Chili's 2008 Annual Report Download - page 41

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
charge related to the impairment of long-lived assets at 13 restaurants as well as lease obligation charges
for seven of the restaurants that closed during fiscal 2007.
Interest expense increased $14.9 million in fiscal 2008 primarily due to outstanding borrowings on our
$400 million three-year term loan agreement used to fund share repurchases in fiscal 2007 and for general
corporate purposes. We entered into the agreement in October 2007 and terminated the one-year
unsecured committed credit facility of $400 million. The increase was partially offset by a decrease in
interest rates on our debt carrying variable interest rates. Interest expense increased by $8.1 million in
fiscal 2007 primarily due to outstanding borrowings on the $400 million credit facility in the fourth quarter.
Additionally, increased average borrowings and interest rates on our existing lines of credit contributed to
the increase.
Other, net decreased $1.0 million in fiscal 2008 due to the realized gains from the liquidation of our
investments in mutual funds in fiscal 2007, partially offset by higher interest income on cash balances in
our captive insurance company. Other, net increased $3.4 million in fiscal 2007 due to the realized gains
from the liquidation of our investments in mutual funds and higher interest income.
INCOME TAXES
The effective income tax rate related to continuing operations was 5.7%, 27.8% and 29.9% for fiscal
2008, 2007 and 2006, respectively. The decrease in the tax rate in fiscal 2008 was primarily due to a
decrease in profits before taxes related to other gains and charges partially offset by prior year favorable
settlement of certain tax audits and prior year benefits from state income tax planning. The decrease in the
tax rate in fiscal 2007 was primarily due to stock-based compensation expense related to the impact of
incentive stock options which are not deductible until they are exercised, an income tax benefit totaling
$6.8 million associated with the favorable settlement of certain tax audits and benefits from state income
tax planning.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of liquidity is cash flows generated from our restaurant operations. We expect our
ability to generate strong cash flows from operations to continue into the future. Net cash provided by
operating activities of continuing operations decreased to $361.5 million for fiscal 2008 from $485.0 million
in fiscal 2007 primarily due to lower income (adjusted for non-cash items) driven by incremental margin
pressures 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 equipment, and ongoing
remodeling programs. Capital expenditures were $270.4 million for fiscal 2008 compared to $430.5 million
for fiscal 2007. The reduction in capital expenditures is primarily due to a decrease in company-owned
restaurants developed this year. We estimate that our capital expenditures during fiscal 2009 will be
approximately $175 to $185 million, including new restaurant development of approximately $40 million,
$20 to $25 million of Chili’s re-images, $25 to $30 million of investments in kitchen technology, and the
remainder for capital expenditure maintenance programs. Our capital expenditures will be funded entirely
by cash from operations and existing credit facilities.
We sold 76 company-owned Chili’s restaurants to a franchisee during fiscal 2008 for cash proceeds of
approximately $122 million. We plan to continue the sale of select company-owned restaurants to
franchisees in fiscal 2009.
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