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 27, 2002
Commission File Number 1-10275
BRINKER INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1914582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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 _____
Number of shares of common stock of registrant outstanding at March
27, 2002: 98,018,537
BRINKER INTERNATIONAL, INC.
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
March 27, 2002 (Unaudited) and June 27, 2001 3
Consolidated Statements of Income
(Unaudited) - Thirteen-week and thirty-nine
week periods ended March 27, 2002 and
March 28, 2001 4
Consolidated Statements of Cash Flows
(Unaudited) - Thirty-nine week periods ended
March 27, 2002 and March 28, 2001 5
Notes to Consolidated
Financial Statements (Unaudited) 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Part II - Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
March 27, June 27,
2002 2001
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 23,127 $ 13,312
Accounts receivable 23,205 31,438
Inventories 25,297 27,351
Prepaid expenses and other 61,752 57,809
Deferred income taxes 12,115 7,295
Total current assets 145,496 137,205
Property and Equipment, at Cost:
Land 247,000 201,013
Buildings and leasehold improvements 1,044,495 898,133
Furniture and equipment 605,131 478,847
Construction-in-progress 79,420 70,051
1,976,046 1,648,044
Less accumulated depreciation and
amortization (647,849) (563,320)
Net property and equipment 1,328,197 1,084,724
Other Assets:
Goodwill, net 193,899 138,127
Other 97,346 82,245
Total other assets 291,245 220,372
Total assets $1,764,938 $1,442,301
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current installments of long-term debt $ 16,451 $ 17,635
Accounts payable 110,865 89,436
Accrued liabilities 164,710 134,420
Total current liabilities 292,026 241,491
Long-term debt, less current installments 464,969 236,060
Deferred income taxes 17,901 12,502
Other liabilities 52,601 51,961
Shareholders' Equity:
Common stock - 250,000,000 authorized shares; $0.10
par value; 117,500,054 shares issued and
98,018,537 shares outstanding at March 27,
2002, and 117,501,080 shares issued and
99,509,455 shares outstanding at June 27, 2001 11,750 11,750
Additional paid-in capital 311,510 314,867
Retained earnings 910,428 801,988
1,233,688 1,128,605
Less:
Treasury stock, at cost (19,481,517 shares at March
27, 2002 and 17,991,625 shares at June 27, 2001) (293,969) (225,334)
Accumulated other comprehensive loss - (895)
Unearned compensation (2,278) (2,089)
Total shareholders' equity 937,441 900,287
Total liabilities and shareholders' equity $1,764,938 $1,442,301
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Thirteen-Week Periods Ended Thirty-Nine Week Periods Ended
March 27, March 28, March 27, March 28,
2002 2001 2002 2001
Revenues $ 767,428 $ 626,007 $ 2,162,657 $ 1,798,553
Operating Costs and Expenses:
Cost of sales 207,871 167,604 584,529 480,435
Restaurant expenses 439,049 348,814 1,219,952 998,256
Depreciation and amortization 34,273 25,405 92,610 73,157
General and administrative 29,586 28,193 87,833 82,102
Total operating costs and
expenses 710,779 570,016 1,984,924 1,633,950
Operating income 56,649 55,991 177,733 164,603
Interest expense 4,034 1,906 10,655 5,580
Other, net 998 284 1,806 1,197
Income before provision for
income taxes 51,617 53,801 165,272 157,826
Provision for income taxes 17,447 18,938 56,832 55,555
Net income $ 34,170 $ 34,863 $ 108,440 $ 102,271
Basic net income per share $ 0.35 $ 0.35 $ 1.11 $ 1.03
Diluted net income per share $ 0.34 $ 0.34 $ 1.08 $ 1.00
Basic weighted average
shares outstanding 97,694 99,450 97,924 98,868
Diluted weighted average
shares outstanding 100,652 102,498 100,588 101,927
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Thirty-Nine Week Periods Ended
March 27, March 28,
2002 2001
Cash Flows from Operating Activities:
Net income $ 108,440 $ 102,271
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 92,610 73,157
Amortization of deferred costs 5,311 1,227
Deferred income taxes 7,672 7,498
Loss on sale of affiliate - 387
Changes in assets and liabilities, excluding
effects of acquisitions:
Receivables 5,697 (4,529)
Inventories 2,756 (2,815)
Prepaid expenses (591) 1,210
Other assets 3,171 (6,101)
Accounts payable 22,093 4,434
Accrued liabilities 27,231 10,585
Other liabilities 640 6,224
Net cash provided by operating activities 275,030 193,548
Cash Flows from Investing Activities:
Payments for property and equipment (304,303) (168,073)
Payments for purchases of restaurants (60,491) -
Payment for purchase of affiliate, net - (29,560)
Proceeds from sale of affiliate 4,000 1,000
Investment in equity method investees (12,322) (3,443)
Net (payments from) advances to affiliates (675) 975
Net cash used in investing activities (373,791) (199,101)
Cash Flows from Financing Activities:
Net (payments) borrowings on credit facilities (61,240) 21,830
Net proceeds from issuance of debt 244,243 -
Proceeds from issuances of treasury stock 33,459 30,595
Purchases of treasury stock (107,886) (44,134)
Net cash provided by financing activities 108,576 8,291
Net change in cash and cash equivalents 9,815 2,738
Cash and cash equivalents at beginning of year 13,312 12,343
Cash and cash equivalents at end of year $ 23,127 $ 15,081
See accompanying notes to consolidated financial statements.
BRINKER INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of Brinker International, Inc.
and its wholly-owned subsidiaries (collectively, the "Company") as
of March 27, 2002 and June 27, 2001 and for the thirteen-week and
thirty-nine week periods ended March 27, 2002 and March 28, 2001,
respectively, have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission
("SEC"). The Company owns, operates, or franchises various
restaurant concepts 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"), Maggiano's Little
Italy ("Maggiano's"), Cozymel's Coastal Mexican Grill ("Cozymel's"),
Maggiano's Little Italy ("Maggiano's"), Corner Bakery Cafe ("Corner
Bakery"), and Big Bowl. In addition, the Company is involved in the
ownership and has been involved in the development of the Eatzi's
Market and Bakery ("Eatzi's") concept and owns an approximately 40%
interest in the legal entities owning and developing Rockfish
Seafood Grill ("Rockfish").
The information furnished herein reflects all adjustments
(consisting only of normal recurring accruals and adjustments) which
are, in the opinion of management, necessary to fairly state the
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 generally accepted accounting principles
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, 2001 Form 10-K. Company
management believes that the disclosures are sufficient for interim
financial reporting purposes.
Certain prior year amounts in the accompanying consolidated
financial statements have been reclassified to conform with fiscal
2002 classifications. These reclassifications have no effect on the
Company's net income or financial position as previously reported.
2. Business Combinations
In June 2001, the Company acquired from its franchise partner, Hal
Smith Restaurant Group ("Hal Smith"), three On The Border
restaurants for approximately $6.6 million. Goodwill of
approximately $2.9 million was recorded in connection with the
acquisition. The operations of the restaurants are included in the
Company's consolidated results of operations from the date of the
acquisition. The results of operations on a pro forma basis are not
presented separately as the results do not differ significantly from
historical amounts reported herein.
In November 2001, the Company acquired from its franchise partner,
Sydran Group, LLC, and Sydran Food Services III, L.P. (collectively,
"Sydran") 39 Chili's restaurants for approximately $53.9 million.
As part of the acquisition, the Company assumed $35.5 million in
capital lease obligations ($19.9 million principal plus $15.6
million representing a debt premium) and recorded goodwill totaling
approximately $52.5 million. The operations of the restaurants are
included in the Company's consolidated results of operations from
the date of the acquisition. The results of operations on a pro
forma basis are not presented separately as the results do not
differ significantly from historical amounts reported herein.
3. Investment in Unconsolidated Entities
Effective July 12, 2001, the Company formed a partnership with
Rockfish, a privately held Dallas-based restaurant company with ten
locations currently in operation. The Company made a $12.3 million
capital contribution to Rockfish in exchange for an approximate 40%
ownership interest in the legal entities owning and developing the
restaurant concept.
4. Goodwill and Other Intangibles
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective
June 28, 2001. SFAS No. 142 eliminates the amortization for
goodwill and other intangible assets with indefinite lives.
Intangible assets with lives restricted by contractual, legal, or
other means will continue to be amortized over their useful lives.
Goodwill and other intangible assets not subject to amortization are
tested for impairment annually or more frequently if events or
changes in circumstances indicate that the asset might be impaired.
SFAS No. 142 requires a two-step process for testing impairment.
First, the fair value of each reporting unit is compared to its
carrying value to determine whether an indication of impairment
exists. If an impairment is indicated, then the fair value of the
reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized
intangible assets) as if the reporting unit had been acquired in a
business combination. The amount of impairment for goodwill and
other intangible assets is measured as the excess of its carrying
value over its fair value. No such impairment losses were recorded
upon the initial adoption of SFAS 142.
Intangible assets subject to amortization under SFAS No. 142 consist
primarily of intellectual property rights. Amortization expense is
calculated using the straight-line method over their estimated
useful lives of 15 to 25 years. Intangible assets not subject to
amortization consist primarily of reacquired development rights.
The gross carrying amount of intellectual property rights subject to
amortization totaled $6.4 million at March 27, 2002 and June 27,
2001. Accumulated amortization related to these intangible assets
totaled approximately $1.2 million and $960,000 at March 27, 2002
and June 27, 2001, respectively. The carrying amount of reacquired
development rights not subject to amortization totaled $4.4 million
at March 27, 2002 and June 27, 2001.
The changes in the carrying amount of goodwill for the thirty-nine
week period ended March 27, 2002 are as follows (in thousands):
Balance, June 27, 2001 $ 138,127
Goodwill arising from acquisitions 55,473
Other adjustments 299
Balance, March 27, 2002 $ 193,899
The pro forma effects of the adoption of SFAS No. 142 on net income
is as follows (in thousands, net of taxes):
13-Week Periods Ended 39-Week Periods Ended
Mar. 27, Mar. 28, Mar. 27, Mar. 28,
2002 2001 2001 2002
Net income, as reported $ 34,170 $ 34,863 $ 108,440 $ 102,271
Intangible amortization - 620 - 1,535
Net income, pro forma $ 34,170 $ 35,483 $ 108,440 $ 103,806
The pro forma effects of the adoption of SFAS No. 142 on basic and
diluted earnings per share is as follows:
13-Week Periods Ended 39-Week Periods Ended
Mar. 27, Mar. 28, Mar. 27, Mar. 28,
2002 2001 2001 2002
Basic net income per share, $ 0.35 $ 0.35 $ 1.11 $ 1.03
as reported
Basic net income per share, 0.35 0.36 1.11 1.05
pro forma
Diluted net income per share, $ 0.34 $ 0.34 $ 1.08 $ 1.00
as reported
Diluted net income per share, 0.34 0.35 1.08 1.02
pro forma
5. Debt
In October 2001, the Company issued $431.7 million of zero coupon
convertible senior debentures ("Debentures"), maturing on October 10,
2021, and received proceeds totaling approximately $250.0 million
prior to debt issuance costs. The Debentures require no interest
payments and were issued at a discount representing a yield to
maturity of 2.75% per annum. The Debentures are redeemable at the
Company's option on October 10, 2004, and the holders of the
Debentures may require the Company to redeem the Debentures on
October 10, 2003, 2005, 2011 or 2016, and in certain other
circumstances. In addition, each Debenture is convertible into 18.08
shares of the Company's common stock if the stock's market price
exceeds 120% of the carrying value of the Debentures at specified
dates, the credit rating of the Debentures is reduced below certain
levels, the Company exercises its option to redeem the Debentures or
upon the occurrence of certain specified corporate transactions.
6. Leases
In fiscal 1998 and 2000, the Company entered into equipment leasing
facilities totaling $55.0 million and $25.0 million, respectively.
The leasing facilities were accounted for as operating leases and had
expiration dates of 2004 and 2006, respectively. The Company
guaranteed a residual value of approximately 87% of the total amount
funded under the leases. The Company had the option to purchase all
of the leased equipment for an amount equal to the unamortized lease
balance, which could not exceed 75% of the total amount funded
through the leases. In February 2002, the Company acquired the
remaining assets leased under the equipment leasing facilities for
$36.2 million and terminated the lease arrangements.
In fiscal 2000, the Company entered into a $50.0 million real estate
leasing facility. During fiscal 2001, the Company increased the
facility to $75.0 million. The real estate facility was accounted
for as an operating lease and was to expire in fiscal 2007. The
Company guaranteed a residual value of approximately 87% of the total
amount funded under the lease. The Company had the option to
purchase all of the leased real estate for an amount equal to the
unamortized lease balance. In February 2002, the Company acquired
the remaining assets leased under the real estate leasing facility
for $56.8 million and terminated the lease arrangement.
7. Derivative Financial Instruments and Hedging Activities
The Company entered into three additional interest rate swaps in
December 2001the second quarter with a total notional value of $118.6
million at March 27, 2002. These fair value hedges change the fixed-
rate interest component of the sale and leaseback of certain real
estate properties entered into in November 1997 to variable-rate
interest. Under the terms of the hedges (which expire in fiscal
2018), the Company pays monthly a variable rate based on LIBOR (1.88%
at March 27, 2002) plus 1.26%. The Company receives monthly the
fixed interest rate of 7.156% on the lease. The estimated fair value
of these agreements at March 27, 2002 was a liability of
approximately $1.4 million. The fair value hedges were fully
effective during the thirty-nine week period ended March 27, 2002.
Accordingly, the change in fair value of the swaps was recorded in
other liabilities.
8. Contingencies
During the third quarter of fiscal 2002, the Company recorded an
approximate $11.0 million charge to restaurant expenses stemming
from an agreement in principle reached with the California
Department of Labor Standards Enforcement (the "DLSE") in April
2002. The DLSE's primary allegation involved the Company's
documentation policies related to breaks provided to employees. The
Company believes it has been in substantial compliance with the
California lLabor lLaws related to employee breaks and other
employee related matters, but was unable to document all issues to
the DLSE's satisfaction. The Company agreed to the settlement to
avoid a potentially costly and protracted litigation.
The Company is engaged in various other legal proceedings and has
certain unresolved claims pending. The ultimate liability, if any,
for the aggregate amounts claimed cannot be determined at this time.
However, management of the Company, based upon consultation with
legal counsel, is of the opinion that there are no matters pending
or threatened, other than those that previously mentioned, which are
expected to have a material adverse effect, individually or in the
aggregate, on the Company's consolidated financial condition or
results of operations.
9. Shareholders' Equity
In August 2001, the Board of Directors authorized an increase in the
stock repurchase plan of an additional $100.0 million, bringing the
Company's total share repurchase program to $310.0 million.
Pursuant to the Company's stock repurchase plan, the Company
repurchased approximately 4,193,000 shares of its common stock for
$107.9 million during the first, second and third quarters of fiscal
2002, resulting in a cumulative repurchase total of approximately
15.2 million shares of its common stock for $299.4 million. The
Company's stock repurchase plan is used by the Company to increase
shareholder value, offset the dilutive effect of stock option
exercises, satisfy obligations under its savings plans, and for
other corporate purposes. The repurchased common stock is reflected
as a reduction of shareholders' equity.
10. Supplemental Cash Flow Information
Cash paid for interest and income taxes is as follows (in
thousands):
Mar. 27, Mar. 28,
2002 2001
Interest, net of amounts capitalized $ 6,712 $ 4,694
Income taxes, net of refunds 49,462 56,464
Non-cash investing and financing activities are as follows (in
thousands):
Mar. 27, Mar. 28,
2002 2001
Restricted common stock issued, net of forfeitures $ 2,435 $ 800
Increase in fair value of interest rate swaps and
debt 544 3,353
Decrease in fair value of forward rate agreements
included in other comprehensive income - (951)
Decrease in fair value of interest rate swaps on
real estate leasing facility (1,370) -
During the first and second quarters of fiscal 2002, the Company
purchased certain assets and assumed certain liabilities in
connection with the acquisitions of restaurants. The fair values of
the assets acquired and liabilities assumed at the date of
acquisition are as follows (in thousands):
Property, plant and equipment acquired $ 36,312
Other assets acquired 8,585
Goodwill 55,473
Capital lease obligations assumed (35,480)
Other liabilities assumed (4,399)
Net cash paid $ 60,491
11. Subsequent Event
In April 2002, the Company authorized an increase in the
stock repurchase plan (described in Note 9) of an additional $100.0
million, bringing the Company's total share repurchase program to
$410.0 million.
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.
13-Week Periods Ended 39-Week Periods Ended
Mar. 27, Mar. 28, Mar. 27, Mar. 28,
2002 2001 2002 2001
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Operating Costs and Expenses:
Cost of sales 27.1 % 26.8 % 27.0 % 26.7 %
Restaurant expenses 57.2 % 55.7 % 56.4 % 55.5 %
Depreciation and amortization 4.5 % 4.1 % 4.3 % 4.1 %
General and administrative 3.9 % 4.5 % 4.1 % 4.6 %
Total operating costs and expenses 92.7 % 91.1 % 91.8 % 90.9 %
Operating income 7.3 % 8.9 % 8.2 % 9.1 %
Interest expense 0.5 % 0.3 % 0.5 % 0.3 %
Other, net 0.1 % 0.0 % 0.1 % 0.1 %
Income before provision for income taxes 6.7 % 8.6 % 7.6 % 8.7 %
Provision for income taxes 2.3 % 3.0 % 2.6 % 3.1 %
Net income 4.4 % 5.6 % 5.0 % 5.6 %
The following table details the number of restaurant openings
during the third quarter and year-to-date and total restaurants
open at the end of the third quarter.
Third Quarter Year-to-Date Total Open at End
Openings Openings Of Third Quarter
Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal
2002 2001 2002 2001 2002 2001
Chili's:
Company-owned 16 9 41 22 618 487
Franchised 6 9 20 27 188 243
Total 22 18 61 49 806 730
Macaroni Grill:
Company-owned 6 5 13 11 172 156
Franchised - - - 2 6 6
Total 6 5 13 13 178 162
On The Border:
Company-owned 4 4 7 9 108 91
Franchised 1 - 2 2 18 29
Total 5 4 9 11 126 120
Corner Bakery:
Company-owned 3 1 9 3 70 58
Franchised - - - 1 2 2
Total 3 1 9 4 72 60
Cozymel's 1 - 1 - 15 13
Maggiano's 1 - 4 1 18 13
Big Bowl 2 1 2 1 11 7
Rockfish - - 2 - 10 -
Eatzi's - - - - 4 4
Grand Total 40 29 101 79 1,240 1,109
REVENUES
Revenues for the third quarter of fiscal 2002 increased to $767.4
million, 22.6% over the $626.0 million generated for the same
quarter of fiscal 2001. Revenues for the thirty-nine week period
ended March 27, 2002 rose 20.2% to $2,162.7 million from the
$1,798.6 million generated for the same period of fiscal 2001. The
increases are primarily attributable to a net increase of 187
company-owned restaurants since March 28, 2001 and an increase in
comparable store sales for the third quarter of fiscal 2002
compared to the same quarter of fiscal 2001. The Company increased
its capacity (as measured in sales weeks) for the third quarter and
year-to-date of fiscal 2002 by 22.2% and 19.7%, respectively,
compared to the respective prior year periods. Comparable store
sales increased 1.9% and 1.4% for the third quarter and year-to-
date, respectively, from the same periods of fiscal 2001. Menu
prices in the aggregate increased 1.8% in fiscal 2002 as compared
to fiscal 2001.
COSTS AND EXPENSES (as a Percent of Revenues)
Cost of sales increased for the third quarter and year-to-date of
fiscal 2002 as compared to the respective periods of fiscal 2001
due to product mix changes to menu items with higher percentage
food costs, unfavorable commodity price variances for produce and
dairy and cheese, and unfavorable purchase contracts for reacquired
franchise restaurants, which were partially offset by menu price
increases and favorable commodity price variances for seafood, meat
and beverages.
Restaurant expenses increased for the third quarter and year-to-
date of fiscal 2002 compared to the respective periods of fiscal
2001. The increases were primarily due to an approximate $11.0
million expense recorded in the third quarter related to the
settlement of certain California lLabor lLaw issues. Also
contributing to the increases were higher facility costs and
preopening costs and the effects of reacquired franchise
restaurants which have higher operating costs than an average
company owned unit. These increases which were partially offset
by increased sales leverage, improvements in labor productivity,
and menu price increases year-over-year.
Depreciation and amortization increased for the third quarter and
year-to-date of fiscal 2002 as compared to the respective periods
of fiscal 2001. Depreciation and amortization increases resulted
from new unit construction, ongoing remodel costs, the acquisition
of previously leased equipment and real estate assets, and
restaurants acquired during fiscal 20021 and 20012. These
increases were partially offset by increased sales leverage, a
declining depreciable asset base for older units, and the
elimination of goodwill amortization in accordance with SFAS 142.
General and administrative expenses decreased for the third quarter
and year-to-date of fiscal 2002 compared to the respective periods
of fiscal 2001 as a result of the Company's continued focus on
controlling corporate expenditures relative to increasing revenues
and increased sales leverage resulting from new unit openings and
acquisitions.
Interest expense increased for the third quarter and year-to-date
of fiscal 2002 compared with the respective periods of fiscal 2001
as a result of amortization of debt issuance costs and debt
discounts on the Company's $431.7 million convertible debt. These
increases were partially offset by a decrease in interest expense
on senior notes due to the scheduled repayment made in April 2001,
repayments on the credit facilities, and an increase in interest
capitalization related to new restaurant construction activity.
Other, net increased for the third quarter and remained flat for
the first nine months of fiscal 2002 as compared to the respective
periods of fiscal 2001 due to a decrease in the market value of the
Company's savings plan investments, partially offset by reduced
equity losses related to the Company's share in equity method
investees.
INCOME TAXES
The Company's effective income tax rate decreased to 33.8% from
35.2% for the third quarter of fiscal 2002 and to 34.4% from
35.2% year-to-date of fiscal 2002. The decrease is primarily due
to the elimination of goodwill amortization in accordance with SFAS
142 and to a decrease in the effective state tax rates.
NET INCOME AND NET INCOME PER SHARE
Exclusive of the after tax settlement expense of $7.3 million recorded
in the third quarter of fiscal 2002, net income increased for the third
quarter and year-to-date of fiscal 2002 by 18.8% and 13.1%,
respectively, compared to the same periods of fiscal 2001.
Excluding the $11.0 million charge, diluted net income per share
increased for the third quarter and year-to-date of fiscal 2002 by
20.9% and 15.0%, respectively, compared to the same periods of
fiscal 2001. The increase in both net income and diluted net
income per share was primarily due to increasing revenues driven by
increases in sales weeks, comparable store sales, and menu prices
and decreases in general and administrative expenses, partially
offset by increases in cost of sales and restaurant expenses as a
percent of revenues.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficit increased from $104.3 million at June
27, 2001 to $146.5 million at March 27, 2002. Net cash provided by
operating activities increased to $275.0 million for the first nine
months of fiscal 2002 from $193.5 million during the same period in
fiscal 2001 due to increased profitability and the timing of
operational receipts and payments. The Company believes that its
various sources of capital, including availability under existing
credit facilities and cash flow from operating activities, are
adequate to finance operations as well as the repayment of current
debt obligations.
Long-term debt outstanding at March 27, 2002 consisted of $253.2
million of zero coupon convertible debentures ($431.7 million
principal less $178.5 million representing an unamortized debt
discount), $60.5 million of unsecured senior notes ($57.1 million
principal plus $3.4 million representing the effect of changes in
interest rates on the fair value of the debt), $44.1 million in
assumed debt related to the acquisition of restaurants from a
former franchise partner ($39.3 million principal plus $4.8 million
representing a debt premium), $35.2 million in assumed capital
lease obligations related to the acquisition of restaurants from a
former franchise partner ($19.6 million principal plus $15.6
million representing a debt premium), and other obligations under
capital leases. The Company has credit facilities totaling $375.0
million. At March 27, 2002, the Company had $287.6 million in
available funds from these facilities.
In October 2001, the Company issued $431.7 million of zero coupon
convertible debentures and received proceeds totaling approximately
$250.0 million. The Company used the proceeds for repayment of
existing indebtedness, restaurant acquisitions, purchases of
outstanding common stock under the Company's stock repurchase plan
and for general corporate purposes.
On July 12, 2001, the Company made a $12.3 million capital
contribution to Rockfish in exchange for an approximately 40%
ownership interest in the legal entities owning and developing
Rockfish. Additionally, in June and November 2001, the Company
acquired three On the Border and 39 Chili's restaurants from its
franchise partners Hal Smith and Sydran, respectively, for $60.5
million. The Company financed these acquisitions through existing
credit facilities, the Debentures and cash provided by operations.
In February 2002, the Company acquired the remaining assets leased
under its $80.0 million equipment leasing facilities and $75.0
million real estate leasing facility for $36.2 million and $56.8
million, respectively, and terminated the leasing arrangements.
The acquisitions were primarily funded by utilizing amounts
available under existing credit facilities.
Capital expenditures consist of purchases of land for future
restaurant sites, new restaurants under construction, purchases of
new and replacement restaurant furniture and equipment, the
acquisition of previously leased equipment and real estate assets,
and ongoing remodeling programs. Capital expenditures were $304.3
million for the first nine months of fiscal 2002 compared to $168.1
million (net of amounts funded under the respective equipment and
real estate leasing facilities), for the same period of fiscal
2001. The increase is due primarily to the acquisition of the
remaining assets leased under the equipment and real estate leasing
facilities and an increase in the number of new store openings.
The Company estimates that its capital expenditures during the
fourth quarter of fiscal 2002 will approximate $66.9 million.
These capital expenditures will be funded entirely from operations
and existing credit facilities.
The Board of Directors authorized an increase in the stock
repurchase plan of $100.0 million in August 2001 and an additional
$100.0 million in April 2002, bringing the Company's total share
repurchase program to $410.0 million. Pursuant to the Company's
stock repurchase plan, approximately 4,193,000 shares of its common
stock were repurchased for $107.9 million during the first three
quarters, second and third quarters of fiscal 2002. As of March
27, 2002, approximately 15.2 million shares had been repurchased
for $299.4 million under the stock repurchase plan. The Company
repurchases common stock to increase shareholder value, offset the
dilutive effect of stock option exercises, satisfy obligations
under its savings plans, and for other corporate purposes. The
repurchased common stock is reflected as a reduction of
shareholders' equity. The Company financed the repurchase program
through a combination of cash provided by operations, drawdowns on
its available credit facilities and the issuance of the Debentures.
The Company is not aware of any other event or trend which would
potentially affect its liquidity. In the event such a trend
develops, the Company believes that there are sufficient funds
available under its lines of credit and from its strong internal
cash generating capabilities to adequately manage the expansion of
business.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board issued
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets". This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 "Reporting the Results
of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 retains the fundamental
provisions of SFAS No. 121, but eliminates the requirement to
allocate goodwill to long-lived assets to be tested for
impairment. This statement also requires discontinued operations
to be carried at the lower of cost or fair value less costs to
sell and broadens the presentation of discontinued operations to
include a component of an entity rather than a segment of a
business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The Company does not
expect the adoption of this statement to have a material impact on
its results of operations or financial position.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the quantitative and
qualitative market risks of the Company since the prior reporting
period.
FORWARD-LOOKING STATEMENTS
The Company wishes to caution readers that the following important
factors, among others, could cause the actual results of the
Company to differ materially from those indicated by forward-
looking statements made in this report and from time to time in
news releases, reports, proxy statements, registration statements
and other written communications, as well as oral forward-looking
statements made from time to time by representatives of the
Company. Such forward-looking statements involve risks and
uncertainties that may cause the Company's or the restaurant
industry's actual results, level of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. Factors that might
cause actual events or results to differ materially from those
indicated by these forward-looking statements may include matters
such as future economic performance, restaurant openings, operating
margins, the availability of acceptable real estate locations for
new restaurants, the sufficiency of the Company's cash balances and
cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs, and other
matters, and are generally accompanied by words such as "believes,"
"anticipates," "estimates," "predicts," "expects" and similar
expressions that convey the uncertainty of future events or
outcomes. An expanded discussion of some of these risk factors
follows.
Competition may adversely affect the Company's operations and
financial results.
The restaurant business is highly competitive with respect to
price, service, restaurant location and food quality, and is often
affected by changes in consumer tastes, economic conditions,
population and traffic patterns. The Company competes within each
market with locally-owned restaurants as well as national and
regional restaurant chains, some of which operate more restaurants
and have greater financial resources and longer operating histories
than the Company. There is active competition for management
personnel and for attractive commercial real estate sites suitable
for restaurants. In addition, factors such as inflation, increased
food, labor and benefits costs, and difficulty in attracting hourly
employees may adversely affect the restaurant industry in general
and the Company's restaurants in particular.
The Company's sales volumes generally decrease in winter months.
The Company's sales volumes fluctuate seasonally, and are generally
higher in the summer months and lower in the winter months, which
may cause seasonal fluctuations in the Company's operating results.
Changes in governmental regulation may adversely affect the
Company's ability to open new restaurants and the Company's
existing and future operations.
Each of the Company's restaurants is subject to licensing and
regulation by alcoholic beverage control, health, sanitation,
safety and fire agencies in the state and/or municipality in which
the restaurant is located. The Company has not encountered any
difficulties or failures in obtaining the required licenses or
approvals that could delay or prevent the opening of a new
restaurant and although the Company does not, at this time,
anticipate any occurring in the future, there can be no assurance
that the Company will not experience material difficulties or
failures that could delay the opening of restaurants in the future.
The Company is subject to federal and state environmental
regulations, and although these have not had a material negative
effect on the Company's operations, there can be no assurance that
there will not be a material negative effect in the future. More
stringent and varied requirements of local and state governmental
bodies with respect to zoning, land use and environmental factors
could delay or prevent development of new restaurants in particular
locations. The Company is subject to the Fair Labor Standards Act,
which governs such matters as minimum wages, overtime and other
working conditions, along with the Americans With Disabilities Act,
and various family leave mandates and a variety of other laws
enacted by the states that govern these and other employment law
matters. Although the Company expects increases in payroll expenses
as a result of federal and state mandated increases in the minimum
wage, and although such increases are not expected to be material,
there can be no assurance that there will not be material increases
in the future. However, the Company's vendors may be affected by
higher minimum wage standards, which may result in increases in the
price of goods and services supplied to the Company.
Inflation may increase the Company's operating expenses.
The Company has not experienced a significant overall impact from
inflation. As operating expenses increase, the Company, to the
extent permitted by competition, recovers increased costs by
increasing menu prices, by reviewing, then implementing,
alternative products or processes, or by implementing other cost-
reduction procedures. There can be no assurance, however, that the
Company will be able to continue to recover increases in operating
expenses due to inflation in this manner.
Increased energy costs may adversely affect the Company's
profitability.
The Company's success depends in part on its ability to absorb
increases in utility costs. Various regions of the United States
in which the Company operates multiple restaurants, particularly
California, experienced significant increases in utility prices
during the 2001 fiscal year. If these increases should recur, they
will have an adverse effect on the Company's profitability.
If the Company is unable to meet its growth plan, the Company's
profitability in the future may be adversely affected.
The Company's ability to meet its growth plan is dependent upon,
among other things, its ability to identify available, suitable and
economically viable locations for new restaurants, obtain all
required governmental permits (including zoning approvals and
liquor licenses) on a timely basis, hire all necessary contractors
and subcontractors, and meet construction schedules. The costs
related to restaurant and concept development include purchases and
leases of land, buildings and equipment and facility and equipment
maintenance, repair and replacement. The labor and materials costs
involved vary geographically and are subject to general price
increases. As a result, future capital expenditure costs of
restaurant development may increase, reducing profitability. There
can be no assurance that the Company will be able to expand its
capacity in accordance with its growth objectives or that the new
restaurants and concepts opened or acquired will be profitable.
Unfavorable publicity relating to one or more of the Company's
restaurants in a particular brand can taint public perception of
the brand.
Multi-unit restaurant businesses can be adversely affected by
publicity resulting from poor food quality, illness or other health
concerns or operating issues stemming from one or a limited number
of restaurants. In particular, since the Company depends heavily
on the "Chili's" brand for a majority of its revenues, unfavorable
publicity relating to one or more Chili's restaurants could have a
material adverse effect on the Company's business, results of
operations and financial condition.
Other risk factors may adversely affect the Company's financial
performance.
Other risk factors that could cause the Company's actual results to
differ materially from those indicated in the forward-looking
statements include, without limitation, changes in economic
conditions, consumer perceptions of food safety, changes in
consumer tastes, governmental monetary policies, changes in
demographic trends, availability of employees, terrorist acts, and
weather and other acts of God.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the third quarter of fiscal 2002, the Company recorded an
approximate $11.0 million charge to restaurant expense stemming
from an agreement in principle reached with the California
Department of Labor Standards Enforcement (the "DLSE") in April
2002. The DLSE's primary allegation involved the Company's
documentation policies related to breaks provided to employees.
The Company believes it has been in substantial compliance with
the California Labor Laws related to employee breaks and other
employee related matters, but was unable to document all issues to
the DLSE's satisfaction. The Company agreed to the settlement to
avoid a potentially costly and protracted litigation.
The Company is engaged in various other legal proceedings and has
certain unresolved claims pending. The ultimate liability, if any,
for the aggregate amounts claimed cannot be determined at this
time. However, management of the Company, based upon consultation
with legal counsel, is of the opinion that there are no matters
pending or threatened, other than thathose previously mentioned,
which are expected to have a material adverse effect, individually
or in the aggregate, on the Company's consolidated financial
condition or results of operations.
Item 6. Exhibits and Reports on FORM 8-K
(a) Exhibits
4. Instruments Defining the Rights of Security Holders, Including
Debentures.
Indenture, dated as of October 10, 2001, between the Company
and SunTrust Bank, as Trustee, was filed as an exhibit to the
quarterly report on Form 10-Q for the period ended September
26, 2001 and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
BRINKER INTERNATIONAL, INC.
Date: May 8, 2002 By:___ /s/_____________________________________
Ronald A. McDougall, Chairman and
Chief Executive Officer
Date: May 8, 2002 By:____/s/_____________________________________
Charles M. Sonsteby,
Executive Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
