UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| (Mark One) | |
| [X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| | For the fiscal year ended: December 31, 201228, 2014 |
| | 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)
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| | | | |
| 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)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
| Title of each class | | | | Name of each exchange on which registered |
| Common Stock, $0.01 par value | | | | The Nasdaq Stock Market LLC (Nasdaq (Nasdaq Global Select Market) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES oý NO ýo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant 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 ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
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 oý Accelerated filer o
Non-accelerated filer ýo (Do not check if 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 Act). YES o NO ý
The aggregate market value of the voting and non-votingcommon stock of the registrant held by non-affiliates of Bloomin’ Brands, Inc. computed by reference to(based on the closing price of the registrant’s common stock on the Nasdaq Global Select Market as of August 8, 2012, was approximately $235.8 million. As of June 30, 2012, the last business day of the registrant’s most recently completed second fiscal quarter thereas reported on the Nasdaq Global Select Market) was no established public trading market$1.6 billion. All executive officers and directors of the registrant and all persons filing a Schedule 13G with the Securities and Exchange Commission in respect to registrant’s common stock have been deemed, solely for the registrant’s equity securities.purpose of the foregoing calculation, to be “affiliates” of the registrant.
As of February 25, 2013, 121,529,44618, 2015, 126,386,965 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders on April 24, 2013,29, 2015, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 201228, 2014, are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
INDEX TO ANNUAL REPORT ON FORM 10-K
For theFiscal Year Ended December 31, 20122014
TABLE OF CONTENTS
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| PART I | |
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| PART II | |
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| PART III | |
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| PART IV | |
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PART I
Cautionary Statement
This Annual Report on Form 10-K (the “Report”) 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,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology.terminology, although not all forward-looking statements are accompanied by such terms. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this reportReport 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, those described in the “Risk Factors” section of this filing, which include, but are not limited to, the following:
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(i) | The restaurant industry is a highly competitive industry with many well-established competitors; |
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(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; |
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(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; our 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; |
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(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; |
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(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; |
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(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; |
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(vii) | Our results can be impacted by unanticipated changes in our tax rates, exposure to additional income tax liabilities, a change in our ability to realize deferred tax benefits or the timing and amount of a reversal of recorded deferred tax benefit valuation allowances; |
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(viii) | Minimum wage increases and mandated employee benefits could cause a significant increase in our labor costs; |
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(ix) | Commodities, including but not limited to, such items as beef, chicken, shrimp, pork, seafood, dairy, produce, potatoes, onions and energy supplies, are subject to fluctuation in price and availability and price could increase or decrease more than we expect; |
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(x) | Our results can be affected by consumer reaction to public health issues; |
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(xi) | Our results can be affected by consumer perception of food safety; |
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(xii) | We could face liabilities if we are unable to protect customer credit and debit card data or personal employee information; and |
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(xiii) | 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.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,Report, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause actual results to differ materially from statements made or suggested by forward-looking statements include, but are not limited to, those described in the “Risk Factors” section of this filing and the following:
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| (i) | Economic conditions and their effects on consumer confidence and discretionary spending, consumer traffic, the cost and availability of credit and interest rates; |
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| (ii) | Our ability to compete in the highly competitive restaurant industry with many well-established competitors and new market entrants; |
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| (iii) | Our ability to preserve and grow the reputation and value of our brands; |
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| (iv) | Our ability to acquire attractive sites on acceptable terms, obtain required permits and approvals, recruit and train necessary personnel and obtain adequate financing in order to develop new restaurants as planned, and difficulties in estimating the performance of newly opened restaurants; |
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| (v) | The effects of international economic, political, social and legal conditions on our foreign operations and on foreign currency exchange rates; |
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| (vi) | Our ability to effectively respond to changes in patterns of consumer traffic, consumer tastes and dietary habits; |
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| (vii) | Seasonal and periodic fluctuations in our results and the effects of significant adverse weather conditions and other disasters or unforeseen events; |
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| (viii) | Our ability to comply with governmental laws and regulations, the costs of compliance with such laws and regulations and the effects of changes to applicable laws and regulations; |
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| (ix) | Minimum wage increases and additional mandated employee benefits; |
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| (x) | Fluctuations in the price and availability of commodities; |
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| (xi) | Consumer reactions to public health and food safety issues; |
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| (xii) | Our ability to protect our information technology systems from interruption or security breach and to protect consumer data and personal employee information; and |
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| (xiii) | The effects of our substantial leverage and restrictive covenants in our various credit facilities on our ability to raise additional capital to fund our operations, to make capital expenditures to invest in new or renovate restaurants and to react to changes in the economy or our industry, and our exposure to interest rate risk in connection with our variable-rate debt. |
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 reportReport 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.
Item 1. Business
GENERAL
General and History - Bloomin’ Brands, Inc. (“Bloomin’ Brands,” the “Company,” “we,” “us,” “our,” and other similar terms mean Bloomin’ Brands, Inc. and its subsidiaries, except where the context indicates otherwise)“our”) is one of the largest casual dining restaurant companies in the world, with a portfolio of leading, differentiated restaurant concepts. We own and operate 1,268 restaurants and have 203 restaurants operating under franchise or joint venture arrangements across 48 states, Puerto Rico, Guam and 19 countries. We have fivefour founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s. Each of our concepts maintains its unique, founder-inspired brand identity and entrepreneurial culture to provide a compelling customer experience combining great food, highly-attentive service and lively ambience at attractive prices. Our restaurants attract customers across a variety of occasions, including everyday dining, celebrations and business entertainment.
In 2010, we launched a new strategic plan and operating model, strengthened 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. We have made these changes while preserving our entrepreneurial culture at the operating level. Our restaurant managing partners are a key element of this culture, each of whom shares in the cash flows of his or her restaurant after making a required initial cash investment.
OUR HISTORY
Our predecessor OSI Restaurant Partners, Inc., was incorporated in August 1987, and we opened our first Outback Steakhouse restaurant in 1988. We became a Delaware corporation in 1991 as part of a corporate reorganization completed in connection with our predecessor’s initial public offering. Between 1993 and 2002, we acquired or developed our other restaurant concepts, and in 1996, we began expanding the Outback Steakhouse concept internationally.
Bloomin’ Brands, formerly known as Kangaroo Holdings, Inc., was incorporated in Delaware in October 2006 by an investor group comprised of funds advised by Bain Capital Partners, LLC (“Bain Capital”) and Catterton Management Company, LLC (“Catterton”), who we collectively refer to as our “Sponsors,” and Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon, whom we collectively refer to as our “Founders,” and members of our management. On June 14, 2007, we acquired OSI Restaurant Partners, Inc. by means of a merger and related transactions, referred to in this report as 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, we implemented a new ownership and financing arrangement for our owned restaurant properties, pursuant to which Private Restaurant Properties, LLC (“PRP”), our indirect wholly-owned subsidiary, acquired 343 restaurant properties then owned by OSI and leased them back to subsidiaries of OSI. In March 2012, we refinanced the commercial mortgage-backed securities loan (the “CMBS Loan”) that we entered into in 2007 in connection with the Merger with a new commercial mortgage-backed securities loan. Following the refinancing, OSI remains our primary operating entity and New Private Restaurant Properties, LLC, another indirect wholly-owned subsidiary of ours, continues to lease 261 of our owned restaurant properties to OSI subsidiaries. In August 2012, we completed an initial public offering of our common stock. An investor group comprised of funds advised by our Sponsors and two of our Founders continue to beneficially own a controlling interest of our common stock.
OUR RESTAURANT CONCEPTS
As of December 31, 2012, the 1,471 full-service restaurants in our restaurant system consisted of the following, identified by concept and ownership structure:
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| | | Outback Steakhouse (domestic)(1) | | Outback Steakhouse (international)(1) | | Carrabba’s Italian Grill | | Bonefish Grill | | Fleming’s Prime Steakhouse and Wine Bar | | Roy’s | | Total |
| Company-owned | | 665 | | 115 | | 234 | | 167 | | 65 | | 22 | | 1,268 |
| Development joint venture | | — | | 41 | | — | | — | | — | | — | | 41 |
| Franchise | | 106 | | 48 | | 1 | | 7 | | — | | — | | 162 |
Total | | 771 | | 204 | | 235 | | 174 | | 65 | | 22 | | 1,471 |
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(1) | One Company-owned restaurant in Puerto Rico that was previously included in Outback Steakhouse (international) in prior filings is now included in Outback Steakhouse (domestic). |
Our core concepts are Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and& Wine Bar. Our Roy’s concept operated as a 50/50 joint venture until October 1, 2012, when we acquired the remaining joint venture interests.
Our restaurant concepts range in price point and degree of formality from casual (Outback Steakhouse and Carrabba’s Italian Grill) to polishedupscale casual (Bonefish Grill) and fine dining (Fleming’s Prime Steakhouse & Wine Bar). In January 2015, we sold our Roy’s concept.
As of December 28, 2014, we owned and Wine Baroperated 1,344 restaurants and Roy’s)franchised 166 restaurants across 48 states, Puerto Rico, Guam and 21 countries.
Our predecessor, OSI Restaurant Partners, Inc., opened the first Outback Steakhouse restaurant in 1988. In 1991, OSI Restaurant Partners, Inc. completed an initial public offering (“IPO”). Polished casual seeksIn 1996, we expanded the Outback Steakhouse concept internationally.
On June 14, 2007, Bloomin’ Brands, which was incorporated in 2006, 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 limited liability company named OSI Restaurant Partners, LLC (“OSI”). OSI is our primary operating entity. New Private Restaurant Properties, LLC (“PRP”), a wholly-owned subsidiary of Bloomin’ Brands, leases our owned restaurant properties to deliver the design elements, food quality and knowledgeable service suggestive of fine dining restaurants, except that the atmosphere is more relaxed and the prices are lower than fine dining. We source ingredients from around the world, whichOSI subsidiaries. In August 2012, we believe allows us to achieve a high degree of freshness and quality and maintain the authenticitycompleted an IPO of our recipes, while keeping costs in line with the target pricing for our concepts.common stock.
OUR RESTAURANT CONCEPTS
Outback Steakhouse - Domestic
U.S. - Outback Steakhouse is a casual dining steakhouse featuring high quality, freshly prepared food, attentive servicerestaurant focused on steaks, signature flavors and Australian décor. As of December 31, 2012, we owned and operated 665 restaurants and 106 restaurants were franchised across 48 states and Puerto Rico.
decor. The Outback Steakhouse menu offers several cuts of uniquely seasoned and seared or wood-fire grilled steaks, chops, chicken, seafood, pasta, salads and seasonal specials. We use fresh and authentic ingredients, such as USDA Choice steaks and imported Danish blue cheese, and make items such as our sauces, soups, salad dressings, and chocolate sauce from scratch. The menu also includes several specialty appetizers, including our signature “Bloomin’Bloomin’ Onion®,” and desserts, together with full bar service featuring Australian wine and beer. Alcoholic beverages account for approximately 11% of domestic Outback Steakhouse’s restaurant sales. The average check per person, which varies for all of our concepts based on limited-time offers, special menu items and promotions, was approximately $20 during 2012.
The décor includes a contemporary, casual atmosphere with blond woods, large booths and tables and Australian artwork. Outback Steakhouse restaurants serve dinner every day of the week and most locations are open for lunch on Saturday and Sunday. Some locations are also open for lunch Monday through Friday.
Carrabba’s Italian Grill
- Carrabba’s Italian Grill is ana casual authentic Italian casual dining restaurant featuring high quality handcrafted dishes, an exhibition kitchen and a welcoming atmosphere. As of December 31, 2012, we owned and operated 234 restaurants and franchised one restaurant across 32 states.
dishes. The Carrabba’s Italian Grill menu includes a variety of Italian pasta, chicken, beef and seafood dishes, salads and wood-fired pizza. Our use of a wood-fired grill, combined with our signature grill seasoning, produces Italian dishes with flavors we believe are unique to the category. Our ingredients are sourced from around the world such as our Prince Edward Island mussels, our extra virgin olive oil imported from Catalonia, Spain, and our pasta imported from a small town outside Pompeii, to meet our quality specifications. We grate our fresh romano and parmesan cheese daily and prepare items such as soups, sauces, lasagna, mozzarella sticks, salad dressings and desserts, including the roasted cinnamon rum pecans that top our John Cole dessert, from scratch. The menu also includes specialty appetizers, desserts and coffees, together with full bar service featuring Italian wines and specialty drinks. Alcoholic beverages account for approximately 16% of Carrabba’s Italian Grill’s restaurant sales. The average check per person was approximately $21 during 2012.
The décor includes dark woods, large booths and tables and Italian memorabilia featuring Carrabba family photos and authentic Italian pottery. Our traditional Italian exhibition kitchen allows customersconsumers to watch hand-madehandmade dishes being prepared. Carrabba’s Italian Grill restaurants serve dinner every day of the week and the majority are open for lunch on Saturday and Sunday.
Bonefish Grill
- Bonefish Grill is a polishedan upscale casual seafood restaurant featuring market fresh grilled fish, high-end yet approachable service and a lively bar. Servers wear chef coats to underscore their knowledge and professionalism, and guide guests through a comfortable rather than stuffy dining experience. As of December 31, 2012, we owned and operated 167 and franchised seven restaurants across 29 states.
fish. The Bonefish Grill menu is anchored by fresh fish, hand-cut and topped with freshly prepared sauces, and seasonal seafood specials. These selections are based on the types of seafood then available to the restaurant to ensure a fresh and flavorful meal. In addition, Bonefish Grill offers beef, pork and chicken entrees,entrées, as well as several specialty appetizers, including our signature “BangBang Bang Shrimp,®,” and desserts. Bonefish Grill’s bar provides an energetic setting for drinks, dining and socializing, with large tables, music from emerging artists and a bar menu featuring a large variety of hand crafted cocktails, a specialty martini list, wine and regional beer selections. Alcoholic beverages account for approximately 24% of Bonefish Grill’s restaurant sales. The average check per person was approximately $23 in 2012.
The décor is warm and inviting, with hardwood floors, large booths and tables and distinctive artwork inspired by regional coastal settings. Bonefish Grill restaurants typically serve dinner only, but began serving Sunday brunch in 2012 at select locations.
Fleming’s Prime Steakhouse and Wine Bar
Fleming’s Prime Steakhouse and& Wine Bar - Fleming’s Prime Steakhouse & Wine Bar is an upscale,a contemporary prime steakhouse for food and wine lovers seeking a stylish, lively and memorable dining experience. As of December 31, 2012, we owned and operated 65 Fleming’s Prime Steakhouse and Wine Bar restaurants across 28 states.
The Fleming’s Prime Steakhouse and Wine Bar menu featuresfeaturing prime cuts of beef, fresh seafood and pork veal and chicken entreesentrées, accompanied by an extensive assortment of freshly prepared salads and side dishes available a la carte, plus several specialty appetizers and desserts. Fleming’s Prime Steakhouse and Wine Bardishes. The steak selection features USDA Prime corn-fed beef, aged up to four weeksboth wet- and dry-aged for flavor and texture, andin a selection of sizes and cuts, all seared and broiled at 1,600 degrees to seal in the beef’s natural juices and flavors. Among national high-end steak concepts,cuts. Fleming’s Prime Steakhouse and& Wine Bar offers the largesta large selection of wines by the glass, with 100 quality wines available, as well as specialty cocktails. Alcoholic beverages account for approximately 30% of Fleming’s Prime Steakhouse and Wine Bar’s restaurant sales. The average check per person was approximately $67 in 2012.available.
The décor features an open dining room built around an exhibition kitchen and expansive bar, with lighter woods and colors with rich cherry wood accents and high ceilings. Private dining rooms are available for private gatherings or corporate functions. Fleming’s Prime Steakhouse and Wine Bar restaurants serve dinner only.
Roy’s
Roy’s provides an upscale dining experience featuring Pacific Rim cuisine. As ofBloomin’ Brands International - December 31, 2012, we owned and operated 22 Roy’s restaurants located across seven states. We did not have an economic interest in nine Roy’s as of December 31, 2012, including six in Hawaii and one each in the continental United States, Japan and Guam.
The Roy’s menu offers Chef Roy Yamaguchi’s “Hawaiian Fusion” cuisine, a blend of bold Asian spices, European sauces and local ingredients, and features a variety of fish and seafood, beef, short ribs, pork, lamb and chicken. The menu also includes several specialty appetizers and desserts. In addition to full bar service, Roy’s offers a large selection of highly rated wines. Alcoholic beverages account for approximately 27% of Roy’s restaurant sales. The average check per person was approximately $58 during 2012.
The décor features large dining rooms, a lounge area, an outdoor dining patio in certain locations and Roy’s signature exhibition kitchen. Private dining rooms are available for private gatherings or corporate functions. The majority of Roy’s restaurants serve dinner only.
Outback Steakhouse - International
Outback SteakhouseBloomin’ Brands International is our business unit for developing and operating Outback Steakhouseour restaurants outside of the U.S. In 2011, we enhanced our international organizational structure by adding a new unit president and recruiting internal and external talent from market-leading companies with the experience we believe is needed to drive international growth. We have cross-functional, local management to support and grow restaurants in each of the countries where we have Company-owned operations. Our international operations are integrated this team intowith our corporate headquartersorganization to leverage enterprise-wide capabilities, including marketing, finance, consumer research and analytics, real estate, development, information technology, legal, supply chain management and productivityproductivity.
Prior to November 1, 2013, our Outback Steakhouse locations in order to support both Company-owned and franchised locations. In addition, our Company-owned andBrazil were operated as an unconsolidated joint venture operations(“Brazil Joint Venture”). On November 1, 2013, we acquired a controlling interest in South Korea, Hong Kong, China andthe Brazil have cross-functional, local management staff in place to grow and support restaurants in those locations.
Joint Venture.
OurAs of December 28, 2014, we owned and operated 167 international Outback Steakhouse restaurants and franchised 55 restaurants across 21 countries and Guam. As of December 28, 2014, our other concepts currently dodid not operate outside of the U.S. AsSee Item 2 - Properties for disclosure of December 31, 2012, we owned and operated 115our international Outback Steakhouse restaurants, restaurant count by country.41 were owned and operated through a joint venture and 48 were operated under franchise arrangements across 19 countries and Guam as follows:
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Country/Territory | | Ownership Type | | Total |
South Korea | | Company-owned | | 106 |
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Hong Kong | | Company-owned | | 8 |
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China (Mainland) | | Company-owned | | 1 |
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Brazil | | Joint venture | | 41 |
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Japan | | Franchise | | 10 |
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Australia | | Franchise | | 6 |
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Mexico | | Franchise | | 5 |
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Taiwan | | Franchise | | 5 |
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Canada | | Franchise | | 4 |
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Indonesia | | Franchise | | 3 |
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Philippines | | Franchise | | 3 |
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Saudi Arabia | | Franchise | | 3 |
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United Arab Emirates | | Franchise | | 2 |
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Costa Rica | | Franchise | | 1 |
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Dominican Republic | | Franchise | | 1 |
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Egypt | | Franchise | | 1 |
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Guam | | Franchise | | 1 |
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Malaysia | | Franchise | | 1 |
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Singapore | | Franchise | | 1 |
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Thailand | | Franchise | | 1 |
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Total | | | | 204 |
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Financial information about geographic areas is included in this Form 10-K in Item 8, Note 2 - Summary of Significant Accounting Policies of our Notes to consolidated financial statements. Risks associated with our international operations are included in this Form 10-K in Item 1A.Consolidated Financial Statements.
InternationalSystem-wide Restaurant Summary - Following is a system-wide rollforward of restaurants in operation during fiscal year 2014:
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| | | | | | | | | | | |
| | DECEMBER 31, | | 2014 ACTIVITY | | DECEMBER 28, | | U.S. STATE |
| | 2013 | | OPENED | | CLOSED | | 2014 | | COUNT |
| Number of restaurants: | | | | | | | | | |
| Outback Steakhouse | | | | | | | | | |
| Company-owned—U.S. | 663 | | 3 |
| | (18 | ) | | 648 | | |
| Company-owned—international (1) (2) (3) | 169 | | 24 |
| | (26 | ) | | 167 | | |
| Franchised—U.S. | 105 | | 1 |
| | (1 | ) | | 105 | | |
| Franchised—international (2) | 51 | | 5 |
| | (1 | ) | | 55 | | |
| Total | 988 | | 33 |
| | (46 | ) | | 975 | | 48 |
| Carrabba’s Italian Grill | | | | | | | | | |
| Company-owned | 239 | | 6 |
| | (3 | ) | | 242 | | |
| Franchised | 1 | | — |
| | — |
| | 1 | | |
| Total | 240 | | 6 |
| | (3 | ) | | 243 | | 32 |
| Bonefish Grill | | | | | | | | | |
| Company-owned (4) | 187 | | 17 |
| | (3 | ) | | 201 | | |
| Franchised (4) | 7 | | — |
| | (2 | ) | | 5 | | |
| Total | 194 | | 17 |
| | (5 | ) | | 206 | | 37 |
| Fleming’s Prime Steakhouse & Wine Bar | | | | | | | | | |
| Company-owned | 65 | | 1 |
| | — |
| | 66 | | 28 |
| Roy’s | | | | | | | | | |
| Company-owned | 21 | | — |
| | (1 | ) | | 20 | | 7 |
| System-wide total | 1,508 | | 57 |
| | (55 | ) | | 1,510 | | |
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| (1) | The restaurant count for Brazil is reported as of November 30, 2014 and excludes one restaurant opened in December 2014. |
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| (2) | Effective December 28, 2014, we sold one Company-owned Outback Steakhouse location in Mexico to an existing franchisee. |
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| (3) | The restaurant count as of December 28, 2014 includes 21 locations scheduled to close during 2015, including 20 in South Korea. |
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| (4) | Effective March 1, 2014, we acquired two Bonefish Grill restaurants from a franchisee. |
Selected sales data - Following is sales mix by product type and average check per person for domestic Company-owned restaurants during fiscal year 2014:
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| | Outback Steakhouse (U.S.) | | Carrabba’s Italian Grill | | Bonefish Grill | | Fleming’s
Prime Steakhouse
& Wine Bar |
| Food & non-alcoholic beverage | 89 | % | | 84 | % | | 77 | % | | 71 | % |
| Alcoholic beverage | 11 | % | | 16 | % | | 23 | % | | 29 | % |
| | 100 | % | | 100 | % | | 100 | % | | 100 | % |
| | | | | | | | |
| Average check per person | $ | 21 |
| | $ | 21 |
| | $ | 24 |
| | $ | 71 |
|
Lunch expansion - All of our concepts serve dinner every day of the week. Outback Steakhouse restaurants have substantially the same core menu items as domestic Outback Steakhouseand Carrabba’s Italian Grill are open for lunch on Saturday and Sunday (“weekend lunch”), with many locations although certain side items and other menu items are local in nature. The prices that we charge in individual locations are reflective of local demographics and related local costs involved in procuring product.also open for lunch Monday through Friday (“weekday lunch”). Most of our international locations serve lunch and dinner. Following is the percentage of U.S. Outback Steakhouse and Carrabba’s Italian Grill locations open for weekday and weekend lunch as of the dates indicated:
|
| | | | | | | | | | | | | | | | | |
| | DECEMBER 28, 2014 | | DECEMBER 31, 2013 | | DECEMBER 31, 2012 |
| | WEEKEND | | WEEKDAY | | WEEKEND | | WEEKDAY | | WEEKEND | | WEEKDAY |
| Outback Steakhouse | 100 | % | | 61 | % | | 100 | % | | 35 | % | | 100 | % | | 19 | % |
| Carrabba’s Italian Grill | 100 | % | | 55 | % | | 100 | % | | 40 | % | | 100 | % | | 9 | % |
We utilize a global core menu policy to ensure consistency and quality in our menu offerings. We allow local tailoring of the menu to best address the preference of local customers in a market. Prior to the addition of an item to the core menu, we conduct customer research and it is reviewed and approved by our research and development (“R&D”) team. In South Korea, for example, we serve “lunch box sets,” offering affordable options to busy customers seeking a quick lunch at Outback Steakhouse. Similarly, in Brazil, we offer “set pricing” lunch options that provide various price point options for our lunchtime diners.
Our international Outback Steakhouse locations are similar in the look and feel of our domestic locations, although there is more diversity in certain restaurant locations, layouts and sizes.
RESTAURANT DESIGN AND DEVELOPMENT
Site Design
- We generally construct freestanding buildings on leased properties, although ourcertain leased sites are also located in strip shopping centers. Construction of a new restaurant typically takes approximately 9060 to 180 days from the date the location is leased or under contract and fully permitted. In the majority of cases, future we intend to either convertrestaurant development will result from the lease of existing third-party leased retail space or construct new restaurants through leases in the majority of circumstances.space. We typically design the interior of our restaurants in-house, utilizing outside architects when necessary.
A typical Outback Steakhouse is approximately 6,200 square feetRemodel and features a dining room and a full-service liquor bar. The dining area of a typical Outback Steakhouse consists of 45 to 48 tables and seats approximately 220 people. The bar area consists of approximately ten tables and has seating capacity for approximately 54 people. Appetizers and complete dinners are served in the bar area.
Outback Steakhouse international restaurants range in size from 3,500 to 10,000 square feet and may be basement, ground level or upper floor locations.
A typical Carrabba’s Italian Grill is approximately 6,500 square feet and features a dining room, pasta bar seating that overlooks the exhibition kitchen and a full-service liquor bar. The dining area of a typical Carrabba’s Italian Grill consists of 40 to 45 tables and seats approximately 230 people. The liquor bar area typically includes six tables and seating capacity for approximately 60 people, and the pasta bar has seating capacity for approximately ten people. Appetizers and complete dinners are served in both the pasta bar and liquor bar areas.
A typical Bonefish Grill is approximately 5,500 square feet and features a dining room and full-service liquor bar. The dining area of a typical Bonefish Grill consists of approximately 38 tables and seats approximately 145 people. The bar area is generally in the front of the restaurant and offers community-style seating with approximately ten tables and bar seating with a capacity for approximately 72 people. Appetizers and complete dinners are served in the bar area.
A typical Fleming’s Prime Steakhouse and Wine Bar is approximately 7,100 square feet and features a dining room, a private dining area,Relocation Plans - We have an exhibition kitchen and full-service liquor bar. The main dining area of a typical Fleming’s Prime Steakhouse and Wine Bar consists of approximately 35 tables and seats approximately 170 people, while the private dining area seats approximately 30 additional people. The bar area includes approximately six tables and bar seating with a capacity for approximately 35 people. Appetizers and complete dinners are served in the bar area.
A typical Roy’s is approximately 7,100 square feet and features a dining room, a private dining area, an exhibition kitchen and full-service liquor bar. The main dining area of a typical Roy’s consists of approximately 41 tables and seats approximately 155 people, while the private dining area seats an additional 50 people. The bar area includes tables and bar seating with a capacity for approximately 35 people. Appetizers and complete dinners are served in the bar area.
Remodel / Renovation Plan
We are committed to the strategy of continuing to maintain relevance with our décor by implementing an ongoing renovation program across all of our concepts.concepts to maintain the relevance of our restaurants’ ambience. We also have an ongoing relocation plan, primarily related to the Outback Steakhouse brand. This multi-year relocation plan is focused on driving additional traffic to our restaurants by moving legacy restaurants from non-prime to prime locations within the same trade area.
In 2009, we began a remodeling program at Outback Steakhouse to refresh our restaurants and modernize the look and feel of the dining experience. The Outback Steakhouse décor now features larger, more comfortable waiting areas, a brighter more upscale bar and a natural, contemporary dining area. We have remodeled 406 restaurants since the beginning of the remodeling program through December 31, 2012, including 150 in 2012. We plan to complete approximately 80 remodels in 2013 for a cumulative total of approximately 486 remodels by the end of 2013. Going
forward, we expect to remodel approximately 10% of our locations annually. Our average remodel cost per restaurant has been approximately $225,000 in 2012.
Carrabba’s Italian Grill is currently implementing a similar renovation program, which includes the creation of a more contemporary Italian-themed décor that maintains its welcoming atmosphere and matches the high quality of our food. We recently finalized the new design format and expect to remodel between 50 and 60 locations in 2013.
Site Selection Process
We consider the location of a restaurant to be critical to its long-term success and as such, we devote significant effort to the investigation and evaluation of potential sites. - We have a central site selection team serving all of our concepts comprised of real estate development, property/lease management and design and construction personnel. We have significantly increased the resources dedicated to this team since 2009, enabling the acceleration of remodels and unit additions. OurThis site selection team also utilizes a combination of existing field operations managers, internal development personnel and outside real estate brokers to identify and qualify potential sites. We have developed a robust analytical infrastructure, aided by site selection software customized to assist our site selection team in implementing our new restaurant growth plan. By leveraging expanded data regarding potential sites, developing success criteria and using predictive models, we are improving site selection.
We follow a phased approach to new site selection and approval, with all proposed sites reviewed and approved by the appropriate concept president, Chief Development Officer, Chief Resource Officer, Chief Financial Officer and Chief Executive Officer.
Restaurant Development
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. During 2012, we opened 37 new system-wide locations: 17 Domestic Development - Bonefish Grill restaurants, four Carrabba’s Italian Grill restaurants, one Fleming’s Prime Steakhouse and Wine Bar restaurant and 15 international Outback Steakhouse restaurants comprised of five Company-owned, seven unconsolidated joint venture and three franchise locations. We expect to open between 45 and 55 system-wide locations in 2013 and increase the pace thereafter. We expect that the mix of new unitsunit growth will be weighted approximately 60% to domestic opportunities in 2013, but will shift to a higher weight of international units as we continue to implementbe our international expansion plans.
Domestic Development
We believe we are well-equipped to accelerate new unittop domestic development with a disciplined approach focusing on achieving unit returns at target levels across each of our concepts. In 2013, we plan to open approximately 30 locations, with a primary domestic focus on opening new Bonefish Grill units.priority in 2015. We believe we have the potential to increase the units in our Bonefish Grill concept to over 300 in the next fivethree to sevenfive years. Currently, the majority of Bonefish Grill restaurants are located in the southern and eastern U.S., with significant geographic expansion potential in the top 100 U.S. markets. Bonefish Grill unit growth will continue to be our top domestic development priority in 2013, with 20 or more new restaurants planned. We also see significant opportunities to expand Carrabba’s Italian Grill from an existing base of 235 units as of December 31, 2012. Currently, the majority of Carrabba’s Italian Grill restaurants are also located in the southern and eastern U.S., with significant geographic expansion potential in the top 100 U.S. markets. We recently finalized an updated restaurant design for Carrabba’s Italian Grill, which we plan to implement in new units in 2013. Following 2013, we plan to accelerate new unit development. In addition, we believe that Fleming’s Prime Steakhouse and& Wine Bar has existing geography fill-in and market expansion opportunities based on its current location mix.
International Development
- We believe we are well-positioned to continue to expand internationally, leveraging established equity and plan to approach such growth in a disciplined, prioritized manner, leveraging existingfranchise markets in Asia and South Korea, Hong KongAmerica and Brazil while expanding in strategically selected new emerging and high growthhigh-growth developed markets. The system-wide sales of our international Outback Steakhouse restaurants represented approximately 15% of our total system-wide sales in 2012. We believe the international business represents a significant growth opportunity. We will continue to leverage our market position by offering our top-ranked Outback Steakhouse concept in a format adapted to local cultural preferences. For example, we believe that we can leverage existing infrastructure and expertise in the Asia-Pacific region and Latin America to grow in those areas and accelerate entry into nearby countries.
As a part of the restructuring of our international business unit, we developed a prioritized growth agenda. We aremarkets, focusing our existing market growth in South Korea, Hong Kong andon Brazil and our new marketChina. We see significant potential for growth in China, Mexico and South America.
Our Company-owned operations in Hong Kong and Korea, where we have 114 restaurants, provide operational expertise in running multi-unit operations, but also cultural insights and available talent to deploy into new Asian markets. In addition, our Outback Steakhouse International leadership team has significant experience in opening retail outlets in China that we can further leverage into our expansion efforts. During 2012, we opened our firstof Outback Steakhouse in China.Brazil to 100 restaurants. New restaurant growth in Brazil will be our top international development priority in 2015. We plan to introduce the Carrabba’s Italian Grill concept in Brazil, known as Abbraccio, with our first opening expected in March 2015.
We will utilize the ownership structure and market entry strategy that best fits the needneeds for a particular market, including Company-owned units, joint ventures and franchises. In markets where there is potential for a significant number of restaurants, we expect to focus on Company-owned units and joint venture arrangementsventures rather than franchises.
RESEARCH & DEVELOPMENT / INNOVATION
In 2010,We utilize a global core menu policy to ensure consistency and quality in our menu offerings. Before we added a Company-wide head of R&Dadd an item to our senior managementthe core menu, we conduct consumer research. Our research and development (“R&D”) team reviews and have increasedapproves the size of that team to approximately 25 people. We believeitem. Internationally, we have also strengthenedteams in our innovation capability by establishing a focused, collaborative process and enhancingdeveloped markets that tailor our R&D capabilities, and expandedmenus to address the scopepreferences of innovation to focus on new product development, product efficiency and core menu quality. As a result, we believe we are now better able tolocal consumers.
We continuously evolve our product offerings based on consumer trends and feedback and to improve productivity.our efficiency. We have a 12-month pipeline of new consumer-driven menu and promotional items and are able to introduce items faster than we have in the past.
Our cross-functional innovation processes leverage practices of the consumer products industry to continuously research and enhance every dimension of the customer experience. Our innovation teams collaborate across R&D, supply chain, operations, marketing, financeall concepts, and market intelligence. Our goal is continuous innovation of our new menu, service and marketing initiatives to improve brand relevance, productivity and competitiveness based on evolving consumer trends and direct customer feedback on our products. For example, as the direct result of market and consumer research, we have added over 85 new menu items across our concepts since 2010, including many items under 600 calories, which have broadened the appeal of our menus. By incorporating analytics, customer testing and in-store guest and operator feedback, we are able to refine and reducequickly make adjustments with market demands, when necessary. In addition, we have dedicated resources focused on productivity across the potential risks associated with these introductions or changes.portfolio. For new menu items and significant product changes, we have a meaningful testing process that includes internal testing, testing at one restaurant and testing at a group of restaurants before the roll-out is staged system-wide. Throughout this process, our customers provide direct consumer feedback on the product as well as pricing.
We also utilize our cross-functional processes to develop limited-time offers with compelling price points and attractive margins. This requires more occasion-based testing and research to validate that the special offer was valued by customers based on the occasion. For example, Outback Steakhouse offered a four-course meal promotion (the Outback 4) in 2012, which included a soup, salad, entree and dessert for $15.00 that was not only very popular with our customers, but also met our profitability and food quality objectives.
STRATEGY AND MARKET INTELLIGENCE
Our strategy and market intelligence (“SMI”) function was created in 2010 to identify opportunities for profitable growth based on market and consumer intelligence, and to help improve returns on the investments we make in capital and operations, through the targeted application of analytics. Our customer feedback and testing process enables rapid assessment of how new ideas and productivity initiatives perform with customers, allowing us to make improvements before they are launched nationally. Our marketing mix models guide reallocation of our marketing investments to more efficient and effective programs and have prompted increased marketing investments in Bonefish Grill and Carrabba’s Italian Grill.
Our customer research techniques provide a greater perspective into customer behavior. We deploy a variety of qualitative approaches ranging from basic focus groups to techniques designed to capture deeper consumer insights based on emotional responses. On the quantitative side, we develop, execute and analyze consumer research related to menu items, restaurant design, consumer communication, brand positioning and casual dining segment health.
INFORMATION SYSTEMS
Beginning in 2010, we added significant resources that focused on building our competencies in human resources, information technology and real estate, design and construction, including the completion of standardized Point of Sale (“POS”) systems across our core concepts, the implementation of a Human Resources Information System (“HRIS”), uniform and comprehensive training programs, expanded data warehousing capability, and increased resources and tools to accelerate renovations and new unit site selection.
In late 2010, we hired a new Chief Information Officer and developed a multi-year information technology strategy to further transform information technology into a growth enabling function by focusing on building infrastructure, increasing technical staff, creating a technology platform to support sales growth and enabling productivity improvements.
Restaurant levelRestaurant-level financial and accounting controls are handled through the POSpoint-of-sale (“POS”) system and network in each restaurant that communicates with our corporate headquarters. The POS system is also used to authorize and transmit credit card sales transactions and to manage the business and control costs, such as labor.transactions. Our Company-owned restaurants are connected through data centers and a portal to provide our corporate employees and regional partners with access to business information and tools that allow them to collaborate, communicate, train and share information between restaurantsinformation.
We continue to invest in our infrastructure to provide a better overall consumer experience, reduce our costs, create efficiencies and the corporate office.enhance security. During 2012,2014, we upgradedimplemented several productivity tools including a labor tool that automates scheduling and a centralized inventory management system to monitor our wireless access points in all of our restaurants. This provided enhanced capability to pilot and roll out new mobile technology devices within our restaurants to enhance our operational capability. During 2013, we expect to enhance our corporate office and restaurant information systemcommodity costs. We also made infrastructure for continued improvementsenhancements to our operational capability.financial, POS and human resource systems in 2014.
ADVERTISING AND MARKETING
We generally advertise through national television and/or radio media, with some spot television advertising for Carrabba’s Italian Grill. Our concepts have an active public relations program and also rely on national promotions, site visibility, local marketing, strategy is designeddigital marketing, direct mail, billboards and point-of-sale materials to drive comparable restaurant sales growth by increasing the frequency ofpromote our restaurants. Internationally, we have teams in our developed markets that engage local agencies to tailor advertising to each market and occasions for visits by our current customers as well as attracting new customers.develop relevant and timely promotions based on local consumer demand.
To help maintain customerconsumer interest and relevance, each concept leverages limited-time offers featuring seasonal specials, ingredients and flavorsspecials. We promote limited-time offers through integrated marketing programs that are consistent with the concept’s offerings, but provide something new to discover on the menu. We have increased the frequencyutilize all of these promotions so that Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill generally have five to seven promotion periods each year. The nature of the message regarding these promotions has also changed to encourage prompt action, rather than just promote brand awareness, resulting in more immediate increases in traffic. For example, for the past few years, Outback Steakhouse has leveraged a “Back By Popular Demand” steak and lobster entree for $14.99. This offer reinforces the high quality food at affordable prices available at Outback Steakhouse. We promoted the limited time offer through extensive television, social media, public relations local marketing outreach and in-restaurant materials.our advertising resources.
We promote our Outback Steakhouse and Carrabba’s Italian Grill restaurants through national and spot television and/or radio media and our Bonefish Grill restaurants through radio advertising. We advertise on television selectively when we have a sufficient number of restaurants in a market to make the media purchase efficient (generally three to 10 restaurants in a market, depending on the media cost in that market). Each of our concepts has an active public relations program and relies on word-of-mouth customer experience, site visibility, marketing in local venues, direct mail, on-line/digital advertising and billboards. We also create point-of-sale materials to communicate and promote key brand initiatives to our guests while they are dining in our restaurants. We have local marketing personnel who customize these programs to optimize them for their target market.
We also use the openings of new restaurants as an opportunity to employ a comprehensive marketing strategy. We reach out to various media outlets as well as the local community to obtain appearances on radio and television, establish relationships with local charities and gain coverage in local newspapers and magazines. The managing partner in each restaurant is the visible face of the concept and, with local involvement, reinforces our role as a concerned, active member of the community.
We have increased our use of e-marketing tools, which enable us to reach a significant number of people in a timely and targeted fashion at a fraction of the cost of traditional media. We believe that our customers are frequent internet users and will explore e-applications to make dining decisions or to share dining experiences. We have set up pages and advertise on various social media and other websites.
These methods of advertising promote and maintain brand image and generate consumer awareness of new menu offerings, such as new items added to appeal to value-conscious consumers. We also strive to increase sales through excellence in execution. Our marketing strategy of enticing customers to visit frequently and also recommending our restaurants to others complements our goal of providing a compelling dining experience. Additionally, we engage in a variety of promotional activities, such as contributing goods, time and money to charitable, civic and cultural programs, in order to give back to the communities we serve and increase public awareness of our restaurants.
RESTAURANT OPERATIONS
We believe the success of our restaurants depends on our service-oriented employees and consistent execution of our menu items in a well-managed restaurant.
Management and Employees
- The management staff of a typical Outback Steakhouse, Carrabba’s Italian Grill or Bonefish Grill consists of one managing partner, one assistant managerour restaurants varies by concept and one kitchen manager. The management staff of a typical Fleming’s Prime Steakhouse and Wine Bar or Roy’s consists of one managing partner, a chef partner and two assistant managers. Each restaurant also employs approximately 50 to 95size. Our restaurants employ primarily hourly employees, many of whom work part-time. The managing partner of each restaurant has primary responsibility for the day-to-day operation of his or herthe restaurant and is required to abide by Company-established operating standards. Area operating partners are responsible for overseeing the operations of typically six to 14 restaurants and managing partners in a specific region.
Area Operating,Operations Directors, Restaurant Managing Partner and Chef Partner Programs
We have established a compensation structure- Area Operations Directors, Restaurant Managing Partners and Chef Partners generally receive distributions or payments for our area operating, managing and chef partners that we believe encourages high quality restaurant operations, fosters long-term employee commitment and generally results in profitable restaurants.
Historically, the managing partner of each Company-owned domestic restaurant and the chef partner of each Fleming’s Prime Steakhouse and Wine Bar and Roy’s restaurant were required, as a condition of employment, to sign a five-year employment agreement and to purchase a non-transferable ownership interest in a partnership (“Management Partnership”) that providedproviding management and supervisory services to his or her restaurant. The purchase price for a managing partner’s ownership interest was fixed at $25,000, and the purchase price for a chef partner’s ownership
interest ranged from $10,000 to $15,000. Managing and chef partners had the right to receive monthly distributions from the Management Partnershiptheir restaurants based on a percentage of their restaurant’srestaurants’ monthly distributable cash flows for the duration of the agreement, which varied by concept from 6% to 10% for managing partnersflow (“Monthly Payments”).
Restaurant Managing Partners and 2% to 5% for chef partners. Further, managing and chef partners wereChef Partners are eligible to participate in the Partner Equity Plan (“PEP”), a deferred compensation program,programs. Under these deferred compensation programs, the Restaurant Managing Partners and Chef Partners are eligible to receive payments beginning upon completion of their five-year employment agreement. We invest in various corporate-owned life insurance policies, which are held within an irrevocable grantor or “rabbi” trust account for settlement of our obligations under the deferred compensation plans.
In April 2011, we modified our managing and chef partner compensation structure to provide greater incentives for sales and profit growth. UnderOn the revised program, managing and chef partners continue to sign five-year employment agreements and receive monthly distributionsfifth anniversary of the same percentageopening of their restaurant’seach new restaurant, the Area Operations Director supervising the restaurant during the first five years of operation receives an additional bonus based upon the average annual distributable cash flow as underof the prior program. However, under the revised program, in lieu of participation in the PEP, managing partnersrestaurant. In addition to Monthly Payments and chef partners are eligible to receive deferred compensation, payments under our Partner Ownership Account Plan (the “POA”). The POA places greater emphasis on year-over-year growth in cash flow than the PEP.Area Operations Directors,
Restaurant Managing Partners and chef partners receive a greater value under the POA than they would have received under the PEP if certain levels of year-over-year cash flow growth are achieved and a lesser value than under the PEP if these levels are not achieved.
The POA requires managing and chef partners to make an initial deposit of up to $10,000 into their “Partner Investment Account,” and we make a bookkeeping contribution to each partner’s “Company Contributions Account” no later than the end of February of each year following the completion of each year (or partial year where applicable) under the partner’s employment agreement. The value of each of our contributions is equal to a percentage of the partner’s restaurant’s cash flow plus, if the restaurant has been open at least 18 calendar months, a percentage of the year-over-year increase in the restaurant’s cash flow.
The POA also provides an annual bonus known as the President’s Club, paid in addition to the monthly distributions of cash flow, designed to reward increases in a restaurant’s annual sales above the concept sales plan with a required flow-through percentage of the incremental sales to cash flow as defined in the plan. Managing and chef partnersChef Partners whose restaurants achieve certain annual sales and profitability targets above the concept’s sales plan (and the required flow-through percentage)are eligible to receive aan annual bonus equal to a percentage of the restaurant’s incremental sales such percentage determined by the sales target achieved.
All managing and chef partners who execute new employment agreements after May 1, 2011 are required to participate in the revised partner program, including the POA (see “Liquidity and Capital Resources—Deferred Compensation Plans” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).increase.
Many of Outback Steakhouse international restaurant managing partnersour Restaurant Managing Partners enter into employment agreements and purchase participation interests in the cash distributions from the restaurants they manage. The amount and terms vary by country. This interest gives the managing partnerpartners the right to receive a percentage of his or herthe restaurant’s annual cash flows for the duration of the agreement. Additionally, each new unaffiliated franchisee is required to provide the same opportunity to the managing partner of each new restaurant opened by that franchisee.
Historically, an area operating partner was required, as a condition of employment and within 30 days of the opening of his or her first restaurant, to make an initial investment of $50,000 in a Management Partnership that provides supervisory services to the restaurants that the area operating partner oversees. This interest gave the area operating partner the right to distributions from the Management Partnership based on a percentage of his or her restaurants’ monthly cash flows for the duration of the agreement, typically ranging from 4% to 9%. We have the option to purchase an area operating partner’s interest in the Management Partnership after the restaurant has been open for a five-year period on the terms specified in the agreement. For restaurants opened between January 1, 2007 and December 31, 2011, the area operating partner’s percentage of cash distributions and buyout percentage was calculated based on the associated restaurant’s return on investment compared to our targeted return on investment and may range from 3.0% to 12.0% depending on the concept.
In 2011, we also began a version of the President’s Club annual bonus described above for area operating partners to provide additional rewards for achieving sales targets with a required flow-through of the incremental sales to cash flow as defined in the plan.
In April 2012, we revised our area operating partner program for restaurants opened on or after January 1, 2012. For these restaurants, an area operating partner is required, as a condition of employment, to make a deposit of $10,000 within 30 days of the opening of each new restaurant that he or she oversees, up to a maximum deposit of $50,000 (taking into account investments under prior programs). This deposit gives the area operating partner the right to monthly payments based on a percentage of his or her restaurants’ monthly cash flows for the duration of the employment agreement, typically ranging from 4.0% to 4.5%. After the restaurant has been open for a five-year period, the area operating partner will receive a bonus equal to a multiple of the area operating partner’s average monthly payments for the 24 months immediately preceding the bonus date. The bonus will be paid within 90 days or over a two-year period, depending on the bonus amount.
We have also improved our field operations performance evaluation and development processes since 2009. All field managing partners and area managers receive feedback on performance with consistent metrics linked to quarterly restaurant, area and concept business objectives.
By offering these types of compensation arrangements and by providing the area operating, managing and chef partners a significant interest in the success of their restaurants, we believe we are able to attract and retain experienced and highly motivated area operating, managing and chef partners.
Supervision and Training
- We require our area operating partnersArea Operations Directors and restaurant managing partnersRestaurant Managing Partners to have significant experience in the full-service restaurant industry. As part of our management development programs, we engage in succession planning at a total CompanyAll Area Operations Directors and concept level to identify promotable personnel, with focused training programs to prepare managers for the next level of responsibility. Our current core concept presidents have been with us for an average of 14 years and have an average of 29 years of industry experience. Our regional field management team has an average of 12 years of experience working with us at the managing partner level or above.
All operating partners and managing partnersRestaurant Managing Partners are required to complete a comprehensive training program that emphasizes our operating strategy, procedures and standards. Our senior management meets quarterly with our area operating partners to discuss business-related issuesThe Restaurant Managing and to share ideas. In addition, members of senior management visit restaurants regularly to ensure that our concept, strategy and standards of quality are being adhered to in all aspects of restaurant operations.
The restaurant managing and area operating partners,Area Operations Directors, together with our Presidents, Regional Vice Presidents, Senior Vice Presidents of Training and Directors of Training, are responsible for selecting and training the employees for each new restaurant. The training period for new non-management employees lasts approximately one week and is characterized by on-the-job supervision by an experienced employee. Ongoing employee training remains the responsibility of the restaurant manager. Written tests and observation in the work place are used to evaluate each employee’s performance. Special emphasis is placed on the consistency and quality of food preparation and service, which is monitored through monthly meetings between kitchen managers and management.
Service
We seek to deliver superior service to each customer at every opportunity. We offer customers prompt, friendly and efficient service, keep wait staff-to-table ratios high and staff each restaurant with experienced management teams to ensure consistent and attentive customer service. Members of our wait staff demonstrate an attention to detail, culinary expertise and focus on execution and complete training programs specific to the concept’s menu (including the specific flavors of each dish), culture and brand positioning. They are trained to be responsive to the needs of our customers as they assist guests in selecting menu items complementing individual preferences.
- In order to better assess and improve our performance, in 2009 we began using Service Management Group (“SMG”)use a third-party research firm to conduct an ongoing satisfaction measurement program that utilizes a random invitation to participate in a web-based survey printed on 25% of our customer checks per week and provides us with industry benchmarking information from other restaurants. Thefor our Company-owned and franchise locations in the U.S. We have a similar consumer satisfaction measurement program measuresfor our international Company-owned locations. These programs measure satisfaction across a wide range of experience elements, from the pace of the experience to the temperature of the food. Results are compiled and reported through a central web site at the national, regional and individual restaurant level. As of December 31, 2012, 24 casual dining restaurant concepts, including Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill, and eight fine dining concepts, including Fleming’s Prime Steakhouse and Wine Bar, participate in the SMG survey web methodology and contribute to the SMG average comparison measures for casual and fine dining, respectively, that we utilize in assessing our performance. The minimum sample size for our SMG customer surveys is 100 customers per restaurant per month.elements.
Food Preparation and Quality Control
We focus on using high quality ingredients in our menu items, including the grade of our beef and freshness of our seafood and vegetables, while keeping costs in line with target pricing for our concepts. Food safety is a critical priority, and we dedicate resources to ensuring that our customers enjoy safe, quality food products. We have taken various steps to mitigate food quality and safety risks and have central teams focused on this goal together with our supply chain, food safety/quality assurance and R&D teams.
- We have an R&D facility located in Tampa, Florida that serves as a test kitchen and vendor product qualification site. Our supply chain organizationquality assurance team manages internal auditors responsible for vendorsupplier evaluations along withand external third parties towho inspect vendorsupplier adherence to quality, food safety and product specification on a risk based schedule. Vendorsspecification. Our suppliers also utilize third-party labs for food safety and quality verification. Suppliers that do not comply with quality, food safety and other specifications are not utilized until they have corrective actions in place and are re-certified for compliance. Additionally, a daily “line check” is performed by the restaurant managing partner and their key team members to inspect food prepared for that day, as well as the freshness of liquor, beverages, condiments and other perishables used for all menu items.
We alsoOur operational teams have multiple touch points in the restaurants ensuring food safety, quality and freshness throughout all phases of the preparation process. In addition, we employ two outside advisory councils comprisedthird-party auditors to verify our standards of external subject matter experts to advise our senior management on industry trendsfood safety, training and on quality, safety and animal considerations pertinent to our industry, such as well-being strategies and procedures.sanitation.
SOURCING AND SUPPLY
We take a centralizedglobal approach to purchasingprocurement and supply chain management, with our corporate team serving all concepts domesticallyin the U.S. and internationally. In addition, we have dedicated supply chain management personnel at the local level in our larger international operations in Asia and South America. The supply chain management organization is responsible for all food and operating supply purchases as well as a large percentage of field and home officecorporate services. In addition, we have logistics teams dedicated to optimizing freight costs. The supply chain management organization’s mission is to utilize a combination of centralized domestic and locally-based supply to capture the efficiencies and economies of scale that come from making strategic buys, while maintaining (or improving) quality.
We work to address the end-to-end costs (from the source to the fork) associated with the products and goods we purchase. We utilizepurchase by utilizing a combination of global, regional and locally based suppliers to capture the efficiencies and economies of scale. This “total cost of ownership” (“TCO”) approach which focuses on both the initial purchase price, coupled with the cost structure underlying the procurement and order fulfillment process. The TCO approach includes monitoring commodity markets and trends and seeking to execute product purchases at the most advantageous times. We develop commodity sourcing strategies for all major commodity categories based on the dynamics of each category. Those strategies include both spot purchases and long-term contracts of generally one year or less where we believe long-term contract prices are more attractive than anticipated spot prices. In addition, we limit exposure to potential risk by requiringrequire our vendorsupplier partners to meet or exceed our quality assurance standards.
We have a national distribution program in place that includes food, beverage, smallwares and packaging goods.goods in all major markets. This program is withmanaged by a custom distribution company that uses a limited number of warehouses that provide only provides products approved for our system. This customized relationship also enables our procurement staff to effectively manage and prioritize our supply chain.
Proteins represent about 50%60% of our global commodity purchasingprocurement composition, with beef representing slightly over half53% of total purchased proteins. In 2012,2014, we purchased more than 75%90% of our beef raw materials from four beef suppliers whothat represent approximately 85%more than 90% of the total U.S. beef marketplace in the U.S.marketplace. Due to the nature of our industry, we expect to continue to purchasepurchasing a
substantial amount of our beef from a small number of suppliers. Other major commodity categories purchased include produce, dairy, bread and pasta, and energy sources to operate our restaurants, such as natural gas.
RESTAURANT OWNERSHIP STRUCTURES
Our restaurants are predominately Company-owned or controlled, including through joint ventures, and otherwise operated under franchise arrangements. We generate our revenues primarily from our Company-owned or controlled restaurants and secondarily through ongoing royalties from our franchised restaurants and sales of franchise rights.
Company-Owned Restaurants
- Company-owned or controlled restaurants include restaurants owned directlywholly-owned by us by limited liability companies in whichand restaurants where we arehave a member and by limited partnerships in which we are the general partner. Our legal ownership interests in these limited liability companies and, as general partner, in these limited partnerships generally range, in each case, from 54.5% to 100%.majority ownership. Our cash flows from these entities where we have a majority ownership are limited to the relative portion of our ownership. The results of operations of Company-owned restaurants are included in our consolidated operating results. The portion of income or loss attributable to the other partners’noncontrolling interests is eliminated in Net income attributable to noncontrolling interests in our Consolidated Statements of Operations and Comprehensive Income.
In the future, we do not plan to utilize limited partnerships for domestic Company-owned restaurants. Instead, the restaurants will be wholly-owned by us and the area operating, managing and chef partners will receive their distributions of restaurant cash flow as employee compensation rather than partnership distributions.
We pay royalties on approximately 95%the majority of our Carrabba’s Italian Grill restaurants ranging from 1.0% to 1.5% of sales pursuant to agreements we entered into with the Carrabba’s Italian Grill founders.Founders (“Carrabba’s Founders”). Following is a summary of Carrabba’s royalties and locations in the U.S. subject to royalties as of December 28, 2014:
|
| | | | | |
| | ROYALTY PERCENTAGE | | LOCATIONS AS OF DECEMBER 28, 2014 |
| U.S. sales, except for qualifying lunch sales, as described below | 1.0% | - | 1.5% | | 230 |
| U.S. lunch sales for new restaurants opened on or after June 1, 2014 (1) | 0.5% | | 4 |
| U.S. lunch sales for existing restaurants that began serving weekday lunch on or after June 1, 2014 (2) | 0.5% | | 14 |
____________________
| |
| (1) | Lunch sales for new locations are defined as sales occurring prior to 4 pm local time Monday through Saturday. |
| |
| (2) | Weekday lunch sales for existing locations are defined as sales occurring prior to 4 pm local time Monday through Friday. |
Each Carrabba’s restaurant located outside the United States pays a one-time lump sum royalty fee, which varies depending on the size of the restaurant. No continuing royalty fee is paid to the Carrabba’s Founders for Carrabba’s restaurants located outside the United States.
Historically, Company-owned restaurants also included restaurants owned by our Roy’s joint venture and our consolidated financial statements included the accounts and operations of our Roy’s joint venture even though we had less than majority ownership due to our status as primary beneficiary of the joint venture and ability to control its significant activities. Effective October 1, 2012, we purchased the remaining interests in our Roy’s joint venture from our joint venture partner, RY-8, Inc. (“RY-8”), for $27.4 millionUnaffiliated Franchise Program (see “Liquidity and Capital Resources—Transactions” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
Through a joint venture arrangement with PGS Participacoes Ltda., we hold a 50% ownership interest in PGS Consultoria e Serviços Ltda. (the “Brazilian Joint Venture”). The Brazilian Joint Venture was formed in 1998 for the purpose of operating Outback Steakhouse restaurants in Brazil. We account for the Brazilian Joint Venture under the equity method of accounting. We are responsible for 50% of the costs of new restaurants operated by the Brazilian Joint Venture, and our joint venture partner is responsible for the other 50% and has operating control. Income and loss derived from the Brazilian Joint Venture is presented in the line item “Income from operations of unconsolidated affiliates” in our Consolidated Statements of Operations and Comprehensive Income. We do not consider restaurants owned by the Brazilian Joint Venture as “Company-owned” restaurants.
In connection with the settlement of litigation with T-Bird Nevada, LLC and its affiliates (collectively, “T-Bird”), which include the franchisees of 56 Outback Steakhouse restaurants in California, T-Bird has a right (referred to as the “Put Right”), which would require us to purchase for cash all of the ownership interests in the T-Bird entities that own Outback Steakhouse restaurants and certain rights under the development agreement with T-Bird entity. The Put Right is non-transferable, other than under limited circumstances set forth in the settlement agreement. The Put Right
is exercisable by T-Bird until August 13, 2013. If the Put Right is exercised, we will pay a purchase price equal to a multiple of the T-Bird entities’ adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the trailing 12 months, net of liabilities of the T-Bird entities. The multiple is equal to 75% of the multiple of our adjusted EBITDA reflected in our stock price. We have a one-time right to reject the exercise of the Put Right if the transaction would be dilutive to our consolidated earnings per share. In such event, the Put Right is extended until the first anniversary of our notice to the T-Bird entities of such rejection. The closing of the Put Right is subject to certain conditions, including the negotiation of a transaction agreement reasonably acceptable to the parties, the absence of dissenters’ rights being exercised by the equity owners above a specified level and compliance with our debt agreements.
UNAFFILIATED FRANCHISE PROGRAM
- Our unaffiliated franchise arrangementsagreements grant third parties a licenserights to establish and operate a restaurant using one of our concepts, our systems and our trademarks in a given area. The unaffiliated franchisee pays us for the concept ideas, strategy, marketing, operating system, training, purchasing power and brand recognition.
concepts. Franchised restaurants mustare required to be operated in compliance with their respective concept’s methods, standards and specifications, including regarding menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs, although the franchisee has full discretion to determine menu prices. In addition, all franchisees are required to purchase all food, ingredients, supplies and materials from approved suppliers. Our regional vice presidents semi-annually inspect franchised restaurants to confirm compliance with our requirements.
At December 31, 2012, there were 106 domestic franchised Outback Steakhouse restaurants and 48 international (including Guam) franchised Outback Steakhouse restaurants. Each domestic franchisee paid an initial franchise fee of $40,000 for each restaurant and is required to pay a continuing monthly royalty of 3.0% of gross restaurant sales and a monthly marketing administration fee of 0.5% of gross restaurant sales. Initial fees and royalties for international franchisees vary by market. Generally, each international franchisee paid an initial franchise fee of $40,000 to $200,000 for each restaurant and is expected to pay a continuing monthly royalty of 2.0% to 4.0% of gross restaurant sales. Certain international franchisees enter into an international development agreement that requires them to pay a development fee in exchange for the right and obligation to develop and operate up to five restaurants within a defined development territory pursuant to separate franchise agreements. Domestic franchisees are required to expend an annually adjusted percentage of gross restaurant sales, up to a maximum of 3.5%, for national advertising on a monthly basis (3.0% in 2012 and increasing to 3.2% in 2013).specifications.
At December 31, 2012, there was one domestic franchised Carrabba’s Italian Grill. The franchisee paid an initial franchise fee of $40,000 and pays a continuing monthly royalty of 5.75% of gross restaurant sales.
At December 31, 2012, there were seven domestic franchised Bonefish Grills. Four of these franchisees paid an initial franchise fee of $50,000 for each restaurant and pay a continuing monthly royalty of 4.0% of gross restaurant sales. Three of these franchisees pay royalties up to 4.0%, depending on sales volumes. Under the terms of theIn 2013, we updated our standard franchise agreement in the franchisees are required to expend, on a monthly basis, a minimum of 1.5% of gross restaurant sales on local advertisingU.S. for all new and pay a monthly marketing administration fee of 0.5% of gross restaurant sales.
There were no unaffiliated franchises of anyrenewing franchisees. The majority of our other restaurant concepts at December 31, 2012.
Underexisting domestic franchisees continue to operate under the development agreement grantedprior franchise agreement. As each franchise location renews, that location will convert to one of the T-Bird entities, for the period ending in 2031, the T-Bird entities have the exclusive right through 2031 to develop and operate Outback Steakhouse restaurants as a franchisee in the State of California. We have agreed to waive all rights of first refusal in our then-current franchise arrangements with the T-Bird entities in connection with a sale of all, and not less than all, of the assets, or at least 75% of the ownership of the T-Bird entities.agreement.
Under the standard franchise agreements, each of our franchisees is required to pay an initial franchise fee. Franchisees also pay monthly royalties and administration fees based on a percentage of gross restaurant sales. Following is a summary of typical franchise fees based on unaffiliated franchise agreements in place as of December 28, 2014:
|
| | | | | | | | |
| (all fees in thousands or as a % of gross Restaurant sales) | FRANCHISED
LOCATIONS | | INITIAL
FRANCHISE FEE | | MONTHLY FEES (2) |
| | | ROYALTY | | ADMIN. |
| Outback Steakhouse-U.S. | 105 |
| | $40 | | 3.00% - 3.50% | | 0.50% |
| Outback Steakhouse-international (1) | 55 |
| | $40 - $200 | | 3.00% - 6.00% | | n/a |
| Bonefish Grill | 5 |
| | $50 | | 3.50% - 4.00% | | 0.50% |
| Carrabba’s Italian Grill | 1 |
| | $40 | | 3.50% - 5.75% | | n/a |
_________________
| |
| (1) | Initial fees and royalties for international franchisees vary by market. Includes one franchised location in Guam. |
| |
| (2) | Under the previous franchise agreement, a U.S. franchisee typically pays a monthly royalty fee, which varies by concept, and certain U.S. franchisees pay an additional marketing administration fee. Each U.S. franchisee is also generally required to expend or contribute, on a monthly basis, a minimum of 1.5% to 3.5% of each restaurant’s monthly gross sales for local and national advertising. Under the new U.S. franchise agreement, a U.S. franchisee typically pays a monthly royalty of 3.5% of the restaurant’s gross sales and is no longer required to pay a monthly administration fee. In addition, U.S. franchisees must contribute a percentage of gross sales for national marketing programs and must spend a certain amount of gross sales on local advertising, up to a maximum of 8.0% of gross restaurant sales. |
T-Bird Restaurant Group, Inc. (T-Bird) is party to an Outback Steakhouse Master Franchise Agreement. In January 2015, T-Bird acquired its franchise and development rights from T-Bird Nevada, LLC and its affiliates. T-Bird, through its affiliates, owns and operates 56 Outback Steakhouse restaurants in California. T-Bird is also party to a separate Outback Steakhouse development agreement, which gives T-Bird the exclusive right to open additional Outback Steakhouse restaurants in California through 2031 and commits T-Bird to opening seven new Outback Steakhouse restaurants in California during the next seven years.
COMPETITION
The restaurant industry is highly competitive with a substantial number of restaurant operators that compete directly and indirectly with us in respect to price, service, location and food quality, and there are other well-established competitors with significant financial and other resources. There is also active competition for management personnel, attractive suitable real estate sites, supplies and restaurant employees. In addition, competition is also influenced strongly by marketing and brand reputation. At an aggregate level, all major U.S. casual dining restaurants and casual dining restaurants in the international markets in which we operate would be considered competitors of our concepts. Further, we face growing competition from the supermarket industry, with improved selections of prepared meals, and from quick service and fast casual restaurants, as a result of higher-quality food and beverage offerings. We expect intenseInternationally, we face increasing competition due to continuean increase in allthe number of these areas.casual dining restaurant options in the markets in which we operate.
Industry and internal research conducted suggests that consumers consider casual dining restaurants within a given trade area when making dining decisions. As a result, an individual restaurant’s competitors will vary based on its trade area and will include both independent and chain restaurants. At an aggregate level, all major casual dining restaurants would be considered competitors of our concepts.
We believe our principal strategies, which include but are not limited to, the use of high quality ingredients that are in line with our target pricing, the variety of our menu and concepts, the quality and consistency of our food and service, the use of various promotions and the selection of appropriate locations for our restaurants, allow us to effectively and efficiently compete in the restaurant industry.
GOVERNMENT REGULATION
We are subject to various federal, state, local and international laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include, among others, alcoholic beverage control, health and safety, nutritional menu labeling, health care, environmental and fire agencies in the state, municipality or country in which the restaurant is located. Difficulty in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. Additionally, difficulties or inabilities to retain or renew licenses, or increased compliance costs due to changed regulations, could adversely affect operations at existing restaurants.
ApproximatelyUnited States - Alcoholic beverage sales represent 15% of our consolidated restaurant sales are attributable to the sale of alcoholic beverages.sales. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, training, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations. Additionally, we are subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
Our restaurant operations are also subject to federal and state labor laws including the Fair Labor Standards Act, governingfor such matters asas:
immigration, employment, minimum wages, overtime, tip credits, worker conditions and worker conditions. Our employees who receive tips as part of their compensation, such as servers, are paid at a minimum wage rate, after giving effect to applicable tip credits. We rely on our employees to accurately disclose the full amount of their tip income, and we base our FICA tax reporting on the disclosures provided to us by such tipped employees. Our other personnel, such as our kitchen staff, are typically paid in excess of minimum wage. As significant numbers of our food service and preparation personnel are paid at rates related to the applicable minimum wage, further increases in the minimum wage or other changes in these laws could increase our labor costs. Our ability to respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and customers.
Further, we continue to assess our health care benefit costs. Due to the breadth and complexity of federal health care legislation and the staggered implementation of its provisions and corresponding regulations, it is difficult to predict the overall impact of the health care legislation on our business over the coming years. Although these laws do not mandate that employers offer health insurance to all employees who are eligible under the legislation, beginning in 2014 penalties will be assessed on large employers who do not offer health insurance that meets certain affordability or benefit requirements. Providing health insurance benefits to employees that are more extensive than the health insurance benefits we currently provide and to a potentially larger proportion of our employees, or the payment of penalties if the specified level of coverage is not provided at an affordable cost to employees, could have a material adverse effect on our results of operations and financial position. In addition, these laws require employers to comply with a significant number of new reporting and notice requirements from the Departments of Treasury, Labor and Health and Human Services, and we will have to develop systems and processes to track the requisite information and to comply with the reporting and notice requirements. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us.care;
We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federalnutritional labeling, nutritional content, menu labeling and state laws regarding workplace and employment matters, discrimination and similar matters. A number of lawsuits have resulted in the payment of substantial damages by the defendants. For example, in December 2009, we entered into a Consent Decree in settlement of certain litigation brought by the U.S. Equal Employment Opportunity Commission alleging gender discrimination in promotions to management in the Outback Steakhouse organization, which required us to make a settlement payment of $19.0 million. In addition, during the four-year term of the Consent Decree, we are required to fulfill certain training, record-keeping and reporting requirements and maintain an open access system for restaurant employees to express interest in promotions within the Outback Steakhouse organization, and employ a human resources executive.food safety;
The Patient Protection and Affordability Act of 2010 (the “PPACA”) enacted in March 2010 requires chain restaurants with 20 or more locations in the United States to comply with federal nutritional disclosure requirements. The FDA has indicated that it intends to issue final regulations by the first part of 2013 and begin enforcing the regulations by the end of 2013 or beginning of 2014. A number of states, counties and cities have also enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain nutritional information to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Although the federal legislation is intended to preempt conflicting state or local laws on nutrition labeling, until we are required to comply with the federal law we will be subject to a patchwork of state and local laws and regulations regarding nutritional content disclosure requirements. Many of these requirements are inconsistent or are interpreted differently from one jurisdiction to another. While our ability to adapt to consumer preferences is a strength of our concepts, the effect of such labeling requirements on consumer choices, if any, is unclear at this time.
There is potential for increased regulation of food in the United States under the recent changes in the Hazard Analysis & Critical Control Points (“HACCP”) system requirements. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the Food Safety Modernization Act (the “FSMA”), signed into law in January 2011, granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise harm our business.
We are subject to the Americans with Disabilities Act or the ADA,(“ADA”), which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employmentdisabled; and public accommodations on the basis of disability. Under the ADA, we could be required to expend funds to modify our restaurants to provide service to, or make reasonable accommodations for the employment of, disabled persons. In
addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency. Government regulations could affect and change the items we procure for resale. We may also become subject to legislation or regulation seeking to tax and/or regulate high-fat and high-sodium foods, particularly in the United States, which could be costly to comply with. Our results can be impacted by tax legislation and regulation in the jurisdictions in which we operate and by accounting standards or pronouncements.
We are also subject to laws and regulations relating to information security, privacy, cashless payments, gift cards and consumer credit, protection and fraud, and any failure or perceived failurefraud.
International - Our restaurants outside of the United States are subject to comply with thesesimilar local laws and regulations could harmas our reputation or leadU.S. restaurants, including labor, food safety and information security. In addition, we are subject to litigation, which could adversely affect our financial condition.anti-bribery and anti-corruption laws and regulations.
See “Risk Factors”Item 1A - Risk Factors for a discussion of risks relating to federal, state, local and international regulation of our business.
EXECUTIVE OFFICERS OF THE REGISTRANT
Below is a list of the names, ages, and positions as of February 15, 2013, and a brief description of the business experience of each of our executive officers.
officers as of February 18, 2015.
|
| | | | |
NameNAME | | AgeAGE | | PositionPOSITION |
| Elizabeth A. Smith | | 4951 | | Chairman of the Board of Directors and Chief Executive Officer |
| David J. Deno | | 5557 | | Executive Vice President and Chief Financial and Administrative Officer |
David P. BergDonagh M. Herlihy | | 51 | | Executive Vice President, and President of Outback Steakhouse International |
Jody L. Bilney | | 51 | | Executive Vice PresidentDigital and Chief BrandInformation Officer |
| Stephen K. Judge | | 4446 | | Executive Vice President and President of Bonefish Grill |
| Joseph J. Kadow | | 5658 | | Executive Vice President, Chief Legal Officer and Secretary |
| Patrick C. Murtha | | 57 | | Executive Vice President and Chief Legal OfficerPresident of Bloomin’ Brands International |
| David A. Pace | | 53 | | Executive Vice President and Chief Resources Officer |
Steven T. Shlemon | | 5355 | | Executive Vice President and President of Carrabba’s Italian Grill |
| Amanda L. Shaw | | 43 | | Senior Vice President, Chief Accounting Officer and International Finance |
| Jeffrey S. Smith | | 5052 | | Executive Vice President and President of Outback Steakhouse |
Elizabeth A. Smith was appointed Chairman in January 2012. Since November 2009, Ms. Smith has served as Chief Executive Officer and a member of our Board of Directors effective January 4, 2012 and has served as our Chief Executive Officer (“CEO”) and a Director since November 2009. From September 2007 to October 2009, Ms. Smith was President of Avon Products, Inc. and was responsible for its worldwide product-to-market processes, infrastructure and systems, including Global Brand Marketing, Global Sales, Global Supply Chain and Global Information Technology. In January 2005, Ms. Smith joined Avon Products as President, Global Brand, and was given the additional role of leading Avon North America in August 2005. From September 1990 to November 2004, Ms. Smith worked in various capacities at Kraft Foods Inc.Directors. Ms. Smith is a member of the boardBoard of directorsDirectors of Staples,Hilton Worldwide Holdings, Inc.
David J. Deno has served as our Executive Vice President and Chief Financial and Administrative Officer since May 2012. PriorFrom December 2009 to May 2012, Mr. Deno served as Chief Financial Officer of the international division of Best Buy Co. since December 2009.Inc.
Donagh M. Herlihyjoined Bloomin’ Brands as Executive Vice President, Digital and Chief Information Officer in September 2014. Prior to joining Best Buy Co.,Bloomin’ Brands, Mr. DenoHerlihy was a consultant with Obelysk Capital from February 2009 to December 2009. Prior to joining Obelysk Capital, Mr. Deno was a Managing Director of CCMP Capital Advisors, LLC (“CCMP”), a private equity firm from August 2006 to February 2009. While with CCMP, Mr. Deno was the President and then CEO of Quiznos, LLC, an operator of quick service restaurants. Prior to this, he had a 15 year career with YUM! Brands where he served as Chief Financial Officer and later as Chief Operating Officer.
David P. Berg has been the President of Outback Steakhouse International since September 2011 and our Executive Vice President since January 1, 2012. Prior to joining the Company, Mr. Berg was Executive Vice President and Chief Operating Officer of GNC Holdings, Inc., a global specialty retailer of vitamins, supplements and nutritional products that operates in 48 countries, from June 2010 to September 2011 and served as Executive Vice President—International from September 2009 to June 2010. Mr. Berg was the Executive Vice President and Chief Operating Officer—Best Buy International for Best Buy Co., Inc. from 2008 to 2009 and served as a Vice President and Senior Vice President, Chief Information Officer and eCommerce of Best BuyAvon Products, Inc. from 2002March 2008 to 2008. Mr. Berg is a member of the board of directors of Imation Corp.
Jody L. Bilney has served as Chief Brand Officer since January 2008 and our Executive Vice President since January 1, 2012. Ms. Bilney also has responsibility for our R&D function. She was Chief Marketing Officer of Outback Steakhouse from October 2006 to January 2008.August 2014.
Stephen K. Judge joined Bloomin’ Brandshas served as Executive Vice President and President of Bonefish Grill insince January 2013. PriorFrom March 2007 to joining the Company, heDecember 2012, Mr. Judge was President of Seasons 52, which is a restaurant concept owned by Darden Restaurants, Inc., from March 2007 to December 2012. Prior to Seasons 52, Mr. Judge held Food & Beverage and Operations leadership positions at the MGM Grand, one of the world’s largest hotels, Rosewood Hotels and Resorts, and the Princess and Premier Cruise Lines.
Joseph J. Kadow has been ourserved as Executive Vice President, Chief Legal Officer and Secretary since April 2005.
Patrick C. Murtha has served as Executive Vice President and President of Bloomin’ Brands International since November 2013. From January 2006 to March 2013, Mr. Murtha was the Chief LegalOperating Officer since April 2005 and served as our Senior Vice President and General Counsel from April 1994 to April 2005. Mr. Kadow has also served as Secretary since April 1994.of Pizza Hut, Inc.
David A. Pace has served as our Chief Resources Officer and Executive Vice President and President of Carrabba’s Italian Grill since June 2014. Mr. Pace served as Executive Vice President and Chief Resource Officer from August 2010.2010 to June 2014. Mr. Pace served as a consultant for Egon Zehnder International from 2009 to 2010. From 2002 to 2008, Mr. Pace served as Executive Vice President of Partner Resources for Starbucks Coffee Company. Mr. Pace has also held various positions with other companies prior to his position with Starbucks Coffee Company, including PepsiCo, Inc. and YUM! Brands.
Steven T. ShlemonAmanda L. Shaw has been the President of Carrabba’s Italian Grill since April 2000 and our Executiveserved as Senior Vice President, Chief Accounting Officer and International Finance since January 1, 2012.September 2014. Ms. Shaw served as Senior Vice President, Technology and Chief Accounting Officer from August 2013 to September 2014. From December 2006 until August 2013, Ms. Shaw served as Corporate Controller.
Jeffrey S. Smith has served as President of Outback Steakhouse since April 2007 and our Executive Vice President since January 1, 2012. Mr. Smith served as a Vice President of Bonefish Grill from May 2004 to April 2007 and as Regional Vice President—Operations of Outback Steakhouse from January 2002 to May 2004.
EMPLOYEES
As of December 31, 201228, 2014, we employed approximately 93,000100,000 persons, of which 860950 are corporate personnel, approximately 5,100 are restaurant management personnel and the remainder are hourly restaurant personnel. Of the 860 corporate employees, approximately 185 are in management and 675 are administrative or office employees. None of our U.S. employees are covered by a collective bargaining agreement. Various national industry-wide labor agreements apply to certain of our employees in Brazil. We consider our employee relations to be good.
TRADEMARKS
We regard our “OutbackOutback®, Outback Steakhouse” “Carrabba’s®, Carrabba’s Italian Grill” “Bonefish®, Bonefish Grill”®, and “Fleming’s Prime Steakhouse and& Wine Bar” and “Roy’s”Bar® service marks and our “Bloomin’ Onion”Bloomin’ Onion® trademark as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several of our other menu items and for various advertising slogans. We are aware of names and marks similar to the service marks of ours used by other persons in certain geographic areas in which we have restaurants. However, we believe such uses will not adversely affect us. Our policy is to pursue registration of our marks whenever possible and to oppose vigorously any infringement of our marks.
We license the use of our registered trademarks to franchisees and third parties through franchise arrangements and licenses. The franchise and license arrangements restrict franchisees’ and licensees’ activities with respect to the use of our trademarks, and impose quality control standards in connection with goods and services offered in connection with the trademarks.
SEASONALITY AND QUARTERLY RESULTS
Our business is subject to seasonal fluctuations. Historically, customer spendingconsumer traffic patterns forto our established restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. Additionally, holidays and severe winter weather hurricanes, thunderstorms and similar conditions may affect sales volumes seasonally in some of our markets. Quarterly results have been and will continue to be significantly affected by general economic conditions, the timing of new restaurant openings and their associated pre-opening costs, restaurant closures and exit-related costs and impairments of goodwill, definite and indefinite-lived intangible assets and property, fixtures and equipment. In 2014, we changed our fiscal year end, which impacted the comparability of our quarterly and annual results to prior periods. As a result of these and other factors, our financial results for any given quarter may not be indicative of the results that may be achieved for a full fiscal year.
ADDITIONAL INFORMATION
We make available, free of charge, through our internet website www.bloominbrands.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing such material with the Securities and Exchange Commission (“SEC”). You may read and copy any materials filed with the SEC at the Securities and Exchange Commission’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information isOur reports and other materials filed with the SEC are also available at www.sec.gov. The reference to these website addresses does not constitute incorporation by reference of the information contained on the websites and should not be considered part of this document.Report.
Item 1A. Risk Factors
The risk factors set forth below should be carefully considered. The risks described below are those that we believe are risks that we face that could materially and adversely affect our business, financial condition or results of operations, however, they are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations.
Risks Related to Our Business and Industry
Challenging economic conditions may have a negative effect on our business and financial results.
Challenging economic conditions may negatively impact consumer spending and thus cause a decline in our financial results. For example, international, domestic and regional economic conditions and the impacts of unemployment and underemployment, reduced or stagnant disposable consumer income, financial market volatility, social unrest and governmental spending and budget matters and the slow pace of economic recovery from the recent recession generally have had a negative effect on consumer confidence and discretionary spending. This has affected consumer traffic and comparable restaurant sales for us and throughout our industry in recent periods. We face significant competition for customers, real estatebelieve these factors and employeesconditions will continue to result in a challenging sales environment in the casual dining sector. Continued weakness in or a further worsening of the economy or the other factors mentioned above, generally or in particular markets in which we operate, and competitiveour consumers’ reactions to these trends could result in increased pressure with respect to adaptour pricing, traffic levels, commodity and other costs and the continuation of our innovation and productivity initiatives, which could negatively impact our business and results of operations. These factors could also cause us to, changes inamong other things, reduce the number and frequency of new restaurant openings, close restaurants or delay remodeling of our existing restaurant locations. Further, poor economic conditions driving customer traffic.may force nearby businesses to shut down, which could cause our restaurant locations to be less attractive.
The restaurant industry is highly competitive. Our inability to compete effectively may affect our traffic, sales and profit margins, which could adversely affect our business, financial condition and results of operations.
The restaurant industry is intensely competitive with aA substantial number of restaurant operators that compete directly and indirectly with us inwith respect to price, service, location and food quality, and theresome of which are other well-established competitors with significant financial and other resources. There is also active competition for management and other personnel as well asand attractive suitable real estate sites. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to those conditions. Further, we face growing competition from the supermarket industry, with the improvement of their “convenient meals” in the deli and prepared food sections,offerings, and from quick service and fast casual restaurants, as a result of higher-quality food and beverage offerings by those restaurants. If we are unable to continue to compete effectively, our traffic, sales and margins could decline and our business, financial condition and results of operations would be adversely affected.
Challenging economic conditions may have a negative effectOur success depends substantially on our business and financial results through lower consumer confidence and discretionary spending, availability and cost of credit, foreign currency exchange rates and other items.
Challenging economic conditions may negatively impact consumer confidence and discretionary spending and thus cause a decline in our cash flows from operations. For example, the ongoing impacts of the housing crisis, high unemployment, financial market volatility and unpredictability, the so-called “sequester” and related governmental spending and budget matters, other national, regional and local regulatory and economic conditions, gasoline prices, reduced disposable consumer income and consumer confidence have had a negative effect on discretionary consumer spending. This has negatively affected customer traffic and comparable restaurant sales for us and throughout our industry thus far in 2013. We believe these factors and conditions are creating a challenging sales environment in the casual dining sector for 2013. If challenging economic conditions persist for an extended period of time or worsen, consumers might make long-lasting changes to their discretionary spending behavior, including dining out less frequently. The ability of the U.S. economy to continue to recover from these challenging economic conditions is likely to be affected by many national and international factors that are beyond our control, including current economic trends in Europe. Continued weakness in or a further worsening of the economy, generally or in a numbervalue of our markets, and our customers’ reactions to these trends could result in increased pressure with respect to our pricing, traffic levels, commodity costs and the continuation of our innovation and productivity initiatives, which could negatively impact our business and results of operations. These factors could also cause us to, among other things, reduce the number and frequency of new restaurant openings, close restaurants or delay remodeling of our existing restaurant locations.
In addition, as noted in our other risk factors, our high degree of leverage could increase our vulnerability to general economic and industry conditions and require that a substantial portion of cash flow from operations be dedicated to the payment of principal and interest on our indebtedness. Further, the availability of credit already arranged for under our revolving credit facilities and the cost and availability of future credit may be adversely impacted by economic challenges. Foreign currency exchange rates for the countries in which we operate may decline. In addition, we may experience interruptions in supplies and other services from our third-party vendors as a result of market conditions.
These disruptions in the economy are beyond our control, and there is no guarantee that any government response will restore consumer confidence, stabilize the economy or increase the availability of credit.
Loss of key management personnel could hurt our business and inhibit our ability to operate and grow successfully.brands.
Our success will continue to depend, to a significant extent,depends on our leadership teamability to preserve and other key management personnel. If wegrow our brands. Brand value is based in large part on consumer perceptions, which are unable to attractdriven by both our actions and retain sufficiently experienced and capable management personnel,actions beyond our business and financial results may suffer. If memberscontrol. Business incidents, ineffective advertising or marketing efforts, or unfavorable mainstream or social media publicity involving us, our industry, our franchisees, or our suppliers could damage our brands. Regardless of its basis or validity, any unfavorable publicity could adversely affect public perception of our leadership team or other key management personnel leave, we may have difficulty replacing them, andbrands. Any damage to the reputation of our business may suffer. There can be no assurance that we will be able to successfully attract and retainbrands could adversely affect our leadership team and other key management personnel that we need.business.
Risks associated with our expansion plans may have adverse effects on our ability to increase revenues.
As part of our business strategy, we intend to continue to expand our current portfolio of restaurants. CurrentOur current development schedules callschedule calls for the construction of between 4540 and 5550 new system-wide locations in 2013.2015. A variety
of factors could cause the actual results and outcome of those expansion plans to differ from the anticipated results, including among other things:
the availability of attractive sites for new restaurants and the ability to acquirerestaurants;
acquiring or lease appropriate real estate atleasing those sites at acceptable prices;prices and other terms;
our ability to generate sufficient funds from operationsfunding or to obtain acceptable financing to support our development;
our ability to obtainobtaining all required governmental permits, including zoning approvals and liquor licenses on a timely basis;
the impact of moratoriums or approval processes of state, local or foreign governments, which could result in significant delays;
our ability to obtain all necessary contractorsrecruiting and sub-contractors;
union activities such as picketing and hand billing, which could delay construction;
our ability to negotiate suitable lease terms;
our ability to recruit and traintraining skilled management and restaurant employees;
our ability to receive the premises from the landlord’s developer without any delays;
employees and retaining those employees on acceptable terms;
weather, natural disasters and disastersother events or factors beyond our control resulting in construction or other delays; and
consumer tastes in new geographic regions and acceptance of our restaurant concepts.concepts and awareness of our brands in those regions.
Some of our new restaurants may take several months to reach planned operating levels due to lack of market awareness, start-up costs and other factors typically associated with new restaurants. There is also the possibility that new restaurants may attract customers away from other restaurants we own, thereby reducing the revenues of those existing restaurants.
Development rates for each concept may differ significantly. The development of each concept may not be as successful as our experience in the past. It is difficult to estimate the performance of newly opened restaurants. Earnings achieved to date by restaurants open for less than two years may not be indicative of future operating results. Should enough of these new restaurants not meet targeted performance, it could have a material adverse effect on our operating results.
We could face labor shortages There is also the possibility that could slow our growth and adversely impact our ability to operate our restaurants.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including managing partners, restaurant managers, kitchen staff and servers, necessary to keep pace with our anticipated expansion schedule and meet the needs of our existing restaurants. A sufficient number of qualified individuals of the requisite caliber to fill these positions may be in short supply in some communities. Competition in these communities for qualified staff could require us to pay higher wages and provide greater benefits. Any inability to recruit and retain qualified individuals may also delay the planned openings of new restaurants and could adversely impact our existing restaurants. Any such inability to retain or recruit qualified employees, increased costs of attracting qualified employees or delays in restaurant openings could adversely affect our business and results of operations.
Our business is subject to seasonal fluctuations and past results are not indicative of future results.
Historically, customer spending patterns for our established restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. Additionally, holidays may affect sales volumes seasonally in some of the markets in which we operate. Our quarterly results have been and will continue to be affected by the timing of new restaurant openings and their associated pre-opening costs, as well as restaurant closures and exit-related costs and impairments of goodwill, intangible assets and property, fixtures and equipment. As a result of these andattract consumers away from other factors, our financial results for any quarter may not be indicative of the results that may be achieved for a full fiscal year.
Significant adverse weather conditions and other disasters could negatively impact our results of operations.
Adverse weather conditions and natural disasters, such as regional winter storms, floods, major hurricanes and earthquakes, severe thunderstorms and other disasters, such as oil spills, could negatively impact our results of operations. Temporary and prolonged restaurant closures may occur and customer traffic may decline due to the actual or perceived effects from these events.
We may be required to use cash to pay one of our franchisees in connection with a put right under a settlement agreement, which could have an adverse impact on our development plans and operating results.
In connection with the settlement of litigation with T-Bird, which include the franchisees of 56 Outback Steakhouse restaurants in California, we entered into an agreement with T-Bird pursuant to which T-Bird has the right, referred to as the Put Right, to require us to purchase for cash all of the ownership interests in the T-Bird entities (which include general and limited partnership interests in such entities) that own 56 restaurants. The Put Right is exercisable by T-Bird until August 13, 2013. If the Put Right is exercised, we will pay a purchase price equal to a multiple of the T-Bird entities’ adjusted EBITDA, net of liabilities, for the trailing 12 months as of the closing of the purchase from T-Bird. The multiple will be equal to 75% of the multiple of our adjusted EBITDA for the same trailing 12-month period as reflected in our stock price. We have a one-time right to reject the exercise of the Put Right if the transaction would be dilutive to our consolidated earnings per share. In that event, the Put Right is extended until the first anniversary of our notice to the T-Bird entities of that rejection. We have agreed to waive all rights of first refusal in our franchise arrangements with the T-Bird entities in connection with a sale of all, and not less than all, of the assets, or at least 75% of the ownership, of the T-Bird entities. If the Put Right is exercised, we will have to use cash to pay the purchase price that could have been allocated to more profitable development initiatives or other business needs, and we will then own restaurants that may not fit our current expansion criteria. This could have an adverse impact on our operating results.
We have limited control with respect to the operations of our franchisees and joint venture partners, which could have a negative impact on our business.
Our franchisees and joint venture partners are obligated to operate their restaurants according to the specific guidelines we set forth. We provide training opportunities to these franchisees and joint venture partners to fully integrate them into our operating strategy. However, since we do not have control over these restaurants we cannot give assurance that there will not be differences in product quality or that there will be adherence to allown, thereby reducing the revenues of our guidelines at these
restaurants. The failure of these restaurants to operate effectively or in accordance with our guidelines could adversely affect our cash flows from those operations or have a negative impact on our reputation or our business.
Our failure to comply with government regulation, and the costs of compliance or non-compliance, could adversely affect our business.
We are subject to various federal, state, local and foreign laws affecting our business. Each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include, among others, alcoholic beverage control, health and safety, nutritional menu labeling, health care, environmental and fire agencies in the state, municipality or country in which the restaurant is located. Difficulty in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. Additionally, difficulties or inabilities to retain or renew licenses, or increased compliance costs due to changed regulations, could adversely affect operations at existing restaurants.
Approximately 15% of our consolidated restaurant sales are attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of patrons and employees, hours of operation, advertising, training, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations. Additionally, we are subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
Our restaurant operations are also subject to federal and state labor laws, including the Fair Labor Standards Act, governing such matters as minimum wages, overtime, tip credits and worker conditions. Our employees who receive tips as part of their compensation, such as servers, are generally paid at a minimum wage rate, after giving effect to applicable tip credits. We rely on our employees to accurately disclose the full amount of their tip income, and we base our FICA tax reporting on the disclosures provided to us by such tipped employees. Our other personnel, such as our kitchen staff, are typically paid in excess of minimum wage. As significant numbers of our food service and preparation personnel are paid at rates related to the applicable minimum wage, further increases in the minimum wage, including the recent proposal by President Obama to increase the federal minimum wage by $1.75 per hour and index future increases to inflation, or other changes in these laws could increase our labor costs. Our ability to respond to minimum wage increases by increasing menu prices will depend on the responses of our competitors and customers.
Further, we continue to assess our health care benefit costs. Due to the breadth and complexity of federal health care legislation and the staggered implementation of its provisions and corresponding regulations, it is difficult to predict the overall impact of the health care legislation on our business over the coming years. Although these laws do not mandate that employers offer health insurance to all employees who are eligible under the legislation, beginning in 2014 penalties will be assessed on large employers who do not offer health insurance that meets certain affordability or benefit requirements. Providing health insurance benefits to employees that are more extensive than the health insurance benefits we currently provide and to a potentially larger proportion of our employees, or the payment of penalties if the specified level of coverage is not provided at an affordable cost to employees, will increase our expenses. If we are unable to raise our prices or cut other costs to cover this expense, such increases in expenses could materially reduce our operating profit. Our distributors and suppliers also may be affected by higher minimum wage and benefit standards, which could result in higher costs for goods and services supplied to us.
The PPACA enacted in March 2010 requires chain restaurants with 20 or more locations in the United States to comply with federal nutritional disclosure requirements. The FDA has indicated that it intends to issue final regulations by the first part of 2013 and begin enforcing the regulations by the end of 2013 or beginning of 2014. A number of states, counties and cities have also enacted menu labeling laws requiring multi-unit restaurant operators to disclose certain
nutritional information to customers, or have enacted legislation restricting the use of certain types of ingredients in restaurants. Although the federal legislation is intended to preempt conflicting state or local laws on nutrition labeling, until we are required to comply with the federal law we will be subject to a patchwork of state and local laws and regulations regarding nutritional content disclosure requirements. Many of these requirements are inconsistent or are interpreted differently from one jurisdiction to another. The effect of such labeling requirements on consumer choices, if any, is unclear at this time. We may also become subject to other legislation or regulation seeking to tax or regulate high fat and high sodium foods, particularly in the U.S., which could be costly to comply with.
There is also a potential for increased regulation of food in the United States under the recent changes in the HACCP system requirements. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems and the United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the FSMA, enacted in January 2011, granted the FDA new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these new requirements, we anticipate that the new requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise harm our business.
We are subject to the ADA, which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employment and public accommodations on the basis of disability. Under the ADA, we could be required to expend funds to modify our restaurants to provide service to, or make reasonable accommodations for the employment of, disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency. Government regulations could affect and change the items we procure for resale such as commodities. We may also become subject to legislation or regulation seeking to tax or regulate high fat and high sodium foods, particularly in the United States, which could be costly to comply with. Our results can be impacted by tax legislation and regulation in the jurisdictions in which we operate and by accounting standards or pronouncements.
We are also subject to laws and regulations relating to information security, privacy, cashless payments, gift cards and consumer credit, protection and fraud, and any failure or perceived failure to comply with these laws and regulations could harm our reputation or lead to litigation, which could adversely affect our financial condition.
Changes in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the United States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with different statutory tax rates; changes in the valuation of deferred tax assets and liabilities; changes in tax laws; the outcome of income tax audits; and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our income tax provision, results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits and by any release of our valuation allowances applied to our existing deferred tax assets.
We face a variety of risks associated with doing business in foreign markets that could have a negative impact on our financial performance.
We have a significant number of franchised, joint venture and Company-owned Outback Steakhouse restaurants outside the United States, and we intend to continue our efforts to grow internationally. We currently expect at least 50% of our targeted 40 to 50 system-wide new restaurants in 2015 will be located outside the United States. Although we believe we have developed an appropriate support structure for international operations and growth, there is no assurance that international operations will be profitable or international growth will continue.
Our foreign operations are subject to all of the same risks as our domestic restaurants, as well as additional risks including, among others, international economic, political, social and politicallegal conditions and the possibility of instability and unrest, differing cultures and consumer preferences, diverse government regulations and tax systems, corruption, anti-American sentiment, the ability to source high quality ingredients and other commodities in a cost-effective manner, uncertain or differing interpretations of rights and obligations in connection with international franchise agreements and the collection of ongoing royalties from international franchisees, the availability and costcosts of land and construction, costs, and the availability of experienced management, appropriate franchisees and area operating partners.
Currency regulations and fluctuations in exchange rates could also affect our performance. We have foreign operations in a total of 21 countries and Guam, including direct investments in restaurants in South Korea, Brazil, Hong Kong China and Brazil,China, as well as international franchises, in a total of 19 countries.franchises. As a result, we may experience losses from fluctuations in foreign currency translation,exchange rates, and such losses could adversely affect our overall sales and earnings.
We are subject to governmental regulation throughout the world,of our foreign operations, including antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act and the Foreign Corrupt Practices Act. Any new regulatory or trade initiatives could impact our operations in certain countries. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
Increased commodity, energyOur business is subject to seasonal and periodic fluctuations and past results are not indicative of future results.
Historically, consumer traffic patterns for our established restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year. Holidays may also affect sales volumes seasonally in some of the markets in which we operate. In addition, our quarterly results have been and will continue to be affected by the timing
of new restaurant openings and their associated preopening costs, as well as restaurant closures and exit-related costs and impairments of goodwill, intangible assets and property, fixtures and equipment. As a result of these and other factors, our financial results for any quarter may not be indicative of the results that may be achieved for a full fiscal year.
Significant adverse weather conditions and other disasters or unforeseen events could negatively impact our results of operations.
Adverse weather conditions and natural disasters and other unforeseen events, such as winter storms, severe temperatures, thunderstorms, floods, hurricanes and earthquakes, terror attacks, war and widespread/pandemic illness, and the effects of such events on economic conditions and consumer spending patterns, could negatively impact our results of operations. Temporary and prolonged restaurant closures may occur and consumer traffic may decline due to the actual or perceived effects from these events. For example, severe winter weather conditions impacted our traffic and results of operations in the first quarter of 2014.
Loss of key management personnel could hurt our business and inhibit our ability to operate and grow successfully.
Our success will continue to depend, to a significant extent, on our leadership team and other key management personnel. If we are unable to attract and retain sufficiently experienced and capable management personnel, our business and financial results may suffer.
Our failure to comply with government regulation related to our restaurant operations, and the costs could decrease our profit marginsof compliance or cause us to limit or otherwise modify our menus, whichnon-compliance, could adversely affect our business.
The performance ofWe are subject to various federal, state, local and foreign laws affecting our restaurants depends on our ability to anticipate and react to changes in the price and availability of food commodities, including among other things beef, chicken, seafood, butter, cheese and produce. Prices may be affected due to market changes, increased competition, the general risk of inflation, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Increased prices or shortages could affect the cost and quality of the items we buy or require us to raise prices or limit our menu options. For example, in 2012, commodity costs increased by approximately 3% and, as a result, we increased our prices at each of our concepts in the range of 2.0% to 2.3%. These events, combined with other more general economic and demographic conditions, could impact our pricing and negatively affect our sales and profit margins.
The performancebusiness. Each of our restaurants is also adversely affectedsubject to licensing and regulation by increasesa number of governmental authorities, which may include, among others, alcoholic beverage control, food safety, nutritional menu labeling, health care, environmental and fire agencies in the price of utilities, such as natural gas, whether as a result of inflation, shortagesstate, municipality or interruptionscountry in supply, or otherwise. We use derivative instrumentswhich the restaurant is located. Our suppliers are also subject to mitigateregulation in some of our overall exposurethese areas. Any difficulties or inabilities to material increases in natural gas prices. We do not apply hedge accounting to these instruments, and any changes in the fair value of the derivative instruments are marked-to-market through earnings in the period of change. To date, the effects of these derivative instruments have been immaterial to our financial statements for all periods presented.
Our business also incurs significantretain or renew licenses, or increased compliance costs for insurance, labor, marketing, taxes, real estate, borrowing and litigation, all of which could increase due to inflation, changes in laws, competition or other events beyond our control.
Our ability to respond to increased costs by increasing menu prices or by implementing alternative processes or products will depend on our ability to anticipate and react to such increases and other more general economic and demographic conditions, as well as the responses of our competitors and customers. All of these things may be difficult to predict and beyond our control. In this manner, increased costschanged regulations, could adversely affect operations at existing restaurants. Additionally, difficulties in obtaining or failing to obtain the required licenses or approvals could delay or prevent the development of new restaurants.
Alcoholic beverage sales represent 15% of our performance.consolidated restaurant sales and are subject to extensive state and local licensing and other regulations. The failure of a restaurant to obtain or retain a liquor license would adversely affect that restaurant’s operations. In addition, we are subject to “dram shop” statutes in certain states. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.
The FDA recently adopted final regulations to implement federal nutritional disclosure requirements, and we will be required to comply with these regulations by the end of 2015. The regulations will require us to include calorie information on our menus, and provide additional nutritional information upon request. If the costs of implementing or complying with these new requirements exceed our expectations, our results of operations could be adversely affected. Furthermore, the effect of such labeling requirements on consumer choices, if any, is unclear. It is possible that we may also become subject to other regulation in the future seeking to tax or regulate high fat and high sodium foods in certain of our markets, which could be costly to comply with.
We are subject to various federal and state employment and labor laws and regulations.
Various federal and state employment and labor laws and regulations govern our relationships with our employees and affect operating costs, and similar laws and regulations apply to our operations outside of the U.S. These laws and regulations relate to matters including employment discrimination, minimum wage requirements, overtime, tip credits, unemployment tax rates, workers’ compensation rates, working conditions, immigration status, tax reporting and other wage and benefit requirements. Any significant additional government regulations and new laws governing our
Infringement of our intellectual property could diminish the value of our restaurant concepts and harm our business.
We regard our service marks,relationships with employees, including “Outback Steakhouse,” “Carrabba’s Italian Grill,” “Bonefish Grill,” “Fleming’s Prime Steakhouse and Wine Bar” and “Roy’s” and our “Bloomin’ Onion” trademark as having significant value and as being important factors in the marketing of our restaurants. We have also obtained trademarks for several of our other menu items and for various advertising slogans. In addition, the overall layout, appearance and designs of our restaurants are valuable assets. We believe that these and other intellectual property are valuable assets that are critical to our success. We rely on a combination of protections provided by contracts, copyrights, trademarks, and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks and have other registration applications pending in the United States and foreign jurisdictions. However, not all of the trademarks or service marks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of these countries. There may not be adequate protection for certain intellectual property such as the overall appearance of our restaurants. We are aware of names and marks similar to our service marks being used by other persons in certain geographic areas in which we have restaurants. Although we believe such uses will not adversely affect us, further or currently unknown unauthorized usesminimum wage increases, mandated benefits or other misappropriation ofrequirements that impose additional obligations on us, could increase our trademarks or service marks could diminish the value of our brandscosts and restaurant concepts and may adversely affect our business. We may be unable to detect such unauthorized use of, or take appropriate steps to enforce, our intellectual property rights.
Effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Failure to adequately protect our intellectual property rights could damage or even destroy our brands and impair our ability to compete effectively. Even where we have effectively secured statutory protection for intellectual property, our competitors may misappropriate our intellectual property and our employees, consultants and suppliers may breach their obligations not to reveal our confidential information, including trade secrets. Although we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections will be adequate or that our competitors will not independently develop products or concepts that are substantially similar to our restaurants and services. Despite our efforts, it may be possible for third-parties to reverse-engineer, otherwise obtain, copy, and use information that we regard as proprietary. Furthermore, defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking injunctions against and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources.
Restaurant companies, including ours, have been the target of class action lawsuits and other proceedings alleging, among other things, violations of federal and state workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.
Our business is subject to the risk of litigation by employees, consumers, suppliers, franchisees, minority investors, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, we and other restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, the sharing of tips among certain employees, overtime eligibility of assistant managers and failure to pay for all hours worked. If we are required to pay substantial damages and expenses as a result of these or other types of lawsuits our business and results of operations would be adversely affected.
Occasionally, our customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to one of our restaurants, including actions seeking damages resulting from food borne illness and relating to notices with respect to chemicals contained in food products required under state law. We are also subject to a variety of other claims from third parties arising in the ordinary course of our business, including
personal injury claims, contract claims and claims alleging violations of federal and state laws. In addition, our restaurants are subject to state “dram shop” or similar laws which generally allow a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their customers. We may also be subject to lawsuits from our employees, the U.S. Equal Employment Opportunity Commission or others alleging violations of federal and state laws regarding workplace and employment matters, discrimination and similar matters. For example, in December 2009, we entered into a Consent Decree in settlement of certain litigation brought by the U.S. Equal Employment Opportunity Commission alleging gender discrimination in promotions to management within the Outback Steakhouse organization, which required us to make a settlement payment of $19.0 million. In addition, during the four-year term of the Consent Decree, we are required to fulfill certain training, record-keeping and reporting requirements and maintain an open access system for restaurant employees to express interest in promotions within the Outback Steakhouse organization, and employ a human resources executive.
Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. In addition, they may generate negative publicity, which could reduce customer traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could adversely affect our business and results of operations.
As a significant number of our food service and preparation personnel are paid at rates related to the applicable minimum wage, federal, state and local proposals related to minimum wage requirements or similar matters could, if implemented, materially increase our labor and other costs. Our insurance policies may not provide adequate levelsability to respond to minimum wage increases by increasing menu prices would depend on the responses of coverage against all claims,our competitors and fluctuating insurance requirementsconsumers. Our distributors and suppliers could also be affected by higher minimum wage, benefit standards and compliance costs, which could negatively impactresult in higher costs for goods and services supplied to us.
We rely on our profitability.
employees to accurately disclose the full amount of their tip income, and we base our FICA tax reporting on the disclosures provided to us by such tipped employees. Inaccurate FICA tax reporting could subject us to monetary liabilities, which could harm our business, results of operations and financial condition. For example, in March 2014, the IRS issued a final audit adjustment of $5.0 million to the us for the employer’s share of FICA taxes related to cash tips unreported by the our employees during the calendar year 2010.
We are self-insured,also subject, in the ordinary course of business, to employee claims against us based, among other things, on discrimination, harassment, wrongful termination, or carry insurance programs with specific retention levelsviolation of wage and labor laws. These claims may divert our financial and management resources that would otherwise be used to benefit our operations. The ongoing expense of any resulting lawsuits, and any substantial settlement payment or deductibles, for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, liquor liability, employment practices liability, property, health benefits and other insurable risks. However, there are types of losses we may incur that cannot be insureddamage award against or that we believe are not commercially reasonable to insure. These losses, if they occur,us, could have a material and adverse effect onadversely affect our business and results of operations. Additionally, health insurance costs in general have risen significantly over the past few years and are expected to continue to increase. These increases could have a negative impact on our profitability, and there can be no assurance that we will be able to successfully offset the effect of such increases with plan modifications and cost control measures, additional operating efficiencies or the pass-through of such increased costs to our customers or employees.
Conflict or terrorism could negatively affect our business.
We cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on local, regional, national, or international economies or consumer confidence. Such events could negatively affect our business, including by reducing customer traffic or the availability of commodities.
If our advertising and marketing programs are unsuccessful in maintaining or driving increased customer traffic or are ineffective in comparison to those of our competitors, our results of operations could be adversely affected.
We conduct ongoing promotion-based brand awareness advertising campaigns and customer loyalty programs. If these programs are not successful or conflict with evolving customer preferences, we may not increase or maintain our customer traffic and will incur expenses without the benefit of higher revenues. In addition, if our competitors increase their spending on marketing and advertising programs, or develop more effective campaigns, this could have a negative effect on our brand relevance, customer traffic and results of operations.
Unfavorable publicity could harm our business by reducing demand for our concepts or specific menu offerings.
Our business could be negatively affected by publicity resulting from complaints or litigation, either against us or other restaurant companies, alleging poor food quality, food-borne illness, personal injury, adverse health effects (including obesity) or other concerns. Regardless of the validity of any such allegations, unfavorable publicity relating to any number of restaurants or even a single restaurant could adversely affect public perception of the entire brand.
Additionally, unfavorable publicity towards a food product generally could negatively impact our business. For example, publicity regarding health concerns or outbreaks of disease in a food product, such as bovine spongiform encephalopathy (also known as “mad cow” disease), could reduce demand for our menu offerings. These factors could have a material adverse effect on our business.
Consumer reaction to public health issues, such as an outbreak of flu viruses or other diseases, could have an adverse effect on our business.
Our business could be harmed if the United States or other countries in which we operate experience an outbreak of flu viruses or other diseases. If a virus is transmitted by human contact, our employees or customers could become infected or could choose or be advised to avoid gathering in public places. This could adversely affect our restaurant traffic, our ability to adequately staff our restaurants, our ability to receive deliveries on a timely basis or our ability to perform functions at the corporate level. Our business could also be negatively affected if mandatory closures, voluntary closures or restrictions on operations are imposed in the jurisdictions in which we operate. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or significant health risk may have a material adverse effect on our business.
Food safety and food-borne illness concerns throughout the supply chain may have an adverse effect on our business by reducing demand and increasing costs.
Food safety issues could be caused by food suppliers or distributors and, as a result, be out of our control. In addition, regardless of the source or cause, any report of food-borne illnesses and other food safety issues including food tampering or contamination at one of our restaurants could adversely affect the reputation of our brands and have a negative impact on our sales. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry generally and adversely impact our sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
The food service industry is affected by consumer preferences and perceptions. Changes in these preferences and perceptions may lessen the demand for our products, which would reduce sales and harm our business.
Food service businesses are affected by changes in consumer tastes and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid steak and other products we offer in favor of foods that are perceived as more healthy, our business and operating results would be harmed.
We have a limited number of suppliers for our major products and rely on one custom distribution company for our national distribution program in the U.S. If our suppliers or custom distributor are unable to fulfill their obligations under their contracts or we are unable to develop or maintain relationships with these or new suppliers or distributors, if needed, we could encounter supply shortages and incur higher costs.
We have a limited number of suppliers for our major products, such as beef. In 2012, we purchased more than 75% of our beef raw materials from four beef suppliers who represent approximately 85% of the total beef marketplace in the U.S. Due to the nature of our industry, we expect to continue to purchase a substantial amount of our beef from a small number of suppliers. In addition, we use one distribution company to provide distribution services in the U.S. Although we have not experienced significant problems with our suppliers or distributor, if our suppliers or distributor are unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs.
In addition, if we are unable to maintain current purchasing terms or ensure service availability with our suppliers and distributor, we may lose customers and experience an increase in costs in seeking alternative supplier services. The failure to develop and maintain supplier and distributor relationships and any resulting disruptions to the provision of food and other supplies to our restaurant locations could adversely affect our operating results.
Shortages or interruptions in the supply or delivery of fresh food products could adversely affect our operating results.
We are dependent on frequent deliveries of fresh food products that meet our specifications. Shortages or interruptions in the supply of fresh food products caused by unanticipated demand, problems in production or distribution, inclement weather or other conditions could adversely affect the availability, quality and cost of ingredients, which would adversely affect our operating results.
We outsource certain accounting processes to a third-party vendor, which subjects us to many risks that could disrupt our business, increase our costs and negatively impact our internal control processes.
In early 2011, we began to outsource certain accounting processes to a third-party vendor. The third-party vendor may not be able to handle the volume of activity or perform the quality of service that we have currently achieved at a cost-effective rate, which could adversely affect our business. The decision to outsource was made based on cost savings initiatives; however, we may not achieve these savings because of unidentified intangible costs and legal and regulatory matters, which could adversely affect our results of operations or financial condition. In addition, the performance of certain business processes in an outsourced capacity could negatively impact our internal control processes.
We rely heavily on information technology in our operations and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business.
We rely heavily on information systems across our operations and corporate functions, including point-of-sale processing in our restaurants, management of our supply chain, payment of obligations, collection of cash, data warehousing to support analytics, finance and accounting systems and other various processes and procedures.procedures, some of which are handled by third parties. Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, maintenance problems, upgrading or transitioning to new platforms, or a breach in security of these systems could result in delays in customerconsumer service and reduce efficiency in our operations. RemediationThese problems could adversely affect our results of such problemsoperations, and remediation could result in significant unplanned capital investments.
We are also in the process of implementing a finance and accounting system. Large-scale system implementations are complex and time-consuming projects that are capital intensive and can span 12 months or longer. Certain business and financial processes will also require transformation in order to effectively leverage the system’s benefits. Our business and results of operations may be adversely affected if we experience system usage problems and/or cost overruns during the implementation process, or if associated process changes do not give rise to the benefits that we expect. Additionally, if we do not effectively implement the system as planned or if the system does not operate as intended, it could adversely affect the effectiveness of our internal controls over financial reporting.
Security breaches of confidential customerconsumer information or personal employee information may adversely affect our business.
The majority of our restaurant sales are by credit or debit cards. Other restaurants and retailers have experienced security breaches in which credit and debit card information or other personal information of their customersconsumers has been stolen. We also maintain certain personal information regarding our employees. Despite our implementation of security measures, all of our technology systems are vulnerable to damage, disability or failures due to physical theft, fire, power loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, employee error or malfeasance, denial of service attacks, viruses, worms and other disruptive problems caused by hackers and cyber criminals. A breach in our systems that compromises the information of our consumers or employees could result in widespread negative publicity, damage to the reputation of our brands, a loss of consumers and legal liabilities.
We may in the future become subject to lawsuits or other proceedings for purportedly fraudulent transactions arising out of the actual or alleged theft of our customers’consumers’ credit or debit card information or if customerconsumer or employee information is obtained by unauthorized persons or used inappropriately. Any such claim or proceeding, or any adverse publicity resulting from such an event, may have a material adverse effect on our business.
An impairmentChanges in tax laws and unanticipated tax liabilities could adversely affect the taxes we pay and our profitability.
We are subject to income and other taxes in the carrying valueUnited States and numerous foreign jurisdictions. Our effective income tax rate in the future could be adversely affected by a number of factors, including changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits, and any repatriation of non-U.S. earnings for which we have not previously provided for U.S. taxes. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits and by any increases or decreases of our goodwillvaluation allowances applied to our existing deferred tax assets.
Increased commodity, energy and other costs could decrease our profit margins or other intangible assetscause us to limit or otherwise modify our menus, which could adversely affect our financial condition and results of operations.business.
We test goodwill for impairmentThe performance of our restaurants depends on our ability to anticipate and react to changes in the second quarterprice and availability of each fiscal yearfood commodities. Our business also incurs significant costs for energy, insurance, labor, marketing, and whenever events orreal estate. Prices may be affected due to supply, market changes, increased competition, the general risk of inflation, changes in circumstances indicate that impairment may have occurred. A significant amountlaws, shortages or interruptions in supply due to weather, disease or other conditions beyond our control, or other reasons. Increased prices or shortages could affect the cost and quality of judgment is involvedthe items we buy or require us to raise prices, limit our menu options or implement alternative processes or products. For example, in determining if an indication2014, commodity costs increased by 2.8% and we increased our prices at each of impairment exists. Factors may include, among others:
a significant decline in our expected future cash flows;
a significant adverse change in legal factors orconcepts in the business climate;
unanticipated competition;
the testing for recoverabilityrange of 2.7% to 3.1%. We cannot provide any assurance that we would be able to successfully offset increased costs by increasing menu prices or by other measures, as our ability to do so depends on a significant asset group within a reporting unit;variety of factors, many of which are beyond our control. As result, these events, combined with other more general economic and
slower growth rates.
Any adverse change in these factors would have a significant demographic conditions, could impact on the recoverability of these assetsour pricing and negatively affect our financial conditionsales and results of operations. We compare the carrying value of a reporting unit, including goodwill, to the fair value of the reporting unit. Carrying value is based on the assets and liabilities associated with the operations of that reporting unit. If the carrying value is less than the fair value, no impairment exists. If the carrying value is higher than the fair value, there is an indication of impairment and a second step is required to measure a goodwill impairment loss, if any. We are required to record a non-cash impairment charge if the testing performed indicates that goodwill has been impaired.profit margins.
We evaluatehave a limited number of suppliers for our major products and rely on one custom distribution company for our national distribution program in the U.S. If our suppliers or custom distributor are unable to fulfill their obligations under their contracts or we are unable to develop or maintain relationships with these or new suppliers or distributors, if needed, we could encounter supply shortages and incur higher costs.
We depend on frequent deliveries of fresh food products that meet our specifications and we have a limited number of suppliers for our major products, such as beef. In 2014, we purchased more than 90% of our beef raw materials from four beef suppliers that represent more than 90% of the total beef marketplace in the U.S. Due to the nature of our industry, we expect to continue to purchase a substantial amount of our beef from a small number of suppliers. We also use one supplier in the U.S. to process beef raw materials to our specifications and we use one distribution company to provide distribution services in the U.S. Although we have not experienced significant problems with our suppliers or distributor, if our suppliers or distributor are unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs.
In addition, if we are unable to maintain current purchasing terms or ensure service availability with our suppliers and distributor, we may lose consumers and experience an increase in costs in seeking alternative supplier or distribution services. The failure to develop and maintain supplier and distributor relationships and any resulting disruptions to the provision of food and other intangible assets, primarilysupplies to our restaurant locations could adversely affect our operating results.
Our failure or inability to enforce our trademarks or other proprietary rights could adversely affect our competitive position or the value of our brand.
Our trademarks, including Outback Steakhouse, (domestic and international), Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and& Wine Bar and Roy’s trademarks or trade names,Bloomin’ Onion, and other proprietary rights are important to determine if they are definite or indefinite-lived. Reaching a determination on useful life requires significant judgmentsour success and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative actionour competitive position. The protective actions that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
As with goodwill, we test our indefinite-lived intangible assets for impairment in the second quarter of each fiscal year and whenever events or changes in circumstances indicate that their carrying valuetake may not be recoverable. We estimate the fair valuesufficient to prevent unauthorized usage or imitation by others, which
could harm our image, brand or competitive position. Furthermore, our ability to projected revenues from our annual long-range plan, assumed royalty rates that couldprotect trademarks and other proprietary rights may be payable ifmore limited in certain international markets where we did not own the assets and a discount rate.operate.
During the years ended December 31, 2012, 2011Litigation could have a material adverse impact on our business and 2010, we did not record any goodwill or material intangible asset impairment charges. However, during the year ended December 31, 2009, we recorded goodwillour financial performance.
We are subject to lawsuits, administrative proceedings and intangible asset impairment charges of $58.1 million and $43.7 million, respectively. We cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other intangible assets become impairedclaims that arise in the future,regular course of business. These matters typically involve claims by consumers, employees and others regarding issues such as food borne illness, food safety, premises liability, “dram shop” statute liability, compliance with wage and hour requirements, work-related injuries, discrimination, harassment, disability and other operational issues common to the foodservice industry, as well as contract disputes and intellectual property infringement matters. Significant legal fees and costs in complex class action litigation or an adverse judgment or settlement that is not insured or is in excess of insurance coverage could have a material adverse effect on our financial position and results of operations.
Our insurance policies may not provide adequate levels of coverage against all claims, and fluctuating insurance requirements and costs could negatively impact our profitability.
We are self-insured, or carry insurance programs with specific retention levels or high per-claim deductibles, for a significant portion of our risks and associated liabilities with respect to workers’ compensation, general liability, liquor liability, employment practices liability, property, health benefits and other insurable risks. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure, including wage and hour claims. These losses, if they occur, could have a material and adverse effect on our business and results of operations. Additionally, if our insurance costs increase, there can be no assurance that we will be able to successfully offset the effect of such increases and our results of operations may be adversely affected.
Food safety and food-borne illness concerns in our restaurants or throughout the industry or supply chain may have an adverse effect on our financial conditionbusiness by reducing demand and results of operations.increasing costs.
Changes to estimates related toRegardless of the source or cause, any report of food-borne illnesses and other food safety issues, whether at one of our property, fixturesrestaurants or in the industry or supply chain generally, could have a negative impact on our traffic and equipmentsales and definite-lived intangible assets or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment charges on certain long-lived assets, which may adversely affect the reputation of our results of operations.
In accordance with accounting guidance as it relates to the impairment of long-lived assets, we make certain estimates and projections with regard to individual restaurant operations, as well as our overall performance, in connection with our impairment analyses for long-lived assets. When impairment triggers are deemed to exist for any location, the estimated undiscounted future cash flows are compared to its carrying value. If the carrying value exceeds the
undiscounted cash flows, an impairment charge equal to the difference between the carrying value and the sum of the discounted cash flows is recorded. The projections of future cash flows used in these analyses require the use of judgment and a number of estimates and projections of future operating results. If actual results differ from our estimates, additional charges for asset impairments may be required in the future. If impairment charges are significant, our results of operationsbrands. Food safety issues could be caused by suppliers or distributors and, as a result, be out of our control. Health concerns or outbreaks of disease in a food product could also reduce demand for particular menu offerings. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry generally and adversely affected.impact our sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
The possibilityfood service industry is affected by consumer preferences and perceptions, including the increasing prevalence of future misstatement exists due to inherent limitationsfood allergies. Changes in these preferences and perceptions may lessen the demand for our control systems,products, which could adversely affectwould reduce sales and harm our business.
WeFood service businesses are affected by changes in consumer tastes and demographic trends. For instance, if prevailing health or dietary preferences cause consumers to avoid steak and other products we offer in favor of foods that are perceived as more healthy, our business and operating results would be harmed. The increasing prevalence of food allergies and consumers with vegan and gluten-free diets, for example, may cause consumers to choose to dine out less frequently or choose other restaurants with different menu options.
Failure to maintain effective systems of internal control over financial reporting and disclosure controls and procedures could adversely affect the trading price of our common stock.
Effective internal control over financial reporting is necessary for us to provide accurate financial information. If we are unable to adequately maintain effective internal control over financial reporting, we may not be able to accurately report our financial results, which could cause investors to lose confidence in our reported financial information and negatively affect the trading price of our common stock. Furthermore, we cannot be certain that our internal control
over financial reporting and disclosure controls and procedures will prevent all possible error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of error or fraud, if any, in our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake, which could have an adverse impact on our business.
Our reported financial results may be adversely affected by changes in accounting principles applicable to us.
Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change, such as standards relating to leasing. In addition, the SEC has announced a multi-year plan that could ultimately lead to the use of International Financial Reporting Standards by U.S. issuers in their SEC filings. Any such change could have a significant effect on our reported financial results.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to fund our operations, which could prevent us from meeting our obligations.
We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to fund our operations. Our ability to obtain funds from our subsidiaries is limited by our debt agreements. Our inability to comply with these covenants and the deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us.
Risks Related to Our Indebtedness
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, 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.
We are highly leveraged. As of December 31, 2012,28, 2014, our total indebtedness was approximately $1.5 billion.$1.3 billion. As of December 31, 2012,28, 2014, we also had approximately $183.8$245.4 million in available unused borrowing capacity under our revolving credit facility, (after giving effect toincluding undrawn letters of credit of approximately $41.2 million).$29.6 million.
Our high degree of leverage could have important consequences, including:
making it more difficult for us to make payments on indebtedness;
increasing our vulnerability to general economic, industry and competitive conditions;
conditions and the various risks we face in our business;
increasing our cost of borrowing;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, dividend payments, share repurchases and future business opportunities;
exposing us to the risk of increased interest rates because certain of our borrowings under our senior secured credit facilities and commercial mortgage-backed securities loans are at variable rates of interest;
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
limiting our ability to obtain additional financing for working capital, capital expenditures, restaurant development, debt service requirements, acquisitions and general corporate or other purposes; and
limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may not be as highly leveraged.
We may incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities entered into in October 2012 (the “New“Credit Facilities”) and the commercial mortgage-backed securities loans entered into in March 2012 (the “2012 CMBS Loan”). If new indebtedness is added to our current debt levels, the related risks that we now face could increase.
Approximately $1.0 billionWe have $846.3 million of variable-rate debt outstanding under our NewCredit Facilities, and approximately $48.7$45.1 million of ourthe 2012 CMBS Loan bearbears interest based on a floating rate index. AnIn September 2014, we entered into variable-to-fixed interest rate swap agreements with eight counterparties to hedge a portion of the cash flows of our variable rate debt. The swap agreements have an aggregate notional amount of $400.0 million, a forward start date of June 30, 2015 and mature on May 16, 2019. While these agreements limit our exposure to higher interest rates, an increase in thesethe floating ratesrate could cause a material increase in our interest expense.expense due to the total amount of our outstanding variable rate indebtedness.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
We are a holding company and conduct our operations through our subsidiaries, certain of which have incurred their own indebtedness. Our subsidiaries’ debt agreements contain various covenants that limit our ability to obtain funds from our subsidiaries through dividends, loans or advances. In addition, certain of our debt agreements limit our and our subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, redeem or repurchase our capital stock, make certain acquisitions or investments, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, merge or consolidate with or into, another company. Our debt
agreements require us to satisfy certain financial tests and ratios. Our ability to satisfy such tests and ratios may be affected by events outside of our control.
If we breach the covenants under our debt agreements, the lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable and terminate all commitments to extend further credit. If we are unable to repay those amounts, the lenders under the NewCredit Facilities and the 2012 CMBS Loan could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under our NewCredit Facilities and the 2012 CMBS Loan. If the lenders under the NewCredit Facilities and the 2012 CMBS Loan accelerate the repayment of borrowings, we cannot be certain that we will have sufficient assets to repay them.
We may not be able to generate sufficient cash to service all of our indebtedness and operating lease obligations, and we may be forced to take other actions to satisfy our obligations under our indebtedness and operating lease obligations, which may not be successful. If we fail to meet these obligations, we would be in default under our debt agreements and the lenders could elect to declare all amounts outstanding under them to be immediately due and payable and terminate all commitments to extend further credit.
Our ability to make scheduled payments on or to refinance our debt obligations and to satisfy our operating lease obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. Our ability to refinance our indebtedness also depends on our financial condition, as well as credit market conditions, at the time. We cannot be certain that conditions will be favorable when our 2012 CMBS Loan matures in 2017 or when our Credit Facilities mature in 2019, or at any earlier time we may seek to refinance our debt. We cannot be certain that we will maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium,
if any, and interest on our indebtedness, or to pay our operating lease obligations. If our cash flow and capital resources are insufficient to fund our debt service obligations and operating lease obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations or take other actions to meet our debt service and other obligations. Our debt agreements restrict our ability to dispose of assets and how we may use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could otherwise realize from such dispositions and any such proceeds that are realized may not be adequate to meet any debt service obligations then due. The failure to meet our debt service obligations or the failure to remain in compliance with the financial covenants under our debt agreements would constitute an event of default under those agreements and the lenders could elect to declare all amounts outstanding under them to be immediately due and payable and terminate all commitments to extend further credit.
Risks Related to Our Common Stock
We are a “controlled company” within the meaning of Nasdaq Stock Market Rules (“Nasdaq”), and as a result, we qualify for, and rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
An investor group consisting of funds advised by our Sponsors and two of our Founders controls a majority of the voting power of our outstanding common stock. As a result, we qualify as a “controlled company” within the meaning of the corporate governance rules of Nasdaq. “Controlled companies” under those rules are companies of which more than 50% of the voting power is held by an individual, a group or another company. Each member of the investor group has filed a Statement of Beneficial Ownership on Schedule 13G with the SEC relating to its respective holdings and the group’s arrangements with respect to disposition of the shares. On this basis, we currently avail ourselves of the “controlled company” exception under the Nasdaq rules and elect not to comply with certain corporate governance requirements, including:
the requirement that a majority of our Board of Directors consist of independent Directors;
the requirement that we have a nominating and corporate governance committee that is composed entirely of independent Directors with a written charter addressing the committee’s purpose and responsibilities, or otherwise have Director nominees selected by vote of a majority of the independent directors;
the requirement that we have a compensation committee that is composed entirely of independent Directors with a written charter addressing the committee’s purpose and responsibilities; and
the requirement for an annual performance evaluation of the nominating and corporate governance and compensation committees.
We utilize these exemptions, as we do not currently have a majority of independent Directors and our compensation committee and nominating and corporate governance committee do not consist entirely of independent Directors. Accordingly, you do not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements.
The investor group, however, is not subject to any contractual obligation to retain its controlling interest. There can be no assurance as to the period of time during which such group will maintain their ownership of our common stock.
Our stock price is subject to volatility and, as a result, you may not be able to resell your shares at or above the price you paid for them.volatility.
Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. Since our initial public offering in August 2012 through February 28, 2013, the price of our common stock, as reported by Nasdaq, has ranged from a low of $11.57 on August 8, 2012 to a high of $18.99 on February 1, 2013. The stock market in general has beenis highly volatile. As a result, the market price of our common stock is similarly volatile. You may experience a decrease, which could be substantial, in the value of your stock, including decreases unrelated to our operating performance or prospects, and could lose part or all of your investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this filing and others such as:
some of which may beyond our control. These factors include actual or anticipated fluctuations in our quarterly or annual operating results, and the performancechanges in, or our ability to achieve, estimates of our competitors;
publication of research reportsoperating results by securities analysts, about us, our competitorsinvestors or our industry;
our failure or the failure of our competitors to meetmanagement, analysts’ projections or guidance that we or our competitors may give to the market;
additions and departures of key personnel;
sales, or anticipated sales, of large blocks ofrecommendations regarding our stock or of shares held by our Directors, executive officers, Sponsors and/competitors’ stock, actions or Founders;
strategic decisionsannouncements by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
the passagemaintenance and growth of the value of our brands, litigation, legislation or other regulatory developments affecting us or our industry;
speculation in the press or investment community, whether or not correct, involving us, our suppliers or our competitors;
changes in accounting principles;
litigation and governmental investigations;
industry, natural disasters, terrorist acts, acts of war or periods of widespread civil unrest;
a food borne illness outbreak;
natural disastersother calamities and other calamities; and
changes in general market and economic conditions.
As we operate in a single industry, we are especially vulnerable to these factors to the extent that they affect our industry or our products. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
There may be sales of a substantial amount of our common stock by our current stockholders, and these sales could cause the price of our common stock to fall.
Sales of substantial amounts of our common stock in the public market, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future.
AtAs of February 15, 2013, there were 121,439,523 shares18, 2015, the Bain Capital Entities hold 14.5% of our outstanding common stock issued and outstanding. Of these shares, the 18,393,690 shares sold in our initial public offering are eligible for immediate sale in the public market without restriction by persons other than our affiliates. Our existing stockholders were subjectstock. Pursuant to a lock-upregistration rights agreement restricting sales of our common stock fromto which we are party with the time ofBain Capital Entities and certain other stockholders, the offering until February 3, 2013. Many of these holders are subject to our insider trading policy and some can engage in transactions in our common stock only during designated trading windows, which will impact the timing of any sales byBain Capital Entities or such holders.
Approximately 78.7% of our issued and outstanding shares are held by investment funds associated with our Sponsors and two of our Founders as of February 15, 2013. Our Sponsors and Foundersother stockholders may require us to register theirfile one or more prospectus supplements to the registration statement on Form S-3 we have filed with the SEC for the resale of shares, for resale under federal securities laws. Registration of suchand any shares would allow the holders to immediately sell the shares into the public market and shares that are sold pursuant to any such registration statementprospectus supplements would become eligible for sale without restriction by persons other than our affiliates.
In addition,If we registered with the SEC the issuance of shares ofare unable to continue to pay dividends or repurchase our stock, your investment in our common stock pursuantmay decline in value.
We recently announced the initiation of a quarterly dividend program and stock repurchase program. The continuation of these programs will require the generation of sufficient cash flows. Any decisions to outstanding optionsdeclare and pay dividends and continue the stock repurchase program in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, borrowing capacity, contractual restrictions and other factors that our Board of Directors may deem relevant at the time.
Our ability to pay dividends is dependent on our ability to obtain funds from our subsidiaries and to have access to our revolving credit facility. Payment of dividends by OSI, our primary operating subsidiary, to Bloomin’ Brands is restricted under our 2007 Equity Incentive Plan (the “2007 Equity Plan”)Credit Facilities to dividends for the purpose of paying Bloomin’ Brands’ franchise and sharesincome taxes and ordinary course operating expenses; dividends for certain other limited purposes; and other dividends subject to an aggregate cap over the term of the agreement. Restricted dividend payments from OSI to Bloomin’ Brands can be made on an unlimited basis provided the total net leverage ratio does not exceed 2:50 to 1.00.
If we discontinue our dividend or stock repurchase program, or reduce the amount of the dividends we pay or stock that we repurchase, the price of our common stock that are reservedmay fall. As a result, you may not be able to resell your shares at or above the price you paid for issuance under our 2012 Incentive Award Plan (the “2012 Equity Plan”).them.
Provisions in our certificate of incorporation and bylaws, our 2012 CMBS Loan documents, our Credit Facilities and Delaware law may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.
Our certificate of incorporation and bylaws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our company or changes in our management, including, among other things:
our Board of Directors is classified into three classes of Directors with only one class subject to election each year;management.
restrictions on the ability of our stockholders to fill a vacancy on the Board of Directors;
our ability to issue preferred stock with terms that the Board of Directors may determine, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
the inability of our stockholders to call a special meeting of stockholders;
our Directors may only be removed from the Board of Directors for cause by the affirmative vote of the holders of at least 75% of the voting power of outstanding shares of our capital stock entitled to vote generally in the election of Directors;
the absence of cumulative voting in the election of Directors, which may limit the ability of minority stockholders to elect Directors; and
advance notice requirements for stockholder proposals and nominations, which may discourage or deter a potential acquirer from soliciting proxies to elect a particular slate of Directors or otherwise attempting to obtain control of us.
In addition, the mortgage loan agreement for the 2012 CMBS Loan requiresand our Credit Facilities require that the Bain Capital Entities, our Sponsors, our Foundersfounders and our management stockholders or other permitted holders either own no less than 51% of our common stock or if they do not, that certain other conditions are satisfied. satisfied, including that a new stockholder has not obtained ownership above certain thresholds. As of the date of this Report, no new stockholder has obtained ownership above those thresholds.
These provisions in our certificate of incorporation, and bylaws, and the 2012 CMBS Loan documents and Credit Facilities may discourage, delay or prevent a transaction involving a change in control of our company that is in the best interests of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
Section 203 of the Delaware General Corporation Law may affect the ability of an “interested stockholder” to engage in certain business combinations, including mergers, consolidations or acquisitions of additional shares, for a period of three years following the time that the stockholder becomes an “interested stockholder.” An “interested stockholder”
is defined to include persons owning directly or indirectly 15% or more of the outstanding voting stock of a corporation. We have elected in our certificate of incorporation not to be subject to Section 203 of the Delaware General Corporation Law. However, our certificate of incorporation contains provisions that have the same effect as Section 203, except that they provide that our Sponsorsthe Bain Capital Entities and their respective affiliates will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.
If securities analysts or industry analysts downgrade our stock, publish negative research or reports, or do not publish reports about our business, our stock price and trading volume could decline.
We expect that the trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our stock or our competitors’ stock, our stock price would likely decline. If one or more analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Our Sponsors and FoundersThe Bain Capital Entities have significant influence over us, including control overwith respect to decisions that require the approval of stockholders, which could limit your ability to influence the outcome of key transactions, including a change of control.
We are currently controlled by an investor group consistingAs of funds advised by our Sponsors and two of our Founders. At February 15, 2013, such group18, 2015, the Bain Capital Entities beneficially owned an aggregate of approximately 78.7%own 14.5% of our outstanding common stock. For asAs long as such group continues tothe Bain Capital Entities beneficially own sharesat least 3% of our outstanding common stock, representing more than 50%they will have the right to designate two nominees for election to our Board of the voting powerDirectors, with each nominee to serve in a separate class. The Bain Capital Entities are also entitled to have one of our common stock, it will be able to direct the election of all of the memberstheir nominees serve on each committee of our Board of Directors, other than the Audit Committee, subject to applicable law and couldstock exchange rules. As a result, for so long as the Bain Capital Entities beneficially own at least 3% of our outstanding common stock, they will continue to be able exercise a controllingsubstantial influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, the investor group will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will be able to prevent or approve a change in our control and could take other actions that might be favorable to the members of the group. Even if the investor group’s ownership falls below 50%, our Sponsors will continue to be able to strongly influence or effectively control our decisions.
Additionally, certain of our Directors are also officers or control persons of our Sponsors. Although these Directors owe a fiduciary duty to manage us in a manner beneficial to us and our stockholders, these individuals also owe fiduciary duties to these other entities and their stockholders, members and limited partners. Because our Sponsors have such interests in other companies and engage in other business activities, certain of our Directors may experience conflicts of interest in allocating their time and resources among our business and these other activities. Two of our Founders also serve as our Directors and, due to their interests in certain transactions with us and our affiliates, they may also experience such conflicts of interest. Furthermore, these individuals could make substantial profits as a result of investment opportunities allocated to entities other than us. As a result, these individuals could pursue transactions that may not be in our best interest, which could have a material adverse effect on our operations and your investment.
Because we have no plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including our New Facilities. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.affairs.
Our ability to raise capital in the future may be limited, which could make us unable to fund our capital requirements.
Our business and operations may consume resources faster than we anticipate. In the future, we may need to raise additional funds through the issuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may be unable to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to common stockholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing stockholders may experience dilution, and the new equity securities could have rights senior to those of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future securities offerings reducing the market price of our common stock and diluting their interest.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
During the year ended December 31, 2012, we added 37 new restaurant sites and closed nine others. As of December 31, 201228, 2014, we owned 20% of our restaurant sites and leased the remaining 80% of our restaurant sites from third parties. We had 1,4711,510 system-wide restaurants located across the following states, territories or countries:countries as of
December 28, 2014:
| | | Company-Owned | |
| U.S. | | U.S. |
| COMPANY-OWNED | | COMPANY-OWNED | | FRANCHISE |
| Alabama | | 22 | | Kansas | | 10 | | New Jersey | | 41 | | Utah | | 6 | 20 |
| | Louisiana | 21 |
| | Ohio | 48 |
| | Alabama | 1 |
| Arizona | | 31 | | Kentucky | | 17 | | New Mexico | | 5 | | Vermont | | 1 | 30 |
| | Maryland | 42 |
| | Oklahoma | 11 |
| | Alaska | 1 |
| Arkansas | | 11 | | Louisiana | | 21 | | New York | | 43 | | Virginia | | 60 | 11 |
| | Massachusetts | 20 |
| | Pennsylvania | 45 |
| | California | 63 |
| California | | 21 | | Maryland | | 41 | | North Carolina | | 64 | | West Virginia | | 8 | 22 |
| | Michigan | 37 |
| | Puerto Rico | 1 |
| | Florida | 2 |
| Colorado | | 28 | | Massachusetts | | 19 | | Ohio | | 48 | | Wisconsin | | 11 | 30 |
| | Minnesota | 9 |
| | Rhode Island | 4 |
| | Idaho | 6 |
| Connecticut | | 12 | | Michigan | | 35 | | Oklahoma | | 11 | | Wyoming | | 2 | 15 |
| | Mississippi | 2 |
| | South Carolina | 39 |
| | Mississippi | 7 |
| Delaware | | 2 | | Minnesota | | 9 | | Pennsylvania | | 43 | | | | | 3 |
| | Missouri | 16 |
| | South Dakota | 2 |
| | Montana | 2 |
| Florida | | 217 | | Mississippi | | 2 | | Puerto Rico | | 1 | | China (Mainland) | | 1 | 224 |
| | Montana | 1 |
| | Tennessee | 36 |
| | Ohio | 1 |
| Georgia | | 51 | | Missouri | | 16 | | Rhode Island | | 3 | | Hong Kong | | 8 | 49 |
| | Nebraska | 7 |
| | Texas | 73 |
| | Oregon | 7 |
| Hawaii | | 7 | | Montana | | 1 | | South Carolina | | 37 | | South Korea | | 106 | 6 |
| | Nevada | 17 |
| | Utah | 6 |
| | Tennessee | 3 |
| Illinois | | 27 | | Nebraska | | 7 | | South Dakota | | 2 | | 27 |
| | New Hampshire | 2 |
| | Vermont | 1 |
| | Washington | 18 |
| Indiana | | 22 | | Nevada | | 16 | | Tennessee | | 37 | | | |
| 23 |
| | New Jersey | 44 |
| | Virginia | 62 |
| |
|
| Iowa | | 8 | | New Hampshire | | 2 | | Texas | | 75 | | | | | 7 |
| | New Mexico | 6 |
| | West Virginia | 8 |
| | |
| Franchise and Development Joint Venture | |
| Alabama | | 1 | | Oregon | | 8 | | Dominican Republic | | 1 | | Singapore | | 1 | |
| Alaska | | 1 | | South Carolina | | 1 | | Egypt | | 1 | | Taiwan | | 5 | |
| California | | 63 | | Tennessee | | 3 | | Guam | | 1 | | Thailand | | 1 | |
| Florida | | 3 | | Washington | | 18 | | Indonesia | | 3 | | United Arab Emirates | | 2 | |
| Idaho | | 6 | | | | | | Japan | | 10 | | |
| Mississippi | | 6 | | Australia | | 6 | | Malaysia | | 1 | | |
| Montana | | 2 | | Brazil | | 41 | | Mexico | | 5 | | | |
| |
| North Carolina | | 1 | | Canada | | 4 | | Philippines | | 3 | | | | | |
| Ohio | | 1 | | Costa Rica | | 1 | | Saudia Arabia | | 3 | | | | | |
| Kansas | | 8 |
| | New York | 46 |
| | Wisconsin | 12 |
| | |
| Kentucky | | 17 |
| | North Carolina | 65 |
| | Wyoming | 2 |
| | |
| Total U.S. company-owned | | Total U.S. company-owned | 1,177 |
| | Total U.S. franchise | 111 |
|
| INTERNATIONAL | | INTERNATIONAL |
| COMPANY-OWNED | | COMPANY-OWNED | | FRANCHISE |
| Brazil (1) | | 63 |
| | Australia | 7 |
| | Guam | 1 |
| | Qatar | 1 |
|
| China (Mainland) | | 3 |
| | Bahamas | 1 |
| | Indonesia | 3 |
| | Saudia Arabia | 4 |
|
| Hong Kong | | 8 |
| | Canada | 3 |
| | Japan | 10 |
| | Singapore | 2 |
|
| South Korea (2) | | 93 |
| | Costa Rica | 1 |
| | Malaysia | 2 |
| | Taiwan | 5 |
|
| | | | | Dominican Republic | 2 |
| | Mexico | 6 |
| | Thailand | 1 |
|
| | | | | Ecuador | 1 |
| | Philippines | 4 |
| | United Arab Emirates | 1 |
|
| Total International company-owned | | 167 |
| | Total International franchise | 55 |
|
____________________
| |
| (1) | The restaurant count for Brazil is reported as of November 30, 2014 and excludes one restaurant opened in December 2014. |
| |
| (2) | The restaurant count as of December 28, 2014 includes 21 locations, primarily in South Korea, scheduled to close during 2015. |
AsFollowing is a summary of the location and square footage for our corporate offices, all of which are leased, as of December 31, 201228, 2014, approximately 20% of our restaurant sites were owned by our subsidiaries. The remaining 80% of our restaurant sites were leased by our subsidiaries from third parties.:
|
| | | | | | | |
| LOCATION | | USE | | SQUARE FEET | | LEASE EXPIRATION |
| Tampa, Florida | | Corporate Headquarters | | 168,000 |
| | 1/31/2025 |
| Newport Beach, California | | Fleming’s Operations Center | | 3,941 |
| | 2/28/2017 |
| Seoul, Korea | | Korea Operations Center | | 6,174 |
| | 6/30/2017 |
| São Paulo, Brazil | | Brazil Operations Center | | 11,722 |
| | 6/30/2019 |
In the future, we intend to either convert existing third-party leased retail space or construct new restaurants through leasesWe also have a number of other smaller office locations regionally in the majority of circumstances. Initial lease expirations for our other leased properties typically range from five to ten years, with the majority of the leases providing for an option to renew for two or more additional terms. All of our leases provide for a minimum annual rent,United States, China (mainland) and many leases call for additional rent based on sales volume at the particular location over specified minimum levels. Generally, the leases are net leases that require us to pay our share of the costs of insurance, taxes and common area operating costs.Hong Kong.
As of December 31, 2012, we leased approximately 168,000 square feet of office space in Tampa, Florida for our corporate headquarters and research and development facilities under leases expiring on January 31, 2025.
Item 3. Legal Proceedings
We are subject toFor a description of our legal proceedings, claimssee Note 19 - Commitments and liabilities, such as liquor liability, sexual harassment and slip and fall cases, which arise inContingencies, of the ordinary course of business and are generally covered by insurance if they exceed specified retention or deductible amounts. In the opinion of management, the amount of ultimate liability with respectNotes to those actions will not have a material adverse impact on our financial position or results of operations and cash flows. We accrue for loss contingencies that are probable and reasonably estimable. Legal costs are reported in General and administrative expense in the Consolidated Financial Statements of Operations and Comprehensive Income. We generally do not accrue for legal costs expected to be incurred with a loss contingency until those services are provided.this Report.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
MARKET INFORMATION
Our common stock has beenis listed on the Nasdaq Global Select Market under the symbol “BLMN” since August 8, 2012. Prior to that time, there was no public market for our common stock.. The following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on Nasdaq:
|
| | | | | | | |
| | 2012 |
| | HIGH | | LOW |
| Third quarter (1) | $ | 16.53 |
| | $ | 11.57 |
|
| Fourth quarter | $ | 16.98 |
| | $ | 13.01 |
|
|
| | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| | HIGH | | LOW | | HIGH | | LOW |
| First Quarter | $ | 26.45 |
| | $ | 21.59 |
| | $ | 18.99 |
| | $ | 15.86 |
|
| Second Quarter | 24.96 |
| | 20.16 |
| | 26.08 |
| | 17.41 |
|
| Third Quarter | 22.81 |
| | 15.01 |
| | 26.71 |
| | 21.73 |
|
| Fourth Quarter | 24.05 |
| | 17.45 |
| | 27.27 |
| | 20.91 |
|
____________________
| |
(1) | Represents the period from August 8, 2012, the date of our initial public offering, through September 30, 2012, the end of our third quarter. |
HOLDERS
As of February 15, 2013,18, 2015, there were 58150 holders of record of our common stock. An investor group consisting of funds advised by our Sponsors and two of our Founders beneficially own a controlling interest in our Company.
DIVIDENDS
The terms of our debt agreements place restrictions on the amount of dividends we can pay. We did not declare or pay any dividends on our common stock during 20112014 or 2012. Our Board2013. For a discussion of Directors does not intend to pay regular dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basisprogram and may, subject to compliance with the covenants contained in the New Facilitiesrestrictions, see Part II, Item 7 “Management’s Discussion and other considerations, determine to pay dividends in the future.Analysis of Financial Condition and Results of Operations - DIVIDENDS AND SHARE REPURCHASES.”
Our ability to pay dividends is dependent on our ability to obtain funds from our subsidiaries. Payment of dividends by OSI to Bloomin’ Brands is restricted under the New Facilities to dividends for the purpose of paying Bloomin’ Brands’ franchise and income taxes and ordinary course operating expenses; dividends for certain other limited purposes; and other dividends subject to an aggregate cap over the term of the agreement.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
During the year ended December 31, 2012, securities were authorized for issuance under both the 2007 Equity Plan and the 2012 Equity Plan. Upon completion of our initial public offering, the 2012 Equity Plan was adopted, and no further awards were made under the 2007 Equity Plan or will be made in the future. The following table presents the securities authorized for issuance under our equity compensation plans atas of December 31, 201228, 2014 (in thousands, except exercise price):
| | | | | (a) | | (b) | | (c) | |
| (in thousands, except exercise price) | | | (a) | | (b) | | (c) |
| PLAN CATEGORY | | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (1) | | NUMBER OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | | WEIGHTED-AVERAGE EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS | | NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES REFLECTED IN COLUMN (a)) (1) |
| Equity compensation plans approved by security holders | | 12,379 |
| | $ | 7.99 |
| | 2,730 |
| | 9,777 |
| | $ | 11.59 |
| | 5,253 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| |
| Total | | 12,379 |
| | $ | 7.99 |
| | 2,730 |
| |
____________________
| |
| (1) | The shares remaining available for issuance may be issued in the form of restricted stock, restricted stock units or other stock awards.awards under the 2012 Incentive Plan. |
As ofOn the first business day of each fiscal year, commencing on January 1, 2013, the aggregate number of shares that may be issued pursuant to theour 2012 EquityIncentive Plan will automatically increaseincreases by a number equal to 2%two percent of the total number of shares then issued and outstanding.
STOCK PERFORMANCE GRAPH
The following graph depicts the total return to stockholders from August 8, 2012, the date our common stock became listed on the Nasdaq Global Select Market, through December 31, 201228, 2014, relative to the performance of the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Consumer Discretionary Sector, a peer group. The graph assumes an investment of $100 in our common stock and each index on August 8, 2012 and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.
| | | | | AUGUST 8, 2012 | | DECEMBER 31, 2012 | | AUGUST 8, 2012 | | DECEMBER 31, 2012 | | DECEMBER 31, 2013 | | DECEMBER 28, 2014 |
| Bloomin’ Brands, Inc. (BLMN) | | $ | 100.00 |
| | $ | 126.03 |
| | $ | 100.00 |
| | $ | 126.03 |
| | $ | 193.47 |
| | $ | 191.38 |
|
| Standard & Poor’s 500 | | $ | 100.00 |
| | $ | 102.72 |
| | 100.00 |
| | 102.72 |
| | 135.96 |
| | 156.76 |
|
| Standard & Poor’s Consumer Discretionary | | $ | 100.00 |
| | $ | 107.53 |
| | 100.00 |
| | 107.53 |
| | 153.58 |
| | 168.55 |
|
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES28
Equity Securities
During the period beginning January 1, 2012 through August 7, 2012, we granted to certain eligible participants 35,000 options to purchase our common stock with an exercise price of $10.03, 20,000 options to purchase our common stock with an exercise price of $12.02, and 600,000 options to purchase our common stock with an exercise price of $14.58 under our 2007 Equity Plan. In addition, we granted to certain eligible participants 260,859 shares of restricted stock under our 2007 Equity Plan during this period. The options and shares of restricted stock were issued without registration in reliance on the exemption afforded by Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering, or Rule 701 promulgated under the Securities Act, as a transaction pursuant to a compensatory benefit plan.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.The following table provides information regarding our purchases of common stock during the thirteen weeks ended December 28, 2014:
|
| | | | | | | | | | | | | | |
| MONTH | | TOTAL NUMBER OF SHARES PURCHASED (1) | | AVERAGE PRICE PAID PER SHARE | | TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS | | APPROXIMATE DOLLAR VALUE OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS (2) |
| September 29, 2014 through October 26, 2014 | | — |
| | $ | — |
| | * | | * |
| October 27, 2014 through November 23, 2014 | | — |
| | $ | — |
| | * | | * |
| November 24, 2014 through December 28, 2014 | | 2,652 |
| | $ | 23.02 |
| | — |
| | $ | 100,000,000 |
|
| Total | | 2,652 |
| | | | — |
| | $ | 100,000,000 |
|
____________________
| |
| * | Not applicable as we did not have a share repurchase plan in effect until December 2014. |
| |
| (1) | Common stock purchased during the thirteen weeks ended December 28, 2014 represented shares which were withheld for tax payments due upon the vesting of employee restricted stock awards. |
| |
| (2) | The Board of Directors authorized the repurchase of $100.0 million of our outstanding common stock as announced publicly in our press release issued on December 16, 2014. As of December 28, 2014, no shares had been repurchased under the program. The authorization expires on June 12, 2016. |
Item 6. Selected Financial Data
|
| | | | | | | | | | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands, except per share data) | 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
| Operating Results: | | | | | | | | | |
| Revenues | | | | | | | | | |
| Restaurant sales | $ | 4,415,783 |
| | $ | 4,089,128 |
| | $ | 3,946,116 |
| | $ | 3,803,252 |
| | $ | 3,594,681 |
|
| Other revenues | 26,928 |
| | 40,102 |
| | 41,679 |
| | 38,012 |
| | 33,606 |
|
| Total revenues (1) | 4,442,711 |
| | 4,129,230 |
| | 3,987,795 |
| | 3,841,264 |
| | 3,628,287 |
|
| Income from operations (2) | 191,964 |
| | 225,357 |
| | 181,137 |
| | 213,452 |
| | 168,911 |
|
| Net income including noncontrolling interests (2) (3) | 95,926 |
| | 214,568 |
| | 61,304 |
| | 109,179 |
| | 59,176 |
|
| Net income attributable to Bloomin’ Brands (2) (3) | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
|
| Basic earnings per share | $ | 0.73 |
| | $ | 1.69 |
| | $ | 0.45 |
| | $ | 0.94 |
| | $ | 0.50 |
|
| Diluted earnings per share | $ | 0.71 |
| | $ | 1.63 |
| | $ | 0.44 |
| | $ | 0.94 |
| | $ | 0.50 |
|
| Balance Sheet Data: | | | | | | | | | |
| Total assets | $ | 3,344,286 |
| | $ | 3,278,476 |
| | $ | 3,016,553 |
| | $ | 3,353,936 |
| | $ | 3,243,411 |
|
| Total debt, net | 1,315,843 |
| | 1,419,143 |
| | 1,494,440 |
| | 2,109,290 |
| | 2,171,524 |
|
| Total stockholders’ equity (deficit) (4) | 556,449 |
| | 482,709 |
| | 220,205 |
| | 40,297 |
| | (55,911 | ) |
| Cash Flow Data: | | | | | | | | | |
| Capital expenditures | $ | 237,868 |
| | $ | 237,214 |
| | $ | 178,720 |
| | $ | 120,906 |
| | $ | 60,476 |
|
____________________
Note: This selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto, included in Item 8 of this report,Report and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 of this report and Risk Factors, included in Item 1A of this report. The following table sets forth our selected consolidated financial data as of the dates and for the periods indicated (in thousands):Report.
|
| | | | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | | | | | | | | | | (unaudited) |
| Statements of Operations and Comprehensive Income (Loss) Data: | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Restaurant sales | | $ | 3,946,116 |
| | $ | 3,803,252 |
| | $ | 3,594,681 |
| | $ | 3,573,760 |
| | $ | 3,937,894 |
|
| Other revenues | | 41,679 |
| | 38,012 |
| | 33,606 |
| | 27,896 |
| | 23,262 |
|
| Total revenues | | 3,987,795 |
| | 3,841,264 |
| | 3,628,287 |
| | 3,601,656 |
| | 3,961,156 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales | | 1,281,002 |
| | 1,226,098 |
| | 1,152,028 |
| | 1,184,074 |
| | 1,389,365 |
|
| Labor and other related | | 1,117,624 |
| | 1,094,117 |
| | 1,034,393 |
| | 1,024,063 |
| | 1,094,907 |
|
| Other restaurant operating | | 918,522 |
| | 890,004 |
| | 864,183 |
| | 849,696 |
| | 938,374 |
|
| Depreciation and amortization | | 155,482 |
| | 153,689 |
| | 156,267 |
| | 186,074 |
| | 205,492 |
|
| General and administrative (1) (2) | | 326,473 |
| | 291,124 |
| | 252,793 |
| | 252,298 |
| | 264,021 |
|
| (Recovery) allowance of note receivable from affiliated entity (3) | | — |
| | (33,150 | ) | | — |
| | — |
| | 33,150 |
|
| Loss on contingent debt guarantee | | — |
| | — |
| | — |
| | 24,500 |
| | — |
|
| Goodwill impairment | | — |
| | — |
| | — |
| | 58,149 |
| | 726,486 |
|
| Provision for impaired assets and restaurant closings (4) | | 13,005 |
| | 14,039 |
| | 5,204 |
| | 134,285 |
| | 117,699 |
|
| Income from operations of unconsolidated affiliates | | (5,450 | ) | | (8,109 | ) | | (5,492 | ) | | (2,196 | ) | | (2,343 | ) |
| Total costs and expenses | | 3,806,658 |
| | 3,627,812 |
| | 3,459,376 |
| | 3,710,943 |
| | 4,767,151 |
|
| Income (loss) from operations | | 181,137 |
| | 213,452 |
| | 168,911 |
| | (109,287 | ) | | (805,995 | ) |
| (Loss) gain on extinguishment and modification of debt (5) | | (20,957 | ) | | — |
| | — |
| | 158,061 |
| | 48,409 |
|
| Other (expense) income, net | | (128 | ) | | 830 |
| | 2,993 |
| | (199 | ) | | (11,122 | ) |
| Interest expense, net (5) | | (86,642 | ) | | (83,387 | ) | | (91,428 | ) | | (115,880 | ) | | (197,041 | ) |
| Income (loss) before provision (benefit) for income taxes | | 73,410 |
| | 130,895 |
| | 80,476 |
| | (67,305 | ) | | (965,749 | ) |
| Provision (benefit) for income taxes | | 12,106 |
| | 21,716 |
| | 21,300 |
| | (2,462 | ) | | (99,416 | ) |
| Net income (loss) | | 61,304 |
| | 109,179 |
| | 59,176 |
| | (64,843 | ) | | (866,333 | ) |
| Less: net income (loss) attributable to noncontrolling interests | | 11,333 |
| | 9,174 |
| | 6,208 |
| | (380 | ) | | (3,041 | ) |
| Net income (loss) attributable to Bloomin’ Brands, Inc. | | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
| | $ | (64,463 | ) | | $ | (863,292 | ) |
| | | | | | | | | | | |
| Net income (loss) | | $ | 61,304 |
| | $ | 109,179 |
| | $ | 59,176 |
| | $ | (64,843 | ) | | $ | (866,333 | ) |
| Other comprehensive income (loss): | | | | | | | | | | |
| Foreign currency translation adjustment | | 7,543 |
| | (2,711 | ) | | 4,556 |
| | 10,273 |
| | (33,380 | ) |
| Comprehensive income (loss) | | 68,847 |
| | 106,468 |
| | 63,732 |
| | (54,570 | ) | | (899,713 | ) |
| Less: comprehensive income (loss) attributable to noncontrolling interests | | 11,333 |
| | 9,174 |
| | 6,208 |
| | (380 | ) | | (3,041 | ) |
| Comprehensive income (loss) attributable to Bloomin’ Brands, Inc. | | $ | 57,514 |
| | $ | 97,294 |
| | $ | 57,524 |
| | $ | (54,190 | ) | | $ | (896,672 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED DECEMBER 31, |
| (in thousands, except per share amounts) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | | | | | | | | | | (unaudited) |
| Basic net income (loss) attributable to Bloomin’ Brands, Inc. per share | | $ | 0.45 |
| | $ | 0.94 |
| | $ | 0.50 |
| | $ | (0.62 | ) | | $ | (8.43 | ) |
| Diluted net income (loss) attributable to Bloomin’ Brands, Inc. per share | | $ | 0.44 |
| | $ | 0.94 |
| | $ | 0.50 |
| | $ | (0.62 | ) | | $ | (8.43 | ) |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | | 111,999 |
| | 106,224 |
| | 105,968 |
| | 104,442 |
| | 102,383 |
|
| Diluted | | 114,821 |
| | 106,689 |
| | 105,968 |
| | 104,442 |
| | 102,383 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | DECEMBER 31, |
| (in thousands) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 |
| | | | | | | | | (unaudited) | | (unaudited) |
| Balance Sheet Data: | | | | | | | | | | |
| Cash and cash equivalents (6) | | $ | 261,690 |
| | $ | 482,084 |
| | $ | 365,536 |
| | $ | 330,957 |
| | $ | 311,118 |
|
| Net working capital (deficit) (5) (7) | | (203,566 | ) | | (248,145 | ) | | (120,135 | ) | | (187,648 | ) | | (171,095 | ) |
| Total assets | | 3,016,553 |
| | 3,353,936 |
| | 3,243,411 |
| | 3,340,708 |
| | 3,695,696 |
|
| Total debt, net (5) | | 1,494,440 |
| | 2,109,290 |
| | 2,171,524 |
| | 2,302,233 |
| | 2,562,889 |
|
| Total stockholders’ equity (deficit) (8) | | 220,205 |
| | 40,297 |
| | (55,911 | ) | | (116,625 | ) | | (66,814 | ) |
____________________
| |
| (1) | Includes management fees and out-of-pocket and other reimbursable expenses paidTotal revenues in fiscal 2014 include $46.0 million of less restaurant sales due to a management company owned bychange in our Sponsors and Founders of $5.8 million, $9.4 million, $11.6 million, $10.7 million and $9.9 million for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively, under a management agreement that terminated upon the completion of our initial public offering. In connection with the termination, we paid an $8.0 million termination fee to the management company in the third quarter of 2012.
fiscal year end. |
| |
| (2) | The expenseFiscal 2014 results include $9.2 million of less income from operations due to a change in our fiscal year end, $26.8 million of asset impairments and restaurant closing costs related to our International and Domestic Restaurant Closure Initiatives, $24.0 million of asset impairments related to our Roy’s concept and corporate airplanes and $9.0 million of severance related to our organizational realignment. Fiscal year 2013 results include $18.7 million of asset impairments due to our Domestic Restaurant Closure Initiative. Fiscal year 2012 includes approximately $34.1 million of certain executive compensation costs and non-cash stock compensation charges recorded uponincurred in connection with the completion of our initial public offeringIPO and approximately $7.4 million of additional legal and other professional fees, primarily from the amendment and restatement ofrelated to a lease amendment between OSI and PRP. Fiscal 2012, 2011 and 2010 results include management fees and other reimbursable expenses of $13.8 million, $9.4 million and $11.6 million, respectively, related to a management agreement with our sponsors and founders, which terminated at the time of our IPO. |
| |
| (3) | In NovemberFiscal 2014, 2013 and 2012 include $11.1 million, $14.6 million and $21.0 million, respectively, of loss on extinguishment and modification for: (i) the refinancing in 2014, the repricing in 2013 and the refinancing in 2012 of our Senior Secured Credit Facility, (ii) the retirement of OSI’s senior notes in 2012 and (iii) the refinancing of the CMBS loan in 2012. Fiscal 2013 includes a $36.6 million gain on remeasurement of a previously held equity investment related to our Brazil acquisition. Fiscal 2013 includes a $52.0 million income tax benefit for a U.S. valuation allowance release. Fiscal 2011 we receivedincludes a settlement payment from T-Bird,$33.2 million gain related to the recovery of a limited liability company affiliated with our California franchisees of Outback Steakhouse restaurants, in connection with a settlement agreement that satisfied all outstanding litigation with T-Bird. This litigation began in early 2009 and therefore, we had recorded an allowance for the note receivable for the year ended December 31, 2008.from an affiliated entity. |
| |
| (4) | During 2009, our Provision for impaired assets and restaurant closings primarily included: (i) $46.0 million of impairment charges to reduce the carrying value of the assets of Cheeseburger in Paradise to their estimated fair market value due to our sale of the concept in the third quarter of 2009, (ii) $47.6 million of impairment charges and restaurant closing expense for certain of our other restaurants and (iii) $36.0 million of impairment charges for the domestic Outback Steakhouse and Carrabba’s Italian Grill trade names. During 2008, our Provision for impaired assets and restaurant closings primarily included: (i) $49.0 million of impairment charges for the domestic and international Outback Steakhouse and Carrabba’s Italian Grill trade names, (ii) $3.5 million of impairment charges for the Blue Coral Seafood and Spirits trademark and (iii) $63.9 million of impairment charges and restaurant closing expense for certain of our restaurants. |
| |
(5) | During the fourth quarter of 2012, OSI completed a refinancing of its outstanding senior secured credit facilities from 2007 (the “2007 Credit Facilities”) and entered into a credit agreement with a syndicate of institutional lenders and financial institutions. The New Facilities provide for senior secured financing of up to $1.225 billion, consisting of a $1.0 billion term loan B and a $225.0 million revolving credit facility, including letter of credit and swing-line loan sub-facilities. The term loan B was issued with an original issue discount of of $10.0 million. We recorded a $9.1 million loss related to the extinguishment and modification of the 2007 Credit Facilities during the fourth quarter of 2012. During the third quarter of 2012, OSI paid an aggregate of $259.8 million to retire its senior notes due 2015, which included $248.1 million in aggregate outstanding principal, $6.5 million of prepayment premium and early tender incentive fees and $5.2 million of accrued interest. The senior notes were satisfied and discharged on August 13, 2012. As a result of these transactions, we recorded a loss from the extinguishment of debt of $9.0 million in the third quarter of 2012. In March 2012, New Private Restaurant Properties, LLC and two of the Company’s other indirect wholly-owned subsidiaries (collectively, “New PRP”) entered into 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 our properties, and two mezzanine loans totaling $175.2 million. The proceeds from the 2012 CMBS Loan were used to repay PRP’s existing commercial mortgage-backed securities loan (the “CMBS Loan”). As a result of refinancing the CMBS Loan, 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, we recorded a $2.9 million loss on extinguishment of debt. In March 2009 and November 2008, we repurchased $240.1 million and $61.8 million, respectively, of OSI’s outstanding senior notes for $73.0 million and $11.7 million, respectively. These repurchases resulted in gains on extinguishment of debt, after the pro rata reduction of unamortized deferred financing fees and other related costs, of $158.1 million in 2009 and $48.4 million in 2008.
|
| |
(6) | Excludes restricted cash. |
| |
(7) | We have, and in the future may continue to have, negative working capital balances (as is common for many restaurant companies). We operate successfully with negative working capital because cash collected on restaurant sales is typically received before payment is due on our current liabilities, and our inventory turnover rates require relatively low investment in inventories. Additionally, ongoing cash flows from restaurant operations and gift card sales are used to service debt obligations and for capital expenditures. |
| |
(8) | On August 13, 2012, we completed an initial public offeringIPO in which (i) the Companywe issued and sold an aggregate of 14,196,845 shares of common stock (including 1,196,845 shares sold pursuant to an underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $156.2 million and (ii) certain of our stockholders sold 4,196,845 shares of our common stock (including 1,196,845 shares pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $46.2 million.share. We received net proceeds in the offering of approximately $142.2 million after deducting underwriting discounts and commissions of approximately $9.4 million on our sale of shares and $4.6 million ofother offering related expenses payable by us. We did not receive any proceeds from the sale of shares of common stock by the selling stockholders. All of the net proceeds, together with cash on hand, were applied to the retirement of OSI’s outstanding senior notes.expenses. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7. 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 consolidated financial statements and the related notes. Unless the context otherwise indicates, as used in this report,Report, the term the “Company,” “we,” “us,” “our” and other similar terms mean Bloomin’ Brands, Inc. and its subsidiaries.
Overview
We are one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. As of December 31, 2012,28, 2014, we owned and operated 1,2681,344 restaurants and hadfranchised 203166 restaurants operating under a franchise or joint venture arrangement across 48 states, Puerto Rico, Guam and 1921 countries. We have fivefour founder-inspired core 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, highly 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.Bar.
The casual dining 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, labor costs 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. Restaurant companies tend to be focused on increasing market share, comparable restaurant sales growth and new unit growth. Competitive pressure for market share, commodity 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 pastcosts. As a certain number of restaurants or number of employees. The combination of these factors underscores our initiative to driveresult, we focus on driving 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 restaurant 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.with strong unit level economics.
2014 Business and Financial Highlights
Our 2014 financial results include:
An increase in total revenues of 7.6% to $4.4 billion in 2014 as compared to 2013, driven primarily by restaurants in Brazil that were acquired November 1, 2013 and an increase in sales from 100 restaurants not included in our comparable restaurant sales base.
An increase in system-wide sales of 2.4% in 2014 as compared to 2013. In 2010,addition, we launched a new strategic plangrew blended domestic comparable restaurant sales by 2.0% in 2014.
Income from operations of $192.0 million in 2014 compared to $225.4 million in 2013, which was primarily due to: (i) impairments and operating model, added experienced executivesrestaurant closing costs related to our management teamInternational and adapted practices from the consumer productsDomestic Restaurant Closure Initiatives, (ii) asset impairments related to Roy’s and retail industries to complementcorporate aircraft, (iii) lower average unit volumes at our restaurant acumenSouth Korea restaurants, (iv) higher General and enhance our brand management, analyticsadministrative costs, and innovation. This new model keeps the customer(v) higher Depreciation and amortization as a percentage of revenue. These decreases were partially offset by an increase in operating margins at the centerrestaurant level.
Productivity and cost management initiatives provided savings of $65.4 million in 2014; and
During fiscal year 2014, we paid down $102.3 million 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 continue to be 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.debt.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Following is a summary of significant actions we have taken during the year and other factors that impacted our operating results and liquidity in 2014:
Dividend and Share Repurchase Programs - In 2011December 2014, our Board of Directors adopted a dividend policy under which it intends to declare quarterly cash dividends on shares of our common stock. On February 12, 2015, the Board of Directors declared our first quarterly cash dividend of $0.06 per share.
Our Board of Directors also approved a share repurchase program under which we are authorized to repurchase up to $100.0 million of our outstanding common stock. As of December 28, 2014, no shares had been repurchased under the program. The authorization will expire on June 12, 2016.
Refinancing - We completed a refinancing of our senior secured credit facilities and 2012, we continuedentered into the Amended Credit Agreement on May 16, 2014. The Amended Credit Agreement provides for senior secured financing of up to balance near-term growth in market share$1.125 billion, consisting of a new $300.0 million Term loan A, a $225.0 million Term loan B and a $600.0 million revolving credit facility, including letter of credit and swing-line loan sub-facilities. The Term loan A and revolving credit facility mature May 16, 2019, and the Term loan B matures on October 26, 2019. The Term loan A was issued with investmentsa discount of $2.9 million. At closing, $400.0 million was drawn under the revolving credit facility. The proceeds of the Term loan A and the loans made at closing under the revolving credit facility were used to achieve sustainable growth. Aspay down a portion of the Term loan B under the Credit Agreement. Our total indebtedness remained unchanged as a result of continued improvements in infrastructure and organizational effectiveness, we grew average restaurant volumes and comparable restaurant sales at each of our existing domestic Company-owned restaurants for our core brands in 2012. In addition, we improved our operating margins at the restaurant level by 6.1% in 2012 as compared to 2011. Operating margins at the restaurant level are calculated as restaurant sales after deduction of the main restaurant-level operating costs (comprised of Cost of sales, Labor and other related and Other restaurant operating expenses). Across our restaurant system, we opened 37 restaurants (22 were domestic and 15 international) and we increased system-wide sales by 3.8% in 2012.refinancing.
Interest Rate Swaps - On September 9, 2014, we entered into variable-to-fixed interest rate swap agreements with eight counterparties to hedge a portion of the cash flows of our variable rate debt. The swap agreements have an aggregate notional amount of $400.0 million, a forward start date of June 30, 2015, and a maturity date of May 16, 2019. Under the terms of the swap agreements, we will pay a weighted-average fixed rate of 2.02% on the $400.0 million notional amount and receive payments from the counterparty based on the 30-day LIBOR rate.
Restaurant Closure Initiatives - We decided to close 36 underperforming international locations, primarily in South Korea (the “International Restaurant Closure Initiative”). We believe thatexpect to substantially complete these international restaurant closings during the first quarter of 2015. In connection with the International Restaurant Closure Initiative, we incurred pre-tax asset impairments and restaurant closing costs of $21.9 million during fiscal year 2014.
In the fourth quarter of 2013, we completed an assessment of our domestic restaurant base and decided to close 22 underperforming domestic locations (the “Domestic Restaurant Closure Initiative”). Aggregate restaurant closing costs of $4.9 million were incurred during fiscal year 2014 in connection with the Domestic Restaurant Closure Initiative.
Roy’s - In September 2014, we reclassified the assets and liabilities of Roy’s to held for sale. In connection with the decision to sell Roy’s, we recorded pre-tax impairment charges of $13.4 million for Assets held for sale for fiscal year 2014. In January 2015, we sold our Roy’s concept.
Carrabba’s Royalty Agreement - To facilitate development opportunities outside the U.S., we amended our royalty agreement with the founders of Carrabba’s effective June 1, 2014. We plan to establish our Carrabba’s Italian Grill brand in Brazil, known as Abbraccio, with the first opening expected in 2015.
Macroeconomic Conditions - The combination of macro-economicmacroeconomic and other factors have put considerable pressure on sales in the casual dining industry thus far in 2013both domestically and as a result, we believe the first quarter of 2013 will reflect a slowdown in our comparable restaurant sales growth. For example,South Korea market.
Domestically, the ongoing impacts of the housing crisis, high unemployment, the so-called “sequester” and related governmental spending and budget matters, gasoline prices, reduced disposable consumer income, unemployment or underemployment, access to credit, other national, regional and local regulatory and economic conditions and consumer confidence have had a negative effect on discretionary consumer spending.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In our South Korea market, higher levels of household debt have impacted discretionary consumer spending, particularly in the casual dining environment. As a result of macro-economic conditions, an increasingly competitive market and other factors, we decided to close 36 underperforming international locations, primarily in South Korea. We anticipate the restaurant closings in South Korea will promote a more efficient cost structure and allow us to maintain current levels of profitability in a continued declining market. As a result of these actions, we believe that we have significantly reduced the operational risk and financial impact related to our South Korea operations.
Should the macro-economic and other conditions persist domestically and in our South Korea market, we will continue to face increased pressure with respect to our pricing, traffic levels and commodity costs. We believe that in this environment, we will need to maintain our focus on value and innovation as well as refreshing our restaurant base to continue to drive sales.
Growth Strategies
In 2015, our key growth strategies include:
Grow Comparable Restaurant Sales. We plan to continue to remodel our restaurants, use limited-time offers and multimedia marketing campaigns to drive traffic, selectively expand lunch and introduce innovative menu items that match evolving consumer preferences.
Pursue New Domestic Development Opportunities with Strong Unit Level Economics. We believe that a substantial development opportunity remains for our concepts in the U.S. Our top domestic development priority is Bonefish Grill unit growth. We expect to open between 40 and 50 system-wide locations in 2015, with 40% to 50% expected to be domestic restaurants.
Pursue Strategic International Development in Selected Markets. We continue to focus on existing geographic regions in Latin America and Asia, with strategic expansion in selected emerging and high growth developed markets. We are focusing our existing market growth in Brazil and new market growth in China. We expect at least 50% of our new units in 2015 will be international locations.
We intend to fund our growth efforts, in part, by utilizing productivity initiatives across our business. Productivity savings will be reinvested in the business to drive revenue growth and margin improvement.
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 customerconsumer traffic, pricing and development of the brand;
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;
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;
Adjusted restaurant-level operating margin, Adjusted income from operations, Adjusted net income, attributable to Bloomin’ Brands, Inc. and Adjusted diluted earnings per share, Adjusted diluted earnings per pro forma share, EBITDA and Adjusted EBITDA—non-GAAP financial measures utilized to evaluate our operating performance, which
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
definitions, usefulness and reconciliations are described in more detail in the “Non-GAAP Financial Measures” section below; and
CustomerConsumer satisfaction scores—measurement of our customers’consumers’ experiences in a variety of key attributes.areas.
2012 Business and Financial HighlightsChange in Fiscal Year End
Our 2012 business and financial results include:
An increaseOn January 3, 2014, our Board of Directors approved a change in consolidated revenues of 3.8%our fiscal year end from a calendar year ending on December 31 to $4.0 billion, driven primarily by 3.7% growtha 52-53 week year ending on the last Sunday in combined comparable restaurant sales at existing domestic Company-owned core restaurants, in 2012 as compared to 2011;
37 system-wide restaurant openings across most brands (27 were Company-owned and ten franchise and unconsolidated joint venture locations), and 150 Outback Steakhouse renovations in 2012;
Productivity and cost management initiatives that we estimate allowed us to save approximately $59 million in the aggregate in 2012, while our costs increased due to rising commodity prices;
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income from operations of $181.1 million in 2012 compared to $213.5 million in 2011, which was primarily due to increased expenses of $42.1 million associatedDecember, effective with our initial public offering partially offset by an increase of 6.1% in operating margins at the restaurant level;
A reorganizationfiscal year 2014. In a 52 week fiscal year, each of our entire capital structure by refinancing PRP’s CMBS Loanquarterly periods comprise 13 weeks. The additional week in the first quarter of 2012, completing our initial public offering and retiring OSI’s senior notes in the third quarter of 2012 and refinancing OSI’s 2007 Credit Facilities ina 53 week fiscal year is added to the fourth quarter, making that quarter consist of 2012;14 weeks. We made the fiscal year change on a prospective basis and did not adjust operating results for prior periods. We believe this change will provide numerous benefits, including aligning our reporting periods to be more consistent with peer restaurant companies and improving comparability between periods by removing the trading day effect on Restaurant sales and operating margins.
AcquiringFiscal year 2014 consisted of the remaining interests52 weeks ended December 28, 2014 and fiscal years 2013 and 2012 consisted of the twelve months ended December 31, 2013 and 2012, respectively. The change in our Roy’s joint venturefiscal year end resulted in three fewer operating days in fiscal year 2014 and we estimate that the remaining limited partnership interestsassociated impact in certainfiscal year 2014 was a reduction of our limited partnerships that either owned or had a contractual right to varying percentages$46.0 million and $9.2 million of cash flows in 44 Bonefish Grill restaurantsRestaurant sales and17 Carrabba’s Italian Grill restaurants.
Growth Strategies
In 2013, our key growth strategies include:
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, additional selective expansion of the lunch daypart 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. Since 2010, we have added significant resources in site selection, construction and design to support the opening of new restaurants. Our top domestic development priority is Bonefish Grill unit growth. Internationally, we are focusing on existing markets in South Korea, Hong Kong and Brazil, with strategic expansion in selected emerging and high growth developed markets. We are focusing our new market growth in China, Mexico and South America. We expect to open between 45 and 55 system-wide locations in 2013.
Drive Margin Improvement. We believe we have the opportunity to increase our margins through leveraging increases in average unit volumes and cost reductions in labor, food cost, supply chain and restaurant facilities.
Ownership Structures
Our restaurants are predominantly Company-owned or controlled, including through joint ventures, and otherwise operated under franchise arrangements. We generate our revenues primarily from our Company-owned or controlled restaurants and secondarily through ongoing royalties from our franchised restaurants and sales of franchise rights.
Company-owned or controlled restaurants include restaurants owned directly by us, by limited partnerships in which we are the general partner and our managing partners and chef partners are limited partners and by joint ventures in which we are a member. Our legal ownership interests in these joint ventures and our legal ownership interests as general partner in these limited partnerships generally range from 50% to 90%. Our cash flows from these entities are limited to the relative portion of our ownership. The results of operations of Company-owned restaurants are included in our consolidated operating results. The portion of income or loss attributable to the other partners’ interests is eliminated in Net income attributable to noncontrolling interests in our Consolidated Statements of Operations and Comprehensive Income.Bloomin’ Brands, respectively.
In the future, we do not plan to utilize limited partnershipsThe reporting periods and applicable reports for domestic Company-owned restaurants. Instead, the restaurants will be wholly-owned by us and the area operating, managing and chef partners will receive their distributions of restaurant cash flowfiscal year 2014 were as employee compensation rather than partnership distributions.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We pay royalties on approximately 95% of our Carrabba’s Italian Grill restaurants ranging from 1.0% to 1.5% of sales pursuant to agreements we entered into with the Carrabba’s Italian Grill founders.
Historically, Company-owned restaurants also included restaurants owned by our Roy’s joint venture and our consolidated financial statements included the accounts and operations of our Roy’s joint venture even though we had less than majority ownership. Effective October 1, 2012, we purchased the remaining interests in our Roy’s joint venture from our joint venture partner, RY-8, for $27.4 million, (see “—Liquidity and Capital Resources—Transactions”).
Through a joint venture arrangement with PGS Participacoes Ltda., we hold a 50% ownership interest in the Brazilian Joint Venture. The Brazilian Joint Venture was formed in 1998 for the purpose of operating Outback Steakhouse restaurants in Brazil. We account for the Brazilian Joint Venture under the equity method of accounting. We are responsible for 50% of the costs of new restaurants operated by the Brazilian Joint Venture and our joint venture partner is responsible for the other 50% and has operating control. Income and loss derived from the Brazilian Joint Venture is presented in Income from operations of unconsolidated affiliates in our Consolidated Statements of Operations and Comprehensive Income. Restaurants owned by the Brazilian Joint Venture are included in “Unconsolidated Joint Venture” restaurants.
We derive no direct income from operations of franchised restaurants other than initial and developmental franchise fees and ongoing royalties, which are included in Other revenues in our Consolidated Statements of Operations and Comprehensive Income.
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:
follows:
|
| | | | | | |
| | | DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| Number of restaurants (at end of the period): | | | | | | |
| Outback Steakhouse | | | | | | |
| Company-owned—domestic (1) | | 665 | | 670 | | 671 |
| Company-owned—international (1) | | 115 | | 110 | | 119 |
| Franchised—domestic | | 106 | | 106 | | 108 |
| Franchised and joint venture—international | | 89 | | 81 | | 70 |
| Total | | 975 | | 967 | | 968 |
| Carrabba’s Italian Grill | | | | | | |
| Company-owned | | 234 | | 231 | | 232 |
| Franchised | | 1 | | 1 | | 1 |
| Total | | 235 | | 232 | | 233 |
| Bonefish Grill | | | | | | |
| Company-owned | | 167 | | 151 | | 145 |
| Franchised | | 7 | | 7 | | 7 |
| Total | | 174 | | 158 | | 152 |
| Fleming’s Prime Steakhouse and Wine Bar | | | | | | |
| Company-owned | | 65 | | 64 | | 64 |
| Roy’s | | | | | | |
| Company-owned | | 22 | | 22 | | 22 |
| System-wide total | | 1,471 | | 1,443 | | 1,439 |
|
| | | | | | | | |
| FISCAL PERIOD | | 2014 REPORTING PERIOD | | 2014 FISCAL PERIOD DAYS | | COMPARABLE 2013 FISCAL PERIOD DAYS | | FISCAL YEAR CHANGE IMPACT (in operating days) |
| First fiscal quarter | | January 1, 2014 to March 30, 2014 | | 89 | | 90 | | (1) |
| Second fiscal quarter | | March 31, 2014 to June 29, 2014 | | 91 | | 91 | | — |
| Third fiscal quarter | | June 30, 2014 to September 28, 2014 | | 91 | | 92 | | (1) |
| Fourth fiscal quarter | | September 29, 2014 to December 28, 2014 | | 91 | | 92 | | (1) |
| Fiscal year | | January 1, 2014 to December 28, 2014 | | 362 | | 365 | | (3) |
____________________
| |
(1) | One Company-owned restaurant in Puerto Rico that was previously included in Outback Steakhouse (international) in prior filings is now included in Outback Steakhouse (domestic). Prior years have been revised to conform to the current year presentation. |
Segments
We operate restaurants under brands that have similar economic characteristics, nature of products and services, class of customerconsumer and distribution methods, and as a result, aggregatewe believe we meet the criteria for aggregating our operating segments, including our international operations, into a single reporting segment in fiscal year 2014.
During the first quarter of 2015, we recasted our segment reporting to reflect two reporting segments, U.S. and International, which matches changes made in how we manage our business, review operating performance and allocate resources. Our U.S. segment includes all brands operating in the U.S. while brands operating outside the U.S. are included in the International segment. Beginning in 2015, we will recast our prior period financial information to reflect comparable financial information for the new segment reporting.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Selected Operating Data
The table below presents the number of our restaurants in operation as of the end of the periods indicated:
|
| | | | | |
| | DECEMBER 28, 2014 | | DECEMBER 31, 2013 | | DECEMBER 31, 2012 |
| Number of restaurants (at end of the period): | | | | | |
| Outback Steakhouse | | | | | |
| Company-owned—U.S. | 648 | | 663 | | 665 |
| Company-owned—international (1) (2) (3) | 167 | | 169 | | 115 |
| Franchised—U.S. | 105 | | 105 | | 106 |
| Franchised and joint venture—international (1) (2) | 55 | | 51 | | 89 |
| Total | 975 | | 988 | | 975 |
| Carrabba’s Italian Grill | | | | | |
| Company-owned | 242 | | 239 | | 234 |
| Franchised | 1 | | 1 | | 1 |
| Total | 243 | | 240 | | 235 |
| Bonefish Grill | | | | | |
| Company-owned | 201 | | 187 | | 167 |
| Franchised | 5 | | 7 | | 7 |
| Total | 206 | | 194 | | 174 |
| Fleming’s Prime Steakhouse & Wine Bar | | | | | |
| Company-owned | 66 | | 65 | | 65 |
| Roy’s (4) | | | | | |
| Company-owned | 20 | | 21 | | 22 |
| System-wide total | 1,510 | | 1,508 | | 1,471 |
____________________
| |
| (1) | Effective November 1, 2013, we acquired a controlling interest in the Brazil Joint Venture resulting in the consolidation and reporting of 47 restaurants (as of the acquisition date) as Company-owned locations, which are reported as unconsolidated joint venture locations in the historical periods presented. |
| |
| (2) | The restaurant count for Brazil is reported as of November 30, 2014 and excludes one restaurant opened in December 2014. Restaurant counts for our Brazil were reported as of December 31st in fiscal year 2012. |
| |
| (3) | The restaurant count as of December 28, 2014 includes 21 locations scheduled to close during 2015, including 20 in South Korea. |
| |
| (4) | On January 26, 2015, we sold our Roy’s concept. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Results of Operations
The following table sets forth, for the periods indicated, the percentages thatof certain items in our Consolidated Statements of Operations and Comprehensive Income bearin relation to totalTotal revenues or restaurantRestaurant sales, as indicated:
| | | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Revenues | | | | | | | | | | | |
| Restaurant sales | | 99.0 | % | | 99.0 | % | | 99.1 | % | 99.4 | % | | 99.0 | % | | 99.0 | % |
| Other revenues | | 1.0 |
| | 1.0 |
| | 0.9 |
| 0.6 |
| | 1.0 |
| | 1.0 |
|
| Total revenues | | 100.0 |
| | 100.0 |
| | 100.0 |
| 100.0 |
| | 100.0 |
| | 100.0 |
|
| Costs and expenses | | | | | | | | | | | |
| Cost of sales (1) | | 32.5 |
| | 32.2 |
| | 32.0 |
| 32.5 |
| | 32.6 |
| | 32.5 |
|
| Labor and other related (1) | | 28.3 |
| | 28.8 |
| | 28.8 |
| 27.6 |
| | 28.3 |
| | 28.3 |
|
| Other restaurant operating (1) | | 23.3 |
| | 23.4 |
| | 24.0 |
| 23.8 |
| | 23.6 |
| | 23.3 |
|
| Depreciation and amortization | | 3.9 |
| | 4.0 |
| | 4.3 |
| 4.3 |
| | 4.0 |
| | 3.9 |
|
General and administrative (2) | | 8.2 |
| | 7.6 |
| | 7.0 |
| 6.9 |
| | 6.5 |
| | 8.2 |
|
| Recovery of note receivable from affiliated entity | | — |
| | (0.9 | ) | | — |
| |
| Provision for impaired assets and restaurant closings | | 0.3 |
| | 0.4 |
| | 0.1 |
| 1.2 |
| | 0.6 |
| | 0.3 |
|
| Income from operations of unconsolidated affiliates | | (0.1 | ) | | (0.2 | ) | | (0.2 | ) | — |
| | (0.2 | ) | | (0.1 | ) |
| Total costs and expenses | | 95.5 |
| | 94.4 |
| | 95.3 |
| 95.7 |
| | 94.5 |
| | 95.5 |
|
| Income from operations | | 4.5 |
| | 5.6 |
| | 4.7 |
| 4.3 |
| | 5.5 |
| | 4.5 |
|
| Loss on extinguishment and modification of debt | | (0.5 | ) | | — |
| | — |
| (0.3 | ) | | (0.4 | ) | | (0.5 | ) |
| Other (expense) income, net | | (*) |
| | * |
| | 0.1 |
| |
| Gain on remeasurement of equity method investment | | — |
| | 0.9 |
| | — |
|
| Other expense, net | | (*) |
| | (*) |
| | (*) |
|
| Interest expense, net | | (2.2 | ) | | (2.2 | ) | | (2.5 | ) | (1.3 | ) | | (1.8 | ) | | (2.2 | ) |
| Income before provision for income taxes | | 1.8 |
| | 3.4 |
| | 2.3 |
| |
| Provision for income taxes | | 0.3 |
| | 0.6 |
| | 0.6 |
| |
| Income before provision (benefit) for income taxes | | 2.7 |
| | 4.2 |
| | 1.8 |
|
| Provision (benefit) for income taxes | | 0.5 |
| | (1.0 | ) | | 0.3 |
|
| Net income | | 1.5 |
| | 2.8 |
| | 1.7 |
| 2.2 |
| | 5.2 |
| | 1.5 |
|
| Less: net income attributable to noncontrolling interests | | 0.3 |
| | 0.2 |
| | 0.2 |
| 0.1 |
| | 0.2 |
| | 0.3 |
|
| Net income attributable to Bloomin’ Brands, Inc. | | 1.2 | % | | 2.6 | % | | 1.5 | % | |
| | | | | | | | |
| Net income | | 1.5 | % | | 2.8 | % | | 1.7 | % | |
| Other comprehensive income: | | | | | | | |
| Foreign currency translation adjustment | | 0.2 |
| | (0.1 | ) | | 0.1 |
| |
| Comprehensive income | | 1.7 |
| | 2.7 |
| | 1.8 |
| |
| Less: comprehensive income attributable to noncontrolling interests | | 0.3 |
| | 0.2 |
| | 0.2 |
| |
| Comprehensive income attributable to Bloomin’ Brands, Inc. | | 1.4 | % | | 2.5 | % | | 1.6 | % | |
| Net income attributable to Bloomin’ Brands | | 2.1 | % | | 5.0 | % | | 1.2 | % |
____________________
| |
| (1) | As a percentage of Restaurant sales. |
| |
(2) | General and administrative costs exclusive of $42.1 million of initial public offering related expenses would have been 7.1% of Total revenues for the year ended December 31, 2012 (see “—General and administrative expenses” discussion).
|
| |
| * | 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 - Continued
REVENUESRESTAURANT SALES
RestaurantFollowing is a summary of the changes in restaurants sales
for fiscal years 2014 and 2013:
| | | | | YEARS ENDED | | | | | | YEARS ENDED | | | | | | | | | |
| | | DECEMBER 31, | | | | | | DECEMBER 31, | | | | | FISCAL YEAR |
| (dollars in millions): | | 2012 | | 2011 | | $ Change | | % Change | | 2011 | | 2010 | | $ Change | | % Change | 2014 | | 2013 |
| Restaurant sales | | $ | 3,946.1 |
| | $ | 3,803.3 |
| | $ | 142.8 |
| | 3.8 | % | | 3,803.3 |
| | 3,594.7 |
| | $ | 208.6 |
| | 5.8 | % | |
| For fiscal years 2013 and 2012 | | $ | 4,089.1 |
| | $ | 3,946.1 |
|
| Change from: | | | | |
| Brazil acquisition (1) | | 253.8 |
| | 23.4 |
|
| Restaurant openings (2) | | 136.4 |
| | 98.0 |
|
| Comparable restaurant sales (2) | | 40.5 |
| | 28.8 |
|
| Restaurant closings | | (58.0 | ) | | (7.2 | ) |
| Change in fiscal year | | (46.0 | ) | | — |
|
| For fiscal years 2014 and 2013 | | $ | 4,415.8 |
| | $ | 4,089.1 |
|
____________________
| |
| (1) | Includes restaurant sales for the 47 formerly unconsolidated joint venture restaurants in Brazil that were acquired November 1, 2013. Sales for restaurants opened in Brazil after November 1, 2013 are included in restaurant openings. |
| |
| (2) | Summation of quarterly changes for restaurant openings and comparable restaurant sales will not total to annual amounts as the restaurants that meet the definition of a comparable restaurant will differ each period based on when the restaurant opened. |
The increase in restaurantRestaurant sales in 20122014 as compared to 20112013 was primarily attributable toto: (i) a $123.2 million increase in comparablethe consolidation of restaurant sales at our existinggenerated by restaurants (including a 3.7% combined comparable restaurant sales increase in 2012 at our core domestic restaurants), which was primarily due to increases in customer traffic and general menu prices andBrazil that were acquired November 1, 2013, (ii) a $50.6 million increase in sales from 36the opening of 100 new restaurants not included in our comparable restaurant sales base. Thebase and (iii) an 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 concept and renovations at additional Outback Steakhouse locations. The increase in restaurant sales in 2012 as compared to 2011 was partially offset by a $6.8 million decrease from the closing of seven restaurants during 2012 and a $24.2 million decrease from the sale (and franchise conversion) of nine of our Company-owned Outback Steakhouse restaurants in Japan in October 2011.
The increase in restaurant sales in 2011 as compared to 2010 was primarily attributable to (i) a $195.7 million increase indomestic comparable restaurant sales at our existing restaurants. The increase in restaurant sales was partially offset by: (i) the closing of 57 restaurants (including a 4.9% combinedsince December 31, 2012, (ii) lower comparable restaurant sales in South Korea and (iii) three fewer operating days due to a change in our fiscal year-end.
The increase in 2011 at our core domestic restaurants) whichRestaurant sales in 2013 as compared to 2012 was primarily due to increases in customer traffic and general menu prices and (ii) a $15.9 million increase in sales from 17attributable to: (i) the opening of 69 new restaurants not included in our comparable restaurant sales base. Thebase, (ii) an increase in customer traffic was primarily a resultdomestic comparable restaurant sales at our existing restaurants and (iii) the consolidation of promotions throughout our concepts, innovationsone month of restaurant sales generated by restaurants in our menu, service and operations and renovations at Outback Steakhouse.Brazil that were acquired November 1, 2013. The increase in restaurant sales in 2011 as compared to 2010was partially offset by a $2.0 million decrease from the closing of threesix restaurants during 2011 and a $1.0 million decrease from the sale (and franchise conversion) of nine of our Company-owned Outback Steakhouse restaurants in Japan in Octobersince December 31, 2011.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following table includes additional information about changes inComparable Domestic Restaurant Sales and Menu Prices
Following is a summary of comparable domestic restaurant sales atand domestic Company-owned restaurants for our core brands:
general menu price increases: | | | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Average restaurant unit volumes (in thousands): | | | | | | | |
Outback Steakhouse (1) | | $ | 3,165 |
| | $ | 3,030 |
| | $ | 2,907 |
| |
| Carrabba’s Italian Grill | | $ | 2,999 |
| | $ | 2,946 |
| | $ | 2,816 |
| |
| Bonefish Grill | | $ | 3,162 |
| | $ | 3,023 |
| | $ | 2,781 |
| |
| Fleming’s Prime Steakhouse and Wine Bar | | $ | 3,929 |
| | $ | 3,730 |
| | $ | 3,476 |
| |
| Operating weeks: | | | | | | | |
| Outback Steakhouse (1) | | 34,959 |
| | 34,966 |
| | 35,252 |
| |
| Carrabba’s Italian Grill | | 12,078 |
| | 12,077 |
| | 12,097 |
| |
| Bonefish Grill | | 8,163 |
| | 7,600 |
| | 7,553 |
| |
| Fleming’s Prime Steakhouse and Wine Bar | | 3,350 |
| | 3,337 |
| | 3,337 |
| |
| Year over year percentage change: | | | | | | | |
| Menu price increases (decreases): (2) | | | | | | | |
| Outback Steakhouse | | 2.2 | % | | 1.5 | % | | (0.1 | )% | |
| Carrabba’s Italian Grill | | 2.3 | % | | 1.5 | % | | 0.4 | % | |
| Bonefish Grill | | 2.2 | % | | 1.9 | % | | 0.2 | % | |
| Fleming’s Prime Steakhouse and Wine Bar | | 2.0 | % | | 3.0 | % | | 0.5 | % | |
| Comparable restaurant sales (restaurants open 18 months or more): | | | | | | | | | | | |
| Outback Steakhouse (1) | | 4.4 | % | | 4.0 | % | | 1.5 | % | 3.1 | % | | 1.6 | % | | 4.4 | % |
| Carrabba’s Italian Grill | | 1.7 | % | | 4.6 | % | | 2.9 | % | (1.0 | )% | | (0.2 | )% | | 1.7 | % |
| Bonefish Grill | | 3.2 | % | | 8.3 | % | | 6.5 | % | 0.5 | % | | — | % | | 3.2 | % |
| Fleming’s Prime Steakhouse and Wine Bar | | 5.1 | % | | 7.4 | % | | 10.4 | % | |
| Fleming’s Prime Steakhouse & Wine Bar | | 3.2 | % | | 4.5 | % | | 5.1 | % |
| Combined (concepts above) | | 3.7 | % | | 4.9 | % | | 2.7 | % | 2.0 | % | | 1.2 | % | | 3.7 | % |
| Year over year percentage change: | | |
| | | | |
| Menu price increases: (1) | | |
| | | | |
| Outback Steakhouse | | 2.9 | % | | 2.5 | % | | 2.2 | % |
| Carrabba’s Italian Grill | | 2.7 | % | | 2.2 | % | | 2.3 | % |
| Bonefish Grill | | 2.9 | % | | 2.1 | % | | 2.2 | % |
| Fleming’s Prime Steakhouse & Wine Bar | | 3.1 | % | | 3.4 | % | | 2.0 | % |
____________________
| |
| (1) | One Company-owned restaurant in Puerto Rico that was previously included in Outback Steakhouse (international) in prior filings is now included in Outback Steakhouse (domestic). This change affects the calculation of average restaurant unit volumes, operating weeks and comparable restaurant sales. Prior years have been revised to conform to the current year presentation. |
| |
(2) | The stated menu price changes exclude the impact of product mix shifts to new menu offerings. |
Our comparable domestic restaurant sales represent the growth from restaurants opened 18 months or more. For 2014, blended domestic comparable restaurant sales increased primarily due to increases in general menu prices, partially offset by a shift in the mix in our product sales.
For 2013, blended domestic comparable restaurant sales increased due to increases in general menu prices and consumer traffic, partially offset by a shift in the mix in our product sales. The increase in consumer traffic was primarily driven by selective daypart expansion across certain concepts, innovations in menu, service, promotions and operations across the portfolio and renovations at additional Outback Steakhouse locations, partially offset by the additional day in February 2012 due to Leap Year.
Average Domestic Restaurant Unit Volumes and Operating Weeks
Following is a summary of the domestic average restaurant unit volumes and operating weeks:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| | 2014 | | 2013 | | 2012 |
| Average restaurant unit volumes (in thousands): | | | | | |
| Outback Steakhouse | $ | 3,329 |
| | $ | 3,230 |
| | $ | 3,165 |
|
| Carrabba’s Italian Grill | $ | 2,945 |
| | $ | 2,998 |
| | $ | 2,999 |
|
| Bonefish Grill | $ | 3,135 |
| | $ | 3,131 |
| | $ | 3,162 |
|
| Fleming’s Prime Steakhouse & Wine Bar | $ | 4,163 |
| | $ | 4,082 |
| | $ | 3,929 |
|
| Operating weeks: | |
| | | | |
| Outback Steakhouse | 33,687 |
| | 34,600 |
| | 34,959 |
|
| Carrabba’s Italian Grill | 12,467 |
| | 12,284 |
| | 12,078 |
|
| Bonefish Grill | 10,047 |
| | 9,238 |
| | 8,163 |
|
| Fleming’s Prime Steakhouse & Wine Bar | 3,411 |
| | 3,389 |
| | 3,350 |
|
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
COSTS AND EXPENSES
Cost of sales
| | | | | YEARS ENDED | | | | YEARS ENDED | | | | | | | | | | | | | | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | | FISCAL YEAR | | | | FISCAL YEAR | | |
| (dollars in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Cost of sales | | $ | 1,281.0 |
| | $ | 1,226.1 |
| | | | $ | 1,226.1 |
| | $ | 1,152.0 |
| | | $ | 1,435.4 |
| | $ | 1,333.8 |
| | | | $ | 1,333.8 |
| | $ | 1,281.0 |
| | |
| % of Restaurant sales | | 32.5 | % | | 32.2 | % | | 0.3 | % | | 32.2 | % | | 32.0 | % | | 0.2 | % | 32.5 | % | | 32.6 | % | | (0.1 | )% | | 32.6 | % | | 32.5 | % | | 0.1 | % |
Cost of sales, consisting of food and beverage costs, increaseddecreased as a percentage of restaurantRestaurant sales in 20122014 as compared to 2011. 2013. The decrease as a percentage of Restaurant sales was primarily due to 0.9% from the impact of certain cost savings initiatives and 0.7% from menu price increases. The decrease was partially offset by increases as a percentage of Restaurant sales of 0.7% from higher commodity costs, primarily seafood and beef, and 0.7% related to lunch expansion, changes in our product mix and promotions.
The increase as a percentage of restaurantRestaurant sales in 2013 as compared to 2012 was primarily 1.1%due to 0.9% from increases inhigher beef seafood and other commodity costs and 0.5%0.2% from changes in our liquor, beer and wine mix and product mix. The increase was partially offset by decreases as a percentage of restaurantRestaurant sales of 0.8%0.6% from the impact of certain cost savings initiatives and 0.6%0.5% from menu price increases.
The increase as a percentageIn fiscal year 2015, we expect to incur four percent to six percent of restaurant sales in 2011 as comparedincreased commodity costs, primarily due to 2010 was primarily 1.4% from increases in seafood, dairy,higher beef and other commodity costs. The increase was partially offset by decreases as a percentage of restaurant sales of 0.9% from the impact of certain cost savings initiatives and 0.4% from menu price increases.
Labor and other related expenses
| | | | | YEARS ENDED | | | | YEARS ENDED | | | | | | | | | | | | | | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | | FISCAL YEAR | | | | FISCAL YEAR | | |
| (dollars in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Labor and other related | | $ | 1,117.6 |
| | $ | 1,094.1 |
| | | | $ | 1,094.1 |
| | $ | 1,034.4 |
| | | $ | 1,219.0 |
| | $ | 1,157.6 |
| | | | $ | 1,157.6 |
| | $ | 1,117.6 |
| | |
| % of Restaurant sales | | 28.3 | % | | 28.8 | % | | (0.5 | )% | | 28.8 | % | | 28.8 | % | | — | % | 27.6 | % | | 28.3 | % | | (0.7 | )% | | 28.3 | % | | 28.3 | % | | — | % |
Labor and other related expenses include all direct and indirect labor costs incurred in operations, including distribution expense to managing partners, costs related to the PEPdeferred compensation plans, and the POA (see “—Liquidity and Capital Resources—Deferred Compensation Plans”), and other field incentive compensation expenses. Labor and other related expenses decreased as a percentage of restaurantRestaurant sales in 2012for 2014 as compared to 2011. Items that contributed2013 due to: (i) 0.5% from the acquisition of Brazil, primarily due to a decrease as a percentage of restaurant sales primarily included 0.7% from higher average unit volumes, at our restaurants and 0.4%(ii) 0.5% from the impact of certain cost savings initiatives.initiatives; (iii) 0.4% from higher average domestic unit volumes, primarily at Outback Steakhouse; and (iv) 0.4% due to expenses from a payroll tax audit contingency recorded in 2013. These decreases were partially offset by increases as a percentage of Restaurant sales primarily attributable to: (i) 0.8% of higher kitchen and service labor costs due to lunch expansion across certain concepts and the addition of new restaurant locations and (ii) 0.3% from lower average unit volumes in South Korea.
Labor and other related expenses were consistent as a percentage of Restaurant sales for 2013 as compared to 2012. Increases as a percentage of the following:Restaurant sales were: (i) 0.5%0.6% from higher kitchen and service labor costs primarily due to lunch expansion across certain concepts and (ii) 0.1%0.4% from higher field management labor and bonus expenses and (iii) 0.1% from an increase in health insurance costs.
Labor and other related expensespayroll tax audit contingencies. These increases were flatpartially offset by a decrease as a percentage of restaurantRestaurant sales in 2011 as compared with 2010. Items that contributedprimarily due to an increase as a percentage of restaurant sales included the following: (i) 0.4% from higher kitchen and service labor costs, (ii) 0.3% from higher field management labor, bonus and distribution expenses, (iii) 0.2% from a settlement of an Internal Revenue Service assessment of employment taxes and (iv) 0.1% from an increase in health insurance costs. These increases were offset by decreases as a percentage of restaurant sales of 0.7% from higher average unit volumes at our restaurants and 0.3% from the impact of certain cost savings initiatives.initiatives, (ii) 0.2% from a decrease in health insurance costs, (iii) 0.2% from higher average unit volumes at the majority of our restaurants and (iv) 0.2% from changes in deferred compensation participant accounts.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other restaurant operating expenses
| | | | | YEARS ENDED | | | | YEARS ENDED | | | | | | | | | | | | | | | |
| | DECEMBER 31, | |
| | DECEMBER 31, | |
| FISCAL YEAR | | | | FISCAL YEAR | | |
| (dollars in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Other restaurant operating | | $ | 918.5 |
| | $ | 890.0 |
| | | | $ | 890.0 |
| | $ | 864.2 |
| | | $ | 1,049.1 |
| | $ | 964.3 |
| | | | $ | 964.3 |
| | $ | 918.5 |
| | |
| % of Restaurant sales | | 23.3 | % | | 23.4 | % | | (0.1 | )% | | 23.4 | % | | 24.0 | % | | (0.6 | )% | 23.8 | % | | 23.6 | % | | 0.2 | % | | 23.6 | % | | 23.3 | % | | 0.3 | % |
Other restaurant operating expenses include certain unit-level operating costs such as operating supplies, rent, repairs and maintenance, advertising expenses, utilities, pre-opening costs and other occupancy costs. A substantial portion of these expenses is fixed or indirectly variable. The decreaseincrease as a percentage of restaurantRestaurant sales in 2012for 2014 as compared to 20112013 was primarily 0.5% from higherdue to the following: (i) 0.4% lower average unit volumes at our restaurantsin South Korea, (ii) 0.2% increase in operating supplies primarily due to lunch expansion and 0.3%promotions, (iii) 0.1% of higher restaurant occupancy costs mainly related to rent escalations from existing leases, (iv) 0.1% of higher restaurant utilities associated with new restaurant locations and lunch expansion across certain cost savings initiatives. The decrease was partially offset by increases as a percentage of restaurant sales primarily attributable to 0.3% ofconcepts, (v) 0.1% higher general liability insurance expense and 0.3%(vi) 0.1% increase in fees due to higher gift card sales. The increases were partially offset by decreases as a percentage of Restaurant sales primarily due to: (i) 0.4% from our acquired Brazil restaurants, primarily due to higher volumes, (ii) 0.2% higher domestic average unit volumes, primarily at Outback Steakhouse and (iii) 0.2% gain on a legal settlement.
The increase as a percentage of Restaurant sales for 2013 as compared to 2012 was primarily due to the following: (i) 0.2% higher advertising expense, (ii) 0.2% of higher restaurant occupancy costs as a result of the sale-leaseback transaction entered into in March 2012 (the “Sale-Leaseback Transaction”) (see “—Liquidityopening new restaurant locations and Capital Resources—Transactions”).
(iii) 0.2% of higher restaurant utilities and operating supplies costs. The decreaseincrease was partially offset by decreases as a percentage of restaurantRestaurant sales in 2011 as compared with 2010 was primarily 0.7% from higher average unit volumes at our restaurants and 0.4% from certain cost savings initiatives. The decrease was partially offset by increases as a percentage of restaurant sales of 0.2% in operating supplies expense and 0.2% in advertising costs.
Depreciation and amortization expenses
|
| | | | | | | | | | | | | | | | | | | | | | |
| | YEARS ENDED | |
| | YEARS ENDED | |
|
| | | DECEMBER 31, | | | | DECEMBER 31, | | |
| (dollars in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change |
| Depreciation and amortization | | $ | 155.5 |
| | $ | 153.7 |
| | | | $ | 153.7 |
| | $ | 156.3 |
| | |
| % of Total revenues | | 3.9 | % | | 4.0 | % | | (0.1 | )% | | 4.0 | % | | 4.3 | % | | (0.3 | )% |
Depreciation and amortization expense decreased as a percentage of total revenues in 2012 as compared to 2011. This decrease as a percentage of total revenues was primarily driven by higher average unit volumes at our restaurants.
The decrease as a percentage of total revenues in 2011 as compared to 2010 was primarily 0.2% from certain assets being fully depreciated as of June 2010 as a result of purchase accounting adjustments recorded in conjunction with the Merger andattributable to: (i) 0.2% from higher average unit volumes at the majority of our restaurants. restaurants and (ii) 0.2% from certain cost savings initiatives.
Depreciation and amortization
|
| | | | | | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| (dollars in millions): | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Depreciation and amortization | $ | 190.9 |
| | $ | 164.1 |
| | | | $ | 164.1 |
| | $ | 155.5 |
| | |
| % of Total revenues | 4.3 | % | | 4.0 | % | | 0.3 | % | | 4.0 | % | | 3.9 | % | | 0.1 | % |
Depreciation and amortization increased as a percentage of Total revenues for 2014 as compared to 2013 primarily due to: (i) amortization expense associated with our acquired Brazil operations; (ii) depreciation expense related to new, renovated and relocated restaurants and (iii) the completion of internally developed technology projects.
The decrease was partially offset by an increase as a percentage of restaurant sales of 0.1% from depreciation expense on property, fixtures and equipment additions during 2011Total revenues for 2013 as compared to 2012 was primarily due to additional depreciation expense related to new restaurant openings and renovations and accelerated depreciation resulting from relocations of certain of our Outback Steakhouse renovations.existing restaurants.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
General and administrative expenses
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED | | | | YEARS ENDED | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | |
| (in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change |
| General and administrative | | $ | 326.5 |
| | $ | 291.1 |
| | $ | 35.4 |
| | $ | 291.1 |
| | $ | 252.8 |
| | $ | 38.3 |
|
General and administrative expense includes salaries and benefits, management incentive programs, related payroll tax and benefits, other employee-related costs and professional services. Following is a summary of the changes in general and administrative expenses:
|
| | | | | | | |
| | FISCAL YEAR |
| (dollars in millions): | 2014 | | 2013 |
| For fiscal years 2013 and 2012 | $ | 268.9 |
| | $ | 326.5 |
|
| Change from: | | | |
| Brazil general and administrative | 18.9 |
| | 1.7 |
|
| Severance | 9.2 |
| | 0.4 |
|
| Employee stock-based compensation | 3.1 |
| | 8.3 |
|
| Termination of split dollar life insurance policies | 2.8 |
| | (4.7 | ) |
| Deferred compensation | 3.0 |
| | (4.5 | ) |
| Compensation, benefits and payroll tax | 4.8 |
| | (4.8 | ) |
| Legal & professional fees | 1.2 |
| | (9.6 | ) |
| Incentive compensation | (6.1 | ) | | (3.3 | ) |
| Other | (1.4 | ) | | (0.1 | ) |
| IPO costs | — |
| | (42.1 | ) |
| Management fees | — |
| | (5.6 | ) |
| Gain on sale of a business | — |
| | 3.5 |
|
| Legal settlement | — |
| | 3.2 |
|
| For fiscal years 2014 and 2013 | $ | 304.4 |
| | $ | 268.9 |
|
In 2014, general and administrative expense increased primarily from the following items:
Costs associated with our Brazil operations, which we acquired a majority ownership in 2012 as compared to 2011November 2013.
Severance increased primarily due to $42.1 millionan organizational realignment of additional expenses associated with our initial public offering, including $18.1certain corporate functions.
Employee stock-based compensation increased due to new grants, partially offset by grants fully vesting and forfeitures.
In fiscal year 2014, we recognized $1.9 million of accelerated CEO retention bonus and incentive bonus expense, $16.0net gains related to the termination of split-dollar agreements with certain of our former executive officers compared to $4.7 million of non-cash stocknet gains in fiscal year 2013.
Deferred compensation expense for the vested portion of outstanding stock options and an $8.0 million management agreement termination fee. Exclusive of these initial public offering related expenses, General and administrative costs decreased $6.7 million in the year ended December 31, 2012 as compared to the same period in 2011 primarilywas higher due to the following: (i) $5.2 milliona net increasedecrease in the cash surrender value (“CSV”) of life insurance investments (ii) $4.3 million loss from the sale of nine ofrelated to our Company-owned Outback Steakhouse restaurantspartner deferred compensation programs.
Employee compensation, benefits and payroll tax were higher primarily due to higher capitalized costs in Japan in October 2011, (iii) $4.2 million decrease in legalfiscal year 2013 due to a financial system project.
Legal and professional fees (iv) $3.5 million lower management fees, exclusive of the termination fee,increased due to higher legal and tax fees supporting operational activities.
Incentive compensation decreased due to performance against current year objectives.
In 2013, the termination of the management agreementdecrease in August 2012, (v) $3.5 million gaingeneral and administrative expense was primarily from the collection of proceeds from the 2009 sale offollowing items:
Higher costs associated with our CheeseburgerBrazil operations, which we acquired a majority ownership in Paradise concept and (vi) $3.2 million gain from the settlement of lawsuits. This decrease wasNovember 2013.
Employee stock-based compensation increased due to new grants, partially offset by (i) $8.1 million of increased generalgrants fully vesting and administrative costs associated with field support, managers-in-training and field compensation, bonus, distribution and buyout expense, (ii) $7.4 million of additional legal and other professional fees mainly resulting from amendment and restatement of a lease between OSI and PRP and (iii) $2.7 million of net additional corporate compensation, payroll taxes, benefits and bonus expenses primarily as a result of increasing our resources in consumer insights, research and development, productivity and human resources.
The increase in 2011 as compared to 2010 was primarily due to the following: (i) $12.1 million of additional corporate compensation, bonus and relocation expenses primarily as a result of increasing our resources in consumer insights, research and development, productivity and human resources, (ii) $8.2 million of increased general and administrative costs associated with field support, managers-in-training and field compensation, bonus, distribution and buyout expense, (iii) a $6.2 million net decline in the cash surrender value of life insurance investments, (iv) $7.4 million of additional legal and other professional fees, (v) a $4.3 million loss from the sale of nine of our Company-owned Outback Steakhouse restaurants in Japan in October 2011, (vi) $3.8 million of additional information technology expense, (vii) $1.7 million of increased corporate business travel and meeting-related expenses and (viii) $0.5 million of expenses incurred in 2011 in connection with the Sale-Leaseback Transaction. This increase was partially offset by $5.3 million of cost savings initiatives and a $2.0 million allowance for the PRG promissory note recorded in the first quarter of 2010.
Recovery of note receivable from affiliated entity
In November 2011, we received a settlement payment of $33.3 million from T-Bird in connection with a settlement agreement that satisfied all outstanding litigation with that franchisee.
forfeitures.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
In fiscal year 2013, we recognized $4.7 million of net gains related to the termination of split-dollar agreements with certain of our former executive officers.
Deferred compensation expense was lower due to a net increase in the CSV of life insurance investments related to our partner deferred compensation programs.
Employee compensation, benefits and payroll tax decreased primarily due to higher capitalized costs in fiscal year 2013 due to a financial system development project.
Legal and other professional fees were lower primarily due to the amendment and restatement of a lease between OSI and PRP in 2012.
Incentive compensation decreased due to performance against current year objectives.
Expenses associated with our IPO in August 2012 included accelerated bonus expense, non-cash stock compensation expense for the vested portion of outstanding stock options and a management agreement termination fee.
Management fees decreased due to the termination of the management agreement in connection with our IPO.
The gain on sale of a business in fiscal year 2012 related to the collection of proceeds from the 2009 sale of our Cheeseburger in Paradise concept.
In fiscal year 2012, we recognized a gain from the settlement of lawsuits.
Provision for impaired assets and restaurant closings
| | | | | YEARS ENDED | | | | YEARS ENDED | | | | | | | | | | | | | | | |
| | DECEMBER 31, | |
| | DECEMBER 31, | |
| FISCAL YEAR | | | | FISCAL YEAR | | |
| (in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Provision for impaired assets and restaurant closings | | $ | 13.0 |
| | $ | 14.0 |
| | $ | (1.0 | ) | | $ | 14.0 |
| | $ | 5.2 |
| | $ | 8.8 |
| $ | 52.1 |
| | $ | 22.8 |
| | $ | 29.3 |
| | $ | 22.8 |
| | $ | 13.0 |
| | $ | 9.8 |
|
DuringRestaurant Closure Initiatives - In 2014, we decided to close 36 underperforming international locations, primarily in South Korea. We expect to substantially complete these restaurant closings during the years ended December 31, 2012 and 2011 and 2010,first quarter of 2015. In connection with the International Restaurant Closure Initiative, we recorded a provision for impaired assetsincurred aggregate pre-tax asset impairments and restaurant closingsclosing costs of $13.0$19.7 million, $14.0 during fiscal year 2014. As a result of the International Restaurant Closure Initiative, we expect to incur additional pre-tax restaurant closing costs, primarily in the first quarter of 2015, of $9.0 million to $12.0 million, including costs associated with lease obligations and $5.2 million, respectively, for certain of our restaurants, intangible assets and other assets (see “—Liquidity and Capital Resources—Fair Value Measurements”).employee terminations.
In 2013, we completed an assessment of our domestic restaurant base and decided to close 22 underperforming domestic locations. Aggregate pre-tax impairments and restaurant closing charges of $6.0 million and $18.7 million were incurred during fiscal year 2014 and 2013, respectively, in connection with the Domestic Restaurant Closure Initiative.
Roy’s - In the third quarter of 2014, we reclassified the assets and liabilities of Roy’s to held for sale. In connection with the decision to sell, we recorded pre-tax impairment charges primarilyof $13.4 million during fiscal year 2014.
Other Disposals - During the third quarter of 2014, we decided to sell both of our corporate airplanes. In connection with the decision to sell the corporate airplanes, we recognized pre-tax asset impairment charges of $10.6 million during fiscal year 2014. In the fourth quarter of 2014, we completed the sale of one airplane with net proceeds of $2.5 million.
The remaining $2.4 million and $4.1 million of restaurant impairment charges during the fiscal year 2014 and 2013, respectively, resulted from the carrying value of a restaurant’s assets exceeding its estimated fair market value, primarily due to declining future cash flows from lower projected future sales at existing locations and locations identified for closure, relocation or renovation (see “—Critical Accounting Policies and Estimates—Impairment or Disposal of Long-Lived Assets”).
Income from operations
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED | | | | YEARS ENDED | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | |
| (dollars in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change |
| Income from operations | | $ | 181.1 |
| | $ | 213.5 |
| | | | $ | 213.5 |
| | $ | 168.9 |
| | |
| % of Total revenues | | 4.5 | % | | 5.6 | % | | (1.1 | )% | | 5.6 | % | | 4.7 | % | | 0.9 | % |
Income from operations decreased in 2012 as compared to 2011 primarily as a result of the increased expenses in General and administrative associated with our initial public offering partially offset by an increase of 6.1% in operating margins at the restaurant level.
Income from operations increased in 2011 as compared to 2010 primarily as a result of a 9.0% increase in operating margins, higher average unit volumes at our restaurants and certain other items as described above.
Loss on extinguishment and modification of debt
During the first quarter of 2012, we recorded a $2.9 million loss related to the extinguishment of PRP’s CMBS Loan in connection with the refinancing. During the third quarter of 2012, we recorded a loss from the extinguishment of OSI’s senior notes of $9.0 million which included $2.4 million for the write-off of unamortized deferred financing fees that related to the extinguished senior notes. During the fourth quarter of 2012, we recorded a loss from the extinguishment and modification of OSI’s 2007 Credit Facilities of $9.1 million which included $6.2 million for the write-off of unamortized deferred financing fees and $2.9 million of third-party financing costs related to the modified portion of the credit facilities. See “—Liquidity and Capital Resources—Credit Facilities and Other Indebtedness” for further discussion of the individual transactions resulting in a loss on the extinguishment and modification of OSI’s and PRP’s debt.renovation.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Interest expense, netSee Note 4 - Impairments, Disposals and Exit Costs of the Notes to Consolidated Financial Statements for further information.
Income from operations
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED | | | | YEARS ENDED | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | |
| (in millions): | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change |
| Interest expense, net | | $ | 86.6 |
| | $ | 83.4 |
| | $ | 3.2 |
| | $ | 83.4 |
| | $ | 91.4 |
| | $ | (8.0 | ) |
|
| | | | | | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| (dollars in millions): | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Income from operations | $ | 192.0 |
| | $ | 225.4 |
| | | | $ | 225.4 |
| | $ | 181.1 |
| | |
| % of Total revenues | 4.3 | % | | 5.5 | % | | (1.2 | )% | | 5.5 | % | | 4.5 | % | | 1.0 | % |
The increaseIncome from operations decreased in net interest expense in 20122014 as compared to 2011 was2013 primarily due to: (i) impairments, restaurant and other closing costs related to higher interest rates from the refinancing of the 2012 CMBS Loanour International and Domestic Restaurant Closure Initiatives, (ii) asset impairments related to Roy’s and the New Facilities resulting in increased interest expensecorporate aircraft, (iii) lower average unit volumes at our South Korea restaurants, (iv) higher General and administrative expenses and (v) higher Depreciation and amortization as a percentage of $9.8 million and $2.7 million, respectively. This increase wasrevenue. These decreases were partially offset by an $8.8 million declineincrease in interest expense for OSI’s senior notes that were satisfied and discharged in August 2012.operating margins at the restaurant level.
The decreaseIncome from operations increased in net interest expense in 20112013 as compared to 2010 was2012 primarily due to a $4.6 million decline in interest expense for OSI’s senior secured credit facilities, largely as a result of a decline in the total outstanding balance of those facilities, and to $1.4 million of interest expense on our interest rate collar for OSI’s senior secured credit facilities during 2010 that was not incurred in 2011 (since the collar matured in 2010).
Provision for income taxes
|
| | | | | | | | | | | | | | | | | | |
| | | YEARS ENDED | | | | YEARS ENDED | | |
| | | DECEMBER 31, | | | | DECEMBER 31, | | |
| | | 2012 | | 2011 | | Change | | 2011 | | 2010 | | Change |
| Effective income tax rate | | 16.5 | % | | 16.6 | % | | (0.1 | )% | | 16.6 | % | | 26.5 | % | | (9.9 | )% |
The effective income tax rate in 2012 was consistent with the prior year. The net decrease in the effective income tax rate in 2011 as compared to the previous year was primarily due to the increase in the domestic pretax book income in which the deferred income tax assets are subject to a valuation allowance and the state and foreign income tax provision being a lower percentage of consolidated pretax income as compared to the prior year.
The effective income tax rate for the year ended December 31, 2012 was lower than the blended federal and state statutory rate of 38.6% primarily due to the benefit of the tax credit for excess FICA tax on employee-reported tips, elimination of noncontrolling interests and foreign rate differential together being such a large percentage of pretax income, which was partially offset by the valuation allowance. The effective income tax rate for the year ended December 31, 2011 was lower than the blended federal and state statutory rate of 38.7% primarily due to the benefit of the tax credit for excess FICA tax on employee-reported tips and loss on investments as a result of the sale of assetsincreased expenses in Japan together being such a large percentage of pretax income. The effectiveGeneral and administrative costs associated with our IPO in August 2012. Excluding IPO-related expenses, the slight increase in income tax rate for the year ended December 31, 2010from operations was lower than the blended federalprimarily driven by decreases in General and state statutory rate of 38.9% primarily due to the benefit of the tax credit for excess FICA tax on employee-reported tips, which wasadministrative expenses, partially offset by higher charges for asset impairment and restaurant closings and depreciation and amortization.
Loss on extinguishment and modification of debt
|
| | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| (in millions) | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Loss on extinguishment and modification of debt | 11.1 |
| | 14.6 |
| | (3.5 | ) | | 14.6 |
| | 21.0 |
| | (6.4 | ) |
In connection with the valuation allowancerefinancing of our senior secured credit facility, we recognized a loss on extinguishment and income taxesmodification of debt for fiscal year 2014. During fiscal year 2013, we recorded a loss on extinguishment and modification of debt in states that only have limited deductionsconnection with the repricing of our Term loan B. During fiscal year 2012, we recorded losses related to: (i) our 2012 CMBS Loan refinancing, (ii) extinguishment of our senior notes, and (iii) the refinancing of our senior secured credit facility.
See Note 12 - Long-term Debt, Net of the Notes to Consolidated Financial Statements for further information.
Gain on remeasurement of equity method investment
In connection with the Brazil acquisition in computingfiscal year 2013, we recognized a $36.6 million gain on remeasurement to fair value of the state current income tax provision.previously held equity investment in the Brazil Joint Venture. See Note 3 - Acquisitions of the Notes to Consolidated Financial Statements for a further description of this transaction.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Other expense, net
Other expense, net, includes foreign currency exchange transaction gains and losses and items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| (in millions): | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Other expense, net | $ | (1.2 | ) | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.2 | ) | | $ | (0.1 | ) | | $ | (0.1 | ) |
During fiscal year 2014, we recorded other expense of $0.8 million in connection with the loss on sale of an Outback Steakhouse restaurant in Mexico to an existing franchisee. The remaining other expense activity during fiscal year 2014 was primarily due to foreign currency exchange transaction losses.
Interest expense, net
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| (in millions): | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Interest expense, net | $ | 59.7 |
| | $ | 74.8 |
| | $ | (15.1 | ) | | $ | 74.8 |
| | $ | 86.6 |
| | $ | (11.8 | ) |
The decrease in net interest expense in fiscal year 2014 as compared to fiscal year 2013 was primarily due to the repricing and refinancing of the Senior Secured Credit Facilities in April 2013 and May 2014, respectively.
The decrease in net interest expense in fiscal year 2013 as compared to fiscal year 2012 was primarily due to a decline in interest expense for our senior notes that were satisfied and discharged in August 2012. This decrease was partially offset by increased interest rates on our Credit Facilities, which were refinanced in October 2012 and subsequently repriced in April 2013. The decrease was partially offset by increased interest rates on the 2012 CMBS Loan, which was refinanced in March 2012.
Provision (benefit) for income taxes
|
| | | | | | | | | | | | | | | | | |
| | FISCAL YEAR | | | | FISCAL YEAR | | |
| | 2014 | | 2013 | | Change | | 2013 | | 2012 | | Change |
| Effective income tax rate | 20.0 | % | | (24.5 | )% | | 44.5 | % | | (24.5 | )% | | 16.5 | % | | (41.0 | )% |
The net increase in the effective income tax rate in fiscal year 2014 as compared to fiscal year 2013 was primarily due to the release of the domestic valuation allowance in 2013, the exclusion of the gain on remeasurement of our equity method investment in 2013 and a change in the blend of income across our domestic and international subsidiaries.
The net decrease in the effective income tax rate in fiscal year 2013 as compared to fiscal year 2012 was primarily due to the benefit of the release of valuation allowance in the second quarter of fiscal year 2013 and the exclusion of the gain on remeasurement of our equity method investment in Brazil, which were partially offset by the benefit of employment-related credits and the elimination of noncontrolling interests together being a smaller percentage of pretax income.
In connection with the International Restaurant Closure Initiative, we reviewed the carrying value of our South Korea net deferred tax assets, which is $8.2 million at December 28, 2014. Based on our review, we believe it is more likely than not that the net deferred tax assets will be realized. Should circumstances change and we determine that it is more likely than not the deferred tax assets in South Korea would not be realized, a valuation allowance would be established, which would result in additional income tax expense.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Non-GAAP Financial Measures
In addition to the results provided in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we provide non-GAAP measures which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and include the following: (i) system-wide sales, (ii) Adjusted restaurant-level operating margins, (iii) Adjusted income from operations and the corresponding margins, (iv) Adjusted net income, attributable to Bloomin’ Brands, Inc. and(v) Adjusted diluted earnings per share. Theseshare, (vi) Adjusted diluted earnings per pro forma share and (vii) Earnings Before Interest, Tax, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA.
Although we believe these non-GAAP measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures are not measurements of our operating or financial performance underintended to replace accompanying U.S. GAAP and shouldfinancial measures. These metrics are not be considered as an alternative to performance measures derived in accordance with U.S. GAAP. These non-GAAP measures may not benecessarily comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.companies.
System-Wide Sales
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:
|
| | | | | | | | | | | | |
| | | | | | | |
| | | YEARS ENDED DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| COMPANY-OWNED RESTAURANT SALES (in millions): | | | | | | |
| Outback Steakhouse | | | | | | |
| Domestic (1) | | $ | 2,115 |
| | $ | 2,031 |
| | $ | 1,964 |
|
| International (1) | | 315 |
| | 332 |
| | 277 |
|
| Total | | 2,430 |
| | 2,363 |
| | 2,241 |
|
| Carrabba’s Italian Grill | | 693 |
| | 682 |
| | 653 |
|
| Bonefish Grill | | 494 |
| | 441 |
| | 403 |
|
| Fleming’s Prime Steakhouse and Wine Bar | | 252 |
| | 239 |
| | 223 |
|
| Other | | 77 |
| | 78 |
| | 75 |
|
| Total Company-owned restaurant sales | | $ | 3,946 |
| | $ | 3,803 |
| | $ | 3,595 |
|
____________________
| |
(1) | Company-owned restaurant sales for one location in Puerto Rico that were previously included in Outback Steakhouse (international) in prior filings are now included in Outback Steakhouse (domestic). Prior years have been revised to conform to the current year presentation. |
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.
System-wide sales comprise sales of Company-owned and franchised restaurants and, in historical periods, sales of unconsolidated joint venture restaurants. Prior to November 1, 2013, sales from the acquired 47 restaurants in Brazil were reported as income from unconsolidated joint ventures. Subsequent to November 1, 2013, the sales of these restaurants are reported as Company-owned.
Following is a summary of sales of Company-owned restaurants:
|
| | | | | | | | | | | | |
| | | FISCAL YEAR |
| | | 2014 | | 2013 | | 2012 |
| COMPANY-OWNED RESTAURANT SALES (in millions): | | | | | | |
| Outback Steakhouse | | | | | | |
| Domestic | | $ | 2,168 |
| | $ | 2,142 |
| | $ | 2,115 |
|
| International | | 583 |
| | 344 |
| | 315 |
|
| Total | | 2,751 |
| | 2,486 |
| | 2,430 |
|
| Carrabba’s Italian Grill | | 710 |
| | 706 |
| | 693 |
|
| Bonefish Grill | | 609 |
| | 555 |
| | 494 |
|
| Fleming’s Prime Steakhouse & Wine Bar | | 275 |
| | 265 |
| | 252 |
|
| Other | | 71 |
| | 77 |
| | 77 |
|
| Total Company-owned restaurant sales | | $ | 4,416 |
| | $ | 4,089 |
| | $ | 3,946 |
|
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following dotable provides a summary of sales of franchised and unconsolidated joint venture restaurants, which are not included in our consolidated financial results, and our income from the royalties and/or service fees that franchisees and affiliates pay us based generally on a percentage of sales. The following table does not represent our sales and areis presented only as an indicator of changes in the restaurant system, which management believes is important information regarding the health of our restaurant concepts.
concepts and in determining our royalties and/or service fees.
| | | | | | | | | | | FISCAL YEAR |
| | | YEARS ENDED DECEMBER 31, | | 2014 | | 2013 | | 2012 |
| | | 2012 | | 2011 | | 2010 | |
| FRANCHISE AND UNCONSOLIDATED JOINT VENTURE SALES (in millions) (1): | | | | | | | |
| FRANCHISE AND UNCONSOLIDATED JOINT VENTURE SALES (in millions): | | | | | | | |
| Outback Steakhouse | | | | | | | | | | | | |
| Domestic | | $ | 281 |
| | $ | 300 |
| | $ | 296 |
| | $ | 323 |
| | $ | 317 |
| | $ | 281 |
|
| International | | 357 |
| | 311 |
| | 234 |
| | 122 |
| | 335 |
| | 357 |
|
| Total | | 638 |
| | 611 |
| | 530 |
| | 445 |
| | 652 |
| | 638 |
|
| Carrabba’s Italian Grill | | 4 |
| | 4 |
| | 4 |
| | 4 |
| | 4 |
| | 4 |
|
| Bonefish Grill | | 18 |
| | 18 |
| | 16 |
| | 13 |
| | 18 |
| | 18 |
|
| Total franchise and unconsolidated joint venture sales (1) | | $ | 660 |
| | $ | 633 |
| | $ | 550 |
| |
| Income from franchise and unconsolidated joint ventures (2) | | $ | 41 |
| | $ | 36 |
| | $ | 31 |
| |
| Total franchise and unconsolidated joint venture sales | | | $ | 462 |
| | $ | 674 |
| | $ | 660 |
|
| Income from franchise and unconsolidated joint ventures (1) | | | $ | 19 |
| | $ | 41 |
| | $ | 41 |
|
____________________
| |
| (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 Other revenues and Income from operations of unconsolidated affiliates, respectively. Income from operations of unconsolidated affiliates for fiscal year 2013 includes the results for our Brazil operations for the period from January 1, 2013 to October 31, 2013, which represents the period that such operations were accounted for as an equity method investment. |
Other Non-GAAP Financial Measures
Adjusted income from operations, Adjusted net income attributable to Bloomin’ Brands, Inc. and Adjusted diluted earnings per share areThe use of other non-GAAP financial measures calculated by eliminating from income from operations, net income and diluted earnings per share the impact of items we do not consider indicative of our ongoing operations. We provide these adjusted operating results because we believe they are useful forpermits investors to assess the operating performance of our business without the effect of these adjustments. For the periods presented, the non-GAAP adjustments include transaction-related expenses primarily attributable to costs incurred in association with our initial public offering, the refinancing of our long-term debt and other deal costs, management fees paid to the management company associated with our Sponsors and Founders, losses incurred on the extinguishment and modification of long-term debt, collection of a promissory note and other amounts associated with the 2009 sale of one of our restaurant concepts and the tax effect of these items.
The use of these measures permits a comparative assessment of our operating performance relative to our performance based on U.S. GAAP results whileand relative to other companies within the restaurant industry by isolating the effects of certain items that vary from period to period without correlation to core operating performance or that vary widely among similar companies. However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items or that the items for which we have made adjustments are unusual or infrequent. In the future, we may incur expenses or generate income similar to the adjusted items. We further believe that the disclosure of these non-GAAP measures is useful to investors as they form the basis for how our management team and Board of Directors evaluate our performance. By disclosing these non-GAAPoperating performance, allocate resources and establish employee incentive plans. EBITDA and Adjusted EBITDA are also frequently used by investors, analysts and credit agencies in evaluating and comparing companies. In addition, our debt agreements require compliance of certain ratios that are based on financial measures we believe that we createsimilar to Adjusted EBITDA.
Adjusted restaurant-level operating margin
Restaurant-level operating margin is calculated as Restaurant sales after deduction of the main restaurant-level operating costs, which includes Cost of sales, Labor and other related and Other restaurant operating expenses. Adjusted restaurant-level operating margin is Restaurant-level operating margin adjusted for investors a greater understanding of, and an enhanced level of transparency into, the means by which our management team operates our business.certain items, as noted below.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following tables show the percentages of certain operating cost financial statement line items in relation to Restaurant sales on both a U.S. GAAP basis and an adjusted basis, as indicated, for fiscal years 2014, 2013 and 2012:
|
| | | | | | | | | | | | | | |
| | FISCAL YEAR |
| | 2014 | | 2013 | | 2012 |
| | U.S. GAAP | | ADJUSTED (1) | | U.S. GAAP | | ADJUSTED (2) | | U.S. GAAP (3) |
| Restaurant sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
| Cost of sales | 32.5 | % | | 32.5 | % | | 32.6 | % | | 32.6 | % | | 32.5 | % |
| Labor and other related | 27.6 | % | | 27.6 | % | | 28.3 | % | | 27.9 | % | | 28.3 | % |
| Other restaurant operating | 23.8 | % | | 24.0 | % | | 23.6 | % | | 23.6 | % | | 23.3 | % |
| | | | | | | | | | |
| Restaurant-level operating margin | 16.1 | % | | 15.9 | % | | 15.5 | % | | 15.9 | % | | 15.9 | % |
_________________
| |
| (1) | Includes adjustments primarily related to a $6.1 million legal settlement gain and the reversal of $2.9 million of deferred rent liabilities associated with the International and Domestic Restaurant Closure Initiatives, which were recorded in Other restaurant operating. |
| |
| (2) | Includes an adjustment of $17.0 million for payroll tax audit contingencies, which were recorded in Labor and other related. |
| |
| (3) | No adjustments impacted Restaurant-level operating margin during fiscal 2012. |
Adjusted income from operations, Adjusted net income and Adjusted diluted earnings per share
The following table reconciles Adjusted income from operations and the corresponding margins, Adjusted net income attributable to Bloomin’ Brands, Inc. and Adjusted diluted earnings per share for the years ended December 31, 2012, 2011 and 2010 to their respective most comparable U.S. GAAP measures (in thousands, except per share amounts)for fiscal years 2014, 2013 and 2012:
|
| | | | | | | | | | | | |
| | | | | | | |
| | | YEARS ENDED DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| Income from operations | | $ | 181,137 |
| | $ | 213,452 |
| | $ | 168,911 |
|
| Transaction-related expenses (1) | | 45,495 |
| | 7,583 |
| | 1,157 |
|
| Management fees and expenses (2) | | 13,776 |
| | 9,370 |
| | 9,550 |
|
| Other gains (3) | | (3,500 | ) | | (33,150 | ) | | — |
|
| Adjusted income from operations | | $ | 236,908 |
| | $ | 197,255 |
| | $ | 179,618 |
|
| | | | | | | |
| Net income attributable to Bloomin’ Brands, Inc. | | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
|
| Transaction-related expenses (1) | | 45,495 |
| | 7,583 |
| | 1,157 |
|
| Management fees and expenses (2) | | 13,776 |
| | 9,370 |
| | 9,550 |
|
| Other gains (3) | | (3,500 | ) | | (33,150 | ) | | — |
|
| Loss on extinguishment and modification of debt (4) | | 20,956 |
| | — |
| | — |
|
| Total adjustments, before income taxes | | 76,727 |
| | (16,197 | ) | | 10,707 |
|
| Income tax effect of adjustments (5) | | (12,660 | ) | | 2,689 |
| | (2,837 | ) |
| Net adjustments | | 64,067 |
| | (13,508 | ) | | 7,870 |
|
| Adjusted net income attributable to Bloomin’ Brands, Inc. | | $ | 114,038 |
| | $ | 86,497 |
| | $ | 60,838 |
|
| | | | | | | |
| Diluted earnings per share | | $ | 0.44 |
| | $ | 0.94 |
| | $ | 0.50 |
|
| Adjusted diluted earnings per share | | $ | 0.99 |
| | $ | 0.81 |
| | $ | 0.57 |
|
| | | | | | | |
| Diluted weighted average common shares outstanding | | 114,821 |
| | 106,689 |
| | 105,968 |
|
_________________
| |
(1) | Transaction-related expenses primarily relate to costs incurred in association with our initial public offering, the refinancing of our long-term debt and other deal costs. The expenses related to the initial public offering primarily include $18.1 million of accelerated CEO retention bonus and incentive bonus and $16.0 million of non-cash stock compensation charges for the vested portion of outstanding stock options recorded upon completion of the initial public offering. |
| |
(2) | Represents management fees, out-of-pocket expenses and certain other reimbursable expenses paid to a management company owned by our Sponsors and Founders under a management agreement with us. In accordance with the terms of an amendment, this agreement terminated immediately prior to the completion of our initial public offering, and a termination fee of $8.0 million was paid to the management company in 2012, in addition to a pro-rated periodic fee. |
| |
(3) | During 2012, we recorded a gain associated with the collection of the promissory note and other amounts due to us in connection with the 2009 sale of the Cheeseburger in Paradise concept. During 2011, we recorded a recovery of a note receivable from T-Bird in connection with a settlement agreement that satisfied all outstanding litigation with T-Bird. |
| |
(4) | Loss on extinguishment and modification of debt is related to the refinancing of OSI’s senior secured credit facilities, charges associated with PRP’s CMBS Loan refinancing and the retirement of the senior notes. |
| |
(5) | Income tax effect of adjustments for the years ended December 31, 2012, 2011 and 2010 were calculated using our full-year effective tax rate of 16.5%, 16.6% and 26.5%.
|
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands, except per share amounts) | 2014 | | 2013 | | 2012 |
| Income from operations | $ | 191,964 |
| | $ | 225,357 |
| | $ | 181,137 |
|
| Operating income margin | 4.3 | % | | 5.5 | % | | 4.5 | % |
| Adjustments: | | | | | |
| Transaction-related expenses (1) | 1,347 |
| | 3,888 |
| | 45,495 |
|
| Management fees and expenses (2) | — |
| | — |
| | 13,776 |
|
| Severance (3) | 9,045 |
| | — |
| | — |
|
| Asset impairments and related costs (4) | 24,490 |
| | — |
| | — |
|
| Restaurant relocations and related costs (5) | 249 |
| | — |
| | — |
|
| Restaurant impairments and closing costs (6) | 26,841 |
| | 18,695 |
| | — |
|
| Gain on disposal of business (7) | — |
| | — |
| | (3,500 | ) |
| Payroll tax audit contingency (8) | — |
| | 17,000 |
| | — |
|
| Legal settlement | (6,070 | ) | | — |
| | — |
|
| Purchased intangibles amortization (9) | 5,952 |
| | 560 |
| | — |
|
| Adjusted income from operations | $ | 253,818 |
| | $ | 265,500 |
| | $ | 236,908 |
|
| Adjusted operating income margin | 5.7 | % | | 6.4 | % | | 5.9 | % |
| | | | | | |
| | | | (CONTINUED...) | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands, except per share amounts) | 2014 | | 2013 | | 2012 |
| Net income attributable to Bloomin’ Brands | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
|
| Transaction-related expenses (1) | 1,347 |
| | 3,888 |
| | 45,495 |
|
| Management fees and expenses (2) | — |
| | — |
| | 13,776 |
|
| Severance (3) | 9,045 |
| | — |
| | — |
|
| Asset impairments and related costs (4) | 24,490 |
| | — |
| | — |
|
| Restaurant relocations and related costs (5) | 249 |
| | — |
| | — |
|
| Restaurant impairments and closing costs (6) | 26,841 |
| | 18,695 |
| | — |
|
| Loss (gain) on disposal of business (7) | 770 |
| | — |
| | (3,500 | ) |
| Payroll tax audit contingency (8) | — |
| | 17,000 |
| | — |
|
| Legal settlement | (6,070 | ) | | — |
| | — |
|
| Purchased intangibles amortization (9) | 5,952 |
| | 560 |
| | — |
|
| Loss on extinguishment and modification of debt (10) | 11,092 |
| | 14,586 |
| | 20,956 |
|
| Gain on remeasurement of equity method investment (11) | — |
| | (36,608 | ) | | — |
|
| Total adjustments, before income taxes | 73,716 |
| | 18,121 |
| | 76,727 |
|
| Adjustment to provision (benefit) for income taxes (12) | (23,996 | ) | | (84,114 | ) | | (12,660 | ) |
| Net adjustments | 49,720 |
| | (65,993 | ) | | 64,067 |
|
| Adjusted net income | $ | 140,810 |
| | $ | 142,374 |
| | $ | 114,038 |
|
| | | | | | |
| Diluted earnings per share | $ | 0.71 |
| | $ | 1.63 |
| | $ | 0.44 |
|
| Adjusted diluted earnings per share | $ | 1.10 |
| | $ | 1.11 |
| | $ | 0.99 |
|
| Adjusted diluted earnings per pro forma share (13) | $ | 1.10 |
| | $ | 1.11 |
| | $ | 0.92 |
|
| | | | | | |
| Diluted weighted average common shares outstanding | 128,317 |
| | 128,074 |
| | 114,821 |
|
| Pro forma IPO adjustment (13) | — |
| | — |
| | 8,684 |
|
| Pro forma diluted weighted average common shares outstanding (13) | 128,317 |
| | 128,074 |
| | 123,505 |
|
_________________
| |
| (1) | Transaction-related expenses primarily relate to the following: (i) secondary offerings of our common stock completed in November 2014, March 2014 and May 2013; (ii) the refinancings of the Senior Secured Credit Facility in May 2014 and March 2012 and the CMBS Loan in 2012; (iii) costs incurred in 2013 to acquire a controlling ownership interest in our Brazil operations, and (iv) costs incurred in connection with the IPO completed in 2012, which includes certain executive and stock compensation costs. |
| |
| (2) | Represents management fees and certain reimbursable expenses paid to a management company owned by our sponsors and founders. |
| |
| (3) | Relates to severance incurred as a result of our organizational realignment. |
| |
| (4) | Represents asset impairment charges and related costs associated with our decision to sell the Roy’s concept and corporate aircraft. |
| |
| (5) | Represents accelerated depreciation incurred in connection with the Outback Steakhouse relocation program. |
| |
| (6) | Represents impairments and expenses incurred for the Domestic and International Restaurant Closure Initiatives. |
| |
| (7) | Represents a loss recognized on the 2014 sale of one Company-owned Outback Steakhouse location in Mexico to an existing franchisee and a gain associated with the 2012 collection of amounts due to us in connection with the 2009 sale of Cheeseburger in Paradise. |
| |
| (8) | Related to an IRS payroll tax audit for the employer’s share of FICA taxes for cash tips. |
| |
| (9) | Represents non-cash intangible amortization recorded as a result of the acquisition of our Brazil operations. |
| |
| (10) | Related to: (i) the refinancing in April 2014, repricing in 2013 and refinancing in 2012 of our senior secured credit facility; (ii) the retirement of our senior notes in 2012, and (iii) the extinguishment of the previous CMBS Loan in 2012. |
| |
| (11) | Represents recognition of a gain on remeasurement of the previously held equity investment in connection with the Brazil acquisition. |
| |
| (12) | Income tax effect of adjustments for fiscal year 2014 was calculated based on the statutory rate applicable to jurisdictions in which the above non-GAAP adjustments relate. For fiscal year 2013, we utilized a normalized annual effective tax rate of 22.0%, which excludes the income tax benefit of the valuation allowance release. For fiscal year 2012, adjustments were calculated using our full-year effective tax rate of 16.5%. |
| |
| (13) | Gives pro forma effect in fiscal year 2012 to the issuance of shares in the IPO as if they were all outstanding on January 1, 2012. There is no effect of this adjustment for fiscal years 2014 and 2013. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA (EBITDA adjusted for certain significant items, as noted below) are supplemental measures of operating performance. The following table reconciles Net income attributable to Bloomin’ Brands to EBITDA and Adjusted EBITDA for fiscal years 2014, 2013 and 2012:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Net income attributable to Bloomin’ Brands | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
|
| Provision (benefit) for income taxes | 24,044 |
| | (42,208 | ) | | 12,106 |
|
| Interest expense, net | 59,658 |
| | 74,773 |
| | 86,642 |
|
| Depreciation and amortization | 190,911 |
| | 164,094 |
| | 155,482 |
|
| EBITDA | 365,703 |
| | 405,026 |
| | 304,201 |
|
| Impairments, closings and disposals (1) | 26,610 |
| | 3,716 |
| | 7,945 |
|
| Transaction-related expenses (2) | 1,347 |
| | 3,888 |
| | 29,495 |
|
| Stock-based compensation expense | 16,107 |
| | 13,857 |
| | 21,526 |
|
| Other (gains) losses (3) | (477 | ) | | 328 |
| | 1,906 |
|
| Severance (4) | 9,045 |
| | — |
| | — |
|
| Restaurant impairment and closing costs (5) | 26,841 |
| | 18,695 |
| | — |
|
| Payroll tax audit contingency (6) | — |
| | 17,000 |
| | — |
|
| Management fees and expenses (7) | — |
| | — |
| | 13,776 |
|
| Loss (gain) on disposal of business (8) | 770 |
| | — |
| | (3,500 | ) |
| Legal settlement | (6,070 | ) | | — |
| | — |
|
| Loss on extinguishment and modification of debt (9) | 11,092 |
| | 14,586 |
| | 20,957 |
|
| Gain on remeasurement of equity method investment (10) | — |
| | (36,608 | ) | | — |
|
| Adjusted EBITDA | $ | 450,968 |
| | $ | 440,488 |
| | $ | 396,306 |
|
_________________
| |
| (1) | Represents non-cash impairment charges for fixed assets and intangible assets, cash and non-cash expense from restaurant closings and net gains or losses on the disposal of fixed assets. Includes asset impairment charges associated with our decision to sell the Roy’s concept and corporate aircraft. |
| |
| (2) | Transaction-related expenses primarily relate to the following: (i) secondary offerings of our common stock completed in November 2014, March 2014 and May 2013; (ii) refinancings of the Senior Secured Credit Facility in May 2014 and March 2012 and the CMBS loan in 2012; (iii) costs incurred in 2013 to acquire a controlling ownership interest in our Brazil operations and (iv) costs incurred in connection with the IPO completed in 2012. |
| |
| (3) | Represents (income) expense incurred as a result of (losses) gains on our partner deferred compensation participant investment accounts, foreign currency loss (gain) and the loss (gain) on the cash surrender value of executive life insurance. |
| |
| (4) | Relates to severance expense incurred as a result of our organizational realignment. |
| |
| (5) | Represents impairments and expenses incurred for the Domestic and International Restaurant Closure Initiatives. |
| |
| (6) | Relates to an IRS payroll tax audit for the employer’s share of FICA taxes for cash tips. |
| |
| (7) | Represents management fees and certain reimbursable expenses paid to a management company owned by our sponsors and founders. |
| |
| (8) | Represents a loss recognized on the 2014 sale of one Company-owned Outback Steakhouse location in Mexico to an existing franchisee and a gain associated with the 2012 collection of amounts due to us in connection with the 2009 sale of Cheeseburger in Paradise. |
| |
| (9) | Relates to the (i) refinancing in May 2014, repricing in 2013, and refinancing in 2012 of our Senior Secured Credit Facility; (ii) the retirement of our Senior Notes in 2012, and (iii) the extinguishment of the previous CMBS loan in 2012. |
| |
| (10) | Represents recognition of a gain on remeasurement of the previously held equity investment in connection with the Brazil acquisition. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
LIQUIDITY
Our liquidity sources consist of cash flow from our operations, cash and cash equivalents and credit capacity under our credit facilities. We expect to use cash primarily for general operating expenses, principal and interest payments on our debt, the development of new restaurants and new markets, share repurchases and dividend payments, remodeling or relocating older restaurants, obligations related to our deferred compensation plans and investments in technology.
We believe that our expected cash flow from operations, planned borrowing capacity, short-term investments and restricted cash balancesliquidity sources are adequate to fund debt service requirements, operating lease obligations, capital expenditures and working capital obligations for the next twelve12 months. However, our ability to continue to meet these requirements and obligations will depend on, among other things, our ability to achieve anticipated levels of revenue and cash flow and our ability to manage costs and working capital successfully.
TRANSACTIONS
Effective March 14, 2012,Cash and Cash Equivalents - As of December 28, 2014 and December 31, 2013, we entered intohad $165.7 million and $209.9 million, respectively, in cash and cash equivalents, of which $89.7 million and $107.5 million, respectively, was held by foreign affiliates, primarily in South Korea, a Sale-Leaseback Transaction with two third-party real estate institutional investorsportion of which would be subject to additional taxes if repatriated to the United States. We consider the undistributed earnings related to our foreign affiliates as of December 28, 2014 to be permanently reinvested and are expected to continue to be permanently reinvested. Accordingly, no provision for United States income and additional foreign taxes has been recorded on aggregate undistributed earnings of $147.7 million as of December 28, 2014. If we identify an exception to our reinvestment policy of undistributed earnings, additional tax liabilities will be recorded. The international jurisdictions in which we sold 67 restaurant properties at fair market value for net proceedshave significant cash do not have any known restrictions that would prohibit the repatriation of $192.9 million. We then simultaneously leased these properties back 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 amountcash 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. We deferred the recognition of the $42.9 million gain on the sale of certain of the properties over the initial term of the lease. In accordance with the applicable accounting guidance, the 67 restaurant properties are not classified as held for sale at December 31, 2011 since we leased the properties.cash equivalents.
Effective March 27, 2012, New PRP entered into the 2012 CMBS Loan, which totaled $500.0 million at origination and was comprised of a first mortgage loanDuring fiscal year 2014, we decided to close 36 underperforming international locations, primarily in the amount of $324.8 million, collateralized by 261 of our properties, and two mezzanine loans totaling $175.2 million. The loans have a maturity date of April 10, 2017, and a weighted average interest rate as of the closing of 6.1%. 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 refinancing the CMBS Loan (the “CMBS 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, we recorded a $2.9 million loss on extinguishment of debt (see “—Credit Facilities and Other Indebtedness”).
On May 10, 2012, we entered into a first amendment to our management agreement with Kangaroo Management Company I, LLC (the “Management Company”), whose members are entities affiliated with Bain Capital and Catterton and our Founders. In accordance with the terms of this amendment, the management agreement terminated immediately prior to the completion of our 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.
On May 10, 2012, the retention bonus and the incentive bonus agreements with our CEO were amended. Under the terms of the amendments, 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 our initial public offering, which was paid in the third quarter of 2012. We recorded $18.1 million for the accelerated bonus expense in General and administrative expenses in our Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2012.
On August 13, 2012, we completed an initial public offering of our common stock. On September 11, 2012, the underwriters in our initial public offering completed the exercise of their option to purchase up to 2,400,000 additional shares of common stock from us and certain of the selling stockholders. In the offering, (i) we issued and sold an aggregate of 14,196,845 shares of common stock (including 1,196,845 shares sold pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $156.2 million and (ii) certain of our stockholders sold 4,196,845 shares of our common stock (including 1,196,845 shares pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $46.2 million. We did not receive any proceeds from the sale of shares of common stock by the selling stockholders.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We received net proceeds in the offering of approximately $142.2 million after deducting underwriting discounts and commissions of approximately $9.4 million and offering related expenses of $4.6 million. All of the net proceeds, together with cash on hand, were applied to the retirement of OSI’s 10% senior notes due 2015.
Upon completion of the offering, our certificate of incorporation was amended and restated to provide for authorized capital stock of 475,000,000 shares of common stock, par value $0.01 per share, and 25,000,000 shares of undesignated preferred stock.
Upon completion of our initial public offering, we recorded approximately $16.0 million of aggregate non-cash compensation expense with respect to (i) certain stock options held by our CEO that become exercisable (to the extent then vested) if following the offering, the volume-weighted average trading price of our common stock is equal to or greater than specified performance targets over a six-month period and (ii) the time vested portion of outstanding stock options containing a management call option due to the automatic termination of the call option upon completion of the offering. Additionally, at the time of the initial public offering, we expected to record an additional $19.6 million in stock-based compensation expense through 2017 (of which $2.7 million was incurred in 2012) related to the portion of these same stock options that will continue to vest following the offering. These amounts are only for the stock options described in (i) and (ii) above and are in addition to stock-based compensation expense we will recognize related to other outstanding equity awards and other equity awards that may be granted in the future. See “—Critical Accounting Policies and Estimates—Stock-Based Compensation” for additional information on the management call option.
During the third quarter of 2012, OSI retired the aggregate outstanding principal amount of its 10% senior notes through a combination of a tender offer and early redemption call. The senior notes retirement was funded using a portion of the net proceeds from our initial public offering together with cash on hand. OSI paid an aggregate of $259.8 million to retire the senior notes, which included $248.1 million in aggregate outstanding principal, $6.5 million of prepayment premium and early tender incentive fees and $5.2 million of accrued interest. The senior notes were satisfied and discharged on August 13, 2012. As a result of these transactions, we recorded a loss from the extinguishment of debt of $9.0 million in the third quarter of 2012 in Loss on extinguishment and modification of debt in our Consolidated Statement of Operations and Comprehensive Income. This loss included $2.4 million for the write-off of unamortized deferred financing fees that related to the extinguished senior notes.
Effective October 1, 2012, we purchased the remaining interests in our Roy’s joint venture from RY-8 for $27.4 million. This purchase price consisted of the assumption of RY-8’s $24.5 million line of credit guaranteed by OSI that had been recorded in Guaranteed debt in our Consolidated Balance Sheet at December 31, 2011, forgiveness of $1.8 million in loans due from RY-8 to OSI and a $1.1 million cash payment. This transaction resulted in a $0.7 million reduction in Additional paid-in capital in our Consolidated Balance Sheet at December 31, 2012. In December 2012, we paid the $24.5 million outstanding balance on the line of credit assumed from RY-8 and the line of credit was terminated.
On October 26, 2012, OSI completed a refinancing of its 2007 Credit Facilities and entered into a credit agreement (“Credit Agreement”) with a syndicate of institutional lenders and financial institutions. The New Facilities provide for senior secured financing of up to $1.225 billion, consisting of a $1.0 billion term loan B and a $225.0 million revolving credit facility, including letter of credit and swing-line loan sub-facilities, maturing seven and five years after the closing date of the New Facilities, respectively. In the fourth quarter of 2012, we capitalized $11.0 million of third-party financing fees incurred to complete the transaction. These deferred financing costs are included in Other assets, net in our Consolidated Balance Sheet. In addition, we recorded a $9.1 million loss related to the extinguishment and modification of the 2007 Credit Facilities in Loss on extinguishment and modification of debt in our Consolidated Statement of Operations and Comprehensive Income during the fourth quarter of 2012 (see “—Credit Facilities and Other Indebtedness”).
During the third and fourth quarters of 2012, we purchased the remaining partnership interests in certain of our limited partnerships that either owned or had a contractual right to varying percentages of cash flows in 44 Bonefish Grill
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
restaurants and 17 Carrabba’s Italian Grill restaurants for an aggregate purchase price of $39.5 million. The purchase price for each of the transactions was paid in cash by December 31, 2012. These transactions resulted in a $39.0 million reduction in Additional paid-in capital in our Consolidated Balance Sheet at December 31, 2012.
South Korea. In connection with the settlementInternational Restaurant Closure Initiative, we expect future cash expenditures of litigation with T-Bird, which include the franchisees of 56 Outback Steakhouse restaurants in California, T-Bird has a Put Right, which would require us$18.0 million to purchase for cash all of the ownership interests in the T-Bird entities that own Outback Steakhouse restaurants and certain rights under the development agreement with T-Bird entity. The Put Right is non-transferable, other than under limited circumstances set forth in the settlement agreement. The Put Right is exercisable by T-Bird until August 13, 2013. If the Put Right is exercised, we will pay a purchase price equal to a multiple of the T-Bird entities’ adjusted EBITDA for the trailing 12 months, net of liabilities of the T-Bird entities. The multiple is equal to 75% of the multiple of our adjusted EBITDA reflected in our stock price. We have a one-time right to reject the exercise of the Put Right if the transaction would be dilutive to our consolidated earnings per share. In such event, the Put Right is extended until the first anniversary of our notice to the T-Bird entities of such rejection. The closing of the Put Right is subject to certain conditions, including the negotiation of a transaction agreement reasonably acceptable to the parties, the absence of dissenters’ rights being exercised by the equity owners above a specified level and compliance with our debt agreements.
SUMMARY OF CASH FLOWS
We require capital$23.0 million, primarily for principal and interest payments on our debt, prepayment requirements under our term loan B facility (see “—Credit Facilities and Other Indebtedness”), obligations related to lease liabilities, through November 2022. We believe our deferred compensation plans, the development of new restaurants, remodeling older restaurants, investments in technology,South Korea subsidiary has sufficient cash to meet these obligations and acquisitions of franchisees and joint venture partners.
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| | | YEARS ENDED |
| | | DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| Net cash provided by operating activities | | $ | 340,091 |
| | $ | 322,450 |
| | $ | 275,154 |
|
| Net cash provided by (used in) investing activities | | 19,944 |
| | (113,142 | ) | | (71,721 | ) |
| Net cash used in financing activities | | (586,219 | ) | | (89,300 | ) | | (167,315 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | 5,790 |
| | (3,460 | ) | | (1,539 | ) |
| Net (decrease) increase in cash and cash equivalents | | $ | (220,394 | ) | | $ | 116,548 |
| | $ | 34,579 |
|
Operating Activitiessupport ongoing operations.
Net cash provided by operating activities increased in 2012Capital Expenditures as compared to 2011 primarily as a result of the following: (i) timing of third-party gift card receipts, (ii) an increase in cash generated from restaurant operations due to comparable restaurant sales increases and (iii) certain food, labor and other cost savings initiatives. The increase in net cash provided by operating activities was partially offset by a bonus payment to our CEO of $18.1 million and a management agreement termination fee of $8.0 million both made in connection with our initial public offering as well as timing related increases in payments associated with our trade payables and accrued expenses.
Net cash provided by operating activities increased in 2011 as compared to 2010 primarily as a result of the following: (i) an increase in cash generated from restaurant operations due to comparable restaurant sales increases, (ii) certain food, labor and other cost savings initiatives, (iii) an acceleration of certain accounts payable and other related payments prior to the end of 2010 and (iv) a decrease in cash paid for interest, which was $72.1 million for the year ended December 31, 2011 compared to $96.7 million in 2010. The increase in net cash provided by operating activities was
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
partially offset by an increase in other current assets primarily due to an increase in third-party gift card receivables and an increase in cash paid for income taxes, net of refunds, which was $27.7 million for the year ended December 31, 2011 compared to $10.8 million in 2010.
Investing Activities
Net cash provided by investing activities during the year ended December 31, 2012 consisted primarily of the following: (i) proceeds from the Sale-Leaseback Transaction of $192.9 million, (ii) the $4.2 million net difference in restricted cash, (iii) proceeds from the sale of property, fixtures and equipment of $4.0 million and (iv) $3.5 million of proceeds from the collection of the promissory note and other amounts due in connection with the 2009 sale of the Cheeseburger in Paradise concept. These increases were partially offset by capital expenditures of $178.7 million and purchases of Company-owned life insurance of $6.5 million. Net cash used in investing activities during the year ended December 31, 2011 consisted primarily of capital expenditures of $120.9 million and a royalty termination fee of $8.5 million. This was partially offset by $10.1 million of proceeds from the sale of nine of our Company-owned Outback Steakhouse restaurants in Japan. Net cash used in investing activities during the year ended December 31, 2010 consisted primarily of the following: (i) capital expenditures of $60.5 million, (ii) the $11.3 million net difference between restricted cash received and restricted cash used and (iii) deconsolidated PRG cash of $4.4 million. This was partially offset by the $4.0 million net difference between the proceeds from the sale and purchases of Company-owned life insurance.
- We estimate that our capital expenditures will total between approximately $220.0$235.0 million and $250.0$255.0 million in 2013.2015. The amount of actual capital expenditures may be affected by general economic, financial, competitive, legislative and regulatory factors, among other things, including restrictions imposed by our borrowing arrangements. We expect to continue to review the level of capital expenditures throughout 2013.
Financing Activities
Net cash used in financing activities during the year ended December 31, 2012 was primarily attributable to the following: (i) the extinguishment and modification of the OSI 2007 Credit Facilities and extinguishment of the PRP CMBS Loan and OSI’s senior notes for an aggregate $2.0 billion, (ii) the repayment of borrowings on OSI’s revolving credit facilities of $144.0 million, (iii) the repayment of long-term debt of $46.9 million, (iv) the purchase of outstanding limited partnership interests in certain restaurants of $40.6 million, (v) the repayments of partner deposits and other contributions of $25.4 million, (vi) the financing fees incurred for PRP’s CMBS Refinancing and the refinancing of OSI’s 2007 Credit Facilities of $19.0 million and (vii) the net distributions to noncontrolling interests of $14.0 million. This was partially offset by proceeds on the issuance of long-term debt for OSI and New PRP and borrowings on OSI’s revolving credit facilities of $1.6 billion and proceeds from the issuance of common stock of $142.2 million. Net cash used in financing activities during the year ended December 31, 2011 was primarily attributable to the following: (i) repayments of borrowings on long-term debt and OSI’s revolving credit facilities of $103.3 million, (ii) the net difference between repayments and receipts of partner deposits and other contributions of $36.0 million and (iii) distributions to noncontrolling interests of $13.5 million. This was partially offset by the collection of the note receivable from T-Bird of $33.3 million and proceeds from borrowings on OSI’s revolving credit facilities of $33.0 million. Net cash used in financing activities during the year ended December 31, 2010 was primarily attributable to the following: (i) repayments of borrowings on long-term debt and OSI’s revolving credit facilities of $196.8 million, (ii) the net difference between repayment and receipt of partner deposit and accrued buyout contributions of $18.0 million and (iii) distributions to noncontrolling interests of $11.6 million. This was partially offset by proceeds from borrowings on OSI’s revolving credit facilities of $61.0 million.2015.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Credit Facilities - Our credit facilities consist of the Senior Secured Credit Facility and the CMBS Loan. See Note 12 - Long-term Debt, Net of the Notes to Consolidated Financial Statements for further information. Following is a summary of principal payments and debt issuance from December 31, 2012 to December 28, 2014:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | SENIOR SECURED CREDIT FACILITY | | 2012 CMBS LOAN | | |
| (in thousands) | TERM LOAN A | | TERM LOAN B | | REVOLVING FACILITY | | FIRST MORTGAGE LOAN | | FIRST MEZZANINE LOAN | | SECOND MEZZANINE LOAN | | TOTAL CREDIT FACILITIES |
| Balance as of December 31, 2012 | $ | — |
| | $ | 1,000,000 |
| | $ | — |
| | $ | 319,574 |
| | $ | 87,048 |
| | $ | 87,273 |
| | $ | 1,493,895 |
|
| 2013 payments | — |
| | (65,000 | ) | | — |
| | (7,930 | ) | | (917 | ) | | (569 | ) | | (74,416 | ) |
Balance as of December 31, 2013
| — |
| | 935,000 |
| | — |
| | 311,644 |
| | 86,131 |
| | 86,704 |
| | 1,419,479 |
|
| 2014 new debt issued (1) | 300,000 |
| | — |
| | 400,000 |
| | — |
| | — |
| | — |
| | 700,000 |
|
| 2014 payments (1) (2) | (3,750 | ) | | (710,000 | ) | | (75,000 | ) | | (11,879 | ) | | (1,004 | ) | | (637 | ) | | (802,270 | ) |
Balance as of
December 28, 2014 | $ | 296,250 |
| | $ | 225,000 |
| | $ | 325,000 |
| | $ | 299,765 |
| | $ | 85,127 |
| | $ | 86,067 |
| | $ | 1,317,209 |
|
| |
| (1) | $700.0 million relates to the refinancing of our Senior Secured Credit Facility, which did not increase total indebtedness. |
| |
| (2) | Subsequent to December 28, 2014 we made payments of $3.8 million, $10.0 million and $60.0 million on our Term loan A, Term loan B and revolving credit facility, respectively. |
We continue to evaluate whether we will make further payments of our outstanding debt ahead of scheduled maturities. Following is a summary of our outstanding credit facilities as of December 28, 2014:
|
| | | | | | | | | | | | | | | | |
| | INTEREST RATE | | | | | | OUTSTANDING |
| (in thousands, except interest rate) | DECEMBER 28, 2014 | | ORIGINAL FACILITY | | PRINCIPAL MATURITY DATE | | DECEMBER 28, 2014 | | DECEMBER 31, 2013 |
| Term loan A, net of discount of $2.9 million | 2.16 | % | | $ | 300,000 |
| | May 2019 | | $ | 296,250 |
| | $ | — |
|
| Term loan B, net of discount of $10.0 million | 3.50 | % | | 225,000 |
| | October 2019 | | 225,000 |
| | 935,000 |
|
| Revolving credit facility | 2.16 | % | | 600,000 |
| | May 2019 | | 325,000 |
| | — |
|
| Total Senior Secured Credit Facility | | | 1,125,000 |
| | | | 846,250 |
| | 935,000 |
|
| First mortgage loan (1) | 4.08 | % | | 324,800 |
| | April 2017 | | 299,765 |
| | 311,644 |
|
| First mezzanine loan | 9.00 | % | | 87,600 |
| | April 2017 | | 85,127 |
| | 86,131 |
|
| Second mezzanine loan | 11.25 | % | | 87,600 |
| | April 2017 | | 86,067 |
| | 86,704 |
|
| Total 2012 CMBS loan | | | 500,000 |
| | | | 470,959 |
| | 484,479 |
|
| Total credit facilities | | | $ | 1,625,000 |
| | | | $ | 1,317,209 |
| | $ | 1,419,479 |
|
| |
| (1) | Represents the weighted-average interest rate for the respective period. |
As of December 28, 2014, we had $245.4 million in available unused borrowing capacity under our revolving credit facility, net of letters of credit of $29.6 million.
The Amended Credit Agreement contains mandatory prepayment requirements for Term loan A and Term loan B. We are required to prepay outstanding amounts under our term loans with 50% of our annual excess cash flow, as defined in the Amended Credit Agreement. The amount of outstanding term loans required to be prepaid may vary based on our leverage ratio and year-end results. Other than the required minimum amortization premiums of $15.0 million, we do not anticipate any other payments will be required through December 27, 2015.
The 2012 CMBS Loan requires annual amortization payments ranging from $10.4 million to $10.9 million, payable in scheduled monthly installments through March 2017, with the remaining balance due upon maturity in April 2017.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Our Amended Credit Agreement and 2012 CMBS Loan contain various financial and non-financial covenants. A violation of these covenants could negatively impact our liquidity by restricting our ability to borrow under the revolving credit facility and cause an acceleration of the amounts due under the credit facilities. See Note 12 - Long-term Debt, Net of the Notes to Consolidated Financial Statements for further information.
As of December 28, 2014 and December 31, 2013, we were in compliance with these debt covenants.
Current assets decreasedCash Flow Hedges of Interest Rate Risk -In September 2014, we entered into variable-to-fixed interest rate swap agreements with eightcounterparties to hedge a portion of the cash flows of our variable rate debt. The swap agreements have an aggregate notional amount of $400.0 million, a forward start date of June 30, 2015, and mature on May 16, 2019. Under the terms of the swap agreements, we will pay a weighted-average fixed rate of 2.02% on the $400.0 million notional amount and receive payments from the counterparty based on the 30-day LIBOR rate. $487.8Based on the current LIBOR curve as of the date of this filing, we estimate $3.0 million at December 31, 2012 as compared with $708.3 million at December 31, 2011 primarily due to a decrease in Cash and cash equivalents of $220.4 million (see “—Summary of Cash Flows”).
Current liabilities decreased to $691.4 million at December 31, 2012 as compared with $956.4 million at December 31, 2011 primarily due to a decreaseadditional interest expense in the Current portionsecond half of long-term debt of $309.9 millionfiscal 2015 as a result of the PRP’sswap transaction. See Note 16 - Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements for further information.
SUMMARY OF CASH FLOWS
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Net cash provided by operating activities | $ | 352,006 |
| | $ | 377,264 |
| | $ | 340,091 |
|
| Net cash (used in) provided by investing activities | (240,342 | ) | | (346,137 | ) | | 19,944 |
|
| Net cash used in financing activities | (148,731 | ) | | (87,127 | ) | | (586,219 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (7,060 | ) | | 4,181 |
| | 5,790 |
|
| Net decrease in cash and cash equivalents | $ | (44,127 | ) | | $ | (51,819 | ) | | $ | (220,394 | ) |
Operating activities - Net cash provided by operating activities decreased in 2014 as compared to 2013 primarily as a result of the following: (i) timing of collections of holiday gift card sales from third-party vendors, (ii) higher income tax payments, (iii) an increase in the redemption of gift cards, (iv) higher inventory and (v) higher incentive compensation payments. These decreases were partially offset by an increase in cash due to: (i) lower cash interest payments and (ii) timing of payments on accounts payable and certain accrual payments.
Net cash provided by operating activities increased in 2013 as compared to 2012 primarily as a result of the following: (i) utilization of inventory on hand, (ii) a decrease in cash paid for interest payments and (iii) timing of accounts payable and certain accrual payments. The increase in net cash provided by operating activities was partially offset by (i) a decrease in cash due to timing of collections of holiday gift card sales from third-party vendors, (ii) higher income tax payments and (iii) $5.2 million of cash paid to terminate certain split-dollar life insurance agreements.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Investing activities
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Capital expenditures | $ | (237,868 | ) | | $ | (237,214 | ) | | $ | (178,720 | ) |
| Acquisition of business, net of cash acquired | (3,063 | ) | | (100,319 | ) | | — |
|
| Purchases of life insurance policies | (1,682 | ) | | (4,159 | ) | | (6,451 | ) |
| Net change in restricted cash | (4,101 | ) | | (8,907 | ) | | 4,200 |
|
| Proceeds from sale of life insurance policies | 627 |
| | 1,239 |
| | — |
|
| Proceeds from disposal of property, fixtures and equipment | 5,745 |
| | 3,223 |
| | 4,529 |
|
| Proceeds from sale-leaseback transaction | — |
| | — |
| | 192,886 |
|
| Proceeds from sale of a business | — |
| | — |
| | 3,500 |
|
| Net cash (used in) provided by investing activities | $ | (240,342 | ) | | $ | (346,137 | ) | | $ | 19,944 |
|
Net cash used in investing activities during 2014 consisted primarily of capital expenditures, the net difference in restricted cash used and restricted cash received and net cash paid to acquire certain franchise restaurants. These decreases were partially offset by proceeds from the disposal of property, fixtures and equipment.
Net cash used in investing activities during 2013 consisted primarily of capital expenditures, net cash paid to acquire a controlling interest in our Brazil operations, the net difference in restricted cash used and restricted cash received and purchases of Company-owned life insurance. These decreases were partially offset by proceeds from the disposal of property, fixtures and equipment.
Net cash provided by investing activities during 2012 consisted primarily of proceeds from a sale-leaseback transaction, proceeds from the sale of property, fixtures and equipment, the net difference in restricted cash and proceeds from the collection of the promissory note and other amounts due in connection with the 2009 sale of the Cheeseburger in Paradise concept. These increases were partially offset by capital expenditures and purchases of Company-owned life insurance.
Financing activities
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Repayments of debt | $ | (925,873 | ) | | $ | (180,805 | ) | | $ | (2,227,666 | ) |
| Purchase of limited partnership interests | (17,211 | ) | | — |
| | (40,582 | ) |
| Repayments of partner deposits and accrued partner obligations | (24,925 | ) | | (23,286 | ) | | (25,397 | ) |
| Financing fees | (4,492 | ) | | (12,519 | ) | | (18,983 | ) |
| Distributions to noncontrolling interests | (3,190 | ) | | (8,059 | ) | | (13,977 | ) |
| Proceeds from borrowings | 816,088 |
| | 100,000 |
| | 1,596,186 |
|
| Proceeds from exercise of stock options, net of shares withheld for employee taxes | 8,140 |
| | 27,350 |
| | 884 |
|
| Excess tax benefits from stock-based compensation | 2,732 |
| | 4,363 |
| | — |
|
| Repayments of notes receivable due from stockholders | — |
| | 5,829 |
| | 1,661 |
|
| Proceeds from the issuance of common stock in connection with initial public offering | — |
| | — |
| | 142,242 |
|
| Issuance of notes receivable due from stockholders | — |
| | — |
| | (587 | ) |
| Net cash used in financing activities | $ | (148,731 | ) | | $ | (87,127 | ) | | $ | (586,219 | ) |
Net cash used in financing activities during 2014 was primarily attributable to the following: (i) repayment of the Term loan B due to the Senior Secured Credit Facility refinancing in May 2014 and voluntary repayments, (ii) repayment of borrowings on our revolving credit facilities and scheduled amortization payments on the 2012 CMBS Loan and
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Term loan A, (iii) repayments of partner deposits and accrued partner obligations, (iv) the purchase of outstanding limited partnership interests in certain restaurants and (v) financing fees related to the Senior Secured Credit Facility refinancing. Net cash used in financing activities was partially offset by proceeds from the refinancing of the Senior Secured Credit Facility and proceeds from the exercise of stock options.
Net cash used in financing activities during 2013 was primarily attributable to: (i) the repayment of long-term debt, (ii) repayments of partner deposits and accrued partnerobligations, (iii) payments of financing fees for the Amended Term Loan B repricing transaction completed in April 2013 and (iv) distributions to noncontrolling interests. This was partially offset by the receipt of proceeds from the exercise of stock options and repayments of notes receivable due from stockholders.
Net cash used in financing activities during 2012 was primarily attributable to: (i) the extinguishment and modification of the 2007 Credit Facilities and the extinguishment of the CMBS Loan and senior notes, (ii) the repayment of borrowings on our revolving credit facilities, (iii) the repayment of long-term debt, (iv) the purchase of outstanding limited partnership interests in certain restaurants, (v) the repayments of partner deposits and other contributions, (vi) the financing fees incurred for the CMBS Refinancing in March 2012 and OSI’sthe refinancing of the 2007 Credit Facilities in October 2012.and (vii) the distributions to noncontrolling interests. This decrease was partially offset by an increase in Unearned revenueproceeds on the issuance of $29.9 million aslong-term debt, borrowings on our revolving credit facilities and proceeds from the issuance of common stock.
FINANCIAL CONDITION
Following is a resultsummary of the increase in third-party gift card and promotional sales and the net increase in Accounts payable and Accrued and otherour current assets, current liabilities of $15.2 million primarily related to the timing of payments at year-end.and working capital:
|
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| (in thousands) | 2014 | | 2013 |
| Current assets | $ | 600,551 |
| | $ | 483,396 |
|
| Current liabilities | 840,110 |
| | 747,270 |
|
| Working capital (deficit) | $ | (239,559 | ) | | $ | (263,874 | ) |
Working capital (deficit) totaled ($203.6)239.6) million and ($248.1)263.9) million at as of December 28, 2014 and December 31, 2012 and 2011,2013, respectively, and included Unearned revenue from unredeemed gift cards of $329.5$376.7 million and $299.6$359.4 million at as of December 28, 2014 and December 31, 2012 and 2011,2013, respectively. We have, and in the future may continue to have, negative working capital balances (as is common for many restaurant companies). We operate successfully with negative working capital because cash collected on restaurant sales is typically received before payment is due on our current liabilities, and our inventory turnover rates require relatively low investment in inventories. Additionally, ongoing cash flows from restaurant operations and gift card sales are used to service debt obligations and forto make capital expenditures.
CREDIT FACILITIESDIVIDENDS AND OTHER INDEBTEDNESSSHARE REPURCHASES
We did not declare or pay any dividends on our common stock during 2014 or 2013. In December 2014, our Board of Directors adopted a dividend policy under which it intends to declare quarterly cash dividends on shares of our common stock. On February 12, 2015, our Board of Directors declared our first quarterly cash dividend of $0.06 per share. Future dividend payments are dependent on our earnings, financial condition, capital expenditure requirements and other factors that our Board of Directors considers relevant.
In December 2014, our Board of Directors approved a holding companyshare repurchase program under which we are authorized to repurchase up to $100.0 million of our outstanding common stock. As of December 28, 2014, no shares had been repurchased under the program. The authorization will expire on June 12, 2016.
Our ability to pay dividends and conductmake share repurchases is dependent on our operations throughability to obtain funds from our subsidiaries certain of whichand to have incurred their own indebtedness as described below.
On October 26, 2012, OSI completed a refinancing of its 2007 Credit Facilities and entered into a Credit Agreement with a syndicate of institutional lenders and financial institutions. The New Facilities provide for senior secured financing of upaccess to $1.225 billion, consisting of a $1.0 billion term loan B and a $225.0 millionour revolving credit facility, including letterfacility. Payment of credit and swing-line loan sub-facilities, maturing seven and five years after the closing date of the New Facilities, respectively. The term loan B was issued with an original issue discount of $10.0 million. In the fourth quarter of 2012, we incurred $13.9 million of third-party financing costsdividends by OSI to complete this transaction of which $11.0 million has been capitalized. These deferred financing costs are primarily included in Other assets, net in our Consolidated Balance Sheet. The remaining $2.9 million of third-party financing costs were expensed as they related to debt held by lenders that participated in both the original and refinanced debt and therefore, the debt was treated as modified rather than extinguished. An additional $6.2 million of loss was recorded for the write-off of deferred financing fees associated with the 2007 Credit Facilities treated as extinguished. We recorded the total $9.1 million loss related to the extinguishment and modification of the 2007 Credit Facilities in Loss on extinguishment and modification of debt in our Consolidated Statement of Operations and Comprehensive Income during the fourth quarter of 2012.
The new senior secured term loan B matures October 26, 2019. The borrowingsBloomin’ Brands is restricted under this facility bear interest at rates ranging from 225 to 250 basis points over the Base Rate or 325 to 350 basis points over the Eurocurrency Rate as defined in the Credit Agreement. The Base Rate option is the highest of (i) the prime rate of Deutsche Bank Trust Company Americas, (ii) the federal funds effective rate plus 0.5 of 1.0% or (iii) the Eurocurrency Rate with a one month interest period plus 1.0% (“Base Rate”) (3.25% at December 31, 2012). The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.21% to 0.51% at December 31, 2012). The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders. With respect to the new senior secured term loan B, the Base Rate is subject to an interest rate floor of 2.25% and the Eurocurrency Rate is subject to an interest rate floor of 1.25%.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - 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 consolidated first lien net leverage ratio), as defined in the Credit Agreement, beginning with the fiscal year ending December 31, 2013 and subject to certain exceptions;
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.
The New Facilities require scheduled quarterly payments on the term loan B equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters commencing on the quarter ending March 31, 2013. 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 loan B was $1.0 billion at December 31, 2012 of which $10.0 million was classified as current due to OSI’s required quarterly payments. Subsequent to December 31, 2012, OSI voluntarily made aggregate prepayments on its term loan B of $25.0 million.
The revolving credit facility matures October 26, 2017 and provides for swing-line loans and letters of credit of up to $225.0 million for working capital and general corporate purposes. The revolving credit facility bears interest at rates ranging from 200 to 250 basis points over the Base Rate or 300 to 350 basis points over the Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at December 31, 2012, however, $41.2 million of the credit facility was not available for borrowing as: (i) $34.5 million of the credit facility was committed for the issuance of letters of credit as required by insurance companies that underwrite our workers’ compensation insurance and also, where required, for construction of new restaurants, (ii) $6.1 million of the credit facility was committed for the issuance of a letter of credit to the insurance company that underwrites our bonds for liquor licenses, utilities, liens and construction and (iii) $0.6 million of the credit facility was committed for the issuance of other letters of credit. Total outstanding letters of credit issued under OSI’s new revolving credit facility may not exceed $100.0 million. Fees for the letters of credit are 3.63% and the commitment fees for unused revolving credit commitments are 0.50%.
The New Facilities require OSI to comply with certain covenants, including, in the case of the revolving credit facility, a covenant to maintain a specified quarterly Total Net Leverage Ratio (“TNLR”) test. The TNLR is the ratio of Consolidated Total Debt to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments as defined in the Credit Agreement) and may not exceed a level set at 6.00 to 1.00 for the last day of any fiscal quarter in 2012 or 2013, with step-downs over a four-year period to a maximum level of 5.00 to 1.00 in 2017. The other negative covenants limit, but provide exceptions for, OSI’s ability and the ability of its restricted subsidiaries to take various actions relating to indebtedness, significant payments, mergers and similar transactions. The Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. At December 31, 2012, OSI was in compliance with its debt covenants under the New Facilities.
The New Facilities are guaranteed by each of OSI’s current and future domestic 100% owned restricted subsidiaries in the Outback Steakhouse and Carrabba’s Italian Grill concepts and certain other subsidiaries (the “Guarantors”) and by OSI HoldCo, Inc., OSI’s direct owner and our indirect, wholly-owned subsidiary (“OSI HoldCo”).
OSI’s obligations are secured by substantially all of its assets and assets of the Guarantors and OSI HoldCo, in each case, now owned or later acquired, including a pledge of all of OSI’s capital stock, the capital stock of substantially all of OSI’s domestic subsidiaries and 65% of the capital stock of foreign subsidiaries that are directly owned by OSI, OSI HoldCo, or a Guarantor. OSI is also required to provide additional guarantees of the New Facilities in the future from other domestic wholly-owned restricted subsidiaries if the Consolidated EBITDA attributable to OSI’s non-guarantor domestic wholly-owned restricted subsidiaries as a group exceeds 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries. If this occurs, guarantees would be required from additional domestic wholly-owned restricted subsidiaries in such number that would be sufficient to lower the aggregate Consolidated EBITDA of the
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
non-guarantor domestic wholly-owned restricted subsidiaries as a group to an amount not in excess of 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries.
Prior to the New Facilities, OSI was party to the 2007 Credit Facilities with a syndicate of institutional lenders and financial institutions, which were entered into on June 14, 2007. These senior secured credit facilities provided 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 provided financing for capital expenditures only.
At each rate adjustment, OSI had the option to select an Original Base Rate plus 125 basis points or an Original Eurocurrency Rate plus 225 basis points for the borrowings under this facility. The base rate option was the higher of the prime rate of Deutsche Bank AG New York Branch and the federal funds effective rate plus 0.5 of 1% (“Original Base Rate”) (3.25% at December 31, 2011). The eurocurrency rate option was the 30, 60, 90 or 180-day eurocurrency rate (“Original Eurocurrency Rate”) (ranging from 0.38% to 0.88% at December 31, 2011). The Original Eurocurrency Rate may have had a nine- or twelve-month interest period if agreed upon by the applicable lenders. With either the Original Base Rate or the Original Eurocurrency Rate, the interest rate would have been reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published was B1 or higher (the rating was Caa1 at December 31, 2011).
OSI was 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 exceeded 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 was 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 were less than $100.0 million, in both cases with 100% of its “annual true cash flow,” as defined in the credit agreement. In accordance with these requirements, in April 2012, 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.”
OSI’s 2007 Credit Facilities required 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 were reduced by the application of any prepayments. The outstanding balance on the term loans was $1.0 billion at December 31, 2011. We classified $13.1 million of OSI’s term loans as current at December 31, 2011 due to OSI’s required quarterly payments and the results of its covenant calculations, which indicated the additional term loan prepayments, as described above, were not required. In October 2011, we sold our nine Company-owned Outback Steakhouse restaurants in Japan to a subsidiary of S Foods, Inc. and used the net cash proceeds from this sale to pay down $7.5 million of OSI’s outstanding term loans in accordance with the terms of the OSI credit agreement amended in January 2010.
Proceeds of loans and letters of credit under OSI’s $150.0 million working capital revolving credit facility provided 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 bore interest at rates ranging from 100 to 150 basis points over the Original Base Rate or 200 to 250 basis points over the Original Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at December 31, 2011, however, $67.6 million of the credit facility was committed for the issuance of letters of credit and not available for borrowing. OSI’s total outstanding
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
letters of credit issued under its working capital revolving credit facility was not permitted to exceed $75.0 million. Fees for the letters of credit ranged from 2.00% to 2.25% and the commitment fees for unused working capital revolving credit commitments ranged from 0.38% to 0.50%.
Proceeds of loans under OSI’s $100.0 million pre-funded revolving credit facility were available to provide financing for capital expenditures, if the capital expenditure account described above had a zero balance. As of December 31, 2011, OSI had $33.0 million outstanding on its pre-funded revolving credit facility. This borrowing was recorded in Current portion of long-term debt in our Consolidated Balance Sheet, as OSI was required to repay any outstanding borrowings in April following each fiscal year using its “annual true cash flow,” as defined in the credit agreement. At each rate adjustment, OSI had the option to select the Original Base Rate plus 125 basis points or an Original Eurocurrency Rate plus 225 basis points for the borrowings under this facility. In either case, the interest rate was reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published is B1 or higher. Fees for the unused portion of the pre-funded revolving credit facility were 2.43%.
At December 31, 2011, OSI was in compliance with its debt covenants under the 2007 Credit Facilities.
Effective March 27, 2012, New PRP entered into 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 our properties, and 2 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 London Interbank Offered Rate (“LIBOR”) (with a floor of 1%) plus 2.37%. The first mezzanine loan bears interest at a rate of 9.00% 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 (see “—Transactions”) and excess cash held in PRP, were used to repay PRP’s existing CMBS Loan. As a result of the CMBS Refinancing, the net amount repaid along with scheduled maturities within P1Y year, $281.3 million, was classified as current at December 31, 2011. During the first quarter of 2012, we recorded a $2.9 million loss related to the extinguishment in Loss on extinguishment and modification of debt in our Consolidated Statement of Operations and Comprehensive Income. We 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 Other assets, net in our Consolidated Balance Sheets. At December 31, 2012, the outstanding balance, excluding the debt discount, on the 2012 CMBS Loan was $493.9 million.
In connection with the 2012 CMBS Loan, New PRP entered into an interest rate cap (the “Rate Cap”) 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 7.00% per annum, the counterparty must pay to New PRP such excess on the notional amount of the floating rate component. If necessary, we would record mark-to-market changes in the fair value of this derivative instrument in 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.
Prior to the 2012 CMBS Loan, PRP had first mortgage and mezzanine notes (together, 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, 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 our subsidiaries. The CMBS Loan comprised a note payable and 4 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.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 2011, the outstanding balance on PRP’s CMBS Loan was $775.3 million. We 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.
On June 14, 2007, OSI issued senior notes in an original aggregate principal amount of $550.0 million under an indenture among OSI, as issuer, OSI Co-Issuer, Inc., as co-issuer (“Co-Issuer”), a third-party trustee and the Guarantors. The senior notes were scheduled to mature on June 15, 2015. Interest was payable semiannually in arrears, at 10% per annum, in cash on each June 15 and December 15. Interest payments to the holders of record of the senior notes occurred on the immediately preceding June 1 and December 1. Interest was computed on the basis of a 360-day year consisting of twelve 30-day months. The principal balance of senior notes outstanding at December 31, 2011 was $248.1 million.
During the third quarter of 2012, OSI retired the aggregate outstanding principal amount of its 10% senior notes through a combination of a tender offer and early redemption call. The senior notes retirement was funded using a portion of the net proceeds from our initial public offering together with cash on hand. OSI paid an aggregate of $259.8 million to retire the senior notes, which included $248.1 million in aggregate outstanding principal, $6.5 million of prepayment premium and early tender incentive fees and $5.2 million of accrued interest. The senior notes were satisfied and discharged on August 13, 2012. As a result of these transactions, we recorded a loss from the extinguishment of debt of $9.0 million in the third quarter of 2012 in Loss on extinguishment and modification of debt in our Consolidated Statement of Operations and Comprehensive Income. This loss included $2.4 million for the write-off of unamortized deferred financing fees that related to the extinguished senior notes.
As of December 31, 2012 and 2011, OSI had approximately $9.8 million and $9.1 million, respectively, of notes payable at interest rates ranging from 0.63% to 7.00% and from 0.76% to 7.00%, respectively. These notes have been primarily issued for buyouts of managing and area operating partner interests in the cash flows of their restaurants and generally are payable over a period of two through five years.
DEBT GUARANTEES
Effective October 1, 2012, we purchased the remaining interests in our Roy’s joint venture from RY-8 for $27.4 million. This purchase price consisted of the assumption of RY-8’s $24.5 million line of credit by OSI that had been recorded in Guaranteed debt in our Consolidated Balance Sheet at December 31, 2011, forgiveness of $1.8 million in loans due from RY-8 to OSI and a $1.1 million cash payment. In December 2012, we paid the $24.5 million outstanding balance on the line of credit assumed from RY-8.
Prior to this acquisition, OSI was the guarantor of an uncollateralized line of credit that permitted borrowing of up to $24.5 million for RY-8 in the development of Roy’s restaurants. The line of credit was set to expire on April 15, 2013. According to the terms of the line of credit agreement, RY-8 had the ability to borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement. On the termination date of the agreement, the entire outstanding principal amount of the loan then outstanding and any accrued interest would have been due. At December 31, 2011, the outstanding balance on the line of credit was $24.5 million.
RY-8’s obligations under the line of credit were unconditionally guaranteed by OSI and Roy’s Holdings, Inc. If an event of default had occurred, as defined in the agreement, the total outstanding balance, including any accrued interest, would have been immediately due from the guarantors. At December 31, 2011, $24.5 million of OSI’s $150.0 million working capital revolving credit facility was committed for the issuance of a letter of credit for this guarantee.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS
During the second quarter of 2012, we performed our annual assessment for impairment of goodwill and other indefinite-lived intangible assets. Our review of the recoverability of goodwill was based primarily upon an analysis of the discounted cash flows of the related reporting units as compared to the carrying values. We also used the relief from royalty method to determine the fair value of our indefinite-lived intangible assets. We did not record any goodwill or indefinite-lived intangible asset impairment charges as a result of this assessment and determined that none of our reporting units are at risk for material goodwill impairment.
FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date (exit price) and is a market-based measurement, not an entity-specific measurement. To measure fair value, we incorporate assumptions that market participants would use in pricing the asset or liability, and utilize market data to the maximum extent possible. Measurement of fair value incorporates nonperformance risk (i.e., the risk that an obligation will not be fulfilled). In measuring fair value, we reflect the impact of our own credit risk on our liabilities, as well as any collateral. We also consider the credit standing of our counterparties in measuring the fair value of our assets.
In connection with the 2012 CMBS Loan, we entered into a Rate Cap 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. Additionally, we 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, which was terminated in June 2012 (see “—Credit Facilities and Other Indebtedness”). The interest rate caps had nominal fair market value at December 31, 2012 and 2011, respectively.
In September 2007, we entered into an interest rate collar with a notional amount of $1.0 billion as a method to limit the variability of OSI’s 2007 Credit Facilities. The collar consisted of a LIBOR cap of 5.75% and a LIBOR floor of 2.99%. The collar’s first variable-rate set date was December 31, 2007, and the option pairs expired at the end of each calendar quarter beginning March 31, 2008 and ending September 30, 2010, which was the maturity date of the collar. The quarterly expiration dates corresponded to the scheduled amortization payments of OSI’s term loan then in effect. We expensed $19.9 million of interest for the year ended December 31, 2010 as a result of the quarterly expiration of the collar’s option pairs. We recorded mark-to-market changes in the fair value of the derivative instrument in earnings in the period of change. We included $18.5 million of net interest income for the year ended December 31, 2010, in Interest expense, net in our Consolidated Statement of Operations and Comprehensive Income for the mark-to-market effects of this derivative instrument.
We invested $37.7 million of our excess cash in money market funds classified as Cash and cash equivalents or restricted cash on our Consolidated Balance Sheet at December 31, 2011, 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. As a result, we have determined that the inputs used to value this investment fall within Level 1 of the fair value hierarchy. The amount of excess cash invested in money market funds at December 31, 2012 was immaterial to our consolidated financial statements.
We recorded $10.6 million, $11.6 million and $2.2 million of impairment charges as a result of the fair value measurement on a nonrecurring basis of its long-lived assets held and used during the years ended December 31, 2012, 2011 and 2010, respectively, primarily related to certain specifically identified restaurant locations that have, or are scheduled to be, closed, relocated or renovated or are under-performing. The impaired long-lived assets had $6.2 million and $30.8 million of remaining fair value at December 31, 2012 and 2011, respectively. Restaurant closure and related expenses of $2.4 million, $2.4 million and $3.0 million were recognized for the years ended December 31, 2012, 2011 and 2010, respectively. Impairment losses for long-lived assets held and used and restaurant closure and
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related expenses were recognized in Provision for impaired assets and restaurant closings in the Consolidated Statement of Operations and Comprehensive Income.
We used quoted prices from brokers (Level 1), third-party market appraisals (Level 2) and discounted cash flow models (Level 3) to estimate the fair value of the long-lived assets. 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, we have 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.
The following table presents quantitative information related to the unobservable inputs used in our Level 3 fair value measurements for the impairment loss incurred in the year ended December 31, 2012:
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| | |
Unobservable Input | | Range |
Weighted-average cost of capital (1) | | 9.5% - 11.2% |
Long-term growth rates | | 3.0% |
Annual revenue growth rates (2) | | (8.7)% - 4.3% |
____________________
| |
(1) | Weighted average of the costs of capital unobservable input range for the year ended December 31, 2012 was 10.8%.
|
| |
(2) | Weighted average of the annual revenue growth rate unobservable input range for the year ended December 31, 2012 was 2.6%.
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Sales declines at our restaurants, unplanned increases in health insurance, commodity or labor costs, deterioration in overall economic conditions and challenges in the restaurant industry may result in future impairment charges. It is possible that changes in circumstances or changes in our judgments, assumptions and estimates, could result in a future impairment charge of a portion or all of our goodwill, other intangible assets or long-lived assets held and used.
DEFERRED COMPENSATION PLANS
Managing and Chef Partners
Historically, the managing partner of each Company-owned domestic restaurant and the chef partner of each Fleming’s Prime Steakhouse and Wine Bar and Roy’s restaurant were required, as a condition of employment, to sign a five-year employment agreement and to purchase a non-transferable ownership interest in the Management Partnership that provided management and supervisory services to his or her restaurant. The purchase price for a managing partner’s ownership interest was fixed at $25,000, and the purchase price for a chef partner’s ownership interest ranged from $10,000 to $15,000. Managing and chef partners had the right to receive monthly distributions from the Management Partnership based on a percentage of their restaurant’s monthly cash flows for the duration of the agreement, which varied by concept from 6% to 10% for managing partners and 2% to 5% for chef partners. Further, managing and chef partners were eligible to participate in the PEP, a deferred compensation program, upon completion of their five-year employment agreement. Amounts credited to partners’ PEP accounts are fully vested at all times and participants have no discretion with respect to the form of benefit payments under the PEP.
In April 2011, we modified our managing and chef partner compensation structure to provide greater incentives for sales and profit growth. Under the revised program, managing and chef partners continue to sign five-year employment agreements and receive monthly distributions of the same percentage of their restaurant’s cash flow as under the prior program. However, under the revised program, in lieu of participation in the PEP, managing partners and chef partners are eligible to receive deferred compensation payments under the POA. The POA places greater emphasis on year-over-year growth in cash flow than the PEP. Managing and chef partners receive a greater value under the POA than they would have received under the PEP if certain levels of year-over-year cash flow growth are achieved and a lesser value than under the PEP if these levels are not achieved.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The POA requires managing and chef partners to make an initial deposit of up to $10,000 into their “Partner Investment Account,” and we make a bookkeeping contribution to each partner’s “Company Contributions Account” no later than the end of February of each year following the completion of each year (or partial year where applicable) under the partner’s employment agreement. The value of each of our contributions is equal to a percentage of the partner’s restaurant’s cash flow plus, if the restaurant has been open at least 18 calendar months, a percentage of the year-over-year increase in the restaurant’s cash flow.
The POA also provides an annual bonus known as the President’s Club, paid in addition to the monthly distributions of cash flow, designed to reward increases in a restaurant’s annual sales above the concept sales plan with a required flow-through percentage of the incremental sales to cash flow as defined in the plan. Managing and chef partners whose restaurants achieve certain annual sales targets above the concept’s sales plan (and the required flow-through percentage) receive a bonus equal to a percentage of the incremental sales, such percentage determined by the sales target achieved.
Amounts credited to each partner’s account under the POA may be allocated by the partner among benchmark funds offered under the POA, and the account balances of the partner will increase or decrease based on the performance of the benchmark funds. Upon termination of employment, all remaining balances in the Company Contributions Account in the POA are forfeited unless the partner has been with us for twenty years or more. Unless previously forfeited under the terms of the POA, 50% of the partner’s total account balances generally will be distributed in the March following the completion of the initial five-year contract term with subsequent distributions varying based on the length of continued employment as a partner. The deferred compensation obligations under the POA are our unsecured obligations.
All managing and chef partners who execute new employment agreements after May 1, 2011 are required to participate in the revised partner program, including the POA. Managing and chef partners with an employment agreement scheduled to expire December 1, 2011 or later had the opportunity (from April 27, 2011 through July 27, 2011) to amend their employment agreements to convert their existing partner program to participation in the new partner program, including the POA, effective June 1, 2011. As of December 31, 2012 and 2011, our POA liability was $15.3 million and $8.0 million, respectively, which primarily was recorded in Partner deposits and accrued partner obligations in our Consolidated Balance Sheets.
Upon the closing of the Merger, certain stock options that had been granted to managing and chef partners under a pre-merger managing partner stock plan upon completion of a previous employment contract were converted into the right to receive cash in the form of a “Supplemental PEP” contribution.
As of December 31, 2012, our total vested liability with respect to obligations primarily under the PEP and Supplemental PEP was approximately $122.6 million, of which $17.8 million and $104.8 million was included in Accrued and other current liabilities and Other long-term liabilities, net, respectively, in our Consolidated Balance Sheet. As of December 31, 2011, our total vested liability with respect to obligations primarily under the PEP and Supplemental PEP was approximately $107.8 million, of which $11.8 million and $96.0 million was included in Accrued and other current liabilities and Other long-term liabilities, net, respectively, in our Consolidated Balance Sheet. Partners may allocate the contributions into benchmark investment funds, and these amounts due to participants will fluctuate according to the performance of their allocated investments and may differ materially from the initial contribution and current obligation.
As of December 31, 2012 and 2011, we had approximately $67.8 million and $56.9 million, respectively, in various corporate-owned life insurance policies and at December 31, 2011, another $0.3 million of restricted cash, both of which are held within an irrevocable grantor or “rabbi” trust account for settlement of our obligations primarily under the PEP, Supplemental PEP and POA. We are the sole owner of any assets within the rabbi trust and participants are considered our general creditors with respect to assets within the rabbi trust.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of December 31, 2012 and 2011, there were $65.1 million and $55.6 million, respectively, of unfunded obligations primarily related to the PEP, Supplemental PEP and POA, excluding amounts not yet contributed to the partners’ investment funds, which may require the use of cash resources in the future.
We require the use of capital to fund the PEP and the POA as each managing and chef partner earns a contribution, and currently estimate funding requirements ranging from $16.0 million to $19.0 million for PEP and from $5.0 million to $9.0 million for POA in each of the next two years through December 31, 2014. Actual funding of the current PEP and POA obligations and future funding requirements may vary significantly depending on timing of partner contracts, forfeiture rates and numbers of partner participants and may differ materially from estimates.
Area Operating Partners
Historically, an area operating partner was required, as a condition of employment and within 30 days of the opening of his or her first restaurant, to make an initial investment of $50,000 in the Management Partnership that provides supervisory services to the restaurants that the area operating partner oversees. This interest gave the area operating partner the right to distributions from the Management Partnership based on a percentage of his or her restaurants’ monthly cash flows for the duration of the agreement, typically ranging from 4% to 9%. We have the option to purchase an area operating partner’s interest in the Management Partnership after the restaurant has been open for a five-year period on the terms specified in the agreement.
For restaurants opened on or between January 1, 2007 and December 31, 2011, the area operating partner’s percentage of cash distributions and buyout percentage was calculated based on the associated restaurant’s return on investment compared to our targeted return on investment and ranged from 3.0% to 12.0% depending on the concept. This percentage was determined after the first five full calendar quarters from the date of the associated restaurant’s opening and was adjusted each quarter thereafter based on a trailing 12-month restaurant return on investment. The buyout percentage was the area operating partner’s average distribution percentage for the 24 months immediately preceding the buyout. Buyouts were paid in cash within 90 days or paid over a two-year period.
In 2011, we also began a version of the President’s Club annual bonus described above under “—Managing and Chef Partners” for area operating partners to provide additional rewards for achieving sales targets with a required flow-through of the incremental sales to cash flow as defined in the plan.
In April 2012, we revised our area operating partner program for restaurants opened on or after January 1, 2012. For these restaurants, an area operating partner is required, as a condition of employment, to make a deposit of $10,000 within thirty days of the opening of each new restaurant that he or she oversees, up to a maximum deposit of $50,000 (taking into account investments under prior programs). This deposit gives the area operating partner the right to monthly payments based on a percentage of his or her restaurants’ monthly cash flows for the duration of the employment agreement, typically ranging from 4.0% to 4.5%. After the restaurant has been open for a five-year period, the area operating partner will receive a bonus equal to a multiple of the area operating partner’s average monthly payments for the 24 months immediately preceding the bonus date. The bonus will be paid within 90 days or over a two-year period, depending on the bonus amount.
Highly Compensated Employees
We provide a deferred compensation plan for our highly compensated employees who are not eligible to participate in the OSI Restaurant Partners, LLC Salaried Employees 401(k) Plan and Trust. The deferred compensation plan allows these employees to contribute from 5% to 90% of their base salary and up to 100% of their cash bonus on a pre-tax basis to an investment account consisting of various investment fund options. We do not currently intend to provide any matching or profit-sharing contributions, and participants are fully vested in their deferrals and their related returns. Participants are considered unsecured general creditors in the event of our bankruptcy or insolvency.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change. We recorded a valuation allowance to reduce our deferred income tax assets to the amount that is more likely than not to be realized. We have considered future taxable income and ongoing feasible tax planning strategies in assessing the need for the valuation allowance.
Should we determine that we would be able to realize our remaining deferred income tax assets in the foreseeable future, a release of all, or part, of the related valuation allowance could cause an immediate material increase to income in the period such determination is made. Significant management judgment is required in determining the period in which the reversal of a valuation allowance should occur. We consider all available evidence, both positive and negative, such as historical levels of income and future forecasts of taxable income among other items in determining whether a full or partial release of a valuation allowance is required. In addition, our assessments sometimes require us to schedule future taxable income in accordance with the applicable tax accounting guidance to assess the appropriateness of a valuation allowance which further requires the exercise of significant management judgment. Such release of the valuation allowance could occur within the next 12 months upon resolution of the aforementioned uncertainties.
Any release of valuation allowance will be recorded as a tax benefit increasing net income or as an adjustment to paid-in capital. We expect that a significant portion of the release of the valuation allowance will be recorded as an income tax benefit at the time of release, significantly increasing our reported net income. Because we expect our recorded tax rate to increase in subsequent periods following a significant release of the valuation allowance, our net income will be negatively affected in periods following the release. Any valuation allowance release will not affect the amount of cash paid for income taxes.
As of December 31, 2012 and 2011, we had $261.7 million and $482.1 million, respectively, in cash and cash equivalents (excluding restricted cash of $20.1 million and $24.3 million, respectively), of which approximately $92.9 million and $82.2 million, respectively, was held by foreign affiliates, a portion of which would be subject to additional taxes if repatriated to the United States. Based on cash and working capital projections within domestic tax jurisdictions, we believe we will generate sufficient cash flows from our United States operations to meet our future debt repayment requirements, anticipated working capital needs and planned capital expenditures, as well as all of our other business needs in the United States.
A provision for income taxes has not been recorded for any United States or additional foreign taxes on undistributed earnings related to our foreign affiliates as these earnings were and are expected to continue to be permanently reinvested. If we identify an exception to our general reinvestment policy of undistributed earnings, additional taxes will be posted. It is not practical to determine the amount of unrecognized deferred income tax liabilities on the undistributed earnings. The international jurisdictions in which we operate do not have any known restrictions that would prohibit the repatriation of cash and cash equivalents.
We are currently under examination by the IRS for the years ended December 31, 2009 through 2010. At this time, we do not believe that the outcome of any examination will have a material impact on our results of operations or financial position.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DIVIDENDS
We did not declare or pay any dividends on our common stock during 2011 or 2012. Our Board of Directors does not intend to pay regular dividends on our common stock. However, we expect to reevaluate our dividend policy on a regular basis and may, subject to compliance with the covenants contained in the New Facilities and other considerations, determine to pay dividends in the future.
Our ability to pay dividends is dependent on our ability to obtain funds from our subsidiaries. Payment of dividends by OSI to Bloomin’ Brands is restricted under the New Facilities to dividends for the purpose of paying Bloomin’ Brands’ franchise and income taxes and ordinary course operating expenses; dividends for certain other limited purposes; and other dividends subject to an aggregate cap over the term of the agreement. Restricted dividend payments from OSI to Bloomin’ Brands can be made on an unlimited basis provided the total net leverage ratio does not exceed 2:50 to 1.00.
OFF-BALANCE SHEET ARRANGEMENTS
None.
OTHER MATERIAL COMMITMENTS
Our contractual obligations, debt obligations commitments and debt guaranteescommitments as of December 31, 201228, 2014 are summarized in the table below (in thousands):below:
|
| | | | | | | | | | | | | | | | | | | | |
| | | PAYMENTS DUE BY PERIOD |
| | | | | LESS THAN | | 1-3 | | 3-5 | | MORE THAN |
| | | TOTAL | | 1 YEAR | | YEARS | | YEARS | | 5 YEARS |
| Contractual Obligations | | | | | | | | | | |
| Long-term debt (including current portion) | | $ | 1,508,230 |
| | $ | 25,604 |
| | $ | 45,241 |
| | $ | 485,010 |
| | $ | 952,375 |
|
| Interest (1) | | 449,501 |
| | 79,948 |
| | 157,169 |
| | 131,598 |
| | 80,786 |
|
| Operating leases (2) | | 873,615 |
| | 128,855 |
| | 213,328 |
| | 140,966 |
| | 390,466 |
|
| Purchase obligations (3) | | 320,291 |
| | 279,876 |
| | 37,168 |
| | 3,247 |
| | — |
|
| Partner deposits and accrued partner obligations (4) | | 100,533 |
| | 14,771 |
| | 37,716 |
| | 15,932 |
| | 32,114 |
|
| Other long-term liabilities (5) | | 166,230 |
| | — |
| | 68,956 |
| | 40,628 |
| | 56,646 |
|
| Other current liabilities (6) | | 38,044 |
| | 38,044 |
| | — |
| | — |
| | — |
|
| Total contractual obligations | | $ | 3,456,444 |
| | $ | 567,098 |
| | $ | 559,578 |
| | $ | 817,381 |
| | $ | 1,512,387 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | PAYMENTS DUE BY PERIOD |
| | | | LESS THAN | | 1-3 | | 3-5 | | MORE THAN |
| (in thousands) | TOTAL | | 1 YEAR | | YEARS | | YEARS | | 5 YEARS |
| Recorded Contractual Obligations | | | | | | | | | |
| Long-term debt (1) | $ | 1,321,916 |
| | $ | 27,601 |
| | $ | 501,130 |
| | $ | 791,927 |
| | $ | 1,258 |
|
| Deferred compensation and other partner obligations (2) | 202,805 |
| | 42,921 |
| | 71,976 |
| | 46,672 |
| | 41,236 |
|
| Other recorded contractual obligations (3) | 25,031 |
| | 6,508 |
| | 6,664 |
| | 2,888 |
| | 8,971 |
|
| Unrecorded Contractual Obligations | | | | | | | | | |
| Interest (4) | 195,256 |
| | 55,928 |
| | 96,126 |
| | 43,202 |
| | — |
|
| Operating leases | 1,012,906 |
| | 146,855 |
| | 245,068 |
| | 176,941 |
| | 444,042 |
|
| Purchase obligations (5) | 563,175 |
| | 303,470 |
| | 104,071 |
| | 92,700 |
| | 62,934 |
|
| Total contractual obligations | $ | 3,321,089 |
| | $ | 583,283 |
| | $ | 1,025,035 |
| | $ | 1,154,330 |
| | $ | 558,441 |
|
____________________
| |
| (1) | Includes interest estimated on OSI’s New Facilities and New PRP’s 2012 CMBS Loan with gross outstanding balances of $1.0 billion and $493.9 million, respectively, at December 31, 2012. Projected future interest payments for OSI’s New Facilities and the variable-rate tranche of New PRP’s 2012 CMBS Loan are based on interest rates in effect at December 31, 2012 and assumes only scheduled principal payments. Interest obligations also include letter of credit and commitment fees for the used and unused portions of OSI’s revolving credit facility and interest related to OSI’s capital lease obligations. Interest on OSI’s notes payable issued for the returnExcludes unamortized discount of capital to managing and area operating partners and the buyouts of area operating partner interests has been excluded from the table. In addition, interest expense associated with deferred financing fees was excluded from the table as the expense is non-cash in nature. $6.1 million. |
| |
| (2) | Total minimum leaseIncludes deferred compensation obligations, deposits and other accrued obligations due to our restaurant partners. Timing and amounts of payments have not been reduced by minimum sublease rentalsmay vary significantly based on employee turnover, return of $2.4 million due in future periods under non-cancelable subleases.
deposits and changes to buyout values. |
| |
| (3) | We have minimum purchase commitments with various vendors through November 2017. Outstanding minimum purchase commitments consist primarily of beef, pork, cooking oil, butter andIncludes other food and beverage products, as well as, commitments for advertising, marketing, technology, insurance, and sports sponsorships. |
| |
(4) | Timing of payments of partner deposits and accrued partner obligations are estimates only and may vary significantly in amounts and timing of settlement based on employee turnover, return of deposits to us in accordance with employee agreements and changes to buyout values of employee partners. |
| |
(5) | Other long-term liabilities include but are not limited to: long-term portionprimarily consisting of amounts owed to managing and chef partners for variousnon-partner deferred compensation programs, long-term insurance accrualsobligations, restaurant closing cost liabilities and long-term split-dollar arrangements on life insurance policies. The long-term portionasset retirement obligations. As of the liability forDecember 28, 2014, unrecognized tax benefits and the related accrued interest and penalties was $1.0of $17.6 million and $0.5 million, respectively, at December 31, 2012. These amounts were excluded from the table since it is not possible to estimate when these future payments will occur. In addition, net unfavorable leases, the long-term portion of deferred gain on the Sale-Leaseback Transaction and other miscellaneous items of approximately $96.6 million at December 31, 2012 were excluded from the table as payments are not associated with these liabilities.
|
| |
(6)(4) | Other current liabilitiesProjected future interest payments on long-term debt are based on interest rates in effect as of December 28, 2014 and assume only scheduled principal payments. Estimated interest expense includes the impact of our variable-to-fixed interest rate swap agreements. As of December 28, 2014, we had a derivative liability of $3.9 million for the interest rate swap agreements recorded in our Consolidated Balance Sheet. |
| |
| (5) | Purchase obligations include agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the current portion of amounts owed to managing and chef partners for various compensation programs, the current portion of insurance accruals, the current portionapproximate timing of the liability for unrecognized tax benefitstransaction. We have purchase obligations with various vendors that consist primarily of inventory, advertising, technology and the accrued interest and penalties related to uncertain tax positions.store level service contracts. |
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these accompanying consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities during the reporting period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider an accounting estimate to be critical if it requires assumptions to be made and changes in these assumptions could have a material impact on our consolidated financial condition or results of operations.
Property, Fixtures and Equipment
Property, fixtures and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes renewal periods that are reasonably assured. The useful lives of the assets are based upon our expectations for the period of time that the asset will be used to generate revenues. We periodically review the assets for changes in circumstances, which may impact their useful lives.
|
| |
Buildings and building improvements | 20 to 30 years |
Furniture and fixtures | 5 to 7 years |
Equipment | 2 to 7 years |
Leasehold improvements | 5 to 20 years |
Capitalized software | 3 to 5 years |
We capitalize direct and indirect internal costs clearly associated with the acquisition, development, design and construction of Company-owned restaurant locations as these costs will provide us a future benefit. Internal costs of $2.4 million were capitalized during the year ended December 31, 2012. Internal costs incurred for the years ended December 31, 2011 and 2010 were not material to our consolidated financial statements.
Our accounting policies regarding property, fixtures and equipment include certain management judgments and projections regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated or amortized, the determination of expected lease terms and the determination of what constitutes increasing the value and useful life of existing assets. These estimates, judgments and projections may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used.
Operating Leases
Rent expense for our operating leases, which generally have escalating rentals over the term of the lease and may include potential rent holidays, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of our leases, which is typically before rent payments are due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in the Consolidated Balance Sheets. Payments received from landlords as incentives for leasehold improvements are recorded as deferred rent and are amortized on a straight-line basis over the term of the lease as a reduction of rent expense. Lease termination fees, if any, and future obligated lease payments for closed locations are recorded as an expense in the period they are incurred. Assets and liabilities resulting from the Merger relating to favorable and unfavorable lease amounts are amortized on a straight-line basis to rent expense over the remaining lease term.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Impairment or Disposal of Long-Lived Assets
We assess the potentialLong-lived assets are reviewed for impairment of definite lived intangibles, including trademarks, franchise agreements and net favorable leases, and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In evaluating long-lived restaurant assets for impairment, we consider a number of factors relevant to the assets’ current market value and future ability to generate cash flows.
If these factors indicate that we should review the carrying value of the restaurant’s long-lived assets, we perform a two-step impairment analysis. Each of our restaurantsThe evaluation is evaluated individually for impairment since that isperformed at the lowest level at whichof identifiable cash flows can be measured independently fromindependent of other assets. For long-lived assets deployed at our restaurants, we review for impairment at the individual restaurant level.
When evaluating for impairment, the total future undiscounted cash flows of otherexpected to be generated by the asset groups.are compared to the carrying amount. If the total future undiscounted cash flows expected to be generated by the assets are less than the carrying amount, as prescribed by step one testing, recoverability is measured in step two by comparing fair valuethis may be an indicator of the asset to its carrying amount. Should the carrying amount exceed the asset’s estimated fair value, animpairment. An impairment loss is charged to earnings. Restaurant fair value is determined based on estimates of discounted future cash flows; and impairment charges primarily occur as a result ofrecognized in earnings when the asset’s carrying value of a restaurant’s assets exceedingexceeds its estimated fair marketvalue. Fair value primarily due to anticipated closures or decliningis generally estimated using a discounted cash flow model. The key estimates and assumptions used in this model are future cash flow estimates, with material changes generally driven by changes in expected use, and the discount rate.
If actual results are not consistent with our estimates and assumptions used in estimating future cash flows from lower projected future sales at existing locations.
and asset fair values, we may be exposed to losses that could be material. We incurred totaldo not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment charges and restaurant closing expense of $13.0 million, $14.0 million and $5.2 million for the years ended December 31, 2012, 2011 and 2010, respectively (see “—Results of Operations—Costs and Expenses—Provision for Impaired Assets and Restaurant Closings”). All impairment charges are recorded in Provision for impaired assets and restaurant closings in our Consolidated Statements of Operations and Comprehensive Income.
Our judgments and estimates related to the expected useful lives of long-lived assets are affected by factors such as changes in economic conditions, operating performance and expected use. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, these factors could cause us to realize a material impairment charge.
Restaurant sites and certain other assets to be sold are included in assets held for sale when certain criteria are met, including the requirement that the likelihood of selling the assets within one year is probable. For assets that meet the held for sale criteria, we separately evaluate whether the assets also meet the requirements to be reported as discontinued operations. If we no longer had any significant continuing involvement with respect to the operations of the assets and cash flows were discontinued, we would classify the assets and related results of operations as discontinued. Assets whose sale is not probable within one year remain in property, fixtures and equipment until their sale is probable within one year. We had $2.4 million and $1.3 million of assets held for sale as of December 31, 2012 and 2011, respectively, recorded in Other current assets, net.
Generally, restaurant closure costs are expensed as incurred. When it is probable that we will cease using the property rights under a non-cancelable operating lease, we record a liability for the net present value of any remaining lease obligations net of estimated sublease income that can reasonably be obtained for the property. The associated expense is recorded in Provision for impaired assets and restaurant closings. Any subsequent adjustments to the liability from changes in estimates are recorded in the period incurred.losses.
Goodwill and Indefinite-Lived Intangible Assets
OurGoodwill and indefinite-lived intangible assets consist only of goodwill and our trade names. Goodwill represents the residual after allocation of the purchase price to the individual fair values and carryover basis of assets acquired. On an annual basis (duringare tested for impairment annually in the second quarter of the fiscal year)quarter, or whenever events or changes in circumstances indicate that the carrying amountsamount may not be recoverable,recoverable.
We may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. In considering the qualitative approach, we reviewevaluate factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability and the recoverabilityoverall financial performance of goodwill and indefinite-lived intangible assets. The impairment test for goodwill involves comparingthe reporting units.
If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting units to their carrying
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amounts. Ifunit exceeds the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure a goodwill impairment loss, if any. This step revalues all assets and liabilities of the reporting unit to their current fair values and then compares the implied fair value of the reporting unit’s goodwill tounit is calculated. Fair value of a reporting unit is the carrying amount of that goodwill. If the carrying amount ofprice a willing buyer would pay for the reporting unit’s goodwill exceedsunit and is estimated using a discounted cash flow model. The key estimates and assumptions used in this model are future cash flow estimates, which are heavily influenced by growth rates, and the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess.discount rate. The impairment test for trade names involves comparing the fair value of the trade name asis determined through a relief from royalty method, to its carrying value.method.
We test both our goodwill and our trade names for impairment primarily by utilizing discounted cash flow models to estimate their fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates. Assumptions critical to our fair value estimates are: (i) weighted-average cost of capital rates used to derive the present value factors used in determining the fairThe carrying value of the reporting units and trade names; (ii) projected annual revenue growth rates usedunit is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an indicator of potential impairment, in which case a second step is performed comparing the reporting unit and trade name models; and (iii) projected long-term growth rates used inrecorded amount of goodwill or indefinite-lived intangible assets to the derivation of terminal year values. Other assumptions include estimates of projected capital expenditures and working capital requirements. These and other assumptions are impacted by economic conditions and expectations of management and will change in the future based on period-specific facts and circumstances.implied fair value.
We performed our annual impairment test in the second quarter of 20122014 utilizing the qualitative assessment and determined at that time that none of our five reporting units with remaining goodwill were at risk for material goodwill impairment since the fair value of each reporting unit was substantially in excess of its carrying amount. We did not record any goodwill or indefinite-lived intangible asset impairment charges during the years ended December 31, 2012, 2011 and 2010.impairment.
Sales declines at our restaurants, unplanned increases in health insurance, commodity or labor costs, deterioration in overall economic conditions and challenges in the restaurant industry may result in future impairment charges. It is possible that changes in circumstances or changes in our judgments, assumptions and estimates could result in an impairment charge of a portion or all of our goodwill or other intangible assets.
Revenue Recognition
We record food and beverage revenues upon sale. Initial and developmental franchise fees are recognized as income once we have substantially performed all of our material obligations under the franchise agreement, which is generally upon the opening of the franchised restaurant. Continuing royalties, which are a percentage of net sales of the franchisee, are recognized as income when earned. Franchise-related revenues are included in Other revenues in our Consolidated Statements of Operations and Comprehensive Income.
We defer revenue for gift cards, which do not have expiration dates, until redemption by the customer. We also recognize gift card “breakage” revenue for gift cards when the likelihood of redemption by the customer is remote, which we determined are those gift cards issued on or before three years prior to the balance sheet date. We recorded breakage revenue of $13.3 million, $11.1 million and $11.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Breakage revenue is recorded as a component of Restaurant sales in our Consolidated Statements of Operations and Comprehensive Income.
Gift cards sold at a discount are recorded as revenue upon redemption of the associated gift cards at an amount net of the related discount. Gift card sales commissions paid to third-party providers are initially capitalized and subsequently recognized as Other restaurant operating expenses in our Consolidated Statements of Operations and Comprehensive Income upon redemption of the associated gift card. Deferred expenses are $10.9 million and $9.7 million as of December 31, 2012 and 2011, respectively, and are reflected in Other current assets, net in our Consolidated Balance Sheets. Gift card sales that are accompanied by a bonus gift card to be used by the customer at a future visit result in a separate deferral of a portion of the original gift card sale. Revenue is recorded when the bonus card is redeemed at a value based on the estimated fair market value of the bonus card.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We collect and remit sales, food and beverage, alcoholic beverage and hospitality taxes on transactions with customers and report such amounts under the net method in our Consolidated Statements of Operations and Comprehensive Income. Accordingly, these taxes are not included in gross revenue. - Continued
Insurance Reserves
We self-insure or maintain a deductiblehigh per-claim deductibles for a significant portion of expected losses under our workers’ compensation, general liability/liquor liability, health, property and management liability insurance programs. We purchase insurance for individual claims that exceedFor some programs, we maintain stop-loss coverage to limit the amounts listed in the following table:exposure relating to certain risks.
|
| | | | | | | | |
| | | 2013 | | 2012 |
| Workers’ compensation | | $ | 1,000,000 |
| | $ | 1,500,000 |
|
| General liability / Liquor liability | | 1,500,000 / 2,500,000 |
| | 1,500,000 / 1,500,000 |
|
| Health (1) | | 400,000 |
| | 400,000 |
|
| Property coverage (2) | | 500,000 / 2,500,000 |
| | 500,000 / 2,500,000 |
|
| Employment practices liability | | 2,000,000 |
| | 2,000,000 |
|
| Directors’ and officers’ liability (3) | | 1,000,000 |
| | 1,000,000 |
|
| Fiduciary liability | | 25,000 |
| | 25,000 |
|
____________________ | |
(1) | We are self-insured for all covered health benefits claims, limited to $0.4 million per covered individual per year. In 2013, we will be responsible for the first $0.6 million of payable losses under the plan as an additional deductible, and in 2012, we are responsible for the first $0.3 million of payable losses under the plan as an additional aggregating specific deductible to apply after the individual specific deductible was met.
|
| |
(2) | We have a $0.5 million deductible per occurrence for those properties that collateralize New PRP’s 2012 CMBS Loan and a $2.5 million deductible per occurrence for all other locations. The deductibles for named storms and earthquakes are 5.0% of the total insurable value at the time of the loss per unit of insurance at each location involved in the loss, subject to a minimum of $0.5 million for those properties that collateralize New PRP’s 2012 CMBS Loan and $2.5 million for all other locations. Property limits are $60.0 million each occurrence, and we do not quota share in any loss above either deductible level.
|
| |
(3) | Retention increase in 2012 from $0.3 million was effective with our initial public offering on August 8, 2012. |
We record a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to us. In establishing our reserves, we consider certain actuarial assumptions and judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. Unanticipated changes in these factors or future adjustments to these estimates may produce materially different amounts of expense that would be reported under these programs. Reserves recorded for workers’ compensation and general liability/liquor liability claims are discounted using the average of the 1-yearone-year and 5-yearfive-year risk free rate of monetary assets that have comparable maturities. When recovery for an insurance policy is considered probable, a receivable is recorded.
Employee Partner Payments and Buyouts
The managing partner of each Company-owned domestic restaurant and the chef partner of each Fleming’s Prime Steakhouse and Wine Bar and Roy’s Company-owned domestic restaurant, as well as area operating partners, generally receive distributions or payments for providing management and supervisory services to their restaurants based on a percentage of their associated restaurants’ monthly cash flows. The expense associated with the monthly payments for managing and chef partners is included in Labor and other related expenses, and the expense associated with the monthly payments for area operating partners is included in General and administrative expenses in our Consolidated Statements of Operations and Comprehensive Income.
We estimate future area operating partner bonuses and purchases of area operating partners’ interests, as well as deferred compensation obligationsdo not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to managing and chef partners, using current and historical information on restaurant performance and recordcalculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 50 basis point change in the partner obligations in Partner deposits and accrued partner obligationsdiscount rate in our Consolidated
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Balance Sheets. In the period we pay an area operating partner bonus or purchase the area operating partner’s interests, an adjustment is recorded to recognize any remaining expense associated with the bonus or purchase and reduce the related accrued buyout liability. Deferred compensation expenses for managing and chef partners are includedDecember 28, 2014, would have affected net earnings by $1.0 million in Labor and other related expenses and bonus and buyout expenses for area operating partners are included in General and administrative expenses in our Consolidated Statements of Operations and Comprehensive Income.fiscal year 2014.
Stock-Based Compensation
Upon completion of our initial public offering, the 2012 Equity Plan was adopted, and no further awards will be made under our 2007 Equity Plan. The 2012 Equity PlanWe have a stock-based compensation plan that permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards to our management and other key employees. We account for our stock-based employee compensation using a fair value-based method of accounting.
Under the 2007 Equity Plan, stock options generally vest and become exercisable in 20% increments over a period of five years contingent on continued employee service. Shares acquired upon the exercise of stock options under the 2007 Equity Plan were generally subject to a stockholder’s agreement that contained a management call option that allowed us to repurchase all shares purchased through exercise of stock options upon termination of employment at any time prior to the earlier of an initial public offering or a change of control. As a result of certain transfer restrictions and the management call option, we did not record compensation expense for stock options that contained the call option since employees were not able to realize monetary benefit from the options or any shares acquired upon the exercise of the options unless the employee was employed at the time of an initial public offering or change of control. The management call option automatically terminated upon completion of the initial public offering. Under the 2012 Equity Plan, stock options generally vest and become exercisable in 25% increments over a period of four years on the grant anniversary date contingent on continued employee service. Stock options have an exercisable life of no more than ten years from the date of grant.
We use the Black-Scholes option pricing model to estimate the weighted-average grant date fair value of stock options granted. Expected volatilities are based on historical volatilities of our stock and the stock of comparable peer companies. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The simplified method of estimating expected term is used since we do not have significant historical exercise experience for our stock options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect atas of the time of grant. Results may vary depending on the assumptions applied within the model. grant date.
Restricted stock shares vest onOur performance-based share units (“PSUs”) require assumptions regarding the grant anniversary date at a ratelikelihood of 33.3% per year for those issued to directors and 25% per year for all other issuances. Restricted stock vesting is dependent upon continued service with forfeiture of all unvested restricted stock shares upon termination, unlessachieving certain Company performance criteria set forth in the caseaward agreements. Assumptions used in our assessment are consistent with our internal forecasts and operating plans and assume achievement of death or disability, in which case all restricted stock shares are immediately vested. Restricted stock awards are issued and measured at market value on the date of grant.performance conditions.
The benefitsEstimates and assumptions are based upon information currently available, including historical experience and current business and economic conditions. A simultaneous 10% change in our volatility, forfeiture rate, weighted-average risk-free interest rate and term of tax deductionsgrant in excess of recognized compensation cost, if any, are reported as a financing cash flow.our stock option pricing model for fiscal year 2014 would have affected net income by $0.4 million.
We recordedIf we assumed that the PSU performance conditions for stock-based awards were not met, stock-based compensation expense of $20.1would have decreased by $0.9 million for thefiscal year ended December 31, 20122014. If we assumed that PSU share awards met their maximum threshold, expense would have increased by $3.5 million for vested stock options. As of December 31, 2012, there was $22.6 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.8 years.fiscal year 2014.
Compensation expense related to restricted stock awards for the year ended December 31, 2012 was $1.4 million, and unrecognized pre-tax compensation expense related to non-vested restricted stock awards was approximately $3.7 million at December 31, 2012 and will be recognized over a weighted-average period of 3.4 years.Income Taxes
Deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years in which we expect those temporary differences to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Income Taxesassumptions regarding our level and composition of earnings, tax laws or the deferred tax valuation allowance and the results of tax audits, may materially impact the effective income tax rate.
Our income tax returns, like those of most companies, are periodically audited by U.S. and foreign tax authorities. In determining nettaxable income, income or loss before taxes is adjusted for financial statement purposes, we make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities as well as in the recoverability of deferred tax assets that arise from temporary differences between thelocal tax laws and financial statement recognition of revenue and expense.
Deferred incomegenerally accepted accounting principles. A tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in the tax ratebenefit from an uncertain position is recognized in income in the period that includes the enactment date of the rate change. We recorded a valuation allowance to reduce our deferred income tax assets to the amount thatonly if it is more likely than not to be realized. We have considered future taxable income and ongoing feasiblethat the position is sustainable based on its technical merits. For uncertain tax planning strategies in assessing the needpositions that do not meet this threshold, we recognize a liability. The liability for the valuation allowance.
Judgments madeunrecognized tax benefits requires significant management judgment regarding future taxable income may change due to changes in market conditions, changes inexposures about our various tax laws or other factors. If thepositions. These assumptions and estimates changeprobabilities are periodically reviewed and updated based upon new information. An unfavorable tax settlement generally requires the use of cash and an increase in the future, the valuation allowance established may be increased or decreased, resulting in a respective increase or decrease inamount of income tax expense.
We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time while the actual effective tax rate is calculated at year-end.
As our net income increases,expense we expect our effective income tax rate to increase due to the benefit of U.S. income tax credits becoming a smaller percentage of net income and the fact that the substantial majority of our earnings are generated in the U.S., where we have higher statutory rates. To the extent we continue to generate pretax income in the U.S., it is likely that we will reverse some or all of the applicable valuation allowance recorded against our U.S. deferred tax assets during 2013. We expect our annual effective income tax rate for 2013 to range between 10% and 20% for each reporting period prior to the reversal of any valuation allowance. Should we reverse the valuation allowance, we anticipate recording a tax benefit of approximately $50 million related to the valuation allowance recorded at December 31, 2012. Such reversal will impact our quarterly and annual effective income tax rates and could result in an overall income tax benefit in the period of release. We expect to continue to generate U.S. income tax credits, which combined with the mix of U.S. and foreign earnings in periods subsequent to the reversal will result in an effective income tax rate that is lower than the blended federal and state statutory rate.recognize.
Recently Issued Financial Accounting Standards
In December 2011, the FASBFor a description of recently issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting AssetsFinancial Accounting Standards that we adopted in 2014 and Liabilities,” (“ASU No. 2011-11”) which enhances current disclosures about financial instruments and derivative instruments that are either offset on the statementapplicable to us but have not yet been adopted, see Note 2 - Summary 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 us to provide both net and gross information for these assets and liabilities. In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2013-01”), to limit the scopeSignificant Accounting Policies of the new balance sheet offsetting disclosure requirementsNotes to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. Both ASU No. 2011-11 and ASU No. 2013-01 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. We will adopt ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. This guidance will not have an impact on our financial position, resultsthe Consolidated Financial Statements of operations or cash flows.this Report.
BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. We will adopt ASU No. 2012-02 effective January 1, 2013. This guidance will not have an impact on our financial position, results of operations or cash flows.
In January 2013, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 11-A “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“EITF 11-A”). Under the final consensus, an entity would recognize cumulative translation adjustments in earnings when it ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. However, when an entity sells either a part or all of its investment in a consolidated foreign entity, an entity would recognize cumulative translation adjustments in earnings only if the parent no longer has a controlling financial interest in the foreign entity as a result of the sale. In the case of sales of an equity method investment that is a foreign entity, a pro rata portion of cumulative translation adjustments attributable to the equity method investment would be recognized in earnings upon sale of the equity method investment. In addition, cumulative translation adjustments would be recognized in earnings upon a business combination achieved in stages such as a step acquisition. EITF 11-A is effective for public companies for fiscal years beginning on or after December 15, 2013 and interim periods within those fiscal years, with early adoption permitted. We will adopt EITF 11-A effective January 1, 2014 with prospective application to the derecognition of any foreign entity subsidiaries, groups of assets or investments in foreign entities completed on or after January 1, 2014. The impact of EITF 11-A on our financial position, results of operations and cash flows is dependent on future transactions resulting in derecognition of our foreign assets, subsidiaries or investments in foreign entities completed on or after adoption.
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU No. 2013-02”), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other required disclosures that provide additional detail about those amounts. ASU No. 2013-02 is effective for us prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. We will adopt ASU No. 2013-02 effective January 1, 2013. This guidance will not have an impact on our financial position, results of operations or cash flows.
Impact of Inflation
In the last three years, we have not operated in a period of high general inflation; however, we have experienced material increases in specific commodity costs. Our restaurant operations are subject to federal and state minimum wage laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our food service and preparation personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage have increased our labor costs in the last three years. To the extent permitted by competition and the economy, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates on debt, changes in foreign currency exchange rates and changes in commodity prices.
Interest Rate Risk
At December 31, 2012We are exposed to market risk from fluctuations in interest rates, which could affect our consolidated balance sheet, earnings and 2011, our total debt, excluding consolidated guaranteed debt, was approximately $1.5 billion and $2.1 billion, respectively. For fixed-rate debt,cash flows. Stockholders’ equity can be adversely affected by changing interest raterates, as after-tax changes affectin the fair value of debt. However, for variable-rate debt, interest rate changes generally impact our earningsswaps designated as cash flow hedges are reflected as increases and cash flows, assuming other factors are held constant. Our current exposuredecreases to interest rate fluctuations includes OSI’s borrowings under its New Facilities and the floating ratea component of the first mortgage loan in New PRP’s 2012 CMBS Loan that bear interest at floating rates based on the Eurocurrency Rate or the Base Rate and the one-month LIBOR, respectively, plus an applicable borrowing margin. stockholders’ equity.
We manage our interest rateexposure to market risk by offsetting some of our variable-rate debt with fixed-rate debt, through normalregular operating and financing activities and when deemed appropriate, through the use of derivative financial instruments. We use derivative financial instruments as risk management tools and not for speculative purposes. See Note 16 - Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements for further information.
As of December 28, 2014, our interest rate risk was primarily from variable interest rate changes on our Senior Secured Credit Facility and a portion of our 2012 CMBS Loan. To manage the risk of fluctuations in variable interest rate debt, we entered into interest rate swaps for an aggregate notional amount of $400.0 million in September 2014 with a forward start date of June 30, 2015. We also use an interest rate cap to limit the volatility of the floating rate component of a portion of the first mortgage loan in New PRP’s 2012 CMBS Loan. From September 2007
We utilize valuation models to September 2010, we usedestimate the effects of changing interest rates. The following table summarizes the changes to fair value and interest expense under a shock scenario. This analysis assumes that interest rates change suddenly, as an interest rate collar as part of our interest rate risk management strategy“shock” and continue to manage our exposure to interest rate movements related to OSI’s 2007 Credit Facilities. Givenincrease or decrease at a consistent level above or below the interest rate environment, we did not enter into another derivative financial instrument upon the maturity of this interest rate collar on September 30, 2010. We do not enter into financial instruments for trading or speculative purposes.
At December 31, 2012, we had $445.2 million of fixed-rate debt outstanding, excluding the debt discount, on New PRP’s 2012 CMBS Loan, and at December 31, 2011, we had $248.1 million of fixed-rate debt outstanding through OSI’s senior notes. At December 31, 2012 and 2011, we had $1.0 billion and $1.8 billion, respectively, of aggregate variable-rate debt outstanding on OSI’s senior secured credit facilities, New PRP’s 2012 CMBS Loan and PRP’s CMBS Loan. At December 31, 2012, we also had $183.8 million in available unused borrowing capacity under OSI’s revolving credit facility (after giving effect to undrawn letters of credit of approximately $41.2 million). At December 31, 2011, we had $82.4 million in available unused borrowing capacity under OSI’s working capital revolving credit facility (after giving effect to undrawn letters of credit of approximately $67.6 million) and $67.0 million in available unused borrowing capacity under OSI’s pre-funded revolving credit facility that provided financing for capital expenditures only. Based on $1.0 billion of outstanding variable-rate debt at December 31, 2012, an increase of one percentage point on January 1, 2013, would cause an increase to cash interest expense of approximately $10.5 million per year.
If a one percentage point increase in interest rates were to occur over the next four quarters, such an increase would result in the following additional interest expense, assuming the current borrowing level remains constant:LIBOR curve.
|
| | | | | | | | | | | | | | | | | | | | |
| | | PRINCIPAL OUTSTANDING AT DECEMBER 31, | | ADDITIONAL INTEREST EXPENSE |
| | |
| | | Q1 | | Q2 | | Q3 | | Q4 |
| VARIABLE-RATE DEBT | | 2012 | | 2013 | | 2013 | | 2013 | | 2013 |
| Senior secured term loan B facility, interest rate of 4.75% at December 31, 2012 (1) | | $ | 1,000,000,000 |
| | $ | 2,500,000 |
| | $ | 2,500,000 |
| | $ | 2,500,000 |
| | $ | 2,500,000 |
|
| Floating rate component of mortgage loan, interest rate of 3.37% at December 31, 2012 (2) | | 48,697,000 |
| | 121,743 |
| | 121,743 |
| | 121,743 |
| | 121,743 |
|
| Total | | $ | 1,048,697,000 |
| | $ | 2,621,743 |
| | $ | 2,621,743 |
| | $ | 2,621,743 |
| | $ | 2,621,743 |
|
|
| | | | | | | |
| | DECEMBER 28, 2014 |
| (in thousands) | INCREASE (1) | | DECREASE (2) |
| Change in fair value: | | | |
| Interest rate swap | $ | 10,700 |
| | $ | (20,214 | ) |
| | | | |
| Change in annual interest expense (3): | | | |
| Variable rate debt | $ | 5,055 |
| | $ | (1,334 | ) |
____________________________________
| |
| (1) | Represents an obligation of OSI.The potential change from a hypothetical 100 basis point increase in short-term interest rates. |
| |
| (2) | Represents an obligationThe potential change from a hypothetical basis point decrease in short-term interest rates based on the LIBOR curve with a floor of New PRP.zero. The curve ranges from our current interest rate of 16 basis points to 71 basis points. |
| |
| (3) | Excludes the floating rate component of the 2012 CMBS Loan. |
A change in interest rates generally does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange risk for our restaurants operating in foreign countries. Our exposures to foreign currency exchange risk are primarily related to fluctuations in the South Korea Yen and the Brazil Real relative to the U.S. dollar. Our operations in other markets consist of Company-owned restaurants on a smaller scale than the markets identified above and franchised locations, from which we collect royalties in local currency. If foreign currency exchange rates depreciate in certain of the countries in which we operate, we may experience declines in our international operating results but such exposure wouldresults. Historically, we have chosen not be material to the consolidated financial statements. We currently do not use financial instruments to hedge foreign currency exchange rate changes.risks related to our foreign currency denominated earnings through the use of financial instruments. A 10% change in average foreign currency rates against the U.S. dollar during fiscal year 2014 would have increased or decreased our Total revenues and Net income for our consolidated foreign entities by $117.9 million and $2.6 million, respectively.
Commodity Pricing Risk
Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and wild fish, and we are subject to prevailing market conditions when purchasing those types of commodities. Other commodities are purchased based upon negotiated price ranges established with vendors with reference to the fluctuating market prices. The related agreements may contain contractual features that limit the price paid by establishing certain price floors and caps. Extreme changes in commodity prices or long-term changes could affect our financial results adversely. We expect that in most cases increased commodity prices could be passed through to our consumers through increases in menu prices. However, if there is a time lag between the increasing commodity prices and our ability to increase menu prices, or if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected. Additionally, from time to time, competitive circumstances could limit menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices.
Our restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. We utilize derivative instruments to mitigate some of our overall exposure to material increases in natural gas prices. We record mark-to-market changes in the fair value of our natural gas derivative instruments in earnings in the period of change. The effectsWe incurred a $0.6 million loss as a result of thesechanges in the fair value of the commodity derivative instruments during fiscal year 2014. At December 28, 2014, the fair value of the derivative instruments was $0.6 million. Changes in the fair value of the commodity derivative instruments and any gains or losses were immaterial to our financial statements nominal for all periods presented.fiscal years 2013 and 2012.
In addition to the market risks identified above, and to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we are subject to business risk as our U.S. beef supply is highly dependent upon a limited number of vendors. In 2012, we purchased more than 75% of our beef raw materials from four beef suppliers who represent approximately 85% of the total beef marketplace in the U.S. Due to the nature of our industry, we expect to continue to purchase a substantial amount of our beef from a small number of suppliers. If these vendors were unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs to secure adequate supplies. See Note 19 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further details.
This market risk discussion contains forward-looking statements. Actual results may differ materially from the discussion based upon general market conditions and changes in domestic and global financial markets.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) |
| | | | | | | | |
| | | DECEMBER 31, |
| | | 2012 | | 2011 |
| ASSETS | | | | |
| Current Assets | | | | |
| Cash and cash equivalents | | $ | 261,690 |
| | $ | 482,084 |
|
| Current portion of restricted cash | | 4,846 |
| | 20,640 |
|
| Inventories | | 78,181 |
| | 69,223 |
|
| Deferred income tax assets | | 39,774 |
| | 31,959 |
|
| Other current assets, net | | 103,321 |
| | 104,373 |
|
| Total current assets | | 487,812 |
| | 708,279 |
|
| Restricted cash | | 15,243 |
| | 3,641 |
|
| Property, fixtures and equipment, net | | 1,506,035 |
| | 1,635,898 |
|
| Investments in and advances to unconsolidated affiliates, net | | 36,748 |
| | 35,033 |
|
| Goodwill | | 270,972 |
| | 268,772 |
|
| Intangible assets, net | | 551,779 |
| | 566,148 |
|
| Deferred income tax assets | | 2,532 |
| | — |
|
| Other assets, net | | 145,432 |
| | 136,165 |
|
| Total assets | | $ | 3,016,553 |
| | $ | 3,353,936 |
|
| | | | | |
| | | (CONTINUED...) | |
Report of Independent Registered Certified Public Accounting Firm
To Board of Directors and Stockholders of
Bloomin’ Brands, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Bloomin’ Brands, Inc. and its subsidiaries at December 28, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 28, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits (which was an integrated audit in 2013). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, FL
February 24, 2015
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current Liabilities | | | | |
| Accounts payable | | $ | 131,814 |
| | $ | 97,393 |
|
| Accrued and other current liabilities | | 192,284 |
| | 211,486 |
|
| Current portion of partner deposits and accrued partner obligations | | 14,771 |
| | 15,044 |
|
| Unearned revenue | | 329,518 |
| | 299,596 |
|
| Current portion of long-term debt | | 22,991 |
| | 332,905 |
|
| Total current liabilities | | 691,378 |
| | 956,424 |
|
| Partner deposits and accrued partner obligations | | 85,762 |
| | 98,681 |
|
| Deferred rent | | 87,641 |
| | 70,135 |
|
| Deferred income tax liabilities | | 195,874 |
| | 193,262 |
|
| Long-term debt | | 1,471,449 |
| | 1,751,885 |
|
| Guaranteed debt | | — |
| | 24,500 |
|
| Other long-term liabilities, net | | 264,244 |
| | 218,752 |
|
| Total liabilities | | 2,796,348 |
| | 3,313,639 |
|
| Commitments and contingencies (see Note 18) | |
| |
|
| Stockholders’ Equity | | | | |
| Bloomin’ Brands, Inc. Stockholders’ Equity | | | | |
| Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued and outstanding at December 31, 2012; and no shares authorized, issued and outstanding at December 31, 2011 | | — |
| | — |
|
| Common stock, $0.01 par value, 475,000,000 shares authorized; 121,148,451 shares issued and outstanding at December 31, 2012; and 120,000,000 shares authorized; 106,573,193 shares issued and outstanding at December 31, 2011 | | 1,211 |
| | 1,066 |
|
| Additional paid-in capital | | 1,000,963 |
| | 874,753 |
|
| Accumulated deficit | | (773,085 | ) | | (822,625 | ) |
| Accumulated other comprehensive loss | | (14,801 | ) | | (22,344 | ) |
| Total Bloomin’ Brands, Inc. stockholders’ equity | | 214,288 |
| | 30,850 |
|
| Noncontrolling interests | | 5,917 |
| | 9,447 |
|
| Total stockholders’ equity | | 220,205 |
| | 40,297 |
|
| Total liabilities and stockholders’ equity | | $ | 3,016,553 |
| | $ | 3,353,936 |
|
| | | | | |
| The accompanying notes are an integral part of these consolidated financial statements. |
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) |
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| | 2014 | | 2013 |
| ASSETS | | | |
| Current Assets | | | |
| Cash and cash equivalents | $ | 165,744 |
| | $ | 209,871 |
|
| Current portion of restricted cash and cash equivalents | 6,829 |
| | 3,364 |
|
| Inventories | 80,817 |
| | 80,613 |
|
| Deferred income tax assets | 123,866 |
| | 70,802 |
|
| Assets held for sale | 16,667 |
| | 1,034 |
|
| Other current assets, net | 206,628 |
| | 117,712 |
|
| Total current assets | 600,551 |
| | 483,396 |
|
| Restricted cash | 25,451 |
| | 25,055 |
|
| Property, fixtures and equipment, net | 1,629,311 |
| | 1,633,263 |
|
| Goodwill | 341,540 |
| | 352,118 |
|
| Intangible assets, net | 585,432 |
| | 617,133 |
|
| Deferred income tax assets | 6,038 |
| | 2,392 |
|
| Other assets, net | 155,963 |
| | 165,119 |
|
| Total assets | $ | 3,344,286 |
| | $ | 3,278,476 |
|
| | | | |
| | (CONTINUED...) | |
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) |
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| | 2014 | | 2013 |
| LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY | | | |
| Current Liabilities | | | |
| Accounts payable | $ | 191,207 |
| | $ | 164,619 |
|
| Accrued and other current liabilities | 237,844 |
| | 197,114 |
|
| Current portion of partner deposits and accrued partner obligations | 8,399 |
| | 12,548 |
|
| Unearned revenue | 376,696 |
| | 359,443 |
|
| Current portion of long-term debt | 25,964 |
| | 13,546 |
|
| Total current liabilities | 840,110 |
| | 747,270 |
|
| Partner deposits and accrued partner obligations | 69,766 |
| | 78,116 |
|
| Deferred rent | 121,819 |
| | 105,963 |
|
| Deferred income tax liabilities | 181,125 |
| | 150,051 |
|
| Long-term debt, net | 1,289,879 |
| | 1,405,597 |
|
| Other long-term liabilities, net | 260,405 |
| | 286,786 |
|
| Total liabilities | 2,763,104 |
| | 2,773,783 |
|
| Commitments and contingencies (Note 19) |
| |
|
| Mezzanine Equity | | | |
| Redeemable noncontrolling interests | 24,733 |
| | 21,984 |
|
| Stockholders’ Equity | | | |
| Bloomin’ Brands Stockholders’ Equity | | | |
| Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued and outstanding as of December 28, 2014 and December 31, 2013 | — |
| | — |
|
| Common stock, $0.01 par value, 475,000,000 shares authorized; 125,949,870 and 124,784,124 shares issued and outstanding as of December 28, 2014 and December 31, 2013, respectively | 1,259 |
| | 1,248 |
|
| Additional paid-in capital | 1,085,627 |
| | 1,068,705 |
|
| Accumulated deficit | (474,994 | ) | | (565,154 | ) |
| Accumulated other comprehensive loss | (60,542 | ) | | (26,418 | ) |
| Total Bloomin’ Brands stockholders’ equity | 551,350 |
| | 478,381 |
|
| Noncontrolling interests | 5,099 |
| | 4,328 |
|
| Total stockholders’ equity | 556,449 |
| | 482,709 |
|
| Total liabilities, mezzanine equity and stockholders’ equity | $ | 3,344,286 |
| | $ | 3,278,476 |
|
| | | | |
| 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)
| | | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Revenues | | | | | | | | | | | |
| Restaurant sales | | $ | 3,946,116 |
| | $ | 3,803,252 |
| | $ | 3,594,681 |
| $ | 4,415,783 |
| | $ | 4,089,128 |
| | $ | 3,946,116 |
|
| Other revenues | | 41,679 |
| | 38,012 |
| | 33,606 |
| 26,928 |
| | 40,102 |
| | 41,679 |
|
| Total revenues | | 3,987,795 |
| | 3,841,264 |
| | 3,628,287 |
| 4,442,711 |
| | 4,129,230 |
| | 3,987,795 |
|
| Costs and expenses | | | | | | | | | | | |
| Cost of sales | | 1,281,002 |
| | 1,226,098 |
| | 1,152,028 |
| 1,435,359 |
| | 1,333,842 |
| | 1,281,002 |
|
| Labor and other related | | 1,117,624 |
| | 1,094,117 |
| | 1,034,393 |
| 1,218,961 |
| | 1,157,622 |
| | 1,117,624 |
|
| Other restaurant operating | | 918,522 |
| | 890,004 |
| | 864,183 |
| 1,049,053 |
| | 964,279 |
| | 918,522 |
|
| Depreciation and amortization | | 155,482 |
| | 153,689 |
| | 156,267 |
| 190,911 |
| | 164,094 |
| | 155,482 |
|
| General and administrative | | 326,473 |
| | 291,124 |
| | 252,793 |
| 304,382 |
| | 268,928 |
| | 326,473 |
|
| Recovery of note receivable from affiliated entity | | — |
| | (33,150 | ) | | — |
| |
| Provision for impaired assets and restaurant closings | | 13,005 |
| | 14,039 |
| | 5,204 |
| 52,081 |
| | 22,838 |
| | 13,005 |
|
| Income from operations of unconsolidated affiliates | | (5,450 | ) | | (8,109 | ) | | (5,492 | ) | — |
| | (7,730 | ) | | (5,450 | ) |
| Total costs and expenses | | 3,806,658 |
| | 3,627,812 |
| | 3,459,376 |
| 4,250,747 |
| | 3,903,873 |
| | 3,806,658 |
|
| Income from operations | | 181,137 |
| | 213,452 |
| | 168,911 |
| 191,964 |
| | 225,357 |
| | 181,137 |
|
| Loss on extinguishment and modification of debt | | (20,957 | ) | | — |
| | — |
| (11,092 | ) | | (14,586 | ) | | (20,957 | ) |
| Other (expense) income, net | | (128 | ) | | 830 |
| | 2,993 |
| |
| Gain on remeasurement of equity method investment | | — |
| | 36,608 |
| | — |
|
| Other expense, net | | (1,244 | ) | | (246 | ) | | (128 | ) |
| Interest expense, net | | (86,642 | ) | | (83,387 | ) | | (91,428 | ) | (59,658 | ) | | (74,773 | ) | | (86,642 | ) |
| Income before provision for income taxes | | 73,410 |
| | 130,895 |
| | 80,476 |
| |
| Provision for income taxes | | 12,106 |
| | 21,716 |
| | 21,300 |
| |
| Income before provision (benefit) for income taxes | | 119,970 |
| | 172,360 |
| | 73,410 |
|
| Provision (benefit) for income taxes | | 24,044 |
| | (42,208 | ) | | 12,106 |
|
| Net income | | 61,304 |
| | 109,179 |
| | 59,176 |
| 95,926 |
| | 214,568 |
| | 61,304 |
|
| Less: net income attributable to noncontrolling interests | | 11,333 |
| | 9,174 |
| | 6,208 |
| 4,836 |
| | 6,201 |
| | 11,333 |
|
| Net income attributable to Bloomin’ Brands, Inc. | | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
| |
| Net income attributable to Bloomin’ Brands | | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
|
| | | | | | | | | | | | |
| Net income | | 61,304 |
| | 109,179 |
| | 59,176 |
| $ | 95,926 |
| | $ | 214,568 |
| | $ | 61,304 |
|
| Other comprehensive income: | | | | | | | | | | | |
| Foreign currency translation adjustment | | 7,543 |
| | (2,711 | ) | | 4,556 |
| (31,731 | ) | | (17,597 | ) | | 7,543 |
|
| Reclassification of accumulated foreign currency translation adjustment for previously held equity investment | | — |
| | 5,980 |
| | — |
|
| Unrealized losses on derivatives, net of tax | | (2,393 | ) | | — |
| | — |
|
| Comprehensive income | | 68,847 |
| | 106,468 |
| | 63,732 |
| 61,802 |
| | 202,951 |
| | 68,847 |
|
| Less: comprehensive income attributable to noncontrolling interests | | 11,333 |
| | 9,174 |
| | 6,208 |
| 4,836 |
| | 6,201 |
| | 11,333 |
|
| Comprehensive income attributable to Bloomin’ Brands, Inc. | | $ | 57,514 |
| | $ | 97,294 |
| | $ | 57,524 |
| |
| Comprehensive income attributable to Bloomin’ Brands | | $ | 56,966 |
| | $ | 196,750 |
| | $ | 57,514 |
|
| | | | | | | | | | | | |
| Net income attributable to Bloomin’ Brands, Inc. per common share: | | | | | | | |
| Earnings per share: | | | | | | |
| Basic | | $ | 0.45 |
| | $ | 0.94 |
| | $ | 0.50 |
| $ | 0.73 |
| | $ | 1.69 |
| | $ | 0.45 |
|
| Diluted | | $ | 0.44 |
| | $ | 0.94 |
| | $ | 0.50 |
| $ | 0.71 |
| | $ | 1.63 |
| | $ | 0.44 |
|
| Weighted average common shares outstanding: | | | | | | | | | | | |
| Basic | | 111,999 |
| | 106,224 |
| | 105,968 |
| 125,139 |
| | 122,972 |
| | 111,999 |
|
| Diluted | | 114,821 |
| | 106,689 |
| | 105,968 |
| 128,317 |
| | 128,074 |
| | 114,821 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS)
| | | | BLOOMIN’ BRANDS, INC. | | | | | BLOOMIN’ BRANDS | | | | |
| | COMMON
STOCK | | COMMON
STOCK
AMOUNT | | ADDITIONAL PAID-IN
CAPITAL | | ACCUM- ULATED
DEFICIT | | ACCUMULATED
OTHER
COMPREHENSIVE
LOSS | | NON-
CONTROLLING
INTERESTS | | TOTAL | COMMON STOCK | | ADDITIONAL
PAID-IN
CAPITAL | | ACCUM- ULATED
DEFICIT | | ACCUMULATED
OTHER
COMPREHENSIVE
LOSS | | NON-
CONTROLLING
INTERESTS | | TOTAL |
| Balance, December 31, 2009 | 106,573 |
| | $ | 1,066 |
| | $ | 869,202 |
| | $ | (981,676 | ) | | $ | (24,189 | ) | | $ | 18,972 |
| | $ | (116,625 | ) | |
| | | SHARES | | AMOUNT | | ADDITIONAL
PAID-IN
CAPITAL | | ACCUM- ULATED
DEFICIT | | ACCUMULATED
OTHER
COMPREHENSIVE
LOSS | | NON-
CONTROLLING
INTERESTS | | TOTAL |
| Balance, December 31, 2011 | | 106,573 |
| | $ | 1,066 |
| |
| Net income | — |
| | — |
| | — |
| | 52,968 |
| | — |
| | 6,208 |
| | 59,176 |
| — |
| | — |
| | — |
| | 49,971 |
| | — |
| | 11,333 |
| | 61,304 |
|
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 4,556 |
| | — |
| | 4,556 |
| |
| Cumulative effect from adoption of variable interest entity guidance | — |
| | — |
| | — |
| | 6,078 |
| | — |
| | (386 | ) | | 5,692 |
| |
| Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | — |
| | 7,543 |
| | — |
| | 7,543 |
|
| Issuance of common stock in connection with initial public offering | | 14,197 |
| | 142 |
| | 142,100 |
| | — |
| | — |
| | — |
| | 142,242 |
|
| Stock-based compensation | — |
| | — |
| | 3,411 |
| | — |
| | — |
| | — |
| | 3,411 |
| — |
| | — |
| | 21,671 |
| | — |
| | — |
| | — |
| | 21,671 |
|
| Common stock issued under stock plans, net of forfeitures and shares withheld for employee taxes | | 378 |
| | 3 |
| | 1,061 |
| | (431 | ) | | — |
| | — |
| | 633 |
|
| Issuance of notes receivable due from stockholders | — |
| | — |
| | (747 | ) | | — |
| | — |
| | — |
| | (747 | ) | — |
| | — |
| | (587 | ) | | — |
| | — |
| | — |
| | (587 | ) |
| Repayments of notes receivable due from stockholders | — |
| | — |
| | 97 |
| | — |
| | — |
| | — |
| | 97 |
| — |
| | — |
| | 1,661 |
| | — |
| | — |
| | — |
| | 1,661 |
|
| Purchase of limited partnership and joint venture interests | | — |
| | — |
| | (39,696 | ) | | — |
| | — |
| | (886 | ) | | (40,582 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (11,596 | ) | | (11,596 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (13,977 | ) | | (13,977 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 125 |
| | 125 |
| |
| Balance, December 31, 2010 | 106,573 |
| | $ | 1,066 |
| | $ | 871,963 |
| | $ | (922,630 | ) | | $ | (19,633 | ) | | $ | 13,323 |
| | $ | (55,911 | ) | |
| Net income | — |
| | — |
| | — |
| | 100,005 |
| | — |
| | 9,174 |
| | 109,179 |
| |
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | (2,711 | ) | | — |
| | (2,711 | ) | |
| Stock-based compensation | — |
| | — |
| | 3,907 |
| | — |
| | — |
| | — |
| | 3,907 |
| |
| Issuance of notes receivable due from stockholders | — |
| | — |
| | (1,082 | ) | | — |
| | — |
| | — |
| | (1,082 | ) | |
| Repayments of notes receivable due from stockholders | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| |
| Distributions to noncontrolling interests | — |
| | — |
| | (38 | ) | | — |
| | — |
| | (13,472 | ) | | (13,510 | ) | |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 422 |
| | 422 |
| |
| Balance, December 31, 2011 | 106,573 |
| | $ | 1,066 |
| | $ | 874,753 |
| | $ | (822,625 | ) | | $ | (22,344 | ) | | $ | 9,447 |
| | $ | 40,297 |
| |
| Balance, December 31, 2012 | | 121,148 |
| | $ | 1,211 |
| | $ | 1,000,963 |
| | $ | (773,085 | ) | | $ | (14,801 | ) | | $ | 5,917 |
| | $ | 220,205 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | (CONTINUED...) | | | | | | | | | | | | (CONTINUED...) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | — |
| | — |
| | — |
| | 49,971 |
| | — |
| | 11,333 |
| | 61,304 |
|
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | — |
| | 7,543 |
| | — |
| | 7,543 |
|
| Issuance of common stock in connection with initial public offering | 14,197 |
| | 142 |
| | 142,100 |
| | — |
| | — |
| | — |
| | 142,242 |
|
| Exercises of stock options | 136 |
| | 1 |
| | 883 |
| | — |
| | — |
| | — |
| | 884 |
|
| Stock-based compensation | — |
| | — |
| | 21,025 |
| | — |
| | — |
| | — |
| | 21,025 |
|
| Repurchase of common stock | (36 | ) | | (1 | ) | | 316 |
| | (431 | ) | | — |
| | — |
| | (116 | ) |
| Issuance of restricted stock | 314 |
| | 3 |
| | 646 |
| | — |
| | — |
| | — |
| | 649 |
|
| Forfeiture of restricted stock | (36 | ) | | — |
| | (138 | ) | | — |
| | — |
| | — |
| | (138 | ) |
| Issuance of notes receivable due from stockholders | — |
| | — |
| | (587 | ) | | — |
| | — |
| | — |
| | (587 | ) |
| Repayments of notes receivable due from stockholders | — |
| | — |
| | 1,661 |
| | — |
| | — |
| | — |
| | 1,661 |
|
| Purchase of limited partnership and joint venture interests | — |
| | — |
| | (39,696 | ) | | — |
| | — |
| | (886 | ) | | (40,582 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (14,367 | ) | | (14,367 | ) |
| Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 390 |
| | 390 |
|
| Balance, December 31, 2012 | 121,148 |
| | $ | 1,211 |
| | $ | 1,000,963 |
| | $ | (773,085 | ) | | $ | (14,801 | ) | | $ | 5,917 |
| | $ | 220,205 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | BLOOMIN’ BRANDS | | | | |
| | COMMON STOCK | | ADDITIONAL
PAID-IN
CAPITAL | | ACCUM- ULATED
DEFICIT | | ACCUMULATED
OTHER
COMPREHENSIVE
LOSS | | NON-
CONTROLLING
INTERESTS | | TOTAL |
| | SHARES | | AMOUNT | | | | | |
| Balance, December 31, 2012 | 121,148 |
| | $ | 1,211 |
| | $ | 1,000,963 |
| | $ | (773,085 | ) | | $ | (14,801 | ) | | $ | 5,917 |
| | $ | 220,205 |
|
| Net income | — |
| | — |
| | — |
| | 208,367 |
| | — |
| | 6,470 |
| | 214,837 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (11,617 | ) | | — |
| | (11,617 | ) |
| Release of valuation allowance related to purchases of limited partnerships and joint venture interests | — |
| | — |
| | 15,669 |
| | — |
| | — |
| | — |
| | 15,669 |
|
| Stock-based compensation | — |
| |
|
| | 14,185 |
| | — |
| | — |
| | — |
| | 14,185 |
|
| Excess tax benefit on stock-based compensation | — |
| | — |
| | 4,363 |
| | — |
| | — |
| | — |
| | 4,363 |
|
| Common stock issued under stock plans, net of forfeitures and shares withheld for employee taxes | 3,636 |
| | 37 |
| | 27,696 |
| | (436 | ) | | — |
| | — |
| | 27,297 |
|
| Repayments of notes receivable due from stockholders | — |
| | — |
| | 5,829 |
| | — |
| | — |
| | — |
| | 5,829 |
|
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (8,059 | ) | | (8,059 | ) |
| Balance, December 31, 2013 | 124,784 |
| | $ | 1,248 |
| | $ | 1,068,705 |
| | $ | (565,154 | ) | | $ | (26,418 | ) | | $ | 4,328 |
| | $ | 482,709 |
|
| Net income | — |
| | — |
| | — |
| | 91,090 |
| | — |
| | 4,161 |
| | 95,251 |
|
| Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | — |
| | (34,124 | ) | | — |
| | (34,124 | ) |
| Stock-based compensation | — |
| | — |
| | 17,420 |
| | — |
| | — |
| | — |
| | 17,420 |
|
| Excess tax benefit on stock-based compensation | — |
| | — |
| | 2,732 |
| | — |
| | — |
| | — |
| | 2,732 |
|
| Common stock issued under stock plans, net of forfeitures and shares withheld for employee taxes | 1,166 |
| | 11 |
| | 9,059 |
| | (930 | ) | | — |
| | — |
| | 8,140 |
|
| Purchase of limited partnership interests, net of tax of $6,785 | — |
| | — |
| | (11,662 | ) | | — |
| | — |
| | 1,236 |
| | (10,426 | ) |
| Transfer to redeemable noncontrolling interest | — |
| | — |
| | (627 | ) | | — |
| | — |
| | — |
| | (627 | ) |
| Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (4,626 | ) | | (4,626 | ) |
| Balance, December 28, 2014 | 125,950 |
| | $ | 1,259 |
| | $ | 1,085,627 |
| | $ | (474,994 | ) | | $ | (60,542 | ) | | $ | 5,099 |
| | $ | 556,449 |
|
The accompanying notes are an integral part of these consolidated financial statements.
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Cash flows provided by operating activities: | | | | | | | | | | |
| Net income | $ | 61,304 |
| | $ | 109,179 |
| | $ | 59,176 |
| $ | 95,926 |
| | $ | 214,568 |
| | $ | 61,304 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 155,482 |
| | 153,689 |
| | 156,267 |
| 190,911 |
| | 164,094 |
| | 155,482 |
|
| Amortization of deferred financing fees | 8,222 |
| | 12,297 |
| | 13,435 |
| 3,116 |
| | 3,574 |
| | 8,222 |
|
| Amortization of capitalized gift card sales commissions | 21,136 |
| | 18,058 |
| | 15,046 |
| 27,509 |
| | 23,826 |
| | 21,136 |
|
| Provision for impaired assets and restaurant closings | 13,005 |
| | 14,039 |
| | 5,204 |
| 52,081 |
| | 22,838 |
| | 13,005 |
|
| Accretion on debt discounts | 880 |
| | 663 |
| | 616 |
| 2,078 |
| | 2,451 |
| | 880 |
|
| Stock-based and other non-cash compensation expense | 44,778 |
| | 39,228 |
| | 39,512 |
| 19,689 |
| | 21,589 |
| | 44,778 |
|
| Income from operations of unconsolidated affiliates | (5,450 | ) | | (8,109 | ) | | (5,492 | ) | — |
| | (7,730 | ) | | (5,450 | ) |
| Deferred income tax (benefit) expense | (7,442 | ) | | (175 | ) | | 5,182 |
| |
| Deferred income tax benefit | | (13,623 | ) | | (83,603 | ) | | (7,442 | ) |
| Loss on disposal of property, fixtures and equipment | 2,141 |
| | 1,987 |
| | 4,050 |
| 3,608 |
| | 1,441 |
| | 2,141 |
|
| Unrealized (gain) loss on derivative financial instruments | (519 | ) | | 723 |
| | (18,267 | ) | |
| Gain on life insurance and restricted cash investments | (5,150 | ) | | (126 | ) | | (2,821 | ) | (2,213 | ) | | (5,284 | ) | | (5,150 | ) |
| Loss on extinguishment and modification of debt | 20,957 |
| | — |
| | — |
| 11,092 |
| | 14,586 |
| | 20,957 |
|
| (Gain) loss on disposal of business | (3,500 | ) | | 4,331 |
| | — |
| |
| Recovery of note receivable from affiliated entity | — |
| | (33,150 | ) | | — |
| |
| Gain on remeasurement of equity method investment | | — |
| | (36,608 | ) | | — |
|
| Loss (gain) on disposal of business or subsidiary | | 770 |
| | — |
| | (3,500 | ) |
| Recognition of deferred gain on sale-leaseback transaction | (1,610 | ) | | — |
| | — |
| (2,140 | ) | | (2,135 | ) | | (1,610 | ) |
| Excess tax benefits from stock-based compensation | | (2,732 | ) | | (4,363 | ) | | — |
|
| Change in assets and liabilities: | | | | | | | | | | |
| Increase in inventories | (8,577 | ) | | (10,525 | ) | | (2,599 | ) | |
| (Increase) decrease in inventories | | (3,126 | ) | | 3,768 |
| | (8,577 | ) |
| Increase in other current assets | (13,746 | ) | | (60,858 | ) | | (13,292 | ) | (116,828 | ) | | (28,336 | ) | | (13,746 | ) |
| Decrease in other assets | 4,034 |
| | 8,209 |
| | 10,721 |
| |
| Increase (decrease) in accounts payable and accrued and other current liabilities | 5,206 |
| | 32,152 |
| | (28,601 | ) | |
| Decrease (increase) in other assets | | 9,459 |
| | (259 | ) | | 4,034 |
|
| Increase in accounts payable and accrued and other current liabilities | | 32,182 |
| | 10,192 |
| | 4,687 |
|
| Increase in deferred rent | 17,064 |
| | 12,510 |
| | 10,677 |
| 18,746 |
| | 20,618 |
| | 17,064 |
|
| Increase in unearned revenue | 29,621 |
| | 30,623 |
| | 31,964 |
| 21,030 |
| | 29,634 |
| | 29,621 |
|
| Increase (decrease) in other long-term liabilities | 2,255 |
| | (2,295 | ) | | (5,624 | ) | |
| Increase in other long-term liabilities | | 4,471 |
| | 12,403 |
| | 2,255 |
|
| Net cash provided by operating activities | 340,091 |
| | 322,450 |
| | 275,154 |
| 352,006 |
| | 377,264 |
| | 340,091 |
|
| Cash flows provided by (used in) investing activities: | | | | | | |
| Purchases of Company-owned life insurance | (6,451 | ) | | (2,027 | ) | | (2,405 | ) | |
| Proceeds from sale of Company-owned life insurance | — |
| | 2,638 |
| | 6,411 |
| |
| Proceeds from sale of property, fixtures and equipment | 3,971 |
| | 1,190 |
| | 462 |
| |
| Cash flows (used in) provided by investing activities: | | | | | | |
| Purchases of life insurance policies | | (1,682 | ) | | (4,159 | ) | | (6,451 | ) |
| Proceeds from sale of life insurance policies | | 627 |
| | 1,239 |
| | — |
|
| Proceeds from disposal of property, fixtures and equipment | | 5,745 |
| | 3,223 |
| | 4,529 |
|
| Proceeds from sale-leaseback transaction | 192,886 |
| | — |
| | — |
| — |
| | — |
| | 192,886 |
|
| De-consolidation of subsidiary | — |
| | — |
| | (4,398 | ) | |
| Acquisition of business, net of cash acquired | | (3,063 | ) | | (100,319 | ) | | — |
|
| Proceeds from sale of a business | 3,500 |
| | 10,119 |
| | — |
| — |
| | — |
| | 3,500 |
|
| Capital expenditures | (178,720 | ) | | (120,906 | ) | | (60,476 | ) | (237,868 | ) | | (237,214 | ) | | (178,720 | ) |
| Decrease in restricted cash | 84,270 |
| | 86,579 |
| | 18,545 |
| 26,075 |
| | 29,210 |
| | 84,270 |
|
| Increase in restricted cash | (80,070 | ) | | (83,148 | ) | | (29,860 | ) | (30,176 | ) | | (38,117 | ) | | (80,070 | ) |
| Royalty termination fee | — |
| | (8,547 | ) | | — |
| |
| Return on investment from unconsolidated affiliates | 558 |
| | 960 |
| | — |
| |
| Net cash provided by (used in) investing activities | $ | 19,944 |
| | $ | (113,142 | ) | | $ | (71,721 | ) | |
| Net cash (used in) provided by investing activities | | $ | (240,342 | ) | | $ | (346,137 | ) | | $ | 19,944 |
|
| | | | | | | | | | | |
| | | | (CONTINUED...) | | | | (CONTINUED...) | |
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Cash flows used in financing activities: | | | | | | | | | | |
Proceeds from issuance of senior secured term loan B
| $ | 990,000 |
| | $ | — |
| | $ | — |
| |
| Proceeds from issuance of senior secured debt | | $ | 297,088 |
| | $ | — |
| | $ | 990,000 |
|
Extinguishment and modification of senior secured term loan
| (1,004,575 | ) | | — |
| | — |
| (700,000 | ) | | — |
| | (1,004,575 | ) |
| Proceeds from issuance of 2012 CMBS Loan | 495,186 |
| | — |
| | — |
| — |
| | — |
| | 495,186 |
|
| Repayments of long-term debt | (46,868 | ) | | (25,189 | ) | | (140,853 | ) | (31,873 | ) | | (80,805 | ) | | (46,868 | ) |
| Extinguishment of CMBS loan | (777,563 | ) | | — |
| | — |
| — |
| | — |
| | (777,563 | ) |
| Extinguishment of senior notes | (254,660 | ) | | — |
| | — |
| — |
| | — |
| | (254,660 | ) |
| Proceeds from borrowings on revolving credit facilities | 111,000 |
| | 33,000 |
| | 61,000 |
| 519,000 |
| | 100,000 |
| | 111,000 |
|
| Repayments of borrowings on revolving credit facilities | (144,000 | ) | | (78,072 | ) | | (55,928 | ) | (194,000 | ) | | (100,000 | ) | | (144,000 | ) |
| Collection of note receivable from affiliated entity | — |
| | 33,300 |
| | — |
| |
| Financing fees | (18,983 | ) | | (2,222 | ) | | (1,391 | ) | (4,492 | ) | | (12,519 | ) | | (18,983 | ) |
| Proceeds from the issuance of common stock in connection with initial public offering | 142,242 |
| | — |
| | — |
| — |
| | — |
| | 142,242 |
|
| Proceeds from the exercise of stock options | 884 |
| | — |
| | — |
| 9,540 |
| | 27,786 |
| | 884 |
|
| Contributions from noncontrolling interests | 390 |
| | 422 |
| | 125 |
| |
| Distributions to noncontrolling interests | (14,367 | ) | | (13,510 | ) | | (11,596 | ) | (3,190 | ) | | (8,059 | ) | | (13,977 | ) |
| Purchase of limited partnership and joint venture interests | (40,582 | ) | | — |
| | — |
| |
| Purchase of limited partnership interests | | (17,211 | ) | | — |
| | (40,582 | ) |
| Repayments of partner deposits and accrued partner obligations | (25,397 | ) | | (35,950 | ) | | (18,022 | ) | (24,925 | ) | | (23,286 | ) | | (25,397 | ) |
| Issuance of notes receivable due from stockholders | (587 | ) | | (1,082 | ) | | (747 | ) | — |
| | — |
| | (587 | ) |
| Repayments of notes receivable due from stockholders | 1,661 |
| | 3 |
| | 97 |
| — |
| | 5,829 |
| | 1,661 |
|
| Repurchase of common stock | | (930 | ) | | (436 | ) | | — |
|
| Excess tax benefits from stock-based compensation | | 2,732 |
| | 4,363 |
| | — |
|
| Tax withholding on performance-based share units | | (470 | ) | | — |
| | — |
|
| Net cash used in financing activities | (586,219 | ) | | (89,300 | ) | | (167,315 | ) | (148,731 | ) | | (87,127 | ) | | (586,219 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 5,790 |
| | (3,460 | ) | | (1,539 | ) | (7,060 | ) | | 4,181 |
| | 5,790 |
|
| Net (decrease) increase in cash and cash equivalents | (220,394 | ) | | 116,548 |
| | 34,579 |
| |
| Cash and cash equivalents at the beginning of the period | 482,084 |
| | 365,536 |
| | 330,957 |
| |
| Cash and cash equivalents at the end of the period | $ | 261,690 |
| | $ | 482,084 |
| | $ | 365,536 |
| |
| Net decrease in cash and cash equivalents | | (44,127 | ) | | (51,819 | ) | | (220,394 | ) |
| Cash and cash equivalents as of the beginning of the period | | 209,871 |
| | 261,690 |
| | 482,084 |
|
| Cash and cash equivalents as of the end of the period | | $ | 165,744 |
| | $ | 209,871 |
| | $ | 261,690 |
|
| Supplemental disclosures of cash flow information: | | | | | | | | | | |
| Cash paid for interest | $ | 78,216 |
| | $ | 72,099 |
| | $ | 96,718 |
| $ | 57,241 |
| | $ | 71,397 |
| | $ | 78,216 |
|
| Cash paid for income taxes, net of refunds | 24,276 |
| | 27,699 |
| | 10,779 |
| 56,216 |
| | 33,673 |
| | 24,276 |
|
| Supplemental disclosures of non-cash investing and financing activities: | | | | | | | | | | |
| Conversion of partner deposits and accrued partner obligations to notes payable | $ | 6,434 |
| | $ | 5,764 |
| | $ | 5,685 |
| $ | 503 |
| | $ | 1,875 |
| | $ | 6,434 |
|
| Acquisitions of property, fixtures and equipment through accounts payable or capital lease liabilities | 8,006 |
| | 8,683 |
| | 2,506 |
| |
| Change in acquisition of property, fixtures and equipment included in accounts payable or capital lease liabilities | | (1,669 | ) | | 3,050 |
| | 8,006 |
|
| Release of valuation allowance through additional paid-in capital related to purchases of limited partnerships and joint venture interests | | — |
| | 15,669 |
| | — |
|
| Deferred tax effect of purchase of noncontrolling interests | | 6,785 |
| | — |
| | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BasisDescription of Presentation
Basis of PresentationBusiness
Bloomin’ Brands, Inc. (“Bloomin’ Brands” or the “Company”), formerly known as Kangaroo Holdings, Inc., was formed by an investor group comprised ofcomprising 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 Company’s primary operating entity and New Private Restaurant Properties, LLC, another indirect wholly-owned subsidiary of the Company, continues to lease certain of the Company-owned restaurant properties to OSI’s subsidiaries. On August 13, 2012, the Company completed an initial public offering (the “IPO”) of its common stock (see Note 3).stock.
The Company owns and operates casual, polishedupscale casual and fine dining restaurants primarily in the United States. The Company’s restaurant portfolio has fivefour concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and& Wine Bar and Roy’s.Bar. Additional Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill restaurants in which the Company has no direct investment are operated under franchise agreements.
In the opinion ofJanuary 2015, the Company all adjustments necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included.sold its Roy’s concept.
2. Summary of Significant Accounting Policies
PrinciplesBasis of Consolidation
Presentation -The Company’s consolidated financial statements include the accounts and operations of Bloomin’ Brands and its wholly-owned subsidiaries, including OSI, PRPsubsidiaries.
To ensure timely reporting, the Company consolidates the results of its Brazil operations on a one-month calendar lag. There were no intervening events that would materially affect the Company’s consolidated financial position, results of operations or cash flows as of December 28, 2014 and New PRP. for fiscal year 2014.
Principles of Consolidation - All intercompany accounts and transactions have been eliminated in consolidation.
The Company consolidates variable interest entities in whichwhere it has been determined the Company is deemed to have a controlling financial interest as a resultthe primary beneficiary 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 (see Note 13).
those entities’ operations. The Company is a franchisor of 162166 restaurants as of December 31, 201228, 2014, but does not possess any ownership interests in its franchisees and generally does not provide financial support to franchisees in its typical franchise relationship. These franchise relationships are not deemed variable interest entities and are not consolidated.
The equity method of accounting is used for investmentsInvestments in affiliated companies in whichentities the Company isdoes not in control, but where the Company’s interest is generally between 20% and 50% and the Company has the ability to exercise significant influence over the entity.entity are accounted for under the equity method. The Company’s share of earnings or losses of affiliated companies accounted for under the equity method isare recorded in Income from operations of unconsolidated affiliates in itsthe Consolidated Statements of Operations and Comprehensive Income. Through a joint venture arrangement with PGS Participacoes Ltda.
Prior to November 1, 2013, the Company holdsheld a 50% ownership interest in PGS Consultoria e Serviços Ltda. (the “Brazilian“Brazil Joint Venture”) through a joint venture arrangement with PGS Participações Ltda (“PGS Par”). The BrazilianEffective November 1, 2013, the Company acquired a controlling interest in the Brazil Joint Venture was formedresulting in 1998the consolidation of this entity. Prior to the acquisition, the Company accounted for the purpose of operating Outback Steakhouse restaurants in Brazil. The Company accounts for the BrazilianBrazil Joint Venture under the equity method of accounting (see Note 7)3 - Acquisitions).
Fiscal Year - On January 3, 2014, the Board of Directors approved a change in the Company’s fiscal year end from a calendar year ending on December 31 to a 52-53 week year ending on the last Sunday in December, effective with
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
fiscal year 2014. In a 52 week fiscal year, each of the Company’s quarterly periods comprise 13 weeks. The additional week in a 53 week fiscal year is added to the fourth quarter, making such quarter consist of 14 weeks. The Company made the fiscal year change on a prospective basis and did not adjust operating results for prior periods.
Fiscal year 2014 consisted of the 52 weeks ended December 28, 2014 and fiscal years 2013 and 2012 consisted of the twelve months ended December 31, 2013 and 2012, respectively. Fiscal year 2014 included three less operating days than the comparable prior fiscal year and the Company estimates that the associated impact was a reduction of $46.0 million and $9.2 million of Restaurant sales and Net income attributable to Bloomin’ Brands, respectively.
Use of Estimates
- The preparation of the accompanying consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimated.
Cash and Cash Equivalents
- Cash equivalents consist of investments that are readily convertible to cash with an original maturity date of three months or less. Cash and cash equivalents include $56.4$48.0 million and $44.335.1 million, as of December 31, 201228, 2014 and 2011December 31, 2013, respectively, for amounts in transit from credit card companies since settlement is reasonably assured.
Concentrations of Credit and Counterparty Risk - Financial instruments that potentially subject the Company to a concentration of credit risk are vendor and other receivables. Vendor and other receivables consist primarily of amounts due from vendor rebates and gift card resellers, respectively. The Company considers the concentration of credit risk for vendor and other receivables to be minimal due to the payment histories and general financial condition of its vendors and gift card resellers. Gift card receivables of $86.0 million and $17.9 million as of December 28, 2014 and December 31, 2013, respectively, were reflected in Other current assets, net in the Company’s Consolidated Balance Sheets.
Financial instruments that potentially subject the Company to concentrations of creditcounterparty risk are cash and cash equivalents, restricted cash and restricted cash.derivatives. The Company attempts to limit its creditcounterparty risk by utilizing outside investment managers with major financial institutions that,investing in turn, invest in United States treasury security funds, certificates of deposit, money market funds, noninterest-bearing accounts and other highly rated investments and marketable securities. At times, cash balances may be in excess of FDIC insurance limits. See Note 16. - Derivative Instruments and Hedging Activities for a discussion of the Company’s use of derivative instruments and management of credit risk inherent in derivative instruments.
Financial Instruments
Disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, is required for those instruments for which it is practical to estimate that value. Fair Value - Fair value is the price that would be received for an asset or paid to transfer a market-based measurement.liability, or the exit price, in an orderly transaction between market participants on the measurement date. Fair value is categorized into one of the following three levels based on the lowest level of significant input:
|
| |
| Level 1 | Unadjusted quoted market prices in active markets for identical assets or liabilities |
| Level 2 | Observable inputs available at measurement date other than quoted prices included in Level 1 |
| Level 3 | Unobservable inputs that cannot be corroborated by observable market data |
The Company’s non-derivative financial instruments atInventories - December 31, 2012 and 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 debt is determined based on quoted market prices in inactive markets and discounted cash flows of debt instruments, as well as assumptions derived from current conditions in the real estate and credit environments, changes in the underlying collateral and expectations of management. These inputs represent assumptions impacted by economic conditions and management expectations and may change in the future based on period-specific facts and circumstances (see Note 14).
Derivatives
The Company is highly leveraged and exposed to interest rate risk to the extent of its variable-rate debt. The Company manages its interest rate risk by offsetting some of its variable-rate debt with fixed-rate debt, through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.
The Company’s restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. The Company uses derivative instruments to mitigate some of its overall exposure to material increases in natural gas prices. The Company records mark-to-market changes in the fair value of derivative instruments
in earnings in the period of change. The Company does not enter into financial instruments for trading or speculative purposes.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories
Inventories consist of food and beverages, and are stated at the lower of cost (first-in, first-out) or market. The Company periodically makes advance purchases of various inventory items to ensure adequate supply or to obtain favorable pricing. At December 31, 2012 and 2011, inventories included advance purchases of approximately $31.7 million and $23.4 million, respectively.
Consideration Received from Vendors
Restricted Cash - The Company receives consideration for a variety of vendor-sponsored programs, such as volume rebates, promotionshas both current and advertising allowances. Advertising allowances are intended to offset the Company’s costs of promoting and selling menu items in its restaurants. Vendor consideration is recorded as a reduction of Cost of sales or Other restaurant operating expenses when recognized in the Company’s Consolidated Statements of Operations and Comprehensive Income.
Restricted Cash
At December 31, 2012, the current portion oflong-term restricted cash balances consisting of $4.8 million was restrictedamounts: (i) held in escrow for certain indemnifications associated with the Brazil Joint Venture acquisition, (ii) held for fulfillment of certain loan provisions, in New PRP’s commercial mortgage-backed securities loans,(iii) restricted for the payment of property taxes and (iv) pledged for settlement of obligations in a rabbi trust for deferred compensation plans. At plan obligations.December 31, 2011, the current portion
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property, Fixtures and Equipment
- Property, fixtures and equipment are stated at cost, net of accumulated depreciation. AtDepreciation is computed on the time property, fixtures and equipment are retired, or otherwise disposed of,straight-line method over the asset and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in earnings. The Company expenses repair and maintenance costs that maintain the appearance and functionality of the restaurant but do not extend theestimated useful life of any restaurant asset.the assets. Improvements to leased properties are depreciated over the shorter of their useful life or the lease term, which includes renewal periods that are reasonably assured. Depreciation is computed on the straight-line method over the following estimatedEstimated useful lives:lives by major asset category are generally as follows:
|
| |
| Buildings and building improvements | 20 to 30 years |
| Furniture and fixtures | 5 to 7 years |
| Equipment | 2 to 7 years |
| Leasehold improvements | 5 to 20 years |
| Capitalized software | 3 to 57 years |
Operating LeasesRepair and maintenance costs that maintain the appearance and functionality of the restaurant, but do not extend the useful life of any restaurant asset are expensed as incurred. The Company suspends depreciation and amortization for assets held for sale. The cost and related accumulated depreciation of assets sold or disposed are removed from the Consolidated Balance Sheets, and any resulting gain or loss is generally recognized in the Other restaurant operating expense line of the Consolidated Statements of Operations and Other Comprehensive Income.
The Company capitalizes direct and indirect internal costs associated with the acquisition, development, design and construction of Company-owned restaurant locations as these costs have a future benefit to the Company. Upon restaurant opening, these costs are depreciated and charged to depreciation and amortization expense. Internal costs of $8.7 million, $9.1 million and $2.4 million were capitalized during fiscal years 2014, 2013 and 2012, respectively.
For fiscal years 2014 and 2013, software development costs of $5.0 million and $22.7 million, respectively, were capitalized. As of December 28, 2014 and December 31, 2013, there were $30.6 million and $25.9 million, respectively, of unamortized software development costs included in Property, fixtures and equipment.
Goodwill and Intangible Assets - Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate. The Company’s indefinite-lived intangible assets consist of trade names. Goodwill and indefinite-lived intangible assets are tested for impairment annually, as of the first day of the second fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
The Company may elect to perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. If the qualitative assessment is not performed or if the Company determines that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated. The carrying value of the reporting unit is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an indicator of potential impairment, in which case a second step is performed comparing the recorded amount of goodwill or indefinite-lived intangible assets to the implied fair value.
Definite-lived intangible assets, which consist primarily of trademarks, franchise agreements, reacquired franchise rights, favorable leases, and other long-lived assets, are amortized over their estimated useful lives and are tested for impairment, using the discounted cash flow method, whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Derivatives - The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. If the derivative qualifies for hedge accounting treatment, then the effective portion of the gain or loss on the derivative instrument is recognized in equity as a change
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
to Accumulated other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument is immediately recognized in the Consolidated Statements of Operations and Comprehensive Income.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
Deferred Financing Fees - The Company capitalizes deferred financing fees related to the issuance of debt obligations. The Company amortizes deferred financing fees to interest expense over the terms of the respective financing arrangements, primarily using the effective interest method.
Liquor Licenses - The costs of obtaining non-transferable liquor licenses directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in Other assets, net. Annual liquor license renewal fees are expensed over the renewal term.
Insurance Reserves - The Company self-insures or maintains high per-claim deductibles for a significant portion of expected losses under its workers’ compensation, general liability/liquor liability, health, property and management liability insurance programs. The Company records a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to the Company. In establishing reserves, the Company considers certain actuarial assumptions and judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. Reserves recorded for workers’ compensation and general liability claims are discounted using the average of the one-year and five-year risk free rate of monetary assets that have comparable maturities.
Redeemable Noncontrolling Interests - The Company consolidates Outback Steakhouse subsidiaries in Brazil and China, each of which have noncontrolling interests that are permitted to deliver subsidiary shares in exchange for cash at a future date. The Company believes that it is probable that the noncontrolling interests will become redeemable.
The Redeemable noncontrolling interests are reported at their estimated redemption value measured as the greater of estimated fair value at the end of each reporting period or the historical cost basis of the redeemable noncontrolling interest adjusted for cumulative earnings or loss allocations. The resulting increases or decreases to fair value, if applicable, are recognized as adjustments to Retained earnings, or in the absence of Retained earnings, Additional paid-in capital. The estimated fair value of Redeemable noncontrolling interests are measured quarterly using the income approach, based on a discounted cash flow methodology, with projected cash flows as the significant input. Redeemable noncontrolling interests are classified in Mezzanine equity in the Company’s Consolidated Balance Sheet.
Revenue Recognition - The Company records food and beverage revenues upon sale. Initial and developmental franchise fees are recognized as income once the Company has substantially performed all of its material obligations under the franchise agreement, which is generally upon the opening of the franchised restaurant. Continuing royalties, which are a percentage of net sales of the franchisee, are recognized as income when earned. Franchise-related revenues are included in Other revenues in the Consolidated Statements of Operations and Comprehensive Income.
The Company defers revenue for gift cards, which do not have expiration dates, until redemption by the consumer. Gift cards sold at a discount are recorded as revenue upon redemption of the associated gift cards at an amount net of the related discount. The Company also recognizes gift card breakage revenue for gift cards when the likelihood of redemption by the consumer is remote, which the Company determined are those gift cards issued on or before three years prior to the balance sheet date. The Company recorded breakage revenue of $18.8 million, $16.3 million and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
$13.3 million for fiscal years 2014, 2013 and 2012, respectively. Breakage revenue is recorded as a component of Restaurant sales in the Consolidated Statements of Operations and Comprehensive Income.
Gift card sales commissions paid to third-party providers are initially capitalized and subsequently recognized as Other restaurant operating expenses upon redemption of the associated gift card. Deferred expenses of $15.6 millionand $12.0 million as of December 28, 2014 and December 31, 2013, respectively, were reflected in Other current assets, net in the Company’s Consolidated Balance Sheets. Gift card sales that are accompanied by a bonus gift card to be used by the consumer at a future visit result in a separate deferral of a portion of the original gift card sale. Revenue is recorded when the bonus card is redeemed at the estimated fair market value of the bonus card.
The Company collects and remits sales, food and beverage, alcoholic beverage and hospitality taxes on transactions with consumers and reports revenue net of taxes in its Consolidated Statements of Operations and Comprehensive Income.
Operating Leases - Rent expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease and may include potential rent holidays, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. The initial lease term includes the “build-out” period of the Company’s leases, which is typically before rent payments are due under the terms of the lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in the Consolidated Balance Sheets. Payments received from landlords as incentives for leasehold improvements are recorded as deferred rent and are amortized on a straight-line basis over the term of the lease as a reduction of rent expense. Lease termination fees, if any, and future obligated lease
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payments for closed locations are recorded as an expense in the period that they are incurred. Assets and liabilities resulting from the Merger relating to favorableFavorable and unfavorable lease amountsassets and liabilities are amortized on a straight-line basis to rent expense over the remaining lease term.
Pre-Opening Expenses
- Non-capital expenditures associated with opening new restaurants are expensed as incurred and are included in Other restaurant operating expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income.
ImpairmentConsideration Received from Vendors - The Company receives consideration for a variety of vendor-sponsored programs, such as volume rebates, promotions and advertising allowances. Advertising allowances are intended to offset the Company’s costs of promoting and selling menu items in its restaurants. Vendor consideration is recorded as a reduction of Cost of sales or DisposalOther restaurant operating expenses when recognized in the Company’s Consolidated Statements of Operations and Comprehensive Income.
Impairment of Long-Lived Assets
The Company assesses the potential and Costs Associated with Exit Activities - Long-lived assets are reviewed for impairment of amortizable intangibles, including trademarks, franchise agreements and net favorable leases, and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In evaluating long-lived restaurant assets for impairment, the Company considers a number of factors such as:
A significant change in market price;
A significant adverse change in the manner in which a long-lived assetThe evaluation is being used;
New laws and government regulations or a significant adverse change in business climate that adversely affect the value of a long-lived asset;
A current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life; and
A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection that demonstrates continuing losses associated with the use of the underlying long-lived asset.
If the aforementioned factors indicate that the Company should review the carrying value of the restaurant’s long-lived assets, the Company performs a two-step impairment analysis. Each Company-owned restaurant is evaluated individually for impairment since that isperformed at the lowest level at whichof identifiable cash flows can be measured independently from cash flowsindependent of other asset groups. Ifassets. For long-lived assets deployed at its restaurants, the Company reviews for impairment at the individual restaurant level. When evaluating for impairment, the total future undiscounted cash flows expected to be generated by the assetsasset are compared to the carrying amount. If the total future undiscounted cash flows of the asset are less than its carrying amount, as prescribed by step one testing, recoverability is measured in step two by comparing the fair value of the assets to itsthe carrying amount. Should the carrying amount exceed the asset’s estimated fair value, anAn impairment loss is charged to earnings. Restaurantrecognized in earnings when the asset’s carrying value exceeds its estimated fair value. Fair value is determined based on estimatesgenerally estimated using a discounted cash flow model.
Generally, restaurant closure costs are expensed as incurred. When the Company ceases using the property rights under a non-cancelable operating lease, it records a liability for the net present value of discounted future cash flows; and impairment charges primarily occurany remaining lease obligations as a result of lease termination, less the carrying value of a restaurant’s assets exceeding its estimated fair market value, primarily due to anticipated closures or declining future cash flows from lower projected future sales at existing locations.
The Company incurred total long-lived asset impairment charges and restaurant closing expense of $13.0 million, $14.0 million and $5.2 millionsublease income that can reasonably be obtained for the years endedproperty. December 31, 2012Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. , 2011 and 2010, respectively (see Note 14). All impairment charges areThe associated expense is recorded in Provision for impaired assets and restaurant closings in the Company’s Consolidated Statements of Operations and Comprehensive Income.
The Company’s judgments and estimates related to the expected useful lives of long-lived assets are affected by factors such as changes in economic conditions and changes in operating performance and expected use. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause it to realize a material impairment charge. The Company uses the straight-line method to amortize definite-lived intangible assets.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Restaurant sites and certain other assets to be sold are included in assets held for sale when certain criteria are met, including the requirement that the likelihood of selling the assets within one year is probable. For assets that meet the held for sale criteria, the Company separately evaluates whether the assets also meet the requirements to be reported as discontinued operations. If the Company no longer had any significant continuing involvement with respect to the operations of the assets and cash flows were discontinued, it would classify the assets and related results of operations as discontinued. Assets whose sale is not probable within one year remain in Property, fixtures and equipment until their sale is probable within one year. The Company had $2.4 million and $1.3 million of assets held for sale as of December 31, 2012 and 2011, respectively, recorded in Other current assets, net.
Generally, restaurant closure costs are expensed as incurred. When it is probable that the Company will cease using the property rights under a non-cancelable operating lease, it records a liability for the net present value of any remaining lease obligations net of estimated sublease income that can reasonably be obtained for the property. The associated expense is recorded in Provision for impaired assets and restaurant closings in the Company’s Consolidated Statements of Operations and Comprehensive Income. Any subsequent adjustments to the liability from changes in estimates are recorded in the period incurred.
Goodwill and Indefinite-Lived Intangible Assets
The Company’s indefinite-lived intangible assets consist of goodwill and trade names. Goodwill represents the residual after allocation of the purchase price to the individual fair values and carryover basis of assets acquired. On an annual basis (during the second quarter of the fiscal year) or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, the Company reviews the recoverability of goodwill and indefinite-lived intangible assets. The impairment test for goodwill involves comparing the fair value of the reporting units to their carrying amounts. If the carrying amount of a reporting unit exceeds its fair value, a second step is required to measure a goodwill impairment loss, if any. This step revalues all assets and liabilities of the reporting unit to their current fair values and then compares the implied fair value of the reporting unit’s goodwill to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess. The impairment test for trade names involves comparing the fair value of the trade name, as determined through a relief from royalty method, to its carrying value.
Impairment indicators that may necessitate goodwill impairment testing in between the Company’s annual impairment tests include the following:
a significant decline in the Company’s expected future cash flows;
a significant adverse change in legal factors or in the business climate;
unanticipated competition;
the testing for recoverability of a significant asset group within a reporting unit; and
slower growth rates.
Impairment indicators that may necessitate indefinite-lived intangible asset impairment testing in between the Company’s annual impairment tests are consistent with those of its long-lived assets.
The Company performed its annual impairment test in the second quarter of 2012 and determined at that time that none of its five reporting units with remaining goodwill were at risk for goodwill impairment since the fair value of each reporting unit was substantially in excess of its carrying amount. The Company did not record any goodwill or indefinite-lived intangible asset impairment charges during the years ended December 31, 2012, 2011 and 2010.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales declines at the Company’s restaurants, unplanned increases in health insurance, commodity or labor costs, deterioration in overall economic conditions and challenges in the restaurant industry may result in future impairment charges. It is possible that changes in circumstances or changes in management’s judgments, assumptions and estimates could result in an impairment charge of a portion or all of its goodwill or other intangible assets.
Construction in Progress
The Company capitalizes direct and indirect internal costs clearly associated with the acquisition, development, design and construction of Company-owned restaurant locations as these costs have a future benefit to the Company. Upon restaurant opening, these costs are depreciated and charged to expense based upon their classification within Property, fixtures and equipment. Internal costs of $2.4 million were capitalized during the year ended December 31, 2012. Internal costs incurred for the years ended December 31, 2011 and 2010 were not material to the Company’s consolidated financial statements. The amount of interest capitalized in connection with restaurant construction was immaterial in all periods.
Deferred Financing Fees
The Company capitalizes deferred financing fees related to the issuance of debt obligations. The Company amortizes deferred financing fees to interest expense over the terms of the respective financing arrangements using the effective interest method or the straight-line method.
Liquor Licenses
The costs of obtaining non-transferable liquor licenses directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in Other assets, net. Annual liquor license renewal fees are expensed over the renewal term.
Revenue Recognition
The Company records food and beverage revenues upon sale. Initial and developmental franchise fees are recognized as income once the Company has substantially performed all of its material obligations under the franchise agreement, which is generally upon the opening of the franchised restaurant. Continuing royalties, which are a percentage of net sales of the franchisee, are recognized as income when earned. Franchise-related revenues are included in Other revenues in the Consolidated Statements of Operations and Comprehensive Income.
The Company defers revenue for gift cards, which do not have expiration dates, until redemption by the customer. The Company also recognizes gift card “breakage” revenue for gift cards when the likelihood of redemption by the customer is remote, which the Company determined are those gift cards issued on or before three years prior to the balance sheet date. The Company recorded breakage revenue of $13.3 million, $11.1 million and $11.0 million for the years ended December 31, 2012, 2011 and 2010, respectively. Breakage revenue is recorded as a component of Restaurant sales in the Consolidated Statements of Operations and Comprehensive Income.
Gift cards sold at a discount are recorded as revenue upon redemption of the associated gift cards at an amount net of the related discount. Gift card sales commissions paid to third-party providers are initially capitalized and subsequently recognized as Other restaurant operating expenses upon redemption of the associated gift card. Deferred expenses were $10.9 million and $9.7 million as of December 31, 2012 and 2011, respectively, and were reflected in Other current assets, net in the Company’s Consolidated Balance Sheets. Gift card sales that are accompanied by a bonus gift card to be used by the customer at a future visit result in a separate deferral of a portion of the original gift card sale. Revenue is recorded when the bonus card is redeemed at a value based on the estimated fair market value of the bonus card.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company collects and remits sales, food and beverage, alcoholic beverage and hospitality taxes on transactions with customers and reports such amounts under the net method in its Consolidated Statements of Operations and Comprehensive Income. Accordingly, these taxes are not included in gross revenue.
Advertising Costs
- Advertising production costs are expensed in the period when the advertising first occurs. All other advertising costs are expensed in the period in which the costs are incurred. The total amounts charged to advertisingAdvertising expense wereof $191.1 million, $182.4 million and $170.6 million for fiscal years 2014, $161.4 million2013 and $146.1 million, for the years ended December 31, 2012, 2011 and 2010, respectively, and werewas recorded in Other restaurant operating expenses in the Consolidated Statements of Operations and Comprehensive Income.
ResearchLegal Costs - Settlement costs are accrued when they are deemed probable and Development Expenses
Research and development expenses,reasonably estimable. Legal fees are expensedrecognized as incurred andincurred. Legal costs are reported in General and administrative expense in the Consolidated Statements of Operations and Comprehensive Income. The Company recorded research
Research and development expensesDevelopment Expenses (“R&D”) - R&D is expensed as incurred in General and administrative expense in the Consolidated Statements of Operations and Comprehensive Income. R&D primarily consists of payroll and benefit costs. R&D was $5.8 million, $7.3 million, $6.66.4 million and $5.77.3 millionfor thefiscal years ended December 31, 20122014, 20112013 and 20102012, respectively. These costs consist primarily of payroll and payroll related tax and benefit costs that are incurred in connection with the development of restaurant designs and menu offerings.
Partner Compensation - The Restaurant Managing Partner of each Company-owned domestic restaurant and the Chef Partner of each Fleming’s Prime Steakhouse & Wine Bar, as well as Area Operations Directors, generally receive distributions or payments for providing management and supervisory services to their restaurants based on a percentage of their associated restaurants’ monthly cash flows. The expense associated with the monthly payments for Restaurant Managing Partners and Chef Partners is included in Labor and other related expenses, and the expense associated with the monthly payments for Area Operations Directors is included in General and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Restaurant Managing Partners and Chef Partners that are eligible to participate in a deferred compensation program receive an unsecured promise of a cash contribution to their account (see Note 6 - Stock-based and Deferred Compensation Plans). On the fifth anniversary of the opening of each new restaurant, the Area Operations Director supervising the restaurant during the first five years of operation receives an additional bonus based upon the average annual distributable cash flow of the restaurant.
The Company estimates future bonuses and deferred compensation obligations to Restaurant Managing and Chef Partners, using current and historical information on restaurant performance and records the partner obligations in Partner deposits and accrued partner obligations in its Consolidated Balance Sheets. Deferred compensation expenses for Restaurant Managing and Chef partners are included in Labor and other related expenses and bonus expense for Area Operations Directors is included in General and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Stock-based Compensation - Stock-based compensation awards are measured at fair value at the date of grant and expensed over their vesting or service periods. Stock-based compensation expense is recognized only for those awards expected to vest. The expense, net of forfeitures, is recognized using the straight-line method.
Foreign Currency Translation and Transactions
- For all significant non-U.S. operations, the functional currency is the local currency. AssetsForeign currency denominated assets and liabilities of those operations are translated into U.S. dollars using the exchange rates in effect at the balance sheet date.date with the translation adjustments recorded in Accumulated other comprehensive loss in the Consolidated Statements of Changes in Stockholders’ Equity. Results of operations are translated using the average exchange rates for the reporting period. The effect of gains and (losses) from translation adjustments of approximately $7.5 million, ($2.7) million and $4.6 million are included as a separate component of Accumulated other comprehensive loss in the Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2012, 2011 and 2010, respectively. Accumulated other comprehensive loss contained only foreign currency translation adjustments as of December 31, 2012 and 2011.
Foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid. A change in exchange rates between the U.S dollar and the currency in which a transaction is denominated increases or decreases the expected amount of cash flows in U.S. dollars upon settlement of the transaction. This increase or decrease is a foreign currency transaction gain or loss that generally will be included in determining net income for the period in which the exchange rate changes. Similarly, a transaction gain or loss, measured from the transaction date or the most recent intervening balance sheet date, whichever is later, realized upon settlement of a foreign currency transaction generally will be included in determining net income for the period in which the transaction is settled.
Foreign currency exchange transaction losses of $0.7 million, $0.2 millionand gains$0.1 million for fiscal years 2014, 2013 and 2012, respectively, are recorded in Other (expense) income,expense, net in the Company’s Consolidated Statements of Operations and Comprehensive Income and were a net (loss) gain of $(0.1) million, $0.8 million and $3.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.Income.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Income Taxes - Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in the tax rate is recognized in income in the period that includes the enactment date of the rate change.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintains aA valuation allowance tomay reduce its deferred income tax assets to the amount that is more likely than not to be realized. The Company has consideredconsiders future taxable income and ongoing feasible tax planning strategies in assessing the need for thea valuation allowance. Judgments made regarding future taxable income may change due to changes in market conditions, changes in tax laws or other factors. If the assumptions and estimates change in the future, the valuation allowance may increase or decrease, resulting in a respective increase or decrease in income tax expense.
The Noncontrolling interests do not include a provision or liability for income taxes for affiliated entities that are subject to domestic tax jurisdictions, as any tax liability related thereto is the responsibility of the holder of the noncontrolling interest.
Employee Partner Payments and Buyouts
The managing partner of each Company-owned domestic restaurant and the chef partner of each Fleming’s Prime Steakhouse and Wine Bar and Roy’s Company-owned domestic restaurant, as well as area operating partners, generally receive distributions or payments for providing management and supervisory services to their restaurants based on a percentage of their associated restaurants’ monthly cash flows. The expense associated with the monthly payments for managing and chef partners is included in Labor and other related expenses, and the expense associated with the monthly payments for area operating partners is included in General and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Managing and chef partners that are eligible to participate in a deferred compensation program receive an unsecured promise of a cash contribution (see Note 4). An area operating partner’s interest in the partnership (the “Management Partnership”) that provides management and supervisory services to his or her restaurant may be purchased, at the Company’s option, after the restaurant has been open for a five-year period based on the terms specified in the agreement. For those area operating partners with restaurants that opened on or after January 1, 2012, a bonus will be paid after the restaurant has been open for a five-year period based on the terms specified in the agreement. The Company estimates future bonuses and purchases of area operating partners’ interests, as well as deferred compensation obligations to managing and chef partners, using current and historical information on restaurant performance and records the partner obligations in Partner deposits and accrued partner obligations in its Consolidated Balance Sheets. In the period the Company pays an area operating partner bonus or purchases the area operating partner’s interests, an adjustment is recorded to recognize any remaining expense associated with the bonus or purchase and reduce the related accrued buyout liability. Deferred compensation expenses for managing and chef partners are included in Labor and other related expenses and bonus and buyout expenses for area operating partners are included in General and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income.
Stock-based Compensation
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 Company’s 2007 Equity Incentive Plan (the “2007 Equity Plan”). The 2012 Equity Plan permits the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards to Company management and other key employees. The Company accounts for its stock-based employee compensation using a fair value-based method of accounting.
The Company usesrecords a tax benefit for an uncertain tax position using the Black-Scholes option pricing modelhighest cumulative tax benefit that is more likely than not to estimate the weighted-average grant date fair value of stock options granted. Expected volatilities are based on historical volatilities of the stock of comparable companies.be realized. The expected term of options granted representsCompany adjusts its liability for unrecognized tax benefits in the period in which its determines the issue is effectively settled, the statute of time that options grantedlimitations expires or when more information becomes available. Liabilities for unrecognized tax benefits, including penalties and interest, are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is basedrecorded in Accrued and other current liabilities and Other long-term liabilities on the U.S. Treasury yield curve in effect at the time of grant. Results may vary depending on the assumptions applied within the model. Restricted stock awards are issued and measured at market value on the date of grant. The benefits of tax deductions in excess of recognized compensation cost, if any, are reported as a financing cash flow.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net Income Attributable to Bloomin’ Brands, Inc. Per Common ShareCompany’s Consolidated Balance Sheets.
Basic net income 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 per 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.
Segment Reporting
- The Company operates restaurants underfive brands that have similar economic characteristics, nature of products and services, class of customerconsumer and distribution methods, and the Company believes it meets the criteria for aggregating its sixoperating segments, which are the five brands and the Company’sincluding its international Outback Steakhouse operations, into a single reporting segmentsegment. Revenue in accordance with the applicable accounting guidance. Approximately 8%foreign countries and Guam represented 13%, 9%and 8% of the Company’s total revenues for thefiscal years ended December 31,2014, 2013 and 2012,, 2011 respectively. Long-lived assets, excluding goodwill and 2010, respectively, were attributable to operationsintangible assets, located in foreign countries represented 8%, 7% and Guam. Approximately 3% and 2% of the Company’s total long-lived assets excluding goodwill and intangible assets, were located in foreign countries where the Company holds assets as of December 28, 2014, December 31, 2013 and December 31, 2012, and 2011, respectively.
Reclassifications
- The Company has reclassified certain items in the accompanying consolidated financial statements for prior periods to be comparable with the classification for the fiscal year ended December 31, 2012.2014. These reclassifications had no effect on previously reported net income.
Recently Adopted Financial Accounting Standards
- In May 2011,April 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement2014-08 “Presentation of Financial Statements (Topic 820)205) and Property, Plant, and Equipment (Topic 360): Amendments to Achieve Common Fair Value MeasurementReporting Discontinued Operations and Disclosure Requirements in U.S. GAAP and IFRSs”Disclosures of Disposals of Components of an Entity” (“ASU No. 2011-04”2014-08”), that establishes a number. ASU No. 2014-08 changes the criteria for reporting and revises the definition of newdiscontinued operations while enhancing disclosures in this area. Additional disclosure requirements for fair value measurements. These include: (i) a prohibition on grouping financial instrumentsdiscontinued operations and new disclosures for purposes of determining fair value, except when an entity manages market and credit risks onindividually material disposal transactions that do not meet the basis of the entity’s net exposure to the group; (ii) an extension of the prohibition against the userevised definition 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, entitiesdiscontinued operation will be requiredapplicable. The Company elected to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed.early adopt ASU No. 2011-04 is effective2014-08 in the third quarter of fiscal 2014. Accordingly, the Roy’s concept was accounted for interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 on January 1, 2012 increasedas a disposal as it did not represent a strategic shift in the Company’s fair value disclosure requirements but did not have an impact onoperations. See Note 4 - Impairments, Disposals and Exit Costs regarding the Company’s financial position, results of operations or cash flows.Roy’s disposal.
Recently Issued Financial Accounting Standards Not Yet Adopted - In June 2011,August 2014, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220)2014-15: “Presentation of Financial Statements-Going Concern (Subtopic 205-40): PresentationDisclosure of Comprehensive Income”Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU No. 2011-05”2014-15”), that eliminates the option. ASU No. 2014-15 will explicitly require management to report other comprehensive incomeevaluate whether there is substantial doubt about an entity’s ability to continue as a going concern, and its componentsto provide related footnote disclosures in the statement of changes in equity. Instead, thecertain circumstances. The new guidance requiresstandard is applicable for all entities and will be effective for 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.fiscal year 2016. The Company does not expect 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 2011,2014-15 to have a material impact.
In May 2014, the FASB issued ASU No. 2011-12, “Comprehensive Income2014-09 “Revenue Recognition (Topic 220): Deferral606), Revenue from Contracts with Customers” (“ASU No. 2014-09”). ASU No. 2014-09 provides a single source of guidance for revenue arising from contracts with customers and supersedes current revenue recognition standards. Under ASU No. 2014-09, revenue is recognized in an amount that reflects the Effective Dateconsideration an entity expects to receive for Amendmentsthe transfer of goods and services. ASU No. 2014-09 will be effective for the Company in fiscal year 2017 and is applied retrospectively to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income ineach period
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Accounting Standards Update No. 2011-05” (“ASU No. 2011-12”), which indefinitely deferspresented or as a cumulative effect adjustment at 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 adoption. The Company has not selected a transition method and is evaluating the other requirements in ASU No. 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. 2011-12impact this guidance will have on January 1, 2012 did not have an impact on the Company’sits 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 ceasesRecent accounting guidance not discussed above is not applicable, did not have, or is not expected 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 titlematerial impact 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 is effective 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 an impact on the Company’s financial statements.Company.
3. Stockholders’ Equity
Initial Public OfferingAcquisitions
On August 13, 2012, the Company completed an initial public offeringAcquisition of its common stock. On September 11, 2012, the underwritersControlling Interest in the Company’s initial public offeringBrazil Operations - In connection with the Company’s international development growth strategy, effective November 1, 2013, the Company, through its wholly-owned subsidiary, Outback Steakhouse Restaurantes Brasil S.A. (“OB Brasil”), completed the exerciseacquisition of their option to purchase up to 2,400,000 additional sharesa controlling interest in the Brazil Joint Venture. As a result of common stock fromthe acquisition, the Company and certain ofhas a 90% interest in the selling stockholders. In the offering, (i) the Company issued and sold an aggregate of 14,196,845 shares of common stock (including 1,196,845 shares sold pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $156.2 million and (ii) certain of the Company’s stockholders sold 4,196,845 shares of the Company’s common stock (including 1,196,845 shares pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $46.2 million. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders.Brazil Joint Venture, which was subsequently merged with OB Brasil.
The Company received net proceedscompleted the acquisition for total cash consideration of approximately $110.4 million, of which $10.1 million was held in escrow for customary indemnifications. The Company financed the acquisition with borrowings of $100.0 million on its revolving credit facility and available cash. The borrowings on the revolving credit facility were subsequently repaid in fiscal year 2013. Acquisition-related costs of $1.8 million for fiscal year 2013, have been recognized in General and administrative expenses in the offeringConsolidated Statement of approximately $142.2 million after deducting underwriting discountsOperations and commissions of approximately $9.4 million and offering related expenses of $4.6 million. AllComprehensive Income.
As a result of the net proceeds,acquisition, the previously-held equity interest was remeasured at fair value. The difference between the fair value and the carrying value of the equity interest held resulted in a $36.6 million gain for fiscal year 2013. The fair value assigned to the previously held equity investment in the Brazil Joint Venture was determined using the income approach, based on a discounted cash flow methodology.
PGS Par retained a noncontrolling interest of 10% in the Brazil Joint Venture. The Purchase Agreement provides the equity holders of PGS Par with options to sell their remaining interests to OB Brasil (the “put options”) and provides OB Brasil with options to purchase such remaining interests (the “call options” and together with cashthe put options, the “Options”), in various amounts and at various times from 2015 through 2018, subject to acceleration in certain circumstances. The purchase price under each of the Options is based on hand,a multiple of adjusted earnings before interest, taxes, depreciation and amortization of the business, subject to a possible fair market value adjustment. The Options are embedded features within the noncontrolling interest and are classified within the Consolidated Balance Sheet as Redeemable noncontrolling interests. The fair value of the Redeemable noncontrolling interest in OB Brasil on the date of the acquisition was applied to retire OSI’s 10%$22.4 million senior notes due 2015., which was determined based on 10% of the enterprise value and discounted for lack of control and marketability.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Upon completionThe following table summarizes the fair values of the initial public offering, the Company’s certificate of incorporation was amendedassets acquired and restated to provide for authorized capital stock of 475,000,000 shares of common stock, par value $0.01 per share, and 25,000,000 shares of undesignated preferred stock.
On May 10, 2012, the retention bonus and the incentive bonus agreements with the Company’s Chief Executive Officer (“CEO”) were amended. Under the termsliabilities assumed as of the amendments, the remaining payments under each agreement were accelerated to a single lump sum payment of $22.4 million as a resultdate of the completion of the Company’s initial public offering, which was paid inacquisition and the third quarter of 2012.2014 measurement period adjustments made to amounts initially recorded. The Company recorded $18.1 million formeasurement period adjustments did not have a significant impact to the accelerated bonus expense in General and administrative in itsCompany’s Consolidated StatementStatements of Operations and Comprehensive Income for the year ended December 31, 2012.or Consolidated Statements of Cash Flows.
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 outstanding stock options containing a management call option due to the automatic termination of the call option upon completion of the offering. |
| | | | | | | | | | | |
| (in thousands) | AMOUNTS PREVIOUSLY RECORDED AS OF NOVEMBER 1, 2013 | | MEASUREMENT PERIOD ADJUSTMENTS | | ADJUSTED ACQUISITION DATE AMOUNTS |
| Cash and cash equivalents | $ | 10,124 |
| | $ | — |
| | $ | 10,124 |
|
| Inventories | 6,607 |
| | — |
| | 6,607 |
|
| Other current assets, net | 14,984 |
| | (676 | ) | | 14,308 |
|
| Property, fixtures and equipment | 81,038 |
| | (923 | ) | | 80,115 |
|
| Goodwill (1) | 135,701 |
| | 6,241 |
| | 141,942 |
|
| Intangible assets, net | 86,623 |
| | — |
| | 86,623 |
|
| Other assets, net | 4,535 |
| | (64 | ) | | 4,471 |
|
| Accounts payable | (7,782 | ) | | — |
| | (7,782 | ) |
| Accrued and other current liabilities | (17,486 | ) | | (2,946 | ) | | (20,432 | ) |
| Current portion of partner deposits and accrued partner obligations | (729 | ) | | — |
| | (729 | ) |
| Long-term portion of partner deposits and accrued partner obligations | (4,482 | ) | | — |
| | (4,482 | ) |
| Deferred income taxes | (26,881 | ) | | 565 |
| | (26,316 | ) |
| Other long-term liabilities, net | (11,390 | ) | | (2,197 | ) | | (13,587 | ) |
| | 270,862 |
| | — |
| | 270,862 |
|
| Fair value of previously held equity investment | (138,054 | ) | | — |
| | (138,054 | ) |
| Remaining redeemable noncontrolling interests | (22,365 | ) | | — |
| | (22,365 | ) |
| Total purchase price | $ | 110,443 |
| | $ | — |
| | $ | 110,443 |
|
____________
Net Income Attributable to Bloomin’ Brands, Inc. Per Common Share
| |
| (1) | The goodwill recognized is attributable primarily to the potential for strategic future growth. The carrying value of historical goodwill associated with the Company’s former equity investment in this entity of $52.6 million was disposed in connection with the acquisition. Goodwill recognized included $80.1 million that is expected to be deductible for tax purposes. |
The computationfair value of basicnet intangible assets has been allocated to reacquired franchise rights and diluted net income per common share is as follows (in thousands, except per share amounts):
favorable and unfavorable leases. The following table presents details of the purchased intangible assets and their remaining weighted-average amortization periods:
|
| | | | | | | | | | | |
| | YEARS ENDED DECEMBER 31, |
| | 2012 | | 2011 | | 2010 |
| Net income attributable to Bloomin’ Brands, Inc. | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
|
| | | | | | |
| Basic weighted average common shares outstanding | 111,999 |
| | 106,224 |
| | 105,968 |
|
| | | | | | |
| Effect of diluted securities: | | | | | |
| Stock options | 2,738 |
| | 399 |
| | — |
|
| Unvested restricted stock | 84 |
| | 66 |
| | — |
|
| Diluted weighted average common shares outstanding | 114,821 |
| | 106,689 |
| | 105,968 |
|
| | | | | | |
| Basic net income attributable to Bloomin’ Brands, Inc. per common share | $ | 0.45 |
| | $ | 0.94 |
| | $ | 0.50 |
|
| Diluted net income attributable to Bloomin’ Brands, Inc. per common share | $ | 0.44 |
| | $ | 0.94 |
| | $ | 0.50 |
|
|
| | | | | |
| (in thousands, or as otherwise indicated) | FAIR VALUE AMOUNT AS OF NOVEMBER 1, 2013 | | WEIGHTED-AVERAGE AMORTIZATION PERIOD (IN YEARS) |
| Reacquired franchise rights (1) | $ | 82,389 |
| | 14 |
| Favorable leases (2) | 4,234 |
| | 9 |
| Unfavorable leases (2) (3) | (1,798 | ) | | 10 |
| Total identified intangible assets | $ | 84,825 |
| | 14 |
____________________
| |
| (1) | Reacquired franchise rights are amortized on a straight-line basis over the remaining life of each restaurants’ franchise agreement, without consideration of renewal. |
| |
| (2) | Favorable and unfavorable leases are amortized on a straight-line basis over the remaining lease term. |
| |
| (3) | Unfavorable leases are included in Other long-term liabilities, net. |
Dilutive securities outstanding not includedIncluded in the computationCompany’s operating results for fiscal year 2013 are Revenues of $23.7 million and net income attributable to Bloomin’ Brands, Inc. per common share because their effect was antidilutive were as follows (in thousands):
|
| | | | | | | | | |
| | | YEARS ENDED DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| Stock options | | 1,092 |
| | 550 |
| | 2,576 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
PurchaseThe following table presents summarized financial information for 100% of the Brazil Joint Venture for the periods ending as indicated:
|
| | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2013(1) | | 2012 |
| Net revenue from sales | $ | 215,050 |
| | $ | 246,819 |
|
| Gross profit | $ | 148,229 |
| | $ | 172,011 |
|
| Income from continuing operations | $ | 26,945 |
| | $ | 24,268 |
|
| Net income | $ | 15,382 |
| | $ | 11,151 |
|
____________________
| |
| (1) | Summarized financial information for fiscal year 2013 includes results for January 1, 2013 to October 31, 2013, when the Brazil Joint Venture was accounted for as an equity method investment. |
The following comparative unaudited pro forma results of operations information for fiscal years 2013 and 2012 assumes the acquisition occurred on January 1, 2012, and reflects the full results of operations for the years presented. The pro forma results have been prepared for comparative purposes only and do not indicate the results of operations which would actually have occurred had the combination been in effect on the dates indicated, or which may occur in the future.
|
| | | | | | | |
| | PRO FORMA (1) |
| | FISCAL YEAR |
| | 2013 | | 2012 |
| (in thousands, except per share data) | (unaudited) | | (unaudited) |
| Total revenues | $ | 4,360,571 |
| | $ | 4,223,393 |
|
| Net income attributable to Bloomin’ Brands | $ | 174,769 |
| | $ | 49,623 |
|
| Earnings per share: | | | |
| Basic | $ | 1.42 |
| | $ | 0.44 |
|
| Diluted | $ | 1.36 |
| | $ | 0.43 |
|
____________________
| |
| (1) | These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting for the following items: (i) fair value and depreciable lives adjustments to property and equipment, (ii) elimination of royalty revenue and expense, (iii) reversal of equity method income in the Company’s operating results, (iv) reversal of professional fees associated with the acquisition and (v) the related tax effects of these adjustments. These unaudited pro forma results of operations do not reflect the one-month reporting lag. |
Acquisition of Limited Partnership and Joint Venture Interests
During 2014, the third and fourth quartersCompany purchased the remaining partnership interests in certain of the Company’s limited partnerships that either owned or had a contractual right to varying percentages of cash flows in 37Bonefish Grill restaurants for an aggregate purchase price of $17.2 million. These transactions resulted in a reduction of $11.7 million in Additional paid-in capital in the Company’s Consolidated Statements of Changes in Stockholders’ Equity during fiscal year 2014.
During 2012, the Company purchased the remaining partnership interests in certain of the Company’s limited partnerships that either owned or had a contractual right to varying percentages of cash flows in 44 Bonefish Grill restaurants and 17 Carrabba’s Italian Grill restaurants for an aggregate purchase price of $39.5 million. The purchase price for each of the transactions was paid in cash by December 31, 2012.$39.5 million. These transactions resulted in a $39.0reduction of $39.0 million reduction in Additional paid-in capital in the Company’s Consolidated Balance Sheet at December 31,Statements of Changes in Stockholders’ Equity during fiscal year 2012.
Effective October 1, 2012, the Company purchased the remaining interests in the Roy’s joint venture from its joint venture partner, RY-8, Inc. (“RY-8”), for $27.4 million. This purchase price consisted of the assumption of RY-8’s $24.5 million line of credit guaranteed by OSI that had been recorded in Guaranteed debt in the Company’s Consolidated Balance Sheet at December 31, 2011, forgiveness of $1.8 million in loans due from RY-8 to OSI and a $1.1 million cash payment. This transaction resulted in a $0.7 million reduction in Additional paid-in capital in the Company’s Consolidated Balance Sheet at December 31, 2012. In December 2012, the Company paid the $24.5 million outstanding balance on the line of credit assumed from RY-8 and the line of credit was terminated.
The following table sets forth the effect of these transactions on stockholders’ equity attributable to Bloomin’ Brands, Inc. (in thousands):
|
| | | | | | | | | | | |
| | NET INCOME ATTRIBUTABLE TO BLOOMIN’ BRANDS, INC. AND TRANSFERS TO NONCONTROLLING INTERESTS |
| |
| | YEARS ENDED DECEMBER 31, |
| | 2012 | | 2011 | | 2010 |
| Net income attributable to Bloomin’ Brands, Inc. | $ | 49,971 |
| | $ | 100,005 |
| | $ | 52,968 |
|
| Transfers to noncontrolling interests: | | | | | |
| Decrease in Bloomin’ Brands, Inc. additional paid-in capital for purchase of | | | | | |
| joint venture and limited partnership interests | (39,696 | ) | | — |
| | — |
|
| Change from net income attributable to Bloomin’ Brands, Inc. and transfers to | $ | 10,275 |
| | $ | 100,005 |
| | $ | 52,968 |
|
| noncontrolling interests | | |
4. Stock-based and Deferred Compensation Plans
Stock-based and Deferred Compensation Plans
Managing and Chef Partners
Historically, the managing partner of each Company-owned domestic restaurant and the chef partner of each Fleming’s Prime Steakhouse and Wine Bar and Roy’s restaurant were required, as a condition of employment, to sign a five-year employment agreement and to purchase a non-transferable ownership interest in the Management Partnership that provided management and supervisory services to his or her restaurant. The purchase price for a managing partner’s ownership interest was fixed at $25,000, and the purchase price for a chef partner’s ownership interest ranged from $10,000 to $15,000. Managing and chef partners had the right to receive monthly distributions from the Management Partnership based on a percentage of their restaurant’s monthly cash flows for the duration of the agreement, which varied by concept from 6% to 10% for managing partners and 2% to 5% for chef partners. Further, managing and chef partners were eligible to participate in the Partner Equity Plan (“PEP”), a deferred compensation program, upon completion of their five-year employment agreement. Amounts credited to partners’ PEP accounts are fully vested at all times and participants have no discretion with respect to the form of benefit payments under the PEP.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
In April 2011,The following table sets forth the Company modified its managing and chef partner compensation structure to provide greater incentives for sales and profit growth. Under the revised program, managing and chef partners continue to sign five-year employment agreements and receive monthly distributionseffect of the same percentage of their restaurant’s cash flow as under the prior program. However, under the revised program, in lieu of participation in the PEP, managing partnerslimited partnership interests and chef partners are eligibleRoy’s joint venture acquisition transactions on stockholders’ equity attributable to receive deferred compensation payments under the Partner Ownership Account Plan (the “POA”). The POA places greater emphasis on year-over-year growth in cash flow than the PEP. Managing and chef partners receive a greater value under the POA than they would have received under the PEP if certain levels of year-over-year cash flow growth are achieved and a lesser value than under the PEP if these levels are not achieved.Bloomin’ Brands:
|
| | | | | | | | | | | |
| | NET INCOME ATTRIBUTABLE TO BLOOMIN’ BRANDS AND TRANSFERS TO NONCONTROLLING INTERESTS |
| |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Net income attributable to Bloomin’ Brands | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
|
| Transfers to noncontrolling interests: | | | | | |
| Decrease in Bloomin’ Brands additional paid-in capital for purchase of | | | | | |
| joint venture and limited partnership interests | (11,662 | ) | | — |
| | (39,696 | ) |
| Change from net income attributable to Bloomin’ Brands and transfers | $ | 79,428 |
| | $ | 208,367 |
| | $ | 10,275 |
|
| to noncontrolling interests | | |
The POA requires managing and chef partners to make an initial depositAcquisition of up toFranchised Restaurants - $10,000 into their “Partner Investment Account,” andEffective March 1, 2014, the Company makeacquired two Bonefish Grill restaurants from a bookkeeping contribution to each partner’s “Company Contributions Account” no later thanfranchisee for a purchase price of $3.2 million, including customary escrow amounts. The Consolidated Statement of Operations and Comprehensive Income includes the endresults of Februaryoperations for these restaurants from the date of each year following the completion of each year (or partial year where applicable) under the partner’s employment agreement.acquisition. The value of each Company contribution is equal to a percentagepro forma impact of the partner’s restaurant’s cash flow plus, ifacquisition on prior periods is not presented as the restaurant has been open at least 18 calendar months, a percentage of the year-over-year increase in the restaurant’s cash flow.impact was not material to reported results.
The POA also provides an annual bonus known asCompany allocated the President’s Club, paid in additionpurchase price to the monthly distributionsassets acquired less the liabilities assumed based on their estimated fair value on the date of cash flow, designed to reward increases in a restaurant’s annual sales aboveacquisition with the concept sales plan with a required flow-through percentageremaining $2.5 million of the incremental salespurchase price allocated to cash flowgoodwill. All goodwill recognized is expected to be deductible for tax purposes.
4. Impairments, Disposals and Exit Costs
The components of Provision for impaired assets and restaurant closings are as defined in the plan. Managing and chef partners whose restaurants achieve certain annual sales targets above the concept’s sales plan (and the required flow-through percentage) receive a bonus equal to a percentage of the incremental sales, such percentage determined by the sales target achieved.follows:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Impairment losses | $ | 37,071 |
| | $ | 19,761 |
| | $ | 10,584 |
|
| Restaurant closure expenses | 15,010 |
| | 3,077 |
| | 2,421 |
|
| Provision for impaired assets and restaurant closings | $ | 52,081 |
| | $ | 22,838 |
| | $ | 13,005 |
|
Amounts credited to each partner’s account underRestaurant Closure Initiatives - In the POA may be allocated by the partner among benchmark funds offered under the POA, and the account balancesfourth quarter of the partner will increase or decrease based on the performance of the benchmark funds. Upon termination of employment, all remaining balances in2013, the Company Contributions Accountcompleted an assessment of its domestic restaurant base and decided to close 22 underperforming domestic locations (the “Domestic Restaurant Closure Initiative”). Aggregate pre-tax impairment, restaurant and other closing costs of $4.9 million and $18.7 million were incurred, during fiscal year 2014 and 2013, respectively, in the POA are forfeited unless the partner has beenconnection with the Company for twenty years or more. Unless previously forfeited under the terms of the POA, 50% of the partner’s total account balances generally will be distributed in the March following the completion of the initial five-year contract term with subsequent distributions varying based on the length of continued employment as a partner. The deferred compensation obligations under the POA are unsecured obligations of the Company.Domestic Restaurant Closure Initiative.
All managing and chef partners who execute new employment agreements after May 1, 2011 are requiredDuring 2014, the Company decided to participateclose 36 underperforming international locations, primarily in South Korea (the “International Restaurant Closure Initiative”). The Company expects to substantially complete these international restaurant closings during the revised partner program, includingfirst quarter of 2015. In connection with the POA. Managing and chef partners with a current employment agreement scheduled to expire December 1, 2011 or later hadInternational Restaurant Closure Initiative, the opportunity (from April 27, 2011 through July 27, 2011) to amend their employment agreements to convert their existing partner program to participation in the new partner program, including the POA, effective June 1, 2011. As of December 31, 2012 and 2011, the Company’s POA liability was $15.3 million and $8.0 million, respectively, which was recorded in Partner deposits and accrued partner obligations in its Consolidated Balance Sheets.
Upon theCompany incurred pre-tax asset impairments, restaurant closing of the Merger, certain stock options that had been granted to managing and chef partners under a pre-merger managing partner stock plan upon completion of a previous employment contract were converted into the right to receive cash in the form of a “Supplemental PEP” contribution.
As of December 31, 2012, the Company’s total vested liability with respect to obligations primarily under the PEP and Supplemental PEP was approximately $122.6 million, of which $17.8 million and $104.8 million was included in Accrued and other current liabilities and Other long-term liabilities, net, respectively, in its Consolidated Balance Sheet. Ascosts of December 31, 2011, the Company’s total vested liability with respect to obligations primarily under the PEP and Supplemental PEP was approximately $107.8$21.9 million, of which $11.8 million and $96.0 million was included in Accrued and other current liabilities and Other long-term liabilities, net, respectively, in its Consolidated Balance Sheet. Partners may allocate the contributions into benchmark investment funds, and these amounts due to participants will fluctuate according to the performance of their allocated investments and may differ materially from the initial contribution and current obligation. during fiscal year 2014.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company expects to incur additional charges of $9.0 million to $12.0 million, including costs associated with lease obligations, employee terminations and other closure related obligations, primarily through the first quarter of 2015. Lease obligations represent $7.0 million to $10.0 million of the remaining charges the Company expects to incur. Future cash expenditures of $18.0 million to $23.0 million, primarily related to lease liabilities, are expected to occur through November 2022.
Following is a summary of the above restaurant closure initiative expenses recognized in the Consolidated Statement of Operations and Comprehensive Income during the periods indicated (in thousands):
|
| | | | | | | | | | | | | | |
| DESCRIPTION | | LOCATION OF CHARGE IN THE CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME | | FISCAL YEAR |
| | | 2014 | | 2013 | | 2012 |
| Property, fixtures and equipment impairments | | Provision for impaired assets and restaurant closings | | $ | 11,573 |
| | $ | 18,695 |
| | $ | — |
|
| Facility closure and other expenses | | Provision for impaired assets and restaurant closings | | 14,137 |
| | — |
| | — |
|
| Severance and other liabilities | | General and administrative | | 4,042 |
| | — |
| | — |
|
| Reversal of deferred rent liability | | Other restaurant operating | | (2,911 | ) | | — |
| | — |
|
| | | | | $ | 26,841 |
| | $ | 18,695 |
| | $ | — |
|
The following table summarizes the Company’s accrual activity related to facility closure and other costs, primarily associated with the Domestic and International Restaurant Closure Initiatives, during the fiscal years ended December 28, 2014, and December 31, 2013:
|
| | | | | | | |
| (in thousands) | 2014 | | 2013 |
| Beginning of the year | $ | 2,232 |
| | $ | 990 |
|
| Charges | 12,644 |
| | 1,573 |
|
| Cash payments | (4,086 | ) | | (1,203 | ) |
| Adjustments (1) | 210 |
| | 872 |
|
| End of the year (2) | $ | 11,000 |
| | $ | 2,232 |
|
________________
| |
| (1) | Adjustments to facility closure and other costs represent changes in sublease assumptions and reductions in the Company’s remaining lease obligations. |
| |
| (2) | As of December 28, 2014 and December 31, 2013, the Company had exit-related accruals of $4.7 million and $1.2 million, respectively, recorded in Accrued and other current liabilities and $6.3 million and $1.1 million, respectively, recorded in Other long-term liabilities, net. |
Roy’s - In September 2014, the Company reclassified the assets and liabilities of Roy’s to held for sale. In connection with the decision to sell Roy’s, the Company recorded a pre-tax impairment charge of $13.4 million for Assets held for sale during fiscal year 2014. This impairment charge is recorded in Provision for impaired assets and restaurant closings in the Consolidated Statements of Operations and Comprehensive Income.
On January 26, 2015, the Company sold its Roy’s concept to United Ohana, LLC (the “buyer”), for a purchase price of $10.0 million, less certain liabilities. Included in the purchase agreement is a provision in which the Company will pay the buyer up to $5.0 million, if certain lease contingencies are not resolved prior to April 2018 and the buyer is damaged. At the time of this report, the Company believes it is probable the lease contingencies will be resolved as required pursuant to the purchase agreement.
In connection with the sale of Roy’s, the Company continues to provide lease guarantees for certain of the Roy’s locations. Under the guarantees, the Company will pay the rental expense over the remaining lease term in the event of default. The fair value and maximum value of the lease guarantees is nominal. The maximum amount is calculated as the fair value of the lease payments over the remaining lease term and assumes that there are subleases.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Following are the assets and liabilities of Roy’s held for sale as of December 28, 2014:
|
| | | |
| (in thousands) | DECEMBER 28, 2014 |
| Assets | |
| Current assets | $ | 2,818 |
|
| Property, fixtures and equipment, net | 16,274 |
|
| Intangible assets, net | 5,812 |
|
Other non-current assets
| 591 |
|
| Total assets (1) | $ | 25,495 |
|
| Liabilities | |
| Current liabilities | $ | 3,743 |
|
| Non-current liabilities | 3,105 |
|
| Total liabilities (2) | $ | 6,848 |
|
| |
| (1) | The impairment charge of $13.4 million is excluded from the amount presented. |
| |
| (2) | Liabilities held for sale are included with Accrued and other current liabilities in the Consolidated Balance Sheet. |
Following are the components of Roy’s included in the Consolidated Statements of Operations and Comprehensive Income for the following periods:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Restaurant sales | $ | 68,575 |
| | $ | 73,945 |
| | $ | 75,721 |
|
| (Loss) income before income taxes (1) | $ | (13,612 | ) | | $ | (1,844 | ) | | $ | 923 |
|
________________
| |
| (1) | Includes impairment charges of $13.4 million for Assets held for sale during the fiscal year 2014. |
Other Disposals - During the third quarter of 2014, the Company decided to sell both of its corporate airplanes. In connection with this decision, the Company recognized pre-tax asset impairment charges of $10.6 million for fiscal year 2014. The impairment charges are recorded in Provision for impaired assets and restaurant closings in the Consolidated Statements of Operations and Comprehensive Income. The Company completed the sale of one airplane during the fourth quarter of 2014 for net proceeds of $2.5 million. The fair value of the remaining airplane of $2.6 million is recorded in Assets held for sale as of December 28, 2014.
5. Earnings Per Share
The Company computes basic earnings per share based on the weighted average number of common shares that were outstanding during the period. Diluted earnings per share includes the dilutive effect of common stock equivalents consisting of restricted stock, restricted stock units, performance-based share units and stock options, using the treasury stock method. Performance-based share units are considered dilutive when the related performance criterion has been met.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table presents the computation of basic and diluted earnings per share:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands, except per share amounts) | 2014 | | 2013 | | 2012 |
| Net income attributable to Bloomin’ Brands | $ | 91,090 |
| | $ | 208,367 |
| | $ | 49,971 |
|
| | | | | | |
| Basic weighted average common shares outstanding | 125,139 |
| | 122,972 |
| | 111,999 |
|
| | | | | | |
| Effect of diluted securities: | | | | | |
| Stock options | 3,079 |
| | 4,902 |
| | 2,738 |
|
| Nonvested restricted stock and restricted stock units | 91 |
| | 191 |
| | 84 |
|
| Nonvested performance-based share units | 8 |
| | 9 |
| | — |
|
| Diluted weighted average common shares outstanding | 128,317 |
| | 128,074 |
| | 114,821 |
|
| | | | | | |
| Basic earnings per share | $ | 0.73 |
| | $ | 1.69 |
| | $ | 0.45 |
|
| Diluted earnings per share | $ | 0.71 |
| | $ | 1.63 |
| | $ | 0.44 |
|
Dilutive securities outstanding not included in the computation of earnings per share because their effect was antidilutive were as follows:
|
| | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Stock options | 3,090 |
| | 1,348 |
| | 1,092 |
|
| Nonvested restricted stock and restricted stock units | 206 |
| | 12 |
| | — |
|
6. Stock-based and Deferred Compensation Plans
Stock-based Compensation Plans
Equity Compensation Plans - The Company’s 2012 Incentive Plan permits the grants of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards to officers, employees and directors. Upon adoption and approval of the 2012 Incentive Plan, all of the Company’s previous equity compensation plans were terminated. Existing awards under previous plans continue to vest in accordance with the original vesting schedule and will expire at the end of their original term.
As of December 28, 2014, the maximum number of shares of common stock available for issuance pursuant to the 2012 Incentive Plan was 7,918,651. On the first business day of each fiscal year, the aggregate number of shares that may be issued automatically increases by two percent of the total shares then issued and outstanding. All outstanding stock-based compensation awards contain certain forfeiture provisions.
The Company recognized stock-based compensation expense as follows:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Stock options | $ | 11,946 |
| | $ | 11,168 |
| | $ | 20,148 |
|
| Restricted stock and restricted stock units | 3,857 |
| | 2,026 |
| | 1,392 |
|
| Performance-based share units | 1,190 |
| | 663 |
| | — |
|
| | $ | 16,993 |
| | $ | 13,857 |
| | $ | 21,540 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock Options - December 31,Beginning in August 2012, stock options generally vest and become exercisable over a period of four years in an equal number of shares each year. Stock options have an exercisable life of no more than ten years from the date of grant.2011,
Stock options granted prior to August 2012 generally vest and become exercisable over a period of five years in an equal number of shares each year. Shares acquired upon the exercise of stock options were generally subject to a stockholder’s agreement that contained a management call option and certain transfer restrictions. The management call option allowed the Company had approximatelyto repurchase all shares purchased through exercise of stock options upon termination of employment at any time prior to the earlier of an IPO or a change of control. As a result of the transfer restrictions and management call option, the Company did not record compensation expense for stock options that contained the call option. Prior to the Company’s IPO in August 2012, there were no exercises of stock options by employees, and generally all stock options of terminated employees with a call provision either expired or were forfeited.
Upon completion of the Company’s IPO, the Company recorded $16.0 million of stock compensation expense for: (i) certain stock options that became exercisable and (ii) the time-vested portion of outstanding stock options containing the management call option due to automatic termination of the call option upon completion of the offering.
The following table presents a summary of the Company’s stock option activity for fiscal year 2014:
|
| | | | | | | | | | | | |
| (in thousands, except exercise price and contractual life) | OPTIONS | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS) | | AGGREGATE
INTRINSIC
VALUE |
| Outstanding as of December 31, 2013 | 10,010 |
| | $ | 9.54 |
| | 6.6 | | $ | 144,813 |
|
| Granted | 1,541 |
| | 23.38 |
| | | | |
| Exercised | (1,260 | ) | | 7.53 |
| | | | |
| Forfeited or expired | (514 | ) | | 17.07 |
| | | | |
| Outstanding as of December 28, 2014 | 9,777 |
| | $ | 11.59 |
| | 6.2 | | $ | 120,461 |
|
| Vested and expected to vest as of December 28, 2014 | 9,716 |
| | $ | 11.54 |
| | 6.2 | | $ | 120,193 |
|
| Exercisable as of December 28, 2014 | 6,427 |
| | $ | 7.84 |
| | 5.2 | | $ | 102,367 |
|
Assumptions used in the Black-Scholes option pricing model and the weighted-average fair value of option awards granted were as follows for the periods indicated:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| | 2014 | | 2013 | | 2012 |
| Assumptions: | | | | | |
| Weighted-average risk-free interest rate (1) | 1.82 | % | | 1.22 | % | | 1.11 | % |
| Dividend yield (2) | — | % | | — | % | | — | % |
| Expected term (3) | 6.3 years |
| | 6.3 years |
| | 6.5 years |
|
| Weighted-average volatility (4) | 48.4 | % | | 48.6 | % | | 48.6 | % |
| | | | | | |
| Weighted-average grant date fair value per option | $ | 11.37 |
| | $ | 9.14 |
| | $ | 6.93 |
|
________________
| |
| (1) | Risk-free rate is the U.S. Treasury yield curve in effect as of the grant date for periods within the contractual life of the option. |
| |
| (2) | Dividend yield is the level of dividends expected be paid on the Company’s common stock over the expected term of the option. |
| |
| (3) | Expected term represents the period of time that the options are expected to be outstanding. The simplified method of estimating the expected term is used since the Company does not have significant historical exercise experience for its stock options. |
| |
| (4) | Volatility for fiscal years 2014 and 2013 is based on the historical volatilities of the Company’s stock and the stock of comparable peer companies. Volatility for fiscal year 2012 is based on the historical volatilities of the stock of comparable peer companies. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following represents stock option compensation information for the periods indicated:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Intrinsic value of options exercised | $ | 19,474 |
| | $ | 42,661 |
| | $ | 523 |
|
| Excess tax benefits for tax deductions related to the exercise of stock options (1) | $ | 2,405 |
| | $ | 4,304 |
| | $ | — |
|
| Cash received from option exercises | $ | 9,540 |
| | $ | 27,786 |
| | $ | 884 |
|
| Fair value of stock options vested (2) | $ | 36,614 |
| | $ | 47,468 |
| | $ | 66,467 |
|
| Tax benefits for stock option compensation expense (1) | $ | 7,576 |
| | $ | 4,381 |
| | $ | — |
|
| | | | | | |
| Unrecognized stock option expense | $ | 24,164 |
| | | | |
| Remaining weighted-average vesting period | 2.8 years |
| | | | |
________________
| |
| (1) | Excess tax benefits for tax deductions related to the exercise of stock options and tax benefits for stock option compensation expense were not recognized in fiscal year 2012 due to a valuation allowance and other available tax credits. |
| |
| (2) | The fair value of stock options that vested during fiscal year 2012 included $39.3 million of stock options that would have vested in prior years without the management call option. |
Restricted Stock and Restricted Stock Units - $67.8 millionRestricted stock and restricted stock units generally vest and become exercisable in an equal number of shares each year. Restricted stock and stock units issued to members of the Board of Directors vest over a period of three years. For employees, restricted stock and restricted stock units vest over four years. Following is a summary of the Company’s restricted stock and restricted stock unit activity for fiscal year 2014:
|
| | | | | | |
| (in thousands, except grant date fair value) | NUMBER OF RESTRICTED STOCK & RESTRICTED STOCK UNIT AWARDS | | WEIGHTED-AVERAGE
GRANT DATE
FAIR VALUE PER AWARD |
| Outstanding as of December 31, 2013 | 581 |
| | $ | 18.43 |
|
| Granted | 669 |
| | 20.88 |
|
| Vested | (146 | ) | | 18.32 |
|
| Forfeited | (158 | ) | | 19.40 |
|
| Outstanding as of December 28, 2014 | 946 |
| | $ | 20.08 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following represents restricted stock and restricted stock unit compensation information as of December 28, 2014:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Fair value of restricted stock vested | $ | 2,680 |
| | $ | 1,597 |
| | $ | 2,839 |
|
| Tax benefits for restricted stock compensation expense (1) | $ | 1,298 |
| | $ | 817 |
| | $ | — |
|
| | | | | | |
| Unrecognized restricted stock expense | $ | 15,327 |
| | | | |
| Remaining weighted-average vesting period | 3.2 years |
| | | | |
________________
| |
| (1) | Excess tax benefits for tax deductions related to restricted stock compensation expense were not recognized in fiscal year 2012 due to a valuation allowance and other available tax credits. |
Performance-based Share Units - Beginning in 2013, the Company granted performance-based share units (“PSUs”) to certain employees. The PSUs vest in an equal number of shares over four years. The number of units that vest is determined for each year based on the achievement of certain Company performance criteria as set forth in the award agreement and may range from zero to 200% of the annual target grant. The PSUs are settled in shares of common stock, with holders receiving one share of common stock for each performance-based share unit that vests. The fair value of PSUs is based on the closing price of the Company’s common stock on the grant date. Compensation expense for PSUs is recognized over the vesting period when it is probable the performance criteria will be achieved.
At December 28, 2014, the following performance-based share unit (“PSUs”) programs were in progress:
|
| | | | | | | | | | | | | | | | | |
| | | | | TARGET NO. OF PSUs AWARDED AND REMAINING TO GRANT (1) | | TARGET NO. OF GRANTED AND OUTSTANDINGPSUs (2) | | ESTIMATED PAYOUT OF GRANTED AND OUTSTANDING PSUs AS OF DECEMBER 28, 2014 | | | | MAXIMUM PAYOUT (AS A % OF TARGET NO. OF PSUs) |
| (units in thousands) | | | | | MINIMUM PAYOUT | |
| AWARD DATE | | PROGRAM | | | | | |
| 2/26/2013 | | 2013 Program | | 103 |
| | 32 |
| | 19 |
| | — | % | | 200 | % |
| 4/24/2013 | | 2013 Grant | | 12 |
| | 6 |
| | 6 |
| | — | % | | 100 | % |
| 2/27/2014 | | 2014 Program | | 174 |
| | 54 |
| | 34 |
| | — | % | | 200 | % |
| | | | | 289 |
| | 92 |
| | 59 |
| | | | |
________________
| |
| (1) | Represents target PSUs awarded under each of the identified programs that have not been granted for accounting purposes. These PSUs do not result in the recognition of stock-based compensation expense until the performance target has been set by the Board of Directors as of the beginning of each fiscal year. There is no effect of these PSUs on the Company’s basic or diluted shares outstanding. |
| |
| (2) | Assumes achievement of target threshold of the Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) goals for the Company or respective concepts for the 2013 Programs and achievement of target threshold of the Adjusted EPS goal for the 2014 Program. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table presents a summary of the Company’s PSU activity for fiscal year 2014:
|
| | | | | | |
| (in thousands, except grant date fair value) | PERFORMANCE-BASED SHARE UNITS | | WEIGHTED-AVERAGE
GRANT DATE
FAIR VALUE PER AWARD |
| Outstanding as of December 31, 2013 | 49 |
| | $ | 17.85 |
|
| Granted (1) | 110 |
| | 25.07 |
|
| Vested (2) | (56 | ) | | 16.70 |
|
| Forfeited | (11 | ) | | 23.10 |
|
| Outstanding as of December 28, 2014 | 92 |
| | $ | 25.08 |
|
________________
| |
| (1) | Share unit amounts include the number of PSUs at the target threshold in the current period grant and additional shares earned above target due to exceeding prior period performance criteria. |
| |
| (2) | In February 2014, 44,996 PSUs vested based upon satisfaction of the 2013 Company performance criteria, representing the achievement of 114% of the annual target threshold. |
Deferred Compensation Plans
Restaurant Managing Partners and Chef Partners - $56.9 million, respectively,Restaurant Managing Partners and Chef Partners are eligible to participate in deferred compensation programs. The Company invests in various corporate-owned life insurance policies, and at December 31, 2011, another $0.3 million of restricted cash, both of which are held within an irrevocable grantor or “rabbi” trust account for settlement of the Company’s obligations primarily under the PEP, Supplemental PEPdeferred compensation plans. The deferred compensation obligation due to managing and POA. The Company is the sole ownerchef partners was $155.6 million and $148.3 million as of any assets within the rabbi trust and participants are considered general creditors of the Company with respect to assets within the rabbi trust.
As of December 31, 2012 and 2011, there were $65.1 million and $55.6 million, respectively, of unfunded obligations primarily related to the PEP, Supplemental PEP and POA, excluding amounts not yet contributed to the partners’ investment funds, which may require the use of cash resources in the future.
Area Operating Partners
Historically, an area operating partner was required, as a condition of employment and within 30 days of the opening of his or her first restaurant, to make an initial investment of $50,000 in the Management Partnership that provides supervisory services to the restaurants that the area operating partner oversees. This interest gave the area operating partner the right to distributions from the Management Partnership based on a percentage of his or her restaurants’ monthly cash flows for the duration of the agreement, typically ranging from 4% to 9%. The Company has the option to purchase an area operating partner’s interest in the Management Partnership after the restaurant has been open for a five-year period on the terms specified in the agreement.
For restaurants opened on or between January 1, 200728, 2014 and December 31, 2011, the area operating partner’s percentage2013, respectively. The unfunded obligation for managing and chef partners’ deferred compensation was $82.6 million and $76.5 million as of cash distributionsDecember 28, 2014 and buyout percentage was calculated based on the associated restaurant’s return on investment compared to the Company’s targeted return on investment and ranged from 3.0% to 12.0% depending on the concept. This percentage was determined after the first five full calendar quarters from the date of the associated restaurant’s opening and was adjusted each quarter thereafter based on a trailing 12-month restaurant return on investment. The buyout percentage was the area operating partner’s average distribution percentage for the 24 months immediately preceding the buyout. Buyouts were paid in cash within 90 days or paid over a two-year period.
In 2011, the Company also began a version of the President’s Club annual bonus described above under “Managing and Chef Partners” for area operating partners to provide additional rewards for achieving sales targets with a required flow-through of the incremental sales to cash flow as defined in the plan.
In April 2012, the Company revised its area operating partner program for restaurants opened on or after January 1, 2012. For these restaurants, an area operating partner is required, as a condition of employment, to make a deposit of $10,000 within 30 days of the opening of each new restaurant that he or she oversees, up to a maximum deposit of $50,000 (taking into account investments under prior programs). This deposit gives the area operating partner the right to monthly payments based on a percentage of his or her restaurants’ monthly cash flows for the duration of the employment agreement, typically ranging from 4.0% to 4.5%. After the restaurant has been open for a five-year period, the area operating partner will receive a bonus equal to a multiple of the area operating partner’s average monthly payments for the 24 months immediately preceding the bonus date. The bonus will be paid within 90 days or over a two-year period, depending on the bonus amount.
Management and Other Key Employees
During the years ended December 31, 2012 and 2011, the Board of Directors authorized an additional 850,000 and 1,350,000 shares, respectively, for issuances of stock options and restricted stock under the Company’s 2007 Equity Plan. During the year ended December 31, 2010, no additional shares were approved. A total of 13,200,000 shares were approved for stock options and restricted stock grants under the 2007 Equity Plan by the Board of Directors as of December 31, 2012. The maximum term of stock options and restricted stock granted under the 2007 Equity Plan is ten years. 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.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 of the Board of Directors. The maximum number of shares of common stock available for issuance pursuant to the 2012 Equity Plan was 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 automatically increases 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 as established by the Compensation Committee of the Board of Directors. Unless terminated earlier, the 2012 Equity Plan will terminate ten years from its effective date.respectively.
Other Benefit Plans
401(k) Plan - The Company has a qualified defined contribution 401(k) plan (the OSI Restaurant Partners, LLC Salaried Employeesthat qualifies under Section 401(k) Plan and Trust, or the “401(k) Plan”) covering employees eligible for salaried benefits, except officers and certain highly compensated employees. Assets of the 401(k) Plan are held in trust for the sole benefit of the employees. Participants in the 401(k) Plan may make pre-tax elective deferrals to the 401(k) Plan of between 1% and 20% of their compensation, subject to Internal Revenue Service (“IRS”) limitations.Code of 1986, as amended. The Company also may make matching and/or profit-sharing contributions to the 401(k) Plan. The Company contributed $2.0incurred costs of $1.1 million,, $2.0 $2.1 million, and $1.9$2.1 million to for the 401(k) Plan for the planfiscal years ended2014, December 31, 2012, 20112013 and 20102012, respectively.
Deferred Compensation Plan - The Company provides a deferred compensation plan for its highly compensated employees who are not eligible to participate in the 401(k) Plan. The deferred compensation plan allows these employees to contribute from 5% to 90%a percentage of their base salary and 5% to 100% of their cash bonus on a pre-tax basis to an investment account consisting of various investment fund options.basis. The Company does not currently intend to provide any matching or profit-sharing contributions,deferred compensation plan is unfunded and participants are fully vested in their deferrals and their related returns. Participants are considered unsecured general creditors in the event of Company bankruptcy or insolvency.
Stock Options
The following table presents a summary of the Company’s stock option activity for the year ended December 31, 2012 (in thousands, except exercise price and contractual life):
|
| | | | | | | | | | | | |
| | OPTIONS | | WEIGHTED-
AVERAGE
EXERCISE
PRICE | | WEIGHTED-
AVERAGE
REMAINING
CONTRACTUAL
LIFE (YEARS) | | AGGREGATE
INTRINSIC
VALUE |
| Outstanding at December 31, 2011 | 11,943 |
| | $ | 7.50 |
| | 7.5 | | $ | 53,989 |
|
| Granted | 872 |
| | 14.23 |
| | | | |
| Exercised | (136 | ) | | 6.50 |
| |
| |
|
|
| Forfeited or expired | (300 | ) | | 7.20 |
| | | | |
| Outstanding at December 31, 2012 | 12,379 |
| | $ | 7.99 |
| | 6.7 | | $ | 94,710 |
|
| Exercisable at December 31, 2012 | 7,293 |
| | $ | 7.41 |
| | 6.0 | | $ | 60,026 |
|
The total intrinsic value of stock options exercised during the year ended December 31, 2012 was $0.5 million. The Company received $0.9 million in cash and did not realize any tax benefits from the exercise of stock options in the year ended December 31, 2012. The Company did not have any stock options exercised in the years ended December 31, 2011 and 2010. The Company settles stock option exercises with authorized but unissued shares of the Company’s common stock.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant date fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010 was $6.93, $6.02, and $3.18, respectively, and was estimated using the Black-Scholes option pricing model. The following assumptions were used to calculate the fair value of options granted for the periods indicated:
|
| | | | | | | | | |
| | | |
| | | YEARS ENDED DECEMBER 31, |
| | | 2012 | | 2011 | | 2010 |
| Weighted-average risk-free interest rate | | 1.11 | % | | 2.09 | % | | 1.95 | % |
| Dividend yield | | — | % | | — | % | | — | % |
| Expected term | | 6.5 years |
| | 6.5 years |
| | 6.5 years |
|
| Weighted-average volatility | | 48.6 | % | | 54.8 | % | | 73.9 | % |
Under the 2007 Equity Plan, stock options generally vest and become exercisable in 20% increments over a period of five years contingent on continued employee service. Shares acquired upon the exercise of stock options under the 2007 Equity Plan were generally subject to a stockholder’s agreement that contained a management call option that allowed the Company to repurchase all shares purchased through exercise of stock options upon termination of employment at any time prior to the earlier of an initial public offering or a change of control. If an employee’s termination of employment was a result of death or disability, by the Company other than for cause or by the employee for good reason, the Company was able to repurchase exercised stock under this call option at fair market value. If an employee’s termination of employment was by the Company for cause or by the employee without good reason, the Company was able to repurchase the stock under this call provision for the lesser of the exercise price or fair market value. Additionally, the holder of shares acquired upon the exercise of stock options was prohibited from transferring the shares to any person, subject to narrow exceptions, and if a permitted transfer occurred, the transferred shares remained subject to the management call option. As a result of the transfer restrictions and call option, the Company did not record compensation expense for stock options that contained the call option since employees were not able to realize monetary benefit from the options or any shares acquired upon the exercise of the options unless the employee was employed at the time of an initial public offering or change of control. Prior to the Company’s initial public offering in August 2012, there had not been any exercises of stock options by any employee, and generally all stock options of terminated employees with a call provision either expired or were forfeited.
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 outstanding stock options containing the management call option due to the automatic termination of the call option upon completion of the offering.
On July 1, 2011, the CEO was granted an option to purchase 550,000 shares of common stock under the 2007 Equity Plan in accordance with the terms of her employment agreement. This option has an exercise price of $10.03 per share and was subject to a modified form of the management call option that did not preclude the Company from recording compensation expense during the service period. This modified form of the management call option terminated upon completion of the Company’s initial public offering. These options vest and compensation expense is recorded equally over a five-year period on each anniversary of the grant date, contingent upon her continued employment with the Company.
In March 2010, the Company offered all then active employees the opportunity to exchange outstanding stock options with an exercise price of $10.00 per share for the same number of replacement stock options with an exercise price of $6.50 per share. Under the exchange program, the vested portion of the eligible stock options as of the grant date of the replacement stock options were exchanged for stock options that were fully vested. The unvested portion of the exchanged stock options were exchanged for unvested replacement stock options that vest and become exercisable over a period of time that is equal to the remaining vesting period of the exchanged stock options plus one year, subject
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to the participant’s continued employment through the new vesting date. For exchanged stock options that contained both performance-based and time-based vesting conditions, the replacement stock options contain only time-based vesting conditions and vest in accordance with the above terms. All eligible stock options were exchanged pursuant to the exchange program. The original stock options were cancelled, and the issuance of the replacement stock options occurred on April 6, 2010. As a result of the management call option, the stock options exchange did not have a material effect on the Company’s consolidated financial statements.
Under the 2012 Equity Plan, stock options generally vest and become exercisable in 25% increments over a period of four years on the grant anniversary date contingent on continued employee service. Stock options have an exercisable life of no more than ten years from the date of grant.
The Company recorded compensation expense of $20.1 million, $2.2 million and $1.1 million during the years ended December 31, 2012, 2011 and 2010 respectively, for vested stock options. The Company did not recognize any tax benefits for vested stock options in any of the years ended December 31, 2012, 2011 and 2010 due to a valuation allowance and other tax credits available. The total fair value of stock options that vested during the years ended December 31, 2012, 2011 and 2010 was $66.5 million (of which $39.3 million relates to stock options that would have vested in prior years without the management call option), $3.7 million and $2.2 million, respectively. The Company did not capitalize any stock-based compensation costs during any periods presented. As of December 31, 2012, there was $22.6 million of total unrecognized compensation expense related to non-vested stock options, which is expected to be recognized over a weighted-average period of approximately 2.8 years.
Restricted Stock
|
| | | | | | |
| | NUMBER OF RESTRICTED STOCK AWARDS
(in thousands) | | WEIGHTED-AVERAGE
GRANT DATE
FAIR VALUE PER AWARD |
| Restricted stock outstanding at December 31, 2011 | 239 |
| | $ | 10.00 |
|
| Granted | 314 |
| | 14.69 |
|
| Vested | (218 | ) | | 10.00 |
|
| Forfeited | (36 | ) | | 11.93 |
|
| Restricted stock outstanding at December 31, 2012 | 299 |
| | $ | 14.69 |
|
Compensation expense recognized in net income for the years ended December 31, 2012, 2011 and 2010 was $1.4 million, $1.7 million and $2.0 million, respectively, for restricted stock awards. The Company did not recognize any tax benefits related to the compensation expense recorded for restricted stock awards for the years ended December 31, 2012, 2011 and 2010 due to a valuation allowance and other tax credits available. As measured on the vesting date, the total fair value of restricted stock that vested during the years ended December 31, 2012, 2011 and 2010 was $2.8 million, $2.3 million and $1.8 million, respectively. Unrecognized pre-tax compensation expense related to non-vested restricted stock awards was approximately $3.7 million at December 31, 2012 and will be recognized over a weighted-average period of 3.4 years.
Shares of restricted stock issued in 2007 to certain of the Company’s current and former executive officers and other members of management under the 2007 Equity Plan vested each June 14 through 2012. In accordance with the terms of their applicable agreements, the Company loaned an aggregate of $0.4 million, $0.9 million and $0.7 million to these individuals in 2012, 2011 and 2010, respectively, for their personal income tax obligations that resulted from vesting. During the first quarter of 2012, the three executive officers of the Company having outstanding loans and certain other former members of management repaid their entire loan balances to the Company. As of December 31, 2012 and 2011, a total of $5.8 million and $7.2 million of loans and associated interest obligations to current and former executive officers and other members of management was outstanding and was recorded in Additional paid-in capital in the Company’s Consolidated Balance Sheets. The loans are full recourse and are collateralized by the vested shares
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of restricted stock. 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.
Restricted stock shares vest on the grant anniversary date at a rate of approximately 33.3% per year for those issued to directors and 25% per year for all other issuances. Restricted stock vesting is dependent upon continued service with forfeiture of all unvested restricted stock shares upon termination, unless in the case of death or disability, in which case all restricted stock shares are immediately vested.unsecured.
5.7. Other Current Assets, Net
Other current assets, net, consisted of the following (in thousands):
following:
| | | | DECEMBER 31, | DECEMBER 28, | | DECEMBER 31, |
| | 2012 | | 2011 | |
| (in thousands) | | 2014 | | 2013 |
| Prepaid expenses | $ | 23,186 |
| | $ | 18,113 |
| $ | 30,260 |
| | $ | 27,652 |
|
| Accounts receivable - vendors, net | 38,459 |
| | 48,568 |
| 27,340 |
| | 23,218 |
|
| Accounts receivable - franchisees, net | 2,019 |
| | 2,396 |
| 1,159 |
| | 1,394 |
|
| Accounts receivable - other, net | 7,498 |
| | 11,869 |
| 107,178 |
| | 33,086 |
|
| Other current assets, net | 32,159 |
| | 23,427 |
| 40,691 |
| | 32,362 |
|
| | $ | 103,321 |
| | $ | 104,373 |
| $ | 206,628 |
| | $ | 117,712 |
|
6.BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. Property, Fixtures and Equipment, Net
Property, fixtures and equipment, net, consisted of the following (in thousands):following:
| | | | DECEMBER 31, | DECEMBER 28, | | DECEMBER 31, |
| | 2012 | | 2011 | |
| (in thousands) | | 2014 | | 2013 |
| Land | $ | 262,378 |
| | $ | 329,143 |
| $ | 262,141 |
| | $ | 263,989 |
|
| Buildings and building improvements | 917,243 |
| | 1,013,618 |
| 998,787 |
| | 959,102 |
|
| Furniture and fixtures | 303,304 |
| | 263,266 |
| 368,638 |
| | 345,040 |
|
| Equipment | 422,069 |
| | 362,649 |
| 531,117 |
| | 487,276 |
|
| Leasehold improvements | 396,101 |
| | 369,726 |
| 457,623 |
| | 443,376 |
|
| Construction in progress | 32,646 |
| | 22,011 |
| 46,025 |
| | 79,526 |
|
| Less: accumulated depreciation | (827,706 | ) | | (724,515 | ) | (1,035,020 | ) | | (945,046 | ) |
| | $ | 1,506,035 |
| | $ | 1,635,898 |
| $ | 1,629,311 |
| | $ | 1,633,263 |
|
At December 28, 2014, the Company leased $13.6 million and $19.5 million, respectively, of certain land and buildings to third parties. Accumulated depreciation related to the leased building assets of $4.9 million is included in Property, fixtures and equipment as of December 28, 2014.
Depreciation and repair and maintenance expense is as follows for the periods indicated:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Depreciation expense | $ | 177,504 |
| | $ | 156,015 |
| | $ | 147,768 |
|
| Repair and maintenance expense | 108,392 |
| | 103,613 |
| | 98,039 |
|
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.$192.9 million. The Company then simultaneously leased these properties under nine master leases (collectively, the “REIT Master Leases”). The initial terms of the REIT Master Leases are 20 years with fourfive-year five-year renewal options. One renewal period is at a fixed rental amount and the last three renewal periods are generally based aton 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 leased the properties. The Company recorded a deferred gain on the sale of certain of the properties of $42.9$42.9 million primarily in Other long-term liabilities, net in its Consolidated Balance Sheet at the time of the transaction, which is amortized over the initial 20-year term of the lease.
9. Goodwill and Intangible Assets, Net
Goodwill - The following table is a roll-forward of goodwill:
|
| | | | | | | |
| (in thousands) | 2014 | | 2013 |
Balance as of beginning of year
| $ | 352,118 |
| | $ | 270,972 |
|
| Acquisitions (1) | 2,461 |
| | 141,942 |
|
| Translation adjustments | (13,039 | ) | | (8,165 | ) |
| Disposals (1) | — |
| | (52,631 | ) |
Balance as of end of year
| $ | 341,540 |
| | $ | 352,118 |
|
________________
| |
| (1) | Effective November 1, 2013, the Company acquired a controlling interest in the Brazil Joint Venture. Refer to Note 3 - Acquisitions for discussion of goodwill associated with the Brazil acquisition. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of December 31, 2012, the Company had certain land and buildings with historical cost amounts of $14.1 million and $20.3 million, respectively, that have been leased to third parties under operating leases. Accumulated depreciation related to the leased building assets of $4.1 million is included in Property, fixtures and equipment at December 31, 2012.
The Company expensed repair and maintenance costs of approximately $98.0 million, $97.3 million and $94.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was $147.8 million, $147.4 million and $150.4 million, respectively.
During the years ended December 31, 2012, 2011 and 2010, the Company recorded property, fixtures and equipment impairment charges of $10.6 million, $11.6 million and $2.2 million, respectively, for certain of the Company’s restaurants in Provision for impaired assets and restaurant closings in its Consolidated Statements of Operations and Comprehensive Income (see Note 14).
The fixed asset impairment charges described above primarily occurred as a result of the carrying value of a restaurant’s assets exceeding its estimated fair market value, primarily due to anticipated closures or declining future cash flows from lower projected future sales at existing locations.
7. Investment in Equity Method Investee
Through a joint venture arrangement with PGS Participacoes Ltda., the Company holds a 50% ownership interest in the Brazilian Joint Venture, which operates Outback Steakhouse restaurants in Brazil. The Company accounts for the Brazilian Joint Venture under the equity method of accounting. At December 31, 2012 and 2011, the Company’s net investment of $36.0 million and $34.0 million, respectively, was recorded in Investments in and advances to unconsolidated affiliates, net, and a foreign currency translation adjustment of ($3.1) million and ($3.8) million was recorded in Accumulated other comprehensive loss in the Company’s Consolidated Balance Sheets during the years ended December 31, 2012 and 2011, respectively. The Company’s share of earnings of $5.1 million, $6.8 million and $5.5 million for the years ended December 31, 2012, 2011 and 2010, respectively, was recorded in Income from operations of unconsolidated affiliates in the Company’s Consolidated Statements of Operations and Comprehensive Income.
The following tables present summarized financial information for 100%table is a summary of the Brazilian Joint Venture forCompany’s gross goodwill balances and accumulated impairments as of the periods ending as indicated (in thousands):indicated:
|
| | | | | | | |
| | DECEMBER 31, |
| | 2012 | | 2011 |
| Current assets | $ | 33,269 |
| | $ | 26,882 |
|
| Noncurrent assets | 72,214 |
| | 63,458 |
|
| Current liabilities | 24,546 |
| | 20,516 |
|
| Noncurrent liabilities | 16,997 |
| | 10,694 |
|
|
| | | | | | | | | | | |
| | |
| | YEARS ENDED DECEMBER 31, |
| | 2012 | | 2011 | | 2010 |
| Net revenue from sales | $ | 246,819 |
| | $ | 225,720 |
| | $ | 161,860 |
|
| Gross profit | 172,011 |
| | 153,377 |
| | 112,647 |
|
| Income from continuing operations | 24,268 |
| | 24,507 |
| | 18,980 |
|
| Net income | 11,151 |
| | 13,547 |
| | 11,300 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Goodwill and Intangible Assets, Net |
| | | | | | | | | | | | | | | | | | | | | | | |
| | DECEMBER 28, 2014 | | DECEMBER 31, 2013 | | DECEMBER 31, 2012 |
| (in thousands) | GROSS CARRYING AMOUNT | | ACCUMULATED IMPAIRMENTS | | GROSS CARRYING AMOUNT | | ACCUMULATED IMPAIRMENTS | | GROSS CARRYING AMOUNT | | ACCUMULATED IMPAIRMENTS |
| Goodwill | $ | 1,126,176 |
| | $ | (784,636 | ) | | $ | 1,136,754 |
| | $ | (784,636 | ) | | $ | 1,055,608 |
| | $ | (784,636 | ) |
The change in goodwill for the years ended December 31, 2012 and 2011 is as follows (in thousands):
|
| | | | | | | |
| | 2012 | | 2011 |
| Balance as of January 1: | | | |
| Goodwill | $ | 1,059,051 |
| | $ | 1,059,051 |
|
| Accumulated purchase accounting adjustments | 3,604 |
| | 3,604 |
|
| Accumulated impairment losses | (784,636 | ) | | (784,636 | ) |
| Cumulative translation adjustments | (8,197 | ) | | (8,118 | ) |
| Accumulated disposal adjustments | (1,050 | ) | | — |
|
| | 268,772 |
| | 269,901 |
|
| | | | |
| Translation adjustments | 2,200 |
| | (79 | ) |
| Disposal adjustment | — |
| | (1,050 | ) |
| | | | |
| Balance as of December 31: | | | |
| Goodwill | 1,059,051 |
| | 1,059,051 |
|
| Accumulated purchase accounting adjustments | 3,604 |
| | 3,604 |
|
| Accumulated impairment losses | (784,636 | ) | | (784,636 | ) |
| Cumulative translation adjustments | (5,997 | ) | | (8,197 | ) |
| Accumulated disposal adjustments | (1,050 | ) | | (1,050 | ) |
| | $ | 270,972 |
| | $ | 268,772 |
|
The Company performs its annual assessment for impairment of goodwill and other indefinite-lived intangible assets each year during the second quarter. The Company’s reviewCompany did not record any goodwill asset impairment charges during fiscal years 2014, 2013 or 2012.
Intangible Assets, net - Intangible assets, net, consisted of the recoverabilityfollowing as of goodwill is based primarily upon an analysis of the discounted cash flows of the related reporting units as compared to their carrying values (see Note 14). The Company also uses the discounted cash flow method to determine the fair value of its intangible assets.December 28, 2014 and December 31, 2013:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | WEIGHTED AVERAGE AMORTIZATION PERIOD
(IN YEARS) | | DECEMBER 28, 2014 | | DECEMBER 31, 2013 |
| (in thousands) | | GROSS CARRYING VALUE | | ACCUMULATED AMORTIZATION | | NET CARRYING VALUE | | GROSS CARRYING VALUE | | ACCUMULATED AMORTIZATION | | NET CARRYING VALUE |
| Trade names | Indefinite | | $ | 414,000 |
| | | | $ | 414,000 |
| | $ | 413,000 |
| | | | $ | 413,000 |
|
| Trademarks | 14 | | 83,991 |
| | $ | (30,656 | ) | | 53,335 |
| | 88,581 |
| | $ | (26,619 | ) | | $ | 61,962 |
|
| Favorable leases | 9 | | 87,655 |
| | (43,083 | ) | | 44,572 |
| | 92,511 |
| | (39,759 | ) | | $ | 52,752 |
|
| Franchise agreements | 6 | | 14,881 |
| | (8,633 | ) | | 6,248 |
| | 14,881 |
| | (7,488 | ) | | $ | 7,393 |
|
| Reacquired franchise rights | 13 | | 70,023 |
| | (6,072 | ) | | 63,951 |
| | 77,418 |
| | (516 | ) | | $ | 76,902 |
|
| Other intangibles | 2 | | 9,099 |
| | (5,773 | ) | | 3,326 |
| | 9,099 |
| | (3,975 | ) | | $ | 5,124 |
|
| Total intangible assets | 12 | | $ | 679,649 |
| | $ | (94,217 | ) | | $ | 585,432 |
| | $ | 695,490 |
| | $ | (78,357 | ) | | $ | 617,133 |
|
The Company did not record any goodwill or indefinite-lived intangible asset impairment charges or any material definite-lived intangible asset impairment charges during fiscal years 20122014, 20112013 or 20102012. In October 2011, the Company sold its nine Company-owned Outback Steakhouse restaurants in Japan to a subsidiary of S Foods, Inc., one of the Company’s beef suppliers in Japan, for $9.4 million. The buyer will have the right for future development of Outback Steakhouse franchise restaurants in Japan and will pay the Company a royalty in the range of 2.75% to 4.00% based on sales volumes. The Company used the net cash proceeds from this sale to pay down $7.5 million of OSI’s then outstanding term loans in accordance with the terms of the credit agreement amended in January 2010. The Company recorded a $1.1 million adjustment to reduce goodwill related to the disposal of these assets and recorded a loss of $4.3 million from this sale in General and administrative expenses in its Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2011.
The accumulated purchase accounting adjustments to Goodwill of $3.6 million were the result of adjustments to appraised fair values of acquired tangible assets.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets, net, consisted of the following (in thousands):
|
| | | | | | | | | |
| | WEIGHTED
AVERAGE AMORTIZATION PERIOD (YEARS) | | DECEMBER 31, |
| | 2012 | | 2011 |
| Trade names (gross) | Indefinite | | $ | 413,000 |
| | $ | 413,000 |
|
| Trademarks (gross) | 16 | | 87,831 |
| | 87,531 |
|
| Less: accumulated amortization | | | (22,529 | ) | | (18,454 | ) |
| Net trademarks | | | 65,302 |
| | 69,077 |
|
| Favorable leases (gross, lives ranging from 0.8 to 25 years) | 11 | | 95,514 |
| | 99,391 |
|
| Less: accumulated amortization | | | (38,934 | ) | | (34,752 | ) |
| Net favorable leases | | | 56,580 |
| | 64,639 |
|
| Franchise agreements (gross) | 8 | | 17,385 |
| | 17,385 |
|
| Less: accumulated amortization | | | (7,410 | ) | | (6,073 | ) |
| Net franchise agreements | | | 9,975 |
| | 11,312 |
|
| Other intangibles (gross) | 4 | | 9,099 |
| | 8,547 |
|
| Less: accumulated amortization | | | (2,177 | ) | | (427 | ) |
| Net other intangibles | | | 6,922 |
| | 8,120 |
|
| Intangible assets, less total accumulated amortization of $71,051 and | | | |
| | |
|
| $59,706 at December 31, 2012 and 2011, respectively | | | $ | 551,779 |
| | $ | 566,148 |
|
Definite-lived intangible assets are amortized on a straight-line basis. The following table presents the aggregate expense related to the amortization of the Company’s trademarks, favorable leases, franchise agreements, reacquired franchise rights and other intangiblesintangibles:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Amortization expense (1) | $ | 19,807 |
| | $ | 14,405 |
| | $ | 14,550 |
|
________________
| |
| (1) | Amortization expense is recorded in Depreciation and amortization and Other restaurant operating expense in the Company’s Consolidated Statements of Operations and Comprehensive Income. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following table presents expected annual amortization of intangible assets as of December 28, 2014:
|
| | | |
| (in thousands) | |
| 2015 | $ | 18,256 |
|
| 2016 | 17,229 |
|
| 2017 | 15,336 |
|
| 2018 | 14,940 |
|
| 2019 | 14,465 |
|
Effective June 1, 2014, OSI and Carrabba’s Italian Grill, LLC (“Carrabba’s”), a wholly owned subsidiary of OSI, entered into a Third Amendment to the Royalty Agreement with the founders of Carrabba’s Italian Grill and their affiliated entities (collectively, the “Carrabba’s Founders”). The amendment provides that no continuing royalty fee will be paid to the Carrabba’s Founders for Carrabba’s restaurants located outside the United States. Each Carrabba’s restaurant located outside the United States will pay a one-time lump sum royalty fee, which varies depending on the size of the restaurant. The one-time fee is $100,000 for restaurants 5,000 square feet or larger, $75,000 for restaurants 3,500 square feet or larger but less than 5,000 square feet and $50,000 for restaurants less than 3,500 square feet. In connection with the amendment, the Company made a non-refundable payment of $1.0 million to the Carrabba’s Founders for the first ten restaurants of 5,000 square feet or more to be located outside the United States. The payment to the Carrabba’s Founders was recorded as a trade name in Intangible Assets, net, in the Consolidated Balance Sheet as of December 28, 2014.
In addition, new Carrabba’s restaurants in the U.S. that first open on or after June 1, 2014 will pay a fixed royalty of 0.5 percent on sales occurring prior to 4 pm local time Monday through Saturday. Existing Carrabba’s restaurants in the U.S. that begin serving weekday lunch on or after June 1, 2014 will pay a fixed royalty of 0.5 percent on sales occurring prior to 4 pm local time Monday through Friday. In each case, these sales will be excluded in calculating the volume based royalty percentage on sales after 4 pm.
10. Other Assets, Net
Other assets, net, consisted of the following:
|
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| (in thousands) | 2014 | | 2013 |
| Company-owned life insurance | $ | 64,067 |
| | $ | 66,749 |
|
| Deferred financing fees (1) | 6,917 |
| | 12,354 |
|
| Liquor licenses | 27,844 |
| | 27,793 |
|
| Other assets | 57,135 |
| | 58,223 |
|
| | $ | 155,963 |
| | $ | 165,119 |
|
________________
| |
| (1) | Net of accumulated amortization of $6.1 million and $11.4 million at December 28, 2014 and December 31, 2013, respectively. |
The Company amortized deferred financing fees of $3.1 million, $14.6 million, $13.93.6 million and $14.08.2 million to interest expense for thefiscal years ended December 31, 2012, 2011 and 2010, respectively. Annual expense related to the amortization of intangible assets is anticipated to be approximately $13.9 million in 2013, $13.2 million in 2014, $12.8 million in 2015, $11.8 million in 20162013 and $9.9 million2012 in 2017.
In accordance with the terms of an asset purchase agreement that was amended in December 2004, the Company was obligated to pay a royalty to its Bonefish Grill founder and joint venture partner during his employment term with the Company. The Company had the option to terminate this royalty within 45 days of his termination of employment by making an aggregate payment equal to five times the amount of the royalty payable during the twelve full calendar months immediately preceding the month of his termination. As his employment terminated on October 1, 2011, the Company paid the approximately $8.5 million royalty termination fee in October 2011 and recorded this payment as an intangible asset in its Consolidated Balance Sheet in the fourth quarter of 2011. The intangible asset is amortized over a five-year useful life., respectively.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Other Assets, Net
Other assets, net, consisted of the following (in thousands):
|
| | | | | | | |
| | DECEMBER 31, |
| | 2012 | | 2011 |
| Company-owned life insurance | $ | 59,787 |
| | $ | 51,955 |
|
| Deferred financing fees, net of accumulated amortization of $8,890 and $66,275 | | | |
|
| at December 31, 2012 and 2011, respectively | 15,097 |
| | 19,988 |
|
| Liquor licenses | 26,002 |
| | 25,545 |
|
| Other assets | 44,546 |
| | 38,677 |
|
| | $ | 145,432 |
| | $ | 136,165 |
|
The Company amortized deferred financing fees to interest expense of $8.2 million, $12.3 million and $13.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.
10.11. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (in thousands):
following:
| | | | DECEMBER 31, | DECEMBER 28, | | DECEMBER 31, |
| | 2012 | | 2011 | |
| (in thousands) | | 2014 | | 2013 |
| Accrued payroll and other compensation | $ | 108,612 |
| | $ | 117,013 |
| $ | 121,548 |
| | $ | 100,955 |
|
| Accrued insurance | 22,235 |
| | 19,284 |
| 19,455 |
| | 20,710 |
|
| Other current liabilities | 61,437 |
| | 75,189 |
| 96,841 |
| | 75,449 |
|
| | $ | 192,284 |
| | $ | 211,486 |
| $ | 237,844 |
| | $ | 197,114 |
|
Accrued Payroll Taxes - The Company is currently under payroll tax examination by the IRS. During 2013, the IRS informed the Company that it proposed to issue an audit adjustment for the employer’s share of FICA taxes related to cash tips allegedly received and unreported by the Company’s tipped employees during calendar year 2010. Subsequently, the IRS indicated that the scope of the proposed adjustment would expand to include the 2011 and 2012periods. During 2014, the Company settled the calendar year 2010 audit adjustment for $5.0 million. Following are the components recognized in the Consolidated Balance Sheets for the payroll tax audits:
|
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| (in thousands) | 2014 | | 2013 |
| Accrued and other current liabilities | $ | 12,000 |
| | $ | 5,000 |
|
| Other long-term liabilities, net | — |
| | 12,000 |
|
| | $ | 12,000 |
| | $ | 17,000 |
|
In addition, a deferred income tax benefit was recorded for the allowable income tax credits for the payroll audits. As a result of the associated income tax benefit, the recognition of the liability had no impact on net income.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
11.12. Long-term Debt, Net
Long-term debt, net consistedFollowing is a summary of the following (in thousands):outstanding long-term debt:
|
| | | | | | | |
| | DECEMBER 31, |
| | 2012 | | 2011 |
| Senior secured term loan B facility, interest rate of 4.75% at December 31, 2012 (1) (2) | $ | 1,000,000 |
| | $ | — |
|
| Senior secured term loan facility, interest rate of 2.63% at December 31, 2011 (1) (3) | — |
| | 1,014,400 |
|
| Senior secured pre-funded revolving credit facility, interest rate of 2.63% at December 31, 2011 (1) | — |
| | 33,000 |
|
| Mortgage loan, weighted average interest rate of 3.98% at December 31, 2012 (4) | 319,574 |
| | — |
|
| First mezzanine loan, interest rate of 9.00% at December 31, 2012 (4) | 87,048 |
| | — |
|
| Second mezzanine loan, interest rate of 11.25% at December 31, 2012 (4) | 87,273 |
| | — |
|
| Note payable, weighted average interest rate of 0.98% at December 31, 2011 (4) | — |
| | 466,319 |
|
| First mezzanine note, interest rate of 3.28% at December 31, 2011 (4) | — |
| | 88,900 |
|
| Second mezzanine note, interest rate of 3.53% at December 31, 2011 (4) | — |
| | 123,190 |
|
| Third mezzanine note, interest rate of 3.54% at December 31, 2011 (4) | — |
| | 49,095 |
|
| Fourth mezzanine note, interest rate of 4.53% at December 31, 2011 (4) | — |
| | 48,113 |
|
| Senior notes, interest rate of 10.00% at December 31, 2011 (1) | — |
| | 248,075 |
|
| Other notes payable, uncollateralized, interest rates ranging from 0.63% to 7.00% and from 0.76% to 7.00% at December 31, 2012 and 2011, respectively (1) | 9,848 |
| | 9,094 |
|
| Sale-leaseback obligations (1) | 2,375 |
| | 2,375 |
|
| Capital lease obligations (1) | 2,112 |
| | 2,520 |
|
| Guaranteed debt, interest rate of 2.65% at December 31, 2011 (1) | — |
| | 24,500 |
|
| | 1,508,230 |
| | 2,109,581 |
|
| Less: current portion of long-term debt | (22,991 | ) | | (332,905 | ) |
| Less: guaranteed debt | — |
| | (24,500 | ) |
| Less: debt discount | (13,790 | ) | | (291 | ) |
| Long-term debt, net | $ | 1,471,449 |
| | $ | 1,751,885 |
|
|
| | | | | | | | | | | | | |
| | DECEMBER 28, 2014 | | DECEMBER 31, 2013 |
| (in thousands, except interest rate) | OUTSTANDING BALANCE | | INTEREST RATE | | OUTSTANDING BALANCE | | INTEREST RATE |
| Senior Secured Credit Facility (1): | | | | | | | |
| Term loan A | $ | 296,250 |
| | 2.16 | % | | $ | — |
| | — | % |
| Term loan B | 225,000 |
| | 3.50 | % | | 935,000 |
| | 3.50 | % |
| Revolving credit facility | 325,000 |
| | 2.16 | % | | — |
| | — | % |
| Total Senior Secured Credit Facility | 846,250 |
| | | | 935,000 |
| | |
| 2012 CMBS loan: | | | | | | | |
| First mortgage loan (2) | 299,765 |
| | 4.08 | % | | 311,644 |
| | 4.02 | % |
| First mezzanine loan | 85,127 |
| | 9.00 | % | | 86,131 |
| | 9.00 | % |
| Second mezzanine loan | 86,067 |
| | 11.25 | % | | 86,704 |
| | 11.25 | % |
| Total 2012 CMBS Loan | 470,959 |
| | | | 484,479 |
| | |
| Capital lease obligations | 634 |
| | | | 1,255 |
| | |
| Other long-term debt (3) | 4,073 |
| | 0.52% to 7.00% |
| | 8,561 |
| | 0.58% to 7.00% |
|
| | 1,321,916 |
| | | | 1,429,295 |
| | |
| Less: current portion of long-term debt | (25,964 | ) | | | | (13,546 | ) | | |
| Less: unamortized debt discount | (6,073 | ) | | | | (10,152 | ) | | |
| Long-term debt, net | $ | 1,289,879 |
| | | | $ | 1,405,597 |
| | |
____________________________________
| |
| (1) | Represents obligationsSubsequent to December 28, 2014, the Company made payments of OSI.$3.8 million, $10.0 million and $60.0 million on its Term loan A, Term loan B and revolving credit facility, respectively. |
| |
| (2) | At December 31, 2012, $50.0 million of OSI’s outstanding senior secured term loan B facility was at 5.75%.
Represents the weighted-average interest rate for the respective period. |
| |
| (3) | At December 31, 2011, $61.9 millionBalance is comprised of OSI’s outstanding senior secured term loan facility was at 4.50%.
|
| |
(4) | Representssale-leaseback obligations of New PRP as of December 31, 2012and obligations of PRP as of December 31, 2011.
uncollateralized notes payable. Interest rates presented relate to the notes payable. |
Bloomin’ Brands, Inc. is a holding company and conducts its operations through its subsidiaries, certain of which have incurred their own indebtedness as described below.
Credit Agreement - On October 26, 2012, OSI completed a refinancing ofrefinanced its outstanding senior secured credit facilities from 2007 (the “2007 Credit Facilities”) and entered into a credit agreement (“Credit Agreement”) with a syndicate of institutional lenders and financial institutions. The new senior secured credit facilities provide for senior secured financingfacility (the “Senior Secured Credit Facility”) of up to $1.225 billion, consisting was comprised of a $1.0$1.0 billion term Term loan B and a $225.0$225.0 million revolving credit facility, including letter of credit and swing-lineswing line loan sub-facilities (the “New Facilities”).sub-facilities. The termTerm loan B was issued with an original issue discount of $10.0 million.$10.0 million.
On April 10, 2013, OSI amended the Credit Agreement in connection with a repricing of the Term loan B. The terms of the amended Term loan B remained unchanged, but had a lower applicable interest rate than the existing senior secured Term loan B facility. In January 2014, the fourth quarter of 2012,Credit Agreement was amended to align with the Company incurred $13.9 million of third-party financing costs to complete this transaction of which $11.0 million has been capitalized. These deferred financing costs are primarily included in Other assets, netchange in the Company’s Consolidated Balance Sheet. The remainingfiscal year.
Amended Credit Agreement - $2.9 millionOSI completed a refinancing of third-party financing costs were expensed as they related to debt held by lenders that participated in both the originalits Senior Secured Credit Facility and refinanced debt and therefore, the debt was treated as modified rather than extinguished. An additional $6.2 million of loss was recorded for the write-off of deferred financing fees associated with the 2007 Credit Facilities treated as extinguished. The Company recorded the total $9.1 million loss relatedentered into an amendment to the modificationCredit Agreement (“Amended Credit Agreement”) on May 16, 2014. The Amended Credit Agreement provides for senior secured financing of up to $1.125 billion, initially consisting of a new $300.0 million Term loan A, a $225.0 million Term loan B and extinguishmenta $600.0 million revolving credit facility, including letter of credit and swing line loan sub-facilities. The Term loan A and revolving credit facility mature May 16, 2019, and the 2007 Credit Facilities in LossTerm loan B matures on extinguishment and modificationOctober 26, 2019. The Term loan A was issued with a discount of debt in the Company’s Consolidated Statement of Operations and Comprehensive Income during the fourth quarter of 2012.$2.9 million.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
At closing, $400.0 million was drawn under the revolving credit facility. The new senior secured termproceeds of the Term loan A and the loans made at closing under the revolving credit facility were used to pay down a portion of Term loan B matures October 26, 2019.under the Credit Agreement. The borrowings under this facility beartotal indebtedness of the Company remained unchanged as a result of the refinancing.
The Company may elect an interest rate for the Amended Credit Agreement at rates ranging from 225 to 250 basis points overeach reset period based on the Base Rate or 325 to 350 basis points over the Eurocurrency Rate as defined in the Credit Agreement.Rate. The Base Rate option is the highest ofof: (i) the prime rate of DeutscheWells Fargo Bank, Trust Company Americas,National Association, (ii) the federal funds effective rate plus 0.5 of 1.0% or (iii) the Eurocurrency Raterate with a one monthone-month interest period plus 1.0% (“Base (the “Base Rate”) (3.25% at December 31, 2012). The Eurocurrency Rate option is the seven, 30,, 60,, 90 or 180-day180-day Eurocurrency Raterate (“Eurocurrency Rate”) (ranging from 0.21% to 0.51% at December 31, 2012). The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders. With respect to the new senior secured termrates are as follows:
|
| | | | |
| | BASE RATE ELECTION | | EUROCURRENCY RATE ELECTION |
| Term loan A and revolving credit facility | | 75 to 125 basis points over Base Rate | | 175 to 225 basis points over the Eurocurrency Rate |
| Term loan B | | 150 basis points over Base Rate | | 250 basis points over the Eurocurrency Rate |
Since the effective date of the Amended Credit Agreement, the Company has elected the Eurocurrency rate as its primary interest rate. Under the terms of the Amended Credit Agreement, the Term loan B interest rate determined using the Base Rate is subject to an interestand Eurocurrency rate floorhas minimum rates of 2.25%2.00% and the Eurocurrency Rate is subject to an interest rate floor of 1.25%.1.00%, respectively.
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 consolidated first lien net leverage ratio), as defined in the Credit Agreement, beginning with the fiscal year ending December 31, 2013 and subject to certain exceptions;
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.
The New Facilities require scheduled quarterly paymentsFees on the term loan B equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters commencing on the quarter ending March 31, 2013. 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 loan B was $1.0 billion at December 31, 2012 of which $10.0 million was classified as current due to OSI’s required quarterly payments. Subsequent to December 31, 2012, OSI voluntarily made aggregate prepayments on its term loan B of $25.0 million.
The revolving credit facility matures October 26, 2017 and provides for swing-line loans and letters of credit of up to $225.0 million for working capital and general corporate purposes. The revolving credit facility bears interest at rates ranging from 200 to 250 basis points over the Base Rate or 300 to 350 basis points over the Eurocurrency Rate. There were no loans outstandingdaily unused availability under the revolving credit facility at as of December 31, 201228, 2014, were 2.13% and 0.30%, however, $41.2respectively. As of December 28, 2014, $29.6 million of the credit facility was not available for borrowing as: (i) $34.5 million of the credit facility was committed for the issuance of letters of credit as required by insurance companies that underwrite the Company’s workers’ compensation insurance and also, where required, for construction of new restaurants, (ii) $6.1 million of the credit facility was committed for the issuance of a letter of credit to the insurance company that underwrites the Company’s bonds for liquor licenses, utilities, liens and construction and (iii) $0.6 million of the credit facility was committed for the issuance of other letters of credit. Total outstanding letters of credit issued under OSI’s new revolving credit facility may not exceed $100.0 million. Fees for the letters of credit were 3.63% and the commitment fees for unused revolving credit commitments were 0.50%.
The New Facilities require OSI to comply with certain covenants, including, in the case of the revolving credit facility, a covenant to maintain a specified quarterly Total Net Leverage Ratio (“TNLR”) test. The TNLR is the ratio of Consolidated Total Debt to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments as defined in the Credit Agreement) and may not exceed a level set at 6.00 to 1.00 for the last day of any fiscal quarter in 2012 or 2013, with step-downs over a four-year period to a maximum level of 5.00 to 1.00 in 2017. The other negative covenants limit, but provide exceptions for, OSI’s ability and the ability of its restricted subsidiaries to take various actions relating to indebtedness, significant payments, mergers and similar transactions. The Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default. At December 31, 2012, OSI was in compliance with its debt covenants under the New Facilities.
The New Facilities are guaranteed by each of OSI’s current and future domestic 100% owned restricted subsidiaries in the Outback Steakhouse and Carrabba’s Italian Grill concepts and certain other subsidiaries (the “Guarantors”) and by OSI HoldCo, Inc., OSI’s direct owner and the Company’s indirect, wholly-owned subsidiary (“OSI HoldCo”).
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OSI’s obligations are secured by substantially all of its assets and assets of the Guarantors and OSI HoldCo, in each case, now owned or later acquired, including a pledge of all of OSI’s capital stock, the capital stock of substantially all of OSI’s domestic subsidiaries and 65% of the capital stock of foreign subsidiaries that are directly owned by OSI, OSI HoldCo, or a Guarantor. OSI is also required to provide additional guarantees of the New Facilities in the future from other domestic wholly-owned restricted subsidiaries if the Consolidated EBITDA attributable to OSI’s non-guarantor domestic wholly-owned restricted subsidiaries as a group exceeds 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries. If this occurs, guarantees would be required from additional domestic wholly-owned restricted subsidiaries in such number that would be sufficient to lower the aggregate Consolidated EBITDA of the non-guarantor domestic wholly-owned restricted subsidiaries as a group to an amount not in excess of 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries.
Prior to the New Facilities, OSI was party to the 2007 Credit Facilities with a syndicate of institutional lenders and financial institutions, which were entered into on June 14, 2007. These senior secured credit facilities provided 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 provided financing for capital expenditures only.
At each rate adjustment, OSI had the option to select an Original Base Rate plus 125 basis points or an Original Eurocurrency Rate plus 225 basis points for the borrowings under this facility. The base rate option was the higher of the prime rate of Deutsche Bank AG New York Branch and the federal funds effective rate plus 0.5 of 1% (“Original Base Rate”) (3.25% at December 31, 2011). The eurocurrency rate option was the 30, 60, 90 or 180-day eurocurrency rate (“Original Eurocurrency Rate”) (ranging from 0.38% to 0.88% at December 31, 2011). The Original Eurocurrency Rate may have had a nine- or twelve-month interest period if agreed upon by the applicable lenders. With either the Original Base Rate or the Original Eurocurrency Rate, the interest rate would have been reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published was B1 or higher (the rating was Caa1 at December 31, 2011).
OSI was 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 exceeded 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 was 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 were 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, in April 2012, 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.”
OSI’s 2007 Credit Facilities required 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 were reduced by the application of any prepayments. The outstanding balance on the term loans was $1.0 billion at December 31, 2011. The Company classified $13.1 million of OSI’s term loans as current at December 31, 2011 due to OSI’s required quarterly payments and the results of its covenant calculations, which indicated the additional term loan prepayments, as described above, were not required. In October 2011, the Company sold its nine Company-owned Outback Steakhouse restaurants in Japan to a subsidiary of S Foods, Inc. and used the net cash proceeds from
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this sale to pay down $7.5 million of OSI’s outstanding term loans in accordance with the terms of the OSI credit agreement amended in January 2010 (see Note 8).
Proceeds of loans and letters of credit under OSI’s $150.0 million working capital revolving credit facility provided 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 bore interest at rates ranging from 100 to 150 basis points over the Original Base Rate or 200 to 250 basis points over the Original Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at December 31, 2011, however, $67.6 million of the credit facility was committed for the issuance of letters of credit and not available for borrowing. OSI’s total outstanding letters
Substantially all of credit issued under its working capital revolving credit facility was not permitted to exceed $75.0 million. Fees for the lettersassets of credit ranged from 2.00% to 2.25% and the commitment fees for unused working capital revolving credit commitments ranged from 0.38% to 0.50%.Company’s domestic OSI subsidiaries collateralize the Senior Secured Credit Facility.
Proceeds of loans under OSI’s Commercial Mortgage-Backed Securities Loan -$100.0 million pre-funded revolving credit facility were available to provide financing for capital expenditures, if the capital expenditure account described above had a zero balance. As of December 31, 2011, OSI had $33.0 million outstanding on its pre-funded revolving credit facility. This borrowing was recorded in Current portion of long-term debt in the Company’s Consolidated Balance Sheet, as OSI was required to repay any outstanding borrowings in April following each fiscal year using its “annual true cash flow,” as defined in the credit agreement. At each rate adjustment, OSI had the option to select the Original Base Rate plus 125 basis points or an Original Eurocurrency Rate plus 225 basis points for the borrowings under this facility. In either case, the interest rate was reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published was B1 or higher. Fees for the unused portion of the pre-funded revolving credit facility were 2.43%.
At December 31, 2011, OSI was in compliance with its debt covenants under the 2007 Credit Facilities.
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$500.0 million at origination and was originally comprised of a first mortgage loan in the amount of $324.8$324.8 million,, collateralized by 261 of the Company’s properties, and two mezzanine loans totaling $175.2 million.$175.2 million. The loans have a maturity date of April 10, 2017.
The first mortgage loan has five fixed rate fixed-rate components and a floating rate component. The fixed ratefixed-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 London Interbank Offered Rate (“30-day LIBOR”), (with a floor of 1%) plus 2.37%. The first mezzanine loan bears interest at a rate of 9.00% per annum, and the second mezzanine loan bears interest at a rate of 11.25% per annum. In connection
Debt Covenants and Other Restrictions -Borrowings under the Company’s debt agreements are subject to various covenants that limit the Company’s ability to: incur additional indebtedness; make significant payments; sell assets; pay dividends and other restricted payments; acquire certain assets; effect mergers and similar transactions; and effect certain other transactions with affiliates. The Amended Credit Agreement also has a financial covenant to maintain a specified quarterly Total Net Leverage Ratio (“TNLR”). TNLR is the ratio of Consolidated Total Debt (Current portion of long-term debt and Long-term debt, net) to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments). The TNLR may not exceed a level set at 5.00 to 1.00 through fiscal 2017, with a step down to a maximum level of 4.75 to 1.00 in fiscal 2018 and thereafter.
The 2012 CMBS Loan New PRP entered intoalso requires the Company to maintain an interest rate cap (the “Rate(“Rate Cap”) as a method to limit the volatility of the floating rate component of the first mortgage loan (see Note 15).
The proceeds fromwithin the 2012 CMBS Loan, together with the proceeds from the Sale-Leaseback TransactionLoan. See Note 16 - Derivative Instruments and excess cash held in PRP, were used to repay PRP’s original first mortgageHedging Activities for further information.
At December 28, 2014 and mezzanine notes (together, the commercial mortgage-backed securities loan, or the “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 2012,2013, the Company recorded a $2.9 million loss related to the extinguishmentwas in Loss on extinguishment and modification ofcompliance with its 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 primarily included in Other assets, net in the Company’s Consolidated Balance Sheets. At December 31, 2012, the outstanding balance, excluding the debt discount, on the 2012 CMBS Loan was $493.9 million.
Prior to the 2012 CMBS Loan, PRP had a CMBS Loan totaling $790.0 million, which was entered into on June 14, 2007. As part of the CMBS Loan, German American Capital Corporation and Bank of America, N.A. et al (the “Lenders”) had a security interest in the acquired real estate and related improvements, and direct and indirect equitycovenants.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
interestsLoss on Extinguishment and Modification of certainDebt - Following is a summary 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. At December 31, 2011, the outstanding balance on PRP’s CMBS Loan was $775.3 million. 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.
On June 14, 2007, OSI issued senior notes in an original aggregate principal amount of $550.0 million under an indenture among OSI, as issuer, OSI Co-Issuer, Inc., as co-issuer (“Co-Issuer”), a third-party trustee and the Guarantors. The senior notes were scheduled to mature on June 15, 2015. Interest was payable semiannually in arrears, at 10% per annum, in cash on each June 15 and December 15. Interest payments to the holders of record of the senior notes occurred on the immediately preceding June 1 and December 1. Interest was computed on the basis of a 360-day year consisting of twelve 30-day months. The principal balance of senior notes outstanding at December 31, 2011 was $248.1 million.
During the third quarter of 2012, OSI retired the aggregate outstanding principal amount of its 10% senior notes through a combination of a tender offer and early redemption call. The senior notes retirement was funded using a portion of the net proceeds from the Company’s initial public offering together with cash on hand. OSI paid an aggregate of $259.8 million to retire the senior notes, which included $248.1 million in aggregate outstanding principal, $6.5 million of prepayment premium and early tender incentive fees and $5.2 million of accrued interest. The senior notes were satisfied and discharged on August 13, 2012. 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 in Loss on extinguishment and modification of debt recorded in itsthe Company’s Consolidated Statement of Operations and Comprehensive Income. This loss included Income:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 (1) | | 2013 (2) | | 2012 |
| 2012 CMBS Loan refinancing | $ | — |
| | $ | — |
| | $ | 2,852 |
|
| Retirement of OSI senior notes | — |
| | — |
| | 8,956 |
|
| Refinancing of Senior Secured Credit Facility | 11,092 |
| | — |
| | 9,149 |
|
| Repricing Term loan B | — |
| | 14,586 |
| | — |
|
| Loss on extinguishment and modification of debt | $ | 11,092 |
| | $ | 14,586 |
| | $ | 20,957 |
|
________________
| |
| (1) | The loss was comprised of write-offs of $5.5 million of deferred financing fees and $4.9 million of unamortized debt discount and a prepayment penalty of $0.7 million. |
| |
| (2) | The loss was comprised of a prepayment penalty of $9.8 million, third-party financing costs of $2.4 million and the write-down of $1.2 million each of deferred financing fees and unamortized debt discount. |
$2.4 millionDeferred financing fees - forThe Company deferred $3.8 million of financing costs incurred to complete the write-offrefinancing of unamortizedthe Senior Secured Credit Facility in fiscal year 2014. These deferred financing fees that related tocosts are included in the extinguished senior notes.line item, Other assets, net in the Consolidated Balance Sheets.
AsMaturities - Following is a summary of principal payments of the Company’s total consolidated debt outstanding as of December 31, 201228, 2014: and 2011, OSI had approximately $9.8 million and $9.1 million, respectively,
|
| | | |
| (in thousands) | DECEMBER 28, 2014 |
| Year 1 (1) | $ | 27,601 |
|
| Year 2 | 40,147 |
|
| Year 3 | 460,983 |
|
| Year 4 | 24,403 |
|
| Year 5 | 767,524 |
|
| Thereafter | 1,258 |
|
| Total | $ | 1,321,916 |
|
________________
| |
| (1) | Excludes unamortized discount of $1.6 million. |
The following is a summary of notes payable at interest rates ranging from 0.63% to 7.00% and from 0.76% to 7.00%, respectively. These notes have been primarily issuedrequired amortization payments for buyouts of managing and area operating partner interests in the cash flows of their restaurants and generally are payable over a period of two through five years.Term loan A:
|
| | | | |
| SCHEDULED QUARTERLY PAYMENT DATES | | (in thousands) |
| December 31, 2014 through June 30, 2016 | | $ | 3,750 |
|
| September 30, 2016 through June 30, 2018 | | $ | 5,625 |
|
| September 30, 2018 through March 31, 2019 | | $ | 7,500 |
|
Debt Guarantees
Effective October 1, 2012,Since the Company purchasedinception of the Term loan B, OSI has made voluntary prepayments in excess of the remaining interests inrequired amortization payments and, as a result, will not be required to make any further required amortization payments until the Roy’s joint venture from RY-8 for $27.4 million. This purchase price consisted of the assumption of RY-8’s $24.5 million line of credit by OSI that had been recorded in Guaranteed debt in the Company’s Consolidated Balance Sheet at December 31, 2011, forgiveness of $1.8 million in loans due from RY-8 to OSI and a $1.1 million cash payment. In December 2012, the Company paid the $24.5 million outstandingremaining balance on the line of credit assumed from RY-8.
Prior to this acquisition, OSI was the guarantor of an uncollateralized line of credit that permitted borrowing of up to $24.5 million for RY-8 in the development of Roy’s restaurants. The line of credit was set to expire on April 15, 2013. According to the terms of the line of credit agreement, RY-8 had the ability to borrow, repay, re-borrow or prepay advances at any time before the termination date of the agreement. On the termination date of the agreement, the entire outstanding principal amount of the loan then outstanding and any accrued interest would have been due. At December 31, 2011, the outstanding balance on the line of credit was $24.5 million.reaches maturity in October 2019.
RY-8’s obligationsThe Amended Credit Agreement contains mandatory prepayment requirements for Term loan A and Term loan B. Beginning with the fiscal year ended December 28, 2014, the Company is required to prepay outstanding amounts under the lineits term loans with 50% of credit were unconditionally guaranteed by OSI and Roy’s Holdings, Inc. If an event of default had occurred,its annual excess cash flow, as defined in the agreement,Amended Credit Agreement. The amount of outstanding term loans required to be prepaid in accordance with the total outstanding balance, including any accrued interest, would have been immediately due fromdebt covenants may vary based on the guarantors. At December 31, 2011, $24.5 million of OSI’s $150.0 million working capital revolving credit facility was committed for the issuance of a letter of credit for this guarantee.Company’s leverage ratio and year-end results.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The aggregate mandatory principal payments of total consolidated debt outstanding at December 31, 2012, for the next five years, are summarized as follows (in thousands):
|
| | | |
| 2013 | $ | 25,604 |
|
| 2014 | 23,694 |
|
| 2015 | 21,547 |
|
| 2016 | 21,709 |
|
| 2017 | 463,301 |
|
| Thereafter | 952,375 |
|
| Total | $ | 1,508,230 |
|
12.13. Other Long-term Liabilities, Net
Other long-term liabilities, net, consisted of the following (in thousands):following:
|
| | | | | | | |
| | DECEMBER 31, |
| | 2012 | | 2011 |
| Accrued insurance liability | $ | 42,401 |
| | $ | 39,575 |
|
| Unfavorable leases, net of accumulated amortization of $21,625 and $18,891 at December 31, 2012 and 2011, respectively | 57,359 |
| | 62,012 |
|
| PEP and Supplemental PEP obligations | 102,206 |
| | 93,877 |
|
| Deferred gain on Sale-Leaseback Transaction, net of accumulated amortization of $1,610 at December 31, 2012 | 39,149 |
| | — |
|
| Other long-term liabilities | 23,129 |
| | 23,288 |
|
| | $ | 264,244 |
| | $ | 218,752 |
|
|
| | | | | | | |
| | DECEMBER 28, | | DECEMBER 31, |
| (in thousands) | 2014 | | 2013 |
| Accrued insurance liability | $ | 42,922 |
| | $ | 43,635 |
|
| Unfavorable leases, net of accumulated amortization | 49,492 |
| | 54,843 |
|
| Chef and managing partner deferred compensation obligations | 90,564 |
| | 109,529 |
|
| Deferred gain on sale-leaseback transaction, net of accumulated amortization | 35,864 |
| | 36,910 |
|
| Other long-term liabilities | 41,563 |
| | 41,869 |
|
| | $ | 260,405 |
| | $ | 286,786 |
|
The Company maintains an endorsement split-dollar insurance policiespolicy with a death benefit ranging from $5.0of $5.0 million to $10.0 million for certainone of its current and former executive officers. The Company is the beneficiary of the policiespolicy to the extent of premiums paid or the cash value, whichever is greater, with the remaining death benefit being paid to personal beneficiaries designated by the executive officers. The
During fiscal years 2014 and 2013, the Company has agreed notterminated the split-dollar agreements with certain of its former executive officers for cash payments of $2.0 million and $5.2 million. Upon termination, the release of the death benefit and related liabilities less the associated cash termination payment resulted in net gains of $1.9 million and $4.7 million during fiscal years 2014 and 2013, which were recorded in General and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income. As a result of the terminations, the Company became the sole and exclusive owner of the related split-dollar insurance policies and elected to terminate the policies regardless of continued employment. cancel them.
As of December 31, 201228, 2014 and 2011December 31, 2013, the Company has $14.3had $1.2 million and $13.4$5.0 million,, respectively, recorded in Other long-term liabilities, net in its Consolidated Balance Sheets for the outstanding obligations under the endorsement split-dollar insurance policies.
13. Variable Interest Entities14. Redeemable Noncontrolling Interests
Roy’sThe Company consolidates subsidiaries in Brazil and RY-8, Inc.China, each of which have noncontrolling interests that are permitted to deliver subsidiary shares in exchange for cash at a future date. The following table presents a rollforward of Redeemable noncontrolling interests for fiscal year 2014:
|
| | | |
| | FISCAL YEAR |
| (in thousands) | 2014 |
| Balance, beginning of period | $ | 21,984 |
|
| Net income attributable to Redeemable noncontrolling interests | 666 |
|
| Contributions by noncontrolling shareholders | 1,456 |
|
| Transfer to redeemable noncontrolling interest | 627 |
|
| Balance, end of period | $ | 24,733 |
|
Historically,As of December 28, 2014, the Company’s consolidated financial statements included the accountsCompany allocated Net income attributable to noncontrolling interests and operations of its Roy’s joint venture although it had less than majority ownership. The Company determined it was the primary beneficiaryperformed a measurement of the joint venture sinceredemption amount for Redeemable noncontrolling interests, including a fair value assessment. Based on the Company had the power to direct or cause the direction of the activities that most significantly impacted 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 had the obligation to absorb losses or the right to receive benefits of the Roy’s joint venture that could have potentially been 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, were funded by loans to RY-8 from a third party where OSI provided a guarantee (see Note 11). The guaranteefair value assessment, no adjustment was 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 Sheetrequired for the Roy’s joint venture were $26.2 million and $9.6 million, respectively, at December 31, 2011.fiscal year 2014.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. Stockholders’ Equity
Public Offerings - During 2012, the Company completed an IPO of its common stock. In the offering, the Company issued and sold an aggregate of 14,196,845 shares of common stock at a price of $11.00 per share. The Company received net proceeds in the offering of $142.2 million after deducting underwriting discounts, commissions and offering-related expenses of $14.0 million. All of the net proceeds, together with cash on hand, was alsoapplied to retire OSI’s 10% senior notes due 2015.
In 2012, the primary beneficiaryretention bonus and the incentive bonus agreements with the Company’s CEO were amended. The remaining payments under each agreement were accelerated to a single lump sum payment of RY-8 because its implicit variable interest in that entity,$22.4 million, which was considered a de facto related party, indirectly receivedpaid upon the variabilitycompletion of the entity through absorption of RY-8’s expected losses, and therefore the Company also consolidated RY-8. Since RY-8’s $24.5 million line of credit became fully extendedCompany’s IPO in 2007, the Company had made interest payments, paid line of credit renewal fees and made capital expenditures for additional restaurant development on behalf of RY-8. The Company was 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 infiscal year 2012. In connection with the joint venture were likely to beamended agreements, the Company recorded $18.1 million of accelerated bonus expense for fiscal year 2012 in General and administrative in its Consolidated Statement of Operations and Comprehensive Income.
Share Repurchases - In December 2014, the Company’s responsibility. RY-8’s lineBoard of credit was setDirectors approved a share repurchase program under which the Company is authorized to repurchase up to $100.0 million of its outstanding common stock. The authorization will expire on April 15, 2013. June 12, 2016. As of December 28, 2014, no shares had been repurchased under the program.
Dividends - In December 2014, the Board of Directors adopted a dividend policy under which it intends to declare quarterly cash dividends on shares of the Company’s common stock. On February 12, 2015, the Board of Directors declared the Company’s first quarterly cash dividend of $0.06 per share.
Accumulated Other Comprehensive Loss - The components of Accumulated other comprehensive loss (“AOCL”), net of tax, are as follows:
|
| | | | | | | | | | | |
| (in thousands) | FOREIGN CURRENCY TRANSLATION ADJUSTMENT | | UNREALIZED LOSSES ON DERIVATIVES | | ACCUMULATED OTHER COMPREHENSIVE LOSS |
| Balances as of December 31, 2013 | $ | (26,418 | ) | | $ | — |
| | $ | (26,418 | ) |
| Other comprehensive loss, net of tax | (31,731 | ) | | (2,393 | ) | | (34,124 | ) |
| Balances as of December 28, 2014 | $ | (58,149 | ) | | $ | (2,393 | ) | | $ | (60,542 | ) |
16. Derivative Instruments and Hedging Activities
The Company classified OSI’s $24.5 million contingent obligation as guaranteedis exposed to certain risk arising from both its business operations and economic conditions. The Company manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its debt at December 31, 2011funding and through the use of derivative financial instruments. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and an interest rate cap.
DESIGNATED HEDGES
Cash Flow Hedges of Interest Rate Risk -On September 9, 2014, the Company entered into variable-to-fixed interest rate swap agreements with eightcounterparties to hedge a portion of incomethe cash flows of the Company’s variable rate debt. The swap agreements have an aggregate notional amount of $400.0 million, a forward start date of June 30, 2015, and mature on May 16, 2019. Under the terms of the swap agreements, the Company will pay a weighted-average fixed rate of 2.02% on the $400.0 million notional amount and receive payments from the counterparty based on the 30-day LIBOR rate.
The interest rate swaps, which have been designated and qualify as a cash flow hedge, are recognized on the Company’s Consolidated Balance Sheets at fair value and are classified based on the instruments’maturity dates. Fair value changes in the interest rate swaps are recognized in AOCL for all effective portions. Balances in AOCL are subsequently
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
reclassified to earnings in the same period that the hedged interest payments affect earnings. The Company estimates $3.0 millionwill be reclassified to interest expense over the next twelve months.
The following table presents the fair value of the Company’s interest rate swaps as well as their classification on the Consolidated Balance Sheet:
|
| | | | | |
| (in thousands) | DECEMBER 28, 2014 | | CONSOLIDATED BALANCE SHEET CLASSIFICATION |
| Interest rate swaps - liability | $ | 2,617 |
| | Accrued and other current liabilities |
| Interest rate swaps - liability | 1,307 |
| | Other long-term liabilities, net |
| Total fair value of derivative instruments - liability (1) | $ | 3,924 |
| | |
____________________
(1) See Note 17 - Fair Value Measurements for fair value discussion of the interest rate swaps.
As of December 28, 2014, no interest expense related to the interest rate swaps is accrued in the Consolidated Balance Sheets or loss attributable to RY-8 was eliminated in Net income attributable to noncontrolling interestsrecognized in the Consolidated Statements of Operations and Comprehensive Income foras the years endedinterest rate swaps are not effective until June 30, 2015. During fiscal year 2014, the Company did December 31, 2012, 2011not and 2010. All material intercompany balances and transactions have been eliminated.recognize any gain or loss as a result of hedge ineffectiveness.
Effective October 1, 2012,The following table summarizes the Company purchased the remaining interests in the Roy’s joint venture from RY-8 for $27.4 million (see Note 3). Subsequent to the purchase, Roy’s is a wholly-owned subsidiaryeffects of the Company and RY-8 is no longer a variable interest entity.
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. Basedrate swap 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 was no longer the primary beneficiary of PRG and deconsolidated PRG on January 1, 2010. At the time of sale, the Company received a promissory note for the full sale price, which subsequently became fully reserved upon deconsolidation. In the fourth quarter of 2012, the Company recorded a gain of $3.5 million for the collection of the promissory note and other amounts due to the Company in connection with the sale of the Cheeseburger in Paradise concept. The gain was recorded in General and administrative expenses in the Consolidated StatementStatements of Operations and Comprehensive Income for thefiscal year ended December 31, 2012. 2014:
14. Fair Value Measurements |
| | | | |
| (in thousands) | | AMOUNT OF (LOSS) GAIN RECOGNIZED IN OTHER COMPREHENSIVE INCOME |
| Interest rate swaps | | $ | (3,924 | ) |
| Income tax benefit | | 1,531 |
|
| Net of income taxes | | $ | (2,393 | ) |
Fair value isThe Company records its derivatives on the price that would be received upon saleConsolidated Balance Sheets on a gross balance basis. The Company’s derivatives are subject to master netting arrangements. As of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date (exit price) and is a market-based measurement, not an entity-specific measurement. To measure fair value,December 28, 2014, the Company incorporates assumptionsdid not have more than one derivative between the same counterparties and as such, there was no netting.
By utilizing the interest rate swaps, the Company is exposed to credit-related losses in the event that market participants would use in pricing the asset or liability,counterparty fails to perform under the terms of the derivative contract. To mitigate this risk, the Company enters into derivative contracts with major financial institutions based upon credit ratings and utilizes market dataother factors. The Company continually assesses the creditworthiness of its counterparties. As of December 28, 2014, all counterparties to the maximum extent possible. Measurementinterest rate swaps had performed in accordance with their contractual obligations.
The Company has agreements with each of fair value incorporates nonperformance risk (i.e., the riskits derivative counterparties that an obligation will not be fulfilled). In measuring fair value,contain a provision where the Company reflects the impact of its own credit riskcould be declared in default on its liabilities, as well as any collateral. The Company also considersderivative obligations if the credit standingrepayment of its counterparties in measuringthe underlying indebtedness is accelerated by the lender due to the Company’s default on indebtedness.
As of December 28, 2014, the fair value of its assets.
the Company’s interest rate swaps in a net liability position, excluding any adjustment for nonperformance risk, was $4.0 million. As a basis for considering market participant assumptions in fair value measurements, a three-tier fair value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1—Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities thatof December 28, 2014, the Company has not posted any collateral related to these agreements. If the abilityCompany had breached any of these provisions as of December 28, 2014, it could have been required to access;
Level 2—Inputs, other thansettle its obligations under the quoted market prices included in Level 1, which are observable for the asset or liability, either directly or indirectly; and
Level 3—Unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market data available.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.$4.0 million.
Fair Value Measurements on a Recurring BasisNON-DESIGNATED HEDGES
Interest Rate Cap - The Company invested $37.7 million of its excess cash in money market funds classified as Cash and cash equivalents or restricted cash in its Consolidated Balance Sheet as of December 31, 2011, 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. As a result, the Company has determined that the inputs usedrequired to value this investment fall within Level 1 of the fair value hierarchy. The amount of excess cash invested in money market funds at December 31, 2012 was immaterial to the Company’s consolidated financial statements.
In connection with the 2012 CMBS Loan, New PRP entered intomaintain an interest rate cap with a notional amount of $48.7 million as a methodRate Cap to limit the volatility of the floating rate component of the first mortgage loan within the 2012 CMBS loan. Additionally,In April 2014, the Company’s Rate Cap expired. In connection with the expiration of the Rate Cap, the Company used an interestentered into a replacement rate cap (“Replacement Rate Cap”), with a notional amount of $48.7 million. Under the Replacement Rate Cap, if the 30-day LIBOR rate
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
exceeds 7.00% per annum, the counterparty must pay to the Company such excess on the notional amount of the floating rate component. The Replacement Rate Cap expires in April 2016. Changes in the fair value of the Replacement Rate Cap were nominal for fiscal years 2014 and 2013.
$775.7 millionCommodities as- The Company’s restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. The Company utilizes derivative instruments with a methodnotional amount of $2.7 million to limit the volatilitymitigate some of PRP’s variable-rate CMBS Loan, which was terminatedits overall exposure to material increases in June 2012 (see Note 15). The interest rate caps had nominal fair market value at December 31, 2012 or 2011, respectively, and therefore were excluded from the applicable tables within this footnote.natural gas.
The following table presents the fair value of the Company’s commodity derivative instruments as well as their classification on the Consolidated Balance Sheet:
|
| | | | | |
| (in thousands) | DECEMBER 28, 2014 | | CONSOLIDATED BALANCE SHEET CLASSIFICATION |
| Commodities - liability | $ | 566 |
| | Accrued and other current liabilities |
| Total fair value of derivative instruments - liability | $ | 566 |
| | |
The following table summarizes the effects of commodity derivative instruments on the Consolidated Statements of Operations and Comprehensive Income for fiscal year 2014:
|
| | | | | | |
| (in thousands) | | LOCATION OF (LOSS) GAIN RECOGNIZED IN INCOME ON DERIVATIVE | | AMOUNT OF (LOSS) GAIN RECOGNIZED IN INCOME ON DERIVATIVE |
| Commodities | | Other restaurant operating expense | | $ | (629 | ) |
| Total | | | | $ | (629 | ) |
Changes in the fair value of the commodity derivative instruments and any gains or losses were nominal for fiscal years 2013 and 2012.
17. Fair Value Measurements
Fair Value Measurements on a Recurring Basis - The following table presents the Company’s fixed income, money market funds and derivative instruments measured at fair value on a recurring basis as of December 28, 2014 and December 31, 2011,2013, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):fall:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| (in thousands) | TOTAL | | LEVEL 1 | | LEVEL 2 | | TOTAL | | LEVEL 1 | | LEVEL 2 |
| Assets: | | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | | |
| Fixed income funds | $ | 4,602 |
| | $ | 4,602 |
| | $ | — |
| | $ | 9,849 |
| | $ | 9,849 |
| | $ | — |
|
| Money market funds | 7,842 |
| | 7,842 |
| | — |
| | 1,988 |
| | 1,988 |
| | — |
|
| Restricted cash equivalents: | | | | | | | | | | | |
| Money market funds | 3,360 |
| | 3,360 |
| | — |
| | 68 |
| | 68 |
| | — |
|
| Total asset recurring fair value measurements | $ | 15,804 |
| | $ | 15,804 |
| | $ | — |
| | $ | 11,905 |
| | $ | 11,905 |
| | $ | — |
|
| | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
Accrued and other current liabilities:
| | | | | | | | | | | |
| Derivative instruments - interest rate swaps | $ | 2,617 |
| | $ | — |
| | $ | 2,617 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Derivative instruments - commodities | 566 |
| | — |
| | 566 |
| | — |
| | — |
| | — |
|
| Other long-term liabilities | | | | | | | | | | | |
| Derivative instruments - interest rate swaps | 1,307 |
| | — |
| | 1,307 |
| | — |
| | — |
| | — |
|
Total liability recurring fair value measurements
| $ | 4,490 |
| | $ | — |
| | $ | 4,490 |
| | $ | — |
| | $ | — |
| | $ | — |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Fair value of each class of financial instrument is determined based on the following:
|
| | | | | | | |
| FINANCIAL INSTRUMENT | | METHODS AND ASSUMPTIONS |
Fixed income funds and Money market funds | | Carrying value approximates fair value because maturities are less than three months. |
| Derivative instruments | | | Derivative instruments primarily relate to the interest rate swaps, interest rate cap and commodities. Fair value measurements are based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives and uses observable market-based inputs, including interest rate curves and credit spreads. The Company incorporates credit valuation adjustments to reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. As of December 28, 2014, the Company has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. |
|
| | | | | | | | | | | | | | | |
| | TOTAL | | | | | | |
| | DECEMBER 31, 2011 | | 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 assetsAssets and liabilities that wereare measured at fair value on a nonrecurring basis duringrelate primarily to property, fixtures and equipment, goodwill and other intangible assets, which are remeasured when carrying value exceeds fair value. The following table summarizes the fair value remeasurements for Assets held for sale and Property, fixtures and equipment for fiscal years ended December 31,2014, 2013 and 2012 and 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):fall:
|
| | | | | | | | | | | | | | | | | | | |
| | YEAR ENDED | | | | | | | | |
| | DECEMBER 31, 2012 | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 | | TOTAL
LOSSES |
| Long-lived assets held and used | $ | 6,178 |
| | $ | — |
| | $ | 3,585 |
| | $ | 2,593 |
| | $ | 10,584 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| (in thousands) | CARRYING VALUE | | TOTAL IMPAIRMENT | | CARRYING VALUE | | TOTAL IMPAIRMENT | | CARRYING VALUE | | TOTAL IMPAIRMENT |
| Assets held for sale (1) | $ | 9,613 |
| | $ | 23,974 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Property, fixtures and equipment (2) | 2,429 |
| | 13,097 |
| | 9,990 |
| | 19,761 |
| | 6,178 |
| | 10,584 |
|
| | $ | 12,042 |
| | $ | 37,071 |
| | $ | 9,990 |
| | $ | 19,761 |
| | $ | 6,178 |
| | $ | 10,584 |
|
________________
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| | YEAR ENDED | | | | | | | | |
| | DECEMBER 31, 2011 | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 | | TOTAL
LOSSES |
| Long-lived assets held and used | $ | 30,840 |
| | $ | 29,455 |
| | $ | — |
| | $ | 1,385 |
| | $ | 11,593 |
|
The Company recorded $10.6 million, $11.6 million and $2.2 million of impairment charges as a result of the fair value measurement on a nonrecurring basis of its long-lived assets held and used during the years ended December 31, 2012, 2011 and 2010, respectively, primarily related to certain specifically identified restaurant locations that have, or are scheduled to be, closed, relocated or renovated or are under-performing. The impaired long-lived assets had $6.2 million and $30.8 million of remaining fair value at December 31, 2012 and 2011, respectively. Restaurant closure and related expenses of $2.4 million, $2.4 million and $3.0 million were recognized for the years ended December 31, 2012, 2011 and 2010, respectively. Impairment losses for long-lived assets held and used and restaurant closure and related expenses were recognized in Provision for impaired assets and restaurant closings in the Consolidated Statement of Operations and Comprehensive Income. | |
| (1) | Carrying value approximates fair value with all assets measured using Level 2 inputs. Refer to Note 4 - Impairments, Disposals and Exit Costs for discussion of impairments related to corporate airplanes and Roy’s. |
| |
| (2) | Carrying value approximates fair value. Carrying values for assets measured using Level 2 inputs totaled $1.8 million, $8.3 million and $3.6 million for fiscal years 2014, 2013 and 2012, respectively. Assets measured using Level 3 inputs, had carrying values of $0.6 million, $1.6 million and $2.6 million for fiscal years 2014, 2013 and 2012, respectively. Refer to Note 4 - Impairments, Disposals and Exit Costs for discussion of impairments related to restaurant closure initiatives. |
The Company used quoted prices from brokers (Level 1),a third-party market appraisalsappraisal (Level 2) and discounted cash flow models (Level 3) to estimate the fair value of the long-lived assets included in the tablestable 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.
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 year ended December 31, 2012:
|
| | |
UNOBSERVABLE INPUT | | RANGE |
Weighted-average cost of capital (1) | | 9.5% - 11.2% |
Long-term growth rates | | 3.0% |
Annual revenue growth rates (2) | | (8.7)% - 4.3% |
____________________
| |
(1) | Weighted average of the costs of capital unobservable input range for the year ended December 31, 2012 was 10.8%.
|
| |
(2) | Weighted average of the annual revenue growth rate unobservable input range for the year ended December 31, 2012 was 2.6%.
|
During the years ended December 31, 2012, 2011 and 2010 the Company did not incur any goodwill and other indefinite-lived intangible asset impairment charges as a result of fair value measurements on a nonrecurring basis.
Fair Value of Financial Instruments
Disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, is required for those instruments for which it is practical to estimate that value. Fair value is a market-based measurement.
- The Company’s non-derivative financial instruments at as of December 28, 2014 and December 31, 2012 and 20112013 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 term loan B facility is determined based on quoted market prices in inactive markets. The fair value of 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 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
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Debt is carried at amortized cost; however, the determinationCompany estimates the fair value of fair value. These inputs represent assumptions impacted by economic conditions and management expectations and may change in the future based on period-specific facts and circumstances.
debt for disclosure purposes. The following table includes the carrying value and fair value of the Company’s financial instruments at debt as of December 28, 2014 and December 31, 20122013 aggregated by the level in the fair value hierarchy in which those measurements fall (in thousands):
fall:
|
| | | | | | | | | | | | | | | | |
| | | DECEMBER 31, 2012 |
| | | | | FAIR VALUE |
| | | CARRYING VALUE | | LEVEL 1 | | LEVEL 2 | | LEVEL 3 |
| Senior secured term loan B facility (1) | | $ | 1,000,000 |
| | $ | — |
| | $ | 1,010,000 |
| | $ | — |
|
| Mortgage loan (2) | | 319,574 |
| | — |
| | — |
| | 334,678 |
|
| First mezzanine loan (2) | | 87,048 |
| | — |
| | — |
| | 90,371 |
|
| Second mezzanine loan (2) | | 87,273 |
| | — |
| | — |
| | 91,423 |
|
| Other notes payable (1) | | 9,848 |
| | — |
| | — |
| | 9,230 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2014 | | 2013 |
| | | | FAIR VALUE | | | | FAIR VALUE |
| (in thousands) | CARRYING VALUE | | LEVEL 2 | | LEVEL 3 | | CARRYING VALUE | | LEVEL 2 | | LEVEL 3 |
| Senior Secured Credit Facility: | | | | | | | | | | | |
| Term loan A | $ | 296,250 |
| | $ | 294,769 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Term loan B | 225,000 |
| | 222,188 |
| | — |
| | 935,000 |
| | 936,169 |
| | — |
|
| Revolving credit facility | 325,000 |
| | 322,563 |
| | — |
| | — |
| | — |
| | — |
|
| CMBS loan: | | | | | | | | | | | |
| Mortgage loan | 299,765 |
| | — |
| | 308,563 |
| | 311,644 |
| | — |
| | 318,787 |
|
| First mezzanine loan | 85,127 |
| | — |
| | 85,187 |
| | 86,131 |
| | — |
| | 86,131 |
|
| Second mezzanine loan | 86,067 |
| | — |
| | 86,988 |
| | 86,704 |
| | — |
| | 87,571 |
|
| Other notes payable | 2,722 |
| | — |
| | 2,625 |
| | 6,186 |
| | — |
| | 5,912 |
|
____________________
Fair value of debt is determined based on the following:
|
| | |
(1)DEBT FACILITY | Represents obligations of OSI. |
| METHODS AND ASSUMPTIONS |
(2)Senior Secured Credit Facility | Represents obligations | Quoted market prices in inactive markets. |
| CMBS loan | | Assumptions derived from current conditions in the real estate and credit markets, changes in the underlying collateral and expectations of New PRP.management. |
| Other notes payable | | 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. |
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 fair value of OSI’s senior secured credit facilities and senior notes was determined based on quoted market prices in inactive markets. 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 |
|
15. Derivative Instruments and Hedging Activities
The Company is exposed to market risk from changes in interest rates on debt, changes in commodity prices and changes in foreign currency exchange rates.
Interest rate changes associated with the Company’s variable-rate debt generally impact its earnings and cash flows, assuming other factors are held constant. The Company’s current exposure to interest rate fluctuations includes OSI’s borrowings under its New Facilities and the floating rate component of the first mezzanine loan in New PRP’s 2012 CMBS Loan that bear interest at floating rates based on the Eurocurrency Rate or the Base Rate and the one-month LIBOR, respectively, plus an applicable borrowing margin (see Note 11). The Company manages its interest rate risk by offsetting some of its variable-rate debt with fixed-rate debt, through normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments.
In connection with the 2012 CMBS Loan, New PRP entered into an interest rate cap (the “Rate Cap”) with a notional amount of $48.7 million as a method to limit the volatility of the floating rate component of the first mezzanine loan. Under the Rate Cap, if the 30-day LIBOR market rate exceeds 7.00% per annum, the counterparty must pay to New PRP such excess on the notional amount of the floating rate component. If necessary, the Company would record mark-to-market changes in the fair value of this derivative instrument in 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
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Rate Cap had nominal fair market value at December 31, 2012. Previously, the Company used an interest rate cap as a method to limit the volatility of PRP’s variable-rate CMBS Loan. Under the $775.7 million notional interest rate cap that terminated on June 15, 2012, interest rate payments had a ceiling of 6.31%. If the market rate exceeded the ceiling, the counterparty had to pay the Company an amount sufficient to reduce the interest payment to 6.31%. The interest rate cap had nominal fair market value at December 31, 2011. The effects of both of these interest rate caps were immaterial to the Company’s consolidated financial statements for all periods presented and have been excluded from any tables within this footnote.
From September 2007 to September 2010, the Company used an interest rate collar as part of its interest rate risk management strategy to manage its exposure to interest rate movements related to OSI’s senior secured credit facilities. Given the interest rate environment, the Company did not enter into another derivative financial instrument upon the maturity of this interest rate collar on September 30, 2010. The Company does not enter into financial instruments for trading or speculative purposes.
Many of the ingredients used in the products sold in the Company’s restaurants are commodities that are subject to unpredictable price volatility. Although the Company attempts to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and wild fish, and the Company is subject to prevailing market conditions when purchasing those types of commodities. Other commodities are purchased based upon negotiated price ranges established with vendors with reference to the fluctuating market prices. The Company attempts to offset the impact of fluctuating commodity prices with other strategic purchasing initiatives. The Company does not use derivative financial instruments to manage its commodity price risk, except for natural gas as described below.
The Company’s restaurants are dependent upon energy to operate and are impacted by changes in energy prices, including natural gas. The Company utilizes derivative instruments to mitigate some of its overall exposure to material increases in natural gas prices. The Company records mark-to-market changes in the fair value of these derivative instruments in earnings in the period of change. The effects of these natural gas swaps were immaterial to the Company’s consolidated financial statements for all periods presented and have been excluded from any tables within this footnote.
The Company’s exposure to foreign currency exchange fluctuations relates primarily to its direct investment in restaurants in South Korea, Hong Kong and Brazil and to its royalties from international franchisees. The Company has not used financial instruments to hedge foreign currency exchange rate changes.
In addition to the market risks identified above, the Company is subject to business risk as its U.S. beef supply is highly dependent upon a limited number of vendors. In 2012, the Company purchased more than 75% of its beef raw materials from four beef suppliers who represent approximately 85% of the total beef marketplace in the U.S.
Non-designated Hedges of Interest Rate Risk
In September 2007, the Company entered into an interest rate collar with a notional amount of $1.0 billion as a method to limit the variability of OSI’s 2007 Credit Facilities. The collar consisted of a LIBOR cap of 5.75% and a LIBOR floor of 2.99%. The collar’s first variable-rate set date was December 31, 2007, and the option pairs expired at the end of each calendar quarter beginning March 31, 2008 and ending September 30, 2010, which was the maturity date of the collar. The quarterly expiration dates corresponded to the scheduled amortization payments of OSI’s term loan then in effect. The Company expensed $19.9 million of interest for the year ended December 31, 2010 as a result of the quarterly expiration of the collar’s option pairs. The Company recorded mark-to-market changes in the fair value of the derivative instrument in earnings in the period of change. Net interest income of $18.5 million for the year ended December 31, 2010 was recorded in Interest expense, net in the Company’s Consolidated Statement of Operations and Comprehensive Income for the mark-to-market effects of this derivative instrument.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s interest rate collar was a non-designated hedge of the Company’s exposure to interest rate risk. The Company recorded mark-to-market changes in the fair value of the derivative instrument in earnings in the period of change.
The following table presents the location and effect of the Company’s interest rate collar on its Consolidated Statement of Operations and Comprehensive Income for the years ended December 31, 2012, 2011 and 2010 (in thousands):
|
| | | | | | | | | | | | | | |
DERIVATIVES NOT
DESIGNATED AS
HEDGING
INSTRUMENTS | | LOCATION OF LOSS
RECOGNIZED IN
INCOME ON
DERIVATIVE | | AMOUNT OF LOSS RECOGNIZED
IN INCOME ON DERIVATIVE |
| YEARS ENDED DECEMBER 31, |
| 2012 | | 2011 | | 2010 |
| Interest rate collar | | Interest expense, net | | $ | — |
| | $ | — |
| | $ | (1,436 | ) |
16.18. Income Taxes
The following table presents the domestic and foreign components of incomeIncome before provision for income taxes (in thousands):
taxes:
| | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | 2012 | | 2011 | | 2010 | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| Domestic | $ | 43,744 |
| | $ | 105,620 |
| | $ | 58,346 |
| $ | 124,157 |
| | $ | 112,674 |
| | $ | 43,744 |
|
| Foreign | 29,666 |
| | 25,275 |
| | 22,130 |
| (4,187 | ) | | 59,686 |
| | 29,666 |
|
| | $ | 73,410 |
| | $ | 130,895 |
| | $ | 80,476 |
| $ | 119,970 |
| | $ | 172,360 |
| | $ | 73,410 |
|
Provision (benefit) for income taxes consisted of the following (in thousands):
following:
| | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | 2012 | | 2011 | | 2010 | |
| Current provision (benefit): | | | | | | |
| (in thousands) | | 2014 | | 2013 | | 2012 |
| Current provision: | | | | | | |
| Federal | $ | 15 |
| | $ | 382 |
| | $ | (4,324 | ) | $ | 13,364 |
| | $ | 21,518 |
| | $ | 15 |
|
| State | 10,896 |
| | 10,556 |
| | 12,430 |
| 7,687 |
| | 10,196 |
| | 10,896 |
|
| Foreign | 8,637 |
| | 10,953 |
| | 8,012 |
| 16,616 |
| | 9,681 |
| | 8,637 |
|
| | 19,548 |
| | 21,891 |
| | 16,118 |
| 37,667 |
| | 41,395 |
| | 19,548 |
|
| Deferred (benefit) provision: | | | | | | | | | | |
| Federal | 397 |
| | (127 | ) | | 1,215 |
| (8,842 | ) | | (83,437 | ) | | 397 |
|
| State | (8,118 | ) | | (179 | ) | | 10 |
| 688 |
| | (347 | ) | | (8,118 | ) |
| Foreign | 279 |
| | 131 |
| | 3,957 |
| (5,469 | ) | | 181 |
| | 279 |
|
| | (7,442 | ) | | (175 | ) | | 5,182 |
| (13,623 | ) | | (83,603 | ) | | (7,442 | ) |
| Provision for income taxes | $ | 12,106 |
| | $ | 21,716 |
| | $ | 21,300 |
| |
| Provision (benefit) for income taxes | | $ | 24,044 |
| | $ | (42,208 | ) | | $ | 12,106 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Effective Income Tax Rate - The reconciliation of income taxes calculated at the United States federal tax statutory rate to the Company’s effective income tax rate is as follows:
| | | | YEARS ENDED DECEMBER 31, | FISCAL YEAR |
| | 2012 | | 2011 | | 2010 | 2014 | | 2013 | | 2012 |
| Income taxes at federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State and local income taxes, net of federal benefit | 2.2 |
| | 4.1 |
| | 4.8 |
| 3.2 |
| | 3.6 |
| | 2.2 |
|
| Valuation allowance on deferred income tax assets | 24.2 |
| | 7.6 |
| | 13.2 |
| 1.5 |
| | (30.6 | ) | | 24.2 |
|
| Employment related credits, net | (31.0 | ) | | (19.1 | ) | | (22.4 | ) | |
| Net officers’ life insurance expense | (1.3 | ) | | 0.9 |
| | (1.3 | ) | |
| Employment-related credits, net | | (24.2 | ) | | (22.3 | ) | | (31.0 | ) |
| Net life insurance expense | | (0.8 | ) | | (1.6 | ) | | (1.3 | ) |
| Noncontrolling interests | (7.8 | ) | | (4.3 | ) | | (5.1 | ) | (1.2 | ) | | (2.8 | ) | | (7.8 | ) |
| Tax settlements and related adjustments | (1.0 | ) | | 1.3 |
| | 3.8 |
| 1.7 |
| | 0.7 |
| | (1.0 | ) |
| Loss on investments | — |
| | (5.6 | ) | | — |
| |
| Gain on remeasurement of equity method investment | | — |
| | (6.8 | ) | | — |
|
| Foreign rate differential | (4.5 | ) | | (2.4 | ) | | (2.1 | ) | 2.7 |
| | (1.4 | ) | | (4.5 | ) |
| Other, net | 0.7 |
| | (0.9 | ) | | 0.6 |
| 2.1 |
| | 1.7 |
| | 0.7 |
|
| Total | 16.5 | % | | 16.6 | % | | 26.5 | % | 20.0 | % | | (24.5 | )% | | 16.5 | % |
The effective income tax rate fornet increase in the year ended December 31, 2012 was 16.5% compared to 16.6% for the year ended December 31, 2011. The effective income tax rate in 2012 was consistent with the prior year. The effective income tax rate for thefiscal year ended December 31, 2011 was 16.6%2014 as compared to 26.5% forfiscal year 2013 was primarily due to the year ended December 31, 2010. release of the domestic valuation allowance in 2013, the exclusion of gain on remeasurement of equity method investment in 2013 and a change in the blend of income across the Company’s domestic and international subsidiaries.
The net decrease in the effective income tax rate in 2011fiscal year 2013 as compared to the previousfiscal year 2012 was primarily due to the increase in the domestic pretax book income in which the deferred income tax assets are subject to a valuation allowance and the state and foreign income tax provision being a lower percentage of consolidated pretax income as compared to the prior year.
The effective income tax rate for the year ended December 31, 2012 was lower than the blended federal and state statutory rate of 38.6% primarily due to the benefit of the tax credit for excess FICA taxrelease of valuation allowance in the second quarter of fiscal year 2013 and the exclusion of gain on employee-reported tips, eliminationremeasurement of noncontrolling interests and foreign rate differential together being such a large percentage of pretax income,equity method investment, which was partially offset by the valuation allowance. The effective income tax rate for the year ended December 31, 2011 was lower than the blended federal and state statutory rate of 38.7% primarily due to the benefit of the tax credit for excess FICA tax on employee-reported tipsemployment-related credits and loss on investments as a resultthe elimination of the sale of assets in Japannoncontrolling interests together being such a largesmaller percentage of pretax income. The effective income tax rate for the year ended December 31, 2010 was lower than the blended federal and state statutory rate of 38.9% primarily due to the benefit of the tax credit for excess FICA tax on employee-reported tips, which was partially offset by the valuation allowance and income taxes in states that only have limited deductions in computing the state current income tax provision.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- The income tax effects of temporary differences that give rise to significant portions of deferred income tax assets and liabilities are as follows (in thousands):follows:
| | | | DECEMBER 31, | DECEMBER 28, | | DECEMBER 31, |
| | 2012 | | 2011 | |
| (in thousands) | | 2014 | | 2013 |
| Deferred income tax assets: | | | | | | |
| Deferred rent | $ | 33,050 |
| | $ | 26,421 |
| $ | 46,226 |
| | $ | 40,555 |
|
| Insurance reserves | 23,714 |
| | 21,740 |
| 22,082 |
| | 23,226 |
|
| Unearned revenue | 11,155 |
| | 9,375 |
| 16,248 |
| | 13,494 |
|
| Deferred compensation | 60,977 |
| | 53,487 |
| 70,849 |
| | 66,607 |
|
| Net operating loss carryforwards | 6,716 |
| | 19,397 |
| 9,193 |
| | 5,612 |
|
| Federal tax credit carryforwards | 133,122 |
| | 146,991 |
| 160,266 |
| | 155,321 |
|
| Deferred loss on contingent debt guarantee | — |
| | 9,493 |
| |
| Partner deposits and accrued partner obligations | 29,376 |
| | 31,858 |
| 18,026 |
| | 22,586 |
|
| Other, net | 686 |
| | 1,075 |
| 11,585 |
| | 2,594 |
|
| Gross deferred income tax assets | 298,796 |
| | 319,837 |
| 354,475 |
| | 329,995 |
|
| Less: valuation allowance | (72,515 | ) | | (35,837 | ) | (5,658 | ) | | (4,526 | ) |
| Net deferred income tax assets | 226,281 |
| | 284,000 |
| 348,817 |
| | 325,469 |
|
| Deferred income tax liabilities: | | | | | | |
| Less: property, fixtures and equipment basis differences | (189,289 | ) | | (239,806 | ) | (198,532 | ) | | (184,984 | ) |
| Less: intangible asset basis differences | (133,496 | ) | | (148,433 | ) | (155,741 | ) | | (160,111 | ) |
| Less: deferred gain on extinguishment of debt | (57,064 | ) | | (57,064 | ) | (45,782 | ) | | (57,231 | ) |
| Net deferred income tax liabilities | $ | (153,568 | ) | | $ | (161,303 | ) | $ | (51,238 | ) | | $ | (76,857 | ) |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Valuation Allowance - In 2013, the Company released $67.7 million of the valuation allowance account for therelated to U.S. deferred income tax assets arebased on the expectation that the Company will maintain a cumulative income position in the future to utilize deferred tax assets. Of the $67.7 million valuation allowance release, $52.0 million was recorded as follows (in thousands):
|
| | | |
| Balance at January 1, 2010 | $ | 21,977 |
|
| Change in assessments about the realization of deferred income tax assets | 3,909 |
|
| Balance at December 31, 2010 | 25,886 |
|
| Change in assessments about the realization of deferred income tax assets | 9,951 |
|
| Balance at December 31, 2011 | 35,837 |
|
| Change in assessments about the realization of deferred income tax assets | 36,678 |
|
| Balance at December 31, 2012 | $ | 72,515 |
|
A valuation allowance reduces the deferred income tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred income tax assets will not be realized. After consideration of all of the evidence, the Company has determined that a valuation allowance of $72.5 millionUndistributed Earnings and $35.8 million is necessary at December 31, 2012 and 2011, respectively.
- A provision for income taxes has not been recorded for any United States or additional foreign taxes on undistributed earnings related to the Company’s foreign affiliates as these earnings were and are expected to continue to be permanently reinvested. The aggregate undistributed earnings of the Company’s foreign subsidiaries for which no deferred tax liability has been recorded is $147.7 million as of December 28, 2014. If the Company identifies an exception to its general reinvestment policy of undistributed earnings, additional taxestax liabilities will be recorded. It is not practical to determine the amount of unrecognized deferred income tax liabilities on the undistributed earnings.
The Company has utilized all of its available federal net operating loss and foreign tax credit carryforwards for tax purposes in 2012. The Company has state net operating loss carryforwards of approximately $41.3 million. These state net operating loss carryforwards will expire between 2013 and 2031. The Company has foreign net operating loss carryforwards of approximately $11.8 million. These foreign net operating loss carryforwards will expire between 2015 and 2019.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has general business tax credits of approximately $144.9 million. These credits can be carried forward for 20 years and will expire between 2027 and 2032.
Deferred incomeTax Carryforwards - The amount and expiration dates of tax assets relating to tax benefits of stock-based compensation have been reduced by approximately $1.1 million to reflect exercises of stock options and vesting of restricted stock during the year ended December 31, 2012. Certain stock option exercises and restricted stock vesting resulted in tax deductions in excess of previously recorded tax benefits based on the value of such stock-based compensation at the time of grant (“windfalls”). Although the additional tax benefit for the windfalls is reflected in the general business tax credits and state net operating loss carryforwards the additional tax benefit associated with the windfalls is not recognized for financial statement purposes until the deduction reduces income taxes payable. Accordingly, windfall tax benefits of $0.2 million are not reflected in the deferred tax assetsand credit carryforwards as of December 31, 2012. When realized, these windfalls28, 2014 are recognized directly to Additional paid-in capital.as follows:
|
| | | | | | | |
| (in thousands) | EXPIRATION DATE | | AMOUNT |
| United States state loss carryforwards | 2020 | - | 2033 | | $ | 13,631 |
|
| United States federal tax credit carryforwards | 2031 | - | 2034 | | $ | 156,794 |
|
| Foreign loss carryforwards | 2017 | - | indefinite | | $ | 31,482 |
|
Unrecognized Tax Benefits - As of December 31, 201228, 2014 and 2011December 31, 2013, respectively, the Company had $13.6liability for unrecognized tax benefits was $17.6 million and $14.017.1 million, respectively, of unrecognized tax benefits ($1.0 million and $1.5 million, respectively, in Other long-term liabilities, net, $0.9 million and $2.5 million, respectively, in Accrued and other current liabilities and $11.7 million and $10.0 million, respectively, in Deferred income tax liabilities). Additionally, the Company accrued $2.4 million and $4.1 million of interest and penalties related to uncertain tax positions as of December 31, 2012 and 2011, respectively. Of the total amount of unrecognized tax benefits, including accrued interest and penalties, $13.8$18.3 million and $15.217.2 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.
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in thousands):
benefits:
|
| | | |
| Balance at January 1, 2010 | $ | 14,411 |
|
| Increases for tax positions taken during a prior period | 1,889 |
|
| Decreases for tax positions taken during a prior period | (676 | ) |
| Increases for tax positions taken during the current period | 3,801 |
|
| Settlements with taxing authorities | 58 |
|
| Lapses in the applicable statutes of limitations | (3,096 | ) |
| Balance at December 31, 2010 | $ | 16,387 |
|
| Increases for tax positions taken during a prior period | 472 |
|
| Decreases for tax positions taken during a prior period | (708 | ) |
| Increases for tax positions taken during the current period | 2,136 |
|
| Settlements with taxing authorities | (4,190 | ) |
| Lapses in the applicable statutes of limitations | (58 | ) |
| Balance at December 31, 2011 | $ | 14,039 |
|
| Increases for tax positions taken during a prior period | 416 |
|
| Decreases for tax positions taken during a prior period | (291 | ) |
| Increases for tax positions taken during the current period | 2,153 |
|
| Settlements with taxing authorities | (1,788 | ) |
| Lapses in the applicable statutes of limitations | (938 | ) |
| Balance at December 31, 2012 | $ | 13,591 |
|
|
| | | | | | | | | | | |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Balance as of beginning of year | $ | 17,068 |
| | $ | 13,591 |
| | $ | 14,039 |
|
| Additions for tax positions taken during a prior period | 2,177 |
| | 73 |
| | 416 |
|
| Reductions for tax positions taken during a prior period | (422 | ) | | (26 | ) | | (291 | ) |
| Additions for tax positions taken during the current period | 2,649 |
| | 1,960 |
| | 2,153 |
|
| Additions for tax positions on acquisition | — |
| | 2,799 |
| | — |
|
| Settlements with taxing authorities | (3,935 | ) | | (488 | ) | | (1,788 | ) |
| Lapses in the applicable statutes of limitations | (120 | ) | | (841 | ) | | (938 | ) |
| Translation adjustments | 146 |
| | — |
| | — |
|
| Balance as of end of year | $ | 17,563 |
| | $ | 17,068 |
| | $ | 13,591 |
|
The Company recognizes interest and penalties related to uncertain tax positions in Provision (benefit) for income taxes. The Company recognized an expense related to interest and penalties of $1.5 million, a benefit of $0.2 million and a benefit of $0.6 million for fiscal years 2014, 2013 and 2012, respectively. The Company had approximately $2.2 million and $2.1 million for the payment of interest and penalties accrued at December 28, 2014 and December 31, 2013 respectively.
Since timing of the resolution and/or closure of audits is not certain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 asOpen Tax Years - Following is a resultsummary 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 decreaseopen audit years by approximately jurisdiction:$0.4 million to $0.5 million within the next twelve months after December 31, 2012.
|
| | | |
| | OPEN AUDIT YEARS |
| United States federal | 2007 | - | 2013 |
| United States states | 2001 | - | 2013 |
| Foreign | 2007 | - | 2013 |
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. The Company is currently under examination by the IRStax authorities in South Korea for the years ended December 31, 2009 through 2010. At2008 to 2012 tax years. In connection with this time,examination, the Company does not believe that the outcomewas assessed an additional $7.9 million of any examination will have a material impact on the Company’s results of operations or financial position.
tax obligations. The Company accounts for interest and penalties relatedhas appealed the assessment. In order to uncertainenter into the appeal, the Company was required to deposit the amount of the assessment with the South Korea tax positions as partauthorities. As of its Provision for income taxes and recognized (benefit) expense of ($0.6) million, $0.9 million and $2.1 million forFebruary 2015, the years ended December 31, 2012, 2011 and 2010.Company is currently seeking relief from double taxation through competent authority.
17. Recently Issued Financial Accounting Standards19. Commitments and Contingencies
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. In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2013-01”), to limit the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. Both ASU No. 2011-11 and ASU No. 2013-01 are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. The Company will adopt ASU No. 2011-11 and ASU No. 2013-01 effective January 1, 2013. This guidance will not have an impact on the Company’s financial position, results of operations or cash flows.
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 an impact on the Company’s financial position, results of operations or cash flows.
In January 2013, the Emerging Issues Task Force (“EITF”) reached a final consensus on EITF Issue No. 11-A “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity” (“EITF 11-A”). Under the final consensus, an entity would recognize cumulative translation adjustments in earnings when it ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. However, when an entity sells either a part or all of its investment in a consolidated foreign entity, an entity would recognize cumulative translation adjustments in earnings only if the parent no longer has a controlling financial interest in the
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
foreign entity as a result of the sale. In the case of sales of an equity method investment that is a foreign entity, a pro rata portion of cumulative translation adjustments attributable to the equity method investment would be recognized in earnings upon sale of the equity method investment. In addition, cumulative translation adjustments would be recognized in earnings upon a business combination achieved in stages such as a step acquisition. EITF 11-A is effective for public companies for fiscal years beginning on or after December 15, 2013 and interim periods within those fiscal years, with early adoption permitted. The Company will adopt EITF 11-A effective January 1, 2014 with prospective application to the derecognition of any foreign entity subsidiaries, groups of assets or investments in foreign entities completed on or after January 1, 2014. The impact of EITF 11-A on the Company’s financial position, results of operations and cash flows is dependent on future transactions resulting in derecognition of the Company’s foreign assets, subsidiaries or investments in foreign entities completed on or after adoption.
In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU No. 2013-02”), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other required disclosures that provide additional detail about those amounts. ASU No. 2013-02 is effective for the Company prospectively for reporting periods beginning after December 15, 2012, with early adoption permitted. The Company will adopt ASU No. 2013-02 effective January 1, 2013. This guidance will not have an impact on the Company’s financial position, results of operations or cash flows.
18. Commitments and Contingencies
Operating Leases
- The Company leases restaurant and office facilities and certain equipment under operating leases mainly having initial terms expiring between 20132015 and 2032. The restaurant facility leases have renewal clauses primarily from five to 30 years, exercisable at the option of the Company. Rent expense for the Company’s operating leases, which generally have escalating rentals over the term of the lease and may include potential rent holidays, is recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. Certain of these leases require the payment of contingent rentals leased on a percentage of gross revenues, as defined by the terms of the applicable lease agreement.
Total rentalrent expense is as follows for the years endedperiods indicated:
|
| | | | | | | | | | | |
| | FISCAL YEAR |
| (in thousands) | 2014 | | 2013 | | 2012 |
| Rent expense (1) | $ | 169,701 |
| | $ | 156,720 |
| | $ | 140,866 |
|
____________________
| |
| (1) | Includes contingent rent expense of $8.0 million, $6.5 million and $6.1 million for fiscal years 2014, 2013 and December 31, 2012, 2011 and 2010 was approximately $140.9 million, $132.9 million and $128.1 million, respectively, and included contingent rentals of approximately $6.1 million, $5.6 million and $4.5 million, respectively. |
As of December 31, 201228, 2014, future minimum rental payments under non-cancelable operating leases (including executed leases for restaurants scheduled to open in 2013) are as follows (in thousands):follows:
| | | 2013 | $ | 128,855 |
| |
| 2014 | 115,287 |
| |
| (in thousands) | | |
| 2015 | 98,041 |
| $ | 146,855 |
|
| 2016 | 79,364 |
| 131,858 |
|
| 2017 | 61,602 |
| 113,210 |
|
| 2018 | | 97,241 |
|
| 2019 | | 79,700 |
|
| Thereafter | 390,466 |
| 444,042 |
|
| Total minimum lease payments (1) | $ | 873,615 |
| $ | 1,012,906 |
|
____________________
| |
| (1) | Total minimum lease payments have not been reduced by minimum sublease rentals of $2.4$2.1 million due in future periods under non-cancelable subleases. |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Purchase Obligations
- The Company has minimumPurchase obligations were $563.2 million and $439.8 million at December 28, 2014 and December 31, 2013, respectively. These purchase obligations are primarily due within three years, however, commitments with various vendors extend through November 2017.December 2021. Outstanding commitments consist primarily of beef, pork, cooking oil, butterseafood and other food and beverage products related to normal business operations and contracts for advertising, marketing, technology insurance, and sports sponsorships.restaurant level service contracts. In 2012,2014, the Company purchased more than 75%90% of its beef raw materials from four beef suppliers who represented approximately 85%that represent more than 90% of the total beef marketplace in the United States.U.S.
Litigation and Other Matters - The matter set forth below is subject to uncertainties and outcomes that are not predictable with certainty. The Company is unable to estimate a range of reasonably possible loss for the matter described below as the proceedings are at stages where significant uncertainty exists as to the legal or factual issues. The Company
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
provides disclosure of matters when management believes it is reasonably possible the impact may be material to the consolidated financial statements.
On October 4, 2013, two then current employees (the “Nevada Plaintiffs”) filed a purported collective action lawsuit against the Company, OSI, and two of its subsidiaries in the U.S. District Court for the District of Nevada (Cardoza, et al. v. Bloomin’ Brands, Inc., et al., Case No.: 2:13-cv-01820-JAD-NJK). The complaint alleges violations of the Fair Labor Standards Act by requiring employees to work off the clock, complete on-line training without pay, and attend meetings in the restaurant without pay. The suit seeks to certify a nationwide collective action that all hourly employees in all Outback Steakhouse restaurants would be permitted to join. The suit seeks an unspecified amount in back pay for the employees that join the lawsuit, an equal amount in liquidated damages, costs, expenses, and attorney’s fees. The Nevada Plaintiffs also filed a companion lawsuit in Nevada state court alleging that the Company violated the state break time rules. On October 27, 2014 the Court conditionally certified a class for notice purposes consisting of all employees that worked at a company-owned Outback Steakhouse between October 27, 2011 and October 27, 2014. The Company subsequently filed a Motion to Reconsider the October 27, 2014 order. On February 5, 2015 the Court denied the Company’s Motion to reconsider the October 27, 2014 order granting conditional certification. The Company believes these lawsuits are without merit, and is vigorously defending all allegations.
On November 8, 2013, three employees of the Company’s franchisee (collectively, the “California Plaintiffs”) filed a purported class action lawsuit against the Company, OSI and OS Restaurant Services, LLC, two of its subsidiaries, and T-Bird Restaurant Group, Inc. (“T-Bird”), one of its franchisees, in the California Superior Court, County of Alameda. The defendants removed the matter to the U.S. District Court for the Northern District of California in December 2013 (Holly Gehl, et al. v. Bloomin’ Brands, Inc., et al., Case No.: 4:13-cv-05961-KAW). The complaint alleged, among other things, violations of the California Labor Code, failure to pay overtime, failure to provide meal and rest periods and termination compensation, and violations of California’s Business and Professions Code. On September 23, 2014, the California Plaintiffs’ agreed to dismiss Bloomin’ Brands and its related entities as defendants.
In addition, the Company is subject to legal proceedings, claims and liabilities, such as liquor liability, sexual harassment and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance if they exceed specified retention or deductible amounts. In the opinion of management, the amount of ultimate liability with respect to those actions will not have a material adverse impact on the Company’s financial position or results of operations and cash flows. The Company accrues for loss contingencies that are probable and reasonably estimable. Legal costs are reported in General and administrative expense in the Consolidated Statements of Operations and Comprehensive Income. The Company generally does not accrue for legal costs expected to be incurred with a loss contingency until those services are provided.
Insurance
The Company purchased insurance for individual claims that exceed - As of December 28, 2014, the amounts listed in the following table:
|
| | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 |
| Workers’ compensation | $ | 1,500,000 |
| | $ | 1,500,000 |
| | $ | 1,500,000 |
|
| General liability (1) | 1,500,000 |
| | 1,500,000 |
| | 1,500,000 |
|
| Health (2) | 400,000 |
| | 400,000 |
| | 300,000 |
|
| Property coverage (3) | 500,000 / 2,500,000 |
| | 500,000 / 2,500,000 |
| | 500,000 / 2,500,000 |
|
| Employment practices liability | 2,000,000 |
| | 2,000,000 |
| | 2,000,000 |
|
| Directors’ and officers’ liability (4) | 1,000,000 |
| | 250,000 |
| | 250,000 |
|
| Fiduciary liability | 25,000 |
| | 25,000 |
| | 25,000 |
|
____________________
| |
(1) | In 2012 and 2011, claims arising from liquor liability had the same self-insured retention as general liability. For claims in 2010, there was an additional $1.0 million self-insured retention per claim until a $2.0 million liquor liability aggregate had been met. At that time, any claims arising from liquor liability reverted to the general liability self-insured retention.
|
| |
(2) | The Company is self-insured for all covered health benefits claims, limited to $0.4 million per covered individual in 2012 and 2011 and $0.3 million per covered individual in 2010. The Company is responsible for the first $0.3 million, $0.3 million and $0.4 million of payable losses under the plan as an additional aggregating specific deductible to apply after the individual specific deductible was met in 2012, 2011 and 2010, respectively. The 2010 insurer’s liability was limited to $2.0 million per individual per year.
|
| |
(3) | The Company has a $0.5 million deductible per occurrence for those properties that collateralize New PRP’s 2012 CMBS Loan and a $2.5 million deductible per occurrence for all other locations. The deductibles for named storms and earthquakes are 5.0% of the total insurable value at the time of the loss per unit of insurance at each location involved in the loss, subject to a minimum of $0.5 million for those properties that collateralize New PRP’s 2012 CMBS Loan and $2.5 million for all other locations. Property limits are $60.0 million each occurrence, and the Company does not quota share in any loss above either deductible level.
|
| |
(4) | Retention increase in 2012 was effective with the Company’s initial public offering on August 8, 2012. |
The Company records a liability for all unresolved claims and for an estimate of incurred but not reported claims at the anticipated cost to the Company. In establishing reserves,future payments the Company considers certain actuarial assumptions and judgments regarding economic conditions, the frequency and severity of claims and claim development history and settlement practices. Unanticipated changes in these factors or future adjustments to these estimates may produce materially different amounts of expense that would be reported under these programs. Reserves recordedexpects for workers’ compensation, and general liability and health insurance claims are discounted using the average of the are:1-year and 5-year risk free rate of
|
| | | |
| (in thousands) | |
| 2015 | $ | 19,515 |
|
| 2016 | 12,459 |
|
| 2017 | 8,041 |
|
| 2018 | 4,959 |
|
| 2019 | 2,614 |
|
| Thereafter | 16,569 |
|
| | $ | 64,157 |
|
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
monetary assets that have comparable maturities. When recovery from an insurance policy is considered probable, a receivable is recorded.
The payments the Company expects to make asDiscount rates of 0.83% and 0.78% were used for December 28, 2014 and December 31, 2012 for each of the five succeeding years and the aggregate amount thereafter are as follows:
|
| | | |
| 2013 | $ | 22,235 |
|
| 2014 | 11,905 |
|
| 2015 | 7,781 |
|
| 2016 | 5,141 |
|
| 2017 | 3,068 |
|
| Thereafter | 14,506 |
|
| | $ | 64,636 |
|
Increased liability balances at December 31, 2012 as compared to December 31, 2011 are due to higher insurance claim severity and frequency primarily within the Company’s general liability insurance.2013, respectively. A reconciliation of the expected aggregate undiscounted amountreserves to the amountdiscounted reserves for workers’ compensation, general liability and health insurance claims recognized in the Company’s Consolidated Balance Sheets is as follows:
|
| | | | | | | |
| | DECEMBER 31, |
| | 2012 | | 2011 |
| Undiscounted liability | $ | 65,594 |
| | $ | 54,010 |
|
| Less: discount | (958 | ) | | (862 | ) |
| Liability balance | $ | 64,636 |
| | $ | 53,148 |
|
Discount rates of 0.40% and 0.48% were used for December 31, 2012 and 2011, respectively. The discounted liabilities are presented in the Company’s Consolidated Balance Sheets as follows:
| | | | DECEMBER 31, | DECEMBER 28, | | DECEMBER 31, |
| | 2012 | | 2011 | |
| (in thousands) | | 2014 | | 2013 |
| Undiscounted reserves | | $ | 64,157 |
| | $ | 66,109 |
|
| Discount | | $ | (1,780 | ) | | $ | (1,764 | ) |
| Discounted reserves recognized in the Consolidated Balance Sheets: | | | | |
| Accrued and other current liabilities | $ | 22,235 |
| | $ | 13,573 |
| $ | 19,455 |
| | $ | 20,710 |
|
| Other long-term liabilities, net | 42,401 |
| | 39,575 |
| 42,922 |
| | 43,635 |
|
| | | $ | 62,377 |
| | $ | 64,345 |
|
19.20. Related Parties
T-Bird Nevada, LLC
On February 19, 2009, the Company filed an action in Florida against T-Bird Nevada, LLC (“T-Bird”) and certain of its affiliates (collectively, the “T-Bird Parties”). T-Bird is a limited liability company affiliated with the Company’s California franchisees of Outback Steakhouse restaurants. The action sought payment on a promissory note made by T-Bird that the Company purchased from T-Bird’s former lender, among other remedies. The principal balance on the promissory note, plus accrued and unpaid interest, was approximately $33.3 million at the time it was purchased.
On September 26, 2011,May 10, 2012, the Company entered into a settlement agreement (the “Settlement Agreement”) with the T-Bird Parties. In accordance with the terms of the Settlement Agreement, T-Bird agreedan amendment to pay$33.3 million to the Company, which included $33.2 million to satisfy the T-Bird promissory note that the Company purchased from T-Bird’s former lender. This settlement payment was received in November 2011, and $33.2 million was recorded as Recovery of note receivable from affiliated entity in the Company’s Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2011.
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Settlement Agreement, the Company (through its indirect subsidiary, Outback Steakhouse of Florida, LLC) granted to California Steakhouse Developer, LLC, a T-Bird affiliate, for a period of 20 years, the right to develop and operate Outback Steakhouse restaurants as a franchisee in the State of California as set forth in a development agreement dated November 23, 2011 (the “Development Agreement”).
Additionally, the Company has granted certain T-Bird affiliates (the “T-Bird Entities”) the non-transferable right (the “Put Right”) to require the Company to acquire all of the equity interests in the T-Bird Entities that own Outback Steakhouse restaurants and the rights under the Development Agreement for cash. The closing of the Put Right is subject to certain conditions including the negotiation of a transaction agreement reasonably acceptable to the parties, the absence of dissenters rights being exercised by the equity owners above a specified level and compliance with the Company’s debt agreements. The Put Right is exercisable until August 13, 2013.
If the Put Right is exercised, the Company will pay a purchase price equal to a multiple of the T-Bird Entities’ earnings before interest, taxes, depreciation and amortization, subject to certain adjustments (“Adjusted EBITDA”), for the trailing 12 months, net of liabilities of the T-Bird Entities. The multiple is equal to 75% of the multiple of the Company’s or affiliate’s Adjusted EBITDA reflected in its stock price. The Company has a one-time right to reject the exercise of the Put Right if the transaction would be dilutive to its consolidated earnings per share. In such event, the Put Right is extended until the first anniversary of the Company’s notice to the T-Bird Entities of such rejection. The Company has agreed to waive all rights of first refusal in its franchise arrangements with the T-Bird Entities in connection with a sale of all, and not less than all, of the assets, or at least 75% of the ownership of the T-Bird Entities.
Bain Capital, Catterton, Founders and Board of Directors
Upon completion of the Merger, the Company entered into a management agreement with Kangaroo Management Company I, LLC, (the “Management Company”), whose members are the Founders and entities affiliated with Bain Capital and Catterton. In accordance with the terms of the management agreement, the Management Company was to provide management services to the Company until the tenth anniversary of the consummation of the Merger, with one-year extensions thereafter until terminated. The Management Company was to receive an aggregate annual management fee equal to $9.1 million and reimbursement for out-of-pocket and other reimbursable expenses incurred by it, its members, or their respective affiliates in connection with the provision of services pursuant to the agreement.
On May 10, 2012, the Company entered into a first amendment to its management agreement with the Management Company. 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.IPO. Management fees of $13.8 million, $9.4 million and $11.6 million , including the 2012a termination fee, out-of-pocket and other reimbursable expenses, for the years endedfiscal year December 31, 2012, 2011 and 2010, respectively, were included in General and administrative expenses in the Company’s Consolidated Statements of Operations and Comprehensive Income.
The Company holds an 89.62% interest in OSI/Fleming’s, LLC and a minority interest holder in the Fleming’s Prime Steakhouse and Wine Bar joint venture holds a 7.88% interest in any Fleming’s Prime Steakhouse and Wine Bar restaurants that opened prior to 2009. The remaining 2.50% is owned by AWA III Steakhouses, Inc., which is wholly-owned by a former Chairman of the Board of Directors (through December 31, 2011) and former named executive officer of the Company, through a revocable trust in which he and his wife are the grantors, trustees and sole beneficiaries. The Company assumed the minority interest holder’s 7.88% ownership interest in any Fleming’s Prime Steakhouse and Wine Bar restaurants that opened in 2009 or later and AWA III Steakhouses, Inc.’s interest remains at 2.50% for these restaurants.21. Selected Quarterly Financial Data (Unaudited)
|
| | | | | | | | | | | | | | | |
2014 FISCAL QUARTERS
(in thousands, except per share data) | FIRST (1) | | SECOND (1) | | THIRD (1) | | FOURTH (1) |
| Total revenues | $ | 1,157,859 |
| | $ | 1,110,912 |
| | $ | 1,065,454 |
| | $ | 1,108,486 |
|
| Income (loss) from operations | 90,026 |
| | 62,391 |
| | (1,121 | ) | | 40,668 |
|
| Net income (loss) | 55,100 |
| | 27,722 |
| | (10,830 | ) | | 23,934 |
|
| Net income (loss) attributable to Bloomin’ Brands | 53,733 |
| | 26,391 |
| | (11,443 | ) | | 22,409 |
|
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.43 |
| | $ | 0.21 |
| | $ | (0.09 | ) | | $ | 0.18 |
|
| Diluted | $ | 0.42 |
| | $ | 0.21 |
| | $ | (0.09 | ) | | $ | 0.17 |
|
|
| | | | | | | | | | | | | | | |
2013 FISCAL QUARTERS
(in thousands, except per share data) | FIRST (2) | | SECOND (2) | | THIRD (2) | | FOURTH (2) |
| Total revenues | $ | 1,092,250 |
| | $ | 1,018,856 |
| | $ | 967,569 |
| | $ | 1,050,555 |
|
| Income from operations | 96,860 |
| | 67,886 |
| | 29,510 |
| | 31,101 |
|
| Net income | 65,056 |
| | 76,464 |
| | 12,134 |
| | 60,914 |
|
| Net income attributable to Bloomin’ Brands | 63,223 |
| | 74,868 |
| | 11,294 |
| | 58,982 |
|
| Earnings per share: | | | | | | | |
| Basic | $ | 0.52 |
| | $ | 0.61 |
| | $ | 0.09 |
| | $ | 0.48 |
|
| Diluted | $ | 0.50 |
| | $ | 0.58 |
| | $ | 0.09 |
| | $ | 0.46 |
|
____________________
| |
| (1) | Total revenues in the first, third and fourth quarters of 2014 include $7.5 million, $6.9 million and $31.6 million, respectively, of less restaurant sales due to a change in the Company’s fiscal year end. Income from operations in the first quarter of 2014 includes $4.9 million of pre-tax restaurant closing charges incurred in connection with the Domestic Restaurant Closure Initiative. Income from operations in the third and fourth quarters of 2014 includes asset impairment charges of $16.6 million and $7.4 million, respectively, associated with the Company’s decision to sell its Roy’s concept and corporate aircraft. Income from operations in the third and fourth quarters of 2014 includes $11.6 million and $10.3 million, respectively, of pre-tax impairments and restaurant closing costs incurred in connection with the International Restaurant Closure Initiative and $5.4 million and $3.6 million, respectively, of severance expense incurred as a result of the Company’s organizational realignment. Net income in the first, third and fourth quarters of 2014 includes $1.5 million, $1.4 million and $6.3 million, respectively, of less net income due to a change in the Company’s fiscal year end. Net |
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
20. Selected Quarterly Financial Data (Unaudited)
The following tables present selected unaudited quarterly financial dataincome for the periods ending as indicated (in thousands, except per share data):second quarter of 2014 includes an $11.1 million loss in connection with a refinancing of the Company’s Senior Secured Credit Facility.
|
| | | | | | | | | | | | | | | | |
| | | MARCH 31,
2012 | | JUNE 30,
2012 | | SEPTEMBER 30,
2012 | | DECEMBER 31,
2012 |
| Revenues | | $ | 1,055,626 |
| | $ | 980,866 |
| | $ | 952,916 |
| | $ | 998,387 |
|
| Income (loss) from operations (1) (2) (3) | | 90,408 |
| | 48,720 |
| | (11,545 | ) | | 53,554 |
|
| Net income (loss) (1) (2) (3) (4) | | 53,832 |
| | 20,564 |
| | (33,755 | ) | | 20,663 |
|
| Net income (loss) attributable to Bloomin’ Brands, Inc. (1) (2) (3) (4) | | 49,999 |
| | 17,440 |
| | (35,866 | ) | | 18,398 |
|
| Net income (loss) attributable to Bloomin’ Brands, Inc. per common share: | | | | | | | | |
| Basic | | $ | 0.47 |
| | $ | 0.16 |
| | $ | (0.31 | ) | | $ | 0.15 |
|
| Diluted | | $ | 0.47 |
| | $ | 0.16 |
| | $ | (0.31 | ) | | $ | 0.15 |
|
|
| | | | | | | | | | | | | | | | |
| | | MARCH 31,
2011 | | JUNE 30,
2011 | | SEPTEMBER 30,
2011 | | DECEMBER 31,
2011 |
| Revenues | | $ | 1,001,849 |
| | $ | 955,502 |
| | $ | 928,275 |
| | $ | 955,638 |
|
| Income from operations (5) (6) (7) | | 90,693 |
| | 40,754 |
| | 21,042 |
| | 60,963 |
|
| Net income (5) (6) (7) | | 58,115 |
| | 16,443 |
| | 1,368 |
| | 33,253 |
|
| Net income attributable to Bloomin’ Brands, Inc. (5) (6) (7) | | 54,892 |
| | 14,003 |
| | 579 |
| | 30,531 |
|
| Net income attributable to Bloomin’ Brands, Inc. per common share: | | | | | | | | |
| Basic | | $ | 0.52 |
| | $ | 0.13 |
| | $ | 0.01 |
| | $ | 0.28 |
|
| Diluted | | $ | 0.52 |
| | $ | 0.13 |
| | $ | 0.01 |
| | $ | 0.28 |
|
____________________
| |
(1) | The first quarter of 2012 includes approximately $7.4 million of additional legal and other professional fees mainly resulting from amendment and restatement of a lease between OSI and PRP.
|
| |
| (2) | TheIncome from operations in the third quarterand fourth quarters of 20122013 includes approximately $42.1$5.0 million and $12.0 million, respectively, of transaction-related expenses that relate to costs incurredassociated with a payroll tax contingency. Income from operations in association with the completion of the initial public offering in August 2012. These expenses primarily include $34.1 million of certain executive compensation costs and non-cash stock compensation charges recorded upon completion of the initial public offering and an $8.0 million management agreement termination fee (see Notes 3 and 19).
|
| |
(3) | The fourth quarter of 20122013 includes impairment charges of $18.7 million incurred in connection with the Domestic Restaurant Closure Initiative. Net income in the second quarter of 2013 includes an income tax benefit of $52.0 million related to a reduction of the U.S. valuation allowance and a $14.6 million loss related to the repricing of the Company’s Term Loan B. As a result of the Company’s acquisition of a controlling interest in the Brazil Joint Venture, net income in the fourth quarter of 2013 includes a gain of $3.5$36.6 million from the collection of proceeds and other related amounts from the 2009 saleremeasurement of the Company’s Cheeseburger in Paradise concept (see Note 13).
|
| |
(4) | During 2012, the Company recorded losses on extinguishment and modification of debt for refinancing transactions of $2.9 million, $9.0 million, and $9.1 million, in the first, third, and fourth quarters, respectively (see Note 11).
|
| |
(5) | The second quarter of 2011 includes $5.8 million of expense related to a settlement of an IRS assessment of employment taxes.
|
| |
(6) | The fourth quarter of 2011 includes $33.2 million of Recovery of note receivable from affiliated entity as a result of a settlement agreement with T-Bird that satisfied all outstanding litigation with T-Bird (see Note 19).
|
| |
(7) | The fourth quarter of 2011 includes a $4.3 million loss from the sale of nine Company-owned Outback Steakhouse restaurants in Japan in October 2011 (see Note 8).
previously held equity investment. |
Report of Independent Registered Certified Public Accounting Firm
To Board of Directors and Stockholders of
Bloomin’ Brands, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity (deficit), and cash flows present fairly, in all material respects, the financial position of Bloomin’ Brands, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Tampa, FL
March 4, 2013
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial and Administrative Officer concluded that our disclosure controls and procedures were effective as of December 31, 201228, 2014.
Management’s Annual Report on Internal Control over Financial Reporting
This annual report does not include a report of management’s assessment regardingManagement is responsible for establishing and maintaining adequate internal control over financial reporting, or an attestation reportas such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
On May 14, 2013 the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued an updated version of its Internal Control—Integrated Framework (“2013 Framework”). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial and Administrative Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 28, 2014 using the 2013 Framework. Based upon our evaluation, management concluded that our internal control over financial reporting was effective as of December 28, 2014.
The effectiveness of our internal control over financial reporting as of December 28, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, due to a transition period established by rulesas stated in their report which is included herein, and which expresses an unqualified opinion on the effectiveness of the Securities and Exchange Commission for newly public companies.Company’s internal control over financial reporting as of December 28, 2014.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during our most recent quarter ended December 31, 201228, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 28, 2013, we terminated the split-dollar agreement we had entered into in 2008 with our former Executive Vice President and Chief Value Chain Officer, Dirk A. Montgomery (the “Split-Dollar Agreement”). The Split-Dollar Agreement required us to maintain an endorsement split-dollar life insurance policy (the “Policy”) with a death benefit of approximately $5.0 million for Mr. Montgomery. We were the beneficiary of the Policy to the extent of premiums paid or the cash value, whichever was greater, with the remaining death benefit to be paid to a personal beneficiary designated by Mr. Montgomery. Mr. Montgomery’s right to the policy had fully vested on January 1, 2013. We paid Mr. Montgomery $150,000 in exchange for full termination of the Split-Dollar Agreement. As a result of the termination agreement, we became the sole and exclusive owner of the Policy and elected to cancel it.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item relating to our directors and nominees will be included under the captions “Proposal No. 1: Election of Directors—Nominees for Election at this Annual Meeting” and “—Directors Continuing in Office” in our definitive Proxy Statement for the 20132015 Annual Meeting of Stockholders which will be filed with the SEC no later than 120 days after December 31, 201228, 2014 (“Definitive Proxy Statement”) and is incorporated herein by reference.
The information required by this item regarding our Audit Committee will be included under the caption “Proposal No. 1: Election of Directors—Board Committees and Meetings” in our Definitive Proxy Statement and is incorporated herein by reference.
The information required by this item relating to our executive officers is included under the caption “Executive Officers”Officers of the Registrant” in Part I of this report.Annual Report on Form 10-K.
The information required by this item regarding compliance with Section 16(a) of the Securities Act of 1934 will be included under the caption “Ownership of Securities—Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive Proxy Statement and is incorporated herein by reference.
We have adopted a Business Conduct and Code of Ethics that applies to all employees. A copy of our Business Conduct and Code of Ethics is available on our website, free of charge. The Internet address for our website is www.bloominbrands.com , and the Business Conduct and Code of Ethics may be found from our main webpage by clicking first on “Investors” and then on “Corporate Governance” and next on “Code of Business Conduct and Ethics.”
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, on the webpage found by clicking through to “Code of Business Conduct and Ethics” as specified above.
Item 11. Executive Compensation
The information required by this item will be included under the captions “Proposal No. 1: Election of Directors—Director Compensation” and “Executive Compensation and Related Information” in our Definitive Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item relating to security ownership of certain beneficial owners and management will be included under the caption “Ownership of Securities” in our Definitive Proxy Statement and is incorporated herein by reference.
The information relating to securities authorized for issuance under equity compensation plans is included under the caption “Securities Authorized for Issuance Under Equity Compensation Plans” in Item 5 of this Report.Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item relating to transactions with related persons will be included under the caption “Certain Relationships and Related Party Transactions,” and the information required by this item relating to director independence will be included under the caption “Proposal No. 1: Election of Directors—Independent Directors,” in each case in our Definitive Proxy Statement, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this item will be included under the captions “Proposal No. 2: Ratification of Independent Registered Certified Public Accounting Firm—Principal Accountant Fees and Services” and “—Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Certified Public Accounting Firm” in our Definitive Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) LISTING OF FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and subsidiaries are included in Item 8 of this Report:
Consolidated Balance Sheets - December 31, 201228, 2014 and 2011December 31, 2013
Consolidated Statements of Operations and Comprehensive Income – Years endedFiscal years December 31, 20122014, 20112013, and 20102012
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) – Years endedFiscal years December 31, 20122014, 20112013, and 20102012
Consolidated Statements of Cash Flows – Years endedFiscal years December 31, 20122014, 20112013, and 20102012
Notes to consolidated financial statementsConsolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
The followingAll financial statement schedule is filed as a part of this Report under Schedule II immediately following the exhibits index: Schedule II — Valuation and Qualifying Accounts for the years ended December 31, 2012, 2011, and 2010. All other schedules called for by Form 10-K arehave been omitted, because they are inapplicable orsince the required information is shownnot applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto included in this Report.
(a)(3) EXHIBITS
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ExhibitEXHIBIT
NumberNUMBER
| | DescriptionDESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
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| 2.1 | | Quota Purchase and Sale Agreement dated October 31, 2013 and effective November 1, 2013, by and between Bloomin’ Brands, Inc., Outback Steakhouse Restaurantes Brasil S.A. (formerly known as Bloom Holdco Participações Ltda.), PGS Participações Ltda., the equity holders of ExhibitsPGS Participações Ltda., PGS Consultoria e Serviços Ltda., and Bloom Participações Ltda.1 | | December 31, 2013 Form 10-K, Exhibit 2.1 |
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| 3.1 | | Second Amended and Restated Certificate of Incorporation of Bloomin’ Brands, Inc. (included as an exhibit to Registrant’s | | Registration Statement on Form S-8, File No. 333-183270, (“Form S-8”), filed on August 13, 2012, and incorporated herein by reference)Exhibit 4.1 |
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| 3.2 | | Second Amended and Restated Bylaws of Bloomin’ Brands, Inc. (included as an exhibit to Registrant’s | | Registration Statement on Form S-8, File No. 333-183270, filed on August 13, 2012, and incorporated herein by reference)Exhibit 4.2 |
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| 4.1 | | Form of Common Stock Certificate (included as an exhibit to | | Amendment No. 4 to Registrant’s Registration Statement on Form S-1, File No. 333-180615, (“Form S-1”), filed on July 18, 2012, and incorporated herein by reference)Exhibit 4.1 |
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| 10.1 | | Credit Agreement dated October 26, 2012 among OSI Restaurant Partners, LLC, OSI HoldCo, Inc., the Lenders and Deutsche Bank Trust Company Americas, as administrative agent for the Lenders1 (included as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended | | September 30, 2012 File No. 001-35625,Form 10-Q, Exhibit 10.1 |
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| 10.2 | | First Amendment to Credit Agreement, Guaranty and incorporated herein by reference)Security Agreement dated as of April 10, 2013 among OSI Restaurant Partners, LLC, OSI HoldCo, Inc., the Subsidiary Guarantors, the Lenders and Deutsche Bank Trust Company Americas, as administrative agent for the Lenders | | March 31, 2013 Form 10-Q, Exhibit 10.1 |
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| 10.3 | | Second Amendment to Credit Agreement dated as of January 3, 2014 among OSI Restaurant Partners, LLC, OSI HoldCo, Inc., the Subsidiary Guarantors and Deutsche Bank Trust Company Americas, as administrative agent | | December 31, 2013 Form 10-K, Exhibit 10.3 |
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EXHIBIT NUMBER | | DESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
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10.210.4 | | Third Amendment to Credit Agreement dated as of May 16, 2014 among OSI Restaurant Partners, LLC, OSI HoldCo, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as administrative agent, collateral agent, L/C issuer, swing line lender and assigning Lender, Deutsche Bang AG New York Branch, as assignee and Wells Fargo Bank, National Association, as successor administrative agent | | June 29, 2014 Form 10-Q, Exhibit 10.5 |
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| 10.5 | | Loan and Security Agreement, dated March 27, 2012, between New Private Restaurant Properties, LLC, as borrower, and German American Capital Corporation and Bank of America, N.A., collectively as lender1 (included as an exhibit to | | Amendment No. 1 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on May 17, 2012, and incorporated herein by reference)Exhibit 10.10 |
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10.310.6 | | First Amendment to Loan and Security Agreement, dated effective January 1, 2014, by and among New Private Restaurant Properties, LLC, as borrower, OSI HoldCo I, Inc., as guarantor and Wells Fargo Bank, N.A., as trustee for the registered holders of BAMLL-DB 2012-OSI Trust, Commercial Mortgage Pass-Through Certificates, Series 2012-OSI, as lender | | December 31, 2013 Form 10-K, Exhibit 10.5 |
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| 10.7 | | Mezzanine Loan and Security Agreement (First Mezzanine), dated March 27, 2012, between New PRP Mezz 1, LLC, as borrower, and German American Capital Corporation and Bank of America, N.A., collectively as lender (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.11 |
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10.410.8 | | First Amendment to Mezzanine Loan and Security Agreement (First Mezzanine), dated as of January 3, 2014, between New PRP Mezz 1, LLC, as borrower, OSI HoldCo I, Inc., as guarantor, and Athene Annuity & Life Assurance Company, Thornburg Strategic Income Fund, Thornburg Investment Income Builder Fund and Newcastle CDO IX, 1 Limited, collectively as lender | | December 31, 2013 Form 10-K, Exhibit 10.7 |
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| 10.9 | | Mezzanine Loan and Security Agreement (Second Mezzanine), dated March 27, 2012, between New PRP Mezz 2, LLC, as borrower, and German American Capital Corporation and Bank of America, N.A., collectively, as lender (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.12 |
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Exhibit
Number
10.10 | | DescriptionFirst Amendment to Mezzanine Loan and Security Agreement (Second Mezzanine), dated as of ExhibitsJanuary 3, 2014, between New PRP Mezz 2, LLC, as borrower, OSI HoldCo I, Inc., as guarantor, and Annaly CRE Holdings LLC, as lender | | December 31, 2013 Form 10-K, Exhibit 10.9 |
10.5 | | | | |
| 10.11 | | Environmental Indemnity, dated March 27, 2012, by OSI HoldCo I, Inc. for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.13 |
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10.610.12 | | Environmental Indemnity, dated March 27, 2012, by OSI Restaurant Partners, LLC and Private Restaurant Master Lessee, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.14 |
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10.710.13 | | Environmental Indemnity, dated March 27, 2012, by PRP Holdings, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.15 |
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10.810.14 | | Environmental Indemnity (First Mezzanine), dated March 27, 2012, by OSI HoldCo I, Inc. for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.16 |
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10.9 | | | | |
EXHIBIT NUMBER | | DESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
| 10.15 | | Environmental Indemnity (First Mezzanine), dated March 27, 2012, by OSI Restaurant Partners, LLC and Private Restaurant Master Lessee, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.17 |
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10.1010.16 | | Environmental Indemnity (First Mezzanine), dated March 27, 2012, by PRP Holdings, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.18 |
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10.1110.17 | | Environmental Indemnity (Second Mezzanine), dated March 27, 2012, by OSI HoldCo I, Inc. for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.19 |
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10.1210.18 | | Environmental Indemnity (Second Mezzanine), dated March 27, 2012, by OSI Restaurant Partners, LLC and Private Restaurant Master Lessee, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.20 |
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10.1310.19 | | Environmental Indemnity (Second Mezzanine), dated March 27, 2012, by PRP Holdings, LLC for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.21 |
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10.1410.20 | | Guaranty of Recourse Obligations, dated March 27, 2012, by OSI HoldCo I, Inc. to and for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.22 |
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10.1510.21 | | Guaranty of Recourse Obligations (First Mezzanine), dated March 27, 2012, by OSI HoldCo I, Inc. to and for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.23 |
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10.1610.22 | | Guaranty of Recourse Obligations (Second Mezzanine), dated March 27, 2012, by OSI HoldCo I, Inc. to and for the benefit of German American Capital Corporation and Bank of America, N.A. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.24 |
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10.1710.23 | | Amended and Restated Guaranty, dated March 27, 2012, by OSI Restaurant Partners, LLC to and for the benefit of New Private Restaurant Properties, LLC (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.27 |
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10.1810.24 | | Subordination, Non-Disturbance and Attornment Agreement (New Private Restaurant Properties, LLC), dated March 27, 2012, by and between Bank of America, N.A., German American Capital Corporation, Private Restaurant Master Lessee, LLC and New Private Restaurant Properties, LLC, with the acknowledgement, consent and limited agreement of OSI Restaurant Partners, LLC (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.25 |
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Exhibit
Number
| | Description of Exhibits |
10.1910.25 | | Royalty Agreement dated April 1995 among Carrabba’s Italian Grill, Inc., Outback Steakhouse, Inc., Mangia Beve, Inc., Carrabba, Inc., Carrabba Woodway, Inc., John C. Carrabba, III, Damian C. Mandola, and John C. Carrabba, Jr., as amended by First Amendment to Royalty Agreement dated January 1997 and Second Amendment to Royalty Agreement made and entered into effective April 7, 2010 by and among Carrabba’s Italian Grill, LLC, OSI Restaurant Partners, LLC, Mangia Beve, Inc., Mangia Beve II, Inc., Original, Inc., Voss, Inc., John C. Carrabba, III, Damian C. Mandola, and John C. Carrabba, Jr. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.6 |
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10.20 | | | | |
EXHIBIT NUMBER | | DESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
| 10.26 | | Third Amendment to Royalty Agreement made and entered into effective June 1, 2014, by and among Carrabba’s Italian Grill, LLC, OSI Restaurant Partners, LLC, Mangia Beve, Inc., Mangia Beve II, Inc., Original, Inc., Voss, Inc., John C. Carrabba, III, Damian C. Mandola, and John C. Carrabba, Jr. | | June 29, 2014 Form 10-Q, Exhibit 10.6 |
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| 10.27 | | Amended and Restated Operating Agreement for OSI/Fleming’s, LLC made as of June 4, 2010 by and among OS Prime, LLC, a wholly-owned subsidiary of OSI Restaurant Partners, LLC, FPSH Limited Partnership and AWA III Steakhouses, Inc. (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.8 |
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10.2110.28 | | Amended and Restated Master Lease Agreement, dated March 27, 2012, between New Private Restaurant Properties, LLC, as landlord, and Private Restaurant Master Lessee, LLC, as tenant1 (included as an exhibit to | | Amendment No. 1 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on May 17, 2012, and incorporated herein by reference)Exhibit 10.26 |
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10.22 | | Lease, dated June 14, 2007, between OS Southern, LLC and Selmon’s/Florida-I, Limited Partnership (predecessor to MVP LRS, LLC) (included as an exhibit to Amendment No. 1 to Registrant’s Form S-1 filed on May 17, 2012 and incorporated herein by reference) |
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10.2310.29 | | Lease, dated June 14, 2007, between OS Southern, LLC and Selmon’s/Florida-I, Limited Partnership (predecessor to MVP LRS, LLC), as amended May 27, 2010 (included as an exhibit to | | Amendment No. 1 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on May 17, 2012, and incorporated herein by reference)Exhibit 10.52 |
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10.24*10.30 | | Lease, dated January 21, 2014, between OS Southern, LLC and MVP LRS, LLC | | December 31, 2013 Form 10-K, Exhibit 10.28 |
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| 10.31* | | Employee Rollover Agreement for conversion of OSI Restaurant Partners, Inc. restricted stock to Kangaroo Holdings, Inc. restricted stock entered into by the individuals listed on Schedule 1 thereto (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.4 |
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10.25*10.32* | | OSI Restaurant Partners, LLC HCE Deferred Compensation Plan effective October 1, 2007 (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.46 |
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10.26*10.33* | | Kangaroo Holdings, Inc. 2007 Equity Incentive Plan, as amended (included as an exhibit to Amendment No. 1 to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on May 17,April 6, 2012, and incorporated herein by reference)Exhibit 10.1 |
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10.27*10.34* | | Form of Option Agreement for Options under the Kangaroo Holdings, Inc. 2007 Equity Incentive Plan (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.42 |
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10.28*10.35* | | Bloomin’ Brands, Inc. 2012 Incentive Award Plan (included as an exhibit to | | Amendment No. 4 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on July 18, 2012, and incorporated herein by reference)Exhibit 10.2 |
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10.29*10.36* | | Form of Nonqualified Stock Option Award Agreement for options granted under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (included as an exhibit to Registrant’s Current Report on Form 8-K filed on | | December 7, 2012 File No. 001-35625, and incorporated herein by reference)Form 8-K, Exhibit 10.2 |
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10.30*10.37* | | Form of Restricted Stock Award Agreement for restricted stock granted to directors under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (included as an exhibit to Registrant’s Current Report on Form 8-K filed on | | December 7, 2012 File No. 001-35625, and incorporated herein by reference)Form 8-K, Exhibit 10.3 |
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10.31*10.38* | | Form of Restricted Stock Award Agreement for restricted stock granted to employees and consultants under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (included as an exhibit to Registrant’s Current Report on Form 8-K filed on | | December 7, 2012 File No. 001-35625, and incorporated herein by reference)Form 8-K, Exhibit 10.4 |
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| 10.39* | | Form of Restricted Stock Unit Award Agreement for restricted stock granted to directors under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan | | September 30, 2013 Form 10-Q, Exhibit 10.1 |
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ExhibitEXHIBIT
NumberNUMBER
| | Description of ExhibitsDESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
10.32*10.40* | | Form of Restricted Stock Unit Award Agreement for restricted stock granted to employees and consultants under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan | | September 30, 2013 Form 10-Q, Exhibit 10.2 |
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| 10.41* | | Form of Performance Unit Award Agreement for performance units granted under the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (included as an exhibit to Registrant’s Current Report on Form 8-K filed on | | December 7, 2012 File No. 001-35625, and incorporated herein by reference)Form 8-K, Exhibit 10.5 |
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10.33*10.42* | | Form of Bloomin’ Brands, Inc. Indemnification Agreement by and between Bloomin’ Brands, Inc. and each member of its Board of Directors and each of its executive officers (included as an exhibit to | | Amendment No. 4 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on July 18, 2012, and incorporated herein by reference)Exhibit 10.39 |
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10.34*10.43* | | Bloomin’ Brands, Inc. Executive Change in Control Plan, effective December 6, 2012 (included as an exhibit to Registrant’s Current Report on Form 8-K filed on | | December 7, 2012 File No. 001-35625, and incorporated herein by reference)Form 8-K, Exhibit 10.1 |
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10.35*10.44* | | Amended and Restated Employment Agreement made and entered into September 4, 2012 by and between Elizabeth A. Smith and Bloomin’ Brands, Inc. (included as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the quarter ended | | June 30, 2012 File No. 001-35625, and incorporated herein by reference) |
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10.36* | | Retention Bonus Agreement, dated November 2, 2009, between Kangaroo Holdings, Inc. and Elizabeth A. Smith (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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10.37* | | Bonus Agreement, dated December 31, 2009, between Kangaroo Holdings, Inc. and Elizabeth A. Smith (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-Q, Exhibit 10.1 |
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10.38* | | Amendment to Bonus Agreements, dated May 10, 2012, by and between Elizabeth A. Smith and Bloomin’ Brands, Inc. (included as an exhibit to Amendment No. 1 to Registrant’s Form S-1 filed on May 17, 2012 and incorporated herein by reference) |
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10.39*10.45* | | Option Agreement, dated November 16, 2009, by and between Kangaroo Holdings, Inc. and Elizabeth A. Smith, as amended December 31, 2009 (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.40 |
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10.40*10.46* | | Option Agreement, dated July 1, 2011, by and between Kangaroo Holdings, Inc. and Elizabeth A. Smith (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.41 |
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10.41*10.47* | | Officer Employment Agreement, made and entered into effective May 7, 2012, by and among David Deno and OSI Restaurant Partners, LLC (included as an exhibit to | | Amendment No. 1 to Registrant’sRegistration Statement on Form S-1, File No. 333-180615, filed on May 17, 2012, and incorporated herein by reference)Exhibit 10.53 |
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10.42* | | Amended and Restated Employment Agreement dated June 14, 2007, between Dirk A. Montgomery and OSI Restaurant Partners, LLC, as amended on January 1, 2009, December 30, 2010, January 1, 2012 and January 10, 2012 (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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10.43*10.48* | | Split-Dollar AgreementAmendment, dated August 12, 2008, by and between OSI Restaurant Partners, LLC (formerly known as Outback Steakhouse, Inc.) and Dirk A. Montgomery, Trustee ofJuly 16, 2014, to the Dirk A. Montgomery Revocable Trust dated April 12, 2001 (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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10.44* | | Split-Dollar Termination Agreement made and entered into February 28, 2013 by and between OSI Restaurant Partners, LLC and Dirk A. Montgomery, in his individual capacity and in his capacity as Trustee of the Dirk A. Montgomery Revocable Trust dated April 12, 2001 (filed herewith) |
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10.45* | | Officer Employment Agreement amended November 1, 2006 and effective April 27, 2000, by and among Steven T. Shlemon and Carrabba’s Italian Grill, Inc., as amended on January 1, 2012 (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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Exhibit
Number
| | Description of Exhibits |
10.46* | | Assignment and Amendment and Restatement of Officer Employment Agreement, made and entered into March 26, 2009 and effective as of February 5, 2008,May 7, 2012, by and among Jody Bilney and Outback Steakhouse of Florida, LLCDavid Deno and OSI Restaurant Partners, LLC as amended on January 1, 2012 (included as an exhibit to Registrant’s | | June 29, 2014 Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-Q, Exhibit 10.7 |
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10.47*10.49* | | Officer Employment Agreement dated January 23, 2008 and effective April 12, 2007 by and among Jeffrey S. Smith and Outback Steakhouse of Florida, LLC, as amended on January 1, 2009 and January 1, 2012 (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.32 |
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10.48*10.50* | | Amended and Restated Employment Agreement dated June 14, 2007, between Joseph J. Kadow and OSI Restaurant Partners, LLC, as amended on January 1, 2009, June 12, 2009, December 30, 2010 and December 16, 2011 (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.29 |
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10.49*10.51* | | Split-Dollar Agreement dated August 12, 2008 and effective March 30, 2006, by and between OSI Restaurant Partners, LLC (formerly known as Outback Steakhouse, Inc.) and Joseph J. Kadow (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.48 |
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10.50*10.52* | | Officer Employment Agreement made and entered into August 16, 2010 and effective for all purposes as of August 16, 2010 by and among David A. Pace and OSI Restaurant Partners, LLC (included as an exhibit to Registrant’s | | Registration Statement on Form S-1, File No. 333-180615, filed on April 6, 2012, and incorporated herein by reference)Exhibit 10.37 |
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10.51*10.53* | | Amended and RestatedAmendment, dated July 30, 2014, to the Officer Employment Agreement effective September 12, 2011,made and entered into August 16, 2010 by and among David Berg, OS Management, Inc.A. Pace and Outback Steakhouse International, L.P., as amended on January 1, 2012 (included as an exhibit to Registrant’sOSI Restaurant Partners, LLC | | June 29, 2014 Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-Q, Exhibit 10.8 |
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10.52* | | | | |
EXHIBIT NUMBER | | DESCRIPTION OF EXHIBITS | | FILINGS REFERENCED FOR INCORPORATION BY REFERENCE |
| 10.54* | | Employment Offer Letter Agreement, dated as of November 27, 2012, between Bloomin’ Brands, Inc. and Stephen K. Judge (filed herewith) | | December 31, 2012 Form 10-K, Exhibit 10.52 |
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10.53*10.55* | | Officer Employment Agreement, made and entered into effective August 1, 2001,7, 2013, by and among John W. CooperAmanda L. Shaw and Bonefish Grill,Bloomin’ Brands, Inc., as amended on January 1, 2012 (included as an exhibit to Registrant’s and OS Management, Inc. | | December 31, 2013 Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-K, Exhibit 10.54 |
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10.54* | | Employment Agreement dated June 14, 2007, between Robert D. Basham and OSI Restaurant Partners, LLC, as amended on January 1, 2009 (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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10.55* | | Split-Dollar Agreement dated August 19, 2008 and effective August 2005, by and between OSI Restaurant Partners, LLC (formerly known as Outback Steakhouse, Inc.) and Richard Danker, Trustee of Robert D. Basham Irrevocable Trust Agreement of 1999 dated December 20, 1999 (included as an exhibit to Registrant’s Form S-1 filed on April 6, 2012 and incorporated herein by reference) |
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| 10.56* | | Amendment, dated September 16, 2014, to the Officer Employment Agreement dated June 14, 2007, between Chris T. Sullivanmade and OSI Restaurant Partners, LLC,entered into August 7, 2013 and effective for all purposes as amended on January 1, 2009 (included as an exhibit to Registrant’sof August 16, 2010 by and among Amanda L. Shaw and Bloomin’ Brands, Inc. | | September 28, 2014 Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-Q, Exhibit 10.2 |
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| 10.57* | | Split-DollarEmployment Offer Letter Agreement, dated as of November 1, 2013, between Bloomin’ Brands, Inc. and Patrick Murtha | | December 18, 2008 and effective August 18, 2005, by and between OSI Restaurant Partners, LLC (formerly known as Outback Steakhouse, Inc.) and Shamrock PTC, LLC, Trustee of the Chris Sullivan 2008 Insurance Trust dated July 17, 2008 and William T. Sullivan, Trustee of the Chris Sullivan Non-exempt Irrevocable Trust dated January 5, 2000 and the Chris Sullivan Exempt Irrevocable Trust dated January 5, 2000 (included as an exhibit to Registrant’s31, 2013 Form S-1 filed on April 6, 2012 and incorporated herein by reference)10-K, Exhibit 10.55 |
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10.58 | | Amended |
| 10.58* | | Employment Offer Letter Agreement, dated as of July 30, 2014, between Bloomin’ Brands, Inc. and Restated Donagh Herlihy | | Filed herewith |
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| 10.59 | | Registration Rights Agreement among Bloomin’ Brands, Inc. and certain stockholders of Bloomin’ Brands, Inc. (filed herewith)made as of April 29, 2014 | | May 1, 2014 Form 8-K, Exhibit 10.3 |
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Exhibit
Number
| | Description of Exhibits |
10.5910.60 | | Stockholders Agreement among Bloomin’ Brands, Inc. and certain stockholders of Bloomin’ Brands, Inc. (filed herewith)made as of April 29, 2014 | | May 1, 2014 Form 8-K, Exhibit 10.4 |
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| 21.1 | | List of Subsidiaries (filed herewith) | | Filed herewith |
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| 23.1 | | Consent of PricewaterhouseCoopers LLP (filed herewith) | | Filed herewith |
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| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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| 31.2 | | Certification of Chief Financial and Administrative Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | Filed herewith |
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| 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022 | | Filed herewith |
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| 32.2 | | Certification of Chief Financial and Administrative Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 20022 | | Filed herewith |
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| 101.INS | | XBRL Instance Document | | Filed herewith |
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| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | Filed herewith |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
* Management contract or compensatory plan or arrangement required to be filed as an exhibit
1Confidential treatment has been granted with respect to portions of Exhibits 2.1, 10.1, 10.210.5 and 10.2110.28 and such portions have been filed separately with the Securities and Exchange Commission.
2 These certifications are not deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. These certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.
The registrant hereby undertakes to furnish supplementally a copy of any omitted schedule or other attachment to the Securities and Exchange Commission upon request.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS (in thousands):
|
| | | | | | | | | | | | | | | | |
| | | BALANCE AT THE BEGINNING OF THE PERIOD | | CHARGED TO COSTS AND EXPENSES | | DEDUCTIONS (1) | | BALANCE AT THE END OF THE PERIOD |
| Year Ended December 31, 2012 | | | | | | | | |
| Allowance for doubtful accounts (2) | | $ | 2,117 |
| | $ | 280 |
| | $ | (2,397 | ) | | $ | — |
|
| Valuation allowance on deferred income tax assets (3) | | 35,837 |
| | 44,260 |
| | (7,582 | ) | | 72,515 |
|
| | | $ | 37,954 |
| | $ | 44,540 |
| | $ | (9,979 | ) | | $ | 72,515 |
|
| Year Ended December 31, 2011 | | | | | | | | |
| Allowance for note receivable for affiliated entity (4) | | $ | 33,150 |
| | $ | (33,150 | ) | | $ | — |
| | $ | — |
|
| Allowance for doubtful accounts | | 2,454 |
| | 117 |
| | (454 | ) | | 2,117 |
|
| Valuation allowance on deferred income tax assets | | 25,886 |
| | 12,948 |
| | (2,997 | ) | | 35,837 |
|
| | | $ | 61,490 |
| | $ | (20,085 | ) | | $ | (3,451 | ) | | $ | 37,954 |
|
| Year Ended December 31, 2010 | | | | | | | | |
| Allowance for note receivable for affiliated entity | | $ | 33,150 |
| | $ | — |
| | $ | — |
| | $ | 33,150 |
|
| Allowance for doubtful accounts | | 1,697 |
| | 2,295 |
| | (1,538 | ) | | 2,454 |
|
| Valuation allowance on deferred income tax assets | | 21,977 |
| | 3,909 |
| | — |
| | 25,886 |
|
| | | $ | 56,824 |
| | $ | 6,204 |
| | $ | (1,538 | ) | | $ | 61,490 |
|
____________________
| |
(1) | Deductions for Allowance for doubtful accounts represent the write off of uncollectible accounts or reductions to allowances previously provided. Deductions for Valuation allowance on deferred income tax assets represent changes in timing differences between periods. |
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(2) | In 2009, the Company received a promissory note for the full sale price of its Cheeseburger in Paradise concept ($2.0 million), which subsequently became fully reserved in 2010. In the fourth quarter of 2012, the Company collected the outstanding amounts under the terms of the promissory note, which included accrued interest charges, and released the Allowance for doubtful accounts balance in full.
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| |
(3) | The charges to the valuation allowance for the year ended December 31, 2012 were primarily due to the tax benefits associated with tax goodwill related to the joint venture and limited partnership interests purchased and the deferred gain recorded for the Sale-Leaseback Transaction. Of the aggregate charges, $15.8 million was recorded in Additional paid-in capital.
|
| |
(4) | On September 26, 2011, the Company entered into a settlement agreement with the T-Bird Parties to settle all outstanding litigation with T-Bird. In accordance with the terms of the settlement agreement, T-Bird agreed to pay $33.3 million to the Company, which included $33.2 million to satisfy the T-Bird promissory note that the Company purchased from T-Bird’s former lender. The settlement payment was received in November 2011, and $33.2 million was recorded as Recovery of note receivable from affiliated entity in the Company’s Consolidated Statement of Operations and Comprehensive Income for the year ended December 31, 2011.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | |
| | Date: | March 4, 2013February 24, 2015 | Bloomin’ Brands, Inc. |
| | | | |
| | | | By: /s/ Elizabeth A. Smith |
| | | | Elizabeth A. Smith Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ Elizabeth A. Smith | | Chief Executive Officer and Director (Principal Executive Officer) | | |
| Elizabeth A. Smith | | | March 4, 2013February 24, 2015 |
| | | | | |
| /s/ David J. Deno | | Executive Vice President and Chief Financial and Administrative Officer (Principal (Principal Financial and Accounting Officer)
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| David J. Deno | | | March 4, 2013February 24, 2015 |
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| /s/ Amanda L. Shaw | | Senior Vice President, Chief Accounting Officer and International Finance (Principal Accounting Officer) | | |
| Amanda L. Shaw | | | February 24, 2015 |
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| /s/ Andrew B. Balson | | | | |
| Andrew B. Balson | | Director | | March 4, 2013February 24, 2015 |
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/s/ Robert D. BashamJames R. Craigie | | | | |
Robert D. BashamJames R. Craigie | | Director | | March 4, 2013February 24, 2015 |
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/s/ J. Michael ChuDavid R. Fitzjohn | | | | |
J. Michael ChuDavid R. Fitzjohn | | Director | | March 4, 2013February 24, 2015 |
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| /s/ Mindy Grossman | | | | |
| Mindy Grossman | | Director | | March 4, 2013February 24, 2015 |
| | | | | |
| /s/ David Humphrey | | | | |
| David Humphrey | | Director | | March 4, 2013February 24, 2015 |
| | | | |
| /s/ Tara Walpert Levy | | | | |
| Tara Walpert Levy | | Director | | February 24, 2015 |
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| /s/ John J. Mahoney | | | | |
| John J. Mahoney | | Director | | March 4, 2013 |
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/s/ Mark E. Nunnelly | | | | |
Mark E. Nunnelly | | Director | | March 4, 2013February 24, 2015 |
| | | | | |
| /s/ Chris T. Sullivan | | | | |
| Chris T. Sullivan | | Director | | March 4, 2013 |
| | | | February 24, 2015 |
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