BRINKER INTERNATIONAL, INC 10-Q

ITEM 1. FINANCIAL STATEMENTS BRINKER INTERNATIONAL, INC. Consolidated Statements of Comprehensive Income (Unaudited) (In millions, except per share amounts) Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Revenues Company sales $ 859.6 $ 728.2 Franchise and other revenues 16.8 11.9 Total revenues 876.4 740.1 Operating costs and expenses Food and beverage costs 234.3 193.5 Restaurant labor 304.9 248.0 Restaurant expenses 231.3 202.5 Depreciation and amortization 39.3 37.4 General and administrative 36.5 30.5 Other (gains) and charges 4.5 3.8 Total operating costs and expenses 850.8 715.7 Operating income 25.6 24.4 Interest expenses 12.5 14.6 Other income, net ( 0.3 ) ( 0.4 ) Income before income taxes 13.4 10.2 Provision (benefit) for income taxes 0.2 ( 0.5 ) Net income $ 13.2 $ 10.7 Basic net income per share $ 0.29 $ 0.24 Diluted net income per share $ 0.28 $ 0.23 Basic weighted average shares outstanding 45.9 45.1 Diluted weighted average shares outstanding 47.0 45.7 Other comprehensive income (loss) Foreign currency translation adjustment $ ( 0.4 ) $ 0.3 Other comprehensive income (loss) ( 0.4 ) 0.3 Comprehensive income $ 12.8 $ 11.0 See accompanying Notes to Consolidated Financial Statements (Unaudited) 3 Table of Contents BRINKER INTERNATIONAL, INC. Consolidated Balance Sheets (In millions, except per share amounts) Unaudited September 29, 2021 June 30, 2021 ASSETS Current assets Cash and cash equivalents $ 31.2 $ 23.9 Accounts receivable, net 59.5 65.2 Inventories 29.5 28.9 Restaurant supplies 53.4 52.6 Prepaid expenses 18.1 13.6 Income taxes receivable, net 25.6 23.0 Total current assets 217.3 207.2 Property and equipment, at cost Land 38.3 33.1 Buildings and leasehold improvements 1,623.6 1,595.2 Furniture and equipment 836.7 818.1 Construction-in-progress 15.9 14.9 2,514.5 2,461.3 Less accumulated depreciation and amortization ( 1,715.1 ) ( 1,686.5 ) Net property and equipment 799.4 774.8 Other assets Operating lease assets 1,041.0 1,007.4 Goodwill 188.1 188.2 Deferred income taxes, net 42.6 50.9 Intangibles, net 25.3 21.1 Other 25.7 25.3 Total other assets 1,322.7 1,292.9 Total assets $ 2,339.4 $ 2,274.9 LIABILITIES AND SHAREHOLDERS’ DEFICIT Current liabilities Accounts payable $ 112.4 $ 127.7 Gift card liability 102.2 106.4 Accrued payroll 97.6 122.4 Operating lease liabilities 109.3 97.7 Other accrued liabilities 125.7 117.4 Total current liabilities 547.2 571.6 Long-term debt and finance leases, less current installments 999.7 917.9 Long-term operating lease liabilities, less current portion 1,037.2 1,006.7 Other liabilities 80.8 82.0 Commitments and contingencies (Note 14) Shareholders’ deficit Common stock ( 250.0 million authorized shares; $ 0.10 par value; 70.3 million shares issued; and 45.4 million shares outstanding at September 29, 2021, and 45.9 million shares outstanding at June 30, 2021) 7.0 7.0 Additional paid-in capital 679.4 685.4 Accumulated other comprehensive loss ( 5.1 ) ( 4.7 ) Accumulated deficit ( 252.9 ) ( 266.1 ) Treasury stock, at cost ( 24.9 million shares at September 29, 2021, and 24.4 million shares at June 30, 2021) ( 753.9 ) ( 724.9 ) Total shareholders’ deficit ( 325.5 ) ( 303.3 ) Total liabilities and shareholders’ deficit $ 2,339.4 $ 2,274.9 See accompanying Notes to Consolidated Financial Statements (Unaudited) 4 Table of Contents BRINKER INTERNATIONAL, INC. Consolidated Statements of Cash Flows (Unaudited) (In millions) Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Cash flows from operating activities Net income $ 13.2 $ 10.7 Adjustments to reconcile Net income to Net cash provided by operating activities: Depreciation and amortization 39.3 37.4 Stock-based compensation 4.3 3.9 Restructure and impairment charges 1.9 0.5 Net loss on disposal of assets 0.7 0.4 Other 1.5 0.8 Changes in assets and liabilities: Accounts receivable, net 12.7 0.6 Inventories ( 0.3 ) 1.4 Restaurant supplies ( 0.3 ) — Prepaid expenses ( 4.6 ) 0.4 Operating lease assets, net of liabilities 8.1 ( 2.2 ) Deferred income taxes, net 8.2 ( 0.9 ) Other assets 0.1 — Accounts payable ( 12.7 ) ( 4.9 ) Gift card liability ( 4.8 ) ( 2.7 ) Accrued payroll ( 24.8 ) ( 1.9 ) Other accrued liabilities 7.7 16.2 Current income taxes ( 9.1 ) 2.4 Other liabilities ( 0.9 ) 20.7 Net cash provided by operating activities 40.2 82.8 Cash flows from investing activities Payments for property and equipment ( 37.3 ) ( 13.6 ) Payments for franchise restaurant acquisitions ( 47.5 ) — Proceeds from sale leaseback transactions, net of related expenses 20.5 — Proceeds from note receivable — 0.6 Net cash used in investing activities ( 64.3 ) ( 13.0 ) Cash flows from financing activities Borrowings on revolving credit facility 285.0 28.4 Payments on revolving credit facility ( 205.0 ) ( 75.0 ) Purchases of treasury stock ( 39.6 ) ( 3.9 ) Payments on long-term debt ( 5.5 ) ( 4.6 ) Payments for debt issuance costs ( 3.0 ) ( 1.5 ) Payments of dividends ( 0.8 ) ( 1.3 ) Proceeds from issuance of treasury stock 0.3 3.0 Net cash provided by (used in) financing activities 31.4 ( 54.9 ) Net change in cash and cash equivalents 7.3 14.9 Cash and cash equivalents at beginning of period 23.9 43.9 Cash and cash equivalents at end of period $ 31.2 $ 58.8 See accompanying Notes to Consolidated Financial Statements (Unaudited) 5 Table of Contents Footnote Index BRINKER INTERNATIONAL, INC. Notes to Consolidated Financial Statements (Unaudited) Footnote Index Note # Description Page Note 1 Basis of Presentation 7 Note 2 Chili’s Restaurant Acquisition 8 Note 3 Revenue Recognition 9 Note 4 Other Gains and Charges 10 Note 5 Income Taxes 11 Note 6 Net Income Per Share 11 Note 7 Segment Information 11 Note 8 Fair Value Measurements 13 Note 9 Leases 14 Note 10 Debt 16 Note 11 Accrued and Other Liabilities 17 Note 12 Shareholders’ Deficit 17 Note 13 Supplemental Cash Flow Information 19 Note 14 Contingencies 19 Note 15 Subsequent Events 20 6 Table of Contents Footnote Index 1. BASIS OF PRESENTATION References to “Brinker,” the “Company,” “we,” “us,” and “our” in this Form 10-Q refer to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc. Our Consolidated Financial Statements (Unaudited) as of September 29, 2021 and June 30, 2021, and for the thirteen week periods ended September 29, 2021 and September 23, 2020, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). We are principally engaged in the ownership, operation, development and franchising of the Chili’s ® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy ® (“Maggiano’s”) restaurant brands, as well as virtual brands including It’s Just Wings ® and Maggiano’s Italian Classics™. At September 29, 2021, we owned, operated or franchised 1,650 restaurants, consisting of 1,145 Company-owned restaurants and 505 franchised restaurants, located in the United States, 28 countries and two United States territories. Fiscal Year 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 year 2022 contains 52 weeks and will end on June 29, 2022. Fiscal year 2021 ended on June 30, 2021 and contained 53 weeks. Use of Estimates The preparation of the Consolidated Financial Statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements (Unaudited), and the reported amounts of revenues and costs and expenses in the reporting periods. Actual results could differ from those estimates. The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, necessary to fairly state the interim operating results, financial position and cash flows for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with GAAP, have been omitted pursuant to SEC rules and regulations. The Notes to Consolidated Financial Statements (Unaudited) should be read in conjunction with the Notes to Consolidated Financial Statements contained in our June 30, 2021 Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes. All amounts in the Notes to Consolidated Financial Statements (Unaudited) are presented in millions unless otherwise specified. Foreign Currency Translation The foreign currency translation adjustment included in Comprehensive income in the Consolidated Statements of Comprehensive Income (Unaudited) represents the unrealized impact of translating the financial statements of our Canadian restaurants from Canadian dollars to United States dollars. This amount is not included in Net income and would only be realized upon disposition of our Canadian restaurants. The related Accumulated other comprehensive loss is presented in the Consolidated Balance Sheets (Unaudited). 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. The spread of COVID-19 has 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. The number of open dining rooms and the dining room capacity restrictions have fluctuated over the course of the pandemic based on state and local mandates, which has resulted in significant 7 Table of Contents Footnote Index impacts to our guest traffic and sales. At the end of the first quarter of fiscal 2022, all of our Company-owned restaurant dining rooms or patios were open in some capacity. We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve. At this time, the ultimate impact of COVID-19 cannot be reasonably estimated due to the uncertainty about the extent and the duration of the spread of the virus and could lead to further reduced sales, capacity restrictions, restaurant closures, delays in our supply chain or impair our ability to staff accordingly which could adversely impact our financial results. New Accounting Standards Implemented in Fiscal 2022 We reviewed all recently issued accounting pronouncements and determined that they were either not applicable or are not expected to have a material impact on the Consolidated Financial Statements (Unaudited). 2. CHILI’S RESTAURANT ACQUISITION On September 2, 2021, we completed the acquisition of certain assets and liabilities related to 23 previously franchised Chili’s restaurants located in the Mid-Atlantic region of the United States. Pro-forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements (Unaudited). The total purchase price of $ 48.0 million, excluding post-closing adjustments, was funded with borrowings from our existing credit facility and proceeds from a sale leaseback transaction completed simultaneously with the acquisition (refer to Note 9 - Leases for further details on the sale leaseback transaction). We accounted for this acquisition as a business combination. The assets and liabilities of these restaurants were recorded at their preliminary fair values and are subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available. The final purchase price allocation is expected to be completed during the second quarter of fiscal 2022. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements (Unaudited) from the date of acquisition. The fair value of tangible and intangible assets acquired was primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows and discount rates. These inputs represent Level 3 fair value measurements as defined under GAAP. The preliminary amounts recorded for the fair value of acquired assets and liabilities at the acquisition date are as follows: Fair Value September 2, 2021 Current assets $ 1.4 Property and equipment (2) 46.2 Operating lease assets (2) 23.6 Reacquired franchise rights (1) 4.7 Current liabilities ( 1.4 ) Finance lease liabilities, less current portion ( 3.7 ) Operating lease liabilities, less current portion (2) ( 23.1 ) Net assets acquired (3) $ 47.7 (1) Reacquired franchise rights have a weighted average amortization period of approximately 15 years. (2) Refer to Note 9 - Leases for further details. (3) Net assets acquired at fair value are equal to the total purchase price of $ 48.0 million, less $ 0.3 million of closing adjustments. 8 Table of Contents Footnote Index 3. REVENUE RECOGNITION Deferred Franchise and Development Fees Our deferred franchise and development fees consist of the unrecognized fees received from franchisees. Recognition of these fees in subsequent periods is based on satisfaction of the contractual performance obligations of the active contracts with franchisees. We also expect to earn subsequent period royalties and advertising fees related to our franchise contracts; however, due to the variability and uncertainty of these future revenues based upon a sales-based measure, these future revenues are not yet estimable as the performance obligations remain unsatisfied. Deferred franchise and development fees are classified within Other accrued liabilities for the current portion expected to be recognized within the next 12 months, and Other liabilities for the long-term portion in the Consolidated Balance Sheets (Unaudited). The following table reflects the changes in deferred franchise and development fees between June 30, 2021 and September 29, 2021: Deferred Franchise and Development Fees Balance as of June 30, 2021 $ 11.4 Additions 0.5 Amount recognized for Chili's restaurant acquisition (1) ( 0.3 ) Amount recognized to Franchise and other revenues ( 0.4 ) Balance as of September 29, 2021 $ 11.2 (1) The remaining deferred franchise and development fee balances associated with the 23 acquired Chili’s restaurants were recognized as of the acquisition date in Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited). Refer to Note 2 - Chili’s Restaurant Acquisition for further details. The following table illustrates franchise and development fees expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of September 29, 2021: Fiscal Year Franchise and Development Fees Revenue Recognition Remainder of 2022 $ 0.7 2023 0.9 2024 0.9 2025 0.9 2026 0.8 Thereafter 7.0 $ 11.2 9 Table of Contents Footnote Index Deferred Gift Card Revenues Deferred revenues related to our gift cards include the full value of unredeemed gift card balances less recognized breakage and the unamortized portion of third party fees. The following table reflects the changes in the Gift card liability between June 30, 2021 and September 29, 2021: Gift Card Liability Balance as of June 30, 2021 $ 106.4 Gift card sales 21.2 Gift card redemptions recognized to Company sales ( 23.4 ) Gift card breakage recognized to Franchise and other revenues ( 2.4 ) Other 0.4 Balance as of September 29, 2021 $ 102.2 4. OTHER GAINS AND CHARGES Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited) consist of the following: Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Remodel-related costs $ 1.5 $ 0.2 Loss from natural disasters, net of (insurance recoveries) 0.6 — Enterprise system implementation 0.6 — COVID-19 related charges 0.3 1.2 Restaurant closure charges 0.2 1.5 Other 1.3 0.9 $ 4.5 $ 3.8 Fiscal 2022 • Remodel-related costs related to existing fixed asset write-offs associated with the ongoing Chili’s and Maggiano’s remodel projects. • Loss from natural disasters, net of (insurance recoveries) primarily consisted of team member relief pay and inventory spoilage related to Hurricane Ida. • Enterprise system implementation primarily consisted of consulting fees and subscription fees related to the ongoing enterprise system implementation. • COVID-19 related charges primarily consisted of charges for employee assistance and related payroll taxes for certain team members, partially offset by credits received as part of the 2021 New Mexico Senate Bill 1. Fiscal 2021 • COVID-19 related charges consisted of the following costs related to both Chili’s and Maggiano’s: – employee assistance and related payroll taxes for certain team members, – initial purchases of restaurant and personal protective supplies such as face masks and hand sanitizers required to continue to reopen dining rooms. • Restaurant closure charges primarily related to closure costs associated with certain Chili’s restaurants closed in the first quarter of fiscal 2021. 10 Table of Contents Footnote Index 5. INCOME TAXES Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Effective income tax rate 1.5 % ( 4.9 ) % The federal statutory tax rate for the periods presented was 21.0 %. Our effective income tax rate for the thirteen week period ended September 29, 2021 was lower than the federal statutory rate primarily due to the favorable impact from the FICA tip tax credit and excess tax windfalls associated with stock-based compensation. A reconciliation between the reported Provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to Income before income taxes is as follows: Thirteen Week Period Ended September 29, 2021 Income tax expense at statutory rate - 21.0% $ 2.8 FICA tip tax credit ( 1.8 ) Stock-based compensation excess tax benefits ( 0.5 ) State income taxes, net of federal benefit 0.8 Other ( 1.1 ) Provision (benefit) for income taxes - 1.5% $ 0.2 Our effective income tax rate for the thirteen week period ended September 23, 2020 was lower than the federal statutory rate due to the favorable impact from the FICA tip tax credit and excess tax windfalls associated with stock-based compensation. 6. NET INCOME PER SHARE Basic net income per share is computed by dividing Net income by the Basic weighted average shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of Diluted net income per share, the Basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the Diluted net income per share calculation. Basic weighted average shares outstanding are reconciled to Diluted weighted average shares outstanding as follows: Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Basic weighted average shares outstanding 45.9 45.1 Dilutive stock options 0.4 0.1 Dilutive restricted shares 0.7 0.5 Total dilutive impact 1.1 0.6 Diluted weighted average shares outstanding 47.0 45.7 Awards excluded due to anti-dilutive effect 0.0 1.6 7. SEGMENT INFORMATION Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our Company-owned Chili’s restaurants, which are principally located in the United States, within the full-service casual dining segment of the industry. The Chili’s segment also has Company-owned restaurants in Canada, and franchised 11 Table of Contents Footnote Index locations in the United States, 28 countries and two United States territories. The Maggiano’s segment includes the results of our Company-owned Maggiano’s restaurants in the United States as well as the results from our domestic franchise business. The Other segment includes costs related to our restaurant support teams for the Chili’s and Maggiano’s brands, including operations, finance, franchise, marketing, human resources and culinary innovation. The Other segment also includes costs related to the common and shared infrastructure, including accounting, information technology, purchasing, guest relations, legal and restaurant development. Company sales for each segment include revenues generated by the operation of Company-owned restaurants including gift card redemptions and revenues from our It’s Just Wings and Maggiano’s Italian Classics virtual brands. Franchise and other revenues for each operating segment include royalties, delivery fee income, gift card breakage, Maggiano’s banquet service charge income, digital entertainment revenue, franchise advertising fees, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly located in the United States. There were no material transactions amongst our operating segments. Our chief operating decision maker uses Operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Restaurant expenses during the periods presented primarily included restaurant rent, supplies, property and equipment maintenance, utilities, delivery fees, credit card processing fees, property taxes and advertising. The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP: Thirteen Week Period Ended September 29, 2021 Chili’s (1) Maggiano’s Other Consolidated Company sales $ 773.3 $ 86.3 $ — $ 859.6 Royalties 9.0 0.1 — 9.1 Franchise fees and other revenues 5.3 2.4 — 7.7 Franchise and other revenues 14.3 2.5 — 16.8 Total revenues 787.6 88.8 — 876.4 Food and beverage costs 213.4 20.9 — 234.3 Restaurant labor 273.5 31.4 — 304.9 Restaurant expenses 204.6 26.6 0.1 231.3 Depreciation and amortization 33.0 3.4 2.9 39.3 General and administrative 8.0 2.0 26.5 36.5 Other (gains) and charges 2.8 0.2 1.5 4.5 Total operating costs and expenses 735.3 84.5 31.0 850.8 Operating income (loss) 52.3 4.3 ( 31.0 ) 25.6 Interest expenses 1.4 0.1 11.0 12.5 Other income, net ( 0.1 ) — ( 0.2 ) ( 0.3 ) Income (loss) before income taxes $ 51.0 $ 4.2 $ ( 41.8 ) $ 13.4 Segment assets $ 1,973.0 $ 227.0 $ 139.4 $ 2,339.4 Segment goodwill 149.7 38.4 — 188.1 Payments for property and equipment 33.7 1.9 1.7 37.3 12 Table of Contents Footnote Index Thirteen Week Period Ended September 23, 2020 Chili’s Maggiano’s Other Consolidated Company sales $ 675.0 $ 53.2 $ — $ 728.2 Royalties 6.6 0.0 — 6.6 Franchise fees and other revenues 4.9 0.4 — 5.3 Franchise and other revenues 11.5 0.4 — 11.9 Total revenues 686.5 53.6 — 740.1 Food and beverage costs 180.8 12.7 — 193.5 Restaurant labor 228.2 19.8 — 248.0 Restaurant expenses 181.4 20.8 0.3 202.5 Depreciation and amortization 30.6 3.6 3.2 37.4 General and administrative 5.4 1.3 23.8 30.5 Other (gains) and charges 3.6 0.1 0.1 3.8 Total operating costs and expenses 630.0 58.3 27.4 715.7 Operating income (loss) 56.5 ( 4.7 ) ( 27.4 ) 24.4 Interest expenses 1.4 — 13.2 14.6 Other income, net ( 0.1 ) — ( 0.3 ) ( 0.4 ) Income (loss) before income taxes $ 55.2 $ ( 4.7 ) $ ( 40.3 ) $ 10.2 Payments for property and equipment $ 11.6 $ 0.5 $ 1.5 $ 13.6 (1) Chili’s segment information for fiscal 2022 includes the results of operations and the preliminary fair value of assets related to the 23 restaurants purchased from a former franchisee subsequent to the acquisition date. Refer to Note 2 - Chili’s Restaurant Acquisition for details. 8. FAIR VALUE MEASUREMENTS Fair value is the price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. Fair value measurements are categorized in three levels based on the types of significant inputs used, as follows: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities Level 2 Observable inputs available at measurement date other than quote prices included in Level 1 Level 3 Unobservable inputs that cannot be corroborated by observable market data Non-Financial Assets Measured on a Non-Recurring Basis We review the carrying amounts of long-lived property and equipment including finance lease assets, operating lease assets, reacquired franchise rights and transferable liquor licenses semi-annually or when events or circumstances indicate that the fair value may not substantially exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value. Intangibles, net in the Consolidated Balance Sheets (Unaudited) includes both indefinite-lived intangible assets such as transferable liquor licenses and definite-lived intangible assets such as reacquired franchise rights and trademarks. Intangibles, net included accumulated amortization associated with definite-lived intangible assets at September 29, 2021 and June 30, 2021, of $ 10.1 million and $ 9.6 million, respectively. 13 Table of Contents Footnote Index Definite Lived Assets Impairment Definite lived assets include property and equipment, including finance lease assets, operating lease assets and reacquired franchise rights. During the thirteen week periods ended September 29, 2021 and September 23, 2020, no indicators of impairment were identified. Indefinite Lived Assets Impairment The fair values of transferable liquor licenses are based on prices in the open market for licenses in the same or similar jurisdictions, and are categorized as Level 2. During the thirteen week periods ended September 29, 2021 and September 23, 2020, no indicators of impairment were identified. Goodwill We review the carrying amounts of goodwill annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the implied fair value of the goodwill. During the thirteen week period ended September 29, 2021, management concluded that no triggering event occurred. Our ability to operate dining and banquet rooms and generate off-premise sales at our restaurants is critical to avoiding a future triggering event as the impact of the COVID-19 pandemic continues. Management’s judgments about the impact of the pandemic could change as additional developments occur. We will continue to monitor and evaluate our results in future periods to determine if a more detailed assessment is necessary. Chili’s Restaurant Acquisition In the first quarter of fiscal 2022, we completed the acquisition of 23 Chili’s restaurants from a former franchisee. The preliminary fair value of assets acquired and liabilities assumed for these restaurants utilized Level 3 inputs. The fair values of intangible assets acquired were primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows, and discount rates. Refer to Note 2 - Chili’s Restaurant Acquisition for further details. Other Financial Instruments Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items. Long-Term Debt The carrying amount of debt outstanding related to our revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the 3.875 % and 5.000 % notes are based on quoted market prices and are considered Level 2 fair value measurements. The carrying amounts and fair values of the 3.875 % notes and 5.000 % notes, net of unamortized debt issuance costs and discounts, are as follows: September 29, 2021 June 30, 2021 Carrying Amount Fair Value Carrying Amount Fair Value 3.875 % notes $ 299.4 $ 308.3 $ 299.3 $ 309.0 5.000 % notes 347.6 369.3 347.5 369.3 9. LEASES We typically lease our restaurant facilities through ground leases (where we lease land only, but construct the building and improvements) or retail leases (where we lease the land/retail space and building). In addition to our restaurant facilities, we also lease our corporate headquarters location and certain equipment. 14 Table of Contents Footnote Index Lease Amounts Included in the Consolidated Statements of Comprehensive Income (Unaudited) The components of lease expenses included in the Consolidated Statements of Comprehensive Income (Unaudited) were as follows: Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Operating lease cost $ 41.4 $ 41.7 Variable lease cost 15.1 14.0 Finance lease amortization 5.6 4.0 Finance lease interest 1.6 1.5 Short-term lease cost 0.1 0.1 Sublease income ( 1.1 ) ( 1.0 ) Total lease costs, net $ 62.7 $ 60.3 Pre-Commencement Leases In the first quarter of fiscal 2022, we executed 16 leases for new Chili’s locations with undiscounted fixed payments over the initial term of $ 24.7 million. These leases are expected to commence in the next 12 months and are expected to have an economic lease term of 20 years. These leases will commence when the landlords make the property available to us for new restaurant construction. We will assess the reasonably certain lease term at the lease commencement date. Significant Changes in Leases during the Period In the first quarter of fiscal 2022, as part of the Chili’s restaurant acquisition, we assumed 11 new real estate operating leases included in the balances at September 29, 2021. The leases were recorded net of prepaid rent at the date of acquisition. At September 29, 2021, the balances associated with these new leases in the Consolidated Balance Sheets (Unaudited) include Operating lease assets of $ 23.6 million, Operating lease liabilities of $ 0.6 million, and Long-term operating lease liabilities, less current portion of $ 23.0 million. The leases were recorded net of purchase price accounting adjustments and prepaid rent. Refer to Note 2 - Chili’s Restaurant Acquisition for further details. Restaurant Properties Sale Leaseback Transaction In the first quarter of fiscal 2022, simultaneous with the acquisition of the 23 Chili’s restaurants, we completed sale leaseback transactions on six of the acquired restaurants. The properties were sold at their acquisition cost resulting in proceeds of $ 20.5 million with no gain or loss. The initial terms of all leases we entered into as part of the sale leaseback transactions are for 15 years, plus renewal options at our discretion. All of the leases were determined to be operating leases. Rent expenses associated with these operating leases are recognized on a straight-line basis over the lease terms under ASC 842. At September 29, 2021, the balances associated with these new leases in the Consolidated Balance Sheets (Unaudited) include Operating lease assets of $ 18.2 million, Operating lease liabilities of $ 0.4 million, and Long-term operating lease liabilities, less current portion of $ 17.8 million. 15 Table of Contents Footnote Index 10. DEBT Long-term debt consists of the following: September 29, 2021 June 30, 2021 Revolving credit facility $ 251.3 $ 171.3 5.000% notes 350.0 350.0 3.875% notes 300.0 300.0 Finance lease obligations 124.8 121.3 Total long-term debt and finance leases 1,026.1 942.6 Less: unamortized debt issuance costs and discounts ( 3.0 ) ( 3.2 ) Total long-term debt, less unamortized debt issuance costs and discounts 1,023.1 939.4 Less: current installments of long-term debt (1) ( 23.4 ) ( 21.5 ) Long-term debt and finance leases, less current installments $ 999.7 $ 917.9 (1) Current installments of long-term debt consist only of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets (Unaudited). Refer to Note 11 - Accrued and Other Liabilities for further details. Revolving Credit Facility On August 18, 2021, we revised our existing $1.0 billion revolving credit facility to an $ 800.0 million revolving credit facility to extend the maturity date and provide additional flexibility. In the thirteen week period ended September 29, 2021, net borrowings of $ 80.0 million were drawn on the revolving credit facility. As of September 29, 2021, $ 548.7 million of credit was available under the new revolving credit facility. The $ 800.0 million revolving credit facility matures on August 18, 2026 and bears interest of LIBOR plus an applicable margin of 1.500 % to 2.250 % and an undrawn commitment fee of 0.250 % to 0.350 %, both based on a function of our debt-to-cash-flow ratio. As of September 29, 2021, our interest rate was 1.875 % consisting of LIBOR of 0.125 % plus the applicable margin of 1.750 %. In the thirteen week period ended September 29, 2021, we incurred and capitalized $ 3.0 million of debt issuance costs associated with the new revolver, which are included in Other assets in the Consolidated Balance Sheets (Unaudited). Financial Covenants Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. As of September 29, 2021, we were in compliance with our covenants pursuant to the $800.0 million revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes . We expect to remain in compliance with our covenants during the remainder of fiscal 2022. 16 Table of Contents Footnote Index 11. ACCRUED AND OTHER LIABILITIES Other accrued liabilities consist of the following: September 29, 2021 June 30, 2021 Property tax $ 27.7 $ 22.4 Current installments of finance leases 23.4 21.5 Insurance 21.4 21.7 Sales tax 17.2 23.2 Interest 13.5 6.9 Utilities and services 8.7 8.4 Other (1) 13.8 13.3 $ 125.7 $ 117.4 (1) Other primarily consists of guest deposits for Maggiano’s banquets, rent-related accruals, certain exit-related lease accruals, deferred franchise and development fees, charitable donations and other various accruals. Other liabilities consist of the following: September 29, 2021 June 30, 2021 Insurance $ 35.4 $ 35.0 Deferred payroll taxes (1) 27.2 27.2 Deferred franchise and development fees 10.2 10.4 Unrecognized tax benefits 2.7 3.5 Other 5.3 5.9 $ 80.8 $ 82.0 (1) Deferred payroll taxes consists of the second installment of the deferral of the employer portion of certain payroll related taxes as allowed under the CARES Act which is due on December 31, 2022. The first installment of $ 27.2 million, which is due on December 31, 2021, is recorded within Accrued payroll in the Consolidated Balance Sheets (Unaudited). 12. SHAREHOLDERS’ DEFICIT The changes in Total shareholders’ deficit during the thirteen week periods ended September 29, 2021 and September 23, 2020, respectively, were as follows: Thirteen Week Period Ended September 29, 2021 Common Stock Additional Paid-In Capital Accumulated Deficit Treasury Stock Accumulated Other Comprehensive Loss Total Balance at June 30, 2021 $ 7.0 $ 685.4 $ ( 266.1 ) $ ( 724.9 ) $ ( 4.7 ) $ ( 303.3 ) Net income — — 13.2 — — 13.2 Other comprehensive loss — — — — ( 0.4 ) ( 0.4 ) Dividends — — 0.0 — — 0.0 Stock-based compensation — 4.3 — — — 4.3 Purchases of treasury stock — ( 2.0 ) — ( 37.6 ) — ( 39.6 ) Issuances of treasury stock — ( 8.3 ) — 8.6 — 0.3 Balance at September 29, 2021 $ 7.0 $ 679.4 $ ( 252.9 ) $ ( 753.9 ) $ ( 5.1 ) $ ( 325.5 ) 17 Table of Contents Footnote Index Thirteen Week Period Ended September 23, 2020 Common Stock Additional Paid-In Capital Accumulated Deficit Treasury Stock Accumulated Other Comprehensive Loss Total Balance at June 24, 2020 $ 7.0 $ 669.4 $ ( 397.5 ) $ ( 751.8 ) $ ( 6.2 ) $ ( 479.1 ) Net income — — 10.7 — — 10.7 Other comprehensive income — — — — 0.3 0.3 Dividends — — 0.0 — — 0.0 Stock-based compensation — 3.9 — — — 3.9 Purchases of treasury stock — ( 1.1 ) — ( 2.8 ) — ( 3.9 ) Issuances of treasury stock — ( 9.0 ) — 12.0 — 3.0 Balance at September 23, 2020 $ 7.0 $ 663.2 $ ( 386.8 ) $ ( 742.6 ) $ ( 5.9 ) $ ( 465.1 ) Share Repurchases Our share repurchase program is used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings, and planned investment and financing needs. Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets (Unaudited). 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 August 2021, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $ 300.0 million. In the thirteen week period ended September 29, 2021, we repurchased 0.8 million shares of our common stock for $ 39.6 million, including 0.7 million shares purchased as part of our share repurchase program and 0.1 million shares purchased from team members to satisfy tax withholding obligations on the vesting of restricted shares. As of September 29, 2021, approximately $ 265.0 million was available under our share repurchase authorizations. Stock-based Compensation The following table presents the restricted share awards granted and related weighted average fair value per share amounts. Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Restricted share awards Restricted share awards granted 0.4 0.5 Weighted average fair value per share $ 53.76 $ 39.76 Dividends In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend in response to liquidity needs created by the COVID-19 pandemic. In the thirteen week periods ended September 29, 2021 and September 23, 2020, dividends paid were solely related to the accrued dividends for restricted share awards that were granted prior to the suspension and vested in the period. Restricted share award dividends are accrued in Other accrued liabilities for the current portion to vest within 12 months, and Other liabilities for the portion that will vest after one year. 18 Table of Contents Footnote Index 13. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for income taxes and interest is as follows: Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Income taxes, net of (refunds) $ 1.9 $ ( 2.1 ) Interest, net of amounts capitalized 3.1 5.5 Non-cash operating, investing and financing activities are as follows: Thirteen Week Periods Ended September 29, 2021 September 23, 2020 Operating lease additions (1) $ 60.0 $ 14.5 Finance lease additions 8.9 3.5 Accrued capital expenditures 6.2 6.4 Retirement of fully depreciated assets 7.9 2.5 (1) The thirteen week period ended September 29, 2021 primarily included operating lease additions associated with the 23 restaurants purchased from a former franchisee. Refer to Note 2 - Chili’s Restaurant Acquisition and to Note 9 - Leases for details. 14. CONTINGENCIES Lease Commitments We have, in certain cases, divested brands or sold restaurants to franchisees and have not been released from lease guarantees for the related restaurants. As of September 29, 2021 and June 30, 2021, we have outstanding lease guarantees or are secondarily liable for an estimated $ 28.4 million and $ 29.2 million, respectively. These amounts represent the known potential liability of future rent payments under the leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2022 through fiscal 2027. In the event of default under a lease by a franchisee or owner of a divested brand, the indemnity and default clauses in our agreements with such third parties and applicable laws govern our ability to pursue and recover amounts we may pay on behalf of such parties. We have received notices of default and have been named a party in lawsuits pertaining to some of these leases in circumstances where the current lessee did not pay its rent obligations. These lessees are in communication with the landlords to defer or resolve payments. We will continue to closely monitor this situation. Letters of Credit We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of September 29, 2021, we had $ 5.9 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next 12 months. Cyber Security Litigation In fiscal 2018, we discovered malware at certain Chili’s restaurants that may have resulted in unauthorized access or acquisition of customer payment card data. We settled all claims from payment card companies related to this incident and do not expect material claims in the future. The Company was also named as a defendant in a putative class action lawsuit in the United States District Court for the Middle District of Florida (the “Litigation”) relating to this incident. In the Litigation, plaintiffs assert various claims at the Company’s Chili’s restaurants involving customer payment card information and seek monetary damages in excess of $ 5.0 million, injunctive and declaratory relief, and attorney’s fees and costs. 19 Table of Contents Footnote Index On April 14, 2021, the district court issued an order granting in part and deferring in part Plaintiffs’ motion for class certification. The court certified a class on Plaintiffs’ negligence claim and a separate class on Plaintiffs’ California state Unfair Competition Law claims. On September 16, 2021, the Eleventh Circuit Court of Appeals granted Brinker’s petition seeking immediate discretionary review of the district court’s certification orders. We believe we have defenses and intend to continue defending the Litigation. As such, as of September 29, 2021, we have concluded that a loss, or range of loss, from this matter is not determinable, therefore, we have not recorded a liability related to the Litigation. We will continue to evaluate this matter based on new information as it becomes available. Legal Proceedings Evaluating contingencies related to litigation is a process involving judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Consolidated Financial Statements. We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on the consolidated financial condition or results of operations. 15. SUBSEQUENT EVENTS Chili’s Restaurant Acquisition On October 31, 2021, we acquired 36 Chili’s restaurants located in the Great Lakes and Northeast region of the United States that were owned by a franchisee. The purchase price of $ 55 million, excluding post-closing adjustments, was funded with availability under our existing revolving credit facility. The results of operations of these restaurants will be included in the consolidated financial statements from the date of acquisition beginning in the second quarter of fiscal 2022. We will evaluate the fair value of the assets and liabilities of the acquired restaurants through internal studies and third-party valuations, and we expect to complete a preliminary purchase price allocation in the second quarter of fiscal 2022.