<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: Commission File Number:
September 30, 1998 0-19334
------------------- ------------------------
OUTBACK STEAKHOUSE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3061413
- ------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
550 North Reo Street, Suite 200
Tampa, FL 33609
---------------------------------------------------
(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 9, 1998, there
were 49,084,544 shares of Common Stock, $.01 par value outstanding.
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OUTBACK STEAKHOUSE, INC.
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
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 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.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents.............. $ 36,721 $ 39,817
Inventories............................ 17,901 20,196
Assets held for disposal............... 4,323 4,681
Other current assets................... 19,432 15,557
-------- --------
Total current assets.............. 78,377 80,251
PROPERTY, FIXTURES AND EQUIPMENT, NET.... 495,286 459,069
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES.............. 7,643 7,685
DEFERRED INCOME TAXES.................... 10,215 8,143
OTHER ASSETS............................. 36,367 37,632
-------- --------
$627,888 $592,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 23,385 $ 23,726
Sales taxes payable.................... 7,258 7,252
Accrued expenses....................... 28,712 24,011
Unearned revenue....................... 5,158 25,086
Current portion of long-term debt...... 770 715
-------- --------
Total current liabilities......... 65,283 80,790
LONG-TERM DEBT........................... 39,224 68,276
OTHER LONG TERM LIABILITIES.............. 4,500 4,500
-------- --------
Total liabilities.................... 109,007 153,566
-------- --------
INTEREST OF MINORITY PARTNERS IN
CONSOLIDATED PARTNERSHIPS.............. 5,345 4,497
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized, 49,933 and 49,250
shares issued; and 48,997 and 48,514
outstanding as of September 30, 1998
and December 31,1997, respectively... 499 492
Additional paid-in capital............. 175,371 156,655
Retained earnings...................... 357,911 291,470
-------- --------
533,781 448,617
Less treasury stock, 1,136 and 936 shares,
at cost, as of September 30, 1998 and
December 31, 1997, respectively...... (20,245) (13,900)
-------- --------
Total stockholders' equity........... 513,536 434,717
-------- --------
$627,888 $592,780
======== ========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
REVENUES
Restaurant sales........ $338,207 $286,843 $998,492 $841,206
Other revenues.......... 3,604 2,366 9,602 6,769
-------- -------- -------- --------
TOTAL REVENUES.......... 341,811 289,209 1,008,094 847,975
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales......... 132,973 110,299 390,125 323,850
Labor & other
related.............. 80,026 68,815 234,357 200,377
Other operating....... 72,346 63,333 215,280 187,054
General & administrative 13,966 10,468 40,252 31,714
(Income) loss from
operations of uncon-
solidated affiliates. (63) 118 (356) 532
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 299,248 253,033 879,658 743,527
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 42,563 36,176 128,436 104,448
INTEREST EXPENSE........ (146) (632) (1,070) (1,513)
-------- -------- -------- --------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES...... 42,417 35,544 127,366 102,935
ELIMINATION OF MINORITY
PARTNERS' INTEREST.... 4,916 4,946 16,790 14,915
-------- -------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES...... 37,501 30,598 110,576 88,020
PROVISION FOR INCOME
TAXES................. 13,094 10,282 39,255 31,241
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 24,407 20,316 71,321 56,779
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
(NET OF TAXES) 4,880
-------- -------- -------- --------
NET INCOME.............. $ 24,407 $ 20,316 $ 66,441 $ 56,779
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF INCOME (continued)
(in thousands except per share data, unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
BASIC EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.50 $ 0.43 $ 1.46 $ 1.19
Cumulative effect of change
in accounting principle
(net of taxes)....... 0.10
-------- -------- -------- --------
Net income.............. $ 0.50 $ 0.43 $ 1.36 $ 1.19
======== ======== ======== ========
BASIC WEIGHTED SHARES
OUTSTANDING........... 49,042 47,574 48,908 47,667
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.49 $ 0.42 $ 1.42 $ 1.18
Cumulative effect of change
in accounting principle
(net of taxes)....... 0.10
-------- -------- -------- --------
Net income.............. $ 0.49 $ 0.42 $ 1.32 $ 1.18
======== ======== ======== ========
DILUTED WEIGHTED SHARES
OUTSTANDING........... 50,126 48,140 50,142 48,273
======== ======== ======== ========
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited) Nine Months Ended September 30,
1998 1997
Cash flows from operating activities: -------- --------
Net income.................................. $ 66,441 $ 56,779
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation.............................. 27,844 22,845
Amortization.............................. 1,240 10,748
Cumulative effect of accounting change.... 4,880
Minority partners' interest in
consolidated partnerships' income........ 16,790 14,915
(Income) loss from unconsolidated affiliates (356) 532
Other.................................... 358
Change in assets and liabilities:
Decrease (increase) in inventories........ 2,295 (663)
Increase in other current assets.......... (3,875) (3,601)
(Increase) decrease in deferred income taxes (2,072) 59
Increase in other assets.................. (1,849) (9,968)
Increase (decrease) in accounts payable,
sales taxes payable, and accrued expenses 4,366 (8,637)
Decrease in unearned revenue.............. (19,928) (13,940)
Increase in other long term liabilities... 2,000
-------- --------
Net cash provided by operating activities 96,134 71,069
Cash flows used in investing activities: -------- --------
Capital expenditures....................... (64,061) (83,538)
Payments from unconsolidated affiliates.... 3,408 2,957
Distributions to unconsolidated affiliates. (603) (236)
Investments in and advances to unconsolidated
affiliates................................ (2,407) (703)
-------- --------
Net cash used in investing activities.... (63,663) (81,520)
Cash flows from financing activities: -------- --------
Proceeds from exercises of stock options... 17,302 2,826
Proceeds from issuance of long-term debt... 39,424
Proceeds from minority partners' contributions 950 1,375
Distributions to minority partners
and shareholders.......................... (18,477) (16,271)
Repayments of long-term debt............... (28,997) (530)
Purchases of treasury stock................ (6,345) (13,900)
Net cash (used in) provided by financing -------- --------
activities............................. (35,567) 12,924
-------- --------
Net (decrease) increase in cash and
cash equivalents.......................... (3,096) 2,473
Cash and cash equivalents at beginning
of period................................ 39,817 15,661
-------- --------
Cash and cash equivalents at end of period.. $ 36,721 $ 18,134
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest................... $ 1,958 $ 2,858
Cash paid for income taxes............... 33,434 30,235
Supplemental disclosures of non-cash items:
Purchase of minority partners interest... $ 3,006
See notes to unaudited consolidated financial statements.
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the 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 financial statements have been reclassified to
conform with the current period presentation.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
These financial Statements should be read in conjunction with the Financial
Statements and financial notes thereto included in the Company's 1997 Annual
Report.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
September 30, December 31,
1998 1997
-------- ---------
Deposits (including income tax deposits) $ 3,743 $ 2,251
Accounts receivable............... 8,424 6,466
Prepaid expenses.................. 6,094 6,034
Other current assets.............. 1,171 806
-------- ---------
$ 19,432 $ 15,557
======== =========
3. Property, Fixtures and Equipment, net
Property, fixtures and equipment consisted of the following (in thousands):
September 30, December 31,
1998 1997
-------- ---------
Land.............................. $ 108,812 $ 99,774
Buildings and building improvements 220,757 193,667
Furniture and fixtures............ 55,934 49,484
Equipment......................... 125,060 112,537
Leasehold improvements............ 94,912 87,624
Construction in progress.......... 10,440 8,768
Accumulated depreciation.......... (120,629) (92,785)
-------- ---------
$ 495,286 $ 459,069
======== ========
4. Other Assets
Other assets consisted of the following (in thousands):
September 30, December 31,
1998 1997
-------- ---------
Preopening costs, net............. $ 6,640
Intangible assets (including liquor
licenses)........................ $ 30,739 27,307
Other assets...................... 5,628 3,685
-------- ---------
$ 36,367 $ 37,632
======== =========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. Long-term Debt
Long-term debt consisted of the following (in thousands):
September 30, December 31,
1998 1997
-------- ---------
Notes payable to banks collateralized by
property, fixtures and equipment, interest
at rates ranging from 8.83% to 9.90%....... $ 956 $ 1,127
Note payable to corporation, collateralized
by real estate, interest at 9.0%........... 270 344
Other notes payable, unsecured, interest at
rates ranging from 5.36% to 7.99%.......... 1,210 1,160
Revolving line of credit, interest at
5.81% at September 30, 1998 (see below) 37,558 66,360
-------- ---------
39,994 68,991
Less current portion 770 715
-------- ---------
Long-term debt $39,224 $68,276
======== =========
The Company has an unsecured revolving line of credit which permits
borrowing up to a maximum of $125,000,000 at rates ranging from 50 to 75
basis points over the 30,60, 90 or 180 day London Interbank Offered Rate
(LIBOR) (5.25% to 5.38% at September 30, 1998). At September 30, 1998 the
unused portion of the revolving line of credit was $87,442,000. The line
matures in August 2000.
The Company has a $7,500,000 unsecured line of credit bearing interest at
rates ranging from 50 to 75 basis points over LIBOR. Approximately $5,277,000
of the line of credit is committed for the issuance of letters of credit,
$1,421,000 of which is to secure loans made by the bank to certain franchisees.
The Company is the guarantor of an unsecured line of credit which permits
borrowing of up to a maximum of $25,000,000, maturing in March 2002, for one
of its franchise groups. At September 30, 1998 the balance was approximately
$10,011,000.
See "Liquidity and Capital Resources" in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
September 30, December 31,
1998 1997
-------- ---------
Accrued payroll................... $ 10,201 $ 4,907
Accrued advertising............... 2,759 5,527
Accrued rent...................... 1,305 1,403
Accrued insurance................. 5,216 4,985
Accrued ESOP contribution......... 1,171 174
Accrued property taxes............ 5,434 3,921
Other accrued expenses............ 2,626 3,094
-------- --------
$ 28,712 $ 24,011
======== ========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Adoption of Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities".
The Company chose early adoption of a new accounting standard, Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," which requires
that pre-opening and other start-up costs be expensed as incurred rather than
capitalized. The adoption has been made effective as of the beginning of the
Company's current fiscal year. As a result of the adoption the Company has
begun to report pre-opening costs as part of its store operating expenses which
in turn will result in lower future amortization expense. The cumulative effect
of the change in accounting, which totaled $4,880,000 net of taxes or $0.10 per
share diluted, was recorded as a one-time charge in the Company's year-to-date
results.
8. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." Comprehensive income is generally defined as all
changes in stockholders' equity exclusive of transactions with owners.
Comprehensive income, net of taxes, is comprised of (in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net income.............. $ 24,407 $ 20,316 $ 66,441 $ 56,779
Tax effect of stock
option exercises..... 605 815 4,359 2,218
-------- -------- -------- --------
Comprehensive income.... $ 25,012 $ 21,131 $ 70,800 $ 58,997
======== ======== ======== ========
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OUTBACK STEAKHOUSE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth, for the periods indicated, (i) the
percentages which the items in the Company's 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,
---------------- ----------------
1998 1997 1998 1997
REVENUES ------ ------ ------ ------
Restaurant sales 98.9% 99.2% 99.0% 99.2%
Other revenues 1.1 0.8 1.0 0.8
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of sales (1) 39.3 38.5 39.1 38.5
Labor & other related (1) 23.7 24.0 23.5 23.8
Other operating 21.2 21.9 21.4 22.1
General & administrative 4.1 3.6 4.0 3.7
(Income) loss from operations of
unconsolidated affiliates 0.1
Total costs and expenses 87.5 87.5 87.3 87.7
------ ------ ------ ------
INCOME FROM OPERATIONS 12.5 12.5 12.7 12.3
INTEREST EXPENSE, NET (0.2) (0.1) (0.2)
------ ------ ------ ------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES 12.4 12.3 12.6 12.2
ELIMINATION OF MINORITY PARTNERS'
INTEREST 1.4 1.7 1.6 1.8
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES 10.9 10.6 11.0 10.4
PROVISION FOR INCOME TAXES 3.8 3.6 3.9 3.7
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 7.1 7.0 7.1 6.7
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES) 0.5
------ ------ ------ ------
NET INCOME 7.1% 7.0% 6.6% 6.7%
====== ====== ====== ======
(1) As a percentage of restaurant sales.
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Results of Operations (continued)
System-wide sales (millions of dollars):
Outback Steakhouses restaurants
Company owned $309.7 $261.1 $909.7 $770.4
Domestic franchised 60.7 45.7 179.2 130.8
International franchised 12.3 6.1 35.3 11.5
------ ------ ------ ------
Total 382.7 312.9 1,124.2 912.7
------ ------ ------ ------
Carrabba's Italian Grills
Company owned restaurants 28.5 25.7 88.8 70.8
Joint venture restaurants 6.9 6.2 20.8 18.2
------ ------ ------ ------
Total 35.4 31.9 109.6 89.0
------ ------ ------ ------
System-wide total $418.1 $344.8 $1,233.8 $1,001.7
====== ====== ====== ======
September 30,
--------------
1998 1997
---- ----
Number of restaurants (at end
of the period):
Outback Steakhouses
Company owned restaurants 400 357
Domestic franchised restaurants 82 64
International franchised restaurants 21 10
--- ---
Total 503 431
--- ---
Carrabba's Italian Grills
Company owned restaurants 51 51
Joint venture restaurants 12 13
--- ---
Total 63 64
--- ---
System-wide total 566 495
=== ===
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Three months ended September 30, 1998 and 1997
Revenues. Total revenues increased by 18.2% to $341,811,000 during
the third quarter of 1998 as compared with $289,209,000 in the same period
in 1997. The increase was attributable to the opening of new restaurants
after September 30, 1997, a 1.0% menu price increase in September 1997 at
Outback Steakhouse, a 5.0% menu price increase in December 1997 at Carrabba's
Italian Grills, and comparable store revenue increases during the quarter of
5.8% and 7.4% at Outback Steakhouse and Carrabba's Italian Grills,
respectively. The following table depicts additional activities which
influenced the period to period changes in revenues:
Three Months Ended
September 30,
----------------
1998 1997
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $59,755 $57,404
Carrabba's Italian Grills.... $43,924 $39,981
Per person check averages:
Outback Steakhouses.......... $16.98 $16.72
Carrabba's Italian Grills.... $17.63 $17.20
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 5.8% (1.0%)
Carrabba's Italian Grills.... 7.4% 10.2%
Same store customer counts:
Outback Steakhouses.......... 4.2% (1.1%)
Carrabba's Italian Grills.... 4.9% 8.3%
Costs and expenses. Costs of restaurant sales, consisting of food
and beverage costs, increased in the third quarter of 1998 to 39.3% of
restaurant sales as compared with 38.5% in the same period in 1997. The
increase was attributable to commodity cost increases in dairy products,
particularly butter, and produce, partially offset by a slight decrease
in meat prices and higher menu prices.
Labor and other related expenses decreased as a percentage of
restaurant sales by 0.3% to 23.7% in the third quarter of 1998 as compared
with 24.0% in the same period in 1997. The decrease resulted from higher
comparable store revenues at Outback Steakhouse and Carrabba's Italian Grills
during the quarter, partially offset by higher hourly wage rates resulting from
a competitive labor market and the effect of the increase in the Federal
minimum wage.
Other operating expenses include all other unit-level
operating costs, the major components of which are operating supplies, rent,
repairs and maintenance, advertising expenses, utilities, depreciation and
amortization and other occupancy costs. A substantial portion of these expenses
are fixed or indirectly variable. These costs decreased by 0.7% of revenues to
21.2% in the third quarter of 1998, as compared with 21.9% in the same period
in 1997. The decrease resulted from higher comparable store revenues at Outback
Steakhouses and Carrabba's Italian Grills during the quarter, which reduces the
fixed and indirectly variable costs as a percentage of revenue.
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General and administrative costs increased by $3,498,000 to $13,966,000
in the third quarter of 1998 compared with $10,468,000 during the same period
in 1997. This increase resulted from additional staff employed to manage
Outback Steakhouse's international franchising operations, lower international
franchise revenue growth, an increase in salary expenses related to higher
restaurant management training costs, and an increase in overall
administrative costs associated with operating additional Outback Steakhouses.
(Income)loss from operations of unconsolidated affiliates represents
the Company's portion of the income or loss from the Carrabba's Italian Grills
operated as development joint ventures. Income from the development joint
ventures was $63,000 during the third quarter of 1998 as compared with a loss
of $118,000 during the same period in 1997. This increase was attributable to
an increase in comparable store revenues and improved operating margins at
Carrabba's Italian Grills joint venture restaurants.
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
$6,387,000, to $42,563,000, in the third quarter of 1998 as compared with
$36,176,000 in the same period in 1997.
Interest expense. Interest expense was $146,000 during the third
quarter of 1998 as compared with interest expense of $632,000 in the same
period in 1997. The decrease in interest expense resulted from a lower average
line of credit balance during the third quarter of 1998 as compared with the
same period in 1997.
Elimination of minority partners' interests. The costs included in
this line item represent 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.
As a percentage of revenues, these costs were 1.4% and 1.7% during the
quarters ended September 30, 1998 and 1997, respectively. The decrease in this
ratio reflected changes in overall restaurant operating margins and decreases
in minority partners' ownership interests resulting from the purchase of
minority interests in the Company's South Florida, Houston, Detroit, Washington
D.C., and North and South Carolina markets in the fourth quarter of 1997 and
the Indiana and Kentucky markets in the second quarter of 1998.
Provision for income taxes. The provision for income taxes in both
quarters reflected expected income taxes due at federal statutory rates and
state income tax rates, net of the federal benefit. The effective income tax
rates were 34.9% and 33.6% during the third quarters of 1998 and 1997,
respectively.
Net income and earnings per common share. Net income for the third
quarter of 1998 was $24,407,000 as compared with net income of $20,316,000 in
the same period in 1997. Basic earnings per share increased to $0.50 per share
during the third quarter of 1998 as compared with basic earnings per share of
$0.43 for the same period in 1997. Diluted earnings per share increased to
$0.49 per share during the third quarter of 1998 as compared with diluted
earnings per share of $0.42 for the same period in 1997.
13 of 20
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Nine months ended September 30, 1998 and 1997
Revenues. Total revenues increased by 18.9% to $1,008,094,000 during
the first nine months of 1998 as compared with $847,975,000 in the same period
in 1997. The increase was attributable to the opening of new restaurants after
September 30, 1997, menu price increases in September 1997 of 1.0% at Outback
Steakhouse, a 5.0% menu price increase in December 1997 at Carrabba's Italian
Grills, and comparable store revenue increases during the first nine months of
1998 of 5.0% and 10.6% for Outback Steakhouse and Carrabba's Italian Grills,
respectively. The following table depicts additional activities which
influenced the period to period changes in revenues:
Nine Months Ended
September 30,
----------------
1998 1997
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $61,035 $59,245
Carrabba's Italian Grills.... $45,883 $41,383
Per person check averages:
Outback Steakhouses.......... $16.90 $16.60
Carrabba's Italian Grills.... $17.25 $16.18
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 4.9% (1.9%)
Carrabba's Italian Grills.... 10.6% 8.4%
Same store customer counts:
Outback Steakhouses.......... 3.4% (1.6%)
Carrabba's Italian Grills.... 4.0% 6.8%
Costs and expenses. Cost of restaurant sales increased by 0.6% to
39.1% in the first nine months of 1998 as compared with 38.5% in the same
period in 1997. The increase was attributable to commodity cost increases
in dairy products, particularly butter, shrimp and produce, partially offset
by a decrease in meat costs and higher menu prices.
Labor and other related expenses decreased as a percentage of
restaurant sales by 0.3% to 23.5% in the first nine months of 1998 as compared
with 23.8% in the same period in 1997. The decrease resulted from higher
comparable store revenues at Outback Steakhouse and Carrabba's Italian Grills
during the nine months, partially offset by higher hourly wage rates resulting
from a competitive labor market and the effect of the increase in the federal
minimum wage.
Other operating expenses decreased by 0.7% of revenues to 21.4% in the
first nine months of 1998 as compared with 22.1% in the same period in 1997.
The decrease resulted from higher comparable store revenues for both Outback
Steakhouse and Carrabba's Italian Grills during the nine months, which reduces
the fixed and indirectly variable costs as a percentage of revenue.
General and administrative costs increased by $8,538,000 to $40,252,000
during the first nine months of 1998 as compared to with $31,714,000 during the
same period in 1997. The increase resulted from additional staff employed to
manage Outback Steakhouse's international franchising operations, an increase
in salary expenses related to higher restaurant management training costs, and
an increase in overall administrative costs associated with operating additional
Outback Steakhouses. 14 of 20
<PAGE>
(Income)loss from operations of unconsolidated affiliates represents the
Company's portion of the income or loss from the Carrabba's Italian Grills
operated as development joint ventures. Income from unconsolidated affiliates
was $356,000 in the first nine months of 1998 as compared with a loss of
$532,000 in the same period in 1997. This increase was attributable to the
increases in comparable store revenues and improved operating margins at
Carrabba's Italian Grills joint venture restaurants.
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
$23,988,000, to $128,436,000 in the first nine months of 1998 as compared with
$104,448,000 in the same period in 1997.
Interest expense. Interest expense was $1,070,000 during the first
nine months of 1998 as compared with interest expense of $1,513,000 in the same
period in 1997. The period to period changes in interest expense resulted from
changes in borrowings needs as funds were expended to finance the construction
of new restaurants and a lower average line of credit balance during the first
nine months of 1998 as compared with the same period in 1997.
Elimination of minority interests. The costs included in this line
item represent the portion of income from operations included in consolidated
operating results attributable to the ownership interests of restaurant
managers and joint venture partners in Company owned restaurants. As a
percentage of revenues, these costs were 1.6 and 1.8% in the nine month periods
ended September 30, 1998 and 1997, respectively. The decrease in this ratio
reflected changes in overall restaurant operating margins and decreases in
minority partners' ownership interests resulting from the purchase of minority
interests in the Company's South Florida, Houston, Detroit, Washington D.C.,
and North and South Carolina markets in the fourth quarter of 1997 and the
Indiana and Kentucky markets in the second quarter of 1998.
Provision for income taxes. The provision for income taxes in the
first nine months of both 1998 and 1997 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 35.5% for both of the nine month
periods ended September 30, 1998 and 1997.
Income before cumulative effect of a change in accounting principle.
The income before cumulative effect of a change in accounting principle for
the first nine months of 1998 was $71,321,000 as compared with $56,779,000 in
the same period in 1997. Basic earnings per share on income before cumulative
effect of a change in accounting principle increased to $1.46 during the first
nine months of 1998 as compared with $1.19 for the same period in 1997.
Diluted earnings per share on income before the cumulative effect of a change
in accounting principle increased to $1.42 during the first nine months of
1998 as compared with $1.18 for the same period in 1997.
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 new accounting principle, Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities". The cumulative effect of the
change in accounting principle (net of taxes), for the first nine months of
1998 was $4,880,000. There was no effect of the adoption of the change in
accounting principle during the first nine months of 1997. Basic and diluted
earnings per share for the first nine months of 1998 were both reduced by $0.10
due to the impact of the cumulative effect of the change in accounting
principle. 15 of 20
<PAGE>
Net income and earnings per common share. Net income for the first
nine months of 1998 was $66,441,000 as compared with net income of $56,779,000
in the same period in 1997. Basic earnings per share increased to $1.36 during
the first nine months of 1998 as compared with $1.19 in the same period in 1997.
Diluted earnings per share increased to $1.32 during the first nine months of
1998 as compared with $1.18 in the same period in 1997.
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,
1997 1998 1997
--------- ---------- ----------
Net cash provided by
operating activities $ 123,624 $ 96,134 $ 71,069
Net cash used in investing
activities (111,546) (63,663) (81,520)
Net cash provided by (used
in) financing activities 12,078 (35,567) 12,924
--------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents $ 24,156 $ (3,096) $ 2,473
========= ======== ========
The Company requires capital principally for the development of new
Company owned and joint venture restaurants. Capital expenditures totaled
approximately $115,213,000 for year ended December 31, 1997 and $64,061,000
and $83,538,000 during the first nine months of 1998 and 1997, respectively.
The Company either leases its restaurants under operating leases for periods
ranging from five to twenty years or purchases land and buildings where it is
cost effective.
At September 30, 1998, the Company had two unsecured lines of credit
totaling $132,500,000. Approximately $5,277,000 is committed for the
issuance of letters of credit, some of which is to secure loans made by the
bank to certain franchisees, and $37,558,000 has been drawn by the Company to
finance capital expenditures. The Company expects that its capital requirements
through the end of 1998 will be met by cash flows from operations and advances
on its line of credit. See Note 5 of Notes to Unaudited Consolidated Financial
Statements.
The Company is the guarantor of an unsecured line of credit that permits
borrowing of up to $25,000,000 for one of its franchisees. At September 30,
1998, the borrowings totaled approximately $10,011,000. See Note 5 of Notes
to Unaudited Consolidated Financial Statements.
Year 2000 Issue
Many software applications and operational programs written in the past were
not designed to recognize calendar dates beginning in the Year 2000. The
failure of such applications or systems to properly recognize the dates
beginning in the Year 2000 could result in miscalculations or system failures
which could result in an adverse effect on the Company's operations.
The Company has instituted a Year 2000 task force which has initiated a
comprehensive project to prepare its computer systems and communication systems
16 of 20
<PAGE>
for the Year 2000. The project includes identification and assessment of all
software, hardware and equipment that could potentially be affected by the Year
2000 issue and remedial action and further testing, if necessary. The Company
plans to complete this project by June 30, 1999. The Company believes that the
majority of its major systems are Year 2000 compliant and currently estimates
the total cost of its Year 2000 project will be approximately $500,000
including approximately $150,000 which has been or will be expensed as incurred
and approximately $350,000 of capital expenditures. The Company's aggregate
cost estimate does not include time and costs that may be incurred by the
Company as a result of the failure of any third parties, including suppliers,
to become Year 2000 ready or costs to implement any contingency plans.
The Company is also contacting critical suppliers of products and services
to determine the extent to which the Company may be vulnerable to such parties
failure to resolve their own Year 2000 issues. Where practicable, the Company
will assess and attempt to mitigate its risks with respect to the failure of
these entities to be Year 2000 ready. The effect, if any, on the Company's
results of operations from the failure of such parties to be Year 2000 ready is
not reasonably estimable.
Based on the assessment efforts to date, the Company has not identified any
matters with regard to the Year 2000 issue that will have a material adverse
effect on its financial condition or results of operations. The Company
operates a large number of geographically dispersed stores and has a large
supplier base and believes this will mitigate any adverse impact. The
Company's beliefs and expectations, however, are based on certain assumptions
and expectations that ultimately may prove to be inaccurate. Potential sources
of risk include the inability of principal suppliers to be Year 2000 ready,
which could result in delays in product deliveries from suppliers, and
disruption of the distribution channel, including transportation vendors.
The Company has not yet established a contingency plan, but intends to develop
one to mitigate the effects of problems experienced by it or key vendors or
service providers in the timely implementation of Year 2000 programs and
expects to have the contingency plan developed by mid-1999.
Recently Issued Financial Accounting Standards
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures of
certain information about operating segments and about products and services,
geographic areas in which the Company operates, and their major customers. This
Statement is effective for Financial Statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be presented. This Statement need not be applied to
interim periods in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in Financial Statements for interim periods in the second year of
application.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 defines derivative
instruments and requires that these items be recognized as assets or
liabilities in the statement of financial position. This statement is
effective for fiscal years beginning after June 15, 1999. As of September 30,
1998 the Company does not have any derivative instruments.
17 of 20
<PAGE>
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 Section27A 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 belief concerning
future events, including the following: any statements regarding future sales
and gross profits 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 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," and similar expressions are intended to
identify forward-looking statements. The Company cautions that these statements
are further qualified by important economic and competitive factors that could
cause actual results to differ materially from those in the forward-looking
statements including, without limitation, risks of the restaurant industry,
including a highly competitive industry with many well-established competitors
with greater financial and other resources than the Company, and the impact of
changes in consumer tastes, local, regional and national economic conditions,
demographic trends, traffic patterns, employee availability and cost increases.
In addition, the Company's ability to expand is dependent upon various factors,
such as the availability of attractive sites for new restaurants, the ability
to negotiate suitable lease terms, the ability to generate or borrow funds to
develop new restaurants and obtain various government permits and licenses and
the recruitment and training of skilled management and restaurant employees.
Accordingly, such forward-looking statements do not purport to be predictions
of future events or circumstances and may not be realized.
The Company notes that a variety of factors could cause the actual
results and experience to differ from the anticipated results referred to in
the previous paragraphs. The Company's forward looking statements regarding
its development schedule for new restaurant openings are subject to a number
of risk factors including:
(i) Ability to secure appropriate real estate sites at acceptable prices;
(ii) Ability to obtain all required governmental permits including zoning
approvals and liquor licenses on a timely basis;
(iii) Impact of government moratoriums or approval processes which could
result in significant delays;
(iv) Ability to secure all necessary contractors and sub-contractors;
(v) Union activities such as picketing and hand billing which could
delay construction;
(vi) Weather and acts of God beyond the Company's control resulting in
construction delays.
18 of 20
<PAGE>
OUTBACK STEAKHOUSE, INC.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27- Financial Data Schedules (for SEC use only)
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during
the quarter ended September 30, 1998.
19 of 20
<PAGE>
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.
________________________
(Registrant)
Date: November 13, 1998 By: /s/ Robert S. Merritt
__________________ __________________________
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
20 of 20
<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 36,721
<SECURITIES> 0
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0
0
<COMMON> 499
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