BLMN-9.30.13_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, 2013
 
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 1, 2013, 124,482,148 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, 2013
(Unaudited)

TABLE OF CONTENTS

 
 
            
 
Page No.
 
 
 
Item 1.
3
 
 
 
 
 
 
 
 
            
3
 
 
 
 
5
 
 
 
 
6
 
 
 
 
8
 
 
 
 
10
 
 
 
Item 2.
25
 
 
 
Item 3.
54
 
 
 
Item 4.
54
 
 
 
 
 
 
 
 
Item 1A.
55
 
 
 
Item 6.
55
 
 
 
 
56


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,
 
2013
 
2012
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
183,658

 
$
261,690

Current portion of restricted cash
3,789

 
4,846

Inventories
70,717

 
78,181

Deferred income tax assets
49,446

 
39,774

Other current assets, net
99,770

 
103,321

Total current assets
407,380

 
487,812

Restricted cash
15,504

 
15,243

Property, fixtures and equipment, net
1,563,443

 
1,506,035

Investments in and advances to unconsolidated affiliates, net
40,973

 
36,748

Goodwill
271,163

 
270,972

Intangible assets, net
541,214

 
551,779

Deferred income tax assets
2,893

 
2,532

Other assets, net
155,557

 
145,432

Total assets
$
2,998,127

 
$
3,016,553

 
 
 
 
 
(CONTINUED...)
 

3

Table of Contents
BLOOMIN’ BRANDS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA, UNAUDITED) 


 
SEPTEMBER 30,
 
DECEMBER 31,
 
2013
 
2012
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current Liabilities
 

 
 

Accounts payable
$
155,445

 
$
131,814

Accrued and other current liabilities
171,272

 
192,284

Current portion of partner deposits and accrued partner obligations
13,566

 
14,771

Unearned revenue
202,204

 
329,518

Current portion of long-term debt
13,341

 
22,991

Total current liabilities
555,828

 
691,378

Partner deposits and accrued partner obligations
77,094

 
85,762

Deferred rent
103,024

 
87,641

Deferred income tax liabilities
130,636

 
195,874

Long-term debt, net
1,447,768

 
1,471,449

Other long-term liabilities, net
261,064

 
264,244

Total liabilities
2,575,414

 
2,796,348

Commitments and contingencies (see Note 12)


 


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, 2013 and December 31, 2012

 

Common stock, $0.01 par value, 475,000,000 shares authorized; 124,287,148 and 121,148,451 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
1,243

 
1,211

Additional paid-in capital
1,057,933

 
1,000,963

Accumulated deficit
(624,070
)
 
(773,085
)
Accumulated other comprehensive loss
(16,780
)
 
(14,801
)
Total Bloomin’ Brands, Inc. stockholders’ equity
418,326

 
214,288

Noncontrolling interests
4,387

 
5,917

Total stockholders’ equity
422,713

 
220,205

Total liabilities and stockholders’ equity
$
2,998,127

 
$
3,016,553

 
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 INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA, UNAUDITED)


 
THREE MONTHS ENDED SEPTEMBER 30,
 
NINE MONTHS ENDED SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Restaurant sales
$
957,507

 
$
943,260

 
$
3,047,854

 
$
2,958,747

Other revenues
10,062

 
9,656

 
30,821

 
30,661

Total revenues
967,569

 
952,916

 
3,078,675

 
2,989,408

Costs and expenses
 

 
 

 
 

 
 
Cost of sales
317,589

 
309,420

 
993,031

 
960,751

Labor and other related
274,125

 
270,011

 
858,020

 
834,912

Other restaurant operating
246,240

 
236,318

 
717,489

 
686,160

Depreciation and amortization
40,135

 
38,347

 
121,220

 
116,454

General and administrative
61,822

 
111,633

 
199,407

 
259,851

Provision for impaired assets and restaurant closings
121

 

 
2,706

 
9,089

Income from operations of unconsolidated affiliates
(1,973
)
 
(1,268
)
 
(7,454
)
 
(5,392
)
Total costs and expenses
938,059

 
964,461

 
2,884,419

 
2,861,825

Income (loss) from operations
29,510

 
(11,545
)
 
194,256

 
127,583

Loss on extinguishment and modification of debt

 
(8,956
)
 
(14,586
)
 
(11,807
)
Other income (expense), net
223

 
83

 
(127
)
 
(46
)
Interest expense, net
(17,690
)
 
(21,173
)
 
(56,585
)
 
(66,184
)
Income (loss) before (benefit) provision for income taxes
12,043

 
(41,591
)
 
122,958

 
49,546

(Benefit) provision for income taxes
(91
)
 
(7,836
)
 
(30,696
)
 
8,905

Net income (loss)
12,134

 
(33,755
)
 
153,654

 
40,641

Less: net income attributable to noncontrolling interests
840

 
2,111

 
4,269

 
9,068

Net income (loss) attributable to Bloomin’ Brands, Inc.
$
11,294

 
$
(35,866
)
 
$
149,385

 
$
31,573

 
 
 
 
 
 
 
 
Net income (loss)
$
12,134

 
$
(33,755
)
 
$
153,654

 
$
40,641

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
10,697

 
6,710

 
(1,979
)
 
3,197

Comprehensive income (loss)
22,831

 
(27,045
)
 
151,675

 
43,838

Less: comprehensive income attributable to noncontrolling interests
840

 
2,111

 
4,269

 
9,068

Comprehensive income (loss) attributable to Bloomin’ Brands, Inc.
$
21,991

 
$
(29,156
)
 
$
147,406

 
$
34,770

 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.09

 
$
(0.31
)
 
$
1.22

 
$
0.29

Diluted
$
0.09

 
$
(0.31
)
 
$
1.16

 
$
0.28

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
123,747

 
114,331

 
122,624

 
109,028

Diluted
129,439

 
114,331

 
128,464

 
111,145

 
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, 2012
121,148

 
$
1,211

 
$
1,000,963

 
$
(773,085
)
 
$
(14,801
)
 
$
5,917

 
$
220,205

Net income

 

 

 
149,385

 

 
4,269

 
153,654

Foreign currency translation adjustment

 

 

 

 
(1,979
)
 

 
(1,979
)
Release of valuation allowance related to purchases of limited partnerships and joint venture interests

 

 
15,669

 

 

 

 
15,669

Stock-based compensation

 

 
10,841

 

 

 

 
10,841

Exercises of stock options
2,921

 
29

 
24,652

 

 

 

 
24,681

Repurchase of common stock
(18
)
 

 

 
(370
)
 

 

 
(370
)
Issuance of restricted stock
266

 
3

 

 

 

 

 
3

Forfeiture of restricted stock
(30
)
 

 
(21
)
 

 

 

 
(21
)
Repayments of notes receivable due from stockholders

 

 
5,829

 

 

 

 
5,829

Distributions to noncontrolling interests

 

 

 

 

 
(5,799
)
 
(5,799
)
Balance, September 30, 2013
124,287

 
$
1,243

 
$
1,057,933

 
$
(624,070
)
 
$
(16,780
)
 
$
4,387

 
$
422,713

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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, 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

Stock-based compensation

 

 
19,215

 

 

 

 
19,215

Exercises of stock options
136

 
1

 
883

 

 

 

 
884

Repurchase of common stock
(36
)
 
(1
)
 
316

 
(431
)
 

 

 
(116
)
Issuance of restricted stock
268

 
3

 

 

 

 

 
3

Forfeiture of restricted stock
(36
)
 

 
(138
)
 

 

 

 
(138
)
Issuance of notes receivable due from stockholders

 

 
(550
)
 

 

 

 
(550
)
Repayments of notes receivable due from stockholders

 

 
1,661

 

 

 

 
1,661

Purchase of limited partnership and joint venture interests

 

 
(18,247
)
 

 

 
545

 
(17,702
)
Distributions to noncontrolling interests

 

 

 

 

 
(10,673
)
 
(10,673
)
Balance, September 30, 2012
121,102

 
$
1,211

 
$
1,020,273

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

 
$
219,241


The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents
BLOOMIN’ BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)


 
NINE MONTHS ENDED SEPTEMBER 30,
 
2013
 
2012
Cash flows provided by operating activities:
 
 
 
Net income
$
153,654

 
$
40,641

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

 
 

Depreciation and amortization
121,220

 
116,454

Amortization of deferred financing fees
2,673

 
7,028

Amortization of capitalized gift card sales commissions
17,209

 
15,237

Provision for impaired assets and restaurant closings
2,706

 
9,089

Accretion on debt discounts
1,837

 
647

Stock-based and other non-cash compensation expense
16,584

 
37,954

Income from operations of unconsolidated affiliates
(7,454
)
 
(5,392
)
Deferred income tax benefit
(56,146
)
 
(337
)
Loss on disposal of property, fixtures and equipment
321

 
1,302

Unrealized gain on derivative financial instruments
(262
)
 
(512
)
Gain on life insurance and restricted cash investments
(3,464
)
 
(4,149
)
Loss on extinguishment and modification of debt
14,586

 
11,807

Recognition of deferred gain on sale-leaseback transaction
(1,600
)
 
(1,073
)
Change in assets and liabilities:
 

 
 

Decrease (increase) in inventories
7,370

 
(12,939
)
(Increase) decrease in other current assets
(15,881
)
 
4,764

(Increase) decrease in other assets
(3,083
)
 
2,530

Decrease in accounts payable and accrued and other current liabilities
(13,188
)
 
(34,208
)
Increase in deferred rent
17,708

 
11,617

Decrease in unearned revenue
(127,330
)
 
(121,725
)
(Decrease) increase in other long-term liabilities
(787
)
 
2,215

Net cash provided by operating activities
126,673

 
80,950

Cash flows (used in) provided by investing activities:
 

 
 

Purchases of life insurance policies
(760
)
 
(60
)
Proceeds from sale of life insurance policies
1,071

 

Proceeds from disposal of property, fixtures and equipment
3,294

 
2,567

Proceeds from sale-leaseback transaction

 
192,886

Capital expenditures
(166,154
)
 
(134,166
)
Decrease in restricted cash
19,280

 
72,973

Increase in restricted cash
(18,470
)
 
(75,834
)
Return on investment from unconsolidated affiliates
267

 
332

Net cash (used in) provided by investing activities
$
(161,472
)
 
$
58,698

 
 
 
 
 
(CONTINUED...)
 

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Table of Contents
BLOOMIN’ BRANDS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)


 
NINE MONTHS ENDED SEPTEMBER 30,
 
2013
 
2012
Cash flows used in financing activities:
 
 
 
Proceeds from issuance of 2012 CMBS Loan
$

 
$
495,186

Repayments of long-term debt
(37,401
)
 
(18,949
)
Extinguishment of CMBS loan

 
(777,563
)
Extinguishment of senior notes

 
(254,660
)
Proceeds from borrowings on revolving credit facilities

 
25,000

Repayments of borrowings on revolving credit facilities

 
(33,000
)
Financing fees
(12,519
)
 
(5,442
)
Proceeds from the issuance of common stock in connection with initial public offering

 
142,522

Proceeds from the exercise of stock options
24,681

 
885

Distributions to noncontrolling interests
(5,799
)
 
(10,673
)
Repayments of partner deposits and accrued partner obligations
(17,426
)
 
(20,869
)
Issuance of notes receivable due from stockholders

 
(550
)
Repayments of notes receivable due from stockholders
5,829

 
1,661

Repurchase of common stock
(370
)
 

Net cash used in financing activities
(43,005
)
 
(456,452
)
Effect of exchange rate changes on cash and cash equivalents
(228
)
 
2,995

Net decrease in cash and cash equivalents
(78,032
)
 
(313,809
)
Cash and cash equivalents at the beginning of the period
261,690

 
482,084

Cash and cash equivalents at the end of the period
$
183,658

 
$
168,275

Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
54,416

 
$
59,129

Cash paid for income taxes, net of refunds
17,861

 
20,406

Supplemental disclosures of non-cash investing and financing activities:
 

 
 

Conversion of partner deposits and accrued partner obligations to notes payable
$
1,051

 
$
5,699

Purchase of limited partnership interests through accounts payable or notes payable

 
17,702

Acquisition of property, fixtures and equipment through accounts payable or capital lease liabilities
13,187

 
9,567

Release of valuation allowance through additional paid-in capital related to purchases of limited partnerships and joint venture interests
15,669

 


 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”) was formed by an investor group comprised of funds advised by Bain Capital Partners, LLC and Catterton Management Company, LLC (the “Sponsors”) and Chris T. Sullivan, Robert D. Basham and J. Timothy Gannon (the “Founders”) and certain members of management. Bloomin’ Brands is a holding company and conducts its operations through OSI Restaurant Partners, LLC (“OSI”), the Company’s primary operating entity, and New Private Restaurant Properties, LLC, an indirect wholly-owned subsidiary of the Company that leases certain Company-owned restaurant properties to a subsidiary of OSI. In August 2012, the Company completed an initial public offering of its common stock (see Note 11).

The Company owns and operates casual, polished 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 Company has reclassified certain items in the accompanying consolidated financial statements for prior periods to be comparable with the classification for the three and nine months ended September 30, 2013. These reclassifications had no effect on previously reported Net income (loss).

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. 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 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).
 
2.         Recently Issued Financial Accounting Standards

In December 2011, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2011-11”), which enhances current disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset on the statement of financial position. The guidance requires the Company to provide both net and gross information for these assets and liabilities. In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (“ASU No. 2013-01”), to limit the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. Both ASU No. 2011-11 and ASU No. 2013-01 were effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods with retrospective application required. The adoption of ASU No. 2011-11 and ASU No. 2013-01 on January 1, 2013 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 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 was effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of ASU No. 2012-02 on January 1, 2013 did not have an impact on the Company’s financial position, results of operations or cash flows.

In February 2013, the FASB issued ASU No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU No. 2013-02”), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. The guidance requires an entity to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other required disclosures that provide additional detail about those amounts. ASU No. 2013-02 was effective for the Company prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU No. 2013-02 on January 1, 2013 did not have an impact on the Company’s financial position, results of operations or cash flows.

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2013-05”). Under ASU No. 2013-05, which clarifies existing U.S. GAAP guidance, an entity would recognize cumulative translation adjustments in earnings when it ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets resided. However, when an entity sells either a part or all of its investment in a consolidated foreign entity, an entity would recognize cumulative translation adjustments in earnings only if the parent no longer has a controlling financial interest in the foreign entity as a result of the sale. In the case of sales of an equity method investment that is a foreign entity, a pro rata portion of cumulative translation adjustments attributable to the equity method investment would be recognized in earnings upon sale of the equity method investment. In addition, cumulative translation adjustments would be recognized in earnings upon a business combination achieved in stages such as a step acquisition. ASU No. 2013-05 is effective for public companies for fiscal years beginning on or after December 15, 2013 and interim periods within those fiscal years, with early adoption permitted. The Company will adopt ASU No. 2013-05 effective January 1, 2014 with prospective application to the derecognition of any foreign entity subsidiaries, groups of assets or investments in foreign entities completed on or after January 1, 2014. The impact of ASU No. 2013-05 on the Company’s financial position, results of operations and cash flows is dependent on future transactions resulting in derecognition of the Company’s foreign assets, subsidiaries or investments in foreign entities completed on or after adoption.

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)” (“ASU No. 2013-11”). Under ASU No. 2013-11, an entity is required to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events. Gross presentation in the notes to the financial statements will still be required. ASU No. 2013-11 is effective for public companies for fiscal years beginning on or after December 15, 2013 and interim periods within those fiscal years, with early adoption permitted. ASU No. 2013-11 will apply on a prospective basis to all

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

unrecognized tax benefits that exist at the effective date, with the option to apply it retrospectively. This guidance will not have an impact upon adoption at January 1, 2014 on the Company’s financial position, results of operations or cash flows as the Company currently presents its unrecognized tax benefits net of its deferred tax assets where applicable.

3.         Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share is as follows (in thousands, except per share amounts):
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) attributable to Bloomin’ Brands, Inc.
$
11,294

 
$
(35,866
)
 
$
149,385

 
$
31,573

 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
123,747

 
114,331

 
122,624

 
109,028

 
 
 
 
 
 
 
 
Effect of diluted securities:
 
 
 
 
 
 
 
  Stock options
5,500

 

 
5,303

 
2,028

  Unvested restricted stock
192

 

 
537

 
89

Diluted weighted average common shares outstanding
129,439

 
114,331

 
128,464

 
111,145

 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.09

 
$
(0.31
)
 
$
1.22

 
$
0.29

Diluted earnings (loss) per share
$
0.09

 
$
(0.31
)
 
$
1.16

 
$
0.28


Dilutive securities outstanding not included in the computation of earnings (loss) per share because their effect was antidilutive were as follows (in thousands):
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Stock options
1,328

 
12,319

 
1,557

 
1,178

Unvested restricted stock

 
253

 

 


For the three and nine months ended September 30, 2013, an immaterial number of performance-based share units (“PSUs”) were not included in the computation of diluted weighted average common shares outstanding because the number of shares ultimately issued is contingent on the Company’s performance compared to pre-established performance criteria.

4.         Stock-based Compensation

During the first and second quarters of 2013, the Company granted PSUs to executives and key members of management. There were no PSUs awarded in periods prior to 2013. The PSUs vest over a period of four years following the date of grant, and 25% of the grant is earned or forfeited on each grant anniversary date, subject to certification of the performance criteria by the Board of Directors. The number of units that actually vest will be determined for each year based on the achievement of certain Company performance criteria set forth in the award agreement and may range from zero to 200% of the annual target grant. PSUs that do not vest based on failure to satisfy the stated performance criteria for any annual period are forfeited. In addition to the satisfaction of the performance criteria for the PSUs, vesting is dependent upon continued service with forfeiture of all unvested PSUs upon termination, unless in the case of death or disability, in which case a pro rata portion of the target number of PSUs are eligible to immediately vest based on actual performance during the performance period. The PSUs are settled in shares of common stock. Holders will receive one share of common stock for each performance-based share unit that vests. The fair value of PSUs is based on the closing price of the Company’s common stock on the grant date. Compensation expense for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

PSUs is recognized over the vesting period when it is probable the performance criteria will be achieved. During the three and nine months ended September 30, 2013, compensation expense recorded for PSUs was immaterial to the Company’s consolidated financial statements.

The following table presents a summary of the Company’s stock-based compensation activity for the nine months ended September 30, 2013 (in thousands):

 
STOCK OPTIONS
 
RESTRICTED STOCK AWARDS
 
PERFORMANCE-BASED SHARE UNITS (1)
Outstanding at December 31, 2012
12,379

 
299

 

Granted
1,402

 
266

 
58

Exercised or vested
(2,921
)
 
(68
)
 

Forfeited or expired
(502
)
 
(30
)
 
(7
)
Outstanding at September 30, 2013
10,358

 
467

 
51

________________
(1)
Share unit amounts represent the target number of PSUs considered granted for accounting recognition based on the establishment of performance targets for future years. The actual number of shares that will be earned upon vesting is dependent upon actual performance and may range from zero to 200% of the target number of shares.

At September 30, 2013 and December 31, 2012, approximately 5.1 million and 7.3 million, respectively, of outstanding stock options were exercisable.

The weighted-average grant date fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was $8.66 and $6.91, respectively, and was estimated using the Black-Scholes option pricing model. The following assumptions were used to calculate the fair value of options granted for the periods indicated:

 
NINE MONTHS ENDED SEPTEMBER 30,
 
2013
 
2012
Weighted-average risk-free interest rate
1.13
%
 
1.14
%
Dividend yield
%
 
%
Expected term
6.3 years

 
6.5 years

Weighted-average volatility
48.7
%
 
48.5
%

During the three months ended September 30, 2013 and 2012, the Company recognized aggregate stock-based compensation expense of $3.2 million and $17.6 million, respectively, and during the nine months ended September 30, 2013 and 2012, the Company recognized aggregate stock-based compensation expense of $10.6 million and $19.1 million, respectively. Aggregate stock-based compensation expense recorded in the three and nine months ended September 30, 2012 includes a $16.0 million charge for certain stock options held by the Company’s Chief Executive Officer (“CEO”) and the termination of the management call option, both in connection with the Company’s initial public offering in August 2012 (see Note 11).


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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

5.           Investment in Equity Method Investee

Through a joint venture arrangement with PGS Participações Ltda. (“PGS Par”), the Company held a 50% ownership interest through October 2013 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, 2013 and December 31, 2012, the Company’s net investment of $40.5 million and $36.0 million, respectively, was recorded in Investments in and advances to unconsolidated affiliates, net, and a foreign currency translation adjustment of ($3.0) million and ($2.7) million was recorded in Accumulated other comprehensive loss in the Company’s Consolidated Balance Sheets for the nine months ended September 30, 2013 and 2012, respectively. The Company’s share of earnings of $2.0 million and $1.3 million for the three months ended September 30, 2013 and 2012, respectively, and $7.5 million and $5.1 million for the nine months ended September 30, 2013 and 2012, respectively, was recorded in Income from operations of unconsolidated affiliates in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss).

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,
 
2013
 
2012
 
2013
 
2012
Net revenue from sales
$
61,844

 
$
58,482

 
$
191,551

 
$
172,608

Gross profit
42,631

 
40,912

 
132,130

 
120,744

Income from continuing operations
9,875

 
4,761

 
24,388

 
18,957

Net income
3,902

 
2,536

 
13,957

 
10,120


Through an acquisition of PGS Par, which became effective on November 1, 2013, the Company acquired a controlling interest in the Brazilian Joint Venture (see Note 13).

6.           Accrued and Other Current Liabilities

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

 
 
SEPTEMBER 30,
 
DECEMBER 31,
 
 
2013
 
2012
Accrued payroll and other compensation
 
$
81,729

 
$
108,612

Accrued insurance
 
23,862

 
22,235

Other current liabilities
 
65,681

 
61,437

 
 
$
171,272

 
$
192,284



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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

7.           Long-term Debt, Net

Long-term debt, net consisted of the following (in thousands):
 
SEPTEMBER 30,
 
DECEMBER 31,
 
2013
 
2012
Senior secured term loan B facility, interest rates of 3.50% and 4.75% at September 30, 2013 and December 31, 2012, respectively (1) (2)
$
975,000

 
$
1,000,000

Mortgage loan, weighted average interest rates of 4.01% and 3.98% at September 30, 2013 and December 31, 2012, respectively (3)
313,656

 
319,574

First mezzanine loan, interest rate of 9.00% at September 30, 2013 and December 31, 2012 (3)
86,374

 
87,048

Second mezzanine loan, interest rate of 11.25% at September 30, 2013 and December 31, 2012 (3)
86,859

 
87,273

Other notes payable, uncollateralized, interest rates ranging from 0.58% to 7.00% and from 0.63% to 7.00% at September 30, 2013 and December 31, 2012, respectively (2)
6,030

 
9,848

Sale-leaseback obligations (2)
2,375

 
2,375

Capital lease obligations (2)
1,581

 
2,112

 
1,471,875

 
1,508,230

Less: current portion of long-term debt
(13,341
)
 
(22,991
)
Less: unamortized debt discount
(10,766
)
 
(13,790
)
Long-term debt, net
$
1,447,768

 
$
1,471,449

________________
(1)
At December 31, 2012, $50.0 million of OSI’s outstanding senior secured term loan B facility was at an interest rate of 5.75%.
(2)
Represents obligations of OSI.
(3)
Represents obligations of New PRP (as defined below).

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

On October 26, 2012, OSI entered into a credit agreement (“Credit Agreement”) with a syndicate of institutional lenders and financial institutions.  The 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 “Credit Facilities”). The term loan B was issued with an original issue discount of $10.0 million.

On April 10, 2013, OSI completed a repricing of its senior secured term loan B facility pursuant to the First Amendment to Credit Agreement, Guaranty and Security Agreement, among OSI, OSI HoldCo, Inc., the subsidiary guarantors named therein, Deutsche Bank Trust Company Americas, as administrative agent and collateral agent, and a syndicate of institutional lenders and financial institutions (the “Amended Credit Agreement”). The Amended Credit Agreement replaced OSI’s existing senior secured term loan B facility with a new senior secured term loan B facility (the “Amended Term Loan B”). The Amended Term Loan B had the same principal amount outstanding (as of the repricing date) of $975.0 million, maturity date of October 26, 2019, amortization schedule and financial covenants but a lower applicable interest rate than the existing senior secured term loan B facility. Voluntary prepayments made on the principal amount outstanding since the inception of the Credit Agreement will continue to be treated as prepayments for purposes of determining amortization payment and mandatory prepayment requirements under the Amended Term Loan B.

As a result of the repricing transaction, the Company recorded a Loss on extinguishment and modification of debt of $14.6 million in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) during the second quarter of 2013. The loss was comprised of a prepayment penalty of $9.8 million, third-party financing costs of $2.4 million and the write-off of $1.2 million each of deferred financing fees and unamortized debt discount. The third-party financing costs included in the loss related to debt held by lenders that participated in both the original, and repriced debt and therefore, the debt was treated as modified rather than extinguished. The deferred financing fees and unamortized debt discount amounts included in the loss were related to the extinguished portion of the debt.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued


The Amended Credit Agreement decreased the interest rate applicable to the Amended Term Loan B to 150 basis points over the Base Rate or 250 basis points over the Eurocurrency Rate and reduced the interest rate floors applicable to the Amended Term Loan B to 2.00% for the Base Rate and 1.00% for the Eurocurrency Rate. The Base Rate option is the highest of (i) the prime rate of Deutsche Bank Trust Company Americas, (ii) the federal funds effective rate plus 0.5 of 1.0% or (iii) the Eurocurrency Rate with a one-month interest period plus 1.0% (“Base Rate”) (3.25% at September 30, 2013 and December 31, 2012).  The Eurocurrency Rate option is the 30, 60, 90 or 180-day Eurocurrency Rate (“Eurocurrency Rate”) (ranging from 0.18% to 0.37% and 0.21% to 0.51% at September 30, 2013 and December 31, 2012, respectively).  The Eurocurrency Rate may have a nine- or twelve-month interest period if agreed upon by the applicable lenders.

Prior to the repricing of the senior secured term loan B facility, borrowings under this facility bore interest at rates ranging from 225 to 250 basis points over the Base Rate or 325 to 350 basis points over the Eurocurrency Rate. The Base Rate was subject to an interest rate floor of 2.25%, and the Eurocurrency Rate was 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 Amended Term Loan B requires amortization payments of approximately $10.0 million per calendar year, payable in scheduled equal quarterly installments through September 2019. These payments are reduced by the application of any prepayments, and any remaining balance is due at maturity in October 2019. The outstanding balance on the Amended Term Loan B and term loan B, excluding the unamortized debt discount, was $975.0 million and $1.0 billion at September 30, 2013 and December 31, 2012, respectively. The remaining unamortized debt discount on the Amended Term Loan B and term loan B was $7.4 million and $9.7 million at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, none of the outstanding balance on the Amended Term Loan B was classified as current due to voluntary prepayments of $25.0 million made by OSI during the first quarter of 2013 and the results of its projected covenant calculations, which indicate the additional term loan prepayments, as described above, will not be required in the next 12 months. The amount of outstanding term loans required to be prepaid in accordance with OSI’s debt covenants may vary based on year-end results. At December 31, 2012, $10.0 million of the outstanding balance on the term loan B was classified as current due to OSI’s required quarterly payments.
 
The revolving credit facility matures October 26, 2017 and provides for swing-line loans and letters of credit of up to $225.0 million for working capital and general corporate purposes. The revolving credit facility bears interest at rates ranging from 200 to 250 basis points over the Base Rate or 300 to 350 basis points over the Eurocurrency Rate. There were no loans outstanding under the revolving credit facility at September 30, 2013 or December 31, 2012, however, $37.6 million and $41.2 million, respectively, of the revolving credit facility was committed for the issuance of letters of credit and not available for borrowing. Total outstanding letters of credit issued under OSI’s revolving credit facility may not exceed $100.0 million. Subsequent to the end of the third quarter of 2013, OSI borrowed $100.0 million from its revolving credit facility to finance, in part, the acquisition of the Company’s Brazilian operations (see Note 13).

At September 30, 2013 and December 31, 2012, the Company was in compliance with its debt covenants. See the 2012 Form 10-K for further information about OSI’s debt covenant requirements.


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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

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 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 comprised 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 London Interbank Offered Rate (“LIBOR”) (with a floor of 1%) plus 2.37%. The first mezzanine loan bears interest at a rate of 9.00% per annum, and the second mezzanine loan bears interest at a rate of 11.25% per annum.

The proceeds from the 2012 CMBS Loan, together with the proceeds from a sale-leaseback transaction and excess cash held in Private Restaurant Properties, LLC (“PRP”), a wholly-owned subsidiary, were used to repay PRP’s original first mortgage and mezzanine notes (together, the commercial mortgage-backed securities loan) (“CMBS Loan”). During the first quarter of 2012, the Company recorded a $2.9 million loss related to the extinguishment in Loss on extinguishment and modification of debt in its Consolidated Statement of Operations and Comprehensive Income (Loss).

At September 30, 2013 and December 31, 2012, the outstanding balance, excluding the unamortized debt discount, on the 2012 CMBS Loan was $486.9 million and $493.9 million, respectively.

8.     Other Long-term Liabilities, Net

The Company maintains endorsement split-dollar insurance policies with a death benefit ranging from $5.0 million to $10.0 million for one of its current and certain of its former executive officers.  The Company is the beneficiary of the policies to the extent of premiums paid or the cash value, whichever is greater, with the remaining death benefit being paid to personal beneficiaries designated by the executive officers.  During the nine months ended September 30, 2013, the Company terminated the split-dollar agreements with four of its former executive officers in exchange for an aggregate $4.7 million in cash. Upon termination, the release of the death benefit and related liabilities and net of the associated cash termination payment resulted in net gains of $4.1 million during the nine months ended September 30, 2013, which were recorded in General and administrative in the Consolidated Statement of Operations and Comprehensive Income (Loss). As a result of the terminations, the Company became the sole and exclusive owner of the related split-dollar insurance policies and elected to cancel them.

As of September 30, 2013 and December 31, 2012, the Company had $5.9 million and $14.3 million, respectively, recorded in Other long-term liabilities, net in its Consolidated Balance Sheets for the outstanding obligations under the endorsement split-dollar insurance policies.

9.           Fair Value Measurements

Fair Value Measurements on a Recurring Basis

In connection with the 2012 CMBS Loan, the Company entered into an interest rate cap with a notional amount of $48.7 million as a method to limit the volatility of the floating rate component of the first mortgage loan. This interest rate cap had a nominal fair market value at September 30, 2013 and December 31, 2012.


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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

Fair Value Measurements on a Nonrecurring Basis

The Company did not record material impairment charges as a result of fair value measurements on a nonrecurring basis of its long-lived assets held and used during the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013, respectively. 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

 
$
7,558


The Company did not record any material impairment charges as a result of fair value measurements on a nonrecurring basis of its long-lived assets held and used during the three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013. The Company recorded $7.6 million of impairment charges during the nine months ended September 30, 2012, as a result of the fair value measurement on a nonrecurring basis of its long-lived assets held and used, primarily related to certain specifically identified restaurant locations that have, or are scheduled to be, relocated or renovated or were under-performing. As of September 30, 2012, there was $2.7 million of remaining fair value associated with long-lived assets for which asset impairment losses were recognized during the nine months ended September 30, 2012. Restaurant closure expenses recognized for the three months ended September 30, 2013 and 2012 were not material to the consolidated financial statements. The Company recognized restaurant closure expenses of $1.6 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively.  Impairment losses for long-lived assets held and used and restaurant closure expenses were recognized in Provision for impaired assets and restaurant closings in the Consolidated Statements of Operations and Comprehensive Income (Loss).

The Company used a third-party market appraisal (Level 2) and discounted cash flow models (Level 3) to estimate the fair value of the long-lived assets included in the table 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.  

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

The Company performed its annual goodwill and other indefinite-lived intangible assets impairment test during the second quarters of 2013 and 2012. The impairment test performed in the second quarter of 2013 utilized a qualitative assessment. This qualitative assessment is referred to as a “step zero” approach and allows the Company the option

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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

to assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, based on the review of the qualitative factors, an entity determines there is sufficient evidence to support a more likely than not (greater than 50%) probability that the fair value of a reporting unit is greater than its carrying value, the entity may skip the two-step impairment test. During 2012, the Company elected to forgo step zero and proceeded to the first step of the impairment test for goodwill and other indefinite-lived intangible assets.

In considering the step zero approach in 2013, the Company evaluated factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability and the overall financial performance of the reporting units. As a result of the Company’s step zero assessment, no impairment conditions were identified and no further testing was deemed necessary.

The Company did not have any impairment charges in the second quarter of 2013 or 2012 as a result of the annual goodwill and other indefinite-live intangible assets impairment tests.

Interim Disclosures about Fair Value of Financial Instruments

The Company’s non-derivative financial instruments at September 30, 2013 and December 31, 2012 consist of cash equivalents, restricted cash, accounts receivable, accounts payable and current and long-term debt.  The fair values of cash equivalents, restricted cash, accounts receivable and accounts payable approximate their carrying amounts reported in the Consolidated Balance Sheets due to their short duration.  The fair value of OSI’s senior secured term loan B facility is determined based on quoted market prices in inactive markets. The fair value of New PRP’s commercial mortgage-backed securities is based on assumptions derived from current conditions in the real estate and credit markets, changes in the underlying collateral and expectations of management.  Fair value estimates for other notes payable are derived using a discounted cash flow approach. Discounted cash flow inputs primarily include cost of debt rates which are used to derive the present value factors for the determination of fair value. These inputs represent assumptions impacted by economic conditions and management expectations and may change in the future based on period-specific facts and circumstances.

The following tables include the carrying value and fair value of the Company’s financial instruments at September 30, 2013 and December 31, 2012 aggregated by the level in the fair value hierarchy in which those measurements fall (in thousands):

 
 
SEPTEMBER 30, 2013
 
 
 
 
FAIR VALUE
 
 
CARRYING VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Senior secured term loan B facility (1)
 
$
975,000

 
$

 
$
972,563

 
$

Mortgage loan (2)
 
313,656

 

 

 
330,647

First mezzanine loan (2)
 
86,374

 

 

 
87,453

Second mezzanine loan (2)
 
86,859

 

 

 
87,945

Other notes payable (1)
 
6,030

 

 

 
5,697



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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

 
 
DECEMBER 31, 2012
 
 
 
 
FAIR VALUE
 
 
CARRYING VALUE
 
LEVEL 1
 
LEVEL 2
 
LEVEL 3
Senior secured term loan B facility (1)
 
$
1,000,000

 
$

 
$
1,010,000

 
$

Mortgage loan (2)
 
319,574

 

 

 
334,678

First mezzanine loan (2)
 
87,048

 

 

 
90,371

Second mezzanine loan (2)
 
87,273

 

 

 
91,423

Other notes payable (1)
 
9,848

 

 

 
9,230

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

10.           Income Taxes

The effective income tax rate for the three months ended September 30, 2013 was (0.8)% compared to 18.8% for the same period in 2012. This net decrease in the effective income tax rate as compared to the prior year was primarily due to the effect of the change in the projected annual income tax rate and the income tax benefit related to items required to be treated discretely.
 
The effective income tax rate for the nine months ended September 30, 2013 was (25.0)% compared to 18.0% for the same period in 2012. This net decrease in the effective income tax rate was primarily due to the benefit of the release of valuation allowance in the second quarter of 2013 as discussed below.

The effective income tax rates for the three and nine months ended September 30, 2013 were lower than the blended federal and state statutory rate of 39.1% primarily due to the benefit of the expected tax credit for excess FICA tax on employee-reported tips, the release of valuation allowance, the elimination of noncontrolling interest and the foreign rate differential, together being such a large percentage of projected annual pretax income. The effective income tax rates for the three and nine months ended September 30, 2012 were lower than the blended 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.

At December 31, 2012, the Company had a valuation allowance against net deferred income tax assets recorded of $72.5 million, of which $67.7 million was for U.S. net deferred income tax assets. The Company established the domestic portion of the valuation allowance in 2009 with increases through 2012 against its then existing U.S. net deferred income tax assets as it was deemed the negative evidence outweighed the positive evidence and therefore the deferred income tax assets were not likely to be realized in future periods.

As of June 30, 2013, the Company conducted an assessment of the recoverability of its net deferred income tax assets and determined it was more likely than not that its existing net deferred income tax assets for general business tax credit carryforwards would be realized. The Company’s assessment included consideration of all available positive and negative evidence including, among other evidence, historical cumulative operating income, projected future taxable income and recent utilization of U.S. net operating loss carryforwards and tax credit carryforwards. Accordingly, the Company recorded a $67.7 million reduction of the valuation allowance against the U.S. net deferred income tax assets of which $52.0 million was recorded as income tax benefit and $15.7 million was an increase to Additional paid-in capital as of June 30, 2013. As the general business tax credits are expected to be realized due to current year and future year’s income, the portion attributable to future year’s income, or $44.8 million, was released as a discrete event during the second quarter of 2013. The remainder was allocated to interim periods as current year activity as income is expected to be realized and impacts the estimated 2013 annual effective income tax rate. The Company did not release the valuation allowance against foreign net operating loss carryforwards.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued


The Company expects to continue to generate significant U.S. income tax credits, which combined with the mix of U.S. and foreign earnings in periods subsequent to 2013 will result in an effective income tax rate that is higher than the rates in the current and prior periods but continues to be lower than the blended federal and state statutory rate.

As of September 30, 2013 and December 31, 2012, the Company had $14.4 million and $13.6 million, respectively, of unrecognized tax benefits ($4.2 million and $1.0 million, respectively, in Other long-term liabilities, net, $1.1 million and $0.9 million, respectively in Accrued and other current liabilities and $9.1 million and $11.7 million, respectively, in Deferred income tax liabilities).  Additionally, the Company accrued $2.6 million and $2.4 million, respectively of interest and penalties related to uncertain tax positions as of September 30, 2013 and December 31, 2012, respectively.  Of the total amount of unrecognized tax benefits, including accrued interest and penalties, $14.8 million and $13.8 million as of September 30, 2013 and December 31, 2012, respectively, if recognized, would impact the Company’s effective income tax rate.  The difference between the total amount of unrecognized tax benefits and the amount that would impact the effective income tax rate consists of items that are offset by deferred income tax assets and the federal income 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 change by approximately $0.5 million to $0.6 million within the next twelve months after September 30, 2013.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service (“IRS”) for the years ended December 31, 2007 through 2012. 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 2012.

The Company is currently under examination by the IRS for the years ended December 31, 2009 through 2011. In September 2013, the IRS informed the Company that it proposes to issue an audit adjustment to the Company for the employer’s share of FICA taxes related to cash tips allegedly received and unreported by the Company’s tipped employees during calendar year 2010. The cash tips allegedly unreported by the tipped employees are based on an IRS estimate of the aggregate amount of tips directly received by tipped employees from the Company’s customers. The potential employer’s FICA tax liability based on the IRS’ preliminary estimate of allegedly unreported tips is $10.0 million. The Company recorded a liability that it believes is appropriate in Accrued and other current liabilities in its Consolidated Balance Sheet at September 30, 2013. The associated expense is included in Labor and other related expenses for the three months ended September 30, 2013. In addition, a deferred income tax benefit has been recorded for the allowable income tax credits for the employer share of FICA taxes expected to be paid as result of the assessment. This income tax benefit is included in (Benefit) provision for income taxes and offsets the additional Labor and other related expenses in 2013.

11.         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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

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.

During the third quarter of 2012, 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, was applied to retire OSI’s 10% senior notes due 2015.

On May 10, 2012, the retention bonus and the incentive bonus agreements with the Company’s 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 General and administrative in its Consolidated Statement of Operations and Comprehensive Income (Loss) for the three months ended September 30, 2012.

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 became exercisable (to the extent then vested) after the offering once 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.

Purchase of Limited Partnership and Joint Venture Interests

On September 30, 2012, the Company purchased the remaining partnership interests in certain of the Company’s limited partnerships that either owned or had a contractual right to varying percentages of cash flows in 15 Carrabba’s Italian Grill restaurants 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 that was repaid in cash in the fourth quarter of 2012.

The following table sets forth the effect of these transactions on Bloomin’ Brands, Inc. stockholders’ equity (in thousands):

 
NET INCOME (LOSS) ATTRIBUTABLE TO BLOOMIN’ BRANDS, INC. AND TRANSFERS TO NONCONTROLLING INTERESTS
 
 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) attributable to Bloomin’ Brands, Inc.
$
11,294

 
$
(35,866
)
 
$
149,385

 
$
31,573

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 income (loss) attributable to Bloomin’ Brands,
$
11,294

 
$
(54,113
)
 
$
149,385

 
$
13,326

Inc. and transfers to noncontrolling interests
 
 
 


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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

12.           Commitments and Contingencies

In connection with the settlement of litigation with T-Bird Nevada, LLC and its affiliates (collectively, “T-Bird”), which include the franchisees of 56 Outback Steakhouse restaurants in California, T-Bird has a right (referred to as the “Put Right”), which would require the Company to purchase for cash all of the ownership interests in the T-Bird entities that own Outback Steakhouse restaurants and rights under the development agreement with T-Bird.

The Put Right was exercised by T-Bird on August 5, 2013 (the “Put Notice”). Based on the date of the Put Notice, the Put Right provides for a closing (the “Closing”) to occur on November 29, 2013, the last business day of the third calendar month following the month in which the Put Notice was given. The Closing is subject to certain conditions and regulatory approvals, including the negotiation of a transaction agreement reasonably acceptable to the parties, the absence of dissenters’ rights being exercised by the equity owners above a specified level and compliance with the Company’s debt agreements. In addition, T-Bird is entitled to revoke the Put Notice at any time prior to the closing and, accordingly, there can be no assurance that the Closing will occur. T-Bird’s Put Right will terminate upon such revocation.

The Put Right provides for the Company to pay a purchase price equal to a multiple of the T-Bird entities’ adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the twelve months ending October 31, 2013. The multiple is equal to 75% of the Company’s per share adjusted EBITDA multiple. The Company’s per share adjusted EBITDA multiple will be calculated by dividing the Company’s weighted average closing price of its common stock for the month of October 2013 by the Company’s per share EBITDA, adjusted for certain non-recurring items, for the twelve months ending October 31, 2013.

The purchase price will be reduced by a $15.0 million holdback for renovations of the 56 Outback Steakhouse restaurants to bring the restaurants to current system standards. If the cost of the renovations exceeds $15.0 million, the T-Bird entities are not responsible for the excess costs. If the cost of the renovations is less than $15.0 million, the Company is obligated to refund the difference to the T-Bird entities. Based on preliminary assessments, the Company expects the cost of the renovations will exceed $15.0 million.

Under the provisions of U.S. GAAP, the transaction, if completed, will be accounted for using the acquisition method of accounting for business combinations as of the closing date. Under the acquisition method, the Company will record, at fair value, the acquired assets and assumed liabilities of the T-Bird entities as of the date of the Closing. To the extent the total purchase price exceeds the fair value of net tangible and identifiable intangible assets acquired, including reacquired franchise rights, the Company will record goodwill.

The Company has a one-time right to reject the exercise of the Put Right if the transaction would be dilutive to the Company’s consolidated earnings per share, which is not expected based on preliminary estimates. In such event, the Put Right is extended until the first anniversary of the Company’s notice to the T-Bird entities of such rejection.

13.           Subsequent Events

On October 31, 2013, the Company entered into a Quota Purchase and Sale Agreement (the “Purchase Agreement”), by and between the Company, Bloom Holdco Participações Ltda. (“Purchaser”), PGS Par, the equity holders of PGS Par (the “Sellers”), the Brazilian Joint Venture, and Bloom Participações Ltda., parent company of Purchaser. Pursuant to the Purchase Agreement, effective November 1, 2013, the Company, through a wholly owned subsidiary, completed the acquisition of a controlling interest in the Brazilian Joint Venture by purchasing 80% of the issued and outstanding capital stock of PGS Par, the Company’s joint venture partner which holds a 50% interest in the Brazilian Joint Venture (the “Acquisition”). Prior to the Acquisition, the Company held a 50% interest in the Brazilian Joint Venture. As a result of the Acquisition, the Company now holds a 90% interest in the Brazilian Joint Venture. The Brazilian Joint Venture operates Outback Steakhouse restaurants in Brazil (the “Business”). The acquisition of a controlling interest

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BLOOMIN’ BRANDS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) - Continued

in the Company’s Brazilian operations allows it to participate in what it believes are the ongoing and significant growth opportunities in Brazil and supports the Company’s international development growth strategy.

The Company completed the Acquisition for total consideration of R$240.8 million (BRL) (or approximately $110.5 million) in cash. The Company financed the Acquisition primarily with borrowings of $100.0 million on its existing revolving credit facility and available cash.

The Purchase Agreement includes provisions providing the Sellers options to sell their remaining interests in the Business to Purchaser (the “put options”) and providing Purchaser options to purchase such remaining interests (the “call options” and together with the put options, the “Options”), in various amounts and at various times from 2015 through 2018, subject to acceleration in certain circumstances. The purchase price under each of the Options is based on a multiple of the EBITDA of the Business, subject to a fair market value adjustment, as determined at the time of exercise pursuant to the Purchase Agreement.

The Purchase Agreement also contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties, covenants and obligations, and certain other designated matters.

The Company will account for the acquisition as a business combination utilizing the step acquisition method. Due to the proximity of the acquisition to the filing date of the Form 10-Q, it was not practicable to include certain disclosures including the fair values of the assets and liabilities assumed, as well as the goodwill and intangible assets acquired. A preliminary purchase price allocation is expected to be included in the Company’s consolidated financial statements for the year ending December 31, 2013.

To ensure timely reporting, the Company will consolidate the results of its Brazilian operations on a one-month lag effective as of the acquisition date. Accordingly, the Company’s operating results for 2013 will include the operating results of the Brazilian operations for only a one-month post-acquisition period ended November 30, 2013. The net effect of this reporting lag is not expected to be material to the consolidated financial statements.



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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. and its subsidiaries.

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 Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could” or “would” or, in each case, their negative or other variations or comparable terminology. 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, capital expenditures 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. 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. 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; our ability to recruit and train skilled management and restaurant employees; and our ability to receive the premises from the landlord’s developer without any delays;


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

(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;

(vi)
Our results can be negatively impacted by the effects of acts of war; periods of widespread civil unrest; or actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, or other military action affecting countries in which we do business and by the effects of heightened security requirements on local, regional, national, or international economies or consumer confidence;

(vii)
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;

(viii)
Our results can be impacted by unanticipated changes in our tax rates, exposure to additional income tax liabilities, or a change in our ability to realize deferred tax benefits;

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

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

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

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

(xiii)
We could face liabilities if we are unable to protect customer credit and debit card data or personal employee information; and

(xiv)
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, relocate 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.

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 - Continued

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, 2013, we owned and operated 1,287 restaurants and had 208 restaurants operating under a franchise or joint venture arrangement across 48 states, Puerto Rico, Guam and 21 countries. 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, highly attentive service and lively and contemporary ambience at attractive prices. Our restaurants attract customers across a variety of occasions, including everyday dining, celebrations and business entertainment. Each of our concepts maintains a unique, founder-inspired brand identity and entrepreneurial culture, while leveraging our scale and enhanced operating model. We consider Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s Prime Steakhouse and Wine Bar to be our core concepts.
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 our restaurants are generally highest in the first quarter of the year and lowest in the third quarter of the year) and fluctuating costs. Operating margins for restaurants can vary due to competitive pricing strategies, labor costs and fluctuations in prices of commodities, including beef, chicken, seafood, butter, cheese, produce and other necessities to operate a restaurant, such as natural gas or other energy supplies.  Restaurant companies tend to focus on increasing market share, comparable restaurant sales growth and new unit growth. Competitive pressure for market share, commodity inflation, foreign currency exchange rates and other market conditions have had and could continue to have an adverse impact on our business.
Our industry is characterized by high initial capital investment, coupled with high labor costs. 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.
Our strategic plan and operating model entails maintaining an experienced executive management team and adapting practices from the consumer products and retail industries to complement our restaurant acumen and enhance our brand management, analytics and innovation. This 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. In addition, we remain 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.

We continue to balance near-term growth in market share with investments to achieve sustainable growth. In 2013, our key growth strategies, which are enabled by continued improvements in infrastructure and organizational effectiveness include:

Grow Comparable Restaurant Sales. We plan to continue our efforts to remodel our Outback Steakhouse and Carrabba’s Italian Grill restaurants, use limited-time offers and multimedia marketing campaigns to drive traffic, selectively expand the lunch daypart and introduce innovative menu items that match evolving consumer preferences. In addition, in April 2013, we accelerated our restaurant relocation plan primarily related to the Outback Steakhouse brand.   


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BLOOMIN’ BRANDS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

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. Our top domestic development priority is Bonefish Grill unit growth. Internationally, we are focusing on developing Outback Steakhouse in the existing markets of South Korea, Hong Kong and Brazil, with strategic expansion in selected emerging and high growth developed markets. We are focusing our new market growth in China, Mexico and South America. During the fourth quarter of 2013, we acquired a a controlling interest in our Brazilian operations, which allows us to participate in what we believe are the ongoing and significant growth opportunities in Brazil. We expect to open between 45 and 55 system-wide locations in 2013 and increase the pace thereafter.

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

The combination of macro-economic and other factors have put considerable pressure on sales in the casual dining industry thus far in 2013 and, as a result, the first nine months of 2013 has reflected a slowdown in our comparable restaurant sales growth.  For example, the ongoing impacts of high unemployment, the so-called “sequester” and related governmental spending and budget matters, gasoline prices, reduced disposable consumer income and consumer confidence have had a negative effect on discretionary consumer spending.  As these conditions persist, we will face increased pressure with respect to our pricing, traffic levels and commodity costs.  We believe that in this environment, we will need to maintain our focus on value and innovation to continue to drive sales.

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;

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

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

Adjusted income from operations, Adjusted net income attributable to Bloomin’ Brands, Inc., Adjusted diluted earnings per share and Adjusted diluted earnings per pro forma share—non-GAAP financial measures utilized to evaluate our operating performance (see “—Non-GAAP Financial Measures” section for further information); and

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



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BLOOMIN’ BRANDS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Selected Operating Data

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

 
SEPTEMBER 30,
 
2013
 
2012
Number of restaurants (at end of the period):
 
 
 
Outback Steakhouse
 
 
 
Company-owned—domestic (1)
664

 
667

Company-owned—international (1)
119

 
114

Franchised—domestic
106

 
106

Franchised and joint venture—international
94

 
83

Total
983

 
970

Carrabba’s Italian Grill
 
 
 
Company-owned
237

 
232

Franchised
1

 
1

Total
238

 
233

Bonefish Grill
 
 
 
Company-owned
181

 
160

Franchised
7

 
7

Total
188

 
167

Fleming’s Prime Steakhouse and Wine Bar
 
 
 
Company-owned
65

 
64

Roy’s
 
 
 
Company-owned
21

 
22

System-wide total
1,495

 
1,456

____________________
(1)
One Company-owned restaurant in Puerto Rico that was previously included in Outback Steakhouse (international) is now included in Outback Steakhouse (domestic). The prior period has been revised to conform to the current period presentation.

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.



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BLOOMIN’ BRANDS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

Results of Operations

The following table sets forth, for the periods indicated, percentages that items in our Consolidated Statements of Operations and Comprehensive Income (Loss) bear to Total revenues or Restaurant sales, as indicated: 

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 

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

 
1.0

 
1.0

 
1.0

Total revenues
100.0

 
100.0

 
100.0

 
100.0

Costs and expenses
 

 
 

 
 

 
 
Cost of sales (1)
33.2

 
32.8

 
32.6

 
32.5

Labor and other related (1)
28.6

 
28.6

 
28.2

 
28.2

Other restaurant operating (1)
25.7

 
25.1

 
23.5

 
23.2

Depreciation and amortization
4.1

 
4.0

 
3.9

 
3.9

General and administrative
6.4

 
11.7

 
6.5

 
8.7

Provision for impaired assets and restaurant closings
*

 

 
0.1

 
0.3

Income from operations of unconsolidated affiliates
(0.2
)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Total costs and expenses
97.0

 
101.2

 
93.7

 
95.7

Income (loss) from operations
3.0

 
(1.2
)
 
6.3

 
4.3

Loss on extinguishment and modification of debt

 
(1.0
)
 
(0.5
)
 
(0.4
)
Other income (expense), net
*

 
*

 
(*)

 
(*)

Interest expense, net
(1.7
)
 
(2.2
)
 
(1.8
)
 
(2.2
)
Income (loss) before (benefit) provision for income taxes
1.3

 
(4.4
)
 
4.0

 
1.7

(Benefit) provision for income taxes
(*)

 
(0.9
)
 
(1.0
)
 
0.3

Net income (loss)
1.3

 
(3.5
)
 
5.0

 
1.4

Less: net income attributable to noncontrolling interests
0.1

 
0.3

 
0.1

 
0.3

Net income (loss) attributable to Bloomin’ Brands, Inc.
1.2
 %
 
(3.8
)%
 
4.9
 %
 
1.1
 %
 
 
 
 
 
 
 
 
Net income (loss)
1.3
 %
 
(3.5
)%
 
5.0
 %
 
1.4
 %
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
1.1

 
0.7

 
(0.1
)
 
0.1

Comprehensive income (loss)
2.4

 
(2.8
)
 
4.9

 
1.5

Less: comprehensive income attributable to noncontrolling interests
0.1

 
0.3

 
0.1

 
0.3

Comprehensive income (loss) attributable to Bloomin’ Brands, Inc.
2.3
 %
 
(3.1
)%
 
4.8
 %
 
1.2
 %
________________
(1)
As a percentage of Restaurant sales.
*
Less than 1/10th of one percent of Total revenues.


30

Table of Contents
BLOOMIN’ BRANDS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

REVENUES

Restaurant sales
 
THREE MONTHS ENDED
 
 
 
 
 
NINE MONTHS ENDED
 
 
 
 
 
SEPTEMBER 30,
 
 
 
 
 
SEPTEMBER 30,
 
 
 
 
(dollars in millions):
2013
 
2012
 
$ Change
 
% Change
 
2013
 
2012
 
$ Change
 
% Change
Restaurant sales
$
957.5

 
$
943.3

 
$
14.2

 
1.5
%
 
$
3,047.9

 
$
2,958.7

 
$
89.2

 
3.0
%

The increase in restaurant sales in the three months ended September 30, 2013 as compared to the same period in 2012 was primarily attributable to additional revenues of approximately $24.4 million from the opening of 51 new restaurants not included in our comparable restaurant sales base. This increase was partially offset by (i) a $6.7 million decrease in comparable restaurant sales at our existing restaurants (including a 0.3% combined comparable restaurant sales decline in the third quarter of 2013 at our core domestic concepts), primarily due to mix in our product sales partially offset by general menu price increases and (ii) a $3.5 million decrease from the closing of seven restaurants since September 30, 2012.

The increase in restaurant sales in the nine months ended September 30, 2013 as compared to the same period in 2012 was primarily attributable to (i) additional revenues of approximately $72.4 million from the opening of 58 new restaurants not included in our comparable restaurant sales base and (ii) a $25.2 million increase in comparable restaurant sales at our existing restaurants (including a 1.2% combined comparable restaurant sales increase for the nine months ended September 30, 2013 at our core domestic concepts), primarily due to increases in general menu prices and customer traffic, which were partially offset by mix in our product sales. The increase in customer traffic was primarily driven by selective daypart expansion across certain concepts, innovations in menu, service, promotions and operations across the portfolio and renovations at additional Outback Steakhouse locations partially offset by unfavorable winter weather conditions and the additional day in February 2012 due to Leap Year. The increase in restaurant sales in the nine months ended September 30, 2013 as compared to the same period in 2012 was partially offset by a $8.4 million decrease from the closing of seven restaurants since September 30, 2012.


31

Table of Contents
BLOOMIN’ BRANDS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Continued

The following table includes additional information about changes in Restaurant sales at domestic Company-owned restaurants for our core brands:

 
THREE MONTHS ENDED
 
NINE MONTHS ENDED
 
SEPTEMBER 30,
 
SEPTEMBER 30,
 
2013
 
2012
 
2013
 
2012
Average restaurant unit volumes (weekly):
 
 
 
 
 
 
 
Outback Steakhouse (1)
$
58,069

 
$
57,922

 
$
62,491

 
$
60,961

Carrabba’s Italian Grill
$
54,132

 
$
53,595

 
$
58,085

 
$
58,123

Bonefish Grill
$
55,699

 
$
57,847

 
$
60,927

 
$
61,644

Fleming’s Prime Steakhouse and Wine Bar
$
66,254

 
$
64,058

 
$
75,515

 
$
72,537

Operating weeks:
 
 
 
 
 

 
 
Outback Steakhouse (1)
8,721

 
8,795

 
25,882

 
26,215

Carrabba’s Italian Grill
3,104

 
3,042

 
9,155

 
9,023

Bonefish Grill
2,347

 
2,066

 
6,807

 
6,009

Fleming’s Prime Steakhouse and Wine Bar
854

 
841

 
2,535

 
2,505

Year over year percentage change:
 
 
 
 
 

 
 
Menu price increases: (2)
 
 
 
 
 

 
 
Outback Steakhouse
2.7
 %
 
2.2
%
 
2.5
 %
 
2.1
%
Carrabba’s Italian Grill
2.9
 %
 
2.2
%
 
2.2
 %
 
2.2
%
Bonefish Grill
2.1
 %
 
2.1
%
 
2.0
 %
 
2.4
%
Fleming’s Prime Steakhouse and Wine Bar