BLMN-9.30.12_10-Q
 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
or
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
Commission File Number: 001-35625


BLOOMIN’ BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-8023465
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2202 North West Shore Boulevard, Suite 500, Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)

(813) 282-1225
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x   NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer  o
Non-accelerated filer x (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  x

As of November 5, 2012, 121,102,451 shares of common stock of the registrant were outstanding.
 
 
 
 
 


Table of Contents
BLOOMIN’ BRANDS, INC.



INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2012
(Unaudited)

TABLE OF CONTENTS

 
 
            
 
Page No.
 
 
 
Item 1.
3
 
 
 
 
 
 
 
 
            
3
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
10
 
 
 
Item 2.
27
 
 
 
Item 3.
51
 
 
 
Item 4.
51
 
 
 
 
 
 
 
 
Item 1A.
52
 
 
 
Item 2.
52
 
 
 
Item 6.
53
 
 
 
 
54


2

Table of Contents
BLOOMIN’ BRANDS, INC.


PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNAUDITED) 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
2012
 
2011
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
168,275

 
$
482,084

Current portion of restricted cash
11,880

 
20,640

Inventories
82,431

 
69,223

Deferred income tax assets
27,301

 
31,959

Other current assets, net
80,892

 
104,373

Total current assets
370,779

 
708,279

Restricted cash
15,268

 
3,641

Property, fixtures and equipment, net
1,505,538

 
1,635,898

Investments in and advances to unconsolidated affiliates, net
37,407

 
35,033

Goodwill
270,051

 
268,772

Intangible assets, net
555,394

 
566,148

Other assets, net
144,188

 
136,165

Total assets
$
2,898,625

 
$
3,353,936

 
 
 
 
 
(CONTINUED...)
 

3

Table of Contents
BLOOMIN’ BRANDS, INC.


CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNAUDITED) 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
2012
 
2011
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
109,306

 
$
97,393

Accrued and other current liabilities
179,129

 
211,486

Current portion of partner deposits and accrued partner obligations
15,349

 
15,044

Unearned revenue
178,047

 
299,596

Current portion of long-term debt
66,327

 
332,905

Current portion of guaranteed debt
24,500

 

Total current liabilities
572,658

 
956,424

Partner deposits and accrued partner obligations
89,891

 
98,681

Deferred rent
81,929

 
70,135

Deferred income tax liabilities
188,104

 
193,262

Long-term debt
1,483,927

 
1,751,885

Guaranteed debt

 
24,500

Other long-term liabilities, net
262,875

 
218,752

Total liabilities
2,679,384

 
3,313,639

Commitments and contingencies
 
 
 
Stockholders’ Equity
 

 
 

Bloomin’ Brands, Inc. Stockholders’ Equity
 

 
 

Preferred stock, $0.01 par value, 25,000,000 shares authorized; no shares issued and outstanding at September 30, 2012; and no shares authorized, issued and outstanding at December 31, 2011

 

Common stock, $0.01 par value, 475,000,000 shares authorized; 121,102,451 shares issued and outstanding at September 30, 2012; and 120,000,000 shares authorized; 106,573,193 shares issued and outstanding at December 31, 2011
1,211

 
1,066

Additional paid-in capital
1,020,273

 
874,753

Accumulated deficit
(791,483
)
 
(822,625
)
Accumulated other comprehensive loss
(19,147
)
 
(22,344
)
Total Bloomin’ Brands, Inc. stockholders’ equity
210,854

 
30,850

Noncontrolling interests
8,387

 
9,447

Total stockholders’ equity
219,241

 
40,297

Total liabilities and stockholders’ equity
$
2,898,625

 
$
3,353,936

 
The accompanying notes are an integral part of these Consolidated Financial Statements.
 
 
 
 


4

Table of Contents
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)


 
THREE MONTHS ENDED SEPTEMBER 30,
 
NINE MONTHS ENDED SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Restaurant sales
$
943,260

 
$
919,093

 
$
2,958,747

 
$
2,858,235

Other revenues
9,656

 
9,182

 
30,661

 
27,391

Total revenues
952,916

 
928,275

 
2,989,408

 
2,885,626

Costs and expenses
 

 
 

 
 

 
 
Cost of sales
309,420

 
300,140

 
960,751

 
922,907

Labor and other related
270,011

 
262,345

 
834,912

 
820,466

Other restaurant operating
236,318

 
230,268

 
686,160

 
669,117

Depreciation and amortization
38,347

 
37,807

 
116,454

 
114,558

General and administrative
111,633

 
76,881

 
259,851

 
208,007

Provision for impaired assets and restaurant closings

 
1,208

 
9,089

 
5,139

Income from operations of unconsolidated affiliates
(1,268
)
 
(1,416
)
 
(5,392
)
 
(7,057
)
Total costs and expenses
964,461

 
907,233

 
2,861,825

 
2,733,137

(Loss) income from operations
(11,545
)
 
21,042

 
127,583

 
152,489

Loss on extinguishment of debt
(8,956
)
 

 
(11,807
)
 

Other income (expense), net
83

 
1,234

 
(46
)
 
1,490

Interest expense, net
(21,173
)
 
(20,674
)
 
(66,184
)
 
(62,559
)
(Loss) income before (benefit) provision for income taxes
(41,591
)
 
1,602

 
49,546

 
91,420

(Benefit) provision for income taxes
(7,836
)
 
234

 
8,905

 
15,494

Net (loss) income
(33,755
)
 
1,368

 
40,641

 
75,926

Less: net income attributable to noncontrolling interests
2,111

 
789

 
9,068

 
6,452

Net (loss) income attributable to Bloomin’ Brands, Inc.
$
(35,866
)
 
$
579

 
$
31,573

 
$
69,474

 
 
 
 
 
 
 
 
Net (loss) income
$
(33,755
)
 
$
1,368

 
$
40,641

 
$
75,926

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
6,710

 
(15,526
)
 
3,197

 
(8,381
)
Comprehensive (loss) income
(27,045
)
 
(14,158
)
 
43,838

 
67,545

Less: comprehensive income attributable to noncontrolling interests
2,111

 
789

 
9,068

 
6,452

Comprehensive (loss) income attributable to Bloomin’ Brands, Inc.
$
(29,156
)
 
$
(14,947
)
 
$
34,770

 
$
61,093

 
 
 
 
 
 
 
 
Net (loss) income attributable to Bloomin’ Brands, Inc. per common share:
 
 
 
 
 
 
 
Basic
$
(0.31
)
 
$
0.01

 
$
0.29

 
$
0.65

Diluted
$
(0.31
)
 
$
0.01

 
$
0.28

 
$
0.65

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
114,331

 
106,333

 
109,028

 
106,188

Diluted
114,331

 
106,731

 
111,145

 
106,491

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

5

Table of Contents
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, UNAUDITED)

 
BLOOMIN’ BRANDS, INC.
 
 
 
 

COMMON
STOCK

COMMON
STOCK
AMOUNT

ADDITIONAL PAID-IN
CAPITAL

ACCUM- ULATED
DEFICIT

ACCUMULATED
OTHER
COMPREHENSIVE
LOSS

NON-
CONTROLLING
INTERESTS

TOTAL
Balance,
December 31, 2011
106,573

 
$
1,066

 
$
874,753

 
$
(822,625
)
 
$
(22,344
)
 
$
9,447

 
$
40,297

Net income

 

 

 
31,573

 

 
9,068

 
40,641

Foreign currency translation adjustment

 

 

 

 
3,197

 

 
3,197

Issuance of common stock in connection with initial public offering
14,197

 
142

 
142,380

 

 

 

 
142,522

Exercises of stock options
136

 
1

 
883

 

 

 

 
884

Stock-based compensation
252

 
3

 
19,077

 

 

 

 
19,080

Repurchase of common stock
(56
)
 
(1
)
 
316

 
(431
)
 

 

 
(116
)
Issuance of notes receivable due from stockholders

 

 
(550
)
 

 

 

 
(550
)
Repayments of notes receivable due from stockholders

 

 
1,661

 

 

 

 
1,661

Purchase of limited partnership interests

 

 
(18,247
)
 

 

 
545

 
(17,702
)
Distributions to noncontrolling interests

 

 

 

 

 
(11,063
)
 
(11,063
)
Contributions from noncontrolling interests

 

 

 

 

 
390

 
390

Balance,
September 30, 2012
121,102

 
$
1,211

 
$
1,020,273

 
$
(791,483
)
 
$
(19,147
)
 
$
8,387

 
$
219,241

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(CONTINUED...)
 


6

Table of Contents
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(IN THOUSANDS, UNAUDITED)


 
BLOOMIN’ BRANDS, INC.
 
 
 
 
 
COMMON
STOCK
 
COMMON
STOCK
AMOUNT
 
ADDITIONAL PAID-IN
CAPITAL
 
ACCUM- ULATED
DEFICIT
 
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS
 
NON-
CONTROLLING
INTERESTS
 
TOTAL
Balance,
December 31, 2010
106,573

 
$
1,066

 
$
871,963

 
$
(922,630
)
 
$
(19,633
)
 
$
13,323

 
$
(55,911
)
Net income

 

 

 
69,474

 

 
6,452

 
75,926

Foreign currency translation adjustment

 

 

 

 
(8,381
)
 

 
(8,381
)
Stock-based compensation

 

 
2,204

 

 

 

 
2,204

Issuance of notes receivable due from stockholders

 

 
(1,034
)
 

 

 

 
(1,034
)
Distributions to noncontrolling interests

 

 
(38
)
 

 

 
(9,759
)
 
(9,797
)
Contributions from noncontrolling interests

 

 

 

 

 
177

 
177

Balance,
September 30, 2011
106,573

 
$
1,066

 
$
873,095

 
$
(853,156
)
 
$
(28,014
)
 
$
10,193

 
$
3,184


 
The accompanying notes are an integral part of these Consolidated Financial Statements.

7

Table of Contents
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)


 
NINE MONTHS ENDED SEPTEMBER 30,
 
2012
 
2011
Cash flows provided by operating activities:
 
 
 
Net income
$
40,641

 
$
75,926

Adjustments to reconcile net income to cash provided by operating activities:
 

 
 

Depreciation and amortization
116,454

 
114,558

Amortization of deferred financing fees
7,028

 
9,313

Amortization of capitalized gift card sales commissions
15,237

 
12,855

Provision for impaired assets and restaurant closings
9,089

 
5,139

Accretion on debt discounts
647

 
492

Stock-based and other non-cash compensation expense
37,954

 
26,780

Income from operations of unconsolidated affiliates
(5,392
)
 
(7,057
)
Change in deferred income taxes
(337
)
 
(57
)
Loss on disposal of property, fixtures and equipment
1,302

 
1,946

Unrealized (gain) loss on derivative financial instruments
(512
)
 
214

(Gain) loss on life insurance and restricted cash investments
(4,149
)
 
3,139

Loss on extinguishment of debt
11,807

 

Recognition of deferred gain on sale-leaseback transaction
(1,073
)
 

Change in assets and liabilities:
 

 
 

Increase in inventories
(12,939
)
 
(12,342
)
Decrease (increase) in other current assets
4,764

 
(27,457
)
Decrease in other assets
2,530

 
6,111

(Decrease) increase in accounts payable and accrued and other current liabilities
(34,208
)
 
3,254

Increase in deferred rent
11,617

 
8,959

Decrease in unearned revenue
(121,725
)
 
(112,639
)
Increase (decrease) in other long-term liabilities
2,215

 
(2,717
)
Net cash provided by operating activities
80,950

 
106,417

Cash flows provided by (used in) investing activities:
 

 
 

Purchases of Company-owned life insurance
(60
)
 
(1,965
)
Proceeds from sale of Company-owned life insurance

 
2,638

Proceeds from sale of property, fixtures and equipment
2,567

 
826

Proceeds from sale-leaseback transaction
192,886

 

Capital expenditures
(134,166
)
 
(85,335
)
Decrease in restricted cash
72,973

 
77,563

Increase in restricted cash
(75,834
)
 
(78,443
)
Return on investment from unconsolidated affiliates
332

 
960

Net cash provided by (used in) investing activities
$
58,698

 
$
(83,756
)
 
 
 
 
 
(CONTINUED...)
 

8

Table of Contents
BLOOMIN’ BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)


 
NINE MONTHS ENDED SEPTEMBER 30,
 
2012
 
2011
Cash flows used in financing activities:
 
 
 
Proceeds from issuance of long-term debt
$
495,186

 
$

Repayments of long-term debt
(18,949
)
 
(13,521
)
Extinguishment of CMBS loan
(777,563
)
 

Extinguishment of senior notes
(254,660
)
 

Proceeds from borrowings on revolving credit facilities
25,000

 
7,000

Repayments of borrowings on revolving credit facilities
(33,000
)
 
(78,072
)
Deferred financing fees
(5,442
)
 
(985
)
Proceeds from the issuance of common stock in connection with initial public offering
142,522

 

Proceeds from the exercise of stock options
885

 

Contributions from noncontrolling interests
390

 
177

Distributions to noncontrolling interests
(11,063
)
 
(9,797
)
Repayments of partner deposits and accrued partner obligations
(20,869
)
 
(29,151
)
Issuance of notes receivable due from stockholders
(550
)
 
(1,033
)
Repayments of notes receivable due from stockholders
1,661

 

Net cash used in financing activities
(456,452
)
 
(125,382
)
Effect of exchange rate changes on cash and cash equivalents
2,995

 
(3,770
)
Net decrease in cash and cash equivalents
(313,809
)
 
(106,491
)
Cash and cash equivalents at the beginning of the period
482,084

 
365,536

Cash and cash equivalents at the end of the period
$
168,275

 
$
259,045

Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
59,129

 
$
48,051

Cash paid for income taxes, net of refunds
20,406

 
23,390

Supplemental disclosures of non-cash investing and financing activities:
 

 
 

Conversion of partner deposits and accrued partner obligations to notes payable
$
5,699

 
$
4,770

Purchase of limited partnership interests through accounts payable or notes payable
17,702

 

Acquisitions of property, fixtures and equipment through accounts payable or capital lease liabilities
9,567

 
7,816


 The accompanying notes are an integral part of these Consolidated Financial Statements.

9

Table of Contents
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1.           Basis of Presentation

Bloomin’ Brands, Inc. (“Bloomin’ Brands” or the “Company”), formerly known as Kangaroo Holdings, Inc., was formed by an investor group comprised of funds advised by Bain Capital Partners, LLC (“Bain Capital”), Catterton Management Company, LLC (“Catterton”), Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon (the “Founders”) and certain members of management. On June 14, 2007, Bloomin’ Brands acquired OSI Restaurant Partners, Inc. by means of a merger and related transactions (the “Merger”). At the time of the Merger, OSI Restaurant Partners, Inc. was converted into a Delaware limited liability company named OSI Restaurant Partners, LLC (“OSI”). In connection with the Merger, Bloomin’ Brands implemented a new ownership and financing arrangement for some of its restaurant properties, pursuant to which Private Restaurant Properties, LLC (“PRP”), a wholly-owned subsidiary of Bloomin’ Brands, acquired 343 restaurant properties from OSI and leased them back to subsidiaries of OSI. OSI remains the primary operating entity, and a wholly-owned subsidiary of Bloomin’ Brands continues to lease certain of the Company-owned restaurant properties to OSI’s subsidiaries. On August 13, 2012, the Company completed its initial public offering (see Note 3 for further information).

The Company owns and operates casual, upscale casual and fine dining restaurants primarily in the United States. The Company’s restaurant portfolio has five concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s. Additional Outback Steakhouse, Carrabba’s Italian Grill and Bonefish Grill restaurants in which the Company has no direct investment are operated under franchise agreements.
 
The accompanying interim unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States (“U.S. GAAP”) for complete financial statements. In the opinion of the Company, all adjustments considered necessary for the fair presentation of the Company’s results of operations, financial position and cash flows for the periods presented have been included and are of a normal, recurring nature. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s registration statement on Form S-1, as amended (File No. 333-180615), that was declared effective on August 7, 2012 (the “Registration Statement”).

2.         Recently Issued Financial Accounting Standards

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”), that establishes a number of new requirements for fair value measurements. These include: (i) a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; (ii) an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and (iii) a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. Additionally, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 on January 1, 2012 increased the Company’s fair value disclosure requirements but did not have an impact on the Company’s financial position, results of operations or cash flows.


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Table of Contents
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”), that eliminates the option to report other comprehensive income and its components in the statement of changes in equity. Instead, the new guidance requires the Company to present the components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements.  While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance.  ASU No. 2011-05 must be applied retrospectively and is effective for public companies during the interim and annual periods beginning after December 15, 2011. Additionally, in December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU No. 2011-12”), which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The deferral of the presentation requirements does not impact the effective date of the other requirements in ASU No. 2011-05. During the deferral period, the existing requirements in generally accepted accounting principles in the United States for the presentation of reclassification adjustments must continue to be followed. ASU No. 2011-12 is effective for public companies during the interim and annual periods beginning after December 15, 2011.  The adoption of ASU No. 2011-05 and ASU No. 2011-12 on January 1, 2012 did not have an impact on the Company’s financial position, results of operations or cash flows as the guidance only requires a presentation change to comprehensive income.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU No. 2011-08”), which permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value before applying the two-step quantitative goodwill impairment test. If it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the quantitative assessment. ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this guidance on January 1, 2012 did not have an impact on the Company’s financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-10, “Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification” (“ASU No. 2011-10”), which applies to a parent company that ceases to have a controlling financial interest in a subsidiary, that is in substance real estate, as a result of a default on the subsidiary’s nonrecourse debt. The new guidance emphasizes that the parent should only deconsolidate the real estate subsidiary when legal title to the real estate is transferred to the lender and the related nonrecourse debt has been extinguished. If the reporting entity ceases to have a controlling financial interest under subtopic 810-10, the reporting entity would continue to include the real estate, debt, and the results of the subsidiary’s operations in its consolidated financial statements until legal title to the real estate is transferred to legally satisfy the debt. This standard is effective for public companies during the annual and interim periods beginning on or after June 15, 2012. The adoption of this guidance on July 1, 2012 did not have an impact on the Company’s financial statements.


11

Table of Contents
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”), which enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. The guidance requires the Company to provide both net and gross information for these assets and liabilities. ASU No. 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. The Company will adopt ASU No. 2011-11 effective January 1, 2013. This guidance will not have an impact on the Company’s financial position, results of operations or cash flows as it only requires a presentation change to offsetting (netting) assets and liabilities.

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU No. 2012-02”), which permits an entity to make a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset’s fair value is less than its carrying value before applying the two-step quantitative impairment test. If it is determined through the qualitative assessment that an indefinite-lived intangible asset’s fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the quantitative assessment. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company will adopt ASU No. 2012-02 effective January 1, 2013. This guidance will not have an impact on the Company’s financial position, results of operations or cash flows.

3.         Stockholders’ Equity
Initial Public Offering
On August 13, 2012, the Company completed an initial public offering of its common stock. On September 11, 2012, the underwriters in the Company’s initial public offering completed the exercise of their option to purchase up to 2,400,000 additional shares of common stock from the Company and certain of the selling stockholders. In the offering, (i) the Company issued and sold an aggregate of 14,196,845 shares of common stock (including 1,196,845 shares sold pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $156.2 million and (ii) certain of the Company’s stockholders sold 4,196,845 shares of the Company’s common stock (including 1,196,845 shares pursuant to the underwriters’ option to purchase additional shares) at a price to the public of $11.00 per share for aggregate gross offering proceeds of $46.2 million. The Company did not receive any proceeds from the sale of shares of common stock by the selling stockholders.

The Company received net proceeds in the offering of approximately $142.5 million after deducting underwriting discounts and commissions of approximately $9.4 million and offering related expenses of $4.3 million. All of the net proceeds, together with cash on hand, have been applied to the retirement of OSI’s 10% senior notes due 2015.

Upon completion of the initial public offering, the Company’s certificate of incorporation was amended and restated to provide for authorized capital stock of 475,000,000 shares of common stock, par value $0.01 per share, and 25,000,000 shares of undesignated preferred stock.

On May 10, 2012, the retention bonus and the incentive bonus agreements with the Company’s Chief Executive Officer (“CEO”) were amended. Under the terms of the amendments, the remaining payments under each agreement were accelerated to a single lump sum payment of $22.4 million as a result of the completion of the Company’s initial public offering, which was paid in the third quarter of 2012. The Company recorded $18.1 million for the accelerated bonus expense in the line item “General and administrative” in its Consolidated Statement of Operations and Comprehensive (Loss) Income for the three months ended September 30, 2012.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

Upon completion of the Company’s initial public offering, the Company recorded approximately $16.0 million of aggregate non-cash compensation expense with respect to (i) certain stock options held by its CEO that become exercisable (to the extent then vested) if following the offering, the volume-weighted average trading price of the Company’s common stock is equal to or greater than specified performance targets over a six-month period and (ii) the time vested portion of outstanding stock options containing a management call option due to the automatic termination of the call option upon completion of the offering.

Net (Loss) Income Attributable to Bloomin’ Brands, Inc. Per Common Share
Basic net (loss) income attributable to Bloomin’ Brands, Inc. per common share is computed on the basis of the weighted average number of common shares that were outstanding during the period. Diluted net (loss) income attributable to Bloomin’ Brands, Inc. per common share includes the dilutive effect of common stock equivalents consisting of restricted stock and stock options, using the treasury stock method. Performance-based restricted stock and stock options are considered dilutive in the calculation when the related performance criterion has been met.

The computation of basic and diluted net (loss) income attributable to Bloomin’ Brands, Inc. per common share is as follows (in thousands, except share and per share amounts):
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Net (loss) income attributable to Bloomin’ Brands, Inc.
$
(35,866
)
 
$
579

 
$
31,573

 
$
69,474

 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
114,331,426

 
106,332,877

 
109,027,502

 
106,187,631

 
 
 
 
 
 
 
 
Effect of diluted securities:
 
 
 
 
 
 
 
  Stock options

 
302,663

 
2,028,646

 
182,444

  Unvested restricted stock

 
95,005

 
89,217

 
121,077

Diluted weighted average common shares outstanding
114,331,426

 
106,730,545

 
111,145,365

 
106,491,152

 
 
 
 
 
 
 
 
Basic net (loss) income attributable to Bloomin’ Brands, Inc. per common share
$
(0.31
)
 
$
0.01

 
$
0.29

 
$
0.65

Diluted net (loss) income attributable to Bloomin’ Brands, Inc. per common share
$
(0.31
)
 
$
0.01

 
$
0.28

 
$
0.65


Dilutive securities outstanding not included in the computation of net income attributable to Bloomin’ Brands, Inc. per common share because their effect was antidilutive were as follows:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Stock options
12,319,121

 
550,000

 
1,177,922

 
1,171,897

Unvested restricted stock
252,798

 

 

 


Purchase of Limited Partnership Interests

On September 30, 2012, the Company purchased the outstanding partnership interests that it did not already own in certain of the Company’s limited partnerships that either owned or had a contractual right to varying percentages of cash flows in 15 Carrabba’s Italian Grill and nine Bonefish Grill restaurants for an aggregate purchase price of $17.7 million. Of the aggregate purchase price, 20% was paid in cash on October 1, 2012, and the remaining balance was paid in the form of a promissory note due on or before December 21, 2012.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

The following table sets forth the effect of these transactions on stockholders’ equity attributable to Bloomin’ Brands, Inc. (in thousands):
 
NET (LOSS) INCOME ATTRIBUTABLE TO BLOOMIN’ BRANDS, INC. AND TRANSFERS TO NONCONTROLLING INTERESTS
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Net (loss) income attributable to Bloomin’ Brands, Inc.
$
(35,866
)
 
$
579

 
$
31,573

 
$
69,474

Transfers to noncontrolling interests:
 
 
 
 
 
 
 
   Decrease in Bloomin’ Brands, Inc. additional paid-in capital
 
 
 
 
 
 
 
     for purchase of limited partnership interests
(18,247
)
 

 
(18,247
)
 

Change from net (loss) income attributable to Bloomin’
$
(54,113
)
 
$
579

 
$
13,326

 
$
69,474

  Brands, Inc. and transfers to noncontrolling interests
 
 
 

4.         Stock-based and Deferred Compensation Plans

Shares of restricted stock issued on June 14, 2007 to certain of the Company’s current and former executive officers and other members of management vested each June 14 through 2012.  In accordance with the terms of their applicable agreements, the Company loaned an aggregate of $0.4 million and $0.9 million to these individuals in June of 2012 and 2011, respectively, for their personal income tax obligations that resulted from vesting of the restricted stock. During the first quarter of 2012, three of the Company’s named executive officers and certain other former members of management repaid their entire loan balances to the Company. As of September 30, 2012 and December 31, 2011, a total of $5.8 million and $7.2 million, respectively, of loans and associated interest obligations to current and former executive officers and other members of management was outstanding and was recorded as contra-equity in the line item “Additional paid-in capital” in the Company’s Consolidated Balance Sheets. The loans are full recourse and are collateralized by the vested shares of restricted stock.  Although these loans are permitted in accordance with the terms of the agreements, the Company is not required to make them in the future. On May 10, 2012, the Company approved an amendment to the loans to extend the timing for mandatory prepayment in connection with an initial public offering to require full repayment by the last trading day in the first trading window subsequent to the expiration of contractual lock-up restrictions imposed in connection with the offering.

On May 10, 2012, the Board of Directors authorized an additional 850,000 shares for issuances of stock options and restricted stock under the Company’s 2007 Equity Incentive Plan (the “2007 Equity Plan”). The total shares authorized under the 2007 Equity Plan, including the increase, is 13,200,000. Upon completion of the Company’s initial public offering, the Bloomin’ Brands, Inc. 2012 Incentive Award Plan (the “2012 Equity Plan”) was adopted, and no further awards will be made under the 2007 Equity Plan.

The 2012 Equity Plan provides for grants of stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards and other stock-based awards determined by the compensation committee of the Board of Directors. The maximum number of shares of common stock available for issuance pursuant to the 2012 Equity Plan is initially 3,000,000 shares. As of the first business day of each fiscal year, commencing on January 1, 2013, the aggregate number of shares that may be issued pursuant to the 2012 Equity Plan will automatically increase by a number equal to 2% of the total number of shares then issued and outstanding. The 2012 Equity Plan provides that grants of performance awards will be made based upon, and subject to achieving, one or more performance measures over a performance period of not less than one year as established by the compensation committee of the Board of Directors. Unless terminated earlier, the 2012 Equity Plan will terminate ten years from its effective date.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

On September 4, 2012, the Company entered into an amended and restated employment agreement with its CEO, Elizabeth A. Smith. The agreement extends her employment until August 13, 2017 with one year automatic renewals thereafter. In accordance with the terms of the amended and restated employment agreement, Ms. Smith’s annual base salary increased by $50,000 to $975,000, and she will be eligible for additional equity award grants beginning in 2014.

5.           Variable Interest Entities

The Company consolidates variable interest entities in which it is deemed to have a controlling financial interest as a result of the Company having (1) the power to direct the activities that most significantly impact the entity’s economic performance and (2) the obligation to absorb the losses or the right to receive the benefits that could potentially be significant to the variable interest entity. If the Company has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the operations of the variable interest entity are included in the consolidated financial statements.

Roy’s and RY-8, Inc.

The Company’s consolidated financial statements include the accounts and operations of its Roy’s joint venture although it has less than majority ownership.  The Company determined it is the primary beneficiary of the joint venture since the Company has the power to direct or cause the direction of the activities that most significantly impact the entity on a day-to-day basis, such as decisions regarding menu development, purchasing, restaurant expansion and closings and the management of employee-related processes.  Additionally, the Company has the obligation to absorb losses or the right to receive benefits of the Roy’s joint venture that could potentially be significant to the Roy’s joint venture.  The majority of capital contributions made by the Company’s partner in the Roy’s joint venture, RY-8, Inc. (“RY-8”), have been funded by loans to RY-8 from a third party which OSI guarantees. The guarantee is secured by a collateral interest in RY-8’s membership interest in the joint venture.  The carrying amounts of consolidated assets and liabilities included within the Company’s Consolidated Balance Sheets for the Roy’s joint venture were $24.5 million and $11.2 million, respectively, at September 30, 2012 and $26.2 million and $9.6 million, respectively, at December 31, 2011.

The Company is also the primary beneficiary of RY-8 because its implicit variable interest in that entity, which is considered a de facto related party, indirectly receives the variability of the entity through absorption of RY-8’s expected losses, and therefore the Company also consolidates RY-8.  Since RY-8’s $24.5 million line of credit became fully extended in 2007, the Company made interest payments, paid line of credit renewal fees and made capital expenditures for additional restaurant development on behalf of RY-8.  The Company is obligated to provide financing, either through OSI’s guarantee with a third-party institution or loans, for all required capital contributions and interest payments.  Therefore, any additional RY-8 capital requirements in connection with the joint venture likely will be the Company’s responsibility.  RY-8’s line of credit expires on April 15, 2013. The Company classifies OSI’s $24.5 million contingent obligation as guaranteed debt and the portion of income or loss attributable to RY-8 is eliminated in the line item in the Consolidated Statements of Operations and Comprehensive (Loss) Income entitled “Net income attributable to noncontrolling interests.”  All material intercompany balances and transactions have been eliminated.

Paradise Restaurant Group, LLC
 
In September 2009, the Company sold its Cheeseburger in Paradise concept, which included 34 restaurants, for $2.0 million to Paradise Restaurant Group, LLC (“PRG”), an entity formed and controlled by the president of the concept.  Based on the terms of the purchase and sale agreement, the Company determined at that time that it was the primary beneficiary and continued to consolidate PRG after the sale transaction.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

Upon adoption of new accounting guidance for variable interest entities on January 1, 2010, the Company determined that it is no longer the primary beneficiary of PRG.  As a result, the Company deconsolidated PRG on January 1, 2010. The Company determined that certain rights pursuant to a $2.0 million promissory note, which is fully reserved, owed to the Company by PRG are non-substantive participating rights, and as a result, the Company does not have the power to direct the activities that most significantly impact the entity.  At September 30, 2012, the maximum undiscounted exposure to loss as a result of the Company’s involvement with PRG is $17.3 million related to lease payments extending through June 13, 2022 in the event that PRG defaults on these leases.

6.           Other Current Assets, Net

Other current assets, net, consisted of the following (in thousands):

 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
 
2012
 
2011
Prepaid expenses
 
$
25,976

 
$
18,113

Accounts receivable - vendors, net
 
25,037

 
48,568

Accounts receivable - franchisees, net
 
3,165

 
2,396

Accounts receivable - other, net
 
7,560

 
11,869

Other current assets, net
 
19,154

 
23,427

 
 
$
80,892

 
$
104,373


7.     Property, Fixtures and Equipment, Net
Property, fixtures and equipment, net, consisted of the following (in thousands):
 
 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
 
2012
 
2011
Land
 
$
265,691

 
$
329,143

Buildings and building improvements
 
911,460

 
1,013,618

Furniture and fixtures
 
292,501

 
263,266

Equipment
 
401,008

 
362,649

Leasehold improvements
 
389,421

 
369,726

Construction in progress
 
48,359

 
22,011

Less: accumulated depreciation
 
(802,902
)
 
(724,515
)
 
 
$
1,505,538

 
$
1,635,898


Effective March 14, 2012, the Company entered into a sale-leaseback transaction (the “Sale-Leaseback Transaction”) with two third-party real estate institutional investors in which the Company sold 67 restaurant properties at fair market value for net proceeds of $192.9 million.  The Company then simultaneously leased these properties under nine master leases (collectively, the “REIT Master Leases”).  The initial terms of the REIT Master Leases are 20 years with four five-year renewal options.  One renewal period is at a fixed rental amount and the last three renewal periods are generally based at then-current fair market values.  The sale at fair market value and subsequent leaseback qualified for sale-leaseback accounting treatment, and the REIT Master Leases are classified as operating leases. In accordance with the applicable accounting guidance, the 67 restaurant properties are not classified as held for sale at December 31, 2011 since the Company is leasing back the properties. The Company recorded a deferred gain on the sale of certain of the properties of $42.9 million primarily in the line item “Other long-term liabilities, net” in its Consolidated Balance Sheet at the time of the transaction, which is amortized over the initial term of the lease.



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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8.           Investment in Equity Method Investee

Through a joint venture arrangement with PGS Participacoes Ltda., the Company holds a 50% ownership interest in PGS Consultoria e Serviços Ltda. (the “Brazilian Joint Venture”), which operates Outback Steakhouse restaurants in Brazil.  The Company accounts for the Brazilian Joint Venture under the equity method of accounting.  At September 30, 2012 and December 31, 2011, the Company’s net investment of $36.4 million and $34.0 million, respectively, was recorded in “Investments in and advances to unconsolidated affiliates, net,” and a foreign currency translation adjustment of ($2.7) million and ($3.8) million was recorded in “Accumulated other comprehensive loss” in the Company’s Consolidated Balance Sheets during the nine months ended September 30, 2012 and year ended December 31, 2011, respectively. The Company’s share of earnings of $1.3 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively, and $5.1 million and $5.7 million for the nine months ended September 30, 2012 and 2011, respectively, was recorded in “Income from operations of unconsolidated affiliates” in the Company’s Consolidated Statements of Operations and Comprehensive (Loss) Income.

The following table presents summarized financial information for 100% of the Brazilian Joint Venture for the periods ending as indicated (in thousands):
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Net revenue from sales
$
58,482

 
$
57,369

 
$
172,608

 
$
161,348

Gross profit
40,912

 
39,406

 
120,744

 
110,623

Income from continuing operations
4,761

 
6,741

 
18,957

 
20,836

Net income and total comprehensive income
2,536

 
2,861

 
10,120

 
11,443


9.           Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following (in thousands):

 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
 
2012
 
2011
Accrued payroll and other compensation
 
$
83,330

 
$
117,013

Accrued insurance
 
21,559

 
19,284

Other current liabilities
 
74,240

 
75,189

 
 
$
179,129

 
$
211,486




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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

10.           Long-term Debt, Net

Long-term debt, net consisted of the following (in thousands):
 
SEPTEMBER 30,
 
DECEMBER 31,
 
2012
 
2011
Senior secured term loan facility, interest rates of 2.50% and 2.63% at September 30, 2012 and December 31, 2011, respectively (1) (2)
$
1,004,575

 
$
1,014,400

Senior secured pre-funded revolving credit facility, interest rate of 2.56% and 2.63% at September 30, 2012 and December 31, 2011, respectively (2)
25,000

 
33,000

Mortgage loan, weighted average interest rate of 3.97% at September 30, 2012 (3)
321,507

 

First mezzanine loan, interest rate of 9.00% at September 30, 2012 (3)
87,270

 

Second mezzanine loan, interest rate of 11.25% at September 30, 2012 (3)
87,412

 

Note payable, weighted average interest rate of 0.98% at December 31, 2011 (3)

 
466,319

First mezzanine note, interest rate of 3.28% at December 31, 2011 (3)

 
88,900

Second mezzanine note, interest rate of 3.53% at December 31, 2011 (3)

 
123,190

Third mezzanine note, interest rate of 3.54% at December 31, 2011 (3)

 
49,095

Fourth mezzanine note, interest rate of 4.53% at December 31, 2011 (3)

 
48,113

Senior notes, interest rate of 10.00% at December 31, 2011 (2)

 
248,075

Other notes payable, uncollateralized, interest rates ranging from 0.58% to 7.00% and from 0.76% to 7.00% at September 30, 2012 and December 31, 2011, respectively (2)
24,223

 
9,094

Sale-leaseback obligations (2)
2,375

 
2,375

Capital lease obligations (2)
2,227

 
2,520

Guaranteed debt, interest rate of 2.65% at September 30, 2012 and December 31, 2011, respectively (2)
24,500

 
24,500

 
1,579,089

 
2,109,581

Less: current portion of long-term debt
(66,327
)
 
(332,905
)
Less: guaranteed debt
(24,500
)
 
(24,500
)
Less: debt discount
(4,335
)
 
(291
)
Long-term debt, net
$
1,483,927

 
$
1,751,885

________________
(1)
At December 31, 2011, $61.9 million of OSI’s outstanding senior secured term loan facility was at an interest rate of 4.50%.
(2)
Represents obligations of OSI.
(3)
Represents obligations of New PRP (as defined below) at September 30, 2012 and obligations of PRP at December 31, 2011.

Bloomin’ Brands is a holding company and conducts its operations through its subsidiaries, certain of which have incurred their own indebtedness as described below.

On June 14, 2007, OSI entered into senior secured credit facilities with a syndicate of institutional lenders and financial institutions.  These senior secured credit facilities provide for senior secured financing of up to $1.6 billion, consisting of a $1.3 billion term loan facility, a $150.0 million working capital revolving credit facility, including letter of credit and swing-line loan sub-facilities, and a $100.0 million pre-funded revolving credit facility that provides financing for capital expenditures only (“2007 Credit Facilities”).

The senior secured term loan facility matures June 14, 2014.  At each rate adjustment, OSI has the option to select a Base Rate plus 125 basis points or a Eurocurrency Rate plus 225 basis points for the borrowings under this facility.  The Base Rate option is the higher of the prime rate of Deutsche Bank AG New York Branch and the federal funds effective rate plus 0.5 of 1.0% (“Base Rate”) (3.25% at September 30, 2012 and December 31, 2011).  The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.25% to 0.50% and from 0.38% to 0.88% at September 30, 2012 and December 31, 2011, respectively).  The Eurocurrency Rate may have

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Table of Contents
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

a nine- or twelve-month interest period if agreed upon by the applicable lenders.  With either the Base Rate or the Eurocurrency Rate, the interest rate is reduced by 25 basis points if the associated Moody’s Applicable Corporate Rating then most recently published is B1 or higher (the rating was Caa1 at September 30, 2012 and December 31, 2011).

OSI is required to prepay outstanding term loans, subject to certain exceptions, with:

50% of its “annual excess cash flow” (with step-downs to 25% and 0% based upon its rent-adjusted leverage ratio), as defined in the credit agreement and subject to certain exceptions;
100% of its “annual minimum free cash flow,” as defined in the credit agreement, not to exceed $75.0 million for each fiscal year, if its rent-adjusted leverage ratio exceeds a certain minimum threshold;
100% of the net proceeds of certain assets sales and insurance and condemnation events, subject to reinvestment rights and certain other exceptions; and
100% of the net proceeds of any debt incurred, excluding permitted debt issuances.

Additionally, OSI is required, on an annual basis, to first, repay outstanding loans under the pre-funded revolving credit facility and second, fund a capital expenditure account to the extent amounts on deposit are less than $100.0 million, in both cases with 100% of OSI’s “annual true cash flow,” as defined in the credit agreement.  In accordance with these requirements, OSI repaid its pre-funded revolving credit facility outstanding loan balance of $33.0 million and funded $37.6 million to its capital expenditure account using its “annual true cash flow” in April 2012.
  
OSI’s senior secured credit facilities require scheduled quarterly payments on the term loans equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters following June 14, 2007.  These payments are reduced by the application of any prepayments, and any remaining balance will be paid at maturity.  The outstanding balance on the term loans was $1.0 billion at September 30, 2012 and December 31, 2011. OSI has classified $13.1 million of its term loans as current at September 30, 2012 and December 31, 2011 due to its required quarterly payments and the results of its projected and actual covenant calculations, which indicate the additional term loan prepayments, as described above, will not be required. The amount of outstanding term loans required to be prepaid in accordance with OSI’s debt covenants may vary based on year-end results.
  
Proceeds of loans and letters of credit under OSI’s $150.0 million working capital revolving credit facility, which matures June 14, 2013, provide financing for working capital and general corporate purposes and, subject to a rent-adjusted leverage condition, for capital expenditures for new restaurant growth.  This revolving credit facility bears interest at rates ranging from 100 to 150 basis points over the Base Rate or 200 to 250 basis points over the Eurocurrency Rate.  There were no loans outstanding under the revolving credit facility at September 30, 2012 and December 31, 2011; however, $65.8 million and $67.6 million, respectively, of the credit facility was committed for the issuance of letters of credit and not available for borrowing. OSI’s total outstanding letters of credit issued under its working capital revolving credit facility may not exceed $75.0 million.

Proceeds of loans under OSI’s $100.0 million pre-funded revolving credit facility, which expires June 14, 2013, are available to provide financing for capital expenditures, if the capital expenditure account described above has a zero balance.  There was $25.0 million and $33.0 million outstanding under OSI’s pre-funded revolving credit facility as of September 30, 2012 and December 31, 2011, respectively.  The borrowings were recorded in “Current portion of long-term debt” in the Company’s Consolidated Balance Sheets, as OSI is required to repay any outstanding borrowings in April following each fiscal year using its “annual true cash flow,” as defined in the credit agreement.

At September 30, 2012 and December 31, 2011, OSI was in compliance with its debt covenants. See the Company’s audited financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Registration Statement for further information about OSI’s debt covenant requirements.


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Table of Contents
BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

On October 26, 2012, OSI completed a refinancing of its outstanding 2007 Credit Facilities. The new facilities consist of a $1.0 billion term loan B and a $225.0 million revolving credit facility maturing seven and five years after the closing date of the new facilities, respectively. At closing, the new term loan B was fully drawn, $45.0 million was drawn under the revolving credit facility and $65.8 million of the credit facility was committed for the issuance of letters of credit and not available for borrowing. Additional information related to the new facilities is included in Note 15.

In March 2012, the Company refinanced the debt at PRP. Until that time, PRP had first mortgage and mezzanine notes (together, the commercial mortgage-backed securities loan, or the “CMBS Loan”) totaling $790.0 million, which were entered into on June 14, 2007. As part of the CMBS Loan, German American Capital Corporation and Bank of America, N.A. et al (the “Lenders”) had a security interest in the acquired real estate and related improvements, and direct and indirect equity interests of certain of the Company’s subsidiaries. The CMBS Loan comprised a note payable and four mezzanine notes. All notes bore interest at the one-month LIBOR which was 0.28% at December 31, 2011, plus an applicable spread which ranged from 0.51% to 4.25%. Interest-only payments were made on the ninth calendar day of each month and interest accrued beginning on the fifteenth calendar day of the preceding month.

Effective March 27, 2012, New Private Restaurant Properties, LLC and two of the Company’s other indirect wholly-owned subsidiaries (collectively, “New PRP”) entered into a new commercial mortgage-backed securities loan (the “2012 CMBS Loan”) with German American Capital Corporation and Bank of America, N.A. The 2012 CMBS Loan totaled $500.0 million at origination and was comprised of a first mortgage loan in the amount of $324.8 million, collateralized by 261 of the Company’s properties, and two mezzanine loans totaling $175.2 million. The loans have a maturity date of April 10, 2017. The first mortgage loan has five fixed rate components and a floating rate component. The fixed rate components bear interest at rates ranging from 2.37% to 6.81% per annum. The floating rate component bears interest at a rate per annum equal to the 30-day LIBOR rate (with a floor of 1%) plus 2.37%. The first mezzanine loan bears interest at a rate of 9.0% per annum, and the second mezzanine loan bears interest at a rate of 11.25% per annum. The proceeds from the 2012 CMBS Loan, together with the proceeds from the Sale-Leaseback Transaction and excess cash held in PRP, were used to repay PRP’s existing CMBS Loan. As a result of the 2012 CMBS Loan refinancing, the net amount repaid along with scheduled maturities within one year, $281.3 million was classified as current at December 31, 2011. During the first quarter of 2012, the Company recorded a $2.9 million loss related to the extinguishment in the line item, “Loss on extinguishment of debt” in its Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company deferred $7.6 million of financing costs incurred to complete this transaction of which $2.2 million had been capitalized as of December 31, 2011 and the remainder was capitalized in the first quarter of 2012. These deferred financing costs are included in the line item, “Other assets, net” in its Consolidated Balance Sheets. At September 30, 2012, the outstanding balance, excluding the debt discount, on the 2012 CMBS Loan was $496.2 million.

Historically, the Company used an interest rate cap with a notional amount of $775.7 million as a method to limit the volatility of PRP’s variable-rate CMBS Loan. During the first quarter of 2012, this interest rate cap was terminated. In connection with the 2012 CMBS Loan refinancing, New PRP entered into a replacement interest rate cap instrument (“Rate Cap”) effective March 27, 2012 with a notional amount of $48.7 million as a method to limit the volatility of the floating rate component of the first mortgage loan. Under the Rate Cap, if the 30-day LIBOR market rate exceeds 7.0% per annum, the counterparty must pay to New PRP such excess on the notional amount of the floating rate component. Should it be necessary, New PRP would record any mark-to-market changes in the fair value of its derivative instrument into earnings in the period of change. The Rate Cap has a term of approximately two years from the closing of the 2012 CMBS Loan. Upon the expiration or termination of the Rate Cap or the downgrade of the credit ratings of the counterparty under the Rate Cap’s specified thresholds, New PRP is required to replace the Rate Cap with a replacement interest rate cap in a notional amount equal to the outstanding principal balance (if any) of the floating rate component.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

During the third quarter of 2012, OSI retired the aggregate outstanding principal amount of its 10% senior notes through a combination of a tender offer and early redemption call. The senior notes retirement was funded using a portion of the net proceeds from the Company’s initial public offering together with cash on hand. OSI paid an aggregate of $259.8 million to retire the senior notes, which included $248.1 million in aggregate outstanding principal, $6.5 million of prepayment premium and early tender incentive fees and $5.2 million of accrued interest. The senior notes were satisfied and discharged on August 13, 2012. As a result of these transactions, the Company recorded a loss from the extinguishment of debt of $9.0 million in the third quarter of 2012, which included $2.4 million for the write-off of unamortized deferred financing fees that related to the extinguished senior notes.

11.     Other Long-term Liabilities, Net

Other long-term liabilities, net, consisted of the following (in thousands):
 
 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
 
2012
 
2011
Accrued insurance liability
 
$
42,545

 
$
39,575

Unfavorable leases, net of accumulated amortization of $20,765 and $18,891 at September 30, 2012 and December 31, 2011, respectively
 
58,525

 
62,012

Partner Equity Plan obligation
 
84,922

 
77,642

Supplemental Partner Equity Plan obligation
 
14,503

 
16,235

Deferred gain on Sale-Leaseback Transaction, net of accumulated amortization of $1,073 at September 30, 2012
 
39,830

 

Other long-term liabilities
 
22,550

 
23,288

 
 
$
262,875

 
$
218,752


12.           Fair Value Measurements

Fair Value Measurements on a Recurring Basis

The Company invested $37.7 million of its excess cash in money market funds classified as Cash and cash equivalents or restricted cash in its Consolidated Balance Sheet at December 31, 2011 at a net value of 1:1 for each dollar invested.  The fair value of the investment in the money market funds is determined by using quoted prices for identical assets in an active market. The amount of excess cash invested in money market funds at September 30, 2012 was immaterial to the Company’s consolidated financial statements.

The Company is highly leveraged and exposed to interest rate risk to the extent of its variable-rate debt. The Company used an interest rate cap with a notional amount of $775.7 million as a method to limit the volatility of PRP’s variable-rate commercial mortgage-backed securities loan. During the first quarter of 2012, this interest rate cap was terminated. In connection with the refinancing of the commercial mortgage-backed securities loan that was effective in March 2012, a new Rate Cap with a notional amount of $48.7 million was entered into for similar purposes (see Note 10). The interest rate caps did not have any fair market value at September 30, 2012 or December 31, 2011 and, therefore, were excluded from the applicable tables within this footnote.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

The following table presents the Company’s money market funds measured at fair value on a recurring basis as of  December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
 
 
DECEMBER 31, 2011
 
 
 
 
FAIR VALUE
 
 
CARRYING VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Assets:
 
 
 
 
 
 
 
 
Money market funds - cash equivalents
 
$
30,208

 
$
30,208

 
$

 
$

Money market funds - restricted cash
 
7,499

 
7,499

 

 

Total recurring fair value measurements
 
$
37,707

 
$
37,707

 
$

 
$


Fair Value Measurements on a Nonrecurring Basis

The Company periodically evaluates long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. The Company analyzes historical and expected future cash flows of operating locations as well as lease terms, condition of the assets and related need for repairs and maintenance. Impairment loss is recognized to the extent that the fair value of the assets is less than the carrying value.

The following table presents losses related to the Company’s assets and liabilities that were measured at fair value on a nonrecurring basis during the nine months ended September 30, 2012 aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
SEPTEMBER 30, 2012
 
 
 
 
 
 
REMAINING FAIR VALUE
 
NINE MONTHS ENDED
SEPTEMBER 30, 2012
 
 
CARRYING VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
 
TOTAL
LOSSES
Long-lived assets held and used
 
$
2,704

 
$

 
$
646

 
$
2,058

 
$
9,089


The Company recorded $9.1 million of impairment charges during the nine months ended September 30, 2012 as a result of fair value measurement on a nonrecurring basis primarily related to certain specifically identified restaurant locations with individual store under-performance or having been designated for relocation or renovation. As of September 30, 2012, there was $2.7 million remaining fair value associated with long-lived assets for which asset impairment losses were recognized during the nine months ended September 30, 2012.  Impairment losses for long-lived assets held and used were recognized in the line item “Provision for impaired assets and restaurant closings” in the Consolidated Statement of Operations and Comprehensive (Loss) Income. The Company did not recognize any impairment charges during the three months ended September 30, 2012.

The Company used a third-party market appraisal for the fair value of the assets included in Level 2 in the tables above and primarily used discounted cash flow models to estimate the fair value of the long-lived assets included in Level 3 in the tables above.  Projected future cash flows, including discount rate and growth rate assumptions, are derived from current economic conditions, expectations of management and projected trends of current operating results.  As a result, the Company has determined that the majority of the inputs used to value its long-lived assets held and used are unobservable inputs that fall within Level 3 of the fair value hierarchy.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

The following table presents quantitative information related to the unobservable inputs used in the Company’s Level 3 fair value measurements for the impairment loss incurred in the nine months ended September 30, 2012:
UNOBSERVABLE INPUT
 
RANGE
Weighted-average costs of capital (1)
 
10.4% - 11.2%
Long-term growth rate
 
3.0%
Annual revenue growth rates (2)
 
(8.7)% - 4.3%
________________
(1)
Weighted average of the costs of capital unobservable input range for the nine months ended September 30, 2012 was 10.9%.
(2)
Weighted average of the annual revenue growth rate unobservable input range for the nine months ended September 30, 2012 was 2.6%.

The Company performed its annual goodwill and other indefinite-lived intangible assets impairment test during the second quarters of 2012 and 2011 and did not have any impairment charges.  The Company did not have any other material impairment charges as a result of fair value measurements on a nonrecurring basis during the three and nine months ended September 30, 2011.

Interim Disclosures about Fair Value of Financial Instruments

The Company’s non-derivative financial instruments at September 30, 2012 and December 31, 2011 consist of cash equivalents, restricted cash, accounts receivable, accounts payable and current and long-term debt.  The fair values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amounts reported in the Consolidated Balance Sheets due to their short duration.  The fair value of OSI’s senior secured credit facilities and senior notes is determined based on quoted market prices in inactive markets. The fair value of PRP’s and New PRP’s commercial mortgage-backed securities is based on assumptions derived from current conditions in the real estate and credit environments, changes in the underlying collateral and expectations of management.  Fair value estimates for other notes payable and guaranteed debt are derived using a discounted cash flow approach. Discounted cash flow inputs primarily include cost of debt rates which are used to derive the present value factors for the determination of fair value. Guaranteed debt fair value also includes assumptions of the probability and timing of performance under the guarantee. These inputs represent assumptions impacted by economic conditions and management expectations and may change in the future based on period-specific facts and circumstances.

The following table includes the carrying value and fair value of the Company’s financial instruments (excluding cash equivalents and restricted cash shown in the table above) at September 30, 2012 aggregated by the level in the fair value hierarchy in which those measurements fall (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 
 
SEPTEMBER 30, 2012
 
 
 
 
FAIR VALUE
 
 
CARRYING VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Senior secured term loan facility (1)
 
$
1,004,575

 
$

 
$
997,041

 
$

Senior secured pre-funded revolving credit facility (1)
 
25,000

 

 
24,813

 

Mortgage loan (2)
 
321,507

 

 

 
321,507

First mezzanine loan (2)
 
87,270

 

 

 
87,270

Second mezzanine loan (2)
 
87,412

 

 

 
87,412

Other notes payable (1)
 
24,223

 

 

 
23,637

Guaranteed debt (1)
 
24,500

 

 

 
24,287

_______________
(1)
Represents obligations of OSI.
(2)
Represents obligations of New PRP.
 

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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

The carrying amounts of PRP’s commercial mortgage-backed securities loan and OSI’s Other notes payable and Guaranteed debt approximated fair value at December 31, 2011. The following table includes the carrying value and fair value of OSI’s senior secured credit facilities and senior notes at December 31, 2011 (in thousands):

 
DECEMBER 31, 2011
 
CARRYING VALUE
 
FAIR VALUE
Senior secured term loan facility
$
1,014,400

 
$
953,536

Senior secured pre-funded revolving credit facility
33,000

 
31,020

Senior notes
248,075

 
254,277


13.           Income Taxes

The effective income tax rate for the three months ended September 30, 2012 was a benefit of 18.8% compared to an expense of 14.6% for the same period in 2011. This net increase in the effective income tax rate as compared to the prior year was primarily due to an increase in the projected foreign pretax book income and the foreign provision being a higher percentage of projected consolidated pretax annual income in part due to the initial public offering costs impacting only the domestic pretax book income.

The effective income tax rate for the nine months ended September 30, 2012 was an expense of 18.0% compared to an expense of 16.9% for the same period in 2011. This net increase in the effective income tax rate was primarily due to an increase in the projected foreign pretax book income and the foreign provision being a higher percentage of projected consolidated pretax annual income as compared to the prior year partially offset by the benefit of items required to be treated discretely, such as changes in domestic and foreign uncertain tax positions.

The effective income tax rates for the three and nine months ended September 30, 2012 were lower than the combined federal and state statutory rate of 38.7% primarily due to the benefit of the expected tax credit for excess FICA tax on employee-reported tips, the foreign rate differential and the elimination of noncontrolling interest together being such a large percentage of projected annual pretax income. This was partially offset by an increase in the valuation allowance. The effective income tax rates for the three and nine months ended September 30, 2011 were lower than the combined federal and state statutory rate of 38.9% due to the benefit of the expected tax credit for excess FICA tax on employee-reported tips and the foreign rate differential together being such a large percentage of projected annual pretax income. This was partially offset by an increase in the valuation allowance.

As of September 30, 2012 and December 31, 2011, the Company had $11.9 million and $14.0 million, respectively, of unrecognized tax benefits ($1.0 million and $1.5 million, respectively, in “Other long-term liabilities, net,” $0.9 million and $2.5 million, respectively, in “Accrued and other current liabilities” and $10.0 million in “Deferred income tax liabilities”).  Additionally, the Company accrued $2.3 million and $4.1 million of interest and penalties related to uncertain tax positions as of September 30, 2012 and December 31, 2011, respectively.  Of the total amount of unrecognized tax benefits, including accrued interest and penalties, $12.1 million and $15.2 million, respectively, if recognized, would impact the Company’s effective tax rate.  The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate consists of items that are offset by deferred income tax assets and the federal tax benefit of state income tax items.

In many cases, the Company’s uncertain tax positions are related to tax years that remain subject to examination by relevant taxable authorities.  Based on the outcome of these examinations, or as a result of the expiration of the statute of limitations for specific jurisdictions, it is reasonably possible that the related recorded unrecognized tax benefits for tax positions taken on previously filed tax returns will decrease by approximately $2.0 million to $4.0 million within the next twelve months after September 30, 2012.


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2007 through 2011. The Company and its subsidiaries’ state and foreign income tax returns are also open to audit under the statute of limitations for the years ended December 31, 2000 through 2011. The Company is currently under examination by the Internal Revenue Service for the years ended December 31, 2009 through 2010. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s results of operations or financial position.

14.           Related Parties

On May 10, 2012, the Company entered into a first amendment to its management agreement with Kangaroo Management Company I, LLC (the “Management Company”), whose members are entities associated with Bain Capital and Catterton and the Founders. In accordance with the terms of this amendment, the management agreement terminated immediately prior to the completion of the Company’s initial public offering, and a termination fee of $8.0 million was paid to the Management Company in the third quarter of 2012, in addition to a pro-rated periodic fee.

15.           Subsequent Events

On October 26, 2012, OSI completed a refinancing of its outstanding 2007 Credit Facilities and entered into a credit agreement (“Credit Agreement”) with a syndicate of institutional lenders and financial institutions.  These senior secured credit facilities provide for senior secured financing of up to $1.225 billion, consisting of a $1.0 billion term loan B and a $225.0 million revolving credit facility, including letter of credit and swing-line loan sub-facilities (the “New Facility”).

The new senior secured term loan B matures October 26, 2019.  The borrowings under this facility bear interest at rates ranging from 225 to 250 basis points over the Base Rate or 325 to 350 basis points over the Eurocurrency Rate as defined in the Credit Agreement.  The Base Rate option is the highest of (i) the prime rate of Deutsche Bank Trust Company Americas, (ii) the federal funds effective rate plus 0.5 of 1.0% or (iii) the Eurocurrency Rate with a one month interest period plus 1.0% (“Base Rate”).  The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”).  The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders. With respect to the new senior secured term loan B, the Base Rate is subject to an interest rate floor of 2.25% and the Eurocurrency Rate is subject to an interest rate floor of 1.25%.

OSI is required to prepay outstanding term loans, subject to certain exceptions, with:

50% of its “annual excess cash flow” (with step-downs to 25% and 0% based upon its consolidated first lien net leverage ratio), as defined in the Credit Agreement, beginning with the fiscal year ending December 31, 2013 and subject to certain exceptions;
100% of the net proceeds of certain assets sales and insurance and condemnation events, subject to reinvestment rights and certain other exceptions; and
100% of the net proceeds of any debt incurred, excluding permitted debt issuances.

The New Facility requires scheduled quarterly payments on the term loan B equal to 0.25% of the original principal amount of the term loans for the first six years and three quarters commencing on the quarter ending March 31, 2013.  These payments are reduced by the application of any prepayments, and any remaining balance will be paid at maturity. 


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BLOOMIN’ BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The revolving credit facility matures October 26, 2017 and provides for swing-line loans and letters of credit of up to $225.0 million for working capital and general corporate purposes.  Total outstanding letters of credit issued under its new revolving credit facility may not exceed $100.0 million. The revolving credit facility bears interest at rates ranging from 200 to 250 basis points over the Base Rate or 300 to 350 basis points over the Eurocurrency Rate.  At closing, $45.0 million was drawn under the revolving credit facility and $65.8 million of the credit facility was committed for the issuance of letters of credit and not available for borrowing. On October 31, 2012, OSI repaid $15.0 million of the amount outstanding on the revolving credit facility.

The New Facility requires OSI to comply with certain covenants, including, in the case of the revolving credit facility, a covenant to maintain a specified quarterly Total Net Leverage Ratio (“TNLR”) test. The TNLR is the ratio of Consolidated Total Debt to Consolidated EBITDA (earnings before interest, taxes, depreciation and amortization and certain other adjustments as defined in the Credit Agreement) and may not exceed a level set at 6.00 to 1.00 for the last day of any fiscal quarter in 2012 or 2013, with step-downs over a four-year period to a maximum level of 5.00 to 1.00 in 2017. The other negative covenants limit, but provide exceptions for, OSI’s ability and the ability of its restricted subsidiaries to take various actions relating to indebtedness, significant payments, mergers and similar transactions. The Credit Agreement also contains customary representations and warranties, affirmative covenants and events of default.

The New Facility is guaranteed by each of OSI’s current and future domestic 100% owned restricted subsidiaries in the Outback Steakhouse and Carrabba’s Italian Grill concepts and certain other subsidiaries (the “Guarantors”) and by OSI HoldCo, Inc., OSI’s direct owner and the Company’s indirect, wholly-owned subsidiary (“OSI HoldCo”).

OSI’s obligations are secured by substantially all of their assets and assets of the Guarantors and OSI HoldCo, in each case, now owned or later acquired, including a pledge of all of OSI’s capital stock, the capital stock of substantially all of OSI’s domestic subsidiaries and 65% of the capital stock of foreign subsidiaries that are directly owned by OSI, OSI HoldCo, or a Guarantor. OSI is also required to provide additional guarantees of the New Facility in the future from other domestic wholly-owned restricted subsidiaries if the Consolidated EBITDA attributable to OSI’s non-guarantor domestic wholly-owned restricted subsidiaries as a group exceeds 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries. If this occurs, guarantees would be required from additional domestic wholly-owned restricted subsidiaries in such number that would be sufficient to lower the aggregate Consolidated EBITDA of the non-guarantor domestic wholly-owned restricted subsidiaries as a group to an amount not in excess of 10% of the Consolidated EBITDA of OSI and its restricted subsidiaries.



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BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our Unaudited Consolidated Financial Statements and the related Notes.  Unless the context otherwise indicates, as used in this report, the term the “Company,” “we,” “us,” “our” and other similar terms mean Bloomin’ Brands, Inc.

Cautionary Statement

This Quarterly Report on Form 10-Q includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “forecasts,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, the following:

(i)
The restaurant industry is a highly competitive industry with many well-established competitors;

(ii)
Challenging economic conditions may affect our liquidity by adversely impacting numerous items that include, but are not limited to: consumer confidence and discretionary spending; the availability of credit presently arranged from our revolving credit facilities; the future cost and availability of credit; interest rates; foreign currency exchange rates; and the liquidity or operations of our third-party vendors and other service providers;

(iii)
Our ability to expand is dependent upon various factors such as the availability of attractive sites for new restaurants; our ability to obtain appropriate real estate sites at acceptable prices; our ability to obtain all required governmental permits including zoning approvals and liquor licenses on a timely basis; the impact of government moratoriums or approval processes, which could result in significant delays; our ability to obtain all necessary contractors and subcontractors; union activities such as picketing and hand billing that could delay construction; our ability to generate or borrow funds; our ability to negotiate suitable lease terms; the ability to recruit and train skilled management and restaurant employees; and our ability to receive the premises from the landlord’s developer without any delays;

(iv)
Our results can be impacted by changes in consumer tastes and the level of consumer acceptance of our restaurant concepts (including consumer tolerance of our prices); local, regional, national and international economic and political conditions; the seasonality of our business; demographic trends; traffic patterns and our ability to effectively respond in a timely manner to changes in traffic patterns; changes in consumer dietary habits; employee availability; the cost of advertising and media; government actions and policies; inflation or deflation; unemployment rates; interest rates; exchange rates; and increases in various costs, including construction, real estate and health insurance costs;

(v)
Weather, natural disasters and other disasters could result in construction delays and also adversely affect the results of one or more restaurants for an indeterminate amount of time;



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BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


(vi)
Our results can be impacted by tax and other legislation and regulation in the jurisdictions in which we operate and by accounting standards or pronouncements;

(vii)
Minimum wage increases and mandated employee benefits could cause a significant increase in our labor costs;

(viii)
Commodities, including but not limited to, such items as beef, chicken, shrimp, pork, seafood, dairy, potatoes, onions and energy supplies, are subject to fluctuation in price and availability and price could increase or decrease more than we expect;

(ix)
Our results can be affected by consumer reaction to public health issues;

(x)
Our results can be affected by consumer perception of food safety;

(xi)
We could face liabilities if we are unable to protect customer credit and debit card data; and

(xii)
Our substantial leverage and significant restrictive covenants in our various credit facilities could adversely affect our ability to raise additional capital to fund our operations, limit our ability to make capital expenditures to invest in new or renovate restaurants, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk in connection with our variable-rate debt.

Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

In light of these risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. Any forward-looking statement that we make in this report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data.


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BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview

We are one of the largest casual dining restaurant companies in the world with a portfolio of leading, differentiated restaurant concepts. As of September 30, 2012, we owned and operated 1,259 restaurants and had 197 restaurants operating under a franchise or joint venture arrangement across 48 states and 20 countries and territories internationally. We have five founder-inspired concepts: Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill, Fleming’s Prime Steakhouse and Wine Bar and Roy’s. Our concepts seek to provide a compelling customer experience combining great food, attentive service and lively and contemporary ambience at attractive prices. Our restaurants attract customers across a variety of occasions, including everyday dining, celebrations and business entertainment. Each of our concepts maintains a unique, founder-inspired brand identity and entrepreneurial culture, while leveraging our scale and enhanced operating model. We consider Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and Wine Bar to be our core concepts.
The restaurant industry is a highly competitive and fragmented industry and is sensitive to changes in the economy, trends in lifestyles, seasonality (customer spending patterns at restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year) and fluctuating costs. Operating margins for restaurants can vary due to competitive pricing strategies and fluctuations in prices of commodities, including beef, chicken, seafood, butter, cheese, produce and other necessities to operate a restaurant, such as natural gas or other energy suppliesCompanies tend to be focused on increasing market share, comparable restaurant sales growth and new unit growth. Competitive pressure for market share, inflation, foreign currency exchange rates and other market conditions have had and could continue to have an adverse impact on our business.
Our industry is characterized by high initial capital investment, coupled with high labor costs, and chain restaurants have been increasingly taking share from independent restaurants over the past several years. We believe that this trend will continue due to increasing barriers that may prevent independent restaurants and/or start-up chains from building scale operations, including menu labeling, burdensome labor regulations and healthcare reforms that will be enforced once chains grow past a certain number of restaurants or number of employees. The combination of these factors underscores our initiative to drive increased sales at existing restaurants in order to raise margins and profits, because the incremental contribution to profits from every additional dollar of sales above the minimum costs required to open, staff and operate a restaurant is relatively high.  Historically, we have not focused on growth in the number of restaurants just to generate additional sales. Our expansion and operating strategies have balanced investment and operating cost considerations in order to generate reasonable, sustainable margins and achieve acceptable returns on investment from our restaurant concepts.
In 2010, we launched a new strategic plan and operating model, added experienced executives to our management team and adapted practices from the consumer products and retail industries to complement our restaurant acumen and enhance our brand management, analytics and innovation. This new model keeps the customer at the center of our decision-making and focuses on continuous innovation and productivity to drive sustainable sales and profit growth. As a result of these initiatives, we are recommitted to new unit development after curtailing expansion from 2009 to 2011. We believe that a substantial development opportunity remains for our concepts in the U.S. and internationally.


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Table of Contents
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


In 2011 and 2012, we continue to balance near-term growth in share gains with investments to achieve sustainable growth. For the remainder of 2012, our key growth strategies, which are enabled by continued improvements in infrastructure and organizational effectiveness, are:

Grow Comparable Restaurant Sales. We plan to continue our efforts to remodel our Outback Steakhouse and Carrabba’s Italian Grill restaurants, use limited-time offers and multimedia marketing campaigns to drive traffic, grow beyond our traditional weekend dinner traffic and introduce innovative menu items that match evolving consumer preferences.

Pursue New Domestic and International Development With Strong Unit Level Economics. We believe that a substantial development opportunity remains for our concepts in the U.S. and internationally. We added significant resources in site selection, construction and design in 2010 and 2011 to support the opening of new restaurants. Our top domestic development priority is Bonefish Grill unit growth while internationally we are focusing on existing markets such as South Korea, Brazil and Hong Kong, with strategic expansion in selected emerging and high growth developed markets. We are focusing our new market growth in China, Mexico and South America. We expect to open 30 or more restaurants system-wide in 2012 and increase the pace thereafter.

Drive Margin Improvement. We believe we have the opportunity to increase our margins through cost reductions in labor, food cost, supply chain and restaurant facilities.

Key Performance Indicators

Key measures that we use in evaluating our restaurants and assessing our business include the following:

Average restaurant unit volumes - average sales per restaurant to measure changes in customer traffic, pricing and development of the brand;

System-wide sales - total restaurant sales volume for all Company-owned, franchise and unconsolidated joint venture restaurants, regardless of ownership, to interpret the overall health of our brands;

Comparable restaurant sales - year-over-year comparison of sales volumes for domestic, Company-owned restaurants that are open 18 months or more in order to remove the impact of new restaurant openings in comparing the operations of existing restaurants; and

Customer satisfaction scores - measurement of our customers’ experiences in a variety of key attributes.



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Table of Contents
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Results of Operations

The following tables set forth, for the periods indicated, (i) percentages that items in our Consolidated Statements of Operations and Comprehensive (Loss) Income bear to Total revenues or Restaurant sales, as indicated, and (ii) selected operating data: 

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
Revenues
 

 
 
 
 
 
 
Restaurant sales
99.0
 %
 
99.0
 %
 
99.0
 %
 
99.1
 %
Other revenues
1.0

 
1.0

 
1.0

 
0.9

Total revenues
100.0

 
100.0

 
100.0

 
100.0

Costs and expenses
 

 
 

 
 

 
 
Cost of sales (1)
32.8

 
32.7

 
32.5

 
32.3

Labor and other related (1)
28.6

 
28.5

 
28.2

 
28.7

Other restaurant operating (1)
25.1

 
25.1

 
23.2

 
23.4

Depreciation and amortization
4.0

 
4.1

 
3.9

 
4.0

General and administrative (2)
11.7

 
8.3

 
8.7

 
7.2

Provision for impaired assets and restaurant closings

 
0.1

 
0.3

 
0.2

Income from operations of unconsolidated affiliates
(0.1
)
 
(0.2
)
 
(0.2
)
 
(0.2
)
Total costs and expenses
101.2

 
97.7

 
95.7

 
94.7

(Loss) income from operations
(1.2
)
 
2.3

 
4.3

 
5.3

Loss on extinguishment of debt
(1.0
)
 

 
(0.4
)
 

Other income (expense), net
*

 
0.1

 
(*)

 
0.1

Interest expense, net
(2.2
)
 
(2.2
)
 
(2.2
)
 
(2.2
)
(Loss) income before (benefit) provision for income taxes
(4.4
)
 
0.2

 
1.7

 
3.2

(Benefit) provision for income taxes
(0.9
)
 
*

 
0.3

 
0.6

Net (loss) income
(3.5
)
 
0.2

 
1.4

 
2.6

Less: net income attributable to noncontrolling interests
0.3

 
0.1

 
0.3

 
0.2

Net (loss) income attributable to Bloomin’ Brands, Inc.
(3.8
)%
 
0.1
 %
 
1.1
 %
 
2.4
 %
 
 
 
 
 
 
 
 
Net (loss) income
(3.5
)%
 
0.2
 %
 
1.4
 %
 
2.6
 %
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
0.7

 
(1.7
)
 
0.1

 
(0.3
)
Comprehensive (loss) income
(2.8
)
 
(1.5
)
 
1.5

 
2.3

Less: comprehensive income attributable to noncontrolling interests
0.3

 
0.1

 
0.3

 
0.2

Comprehensive (loss) income attributable to Bloomin’ Brands, Inc.
(3.1
)%
 
(1.6
)%
 
1.2
 %
 
2.1
 %
________________
(1)
As a percentage of Restaurant sales.
(2)
General and administrative costs exclusive of $40.9 million of initial public offering related expenses would have been 7.4% and 7.3% of Total revenues for the three and nine months ended September 30, 2012, respectively (see General and administrative expenses discussion in “Results of Operations” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).
*
Less than 1/10th of one percent of Total revenues.


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Table of Contents
BLOOMIN’ BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The table below presents the number of our restaurants in operation at the end of the periods indicated:

 
SEPTEMBER 30,
 
2012
 
2011
Number of restaurants (at end of the period):
 
 
 
Outback Steakhouse
 
 
 
Company-owned - domestic
666

 
669

Company-owned - international
115

 
120

Franchised - domestic
106

 
106

Franchised and development joint venture - international
83

 
68

Total
970

 
963

Carrabba’s Italian Grill
 

 
 

Company-owned
232

 
232

Franchised
1

 
1

Total
233

 
233

Bonefish Grill
 

 
 

Company-owned
160

 
145

Franchised
7

 
7

Total
167

 
152

Fleming’s Prime Steakhouse and Wine Bar
 

 
 

Company-owned
64

 
64

Roy’s
 

 
 

Company-owned
22

 
22

System-wide total
1,456

 
1,434


We operate restaurants under brands that have similar economic characteristics, nature of products and services, class of customer and distribution methods, and as a result, aggregate our operating segments into a single reporting segment.

SYSTEM-WIDE SALES

System-wide sales increased 3.2% and 4.3% for the three and nine months ended September 30, 2012 as compared with the corresponding periods in 2011.  System-wide sales is a non-GAAP financial measure that includes sales of all restaurants operating under our brand names, whether we own them or not.  System-wide sales comprises sales of Company-owned restaurants and sales of franchised and unconsolidated joint venture restaurants.  The table below presents the first component of system-wide sales, which is sales of Company-owned restaurants:
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2012
 
2011
 
2012
 
2011
COMPANY-OWNED RESTAURANT SALES (in millions):
 
 
 
 
 
 
 
Outback Steakhouse
 
 
 
 
 
 
 
Domestic
$
508

 
$
488

 
$
1,595

 
$
1,534

International
80

 
96

 
228

 
249

Total
588

 
584

 
1,823