BLOOMIN' BRANDS, INC. 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. For discussion of our consolidated and
segment-level results of operations, non-GAAP measures, and liquidity and
capital resources for fiscal year 2017, see our Annual Report on Form 10-K for
the year ended
Overview
We are one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. As ofDecember 29, 2019 , we owned and operated 1,173 restaurants and franchised 300 restaurants across 48 states,Puerto Rico ,Guam and 21 countries. We have four founder-inspired concepts:Outback Steakhouse ,Carrabba's Italian Grill ,Bonefish Grill andFleming's Prime Steakhouse & Wine Bar .
Executive Summary
Our 2019 financial results include:
• An increase in Total revenues of 0.3% to
compared to 2018, driven primarily by higher comparable restaurant sales
and the net impact of restaurant openings and closures. These increases
were partially offset by the effect of foreign currency translation and
domestic refranchising.
• Income from operations increased to
to
sales, the impact of certain cost savings initiatives and lower
impairment charges and restaurant closing costs. These increases were
partially offset by labor, commodity and operating expense inflation,
delivery rollout costs and the impact of deferred gain amortization no
longer recognized upon adoption of the new lease standard.
Following is a summary of factors that impacted our operating results and liquidity in 2019 and significant actions we have taken during the year:
Refranchising - During 2019, we completed the sale of 18 of ourU.S. Company -ownedCarrabba's Italian Grill restaurants to an existing franchisee for cash proceeds of$3.6 million , net of certain purchase price adjustments. See Note 4 - Disposals of the Notes to Consolidated Financial Statements for additional details. Surplus Property Disposals - During 2019, we completed the sale of five of ourU.S. surplus properties to a franchisee for cash proceeds of$12.7 million , net of certain purchase price adjustments. The transaction resulted in a net gain of$3.6 million , recorded within Other restaurant operating expense in our Consolidated Statements of Operations and Comprehensive Income. Share Repurchase Programs and Dividends - We repurchased 5.5 million shares of common stock during 2019 for a total of$107.0 million and paid$35.7 million of dividends. 31
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Business Strategies
In 2020, our key business strategies include:
• Enhance the 360-Degree Customer Experience to Drive Sustainable Healthy
Sales Growth. We plan to continue to make investments to enhance our
core guest experience, increase off-premises dining occasions, remodel
and relocate restaurants, invest in digital marketing and data
personalization and utilize the Dine Rewards loyalty program and
multimedia marketing campaigns to drive sales.
• Drive Long-Term Shareholder Value. We plan to drive long-term
shareholder value by reinvesting operational cash flow into our
business, improving our credit profile and returning excess cash to
shareholders through dividends and share repurchases.
• Enrich Engagement Among Stakeholders. We take the responsibility to our
people, customers and communities seriously and continue to invest in
programs that support the well-being of those engaged with us.
• Maximize International Opportunity. We continue to focus on existing
geographic regions in
and pursue global franchise opportunities.
We intend to fund our business strategies, drive revenue growth and margin improvement, in part by reinvesting savings generated by anticipated cost savings discussed below and productivity initiatives across our businesses.
Strategic Alternatives Review Update
InNovember 2019 , we announced that we are exploring and evaluating strategic alternatives that have the potential to maximize value for our shareholders, including but not limited to, a possible sale of the Company. Since then, management has been actively working with the Board of Directors and its financial and legal advisors to review all aspects of the business and available opportunities. Concurrently, we have built a plan that supports a growth-focused, operations centric organization. The pillars of this plan are as follows:
• Aligned leadership, resources and structure to prioritize growth,
efficiency and scale.
• Simplified our corporate support functions to enable a more agile and
operations-focused organization.
• Rebalanced capital allocation policy, including doubling our dividend,
while maintaining flexibility to pay down debt, repurchase shares and
reinvest back in our business.
We are confident that these actions, coupled with our ongoing focus on driving sustainable healthy sales growth in our restaurants, will increase total shareholder return in 2020 and beyond.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 (excluding gift card
breakage) per restaurant to measure changes in consumer traffic, pricing
and development of the brand;
• Comparable restaurant sales-year-over-year comparison of sales volumes
(excluding gift card breakage) for 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 and
franchise restaurants, regardless of ownership, to interpret the overall
health of our brands;
• Restaurant-level operating margin, Income from operations, Net income and
Diluted earnings per share - financial measures utilized to evaluate our
operating performance.
Restaurant-level operating margin is widely regarded in the industry as a useful
metric to evaluate restaurant level operating efficiency and performance of
ongoing restaurant-level operations, and we use it for these purposes, overall
and particularly within our two segments. Our restaurant-level operating margin
is expressed as the percentage of our Restaurant sales that Cost of sales, Labor
and other related and Other restaurant operating expense (including advertising
expenses) represent, in each case as such items are reflected in our
Consolidated Statements of Operations. The following categories of our revenue
and operating expenses are not included in restaurant-level operating margin
because we do not consider them reflective of operating performance at the
restaurant-level within a period:
(i) Franchise and other revenues which are earned primarily from franchise
royalties and other non-food and beverage revenue streams, such as
rental and sublease income.
(ii) Depreciation and amortization which, although substantially all is
related to restaurant-level assets, represent historical sunk costs
rather than cash outlays for the restaurants.
(iii) General and administrative expense which includes primarilynon-restaurant-level costs associated with support of the restaurants
and other activities at our corporate offices.
(iv) Asset impairment charges and restaurant closing costs which are not
reflective of ongoing restaurant performance in a period.
Restaurant-level operating margin excludes various expenses, as discussed above,
that are essential to support the operations of our restaurants and may
materially impact our Consolidated Statements of Operations and Comprehensive
Income. As a result, restaurant-level operating margin is not indicative of our
consolidated results of operations and is presented exclusively as a supplement
to, and not a substitute for, net income or income from operations. In addition,
our presentation of restaurant operating margin may not be comparable to
similarly titled measures used by other companies in our industry;
• Adjusted restaurant-level operating margin, Adjusted income from
operations, Adjusted net income, Adjusted diluted earnings per
share-non-GAAP financial measures utilized to evaluate our operating
performance, which definitions, usefulness and reconciliations aredescribed in more detail in the "Non-GAAP Financial Measures" section
below; and
• Consumer satisfaction scores-measurement of our consumers' experiences in
a variety of key areas.
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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 periods indicated:
DECEMBER 29, DECEMBER 30,
2019 2018
Number of restaurants (at end of the period):
U.S.
Outback Steakhouse
Company-owned 579 579
Franchised 145 154
Total 724 733
Carrabba's Italian Grill
Company-owned (1) 204 224
Franchised (1) 21 3
Total 225 227
Bonefish Grill
Company-owned 190 190
Franchised 7 7
Total 197 197
Fleming's Prime Steakhouse & Wine Bar
Company-owned 68 70
Other
Company-owned 4 5
U.S. Total 1,218 1,232
International
Company-owned
Outback Steakhouse - Brazil (2) 99 92
Other 29 33
Franchised
Outback Steakhouse - South Korea 72 76 Other 55 55 International Total 255 256 System-wide total 1,473 1,488 ____________________
(1) In 2019, we sold 18Carrabba's Italian Grill restaurants, which are now operated as franchises.
(2) The restaurant counts for
2018, respectively, to correspond with the balance sheet dates of this
subsidiary.
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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 of
certain items in our Consolidated Statements of Operations in relation to Total
revenues or Restaurant sales, as indicated:
FISCAL YEAR
2019 2018
Revenues
Restaurant sales 98.4 % 98.4 %
Franchise and other revenues 1.6 1.6
Total revenues 100.0 100.0
Costs and expenses
Cost of sales (1) 31.4 31.9
Labor and other related (1) 29.6 29.5
Other restaurant operating (1) 24.1 23.8
Depreciation and amortization 4.8 4.9
General and administrative 6.6 6.9
Provision for impaired assets and restaurant closings 0.2 0.9
Total costs and expenses 95.4 96.5
Income from operations 4.6 3.5
Other expense, net (*) (*)
Interest expense, net (1.2 ) (1.1 )Income before Provision (benefit) for income taxes 3.4 2.4 Provision (benefit) for income taxes
0.2 (0.3 )
Net income 3.2 2.7
Less: net income attributable to noncontrolling interests * 0.1
Net income attributable to
3.2 % 2.6 %
____________________
(1) As a percentage of Restaurant sales.
* Less than 1/10th of one percent of Total revenues.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Revenues
RESTAURANT SALES
Following is a summary of the change in Restaurant sales for the period
indicated:
FISCAL YEAR
(dollars in millions) 2019
For fiscal year 2018 $ 4,060.9
Change from:
Comparable restaurant sales (1) 62.5
Restaurant openings (1) 50.1
Effect of foreign currency translation (35.9 )
Divestiture of restaurants through refranchising transactions (32.0 )
Restaurant closings (30.6 )
For fiscal year 2019 $ 4,075.0
____________________(1) 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 Restaurant sales in 2019 as compared to 2018 was primarily due to higher comparable restaurant sales and sales from 40 new restaurants not included in our comparable restaurant sales base. The increase in Restaurant sales was partially offset by: (i) the effect of foreign currency translation of the Brazilian Real relative to theU.S. dollar, (ii) domestic refranchising and (iii) the closing of 40 restaurants sinceDecember 31, 2017 .
Average Restaurant Unit Volumes and Operating Weeks Following is a summary of the average restaurant unit volumes and operating weeks, for the periods indicated:
FISCAL YEAR
(dollars in thousands) 2019 2018
Average restaurant unit volumes:
U.S.
Outback Steakhouse $ 3,663 $ 3,580
Carrabba's Italian Grill $ 2,934 $ 2,887
Bonefish Grill $ 3,026 $ 3,012 Operating weeks:U.S. Outback Steakhouse 30,119 30,265 Carrabba's Italian Grill 10,864 11,660 Bonefish Grill 9,865 9,981
5,037 4,711
____________________
(1) Translated at average exchange rates of 3.93 and 3.59 for 2019 and 2018,
respectively.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Comparable Restaurant Sales, Traffic and Average Check Per Person Increases
(Decreases)
Following is a summary of comparable restaurant sales, traffic and average check
per person increases (decreases), for the periods indicated:
FISCAL YEAR
2019 2018 (1)
Year over year percentage change: Comparable restaurant sales (stores open 18 months or more):U.S. (2) Outback Steakhouse 2.0 % 4.0 % Carrabba's Italian Grill 0.1 % 0.2 % Bonefish Grill 0.1 % 0.5 % Fleming's Prime Steakhouse & Wine Bar 0.7 % 0.8 % Combined U.S. 1.2 % 2.5 % International Outback Steakhouse - Brazil (3) 5.8 % (1.5 )% Traffic: U.S. Outback Steakhouse (0.7 )% 0.9 % Carrabba's Italian Grill 0.2 % (4.1 )% Bonefish Grill (1.7 )% (2.6 )% Fleming's Prime Steakhouse & Wine Bar 0.1 % (4.3 )% Combined U.S. (0.6 )% (0.8 )% International Outback Steakhouse - Brazil 3.9 % (4.4 )% Average check per person (4): U.S. Outback Steakhouse 2.7 % 3.1 % Carrabba's Italian Grill (0.1 )% 4.3 % Bonefish Grill 1.8 % 3.1 % Fleming's Prime Steakhouse & Wine Bar 0.6 % 5.1 % Combined U.S. 1.8 % 3.3 % International Outback Steakhouse - Brazil 1.8 % 2.8 % ____________________
(1) For 2018,U.S. comparable restaurant sales and traffic compare the 52 weeks fromJanuary 1, 2018 throughDecember 30, 2018 to the 52 weeks fromJanuary 2, 2017 throughDecember 31, 2017 . (2) Relocated restaurants closed more than 60 days are excluded from
comparable restaurant sales until at least 18 months after reopening.
(3) Excludes the effect of fluctuations in foreign currency rates. Includes
trading day impact from calendar period reporting.
(4) Average check per person increases (decreases) include the impact of menu
pricing changes, product mix and discounts.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Franchise and other revenues
FISCAL YEAR
(dollars in millions) 2019 2018
Franchise revenues (1) $ 52.2 $ 52.9
Other revenues 12.2 12.6
Franchise and other revenues
____________________
(1) Represents franchise royalties, advertising fees and initial franchise fees.
COSTS AND EXPENSES
Cost of sales
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Cost of sales
Cost of sales, consisting of food and beverage costs, decreased as a percentage of Restaurant sales in 2019 as compared to 2018 primarily due to 0.6% from increases in average check per person and 0.4% from the impact of certain cost saving initiatives, partially offset by an increase as a percentage of Restaurant sales of 0.6% from commodity cost inflation.
In 2020, we expect commodity costs to increase approximately 2%.
Labor and other related expenses
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Labor and other related
Labor and other related expenses include all direct and indirect labor costs incurred in operations, including distribution expense toRestaurant Managing Partners , costs related to field deferred compensation plans and other field incentive compensation expenses. Labor and other related expenses increased as a percentage of Restaurant sales in 2019 as compared to 2018 primarily due to 0.6% from wage rate increases, offset by decreases as a percentage of Restaurant sales of 0.4% from increases in average check per person and 0.2% from the impact of certain cost savings initiatives.
In 2020, we anticipate approximately 3.5% labor cost inflation.
Other restaurant operating expenses
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Other restaurant operating
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. Other restaurant operating
expenses increased as a percentage of
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Restaurant sales in 2019 as compared to 2018 primarily due to: (i) 0.5% from
additional expense related to the rollout of delivery services, (ii) 0.4% from
operating expense inflation and (iii) 0.3% from the impact of deferred gains on
sale-leaseback transactions no longer recognized in 2019 as a result of adoption
of the new lease accounting standard. These increases were partially offset by
decreases as a percentage of Restaurant sales of 0.5% from the impact of certain
cost savings initiatives and 0.3% from increases in average check per person.
Depreciation and amortization
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Depreciation and amortization
Depreciation and amortization decreased in 2019 as compared to 2018 primarily due to: (i) disposal of assets related to the sale-leaseback of certain properties, (ii) store closures and domestic refranchising and (iii) the effect of foreign currency translation. These decreases were partially offset by additional depreciation expense related to restaurant openings, relocations and remodels.
General and administrative expenses
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 expense for the period indicated:
FISCAL YEAR
(dollars in millions) 2019
For fiscal year 2018 $ 282.7
Change from:
Incentive compensation (4.2 )
Foreign currency exchange (2.5 )
Legal and professional fees (2.9 )
Severance 1.8
Other 0.3
For fiscal year 2019 $ 275.2 Provision for impaired assets and restaurant closings
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Provision for impaired assets and restaurant closings
International Restructuring - We recognized asset impairment and closure charges of$2.0 million and$13.9 million during 2019 and 2018, respectively, related to restructuring of certain international markets, includingPuerto Rico andChina , within the international segment. Express Concept Restructuring - In 2018, we recognized asset impairment charges of$7.4 million related to the restructuring of our Express concept, within theU.S. segment. As a part of the restructuring, three Express locations closed during 2019. 39
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Refranchising - During 2019, we completed the sale of 18 of our U.S.
Company -owned Carrabba's Italian Grill restaurants to an existing franchisee. In
connection with the sale of these restaurants, we recognized asset impairment
charges of $5.5 million in 2018, within the U.S. segment.
The remaining impairment and closing charges for the periods presented primarily resulted from approved store closure initiatives, locations identified for remodel, relocation or closure and certain other assets.
We continue to pursue refranchising opportunities in select markets as we look
to further optimize our restaurant portfolio. As a result of these transactions,
we may record future net gains or losses, impairment charges and transaction
related expenses.
Income from operations
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Income from operations
The increase in Income from operations during 2019 as compared to 2018 was primarily due to: (i) higher comparable restaurant sales, (ii) the impact of certain cost saving initiatives and (iii) lower impairment charges and restaurant closing costs. These increases were partially offset by: (i) labor, commodity and operating expense inflation, (ii) additional expense related to the rollout of delivery services and (iii) the impact of deferred gain amortization no longer recognized upon adoption of the new lease standard.
Interest expense, net
FISCAL YEAR
(dollars in millions) 2019 2018 Change
Interest expense, net $ 49.3 $ 44.9 $ 4.4 The increase in Interest expense, net during 2019 as compared to 2018 was primarily due to a higher fixed rate on the notional amount of our derivative instruments and higher average interest rates and borrowings outstanding, partially offset from the derecognition of certain lease-related debt obligations due to adoption of the new lease accounting standard.
Provision (benefit) for income taxes
FISCAL YEAR
2019 2018 Change
Effective income tax rate 5.3 % (9.2 )% 14.5 %
The net increase in the effective income tax rate in 2019 as compared to 2018
was primarily due to employment-related credits being a lower percentage of net
income in 2019, excess tax benefits from equity-based compensation arrangements
recorded in 2018 and an increase in the foreign tax rate differential in 2019.
These increases were partially offset by a decrease in valuation allowances
recorded against deferred income tax assets in 2019.
The effective income tax rate for 2019 was lower than the blended federal and
state statutory rate of approximately 26%, primarily due to the benefit of tax
credits for FICA taxes on certain employees' tips. The effective income tax rate
for 2018 was lower than the blended federal and state statutory rate of
approximately 26%, primarily due to the benefit of tax credits for FICA taxes on
certain employees' tips and excess tax benefits from equity-based compensation
arrangements.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Segments
We consider our restaurant concepts and international markets as operating
segments, which reflects how we manage our business, review operating
performance and allocate resources. Resources are allocated and performance is
assessed by our Chief Executive Officer, whom we have determined to be our Chief
Operating Decision Maker. We aggregate our operating segments into two
reportable segments, U.S. and international. The U.S. segment includes all
restaurants operating in the U.S. while restaurants operating outside the U.S.
are included in the international segment.
Revenues for both segments include only transactions with customers and excludes
intersegment revenues. Excluded from Income from operations for U.S. and
international are certain legal and corporate costs not directly related to the
performance of the segments, most stock-based compensation expenses and certain
bonus expenses.
Refer to Note 21 - Segment Reporting of the Notes to Consolidated Financial Statements for a reconciliation of segment income from operations to the consolidated operating results.
U.S. Segment FISCAL YEAR (dollars in thousands) 2019 2018 Revenues Restaurant sales$ 3,634,668 $ 3,634,198 Franchise and other revenues 53,250 53,041 Total revenues$ 3,687,918 $ 3,687,239 Restaurant-level operating margin 14.2 % 14.2 % Income from operations$ 311,666 $ 288,959 Operating income margin 8.5 % 7.8 % Restaurant sales Following is a summary of the change inU.S. segment Restaurant sales for the period indicated: FISCAL YEAR (dollars in millions) 2019 For fiscal year 2018$ 3,634.2 Change from: Comparable restaurant sales (1) 42.8 Restaurant openings (1) 13.7 Divestiture of restaurants through refranchising transactions (32.0 ) Restaurant closures (24.1 ) For fiscal year 2019$ 3,634.6 ____________________
(1) 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.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Income from operations
The increase inU.S. Income from operations generated in 2019 as compared to 2018 was primarily due to: (i) higher comparable restaurant sales, (ii) the impact of certain cost savings initiatives and (iii) lower impairment charges and restaurant closing costs. These increases were partially offset by: (i) labor, commodity and operating expense inflation, (ii) additional expense related to the rollout of delivery services and (iii) the impact of deferred gain amortization no longer recognized upon adoption of the new lease standard. International Segment FISCAL YEAR (dollars in thousands) 2019 2018 Revenues Restaurant sales$ 440,346 $ 426,673 Franchise and other revenues 11,125 12,501 Total revenues$ 451,471 $ 439,174 Restaurant-level operating margin 20.3 % 18.8 % Income from operations$ 44,428 $ 22,001 Operating income margin 9.8 % 5.0 % Restaurant sales Following is a summary of the change in international segment Restaurant sales for the period indicated: FISCAL YEAR (dollars in millions) 2019 For fiscal year 2018$ 426.7 Change from: Restaurant openings 36.3 Comparable restaurant sales 19.7 Effect of foreign currency translation (35.9 ) Restaurant closures (6.5 ) For fiscal year 2019$ 440.3 The increase in international Restaurant sales in 2019 as compared to 2018 was primarily due to sales from 28 new restaurants not included in our comparable restaurant sales base and higher comparable restaurant sales. The increase in international Restaurant sales was partially offset by the effect of foreign currency translation of the Brazilian Real relative to theU.S. dollar and the closing of 18 restaurants sinceDecember 31, 2017 .
Income from operations
The increase in international Income from operations in 2019 as compared to 2018 was primarily due to: (i) lower impairment and restaurant closing costs, (ii) the impact of certain cost savings initiatives, (iii) higher comparable restaurant sales, (iv) improved operating performance by our Abbraccio concept and (v) lower General and administrative expense, primarily from lower severance costs. These increases were partially offset by labor, operating and commodity expense inflation. Non-GAAP Financial Measures In addition to the results provided in accordance withU.S. GAAP, we provide certain non-GAAP measures, which present operating results on an adjusted basis. These are supplemental measures of performance that are not required 42
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
by or presented in accordance with
We believe that our use of non-GAAP financial measures permits investors to assess the operating performance of our business relative to our performance based onU.S. GAAP results and relative to other companies within the restaurant industry by isolating the effects of certain items that may 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 or will not recur. We believe that the disclosure of these non-GAAP measures is useful to investors as they form part of the basis for how our management team and Board of Directors evaluate our operating performance, allocate resources and establish employee incentive plans. These non-GAAP financial measures are not intended to replaceU.S. GAAP financial measures, and they are not necessarily standardized or comparable to similarly titled measures used by other companies. We maintain internal guidelines with respect to the types of adjustments we include in our non-GAAP measures. These guidelines endeavor to differentiate between types of gains and expenses that are reflective of our core operations in a period, and those that may vary from period to period without correlation to our core performance in that period. However, implementation of these guidelines necessarily involves the application of judgment, and the treatment of any items not directly addressed by, or changes to, our guidelines will be considered by our disclosure committee. Refer to the reconciliations of non-GAAP measures for descriptions of the actual adjustments made in the current period and the corresponding prior period. 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. Management 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. For a summary of sales of Company-owned restaurants, refer to Note 3 - Revenue Recognition of the Notes to Consolidated Financial Statements. The following table provides a summary of sales of franchised restaurants, which are not included in our consolidated financial results. Franchise sales within this table do not represent our sales and are presented only as an indicator of changes in the restaurant system, which management believes is important information regarding the health of our restaurant concepts and in determining our royalties and/or service fees. FISCAL YEAR (dollars in millions) 2019 2018
Outback Steakhouse$ 500 $ 513 Carrabba's Italian Grill (1) 40 12 Bonefish Grill 13 14 U.S. Total$ 553 $ 539
International
Outback Steakhouse-South Korea$ 215 $ 208 Other 105 112 International Total$ 320 $ 320 Total franchise sales (2)$ 873 $ 859 ____________________
(1) In 2019, we sold 18Carrabba's Italian Grill restaurants, which are now operated as franchises.
(2) Franchise sales are not included in Total revenues in the Consolidated
Statements of Operations and Comprehensive Income.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 expense. Adjusted restaurant-level operating margin is
Restaurant-level operating margin adjusted for certain items, as noted below.
The following tables show the percentages of certain operating cost financial
statement line items in relation to Restaurant sales:
FISCAL YEAR
2019 2018
U.S. GAAP ADJUSTED (1) U.S. GAAP ADJUSTED (1)
Restaurant sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 31.4 % 31.4 % 31.9 % 31.9 %
Labor and other related 29.6 % 29.6 % 29.5 % 29.5 %
Other restaurant operating 24.1 % 24.2 % 23.8 % 23.9 %
Restaurant-level operating margin 14.9 % 14.7 % 14.8 %
14.7 %
_________________
(1) Includes unfavorable (favorable) adjustments recorded in Other restaurant
operating expense (unless otherwise noted below) for the following
activities, as described in the Adjusted income from operations, Adjusted
net income and Adjusted diluted earnings per share table below for the
periods indicated:
FISCAL YEAR
(dollars in millions) 2019 2018
Legal and other matters (1) $ 4.6 $ -Restaurant and asset impairments and closing costs 4.3 3.4 Restaurant relocations and related costs
(0.6 ) 0.7
$ 8.3 $ 4.1
(1) Includes adjustments of $2.7 million and $1.9 million recorded in
Cost of sales and Other restaurant operating expense,
respectively.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 and Adjusted
diluted earnings per share to their respective most comparable
FISCAL YEAR
(in thousands, except share and per share data) 2019 2018
Income from operations $ 191,090 $ 145,253
Operating income margin 4.6 % 3.5 %
Adjustments:
Severance (1) $ 5,511 $ 3,493 Restaurant and asset impairments and closing costs (2) 3,550 29,542 Restaurant relocations and related costs (3)
3,208 8,647
Legal and other matters (4) (2,996 )
1,068
Total income from operations adjustments$ 9,273 $
42,750
Adjusted income from operations$ 200,363 $
188,003
Adjusted operating income margin 4.8 %
4.6 %
Net income attributable to Bloomin' Brands$ 130,573 $
107,098
Adjustments:
Income from operations adjustments 9,273
42,750
Total adjustments, before income taxes$ 9,273 $
42,750
Adjustment to provision for income taxes (5) (1,263 ) (8,944 ) Net adjustments$ 8,010 $ 33,806 Adjusted net income$ 138,583 $ 140,904 Diluted earnings per share$ 1.45 $
1.14
Adjusted diluted earnings per share$ 1.54 $
1.50
Diluted weighted average common shares outstanding 89,777 94,075
_________________
(1) Relates to severance expense incurred as a result of restructuring
activities.
(2) Represents asset impairment charges and related costs primarily related
to: (i) approved closure and restructuring initiatives, (ii) the
restructuring of certain international markets, (iii) the restructuring of
our Express concept in 2018 and (iv) reclassification of assets to held
for sale in connection with refranchising certain restaurants in 2018.
Also includes gains on the sale of certain surplus properties of $3.8
million in 2019.
(3) Represents asset impairment charges and accelerated depreciation incurred
in connection with our relocation program.
(4) Amount includes the recognition of certain value-added tax credits inrelated to certain legal matters in 2019.
(5) Represents income tax effect of the adjustments for the periods presented.
Liquidity and Capital Resources
LIQUIDITY
Our liquidity sources consist of cash flow from operations, cash and cash equivalents and credit capacity under our credit facilities. We expect to use cash primarily for general operating expenses, lease payments, share repurchases and dividend payments, payments on our debt, remodeling or relocating older restaurants, obligations related to our deferred compensation plans and investments in technology.
We believe that our expected liquidity sources are adequate to fund debt service requirements, lease obligations, capital expenditures and working capital obligations during the 12 months following this filing and beyond. However, our
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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.
Cash and Cash Equivalents - As of December 29, 2019 , we had $67.1 million in
cash and cash equivalents, of which $21.1 million was held by foreign
affiliates. The international jurisdictions in which we have significant cash do
not have any known restrictions that would prohibit repatriation.
As of December 29, 2019 , we had aggregate accumulated foreign earnings of
approximately $84.4 million . This amount primarily consists of historical
earnings from 2017 and prior that were previously taxed in the U.S. under the
2017 Tax Cuts and Jobs Act and post-2017 foreign earnings, which we may
repatriate to the U.S. without additional material U.S. federal income taxes.
These amounts are no longer considered indefinitely reinvested in our foreign
subsidiaries. See Note 19 - Income Taxes of the Notes to Consolidated Financial
Statements for further information regarding our indefinite reinvestment
assertion.
Closure Initiatives - Total aggregate future undiscounted cash expenditures of
$11.3 million to $13.8 million related to lease liabilities for certain closure
initiatives are expected to occur over the remaining lease terms with the final
term ending in January 2029 .
Capital Expenditures - We estimate that our capital expenditures will total
approximately $175 million to $190 million in 2020. 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.
Credit Facilities - As of December 29, 2019 , we had $1.0 billion of outstanding
borrowings under our Senior Secured Credit Facility. We continue to evaluate
whether we will make further payments of our outstanding debt ahead of scheduled
maturities. See Note 13 - Long-term Debt, Net of the Notes to Consolidated
Financial Statements for further information. Following is a summary of our
outstanding credit facilities as of the dates indicated and principal payments
and debt issuance during the periods indicated:
SENIOR SECURED CREDIT FACILITY
TOTAL CREDIT
(dollars in thousands) TERM LOAN A REVOLVING FACILITY FACILITIES
Balance as of December 31, 2017 $ 500,000 $ 600,000 $ 1,100,000
2018 new debt - 478,000 478,000
2018 payments (25,000 ) (478,500 ) (503,500 )
Balance as of December 30, 2018 475,000 599,500 1,074,500
2019 new debt - 670,800 670,800
2019 payments (25,000 ) (671,300 ) (696,300 )
Balance as of December 29, 2019 (1) $ 450,000 $
599,000
Weighted-average interest rate, as of December 29, 2019 3.40 % 3.44 % Principal maturity date November 2022 November 2022 ________________
(1) Subsequent to
borrowings, on our revolving credit facility.
Credit Agreement - OnNovember 30, 2017 , we and OSI, as co-borrowers, entered into a credit agreement (the "Credit Agreement") with a syndicate of institutional lenders, providing for senior secured financing of up to$1.5 billion , consisting of a$500.0 million Term loan A and a$1.0 billion revolving credit facility (the "Senior Secured Credit Facility"), including letter of credit and swing line loan sub-facilities. As ofDecember 29, 2019 , we had$380.8 million in available unused borrowing capacity under our revolving credit facility, net of letters of credit of$20.2 million . 46
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Our Credit Agreement contains mandatory prepayment requirements of 50% of our
annual excess cash flow, as defined in the Credit Agreement. The amount
outstanding required to be prepaid may vary based on our leverage ratio and year
end results. Other than the required minimum amortization premiums of $25.0
million , we do not anticipate any other payments will be required through
December 27, 2020 .
Debt Covenants - Our Credit Agreement contains 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 13 - Long-term Debt, Net of the Notes to Consolidated
Financial Statements for further information.
As of December 29, 2019 and December 30, 2018 , we were in compliance with our
debt covenants. We believe that
we will remain in compliance with our debt covenants during the next 12 months
and beyond.
Cash Flow Hedges of Interest Rate Risk - We have variable-to-fixed interest rate
swap agreements with 12 counterparties to hedge a portion of the cash flows of
our variable rate debt. The swap agreements have an aggregate notional amount of
$550.0 million and mature on November 30, 2022 . We pay a weighted-average fixed
rate of 3.04% on the notional amount and receive payments from the
counterparties based on the one-month LIBOR rate. See Note 16 - Derivative
Instruments and Hedging Activities of the Notes to Consolidated Financial
Statements for further information.
SUMMARY OF CASH FLOWS
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the periods indicated:
FISCAL YEAR
(dollars in thousands) 2019
2018
Net cash provided by operating activities$ 317,603 $ 288,074 Net cash used in investing activities (131,291 ) (177,296 ) Net cash used in financing activities (189,359 ) (164,352 ) Effect of exchange rate changes on cash and cash equivalents (1,631 )
(4,146 )
Net decrease in cash, cash equivalents and restricted cash
Operating activities - Net cash provided by operating activities increased during 2019 as compared to 2018 primarily due to: (i) the timing of collections of receivables, (ii) the timing of payments and (iii) lower purchases of inventory. Net cash provided by operating activities was partially offset by higher income tax and interest payments.
Investing activities - Net cash used in investing activities during 2019 primarily consisted of capital expenditures, partially offset by proceeds from the disposal of property, fixtures and equipment and proceeds from sale-leaseback transactions.
Net cash used in investing activities during 2018 primarily consisted of capital expenditures, partially offset by proceeds from sale-leaseback transactions and proceeds from the disposal of property, fixtures and equipment.
Financing activities - Net cash used in financing activities during 2019 primarily consisted of the following: (i) the repurchase of common stock, (ii) payment of cash dividends on our common stock, (iii) the net repayment of long-term debt and (iv) partner equity plan payments.
Net cash used in financing activities during 2018 primarily consisted of the
following: (i) the repurchase of common stock, (ii) payment of cash dividends on
our common stock, (iii) the net repayment of long-term debt and (iv) partner
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
equity plan payments. Net cash used in financing activities was partially offset by net proceeds from share-based compensation.
FINANCIAL CONDITION
Following is a summary of our current assets, current liabilities and working capital (deficit) as of the periods indicated:
DECEMBER 29, DECEMBER 30,
(dollars in thousands) 2019 2018
Current assets $ 340,468 $ 335,483
Current liabilities 962,021 791,039
Working capital (deficit) (1)
_________________
(1) During fiscal year 2019, net working capital (deficit) was negatively
impacted by the recognition of approximately $170 million of current lease
liabilities as a result of the adoption of the new lease accounting
standard.
Working capital (deficit) includes: (i) Unearned revenue primarily from
unredeemed gift cards of $369.3 million and $342.7 million as of December 29,
2019 and December 30, 2018 , respectively and (ii) current operating lease
liabilities of $171.9 million as of December 29, 2019 , with the corresponding
operating right-of-use assets recorded as non-current on our Consolidated
Balance Sheet. 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 make capital
expenditures.
Deferred Compensation Programs - Certain Restaurant Managing Partners and Chef
Partners in the U.S. ("U.S. Partners ") participate in deferred compensation
programs that are subject to the rules of Section 409A of the Internal Revenue
Code. The deferred compensation obligation due under these plans was $49.0
million and $69.6 million as of December 29, 2019 and December 30, 2018 ,
respectively. 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 these deferred compensation plans. The rabbi
trust is funded through our voluntary contributions. The unfunded obligation was
$9.1 million and $26.3 million as of December 29, 2019 and December 30, 2018 ,
respectively.
We use working capital to fund the deferred compensation plans and currently
expect annual cash funding of $9.0 million to $11.0 million in 2020. Actual
funding of the deferred compensation obligations and future funding requirements
may vary significantly depending on the actual performance compared to targets,
timing of deferred payments of partner contracts, forfeiture rates, number of
partner participants, growth of partner investments and our funding strategy.
Other Compensation Programs -
DIVIDENDS AND SHARE REPURCHASES
Dividends - In 2019 and 2018, we declared and paid quarterly cash dividends of
InFebruary 2020 , our Board declared a quarterly cash dividend of$0.20 per share, payable onMarch 13, 2020 . Future dividend payments are dependent on our earnings, financial condition, capital expenditure requirements, surplus and other factors that our Board considers relevant. 48
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Share Repurchases - Following is a summary of our share repurchase programs as
of
BOARD
SHARE REPURCHASE APPROVAL
PROGRAM DATE AUTHORIZED REPURCHASED CANCELED REMAINING
December 12,
2014 2014 $ 100,000 $ 100,000 $ - $ -
August 3,
2015 2015 $ 100,000 69,999 $ 30,001 $ -
February 12,
2016 2016 $ 250,000 139,892 $ 110,108 $ -
July 26,
July 2016 2016 $ 300,000 247,731 $ 52,269 $ -
April 21,
2017 2017 $ 250,000 195,000 $ 55,000 $ -
February 16,
2018 2018 $ 150,000 113,967 $ 36,033 $ -
February 12,
2019 2019 $ 150,000 106,992 $ - $ 43,008
Total share repurchase programs $ 973,581
The following table presents our dividends and share repurchases for the periods
indicated:
(dollars in thousands) DIVIDENDS PAID SHARE REPURCHASES (1) TOTAL
Fiscal year 2019 $ 35,734 $ 106,992 $ 142,726
Fiscal year 2018 33,312 113,967 147,279
Fiscal year 2017 30,988 272,736 303,724
Fiscal year 2016 31,379 309,887 341,266
Fiscal year 2015 29,332 169,999 199,331
Total $ 160,745 $ 973,581 $ 1,134,326
________________(1) Excludes share repurchases for the settlement of taxes related to equity
awards of $180 , $447 and $770 for fiscal years 2017, 2016 and 2015,
respectively.
Our ability to pay dividends and make share repurchases is dependent on our
ability to obtain funds from our subsidiaries, have access to our revolving
credit facility and the existence of surplus. Based on our Credit Agreement,
restricted dividend payments can be made on an unlimited basis provided we are
compliant with our debt covenants.
OFF-BALANCE SHEET ARRANGEMENTS
None.
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
OTHER MATERIAL COMMITMENTS
Our operating lease obligations, debt obligations, contractual obligations and
commitments as of
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
(dollars in thousands) TOTAL 1 YEAR YEARS YEARS 5 YEARS
Recorded Contractual Obligations
Operating leases (1) $ 2,643,642 $ 179,168 $ 381,854 $ 364,911 $ 1,717,709
Long-term debt (2) 1,048,891 26,462 1,022,429 - -
Deferred compensation and other
partner obligations (3) 70,270 22,440 30,201 9,466 8,163
Other recorded contractual
obligations (4) 23,640 4,559 4,267 1,963 12,851
Unrecorded Contractual
Obligations
Interest (5) 128,150 44,764 83,386 - -
Purchase obligations (6) 312,033 217,668 55,858 35,540 2,967
Total contractual obligations $ 4,226,626 $ 495,061 $ 1,577,995 $ 411,880 $ 1,741,690
____________________
(1) Amounts represent undiscounted future minimum rental commitments under
non-cancelable operating leases. Includes $1.0 billion related to lease
renewal options that are reasonably certain of exercise.
(2) Includes finance lease obligations. Amount is net of unamortized debt
issuance costs and discount of $2.7 million .
(3) Includes deferred compensation obligations, deposits and other accrued
obligations due to our restaurant partners. Timing and amounts of payments
may vary significantly based on employee turnover, return of deposits and
changes to buyout values.
(4) Includes other long-term liabilities, primarily consisting of non-partner
deferred compensation obligations. Unrecognized tax benefits are excluded
from this table since it is not possible to estimate when these future
payments will occur.
(5) Projected future interest payments on long-term debt are based on interest
rates in effect as of
principal payments. Estimated interest expense includes the impact of our
variable-to-fixed interest rate swap agreements.
(6) Purchase obligations include agreements to purchase goods or services that
are enforceable, legally binding and specify all significant terms,
including fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
We have purchase obligations with various vendors that consist primarily
of inventory, advertising, restaurant-level service contracts and
technology.
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 withU.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. Impairment or Disposal of Long-Lived Assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The evaluation is performed at the lowest level of identifiable cash flows independent 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 expected to be generated by the assets 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, this may be an indicator of impairment. An impairment loss is recognized in earnings 50
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
when the asset's carrying value exceeds its estimated fair value. Fair value is
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.
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 evaluate 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 overall financial performance of the 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 unit exceeds the carrying value, the fair value of the reporting unit is calculated. Fair value of a reporting unit is the price a willing buyer would pay for the reporting unit and is estimated by utilizing a weighted average of the income approach, using a discounted cash flow model, and the market approach including the guideline public company method and guideline transaction method. The key estimates and assumptions used in these models are future cash flow estimates, which are heavily influenced by revenue growth rates, operating margins and capital expenditures. The fair value of the trade name is determined through a relief from royalty method.
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 impairment.
The carrying value of goodwill as ofDecember 29, 2019 was$288.4 million , which related to ourU.S. and international reporting units. We performed our annual impairment test in the second quarter of 2019 by utilizing the qualitative approach and determined that there were no events or circumstances to indicate that it was more likely than not that the fair value of our reporting units was less than their carrying values. Sales declines at our restaurants, unplanned increases in 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. Leases - OnDecember 31, 2018 , we adopted Accounting Standards Update ("ASU") No. 2016-02: Leases (Topic 842) ("ASU No. 2016-02") and its applicable amendments (the "new lease standard"), as described in detail within Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Upon adoption, we recognized right-of-use assets of$1.3 billion and corresponding lease liabilities of$1.5 billion . We use judgment to determine the reasonably certain lease term, which in turn, impacts the applicable incremental borrowing rate ("IBR") used to calculate the initial lease liability for each portfolio of leases. We determined the present value of the lease liabilities by using a country specific IBR and applying a single rate to the respective portfolio of leases based on term, regardless of the underlying asset type. The reasonably certain lease term used in the evaluation of existing leases at transition and new leases after adoption of the new lease standard includes renewal option periods only in instances in which the exercise of the renewal option is reasonably certain because failure to exercise such an option would result in an economic penalty. Such an economic penalty would typically result from having to abandon a building or equipment with remaining economic value upon vacating a property. 51
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
We use our estimated IBR, which is derived from information available at the
lease commencement date, in determining the present value of lease payments. We
give consideration to market data as well as publicly available data for
instruments with similar characteristics when calculating our IBR.
At the inception of each lease, we evaluate the property and the lease to
determine whether the lease is an operating lease or a financing lease. This
lease accounting evaluation may require significant judgment in determining the
fair value and useful life of the leased property and the appropriate reasonably
certain lease term. These judgments may produce materially different amounts of
rent expense in a given reporting period than would be reported if different
assumed lease terms were used.
Insurance Reserves - We carry insurance programs with specific retention levels
or high per-claim deductibles for a significant portion of expected losses under
our workers' compensation, general or liquor liability, health, property and
management liability insurance programs. For some programs, we maintain
stop-loss coverage to limit the exposure relating to certain risks.
We record a liability for all unresolved claims and for an estimate of incurred
but not reported claims at the anticipated cost that falls below our specified
retention levels or per-claim deductible amounts. Our liability for insurance
claims was $54.3 million and $55.8 million as of December 29, 2019 and
December 30, 2018 , respectively. 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. Reserves recorded for workers' compensation and general or liquor
liability claims are discounted using the average of the one-year and five-year
risk-free rate of monetary assets that have comparable maturities.
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 discount rate in our insurance claim liabilities as of December 29, 2019 ,
would have affected net earnings by $0.8 million in 2019.
Stock-Based Compensation - We have a stock-based compensation plan that permits
the grant of stock options, stock appreciation rights, 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.
We use the Black-Scholes option pricing model to estimate the weighted-average
grant date fair value of stock options granted. Expected volatility is based on
historical volatility of our stock. The expected term of options granted
represents the period of time that options granted are expected to be
outstanding. Expected term is estimated based on historical exercise experience
of our stock options. Dividend yield is the level of dividends expected to be
paid on our common stock over the expected term of our options. The risk-free
rate for periods within the expected life of the option is based on the U.S.
Treasury yield curve in effect as of the grant date. Forfeitures of share-based
compensation awards are recognized as they occur.
Estimates 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, dividend rate and term of grant in our stock option
pricing model for 2019 would not have a material effect on net income.
Our performance-based share units ("PSUs") require assumptions regarding the
likelihood of achieving certain Company performance criteria set forth in the
award agreements. Assumptions used in our assessment are consistent with our
internal forecasts and operating plans.
If we assumed that the PSU performance conditions for stock-based awards were
not met, stock-based compensation expense would have decreased by $10.5 million
for 2019, including reversal of expense recorded in prior years. If we
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BLOOMIN' BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
assumed that all granted PSU share awards met or will meet their maximum
threshold, expense would have increased by
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. As ofDecember 29, 2019 , tax loss carryforwards and credit carryforwards that do not have a valuation allowance are expected to be recoverable within the applicable statutory expiration periods. We currently expect to utilize general business tax credit carryforwards within a four to six year period. However, our ability to utilize these tax credits could be adversely impacted by, among other items, a future "ownership change" as defined under Section 382 of the Internal Revenue Code. 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 assumptions 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 byU.S. and foreign tax authorities. In determining taxable income, income or loss before taxes is adjusted for differences between local tax laws and generally accepted accounting principles. A tax benefit from an uncertain position is recognized only if it is more likely than not that the position is sustainable based on its technical merits. For uncertain tax positions that do not meet this threshold, we recognize a liability. The liability for unrecognized tax benefits requires significant management judgment regarding exposures about our various tax positions. These assumptions and probabilities are reviewed and updated based upon new information. An unfavorable tax settlement generally requires the use of cash and an increase in the amount of income tax expense we recognize. Revenue Recognition - We sell gift cards to customers in our restaurants, through our websites and through select third parties. A liability is initially established for the value of the gift card when sold. We recognize revenue from gift cards when the card is redeemed by the customer. There is uncertainty when calculating gift card breakage, the amount of gift cards which will not be redeemed, because management is required to make assumptions and to apply judgment regarding the effects of future events. We recognize gift card breakage revenue using estimates based on historical redemption patterns. If actual redemptions vary from the estimated breakage, gift card breakage revenue may differ from the amount recorded. We periodically update our estimates used for breakage and apply that rate to gift card redemptions. A change in our breakage rate estimates by 50 basis points would have resulted in an adjustment in our breakage revenue of$2.0 million for 2019.
Recently Issued Financial Accounting Standards
For a description of recently issued Financial Accounting Standards that we adopted in 2019 and, that are applicable to us and likely to have material effect on our consolidated financial statements, but have not yet been adopted, see Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements of this Report.
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