BLMN-6.30.12_10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) | |
[X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the quarterly period ended June 30, 2012 |
| Or |
[ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from ______ to ______ |
Commission File Number: 001-35625
BLOOMIN’ BRANDS, INC.
(Exact name of registrant as specified in its charter)
|
| | |
DELAWARE | | 20-8023465 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
2202 North West Shore Boulevard, Suite 500, Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)
(813) 282-1225
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 o NO x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company 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 x
As of August 31, 2012, 119,898,667 shares of common stock of the registrant were outstanding.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2012
(Unaudited)
TABLE OF CONTENTS
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Item 1. | | 3 |
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Item 2. | | 23 |
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Item 3. | | 45 |
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Item 4. | | 45 |
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Item 1A. | | 46 |
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Item 2. | | 46 |
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Item 5. | | 46 |
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Item 6. | | 47 |
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| | 48 |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNAUDITED) |
| | | | | | | |
| JUNE 30, | | DECEMBER 31, |
| 2012 | | 2011 |
ASSETS | | | |
Current Assets | | | |
Cash and cash equivalents | $ | 279,954 |
| | $ | 482,084 |
|
Current portion of restricted cash | 24,916 |
| | 20,640 |
|
Inventories | 74,131 |
| | 69,223 |
|
Deferred income tax assets | 28,040 |
| | 31,959 |
|
Other current assets, net | 85,801 |
| | 104,373 |
|
Total current assets | 492,842 |
| | 708,279 |
|
Restricted cash | 18,788 |
| | 3,641 |
|
Property, fixtures and equipment, net | 1,482,437 |
| | 1,635,898 |
|
Investments in and advances to unconsolidated affiliates, net | 35,256 |
| | 35,033 |
|
Goodwill | 268,902 |
| | 268,772 |
|
Intangible assets, net | 558,493 |
| | 566,148 |
|
Other assets, net | 144,104 |
| | 136,165 |
|
Total assets | $ | 3,000,822 |
| | $ | 3,353,936 |
|
| | | |
| (CONTINUED...) | |
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNAUDITED) |
| | | | | | | |
| JUNE 30, | | DECEMBER 31, |
| 2012 | | 2011 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
|
Current Liabilities | |
| | |
|
Accounts payable | $ | 102,351 |
| | $ | 97,393 |
|
Accrued and other current liabilities | 176,255 |
| | 211,486 |
|
Current portion of partner deposits and accrued partner obligations | 16,828 |
| | 15,044 |
|
Unearned revenue | 193,512 |
| | 299,596 |
|
Current portion of long-term debt | 26,580 |
| | 332,905 |
|
Current portion of guaranteed debt | 24,500 |
| | — |
|
Total current liabilities | 540,026 |
| | 956,424 |
|
Partner deposits and accrued partner obligations | 91,913 |
| | 98,681 |
|
Deferred rent | 77,350 |
| | 70,135 |
|
Deferred income tax liabilities | 189,011 |
| | 193,262 |
|
Long-term debt | 1,737,210 |
| | 1,751,885 |
|
Guaranteed debt | — |
| | 24,500 |
|
Other long-term liabilities, net | 259,871 |
| | 218,752 |
|
Total liabilities | 2,895,381 |
| | 3,313,639 |
|
Commitments and contingencies |
|
| |
|
|
Stockholders’ Equity | |
| | |
|
Bloomin’ Brands, Inc. Stockholders’ Equity | |
| | |
|
Common stock, $0.01 par value, 120,000,000 shares authorized; 106,777,584 shares issued and outstanding at June 30, 2012; and 120,000,000 shares authorized; 106,573,193 shares issued and outstanding at December 31, 2011 | 1,068 |
| | 1,066 |
|
Additional paid-in capital | 877,474 |
| | 874,753 |
|
Accumulated deficit | (755,617 | ) | | (822,625 | ) |
Accumulated other comprehensive loss | (25,857 | ) | | (22,344 | ) |
Total Bloomin’ Brands, Inc. stockholders’ equity | 97,068 |
| | 30,850 |
|
Noncontrolling interests | 8,373 |
| | 9,447 |
|
Total stockholders’ equity | 105,441 |
| | 40,297 |
|
Total liabilities and stockholders’ equity | $ | 3,000,822 |
| | $ | 3,353,936 |
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements. |
| | | |
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | | SIX MONTHS ENDED JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues | | | | | | | |
Restaurant sales | $ | 970,021 |
| | $ | 946,033 |
| | $ | 2,015,487 |
| | $ | 1,939,142 |
|
Other revenues | 10,845 |
| | 9,469 |
| | 21,005 |
| | 18,209 |
|
Total revenues | 980,866 |
| | 955,502 |
| | 2,036,492 |
| | 1,957,351 |
|
Costs and expenses | |
| | |
| | |
| | |
Cost of sales | 315,472 |
| | 305,003 |
| | 651,331 |
| | 622,767 |
|
Labor and other related | 271,400 |
| | 275,314 |
| | 564,901 |
| | 558,121 |
|
Other restaurant operating | 230,877 |
| | 224,692 |
| | 449,842 |
| | 438,849 |
|
Depreciation and amortization | 39,247 |
| | 38,463 |
| | 78,107 |
| | 76,751 |
|
General and administrative | 72,216 |
| | 69,548 |
| | 148,218 |
| | 131,126 |
|
Provision for impaired assets and restaurant closings | 4,654 |
| | 3,723 |
| | 9,089 |
| | 3,931 |
|
Income from operations of unconsolidated affiliates | (1,720 | ) | | (1,995 | ) | | (4,124 | ) | | (5,641 | ) |
Total costs and expenses | 932,146 |
| | 914,748 |
| | 1,897,364 |
| | 1,825,904 |
|
Income from operations | 48,720 |
| | 40,754 |
| | 139,128 |
| | 131,447 |
|
Loss on extinguishment of debt | — |
| | — |
| | (2,851 | ) | | — |
|
Other (expense) income, net | (183 | ) | | 559 |
| | (129 | ) | | 256 |
|
Interest expense, net | (24,037 | ) | | (20,692 | ) | | (45,011 | ) | | (41,885 | ) |
Income before provision for income taxes | 24,500 |
| | 20,621 |
| | 91,137 |
| | 89,818 |
|
Provision for income taxes | 3,936 |
| | 4,178 |
| | 16,741 |
| | 15,260 |
|
Net income | 20,564 |
| | 16,443 |
| | 74,396 |
| | 74,558 |
|
Less: net income attributable to noncontrolling interests | 3,124 |
| | 2,440 |
| | 6,957 |
| | 5,663 |
|
Net income attributable to Bloomin’ Brands, Inc. | $ | 17,440 |
| | $ | 14,003 |
| | $ | 67,439 |
| | $ | 68,895 |
|
| | | | | | | |
Net income | $ | 20,564 |
| | $ | 16,443 |
| | $ | 74,396 |
| | $ | 74,558 |
|
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustment | (6,662 | ) | | 4,124 |
| | (3,513 | ) | | 7,144 |
|
Comprehensive income | 13,902 |
| | 20,567 |
| | 70,883 |
| | 81,702 |
|
Less: comprehensive income attributable to noncontrolling interests | 3,124 |
| | 2,440 |
| | 6,957 |
| | 5,663 |
|
Comprehensive income attributable to Bloomin’ Brands, Inc. | $ | 10,778 |
| | $ | 18,127 |
| | $ | 63,926 |
| | $ | 76,039 |
|
| | | | | | | |
Net income attributable to Bloomin’ Brands, Inc. per common share: | | | | | | | |
Basic | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.63 |
| | $ | 0.65 |
|
Diluted | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.63 |
| | $ | 0.65 |
|
Weighted average common shares outstanding: | | | | | | | |
Basic | 106,361 |
| | 106,135 |
| | 106,361 |
| | 106,135 |
|
Diluted | 107,380 |
| | 106,214 |
| | 107,255 |
| | 106,362 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| BLOOMIN’ BRANDS, INC. | | | | |
| COMMON STOCK |
| COMMON STOCK AMOUNT |
| ADDITIONAL PAID-IN CAPITAL |
| ACCUM- ULATED DEFICIT |
| ACCUMULATED OTHER COMPREHENSIVE LOSS |
| NON- CONTROLLING INTERESTS |
| TOTAL |
Balance, December 31, 2011 | 106,573 |
| | $ | 1,066 |
| | $ | 874,753 |
| | $ | (822,625 | ) | | $ | (22,344 | ) | | $ | 9,447 |
| | $ | 40,297 |
|
Net income | — |
| | — |
| | — |
| | 67,439 |
| | — |
| | 6,957 |
| | 74,396 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (3,513 | ) | | — |
| | (3,513 | ) |
Stock-based compensation | 261 |
| | 3 |
| | 1,460 |
| | — |
| | — |
| | — |
| | 1,463 |
|
Repurchase of common stock | (56 | ) | | (1 | ) | | 316 |
| | (431 | ) | | — |
| | — |
| | (116 | ) |
Issuance of notes receivable due from stockholders | — |
| | — |
| | (518 | ) | | — |
| | — |
| | — |
| | (518 | ) |
Repayments of notes receivable due from stockholders | — |
| | — |
| | 1,463 |
| | — |
| | — |
| | — |
| | 1,463 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (8,409 | ) | | (8,409 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 378 |
| | 378 |
|
Balance, June 30, 2012 | 106,778 |
| | $ | 1,068 |
| | $ | 877,474 |
| | $ | (755,617 | ) | | $ | (25,857 | ) | | $ | 8,373 |
| | $ | 105,441 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| BLOOMIN’ BRANDS, INC. | | | | |
| COMMON STOCK | | COMMON STOCK AMOUNT | | ADDITIONAL PAID-IN CAPITAL | | ACCUM- ULATED DEFICIT | | ACCUMULATED OTHER COMPREHENSIVE LOSS | | NON- CONTROLLING INTERESTS | | TOTAL |
Balance, December 31, 2010 | 106,573 |
| | $ | 1,066 |
| | $ | 871,963 |
| | $ | (922,630 | ) | | $ | (19,633 | ) | | $ | 13,323 |
| | $ | (55,911 | ) |
Net income | — |
| | — |
| | — |
| | 68,895 |
| | — |
| | 5,663 |
| | 74,558 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 7,144 |
| | — |
| | 7,144 |
|
Stock-based compensation | — |
| | — |
| | 1,357 |
| | — |
| | — |
| | — |
| | 1,357 |
|
Issuance of notes receivable due from stockholders | — |
| | — |
| | (985 | ) | | — |
| | — |
| | — |
| | (985 | ) |
Distributions to noncontrolling interests | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (7,520 | ) | | (7,558 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 26 |
| | 26 |
|
Balance, June 30, 2011 | 106,573 |
| | $ | 1,066 |
| | $ | 872,297 |
| | $ | (853,735 | ) | | $ | (12,489 | ) | | $ | 11,492 |
| | $ | 18,631 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
|
| | | | | | | |
| SIX MONTHS ENDED JUNE 30, |
| 2012 | | 2011 |
Cash flows provided by operating activities: | | | |
Net income | $ | 74,396 |
| | $ | 74,558 |
|
Adjustments to reconcile net income to cash provided by operating activities: | |
| | |
|
Depreciation and amortization | 78,107 |
| | 76,751 |
|
Amortization of deferred financing fees | 4,983 |
| | 6,276 |
|
Amortization of capitalized gift card sales commissions | 11,193 |
| | 9,390 |
|
Provision for impaired assets and restaurant closings | 9,089 |
| | 3,931 |
|
Accretion on debt discounts
| 362 |
| | 325 |
|
Stock-based and other non-cash compensation expense | 16,029 |
| | 20,420 |
|
Income from operations of unconsolidated affiliates | (4,124 | ) | | (5,641 | ) |
Change in deferred income taxes | (330 | ) | | (57 | ) |
Loss on disposal of property, fixtures and equipment | 1,001 |
| | 1,841 |
|
Unrealized gain on derivative financial instruments | (191 | ) | | (35 | ) |
Gain on life insurance and restricted cash investments | (2,208 | ) | | (486 | ) |
Loss on extinguishment of debt | 2,851 |
| | — |
|
Recognition of deferred gain on sale-leaseback transaction | (537 | ) | | — |
|
Change in assets and liabilities: | |
| | |
|
(Increase) decrease in inventories | (4,949 | ) | | 6,043 |
|
Decrease (increase) in other current assets | 6,642 |
| | (19,624 | ) |
Decrease in other assets | 892 |
| | 3,942 |
|
(Decrease) increase in accounts payable and accrued and other current liabilities | (38,141 | ) | | 20,994 |
|
Increase in deferred rent | 7,208 |
| | 5,506 |
|
Decrease in unearned revenue | (106,084 | ) | | (95,292 | ) |
Increase (decrease) in other long-term liabilities | 1,515 |
| | (7,095 | ) |
Net cash provided by operating activities | 57,704 |
| | 101,747 |
|
Cash flows provided by (used in) investing activities: | |
| | |
|
Purchases of Company-owned life insurance | (308 | ) | | (789 | ) |
Proceeds from sale of Company-owned life insurance | — |
| | 2,638 |
|
Proceeds from sale of property, fixtures and equipment | 1,255 |
| | 688 |
|
Proceeds from sale-leaseback transaction
| 192,886 |
| | — |
|
Capital expenditures | (79,743 | ) | | (49,230 | ) |
Restricted cash received for capital expenditures, property taxes and certain deferred compensation plans | 50,614 |
| | 45,569 |
|
Restricted cash used to fund capital expenditures, property taxes and certain deferred compensation plans | (70,032 | ) | | (70,417 | ) |
Return on investment from unconsolidated affiliates | 332 |
| | — |
|
Net cash provided by (used in) investing activities | $ | 95,004 |
| | $ | (71,541 | ) |
| | | |
| (CONTINUED...) | |
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
|
| | | | | | | |
| SIX MONTHS ENDED JUNE 30, |
| 2012 | | 2011 |
Cash flows used in financing activities: | | | |
Proceeds from issuance of long-term debt
| $ | 495,186 |
| | $ | — |
|
Repayments of long-term debt | (12,211 | ) | | (9,598 | ) |
Extinguishment of debt
| (777,563 | ) | | — |
|
Repayments of borrowings on revolving credit facilities | (33,000 | ) | | (78,072 | ) |
Deferred financing fees | (5,442 | ) | | (52 | ) |
Contributions from noncontrolling interests | 378 |
| | 26 |
|
Distributions to noncontrolling interests | (8,409 | ) | | (7,558 | ) |
Repayments of partner deposits and accrued partner obligations | (15,306 | ) | | (21,188 | ) |
Issuance of notes receivable due from stockholders
| (83 | ) | | (985 | ) |
Repayments of notes receivable due from stockholders
| 1,463 |
| | — |
|
Net cash used in financing activities | (354,987 | ) | | (117,427 | ) |
Effect of exchange rate changes on cash and cash equivalents | 149 |
| | 2,062 |
|
Net decrease in cash and cash equivalents | (202,130 | ) | | (85,159 | ) |
Cash and cash equivalents at the beginning of the period | 482,084 |
| | 365,536 |
|
Cash and cash equivalents at the end of the period | $ | 279,954 |
| | $ | 280,377 |
|
Supplemental disclosures of cash flow information: | |
| | |
|
Cash paid for interest | $ | 39,923 |
| | $ | 36,328 |
|
Cash paid for income taxes, net of refunds | 15,916 |
| | 16,356 |
|
Supplemental disclosures of non-cash investing and financing activities: | |
| | |
|
Conversion of partner deposits and accrued partner obligations to notes payable | $ | 3,932 |
| | $ | 3,814 |
|
Acquisitions of property, fixtures and equipment through accounts payable or capital lease liabilities | 1,577 |
| | 2,846 |
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
Bloomin’ Brands, Inc. (“Bloomin’ Brands” or the “Company”), formerly known as Kangaroo Holdings, Inc., was formed by an investor group comprised of funds advised by Bain Capital Partners, LLC (“Bain Capital”), Catterton Management Company, LLC (“Catterton”), Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon (the “Founders”) and certain members of management. On June 14, 2007, Bloomin’ Brands acquired OSI Restaurant Partners, Inc. by means of a merger and related transactions (the “Merger”). At the time of the Merger, OSI Restaurant Partners, Inc. was converted into a Delaware limited liability company named OSI Restaurant Partners, LLC (“OSI”). In connection with the Merger, Bloomin’ Brands implemented a new ownership and financing arrangement for some of its restaurant properties, pursuant to which Private Restaurant Properties, LLC (“PRP”), a wholly-owned subsidiary of Bloomin’ Brands, acquired 343 restaurant properties from OSI and leased them back to subsidiaries of OSI. OSI remains the primary operating entity, and a wholly-owned subsidiary of Bloomin’ Brands continues to lease certain of the Company-owned restaurant properties to OSI’s subsidiaries.
The Company owns and operates casual, upscale casual and fine dining restaurants primarily in the United States. The Company’s restaurant portfolio has five concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s. Additional Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill restaurants in which the Company has no direct investment are operated under franchise agreements.
The accompanying interim unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s registration statement on Form S-1, as amended (File No. 333-180615), that was declared effective on August 7, 2012 (the “Registration Statement”). The Company's initial public offering was completed on August 13, 2012.
2. Recently Issued Financial Accounting Standards
In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”), that establishes a number of new requirements for fair value measurements. These include: (i) a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; (ii) an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and (iii) a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. Additionally, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 on January 1, 2012 increased the Company’s fair value disclosure requirements but did not have an impact on the Company’s financial position, results of operations or cash flows.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”), that eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Instead, the new guidance requires the Company to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. ASU No. 2011-05 must be applied retrospectively and is effective for public companies during the interim and annual periods beginning after December 15, 2011. Additionally, in December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The deferral of the presentation requirements does not impact the effective date of the other requirements in ASU 2011-05. During the deferral period, the existing requirements in generally accepted accounting principles in the United States for the presentation of reclassification adjustments must continue to be followed. ASU No. 2011-12 is effective for public companies during the interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-05 and ASU No. 2011-12 on January 1, 2012 did not have an impact on the Company’s financial position, results of operations or cash flows as the guidance only requires a presentation change to comprehensive income.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU No. 2011-08”), which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the two-step quantitative goodwill impairment test. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the quantitative assessment. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not have an impact on the Company’s financial position, results of operations or cash flows.
In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification” (“ASU No. 2011-10”), which applies to a parent company that ceases to have a controlling financial interest in a subsidiary, that is in substance real estate, as a result of a default on the subsidiary’s nonrecourse debt. The new guidance emphasizes that the parent should only deconsolidate the real estate subsidiary when legal title to the real estate is transferred to the lender and the related nonrecourse debt has been extinguished. If the reporting entity ceases to have a controlling financial interest under subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. This standard takes effect for public companies during the annual and interim periods beginning on or after June 15, 2012. The adoption of this guidance on July 1, 2012 did not have a material impact on the Company’s financial statements.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”), which enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. The guidance requires the Company to provide both net and gross information for these assets and liabilities. ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. This guidance will not have an impact on the Company’s financial position, results of operations or cash flows as it only requires a presentation change to offsetting (netting) assets and liabilities.
In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU No. 2012-02”), which permits an entity to make a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying value before applying the two-step quantitative impairment test. If it is determined through the qualitative assessment that an indefinite-lived intangible asset’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the quantitative assessment. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company will adopt ASU No. 2012-02 effective January 1, 2013. This guidance will not have a material impact on the Company’s financial position, results of operations or cash flows.
3. Stock-based and Deferred Compensation Plans
Shares of restricted stock issued on June 14, 2007 to certain of the Company’s current and former executive officers and other members of management vested each June 14 through 2012. In accordance with the terms of their applicable agreements, the Company loaned an aggregate of $0.4 million and $0.9 million to these individuals in June of 2012 and 2011, respectively, for their personal income tax obligations that resulted from vesting of the restricted stock. During the first quarter of 2012, three of the Company’s named executive officers and certain other former members of management repaid their entire loan balances to the Company. As of June 30, 2012 and December 31, 2011, a total of $6.0 million and $7.2 million, respectively, of loans and associated interest obligations to current and former executive officers and other members of management was outstanding and was recorded as contra-equity in the line item “Additional paid-in capital” in the Company’s Consolidated Balance Sheets. The loans are full recourse and are collateralized by the vested shares of restricted stock. Although these loans are permitted in accordance with the terms of the agreements, the Company is not required to make them in the future. On May 10, 2012, the Company approved an amendment to the loans to extend the timing for mandatory prepayment in connection with an initial public offering to require full repayment by the last trading day in the first trading window subsequent to the expiration of contractual lock-up restrictions imposed in connection with the offering.
On May 10, 2012, the Board of Directors authorized an additional 850,000 shares for issuances of stock options and restricted stock under the Company’s 2007 Equity Incentive Plan (the “2007 Equity Plan”). The total shares authorized under the 2007 Equity Plan, including the increase, is 13,200,000. Upon completion of the Company’s initial public offering, the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (the “2012 Equity Plan”) was adopted, and no further awards will be made under the 2007 Equity Plan (see Note 14).
On May 10, 2012, the retention bonus and the incentive bonus agreements with the Company’s Chief Executive Officer (“CEO”) were amended. In accordance with the terms of this amendment to the bonus agreements, the remaining payments under each agreement were accelerated to a single lump sum payment of $22.4 million as a result of the completion of the Company’s initial public offering and was paid in the third quarter of 2012. The Company recorded $18.1 million for the accelerated bonus expense in the line item “General and administrative” in its Consolidated Statement of Operations and Comprehensive Income for the three months ended September 30, 2012.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
4. Net Income Attributable to Bloomin’ Brands, Inc. Per Common Share
Basic net income attributable to Bloomin’ Brands, Inc. per common share is computed on the basis of the weighted average number of common shares that were outstanding during the period. Diluted net income attributable to Bloomin’ Brands, Inc. per common share includes the dilutive effect of common stock equivalents consisting of restricted stock and stock options, using the treasury stock method. Performance-based restricted stock and stock options are considered dilutive when the related performance criterion has been met.
The computation of basic and diluted net income attributable to Bloomin’ Brands, Inc. per common share is as follows (in thousands, except share and per share amounts):
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Net income attributable to Bloomin’ Brands, Inc. | $ | 17,440 |
| | $ | 14,003 |
| | $ | 67,439 |
| | $ | 68,895 |
|
| | | | | | | |
Basic weighted average common shares outstanding | 106,360,717 |
| | 106,134,814 |
| | 106,360,717 |
| | 106,134,814 |
|
| | | | | | | |
Effect of diluted securities: | | | | | | | |
Stock options | 900,623 |
| | 42,856 |
| | 804,517 |
| | 212,687 |
|
Unvested restricted stock | 118,348 |
| | 36,677 |
| | 89,551 |
| | 14,267 |
|
Diluted weighted average common shares outstanding | 107,379,688 |
| | 106,214,347 |
| | 107,254,785 |
| | 106,361,768 |
|
| | | | | | | |
Basic net income attributable to Bloomin’ Brands, Inc. per common share | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.63 |
| | $ | 0.65 |
|
Diluted net income attributable to Bloomin’ Brands, Inc. per common share | $ | 0.16 |
| | $ | 0.13 |
| | $ | 0.63 |
| | $ | 0.65 |
|
Dilutive securities outstanding not included in the computation of net income attributable to Bloomin’ Brands, Inc. per common share because their effect was antidilutive were as follows:
|
| | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Stock options | 550,000 |
| | 1,488,000 |
| | 550,000 |
| | 1,488,000 |
|
5. Variable Interest Entities
The Company consolidates variable interest entities in which it is deemed to have a controlling financial interest as a result of the Company having (1) the power to direct the activities that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses or the right to receive the benefits that could potentially be significant to the variable interest entity. If the Company has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the operations of the variable interest entity are included in the consolidated financial statements.
Roy’s and RY-8, Inc.
The Company’s consolidated financial statements include the accounts and operations of its Roy’s joint venture although it has less than majority ownership. The Company determined it is the primary beneficiary of the joint venture since the Company has the power to direct or cause the direction of the activities that most significantly impact the entity on a day-to-day basis, such as decisions regarding menu development, purchasing, restaurant expansion and closings and the management of employee-related processes. Additionally, the Company has the obligation to absorb losses
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
or the right to receive benefits of the Roy’s joint venture that could potentially be significant to the Roy’s joint venture. The majority of capital contributions made by the Company’s partner in the Roy’s joint venture, RY-8, Inc. (“RY-8”), have been funded by loans to RY-8 from a third party which OSI guarantees. The guarantee is secured by a collateral interest in RY-8’s membership interest in the joint venture. The carrying amounts of consolidated assets and liabilities included within the Company’s Consolidated Balance Sheets for the Roy’s joint venture were $24.3 million and $10.6 million, respectively, at June 30, 2012 and $26.2 million and $9.6 million, respectively, at December 31, 2011.
The Company is also the primary beneficiary of RY-8 because its implicit variable interest in that entity, which is considered a de facto related party, indirectly receives the variability of the entity through absorption of RY-8’s expected losses, and therefore the Company also consolidates RY-8. Since RY-8’s $24.5 million line of credit became fully extended in 2007, the Company made interest payments, paid line of credit renewal fees and made capital expenditures for additional restaurant development on behalf of RY-8. The Company is obligated to provide financing, either through OSI’s guarantee with a third-party institution or loans, for all required capital contributions and interest payments. Therefore, any additional RY-8 capital requirements in connection with the joint venture likely will be the Company’s responsibility. RY-8’s line of credit expires on April 15, 2013. The Company classifies OSI’s $24.5 million contingent obligation as guaranteed debt and the portion of income or loss attributable to RY-8 is eliminated in the line item in the Consolidated Statements of Operations and Comprehensive Income entitled “Net income attributable to noncontrolling interests.” All material intercompany balances and transactions have been eliminated.
Paradise Restaurant Group, LLC
In September 2009, the Company sold its Cheeseburger in Paradise concept, which included 34 restaurants, for $2.0 million to Paradise Restaurant Group, LLC (“PRG”), an entity formed and controlled by the president of the concept. Based on the terms of the purchase and sale agreement, the Company determined at that time that it was the primary beneficiary and continued to consolidate PRG after the sale transaction.
Upon adoption of new accounting guidance for variable interest entities on January 1, 2010, the Company determined that it is no longer the primary beneficiary of PRG. As a result, the Company deconsolidated PRG on January 1, 2010. The Company determined that certain rights pursuant to a $2.0 million promissory note, which is fully reserved, owed to the Company by PRG are non-substantive participating rights, and as a result, the Company does not have the power to direct the activities that most significantly impact the entity. At June 30, 2012, the maximum undiscounted exposure to loss as a result of the Company’s involvement with PRG is $17.8 million related to lease payments extending through June 13, 2022 in the event that PRG defaults on these leases.
6. Other Current Assets, Net
Other current assets, net, consisted of the following (in thousands):
|
| | | | | | | | |
| | JUNE 30, | | DECEMBER 31, |
| | 2012 | | 2011 |
Prepaid expenses | | $ | 28,718 |
| | $ | 18,113 |
|
Accounts receivable - vendors, net | | 33,350 |
| | 48,568 |
|
Accounts receivable - franchisees, net | | 2,787 |
| | 2,396 |
|
Accounts receivable - other, net | | 6,018 |
| | 11,869 |
|
Other current assets, net | | 14,928 |
| | 23,427 |
|
| | $ | 85,801 |
| | $ | 104,373 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
7. Property, Fixtures and Equipment, Net
Property, fixtures and equipment, net, consisted of the following (in thousands):
|
| | | | | | | | |
| | JUNE 30, | | DECEMBER 31, |
| | 2012 | | 2011 |
Land | | $ | 265,244 |
| | $ | 329,143 |
|
Buildings and building improvements | | 906,922 |
| | 1,013,618 |
|
Furniture and fixtures | | 279,854 |
| | 263,266 |
|
Equipment | | 388,356 |
| | 362,649 |
|
Leasehold improvements | | 381,627 |
| | 369,726 |
|
Construction in progress | | 32,208 |
| | 22,011 |
|
Less: accumulated depreciation | | (771,774 | ) | | (724,515 | ) |
| | $ | 1,482,437 |
| | $ | 1,635,898 |
|
Effective March 14, 2012, the Company entered into a sale-leaseback transaction (the “Sale-Leaseback Transaction”) with two third-party real estate institutional investors in which the Company sold 67 restaurant properties at fair market value for net proceeds of $192.9 million. The Company then simultaneously leased these properties under nine master leases (collectively, the “REIT Master Leases”). The initial term of the REIT Master Leases are 20 years with four five-year renewal options. One renewal period is at a fixed rental amount and the last three renewal periods are generally based at then-current fair market values. The sale at fair market value and subsequent leaseback qualified for sale-leaseback accounting treatment, and the REIT Master Leases are classified as operating leases. In accordance with the applicable accounting guidance, the 67 restaurant properties are not classified as held for sale at December 31, 2011 since the Company is leasing back the properties. The Company recorded the deferred gain of $42.9 million on the sale of certain of the properties primarily in the line item “Other long-term liabilities, net” in its Consolidated Balance Sheet as of March 31, 2012, which is amortized over the initial term of the lease.
8. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (in thousands):
|
| | | | | | | | |
| | JUNE 30, | | DECEMBER 31, |
| | 2012 | | 2011 |
Accrued payroll and other compensation | | $ | 91,064 |
| | $ | 117,013 |
|
Accrued insurance | | 21,459 |
| | 19,284 |
|
Other current liabilities | | 63,732 |
| | 75,189 |
|
| | $ | 176,255 |
| | $ | 211,486 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
9. Long-term Debt, Net
Long-term debt, net consisted of the following (in thousands):
|
| | | | | | | |
| JUNE 30, | | DECEMBER 31, |
| 2012 | | 2011 |
Senior secured term loan facility, interest rates of 2.56% and 2.63% at June 30, 2012 and December 31, 2011, respectively (1) (2) | $ | 1,007,850 |
| | $ | 1,014,400 |
|
Senior secured pre-funded revolving credit facility, interest rate of 2.63% at December 31, 2011 (2) | — |
| | 33,000 |
|
Mortgage loan, weighted average interest rate of 3.96% at June 30, 2012 (3)
| 323,530 |
| | — |
|
First mezzanine loan, interest rate of 9.00% at June 30, 2012 (3)
| 87,465 |
| | — |
|
Second mezzanine loan, interest rate of 11.25% at June 30, 2012 (3)
| 87,520 |
| | — |
|
Note payable, weighted average interest rate of 0.98% at December 31, 2011 (3)
| — |
| | 466,319 |
|
First mezzanine note, interest rate of 3.28% at December 31, 2011 (3)
| — |
| | 88,900 |
|
Second mezzanine note, interest rate of 3.53% at December 31, 2011 (3)
| — |
| | 123,190 |
|
Third mezzanine note, interest rate of 3.54% at December 31, 2011 (3)
| — |
| | 49,095 |
|
Fourth mezzanine note, interest rate of 4.53% at December 31, 2011 (3)
| — |
| | 48,113 |
|
Senior notes, interest rate of 10.00% at June 30, 2012 and December 31, 2011 (2) | 248,075 |
| | 248,075 |
|
Other notes payable, uncollateralized, interest rates ranging from 0.73% to 7.00% and from 0.76% to 7.00% at June 30, 2012 and December 31, 2011, respectively (2) | 9,213 |
| | 9,094 |
|
Sale-leaseback obligations (2) | 2,375 |
| | 2,375 |
|
Capital lease obligations (2) | 2,382 |
| | 2,520 |
|
Guaranteed debt, interest rate of 2.67% and 2.65% at June 30, 2012 and December 31, 2011, respectively (2) | 24,500 |
| | 24,500 |
|
| 1,792,910 |
| | 2,109,581 |
|
Less: current portion of long-term debt | (26,580 | ) | | (332,905 | ) |
Less: guaranteed debt | (24,500 | ) | | (24,500 | ) |
Less: debt discount
| (4,620 | ) | | (291 | ) |
Long-term debt, net | $ | 1,737,210 |
| | $ | 1,751,885 |
|
________________
| |
(1) | At December 31, 2011, $61.9 million of the Company’s outstanding senior secured term loan facility was at an interest rate of 4.50%. |
| |
(2) | Represents obligations of OSI. |
| |
(3) | Represents obligations of New PRP (as defined below) at June 30, 2012 and obligations of PRP at December 31, 2011. |
Bloomin’ Brands is a holding company and conducts its operations through its subsidiaries, certain of which have incurred their own indebtedness as described below.
On June 14, 2007, OSI entered into senior secured credit facilities with a syndicate of institutional lenders and financial institutions. These senior secured credit facilities provide for senior secured financing of up to $1.6 billion, consisting of a $1.3 billion term loan facility, a $150.0 million working capital revolving credit facility, including letter of credit and swing-line loan sub-facilities, and a $100.0 million pre-funded revolving credit facility that provides financing for capital expenditures only.
The senior secured term loan facility matures June 14, 2014. At each rate adjustment, OSI has the option to select a Base Rate plus 125 basis points or a Eurocurrency Rate plus 225 basis points for the borrowings under this facility. The Base Rate option is the higher of the prime rate of Deutsche Bank AG New York Branch and the federal funds effective rate plus 0.5 of 1.0% (“Base Rate”) (3.25% at June 30, 2012 and December 31, 2011). The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.31% to 0.81% and from 0.38% to 0.88% at June 30, 2012 and December 31, 2011, respectively). The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders. With either the Base Rate or the Eurocurrency Rate, the interest rate is reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published is B1 or higher (the rating was Caa1 at June 30, 2012 and December 31, 2011).
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
OSI is required to prepay outstanding term loans, subject to certain exceptions, with:
| |
• | 50% of its “annual excess cash flow” (with step-downs to 25% and 0% based upon its rent-adjusted leverage ratio), as defined in the credit agreement and subject to certain exceptions; |
| |
• | 100% of its “annual minimum free cash flow,” as defined in the credit agreement, not to exceed $75.0 million for each fiscal year, if its rent-adjusted leverage ratio exceeds a certain minimum threshold; |
| |
• | 100% of the net proceeds of certain assets sales and insurance and condemnation events, subject to reinvestment rights and certain other exceptions; and |
| |
• | 100% of the net proceeds of any debt incurred, excluding permitted debt issuances. |
Additionally, OSI is required, on an annual basis, to first, repay outstanding loans under the pre-funded revolving credit facility and second, fund a capital expenditure account to the extent amounts on deposit are less than $100.0 million, in both cases with 100% of OSI’s “annual true cash flow,” as defined in the credit agreement. In accordance with these requirements, OSI repaid its pre-funded revolving credit facility outstanding loan balance of $33.0 million and funded $37.6 million to its capital expenditure account using its “annual true cash flow” in April 2012.
OSI’s senior secured credit facilities require scheduled quarterly payments on the term loans equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters following June 14, 2007. These payments are reduced by the application of any prepayments, and any remaining balance will be paid at maturity. The outstanding balance on the term loans was $1.0 billion at June 30, 2012 and December 31, 2011. OSI has classified $13.1 million of its term loans as current at June 30, 2012 and December 31, 2011 due to its required quarterly payments and the results of its projected and actual covenant calculations, which indicate the additional term loan prepayments, as described above, will not be required. The amount of outstanding term loans required to be prepaid in accordance with OSI’s debt covenants may vary based on year-end results.
Proceeds of loans and letters of credit under OSI’s $150.0 million working capital revolving credit facility, which matures June 14, 2013, provide financing for working capital and general corporate purposes and, subject to a rent-adjusted leverage condition, for capital expenditures for new restaurant growth. This revolving credit facility bears interest at rates ranging from 100 to 150 basis points over the Base Rate or 200 to 250 basis points over the Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at June 30, 2012 and December 31, 2011; however, $65.6 million and $67.6 million, respectively, of the credit facility was committed for the issuance of letters of credit and not available for borrowing. OSI’s total outstanding letters of credit issued under its working capital revolving credit facility may not exceed $75.0 million.
Proceeds of loans under OSI’s $100.0 million pre-funded revolving credit facility, which expires June 14, 2013, are available to provide financing for capital expenditures, if the capital expenditure account described above has a zero balance. There were no loans outstanding under OSI’s pre-funded revolving credit facility as of June 30, 2012 and $33.0 million was outstanding under this facility as of December 31, 2011. This borrowing was recorded in “Current portion of long-term debt” in the Company’s Consolidated Balance Sheet, as OSI is required to repay any outstanding borrowings in April following each fiscal year using its “annual true cash flow,” as defined in the credit agreement. Subsequent to the end of the second quarter of 2012, OSI borrowed $25.0 million from its pre-funded revolving credit facility.
At June 30, 2012 and December 31, 2011, OSI was in compliance with its debt covenants. See the Company’s audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Registration Statement for further information about OSI’s debt covenant requirements.
In March 2012, the Company refinanced the debt at PRP. Until that time, PRP had first mortgage and mezzanine notes (together, the commercial mortgage-backed securities loan, or the “CMBS Loan”) totaling $790.0 million, which were entered into on June 14, 2007. As part of the CMBS Loan, German American Capital Corporation and Bank of America,
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
N.A. et al (the “Lenders”) had a security interest in the acquired real estate and related improvements, and direct and indirect equity interests of certain of the Company’s subsidiaries. The CMBS Loan comprised a note payable and four mezzanine notes. All notes bore interest at the one-month LIBOR which was 0.28% at December 31, 2011, plus an applicable spread which ranged from 0.51% to 4.25%. Interest-only payments were made on the ninth calendar day of each month and interest accrued beginning on the fifteenth calendar day of the preceding month.
Effective March 27, 2012, New Private Restaurant Properties, LLC and two of the Company’s other indirect wholly-owned subsidiaries (collectively, “New PRP”) entered into a new commercial mortgage-backed securities loan (the “2012 CMBS Loan”) with German American Capital Corporation and Bank of America, N.A. The 2012 CMBS Loan totaled $500.0 million at origination and was comprised of a first mortgage loan in the amount of $324.8 million, collateralized by 261 of the Company’s properties, and two mezzanine loans totaling $175.2 million. The loans have a maturity date of April 10, 2017. The first mortgage loan has five fixed rate components and a floating rate component. The fixed rate components bear interest at rates ranging from 2.37% to 6.81% per annum. The floating rate component bears interest at a rate per annum equal to the 30-day LIBOR rate (with a floor of 1%) plus 2.37%. The first mezzanine loan bears interest at a rate of 9.0% per annum, and the second mezzanine loan bears interest at a rate of 11.25% per annum. The proceeds from the 2012 CMBS Loan, together with the proceeds from the Sale-Leaseback Transaction and excess cash held in PRP, were used to repay PRP’s existing CMBS Loan. As a result of the 2012 CMBS Loan refinancing, the net amount repaid along with scheduled maturities within one year, $281.3 million was classified as current at December 31, 2011. During the first quarter of 2012, the Company recorded a $2.9 million loss related to the extinguishment in the line item, “Loss on extinguishment of debt” in its Consolidated Statement of Operations and Comprehensive Income. The Company deferred $7.6 million of financing costs incurred to complete this transaction of which $2.2 million had been capitalized as of December 31, 2011 and the remainder was capitalized in the first quarter of 2012. These deferred financing costs are included in the line item, “Other assets, net” in its Consolidated Balance Sheets. At June 30, 2012, the outstanding balance, excluding the debt discount, on the 2012 CMBS Loan was $498.5 million.
Historically, the Company used an interest rate cap with a notional amount of $775.7 million as a method to limit the volatility of PRP’s variable-rate CMBS Loan. During the first quarter of 2012, this interest rate cap was terminated. In connection with the 2012 CMBS Loan refinancing, New PRP entered into a replacement interest rate cap instrument (“Rate Cap”) effective March 27, 2012 with a notional amount of $48.7 million as a method to limit the volatility of the floating rate component of the first mortgage loan. Under the Rate Cap, if the 30-day LIBOR market rate exceeds 7.0% per annum, the counterparty must pay to New PRP such excess on the notional amount of the floating rate component. Should it be necessary, New PRP would record any mark-to-market changes in the fair value of its derivative instrument into earnings in the period of change. The Rate Cap has a term of approximately two years from the closing of the 2012 CMBS Loan. Upon the expiration or termination of the Rate Cap or the downgrade of the credit ratings of the counterparty under the Rate Cap’s specified thresholds, New PRP is required to replace the Rate Cap with a replacement interest rate cap in a notional amount equal to the outstanding principal balance (if any) of the floating rate component.
On July 25, 2012, OSI announced the commencement of a tender offer for all of its outstanding 10% senior notes due 2015, and on August 13, 2012, the remaining senior notes not tendered were called for redemption at 102.5% of the principal amount outstanding plus accrued interest, up to but not including such date of redemption (see Note 14).
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
10. Other Long-term Liabilities, Net
Other long-term liabilities, net, consisted of the following (in thousands):
|
| | | | | | | | |
| | JUNE 30, | | DECEMBER 31, |
| | 2012 | | 2011 |
Accrued insurance liability | | $ | 40,542 |
| | $ | 39,575 |
|
Unfavorable leases, net of accumulated amortization of $20,083 and $18,891 at June 30, 2012 and December 31, 2011, respectively | | 59,918 |
| | 62,012 |
|
Partner Equity Plan obligation | | 81,492 |
| | 77,642 |
|
Supplemental Partner Equity Plan obligation | | 14,926 |
| | 16,235 |
|
Deferred gain on Sale-Leaseback Transaction, net of accumulated amortization of $537 at June 30, 2012 | | 40,255 |
| | — |
|
Other long-term liabilities | | 22,738 |
| | 23,288 |
|
| | $ | 259,871 |
| | $ | 218,752 |
|
11. Fair Value Measurements
Fair Value Measurements on a Recurring Basis
The Company invested $23.3 million and $37.7 million of its excess cash in money market funds classified as Cash and cash equivalents or restricted cash in its Consolidated Balance Sheets at June 30, 2012 and December 31, 2011, respectively, at a net value of 1:1 for each dollar invested. The fair value of the investment in the money market funds is determined by using quoted prices for identical assets in an active market.
At December 31, 2011, the Company was highly leveraged and exposed to interest rate risk to the extent of its variable-rate debt. The Company used an interest rate cap with a notional amount of $775.7 million as a method to limit the volatility of PRP’s variable-rate commercial mortgage-backed securities loan. During the first quarter of 2012, this interest rate cap was terminated. In connection with the refinancing of the commercial mortgage-backed securities loan that was effective in March 2012, a new Rate Cap with a notional amount of $48.7 million was entered into for similar purposes (see Note 9). The interest rate caps did not have any fair market value at June 30, 2012 or December 31, 2011 and, therefore, were excluded from the applicable tables within this footnote.
The following tables present the Company’s money market funds measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
| | | | | | | | | | | | | | | | |
| | JUNE 30, 2012 |
| | | | FAIR VALUE |
| | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
Assets: | | | | | | | | |
Money market funds - cash equivalents | | $ | 208 |
| | $ | 208 |
| | $ | — |
| | $ | — |
|
Money market funds - restricted cash | | 23,084 |
| | 23,084 |
| | — |
| | — |
|
Total recurring fair value measurements | | $ | 23,292 |
| | $ | 23,292 |
| | $ | — |
| | $ | — |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
|
| | | | | | | | | | | | | | | | |
| | DECEMBER 31, 2011 |
| | | | FAIR VALUE |
| | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
Assets: | | | | | | | | |
Money market funds - cash equivalents | | $ | 30,208 |
| | $ | 30,208 |
| | $ | — |
| | $ | — |
|
Money market funds - restricted cash | | 7,499 |
| | 7,499 |
| | — |
| | — |
|
Total recurring fair value measurements | | $ | 37,707 |
| | $ | 37,707 |
| | $ | — |
| | $ | — |
|
Fair Value Measurements on a Nonrecurring Basis
The Company periodically evaluates long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical and expected future cash flows of operating locations as well as lease terms, condition of the assets and related need for repairs and maintenance. Impairment loss is recognized to the extent that the fair value of the assets is less than the carrying value.
The following tables present losses related to the Company’s assets and liabilities that were measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2012 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | JUNE 30, 2012 | | |
| | | | REMAINING FAIR VALUE | | THREE MONTHS ENDED JUNE 30, 2012 |
| | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 | | TOTAL LOSSES |
Long-lived assets held and used | | $ | 2,075 |
| | $ | — |
| | $ | — |
| | $ | 2,075 |
| | $ | 4,654 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | JUNE 30, 2012 | | |
| | | | REMAINING FAIR VALUE | | SIX MONTHS ENDED JUNE 30, 2012 |
| | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 | | TOTAL LOSSES |
Long-lived assets held and used | | $ | 2,933 |
| | $ | — |
| | $ | 650 |
| | $ | 2,283 |
| | $ | 9,088 |
|
The Company recorded $4.7 million and $9.1 million of impairment charges during the three and six months ended June 30, 2012, respectively, as a result of fair value measurement on a nonrecurring basis primarily related to certain specifically identified restaurant locations with individual store under-performance or having been designated for relocation or renovation. At the time of the impairment recognized in the second quarter of 2012, the impaired long-lived assets had $2.1 million of remaining fair value. As of June 30, 2012, there was $2.9 million remaining fair value associated with long-lived assets for which asset impairment losses were recognized during the six months ended June 30, 2012. Impairment losses for long-lived assets held and used were recognized in the line item “Provision for impaired assets and restaurant closings” in the Consolidated Statements of Operations and Comprehensive Income.
The Company used a third-party market appraisal for the fair value of the assets included in Level 2 in the tables above and primarily used discounted cash flow models to estimate the fair value of the long-lived assets included in Level 3 in the tables above. Projected future cash flows, including discount rate and growth rate assumptions, are derived from current economic conditions, expectations of management and projected trends of current operating results. As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
The following table presents quantitative information related to the unobservable inputs used in the Company’s Level 3 fair value measurements for the impairment loss incurred in the six months ended June 30, 2012:
|
| | |
UNOBSERVABLE INPUT | | RANGE |
Weighted-average costs of capital (1) | | 10.4% - 11.2% |
Long-term growth rate | | 3.0% |
Annual revenue growth rates (2) | | (8.7)% - 4.3% |
________________
| |
(1) | Weighted average of the costs of capital unobservable input range for the six months ended June 30, 2012 was 10.9%. |
| |
(2) | Weighted average of the annual revenue growth rate unobservable input range for the six months ended June 30, 2012 was 2.6%. |
The Company performed its annual goodwill and other indefinite-lived intangible assets impairment test during the second quarters of 2012 and 2011 and did not have any impairment charges. The Company did not have any other material impairment charges as a result of fair value measurements on a nonrecurring basis during the three and six months ended June 30, 2011.
Interim Disclosures about Fair Value of Financial Instruments
The Company’s non-derivative financial instruments at June 30, 2012 and December 31, 2011 consist of cash equivalents, restricted cash, accounts receivable, accounts payable and current and long-term debt. The fair values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amounts reported in the Consolidated Balance Sheets due to their short duration. The fair value of OSI’s senior secured credit facilities and senior notes is determined based on quoted market prices in inactive markets. The fair value of PRP’s and New PRP’s commercial mortgage-backed securities is based on assumptions derived from current conditions in the real estate and credit environments, changes in the underlying collateral and expectations of management. Fair value estimates for other notes payable and guaranteed debt are derived using a discounted cash flow approach. Discounted cash flow inputs primarily include cost of debt rates which are used to derive the present value factors for the determination of fair value. Guaranteed debt fair value also includes assumptions of the probability and timing of performance under the guarantee. These inputs represent assumptions impacted by economic conditions and management expectations and may change in the future based on period-specific facts and circumstances.
The following table includes the carrying value and fair value of the Company’s financial instruments (excluding cash equivalents and restricted cash shown in the table above) at June 30, 2012 aggregated by the level in the fair value hierarchy in which those measurements fall (in thousands):
|
| | | | | | | | | | | | | | | | |
| | JUNE 30, 2012 |
| | | | FAIR VALUE |
| | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
Senior secured term loan facility (1) | | $ | 1,007,850 |
| | $ | — |
| | $ | 990,213 |
| | $ | — |
|
Mortgage loan (2) | | 323,530 |
| | — |
| | — |
| | 323,530 |
|
First mezzanine loan (2) | | 87,465 |
| | — |
| | — |
| | 87,465 |
|
Second mezzanine loan (2) | | 87,520 |
| | — |
| | — |
| | 87,520 |
|
Senior notes (1) | | 248,075 |
| | — |
| | 254,897 |
| | — |
|
Other notes payable (1) | | 9,213 |
| | — |
| | — |
| | 8,585 |
|
Guaranteed debt (1) | | 24,500 |
| | — |
| | — |
| | 22,790 |
|
_______________
| |
(1) | Represents obligations of OSI. |
| |
(2) | Represents obligations of New PRP. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
The carrying amounts of PRP’s commercial mortgage-backed securities loan and OSI’s Other notes payable and Guaranteed debt approximated fair value at December 31, 2011. The following table includes the carrying value and fair value of OSI’s senior secured credit facilities and senior notes at December 31, 2011 (in thousands):
|
| | | | | | | |
| DECEMBER 31, 2011 |
| CARRYING VALUE | | FAIR VALUE |
Senior secured term loan facility | $ | 1,014,400 |
| | $ | 953,536 |
|
Senior secured pre-funded revolving credit facility | 33,000 |
| | 31,020 |
|
Senior notes | 248,075 |
| | 254,277 |
|
12. Income Taxes
The effective income tax rate for the three months ended June 30, 2012 was 16.1% compared to 20.3% for the same period in 2011. This net decrease in the effective income tax rate was primarily due to the benefit of items required to be treated discretely, such as changes in domestic and foreign uncertain tax positions, offsetting the effect of the increase in the projected and actual domestic pretax book income as compared to the prior year.
The effective income tax rate for the six months ended June 30, 2012 was 18.4% compared to 17.0% for the same period in 2011. This net increase in the effective income tax rate was primarily due to the increase in the projected and actual domestic pretax book income as compared to the prior year offsetting the benefit of items required to be treated discretely, such as changes in domestic and foreign uncertain tax positions.
The effective income tax rates for the three and six months ended June 30, 2012 were lower than the combined federal and state statutory rate of 38.7% primarily due to the benefit of the expected tax credit for excess FICA tax on employee-reported tips and the elimination of noncontrolling interest together being such a large percentage of projected annual pretax income. This was partially offset by an increase in the valuation allowance. The effective income tax rates for the three and six months ended June 30, 2011 were lower than the combined federal and state statutory rate of 38.9% due to the benefit of the expected tax credit for excess FICA tax on employee-reported tips and the foreign rate differential together being such a large percentage of projected annual pretax income. This was partially offset by an increase in the valuation allowance.
As of June 30, 2012 and December 31, 2011, the Company had $11.9 million and $14.0 million, respectively, of unrecognized tax benefits ($0.9 million and $1.5 million, respectively, in “Other long-term liabilities, net,” $1.0 million and $2.5 million, respectively, in “Accrued and other current liabilities” and $10.0 million in “Deferred income tax liabilities”). Additionally, the Company accrued $2.3 million and $4.1 million of interest and penalties related to uncertain tax positions as of June 30, 2012 and December 31, 2011, respectively. Of the total amount of unrecognized tax benefits, including accrued interest and penalties, $12.1 million and $15.2 million, respectively, if recognized, would impact the Company’s effective tax rate. The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred income tax assets and the federal tax benefit of state income tax items.
In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant taxable authorities. Based on the outcome of these examinations, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related recorded unrecognized tax benefits for tax positions taken on previously filed tax returns will decrease by approximately $2.0 million to $4.0 million within the next twelve months after June 30, 2012.
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2007 through 2011. The Company and its subsidiaries’ state and foreign income tax returns are also open to audit under the statute of limitations for the years ended December 31, 2000 through 2011.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued
13. Related Parties
On May 10, 2012, the Company entered into a first amendment to its management agreement with Kangaroo Management Company I, LLC (the “Management Company”), whose members are entities associated with Bain Capital and Catterton and the Founders. In accordance with the terms of this amendment, the management agreement terminated immediately prior to the completion of the Company’s initial public offering, and a termination fee of $8.0 million was paid to the Management Company in the third quarter of 2012, in addition to a pro-rated periodic fee.
14. Subsequent Events
On July 25, 2012, OSI announced the commencement of a tender offer for all of its outstanding senior notes. On August 13, 2012, OSI accepted for payment $102.2 million, or 41.2%, of the aggregate principal amount of its 10% senior notes, using a portion of the net proceeds from the Company’s initial public offering. OSI paid $106.8 million for the senior notes tendered, which included $2.9 million of prepayment premium and early tender incentive fees and $1.7 million of accrued interest. Further, on August 13, 2012, the remaining senior notes were called for redemption at 102.5% of the principal amount outstanding plus accrued interest, up to but not including such date of redemption. OSI deposited the full funds for the redemption with the trustee under the indenture governing the senior notes, which was comprised of the rest of the Company’s net proceeds from its initial public offering and cash on hand, and the senior notes obligation was satisfied and discharged. The deposited funds will be used to repay in full $145.9 million of remaining outstanding senior notes plus the related prepayment premium of $3.6 million and accrued interest of $3.5 million. As a result of these transactions, the Company recorded a loss from the extinguishment of debt of $9.0 million in the third quarter of 2012, which included $2.4 million for the write-off of unamortized deferred financing fees that related to the extinguished senior notes.
Upon completion of the Company’s initial public offering, the Company recorded approximately $16.0 million of aggregate non-cash compensation expense with respect to (i) certain stock options held by its CEO that become exercisable (to the extent then vested) if following the offering, the volume-weighted average trading price of the Company’s common stock is equal to or greater than specified performance targets over a six-month period and (ii) the time vested portion of stock options containing a management call option due to the automatic termination of the call option upon completion of the offering.
Upon completion of the Company’s initial public offering, the 2012 Equity Plan was adopted, and no further awards will be made under the 2007 Equity Plan. The 2012 Equity Plan provides for grants of stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and other stock-based awards determined by the compensation committee. The maximum number of shares of common stock available for issuance pursuant to the 2012 Equity Plan is initially 3,000,000 shares. As of the first business day of each fiscal year, commencing on January 1, 2013, the aggregate number of shares that may be issued pursuant to the 2012 Equity Plan will automatically increase by a number equal to 2% of the total number of shares then issued and outstanding. The 2012 Equity Plan provides that grants of performance awards will be made based upon, and subject to achieving, one or more performance measures over a performance period of not less than one year established by the compensation committee. Unless terminated earlier, the 2012 Equity Plan will terminate ten years from its effective date.
On September 4, 2012, the Company entered into an amended and restated employment agreement with its CEO, Elizabeth A. Smith. The agreement became effective upon execution and extends her employment until August 13, 2017 with one year automatic renewals thereafter. In accordance with the terms of the amended and restated employment agreement, Ms. Smith’s annual base salary increased by $50,000 to $975,000, and she will be eligible for additional equity award grants beginning in 2014.
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and the related Notes. Unless the context otherwise indicates, as used in this report, the term the “Company,” “we,” “us,” “our” and other similar terms mean Bloomin’ Brands, Inc.
Cautionary Statement
This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, the following:
| |
(i) | The restaurant industry is a highly competitive industry with many well-established competitors; |
| |
(ii) | Challenging economic conditions may affect our liquidity by adversely impacting numerous items that include, but are not limited to: consumer confidence and discretionary spending; the availability of credit presently arranged from our revolving credit facilities; the future cost and availability of credit; interest rates; foreign currency exchange rates; and the liquidity or operations of our third-party vendors and other service providers; |
| |
(iii) | Our ability to expand is dependent upon various factors such as the availability of attractive sites for new restaurants; our ability to obtain appropriate real estate sites at acceptable prices; our ability to obtain all required governmental permits including zoning approvals and liquor licenses on a timely basis; the impact of government moratoriums or approval processes, which could result in significant delays; our ability to obtain all necessary contractors and subcontractors; union activities such as picketing and hand billing that could delay construction; our ability to generate or borrow funds; our ability to negotiate suitable lease terms; the ability to recruit and train skilled management and restaurant employees; and our ability to receive the premises from the landlord’s developer without any delays; |
| |
(iv) | Our results can be impacted by changes in consumer tastes and the level of consumer acceptance of our restaurant concepts (including consumer tolerance of our prices); local, regional, national and international economic and political conditions; the seasonality of our business; demographic trends; traffic patterns and our ability to effectively respond in a timely manner to changes in traffic patterns; changes in consumer dietary habits; employee availability; the cost of advertising and media; government actions and policies; inflation or deflation; unemployment rates; interest rates; exchange rates; and increases in various costs, including construction, real estate and health insurance costs; |
| |
(v) | Weather, natural disasters and other disasters could result in construction delays and also adversely affect the results of one or more restaurants for an indeterminate amount of time; |
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| |
(vi) | Our results can be impacted by tax and other legislation and regulation in the jurisdictions in which we operate and by accounting standards or pronouncements; |
| |
(vii) | Minimum wage increases and mandated employee benefits could cause a significant increase in our labor costs; |
| |
(viii) | Commodities, including but not limited to, such items as beef, chicken, shrimp, pork, seafood, dairy, potatoes, onions and energy supplies, are subject to fluctuation in price and availability and price could increase or decrease more than we expect; |
| |
(ix) | Our results can be affected by consumer reaction to public health issues; |
| |
(x) | Our results can be affected by consumer perception of food safety; |
| |
(xi) | Inability to protect customer credit and debit card data; and |
| |
(xii) | Our substantial leverage and significant restrictive covenants in our various credit facilities could adversely affect our ability to raise additional capital to fund our operations, limit our ability to make capital expenditures to invest in new or renovate restaurants, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk in connection with our variable-rate debt. |
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. As of June 30, 2012, we owned and operated 1,253 restaurants and had 197 restaurants operating under a franchise or joint venture arrangement across 49 states and 21 countries and territories internationally. We have five founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s. Our concepts seek to provide a compelling customer experience combining great food, attentive service and lively and contemporary ambience at attractive prices. Our restaurants attract customers across a variety of occasions, including everyday dining, celebrations and business entertainment. Each of our concepts maintains a unique, founder-inspired brand identity and entrepreneurial culture, while leveraging our scale and enhanced operating model. We consider Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and Wine Bar to be our core concepts.
The restaurant industry is a highly competitive and fragmented industry and is sensitive to changes in the economy, trends in lifestyles, seasonality (customer spending patterns at restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year) and fluctuating costs. Operating margins for restaurants can vary due to competitive pricing strategies and fluctuations in prices of commodities, including beef, chicken, seafood, butter, cheese, produce and other necessities to operate a restaurant, such as natural gas or other energy supplies. The pace of new unit growth has slowed in the casual dining category over the last few years. Given this dynamic, companies tend to be more focused on increasing market share and comparable restaurant sales growth. Competitive pressure for market share, inflation, foreign currency exchange rates and other market conditions have had and could continue to have an adverse impact on our business.
Our industry is characterized by high initial capital investment, coupled with high labor costs, and chain restaurants have been increasingly taking share from independent restaurants over the past several years. We believe that this trend will continue due to increasing barriers that may prevent independent restaurants and/or start-up chains from building scale operations, including menu labeling, burdensome labor regulations and healthcare reforms that will be enforced once chains grow past a certain number of restaurants or number of employees. The combination of these factors underscores our initiative to drive increased sales at existing restaurants in order to raise margins and profits, because the incremental contribution to profits from every additional dollar of sales above the minimum costs required to open, staff and operate a restaurant is relatively high. Historically, we have not focused on growth in the number of restaurants just to generate additional sales. Our expansion and operating strategies have balanced investment and operating cost considerations in order to generate reasonable, sustainable margins and achieve acceptable returns on investment from our restaurant concepts.
In 2010, we launched a new strategic plan and operating model, added experienced executives to our management team and adapted practices from the consumer products and retail industries to complement our restaurant acumen and enhance our brand management, analytics and innovation. This new model keeps the customer at the center of our decision-making and focuses on continuous innovation and productivity to drive sustainable sales and profit growth. As a result of these initiatives, we are recommitted to new unit development after curtailing expansion from 2009 to 2011. We believe that a substantial development opportunity remains for our concepts in the U.S. and internationally.
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 2011 and the first half of 2012, we continued to balance near-term growth in share gains with investments to achieve sustainable growth. For the remainder of 2012, our key growth strategies, which are enabled by continued improvements in infrastructure and organizational effectiveness, are:
| |
• | Grow Comparable Restaurant Sales. We plan to continue our efforts to remodel our Outback Steakhouse and Carrabba’s Italian Grill restaurants, use limited-time offers and multimedia marketing campaigns to drive traffic, grow beyond our traditional weekend dinner traffic and introduce innovative menu items that match evolving consumer preferences. |
| |
• | Pursue New Domestic and International Development With Strong Unit Level Economics. We believe that a substantial development opportunity remains for our concepts in the U.S. and internationally. We added significant resources in site selection, construction and design in 2010 and 2011 to support the opening of new restaurants. We expect to open 30 or more restaurants in 2012 and increase the pace thereafter. |
| |
• | Drive Margin Improvement. We believe we have the opportunity to increase our margins through cost reductions in labor, food cost, supply chain and restaurant facilities. |
Key Performance Indicators
Key measures that we use in evaluating our restaurants and assessing our business include the following:
| |
• | Average restaurant unit volumes - average sales per restaurant to measure changes in customer traffic, pricing and development of the brand; |
| |
• | System-wide sales - total restaurant sales volume for all Company-owned, franchise and unconsolidated joint venture restaurants, regardless of ownership, to interpret the overall health of our brands; |
| |
• | Comparable restaurant sales - year-over-year comparison of sales volumes for domestic, Company-owned restaurants that are open 18 months or more in order to remove the impact of new restaurant openings in comparing the operations of existing restaurants; and |
| |
• | Customer satisfaction scores - measurement of our customers’ experiences in a variety of key attributes. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following tables set forth, for the periods indicated, (i) percentages that items in our Consolidated Statements of Operations and Comprehensive Income bear to Total revenues or Restaurant sales, as indicated, and (ii) selected operating data:
|
| | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Revenues | | | | | | | |
Restaurant sales | 98.9 | % | | 99.0 | % | | 99.0 | % | | 99.1 | % |
Other revenues | 1.1 |
| | 1.0 |
| | 1.0 |
| | 0.9 |
|
Total revenues | 100.0 |
| | 100.0 |
| | 100.0 |
| | 100.0 |
|
Costs and expenses | |
| | |
| | |
| | |
Cost of sales (1) | 32.5 |
| | 32.2 |
| | 32.3 |
| | 32.1 |
|
Labor and other related (1) | 28.0 |
| | 29.1 |
| | 28.0 |
| | 28.8 |
|
Other restaurant operating (1) | 23.8 |
| | 23.8 |
| | 22.3 |
| | 22.6 |
|
Depreciation and amortization | 4.0 |
| | 4.0 |
| | 3.8 |
| | 3.9 |
|
General and administrative | 7.4 |
| | 7.3 |
| | 7.3 |
| | 6.7 |
|
Provision for impaired assets and restaurant closings | 0.5 |
| | 0.4 |
| | 0.4 |
| | 0.2 |
|
Income from operations of unconsolidated affiliates | (0.2 | ) | | (0.2 | ) | | (0.2 | ) | | (0.3 | ) |
Total costs and expenses | 95.0 |
| | 95.7 |
| | 93.2 |
| | 93.3 |
|
Income from operations | 5.0 |
| | 4.3 |
| | 6.8 |
| | 6.7 |
|
Loss on extinguishment of debt | — |
| | — |
| | (0.1 | ) | | — |
|
Other (expense) income, net | (*) |
| | 0.1 |
| | (*) |
| | * |
|
Interest expense, net | (2.5 | ) | | (2.2 | ) | | (2.2 | ) | | (2.1 | ) |
Income before provision for income taxes | 2.5 |
| | 2.2 |
| | 4.5 |
| | 4.6 |
|
Provision for income taxes | 0.4 |
| | 0.5 |
| | 0.8 |
| | 0.8 |
|
Net income | 2.1 |
| | 1.7 |
| | 3.7 |
| | 3.8 |
|
Less: net income attributable to noncontrolling interests | 0.3 |
| | 0.2 |
| | 0.4 |
| | 0.3 |
|
Net income attributable to Bloomin’ Brands, Inc. | 1.8 | % | | 1.5 | % | | 3.3 | % | | 3.5 | % |
| | | | | | | |
Net income | 2.1 |
| | 1.7 |
| | 3.7 |
| | 3.8 |
|
Other comprehensive income: | | | | | | | |
Foreign currency translation adjustment | (0.7 | ) | | 0.4 |
| | (0.2 | ) | | 0.4 |
|
Comprehensive income | 1.4 |
| | 2.1 |
| | 3.5 |
| | 4.2 |
|
Less: comprehensive income attributable to noncontrolling interests | 0.3 |
| | 0.2 |
| | 0.4 |
| | 0.3 |
|
Comprehensive income attributable to Bloomin’ Brands, Inc. | 1.1 | % | | 1.9 | % | | 3.1 | % | | 3.9 | % |
________________
| |
(1) | As a percentage of Restaurant sales. |
| |
* | Less than 1/10th of one percent of Total revenues. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below presents the number of our restaurants in operation at the end of the periods indicated:
|
| | | | | |
| JUNE 30, |
| 2012 | | 2011 |
Number of restaurants (at end of the period): | | | |
Outback Steakhouse | | | |
Company-owned - domestic | 669 |
| | 670 |
|
Company-owned - international | 113 |
| | 120 |
|
Franchised - domestic | 106 |
| | 107 |
|
Franchised and development joint venture - international | 83 |
| | 68 |
|
Total | 971 |
| | 965 |
|
Carrabba’s Italian Grill | |
| | |
|
Company-owned | 230 |
| | 231 |
|
Franchised | 1 |
| | 1 |
|
Total | 231 |
| | 232 |
|
Bonefish Grill | |
| | |
|
Company-owned | 155 |
| | 145 |
|
Franchised | 7 |
| | 7 |
|
Total | 162 |
| | 152 |
|
Fleming’s Prime Steakhouse and Wine Bar | |
| | |
|
Company-owned | 64 |
| | 64 |
|
Roy’s | |
| | |
|
Company-owned | 22 |
| | 22 |
|
System-wide total | 1,450 |
| | 1,435 |
|
We operate restaurants under brands that have similar economic characteristics, nature of products and services, class of customer and distribution methods, and as a result, aggregate our operating segments into a single reporting segment.
SYSTEM-WIDE SALES
System-wide sales increased 3.1% and 4.8% for the three and six months ended June 30, 2012 as compared with the corresponding periods in 2011. System-wide sales is a non-GAAP financial measure that includes sales of all restaurants operating under our brand names, whether we own them or not. System-wide sales comprises sales of Company-owned restaurants and sales of franchised and unconsolidated joint venture restaurants. The table below presents the first component of system-wide sales, which is sales of Company-owned restaurants:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
COMPANY-OWNED RESTAURANT SALES (in millions): | | | | | | | |
Outback Steakhouse | | | | | | | |
Domestic | $ | 526 |
| | $ | 514 |
| | $ | 1,086 |
| | $ | 1,046 |
|
International | 65 |
| | 70 |
| | 148 |
| | 153 |
|
Total | 591 |
| | 584 |
| | 1,234 |
| | 1,199 |
|
Carrabba’s Italian Grill | 173 |
| | 172 |
| | 360 |
| | 352 |
|
Bonefish Grill | 124 |
| | 113 |
| | 251 |
| | 227 |
|
Fleming’s Prime Steakhouse and Wine Bar | 61 |
| | 57 |
| | 128 |
| | 120 |
|
Other | 21 |
| | 20 |
| | 42 |
| | 41 |
|
Total Company-owned restaurant sales | $ | 970 |
| | $ | 946 |
| | $ | 2,015 |
| | $ | 1,939 |
|
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information presents the second component of system-wide sales, which is sales of franchised and unconsolidated joint venture restaurants. These are restaurants that are not consolidated and from which we only receive a franchise royalty or a portion of their total income. Management believes that franchise and unconsolidated joint venture sales information is useful in analyzing our revenues because franchisees and affiliates pay royalties and/or service fees that generally are based on a percentage of sales. Management also uses this information to make decisions about future plans for the development of additional restaurants and new concepts as well as evaluation of current operations.
The following do not represent our sales and are presented only as an indicator of changes in the restaurant system, which management believes is important information regarding the health of our restaurant concepts.
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
FRANCHISE AND UNCONSOLIDATED JOINT VENTURE SALES (in millions) (1): | | | | | | | |
Outback Steakhouse | | | | | | | |
Domestic | $ | 78 |
| | $ | 77 |
| | $ | 160 |
| | $ | 157 |
|
International | 86 |
| | 76 |
| | 173 |
| | 145 |
|
Total | 164 |
| | 153 |
| | 333 |
| | 302 |
|
Carrabba’s Italian Grill | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Bonefish Grill | 4 |
| | 5 |
| | 9 |
| | 9 |
|
Total franchise and unconsolidated joint venture sales (1) | $ | 169 |
| | $ | 159 |
| | $ | 344 |
| | $ | 313 |
|
Income from franchise and unconsolidated joint ventures (2) | $ | 10 |
| | $ | 9 |
| | $ | 21 |
| | $ | 19 |
|
__________________
| |
(1) | Franchise and unconsolidated joint venture sales are not included in revenues in the Consolidated Statements of Operations and Comprehensive Income. |
| |
(2) | Represents the franchise royalty and the portion of total income related to restaurant operations included in the Consolidated Statements of Operations and Comprehensive Income in the line items “Other revenues” and “Income from operations of unconsolidated affiliates,” respectively. |
REVENUES
Restaurant sales
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | | | | | SIX MONTHS ENDED | | | | |
| JUNE 30, | | | | | | JUNE 30, | | | | |
(dollars in millions): | 2012 | | 2011 | | $ Change | | % Change | | 2012 | | 2011 | | $ Change | | % Change |
Restaurant sales | $ | 970.0 |
| | $ | 946.0 |
| | $ | 24.0 |
| | 2.5 | % | | $ | 2,015.5 |
| | $ | 1,939.1 |
| | $ | 76.4 |
| | 3.9 | % |
The increase in restaurant sales in the three months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to (i) a $22.1 million increase in comparable restaurant sales at our existing restaurants (including a 2.4% combined comparable restaurant sales increase in the second quarter of 2012 at our core domestic concepts) which was primarily due to increases in customer traffic and general menu prices and (ii) a $10.5 million increase in sales from fifteen restaurants not included in our comparable restaurant sales base. The increase in customer traffic was primarily a result of promotions throughout our concepts, innovations in our menu, service and operations, weekend lunch expansions in our Outback Steakhouse and Carrabba’s Italian Grill concepts and renovations at additional Outback Steakhouse locations. The increase in restaurant sales in the three months ended June 30, 2012 as compared to the same period in 2011 was partially offset by a $6.5 million decrease from the sale (and franchise conversion) of nine of our Company-owned Outback Steakhouse restaurants in Japan in October 2011 and a $2.1 million decrease from the closing of four restaurants since June 30, 2011.
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increase in restaurant sales in the six months ended June 30, 2012 as compared to the same period in 2011 was primarily attributable to (i) a $76.3 million increase in comparable restaurant sales at our existing restaurants (including a 3.8% combined comparable restaurant sales increase in the first half of 2012 at our core domestic concepts) which was primarily due to increases in customer traffic and general menu prices and (ii) a $17.4 million increase in sales from sixteen restaurants not included in our comparable restaurant sales base. The increase in customer traffic was primarily a result of promotions throughout our concepts, innovations in our menu, service and operations, mild winter weather conditions, the additional day in February due to Leap Year, weekend lunch expansions in our Outback Steakhouse and Carrabba’s Italian Grill concepts and renovations at additional Outback Steakhouse locations. The increase in restaurant sales in the six months ended June 30, 2012 as compared to the same period in 2011 was partially offset by a $12.4 million decrease from the sale (and franchise conversion) of nine of our Company-owned Outback Steakhouse restaurants in Japan in October 2011 and a $4.9 million decrease from the closing of four restaurants since June 30, 2011.
The following table includes additional information about changes in restaurant sales at domestic Company-owned restaurants for our core brands:
|
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED | | SIX MONTHS ENDED |
| JUNE 30, | | JUNE 30, |
| 2012 | | 2011 | | 2012 | | 2011 |
Average restaurant unit volumes (weekly): | | | | | | | |
Outback Steakhouse | $ | 60,556 |
| | $ | 59,088 |
| | $ | 62,480 |
| | $ | 60,429 |
|
Carrabba’s Italian Grill | $ | 57,979 |
| | $ | 57,033 |
| | $ | 60,245 |
| | $ | 58,720 |
|
Bonefish Grill | $ | 62,417 |
| | $ | 60,031 |
| | $ | 63,634 |
| | $ | 60,501 |
|
Fleming’s Prime Steakhouse and Wine Bar | $ | 73,136 |
| | $ | 68,362 |
| | $ | 76,824 |
| | $ | 72,742 |
|
Operating weeks: | | | | | |
| | |
Outback Steakhouse | 8,697 |
| | 8,710 |
| | 17,394 |
| | 17,324 |
|
Carrabba’s Italian Grill | 2,990 |
| | 3,011 |
| | 5,981 |
| | 5,994 |
|
Bonefish Grill | 1,985 |
| | 1,885 |
| | 3,943 |
| | 3,749 |
|
Fleming’s Prime Steakhouse and Wine Bar | 832 |
| | 832 |
| | 1,664 |
| | 1,655 |
|
Year over year percentage change: | | | | | |
| |