BRINKER INTERNATIONAL, INC. - bizvalblog · eye toward future growth, Brinker International was...

KylePierceSpring2013

SemesterProject–Part1 1

BRINKERINTERNATIONAL,INC.

BriefOverviewoftheCompany

BrinkerInternational,Inc.(“Brinker”or“theCompany”)istheDallas,Texasbasedparentcompanyforagroupofcasualdiningrestaurants,thelargestofwhicharetheChili’sGrill&BarandtheMaggiano’sLittleItalyrestaurants(Hoover’s,2013a).Thecompany’sprimaryfocusisfull‐service,moderatelypricedcasualdining.TheChili’slinefocusesonAmerican‐stylefoods,suchassteak,BBQribs,andburgers,aswellasfajitasandotherTex‐Mexmeals.Foodandnon‐alcoholicbeveragescomprise86%oftheChili’sbrandrevenuewithsalesofalcoholcomprisingtheother14%.TheMaggiano’slineisanItalian‐AmericanrestaurantstyledafterNewYork’s1940sLittleItaly.Approximately83%ofitssalesrevenueisderivedfromfoodandnon‐alcoholicbeverages,withtheremaining17%comingfromalcoholsales(Brinker,2012b).

Bothlinesfocusonthecasualdinerwithmoderatelypricedmeals,anemphasisonserviceandatmosphere,andconvenience.MostofBrinker’srestaurantsoffercarryoutserviceinadditiontoin‐storedining,andtheChili’slineoffersseparateentrancesforcarryoutpatrons.Additionally,thecompanyhasdeployedamobileappforitsChili’slinethroughwhichitscustomerscanplaceorders,andseveraloftheMaggiano’srestaurantsofferlocaldeliveryservice(Brinker,2012b).

Afterpioneeringthecasualdiningrestaurantideain1966withhisSteak&Aleline,NormanBrinkerfoundedBrinkerInternationalin1983toexpandonthesuccessoftheChili’sbrand,aTexas‐basedcompanyfoundedin1977.AfterthePillsburyRestaurantGroupboughttheSteak&Alechain,Mr.Brinkerwaskeptontoserveasthegroup’spresidentuntilheleftin1983torunChili’s,whichwasaprivatelyheldTexas‐basedcompanyatthetime.Mr.BrinkereventuallytookChili’spublic,andthechaingrew.Withaneyetowardfuturegrowth,BrinkerInternationalwasfounded,andtheChili’scompanywasabsorbedintothenewcompany(Hoover’s,2013a).

In1995,Mr.BrinkerretiredfromtheCompany.ThenewCEOcontinuedthegrowthstrategy,andtheCompanyacquiredtheMaggiano’slinefromLettuceEntertainYouEnterprises.ThisacquisitionisonlyoneofmanythattheCompanyhaspursued.Duringitsexistence,Brinkerhaspurchasedanddisposedofseveralotherexistingrestaurantlines–suchasRomano’sMacaroniGrill,Cozymel’sCostalMexicanGrill,Grady’sGoodtimes,RockfishSeafoodGrill,andOnTheBorder–inanefforttogrowtheCompany(Hoover’s,2013a).

In1999,fouryearsafterNormanBrinkerretired,theCompanyexpandedintotheinternationalmarketwithrestaurantsinMexico,Guatemala,andSaudiArabia(Brinker,2012a).



With$2.82billioninfiscalyear2012sales,BrinkeristhetenthlargestcompanybysalesdollarsintheCasualRestaurantscategory(Hoover’s,2013b).Asofitsfiscal2012report,thecompanyemploys53,000peopleinnon‐managementrestaurantpositions.Itscorporatestaffingincludes646peopleinvarioussupportpositions.Thecompanysharessupportinfrastructure,suchaspurchasing,legal,accounting,andtechnologyservices,acrossbrands(Brinker,2012b).

Thecompany’shistoricalfocuswasonthegrowthofcompany‐ownedstores.However,Brinkerhasrecentlyshiftedthisfocustothegrowthoffranchiselocations,especiallyininternationalmarkets(Brinker,2012b,Hoover’s,2013a).

Porter’sFiveForcesModel–IndustryRiskAnalysis

Porter’sFiveForcesmodelisamethodofanalyzingtheeconomicconditionsinanindustry.Itviewsmarketconditionsthroughfivefactorsthataffectthepotentialforprofitableoperationsinanindustry.Thefiveforcesare:(1)rivalry,whichcanbethoughtofacompetitionamongproductswithintheindustry;(2)threatofnewentrants,whichisreflectedinthecostsincurredandbarriersthatmustbeovercometoentertheindustry;(3)threatofsubstitutes,whichrelatestocompetitionfromproductsoutsidetheindustry;(4)supplierpower,orhowmuchsupplierstotheindustrycandictateprices;and(5)buyerpower,meaninghoweffectivelytheindustry’sconsumerscandictateprices.Theinteractionbetweentheseforcescanindicatethelevelofriskstoprofitabilityinherenttooperatingwithintheindustry(Wahlen,Baginski&Bradshaw,2011).

TheindustryweareconcernedwithtodayisdescribedintheNorthAmericanIndustryClassificationSystemas“full‐servicerestaurants”andhasNAICScode722511.Thiscodewasformerly722110inthe2007and2002NAICSsystem("NAICS,"2008).

Rivalry:VeryHigh

Rivalryintheindustryisveryhigh.Accordingtothe2007EconomicCensuscompiledbytheU.S.CensusBureau,thetopfourfirmscomprise9.3%oftheoverallmarket,whilethetop50firmsmakeuponly22.1%.Theindustryitselfisconsistsof220,089companies(“Accommodationandfood,”2007).Thishighlyfragmentedindustryleadstointenserivalryamongexistingfirms.

Additionally,therecenteconomicslowdownhasledtoadeclineindiscretionaryincomeandconsumerspending(Brinker,2012b).Mostconsumersviewdiningoutasaluxury;therefore,asdisposableincomedrops,manypeoplewillreducetheirrestaurantvisits(Hoover’s,2013b).Thisshrinksthenumberofcustomersavailabletotheindustry,whichresultsinincreasedcompetitionfortheremainingconsumers.



Furthermore,thepeoplewhocontinuetodineouthaveverylowswitchingcosts.ThesamecustomerwhoenjoyseatingataChili’smayeasilychooseadifferentrestaurant,suchasApplebee’sorOliveGarden,onadifferentvisit.Thismeansthatfirmsintheindustrywillhavetostronglycompetetoenticereturnbusiness.

Finally,asthecustomerbaseshrinksandsalesrevenuesdeclineacrosstheindustry,thehighlyfragmentednatureoftheindustryalsomeansthattheneedtocapturealargershareofthelimitedconsumerspendingbecomesanincreasinglyimportantfactortomaintainingasuccessfulbusiness.Ifacompanycannotpreserveitsincomebycuttingcosts,asthetotaldollarsavailableinsalesdecreases,thatcompanymustgrowitsmarketsharetosurvive.Thisintensifiesrivalryamongindustryinsiders.

ThreatofNewEntrants:High

Whiletherearehealthandsafetyregulatoryrequirementsaswellasfixedassetcoststhatmustbeincurredtoenterintothefull‐servicerestaurantbusiness,thesearerelativelyeasybarrierstoovercome.Thismakesiteasyforanewrestauranttoenterthefrayandcompeteformarketshare,asisevidencedbythe220,000firmsintheindustryandthehighmarketfragmentationdiscussedintherivalrysection(“Accommodationandfood,”2007).

ThreatofSubstitutes:High

Substitutesforfull‐servicediningincludefastfoodrestaurants,finedining,foodtrucks,andin‐homecooking.Additionally,somegrocerystoresareofferingready‐mademealsorprepackagedmealsthatjustneedtobeheatedathome.

Asconsumerstendtoviewsit‐downdiningatacasualrestaurantasamodestluxury(Brinker,2012b),thepriceconsciousconsumerswithalowerdiscretionaryincomemayswitchtocheaperalternatives,suchasfastfood,preparedmealsfromgrocerystores,orhomecooking.

Furthermore,currentfoodfashionhasseentheriseofwalk‐updiningintheformoffoodtrucks,bothmobileandinsemi‐permanentlocations.Asdiningtrendschange,theindustryfacesanincreasingthreatofalternatesourcesforfoodthatconsumersdonotcookthemselves.

Whiletherecenttrendhasbeenforpeopletocookathomelessoften,theprolongedeconomicdownturnmaycontinuetoputpressureonconsumerstosubstitutecasualsit‐downdiningwithcheaperalternatives.Weknowthatpeoplemustcontinuetoeat;however,thedeclineinsalesrevenuesacrosstheindustryprovidesevidencethatpeoplearefindingalternativestoeatingatcasualdiningrestaurants.



SupplierPower:Low

Supplierstotheindustryarepredominantlycommodityproducersforindustryinventoryandunskilledlabor.Bothofthesesuppliermarketsarehighlyfragmentedand,assuch,havelowpower.Giventhehigherlong‐termunemploymentrates,theavailableunskilledlaborpoolislargerthanaverage,therebyreducinglabor’spowerevenfurther.

Additionally,theinventorycommoditiesarepredominantlyperishablefooditems.Suppliersmustselltheirproductsquicklyortheproductswillspoil.Thisdecreasestheirpowerinsettingpricestotheindustry.

BuyerPower:Low

Ingeneral,buyersareindividualsandsmallgroupssuchasfamilies.Thismeanstheyareafragmentedgroupthatcannoteasilyactonacollectivebasistoforcepriceconcessionsfromindustryfirms.However,thelowcostofswitchingforthebuyersdoesmeanthattheindustryfirmsmustpayattentiontoconsumerpreferencesandpricesensitivity.Thisconcernisbetterobservedinthismodelthroughthehighlevelofindustryrivalry.

OverallIndustryRisk:High

Force LevelRivalry VeryHighThreatofNewEntrants HighThreatofSubstitutes HighSupplierPower LowBuyerPower Low

OverallIndustryRisk High

UsingPorter’sFiveForcesmodeltoanalyzetheindustry,wefindthatthefull‐servicerestaurantbusinessiscurrentlyariskyendeavor.Thecurrenteconomicconditionsareforcingtheindustry’scustomersoutofthemarket.Instead,consumersareseekingsubstituteproductswithalowerpricepointorhigherperceivedvalueforthedollar.Thisiscausingthetotalavailableindustry‐widerevenuetodecline.Asoverallsalesrevenueswane,competitionamongexistingfirmswillincrease.Thiswilllikelydrivedownprofits,asfirmsmustincreaseinvestmentsinmarketingandbecomemorecompetitiveonvalue.Firmsthatareunabletoincreasevaluewhilemaintainingpricesataprofitablelevelwillbeforcedoutofthemarketbyexistingbusinessesthatareabletodosoornewentrantstotheindustry.



CompanyStrategies

Brinker’sprimarybusinessstrategiesarefocusedonbranddifferentiationandfranchisegrowth.Tobuildaloyalcustomerbase,thecompanytriestodeliverafriendlyandconvenientcustomerexperiencethatisledbyateam‐focusedstaffservinghighqualityandconsistentlypreparedfoodatmoderateprices.Inordertomaximizeprofits,theCompanyengagesinlargemarketingcampaigns,seekscustomerfeedback,andembracestechnologythathelpsitreducelaborcostsandmoretightlycontrolitsinventory(Brinker,2012b).

Domestically,Brinker’sprimarycustomerbaseismiddle‐classAmerica.Specifically,itsadvertisingtargetsthe24‐54year‐oldagegroup.TherecentdownturnintheAmericaneconomyandthesubsequentdeclineindiscretionaryincomeinthetargetdemographichavepresentedchallengesforBrinker.Itsoverallsalesrevenuehasdeclinedfrom$4.2billionin2008to$2.8billionin2012.ThisdropinsaleshasforcedtheCompanytostreamlineoperationsinordertocontinuetogrowitsbottomline(Brinker,2012b).

Someofthestreamliningeffortshaveincludedakitchen‐retrofittingprojectinitsChili’sline.Thisprojectisscheduledtobecompletedinfiscal2013.Therefittingisdesignedtoincreasetheconsistencyandqualityofthepreparedfoodwhilereducingtheamountoflaborrequiredtodeliveritsproduct.Additionally,theCompanyhasinstalledanewrestaurantinformationsystemthatstrengthensitsinventorycontrolandbuildsonimprovedprocessefficienciesinthekitchen.Onthelaborside,thecompanyhasadoptedwhatitcallsa“TeamServiceModel”thatitsaysisdesignedtostreamlineserviceoperationsandimproveefficiencies.Thecompanystatesthatithasreceivedpositivecustomerfeedbackbasedonthisnewapproach(Brinker,2012b).

Brinkerisalsopursuingastrategytorebuilditssalesrevenues.Itmonitorsproductsaleslevelsandmodifiesitsmenuinresponsetocustomercommentsandpreferences.Inanefforttodrivesales,theCompanyalsoexperimentswithitspricepointsbyofferinglunchspecials,mealcombos,andother“valueofferings”(Brinker2012b,p.3).TheCompanyhasintroducedthesestrategiesinbothofitsmajorlines(Brinker,2012b).

Asdiscussedabove,Brinkerhassheditselfofseveralsmallerbrandsinanefforttomaintainitscompetitiveness.Ithasalsosloweditsrateofgrowthinresponsetotheglobaleconomicdifficulties(Brinker,2012b,Hoover’s,2013a).Additionally,theCompanyenteredintoastrategicbuybackofsomeofitsoutstandingstocktostabilizepricesand“returnvalueto[its]shareholders”(Brinker,2012b,p.3).

TheCompanyisalsofocusedonexpandingthemarketsinwhichitoperates,shiftingfromahistoricalfocusoncompany‐ownedlocationstofranchiselocations.Tothisend,itisincreasingthenumberoffranchisesinitsinternationalmarkets.Brinkerprojectsthatthe



majorityofthegrowthinthenumberoflocationsduringfiscal2013willbeinitsinternationalfranchises,whileitsdomesticgrowthwillbemuchsmaller(Brinker,2012b).

Tosupportitsgoalofprovidingaconsistent,enjoyablecustomerdiningexperienceatamoderatepricepoint,Brinkerhasdevelopedbrand‐specifictrainingprogramsforitsmanagementteamsatbothcompany‐ownedandfranchiselocations.Thetrainingprogramsaredesignedtopreparestoremanagerstoperformtheirjobandtopreparethemforhigherpositions.Thefocusoftheseprogramsisonconsistentquality,efficiency,andcustomerservice.Additionally,inordertoprotectitsreputationforcustomerserviceandquality,theCompanylimitsitsfranchiseopportunitiestolargergroupsthathaveahistoryofsuccessfulmulti‐locationrestaurantoperationsexperience(Brinker,2012b).

Brinkeralsoentersintostrategicpurchaseagreementswithitssuppliers.ThedescriptionoftheseagreementsintheCompany’s201210‐Kappearstobefuturescontractsenteredintoinordertominimizethevolatilityofcommoditypricesforitsinventory(Brinker,2012b).

Theresultsofthesestrategiesareclear.Despiteasignificantdeclineinsalesrevenuesoverthelastfouryears,Brinker’snetincomehasrisento$151millionin2012fromalowof$51.7millionin2008(Brinker,2012a).However,itisimportanttorememberthatoverallsalesrevenuesareonlyapproximately50%ofrecentpre‐recessionlevels.Inordertomaintainthisbottom‐linegrowth,theCompanymusteventuallygrowitssalesrevenuesagain.Brinkeracknowledgesthatitisunclearwhenthiswillhappen;however,theybelievesalesgrowthwillreboundwhenthenationalandglobaleconomicconditionsimprove.ThequestionremainsastohowlongarecoverywilltakeandhowwellBrinkercansustainitsoperationalgrowthintheinterim.



References

BrinkerInternational,Inc.(2012).2012Annualreporttoshareholders.[electronicresource]Retrievedfrom:http://www.brinker.com/company/annual_report.asp

BrinkerInternational,Inc.(2012).Form10‐KforthefiscalyearendedJune27,2012.[electronicresource]Retrievedfrom:http://phx.corporate‐ir.net/phoenix.zhtml?c=119205&p=irol‐sec

Hoover’sInc.(2013a)BrinkerInternational,Inc.Profile.[electronicdocument]Retrievedfrom:http://subscriber.hoovers.com.lsproxy.austincc.edu/H/home/index.html

Hoover’sInc.(2013b)CasualRestaurants:FirstResearch.[electronicdocument]Retrievedfrom:http://subscriber.hoovers.com.lsproxy.austincc.edu/H/home/index.html

NAICS.(2008).FreeNAICS&SICcodelookup.Retrievedfromhttp://www.naics.com/search.htm

U.S.CensusBureau,AmericanFactFinder.(2007).Accommodationandfoodservices:Subjectseries‐estabandfirmsize(EC0772SSSZ6).[electronicresource]Retrievedfromwebsite:http://factfinder2.census.gov/faces/nav/jsf/pages/searchresults.xhtml

Wahlen,J.,Baginski,S.,&Bradshaw,M.(2011).Financialreporting,financialstatementanalysis,andvaluation:Astrategicperspective.(7ed.).Mason,OH:South‐WesternCengageLearning.



BRINKERINTERNATIONAL,INC.–FINANCIALANALYSIS

Forthisanalysis,wefocusonthelastthreeyearsofthefinancialstatementsfromBrinkerInternational,Inc.(“Brinker”or“theCompany”).ThisincludesthefiscalyearsendingJune27,2010throughJune27,2012.Specifically,wewillfocusonananalysisoftheCompany’sliquidityandsolvency.

Aswebeginthisfinancialanalysis,wenotethatinMarch2010,BrinkerinitiatedthesaleofitsOnTheBorderrestaurantline.ThecompanycompletedthesaleinJune2010,anditseffectsareevidentinseveralaspectsofthefinancialstatements,mostnotablyasalargeincreaseincashinfiscal2010.

Furthermore,wemustalsoputtherecentfinancialyearsintocontext.Brinker’srevenuescontinuouslyshrankfromapeakof$4.4billioninfiscal2007.Revenuesbottomedoutinfiscal2011at$2.8billion.AsseeninError!Referencesourcenotfound.,thisrevenuepatternfollowsthegeneralsalestrendacrossthefoodserviceindustry(Technomic,2013).

Figure1:Twelve‐MonthMovingAverageofChangeinSalesRevenues–FoodserviceandDrinkingPlaces

Source:Technomic

ReturnonAssets

Returnonassets(ROA)measureshoweffectivelyacompanyusesitsassetstogeneratevalueforitsshareholders.AnalystscalculateROAbyaddinginterestexpense,netoftaxestonetincome,thendividingthatbythecompany’saverageassetsfortheperiod.



ROAcanbefactoredfurtherintoprofitmarginandassetturnover,whichallowsananalysttoexaminethecompanyactionsthateffectedanychange.

Brinkerincreaseditsreturnonassetsfrom7.0%in2010to12.2%in2012(Exhibit1:ReturnonAssetsAnalysis(ExcludingtheEffectsofNon‐RecurringItems)

Level1 RETURNONASSETS 2010 2011 2012

7.0% 10.2% 12.2%

Level2 PROFITMARGINFORROA ASSETTURNOVER 2010 2011 2012 2010 2011 2012 4.6% 6.1% 6.3% 1.5 1.7 1.9

Level3 2010 2011 2012 2010 2011 2012 Turnovers:

Revenues 100.0% 100.0% 100.0% 61.0 62.8 65.5 Receivables

<Costofgoodssold> (28.5%) (26.9%) (27.3%) 26.9 28.5 30.3 Inventory

GrossProfit 71.5% 73.1% 72.7% 2.4 2.5 2.7 FixedAssets

<SG&Aexpenses> (4.8%) (4.8%) (5.1%)OperatingProfit 5.4% 7.4% 8.2%

IncomebeforeTax 4.6% 6.6% 7.4%<Incometaxexpense> (1.0%) (1.5%) (2.0%)ProfitMarginforROA 4.6% 6.1% 6.3%

Exhibit2:Common‐SizeIncomeStatements).WhenwedisaggregatetheROAintoits

componentparts,weseethattheCompany’sincreasedROAfollowedfromincreasesinbothprofitmarginandassetturnover.Specifically,theprofitmarginincreasedfrom4.6%to6.3%whiletheassetturnoverratioclimbedfrom1.5to1.9acrosstheperiod.

Whenweexaminethecomponentsofprofitmargin,weseethatBrinkerconsistentlyearnedagrossprofitofabout72%;however,theCompanysignificantlyimproveditsoperatingprofitacrossthethreeyears.Lookingatthecommon‐sizeincomestatements(Exhibit2),weseethatthemaineffectsonoperatingprofitwereimprovementsinthecostofgoodssoldof1.2%points,acutof0.8%pointsfromBrinker’srestaurantexpenses,andareductionofotheroperatingchargesby0.7%points.Thisperformanceresultedinanincreasetonetincome.

Thechangeinotheroperatingchargespredominantlyresultedfromanunusuallyhighimpairmentchargeof$19.8millionassociatedwithunderperformingstoresin2010.Similarimpairmentchargeswere$1.9millionand$3.1millionin2011and2012respectively.Assuch,theoverallchangeinoperatingprofitshouldbediscountedabout0.6%pointstoaccountfortheunusualchargein2010.However,thisstillresultsinaperformanceimprovementacrosstheperiod.



Furthermore,weseeimprovementsinBrinker’sreceivablesandinventoryturnoverratios.Thereceivablesturnoverimprovedfrom61.0to65.5,resultinginanaveragesixdaysheldforreceivables.Brinker’sinventoryturnoverratioincreasedfrom26.9to30.3,whichresultsinanaverage12daysheldforinventory.Whilewewouldexpectinventorytomovequicklyinarestaurantduetotheperishablenatureoftheproduct,theCompanydidimprovetheaverageinventoryturnoverratebytwodaysacrosstheperiod.

ItalsobearsnotingthatthedisposaloftheCompany’sOnTheBorderlineoccurredinthefourthquarteroffiscal2010.Thecompanyalsousedcashtopurchasesignificantamountsoftreasurystockin2011($420million)and2012($284million).WhilethepurchaseoftreasurystockwillhaveagreaterimpactontheCompany’sreturnoncommonequity,giventhattheamountofthepurchasesexceedednetincomeinbothyears,thetreasurystockpurchasesrepresentanoverallreductionofassets,whichwillinflateROA.

ReturnonCommonEquity

Whilereturnonassetsexaminesacompany’sprofitabilityontheuseofitsassetsinoperations,returnonCommonEquity(ROCE)measureshoweffectiveacompanyisatproducingvalueforitsshareholdersoverall,includingtheeffectsoffinancingandinvestingdecisions.AnalystscalculateROCEbydividingnetincomebytheaveragecommonequityoveraperiodoftime.ROCEcanbefactoredfurtherintothreecomponents:profitmargin,assetturnover,andcapitalstructureleverage.UnlikewithROA,profitmarginforROCEdoesnotgetanadjustmenttoaddbackinterestexpense.Thecapitalstructureleverage(CSL)istheratioofaveragetotalassetstoaveragetotalcommonequity.Assetturnoveristhesameforbothmeasurements.

BrinkerimproveditsROCEfrom15.1%in2010to40.4%in2012.Whenwedecomposethisintothethreefactors,weseethatBrinkergrewitsprofitmarginfrom3.6%in2010to5.4%in2012andincreaseditsCSLfrom2.8to3.9respectively.Theassetturnoverratealsogrewfrom1.5to1.9asdiscussedabove.

TheitemsaffectingprofitmarginandassetturnoverforROCEarethesameasdiscussedinrelationtoROAabove.

WeseefromthisbreakdownthatBrinker’schangeinitscapitalstructureleveragehelpeditexploitincreasesinprofitmarginandassetturnover.Rememberingthatthecompanyrepurchasedlargeamountsoftreasurystockin2011and2012,wewouldexpecttheCSLtoincreaseduetothediminishingamountofcommonstockoutstanding.



AlternativeDisaggregationofROAandROCE

AnothermethodofdisaggregatingROAandROCEseparatesthecomponentsintofactorsaffectingoperations,financing,andequityinordertoexaminethefirm’sfinancialflexibility.Operatingassetsarenettedagainstoperatingliabilities,financingassetsareseparatedfromequityandotherliabilities,andequityitemsthatfunctionmoreasafinancingcomponentarenettedwithpurefinancingitems.ThisallowstheanalysttolookatoperatingROAandusethistocalculateROCE.Weincludethereformattedbalancesheet(Exhibit4)andincomestatementdata(Exhibit5)forBrinkerintheAppendix.

Whenperformingthisalternativefactoringstrategy,weremovedsomenon‐recurringdatathatwebelievedcloudedtheactualresults.Assuch,theROAandROCEareslightlydifferentfromthosecalculatedbyFSAP.Webelievethatthedifferencedoesnotmateriallyaffecttheinterpretationoftheratesofreturn.

Brinker’soperatingROAunderthisformulationincreasedfrom9.5%in2010to16.5%in2012whileitsROCEincreasedfrom15.9%to41.7%respectively.ThechangesresultedfromagreatlywideningspreadandincreasingleverageappliedbytheCompany(Exhibit6).

Lookingatthecomponentpartsofthisdisaggregation(Exhibit6),wenotethatBrinkersubstantiallydecreaseditscommonequityacrosstheperiod(reducedto54%of2010amountby2012).Furthermore,weseethatnetoperationprofitaftertax(NOPAT)increasedbecauseofsubstantialreductionsinotheroperatingcharges(thecauseofwhichwedescribedabove)andminorgainsinefficienciesamongotheroperatingexpenses(seeExhibit5fordetails).

LiquidityAnalysis

Acompany’sliquidityisameasurementofitsabilitytocollectcashtopaycurrentliabilitiesastheycomedueduringthecompany’soperatingcycle.Theoperatingcycleforacasualdiningrestaurantisthetimeittakesforthecompanytoreceiveinventory(e.g.rawandpre‐madefooditems),converttheinventorytoafinalproduct,selltheproduct,collectcashfromthecustomer,andpaythecompany’svendors.

WeexaminedBrinker’sliquiditybylookingatthecurrentratio,quickratio,andoperatingcashflowto(average)currentliabilitiesratioforthemostrecentthreeyearsfinancialstatements.Thecurrentratioiscalculatedbydividingacompany’stotalcurrentassetsbyitstotalcurrentliabilities.WefoundthatBrinker’scurrentratiodroppedsignificantlyfrom1.11in2010,to0.55in2011,and0.48in2012.Thequickratiofollowedthesamepattern,droppingfrom0.87,to0.31,andendingat0.26.However,operatingcash



flowtocurrentliabilitiesincreasedovertheperiodfrom68.5%in2010to75.2%in2012(seeExhibit10).

Tounderstandthesenumbers,itisimportanttounderstandBrinker’soperatingcycle.Todothis,wefirstexamineseveralassetturnoverratios(Exhibit11)sowecanuncovertheamountoftimeeachphaseoftheoperatingcycletakes.

Whenweexaminetheinventoryturnoverratio,wefindthatBrinkerhasbeenincreasingtherateatwhichitsellsitsinventory.Theaveragedaysinventoryhelddroppedfrom13.5in2010to12.0in2012.Thiscouldbeduetoincreasingsalesratesasconsumerconfidenceandspendingincreasedinthefoodserviceindustryacrosstheperiod.Restaurantsarepredominantlyacashbusiness,soweexpecttheaccountsreceivableturnoverratiotobehighforBrinker.Thisturnsouttobethecase.Brinker’saccountsreceivableturnoverwasabrisk65.5in2012,whichequatestoadaysreceivablesheldrateof5.6(Figure2).

Restaurantsarepredominantlyacashbusiness,soweexpecttheaccountsreceivableturnoverratiotobehighforBrinker.Thisturnsouttobethecase.Brinker’saccountsreceivableturnoverwasabrisk65.5in2012,whichequatestoadaysreceivablesheldrateof5.6.



Figure2:Same‐StoreSalesRevenues–FoodserviceandDrinkingPlaces

Source:(Technomic,2013)

ThelastpieceofinformationweneedtounderstandBrinker’soperatingcycleisitsaccountspayableturnoverratio,whichequaled8.2in2012.Thistranslatestoadayspayablesheldof44.6.

Fromtheseratios,weseethatBrinker’soperatingcyclebeginswiththereceiptofinventory.IttakestheCompany12.0daystoselltheinventoryandanaverageof5.6daystocollectonthesale.Thisresultsinanoperatingcycleof17.6daysfromreceiptofinventorytocollectionofcash.However,Brinkerwithholdspaymenttoitssuppliersforanaverageof44.6days.Thisresultsinanetnegative27daysoffinancingrequiredforBrinker’sworkingcapital.

Furthermore,itisimportanttorememberthatthebusinessispredominantlycash‐based,andaccountsreceivablescomprisednomorethan3%ofsales.Assuch,theactualoperatingcycleiseffectivelythesameasthedaysinventoryheld.

Giventhenegativedaysoffinancingrequired,Brinkerisshouldbeabletogenerateenoughcashfromsalestofinanceitsoperationsintheshort‐term.However,managementisrunningthecompanylean,holdingfewliquidassets.Thisincreasestheshort‐term



liquidityrisksomewhat,asthecompanyishighlyreliantoncontinuedsalestopayitsbills.Overall,wefindtheliquidityriskforBrinkertobeverylow.

SolvencyAnalysis

Solvencyisameasureofacompany’sabilitytopayitsdebtandotherobligationsovertime.ToanalyzeBrinker’ssolvency,weexamineseveraldebtandinterestratios(Exhibit12).

Brinker’stotalliabilitiestototalassetsratioincreasedfrom60.7%to78.4%overthe2010–2012period.Similarly,itstotalliabilitiestoshareholders’equityratiomorethandoubled,endingat363.4%in2012.Thesamepatternheldtruewhenonlylookingatlong‐termdebtandlong‐termcapital.WealsofindthatBrinkerincreaseditsoperatingcashflowtototalliabilitiesratiotoahealthy27.9%duringtheperiod.Finally,thecompanyimproveditsinterestcoverageratiofrom6.8to8.8.

WhenBrinkersoldOnTheBorder,itfocusedonincreasingshareholdervaluebyrepurchasinglargeamountsofoutstandingcommonstock.Thishadtheeffectofshiftingthedebttoequityratiotowardsdebt,which,bydefinition,increasesthetotalliabilitiestoequityandlong‐termliabilitiestoequityratioswithoutaffectingtheamountofcashthatBrinkermustexpendtoservicedebt.Whenwelookatthedollarvaluesoftotalliabilities,weseethattheamountdidnotchangesignificantlyoverthelastthreefiscalyears.Long‐termdebtdidincreaseslightly,butthiswasoffsetbydecreasesinotherliabilities.Assuch,thechangeintheseliabilityratiosdoesnotrepresentachangeintheabilityoftheCompanytogeneraterevenueoverthelong‐term.

Duetotheseresults,wefindalowsolvencyriskassociatedwithBrinker’sdebt.

Conclusion

Thecasualdiningindustryisemergingfromamulti‐yearperiodofdecliningsalesassociatedwiththerecentgeneraleconomicdownturnexperiencedacrossthenationandglobe.BrinkerInternationalappearstohaveweatheredthestorm,andisinasolidfinancialpositionasoftheendoffiscal2012.

Managementdecisionstoconsolidateoperations,focusingontheCompany’stwoprimarybrandsallowedBrinkertogeneratedecentreturnsoncompanyassets.Brinker’sBoardofDirectors’decisiontoreacquirelargeamountsofoutstandingcommonstockfurtherenabledtheCompanytorebuildvalueforitsshareholders,generatingareturnonequityfarabovemarketrates.



WecurrentlyfindbothalowliquidityriskandalowsolvencyriskassociatedwiththeCompany.Theprimaryconcernwehaveismanagement’sdecisiontomaintainalowlevelofliquidassetsasmeasuredagainstitscurrentliabilities.Managementisbettingthatthecurrentimprovementsinrevenueswillcontinue,relyingonsalestonotfallfurtherinordertogenerateenoughcashtofunditsoperations.Ifconsumerspendingsoftens,orconsumersshifttosubstituteproducts,thisgamblemaymakeitdifficulttofundoperations.



EXHIBITS

Exhibit1:ReturnonAssetsAnalysis(ExcludingtheEffectsofNon‐RecurringItems)

Level1 RETURNONASSETS 2010 2011 2012

7.0% 10.2% 12.2%

Level2 PROFITMARGINFORROA ASSETTURNOVER 2010 2011 2012 2010 2011 2012 4.6% 6.1% 6.3% 1.5 1.7 1.9

Level3 2010 2011 2012 2010 2011 2012 Turnovers:

Revenues 100.0% 100.0% 100.0% 61.0 62.8 65.5 Receivables

<Costofgoodssold> (28.5%) (26.9%) (27.3%) 26.9 28.5 30.3 Inventory

GrossProfit 71.5% 73.1% 72.7% 2.4 2.5 2.7 FixedAssets

<SG&Aexpenses> (4.8%) (4.8%) (5.1%)OperatingProfit 5.4% 7.4% 8.2%

IncomebeforeTax 4.6% 6.6% 7.4%<Incometaxexpense> (1.0%) (1.5%) (2.0%)ProfitMarginforROA 4.6% 6.1% 6.3%

Exhibit2:Common‐SizeIncomeStatements

FortheYearEndingJune27 2010 2011 2012

Revenues 100.0% 100.0% 100.0%<Costofgoodssold> (28.5%) (26.9%) (27.3%)GrossProfit 71.5% 73.1% 72.7%<Selling,generalandadministrativeexpenses> (4.8%) (4.8%) (5.1%)<Amortizationofintangibleassets> (4.8%) (4.7%) (4.4%)<Restaurantexpenses> (55.5%) (55.8%) (54.7%)Othergainsand<charges> (1.0%) (0.4%) (0.3%)OperatingProfit 5.4% 7.4% 8.2%<Interestexpense> (1.0%) (1.0%) (1.0%)Otherincomeorgains 0.2% 0.2% 0.1%IncomebeforeTax 4.6% 6.6% 7.4%<Incometaxexpense> (1.0%) (1.5%) (2.0%)Income<Loss>fromdiscontinuedoperations 1.2% 0.0% 0.0%NetIncome 4.8% 5.1% 5.4%



Exhibit3:ReturnonCommonShareholders'EquityAnalysis(ExcludingtheEffectsofNon‐RecurringItems)

ReturnonCommonShareholders'Equity

2010 2011 201215.1% 24.2% 40.4%

2010 2011 2012ProfitmarginforROCE 3.6% 5.1% 5.4%

Assetturnover 1.5 1.7 1.9Capitalstructureleverage 2.8 2.9 3.9

Exhibit4:BalanceSheetData‐AlternativeArrangement

AsofJune27 2010 2011 2012

OPERATINGASSETS:Cashandcashequivalents 344,624 81,988 59,103Accountsreceivable–net 45,140 42,785 43,387Inventories 26,735 25,365 25,360Prepaidexpensesandothercurrentassets 63,961 59,698 63,023Deferredtaxassets‐current 20,607 11,524 2,918Incometaxesreceivable ‐ ‐ 1,055Property,plant,andequipment‐atcost 2,099,349 2,090,149 2,119,802<Accumulateddepreciation> (970,272) (1,033,870) (1,076,238)Goodwillandnonamortizableintangibles 124,089 124,089 125,604Deferredtaxassets‐noncurrent 44,213 30,365 20,231Othernoncurrentassets 53,658 52,475 51,827LESS:OPERATINGLIABILITIESAccountspayable–trade 112,824 87,549 100,531Currentaccruedliabilities 300,540 287,365 273,884Incometaxespayable 19,647 8,596 ‐NetOperatingAssets 1,419,093 1,101,058 1,061,657

FINANCINGOBLIGATIONS:Currentmaturitiesoflong‐termdebt 16,866 22,091 27,334Long‐termdebt 524,511 502,572 587,890OtherLiabilities 148,968 137,485 136,560FinancingObligations 690,345 662,148 751,784

COMMONEQUITY:Commonstock+Additionalpaidincapital 483,346 481,313 484,406Retainedearnings 1,923,561 2,013,189 2,112,858<Treasurystock> (1,678,159) (2,055,592) (2,287,391)CommonEquity 728,748 438,910 309,873



Exhibit5:IncomeStatementData‐AlternativeArrangement

YearEndedJune27 2010 2011 2012

Revenues 2,858,498 2,761,386 2,820,722<Costofgoodssold> (816,015) (742,283) (769,729)<Selling,generalandadministrative expenses> (136,270) (132,834) (143,388)<Amortizationofintangibleassets> (135,832) (128,447) (125,054)<Restaurantexpenses> (1,587,396) (1,541,619) (1,541,740)OtherGainsand<charges> (28,485) (10,783) (8,974)Otherincomeorgains 6,001 6,220 3,772OperatingProfit 160,501 211,640 235,609Provisionforincometaxesateffective rate (28,264) (42,269) (57,577)NetOperatingProfitAfterTax(NOPAT) 132,237 169,371 178,032

FINANCINGEXPENSE:<Interestexpense>x(1–EffectiveTax Rate) (22,409) (21,784) (19,410)NetFinancingExpenseAfterTax (22,409) (21,784) (19,410)

NetIncometoCommonShareholders 154,646 191,155 197,442

Exhibit6:AlternativeCalculationofROAandROCE

AsofJune27 2010 2011 2012

ROCE‐AlternativeCalculation 15.9% 25.2% 41.7%

OperatingROA 9.5% 13.4% 16.5%Leverage 1.14 1.16 1.89Spread 5.6% 10.1% 13.4%

NOPAT 132,237 169,371 178,032Revenues 2,858,498 2,761,386 2,820,722AverageNetOperatingAssets 1,395,509 1,260,076 1,081,358AverageFinancingObligations 785,693 676,247 706,966AverageCommonEquity 687,836 583,829 374,392NetFinancingExpenseAfterTax 30,484 22,409 21,784AverageFinancingObligations 785,693 676,247 706,966NetBorrowingRate 3.9% 3.3% 3.1%

Note:TheROAandROCEareslightlydifferentduetoremovingnon‐recurringitemsfromthiscalculationthatappearedinthestandardcalculationprovidedbyFSAP



Exhibit7:Common‐SizeBalanceSheetData

AsofYearEndingJune27 2010 2011 2012

Assets:Cashandcashequivalents 18.6% 5.5% 4.1%Accountsreceivable‐net 2.4% 2.9% 3.0%Inventories 1.4% 1.7% 1.8%Prepaidexpensesandothercurrent

assets 3.5% 4.0% 4.4%Deferredtaxassets‐current 1.1% 0.8% 0.2%CurrentAssets 27.1% 14.9% 13.6%Property,plant,andequipment‐atcost 113.3% 140.8% 147.6%<Accumulateddepreciation> (52.4%) (69.6%) (74.9%)Goodwillandnonamortizableintangibles 6.7% 8.4% 8.7%Deferredtaxassets‐noncurrent 2.4% 2.0% 1.4%Other 2.9% 3.5% 3.6%TotalAssets 100.0% 100.0% 100.0%

LiabilitiesandEquities:Accountspayable‐trade 6.1% 5.9% 7.0%Currentaccruedliabilities 16.2% 19.4% 19.1%Currentmaturitiesoflong‐termdebt 0.9% 1.5% 1.9%Incometaxespayable 1.1% 0.6% 0.0%CurrentLiabilities 24.3% 27.3% 28.0%Long‐termdebt 28.3% 33.9% 40.9%OtherLiabilities 8.0% 9.3% 9.5%TotalLiabilities 60.7% 70.4% 78.4%

Commonstock+Additionalpaidincapital 26.1% 32.4% 33.7%

Retainedearnings<deficit> 103.9% 135.6% 147.1%<Treasurystock> (90.6%) (138.5%) (159.3%)CommonShareholders'Equity 39.3% 29.6% 21.6%TotalLiabilitiesandEquities 100.0% 100.0% 100.0%



Exhibit8:IncomeStatementGrowthRates

FortheYearEndedJune27 2010 2011 2012

CompoundGrowthRate(2010‐2012)

Revenues (12.8%) (3.4%) 2.1% (0.7%)<Costofgoodssold> (11.7%) (9.0%) 3.7% (2.9%)GrossProfit (13.2%) (1.1%) 1.6% 0.2%<Selling,generalandadministrative

expenses> (7.5%) (2.5%) 7.9% 2.6%<Amortizationofintangibleassets> (6.5%) (5.4%) (2.6%) (4.0%)<Restaurantexpenses> (13.7%) (2.9%) 0.0% (1.4%)OtherGainsand<charges> (76.0%) (62.1%) (16.8%) (43.9%)OperatingProfit 50.4% 33.0% 12.9% 22.5%<Interestexpense> (14.4%) (0.7%) (5.3%) (3.1%)Otherincomeorgains (36.4%) 3.6% (39.4%) (20.7%)IncomebeforeTax 67.4% 38.9% 13.9% 25.8%<Incometaxexpense> 319.7% 49.6% 36.2% 42.7%Income<Loss>fromdiscontinued

operations 382.4% (100.0%) (100.0%)NetIncome 73.9% 2.4% 7.2% 4.8%



Exhibit9:BalanceSheetGrowthRates

AsofJune27inYear 2010 2011 2012

CompoundGrowthRate(2010‐2012)

Assets:Cashandcashequivalents 266.0% (76.2%) (27.9%) (58.6%)Accountsreceivable‐net (7.0%) (5.2%) 1.4% (2.0%)Inventories (21.0%) (5.1%) (0.0%) (2.6%)Prepaidexpensesandothercurrent

assets (29.1%) (6.7%) 5.6% (0.7%)Deferredtaxassets‐current (59.4%) (44.1%) (74.7%) (62.4%)CurrentAssets (5.3%) (55.8%) (12.0%) (37.6%)Property,plant,andequipment‐atcost (2.9%) (0.4%) 1.4% 0.5%<Accumulateddepreciation> 6.1% 6.6% 4.1% 5.3%Goodwillandnonamortizableintangibles (0.7%) 0.0% 1.2% 0.6%Deferredtaxassets‐noncurrent (31.3%) (33.4%) (32.4%)Othernoncurrentassets 14.4% (2.2%) (1.2%) (1.7%)TotalAssets (5.0%) (19.8%) (3.3%) (11.9%)

LiabilitiesandEquities:Accountspayable‐trade (7.1%) (22.4%) 14.8% (5.6%)Currentaccruedliabilities 5.3% (4.4%) (4.7%) (4.5%)Currentmaturitiesoflong‐termdebt 829.3% 31.0% 23.7% 27.3%CurrentLiabilities 7.5% (9.8%) (0.9%) (5.5%)Long‐termdebt (27.9%) (4.2%) 17.0% 5.9%OtherLiabilities (1.9%) (7.7%) (0.7%) (4.3%)TotalLiabilities (13.7%) (6.9%) 7.7% 0.1%

Commonstock+Additionalpaidincapital 0.4% (0.4%) 0.6% 0.1%Retainedearnings<deficit> 4.9% 4.7% 5.0% 4.8%<Treasurystock> 0.5% 22.5% 11.3% 16.7%CommonShareholders'Equity 12.6% (39.8%) (29.4%) (34.8%)TotalLiabilitiesandEquities (5.0%) (19.8%) (3.3%) (11.9%)



Exhibit10:LiquidityRatios

Year 2010 2011 2012CurrentRatio 1.1 0.5 0.5QuickRatio 0.9 0.3 0.3OperatingCashFlowtoCurrent

Liabilities 68.5% 60.8% 75.2%

Exhibit11:TurnoverRatios

Year 2010 2011 2012AccountsReceivableTurnover 61.0 62.8 65.5DaysReceivablesHeld 6.0 5.8 5.6InventoryTurnover 26.9 28.5 30.3DaysInventoryHeld 13.5 12.8 12.0AccountsPayableTurnover 6.9 7.4 8.2DaysPayablesHeld 52.9 49.4 44.6NetWorkingCapitalDays (33.3) (30.7) (27.0)Revenues/AverageNetFixedAssets 2.4 2.5 2.7CashTurnover 13.0 12.9 40.0DaysSalesHeldinCash 28.0 28.2 9.1

Exhibit12:SolvencyRatios

Year 2010 2011 2012TotalLiabilities/TotalAssets 60.7% 70.4% 78.4%TotalLiabilities/Shareholders'Equity 154.1% 238.2% 363.4%LTDebt/LTCapital 41.9% 53.4% 65.5%LTDebt/Shareholders'Equity 72.0% 114.5% 189.7%OperatingCashFlowtoTotalLiabilities 24.5% 24.0% 27.9%InterestCoverageRatio(reported

amounts) 6.8 7.5 8.8InterestCoverageratio(recurring

amounts) 5.4 7.3 8.7



WorksCited

Technomic.(2013).12‐MonthMovingAverage|Technomic,Inc.RetrievedMarch2,2013,fromhttp://www.technomic.com/Resources/Industry_Facts/dyn12‐Month.php

Technomic.(2013).SameStoreSales‐QuarterlyData|Technomic,Inc.RetrievedMarch2,2013,fromhttp://www.technomic.com/Resources/Industry_Facts/dynSSS.php




AfterreviewingtheBrinkerInternational,Inc.SECForm10‐Kforfiscalyear2012(“financialstatements”or“statements”),Ifindthatthecompany’sstatementsareofhighquality.Thestatementspresentenoughinformationtoassesstheeconomicpositionofthefirmandtomakereasonableprojectionsintothenearfuture.Furthermore,KPMGauditedthefinancialstatementsandreleasedanunqualifiedopiniononthem.

Thefirmdidhaveareasthatincludedaccountingandreportingchoicesintheirfinancialstatements.Additionally,thestatementsincludesomevaluesbasedonlevel2andlevel3estimates,whichmustbeskepticallyreviewedpriortoformulationofprojectedrevenuesandexpenses.However,Ifoundnoareasthatindicatedlikelymanipulationorearningsmanagementatamateriallevel.

Finally,severalitemswillneedadjustingwhenpreparingprojectedfuturefinancials.Theseitemsarecomposedofone‐offcharges,discontinuedoperations,andamountsthatarehighlyvolatileoverthenextfiveyears.

ImportantAccountingandFinancialReportingChoices

WhilemostofBrinker’sfinancialstatementitemsarestraightforwarditemsthatallowlittle,ifany,flexibilityinhowBrinkermustrecordthem,thereareafewitemsthataffectthefinancialsthatdoallowthefirmtochoosehowitrecordsthem.

First,mostoftherevenuethatBrinkerrecognizesisfromsimplecashsalestocustomers.Thecompanyproperlyrecordsthisrevenuewhenthetransactioniscompleteatthetimeofsale.However,thecompanydoeshaveotherrevenuestreams,suchasfeesfromnewfranchiseesandgiftcardsales.FranchisefeesarerecordedwhenBrinkercompletesitsobligationtothefranchisee,whichconsistsofassistanceindevelopingandopeninganewrestaurantlocation.Brinkerrecordsthesefeesasrevenueupontheopeningofthenewfranchiselocation.Thecompanyrecordsgiftcardsalesasrevenuewhenthecustomerusesthegiftcardtomakeapurchase.Additionally,Brinkerconvertsaportionoftheoutstandinggiftcardbalancestorevenuebasedonhistoricalusagedatathatindicatesbalanceamountsthatareunlikelytoberedeemed(called“breakage”inthefinancials).

Second,companieshaveachoiceinhowtheyvaluetheirinventory.Brinkerisintheprocessofchangingfromalowerofweighted‐average‐costormarket(LCM)valuationmethodtotheFIFOmethodasitreplacesitsstores’inventorymanagementsystems.StoresthathavethenewsysteminstalleduseFIFO,whileolderstoresystemsuseLCM.Brinkerstatesthatthechangedidnothaveamaterialeffectonitsinventoryvaluation.Giventhehighinventoryturnoverrateinarestaurant,thisappearstobeareasonableassertion.



Third,depreciationratesareanotherareawherecompanieshaveflexibilityintheiraccountingassumptions.Brinkerusesstraight‐linedepreciationforitsproperty,plant,andequipment,includingcapitalleases.Thecompanyappropriatelydepreciatescapitalleasesovertheleaseterm,includingbargainrenewalperiods,ortheusefullifeoftheleasedproperty,whicheverisshorter.Brinkerdepreciatesequipmentandfurnitureoverathreetotenyearperiod,expensesroutinemaintenanceandrepairsasincurred,andcapitalizesmajorrefurbishments.Finally,thecompanyevaluatesthevalueofitsPP&Eforimpairmentonasemi‐annualbasis.

Fourth,Brinkerexpensesitsadvertisingexpensesintwoways.Itwaitstoexpensecostsfortheproductionofadvertisinguntiltheperiodinwhichtheadvertisingbegins;however,thecompanyexpensesfurtheradvertisingcostsasincurred.

Fifth,Brinkertreatsitsintangiblesinastandardmanner.Itrecordsgoodwillbasedonthepurchaseofexistingcompanies,andtestsgoodwillforimpairmentaccordingtoGAAPstandards.Thecompanydividesitselfintotwooperatingsegments,onefortheChili’slineandtheotherfortheMaggiano’sline.Stock‐basedcompensationgetsexpensedoveritsvestingperiodandperformance‐basedbonusesgivenasstock,restrictedstock,orrestrictedstockunitsarevaluedasofthegrantdate.BrinkerusestheBlack‐Scholespricingmodelforstock‐optionawardvaluation.

Sixth,initsreporting,Brinkercombinesthetwooperatingsegmentsdescribedaboveintoasinglereportingunit.Thispreventsananalystfromdeterminingtherelativeprofitabilityofthetwolines,butseemslikeareasonablechoicegivenhowbothrestaurantchainsaremarketedtothesamecustomerbase,operateinsimilarenvironments,andareinthesamecasualdininglineofbusiness.Ifinditreasonabletoassumethatmarketforcesaffectingonelinewillhavesimilareffectsontheother.

Seventh,Brinkerusesamixofoperatingandcapitalleasingarrangementstoobtainpropertyforitsrestaurants.Brinkerstructuredthemajorityofitsagreementsasoperatingleases.Accordingtothedisclosuresinthefinancials,93.2%ofthepresentvalueofleasepaymentsoverthe2013‐2017periodareoperatingleases.Thatvaluedropsto86.6%whenthepresentvaluesofleasepaymentsbeyond2017areadded.Additionally,Brinkerusesastraight‐lineamortizationofrentexpenseforitsoperatingleases.Thisincludesscheduledrentincreasesanddeferralofrentduebetweenthetimethecompanyisgivencontrolofaleasedsiteandthedatethefirstrentalpaymentisdue.Anycontingentrentdue(asaportionofsalesaboveanegotiatedamount)isexpensedwhendue.

Finally,Brinkerreportssomecontingentliabilitiesinitsnotes.Brinkerguaranteescertainfranchiseeleaseagreements,buttheoverallamountissmall($142.6millionattheendoffiscal2012).Italsoisinthemiddleofalawsuitthatformerandcurrentemployees



filedalleginglaborlawviolations.Brinkerdidnotdiscloseanestimatedcontingentliabilityforthislawsuit;however,thatisstandardpractice.Additionally,thecompanyhasotheroutstandinglawsuitsandunresolvedclaimsagainstit,butthefirmstatesthattheamountsareimmaterial,evenwhenaggregated.

KeyFinancialEstimates

Brinker’sfinancialsrelyonfewfinancialestimates,buttherearesomeofwhichananalystshouldtakenote.

First,thecompanyusesstock‐basedcompensationtorewardkeyemployees.Specifically,itissuesstockasaperformanceaward,grantsstockoptions,andawardsrestrictedstock/restrictedstockunits.Thevalueoftheseitemsmustoftenbeestimated,asGAAPrequirescompaniestoreportthedeferredcompensationamountwhentheitemsaregranted.BrinkerusestheBlack‐Scholesmodelforvaluingitsstockoptionawards.TheperformanceshareawardsarevaluedusingastatisticalMonteCarlosimulationmethodology.Finally,thecompanyusesanestimateoffutureforfeitsofstock‐basedcompensationawardstoreducethecompensationexpenseitrecognizes.

Additionally,Brinkerusesdeferredtaxassetsandliabilitiestorecordtime‐shiftedincometaxexpense.Theseassetsandliabilitiesrequireanestimateofaneffectivetaxrate,thelikelihoodoftheirtaxpositionbeingallowed,andapredictedfuturetaxrate.

Furthermore,Long‐livedassetdepreciationisbasedonanestimateoftheusefullifeoftheitemandafuturesalvagevalue.BothoftheseitemsrequiregoodjudgmentonthepartofBrinker’smanagementinordertobeaccurate.

Inaddition,thevaluationofBrinker’sgoodwillisbasedontheestimateofthemarketvalueofthefirm’stwooperatingsegments.Thisisanestimatedvaluebasedonlevel3inputs,somustbeapproachedskeptically.

Finally,Brinkerestimatesthe“breakage”revenueitreceivesfromgiftcardsthatareunlikelytoberedeemed.Ifagiftcardwillberedeemed,thecompanydefersrevenueuntilthecardisusedforapurchase.However,thecompanyuseshistoricaldatatopredicttheamountoftheoutstandinggiftcardbalancethatwillneverberedeemed.Itrecognizesthoseamountsinincome.

AccountingQuality

Overall,theBrinkerfinancialstatementsappeartobeofhighquality.Thecompanydisclosesamountsinsufficientdetailforananalysttoassessperformanceandpredictfutureperformancewithreasonableconfidence.Thefinancialsdonotcontainmanyareas



thatareeasilymanipulated,andthoseitemsthatcouldbeeasilymanipulatedaresmallwhencomparedtooverallbalancesheetamounts.Therearenoeasilyidentifiableredflagsindicatingfinancialmanipulationormanagement.

However,itisimportanttonotethatBrinkerisintheearlystagesofreboundingfromasignificant,multi‐yeardownturn.Itsrevenuesarefarbelowthoseofafewyearsago,andthiswillapplysignificantpressureformanagementtoreportbetternumbers.Someofthispressureismitigatedbythefactthatthedownturnwasglobalandtheentireindustrywasaffected.Thisrelievesmanagementofsomeoftheresponsibilityfortherecentyears’poorperformance.Despitethis,stockholdersdemandareturnontheirinvestmentsregardlessofthesituation,soacarefulanalystmustbevigilantforsignsofearningsmanagementordeliberatefraud.

Sometraditionalareasofmanipulationincludeinventory,contingencies,restructuring,andrevenuerecognition.However,thefinancialstatementsdonothaveindicationsofimproperreportingbyBrinker’smanagementintheseareas.Inventoriesinarestaurantareturnedoverquickly,andthisisthecasewithBrinker.Furthermore,theendinginventoryvalueisstableacrossyears,whichisanothersignthattheamountislikelytobereliable.Brinkerreportsnovaluesforcontingentliabilitiesorrestructuringcharges.ThecompanydidreportadiscontinuedoperationfromthesaleofitsMacaroniGrilllineinpaststatements;however,therearenoremainingchargesorliabilitiesassociatedwiththattransaction.Finally,revenuerecognitionisstraightforwardforBrinker.Asitssalesarepredominantlycash,themostlikelyfraudassociatedwithrevenuerecognitionwouldbeskimming,whichwouldunderreportsales.Companymanagementwouldnothaveanincentivetoreportlowersales,sotheprobabilityofthishappeningatthedirectionofcorporatemanagementislow.ThetwomainareasthatcouldbemanipulatedbyBrinker’smanagementinanefforttoaffectearningsaregiftcardrevenuefrombreakageandstock‐basedcompensationestimatedvalues.

First,BrinkerincludesthebreakageincomeamountinRevenues,soitisimpossibletotellfromthefinancialsalonetheratethatBrinkerusestodeterminethisincome.Thecompanyreportedatotalgiftcardliabilityof$86.3millionattheendoffiscal2012(3.1%of2012totalrevenues).Giventhatthisistheoverallliability,thebreakageamountcouldnotexceed$86.3million.IfweassumethatKPMGperformeditsauditcompetently,theoverallbreakageratewouldhavetobeasmallportionofthistotalvalueandbejustifiedbyhistoricaldatatoallowanunqualifiedopinion.Therewouldbelittleadvantagetomanipulationofthisamount,soitisunlikelythatmanagementisdoingso.

Second,Brinkerdisclosesalotofinformationaboutitsstock‐basedcompensationinitsfinancials.Thecompanydiscussesthemodelsitusestodeterminethefairvaluesofawards,andthosemodelsarethestandardsforsuchvaluations.Furthermore,thecompany



disclosesseveraloftheinputsitusesinthepricingmodels,whichallowstheanalysttodeterminethereasonablenessoftheassumptionsBrinkermakesinitsvaluationprocess.Finally,whiletheoverallamountofstock‐basedcompensationismaterial,theamountthatcouldbemanipulatedbydeliberateselectionofinputswouldnotbeverylargewithoutcreatingunreasonablevaluesthatwouldbenoticedbyacompetentauditororanalyst.Fromthis,Iconcludethattheriskofmanagement’smanipulationoftheseamountsislow.

PossibleAdjustments

Despitethelowlikelihoodofdeliberatemanipulationofthefinancialstatements,thereareafewitemsthatshouldbeadjustedpriortousingBrinker’sfinancialstopredictfutureperformance.Amongthesearelong‐termdebtmaturityamountsandoperatingleaseexpenses.Furthermore,eventhoughthediscontinuedoperationfromthesaleoftheOntheBorderlineoccurredinaprioryear,itmustbeproperlyaccountedforwhendevelopingprojections,asshouldthegainfromthesaleofrestaurantstoafranchiseein2010.

Brinker’slong‐termdebtconsistsoffouritems:atermloan,notespayable,arevolvingcreditline,andcapitalleaseobligations.Thelong‐termliabilitiesnetofcurrentinstallmentpaymentstotaled$502.5millionin2011and$587.9millionin2012.Thedebtmaturesinvariableamountsoverthenextfiveyears.Ineachoffiscalyears2013,2015,and2016,only$25millionmatures;however,$314millionbecomesduein2014.Thiswillhaveasignificantnegativeeffectoncashflowsin2014ifBrinkerisunabletorefinancethedebt.WhileitislikelythatBrinkerwillbeabletonegotiatearefinancingofthisdebt,givenBrinker’smixedcreditscores(investmentgrade(BBB‐)fromStandardandPoor’sbutnon‐investmentgrade(Ba1)fromMoody’s),itisconceivablethatthecompanywouldincurahighercostofcapitaltodoso.Furthermore,eventhe$25millionduein2013isalargeramountthanwhatthecompanypaidin2011or2012.Clearly,thecashflowtothepaymentoflong‐termdebtwillbehigherinfutureperiodsthanithasbeeninpriorperiods.

Asstatedabove,Brinkerstructuredthemajorityofitsleaseagreementsasoperatingleases.WhilethistreatmentisappropriateunderGAAP,Ibelievethattheseamountsshouldbecapitalizedwhendevelopingprojectedperformance.Myrationaleforthisisasfollows.Restaurantrevenueishighlydependentonthecompanycontrollingalocationfromwhichtodobusiness.Asthecompanychangesthenumberofrestaurantsitowns,therevenuewillchangeproportionally(inmostcircumstances).Thismeansthatthecompany’sreturnonassetswillbeavaluableindicatorofperformance.However,thedenominatorforROAwillnotbeaffectedbytheopeningorclosingoflocationscontrolledthroughoperatingleases.ThisreducestheeffectivenessofusingROAtohelpprojectfutureearnings.CapitalizingtheleasewillincludethepropertyinROA,andthiswillhelptomoreaccuratelydeterminefutureperformance.AsBrinkershiftsitsstrategytowardsafranchise



modelandawayfromcompany‐ownedlocations,thebenefitofcapitalizingleasestomakeaccuratepredictionsofperformancewilldiminish.

Conclusion

Brinkerpreparedhighqualityfinancialstatementsforfiscalyear2012.Thecompanydisclosedsufficientinformationforananalysttodeterminethecompany’seconomiccircumstancesandtomakereasonablepredictionsofBrinker’sfutureperformance.Thecompanyusedreliableinformationtoproduceitsstatements.Additionally,itsestimatesappearedreasonableandconformedtocommonpractice.Furthermore,Ididnotfindanyeasilyidentifiableindicationsofsignificantfinancialmanipulationorearningsmanagement.Finally,onlytwoareasonthefinancialsappeartoneedadjustingpriortoprojectingBrinker’sfutureprofitability.



REFERENCES

BrinkerInternational,Inc.(2012).Form10‐KforthefiscalyearendedJune27,2012.[electronicresource]Retrievedfrom:http://phx.corporate‐ir.net/phoenix.zhtml?c=119205&p=irol‐sec




Afteracarefulanalysisusingtheresidualincomemethod,IestimatethefairmarketvalueofBrinkerInternational,Inc.at$2,860,000,000onMay7,2013.With70.55millionsharesoutstanding,thisyieldsamarketpricepershareof$40.50.

Inordertoestimatethevalueofthecompany,Imadeseveralassumptionsaboutthefutureeconomicconditionsforthecompanyanditscompetitiveenvironment.Ialsoestimatedadiscountratetoapplytotheresidualincome.ThenextsectionsofthepaperdetailtheassumptionsandexplaintherationaleIusedtomakethem.

AssumptionsMadeinForecasting

IstartedmyforecastingbyassumingarevenuegrowthpatternforFY2013‐FY2017(referredtoasyear+1throughyear+5respectivelyintheexhibitsandthisreport)fiscalyearsandastablecontinuedgrowthratebeyondthoseyears.Asastartingpoint,Iinitiallyassumeda1.5%year+1rateandallowedittoclimbsteadilyto3.5%inyear+5andremainatthatlevelforsteadygrowth.Iselectedthisrateandpatternbasedoffofthecompany’sFY2009‐FY2012financialstatements.Itappearsthatthecompany’sretrenchmentperiodduetotheeconomicdownturnisover,andBrinkerhasreturnedtoaslowgrowthstatelateinFY2012.

Aftermakingthisassumption,Ireviewedbroadereconomicanalyses(WhiteHouse,2012)andthetranscriptofBrinker’sFY2013thirdquarterearningsconferencecall(SeekingAlpha,2013).BasedontheinformationIlearnedfromthosesourcesandfromreviewingthecompany’sForm10‐QforthethirdquarterofFY2013(BrinkerInternationalInc.,2013),Imodifiedmyprojectedrevenuegrowthto3.0%inyear+1andastable3.5%intheotheryears.IselectedthislevelbasedonmoreoptimisticgeneraleconomicprojectionsandBrinker’sperformanceinthefirstthreequartersofthecurrentfiscalyear.Ichoseagrowthpatternwithlowvolatilityduetotheindustryandcompanybeinginamaturegrowthphase.Furthermore,thepastpatternofearningsforthecompanyshowsthatithasadjustedtothechangeineconomicconditionsthatthehousingmarketcollapsebroughtabout(BrinkerInternationalInc.,2012).Revenueshavereturnedtoagrowthmodel,andtheexecutivesofthecompanyhaveannouncedtheirviewthatrevenuesshouldcontinuetoshowaslow,butsteadygrowth(SeekingAlpha,2013).Additionally,thecompanywillopennewrestaurantsduringFY2014,andit’sinternationalfranchisemarketisshowingstronggrowth(BrinkerInternationalInc.,2013;SeekingAlpha,2013).Duetothis,Iselectedapatternofrevenuegrowththatwasstableacrosstheyears.Ialsoreduceditslightlyforyear+1duetotheslightcontractioninrevenuesthecompanyexperiencedinthewinterandearlymonthsincalendaryear2013.



Aftersettlingonarevenuegrowthpatternandrate,Ianalyzedinformationaboutthecompany’sexpenses.During2013Q3,BrinkercompletedthekitchenandinformationmanagementrefitprojectitbeganinFY2012.Thecompany’sanalysisshowsareductioninrestaurantlaborcostsduetoincreasedefficienciesbroughtaboutbytheproject,andmanagementexpectstoseestrongercostcontrolresultsinthefuturenowthatpre/postrefitcomparablecostscanbecalculated(SeekingAlpha,2013).Duetothis,Iprojectedaslightlydecreasingcommonsizeforrestaurantlaborexpensesinthefuture.Inmyforecast,laborexpensescontinuetogrow,butataslowerratethansales.Iprojectedthecompany’sCOGStoincreasewithsalesbasedontheirstrongcommodityfuturespositionandBrinker’ssuccessinreducingwasteinrestaurantswheretherefitprojectwascompleted(SeekingAlpha,2013).Igrewotheroperatingexpenseswithsalesrevenuesasthecompanyhasastrongrecordofsuccessfullycontrollingoperatingcosts.

Fornon‐operatingexpenses,Iassumedthatthecompanywouldrefinanceitscurrentdebtthatiscomingdueoverthenextfiveyearsratherthantakingasignificantreductioninnetincomebyretiringthedebtcompletely.Interestratesarelow,thecompanyhasarevolvingcreditagreementthatdemonstratescreditorsarewillingtolenditmoney,andBrinkerhasbeenrepurchasingtreasurystocktoincreaseitsreturnstoowners.Asithasjustemergedfromasignificantretrenchmentandoveralllosses,itseemsunlikelythatthecompanywouldallowachargeagainstnetincometotheextentnecessarytoretirethedebt.Iprojectedasteadycommonsizeforallothersmallernon‐operatingexpenses.

Myassumptionsforthebalancesheetaccountsgenerallystartwiththereportedamountsinthecompany’sFY2013Q310‐Q.Iassumedthataccountsreceivable,inventory,andprepaidexpensesgrowatthesamerateassales.IalsoassumedthatcurrentdeferredtaxesremainatthesamecommonsizelevelasreportedintheFY2013Q310‐Qastheseamountshaveshrunktoalevelthatisalmostimmaterial.

Forproperty,plan,andequipment,Istartedwithayear+1ratethatresultedinavaluenearthemiddleofthe$130M‐$140MrangethatthecompanyreconfirmedasitstargetcapitalspendingforFY2013(SeekingAlpha,2013).Beyond2013,Iassumedacapitalspendingrateof2.5%ofrevenues,asthiswasthecompany’saveragespendingintheyearspriortotherefitinitiative.Iassumedothernon‐currentassetswouldgrowatthesamerateassales.

Ontheliabilitiessideofthebalancesheet,IstartedwithvaluesfromtheFY2013Q310‐Qandgrewmostofthemwiththechangeinrevenues.Forthecurrentmaturitiesoflong‐termdebt,Icalculatedtheratioofcurrentmaturitiesoflong‐termdebttototallong‐termdebtasshownintheFY2013Q310‐Q.Thisratioisapproximately4.1%oftotallong‐termdebt.Ithenappliedthisratiotoforecastthefuturematuritiesineachyear.Thisalso



reliesontheassumptionthatBrinkerwillrefinancethelong‐termdebtthatiscomingdueinthenextfiveyears(seediscussionabove).

Finally,inequity,Iassumedthatthecompanywouldcontinueitscurrentstrategyoftreasurystockpurchasestoincreasereturnonequity.AccordingtoBrinker’slastannualreport,thecompany’sboardofdirectorsauthorizedupto$500Mofstockrepurchasesgoingforward(BrinkerInternationalInc.,2012).Thecompany’sstrategyhasbeentousethepurchaseoftreasurystocktoboostthedividendrateinadditiontosecuringsharestouseinitsstock‐basedcompensationplans.Thecompanyisclosetoreachingitstargetdividendrate,soIassumedthatnofurthertreasurystockrepurchaseswouldbeneededtoreturnvaluetoshareholdersbeyondthecurrentauthorization.Ispreadthetreasurystockrepurchasesoverthenextfiveyearsindecreasingamountsthatresultedinatotaluseof$463Moftheallocation.

Isettheinitialdividendrateforyear+1tobringretainedearningsto1.25%abovethelevelreportedintheFY2013Q310‐Q.Ikeptdividendsatthatsamelevelinyear+2,andincreaseditslightlyfortheremainingyears.Iassumedthatthecompanywouldhaveastrategicplantostartrebuildingequity,andthisdividendrateallowsBrinkertodothatwhiletransitioningfromreturningvaluethoughstockbuyoutstorelyingondividendstoprovideabenefittostockholders,withtotalcashtostockholdersclimbingbutremainingcloseto$200Mineachyearexceptforyear+2.

Finally,Iselectedmarketablesecuritiesforaplugaccounttobalancethefinancials.Giventhecompany’sstrongerresults,theprojectedimprovementinthegeneraleconomy,andrecenttrendsinthestockmarket,IbelieveitisreasonabletoassumethatBrinkerwillbelookingforinvestmentstohelpmaintainarobustreturnonequityasitmovesawayfromtreasurystockrepurchases.WiththeFederalReservecontinuingtoindicateitwillmaintainexceptionallylowinterestrates,Brinkerwillhavetoseekreturnselsewhere.

DiscountRate

Iselectedadiscountrateof9.85%formyvaluation.Thediscountrateiscalculatedusingthefollowingformula:

E[REj]=E[RF]+βjx{E[RM]–E[RF]}

whereE[RF]istherisk‐freerateofreturn,βjisthecompanybeta,and{E[RM]–E[RF]}isthemarketriskpremiumforafully‐diversifiedportfolio.

Isetavalueof0.75%fortherisk‐freerateofreturn,whichwasthepriceofa5‐yearU.S.TreasurybondonMay7,2013asfoundontheBloombergwebsite(Bloomberg,2013).Iusedabetaof1.40forBrinkerasreportedbyReutersonMay7,2013(Reuters,2013).



Forthemarketriskpremium,Iused6.5%asreportedbyAmericanAppraisal(AmericanAppraisal,2013).ThesefactorscombineintheCapitalAssetPricingModeltoyieldacostofequitycapitalof9.85%.

StockPrice

Thestockpricecalculatedusingmyprojectionsis$40.50pershare.Thisvalueisbasedonhaving70.55Msharesofstockoutstanding,whichisthenumberreportedontheReuterswebsiteonMay7,2013.TheclosingpriceofBrinker’sstockonthatdatewas$39.96pershare.Thisisa1.3%differenceinprice.

Note:Thestockreachedapriceof$40.42intradingonMay8,2013(a52‐weekhigh)andclosedat$40.27.Thedifferencebetweenthepeakpriceandmyvaluationwas0.2%,andthedifferencebetweentheclosingpriceandmyvaluationis0.6%.

Conclusion

Usingtheresidualincomemodel,IestimatethefairmarketvalueofBrinkerInternational,Inc.at$2.86billion.Thisvaluationassumesarequiredreturnonequityof9.85%andprojectedfinancialsasshownintheFSAPworkbook.Thevaluationresultsinastockpriceof$40.50,whichcorrespondscloselytotheobservedmarketpriceonMay8,2013.



REFERENCES

AmericanAppraisal.(2013,January).Equityriskpremiumquarterly‐January2013.Retrievedfrom:http://www.american‐appraisal.com/US/Library/Articles/Equity‐Risk‐Premium‐Quarterly‐1.htm

Bloomberg.(2013,May7).U.S.GovernmentBonds.Retrievedfromhttp://www.bloomberg.com/markets/rates‐bonds/government‐bonds/us/

BrinkerInternational,Inc.(2012,August27).Form10‐KforthefiscalyearendedJune27,2012.Retrievedfrom:http://phx.corporate‐ir.net/phoenix.zhtml?c=119205&p=irol‐sec

BrinkerInternational,Inc.(2013,May3).Quarterlyreportpursuanttosection13or15(d)oftheSecuritiesExchangeActof1934forthequarterlyperiodendedMarch27,2013.Retrievedfrom:http://phx.corporate‐ir.net/phoenix.zhtml?c=119205&p=irol‐sec

Hoover’sInc.(2013,February5).CasualRestaurants:FirstResearch.Retrievedfrom:http://subscriber.hoovers.com.lsproxy.austincc.edu/H/home/index.html

Reuters.(2013,May7).BrinkerInternationalInc(EAT.N).Retrievedfrom:http://www.reuters.com/finance/stocks/overview?symbol=EAT.N

SeekingAlpha.(2013,April23).BrinkerinternationalmanagementdiscussesQ32013results‐Earningscalltranscript.Retrievedfrom:http://seekingalpha.com/article/1362561‐brinker‐international‐management‐discusses‐q3‐2013‐results‐earnings‐call‐transcript

WhiteHouse.(2012).Economicandbudgetanalysis.Retrievedfrom:http://www.whitehouse.gov/sites/default/files/omb/budget/fy2012/assets/econ_analyses.pdf

Kyle Pierce Company Project - Part 4

Financial Statement Analysis Package (FSAP): Version 7.0Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th EditioBy James Wahlen, Steve Baginski and Mark Bradshaw

Analyst Name: Kyle PierceCompany Name: Brinker International, Inc.Year (Most recent in far right column.) 2007 2008 2009 2010 2011 2012

BALANCE SHEET DATAAssets:Cash and cash equivalents 84,823 54,714 94,156 344,624 81,988 59,103Marketable securities 0 0 0 0 0 0Accounts receivable - net 49,851 52,304 48,557 45,140 42,785 43,387Inventories 29,189 35,377 33,845 26,735 25,365 25,360Prepaid expenses and other current assets 70,515 106,183 90,218 63,961 59,698 63,023Deferred tax assets - current 16,100 71,595 50,785 20,607 11,524 2,918Income taxes recievable 0 0 41,620 0 0 1,055Assets held for sale 404,692 135,850 170,133 0 0 0

Current Assets 655,170 456,023 529,314 501,067 221,360 194,846Long term investments 0 0 0 0 0 0Property, plant, and equipment - at cost 2,110,727 2,271,976 1,988,164 1,936,331 1,933,418 1,967,420<Accumulated depreciation> -830,733 -940,815 -914,142 -970,272 -1,033,870 -1,076,238Amortizable intangible assets (net) 0 0 0 0 0 0Goodwill and nonamortizable intangibles 138,876 140,371 124,932 124,089 124,089 125,604Deferred tax assets - noncurrent 4,778 23,160 0 44,213 30,365 20,231Other noncurrent assets 36,461 43,853 46,921 53,658 52,475 51,827Land 202,742 198,554 173,758 163,018 156,731 152,382

Total Assets 2,318,021 2,193,122 1,948,947 1,852,104 1,484,568 1,436,072Liabilities and Equity:Accounts payable - trade 167,789 168,619 121,483 112,824 87,549 100,531Current accrued liabilities 330,031 331,878 285,406 300,540 287,365 273,884Notes payable and short-term debt 0 0 0 0 0 0Current maturities of long-term debt 1,761 1,973 1,815 16,866 22,091 27,334Deferred tax liabilities - current 0 0 0 0 0 0Income taxes payable 21,555 5,946 0 19,647 8,596 0Liabilities associated with assets held for sale 22,328 18,408 9,798 0 0 0Other current liabilities (2) 0 0 0 0 0 0

Current Liabilities 543,464 526,824 418,502 449,877 405,601 401,749Long-term debt 826,918 901,604 727,447 524,511 502,572 587,890Long-term accrued liabilities 0 0 0 0 0 0Deferred tax liabilities - noncurrent 0 0 4,295 0 0 0Other Liabilities 142,550 169,605 151,779 148,968 137,485 136,560Other noncurrent liabilities (2) 0 0 0 0 0 0

Total Liabilities 1,512,932 1,598,033 1,302,023 1,123,356 1,045,658 1,126,199Minority interest 0 0 0 0 0 0Preferred stock 0 0 0 0 0 0

Common stock + Additional paid in capital 468,290 482,291 481,605 483,346 481,313 484,406Retained earnings <deficit> 1,791,311 1,800,300 1,834,307 1,923,561 2,013,189 2,112,858Accum. other comprehensive income <loss> -37 -168 0 0 0 0Other equity adjustments 0 0 0 0 0 0<Treasury stock> -1,454,475 -1,687,334 -1,668,988 -1,678,159 -2,055,592 -2,287,391

Common Shareholders' Equity 805,089 595,089 646,924 728,748 438,910 309,873Total Liabilities and Equities 2,318,021 2,193,122 1,948,947 1,852,104 1,484,568 1,436,072

Data Worksheet 1


INCOME STATEMENT DATA 2007 2008 2009 2010 2011 2012

Revenues 4,376,904 3,860,921 3,276,362 2,858,498 2,761,386 2,820,722<Cost of goods sold> -1,222,198 -1,101,125 -923,668 -816,015 -742,283 -769,729 Gross Profit 3,154,706 2,759,796 2,352,694 2,042,483 2,019,103 2,050,993<Selling, general and administrative expenses> -194,349 -163,996 -147,372 -136,270 -132,834 -143,388<Research and development expenses> 0 0 0 0 0 0<Depreciation and amortization expense> -189,162 -147,393 -145,220 -135,832 -128,447 -125,054<Restaurant expenses> -2,435,866 -2,161,986 -784,657 -660,922 -655,060 -649,830Other Gains and <charges> 8,999 -196,364 -118,612 -28,485 -10,783 -8,974<Restaurant labor> 0 0 -1,054,078 -926,474 -886,559 -891,910Other operating income (2) 0 0 0 0 0 0Non-recurring operating gains 0 0 0 0 0 0<Non-recurring operating losses> 0 0 0 0 0 0 Operating Profit 344,328 90,057 102,755 154,500 205,420 231,837Interest income 0 0 0 0 0 0<Interest expense> -30,929 -45,862 -33,330 -28,515 -28,311 -26,800Income <Loss> from equity affiliates 0 0 0 0 0 0Other income or gains 5,071 4,046 9,430 6,001 6,220 3,772<Other expenses or losses> 0 0 0 0 0 0 Income before Tax 318,470 48,241 78,855 131,986 183,329 208,809<Income tax expense> -88,421 -2,644 -6,734 -28,264 -42,269 -57,577<Minority interest in earnings> 0 0 0 0 0 0Income <Loss> from discontinued operations 0 6,125 7,045 33,982 0 0Extraordinary gains <losses> 0 0 0 0 0 0Changes in accounting principles 0 0 0 0 0 0Net Income (computed) 230,049 51,722 79,166 137,704 141,060 151,232Net Income (enter reported amount as a check) 230,049 51,722 79,166 137,704 141,060 151,232

Other comprehensive income items 0 0 0 0 0 0Comprehensive Income 230,049 51,722 79,166 137,704 141,060 151,232

Data Worksheet 2


STATEMENT OF CASH FLOWS DATA 2007 2008 2009 2010 2011 2012

Net Income 230,049 51,722 79,166 137,704 141,060 151,232Add back depreciation and amortization expenses 189,162 165,229 145,220 135,832 128,447 125,054Add back stock-based compensation expense 29,870 16,577 17,128 15,595 12,789 13,461Deferred income taxes -18,823 -68,064 40,921 -25,516 15,277 11,808<Income from equity affiliates, net of dividends> 0 0 201 -114 -1,802 1,350<Increase> Decrease in accounts receivable 3,394 -972 -800 6,083 1,255 608<Increase> Decrease in inventories 3,229 -6,640 -1,680 6,544 1,341 -15<Increase> Decrease in prepaid expenses 25,541 1,454 2,150 1,847 1,044 352Other Assets -5,168 459 1,496 551 406 489Current Income Taxes -1,945 2,581 -42,153 51,800 -3,976 -3,874Increase <Decrease> in accounts payable -1,978 13,320 -43,512 -9,963 -21,515 12,188Accrued Liabilities 19,966 -20,458 -68,199 -7,483 -15,178 -17,197Other Liabilities 19,225 9,786 -1,975 -11,021 -7,591 -3,703Other adjustments to net income -130 283 -823 2,637 405 799Increase <Decrease> in other noncurrent liabilities (2 0 0 0 0 0 0Restructure charges and other impairments 13,812 225,945 76,957 31,766 8,427 10,396Income from Discontinued Operations 0 0 -7,045 -33,982 0 0Net loss <gain> on disposal of assets -21,207 -29,682 36,955 -4,878 -401 490 Net CF from Operations 484,997 361,540 234,007 297,402 259,988 303,438Proceeds from sales of property, plant, and equipme 180,966 127,780 81,865 26,603 8,696 8,112<Property, plant, and equipment acquired> -430,532 -270,413 -88,152 -60,879 -70,361 -125,226<Increase> Decrease in marketable securities 0 -8,711 -4,612 0 -2,896 -3,170Investments sold 5,994 0 0 0 0 0<Payments for purchase of restaurants> 0 -2,418 0 0 0 -3,120Decrease in restricted cash 0 -34,435 4,688 29,749 0 0Other investment transactions 0 0 0 0 0 0 Net CF from Investing Activities -243,572 -188,197 -6,211 -4,527 -64,561 -123,404Increase in short-term borrowing (revolving credit) 0 0 0 0 0 40,000<Decrease in short-term borrowing> 0 0 0 0 0 0Increase in long-term borrowing 338,188 399,287 0 200,000 0 70,000<Decrease in long-term borrowing> -12,979 -324,648 -180,492 -394,657 -16,127 -20,369Issue of capital stock 0 0 0 0 0 0Proceeds from stock option exercises 0 0 0 0 0 0<Share repurchases - treasury stock> -569,347 -240,784 -3,739 -22,868 -422,099 -287,291<Dividend payments> -40,906 -42,914 -45,355 -34,448 -53,185 -50,081Proceeds from Issuance of Treasury Stock 66,287 5,277 4,650 2,396 33,057 43,416Excess tax benefit from stock comp 7,139 330 551 139 291 1,406 Net CF from Financing Activities -211,618 -203,452 -224,385 -249,438 -458,063 -202,919Net cash provided <used> by discontinued ops 0 0 36,031 207,031 0 0 Net Change in Cash 29,807 -30,109 39,442 250,468 -262,636 -22,885Cash and cash equivalents, beginning of year 84,823 54,714 94,156 344,624 81,988Cash and cash equivalents, end of year 54,714 94,156 344,624 81,988 59,103

SUPPLEMENTAL DATA 2007 2008 2009 2010 2011 2012

Statutory tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%Average tax rate implied from income statement data 27.8% 5.5% 8.5% 21.4% 23.1% 27.6%After-tax effects of nonrecurring and unusual itemson net income 0 6,125 7,045 33,982 0 0Total deferred tax assets (from above 20,878 94,755 50,785 64,820 41,889 23,149Deferred tax asset valuation allowanc 0 0 0 0 0 0Allowance for uncollectible accounts receivable 0 0 0 0 0 0Depreciation expense 189,162 147,393 145,220 135,832 128,447 125,054Preferred stock dividends (total, if any) 0 0 0 0 0 0Common shares outstanding 110,127 101,316 102,125 101,572 82,938 74,342Earnings per share (basic) 1.90 0.44 0.71 1.02 1.55 1.93Common dividends per share 0.37 0.42 0.44 0.34 0.64 0.67Market price per share at fiscal year end 27.58 22.01 15.45 13.84 14.89 15.52

FINANCIAL DATA CHECKSAssets - Liabilities - Equities 0 0 0 0 0 0Net Income (computed) - Net Income (reported) 0 0 0 0 0 0Cash Changes 0 0 0 0 0

Data Worksheet 3


Financial Statement Analysis Package (FSAP): Version 7.0Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th EditionBy James Wahlen, Steve Baginski and Mark Bradshaw

Analyst Name: Kyle PierceCompany Name: Brinker International, Inc.

DATA CHECKSAssets - Liabilities - Equities 0 0 0 0 0Net Income (computed) - Net Income (reported) 0 0 0 0 0Cash Changes 0 0 0 0In the computations below, a #DIV/0! message indicates that a ratio denominator is zero

PROFITABILITY FACTORS:Year 2008 2009 2010 2011 2012

RETURN ON ASSETS (based on reported amounts): Profit Margin for ROA 2.1% 3.1% 5.5% 5.8% 6.0%x Asset Turnover 1.7 1.6 1.5 1.7 1.9= Return on Assets 3.6% 4.9% 8.2% 9.6% 11.5%

RETURN ON ASSETS (excluding the effects of nonrecurring items): Profit Margin for ROA 2.0% 2.9% 4.3% 5.8% 6.0%x Asset Turnover 1.7 1.6 1.5 1.7 1.9= Return on Assets 3.3% 4.5% 6.4% 9.6% 11.5%

RETURN ON COMMON EQUITY (based on reported amounts): Profit Margin for ROCE 1.3% 2.4% 4.8% 5.1% 5.4%x Asset Turnover 1.7 1.6 1.5 1.7 1.9x Capital Structure Leverage 3.2 3.3 2.8 2.9 3.9= Return on Common Equity 7.4% 12.7% 20.0% 24.2% 40.4%

RETURN ON COMMON EQUITY (excluding the effects of nonrecurring items): Profit Margin for ROCE 1.2% 2.2% 3.6% 5.1% 5.4%x Asset Turnover 1.7 1.6 1.5 1.7 1.9x Capital Structure Leverage 3.2 3.3 2.8 2.9 3.9= Return on Common Equity 6.5% 11.6% 15.1% 24.2% 40.4%

OPERATING PERFORMANCE:Gross Profit / Revenues 71.5% 71.8% 71.5% 73.1% 72.7%Operating Profit / Revenues 2.3% 3.1% 5.4% 7.4% 8.2%Net Income / Revenues 1.3% 2.4% 4.8% 5.1% 5.4%Comprehensive Income / Revenues 1.3% 2.4% 4.8% 5.1% 5.4%

PERSISTENT OPERATING PERFORMANCE (excluding the effects of nonrecurring items):Persistent Operating Profit / Revenues 2.3% 3.1% 5.4% 7.4% 8.2%Persistent Net Income / Revenues 1.2% 2.2% 3.6% 5.1% 5.4%

GROWTH:Revenue Growth -11.8% -15.1% -12.8% -3.4% 2.1%Net Income Growth -77.5% 53.1% 73.9% 2.4% 7.2%Persistent Net Income Growth -80.2% 58.2% 43.8% 36.0% 7.2%

OPERATING CONTROL:Gross Profit Control Index 99.2% 100.5% 99.5% 102.3% 99.4%Operating Profit Contol Index 29.6% 134.5% 172.3% 137.6% 110.5%Profit Margin Decomposition:Gross Profit Margin 71.5% 71.8% 71.5% 73.1% 72.7%Operating Profit Index 3.3% 4.4% 7.6% 10.2% 11.3%Leverage Index 53.6% 76.7% 85.4% 89.2% 90.1%Tax Index 107.2% 100.4% 104.3% 76.9% 72.4%Net Profit Margin 1.3% 2.4% 4.8% 5.1% 5.4%Comprehensive Income Performance:Comprehensive Income Index 100.0% 100.0% 100.0% 100.0% 100.0%Comprehensive Income Margin 1.3% 2.4% 4.8% 5.1% 5.4%

Analysis Worksheet 4


RISK FACTORS:Year 2008 2009 2010 2011 2012

LIQUIDITY:Current Ratio 0.87 1.26 1.11 0.55 0.48Quick Ratio 0.20 0.34 0.87 0.31 0.26Operating Cash Flow to Current Liabilities 67.6% 49.5% 68.5% 60.8% 75.2%

ASSET TURNOVER:Accounts Receivable Turnover 75.6 65.0 61.0 62.8 65.5 Days Receivables Held 5 6 6 6 6Inventory Turnover 34.1 26.7 26.9 28.49 30.35 Days Inventory Held 11 14 14 12.81 12.03Accounts Payable Turnover 6.6 6.4 6.9 7.4 8.2 Days Payables Held 55 57 53 49 45Net Working Capital Days -40 -38 -33 -31 -27Revenues / Average Net Fixed Assets 2.96 2.72 2.80 2.96 3.15Cash Turnover 55.3 44.0 13.0 12.9 40.0 Days Sales Held in Cash 6.6 8.3 28.0 28.2 9.1

SOLVENCY:Total Liabilities / Total Assets 72.9% 66.8% 60.7% 70.4% 78.4%Total Liabilities / Shareholders' Equity 268.5% 201.3% 154.1% 238.2% 363.4%LT Debt / LT Capital 60.2% 52.9% 41.9% 53.4% 65.5%LT Debt / Shareholders' Equity 151.5% 112.4% 72.0% 114.5% 189.7%Operating Cash Flow to Total Liabilities 23.2% 16.1% 24.5% 24.0% 27.9%Interest Coverage Ratio (reported amounts) 2.2 3.6 6.8 7.5 8.8Interest Coverage ratio (recurring amounts) 2.0 3.1 5.4 7.3 8.7

RISK FACTORS:Bankruptcy Predictors:Altman Z Score 3.85 3.98 4.07 4.79 5.01 Bankruptcy Probability 0.22% 0.14% 0.11% 0.01% 0.00%Earnings Manipulation Predictors:Beneish Earnings Manipulation Score -3.06 -2.90 -2.98 -2.88 -3.00 Earnings Manipulation Probability 0.11% 0.19% 0.14% 0.20% 0.14%

STOCK MARKET-BASED RATIOS:Stock Returns -18.7% -27.8% -8.2% 12.2% 8.8%Price-Earnings Ratio (reported amounts) 50.02 21.76 13.57 9.61 8.04Price-Earnings Ratio (recurring amounts) 57.99 24.10 20.19 9.61 8.04Market Value to Book Value Ratio 3.7 2.4 1.9 2.8 3.7

INCOME STATEMENT ITEMS AS A PERCENT OF REVENUES:Year 2008 2009 2010 2011 2012

Revenues 100.0% 100.0% 100.0% 100.0% 100.0%<Cost of goods sold> -28.5% -28.2% -28.5% -26.9% -27.3% Gross Profit 71.5% 71.8% 71.5% 73.1% 72.7%<Selling, general and administrative expenses> -4.2% -4.5% -4.8% -4.8% -5.1%<Research and development expenses> 0.0% 0.0% 0.0% 0.0% 0.0%<Depreciation and amortization expense> -3.8% -4.4% -4.8% -4.7% -4.4%<Restaurant expenses> -56.0% -23.9% -23.1% -23.7% -23.0%Other Gains and <charges> -5.1% -3.6% -1.0% -0.4% -0.3%<Restaurant labor> 0.0% -32.2% -32.4% -32.1% -31.6%Other operating income (2) 0.0% 0.0% 0.0% 0.0% 0.0%Non-recurring operating gains 0.0% 0.0% 0.0% 0.0% 0.0%<Non-recurring operating losses> 0.0% 0.0% 0.0% 0.0% 0.0% Operating Profit 2.3% 3.1% 5.4% 7.4% 8.2%Interest income 0.0% 0.0% 0.0% 0.0% 0.0%<Interest expense> -1.2% -1.0% -1.0% -1.0% -1.0%Income <Loss> from equity affiliates 0.0% 0.0% 0.0% 0.0% 0.0%Other income or gains 0.1% 0.3% 0.2% 0.2% 0.1%<Other expenses or losses> 0.0% 0.0% 0.0% 0.0% 0.0% Income before Tax 1.2% 2.4% 4.6% 6.6% 7.4%<Income tax expense> -0.1% -0.2% -1.0% -1.5% -2.0%<Minority interest in earnings> 0.0% 0.0% 0.0% 0.0% 0.0%Income <Loss> from discontinued operations 0.2% 0.2% 1.2% 0.0% 0.0%Extraordinary gains <losses> 0.0% 0.0% 0.0% 0.0% 0.0%Changes in accounting principles 0.0% 0.0% 0.0% 0.0% 0.0%Net Income (computed) 1.3% 2.4% 4.8% 5.1% 5.4%

Other comprehensive income items 0.0% 0.0% 0.0% 0.0% 0.0%Comprehensive Income 1.3% 2.4% 4.8% 5.1% 5.4%



INCOME STATEMENT ITEMS: GROWTH RATESYear 2008 2009 2010 2011 2012

COMPOUNDGROWTH

YEAR TO YEAR GROWTH RATES: RATERevenues -11.8% -15.1% -12.8% -3.4% 2.1% -8.4%<Cost of goods sold> -9.9% -16.1% -11.7% -9.0% 3.7% -8.8% Gross Profit -12.5% -14.8% -13.2% -1.1% 1.6% -8.3%<Selling, general and administrative expenses> -15.6% -10.1% -7.5% -2.5% 7.9% -5.9%<Research and development expenses><Depreciation and amortization expense> -22.1% -1.5% -6.5% -5.4% -2.6% -7.9%<Restaurant expenses> -11.2% -63.7% -15.8% -0.9% -0.8% -23.2%Other Gains and <charges> -2282.1% -39.6% -76.0% -62.1% -16.8% -199.9%<Restaurant labor> -12.1% -4.3% 0.6%Other operating income (2)Non-recurring operating gains<Non-recurring operating losses> Operating Profit -73.8% 14.1% 50.4% 33.0% 12.9% -7.6%Interest income<Interest expense> 48.3% -27.3% -14.4% -0.7% -5.3% -2.8%Income <Loss> from equity affiliatesOther income or gains -20.2% 133.1% -36.4% 3.6% -39.4% -5.7%<Other expenses or losses> Income before Tax -84.9% 63.5% 67.4% 38.9% 13.9% -8.1%<Income tax expense> -97.0% 154.7% 319.7% 49.6% 36.2% -8.2%<Minority interest in earnings>Income <Loss> from discontinued operations 15.0% 382.4% -100.0%Extraordinary gains <losses>Changes in accounting principlesNet Income (computed) -77.5% 53.1% 73.9% 2.4% 7.2% -8.0%

Other comprehensive income itemsComprehensive Income -77.5% 53.1% 73.9% 2.4% 7.2% -8.0%

COMMON SIZE BALANCE SHEET - AS A PERCENT OF TOTAL ASSETSYear 2008 2009 2010 2011 2012

Assets:Cash and cash equivalents 2.5% 4.8% 18.6% 5.5% 4.1%Marketable securities 0.0% 0.0% 0.0% 0.0% 0.0%Accounts receivable - net 2.4% 2.5% 2.4% 2.9% 3.0%Inventories 1.6% 1.7% 1.4% 1.7% 1.8%Prepaid expenses and other current assets 4.8% 4.6% 3.5% 4.0% 4.4%Deferred tax assets - current 3.3% 2.6% 1.1% 0.8% 0.2%Income taxes recievable 0.0% 2.1% 0.0% 0.0% 0.1%Assets held for sale 6.2% 8.7% 0.0% 0.0% 0.0%

Current Assets 20.8% 27.2% 27.1% 14.9% 13.6%Land 9.1% 8.9% 8.8% 10.6% 10.6%Long term investments 0.0% 0.0% 0.0% 0.0% 0.0%Property, plant, and equipment - at cost 103.6% 102.0% 104.5% 130.2% 137.0%<Accumulated depreciation> -42.9% -46.9% -52.4% -69.6% -74.9%Amortizable intangible assets (net) 0.0% 0.0% 0.0% 0.0% 0.0%Goodwill and nonamortizable intangibles 6.4% 6.4% 6.7% 8.4% 8.7%Deferred tax assets - noncurrent 1.1% 0.0% 2.4% 2.0% 1.4%Other noncurrent assets 2.0% 2.4% 2.9% 3.5% 3.6%

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0%

Liabilities and Equity:Accounts payable - trade 7.7% 6.2% 6.1% 5.9% 7.0%Current accrued liabilities 15.1% 14.6% 16.2% 19.4% 19.1%Notes payable and short-term debt 0.0% 0.0% 0.0% 0.0% 0.0%Current maturities of long-term debt 0.1% 0.1% 0.9% 1.5% 1.9%Deferred tax liabilities - current 0.0% 0.0% 0.0% 0.0% 0.0%Income taxes payable 0.3% 0.0% 1.1% 0.6% 0.0%Liabilities associated with assets held for sale 0.8% 0.5% 0.0% 0.0% 0.0%Other current liabilities (2) 0.0% 0.0% 0.0% 0.0% 0.0%

Current Liabilities 24.0% 21.5% 24.3% 27.3% 28.0%Long-term debt 41.1% 37.3% 28.3% 33.9% 40.9%Long-term accrued liabilities 0.0% 0.0% 0.0% 0.0% 0.0%Deferred tax liabilities - noncurrent 0.0% 0.2% 0.0% 0.0% 0.0%Other Liabilities 7.7% 7.8% 8.0% 9.3% 9.5%Other noncurrent liabilities (2) 0.0% 0.0% 0.0% 0.0% 0.0%

Total Liabilities 72.9% 66.8% 60.7% 70.4% 78.4%Minority interest 0.0% 0.0% 0.0% 0.0% 0.0%Preferred stock 0.0% 0.0% 0.0% 0.0% 0.0%

Common stock + Additional paid in capital 22.0% 24.7% 26.1% 32.4% 33.7%Retained earnings <deficit> 82.1% 94.1% 103.9% 135.6% 147.1%Accum. other comprehensive income <loss> 0.0% 0.0% 0.0% 0.0% 0.0%Other equity adjustments 0.0% 0.0% 0.0% 0.0% 0.0%<Treasury stock> -76.9% -85.6% -90.6% -138.5% -159.3%

Common Shareholders' Equity 27.1% 33.2% 39.3% 29.6% 21.6%Total Liabilities and Equities 100.0% 100.0% 100.0% 100.0% 100.0%



BALANCE SHEET ITEMS: GROWTH RATESYear 2008 2009 2010 2011 2012

COMPOUNDGROWTH

Assets: YEAR TO YEAR GROWTH RATES: RATECash and cash equivalents -35.5% 72.1% 266.0% -76.2% -27.9% -7.0%Marketable securitiesAccounts receivable - net 4.9% -7.2% -7.0% -5.2% 1.4% -2.7%Inventories 21.2% -4.3% -21.0% -5.1% 0.0% -2.8%Prepaid expenses and other current assets 50.6% -15.0% -29.1% -6.7% 5.6% -2.2%Deferred tax assets - current 344.7% -29.1% -59.4% -44.1% -74.7% -28.9%Income taxes recievable -100.0%Assets held for sale -66.4% 25.2% -100.0% -100.0%Current Assets -30.4% 16.1% -5.3% -55.8% -12.0% -21.5%Long term investmentsProperty, plant, and equipment - at cost 7.6% -12.5% -2.6% -0.2% 1.8% -1.4%<Accumulated depreciation> 13.3% -2.8% 6.1% 6.6% 4.1% 5.3%Amortizable intangible assets (net)Goodwill and nonamortizable intangibles 1.1% -11.0% -0.7% 0.0% 1.2% -2.0%Deferred tax assets - noncurrent 384.7% -100.0% -31.3% -33.4% 33.5%Other noncurrent assets 20.3% 7.0% 14.4% -2.2% -1.2% 7.3%Land -2.1% -12.5% -6.2% -3.9% -2.8% -5.6%Total Assets -5.4% -11.1% -5.0% -19.8% -3.3% -9.1%

Liabilities and Equity:Accounts payable - trade 0.5% -28.0% -7.1% -22.4% 14.8% -9.7%Current accrued liabilities 0.6% -14.0% 5.3% -4.4% -4.7% -3.7%Notes payable and short-term debtCurrent maturities of long-term debt 12.0% -8.0% 829.3% 31.0% 23.7% 73.1%Deferred tax liabilities - currentIncome taxes payable -72.4% -100.0% -56.2% -100.0% -100.0%Liabilities associated with assets held for sale -17.6% -46.8% -100.0% -100.0%Other current liabilities (2)Current Liabilities -3.1% -20.6% 7.5% -9.8% -0.9% -5.9%Long-term debt 9.0% -19.3% -27.9% -4.2% 17.0% -6.6%Long-term accrued liabilitiesDeferred tax liabilities - noncurrent -100.0%Other Liabilities 19.0% -10.5% -1.9% -7.7% -0.7% -0.9%Other noncurrent liabilities (2)Total Liabilities 5.6% -18.5% -13.7% -6.9% 7.7% -5.7%Minority interestPreferred stock

Common stock + Additional paid in capital 3.0% -0.1% 0.4% -0.4% 0.6% 0.7%Retained earnings <deficit> 0.5% 1.9% 4.9% 4.7% 5.0% 3.4%Accum. other comprehensive income <loss> 354.1% -100.0% -100.0%Other equity adjustments<Treasury stock> 16.0% -1.1% 0.5% 22.5% 11.3% 9.5%Common Shareholders' Equity -26.1% 8.7% 12.6% -39.8% -29.4% -17.4%Total Liabilities and Equities -5.4% -11.1% -5.0% -19.8% -3.3% -9.1%



RETURN ON ASSETS ANALYSIS (excluding the effects of non-recurring items)

Level 1 RETURN ON ASSETS2010 2011 20126.4% 9.6% 11.5%

Level 2 PROFIT MARGIN FOR ROA ASSET TURNOVER2010 2011 2012 2010 2011 20124.3% 5.8% 6.0% 1.5 1.7 1.9

Level 3 2010 2011 2012 2010 2011 2012 Turnovers:Revenues 100.0% 100.0% 100.0% 61.0 62.8 65.5 Receivables

<Cost of goods sold> -28.5% -26.9% -27.3% 26.9 28.5 30.3 Inventory Gross Profit 71.5% 73.1% 72.7% 2.8 3.0 3.2 Fixed Asse

<Selling, general and administrative expenses> -4.8% -4.8% -5.1% Operating Profit 5.4% 7.4% 8.2%

Income before Tax 4.6% 6.6% 7.4%<Income tax expense> -1.0% -1.5% -2.0%Profit Margin for ROA* 4.3% 5.8% 6.0%*Amounts do not sum

RETURN ON COMMON SHAREHOLDERS' EQUITY ANALYSIS (excluding the effects of non-recurring items

RETURN ON COMMON SHAREHOLDERS' EQUITY2010 2011 2012

15.1% 24.2% 40.4%

2010 2011 2012PROFIT MARGIN FOR ROCE 3.6% 5.1% 5.4%

ASSET TURNOVER 1.5 1.7 1.9 CAPITAL STRUCTURE LEVERAGE 2.8 2.9 3.9

STATEMENT OF CASH FLOWS: SUMMARYYear 2008 2009 2010 2011 2012

Operating Activities:Net Income 51,722 79,166 137,704 141,060 151,232Add back depreciation and amortization expenses 165,229 145,220 135,832 128,447 125,054Net cash flows for working capital -187 -155,496 40,995 -43,809 -10,353Other net addbacks/subtractions 144,776 165,117 -17,129 34,290 37,505 Net CF from Operations 361,540 234,007 297,402 259,988 303,438

Investing Activities:Capital expenditures (net) -142,633 -6,287 -34,276 -61,665 -117,114Investments -11,129 -4,612 0 -2,896 -6,290Other investing transactions -34,435 4,688 29,749 0 0 Net CF from Investing Activities -188,197 -6,211 -4,527 -64,561 -123,404

Financing Activities:Net proceeds from short-term borrowing 0 0 0 0 40,000Net proceeds from long-term borrowing 74,639 -180,492 -194,657 -16,127 49,631Net proceeds from share issues and repurchases -240,784 -3,739 -22,868 -422,099 -287,291Dividends -42,914 -45,355 -34,448 -53,185 -50,081Other financing transactions 5,607 5,201 2,535 33,348 44,822 Net CF from Financing Activities -203,452 -224,385 -249,438 -458,063 -202,919

Net cash provided <used> by discontinued ops 0 36,031 207,031 0 0 Net Change in Cash -30,109 39,442 250,468 -262,636 -22,885



Financial Statement Analysis Package (FSAP): Version 7.0Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th EditionBy James Wahlen, Steve Baginski and Mark Bradshaw

Analyst Name: Kyle PierceCompany Name: Brinker International, Inc.

Sales Revenue Forecast Development

Actuals ForecastsYear 2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5

Revenues 2,858,498 2,761,386 2,820,722 2,905,344 3,007,031 3,112,277 3,221,206 3,333,949 rate of change -3.4% 2.1% 3.0% 3.5% 3.5% 3.5% 3.5%

-0.7% Sales growth rate assumptions.

Forecast Development: Capital Expenditures, Property, Plant and Equipment, and Depreciation

Capital Expenditures: CAPEX Forecasts:2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5

CAPEX:PP&E Acquired 60,879 70,361 125,226

PP&E Sold -26,603 -8,696 -8,112Net CAPEX 34,276 61,665 117,114 136,551 75,176 77,807 80,530 83,349

Net CAPEX as a percent of: Gross PP&E 1.8% 3.2% 6.0%

Revenues 1.2% 2.2% 4.2% 4.7% 2.5% 2.5% 2.5% 2.5%2.5%

Property, Plant and Equipment and Depreciation Property, Plant and Equipment and Depreciation Forecasts:

PP&E at cost: 2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5Beg. balance at cost: 1,967,420 2,103,971 2,179,147 2,256,954 2,337,484Add: CAPEX forecasts from above: 136,551 75,176 77,807 80,530 83,349End balance at cost: 1,936,331 1,933,418 1,967,420 2,103,971 2,179,147 2,256,954 2,337,484 2,420,833

Accumulated Depreciation:Beg. Balance: -1,076,238 -1,211,137 -1,350,856 -1,495,564 -1,645,436Subtract: Depreciation expense forecasts from below: -134,899 -139,719 -144,708 -149,871 -155,215End Balance: -970,272 -1,033,870 -1,076,238 -1,211,137 -1,350,856 -1,495,564 -1,645,436 -1,800,651

PP&E - net 966,059 899,548 891,182 892,834 828,290 761,389 692,048 620,182

Depreciation Expense Forecast Development: Depreciation expense forecast on existing PP&E:Existing PP&E at cost: 1,967,420 126,144 126,144 126,144 126,144 126,144

Remaining balance to be depreciated. 891,182 765,038 638,894 512,750 386,606 260,462

PP&E Purchases: Depreciation expense forecasts on new PP&E:Capex Year +1 136,551 8,755 8,755 8,755 8,755 8,755Capex Year +2 75,176 4,820 4,820 4,820 4,820Capex Year +3 77,807 4,989 4,989 4,989Capex Year +4 80,530 5,163 5,163Capex Year +5 83,349 5,344

Total Depreciation Expense 134,899 139,719 144,708 149,871 155,215

Depreciation methods: 2010 2011 2012

PPE at Cost 1,936,331 1,933,418 1,967,420Avg Depreciable PPE 1,934,875 1,950,419Depreciation Expense 135,832 128,447 125,054Implied Avg. Useful Life in Years 15.1 15.6Useful Life Forecast Assumption: 15.6

(in years)

Forecast Development Worksheet 9


Financial Statement Analysis Package (FSAP): Version 7.0Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th EditionBy James Wahlen, Steve Baginski, and Mark Bradshaw

FSAP OUTPUT: FINANCIAL STATEMENT FORECASTSAnalyst Name: Kyle PierceCompany Name: Brinker International, Inc.

Row Format: Row Format:Actual Amounts Forecast Amounts Year +6 and beyond:Common Size Percentage Forecast assumption Long-Run Growth Rate: 3.0%Rate of Change Percentage Forecast assumption explanationLong-Run Growth Factor: 103.0%

Actuals ForecastsYear 2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

INCOME STATEMENTRevenues 2,858,498 2,761,386 2,820,722 2,905,344 3,007,031 3,112,277 3,221,206 3,333,949 3,433,967

common size 100.0% 100.0% 100.0% 3.0% 3.5% 3.5% 3.5% 3.5%rate of change -3.4% 2.1% See Forecast Development worksheet for details of revenues forecasts

<Cost of goods sold> -816,015 -742,283 -769,729 -792,821 -820,570 -849,290 -879,015 -909,780 -937,074common size -28.5% -26.9% -27.3% -27.3% -27.3% -27.3% -27.3% -27.3%

rate of change -9.0% 3.7% Assume stable common size (grows with sales). Gross Profit 2,042,483 2,019,103 2,050,993 2,112,523 2,186,461 2,262,987 2,342,192 2,424,168 2,496,894common size 71.5% 73.1% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7%

rate of change -1.1% 1.6% 3.0% 3.5% 3.5% 3.5% 3.5% 3.0%

<Selling, general and administrative expenses> -136,270 -132,834 -143,388 -147,690 -152,859 -158,209 -163,746 -169,477 -174,562common size -4.8% -4.8% -5.1% -5.1% -5.1% -5.1% -5.1% -5.1%

rate of change -2.5% 7.9% Assume stable common size (grows with sales).<Research and development expenses> 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%rate of change #DIV/0! #DIV/0! None.

<Depreciation and amortization expense> -135,832 -128,447 -125,054 -134,899 -139,719 -144,708 -149,871 -155,215 -159,872common size -4.8% -4.7% -4.4% -4.6% -4.6% -4.6% -4.7% -4.7%

rate of change -5.4% -2.6% See depreciation schedule on Forecast Development sheet.<Restaurant expenses> -660,922 -655,060 -649,830 -669,325 -692,751 -716,998 -742,092 -768,066 -791,108

common size -23.1% -23.7% -23.0% -23.0% -23.0% -23.0% -23.0% -23.0%rate of change -0.9% -0.8% Assume stable common size (grows with sales).

Other Gains and <charges> -28,485 -10,783 -8,974 -8,716 -9,021 -9,337 -9,664 -10,002 -10,302common size -1.0% -0.4% -0.3% -0.3% -0.3% -0.3% -0.3% -0.3%

rate of change -62.1% -16.8% Assume stable common size (grows with sales).<Restaurant labor> -926,474 -886,559 -891,910 -900,657 -917,144 -939,908 -972,804 -1,006,852 -1,037,058

common size -32.4% -32.1% -31.6% -31.0% -30.5% -30.2% -30.2% -30.2%rate of change -4.3% 0.6% Decreased common size due to efficiencies from refit.

Other operating income (2) 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None.Non-recurring operating gains 0 0 0 0 0 0 0 0 0


<Non-recurring operating losses> 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None. Operating Profit 154,500 205,420 231,837 251,236 274,966 293,828 304,014 314,556 323,993

common size 5.4% 7.4% 8.2% 8.6% 9.1% 9.4% 9.4% 9.4% 9.4%rate of change 33.0% 12.9% 8.4% 9.4% 6.9% 3.5% 3.5% 3.0%

Interest income 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None.<Interest expense> -28,515 -28,311 -26,800 -28,207 -29,053 -30,070 -31,123 -32,212 -33,178

common size -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%rate of change -0.7% -5.3% Assume refinance of notes due in 1-5 years.

Income <Loss> from equity affiliates 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None.Other income or gains 6,001 6,220 3,772 2,821 2,905 3,007 3,112 3,221 3,318

common size 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%rate of change 3.6% -39.4% Assume stable common size (grows with sales).

<Other expenses or losses> 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None. Income before Tax 131,986 183,329 208,809 225,850 248,818 266,765 276,003 285,565 294,132


<Income tax expense> -28,264 -42,269 -57,577 -58,107 -60,141 -62,246 -64,424 -66,679 -68,679common size -1.0% -1.5% -2.0% -2.0% -2.0% -2.0% -2.0% -2.0%

rate of change 49.6% 36.2% Assume stable common size (grows with sales).<Minority interest in earnings> 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0.0 0.0 0.0 0.0 0.0rate of change #DIV/0! #DIV/0! None.

Income <Loss> from discontinued operations 33,982 0 0 0 0 0 0 0 0common size 1.2% 0.0% 0.0% 0.0 0.0 0.0 0.0 0.0

rate of change -100.0% #DIV/0! None.Extraordinary gains <losses> 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0.0 0.0 0.0 0.0 0.0rate of change #DIV/0! #DIV/0! None.

Changes in accounting principles 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0 0.0 0.0 0.0 0.0

Forecasts Worksheet 10


rate of change #DIV/0! #DIV/0! None.Net Income (computed) 137,704 141,060 151,232 167,743 188,678 204,520 211,579 218,886 225,453


Other comprehensive income items 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0 0.0 0.0 0.0 0.0

rate of change #DIV/0! #DIV/0! None.Comprehensive Income 137,704 141,060 151,232 167,743 188,678 204,520 211,579 218,886 225,453



Row Format: Row Format:Actual Amounts Forecast Amounts Year +6 and beyond:Common Size Percent Forecast assumption Long-Run Growth Rate: 3.0%Rate of Change Percent Forecast assumption explanationLong-Run Growth Factor: 103.0%

Actuals Forecasts2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

BALANCE SHEETASSETS:

Cash and cash equivalents 344,624 81,988 59,103 88,441 91,536 94,740 98,056 101,488 104,532common size 18.6% 5.5% 4.1% 6.1% 5.9% 5.9% 5.9% 6.0%

rate of change -76.2% -27.9% Initial value from 2013Q3 10-Q, then modified to balance. Assume growMarketable securities 0 0 0 0 132,746 240,491 345,445 434,490 447,524

common size 0.0% 0.0% 0.0% 0.0% 8.6% 15.0% 20.9% 25.7%rate of change #DIV/0! #DIV/0! Used as plug.

Accounts receivable - net 45,140 42,785 43,387 38,471 39,817 41,211 42,653 44,146 45,471common size 2.4% 2.9% 3.0% 2.6% 2.6% 2.6% 2.6% 2.6%

rate of change -5.2% 1.4% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.Inventories 26,735 25,365 25,360 24,548 25,407 26,296 27,217 28,169 29,014

common size 1.4% 1.7% 1.8% 1.7% 1.6% 1.6% 1.6% 1.7%rate of change -5.1% 0.0% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.

Prepaid expenses and other current assets 63,961 59,698 63,023 64,381 66,634 68,967 71,380 73,879 76,095common size 3.5% 4.0% 4.4% 4.4% 4.3% 4.3% 4.3% 4.4%

rate of change -6.7% 5.6% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.Deferred tax assets - current 20,607 11,524 2,918 1,805 1,807 1,809 1,812 1,814 1,868

common size 1.1% 0.8% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1%rate of change -44.1% -74.7% Initial value from 2013Q3 10-Q. Assume steady state beyond.

Income taxes recievable 0 0 1,055 0 0 0 0 0 0common size 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! Assume none.Assets held for sale 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%rate of change #DIV/0! #DIV/0! None held.

Current Assets 501,067 221,360 194,846 217,646 357,949 473,514 586,563 683,986 704,505common size 27.1% 14.9% 13.6% 14.9% 23.2% 29.6% 35.5% 40.5% 40.5%

rate of change -55.8% -12.0% 11.7% 64.5% 32.3% 23.9% 16.6% 3.0%Long term investments 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0% 0% 0% 0% 0%rate of change #DIV/0! #DIV/0! None held.

Property, plant, and equipment - at cost 1,936,331 1,933,418 1,967,420 2,103,971 2,179,147 2,256,954 2,337,484 2,420,833 2,493,458common size 104.5% 130.2% 137.0% 144.0% 141.1% 140.9% 141.4% 143.4%

rate of change -0.2% 1.8% PP&E assumptions - see schedule in forecast development<Accumulated depreciation> -970,272 -1,033,870 -1,076,238 -1,211,137 -1,350,856 -1,495,564 -1,645,436 -1,800,651 -1,854,670

common size -52.4% -69.6% -74.9% -82.9% -87.5% -93.4% -99.5% -106.7%rate of change 6.6% 4.1% See depreciation schedule in forecast development worksheet.

Goodwill and nonamortizable intangibles 124,089 124,089 125,604 125,604 125,604 125,604 125,604 125,604 129,372common size 6.7% 8.4% 8.7% 8.6% 8.1% 7.8% 7.6% 7.4%

rate of change 0.0% 1.2% Assume no change in value.Deferred tax assets - noncurrent 44,213 30,365 20,231 27,029 27,975 28,954 29,968 31,016 31,947

common size 2.4% 2.0% 1.4% 1.9% 1.8% 1.8% 1.8% 1.8%rate of change -31.3% -33.4% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.

Other noncurrent assets 53,658 52,475 51,827 48,411 50,105 51,859 53,674 55,553 57,219common size 2.9% 3.5% 3.6% 3.3% 3.2% 3.2% 3.2% 3.3%

rate of change -2.2% -1.2% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.Land 163,018 156,731 152,382 149,310 154,536 159,945 165,543 171,337 176,477

common size 8.8% 10.6% 10.6% 10.2% 10.0% 10.0% 10.0% 10.2%rate of change -3.9% -2.8% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.Total Assets 1,852,104 1,484,568 1,436,072 1,460,834 1,544,459 1,601,265 1,653,400 1,687,677 1,738,307common size 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

rate of change -19.8% -3.3% 1.7% 5.7% 3.7% 3.3% 2.1% 3.0%LIABILITIES:

Accounts payable - trade 112,824 87,549 100,531 83,135 86,045 89,056 92,173 95,399 98,261common size 6.1% 5.9% 7.0% 5.7% 5.6% 5.6% 5.6% 5.7%

rate of change -22.4% 14.8% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.Current accrued liabilities 300,540 287,365 273,884 273,636 283,213 293,126 303,385 314,004 323,424

common size 16.2% 19.4% 19.1% 18.7% 18.3% 18.3% 18.3% 18.6%rate of change -4.4% -4.7% Initial value from 2013Q3 10-Q. Assume growth with sales beyond.

Notes payable and short-term debt 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None - recorded elsewhere in balance sheet.Current maturities of long-term debt 16,866 22,091 27,334 27,528 29,104 30,174 31,157 31,803 32,757

common size 0.9% 1.5% 1.9% 1.9% 1.9% 1.9% 1.9% 1.9%rate of change 31.0% 23.7% Initial value from 2013Q3 10-Q. Assume steady 4.1% of long-term debt

Deferred tax liabilities - current 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%



rate of change #DIV/0! #DIV/0! Assume none.Income taxes payable 19,647 8,596 0 0 0 0 0 0 0

common size 1.1% 0.6% 0.0%rate of change -56.2% -100.0% Assume none.

Liabilities associated with assets held for sale 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None.Other current liabilities (2) 0 0 0 0 0 0 0 0 0


Current Liabilities 449,877 405,601 401,749 384,299 398,362 412,356 426,715 441,206 454,442common size 24.3% 27.3% 28.0% 26.3% 25.8% 25.8% 25.8% 26.1% 26.1%

rate of change -9.8% -0.9% -4.3% 3.7% 3.5% 3.5% 3.4% 3.0%Long-term debt 524,511 502,572 587,890 677,309 716,082 742,419 766,591 782,484 805,958

common size 28.3% 33.9% 40.9% 46.4% 46.4% 46.4% 46.4% 46.4%rate of change -4.2% 17.0% Initial value from 2013Q3 10-Q. Assume steady common size.

Long-term accrued liabilities 0 0 0 0 0 0 0 0 0common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

rate of change #DIV/0! #DIV/0! None.Deferred tax liabilities - noncurrent 0 0 0 0 0 0 0 0 0

common size 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%rate of change #DIV/0! #DIV/0! Assume none.

Other Liabilities 148,968 137,485 136,560 132,709 140,306 145,466 150,203 153,317 157,916common size 8.0% 9.3% 9.5% 9.1% 9.1% 9.1% 9.1% 9.1%

rate of change -7.7% -0.7% Initial value from 2013Q3 10-Q. Assume steady common size.Other noncurrent liabilities (2) 0 0 0 0 0 0 0 0 0


Total Liabilities 1,123,356 1,045,658 1,126,199 1,194,317 1,254,749 1,300,242 1,343,509 1,377,006 1,418,316common size 60.7% 70.4% 78.4% 81.8% 81.2% 81.2% 81.3% 81.6% 81.6%

rate of change -6.9% 7.7% 6.0% 5.1% 3.6% 3.3% 2.5% 3.0%

SHAREHOLDERS' EQUITYCommon stock + Additional paid in capital 483,346 481,313 484,406 484,406 484,406 484,406 484,406 484,406 498,938

common size 26.1% 32.4% 33.7% 33.2% 31.4% 30.3% 29.3% 28.7%rate of change -0.4% 0.6% Assume no net changes to common stock.

Retained earnings <deficit> 1,923,561 2,013,189 2,112,858 2,212,547 2,325,740 2,417,053 2,505,921 2,576,701 2,654,002common size 103.9% 135.6% 147.1% 151.5% 150.6% 150.9% 151.6% 152.7%

rate of change 4.7% 5.0% Add net income and subtract dividends; see dividends forecast box be<Treasury stock> -1,678,159 -2,055,592 -2,287,391 -2,430,436 -2,520,436 -2,600,436 -2,680,436 -2,750,436 -2,832,949

common size -90.6% -138.5% -159.3% -143,045 -90,000 -80,000 -80,000 -70,000rate of change 22.5% 11.3% Assume no further changes in repurchase authorization amount.

Common Shareholders' Equity 728,748 438,910 309,873.0 266,516.7 289,710.0 301,023.0 309,890.5 310,671.1 319,991common size 39.3% 29.6% 21.6% 18.2% 18.8% 18.8% 18.7% 18.4% 18.4%

rate of change -39.8% -29.4% -14.0% 8.7% 3.9% 2.9% 0.3% 3.0%Total Liabilities and Equities 1,852,104 1,484,568 1,436,072 1,460,834 1,544,459 1,601,265 1,653,400 1,687,677 1,738,307

common size 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%rate of change -19.8% -3.3% 1.7% 5.7% 3.7% 3.3% 2.1% 3.0%

Account adjusted: DividendsDividends forecasts:

Common dividends: 68,054 75,484 113,207 122,712 148,106 148,15245.0% 45.0% 60.0% 60.0% 70.0%

Set Y+1 dividend rate to match 2013Q3 10-Q R/E amount + 1.25%Preferred dividends: 0 0 0 0 0 0

0.0% 0.0% 0.0% 0.0% 0.0%None.

Implied dividends: 0 0 0 0 0 0Implied dividend amount to balance the balance sheet.

Total dividends: 68,054 75,484 113,207 122,712 148,106 148,152Total dividend forecast amounts.


Actuals ForecastsIMPLIED STATEMENT OF CASH FLOWS 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Net Income 141,060 151,232 167,743 188,678 204,520 211,579 218,886 225,453Add back depreciation expense (net) 63,598 42,368 134,899 139,719 144,708 149,871 155,215 54,020Add back amortization expense (net) 128,447 125,054 134,899 139,719 144,708 149,871 155,215 159,872<Increase> Decrease in receivables - net 2,355 -602 4,916 -1,346 -1,394 -1,442 -1,493 -1,324<Increase> Decrease in inventories 1,370 5 812 -859 -889 -920 -953 -845<Increase> Decrease in prepaid expenses 4,263 -3,325 -1,358 -2,253 -2,332 -2,414 -2,498 -2,216<Increase> Decrease in other current assets (1) 0 -1,055 1,055 0 0 0 0 0<Increase> Decrease in other current assets (2) 0 0 0 0 0 0 0 0Increase <Decrease> in accounts payable - trade -25,275 12,982 -17,396 2,910 3,012 3,117 3,226 2,862Increase <Decrease> in current accrued liabilities -13,175 -13,481 -248 9,577 9,912 10,259 10,618 9,420Increase <Decrease> in income taxes payable -11,051 -8,596 0 0 0 0 0 0Increase <Decrease> in other current liabilities (1) 0 0 0 0 0 0 0 0Increase <Decrease> in other current liabilities (2) 0 0 0 0 0 0 0 0Net change in deferred tax assets and liabilities 22,931 18,740 -5,685 -948 -981 -1,016 -1,051 -985Increase <Decrease> in long-term accrued liabilities 0 0 0 0 0 0 0 0Increase <Decrease> in other noncurrent liabilities (1) -11,483 -925 -3,851 7,597 5,161 4,736 3,114 4,599Increase <Decrease> in other noncurrent liabilities (2) 0 0 0 0 0 0 0 0 Net Cash Flows from Operations 303,040 322,397 415,787 482,793 506,424 523,642 540,280 450,855<Increase> Decrease in property, plant, & equip. at cost 2,913 -34,002 -136,551 -75,176 -77,807 -80,530 -83,349 -72,625<Increase> Decrease in marketable securities 0 0 0 -132,746 -107,744 -104,954 -89,045 -13,035<Increase> Decrease in investment securities 0 0 0 0 0 0 0 0



<Increase> Decrease in amortizable intangible assets (net) -128,447 -125,054 -134,899 -139,719 -144,708 -149,871 -155,215 -159,872<Increase> Decrease in goodwill and nonamort. intangibles 0 -1,515 0 0 0 0 0 -3,768<Increase> Decrease in other noncurrent assets (1) 1,183 648 3,416 -1,694 -1,754 -1,815 -1,879 -1,667<Increase> Decrease in other noncurrent assets (2) 6,287 4,349 3,072 -5,226 -5,409 -5,598 -5,794 -5,140 Net Cash Flows from Investing Activities -118,064 -155,574 -264,962 -354,562 -337,422 -342,769 -335,281 -256,106Increase <Decrease> in short-term debt 5,225 5,243 194 1,576 1,070 982 646 954Increase <Decrease> in long-term debt -21,939 85,318 89,419 38,773 26,338 24,172 15,893 23,475Increase <Decrease> in minority interest and preferred stock 0 0 0 0 0 0 0 0Increase <Decrease> in common stock + paid in capital -2,033 3,093 0 0 0 0 0 14,532Increase <Decrease> in accum. OCI and other equity adjs. 0 0 0 0 0 0 0 0Increase <Decrease> in treasury stock -377,433 -231,799 -143,045 -90,000 -80,000 -80,000 -70,000 -82,513Dividends -51,432 -51,563 -68,054 -75,484 -113,207 -122,712 -148,106 -148,152 Net Cash Flows from Financing Activities -447,612 -189,708 -121,486 -125,136 -165,798 -177,558 -201,567 -191,704 Net Change in Cash -262,636 -22,885 29,338 3,095 3,204 3,316 3,432 3,045


Actuals Forecasts2010 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

FORECAST VALIDITY CHECK DATA:GROWTH

Revenue Growth Rates: -12.8% -3.4% 2.1% 3.0% 3.5% 3.5% 3.5% 3.5% 3.0%Net Income Growth Rates: 73.9% 2.4% 7.2% 10.9% 12.5% 8.4% 3.5% 3.5% 3.0%Total Asset Growth Rates -5.0% -19.8% -3.3% 1.7% 5.7% 3.7% 3.3% 2.1% 3.0%

RETURN ON ASSETS (based on reported amounts): Profit Margin for ROA 5.5% 5.8% 6.0% 6.5% 7.0% 7.3% 7.3% 7.3% 7.3%

x Asset Turnover 1.5 1.7 1.9 2.0 2.0 2.0 2.0 2.0 2.0= Return on Assets 8.2% 9.6% 11.5% 13.0% 14.0% 14.5% 14.5% 14.6% 14.6%

RETURN ON ASSETS (excluding the effects of nonrecurring items): Profit Margin for ROA 4.3% 5.8% 6.0% 6.4% 6.9% 7.2% 7.2% 7.2% 7.2%

x Asset Turnover 1.5 1.7 1.9 2.0 2.0 2.0 2.0 2.0 2.0= Return on Assets 6.4% 9.6% 11.5% 12.9% 13.9% 14.3% 14.3% 14.4% 14.5%

RETURN ON COMMON EQUITY (based on reported amounts): Profit Margin for ROCE 4.8% 5.1% 5.4% 5.8% 6.3% 6.6% 6.6% 6.6% 6.6%

x Asset Turnover 1.5 1.7 1.9 2.0 2.0 2.0 2.0 2.0 2.0x Capital Structure Leverage 2.8 2.9 3.9 5.0 5.4 5.3 5.3 5.4 5.4= Return on Common Equity 20.0% 24.2% 40.4% 58.2% 67.8% 69.2% 69.3% 70.5% 71.5%

RETURN ON COMMON EQUITY (excluding the effects of nonrecurring items): Profit Margin for ROCE 3.6% 5.1% 5.4% 5.7% 6.2% 6.5% 6.5% 6.5% 6.5%

x Asset Turnover 1.5 1.7 1.9 2.0 2.0 2.0 2.0 2.0 2.0x Capital Structure Leverage 2.8 2.9 3.9 5.0 5.4 5.3 5.3 5.4 5.4= Return on Common Equity 15.1% 24.2% 40.4% 57.5% 67.0% 68.5% 68.5% 69.7% 70.7%

OPERATING PERFORMANCE:Gross Profit / Revenues 71.5% 73.1% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7%

Operating Profit Before Taxes / Revenues 5.4% 7.4% 8.2% 8.6% 9.1% 9.4% 9.4% 9.4% 9.4%

ASSET TURNOVER:Revenues / Avg. Accounts Receivable 61.0 62.8 65.5 71.0 76.8 76.8 76.8 76.8 76.6

COGS / Average Inventory 26.9 28.5 30.3 31.8 32.9 32.9 32.9 32.9 32.8Revenues / Average Fixed Assets 2.8 3.0 3.2 3.3 3.5 3.9 4.4 5.1 5.5

LIQUIDITY:Current Ratio 1.1 0.5 0.5 0.6 0.9 1.1 1.4 1.6 1.6

Quick Ratio 0.9 0.3 0.3 0.3 0.7 0.9 1.1 1.3 1.3

SOLVENCY:Total Liabilities / Total Assets 60.7% 70.4% 78.4% 81.8% 81.2% 81.2% 81.3% 81.6% 81.6%Total Liabilities / Total Equity 154.1% 238.2% 363.4% 448.1% 433.1% 431.9% 433.5% 443.2% 443.2%

Interest Coverage Ratio 6.8 7.5 8.8 9.0 9.6 9.9 9.9 9.9 9.9



Financial Statement Analysis Package (FSAP): Version 7.0Financial Reporting, Financial Statement Analysis, and Valuation: A Strategic Perspective, 7th EditioBy James Wahlen, Steve Baginski and Mark Bradshaw

The FSAP User Guides appear in column L to the right.

DATA CHECKS - Estimated Value per ShareDividend Based Valuation 40.50$ Free Cash Flow Valuation 40.50$ Residual Income Valuation 40.50$ Residual Income Market-to-Book Valuation 40.50$ Free Cash Flow for All Debt and Equity Valuation 42.28$ Check: All Estimated Value per Share amounts should be the same, with the possible exception of the share value from the Free Cash Flow for All Debt and Equity model. See additional comments in cell L266.

FSAP OUTPUT: VALUATION MODELS Analyst Name: Kyle PierceCompany Name: Brinker International, Inc.

VALUATION PARAMETER ASSUMPTIONS

Current share price 39.96$ Number of shares outstanding 70,550.0Current market value 2,819,178$

Long-run growth assumption used in forecasts 3.0%Long-run growth assumption used in valuation. 3.0% (Both long-run growth assumptions should be the same.)

COST OF EQUITY CAPITAL:Equity risk factor (market beta) 1.40Risk free rate 0.75%Market risk premium 6.50%Required rate of return on common equity: 9.85%

COST OF DEBT CAPITALDebt capital 615,224$ Cost of debt capital, before tax 1.0%Effective tax rate -2.0%After-tax cost of debt capita 0.98%

COST OF PREFERRED STOCKPreferred stock capital -$ Preferred dividends -$ Implied yield 0.00%

WEIGHTED AVERAGE COST OF CAPITALWeight of equity in capital structure 0.821Weight of debt in capital structure 0.179Weight of preferred in capital structure 0.00Weighted average cost of capital 8.26%

Valuation Worksheet 14


FSAP OUTPUT: VALUATION MODELSAnalyst Name: Kyle PierceCompany Name: Brinker International, Inc.

Continuing1 2 3 4 5 Value

Dividends-Based Valuation Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Dividends Paid to Common Shareholders 68,054.4 75,484.4 113,206.6 122,711.8 148,105.5Less: Common Stock Issues 0.0 0.0 0.0 0.0 0.0Plus: Common Stock Repurchases 143,045.0 90,000.0 80,000.0 80,000.0 70,000.0Dividends to Common Equity 211,099.4 165,484.4 193,206.6 202,711.8 218,105.5 216,132.51

Present Value Factors 0.910 0.829 0.754 0.687 0.625Present Value Net Dividends 192,170.6 137,137.7 145,754.4 139,212.7 136,353.5Sum of Present Value Net Dividends 750,628.9Present Value of Continuing Value 1,972,555.5Total 2,723,184.4Adjust to midyear discounting 1.049Total Present Value Dividends 2,857,301.3Shares Outstanding 70,550.0Estimated Value per Share 40.50$

Current share price 39.96$ Percent difference 1%



Free Cash Flows for Common Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Net Cash Flow from Operations 415,786.5 482,792.8 506,423.7 523,642.1 540,280.2 450,854.7Decrease (Increase) in Cash Required for Operations -29,337.8 -3,095.4 -3,203.8 -3,315.9 -3,432.0 -3,044.6Net Cash Flow from Investing -264,962.3 -354,561.5 -337,421.5 -342,768.6 -335,281.3 -256,106.2Net CFs from Debt Financing 89,613.0 40,348.6 27,408.2 25,154.2 16,538.6 24,428.6Net CFs into Financial Assets 0.0 0.0 0.0 0.0 0.0 0.0Net CFs - Pref. Stock and Minority Int. 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flow for Common Equity 211,099.4 165,484.4 193,206.6 202,711.8 218,105.5 216,132.5

Present Value Factors 0.910 0.829 0.754 0.687 0.625Present Value Free Cash Flows 192,170.6 137,137.7 145,754.4 139,212.7 136,353.5Sum of Present Value Free Cash Flows 750,628.9Present Value of Continuing Value 1,972,555.5Total 2,723,184.4Adjust to midyear discounting 1.049Total Present Value Free Cash Flows to Equity 2,857,301.3Shares Outstanding 70,550.0Estimated Value per Share 40.50$





Free Cash Flow Valuation Sensitivity Analysis

Long-Run Growth Assumptions40.50 0% 2% 3% 4% 5% 6% 8% 10%

Discount 5% 46.16 85.85 135.45 284.26 #DIV/0! -310.99 -112.57 -72.89Rates: 6% 39.09 64.92 90.75 142.41 297.39 #DIV/0! -167.55 -90.06

7% 34.02 52.35 68.40 95.14 148.62 309.06 -332.70 -118.788.50% 28.62 40.74 50.11 63.64 84.90 123.17 658.98 -234.03

9% 27.22 37.98 46.05 57.35 74.29 102.54 328.51 -349.4010% 24.82 33.48 39.66 47.91 59.45 76.77 163.35 #DIV/0!11% 22.85 29.97 34.87 41.17 49.57 61.32 108.35 343.4712% 21.20 27.17 31.15 36.12 42.52 51.05 80.89 170.4213% 19.80 24.87 28.17 32.20 37.24 43.72 64.44 112.8114% 18.59 22.96 25.73 29.07 33.14 38.23 53.51 84.0515% 17.54 21.33 23.70 26.50 29.86 33.97 45.71 66.8416% 16.62 19.94 21.98 24.37 27.19 30.57 39.88 55.3918% 15.06 17.67 19.24 21.02 23.09 25.49 31.75 41.1420% 13.81 15.90 17.14 18.52 20.09 21.88 26.37 32.65

FSAP OUTPUT: VALUATION MODELSAnalyst Name: Kyle PierceCompany Name: Brinker International, Inc.Amounts in thousands except for share prices Continuing

1 2 3 4 5 ValueRESIDUAL INCOME VALUATION Year +1 Year +2 Year +3 Year +4 Year +5 Year +6Comprehensive Income Available for Common Shareholders 167,743 188,678 204,520 211,579 218,886 225,453Lagged Book Value of Common Shareholders' Equity (at t-1) 309,873 266,517 289,710 301,023 309,891 310,671

Required Earnings 30,522 26,252 28,536 29,651 30,524 30,601Residual Income 137,221 162,426 175,983 181,929 188,362 194,852

Present Value Factors 0.910 0.829 0.754 0.687 0.625Present Value Residual Income 124,916 134,603 132,761 124,940 117,759Sum of Present Value Residual Income 634,979Present Value of Continuing Value 1,778,333Total 2,413,311Add: Beginning Book Value of Equity 309,873Present Value of Equity 2,723,184Adjust to midyear discounting 1.049Total Present Value of Equity 2,857,301 Rounded 2,860,000 Shares Outstanding (May 7, 2013) 70,550Estimated Value per Share on May 7, 2013 40.50$

Closing share price on May 7, 2013 39.96$ Percent difference 1%




RESIDUAL INCOME VALUATION SENSITIVITY ANALYSIS

Long-Run Growth Assumptions40.50 0% 2% 3% 4% 5% 6% 8% 10%

Discount 5% 62.27 94.79 135.45 257.42 #DIV/0! -230.47 -67.84 -35.31Rates: 6% 51.95 71.35 90.75 129.55 245.94 #DIV/0! -103.24 -45.05

7% 44.59 57.28 68.40 86.92 123.95 235.07 -209.39 -61.248.50% 36.80 44.31 50.11 58.49 71.66 95.37 427.27 -125.90

9% 34.78 41.22 46.05 52.81 62.94 79.84 215.02 -190.5210% 31.36 36.20 39.66 44.28 50.74 60.43 108.87 #DIV/0!11% 28.56 32.30 34.87 38.18 42.59 48.77 73.47 197.0012% 26.23 29.18 31.15 33.61 36.78 40.99 55.76 100.0713% 24.26 26.63 28.17 30.05 32.41 35.44 45.13 67.7414% 22.57 24.50 25.73 27.21 29.01 31.27 38.03 51.5515% 21.11 22.71 23.70 24.88 26.29 28.02 32.95 41.8316% 19.84 21.17 21.98 22.94 24.07 25.42 29.14 35.3418% 17.72 18.67 19.24 19.89 20.64 21.51 23.79 27.2120% 16.03 16.72 17.14 17.60 18.12 18.72 20.21 22.31


ContinuingRESIDUAL INCOME VALUATION 1 2 3 4 5 ValueMarket-to-Book Approach Year +1 Year +2 Year +3 Year +4 Year +5 Year +6Comprehensive Income Available for Common Shareholders 167,743.1 188,677.7 204,519.7 211,579.3 218,886.1 225,452.6Book Value of Common Shareholders' Equity (at t-1) 309,873.0 266,516.7 289,710.0 301,023.0 309,890.5 310,671.1

Implied ROCE 54.1% 70.8% 70.6% 70.3% 70.6% 72.6%Residual ROCE 44.3% 60.9% 60.7% 60.4% 60.8% 62.7%Cumulative growth factor in common equity as of t-1 100.0% 86.0% 93.5% 97.1% 100.0% 100.3%Residual ROCE times cumulative growth 44.3% 52.4% 56.8% 58.7% 60.8% 62.9%

Present Value Factors 0.910 0.829 0.754 0.687 0.625Present Value Residual ROCE times growth 0.403 0.434 0.428 0.403 0.380Sum of Present Value Residual ROCE times growth 2.05Present Value of Continuing Value 5.74Total Present Value Residual ROCE 7.79Add one for book value of equity at t-1 1.0Sum 8.79Adjust to mid-year discounting 1.049Implied Market-to-Book Ratio 9.221Times Beginning Book Value of Equity 309,873.0Total Present Value of Equity 2,857,301.3Shares Outstanding 70,550.0Estimated Value per Share 40.50$


Sensitivity analysis for the market-to-book approach should be identical to that of the residual income approach





Free Cash Flows for All Debt and Equity Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Net Cash Flow from Operations 415,786.5 482,792.8 506,423.7 523,642.1 540,280.2 450,854.7Add back: Interest Expense after tax 20,950.0 22,031.1 23,053.9 23,858.2 24,690.6 25,431.3Subtract: Interest Income after tax 0.0 0.0 0.0 0.0 0.0 0.0Decrease (Increase) in Cash Required for Operations -29,337.8 -3,095.4 -3,203.8 -3,315.9 -3,432.0 -3,044.6Free Cash Flow from Operations 407,398.8 501,728.5 526,273.7 544,184.3 561,538.9 473,241.4Net Cash Flow from Investing -264,962.3 -354,561.5 -337,421.5 -342,768.6 -335,281.3 -256,106.2Add back: Net CFs into Financial Assets 0.0 0.0 0.0 0.0 0.0 0.0Free Cash Flows - All Debt and Equity 142,436.4 147,166.9 188,852.2 201,415.7 226,257.5 217,135.2

Present Value Factors 0.924 0.853 0.788 0.728 0.672Present Value Free Cash Flows 131,567.6 125,564.1 148,835.1 146,623.7 152,139.3Sum of Present Value Free Cash Flows 704,729.8Present Value of Continuing Value 2,775,204.7Total Present Value Free Cash Flows to Equity and Deb 3,479,934.5Less: Value of Outstanding Debt -615,224.0Less: Value of Preferred Stock 0.0Plus: Value of Financial Assets 0.0Present Value of Equity 2,864,710.5Adjust to midyear discounting 1.0413Total Present Value of Equity 2,983,038.3Shares Outstanding 70,550.0Estimated Value per Share 42.28$



BRINKER INTERNATIONAL, INC. - bizvalblog · eye toward future growth, Brinker International was...

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