Brinker International Reports 17 Percent Increase in First Quarter Fiscal 2008 EPS From Continuing Operations, Before Special Items

n August, the company announced that it had begun exploring the potential sale of the Romano's Macaroni Grill restaurant chain. During the first quarter of 2008, the company made significant progress in its search for a buyer, which allowed management to commit to a plan to sell the brand. A deal is expected to close in late fiscal 2008. Therefore, Macaroni Grill has been presented as discontinued operations in the company's financial statements beginning in the first quarter of fiscal 2008. Before special items, earnings per diluted share from discontinued operations decreased 33 percent from $0.06 in the first quarter of fiscal 2007 to $0.04 in the current quarter (reconciliation included in Table 4). All amounts presented in this release are related to continuing operations unless otherwise stated.

Highlights for the first quarter 2008:

• Revenues increased 3 percent,

• Company-owned and franchise restaurants, or system restaurants, increased 12 percent,

• New company restaurant growth was partially offset by selling company restaurants to franchisees resulting in net capacity growth of 3 percent (as measured by average-weighted sales weeks),

• Revenues from franchisees increased 33 percent,

• Operating income before special items from continuing operations increased 10 percent (reconciliation included in Table 2),

• Five million common shares were repurchased by the company for approximately $140 million, and

• The company entered into two development agreements with new or existing franchisees with commitments to build 57 restaurants over the next several years.

Revenue Growth

Brinker reported revenues from continuing operations for the 13-week period of $895.1 million, an increase of 3 percent compared with $869.3 million reported for the same period of fiscal 2007. These revenue gains were driven by restaurant capacity growth (as measured by average-weighted sales weeks) of 2.6 percent. Revenue growth was negatively impacted by 7.3 percent due to the sale of 97 restaurants to franchisees and other restaurant closures since the first quarter of fiscal 2007. However, revenues from franchisees increased to $14.1 million in the first quarter of fiscal 2008, a 33 percent increase from $10.6 million in the first quarter of fiscal 2007. Comparable restaurant sales were even with the prior year quarter (see Table 1).

  Table 1: Q1 comparable restaurant sales

  Q1 08 and Q1 07, company and three reported brands, percentage



                      Q1 08          Q1 07        Q1 08

                    Comparable    Comparable     Pricing        Q1 08

                      Sales          Sales        Impact      Mix-Shift

  Brinker

   International(1)     0.0          (2.2)          1.9          0.9

    Chili's             0.7          (2.3)          2.0          1.5

    On The Border      (5.3)         (2.2)          1.2         (0.9)

    Maggiano's          0.5          (1.5)          2.0         (1.9)



  (1) Brinker International comparable restaurant sales exclude the impact

      of Macaroni Grill.

Operating Performance

Cost of sales, as a percent of revenues, remained flat compared to the prior year at 27.4 percent. During the quarter, cost of sales was negatively impacted by unfavorable commodity prices, primarily beef and cheese, and unfavorable product mix shifts, offset by favorable menu price changes and increased revenues from franchisees.

Restaurant expenses, as a percent of revenues, increased to 56.1 percent from 55.3 percent in the prior year, primarily driven by increased labor and restaurant supply costs, partially offset by increased revenues from franchisees and lower pre-opening and stock-based compensation expenses.

Depreciation and amortization for the first quarter fiscal 2008, compared to the same quarter in fiscal year 2007, decreased $1.7 million. The change was primarily driven by the sale of 95 restaurants to Pepper Dining, Inc. in the fourth quarter of fiscal 2007 and other restaurant closures, an increase in fully depreciated assets and the classification of assets as held for sale related to the pending sale of 76 restaurants to ERJ Dining IV, LLC. These decreases were partially offset by an increase in depreciation due to the addition of new restaurants and remodel investments.

Compared to the prior year, general and administrative expense decreased $7.2 million for the quarter, primarily due to lower stock and performance- based compensation expenses in the first quarter of fiscal 2008.

Other gains and charges decreased $3.8 million compared to the first quarter of fiscal 2007 as a result of a $3.2 million gain recorded in the first quarter of fiscal 2007 from the termination of an interest rate swap on an operating lease commitment.

The above results provided operating income from continuing operations, before special items, of $67.8 million in the first quarter of fiscal 2008, a 10 percent increase from $61.5 million in the first quarter of fiscal 2007.

Interest expense for the first quarter fiscal 2008, compared to the same quarter in fiscal 2007, increased $6.7 million primarily due to additional debt outstanding of $400 million borrowed under a one-year unsecured committed credit facility used primarily to fund share repurchases in fiscal 2007 and for general corporate purposes.

The effective income tax rate for continuing operations decreased to 30.8 percent for the current quarter as compared to 32.5 percent for the same quarter last year. The decrease in the tax rate was primarily due to an increase in federal tax credits and a decrease in incentive stock option expense.

Income from discontinued operations, before special items decreased from $7.5 million in the first quarter of fiscal 2007 to $4.2 million in the first quarter of fiscal 2008 (reconciliation included in Table 4). This decrease was primarily due to a 4.8 percent decline in comparable restaurant sales at Macaroni Grill, which also resulted in the de-leveraging of fixed costs.

Cash Flow and Capital Allocation

Cash flow from continuing operations for the first quarter of fiscal 2008 decreased to approximately $77.9 million compared to $92.6 million in the prior year due to the timing and amount of income taxes. Capital expenditures for continuing operations for the quarter totaled $70.9 million, a reduction of $15.5 million compared to the prior year, primarily due to a decrease in new restaurants developed by the company. The company repurchased 5 million shares for approximately $140 million during the first quarter. At the end of the quarter, approximately $160 million remained available under the company's share authorizations. Diluted weighted average shares outstanding for the first quarter were reduced over 13 percent to 109.2 million from 126.1 million at the end of the first quarter fiscal 2007.

  Special Items

  Table 2: Reconciliation of operating income from continuing operations,

  before special items Q1 08 and Q1 07, $ millions





                                                           $           $

  Item                                                   Q1 08       Q1 07

  Operating Income from Continuing Operations             67.3        64.7

   Other Gains and Charges                                 0.5        (3.2)

  Operating Income from Continuing Operations,

  before Special Items                                    67.8        61.5





  Table 3: Reconciliation of income from continuing operations, before

  special items Q1 08 and Q1 07, $ millions and $ per diluted share after-

  tax



                                                  EPS                  EPS

                                                  Per                  Per

                                            $    Share       $        Share

  Item                                    Q1 08   Q1 08    Q1 07      Q1 07

  Income from Continuing Operations       38.5    0.35     40.1       0.32

   Other Gains and Charges                 0.3    0.00     (2.0)     (0.02)

  Income from Continuing Operations,

   before Special Items                   38.8    0.35     38.1       0.30

Table 4: Reconciliation of income from discontinued operations, before special items Q1 08 and Q1 07, $ millions and $ per diluted share after-tax

                                                  EPS                 EPS

                                                  Per                 Per

                                            $    Share       $       Share

  Item                                    Q1 08  Q1 08     Q1 07     Q1 07

  Income (Loss) from Discontinued

  Operations                              (0.9)  (0.01)     7.5       0.06

   Other Gains and Charges                 5.1    0.05      0.0       0.00

  Income from Discontinued

  Operations, before Special Items         4.2    0.04      7.5       0.06





  Table 5: Reconciliation of net income, before special items

  Q1 08 and Q1 07, $ millions and $ per diluted share after-tax



                                                  EPS                 EPS

                                                  Per                 Per

                                            $    Share       $       Share

  Item                                    Q1 08  Q1 08     Q1 07     Q1 07

  Net Income                              37.6    0.34     47.6       0.38

   Other Gains and Charges                 5.4    0.05     (2.0)     (0.02)

  Net Income, before Special Items        43.0    0.39     45.6       0.36

Fiscal 2008 Outlook

Due to the pending sale of Romano's Macaroni Grill and its classification as a discontinued operation, the company is defining its guidance to be earnings per diluted share growth from continuing operations. The company affirms its previous expectations of low to mid double-digit earnings per diluted share growth from continuing operations.

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