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, 2002
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: 1-15935
OUTBACK STEAKHOUSE, INC.
(Exact name of registrant as specified in its charter)
_______________
DELAWARE 59-3061413
--------------------- ----------------------
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
2202 NORTH WEST SHORE BOULEVARD, 5TH 33607
FLOOR, TAMPA, FLORIDA
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(813) 282-1225
-------------------------------------------------------------
(Registrant's telephone number, including area code)
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 .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of November 8, 2002, there
were 75,786,254 shares of Common Stock, $.01 par value, outstanding.
Page 1 of 45
OUTBACK STEAKHOUSE, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by Outback Steakhouse, Inc. and Affiliates (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company, all adjustments (consisting only of normal
recurring entries) necessary for the fair presentation of the Company's results
of operations, financial position and cash flows for the periods presented have
been included.
Page 2 of 45
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
September 30, December 31,
ASSETS 2002 2001
CURRENT ASSETS --------------- ---------------
Cash and cash equivalents.................... $ 145,269 $115,928
Short term investments....................... 10,732 20,310
Inventories.................................. 24,723 38,775
Other current assets......................... 28,176 31,347
------------- -----------
Total current assets......................... 208,900 206,360
PROPERTY, FIXTURES AND EQUIPMENT, NET.......... 878,786 813,065
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES, NET 55,415 46,485
GOODWILL, NET.................................. 80,932 80,074
INTANGIBLE ASSETS, NET......................... 16,210 14,379
OTHER ASSETS................................... 73,322 77,385
------------- -----------
$ 1,313,565 $ 1,237,748
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 48,014 $47,179
Sales taxes payable.......................... 13,712 13,096
Accrued expenses............................. 62,711 56,587
Unearned revenue............................. 11,026 60,135
Income taxes payable......................... 22,799
Current portion of long-term debt............ 16,820 12,763
------------- -----------
Total current liabilities.................... 175,082 189,760
DEFERRED INCOME TAXES.......................... 36,361 22,878
LONG-TERM DEBT................................. 14,255 13,830
OTHER LONG-TERM LIABILITIES.................... 23,675 24,500
------------- -----------
Total liabilities............................ 249,373 250,968
INTEREST OF MINORITY PARTNERS IN ------------- -----------
CONSOLIDATED PARTNERSHIPS.................... 39,072 44,936
------------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized;
78,750 and 78,554 shares issued; and
76,032 and 76,913 shares outstanding as of
September 30, 2002 and
December 31, 2001, respectively............ 788 786
Additional paid-in capital................... 234,817 220,648
Retained earnings............................ 872,140 762,414
------------- -----------
1,107,745 983,848
Less treasury stock, 2,718 and 1,641
shares as of September 30, 2002 and
December 31, 2001, respectively, at cost..... (82,625) (42,004)
------------- -----------
Total stockholders' equity................... 1,025,120 941,844
------------- -----------
$ 1,313,565 $ 1,237,748
======== ========
See notes to unaudited consolidated financial statements.
Page 3 of 45
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
REVENUES -------------- ------------ ------------- --------------
Restaurant sales.............................. $ 579,677 $ 524,360 $ 1,745,654 $ 1,575,323
Other revenues................................ 4,570 4,685 13,782 13,819
----------- ----------- ----------- -----------
TOTAL REVENUES.............................. 584,247 529,045 1,759,436 1,589,142
COSTS AND EXPENSES: ----------- ----------- ----------- -----------
Cost of sales............................... 212,452 205,339 644,593 605,807
Labor & other related....................... 142,490 127,114 425,451 378,014
Other restaurant operating.................. 120,423 106,921 352,853 313,379
Depreciation & amortization................. 19,206 17,529 55,882 50,318
General & administrative.................... 21,656 18,835 64,992 58,575
Provision for impaired assets and
restaurant closings................... 4,284 2,047 4,284 2,047
Contribution for "Dine Out for America"..... 7,000 7,000
Income from operations of unconsolidated
affiliates............................ (1,359) (1,108) (4,460) (3,086)
----------- ----------- ----------- -----------
Total costs and expenses............... 519,152 483,677 1,543,595 1,412,054
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS......................... 65,095 45,368 215,841 177,088
OTHER INCOME (EXPENSE), NET.................... (1,412) (608) (2,299) (1,568)
INTEREST INCOME (EXPENSE), NET................. 443 684 999 2,445
INCOME BEFORE ELIMINATION OF ----------- ----------- ----------- -----------
MINORITY PARTNERS' INTEREST
AND INCOME TAXES............................ 64,126 45,444 214,541 177,965
ELIMINATION OF MINORITY PARTNERS'
INTEREST.................................... 8,880 6,246 29,895 23,902
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES....... 55,246 39,198 184,646 154,063
PROVISION FOR INCOME TAXES..................... 19,447 13,798 64,996 54,230
----------- ---------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE............ 35,799 25,400 119,650 99,833
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES)......... (4,422)
----------- ---------- ----------- -----------
NET INCOME..................................... $ 35,799 $ 25,400 $ 115,228 $ 99,833
======= ======= ======= =======
See notes to unaudited consolidated financial statements.
Page 4 of 45
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited, continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
BASIC EARNINGS PER COMMON SHARE -------------- ------------ -------------- --------------
Income before cumulative effect of
a change in accounting principle....... $ 0.47 $ 0.33 $ 1.55 $ 1.30
Cumulative effect of a change in
accounting principle (net of taxes).... - - (0.06) -
Net income.................................. $ 0.47 $ 0.33 $ 1.50 $ 1.30
BASIC WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................... 76,771 76,786 77,040 76,622
DILUTED EARNINGS PER SHARE
Income before cumulative effect of
a change in accounting principle....... $ 0.46 $ 0.32 $ 1.50 $ 1.28
Cumulative effect of a change in
accounting principle (net of taxes).... - - (0.06) -
Net income.................................. $ 0.46 $ 0.32 $ 1.45 $ 1.28
DILUTED WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING................... 78,576 78,524 79,673 78,182
See notes to unaudited consolidated financial statements.
Page 5 of 45
OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Nine Months Ended September 30,
2002 2001
Cash flows from operating activities: -------- --------
Net income................................................. $ 115,228 $ 99,833
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation............................................. 53,936 45,528
Amortization............................................. 1,946 4,790
Provision for impaired assets and restaurant closings.... 4,284 2,047
Cumulative effect of a change in accounting principle.... 4,422
Minority partners' interest in
consolidated partnerships' income..................... 29,895 23,902
Income from unconsolidated affiliates.................... (4,460) (3,086)
Change in assets and liabilities:
Decrease (increase) in inventories.................... 14,052 (3,845)
Decrease (increase) in other current assets........... 3,171 (3,493)
Decrease in goodwill, intangible assets and
other assets........................................ 2,882 1,288
Increase in accounts payable,
sales taxes payable, and accrued expenses........... 7,575 2,647
Decrease in unearned revenue.......................... (49,109) (45,231)
Increase (decrease) in income taxes payable........... 29,970 (13,621)
Increase in deferred income taxes..................... 13,483 1,122
Decrease in other long-term liabilities............... (825) (1,125)
----------- -----------
Net cash provided by operating activities............. 226,450 110,756
Cash flows used in investing activities: ----------- -----------
Purchase of investment securities........................ (257)
Maturity of investment securities........................ 9,835
Capital expenditures..................................... (125,213) (143,645)
Change in investments in and advances to
unconsolidated affiliates............................. (4,470) (8,925)
----------- -----------
Net cash used in investing activities................. (120,105) (152,570)
Cash flows from financing activities: ----------- -----------
Proceeds from issuance of long-term debt................. 5,305 16,758
Proceeds from minority partners' contributions........... 7,878 5,781
Distributions to minority partners....................... (42,365) (27,272)
Repayments of long-term debt............................. (823) (9,575)
Payments for purchase of treasury stock.................. (72,596) (23,313)
Proceeds from reissuance of treasury stock............... 25,597 15,344
----------- -----------
Net cash used in financing activities................. (77,004) (22,277)
----------- -----------
Net increase (decrease) in cash and cash equivalents....... 29,341 (64,091)
Cash and cash equivalents at beginning of period........... 115,928 131,604
----------- -----------
Cash and cash equivalents at end of period................. $ 145,269 $ 67,513
======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest................................... $ 1,080 $ 582
Cash paid for income taxes............................... $ 14,001 $ 69,598
Supplemental disclosures of non-cash items:
Assets/liabilities of businesses transferred under
contractual arrangements............................... $ 22,000
Purchase of minority partners' interest.................. $ 7,876 4,161
See notes to unaudited consolidated financial statements.
Page 6 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Outback Steakhouse, Inc. (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 for complete financial statements. In the opinion of the
Company, all adjustments (consisting only of normal recurring entries) necessary
for the fair presentation of the Company's results of operations, financial
position and cash flows for the periods presented have been included.
Certain amounts shown in the 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation. These reclassifications
did not have an effect on total assets, total liabilities, stockholders' equity
or net income.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
The December 31, 2001 consolidated balance sheet has been derived from the
audited consolidated financial statements but does not include all of the
disclosures required by generally accepted accounting principles. It is
suggested that these financial statements be read in conjunction with the
financial statements and financial notes thereto included in the Company's 2001
Annual Report to Stockholders.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
------------- ------------
Deposits (including income tax deposits).. $ 2,324 $ 9,275
Accounts receivable....................... 8,050 7,710
Accounts receivable franchisees........... 3,024 3,560
Prepaid expenses.......................... 14,398 8,212
Other current assets...................... 380 2,590
------------ --------------
$ 28,176 $ 31,347
======= =========
Page 7 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Property, Fixtures and Equipment, Net
Property, fixtures and equipment consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
---------- ------------
Land.................................. $ 164,143 $ 158,314
Buildings & building improvements..... 435,923 382,793
Furniture & fixtures.................. 114,214 99,767
Equipment............................. 272,590 238,285
Leasehold improvements................ 198,631 185,623
Construction in progress.............. 30,077 35,464
Accumulated depreciation.............. (336,792) (287,181)
----------- -------------
$ 878,786 $ 813,065
======= =======
4. Goodwill and Other Intangible Assets, Net
Goodwill and other intangible assets consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
-------------- --------------
Goodwill, net........................ $ 80,932 $ 80,074
Intangible assets, net (including
liquor licenses)................... 16,210 14,379
----------- -----------
$ 97,142 $ 94,453
======= =======
"Intangible assets" included the following intangible assets subject to
amortization (in thousands):
September 30, December 31,
2002 2001
(unaudited)
-------------- --------------
Non-compete/non-disclosure and related
contractual agreements................. $ 13,039 $ 10,141
Accumulated amortization................. (6,202) (4,482)
----------- -----------
$ 6,837 $ 5,659
======= =======
Aggregate amortization expense on the intangible assets subject to
amortization was approximately $1,720,000 for the nine months ended September
30, 2002 and is estimated to be approximately $2,500,000 to $3,000,000 for each
of the years ended December 31, 2002 through 2006. The net carrying amount of
goodwill as of September 30, 2002 and December 31, 2001 was approximately
$80,932,000 and $80,074,000, respectively.
Page 8 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Other Assets
Other assets consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
--------------- --------------
Other assets........................... $ 39,582 $ 42,885
Assets of business transferred under
contractual arrangement.............. 13,565 15,500
Deferred license fee................... 20,175 19,000
------------- -----------
$ 73,322 $ 77,385
======= =======
In January 2001, the Company entered into a ten-year licensing agreement
with an entity owned by minority interest owners of certain non-restaurant
operations (referred to in some Company literature as Outback Sports). The
licensing agreement transferred the right and license to use certain assets of
these non-restaurant operations from the Company to the licensee. License fees
payable over the term of the agreement total approximately $22,000,000 of which
$20,175,000 is outstanding and is included in "Other Assets" in the Unaudited
Consolidated Balance Sheet.
In July 2002, the Company agreed to defer the July 31, 2002 scheduled
payment of $1,125,000 and the November 30, 2002 scheduled payment of
$375,000 for one year. During the third quarter of 2002, the licensee made a
$325,000 payment towards the deferred amounts. The Company is currently
negotiating with the licensee to alter the remaining payment schedule.
The net book value of these assets is approximately $13,565,000 and has
been reclassified from the line item entitled "Property, Fixtures and Equipment"
to "Other Assets" in the Consolidated Balance Sheet. The corresponding long-term
liability is included in the line item entitled "Other Long Term Liabilities" in
the Consolidated Balance Sheet. The Company has deferred the gain associated
with the transaction until such time as the amounts due under the licensing
agreement are realized and has continued depreciating the assets. See Note 8 of
Notes to Unaudited Consolidated Financial Statements.
Page 9 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Other Assets (continued)
Other Assets includes approximately $5,563,000 in principal and accrued
interest on loans made to Fleming's Prime Steakhouse II, LLC ("FPSH II"), the
operator of three unaffiliated Fleming's Prime Steakhouses, which the Company
has agreed to purchase. The value of these restaurants approximates the
Company's carrying value of the loan as of September 30, 2002. The Company and
FPSH II have agreed that the conveyance of the restaurants to the Company will
satisfy the outstanding balance.
Other Assets also includes approximately $8,609,000 in loans to its
operating partner in the Outback/Fleming's, LLC for its partner's share of
capital to build new restaurants required beyond the initial $13,000,000
contributed by the Company. The Company expects to continue to make advances
to its operating partner for the construction of new restaurants. The carrying
value of the loan is exceeded by the value of the partners' interest in the
partnership.
6. Long-term Debt
Long-term debt consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
-------------- --------------
Revolving line of credit, interest at 2.39%
and 3.67% at September 30, 2002 and December 31,
2001, respectively ................................ $10,000 $10,000
Other notes payable, uncollateralized,
interest rates ranging from 3.55% to 6.75%
at September 30, 2002 and 4.40% to 7.50%
at December 31, 2001............................... 21,075 16,593
------------ ----------
31,075 26,593
Less current portion................................. 16,820 12,763
------------ ----------
Long-term debt....................................... $14,255 $13,830
======= ======
LONG-TERM DEBT
The Company has an uncollateralized revolving line of credit that permits
borrowing up to a maximum of $125,000,000 at 57.5 basis points over the 30, 60,
90 or 180 day London Interbank Offered Rate ("LIBOR") (1.71% to 1.82% at
September 30, 2002 and 1.87% to 1.98% at December 31, 2001). At September 30,
2002 and December 31, 2001 the unused portion of the revolving line of credit
was $115,000,000. The line includes a credit facility fee of 17.5 basis points
and matures in December 2004.
Page 10 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long-term Debt (continued)
The Company has a $15,000,000 uncollateralized line of credit bearing
interest at rates ranging from 57.5 to 95.0 basis points over LIBOR.
Approximately $3,850,000 and $4,350,000 of the line of credit was committed for
the issuance of letters of credit at September 30, 2002 and December 31, 2001,
respectively. The remaining $11,150,000 at September 30, 2002 is available to
the company.
The Company has notes payable with banks bearing interest at rates ranging
from 6.5% to 6.75% to support the Company's Korean operations. As of September
30, 2002 and December 31, 2001, the outstanding balance was approximately
$15,480,000 and $12,194,000, respectively. The notes mature at dates ranging
from January 2003 to August 2003.
DEBT GUARANTEES
The Company is the guarantor of two uncollateralized lines of credit that
permit borrowing of up to $20,000,000 for its franchisee operating Outback
Steakhouses in Japan. At September 30, 2002 and December 31, 2001 the
borrowings totaled approximately $15,167,000 and $8,215,000, respectively. (See
further discussion in "Liquidity and Capital Resources" in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".)
The Company is the guarantor of an uncollateralized line of credit which
permits borrowing of up to $35,000,000, maturing in December 2004, for its
franchisee operating Outback Steakhouses in California. At September 30, 2002
and December 31, 2001, the outstanding balance was approximately $28,533,000 and
$26,354,000, respectively.
The Company is the guarantor of an uncollateralized line of credit which
permits borrowing of up to a maximum of $24,500,000, maturing in December 2004,
for its joint venture partner in the development of Roy's restaurants. At
September 30, 2002 and December 31, 2001, the outstanding balance was
approximately $19,691,000 and $19,427,000, respectively.
The Company is the guarantor of bank loans made to certain franchisees
operating Outback Steakhouse restaurants. At September 30, 2002 and December 31,
2001, the outstanding balance on these loans was approximately $233,000 and
$437,000, respectively.
The Company is the guarantor of up to approximately $9,445,000 of a
$68,000,000 note for Kentucky Speedway in which the Company has a 22.22% equity
interest and at which the Company operates catering and concession facilities.
At September 30, 2002 and December 31, 2001, the outstanding balance on the note
was approximately $68,000,000.
Page 11 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long-term Debt (continued)
DEBT AND DEBT GUARANTEE SUMMARY
The Company's contractual debt obligations and debt guarantees as of
September 30, 2002 are summarized in the table below (in thousands):
Current Long-term
Total Portion Portion
------------- ------------ ---------------
Debt........................... $ 31,075 $ 16,820 $ 14,255
Debt guarantees................ $ 89,178 $ 20,233 $ 68,945
Amount outstanding under debt
guarantees................... $ 73,069 $ 15,400 $ 57,669
See "Liquidity and Capital Resources" in Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
7. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
-------------- --------------
Accrued payroll and other compensation... $ 20,597 $ 19,207
Accrued insurance........................ 15,392 13,206
Accrued property taxes................... 9,843 6,970
Other accrued expenses................... 16,879 17,204
----------- -----------
$ 62,711 $ 56,587
======= =======
Page 12 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Other Long Term Liabilities
Other long term liabilities consisted of the following (in thousands):
September 30, December 31,
2002 2001
(unaudited)
---------------- ----------------
Accrued insurance........................ $ 4,000 $ 4,000
Other deferred liability................. 19,675 20,500
--------- -----------
$ 23,675 $ 24,500
======= =======
In January 2001, the Company entered into a ten year licensing agreement
with an entity owned by minority interest owners of certain non-restaurant
operations. The licensing agreement transferred the right and license to use
certain assets of these non-restaurant operations. License fees payable over the
term of the agreement total approximately $22,000,000 of which $20,175,000 is
outstanding. The Company has deferred the gain associated with the transaction
until such time as the amounts due under the licensing agreement are realized.
The corresponding long-term asset is included in the line item entitled "Other
Assets." See Note 5 of Notes to Unaudited Consolidated Financial Statements.
9. Business Combinations
In June 2002, the Company issued approximately 34,000 shares of Common
Stock to one area operating partner to acquire its interest in nine Outback
Steakhouses in Ohio and Pennsylvania. The acquisition was accounted for by the
purchase method, and the related goodwill is included in the line item entitled
"Goodwill, Net" in the Company's Unaudited Consolidated Balance Sheets.
In April 2002, the Company exercised its option to convert its $5,300,000
preferred stock investment in its Hong Kong franchisee into ownership of three
Outback Steakhouse restaurants formerly operated as franchises. The acquisition
was accounted for by the purchase method.
As part of the Company's realignment of its international operations, the
Company issued approximately 194,000 shares of Common Stock in May 2002 to
purchase the 20% interest in Outback Steakhouse International LP
("International") that it did not previously own. The acquisition was accounted
for by the purchase method and the related goodwill is included in the line item
entitled "Goodwill, Net" in the Company's Unaudited Consolidated Balance
Sheets. See discussion in "Liquidity and Capital Resources" in Item 2,
"Managements Discussion and Analysis of Financial Condition and Results of
Operations". Approximately 50% of International's restaurants in which the
Company has a direct investment are owned through a Cayman Island corporation.
Page 13 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Recently Issued Financial Accounting Standards
"Business Combinations" and "Goodwill and Other Intangible Assets"
On June 30, 2001, the Financial Accounting Standards Board ("FASB")
finalized Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires all business combinations initiated after June
30, 2001, to be accounted for using the purchase method of accounting. With the
adoption of SFAS No. 142 effective January 1, 2002, goodwill is no longer
subject to amortization. Rather, goodwill will be subject to at least an annual
assessment for impairment by applying a fair-value-based test. Under the new
rules, an acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred, licensed, rented,
or exchanged regardless of the acquirer's intent to do so. These intangible
assets will be required to be amortized over their useful lives.
In connection with the adoption of SFAS No. 142, the Company completed the
transitional impairment testing of goodwill during the six months ended June 30,
2002. The adoption has been made effective as of the beginning of the Company's
current fiscal year. The transitional impairment testing resulted in an initial
goodwill impairment charge of approximately $4,422,000, net of taxes of
approximately $2,199,000, during the six month period ended June 30, 2002. In
accordance with SFAS No. 142, the initial impairment charge was recorded as a
cumulative effect of a change in accounting principle in the Company's
Consolidated Statements of Income for the six month period ended June 30, 2002.
Page 14 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Recently Issued Financial Accounting Standards (continued)
"Business Combinations" and "Goodwill and Other Intangible Assets"
The following table represents net income and earnings per share for prior
periods had SFAS No. 142 been in effect for those periods (in thousands except
per share data, unaudited):
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Reported income before cumulative effect of
a change in accounting principle............... $ 35,799 $ 25,400 $ 119,650 $ 99,833
Add back: Goodwill amortization, net of taxes..... - 1,001 - 2,955
Adjusted income before cumulative effect of ----------- ----------- ----------- -----------
a change in accounting principle................ 35,799 26,401 119,650 102,788
Cumulative effect of a change in accounting
principle (net of taxes) ....................... - - (4,422) -
----------- ----------- ----------- -----------
Adjusted net income .............................. $ 35,799 $ 26,401 $ 115,228 $ 102,788
======= ======= ======= =======
BASIC EARNINGS PER SHARE
Reported income before cumulative effect of
a change in accounting principle............... $ 0.47 $ 0.33 $ 1.55 $ 1.30
Add back: Goodwill amortization, net of taxes..... - 0.01 - 0.04
Adjusted income before cumulative effect of
a change in accounting principle................ 0.47 0.34 1.55 1.34
Cumulative effect of a change in accounting
principle (net of taxes) ....................... - - (0.06) -
Adjusted net income............................... $ 0.47 $ 0.34 $ 1.50 $ 1.34
DILUTED EARNINGS PER SHARE
Reported income before cumulative effect of
a change in accounting principle............... $ 0.46 $ 0.32 $ 1.50 $ 1.28
Add back: Goodwill amortization, net of taxes..... - 0.01 - 0.04
Adjusted income before cumulative effect of
a change in accounting principle................ 0.46 0.33 1.50 1.31
Cumulative effect of a change in accounting
principle (net of taxes) ....................... - - (0.06) -
Adjusted net income............................... $ 0.46 $ 0.33 $ 1.45 $ 1.31
Page 15 of 45
OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. Recently Issued Financial Accounting Standards (continued)
"Accounting for the Impairment or Disposal of Long-Lived Assets"
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued, replacing SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and portions of APB Opinion 30 "Reporting the Results of Operations." SFAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and changes the criteria that would have to be met to classify an asset as held-
for-sale. SFAS No. 144 retains the requirement of APB Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. SFAS No. 144 is effective January 1, 2002 and was
adopted by the Company as of that date. The adoption of SFAS No. 144 did not
have a material impact on the Company's financial condition or results of
operations in the nine months ended September 30, 2002.
"Accounting for Exit or Disposal Activities"
In June 2002, the FASB voted in favor of issuing SFAS No. 146 "Accounting
for Exit or Disposal Activities". SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The scope of
SFAS No. 146 also includes (1) costs related to terminating a contract that is
not a capital lease and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred-
compensation contract. SFAS No. 146 is effective January 1, 2003.
11. Subsequent Event
On October 23, 2002, the Company announced that its Board of Directors
declared the Company's first quarterly dividend of $0.12 per share of the
Company's common stock. The dividend is payable December 6, 2002 to
shareholders of record as of November 22, 2002.
Page 16 of 45
OUTBACK STEAKHOUSE, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (unaudited)
The following table sets forth, for the periods indicated, (i) the
percentages which the items in the Company's Unaudited Consolidated Statements
of Income bear to total revenues, or restaurant sales as indicated, and (ii)
selected operating data:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
REVENUES ------ ----- ------- ------
Restaurant sales.......................... 99.2% 99.1% 99.2% 99.1%
Other revenues............................ 0.8 0.9 0.8 0.9
------- ------ ------- -------
TOTAL REVENUES............................ 100.0 100.0 100.0 100.0
COSTS AND EXPENSES: ------- ------ ------- -------
Cost of sales (1) ...................... 36.7 39.2 36.9 38.5
Labor & other related (1) .............. 24.6 24.2 24.4 24.0
Other restaurant operating (1) ......... 20.8 20.4 20.2 19.9
Depreciation & amortization............. 3.3 3.3 3.2 3.2
General & administrative................ 3.7 3.6 3.7 3.7
Provision for impaired assets and
restaurant closings................ 0.7 0.4 0.2 0.1
Contribution for "Dine Out for America". 1.3 0.4
Income from operations of
unconsolidated affiliates............. (0.2) (0.2) (0.3) (0.2)
Total costs and expenses............ 88.9 91.4 87.7 88.9
INCOME FROM OPERATIONS.................... 11.1 8.6 12.3 11.1
OTHER INCOME (EXPENSE), NET............... (0.2) (0.1) (0.1) (0.1)
INTEREST INCOME (EXPENSE), NET............ 0.1 0.1 0.1 0.2
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES........................ 11.0 8.6 12.2 11.2
ELIMINATION OF MINORITY PARTNERS'
INTEREST................................ 1.5 1.2 1.7 1.5
INCOME BEFORE PROVISION FOR
INCOME TAXES............................ 9.5 7.4 10.5 9.7
PROVISION FOR INCOME TAXES ............... 3.3 2.6 3.7 3.4
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING PRINCIPLE........ 6.1 4.8 6.8 6.3
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES) .... (0.3)
NET INCOME ............................... 6.1% 4.8% 6.5% 6.3%
(1) As a percentage of restaurant sales.
Page 17 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
System-wide sales (millions of dollars): ------ ------ ------ ------
Outback Steakhouse restaurants
Company owned.............................. $494 $461 $1,483 $1,390
Domestic franchised and development
joint venture............................ 94 91 284 272
International franchised and development
joint venture............................ 23 21 68 61
------ ------ ------ ------
Total...................................... 611 573 1,835 1,723
------ ------ ------ ------
Carrabba's Italian Grills
Company owned.............................. 60 51 184 149
Development joint venture.................. 23 18 68 52
------ ------ ------ ------
Total...................................... 83 69 252 201
------ ------ ------ ------
Other restaurants
Company owned.............................. 26 12 79 36
Franchised and development joint venture... 3 1 8 1
------ ------ ------ ------
Total...................................... 29 13 87 37
------ ------ ------ ------
System-wide total............................ $723 $655 $2,174 $1,961
====== ====== ====== ======
Page 18 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
September 30,
2002 2001
Number of restaurants (at end of the period): --------- ---------
Outback Steakhouses
Company owned.............................. 600 556
Domestic franchised and development joint
venture.................................. 118 111
International franchised and development
joint venture............................ 53 47
--- ---
Total...................................... 771 714
--- ---
Carrabba's Italian Grills
Company owned.............................. 86 70
Development joint venture.................. 29 24
--- ---
Total...................................... 115 94
Fleming's Prime Steakhouse and Wine Bars --- ---
Company owned.............................. 14 7
Roy's --- ---
Company owned.............................. 12 8
Franchised and development joint venture... 2 1
--- ---
Total...................................... 14 9
Lee Roy Selmon's --- ---
Company owned.............................. 1 1
Bonefish Grills --- ---
Company owned.............................. 7 -
Franchised and development joint venture... 2 -
--- ---
Total...................................... 9 -
Cheeseburger in Paradise --- ---
Company owned.............................. 1 -
--- ---
System-wide total............................ 925 825
=== ===
Page 19 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended September 30, 2002 and 2001 (unaudited)
Revenues. Restaurant sales increased by 10.5% to $579,677,000 during the
third quarter of 2002 as compared with $524,360,000 in the same period in 2001.
The increase was primarily attributable to the opening of new restaurants after
September 30, 2001. The following table includes additional activities that
influenced the changes in restaurant sales at domestic Company owned restaurants
for the three months ended September 30, 2002 and 2001.
Three Months Ended
September 30,
2002 2001
Average unit volumes(weekly) for -------------- ----------------
restaurants opened
for one year or more:
Outback Steakhouses.................. $ 64,253 $ 64,684
Carrabba's Italian Grills............ $ 56,831 $ 56,665
Average unit volumes(weekly) for
restaurants opened
for less than one year:
Outback Steakhouses.................. $ 55,829 $ 56,984
Carrabba's Italian Grills............ $ 57,854 $ 65,192
Operating weeks
Outback Steakhouses.................. 7,365 6,913
Carrabba's Italian Grills............ 1,059 891
Menu price increases
Outback Steakhouses.................. 2.1% 2.7%
Carrabba's Italian Grills............ 1.4% 4.6%
Year to year percentage change:
Same-store sales (stores open
18 months or more):
Outback Steakhouses.................. 0.0% (2.3%)
Carrabba's Italian Grills............ (0.3%) 3.6%
Other revenues, consisting primarily of initial franchise fees and
royalties, decreased by $115,000 to $4,570,000 during the third quarter of 2002
as compared with $4,685,000 in the same period in 2001. The decrease was
attributable to lower initial franchise fees from international franchise
operations partially offset by higher royalties from additional stores operated
as franchises during the third quarter of 2002 compared with the same period in
2001. The decrease was also attributable to the Company's decision to allow
international franchisees in certain markets, including Costa Rica, the
Dominican Republic, Indonesia, Mexico, Malaysia, Singapore, Thailand, the United
Kingdom and Venezuela to spend the royalties due to the Company on additional
advertising to increase brand awareness and penetration in new markets.
Costs and expenses. Costs of sales, consisting of food and beverage costs,
as a percentage of restaurant sales, decreased in the third quarter of 2002 to
36.7% of restaurant sales as compared with 39.2% in the same period in 2001. The
decrease was attributable to commodity cost decreases for beef, ribs, dairy and
shrimp and seafood, partially offset by higher produce costs. The decrease was
also attributable to higher menu prices at both Outback Steakhouse and
Carrabba's Italian Grills and a shift in the proportion of sales and cost of
sales associated with non Outback Steakhouse restaurants which operate at lower
cost of goods sold levels than Outback Steakhouse.
Page 20 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended September 30, 2002 and 2001 (continued)
Labor and other related expenses include all direct and indirect labor
costs incurred in restaurant operations. Labor expenses increased as a
percentage of restaurant sales by 0.4% to 24.6% in the third quarter of 2002 as
compared with 24.2% in the same period in 2001. The increase resulted from
higher employee health insurance costs, higher hourly employee bonuses, lower
average unit volumes at Outback Steakhouse and Carrabba's Italian Grill and an
increase in the proportion of new restaurant formats (Fleming's, Roy's and
Selmon's) and international Outback Steakhouses which have higher average labor
costs than domestic Outback Steakhouses and Carrabba's Italian Grills.
Other restaurant operating expenses include all other unit-level operating
costs, the major components of which are operating supplies, rent, repairs and
maintenance, advertising expenses, utilities, pre-opening costs and other
occupancy costs. A substantial portion of these expenses are fixed or indirectly
variable. These costs increased by 0.4% of restaurant sales to 20.8% in the
third quarter of 2002, as compared with 20.4% in the same period in 2001. The
increase was attributable to increased advertising expense and to lower average
unit volumes at Outback Steakhouse and Carrabba's Italian Grill. The increase
was also attributable to an increase in the proportion of new format restaurants
and international Outback Steakhouses in operation which have higher average
restaurant operating expenses as a percentage of restaurant sales than domestic
Outback Steakhouses and Carrabba's Italian Grills. The increase was partially
offset by lower preopening costs as a percentage of restaurant sales in
the third quarter of 2002 compared with the third quarter of 2001.
Depreciation and amortization costs were 3.3% of total revenues in the
third quarter of both 2002 and 2001. The impact of reduced amortization expense
due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" was
offset by higher depreciation costs. The increase in depreciation costs
resulted primarily from additional depreciation related to new unit development
and to higher depreciation costs for the new restaurant formats which have
higher average construction costs than Outback Steakhouse and Carrabba's Italian
Grills. Slightly lower average unit volumes at Outback Steakhouse also
contributed to depreciation costs increasing as a percentage of restaurant
sales.
General and administrative costs increased by $2,821,000 to $21,656,000 in
the third quarter of 2002 compared with $18,835,000 during the same period in
2001. This increase resulted from an increase in overall administrative costs
associated with operating additional domestic and international Outback
Steakhouses, Carrabba's Italian Grills, Fleming's Prime Steakhouses, Roy's and
Bonefish Grills as well as costs associated with the development of new
restaurant formats.
Page 21 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended September 30, 2002 and 2001 (continued)
Provision for impaired assets and restaurant closings. In accordance with
SFAS No. 144, in the third quarter of 2002 the Company recorded a pretax charge
to earnings of $4,284,000 which is primarily related to the closing of one Roy's
restaurant during the quarter and to the write-down of the carrying value of
three Outback Steakhouses and one Carrabba's Italian Grill. (Refer to
Impairment of Long-lived Assets measurement discussion in the Critical
Accounting Policies section of Management's Discussion and Analysis of Financial
Condition and Results of Operations). In the third quarter of 2001, the
Company recorded a pretax charge to earnings of $2,047,000 which is primarily
related to the costs associated with the closing of the Company's two Zazarac
restaurants.
Contribution for "Dine Out for America". This line item represents the
Company's commitment, announced on September 26, 2001, to contribute 100% of its
sales proceeds from Thursday October 11, 2001 to the victims and families of the
victims of the terrorist attacks of September 11, 2001. The Company's sales on
October 11, 2001 for the "Dine Out for America" fund raising event totaled
approximately $7,000,000 and accordingly the Company has recorded a pretax
charge to earnings of $7,000,000 during three months ended September 30, 2001.
Income from operations of unconsolidated affiliates represents the
Company's portion of the income from restaurants operated as development joint
ventures. Income from the development joint ventures was $1,359,000 during the
third quarter of 2002 as compared with income of $1,108,000 during the same
period in 2001. This increase was attributable to additional stores operating as
development joint ventures in the third quarter of 2002 and to an improvement in
the operating results of these restaurants similar to that seen in the operating
results of Company owned restaurants during the third quarter of 2002.
Income from operations. As a result of the increase in revenues, the
changes in the relationship between revenues and expenses discussed above and
the opening of new restaurants, income from operations increased by $19,727,000
to $65,095,000 in the third quarter of 2002 as compared with $45,368,000 in the
same period in 2001.
Other income (expense), net. Other income (expense) includes the net of
revenues and expenses from non-restaurant operations. Net other expense was
$1,412,000 during the third quarter of 2002 as compared with net other expense
of $608,000 in the same period in 2001. The increase in net other expense was
the result of a decrease of approximately $880,000 in the cash surrender value
of certain life insurance policies during the third quarter of 2002. The
insurance policies are in place on the lives of certain executives to fund
buy/sell agreements with the executives' estates. The agreements provide for
the Company to use the life insurance proceeds to buy shares of the Company's
stock at the current market price from the executives' estate for estate tax
payment purposes while maintaining share price stability. The increase in net
other expense is also attributable to the Company's portion of the losses
associated with the operation of Kentucky Speedway in which the Company has
a 22.22% equity interest and at which the Company operates catering and
concession facilities.
Page 22 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended September 30, 2002 and 2001 (continued)
Interest income (expense), net. Interest income, net, was $443,000 during
the third quarter of 2002 as compared with interest income, net, of $684,000 in
the same period in 2001. The decrease in interest income resulted from lower
interest rates on short term investments during the third quarter of 2002
compared with the same period in 2001 offset by increased interest expense due
to higher average debt balances on borrowings used to support Outback
Steakhouse's international operations during the third quarter of 2002 compared
with the third quarter of 2001.
Elimination of minority partners' interests. The allocation of minority
partners' income included in this line item represents the portion of income
from operations included in consolidated operating results attributable to the
ownership interests of restaurant managers and area operating partners in
Company owned restaurants and the ownership interests in certain other
restaurants in which the Company has a controlling interest. As a percentage of
revenues, these allocations were 1.5% and 1.2% during the quarters ended
September 30, 2002 and 2001, respectively. The increase in the ratio is the
result of an increase in overall restaurant operating margins and improvement in
the performance of new format restaurants which have a higher percentage of
minority interest than the Company's older formats.
Provision for income taxes. The provision for income taxes in the third
quarter of both 2002 and 2001 reflected the expected income taxes due at federal
statutory rates and state income tax rates, net of the federal benefit. The
effective income tax rate was 35.2% during the third quarter of 2002 and 2001.
Approximately 50% of the Company's international restaurants in which the
Company has a direct investment are owned through a Cayman Island corporation.
Net income and earnings per share. Net income for the third quarter of 2002
was $35,799,000 as compared with $25,400,000 in the same period in 2001. Basic
earnings per share increased to $0.47 during the third quarter of 2002 as
compared with $0.33 for the same period in 2001. Diluted earnings per share
increased to $0.46 during the third quarter of 2002 as compared with $0.32 for
the same period in 2001.
Page 23 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 2002 and 2001 (unaudited)
Revenues. Restaurant sales increased by 10.8% to $1,745,654,000 during the
first nine months of 2002 as compared with $1,575,323,000 in the same period in
2001. The increase in restaurant sales was primarily attributable to the opening
of new restaurants after September 30, 2001. The following table includes
additional activities that influenced the changes in restaurant sales at
domestic Company owned restaurants for the nine months ended September 30, 2002
and 2001.
Nine Months Ended
September 30,
2002 2001
Average unit volumes(weekly) for ------------- ----------------
restaurants opened
for one year or more:
Outback Steakhouses.................... $ 66,024 $ 66,830
Carrabba's Italian Grills.............. $ 60,733 $ 60,218
Average unit volumes(weekly) for
restaurants opened
for less than one year:
Outback Steakhouses.................... $ 57,804 $ 61,248
Carrabba's Italian Grills.............. $ 62,167 $ 65,551
Operating weeks
Outback Steakhouses.................... 21,602 20,241
Carrabba's Italian Grills.............. 3,031 2,473
Menu price increases
Outback Steakhouses.................... 1.3% 2.9%
Carrabba's Italian Grills.............. 0.9% 4.8%
Year to year percentage change:
Same-store sales (stores open
18 months or more):
Outback Steakhouses.................... (0.5%) 0.7%
Carrabba's Italian Grills.............. 1.4% 6.9%
Other revenues, consisting of initial franchise fees and royalties,
decreased by $37,000 to $13,782,000 during the first nine months of 2002 as
compared with $13,819,000 in the same period in 2001. The decrease was
attributable to lower initial franchise fees from international franchise
operations partially offset by higher royalties from additional stores operated
as franchises during the first nine months of 2002 compared with the same period
in 2001. The decrease was also attributable to the Company's decision to allow
international franchisees in certain markets, including Costa Rica, the
Dominican Republic, Indonesia, Mexico, Malaysia, Singapore, Thailand, the United
Kingdom and Venezuela to spend the royalties due to the Company on additional
advertising to increase brand awareness and penetration in new markets.
Page 24 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 2002 and 2001 (continued)
Costs and expenses. Cost of sales as a percentage of restaurant sales,
decreased by 1.6% to 36.9% in the first nine months of 2002 as compared with
38.5% in the same period in 2001. The decrease was attributable to commodity
cost decreases for beef, ribs, butter and seafood partially offset by higher
produce costs. The decrease was also attributable to higher menu prices at both
Outback Steakhouse and Carrabba's Italian Grills and a shift in the proportion
of sales and cost of sales associated with the Company's non Outback Steakhouse
restaurants which operate at lower cost of goods sold levels than Outback
Steakhouse.
Labor and other related expenses increased as a percentage of restaurant
sales by 0.4% to 24.4% in the first nine months of 2002 as compared with 24.0%
in the same period in 2001. The increase resulted from higher employee health
insurance costs, higher hourly employee bonuses, lower average unit volumes at
Outback Steakhouse and an increase in the proportion of new restaurant formats
and international Outback Steakhouses which have higher average labor costs than
domestic Outback Steakhouses and Carrabba's Italian Grills.
Other restaurant operating expenses increased by 0.3% of restaurant sales
to 20.2% in the first nine months of 2002 as compared with 19.9% in the same
period in 2001. The increase was attributable to higher insurance costs, lower
average unit volumes for Outback Steakhouse and an increase in the proportion of
new format restaurants and international Outback Steakhouses in operation, which
have higher average restaurant operating expenses as a percentage of restaurant
sales than domestic Outback Steakhouses and Carrabba's Italian Grills. The
increase was partially offset by lower restaurant preopening costs, lower
natural gas costs and higher average unit volumes for Carrabba's Italian Grills,
which reduced the fixed and indirectly variable costs as a percentage of
restaurant sales.
Depreciation and amortization costs were 3.2% of total revenues in the
first nine months of 2002 and 2001. The impact of reduced amortization expense
due to the adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" was
offset by higher depreciation costs. The increase in depreciation costs
resulted primarily from additional depreciation related to new unit development
and to higher depreciation costs for new restaurant formats which have higher
average construction costs than Outback Steakhouse and Carrabba's Italian
Grills. Slightly lower average unit volumes at Outback Steakhouse also
contributed to depreciation costs increasing as a percentage of restaurant
sales.
General and administrative costs increased by $6,417,000 to $64,992,000
during the first nine months of 2002 as compared to with $58,575,000 during the
same period in 2001. This increase resulted from an increase in overall
administrative costs associated with operating additional domestic and
international Outback Steakhouses, Carrabba's Italian Grills, Fleming's Prime
Steakhouses, Roy's and Bonefish Grills as well as costs associated with the
development of new restaurant formats.
Page 25 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 2002 and 2001 (continued)
Provision for impaired assets and restaurant closings. In accordance with
SFAS No. 144, in the third quarter of 2002 the Company recorded a pretax charge
to earnings of $4,284,000 which is primarily related to the closing of one Roy's
restaurant during the quarter and to the write-down of the carrying value of
three Outback Steakhouses and one Carrabba's Italian Grill. (Refer to
Impairment of Long-lived Assets measurement discussion in the Critical
Accounting Policies section of Management's Discussion and Analysis of Financial
Condition and Results of Operations). In the third quarter of 2001, the Company
recorded a pretax charge to earnings of $2,047,000 which is primarily related to
the costs associated with the closing of the Company's two Zazarac restaurants.
Contribution for "Dine Out for America". This line item represents the
Company's commitment, announced on September 26, 2001, to contribute 100% of its
sales proceeds from Thursday October 11, 2001 to the victims and families of the
victims of the terrorist attacks of September 11, 2001. The Company's sales on
October 11, 2001 for the "Dine Out for America" fund raising event totaled
approximately $7,000,000 and accordingly the Company has recorded a pretax
charge to earnings of $7,000,000 during three months ended September 30, 2001.
Income from operations of unconsolidated affiliates was $4,460,000 in the
first nine months of 2002 as compared with income of $3,086,000 in the same
period in 2001. This increase was attributable to additional stores operating as
development joint ventures in the first nine months of 2002 and to an
improvement in the operating results of these restaurants similar to that seen
in the operating results of Company owned restaurants during the first nine
months of 2002.
Income from operations. As a result of the increase in revenues, the
changes in the relationship between revenues and expenses discussed above and
the opening of new restaurants, income from operations increased by $38,753,000,
to $215,841,000 in the first nine months of 2002 as compared with $177,088,000
in the same period in 2001.
Other income (expense), net. Other income (expense) includes the net of
revenues and expenses from non-restaurant operations. Net other expense was
$2,299,000 during the first nine months of 2002 as compared with net other
expense of $1,568,000 in the same period in 2001. The increase in the net
expense partially resulted from a decrease of approximately $1,757,000 in the
cash surrender values of certain life insurance policies during the nine months
ended September 30, 2002. The increase in net expense is also attributable to
the Company's portion of increased losses associated with the operation of
Kentucky Speedway, partially offset by a gain of approximately $500,000 on the
sale of an airplane during the first nine months of 2002 compared with the first
nine months of 2001.
Page 26 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 2002 and 2001 (continued)
Interest income (expense), net. Interest income, net was $999,000 during
the first nine months of 2002 as compared with interest income, net of
$2,445,000 in the same period in 2001. The decrease in interest income resulted
from lower interest rates on short term investments during the first nine months
of 2002 compared with the same period in 2001 offset by increased interest
expense due to higher average debt balances on borrowings used to support
Outback Steakhouses international operations during the first nine months of
2002 compared with the same period in 2001.
Elimination of minority interests. As a percentage of revenues, these
allocations were 1.7% and 1.5% during the nine months ended September 30, 2002
and 2001, respectively. The increase in the ratio is the result of an increase
in overall restaurant operations margins and improvement in the performance of
new format restaurants.
Provision for income taxes. The provision for income taxes in the first
nine months of both 2002 and 2001 reflected the expected income taxes due at
federal statutory rates and state income tax rates, net of the federal benefit.
The effective income tax rate was 35.2% during the first nine months of 2002 and
2001. Approximately 50% of the Company's international restaurants in which the
Company has a direct investment are owned through a Cayman Island corporation.
Cumulative effect of a change in accounting principle. The cumulative
effect of a change in accounting principle represents the effect of the adoption
of the transitional impairment provision of SFAS No. 142, "Goodwill and Other
Intangible Assets". The adoption has been made effective as of the beginning of
the Company's current fiscal year. The cumulative effect of the change in
accounting principle was approximately $4,422,000, net of taxes of approximately
$2,199,000, during the nine month period ended September 30, 2002. Basic and
diluted earnings per share were both reduced by $0.06 due to the impact of the
change in accounting principle.
Net income and earnings per common share. Net income for the first nine
months of 2002 was $115,228,000 as compared with pro forma net income of
$99,833,000 in the same period in 2001. Basic earnings per share increased to
$1.50 during the first nine months of 2002, as compared with $1.30 in the same
period in 2001. Diluted earnings per share increased to $1.45 during the first
nine months of 2002, as compared with $1.28 in the same period in 2001.
Page 27 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The following table presents a summary of the Company's cash flows from
operating, investing and financing activities for the periods indicated (in
thousands).
Year Ended Nine Months Ended
December 31, September 30, September 30,
2001 2002 2001
------------- ------------- ------------
Net cash provided by operating
activities..................... $ 228,821 $ 226,450 $ 110,756
Net cash used in investing
activities..................... (233,662) (120,105) (152,570)
Net cash used in financing
activities..................... (10,835) (77,004) (22,277)
---------- ----------- ---------
Net (decrease) increase in
cash and cash equivalents..... $ (15,676) $ 29,341 $ (64,091)
======== ======== ========
The Company requires capital principally for the development of new
restaurants, remodeling of older restaurants and investment in technology. The
Company also requires capital to pay dividends to common stockholders (refer to
additional discussion in the Dividend section of Management's Discussion and
Analysis of Financial Condition and Results of Operation). Capital expenditures
totaled approximately $201,039,000 for year ended December 31, 2001 and
approximately $125,213,000 and $143,645,000 during the first nine months of
2002 and 2001, respectively. The Company either leases its restaurants under
operating leases for periods ranging from five to thirty years (including
renewal periods) or purchases free standing restaurants where it is cost
effective.
During 2001, the Company entered into an agreement with the founders of
Bonefish Grill ("Bonefish") to develop and operate Bonefish restaurants. Under
the terms of the Bonefish agreement, the Company purchased the Bonefish
restaurant operating system for approximately $1,500,000. In addition, the
interest in the three existing Bonefish Grills was contributed to a partnership
formed between the Bonefish founders and the Company, and, in exchange, the
Company committed to the first $7,500,000 of future development costs of which
approximately $3,909,000 has been expended as of September 30, 2002.
The Company entered into an agreement to develop and operate Fleming's
Prime Steakhouse and Wine Bars ("Fleming's"). Under the terms of the Fleming's
agreement, the Company purchased three existing Fleming's for $12,000,000 and
committed to the first $13,000,000 of future development costs, all of which had
been invested as of December 31, 2001.
During 1999, the Company entered into an agreement to develop and operate
Roy's Restaurants. Under the terms of the Roy's agreement, the Company paid a
consulting fee of approximately $1,800,000 to Roy Yamuguchi, founder of Roy's.
Refer to the Debt Guarantees section of Management's Discussion and Analysis of
Financial Condition and Results of Operation.
Page 28 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
The Company has formed joint ventures to develop Outback Steakhouses in
Brazil and the Philippines. During the second quarter of 2001, the Company
purchased three Outback Steakhouses in Puerto Rico which had been previously
operated as franchises and will also develop future Company owned Outback
Steakhouses in Puerto Rico. The Company is also developing Company owned
restaurants internationally in Korea and Hong Kong.
In connection with the realignment of the Company's international
operations, the Company expects to merge the interests of its franchisee
operating restaurants in Japan into a new Japanese corporation which will be
majority owned by the Company and which will have responsibility for the future
development of Outback Steakhouse restaurants in Japan. As part of the
realignment, the Company expects to become directly liable for the debt which it
now guarantees, which totaled approximately $15,167,000, with a potential
maximum of $20,000,000, as of September 30, 2002, referred to above and in Note
5 of Notes to Unaudited Consolidated Financial Statements. As part of this
transaction, the Company also expects to invest approximately $2,000,000 in
equity in addition to the assumption of the bank debt.
LONG TERM DEBT
At September 30, 2002, the Company had two uncollateralized lines of credit
totaling $140,000,000. Approximately $3,850,000 is committed for the issuance of
letters of credit required by insurance companies that underwrite the Company's
workers compensation insurance. As of September 30, 2002, the Company had
borrowed $10,000,000 on the line of credit to finance the development of new
restaurants. The Company expects that its capital requirements through the end
of 2002 will be met by cash flows from operations and, to the extent needed,
advances on its line of credit. The revolving line of credit contains certain
restrictions and conditions as defined in the agreement which requires the
Company to maintain net worth of $563,515,000 as of September 30, 2002, a fixed
charge coverage ratio of 3.5 to 1.0, and a maximum total debt to EBITDA ratio of
2.0 to 1.0. At September 30, 2002, the Company was in compliance with all of
the above debt covenants. See Note 5 of Notes to Unaudited Consolidated
Financial Statements.
The Company has notes payable with banks bearing interest at rates ranging
from 6.5% to 6.75% to support the Company's Korean operations. As of September
30, 2002, the outstanding balance was approximately $15,480,000.
DEBT GUARANTEES
The Company is the guarantor of two uncollateralized lines of credit that
permit borrowing of up to $20,000,000 for its franchisee operating Outback
Steakhouses in Japan. At September 30, 2002 the borrowings totaled
approximately $15,167,000.
Page 29 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
The Company is the guarantor of an uncollateralized line of credit that
permits borrowing of up to $35,000,000 for its franchisee operating Outback
Steakhouses in California. At September 30, 2002 the balance on the line of
credit was approximately $28,533,000.
The Company is the guarantor of an uncollateralized line of credit that
permits borrowing of up to a maximum of $24,500,000 for its joint venture
partner in the development of Roy's restaurants. At September 30, 2002, the
outstanding balance was approximately $19,691,000.
The Company is the guarantor of bank loans made to certain franchisees
operating Outback Steakhouses. At September 30, 2002, the outstanding balance
on the loans was approximately $233,000.
The Company is the guarantor of up to approximately $9,445,000 of a
$68,000,000 note for Kentucky Speedway ("Speedway") in which the Company has a
22.2% equity interest and at which the Company operates catering and concession
facilities. At September 30, 2002 the outstanding balance on the note was
approximately $68,000,000. The Company's investment is included in the line
item entitled "Investments In and Advances to Unconsolidated Affiliates".
Speedway has not yet reached its operating break-even point. Accordingly, the
Company has made two additional working capital contributions, $667,000 in
December 2001 and $444,000 in July 2002, in addition to its original investment.
The Company anticipates that it may need to make additional contributions for
its pro rata portion of future losses, if any.
The Company is not aware of any non-compliance with the underlying terms of
the borrowing agreements for which it provides a guarantee that would result in
the Company having to perform in accordance with the terms of the guarantee.
DEBT AND DEBT GUARANTEE SUMMARY
The Company's contractual debt obligations, debt guarantees and commitments
as of September 30, 2002 are summarized in the table below (in thousands):
Current Long-term
Total Portion Portion
--------- ----------- ------------
Debt....................... $31,075 $ 16,820 $ 14,255
Debt guarantees............ $89,178 $ 20,233 $ 68,945
Amount outstanding under
debt guarantees.......... $73,069 $ 15,400 $ 57,669
Commitments................ $ 3,591 $ 3,591
Page 30 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
SHARE REPURCHASE
On July 26, 2000, the Company's Board of Directors authorized a program to
repurchase up to 4,000,000 shares of the Company's Common Stock. The timing,
price, quantity and manner of the purchases will be made at the discretion of
management and will depend upon market conditions. In addition, the Board of
Directors also authorized a program to repurchase shares on a regular basis to
offset shares issued as a result of stock option exercises. During the period
from the program authorization date through September 30, 2002, approximately
2,825,000 shares of the Company's Common stock have been issued as the result of
stock option exercises. The Company will fund the repurchase program with
available cash and bank credit facilities. As of September 30, 2002, under these
authorizations the Company has repurchased approximately 5,543,000 shares of its
Common Stock for approximately $152,461,000. Subsequent to September 30, 2002,
the Company has repurchased approximately 337,000 shares of its Common Stock for
approximately $9,053,000.
DIVIDEND
On October 23, 2002, the Company's Board of Directors declared a quarterly
dividend of $0.12 for each share of the Company's common stock. The dividend is
payable December 6, 2002 to shareholders of record as of November 22, 2002. At
the current dividend rate, the annual dividend payment is expected to be between
$35,000,000 and $40,000,000 depending on the shares outstanding during the
respective quarters. The Company intends to pay the dividend with cash flow
from operations.
OTHER
See Notes 5 and 8 of Notes to Unaudited Consolidated Financial Statements
for discussion of the Company's $22,000,000 licensing agreement for use of the
assets of some of its non-restaurant operations.
Page 31 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities during the reporting
period (see Note 1 of Notes to Consolidated Financial Statements included in our
Annual Report on Form 10-K). The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. The Company's significant
accounting policies are described in Note 1 of Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K. The Company considers
the following policies to be the most critical in understanding the judgments
that are involved in preparing its financial statements.
Property, Fixtures and Equipment
Property, fixtures and equipment are recorded at cost. Depreciation is
computed on the straight-line basis over the following estimated useful lives:
Buildings and building improvements... 20 to 31.5 years
Furniture and fixtures................ 7 years
Equipment............................. 2 to 15 years
Leasehold improvements................ 5 to 20 years
The Company's accounting policies regarding property, fixtures and
equipment include certain management judgments and projections regarding the
estimated useful lives of these assets and what constitutes increasing the value
and useful life of existing assets. These estimates, judgments and projections
may produce materially different amounts of depreciation expense than would be
reported if different assumptions were used.
Page 32 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)
Impairment of Long-Lived Assets
The Company assesses the potential impairment of identifiable intangibles,
long-lived assets and goodwill whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Recoverability of
assets is measured by comparing the carrying value of the asset to the
future cash flows expected to be generated by the asset. If the total future
cash flows are less than the carrying amount of the asset, the carrying amount
is written down to the estimated fair value, and a loss resulting from value
impairment is recognized by a charge to earnings.
Judgments and estimates made by the Company related to the expected useful
lives of long-lived assets are affected by factors such as changes in economic
conditions and changes in operating performance. As the Company assesses the
ongoing expected cash flows and carrying amounts of its long-lived assets, these
factors could cause the Company to realize a material impairment charge.
Insurance Reserves
The Company self-insures a significant portion of expected losses under its
workers compensation, general liability, health and property insurance programs.
The Company purchases insurance for individual claims that exceed the amounts
listed in the following table:
Workers Compensation.......... $ 250,000
General Liability............. $ 500,000
Health........................ $ 230,000
Property damage............... $ 5,000,000
The Company records a liability for all unresolved claims and for an
estimate of incurred but not reported claims at the anticipated cost to the
Company based on estimates provided by a third party administrator and insurance
company. The Company's accounting policies regarding insurance reserves include
certain actuarial assumptions and management judgments regarding economic
conditions, the frequency and severity of claims and claim development history
and settlement practices. Unanticipated changes in these factors may produce
materially different amounts of expense that would be reported under these
programs.
Page 33 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued)
Revenue Recognition
The Company records revenues for normal recurring sales upon the
performance of services. Revenues from the sales of franchises are recognized
as income when the Company has substantially performed all of its material
obligations under the franchise agreement. Continuing royalties, which are a
percentage of net sales of franchised restaurants, are accrued as income when
earned.
Unearned revenues primarily represent the Company's liability for gift
certificates which have been sold but not yet redeemed and are recorded at the
anticipated redemption value. When the gift certificates are redeemed, the
Company recognizes restaurant sales and reduces the related deferred liability.
Principles of Consolidation
The consolidated financial statements include the accounts and operations
of the Company and affiliated partnerships in which the Company is a general
partner and owns a controlling interest. All material balances and transactions
have been eliminated. The unconsolidated affiliates are accounted for using the
equity method.
OUTLOOK
The following discussion of the Company's future operating results and
expansion strategy and other statements in this report that are not historical
statements constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
represent the Company's expectations or beliefs concerning future events and may
be identified by words such as "believes," "anticipates," "expects," "plans,"
"should," "estimates" and similar expressions. The Company's forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those stated or implied in the forward-looking
statement. We have endeavored to identify the most significant factors that
could cause actual results to differ materially from those stated or implied in
forward-looking statements in the section entitled "Cautionary Statement" below.
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year.
In the Outlook portion of Management's Discussion and Analysis Of Financial
Condition and Results of Operations in its Annual Report to the Securities and
Exchange Commission on Form 10-K for the year ended December 31, 2001, the
Company provided information regarding the outlook for its businesses in 2002
and factors that may affect the Company's financial results for that year.
Page 34 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK (continued)
In the Outlook portion of Management's Discussion and Analysis of Financial
Condition and Results of Operations in its Quarterly Report to the Securities
and Exchange Commission on Form 10-Q for the quarter ended March 31, 2002, the
Company reported that average unit volumes for its Outback Steakhouse
restaurants ("Outback") had decreased by approximately 2.1% during the quarter
as compared with the same quarter a year ago and that to the extent to which
average unit volume trends remained weaker than expected, the Company's revenues
and operating results for the remainder of 2002 may be affected.
In the Outlook portion of Management's Discussion and Analysis of Financial
Condition and Results of Operations in its Quarterly Report to the Securities
and Exchange Commission on Form 10-Q for the quarter ended June 30, 2002, the
Company reported that average unit volumes for its Outback Steakhouse
restaurants ("Outback") had decreased by approximately 1.6% and that average
unit volumes for Carrabba's Italian Grills ("Carrabba's) increased by 2.4%
during the quarter as compared with the same quarter a year ago and that to the
extent to which average unit volume trends remained weaker than expected, the
Company's revenues and operating results for the remainder of 2002 may be
affected.
The remaining paragraphs in this Outlook section update the information
provided in the two Forms referenced above and the Company recommends that this
section be read in conjunction with those Outlook sections.
During the three month period ended September 30, 2002, as compared with
the same period a year ago, average unit volumes for Outback declined by
approximately 0.9% and average unit volumes for Carrabba's Italian Grills
("Carrabba's") decreased by approximately 1.3%. Results for both formats were
below those anticipated in the Company's comments in Form 10-K referenced above.
In an attempt to reverse the negative trend at Outback, a price increase of
approximately 1.8% was implemented in mid May 2002 and the Company increased its
planned 2002 television advertising expenditures by $5.4 million. The additional
advertising began in September. Although the effect of these plans cannot be
accurately forecast, the Company set a goal of achieving positive average unit
volume gains at Outback for the second half of 2002 of one to two percent. As a
result of the decline in average unit volumes for Carrabba's, the Company is now
anticipating gains of only one to two percent for the last quarter of 2002. To
the extent to which these goals are not met and negative sales trends continue,
the Company's revenues and operating results for the full year may fall short of
its original objectives.
During the quarter ended September 30, 2002, the Company benefited from
lower than expected commodity costs for baby back ribs, shrimp, fresh fish and
dairy products. As a result of lower commodity costs and the effect of the price
increase discussed above, the Company now expects cost of goods sold as a
percentage of restaurant sales for the full year to be 90 to 110 basis points
better than originally expected and 50 to 60 basis points better than the amount
expected as stated in Form 10-Q for the quarter ended June 30, 2002.
Page 35 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK(continued)
Because of lower than planned average unit volumes, through the first three
quarters of the year labor costs as a percentage of restaurant sales were 10 to
20 basis points higher than expected. If the steps taken to grow average unit
volumes in Outback are successful, labor cost ratios for the last quarter of
2002 should be more in line with the guidance given in Form 10-K referenced
above. If the Company's steps do not achieve their targeted objectives, labor
cost ratios for the full year will be higher than originally planned.
The Company has not received the benefit it originally expected from a
decline in natural gas costs. Accordingly, the Company is now planning for
restaurant operating expenses as a percentage of restaurant sales for the last
quarter of the year to be 20 to 30 basis points higher than originally expected.
The Company is now planning for the last quarter of 2002 for all other
expense ratio variances to be comparable to those experienced in and reported
for the first three quarters of 2002.
Future Operating Results.
As of the date of this report substantial uncertainty exists as to the
strength of consumer spending as a result of the economic downturn. The
Company's revenue growth expectations summarized in the following paragraph
assume that current spending trends do not worsen in the fourth quarter of 2002
or fiscal 2003. The Company's revenues and financial results in 2003 could vary
significantly depending upon consumer and business spending trends.
2003 Revenue. The Company plans to grow revenues in 2003 by opening additional
restaurants and increasing comparable store sales and average unit volumes in
all brands. The Company's expansion plans are summarized in this
section. Based upon current economic conditions, the Company is currently
planning for average unit volumes for Outback to increase by approximately 1% to
2% during 2003 compared with 2002. At present, the Company is not planning on
any price increases during 2003 for Outback Steakhouse. However, the Company
will reevaluate Outback menu pricing periodically and may change prices as
economic and commodity conditions dictate. The Company is currently planning
for average unit volumes for Carrabba's Italian Grills to increase by
approximately 1% to 2% during 2003. The Company is not planning any price
increases during 2003 for Carrabba's Italian Grills. However, the Company will
reevaluate Carrabba's menu pricing periodically and may change prices as
economic and commodity conditions dictate. The Company is also currently planning
for average unit volumes to increase by approximately 3% to 4% for Fleming's
Prime Steakhouse, 1% to 2% for Roy's and 1% to 2% for Bonefish Grill.
Page 36 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK(continued)
2003 Cost of Revenue. The Company is anticipating favorable pork rib pricing
versus 2002 as it continues to use less expensive domestic ribs. The Company
has also entered into contracts to secure its butter and cheese supplies for all
of 2003 at a price that is slightly favorable to the average price in 2002. Cost
of revenue is also expected to decrease in 2003 as new format restaurants are
developed that have a lower cost of revenue as compared with Outback and
Carrabba's. The Company expects the favorable commodities and brand mix to be
partially offset by unfavorable potato and onion pricing. Although the total
change in food cost is subject to several factors, such as the mix of new
restaurants, commodity availability and usage, and price fluctuations in
commodities which the Company does not have purchase contracts, the current
expectation for the Company is for a decrease of approximately 0.1% to 0.3% of
sales for the full year.
2003 Labor Costs. During the last few years, the Company has experienced
significant wage pressure resulting from a tight labor market. The Company
expects the upward wage pressure to continue during 2003 but at a lower rate
than 2002. The Company expects that as more of the new format restaurants
(Roy's, Fleming's and Selmon's) are opened, that labor costs as a percentage of
restaurant sales will increase because the labor costs as a percentage of sales
at the new restaurant formats run at a higher rate than at Outback and
Carrabba's. In addition, higher employee health insurance cost will also
continue the upward pressure on labor costs as a percentage of restaurant sales.
As a result, the Company is currently planning for its labor costs to increase
by 0.2% to 0.3% of restaurant sales.
2003 Restaurant Operating Expenses. The Company plans to increase its
advertising expenditures as a percent of sales in both Outback Steakhouse and
Carrabba's Italian Grill in 2003. In addition, costs incurred prior to the
opening of new restaurants are expected to increase as a result of additional
restaurant openings in 2003 versus 2002. These preopening expenses total
approximately $150,000 for each Company owned and joint venture Outback
Steakhouse, approximately $195,000 for each Carrabba's Italian Grill,
approximately $125,000 for each Bonefish Grill and approximately $300,000 for
each new Roy's and Fleming's Prime Steakhouse and Wine Bar. Restaurant operating
expense ratios may vary materially from quarter to quarter depending on when
units open. As a result of the additional advertising expenditures and
increase in planned openings of new restaurants, restaurant operating expenses
may increase in 2003 by 0.2% to 0.3% of restaurant sales.
2003 Depreciation and Amortization. The Company expects depreciation costs,
which are directly affected by investment in fixed assets, to increase as it
builds new restaurants, improves and remodels existing restaurants and invests
in technology. The Company estimates that its capital expenditures for the
development of new restaurants will be approximately $175,000,000 to
$200,000,000 in 2003.
Page 37 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK(continued)
2003 General and Administrative Expenses. Based upon its current plan, the
Company expects that total general and administrative costs will increase by
approximately 12% to 13% in 2003 compared with 2002.
Expansion Strategy.
The Company's goal is to add new restaurants to the Outback system during
the remainder of 2002. The following table presents a summary of the expected
restaurant openings during the fourth quarter of 2002 and for the full year
2003:
4th Quarter Full Year
Outback Steakhouses - Domestic 2002 2003
Company owned...................... 5 to 6 24 to 25
Franchised or development joint
venture........................... 1 to 2 5 to 7
Outback Steakhouses - International
Company owned...................... 1 to 2 8 to 10
Franchised or development joint
venture........................... 1 3 to 5
Carrabba's Italian Grills
Company owned...................... 7 to 8 22 to 25
Fleming's Prime Steakhouse and Wine Bars
Company owned...................... 2 6 to 8
Roy's
Company owned...................... - 2 to 3
Selmon's
Company owned...................... - -
Cheeseburger in Paradise
Company owned...................... - -
Bonefish Grill
Company owned...................... 2 to 3 10 to 15
Franchised or development joint
venture........................... 1 1 to 2
Page 38 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations contains various "forward-looking statements" within
the meaning of Section 27A of the Securities Exchange Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-
looking statements represent the Company's expectations or beliefs concerning
future events, including the following: any statements regarding future sales
and gross profit percentages, any statements regarding the continuation of
historical trends, and any statements regarding the sufficiency of the Company's
cash balances and cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," "should,"
and similar expressions are intended to identify forward-looking statements.
The Company's actual results could differ materially from those stated or
implied in the forward-looking statements included in the discussion of future
operating results and expansion strategy and elsewhere in this report as a
result, among other things, of the following:
(i) The restaurant industry is a highly competitive industry with many well
established competitors;
(ii) The Company's results can be impacted by changes in consumer tastes and the
level of consumer acceptance of the Company's restaurant concepts; local,
regional and national economic conditions; the seasonality of the Company's
business; demographic trends; traffic patterns; consumer perception of food
safety; employee availability; the cost of advertising and media;
government actions and policies; inflation; and increases in various costs;
(iii)The Company's ability to expand is dependent upon various factors such
as the availability of attractive sites for new restaurants, ability to
obtain appropriate real estate sites at acceptable prices; ability to
obtain all required governmental permits including zoning approvals and
liquor licenses on a timely basis, impact of government moratoriums or
approval processes, which could result in significant delays, ability to
obtain all necessary contractors and subcontractors, union activities such
as picketing and hand billing that could delay construction, the ability to
generate or borrow funds, the ability to negotiate suitable lease terms,
and the ability to recruit and train skilled management and restaurant
employees;
(iv) Price and availability of commodities including, but not limited to, such
items as beef, chicken, shrimp, pork, dairy, potatoes and onions and energy
commodities are subject to fluctuation and could increase or decrease more
than the Company expects; and/or
(v) Weather and acts of God could result in construction delays and also
adversely affect the results of one or more stores for an indeterminate
amount of time.
Page 39 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates on
debt, changes in foreign currency exchange rates and changes in commodity
prices.
The Company's exposure to interest rate risk relates to its $140,000,000
revolving lines of credit with its banks. Borrowings under the agreements bear
interest at rates ranging from 57.5 to 95 basis points over the 30, 60, 90 or
180 London Interbank Offered Rate. At September 30, 2002 and December 31, 2001,
the Company had a $10,000,000 outstanding balance on the lines of credit.
The Company's exposure to foreign currency exchange risk relates primarily
to its direct investment in restaurants in Korea, Hong Kong, the Philippines and
Brazil and to its royalties from international franchisees in 21 countries. The
Company does not use financial instruments to hedge foreign currency exchange
rate changes.
Many of the food products purchased by the Company and its franchisees are
affected by commodity pricing and are, therefore, subject to unpredictable price
volatility. These commodities are generally purchased based upon market prices
established with vendors. The purchase arrangement may contain contractual
features that limit the price paid by establishing certain floors and caps. The
Company does not use financial instruments to hedge commodity prices because the
Company's purchase arrangements help control the ultimate cost paid. Extreme
changes in commodity prices and/or long-term changes could affect the Company
adversely. However, any changes in commodity prices would affect the Company's
competitors at about the same time as the Company. The Company expects that in
most cases increased commodity prices could be passed through to its consumers
via increases in menu prices. From time to time, competitive circumstances could
limit menu price flexibility, and in those cases margins would be negatively
impacted by increased commodity prices.
This market risk discussion contains forward-looking statements. Actual
results may differ materially from the discussion based upon general market
conditions and changes in domestic and global financial markets.
Page 40 of 45
OUTBACK STEAKHOUSE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 4. CONTROLS AND PROCEDURES
The Company has established and maintains disclosure controls and
procedures that are designed to ensure that material information relating to the
Company and its subsidiaries required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. Within the
90 days prior to the date of this quarterly report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the date of such evaluation.
The Chief Executive Officer and Chief Financial Officer have also concluded
that there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date that the Company completed its evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Page 41 of 45
OUTBACK STEAKHOUSE, INC.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal proceedings, claims and liabilities,
such as liquor liability, sexual harassment and slip and fall cases etc.,
which arise in the ordinary course of business and are generally covered by
insurance. In the opinion of management, the amount of the ultimate
liability with respect to those actions will not have a materially adverse
impact on the Company's financial position or result of operations and cash
flows.
The Company filed a report on Form 8-K with the Securities and Exchange
Commission dated February 14, 2002 regarding threatened litigation and there
has been no change in the status.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed reports on Form 8-K with the Securities and Exchange
Commission dated August 14, 2002, October 23, 2002 and November 8, 2002.
Page 42 of 45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
OUTBACK STEAKHOUSE, INC.
Date: November 14, 2002. (Registrant)
By: /s/ Robert S. Merritt
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
Page 43 of 45
CERTIFICATIONS
I, Robert S. Merritt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Outback Steakhouse,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002. /s/ Robert S. Merritt
Robert S. Merritt, Principal Financial Officer
Page 44 of 45
CERTIFICATIONS
I, Chris T. Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Outback Steakhouse,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002. /s/ Chris T. Sullivan
Chris T. Sullivan, Principal Executive Officer
Page 45 of 45