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REVENUE RECOGNITION | 3 Months Ended
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Sep. 26, 2018
Revenue Recognition [Abstract] |
Revenue Recognition | Effective June 28, 2018, our first quarter of fiscal 2019, we adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), from the previous guidance ASC Topic 605, Revenue Recognition and ASC Subtopic 952-605, Franchisors - Revenue Recognition (together, “Legacy GAAP”). Our transition to ASC 606 represents a change in accounting principle. Our Consolidated Financial Statements for the first quarter of fiscal 2019 reflect the application of ASC 606 guidance using the modified retrospective transition method, while our Consolidated Financial Statements for prior periods were prepared under Legacy GAAP. Significant Accounting Policy Revenues are presented in Company sales and Franchise and other revenues captions in the Consolidated Statements of Comprehensive Income. Company sales include revenues generated by the operation of company-owned restaurants including gift card redemptions. Franchise and other revenues includes royalties, advertising fees (effective first quarter of fiscal 2019), development fees, franchise fees, Maggiano’s banquet service charge income, gift card breakage, service fees and discount costs from third-party gift card sales, digital entertainment revenue, delivery fee income, and retail royalty revenues. Company sales The adoption of ASC 606 did not i mpact revenue recognition related to Company sales. We will continue to record revenue from the sale of food, beverages and alcohol as products are sold. Franchise and other revenues Royalties - Franchise royalties are based on a percentage of the sales generated by our franchised restaurants. The provisions of ASC 606 did not impact the recognition of these royalties, as the performance obligation related to franchise sales is considered complete upon the sale of food, beverages and alcohol. Royalty revenues attributable to franchise restaurants will continue to be recognized in the same period the sales are generated at the franchise restaurants. Advertising fees - Domestic franchisees are contractually obligated to contribute into certain advertising and marketing funds. The adoption of ASC 606 did not impact the timing of revenue recognition of the advertising fees received; however, effective first quarter of fiscal 2019, advertising fees are now presented on a gross basis within Franchise and other revenues. Under Legacy GAAP, the advertising funds received from franchisees were considered a reimbursement of advertising expenses and were presented on a net basis as a reduction to advertising expenses in Restaurant expenses in the Consolidated Statements of Comprehensive Income. Initial development and franchise fees - We receive development fees from franchisees for territory development arrangements and franchise fees for a new restaurant opening. Under ASC 606 these arrangements will be collectively deferred as a contract liability and recognized on a straight-line basis into Franchise and other revenues in the Consolidated Statements of Comprehensive Income over the term of the underlying agreements. Deferred franchise and development fees are classified within Other accrued liabilities for the current portion expected to be recognized within the next 12 months, and Other liabilities for the long-term portion in the Consolidated Balance Sheets. Under Legacy GAAP, development fees were recognized as income upon the execution of the agreement, when development rights were conveyed to the franchisee. Franchise fees were recognized as income when the obligations under the franchise agreement were satisfied, generally upon the opening of the new franchise restaurant. Gift card breakage income - Breakage revenues represent the monetary value associated with outstanding gift card balances for which redemption is considered remote. We estimate this amount based on our historical gift card redemption patterns and update the breakage rate estimate periodically and if necessary, adjust the deferred revenue balance accordingly. In accordance with ASC 606, breakage revenues will be recognized proportionate to the pattern of related gift card redemptions. Under Legacy GAAP, breakage revenues were recognized when redemption was considered remote. We do not charge dormancy or any other fees related to monitoring or administering the gift card program. Additionally, proceeds from the sale of gift cards will continue to be recorded as deferred revenue in Gift card liability in the Consolidated Balance Sheets and recognized as Company sales when the gift card is redeemed by the holder. Gift card service fees and discount costs - Our gift cards are sold through various outlets such as in-store, Chili’s and Maggiano’s websites, directly to other businesses, and through third parties distributors that sell our gift cards at various retail locations. We incur incremental direct costs related to gift card sales, such as commissions and activation fees, for gift cards sold to third party businesses and distributors. These initial direct costs are deferred and amortized against revenue proportionate to the pattern of related gift card redemption. Other revenues - Other revenues not described above, such as Maggiano’s banquet service charge income, digital entertainment revenue, Chili’s retail food product royalties and delivery fee income had no change in recognition from the adoption of ASC 606. Sales taxes Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue transaction and collected from a customer have been excluded from revenue under both Legacy GAAP and ASC 606. Disaggregation of Total Revenues The following table disaggregates revenue by operating segment and major source:
| Thirteen Weeks Ended September 26, 2018
| Chili's |  | Maggiano's |  | Total
Company sales | $ | 640.3 |  |  | $ | 88.0 |  |  | $ | 728.3 |
Royalties | 12.9 |  |  | — |  |  | 12.9 |
Advertising fees | 5.1 |  |  | — |  |  | 5.1 |
Franchise fees and other revenues | 3.5 |  |  | 4.0 |  |  | 7.5 |
Total revenues | $ | 661.8 |  |  | $ | 92.0 |  |  | $ | 753.8 |
Franchise fees and other revenues primarily includes gift card breakage revenue, Maggiano’s banquet service charge income, digital entertainment revenues, delivery fee income, initial development and franchise fees from franchisees, service fees and discount costs from third-party gift card sales, and other revenues. Deferred Development and Franchise Fees Our deferred development and franchise fees consist of the unrecognized fees received from franchisees. A summary of significant changes to the related deferred balance during the first quarter of fiscal 2019 is presented below, along with the revenue to be recognized in the subsequent periods.
| Deferred Development and Franchise Fees
Balance at June 27, 2018 | $ | — |
Cumulative effect adjustment from adoption of ASC 606 | 18.1 |
Additions | 0.2 |
Amount recognized to Franchise and other revenue | (0.5 | )
Balance at September 26, 2018 | $ | 17.8 |
Fiscal Year | Development and Franchise Fees Revenue Recognition
2019 | $ | 1.2 |
2020 | 1.4 |
2021 | 1.4 |
2022 | 1.4 |
2023 | 1.4 |
Thereafter | 11.0 |
| $ | 17.8 |
The development and franchise fees that will be recognized in future years are based on active contracts with franchisees. These amounts represent the amount that will be recognized pursuant to the satisfaction of the contractual performance obligations. We also expect to have future year royalties and advertising fees related to our franchise contracts, however under ASC 606, these future year revenues are not yet determinable due to unsatisfied performance obligations based upon a sales-based royalty. Financial Statement Impact of Transition to ASC 606 ASC 606 was applied to all contracts with customers as of the first day of fiscal 2019, June 28, 2018. The cumulative effect was applied using the modified retrospective approach. Below our Consolidated Balance Sheets reflects the transition to ASC 606 as an adjustment at June 28, 2018 as follows:
| June 27, 2018 |  | ASC 606 Cumulative Effect Adjustments |  | June 28, 2018
ASSETS |  |  |  |  |
Other assets |  |  |  |  |
Deferred income taxes, net (1) | $ | 33.6 |  |  | $ | 2.5 |  |  | $ | 36.1 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current liabilities |  |  |  |  |
Gift card liability (2) | 119.1 |  |  | (8.2 | ) |  | 110.9 |
Other accrued liabilities (3) | 127.2 |  |  | 1.5 |  |  | 128.7 |
Other liabilities (3) | 131.7 |  |  | 16.6 |  |  | 148.3 |
Shareholders’ deficit |  |  |  |  |
Retained earnings (2) (3) | (718.3 | ) |  | (7.4 | ) |  | (725.7 | )
(1) | Deferred income taxes, net adjustment relates to the net change in liabilities and equity as a result of the adoption of ASC 606 described in notes (2) and (3) below.
(2) | Gift card liability is adjusted for the ASC 606 adoption impact of the change to recognize gift card breakage proportionate to the pattern of related gift card redemption. Under Legacy GAAP, gift card breakage was recognized when the likelihood of redemption was deemed remote. The cumulative effect of applying ASC 606 accounting to gift card balances outstanding at June 28, 2018 resulted in an $8.2 million decrease in Gift card liability due to the change in timing of recognition between ASC 606 and Legacy GAAP, and a corresponding $2.0 million decrease in Deferred income taxes, net, and a $6.2 million increase in Retained earnings.
(3) | Other liabilities $16.6 million and Other accrued liabilities $1.5 million adjustments relate to the deferral of previously recognized franchise and development fees received from franchisees, with a corresponding $4.5 million increase in Deferred income taxes, and a $13.6 million decrease to Retained earnings at June 28, 2018.
Comparison of Fiscal 2019 Periods if Legacy GAAP had been in Effect The following tables reflect the impact to our Condensed Consolidated Statement of Income (Unaudited) and Cash flows from operating activities for the thirteen week period ended September 26, 2018, and the unaudited Condensed Consolidated Balance Sheet at September 26, 2018 as if the Legacy GAAP was still in effect. The adjustments presented below in the Condensed Consolidated Statement of Income (Unaudited) include under ASC 606, advertising fees now presented on a gross basis as a component of Franchise and other revenues. Under Legacy GAAP, the advertising fees were recorded as a reduction to advertising expenses within Restaurant expenses in the Consolidated Statements of Comprehensive Income. Additionally, the recognition timing change for franchise related fees and gift card breakage are included within Franchise and other revenues. The adjustments presented below in the Condensed Consolidated Balance Sheet relate to the cumulative effect impact described above in the “Financial Statement Impact of Transition to ASC 606” section, as well as the impact from the change in the gift card breakage, deferred development and franchise fees, and corresponding deferred tax and retained earnings balances as of September 26, 2018. Condensed Consolidated Statement of Income (Unaudited)
| Thirteen Week Period Ended September 26, 2018
| As Reported ASC 606 Amounts |  | Adjustments |  | Legacy GAAP Amounts
Revenues |  |  |  |  |
Company sales | $ | 728.3 |  |  | $ | — |  |  | $ | 728.3 |
Franchise and other revenues | 25.5 |  |  | (4.8 | ) |  | 20.7 |
Total revenues | 753.8 |  |  | (4.8 | ) |  | 749.0 |
Operating costs and expenses |  |  |  |  |
Company restaurants (excluding depreciation and amortization) |  |  |  |  |
Cost of sales | 191.9 |  |  | — |  |  | 191.9 |
Restaurant labor | 256.3 |  |  | — |  |  | 256.3 |
Restaurant expenses | 199.0 |  |  | (5.1 | ) |  | 193.9 |
Company restaurant expenses | 647.2 |  |  | (5.1 | ) |  | 642.1 |
Depreciation and amortization | 37.0 |  |  | — |  |  | 37.0 |
General and administrative | 33.8 |  |  | — |  |  | 33.8 |
Other (gains) and charges | (11.1 | ) |  | — |  |  | (11.1 | )
Total operating costs and expenses | 706.9 |  |  | (5.1 | ) |  | 701.8 |
Operating income | 46.9 |  |  | 0.3 |  |  | 47.2 |
Interest expense | 15.6 |  |  | — |  |  | 15.6 |
Other (income), net | (0.8 | ) |  | — |  |  | (0.8 | )
Income before provision for income taxes | 32.1 |  |  | 0.3 |  |  | 32.4 |
Provision for income taxes | 5.7 |  |  | 0.1 |  |  | 5.8 |
Net income | $ | 26.4 |  |  | $ | 0.2 |  |  | $ | 26.6 |
Basic net income per share | $ | 0.65 |  |  | $ | 0.01 |  |  | $ | 0.66 |
Diluted net income per share | $ | 0.64 |  |  | $ | 0.01 |  |  | $ | 0.65 |
Cash flows from operating activities (Unaudited)
| Thirteen Week Period Ended September 26, 2018
| As Reported ASC 606 Amounts |  | Adjustments |  | Legacy GAAP Amounts
Net income | $ | 26.4 |  |  | $ | 0.2 |  |  | $ | 26.6 |
Adjustments to reconcile Net income to net cash from operating activities: |  |  |  |  |
Depreciation and amortization | 37.0 |  |  | — |  |  | 37.0 |
Stock-based compensation | 3.6 |  |  | — |  |  | 3.6 |
Deferred income taxes, net | (76.1 | ) |  | 0.1 |  |  | (76.0 | )
Restructure charges and other impairments | 1.9 |  |  | — |  |  | 1.9 |
Net (gain) loss on disposal of assets | (13.6 | ) |  | — |  |  | (13.6 | )
Other | 0.8 |  |  | — |  |  | 0.8 |
Changes in assets and liabilities: |  |  |  |  |  |
Accounts receivable, net | 7.9 |  |  | — |  |  | 7.9 |
Inventories | 0.8 |  |  | — |  |  | 0.8 |
Prepaid expenses | (6.3 | ) |  | — |  |  | (6.3 | )
Other assets | (0.5 | ) |  | — |  |  | (0.5 | )
Accounts payable | (5.1 | ) |  | — |  |  | (5.1 | )
Gift card liability | (4.6 | ) |  | (0.6 | ) |  | (5.2 | )
Accrued payroll | (11.9 | ) |  | — |  |  | (11.9 | )
Other accrued liabilities | 12.5 |  |  | 0.3 |  |  | 12.8 |
Current income taxes | 77.5 |  |  | — |  |  | 77.5 |
Other liabilities | (0.7 | ) |  | — |  |  | (0.7 | )
Net cash provided by operating activities | $ | 49.6 |  |  | $ | — |  |  | $ | 49.6 |
Condensed Consolidated Balance Sheet
| September 26, 2018
| As Reported ASC 606 Amounts |  | Adjustments |  | Legacy GAAP Amounts
ASSETS |  |  |  |  |
Current assets |  |  |  |  |
Total current assets | $ | 151.0 |  |  | $ | — |  |  | $ | 151.0 |
Property and equipment, at cost |  |  |  |  |
Net property and equipment | 762.2 |  |  | — |  |  | 762.2 |
Other assets |  |  |  |  |
Goodwill | 164.0 |  |  | — |  |  | 164.0 |
Deferred income taxes, net | 112.1 |  |  | (2.6 | ) |  | 109.5 |
Intangibles, net | 23.6 |  |  | — |  |  | 23.6 |
Other | 31.1 |  |  | — |  |  | 31.1 |
Total other assets | 330.8 |  |  | (2.6 | ) |  | 328.2 |
Total assets | $ | 1,244.0 |  |  | $ | (2.6 | ) |  | $ | 1,241.4 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current liabilities |  |  |  |  |
Current installments of long-term debt | $ | 7.4 |  |  | $ | — |  |  | $ | 7.4 |
Accounts payable | 97.2 |  |  | — |  |  | 97.2 |
Gift card liability | 106.3 |  |  | 7.6 |  |  | 113.9 |
Accrued payroll | 62.6 |  |  | — |  |  | 62.6 |
Other accrued liabilities | 159.5 |  |  | (1.2 | ) |  | 158.3 |
Income taxes payable | 74.6 |  |  | — |  |  | 74.6 |
Total current liabilities | 507.6 |  |  | 6.4 |  |  | 514.0 |
Long-term debt, less current installments | 1,153.0 |  |  | — |  |  | 1,153.0 |
Deferred gain on sale leaseback transactions | 251.0 |  |  | — |  |  | 251.0 |
Other liabilities | 148.3 |  |  | (16.6 | ) |  | 131.7 |
Shareholders’ deficit |  |  |  |  |
Common stock | 17.6 |  |  | — |  |  | 17.6 |
Additional paid-in capital | 503.9 |  |  | — |  |  | 503.9 |
Accumulated other comprehensive loss | (5.5 | ) |  | — |  |  | (5.5 | )
Retained earnings | 2,686.5 |  |  | 7.6 |  |  | 2,694.1 |
Less treasury stock, at cost | (4,018.4 | ) |  | — |  |  | (4,018.4 | )
Total shareholders’ deficit | (815.9 | ) |  | 7.6 |  |  | (808.3 | )
Total liabilities and shareholders’ deficit | $ | 1,244.0 |  |  | $ | (2.6 | ) |  | $ | 1,241.4 |

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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