EX-13 4 eat2018627ex13.htm EXHIBIT 13 Exhibit
EXHIBIT 13
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following are attached hereto as part of Exhibit 13:


F-1

BRINKER INTERNATIONAL, INC.
SELECTED FINANCIAL DATA
(In thousands, except per share amounts and number of restaurants)
 
Fiscal Years Ended
 
6/27/2018
 
6/28/2017
 
6/29/2016(1)
 
6/24/2015
 
6/25/2014
Income Statement Data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Company sales
$
3,041,516

 
$
3,062,579

 
$
3,166,659

 
$
2,904,746

 
$
2,823,069

Franchise and other revenues
93,901

 
88,258

 
90,830

 
97,532

 
86,426

Total revenues
3,135,417

 
3,150,837

 
3,257,489

 
3,002,278

 
2,909,495

Operating costs and expenses:
 
 
 
 
 
 
 
 
 
Company restaurants (excluding depreciation and amortization)
 
 
 
 
 
 
 
 
 
Cost of sales
796,007

 
791,321

 
840,204

 
775,063

 
758,028

Restaurant labor
1,033,853

 
1,017,945

 
1,036,005

 
929,206

 
905,589

Restaurant expenses
757,547

 
773,510

 
762,663

 
703,334

 
686,314

Company restaurant expenses
2,587,407

 
2,582,776

 
2,638,872

 
2,407,603

 
2,349,931

Depreciation and amortization
151,392

 
156,409

 
156,368

 
145,242

 
136,081

General and administrative
136,012

 
132,819

 
127,593

 
133,467

 
132,094

Other gains and charges
34,500

 
22,655

 
17,180

 
4,764

 
49,224

Total operating costs and expenses
2,909,311

 
2,894,659

 
2,940,013

 
2,691,076

 
2,667,330

Operating income
226,106

 
256,178

 
317,476

 
311,202

 
242,165

Interest expense
58,986

 
49,547

 
32,574

 
29,006

 
28,091

Other, net
(3,102
)
 
(1,877
)
 
(1,485
)
 
(2,081
)
 
(2,214
)
Income before provision for income taxes
170,222

 
208,508

 
286,387

 
284,277

 
216,288

Provision for income taxes
44,340

 
57,685

 
85,767

 
89,618

 
62,249

Net income
$
125,882

 
$
150,823

 
$
200,620

 
$
194,659

 
$
154,039

 
 
 
 
 
 
 
 
 
 
Basic net income per share
$
2.75

 
$
2.98

 
$
3.47

 
$
3.09

 
$
2.33

 
 
 
 
 
 
 
 
 
 
Diluted net income per share
$
2.72

 
$
2.94

 
$
3.42

 
$
3.02

 
$
2.26

 
 
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
45,702

 
50,638

 
57,895

 
63,072

 
66,251

 
 
 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding
46,264

 
51,250

 
58,684

 
64,404

 
68,152

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital
$
(278,056
)
 
$
(292,036
)
 
$
(257,209
)
 
$
(233,304
)
 
$
(271,426
)
Total assets(2)
1,347,340

 
1,403,633

 
1,458,450

 
1,421,450

 
1,485,612

Long-term obligations(2)
1,631,309

 
1,460,953

 
1,248,375

 
1,091,734

 
956,408

Shareholders’ (deficit) equity
(718,309
)
 
(493,681
)
 
(225,576
)
 
(90,812
)
 
63,094

Dividends per share
$
1.52

 
$
1.36

 
$
1.28

 
$
1.12

 
$
0.96

 
 
 
 
 
 
 
 
 
 
Number of Restaurants Open (End of Year):
 
 
 
 
 
 
 
 
 
Company-owned
997

 
1,003

 
1,001

 
888

 
884

Franchise
689

 
671

 
659

 
741

 
731

Total
1,686

 
1,674

 
1,660

 
1,629

 
1,615

 
 
 
 
 
 
 
 
 
 
Revenues of franchisees(3)
$
1,309,379

 
$
1,331,908

 
$
1,348,616

 
$
1,644,015

 
$
1,616,747


F-2

(1) 
Fiscal year 2016 consisted of 53 weeks while all other periods presented consisted of 52 weeks.
(2) 
Debt issuance costs are presented in the Consolidated Balance Sheets as a direct deduction from the associated debt liability. Amounts presented for fiscal years prior to fiscal 2017 were reclassified from other assets to long-term debt to conform to the current year’s presentation.
(3) 
Royalty revenues are recognized based on the sales generated and reported to the Company by franchisees.


F-3

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 during the past three fiscal years, the MD&A should be read in conjunction with the Consolidated Financial Statements and related notes included in this annual report. Our MD&A consists of the following sections:
•
Overview - a general description of our business and the casual dining segment of the restaurant industry
•
Results of Operations - an analysis of our Consolidated Statements of Comprehensive Income for the three years presented in our Consolidated Financial Statements
•
Liquidity and Capital Resources - an analysis of cash flows, including capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity, and the impact of inflation
•
Critical Accounting Estimates - a discussion of accounting policies that require critical judgments and estimates including recent accounting pronouncements
The following discussion should be read together with Part II, Item 6 - Selected Financial Data presented for the fiscal year ended June 27, 2018 and Part II, Item 8 - Financial Statements and Supplementary Data of our Annual Report. Our 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 52/53 week fiscal year ending on the last Wednesday in June. Fiscal years 2018 and 2017, which ended on June 27, 2018 and June 28, 2017, respectively, each contained 52 weeks. Fiscal year 2016 ended on June 29, 2016 and contained 53 weeks. The estimated impact of the 53rd week in fiscal 2016 was an increase in revenue of approximately $58.3 million. While certain expenses increased in direct relationship to additional revenue from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis. All amounts within the MD&A are presented in millions unless otherwise specified.
OVERVIEW
We are principally engaged in the ownership, operation, development, and franchising of the Chili’s Grill & Bar (“Chili’s”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. At June 27, 2018, we owned, operated, or franchised 1,686 restaurants, consisting of 997 company-owned restaurants and 689 franchised restaurants. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.
We are committed to strategies and a company culture that we believe are centered on long-term sales and profit growth, enhancing the guest experience and team member engagement. Our strategies and culture are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants and establish a strong presence for our brands in key markets around the world.
We believe the restaurant industry has been building restaurants at a pace that exceeds consumer demand. Growing sales and traffic continues to be a challenge with increasing competition and heavy discounting in the casual dining industry. We regularly evaluate our processes and menu at Chili’s to identify opportunities where we can improve our service quality and food. During fiscal 2018, we cut our menu offerings by a third compared to the prior year, and focused on our core equities of burgers, ribs, fajitas and margaritas. This initiative improved kitchen efficiency and allowed our managers and cooks to deliver our food hotter and faster to our guests. We also invested in the quality of our food and brought bigger burgers, meatier ribs and fajitas to our guests. Additionally, we launched a margarita of the month platform that features a new margarita every month at an every-day value price of $5.00. As fiscal 2018

F-4

ended, our average delivery time in the dining room has improved by approximately one minute compared to the year before, and our burger, fajita and margarita businesses are all growing.
We remain competitive with our value offerings at both lunch and dinner and are committed to offering consistent, quality products at a compelling every day value. During the latter half of fiscal 2018, we offered a promotional “3 for $10” platform that allowed guests to combine a starter, a non-alcoholic drink and an entree for just $10.00. We plan to leverage our scale and business model to continue this promotional platform in fiscal 2019, and we believe that few of our competitors can match this promotional value on a consistent basis. In the latter half of fiscal 2018, we also relaunched our My Chili’s Rewards program and moved away from the points system that is characteristic of most retail and restaurant loyalty programs. Our simple program currently provides customized offers to loyalty members, that includes free chips and salsa or soft drink on every visit. We will continue to seek opportunities to reinforce value and create interest for the Chili’s brand with new and varied offerings to further enhance sales and drive incremental traffic.
The Chili’s brand continues to leverage technology to improve convenience for our guests and to create a digital guest experience that we believe will help us engage our guests more effectively. Our database of guests in our My Chili’s Rewards program increased by approximately 20% in fiscal 2018, and we are able to give our loyalty members customized offers tied to their purchase behavior. We anticipate that guest loyalty programs will be a significant part of our marketing strategy going forward. We also have put greater emphasis on advertising our To Go capabilities. In the fourth quarter of fiscal 2018, Chili’s grew its To Go business by double digit sales increases every month compared to the prior year. To Go sales grew to be approximately 11.5% of total Chili’s To Go and dine-in sales by the end of fiscal 2018. We believe that guests will continue to prefer more convenience and options that allow them to eat at home, and we plan to continue investments in our digital guest experience and To Go capabilities.
We believe that improvements at Chili’s will have a significant impact on the business; however, our results will also benefit through additional contributions from Maggiano’s and our global Chili’s business. Maggiano’s opened one restaurant in fiscal 2018, and Maggiano’s is expected to open one franchise location in fiscal 2019. Guests are responding favorably to the addition of Saturday and Sunday brunch, together with our lunch menu, at all Maggiano’s restaurants. Maggiano’s is committed to delivering high quality food and a dining experience in line with this brand’s heritage.
Our global Chili’s business continues to grow with locations in 31 countries and two territories outside of the United States. Our international franchisees opened 34 new restaurants in fiscal 2018, including our first Chili’s restaurants in the countries of Chile and Panama. We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and existing franchise partners.

F-5


RESULTS OF OPERATIONS
The following table sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying Consolidated Statements of Comprehensive Income:
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Revenues:
 
 
 
 
 
Company sales
97.0
 %
 
97.2
 %
 
97.2
 %
Franchise and other revenues
3.0
 %
 
2.8
 %
 
2.8
 %
Total revenues
100.0
 %
 
100.0
 %
 
100.0
 %
Operating Costs and Expenses:
 
 
 
 
 
Company restaurants (excluding depreciation and amortization)
 
 
 
 
 
Cost of sales(1)
26.2
 %
 
25.8
 %
 
26.5
 %
Restaurant labor(1)
34.0
 %
 
33.2
 %
 
32.7
 %
Restaurant expenses(1)
24.9
 %
 
25.3
 %
 
24.1
 %
Company restaurant expenses(1)
85.1
 %
 
84.3
 %
 
83.3
 %
Depreciation and amortization
4.8
 %
 
5.0
 %
 
4.8
 %
General and administrative
4.3
 %
 
4.2
 %
 
3.9
 %
Other gains and charges
1.1
 %
 
0.7
 %
 
0.5
 %
Total operating costs and expenses
92.8
 %
 
91.9
 %
 
90.3
 %
Operating income
7.2
 %
 
8.1
 %
 
9.7
 %
Interest expense
1.9
 %
 
1.6
 %
 
0.9
 %
Other, net
(0.1
)%
 
(0.1
)%
 
—
 %
Income before provision for income taxes
5.4
 %
 
6.6
 %
 
8.8
 %
Provision for income taxes
1.4
 %
 
1.8
 %
 
2.6
 %
Net income
4.0
 %
 
4.8
 %
 
6.2
 %
(1) 
As a percentage of company sales
REVENUES
Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions. Franchise and other revenues includes royalties, development fees, franchise fees, Maggiano’s banquet service charge income, gift card breakage and discounts, digital entertainment revenue, Chili’s retail food product royalties, merchandise and delivery fee income.

F-6

Fiscal 2018 versus Fiscal 2017
The following is a summary of the change in Total revenues:
 
Revenues
Fiscal Year Ended June 28, 2017
$
3,150.8

Change from:
 
Restaurant closings
(18.8
)
Restaurant openings
26.5

Comparable restaurant sales
(23.3
)
Hurricanes Harvey and Irma impact
(5.4
)
Company sales
(21.0
)
Franchise and other revenues
5.6

Fiscal Year Ended June 27, 2018
$
3,135.4

Total revenues for fiscal 2018 decreased to $3,135.4 million, a 0.5% decrease from the $3,150.8 million generated for fiscal 2017 driven primarily by a 0.7% decrease in Company sales. The decrease in Company sales for fiscal 2018 was primarily due to a decline of $23.3 million in comparable restaurant sales, $18.8 million due to the closure of underperforming restaurants and $5.4 million related to temporary restaurant closures associated with Hurricanes Harvey and Irma in the first quarter of fiscal 2018, partially offset by an increase in Company sales of $26.5 million due to sales generated at Chili’s and Maggiano’s restaurants opened during fiscal 2018. Franchise and other revenues increased 6.3% to $93.9 million in fiscal 2018 compared to $88.3 million in fiscal 2017 primarily driven by an increase of $8.7 million in gift card-related revenues, partially offset by a $1.6 million decrease in digital entertainment revenues. Our franchisees generated approximately $1,309.4 million in sales in fiscal 2018.
The table below presents the percent change in comparable restaurant sales for the fiscal year ended June 27, 2018:
 
Fiscal Year Ended June 27, 2018
 
Comparable
Sales(1)
 
Price
Increase
 
Mix
Shift(2)
 
Traffic
 
Restaurant Capacity(3)
Company-owned
(1.0
)%
 
1.3
%
 
1.1
%
 
(3.4
)%
 
(0.2
)%
Chili’s
(1.1
)%
 
1.3
%
 
1.2
%
 
(3.6
)%
 
(0.3
)%
Maggiano’s
0.1
 %
 
1.1
%
 
0.6
%
 
(1.6
)%
 
1.2
 %
Chili’s Franchise(4)
(2.1
)%
 
 
 
 
 
 
 
 
U.S.
(1.8
)%
 
 
 
 
 
 
 
 
International
(2.7
)%
 
 
 
 
 
 
 
 
Chili’s Domestic(5)
(1.3
)%
 
 
 
 
 
 
 
 
System-wide(6)
(1.3
)%
 
 
 
 
 
 
 
 
(1) 
Comparable restaurant sales include all restaurants that have been in operation for more than 18 months. Amounts are calculated based on comparable 52 weeks in each fiscal 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.
(3) 
Restaurant capacity is measured by sales weeks. Amounts are calculated based on comparable 52 weeks in each fiscal year.

F-7

(4) 
Revenues generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income; however, we generate royalty revenue and advertising fees based on franchisee revenues, where applicable. We believe including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.
(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 company-owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchise-operated Chili’s restaurants.
Chili’s company sales decreased 0.9% to $2,628.3 million in fiscal 2018 from $2,653.3 million in fiscal 2017. The decrease was primarily due to a decline in comparable restaurant sales of $29.3 million, or 1.1%, which includes $4.1 million related to temporary restaurant closures associated with Hurricanes Harvey and Irma in the first quarter of fiscal 2018, and restaurant closures of $14.9 million, partially offset by an increase of $18.8 million due to sales generated at new Chili’s restaurants opened during fiscal 2018. Chili’s company-owned restaurant capacity (as measured in sales weeks) decreased 0.3% compared to the prior year due to six net restaurant closures during fiscal 2018.
Maggiano’s company sales increased 1.0% to $413.3 million in fiscal 2018 from $409.3 million in fiscal 2017. The increase was primarily due to an increase in restaurant capacity of $3.7 million and comparable restaurant sales of $0.6 million, or 0.1%, which includes the negative impact of $1.3 million related to temporary restaurant closures associated with Hurricanes Harvey and Irma in the first quarter of fiscal 2018. Maggiano’s company-owned restaurant capacity (as measured in sales weeks) increased 1.2% compared to fiscal 2017 due to the timing of one restaurant opening and one restaurant closure during fiscal 2018.
Fiscal 2017 versus Fiscal 2016
Total revenues for fiscal 2017 decreased to $3,150.8 million, a 3.3% decrease from the $3,257.5 million generated for fiscal 2016 driven primarily by a 3.3% decrease in Company sales. The decrease in Company sales for fiscal 2017 was primarily due to a decline in comparable restaurant sales, partially offset by an increase in restaurant capacity (see table below). The 53rd week in fiscal 2016 contributed additional revenue of approximately $58.3 million.
 
Fiscal Year Ended June 28, 2017
 
Comparable
Sales(1)
 
Price
Increase
 
Mix
Shift(2)
 
Traffic
 
Restaurant Capacity(3)
Company-owned
(2.1
)%
 
1.8
%
 
1.6
%
 
(5.5
)%
 
0.4
%
Chili’s
(2.3
)%
 
1.8
%
 
1.7
%
 
(5.8
)%
 
0.3
%
Maggiano’s
(0.6
)%
 
2.1
%
 
0.3
%
 
(3.0
)%
 
2.7
%
Chili’s Franchise(4)
(2.1
)%
 
 
 
 
 
 
 
 
U.S.
(1.1
)%
 
 
 
 
 
 
 
 
International
(3.7
)%
 
 
 
 
 
 
 
 
Chili’s Domestic(5)
(2.0
)%
 
 
 
 
 
 
 
 
System-wide(6)
(2.1
)%
 
 
 
 
 
 
 
 
(1) 
Comparable restaurant sales include all restaurants that have been in operation for more than 18 months. Amounts are calculated based on comparable 52 weeks in each fiscal 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.
(3) 
Restaurant capacity is measured by sales weeks. Amounts are calculated based on comparable 52 weeks in each fiscal year.

F-8

(4) 
Revenues generated by franchisees are not included in revenues in the Consolidated Statements of Comprehensive Income; however, we generate royalty revenue and advertising fees based on franchisee revenues, where applicable. We believe including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development.
(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 company-owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchise-operated Chili’s restaurants.
Chili’s company sales decreased 3.7% to $2,653.3 million in fiscal 2017 from $2,754.9 million in fiscal 2016. The decrease was primarily due to a decline in comparable restaurant sales as well as one less operating week in fiscal 2017, partially offset by an increase in restaurant capacity. Chili’s comparable restaurant sales decreased 2.3% for fiscal 2017 compared to the prior year. Chili’s company-owned restaurant capacity increased 0.3% compared to prior year due to one net restaurant opening during fiscal 2017.
Maggiano’s company sales decreased 0.6% to $409.3 million in fiscal 2017 from $411.8 million in fiscal 2016. The decrease was primarily driven by a decline in comparable restaurant sales as well as one less operating week in fiscal 2017, partially offset by an increase in restaurant capacity. Maggiano’s comparable restaurant sales decreased 0.6% for fiscal 2017 compared to the prior year. Maggiano’s company-owned restaurant capacity increased 2.7% compared to prior year due to one net restaurant opening during fiscal 2017.
Franchise and other revenues decreased 2.8% to $88.3 million in fiscal 2017 compared to $90.8 million in fiscal 2016 primarily driven by a decrease in royalty revenues due to a decline in domestic and international franchise comparable restaurant sales, partially offset by an increase in gift card related revenues. Our franchisees generated approximately $1,331.9 million in sales in fiscal 2017.
COSTS AND EXPENSES
Fiscal 2018 versus Fiscal 2017
 
Fiscal Years Ended
 
(Favorable) Unfavorable Variance
 
June 27, 2018
 
June 28, 2017
 
 
Dollars
 
% of Company Sales
 
Dollars
 
% of Company Sales
 
Dollars
 
% of Company Sales
Cost of sales
$
796.0

 
26.2
%
 
$
791.3

 
25.8
%
 
$
4.7

 
0.4
 %
Restaurant labor
1,033.9

 
34.0
%
 
1,017.9

 
33.2
%
 
16.0

 
0.8
 %
Restaurant expenses
757.5

 
24.9
%
 
773.5

 
25.3
%
 
(16.0
)
 
(0.4
)%
Depreciation and amortization
151.4

 
 
 
156.4

 
 
 
(5.0
)
 
 
General and administrative
136.0

 
 
 
132.8

 
 
 
3.2

 
 
Other gains and charges
34.5

 
 
 
22.7

 
 
 
11.8

 
 
Interest expense
59.0

 
 
 
49.5

 
 
 
9.5

 
 
Other, net
(3.1
)
 
 
 
(1.9
)
 
 
 
(1.2
)
 
 
Cost of sales as a percentage of Company sales increased 0.4%, or $10.1 million, due to $18.0 million of unfavorable menu item mix primarily related to beef and chicken and $1.2 million of other unfavorable items, partially offset by $9.1 million increased menu pricing.
Restaurant labor as a percentage of Company sales increased 0.8%, or $22.9 million, due to $19.1 million of higher wage rates as well as a $1.9 million increase in employee health insurance expenses and $1.9 million of other unfavorable management and employee-related expenses. These changes include the impact of $6.9 million of sales deleverage due to a decrease in Company sales.

F-9

Restaurant expenses as a percentage of Company sales decreased 0.4%, or $10.6 million, due to $6.4 million of reduced operating lease expenses related to the change in classification of a technology-related lease, $6.1 million of lower advertising and marketing related expenses, $2.7 million of lower supervision related expenses related to the impact from organizational changes implemented in the third quarter of fiscal 2017, and $1.3 million of reduced workers’ compensation and general liability expenses. These reductions were partially offset by $2.3 million of higher supplies expense, $1.5 million of increased rent expense, $1.2 million of higher repairs and maintenance, and $0.8 million related to other various restaurant expenses. These changes include the impact of $5.4 million of sales deleverage due to a decrease in Company sales.
Depreciation and amortization decreased $5.0 million in fiscal 2018 as compared to fiscal 2017 due to an increase in fully depreciated assets and restaurant closures of $21.1 million and $2.3 million in various depreciation expense, partially offset by depreciation on asset replacements of $12.2 million, an increase in technology-related capital lease depreciation of $3.6 million and new restaurant openings of $2.5 million.
General and administrative expenses increased $3.2 million in fiscal 2018 as compared to fiscal 2017 as follows:
 
General and administrative
Fiscal Year Ended June 28, 2017
$
132.8

Change from:
 
Incentive compensation
3.8

Stock-based compensation
0.5

Legal and professional fees
0.2

Payroll related expenses
(0.6
)
Other
(0.7
)
Fiscal Year Ended June 27, 2018
$
136.0

Other gains and charges increased $11.8 million in fiscal 2018 as compared to fiscal 2017 which included additional Restaurant impairment charges of $5.7 million related to nine underperforming Chili’s restaurants located in Alberta, Canada which were closed in fiscal 2018, as well as certain underperforming Chili’s and Maggiano’s which will continue to operate.
Hurricane-related costs, net of recoveries includes $5.1 million associated with Hurricanes Harvey and Irma during fiscal 2018 primarily related to employee relief payments and inventory spoilage.
Restaurant closure charges in fiscal 2018 as compared with fiscal 2017 increased $3.4 million primarily related to lease termination charges and other costs associated with the closure of the nine underperforming Chili’s restaurants located in Canada.
Gain on the sale of assets, net for fiscal 2018 as compared with fiscal 2017 was lower, primarily due to the lower overall gains in fiscal 2018. In fiscal 2018, Gain on the sale of assets, net of $0.2 million was related to the sale of our equity interest in our Mexico joint venture, for further details please see Note 2 - Equity Method Investment.
Cyber security incident charges in fiscal 2018 included $2.0 million related to professional services due to legal and other costs associated with our response to the incident. We first reported the incident during the fourth quarter of fiscal 2018. For further details refer to Item 1A - Risk Factors and Note 13 - Commitments and Contingencies presented within Item 8 - Financial Statements and Supplementary Data provided within Exhibit 13 of this filing.
Sale-leaseback transaction charges of $2.0 million were recorded in fiscal 2018 which include professional fees for brokers, legal, due diligence, and other professional service firms in connection with the sale-leaseback transaction that marketed certain company-owned restaurant properties during the fourth quarter of fiscal 2018. For further details, please see Note 16 - Subsequent Events.

F-10

Remodel-related costs during fiscal 2018 of $1.5 million were recorded related to existing fixed asset write-offs associated with the Chili’s reimaging project.
During fiscal 2018, we sold our equity interest in our Mexico joint venture and received a note as consideration denominated in Mexican pesos which is re-measured to U.S. dollars at the end of each period resulting in a gain or loss from foreign currency exchange rate changes. Foreign currency transaction loss (gain) for fiscal 2018 included a net loss of $1.2 million because the value of the Mexican peso decreased as compared to the U.S. dollar during the fiscal year.
Lease guarantee charges for fiscal 2018 as compared with fiscal 2017 increased $0.9 million related to additional leases that were assigned to a divested brand that is currently in bankruptcy proceedings, for which we are secondarily liable.
The above mentioned increases in Other gains and charges were offset partially by a decrease in Severance and other benefits for fiscal 2018 as compared with fiscal 2017 of $6.3 million due to organizational changes that occurred in fiscal 2017. Other for fiscal 2018 as compared with fiscal 2017 decreased primarily related to professional consulting charges related to the organization changes in fiscal 2017. Information technology restructuring for fiscal 2018 as compared with fiscal 2017 decreased $2.7 million related to professional fees and severance incurred in fiscal 2017.
Interest expense increased $9.5 million in fiscal 2018 as compared to fiscal 2017 due to higher average borrowing balances and higher interest rates.
Other, net was favorable $1.2 million in fiscal 2018 as compared to fiscal 2017 due to higher interest and dividends of $0.9 million that includes $0.6 million in interest income related to the CMR note receivable, and $0.3 million increase in sub-lease income. Other, net during fiscal 2018 includes $1.9 million of sublease income primarily from franchisees as part of their respective lease agreements, as well as other subtenants.
Fiscal 2017 versus Fiscal 2016
Cost of sales, as a percent of Company sales, decreased 0.7% in fiscal 2017 due to increased menu pricing, favorable commodity pricing primarily related to beef and poultry and favorable menu item mix, partially offset by unfavorable commodity pricing related to avocados.
Restaurant labor, as a percent of Company sales, increased 0.5% in fiscal 2017 primarily due to higher wage rates and sales deleverage.
Restaurant expenses, as a percent of Company sales, increased 1.2% in fiscal 2017 primarily due to higher advertising and marketing related expenses, sales deleverage due to a decline in comparable restaurant sales as well as one less operating week compared to the prior year, and increased workers’ compensation insurance expenses.
Depreciation and amortization was flat in fiscal 2017 compared to fiscal 2016. Depreciation on asset replacements and new restaurant openings were offset by an increase in fully-depreciated assets and restaurant closures.
General and administrative increased $5.2 million in fiscal 2017 primarily due to higher performance-based compensation and professional fees, partially offset by lower payroll due to reduced headcount and lower stock-based compensation expenses.
Other gains and charges were $22.7 million in fiscal 2017. We incurred $6.6 million in severance and other benefits related to organizational changes to better align our staffing with the current management strategy and resource needs. Additionally, we recorded restaurant impairment charges of $5.2 million primarily related to long-lived assets and reacquired franchise rights of ten underperforming Chili’s restaurants which will continue to operate. We also recorded restaurant closure charges of $4.1 million primarily related to lease charges and other costs associated with closed restaurants. Furthermore, we incurred $2.7 million of professional fees and severance associated with our information technology restructuring offset by a $2.7 million gain on the sale of property. We also recorded accelerated depreciation charges of $2.0 million related to long-lived assets to be disposed of and lease guarantee charges of $1.1

F-11

million related to leases that were assigned to a divested brand. Other charges primarily include $2.4 million of expenses for consulting fees related to a special project.
Other gains and charges were $17.2 million in fiscal 2016. We recorded impairment charges of $10.7 million primarily related to seven underperforming restaurants that either continue to operate or closed in fiscal 2017 and $1.0 million related to a cost method investment. We recorded restaurant closure charges of $3.8 million that primarily consisted of additional lease and other costs associated with closed restaurants. We also incurred $3.3 million in severance and other benefits related to organizational changes. We were a plaintiff in a class action lawsuit against US Foods styled as In re U.S. Foodservice, Inc. Pricing Litigation. A settlement agreement was fully executed by all parties in September 2015, and we received approximately $2.0 million during the second quarter of fiscal 2016 in settlement of this litigation. We also received net proceeds of $1.2 million from British Petroleum in the fourth quarter of fiscal 2016 related to the 2010 Gulf of Mexico oil spill judgment. Additionally, we recorded a $2.9 million gain on the sale of several properties and $0.7 million of transaction costs related to the acquisition of Pepper Dining. Other charges primarily included $1.4 million of expenses to reserve for royalties, rents and other outstanding amounts related to a bankrupt franchisee and $1.2 million of professional service fees associated with organizational changes.
Interest expense increased $17.0 million in fiscal 2017 resulting from higher borrowing balances.
Other, net decreased $0.4 million in fiscal 2017 primarily due to increase in sublease income. Other, net includes $1.6 million of sublease income primarily from franchisees as part of their respective lease agreements, as well as other subtenants.
SEGMENT RESULTS
Fiscal 2018 versus Fiscal 2017
 
Fiscal Years Ended
 
Favorable (Unfavorable) Variance
Chili’s Segment
June 27, 2018
 
June 28, 2017
 
Company sales
$
2,628.3

 
$
2,653.3

 
$
(25.0
)
Franchise and other revenues
71.9

 
66.7

 
5.2

Total revenues
2,700.2

 
2,720.0

 
(19.8
)
 
 
 
 
 
 
Company restaurant expenses(1)
2,224.0

 
2,220.6

 
(3.4
)
Depreciation and amortization
125.0

 
129.4

 
4.4

General and administrative
39.6

 
37.0

 
(2.6
)
Other gains and charges
24.5

 
13.2

 
(11.3
)
Total operating costs and expenses
2,413.1

 
2,400.2

 
(12.9
)
 
 
 
 
 
 
Operating income
$
287.1

 
$
319.8

 
$
(32.7
)
(1) 
Company restaurant expenses includes Cost of sales, Restaurant labor, and Restaurant expenses, including advertising.
Chili’s revenues decreased 0.7% to $2,700.2 million in fiscal 2018 from $2,720.0 million in fiscal 2017, please refer to the REVENUES section above for further details on Chili’s revenue. Chili’s operating income, as a percent of Total revenues, was 10.6% in fiscal 2018 compared to 11.8% in fiscal 2017, this decrease was primarily driven by the decreased Company sales in addition to increased Total operating costs and expenses.
Other gains and charges for Chili’s increased $11.3 million in fiscal 2018 as compared to fiscal 2017 due to an increase in impairment charges of $4.8 million. During fiscal 2018 we also incurred additional lease termination and other related closure costs of $4.6 million due to the decision to close nine Chili’s restaurants located in Alberta, Canada. Additionally during fiscal 2018 we incurred $4.5 million of additional hurricane-related expenses net of insurance proceeds, and $2.0 million in sale-leaseback transaction fees, partially offset by the impact of $4.6 million for severance and other benefits related to organizational changes incurred during fiscal 2017.

F-12

Company restaurant expenses for Chili’s as a percentage of Company sales decreased 0.9%, or $24.3 million, in fiscal 2018 as compared to fiscal 2017 primarily due to $19.4 million of higher wage expense driven by increased restaurant labor wage rates, $17.1 million of unfavorable menu item mix, $3.6 million of higher health insurance and other employee expenses, $2.1 million of higher supplies, $1.5 million of unfavorable commodity pricing and other, $1.4 million of higher property taxes, $1.2 million of higher repairs and maintenance expenses and $1.2 million of other unfavorable restaurant expenses. These were partially offset by $8.5 million of increased menu pricing, $6.3 million of reduced operating lease expenses related to the change in classification of a technology-related lease, $5.7 million of lower advertising and marketing related expenses, and $2.7 million of lower supervision related expenses related to the impact from organizational changes implemented in the third quarter of fiscal 2017. These changes include the impact of $20.9 million of sales deleverage due to a decrease in Chili’s Company sales.
General and administrative expenses for Chili’s increased $2.6 million in fiscal 2018 as compared to fiscal 2017 due primarily to higher fiscal 2018 performance-based and stock-based compensation expenses.
Depreciation and amortization for Chili’s decreased $4.4 million in fiscal 2018 as compared to fiscal 2017 due primarily to $15.7 million related to fully-depreciated assets in fiscal 2018, and a $2.0 million decrease related to restaurant closures and restaurant remodels in fiscal 2018, partially offset by $8.8 million related to asset replacements, $8.8 million related to a technology-related capital lease and $2.0 million related to new restaurant openings.
 
Fiscal Years Ended
 
Favorable (Unfavorable) Variance
Maggiano’s Segment
June 27, 2018
 
June 28, 2017
 
Company sales
$
413.3

 
$
409.3

 
$
4.0

Franchise and other revenues
21.9

 
21.5

 
0.4

Total revenues
435.2

 
430.8

 
4.4

 
 
 
 
 
 
Company restaurant expenses(1)
362.8

 
361.7

 
(1.1
)
Depreciation and amortization
15.9

 
16.1

 
0.2

General and administrative
5.6

 
6.2

 
0.6

Other gains and charges
1.1

 
0.8

 
(0.3
)
Total operating costs and expenses
385.4

 
384.8

 
(0.6
)
 
 
 
 
 
 
Operating income
$
49.8

 
$
46.0

 
$
3.8

(1) 
Company restaurant expenses includes Cost of sales, Restaurant labor, and Restaurant expenses, including advertising.
Maggiano’s revenues increased 1.0% to $435.2 million in fiscal 2018 from $430.8 million in fiscal 2017, please refer to the REVENUES section above for further details on Maggiano’s revenue. Maggiano’s operating income, as a percent of Total revenues, was 11.4% in fiscal 2018 compared to 10.7% in fiscal 2017, this increase was primarily driven by the increased Total revenues, partially offset by increased Total operating costs and expenses consisting primarily of Company restaurant expenses partially offset by lower General and administrative expenses.
Company restaurant expenses as a percentage of Company sales increased 0.6%, or $2.4 million, for Maggiano’s in fiscal 2018 as compared to fiscal 2017 primarily driven by favorable menu item mix of $1.2 million, $0.9 million of increased menu pricing, $0.8 million of favorable workers compensation and general liability insurance claims, $0.7 million of favorable pre-opening related supplies, $0.7 million of other restaurant expenses, $0.6 million of favorable wage expense, $0.5 million of favorable property taxes, and $0.4 million of favorable banquet and delivery expenses, partially offset by $2.2 million of unfavorable commodity pricing and other, $0.8 million of increased rent expense, and $0.4 million of unfavorable hourly employee-related expenses. These changes include the impact of $3.5 million of sales leverage due to an increase in Maggiano’s Company sales.
General and administrative expenses for Maggiano’s decreased in fiscal 2018 as compared to fiscal 2017 by $0.6 million due primarily to lower stock-based compensation expenses of $0.5 million.

F-13

Fiscal 2017 versus Fiscal 2016
Chili’s revenues decreased 3.7% to $2,720.0 million in fiscal 2017 from $2,823.4 million in fiscal 2016. The decrease was primarily due to a decline in comparable restaurant sales as well as one less operating week in fiscal 2017, partially offset by an increase in restaurant capacity. Chili’s operating income, as a percent of total revenues, was 11.8% in fiscal 2017 compared to 13.3% in fiscal 2016. The decrease was primarily driven by sales deleverage, higher restaurant labor wage rates and higher advertising and marketing related expenses, partially offset by increased menu pricing and favorable commodity pricing. The decrease in Chili’s operating income was also due to costs incurred for severance and other benefits related to organizational changes and restaurant closure charges.
Maggiano’s revenues decreased 0.8% to $430.8 million in fiscal 2017 from $434.1 million in fiscal 2016. The decrease was primarily driven by a decline in comparable restaurant sales as well as one less operating week in fiscal 2017, partially offset by an increase in restaurant capacity. Maggiano’s operating income, as a percent of total revenues, was 10.7% in fiscal 2017 compared to 10.3% in fiscal 2016. The increase was primarily due to favorable commodity pricing and increased menu pricing, partially offset by sales deleverage, higher workers’ compensation insurance expenses, advertising expenses and unfavorable menu item mix. The increase in Maggiano’s operating income was also due to an impairment charge in fiscal 2016 for an underperforming restaurant.
INCOME TAXES
The effective income tax rate for fiscal 2018 decreased to 26.0% compared to 27.7% in fiscal 2017 due primarily to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) that was enacted on December 22, 2017 with an effective date of January 1, 2018. The enactment date occurred prior to the end of the second quarter of fiscal 2018 and therefore the federal statutory tax rate changes stipulated by the Tax Act were reflected in the second quarter. The Tax Act lowered the federal statutory tax rate from 35.0% to 21.0% effective January 1, 2018. Our federal statutory tax rate for fiscal 2018 is now 28.1%, representing a blended tax rate for the current fiscal year based on the number of days in the fiscal year before and after the effective date. For subsequent years, our federal statutory tax rate will be 21.0%. In accordance with ASC 740, we re-measured our deferred tax accounts as of the enactment date using the new federal statutory tax rate and recognized the change as a discrete item in the Provision for income taxes. For the fiscal year ended June 27, 2018, the adjustment was $8.2 million, and changed slightly from the prior quarter due to revised full year estimates for changes in our net deferred tax balance.
The effective income tax rate for fiscal 2017 decreased to 27.7% compared to 29.9% in fiscal 2016 due to the decline in profit in fiscal 2017 compared to fiscal 2016 coupled with no significant change in realized tax credits, most notably the FICA tip credit. The FICA tip credit in fiscal 2017 was consistent with fiscal 2016 and therefore the decline in profit before taxes resulted in a decrease in the effective tax rate in comparison to fiscal 2016. The resolution of uncertain tax positions resulted in a net reduction in tax expense for fiscal 2017 but to a lesser extent than in fiscal 2016.
In connection with the preparation of the Consolidated Financial Statements for the year ended June 28, 2017, we identified and assessed a material weakness related to the measurement and presentation of deferred income taxes as a result of immaterial errors in prior years. During fiscal 2018, new controls were added and operated successfully prior to filing this Form 10-K, remediating the material weakness. Please see Item 9A - Controls and Procedures for further details.

F-14

LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash Flows from Operating Activities
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Net cash provided by operating activities (in millions):
$
284.5

 
$
315.1

 
$
400.2

Fiscal 2018 vs Fiscal 2017 - During fiscal 2018, net cash flow provided by operating activities decreased $30.6 million from fiscal 2017 primarily due to a $24.9 million decrease in earnings in fiscal 2018 and more cash used compared to fiscal 2017 related to Other liabilities of $12.5 million, Gift card liability of $11.5 million, Current income taxes of $7.2 million and Accounts receivable, net of $6.8 million, partially offset by a $26.1 million increase in deferred income taxes, net and less cash used compared to fiscal 2017 for Accrued payroll of $4.9 million.
Fiscal 2017 vs Fiscal 2016 - During fiscal 2017, net cash flow provided by operating activities was $315.1 million compared to $400.2 million in fiscal 2016. Cash flow from operations decreased due to the impact of adopting the final IRS tangible property regulations in fiscal 2016 and decreased earnings in the current year, partially offset by an increase due to the prior year impact of the acquisition of Pepper Dining in addition to lower payments related to performance-based compensation liabilities.
Cash Flows from Investing Activities
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Net cash used in investing activities (in millions):
 
 
 
 
 
Payments for property and equipment
$
(101.3
)
 
$
(102.6
)
 
$
(112.8
)
Proceeds from sale of assets
19.9

 
3.2

 
4.3

Proceeds from note receivable
1.9

 
—

 
—

Insurance recoveries
1.7

 
—

 
—

Payment for business acquisition, net of cash acquired
—

 
—

 
(105.6
)
 
$
(77.8
)
 
$
(99.4
)
 
$
(214.1
)
Fiscal 2018 vs Fiscal 2017 - Net cash used in investing activities for fiscal 2018 decreased $21.6 million from fiscal 2017. Proceeds from sale of assets for the fiscal year ended June 27, 2018 includes $13.7 million of net cash proceeds related to the sale of the portion of our current corporate headquarters property that we owned. We will continue to occupy the current headquarters until our new corporate headquarters is available during fiscal 2019 or until March 31, 2019. Proceeds from note receivable of $1.9 million during fiscal 2018 relates to payments received on the note receivable obtained as consideration from the sale of our equity interest in our Mexico joint venture. Insurance recoveries for the fiscal year ended June 27, 2018 includes $1.0 million of insurance proceeds received related to Hurricane Harvey property claims and an additional $0.7 million received related to insurance claims on property damages from natural disaster flooding in Louisiana. Payments for property and equipment decreased primarily due to the fiscal 2017 increase in purchases for new beer taps for the line of craft beers launched, partially offset by the fiscal 2018 Chili’s reimages.
Fiscal 2017 vs Fiscal 2016 - Net cash used in investing activities for fiscal 2017 decreased to $99.4 million compared to $214.1 million in fiscal 2016 primarily due to the acquisition of Pepper Dining for $105.6 million in fiscal 2016. Capital expenditures decreased to $102.6 million for fiscal 2017 compared to $112.8 million for fiscal 2016 primarily due to decrease in Chili’s new restaurant construction, partially offset by the purchase of new beer taps for the new line of craft beers at Chili’s.

F-15

Cash Flows from Financing Activities
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Net cash used in financing activities (in millions):
 
 
 
 
 
Borrowings on revolving credit facility
$
1,016.0

 
$
250.0

 
$
256.5

Payments on revolving credit facility
(588.0
)
 
(388.0
)
 
(110.0
)
Purchases of treasury stock
(303.2
)
 
(370.9
)
 
(284.9
)
Payments on long-term debt
(260.3
)
 
(3.8
)
 
(3.4
)
Payments of dividends
(70.0
)
 
(70.8
)
 
(74.1
)
Proceeds from issuances of treasury stock
2.3

 
5.6

 
6.2

Payments for debt issuance costs
(1.6
)
 
(10.2
)
 
—

Proceeds from issuance of long-term debt
—

 
350.0

 
—

 
$
(204.8
)
 
$
(238.1
)
 
$
(209.7
)
Fiscal 2018 vs Fiscal 2017 - Net cash used in financing activities for fiscal 2018 decreased $33.3 million from fiscal 2017 primarily due to $566.0 million in net borrowing proceeds on our revolver and $67.7 million decrease in spending on share repurchases, partially offset by the impact of $350.0 million received from the issuance of our 5.00% notes in fiscal 2017 and $250.0 million used in fiscal 2018 for the repayment of our matured 2.60% notes.
Net borrowings of $428.0 million were drawn on the $1.0 billion revolving credit facility primarily to fund fiscal 2018 share repurchases and repay the $250.0 million 2.60% notes that matured in May 2018. As of June 27, 2018, $820.3 million was outstanding under the revolving credit facility. Subsequent to the end of the fiscal year, net payments of $381.0 million were made on the revolving credit facility. During the fourth quarter of fiscal 2018, we amended the revolving credit facility, this amendment was executed to provide the ability to execute certain sale-leaseback transactions and to increase the restricted payment capacity. The related debt issuance costs of $1.6 million are included in Other assets in the Consolidated Balance Sheets as of June 27, 2018. Under the revolving credit facility, the maturity date for $890.0 million of the facility is September 12, 2021, and the remaining $110.0 million is due on March 12, 2020. The amended revolving credit facility generally bears interest of LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.00%. For a period of 180 days following the third amendment to the revolving credit facility, we are paying interest at a rate of LIBOR plus 1.70% for a total of 3.79%. One month LIBOR at June 27, 2018 was approximately 2.09%. As of June 27, 2018, $179.8 million of credit is available under the revolving credit facility. As of June 27, 2018, we were in compliance with all financial debt covenants.
During fiscal 2018 we repurchased approximately 7.9 million shares of our common stock for $303.2 million. The repurchased shares included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares. In August 2017, our Board of Directors authorized a $250.0 million increase to our existing share repurchase program resulting in total authorizations of $4.6 billion. As of June 27, 2018, approximately $63.8 million was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. Repurchased common stock is reflected as an increase in Treasury stock within Shareholders’ deficit. Additionally, during fiscal 2018, approximately 0.1 million stock options were exercised resulting in cash proceeds of approximately $2.3 million. Subsequent to the end of the fiscal year, our Board of Directors authorized a $300.0 million increase to our existing share repurchase program, bringing the total amount available for repurchases to $363.8 million. We subsequently repurchased and settled approximately 0.5 million shares of our common stock for $24.0 million.
During the fourth quarter of fiscal 2018, an amendment to the revolving credit facility was executed to provide the ability to complete certain sale-leaseback transactions. In the first quarter of fiscal 2019, we entered into three purchase agreements to sell and leaseback 143 restaurant properties located throughout the United States. Subsequently under these purchase agreements, we have completed sale leaseback transactions of 137 of these restaurants for aggregate consideration of $443.1 million, resulting in a gain of $281.1 million. The net proceeds from these sale

F-16

leaseback transactions were used to repay borrowings on our revolving credit facility. The initial term of the leases are for 15 years, and the leases were determined to be operating leases. As part of this transaction, in the first quarter of fiscal 2019, the restaurant assets will be removed from our Consolidated Balance Sheets. The majority of the gain will be deferred and amortized over the operating lease term in proportion to the gross rental charges. As of June 27, 2018, the Consolidated Balance Sheets includes Land of $100.9 million, Building and LHI of $210.3 million, certain fixtures included in Furniture and equipment of $9.0 million and Accumulated depreciation of $157.9 million related to these properties.
As of June 27, 2018, our credit rating by Standard and Poor’s (“S&P”) was BB+ and our Corporate Family Rating by Moody’s was Ba1, all with a stable outlook. Our goal is to maintain strong free cash flow to support leverage that we believe is appropriate to allow ongoing investment in the business and return of capital to shareholders.
During fiscal 2018 we paid dividends of $70.0 million to common stock shareholders, compared to $70.8 million in the same period of fiscal 2017. Additionally, effective with the August 2017 declared dividend, our Board of Directors approved a 12% increase in the quarterly dividend from $0.34 to $0.38 per share. We also declared a quarterly dividend in April 2018, which was paid subsequent to fiscal 2018 on June 28, 2018 in the amount of $15.7 million. The dividend accrual was included in Other accrued liabilities in our Consolidated Balance Sheets as of June 27, 2018. Also subsequent to the end of the fiscal year, our Board of Directors declared a quarterly dividend of $0.38 per share to be paid on September 27, 2018 to shareholders of record as of September 7, 2018.
Fiscal 2017 vs Fiscal 2016 - Net cash used in financing activities for fiscal 2017 increased to $238.1 million compared to $209.7 million in the prior year. During fiscal 2017, we changed our capital structure by increasing leverage through the issuance of long-term debt and using the majority of the proceeds to return capital to shareholders in the form of share repurchases.
In September 2016, we entered into a $300.0 million accelerated share repurchase agreement (“ASR Agreement”) with Bank of America, N.A. (“BofA”). The ASR Agreement settled in January 2017. Pursuant to the terms of the ASR Agreement, we paid BofA $300.0 million in cash and received 5.9 million shares of our common stock. We also repurchased approximately 1.6 million additional shares of common stock for a total of 7.5 million shares during fiscal 2017 for a total of $370.9 million. The repurchased shares included shares purchased as part of our share repurchase program and shares repurchased to satisfy team member tax withholding obligations on the vesting of restricted shares.
On September 23, 2016, we completed the private offering of $350.0 million of our 5.00% senior notes due October 2024 (the “2024 Notes”). We received proceeds of $350.0 million prior to debt issuance costs of $6.2 million and utilized the proceeds to fund a $300.0 million accelerated share repurchase agreement and to repay $50.0 million on the amended $1.0 billion revolving credit facility. The notes require semi-annual interest payments which began on April 1, 2017.
The indenture for the 2024 Notes contains certain covenants, including, but not limited to, limitations and restrictions on the ability of the Company and its Restricted Subsidiaries (as defined in the indenture) to (i) create liens on Principal Property (as defined in the Indenture) and (ii) merge, consolidate or amalgamate with or into any other person or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all of their property. These covenants are subject to a number of important conditions, qualifications, exceptions and limitations.
On September 13, 2016, we amended the revolving credit facility to increase the borrowing capacity from $750.0 million to $1.0 billion. We capitalized debt issuance costs of $4.0 million associated with the amendment of the revolving credit facility, which is included in Other assets in the Consolidated Balance Sheets as of June 27, 2018. During fiscal 2017, net payments of $138.0 million were made on the revolving credit facility. As of June 28, 2017, $392.3 million was outstanding under the revolving credit facility.
Under the amended $1 billion revolving credit facility, the maturity date for $890.0 million of the facility was extended from March 12, 2020 to September 12, 2021 and the remaining $110.0 million remains due on March 12, 2020. The amended revolving credit facility calculated interest as a function of LIBOR plus an applicable margin, which was a function of our credit rating and debt to cash flow ratio, but was subject to a maximum of LIBOR plus 2.00%. Based on our credit rating, we paid interest at a rate of LIBOR plus 1.38% for a total of 2.60%. One month

F-17

LIBOR at June 28, 2017 was approximately 1.22%. As of June 28, 2017, $607.8 million of credit was available under the revolving credit facility.
We paid dividends of $70.8 million to common stock shareholders in fiscal 2017 compared to $74.1 million in dividends paid in fiscal 2016. Our Board of Directors approved a 6.3% increase in the quarterly dividend from $0.32 to $0.34 per share effective with the dividend declared in August 2016. We also declared a quarterly dividend of $0.34 per share in May 2017 which was paid subsequent to the end of the fiscal year on June 29, 2017 in the amount of $16.6 million.
In August 2016, our Board of Directors authorized a $150.0 million increase to our existing share repurchase program resulting in total authorizations of $4.3 billion. As of June 28, 2017, approximately $115.8 million was available under our share repurchase authorizations. Repurchased common stock is reflected as an increase in treasury stock within shareholders’ deficit. During fiscal 2017, approximately 225,000 stock options were exercised resulting in cash proceeds of approximately $5.6 million.
Cash Flow Outlook
We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would potentially 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. During the fourth quarter of fiscal 2018, an amendment to the revolving credit facility was executed to provide the ability to complete certain sale-leaseback transactions. During the first quarter of fiscal 2019, we completed sale leaseback transactions for 137 of the 194 company-owned real estate restaurants at June 27, 2018. We will continue to periodically evaluate ways to monetize the value of our remaining owned real estate and should alternatives become available that are more cost effective than our financing options currently available, we will consider execution of those alternatives.
Payments due under our contractual obligations for outstanding indebtedness, leases, purchase obligations as defined by the Securities and Exchange Commission (“SEC”), and the expiration of the credit facility as of June 27, 2018 are as follows (in millions):
 
Payments Due by Period
 
Total
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Long-term debt(1)
$
1,470.3

 
$
—

 
$
—

 
$
1,120.3

 
$
350.0

Interest(2)
228.3

 
51.9

 
103.7

 
63.9

 
8.8

Capital leases
55.9

 
9.8

 
16.2

 
9.6

 
20.3

Operating leases
570.0

 
119.6

 
207.2

 
131.0

 
112.2

Purchase obligations(3)
118.5

 
26.8

 
38.5

 
21.3

 
31.9

(1) 
Long-term debt consists of principal amounts owed on the revolver, 3.88% notes, and 5.00% notes. As of June 27, 2018, $179.8 million of credit is available under the revolving credit facility.
(2) 
Interest consists of remaining interest payments on the 3.88% and 5.00% notes totaling $154.4 million and remaining interest payments on the revolver totaling $73.9 million. The interest rates on the notes are fixed whereas the interest rate on the revolver is variable. We have assumed that the revolver balance carried will be $600.0 million until the maturity date of September 12, 2021 using the interest rate as of June 27, 2018 which was approximately 3.79%.
(3) 
A “purchase obligation” is 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 and professional services contracts and exclude agreements that are cancelable without significant penalty.

F-18

 
Amount of Revolving Credit Facility Expiration by Period
(in millions)
 
Total Commitment
 
Less than 1 Year
 
1-3 Years
 
3-5 Years
 
More than 5 Years
Revolving credit facility
$
1,000.0

 
$
—

 
$
110.0

 
$
890.0

 
$
—

In addition to the amounts shown in the table above, $2.9 million of unrecognized tax benefits have been recorded as liabilities. The timing and amounts of future cash payments related to these liabilities are uncertain.
IMPACT OF INFLATION
We have experienced impact from inflation. Inflation has caused increased food, labor and benefits costs and has increased our operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and reviewing, then implementing, alternative products or processes, or by implementing other cost reduction procedures.
OFF-BALANCE SHEET ARRANGEMENTS
We have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 13 - Commitments and Contingencies, in our Consolidated Financial Statements included in this report. Other than these items, we do not have any off-balance sheet arrangements.
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are disclosed in Note 1 - Nature of Operations and Summary of Significant Accounting Policies to our 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.
Stock-Based Compensation
We measure and recognize compensation expense for our performance awards granted in fiscal 2017 and 2018 that contain a company-specific performance condition at the grant date fair value of the awards that are expected to vest based on management’s periodic estimates. Management’s estimates require highly judgmental assumptions regarding our future operating performance and could result in estimates of compensation expense that vary significantly over the vesting period. Changes in estimates of compensation expense are recognized as an adjustment in the period of the change, as appropriate.
Our performance shares granted before fiscal 2017 contain a market condition. We measure and recognize compensation expense for these shares at fair value using a Monte Carlo simulation model. The Monte Carlo method is a statistical modeling technique that requires highly judgmental assumptions regarding our future operating performance compared to our plan designated peer group in the future. The simulation is based on a probability model and market-based inputs that are used to predict future stock returns. We use the historical operating performance and correlation of stock performance to the S&P 500 composite index of us and our peer group as inputs to the simulation model. These historical returns could differ significantly in the future and as a result, the fair value assigned to the performance shares could vary significantly to the final payout. We believe the Monte Carlo simulation model provides the best evidence of fair value at the grant date and is an appropriate technique for valuing share-based awards.
We determine the fair value of our stock option awards using the Black-Scholes option valuation model. The Black-Scholes model requires judgmental assumptions including expected life and stock price volatility. We base our expected life assumptions on historical experience regarding option life. Stock price volatility is calculated based on historical prices and the expected life of the options.
We recognize compensation expense for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards.

F-19

Income Taxes
We make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. 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 during 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 income tax expense. Significant judgment is required in assessing, among other things, 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.
Impairment of Long-Lived Assets
We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. The impairment test is a two-step process. Step one includes comparing the operating cash flows of the restaurants over their 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 the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the inherent risk. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment.
Impairment 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 consider our restaurants brands, Chili’s and Maggiano’s, to be both our operating segments and reporting units. The impairment test is a two-step process. Step one includes comparing the fair value of our reporting units to their carrying value. If the fair value of the reporting unit exceeds the carrying value, then the goodwill balance is not impaired and no further evaluation is required. If the carrying value of the reporting unit exceeds its fair value, impairment may exist and performing step two is necessary to determine the impairment loss. The amount of impairment would be determined by performing a hypothetical analysis resulting in an implied goodwill value by performing a fair value allocation as if the unit were being acquired in a business combination. This implied value would be compared to the carrying value to determine the amount of impairment loss, if any.
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 profits and cash flows, expected growth rates, terminal values and other factors which could significantly impact the fair value calculations. In the event that these

F-20

assumptions change in the future, we may be required to record impairment charges related to goodwill. The fair values of our reporting units were substantially in excess of the carrying values as of our fiscal 2018 goodwill impairment tests that were performed at the end of the second quarter. No indicators of impairment were identified from the date of our impairment test through the end of fiscal year 2018.
Self-Insurance
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. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. 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 trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.
Gift Card Revenues
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when the gift card is redeemed by the holder. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on our historical gift card redemption patterns and considering our gift cards have no expiration dates or dormancy fees, we can reasonably estimate the amount of gift card balances for which redemption is remote and record breakage income based on this estimate. We recognize breakage income within the franchise and other revenues caption in the consolidated statements of comprehensive income. We update our breakage rate estimate periodically and, if necessary, adjust the deferred revenue 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 on unredeemed gift cards by 25 basis points would result in an impact to our consolidated statement of comprehensive income of approximately $7.8 million. Effective for the first quarter of fiscal 2019, we will adopt the ASU 2014-09, Revenue from Contracts with Customers (Topic 606), please see Note 17 - Effect of New Accounting Standards for further details on this adoption and the impact related to gift card breakage revenues.
Effect of New Accounting Standards
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment - In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This update eliminates step two of the goodwill impairment analysis. Companies will no longer be required to perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, they will measure impairment as the difference between the carrying amount and the fair value of the reporting unit. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2019, which will require us to adopt these provisions in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed with measurement dates after January 1, 2017. The update will be applied on a prospective basis. We do not expect the adoption of this guidance to have any impact to our consolidated financial statements as the fair value of our reporting units is substantially in excess of the carrying values.
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230) - In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods for fiscal years beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early adoption is permitted for financial statements that have not been previously issued. The update will be applied on a retrospective basis. We do not expect the adoption of this guidance to have a material impact to our consolidated financial statements or debt covenants.
ASU 2016-02, Leases (Topic 842) - In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB has subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates requires a lessee to recognize in the balance sheet a liability to make lease payments and a corresponding right-of-use asset for virtually all leases, other

F-21

than leases with a term of 12 months or less. The update also requires additional disclosures about the amount, timing, and uncertainty of cash flows arising from leases. In February 2018, the FASB issued ASU 2018-01 that provided a practical expedient for existing or expired land easements that were not previously accounted for in accordance with ASC 840. The practical expedient would allow entities to elect not to assess whether those land easements are, or contain, leases in accordance with ASC 842 when transitioning to the new leasing standard. The ASU clarifies that land easements entered into (or existing land easements modified) on or after the effective date of the new leasing standard must be assessed under ASC 842.
The updates are effective for annual and interim periods for fiscal years beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020. Early adoption is permitted for financial statements that have not been previously issued. In July 2018, the FASB issued ASU 2018-11 that provided either a modified retrospective transition approach with application in all comparative periods presented, or an alternative transition method, which permits a company to use its effective date as the date of initial application without restating comparative period financial statements. We anticipate implementing the standard by taking advantage of the practical expedient options. The discounted minimum remaining rental payments will be the starting point for determining the right-of-use asset and lease liability. We had operating leases with remaining rental payments of approximately $569.9 million at the end of fiscal 2018. We expect that adoption of the new guidance will have a material impact to our consolidated balance sheets due to recognition of the right-of-use asset and lease liability related to our current operating leases. The process of evaluating the full impact of the new guidance to our consolidated financial statements and disclosures is ongoing, but we anticipate the initial evaluation of the impact will be completed in the first half of fiscal 2019.
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) - In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The FASB has subsequently amended this update by issuing additional ASU’s that provide clarification and further guidance around areas identified as potential implementation issues. These updates provide a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. These updates also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU 2015-14 delaying the effective date of adoption. These updates are now effective for annual and interim periods for fiscal years beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019. Early application in fiscal 2018 is permitted, however we have elected to implement the new guidance effective first quarter of fiscal 2019. These updates permit the use of either the retrospective or cumulative effect transition method. We have selected the cumulative effect transition method.
We performed an analysis of the impact of the new revenue recognition guidance and developed a comprehensive plan for the implementation. The implementation plan included analyzing the impact to our current revenue streams, comparing our historical accounting policies to the new guidance, and identifying potential differences from applying the requirements of the new guidance to our contracts. Based on our evaluation of our revenue streams, we do not believe these updates will impact our recognition of revenue from sales generated at company-owned restaurants or recognition of royalty fees from our franchisees, which are our primary sources of revenue. Our evaluation found that accounting for initial franchise and development fees, advertising contributions from franchisees, and gift card breakage would be impacted for the adoption of ASC 606. Under the new guidance, we will defer the initial development and franchise fees and recognize revenue over the term of the related franchise agreement. This is different from our current accounting policy which is to recognize initial development and franchise fees when we have performed all material obligations and services, which generally occurs when the franchised restaurant opens.
The new guidance will also change our reporting of advertising fund contributions from franchisees and the related advertising expenditures, which are currently reported on a net basis in our Consolidated Statements of Comprehensive Income within Restaurant expenses. Under the new guidance, advertising fund contributions from franchisees will be reported on a gross basis within Franchise and other revenues in the Consolidated Statements of Comprehensive Income, and the related advertising expenses will continue to be reported within Restaurant expenses.
Additionally, under the new standard, estimated breakage income on gift cards will be recognized in proportion to the related gift card redemption patterns over the estimated life of the gift cards. Our current accounting policy is

F-22

to estimate the amount of gift card balances for which redemption is remote, and record breakage income based on this estimate.
We expect upon adoption that we will record an increase to Total shareholders’ deficit in the Consolidated Balance Sheets of approximately $7.3 million which includes the impact of deferred taxes from adopting the standard. The recognition of unamortized franchise and development fees is expected to increase Total liabilities in the Consolidated Balance Sheets by approximately $18.0 million. Advertising contributions will increase both Total revenues and Total operating costs and expenses in fiscal 2019, with no impact to Net income. For the fiscal year ended June 27, 2018, advertising contributions included within Restaurant expenses in the Consolidated Statements of Comprehensive Income totaled $22.6 million. The reduction of gift card liability to adjust to the new redemption pattern is expected to decrease Total liabilities in the Consolidated Balance Sheets by approximately $8.2 million. We are currently in the process of implementing internal controls related to these revenue recognition updates and related disclosures under the new standards.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. The variable rate financial instruments consist of the outstanding borrowings on our revolving credit facility. At June 27, 2018, $820.3 million was outstanding under the revolving credit facility. The impact on our annual results of operations of a one-point interest rate change on the outstanding balance of these variable rate financial instruments as of June 27, 2018 would be approximately $8.2 million.
We purchase certain commodities such as beef, pork, poultry, seafood, produce, dairy and natural gas. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid.
This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

F-23

BRINKER INTERNATIONAL, INC.
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
 
June 27, 2018
 
June 28, 2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
10,872

 
$
9,064

Accounts receivable, net
53,659

 
44,658

Inventories
24,242

 
24,997

Restaurant supplies
46,724

 
46,380

Prepaid expenses
20,787

 
19,226

Total current assets
156,284

 
144,325

Property and Equipment, at Cost:
 
 
 
Land
153,953

 
149,098

Buildings and leasehold improvements
1,673,310

 
1,655,227

Furniture and equipment
722,041

 
713,228

Construction-in-progress
22,161

 
21,767

 
2,571,465

 
2,539,320

Less accumulated depreciation and amortization
(1,632,536
)
 
(1,538,706
)
Net property and equipment
938,929

 
1,000,614

Other Assets:
 
 
 
Goodwill
163,808

 
163,953

Deferred income taxes, net
33,613

 
37,029

Intangibles, net
23,977

 
27,512

Other
30,729

 
30,200

Total other assets
252,127

 
258,694

Total assets
$
1,347,340

 
$
1,403,633

LIABILITIES AND SHAREHOLDERS’ DEFICIT
 
 
 
Current Liabilities:
 
 
 
Current installments of long-term debt
$
7,088

 
$
9,649

Accounts payable
104,662

 
104,231

Gift card liability
119,147

 
126,482

Accrued payroll
74,505

 
70,281

Other accrued liabilities
127,200

 
111,515

Income taxes payable
1,738

 
14,203

Total current liabilities
434,340

 
436,361

Long-term debt, less current installments
1,499,624

 
1,319,829

Other liabilities
131,685

 
141,124

Commitments & Contingencies (Note 8 and Note 13)

 

Shareholders’ Deficit:
 
 
 
Common stock—250,000,000 authorized shares; $0.10 par value; 176,246,649 shares issued and 40,797,919 shares outstanding at June 27, 2018, and 176,246,649 shares issued and 48,440,721 shares outstanding at June 28, 2017
17,625

 
17,625

Additional paid-in capital
511,604

 
502,074

Accumulated other comprehensive loss
(5,836
)
 
(11,921
)
Retained earnings
2,683,033

 
2,627,073

 
3,206,426

 
3,134,851

Less treasury stock, at cost (135,448,730 shares at June 27, 2018 and 127,805,928 shares at June 28, 2017)
(3,924,735
)
 
(3,628,532
)
Total shareholders’ deficit
(718,309
)
 
(493,681
)
Total liabilities and shareholders’ deficit
$
1,347,340

 
$
1,403,633


See accompanying Notes to the Consolidated Financial Statements.
F-24

BRINKER INTERNATIONAL, INC.
Consolidated Statements of Comprehensive Income
(In thousands, except per share amounts)
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Revenues:
 
 
 
 
 
Company sales
$
3,041,516

 
$
3,062,579

 
$
3,166,659

Franchise and other revenues
93,901

 
88,258

 
90,830

Total revenues
3,135,417

 
3,150,837

 
3,257,489

Operating costs and expenses:
 
 
 
 
 
Company restaurants (excluding depreciation and amortization)
 
 
 
 
 
Cost of sales
796,007

 
791,321

 
840,204

Restaurant labor
1,033,853

 
1,017,945

 
1,036,005

Restaurant expenses
757,547

 
773,510

 
762,663

Company restaurant expenses
2,587,407

 
2,582,776

 
2,638,872

Depreciation and amortization
151,392

 
156,409

 
156,368

General and administrative
136,012

 
132,819

 
127,593

Other gains and charges
34,500

 
22,655

 
17,180

Total operating costs and expenses
2,909,311

 
2,894,659

 
2,940,013

Operating income
226,106

 
256,178

 
317,476

Interest expense
58,986

 
49,547

 
32,574

Other, net
(3,102
)
 
(1,877
)
 
(1,485
)
Income before provision for income taxes
170,222

 
208,508

 
286,387

Provision for income taxes
44,340

 
57,685

 
85,767

Net income
$
125,882

 
$
150,823

 
$
200,620

 
 
 
 
 
 
Basic net income per share
$
2.75

 
$
2.98

 
$
3.47

 
 
 
 
 
 
Diluted net income per share
$
2.72

 
$
2.94

 
$
3.42

 
 
 
 
 
 
Basic weighted average shares outstanding
45,702

 
50,638

 
57,895

 
 
 
 
 
 
Diluted weighted average shares outstanding
46,264

 
51,250

 
58,684

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment
$
186

 
$
(327
)
 
$
(2,964
)
Other comprehensive income (loss)
186

 
(327
)
 
(2,964
)
Comprehensive income
$
126,068

 
$
150,496

 
$
197,656

 
 
 
 
 
 
Dividends per share
$
1.52

 
$
1.36

 
$
1.28



See accompanying Notes to the Consolidated Financial Statements.
F-25

BRINKER INTERNATIONAL, INC.
Consolidated Statements of Shareholders’ Deficit
(In thousands)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shares
 
Amount
Balances at June 24, 2015
60,586

 
$
17,625

 
$
490,111

 
$
2,419,331

 
$
(3,009,249
)
 
$
(8,630
)
 
$
(90,812
)
Net income
—

 
—

 
—

 
200,620

 
—

 
—

 
200,620

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(2,964
)
 
(2,964
)
Dividends ($1.28 per share)
—

 
—

 
—

 
(74,235
)
 
—

 
—

 
(74,235
)
Stock-based compensation
—

 
—

 
15,207

 
—

 
—

 
—

 
15,207

Purchases of treasury stock
(5,842
)
 
—

 
(3,796
)
 
—

 
(281,109
)
 
—

 
(284,905
)
Issuances of common stock
677

 
—

 
(11,778
)
 
—

 
17,925

 
—

 
6,147

Excess tax benefit from stock-based compensation
—

 
—

 
5,366

 
—

 
—

 
—

 
5,366

Balances at June 29, 2016
55,421

 
17,625

 
495,110

 
2,545,716

 
(3,272,433
)
 
(11,594
)
 
(225,576
)
Net income
—

 
—

 
—

 
150,823

 
—

 
—

 
150,823

Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(327
)
 
(327
)
Dividends ($1.36 per share)
—

 
—

 
—

 
(69,466
)
 
—

 
—

 
(69,466
)
Stock-based compensation
—

 
—

 
14,453

 
—

 
—

 
—

 
14,453

Purchases of treasury stock
(7,451
)
 
—

 
(1,753
)
 
—

 
(369,124
)
 
—

 
(370,877
)
Issuances of common stock
471

 
—

 
(7,404
)
 
—

 
13,025

 
—

 
5,621

Excess tax benefit from stock-based compensation
—

 
—

 
1,668

 
—

 
—

 
—

 
1,668

Balances at June 28, 2017
48,441

 
17,625

 
502,074

 
2,627,073

 
(3,628,532
)
 
(11,921
)
 
(493,681
)
Net income
—

 
—

 
—

 
125,882

 
—

 
—

 
125,882

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
186

 
186

Disposition of equity method investment
—

 
—

 
—

 
—

 
—

 
5,899

 
5,899

Dividends ($1.52 per share)
—

 
—

 
—

 
(69,922
)
 
—

 
—

 
(69,922
)
Stock-based compensation
—

 
—

 
14,245

 
—

 
—

 
—

 
14,245

Purchases of treasury stock
(7,882
)
 
—

 
(213
)
 
—

 
(303,026
)
 
—

 
(303,239
)
Issuances of common stock
239

 
—

 
(4,502
)
 
—

 
6,823

 
—

 
2,321

Balances at June 27, 2018
40,798

 
$
17,625

 
$
511,604

 
$
2,683,033

 
$
(3,924,735
)
 
$
(5,836
)
 
$
(718,309
)


See accompanying Notes to the Consolidated Financial Statements.
F-26

BRINKER INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
 
Fiscal Years Ended
 
June 27, 2018
 
June 28, 2017
 
June 29, 2016
Cash flows from operating activities
 
 
 
 
 
Net income
$
125,882

 
$
150,823

 
$
200,620

Adjustments to reconcile Net income to net cash from operating activities:
 
 
 
 
 
Depreciation and amortization
151,392

 
156,409

 
156,368

Stock-based compensation
14,245

 
14,568

 
15,159

Deferred income taxes, net
3,421

 
(22,704
)
 
23,902

Restructure charges and other impairments
21,704

 
14,412

 
17,445

Net loss (gain) on disposal of assets
1,602

 
(377
)
 
87

Undistributed loss (earnings) on equity investments
330

 
1

 
(571
)
Other
3,068

 
3,009

 
1,918

Changes in assets and liabilities:
 
 
 
 
 
Accounts receivable, net
(3,281
)
 
3,487

 
(3,682
)
Inventories
12

 
(62
)
 
11

Restaurant supplies
(1,231
)
 
(1,496
)
 
(1,651
)
Prepaid expenses
(1,694
)
 
(696
)
 
(11,178
)
Other assets
255

 
308

 
72

Accounts payable
1,569

 
2,984

 
(5,783
)
Gift card liability
(7,334
)
 
4,153

 
6,190

Accrued payroll
4,223

 
(714
)
 
(17,229
)
Other accrued liabilities
(6,794
)
 
(5,803
)
 
725

Current income taxes
(14,877
)
 
(7,692
)
 
14,875

Other liabilities
(8,041
)
 
4,499

 
2,882

Net cash provided by operating activities
284,451

 
315,109

 
400,160

Cash flows from investing activities
 
 
 
 
 
Payments for property and equipment
(101,281
)
 
(102,573
)
 
(112,788
)
Proceeds from sale of assets
19,873

 
3,157

 
4,256

Proceeds from note receivable
1,867

 
—

 
—

Insurance recoveries
1,747

 
—

 
—

Payment for business acquisition, net of cash acquired
—

 
—

 
(105,577
)
Net cash used in investing activities
(77,794
)
 
(99,416
)
 
(214,109
)
Cash flows from financing activities
 
 
 
 
 
Borrowings on revolving credit facility
1,016,000

 
250,000

 
256,500

Payments on revolving credit facility
(588,000
)
 
(388,000
)
 
(110,000
)
Purchases of treasury stock
(303,239
)
 
(370,877
)
 
(284,905
)
Payments on long-term debt
(260,311
)
 
(3,832
)
 
(3,402
)
Payments of dividends
(70,009
)
 
(70,771
)
 
(74,066
)
Proceeds from issuances of treasury stock
2,321

 
5,621

 
6,147

Payments for debt issuance costs
(1,611
)
 
(10,216
)
 
—

Proceeds from issuance of long-term debt
—

 
350,000

 
—

Net cash used in financing activities
(204,849
)
 
(238,075
)
 
(209,726
)
Net change in cash and cash equivalents
1,808

 
(22,382
)
 
(23,675
)
Cash and cash equivalents at beginning of year
9,064

 
31,446

 
55,121

Cash and cash equivalents at end of year
$
10,872

 
$
9,064

 
$
31,446


See accompanying Notes to the Consolidated Financial Statements.
F-27

BRINKER INTERNATIONAL, INC.
Notes to the Consolidated Financial Statements

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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. At June 27, 2018, we owned, operated, or franchised 1,686 restaurants, consisting of 997 company-owned restaurants and 689 franchised restaurants, located in the United States and 31 countries and two territories outside of the United States.
Basis of Presentation
Our Consolidated Financial Statements 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 52/53 week fiscal year ending on the last Wednesday in June. Fiscal years 2018 and 2017, which ended on June 27, 2018 and June 28, 2017, respectively, each contained 52 weeks. Fiscal year 2016 ended on June 29, 2016 and contained 53 weeks. The estimated impact of the 53rd week in fiscal 2016 was an increase in revenue of approximately $58.3 million. While certain expenses increased in direct relationship to additional revenue 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 revenue and operating expense trends. Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions. Franchise and other revenues includes royalties, development fees, franchise fees, Maggiano’s banquet service charge income, gift card breakage and discounts, digital entertainment revenue, Chili’s retail food product royalties, merchandise and delivery fee income.
We report certain labor and related expenses in a separate caption on the Consolidated Statements of Comprehensive Income titled Restaurant labor. Restaurant labor includes all compensation-related expenses, including benefits and incentive compensation, for restaurant team members at the general manager level and below. Labor-related expenses attributable to multi-restaurant (or above-restaurant) supervision is included in Restaurant expenses.
New Accounting Standards Implemented
ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718) - In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-09. This update changed the recognition of excess tax benefits and tax deficiencies resulting from the settlement of share-based awards from an adjustment to Additional paid-in capital on the Consolidated Balance Sheets to an adjustment to the Provision for income taxes on the Consolidated Statements of Comprehensive Income and is applied on a prospective basis. This update also changed the classification of excess tax benefits from Cash flows from financing activities to Cash flows from operating activities on the Consolidated Statements of Cash Flows and is applied retrospectively. This update was effective for annual and interim periods for fiscal years beginning after December 15, 2016, which required us to adopt these provisions in the first quarter of fiscal 2018. We recognized a discrete tax expense of $1.1 million in the Provision for income taxes, which resulted in a decrease in Diluted net income per share of $0.02, in the Consolidated Statements of Comprehensive Income for the fiscal year ended June 27, 2018. The inclusion of excess tax benefits and tax deficiencies within our Provision for income taxes will increase its volatility as the amount of excess tax benefits or tax deficiencies from share-based compensation awards depends on our stock price at the date the awards vest. In addition, we reclassified $2.2 million of excess tax benefits received from Cash flows from financing activities to Cash flows from operating activities in our Consolidated Statements of Cash Flows for the fiscal year period ended June 28, 2017. The adoption of the other provisions in this update, including the accounting policy election for accounting for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows, had no impact to our consolidated

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financial statements. We will continue to estimate forfeitures of share-based awards.
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
We record revenue from the sale of food, beverages and alcohol as products are sold. Initial fees received from a franchisee to establish a new franchise are recognized as income when we have performed our obligations required to assist the franchisee in opening a new franchise restaurant, which is generally upon the opening of such restaurant. Fees received for development arrangements are recognized as income upon satisfaction of our obligations, generally upon the execution of the agreement when the development rights are conveyed to the franchisee. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned.
Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when the gift card is redeemed by the holder. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on our historical gift card redemption patterns and considering our gift cards have no expiration dates or dormancy fees, we can reasonably estimate the amount of gift card balances for which redemption is remote and record breakage income based on this estimate. We recognize breakage income within franchise and other revenues in the Consolidated Statements of Comprehensive Income. We update our estimate of our breakage rate periodically and, if necessary, adjust the deferred revenue balance accordingly.
Effective for the first quarter of fiscal 2019, we will adopt the ASU 2014-09, Revenue from Contracts with Customers (Topic 606), please see Note 17 - Effect of New Accounting Standards for further details on this adoption.
Fair Value Measurements
Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants on the measurement date. In determining fair value, the accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows:
•
Level 1 - inputs are quoted prices in active markets for identical assets or liabilities.
•
Level 2 - inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities.
•
Level 3 - inputs are unobservable and reflect our own assumptions.
Cash and Cash Equivalents
Our policy is to invest cash in excess of operating requirements in income-producing investments. Income-producing investments with original maturities of three months or less are reflected as cash equivalents.
Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, represents the estimated net realizable value. Our primary account receivables are due from franchisees, gift card sales, store purchases made on credit cards, and from time-to-time, insurance recoveries, vendor rebates and landlord related receivables. Provisions for doubtful accounts are recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible.

F-29

Inventories
Inventories consist of food, beverages and supplies and are valued at the lower of cost or net realizable value, using the first-in, first-out or “FIFO” method.
Property and Equipment
Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated using the straight-line method over the lesser of the term of the lease, including certain renewal options, or the estimated useful lives of the assets, which range from 5 to 20 years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from 3 to 7 years. Depreciation expense related to property and equipment for the fiscal years ended June 27, 2018, June 28, 2017, and June 29, 2016 of $150.1 million, $155.0 million, and $154.8 million, respectively, was recorded in Depreciation and amortization on the Consolidated Statements of Comprehensive Income. Routine repair and maintenance costs are expensed when incurred. Major replacements and improvements are capitalized.
We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. We have determined the restaurant level is the lowest level of identifiable cash flows. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on discounted projected future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the inherent risk. Impairment charges are included in Other gains and charges in the Consolidated Statements of Comprehensive Income.
During fiscal 2018, we sold the portion of our current headquarters property that we owned for net proceeds of $13.7 million. We will continue to occupy the property rent-free until our new corporate headquarters location is available or March 31, 2019. The net sales proceeds have been recorded within Other accrued liabilities on the Consolidated Balance Sheets, until we have fully relinquished possession of the sold property and our involvement has been terminated, please see Note 5 - Accrued and Other Liabilities for further details. Once our possession of the existing headquarters has terminated, we will recognize the sale, and record a gain related to the transaction. As of June 27, 2018, Land of $5.9 million and additional Net property and equipment of $2.2 million were recorded in our Consolidated Balance Sheets related to the sold property.
During the fourth quarter of fiscal 2018, we marketed for sale leaseback 137 Chili’s restaurants located throughout the United States. As of June 27, 2018, the Consolidated Balance Sheets includes Land of $100.9 million, Buildings and leasehold improvements of $210.3 million, certain fixtures included in Furniture and equipment of $9.0 million and Accumulated depreciation of $157.9 million related to these properties. Please see Note 16 - Subsequent Events for further details on the sale leaseback transactions.
Definite-lived Intangible Assets
Definite-lived intangible assets primarily include reacquired franchise rights resulting from our acquisitions. Definite-lived intangible assets are amortized using the straight-line method over the estimated useful lives of the assets.
We determine the fair value of reacquired franchise rights based on discounted projected future operating cash flows of the restaurants associated with these franchise rights. We review the carrying amount semi-annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. Impairment charges are included in Other gains and charges in the Consolidated Statements of Comprehensive Income.
Operating Leases
Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation and rent expense includes any rent holiday period, which is the period of time between taking control of a leased site and the rent commencement

F-30

date. Contingent rents are generally amounts due as a result of sales in excess of amounts stipulated in certain restaurant leases and are included in rent expense at the point in time we determine that it is probable that such sales levels will be achieved. Landlord contributions are recorded when received as a deferred rent liability in Other accrued liabilities and/or Other liabilities in the Consolidated Balance Sheets and amortized as a reduction of rent expense on a straight-line basis over the lease term.
Advertising
Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. Advertising costs, net of advertising contributions from franchisees, were $98.3 million, $103.8 million and $93.6 million in fiscal years ended June 27, 2018, June 28, 2017 and June 29, 2016, respectively, and are included in Restaurant expenses in the Consolidated Statements of Comprehensive Income.
Effective for the first quarter of fiscal 2019, we will adopt the ASU 2014-09, Revenue from Contracts with Customers (Topic 606), that reclassifies the presentation of advertising contributions on the Consolidated Statements of Comprehensive Income, please see Note 17 - Effect of New Accounting Standards for further details on this adoption.
Goodwill
Goodwill is not subject to amortization, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill has been assigned to reporting units for purposes of impairment testing. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.
Goodwill impairment tests consist of a comparison of each reporting unit’s fair value with its carrying value. We determine fair value based on a combination of market-based values and discounted projected future operating cash flows of the restaurant brands using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value. We determined that there was no goodwill impairment during our annual tests as the fair value of our reporting units was substantially in excess of the carrying values. No indicators of impairment were identified through the end of fiscal year 2018. See Note 4 - Goodwill and Intangibles for additional disclosures.
We occasionally acquire restaurants from our franchisees. Goodwill from these acquisitions represents the excess of the cost of the business acquired over the net amounts assigned to assets acquired, including identifiable intangible assets, primarily reacquired franchise rights. In connection with the sale of restaurants, we will allocate goodwill from the reporting unit, or restaurant brand, to the disposal group in the determination of the gain or loss on the disposition. The allocation is based on the relative fair values of the disposal group and the portion of the reporting unit that was retained. Additionally, if we sell restaurants with reacquired franchise rights, we will include those assets in the gain or loss on the disposition.
Liquor Licenses
The costs of obtaining non-transferable liquor licenses from local government agencies are expensed over the specified term of the license. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in Intangibles, net in the Consolidated Balance Sheets.
Transferable liquor licenses are tested for impairment semi-annually or more frequently if events or circumstances indicate that the asset might be impaired. Impairment charges are recognized based on the excess of carrying value over fair value. We determine fair value based on prices in the open market for licenses in same or similar jurisdictions. Impairment charges are included in Other gains and charges in the Consolidated Statements of Comprehensive Income.
Sales Taxes
Sales taxes collected from guests are excluded from revenues. The obligation is included in Other accrued liabilities in the Consolidated Balance Sheets until the taxes are remitted to the appropriate taxing authorities.

F-31

Self-Insurance Program
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. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. 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 trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted. The estimated incurred but unreported costs to settle unpaid claims are included in Other accrued liabilities and Other liabilities in the Consolidated Balance Sheets.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return that is not more-likely-than-not to be realized. We recognize any interest and penalties related to unrecognized tax benefits in Provision for income taxes in the Consolidated Statements of Comprehensive Income.
We reinvest foreign earnings, therefore, United States deferred income taxes have not been provided on foreign earnings.
Stock-Based Compensation
We measure and recognize compensation cost at fair value for all share-based payments. We record compensation expense using a graded-vesting schedule or on a straight-line basis, as applicable, over the vesting period, or to the date on which retirement eligibility is achieved, if shorter. We recognize compensation expense for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards.
Certain employees are eligible to receive stock options, performance stock options, performance shares, restricted stock, and restricted stock units, while non-employee members of the Board of Directors (the “Board”) are eligible to receive stock options, restricted stock and restricted stock units. Awards granted to the Board are non-forfeitable and are fully expensed upon grant. Awards to eligible employees may vest over a specified period of time, or service period, only or may also contain performance-based conditions. The fair value of restricted stock and restricted stock units that do not contain a performance condition are based on our closing stock price on the date of grant, while the fair value of stock options is estimated using the Black-Scholes option-pricing model on the date of grant.
Performance shares represent a right to receive shares of common stock upon satisfaction of company performance goals at the end of a three-fiscal-year cycle. Vesting of performance shares granted in fiscal 2018 and 2017 are contingent upo