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Sculptor Capital ManagementB R I N K E R I N T E R N A T I O N A L ® Annual Report 2013 To Our Shareholders, Team Members, Guests, Franchise Partners and Supplier Partners: Taking care of business. That’s exactly what Brinker International has set forth to do, committing to be one of the world’s leading casual dining restaurant companies in this ever-changing economic environment, with strategies and initiatives to keep us top of mind with guests worldwide. We’ve been persistently executing our ‘Plan to Win’ for more than three years, with lofty goals designed to change the trajectory and profitability of our company. We told you we could take 400 basis points of margin out of our business, and we’ll accomplish that goal a full year ahead of schedule. In 2010, we also promised we would double earnings per share to $2.75 - $2.80 by fiscal 2015, and we’ll hit that goal this fiscal year. At our investor conference this past February, we confidently set another long-term goal – doubling our fiscal 2012 earnings per share by fiscal 2017. Aggressive, yet attainable, Brinker is dedicated to complete this by driving 10 to 15 percent annual earnings per share growth over the next five years. At the same time, we’ll continue our historic, disciplined approach to capital allocation, further enhancing shareholder value. Despite the economic headwinds, I’m pleased to report last year Brinker achieved double-digit earnings per share growth. Our brands, Chili’s® Grill & Bar and Maggiano’s Little Italy®, focused their efforts to ensure every initiative accomplishes the ‘Three Wins’— a win for our guests, a win for our team members and a win for our business. Growth is on the horizon as both Brinker brands return to building new restaurants. As we move forward into fiscal 2014, we’re optimistic about our goals — our teams can execute against our strategy, which translates into increased shareholder value for you. Chili’s Grill & Bar At 38-years strong, Chili’s is setting the foundation to help Brinker achieve our ‘Plan to Win.’ The brand continues executing ‘Big Rock’ initiatives, including: rollout of our reimage program, implementation of upgraded point-of-sale and back office systems, installation of retrofitted kitchen equipment technology, renewed focus on menu innovation, and (cid:120) (cid:120) (cid:120) (cid:120) (cid:120) streamlined operations consistencies in the restaurants. To date, we’ve reimaged 383 company-owned restaurants in 15 markets. With the goal to complete 614 restaurants by the end of fiscal 2014, more guests across the country will be able to enjoy updated elements both inside and outside at their favorite Chili’s locations. With refreshed changes to our atmosphere, from an upgraded video package in the bar and dining room to spacious community tables, we’re making it easier for our guests to connect with their friends and family. We’re fulfilling the need for emotional connections between guests as highlighted by the brand’s new creative direction, ‘more LIFE happens here.(cid:930)’ 1 We’ve implemented new point-of-sale technologies to maximize our servers’ productivity when placing and modifying guest orders. Newly installed back office systems help operators run their restaurants more efficiently than ever. In fiscal 2013, these systems helped us deliver great margins and an all-time low cost of sales. One of the largest investments made in our brand’s history has been the rollout of our new kitchen equipment, ‘Kitchen of the Future.’ New ovens have transformed our kitchen operations by improving our efficiency and labor, while increasing the pace at which food is delivered to guests’ tables. The ‘Kitchen of the Future,’ now in all corporate-owned and franchised locations, allow us to continue to evolve our menu to meet guests’ expectations of the Chili’s brand. We’ve set our sights on advancements to continue to elevate our brand. Growth potential opportunities such as delivery are in the foreseeable future. Additionally, we’ll be amping up our To Go business to offer guests an opportunity to enjoy their Chili’s favorites in a way they haven’t before. As previously mentioned, Chili’s has earned the right to build new restaurants, with 11 to 12 openings slated for this fiscal year. In fiscal 2014, we will continue to position our operators for success to make Chili’s truly ‘Like No Place Else®,’ for our team members and guests. Maggiano’s Little Italy At Maggiano’s, we just completed the 14th consecutive quarter of sales growth, quite an impressive feat for the 44-unit, Italian-American brand. Classic Pastas, now a popular staple on the menu, have continued to play a significant role in driving the brand’s consecutive sales growth. On average, 40 percent of Maggiano’s guests order from the Classic Pastas menu and they rave about the buy one, take a Classic Pasta home, compliments of the chef. Maggiano’s understands the need to remain competitive in this tug-of-war for market share in the casual-plus category. While our brand certainly is a frontrunner destination for guests to enjoy celebrations and events, Maggiano’s is focusing on continuing to attract guests beyond these special occasions. Like its sister brand, Maggiano’s is also enjoying a return to new restaurant growth during the new fiscal year. While a traditional Maggiano’s building is large in scale, the brand’s return to growth strategy includes opening a new, smaller prototype complete with the traditional Maggiano’s opulence like high ceilings and rich hardwood floors, but with a strategically-sized kitchen and most notably, without banquet spaces. Reducing the physical size of the building opens the door for more real estate and site availability, which of course, contributes to a lower investment model. Six to eight new locations are scheduled to open during the next two fiscal years, including Annapolis, Md. this fall. Global Business Development We continue to see growth and solid comp sales on the global side of our business as our international restaurants reported another year of positive comp sales, up 2.7 percent. This consistent track record can be attributed to carefully laid plans to position 2 Brinker as one of the pioneer casual dining companies in the global marketplace. Because we claimed our stake on international soil early on, we were afforded the advantage of being first in terms of recognition and affinity. As a testament to our global longevity, we recently celebrated 20 years of business last November with our franchise partners in Mexico. During fiscal 2013, our global team successfully completed the acquisition of 11 restaurants from our largest Canadian franchisee and opened 33 restaurants outside the United States. We have 37 restaurant openings taking place this current fiscal year, which puts Brinker even closer to our goal of 430 international locations by the end of fiscal 2017. Closing out another year, looking ahead We have an unyielding confidence in Brinker’s ability to grow top-line sales; framing our approach as more of a marathon than a sprint, continuing at a steady pace. As we reflect on the accomplishments we’ve achieved this last fiscal year, it bears repeating that these achievements were set in motion years ago with our clearly defined ‘Plan to Win.’ As we look toward Brinker’s promising future during fiscal 2014 and beyond, we remain committed to building sales through initiatives that enhance both the guest and team member restaurant experience, and strengthening our brands’ relevance through improved menu innovation and atmosphere. It’s no secret, we operate in a mature space, but we truly believe the success of this company will be built upon the solid foundation of our current accomplishments, while reinvesting back into the business to drive margin improvements and sales in the years ahead. And it’s fitting when talking about the future for our company, that I take a moment to recognize the legacy built by our long-tenured leader, Doug Brooks. For more than 35 years, Doug has shaped the vision for Brinker International. Every member of our organization is committed to honoring Doug by continuing his drive for excellence within our brands. Thank you, Doug, for your longstanding leadership, dedication and passion. We — and you — should be confident that with the Brinker leadership team’s concentrated focus, the finish line to achieve the aggressive goals we outlined is well within our reach. We’re up for the challenge and we’re glad to have you, our valued shareholders, along with us! Sincerely, Wyman T. Roberts Chief Executive Officer and President 3 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 26, 2013 Commission File No. 1-10275 BRINKER INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 6820 LBJ Freeway, Dallas, Texas (Address of principal executive offices) 75-1914582 (I.R.S. Employer Identification No.) 75240 (Zip Code) (972) 980-9917 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to Section 12(g) of the Act: None Title of Each Class Common Stock, $0.10 par value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Non-accelerated filer ‘ (Do not check if a smaller reporting company) Accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $1,999,440,915. Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. Class Common Stock, $0.10 par value Outstanding at August 12, 2013 66,224,836 shares DOCUMENTS INCORPORATED BY REFERENCE We have incorporated portions of our Annual Report to Shareholders for the fiscal year ended June 26, 2013 into Part II hereof, to the extent indicated herein. We have also incorporated by reference portions of our Proxy Statement for our annual meeting of shareholders on November 7, 2013, to be dated on or about September 17, 2013, into Part III hereof, to the extent indicated herein. Item 1. BUSINESS. General PART I References to “Brinker,” “the Company,” “we,” “us,” and “our” in this Form 10-K are references to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc. We own, develop, operate and franchise the Chili’s Grill & Bar (“Chili’s”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. The Company was organized under the laws of the State of Delaware in September 1983 to succeed to the business operated by Chili’s, Inc., a Texas corporation, which was organized in August 1977. We completed the acquisition of Maggiano’s in August 1995. Restaurant Brands Chili’s Grill & Bar Chili’s, a recognized leader in the Bar & Grill category of casual dining, has been operating restaurants for 38 years. Chili’s also enjoys a global presence with locations in 32 foreign countries and two U.S. territories around the world. Consistent locations, whether domestic or international and company-owned or franchised, Chili’s passion is making our guests feel special. Our Team Members, referred to as ChiliHeads, take special pride in proudly serving America’s Favorites Like No Place Else. in all Chili’s varied menu features America’s favorites boldly flavored and freshly prepared, including several signature items such as Baby Back Ribs smoked in-house, Big Mouth Burgers, Sizzling Fajitas, hand-battered Chicken Crispers and house-made Chips and Salsa. Chili’s has also introduced new pizzas and flatbreads. The all-day menu offers our guests a generous selection of appetizers, entrees and desserts at affordable prices. A special lunch section is available on weekdays. In addition to our flavorful food options, Chili’s offers a full selection of alcoholic beverages available from the bar, with Margaritas and draft beer being favorites of our guests. For guests seeking convenience, Chili’s offers To Go service that can be ordered by calling the restaurant or on-line or via mobile app, and most Chili’s offer a separate To Go entrance for service. During the year ending June 26, 2013, at our company-owned restaurants, entrée selections ranged in menu price from $6.00 to $17.69. The average revenue per meal, including alcoholic beverages, was approximately $13.99 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 86.1% of Chili’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 13.9%. Our average annual sales volume per Chili’s restaurant during this same year was $3.0 million. Maggiano’s Little Italy Maggiano’s is a full-service, national, casual dining Italian restaurant brand with a passion for making people feel special. The exterior of each Maggiano’s restaurant varies to reflect local architecture; however, the interior of all locations transport our guests back to a classic Italian-American restaurant in the style of New York’s Little Italy in the 1940s. Our Maggiano’s restaurants feature individual and family-style menus, and our restaurants also have extensive banquet facilities designed to host large party business or social events. We have 2 a full lunch and dinner menu offering chef-prepared, classic Italian-American fare in the form of appetizers, entrées with bountiful portions of pasta, chicken, seafood, veal and prime steaks, and desserts. Our Maggiano’s restaurants also offer a full range of alcoholic beverages, including a selection of Handcrafted Classic Cocktails and premium wines. In addition, Maggiano’s offers a full carryout menu as well as local delivery services. During the year ending June 26, 2013, entrée selections ranged in menu price from $12.95 to $42.50. The average revenue per meal, including alcoholic beverages, was approximately $26.72 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 83.0% of Maggiano’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 17.0%. Sales from events at our banquet facilities made up 19.4% of our total restaurant revenues for the year. Our average annual sales volume per Maggiano’s restaurant during this same year was $8.81 million. Business Strategy We are committed to strategies and initiatives that are centered on long-term sales and profit growth, enhancing the guest experience and team member engagement. These strategies are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants allowing us to reinvest back into the guest experience and value proposition, and establish a strong presence for our brands in key markets around the world. We will continue to maintain a strong balance sheet and financial flexibility to support our strategic initiatives and to provide stability in all operating environments. Overall economic growth continues to be tepid providing a challenging operating environment for the casual dining industry as a whole. Growth in key economic factors such as total employment, consumer confidence and personal disposable income levels has been slight this year suggesting consumers remain cautious as the economy slowly rebounds. Consumer optimism now appears focused more on housing and large purchases such as cars in light of continued low interest rates. We anticipate market conditions will continue to challenge the industry; however, we believe our strategies and initiatives will provide a solid foundation for earnings growth going forward and are appropriate for all operating conditions. Our current initiatives are designed to drive profitable sales growth and improve the guest experience in our restaurants. We are investing in new kitchen equipment, operations software and remodel initiatives as the core pieces of our current strategy. We have now completed the installation of new kitchen equipment in both our company-owned Chili’s restaurants and our domestic franchise restaurants. We anticipate that the upgraded equipment will consistently provide a high quality product at a faster pace, enhancing both profitability and guest satisfaction. Based on our robust testing process, we believe the usability and efficiency of the equipment results in significant labor savings over time. Also, the flexibility of our equipment allows for the development of new menu categories that we believe results in increased sales and guest traffic. All company-owned Chili’s restaurants are now operating with an integrated point of sale and back office software system that was designed to enhance the efficiency of our restaurant operations and reporting capabilities. Timely and more detailed reporting in our restaurants will result in improved inventory and labor management while reducing software maintenance costs. Additionally, our management team will have timely visibility into operating performance and trends which will enhance decision making and improve profitability. We expect to complete the system installation in Maggiano’s restaurants by the end of the calendar year. We have remodeled a significant number of our company-owned Chili’s restaurants and plan to continue the initiative at a brisk pace. The remodel design in intended to revitalize Chili’s in a way which enhances the relevance of the brand and raises guest expectations regarding the quality of the experience. The design is contemporary while staying true to the Chili’s brand heritage. We believe that these updates will positively impact the guest perception of the restaurant in both the dining room and bar areas and provide a long-term positive impact to traffic and sales. 3 We continually evaluate our menu at Chili’s to improve quality, freshness and value by introducing new items and improving existing favorites. This year, Chili’s has introduced new menu innovations including several pizza and flatbread choices and lighter entree selections like Mango Chile Chicken and Mango Chile Tilapia. The dessert and appetizer sections of the menu have also been enhanced with a new freshly baked skillet cookie, soft pretzel sticks and sweet potato fries. Our two for twenty dollars and lunch combo offerings have been refreshed with new menu items including pizzas, flatbreads and Southwestern Mac ‘n’ Cheese with Grilled Chicken. Our new steak selection introduced last year also continues to have a high guest preference and has been enhanced with steak topper add-ons. An emphasis on new products, training and our reimaged bar also resulted in improved bar sales over last year. We believe these changes as well as our ability to develop new and innovative items will further enhance sales and drive incremental traffic. We are committed to offering a compelling everyday menu that provides items our guests prefer at a solid value. Improvements at Chili’s are expected to have the most significant impact on the business; however, our results are also expected to benefit through additional contributions from Maggiano’s and our global business. Maggiano’s sales trends and traffic continue to improve, driven by offering guests a great value with Classic Pastas, Marco’s Meal offering, new food and beverage options and direct marketing. Additionally, Maggiano’s has implemented initiatives around kitchen efficiency and inventory control contributing to increased financial results. We believe our authentic Italian-American cuisine and signature drinks, improved service and updated atmospheres will result in stronger brands and sustainable sales and profit growth through increased guest loyalty and traffic. Global expansion allows further diversification which will enable us to build strength in a variety of markets and economic conditions. This expansion will come through acquisitions, franchise relationships, joint venture arrangements and equity investments, taking advantage of demographic and food trends that will accelerate in the international market over the next decade. Our growing percentage of franchise operations, both domestically and internationally, allow us to improve margins as royalty payments impact the bottom line. The casual dining industry is a competitive business which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. Our priority remains increasing profitable growth over time in all operating environments. We have designed both operational and financial strategies to achieve this goal and in our opinion, improve shareholder value. Success with our initiatives to improve sales trends and operational effectiveness will enhance the profitability of our restaurants and strengthen our competitive position. The effective execution of our financial strategies, including repurchasing shares of our common stock, payment of quarterly dividends, disciplined use of capital and efficient management of operating expenses, will increase our profitability and return value to our shareholders. We remain confident in the financial health of our company, the long-term prospects of the industry as well as our ability to perform effectively in a competitive marketplace and a variety of economic environments. Company Development In fulfilling our long-term vision, over the past fiscal year we continued the expansion of our restaurant brands domestically through new company-owned restaurants and the development of a select number of company-owned restaurants in strategically desirable markets. We will concentrate on the development of certain identified markets to achieve the necessary levels to improve our competitive position, marketing potential, profitability and return on invested capital. Our domestic expansion efforts focus not only on major metropolitan areas in the United States but also on smaller market areas and non-traditional locations (such as airports and universities) that can adequately support our restaurant brands. The restaurant site selection process is critical and we devote significant effort to the investigation of new locations utilizing a variety of sophisticated analytical techniques. Our process evaluates a variety of factors, including: trade area demographics, such as target population density and household income levels, physical site characteristics, such as visibility, accessibility and traffic volume; relative proximity to activity centers, such as 4 shopping centers, hotel and entertainment complexes and office buildings; supply and demand trends, such as proposed infrastructure improvements, new developments and existing and potential competition. Members of each brand’s executive team inspect, review and approve each restaurant site prior to its acquisition for that brand. The specific rate at which we are able to open new restaurants is determined, in part, by our success in locating satisfactory sites, negotiating acceptable lease or purchase terms, securing appropriate local governmental permits and approvals, and by our capacity to supervise construction and recruit and train management and hourly team members. The following table illustrates the system-wide restaurants opened in fiscal 2013 and the planned openings in fiscal 2014: Fiscal 2013 Openings(1) Fiscal 2014 Projected Openings(1) Chili’s: Company-owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International: Company-owned(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 — — 33 38 11-12 4-6 2-3 2 31-35 50-58 (1) The numbers in this column are the total of new restaurant openings and openings of relocated restaurants during fiscal 2013. (2) The numbers on this line for fiscal 2014 are projected domestic franchise openings. (3) The numbers on this line are for Chili’s. We periodically re-evaluate company-owned restaurant sites to ensure attributes have not deteriorated below our minimum standards. In the event site deterioration occurs, each brand makes a concerted effort to improve the restaurant’s performance by providing physical, operating and marketing enhancements unique to each restaurant’s situation. If efforts to restore the restaurant’s performance to acceptable minimum standards are unsuccessful, the brand considers relocation to a proximate, more desirable site, or evaluates closing the restaurant if the brand’s measurement criteria, such as return on investment and area demographic trends, do not support relocation. We closed three company-owned restaurants in fiscal 2013. We perform a comprehensive analysis that examines restaurants not performing at a required rate of return. These closed restaurants were generally performing below our standards or were near or at the expiration of their lease term. Our strategic plan is targeted to support our long-term growth objectives, with a focus on continued development of those restaurant locations that have the greatest return potential for the Company and our shareholders. Franchise Development In addition to our development of company-owned restaurants, our restaurant brands will maintain expansion through our franchisees and joint venture partners. 5 As part of our strategy to expand through our franchisees, our franchise operations (domestically and internationally) increased in fiscal 2013. The following table illustrates the percentages of franchise operations as of June 26, 2013 for the Company and by restaurant brand, respectively: Percentage of Franchise Operated Restaurants Domestic(1) International(2) Overall(3) Brinker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chili’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34% 35% —% 96% 96% —% 45% 46% —% (1) The percentages in this column are based on number of domestic franchised restaurants versus total domestic restaurants. (2) The percentages in this column are based on number of international franchised restaurants versus total international restaurants. (3) The percentages in this column are based on the total number of franchised restaurants (domestic and international) versus total system-wide number of restaurants. Domestic Domestic expansion is also focused on growing our number of franchised restaurants. We are accomplishing this through existing, new or renewed development obligations with new or existing franchisees. In addition, we have from time to time also sold and may sell company-owned restaurants to our franchisees (new or existing). As of June 26, 2013, eight total domestic development arrangements existed including a new development agreement for three restaurants in the State of Alaska. A typical domestic franchise development agreement provides for payment of development and initial franchise fees in addition to subsequent royalty and advertising fees based on the gross sales of each restaurant. We expect future domestic franchise development agreements to remain limited to enterprises having significant experience as restaurant operators and proven financial ability to support and develop multi-unit operations. Domestic expansion efforts continue to focus not only on major metropolitan areas in the United States but also on smaller market areas and non-traditional locations (such as airports, college campuses and food courts) that can adequately support our restaurant brands. During the year ended June 26, 2013, our domestic franchisees opened two Chili’s restaurants. Additionally, we acquired one Chili’s restaurant from a franchisee in the Miami, Florida metropolitan area. International We continue our international growth through development agreements with new and existing franchisees and joint venture partners, as well as introducing Chili’s to new countries and expanding the brand within our existing markets. As of June 26, 2013, we had 20 total development arrangements. During fiscal year 2013, our international franchisees and joint venture partners opened 33 Chili’s restaurants. In the same year, we entered into a new development agreement with one franchisee for the development of 25 Chili’s restaurants. The area of development for these locations includes south and west India. As we develop Chili’s internationally, we will selectively pursue expansion through various means, including franchising and joint ventures. Similar to our domestic franchise agreements, a typical international franchise development agreement provides the vehicle for payment of development fees and franchise fees in addition to subsequent royalty fees based on the gross sales of each restaurant. We expect future development agreements to remain limited to enterprises who demonstrate a proven track record as a restaurant operator and showcase financial strength that can support a multi-unit development agreement, as well as, in some instances, multi-brand operations. 6 During the year ended June 26, 2013, we acquired 11 Chili’s restaurants from one of our franchisees in Alberta, Canada. Restaurant Management Our Chili’s and Maggiano’s brands have separate designated teams who support each brand including operations, finance, franchise, marketing, peopleworks and culinary. We believe these strategic, brand-focused teams foster the identities of the individual and uniquely positioned brands. To maximize efficiencies, brands continue to utilize common and shared infrastructure, including, among other services, accounting, information technology, purchasing, legal and restaurant development. At the restaurant level, management structure varies by brand. A typical restaurant is led by a management team including a general manager, two to six additional managers, and for Maggiano’s, an additional three to four chefs. The level of restaurant supervision depends upon the operating complexity and sales volume of individual locations. We believe there is a high correlation between the quality of restaurant management and the long-term success of a brand. In that regard, we encourage increased experience at all management positions through various short and long-term incentive programs, which may include equity ownership. These programs, coupled with a general management philosophy emphasizing quality of life, have enabled us to attract and retain key team members. We ensure consistent quality standards in all brands through the issuance of operations manuals covering all elements of operations and food and beverage manuals, which provide guidance for preparation of brand- formulated recipes. Routine visitation to the restaurants by all levels of supervision enforces strict adherence to our overall brand standards and operating procedures. Each brand is responsible for maintaining their operational training program. The training program typically includes a two to four-month training period for restaurant management trainees. We also provide reoccurring management training for managers and supervisors to improve effectiveness or prepare them for more responsibility. Supply Chain Our ability to maintain consistent quality throughout each restaurant brand depends upon acquiring products from reliable sources. Our pre-approved suppliers and our restaurants are required to adhere to strict product and safety specifications established through our quality assurance and culinary programs. These requirements ensure high quality products are served in each of our restaurants. We strategically negotiate directly with major suppliers to obtain competitive prices. We also use purchase commitment contracts when appropriate to stabilize the potentially volatile pricing associated with certain commodity items. All essential products are available from pre-qualified distributors to be delivered to our restaurant brands. Additionally, as a purchaser of a variety of protein products, we do require our suppliers to adhere to humane processing standards for their respective industries and encourage them to evaluate new technologies for food safety and humane processing improvements. Due to the relatively rapid turnover of perishable food products, inventories in the restaurants, which consists primarily of food, beverages and supplies, have a modest aggregate dollar value in relation to revenues. Internationally, our franchisees and joint venture operations may encounter cultural and regulatory differences resulting in variances with product specifications for international restaurant locations. Advertising and Marketing Our brands generally target the 26 to 54 year-old age group, which constitutes approximately 41 percent of the United States population. It is our belief these consumers value the benefits of the casual dining category for multiple meal occasions. In choosing not to cook, these consumers want the higher food quality, the opportunity to connect with family and friends and the enhanced dining experience our restaurant brands offer. To reach this 7 target group, we use a mix of television, radio, print, outdoor or online advertising, as well as mail (direct and electronic) and social media, with each of our restaurant brands utilizing one or more of these mediums to meet their communication strategy and budget. Our brands have also leveraged extensive consumer marketing research to monitor brand health, guest satisfaction and emerging trends, as well as validate menu development and creative campaigns. Our franchise agreements generally require advertising contributions to us by the franchisees. We use these contributions, in conjunction with company funds, for the purpose of retaining agencies, obtaining consumer insights, developing and producing brand-specific creative materials and purchasing national or regional media to meet the brand’s strategy. Some franchisees also spend additional amounts on local advertising. Any such local advertising must first be approved by us. Team Members As of June 26, 2013, we employed approximately 54,653 team members, of which 644 were restaurant support center personnel in Dallas, and 3,974 were restaurant area directors, managers, or trainees. The remaining 50,035 were employed in non-management restaurant positions. Our executive officers have an average of 20 years of experience in the restaurant industry. We have a positive team member relations outlook and continue to focus on improving our team member turnover rate. We have a variety of tools and strong resources in place to help us recruit and retain the best talent to work in our restaurants. The majority of our team members, outside of restaurant management and restaurant support center personnel, are paid on an hourly basis. We stand firm in the belief that we provide competitive working conditions and wages favorable with other companies in our industry. Our team members are not covered by any collective bargaining agreements. Trademarks We have registered and/or have pending, among other marks, “Brinker International”, “Chili’s”, “Chili’s Bar & Bites”, “Chili’s Express”, “Chili’s Margarita Bar”, “Chili’s Southwest Grill & Bar”, “Chili’s Too”, “Maggiano’s”, and “Maggiano’s Little Italy”, as trademarks with the United States Patent and Trademark Office. Available Information We maintain an internet website with the address of http://www.brinker.com. You may obtain, free of charge, at our website, copies of our reports filed with, or furnished to, the Securities and Exchange Commission (the “SEC”) on Forms 10-K, 10-Q and 8-K. Any amendments to such reports are also available for viewing and copying at our internet website. These reports will be available as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC. In addition, you may view and obtain, free of charge, at our website, copies of our corporate governance materials, including, Corporate Governance Guidelines, Governance and Nominating Committee Charter, Audit Committee Charter, Compensation Committee Charter, Executive Committee Charter, Code of Conduct and Ethical Business Policy, and Problem Resolution Procedure/Whistle Blower Policy. Item 1A. RISK FACTORS. We wish to caution you that our business and operations are subject to a number of risks and uncertainties. The factors listed below are important because they could cause actual results to differ materially from our historical results and from those projected in forward-looking statements contained in this report, in our other filings with the SEC, in our news releases, written or electronic communications, and verbal statements by our representatives. 8 You should be aware that forward-looking statements involve risks and uncertainties. These risks and uncertainties may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performances or achievements contained in or implied by these forward-looking statements. Forward-looking statements are generally accompanied by words like “believes,” “anticipates,” “estimates,” “predicts,” “expects,” and other similar expressions that convey uncertainty about future events or outcomes. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Risks Related to Our Business Competition may adversely affect our operations and financial results. The restaurant business is highly competitive as to price, service, restaurant location, nutritional and dietary trends and food quality, and is often affected by changes in consumer tastes, economic conditions, population and traffic patterns. We compete within each market with locally-owned restaurants as well as national and regional restaurant chains, some of which operate more restaurants and have greater financial resources and longer operating histories than ours. Despite a weak U.S. employment market, there is active competition for quality management personnel and hourly team members. We continue to face competition as a result of several factors, including quick service and fast casual restaurants also offering high quality food and beverage offerings, the convergence in grocery, deli and restaurant services, including the grocery industry offering of convenient meals in the form of improved entrees and side dishes. We compete primarily on the quality, variety and value perception of menu items, as well as the quality and efficiency of service, the attractiveness of facilities and the effectiveness of advertising and marketing programs. Our restaurants also face competition from the introduction of new products and menu items by competitors, as well as substantial price discounting among other offers, and are likely to continue to face such future competition in light of the slow paced economic recovery. Although we may implement a number of business strategies, the success of new products, initiatives and overall strategies is highly difficult to predict and will be influenced by competitive product offerings, pricing and promotions offered by competitors. Our ability to differentiate our brands from their competitors, which is in part limited by the advertising spend available to us and by consumer perception, cannot be assured. These factors could reduce the gross sales or profitability at our restaurants, which would decrease revenues generated by company-owned restaurants and royalty payments from franchisees. Changing health or dietary preferences may cause consumers to avoid our products in favor of alternative foods. The foodservice industry as a whole rests on consumer preferences and demographic trends at the local, regional, national and international levels, including the impact on consumer eating habits of new information regarding diet, nutrition, health and health insurance. We and our franchisees depend on the sustained demand for our products, which may be affected by factors outside of our control. Changes in nutritional or health insurance guidelines issued by federal or local government agencies, issuance of similar guidelines or statistical information by other federal, state or local municipalities, academic studies, or advocacy organizations among other things, may impact consumer choice and cause consumers to select foods other than those that are offered by our restaurants. We may not be able to adequately adapt our menu offerings to keep pace with developments in current consumer preferences, which may result in reductions to the revenues generated by our company- owned restaurants and the payments we receive from franchisees. The weak global economic recovery continues to impact consumer discretionary spending and a prolonged economic recovery could result in declines in consumer discretionary spending materially affecting our financial performance in the future. The restaurant industry is dependent upon consumer discretionary spending. Consumer confidence has not fully recovered from recent lows impacting the public’s ability and/or desire to spend discretionary dollars as a result of significantly limited job availability, slow recovering home values, limited investment gains in the 9 financial markets and continued reduced access to credit. Current international fiscal concerns continue to impact the slow U.S. economic recovery. While sales and traffic gains were made by the restaurant industry and our brands in the prior fiscal year, economic headwinds were encountered in fiscal 2013, including increased personal income taxes and payroll taxes. Economic improvement in the restaurant industry continues to come from cost savings initiatives as well as our success to improve the guest experience within our existing restaurant locations. If this current slow economic recovery continues for a prolonged period of time and/or deepens in magnitude returning to the negative trends of the prior years, our business, results of operations and ability to comply with the covenants under our credit facility could be materially affected. Leading economic indicators such as employment and consumer confidence remain challenged and did not show meaningful improvement in fiscal 2013. Deterioration in guest traffic and/or a reduction in the average amount guests spend in our restaurants will negatively impact our revenues. This will also result in lower royalties collected, sales deleverage, spreading fixed costs across a lower level of sales, and in turn, cause downward pressure on our profitability. The result could be further reductions in staff levels, asset impairment charges and potential restaurant closures. Future slower global economic recovery or recessionary effects on us are unknown at this time and could have a potential material adverse affect on our financial position and results of operations. There is no assurance that the government’s plan to restore fiscal responsibility or future plans to stimulate the economy will revive consumer confidence, stabilize the financial markets, increase liquidity and the availability of credit, or result in lower unemployment, which continues to remain stubbornly high at the present time. The current slow economic recovery could have a material adverse impact on our landlords or other tenants in retail centers in which we or our franchisees are located, which in turn could negatively affect our financial results. If the slow economic recovery continues or returns to recessionary levels, our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay required construction contributions or satisfy other lease covenants to us. In addition, other tenants at retail centers in which we or our franchisees are located or have executed leases, may fail to open or may cease operations. If our landlords fail to satisfy required co-tenancies, this may result in us or our franchisees terminating leases or delaying openings in these locations. Also, decreases in total tenant occupancy in retail centers in which we are located may affect guest traffic at our restaurants. All of these factors could have a material adverse impact on our operations. Inflation may increase our operating expenses. We have experienced impact from inflation. Inflation has caused added food, labor and benefits costs and increased our operating expenses. As operating expenses rise, we, to the extent permitted by competition, recover costs by raising menu prices, or by reviewing, then implementing, alternative products or processes, or other cost reduction procedures. We cannot ensure, however, we will be able to continue to recover increases in operating expenses due to inflation in this manner. Changes in governmental regulation may adversely affect our ability to maintain our existing and future operations and to open new restaurants. We are subject to the Fair Labor Standards Act (which governs such matters as minimum wages, overtime and other working conditions), along with the Americans with Disabilities Act, the Immigration Reform and Control Act of 1986, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated by federal, state and local governmental authorities that govern these and other employment matters, tip credits, working conditions, safety standards and immigration status. We expect adjustments in payroll expenses as a result of federal and state mandated increases in the minimum wage, and although such increases are not expected to be material, we cannot be certain there will be no material increases in the future. Enactment and enforcement of various federal, state and local laws, rules and regulations on including, 10 immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants in a particular area or across the United States. Other labor shortages or increased team member turnover could also increase labor costs. In addition, our suppliers may be affected by higher minimum wage standards or availability of labor, which may increase the price of goods and services they supply to us. We continue to review the health care reform law enacted by Congress in March of 2010 and regulations issued related to the law to evaluate the potential impact of this new law on our business, and to accommodate various parts of the law as they take effect. There are no assurances that a combination of cost management and price increases can accommodate all of the costs associated with compliance. We are subject to laws and regulations, which vary from jurisdiction to jurisdiction, relating to nutritional content and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity, changes in sales mix and profitability, and increased exposure to governmental investigations or litigation. We do not expect to incur material costs from compliance with the provision of the new health care law requiring disclosure of calories on the menus, but cannot reliably anticipate any changes in guest behavior resulting from implementation of this portion of the law, which could have adverse effects on our sales or results of operations. Each of our company-owned and our franchisees’ restaurants is also subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in the state, county and/or municipality where the restaurant is located. We generally have not encountered any material difficulties or failures in obtaining and maintaining the required licenses and approvals that could impact the continuing operations of an existing restaurant, or delay or prevent the opening of a new restaurant. Although we do not, at this time, anticipate any occurring in the future, we cannot be certain that we, or our franchisees, will not experience material difficulties or failures that could impact the continuing operations of an existing restaurant, or delay the opening of restaurants in the future. We are also subject to federal and state environmental regulations, and although these have not had a material negative affect on our operations, we cannot ensure this will not occur in the future. In particular, the U.S. and other foreign governments have increased focus on environmental matters such as climate change, greenhouse gases and water conservation. This may lead to new initiatives directed at regulating an as-yet- unspecified array of environmental matters. These efforts could result in increased taxation or in future restrictions on or increases in costs associated with food and other restaurant supplies, transportation costs and utility costs, any of which could decrease our operating profits and/or necessitate future investments in our restaurant facilities and equipment to achieve compliance. Further, more stringent and varied requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay, prevent or make cost prohibitive the continuing operations of an existing restaurant or the development of new restaurants in particular locations. Due to our international franchising, we are also subject to governmental regulations throughout the world impacting the way we do business with our international franchisees and joint venture partners. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs and other international trade regulations, the USA Patriot Act and The Foreign Corrupt Practices Act. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could adversely impact our business and financial performance. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse affect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings. 11 Our profitability may be adversely affected by increases in energy costs. Our success depends in part on our ability to absorb increases in utility costs, in particular, electricity and natural gas. Various regions of the United States in which we operate multiple restaurants have experienced volatility in utility prices. This has affected costs in the past and if they occur again, it would have possible adverse effects on our profitability to the extent not otherwise recoverable through price increases or alternative products, processes or cost reduction procedures. Further, higher prices for petroleum-based fuels may be passed on to us by suppliers putting further pressure on margins as well as impact our guests discretionary funds and ability to patron our restaurants or their menu choices. Shortages or interruptions in the availability and delivery of food and other products may increase costs or reduce revenues. Possible shortages or interruptions in the supply of food items and other products to our restaurants caused by inclement weather, natural disasters such as floods, drought and hurricanes; the inability of our suppliers to obtain credit in a tightened credit market; food safety warnings or advisories or the prospect of such pronouncements; or other conditions beyond our control, could adversely affect the availability, quality and cost of items we buy and the operations of our restaurants. Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products critical to our restaurant operations. Successful strategic transactions are important to our future growth and profitability. We evaluate potential franchisees of new and existing restaurants and joint venture investments, as well as mergers, acquisitions and divestitures, as part of our strategic planning initiative. These transactions involve various inherent risks, including accurately assessing: • • • the value, future growth potential, strengths, weaknesses, contingent and other liabilities and potential profitability of franchise and joint venture partner candidates; our ability to achieve projected economic and operating synergies; and unanticipated changes in business and economic conditions affecting an acquired business or the completion of a divestiture. If we are unable to meet our business strategy plan, our profitability in the future may be adversely affected. Our ability to meet our business strategy plan is dependent upon, among other things, our and our franchisees’ ability to: • • • • • • increase gross sales and operating profits at existing restaurants with food and beverage options and high quality service desired by our guests through successful implementation of strategic initiatives; identify adequate sources of capital to fund and finance strategic initiatives, including remodeling of existing restaurants and new restaurant development; identify available, suitable and economically viable locations for new restaurants; obtain all required governmental permits (including zoning approvals and liquor licenses) on a timely basis; hire all necessary contractors and subcontractors, obtain construction materials at suitable prices, and maintain construction schedules; and hire and train or retain qualified managers and team members for existing and new restaurants. 12 The success of our franchisees is important to our future growth. We have significantly increased the percentage of restaurants owned and operated by our franchisees. While our franchise agreements are designed to maintain brand consistency, this increase reduces our direct day-to-day control over these restaurants and may expose us to risks not otherwise encountered if we maintained ownership and control of same. These risks include franchisee defaults in their obligations to us arising from financial or other difficulties encountered by them, such as payments to us or maintenance and improvements obligations; limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings; inability to participate in business strategy changes due to financial constraints; inability to meet rent obligations on leases on which we retain contingent liability; and failure to comply with food quality and preparation requirements subjecting us to litigation even when we are not legally liable for a franchisee’s actions or failure to act. Additionally our international franchisees and joint venture partners are subject to risks not encountered by our domestic franchisees. These risks include: • • • • difficulties in achieving consistency of product quality and service as compared to U.S. operations; changes to recipes and menu offerings to meet cultural norms; challenges to obtain adequate and reliable supplies necessary to provide menu items and maintain food quality; and differences, changes or uncertainties in economic, regulatory, legal, social and political conditions. Our sales volumes generally decrease in winter months in North America. Our sales volumes fluctuate seasonally and are generally higher in the summer months and lower in the winter months, which may cause seasonal fluctuations in our operating results. Unfavorable publicity relating to one or more of our restaurants in a particular brand may taint public perception of the brand. Multi-unit restaurant businesses can be adversely affected by publicity resulting from poor food quality, illness or health concerns or operating issues stemming from one or a limited number of restaurants. In particular, since we depend heavily on the Chili’s brand for a majority of our revenues, unfavorable publicity relating to one or more Chili’s restaurants could have a material adverse effect on the Chili’s brand, and consequently on our business, financial condition and results of operations. The speed at which negative publicity (whether or not accurate) can be disseminated has increased dramatically with the capabilities of electronic communication, including social media. If we are unable to quickly and effectively respond to such reports, we may suffer declines in guest traffic which could materially impact our financial performance. Litigation could have a material adverse impact on our business and our financial performance. We are subject to lawsuits, administrative proceedings and claims that arise in the regular course of business. These matters typically involve claims by guests, team members and others regarding issues such as food borne illness, food safety, premises liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, disability and other operational issues common to the foodservice industry, as well as contract disputes and intellectual property infringement matters. We could be adversely affected by negative publicity and litigation costs resulting from these claims, regardless of their validity. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse effect on our financial position and results of operations. 13 We are dependent on information technology and any material failure of that technology or our ability to execute a comprehensive business continuity plan could impair our ability to efficiently operate our business. We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with maintenance, upgrading or transitioning to replacement systems, or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations. Significant capital investments might be required to remediate any problems. Additionally, our corporate systems and processes and corporate support for our restaurant operations are handled primarily at our restaurant support center. We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including tornadoes and other natural disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims. We outsource certain business processes to third-party vendors that subject us to risks, including disruptions in business and increased costs. Some business processes are currently outsourced to third parties. Such processes include gift card tracking and authorization, credit card authorization and processing, insurance claims processing, certain payroll processing, tax filings and other accounting processes. We also continue to evaluate our other business processes to determine if additional outsourcing is a viable option to accomplish our goals. We make a diligent effort to ensure that all providers of outsourced services are observing proper internal control practices, such as redundant processing facilities; however, there are no guarantees that failures will not occur. Failure of third parties to provide adequate services could have an adverse effect on our results of operations, financial condition or ability to accomplish our financial and management reporting. Disruptions in the global financial markets may adversely impact the availability and cost of credit and consumer spending patterns. The disruptions to the global financial markets and continuing slow economic recovery have adversely impacted the availability of credit already arranged and the availability and cost of credit in the future. The disruptions in the financial markets also had an adverse effect on the U.S. and world economy, which has negatively impacted consumer spending patterns. There can be no assurance that various U.S. and world government present and future responses to the disruptions in the financial markets will restore consumer confidence, stabilize the markets or increase liquidity or the availability of credit. Failure to protect the integrity and security of individually identifiable data of our guests and teammates could expose us to litigation and damage our reputation. We receive and maintain certain personal information about our guests and teammates. The use of this information by us is regulated at the federal and state levels, as well as by certain third party contracts. If our security and information systems are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our reputation, as well as operations, results of operations and financial condition, and could result in litigation against us or the imposition of penalties. As privacy and information security laws and regulations change, we may incur additional costs to ensure it remains in compliance. 14 Declines in the market price of our common stock or changes in other circumstances that may indicate an impairment of goodwill could adversely affect our financial position and results of operations. We perform our annual goodwill impairment test in the second quarter of each fiscal year. Interim goodwill impairment tests are also required when events or circumstances change between annual tests that would more likely than not reduce the fair value of our reporting units below their carrying value. It is possible that a change in circumstances such as the decline in the market price of our common stock or changes in consumer spending levels, or in the numerous variables associated with the judgments, assumptions and estimates made in assessing the appropriate valuation of our goodwill, could negatively impact the valuation of our brands and create the potential for a non-cash charge to recognize impairment losses on some or all of our goodwill. If we were required to write down a portion of our goodwill and record related non-cash impairment charges, our financial position and results of operations would be adversely affected. Changes to estimates related to our property and equipment, or operating results that are lower than our current estimates at certain restaurant locations, may cause us to incur impairment charges on certain long-lived assets. We make certain estimates and projections with regards to individual restaurant operations, as well as our overall performance in connection with our impairment analyses for long-lived assets. An impairment charge is required when the carrying value of the asset exceeds the estimated fair value or undiscounted future cash flows of the asset. The projection of future cash flows used in this analysis requires the use of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional charges for asset impairments may be required in the future. If impairment charges are significant, our results of operations could be adversely affected. Identification of material weakness in internal control may adversely affect our financial results. We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Those provisions provide for the identification of material weaknesses in internal control. If such a material weakness is identified, it could indicate a lack of adequate controls to generate accurate financial statements. We routinely assess our internal controls, but we cannot assure you that we will be able to timely remediate any material weaknesses that may be identified in future periods, or maintain all of the controls necessary for continued compliance. Likewise, we cannot assure you that we will be able to retain sufficient skilled finance and accounting team members, especially in light of the increased demand for such individuals among publicly traded companies. Other risk factors may adversely affect our financial performance. Other risk factors that could cause our actual results to differ materially from those indicated in the forward- looking statements by affecting, among many things, pricing, consumer spending and consumer confidence, include, without limitation, changes in economic conditions and financial and credit markets (including rising interest rates and costs for consumers and reduced disposable income); credit availability; increased costs of food commodities; increased fuel costs and availability for our team members, customers and suppliers; increased health care costs; health epidemics or pandemics or the prospects of these events; consumer perceptions of food safety; changes in consumer tastes and behaviors; governmental monetary policies; changes in demographic trends; availability of employees; terrorist acts; energy shortages and rolling blackouts; and weather (including, major hurricanes and regional winter storms) and other acts of God. Item 1B. UNRESOLVED STAFF COMMENTS. None. 15 Item 2. PROPERTIES. Restaurant Locations At June 26, 2013, our system of company-owned and franchised restaurants included 1,591 restaurants located in 50 states and Washington, D.C. We also have restaurants in the U.S. territories of Guam and Puerto Rico and the countries of Bahrain, Brazil, Canada, Columbia, Costa Rica, Dominican Republic, Ecuador, Egypt, El Salvador, Germany, Guatemala, Honduras, India, Indonesia, Japan, Jordan, Kuwait, Lebanon, Malaysia, Mexico, Oman, Peru, Philippines, Qatar, Russia, Saudi Arabia, Singapore, South Korea, Syria, Taiwan, United Arab Emirates and Venezuela. We have provided you a breakdown of our portfolio of restaurants in the two tables below: Table 1: Company-owned vs. franchise (by brand) as of June 26, 2013: Chili’s Company-owned (domestic) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company-owned (international) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s Company-owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 11 714 44 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,591 Table 2: Domestic vs. foreign locations (by brand) as of June 26, 2013 (company-owned and franchised): Chili’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,265(50) 44 282(34) — Domestic (No. of States) Foreign (No. of countries and territories) Restaurant Property Information The following table illustrates the approximate average dining capacity for each current prototypical restaurant in our restaurant brands: Square Feet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dining Seats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dining Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,930-6,000 150-252 35-54 7,700-24,000 200-700 35-150 Chili’s Maggiano’s The leases typically provide for a fixed rental plus percentage rentals based on sales volume. At June 26, 2013, we owned the land and building for 189 of our 877 company-owned restaurant locations. For these 189 restaurant locations, the net book value for the land was $142 million and for the buildings was $118 million. For the remaining 688 restaurant locations leased by us, the net book value of the buildings and leasehold improvements was $537 million. The 688 leased restaurant locations can be categorized as follows: 541 are ground leases (where we lease land only, but own the building) and 147 are retail leases (where we lease the land/retail space and building). We believe that our properties are suitable, adequate, well-maintained and sufficient for the operations contemplated. Some of our leased restaurants are leased for an initial lease term of 5 to 30 years, with renewal terms of 1 to 35 years. Other Properties We own an office building containing approximately 108,000 square feet which we use for part of our corporate headquarters and menu development activities. We lease an additional office complex containing approximately 198,000 square feet for the remainder of our corporate headquarters which is currently utilized by 16 us, reserved for future expansion of our headquarters, or sublet to third parties. Because of our operations throughout the United States, we also lease office space in California, Colorado, Florida, New Jersey and Texas for use as regional operation offices. The size of these office leases range from approximately 100 square feet to approximately 4,000 square feet. Item 3. LEGAL PROCEEDINGS. In August 2004, certain current and former hourly restaurant team members filed a putative class action lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal periods and rest breaks. The lawsuit sought penalties and attorney’s fees and was certified as a class action by the trial court in July 2006. In July 2008, the California Court of Appeal decertified the class action on all claims with prejudice. In October 2008, the California Supreme Court granted a writ to review the decision of the Court of Appeal and oral arguments were heard by the California Supreme Court on November 8, 2011. On April 12, 2012, the California Supreme Court issued an opinion affirming in part, reversing in part, and remanding in part for further proceedings. The California Supreme Court’s opinion resolved many of the legal standards for meal periods and rest breaks in our California restaurants and we intend to vigorously defend our position on the remaining issues upon remand to the trial court. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any. We are engaged in various other legal proceedings and have certain unresolved claims pending. Reserves have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, Management is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations. Item 4. MINE SAFETY DISCLOSURES. Not applicable. PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “EAT”. Bid prices quoted represent interdealer prices without adjustment for retail markup, markdown and/or commissions, and may not necessarily represent actual transactions. The following table sets forth the quarterly high and low closing sales prices of the common stock, as reported by the NYSE. Fiscal year ended June 26, 2013: First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter $35.98 $35.30 $37.07 $41.60 $30.62 $28.71 $30.39 $37.25 High Low Fiscal year ended June 27, 2012: First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter As of August 12, 2013, there were 587 holders of record of our common stock. High Low $26.57 $27.07 $28.98 $32.69 $20.01 $20.07 $25.66 $26.65 17 During the fiscal year ended June 26, 2013, we continued to declare quarterly cash dividends for our shareholders. We have set forth the dividends declared for the fiscal year in the following table on the specified dates: Dividend Per Share of Common Stock $0.20 $0.20 $0.20 $0.20 Declaration Date Record Date Payment Date August 23, 2012 November 8, 2012 February 7, 2013 May 30, 2013 September 10, 2012 December 7, 2012 March 8, 2013 June 14, 2013 September 27, 2012 December 27, 2012 March 28, 2013 June 27, 2013 The following graph compares the cumulative five-year total return provided shareholders on Brinker International, Inc.’s common stock relative to the cumulative total returns of the S&P 500 Index and the S&P Restaurants Index. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Brinker International, Inc., the S&P 500 Index, and the S&P Restaurants Index $250 $200 $150 $100 $50 $0 6/25/08 6/24/09 6/30/10 6/29/11 6/27/12 6/26/13 Brinker International, Inc. S&P 500 S&P Restaurants *$100 invested on 6/25/08 in stock or 6/30/08 in index, including reinvestment of dividends. Indexes calculated on month-end basis. Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. The graph assumes a $100 initial investment and the reinvestment of dividends in our stock and each of the indexes on June 25, 2008 and its relative performance is tracked through June 26, 2013. The values shown are neither indicative nor determinative of future performance. 2008 2009 2010 2011 2012 2013 Brinker International . . . . . . . . . . . . . . . . . . . . . . . S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P Restaurants(1) . . . . . . . . . . . . . . . . . . . . . . . . $100.00 $100.00 $100.00 $ 84.22 $ 73.79 $101.52 $ 78.95 $ 84.43 $127.02 $137.37 $110.35 $177.98 $175.08 $116.36 $206.64 $227.02 $140.32 $237.49 (1) The S&P Restaurants Index is comprised of Chipotle Mexican Grill, Inc., Darden Restaurants, Inc., McDonald’s Corp., Starbucks Corporation and Yum! Brands Inc. 18 In May 2013, the Company issued $250.0 million in the aggregate principal amount at maturity of 2.600% Notes due 2018 (the “2018 Notes”) and $300.0 million in the aggregate principal amount at maturity of 3.875% Notes due 2023 (the “2023 Notes”, and together with the 2018 Notes, the “Notes”). J.P. Morgan Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated served as the joint book-running managers for the offering. The Notes were issued in a public offering pursuant to a registration statement on Form S-3, File No. 333-188252, and are freely tradeable. The Notes are redeemable at the Company’s option at any time, in whole or in part. The proceeds of the offering were and will be used for general corporate purposes, including the redemption of the 5.75% notes due June 2014, pay down of the revolver and the repurchase of the Company’s common stock pursuant to its share repurchase program. Except as described in the immediately preceding paragraphs, during the three-year period ended on August 12, 2013, we issued no securities which were not registered under the Securities Act of 1933, as amended. We continue to maintain our share repurchase program; on August 22, 2013, our Board of Directors increased our share repurchase authorization by $200 million, bringing the total authorization to $3,585 million. During the fourth quarter, we repurchased shares as follows (in thousands, except share and per share amounts): Total Number of Shares Purchased(a) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Program Approximate Dollar Value that May Yet be Purchased Under the Program(b) March 28, 2013 through May 1, 2013 . . . . . . . . . . May 2, 2013 through May 29, 2013 . . . . . . . . . . . . May 30, 2013 through June 26, 2013 . . . . . . . . . . . 420,874 1,375,000 1,721,019 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,516,893 $38.09 $40.91 $40.23 $40.24 420,000 1,375,000 1,720,400 3,515,400 $458,134 $401,856 $332,610 (a) These amounts include shares purchased as part of our publicly announced programs and shares owned and tendered by team members to satisfy tax withholding obligations on the vesting of restricted share awards, which are not deducted from shares available to be purchased under publicly announced programs. Unless otherwise indicated, shares owned and tendered by team members to satisfy tax withholding obligations were purchased at the average of the high and low prices of the Company’s shares on the date of vesting. During the fourth quarter of fiscal 2013, 1,493 shares were tendered by team members at an average price of $37.66. (b) The final amount shown is as of June 26, 2013. Item 6. SELECTED FINANCIAL DATA. The information set forth in that section entitled “Selected Financial Data” in our 2013 Annual Report to Shareholders is presented on page F-1 of Exhibit 13 to this document. We incorporate that information in this document by reference. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth in that section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2013 Annual Report to Shareholders is presented on pages F-2 through F-13 of Exhibit 13 to this document. We incorporate that information in this document by reference. 19 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth in that section entitled “Quantitative and Qualitative Disclosures About Market Risk” contained within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is in our 2013 Annual Report to Shareholders presented on page F-13 of Exhibit 13 to this document. We incorporate that information in this document by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. We refer you to the Index to Financial Statements attached hereto on page 24 for a listing of all financial statements in our 2013 Annual Report to Shareholders. This report is attached as part of Exhibit 13 to this document. We incorporate those financial statements in this document by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 9A. CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 [the “Exchange Act”]), as of the end of the period covered by this Annual Report on Form 10-K, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective. Management’s Report on Internal Control over Financial Reporting “Management’s Report on Internal Control over Financial Reporting” and the attestation report of the independent registered public accounting firm of KPMG, LLP on internal control over financial reporting are in our 2013 Annual Report to Shareholders and are presented on pages F-34 through F-36 of Exhibit 13 to this document. We incorporate these reports in this document by reference. Internal Control over Financial Reporting There were no changes in our internal control over financial reporting during our fourth quarter ended June 26, 2013, that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. OTHER INFORMATION. None. 20 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. PART III If you would like information about: • • • our executive officers, our Board of Directors, including its committees, and our Section 16(a) reporting compliance, you should read the sections entitled “Election of Directors—Information About Nominees”, “Committees of the Board of Directors”, “Executive Officers”, and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. The Board of Directors has adopted a code of ethics that applies to all of the members of Board of Directors and all of our team members, including, the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on our internet website at the internet address: http://www.brinker.com/corp_gov/ethical_business_ policy.asp. You may obtain free of charge copies of the code from our website at the above internet address. Any amendment of, or waiver from, our code of ethics will be posted on our website within four business days of such amendment or waiver. Item 11. EXECUTIVE COMPENSATION. If you would like information about our executive compensation, you should read the section entitled “Executive Compensation—Compensation Discussion and Analysis” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. If you would like information about our security ownership of certain beneficial owners and management and related stockholder matters, you should read the sections entitled “Director Compensation for Fiscal 2013”, “Compensation Discussion and Analysis”, and “Stock Ownership of Certain Persons” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. If you would like information about certain relationships and related transactions, you should read the section entitled “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. If you would like information about the independence of our non-management directors and the composition of the Audit Committee, Compensation Committee and Governance and Nominating Committee, you should read the sections entitled “Director Independence” and “Committees of the Board of Directors” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. 21 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. If you would like information about principal accountant fees and services, you should read the section entitled “Ratification of Independent Auditors” in our Proxy Statement to be dated on or about September 17, 2013, for the annual meeting of shareholders on November 7, 2013. We incorporate that information in this document by reference. Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1) Financial Statements. PART IV We make reference to the Index to Financial Statements attached to this document on page 24 for a listing of all financial statements attached as Exhibit 13 to this document. (a)(2) Financial Statement Schedules. None. (a)(3) Exhibits. We make reference to the Index to Exhibits preceding the exhibits attached hereto on pages E-1 and E-2 for a list of all exhibits filed as a part of this document. 22 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES BRINKER INTERNATIONAL, INC., a Delaware corporation By: /S/ GUY J. CONSTANT Guy J. Constant, Executive Vice President, Chief Financial Officer and President of Global Business Development Dated: August 26, 2013 Pursuant to the requirements of the Securities Exchange Act of 1934, we have signed in our indicated capacities on August 26, 2013. Name Title /S/ WYMAN T. ROBERTS Wyman T. Roberts /S/ GUY J. CONSTANT Guy J. Constant President and Chief Executive Officer of Brinker International, President of Chili’s Grill & Bar (Principal Executive Officer) and Director Executive Vice President, Chief Financial Officer and President of Global Business Development (Principal Financial and Accounting Officer) /S/ DOUGLAS H. BROOKS Chairman of the Board Douglas H. Brooks /S/ JOSEPH M. DEPINTO Joseph M. DePinto /S/ HARRIET EDELMAN Harriet Edelman /S/ MICHAEL A. GEORGE Michael A. George /S/ WILLIAM T. GILES William T. Giles /S/ GERARDO I. LOPEZ Gerardo I. Lopez /S/ /S/ JON L. LUTHER Jon L. Luther JOHN W. MIMS John W. Mims Director Director Director Director Director Director Director /S/ GEORGE R. MRKONIC Director George R. Mrkonic /S/ ROSENDO G. PARRA Rosendo G. Parra Director 23 INDEX TO FINANCIAL STATEMENTS The following is a listing of the financial statements which are attached hereto as part of Exhibit 13. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . Page F-1 F-2 Consolidated Statements of Income—Fiscal Years Ended June 26, 2013, June 27, 2012, and June 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14 Consolidated Balance Sheets— June 26, 2013 and June 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-15 Consolidated Statements of Shareholders’ Equity—Fiscal Years Ended June 26, 2013, June 27, 2012, and June 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-16 Consolidated Statements of Cash Flows—Fiscal Years Ended June 26, 2013, June 27, 2012, and June 29, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-18 Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-34 Management’s Responsibility for Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36 Management’s Report on Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-36 All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes. 24 Exhibit 3(a) 3(b) 4(a) 4(b) 4(c) 4(d) 4(e) 10(a) 10(b) 10(c) 10(d) 13 21 23 31(a) 31(b) 32(a) 32(b) 99(a) 101+ + INDEX TO EXHIBITS Certificate of Incorporation of the Registrant, as amended.(1) Bylaws of the Registrant.(2) Form of 2.600% Note due 2018.(3) Form of 3.875% Note due 2023.(3) Indenture between the Registrant and Wilmington Trust, National Association, as Trustee.(4) First Supplemental Indenture between Registrant and Wilmington Trust, National Association.(3) Second Supplemental Indenture between Registrant and Wilmington Trust, National Association.(3) Registrant’s Stock Option and Incentive Plan.(5) Registrant’s 1999 Stock Option and Incentive Plan for Non-Employee Directors and Consultants.(6) Registrant’s Performance Share Plan Description.(7) Credit Agreement dated as of June 22, 2010, by and among Registrant, Brinker Restaurant Corporation, Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities, LLC, Regions Capital Markets, a Division of Regions Bank, J.P. Morgan Chase Bank, N.A., Regions Bank, Compass Bank, and Wells Fargo Bank, National Association, as amended by Amendment No. 1, dated as of August 9, 2011.(8) 2013 Annual Report to Shareholders.(9) Subsidiaries of the Registrant.(10) Consent of Independent Registered Public Accounting Firm.(10) Certification by Wyman T. Roberts, President, Chief Executive Officer and President of Chili’s Grill & Bar of the Registrant, pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).(10) Certification by Guy J. Constant, Executive Vice President, Chief Financial Officer and President of Global Business Development of the Registrant, pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).(10) Certification by Wyman T. Roberts, President, Chief Executive Officer and President of Chili’s Grill & Bar of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(10) Certification by Guy J. Constant, Executive Vice President, Chief Financial Officer and President of Global Business Development of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(10) Proxy Statement of Registrant.(11) Interactive Data File As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. (1) Filed as an exhibit to annual report on Form 10-K for year ended June 28, 1995, and incorporated herein by reference. (2) Filed as an exhibit to quarterly report on Form 10-Q for quarter ended March 30, 2011, and incorporated herein by reference. E-1 (3) Filed as an exhibit to current report on Form 8-K dated May 15, 2013, and incorporated herein by reference. (4) Filed as an exhibit to registration statement on Form S-3 filed April 30, 2013, SEC File No. 333-188252, and incorporated herein by reference. (5) Filed as an Appendix A to Proxy Statement of Registrant to be filed on or about September 17, 2013, and incorporated herein by reference. (6) Filed as an exhibit to quarterly report on Form 10-Q for the quarter ended December 28, 2005, and incorporated herein by reference. (7) Filed as an exhibit to quarterly report on Form 10-Q for the quarter ended March 29, 2006, and incorporated herein by reference. (8) Filed as an exhibit to current report on Form 8-K dated August 9, 2011, and incorporated herein by reference. (9) Portions filed herewith, to the extent indicated herein. (10) Filed herewith. (11) To be filed on or about September 17, 2013. E-2 EXHIBIT 13 BRINKER INTERNATIONAL, INC. SELECTED FINANCIAL DATA (In thousands, except per share amounts and number of restaurants) Income Statement Data: Revenues: Company sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,766,618 79,480 $2,748,462 72,260 $2,685,441 75,945 $2,803,679 54,819 $3,212,522 63,840 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,846,098 2,820,722 2,761,386 2,858,498 3,276,362 2013 2012 2011 2010(a) 2009 Fiscal Years Operating Costs and Expenses: Company restaurants Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company restaurant expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other gains and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758,377 892,413 655,214 2,306,004 131,481 134,538 17,300 769,729 891,910 649,830 2,311,469 125,054 143,388 8,974 742,283 886,559 655,060 2,283,902 128,447 132,834 10,783 816,015 926,474 660,922 2,403,411 135,832 136,270 28,485 923,668 1,054,078 784,657 2,762,403 145,220 147,372 118,612 Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . 2,589,323 2,588,885 2,555,966 2,703,998 3,173,607 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations, net of taxes . . . . . . . . . . . . 256,775 29,118 (2,658) 230,315 66,956 163,359 0 231,837 26,800 (3,772) 208,809 57,577 151,232 0 205,420 28,311 (6,220) 183,329 42,269 141,060 0 154,500 28,515 (6,001) 131,986 28,264 103,722 33,982 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163,359 $ 151,232 $ 141,060 $ 137,704 Basic net income per share: Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share: Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . Balance Sheet Data: Working capital(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term obligations(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Restaurants Open (End of Period): Company-operated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchised/Joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ 2.28 0.00 2.28 2.20 0.00 2.20 $ $ $ $ $ $ 1.93 0.00 1.93 1.87 0.00 1.87 $ $ $ $ $ $ 1.55 0.00 1.55 1.53 0.00 1.53 $ $ $ $ $ $ 1.02 0.33 1.35 1.01 0.33 1.34 71,788 74,158 78,559 80,664 90,807 92,320 102,287 101,852 103,044 102,713 $ (191,620) $ (203,567) $ (181,047) $ 1,452,603 913,035 149,357 0.80 1,439,408 727,786 309,873 0.64 1,487,762 643,251 438,910 0.56 $ $ $ $ 56,799 1,857,713 679,088 728,748 0.47 $ 115,897 1,954,032 888,606 646,924 0.44 $ 877 714 1,591 865 716 1,581 868 711 1,579 871 679 1,550 1,024 665 1,689 Revenues of franchisees(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,632,076 $1,609,893 $1,558,886 (a) Fiscal year 2010 consisted of 53 weeks while all other periods presented consisted of 52 weeks. (b) Prior year amounts have been updated to conform with fiscal 2013 presentation. (c) Revenues of Franchisees are not recorded as revenues by the Company. Management believes that franchisee revenue information is important in understanding the Company’s financial performance because these revenues are the basis on which the Company calculates and records franchise revenues. F-1 102,755 33,330 (9,430) 78,855 6,734 72,121 7,045 79,166 0.71 0.07 0.78 0.70 0.07 0.77 $ $ $ $ $ $ $ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our company, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the past three fiscal years, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this annual report. Our MD&A consists of the following sections: • Overview—a general description of our business and the casual dining segment of the restaurant industry • Results of Operations—an analysis of our consolidated statements of income for the three years presented in our consolidated financial statements • Liquidity and Capital Resources—an analysis of cash flows, including capital expenditures, aggregate contractual obligations, share repurchase activity, known trends that may impact liquidity, and the impact of inflation • Critical Accounting Estimates—a discussion of accounting policies that require critical judgments and estimates We report certain labor and related expenses in a separate caption on the consolidated statements of income titled restaurant labor. Restaurant labor includes all compensation-related expenses, including benefits and incentive compensation, for restaurant team members at the general manager level and below. Labor-related expenses attributable to multi-restaurant (or above-restaurant) supervision is included in restaurant expenses. OVERVIEW We are principally engaged in the ownership, operation, development, and franchising of the Chili’s Grill & Bar (“Chili’s”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. At June 26, 2013, we owned, operated, or franchised 1,591 restaurants. We are committed to strategies and initiatives that are centered on long-term sales and profit growth, enhancing the guest experience and team member engagement. These strategies are intended to differentiate our brands from the competition, reduce the costs associated with managing our restaurants and establish a strong presence for our brands in key markets around the world. Key economic indicators such as total employment, consumer confidence and spending levels continued to improve slightly this year; however, the casual dining industry experienced soft sales and traffic. As consumers regain some optimism, it appears that housing and large ticket items are taking priority in part due to historically low interest rates. Slow economic growth has challenged our industry for several years and as a result, our strategies and initiatives have been developed to provide a solid foundation for earnings growth going forward and are appropriate for all operating conditions. Our current initiatives are designed to drive profitable sales growth and improve the guest experience in our restaurants. We are investing in new kitchen equipment, operations software and remodel initiatives as the core pieces of our strategy. We have now completed the installation of new kitchen equipment in both our company- owned Chili’s restaurants and our domestic franchise restaurants. We anticipate that the upgraded equipment will consistently provide a high quality product at a faster pace, enhancing both profitability and guest satisfaction. Based on our robust testing process, we believe the usability and efficiency of the equipment results in significant labor savings over time. Also, the flexibility of our equipment allows for the development of new menu categories that we believe results in increased sales and guest traffic. F-2 All company-owned Chili’s restaurants are now operating with an integrated point of sale and back office software system that was designed to enhance the efficiency of our restaurant operations and reporting capabilities. Timely and more detailed reporting in our restaurants will result in improved inventory and labor management while reducing software maintenance costs. Additionally, our management team will have more timely visibility into operating performance and trends which will enhance decision making and improve profitability. We expect to complete the system installation in Maggiano’s restaurants by the end of the calendar year. We have remodeled a significant number of our company-owned Chili’s restaurants and plan to continue the initiative at a brisk pace. The remodel design is intended to revitalize Chili’s in a way which enhances the relevance of the brand and raises guest expectations regarding the quality of the experience. The design is contemporary while staying true to the Chili’s brand heritage. We believe that these updates will positively impact the guest perception of the restaurant in both the dining room and bar areas and provide a long-term positive impact to traffic and sales. We continually evaluate our menu at Chili’s to improve quality, freshness and value by introducing new items and improving existing favorites. Chili’s new menu innovations this year include several pizza and flatbread choices and lighter entree selections like Mango Chile Chicken and Mango Chile Tilapia. The dessert and appetizer sections of the menu have also been enhanced with new selections like the freshly baked skillet cookie, soft pretzel bread sticks and sweet potato fries. Our two for twenty dollars and lunch combo offerings, which provide our guests an excellent value, have been refreshed with new menu items including pizzas, flatbreads and Southwestern Mac ‘n’ Cheese with Grilled Chicken. Our new steak selections introduced last year also continue to have a high guest preference and have been enhanced with steak topper add-ons. An emphasis on new products, training and our reimaged bar also resulted in improved bar sales over last year. We believe these changes as well as our ability to develop new and innovative items will further enhance sales and drive incremental traffic. We are committed to offering a compelling everyday menu that provides items our guests prefer at a solid value. Improvements at Chili’s will have the most significant impact on the business; however, our results will also benefit through additional contributions from Maggiano’s and our global business. Maggiano’s continues to deliver sales growth and strong margin performance. Maggiano’s offers a compelling menu and great value with Classic Pasta and Marco’s Meal. Kitchen efficiency and inventory controls continue to enhance profitability and strengthen the business model. Global expansion allows further diversification which will enable us to build strength in a variety of markets and economic conditions. This expansion will come through acquisitions, franchise relationships, joint venture arrangements and equity investments, taking advantage of demographic and eating trends which we believe will accelerate in the international market over the next decade. We completed the acquisition of 11 Chili’s restaurants in Alberta, Canada this year and are excited about the potential growth for the Chili’s brand in Canada. Our growing franchise operations both domestically and internationally enable us to improve margins as royalty payments impact the bottom line. The casual dining industry is a competitive business which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs. Our priority remains increasing profitable growth over time in all operating environments. We have designed both operational and financial strategies to achieve this goal and in our opinion, improve shareholder value. Success with our initiatives to improve sales trends and operational effectiveness will enhance the profitability of our restaurants and strengthen our competitive position. The effective execution of our financial strategies, including repurchasing shares of our common stock, payment of quarterly dividends, disciplined use of capital and efficient management of operating expenses, will further enhance our profitability and return value to our shareholders. We remain confident in the financial health of our company, the long-term prospects of the industry, as well as our ability to perform effectively in a competitive marketplace and a variety of economic environments. F-3 RESULTS OF OPERATIONS FOR FISCAL YEARS 2013, 2012, AND 2011 The following table sets forth selected operating data as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of income: Fiscal Years 2013 2012 2011 Revenues: Company sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 97.2% 97.4% 97.2% 2.8% 2.6% 2.8% Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Operating Costs and Expenses: Company restaurants Cost of sales(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant labor(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . Company restaurant expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other gains and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.4% 28.0% 27.6% 32.3% 32.5% 33.0% 23.7% 23.6% 24.4% 83.4% 84.1% 85.0% 4.7% 4.4% 4.6% 4.8% 5.1% 4.7% 0.4% 0.3% 0.6% Total operating costs and expenses . . . . . . . . . . . . . . . . . . 91.0% 91.8% 92.6% Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0% 8.2% 7.4% 1.0% 0.9% 1.0% (0.1)% (0.1)% (0.2)% Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1% 2.4% 5.7% 7.4% 2.0% 5.4% 6.6% 1.5% 5.1% (1) As a percentage of company sales. REVENUES Beginning in fiscal 2013, revenues are presented in two separate captions on the consolidated statements of income to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales includes revenues generated by the operation of company-owned restaurants and gift card redemptions. Franchise and other revenues includes royalties, development fees, franchise fees, Maggiano’s banquet service charge income and certain gift card activity (breakage and discounts). Prior year revenue amounts have been reclassified to conform to the fiscal 2013 presentation. These reclassifications have no effect on total revenue or net income previously reported. F-4 Total revenues for fiscal 2013 increased to $2,846.1 million, a 0.9% increase from the $2,820.7 million generated for fiscal 2012 driven by a 0.7% increase in company sales and a 10.0% increase in franchise and other revenues. The increase in company sales was primarily attributable to an increase in comparable restaurant sales as follows: Fiscal Year Ended June 26, 2013 Comparable Sales Price Increase Mix Shift Traffic Capacity Company-owned . . . . . . . . . . . . . . . . . . . Chili’s . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s . . . . . . . . . . . . . . . . . . . Franchise(1) . . . . . . . . . . . . . . . . . . . . . . . U.S. . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Domestic(2) . . . . . . . . . . . . . . . . . . . . . . . System-wide(3) . . . . . . . . . . . . . . . . . . . . 0.5% 0.5% 0.5% 1.9% 1.6% 2.7% 0.8% 1.0% 1.5% 1.4% 1.8% 0.8% (1.8)% 0.0% 0.9% (1.8)% 0.0% 0.5% (1.8)% 0.0% (1) Revenues generated by franchisees are not included in revenues on the consolidated statements of income; however, we generate royalty revenue and advertising fees based on franchisee revenues, where applicable. We believe including franchisee comparable restaurants revenues provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development. (2) Domestic comparable restaurant sales percentages are derived from sales generated by company-owned and franchise operated Chili’s restaurants in the United States. (3) System-wide comparable restaurant sales are derived from sales generated by company- owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchisee operated restaurants. Chili’s company sales increased to $2,392.9 million in fiscal 2013, a 0.7% increase from $2,376.4 million in fiscal 2012. The increase was primarily driven by an increase in comparable restaurant sales of 0.5% resulting from increased menu pricing and mix, partially offset by traffic declines. Maggiano’s company sales increased to $373.7 million in fiscal 2013, a 0.5% increase from $372.0 million in fiscal 2012 driven by increased menu pricing and mix, partially offset by traffic declines. Franchise and other revenues increased to $79.5 million in fiscal 2013 compared to $72.3 million in fiscal 2012. The increase was driven primarily by a $5.2 million reduction in revenues in the prior year resulting from a change in the estimate of gift card breakage. Royalty revenues increased due to the net addition of nine franchised restaurants during fiscal 2013. Our franchisees generated approximately $1,632 million in sales in fiscal 2013. Total revenues for fiscal 2012 increased to $2,820.7 million, a 2.1% increase from the $2,761.4 million generated for fiscal 2011 driven by a 2.3% increase in company sales, partially offset by a 4.9% decrease in franchise and other revenues. The increase in company sales was primarily attributable to an increase in comparable restaurant sales as follows: Fiscal Year Ended June 27, 2012 Comparable Sales Price Increase Mix Shift Traffic Capacity Company-owned . . . . . . . . . . . . . . . . . . . Chili’s . . . . . . . . . . . . . . . . . . . . . . . Maggiano’s . . . . . . . . . . . . . . . . . . . Franchise(1) . . . . . . . . . . . . . . . . . . . . . . . U.S. . . . . . . . . . . . . . . . . . . . . . . . . . International . . . . . . . . . . . . . . . . . . . Domestic(2) . . . . . . . . . . . . . . . . . . . . . . . System-wide(3) . . . . . . . . . . . . . . . . . . . . 2.6% 2.5% 3.0% 2.9% 2.4% 4.2% 2.5% 2.7% F-5 1.5% (0.3)% 1.4% 1.4% (0.4)% 1.5% 0.0% 0.8% 2.2% (0.4)% (0.4)% 0.0% (1) Revenues generated by franchisees are not included in revenues on the consolidated statements of income; however, we generate royalty revenue and advertising fees based on franchisee revenues, where applicable. We believe including franchisee comparable restaurants revenues provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development. (2) Domestic comparable restaurant sales percentages are derived from sales generated by company-owned and franchise operated Chili’s restaurants in the United States. (3) System-wide comparable restaurant sales are derived from sales generated by company- owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchisee operated restaurants. Chili’s company sales increased to $2,376.4 million in fiscal 2012, a 2.2% increase from $2,324.4 million in fiscal 2011. The increase was primarily driven by an increase in comparable restaurant sales of 2.5% resulting from improved guest traffic and favorable menu pricing. Company sales were negatively impacted by a decrease in capacity of 0.4% for fiscal 2012 (as measured by average-weighted sales weeks) primarily due to three net restaurant closures during fiscal 2012. Maggiano’s company sales increased to $372.0 million in fiscal 2012, a 3.0% increase from $361.0 million in fiscal 2011 driven primarily by favorable menu pricing and improved guest traffic. Franchise and other revenues decreased to $72.3 million in fiscal 2012 compared to $75.9 million in fiscal 2011. The decrease was driven primarily by a $5.2 million reduction in revenues due to a change in the estimate of gift card breakage in fiscal 2012. The decrease was partially offset by an increase in royalty revenues related to the net addition of five franchised restaurants during fiscal 2012. Our franchisees generated approximately $1,610 million in sales in fiscal 2012. COSTS AND EXPENSES Cost of sales, as a percent of company sales, decreased 0.6% in fiscal 2013. Cost of sales was positively impacted by favorable commodity usage for proteins, decreased commodity usage by Maggiano’s resulting from efforts to reduce waste and increased menu pricing, partially offset by unfavorable commodity pricing for beef and pork. Cost of sales, as a percent of company sales, increased 0.4% in fiscal 2012. Cost of sales was negatively impacted by unfavorable commodity pricing for pork, beef, oils and dairy, partially offset by favorable commodity pricing for chicken and favorable menu pricing. Restaurant labor, as a percent of company sales, decreased 0.2% in fiscal 2013 primarily driven by reduced hourly labor costs resulting from the installation of new kitchen equipment and lower manager bonuses, partially offset by increased employee health insurance expenses. Restaurant labor, as a percent of company sales, decreased 0.5% in fiscal 2012 primarily driven by decreased hourly labor costs resulting from the installation of new kitchen equipment, changes in the vacation policy and sales leverage related to higher revenue, partially offset by higher salaries and payroll taxes. Restaurant expenses, as a percent of company sales, increased 0.1% in fiscal 2013 primarily driven by higher worker’s compensation insurance expenses and advertising, partially offset by lower repair and maintenance expenses resulting from cost control initiatives and limitations on discretionary spending, lower utilities expense and sales leverage on fixed costs related to higher revenue. Restaurant expenses, as a percent of company sales, decreased 0.8% in fiscal 2012 primarily driven by sales leverage on fixed costs related to higher revenue and lower repair and maintenance expenses. The decrease was also due to reduced credit card fees as a result of the Durbin Amendment, lower worker’s compensation insurance expenses due to favorable claims development and decreased utilities expenses due to lower rates and milder winter weather. Depreciation and amortization increased $6.4 million in fiscal 2013 primarily due to Chili’s reimage, kitchen equipment and software investments in existing restaurants, partially offset by an increase in fully F-6 depreciated assets. Depreciation and amortization decreased $3.4 million in fiscal 2012 primarily driven by an increase in fully depreciated assets, restaurant closures and impairments, partially offset by an increase in depreciation due to investments in existing restaurants and asset replacements. General and administrative expenses decreased $8.9 million in fiscal 2013 primarily due to lower performance based compensation, professional fees and relocation expenses, partially offset by higher stock- based compensation expense driven by a higher grant price in fiscal 2013. General and administrative expenses increased $10.6 million in fiscal 2012 primarily due to a decrease in income resulting from the expiration of the transaction services agreements with On The Border Mexican Grill & Cantina (“On The Border”) and Romano’s Macaroni Grill (“Macaroni Grill”) which was recorded as an offset to general and administrative expenses. The increase was also due to higher relocation expenses, performance based compensation and salary expenses. Other gains and charges in fiscal 2013 primarily included a charge of $15.8 million representing the remaining interest payments and unamortized debt issuance costs and discount resulting from the redemption of our 5.75% notes. Additionally, other gains and charges included $5.3 million of charges related to the impairment of the company-owned restaurant in Brazil and certain underperforming restaurants, $2.3 million of lease termination charges related to previously closed restaurants, and $2.2 million in severance and other benefits. These charges were partially offset by net gains of $11.2 million on the sale of assets, including an $8.3 million gain on the sale of our remaining 16.6% interest in Macaroni Grill and net gains of $2.9 million related to land sales. Other gains and charges in fiscal 2012 primarily included $3.2 million of lease termination charges related to previously closed restaurants, $3.1 million of charges related to the impairment of certain underperforming restaurants, $2.6 million of charges related to the impairment of certain liquor licenses, $1.3 million of litigation charges and $0.4 million of long-lived asset impairment charges resulting from closures. These charges were partially offset by net gains of $3.3 million related to land sales. Other gains and charges in fiscal 2011 consisted of $5.0 million in severance and other benefits resulting from organizational changes, $3.0 million in lease termination charges related to previously closed restaurants and $1.9 million in long-lived asset impairments related to underperforming restaurants that are continuing to operate. Additionally, we recorded $1.5 million related to litigation, partially offset by net gains of $1.7 million related to land sales. Interest expense increased $2.3 million in fiscal 2013 as a result of higher borrowing balances. Interest expense decreased $1.5 million in fiscal 2012 as a result of lower interest rates on our variable interest rate debt, partially offset by the impact of higher borrowing balances and a $0.4 million write-off of deferred financing fees related to the revision of the unsecured senior credit facility that was executed in August 2011. Other, net in fiscal 2013, 2012 and 2011 includes $2.3 million, $3.3 million and $5.3 million, respectively, of sublease income from Macaroni Grill and On The Border headquarters and franchisees as part of the respective sale agreements, as well as other subtenants. Other, net in fiscal 2011 also includes $0.6 million of interest income on short-term investment balances. INCOME TAXES The effective income tax rate increased to 29.1% for fiscal 2013 from 27.6% in fiscal 2012 primarily due to increased earnings, lower tax credits and lower favorable reserve adjustments related to resolved tax positions, partially offset by the increased tax benefit resulting from higher special item charges in the current year. The effective income tax rate increased to 27.6% for fiscal 2012 from 23.1% in fiscal 2011 primarily due to increased earnings and lower favorable reserve adjustments related to resolved tax positions. F-7 LIQUIDITY AND CAPITAL RESOURCES Cash Flows Cash Flow from Operating Activities During fiscal 2013, net cash flow provided by operating activities was $290.7 million compared to $303.4 million in the prior year. The decrease was driven by changes in working capital during the fiscal year, partially offset by an increase in earnings in the current year. The working capital deficit decreased to $191.6 million at June 26, 2013 from $203.6 million at June 27, 2012. The decrease was driven primarily by the timing of operational payments and decreased profit sharing and manager bonus accruals, partially offset by an increase in the gift card liability. Cash Flow Used In Investing Activities Net cash used in investing activities (in thousands): Payments for property and equipment . . . . . . . . . . . . . . . . . . . . Payments for purchase of restaurants . . . . . . . . . . . . . . . . . . . . Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in equity method investees . . . . . . . . . . . . . . . . . . . 2013 2012 $(131,531) (24,622) 17,157 1,152 0 $(125,226) (3,120) 8,112 0 (3,170) $(137,844) $(123,404) Net cash used in investing activities for fiscal 2013 increased to $137.8 million compared to $123.4 million in the prior year. Capital expenditures increased to $131.5 million for fiscal 2013 compared to $125.2 million for fiscal 2012 driven primarily by the ongoing Chili’s reimage program, purchases of new and replacement restaurant furniture and equipment and increased investments in new equipment and technology related to our kitchen retrofit initiative. We estimate that our capital expenditures during fiscal 2014 will be approximately $150 million to $160 million and will be funded entirely by cash from operations. We also purchased 11 Chili’s restaurants located in Alberta, Canada from a franchisee for $24.6 million in June 2013. Additionally, we received $17.2 million in proceeds from the sale of assets which primarily consisted of $8.4 million related to land sales and $8.3 million from the sale of our remaining interest in Macaroni Grill. Cash Flow Used In Financing Activities Net cash used in financing activities (in thousands): Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on revolving credit facility . . . . . . . . . . . . . . . . . . . . Borrowings on revolving credit facility . . . . . . . . . . . . . . . . . . . Payments of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuances of treasury stock . . . . . . . . . . . . . . . . Excess tax benefits from stock-based compensation . . . . . . . . . Payments for deferred financing costs . . . . . . . . . . . . . . . . . . . . 2013 2012 $ 549,528 (333,384) (316,380) (150,000) 110,000 (56,343) 41,190 8,778 (5,969) $ 70,000 (287,291) (18,749) 0 40,000 (50,081) 43,416 1,406 (1,620) $(152,580) $(202,919) F-8 Net cash used in financing activities for fiscal 2013 decreased to approximately $152.6 million compared to $202.9 million in the prior year primarily due to $549.5 million in proceeds related to the $550 million public debt offering and increased borrowing on the revolving credit facility. The decrease is partially offset by payments to retire the 5.75% senior notes and pay-off of the revolving credit facility balance as well as higher spending on share repurchases. We repurchased approximately 9.3 million shares of our common stock for $333.4 million during fiscal to the end of the fiscal year, we repurchased approximately 1.3 million shares for 2013. Subsequent approximately $53 million. In May 2013, we issued $550.0 million of notes consisting of two tranches—$250.0 million of 2.60% notes due in May 2018 and $300.0 million of 3.88% notes due in May 2023. We received proceeds totaling approximately $549.5 million prior to debt issuance costs and utilized the proceeds to redeem the 5.75% notes due in June 2014, pay down the revolver and fund share repurchases. The new notes require semi-annual interest payments beginning in the second quarter of fiscal 2014. Our credit facility includes a $250 million revolver and a $250 million term loan and matures in August 2016. During the first two quarters of fiscal 2013, $110.0 million was drawn from the revolver to fund share repurchases. We subsequently repaid the outstanding balance of $150.0 million in the fourth quarter of fiscal 2013 leaving $250 million of credit available under the revolver as of June 26, 2013. During fiscal 2013, we paid our required term loan installments totaling $25.0 million bringing the outstanding balance to $212.5 million. In July 2013, an additional $60 million was borrowed from the revolver primarily to fund share repurchases discussed above. The term loan and revolving credit facility bear interest at LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.50%. Based on our current credit rating, we are paying interest at a rate of LIBOR plus 1.63%. One month LIBOR at June 26, 2013 was approximately 0.20%. As of June 26, 2013, we were in compliance with all financial debt covenants. As of June 26, 2013, our credit rating by Standard and Poor’s (“S&P”) was BBB- (investment grade) with a stable outlook. Our corporate family rating by Moody’s was Ba1 (non-investment grade) and our senior unsecured rating was Ba2 (non-investment grade) with a stable outlook. Our credit rating by Fitch Ratings (“Fitch”) was BBB- (investment grade) with a stable outlook. Our goal is to maintain our investment grade rating from S&P and Fitch and ultimately regain our investment grade rating from Moody’s. We paid dividends of $56.3 million to common stock shareholders in fiscal 2013 compared to $50.1 million in dividends paid in fiscal 2012. Our Board of Directors approved a 25 percent increase in the quarterly dividend from $0.16 to $0.20 per share effective with the September 2012 dividend. Additionally, we declared a quarterly dividend late in fiscal 2013 which was paid early in fiscal 2014 on June 27, 2013. Subsequent to the end of the fiscal year, our Board of Directors approved a 20% increase in the quarterly dividend from $0.20 to $0.24 per share effective with the September 2013 dividend which was declared in August 2013. We will continue to target a 40 percent dividend payout ratio to provide additional return to shareholders. In August 2012, our Board of Directors authorized a $500.0 million increase to our existing share repurchase program resulting in total authorizations of $3,385.0 million. As of June 26, 2013, approximately $333 million was available under our share repurchase authorizations. Subsequent to the end of the fiscal year, our Board of Directors authorized an additional $200 million in share repurchases, bringing the total authorization to $3,585.0 million. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. Repurchased common stock is reflected as a reduction of shareholders’ equity. During fiscal 2013, approximately 1.8 million stock options were exercised resulting in cash proceeds of $41.2 million. F-9 We have evaluated ways to monetize the value of our owned real estate and determined that the alternatives considered are more costly than other financing options currently available due to a combination of the income tax impact and higher effective borrowing rates. Cash Flow Outlook We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations. We are not aware of any other event or trend that would potentially affect our liquidity. In the event such a trend develops, we believe that there are sufficient funds available under our credit facility and from our internal cash generating capabilities to adequately manage our ongoing business. Payments due under our contractual obligations for outstanding indebtedness, purchase obligations as defined by the Securities and Exchange Commission (“SEC”), and the expiration of the credit facility as of June 26, 2013 are as follows: Long-term debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations(b) . . . . . . . . . . . . . . . . . . . . . . . Payments Due by Period (in thousands) Total $910,786 70,479 472,142 117,555 Less than 1 Year $ 43,125 5,581 102,832 26,213 1-3 Years 3-5 Years $ 86,250 11,498 174,014 24,477 $423,579 11,230 96,207 21,034 More than 5 Years $357,832 42,170 99,089 45,831 Amount of Revolving Credit Facility Expiration by Period (in thousands) Total Commitment Less than 1 year 1-3 Years 3-5 Years More than 5 Years Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . $250,000 $ 0 $ 0 $250,000 $ 0 (a) Long-term debt consists of principal amounts owed on the five-year term loan, 2.60% notes and 3.88% notes, as well as remaining interest payments on the 2.60% and 3.88% notes totaling $148.8 million. (b) A “purchase obligation” is defined as an agreement to purchase goods or services that is enforceable and legally binding on us and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase obligations primarily consist of long-term obligations for the purchase of fountain beverages, professional services contracts and energy, and exclude agreements that are cancelable without significant penalty. In addition to the amounts shown in the table above, $6.4 million of unrecognized tax benefits have been recorded as liabilities. The timing and amounts of future cash payments related to these liabilities are uncertain. IMPACT OF INFLATION We have experienced impact from inflation. Inflation has caused increased food, labor and benefits costs and has increased our operating expenses. To the extent permitted by competition, increased costs are recovered through a combination of menu price increases and reviewing, then implementing, alternative products or processes, or by implementing other cost reduction procedures. CRITICAL ACCOUNTING ESTIMATES Our significant accounting policies are disclosed in Note 1 to our consolidated financial statements. The following discussion addresses our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results, and that require significant judgment. F-10 Stock Based Compensation We measure and recognize compensation cost at fair value for all share-based payments. We determine the fair value of our performance shares using a Monte Carlo simulation model. The Monte Carlo method is a statistical modeling technique that requires highly judgmental assumptions regarding our future operating performance compared to our plan designated peer group in the future. The simulation is based on a probability model and market-based inputs that are used to predict future stock returns. We use the historical operating performance and correlation of stock performance to the S&P 500 composite index of us and our peer group as inputs to the simulation model. These historical returns could differ significantly in the future and as a result, the fair value assigned to the performance shares could vary significantly to the final payout. We believe the Monte Carlo simulation model provides the best evidence of fair value at the grant date and is an appropriate technique for valuing share-based awards. We determine the fair value of our stock option awards using the Black-Scholes option valuation model. The Black-Scholes model requires judgmental assumptions including expected life and stock price volatility. We base our expected life assumptions on historical experience regarding option life. Stock price volatility is calculated based on historical prices and the expected life of the options. We recognize compensation expense for only the portion of share-based awards that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from our historical forfeitures of similar awards. Income Taxes In determining net income for financial statement purposes, we make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. When considered necessary, we record a valuation allowance to reduce deferred tax assets to a balance that is more likely than not to be recognized. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end. We record a liability for unrecognized tax benefits resulting from tax positions taken, or expected to be taken, in an income tax return. We recognize any interest and penalties related to unrecognized tax benefits in income tax expense. Significant judgment is required in assessing, among other things, the timing and amounts of deductible and taxable items. Tax reserves are evaluated and adjusted as appropriate, while taking into account the progress of audits of various taxing jurisdictions. In addition to the risks related to the effective tax rate described above, the effective tax rate reflected in forward-looking statements is based on current tax law. Any significant changes in the tax laws could affect these estimates. Property and Equipment Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the assets are based upon our expectations for the period of time that the asset will be used to generate revenues. We periodically review the assets for changes in circumstances, which may impact their useful lives. Impairment of Long-Lived Assets We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on projected discounted future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. F-11 Impairment of Goodwill We assess the recoverability of goodwill related to our restaurant brands on an annual basis or more often if circumstances or events indicate impairment may exist. We consider our restaurants brands, Chili’s and Maggiano’s, to be both our operating segments and reporting units. The impairment test is a two-step process. Step one includes comparing the fair value of our reporting units to their carrying value. If the fair value of the reporting unit exceeds the carrying value, then the goodwill balance is not impaired and no further evaluation is required. If the carrying value of the reporting unit exceeds its fair value, impairment may exist and performing step two is necessary to determine the impairment loss. The amount of impairment would be determined by performing a hypothetical analysis resulting in an implied goodwill value by performing a fair value allocation as if the unit were being acquired in a business combination. This implied value would be compared to the carrying value to determine the amount of impairment loss, if any. We determine fair value based on projected discounted future operating cash flows of the restaurant brands using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. We make assumptions regarding future profits and cash flows, expected growth rates, terminal values and other factors which could significantly impact the fair value calculations. In the event that these assumptions change in the future, we may be required to record impairment charges related to goodwill. The fair value of our reporting units was substantially in excess of the carry value as of our fiscal 2013 goodwill impairment test that was performed at the end of the second quarter. No indicators of impairment were identified from the date of our impairment test through the end of fiscal year 2013. Self-Insurance We are self-insured for certain losses related to health, general liability and workers’ compensation. We maintain stop loss coverage with third party insurers to limit our total exposure. The self-insurance liability represents an estimate of the ultimate cost of claims incurred and unpaid as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed on a quarterly basis to ensure that the liability is appropriate. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted. Gift Card Revenue Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when the gift card is redeemed by the holder. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on our historical gift card redemption patterns and considering our gift cards have no expiration dates or dormancy fees, we can reasonably estimate the amount of gift cards for which redemption is remote and record breakage income based on this estimate. We recognize breakage income within the Franchise and other revenues caption in the consolidated statements of income. We update our estimate of our breakage rate periodically and, if necessary, adjust the deferred revenue balance accordingly. If actual redemption patterns vary from our estimate, actual gift card breakage income may differ from the amounts recorded. Recent Accounting Pronouncements In July 2012, the Financial Accounting Standards Board (“FASB”) updated its guidance on testing indefinite-lived intangible assets for impairment to allow companies the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Companies electing to perform a qualitative assessment are no longer required to calculate the fair value of an indefinite-lived intangible asset unless the company determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The updated guidance is effective for annual and interim impairment tests performed in fiscal years beginning after September 15, 2012, which requires that we adopt these provisions beginning in the first quarter of fiscal 2014. We do not expect the adoption of this updated guidance to have a significant impact on our consolidated financial statements. F-12 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. The variable rate financial instruments consist of the outstanding borrowings on our term loan and revolving credit facility. At June 26, 2013, $212.5 million was outstanding under the term loan and no amount was outstanding under the revolving credit facility. The impact on our annual results of operations of a one-point interest rate change on the outstanding balance of these variable rate financial instruments as of June 26, 2013 would be approximately $2.1 million. We purchase certain commodities such as beef, pork, poultry, seafood, produce, dairy and natural gas. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid. This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets. F-13 BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Fiscal Years 2013 2012 2011 Revenues: Company sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Franchise and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,766,618 79,480 $2,748,462 72,260 $2,685,441 75,945 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,846,098 2,820,722 2,761,386 Operating Costs and Expenses: Company restaurants Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restaurant expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company restaurant expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other gains and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758,377 892,413 655,214 2,306,004 131,481 134,538 17,300 769,729 891,910 649,830 2,311,469 125,054 143,388 8,974 742,283 886,559 655,060 2,283,902 128,447 132,834 10,783 Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . 2,589,323 2,588,885 2,555,966 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,775 29,118 (2,658) 230,315 66,956 231,837 26,800 (3,772) 208,809 57,577 205,420 28,311 (6,220) 183,329 42,269 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 163,359 $ 151,232 $ 141,060 Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . $ $ 2.28 2.20 $ $ 1.93 1.87 $ $ 71,788 74,158 78,559 80,664 1.55 1.53 90,807 92,320 Dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.80 $ 0.64 $ 0.56 See accompanying notes to consolidated financial statements. F-14 BRINKER INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) 2013 2012 ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 59,367 37,842 24,628 71,824 4,930 0 59,103 43,387 25,360 66,359 1,055 2,918 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,591 198,182 Property and Equipment: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction-in-progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,581 1,435,426 580,115 20,588 152,382 1,399,905 556,304 11,211 Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,183,710 (1,147,895) 2,119,802 (1,076,238) Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,035,815 1,043,564 Other Assets: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,103 24,064 52,030 218,197 125,604 20,231 51,827 197,662 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,452,603 $ 1,439,408 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Current installments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt, less current installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and Contingencies (Notes 9 and 14) Shareholders’ Equity: Common stock—250,000,000 authorized shares; $.10 par value; 176,246,649 shares issued and 67,444,099 shares outstanding at June 26, 2013 and 176,246,649 shares issued and 74,342,115 shares outstanding at June 27, 2012 . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,596 93,326 268,444 845 390,211 780,121 132,914 27,334 100,531 273,884 0 401,749 587,890 139,896 17,625 477,420 2,217,623 17,625 466,781 2,112,858 2,712,668 2,597,264 Less treasury stock, at cost (108,802,550 shares at June 26, 2013 and 101,904,534 shares at June 27, 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,563,311) (2,287,391) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,357 309,873 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,452,603 $ 1,439,408 See accompanying notes to consolidated financial statements. F-15 BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Balances at June 30, 2010 . . . 101,572 $17,625 $465,721 $1,923,561 $(1,678,159) $ Net income and comprehensive income . . . . 0 Dividends ($0.56 per share) . . . . . . . . . . . . . . . . . Stock-based compensation . . . Purchases of treasury stock . . Issuances of common stock . . Excess tax shortfall from stock-based compensation . . . . . . . . . . . Balances at June 29, 2011 . . . Net income and Dividends ($0.64 per share) . . . . . . . . . . . . . . . . . Stock-based compensation . . . Purchases of treasury stock . . Issuances of common stock . . Excess tax benefit from stock- based compensation . . . . . . Balances at June 27, 2012 . . . Net income and 0 0 (20,585) 1,951 0 0 0 (10,966) 2,370 0 comprehensive income . . . . 0 82,938 17,625 463,688 2,013,189 (2,055,592) 0 0 0 0 0 0 0 141,060 0 0 13,381 (1,788) (9,821) (51,432) 0 0 0 0 0 (420,311) 42,878 (3,805) 0 0 0 0 0 0 0 0 0 151,232 0 0 13,461 (2,901) (9,175) (51,563) 0 0 0 0 0 (284,390) 52,591 1,708 0 0 74,342 17,625 466,781 2,112,858 (2,287,391) comprehensive income . . . . 0 Dividends ($0.80 per share) . . . . . . . . . . . . . . . . . Stock-based compensation . . . Purchases of treasury stock . . Issuances of common stock . . Excess tax benefit from stock- based compensation . . . . . . 0 0 (9,176) 2,278 0 0 0 0 0 0 0 0 163,359 0 0 16,610 (5,565) (10,709) (58,594) 0 0 0 0 0 (327,819) 51,899 10,303 0 0 Balances at June 26, 2013 . . . 67,444 $17,625 $477,420 $2,217,623 $(2,563,311) $ See accompanying notes to consolidated financial statements. F-16 Total $ 728,748 141,060 (51,432) 13,381 (422,099) 33,057 (3,805) 438,910 151,232 (51,563) 13,461 (287,291) 43,416 1,708 309,873 163,359 (58,594) 16,610 (333,384) 41,190 10,303 $ 149,357 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 BRINKER INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Fiscal Years 2013 2012 2011 $ 163,359 $ 151,232 $ 141,060 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructure charges and other impairments . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (gain) loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (Earnings) on equity investments . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,481 11,425 (4,793) (6,905) 15,909 851 363 5,398 908 82 (4,115) 749 (9,339) (9,995) (4,690) 125,054 10,396 11,808 490 13,461 1,350 799 608 (15) (2,984) 489 (3,874) 12,188 (17,197) (367) 128,447 8,427 15,277 (401) 12,789 (1,802) 405 1,255 1,341 (2,150) 406 (3,976) (21,515) (15,178) (4,397) Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . 290,688 303,438 259,988 Cash Flows from Investing Activities: Payments for property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments for purchase of restaurants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in equity method investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (131,531) (24,622) 17,157 1,152 0 (125,226) (3,120) 8,112 0 (3,170) (70,361) 0 8,696 0 (2,896) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (137,844) (123,404) (64,561) Cash Flows from Financing Activities: Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowings on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuances of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits from stock-based compensation . . . . . . . . . . . . . . . . . . . Payments for deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549,528 (333,384) (316,380) (150,000) 110,000 (56,343) 41,190 8,778 (5,969) 70,000 (287,291) (18,749) 0 40,000 (50,081) 43,416 1,406 (1,620) 0 (422,099) (16,127) 0 0 (53,185) 33,057 291 0 Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . (152,580) (202,919) (458,063) Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . 264 59,103 (22,885) 81,988 (262,636) 344,624 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,367 $ 59,103 $ 81,988 See accompanying notes to consolidated financial statements. F-17 BRINKER INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of Operations We are principally engaged in the ownership, operation, development, and franchising of the Chili’s Grill & Bar (“Chili’s”) and Maggiano’s Little Italy (“Maggiano’s”) restaurant brands. At June 26, 2013, we owned, operated, or franchised 1,591 restaurants in the United States and 32 countries and two territories outside of the United States. (b) Basis of Presentation Our consolidated financial statements include the accounts of Brinker International, Inc. and our wholly- owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We have a 52/53 week fiscal year ending on the last Wednesday in June. Fiscal years 2013, 2012, and 2011 which ended on June 26, 2013, June 27, 2012, and June 29, 2011, respectively, each contained 52 weeks. Beginning in fiscal 2013, revenues are presented in two separate captions on the consolidated statements of income to provide more clarity around company-owned restaurant revenue and operating expense trends. Company sales includes revenues generated by the operation of company-owned restaurants and gift card redemptions. Franchise and other revenues includes royalties, development fees, franchise fees, Maggiano’s banquet service charge income and certain gift card activity (breakage and discounts). Prior year revenue amounts have been reclassified to conform to the fiscal 2013 presentation. These reclassifications have no effect on total revenue or net income previously reported. Certain other prior year balances in the accompanying consolidated balance sheets have been reclassified to conform with fiscal 2013 presentation. These reclassifications have no effect on our net income as previously reported and an immaterial impact on our prior year consolidated balance sheets. We report certain labor and related expenses in a separate caption on the consolidated statements of income titled restaurant labor. Restaurant labor includes all compensation-related expenses, including benefits and incentive compensation, for restaurant team members at the general manager level and below. Labor-related expenses attributable to multi-restaurant (or above-restaurant) supervision is included in restaurant expenses. (c) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those estimates. (d) Revenue Recognition We record revenue from the sale of food, beverages and alcohol as products are sold. Initial fees received from a franchisee to establish a new franchise are recognized as income when we have performed our obligations required to assist the franchisee in opening a new franchise restaurant, which is generally upon the opening of such restaurant. Fees received for development arrangements are recognized as income upon payment of the fees. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. F-18 Proceeds from the sale of gift cards are recorded as deferred revenue and recognized as revenue when the gift card is redeemed by the holder. Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Based on our historical gift card redemption patterns and considering our gift cards have no expiration dates or dormancy fees, we can reasonably estimate the amount of gift cards for which redemption is remote and record breakage income based on this estimate. We recognize breakage income within franchise and other revenues in the consolidated statements of income. We update our estimate of our breakage rate periodically and, if necessary, adjust the deferred revenue balance accordingly. (e) Fair Value Measurements Fair value is defined as the price that we would receive to sell an asset or pay to transfer a liability in an the orderly transaction between market participants on the measurement date. In determining fair value, accounting standards establish a three level hierarchy for inputs used in measuring fair value, as follows: • Level 1—inputs are quoted prices in active markets for identical assets or liabilities. • Level 2—inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities. • Level 3—inputs are unobservable and reflect our own assumptions. (f) Cash and Cash Equivalents Our policy is to invest cash in excess of operating requirements in income-producing investments. Income- producing investments with original maturities of three months or less are reflected as cash equivalents. (g) Accounts Receivable Accounts receivable, net of the allowance for doubtful accounts, represents their estimated net realizable value. Provisions for doubtful accounts are recorded based on management’s judgment regarding our ability to collect as well as the age of the receivables. Accounts receivable are written off when they are deemed uncollectible. (h) Inventories Inventories consist of food, beverages and supplies. During fiscal 2013, we completed the implementation of a new restaurant information system for all company-owned Chili’s restaurants and began the implementation process for all Maggiano’s restaurants. Inventories located at the converted restaurants are valued using the first- in, first-out or “FIFO” method. All other inventories are stated at the lower of cost (weighted average cost method) or market. The change in inventory valuation methods did not have a material impact on our financial statements. (i) Property and Equipment Property and equipment is stated at cost. Buildings and leasehold improvements are depreciated using the straight-line method over the lesser of the life of the lease, including renewal options, or the estimated useful lives of the assets, which range from 5 to 20 years. Furniture and equipment are depreciated using the straight- line method over the estimated useful lives of the assets, which range from 3 to 10 years. Routine repair and maintenance costs are expensed when incurred. Major replacements and improvements are capitalized. We review the carrying amount of property and equipment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on F-19 projected discounted future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. Impairment charges are included in other gains and charges in the consolidated statements of income. (j) Operating Leases Rent expense for leases that contain scheduled rent increases is recognized on a straight-line basis over the lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty such that the renewal appears reasonably assured. The straight-line rent calculation and rent expense includes the rent holiday period, which is the period of time between taking control of a leased site and the rent commencement date. Contingent rents are generally amounts due as a result of sales in excess of amounts stipulated in certain restaurant leases and are included in rent expense as they are incurred. Landlord contributions are recorded when received as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the lesser of the lease term, including renewal options, or 20 years. (k) Advertising Advertising production costs are expensed in the period when the advertising first takes place. Other advertising costs are expensed as incurred. Advertising costs, net of advertising contributions from franchisees, were $82.8 million, $80.4 million and $80.2 million in fiscal 2013, 2012, and 2011, respectively, and are included in restaurant expenses in the consolidated statements of income. (l) Goodwill Goodwill is not subject to amortization, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill has been assigned to reporting units for purposes of impairment testing. Our two restaurant brands, Chili’s and Maggiano’s, are both reporting units and operating segments. We have established that the appropriate level to evaluate goodwill is at the operating segment level. The menu items, services offered and food preparation are virtually identical at each restaurant within the reporting unit and our targeted customer is consistent across each brand. We maintain a centralized purchasing department which manages all purchasing and distribution for our restaurants. In addition, contracts for our food supplies are negotiated at a consolidated level in order to secure the best prices and maintain similar quality across all of our brands. Local laws, regulations and other issues may result in slightly different legal and regulatory environments; however, the overall regulatory climate within and across our operating segments is quite similar. As such, we believe that aggregating components is appropriate for the evaluation of goodwill. Goodwill impairment tests consist of a comparison of each reporting unit’s fair value with its carrying value. We determine fair value based on a combination of market based values and projected discounted future operating cash flows of the restaurant brands using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. If the carrying value of a reporting unit exceeds its fair value, goodwill is written down to its implied fair value. We determined that there was no goodwill impairment during our annual test and no indicators of impairment were identified through the end of fiscal year 2013. See Note 5 for additional disclosures related to goodwill. We have occasionally acquired restaurants from our franchisees. Goodwill from these acquisitions represents the excess of the cost of a business acquired over the net amounts assigned to assets acquired, including identifiable intangible assets, primarily reacquired franchise rights. In connection with the sale of restaurants, we have allocated goodwill from the reporting unit, or restaurant brand, to the disposal group in the determination of the gain or loss on the disposition. The allocation was based on the relative fair values of the disposal group and the portion of the reporting unit that was retained. We have recognized reacquired rights in connection with previous business combinations; however, we have not sold any restaurants acquired in those F-20 combinations. When we have disposed a restaurant brand and all related restaurants, the entire goodwill balance associated with the reporting unit or brand has been included in the disposal group for purposes of determining the gain or loss on the disposition. (m) Liquor Licenses The costs of obtaining non-transferable liquor licenses from local government agencies are expensed over the specified term of the license. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor licenses are reviewed for impairment semi-annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is not recoverable, we record an impairment charge for the excess of the carrying amount over the fair value. We determine fair value based on prices in the open market for licenses in same or similar jurisdictions. Impairment charges are included in other gains and charges in the consolidated statements of income. (n) Sales Taxes Sales taxes collected from guests are excluded from revenues. The obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities. (o) Self-Insurance Program We utilize a paid loss self-insurance plan for health, general liability and workers’ compensation coverage. Predetermined loss limits have been arranged with insurance companies to limit our per occurrence cash outlay. Accrued and other liabilities include the estimated incurred but unreported costs to settle unpaid claims and estimated future claims. (p) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (q) Stock-Based Compensation We measure and recognize compensation cost at fair value for all share-based payments, including stock options. We record compensation expense using a graded-vesting schedule over the vesting period, or to the date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach). Certain employees are eligible to receive stock options, performance shares, restricted stock and restricted stock units, while non-employee members of the Board of Directors are eligible to receive stock options, restricted stock and restricted stock units. Performance shares represent a right to receive shares of common stock upon satisfaction of performance goals at the end of a three-year cycle. Performance shares are paid out in common stock and will be fully vested upon issuance. The fair value of performance shares is determined on the date of grant based on a Monte Carlo simulation model. The fair value of restricted stock and restricted stock units are based on our closing stock price on the date of grant. F-21 Stock-based compensation expense totaled approximately $16.6 million, $13.5 million and $13.4 million for fiscal 2013, 2012 and 2011, respectively. The total income tax benefit recognized in the consolidated statements of income related to stock-based compensation expense was approximately $6.6 million, $5.1 million and $5.7 million during fiscal 2013, 2012 and 2011, respectively. The weighted average fair values of option grants were $12.94, $9.35 and $7.20 during fiscal 2013, 2012 and 2011, respectively. The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions: Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.4% 0.7% 56.7% 0.9% 55.6% 1.6% 5 years 5 years 5 years 2.4% 2.6% 3.1% 2013 2012 2011 Expected volatility and the expected life of stock options are based on historical experience. The risk-free rate is based on the yield of a Treasury Note with a term equal to the expected life of the stock options. (r) Preferred Stock Our Board of Directors is authorized to provide for the issuance of 1.0 million preferred shares with a par value of $1.00 per share, in one or more series, and to fix the voting rights, liquidation preferences, dividend rates, conversion rights, redemption rights, and terms, including sinking fund provisions, and certain other rights and preferences. As of June 26, 2013, no preferred shares were issued. (s) Shareholders’ Equity In August 2012, our Board of Directors authorized a $500.0 million increase to our existing share repurchase program resulting in total authorizations of $3,385.0 million. We repurchased approximately 9.3 million shares of our common stock for $333.4 million during fiscal 2013. As of June 26, 2013, approximately $333 million was available under our share repurchase authorizations. Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings and planned investment and financing needs. Repurchased common stock is reflected as a reduction of shareholders’ equity. During fiscal 2013, approximately 1.8 million stock options were exercised resulting in cash proceeds of $41.2 million. We paid dividends of $56.3 million to common stock shareholders during fiscal 2013, compared to $50.1 million in the prior year. Additionally, we declared a quarterly dividend of $13.5 million, or $0.20 per share, in June 2013 which was paid on June 27, 2013. (t) Comprehensive Income Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Fiscal 2013, 2012 and 2011 comprehensive income consists of net income. (u) Net Income Per Share Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or F-22 converted into common stock. For the calculation of diluted net income per share, the basic weighted average number of shares is increased by the dilutive effect of stock options and restricted share awards, determined using the treasury stock method. We had approximately 193,000 stock options and restricted share awards outstanding at June 26, 2013, 287,000 stock options and restricted share awards outstanding at June 27, 2012, and 1.7 million stock options and restricted share awards outstanding at June 29, 2011 that were not included in the dilutive earnings per share calculation because the effect would have been antidilutive. (v) Segment Reporting Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Two or more operating segments may be aggregated into a single operating segment if they have similar economic characteristics and are similar in the following areas: • The nature of products and services • Nature of production processes • Type or class of customer • Methods used to distribute products or provide services • The nature of the regulatory environment, if applicable Our two brands have similar types of products, contracts, customers and employees and all operate as full- service restaurants offering lunch and dinner in the casual-dining segment of the industry. In addition, we have similar long-term average margins across our brands. Therefore, we believe we meet the criteria for aggregating operating segments into a single reporting segment. 2. ACQUISITION OF CHILI’S RESTAURANTS On June 1, 2013, we completed the acquisition of 11 Chili’s restaurants in Alberta, Canada from an existing franchisee for $24.6 million in cash. The results of operations of the Canadian restaurants are included in our consolidated financial statements from the date of acquisition. The assets and liabilities of the Canadian restaurants were recorded at their respective fair values as of the date of acquisition. We are in the process of evaluating the fair value of the reacquired franchise rights through internal studies and third-party valuations. When the valuation process is complete, we will record the reacquired franchise rights at their estimated fair value with a corresponding decrease to goodwill. The preliminary allocation of the purchase price is as follows (in thousands): Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 341 8,017 16,499 585 Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,442 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 795 820 Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,622 F-23 The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. We expect the majority of the goodwill balance to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected as a result of the acquisition, including sales and unit growth opportunities. As a result of the acquisition, we incurred expenses of approximately $0.4 million during fiscal 2013, which are included in other gains and charges in our consolidated statement of income. Pro-forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of the Canadian restaurants on our consolidated financial statements. 3. INVESTMENTS AND OTHER DISPOSITIONS (a) Investments We have a joint venture agreement with CMR, S.A.B. de C.V. to develop 50 Chili’s restaurants in Mexico. We made a $1.6 million capital contribution to the joint venture in fiscal 2011. At June 26, 2013, 32 Chili’s restaurants were operating in the joint venture. We account for the Mexico joint venture investment under the equity method of accounting and record our share of the net income or loss of the investee within operating income since their operations are similar to our ongoing operations. These amounts have been included in restaurant expense in our consolidated statements of income due to the immaterial nature of the amounts. In fiscal 2011, we entered into a joint venture investment with BTTO Participacoes Ltda (“BTTO”) to develop Chili’s restaurants in Brazil. We made capital contributions of $1.6 million and $1.3 million to the joint venture during fiscal 2012 and 2011, respectively. One restaurant opened in September 2011. We accounted for this investment under the equity method of accounting until April 2012 when we purchased BTTO’s interest in the joint venture for approximately $1.5 million and began consolidating the entity’s results. In the fourth quarter of fiscal 2013, we fully impaired the property and equipment and recorded a charge in other gains and charges in the consolidated statement of income. The restaurant was subsequently closed in July 2013. (b) Other Dispositions In April 2013, we sold our remaining 16.6% ownership interest in Romano’s Macaroni Grill (“Macaroni Grill”) for approximately $8.3 million in cash proceeds. This amount was recorded as a gain in other gains and charges in the consolidated statement of income in fiscal 2013. 4. OTHER GAINS AND CHARGES . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt Gain on the sale of assets, net (see Note 3) . . . . . . . . . . . . . Restaurant impairment charges . . . . . . . . . . . . . . . . . . . . . . . Restaurant closure charges . . . . . . . . . . . . . . . . . . . . . . . . . . Severance and other benefits . . . . . . . . . . . . . . . . . . . . . . . . Impairment of liquor licenses . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 2012 2011 $ 15,768 (11,228) 5,276 3,637 2,235 170 1,442 $ 0 (3,306) 3,139 4,655 0 2,641 1,845 $ 0 (2,100) 1,937 4,515 5,034 0 1,397 $ 17,300 $ 8,974 $10,783 In June 2013, we redeemed our 5.75% notes due May 2014, resulting in a charge of $15.8 million representing the remaining interest payments and unamortized debt issuance costs and discount. See Note 8 for additional disclosures related to fiscal 2013 and 2012 activity. F-24 In fiscal 2013, we recognized gains of $11.2 million on the sale of assets, including an $8.3 million gain on the sale of our remaining interest in Macaroni Grill and net gains of $2.9 million related to land sales. We recorded impairment charges for the excess of the carrying amount of property and equipment over the fair value related to underperforming restaurants that are continuing to operate. Restaurant impairment charges were $5.3 million, $3.1 million and $1.9 million during fiscal 2013, 2012 and 2011, respectively. The fiscal 2013 charge of $5.3 million primarily includes the impairment of the company-owned restaurant in Brazil. Additionally, we recorded $0.2 million and $2.6 million of impairment charges in fiscal 2013 and 2012, respectively, for the excess of the carrying amount of certain transferable liquor licenses over their fair value. See Note 10 for fair value disclosures related to the fiscal 2013 and 2012 charges. We recorded charges of $3.6 million, $4.7 million and $4.5 million during fiscal 2013, 2012, and 2011, respectively, primarily consisting of lease termination charges associated with restaurants closed in prior years. Additionally, the charge for fiscal 2012 included $0.4 million of long-lived asset impairment charges resulting from closures. During fiscal 2013 and 2011, we made organizational changes designed to better align our staff in support of our strategic goals and evolving business model. We incurred $2.2 million and $5.0 million in severance and other benefits resulting from these actions in fiscal 2013 and 2011, respectively. The severance charges are net of income related to the forfeiture of stock-based compensation awards. 5. GOODWILL The changes in the carrying amount of goodwill for the fiscal years ended June 26, 2013 and June 27, 2012 are as follows (in thousands): Balance at beginning of year: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated impairment losses(a) $188,438 (62,834) $186,923 (62,834) 2013 2012 Changes in goodwill: Additions(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,499 1,515 Balance at end of year: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . 204,937 (62,834) 188,438 (62,834) $142,103 $125,604 125,604 124,089 (a) The impairment losses recorded in prior years are related to restaurant brands that we no longer own. (b) Additions for the current year reflect the preliminary goodwill acquired as a result of the purchase of restaurants from a franchisee. F-25 6. ACCRUED AND OTHER LIABILITIES Accrued liabilities consist of the following (in thousands): Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities consist of the following (in thousands): 2013 2012 $ 77,238 91,893 18,613 17,743 14,119 13,511 35,327 $ 87,414 86,332 18,785 17,130 14,257 11,948 38,018 $268,444 $273,884 2013 2012 Straight-line rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Landlord contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,150 38,602 24,029 5,055 7,078 $ 57,418 44,668 26,260 4,722 6,828 $132,914 $139,896 7. INCOME TAXES The provision for income taxes consists of the following (in thousands): Current income tax expense: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,852 11,800 2,879 $27,707 7,056 5,098 $16,596 1,694 2,046 Total current income tax expense . . . . . . . . . . . 61,531 39,861 20,336 2013 2012 2011 Deferred income tax expense (benefit): Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred income tax expense . . . . . . . . . . 7,344 (1,919) 5,425 16,520 1,196 17,716 20,507 1,426 21,933 $66,956 $57,577 $42,269 A reconciliation between the reported provision for income taxes and the amount computed by applying the statutory Federal income tax rate of 35% to income before provision for income taxes is as follows (in thousands): Income tax expense at statutory rate . . . . . . . . . . . . . . . . . FICA tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income taxes, net of Federal benefit . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,610 (16,450) 6,368 (3,572) $ 73,083 (16,609) 4,750 (3,647) $ 64,165 (15,779) (316) (5,801) 2013 2012 2011 $ 66,956 $ 57,577 $ 42,269 F-26 The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities as of June 26, 2013 and June 27, 2012 are as follows (in thousands): Deferred income tax assets: 2013 2012 Leasing transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructure charges and impairments . . . . . . . . . . . . . . . . . . . . . . . Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gift cards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net $ 40,662 13,250 2,885 18,595 544 13,171 10,903 $41,393 12,577 3,231 19,425 577 11,296 10,294 Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . 100,010 98,793 Deferred income tax liabilities: Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and capitalized interest on property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . 15,776 25,333 32,160 3,522 76,791 14,306 23,879 33,617 3,842 75,644 Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . $ 23,219 $23,149 A reconciliation of unrecognized tax benefits for the fiscal years ended June 26, 2013 and June 27, 2012 are as follows (in thousands): Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year . . . . . Additions based on tax positions related to prior years . . . . . . . . . Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . Expiration of statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . 2013 2012 $7,336 754 7 (930) (779) $ 9,142 927 260 0 (2,993) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,388 $ 7,336 The total amount of unrecognized tax benefits that would favorably affect the effective tax rate if resolved in our favor due to the effect of deferred tax benefits was $4.3 million and $5.0 million as of June 26, 2013 and June 27, 2012, respectively. During the next twelve months, we anticipate that it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $0.6 million ($0.4 million of which would affect the effective tax rate due to the effect of deferred tax benefits) either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. During fiscal 2013, we recognized an expense of approximately $0.5 million in interest. During fiscal 2012 and 2011, we recognized benefits of approximately $0.3 million and $1.8 million, respectively, in interest due to the reduction of accrued interest from statute expirations and settlements, net of accrued interest for remaining positions. As of June 26, 2013, we had $2.1 million ($1.5 million net of a $0.6 million Federal deferred tax benefit) of interest and penalties accrued, compared to $2.9 million ($2.0 million net of a $0.9 million Federal deferred tax benefit) at June 27, 2012. F-27 8. DEBT Long-term debt consists of the following (in thousands): 3.88% notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.60% notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease obligations (see Note 9) . . . . . . . . . . . . . . . . . . . . . Less current installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 2012 $299,707 249,829 212,500 0 0 45,681 807,717 (27,596) $ 0 0 237,500 289,709 40,000 48,015 615,224 (27,334) $780,121 $587,890 In May 2013, we issued $550.0 million of notes consisting of two tranches—$250.0 million of 2.60% notes due in May 2018 and $300.0 million of 3.88% notes due in May 2023. We received proceeds totaling approximately $549.5 million prior to debt issuance costs and utilized the proceeds to redeem the 5.75% notes due in June 2014, pay down the revolver and fund share repurchases. The new notes require semi-annual interest payments beginning in the second quarter of fiscal 2014. Our credit facility includes a $250 million revolver and a $250 million term loan and matures in August 2016. During the first two quarters of fiscal 2013, $110.0 million was drawn from the revolver to fund share repurchases. We subsequently repaid the outstanding balance of $150.0 million in the fourth quarter of fiscal 2013 leaving $250 million of credit available under the revolver as of June 26, 2013. During fiscal 2013, we paid our required term loan installments totaling $25.0 million bringing the outstanding balance to $212.5 million. The term loan and revolving credit facility bear interest at LIBOR plus an applicable margin, which is a function of our credit rating and debt to cash flow ratio, but is subject to a maximum of LIBOR plus 2.50%. Based on our current credit rating, we are paying interest at a rate of LIBOR plus 1.63%. One month LIBOR at June 26, 2013 was approximately 0.20%. Our debt agreements contain various financial covenants that, among other things, require the maintenance of certain leverage and fixed charge coverage ratios. We are currently in compliance with all financial covenants. Excluding capital lease obligations (see Note 9) and interest, our long-term debt maturities for the five years following June 26, 2013 are as follows (in thousands): Fiscal Year 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter Long-Term Debt $ 25,000 25,000 25,000 137,500 249,829 299,707 $762,036 F-28 9. LEASES (a) Capital Leases We lease certain buildings under capital leases. The asset value of $39.0 million at June 26, 2013 and $39.4 million at June 27, 2012, and the related accumulated amortization of $18.2 million and $16.2 million at June 26, 2013 and June 27, 2012, respectively, are included in property and equipment. Amortization of assets under capital leases is included in depreciation and amortization expense. (b) Operating Leases We lease restaurant facilities and office space under operating leases having terms expiring at various dates through fiscal 2093. The restaurant leases have renewal clauses of 1 to 35 years at our option and, in some cases, have provisions for contingent rent based upon a percentage of sales in excess of specified levels, as defined in the leases. We include other rent-related costs in rent expense, such as common area maintenance, taxes and amortization of landlord contributions. Rent expense consists of the following (in thousands): Straight-lined minimum rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contingent rent Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,773 3,637 9,296 $ 88,194 3,752 9,344 $ 87,969 4,138 8,860 Total rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101,706 $101,290 $100,967 2013 2012 2011 (c) Commitments As of June 26, 2013, future minimum lease payments on capital and operating leases were as follows (in thousands): Fiscal Year 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Capital Leases 5,581 5,692 5,806 5,709 5,521 42,170 Operating Leases $102,832 93,741 80,273 57,389 38,818 99,089 Total minimum lease payments(a) . . . . . . . . . . . . . . . . . . . . . . . . 70,479 $472,142 Imputed interest (average rate of 7%) . . . . . . . . . . . . . . . . . . . . . (24,798) Present value of minimum lease payments . . . . . . . . . . . . . . . . . Less current installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,681 (2,596) $ 43,085 (a) Future minimum lease payments have not been reduced by minimum sublease rentals to be received in the future under non-cancelable subleases. Sublease rentals are approximately $37.4 million and $54.8 million for capital and operating subleases, respectively. F-29 10. FAIR VALUE DISCLOSURES (a) Non-Financial Assets Measured on a Non-Recurring Basis In fiscal 2013, assets primarily related to three underperforming restaurants including the company-owned Chili’s in Brazil with a carrying value of $5.6 million were written down to their fair value of $0.3 million resulting in an impairment charge of $5.3 million. In fiscal 2012, assets primarily related to three underperforming restaurants with a carrying value of $4.7 million were written down to their fair value of $1.6 million resulting in an impairment charge of $3.1 million. We determined fair value based on projected discounted future operating cash flows of the restaurants over their remaining service life using a risk adjusted discount rate that is commensurate with the risk inherent in our current business model. In fiscal 2013, one transferable liquor license with a carrying value of $0.3 million was written down to the fair value of $0.1 million resulting in an impairment charge of $0.2 million. In fiscal 2012, certain transferable liquor licenses with a carrying value of $6.7 million were written down to their fair value of $4.1 million resulting in an impairment charge of $2.6 million. We determined fair value based on prices in the open market for licenses in same or similar jurisdictions. All impairment charges related to underperforming restaurants and liquor licenses were included in other gains and charges in the consolidated statement of income for the periods presented. The following table presents fair values for those assets measured at fair value on a non-recurring basis at June 26, 2013 and June 27, 2012 (in thousands): Fair Value Measurements Using (Level 1) (Level 2) (Level 3) Total Long-lived assets held for use: At June 26, 2013 . . . . . . . . . . . . . . . . . . . . . . . At June 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . Liquor licenses: At June 26, 2013 . . . . . . . . . . . . . . . . . . . . . . . At June 27, 2012 . . . . . . . . . . . . . . . . . . . . . . . $0 $0 $0 $0 $ $ 0 0 $ 333 $1,586 $ 333 $1,586 $ 100 $4,109 $ $ 0 0 $ 100 $4,109 (b) Other Financial Instruments Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and long-term debt. The fair value of cash and cash equivalents, accounts receivable and accounts payable approximates their carrying amounts while the fair value of the 2.60% notes, 3.88% notes, and 5.75% notes is based on quoted market prices. At June 26, 2013, the 2.60% notes had a carrying value of $249.8 million and a fair value of $244.2 million and the 3.88% notes had a carrying value of $299.7 million and a fair value of $279.5 million. At June 27, 2012, the 5.75% notes had a carrying value of $289.7 million and a fair value of $310.2 million. 11. STOCK-BASED COMPENSATION Our shareholders approved stock-based compensation plans including the Stock Option and Incentive Plan and the Stock Option and Incentive Plan for Non-Employee Directors and Consultants (collectively, the “Plans”). The total number of shares authorized for issuance to employees and non-employee directors and consultants under the Plans is currently 35.3 million. The Plans provide for grants of options to purchase our common stock, restricted stock, restricted stock units, performance shares and stock appreciation rights. (a) Stock Options Expense related to stock options issued to eligible employees under the Plans is recognized using a graded- vesting schedule over the vesting period or to the date on which retirement eligibility is achieved, if shorter. F-30 Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 to 10 years. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination. Transactions during fiscal 2013 were as follows (in thousands, except option prices): Options outstanding at June 27, 2012 . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited or canceled . . . . . . . . . . . . . . . . . . Options outstanding at June 26, 2013 . . . . . Options exercisable at June 26, 2013 . . . . . Number of Options 4,354 312 (1,825) (116) 2,725 1,709 Weighted Average Exercise Price $22.07 34.73 22.57 23.31 $23.13 $21.94 Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value 4.0 2.7 $42,224 $28,524 At June 26, 2013, unrecognized compensation expense related to stock options totaled approximately $3.1 million and will be recognized over a weighted average period of 1.9 years. The intrinsic value of options exercised totaled approximately $22.4 million, $12.6 million and $5.5 million during fiscal 2013, 2012 and 2011, respectively. The tax benefit realized on options exercised totaled approximately $8.1 million, $4.8 million and $2.1 million during fiscal 2013, 2012 and 2011, respectively. (b) Restricted Share Awards Restricted share awards consist of performance shares, restricted stock and restricted stock units. Performance shares and most restricted stock units issued to eligible employees under the Plans generally vest in full on the third anniversary of the date of grant, while restricted stock units issued to eligible employees under our career equity plan generally vest upon each employee’s retirement from the Company. Expense is recognized ratably over the vesting period, or to the date on which retirement eligibility is achieved, if shorter. Restricted stock and restricted stock units issued to non-employee directors under the Plans generally vest in full on the fourth anniversary of the date of grant or upon each director’s retirement from the Board and are expensed when granted. Full or partial vesting of awards may occur upon a change in control (as defined in the Plans), or upon an employee’s death, disability or involuntary termination. Transactions during fiscal 2013 were as follows (in thousands, except fair values): Restricted share awards outstanding at June 27, 2012 . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted share awards outstanding at June 26, 2013 . . . . . . . . . . . . Number of Restricted Share Awards Weighted Average Fair Value Per Award 2,217 539 (653) (180) 1,923 $14.86 35.41 11.39 21.93 $21.15 At June 26, 2013, unrecognized compensation expense related to restricted share awards totaled approximately $12.6 million and will be recognized over a weighted average period of 2.4 years. The fair value of shares that vested during fiscal 2013, 2012, and 2011 totaled approximately $22.0 million, $11.5 million and $7.5 million, respectively. F-31 12. SAVINGS PLANS We sponsor a qualified defined contribution retirement plan covering all employees who have attained the age of twenty-one and have completed one year and 1,000 hours of service. Eligible employees are allowed to contribute, subject to IRS limitations on total annual contributions, up to 50% of their base compensation and 100% of their eligible bonuses, as defined in the plan, to various investment funds. We match in cash at a rate of 100% of the first 3% an employee contributes and 50% of the next 2% the employee contributes with immediate vesting. In fiscal 2013, 2012, and 2011, we contributed approximately $7.2 million, $6.7 million, and $6.3 million, respectively. We also sponsor a non-qualified defined contribution plan covering a select group of highly compensated employees, as defined in the plan. Eligible employees are allowed to defer receipt of up to 50% of their base compensation and bonus, as defined in the plan. There is no company match, but employee contributions earn interest based on a rate determined and announced in November prior to the start of the plan year. Employee contributions and earnings thereon vest immediately. A Rabbi Trust is used to fund obligations of the non- qualified plan. The market value of the trust assets is included in other assets and the liability to plan participants is included in other liabilities. 13. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows (in thousands): Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest, net of amounts capitalized(a) $60,291 41,504 $47,514 24,455 $38,340 25,810 (a) Interest includes $15.3 million of interest paid upon retirement of our 5.75% notes in June 2013. 2013 2012 2011 Non-cash investing activities are as follows (in thousands): Retirement of fully depreciated assets . . . . . . . . . . . . . . . . . . $55,427 $77,249 $60,175 2013 2012 2011 14. COMMITMENTS AND CONTINGENCIES In connection with the sale of restaurants to franchisees and brand divestitures, we have, in certain cases, guaranteed lease payments. As of June 26, 2013 and June 27, 2012, we have outstanding lease guarantees or are secondarily liable for $132.6 million and $142.6 million, respectively. This amount represents the maximum potential liability of future payments under the guarantees. These leases have been assigned to the buyers and expire at the end of the respective lease terms, which range from fiscal 2014 through fiscal 2024. In the event of default, the indemnity and default clauses in our assignment agreements govern our ability to pursue and recover damages incurred. No material liabilities have been recorded as of June 26, 2013, as the likelihood of default by the buyers on the assignment agreements was deemed to be less than probable. We provide letters of credit to various insurers to collateralize obligations for outstanding claims. As of June 26, 2013, we had $22.4 million in undrawn standby letters of credit outstanding. All standby letters of credit are renewable annually. In August 2004, certain current and former hourly restaurant team members filed a putative class action lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal periods and rest breaks. The lawsuit sought penalties and attorney’s fees and was certified as a class action by the trial court in July 2006. In July 2008, the California Court of Appeal decertified the class action on all claims with prejudice. In October 2008, the California Supreme Court granted a writ to review the decision of the Court of Appeal and oral arguments were heard by the California Supreme Court on November 8, 2011. On April 12, F-32 2012, the California Supreme Court issued an opinion affirming in part, reversing in part, and remanding in part for further proceedings. The California Supreme Court’s opinion resolved many of the legal standards for meal periods and rest breaks in our California restaurants and we intend to vigorously defend our position on the remaining issues upon remand to the trial court. It is not possible at this time to reasonably estimate the possible loss or range of loss, if any. We are engaged in various other legal proceedings and have certain unresolved claims pending. Reserves have been established based on our best estimates of our potential liability in certain of these matters. Based upon consultation with legal counsel, Management is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on our consolidated financial condition or results of operations. 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the unaudited consolidated quarterly results of operations for fiscal 2013 and 2012 (in thousands, except per share amounts): Fiscal Year 2013 Quarters Ended Sept. 26 Dec. 26 March 27 June 26 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . $683,507 $ 40,452 $ 27,864 0.38 $ 0.36 $ 73,903 76,558 $689,764 $ 55,226 $ 37,177 0.51 $ 0.50 $ 72,560 74,720 $742,759 $ 72,814 $ 51,951 0.73 $ 0.71 $ 71,067 73,341 $730,068 $ 61,823 $ 46,367 0.67 $ 0.64 $ 69,607 71,999 Fiscal Year 2012 Quarters Ended Sept. 28 Dec. 28 March 28 June 27 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before provision for income taxes . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . $668,402 $ 33,631 $ 23,621 0.29 $ 0.28 $ 81,744 83,583 $681,904 $ 50,265 $ 35,674 0.45 $ 0.44 $ 79,840 81,655 $742,045 $ 62,565 $ 44,933 0.58 $ 0.56 $ 77,582 79,735 $728,371 $ 62,348 $ 47,004 0.63 $ 0.61 $ 75,070 77,682 Net income for fiscal year 2013 included a $15.8 million loss on extinguishment of debt in the fourth quarter. Long-lived asset impairments of $0.7 million and $4.6 million were recorded in the second and fourth quarter, respectively. Severance charges of $1.3 million and $1.0 million were incurred during the third and fourth quarters, respectively. Additionally, net income also included lease termination charges related to previously closed restaurants of $0.4 million, $1.1 million and $0.6 million in the first, second and fourth quarters, respectively. These charges were partially offset by an $8.3 million gain on the sale of our remaining interest in Macaroni Grill in the fourth quarter and net gains of $2.3 million and $0.4 million related to land sales in the second and fourth quarter, respectively. Net income for fiscal year 2012 included lease termination charges related to previously closed restaurants of $0.5 million, $1.9 million and $0.8 million in the first, second and third quarters, respectively. Long-lived asset impairments of $1.1 million and $2.0 million were recorded in the second and fourth quarters, respectively. Additionally, net income also included $2.6 million of liquor license impairment charges in the fourth quarter. These charges were partially offset by net gains of $1.3 million and $2.0 million related to land sales in the first and fourth quarters, respectively. F-33 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Brinker International, Inc.: We have audited the accompanying consolidated balance sheets of Brinker International, Inc. and subsidiaries (“the Company”) as of June 26, 2013 and June 27, 2012, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended June 26, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brinker International, Inc. and subsidiaries as of June 26, 2013 and June 27, 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended June 26, 2013 in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 26, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 26, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. KPMG LLP Dallas, TX August 26, 2013 F-34 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Brinker International, Inc.: We have audited Brinker International, Inc. and subsidiaries’ (“the Company”) internal control over financial reporting as of June 26, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s is responsible for maintaining effective internal control over financial reporting and for its management assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 26, 2013, based on criteria established in Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Brinker International, Inc. and subsidiaries as of June 26, 2013 and June 27, 2012, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 26, 2013, and our report dated August 26, 2013 expressed an unqualified opinion on those consolidated financial statements. KPMG LLP Dallas, TX August 26, 2013 F-35 MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the reliability of the consolidated financial statements and related notes, which have been prepared in conformity with U. S. generally accepted accounting principles and include amounts based upon our estimate and judgments, as required. The consolidated financial statements have been audited and reported on by our independent registered public accounting firm, KPMG LLP, who were given free access to all financial records and related data, including minutes of the meetings of the Board of Directors and Committees of the Board. We believe that the representations made to the independent auditors were valid and appropriate. We maintain a system of internal controls over financial reporting designed to provide reasonable assurance of the reliability of the consolidated financial statements. Our internal audit function monitors and reports on the adequacy of the compliance with the internal control system and appropriate actions are taken to address significant control deficiencies and other opportunities for improving the system as they are identified. The Audit Committee of the Board of Directors, which is comprised solely of outside directors, provides oversight to the financial reporting process through periodic meetings with our independent auditors, internal auditors, and management. Both our independent auditors and internal auditors have free access to the Audit Committee. Although no cost-effective internal control system will preclude all errors and irregularities, we believe our controls as of and for the year ended June 26, 2013 provide reasonable assurance that the consolidated financial statements are reliable. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is responsible for establishing and maintaining adequate internal control over financial reporting. We have assessed the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, we concluded that our internal control over financial reporting was effective as of June 26, 2013. Because of inherent internal control over financial reporting may not prevent or detect misstatements. Also, projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. limitations, The effectiveness of our internal control over financial reporting as of June 26, 2013 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its attestation report which is included herein. /s/ WYMAN T. ROBERTS WYMAN T. ROBERTS Chief Executive Officer, President and President of Chili’s Grill & Bar /s/ GUY J. CONSTANT GUY J. CONSTANT Executive Vice President, Chief Financial Officer and President of Global Business Development F-36 Exhibit 21 BRINKER INTERNATIONAL, INC., A DELAWARE CORPORATION SUBSIDIARIES BRINKER RESTAURANT CORPORATION, a Delaware corporation BRINKER INTERNATIONAL PAYROLL COMPANY, L.P., a Delaware limited partnership BRINKER ALABAMA, INC., a Delaware corporation BRINKER ARKANSAS, INC., a Delaware corporation BRINKER BRAZIL, LLC, a Delaware limited liability company BRINKER CB, LP, a Texas limited partnership BRINKER CB MANAGEMENT, LLC, a Delaware limited liability company BRINKER CANADIAN HOLDING CO., ULC, a British Columbia unlimited liability company BRINKER CANADIAN RESTAURANT CO., ULC, a British Columbia unlimited liability company BRINKER FLORIDA, INC., a Delaware corporation BRINKER FREEHOLD, INC., a New Jersey corporation BRINKER GEORGIA, INC., a Delaware corporation BRINKER LOUISIANA, INC., a Delaware corporation BRINKER MEXICO SERVICES S DE R.L. DE C.V., a Mexico company BRINKER MHC B.V., a Netherlands private company BRINKER MICHIGAN, INC., a Delaware corporation BRINKER MISSISSIPPI, INC., a Delaware corporation BRINKER MISSOURI, INC., a Delaware corporation BRINKER NEVADA, INC., a Nevada corporation BRINKER NEW JERSEY, INC., a Delaware corporation BRINKER NORTH CAROLINA, INC., a Delaware corporation BRINKER OF BALTIMORE COUNTY, INC., a Maryland corporation BRINKER OF CARROLL COUNTY, INC., a Maryland corporation BRINKER OF CECIL COUNTY, INC., a Maryland corporation BRINKER OKLAHOMA, INC., a Delaware corporation BRINKER PENN TRUST, a Pennsylvania business trust BRINKER PURCHASING, INC., a Delaware corporation BRINKER SERVICES CORPORATION, a Florida corporation BRINKER TEXAS, INC., a Delaware corporation BRINKER VIRGINIA, INC., a Delaware corporation CGB COMERCIO DE ALIMENTOS E BEBIDAS LTDA., a Brazil limited liability company CHILI’S BEVERAGE COMPANY, INC., a Texas corporation CHILI’S, INC., a Delaware corporation CHILI’S, INC., a Tennessee corporation CHILI’S INTERNATIONAL BASES, B.V., a Netherlands private company CHILI’S OF BEL AIR, INC., a Maryland corporation CHILI’S OF KANSAS, INC., a Kansas corporation CHILI’S OF MARYLAND, INC., a Maryland corporation CHILI’S OF WEST VIRGINIA, INC., a West Virginia corporation MAGGIANO’S, INC., an Illinois corporation MAGGIANO’S BEVERAGE COMPANY, a Texas corporation MAGGIANO’S HOLDING CORPORATION, a Delaware corporation MAGGIANO’S OF ANNAPOLIS, INC., a Maryland corporation MAGGIANO’S OF TYSON’S, INC., a Virginia corporation MAGGIANO’S TEXAS, INC., a Delaware corporation BIPC MANAGEMENT, LLC, a Delaware limited liability company BIPC ME JLT, a Dubai Free-Zone company BIPC INVESTMENTS, LLC, a Delaware limited liability company BRINKER INTERNATIONAL GOLF CLASSIC, a Texas non-profit corporation BRINKER FAMILY FUND, INC., a Delaware non-profit corporation Exhibit 23 Consent of Independent Registered Public Accounting Firm The Board of Directors Brinker International, Inc.: We consent to the incorporation by reference in the Registration Statement Nos. 33-56491, 333-02201, 333- 93755, 333-42224, 333-105720, 333-125289, and 333-157050 on Form S-8; Registration Nos. 333-74902 and 333-188252 on Form S-3; and Registration Statement No. 333-116879 on Form S-4 of Brinker International, Inc. of our reports dated August 26, 2013, with respect to the consolidated balance sheets of Brinker International, Inc. as of June 26, 2013 and June 27, 2012, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 26, 2013, and the effectiveness of internal control over financial reporting as of June 26, 2013, which reports appear in the 2013 Annual Report to Shareholders on Form 10-K of Brinker International, Inc. KPMG LLP Dallas, Texas August 26, 2013 Exhibit 31(a) I, Wyman T. Roberts, certify that: 1. I have reviewed this Annual Report on Form 10-K of Brinker International, Inc.; CERTIFICATION 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions); a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: August 26, 2013 /S/ WYMAN T. ROBERTS Wyman T. Roberts, Chief Executive Officer & President and President of Chili’s Grill & Bar (Principal Executive Officer) CERTIFICATION Exhibit 31(b) I, Guy J. Constant, certify that: 1. 2. 3. 4. I have reviewed this Annual Report on Form 10-K of Brinker International, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptable accounting principles; c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions); a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: August 26, 2013 /S/ GUY J. CONSTANT Guy J. Constant Executive Vice President, Chief Financial Officer and President of Global Business Development (Principal Financial Officer) CERTIFICATION Exhibit 32(a) Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Brinker International, Inc. (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended June 26, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 26, 2013 By: /S/ WYMAN T. ROBERTS Name: Wyman T. Roberts Title: President, Chief Executive Officer and President of Chili’s Grill & Bar (Principal Executive Officer) CERTIFICATION Exhibit 32(b) Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Brinker International, Inc. (the “Company”), hereby certifies that the Company’s Annual Report on Form 10-K for the year ended June 26, 2013 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 26, 2013 By: /S/ GUY J. CONSTANT Name: Guy J. Constant Title: Executive Vice President, Chief Financial Officer and President of Global Business Development (Principal Financial Officer) BOARD OF DIRECTORS Douglas H. Brooks Chairman of the Board Brinker International, Inc. Joseph M. DePinto President and Chief Executive Officer 7-Eleven, Inc. Harriet Edelman Vice Chairman Emigrant Bank Michael A. George President and Chief Executive Officer QVC, Inc. William T. Giles Chief Financial Officer and Executive Vice President, Finance, Information Technology and Store Development AutoZone Gerardo I. Lopez President, Chief Executive Officer and Director AMC Entertainment, Inc. Jon L. Luther Retired Chairman of the Board Dunkin' Brands John W. Mims Senior Vice President, World-Wide Sales & Resort Marketing Asia Las Vegas Sands Corporation George R. Mrkonic Non Executive Chairman Paperchase Products Limited Rosendo G. Parra Partner and Founder Daylight Partners Wyman T. Roberts Chief Executive Officer and President and President of Chili's Grill & Bar Brinker International, Inc. PRINCIPAL OFFICERS Wyman T. Roberts Chief Executive Officer and President and President of Chili's Grill & Bar Tony A. Bridwell Senior Vice President of PeopleWorks Guy J. Constant Executive Vice President, Chief Financial Officer and President of Global Business Development David R. Doyle Senior Vice President and Chief Information Officer Krista Gibson Senior Vice President of Brand Strategy for Chili's Grill & Bar Jeffrey A. Hoban Senior Vice President, Assistant General Counsel and Assistant Secretary David Parsley Senior Vice President of Supply Chain Management Marie L. Perry Senior Vice President, Controller and Treasurer Steve D. Provost President of Maggiano's Little Italy Roger F. Thomson Executive Vice President, Chief Administrative Officer, General Counsel and Secretary Kelli A. Valade Chief Operating Officer for Chili's Grill & Bar SHAREHOLDER INFORMATION Executive Offices Brinker International, Inc. 6820 LBJ Freeway Dallas, TX 75240 (972) 980-9917 Annual Meeting Thursday, November 7, 2013 at 9:00 a.m. Brinker International, Inc. The Play Room in Building C 6700 LBJ Freeway Dallas, TX 75240 Independent Public Accountants KPMG LLP 717 N. Harwood, Suite 3100 Dallas, TX 75201 NYSE Symbol: EAT Stock Transfer Agent And Registrar Computershare 250 Royall St. Canton, MA 02021 Customer Service (800) 213-5156 TDD for Hearing Impaired (800) 231-5469 Foreign Shareowners (201) 680-6578 You can now access your Brinker Shareholder Account online via Investor Centre at www.computershare.com 10-K Availability The company will furnish to any shareholder, without charge, a copy of the company's annual report filed with the Securities and Exchange Commission on Form 10-K for the 2013 fiscal year from our website at: www.brinker.com or upon written request from the shareholder. Please send your written request to: Secretary/Investor Relations Brinker International, Inc. 6820 LBJ Freeway Dallas, TX 75240 CEO/CFO Certifications On November 15, 2012, the company submitted its annual Section 303A CEO certification the New York Stock Exchange. The company also filed the CEO and CFO certifications required under Section 302 of the Sarbanes-Oxley Act of 2002 with the Securities and Exchange Commission as exhibits to its Annual Report on Form 10-K for the year ended June 26, 2013. to Chili's® Grill & Bar and Maggiano's Little Italy® are registered and/or proprietary trademarks of Brinker International Payroll Company, L.P. B R I N K E R I N T E R N A T I O N A L ® 6820 LBJ Freeway, Dallas, TX 75240 • www.brinker.com
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