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LEASES | 6 Months Ended
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Dec. 25, 2019
Leases [Abstract] |
Leases | As of December 25, 2019, 1,074 of our 1,117 Company-owned restaurant facilities were leased. We typically lease our restaurant facilities through ground leases (where we lease land only, but own the building) or retail leases (where we lease the land/retail space and building). Our leased restaurants typically have an initial lease term of 10 to 20 years, with one or more renewal terms typically ranging from 1 to 10 years. The leases typically provide for a fixed rental or a fixed rental plus percentage rentals based on sales volume. In addition to our restaurant facilities, we also lease our corporate headquarters location and certain technology and other restaurant equipment. Our lease agreements do not contain any material residual value guarantees or material covenant restrictions. Adoption of ASC 842 Transition and Practical Expedient Elections We adopted FASB Accounting Standards Codification (“ASC”) Topic 842, Leases (“ASC 842”), from the previous guidance ASC Topic 840, Leases (“Legacy GAAP”) effective June 27, 2019, the first day of fiscal 2020. We adopted ASC 842 using the alternative transition method, such that our fiscal 2020 Consolidated Financial Statements (Unaudited) reflect ASC 842, while our prior period Consolidated Financial Statements (Unaudited) were prepared under Legacy GAAP and have not been restated. In connection with the adoption of ASC 842, we elected the following practical expedients and policies:
• | Package of practical expedients - the election of this package allowed us to carry forward our historical lease classification and our assessment of whether a contract is or contains a lease for any leases that existed prior to the adoption of ASC 842.
• | Combine lease and non-lease components policy - we elected for all classes of underlying leased assets to account for lease and non-lease components (such as common area maintenance) and include executory costs (such as property taxes and insurance) to combine as a single lease component.
• | Short-term lease policy - we elected the short-term lease exemption from balance sheet recognition for all classes of underlying assets with an initial term of 12 months or less and that do not include an option to purchase the underlying asset that we are reasonably certain to exercise. Short-term leases are expensed as incurred in Restaurant expenses in the Consolidated Statements of Comprehensive Income (Unaudited)
We did not elect the hindsight practical expedient that permitted a reassessment of lease terms for existing leases. Lease Accounting Policy under ASC 842 ASC 842 requires lessees to recognize on the balance sheet at lease commencement the lease assets and related lease liabilities for the rights and obligations created by operating and finance leases with lease terms of more than 12 months. The lease term commences on the date the lessor makes the underlying property available, irrespective of when lease payments begin under the contract. When determining the lease term at commencement, we consider both termination and renewal option periods available, and only include the period for which failure to renew the lease imposes a penalty on us in such an amount that renewal, or termination options, appear to be reasonably certain. Our lease liability will generally be based on the present value of the lease payments, consisting of fixed costs and certain rent escalations, using our incremental borrowing rate applicable to the lease term. The right-of-use lease asset will generally be based on the lease liability, adjusted for amounts related to other lease-related assets and liabilities. Our adjustments typically include prepaid rent, straight-line rent for timing differences between payment streams and lease term, landlord contributions that are recorded when received as a reduction to the asset, and favorable or unfavorable lease purchase price adjustments. Additionally, upon adoption, we also recorded partial impairments of certain lease assets with an adjustment to Retained earnings related to previously impaired properties. The interest rates used in our lease contracts are not implicit. We have derived our incremental borrowing rate using the interest rate we would pay on our existing borrowings, adjusted for the effect of designating collateral and the lease terms. The reasonably certain lease term and incremental borrowing rate for each lease requires judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the lease asset and liability. The lease asset carrying amounts are assessed for impairment semi-annually or when events or circumstances indicate that the carrying amount may not be recoverable, in accordance with our long-lived asset impairment policy. We monitor for events or changes in circumstances that require reassessment of lease classification. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the lease asset. Variable lease costs are expensed as incurred in Restaurant expenses related to restaurant properties or General and administrative for our corporate headquarters, respectively, in the Consolidated Statements of Comprehensive Income (Unaudited), and are not included in lease liabilities in the Consolidated Balance Sheets (Unaudited). Contingent rent represents payment of variable lease obligations based on a percentage of sales, as defined by the terms of the applicable lease, for certain restaurant facilities and is recorded at the point in time we determine that it is probable that such sales levels will be achieved. Additionally, we have certain leases which periodically reset to a specified index, such leases are initially recorded using the index that existed at lease commencement. Subsequent index changes are recorded as variable rental payments. Maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs. Operating lease expenses are recognized on a straight-line basis over the lease term in Restaurant expenses for restaurant properties, or General and administrative for our corporate headquarters, in the Consolidated Statements of Comprehensive Income (Unaudited), respectively. Finance lease expenses are recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term and the expenses are recognized in Depreciation and amortization in the Consolidated Statements of Comprehensive Income (Unaudited). Interest on each finance lease liability is recorded to Interest expenses in the Consolidated Statements of Comprehensive Income (Unaudited). Financial Statement Impact of ASC 842 Adoption The adoption of ASC 842 represents a change in accounting principle. The adoption did not have a significant impact in the Consolidated Statements of Comprehensive Income (Unaudited) or Consolidated Statements of Cash Flows (Unaudited). Upon adoption, there was a material increase in Total assets and Total liabilities in the Consolidated Balance Sheets (Unaudited) primarily due to the recognition of operating lease assets and related lease liabilities where we are the lessee. The table below reflects the balance sheet adoption impact related to ASC 842 as an adjustment at June 27, 2019, the first day of fiscal 2020 (condensed, unaudited):
| Legacy GAAP |  | ASC 842 Cumulative Adjustments |  | ASC 842
| June 26, 2019 |  |  | June 27, 2019
ASSETS |  |  |  |  |
Current assets(1) | $ | 177.0 |  |  | $ | 0.3 |  |  | $ | 177.3 |
Other assets |  |  |  |  |
Operating lease assets(2) | — |  |  | 1,034.3 |  |  | 1,034.3 |
Deferred income taxes, net(3) | 112.0 |  |  | (65.1 | ) |  | 46.9 |
Intangibles, net(1) | 22.3 |  |  | (4.1 | ) |  | 18.2 |
LIABILITIES AND SHAREHOLDERS’ DEFICIT |  |  |  |  |
Current liabilities |  |  |  |  |
Operating lease liabilities(4) | — |  |  | 110.8 |  |  | 110.8 |
Other accrued liabilities(1)(5) | 141.1 |  |  | (38.3 | ) |  | 102.8 |
Long-term operating lease liabilities, less current portion(4) | — |  |  | 1,044.9 |  |  | 1,044.9 |
Deferred gain on sale leaseback transactions(5) | 255.3 |  |  | (255.3 | ) |  | — |
Other liabilities(1) | 153.0 |  |  | (92.6 | ) |  | 60.4 |
Retained earnings | 2,771.2 |  |  | 195.9 |  |  | 2,967.1 |
(1) | The following prior lease balances were reclassified into Operating lease assets upon adoption of ASC 842:
– | Current assets adjustment related to the prepaid rent.
– | Intangibles, net adjustment related to the favorable lease asset position.
– | Other accrued liabilities and Other liabilities balances adjustments related to the current and long-term portions of straight-line rent balances, unfavorable lease liability positions, exit-related lease accruals, and landlord contributions.
Additionally, Other accrued liabilities included $19.3 million of deferred gain on sale leaseback transactions that was eliminated as a cumulative effect adjustment to Retained earnings upon adoption, refer to (5) below for more details. Refer to Note 10 - Accrued and Other Liabilities for June 26, 2019 balance details.
(2) | Operating lease assets represents the capitalization of operating lease assets equal to the amount of recognized operating lease liability as described in (4) below, adjusted by the net carrying amounts described in (1) above, and $15.5 million related to the impairment of certain operating lease assets for restaurant facilities previously fully impaired under our long-lived asset impairment policy that were recorded to Retained earnings.
(3) | Deferred income taxes, net was reduced by $68.6 million related to the elimination of the deferred gain on sale leaseback transactions as described in (5) below, partially offset by $3.5 million related to the impact of adopting ASC 842 and recording the operating lease assets and liabilities.
(4) | Operating lease liabilities, both current and long-term, represents the liabilities based on the present value of the lease payments, consisting of fixed costs and certain rent escalations, using our incremental borrowing rate applicable to the lease term upon date of adoption.
(5) | Deferred gain on sale leaseback transactions balance of $255.3 million, the related short-term deferred gain balance recorded within Other accrued liabilities of $19.3 million, and the associated Deferred income taxes, net of $68.6 million as described in (3) above, were eliminated upon ASC 842 adoption into Retained earnings as required by ASC 842 using the alternative transition method. No further gain will be amortized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income effective fiscal 2020.
Lease Amounts Included in the Thirteen and Twenty-Six Week Periods Ended December 25, 2019 Consolidated Balance Sheet Disclosure of Lease Amounts The following table includes a detail of lease asset and liabilities included in the Consolidated Balance Sheets (Unaudited):
| December 25, 2019
| Finance Leases(1) |  | Operating Leases(2) |  | Total Leases
Lease assets | $ | 66.7 |  |  | $ | 1,175.9 |  |  | $ | 1,242.6 |
Current lease liabilities | 10.5 |  |  | 119.9 |  |  | 130.4 |
Long-term lease liabilities | 74.8 |  |  | 1,172.1 |  |  | 1,246.9 |
Total lease liabilities | $ | 85.3 |  |  | $ | 1,292.0 |  |  | $ | 1,377.3 |
(1) | Finance lease assets are recorded in Property and equipment, at cost, and the related current and long-term lease liabilities are recorded within Other accrued liabilities and Long-term debt and finance leases, less current installments, respectively.
(2) | Operating lease assets are recorded in Operating lease assets and the related current and long-term lease liabilities are recorded within Operating lease liabilities and Long-term operating lease liabilities, less current portion, respectively.
Consolidated Statement of Comprehensive Income Disclosure of Lease Amounts The components of lease expense, including variable lease costs primarily consisting of rent based on a percentage of sales, common area maintenance and real estate tax charges, and short-term lease expenses for leases with lease terms less than twelve months are included in the Consolidated Statements of Comprehensive Income (Unaudited) as follows:
| Thirteen Week Period Ended December 25, 2019 |  | Twenty-Six Week Period Ended December 25, 2019
Operating lease cost | $ | 41.9 |  |  | $ | 79.2 |
Finance lease amortization | 3.1 |  |  | 5.7 |
Finance lease interest | 1.1 |  |  | 2.0 |
Short-term lease cost | 0.5 |  |  | 0.7 |
Variable lease cost | 15.1 |  |  | 28.3 |
Sublease (income) | (1.2 | ) |  | (2.3 | )
Total lease costs, net | $ | 60.5 |  |  | $ | 113.6 |
Consolidated Statement of Cash Flows Disclosure of Lease Amounts Supplemental cash flow information related to leases recorded in the Consolidated Statements of Cash Flows (Unaudited) is as follows:
| Twenty-Six Week Period Ended December 25, 2019
Cash flows from operating activities |
Cash paid related to lease liabilities |
Operating leases | $ | 83.2 |
Finance leases | 2.0 |
Cash flows from financing activities |
Cash paid related to lease liabilities |
Finance leases | 5.0 |
Non-cash lease assets obtained in exchange for lease liabilities |
Operating leases(1) | 203.2 |
Finance leases(1) | 41.9 |
(1) | New lease assets obtained, net of lease liabilities primarily related to the new and assumed operating and finance leases from the Chili’s restaurant acquisition. Refer to Note 2 - Chili’s Restaurant Acquisition and “Significant Changes in Leases during the Period” section below for more information.
Weighted Average Lease Term and Discount Rate Other information related to leases is as follows:
| December 25, 2019
| Finance Leases |  | Operating Leases
Weighted average remaining lease term | 11.3 years |  |  | 11.9 years |
Weighted average discount rate | 5.4 | % |  | 4.3 | %
Lease Maturity Analysis As of December 25, 2019, accounted for and presented under ASC 842 guidance, the discounted future minimum lease payments on finance and operating leases, as well as sublease income were as follows:
| December 25, 2019
Fiscal Year | Finance Leases |  | Operating Leases |  | Sublease Income
Remainder of 2020 | $ | 7.3 |  |  | $ | 86.8 |  |  | $ | (1.6 | )
2021 | 14.0 |  |  | 170.0 |  |  | (3.3 | )
2022 | 12.4 |  |  | 163.5 |  |  | (3.2 | )
2023 | 10.8 |  |  | 152.6 |  |  | (2.5 | )
2024 | 9.7 |  |  | 142.6 |  |  | (1.8 | )
Thereafter | 60.8 |  |  | 978.4 |  |  | (6.3 | )
Total minimum lease payments | 115.0 |  |  | 1,693.9 |  |  | $ | (18.7 | )
Less: Imputed interest | 29.7 |  |  | 401.9 |  |  |
Present value of lease liability | $ | 85.3 |  |  | $ | 1,292.0 |  |  |
As of June 26, 2019, as previously disclosed in our fiscal 2019 Form 10-K under Legacy GAAP, undiscounted future minimum lease payments on both capital and operating leases were as follows:
| June 26, 2019
Fiscal Year | Capital Leases |  | Operating Leases(2)
2020 | $ | 12.3 |  |  | $ | 156.8 |
2021 | 10.1 |  |  | 154.5 |
2022 | 8.2 |  |  | 148.6 |
2023 | 6.7 |  |  | 137.7 |
2024 | 6.0 |  |  | 127.6 |
Thereafter | 17.4 |  |  | 771.7 |
Total minimum lease payments(1) | 60.7 |  |  | $ | 1,496.9 |
Imputed interest (average rate of 6.18%) | (12.3 | ) |  |
Present value of minimum lease payments | 48.4 |  |  |
Less current capital lease obligations | (9.7 | ) |  |
Long-term capital lease obligations | $ | 38.7 |  |  |
(1) | Total minimum lease payments were not reduced by minimum sublease rentals to be received in the future under non-cancelable subleases. The total of undiscounted future sublease rentals was approximately $22.0 million and $14.6 million for capital and operating subleases, respectively, as of June 26, 2019.
(2) | Operating lease expenses for the fifty-two weeks ended June 26, 2019, recorded under Legacy GAAP, totaled $158.6 million, which included $141.7 million for straight-lined minimum rent, $3.3 million for contingent rent, and $13.6 million of other rent-related expenses.
Significant Changes in Leases during the Period As part of the Chili’s restaurant acquisition in the first quarter of fiscal 2020, we assumed and entered into 90 new operating leases included in the balances at December 25, 2019. The leases were recorded net of preliminary purchase price accounting adjustments and prepaid rent. At December 25, 2019, the balances associated with these new leases in the Consolidated Balance Sheets (Unaudited) include Operating lease assets of $168.8 million, Operating lease liabilities of $5.1 million, and Long-term operating lease liabilities, less current portion of $161.4 million. Additionally related to this transaction, we entered into 12 new finance leases with the initial terms of approximately 11 years, plus renewal options. At December 25, 2019, the balances associated with these finance leases in the Consolidated Balance Sheets (Unaudited) include Buildings and leasehold improvements of $25.4 million, Other accrued liabilities of $0.6 million, and Long-term debt and finance leases, less current installments of $24.8 million. Refer to Note 2 - Chili’s Restaurant Acquisition for information about the acquisition. Pre-Commencement Leases In the first quarter of fiscal 2020, we executed one finance lease for Chili’s table-top devices with an initial term of 3 years beginning once all devices have been received, plus one 3-year renewal option. We began receiving the table-top devices in the second quarter of fiscal 2020 and will continue over the remaining course of fiscal 2020. The lease balances at December 25, 2019 related to the devices received through end of the second quarter of fiscal 2020 are included in the finance lease balances in the Consolidated Balance Sheets (Unaudited). The undiscounted fixed payments over the initial term of the lease, net of lease incentives for the remaining devices not received by December 25, 2019 is $23.6 million. Additionally, we have executed two leases for new Chili’s locations with undiscounted fixed payments over the initial term of $7.2 million. These leases are expected to commence during the next 12 months and are expected to have an economic lease term of 20 years. These leases will commence when the landlords make the property available to us for new restaurant construction. We will assess the reasonably certain lease term at the lease commencement date. Fiscal 2019 Sale Leaseback Transactions Restaurant Properties Sale Leaseback Transactions In the thirteen week period ended December 26, 2018, we completed sale leaseback transactions of four restaurant properties which were sold for aggregate consideration of $10.6 million. The balances attributable to the restaurant assets sold included Land of $2.9 million, Buildings and leasehold improvements of $6.8 million, certain fixtures included in Furniture and equipment of $0.3 million, and Accumulated depreciation of $5.7 million. The total gain was $6.3 million an d the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility. In the twenty-six week period ended December 26, 2018, we completed sale leaseback transactions of 145 restaurant properties which were sold for aggregate consideration of $466.3 million. The balances attributable to the restaurant assets sold included Land of $106.5 million, Buildings and leasehold improvements of $224.4 million, certain fixtures included in Furniture and equipment of $9.6 million, and Accumulated depreciation of $169.6 million. The total gain was $295.4 million an d the net proceeds from these sale leaseback transactions were used to repay borrowings on our revolving credit facility. Lease Details The initial terms of all leases included in the sale leaseback transactions were for 15 years, plus renewal options at our discretion. All of these leases were determined to be operating leases. Rent expenses associated with these operating leases were recognized on a straight-line basis over the lease terms under Legacy GAAP during fiscal 2019. As of June 26, 2019, the straight-line rent accrual balance of $62.3 million was included in Other accrued liabilities (current portion) and Other liabilities (long-term portion) in the Consolidated Balance Sheets (Unaudited) which included $2.8 million associated with these operating leases that were reclassified into the Operating lease assets balance upon adoption of ASC 842 effective June 27, 2019, the first day of fiscal 2020. Gain and Deferred Gain Recognition In fiscal 2019, we recognized the portion of the gross gain in excess of the present value of the future minimum lease payments, and deferred the remainder of the gain to be recognized straight-line in proportion to the operating lease terms. During the thirteen and twenty-six week periods ended December 26, 2018, $4.4 million and $17.7 million of the gain was recognized to Other (gains) and charges in the Consolidated Statements of Comprehensive Income (Unaudited), respectively. As of June 26, 2019, the remaining balance of the deferred gain of $274.6 million was recorded in Other accrued liabilities (current portion) and Deferred gain on sale leaseback transactions (long-term portion) in the Consolidated Balance Sheets (Unaudited). The deferred gain balance was eliminated through the cumulative effect adjustment to Retained earnings effective June 27, 2019, the first day of fiscal 2020, upon the adoption of ASC 842. Refer above for ASC 842 adoption details. For any future sale leaseback transactions under the ASC 842 guidance, the gain, adjusted for any off-market terms, will be recognized immediately in most cases.

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- Definition The entire disclosure for lessee entity's leasing arrangements including, but not limited to, all of the following: (a.) The basis on which contingent rental payments are determined, (b.) The existence and terms of renewal or purchase options and escalation clauses, (c.) Restrictions imposed by lease agreements, such as those concerning dividends, additional debt, and further leasing. + References Reference 1: http://fasb.org/us-gaap/role/ref/otherTransitionRef -Publisher FASB -Name Accounting Standards Codification -Topic 840 -URI http://asc.fasb.org/topic&trid=2208923 + Details
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