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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 29, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from .................... to ......................
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1-13666
Commission File Number
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DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3305930
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5900 Lake Ellenor Drive,
Orlando, Florida 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(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.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
----------------------------------
Number of shares of common stock outstanding as of October 1, 2004:
157,217,444 (excluding 109,111,360 shares held in our treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes in
Stockholders' Equity and Accumulated
Other Comprehensive Income (Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Item 4. Controls and Procedures 17
Part II - Other Information
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 18
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 20
Index to Exhibits 21
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Quarter Ended
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August 29, 2004 August 24, 2003
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Sales........................................................ $ 1,278,644 $ 1,259,689
Costs and expenses:
Cost of sales:
Food and beverage....................................... 391,421 396,713
Restaurant labor........................................ 405,816 392,335
Restaurant expenses..................................... 193,214 190,822
------------ ------------
Total cost of sales, excluding restaurant depreciation
and amortization of $49,219 and $48,082, respectively. $ 990,451 $ 979,870
Selling, general, and administrative...................... 114,580 113,641
Depreciation and amortization............................. 52,760 51,553
Interest, net............................................. 10,964 10,641
------------ ------------
Total costs and expenses.............................. $1,168,755 $ 1,155,705
------------ ------------
Earnings before income taxes................................. 109,889 103,984
Income taxes................................................. (37,764) (35,390)
------------ ------------
Net earnings................................................. $ 72,125 $ 68,594
============ ============
Net earnings per share:
Basic..................................................... $ 0.46 $ 0.42
============ ============
Diluted................................................... $ 0.44 $ 0.40
============ ============
Average number of common shares outstanding:
Basic..................................................... 157,600 164,700
============ ============
Diluted................................................... 163,200 170,500
============ ============
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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August 29, 2004 May 30, 2004
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 38,603 $ 36,694
Receivables............................................... 25,522 30,258
Inventories............................................... 217,989 198,781
Prepaid expenses and other current assets................. 27,803 25,316
Deferred income taxes..................................... 56,745 55,258
------------ -----------
Total current assets.................................. $ 366,662 $ 346,307
Land, buildings, and equipment............................... 2,261,646 2,250,616
Other assets................................................. 181,123 183,425
------------ -----------
Total assets.......................................... $ 2,809,431 $ 2,780,348
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 164,698 $ 174,624
Short-term debt .......................................... 17,800 14,500
Accrued payroll........................................... 89,427 103,327
Accrued income taxes...................................... 78,088 48,753
Other accrued taxes....................................... 40,273 38,440
Unearned revenues......................................... 65,091 75,513
Other current liabilities................................. 233,401 228,324
------------ ------------
Total current liabilities............................. $ 688,778 $ 683,481
Long-term debt............................................... 652,672 653,349
Deferred income taxes........................................ 173,528 176,216
Other liabilities............................................ 22,077 21,532
------------ ------------
Total liabilities..................................... $ 1,537,055 $ 1,534,578
------------ ------------
Stockholders' equity:
Common stock and surplus.................................. $ 1,605,563 $ 1,584,115
Retained earnings......................................... 1,270,046 1,197,921
Treasury stock........................................... (1,544,882) (1,483,768)
Accumulated other comprehensive income (loss)............. (10,369) (9,959)
Unearned compensation..................................... (47,190) (41,401)
Officer notes receivable.................................. (792) (1,138)
------------ ------------
Total stockholders' equity............................ $ 1,272,376 $ 1,245,770
------------ ------------
Total liabilities and stockholders' equity............ $ 2,809,431 $ 2,780,348
============ ============
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the quarters ended August 29, 2004 and August 24, 2003
(In thousands)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Officer Total
and Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income (Loss) Compensation Receivable Equity
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Balance at May 30, 2004..........$1,584,115 $1,197,921 $(1,483,768) $(9,959) $(41,401) $(1,138) $1,245,770
Comprehensive income:
Net earnings.................. -- 72,125 -- -- -- -- 72,125
Other comprehensive income
(loss):
Foreign currency adjustment... -- -- -- 1,085 -- -- 1,085
Change in fair value of
derivatives, net of tax
of $1,139.................... -- -- -- (1,495) -- -- (1,495)
----------
Total comprehensive income. -- -- -- -- -- -- 71,715
Stock option exercises (964
shares) 7,923 -- 439 -- -- -- 8,362
Issuance of restricted stock
(361 shares), net of forfeiture
adjustments.................... 8,227 -- -- -- (8,227) -- --
Earned compensation.............. -- -- -- -- 1,688 -- 1,688
ESOP note receivable repayments.. -- -- -- -- 750 -- 750
Income tax benefits credited to
equity......................... 4,527 -- -- -- -- -- 4,527
Purchases of common stock for
treasury (2,923 shares)........ -- -- (61,963) -- -- -- (61,963)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (71 shares)...... 771 -- 410 -- -- -- 1,181
Repayment of officer notes....... -- -- -- -- -- 346 346
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 29, 2004 $1,605,563 $1,270,046 $(1,544,882) $(10,369) $(47,190) $(792) $1,272,376
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Officer Total
And Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income (Loss) Compensation Receivable Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at May 25, 2003............ $1,525,957 $ 979,443 $(1,254,293) $(10,489) $(42,848) $(1,579) $1,196,191
Comprehensive income:
Net earnings.................... -- 68,594 -- -- -- -- 68,594
Other comprehensive income
(loss):
Foreign currency adjustment.... -- -- -- (604) -- -- (604)
Change in fair value of
derivatives, net of tax of $44 -- -- -- (545) -- -- (545)
---------
Total comprehensive income.. -- -- -- -- -- -- 67,445
Stock option exercises (997 shares) 8,924 -- 444 -- -- -- 9,368
Issuance of restricted stock (392
shares), net of forfeiture
adjustments...................... 7,559 -- 169 -- (7,728) -- --
Earned compensation................ -- -- -- -- 1,010 -- 1,010
ESOP note receivable repayments.... -- -- -- -- 1,285 -- 1,285
Income tax benefits credited to
equity........................... 4,405 -- -- -- -- -- 4,405
Purchases of common stock for
treasury (1,423 shares)............ -- -- (27,578) -- -- -- (27,578)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (82 shares)............ 737 -- 491 -- -- -- 1,228
Repayment of officer notes......... -- -- -- -- -- 303 303
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at August 24, 2003 $1,547,582 $1,048,037 $(1,280,767) $(11,638) $(48,281) $(1,276) $1,253,657
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See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended
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August 29, 2004 August 24, 2003
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Cash flows--operating activities
Net earnings................................................. $ 72,125 $ 68,594
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 52,760 51,553
Asset impairment (credit) charge, net...................... (5) 502
Amortization of unearned compensation and loan costs....... 2,551 1,844
Non-cash compensation expense.............................. 28 67
Change in current assets and liabilities................... (14,890) 22,325
Change in other liabilities ............................... 629 428
Contribution to defined benefit pension plans and
postretirement plan.................................. (106) (56)
Loss (gain) on disposal of land, buildings, and equipment.. 154 (1,559)
Change in cash surrender value of trust owned life insurance 271 (2,000)
Deferred income taxes...................................... (3,036) 3,307
Income tax benefits credited to equity..................... 4,527 4,405
Other, net................................................. (2,151) (303)
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Net cash provided by operating activities................ $ 112,857 $ 149,107
----------- ------------
Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (62,665) (86,673)
Increase in other assets..................................... (319) (391)
Proceeds from disposal of land, buildings, and equipment .... 1,184 2,898
----------- ------------
Net cash used in investing activities.................... $ (61,800) $ (84,166)
----------- ------------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 9,515 10,529
Purchases of treasury stock.................................. (61,963) (27,578)
Increase in short-term debt.................................. 3,300 --
ESOP note receivable repayment............................... 750 1,285
Repayment of long-term debt.................................. (750) (1,285)
----------- ------------
Net cash used in financing activities.................... $ (49,148) $ (17,049)
----------- ------------
Increase in cash and cash equivalents........................... 1,909 47,892
Cash and cash equivalents - beginning of period................. 36,694 48,630
----------- ------------
Cash and cash equivalents - end of period....................... $ 38,603 $ 96,522
=========== ============
Cash flow from changes in current assets and liabilities
Receivables.................................................. 4,736 (12,714)
Inventories.................................................. (19,208) (91)
Prepaid expenses and other current assets.................... (2,487) (7,532)
Accounts payable............................................. (9,926) 20,342
Accrued payroll.............................................. (13,900) (4,853)
Accrued income taxes......................................... 29,335 13,677
Other accrued taxes.......................................... 1,833 2,791
Unearned revenues............................................ (10,422) (6,011)
Other current liabilities.................................... 5,149 16,716
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Change in current assets and liabilities................. $ (14,890) $ 22,325
=========== ============
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See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 1. Background
Darden Restaurants, Inc. ("we", "our" or the "Company") owns and operates
casual dining restaurants in the United States and Canada under the trade names
Red Lobster(R), Olive Garden(R), Bahama Breeze(R), Smokey Bones Barbeque &
GrillSM, and Seasons 52SM. We have prepared these consolidated financial
statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the "SEC"). They do not include certain information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature. Operating results for the
quarter ended August 29, 2004, are not necessarily indicative of the results
that may be expected for the fiscal year ending May 29, 2005.
These statements should be read in conjunction with the consolidated
financial statements and related notes to consolidated financial statements
included in our Annual Report on Form 10-K for the fiscal year ended May 30,
2004. The accounting policies used in preparing these consolidated financial
statements are the same as those described in our Form 10-K.
Note 2. Consolidated Statements of Cash Flows
During the quarter ended August 29, 2004, we paid $7,438 for interest (net
of amounts capitalized) and $6,700 for income taxes. During the quarter ended
August 24, 2003, we paid $7,193 for interest (net of amounts capitalized) and
$14,133 for income taxes.
Note 3. Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," encourages the use of a fair-value method of
accounting for stock-based awards under which the fair value of stock options is
determined on the date of grant and expensed over the vesting period. As allowed
by SFAS No. 123, we have elected to account for our stock-based compensation
plans under an intrinsic value method that requires compensation expense to be
recorded only if, on the date of grant, the current market price of our common
stock exceeds the exercise price the employee must pay for the stock. Our policy
is to grant stock options at the fair market value of our underlying stock at
the date of grant. Accordingly, no compensation expense has been recognized for
stock options granted under any of our stock plans because the exercise price of
all options granted was equal to the current market value of our stock on the
grant date. Had we determined compensation expense for our stock options based
on the fair value at the grant date as prescribed under SFAS No. 123, our net
earnings and net earnings per share would have been reduced to the pro forma
amounts indicated below:
Quarter Ended
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August 29, 2004 August 24, 2003
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Net earnings, as reported $ 72,125 $ 68,594
Add: Stock-based compensation expense included
in reported net earnings, net of related 1,060 662
tax effects
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects (5,028) (4,658)
------------------------------
Pro forma $ 68,157 $ 64,598
==============================
Basic net earnings per share
As reported $ 0.46 $ 0.42
Pro forma $ 0.43 $ 0.39
Diluted net earnings per share
As reported $ 0.44 $ 0.40
Pro forma $ 0.42 $ 0.38
================================================================================
7
Note 4. Provision for Impaired Assets and Restaurant Closings
During fiscal 2004, we recorded a restructuring charge of $1,112 primarily
related to severance payments made to certain restaurant employees and exit
costs associated with the closing of six Bahama Breeze restaurants in accordance
with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". Below is a summary of the restructuring liability for the quarter
ended August 29, 2004:
Balance at May Cash Balance at
30, 2004 Additions Payments August 29, 2004
- --------------------------------------------------------------------------------------------------------
One-time termination benefits $ 49 $ -- $ (20) $ 29
Other exit costs 311 -- (274) 37
- --------------------------------------------------------------------------------------------------------
$ 360 $ -- (294) $ 66
========================================================================================================
During the first quarter of fiscal 2005 and 2004, we recorded charges of
$33 and $1,184, respectively, for long-lived asset impairments resulting from
the decision to relocate and rebuild certain restaurants. These impairments were
measured based on the amount by which the carrying amount of the assets exceeded
their fair value. Fair value is generally determined based on appraisals or
sales prices of comparable assets. During the first quarter of fiscal 2005 and
2004, we also recorded gains of $38 and $682, respectively, related to assets
sold that were previously impaired. These amounts are included in selling,
general, and administrative expense.
Note 5. Net Earnings per Share
Outstanding stock options and restricted stock granted by us represent the
only dilutive effect reflected in diluted weighted average shares outstanding.
Options and restricted stock do not impact the numerator of the diluted net
earnings per share computation.
Options to purchase 6,330,991 and 3,952,422 shares of common stock were
excluded from the calculation of diluted net earnings per share for the quarters
ended August 29, 2004 and August 24, 2003, respectively, because their exercise
prices exceeded the average market price of common shares for the period.
Note 6. Stockholders' Equity
Pursuant to the authorization of our Board of Directors to repurchase up to
115,400,000 shares in accordance with applicable securities regulations, we
repurchased 2,922,798 shares of our common stock for $61,963 during the quarter
ended August 29, 2004, resulting in a cumulative repurchase of 112,164,482
shares as of August 29, 2004.
Note 7. Derivative Instruments and Hedging Activities
During the first quarter of fiscal 2005, we issued Darden stock units to
certain key employees. The Darden stock units were granted at a value equal to
the market price of our common stock at the date of grant and will be settled in
cash at the end of their vesting periods, which range between four and five
years, at the then market price of our common stock. Compensation expense is
measured based on the market price of our common stock each period and is
amortized over the vesting period. At August 29, 2004, we had 464,320 Darden
stock units outstanding. No Darden stock units were outstanding during fiscal
2004.
During the first quarter of fiscal 2005, we entered into equity forward
contracts to hedge the risk of changes in future cash flows associated with the
unvested unrecognized Darden stock units granted during the first quarter of
fiscal 2005. The equity forward contracts will be settled at the end of the
vesting periods of their underlying Darden stock units, which range between four
and five years. The equity forward contracts, which have a $3,904 notional
amount and can only be net settled in cash, will be used to hedge the
variability in cash flows associated with the unvested unrecognized Darden stock
units. To the extent the equity forward contracts are effective in offsetting
the variability of the hedged cash flows, changes in the fair value of the
equity forward contracts are not included in current earnings but are reported
as accumulated other comprehensive income (loss). A deferred gain of $344
related to the equity forward contracts was recognized in accumulated other
comprehensive income (loss) at August 29, 2004. As the Darden stock units vest,
we will effectively de-designate that portion of the equity forward contract
that no longer qualifies for hedge accounting, and changes in fair value
associated with that portion of the equity forward contract will be recognized
in current earnings. A gain of $14 was recognized in earnings as a component of
restaurant labor during the quarter ended August 29, 2004.
8
During the first quarter of fiscal 2005, we entered into an interest rate
swap agreement ("swap") to hedge the risk of changes in interest rates on the
cost of a future issuance of fixed-rate debt. The swap, which has a $25,000
notional principal amount of indebtedness, will be used to hedge a portion of
the interest payments associated with a forecasted issuance of debt in fiscal
2006. As of August 29, 2004, we have swaps with a total notional principal
amount of indebtedness of $100,000 designated to hedge the forecasted issuance
of debt in fiscal 2006. To the extent the swaps are effective in offsetting the
variability of the hedged cash flows, changes in the fair value of the swaps are
not included in current earnings but are reported as accumulated other
comprehensive income (loss). The accumulated gain or loss at the swap settlement
date will be amortized into earnings as an adjustment to interest expense over
the same period in which the related interest costs on the new debt issuance are
recognized in earnings. A deferred loss of $1,332, net of tax, related to the
swaps was recognized in accumulated other comprehensive income (loss) at August
29, 2004. No amounts were recognized in earnings during the quarter ended August
29, 2004.
Note 8. Retirement Plans
Components of net periodic benefit cost are as follows:
Defined Benefit Plans Postretirement Benefit Plan
- --------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
August 29, August 24, August 29, August 24,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Service cost $ 1,217 $ 1,144 $ 175 $ 150
Interest cost 1,828 1,769 251 230
Expected return on plan assets (3,210) (3,205) -- --
Amortization of unrecognized prior service cost (87) (87) -- 7
Recognized net actuarial loss 1,248 927 87 84
- --------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 996 $ 548 $ 513 $ 471
====================================================================================================================
Note 9. Commitments and Contingencies
We make trade commitments in the course of our normal operations. As of
August 29, 2004 and May 30, 2004, we were contingently liable for approximately
$78 and $242, respectively, under outstanding trade letters of credit issued in
connection with purchase commitments. These letters of credit have terms of two
months or less and are used to collateralize our obligations to third parties
for the purchase of inventories.
As collateral for performance on other contracts and as credit guarantees
to banks and insurers, we were contingently liable pursuant to guarantees of
subsidiary obligations under standby letters of credit. As of August 29, 2004
and May 30, 2004, we had $72,677 and $72,480, respectively, of standby letters
of credit related to workers' compensation and general liabilities accrued in
our consolidated financial statements. As of August 29, 2004 and May 30, 2004,
we also had $15,664 and $15,896, respectively, of standby letters of credit
related to contractual operating lease obligations and other payments. All
standby letters of credit are renewable annually. As of August 29, 2004 and May
30, 2004, we had other commercial commitments of $2,125.
As of August 29, 2004 and May 30, 2004, we had $4,147 and $4,346,
respectively, of guarantees associated with third party assignment obligations.
These amounts represent the maximum potential amount of future payments under
the guarantees. The fair value of these potential payments, discounted at our
pre-tax cost of capital, at August 29, 2004 and May 30, 2004 amounted to $3,023
and $3,131, respectively. We did not accrue for the guarantees, as we believed
the likelihood of the third parties defaulting on the assignment agreements was
improbable. In the event of default by a third party, the indemnity and/or
default clauses in our assignment agreements govern our ability to pursue and
recover from the third party for damages incurred as a result of its default. We
do not hold any third-party assets as collateral related to these assignment
agreements, except to the extent the assignment allows us to repossess the
building and personal property. The guarantees expire over their respective
lease terms, which range from fiscal 2005 through fiscal 2012.
In March 2003 and March 2002, three of our current and former hourly
restaurant employees filed two purported class action lawsuits against us in
California Superior Court of Orange County alleging violations of California
labor laws with respect to providing meal and rest breaks. The lawsuits seek
penalties under Department of Labor rules providing a one hundred dollar penalty
per violation per employee, plus attorney's fees on behalf of the plaintiffs and
other purported class members. Discovery is currently underway in these matters.
One of the cases was removed to our mandatory arbitration program, although the
Court retained the authority to permit a sample of
9
class-wide discovery. The other case remains pending in the California Superior
Court of Orange County. In September 2003, three former employees in Washington
State filed a similar purported class action in Washington State Superior Court
in Spokane County alleging violations of Washington labor laws with respect to
providing rest breaks. The Court stayed the action, and ordered the plaintiffs
into our mandatory arbitration program; the plaintiffs' motion for
reconsideration was not granted, and their motion for modification of the
appellate decision is pending. We intend to vigorously defend our position in
all of these cases. Although the outcome of the cases cannot be ascertained at
this time, we do not believe that the disposition of these cases, either
individually or in the aggregate, would have a material adverse effect on our
financial position, results of operations or liquidity.
We are subject to other private lawsuits, administrative proceedings and
claims that arise in the ordinary course of our business. These matters
typically involve claims from guests, employees and others related to
operational issues common to the restaurant industry. A number of these
lawsuits, proceedings and claims may exist at any given time. We do not believe
that the final disposition of the lawsuits and claims in which we are currently
involved will have a material adverse effect, either individually or in the
aggregate, on our financial position, results of operations or liquidity.
Note 10. Subsequent Events
On September 28, 2004, the Board of Directors declared a four cents per
share cash dividend to be paid on November 1, 2004 to all shareholders of record
as of the close of business on October 8, 2004. On September 28, 2004, the Board
also authorized us to repurchase an additional 22 million shares of our common
stock after the previous authorizations to repurchase an aggregate of
115,400,000 shares of our common stock have been exhausted.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth selected operating data as a percent of
sales for the periods indicated. All information is derived from the
consolidated statements of earnings for the quarters ended August 29, 2004 and
August 24, 2003.
Quarter Ended
--------------------------------------------------------------------------------------------------------------------
August 29, 2004 August 24, 2003
--------------------------------------------------------------------------------------------------------------------
Sales .......................................................... 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage.......................................... 30.6 31.5
Restaurant labor........................................... 31.7 31.1
Restaurant expenses........................................ 15.1 15.2
------ ------
Total cost of sales, excluding restaurant
depreciation and amortization of 3.8%.................. 77.4% 77.8%
Selling, general, and administrative......................... 9.0 9.0
Depreciation and amortization................................ 4.1 4.1
Interest, net................................................ 0.9 0.9
------- -------
Total costs and expenses............................... 91.4% 91.8%
------ ------
Earnings before income taxes.................................... 8.6 8.2
Income taxes.................................................... (3.0) (2.8)
------ ------
Net earnings.................................................... 5.6% 5.4%
====== ======
--------------------------------------------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS
Our sales were $1.28 billion for the first quarter of fiscal 2005 compared
to $1.26 billion for the first quarter of fiscal 2004, a 1.5 percent increase.
The increase was primarily driven by a net increase of 53 company-owned
restaurants since the first quarter of fiscal 2004 and increased U.S.
same-restaurant sales at Olive Garden, partially offset by decreased U.S.
same-restaurant sales at Red Lobster. For the first quarter of fiscal 2005, our
net earnings were $72 million compared to $69 million for the first quarter of
fiscal 2004, a 5.1 percent increase, and our diluted net earnings per share were
$0.44 compared to $0.40 for the first quarter of fiscal 2004, a 10 percent
increase.
Olive Garden reported its 40th consecutive quarter of U.S. same-restaurant
sales growth during the first quarter of fiscal 2005 with a 2.8 percent
increase. Although Red Lobster's U.S. same-restaurant sales decreased for the
fourth consecutive quarter, the decrease in the first quarter of fiscal 2005 was
significantly impacted by a shift in our promotional strategy. During the first
quarter of fiscal 2004, Red Lobster ran its Endless Crab promotion, which
resulted in strong guest counts and high check average, but lower profit margins
and low levels of guest satisfaction. During the first quarter of fiscal 2005,
Red Lobster focused on improving in-restaurant operations and delivering high
levels of guest satisfaction, which resulted in higher profit margins than the
first quarter of fiscal 2004. During the first quarter of fiscal 2005, Red
Lobster also launched its new LightHouse Selections menu, which highlights menu
items that are low in fat, carbohydrates, and calories. While the new menu did
not deliver the short-term guest counts that would be expected from a
limited-time-only promotion, the repurchase intent scores on the LightHouse menu
items were the highest Red Lobster has ever measured. Bahama Breeze continued to
deliver strong sales improvement, driven by the addition of lunch in most of the
restaurants and in spite of operating two fewer restaurants than in the first
quarter of fiscal 2004. Smokey Bones operated 32 more restaurants than the prior
year, including seven restaurants that were opened during the first quarter of
fiscal 2005. During fiscal 2005, Smokey Bones expects to open 30 to 40 new
restaurants.
SALES
Sales were $1.28 billion and $1.26 billion for the quarters ended August
29, 2004 and August 24, 2003, respectively. The 1.5 percent increase in sales
for the first quarter of fiscal 2005 was primarily due to a net increase
11
of 53 company-owned restaurants since the first quarter of fiscal 2004 and
increased U.S. same-restaurant sales at Olive Garden, partially offset by
decreased U.S. same-restaurant sales at Red Lobster. Red Lobster sales of $595
million were 6.2 percent below last year's first quarter, which resulted
primarily from a 7.6 percent decrease in U.S. same-restaurant sales, offset
partially by revenue from five net additional restaurants in operation versus
last year. The decline in U.S. same-restaurant sales resulted primarily from an
8.8 percent decrease in same-restaurant guest counts offset only partially by a
1.2 percent increase in average check. Olive Garden's sales of $581 million were
6.0 percent above last year's first quarter, driven primarily by its 18 net new
restaurants in operation versus last year and a 2.8 percent increase in U.S.
same-restaurant sales. Olive Garden achieved its 40th consecutive quarter of
U.S. same-restaurant sales growth primarily as a result of a 2.1 percent
increase in average check and a 0.7 percent increase in same-restaurant guest
counts.
COSTS AND EXPENSES
Total costs and expenses were $1.17 billion and $1.16 billion for the
quarters ended August 29, 2004 and August 24, 2003, respectively. As a percent
of sales, total costs and expenses decreased from 91.8 percent in the first
quarter of fiscal 2004 to 91.4 percent in the first quarter of fiscal 2005.
Food and beverage costs decreased $5 million, or 1.3 percent, from $397
million to $391 million in the first quarter of fiscal 2005 compared to the
first quarter of fiscal 2004. As a percent of sales, food and beverage costs
decreased in the first quarter of fiscal 2005 primarily as a result of a more
favorable promotional mix and reduced waste at Red Lobster and the
implementation of cost savings initiatives, which were partially offset by
increased lobster, crab and dairy costs at Red Lobster and dairy costs at Olive
Garden. During the first quarter of fiscal 2004, Red Lobster ran its Endless
Crab promotion, which resulted in higher than expected food costs as a
percentage of sales. Restaurant labor increased $13 million, or 3.4 percent,
from $392 million to $406 million in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004. As a percent of sales, restaurant labor
increased primarily as a result of an increase in wage rates and reduced sales
leverage at Red Lobster, which was partially offset by increased sales leverage
at Olive Garden. Restaurant expenses (which include lease, property tax, credit
card, utility, workers' compensation, insurance, new restaurant pre-opening, and
other restaurant-level operating expenses) increased $2 million, or 1.3 percent,
from $191 million to $193 million in the first quarter of fiscal 2005 compared
to the first quarter of fiscal 2004. As a percent of sales, restaurant expenses
decreased in the first quarter of fiscal 2005 primarily as a result of lower
workers' compensation and general liability expenses, which were offset
partially by higher utility expenses. The decrease in our workers' compensation
and general liability expenses is a result of safety initiatives that we believe
should continue to provide long-term reductions in both the number and severity
of claims.
Selling, general, and administrative expenses increased $1 million, or 0.8
percent, from $114 million to $115 million in the first quarter of fiscal 2005
compared to the first quarter of fiscal 2004. As a percent of sales, selling,
general, and administrative expenses for the first quarter of fiscal 2005 was
comparable to the first quarter of fiscal 2004 primarily as a result of reduced
sales leverage at Red Lobster and increased employee benefit costs, which were
offset by decreased marketing expenses at Olive Garden.
Depreciation and amortization expense increased $1 million, or 2.3 percent,
from $52 million to $53 million in the first quarter of fiscal 2005 compared to
the first quarter of fiscal 2004. As a percent of sales, depreciation and
amortization expense for the first quarter of fiscal 2005 was comparable to the
first quarter of fiscal 2004 primarily as a result of new restaurant and remodel
activity, which was offset by the favorable impact of higher sales volumes.
Net interest expense in the first quarter of fiscal 2005 was comparable to
the first quarter of fiscal 2004 reflecting lower capitalized interest in fiscal
2005 as a result of less new restaurant and remodel activity than in the first
quarter of fiscal 2004, which was offset by the favorable impact of higher sales
volumes.
INCOME TAXES
The effective income tax rate for the first quarter of fiscal 2005 was 34.4
percent compared to an effective income tax rate of 34.0 percent in the first
quarter of fiscal 2004. The rate increase in fiscal 2005 was primarily due to a
reduction in the amount of tax credits that we expect to receive for fiscal
2005.
12
NET EARNINGS AND NET EARNINGS PER SHARE
For the first quarter of fiscal 2005, our net earnings were $72 million
compared to $69 million for the first quarter of fiscal 2004, a 5.1 percent
increase, and our diluted net earnings per share were $0.44 compared to $0.40
for the first quarter of fiscal 2004, a 10 percent increase. At Red Lobster,
decreased sales and higher restaurant labor, selling, general, and
administrative, and depreciation expenses as a percent of sales more than offset
decreased food and beverage costs and restaurant expenses as a percentage of
sales. As a result, Red Lobster's operating profit decreased versus the first
quarter of 2004. At Olive Garden, increased sales and lower restaurant expenses
and selling, general, and administrative expenses as a percent of sales more
than offset increased labor costs as a percent of sales, resulting in record
first quarter operating profit for Olive Garden in fiscal 2005 and a
double-digit operating profit increase over the same period in fiscal 2004. The
increase in both our net earnings and diluted net earnings per share for the
first quarter of fiscal 2005 was primarily due to increased U.S. same-restaurant
sales at Olive Garden and decreases in our consolidated food and beverage costs
and restaurant expenses as a percent of sales more than offsetting increased
restaurant labor as a percentage of sales. Earnings results were negatively
impacted by an increase in the effective income tax rate, which was primarily a
result of a reduction in the amount of tax credits that we expect to receive for
fiscal 2005.
SEASONALITY
Our sales volumes fluctuate seasonally. In fiscal 2004 and 2003, our sales
were highest in the spring, lowest in the fall, and comparable during winter and
summer. Holidays, severe weather and similar conditions may affect sales volumes
seasonally in some operating regions. Because of the seasonality of our
business, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the first quarter of fiscal 2005, compared with the number open at the end of
fiscal 2004 and the end of the first quarter of fiscal 2004.
-------------------------------------------------------------------------------------------------------------------
August 29, 2004 May 30, 2004 August 24, 2003
-------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 650 649 645
Red Lobster - Canada............... 31 31 31
------ ------ ------
Total......................... 681 680 676
------ ------ ------
Olive Garden - USA................. 539 537 521
Olive Garden - Canada.............. 6 6 6
------ ------ ------
Total......................... 545 543 527
------ ------ ------
Bahama Breeze...................... 32 32 34
Smokey Bones ...................... 76 69 44
Seasons 52......................... 1 1 1
------ ------ ------
Total......................... 1,335 1,325 1,282
====== ====== ======
-------------------------------------------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide us with a
significant source of liquidity. Since substantially all of our sales are for
cash and cash equivalents and accounts payable are generally due in five to 30
days, we are able to carry current liabilities in excess of current assets. In
addition to cash flows from operations, we use a combination of long-term and
short-term borrowings to fund our capital needs.
Our commercial paper program serves as our primary source of short-term
financing. As of August 29, 2004, $18 million was outstanding under the program.
To support our commercial paper program, we have a credit facility under a
Credit Agreement dated October 17, 2003, with a consortium of banks, including
Wachovia Bank, N.A., as administrative agent, under which we can borrow up to
$400 million. The credit facility allows us to borrow at interest rates based on
a spread over (i) LIBOR or (ii) a base rate that is the higher of the prime
rate, or one-half of one percent above the federal funds rate, at our option.
The interest rate spread over LIBOR is determined by our debt rating. The credit
facility expires on October 17, 2008, and contains various restrictive
covenants, including a leverage test that requires us to maintain a ratio of
consolidated total debt to consolidated total capitalization of less than 0.55
to 1.00 and a limitation of $25 million on priority debt, subject to certain
exceptions.
13
The credit facility does not, however, contain a prohibition on borrowing in the
event of a ratings downgrade or a material adverse change in and of itself. None
of these covenants is expected to limit our liquidity or capital resources. As
of August 29, 2004, we were in compliance with all covenants under the Credit
Agreement.
At August 29, 2004, our long-term debt consisted principally of: (1) $150
million of unsecured 8.375 percent senior notes due in September 2005, (2) $150
million of unsecured 6.375 percent notes due in February 2006, (3) $150 million
of unsecured 5.75 percent medium-term notes due in March 2007, (4) $75 million
of unsecured 7.45 percent medium-term notes due in April 2011, (5) $100 million
of unsecured 7.125 percent debentures due in February 2016, and (6) an
unsecured, variable rate $29 million commercial bank loan due in December 2018
that is used to support two loans from us to the Employee Stock Ownership Plan
portion of the Darden Savings Plan. Through a shelf registration statement on
file with the SEC, we have the ability to issue an additional $125 million of
unsecured debt securities from time to time. The debt securities may bear
interest at either fixed or floating rates and have maturity dates of nine
months or more after issuance.
A summary of our contractual obligations and commercial commitments as of
August 29, 2004 is as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ----------------------------------------------------------------------------------------------------------------------
Contractual Less than 1-3 3-5 After 5
Obligations Total 1 Year Years Years Years
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Short-term debt $ 17,800 $ 17,800 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Long-term debt (1) 653,653 -- 450,000 -- 203,653
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 383,576 62,990 111,388 82,915 126,283
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Purchase obligations (2) 598,010 533,057 63,378 1,575 --
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $1,653,039 $ 613,847 $ 624,766 $ 84,490 $ 329,936
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- ----------------------------------------------------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- ----------------------------------------------------------------------------------------------------------------------
Other Commercial Total Amounts Less than 1-3 3-5 Over 5
Commitments Committed 1 Year Years Years Years
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Trade letters of credit $ 78 $ 78 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (3) 88,341 88,341 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (4) 4,147 795 1,449 1,095 808
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Other 2,125 625 1,000 500 --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 94,691 $ 89,839 $ 2,449 $ 1,595 $ 808
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
<FN>
(1) Excludes issuance discount of $981.
(2) Includes commitments for food and beverage items and supplies, capital
projects, and other miscellaneous commitments.
(3) Includes letters of credit for $72,677 associated with workers'
compensation and general liabilities accrued in our consolidated financial
statements; also includes letters of credit for $7,335 associated with
lease payments included in contractual operating lease obligation payments
noted above.
(4) Consists solely of guarantees associated with properties that have been
assigned. We are not aware of any non-performance under these arrangements
that would result in our having to perform in accordance with the terms of
the guarantees.
</FN>
We are not a party to any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on our financial
condition, changes in financial condition, sales or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Our Board of Directors has authorized us to repurchase up to an aggregate
of 137.4 million shares of our common stock, after giving effect to the
additional 22.0 million shares that were authorized to be repurchased by our
Board on September 28, 2004. Net cash flows used by financing activities
included our repurchase of 2.9 million shares of our common stock for $62
million in the first quarter of fiscal 2005, compared to 1.4 million shares for
$28
14
million in the first quarter of fiscal 2004. As of August 29, 2004, we have
repurchased a total of 112.2 million shares of our common stock. The repurchased
common stock is reflected as a reduction of stockholders' equity.
Net cash flows used in investing activities included capital expenditures
incurred principally for building new restaurants, replacing equipment, and
remodeling existing restaurants. Capital expenditures were $63 million in the
first quarter of fiscal 2005, compared to $87 million in the first quarter of
fiscal 2004. The decreased expenditures in the first quarter of fiscal 2005
resulted primarily from decreased spending associated with building new
restaurants and remodels.
We are not aware of any trends or events that would materially affect our
capital requirements or liquidity. We believe that our internal cash generating
capabilities and borrowings available under our shelf registration statement for
unsecured debt securities and short-term commercial paper program will be
sufficient to finance our capital expenditures, stock repurchase program, and
other operating activities through fiscal 2005.
FINANCIAL CONDITION
Our current assets totaled $367 million at August 29, 2004, compared to
$346 million at May 30, 2004. The increase resulted primarily from the increase
in inventory of $19 million that was due to seasonality and opportunistic
product purchases.
Our current liabilities totaled $689 million at August 29, 2004, up from
$683 million at May 30, 2004. Accounts payable of $165 million at August 29,
2004, decreased from $175 million at May 30, 2004, principally due to the timing
and terms of inventory purchases, capital expenditures, and related payments.
Accrued payroll of $89 million at August 29, 2004, decreased from $103 million
at May 30, 2004, principally due to the payout of the fiscal 2004 incentive
compensation during the first quarter of fiscal 2005. Accrued income taxes of
$78 million at August 29, 2004, increased from $49 million at May 30, 2004,
principally due to the income taxes accrued for in the first quarter of fiscal
2005 and the timing of income tax payments. Unearned revenues of $65 million at
August 29, 2004, decreased from $76 million at May 30, 2004, principally due to
seasonal fluctuations in sales and redemptions of our gift cards.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of sales and expenses during the reporting
period (see Note 1 to our Consolidated Financial Statements included in our
fiscal 2004 Annual Report on Form 10-K). Actual results could differ from those
estimates.
Critical accounting policies are those that we believe are most important
to the portrayal of our financial condition and operating results, and require
our most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those
policies may result in materially different amounts being reported under
different conditions or using different assumptions. We consider the following
policies to be most critical in understanding the judgments that are involved in
preparing our consolidated financial statements.
Land, Buildings, and Equipment
Land, buildings, and equipment are recorded at cost less accumulated
depreciation. Building components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method. Leasehold
improvements, which are reflected on our consolidated balance sheets as a
component of buildings, are amortized over the lesser of the lease term or the
estimated useful lives of the related assets using the straight-line method.
Equipment is depreciated over estimated useful lives ranging from two to 10
years, also using the straight-line method. Accelerated depreciation methods are
generally used for income tax purposes.
Our accounting policies regarding land, buildings, and equipment, including
leasehold improvements, include our judgments regarding the estimated useful
lives of these assets, the residual values to which the assets are depreciated
or amortized, and the determination as to what constitutes enhancing the value
of or increasing the life of existing assets. These judgments and estimates may
produce materially different amounts of reported depreciation and amortization
expense if different assumptions were used. As discussed further below, these
judgments may also
15
impact our need to recognize an impairment charge on the carrying amount of
these assets as the cash flows associated with the assets are realized.
Impairment of Long-Lived Assets
Land, buildings, and equipment and certain other assets, including
capitalized software costs and liquor licenses, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future
undiscounted net cash flows expected to be generated by the assets. Identifiable
cash flows are measured at the lowest level for which they are largely
independent of the cash flows of other groups of assets and liabilities,
generally at the restaurant level. If these assets are determined to be
impaired, the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds their fair value. Fair value is generally
determined based on appraisals or sales prices of comparable assets. Restaurant
sites and certain other assets to be disposed of are reported at the lower of
their carrying amount or fair value, less estimated costs to sell. Restaurant
sites and certain other assets to be disposed of are included in assets held for
disposal when certain criteria are met. These criteria include the requirement
that the likelihood of disposing of these assets within one year is probable.
Those assets whose disposal is not probable within one year remain in land,
buildings, and equipment until their disposal is probable within one year.
The judgments we make related to the expected useful lives of long-lived
assets and our ability to realize undiscounted cash flows in excess of the
carrying amounts of these assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions, and
changes in usage or operating performance. As we assess the ongoing expected
cash flows and carrying amounts of our long-lived assets, significant adverse
changes in these factors could cause us to realize a material impairment charge.
In the fourth quarter of fiscal 2004, we recognized asset impairment charges of
$37 million ($22 million after-tax) for the closing of six Bahama Breeze
restaurants and the write-down of four other Bahama Breeze restaurants, one
Olive Garden restaurant, and one Red Lobster restaurant based on an evaluation
of expected cash flows.
Self-Insurance Accruals
We self-insure a significant portion of expected losses under our workers'
compensation, employee medical, and general liability programs. Accrued
liabilities have been recorded based on our estimates of the ultimate costs to
settle incurred claims, both reported and not yet reported.
Our accounting policies regarding self-insurance programs include our
judgments and independent actuarial assumptions regarding economic conditions,
the frequency or severity of claims and claim development patterns, and claim
reserve, management, and settlement practices. Unanticipated changes in these
factors may produce materially different amounts of reported expense under these
programs.
Income Taxes
We estimate certain components of our provision for income taxes. These
estimates include, among other items, depreciation and amortization expense
allowable for tax purposes, allowable tax credits for items such as taxes paid
on reported employee tip income, effective rates for state and local income
taxes, and the tax deductibility of certain other items.
Our estimates are based on the best available information at the time that
we prepare the provision. We generally file our annual income tax returns
several months after our fiscal year-end. Income tax returns are subject to
audit by federal, state, and local governments, generally years after the
returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.
FORWARD-LOOKING STATEMENTS
Certain statements included in this report and other materials filed or to
be filed by us with the SEC (as well as information included in oral or written
statements made or to be made by us) may contain statements that are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995, as codified in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Words or phrases such as "believe," "plan," "will," "expect,"
"intend," "estimate," and "project," and similar expressions are intended to
identify forward-looking statements. All of these statements, and any other
statements in this report that are not historical facts, are forward-looking.
Examples of forward-looking
16
statements include, but are not limited to, projections regarding: our growth
plans and the number and type of expected new restaurant openings; the impact of
litigation on our financial position; and the expected date of our Chairman's
retirement. These forward-looking statements are based on assumptions concerning
important factors, risks, and uncertainties that could significantly affect
anticipated results in the future and, accordingly, could cause the actual
results to differ materially from those expressed in the forward-looking
statements. These factors, risks, and uncertainties include, but are not limited
to the following factors (each of which is discussed in greater detail in Part
I, Item 1 of our Annual Report on Form 10-K for the fiscal year ended May 30,
2004):
o the highly competitive nature of the restaurant industry, especially
pricing, service, location, personnel, and type and quality of food;
o economic, market, and other conditions, including a protracted economic
slowdown or worsening economy, industry-wide cost pressures, public safety
conditions (including ongoing concerns about terrorism threats or the
continuing conflict in Iraq), weak consumer demand, changes in consumer
preferences, demographic trends, weather conditions, construction costs,
and the cost and availability of borrowed funds;
o the price and availability of food, labor, utilities, insurance and media,
and other costs, including seafood costs, employee benefits, workers'
compensation insurance, litigation costs, and the general impact of
inflation;
o unfavorable publicity relating to food safety or other concerns, including
litigation alleging poor food quality, food-borne illness, or personal
injury;
o the availability of desirable restaurant locations;
o government regulations and litigation relating to federal and state labor
laws, zoning, land use, environmental matters, and liquor licenses; and
o growth plans, including real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development, and the availability of funds to finance growth.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including fluctuations in
interest rates, foreign currency exchange rates, and commodity prices. To manage
this exposure, we periodically enter into interest rate, foreign currency
exchange, and commodity instruments for other than trading purposes.
We use the variance/covariance method to measure value at risk, over time
horizons ranging from one week to one year, at the 95 percent confidence level.
As of August 29, 2004, our potential losses in future net earnings resulting
from changes in foreign currency exchange rate instruments, commodity
instruments, and floating rate debt interest rate exposures were approximately
$5 million over a period of one year (including the impact of the interest rate
swap agreements discussed in Note 7 to the Consolidated Financial Statements).
The value at risk from an increase in the fair value of all of our long-term
fixed rate debt, over a period of one year, was approximately $20 million. The
fair value of our long-term fixed rate debt during the first quarter of fiscal
2005 averaged $673 million, with a high of $677 million and a low of $666
million. Our interest rate risk management objective is to limit the impact of
interest rate changes on earnings and cash flows by targeting an appropriate mix
of variable and fixed rate debt.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of August 29, 2004, the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of August 29,
2004.
During the fiscal quarter ended August 29, 2004, there was no change in our
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In March 2003 and March 2002, three of our current and former hourly
restaurant employees filed two purported class action lawsuits against us in
California Superior Court of Orange County alleging violations of California
labor laws with respect to providing meal and rest breaks. The lawsuits seek
penalties under Department of Labor rules providing a one hundred dollar penalty
per violation per employee, plus attorney's fees on behalf of the plaintiffs and
other purported class members. Discovery is currently underway in these matters.
One of the cases was removed to our mandatory arbitration program, although the
Court retained the authority to permit a sample of class-wide discovery. The
other case remains pending in California Superior Court of Orange County. In
September 2003, three former employees in Washington State filed a similar
purported class action in Washington State Superior Court in Spokane County
alleging violations of Washington labor laws with respect to providing rest
breaks. The Court stayed the action, and ordered the plaintiffs into our
mandatory arbitration program; the plaintiffs motion for reconsideration was not
granted, and their motion for modification of the appellate decision is pending.
We intend to vigorously defend our position in all of these cases. Although the
outcome of the cases cannot be ascertained at this time, we do not believe that
the disposition of these cases, either individually or in the aggregate, would
have a material adverse effect on our financial position, results of operations
or liquidity.
We are subject to other private lawsuits, administrative proceedings and
claims that arise in the ordinary course of our business. These matters
typically involve claims from guests, employees and others related to
operational issues common to the restaurant industry. A number of these
lawsuits, proceedings and claims may exist at any given time. We could be
affected by adverse publicity resulting from the allegations comprising a claim,
regardless of whether the allegations are valid or whether we are ultimately
found liable. From time to time, we also are involved in lawsuits related to
infringement of, or challenges to, our trademarks. We do not believe that the
final disposition of the lawsuits and claims in which we are currently involved,
either individually or in the aggregate, will have a material adverse effect on
our financial position, results of operations or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information concerning our repurchase of shares of
our common stock during the first quarter of fiscal 2005. Since commencing
repurchases in December 1995, we have repurchased a total of 112,164,482 shares
under authorizations from our Board of Directors to repurchase an aggregate of
137,400,000 shares, including an additional 22 million shares that were
authorized by our Board of Directors to be repurchased on September 28, 2004.
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
Total Number of Maximum Number of
Shares Purchased as Shares that
Total Number Average Part of Publicly May Yet be Purchased
of Shares Purchased Price Paid Announced Plans or Under the Plans or
Period (1) per Share Programs Programs (2)
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
May 31, 2004 through
July 4,2004 316,172 $20.63 316,172 5,842,144
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
July 5, 2004 through
August 1, 2004 1,906,537 $21.43 1,906,537 3,935,607
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
August 2, 2004 through
August 29, 2004 700,089 $20.82 700,089 3,235,518
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
Total 2,922,798 $21.20 2,922,798 3,235,518
- -------------------------------- --------------------- -------------- ----------------------- -----------------------
<FN>
(1) All of the shares purchased during the first quarter of fiscal 2005 were
purchased as part of our repurchase program. The authority for our
repurchase program was increased to an aggregate of 115.4 million shares by
our Board on September 18, 2002, and announced publicly in a press release
that same day, and was most recently increased by 22 million shares to an
aggregate of 137.4 million shares by our Board of Directors on September
28, 2004, and announced publicly in a press release issued that same day.
There is no expiration date for our program. The number of shares purchased
includes shares withheld for taxes on vesting of restricted stock, and
shares delivered or deemed to be delivered to us on tender of stock in
payment for the exercise price of options. These shares are included as
part of our repurchase program and deplete the
18
repurchase authority granted by our Board. The number of shares purchased
excludes shares we reacquired pursuant to tax withholding on option
exercises or forfeiture of restricted stock.
(2) Repurchases are subject to prevailing market prices, may be made in open
market or private transactions, and may occur or be discontinued at any
time. There can be no assurance that we will repurchase any shares. The
figures in this column exclude the additional 22 million shares that were
authorized to be repurchased by our Board on September 28, 2004.
</FN>
Item 5. Other Information
On September 28, 2004, our Board of Directors declared a regular
semi-annual cash dividend of four cents per share on our outstanding common
stock. The dividend is payable on November 1, 2004, to shareholders of record as
of the close of business on October 8, 2004. On September 28, 2004, the Board
also authorized us to repurchase an additional 22 million shares of our common
stock after the prior authorizations to repurchase an aggregate of 115,400,000
shares of our common stock have been exhausted.
We entered into a letter agreement dated October 7, 2004, with Joe R. Lee,
our Chairman and Chief Executive Officer, providing that from the expected date
of his retirement as our Chairman on November 29, 2005 until November 28, 2007,
he will be a consultant to us, performing such duties as we may request,
including consultation on matters on which he worked during his employment with
us, or other matters affecting us and the restaurant industry. He may also
represent us in restaurant industry associations and at related events. For
these services, Mr. Lee will be paid a fee of $300,000 per year, will be
reimbursed for reasonable travel and related expenses, and will be provided
office space and secretarial support. Mr. Lee will not be eligible for employee
benefits beyond those available to him as a retiree. Under the letter agreement,
Mr. Lee also has agreed to keep confidential any of our proprietary information,
not to compete with us or become an employee, director or owner of any other
casual dining restaurant company anywhere in the United States, and not to
employ, solicit or offer to employ any of our directors, officers or employees
during the term of his consulting arrangement.
Item 6. Exhibits
Exhibit 10(a) Letter Agreement dated October 7, 2004, between Joe Lee and
Darden Restaurants, Inc.
Exhibit 10(b) Form of Stock Option Award Agreement under the Darden
Restaurants, Inc. 2002 Stock Incentive Plan.
Exhibit 10(c) Form of Restricted Stock Award Agreement under the Darden
Restaurants, Inc. 2002 Stock Incentive Plan.
Exhibit 10(d) Form of Restricted Stock Unit Award Agreement (U.S.) under
the Darden Restaurants, Inc. 2002 Stock Incentive Plan.
Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed
Charges.
Exhibit 31(a) Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31(b) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a) Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(b) Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
19
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 by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: October 7, 2004 By: /s/ Paula J. Shives
-------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: October 7, 2004 By: /s/ Linda J. Dimopoulos
-------------------------
Linda J. Dimopoulos
Senior Vice President and Chief Financial Officer
(Principal financial officer)
20
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
10(a) Letter Agreement dated October 7, 2004, between Joe Lee and Darden
Restaurants, Inc.
10(b) Form of Stock Option Award Agreement under the Darden Restaurants,
Inc. 2002 Stock Incentive Plan.
10(c) Form of Restricted Stock Award Agreement under the Darden
Restaurants, Inc. 2002 Stock Incentive Plan.
10(d) Form of Restricted Stock Unit Award Agreement (U.S.) under the
Darden Restaurants, Inc. 2002 Stock Incentive Plan.
12 Computation of Ratio of Consolidated Earnings to Fixed Charges.
31(a) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
21