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, 1999 0-19334
------------------- ------------------------
OUTBACK STEAKHOUSE, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3061413
------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2202 N. Westshore Blvd., 5th Floor
Tampa, FL 33607
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(813) 282-1225
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(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, 1999,
there were 74,993,910 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. These
financial statements have not been audited by independent public accountants
and 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,
1999 1998
----------- ------------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents.............. $ 70,356 $ 83,594
Inventories............................ 16,775 19,306
Other current assets................... 25,096 19,152
-------- --------
Total current assets.............. 112,227 122,052
PROPERTY, FIXTURES AND EQUIPMENT, NET.... 572,768 526,833
ASSETS HELD FOR DISPOSAL................. 1,008 3,385
INVESTMENTS IN AND ADVANCES TO
UNCONSOLIDATED AFFILIATES.............. 17,040 9,229
DEFERRED INCOME TAXES.................... 949 3,265
OTHER ASSETS............................. 46,941 40,447
-------- --------
$750,933 $705,211
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable....................... $ 26,450 $ 36,718
Sales taxes payable.................... 8,342 8,497
Accrued expenses....................... 34,373 30,009
Unearned revenue....................... 5,717 32,620
Income taxes payable................... 10,768
Current portion of long-term debt...... 1,228 967
-------- --------
Total current liabilities......... 86,878 108,811
LONG-TERM DEBT........................... 716 37,475
OTHER LONG TERM LIABILITIES.............. 4,000 4,000
-------- --------
Total liabilities.................... 91,594 150,286
-------- --------
INTEREST OF MINORITY PARTNERS IN
CONSOLIDATED PARTNERSHIPS.............. 5,177 9,879
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value, 200,000
shares authorized, 75,256 and 74,821
shares issued; and 75,014 and 73,962
outstanding as of September 30, 1999 and
December 31, 1998, respectively...... 753 748
Additional paid-in capital............. 193,154 176,584
Retained earnings...................... 467,485 378,539
-------- --------
661,392 555,871
Less treasury stock, 242 and 859 shares at
September 30, 1999 and December 31,
1998, respectively, at cost.......... (7,230) (10,825)
-------- --------
Total stockholders' equity........... 654,162 545,046
-------- --------
$750,933 $705,211
======== ========
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,
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Restaurant sales........ $389,639 $338,207 $1,162,924 $998,492
Other revenues.......... 4,201 2,951 10,886 8,673
-------- -------- -------- --------
TOTAL REVENUES.......... 393,840 341,158 1,173,810 1,007,165
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of sales......... 148,754 132,973 443,516 390,125
Labor & other
related.............. 94,134 80,026 276,025 234,357
Other restaurant
operating............ 83,616 71,238 248,325 214,172
General & administrative 14,090 13,294 44,492 39,179
Income from operations of
unconsolidated affiliates. (207) (63) (784) (356)
-------- -------- -------- --------
340,387 297,468 1,011,574 877,477
-------- -------- -------- --------
INCOME FROM OPERATIONS.. 53,453 43,690 162,236 129,688
OTHER INCOME (EXPENSE), NET (515) (1,127) (1,919) (1,252)
INTEREST INCOME (EXPENSE) 224 (146) 754 (1,070)
-------- -------- -------- --------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES...... 53,162 42,417 161,071 127,366
ELIMINATION OF MINORITY
PARTNERS' INTEREST.... 6,573 4,916 21,800 16,790
-------- -------- -------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES...... 46,589 37,501 139,271 110,576
PROVISION FOR INCOME TAXES 15,891 13,094 49,720 39,255
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE.. 30,698 24,407 89,551 71,321
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
(NET OF TAXES)........ (4,880)
-------- -------- -------- --------
NET INCOME.............. $ 30,698 $ 24,407 $ 89,551 $ 66,441
======== ======== ======== ========
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,
1999 1998 1999 1998
-------- -------- -------- --------
BASIC EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.41 $ 0.33 $ 1.20 $ 0.97
Cumulative effect of change
in accounting principle
(net of taxes)....... (0.07)
-------- -------- -------- --------
Net income.............. $ 0.41 $ 0.33 $ 1.20 $ 0.90
======== ======== ======== ========
BASIC WEIGHTED SHARES
OUTSTANDING........... 75,084 73,563 74,769 73,362
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Income before cumulative
effect of a change in
accounting principle. $ 0.40 $ 0.32 $ 1.16 $ 0.95
Cumulative effect of change
in accounting principle
(net of taxes)....... (0.07)
-------- -------- -------- --------
Net income.............. $ 0.40 $ 0.32 $ 1.16 $ 0.88
======== ======== ======== ========
DILUTED WEIGHTED SHARES
OUTSTANDING........... 77,422 75,189 77,136 75,213
======== ======== ======== ========
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,
1999 1998
Cash flows from operating activities: -------- --------
Net income.................................. $ 89,551 $ 66,441
Cumulative effect of change in accounting
principle 4,880
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation.............................. 31,718 27,844
Amortization.............................. 1,932 1,240
Minority partners' interest in
consolidated partnerships' income........ 21,800 16,790
Income from unconsolidated affiliates..... (784) (356)
Other 358
Change in assets and liabilities:
Decrease in inventories.................. 2,531 2,295
Increase in other current assets.......... (5,944) (3,875)
Decrease(increase) in deferred income taxes 2,316 (2,072)
Increase in other assets.................. (8,426) (1,849)
(Decrease) increase in accounts payable,
sales taxes payable, and accrued expenses (6,059) 4,366
Increase in income taxes payable.......... 10,768
Decrease in unearned revenue.............. (26,903) (19,928)
-------- --------
Net cash provided by operating activities 112,500 96,134
Cash flows used in investing activities: -------- --------
Capital expenditures....................... (75,276) (64,061)
Payments from unconsolidated affiliates.... 64 3,408
Distributions to unconsolidated affiliates. (949) (603)
Investments in and advances to unconsolidated
affiliates................................ (6,142) (2,407)
-------- --------
Net cash used in investing activities.... (82,303) (63,663)
Cash flows from financing activities: -------- --------
Proceeds from exercises of stock options... 15,617 17,302
Proceeds from minority partners' contributions 550 950
Distributions to minority partners
and shareholders.......................... (27,052) (18,477)
Repayments of long-term debt............... (36,498) (28,997)
Purchase of treasury stock (7,230) (6,345)
Proceeds from reissuance of treasury stock. 11,178
Net cash used in financing -------- --------
activities............................. (43,435) (35,567)
-------- --------
Net decrease in cash and cash equivalents... (13,238) (3,096)
Cash and cash equivalents at beginning
of period................................ 83,594 39,817
-------- --------
Cash and cash equivalents at end of period.. $ 70,356 $ 36,721
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest................... $ 540 $ 1,958
Cash paid for income taxes............... 26,243 33,434
Supplemental disclosures of non-cash items:
Purchase of minority partners' interest.. $ 2,511 $ 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. These financial statements have not been audited by independent
public accountants and 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 1998 consolidated financial statements have
been reclassified to conform to the 1999 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, 1998 Balance Sheet has been derived from the audited
Financial Statements but does not include all of the disclosures required by
generally accepted accounting principles. It is suggested that these
Financial Statements should be read in conjunction with the Financial
Statements and Financial Notes thereto included in the Company's 1998 Annual
Report.
All applicable share and per share data have been restated to reflect the
retroactive effect of a three-for-two stock split effective on March 2, 1999.
2. Other Current Assets
Other current assets consisted of the following (in thousands):
September 30, December 31,
1999 1998
-------- ---------
Deposits.......................... $ 1,944 $ 1,395
Accounts receivable............... 10,912 9,273
Prepaid expenses.................. 11,395 6,532
Other current assets.............. 845 1,952
-------- ---------
$ 25,096 $ 19,152
======== =========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. Property, Fixtures and Equipment, Net. Property, fixtures and equipment
consisted of the following (in thousands):
September 30, December 31,
1999 1998
-------- ---------
Land.............................. $ 119,025 $ 111,961
Buildings and building improvements 275,643 249,486
Furniture and fixtures............ 66,715 59,080
Equipment......................... 154,998 134,309
Leasehold improvements............ 100,290 94,736
Construction in progress.......... 18,024 7,470
Accumulated depreciation.......... (161,927) (130,209)
-------- ---------
$ 572,768 $ 526,833
======== =========
4. Other Assets
Other assets consisted of the following (in thousands):
September 30, December 31,
1999 1998
-------- ---------
Intangible assets (including liquor licenses) $ 32,262 29,900
Other assets...................... 14,679 10,547
-------- ---------
$ 46,941 $ 40,447
======== =========
5. Long-term Debt
Long-term debt consisted of the following (in thousands):
September 30, December 31,
1999 1998
-------- ---------
Notes payable to banks collateralized by
property, fixtures and equipment, interest
at rates ranging from 8.825% to 9.90%....... $ 698 $ 888
Note payable to corporation, collateralized
by real estate, interest at 9.0%........... 141 229
Other notes payable, uncollateralized, interest at
rates ranging from 5.36% to 7.99%.......... 1,105 1,642
Revolving line of credit, interest rates
ranging from 5.56% to 5.57% at
December 31, 1998 (see below)............. 35,683
-------- ---------
1,944 38,442
Less current portion 1,228 967
-------- ---------
Long-term debt $ 716 $37,475
======== =========
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OUTBACK STEAKHOUSE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company has an uncollateralized 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") (5.40% to 6.08% at September 30, 1999). At September 30, 1999 the
unused portion of the revolving line of credit was $125,000,000. The line
matures in August 2000.
The Company has a $7,500,000 uncollateralized line of credit bearing
interest at rates ranging from 50 to 75 basis points over LIBOR.
Approximately $4,755,000 of the line of credit is committed for the issuance
of letters of credit, $1,252,000 of which is to collateralize loans made by
the bank to certain franchisees.
The Company is the guarantor of an uncollateralized 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, 1999 the used portion of
the line of credit was approximately $17,120,000.
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,
1999 1998
-------- ---------
Accrued payroll................... $ 13,017 $10,998
Accrued advertising............... 1,538 2,827
Accrued rent...................... 1,383 1,443
Accrued insurance................. 8,648 6,284
Accrued ESOP contribution......... 1,034 964
Accrued property taxes............ 6,135 4,376
Other accrued expenses............ 2,618 3,117
-------- --------
$ 34,373 $ 30,009
======== ========
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7. Business Combinations
On February 11, 1999, and May 27, 1999, the Company issued a total of
102,500 shares of Common Stock to two area operating partners for all of
their outstanding minority interest in 16 Outback Steakhouses. The mergers
have been accounted for by the purchase method and the related goodwill is
included in the line item entitled "Other Assets" in the Company's
Consolidated Balance Sheets.
8. Subsequent Events
On October 1, 1999, the Company purchased three Fleming's Prime
Steakhouse and Wine Bars for $12,000,000. The transaction will be accounted
for using the purchase method. The Company also formed a joint venture with
Fleming's Prime Steakhouse to develop future Fleming's Prime Steakhouse and
Wine Bars worldwide.
The Company has also reached an agreement in principle to acquire through
merger its New England franchisee for 2,280,000 shares of the Company's
stock. The Company will acquire ownership of 18 restaurants in 4 states with
this transaction.
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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,
---------------- ----------------
1999 1998 1999 1998
REVENUES ------ ------ ------ ------
Restaurant sales 98.9% 99.1% 99.1% 99.1%
Other revenues 1.1 0.9 0.9 0.9
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of sales (1) 38.2 39.3 38.1 39.1
Labor & other related (1) 24.2 23.7 23.7 23.5
Other restaurant operating (1) 21.5 21.1 21.4 21.4
General & administrative 3.6 3.9 3.8 3.9
(Income) loss from operations of
unconsolidated affiliates (0.1) (0.1)
Total costs and expenses 86.4 87.2 86.2 87.1
------ ------ ------ ------
INCOME FROM OPERATIONS 13.5 12.8 13.8 12.9
OTHER INCOME (EXPENSE), NET (0.1) (0.3) (0.2) (0.1)
INTEREST INCOME (EXPENSE) 0.1 (0.1) 0.1 (0.1)
------ ------ ------ ------
INCOME BEFORE ELIMINATION OF
MINORITY PARTNERS' INTEREST
AND INCOME TAXES 13.5 12.4 13.7 12.7
ELIMINATION OF MINORITY PARTNERS'
INTEREST 1.7 1.4 1.9 1.7
------ ------ ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES 11.8 11.0 11.9 11.0
PROVISION FOR INCOME TAXES 4.0 3.8 4.2 3.9
------ ------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE 7.8 7.2 7.6 7.1
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAXES) (0.5)
------ ------ ------ ------
NET INCOME 7.8% 7.2% 7.6% 6.6%
====== ====== ====== ======
(1) As a percentage of restaurant sales.
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Results of Operations (continued)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
System-wide sales (millions of dollars):
Outback Steakhouse restaurants
Company owned - domestic and
international $ 356 $ 310 $1,060 $ 910
Domestic franchised and
joint venture 83 61 243 179
International franchised and
joint venture 17 12 44 35
------ ------ ------ ------
Total 456 383 1,347 1,124
------ ------ ------ ------
Carrabba's Italian Grills
Company owned 34 28 103 89
Joint venture 8 7 23 21
------ ------ ------ ------
Total 42 35 126 110
------ ------ ------ ------
System-wide total $ 498 $ 418 $1,473 $1,234
====== ====== ====== ======
September 30,
--------------
1999 1998
---- ----
Number of restaurants (at end
of the period):
Outback Steakhouses
Company owned - domestic and international 450 400
Domestic franchised and joint venture 106 82
International franchised and joint venture 32 21
--- ---
Total 588 503
--- ---
Carrabba's Italian Grills
Company owned 53 51
Joint venture 14 12
--- ---
Total 67 63
--- ---
System-wide total 655 566
=== ===
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Three months ended September 30, 1999 and 1998
Revenues. Total revenues increased by 15.2% to $393,840,000 during
the third quarter of 1999 as compared with $341,158,000 in the same period in
1998. The increase was attributable to the opening of new restaurants after
September 30, 1998, menu price increases of 1.5% at Outback Steakhouse in
November 1998 and 2.0% at Carrabba's Italian Grills in October 1998, and
comparable per store revenue increases during the quarter of 5.4% and 6.8% 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,
----------------
1999 1998
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $ 61,595 $ 59,755
Carrabba's Italian Grills.... $ 48,301 $ 43,924
Per person check averages:
Outback Steakhouses.......... $ 17.22 $ 16.98
Carrabba's Italian Grills.... $ 18.71 $ 17.63
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 5.4 % 5.8 %
Carrabba's Italian Grills.... 6.8 % 7.4 %
Same store customer counts:
Outback Steakhouses.......... 3.2 % 4.2 %
Carrabba's Italian Grills.... 3.8 % 4.9 %
Costs and expenses. Costs of sales, consisting of food and beverage
costs, as a percentage of restaurant sales, decreased in the third quarter of
1999 to 38.2% of restaurant sales as compared with 39.3% in the same period
in 1998. The decrease was attributable to higher menu prices and commodity
cost decreases in beef and dairy products, particularly butter.
Labor and other related expenses increased as a percentage of
restaurant sales by 0.5% to 24.2% in the third quarter of 1999 as compared
with 23.7% in the same period in 1998. The increase resulted from higher
hourly wage rates for kitchen staff resulting from a competitive labor
market, partially offset by higher comparable store revenues.
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, depreciation,
preopening expenses, and other occupancy costs. A substantial portion of
these expenses are fixed or indirectly variable. These costs increased by
0.4% of restaurant sales to 21.5% in the third quarter of 1999, as compared
with 21.1% in the same period in 1998. The increase resulted from higher
preopening costs during the quarter and was partially offset by higher
average unit volumes 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 $796,000 to $14,090,000
in the third quarter of 1999 compared with $13,294,000 during the same period
in 1998. This increase resulted from an increase in salary expenses related
to higher restaurant management training costs, an increase in overall
administrative costs associated with operating additional Outback Steakhouses
and additional costs associated with new concept development.
Income from operations of unconsolidated affiliates represents the
Company's portion of the income from Outback Steakhouses and Carrabba's
Italian Grills operated as development joint ventures. Income from the
development joint ventures was $207,000 during the third quarter of 1999 as
compared with an income of $63,000 during the same period in 1998. This
increase was attributable to additional stores operating as development joint
ventures in the third quarter of 1999 and to an increase in per store
revenues and improved operating margins.
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
$9,763,000, to $53,453,000, in the third quarter of 1999 as compared with
$43,690,000 in the same period in 1998.
Other income (expense), net. Other income (expense) includes the
net of revenues and expenses from non-restaurant operations. Net other
expense was $515,000 during the third quarter of 1999 as compared with net
expense of $1,127,000 in the same period in 1998. The decrease in the net
expense resulted from increased revenues and lower preopening costs
associated with the development and growth of non-restaurant operations.
Interest income (expense). Interest income was $242,000 during the
third quarter of 1999 as compared with interest expense of $146,000 in the
same period in 1998. The period to period change in interest income (expense)
resulted from changes in borrowing needs and the use of excess cash flow from
operations to pay down the balance on the line of credit.
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 1.7% and 1.4% during the
quarters ended September 30, 1999 and 1998, respectively. The increase in
this ratio reflected the increase in overall restaurant operating margins.
14 of 24
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 34.1% and 34.9% during the third quarters of 1999 and 1998,
respectively. The decrease in the effective rate resulted from state tax
savings from changes in the corporate state tax structure implemented in the
third quarter of 1999, partially offset by the decrease in FICA tip credits
the Company was able to utilize in the current period.
Net income and earnings per common share. Net income for the third
quarter of 1999 was $30,698,000 as compared with net income of $24,407,000 in
the same period in 1998. Basic earnings per share increased to $0.41 per
share during the third quarter of 1999 as compared with basic earnings per
share of $0.33 for the same period in 1998. Basic weighted shares
outstanding increased by approximately 1,521,000 shares from 73,563,000
shares at September 30, 1998 to 75,084,000 at September 30, 1999. The
increase was primarily due to the issuance of shares for stock option
exercises. Diluted earnings per share increased to $0.40 per share during the
third quarter of 1999 as compared with diluted earnings per share of $0.32
for the same period in 1998. Diluted weighted shares outstanding increase by
approximately 2,233,000 shares from 75,189,000 shares at September 30, 1998
to 77,422,000 shares at September 30, 1999. The increase was primarily due to
the issuance of shares for stock option exercises and increased dilutive
effect of outstanding stock options because of higher average stock prices
over the period.
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Nine months ended September 30, 1999 and 1998
Revenues. Total revenues increased by 16.5% to $1,173,810,000 during
the first nine months of 1999 as compared with $1,007,165,000 in the same
period in 1998. The increase was attributable to the opening of new
restaurants after September 30, 1998, menu price increases of 1.5% at Outback
Steakhouse in November 1998 and 2.0% at Carrabba's Italian Grills in October
1998, and comparable per store revenue increases during the first nine months
of 1999 of 5.7% and 6.3% 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,
----------------
1999 1998
------ ------
Average unit volumes(weekly):
Outback Steakhouses.......... $ 63,282 $ 61,035
Carrabba's Italian Grills.... $ 49,634 $ 45,883
Per person check averages:
Outback Steakhouses.......... $ 17.48 $ 16.90
Carrabba's Italian Grills.... $ 18.61 $ 17.25
Year to year percentage change:
Same-store sales:
Outback Steakhouses.......... 5.7 % 4.9 %
Carrabba's Italian Grills.... 6.3 % 10.6 %
Same store customer counts:
Outback Steakhouses.......... 2.7 % 3.4 %
Carrabba's Italian Grills.... 0.1 % 4.0 %
Costs and expenses. Cost of sales as a percentage of restaurant
sales, decreased by 1.0% to 38.1% in the first nine months of 1999 as compared
with 39.1% in the same period in 1998. The decrease was attributable to higher
menu prices and commodity cost decreases in beef, produce and dairy products,
particularly butter.
Labor and other related expenses increased as a percentage of
restaurant sales by 0.2% to 23.7% in the first nine months of 1999 as
compared with 23.5% in the same period in 1998. The increase resulted from
higher hourly wage rates for kitchen staff resulting from a competitive labor
market, partially offset by higher comparable store revenues.
Other restaurant operating expenses were 21.4% of restaurant sales in
the first nine months of both 1999 and 1998. Decreases which resulted from
higher average unit volumes 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, were offset by higher preopening
costs during the period.
16 of 24
General and administrative costs increased by $5,313,000 to
$44,492,000 during the first nine months of 1999 as compared with $39,179,000
during the same period in 1998. This increase resulted from an increase in
salary expenses related to higher restaurant management training costs, an
increase in overall administrative costs associated with operating additional
Outback Steakhouses and additional costs associated with new concept
development.
Income from operations of unconsolidated affiliates represents the
Company's portion of the income or loss from Outback Steakhouses and
Carrabba's Italian Grills operated as development joint ventures. Income
from the joint ventures was $784,000 in the first nine months of 1999 as
compared with income of $356,000 in the same period in 1998. This increase
was attributable to additional stores operating as development joint ventures
in the first half of 1999 and to an increase in per store revenues and
improved operating margins.
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
$32,548,000, to $162,236,000 in the first nine months of 1999 as compared
with $129,688,000 in the same period in 1998.
Other income (expense), net. Other income (expense) includes the net
of revenues and expenses from non-restaurant operations. Net other expense
was $1,919,000 during the first nine months of 1999 as compared with net
expense of $1,252,000 in the same period in 1998. The increase in the net
expense resulted from increased operating costs associated with the
development and growth of non-restaurant operations.
Interest income (expense). Interest income was $754,000 during the
first nine months of 1999 as compared with interest expense of $1,070,000 in
the same period in 1998. The period to period change in interest income
(expense) resulted from changes in borrowing needs and the use of excess cash
flow from operations to pay down the balance on the line of credit.
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 1.9% and 1.7% during the nine months
ended September 30, 1999 and 1998, respectively. The increase in this ratio
reflected the increase in overall restaurant operating margins.
17 of 24
Provision for income taxes. The provision for income taxes in the
first half of both 1999 and 1998 reflected the expected income taxes due at
federal statutory rates and state income tax rates, net of the federal
benefit. The effective income tax rates were 35.7% and 35.5% during the
first nine months of 1999 and 1998, respectively. The increase in the
effective rate resulted from the decrease in FICA tip credits the Company was
able to utilize in the first nine months of 1999 partially offset by state
tax saving from changes in the corporate state tax structure put into effect
in the third quarter of 1999.
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 1999 was $89,551,000 as compared with $71,321,000 in
the same period in 1998. Basic earnings per share on income before
cumulative effect of a change in accounting principle increased to $1.20
during the first nine months of 1999 as compared with $0.97 for the same
period in 1998. Diluted earnings per share on income before the cumulative
effect of a change in accounting principle increased to $1.16 during the
first nine months of 1999 as compared with $0.95 for the same period in 1998.
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 half of 1998
was $4,880,000. Basic and diluted earnings per share for the first nine
months of 1998 both were reduced by $0.07, due to the impact of the
cumulative effect of the change in accounting principle.
Net income and earnings per common share. Net income for the first
nine months of 1999 was $89,551,000 as compared with net income of
$66,441,000 in the same period in 1998. Basic earnings per share increased to
$1.20 during the first nine months of 1999 as compared with $0.90 in the same
period in 1998. Diluted earnings per share increased to $1.16 during the
first nine months of 1999 as compared with $0.88 in the same period in 1998.
18 of 24
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,
1998 1999 1998
--------- ---------- ----------
Net cash provided by
operating activities $ 178,757 $ 112,500 $ 96,134
Net cash used in investing
activities (104,922) (82,303) (63,663)
Net cash used in
financing activities (30,058) (43,435) (35,567)
--------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents $ 43,777 $ (13,238) $ (3,096)
========= ======== ========
The Company requires capital principally for the development of new
domestic and international Company owned and joint venture restaurants.
Capital expenditures totaled approximately $103,892,000 for year ended
December 31, 1998 and $75,276,000 and $64,061,000 during the first nine
months of 1999 and 1998, 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.
The Company has formed joint ventures in Brazil, Hong Kong and the
Philippines to develop Outback Steakhouses in those countries. The Company has
also formed a joint venture with Roy Yamaguchi to develop and operate future
Roy's Restaurants worldwide. On October 1, 1999, the Company purchased three
Fleming's Prime Steakhouse and Wine Bars for $12,000,000. The Company also
formed a joint venture with Fleming's Prime Steakhouse to develop future
Fleming's Prime Steakhouse and Wine Bars worldwide.
At September 30, 1999, the Company had two uncollateralized lines of
credit totaling $132,500,000. Approximately $4,755,000 is committed for the
issuance of letters of credit, some of which are to collateralize loans made
by the bank to certain franchisees. The Company expects that its capital
requirements through the end of 1999 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 uncollateralized line of credit that
permits borrowing of up to $25,000,000 for one of its franchisees. At
September 30, 1999, the borrowings totaled approximately $17,120,000. See
Note 5 of Notes to Unaudited Consolidated Financial Statements.
19 of 24
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 information technology
("IT") systems and non-IT systems for the Year 2000. The project includes
identification and assessment of software, hardware and equipment that could
potentially be affected by the Year 2000 issue, remedial action and further
testing procedures. The Company believes that the majority of its operations
are Year 2000 compliant and currently estimates the total cost of its Year
2000 project will be approximately $600,000. 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's most significant third-party business partners consist
of restaurant food and supplies vendors who serve the Company. An inventory
of significant third-party partners has been completed and letters mailed
requesting information regarding each party's Year 2000 compliance status.
All responses received to date have indicated the vendor is now or will be
Year 2000 compliant prior to January 1, 2000. The Company developed
contingency plans for any vendors that appear to have substantial Year 2000
operational risks. Such contingency plans may include a change of vendors to
minimize our risk. 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.
Management believes that the Company has an effective plan in place
to resolve the Year 2000 issue in a timely manner. However, due to the unique
nature of the problem and lack of historical experience, it is difficult to
predict with certainty what will happen after December 31, 1999. The Company
may encounter unanticipated third party failures or a failure to have
successfully concluded system remediation efforts. Any of these unforeseen
events may have a material adverse impact on the Company's results of
operations, financial condition or cash flows. 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 amount of
any potential losses related to these occurrences cannot be reasonably
estimated at this time. The Company has developed a contingency plan intended
to mitigate the effects of problems experienced by the Company or key vendors
or service providers in the timely implementation of Year 2000 programs. The
contingency plan was completed by the end of the third quarter of 1999.
20 of 24
The most likely worst case scenario for the Company is that a
significant number of our restaurants will be temporarily unable to operate
due to public infrastructure failures and/or food supply problems. Some
restaurants may have problems for extended periods of time. The failure of
restaurants to operate would result in reduced revenues and cash flows for
the Company during the disruption period. Loss of restaurant sales would be
partially mitigated by reduced costs.
Item 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on debt and changes in commodity prices. The Company's exposure to interest
rate risk relates to its $125 million revolving line of credit with its bank.
Borrowings under the agreement bear interest at rates ranging from 50 to 75
basis points over the 30, 60, 90 or 180 London Interbank Offered Rate. At
June 30, 1999, the Company did not have an outstanding balance on the line of
credit. At December 31, 1998, there was $35,683,000 outstanding on the line
of credit. 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. Extreme changes in commodity prices and/or
long-term changes could affect the Company adversely. However, any changes in
commodity prices would also affect the Company's competitors at about the
same time as the Company. The Company expects that in most cases the Company
could pass increased commodity prices 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.
21 of 24
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 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 obtain 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 obtain 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.
22 of 24
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27A- Financial Data Schedules
27B- Financial Data Schedules
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during
the quarter ended September 30, 1999.
23 of 24
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 15, 1999 By: /s/ Robert S. Merritt
__________________ __________________________
Robert S. Merritt
Senior Vice President,
Finance (Principal Financial
and Accounting Officer)
24 of 24
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