Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
References to “Brinker,” the "Company,” “we,” “us” and “our” in this Form 10-Q are references to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc.
Our consolidated financial statements as of
December 28, 2016
and
June 29, 2016
and for the
twenty-six week
periods ended
December 28, 2016
and
December 23, 2015
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We are principally engaged in the ownership, operation, development, and franchising of the Chili’s
®
Grill & Bar (“Chili’s”) and Maggiano’s Little Italy
®
(“Maggiano’s”) restaurant brands. At
December 28, 2016
, we owned, operated or franchised
1,658
restaurants in the United States and
30
countries and
two
territories outside of the United States.
The foreign currency translation adjustment included in comprehensive income on the consolidated statements of comprehensive income represents the unrealized impact of translating the financial statements of our Canadian restaurants and our Mexican joint venture from their respective functional currencies to U.S. dollars. This amount is not included in net income and would only be realized upon disposition of the businesses. The accumulated other comprehensive loss is presented on the consolidated balance sheets. We reinvest foreign earnings, therefore, United States deferred income taxes have not been provided on foreign earnings.
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. Actual results could differ from those estimates.
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-03, Simplifying the Presentation of Debt Issuance Costs. This update requires that debt issuance costs be presented in the balance sheet as a direct deduction from the associated debt liability. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2015, which required us to adopt these provisions in the first quarter of fiscal 2017. Accordingly, we reclassified the debt issuance cost balances associated with the 2.60% notes and 3.88% notes of
$1.0 million
and
$2.2 million
, respectively, from other assets to long-term debt, less current installments on the consolidated balance sheet as of June 29, 2016. The reclassification did not have a material effect on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance to companies that purchase cloud computing services to determine whether or not the arrangement includes a software license and the related accounting treatment. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2015, which required us to adopt these provisions in the first quarter of fiscal 2017. We adopted the guidance prospectively and the adoption did not have any impact on our consolidated financial statements.
The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, necessary to fairly state the interim operating results, financial position and cash flows for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the
June 29, 2016
Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes.
2. ACQUISITION OF CHILI'S RESTAURANTS
On
June 25, 2015
, we completed the stock acquisition of
Pepper Dining Holding Corp. ("Pepper Dining")
, a franchisee of
103
Chili's Grill & Bar restaurants primarily located in the Northeast and Southeast United States. The purchase price of
$106.5 million
, excluding cash and customary working capital adjustments of
$0.9 million
, was funded with borrowings from our existing credit facility. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition. The assets and liabilities of the restaurants were recorded at their respective fair values as of the date of acquisition.
The acquisition of Pepper Dining resulted in the recognition of
$31.9 million
of goodwill and we expect
$12.8 million
of the goodwill balance to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities.
3. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the reporting periods. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method. Stock options and restricted share awards with an anti-dilutive effect are not included in the diluted net income per share calculation.
Basic weighted average shares outstanding is reconciled to diluted weighted average shares outstanding as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 28, 2016
|
|
December 23, 2015
|
|
December 28, 2016
|
|
December 23, 2015
|
Basic weighted average shares outstanding
|
49,833
|
|
|
59,198
|
|
|
52,339
|
|
|
59,712
|
|
Dilutive stock options
|
223
|
|
|
314
|
|
|
235
|
|
|
356
|
|
Dilutive restricted shares
|
424
|
|
|
387
|
|
|
454
|
|
|
485
|
|
|
647
|
|
|
701
|
|
|
689
|
|
|
841
|
|
Diluted weighted average shares outstanding
|
50,480
|
|
|
59,899
|
|
|
53,028
|
|
|
60,553
|
|
|
|
|
|
|
|
|
|
Awards excluded due to anti-dilutive effect on diluted net income per share
|
890
|
|
|
682
|
|
|
959
|
|
|
519
|
|
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2016
|
|
June 29,
2016
|
Revolving credit facility
|
$
|
492,250
|
|
|
$
|
530,250
|
|
5.00% notes
|
350,000
|
|
|
0
|
|
3.88% notes
|
300,000
|
|
|
300,000
|
|
2.60% notes
|
250,000
|
|
|
250,000
|
|
Capital lease obligations
|
36,817
|
|
|
37,532
|
|
Total long-term debt
|
1,429,067
|
|
|
1,117,782
|
|
Less unamortized debt issuance costs and discounts
|
(9,040
|
)
|
|
(3,526
|
)
|
Total long-term debt less unamortized debt issuance costs and discounts
|
1,420,027
|
|
|
1,114,256
|
|
Less current installments
|
(3,815
|
)
|
|
(3,563
|
)
|
|
$
|
1,416,212
|
|
|
$
|
1,110,693
|
|
On September 23, 2016, we completed the private offering of $350 million of our
5.0%
senior notes due
October 2024
. We received proceeds of
$350.0 million
prior to debt issuance costs of
$6.2 million
and utilized the proceeds to fund a $300 million accelerated share repurchase agreement and to repay
$50.0 million
on the amended $1 billion revolving credit facility. See Note 9 for additional disclosures related to the accelerated share repurchase agreement. The notes require semi-annual interest payments beginning on April 1, 2017.
On September 13, 2016, we amended the revolving credit agreement to increase the borrowing capacity from
$750 million
to
$1 billion
. We capitalized debt issuance costs of
$4.0 million
associated with the amendment of the revolving credit facility which is included in other assets in the consolidated balance sheet as of
December 28, 2016
. During the first two quarters of fiscal 2017, net payments of
$38.0 million
were made on the revolving credit facility.
Under the amended $1 billion revolving credit facility, the maturity date for $890.0 million of the facility was extended from March 12, 2020 to
September 12, 2021
and the remaining $110.0 million remains due on
March 12, 2020
. The amended revolving credit facility bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus
2.00%
. Based on our current credit rating, we are paying interest at a rate of LIBOR plus
1.38%
for a total of
2.15%
.
One month LIBOR
at
December 28, 2016
was approximately
0.77%
. As of
December 28, 2016
,
$507.7 million
of credit is available under the revolving credit facility.
Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. The financial covenants were not significantly changed as a result of the new and amended debt agreements.
We are currently in compliance with all financial covenants.
5. OTHER GAINS AND CHARGES
Other gains and charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 28,
2016
|
|
December 23,
2015
|
|
December 28,
2016
|
|
December 23,
2015
|
Gain on the sale of assets, net
|
$
|
(2,569
|
)
|
|
$
|
0
|
|
|
$
|
(2,569
|
)
|
|
$
|
(1,762
|
)
|
Restaurant impairment charges
|
1,851
|
|
|
468
|
|
|
1,851
|
|
|
525
|
|
Restaurant closure charges
|
321
|
|
|
0
|
|
|
2,827
|
|
|
0
|
|
Information technology restructuring
|
209
|
|
|
0
|
|
|
2,700
|
|
|
0
|
|
Severance
|
0
|
|
|
209
|
|
|
293
|
|
|
2,368
|
|
Litigation
|
0
|
|
|
(2,032
|
)
|
|
0
|
|
|
(2,032
|
)
|
Acquisition costs
|
0
|
|
|
0
|
|
|
0
|
|
|
580
|
|
Other
|
1,494
|
|
|
1,268
|
|
|
2,282
|
|
|
1,911
|
|
|
$
|
1,306
|
|
|
$
|
(87
|
)
|
|
$
|
7,384
|
|
|
$
|
1,590
|
|
Fiscal 2017
During the second quarter of fiscal 2017, we recorded a
$2.6 million
gain on the sale of property, partially offset by restaurant impairment charges of
$1.9 million
primarily related to the long-lived assets and reacquired franchise rights of six underperforming Chili's restaurants which will continue to operate. See Note 8 for fair value disclosures.
During the first quarter of fiscal 2017, we recorded restaurant closure charges of
$2.5 million
primarily related to lease termination charges for restaurants closed during the quarter. Additionally, we incurred
$2.5 million
of professional fees and severance associated with the information technology restructuring.
Fiscal 2016
We were a plaintiff in a class action lawsuit against US Foods styled as
In re U.S. Foodservice, Inc. Pricing Litigation
. A settlement agreement was fully executed by all parties in September 2015 and we received approximately
$2.0 million
during the second quarter of fiscal 2016 in settlement of this litigation. Additionally, we incurred expenses of
$1.2 million
to reserve for royalties, rents and other outstanding amounts related to a bankrupt franchisee. We also recorded impairment charges of
$0.5 million
primarily related to a capital lease asset that is subleased to a franchisee and an undeveloped parcel of land that we own for the excess of the carrying amounts over the fair values. See Note 8 for fair value disclosures.
During the first quarter of fiscal 2016, we incurred
$2.2 million
in severance and other benefits related to organizational changes. Additionally, we recorded a
$1.8 million
gain on the sale of property.
6. SEGMENT INFORMATION
Our operating segments are Chili's and Maggiano's. The Chili’s segment includes the results of our company-owned Chili’s restaurants in the U.S. and Canada as well as the results from our domestic and international franchise business. The Maggiano’s segment includes the results of our company-owned Maggiano’s restaurants.
Company sales are derived principally from the sales of food and beverages. Franchise and other revenues primarily includes royalties, development fees, franchise fees, banquet service charge income, gift card breakage and discounts, tabletop device revenue, Chili's retail food product royalties and delivery fee income. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly in the U.S. There were no material transactions amongst our operating segments.
Our chief operating decision maker uses operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Operational expenses include food and beverage costs, restaurant labor costs and restaurant expenses. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 28, 2016
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
632,085
|
|
|
$
|
116,624
|
|
|
$
|
0
|
|
|
$
|
748,709
|
|
Franchise and other revenues
|
|
15,278
|
|
|
7,056
|
|
|
0
|
|
|
22,334
|
|
Total revenues
|
|
647,363
|
|
|
123,680
|
|
|
0
|
|
|
771,043
|
|
|
|
|
|
|
|
|
|
|
Operational expenses (a)
|
|
537,170
|
|
|
98,098
|
|
|
92
|
|
|
635,360
|
|
Depreciation and amortization
|
|
32,643
|
|
|
4,055
|
|
|
2,607
|
|
|
39,305
|
|
General and administrative
|
|
9,414
|
|
|
1,688
|
|
|
22,444
|
|
|
33,546
|
|
Other gains and charges
|
|
2,943
|
|
|
12
|
|
|
(1,649
|
)
|
|
1,306
|
|
Total operating costs and expenses
|
|
582,170
|
|
|
103,853
|
|
|
23,494
|
|
|
709,517
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
65,193
|
|
|
$
|
19,827
|
|
|
$
|
(23,494
|
)
|
|
$
|
61,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended December 23, 2015
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
651,004
|
|
|
$
|
114,668
|
|
|
$
|
0
|
|
|
$
|
765,672
|
|
Franchise and other revenues
|
|
15,543
|
|
|
7,395
|
|
|
0
|
|
|
22,938
|
|
Total revenues
|
|
666,547
|
|
|
122,063
|
|
|
0
|
|
|
788,610
|
|
|
|
|
|
|
|
|
|
|
Operational expenses (a)
|
|
545,569
|
|
|
97,519
|
|
|
(1,033
|
)
|
|
642,055
|
|
Depreciation and amortization
|
|
32,915
|
|
|
3,673
|
|
|
2,526
|
|
|
39,114
|
|
General and administrative
|
|
9,295
|
|
|
1,513
|
|
|
21,101
|
|
|
31,909
|
|
Other gains and charges
|
|
(166
|
)
|
|
(7
|
)
|
|
86
|
|
|
(87
|
)
|
Total operating costs and expenses
|
|
587,613
|
|
|
102,698
|
|
|
22,680
|
|
|
712,991
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
78,934
|
|
|
$
|
19,365
|
|
|
$
|
(22,680
|
)
|
|
$
|
75,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 28, 2016
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
1,280,728
|
|
|
$
|
205,391
|
|
|
$
|
0
|
|
|
$
|
1,486,119
|
|
Franchise and other revenues
|
|
32,193
|
|
|
11,223
|
|
|
0
|
|
|
43,416
|
|
Total revenues
|
|
1,312,921
|
|
|
216,614
|
|
|
0
|
|
|
1,529,535
|
|
|
|
|
|
|
|
|
|
|
Operational expenses (a)
|
|
1,092,740
|
|
|
181,683
|
|
|
452
|
|
|
1,274,875
|
|
Depreciation and amortization
|
|
65,244
|
|
|
7,941
|
|
|
5,006
|
|
|
78,191
|
|
General and administrative
|
|
19,344
|
|
|
3,212
|
|
|
43,527
|
|
|
66,083
|
|
Other gains and charges
|
|
4,869
|
|
|
746
|
|
|
1,769
|
|
|
7,384
|
|
Total operating costs and expenses
|
|
1,182,197
|
|
|
193,582
|
|
|
50,754
|
|
|
1,426,533
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
130,724
|
|
|
$
|
23,032
|
|
|
$
|
(50,754
|
)
|
|
$
|
103,002
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,189,921
|
|
|
$
|
168,440
|
|
|
$
|
139,744
|
|
|
$
|
1,498,105
|
|
Equity method investment
|
|
9,267
|
|
|
0
|
|
|
0
|
|
|
9,267
|
|
Payments for property and equipment
|
|
45,618
|
|
|
8,116
|
|
|
6,321
|
|
|
60,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Week Period Ended December 23, 2015
|
|
|
Chili's
|
|
Maggiano's
|
|
Other
|
|
Consolidated
|
Company sales
|
|
$
|
1,304,055
|
|
|
$
|
202,098
|
|
|
$
|
0
|
|
|
$
|
1,506,153
|
|
Franchise and other revenues
|
|
33,145
|
|
|
11,871
|
|
|
0
|
|
|
45,016
|
|
Total revenues
|
|
1,337,200
|
|
|
213,969
|
|
|
0
|
|
|
1,551,169
|
|
|
|
|
|
|
|
|
|
|
Operational expenses (a)
|
|
1,094,335
|
|
|
180,660
|
|
|
(587
|
)
|
|
1,274,408
|
|
Depreciation and amortization
|
|
66,046
|
|
|
7,307
|
|
|
4,932
|
|
|
78,285
|
|
General and administrative
|
|
18,714
|
|
|
3,326
|
|
|
42,980
|
|
|
65,020
|
|
Other gains and charges
|
|
(1,108
|
)
|
|
166
|
|
|
2,532
|
|
|
1,590
|
|
Total operating costs and expenses
|
|
1,177,987
|
|
|
191,459
|
|
|
49,857
|
|
|
1,419,303
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
159,213
|
|
|
$
|
22,510
|
|
|
$
|
(49,857
|
)
|
|
$
|
131,866
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
1,243,430
|
|
|
$
|
168,733
|
|
|
$
|
164,031
|
|
|
$
|
1,576,194
|
|
Equity method investment
|
|
11,131
|
|
|
0
|
|
|
0
|
|
|
11,131
|
|
Payments for property and equipment
|
|
35,688
|
|
|
10,272
|
|
|
6,239
|
|
|
52,199
|
|
____________________________________________________________________
|
|
(a)
|
Operational expenses includes cost of sales, restaurant labor and restaurant expenses.
|
Reconciliation of operating income to income before provision for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Periods Ended
|
|
Twenty-Six Week Periods Ended
|
|
December 28, 2016
|
|
December 23, 2015
|
|
December 28, 2016
|
|
December 23, 2015
|
Operating income
|
$
|
61,526
|
|
|
$
|
75,619
|
|
|
$
|
103,002
|
|
|
$
|
131,866
|
|
Less interest expense
|
(13,641
|
)
|
|
(7,907
|
)
|
|
(22,450
|
)
|
|
(15,674
|
)
|
Plus other, net
|
383
|
|
|
560
|
|
|
682
|
|
|
833
|
|
Income before provision for income taxes
|
$
|
48,268
|
|
|
$
|
68,272
|
|
|
$
|
81,234
|
|
|
$
|
117,025
|
|
7. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2016
|
|
June 29,
2016
|
Sales tax
|
$
|
22,464
|
|
|
$
|
26,280
|
|
Insurance
|
24,540
|
|
|
19,976
|
|
Property tax
|
18,335
|
|
|
15,762
|
|
Dividends
|
16,887
|
|
|
17,760
|
|
Other
|
49,147
|
|
|
41,546
|
|
|
$
|
131,373
|
|
|
$
|
121,324
|
|
Other liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2016
|
|
June 29,
2016
|
Straight-line rent
|
$
|
57,103
|
|
|
$
|
56,896
|
|
Insurance
|
38,851
|
|
|
38,433
|
|
Landlord contributions
|
27,104
|
|
|
24,681
|
|
Unfavorable leases
|
5,807
|
|
|
6,521
|
|
Unrecognized tax benefits
|
6,131
|
|
|
5,811
|
|
Other
|
7,679
|
|
|
7,081
|
|
|
$
|
142,675
|
|
|
$
|
139,423
|
|
8. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
|
|
•
|
Level 1 – inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
|
|
|
•
|
Level 3 – inputs are unobservable and reflect our own assumptions.
|
|
|
(a)
|
Non-Financial Assets Measured on a Non-Recurring Basis
|
We review the carrying amounts of property and equipment, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value.
We determine the fair value of property and equipment and reacquired franchise rights based on discounted projected future cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the inherent risk. Based on our semi-annual review, during the first six months of fiscal 2017, long-lived assets and reacquired franchise rights with a carrying value of
$1.2 million
and
$0.8 million
, respectively, primarily related to
six
underperforming restaurants, were determined to have a total fair value of
$0.2 million
resulting in an impairment charge of
$1.8 million
. During the first six months of fiscal 2016, long-lived assets with a carrying value of
$106,000
, primarily related to underperforming restaurants previously impaired, were determined to have
no
fair value resulting in an impairment charge of
$106,000
.
We determine the fair value of transferable liquor licenses based on prices in the open market for licenses in the same or similar jurisdictions. Based on our semi-annual review, during the second quarter of fiscal 2017 and fiscal 2016, we determined there was no impairment.
We review the carrying amounts of goodwill annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the implied fair value. We determined that there was no impairment of goodwill during our annual test in the second quarter of fiscal 2017 and fiscal 2016 as the fair value of our reporting units was substantially in excess of the carrying value. No indicators of impairment were identified through the end of the second quarter of fiscal 2017.
During the second quarter of fiscal 2016, we recorded an impairment charge of
$187,000
related to a parcel of undeveloped land that we own. The land had a carrying value of
$937,000
and was written down to the fair value of
$750,000
. The fair value was based on the sales price of comparable properties. Additionally, we recorded an impairment charge of
$231,000
related to a capital lease asset that is subleased to a franchisee. The capital lease asset had a carrying value of
$338,000
and was written down to the fair value of
$107,000
. The fair value of the capital lease asset is based on discounted projected future cash flows from the sublease.
All impairment charges were included in other gains and charges in the consolidated statements of comprehensive income for the periods presented.
The following table presents fair values for those assets measured at fair value on a non-recurring basis at
December 28, 2016
and
December 23, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
Long-lived assets held for use:
|
|
|
|
|
|
|
|
At December 28, 2016
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
192
|
|
|
$
|
192
|
|
At December 23, 2015
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Other long-lived assets:
|
|
|
|
|
|
|
|
At December 28, 2016
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
At December 23, 2015
|
$
|
0
|
|
|
$
|
750
|
|
|
$
|
107
|
|
|
$
|
857
|
|
|
|
(b)
|
Other Financial Instruments
|
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items. The carrying amount of debt outstanding related to the amended revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the
2.60%
notes,
3.88%
notes and
5.00%
notes are based on quoted market prices for similar instruments and are considered Level 2 fair value measurements.
The carrying amounts, which are net of unamortized debt issuance costs, and fair values of the 2.60% notes, 3.88% notes and 5.00% notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2016
|
|
June 29, 2016
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
2.60% Notes
|
$
|
249,206
|
|
|
$
|
250,658
|
|
|
$
|
248,918
|
|
|
$
|
252,445
|
|
3.88% Notes
|
$
|
297,734
|
|
|
$
|
284,571
|
|
|
$
|
297,556
|
|
|
$
|
302,655
|
|
5.00% Notes
|
$
|
344,020
|
|
|
$
|
349,923
|
|
|
$
|
0
|
|
|
$
|
0
|
|
9. SHAREHOLDERS’ DEFICIT
In August 2016, our Board of Directors authorized a
$150.0 million
increase to our existing share repurchase program resulting in total authorizations of
$4.3 billion
. In
September 2016
, we entered into a $300.0 million accelerated share repurchase agreement ("ASR Agreement") with Bank of America, N.A. (“BofA”). Pursuant to the terms of the ASR Agreement, we paid BofA
$300.0 million
in cash, and on
September 26, 2016
, we received an initial delivery of approximately
4.6 million
shares of common stock. During the second quarter of fiscal 2017, we received approximately
483,000
shares for a then-current total of
5.1 million
shares received under the ASR Agreement. Subsequent to the end of the quarter, we received approximately
846,000
shares
of our common stock from BofA in full and final settlement of the ASR Agreement, bringing the total shares received to
5.9 million
. The accelerated share repurchase transaction qualifies for equity accounting treatment. Shares that have been paid for but not yet delivered are reflected as a reduction of additional paid-in capital while other repurchased common stock is reflected as an increase in treasury stock within shareholders’ deficit. We also repurchased approximately
1.0 million
additional shares of common stock for a total of
6.1 million
shares repurchased during the
first two quarters
of fiscal
2017
for
$350.0 million
. The repurchased shares included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares. As of
December 28, 2016
, approximately
$135.8 million
was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings, and planned investment and financing needs.
During the
first two quarters
of fiscal
2017
, we granted approximately
492,000
stock options with a weighted average exercise price per share of
$54.20
and a weighted average fair value per share of
$9.63
, and approximately
216,000
restricted share awards with a weighted average fair value per share of
$54.27
. Additionally, during the
first two quarters
of fiscal
2017
, approximately
142,000
stock options were exercised resulting in cash proceeds of approximately
$3.8 million
. We received an excess tax benefit from stock-based compensation of approximately
$1.2 million
, net of a
$0.5 million
tax deficiency, during the
first two quarters
of fiscal
2017
primarily as a result of the vesting and distribution of restricted stock grants and performance shares and stock option exercises. The excess tax benefit from stock-based compensation represents the additional income tax benefit received resulting from the increase in the fair value of awards from the time of grant to the exercise date.
During the
first two quarters
of fiscal
2017
, we paid dividends of
$36.9 million
to common stock shareholders, compared to
$37.4 million
in the prior year. Additionally, our Board of Directors approved a
6.25%
increase in the quarterly dividend from
$0.32
to
$0.34
per share effective with the dividend declared in August 2016. We also declared a quarterly dividend of
$16.9 million
in November 2016 which was paid on
December 29, 2016
. The dividend accrual was included in other accrued liabilities on our consolidated balance sheet as of
December 28, 2016
.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest in the
first two quarters
of fiscal
2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2016
|
|
December 23,
2015
|
Income taxes, net of refunds
|
$
|
41,605
|
|
|
$
|
26,966
|
|
Interest, net of amounts capitalized
|
15,117
|
|
|
13,828
|
|
Non-cash investing and financing activities for the
first two quarters
of fiscal
2017
and
2016
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 28,
2016
|
|
December 23,
2015
|
Retirement of fully depreciated assets
|
$
|
13,157
|
|
|
$
|
9,901
|
|
Dividends declared but not paid
|
17,527
|
|
|
18,912
|
|
Accrued capital expenditures
|
4,311
|
|
|
1,283
|
|
Capital lease additions
|
1,147
|
|
|
0
|
|
11. CONTINGENCIES
In connection with the sale of restaurants to franchisees and brand divestitures, we have, in certain cases, guaranteed lease payments. As of
December 28, 2016
and
June 29, 2016
, we have outstanding lease guarantees or are secondarily liable for
$75.4 million
and
$72.9 million
, respectively. These amounts represent the maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2017 through fiscal 2027. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred.
No material liabilities have been recorded
as of
December 28, 2016
.
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of
December 28, 2016
, we had
$31.3 million
in undrawn standby letters of credit outstanding. All standby letters of credit are renewable annually.
Evaluating contingencies related to litigation is a complex process involving subjective judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel, and we assess the probability and range of possible losses associated with contingencies for potential accrual in the consolidated financial statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Reserves have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are
no
matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations.
12. SUBSEQUENT EVENTS
On
January 19, 2017
, we completed a reorganization of the Chili’s restaurant operations team and certain departments at the corporate headquarters to better align our staffing with the current management strategy and resource needs. This reorganization is complete and no further actions are anticipated to complete this plan. This employee separation action will result in severance charges and accelerated stock based compensation expenses of approximately
$6.0 million
. We anticipate that substantially all of the severance amounts will be paid by the end of the third quarter of fiscal 2017 and no further cash expenditures will be required. These amounts will be recorded in the third quarter of fiscal 2017 in the other gains and charges caption of our consolidated statements of comprehensive income.
13. EFFECT OF NEW ACCOUNTING STANDARDS
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early adoption is permitted for financial statements that have not been previously issued. The update will be applied on a retrospective basis. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Adoption of the new guidance will require recognition of excess tax benefits and tax deficiencies in the consolidated statements of comprehensive income on a prospective basis, with a cumulative effect adjustment to retained earnings for any prior year excess tax benefits or tax deficiencies not previously recorded. In addition, this guidance will require reclassification of excess tax benefits from cash flows from financing activities to cash flows from operating activities on the consolidated statements of cash flows. We expect to apply this change on a retrospective basis. The adoption of the provisions related to excess tax benefits and tax deficiencies could have a material impact on our consolidated financial statements depending on the changes in fair value of our share-based payment awards. We expect that adoption of the remaining provisions in the update will not have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset for virtually all leases, other than leases with a term of 12 months or less. The update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. Early adoption is permitted for financial statements that have not been previously issued. This update will be applied on a modified retrospective basis. We anticipate implementing the standard by taking advantage of the practical expedient option. We had operating leases with remaining rental payments of approximately $639 million at the end of fiscal 2016. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. We expect that adoption of the new guidance will have a material impact on our consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to our current operating leases. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in fiscal 2017.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB has subsequently amended this update by issuing additional ASU's that provide clarification and further guidance around areas identified as potential implementation issues. These updates provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. These updates also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14 delaying the effective date of adoption. These updates are now effective for annual and interim periods for fiscal years beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application in fiscal 2018 is permitted. These updates permit the use of either the retrospective or cumulative effect transition method. We do not believe the standard will impact our recognition of revenue from sales generated at company-owned restaurants or our recognition of royalty fees from franchisees. We are continuing to evaluate the impact the adoption of this standard will have on the recognition of revenue from our gift card and loyalty programs and our franchise agreements, as well as which adoption method will be used. The process of evaluating the full impact of the new guidance on our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in fiscal 2017.