Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our Company, our operations and our current operating environment. For an understanding of the significant factors that influenced our performance, the MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in Part II, Item 8 - Financial Statements and Supplementary Data of this report. Our MD&A consists of the following sections:
• 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, financing activity, and known trends that may impact liquidity, including off-balance sheet arrangements; and
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• Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates, including recent accounting pronouncements.
The following MD&A includes a discussion comparing our results in fiscal 2023 to fiscal 2022. For a discussion comparing our results from fiscal 2022 to fiscal 2021, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended June 29, 2022, filed with the SEC on August 26, 2022.
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States, and include the accounts of Brinker International, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We have a 52 or 53 week fiscal year ending on the last Wednesday in June. We utilize a 13 week accounting period for quarterly reporting purposes, except in years containing 53 weeks when the fourth quarter contains 14 weeks. Fiscal 2023 and Fiscal 2022, which ended on June 28, 2023 and June 29, 2022, respectively, each contained 52 weeks. Fiscal 2021, which ended on June 30, 2021, contained 53 weeks. All amounts within the MD&A are presented in millions unless otherwise specified.
OVERVIEW
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.
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.
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RESULTS OF OPERATIONS
The following table sets forth selected operating data:
Fiscal Years Ended
June 28, 2023 June 29, 2022
Dollars As a percentage (1)
Dollars As a percentage (1)
Revenues
Company sales $ 4,093.2 99.0 % $ 3,764.5 99.0 %
Franchise revenues 40.0 1.0 % 39.6 1.0 %
Total revenues 4,133.2 100.0 % 3,804.1 100.0 %
Operating costs and expenses
Food and beverage costs 1,146.3 28.0 % 1,048.5 27.9 %
Restaurant labor 1,389.3 34.0 % 1,288.1 34.2 %
Restaurant expenses 1,097.5 26.8 % 968.3 25.7 %
Depreciation and amortization 168.5 4.1 % 164.4 4.3 %
General and administrative 154.5 3.7 % 144.1 3.8 %
Other (gains) and charges 32.7 0.8 % 31.2 0.8 %
Total operating costs and expenses 3,988.8 96.5 % 3,644.6 95.8 %
Operating income 144.4 3.5 % 159.5 4.2 %
Interest expenses 54.9 1.3 % 46.1 1.2 %
Other income, net (1.3) 0.0 % (1.8) 0.0 %
Income before income taxes 90.8 2.2 % 115.2 3.0 %
(Benefit) Provision for income taxes (11.8) (0.3) % (2.4) (0.1) %
Net income $ 102.6 2.5 % $ 117.6 3.1 %
(1) Food and beverage costs, Restaurant labor and Restaurant expenses are calculated based on a percentage of Company sales. All others are calculated as a percentage of Total revenues.
Revenues
Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income to provide more clarity around Company-owned restaurant revenues and operating expenses trends:
• Company sales include revenues generated by the operation of Company-owned restaurants including 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.
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The following is a summary of the change in Total revenues:
Total Revenues
Chili’s Maggiano’s Total Revenues
Fiscal year ended June 29, 2022 $ 3,379.6 $ 424.5 $ 3,804.1
Change from:
Comparable restaurant sales (1)
220.3 68.3 288.6
Restaurant acquisitions (2)
52.6 — 52.6
Restaurant openings 27.7 — 27.7
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
Franchise revenues (4)
0.3 0.1 0.4
Fiscal year ended June 28, 2023 $ 3,646.1 $ 487.1 $ 4,133.2
(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. 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:
Comparable
Sales (1)
Price Impact Mix-Shift Impact (2)
Traffic Impact Restaurant Capacity (3)
Company-owned 8.1 % 9.0 % 4.4 % (5.3) % 1.7 %
Chili’s 7.0 % 9.2 % 4.7 % (6.9) % 1.8 %
Maggiano’s 17.3 % 7.9 % 2.8 % 6.6 % (2.1) %
Franchise (4)
9.6 %
U.S. 3.3 %
International 13.3 %
Chili’s domestic (5)
6.5 %
System-wide (6)
8.4 %
(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. Percentage amounts are calculated based on the comparable periods year-over-year.
(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.
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(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.
(4) Chili’s and Maggiano’s franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income; however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe presenting Franchise Comparable Restaurant Sales provides investors relevant information regarding total brand performance.
(5) Chili’s domestic Comparable Restaurant Sales percentages are derived from sales generated by Company-owned and franchise-operated Chili’s restaurants in the United States.
(6) System-wide Comparable Restaurant Sales are derived from sales generated by Chili’s and Maggiano’s Company-owned and franchise-operated restaurants.
Costs and Expenses
The following is a summary of the changes in Costs and Expenses:
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales
Food and beverage costs $ 1,146.3 28.0 % $ 1,048.5 27.9 % $ (97.8) (0.1) %
Restaurant labor 1,389.3 34.0 % 1,288.1 34.2 % (101.2) 0.2 %
Restaurant expenses 1,097.5 26.8 % 968.3 25.7 % (129.2) (1.1) %
Depreciation and amortization 168.5 164.4 (4.1)
General and administrative 154.5 144.1 (10.4)
Other (gains) and charges 32.7 31.2 (1.5)
Interest expenses 54.9 46.1 (8.8)
Other income, net (1.3) (1.8) (0.5)
As a percentage of Company sales:
• 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.
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Depreciation and amortization increased $4.1 million as follows:
Depreciation and Amortization
Fiscal year ended June 29, 2022 $ 164.4
Change from:
Additions for existing and new restaurant assets 22.0
Acquisition of Chili’s restaurants (1)
3.2
Corporate assets 1.8
Finance leases (3.2)
Retirements and fully depreciated restaurant assets (19.2)
Other (0.5)
Fiscal year ended June 28, 2023 $ 168.5
(1) Represents the incremental depreciation and amortization of the assets and finance leases related to the 68 Chili’s restaurants acquired in fiscal 2022.
General and administrative expenses increased $10.4 million as follows:
General and Administrative
Fiscal year ended June 29, 2022 $ 144.1
Change from:
Performance-based compensation (1)
7.3
Defined contribution plan employer expenses and other benefits 2.4
Payroll expenses 1.5
Travel and entertainment expenses 0.4
Stock-based compensation (2)
(4.4)
Other (3)
3.2
Fiscal year ended June 28, 2023 $ 154.5
(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.
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Other (gains) and charges consisted of the following (for further details, refer to Note 14 - Other Gains and Charges):
Fiscal Years Ended
June 28, 2023 June 29, 2022
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
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
Gain on sale of assets, net (3.7) —
Other 3.7 7.5
$ 32.7 $ 31.2
Interest expenses increased $8.8 million primarily due to higher interest rates and average borrowing balances on our revolving credit facility in fiscal 2023.
Income Taxes
Fiscal Years Ended
June 28, 2023 June 29, 2022
Effective income tax rate (13.0) % (2.1) %
The federal statutory tax rate was 21.0% for both fiscal 2023 and 2022. 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
Chili’s Segment
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022 Dollars %
Company sales $ 3,606.7 $ 3,340.5 $ 266.2 8.0 %
Franchise and other revenues 39.4 39.1 0.3 0.8 %
Total revenues $ 3,646.1 $ 3,379.6 $ 266.5 7.9 %
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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The following is a summary of the changes in Chili’s operating costs and expenses:
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales
Food and beverage costs $ 1,022.9 28.3 % $ 945.9 28.4 % $ (77.0) 0.1 %
Restaurant labor 1,232.3 34.2 % 1,146.5 34.3 % (85.8) 0.1 %
Restaurant expenses 966.2 26.8 % 849.8 25.4 % (116.4) (1.4) %
Depreciation and amortization 145.3 139.8 (5.5)
General and administrative 35.5 33.3 (2.2)
Other (gains) and charges 22.0 23.3 1.3
As a percentage of Company sales:
• 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:
Depreciation and Amortization
Fiscal year ended June 29, 2022 $ 139.8
Change from:
Additions for new and existing restaurant assets 20.3
Acquisition of Chili’s restaurants (1)
3.2
Finance leases (3.0)
Retirements and fully depreciated restaurant assets (14.7)
Other (0.3)
Fiscal year ended June 28, 2023 $ 145.3
(1) Represents the incremental depreciation and amortization of the assets and finance leases related to the 68 Chili’s restaurants acquired in fiscal 2022.
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Chili’s General and administrative increased $2.2 million as follows:
General and Administrative
Fiscal year ended June 29, 2022 $ 33.3
Change from:
Performance-based compensation 2.0
Payroll expenses 0.9
Defined contribution plan employer expenses and other benefits 0.7
Stock-based compensation (1.2)
Other (0.2)
Fiscal year ended June 28, 2023 $ 35.5
Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 14 - Other Gains and Charges):
Fiscal Years Ended
June 28, 2023 June 29, 2022
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
Gain on sale of assets, net (3.7) —
Other 2.5 5.5
$ 22.0 $ 23.3
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Maggiano’s Segment
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022 Dollars %
Company sales $ 486.5 $ 424.0 $ 62.5 14.7 %
Franchise revenues 0.6 0.5 0.1 20.0 %
Total revenues $ 487.1 $ 424.5 $ 62.6 14.7 %
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.
The following is a summary of the changes in Maggiano’s operating costs and expenses:
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales
Food and beverage costs $ 123.4 25.3 % $ 102.6 24.2 % $ (20.8) (1.1) %
Restaurant labor 157.0 32.3 % 141.6 33.4 % (15.4) 1.1 %
Restaurant expenses 130.4 26.8 % 117.9 27.8 % (12.5) 1.0 %
Depreciation and amortization 13.0 13.4 0.4
General and administrative 7.8 8.0 0.2
Other (gains) and charges 1.4 — (1.4)
As a percentage of Company sales:
• 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
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redemptions. 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.
Leases
At the inception of each lease, we evaluate the lease agreement to determine whether it is an operating or finance lease. The evaluation requires significant judgments in determining the fair value of the 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.
Income Taxes
We make certain estimates and judgments in the calculation of tax expenses, the resulting tax liabilities, and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement carrying amounts of existing assets and liabilities and their respective tax bases. When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.
We have recorded deferred tax assets reflecting the benefit of income tax credits and state loss carryforwards, which expire in varying amounts. Realization is dependent on generating sufficient taxable income in the relevant jurisdiction prior to expiration of the income tax credits and state loss carryforwards. Although realization is not assured, management believes it is more likely than not that the recognized deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income in the carryforward period are reduced.
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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
Cash Flows
Cash Flows from Operating Activities
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Net cash provided by operating activities $ 256.3 $ 252.2 $ 4.1
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.
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Cash Flows from Investing Activities
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Cash flows from investing activities
Payments for property and equipment $ (184.9) $ (150.3) $ (34.6)
Payments for franchise restaurant acquisitions — (106.6) 106.6
Proceeds from sale leaseback transactions, net of related expenses — 20.5 (20.5)
Proceeds from note receivable 4.5 2.1 2.4
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 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
Fiscal Years Ended Favorable (Unfavorable) Variance
June 28, 2023 June 29, 2022
Cash flows from financing activities
Borrowings on revolving credit facility $ 765.0 $ 720.5 $ 44.5
Payments on revolving credit facility (875.0) (620.5) (254.5)
Proceeds from issuance of long-term debt 350.0 — 350.0
Payments on long-term debt (322.1) (23.7) (298.4)
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 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 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
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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. Refer to Note 8 - Debt within Part II, Item 8 - Financial Statements and Supplementary Data for further information about our notes and revolving credit facility.
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. 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.
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 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
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.
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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 of June 28, 2023 are as follows:
Payments Due by Period
Less than 1 Year 1-3 Years 3-5 Years More than 5 Years Total
Long-term debt (1)
$ — $ 350.0 $ 161.3 $ 350.0 $ 861.3
Interest (2)
44.9 88.9 59.2 72.2 265.2
Finance leases (3)
13.7 20.4 15.1 40.1 89.3
Operating leases (3)
179.4 342.4 277.0 944.5 1,743.3
Purchase obligations (4)
30.0 38.3 2.5 — 70.8
(1) Long-term debt consists of principal amounts owed on the 5.000% and 8.250% notes and the revolving credit facility. As of June 28, 2023, $738.7 million of credit is available under the revolving credit facility. The revolving credit facility is due in August 2026.
(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 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. As of June 28, 2023, these total future lease payments included non-cancelable lease commitments of $63.6 million for finance leases and $1,067.6 million for operating leases.
(4) Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages, software and professional services contracts, as well as non-cancellable insurance premiums, and exclude agreements that are cancellable without significant penalty.
Off -Balance Sheet Arrangements
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.
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