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Item 7. Management’s Discussion and Analysis

2021-08-26 compared with 2020-08-24 · 286 added, 364 removed, 183 unchanged (78% of the section changed)

1 unchanged sentence

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our Company, our operations and our current operating environment.

For an understanding of the significant factors that influenced our performance, the MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements included in Part II, Item 8 - Financial Statements and Supplementary Data of our Annual Report.

For an understanding of the significant factors that influenced our performance, the MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in Part II, Item 8 - Financial Statements and Supplementary Data of our Annual Report.

Our MD&A consists of the following sections:

Overview - a general description of our business strategy and the casual dining segment of the restaurant industry

• Overview - a brief description of our business and a discussion on the financial impact of the COVID-19 pandemic

• Results of Operations - an analysis of the Consolidated Statements of Comprehensive Income included in the Consolidated Financial Statements

Liquidity and Capital Resources - an analysis of cash flows, including capital expenditures, aggregate contractual obligations, share repurchase activity, and known trends that may impact liquidity

• Liquidity and Capital Resources - an analysis of cash flows, including capital expenditures, aggregate contractual obligations, share issuance and repurchase activity, and known trends that may impact liquidity

• Impact of Inflation - a discussion of the effect of inflation on our business

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• Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates including recent accounting pronouncements

The following MD&A includes a discussion comparing our results in fiscal 2020 to fiscal 2019 , and should be read together with Part II, Item 6 - Selected Financial Data presented for the fiscal year ended June 24, 2020 and Part II, Item 8 - Financial Statements and Supplementary Data of our Annual Report.

For a discussion comparing our results from fiscal 2019 to fiscal 2018 , refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 13 of our Annual Report on Form 10-K for the fiscal year ended June 26, 2019 , filed with the SEC on August 22, 2019.

The following MD&A includes a discussion comparing our results in fiscal 2021 to fiscal 2020.

For a discussion comparing our results from fiscal 2020 to fiscal 2019, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 24, 2020, filed with the SEC on August 24, 2020.

The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of Brinker International, Inc.

and our wholly-owned subsidiaries.

intercompany accounts and transactions have been eliminated in consolidation.

We have a 52/53 week fiscal year ending on the last Wednesday in June.

All intercompany accounts and transactions have been eliminated in consolidation.

We have a 52 or 53 week fiscal year ending on the last Wednesday in June.

We utilize a 13 week accounting period for quarterly reporting purposes, except in years containing 53 weeks when the fourth quarter contains 14 weeks.

Fiscal years 2020 , 2019 and 2018 , which ended on June 24, 2020 , June 26, 2019 and June 27, 2018 , respectively, each contained 52 weeks .

Fiscal 2021 ended on June 30, 2021 and contained 53 weeks.

Fiscal 2020 and 2019, which ended on June 24, 2020 and June 26, 2019, respectively, each contained 52 weeks.

All amounts within the MD&A are presented in millions unless otherwise specified.

At June 24, 2020 , we owned, operated, or franchised 1,663 restaurants, consisting of 1,116 Company-owned restaurants and 547 franchised restaurants, located in the United States , 28 countries and two United States territories.

We are principally engaged in the ownership, operation, development, and franchising of the Chili’s ® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy ® (“Maggiano’s”) restaurant brands, as well as virtual brands including It’s Just Wings ® and Maggiano’s Italian Classics.

Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.

COVID-19 Pandemic

Refer to Part I, Item 1 - Business of this document for additional information about our business and operational strategies.

Impact of COVID-19 Pandemic

COVID-19 caused a dramatic decrease in sales during the last sixteen weeks of fiscal 2020 as it became a global pandemic.

At the end of the third quarter of fiscal 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms as we transitioned to an off-premise business model and temporarily delayed our expansion plans.

Beginning on April 27, 2020, we began to reopen certain dining room locations as permitted by governments.

At the end of fiscal 2020, as of June 24, 2020 , 94.9% of our Company-owned restaurant dining rooms or patios were open in a limited capacity.

Our priority has been protecting the health and safety of team members and guests while continuing to serve our communities.

Both Chili’s and Maggiano’s have been able to serve our guests during the COVID-19 pandemic as a result of our decision to invest in technology, training and partnerships that enable online ordering, mobile app ordering, curbside service and third-party delivery.

Our off-premise sales have grown significantly during the COVID-19 pandemic, and during the first period of fiscal 2021 ended July 29, 2020 , off-premise sales represented approximately 50% of total revenues.

We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve.

As a result of COVID-19, we have experienced a material adverse impact on our revenues, results of operations and cash flows in the third and fourth quarters of fiscal 2020, and expect this to continue into fiscal 2021.

The financial impacts include:

Comparable restaurant sales in the fourth quarter of fiscal 2020 decreased 36.7% (Chili’s decreased 32.2% , and Maggiano’s decreased 66.7% ) compared to the same prior year period

Certain charges, net of (credits) were recorded in the second half of fiscal 2020 related to the COVID-19 pandemic in Other (gains) and charges in the Consolidated Statements of Comprehensive Income , these primarily included:

Employee assistance - $17.3 million of expenses related to both Chili’s and Maggiano’s employee assistance payments and related payroll taxes for the team members that experienced reduced shifts during this pandemic, who would have otherwise not received such payment under our normal compensation practices

Other COVID-19-related expenses - $1.5 million of expenses related to restaurant supplies such as face masks and hand sanitizer required to reopen dining rooms, as well as costs related to canceled projects due to the pandemic , and $1.1 million of expenses related to spoiled inventory at both Chili’s and Maggiano’s due to the unexpected decline in sales and dining room closures

Employee retention credit - $7.9 million credit of certain payroll taxes was received as part of the Coronavirus Aid Relief and Economic Security (“CARES”) Act relief package .

The CARES Act was designed primarily to help keep businesses running during and after the pandemic.

As of June 24, 2020, this package allowed us to take advantage of credits, deferments, and deductions.

Additional information regarding the impact of the CARES Act is set forth within Part II Item 7 .

Discussion and Analysis of Financial Condition and Results of Operations , Liquidity and Capital Resources.

Long-lived and operating lease impairments - $14.5 million of non-cash expenses were recorded during the fourth quarter of fiscal 2020 related to 18 underperforming Chili’s and 3 underperforming Maggiano’s restaurants .

Of the impaired restaurants, 19 continue to operate, and 2 Chili’s will be permanently closed

During the first quarter of fiscal 2021 Chili’s and Maggiano’s continue to operate with reduced dining room capacities due to state and local mandates related to COVID-19.

The following represents a business update from our first period of fiscal 2021 ended July 29, 2020 related to Company-owned restaurants:

As of July 29, 2020 , there were 885 Chili’s and 52 Maggiano’s Company-owned restaurants with dining rooms or patios open, representing 84.0% of total Company-owned restaurants.

Capacities are limited in accordance with state and local mandates

Comparable restaurant sales for the first period of fiscal 2021, ended July 29, 2020, compared to the prior year are as follows:

Comparable Restaurant Sales

Opened Dining Rooms

Off-Premise Only

Total Comparable Restaurant Sales

It’s Just Wings ™ , a virtual brand offering through our partnership with DoorDash, launched nationally in 1,050 of our Company-owned restaurants on June 23, 2020.

It’s Just Wings sales are included in comparable restaurant sales for restaurants operating the virtual brand

Brinker had total liquidity of $576.2 million as of July 29, 2020

At this time, the impact of COVID-19, in both the short term and long term, is difficult to estimate due to the uncertainty about the extent and duration of the spread of the pandemic, the discovery of any effective treatments, cures or vaccines and the related government restrictions.

In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic and a National Public Health Emergency.

Beginning in March 2020, our restaurants experienced a significant decrease in guest traffic and sales due to the spread of COVID-19, which prompted changes in consumer behavior and social distancing preferences as well as dining room closures and dining room capacity restrictions mandated or encouraged by federal, state and local governments.

In March 2020, we temporarily closed all Company-owned restaurant dining and banquet rooms, transitioned to an off-premise business model and temporarily delayed our expansion plans.

Beginning on April 27, 2020, we reopened certain dining room locations as permitted by state and local mandates.

For the remainder of fiscal 2020 and throughout fiscal 2021, the number of open dining rooms, and the dining room capacity restrictions fluctuated based on state and local mandates.

The following table shows the percentages of our Company-owned restaurant dining rooms or patios that were open in at least a limited capacity at the end of each fiscal quarter since the beginning of the pandemic:

Fiscal quarters ended on

June 30, 2021 March 24, 2021 December 23, 2020 September 23, 2020 June 24, 2020 March 25, 2020

Open dining rooms or patios 100.0 % 99.7 % 84.3 % 98.2 % 94.9 % — %

Chili’s and Maggiano’s ability to continue serving guests during the COVID-19 pandemic is the result of our strategic decision to invest in technology, virtual brands, and off-premise capabilities including online ordering,

mobile app ordering, curbside service and third-party delivery.

Our off-premise sales grew significantly during the COVID-19 pandemic and partially offset the lost dining room sales due to the capacity restrictions and closures.

During fiscal 2021, off-premise sales represented approximately 42.2% of Company sales compared to 26.4% in fiscal 2020.

During the COVID-19 pandemic, our franchise partners also experienced regulated closures both domestically and internationally, which negatively impacted our franchise royalties.

COVID-19 Impact to Results of Operations, Liquidity and Capital Resources in Fiscal 2021

We incurred $3.3 million of net charges in Other (gains) and charges which are recorded in the Consolidated Statements of Comprehensive Income in fiscal 2021, including the following:

• employee assistance and related payroll taxes for certain team members,

• conversion of certain parking lots into dining areas, and

• initial purchases of restaurant and personal protective supplies such as face masks and hand sanitizers required to maintain open dining rooms.

We also took the following proactive precautionary measures in fiscal 2021 to preserve liquidity, reduce costs and pause non-critical projects that did not significantly impact our current operations:

• Amended our revolving credit facility in the first quarter of fiscal 2021 to extend the maturity date and provide additional borrowing flexibility.

• Temporarily reduced capital expenditures, although we have begun to strategically resume the Chili’s remodel program and construction of certain new restaurants.

• Reduced marketing, general and administrative and restaurant expenses.

• Continued the suspension of the quarterly cash dividend and the share repurchase program;

• Amended our fiscal 2018 and fiscal 2019 U.S.

Income Tax Returns in order to claim additional depreciation deductions related to qualified improvement property of $4.6 million in accordance with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

We also were able to include a benefit in our fiscal 2020 U.S.

Income Tax Return related to the additional depreciation on qualified improvement property of approximately $ 2.0 million.

• Deferred the employer portion of certain payroll taxes, totaling $ 54.5 million, in accordance with the CARES Act.

These taxes will be repaid in two equal installments on December 31, 2021, and December 31, 2022.

Impact on Financial Outlook

The ultimate impact of the COVID-19 pandemic cannot be reasonably estimated due to the uncertainty about the extent and duration of the spread of the virus, the availability, acceptance and efficacy of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions.

Additional impacts to the business may arise that we are not aware of currently.

We cannot predict whether, when or the manner in which COVID-19 may impact our business, including the capacity of our dining rooms, what operational restrictions may be imposed, and our ability to fully staff reopened dining rooms.

As such, we have taken a number of proactive measures to adapt our business to lower demand levels during the COVID-19 pandemic including measures to significantly reduce costs, partnering with our lenders to provide additional liquidity, issuing additional common stock and negotiating rent concessions with landlords.

We continue to closely monitor and adapt to the evolving situation.

Refer to “ COVID-19 Impact on Liquidity ” section below and Note 2 - Novel Coronavirus Pandemic within Part II, Item 8 - Financial Statements and Supplementary Data Notes to the Consolidated Financial Statements for more information regarding the financial impact of the pandemic.

Fiscal 2020 Performance before the COVID-19 Pandemic

In fiscal 2020 , our strategy was delivering comparable restaurant sales growth at Company-owned Chili’s locations.

Before the COVID-19 pandemic, in the first eight months of fiscal 2020, Company-owned Chili’s comparable restaurant sales increased by 2.7% , while Company-owned Maggiano’s comparable restaurant sales decreased by 1.1% .

While the spread of COVID-19 dramatically impacted our fiscal 2020 results, we believe our results before the pandemic provide evidence of the strong foundation our brands have as they move forward.

At Maggiano’s we believe our focus on operating fundamentals and technology will provide the foundation for future efficiencies and growth.

At Chili’s, our value offerings and My Chili’s Rewards loyalty program helped drive positive traffic.

Our Cheers to Patron® Margarita of the Month and new offerings on our 3 for $10 meal platform were particularly

successful in bringing guests back to Chili’s.

Chili’s off-premise sales, which includes both to-go and delivery, also grew and reached approximately 16% of sales, with approximately 74% coming from to-go and 26% from delivery during the first eight months of fiscal 2020.

Membership in the My Chili’s Rewards loyalty program also continued to grow.

Operations Strategy

We are committed to strategies and a Company culture that we believe are centered on a guest experience.

This includes bringing guests back safely, growing long-term sales and profit, engaging team members and working to return our business to pre-pandemic levels.

Our strategies and culture are intended to differentiate our brands from the competition, effectively and efficiently manage our restaurants and establish a lasting presence for our brands in key markets around the world.

Our primary strategy remains to make our guests feel special through great food and quality service so that they return to our restaurants.

At the end of the second quarter of fiscal 2020, before the COVID-19 pandemic, our guest survey scores on food quality and service reached an all-time high.

Then, during the pandemic, our guest scores improved even more as we not only made guests feel special with our great food and service, but we also made them feel safe with our enhanced safety training and systems.

Chili’s continues to outpace the casual dining industry and grow market share.

We regularly evaluate our processes and menu at Chili’s to identify opportunities where we can improve our service quality and food.

During fiscal 2018, we reduced our menu items by approximately one-third, and focused on our core equities of burgers, ribs, fajitas and margaritas.

This initiative improved kitchen efficiency and allowed our managers and cooks to deliver our food hotter and faster to our guests.

We also invested in the quality of our food.

During fiscal 2019, we continued to focus on our core equities and improving guest satisfaction with our food and service by improving execution of our operations standards.

In fiscal 2020, we upgraded the quality of certain menu items, including new upgraded quality chicken breast we have integrated into several of our menu items.

Part of our strategy is to differentiate Chili’s from our competitors with a flexible platform of value offerings at both lunch and dinner.

We are committed to offering consistent, quality products at a price point that is compelling to our guests.

Our “3 for $10” platform allows guests to combine a starter, a non-alcoholic drink and an entrée for just $10.00 as part of the every-day base menu and is available for guests to enjoy in our dining rooms or off-premise.

Additionally, we have continued our Margarita of the Month promotion that features a premium-liquor margarita every month at an every-day value price of $5.00.

In fiscal 2020, we continued to see an increase in popularity of both 3 for $10 and Margarita of the Month, helping us increase guest traffic.

We have also invested in our technology and off-premise options as more guests are opting for to-go and delivery.

Our to-go menu is available through our Chili’s mobile app, on our brand websites, our exclusive delivery partner DoorDash, or by calling the restaurant.

Since fiscal 2018, as of the end of fiscal 2020, our off-premise business has grown by 133% .

Chili’s exclusive partnership with DoorDash has proven instrumental in offering our guests continued service during the COVID-19 pandemic.

We leveraged technology so that DoorDash orders are sent directly into our point of sale system, creating efficiencies and a system that allows us to better serve our guests by quickly developing and adapting new operational procedures.

We believe that guests will continue to prefer more convenience and off-premise options.

We plan to continue investments in our technology systems to support our carryout and delivery capabilities.

It’s Just Wings ™ , a virtual brand offering, launched on June 23, 2020 and is available only through DoorDash delivery.

The virtual brand allows us to leverage our existing infrastructure, while adding little complexity within our current system.

It’s Just Wings is a no-frills offering that consists of chicken wings available in 11 different sauces and rubs, curly fries, ranch dressing and fried Oreos for a value price.

We will continue to identify opportunities to drive restaurant growth by utilizing our existing restaurant infrastructure and DoorDash partnership .

In dining rooms we use tabletop devices to engage our guests at the table.

In fiscal 2020 we rolled out a new tabletop device to continue to enhance this experience.

We also believe our digital guest experience will help us engage our guests more effectively, particularly during the COVID-19 pandemic.

Our My Chili’s Rewards loyalty database, as of the end of fiscal 2020 , included more than 8 million loyal members who have interacted with Chili’s in the previous six months.

We customize offerings for our guests based on their purchase behavior, and we continue to shift more of

our overall marketing spend to these customized channels and promotions.

We believe this strategy gives us a sustained competitive advantage over independent restaurants and the majority of our competitors.

We believe that improvements at our domestic Chili’s will have a significant impact on the business;

however, our results will also benefit through additional contributions from Maggiano’s and our global Chili’s franchise business.

Maggiano’s has focused on execution of operating fundamentals to improve service and food for its guests.

In fiscal 2020, Maggiano’s also began testing electronic check presenters that facilitate a pay-at-the-table option to provide convenience and efficiency to guests and to increase digital guest engagement.

Maggiano’s also has an exclusive partnership with DoorDash.

Our exclusive partnership creates a more affordable rate structure, making third party delivery more sustainable and efficient for the brand to operate.

In fiscal 2020, our guests were given the ability to order delivery directly through our Maggiano’s website, in addition from the DoorDash platforms.

In fiscal 2019, Maggiano’s opened its first franchise location in the Dallas Fort Worth International Airport.

Progress for a second franchise airport location has been made.

Our global franchisees continue to grow the Chili’s brand around the world, opening 23 restaurants in fiscal 2020 including our first Chili’s restaurant in Vietnam.

Our Chili’s international franchisees are expected to open approximately 6-9 new restaurants in fiscal 2021.

We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and existing franchise partners.

During the COVID-19 pandemic, our franchise partners have experienced similar regulated closures both domestically and globally.

During the fourth quarter of fiscal 2020, we have partnered with our domestic and global franchisees to offer certain royalty payment flexibility to help provide liquidity relief during this time.

We will continue to closely monitor and adapt to the evolving situation.

RESULTS OF OPERATIONS

The following table sets forth selected operating data as a percentage of Total revenues (unless otherwise noted) for the periods indicated.

All information is derived from the accompanying Consolidated Statements of Comprehensive Income :

The following table sets forth selected operating data:

Fiscal Years Ended

June 24, 2020

June 26, 2019

June 30, 2021 June 24, 2020

Dollars As a percentage (1)

Company sales $ 3,279.0 98.2 % $ 3,004.9 97.6 %

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Net income $ 131.6 3.9 % $ 24.4 0.8 %

As a percentage of Total revenues

As a percentage of Company sales

(1) Food and beverage costs, Restaurant labor and Restaurant expenses are calculated based on a percentage of Company sales.

All others are calculated as a percentage of Total revenues.

Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income to provide more clarity around Company-owned restaurant revenues and operating expenses trends:

Company sales include revenues generated by the operation of Company-owned restaurants including sales made with gift card redemptions.

Franchise and other revenues include Royalties and Franchise fees and other revenues .

Franchise fees and other revenues include gift card breakage, Maggiano’s banquet service charge income, franchise advertising fees, delivery fee income, digital entertainment revenues, gift card equalization, franchise and development fees, merchandise income, retail royalty revenues, and gift card discount costs from third-party gift card sales .

• Company sales include revenues generated by the operation of Company-owned restaurants including sales from gift card redemptions and virtual brands.

• Franchise and other revenues include franchise royalties, delivery fee income, gift card breakage, digital entertainment revenues, Maggiano’s banquet service charge income, franchise advertising fees, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales .

The following is a summary of the change in Total revenues:

Total Revenues

Chili’s Maggiano’s Total Revenues

Fiscal year ended June 24, 2020 $ 2,731.7 $ 346.8 $ 3,078.5

Comparable restaurant sales (1)

215.1 (65.0) 150.1

53rd week in Fiscal 2021 62.5 6.9 69.4

Restaurant openings 21.4 — 21.4

Restaurant relocations 2.8 — 2.8

Restaurant closings (2)

Restaurant closures (2)

(19.3) — (19.3)

Restaurant acquisitions (3)

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Royalties (4)

(3.4) — (3.4)

Franchise fees and other revenues (0.6) (10.8) (11.4)

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Fiscal year ended June 30, 2021 $ 3,059.9 $ 277.9 $ 3,337.8

Comparable restaurant sales decreased due to the COVID-19 pandemic that impacted restaurant sales due to guests dining out less, temporary dining room closures and capacity limitations , partially offset by increased off-premise sales .

Restaurant closings include the impact of permanently closed locations, including temporary COVID-19 closures that have extended past 14 consecutive days.

Effective September 5, 2019 , we acquired 116 Chili’s restaurants from a franchisee.

The revenues from these restaurants are included in Company sales subsequent to the acquisition date.

Royalties are based on franchise sales.

Our franchisees generated sales of approximately $833.7 million in fiscal 2020 , and $1,311.3 million in fiscal 2019 .

Lower royalties in fiscal 2020 are primarily due to the acquisition of 116 Chili’s restaurants from a franchisee in the first quarter of fiscal 2020 and the adverse impact of the COVID-19 pandemic .

(1) Comparable restaurant sales increased due to higher off-premise sales and higher dining room guest sales and traffic during the fourth quarter of fiscal 2021.

These increases were partially offset by lower dining room guest traffic during the first three quarters of fiscal 2021 resulting from temporary dining room closures, capacity limitations and our guests’ personal safety preferences related to the pandemic.

(2) Restaurant closures include the impact of permanently closed locations and temporary closures longer than 14 consecutive days.

(3) We acquired 116 Chili’s restaurants from a franchisee effective September 5, 2019.

Restaurant acquisitions include the change in Company sales attributed to these restaurants over the first ten weeks of fiscal 2021.

For the remainder of fiscal 2021, the change in Company sales attributed to these restaurants is included in Comparable restaurant sales.

(4) Lower royalties in fiscal 2021 were primarily due to lower dining room sales by our domestic and global franchisees due to the impacts of the COVID-19 pandemic.

Royalties are based on franchise sales and our franchisees generated sales of approximately $780.7 million in fiscal 2021 including $18.1 million from the additional operating week, and $833.7 million in fiscal 2020.

The table below presents the percentage change in comparable restaurant sales and restaurant capacity for fiscal 2021 compared to fiscal 2020:

Percentage Change in the Fifty-Two Week Period Ended June 24, 2020 versus June 26, 2019

Restaurant Capacity (3)

Price Impact Mix-Shift Impact (3)

Traffic Impact Restaurant Capacity (4)

Company-owned 5.1 % 0.6 % (4.3) % 8.8 % 2.2 %

Chili’s 8.3 % 0.4 % (2.6) % 10.5 % 2.3 %

Maggiano’s (19.8) % 2.3 % (7.7) % (14.4) % 0.0 %

Chili’s franchise (5)

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System-wide (7)

Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after more than 12 months ownership.

Restaurants temporarily closed 14 days or more are excluded from comparable restaurant sales.

(1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after 12 months of ownership.

Restaurants temporarily

closed 14 days or more are excluded from comparable restaurant sales.

Percentage amounts are calculated based on the comparable periods year-over-year.

(2) Comparable Restaurant Sales for Chili’s and Maggiano’s include the results of It’s Just Wings, which was launched nationally in June 2020.

(3) Mix-Shift is calculated as the year-over-year percentage change in Company sales resulting from the change in menu items ordered by guests.

(4) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year.

Chili’s Company-owned Restaurant Capacity increased in fiscal 2020 primarily related to the acquisition of 116 Chili’s restaurants in the first quarter of fiscal 2020.

We believe the COVID-19 related restaurant closures are temporary and therefore no adjustment has been made to capacity.

Chili’s Company-owned Comparable Restaurant Sales exclude the impact from the 116 Chili’s restaurants acquired in the first quarter of fiscal 2020.

Chili’s Franchise U.S.

Comparable Restaurant Sales include sales from these 116 acquired restaurants until the September 5, 2019 acquisition date.

Chili’s Franchise sales generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income ;

No adjustments have been made to capacity for temporary closures.

(5) Chili’s franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income;

however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable.

We believe including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations.

We believe presenting Chili’s franchise comparable restaurant sales provides investors relevant information regarding total brand performance.

(6) Chili’s domestic Comparable Restaurant Sales percentages are derived from sales generated by Company-owned and franchise-operated Chili’s restaurants in the United States.

System-wide Comparable Restaurant Sales are derived from sales generated by Company-owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchise-operated Chili’s restaurants.

(7) System-wide Comparable Restaurant Sales are derived from sales generated by Company-owned Chili’s and Maggiano’s restaurants and sales generated at franchise-operated Chili’s restaurants.

Costs and Expenses

Fiscal Years Ended

(Favorable) Unfavorable Variance

June 24, 2020

June 26, 2019

% of Company Sales

The following is a summary of the changes in Costs and Expenses:

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales

Food and beverage costs $ 867.8 26.4 % $ 798.6 26.6 % $ (69.2) 0.2 %

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Other income, net (2.1) (1.9) 0.2

Food and beverage costs , as a percentage of Company sales , increased 0.1% consisting of 0.4% of unfavorable commodity pricing primarily related to beef and produce , partially offset by 0.3% of favorable menu pricing .

Restaurant labor , as a percentage of Company sales , increased 0.7% consisting of 1.1% of sales deleverage as a result of COVID-19 , partially offset by 0.3% of lower manager bonus expenses and 0.1% of lower other net restaurant labor expenses .

Hourly labor was flat due to higher wage rates offset by the impact of reduced staffing during the fiscal 2020 temporary closures and dining room limited capacities .

Restaurant expenses , as a percentage of Company sales , increased 1.3% consisting of 1.9% of sales deleverage and 1.1% of higher expenses primarily related to delivery fees and supplies in connection with the growth in off-premise sales .

These increases were partially offset by 0.9% of lower advertising expenses , 0.4% of lower repairs and maintenance expenses and 0.4% of lower other net restaurant expenses .

Depreciation and amortization increased $14.7 million as follows:

As a percentage of Company sales:

• Food and beverage costs decreased 0.2%, consisting of 0.3% of favorable menu item mix and 0.1% of increased menu pricing, partially offset by 0.2% of unfavorable commodity pricing primarily related to cheese and poultry.

• Restaurant labor decreased 1.0%, consisting of 0.6% of lower hourly labor expenses due to reduced staffing requirements, 0.6% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.1% of lower other labor expenses, partially offset by 0.3% of higher manager bonus expenses resulting from improved operational performance metrics compared to targets.

• Restaurant expenses decreased 1.3%, consisting of 2.0% of lower advertising expenses, 1.5% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.3% of lower repairs and maintenance expenses, partially offset by 2.5% of higher delivery fees and supplies driven by the growth in off-premise sales.

Depreciation and amortization decreased $12.1 million as follows:

Depreciation and Amortization

Fiscal year ended June 24, 2020 $ 162.3

Additions for existing and new restaurant assets (1)

Retirements and fully depreciated restaurant assets (21.8)

Finance leases (4.3)

Additions for existing and new restaurant assets 8.3

Acquisition of franchise restaurants (1)

Corporate assets 1.6

Retirements and fully depreciated restaurant assets

Fiscal year ended June 30, 2021 $ 150.2

Additions for existing and new restaurant assets increased primarily related to the Chili’s remodel initiative and six new Chili’s restaurants opened during fiscal 2020 .

Finance leases increased primarily due to the new Chili’s table-top devices installed during fiscal 2020 .

Acquisition of franchise restaurants represents the depreciation and amortization of the assets and finance leases acquired of the 116 Chili’s restaurants in the first quarter of fiscal 2020 .

(1) Acquisition of franchise restaurants represents the incremental depreciation and amortization of the assets and finance leases of the 116 Chili’s restaurants acquired on September 5, 2019.

General and administrative expenses decreased $1.5 million as follows:

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Fiscal year ended June 24, 2020 $ 136.3

Defined contribution plan employer expenses (1)

Payroll-related expenses (1.6)

Travel and entertainment expenses (1.6)

Professional fees (0.6)

Performance-based compensation (2)

Professional and legal fees

Stock-based compensation 1.6

Fiscal year ended June 30, 2021 $ 134.8

(1) Defined contribution plan employer expenses decreased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020.

Employer matching contributions were reinstated beginning January 1, 2021.

(2) Performance-based compensation increased in fiscal 2021 due to improved business performance metrics compared to targets.

Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):

Fifty-Two Week Periods Ended

June 24, 2020

June 26, 2019

Fiscal Years Ended

June 30, 2021 June 24, 2020

COVID-19 related charges $ 3.3 $ 12.2

Restaurant impairment charges 3.0 19.1

COVID-19 related charges, net of (credits)

Loss from natural disasters, net of (insurance recoveries) 2.9 (0.7)

Restaurant closure charges 2.4 3.8

Remodel-related costs 2.3 3.2

Loss on lease contingencies 2.2 —

Severance and other benefit charges 0.5 3.2

Corporate headquarters relocation charges

Property damages, net of (insurance recoveries)

Loss (gain) on sale of assets, net

Sale leaseback (gain), net of transaction charges

Foreign currency transaction (gain) loss (0.6) 1.4

Other 3.0 5.2

$ 19.0 $ 47.4

Interest expenses decreased $3.4 million due to lower average borrowing balances on our revolving credit facility, partially offset by higher interest rates on our revolving credit facility and finance leases in fiscal 2021.

Fiscal Years Ended

June 30, 2021 June 24, 2020

Effective income tax rate 9.4 % (398.0) %

The federal statutory tax rate was 21.0% for both fiscal 2021 and 2020.

Our fiscal 2021 effective income tax rate of 9.4% was lower than the federal statutory tax rate primarily due to the leverage of the FICA tip tax credit relative to Income before income taxes in fiscal 2021.

Our fiscal 2020 effective income tax rate benefit of 398.0% was lower than the federal statutory tax rate primarily due to near break-even Income before income taxes and a tax benefit driven by leverage of the FICA tip tax credit.

Segment Results

Chili’s Segment

Fiscal Years Ended

Favorable (Unfavorable) Variance

June 24, 2020

June 26, 2019

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020 Dollars %

Company sales $ 3,005.7 $ 2,673.5 $ 332.2 12.4 %

Royalties 30.3 33.7 (3.4) (10.1) %

Franchise fees and other revenues 23.9 24.5 (0.6) (2.4) %

1 unchanged sentence

Total revenues $ 3,059.9 $ 2,731.7 $ 328.2 12.0 %

Company restaurant expenses (1)

(1) Company restaurant expenses include Food and beverage costs, Restaurant labor, and Restaurant expenses, including advertising.

Chili’s Total revenues increased 12.0% primarily due to higher off-premise sales and higher dining room guest sales and traffic during the fourth quarter of fiscal 2021.

Refer to the “Revenues” section above for further details about Chili’s revenues changes.

The following is a summary of the changes in Chili’s operating costs and expenses:

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales

Food and beverage costs $ 803.5 26.7 % $ 718.7 26.9 % $ (84.8) 0.2 %

Restaurant labor 1,014.2 33.7 % 920.8 34.4 % (93.4) 0.7 %

Restaurant expenses 765.6 25.5 % 723.7 27.1 % (41.9) 1.6 %

Depreciation and amortization 124.3 133.9 9.6

1 unchanged sentence

Other (gains) and charges 12.7 35.3 22.6

Total operating costs and expenses

Operating income

Operating income as a percentage of Total revenues

Company restaurant expenses include Food and beverage costs , Restaurant labor , and Restaurant expenses , including advertising.

Chili’s Total revenues decreased 1.8% primarily due to the COVID-19 pandemic that impacted restaurant sales due to guests dining out less, temporary dining room closures and capacity limitations , partially offset by the acquisition of 116 Chili’s restaurants in the first quarter of fiscal 2020 and increased off-premise sales .

Refer to “Revenues” section above for further details about Chili’s revenues changes.

Company restaurant expenses for Chili’s, as a percentage of Company sales , increased 1.9% consisting of 2.2% of sales deleverage as a result of COVID-19 , 1.4% of higher expenses primarily related to delivery fees and supplies in connection with the growth in off-premise sales , and 0.4% of unfavorable commodity pricing primarily related to beef and produce .

These increases were partially offset by 1.0% of lower advertising expenses , 0.4% of lower repairs and maintenance expenses , 0.3% of favorable menu pricing , 0.3% of lower hourly wages as a result of reduced staffing during the fiscal 2020 temporary closures and dining room limited capacities and 0.1% of lower other net company restaurant expenses .

Other (gains) and charges for Chili’s in fiscal 2020 consisted primarily of $15.4 million of charges related to restaurant impairments, $10.1 million of charges primarily related to the COVID-19 pandemic from employee relief payments and inventory spoilage, $3.7 million related to restaurant closure expenses and $3.2 million of remodel charges, partially offset by a $3.7 million gain on modification of lease liability.

Other (gains) and charges for Chili’s in fiscal 2019 consisted primarily of gains of $26.8 million related to the sale leaseback transactions and $1.1 million on the gain on sale of land, partially offset by charges of $10.8 million related to restaurant impairments, $7.7 million of remodel write-offs, and $4.0 million in charges related to restaurant closure expenses.

Depreciation and amortization for Chili’s increased $13.8 million consisting of $14.3 million in existing and new restaurant additions primarily related to the Chili’s remodel initiative and six new Chili’s restaurants opened during fiscal 2020 , $10.5 million of additional amortization expenses related to the new Chili’s table-top devices installed during fiscal 2020 , and $8.3 million of additional depreciation and amortization expenses related to the acquisition of 116 Chili’s restaurants.

These increases were partially offset by $19.1 million related to fully depreciated assets and retirements and $0.2 million in other depreciation and amortization expenses decreases.

General and administrative decreased $6.6 million that primarily consisted of a $2.9 million decrease in performance-based compensation and $2.8 million of payroll-related expenses.

Maggiano’s Segment

As a percentage of Company sales:

• Chili’s Food and beverage costs decreased 0.2%, including 0.2% of favorable menu item mix and 0.1% of increased menu pricing, partially offset by 0.1% of unfavorable commodity pricing.

• Chili’s Restaurant labor decreased 0.7%, including 0.9% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.2% of lower other labor expenses, partially offset by 0.2% of higher manager expenses and 0.2% of higher manager bonus expenses due to improved operational performance metrics compared to targets.

• Chili’s Restaurant expenses decreased 1.6%, including 2.2% of lower advertising expenses, 2.1% of sales leverage, inclusive of the impact of the additional operating week in fiscal 2021, and 0.2% of lower repairs and maintenance expenses, partially offset by 2.6% of higher delivery fees and supplies driven by the growth in off-premise sales and 0.3% of higher other restaurant expenses.

Chili’s Depreciation and amortization decreased $9.6 million as follows:

Depreciation and Amortization

Fiscal year ended June 24, 2020 $ 133.9

Retirements and fully depreciated restaurant assets (17.2)

Finance leases (4.2)

Additions for new and existing restaurant assets 7.9

Acquisition of franchise restaurants (1)

Fiscal year ended June 30, 2021 $ 124.3

(1) Acquisition of Chili’s restaurants represents the incremental depreciation and amortization of the assets and finance leases of the 116 Chili’s restaurants acquired on September 5, 2019.

Chili’s General and administrative decreased $4.7 million as follows:

General and Administrative

Fiscal year ended June 24, 2020 $ 32.1

Defined contribution plan employer expenses (1)

Payroll-related expenses (1.5)

Travel and entertainment expenses (0.7)

Performance-based compensation 1.0

Professional fees 0.2

Stock-based compensation 0.1

Fiscal year ended June 30, 2021 $ 27.4

Employer matching contributions were reinstated beginning January 1, 2021.

Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):

Fiscal Years Ended

Favorable (Unfavorable) Variance

June 24, 2020

June 26, 2019

June 30, 2021 June 24, 2020

COVID-19 related charges $ 2.7 $ 10.1

Restaurant impairment charges 2.6 15.4

Remodel-related costs 2.3 3.2

Restaurant closure charges 2.2 3.7

Loss from natural disasters, net of (insurance recoveries) 1.5 (0.8)

Acquisition of franchise restaurants-related costs — 2.9

Other 1.4 0.8

$ 12.7 $ 35.3

Maggiano’s Segment

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020 Dollars %

Company sales $ 273.3 $ 331.4 $ (58.1) (17.5) %

Royalties 0.2 0.2 — — %

Franchise fees and other revenues 4.4 15.2 (10.8) (71.1) %

1 unchanged sentence

Total revenues $ 277.9 $ 346.8 $ (68.9) (19.9) %

Company restaurant expenses (1)

Maggiano’s Total revenues decreased 19.9% primarily driven by reduced dining room traffic in the first three quarters of fiscal 2021 and reduced banquet room traffic due to the COVID-19 pandemic.

These declines were partially offset by higher off-premise sales and higher dining room traffic during the fourth quarter of fiscal 2021.

Refer to the “Revenues” section above for further details about Maggiano’s revenues changes.

The following is a summary of the changes in Maggiano’s operating costs and expenses:

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales

Food and beverage costs $ 64.3 23.5 % $ 79.9 24.1 % $ 15.6 0.6 %

Restaurant labor 94.0 34.4 % 124.7 37.7 % 30.7 3.3 %

Restaurant expenses 92.1 33.7 % 101.5 30.6 % 9.4 (3.1) %

Depreciation and amortization 13.8 15.4 1.6

1 unchanged sentence

Other (gains) and charges 1.4 6.8 5.4

Total operating costs and expenses

Operating income

Operating income as a percentage of Total revenues

Company restaurant expenses includes Food and beverage costs , Restaurant labor , and Restaurant expenses , including advertising expenses.

Maggiano’s Total revenues decreased 20.4% due to the COVID-19 pandemic that impacted restaurant sales from guests dining out less, the temporary dining and banquet room closures and limited capacity of reopened locations, partially offset by increased off-premise sales .

Refer to “Revenues” section above for further details about Maggiano’s revenues changes.

Company restaurant expenses for Maggiano’s, as a percentage of Company sales , increased 4.2% consisting of 6.0% of sales deleverage as a result of COVID-19 and 0.3% of higher expenses primarily related to delivery fees and supplies in connection with the growth in off-premise sales .

These increases were partially offset by 1.5% of lower manager and hourly labor expenses as a result of reduced staffing during the fiscal 2020 temporary closures and dining room limited capacities , 0.3% of lower repairs and maintenance expenses , and 0.3% of favorable menu pricing .

Other (gains) and charges for Maggiano’s in fiscal 2020 consisted primarily of $3.8 million of charges related to restaurant impairments and $2.0 million of charges primarily related to the COVID-19 pandemic from employee relief payments and costs related to canceled projects due to the pandemic.

Fiscal Years Ended

June 24, 2020

June 26, 2019

Effective income tax rate

The federal statutory tax rate was 21.0% for both fiscal 2020 and 2019.

The effective income tax rate changed in fiscal 2020 primarily driven by the leverage on the FICA tax credit relative to the Income before income taxes in fiscal 2020 , and the impact of lower Income before income taxes due to the COVID-19 pandemic in the last sixteen weeks of fiscal 2020 .

Our fiscal 2019 effective income tax rate was lower than the federal statutory tax rate due to the FICA tax credit benefit, partially offset by the impact of the taxable gain related to the sale leaseback transactions.

During fiscal 2019, the sale leaseback transactions resulted in tax expenses of $78.6 million, which were paid in full during fiscal 2019.

Refer to Note 4 - Leases included within Part II , Item 8 - Financial Statements and Supplementary Data Notes to the Consolidated Financial Statements for more information.

As a percentage of Company sales:

• Maggiano’s Food and beverage costs decreased 0.6%, including 0.4% of favorable menu item mix and 0.3% of increased menu pricing, partially offset by 0.1% of unfavorable commodity pricing.

• Maggiano’s Restaurant labor decreased 3.3%, including 4.9% of favorable hourly labor expenses and 0.4% of favorable manager expenses both due to reduced staffing requirements, partially offset by 1.7% of sales deleverage and 0.3% of higher manager bonus expenses.

• Maggiano’s Restaurant expenses increased 3.1%, including 4.0% of sales deleverage and 1.5% of higher delivery fees and supplies driven by the growth in off-premise sales.

These increases were partially offset by 0.7% of lower repairs and maintenance expenses, 0.5% of lower credit card fees, 0.4% of lower utilities, 0.2% of lower banquet expenses, 0.2% of lower property tax expenses and 0.4% of lower other restaurant expenses.

LIQUIDITY AND CAPITAL RESOURCES

COVID-19 Impact on Liquidity

Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures, such as remodels, maintaining existing restaurants and constructing new restaurants, to pay dividends and to repurchase shares of our common stock.

We currently anticipate the decreased sales to continue into fiscal 2021 for the majority of our Company-owned restaurants.

We expect all our restaurants will continue offering off-premise options in addition to their dining rooms, except for nine restaurants that have been temporarily closed due to their location within a closed structure or other local regulations as of June 24, 2020.

Our strategic decision to enhance our off-premise business has enabled us to conveniently serve a significantly higher volume of off-premise guests during this pandemic.

In response to the pandemic, due to the uncertainty in the economy and to preserve liquidity, we have taken proactive precautionary measures to raise additional capital, reduce costs and pause non-critical projects that do not significantly impact our current operations.

These measures included:

Issuing common stock for net proceeds of $139.1 million to provide additional liquidity, and amended our revolving credit facility to provide additional flexibility during this time;

Significantly reducing capital expenditures to essential spend only, including suspending the Chili’s remodel program and delaying construction of new restaurants;

Temporarily reducing pay for corporate leadership and team members, as well as above-restaurant level leadership in the fourth quarter of fiscal 2020;

Reducing marketing, general and administrative and restaurant expenses to support the current operations;

Suspending the quarterly cash dividend and the share repurchase program;

Engaging in discussions with our landlords, vendors and other business partners to temporarily reduce or defer our lease and other contractual payments and obtain other concessions in the fourth quarter of fiscal 2020.

Refer to Note 2 - Novel Coronavirus Pandemic within Part II, Item 8 - Financial Statements and Supplementary Data Notes to the Consolidated Financial Statements for more information.

As of July 29, 2020 , we had total liquidity of $576.2 million , comprised of total cash and revolver availability.

We believe we have sufficient liquidity with our current capital position and continued growth in sales to cover all current obligations over the next twelve months.

In the fourth quarter of fiscal 2020, S&P lowered our corporate credit rating to B+ with negative outlook.

Moody’s also lowered us to a corporate family rating B1 with negative outlook.

The downgrades were a result of the COVID-19 impact on the restaurant sector that has been one of the sectors most significantly affected given its sensitivity to consumer demand and sentiment, and the unprecedented precautionary measures implemented by state and local governments, including temporary closures.

Refer to Part I, Item 1A.

Risk Factors for further details.

CARES Act Impact

In the fourth quarter of fiscal 2020, the United States government passed a $2.0 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) designed primarily to help keep businesses running during and after the pandemic.

The CARES Act included provisions for certain deductions and tax credits, filing deadline extensions, filing payment deadlines and making available certain grant money to assist in this pandemic.

As of June 24, 2020, this legislation will allow us to:

Reduce our fiscal 2020 payroll tax liability by utilizing employee retention credits to assist with employee payroll costs during this outbreak of $7.9 million

Amend our 2018 and 2019 U.S.

Income Tax Returns in order to claim additional depreciation deductions related to qualified improvement property that will allow us to generate aggregate refunds of $4.6 million , and upon filing our fiscal 2020 U.S.

Income Tax Return we anticipate to include a benefit related to the additional depreciation on qualified improvement property of approximately $2.0 million

Defer the employer portion of certain payroll taxes, totaling $12.9 million which will be repaid in two equal installments:

on December 31, 2021, and December 31, 2022

Cash Flows from Operating Activities

Fiscal Years Ended

Favorable (Unfavorable) Variance

June 24, 2020

June 26, 2019

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Net cash provided by operating activities $ 369.7 $ 245.0 $ 124.7

Net cash from operating activities increased primarily due to $78.6 million of taxes paid related to the sale leaseback transactions during fiscal 2019 , $16.4 million of higher gift card sales, net of redemptions due to the COVID-19 pandemic, and CARES Act credits and deferments as discussed above in the “CARES Act Impact” section.

These increases were partially offset by lower sales in the third and fourth quarters of fiscal 2020 as a result of the COVID-19 pandemic.

Net cash from operating activities increased primarily due to an increase in Net income and the deferral of payroll tax payments as allowed under the CARES Act in fiscal 2021.

These increases were partially offset by an increase in operating lease payments due to the payment of rent from fiscal 2020 that was deferred to fiscal 2021 and rent that was prepaid at the end of fiscal 2021.

Cash Flows from Investing Activities

Fiscal Years Ended

Favorable (Unfavorable) Variance

June 24, 2020

June 26, 2019

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Cash flows from investing activities

4 unchanged sentences

Proceeds from note receivable 1.5 2.8 (1.3)

Proceeds from sale leaseback transactions, net of related expenses

Net cash (used in) provided by investing activities

Net cash from investing activities decreased primarily due to $485.9 million in net cash proceeds received from the sale leaseback transactions during fiscal 2019 .

Additionally, $91.5 million cash consideration and related transactional charges were paid for the purchase of 116 Chili’s restaurants from a franchisee during fiscal 2020 .

These decreases were partially offset by $63.1 million of lower capital expenditures in fiscal 2020 primarily related to a decline in the pace of the Chili’s remodel program and fiscal 2019 expenditures for our new corporate headquarters, partially offset by an increase in new restaurant construction during fiscal 2020.

Net cash used in investing activities $ (90.9) $ (194.0) $ 103.1

Net cash used in investing activities decreased primarily due to cash outflows related to the acquisition of 116 Chili’s restaurants from a franchisee in fiscal 2020.

Additionally, capital expenditures decreased in fiscal 2021 primarily due to lower spending on new restaurant construction, a decline in the pace of the Chili’s remodel initiative and a reduction in spend for routine capital purchases.

Cash Flows from Financing Activities

Fiscal Years Ended

Favorable (Unfavorable) Variance

June 24, 2020

June 26, 2019

Fiscal Years Ended Favorable (Unfavorable) Variance

June 30, 2021 June 24, 2020

Cash flows from financing activities

9 unchanged sentences

Net cash used in financing activities $ (298.8) $ (20.5) $ (278.3)

Net cash from financing activities decreased primarily due to higher net repayment activity on the revolving credit facility in fiscal 2021 and the absence of cash proceeds from the issuance of common stock in fiscal 2020.

offsets included the impact of suspending the quarterly cash dividend payments and the share repurchase program, and an increase in proceeds from stock option exercises.

Revolving Credit Facility

Net repayments of $50.4 million were made during fiscal 2020 on the $1.0 billion revolving credit facility primarily from funds received from the common stock issuance during the fourth quarter of fiscal 2020, partially offset by cash used to fund ongoing business operations, the acquisition of Chili’s restaurants and share repurchases.

Net repayments of $301.6 million were made during fiscal 2021 on the $1.0 billion revolving credit facility.

As of June 30, 2021, $828.7 million was available under the revolving credit facility.

Our revolving credit facility interest rate as of June 24, 2020 was 3.100% , which is the total of LIBOR plus our applicable margin.

Additionally, the revolving credit facility is subject to a 40 basis points facility fee on the total $1.0 billion credit facility.

During fiscal 2020, we executed three amendments to our revolving credit facility, which modified the maturity date of the facility, provided additional financial flexibility, and added certain restrictions as follows:

Modified the maturity date of the $110.0 million portion of the facility to expire on September 12, 2021 , which coincides with the maturity date for the $890.0 million portion

Secured a waiver of compliance with financial covenants effective the third quarter of fiscal 2020 until the end of the third quarter of fiscal 2021

Imposed a minimum liquidity covenant (defined as availability under the revolving credit facility plus unrestricted cash and cash equivalents) to require at least $175.0 million through the third quarter of fiscal 2021

Increased interest rates temporarily, from the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, to be fixed at LIBOR plus 2.350% .

After this temporary period, the interest rate will return to LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 1.700% .

Additionally the LIBOR floor was permanently increased to 0.750%

Increased facility fee temporarily to 40 basis points from the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021.

After this temporary period, the facility fee will return to a set fee schedule which is a function of our credit rating, but is subject to a maximum of 30 basis points

Prohibited from making dividends, stock repurchases and investments from the fourth quarter of fiscal 2020 through the third quarter of fiscal 2021, and following this period, we will be subject to a $50.0 million aggregate limitation on dividends, stock repurchases and investments

Expanded the collateral securing the revolving credit facility, including intellectual property, among other things, and provided additional subsidiary guarantees

As of June 24, 2020 , pursuant to the amendments to the revolving credit facility described above, and under the terms of the indentures governing our 2023 Notes and 2025 Notes, we are in compliance with our covenants .

Refer to Note 12 - Debt for further information about our notes and revolving credit facility.

Subsequent to fiscal 2020 year-end, on July 23, 2020, we executed the seventh amendment to our revolving credit facility.

This amendment extends the maturity date to December 12, 2022, and has a required commitment reduction to $900.0 million on September 12, 2021 if the commitments have not previously been reduced to or below such commitment level by the issuance of certain debt or preferred equity interests.

The revolving credit facility will bear interest of LIBOR, through December 2021, plus an applicable margin of between 2.250% to 3.000%, and an undrawn commitment fee of 0.350% to 0.500%, both based on a function of our debt-to-cash-flow ratio.

In the event of incurrence of more than $250.0 million of certain debt, our interest rate will be further lowered by 0.250%, and the facility fee lowered by 0.100%.

Upon LIBOR’s expiration in December 2021, our interest rate will be a function of a similar, publicly available, Eurodollar rate.

Additionally, subsequent to the end of fiscal 2020 , $18.4 million additional net borrowings were drawn on the revolving credit facility as of the date that this Annual Report on Form 10-K was filed.

Common Stock Issuance

In the fourth quarter of fiscal 2020 , we sold 8.1 million shares of our common stock at a price to the public of $18.25 per share.

Total net proceeds raised from the offering were $139.1 million , after deducting the professional expenses.

This common stock issuance was executed in part to provide additional capital through the course of the COVID-19 pandemic and for general corporate purposes.

As of June 30, 2021, our interest rate was 3.250% consisting of the LIBOR floor of 0.750% plus the applicable margin of 2.500%.

In fiscal 2021, we executed the seventh amendment to our revolving credit facility, extending the maturity date to December 12, 2022.

This amendment included a capacity reduction to $900.0 million from $1.0 billion which will occur on September 12, 2021.

Under the terms of the amendment, the issuance of certain debt or preferred equity interests will result in an immediate capacity reduction, an interest rate reduction of 0.250% on the spread and 0.100% reduction on the undrawn fee if the issuance exceeds $250.0 million.

During fiscal 2021, we incurred $2.2 million of debt issuance costs, associated with this amendment, which are included in Other assets in the Consolidated Balance Sheets.

As of June 30, 2021, we were in compliance with our covenants pursuant to the amended revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes.

Refer to Note 10 - Debt within Part II, Item 8 - Financial Statements and Supplementary Data for further information about our notes and revolving credit facility.

On August 18, 2021, we replaced our existing $1.0 billion revolving credit facility with an $800.0 million revolving credit facility that matures on August 18, 2026.

The new facility is guaranteed by certain of our subsidiaries, includes covenant restrictions relating to leverage that are similar to our prior arrangement, and contains customary events of default terms.

As of August 18, 2021, $211.3 million was drawn from the new revolver.

Share Repurchase Program

In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend our share repurchase program due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19.

Additionally, the amended revolving credit facility restricts our ability to repurchase shares until the fourth quarter of fiscal year 2021, and subjects any share purchases thereafter, along with dividends paid and investments, to an aggregate cap.

Before this suspension, in fiscal 2020 , we repurchased 0.8 million shares of our common stock for $32.4 million .

The repurchased shares during fiscal 2020 included shares purchased as part of our share repurchase program as well as shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares.

In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the business downturn caused by the COVID-19 pandemic.

In fiscal 2021, we repurchased 0.1 million shares of our common stock for $4.2 million to satisfy team member tax withholding obligations on the vesting of restricted shares.

Before the suspension of our share repurchase program, in fiscal 2020, we repurchased 0.8 million shares of our common stock for $32.4 million.

Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets.

Our share repurchase program has been used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based award s.

At June 24, 2020 , we had $166.8 million remaining under the suspended share repurchase program.

At June 30, 2021, we had $166.8 million of authorized repurchases remaining under the suspended share repurchase program.

Subsequent to fiscal 2021 year-end, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $300 million.

Dividend Program

In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend due to uncertainty surrounding the duration of closures of our dining rooms and other restrictions mandated by state and local governments in response to COVID-19.

Additionally, the amended revolving credit facility restricts our ability to pay dividends until the fourth quarter of fiscal year 2021, and subjects any dividends paid thereafter, along with share purchases and investments, to an aggregate cap.

Following the expiration of these restrictions under our amended revolving credit facility, in the fourth quarter of fiscal year 2021, the Board of Directors will reevaluate the suspension based on current business conditions at that time.

There is significant uncertainty regarding the future impact of the pandemic on the restaurant industry and the broader U.S.

Before this suspension, we paid dividends of $57.4 million in fiscal 2020 to co mmon stock shareholders, compared to $60.3 million in fiscal 2019 .

Before this suspension, we paid dividends of $57.4 million in fiscal 2020 to co mmon stock shareholders.

Refer to Note 13 - Shareholders’ Deficit included within Part II, Item 8 - Financial Statements and Supplementary Data for details.

Cash Flow Outlook

We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations within the next year.

We continue to serve customers at most of our locations through our off-premise offerings and limited capacity dining rooms.

We will continue to monitor the situation and intend to resume normal business operations on a case-by-case basis when permitted under applicable government regulations and when we believe we are able to

do so safely.

Please refer above to COVID-19 Impact on Liquidity for further details on our actions to maintain our liquidity position during this pandemic.

We believe that our various sources of capital, including future cash flows from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations within the next year.

We continue to serve guests at all of our locations through our dining rooms and off-premise offerings, and have resumed normal business operations in accordance with state and local mandates.

In the fourth quarter of fiscal 2021, S&P upgraded our corporate credit rating to BB- with stable outlook.

Moody’s affirmed our B1 corporate family rating and changed the outlook to positive.

Refer to Part I, Item 1A.

Risk Factors for further details.

We are not aware of any other event or trend that would potentially materially affect our liquidity.

3 unchanged sentences

Payments Due by Period

Less than 1 Year

More than 5 Years

Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total

Long-term debt (1)

$ — $ 471.3 $ 350.0 $ — $ 821.3

34.7 49.1 8.8 — 92.6

Finance leases (3)

27.4 43.6 25.7 56.3 153.0

Operating leases (3)

155.9 317.1 274.2 770.5 1,517.7

Purchase obligations (4)

27.9 44.2 33.8 — 105.9

(1) Long-term debt consists of principal amounts owed on the revolving credit facility, 3.875% and 5.000% notes.

As of June 30, 2021, $828.7 million of credit is available under the revolving credit facility.

The revolving credit facility is due in September 2021.

The revolving credit facility is due in December 2022.

The impact of the new revolving credit facility entered into in August 2021 is not reflected in the table because it occurred after June 30, 2021.

(2) Interest consists of remaining interest payments on the 3.875% and 5.000% notes totaling $84.5 million and remaining interest payments on the revolver totaling $8.1 million.

The interest rates on the notes are fixed whereas the interest rate on the revolver is variable based on LIBOR and our applicable margin.

We have assumed that the revolver balance carried will be $491.3 million in fiscal 2021 and fiscal 2022 until the maturity date of September 12, 2021 using the interest rate of 3.100% , which is the total of LIBOR plus our applicable margin as of June 24, 2020 .

Finance leases and Operating leases total future lease payments represent the contractual obligations due under the contract, including cancelable option periods where we are reasonably assured to exercise the options .

A s of June 24, 2020 , these t otal future lease payments included non-cancelable lease commitments of $113.4 million for finance leases, and $1,083.4 million for operating leases.

We have assumed that the revolver balance carried will be $171.3 million in fiscal 2022 and fiscal 2023 until the maturity date of December 12, 2022 using the interest rate of 3.250%, which is the total of LIBOR plus our applicable margin as of June 30, 2021.

The impact of the new revolving credit facility entered into in August 2021 is not reflected in the table because it occurred after June 30, 2021.

(3) Finance leases and Operating leases total future lease payments represent the contractual obligations due under the lease agreements, including cancellable option periods where we are reasonably assured to exercise the options.

As of June 30, 2021, these total future lease payments included non-cancelable lease commitments of $132.7 million for finance leases and $1,044.9 million for operating leases.

(4) Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including:

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and the approximate timing of the transaction.

Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages and professional services contracts and exclude agreements that are cancelable without significant penalty.

In addition to the amounts shown in the table above, $2.1 million of unrecognized tax benefits have been recorded as liabilities.

The timing and amounts of future cash payments related to these liabilities are uncertain.

Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages, software, and professional services contracts and exclude agreements that are cancellable without significant penalty.

IMPACT OF INFLATION

We have experienced impact from inflation.

Inflation has caused increased food, labor and benefits costs and has increased our operating expenses.

From time to time, we experience the impacts of inflation, which cause increased food, labor and benefits costs and higher operating expenses.

To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and reviewing, then implementing, alternative products or processes, or by implementing other cost reduction procedures.

OFF-BALANCE SHEET ARRANGEMENTS

We have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 18 - Commitments and Contingencies , and have entered into certain pre-commencement leases as disclosed in Note 4 - Leases included within Part II , Item 8 - Financial Statements and Supplementary Data , Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the Company has:

(1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us.

We have entered into certain pre-commencement leases as disclosed in Note 9 - Leases and have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 16 - Commitments and Contingencies included within Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

Other than these items, we do not have any off-balance sheet arrangements.

CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are disclosed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in Part II , Item 8 - Financial Statements and Supplementary Data , Notes to the Consolidated Financial Statements .

Our significant accounting policies are disclosed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies in Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements.

The following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results, and that require significant judgment.

Effective the first day of fiscal 2020, we adopted the FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”) as described in Note 1 - Nature of Operations and Summary of Significant Accounting Policies and Note 4 - Leases of the Notes to the Consolidated Financial Statements .

Upon adoption, we recognized operating lease assets of $1.0 billion and corresponding operating lease liabilities of $1.2 billion .

At the inception of each lease, we evaluate the property and the lease to determine whether the lease is an operating or a finance lease.

This lease accounting evaluation may require significant judgment in determining the fair value and useful life of the leased property and the appropriate reasonably certain lease term.

These judgments may produce materially different amounts of rent expense in a given reporting period than would be reported if different assumed lease terms were used.

Our lease agreements generally do not provide information to determine the implicit interest rate, so we determine the applicable incremental borrowing rate (“IBR”) used to calculate the initial lease liability for each lease.

We have derived our incremental borrowing rate using the interest rate we would pay on our existing borrowings, adjusted for the effect of designating collateral and the lease terms using market data as well as publicly available data for instruments with similar characteristics.

The reasonably certain lease term and incremental borrowing rate for each lease requires judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the right-of-use asset and lease liability.

We also estimate the reasonably certain lease term at inception.

The lease term commences on the date the lessor makes the underlying property available, irrespective of when lease payments begin under the contract.

When determining the lease term at commencement, we consider both termination and renewal option periods available, and only include the period for which failure to renew the lease imposes a penalty on us in such an amount that renewal, or termination options, appear to be reasonably certain.

Such an economic penalty would typically result from having to abandon a building or equipment with remaining economic value upon vacating a property.

Our judgment in determining the appropriate expected lease term affects our evaluation of t he classification and accounting for leases as finance versus operating, and the period over with the operating lease asset is amortized.

These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different expected lease terms were used.

We make certain estimates and judgments in the calculation of tax expenses, the resulting tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement carrying amounts of existing assets and liabilities and their respective tax bases .

When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized.

We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.

We have recorded deferred tax assets reflecting the benefit of income tax credits and state loss carryforwards, which expire in varying amounts.

Realization is dependent on generating sufficient taxable income in the relevant jurisdiction prior to expiration of the income tax credits and state loss carryforwards.

Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized.

The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income in the carryforward period are reduced.

We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return.

We recognize any interest and penalties related to unrecognized tax benefits in income tax expenses.

Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items.

Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions.

In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in forward-looking statements is based on current tax law.

Any significant changes in the tax laws could affect these estimates.

Valuation of Long-Lived Assets

We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable.

The impairment test is a two-step process.

Step one includes comparing the operating cash flows of the restaurants over their remaining service life to the carrying value of the asset group.

If the cash flows exceed the carrying value, then the asset group is not impaired and no further evaluation is required.

If the carrying value of the asset group exceeds its cash flows, impairment may exist and performing step two is necessary to determine the impairment loss.

If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value of the asset group.

We determine fair value based on discounted projected future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate.

This process requires the use of estimates and assumptions, which are subject to a high degree of judgment.

Gift Card Revenues Recognition

Proceeds from the sale of gift cards are recorded as deferred revenues and recognized as revenues when the gift cards are redeemed by the holders.

Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed.

Breakage revenues are recognized proportionate to the pattern of related gift card redemptions.

We recognize breakage income in Franchise and other revenues in the Consolidated Statements of Comprehensive Income.

We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenues balance accordingly.

If actual redemption patterns vary from our estimate, actual gift card breakage income may differ from the amounts recorded.

Changing our breakage-rate assumption used to record fiscal 2021 breakage by 25 basis points would result in an impact to the Consolidated Statements of Comprehensive Income of approximately $0.3 million.

Valuation of Goodwill

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The carrying value of goodwill as of June 30, 2021 was $188.2 million, which related to both of our reporting units.

We performed our annual impairment test in the second quarter of fiscal 2020 by utilizing the qualitative approach and determined that there were no events or circumstances to indicate that it was more likely than not that the fair value of our reporting units was less than their carrying values.

During the third quarter of fiscal 2020, we performed a quantitative assessment of our goodwill due to the impact of the COVID-19 pandemic on the market.

Based on our assessment as of March 25, 2020, we determined that our goodwill and indefinite-lived intangible assets were not impaired at that time.

Additionally, we updated the assessment

during the fourth quarter of fiscal 2020 and determined no triggering event existed based on improved market value and actual results compared to forecast for the third quarter of fiscal 2020.

We performed our annual impairment test in the second quarter of fiscal 2021 by utilizing the qualitative approach

and determined that there were no events or circumstances to indicate that it was more likely than not that the fair value of our reporting units was less than their carrying values.

Additionally, no indicators of impairment were identified through the end of fiscal 2021.

During the third quarter of fiscal 2020, we performed a quantitative assessment of our goodwill due to the impact of the COVID-19 pandemic on our operations and on the market.

Based on our assessment as of March 25, 2020, we determined that our goodwill and indefinite-lived intangible assets were not impaired.

Additionally, we updated the assessment during the fourth quarter of fiscal 2020 and determined no triggering event existed based on improved market value and actual results compared to projections in the quantitative assessment prepared in the third quarter.

This assessment is predicated on our ability to continue to operate dining and banquet rooms, and generate off-premise sales at our restaurants.

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It is possible that changes in circumstances or changes in our judgments, assumptions and estimates could result in an impairment charge of a portion or all of our goodwill or other intangible assets.

Valuation of Long-Lived Assets

We review the carrying amount of property, equipment and lease assets semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable.

The impairment test is a two-step process.

Step one includes comparing the operating cash flows of each restaurant over its remaining service life to the carrying value of the asset group.

If the cash flows exceed the carrying value, then the asset group is not impaired and no further evaluation is required.

If the carrying value of the asset group exceeds its cash flows, impairment may exist and performing step two is necessary to determine the impairment loss.

If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value of the asset group.

We determine fair value based on discounted projected future operating cash flows of each restaurant over its remaining service life using a risk adjusted discount rate.

This process requires the use of estimates and assumptions, which are subject to a high degree of judgment.

At the inception of each lease, we evaluate the lease agreement to determine whether it is an operating or finance lease.

The evaluation requires significant judgments in determining the fair value of the leased asset and the lease liability and the appropriate reasonably certain lease term.

Given that our lease agreements generally do not provide an implicit interest rate, we estimate our fully collateralized incremental borrowing rate corresponding with the lease terms for the purposes of determining the fair value of initial liability for each lease.

We also estimate the reasonably certain lease term at inception.

The lease term commences on the date when the lessor makes the underlying property available, irrespective of the contractual lease payments schedule.

When determining the length of the lease term at commencement, we consider both termination and renewal option periods available.

The renewal periods included in the lease term at the inception are those during which failure to renew the lease imposes a significant penalty on us.

Lease accounting requires the application of significant judgements by management.

Variation in judgements applied could result in a change of lease classification and materially different:

• Expenses such as rent, depreciation and amortization in a given reporting period

• Fair value of leased asset and lease liability at inception

• Reasonably certain lease term at inception

When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized.

We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.

We have recorded deferred tax assets reflecting the benefit of income tax credits and state loss carryforwards, which expire in varying amounts.

Realization is dependent on generating sufficient taxable income in the relevant jurisdiction prior to expiration of the income tax credits and state loss carryforwards.

Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized.

The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income in the carryforward period are reduced.

We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return.

We recognize any interest and penalties related to unrecognized tax benefits in Provision (benefit) for income taxes.

Significant judgment is required in assessing, among other factors, the timing and amounts of deductible and taxable items.

Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions.

In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in forward-looking statements is based on current tax law.

Any significant changes in the tax laws could affect these estimates.

Insurance Reserves

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The outcomes of legal proceedings and claims brought against us are subject to significant uncertainty.

An estimated loss from a loss contingency such as a legal proceeding or claim is accrued to expense if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated.

In determining whether a loss should be accrued we evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss.

An estimated loss from a loss contingency such as a legal proceeding or claim is accrued if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated.

In determining whether a loss should be accrued, we evaluate, among other factors, the degree of probability of an unfavorable outcome and our ability to make a reasonable estimate of the amount of loss.

Changes in these factors could materially impact our consolidated financial statements.

Gift Card Revenues Recognition

Proceeds from the sale of gift cards are recorded as deferred revenues and recognized as revenues when the gift card is redeemed by the holder.

Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed.

Effective fiscal 2019 , with the adoption of ASC 606, breakage revenues are recognized proportionate to the pattern of related gift card redemptions.

Before fiscal 2019 , based on our historical gift card redemption patterns and considering our gift cards did not have expiration dates or dormancy fees, we reasonably estimated the amount of gift card balances for which redemption was remote and recorded breakage income based on this estimate.

We recognize breakage income in Franchise and other revenues in the Consolidated Statements of Comprehensive Income .

We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenues balance accordingly.

If actual redemption patterns vary from our estimate, actual gift card breakage income may differ from the amounts recorded.

Changing our breakage-rate assumption used to record fiscal 2020 breakage by 25 basis points would result in an impact to the consolidated statement of comprehensive income of approximately $0.4 million.

Effect of New Accounting Standards

The impact of new accounting pronouncements can be found at Note 19 - Effect of New Accounting Standards in Part II , Item 8 - Financial Statements and Supplementary Data , Notes to the Consolidated Financial Statements .

The impact of new accounting pronouncements can be found at Note 2 - Effect of New Accounting Standards in Part II, Item 8 - Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis