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 June 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.(R)
(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 FLOOR, TAMPA, FLORIDA 33607
(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
August 9, 2002, there were 76,705,445 shares of Common Stock, $.01 par
value, outstanding.
1 of 36
OUTBACK STEAKHOUSE, INC.(R)
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying unaudited consolidated financial statements have
been prepared by Outback Steakhouse, Inc.(R) 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.
2 of 36
OUTBACK STEAKHOUSE, INC.(R)
CONSOLIDATED BALANCE SHEETS
(in thousands, unaudited)
June 30, December 31,
ASSETS 2002 2001
CURRENT ASSETS ---------- ---------
Cash and cash equivalents........... $150,845 $115,928
Short term investments.............. 20,567 20,310
Inventories......................... 29,034 38,775
Other current assets................ 24,736 31,347
--------- --------
Total current assets................ 225,182 206,360
PROPERTY, FIXTURES AND EQUIPMENT, NET. 866,125 813,065
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES, NET...... 50,289 46,485
GOODWILL AND OTHER INTANGIBLE
ASSETS, NET......................... 97,153 94,453
OTHER ASSETS.......................... 72,458 77,385
--------- --------
$1,311,207 $1,237,748
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................... $ 41,088 $ 47,179
Sales taxes payable................. 14,992 13,096
Accrued expenses.................... 64,008 56,587
Unearned revenue.................... 17,494 60,135
Income taxes payable................ 14,023
Current portion of long-term debt... 15,254 12,763
--------- --------
Total current liabilities........... 166,859 189,760
DEFERRED INCOME TAXES................. 32,839 22,878
LONG-TERM DEBT........................ 14,661 13,830
OTHER LONG-TERM LIABILITIES........... 23,675 24,500
--------- --------
Total liabilities................... 238,034 250,968
INTEREST OF MINORITY PARTNERS IN --------- --------
CONSOLIDATED PARTNERSHIPS........... 42,453 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 77,470 and 76,913 shares
outstanding as of June 30, 2002 and
December 31, 2001, respectively.. 788 786
Additional paid-in capital......... 234,550 220,648
Retained earnings.................. 836,794 762,414
--------- --------
1,072,132 983,848
Less treasury stock, 1,280 and
1,641 shares as of June 30, 2002
and December 31, 2001, respectively,
at cost............................ (41,412) (42,004)
--------- --------
Total stockholders' equity......... 1,030,720 941,844
--------- --------
$1,311,207 $1,237,748
========== ==========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.(R)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
REVENUES ------- -------- --------- ---------
Restaurant sales.............. $591,422 $534,309 $1,165,977 $1,050,963
Other revenues................ 4,871 4,535 9,305 9,134
------- -------- --------- ---------
TOTAL REVENUES.............. 596,293 538,844 1,175,282 1,060,097
COSTS AND EXPENSES: ------- -------- --------- ---------
Cost of sales............... 217,333 205,344 432,141 400,468
Labor & other related....... 144,659 127,910 282,961 250,900
Other restaurant operating.. 118,381 105,413 232,430 206,458
Depreciation & amortization. 18,738 16,821 36,676 32,789
General & administrative.... 22,207 20,478 43,336 39,740
Income from operations of
unconsolidated affiliates. (1,549) (977) (3,101) (1,978)
------- -------- --------- --------
Total costs and expenses... 519,769 474,989 1,024,443 928,377
------- -------- --------- --------
INCOME FROM OPERATIONS......... 76,524 63,855 150,839 131,720
OTHER INCOME (EXPENSE), NET.... (663) 275 (980) (960)
INTEREST INCOME (EXPENSE), NET. 320 637 556 1,761
INCOME BEFORE ELIMINATION OF ------- -------- --------- --------
MINORITY PARTNERS' INTEREST
AND INCOME TAXES............ 76,181 64,767 150,415 132,521
ELIMINATION OF MINORITY PARTNERS'
INTEREST.................... 10,647 8,550 21,015 17,656
------- -------- --------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES................. 65,534 56,217 129,400 114,865
PROVISION FOR INCOME TAXES..... 23,068 19,671 45,549 40,432
------- -------- --------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING
PRINCIPLE.................... 42,466 36,546 83,851 74,433
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF
TAXES)....................... - - (4,422) -
------- ------- -------- --------
NET INCOME..................... $42,466 $36,546 $ 79,429 $74,433
======= ======= ======== ========
See notes to unaudited consolidated financial statements.
4 of 36
OUTBACK STEAKHOUSE, INC.(R)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
BASIC EARNINGS PER COMMON SHARE ------- -------- --------- --------
Income before cumulative
effect of a change in
accounting principle......... $ 0.55 $ 0.48 $ 1.09 $ 0.97
Cumulative effect of a change
in accounting principle (net
of taxes).................... - - (0.06) -
------- ------- -------- --------
Net Income................... $ 0.55 $ 0.48 $ 1.03 $ 0.97
BASIC WEIGHTED AVERAGE NUMBER OF ======= ======== ======== ========
COMMON SHARES OUTSTANDING.... 77,274 76,538 77,176 76,539
======= ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle......... $ 0.53 $ 0.47 $ 1.05 $ 0.95
Cumulative effect of a change
in accounting principle (net
of taxes).................... - - (0.06) -
------- -------- -------- --------
Net Income................... $ 0.53 $ 0.47 $ 0.99 $ 0.95
DILUTED WEIGHTED AVERAGE NUMBER ======= ======== ======== =========
OF COMMON SHARES OUTSTANDING... 80,406 78,265 80,223 78,010
======= ======== ======== =========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.(R)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
Six Months Ended
June 30,
2002 2001
Cash flows from operating activities: -------- --------
Net income.............................. $ 79,429 $ 74,433
Adjustments to reconcile net income to
cash provided by operating
activities:
Depreciation.......................... 35,360 29,667
Amortization.......................... 1,316 3,122
Cumulative effect of a change in
accounting principle.................. 4,422
Minority partners' interest in
consolidated partnerships' income.. 21,015 17,656
Income from unconsolidated affiliates. (3,101) (1,978)
Change in assets and liabilities:
Decrease (increase) in inventories. 9,741 (7,204)
Decrease (increase) in other
current assets................... 6,611 (8,363)
Decrease in goodwill, intangible
assets and other assets.......... 4,365 5,618
Increase (decrease) in accounts
payable, sales taxes payable,
and accrued expenses............. 3,226 (4,374)
Decrease in unearned revenue....... (42,641) (36,977)
Increase (decrease) in income
taxes payable.................... 20,927 (13,621)
Increase (decrease) in deferred
income taxes..................... 9,961 (1,159)
Decrease in other long-term
liabilities...................... (825)
-------- --------
Net cash provided by operating
activities....................... 149,806 56,820
Cash flows used in investing -------- --------
activities:
Purchase of investment securities..... (257)
Capital expenditures.................. (88,420) (86,675)
Change in investments in and advances
to unconsolidated affiliates........ (703) (16,305)
-------- --------
Net cash used in investing
activities....................... (89,380) (102,980)
Cash flows from financing activities: -------- --------
Proceeds from issuance of long-term debt 3,923 14,533
Proceeds from minority partners'
contributions....................... 4,459 3,223
Distributions to minority partners.... (27,946) (21,645)
Repayments of long-term debt.......... (601) (10,058)
Payments for purchase of treasury
stock............................... (30,136) (16,276)
Proceeds from reissuance of treasury
stock............................... 24,792 13,112
-------- --------
Net cash used in financing
activities....................... (25,509) (17,111)
-------- --------
Net increase (decrease) in cash and
cash equivalents...................... 34,917 (63,271)
Cash and cash equivalents at beginning
of period............................. 115,928 131,604
-------- --------
Cash and cash equivalents at end of
period................................ $150,845 $ 68,333
======== ========
Supplemental disclosures of cash flow
information:
Cash paid for interest................ $ 613 $ 356
Cash paid for income taxes............ $ 5,084 $ 40,363
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.
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OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared by Outback Steakhouse, Inc.(R) (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.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
June 30, December 31,
2002 2001
(unaudited)
--------- ---------
Deposits (including income tax deposits).$ 1,896 $ 9,275
Accounts receivable...................... 6,126 7,710
Accounts receivable franchisees.......... 2,932 3,560
Prepaid expenses......................... 13,771 8,212
Other current assets..................... 11 2,590
-------- -------
$ 24,736 $31,347
======= =======
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OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Property, Fixtures and Equipment, Net
Property, fixtures and equipment consisted of the following (in
thousands):
June 30, December 31,
2002 2001
(unaudited)
-------- ---------
Land............................... $166,048 $ 158,314
Buildings & building improvements.. 424,489 382,793
Furniture & fixtures............... 109,004 99,767
Equipment.......................... 265,652 238,285
Leasehold improvements............. 198,051 185,623
Construction in progress........... 23,388 35,464
Accumulated depreciation........... (320,507) (287,181)
-------- --------
$866,125 $ 813,065
======== =========
4. Goodwill and Other Intangible Assets, Net
Goodwill and other intangible assets consisted of the following
(in thousands):
June 30, December 31,
2002 2001
(unaudited)
--------- --------
Goodwill, net...................... $81,720 $ 80,074
Intangible assets, net (including
liquor licenses)................. 15,433 14,379
------ --------
$97,153 $ 94,453
====== =======
"Intangible assets" included the following intangible assets
subject to amortization (in thousands):
June 30, December 31,
2002 2001
(unaudited)
--------- ---------
Non-compete/non-disclosure and
related contractual agreements.... $ 12,245 $ 10,141
Accumulated amortization............ (5,798) (4,482)
-------- --------
$ 6,447 $ 5,659
======== ========
Aggregate amortization expense on the intangible assets subject
to amortization was approximately $1,316,000 for the six months ended
June 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 June 30, 2002 and December
31, 2001 was approximately $81,720,000 and $80,074,000, respectively.
8 of 36
OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Other Assets
Other assets consisted of the following (in thousands):
June 30, December 31,
2002 2001
(unaudited)
--------- --------
Other assets......................... $37,973 $ 42,885
Assets of business transferred under
contractual arrangement............ 13,985 15,500
Deferred license fee................. 20,500 19,000
------- --------
$72,458 $ 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.
License fees payable over the term of the agreement total
approximately $22,000,000 of which $20,500,000 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. The remaining eight scheduled
annual installments of $2,375,000 per year were also extended by one
year from 2003 through 2010 to 2004 through 2011.
The net book value of these assets is approximately $13,985,000
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. See Note 8 of Notes to Unaudited Consolidated
Financial Statements.
9 of 36
OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long-term Debt
Long-term debt consisted of the following (in thousands):
June 30, December 31,
2002 2001
(unaudited)
--------- ---------
Revolving line of credit, interest at
2.79% and 3.67% at June 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 June 30, 2002 and 4.40% to
7.50% at December 31, 2001............ 19,915 16,593
--------- -------
29,915 26,593
Less current portion.................... 15,254 12,763
--------- -------
Long-term debt.......................... $14,661 $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")
(1.84% to 1.95% at June 30, 2002 and 1.87% to 1.98% at December 31,
2001). At June 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.
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 June 30, 2002
and December 31, 2001, respectively. The remaining $11,150,000 at
June 30, 2002 is available to the company.
The Company has notes payable with banks bearing interest at
6.75% to support the Company's Korean operations. As of June 30, 2002
and December 31, 2001, the outstanding balance was approximately
$14,144,000 and $12,194,000, respectively. The notes mature in July
2002.
DEBT GUARANTEES
The Company is the guarantor of two uncollateralized lines of
credit that permit borrowing of up to $25,000,000 for its franchisee
operating Outback Steakhouses in Japan. At June 30, 2002 and December
31, 2001 the borrowings totaled approximately $14,584,000 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".)
10 of 36
OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. Long-term Debt (continued)
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 June 30, 2002 and December 31, 2001, the outstanding
balance was approximately $28,408,000 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 June 30, 2002 and December 31,
2001, the outstanding balance was approximately $19,562,000 and
$19,427,000, respectively.
The Company is the guarantor of bank loans made to certain
franchisees operating Outback Steakhouse restaurants. At June 30, 2002
and December 31, 2001, the outstanding balance on the loans was
approximately $304,000 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 in which the Company operates catering and
concession facilities. At June 30, 2002 and December 31, 2001, the
outstanding balance on the note was approximately $68,000,000.
DEBT AND DEBT GUARANTEE SUMMARY
The Company's contractual debt obligations and debt guarantees as
of June 30, 2002 are summarized in the table below (in thousands):
Current Long-term
Total Portion Portion
--------- -------- ---------
Debt....................... $29,915 $15,254 $14,661
Debt guarantees............ $94,249 $25,304 $68,945
Amount outstanding under
debt guarantees.......... $72,303 $14,888 $57,415
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):
June 30, December 31,
2002 2001
(unaudited)
--------- --------
Accrued payroll and other
compensation.................. $ 21,897 $ 19,207
Accrued insurance............... 16,593 13,206
Accrued property taxes.......... 8,825 6,970
Other accrued expenses.......... 16,693 17,204
------ --------
$ 64,008 $ 56,587
========= ========
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OUTBACK STEAKHOUSE, INC.(R)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. Other Long Term Liabilities
Other long term liabilities consisted of the following (in
thousands):
June 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 $20,500,000 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 for 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 and Other Intangible
Assets" 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 and
Other Intangible Assets" 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.
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OUTBACK STEAKHOUSE, INC.(R)
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.
Adoption of SFAS No. 142 effective January 1, 2002 is estimated
to result in the elimination of approximately $3,000,000 to $5,000,000
of annual amortization, subject to the identification of separately
recognized intangible assets which would continue to be amortized
under the new rules.
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.
13 of 36
OUTBACK STEAKHOUSE, INC.(R)
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 June 30, Six months ended June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Reported income before
cumulative effect of a change
in accounting principle........ $ 42,466 $ 36,546 $ 83,851 $ 74,433
Add back: Goodwill
amortization, net of taxes..... - 1,001 - 1,954
Adjusted income before ----------- ----------- ----------- -----------
cumulative effect of a change
in accounting principle........ 42,466 37,547 83,851 76,387
Cumulative effect of a change
in accounting principle (net
of taxes)...................... - - (4,422) -
----------- ----------- ----------- -----------
Adjusted net income............. $ 42,466 $ 37,547 $ 79,429 $ 76,387
======= ======= ======= =======
BASIC EARNINGS PER SHARE
Reported income before
cumulative effect of a change
in accounting principle........ $ 0.55 $ 0.48 $ 1.09 $ 0.97
Add back: Goodwill amortization,
net of taxes................... - 0.01 - 0.03
Adjusted income before ----------- ----------- ----------- -----------
cumulative effect of a change
in accounting principle........ 0.55 0.49 1.09 1.00
Cumulative effect of a change
in accounting principle (net
of taxes)...................... - - (0.06) -
----------- ----------- ----------- -----------
Adjusted net income............. $ 0.55 $ 0.49 $ 1.03 $ 1.00
======= ======= ======= =======
DILUTED EARNINGS PER SHARE
Reported income before
cumulative effect of a change
in accounting principle........ $ 0.53 $ 0.47 $ 1.05 $ 0.95
Add back: Goodwill
amortization, net of taxes..... - 0.01 - 0.03
Adjusted income before ----------- ----------- ----------- -----------
cumulative effect of a change
in accounting principle........ 0.53 0.48 1.05 0.98
Cumulative effect of a change
in accounting principle (net
of taxes)...................... - - (0.06) -
----------- ----------- ----------- -----------
Adjusted net income............. $ 0.53 $ 0.48 $ 0.99 $ 0.98
======= ======= ======= =======
14 of 36
OUTBACK STEAKHOUSE, INC.(R)
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 six
months ended June 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.
15 of 36
OUTBACK STEAKHOUSE, INC.(R)
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
REVENUES ------ ----- ------ ------
Restaurant sales............... 99.2% 99.2% 99.2% 99.1%
Other revenues................. 0.8 0.8 0.8 0.9
----- ------ ----- ------
TOTAL REVENUES................. 100.0 100.0 100.0 100.0
COSTS AND EXPENSES: ----- ------ ----- ------
Cost of sales (1)............ 36.7 38.4 37.1 38.1
Labor & other related (1).... 24.5 23.9 24.3 23.9
Other restaurant operating (1) 20.0 19.7 19.9 19.6
Depreciation & amortization.. 3.1 3.1 3.1 3.1
General & administrative..... 3.7 3.8 3.7 3.7
Income from operations of
unconsolidated affiliates.. (0.3) (0.2) (0.3) (0.2)
Total costs and expenses.. 87.2 88.1 87.2 87.6
----- ------ ----- ------
INCOME FROM OPERATIONS......... 12.8 11.9 12.8 12.4
OTHER INCOME (EXPENSE), NET.... (0.1) (*) (0.1) (0.1)
INTEREST INCOME................ 0.1 0.1 (*) 0.2
----- ------ ----- ------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES............. 12.8 12.0 12.8 12.5
ELIMINATION OF MINORITY
PARTNERS' INTEREST........... 1.8 1.6 1.8 1.7
----- ------ ----- ------
INCOME BEFORE PROVISION FOR
INCOME TAXES................. 11.0 10.4 11.0 10.8
PROVISION FOR INCOME TAXES..... 3.9 3.6 3.9 3.8
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE......... 7.1 6.8 7.1 7.0
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (NET
OF TAXES).................... (0.4)
----- ------ ------ ------
NET INCOME..................... 7.1% 6.8% 6.7% 7.0%
===== ====== ===== ======
(*)Percentages are less than 1/10 of one percent of total revenues.
(1) As a percentage of restaurant sales.
16 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
System-wide sales (millions of ------ ------ ------ ------
dollars):
Outback Steakhouse restaurants
Company owned................. $503 $473 $989 $929
Domestic franchised and
development joint venture..... 97 94 190 181
International franchised and
development joint venture..... 22 19 45 40
------ ------ ------ ------
Total......................... 622 586 1,224 1,150
------ ------ ------ ------
Carrabba's Italian Grills
Company owned................. 62 50 124 98
Development joint venture..... 23 18 45 34
------ ------ ------ ------
Total......................... 85 68 169 132
------ ------ ------ ------
Other restaurants
Company owned................. 26 11 53 24
Franchised and development
joint venture................. 2 - 5 -
------ ------ ------ ------
Total......................... 28 11 58 24
------ ------ ------ ------
System-wide total............... $735 $665 $1,451 $1,306
====== ====== ====== ======
17 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
June 30,
2002 2001
Number of restaurants (at end of the period): ---- ------
Outback Steakhouses
Company owned............................... 589 543
Domestic franchised and development joint
venture..................................... 118 111
International franchised and development
joint venture............................... 52 49
--- ---
Total....................................... 759 703
--- ---
Carrabba's Italian Grills
Company owned............................... 79 63
Development joint venture................... 29 25
--- ---
Total....................................... 108 88
Fleming's Prime Steakhouse and Wine Bars --- ---
Company owned............................... 13 7
Roy's --- ---
Company owned............................... 13 6
Franchised and development joint venture.... 2 1
--- ---
Total....................................... 15 7
Zazarac --- ---
Company owned............................... - 2
Lee Roy Selmon's --- ---
Company owned............................... 1 1
Bonefish Grills --- ---
Company owned............................... 6 -
Development joint venture................... 1 -
--- ---
Total....................................... 7 -
--- ---
System-wide total............................. 903 808
=== ===
18 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended June 30, 2002 and 2001 (unaudited)
Revenues. Restaurant sales increased by 10.7% to $591,422,000
during the second quarter of 2002 as compared with $534,309,000 in the
same period in 2001. The increase was attributable to the opening of
new restaurants after June 30, 2001, menu price increases of
approximately 1.8% at Outback Steakhouse in May 2002 and approximately
0.4% at Carrabba's Italian Grill in August 2001, and same store sales
increases during the quarter of 1.2% at Company owned Carrabba's
Italian Grills, partially offset by same store sales declines of
approximately 0.3% at Company owned Outback Steakhouses. The following
table depicts additional activities that influenced the period to
period changes in restaurant sales at domestic Company owned
restaurants for the three months ended June 30, 2002 and 2001.
Three Months Ended
June 30,
2002 2001
Average unit volumes (weekly): --------- ---------
Outback Steakhouses.................. $ 67,234 $ 68,206
Carrabba's Italian Grills............ 61,853 61,232
Estimated per person check averages:
Outback Steakhouses.................. $18.79 $18.19
Carrabba's Italian Grills............ 19.43 19.36
Year to year percentage change:
Same-store sales:
Outback Steakhouses................ (0.3%) 0.7%
Carrabba's Italian Grills.......... 1.2% 7.0%
Estimated same-store customer
counts:
Outback Steakhouses................ (3.6%) (2.1%)
Carrabba's Italian Grills.......... 0.8% 6.8%
Note: Customer counts are based upon the number of customers served in
the restaurants plus the number for which food is provided through "to
go" service as reported by the customer. Customer count and per
person check average data may be affected by the accuracy of the
information provided by the "to go" customers.
Other revenues, consisting primarily of initial franchise fees
and royalties, increased by $336,000 to $4,871,000 during the second
quarter of 2002 as compared with $4,535,000 in the same period in
2001. The increase was attributable to higher royalties from
additional stores operated as franchises during the second quarter of
2002 compared with the same period in 2001.
Costs and expenses. Costs of sales, consisting of food and
beverage costs, as a percentage of restaurant sales, decreased in the
second quarter of 2002 to 36.7% of restaurant sales as compared with
38.4% in the same period in 2001. The decrease was attributable to
commodity cost decreases in beef, ribs, dairy and shrimp, partially
offset by higher potato and 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.
19 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended June 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 0.6% to 24.5% in the
second quarter of 2002 as compared with 23.9% in the same period in
2001. The increase resulted from higher employee health insurance
costs, higher hourly employee bonus program costs, 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 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 0.3% of restaurant sales to 20.0% in the second quarter of 2002, as
compared with 19.7% in the same period in 2001. The increase was
attributable to lower average unit volumes at Outback Steakhouse and
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 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 3.1% of total revenues
in both the second quarter of 2002 and 2001. The impact of reduced
amortization expense due to the adoption of FAS 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, new restaurant formats
which have higher average construction costs than Outback Steakhouse
and Carrabba's Italian Grills and lower average unit volumes at
Outback Steakhouse.
General and administrative costs increased by $1,729,000 to
$22,207,000 in the second quarter of 2002 compared with $20,478,000
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.
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 $1,549,000 during the second quarter of 2002 as compared with
income of $977,000 during the same period in 2001. This increase was
attributable to additional stores operating as development joint
ventures in the second 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 second
quarter of 2002.
20 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended June 30, 2002 and 2001 (continued)
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 $12,669,000 to $76,524,000 in the second
quarter of 2002 as compared with $63,855,000 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 $663,000 during the second quarter of 2002 as compared
with net other income of $275,000 in the same period in 2001. The
increase in net other expense was the result of a decrease of
approximately $800,000 in the cash surrender value of certain life
insurance policies and 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 in which the Company operates
catering and concession facilities.
Interest income (expense), net. Interest income, net, was
$320,000 during the second quarter of 2002 as compared with interest
income, net, of $637,000 in the same period in 2001. The period to
period change in interest income resulted from lower interest rates on
short term investments during the second quarter of 2002 compared with
the same period in 2001 and increased interest expense due to higher
average debt balances on borrowings used to support Outback
Steakhouse's international operations during the second quarter of
2002 compared with the second 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 1.8% and 1.6% during the quarters ended June 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
second 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 second quarter of 2002 and the effective income tax rate was 35.0%
during the second quarter of 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 second
quarter of 2002 was $42,466,000 as compared with $36,546,000 in the
same period in 2001. Basic earnings per share increased to $0.55
during the second quarter of 2002 as compared with $0.48 for the same
period in 2001. Diluted earnings per share increased to $0.53 during
the second quarter of 2002 as compared with $0.47 for the same period
in 2001.
21 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six months ended June 30, 2002 and 2001 (unaudited)
Revenues. Total restaurant sales increased by 10.9% to
$1,165,977,000 during the first half of 2002 as compared with
$1,050,963,000 in the same period in 2001. The increase was primarily
attributable to the opening of new restaurants after June 30, 2001,
menu price increases of approximately 1.8% in May 2002 at Outback
Steakhouse and menu price increases of approximately 0.5% in April
2001 and 0.4% in August 2001 at Carrabba's Italian Grills. The
increase was also attributable to same store sales increases during
the first half of 2002 of 2.1% for Company owned Carrabba's Italian
Grills, partially offset by same store sales declines of approximately
0.7% at Company owned Outback Steakhouses. The following table depicts
additional activities that influenced the period to period changes in
restaurant sales at domestic Company owned restaurants for the six
months ended June 30, 2002 and 2001.
Six Months Ended
June 30,
2002 2001
Average unit volumes(weekly): ------- -------
Outback Steakhouses..............$66,830 $67,943
Carrabba's Italian Grills........ 63,077 61,593
Estimated per person check
averages:
Outback Steakhouses.............. $18.84 $18.36
Carrabba's Italian Grills........ 19.74 19.61
Year to year percentage change:
Same-store sales:
Outback Steakhouses........... (0.7%) 1.5%
Carrabba's Italian Grills..... 2.1% 6.9%
Estimated same-store customer
counts:
Outback Steakhouses........... (3.4%) (1.4%)
Carrabba's Italian Grills..... 1.5% 5.5%
Note: Customer counts are based upon the number of customers served in
the restaurants plus the number for which food is provided through "to
go" service as reported by the customer. Customer count and per
person check average data may be affected by the accuracy of the
information provided by the "to go" customers.
Other revenues, consisting of initial franchise fees and
royalties, increased by $171,000 to $9,305,000 during the first half
of 2002 as compared with $9,134,000 in the same period in 2001. The
increase was attributable to higher royalties from additional stores
operated as franchises during the first half of 2002 compared with the
same period in 2001.
Costs and expenses. Cost of sales as a percentage of restaurant
sales, decreased by 1.0% to 37.1% in the first half of 2002 as
compared with 38.1% in the same period in 2001. The decrease was
attributable to commodity cost decreases in beef, ribs, butter and
seafood partially offset by higher potato 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.
22 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six months ended June 30, 2002 and 2001 (continued)
Labor and other related expenses increased as a percentage of
restaurant sales by 0.4% to 24.3% in the first half of 2002 as
compared with 23.9% in the same period in 2001. The increase resulted
from higher employee health insurance costs, higher hourly employee
bonus program costs, 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 19.9% in the first half of 2002 as compared with
19.6% 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 unchanged at 3.1% of
total revenues for the second half of 2002 as compared with the same
period in 2001. The impact of reduced amortization expense due to the
adoption of FAS 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, new restaurant formats which have higher average
construction costs than Outback Steakhouse and Carrabba's Italian
Grills and lower average unit volumes at Outback Steakhouse.
General and administrative costs increased by $3,596,000 to
$43,336,000 during the first half of 2002 as compared to with
$39,740,000 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.
Income from operations of unconsolidated affiliates was $
3,101,000 in the first six months of 2002 as compared with income of
$1,978,000 in the same period in 2001. This increase was attributable
to additional stores operating as development joint ventures in the
first half 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 half 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 $19,119,000, to $150,839,000 in the first half
of 2002 as compared with $131,720,000 in the same period in 2001.
23 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six months ended June 30, 2002 and 2001 (continued)
Other income (expense), net. Other income (expense) includes the
net of revenues and expenses from non-restaurant operations. Net other
expense was $980,000 during the first six months of 2002 as compared
with net other expense of $960,000 in the same period in 2001. The
increase in the net expense resulted from the Company's portion of
increased losses associated with the operation of Kentucky Speedway
and a decrease of approximately $500,000 in the cash surrender values
of certain life insurance policies, partially offset by a gain of
approximately $500,000 on the sale of an airplane during the first six
months of 2002 compared with the first six months of 2001.
Interest income (expense), net. Interest income was $556,000
during the first six months of 2002 as compared with interest income
of $1,761,000 in the same period in 2001. The decrease in interest
income resulted from lower interest rates on short term investments
during the first six months of 2002 compared with the same period in
2001 and increased interest expense due to higher average debt
balances on borrowings used to support Outback Steakhouses
international operations during the first six months of 2002 compared
with the same period in 2001.
Elimination of minority interests. As a percentage of revenues,
these allocations were 1.8% and 1.7% during the six months ended June
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 half 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 six 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 six month period ended June 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 half of 2002 was $79,429,000 as compared with pro forma net
income of $74,433,000 in the same period in 2001. Basic earnings per
share increased to $1.03 during the first half of 2002, as compared
with $0.97 in the same period in 2001. Diluted earnings per share
increased to $0.99 during the first half of 2002, as compared with
$0.95 in the same period in 2001.
24 of 36
OUTBACK STEAKHOUSE, INC.(R)
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 Six Months Ended
December 31, June 30, June 30,
2001 2002 2001
--------- -------- ---------
Net cash provided by
operating activities..... $ 228,821 $149,806 $ 56,820
Net cash used in investing
activities............... (233,662) (89,380) (102,980)
Net cash used in financing
activities............... (10,835) (25,509) (17,111)
--------- -------- ---------
Net (decrease) increase in
cash and cash equivalents $ (15,676) $ 34,917 $(63,271)
========= ======== ========
The Company requires capital principally for the development of
new restaurants. Capital expenditures totaled approximately
$201,039,000 for year ended December 31, 2001 and $88,420,000 and
$86,675,000 during the first six 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 $3,218,000 has been expended as of June 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.
The Company 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.
25 of 36
OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 guarantees, which totaled
$14,584,000, with a potential maximum of $25,000,000, as of June 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 June 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. As of June 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.
See Note 5 of Notes to Unaudited Consolidated Financial Statements.
The Company has notes payable with banks bearing interest at
6.75% to support the Company's Korean operations. As of June 30, 2002,
the outstanding balance was approximately $14,144,000.
DEBT GUARANTEES
The Company is the guarantor of two uncollateralized lines of
credit that permit borrowing of up to $25,000,000 for its franchisee
operating Outback Steakhouses in Japan. At June 30, 2002 the
borrowings totalled approximately $14,584,000.
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 June 30, 2002 the
balance on the line of credit was approximately $28,408,000.
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
June 30, 2002, the outstanding balance was approximately $19,562,000.
The Company is the guarantor of bank loans made to its franchisee
operating Outback Steakhouses in Mississippi. At June 30, 2002, the
outstanding balance on the loans was approximately $304,000.
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OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources (continued)
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 in which the Company operates
catering and concession facilities. At June 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 June 30, 2002 are summarized in the table below (in
thousands):
Current Long-term
Total Portion Portion
--------- -------- ---------
Debt...................... $29,915 $15,254 $14,661
Debt guarantees........... $94,249 $25,304 $68,945
Amount outstanding under
debt guarantees......... $72,303 $14,888 $57,415
Commitments............... $ 4,282 $ 4,282
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 June 30, 2002, approximately
2,775,000 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 June 30, 2002, under these authorizations the Company has
repurchased approximately 4,055,000 shares of its Common Stock for
approximately $110,000,000. Subsequent to June 30, 2002, the Company
has repurchased approximately 784,000 shares of its Common Stock for
approximately $22,833,000.
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OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF 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.
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.
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OUTBACK STEAKHOUSE, INC.(R)
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 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 were 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.
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OUTBACK STEAKHOUSE, INC.(R)
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.
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OUTBACK STEAKHOUSE, INC.(R)
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.
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 June 30, 2002, as compared
with the same period a year ago, average unit volumes for Outback
declined by approximately 1.6% and average unit volumes for Carrabba's
Italian Grills ("Carrabba's") increased by approximately 2.4%. Results
for both chains 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, in mid May a price increase of approximately 1.8% was
implemented, and the Company has increased its planned 2002 television
advertising expenditures by $5.4 million. The additional advertising
will begin 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 slowing of average unit volume
increases for Carrabba's the Company is now anticipating gains of only
one to three percent for the second half 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 June 30, 2002, the Company benefited
from lower than expected commodity costs for baby back ribs, shrimp
and fresh fish. 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
40 to 50 basis points better than originally expected.
Because of lower than planned average unit volumes, through the
first two 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 second half 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.
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OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK(continued)
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 second half of the year to be 10 to 20 basis
points higher than originally expected.
The Company is now planning for the second half of 2002 for all
other expense ratio variances to be comparable to those experienced in
and reported for the first two quarters of 2002.
Expansion Strategy.
The Company's goal is to add new restaurants during the remainder
of 2002. The following table presents a summary of the expected
restaurant openings for the full year 2002:
Outback Steakhouses - Domestic
Company owned 28 to 30
Franchised 4 to 5
Outback Steakhouses -
International
Company owned 8 to 10
Franchised 8 to 10
Carrabba's Italian Grills
Company owned 10 to 15
Development joint venture 5 to 10
Fleming's Prime Steakhouse and
Wine Bars
Company owned 3
Roy's
Company owned 1
Franchised 1
Selmon's
Company owned 1
Cheeseburger in Paradise
Company owned 1
Bonefish Grill
Company owned 6 to 7
Franchised 2 to 3
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OUTBACK STEAKHOUSE, INC.(R)
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.
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OUTBACK STEAKHOUSE, INC.(R)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 June 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.
34 of 36
OUTBACK STEAKHOUSE, INC.(R)
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company filed a report on Form 8-K with the Securities and
Exchange Commission dated February 14, 2002 regarding threatened
litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on Wednesday,
April 24, 2002. The matters submitted for vote and the related
election results are as follows:
1. To elect four directors each to serve for a three year term
and until his or her successor is duly elected and qualified.
The results of proxies voted for the election of the directors are
as follows:
Name of Nominee Votes For % of Votes % of Exceptions % of
/Director Eligible Withheld Eligible Eligible
--------------- --------- ------- -------- -------- --------- --------
Robert D. Basham 66,574,926 86.12% 1,382,949 1.79% 0 0.00%
W.R. Carey, Jr. 66,865,761 86.50% 1,092,114 1.41% 0 0.00%
Nancy Schneid 66,847,612 86.48% 1,110,263 1.44% 0 0.00%
Toby S. Wilt 54,069,108 69.95% 13,888,676 17.97% 0 0.00%
Eligible 77,302,211
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
35 of 36
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. (R)
Date: August 14, 2002. (Registrant)
By: /s/ Robert S. Merritt
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
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