UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 26, 2008

Commission File Number 1-10275

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

6820 LBJ FREEWAY, DALLAS, TEXAS  75240

(Address of principal executive offices)

(Zip Code)

(972) 980-9917

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x   No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No   x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

BRINKER INTERNATIONAL, INC.

INDEX

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PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

BRINKER INTERNATIONAL, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

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 March 26, 2008 and June 27, 2007 and for the thirteen week and thirty-nine week periods ended March 26, 2008 and March 28, 2007 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  We  own, operate, or franchise various restaurant brands under the names of Chili’s Grill & Bar (“Chili’s”), Romano’s Macaroni Grill (“Macaroni Grill”), On The Border Mexican Grill & Cantina (“On The Border”), and Maggiano’s Little Italy (“Maggiano’s”).  Beginning in the first quarter of fiscal 2008, Macaroni Grill has been presented as discontinued operations in the consolidated financial statements.  See Note 4 for additional disclosures.

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 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 27, 2007 Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes.

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to fiscal 2008 presentation. These reclassifications have no effect on our net income or financial position as previously reported.

2.             EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings (loss) 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 (loss) 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.  We had approximately 7.6 million stock options and restricted share awards outstanding at March 26, 2008 and 48,000 stock options and restricted share awards outstanding at March 28, 2007 that were not included in the dilutive earnings (loss) per share calculation because the effect would have been antidilutive.

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3.             OTHER GAINS AND CHARGES

In the third quarter of fiscal 2008, we recorded a $9.0 million charge primarily for long-lived asset impairments resulting from the decision to close or decline lease renewals for 21 restaurants including 15 Chili’s and six On The Border restaurants.  The decision to close the restaurants and decline lease renewals was based on a comprehensive analysis that examined restaurants not performing at required levels of return.  During the quarter, we also made the decision to reduce future domestic company-owned restaurant development as well as discontinue certain projects that do not align with our strategic goals.  As a result, we evaluated our infrastructure needed to support this evolving business model, which resulted in the restructuring of our Restaurant Support Center and the elimination of certain administrative positions.  In connection with these actions, we incurred $12.1 million in charges related to asset write-offs for sites under development and other discontinued projects.  In addition, we incurred costs related to ongoing termination benefits under Statement of Financial Accounting Standards (“SFAS”) No. 112, “Employers’ Accounting for Postemployment Benefits,” of approximately $5.4 million in severance and $0.7 million in vacation and other benefits and recorded income of $0.9 million related to the forfeiture of stock-based compensation awards resulting from these actions.  Approximately $0.8 million in benefit payments remained to be paid as of March 26, 2008.

In the second quarter of fiscal 2008, we recorded $7.3 million in charges primarily related to long-lived asset impairments.  The charges included a $5.5 million impairment related to two restaurants which were impaired based on an analysis of projected operating performance and operating cash flows.  Also included is a $1.0 million charge related to the decrease in estimated sales value of land associated with previously closed restaurants and $646,000 related to restaurants closed in the second quarter of fiscal 2008.  We completed the sale of 76 company-owned Chili’s restaurants to ERJ Dining IV, LLC in November 2007 for approximately $122 million and recorded a gain of $29.2 million.  The net assets sold totaled approximately $88.2 million and consisted primarily of property and equipment of $86.4 million.  In the first quarter of fiscal 2008, we recorded a $512,000 charge for asset impairments related to the relocation of a restaurant and the decrease in estimated sales value of land associated with a previously closed restaurant.

In the third quarter of fiscal 2007, the sale of one company-owned On The Border restaurant to a franchisee was completed for a gain of $1.7 million.  Additionally, we recorded a $717,000 charge related to remaining lease obligations associated with closed restaurants.  In the second quarter of fiscal 2007, we recorded a $2.0 million charge for long-lived asset impairments resulting from the decision to close four restaurants, including three On The Border and one Chili’s restaurants.  We terminated our interest rate swaps on certain fixed-rate lease obligations in the first quarter of fiscal 2007 and recorded a $3.2 million gain.

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4.             ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

In February 2008, we entered into tentative agreements to sell nine Chili’s and 11 On The Border restaurants to a franchisee. The assets and liabilities associated with these restaurants have been classified as held for sale in the consolidated balance sheets at March 26, 2008 and June 27, 2007.  The combined net assets to be sold totaled approximately $15.2 million at March 26, 2008 and consisted primarily of property and equipment of $15.5 million. The buyer is in the process of obtaining financing, but we expect the transactions to close in early fiscal 2009.  We also expect to record a gain in the financial statements at the time the sale is completed.

We committed to a plan to sell Macaroni Grill in the first quarter of fiscal 2008, which was the result of our focus on achieving return on investment and growth targets. Macaroni Grill has been presented as discontinued operations in the consolidated financial statements.  Discontinued operations includes only the revenues and expenses which can be specifically identified with Macaroni Grill and excludes any allocation of corporate costs, including general and administrative expenses, or rental charges on company-owned properties.  The results of Macaroni Grill consist of the following (in thousands):

We are currently in negotiations with multiple potential buyers; however, recent contraction in the credit markets has made it difficult to obtain necessary financing.  In addition, the expected performance of the brand has declined due to lower revenues and increased commodity and labor costs.  As a result, in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets,” we recorded an impairment charge of $73.1 million to write-down the net assets of Macaroni Grill to their estimated fair value less costs to sell at March 26, 2008.  Our estimate of fair value is based on the best available information including values obtained in recent sales of company-owned restaurants to franchisees and forecasted operating performance of Macaroni Grill.  Due to uncertainty in the credit markets and other factors outside of our control, management cannot be certain that further adjustments will not be necessary until the transaction is completed.

In addition, during the third quarter of fiscal 2008, we made the decision to close 25 Macaroni Grill restaurants which resulted in $30.6 million of long-lived asset impairment and lease charges and $1.8 million of severance costs. The assets and liabilities related to these restaurants are no longer included in held for sale as of March 26, 2008.  Additionally, we incurred $1.4 million in charges related to the planned sale of the brand.

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Other gains and charges in the second quarter of fiscal 2008 consists primarily of a $3.2 million impairment charge associated with restaurant closures and $1.9 million in charges related to the planned sale of the brand. Other gains and charges in the first quarter of fiscal 2008 consists primarily of a $9.2 million impairment charge to adjust the value of certain restaurants to their fair value less expected costs to sell to a franchisee. This transaction was not completed; however, these assets are still held for sale as part of the expected sale of the brand.

Other gains and charges in fiscal 2007 includes $2.2 million related to lease charges associated with restaurant closures in the third quarter of fiscal 2007 and $8.6 million of impairment charges associated with restaurant closures in the second quarter of fiscal 2007.

As of March 26, 2008, the net assets of Macaroni Grill to be sold totaled approximately $186.4 million and consisted primarily of property and equipment of $180.9 million. We expect to complete the sale of the brand in the first half of fiscal 2009.

5.             TAXES

Effective June 28, 2007, we adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a result of the adoption we recognized an $847,000 decrease in the liability for unrecognized tax benefits, net of the federal deferred tax benefit, with a corresponding increase to retained earnings.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are no longer subject to U.S. federal examinations by tax authorities for fiscal years before 2006.  We are audited by the taxing authorities of most states and certain foreign countries and are subject to examination by these taxing jurisdictions for fiscal years generally after 2003.

The total amount of unrecognized tax benefits as of June 28, 2007 was $23.2 million ($17.4 million of which would favorably affect the effective tax rate if resolved in our favor due to the effect of deferred tax benefits).  During the twelve months following adoption, we anticipate that it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $786,000 ($604,000 of which would affect the effective tax rate due to the effect of deferred tax benefits) either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We had $4.3 million ($3.3 million net of a $1.0 million federal deferred tax benefit) of interest and penalties accrued at June 28, 2007.

6.             SHAREHOLDERS’ EQUITY

The Board of Directors has authorized a total of $2,060.0 million of share repurchases.  Pursuant to our stock repurchase plan, we repurchased approximately 9.1 million shares of our common stock for approximately $240 million during the first three quarters of fiscal 2008.  As of March 26, 2008, approximately $60 million was available under our share repurchase authorizations.  The repurchased common stock is reflected as a reduction of shareholders’ equity.  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. In the future, we may consider additional share repurchases based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.  On January 31, 2008, we announced the declaration of a dividend to common stock shareholders in the amount of $0.11 per share.  Dividends of $11.1 million were paid in March 2008, and we have paid approximately $31.8 million in dividends year-to-date.

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7.             SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for income taxes and interest for the first three quarters of fiscal 2008 and 2007 are as follows (in thousands):

Non-cash investing and financing activities for the first three quarters of fiscal 2008 and 2007 are as follows (in thousands):

8.             CONTINGENCIES

As of March 26, 2008, we guarantee lease payments totaling $161.3 million as a result of the sale of certain brands and the sale of restaurants to franchisees.  This amount represents the maximum potential liability of future payments under the guarantees.  These leases have been assigned to the buyers and the expiration dates of current lease terms range from fiscal 2008 through fiscal 2023.  We remain secondarily liable for the leases.  In the event of default, the terms and conditions in our assignment agreements govern our ability to pursue and recover damages incurred.  No material liabilities have been recorded as of March 26, 2008.

Certain current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal and rest breaks.  The lawsuit seeks penalties and attorney’s fees and was certified as a class action in July 2006.  In October 2007, the California Court of Appeal decertified the class action on all claims, but has been asked to reconsider that decision. We intend to vigorously defend our position.  It is not possible at this time to reasonably estimate the possible loss or range of loss, if any.

We are engaged in various legal proceedings and have certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, based upon consultation with legal counsel, we are 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.

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth selected operating data as a percentage of total revenues from continuing operations for the periods indicated. All information is derived from the accompanying consolidated statements of income.

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The following table details the number of restaurant openings during the third quarter, year-to-date, total restaurants open at the end of the third quarter, and total projected openings in fiscal 2008.

(a)                                  At the end of the third quarter of fiscal year 2008, international company-owned restaurants by brand included five Chili’s and one Macaroni Grill.  International franchise restaurants by brand included 152 Chili’s, 12 Macaroni Grill’s and one On the Border.

At March 26, 2008, we owned the land and buildings for 229 of the 1,062 company-owned restaurants (excluding Macaroni Grill).  The net book values of the land and buildings associated with these restaurants totaled $184.8 million and $195.8 million, respectively.

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GENERAL

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Brinker International, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the quarters ended March 26, 2008 and March 28, 2007, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this quarterly report.  The results of operations discussed in MD&A exclude discontinued operations, except where otherwise noted.

OVERVIEW

At March 26, 2008, we owned, operated, or franchised 1,868 restaurants through our four brands:  Chili’s, Macaroni Grill, On The Border, and Maggiano’s.

Our third quarter of fiscal 2008 proved to be both rewarding and challenging.  While we experienced encouraging trends in comparable restaurant sales, which increased 1.1% for the quarter, our operations continue to be negatively impacted by cost pressures from increased commodities and labor costs.  During the quarter, we also evaluated our portfolio of assets and supporting infrastructure.  As a result, we made decisions that resulted in over $26 million of special charges in continuing operations for the quarter.  These charges, which primarily related to restaurant closures, the adjustment of our development strategy and corporate restructuring, represent the impact of initiatives that will lay the groundwork for achieving profitable long-term growth.

Our ultimate goal is to build a business model that will enable us to achieve sustainable growth in a variety of economic environments in order to create long-term value for our shareholders.  We believe the key to reaching this goal resides within our existing restaurants by leveraging the strong positioning and operating strength of our world-class brands to grow profitable ongoing comparable restaurant sales. The basis of this business model will be grounded in our five areas of focus – hospitality; food and beverage excellence; restaurant atmosphere; pace and convenience; and international expansion. Our organization is focused on these five priorities that are designed to grow our base business by engaging and delighting our guests, differentiating our brands from competitors throughout the industry, reducing the costs associated with managing our restaurants and establishing a strong presence in key markets around the world.

To support this effort, we have further refined our projected domestic company-owned restaurant development schedule.  We expect to open approximately 70 company-owned restaurants in fiscal 2008, approximately 15 in fiscal 2009 and even fewer restaurants in fiscal 2010. With our focus on existing company-owned restaurants, we will restrict development to a limited number of new restaurants that meet or exceed our internal hurdle rates to ensure appropriate returns and shift a greater proportion of new restaurant development to our expanding franchise network in the United States and internationally.  As a result, our overall revenues will now be driven in a more balanced manner of comparable restaurant sales and increasing franchise royalties.  We expect to realize operating margin improvement from this focus inside the four walls of our existing restaurants and less effort towards opening new restaurants, the removal of underperforming restaurants from our system and a more focused organization.

These are challenging times for the casual dining industry.  As evidenced during fiscal 2008, the industry is a highly competitive business, which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. By capitalizing on our previous experiences during other challenging times, our team is responding to the difficult environment and driving results. We remain confident in the long-term prospects of the industry as well as in our ability to perform effectively in an extremely competitive marketplace and a variety of economic environments.

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REVENUES

Revenues for the third quarter of fiscal 2008 were $907.7 million, a 3.9% decrease from the $944.0 million generated for the same quarter of fiscal 2007. Revenues for the thirty-nine week period ended March 26, 2008 were $2,671.0 million, a 1.5% decrease from the $2,712.9 million generated for the same period in fiscal 2007. The decrease in revenue was primarily attributable to declines in capacity at company-owned restaurants, partially offset by comparable restaurant sales as follows: