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HOSPITALITY
BRINKER INTERNATIONAL, INC.
® ANNUAL REPORT

Table of contents

  • Page 1
    B r I n k E r I n T E r n A T I O n A L , I n c.® a n n u a l r e p o r t H O S P I T A L I T Y

  • Page 2
    brands

  • Page 3
    ... value with delicious food and signature drinks. Despite the current economic downturn, guests continue to savor the opportunity to dine out at Brinker® restaurants. Whether they are grabbing a quick lunch while managing a packed schedule or lingering over a celebratory meal with friends or family...

  • Page 4
    ... such favorites as Chicken Crispers®, Baby Back Ribs, Fajitas, and Big Mouth Burgers®. A new addition this year, Big Mouth ® Bites, mini burgers served with Jalapeño Chili's newly remodeled Margarita Bar 2) restaurant atmosphere Ensuring that our restaurant atmosphere represents the unique...

  • Page 5
    ... all types of special celebrations and continue to be an important part of the business. In May, our Maggiano's® team was honored by Nations Restaurant News with a 2008 Menu Masters Award for Best Single Product Rollout - Braised Beef Cannelloni. at romano's Macaroni grill®, the brand builds on...

  • Page 6
    ..., the many cost advantages in terms of food, facilities, and labor make international markets especially attractive to Brinker International as well as our global franchise partners. We intend to continue building on our success in the global marketplace with a number of competitive advantages...

  • Page 7
    ... guest. Comprehensive hospitality training emphasizes the importance of looking for clues that help Team Members understand and act on our guests' needs. In addition, we are streamlining and revamping processes in the front and back of the house so food delivery can be appropriately timed gIvIng...

  • Page 8
    ... Center in Dallas reach o var out to various charitable organizations in the community by ntee volunteering their time as well as donating goods and necessities o those i to in need. The Brinker Family Fund, established in 97, h 1997, holds a special place in the hearts of Brinker Team emb Members...

  • Page 9
    ... General Counsel John R. Hosea Vice President of People Services E. Denise Moore Vice President of Property Management Marie L. Perry Vice President of Treasury and Investor Relations Donald L. Reyburn Vice President of Franchise Business Development William D. Rhodes Vice President of Accounting...

  • Page 10
    ... Annual Report on Form 10-K for the year ended June 25, 2008. Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy are registered and/or proprietary trademarks of Brinker International Payroll Company, L.P . Independent Public Accountants...

  • Page 11
    ..., Dallas, Texas (Address of principal executive offices) Registrant's telephone number, including area code (972) 980-9917 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class 75-1914582 (I.R.S. employer identification no.) 75240 (Zip Code) Common Stock, $0.10 par value...

  • Page 12

  • Page 13
    ... we serve our guests for more than 33 years. Every day at Chili's locations around the world, our guests are greeted with ''Welcome to Chili's''. Chili's menu features signature offerings such as Big Mouth Burgers and Bites, Baby Back Ribs, Sizzling Fajitas and our Triple Dipper Appetizer, to name...

  • Page 14
    ... of Macaroni Grill's Curbside-To-Go service. We deliver delicious, chef-prepared meals right to their cars for our guests to enjoy at home. Macaroni Grill also offers catering service from drop-off delivery to full service event planning in many locations. During the year ending June 25, 2008, entr...

  • Page 15
    ... areas in the United States but also on smaller market areas and non-traditional locations (such as airports, college campuses, toll plazas, and food courts) that can adequately support our restaurant brands. International expansion efforts continue to focus on introducing our brands into new...

  • Page 16
    ...as shopping centers, hotel and entertainment complexes and office buildings; supply and demand trends, such as proposed infrastructure improvements, new developments, and existing and potential competition. Members of each brand's executive team inspect, review and approve each restaurant site prior...

  • Page 17
    ... 2008 and the planned openings in fiscal 2009: Fiscal 2008 Openings(1) Fiscal 2009 Projected Openings Chili's: Company-operated . . Franchise(2) ...On The Border: Company-operated . . Franchise(2) ...Maggiano's ...Macaroni Grill: Company-operated . . Franchise(2) ...International: Company-operated...

  • Page 18
    ... in new restaurants may differ in the future due to building design specifications, site location, and site characteristics. The following table illustrates the approximate average capital investment for restaurants opened in fiscal 2008: Chili's On the Border Maggiano's Macaroni Grill Land...

  • Page 19
    ...dollar value in relation to revenues. Advertising and Marketing Our brands generally focus on the eighteen to fifty-four year-old age group, which constitutes approximately half of the United States population. Though members of this target segment grew up on fast food, we believe that for many meal...

  • Page 20
    ..., Compensation Committee Charter, Executive Committee Charter, Code of Conduct and Ethical Business Policy, and Problem Resolution Procedure/Whistle Blower Policy. Item 1A. RISK FACTORS. International'', ''Chili's'', Southwest Grill & Bar'', Border Mexican Grill & and ''Macaroni Grill'', as We wish...

  • Page 21
    ... ability to open new restaurants and to maintain our existing and future operations. Each of our restaurants is subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in the state, county and/or municipality where the restaurant is located. We...

  • Page 22
    ... and obtain construction materials at suitable prices, • meet construction schedules, and • hire and train qualified managers and team members for the restaurants. The costs related to restaurant and brand development include purchases and leases of land, buildings and equipment and facility and...

  • Page 23
    ... conditions and financial and credit markets (including rising interest rates and costs for consumers and reduced disposable income), credit availability, increased costs of food commodities, increased fuel costs and availability for our team members, customers and suppliers, health epidemics or...

  • Page 24
    Item 2. PROPERTIES. Restaurant Locations At June 25, 2008, our system of company-owned and franchised restaurants included 1,888 restaurants located in 50 states, and Washington, D.C. We also have restaurants in the countries of Bahrain, Canada, Ecuador, Egypt, Germany, Guatemala, Honduras, ...

  • Page 25
    ...current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal and rest breaks. The lawsuit seeks penalties and attorneys' fees and was certified as a class action in July 2006. On July 22, 2008...

  • Page 26
    PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the New York Stock Exchange (''NYSE'') under the symbol ''EAT''. Bid prices quoted represent interdealer prices without adjustment for retail ...

  • Page 27
    ... in our stock and each of the indexes on June 25, 2003 and its relative performance is tracked through June 25, 2008. The values shown are neither indicative nor determinative of future performance. 2003 2004 2005 2006 2007 2008 Brinker International ...S&P 500 ...S&P Restaurants(1) ... $100.00...

  • Page 28
    ...be purchased under publicly announced programs. Unless otherwise indicated, shares owned and tendered by employees to satisfy tax withholding obligations were purchased at the closing price of the Company's shares on the date of vesting. Item 6. SELECTED FINANCIAL DATA. The information set forth in...

  • Page 29
    ... incorporate that information in this document by reference. The Board of Directors has adopted a code of ethics that applies to all of the members of Board of Directors and all of our employees, including, the principal executive officer, principal financial officer, principal accounting officer or...

  • Page 30
    ...If you would like information about our security ownership of certain beneficial owners and management and related stockholder matters, you should read the sections entitled ''Director Compensation for Fiscal 2008'', ''Compensation Discussion and Analysis'', and ''Stock Ownership of Certain Persons...

  • Page 31
    ... has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BRINKER INTERNATIONAL, INC., a Delaware corporation By: /s/ CHARLES M. SONSTEBY Charles M. Sonsteby, Executive Vice President and Chief Financial Officer Dated: August 25, 2008 Pursuant to the...

  • Page 32
    ...Cash Flows-Fiscal Years Ended June 25, 2008, June 27, 2007, and June 28, 2006 ...Notes to Consolidated Financial Statements ...Reports of Independent Registered Public Accounting Firm ...Management's Responsibility for Consolidated Financial Statements ...Management's Report on Internal Control over...

  • Page 33
    ...,000,000 Credit Agreement dated October 6, 2004, by and among Registrant, Brinker Restaurant Corporation, Bank of America, N.A., J.P. Morgan Chase Bank, Citibank, N.A., and Citigroup Global Markets, Inc.(10) Registrant's Performance Share Plan Description.(11) $350,000,000 Fixed Rate Promissory Note...

  • Page 34
    ...Sonsteby, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(2) Proxy Statement of Registrant.(16) (1) Filed as an exhibit to annual report on Form 10-K for year ended June...

  • Page 35
    ... average shares outstanding ...Diluted weighted average shares outstanding ...Balance Sheet Data: Working capital (deficit)(b) ...Total assets ...Long-term obligations(b) ...Shareholders' equity ...Cash dividends per share ...Number of Restaurants Open (End of Period): Company-operated ...Franchised...

  • Page 36
    ... also provide corporate support services for the new entity for one year with an option for one additional year. As a result of this agreement, Macaroni Grill has now been included in our results from continuing operations for fiscal 2008 and prior years. The transaction is expected to close in the...

  • Page 37
    .... During fiscal 2008, these strategies resulted in the following highlights: • Introduced successful menu items across our brands as a result of our focus on food and beverage excellence, including Honey Chipotle Chicken Crispers and updates on the classic Big Mouth Burger at Chili's, Border Smart...

  • Page 38
    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS company-owned restaurants in fiscal 2009 and even fewer restaurants in fiscal 2010. As a result, our overall revenues will now be driven in a more balanced manner of comparable restaurant sales and increasing ...

  • Page 39
    ...comparable restaurant sales resulted from a decline in customer traffic at all brands and unfavorable product mix shifts at On The Border and Maggiano's. These decreases were partially offset by an increase in menu prices at all brands and favorable mix shifts at Chili's and Macaroni Grill. Revenues...

  • Page 40
    ... of new appetizer menu items at Chili's and premium margaritas at On The Border. Additionally, we experienced unfavorable pricing for salmon and produce. The overall cost increase was partially offset by favorable pricing for ribs and steaks. Restaurant expenses, as a percent of revenues, increased...

  • Page 41
    ... and the sale of 171 company-owned restaurants to franchisees as well as the timing of operational payments and receipts. Capital expenditures consist of purchases of land for future restaurant sites, new restaurants under construction, purchases of new and replacement restaurant furniture and...

  • Page 42
    ... of our credit rating at such time, but is subject to a maximum of LIBOR plus 1.5%. Based on our current credit rating, we are paying interest at a rate of LIBOR plus 0.65%. Excluding the impact of assets held for sale, the working capital deficit decreased to $187.9 million at June 25, 2008 from...

  • Page 43
    ... 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...

  • Page 44
    ... 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. In the ordinary course of business, there...

  • Page 45
    ..., at least annually we assess the recoverability of goodwill related to our restaurant brands. This impairment test requires us to estimate fair values of our restaurant brands by making assumptions regarding future profits and cash flows, expected growth rates, terminal values, and other factors...

  • Page 46
    ...and credit facilities, totaled $558.0 million at June 25, 2008. 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 25, 2008 would be approximately $5.6 million. We may from time to time...

  • Page 47
    BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Fiscal Years 2007 2008 2006 Revenues ...Operating Costs and Expenses: Cost of sales ...Restaurant expenses ...Depreciation and amortization General and administrative ...Other gains and charges ...

  • Page 48
    BRINKER INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) 2008 ASSETS Current Assets: Cash and cash equivalents . Accounts receivable ...Inventories ...Prepaid expenses and other Deferred income taxes ...Assets held for sale ...2007 ... ... ... ... ...

  • Page 49
    ...Realized gain on sale of investments, net ...of tax of tax ...- - - - Comprehensive income ...Cash dividends ($0.34 per share) ...Stock-based compensation ...Purchases of treasury stock ...Issuances of common stock ...Tax benefit from stock options exercised . . Issuance of restricted stock, net of...

  • Page 50
    ...) borrowings on credit facilities ...Payments on long-term debt ...Purchases of treasury stock ...Proceeds from issuances of treasury stock ...Payments of dividends ...Excess tax benefits from stock-based compensation ... Net cash used in financing activities of continuing operations ...Cash Flows...

  • Page 51
    ... reported in the consolidated balance sheets. The fair value of the 5.75% notes, based on quoted market prices, totaled approximately $283.4 million and $288.8 million at June 25, 2008 and June 27, 2007, respectively. The fair value of capital lease obligations is based on the amount of future...

  • Page 52
    ... uncollectible. (f) Inventories Inventories, which consist of food, beverages, and supplies, are stated at the lower of cost (weighted average cost method) or market. (g) Property and Equipment Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated using the...

  • Page 53
    ... term, including renewal options, or 20 years. (i) Capitalized Interest Interest costs capitalized during the construction period of restaurants were approximately $3.7 million, $6.0 million and $5.0 million during fiscal 2008, 2007, and 2006, respectively. (j) Advertising Advertising production...

  • Page 54
    ...of compensation cost at fair value for all share-based payments, including stock options. Stock-based compensation expense for fiscal 2008, 2007 and 2006 includes compensation expense, recognized over the applicable vesting periods, for new share-based awards and for share-based awards granted prior...

  • Page 55
    .... The total income tax benefit recognized in the consolidated statements of income related to stock-based compensation was approximately $6.1 million, $10.5 million and $7.7 million during fiscal 2008, 2007 and 2006, respectively. The weighted average fair values of option grants were $7.18...

  • Page 56
    ... of products, contracts, customers, and employees and all operate as full-service restaurants offering lunch and dinner in the casual-dining segment of the industry. In addition, food costs, labor and facility-related costs comprise the majority of our brands' total costs and drive similar long-term...

  • Page 57
    ... ownership interest in the brand. We will also provide corporate support services for the new entity for one year with an option for one additional year. In accordance with SFAS 144, we have classified the results of Macaroni Grill in continuing operations for fiscal 2008 and prior years as we will...

  • Page 58
    ... impaired based on an analysis of projected operating performance and operating cash flows and a $1.9 million charge related to the decrease in the estimated sales value of land associated with previously closed restaurants. In fiscal 2008, we also made the decision to reduce future domestic company...

  • Page 59
    ... and other benefits, net of income related to the forfeiture of stock-based compensation awards. In fiscal 2007, we recorded a $12.9 million charge for long-lived asset impairments resulting from the decision to close 13 restaurants, including nine Macaroni Grill, three On The Border, and one Chili...

  • Page 60
    ... applying the statutory Federal income tax rate of 35% to income before provision for income taxes is as follows (in thousands): 2008 2007 2006 Income tax expense at statutory rate ...FICA tax credit ...State income taxes, net of Federal benefit Tax settlements ...Stock-based compensation ...Other...

  • Page 61
    ... of the 2008 beginning and ending amount of unrecognized tax benefits is a follows: (in thousands) Balance at June 28, 2007 ...Additions based on tax positions related to fiscal 2008 . Additions based on tax positions related to prior years . Settlements with tax authorities ...Expiration...

  • Page 62
    ... giving the lender an option not to extend funding and bears interest based upon a negotiated rate (federal funds rate plus 0.84% or 2.90% as of June 25, 2008). Our current borrowing capacity under this credit facility as of June 25, 2008 was $150.0 million based on our current credit rating...

  • Page 63
    ... facilities, office space, and certain equipment under operating leases having terms expiring at various dates through fiscal 2093. The restaurant leases have renewal clauses of 1 to 35 years at our option and, in some cases, have provisions for contingent rent based upon a percentage of sales in...

  • Page 64
    ... (average rate of 7%) ...Present value of minimum lease payments ...Less current installments ... As of June 25, 2008, we had entered into other lease agreements for restaurant facilities currently under construction or yet to be constructed. Classification of these leases as capital or operating...

  • Page 65
    ... INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 12. STOCK-BASED COMPENSATION (Continued) Transactions during fiscal 2008 were as follows (in thousands, except option prices): Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Number...

  • Page 66
    ...June 25, 2008. Certain current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal and rest breaks. The lawsuit seeks penalties and attorney's fees and was certified as a class action in July...

  • Page 67
    ...CONSOLIDATED FINANCIAL STATEMENTS (Continued) 15. CONTINGENCIES (Continued) the California Court of Appeal decertified the class action on all claims with prejudice. We cannot anticipate what actions the plaintiff will take in response to this ruling, but we intend to vigorously defend our position...

  • Page 68
    ...Share-Based Payment'' in fiscal year 2006. Also as discussed in Note 1 of the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Interpretation No. 48, ''Accounting for Uncertainty in Income Taxes'' in fiscal year 2008. KPMG LLP Dallas...

  • Page 69
    ... Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board...

  • Page 70
    ... effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. The effectiveness of our internal control over financial reporting as of June 25, 2008 has...

  • Page 71
    ... INTERNATIONAL, INC., A DELAWARE CORPORATION SUBSIDIARIES REGISTRANT'S subsidiaries operate full-service restaurants in various locations throughout the United States under the names Chili's Grill & Bar, Romano's Macaroni Grill, On The Border Mexican Grill & Cantina, and Maggiano's Little Italy...

  • Page 72
    ... of Financial Accounting Standards No. 123 (revised 2004), ''Share-Based Payment,'' in fiscal year 2006 and the adoption of the provisions of the Financial Accounting Standards Board's Interpretation No. 48, ''Accounting for Uncertainty in Income Taxes,'' in fiscal year 2008. KPMG LLP Dallas, Texas...

  • Page 73
    ..., that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Dated: August 25, 2008 /s/ DOUGLAS H. BROOKS Douglas H. Brooks Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

  • Page 74
    ... material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Dated: August 25, 2008 /s/ CHARLES M. SONSTEBY Charles M. Sonsteby Executive Vice President and Chief Financial Officer (Principal Financial Officer)

  • Page 75
    ... information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 25, 2008 By: /s/ DOUGLAS H. BROOKS Name: Douglas H. Brooks Title: Chairman of the Board, President and Chief Executive Officer (Principal...

  • Page 76
    ... the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 25, 2008 By: /s/ CHARLES M. SONSTEBY Name: Charles M. Sonsteby Title: Executive Vice President and Chief Financial Officer (Principal...

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    ... InternatIonal, InC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) 2008 Revenues Operating costs and expenses: Cost of sales Restaurant expenses Depreciation and amortization General and administrative Other gains and charges Total operating costs and expenses Operating...

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    B r i n k e r I n te rn a ti o n a l, I n c . 6 820 LBJ Fre e wa y D a lla s, Te x a s 75240 www. b ri n k e r. c o m E A T