12 months.
Expansion and remodeling were paused or delayed. Conditional FY2021 plans included seven new company-owned domestic Chili’s, up to two Chili’s relocations, and 8–13 franchise openings; plans remained subject to pandemic conditions. Chili’s virtual brand It’s Just Wings launched in June 2020 through DoorDash.
The revolving facility was amended to waive certain financial covenant compliance temporarily, require at least $175 million of minimum liquidity through the third quarter of FY2021, increase borrowing costs temporarily, and expand collateral and guarantees. A July 2020 amendment extended maturity to December 2022, subject to a potential commitment reduction. S&P and Moody’s downgraded the company to B+ and B1, respectively, both with negative outlook.
Principal risks include further pandemic-related closures or reduced demand, staffing and cost pressures, dependence on DoorDash for delivery, debt and refinancing needs, lease obligations, asset impairment, food safety, cybersecurity and litigation. The company disclosed an ongoing putative class action concerning the 2018 Chili’s payment-card incident; it said the loss range was not determinable and no liability was recorded. No goodwill impairment was recorded, but management’s assessment depended on continued dining-room operations and off-premise sales.
Important facts for investors to verify
- Subsequent sales trends, dining-room capacity and the sustainability and profitability of off-premise sales.
- Cash use, revolver borrowings, covenant requirements, debt maturity and liquidity after the July 2020 amendment.
- Whether suspended dividends and repurchases can resume, given facility restrictions and business conditions.
- Potential future asset impairments, rent concessions and pandemic-related costs; the filing’s projections are highly uncertain.
- Developments in the payment-card class action and any other material legal or contingent liabilities.
- Effects of the 116-restaurant acquisition and lease-accounting adoption on comparable performance and period-to-period financial comparisons.