As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/06/06  Brinker International Inc         10-Q       12/28/05    7:1.1M                                   Merrill Corp-MD/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report Pursuant to Sections 13 or 15(D)   HTML    525K 
 2: EX-10.(A)   Material Contracts                                  HTML     60K 
 3: EX-10.(B)   Material Contracts                                  HTML     54K 
 4: EX-31.(A)   302 Certification                                   HTML     15K 
 5: EX-31.(B)   302 Certification                                   HTML     15K 
 6: EX-32.(A)   906 Certification                                   HTML      9K 
 7: EX-32.(B)   906 Certification                                   HTML      9K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended December 28, 2005

 

Commission File Number 1-10275

 

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE		75-1914582
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

6820 LBJ FREEWAY, DALLAS, TEXAS  75240

(Address of principal executive offices)

(Zip Code)

 

(972) 980-9917

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ý         No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ý   Accelerated filer  o   Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o         No  ý

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at February 1, 2006
Common Stock, $0.10 par value		85,714,210 shares

 

 

BRINKER INTERNATIONAL, INC.

Notes to Consolidated Financial Statements

(Unaudited)

 

1.              BASIS OF PRESENTATION

 

The consolidated financial statements of Brinker International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) as of December 28, 2005 and June 29, 2005 and for the thirteen week and twenty-six week periods ended December 28, 2005 and December 29, 2004, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The Company owns, operates, or franchises various restaurant brands under the names of Chili’s Grill & Bar (“Chili’s”), Romano’s Macaroni Grill (“Macaroni Grill”), Maggiano’s Little Italy (“Maggiano’s”), On The Border Mexican Grill & Cantina (“On The Border”), and Corner Bakery Cafe (“Corner Bakery”).  In September 2005, the Company entered into an agreement to sell Corner Bakery.  As a result, Corner Bakery is presented as discontinued operations in the accompanying consolidated financial statements.

 

The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the interim operating results 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 accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the June 29, 2005 Form 10-K. Management believes that the disclosures are sufficient for interim financial reporting purposes.

 

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal 2006 classifications.  These reclassifications have no effect on the Company’s net income or financial position as previously reported.

 

2.              STOCK-BASED COMPENSATION

 

Prior to fiscal 2006, the Company accounted for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”), and adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”  Under APB 25, no stock-based compensation cost was reflected in net income for grants of stock options prior to fiscal 2006 because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant.

 

Effective June 30, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123R”), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options.  Stock-based compensation for the first two quarters of fiscal 2006 includes compensation expense, recognized over the applicable vesting periods, for new share-based awards and for share-based awards granted prior to, but not yet vested, as of June 29, 2005.  Stock-based compensation totaled approximately $11.4 million and $632,000 for the second quarter of fiscal 2006 and 2005, respectively, and $19.2 million and $1.2 million for year-to-date fiscal 2006 and 2005, respectively.  The total income tax benefit related to stock-based compensation was approximately $2.5 million and $221,000 during the second quarter of fiscal 2006 and 2005, respectively, and $4.4 million and $435,000 for year-to-date fiscal 2006 and 2005, respectively.

 

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Under APB 25, pro-forma expense for stock options was calculated using a graded-vesting schedule over the applicable vesting period, which generally ranged from 2 to 4 years.  Upon adoption of SFAS 123R, the Company records compensation expense using a graded-vesting schedule over the applicable vesting period, or to the date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach).  Had the Company used the fair value based accounting method for stock-based compensation prescribed by SFAS No. 123, the Company’s net income and earnings per share for the second quarter and year-to-date of fiscal 2005 would have been reduced to the pro-forma amounts illustrated as follows (in thousands, except per share amounts):

 

		Thirteen Week Period Ended December 29, 2004			Twenty-Six Week Period Ended December 29, 2004
Net income - as reported		$	41,403		$	55,312
Add: Reported stock-based compensation expense, net of taxes		411			808
Deduct: Fair value based compensation expense, net of taxes (1)		(5,105		)	(9,831		)
Net income - pro-forma (1)		$	36,709		$	46,289
Earnings per share:
Basic - as reported		$	0.47		$	0.62
Basic - pro-forma (1)		$	0.42		$	0.52
Diluted - as reported		$	0.44		$	0.59
Diluted - pro-forma (1)		$	0.39		$	0.50

 

(1)          If pro-forma expense had been derived using the non-substantive vesting period approach, total stock-based compensation for the second quarter and year-to-date of fiscal 2005 would have been $6.8 million, net of tax, and $10.3 million, net of tax, respectively.  Pro-forma net income for the second quarter and year-to-date of fiscal 2005 would have been $35.0 million and $45.8 million, respectively.  Additionally, basic pro-forma earnings per share for the second quarter and year-to-date of fiscal 2005 would have been $0.40 and $0.52, respectively.  Diluted pro-forma earnings per share for the second quarter and year-to-date of fiscal 2005 would have been $0.38 and $0.50, respectively.

 

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(a)          Stock Options

 

Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 to 10 years.  Transactions during the first two quarters of fiscal 2006 were as follows (in thousands, except option prices and years):

 

		Number of Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Options outstanding at June 29, 2005		9,177		$	29.93
Granted		455		38.62
Exercised		(610	)	25.90
Forfeited		(343	)	32.65
Options outstanding at December 28, 2005		8,679		$	30.56		7.22		$	73,335
Options exercisable at December 28, 2005		4,608		$	27.46		5.99		$	53,231

 

The intrinsic value of options exercised totaled approximately $6.0 million and $7.2 million during the second quarter of fiscal 2006 and 2005, respectively, and $8.0 million and $14.4 million during the first two quarters of fiscal 2006 and 2005, respectively.  The weighted average fair values of stock option grants were $11.52 and $11.42 for the second quarter of fiscal 2006 and 2005, respectively, and $11.51 and $11.42 for year-to-date fiscal 2006 and 2005, respectively.

 

The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

 

		Thirteen Week Periods Ended				Twenty-Six Week Periods Ended
		December 28, 2005		December 29, 2004		December 28, 2005		December 29, 2004
Expected volatility		28.9%		31.2%		28.9%		31.2%
Risk-free interest rate		4.2%		3.4%		4.2%		3.4%
Expected lives		5 years		5 years		5 years		5 years
Dividend yield		1.1%		0.0%		1.1%		0.0%

 

Expected volatility and the expected life of stock options are based on historical experience.  The risk-free rate is based on the yield of a five-year Treasury Note.

 

(b)          Restricted Share Awards

 

In October 2005, the shareholders of the Company approved the Performance Share Plan and the Restricted Stock Unit Plan (the “Plans”).  The restricted share awards issued under the Plans represent a right to receive a certain number of shares of common stock upon satisfaction of performance goals or other specified metrics at the end of a three-year cycle.  Payouts made in common stock will be fully vested upon issuance.  The fair value of performance shares is determined on the date of grant based on a Monte Carlo simulation model and the fair value of restricted stock units is determined based on the Company’s closing stock price on the date of grant.  Expense related to performance shares and restricted stock units is recognized ratably over the three-year vesting period, or to the date on which retirement eligibility is achieved, if shorter.

 

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Other restricted share awards include restricted stock and restricted stock units issued under the Company’s stock option and incentive plans.  Restricted share awards issued under the Company’s long-term incentive plans vest one-third per year beginning on the first or third anniversary of the date of grant, and restricted share awards issued to non-employee directors vest in full on the fourth anniversary of the date of grant.  The fair value of restricted share awards is based on the Company’s closing stock price on the date of grant.

 

Transactions during the first two quarters of fiscal 2006 were as follows (in thousands, except fair values):

 

		Number of Restricted Share Awards		Weighted Average Fair Value Per Award
Restricted share awards outstanding at June 29, 2005		137		$	34.60
Granted		961		35.04
Vested		(74	)	34.50
Forfeited		(28	)	35.17
Restricted share awards outstanding at December 28, 2005		996		$	35.02

 

At December 28, 2005, unrecognized compensation expense related to restricted share awards totaled approximately $24.9 million and will be recognized over a weighted average period of 3.3 years.

 

3.              EARNINGS PER SHARE

 

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings 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 number of shares is increased by the dilutive effect of stock options and restricted share awards determined using the treasury stock method and convertible debt.  The Company had approximately 2.3 million and 2.6 million stock options outstanding at December 28, 2005 and December 29, 2004, respectively, that were not included in the dilutive earnings per share calculation because the effect would have been antidilutive.  The components of basic and diluted earnings per share are as follows:

 

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		Thirteen Week Periods Ended									Twenty-Six Week Periods Ended
		December 28, 2005						December 29, 2004			December 28, 2005			December 29, 2004
Income from continuing operations (a)		$				39,370		$	40,820		$	77,812		$	56,496
Adjustment for interest on convertible debt, net of tax		—						1,182			—			2,325
Income from continuing operations, as adjusted (b)		$			39,370			$	42,002		$	77,812		$	58,821
Basic weighted average shares outstanding (c)		85,980						87,505			86,909			88,633
Dilutive effect of stock options		1,638						1,166			1,508			1,166
Dilutive effect of convertible debt		—						7,800			—			7,800
Diluted weighted average shares outstanding (d)		87,618						96,471			88,417			97,599
Basic earnings per share from continuing operations (a)/(c)		$		0.46				$	0.47		$	0.90		$	0.64
Diluted earnings per share from continuing operations (b)/(d)		$	0.45					$	0.44		$	0.88		$	0.60

 

4.              DISPOSITION OF CORNER BAKERY

 

In September 2005, the Company entered into an agreement to sell Corner Bakery.  The decision to sell the brand was a result of the Company’s continued focus on maximizing returns on investment.  As of December 28, 2005, the net assets to be sold totaled approximately $65.1 million and consisted primarily of property and equipment of $63.7 million, as well as liabilities of $7.4 million primarily associated with severance and selling costs that will be paid by the Company in connection with the disposition.  The sale was completed in February 2006.  The Company has reported the results of operations of Corner Bakery as discontinued operations which consist of the following:

 

		Thirteen Week Periods Ended								Twenty-Six Week Periods Ended
		December 28, 2005					December 29, 2004			December 28, 2005			December 29, 2004
Revenues		$			47,565		$	41,072		$	91,940		$	80,585
Income (loss) before income tax (expense) benefit from discontinued operations		$		6,547			$	930		$	10,853		$	(1,890	)
Income tax (expense) benefit		(2,462				)	(347		)	(4,081		)	706
Net income (loss) from discontinued operations		4,085					583			6,772			(1,184		)
Loss on sale of Corner Bakery, net of taxes (1)		(578				)	—			(9,953		)	—
Income (loss) from discontinued operations		$	3,507				$	583		$	(3,181	)	$	(1,184	)

 

(1)          The sale of Corner Bakery is expected to result in a taxable gain due to $11.0 million of goodwill not being deductible for tax purposes.  The $10.0 million loss includes tax expense totaling $634,000.

 

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5.              SHAREHOLDERS’ EQUITY

 

In August 2005, the Board of Directors authorized an increase in the stock repurchase plan of $150.0 million, bringing the total to $1,160.0 million.  Pursuant to the Company’s stock repurchase plan, the Company repurchased approximately 4.3 million shares of its common stock for $167.0 million during the first two quarters of fiscal 2006. As of December 28, 2005, approximately $108.1 million was available under the Company’s share repurchase authorizations.  The Company’s stock repurchase plan will be used to minimize the dilutive impact of stock options and other share-based awards.  The Company will consider additional share repurchases based on several factors, including the Company’s cash position, share price, operational liquidity, and planned investment and financing needs.  The repurchased common stock is reflected as a reduction of shareholders’ equity.

 

6.              SUPPLEMENTAL CASH FLOW INFORMATION

 

Cash paid for interest and income taxes for the first two quarters of fiscal 2006 and 2005 is as follows (in thousands):

 

		December 28, 2005			December 29, 2004
Income taxes, net of refunds		$	32,365		$	32,294
Interest, net of amounts capitalized		13,434			11,652

 

Non-cash investing and financing activities for the first two quarters of fiscal 2006 and 2005 are as follows (in thousands):

 

		December 28, 2005			December 29, 2004
Retirement of fully depreciated assets		$	39,734		$	8,366
Restricted share awards issued, net of forfeitures		9,732			1,307
Capitalized straight-line rent		3,372			2,405
Net (decrease) increase in fair value of interest rate swaps		(4,946		)	2,238

 

In the second quarter of fiscal 2006, the Company purchased certain assets and assumed certain liabilities in connection with the acquisition of restaurants.  The fair values of the assets and liabilities recorded at the date of acquisition are as follows (in thousands):

 

Property and equipment		$	14,617
Goodwill		20,958
Other assets		4,732
Capital lease obligations		(16,123		)
Other liabilities		(1,089		)
Net cash paid		$	23,095

 

The assets acquired and liabilities assumed are recorded at fair values as determined by management based upon information available.  The Company will finalize the allocation between goodwill and reacquired franchise rights (included in other assets) once information sufficient to complete the allocation is obtained.

 

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7.              CONTINGENCIES

 

The Company is engaged in various legal proceedings and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, management of the Company, based upon consultation with legal counsel, 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 Company’s consolidated financial condition or results of operations.

 

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Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table sets forth selected operating data as a percentage of total revenues for the periods indicated. All information is derived from the accompanying consolidated statements of income.

 

		Thirteen Week Periods Ended				Twenty-Six Week Periods Ended
		December 28,		December 29,		December 28,		December 29,
		2005		2004		2005		2004
Revenues		100.0	%	100.0	%	100.0	%	100.0	%
Operating Costs and Expenses:
Cost of sales		28.5	%	28.6	%	28.3	%	28.2	%
Restaurant expenses		55.0	%	55.8	%	55.3	%	55.6	%
Depreciation and amortization		4.7	%	4.9	%	4.8	%	5.0	%
General and administrative		5.2	%	4.6	%	5.0	%	4.4	%
Restructure charges and otherimpairments		0.1	%	0.5	%	0.1	%	2.9	%
Total operating costs and expenses		93.5	%	94.4	%	93.5	%	96.1	%
Operating income		6.5	%	5.6	%	6.5	%	3.9	%
Interest expense		0.6	%	0.8	%	0.6	%	0.8	%
Other, net		0.0	%	0.1	%	0.0	%	0.1	%
Income before income tax (expense) benefit		5.9	%	4.7	%	5.9	%	3.0	%
Income tax (expense) benefit		(2.0	)%	(0.3	)%	(2.0	)%	0.2	%
Income from continuing operations		3.9	%	4.4	%	3.9	%	3.2	%
Income (loss) from discontinued operations, net of taxes		0.3	%	0.1	%	(0.1	)%	(0.1	)%
Net income		4.2	%	4.5	%	3.8	%	3.1	%

 

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