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, as well as virtual brands including It’s Just Wings® and Maggiano’s Italian Classics®. On June 29, 2022, we owned, operated or franchised 1,650 restaurants, consisting of 1,188 Company-owned restaurants and 462 franchised restaurants, located in the United States, 28 countries and two United States territories.
Basis of Presentation
Principles of Consolidation - The Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, and include the accounts of Brinker International, Inc. and our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. All amounts within the Notes to Consolidated Financial Statements are presented in millions unless otherwise specified.
Fiscal Year - We have a 52 or 53 week fiscal year ending on the last Wednesday in June. We utilize a 13 week accounting period for quarterly reporting purposes, except in years containing 53 weeks when the fourth quarter contains 14 weeks. Fiscal 2022 and Fiscal 2020, which ended on June 29, 2022 and June 24, 2020, respectively, each contained 52 weeks. Fiscal 2021, which ended on June 30, 2021, contained 53 weeks. The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues in comparison to fiscal 2020. While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.
Use of Estimates - The preparation of the Consolidated Financial Statements is in conformity with generally accepted accounting principles in the United States (“GAAP”) and requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, 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 in the reporting periods. Actual results could differ from those estimates.
Impact of COVID-19 Pandemic
The number of open dining rooms and the dining room capacity restrictions have fluctuated over the course of the pandemic based on state and local mandates and has resulted in significant adverse impacts to our guest traffic and sales primarily in fiscal 2021 and fiscal 2020.
In fiscal 2022, we have experienced limited product shortages and service disruptions in our supply chain, limited availability of labor to operate our restaurants due to a tight labor market and an increase in employee turnover. It is possible that supply chain and labor shortages or disruptions could continue or increase in future periods if demand for goods, transportation and labor remains high.
We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve. At this time, the ultimate impact of COVID-19 cannot be reasonably estimated due to the uncertainty about the extent and the duration of the spread of the virus and could lead to further reduced sales, capacity restrictions, restaurant closures, delays in our supply chain or impair our ability to staff accordingly which could adversely impact our financial results.
New Accounting Standards Implemented
We reviewed all accounting pronouncements that became effective for our fiscal 2022 and determined that either they were not applicable or they did not have a material impact on the Consolidated Financial Statements. We also reviewed all recently issued accounting pronouncements to be adopted in future periods and determined that they are not expected to have a material impact on the Consolidated Financial Statements.
Significant Accounting Policies
Revenues - Revenues are presented in the Company sales and Franchise and other revenues captions in the Consolidated Statements of Comprehensive Income.
Company Sales - Company sales include revenues generated by the operation of Company-owned restaurants including sales from gift card redemptions and virtual brands. We record revenues from the sale of food, beverages and alcohol, net of discounts, upon delivery to the customer.
Franchise and Other Revenues - Franchise and other revenues include gift card breakage, royalties, Maggiano’s banquet service charge income, delivery income, digital entertainment revenue, advertising revenue, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales.
Royalties - Franchise royalties are based on a percentage of the sales generated by our franchise-operated restaurants. The performance obligation related to franchise sales is considered complete upon the sale of food, beverages and alcohol, therefore royalty revenues are recognized in the same period the sales are generated at the franchise-operated restaurants.
Advertising Revenue - Domestic franchisees are contractually obligated to contribute into certain advertising and marketing funds. Advertising revenues are presented on a gross basis within Franchise and other revenues.
Franchise and Development Fees - We receive franchise fees for new restaurant openings and development fees from franchisees for territory development arrangements. The performance obligation related to these arrangements are collectively deferred as a contract liability and recognized on a straight-line basis into Franchise and other revenues in the Consolidated Statements of Comprehensive Income over the term of the underlying agreements. Deferred franchise and development fees are classified within Other accrued liabilities for the current portion expected to be recognized within the next 12 months and Other liabilities for the long-term portion in the Consolidated Balance Sheets.
Gift Card Breakage Revenue - Breakage revenues represent the monetary value associated with outstanding gift card balances that will not be redeemed. We estimate this amount based on our historical gift card redemption patterns and actuarial estimates, update the breakage rate estimate periodically and if necessary, adjust the deferred revenues balance within the Gift card liability in the Consolidated Balance Sheets. Breakage revenues are recognized proportionate to the pattern of related gift card redemptions. We do not charge dormancy, or any other fees related to monitoring or administering the gift card program to cardholders. Additionally, proceeds from the sale of gift cards are recorded as deferred revenues in the Gift card liability in the Consolidated Balance Sheets and recognized as Company sales when the gift card is redeemed by the holder.
Gift Card Discount Costs - Our gift cards are sold through various outlets such as in-restaurant, Chili’s and Maggiano’s websites, directly to other businesses and through third-party distributors that sell our gift cards at retail locations. We incur incremental direct costs, such as commissions and activation fees, for gift cards sold by third-party businesses and distributors. These initial direct costs are deferred and amortized against revenues proportionate to the pattern of related gift card redemptions.
Advertising Expenses - Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. In the fiscal years ended June 29, 2022, June 30, 2021 and June 24, 2020, advertising expenses of $37.4 million, $26.4 million and $87.0 million, respectively, were included in Restaurant expenses, and advertising contributions from franchisees of $2.4 million, $2.8 million and $9.7
million, respectively, were recorded in Franchise and other revenues in the Consolidated Statements of Comprehensive Income.
Restaurant Labor Expenses - We report certain labor and related expenses in a separate caption in 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 in the Consolidated Statements of Comprehensive Income.
Fair Value Measurements - Fair value is the price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. Fair value measurements are categorized in three levels based on the types of significant inputs used, as follows:
| | | | | |
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities |
Level 2 | Observable inputs available at measurement date other than quote prices included in Level 1 |
Level 3 | Unobservable inputs that cannot be corroborated by observable market data |
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 credit losses, represents the estimated net realizable value. Our primary accounts receivables are due from third-party gift card sales, vendor rebates, restaurant sales made with credit cards, short-term note receivable and franchisees. Provisions for credit losses 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.
Inventories - Inventories consist of food, beverages and supplies and are valued at the lower of cost (using the first-in, first-out method) or net realizable value.
Property and Equipment - Property and equipment is recorded at cost and depreciated using the straight-line method over the lesser of the remaining term of the lease, including certain renewal options, or the estimated useful lives of the assets. Typical useful lives of our Buildings and leasehold improvements range from 5 to 20 years, and Furniture and equipment range from 3 to 7 years.
Depreciation expenses related to property and equipment for the fiscal years ended June 29, 2022, June 30, 2021, and June 24, 2020, of $161.3 million, $148.2 million, and $160.4 million, respectively, were recorded in Depreciation and amortization in 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 on an annual basis 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 that is considered Level 3 (refer to Fair Value Measurements policy above for definition of levels). Impairment charges are included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income.
Leases - We recognize, on the balance sheet, the lease assets and related lease liabilities for the rights and obligations created at lease commencement by operating and finance leases with lease terms of more than 12 months. The lease term commences on the date the lessor makes the underlying asset or assets available, irrespective of when lease payments begin under the contract. When determining the lease term at commencement, we consider both termination and renewal option periods available, and only include the period for which failure to renew the lease imposes a penalty on us in such an amount that renewal, or termination options, appear to be reasonably certain.
Our lease liability is generally based on the present value of the lease payments, consisting of fixed costs and certain rent escalations, using our incremental borrowing rate applicable to the lease term. The lease asset is generally based on the lease liability, adjusted for amounts related to other lease-related assets and liabilities. Our adjustments typically include prepaid rent, landlord contributions as a reduction to the asset and favorable or unfavorable lease purchase price adjustments.
The interest rates used in our lease contracts are not implicit. We have derived our incremental borrowing rate using the interest rate we would pay on our existing borrowings, adjusted for the effect of designating collateral and the lease terms using market data as well as publicly available data for instruments with similar characteristics. The reasonably certain lease term and incremental borrowing rate for each lease requires judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the lease asset and lease liability.
Lease asset carrying amounts are assessed for impairment annually or when events or circumstances indicate that the carrying amount may not be recoverable, in accordance with our long-lived asset impairment policy. We monitor for events or changes in circumstances that require reassessment of lease classification. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the lease asset.
Variable lease costs, consisting primarily of property taxes, maintenance expenses and contingent rent, are expensed as incurred in Restaurant expenses related to restaurant properties and General and administrative for our corporate headquarters in the Consolidated Statements of Comprehensive Income and are not included in lease liabilities in the Consolidated Balance Sheets. Contingent rent represents payment of variable lease obligations based on a percentage of sales, as defined by the terms of the applicable lease, for certain restaurant facilities and is recorded at the point in time we determine that it is probable that such sales levels will be achieved.
Operating lease expenses are recognized on a straight-line basis over the lease term in Restaurant expenses for restaurant properties and General and administrative for our corporate headquarters, in the Consolidated Statements of Comprehensive Income.
Finance lease expenses are recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term and the expenses are recognized in Depreciation and amortization in the Consolidated Statements of Comprehensive Income. Interest on each finance lease liability is recorded to Interest expenses in the Consolidated Statements of Comprehensive Income.
Definite-lived Intangible Assets - Definite-lived intangible assets primarily include the reacquired franchise rights resulting from our acquisitions and included in Intangibles, net in the Consolidated Balance Sheets. These assets are amortized using the straight-line method over the remaining term of the related franchise agreement. 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 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.
Indefinite-lived Intangible Assets - The costs of obtaining non-transferable liquor licenses from local government agencies are expensed over the specified term of the license to Restaurant expenses in the Consolidated Statements of Comprehensive Income. 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 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.
Goodwill - Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate for purposes of impairment testing. Goodwill is tested for impairment annually, as of the first day of the second quarter of each fiscal year, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Our two restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units.
We may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated. The carrying value of the reporting unit is compared to its estimated fair value, and if the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value.
During fiscal 2022 and fiscal 2021, we performed our annual goodwill impairment analysis using a qualitative approach to determine whether indicators of impairment exist. Related to the qualitative assessment, we evaluated factors including our market capitalization, as well as the market capitalization of other companies in the restaurant industry, sales at our restaurants and significant adverse changes in the operating environment for the restaurant industry. Based on these factors, no indicators of impairment were identified during our annual analysis performed in the second quarters of fiscal 2022 and fiscal 2021. Additionally, no indicators of impairment were identified through the end of each fiscal year.
During fiscal 2020, we performed a quantitative assessment in response to observed declines in operating cash flows and market capitalization primarily driven by the impact of the COVID-19 pandemic on our business. Based on this assessment, we concluded that our goodwill and indefinite-lived intangible assets were not impaired at that time.
Insurance Reserves - We are self-insured for certain losses related to health, general liability and workers’ compensation. We maintain stop loss coverage with third-party insurers to limit our total exposure. 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. The estimated incurred but unreported costs to settle unpaid claims are included in Other accrued liabilities and Other liabilities, depending on their current or long-term nature, in the Consolidated Balance Sheets.
Sales Taxes - Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue transactions and collected from a customer have been 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.
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 (benefit) for income taxes in the Consolidated Statements of Comprehensive Income. Additionally, income taxes are computed on a consolidated legal jurisdiction basis with no regard to brand.
Stock-Based Compensation - We measure and recognize compensation costs at fair value for all share-based payments. We record compensation expenses using a graded-vesting schedule or on a straight-line basis, as applicable, over the vesting period, or the date on which retirement eligibility is achieved, if earlier. We recognize compensation expenses 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 are eligible to receive stock options, restricted stock and restricted stock units. Awards granted to the Board of Directors are non-forfeitable and are fully expensed upon grant. Awards to eligible employees may vest over a specified period of time or service period and 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 usually at the end of a three-fiscal-year cycle. Vesting of performance shares granted are generally contingent upon meeting Company performance goals based on a specified rate of earnings growth or a specified range of earnings at the end of the three-fiscal-year period. Compensation expenses for the performance shares is recorded to Restaurant expenses and General and administrative expenses based on management’s periodic estimates of the number of shares that will ultimately be issued, and the fair value of the shares as determined by our closing stock price on the date of grant. A cumulative expenses adjustment is recognized when that estimate changes.
Preferred Stock - Our Board of Directors is authorized to provide for the issuance of 1.0 million preferred shares with a par value of $1.00 per share, in one or more series, and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights, and terms, including sinking fund provisions, and certain other rights and preferences. As of June 29, 2022, no preferred shares were issued.
Comprehensive Income - Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the fiscal years ended June 29, 2022, June 30, 2021, and June 24, 2020, Comprehensive income consists of Net income and Foreign currency translation adjustment. The Foreign currency translation adjustment for all three fiscal years presented related to the unrealized impact of translating the financial statements of the Canadian restaurants from Canadian dollars to United States dollars. The Accumulated other comprehensive loss is presented in the Consolidated Balance Sheets.
Net Income Per Share - Basic net income per share is computed by dividing Net income by the Basic weighted average shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of Diluted net income per share, the Basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the Diluted net income per share calculation. Basic weighted average shares outstanding are reconciled to Diluted weighted average shares outstanding as follows:
| | | | | | | | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Basic weighted average shares outstanding | 44.8 | | | 45.5 | | | 38.2 | |
Dilutive stock options | 0.2 | | | 0.4 | | | 0.1 | |
Dilutive restricted shares | 0.6 | | | 0.7 | | | 0.6 | |
Total dilutive impact | 0.8 | | | 1.1 | | | 0.7 | |
Diluted weighted average shares outstanding | 45.6 | | | 46.6 | | | 38.9 | |
| | | | | |
Awards excluded due to anti-dilutive effect | 0.8 | | | 0.5 | | | 1.5 | |
Segment Reporting - Operating segments are components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. We manage our business on the basis of two operating segments, Chili’s and Maggiano’s.
2. CHILI’S RESTAURANT ACQUISITIONS
Fiscal 2022
During fiscal 2022, we completed three acquisitions of substantially all of the assets and certain liabilities related to previously franchised Chili’s locations, as follows:
•Mid-Atlantic Region Acquisition - On September 2, 2021, we acquired 23 previously franchised Chili’s restaurants located in the Mid-Atlantic region of the United States for a total purchase price of $47.7 million, including post-closing adjustments. The acquisition was funded with borrowings from our existing credit facility and proceeds from a sale leaseback transaction completed simultaneously with the acquisition (refer to Note 9 - Leases for further details on the sale leaseback transaction).
•Great Lakes Region Acquisition - On October 31, 2021, we acquired 37 previously franchised Chili’s restaurants located in the Great Lakes and Northeast region of the United States for a total purchase price of $57.1 million, including post-closing adjustments, funded with borrowings from our existing credit facility.
•Northwest Region Acquisition - On February 1, 2022, we acquired six previously franchised Chili’s restaurants and on May 5, 2022, we acquired two additional previously franchised Chili’s restaurants located in the Northwest region of the United States for a total purchase price of $2.0 million, including post-closing adjustments, funded with borrowings from our existing credit facility.
Pro-forma financial information, for these acquisitions, is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements. We accounted for each of these acquisitions as a business combination.
The assets and liabilities of the acquired restaurants were recorded at their fair values. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements from the acquisition dates.
Net acquisition-related charges of $1.6 million were recorded during fiscal 2022 to Other (gains) and charges in the Consolidated Statements of Comprehensive Income. The net charges consisted of $2.3 million of professional services, transaction and transition related costs associated with the purchase, partially offset by $0.7 million of franchise deferred revenues balance that were fully recognized at date of acquisition.
The fair values of tangible and intangible assets acquired were primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows and discount rates. These inputs represent Level 3 fair value measurements as defined under GAAP. The amounts recorded for the fair value of acquired assets and liabilities at the acquisition dates for the material acquisitions are as follows:
| | | | | | | | | | | |
| Mid-Atlantic Region | | Great Lakes Region |
| Fair Value September 2, 2021 | | Fair Value October 31, 2021 |
Current assets | $ | 1.4 | | | $ | 2.1 | |
Property and equipment | 46.2 | | | 43.6 | |
Operating lease assets(1) | 23.6 | | | 47.8 | |
Reacquired franchise rights(2) | 4.7 | | | 4.6 | |
Goodwill(3) | — | | | 7.2 | |
Current liabilities | (1.4) | | | (1.4) | |
Finance lease liabilities, less current portion | (3.7) | | | — | |
Operating lease liabilities, less current portion(1) | (23.1) | | | (46.8) | |
Net assets acquired(4) | $ | 47.7 | | | $ | 57.1 | |
(1)Refer to Note 9 - Leases for further details.
(2)Reacquired franchise rights related to the Mid-Atlantic Region acquisition and Great Lakes Region acquisition both have weighted average amortization periods of approximately 15 years.
(3)Goodwill is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents the benefits expected as a result of the acquisition, including sales and unit growth opportunities, and the benefit of the assembled workforce of the acquired restaurants.
(4)Net assets acquired at fair value related to the Mid-Atlantic Region acquisition are equal to the total purchase price of $48.0 million, less $0.3 million of closing adjustments. Net assets acquired at fair value related to the Great Lakes Region acquisition are equal to the total purchase price of $56.0 million, plus $1.1 million of closing adjustments.
Fiscal 2020
On September 5, 2019, we completed the acquisition of certain assets and liabilities related to 116 previously franchised Chili’s restaurants located in the Midwest region of the United States. Pro-forma financial information of the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants in the Consolidated Financial Statements.
Total cash consideration of $96.0 million, including post-closing adjustments, was funded with borrowings from our existing credit facility. We accounted for this acquisition as a business combination. The results of operations, and assets and liabilities, of these restaurants are included in the Consolidated Financial Statements from the date of acquisition. The assets and liabilities of these restaurants are recorded at their fair values.
Net acquisition-related charges of $2.9 million were recorded during fiscal 2020 to Other (gains) and charges in the Consolidated Statements of Comprehensive Income. The net charges consisted of $4.5 million of professional services, transaction and transition related costs associated with the purchase, and $1.0 million of related franchise straight-line rent balances, net of market leasehold improvement adjustments that were fully recognized at the date of the acquisition, partially offset by $2.6 million of franchise deferred revenues balance that were fully recognized at date of acquisition.
3. REVENUE RECOGNITION
Deferred Franchise and Development Fees
Our deferred franchise and development fees consist of the unrecognized fees received from franchisees. Recognition of these fees in subsequent periods is based on satisfaction of the contractual performance obligations of the active contracts with franchisees. The weighted average remaining term of the current franchise agreements, including certain renewal periods expected to be exercised, was approximately 20 years as of June 29, 2022. We also expect to earn subsequent period royalties and advertising fees related to our franchise contracts; however, due to the variability and uncertainty of these future revenues based upon a sales-based measure, these future revenues are not yet estimable as the performance obligations remain unsatisfied.
The following table reflects the changes in deferred franchise and development fees for the fiscal years ended on June 29, 2022 and June 30, 2021:
| | | | | | | | | | | |
| |
| June 29, 2022 | | June 30, 2021 |
Beginning balance | $ | 11.4 | | | $ | 12.7 | |
Additions | 1.1 | | | 0.3 | |
Amount recognized to Other gains and charges(1) | (0.9) | | | 0.2 | |
Amount recognized to Franchise and other revenues | (1.5) | | | (1.8) | |
Ending balance | $ | 10.1 | | | $ | 11.4 | |
(1)The remaining deferred franchise and development fee balances associated with the 68 Chili’s restaurants acquired during fiscal 2022 were recognized as of the acquisition dates in Other (gains) and charges in the
Consolidated Statements of Comprehensive Income. Refer to Note 2 - Chili’s Restaurant Acquisitions for further details.
The following table illustrates franchise and development fees expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of June 29, 2022:
| | | | | |
Fiscal Year | Franchise and Development Fees Revenue Recognition |
2023 | $ | 0.9 | |
2024 | 0.8 | |
2025 | 0.8 | |
2026 | 0.8 | |
2027 | 0.7 | |
Thereafter | 6.1 | |
| $ | 10.1 | |
Deferred Gift Card Revenues
Total deferred revenues related to our gift cards include the full value of unredeemed gift card balances less recognized breakage and the unamortized portion of third-party fees. The following table reflects the changes in the Gift card liability for fiscal years ended on June 29, 2022 and June 30, 2021:
| | | | | | | | | | | |
| |
| June 29, 2022 | | June 30, 2021 |
Beginning balance | $ | 106.4 | | | $ | 109.9 | |
Gift card sales | 134.8 | | | 118.8 | |
Gift card redemptions recognized to Company sales | (122.1) | | | (109.5) | |
Gift card breakage recognized to Franchise and other revenues(1) | (36.1) | | | (13.0) | |
Other | 0.9 | | | 0.2 | |
Ending balance | $ | 83.9 | | | $ | 106.4 | |
(1)Gift card breakage recognized to Franchise and other revenues increased due to a change in estimated gift card breakage rates primarily attributable to gift cards sold prior to fiscal 2022.
4. DEFINED CONTRIBUTION PLAN
We sponsor a qualified defined contribution retirement plan. The plan covers all employees who have attained the age of 21 and have completed 90 days of eligible service.
Eligible employees are allowed to contribute, subject to IRS limitations on total annual contributions, up to 50% of their base compensation and 100% of their eligible bonuses, as defined in the plan, to various investment funds. We match, in cash, what an employee contributes at a rate of 100% of the first 3% and 50% of the next 2% with immediate vesting. Effective January 1, 2021, the Plan was amended and restated in its entirety primarily for the purpose of reinstating the safe harbor matching employer contributions which were suspended in May 2020 to reduce corporate expenses in response to the business downturn caused by the COVID-19 impact.
Additionally, in June 2021, the Plan was amended and restated to adopt a new pre-approved plan document as required by the IRS.
We contributed employer matching contributions in each fiscal year which is recorded to General and administrative in the Consolidated Statements of Comprehensive Income:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Employer contributions match expenses | $ | 11.0 | | | $ | 4.6 | | | $ | 9.3 | |
5. OTHER GAINS AND CHARGES
Other (gains) and charges in the Consolidated Statements of Comprehensive Income consist of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Restaurant impairment charges | $ | 8.3 | | | $ | 3.0 | | | $ | 19.1 | |
Remodel-related costs | 4.9 | | | 2.3 | | | 3.2 | |
Restaurant closure charges | 3.7 | | | 2.4 | | | 3.8 | |
Lease contingencies | 3.1 | | | 2.2 | | | — | |
| | | | | |
Enterprise system implementation costs | 2.4 | | | — | | | — | |
Acquisition-related costs, net | 1.6 | | | — | | | 2.9 | |
Loss from natural disasters, net of (insurance recoveries) | 1.1 | | | 2.9 | | | (0.7) | |
COVID-19 related charges | 0.5 | | | 3.3 | | | 12.2 | |
Other | 5.6 | | | 2.9 | | | 6.9 | |
| $ | 31.2 | | | $ | 19.0 | | | $ | 47.4 | |
Restaurant impairment charges primarily consisted of the long-lived assets of the following:
•Fiscal 2022 - 30 underperforming Chili’s and two underperforming Maggiano’s restaurants. Refer to Note 14 - Fair Value Measurements for further details.
•Fiscal 2021 - 11 underperforming Chili’s and three underperforming Maggiano’s restaurants.
•Fiscal 2020 - 25 underperforming Chili’s and three underperforming Maggiano’s restaurants.
Remodel-related costs related to existing fixed asset write-offs associated with the Chili’s remodel project for all fiscal years presented.
Restaurant closure charges primarily consisted of Chili’s lease termination charges and certain Chili’s restaurant closure costs for all fiscal years presented.
Lease contingencies were recorded in fiscal 2022 and fiscal 2021 for estimated lease defaults on certain secondarily liable lease guarantees and subleases. Refer to Note 16 - Commitments and Contingencies for additional information about our secondarily liable lease guarantees.
Enterprise system implementation costs primarily consisted of consulting and subscription fees related to the ongoing enterprise system implementation. These fees are considered redundant costs until the new systems go live and replace our current legacy systems.
Acquisition-related costs, net primarily related to the following:
•Fiscal 2022 - 68 restaurants acquired from former franchisees. Refer to Note 2 - Chili's Restaurant Acquisitions for further details.
•Fiscal 2020 - 116 restaurants acquired from a former franchisee.
Loss from natural disasters, net of (insurance recoveries) primarily consists of the following:
•Fiscal 2022 - costs incurred related to Hurricane Ida in August 2021.
•Fiscal 2021 - costs incurred related to Winter Storm Uri in February 2021.
•Fiscal 2020 - proceeds related to a previously filed fire claim, partially offset by costs incurred for damages from Tropical Storm Imelda.
COVID-19 related charges primarily consisted of the following costs related to both Chili’s and Maggiano’s:
•Fiscal 2022:
◦employee assistance and related payroll taxes for certain team members, partially offset by
◦employee retention credit as allowed under the CARES Act and
◦credits received as part of the 2021 New Mexico Senate Bill 1.
•Fiscal 2021:
◦employee assistance and related payroll taxes for certain team members,
◦conversion of certain parking lots into dining areas and
◦initial purchases of restaurant and personal protective supplies such as face masks and hand sanitizers required to maintain open dining rooms.
•Fiscal 2020:
◦employee assistance payments and related payroll taxes for team members that experienced reduced shifts during the pandemic,
◦restaurant supplies such as face masks and hand sanitizer required to reopen dining rooms,
◦costs related to canceled projects due to the pandemic and
◦expenses related to spoiled inventory due to the unexpected decline in sales and dining room closures, partially offset by
◦employee retention credit for certain payroll taxes received as part of the CARES Act relief package.
6. INCOME TAXES
Income before income taxes consists of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Domestic | $ | 113.5 | | | $ | 146.7 | | | $ | 5.0 | |
Foreign | 1.7 | | | (1.5) | | | (0.1) | |
Income before income taxes | $ | 115.2 | | | $ | 145.2 | | | $ | 4.9 | |
The Provision (benefit) for income taxes and effective tax rate consists of the following:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Current income tax (benefit) expenses: | | | | | |
Federal | $ | 5.8 | | | $ | 11.6 | | | $ | (32.9) | |
State | 3.7 | | | 14.4 | | | 4.8 | |
Foreign | (0.3) | | | 0.0 | | | 0.0 | |
Total current income tax (benefit) expenses | 9.2 | | | 26.0 | | | (28.1) | |
Deferred income tax (benefit) expenses: | | | | | |
Federal | (15.7) | | | (9.4) | | | 8.8 | |
State | 3.7 | | | (3.0) | | | (0.2) | |
Foreign | 0.4 | | | — | | | 0.0 | |
Total deferred income tax (benefit) expenses | (11.6) | | | (12.4) | | | 8.6 | |
Provision (benefit) for income taxes | $ | (2.4) | | | $ | 13.6 | | | $ | (19.5) | |
| | | | | |
Effective tax rate | (2.1) | % | | 9.4 | % | | (398.0) | % |
A reconciliation between the reported Provision (benefit) for income taxes and the amount computed by applying the statutory Federal income tax rate to Income before income taxes is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Income tax expense at statutory rate | $ | 24.2 | | | $ | 30.5 | | | $ | 1.0 | |
FICA and other tax credits | (32.9) | | | (24.7) | | | (24.8) | |
State income taxes, net of Federal benefit | 6.2 | | | 7.8 | | | 3.6 | |
Stock based compensation tax shortfall (windfall) | (0.7) | | | (2.3) | | | 0.5 | |
Other | 0.8 | | | 2.3 | | | 0.2 | |
Provision (benefit) for income taxes | $ | (2.4) | | | $ | 13.6 | | | $ | (19.5) | |
Our federal statutory tax rate for fiscal 2022, fiscal 2021 and fiscal 2020 was 21.0%.
Deferred Tax and Allowances
The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows:
| | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
Deferred income tax assets: | | | |
Lease liabilities | $ | 337.3 | | | $ | 305.1 | |
Gift cards | 9.9 | | | 17.0 | |
Insurance reserves | 11.6 | | | 11.5 | |
Stock-based compensation | 11.6 | | | 10.9 | |
Federal credit carryover | 41.1 | | | 6.8 | |
| | | |
Net operating losses | 3.7 | | | 4.1 | |
State credit carryover | 2.5 | | | 2.5 | |
Restructure charges and impairments | 2.3 | | | 1.5 | |
Payroll tax deferral | 6.8 | | | 13.6 | |
Other, net | 8.0 | | | 10.6 | |
Less: Valuation allowance | (5.8) | | | (6.1) | |
Total deferred income tax assets | 429.0 | | | 377.5 | |
Deferred income tax liabilities: | | | |
Lease assets | 307.1 | | | 275.7 | |
Goodwill and other amortization | 23.3 | | | 22.6 | |
Depreciation and capitalized interest on property and equipment | 17.8 | | | 11.8 | |
Prepaid expenses | 16.9 | | | 16.0 | |
Other, net | 1.4 | | | 0.5 | |
Total deferred income tax liabilities | 366.5 | | | 326.6 | |
Deferred income taxes, net | $ | 62.5 | | | $ | 50.9 | |
As of June 29, 2022, we have deferred tax assets of $4.2 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between 2023 and 2042. We have deferred tax assets of $41.1 million of federal and $3.2 million of state tax credits, before federal benefit and valuation allowance, which expire at various dates between 2024 and 2042. The recognized deferred tax asset for the state loss carryforwards, net of valuation allowance, is $1.5 million and the federal tax credits is $41.1 million. $6.2 million of the federal credit carryover is limited by Section 382 of the Internal Revenue Code.
The valuation allowance is $5.8 million at the end of fiscal 2022 to recognize certain deductions and tax credits management believes are more-likely-than-not to not be realized. In assessing whether a deferred tax asset will be realized, we consider the likelihood of the realization, and the reversal of existing taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income, as of June 29, 2022, we believe it is more-likely-than-not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowances.
Unrecognized Tax Benefits
A reconciliation of unrecognized tax benefits are as follows:
| | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
Balance at beginning of year | $ | 4.3 | | | $ | 3.0 | |
Additions based on tax positions related to the current year | 0.3 | | | 0.3 | |
(Decreases) Additions based on tax positions related to prior years | (0.1) | | | 1.4 | |
Settlements with tax authorities | (0.8) | | | — | |
Expiration of statute of limitations | — | | | (0.4) | |
Balance at end of year | $ | 3.7 | | | $ | 4.3 | |
The total amount of unrecognized tax benefits, excluding interest and penalties, which would affect income tax expenses if resolved in our favor was $2.9 million and $3.4 million as of June 29, 2022 and June 30, 2021, respectively. We do not expect any material changes to our liability for uncertain tax positions in the next 12 months.
We recognize accrued interest and penalties related to unrecognized tax benefits in Provision (benefit) for income taxes in the Consolidated Statements of Comprehensive Income. As of June 29, 2022, we had $0.5 million ($0.4 million net of a $0.1 million Federal deferred tax benefit) of interest and penalties accrued, compared to $0.4 million ($0.3 million net of a $0.1 million Federal deferred tax benefit) as of June 30, 2021.
Our income tax returns are subject to examination by taxing authorities in the jurisdictions in which we operate. The periods subject to examination for our federal return are fiscal 2021 to fiscal 2023, and fiscal 2019 to fiscal 2021 for our Canadian returns. State income tax returns are generally subject to examination for a period of three to five years from date return is filed. We have various state income tax returns in the process of examination or settlements. Our federal returns for fiscal 2021 to 2023 are currently under examination through the Internal Revenue Service: Compliance Assurance Process (CAP) program. There are no unrecorded liabilities associated with these examinations.
7. SEGMENT INFORMATION
Our operating segments are Chili’s and Maggiano’s. The Chili’s segment includes the results of our Company-owned Chili’s restaurants, which are principally located in the United States, within the full-service casual dining segment of the industry. The Chili’s segment also has Company-owned restaurants in Canada, and franchised locations in the United States, 28 countries and two United States territories. The Maggiano’s segment includes the results of our Company-owned Maggiano’s restaurants in the United States as well as the results from our domestic franchise business. The Other segment includes costs related to our restaurant support teams for the Chili’s and Maggiano’s brands, including operations, finance, franchise, marketing, human resources and culinary innovation. The Other segment also includes costs related to the common and shared infrastructure, including accounting, information technology, purchasing, guest relations, legal and restaurant development.
Company sales for each operating segment include revenues generated by the operation of Company-owned restaurants including gift card redemptions and revenues from our virtual brands. Franchise and other revenues for each operating segment include gift card breakage, royalties, Maggiano’s banquet service charge income, delivery income, digital entertainment revenue, advertising revenue, franchise and development fees, gift card equalization, merchandise income and gift card discount costs from third-party gift card sales.
We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our operating segments are predominantly located in the United States. There were no material transactions amongst our operating segments.
Our chief operating decision maker uses Operating income as the measure for assessing performance of our segments. Operating income includes revenues and expenses directly attributable to segment-level results of operations. Restaurant expenses during the years presented primarily included restaurant rent, supplies, property and
equipment maintenance, delivery fees, utilities, property taxes, credit card processing fees, supervision expenses, worker’s comp and general liability insurance and advertising.
The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 29, 2022 |
| Chili’s(1) | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 3,305.4 | | | $ | 406.7 | | | $ | — | | | $ | 3,712.1 | |
Royalties | 34.0 | | | 0.4 | | | — | | | 34.4 | |
Franchise fees and other revenues | 40.2 | | | 17.4 | | | — | | | 57.6 | |
Franchise and other revenues | 74.2 | | | 17.8 | | | — | | | 92.0 | |
Total revenues | 3,379.6 | | | 424.5 | | | — | | | 3,804.1 | |
| | | | | | | |
Food and beverage costs | 945.9 | | | 102.6 | | | — | | | 1,048.5 | |
Restaurant labor | 1,146.5 | | | 141.6 | | | — | | | 1,288.1 | |
Restaurant expenses | 849.8 | | | 117.9 | | | 0.6 | | | 968.3 | |
Depreciation and amortization | 139.8 | | | 13.4 | | | 11.2 | | | 164.4 | |
General and administrative | 33.3 | | | 8.0 | | | 102.8 | | | 144.1 | |
Other (gains) and charges | 23.3 | | | — | | | 7.9 | | | 31.2 | |
Total operating costs and expenses | 3,138.6 | | | 383.5 | | | 122.5 | | | 3,644.6 | |
Operating income (loss) | 241.0 | | | 41.0 | | | (122.5) | | | 159.5 | |
Interest expenses | 5.1 | | | 0.4 | | | 40.6 | | | 46.1 | |
Other income, net | (0.3) | | | — | | | (1.5) | | | (1.8) | |
Income (loss) before income taxes | $ | 236.2 | | | $ | 40.6 | | | $ | (161.6) | | | $ | 115.2 | |
| | | | | | | |
Segment assets | $ | 2,116.7 | | | $ | 223.6 | | | $ | 144.1 | | | $ | 2,484.4 | |
Payments for property and equipment | 133.7 | | | 9.1 | | | 7.5 | | | 150.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 30, 2021(2) |
| Chili’s | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 3,005.7 | | | $ | 273.3 | | | $ | — | | | $ | 3,279.0 | |
Royalties | 30.3 | | | 0.2 | | | — | | | 30.5 | |
Franchise fees and other revenues | 23.9 | | | 4.4 | | | — | | | 28.3 | |
Franchise and other revenues | 54.2 | | | 4.6 | | | — | | | 58.8 | |
Total revenues | 3,059.9 | | | 277.9 | | | — | | | 3,337.8 | |
| | | | | | | |
Food and beverage costs | 803.5 | | | 64.3 | | | — | | | 867.8 | |
Restaurant labor | 1,014.2 | | | 94.0 | | | — | | | 1,108.2 | |
Restaurant expenses | 765.6 | | | 92.1 | | | 0.8 | | | 858.5 | |
Depreciation and amortization | 124.3 | | | 13.8 | | | 12.1 | | | 150.2 | |
General and administrative | 27.4 | | | 5.8 | | | 101.6 | | | 134.8 | |
Other (gains) and charges | 12.7 | | | 1.4 | | | 4.9 | | | 19.0 | |
Total operating costs and expenses | 2,747.7 | | | 271.4 | | | 119.4 | | | 3,138.5 | |
Operating income (loss) | 312.2 | | | 6.5 | | | (119.4) | | | 199.3 | |
Interest expenses | 5.6 | | | 0.2 | | | 50.4 | | | 56.2 | |
Other income, net | (0.5) | | | — | | | (1.6) | | | (2.1) | |
Income (loss) before income taxes | $ | 307.1 | | | $ | 6.3 | | | $ | (168.2) | | | $ | 145.2 | |
| | | | | | | |
Segment assets | $ | 1,911.8 | | | $ | 223.2 | | | $ | 139.9 | | | $ | 2,274.9 | |
Payments for property and equipment | 82.9 | | | 2.6 | | | 8.5 | | | 94.0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended June 24, 2020 |
| Chili’s(3) | | Maggiano’s | | Other | | Consolidated |
Company sales | $ | 2,673.5 | | | $ | 331.4 | | | $ | — | | | $ | 3,004.9 | |
Royalties | 33.7 | | | 0.2 | | | — | | | 33.9 | |
Franchise fees and other revenues | 24.5 | | | 15.2 | | | — | | | 39.7 | |
Franchise and other revenues | 58.2 | | | 15.4 | | | — | | | 73.6 | |
Total revenues | 2,731.7 | | | 346.8 | | | — | | | 3,078.5 | |
| | | | | | | |
Food and beverage costs | 718.7 | | | 79.9 | | | — | | | 798.6 | |
Restaurant labor | 920.8 | | | 124.7 | | | — | | | 1,045.5 | |
Restaurant expenses | 723.7 | | | 101.5 | | | 0.6 | | | 825.8 | |
Depreciation and amortization | 133.9 | | | 15.4 | | | 13.0 | | | 162.3 | |
General and administrative | 32.1 | | | 5.7 | | | 98.5 | | | 136.3 | |
Other (gains) and charges(2) | 35.3 | | | 6.8 | | | 5.3 | | | 47.4 | |
Total operating costs and expenses | 2,564.5 | | | 334.0 | | | 117.4 | | | 3,015.9 | |
Operating income (loss) | 167.2 | | | 12.8 | | | (117.4) | | | 62.6 | |
Interest expenses | 4.6 | | | — | | | 55.0 | | | 59.6 | |
Other income, net | (0.6) | | | — | | | (1.3) | | | (1.9) | |
Income (loss) before income taxes | $ | 163.2 | | | $ | 12.8 | | | $ | (171.1) | | | $ | 4.9 | |
| | | | | | | |
Payments for property and equipment | $ | 88.2 | | | $ | 8.1 | | | $ | 8.2 | | | $ | 104.5 | |
(1)Chili’s segment information for fiscal 2022 includes the results of operations and the fair values of assets related to the 68 restaurants purchased from three former franchisees subsequent to the acquisition dates. Refer to Note 2 - Chili's Restaurant Acquisitions for further details.
(2)Fiscal 2021, which ended on June 30, 2021, contained 53 weeks. The impact of the 53rd week in fiscal 2021 resulted in an increase in Total revenues. While certain expenses increased in direct relationship to additional revenues from the 53rd week, other expenses, such as fixed costs, are incurred on a calendar month basis.
(3)Chili’s segment information for fiscal 2020 includes the results of operations related to the 116 restaurants purchased from a former franchisee subsequent to the September 5, 2019 acquisition date. Refer to Note 2 - Chili's Restaurant Acquisitions for further details.
8. GOODWILL AND INTANGIBLES
There have been no impairments of Goodwill for the fiscal years ended June 29, 2022, June 30, 2021 and June 24, 2020. The changes in the carrying amount of Goodwill by segment are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
| Chili’s | | Maggiano’s | | Consolidated | | Chili’s | | Maggiano’s | | Consolidated |
Balance at beginning of year | $ | 149.8 | | | $ | 38.4 | | | $ | 188.2 | | | $ | 149.2 | | | $ | 38.4 | | | $ | 187.6 | |
Changes in goodwill: | | | | | | | | | | | |
Additions(1) | 7.2 | | | — | | | 7.2 | | | — | | | — | | | — | |
Foreign currency translation adjustment | (0.3) | | | — | | | (0.3) | | | 0.6 | | | — | | | 0.6 | |
Balance at end of year | $ | 156.7 | | | $ | 38.4 | | | $ | 195.1 | | | $ | 149.8 | | | $ | 38.4 | | | $ | 188.2 | |
(1)In the fiscal year ended June 29, 2022, we acquired 68 domestic Chili’s restaurants previously owned by three franchise partners. Refer to Note 2 - Chili's Restaurant Acquisitions for further information.
Intangible assets, net are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Definite-lived intangible assets | | | | | | | | | | | |
Chili’s reacquired franchise rights(1) | $ | 29.3 | | | $ | (12.2) | | | $ | 17.1 | | | $ | 20.0 | | | $ | (9.2) | | | $ | 10.8 | |
Chili’s other | 0.4 | | | (0.4) | | | — | | | 0.4 | | | (0.4) | | | — | |
| $ | 29.7 | | | $ | (12.6) | | | $ | 17.1 | | | $ | 20.4 | | | $ | (9.6) | | | $ | 10.8 | |
| | | | | | | | | | | |
Indefinite-lived intangible assets | | | | | | | | | | | |
Chili’s liquor licenses | $ | 9.4 | | | | | | | $ | 9.4 | | | | | |
Maggiano’s liquor licenses | 0.9 | | | | | | | 0.9 | | | | | |
| $ | 10.3 | | | | | | | $ | 10.3 | | | | | |
(1)Additions, net of accumulated amortization, of $8.4 million in fiscal 2022 were recorded related to reacquired franchise rights associated with the 68 acquired Chili’s restaurants previously owned by three franchise partners. Refer to Note 2 - Chili's Restaurant Acquisitions for further information.
Amortization expenses for all definite-lived intangible assets were recorded in Depreciation and amortization in the Consolidated Statements of Comprehensive Income as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Definite-lived intangible amortization expense | $ | 3.0 | | | $ | 2.0 | | | $ | 1.9 | |
Annual amortization expenses for definite-lived intangible assets are estimated to be $3.3 million for each of the next two fiscal years, and $3.0 million for fiscal 2025, fiscal 2026 and fiscal 2027.
9. LEASES
As of June 29, 2022, 1,136 of our 1,188 Company-owned restaurant facilities were leased. We typically lease our restaurant facilities through ground leases (where we lease land only, but construct the building and leasehold improvements) or retail leases (where we lease the land/retail space and building, but construct the leasehold improvements). As of June 29, 2022, the restaurant leases have cumulative renewal clauses of 2 to 40 years at our option. Our leased restaurants typically have an initial lease term of 10 to 20 years, with one or more renewal terms typically ranging from 1 to 10 years. The leases typically provide for a fixed rental or a fixed rental plus percentage rentals based on sales volume. In addition to our restaurant facilities, we also lease our corporate headquarters location and certain equipment. Our lease agreements do not contain any material residual value guarantees or material covenant restrictions.
Consolidated Balance Sheet Disclosure of Lease Amounts
The following table includes a detail of lease assets and liabilities included in the Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | |
| June 29, 2022 |
| Finance Leases(1) | | Operating Leases(2) | | Total Leases |
Lease assets | $ | 71.1 | | | $ | 1,160.5 | | | $ | 1,231.6 | |
| | | | | |
Current lease liabilities | 20.3 | | | 112.7 | | | 133.0 | |
Long-term lease liabilities | 69.9 | | | 1,151.1 | | | 1,221.0 | |
Total lease liabilities | $ | 90.2 | | | $ | 1,263.8 | | | $ | 1,354.0 | |
| | | | | | | | | | | | | | | | | |
| June 30, 2021 |
| Finance Leases(1) | | Operating Leases(2) | | Total Leases |
Lease assets | $ | 98.2 | | | $ | 1,007.4 | | | $ | 1,105.6 | |
| | | | | |
Current lease liabilities | 21.5 | | | 97.7 | | | 119.2 | |
Long-term lease liabilities | 99.8 | | | 1,006.7 | | | 1,106.5 | |
Total lease liabilities | $ | 121.3 | | | $ | 1,104.4 | | | $ | 1,225.7 | |
(1)Finance lease assets are recorded in Property and equipment, at cost, and the related current and long-term lease liabilities are recorded within Other accrued liabilities and Long-term debt and finance leases, less current installments, respectively.
(2)Operating lease assets are recorded in Operating lease assets and the related current and long-term lease liabilities are recorded within Operating lease liabilities and Long-term operating lease liabilities, less current portion, respectively.
Consolidated Statement of Comprehensive Income Disclosure of Lease Amounts
The components of lease expenses, including variable lease costs primarily consisting of rent based on a percentage of sales, common area maintenance and real estate tax charges, and short-term lease expenses for leases with lease terms less than twelve months are included in the Consolidated Statements of Comprehensive Income as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Operating lease expenses (amortization and interest) | $ | 173.7 | | | $ | 167.2 | | | $ | 162.8 | |
Finance lease amortization | 21.9 | | | 17.3 | | | 20.9 | |
Finance lease interest | 5.5 | | | 5.9 | | | 4.6 | |
Short-term lease cost | 0.6 | | | 0.5 | | | 1.4 | |
Variable lease cost | 60.5 | | | 57.9 | | | 57.7 | |
Sublease income | (4.2) | | | (4.4) | | | (4.6) | |
Total lease costs, net | $ | 258.0 | | | $ | 244.4 | | | $ | 242.8 | |
Consolidated Statement of Cash Flows Disclosure of Lease Amounts
Supplemental cash flow information related to leases recorded in the Consolidated Statements of Cash Flows is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Cash flows from operating activities | | | | | |
Cash paid related to lease liabilities | | | | | |
Operating leases(1) | $ | 171.1 | | | $ | 195.5 | | | $ | 159.6 | |
Finance leases | 5.5 | | | 5.9 | | | 4.6 | |
Cash flows from financing activities | | | | | |
Cash paid related to lease liabilities | | | | | |
Finance leases | 23.7 | | | 20.0 | | | 17.8 | |
Non-cash lease assets obtained in exchange for lease liabilities(2) | | | | | |
Operating leases(3) | 255.4 | | | 60.6 | | | 224.0 | |
Finance leases | 13.4 | | | 29.8 | | | 73.2 | |
(1)Cash paid related to lease liabilities for Operating leases increased in fiscal 2021 primarily due to the prepayment of July 2021 lease payments and lease payments made during fiscal 2021 for rents that were deferred in fiscal 2020 due to the impacts of the COVID-19 pandemic.
(2)Non-cash lease assets obtained in exchange for lease liabilities were higher in fiscal 2020 primarily due to the new and assumed operating and finance leases from the fiscal 2020 Chili’s restaurant acquisition and the new Chili’s finance lease for table-top devices. Refer to Note 2 - Chili's Restaurant Acquisitions for more information.
(3)Non-cash operating lease assets obtained in exchange for operating lease liabilities were higher in fiscal 2022 primarily due to the new and assumed operating lease additions associated with the 68 restaurants purchased from three former franchisees and the modifications of 25 leases. Refer to Note 2 - Chili's Restaurant Acquisitions and “Significant Changes in Leases in Fiscal 2022” section below for more information.
Weighted Average Lease Term and Discount Rate
Other information related to leases is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 |
| Finance Leases | | Operating Leases | | Finance Leases | | Operating Leases |
Weighted average remaining lease term | 9.1 years | | 12.0 years | | 8.5 years | | 11.0 years |
Weighted average discount rate | 5.1 | % | | 5.5 | % | | 5.4 | % | | 5.6 | % |
Lease Maturity Analysis
Finance leases and Operating leases total future lease payments represent the contractual obligations due under the lease agreements, including cancellable option periods where we are reasonably assured to exercise the options. As of June 29, 2022, the future minimum lease payments on finance and operating leases, as well as sublease income were as follows:
| | | | | | | | | | | | | | | | | |
| June 29, 2022 |
Fiscal Year | Finance Leases | | Operating Leases | | Sublease Income |
2023 | $ | 24.5 | | | $ | 177.6 | | | $ | 1.9 | |
2024 | 15.6 | | | 176.3 | | | 1.2 | |
2025 | 12.4 | | | 166.9 | | | 1.2 | |
2026 | 8.2 | | | 153.2 | | | 0.7 | |
2027 | 7.6 | | | 135.5 | | | 0.5 | |
Thereafter | 47.5 | | | 950.6 | | | 0.5 | |
Total future lease payments(1) | 115.8 | | | 1,760.1 | | | $ | 6.0 | |
Less: Imputed interest | 25.6 | | | 496.3 | | | |
Present value of lease liability | $ | 90.2 | | | $ | 1,263.8 | | | |
(1)Total future lease payments as of June 29, 2022 included non-cancelable lease commitments of $90.1 million for finance leases and $1,110.4 million for operating leases.
Pre-Commencement Leases
In fiscal 2022, we executed fourteen leases for new Chili’s locations with undiscounted fixed payments over the initial term of $19.0 million. These leases are expected to commence in the next 12 months and are expected to have an economic lease term of 20 years. These leases will commence when the landlords make the property available to us for new restaurant construction. We will assess the reasonably certain lease term at the lease commencement date.
Significant Changes in Leases in Fiscal 2022
In the first quarter of fiscal 2022, as part of the Chili’s Mid-Atlantic Region Acquisition, we assumed 11 new real estate operating leases. On June 29, 2022, the balances associated with these new leases in the Consolidated Balance Sheets include Operating lease assets of $22.9 million, Operating lease liabilities of $0.6 million, and Long-term operating lease liabilities, less current portion of $22.5 million. The leases were recorded net of prepaid rent at the date of acquisition.
In the second quarter of fiscal 2022, as part of the Chili’s Great Lakes Region Acquisition, we assumed 26 new real estate operating leases. On June 29, 2022, the balances associated with these new leases in the Consolidated Balance Sheets include Operating lease assets of $46.1 million, Operating lease liabilities of $1.6 million, and Long-term operating lease liabilities, less current portion of $45.4 million. The leases were recorded net of purchase price accounting adjustments and prepaid rent at the date of acquisition.
In the third quarter of fiscal 2022, we completed lease modifications related to 25 real estate leases that were previously classified as finance leases. As a result of the modifications, the lease terms are for 20 years, and the leases were reassessed as operating leases. On June 29, 2022, the balances associated with these leases in the Consolidated Balance Sheets include Operating lease assets of $47.9 million, Operating lease liabilities of $1.1 million, and Long-term operating lease liabilities, less current portion of $47.3 million. Also, as a result of these modifications, the finance lease asset and lease liability balances decreased in the Consolidated Balance Sheets including decreases to Buildings and leasehold improvements of $17.4 million, Other accrued liabilities of $2.8 million and Long-term debt and finance leases, less current installments of $15.0 million.
Restaurant Properties Sale Leaseback Transaction
In the first quarter of fiscal 2022, simultaneous with the Mid-Atlantic Region Acquisition, we completed sale leaseback transactions on six of the acquired restaurants. The properties were sold at their acquisition cost resulting in proceeds of $20.5 million with no gain or loss.
The initial terms of all leases we entered into as part of the sale leaseback transactions are for 15 years, plus renewal options at our discretion. All of the leases were determined to be operating leases. Rent expenses associated with these operating leases are recognized on a straight-line basis over the lease terms under ASC 842. On June 29, 2022, the balances associated with these new leases in the Consolidated Balance Sheets include Operating lease assets of $17.8 million, Operating lease liabilities of $0.4 million, and Long-term operating lease liabilities, less current portion of $17.5 million.
10. DEBT
Long-term debt consists of the following:
| | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
Revolving credit facility | $ | 271.3 | | | $ | 171.3 | |
5.000% notes | 350.0 | | | 350.0 | |
3.875% notes | 300.0 | | | 300.0 | |
Finance lease obligations | 90.2 | | | 121.3 | |
Total long-term debt and finance leases | 1,011.5 | | | 942.6 | |
Less: unamortized debt issuance costs and discounts | (2.1) | | | (3.2) | |
Total long-term debt, less unamortized debt issuance costs and discounts | 1,009.4 | | | 939.4 | |
Less: current installments of long-term debt(1) | (20.3) | | | (21.5) | |
Long-term debt and finance leases, less current installments | $ | 989.1 | | | $ | 917.9 | |
(1)Current installments of long-term debt consist of finance leases for the periods presented and are recorded within Other accrued liabilities in the Consolidated Balance Sheets. Refer to Note 11 - Accrued and Other Liabilities for further details.
Excluding finance lease obligations and interest, our long-term debt maturities for the five fiscal years following June 29, 2022 and thereafter are as follows:
| | | | | |
Fiscal Year | Long-Term Debt |
2023(1) | $ | 300.0 | |
2024 | — | |
2025 | 350.0 | |
2026 | — | |
2027 | 271.3 | |
Thereafter | — | |
| $ | 921.3 | |
(1)Obligations under our 3.875% notes, which will mature in May 2023, have been classified as long-term, reflecting our intent and ability to refinance these notes through our existing revolving credit facility.
Revolving Credit Facility
On August 18, 2021, we amended our existing $1.0 billion revolving credit facility to an $800.0 million revolving credit facility to extend the maturity date and provide additional flexibility. During fiscal 2022, net borrowings of $100.0 million were drawn on the $800.0 million revolving credit facility. As of June 29, 2022, $528.7 million of credit was available under the revolving credit facility.
The $800.0 million revolving credit facility, as amended, matures on August 18, 2026 and bears interest of LIBOR plus an applicable margin of 1.500% to 2.250% and an undrawn commitment fee of 0.250% to 0.350%, both based on a function of our debt-to-cash-flow ratio. As of June 29, 2022, our interest rate was 3.375% consisting of LIBOR of 1.625% plus the applicable margin of 1.750%.
During fiscal 2022, we incurred and capitalized $3.1 million of debt issuance costs associated with the new revolver, which are included in Other assets in the Consolidated Balance Sheets.
5.000% Notes
In fiscal 2017, we issued $350.0 million of 5.000% senior notes due October 2024 (the “2024 Notes”). 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.
3.875% Notes
In fiscal 2013, we issued $300.0 million of 3.875% notes due in May 2023 (the “2023 Notes”). The notes require semi-annual interest payments which began in the second quarter of fiscal 2014.
Financial Covenants
Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage ratios. As of June 29, 2022, we were in compliance with our covenants pursuant to the $800.0 million revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes. We expect to remain in compliance with our covenants throughout fiscal 2023.
11. ACCRUED AND OTHER LIABILITIES
Other accrued liabilities consist of the following:
| | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
Insurance | $ | 23.5 | | | $ | 21.7 | |
Property tax | 23.3 | | | 22.4 | |
Current installments of long-term debt and finance leases | 20.3 | | | 21.5 | |
Sales tax | 14.4 | | | 23.2 | |
Utilities and services | 9.6 | | | 8.4 | |
Interest | 6.5 | | | 6.9 | |
Other(1) | 18.5 | | | 13.3 | |
| $ | 116.1 | | | $ | 117.4 | |
(1)Other primarily consisted of accruals for banquet deposits for Maggiano’s events, contingent lease liabilities related to our lease guarantees, certain exit-related lease accruals, rent-related expenses, charitable donations, deferred franchise and development fees and other various accruals.
Other liabilities consist of the following:
| | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
Insurance | $ | 36.9 | | | $ | 35.0 | |
Deferred franchise and development fees | 9.2 | | | 10.4 | |
Unrecognized tax benefits | 3.0 | | | 3.5 | |
Deferred payroll taxes(1) | — | | | 27.2 | |
Other | 5.2 | | | 5.9 | |
| $ | 54.3 | | | $ | 82.0 | |
(1)Deferred payroll taxes consisted of the employer portion of certain payroll related taxes that were deferred as allowed under the CARES Act. The first installment, due on December 31, 2021, was paid during the second quarter of fiscal 2022. The second installment, due on December 31, 2022, is classified within Accrued payroll in the Consolidated Balance Sheets.
12. STOCK-BASED COMPENSATION
Our shareholder approved stock-based compensation plans include the Stock Option and Incentive Plan for employees (“Employee Plan”) and the Stock Option and Incentive Plan for Non-Employee Directors and Consultants (collectively, the “Plans”). The Plans provide for grants of options to purchase our common stock, performance shares, restricted stock, restricted stock units, and stock appreciation rights. Additionally, grants to eligible employees may vest over a specified period of time or service period, or may contain performance-based conditions. As of June 29, 2022, the total number of shares authorized for issuance to employees and non-employee directors and consultants under the Plans was 38.7 million shares.
Presented below is total stock-based compensation expenses, and the related total income tax benefit recognized in the Consolidated Statements of Comprehensive Income:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Stock-based compensation expenses | $ | 18.6 | | | $ | 16.4 | | | $ | 14.7 | |
Tax benefit related to stock-based compensation expenses | 3.9 | | | 3.0 | | | 2.5 | |
Stock Options
In fiscal 2019 and fiscal 2018, certain eligible employees under the Plans were granted performance stock options whose vesting is contingent upon meeting Company performance goals based on our annual earnings at the end of fiscal 2021 and fiscal 2022. Expenses for performance stock options are recognized using a graded-vesting schedule over the vesting period based upon management’s periodic estimates of the number of stock options that ultimately will vest. At the end of fiscal 2021, the first performance goal was met, resulting in the vesting of 0.4 million, or one-half, of the outstanding performance stock options. At the end of fiscal 2022, the second performance goal was not met, which will result in the forfeiture of the remaining 0.4 million performance stock options. The options have a contractual term to exercise of no later than August 31, 2025.
Stock options that do not contain a performance condition were also granted to eligible employees in fiscal 2020, consistent with prior year grants. No stock options were granted in fiscal 2022 or 2021. Expenses related to these stock options are recognized using a graded-vesting schedule over the vesting period or to the date on which retirement eligibility is achieved, if shorter. Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 years. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination.
Stock option transactions during fiscal 2022 were as follows (option prices in dollars):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value |
Stock options outstanding at June 30, 2021 | 2.0 | | | $ | 38.74 | | | | | |
Granted | — | | | — | | | | | |
Exercised | 0.0 | | | 34.27 | | | | | |
Forfeited or canceled | (0.1) | | | 41.73 | | | | | |
Stock options outstanding at June 29, 2022 | 1.9 | | | $ | 38.73 | | | 3.4 | | $ | 0.2 | |
| | | | | | | |
Stock options exercisable at June 29, 2022 | 1.3 | | | $ | 39.21 | | | 3.2 | | $ | 0.1 | |
The fair value of stock options was estimated using the Black-Scholes option-pricing model with the following weighted average assumptions, and the weighted average fair value of option grants:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022(1) | | June 30, 2021(1) | | June 24, 2020 |
Weighted average fair values of option grants | n/a | | n/a | | $ | 6.92 | |
Expected volatility | n/a | | n/a | | 33.4 | % |
Risk-free interest rate | n/a | | n/a | | 1.3 | % |
Expected lives | n/a | | n/a | | 5 years |
Dividend yield | n/a | | n/a | | 3.2 | % |
(1) No stock option awards were granted in fiscal 2022 or 2021.
Expected volatility and the expected life of stock options are based on historical experience. The risk-free rate is based on the yield of a United States Treasury Note with a term equal to the expected life of the stock options. The dividend yield is based on the most recent quarterly dividend per share declared and the closing stock price on the declaration date.
As of June 29, 2022, unrecognized compensation expenses related to unvested stock options that are expected to vest totaled approximately $0.1 million and will be recognized over a weighted average period of 1.1 years. The intrinsic value and related tax benefit of options exercised is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Intrinsic value of options exercised | $ | 0.2 | | | $ | 9.8 | | | $ | 0.6 | |
Tax benefit realized on options exercised | $ | 0.0 | | | 2.4 | | | 0.1 | |
Restricted Share Awards
Restricted share awards consist of performance shares, restricted stock and restricted stock units. In fiscal 2022, eligible employees under the Plans were granted performance shares whose vesting is contingent upon meeting Company performance goals based on our earnings at the end of a three-fiscal-year period. The number of shares that will vest varies depending on the amount of earnings achieved as compared to the target amount. In fiscal 2021, certain eligible employees under the Plans were granted performance shares whose vesting is contingent upon the Company exceeding a specified level of annual earnings in any of fiscal 2022, fiscal 2023 or fiscal 2024. The number of shares that will vest varies depending on the fiscal year that the performance criteria is first met. In fiscal 2020, eligible employees under the Plans were granted performance shares whose vesting is contingent upon meeting Company performance goals based on our rate of earnings growth at the end of a three-fiscal-year period. The number of shares that will vest varies depending on the rate of earnings growth achieved as compared to the target rate. Expenses are recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter, based upon management’s periodic estimates of the number of shares that ultimately will be issued.
Restricted stock units granted to eligible employees under the Plans generally vest in full on the third anniversary of the date of grant. Restricted stock units issued to eligible employees under our career equity plan generally vest upon each employee’s retirement from the Company. Expenses are recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination.
Restricted share awards and restricted stock units granted to non-employee directors under the Plans are non-forfeitable and are expensed upon grant. Non-employee directors’ awards have variable distribution dates ranging from one year after grant to two years following departure from the Board.
Restricted share award transactions, including performance shares reflected at target, during fiscal 2022 were as follows (fair value per award in dollars):
| | | | | | | | | | | |
| Number of Restricted Share Awards | | Weighted Average Grant Date Fair Value Per Award |
Restricted share awards outstanding at June 30, 2021 | 1.2 | | | $ | 40.07 | |
Granted | 0.5 | | | 49.52 | |
Vested | (0.3) | | | 41.69 | |
Forfeited | (0.1) | | | 44.68 | |
Restricted share awards outstanding at June 29, 2022 | 1.3 | | | 42.85 | |
As of June 29, 2022, unrecognized compensation expenses related to unvested restricted share awards that are expected to vest totaled approximately $15.5 million and will be recognized over a weighted average period of 1.7 years. The fair value of shares that vested is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Fair value of restricted share awards vested | $ | 18.1 | | | $ | 14.9 | | | $ | 6.6 | |
13. SHAREHOLDERS’ DEFICIT
Share Repurchases
Our share repurchase program is used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings and planned investment and financing needs. Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets.
In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the business downturn caused by the COVID-19 pandemic. In August 2021, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $300.0 million. In fiscal 2022, we repurchased 2.4 million shares of our common stock for $100.9 million, including 2.3 million shares purchased as part of our share repurchase program and 0.1 million shares purchased from team members to satisfy tax withholding obligations on the vesting of restricted shares. As of June 29, 2022, approximately $204.0 million was available in the share repurchase program.
Dividends
In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend in response to liquidity needs created by the COVID-19 pandemic. In fiscal 2022 and fiscal 2021, dividends paid were solely related to the accrued dividends for restricted share awards that were granted prior to the suspension and vested in the applicable period. Restricted share award dividends were recorded in Other accrued liabilities for the current portion to vest within 12 months, and Other liabilities for the portion that will vest after one year.
14. FAIR VALUE MEASUREMENTS
Non-Financial Assets Measured on a Non-Recurring Basis
We review the carrying amounts of long-lived property and equipment including finance lease assets, operating lease assets, reacquired franchise rights and transferable liquor licenses annually or when events or circumstances indicate that the fair value may not substantially exceed the carrying amount. We record an impairment charge for the excess of the carrying amount over the fair value. All impairment charges were included in Other (gains) and charges in the Consolidated Statements of Comprehensive Income for the periods presented. Refer to Note 5 - Other Gains and Charges for more information.
Intangibles, net in the Consolidated Balance Sheets includes both indefinite-lived intangible assets such as transferable liquor licenses and definite-lived intangible assets such as reacquired franchise rights and trademarks.
Definite Lived Assets Impairment
Definite lived assets include property and equipment, including finance lease assets, operating lease assets and reacquired franchise rights. During fiscal 2022, we impaired certain long-lived assets and operating lease assets primarily related to 30 underperforming Chili’s and two underperforming Maggiano’s restaurants. During fiscal 2021, we impaired certain long-lived assets and operating lease assets primarily related to 11 underperforming Chili’s and three underperforming Maggiano’s restaurants.
We determined the fair value of these assets based on Level 3 fair value measurements. The table below presents the carrying values and related impairment charges recorded on these impaired restaurants for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Impairment Charges |
| Pre-Impairment Carrying Value | | Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 29, 2022 | | June 30, 2021 |
Underperforming restaurants | | | | | | | |
Long-lived assets | $ | 7.3 | | | $ | 2.6 | | | $ | 7.3 | | | $ | 2.6 | |
Reacquired franchise rights assets | — | | | 0.1 | | | — | | | 0.1 | |
Operating lease assets | 13.0 | | | 1.2 | | | 1.0 | | | 0.3 | |
Finance lease assets | — | | | — | | | — | | | — | |
Total underperforming restaurants | $ | 20.3 | | | $ | 3.9 | | | $ | 8.3 | | | $ | 3.0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Indefinite Lived Assets Impairment
The fair values of transferable liquor licenses are based on prices in the open market for licenses in the same or similar jurisdictions and are categorized as Level 2. Based on our annual reviews, in fiscal 2022 we determined there was a $0.2 million impairment and in fiscal 2021 we determined there was no impairment.
Chili’s Restaurant Acquisitions
During fiscal 2022, we completed the acquisition of 68 Chili’s restaurants from three former franchisees. The preliminary fair value of assets acquired and liabilities assumed for these restaurants utilized Level 3 inputs. The fair values of intangible assets acquired were primarily based on significant inputs not observable in an active market, including estimates of replacement costs, future cash flows, and discount rates. Refer to Note 2 - Chili’s Restaurant Acquisitions for further details.
Other Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate their carrying amounts because of the short maturity of these items.
Long-Term Debt
The carrying amount of debt outstanding related to our revolving credit facility approximates fair value as the interest rate on this instrument approximates current market rates (Level 2). The fair values of the 3.875% and 5.000% notes are based on quoted market prices and are considered Level 2 fair value measurements.
The 3.875% notes and 5.000% notes carrying amounts, which are net of unamortized debt issuance costs and discounts, and fair values are as follows, refer to Note 10 - Debt for further details:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2022 | | June 30, 2021 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
3.875% notes | $ | 299.7 | | | $ | 295.4 | | | $ | 299.3 | | | $ | 309.0 | |
5.000% notes | 348.2 | | | 329.0 | | | 347.5 | | | 369.3 | |
Note Receivable
During fiscal 2018, we received an $18.0 million long-term note receivable as consideration related to the sale of our equity interest in the Chili’s joint venture in Mexico. In fiscal 2021, the note was amended to defer certain scheduled payments from calendar year 2021 to calendar years 2022 and 2023. We determined the fair value of the amended note based on an internally developed analysis relying on Level 3 inputs using a credit rating we assigned to the counterparty and comparable interest rates associated with similar debt instruments. As a result of this analysis, we believe the fair value continues to approximate the note receivable carrying value of $5.2 million as of June 29, 2022. The current portion of the note represents cash payments to be received over the next 12 months and
is included within Accounts receivable, net while the long-term portion of the note is included within Other assets in the Consolidated Balance Sheets.
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for income taxes and interest is as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Income taxes, net of (refunds) | $ | (4.7) | | | $ | 9.7 | | | $ | (7.2) | |
Interest, net of amounts capitalized | 41.0 | | | 49.5 | | | 53.1 | |
Non-cash investing and financing activities are as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Years Ended |
| June 29, 2022 | | June 30, 2021 | | June 24, 2020 |
Retirement of fully depreciated assets(1) | $ | 133.4 | | | $ | 22.4 | | | $ | 32.3 | |
Accrued capital expenditures | 15.2 | | | 8.8 | | | 7.1 | |
Dividends declared but not paid | — | | | — | | | 1.2 | |
(1)Fiscal 2022 included the retirement of fully depreciated assets no longer in use based on a periodic review performed during fiscal 2022.
16. COMMITMENTS AND CONTINGENCIES
Lease Commitments and Guarantees
We have, in certain cases, divested brands or sold restaurants to franchisees and have not been released from lease guarantees for the related restaurants. As of June 29, 2022 and June 30, 2021, we have outstanding lease guarantees or are secondarily liable for $26.3 million and $29.2 million, respectively. These amounts represent the maximum potential liability of rent payments under the leases. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2023 through fiscal 2032. In the event of default under a lease by a franchisee or owner of a divested brand, the indemnity and default clauses in our agreements with such third parties and applicable laws govern our ability to pursue and recover amounts we may pay on behalf of such parties.
We have received notices of default and have been named a party in lawsuits pertaining to some of these leases in circumstances where the current lessee did not pay its rent obligations. These lessees are in communication with the landlords to defer or resolve payments. We recorded a $2.0 million and $1.5 million contingent loss, which represents the low end of our estimated range of losses, in fiscal 2022 and fiscal 2021, respectively, in Other (gains) and charges in the Consolidated Statements of Comprehensive Income related to these leases and lawsuits. As of June 29, 2022, we have contingent liabilities of $2.2 million for our estimated exposure of the lease defaults related to these lease guarantees. These contingent liabilities are classified within Other accrued liabilities in the Consolidated Balance Sheets. We will continue to closely monitor this situation.
Letters of Credit
We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of June 29, 2022, we had $5.8 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable within the next 11 months.
Cyber Security Litigation
In fiscal 2018, we discovered malware at certain Chili’s restaurants that may have resulted in unauthorized access or acquisition of customer payment card data. We settled all claims from payment card companies related to this incident and do not expect material claims from payment card companies in the future.
In connection with this event, the Company was also named as a defendant in a putative class action lawsuit in the United States District Court for the Middle District of Florida (the “Litigation”) relating to this incident. In the Litigation, plaintiffs assert various claims at the Company’s Chili’s restaurants involving customer payment card information and seek monetary damages in excess of $5.0 million, injunctive and declaratory relief, and attorney’s fees and costs.
Oral argument of our appeal of the district court’s class certification order was held before the Eleventh Circuit Court of Appeals on June 8, 2022 in Jacksonville, Florida. We await the court’s ruling. In the interim, all matters at the district court have been stayed.
We believe we have defenses and intend to continue defending the Litigation. As such, as of June 29, 2022, we have concluded that a loss, or range of loss, from this matter is not determinable, therefore, we have not recorded a liability related to the Litigation. We will continue to evaluate this matter based on new information as it becomes available.
Legal Proceedings
Evaluating contingencies related to litigation is a process involving judgment on the potential outcome of future events, and the ultimate resolution of litigated claims may differ from our current analysis. Accordingly, we review the adequacy of accruals and disclosures pertaining to litigated matters each quarter in consultation with legal counsel and we assess the probability and range of possible losses associated with contingencies for potential accrual in the Consolidated Financial Statements.
We are engaged in various legal proceedings and have certain unresolved claims pending. Liabilities have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, management is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on the consolidated financial condition or results of operations.