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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 December 24, 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 definition 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.

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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 December 24, 2008 and June 25, 2008 and for the thirteen week and twenty-six week periods ended December 24, 2008 and December 26, 2007 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”), On The Border Mexican Grill & Cantina (“On The Border”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. We also hold a minority investment in Romano’s Macaroni Grill (“Macaroni Grill”) after completion of the sale of a majority interest in the brand to Mac Acquisition LLC (“Mac Acquisition”), an affiliate of San Francisco-based Golden Gate Capital, in December 2008. 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 25, 2008 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 2009 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 9.2 million stock options and restricted share awards outstanding at December 24, 2008 and 2.3 million stock options and restricted share awards outstanding at December 26, 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

Other gains and charges consist of the following (in thousands):

In the second quarter of fiscal 2009, we recorded a $45.7 million charge primarily related to long-lived asset impairments of $44.2 million resulting from the decision to close or decline lease renewals for 35 underperforming 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.  In December 2008, we completed the sale of a majority interest in Macaroni Grill to Mac Acquisition and recorded a loss on the sale of $43.3 million. See Note 4 for additional disclosures. We also recorded gains of $3.6 million related to the sale of nine restaurants to a franchisee and land sales.

In the first quarter of fiscal 2009, we recorded $2.0 million in lease termination charges, a $1.7 million charge related to uninsured hurricane damage and a $1.3 million charge for expenses associated with the sale of Macaroni Grill.

During the second quarter of fiscal 2008, we recorded a $29.2 million gain on the sale of 76 company-owned Chili’s restaurants to ERJ Dining IV LLC. The sale was completed in November 2007. We also recorded $11.4 million in charges primarily related to long-lived asset impairments. The charges include a $5.5 million impairment related to two restaurants which were impaired based on an analysis of projected operating performance and operating cash flows as well as a $4.0 million asset impairment charge associated with restaurant closures. Also included is a $1.0 million charge related to the decrease in estimated sales value of land associated with previously closed restaurants.  Additionally, we recorded a $1.9 million charge for expenses associated with the sale of Macaroni Grill during the second quarter of fiscal 2008.

In the first quarter of fiscal 2008, other gains and charges consisted primarily of a $9.2 million impairment charge to write-down the net assets of certain Macaroni Grill restaurants to their fair value less costs to sell to a franchisee.

4.     SALE OF MACARONI GRILL

In August 2008, we entered into an agreement with Mac Acquisition for the sale of a majority interest in Macaroni Grill. The assets and liabilities associated with these restaurants were classified as held for sale in the consolidated balance sheet for the fiscal year ended June 25, 2008. The sale was completed on December 18, 2008. We received cash proceeds of approximately $88.0 million and recorded a loss of $43.3 million in other gains and charges in the consolidated statements of income. The net assets sold totaled approximately $110 million and consisted primarily of property and equipment of $105 million. Assets previously held for sale of $19.5 million were retained by us and included in property, plant and equipment as of December 24, 2008.  The land and buildings related to these locations were leased to Mac Acquisition as part of the sale agreement. Liabilities associated with assets held for sale at

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December 24, 2008 totaled approximately $7.9 million and consisted primarily of remaining transaction costs from the sale of Macaroni Grill which are expected to be paid in the third quarter of fiscal 2009.

On December 18, 2008, we contributed $6.0 million to Mac Acquisition for a 19.9% ownership interest in the new entity. We account for the investment under the equity method of accounting and record our share of the net income or loss from the investee within operating income since the operations of Macaroni Grill are similar to our ongoing operations. This amount has been included in restaurant expense in our consolidated statements of income due to the immaterial nature. In accordance with the reporting provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we have classified the results of Macaroni Grill in continuing operations for fiscal 2009 and prior years as we will have continuing involvement in the ongoing operations of Macaroni Grill.

As part of the sale, we entered into an agreement with Mac Acquisition whereby we have provided a three-year $10.0 million unsecured standby letter of credit. Certain conditions must be met in order for Mac Acquisition to draw upon the letter of credit. No amount was outstanding as of December 24, 2008. We will also provide corporate support services for the new entity for one year with an option for one additional year.

5.     LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

As of June 25, 2008, we had credit facilities aggregating $550 million, consisting of a revolving credit facility of $300 million and uncommitted credit facilities of $250 million.  During the second quarter of fiscal 2009, Standard and Poor’s (“S&P”) reaffirmed our debt rating of BBB- (investment grade) with a stable outlook.  However, Moody’s downgraded our corporate family rating to Ba1 (non-investment grade) and our senior unsecured note rating to Ba2 (non-investment grade) with a stable outlook.  As a result of our split rating, our borrowing costs will increase due to increased spreads over LIBOR on our term loan (LIBOR plus 0.95%) and revolving credit facility (LIBOR plus 1.25%). Additionally, under the terms and conditions of our uncommitted credit facility agreements, we have to maintain an investment grade rating with both S&P and Moody’s in order to utilize the credit facilities. Therefore, our uncommitted credit facilities totaling $250 million are no longer available. We manage total borrowings under all of our credit facilities to never exceed total capacity under the revolving credit facility. As a result, outstanding balances on the uncommitted credit facilities were repaid with funds drawn on the revolving credit facility. As of December 24, 2008, we have $90 million outstanding and $210 million available to us under our revolving credit facility.  Subsequent to December 24, 2008, we paid down the outstanding balance on the revolving credit facility by approximately $20 million. 

Our revolving credit facility expires in October 2009.  As a result, the $90 million outstanding under this facility has been classified as current in our consolidated balance sheet as of December 24, 2008. We are in the final stages of renewing this credit facility for a three-year term with a syndicate of banks and, based on the levels of commitment provided in discussions to date with lenders, we expect to complete the transaction in February 2009.  Under the new revolving credit facility, the spreads over LIBOR will increase due to market conditions as well as a change in our credit rating. Due to the divestiture of Macaroni Grill, the reduction in new company-owned restaurant development and our focus on debt repayment, we anticipate that our future borrowing needs will be reduced and, therefore, we have elected to reduce the size of the revolving credit facility to a level that still provides us with adequate liquidity.

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6.     SHAREHOLDERS’ EQUITY

The Board of Directors has authorized a total of $2,060.0 million of share repurchases.  As of December 24, 2008, approximately $60 million was available under our share repurchase authorizations. We did not repurchase any common shares under our share repurchase plan during the first two quarters of fiscal 2009. 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 have currently placed a moratorium on share repurchases but, in the future, we may consider additional share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs. During the first two quarters of fiscal 2009, approximately 642,000 restricted share awards vested with a fair value of $12.3 million.  Approximately 190,000 of these shares were repurchased from employees upon vesting for $3.6 million to satisfy minimum tax withholding obligations.  Repurchased common stock is reflected as a reduction of shareholders’ equity.  We paid dividends of $11.2 million, or $0.11 per share, to common stock shareholders in December 2008 and a total of $22.9 million, or $0.22 per share, to common stock shareholders year-to-date.

7.     SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for income taxes and interest for the first two quarters of fiscal 2009 and 2008 are as follows (in thousands):

Non-cash investing for the first two quarters of fiscal 2009 and 2008 are as follows (in thousands):

8.     CONTINGENCIES

As of December 24, 2008, we remain secondarily liable for lease payments totaling $228.9 million as a result of the sale of a majority interest in Macaroni Grill and the sale of other brands and restaurants to franchisees in previous periods. This amount represents 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 2009 through fiscal 2023.  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 24, 2008.

Certain current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with

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respect to meal and rest breaks.  The lawsuit seeks penalties and attorney’s fees and was certified as a class action in July 2006.  On July 22, 2008, the California Court of Appeal decertified the class action on all claims with prejudice. On October 22, 2008, the California Supreme Court granted a writ to review the decision of the Court of Appeal.  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 other 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, management, based upon consultation with legal counsel, 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.

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 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 second quarter, year-to-date, total restaurants open at the end of the second quarter, and total projected openings in fiscal 2009 (excluding Macaroni Grill).

a)              At the end of the second quarter of fiscal year 2009, international company-owned restaurants by brand included six Chili’s and one Maggiano’s. International franchise restaurants by brand included 177 Chili’s and five On The Border’s.

b)             As of December 24, 2008, we continue to own two Macaroni Grill restaurants which have been excluded from the total restaurants.  Per terms of the sale to Mac Acquisition, we have a limited period of time to close the restaurants or change to an existing Brinker brand.

At December 24, 2008, we owned the land and buildings for 228 of the 1,064 company-owned restaurants.  The net book values of the land and buildings associated with these restaurants totaled $180.6 million and $186.1 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 December 24, 2008 and December 26, 2007, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this quarterly report.

OVERVIEW

We are principally engaged in the ownership, operation, development, and franchising of the Chili’s Grill & Bar (“Chili’s”), On The Border Mexican Grill & Cantina (“On The Border”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands.  At December 24, 2008, we owned, operated, or franchised 1,704 restaurants.  We also hold a minority investment in Romano’s Macaroni Grill (“Macaroni Grill”) after completion of the sale of a majority interest in the brand to Mac Acquisition LLC (“Mac Acquisition”), an affiliate of San Francisco-based Golden Gate Capital, in December 2008. We will also provide corporate support services for the new entity for one year with an option for one additional year.  We will account for our interest in the ongoing operations of the brand through an equity method investment.

Our second quarter of fiscal 2009 was marked by many of the same challenges we faced in the first three months of the fiscal year.  External factors such as the volatile financial market, rising unemployment and the housing crisis continued to put significant pressure on consumer spending in the U.S and overseas.  The holiday season brought little relief as consumers remained cautious about discretionary spending.  As a result, our traffic trends indicated the guests’ choice to limit restaurant dining occasions or scale back on check totals during their visits.  We also experienced a decline in our gift card sales of approximately 15% compared to the prior year which will negatively impact third quarter revenue when the majority of these cards are expected to be redeemed.

Despite these challenging times, we are still committed to our long term strategies and initiatives centered around our five areas of focus - hospitality; food and beverage excellence; restaurant atmosphere; pace and convenience; and international expansion.  These strategic priorities are designed to strengthen Brinker brands and build on the long-term health of the company by engaging and delighting our guests, differentiating our brands from the competition, reducing the costs associated with managing our restaurants and establishing a strong presence in key markets around the world.  However, we will monitor the results closely as well as the current business environment in order to pace the implementation of our initiatives appropriately.

We strongly believe investments in these five strategic priorities will strengthen our brands and allow us to emerge from these tough economic times in a better competitive position to deliver profitable growth over the long term for our shareholders.   For example, with growing economic pressures in the United States, international expansion allows further diversification of our portfolio, enabling Brinker to build strength in a variety of markets and economic conditions.  Our growth will be driven by cultivating relationships with equity investors, joint venture partners and franchisees.  Our growing percentage of franchise operations both domestically and internationally enable us to improve margins as royalty payments flow through to the bottom line.  Another top area of focus remains creating a culture of hospitality that will differentiate Brinker brands from all others in the industry.  Through our investments in team member training and guest measurement programs, we are gaining significant traction in this area and providing guests a reason to make Brinker brands their preferred choice when dining out.  We also believe that the unique and craveable food and beverages as well as the new flavors and offerings we continue to create at each of our brands, the warm, welcoming and

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revitalized atmospheres, and technologies and process improvements related to pace and convenience will give customers new reasons to dine with us more often.

This difficult operating environment highlights the need to be disciplined with our capital allocation and maintain the health of our balance sheet in order to provide a stable financial base to weather these uncertain times.  Generating strong cash flows has long been a hallmark of Brinker and in the second quarter we have taken further steps to shore up our cash flows to provide the necessary flexibility to address current challenges and help drive the business forward.  In the second quarter, we completed an annual evaluation of our restaurant base which led to the decision to close 35 underperforming restaurants.  We also made the decision to further reduce our fiscal 2009 capital expenditures by $30 million, eliminate virtually all company-owned restaurant development in fiscal 2010 and place a moratorium on all share repurchase activity.  This financial discipline designed to improve free cash flow combined with the Macaroni Grill proceeds will allow us to reduce our debt levels and survive in the current economic environment.

The casual dining industry is a highly competitive business which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs.  Our top priority remains increasing profitable traffic over time.  We believe that this focus, combined with discipline around the use of capital and efficient management of operating expenses, will enable Brinker to emerge from the current economic recession as an industry leader.  Despite the disappointing results for the first half of fiscal 2009 and an uncertain outlook for the remainder of fiscal 2009, we remain confident in the financial health of our company, 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.

REVENUES

Revenues for the second quarter of fiscal 2009 decreased to $949.4 million, a 7.8% decrease from the $1,029.8 million generated for the same quarter of fiscal 2008. Revenues for the twenty-six week period ended December 24, 2008 were $1,933.8 million, a 7.2% decrease from the $2,084.5 million generated for the same period in fiscal 2008. The decrease in revenue was primarily attributable to a decrease in comparable restaurant sales across all brands as well as net declines in capacity at company-owned restaurants primarily due to 47 restaurant closures and the sale of 198 restaurants since the second quarter of fiscal 2008 as well as the sale of 76 restaurants during the second quarter of fiscal 2008.

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