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. For discussion of our consolidated and segment-level results of operations, non-GAAP measures, and liquidity and capital resources for fiscal year 2018, see our Annual Report on Form 10-K for the year ended December 29, 2019, filed with the SEC on February 26, 2020.
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 27, 2020, we owned and operated 1,157 restaurants and franchised 317 restaurants across 47 states, Guam and 20 countries. We have four founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar.
Executive Summary
Our 2020 financial results include:
•A decrease in Total revenues of (23.4)% to $3.2 billion in 2020 as compared to 2019, primarily due to: (i) significantly lower comparable restaurant sales and franchise revenues principally attributable to the COVID-19 pandemic, (ii) the effect of foreign currency translation of the Brazil Real relative to the U.S. dollar and (iii) the net impact of restaurant closures and openings.
•Loss from operations of $(175.0) million in 2020, as compared to income from operations of $191.1 million in 2019, was primarily due to significantly lower comparable restaurant sales and franchise revenues and costs incurred in connection with the COVID-19 pandemic, and costs incurred in connection with our transformation initiatives. These losses were partially offset by reduced operating costs and a reduction in prep labor hours, offset by higher labor costs.
Business Strategies
In 2021, 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 and improving our credit profile.
•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 South America, with strategic expansion in Brazil, 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 cost savings and productivity initiatives across our businesses.
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Recent Developments - COVID-19
In response to the COVID-19 pandemic, governmental authorities took dramatic action in an effort to slow the spread of the disease. Along with many other restaurant businesses across the country, we temporarily limited our services in the U.S. to carry-out and delivery only beginning March 20, 2020. In early May 2020, we began to reopen our restaurant dining rooms with limited seating capacity in compliance with state and local regulations. As of December 27, 2020, 85% of our restaurant dining rooms were open with many still subject to seating capacity restrictions. The temporary closure of our dining rooms and the limitations on seating capacity in our reopened dining rooms has resulted in significantly reduced traffic in our restaurants.
In response to the COVID-19 pandemic, we have tightly managed expenses while taking steps to secure our liquidity position. See the subsection below entitled “Liquidity and Capital Resources” for further details.
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, (Loss) income from operations, Net (loss) income and Diluted (loss) 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 Food and beverage costs, 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 primarily non-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 (Loss) Income. As a result, restaurant-level operating margin is not
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indicative of our consolidated results of operations and is presented exclusively as a supplement to, and not a substitute for, net (loss) income or (loss) 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 (loss) income from operations, Adjusted net (loss) income and Adjusted diluted (loss) earnings per share—non-GAAP financial measures utilized to evaluate our operating performance, which definitions, usefulness and reconciliations are described 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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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:
Number of restaurants (at end of the period):
U.S.:
Outback Steakhouse
Carrabba’s Italian Grill
Bonefish Grill
Franchised 7 7
Fleming’s Prime Steakhouse & Wine Bar
Other
Company-owned (1) 5 4
International:
Company-owned
Outback Steakhouse - Brazil (2) 109 99
Franchised
Outback Steakhouse—South Korea (3) 95 72
____________________
(1)U.S. Company-owned and International Franchised Other each include three and two fast-casual Aussie Grill locations as of December 27, 2020 and December 29, 2019, respectively.
(2)The restaurant counts for Brazil are reported as of November 30, 2020 and 2019, respectively, to correspond with the balance sheet dates of this subsidiary.
(3)As of December 27, 2020, we had 20 international dark kitchens that offer delivery only. One of these locations was included within Company-owned Other and 19 were included in Franchised Outback Steakhouse - South Korea.
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Results of Operations
The following table sets forth the percentages of certain items in our Consolidated Statements of Operations in relation to Total revenues or Restaurant sales for the periods indicated:
FISCAL YEAR
Revenues
Franchise and other revenues 0.8 1.6
Costs and expenses
Food and beverage costs (1) 31.3 31.4
Labor and other related (1) 32.0 29.6
Other restaurant operating (1) 26.9 24.1
Depreciation and amortization 5.7 4.8
General and administrative 8.0 6.6
Provision for impaired assets and restaurant closings 2.4 0.2
(Loss) income from operations (5.5) 4.6
Loss on modification of debt (*) —
Other income (expense), net * (*)
Interest expense, net (2.1) (1.2)
(Loss) income before (benefit) provision for income taxes (7.6) 3.4
(Benefit) provision for income taxes (2.6) 0.2
Net (loss) income (5.0) 3.2
Less: net (loss) income attributable to noncontrolling interests (*) *
Net (loss) income attributable to Bloomin’ Brands (5.0) % 3.2 %
____________________
(1)As a percentage of Restaurant sales.
*Less than 1/10th of one percent of Total revenues.
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Revenues
RESTAURANT SALES
Following is a summary of the change in Restaurant sales for the period indicated:
FISCAL YEAR
(dollars in millions) 2020
Change from:
Comparable restaurant sales (1) (826.8)
Restaurant closings (66.1)
Effect of foreign currency translation (52.1)
Divestiture of restaurants through refranchising transactions (11.2)
Restaurant openings (1) 25.8
____________________
(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 decrease in Restaurant sales in 2020 as compared to 2019 was primarily due to: (i) significantly lower comparable restaurant sales principally attributable to the COVID-19 pandemic, (ii) the closure of 55 restaurants since December 30, 2018, (iii) the effect of foreign currency translation of the Brazilian Real relative to the U.S. dollar and (iv) domestic refranchising. The decrease in Restaurant sales was partially offset by the opening of 40 new restaurants not included in our comparable restaurant sales base.
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
Average restaurant unit volumes:
U.S.
Fleming’s Prime Steakhouse & Wine Bar $ 3,189 $ 4,422
International
Outback Steakhouse - Brazil (1) $ 1,996 $ 3,684
Operating weeks:
U.S.
Fleming’s Prime Steakhouse & Wine Bar 3,418 3,613
International
____________________
(1)Translated at average exchange rates of 4.85 and 3.93 for 2020 and 2019, respectively.
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Comparable Restaurant Sales, Traffic and Average Check Per Person (Decreases) Increases
Following is a summary of comparable restaurant sales, traffic and average check per person (decreases) increases for the periods indicated:
FISCAL YEAR
Year over year percentage change:
Comparable restaurant sales (stores open 18 months or more):
U.S. (1)
Outback Steakhouse (16.9) % 2.0 %
Carrabba’s Italian Grill (16.4) % 0.1 %
Bonefish Grill (30.1) % 0.1 %
Fleming’s Prime Steakhouse & Wine Bar (29.5) % 0.7 %
Combined U.S. (19.9) % 1.2 %
International
Outback Steakhouse - Brazil (2) (31.4) % 5.8 %
Traffic:
U.S.
Outback Steakhouse (17.6) % (0.7) %
Carrabba’s Italian Grill (14.6) % 0.2 %
Bonefish Grill (3) (20.0) % (1.7) %
Fleming’s Prime Steakhouse & Wine Bar (26.7) % 0.1 %
Combined U.S. (3) (17.6) % (0.6) %
International
Outback Steakhouse - Brazil (21.5) % 3.9 %
Average check per person (4):
U.S.
Outback Steakhouse 0.7 % 2.7 %
Carrabba’s Italian Grill (1.8) % (0.1) %
Bonefish Grill (10.1) % 1.8 %
Fleming’s Prime Steakhouse & Wine Bar (2.8) % 0.6 %
Combined U.S. (2.3) % 1.8 %
International
Outback Steakhouse - Brazil (9.9) % 1.8 %
____________________
(1)Relocated restaurants closed more than 60 days are excluded from comparable restaurant sales until at least 18 months after reopening.
(2)Excludes the effect of fluctuations in foreign currency rates. Includes trading day impact from calendar period reporting.
(3)During 2020, Bonefish Grill replaced guest count with entrée count to measure restaurant traffic. Bonefish Grill and Combined U.S. traffic for 2020 was calculated using the entrée count methodology for Bonefish Grill as if the new methodology was in effect at the start of the fiscal year.
(4)Average check per person includes the impact of menu pricing changes, product mix and discounts.
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Franchise and other revenues
FISCAL YEAR
Franchise revenues (1) $ 21.2 $ 52.2
Franchise and other revenues $ 25.9 $ 64.4
____________________
(1)Represents franchise royalties, advertising fees and initial franchise fees.
Franchisee Deferred Payment Agreement - On December 27, 2020, we entered into an agreement (the “Resolution Agreement”) with Cerca Trova Southwest Restaurant Group, LLC (d/b/a Out West Restaurant Group) and certain of its affiliates (collectively, “Out West”), a franchisee of approximately 90 Outback Steakhouse restaurants in the western United States, primarily in California. Under the terms of the Resolution Agreement, we agreed to permanently waive all past due royalties and advertising fees for the period of February 24, 2020 to July 26, 2020 and defer, among other items, all past due royalties and advertising fees for the period of July 27, 2020 to November 22, 2020 due to the significant impact of the COVID-19 pandemic on Out West’s business. See Note 4 - Revenue Recognition of the Notes to Consolidated Financial Statements for further details regarding the Resolution Agreement.
Following is a summary of franchise and other revenues and comparable restaurant sales for Out West franchised locations for the periods indicated:
FISCAL YEAR
Franchise revenues $ 4.4 $ 27.9
Other revenues 1.0 4.5
Franchise and other revenues $ 5.4 $ 32.4
____________________
(1)Includes Franchise and other revenues recognized from December 30, 2019 through February 23, 2020. No Franchise and other revenues were recognized after February 23, 2020 since collectability was not reasonably assured.
In 2021, we anticipate franchise revenues from Out West to be materially consistent with 2020, assuming a consistent level of COVID-19-related operating restrictions to the level currently in place. However, if government mandated dining room closures are lifted and seating capacity restrictions for the states Out West operates in are relaxed during 2021, our franchise revenues may increase.
COSTS AND EXPENSES
Food and beverage costs
FISCAL YEAR
% of Restaurant sales 31.3 % 31.4 % (0.1) %
Food and beverage costs decreased as a percentage of Restaurant sales in 2020 as compared to 2019 primarily due to 0.4% from increases in average check per person and 0.3% from cost savings attributable to waste reduction initiatives, including menu simplification, partially offset by an increase as a percentage of Restaurant sales of 0.4% from commodity inflation.
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In 2021, we expect commodity costs to remain flat.
Labor and other related expenses
FISCAL YEAR
% of Restaurant sales 32.0 % 29.6 % 2.4 %
Labor and other related expenses include all direct and indirect labor costs incurred in operations, including distribution expense to Restaurant 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 2020 as compared to 2019 primarily due to: (i) 2.3% from decreased restaurant sales, (ii) 0.9% from relief pay primarily for hourly employees impacted by the closure of dining rooms due to COVID-19, offset by employee retention tax credits, and (iii) 0.6% from higher labor costs. These increases were partially offset by a decrease as a percentage of Restaurant sales of 1.4% from lower prep labor hours.
In 2021, we anticipate approximately 3.0% to 3.5% labor cost inflation.
Other restaurant operating expenses
FISCAL YEAR
Other restaurant operating $ 846.6 $ 982.1
% of Restaurant sales 26.9 % 24.1 % 2.8 %
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 Restaurant sales in 2020 as compared to 2019 primarily due to lower sales volumes and costs incurred as a result of the COVID-19 pandemic, including 2.8% from decreased restaurant sales and 1.9% from incremental delivery-related costs. These increases were partially offset by a decrease as a percentage of Restaurant sales of 2.0% from reduced advertising, utilities and operating expense.
Depreciation and amortization
FISCAL YEAR
Depreciation and amortization decreased in 2020 as compared to 2019 primarily due to impairment and the effect of foreign currency translation.
In 2021, we anticipate approximately $165 million to $175 million of depreciation and amortization expense.
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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) 2020
Change from:
Compensation, benefits and payroll tax (11.2)
Travel and entertainment (1) (10.4)
Legal and professional fees (6.8)
Employee stock-based compensation (4.7)
Foreign currency exchange (4.3)
Deferred compensation (3.8)
Incentive compensation (3.2)
Transformational costs (2) 11.0
Expected credit losses and contingent lease liabilities 7.8
Severance 5.0
Other (0.2)
____________________
(1)Includes managing partner conference costs.
(2)Primarily consists of consulting fees incurred in connection with our transformation initiatives.
In 2021, we anticipate approximately $225 million to $230 million of general and administrative expense.
Provision for impaired assets and restaurant closings
FISCAL YEAR
Provision for impaired assets and restaurant closings $ 76.4 $ 9.1 $ 67.3
COVID-19 Restructuring - During 2020, we recognized asset impairment and closure charges of $66.5 million and $3.6 million within the U.S. and international segments, respectively, primarily related to the COVID-19 pandemic. COVID-19-related pre-tax impairments and closure costs include $23.8 million in connection with the closure of 22 U.S. restaurants and from the update of certain cash flow assumptions, including lease renewal considerations. During 2020, we also recognized asset impairment charges related to transformational initiatives of $6.3 million, which were not allocated to our operating segments. See Note 5 - Impairments, Exit Costs and Disposals of the Notes to Consolidated Financial Statements for further information.
International Restructuring - We recognized asset impairment and closure charges of $2.0 million during 2019, related to restructuring of certain international markets, including Puerto Rico within the international segment.
The remaining impairment and closing charges for the periods presented primarily resulted from locations identified for remodel, relocation or closure and certain other assets.
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(Loss) income from operations
FISCAL YEAR
(Loss) income from operations $ (175.0) $ 191.1
% of Total revenues (5.5) % 4.6 % (10.1) %
Loss from operations during 2020 as compared to income from operations during 2019 was primarily due to: (i) significantly lower comparable restaurant sales and franchise revenues, and costs incurred in connection with the COVID-19 pandemic, including asset impairment charges, incremental delivery-related costs and relief pay (net of tax credits), and (ii) certain costs incurred in connection with our transformation initiatives. These losses were partially offset by reduced advertising, utilities and operating expenses and a reduction in prep labor hours, offset by higher labor costs.
Interest expense, net
FISCAL YEAR
The increase in Interest expense, net during 2020 as compared to 2019 was primarily due to interest expense from our convertible senior notes issued in May 2020 and additional draws on our revolving credit facility, partially offset by lower interest rates on our unhedged variable rate debt balances.
See Note 2 - Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements for details regarding the 2021 interest expense impact from the adoption of Accounting Standards Update No. 2020-06.
(Benefit) provision for income taxes
FISCAL YEAR
(Benefit) provision for income taxes $ (80.7) $ 7.6 $ (88.3)
Effective income tax rate 33.7 % 5.3 % 28.4 %
The net increase in the effective income tax rate in 2020 as compared to 2019 was primarily due to the benefit of the tax credits for FICA taxes on certain employees’ tips in 2020 and the 2020 pre-tax book loss.
We have a blended federal and state statutory rate of approximately 26%. The effective income tax rate for 2020 was higher than the blended federal and state statutory rate primarily due to the benefit of tax credits for FICA taxes on certain employees’ tips. The effective income tax rate for fiscal year 2019 was lower than the blended federal and state statutory rate primarily due to the benefit of tax credits for FICA taxes on certain employees’ tips.
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 (“CODM”). We aggregate our operating segments into two reportable segments, U.S. and
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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 (Loss) 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.
During 2020, we recorded $32.4 million of pre-tax charges as a part of transformational initiatives implemented in connection with our previously announced review of strategic alternatives. These costs were primarily recorded within General and administrative expense and Provision for impaired assets and restaurant closings and were not allocated to our segments since our CODM does not consider the impact of transformational initiatives when assessing segment performance.
Refer to Note 23 - Segment Reporting of the Notes to Consolidated Financial Statements for a reconciliation of segment (loss) income from operations to the consolidated operating results.
U.S. Segment
FISCAL YEAR
Revenues
Restaurant-level operating margin 9.8 % 14.2 %
Operating (loss) income margin (0.1) % 8.5 %
Restaurant sales
Following is a summary of the change in U.S. segment Restaurant sales for the period indicated:
FISCAL YEAR
(dollars in millions) 2020
Change from:
Comparable restaurant sales (1) (698.5)
Restaurant closures (63.4)
Divestiture of restaurants through refranchising transactions (11.2)
Restaurant openings (1) 8.0
____________________
(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 decrease in U.S. Restaurant sales in 2020 as compared to 2019 was primarily due to: (i) significantly lower comparable restaurant sales principally attributable to the COVID-19 pandemic, (ii) the closure of 46 restaurants since December 30, 2018 and (iii) the refranchising of certain Company-owned restaurants. The decrease in U.S. Restaurant sales was partially offset by the opening of 11 new restaurants not included in our comparable restaurant sales base.
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(Loss) income from operations
U.S. loss from operations generated during 2020 as compared to income from operations during 2019 was primarily due to significantly lower comparable restaurant sales and franchise revenues, and costs incurred in connection with the COVID-19 pandemic, including asset impairment charges, incremental delivery-related costs and relief pay (net of tax credits). These losses were partially offset by reduced advertising, utilities and operating expenses and a reduction in prep labor hours, offset by higher labor costs.
International Segment
FISCAL YEAR
Revenues
Restaurant-level operating margin 8.3 % 20.3 %
Operating (loss) income margin (4.7) % 9.8 %
Restaurant sales
Following is a summary of the change in international segment Restaurant sales for the period indicated:
FISCAL YEAR
(dollars in millions) 2020
Change from:
Comparable restaurant sales (1) (128.3)
Effect of foreign currency translation (52.1)
Restaurant closures (2.7)
Restaurant openings (1) 17.9
____________________
(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 decrease in international Restaurant sales in 2020 as compared to 2019 was primarily due to significantly lower comparable restaurant sales principally attributable to the COVID-19 pandemic and the effect of foreign currency translation of the Brazil Real relative to the U.S. dollar. The decrease in international Restaurant sales was partially offset by the opening of 29 new restaurants not included in our comparable restaurant sales base.
(Loss) income from operations
International loss from operations generated during 2020 as compared to income from operations during 2019 was primarily due to: (i) significantly lower comparable sales and costs incurred in connection with the COVID-19 pandemic, including incremental delivery-related costs and inventory obsolescence, and (ii) commodity inflation. These decreases were partially offset by: (i) reduced utilities, operating and advertising expenses, (ii) lower labor costs and (iii) lower General and administrative expense, primarily from the impact of foreign currency translation.
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Non-GAAP Financial Measures
In addition to the results provided in accordance with U.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 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 (loss) income from operations and the corresponding margins, (iv) Adjusted net (loss) income and (v) Adjusted diluted (loss) earnings per share.
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 on U.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 replace U.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 4 - Revenue Recognition of the Notes to Consolidated Financial Statements.
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The following table provides a summary of sales of franchised restaurants for the periods indicated, 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
U.S.
Carrabba’s Italian Grill 32 40
Bonefish Grill 8 13
International
Outback Steakhouse-South Korea $ 253 $ 215
International total $ 319 $ 320
Total franchise sales (1) $ 686 $ 873
____________________
(1)Franchise sales are not included in Total revenues in the Consolidated Statements of Operations and Comprehensive (Loss) Income.
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 Food and beverage costs, 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 for the periods indicated:
FISCAL YEAR
U.S. GAAP ADJUSTED (1) U.S. GAAP ADJUSTED (1)
Restaurant-level operating margin 9.9 % 10.2 % 14.9 % 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 (loss) income from operations, Adjusted net (loss) income and Adjusted diluted (loss) earnings per share table below for the periods indicated:
FISCAL YEAR
COVID-19-related costs (1) $ (14.3) $ —
Restaurant relocations and related costs (0.1) (0.6)
Legal and other matters (2) — 4.6
Restaurant and asset impairments and closing costs 2.8 4.3
_________________
(1)Includes $11.0 million of adjustments recorded in Food and beverage costs.
(2)Includes adjustments of $2.7 million and $1.9 million recorded in Food and beverage costs and Other restaurant operating expense, respectively.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Restaurant-level operating margin - The following tables reconcile consolidated and segment (Loss) income from operations and the corresponding margins to Restaurant-level operating income and the corresponding margins for the periods indicated:
Consolidated FISCAL YEAR
Operating (loss) income margin (5.5) % 4.6 %
Less:
Plus:
Provision for impaired assets and restaurant closings 76,354 9,085
Restaurant-level operating margin 9.9 % 14.9 %
U.S. FISCAL YEAR
Operating (loss) income margin (0.1) % 8.5 %
Less:
Plus:
Provision for impaired assets and restaurant closings 66,487 4,703
Restaurant-level operating margin 9.8 % 14.2 %
International FISCAL YEAR
Operating (loss) income margin (4.7) % 9.8 %
Less:
Plus:
Provision for impaired assets and restaurant closings 3,640 2,083
Restaurant-level operating income $ 22,869 $ 89,417
Restaurant-level operating margin 8.3 % 20.3 %
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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Adjusted (loss) income from operations, Adjusted net (loss) income and Adjusted diluted (loss) earnings per share - The following table reconciles Adjusted (loss) income from operations and the corresponding margins, Adjusted (loss) net income and Adjusted diluted (loss) earnings per share to their respective most comparable U.S. GAAP measures for the periods indicated:
FISCAL YEAR
(in thousands, except share and per share data) 2020 2019
Operating (loss) income margin (5.5) % 4.6 %
Adjustments:
Severance and other transformational costs (2) 32,404 5,511
Restaurant relocations and related costs (3) 592 3,208
Restaurant and asset impairments and closing costs (5) (2,797) 3,550
Total (loss) income from operations adjustments $ 124,188 $ 9,273
Adjusted (loss) income from operations $ (50,785) $ 200,363
Adjusted operating (loss) income margin (1.6) % 4.8 %
Net (loss) income attributable to common stockholders $ (162,211) $ 130,573
Adjustments:
(Loss) income from operations adjustments 124,188 9,273
Amortization of debt discount (6) 6,275 —
Total adjustments, before income taxes $ 130,463 $ 9,273
Adjustment to provision for income taxes (7) (32,526) (1,263)
Redemption of preferred stock in excess of carrying value (8) 3,496 —
Adjusted diluted (loss) earnings per share (9) $ (0.69) $ 1.54
Diluted weighted average common shares outstanding (9) 87,468 89,777
_________________
(1)Costs incurred in connection with the economic impact of the COVID-19 pandemic, primarily consisting of fixed asset and right-of-use asset impairments, restructuring charges, inventory obsolescence and spoilage, contingent lease liabilities and current expected credit losses. See Note 3 - COVID-19 Charges of the Notes to Consolidated Financial Statements for additional details regarding the impact of certain COVID-19 pandemic-related charges on our financial results.
(2)Severance, professional fees and other costs incurred as a result of transformational and restructuring activities.
(3)Asset impairment charges and accelerated depreciation incurred in connection with our relocation program.
(4)For 2019, includes the recognition of certain value-added tax credits in Brazil of $4.6 million related to prior years, offset by fees and expenses related to certain legal matters.
(5)Asset impairment charges and related costs during 2019 primarily related to approved closure and restructuring initiatives and the restructuring of certain international markets. Amount also includes a lease termination gain of $2.8 million during 2020 and gains on the sale of certain surplus properties of $3.8 million during 2019.
(6)Amortization of the debt discount related to the issuance of the 2025 Notes. See Note 14 - Convertible Senior Notes of the Notes to Consolidated Financial Statements for details.
(7)Income tax effect of the adjustments for the periods presented.
(8)Consideration paid in excess of the carrying value for the redemption of preferred stock of our Abbraccio subsidiary.
(9)Due to the net loss, the effect of dilutive securities was excluded from the calculation of diluted and adjusted diluted loss per share for fiscal year 2020.
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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Liquidity and Capital Resources
LIQUIDITY
Typically, cash flows generated from operating activities and availability under our revolving credit facility are our principal sources of liquidity, which we use for operating expenses, payments on our debt, remodeling or relocating older restaurants, obligations related to our deferred compensation plans and investment in technology. During 2020, the temporary closure of our dining rooms and the limitations on seating capacity due to the COVID-19 pandemic resulted in significantly reduced traffic in our restaurants which has negatively impacted our operating cashflows.
In response to the COVID-19 pandemic, we have tightly managed expenses while prioritizing support of our workforce, off-premises business and the safe reopening of our restaurant dining rooms. In addition, we have taken several precautionary measures to preserve liquidity, including the following:
•suspended our quarterly cash dividend and stock repurchases;
•significantly reduced marketing and tightly managed other expenses;
•substantially limited capital expenditures to facility maintenance in support of our off-premises business and safe reopening of our restaurant dining rooms; and
•engaged in constructive dialogue with our landlords regarding operating lease agreement amendments or deferrals.
The above actions are in addition to the significant cost cutting measures for 2020 that we announced and implemented earlier in the year.
In May 2020, we issued $230.0 million aggregate principal amount of 5.00% convertible senior notes due in 2025. Net proceeds from the 2025 Notes were approximately $221.6 million, after deducting the initial purchaser’s discounts and commissions and our offering expenses. See “2025 Notes” below for additional details regarding the convertible senior notes.
Subsequent to December 27, 2020, we made payments of $92.0 million on our revolving credit facility. After consideration of payments made on the revolving credit facility in the second half of 2020 and subsequent to 2020, our total outstanding debt approximates pre-COVID-19 levels.
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. 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.
Cash and Cash Equivalents - As of December 27, 2020, we had $110.0 million in cash and cash equivalents, of which $40.4 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 27, 2020, we had aggregate accumulated foreign earnings of approximately $40.2 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 21 - Income Taxes of the Notes to Consolidated Financial Statements for further information regarding our indefinite reinvestment assertion.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Closure and Restructuring Initiatives - Total aggregate future undiscounted cash expenditures of $9.7 million to $11.8 million related to lease liabilities for certain closure and restructuring 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 $170 million to $185 million in 2021. 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. Under the Amended Credit Agreement, we are limited to $100.0 million of aggregate capital expenditures for the four fiscal quarters through March 28, 2021.
Credit Facilities - As of December 27, 2020, we had $1.1 billion of outstanding borrowings under our Senior Secured Credit Facility and 2025 Notes. 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 FACILITIES
TERM LOAN A REVOLVING FACILITY 2025 NOTES
(dollars in thousands)
Weighted-average interest rate, as of December 27, 2020 2.88 % 2.88 % 5.00 %
________________
(1)Subsequent to December 27, 2020, we made payments of $92.0 million on our revolving credit facility.
As of December 27, 2020, we had $533.7 million in available unused borrowing capacity under our revolving credit facility, net of letters of credit of $19.3 million.
Amended Credit Agreement - On November 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.
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.
On May 4, 2020, we and OSI, as co-borrowers, entered into the Amended Credit Agreement which provides relief for the financial covenant to maintain a specified quarterly Total Net Leverage Ratio (“TNLR”). Without such amendment, violation of financial covenants under the original credit agreement could have resulted in default. The Amended Credit Agreement waived the TNLR requirement for the remainder of fiscal year 2020 and requires a TNLR based on a seasonally annualized calculation of Consolidated EBITDA (earnings before interest, taxes,
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
depreciation and amortization and certain other adjustments as defined in the Amended Credit Agreement) not to exceed the following thresholds for the periods indicated:
QUARTERLY PERIOD ENDED MAXIMUM RATIO
________________
(1)Seasonally annualized Consolidated EBITDA calculated as Consolidated EBITDA for the fiscal quarter ending March 28, 2021 divided by 34.1%.
(2)Seasonally annualized Consolidated EBITDA calculated as Consolidated EBITDA for the two consecutive quarters ending June 27, 2021 divided by 58.5%.
(3)Seasonally annualized Consolidated EBITDA calculated as Consolidated EBITDA for the three consecutive quarters ending September 26, 2021 divided by 77.0%.
Under the terms of the Amended Credit Agreement, we are required to meet a minimum monthly liquidity threshold of $125.0 million through March 28, 2021, calculated as the sum of available capacity under our revolving credit facility, unrestricted domestic cash on hand and up to $25.0 million of unrestricted cash held by foreign subsidiaries. We are also prohibited from making certain restricted payments, investments or acquisitions until after September 26, 2021, with an exception for investments in our foreign subsidiaries which are capped at $27.5 million. Repurchasing shares of our outstanding common stock and paying dividends are also restricted until after September 26, 2021.
Interest rates under the Amended Credit Agreement are 275 and 175 basis points above the Eurocurrency Rate and Base Rate, respectively, and letter of credit fees and fees for the daily unused availability under the revolving credit facility are 2.75% and 0.40%, respectively, subject to reversion to rates under the original credit agreement when we are in compliance with the TNLR covenant for the test period ending September 26, 2021. We are also subject to a 0% Eurocurrency floor under the Amended Credit Agreement.
The Amended Credit Agreement contains term loan mandatory prepayment requirements of 50% of our annual excess cash flow (as defined in the Amended Credit Agreement) after December 27, 2020. The amount outstanding required to be prepaid may vary based on our leverage ratio and year end results. Other than the annual required minimum amortization premiums of $37.5 million, we do not anticipate any other payments will be required through December 26, 2021.
As of December 27, 2020 and December 29, 2019, we were in compliance with our debt covenants. We believe that we will remain in compliance with our debt covenants during the 12 months following the issuance of our financial statements.
2025 Notes - On May 8, 2020, we completed a $200.0 million principal amount private offering of 5.00% convertible senior notes due in 2025 and on May 12, 2020, issued an additional $30.0 million principal amount in connection with the option granted to the initial purchasers as part of the offering (collectively, the “2025 Notes”). The 2025 Notes will mature on May 1, 2025, unless earlier converted, redeemed or purchased by us. The 2025 Notes bear cash interest at an annual rate of 5.00%, payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020.
Net proceeds from this offering were approximately $221.6 million, after deducting the initial purchaser’s discounts and commissions and our offering expenses.
The initial conversion rate applicable to the 2025 Notes is 84.122 shares of common stock per $1,000 principal amount of 2025 Notes, or a total of approximately 19.348 million shares for the total $230.0 million principal amount. This initial conversion rate is equivalent to an initial conversion price of approximately $11.89 per share.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
As of December 27, 2020, we had the option to settle conversions by paying or delivering, as applicable, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, based on the applicable conversion rate.
In February 2021, we provided the trustee of the 2025 Notes notice of our irrevocable election under the indenture to settle the principal portion of the 2025 Notes in cash and any excess in shares.
Convertible Note Hedge and Warrant Transactions - In connection with the offering of the 2025 Notes, we entered into convertible note hedge transactions (the “Convertible Note Hedge Transactions”) with certain of the initial purchasers of the 2025 Notes and/or their respective affiliates and other financial institutions (in this capacity, the (“Hedge Counterparties”). Concurrently with our entry into the Convertible Note Hedge Transactions, we also entered into separate warrant transactions with the Hedge Counterparties collectively relating to the same number of shares of our common stock, subject to customary anti-dilution adjustments, and for which we received proceeds that partially offset the cost of entering into the Convertible Note Hedge Transactions (the “Warrant Transactions”).
The portion of the net proceeds from our offering of the 2025 Notes that was used to pay the premium on the Convertible Note Hedge Transactions (calculated after taking into account our proceeds from the Warrant Transactions) was approximately $19.6 million.
See Note 14 - Convertible Senior Notes of the Notes to Consolidated Financial Statements for additional details regarding the convertible senior notes and related hedge and warrant transactions.
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 London Inter-Bank Offered Rate (“LIBOR”) rate. See Note 17 - 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
Net cash provided by operating activities $ 138,849 $ 317,603
Net cash used in investing activities (76,639) (131,291)
Net cash used in financing activities (16,773) (189,359)
Effect of exchange rate changes on cash and cash equivalents (2,174) (1,631)
Operating activities - Net cash provided by operating activities decreased during 2020 as compared to 2019 primarily due to a decrease in net restaurant sales and lower gift card sales. These decreases were partially offset by: (i) decreased variable operating costs as a result of lower net restaurant sales, offset by relief payments made to employees as a result of the COVID-19 pandemic, (ii) deferral of payroll tax payments as a result of the CARES Act, (iii) the timing of collections of receivables and payments made, (iv) lower inventory purchases and (v) lower income tax payments.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Investing activities - The decrease in net cash used in investing activities during 2020 as compared to 2019 was primarily due to: (i) lower capital expenditures from liquidity management in response to the COVID-19 pandemic and restrictions under the Amended Credit Agreement and (ii) an increase in cash withdrawn from Company-owned life insurances policies to settle deferred compensation obligations, partially offset by lower proceeds from the disposal of property, fixtures and equipment and from sale-leaseback transactions.
Financing activities - The decrease in net cash used in financing activities during 2020 as compared to 2019 was primarily due to: (i) proceeds from issuance of convertible senior notes and related warrant transactions and (ii) a decrease in the repurchase of our common stock and payment of dividends on our common stock from liquidity management in response to the COVID-19 pandemic and restrictions under the Amended Credit Agreement. These decreases were partially offset by increases primarily due to: (i) increased repayments on our revolving credit facility, net of drawdowns, (ii) premium payments for Convertible Note Hedge Transactions and (iii) issuance costs and financing fees in connection with our 2025 Notes and Amended Credit Agreement.
FINANCIAL CONDITION
Following is a summary of our current assets, current liabilities and working capital (deficit) as of the periods indicated:
Working capital (deficit) includes: (i) Unearned revenue primarily from unredeemed gift cards of $381.6 million and $369.3 million as of December 27, 2020 and December 29, 2019, respectively and (ii) current operating lease liabilities of $176.8 million and $171.9 million as of December 27, 2020 and December 29, 2019, respectively, with the corresponding operating right-of-use assets recorded as non-current on our Consolidated Balance Sheets. 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 $28.1 million and $49.0 million as of December 27, 2020 and December 29, 2019, 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 obligation for U.S. Partners’ deferred compensation was fully funded as of December 27, 2020. From time to time, we may utilize operating cash for short periods to fund deferred compensation plan distributions due to restrictions on the timing of withdrawals from the “rabbi” trust account, however, once available for withdrawal, funds from the “rabbi” trust may be returned to operating cash.
Other Compensation Programs - Certain U.S. Partners participate in a non-qualified long-term compensation program that we fund as the obligation for each participant becomes due.
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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
DIVIDENDS AND SHARE REPURCHASES
During the first quarter of 2020, we declared and paid dividends of $0.20 per share. In May 2020, we entered into an Amended Credit Agreement, the terms of which contain certain restrictions on cash dividends and share repurchases until after September 26, 2021 and we are compliant with our financial covenants. In 2019, we declared and paid quarterly cash dividends of $0.10 per share.
Following is a summary of our share repurchase programs as of December 27, 2020 (dollars in thousands):
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
________________
(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.
OFF-BALANCE SHEET ARRANGEMENTS
We guarantee certain lease agreements primarily related to divested restaurant properties in circumstances where we have assigned our lease interest. See Note 22 - Commitments and Contingencies for additional details regarding our lease guarantees.
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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 December 27, 2020 are summarized in the following table:
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
Unrecorded Contractual Obligations
____________________
(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 and convertible senior notes. Amount is not reduced by unamortized debt discount, debt issuance costs and finance lease interest totaling $67.9 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 December 27, 2020 and assume only scheduled 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, technology, advertising and restaurant-level service contracts.
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.
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
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
are less than the carrying amount, this may be an indicator of impairment. An impairment loss is recognized in earnings 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.
Goodwill and Indefinite-Lived Intangible Assets - Goodwill and indefinite-lived intangible assets are tested for impairment annually in the second fiscal quarter, or whenever events or changes in circumstances indicate that the carrying amount may not be 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 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, when appropriate, 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 of December 27, 2020 was $271.2 million. The COVID-19 outbreak was considered a triggering event during the first quarter of 2020 and therefore we performed a quantitative assessment for our four U.S. and three international reporting units. Based on this assessment, which utilized a discounted cash flow analysis, we recorded full impairment of goodwill related to our Hong Kong reporting unit of $2.0 million, within the international segment during the first quarter of 2020. We also determined the fair value of each remaining reporting unit was more than 100% in excess of its carrying value with the exception of one international reporting unit, which had a goodwill carrying value of $69.3 million and a reporting unit fair value approximately 39% in excess of its reporting unit carrying value.
We also performed our annual impairment test in the second quarter of 2020 by utilizing the quantitative approach with the same assumptions and analysis used in the first quarter and determined that there were no additional 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. Our interim and annual impairment tests utilized a discounted cash flows model, using significant assumptions to project future cash flows including operating margins, to estimate the fair value of our reporting units.
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 - 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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.
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 $52.8 million and $54.3 million as of December 27, 2020 and December 29, 2019, respectively. In establishing our reserves, we consider certain actuarial assumptions and judgments regarding economic conditions, and the frequency and severity of claims. 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 increase to the discount rate and a decrease to a zero discount rate in our insurance claim liabilities as of December 27, 2020, would have affected net earnings by $0.8 million and $(0.4) million, respectively, in 2020.
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.
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 2020 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 $8.1 million for 2020, including reversal of expense recorded in prior years. If we assumed that all granted PSU share awards met or will meet their maximum threshold, expense would have increased by $5.1 million for 2020.
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 of December 27, 2020, 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 10-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 by U.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 $1.5 million for 2020.
Recently Issued Financial Accounting Standards
For a description of recently issued Financial Accounting Standards that we adopted in 2020 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.
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BLOOMIN’ BRANDS, INC.
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
We are exposed to market risk from fluctuations in interest rates, which could affect our consolidated balance sheet, earnings and cash flows. Stockholders’ equity can be adversely affected by changing interest rates, as after-tax changes in the fair value of interest rate swaps designated as cash flow hedges are reflected as increases and decreases to a component of stockholders’ equity.
We manage our exposure to market risk through regular 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 17 - Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements for further information.
As of December 27, 2020, our interest rate risk was primarily from variable interest rate changes on our Senior Secured Credit Facility. To manage the risk of fluctuations in variable interest rate debt, we have interest rate swaps for an aggregate notional amount of $550.0 million that mature on November 30, 2022.
We utilize valuation models to estimate 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 “shock” and continue to increase or decrease at a consistent level above or below the LIBOR curve.
(dollars in thousands) INCREASE DECREASE
Change in fair value (1):
Change in annual interest expense (2):