Brinker International (EAT) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 29, 2006

Commission File Number 1-10275

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	75-1914582
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

6820 LBJ FREEWAY, DALLAS, TEXAS 75240

(Address of principal executive offices)

(Zip Code)

(972) 980-9917

(Registrant’s telephone number, including area code)

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  ý        No  o

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 and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o        No  ý

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 3, 2006
Common Stock, $0.10 par value	84,808,535 shares

BRINKER INTERNATIONAL, INC.

INDEX

					Page
Part I - Financial Information
	Item 1.			Financial Statements
	Consolidated Balance Sheets -
	March 29, 2006 (Unaudited) and June 29, 2005				3
	Consolidated Statements of Income
	(Unaudited) – Thirteen week and thirty-nine week
	periods ended March 29, 2006 and
	March 30, 2005				4
	Consolidated Statements of Cash Flows
	(Unaudited) – Thirty-nine week periods ended
	March 29, 2006 and March 30, 2005				5
	Notes to Consolidated Financial Statements (Unaudited)				6
	Item 2.	Management’s Discussion and Analysis of
		Financial Condition and Results of Operations			13
	Item 3.	Quantitative and Qualitative Disclosures
		About Market Risk			17
	Item 4.	Controls and Procedures			18
Part II - Other Information
	Item 1.		Legal Proceedings		21
	Item 2.		Unregistered Sales of Equity Securities and
			Use of Proceeds		21
	Item 6.		Exhibits		21
	Signatures				22

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BRINKER INTERNATIONAL, INC.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	March 29, 2006			June 29, 2005
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	53,941		$	41,859
Accounts receivable	50,252			43,592
Inventories	42,055			48,647
Prepaid expenses and other	79,371			77,069
Deferred income taxes	9,252			21,956
Current assets of discontinued operations	—			79,842
Total current assets	234,871			312,965
Property and Equipment, at Cost:
Land	281,767			284,885
Buildings and leasehold improvements	1,673,014			1,507,587
Furniture and equipment	729,470			697,352
Construction-in-progress	73,887			81,622
	2,758,138			2,571,446
Less accumulated depreciation and amortization	(1,008,572		)	(924,980		)
Net property and equipment	1,749,566			1,646,466
Other Assets:
Goodwill	145,193			124,749
Other	44,808			71,944
Total other assets	190,001			196,693
Total assets	$	2,174,438		$	2,156,124
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current installments of long-term debt	$	2,237		$	1,805
Accounts payable	153,082			133,096
Accrued liabilities	309,416			261,924
Income taxes payable	60,462			22,739
Current liabilities of discontinued operations	—			10,400
Total current liabilities	525,197			429,964
Long-term debt, less current installments	437,147			406,505
Deferred income taxes	19,461			56,189
Other liabilities	144,400			163,184
Contingencies (Note 7)
Shareholders’ Equity:
Common stock – 250,000,000 authorized shares; $0.10 par value; 117,499,541 shares issued and 84,867,222 shares outstanding at March 29, 2006, and 117,499,541 shares issued and 89,182,804 shares outstanding at June 29, 2005	11,750			11,750
Additional paid-in capital	392,926			369,813
Accumulated other comprehensive income	767			700
Retained earnings	1,544,072			1,421,866
	1,949,515			1,804,129
Less:
Treasury stock, at cost (32,632,319 shares at March 29, 2006 and 28,316,737 shares at June 29, 2005)	(901,282		)	(703,847		)
Total shareholders’ equity	1,048,233			1,100,282
Total liabilities and shareholders’ equity	$	2,174,438		$	2,156,124

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Income

(In thousands, except per share amounts)

(Unaudited)

	Thirteen Week Periods Ended					Thirty-Nine Week Periods Ended
	March 29, 2006			March 30, 2005		March 29, 2006			March 30, 2005
Revenues	$	1,092,790		$	970,452	$	3,077,769		$	2,751,138
Operating Costs and Expenses:
Cost of sales	307,205			275,699		869,668			778,669
Restaurant expenses	587,950			529,665		1,686,093			1,520,183
Depreciation and amortization	48,357			45,219		142,670			133,790
General and administrative	53,735			32,573		152,540			110,751
Restructure charges and other impairments	(529		)	350		1,950			51,182
Total operating costs and expenses	996,718			883,506		2,852,921			2,594,575
Operating income	96,072			86,946		224,848			156,563
Interest expense	5,630			5,920		17,195			20,066
Other, net	(939		)	77		(1,123		)	1,612
Income before provision for income taxes	91,381			80,949		208,776			134,885
Provision for income taxes	28,250			26,046		67,833			23,486
Income from continuing operations	63,131			54,903		140,943			111,399
Income (loss) from discontinued operations, net of taxes	1,626			241		(1,555		)	(943		)
Net income	$	64,757		$	55,144	$	139,388		$	110,456
Basic net income per share:
Income from continuing operations	$	0.74		$	0.62	$	1.63		$	1.26
Income (loss) from discontinued operations	$	0.02		$	0.01	$	(0.02	)	$	(0.01	)
Net income per share	$	0.76		$	0.63	$	1.61		$	1.25
Diluted net income per share:
Income from continuing operations	$	0.73		$	0.60	$	1.60		$	1.19
Income (loss) from discontinued operations	$	0.02		$	0.00	$	(0.01	)	$	(0.01	)
Net income per share	$	0.75		$	0.60	$	1.59		$	1.18
Basic weighted average shares outstanding	85,245			88,109		86,332			88,458
Diluted weighted average shares outstanding	86,788			91,769		87,852			95,621

See accompanying notes to consolidated financial statements.

4

BRINKER INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Thirty-Nine Week Periods Ended
	March 29, 2006			March 30, 2005
Cash Flows from Operating Activities:
Net income	$	139,388		$	110,456
Adjustments to reconcile net income to net cash provided by operating activities of continuing operations:
Depreciation and amortization	142,670			133,790
Restructure charges and other impairments	1,950			51,182
Stock-based compensation	25,872			1,434
Deferred income taxes	(22,385		)	(3,696		)
Gain on sale of assets	(10,563		)	(6,314		)
Amortization of deferred costs	915			4,000
Loss from discontinued operations, net of taxes	1,555			943
Gain on extinguishment of debt	—			(1,750		)
Changes in assets and liabilities, excluding effects of dispositions:
Receivables	(6,660		)	768
Inventories	6,924			(9,824		)
Prepaid expenses and other	1,702			(685		)
Other assets	20,287			(2,592		)
Current income taxes	35,689			(13,790		)
Accounts payable	19,986			19,488
Accrued liabilities	47,187			19,142
Other liabilities	(13,635		)	14,775
Net cash provided by operating activities of continuing operations	390,882			317,327
Cash Flows from Investing Activities:
Payments for property and equipment	(253,559		)	(237,138		)
Proceeds from sale of assets	29,962			38,928
Payments for purchases of restaurants	(23,095		)	—
Proceeds from disposition of equity method investee	1,101			—
Proceeds from sale of short-term investments	—			179,325
Net cash used in investing activities of continuing operations	(245,591		)	(18,885		)
Cash Flows from Financing Activities:
Purchases of treasury stock	(252,454		)	(162,893		)
Proceeds from issuances of treasury stock	51,113			54,946
Payment for dividends	(17,058		)	—
Net borrowings on credit facilities	16,450			92,700
Excess tax benefits from stock-based compensation	2,034			5,150
Payments on long-term debt	(1,181		)	(286,868		)
Net cash used in financing activities of continuing operations	(201,096		)	(296,965		)
Cash Flows from Discontinued Operations (Revised – Note 1):
Net cash provided by operating activities of discontinued operations	5,042			6,570
Net cash provided by (used in) investing activities of discontinued operations	62,845			(6,914		)
Net cash provided by (used in) discontinued operations	67,887			(344		)
Net change in cash and cash equivalents	12,082			1,133
Cash and cash equivalents at beginning of period	41,859			47,079
Cash and cash equivalents at end of period	$	53,941		$	48,212

See accompanying notes to consolidated financial statements.

5

BRINKER INTERNATIONAL, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.BASIS OF PRESENTATION

The consolidated financial statements of Brinker International, Inc. and its wholly-owned subsidiaries (collectively, the “Company”) as of March 29, 2006 and June 29, 2005 and for the thirteen week and thirty-nine week periods ended March 29, 2006 and March 30, 2005, have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The Company owns, operates, or franchises various restaurant brands under the names of Chili’s Grill & Bar (“Chili’s”), Romano’s Macaroni Grill (“Macaroni Grill”), Maggiano’s Little Italy (“Maggiano’s”), and On The Border Mexican Grill & Cantina (“On The Border”). In September 2005, the Company entered into an agreement to sell Corner Bakery Cafe (“Corner Bakery”). The sale of the brand was completed in February 2006. As a result, Corner Bakery is presented as discontinued operations in the accompanying consolidated financial statements.

The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the interim operating results for the respective periods. However, these operating results are not necessarily indicative of the results expected for the full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to SEC rules and regulations. The notes to the consolidated financial statements (unaudited) should be read in conjunction with the notes to the consolidated financial statements contained in the June 29, 2005 Form 10-K. Management believes that the disclosures are sufficient for interim financial reporting purposes.

Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform with fiscal 2006 classifications. The Company has also revised its statements of cash flows for the thirty-nine week periods ended March 29, 2006 and March 30, 2005 to separately disclose the operating and investing cash flows attributable to discontinued operations, which in prior periods were reported on a combined basis as a single amount. These changes have no effect on the Company’s net income or financial position as previously reported.

2.STOCK-BASED COMPENSATION

Prior to fiscal 2006, the Company accounted for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”), and adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”  Under APB 25, no stock-based compensation cost was reflected in net income for grants of stock options prior to fiscal 2006 because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant.

Effective June 30, 2005, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123R”), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options. Stock-based compensation for the first three quarters of fiscal 2006 includes compensation expense, recognized over the applicable vesting periods, for new share-based awards and for share-based awards granted prior to, but not yet vested, as of June 29, 2005. Stock-based compensation totaled approximately $6.7 million and $191,000 for the third quarter of fiscal 2006 and 2005, respectively, and $25.9 million and $1.4 million for year-to-date fiscal 2006 and 2005, respectively. The total income tax benefit related to stock-based compensation was approximately $1.6 million and $67,000 during the third quarter of fiscal 2006 and 2005, respectively, and $6.0 million and $502,000 for year-to-date fiscal 2006 and 2005, respectively.

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Under APB 25, pro-forma expense for stock options was calculated using a graded-vesting schedule over the applicable vesting period, which generally ranged from 2 to 4 years. Upon adoption of SFAS 123R, the Company records compensation expense using a graded-vesting schedule over the applicable vesting period, or to the date on which retirement eligibility is achieved, if shorter (non-substantive vesting period approach). Had the Company used the fair value based accounting method for stock-based compensation prescribed by SFAS No. 123, the Company’s net income and earnings per share for the third quarter and year-to-date of fiscal 2005 would have been reduced to the pro-forma amounts illustrated as follows (in thousands, except per share amounts):

	Thirteen Week Period Ended March 30, 2005			Thirty-Nine Week Period Ended March 30, 2005
Net income - as reported	$	55,144		$	110,456
Add: Reported stock-based compensation expense, net of taxes	124			932
Deduct: Fair value based compensation expense, net of taxes (1)	(4,620		)	(14,450		)
Net income – pro-forma (1)	$	50,648		$	96,938
Earnings per share:
Basic – as reported	$	0.63		$	1.25
Basic – pro-forma (1)	$	0.57		$	1.10
Diluted – as reported	$	0.60		$	1.18
Diluted – pro-forma (1)	$	0.56		$	1.05

(1)If pro-forma expense had been derived using the non-substantive vesting period approach, total stock-based compensation (net of taxes) for the third quarter and year-to-date of fiscal 2005 would have been $3.7 million and $14.0 million, respectively. Pro-forma net income for the third quarter and year-to-date of fiscal 2005 would have been $51.6 million and $97.4 million, respectively. Additionally, basic pro-forma earnings per share for the third quarter and year-to-date of fiscal 2005 would have been $0.59 and $1.10, respectively. Diluted pro-forma earnings per share for the third quarter and year-to-date of fiscal 2005 would have been $0.57 and $1.05, respectively.

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(a)Stock Options

Stock options generally vest over a period of 1 to 4 years and have contractual terms to exercise of 8 to 10 years. Transactions during the first three quarters of fiscal 2006 were as follows (in thousands, except option prices):

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Options outstanding at June 29, 2005	9,177		$	29.93
Granted	503		38.61
Exercised	(1,752	)	27.79
Forfeited	(665	)	32.98
Options outstanding at March 29, 2006	7,263		$	30.77	6.93	$	81,291
Options exercisable at March 29, 2006	3,521		$	27.18	5.63	$	52,063

The intrinsic value of options exercised totaled approximately $14.4 million and $19.0 million during the third quarter of fiscal 2006 and 2005, respectively, and $22.3 million and $33.4 million during the first three quarters of fiscal 2006 and 2005, respectively. The weighted average fair values of stock option grants were $11.11 and $12.47 for the third quarter of fiscal 2006 and 2005, respectively, and $11.47 for year-to-date fiscal 2006 and 2005.

The fair value of stock options is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	Thirteen Week Periods Ended		Thirty-Nine Week Periods Ended
	March 29, 2006	March 30, 2005	March 29, 2006	March 30, 2005
Expected volatility	27.7%	31.3%	28.8%	31.3%
Risk-free interest rate	4.2%	3.7%	4.2%	3.4%
Expected lives	5 years	5 years	5 years	5 years
Dividend yield	1.1%	0.0%	1.1%	0.0%

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 five-year Treasury Note.

(b)Restricted Share Awards

In October 2005, the shareholders of the Company approved the Performance Share Plan and the Restricted Stock Unit Plan (the “Plans”). The restricted share awards issued under the Plans represent a right to receive a certain number of shares of common stock upon satisfaction of performance goals or other specified metrics at the end of a three-year cycle. Payouts made in common stock 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 and the fair value of restricted stock units is determined based on the Company’s closing stock price on the date of grant. Expense related to performance shares and restricted stock units is recognized ratably over the three-year vesting period, or to the date on which retirement eligibility is achieved, if shorter.

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Other restricted share awards include restricted stock and restricted stock units issued under the Company’s stock option and incentive plans. Restricted share awards issued under the Company’s long-term incentive plans vest one-third per year beginning on the first or third anniversary of the date of grant, and restricted share awards issued to non-employee directors vest in full on the fourth anniversary of the date of grant. The fair value of restricted share awards is based on the Company’s closing stock price on the date of grant.

Transactions during the first three quarters of fiscal 2006 were as follows (in thousands, except fair values):

	Number of Restricted Share Awards		Weighted Average Fair Value Per Award
Restricted share awards outstanding at June 29, 2005	137		$	34.60
Granted	1,003		35.09
Vested	(77	)	34.34
Forfeited	(95	)	35.46
Restricted share awards outstanding at March 29, 2006	968		$	35.05

At March 29, 2006, unrecognized compensation expense related to restricted share awards totaled approximately $23.2 million and will be recognized over a weighted average period of 3.1 years.

3.EARNINGS 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 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 and convertible debt. The Company had approximately 563,000 and 73,000 stock options outstanding at March 29, 2006 and March 30, 2005, respectively, that were not included in the dilutive earnings per share calculation because the effect would have been antidilutive. The components of basic and diluted earnings per share are as follows:

9

	Thirteen Week Periods Ended							Thirty-Nine Week Periods Ended
	March 29, 2006					March 30, 2005		March 29, 2006		March 30, 2005
Income from continuing operations (a)	$				63,131	$	54,903	$	140,943	$	111,399
Adjustment for interest on convertible debt, net of taxes	—					325		—		2,650
Income from continuing operations, as adjusted (b)	$			63,131		$	55,228	$	140,943	$	114,049
Basic weighted average shares outstanding (c)	85,245					88,109		86,332		88,458
Dilutive effect of stock options	1,543					1,445		1,520		1,253
Dilutive effect of convertible debt	—					2,215		—		5,910
Diluted weighted average shares outstanding (d)	86,788					91,769		87,852		95,621
Basic earnings per share from continuing operations (a)/(c)	$		0.74			$	0.62	$	1.63	$	1.26
Diluted earnings per share from continuing operations (b)/(d)	$	0.73				$	0.60	$	1.60	$	1.19

4.DISPOSITION OF CORNER BAKERY

In September 2005, the Company entered into an agreement to sell Corner Bakery. The decision to sell the brand was a result of the Company’s continued focus on maximizing returns on investment. The sale of the brand was completed in February 2006. The Company has reported the results of operations of Corner Bakery as discontinued operations which consist of the following:

	Thirteen Week Periods Ended								Thirty-Nine Week Periods Ended
	March 29, 2006					March 30, 2005			March 29, 2006			March 30, 2005
Revenues	$			16,992		$	39,077		$	108,932		$	119,662
Income (loss) before income tax (expense) benefit from discontinued operations	$		2,208			$	384		$	13,061		$	(1,506	)
Income tax (expense) benefit	(830				)	(143		)	(4,911		)	563
Net income (loss) from discontinued operations	1,378					241			8,150			(943		)
Gain (loss) on sale of Corner Bakery, net of taxes (1)	248					—			(9,705		)	—
Income (loss) from discontinued operations	$	1,626				$	241		$	(1,555	)	$	(943	)

(1)The sale of Corner Bakery resulted in a taxable gain due to $11.0 million of goodwill not being deductible for tax purposes. The $9.7 million loss includes tax expense totaling $784,000.

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5.SHAREHOLDERS’ EQUITY

The Board of Directors authorized increases in the stock repurchase plan of $150.0 million in August 2005 and February 2006, bringing the total to $1,310.0 million. Pursuant to the Company’s stock repurchase plan, the Company repurchased approximately 6.4 million shares of its common stock for $252.5 million during the first three quarters of fiscal 2006. As of March 29, 2006, approximately $172.7 million was available under the Company’s share repurchase authorizations. The Company’s stock repurchase plan will be used to minimize the dilutive impact of stock options and other share-based awards. The Company will consider additional share repurchases based on several factors, including the Company’s cash position, share price, operational liquidity, and planned investment and financing needs. The repurchased common stock is reflected as a reduction of shareholders’ equity.

6.SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest and income taxes for the first three quarters of fiscal 2006 and 2005 is as follows (in thousands):

	March 29, 2006		March 30, 2005
Income taxes, net of refunds	$	58,194	$	35,262
Interest, net of amounts capitalized	12,516		12,519

Non-cash investing and financing activities for the first three quarters of fiscal 2006 and 2005 are as follows (in thousands):

	March 29, 2006		March 30, 2005
Retirement of fully depreciated assets	$	43,977	$	13,594
Restricted share awards issued, net of forfeitures	9,937		1,408
Decrease in fair value of interest rate swaps	8,400		345
Capitalized straight-line rent	3,372		4,010
Conversion of debt into common stock	—		10,796

In the second quarter of fiscal 2006, the Company purchased certain assets and assumed certain liabilities in connection with the acquisition of restaurants. The fair values of the assets and liabilities recorded at the date of acquisition are as follows (in thousands):

Property and equipment	$	14,617
Goodwill	20,958
Other assets	4,732
Capital lease obligations	(16,123		)
Other liabilities	(1,089		)
Net cash paid	$	23,095

The assets acquired and liabilities assumed are recorded at fair values as determined by management based upon information available. The Company will finalize the allocation between goodwill and reacquired franchise rights (included in other assets) once information sufficient to complete the allocation is obtained.

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7.CONTINGENCIES

As of March 29, 2006, the Company guaranteed lease payments totaling $81.8 million as a result of the sale of certain brands and the sale of restaurants to franchise partners. 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 2006 through fiscal 2017. The Company remains secondarily liable for the leases; however, no liability has been recorded as the likelihood of the buyers defaulting on the leases is considered negligible.

The Company is engaged in various legal proceedings and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, management of the Company, based upon consultation with legal counsel, is of the opinion that there are no matters pending or threatened which are expected to have a material adverse effect, individually or in the aggregate, on the Company’s consolidated financial condition or results of operations.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table sets forth selected operating data as a percentage of total revenues for the periods indicated. All information is derived from the accompanying consolidated statements of income.

	Thirteen Week Periods Ended			Thirty-Nine Week Periods Ended
	March 29, 2006		March 30, 2005	March 29, 2006		March 30, 2005
Revenues	100.0%		100.0%	100.0%		100.0%
Operating Costs and Expenses:
Cost of sales	28.1%		28.4%	28.3%		28.3%
Restaurant expenses	53.8%		54.6%	54.8%		55.2%
Depreciation and amortization	4.4%		4.7%	4.6%		4.9%
General and administrative	4.9%		3.4%	4.9%		4.0%
Restructure charges and other impairments	0.0%		0.0%	0.1%		1.9%
Total operating costs and expenses	91.2%		91.1%	92.7%		94.3%
Operating income	8.8%		8.9%	7.3%		5.7%
Interest expense	0.5%		0.6%	0.5%		0.7%
Other, net	(0.1%	)	0.0%	0.0%		0.1%
Income before provision for income taxes	8.4%		8.3%	6.8%		4.9%
Provision for income taxes	2.6%		2.7%	2.2%		0.9%
Income from continuing operations	5.8%		5.6%	4.6%		4.0%
Income (loss) from discontinued operations, net of taxes	0.1%		0.0%	(0.1%	)	0.0%
Net income	5.9%		5.6%	4.5%		4.0%

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The following table details the number of restaurant openings during the third quarter and year-to-date, total restaurants open at the end of the third quarter, and total projected openings in fiscal 2006.

	Third Quarter Openings		Year-to-Date Openings		Total Open at End Of Third Quarter		Projected Openings
	Fiscal 2006	Fiscal 2005	Fiscal 2006	Fiscal 2005	Fiscal 2006	Fiscal 2005	Fiscal 2006
Chili’s:
Company-owned	25	20	70	57	884	793	97-100
Franchised	8	10	26	21	277	258	25-30
Total	33	30	96	78	1,161	1,051	122-130
Macaroni Grill:
Company-owned	3	6	7	14	226	219	6-7
Franchised	—	—	1	4	14	13	4-5
Total	3	6	8	18	240	232	10-12
Maggiano’s	—	1	4	5	37	33	4-5
On The Border:
Company-owned	1	2	7	4	121	115	6-8
Franchised	—	—	1	—	21	18	1-2
Total	1	2	8	4	142	133	7-10
Corner Bakery:
Company-owned	2	1	6	2	—	84	—
Franchised	—	—	—	—	—	3	—
Total	2	1	6	2	—	87	—
Grand Total	39	40	122	107	1,580	1,536	143-157

At March 29, 2006, the Company owned the land and buildings for 311 of the 1,268 company-owned restaurants. The net book value of the land and buildings associated with these restaurants totaled $268.8 million and $271.4 million, respectively.

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OVERVIEW

At March 29, 2006, the Company owned, operated, or franchised 1,580 restaurants. The Company intends to continue the expansion of its restaurant brands by opening units in strategically desirable markets. The Company considers the restaurant site selection process critical to its long-term success and devotes significant effort to the investigation of new locations utilizing a variety of sophisticated analytical techniques. The Company intends to concentrate on the development of certain identified markets to achieve penetration levels deemed desirable in order to improve competitive position, marketing potential and profitability. Expansion efforts will be focused not only on major metropolitan areas, but also on smaller market areas and non-traditional locations (such as airports, kiosks and food courts) that can adequately support any of the Company’s restaurant brands. The specific rate at which the Company is able to open new restaurants is determined by its success in locating satisfactory sites, negotiating acceptable lease or purchase terms, securing appropriate local governmental permits and approvals, and by its capacity to supervise construction and recruit and train management personnel.

The restaurant industry is a highly competitive business, which is sensitive to changes in economic conditions, trends in lifestyles and fluctuating costs.  Operating margins for restaurants are susceptible to fluctuations in prices of commodities, which include among other things, beef, chicken, seafood, dairy, cheese, produce and other necessities to operate a restaurant such as natural gas or other energy supplies.  Additionally, the restaurant industry is characterized by a high initial capital investment, coupled with high labor costs.

Revenues for the fourth quarter of fiscal 2006 are estimated to increase by 9% to 10% compared to the same quarter in fiscal 2005. Cost of sales, as a percent of revenues, is estimated to be 0.2% lower than last year primarily due to favorable commodity costs. Excluding refranchising gains and the 0.2% impact of incremental stock-based compensation, restaurant expenses are estimated to be 0.8% to 1.0% higher than last year primarily driven by higher advertising and utility costs, partially offset by improved labor costs. General and administrative expenses, excluding the 0.4% impact of incremental stock-based compensation, are expected to be 0.3% higher due to higher performance-based compensation that was not paid in the prior year. Excluding refranchising gains and incremental stock-based compensation, the effective tax rate from continuing operations for the fourth quarter is estimated to be 32.0%.

REVENUES

Revenues for the third quarter of fiscal 2006 increased to $1,092.8 million, 12.6% over the $970.5 million generated for the same quarter of fiscal 2005. Revenues for the thirty-nine week period ended March 29, 2006 rose 11.9% to $3,077.8 million from the $2,751.1 million generated for the same period of fiscal 2005. The increases were primarily attributable to a net increase of 108 company-owned restaurants (excluding Corner Bakery) since March 30, 2005 and an increase in comparable store sales. The Company increased its capacity for the third quarter and year-to-date of fiscal 2006 by 7.4% and 7.2%, respectively, compared to the respective prior year periods. Comparable store sales increased 2.7% and 2.8% for the third quarter and year-to-date, respectively, from the same periods of fiscal 2005. Menu prices in the aggregate increased 2.9% for year-to-date fiscal 2006 as compared to fiscal 2005.

COSTS AND EXPENSES

Cost of sales, as a percent of revenues, decreased 0.3% for the third quarter of fiscal 2006 as compared to the same period of fiscal 2005. The decrease was due to a 0.9% increase in menu prices and a 0.4% favorable product mix shift for poultry, partially offset by a 0.8% unfavorable product mix shift for meat and seafood and a 0.2% increase in commodity prices for produce. Cost of sales, as a percent of revenues, remained flat for year-to-date fiscal 2006 as compared to the same period of fiscal 2005. Unfavorable product mix shifts and increases in commodity prices for meat and seafood of 0.9% and 0.1%, respectively, were offset by a 0.9% increase in menu prices and a 0.1% favorable product mix shift for poultry.

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Restaurant expenses, as a percent of revenues, decreased 0.8% and 0.4% for the third quarter and year-to-date of fiscal 2006, respectively, as compared to the same periods of fiscal 2005. The decreases were primarily due to a net refranchising gain of $7.0 million recorded in the third quarter of fiscal 2006, increases in sales leverage and productivity, and a reduction in repair and maintenance expenses. The decreases were partially offset by increases in utility costs, stock-based compensation and a $2.0 million refranchising gain recorded in the third quarter of fiscal 2005. The decrease in year-to-date fiscal 2006 was also attributable to the $17.3 million FICA tax assessment recorded in the second quarter of fiscal 2005, partially offset by refranchisingand other gains totaling $9.1 million recorded year-to-date fiscal 2005.

Depreciation and amortization increased $3.1 million and $8.9 million for the third quarter and year-to-date of fiscal 2006, respectively, as compared to the same periods of fiscal 2005. The increases in depreciation expense were due to new unit construction and ongoing remodel costs, partially offset by a decrease in depreciation related to store closures and dispositions and a declining depreciable asset base for older units.

General and administrative expenses increased $21.2 million and $41.8 million for the third quarter and year-to-date fiscal 2006, respectively, as compared to the same periods of fiscal 2005. The increases were primarily due to an increase in performance-based compensation that was not paid in the prior year and stock-based compensation.

Restructure charges and other impairments recorded during the third quarter and year-to-date of fiscal 2006 consist of a $1.1 million gain related to the final disposition of the Company’s interest in Rockfish Seafood Grill (“Rockfish”), offset by net charges associated with closed restaurants and asset impairments. Restructure charges and other impairments recorded year-to-date fiscal 2005 include a $36.0 million charge related to the disposition of Big Bowl Asian Kitchen (“Big Bowl”), a $16.9 million charge to fully impair the investment and notes receivable associated with Rockfish, a $1.0 million charge for an existing lease obligation associated with a sub-lease, and a $3.1 million gain associated with closed restaurants.

Interest expense decreased $290,000 and $2.9 million for the third quarter and year-to-date of fiscal 2006, respectively, as compared to the same periods of fiscal 2005. The decreases were primarily due to the redemption of the convertible senior debentures and the payment of the remaining principal balance on the senior notes in fiscal 2005, partially offset by increased average borrowings and interest rates on the Company’s lines-of-credit.

INCOME TAXES

The Company’s effective income tax rate related to continuing operations decreased to 30.9% from 32.2% for the third quarter of fiscal 2006 and increased to 32.5% from 17.4% for year-to-date fiscal 2006 as compared to the same periods of fiscal 2005. The decrease during the third quarter was due to a $1.6 million tax benefit associated with the final disposition of the Company’s interest in Rockfish, partially offset by stock-based compensation related to incentive stock options that are deductible when exercised. The year-to-date increase was primarily attributable to the income tax benefit of $16.9 million, consisting primarily of federal income tax credits related to the additional FICA taxes paid as a result of the IRS resolution in the second quarter of fiscal 2005, the disposition of Big Bowl in the first quarter of fiscal 2005, which allowed the Company to take tax deductions for goodwill impairment charges totaling $48.6 million, and stock-based compensation related to incentive stock options.

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LIQUIDITY AND CAPITAL RESOURCES

The working capital deficit increased to $290.3 million at March 29, 2006 from $117.0 million at June 29, 2005, primarily due to purchases of treasury stock. Net cash provided by operating activities of continuing operations increased to $390.9 million for the first three quarters of fiscal 2006 from $317.3 million during the same period in fiscal 2005 due to increased profitability and the timing of operational receipts and payments. The Company believes that its various sources of capital, including availability under existing credit facilities, ability to raise additional financing, and cash flow from operating activities of continuing operations, are adequate to finance operations as well as the repayment of current debt obligations.

Capital expenditures consist of purchases of land for future restaurant sites, new restaurants under construction, purchases of new and replacement restaurant furniture and equipment, and ongoing remodeling programs. Capital expenditures were $253.6 million for the first three quarters of fiscal 2006 compared to $237.1 million for the same period of fiscal 2005. The Company estimates that its capital expenditures during the fourth quarter of fiscal 2006 will approximate $100.0 million and will be funded entirely from operations and existing credit facilities.

The Company completed the sale of Corner Bakery in February 2006 for gross cash proceeds of $72.5 million. Additionally, the Company sold six Chili’s restaurants and two On The Border restaurants to franchise partners for cash proceeds of $19.0 million during the third quarter of fiscal 2006.

In the second quarter of fiscal 2006, the Company acquired sixteen restaurants from its franchise partners for approximately $23.1 million.

In February 2006, the Company announced the declaration of a dividend to common stock shareholders in the amount of $0.10 per share. The dividend was paid in March 2006, bringing total dividends paid during the first three quarters of fiscal 2006 to $17.1 million.

The Board of Directors authorized increases in the stock repurchase plan of $150.0 million in August 2005 and February 2006, bringing the total to $1,310.0 million. Pursuant to the Company’s stock repurchase plan, the Company repurchased approximately 6.4 million shares of its common stock for $252.5 million during the first three quarters of fiscal 2006. As of March 29, 2006, approximately $172.7 million was available under the Company’s share repurchase authorizations. The Company’s stock repurchase plan will be used to minimize the dilutive impact of stock options and other share-based awards. The Company will consider additional share repurchases based on several factors, including the Company’s cash position, share price, operational liquidity, and planned investment and financing needs. The repurchased common stock is reflected as a reduction of shareholders’ equity.

The Company is not aware of any other event or trend that would potentially affect its liquidity. In the event such a trend develops, the Company believes that there are sufficient funds available under its credit facilities and from its internal cash generating capabilities to adequately manage the expansion of its business.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective December 29, 2005, the Company adopted Financial Accounting Standards Board Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”), which requires that rental costs associated with ground or building operating leases that are incurred during a construction period be recognized as rental expense. Previously, the Company capitalized these costs. Rent expense for the third quarter of fiscal 2006 increased $1.4 million ($887,000 after taxes) and is estimated to increase $2.0 to $2.5 million ($1.2 to $1.6 million after taxes) for the fourth quarter of fiscal 2006 as a result of FSP 13-1.

Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative market risks of the Company since the prior reporting period.

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Item 4.CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures [as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)], as of the end of the period covered by this report.  Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective by making known to them in a timely manner material information relating to the Company required to be disclosed in the Company’s reports filed or submitted under the Exchange Act.

There were no changes in the Company’s internal control over financial reporting or in other factors that could significantly affect this control during the quarter ended March 29, 2006, that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

The Company wishes to caution readers that the following important factors, among others, could cause the actual results of the Company to differ materially from those indicated by forward-looking statements made in this report and from time to time in news releases, reports, proxy statements, registration statements and other written or electronic communications, as well as verbal forward-looking statements made from time to time by representatives of the Company. Such forward-looking statements involve risks and uncertainties that may cause the Company’s or the restaurant industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that might cause actual events or results to differ materially from those indicated by these forward-looking statements may include matters such as future economic performance, restaurant openings, operating margins, the availability of acceptable real estate locations for new restaurants, the sufficiency of the Company’s cash balances and cash generated from operating and financing activities for the Company’s future liquidity and capital resource needs, and other matters, and are generally accompanied by words such as “believes,” “anticipates,” “estimates,” “predicts,” “expects” and similar expressions that convey the uncertainty of future events or outcomes. An expanded discussion of some of these risk factors follows.

Competition may adversely affect the Company’s operations and financial results.

The restaurant business is highly competitive with respect to price, service, restaurant location, nutritional and dietary trends and food quality, and is often affected by changes in consumer tastes and behaviors, economic conditions, population and traffic patterns. The Company competes 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 the Company. There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants. In addition, factors such as inflation, increased food, labor and benefits costs, and difficulty in attracting hourly employees may adversely affect the restaurant industry in general and the Company’s restaurants in particular.

The Company’s sales volumes generally decrease in winter months.

The Company’s sales volumes fluctuate seasonally, and are generally higher in the summer months and lower in the winter months, which may cause seasonal fluctuations in the Company’s operating results.

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Changes in governmental regulation may adversely affect the Company’s ability to open new restaurants and the Company’s existing and future operations.

Each of the Company’s restaurants is subject to licensing and regulation by alcoholic beverage control, health, sanitation, safety and fire agencies in the state, county and/or municipality in which the restaurant is located. The Company generally has not encountered any material difficulties or failures in obtaining the required licenses or approvals that could delay or prevent the opening of a new restaurant or impact the continued operations of an existing restaurant, and although the Company does not, at this time, anticipate any occurring in the future, there can be no assurance that the Company will not experience material difficulties or failures that could delay the opening of restaurants in the future or impact the continued operations of existing restaurants.

The Company is subject to federal and state environmental regulations, and although these have not had a material negative effect on the Company’s operations, the Company cannot ensure that there will not be a material negative effect in the future. More stringent and varied requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new restaurants in particular locations.

The Company is 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, 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. The Company expects increases in payroll expenses as a result of federal, state and local mandated increases in the minimum wage, and although such increases are not expected to be material, the Company cannot assure that there will not be material increases in the future. In addition, the Company’s vendors may be affected by higher minimum wage standards, which may increase the price of goods and services supplied to the Company.

Inflation may increase the Company’s operating expenses.

The Company has not experienced a significant overall impact from inflation. As operating expenses increase, the Company, to the extent permitted by competition, recovers increased costs by increasing menu prices, by reviewing, then implementing, alternative products or processes, or by implementing other cost-reduction procedures. There can be no assurance, however, that the Company will be able to continue to recover increases in operating expenses due to inflation in this manner.

Increased energy costs may adversely affect the Company’s profitability.

The Company’s success depends in part on its ability to absorb increases in utility costs. Various regions of the United States in which the Company operates multiple restaurants have experienced significant and temporary increases in utility prices. If these increases should recur, they will have an adverse effect on the Company’s profitability.

Successful mergers, acquisitions, divestitures and other strategic transactions are important to the future growth and profitability of the Company.

The Company intends to evaluate potential mergers, acquisitions, joint venture investments, and divestitures as part of its 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 acquisition candidates; the Company’s ability to achieve projected economic and operating synergies; unanticipated changes in business and economic conditions affecting an acquired business; and the ability of the Company to complete divestitures on acceptable terms and at or near the prices estimated as attainable by the Company.

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If the Company is unable to meet its growth plan, the Company’s profitability in the future may be adversely affected.

The Company’s ability to meet its growth plan is dependent upon, among other things, its ability to 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, and meet construction schedules. The costs related to restaurant and brand development include purchases and leases of land, buildings and equipment and facility and equipment maintenance, repair and replacement. The labor and materials costs involved vary geographically and are subject to general price increases. As a result, future capital expenditure costs of restaurant development may increase, reducing profitability. There can be no assurance that the Company will be able to expand its capacity in accordance with its growth objectives or that the new restaurants and brands opened or acquired will be profitable.

Unfavorable publicity relating to one or more of the Company’s 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 other health concerns or operating issues stemming from one or a limited number of restaurants. In particular, since the Company depends heavily on the “Chili’s” brand for a majority of its 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 the Company’s business, financial condition, and results of operations.

Identification of material weakness in internal control may adversely affect the Company’s financial results.

The Company is 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 which could indicate a lack of adequate controls to generate accurate financial statements. Though the Company routinely assesses its internal controls, there can be no assurance that the Company will be able to timely remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that the Company will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.

Other risk factors may adversely affect the Company’s financial performance.

Other risk factors that could cause the Company’s actual results to differ materially from those indicated in the forward-looking statements include, without limitation, changes in economic conditions, consumer perceptions of food safety, changes in consumer tastes and behaviors, governmental monetary policies, changes in demographic trends, availability of employees, terrorist acts, and weather and other acts of God.

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PART II. OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

Information regarding legal proceedings is incorporated by reference from Note 7 to the Company’s consolidated financial statements set forth in Part I of this report.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Shares repurchased during the third quarter of fiscal 2006 are as follows (in thousands, except share and per share amounts):

	Total Number of Shares Purchased (a)	Average Price Paid per Share		Maximum Dollar Value that May Yet be Purchased Under the Program
December 29, 2005 through February 1, 2006	581,100	$	39.20	$	85,262
February 2, 2006 through March 1, 2006	1,414,700	$	41.27	$	176,825
March 2, 2006 through March 29, 2006	100,000	$	41.63	$	172,659
	2,095,800	$	40.72

(a)All of the shares purchased during the third quarter of fiscal 2006 were purchased as part of the publicly announced programs described in part I of this report.

Item 6.EXHIBITS

10(a)	The Company’s Performance Share Plan Description.
31(a)	Certification by Douglas H. Brooks, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to 17 CFR 240.13a – 14(a) or 17 CFR 240.15d – 14(a).
31(b)	Certification by Charles M. Sonsteby, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 17 CFR 240.13a – 14(a) or 17 CFR 240.15d – 14(a).
32(a)	Certification by Douglas H. Brooks, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification by Charles M. Sonsteby, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BRINKER INTERNATIONAL, INC.
Date: May 8, 2006	By:		/s/ Douglas H. Brooks
			Douglas H. Brooks,
			Chairman of the Board,
			President and Chief Executive Officer
			(Principal Executive Officer)
Date: May 8, 2006	By:	/s/ Charles M. Sonsteby
		Charles M. Sonsteby,
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

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