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 December 26, 2007

Commission File Number 1-10275

BRINKER INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(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.

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):

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

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

BRINKER INTERNATIONAL, INC.

INDEX

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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)

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)

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to consolidated financial statements.

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BRINKER INTERNATIONAL, INC.

Notes to Consolidated Financial Statements

(Unaudited)

1.     BASIS OF PRESENTATION

        References to “Brinker,” “the Company,” “we,” “us,” and “our” in this Form 10-Q are references to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc.

        Our consolidated financial statements as of December 26, 2007 and June 27, 2007 and for the thirteen week and twenty-six week periods ended December 26, 2007 and December 27, 2006 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  We  own, operate, or franchise various restaurant brands under the names of Chili’s Grill & Bar (“Chili’s”), Romano’s Macaroni Grill (“Macaroni Grill”), On The Border Mexican Grill & Cantina (“On The Border”), and Maggiano’s Little Italy (“Maggiano’s”).  Beginning in the first quarter of fiscal 2008, Macaroni Grill has been presented as discontinued operations in the consolidated financial statements.  See Note 5 for additional disclosures.

        The information furnished herein reflects all adjustments (consisting only of normal recurring accruals and adjustments) which are, in our opinion, 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 27, 2007 Form 10-K. We believe the disclosures are sufficient for interim financial reporting purposes.

        Certain prior year amounts in the accompanying consolidated financial statements have been reclassified to conform to fiscal 2008 presentation. These reclassifications have no effect on our net income or financial position as previously reported.

2.     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.  We had approximately 2.3 million stock options and restricted share awards outstanding at December 26, 2007 and 1.1 million stock options and restricted share awards outstanding at December 27, 2006 that were not included in the dilutive earnings per share calculation because the effect would have been antidilutive.

3.     OTHER GAINS AND CHARGES

In May 2007, we entered into an agreement with ERJ Dining IV, LLC to sell 76 company-owned Chili’s restaurants for approximately $122 million. The assets and liabilities associated with these restaurants were classified as held for sale in the consolidated balance sheet for the fiscal year ended June 27, 2007. The sale was completed in November 2007 and we recorded a gain of $29.2 million in other gains and charges in the consolidated statements of income. The net assets sold totaled approximately $88.2 million and consisted primarily of property and equipment of $86.4 million.

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In the second quarter of fiscal 2008, we recorded $7.3 million in charges primarily related to long-lived asset impairments.  The charges include a $5.5 million impairment related to two restaurants which were impaired based on an analysis of projected operating performance and operating cash flows.  Also included is a $1.0 million charge related to the decrease in estimated sales value of land associated with previously closed restaurants and $646,000 related to restaurants closed in the second quarter of fiscal 2008.

In the first quarter of fiscal 2008, we recorded a $512,000 charge for asset impairments related to the relocation of a restaurant and the decrease in estimated sales value of land associated with a previously closed restaurant.

In the second quarter of fiscal 2007, we made the decision to close restaurants based on a comprehensive analysis that examined restaurants not meeting minimum return on investment thresholds and certain other operating performance criteria.  As a result of this analysis, we recorded charges of $2.0 million in continuing operations and $8.6 million in discontinued operations for long-lived asset impairments.

In the first quarter of fiscal 2007, we recorded a $3.2 million gain related to the termination of interest rate swaps on an operating lease commitment.

5.     DISPOSITION OF MACARONI GRILL

We have committed to a plan to sell Macaroni Grill and expect that the sale will be completed in late fiscal 2008 or early fiscal 2009.  The decision to sell the brand was the result of our focus on achieving return on investment and growth targets.  As of December 26, 2007, the net assets to be sold totaled approximately $283.7 million and consisted primarily of property and equipment of $279.8 million.  We are currently in negotiations for the sale of the brand and believe the fair value less costs to sell of the disposal group exceeds the carrying value at December 26, 2007 based on the best information available.   However, due to uncertainty in the credit markets and other factors outside of our control, management cannot be certain that an impairment will not be necessary until the transaction is completed.

Macaroni Grill has been presented as discontinued operations in the consolidated financial statements.  Discontinued operations includes only the revenues and expenses which can be specifically identified with Macaroni Grill and excludes any allocation of corporate costs, including general and administrative expenses, or rental charges on company-owned properties.  The results of Macaroni Grill consist of the following (in thousands):

(1)                      Other gains and charges includes a $3.2 million asset impairment charge associated with restaurant closures and $1.9 million in incremental charges related to the planned sale of Macaroni Grill recorded in the second quarter of fiscal 2008. During the first quarter of fiscal 2008, we recorded $9.2 million of impairment charges to adjust the value of the related restaurants’ carrying value to fair value less the expected cost to sell to a franchisee.  This transaction will not be completed; however, these assets are still held for sale as part of the expected disposition of the Macaroni Grill brand.  Other gains and charges in fiscal 2007 includes an $8.6 million charge for asset impairments associated with restaurant closures.

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6.     TAXES

Effective June 28, 2007, we adopted the provisions of the Financial Accounting Standards Board’s (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). As a result of the adoption we recognized an $847,000 decrease in the liability for unrecognized tax benefits, net of the federal deferred tax benefit, with a corresponding increase to retained earnings.

We file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. We are no longer subject to U.S. federal examinations by tax authorities for fiscal years before 2006.  We are audited by the taxing authorities of most states and certain foreign countries and are subject to examination by these taxing jurisdictions for fiscal years generally after 2003.

The total amount of unrecognized tax benefits as of June 28, 2007 was $23.2 million ($17.4 million of which would favorably affect the effective tax rate if resolved in our favor due to the effect of deferred tax benefits).  Over the next twelve months, we anticipate that it is reasonably possible that the amount of unrecognized tax benefits could be reduced by approximately $786,000 ($604,000 of which would affect the effective tax rate due to the effect of deferred tax benefits) either because our tax position will be sustained upon audit or as a result of the expiration of the statute of limitations for specific jurisdictions.

We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We had $4.3 million ($3.3 million net of a $1.0 million federal deferred tax benefit) of interest and penalties accrued at June 28, 2007.

7.     SHAREHOLDERS’ EQUITY

    The Board of Directors has authorized a total of $2,060.0 million of share repurchases.  Pursuant to our stock repurchase plan, we repurchased approximately 9.1 million shares of our common stock for approximately $240 million during the first two quarters of fiscal 2008.  As of December 26, 2007, approximately $60 million was available under our share repurchase authorizations.  The repurchased common stock is reflected as a reduction of shareholders’ equity.  Our stock repurchase plan has been and will be used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. In the future, we may consider additional share repurchases based on several factors, including our cash position, share price, operational liquidity, and planned investment and financing needs.  In November 2007, we announced the declaration of a dividend to common stock shareholders in the amount of $0.11 per share.  Dividends of $11.1 million were paid in December 2007 and we have paid approximately $20.6 million in dividends year-to-date.

8.     SUPPLEMENTAL CASH FLOW INFORMATION

        Cash paid for income taxes and interest for the first two quarters of fiscal 2008 and 2007 are as follows (in thousands):

Non-cash investing and financing activities for the first two quarters of fiscal 2008 and 2007 are as follows (in thousands):

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9.     CONTINGENCIES

        As of December 26, 2007, we guarantee lease payments totaling $166.3 million as a result of the sale of certain brands and the sale of restaurants to franchisees.  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 2008 through fiscal 2023.  We remain secondarily liable for the leases.  In the event of default, the terms and conditions in our assignment agreements govern our ability to pursue and recover damages incurred.  No material liabilities have been recorded as of December 26, 2007.

Certain current and former hourly restaurant employees filed a lawsuit against us in California Superior Court alleging violations of California labor laws with respect to meal and rest breaks.  The lawsuit seeks penalties and attorney’s fees and was certified as a class action in July 2006.  In October 2007, the California Court of Appeal decertified the class action on all claims, but has been asked to reconsider that decision. We intend to vigorously defend our position.  It is not possible at this time to reasonably estimate the possible loss or range of loss, if any.

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

10.  SUBSEQUENT EVENT

In January 2008, we made the decision to close 25 under performing restaurants based on a comprehensive analysis that examined restaurants not meeting minimum return on investment thresholds and certain other operating performance criteria. Based on our preliminary analysis, we expect to record a charge related to these planned closures in the third quarter of fiscal 2008 of approximately $7.0 to $9.0 million in continuing operations and approximately $4.0 to $6.0 million in discontinued operations, consisting primarily of long-lived asset impairments.

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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 from continuing operations for the periods indicated. All information is derived from the accompanying consolidated statements of income.

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        The following table details the number of restaurant openings during the second quarter, year-to-date, total restaurants open at the end of the second quarter, and total projected openings in fiscal 2008.

(a)          At the end of the second quarter of fiscal year 2008, international company-owned restaurants by brand included five Chili’s and one Macaroni Grill.  International franchise restaurants by brand included 154 Chili’s, 11 Macaroni Grill’s and one On the Border.

At December 26, 2007, we owned the land and buildings for 231 of the 1,048 company-owned restaurants (excluding Macaroni Grill).  The net book values of the land and buildings associated with these restaurants totaled $184.3 million and $195.4 million, respectively.

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GENERAL

        The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand Brinker International, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the quarters ended December 26, 2007 and December 27, 2006, the MD&A should be read in conjunction with the consolidated financial statements and related notes included in this quarterly report.  The results of operations discussed in MD&A exclude discontinued operations, except where otherwise noted.

OVERVIEW

At December 26, 2007, we owned, operated, or franchised 1,872 restaurants through our four brands:  Chili’s, Macaroni Grill, On The Border, and Maggiano’s.   The casual dining industry continues to face a challenging operating environment due to various factors such as the continually expanding array of food options in the marketplace.  Consumers have also limited their discretionary spending in response to economic uncertainties and price increases for essential goods and services.  In addition, commodity and labor costs have continued to increase, all of which negatively impacted our results during the second quarter of fiscal 2008.  While our results for the second quarter fell short of expectations, we are fully committed to aggressively pursuing all avenues to enhance shareholder return from both an operational and financial perspective.  We have continued to drive shareholder value by executing several operational and financial strategies over the last eighteen months including selling company-owned restaurants to strong franchisees, closing underperforming locations, divesting of brands, returning capital directly to our shareholders through aggressive share repurchases, growth of our dividend program, reimaging Chili’s restaurants and growing our international presence.  The achievement of these strategies can be seen in the following highlights from the second quarter of fiscal 2008:

·                  Sold 76 Chili’s restaurants to ERJ Dining IV, LLC;

·                  Increased royalty revenues from franchisees by 57.4 percent;

·                  Built 18 new company-owned restaurants and saw franchisees build 27 new restaurants;

·                  Entered into an agreement with CMR, S.A.B. de C.V. for the joint investment in a new corporation to develop 50 Chili’s Grill & Bar and Maggiano’s Little Italy restaurants in Mexico, 6 of which have recently opened;

·                  Increased quarterly dividend by 22 percent to $0.11 per share; and

·                  Repurchased 4.1 million common shares.

In addition, we have been very focused on managing operating expenses, including general and administrative expenses, which allows us to deliver the best possible value to our guests.  We believe the financial discipline demonstrated during these difficult times gives us the flexibility to make the necessary long-term changes to evolve the business.  Our ultimate goal is to build a business model that will enable us to be successful in all macro-economic environments.  We believe the key to reaching this goal resides within our existing restaurants, which will be our focus in the coming months.  Growing profitable ongoing comparable restaurant sales is a critical component of building this business model, the basis of which will be grounded in our five areas of key focus — hospitality; food and beverage excellence; atmosphere; pace and convenience of the dining experience; and international expansion.

In the near-term, we are significantly reducing our domestic development and shifting a greater proportion of new restaurant development to our expanding franchise network in the United States and internationally.  With our focus on existing company-owned restaurants, we will restrict development to a limited number of restaurants in selected high-potential markets.  The restaurant site selection process is critical to our long-term success, and we devote significant effort to the investigation of new locations utilizing a variety of sophisticated analytical techniques. Multiple factors are considered when locating satisfactory sites including lease or purchase terms, construction and equipment costs, our ability to secure appropriate local governmental permits and approvals, and our capacity to supervise construction and recruit and train management personnel.  We intend to concentrate on the development of

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certain identified markets to achieve penetration levels deemed desirable in order to improve competitive position, marketing potential and profitability. Expansion efforts by us and our franchisees will be focused not only on major metropolitan areas, but also on smaller market areas and non-traditional locations (such as airports and food courts) that can adequately support any of our restaurant brands.

        In addition, we intend to pursue domestic and international franchise expansion to achieve our goal of increasing franchise ownership of our brands to at least 35% by the end of fiscal year 2008 through an active program of franchising company-owned Chili’s, On The Border and Maggiano’s restaurants and development commitments from franchisees. Future franchise development agreements are expected to remain limited to enterprises having significant restaurant or enterprise management experience and proven financial ability to develop multi-unit operations.

As evidenced during fiscal 2008, 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, pork, chicken, seafood, dairy, cheese, produce, energy, wage rates and other necessities to operate a restaurant.  Additionally, the restaurant industry is characterized by a high initial capital investment, coupled with high labor costs.  Despite these risks, we remain confident in the long-term prospects of the industry and in our ability to perform effectively in an extremely competitive marketplace.

REVENUES

        Revenues for the second quarter of fiscal 2008 were $868.2 million, a 3.5% decrease from the $899.6 million generated for the same quarter of fiscal 2007. Revenues for the twenty-six week period ended December 26, 2007 were $1,763.3 million, a 0.3% decrease from the $1,768.9 million generated for the same period in fiscal 2007. The decrease in revenue was primarily attributable to declines in comparable restaurant sales and capacity at company-owned restaurants.

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