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 2020, see our Annual Report on Form 10-K for the year ended December 26, 2021, filed with the SEC on February 23, 2022.
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 25, 2022, we owned and operated 1,186 full-service restaurants and off-premises only kitchens and franchised 321 full-service restaurants and off-premises only kitchens across 47 states, Guam and 13 countries. We have four founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse & Wine Bar.
Financial Highlights - Our financial highlights for 2022 include the following:
•U.S. combined and Outback Steakhouse comparable restaurant sales of 4.0% and 2.8%, respectively;
•Increase in Total revenues of 7.1%, as compared to 2021;
•Operating income and restaurant-level operating margins of 7.5% and 15.6%, respectively, as compared to 7.5% and 16.5%, respectively for 2021;
•Operating income of $330.4 million as compared to $309.0 million in 2021; and
•Diluted earnings per share of $1.03 as compared to $2.00 in 2021.
Business Strategies -In 2023, 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, upgrade kitchen equipment and technology, 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 share repurchases and dividends.
•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.
•Accelerate Growth Opportunities. We believe a substantial development opportunity remains for our concepts in the U.S. and internationally through existing geography fill-in and market expansion. We will continue to pursue U.S. fill-in opportunities in key states such as Florida and Texas with Outback Steakhouse, and California and Florida with Fleming’s Prime Steakhouse & Wine Bar. We will also focus on 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
Macroeconomic Conditions - The combination of macroeconomic and other factors have put considerable pressure on the casual dining industry. The ongoing impacts of inflation, rising interest rates, reduced disposable consumer income, access to credit, other national, regional and local regulatory and economic conditions and consumer confidence have had a negative effect on discretionary consumer spending.
Should the macroeconomic and other conditions persist, we will continue to face increased pressure with respect to our pricing, traffic levels and commodity costs. We believe that in this environment, we need to maintain our focus on value and innovation as well as refreshing our restaurant base to continue to drive sales.
Key Financial 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 and the benefit of value added tax exemptions in Brazil) per restaurant to measure changes in customer traffic, pricing and development of the brand;
•Comparable restaurant sales—year-over-year comparison of the change in sales volumes (excluding gift card breakage and the benefit of value added tax exemptions in Brazil) 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 (loss) from operations, Net income (loss) and Diluted earnings (loss) per share—financial measures utilized to evaluate our operating performance.
Restaurant-level operating margin is a non-GAAP financial measure 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 expenses and Other restaurant operating expenses (including advertising expenses) represent, in each case as such items are reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss). 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 of which 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; and
(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 (Loss). 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 (loss) or Income (loss) from operations. In addition, our presentation of
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restaurant-level operating margin may not be comparable to similarly titled measures used by other companies in our industry; and
•Adjusted restaurant-level operating margin, Adjusted income from operations, Adjusted net income and Adjusted diluted 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.
Selected Operating Data - The table below presents the number of our full-service restaurants in operation as of the periods indicated:
U.S.
Outback Steakhouse
Carrabba’s Italian Grill
Bonefish Grill
Franchised 7 7
Fleming’s Prime Steakhouse & Wine Bar
Aussie Grill
Company-owned 7 5
International
Company-owned
Outback Steakhouse - Brazil (1) 139 122
Franchised
Outback Steakhouse - South Korea 86 78
System-wide total - Company-owned 1,185 1,165
System-wide total - Franchised 286 289
____________________
(1)The restaurant counts for Brazil, including Abbraccio and Aussie Grill restaurants within International Company-owned Other, are reported as of November 30, 2022 and 2021, respectively, to correspond with the balance sheet dates of this subsidiary.
(2)International Company-owned Other included four and two Aussie Grill locations as of December 25, 2022 and December 26, 2021, respectively. International Franchised Other included four and three Aussie Grill locations as of December 25, 2022 and December 26, 2021, respectively.
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The table below presents the number of our off-premises only kitchens in operation as of the periods indicated:
U.S.
Company-owned 1 3
International
Company-owned — 1
Franchised - South Korea 35 40
System-wide total 36 44
____________________
(1)Excludes virtual concepts that operate out of existing restaurants and sports venue locations.
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 1.4 1.5
Costs and expenses
Food and beverage costs (1) 31.8 30.3
Labor and other related (1) 28.2 28.4
Other restaurant operating (1) 24.5 24.8
Depreciation and amortization 3.8 4.0
General and administrative 5.3 6.0
Provision for impaired assets and restaurant closings 0.1 0.3
Total costs and expenses 92.5 92.5
Income from operations 7.5 7.5
Loss on extinguishment and modification of debt (2.5) (0.1)
Loss on fair value adjustment of derivatives, net (0.4) —
Other (expense) income, net (*) *
Interest expense, net (1.2) (1.4)
Income before provision for income taxes 3.4 6.0
Provision for income taxes 0.9 0.6
Less: net income attributable to noncontrolling interests 0.2 0.2
Net income attributable to Bloomin’ Brands 2.3 % 5.2 %
____________________
(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) 2022
Change from:
Comparable restaurant sales (1) 245.3
Restaurant openings (1) 65.7
Effect of foreign currency translation 11.6
Restaurant closures (1) (31.0)
____________________
(1)Summation of quarterly changes for restaurant openings, closures and comparable restaurant sales will not total to annual amounts as the restaurants that meet the definition of each will differ each period based on when the restaurant opened or closed.
The increase in Restaurant sales in 2022 as compared to 2021 was primarily due to: (i) higher comparable restaurant sales, (ii) the opening of 64 new restaurants not included in our comparable restaurant sales base and (iii) the effect of foreign currency translation of the Brazilian Real relative to the U.S. dollar. The increase in Restaurant sales was partially offset by the closure of 25 restaurants since December 27, 2020.
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 $ 5,845 $ 5,208
International
Outback Steakhouse - Brazil (1) $ 3,067 $ 2,286
Operating weeks:
U.S.
Fleming’s Prime Steakhouse & Wine Bar 3,331 3,321
International
____________________
(1)Translated at average exchange rates of 5.19 and 5.33 for 2022 and 2021, respectively. Excludes the benefit of the Brazil tax legislation discussed in Note 21 - Income Taxes of the Notes to Consolidated Financial Statements.
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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
Year over year percentage change:
Comparable restaurant sales (restaurants open 18 months or more):
U.S. (1)
Outback Steakhouse 2.8 % 24.2 %
Carrabba’s Italian Grill 3.4 % 32.2 %
Bonefish Grill 4.5 % 40.6 %
Fleming’s Prime Steakhouse & Wine Bar 12.0 % 60.9 %
Combined U.S. 4.0 % 30.5 %
International
Outback Steakhouse - Brazil (2) 38.3 % 28.7 %
Traffic:
U.S.
Outback Steakhouse (6.3) % 18.1 %
Carrabba’s Italian Grill (4.3) % 24.6 %
Bonefish Grill (4.2) % 24.3 %
Fleming’s Prime Steakhouse & Wine Bar 3.0 % 41.7 %
Combined U.S. (5.3) % 20.7 %
International
Outback Steakhouse - Brazil 23.6 % 23.5 %
Average check per person (3):
U.S.
Outback Steakhouse 9.1 % 6.1 %
Carrabba’s Italian Grill 7.7 % 7.6 %
Bonefish Grill 8.7 % 16.3 %
Fleming’s Prime Steakhouse & Wine Bar 9.0 % 19.2 %
Combined U.S. 9.3 % 9.8 %
International
Outback Steakhouse - Brazil 14.6 % 5.6 %
____________________
(1)Relocated restaurants closed more than 60 days are excluded from comparable restaurant sales until at least 18 months after reopening.
(2)Includes trading day impact from calendar period reporting. Excludes the effect of fluctuations in foreign currency rates and the benefit of the Brazil tax legislation discussed in Note 21 - Income Taxes of the Notes to Consolidated Financial Statements.
(3)Includes the impact of menu pricing changes, product mix and discounts.
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Franchise and other revenues
FISCAL YEAR
Franchise revenues (1) $ 49.7 $ 45.5
Franchise and other revenues $ 63.8 $ 61.3
____________________
(1)Represents franchise royalties, advertising fees and initial franchise fees.
(2)Includes a $3.1 million benefit in 2021 from the recognition of recoverable Program of Social Integration (“PIS”) and Contribution for the Financing of Social Security (“COFINS”) taxes in connection with favorable court rulings in Brazil regarding the calculation methodology and taxable base.
COSTS AND EXPENSES
Food and beverage costs
FISCAL YEAR
% of Restaurant sales 31.8 % 30.3 % 1.5 %
Food and beverage costs increased as a percentage of Restaurant sales in 2022 as compared to 2021 primarily due to 3.5% from commodity inflation, partially offset by a decrease as a percentage of Restaurant sales of 2.0% from increases in average check per person, primarily driven by increases in menu pricing.
In 2023, we anticipate mid single digits commodity inflation, with approximately 60% of our estimated annual food purchases currently covered by fixed contracts and the remainder subject to floating market prices.
Labor and other related expenses
FISCAL YEAR
% of Restaurant sales 28.2 % 28.4 % (0.2) %
Labor and other related expenses include all direct and indirect labor costs incurred in operations, including distribution expense to Restaurant Managing Partners and other field incentive compensation expenses. Labor and other related expenses decreased as a percentage of Restaurant sales in 2022 as compared to 2021 primarily due to: (i) 1.9% from leveraging increased restaurant sales due to increases in average check per person and lapping the impact of COVID-19, primarily in Brazil and (ii) 0.4% from lower insurance costs. These decreases were partially offset by an increase as a percentage of Restaurant sales of 2.0% from higher labor cost primarily due to wage rate inflation.
In 2023, we anticipate mid single digits labor cost inflation.
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Other restaurant operating expenses
FISCAL YEAR
% of Restaurant sales 24.5 % 24.8 % (0.3) %
In August 2021, we entered into the Royalty Termination Agreement with the Carrabba’s Founders for $61.9 million in cash. See Note 22 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional details.
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 decreased as a percentage of Restaurant sales in 2022 as compared to 2021 primarily due to 1.5% from lapping the Carrabba’s Italian Grill royalty termination and 1.3% from leveraging increased restaurant sales due to increases in average check per person and lapping the impact of COVID-19, primarily in Brazil. These decreases were partially offset by increases as a percentage of Restaurant sales of: (i) 1.5% from higher operating expenses including utilities, primarily due to inflation, (ii) 0.7% from higher advertising expense and (iii) 0.4% from an increase in reserves for certain collective action wage and hour lawsuits.
Depreciation and amortization
FISCAL YEAR
Depreciation and amortization $ 169.6 $ 163.4 $ 6.2
Depreciation and amortization increased in 2022 as compared to 2021 primarily due to additional depreciation expense related to technology projects, upgraded kitchen equipment and restaurant openings and relocations.
General and administrative
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 change in General and administrative expense for the period indicated:
FISCAL YEAR
(dollars in millions) 2022
Change from:
Incentive compensation (13.0)
Employee stock-based compensation (7.9)
Severance (4.7)
Compensation, benefits and payroll tax 7.6
Travel and entertainment 5.1
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Provision for impaired assets and restaurant closings
FISCAL YEAR
Provision for impaired assets and restaurant closings $ 6.0 $ 13.7 $ (7.7)
Impairment and closure charges during the periods presented resulted primarily from locations identified for closure or relocation.
Income from operations
FISCAL YEAR
% of Total revenues 7.5 % 7.5 % — %
The increase in Income from operations generated during 2022 as compared to 2021 was primarily due to: (i) increases in average check per person, (ii) lapping the Carrabba’s Italian Grill royalty termination, (iii) lapping the impact of COVID-19, primarily in Brazil and (iv) lower insurance costs. These increases were partially offset by: (i) commodity inflation, (ii) higher labor cost, primarily due to wage rate inflation, (iii) higher operating expenses including utilities, primarily due to inflation, and (iv) an increase in advertising costs.
In September 2022, our Brazilian subsidiary received a preliminary injunction authorizing it to benefit from the exemptions enacted by Law 14,148/2021 which provides for emergency and temporary actions that grant certain industries a 100% exemption from PIS and COFINS and income taxes for a five-year period. Income from operations for 2022 was not materially impacted by this legislation. During 2023, we expect a benefit to Income from operations of approximately $17 million in connection the PIS and COFINS tax exemptions under this legislation. See Note 21 - Income Taxes of the Notes to Consolidated Financial Statements for further information.
Loss on extinguishment and modification of debt and Loss on fair value adjustment of derivatives, net
In connection with the repurchase of $125.0 million of the outstanding 2025 Notes (the “2025 Notes Partial Repurchase”), which is described in further detail within Note 14 - Convertible Senior Notes of the Notes to Consolidated Financial Statements, we recognized a loss on extinguishment of debt of $104.7 million and a loss on fair value adjustment of derivatives, net, of $17.7 million during 2022.
Interest expense, net
FISCAL YEAR
Interest expense, net $ 53.2 $ 57.6 $ (4.4)
The decrease in Interest expense, net during 2022 as compared to 2021 was primarily due to the repayment of Term Loan A in April 2022 and the 2025 Notes Partial Repurchase in May 2022. These decreases were partially offset by increases in interest expense from: (i) the issuance of the 2029 Notes in April 2021, (ii) higher balances on our revolving credit facility and (iii) higher interest rates on the unhedged portion of our variable rate debt.
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Provision for income taxes
FISCAL YEAR
Income before provision for income taxes $ 151.9 $ 249.3 $ (97.4)
Provision for income taxes $ 42.7 $ 26.4 $ 16.3
Effective income tax rate 28.1 % 10.6 % 17.5 %
The net increase in the effective income tax rate in 2022 as compared to 2021 was primarily due to the non-deductible losses associated with the 2025 Notes Partial Repurchase recorded during 2022.
We have a blended federal and state statutory rate of approximately 26%. The effective income tax rate in 2022 was higher than the blended federal and state statutory rate primarily due to the non-deductible losses associated with the 2025 Notes Partial Repurchase recorded during 2022, partially offset by the benefit of FICA tax credits on certain employees’ tips. The effective income tax rate in 2021 was lower than the blended federal and state statutory rate primarily due to the benefit of FICA tax credits on certain employees’ tips.
A restaurant company employer may claim a credit against its federal income taxes for FICA taxes paid on certain tipped wages (the “FICA tax credit”). The level of FICA tax credits is primarily driven by U.S. Restaurant sales and is not impacted by costs incurred that may reduce pre-tax income.
Provision for income taxes for 2022 was not materially impacted by the Brazilian tax legislation discussed above. During 2023, we expect to generate an income tax benefit of approximately $6 million in connection with the tax exemptions under this legislation. See Note 21 - Income Taxes of the Notes to Consolidated Financial Statements for further information.
Segments
We consider each of 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 exclude 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, certain insurance expenses and certain bonus expenses.
Refer to Note 23 - Segment Reporting of the Notes to Consolidated Financial Statements for reconciliations of segment income (loss) from operations to the consolidated operating results.
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U.S. Segment
FISCAL YEAR
Revenues
Operating income margin 10.4 % 11.8 %
Restaurant-level operating margin 15.4 % 17.1 %
Restaurant sales
Following is a summary of the change in U.S. segment Restaurant sales for the period indicated:
FISCAL YEAR
(dollars in millions) 2022 (1)
Change from:
Comparable restaurant sales 150.0
Restaurant openings 29.1
Restaurant closures (31.0)
____________________
(1)Summation of quarterly changes will not total to annual amounts as the restaurants that meet the definition of each change category will differ each period based on when the restaurant opened or closed.
The increase in U.S. Restaurant sales in 2022 as compared to 2021 was primarily due to higher comparable restaurant sales and the opening of 21 new restaurants not included in our comparable restaurant sales base. These increases were partially offset by the closure of 24 restaurants since December 27, 2020.
Income from operations
The decrease in U.S. Income from operations generated during 2022 as compared to 2021 was primarily due to: (i) commodity inflation, (ii) higher labor cost, primarily due to wage rate inflation, (iii) higher operating expenses including utilities and (iv) higher advertising expense. These decreases were partially offset by higher comparable sales, primarily due to increases in average check per person, and lapping the Carrabba’s Italian Grill royalty termination.
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International Segment
FISCAL YEAR
Revenues
Operating income margin 11.4 % 4.6 %
Restaurant-level operating income $ 90,663 $ 43,927
Restaurant-level operating margin 18.5 % 12.7 %
Restaurant sales
Following is a summary of the change in international segment Restaurant sales for the period indicated:
FISCAL YEAR
(dollars in millions) 2022
Change from:
Comparable restaurant sales (1) 95.3
Restaurant openings (1) 36.6
Effect of foreign currency translation 11.6
____________________
(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 each will differ each period based on when the restaurant opened.
The increase in international Restaurant sales in 2022 as compared to 2021 was primarily due to: (i) higher comparable restaurant sales in Brazil, (ii) the opening of 43 new restaurants not included in our comparable restaurant sales base and (iii) the effect of foreign currency translation of the Brazil Real relative to the U.S. dollar.
Income from operations
The increase in international Income from operations generated during 2022 as compared to 2021 was primarily due to the recovery of in-restaurant dining in Brazil and increases in average check per person. These increases were partially offset by decreases primarily due to commodity and labor inflation.
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) Restaurant-level and adjusted restaurant-level operating income and the corresponding margins, (ii) Adjusted income from operations and the corresponding margins, (iii) Adjusted net income, (iv) Adjusted diluted earnings per share and (v) system-wide sales.
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
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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 our Board 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.
Consolidated restaurant-level operating income and adjusted restaurant-level operating income and corresponding margins non-GAAP reconciliations - 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 expenses and Other restaurant operating expenses. Adjusted restaurant-level operating margin is Restaurant-level operating margin adjusted for certain items. The following table reconciles consolidated Income from operations and the corresponding margin to restaurant-level operating income and adjusted restaurant-level operating income and the corresponding margins for the periods indicated:
Consolidated FISCAL YEAR
Operating income margin 7.5 % 7.5 %
Less:
Plus:
Provision for impaired assets and restaurant closings 5,964 13,737
Restaurant-level operating margin 15.6 % 16.5 %
Adjustments:
Royalty termination expense (1) — 61,880
Total restaurant-level operating income adjustments 5,900 64,641
Adjusted restaurant-level operating income $ 682,841 $ 735,051
Adjusted restaurant-level operating margin 15.7 % 18.1 %
_________________
(1)Payment to the Carrabba’s Founders in connection with the Royalty Termination Agreement. See Note 22 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional details regarding the Royalty Termination Agreement.
(2)For 2022, includes an increase in reserves for certain collective action wage and hour lawsuits during the fourth quarter. See Note 22 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for additional details relating to the lawsuits. For 2021, includes an accrual for Imposto sobre Serviços (“ISS”), a Brazilian municipal service tax, in connection with royalties from our Brazilian subsidiary over the past five years, including related penalties and interest, as a result of an unfavorable Brazilian Supreme Court ruling.
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Segment restaurant-level and adjusted restaurant-level operating margin non-GAAP reconciliations - The following tables reconcile segment Income from operations and the corresponding margin to segment restaurant-level operating income and adjusted restaurant-level operating income and the corresponding margins for the periods indicated:
U.S. FISCAL YEAR
Operating income margin 10.4 % 11.8 %
Less:
Plus:
Provision for impaired assets and restaurant closings 4,420 12,368
Restaurant-level operating margin 15.4 % 17.1 %
Adjustments:
Royalty termination expense (1) — 61,880
Total restaurant-level operating income adjustments — 61,880
Adjusted restaurant-level operating income $ 595,997 $ 696,560
Adjusted restaurant-level operating margin 15.4 % 18.8 %
_________________
(1)Payment to the Carrabba’s Founders in connection with the Royalty Termination Agreement.
International FISCAL YEAR
Operating income margin 11.4 % 4.6 %
Less:
Plus:
Provision for impaired assets and restaurant closings 1,537 1,100
Restaurant-level operating income $ 90,663 $ 43,927
Restaurant-level operating margin 18.5 % 12.7 %
Adjustments:
Legal and other matters (1) — 2,761
Total restaurant-level operating income adjustments — 2,761
Adjusted restaurant-level operating income $ 90,663 $ 46,688
Adjusted restaurant-level operating margin 18.5 % 13.5 %
_________________
(1)Includes an accrual for ISS, a Brazilian municipal service tax, in connection with royalties from our Brazilian subsidiary over the past five years, including related penalties and interest, as a result of an unfavorable Brazilian Supreme Court ruling.
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Adjusted restaurant-level operating margin non-GAAP reconciliations (continued) -The following table presents the percentages of certain operating cost financial statement line items in relation to Restaurant sales for the periods indicated:
FISCAL YEAR
REPORTED ADJUSTED (1) REPORTED ADJUSTED (1)
Restaurant-level operating margin 15.6 % 15.7 % 16.5 % 18.1 %
_________________
(1)See the Consolidated restaurant-level operating income and adjusted restaurant-level operating income and corresponding margins non-GAAP reconciliations table above for details regarding the restaurant-level operating margin adjustments. All restaurant-level operating margin adjustments for the periods presented were recorded within Other restaurant operating expense.
Adjusted income from operations non-GAAP reconciliations - The following table reconciles Income from operations and the corresponding margin to adjusted income from operations and the corresponding margin for the periods indicated:
FISCAL YEAR
Operating income margin 7.5 % 7.5 %
Adjustments:
Total restaurant-level operating margin adjustments (1) 5,900 64,641
Severance and other transformational costs (2) — 2,764
Legal and other matters (3) — (3,133)
Total income from operations adjustments 5,900 64,272
Adjusted operating income margin 7.6 % 9.1 %
_________________
(1)See the Consolidated restaurant-level operating income and adjusted restaurant-level operating income and corresponding margins non-GAAP reconciliations table above for details regarding the restaurant-level operating income adjustments.
(2)Severance, professional fees and other costs incurred as a result of transformational and restructuring activities.
(3)Includes the recognition of recoverable PIS and COFINS taxes, including accrued interest within other revenues as a result of favorable court rulings in Brazil.
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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Adjusted net income and Adjusted diluted earnings per share non-GAAP reconciliations - The following table reconciles Diluted net income attributable to common stockholders to adjusted net income and adjusted diluted earnings per share for the periods indicated:
FISCAL YEAR
(in thousands, except share and per share data) 2022 2021
Diluted net income attributable to common stockholders $ 101,907 $ 215,900
Adjustments:
Income from operations adjustments (2) 5,900 64,272
Loss on extinguishment and modification of debt (3) 107,630 2,073
Loss on fair value adjustment of derivatives, net (3) 17,685 —
Adjustment to provision for income taxes (4) (263) (21,222)
Diluted earnings per share $ 1.03 $ 2.00
Adjusted diluted earnings per share (5) $ 2.52 $ 2.70
Diluted weighted average common shares outstanding 98,512 107,803
Adjusted diluted weighted average common shares outstanding (5) 92,423 96,426
_________________
(1)Adjustment for interest expense related to the 2025 Notes weighted for the portion of the period prior to our election under the 2025 Notes indenture to settle the principal portion of the 2025 Notes in cash.
(2)See the Adjusted income from operations non-GAAP reconciliations table above for details regarding Income from operations adjustments.
(3)For 2022, includes losses in connection with the 2025 Notes Partial Repurchase and Amended Credit Agreement. See Note 14 - Convertible Senior Notes and Note 13 - Long-term Debt, Net, respectively, of the Notes to Consolidated Financial Statements for additional details.
(4)The tax effect of non-GAAP adjustments was determined based on the nature of the underlying non-GAAP adjustments and their relevant jurisdictional tax rates. For 2022, the primary difference between GAAP and adjusted effective income tax rates relates to certain non-deductible losses and other tax costs associated with the 2025 Notes Partial Repurchase. Also includes a $4.2 million adjustment during 2021 for the reduction of certain unrecognized tax benefits related to tax positions taken during a prior period.
(5)Adjusted diluted weighted average common shares outstanding was calculated excluding the dilutive effect of 6,089 and 9,992 shares for 2022 and 2021, respectively, to be issued upon conversion of the 2025 Notes to satisfy the amount in excess of the principal since our convertible note hedge offsets the dilutive impact of the shares underlying the 2025 Notes. For 2021, adjusted diluted weighted average common shares outstanding was also calculated assuming our February 2021 election to settle the principal portion of the 2025 Notes in cash was in effect for the entire 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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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 49 44
International
Outback Steakhouse - South Korea 296 305
Total franchise sales (2) $ 964 $ 917
____________________
(1)Includes franchise sales for off-premises only kitchens in South Korea.
(2)Franchise sales are not included in Total revenues in the Consolidated Statements of Operations and Comprehensive Income (Loss).
Liquidity and Capital Resources
Cash and Cash Equivalents
As of December 25, 2022, we had $84.7 million in cash and cash equivalents, of which $27.1 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 25, 2022, we had aggregate undistributed foreign earnings of approximately $23.2 million. These earnings may be repatriated to the U.S. without additional material U.S. federal income tax. These amounts are not 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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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Borrowing Capacity and Debt Service
Credit Facilities - 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 FORMER CREDIT FACILITY TOTAL CREDIT FACILITIES
(dollars in thousands)
____________________
(1)Subsequent to December 25, 2022, we repaid $80.0 million on our revolving credit facility.
(2)Interest rate for the revolving credit facility represents the weighted average interest rate as of December 25, 2022.
As of December 25, 2022, we had $550.0 million in available unused borrowing capacity under our revolving credit facility, net of letters of credit of $20.0 million.
Credit Agreement - On April 16, 2021, we and OSI, as co-borrowers, entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”), which provides for senior secured financing of up to $1.0 billion consisting of a $200.0 million Term loan A and an $800.0 million revolving credit facility (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility matures on April 16, 2026 and replaced our prior senior secured financing of up to $1.5 billion (the “Former Credit Facility”).
On April 26, 2022, we and OSI entered into the First Amendment to the Second Amended and Restated Credit Agreement and Incremental Amendment (the “Amended Credit Agreement”), which included an increase of our existing revolving credit facility from $800.0 million to $1.0 billion and a transition from the one-month London Inter-Bank Offered Rate (“LIBOR”) rate to the Secured Overnight Financing Rate (“SOFR”) as the benchmark rate for purposes of calculating interest under the Senior Secured Credit Facility. At closing, an incremental $192.5 million was drawn on the revolving credit facility to fully repay the outstanding balance of Term loan A. Our total indebtedness remained unchanged as a result of the Amended Credit Agreement. The transition to SOFR did not materially impact the interest rate applied to our borrowings.
Our Amended 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 additional details regarding the Amended Credit Agreement.
As of December 25, 2022 and December 26, 2021, 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.
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BLOOMIN’ BRANDS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
2025 Notes Partial Repurchase - On May 25, 2022, we and certain holders (the “Noteholders”) entered into exchange agreements in which the Noteholders agreed to exchange $125.0 million in aggregate principal amount of our outstanding 2025 Notes for $196.9 million in cash, plus accrued interest, and approximately 2.3 million shares of our common stock. In connection with the 2025 Notes Partial Repurchase, we entered into partial unwind agreements with certain financial institutions relating to a portion of the convertible note hedge transactions (the “Note Hedge Early Termination Agreements”) and a portion of the Warrant Transactions (the “Warrant Early Termination Agreements”) that were previously entered into by the Company in connection with the issuance of the 2025 Notes. Upon settlement, we received $131.9 million for the Note Hedge Early Termination Agreements and paid $114.8 million for the Warrant Early Termination Agreements.
See Note 14 - Convertible Senior Notes of the Notes to Consolidated Financial Statements for additional details regarding the 2025 Notes Partial Repurchase and related Note Hedge Early Termination Agreements and Warrant Early Termination Agreements.
2029 Notes - On April 16, 2021, we issued $300.0 million aggregate principal amount of senior unsecured notes due 2029. The 2029 Notes mature on April 15, 2029, unless earlier redeemed or purchased by us. The 2029 Notes bear cash interest at an annual rate of 5.125% payable semi-annually in arrears on April 15 and October 15 of each year.
The net proceeds from the 2029 Notes were approximately $294.5 million, after deducting the initial purchaser’s discount and our offering expenses. The net proceeds were used to repay a portion of our outstanding Term loan A and revolving credit facility in conjunction with the refinancing of our Former Credit Facility.
Use of Cash
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, debt payments, share repurchases and dividend payments, development of new restaurants, remodeling or relocating older restaurants and investment 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 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.
Capital Expenditures - We estimate that our capital expenditures will total approximately $240 million to $260 million in 2023. The amount of actual capital expenditures may be affected by general economic, financial, competitive, legislative and regulatory factors, among other things, including raw material constraints.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
Material Cash Requirements - The following table presents current and long-term material cash requirements as of December 25, 2022:
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
(dollars in thousands) TOTAL 1 YEAR YEARS YEARS 5 YEARS
Long-term debt:
____________________
(1)Amounts represent undiscounted future minimum rental commitments under non-cancelable operating leases. Excludes $919.7 million related to operating lease renewal options that are reasonably certain of exercise.
(2)Includes Senior Secured Credit Facility, 2029 Notes, 2025 Notes and finance lease obligations. Amounts are not reduced by unamortized debt issuance costs and finance lease interest totaling $7.7 million.
(3)Projected future interest payments on long-term debt are based on interest rates in effect as of December 25, 2022.
(4)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, kitchen equipment, technology, advertising and restaurant-level service contracts.
(5)Includes other long-term liabilities, primarily consisting of deferred compensation obligations, deposits and other accrued obligations. Unrecognized tax benefits are excluded from this table since it is not possible to estimate when these future payments will occur.
Dividends and Share Repurchases - During 2022, we declared and paid quarterly cash dividends of $0.14 per share. We did not pay dividends during 2021 as a result of certain restrictions that were included within the Credit Agreement.
On February 7, 2023, our Board declared a quarterly cash dividend of $0.24 per share, payable on March 15, 2023. Future dividend payments are dependent on our earnings, financial condition, capital expenditure requirements, surplus and other factors that our Board considers relevant, as well as continued compliance with the financial covenants in our debt agreements.
Following is a summary of our share repurchase program as of December 25, 2022 (dollars in thousands):
________________
(1)Subsequent to December 25, 2022, we repurchased the remaining $15.0 million of our common stock authorized under the 2022 Share Repurchase Program under a Rule 10b5-1 plan.
On February 7, 2023, our Board approved a new $125.0 million authorization (the “2023 Share Repurchase Program”). The 2023 Share Repurchase Program will expire on August 7, 2024.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
The following table presents our dividends and share repurchases for the periods indicated:
(dollars in thousands) DIVIDENDS PAID SHARE REPURCHASES TOTAL
Fiscal year 2021 — — —
Our ability to pay dividends and make share repurchases is dependent on our ability to obtain funds from our subsidiaries, continued compliance with the financial covenants in our debt agreements and the existence of surplus, as well as our earnings, financial condition, capital expenditure requirements and other factors that our Board deems relevant.
Summary of Cash Flows and Financial Condition
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 $ 390,922 $ 402,455
Effect of exchange rate changes on cash and cash equivalents 1,395 (1,642)
Net decrease in cash, cash equivalents and restricted cash $ (4,322) $ (21,351)
Operating activities - The decrease in net cash provided by operating activities during 2022 as compared to 2021 was primarily due to increases and timing of operational payments net of receipts, partially offset by lapping cash paid in connection with the Carrabba’s Italian Grill royalty termination during 2021.
Investing and financing activities - The increase in net cash used in investing activities and the decrease in net cash used in financing activities during 2022 as compared to 2021 was primarily due to repurposing a portion of excess cash flow away from debt paydown and utilizing the cash flow to increase capital expenditures.
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 $394.2 million and $398.8 million as of December 25, 2022 and December 26, 2021, respectively, and (ii) current operating lease liabilities of $183.5 million and $177.0 million as of December 25, 2022 and December 26, 2021, respectively, with
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
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 typically used to service debt obligations and to make capital expenditures.
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 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. These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in our operating performance. Historically, the change in useful lives of our assets as a result of planned closures or the decision not to renew leases has been a key factor in the impairment we have recognized.
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, macroeconomic 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
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
assumptions used in these models are future cash flow estimates, which are heavily influenced by revenue growth rates, operating margins and capital expenditures. These estimates are subjective, and our ability to achieve the forecasted cash flows used in our fair value calculations is affected by factors such as the success of strategic initiatives, changes in economic conditions and discount rates, changes in our operating performance and changes in our business strategies. The fair value of the trade names is determined through a relief from royalty method.
The carrying value of the reporting unit or trade name is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an impairment.
The carrying value of goodwill as of December 25, 2022 was $273.0 million. We performed our annual impairment test in the second quarter of 2022 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 any 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 - 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. Other assumptions used in determining our incremental borrowing rate include our implied credit rating and an estimate of secured borrowing rates based on comparable market data. 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 new leases 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 and 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 $49.1 million and $53.5 million as of December 25, 2022 and December 26, 2021, respectively. In establishing our reserves, we consider certain actuarial assumptions and judgments regarding economic conditions, and the frequency and severity of claims. The establishment of the reserves utilizing such estimates and assumptions is in part based on the
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued
premise that historical claims experience is indicative of current or future expected activity, which could differ significantly. 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 25, 2022, would have affected net earnings by $0.6 million in 2022.
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 25, 2022, 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.
While we consider all of our tax positions to be fully supportable, 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 could require the use of cash and an increase in the amount of income tax expense we recognize. As of December 25, 2022, we had $17.9 million of unrecognized tax benefits, including accrued interest and penalties, that if recognized, would impact our effective income tax rate.
Recently Issued Financial Accounting Standards
For a description of recently issued Financial Accounting Standards that we adopted in 2022 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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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in commodity prices, labor inflation, interest rates and foreign currency exchange rates.
Commodity Pricing Risk
Many of the ingredients used in the products sold in our restaurants are commodities that are subject to unpredictable price volatility. Although we attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients, there are no established fixed price markets for certain commodities such as produce and wild fish, and we are subject to prevailing market conditions when purchasing those types of commodities. Other commodities are purchased based upon negotiated price ranges established with vendors with reference to the fluctuating market prices. The related agreements may contain contractual features that limit the price paid by establishing certain price floors and caps. As of December 25, 2022, approximately 60% of our estimated 2023 annual food purchases are covered by fixed contracts, most of which are scheduled to expire during 2023.
During 2021, commodity markets began experiencing elevated levels of inflation across all proteins given strong consumer demand and product shortages due to supply chain disruptions. In addition, higher input costs across labor, fuel, freight and packaging contributed to increases as well. During 2022, we experienced 14.6% commodity inflation and anticipate mid single digits commodity inflation for 2023. Extreme changes in commodity prices or long-term changes could affect our financial results adversely. We expect that in most cases increased commodity prices could be passed through to our customers through increases in menu prices. However, if there is a time lag between the increasing commodity prices and our ability to increase menu prices, or if we believe the commodity price increase to be short in duration and we choose not to pass on the cost increases, our short-term financial results could be negatively affected. Additionally, from time to time, competitive circumstances could limit menu price flexibility, and in those cases, margins would be negatively impacted by increased commodity prices. Currently we do not use financial instruments to hedge our commodity risk.
In addition to the market risks identified above, we are subject to business risk as our U.S. beef supply is highly dependent upon a limited number of vendors. If these vendors were unable to fulfill their obligations under their contracts, we could encounter supply shortages and incur higher costs to secure adequate supplies. See Note 22 - Commitments and Contingencies of the Notes to Consolidated Financial Statements for further details.
Labor Inflation
Our restaurant operations are subject to federal and state minimum wage and other laws governing such matters as working conditions, overtime and tip credits. A significant number of our restaurant team members are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage increase our labor costs. To the extent permitted by competition and the economy, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years. Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed through to our guests. During 2022, we experienced 7.8% labor cost inflation and anticipate mid single digits labor cost inflation during 2023.
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. We manage our exposure to market risk through regular operating and financing activities and by using a combination of fixed-rate and variable-rate debt. The amount of variable-rate debt fluctuates during the year based on our working capital requirements. As of December 25, 2022, our interest rate risk was primarily from variable interest rate changes on our revolving credit facility, which had an outstanding balance of $430.0 million.
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We periodically evaluate financial instruments to hedge our exposure to variable interest rates. As of December 26, 2021, we had interest rate swaps with an aggregate notional amount of $125.0 million. These swaps matured in November 2022 and as of December 25, 2022, we had no financial instruments to hedge our interest rate exposure. See Note 17 - Derivative Instruments and Hedging Activities of the Notes to Consolidated Financial Statements for further information.
We utilize valuation models to estimate the effects of changing interest rates. As of December 25, 2022, a potential change from a hypothetical 150 basis point increase/decrease in short-term interest rates would increase or decrease our annual interest expense by $6.5 million.
Foreign Currency Exchange Rate Risk
We are subject to foreign currency exchange risk for our restaurants operating in foreign countries. Our exposure to foreign currency exchange risk is primarily related to fluctuations in the Brazilian Real relative to the U.S. dollar. Our operations in other markets consist of Company-owned restaurants on a smaller scale than Brazil. If foreign currency exchange rates depreciate in the countries in which we operate, we may experience declines in our operating results. Currently, we do not use financial instruments to hedge foreign currency exchange rate changes.
For 2022, 11.4% of our revenue was generated in foreign currencies. A 10% change in average foreign currency rates against the U.S. dollar would have increased or decreased our Total revenues and Net income for our foreign entities by $54.4 million and $3.6 million, respectively.
This market risk discussion contains forward-looking statements. Actual results may differ materially from the discussion based upon general market conditions and changes in U.S. and global financial markets.
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Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL INFORMATION
PAGE NO.
Management’s Annual Report on Internal Control over Financial Reporting 63
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 64
Consolidated Balance Sheets — December 25, 2022 and December 26, 2021 67
Consolidated Statements of Cash Flows —For Fiscal Years 2022, 2021 and 2020 71
Notes to Consolidated Financial Statements 73
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Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 25, 2022 using the criteria described in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (“COSO”). Based upon our evaluation, management concluded that our internal control over financial reporting was effective as of December 25, 2022.
The effectiveness of our internal control over financial reporting as of December 25, 2022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Bloomin’ Brands, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Bloomin’ Brands, Inc. and its subsidiaries (the “Company”) as of December 25, 2022 and December 26, 2021, and the related consolidated statements of operations and comprehensive income (loss), of changes in stockholders’ equity and of cash flows for each of the three years in the period ended December 25, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 25, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 25, 2022 and December 26, 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 25, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 25, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for convertible instruments and contracts in an entity’s own equity in 2021.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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BLOOMIN’ BRANDS, INC.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.