Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 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 brief description of our business and a discussion on the financial impact of the COVID-19 pandemic
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• 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 issuance and repurchase activity, and known trends that may impact liquidity
• Impact of Inflation - a discussion of the effect of inflation on our business
• Off-Balance Sheet Arrangements - a discussion of the off-balance sheet arrangements entered into by us
• 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 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. 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 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.
OVERVIEW
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. Refer to Part I, Item 1 - Business of this document for additional information about our business and operational strategies.
Impact of COVID-19 Pandemic
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,
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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 will continue to closely monitor and adapt to the evolving situation.
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RESULTS OF OPERATIONS
The following table sets forth selected operating data:
Fiscal Years Ended
June 30, 2021 June 24, 2020
Dollars As a percentage (1)
Dollars As a percentage (1)
Revenues
Company sales $ 3,279.0 98.2 % $ 3,004.9 97.6 %
Franchise and other revenues 58.8 1.8 % 73.6 2.4 %
Total revenues 3,337.8 100.0 % 3,078.5 100.0 %
Operating costs and expenses
Food and beverage costs 867.8 26.4 % 798.6 26.6 %
Restaurant labor 1,108.2 33.8 % 1,045.5 34.8 %
Restaurant expenses 858.5 26.2 % 825.8 27.5 %
Depreciation and amortization 150.2 4.5 % 162.3 5.3 %
General and administrative 134.8 4.0 % 136.3 4.4 %
Other (gains) and charges 19.0 0.6 % 47.4 1.5 %
Total operating costs and expenses 3,138.5 94.0 % 3,015.9 98.0 %
Operating income 199.3 6.0 % 62.6 2.0 %
Interest expenses 56.2 1.7 % 59.6 1.9 %
Other income, net ( 2.1 ) (0.1) % ( 1.9 ) (0.1) %
Income before income taxes 145.2 4.4 % 4.9 0.2 %
Provision (benefit) for income taxes 13.6 0.5 % ( 19.5 ) (0.6) %
Net income $ 131.6 3.9 % $ 24.4 0.8 %
(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
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 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 .
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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
Change from:
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 closures (2)
(19.3) — (19.3)
Restaurant acquisitions (3)
49.7 — 49.7
Company sales 332.2 (58.1) 274.1
Royalties (4)
(3.4) — (3.4)
Franchise fees and other revenues (0.6) (10.8) (11.4)
Franchise and other revenues (4.0) (10.8) (14.8)
Fiscal year ended June 30, 2021 $ 3,059.9 $ 277.9 $ 3,337.8
(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:
Comparable
Sales (1)(2)
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)
12.5 %
U.S. (4)
13.8 %
International 9.7 %
Chili’s domestic (6)
8.9 %
System-wide (7)
6.0 %
(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
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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. 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 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.
(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
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 %
Restaurant labor 1,108.2 33.8 % 1,045.5 34.8 % (62.7) 1.0 %
Restaurant expenses 858.5 26.2 % 825.8 27.5 % (32.7) 1.3 %
Depreciation and amortization 150.2 162.3 12.1
General and administrative 134.8 136.3 1.5
Other (gains) and charges 19.0 47.4 28.4
Interest expenses 56.2 59.6 3.4
Other income, net (2.1) (1.9) 0.2
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.
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Depreciation and amortization decreased $12.1 million as follows:
Depreciation and Amortization
Fiscal year ended June 24, 2020 $ 162.3
Change from:
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)
3.3
Corporate assets 1.6
Other 0.8
Fiscal year ended June 30, 2021 $ 150.2
(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:
General and Administrative
Fiscal year ended June 24, 2020 $ 136.3
Change from:
Defined contribution plan employer expenses (1)
(5.3)
Payroll-related expenses (1.6)
Travel and entertainment expenses (1.6)
Professional fees (0.6)
Performance-based compensation (2)
4.5
Stock-based compensation 1.6
Other 1.5
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.
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Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):
Fiscal Years Ended
June 30, 2021 June 24, 2020
COVID-19 related charges $ 3.3 $ 12.2
Restaurant impairment charges 3.0 19.1
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
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.
Income Taxes
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 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) %
Franchise and other revenues 54.2 58.2 (4.0) (6.9) %
Total revenues $ 3,059.9 $ 2,731.7 $ 328.2 12.0 %
(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. 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. Refer to the “Revenues” section above for further details about Chili’s revenues changes.
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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
General and administrative 27.4 32.1 4.7
Other (gains) and charges 12.7 35.3 22.6
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
Change from:
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)
3.3
Other 0.6
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.
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Chili’s General and administrative decreased $4.7 million as follows:
General and Administrative
Fiscal year ended June 24, 2020 $ 32.1
Change from:
Defined contribution plan employer expenses (1)
(3.7)
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
Other (0.1)
Fiscal year ended June 30, 2021 $ 27.4
(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.
Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 5 - Other Gains and Charges):
Fiscal Years Ended
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
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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) %
Franchise and other revenues 4.6 15.4 (10.8) (70.1) %
Total revenues $ 277.9 $ 346.8 $ (68.9) (19.9) %
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
General and administrative 5.8 5.7 (0.1)
Other (gains) and charges 1.4 6.8 5.4
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.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flows from Operating Activities
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 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 30, 2021 June 24, 2020
Cash flows from investing activities
Payments for property and equipment $ (94.0) $ (104.5) $ 10.5
Payments for franchise restaurant acquisitions — (94.6) 94.6
Proceeds from sale of assets 1.6 1.2 0.4
Insurance recoveries — 1.1 (1.1)
Proceeds from note receivable 1.5 2.8 (1.3)
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 30, 2021 June 24, 2020
Cash flows from financing activities
Borrowings on revolving credit facility $ 43.4 $ 808.4 $ (765.0)
Payments on revolving credit facility (345.0) (858.8) 513.8
Purchases of treasury stock (4.2) (32.4) 28.2
Payments on long-term debt (20.0) (17.8) (2.2)
Payments of dividends (1.5) (57.4) 55.9
Proceeds from issuance of common stock — 146.9 (146.9)
Proceeds from issuance of treasury stock 30.7 1.6 29.1
Payments for common stock issuance costs — (7.8) 7.8
Payments for debt issuance costs (2.2) (3.2) 1.0
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. Partial
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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 $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. 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 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 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. 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 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.
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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. In the event such a trend develops, we believe that there are sufficient funds available under our credit facility and from our internal cash generating capabilities to adequately manage our ongoing business.
Future Commitments and Contractual Obligations
Payments due under our contractual obligations for outstanding indebtedness, leases and purchase obligations as defined by the Securities and Exchange Commission (“SEC”) as of June 30, 2021 are as follows:
Payments Due by Period
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
Interest (2)
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 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 $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: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. 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
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.
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OFF-BALANCE SHEET ARRANGEMENTS
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 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.
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
We assess the recoverability of goodwill related to our restaurant brands on an annual basis or more often if circumstances or events indicate impairment may exist. We may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. In considering the qualitative approach, we evaluate factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability and the overall financial performance of the reporting units.
If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated. We determine fair value based on a combination of market-based values and discounted projected future operating cash flows of the reporting units using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. We make assumptions regarding future revenues and cash flows, expected growth rates, terminal values and other factors which could significantly impact the fair value calculations. The carrying value of the reporting unit is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an indicator of impairment. In the event that these assumptions change in the future, we may be required to record impairment charges related to goodwill.
We consider our restaurants brands, Chili’s and Maggiano’s, to be both our operating segments and reporting units. 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 2021 by utilizing the qualitative approach
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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. Management’s judgment about the short and long term impacts of the pandemic could change as additional facts become known and therefore affect these conclusions. We will continue to monitor and evaluate our results and evaluate the likelihood of any potential impairment charges at our restaurants and reporting units. Sales declines at our restaurants, unplanned increases in commodity or labor costs, deterioration in overall economic conditions and challenges in the restaurant industry may result in future impairment charges. 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.
Leases
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
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Income Taxes
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 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
We are self-insured for certain losses related to health, general liability and workers’ compensation. We maintain stop loss coverage with third-party insurers to limit our total exposure. We record a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost that falls below our specified retention levels or per-claim deductible amounts. This liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date.
In establishing our reserves, we consider certain actuarial assumptions and judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates and is reviewed on a quarterly basis to ensure that the liability is appropriate. If actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
Legal Contingencies
We are subject to various lawsuits, administrative proceedings, audits and claims arising in the ordinary course of business. Some of these lawsuits purport to be class actions and/or seek substantial damages. 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 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.
Effect of New Accounting Standards
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.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.