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Item 7. Management’s Discussion and Analysis

2023-08-23 compared with 2022-08-26 · 158 added, 202 removed, 226 unchanged (61% of the section changed)

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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 and other trends impacting our business

• Overview - a brief description of our business and a discussion on the financial impact of COVID-19 and other trends impacting our business;

• 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

• Off-Balance Sheet Arrangements - a discussion of the off-balance sheet arrangements entered into by us

• Liquidity and Capital Resources - an analysis of cash flows, including capital expenditures, aggregate contractual obligations, financing activity, and known trends that may impact liquidity, including off-balance sheet arrangements;

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

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

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 ® .

The Company is 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.

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

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 and has resulted in significant adverse impacts to our guest traffic and sales primarily in fiscal 2021 and fiscal 2020.

In fiscal 2022, we have experienced limited product shortages and service disruptions in our supply chain, limited availability of labor to operate our restaurants due to a tight labor market and an increase in employee turnover.

It is possible that supply chain and labor shortages or disruptions could continue or increase in future periods if demand for goods, transportation and labor remains high.

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.

Impact of Inflation

In fiscal 2022, inflation did have a material impact on our operations resulting in an increase of high single digits to Food and beverage costs and Restaurant labor and we reasonably expect inflation to be in the mid-teens in fiscal 2023.

Increases in inflation could have a severe impact on the United States or global economies and have an adverse impact on our business, financial condition and results of operations.

If commodity pricing and labor costs increase significantly, we may not be able to adjust menu prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand.

External impacts to Our Operating Environment

During both fiscal 2022 and fiscal 2023, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and food and beverage costs.

Geopolitical and other macroeconomic events could lead to wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operation.

Such events could also negatively affect consumer spending potentially reducing guest traffic and/or reducing the average amount guests spend in our restaurants.

During fiscal 2023, all our domestic Company-owned and franchise restaurants operated with no restrictions.

During fiscal 2022, the continuing spread of COVID-19 cases (particularly the Omicron variant), significantly impacted our guest traffic and sales.

Many of our restaurants had face mask requirements and some of our restaurants had proof of vaccination requirements for our customers, team members or both.

RESULTS OF OPERATIONS

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Company sales $ 4,093.2 99.0 % $ 3,764.5 99.0 %

Franchise and other revenues 92.0 2.4 % 58.8 1.8 %

Franchise revenues 40.0 1.0 % 39.6 1.0 %

Total revenues 4,133.2 100.0 % 3,804.1 100.0 %

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Income before income taxes 90.8 2.2 % 115.2 3.0 %

Provision (benefit) for income taxes (2.4) (0.1) % 13.6 0.5 %

(Benefit) Provision for income taxes (11.8) (0.3) % (2.4) (0.1) %

Net income $ 102.6 2.5 % $ 117.6 3.1 %

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All others are calculated as a percentage of Total revenues.

(2) Fiscal 2021, which ended on June 30, 2021, contained 53 weeks.

The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues.

While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.

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

• Company sales include revenues generated by the operation of Company-owned restaurants including food and beverage sales, net of discounts, gift card breakage, Maggiano’s banquet service charge income, delivery, digital entertainment revenues, merchandise income and gift card discount costs from third-party gift card sales.

• Franchise revenues include royalties, franchise advertising fees, gift card equalization, and franchise and development fees.

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

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220.3 68.3 288.6

53rd week in Fiscal 2021 (62.5) (6.9) (69.4)

Restaurant acquisitions (2)

108.0 — 108.0

Restaurant openings 27.7 — 27.7

Restaurant relocations 0.5 — 0.5

Maggiano's banquet income — 4.3 4.3

Gift card discount costs 0.9 0.2 1.1

Gift card breakage (3)

(17.2) (2.4) (19.6)

Merchandise income 0.2 — 0.2

Digital entertainment revenues 2.7 — 2.7

Delivery service fee income (3.1) 0.6 (2.5)

Restaurant closures (17.9) (8.5) (26.4)

Company sales 266.2 62.5 328.7

Royalties (3)

Franchise fees and other revenues (4)

16.3 13.0 29.3

Franchise and other revenues 20.0 13.2 33.2

Franchise revenues (4)

Fiscal year ended June 28, 2023 $ 3,646.1 $ 487.1 $ 4,133.2

(1) Comparable restaurant sales increased due to higher dining room and delivery sales and traffic during fiscal 2022 partially offset by lower To-Go sales.

(1) Comparable restaurant sales increased due to menu price increases and favorable menu item mix, partially offset by lower traffic.

(2) We acquired 68 Chili’s restaurants from three former franchisees in fiscal 2022.

The revenues generated by these restaurants since each respective acquisition date are included in Company sales.

(3) Royalties are based on franchise sales and our franchisees generated sales of approximately $814.7 million in fiscal 2022 and $780.7 million including $18.1 million from the additional operating week in fiscal 2021.

(4) Franchise fees and other revenues increased primarily due to incremental gift card breakage resulting from a change in estimate.

Restaurant acquisitions includes revenues of acquired restaurants until the restaurant has been in operation for more than 18 months.

(3) Gift card breakage decreased primarily due to a prior year change in estimate to increase the breakage rate on certain aged sales years.

(4) Our Chili’s and Maggiano’s franchisees generated sales of approximately $876.0 million and $10.6 million respectively in fiscal 2023 compared to $806.2 million and $8.5 million respectively in fiscal 2022.

The table below presents the percentage change in comparable restaurant sales and restaurant capacity for fiscal 2023 compared to fiscal 2022:

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System-wide (6)

(1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months.

(1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 full months.

Restaurants temporarily closed 14 days or more are excluded from Comparable Restaurant Sales.

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

(3) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year, including the effect of the acquisition of 68 Chili’s restaurants in fiscal 2022.

(3) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year, including the effect of the acquisitions completed during fiscal 2022.

No adjustments have been made to capacity for temporary closures.

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As a percentage of Company sales:

• Food and beverage costs increased 1.8%, consisting of 2.4% of higher poultry, meat and other commodity costs due to supply chain constraints and inflationary pressures and 0.3% of unfavorable menu item mix, partially offset by 0.9% of favorable menu pricing.

• Restaurant labor increased 0.9%, consisting of 1.6% of higher hourly restaurant labor costs primarily due to increased wage rates, training and overtime and 0.5% of higher manager salaries and training resulting from merit increases and greater than normal manager turnover, partially offset by 1.0% of sales leverage and 0.2% of lower manager bonus expenses.

• Restaurant expenses decreased 0.1%, consisting of 1.6% of sales leverage and 0.4% of lower delivery fee expenses due to changes in sales channel mix, partially offset by 0.5% of higher repairs and maintenance expenses, 0.4% of higher utilities expenses, 0.3% of higher advertising expenses, 0.2% of higher workers’ compensation and general liability expenses and 0.5% of higher other restaurant expenses.

• Food and beverage costs increased 0.1%, including 3.3% of higher poultry, meat, produce and other commodity costs resulting from inflationary pressures, partially offset by 2.4% of favorable menu pricing and 0.8% of favorable menu item mix.

• Restaurant labor decreased 0.2%, including 2.5% of sales leverage and 0.2% of lower other restaurant labor, partially offset by 1.4% of higher hourly restaurant wages due to increased staffing levels and higher wage rates and 1.1% of higher manager salaries and bonus expenses.

• Restaurant expenses increased 1.1%, driven by 0.8% of higher repairs and maintenance, 0.5% of higher advertising, 0.3% of higher utilities, 0.3% of higher workers’ compensation and general liability insurance, 0.2% of higher rent and 0.5% of higher other restaurant expenses.

These increases were partially offset by 1.5% of sales leverage.

Depreciation and amortization increased $4.1 million as follows:

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Acquisition of Chili’s restaurants (1)

Finance leases 4.9

Corporate assets 1.8

Finance leases (3.2)

Retirements and fully depreciated restaurant assets (19.2)

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Fiscal year ended June 29, 2022 $ 144.1

Defined contribution plan employer expenses (1)

Payroll-related expenses 3.2

Professional fees 3.2

Performance-based compensation (1)

Defined contribution plan employer expenses and other benefits 2.4

Payroll expenses 1.5

Travel and entertainment expenses 0.4

Recruiting 1.3

Stock-based compensation (2)

Performance-based compensation (2)

Fiscal year ended June 28, 2023 $ 154.5

(1) Defined contribution plan employer expenses increased due to the reinstatement of employer matching contributions related to the Company’s 401(k) plan that were temporarily suspended from May 2020 through December 2020.

Employer matching contributions were reinstated beginning January 1, 2021.

(2) Performance based compensation decreased in fiscal 2022 due to lower business performance metrics compared to targets.

(1) Performance-based compensation increased in fiscal 2023 due to higher business performance metrics compared to targets.

(2) Stock-based compensation decreased primarily due to the reversal in the second quarter of fiscal 2023 of performance-based award expense as certain performance targets are no longer expected to be achieved.

(3) Other increased primarily due to an increase in professional consulting fees and costs related to IT initiatives.

Other (gains) and charges consisted of the following (for further details, refer to Note 14 - Other Gains and Charges):

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June 28, 2023 June 29, 2022

Restaurant impairment charges $ 8.3 $ 3.0

Remodel-related costs 4.9 2.3

Restaurant closure charges 3.7 2.4

Lease contingencies 3.1 2.2

Restaurant level impairment charges $ 12.1 $ 8.5

Restaurant closure asset write-offs and charges 8.3 3.7

Enterprise system implementation costs 4.7 2.4

Acquisition-related costs, net 1.6 —

Severance and other benefit charges 3.7 —

Lease contingencies 2.0 3.1

Remodel-related asset write-off 1.1 4.9

Loss from natural disasters, net of (insurance recoveries) 0.8 1.1

COVID-19 related charges 0.5 3.3

Gain on sale of assets, net (3.7) —

Other 3.7 7.5

$ 32.7 $ 31.2

Interest expenses decreased $10.1 million due to lower interest rates and average borrowing balances on our revolving credit facility in fiscal 2022.

Interest expenses increased $8.8 million primarily due to higher interest rates and average borrowing balances on our revolving credit facility in fiscal 2023.

Fiscal Years Ended

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Our effective income tax rates for fiscal 2023 and 2022 were lower than the federal statutory tax rate primarily due to the leverage of the FICA tip tax credit relative to Income before income taxes.

The higher tax benefit in fiscal 2023 is primarily due to an increased leverage of the FICA tip tax credit against a lower Income before incomes taxes compared to fiscal 2022.

Segment Results

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Fiscal Years Ended Favorable (Unfavorable) Variance

June 29, 2022 June 30, 2021 (1)

June 28, 2023 June 29, 2022 Dollars %

Company sales $ 3,606.7 $ 3,340.5 $ 266.2 8.0 %

Royalties 34.0 30.3 3.7 12.2 %

Franchise fees and other revenues 40.2 23.9 16.3 68.2 %

Franchise and other revenues 39.4 39.1 0.3 0.8 %

Total revenues $ 3,646.1 $ 3,379.6 $ 266.5 7.9 %

(1) Fiscal 2021, which ended on June 30, 2021, contained 53 weeks.

The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues.

While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.

Chili’s Total revenues increased 10.4% primarily due to dining room sales growth, the acquisition of 68 Chili’s restaurants from three former franchisees, higher delivery sales, and five new restaurant openings, partially offset by decreased To-Go sales.

Chili’s Total revenues increased 7.9% primarily due to increased menu pricing, favorable menu item mix and the acquisition of 68 Chili’s restaurants from three former franchisees, partially offset by lower traffic.

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

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As a percentage of Company sales:

• Chili’s Food and beverage costs increased 1.9%, including 2.7% of higher poultry, meat and other commodity costs resulting from supply chain constraints and inflationary pressures, partially offset by 0.8% of increased menu pricing.

• Chili’s Restaurant labor increased 1.0%, including 1.5% of higher restaurant hourly labor costs primarily due to increased wage rates, training and overtime and 0.6% of higher manager salaries and training due to merit increases and greater than normal manager turnover, partially offset by 0.7% of sales leverage, 0.3% of lower manager bonus expenses and 0.1% of lower other restaurant labor costs.

• Chili’s Restaurant expenses increased 0.2%, including 0.4% of higher repairs and maintenance expenses, 0.4% of higher utilities expenses, 0.3% of higher rent expenses, 0.3% of higher advertising expenses and 0.3% of higher other restaurant expense.

These increases were partially offset by 1.1% of sales leverage, and 0.4% of lower delivery fee expenses due to changes in sales channel mix.

• Chili’s Food and beverage costs decreased 0.1%, including 2.5% of favorable menu pricing and 1.0% of favorable menu item mix, partially offset by 3.4% of higher poultry, meat, produce and other commodity costs resulting from inflationary pressures.

• Chili’s Restaurant labor decreased 0.1%, including 2.4% of sales leverage and 0.1% of lower other restaurant labor, partially offset by 1.2% of higher restaurant hourly wages and 1.2% of higher manager salaries and bonus expenses.

• Chili’s Restaurant expenses increased 1.4%, driven by 0.8% of higher repairs and maintenance, 0.6% of higher advertising, 0.3% of higher workers’ compensation and general liability insurance, 0.2% of higher utilities, 0.2% of higher rent, and 0.5% of higher other restaurant expense.

These increases were partially offset by 1.2% of sales leverage.

Chili’s Depreciation and amortization increased $5.5 million as follows:

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Fiscal year ended June 29, 2022 $ 33.3

Defined contribution plan employer expenses (1)

Recruiting 1.2

Payroll-related expenses 0.9

Travel and entertainment expenses 0.7

Professional fees 0.1

Stock-based compensation 0.1

Performance-based compensation 2.0

Payroll expenses 0.9

Defined contribution plan employer expenses and other benefits 0.7

Stock-based compensation (1.2)

Fiscal year ended June 28, 2023 $ 35.5

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 14 - Other Gains and Charges):

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June 28, 2023 June 29, 2022

Restaurant impairment charges $ 8.1 $ 2.6

Remodel-related costs 4.8 2.3

Restaurant closure charges 3.6 2.2

Acquisition of franchise restaurants-related costs 1.6 —

Restaurant level impairment charges $ 12.1 $ 8.3

Restaurant closure asset write-offs and charges 7.3 3.6

Severance and other benefit charges 1.9 —

Remodel-related asset write-off 1.1 4.8

Loss from natural disasters, net of (insurance recoveries) 0.8 1.1

COVID-19 related charges 0.3 2.7

Gain on sale of assets, net (3.7) —

Other 2.5 5.5

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Fiscal Years Ended Favorable (Unfavorable) Variance

June 29, 2022 June 30, 2021 (1)

June 28, 2023 June 29, 2022 Dollars %

Company sales $ 486.5 $ 424.0 $ 62.5 14.7 %

Royalties 0.4 0.2 0.2 100.0 %

Franchise fees and other revenues 17.4 4.4 13.0 295.5 %

Franchise and other revenues 17.8 4.6 13.2 287.0 %

Franchise revenues 0.6 0.5 0.1 20.0 %

Total revenues $ 487.1 $ 424.5 $ 62.6 14.7 %

(1) Fiscal 2021, which ended on June 30, 2021, contained 53 weeks.

The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues.

While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.

Maggiano’s Total revenues increased 52.8% primarily due to higher dining and banquet room sales and traffic.

Maggiano’s Total revenues increased 14.7% primarily due to increased menu pricing, favorable menu item mix and higher traffic.

Total banquet income increased $4.3 million in fiscal 2023 compared to fiscal 2022 as our banquet business recovered from the effects of the COVID-19 pandemic.

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

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As a percentage of Company sales:

• Maggiano’s Food and beverage costs increased 1.7%, including 2.2% of unfavorable commodity pricing, partially offset by 0.4% of increased menu pricing and 0.1% of favorable menu item mix.

• Maggiano’s Restaurant labor increased 0.4%, including 3.1% of higher restaurant hourly labor costs primarily due to increased wage rates, training and overtime, and 1.9% of higher manager salaries, training and bonus expenses, partially offset by 4.6% of sales leverage.

• Maggiano’s Restaurant expenses decreased 4.7%, including 8.8% of sales leverage, partially offset by 1.4% of higher supervision expenses, 0.9% of higher repairs and maintenance expenses, 0.9% of higher advertising expenses, 0.6% of higher utilities expenses and 0.3% of higher rent expenses.

• Maggiano’s Food and beverage costs increased 1.1%, including 2.1% of unfavorable commodity pricing and 0.2% of unfavorable menu item mix, partially offset by 1.2% of favorable menu pricing.

• Maggiano’s Restaurant labor decreased 1.1%, including 4.2% of sales leverage, 0.2% of lower manager bonus and 0.1% of other restaurant labor, partially offset by 2.8% of higher restaurant hourly wages and 0.6% of higher manager salaries.

• Maggiano’s Restaurant expenses decreased 1.0%, driven by 2.5% of sales leverage, partially offset by 0.5% of higher delivery fees and to-go supplies, 0.4% of higher repairs and maintenance, 0.2% of higher workers’ compensation and general liability insurance and 0.4% of higher other restaurant expenses.

Maggiano’s Other (gains) and charges primarily consisted of restaurant closure asset write offs and charges, refer to Note 14 - Other Gains and Charges)

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 and is estimated based on our historical gift card redemption patterns and actuarial estimates.

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

We recognize breakage income in Franchise 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 breakage attributable to gift cards sold in fiscal 2023 by 50 basis points would result in an impact to the Consolidated Statements of Comprehensive Income of approximately $0.6 million on the current year.

Valuation of Long-Lived Assets

We review the carrying amount of property, equipment and lease assets on an annual basis or more often if events or circumstances indicate that the carrying amount may not be recoverable.

The impairment test is a two-step process.

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

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

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

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

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

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

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

The evaluation requires significant judgments in determining the fair value of the lease 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 lease asset and lease liability at inception;

or reasonably certain lease terms at inception.

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 (Benefit) Provision 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.

Effect of New Accounting Standards

The impact of new accounting pronouncements can be found at 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.

LIQUIDITY AND CAPITAL RESOURCES

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Net cash provided by operating activities $ 256.3 $ 252.2 $ 4.1

Net cash provided by operating activities decreased due to the current year repayment of the first installment of $27.2 million of payroll taxes that were previously deferred under the CARES Act, an increase in payments of performance based compensation and bonuses in the current year, and the timing of operational receipts and payments.

Net cash provided by operating activities increased due to a decrease in payments of performance-based compensation in the current year and the timing of operational receipts and payments, partially offset by an increase in income tax payments, net of refunds received and a decrease in operating income.

Cash Flows from Investing Activities

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Proceeds from sale of assets 5.5 0.1 5.4

Insurance recoveries 0.7 — 0.7

Net cash used in investing activities $ (174.2) $ (234.2) $ 60.0

Net cash used in investing activities increased primarily due to $106.6 million of cash consideration paid for the purchase of 68 Chili’s restaurants from three former franchisees, partially offset by proceeds of $20.5 million received from the sale leaseback transactions on six of the acquired restaurants.

Additionally, capital expenditures increased in fiscal 2022 primarily for equipment purchases and an increase in the pace of the Chili’s remodel initiative.

Net cash used in investing activities decreased primarily due to $106.6 million of cash consideration paid for the purchase of 68 Chili’s restaurants in fiscal 2022, partially offset by proceeds of $20.5 million received from the sale leaseback transactions on six of the acquired restaurants in fiscal 2022.

Additionally, capital expenditures increased in fiscal 2023 primarily for construction of new restaurants, new equipment purchases, and increased capital maintenance, partially offset by the reduction in scope of the Chili’s remodel initiative and reduced technology spend.

Cash Flows from Financing Activities

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Payments on revolving credit facility (875.0) (620.5) (254.5)

Purchases of treasury stock (100.9) (4.2) (96.7)

Proceeds from issuance of long-term debt 350.0 — 350.0

Payments on long-term debt (322.1) (23.7) (298.4)

Payments of dividends (1.1) (1.5) 0.4

Purchases of treasury stock (5.0) (100.9) 95.9

Proceeds from issuance of treasury stock 12.5 0.4 12.1

Payments for debt issuance costs (5.3) (3.1) (2.2)

Payments of dividends (0.6) (1.1) 0.5

Net cash used in financing activities $ (80.5) $ (28.4) $ (52.1)

Net cash used in financing activities decreased primarily due to $100.0 million of net borrowing activity in fiscal 2022 compared to $301.6 million of net repayment activity in fiscal 2021 on the revolving credit facility, partially

offset by an increase in share repurchases following the reinstatement of the share repurchase program in August 2021 and a decrease in proceeds from employee stock option exercises.

Net cash used in financing activities increased primarily due to the payoff of the $300.0 million 3.875% notes and $110.0 million of net repayment activity in fiscal 2023 compared to $100.0 million of net borrowing activity in fiscal 2022 on the revolving credit facility, partially offset by proceeds from issuance of the $350.0 million 8.250% notes (the “2030 Notes”), a decrease in share repurchases and an increase in proceeds from employee stock option exercises.

Revolving Credit Facility

On August 18, 2021, we amended our existing $1.0 billion revolving credit facility to an $800.0 million revolving credit facility.

Net borrowings of $100.0 million were drawn during fiscal 2022 on the revolving credit facility.

As of June 29, 2022, $528.7 million was available under the new revolving credit facility.

The $800.0 million revolving credit facility, as amended, 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 June 29, 2022, our interest rate was 3.375% consisting of LIBOR of 1.625% plus the applicable margin of 1.750%.

During fiscal 2022, we incurred and capitalized $3.1 million of debt issuance costs associated with the new revolver, which are included in Other assets in the Consolidated Balance Sheets.

On May 2, 2023, we amended our $800.0 million revolving credit facility to increase the capacity to $900.0 million and to adopt SOFR as the new benchmark rate, replacing LIBOR.

During fiscal 2023, we incurred and capitalized $0.5 million of debt issuance costs associated with the revolving credit facility, which are included in Other assets in the Consolidated Balance Sheets.

The $900.0 million revolving credit facility, as amended, matures on August 18, 2026 and bears interest of SOFR 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 June 28, 2023, our interest rate was 6.952% consisting of SOFR

of 5.102% plus the applicable margin and spread adjustment of 1.850%.

As of June 28, 2023, there was $738.7 million of borrowing capacity under the revolving credit facility.

On May 15, 2023, our $300.0 million 3.875% notes matured and the payoff was funded with borrowings from our revolving credit facility.

On June 27, 2023, we issued $350.0 million of 8.250% senior notes due July 15, 2030 and used $340.0 million of the proceeds to reduce outstanding borrowings on the revolver.

The 2030 Notes require semi-annual interest payments in arrears, on each January 15 and July 15, beginning on January 15, 2024.

During fiscal 2023, we incurred and capitalized $5.7 million of debt issuance costs associated with the 2030 Notes, which are included in Long-term debt and finance leases, less current installments in the Consolidated Balance Sheets.

As of June 28, 2023, we were in compliance with our covenants pursuant to the $900.0 million revolving credit facility and under the terms of the indentures governing our 2024 Notes and 2030 Notes.

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Share Repurchase Program

In fiscal 2022, our Board of Directors approved a $300.0 million share repurchase program, and the Company repurchased 2.3 million shares of our common stock for $96.0 million.

The Company did not repurchase any shares under the repurchase program in fiscal 2023.

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.

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

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 million.

In fiscal 2022, we repurchased 2.4 million shares of our common stock for $100.9 million, including 2.3 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.

In fiscal 2023, we repurchased 0.1 million shares of our common stock for $5.0 million, all of which were purchased from team members to satisfy tax withholding obligations on the vesting of restricted shares.

These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan.

On June 28, 2023, we had $204.0 million of authorized repurchases remaining under the share repurchase program.

Dividend Program

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 fiscal 2022 and fiscal 2021, dividends paid were solely related to the accrued dividends for restricted share awards that were granted prior to the suspension and vested in the applicable period.

Restricted share award dividends were recorded 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.

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

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 the COVID-19 pandemic.

Future decisions to reinstate the dividend program to pay, or to increase or decrease dividends, are at the discretion of the Board of Directors and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of our revolving credit facility and applicable law, and such other factors that the Board of Directors considers relevant.

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.

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.

Cash flow from operations typically provides the company with a significant source of liquidity.

During fiscal 2023, all our domestic Company-owned and franchise restaurants operated with no state or local restrictions.

Additionally, during fiscal 2023, we increased the capacity under our revolving credit facility by $100.0 million and issued new $350.0 million senior notes that mature in 2030.

As a result of uncertainties in the near-term macro environment, including supply chain challenges, and commodity and labor inflation, we continue to focus on cash flow generation and maintaining a solid and flexible financial position to execute our long-term strategy of investing in our business.

We continue to monitor the macro environment and will adjust our overall approach to capital allocation, including share repurchases, as events and macroeconomic trends unfolds.

Based on the current level of operations, we believe that our current cash and cash equivalents, coupled with cash generated from operations and availability under our existing revolving credit facility will be adequate to meet our capital expenditure and working capital needs for at least the next twelve months, including the repayment of current debt obligations.

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 29, 2022 are as follows:

Payments due under our contractual obligations for outstanding indebtedness, leases and purchase obligations as of June 28, 2023 are as follows:

Payments Due by Period

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(1) Long-term debt consists of principal amounts owed on the 5.000% and 8.250% notes and the revolving credit facility.

The $300.0 million 3.875% notes mature in May 2023 and are expected to be paid using availability under the revolving credit facility.

As a result of our intent and ability to refinance these notes through our existing revolving credit facility, the notes are classified as long-term debt in the Consolidated Balance Sheets on June 29, 2022.

As of June 28, 2023, $738.7 million of credit is available under the revolving credit facility.

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(2) Interest consists of remaining interest payments on the 5.000% and 8.250% notes totaling $230.2 million and remaining interest payments on the revolver totaling $35.0 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 $271.3 million until May 2023 when the 3.875% notes will be paid using availability under the revolver, and then will increase to $571.3 million until the maturity date of August 18, 2026 using the interest rate of 3.375%, which is the total of LIBOR plus our applicable margin as of June 29, 2022.

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

We have assumed that the revolver balance carried will be $161.3 million until the maturity date of August 18, 2026 using the interest rate of 6.952%, which is the total of SOFR plus our applicable margin as of June 28, 2023.

(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.

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and the approximate timing of the transaction.

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

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

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 7 - Leases and have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 9 - 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

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 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 breakage attributable to gift cards sold in fiscal 2022 by 50 basis points would result in an impact to the Consolidated Statements of Comprehensive Income of approximately $0.7 million on the current year.

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 29, 2022 was $195.1 million, which related to both of our reporting units.

We performed our annual impairment test in the second quarter of fiscal 2022 by utilizing the qualitative approach and determined that there were no events or circumstances to indicate that it was more likely than not that the fair value of our reporting units was less than their carrying values.

Additionally, no indicators of impairment were identified through the end of fiscal 2022.

Our 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 COVID-19 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.