Brinker International, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2016, the 13 weeks ended September 23, 2015; comparisons are with the 13 weeks ended September 24, 2014. Brinker operated or franchised 1,632 Chili’s and Maggiano’s restaurants in the U.S. and 30 countries and two territories.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $762.6 million | $711.0 million |
| Operating income | $56.2 million; 7.4% margin | $54.3 million; 7.6% margin |
| Net income | $33.2 million; 4.4% margin | $32.7 million; 4.6% margin |
| Diluted EPS | $0.54 | $0.49 |
| Operating cash flow | $45.5 million | $70.9 million |
| Capital expenditures | $23.7 million | $40.2 million |
Revenue increased 7.2%, primarily because the company acquired 103 Chili’s restaurants; company sales rose 7.8%, while franchise and other revenue fell 8.6% to $22.1 million. Net income rose about 1.4%, but operating and net margins declined. Cost of sales improved to 26.6% of company sales from 26.9%; labor costs increased to 33.3% from 33.1%, primarily due to wage rates. Interest expense increased about $0.8 million to $7.8 million, mainly from higher borrowings.
Operating cash flow declined by $25.3 million, which management attributed mainly to working-capital timing, including settlement of acquired liabilities, incentive compensation payments, tax and operating payment timing, and lower net gift-card activity. Investing cash use was $126.6 million, including $105.6 million for the acquisition. Financing provided $91.9 million, chiefly through revolver borrowings.
Balance sheet, debt and capital returns
At September 23, 2015, cash was $66.0 million and total debt was $1.129 billion, up from $974.3 million at June 24, 2015. Debt included $539.3 million drawn on the $750 million revolving facility; $210.8 million remained available. The facility matures in March 2020 and carried interest at one-month LIBOR plus 1.38%. The company reported compliance with debt covenants. Total assets were $1.549 billion and shareholders’ deficit was $108.1 million.
Brinker repurchased approximately 894,000 shares for $51.1 million and paid $18.1 million in dividends during the quarter. The quarterly dividend was increased 14% to $0.32 per share; management said it targets a 40% dividend payout ratio. A further $32 million was borrowed in October, followed by repurchases of approximately 760,000 shares for $37.8 million.
Material developments, outlook and risks
- Brinker completed the June 25 acquisition of Pepper Dining, a franchisee of 103 Chili’s restaurants, for a stated purchase price of $106.5 million, funded with credit-facility borrowings. Preliminary purchase accounting included $28.5 million of goodwill; valuation work was still underway. Acquired restaurants contributed approximately $61.8 million of revenue in the period. The acquisition also reduced franchise royalties.
- Comparable sales weakened: company-owned restaurants were down 1.6% versus a 2.4% increase a year earlier; system-wide comparable sales were down 0.5% versus growth of 1.9%. Management cited intense discounting and competition, regional economic pressures, limited consumer discretionary spending and wage pressure. Company-owned traffic declined 2.1%.
- Fiscal 2016 projected openings were 47–56 restaurants system-wide, including 14–16 company-owned locations. Management stated that operating cash flow and available credit should be adequate for foreseeable operations and current debt obligations; the filing provides no earnings or revenue guidance.
- Management highlighted menu, digital guest-experience and operating-efficiency initiatives. Key risks include competition and discounting, slow economic growth, food and labor cost inflation, supply interruptions, regulation, franchisee performance, litigation, and technology or data-security failures.
- The company recorded $1.7 million of other gains and charges, primarily severance and transaction costs partly offset by a property-sale gain. No impairment charges were recorded. Management said pending or threatened legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the acquired Chili’s locations generate sufficient operating profit and cash flow to justify the purchase price and added debt.
- Whether comparable-sales and traffic trends improve amid competition, discounting and wage pressure.
- Why operating cash flow fell, and whether working-capital and acquisition-related effects persist.
- Debt levels, revolver availability and covenant headroom after subsequent borrowing and share repurchases.
- Progress against planned restaurant openings, the 40% dividend payout target and ongoing capital-return plans.