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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(MarkOne)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 27, 2005
[ ] 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 of (I.R.S. Employer Identification No.)
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)
Not applicable.
(Former name, former address and former fiscal year, if changed since last
report)
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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 April 1, 2005:
156,664,569 (excluding 113,854,068 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 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Item 4. Controls and Procedures 23
Part II - Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 24
Item 6. Exhibits 24
Signatures 25
Index to Exhibits 26
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 Nine Months Ended
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February 27, February 22, February 27, February 22,
2005 2004 2005 2004
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(as restated) (as restated)
Sales................................................ $1,375,879 $1,241,952 $3,883,896 $3,644,184
Costs and expenses:
Cost of sales:
Food and beverage............................... 412,863 372,544 1,172,320 1,115,457
Restaurant labor................................ 435,660 391,019 1,242,190 1,158,968
Restaurant expenses............................. 206,918 190,310 604,222 576,087
---------- ---------- ---------- ----------
Total cost of sales, excluding restaurant
depreciation and amortization of $49,047,
$48,690, $147,752, and $145,215, respectively $1,055,441 $ 953,873 $3,018,732 $2,850,512
Selling, general, and administrative.............. 126,488 113,552 371,853 347,513
Depreciation and amortization..................... 52,721 52,179 158,657 155,780
Interest, net..................................... 10,405 10,944 32,376 32,310
---------- ---------- ---------- ----------
Total costs and expenses...................... $1,245,055 $1,130,548 $3,581,618 $3,386,115
---------- ---------- ---------- ----------
Earnings before income taxes......................... 130,824 111,404 302,278 258,069
Income taxes......................................... (38,194) (34,316) (95,661) (83,577)
---------- ---------- ---------- ----------
Net earnings......................................... $ 92,630 $ 77,088 $ 206,617 $ 174,492
========== ========== ========== ==========
Net earnings per share:
Basic............................................. $ 0.59 $ 0.47 $ 1.31 $ 1.06
========== ========== ========== ==========
Diluted........................................... $ 0.56 $ 0.45 $ 1.26 $ $1.02
========== ========== ========== ==========
Average number of common shares outstanding:
Basic............................................. 157,300 164,200 157,200 164,600
========== ========== ========== ==========
Diluted........................................... 164,500 170,100 163,800 170,600
========== ========== ========== ==========
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See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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February 27, 2005 May 30, 2004
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(as restated)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 87,782 $ 36,694
Receivables............................................... 47,610 30,258
Inventories............................................... 271,088 198,781
Assets held for sale...................................... 599 --
Prepaid expenses and other current assets................. 29,036 25,316
Deferred income taxes..................................... 60,693 55,258
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Total current assets.................................. $ 496,808 $ 346,307
Land, buildings, and equipment, net.......................... 2,318,359 2,250,616
Other assets................................................. 180,672 183,425
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Total assets.......................................... $ 2,995,839 $ 2,780,348
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 186,482 $ 174,624
Short-term debt .......................................... -- 14,500
Accrued payroll........................................... 112,273 103,327
Accrued income taxes...................................... 80,151 48,753
Other accrued taxes....................................... 41,211 38,440
Unearned revenues......................................... 103,440 75,513
Current portion of long-term debt......................... 299,887 --
Other current liabilities................................. 263,630 228,324
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Total current liabilities............................. $ 1,087,074 $ 683,481
Long-term debt, less current portion ........................ 351,412 653,349
Deferred income taxes........................................ 120,125 132,690
Deferred rent................................................ 128,722 122,879
Other liabilities............................................ 20,785 12,661
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Total liabilities..................................... $ 1,708,118 $ 1,605,060
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Stockholders' equity:
Common stock and surplus.................................. $ 1,661,683 $ 1,584,115
Retained earnings......................................... 1,328,019 1,127,653
Treasury stock............................................ (1,649,985) (1,483,768)
Accumulated other comprehensive income (loss)............. (8,204) (10,173)
Unearned compensation..................................... (43,076) (41,401)
Officer notes receivable.................................. (716) (1,138)
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Total stockholders' equity............................ $ 1,287,721 $ 1,175,288
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Total liabilities and stockholders' equity............ $ 2,995,839 $ 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 nine months ended February 27, 2005 and February 22, 2004
(In thousands)
(Unaudited)
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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 (as
restated)......................... $1,584,115 $1,127,653 $(1,483,768) $ (10,173) $(41,401) $(1,138) $1,175,288
Comprehensive income:
Net earnings..................... -- 206,617 -- -- -- -- 206,617
Other comprehensive income (loss):
Foreign currency adjustment.... -- -- -- 2,112 -- -- 2,112
Change in fair value of
derivatives, net of tax of $956 -- -- -- (143) -- -- (143)
---------
Total comprehensive income... 208,586
Cash dividends declared............. -- (6,251) -- -- -- -- (6,251)
Stock option exercises (4,294 shares) 40,084 -- 5,196 -- -- -- 45,280
Issuance of restricted stock (388
shares), net of forfeiture
adjustments...................... 9,404 -- -- -- (9,404) -- --
Earned compensation................. -- -- -- -- 5,461 -- 5,461
ESOP note receivable repayments..... -- -- -- -- 2,268 -- 2,268
Income tax benefits credited to
equity........................... 24,763 -- -- -- -- -- 24,763
Purchases of common stock for
treasury (6,841 shares).......... -- -- (173,050) -- -- -- (173,050)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (245 shares)......... 3,317 -- 1,637 -- -- -- 4,954
Repayment of officer notes, net..... -- -- -- -- -- 422 422
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Balance at February 27, 2005 $1,661,683 $1,328,019 $(1,649,985) $ (8,204) $(43,076) $ (716) $1,287,721
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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 25, 2003 (as
restated)......................... $1,525,957 $ 913,464 $(1,254,293) $ (10,646) $(42,848) $(1,579) $1,130,055
Comprehensive income:
Net earnings (as restated)....... -- 174,492 -- -- -- -- 174,492
Other comprehensive income (loss):
Foreign currency adjustment
(as restated) ................ -- -- -- 804 -- -- 804
Change in fair value of derivatives,
net of tax of $480........... -- -- -- (653) -- -- (653)
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Total comprehensive income
(as restated)............ 174,643
Cash dividends declared............. -- (6,575) -- -- -- -- (6,575)
Stock option exercises (2,664 shares) 23,582 -- 2,737 -- -- -- 26,319
Issuance of restricted stock
(436 shares), net of forfeiture
adjustments....................... 8,459 -- 171 -- (8,630) -- --
Earned compensation................. -- -- -- -- 3,310 -- 3,310
ESOP note receivable repayments..... -- -- -- -- 3,995 -- 3,995
Income tax benefits credited to equity 11,278 -- -- -- -- -- 11,278
Purchases of common stock for
treasury (6,330 shares)........... -- -- (131,902) -- -- -- (131,902)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (277 shares)......... 2,943 -- 1,656 -- -- -- 4,599
Repayment of officer notes, net.... -- -- -- -- -- 395 395
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Balance at February 22, 2004
(as restated) $1,572,219 $1,081,381 $(1,381,631) $ (10,495) $(44,173) $(1,184) $1,216,117
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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 Nine Months Ended
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February 27, 2005 February 22, 2004 February 27, 2005 February 22, 2004
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(as restated) (as restated)
Cash flows--operating activities
Net earnings................................................. $ 92,630 $ 77,088 $ 206,617 $ 174,492
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 52,721 52,179 158,657 155,780
Asset impairment charge, net............................... 2,611 597 2,498 4,044
Amortization of unearned compensation and loan costs....... 2,944 2,496 8,143 5,849
Non-cash compensation expense.............................. 32 28 1,005 838
Change in current assets and liabilities................... 29,989 90,729 25,030 (4,800)
Contributions to defined benefit pension plans and
postretirement plan...................................... (237) (61) (388) (202)
Loss (gain) on disposal of land, buildings, and
equipment................................................ 778 (1,404) 1,085 (1,882)
Change in cash surrender value of trust owned life
insurance................................................ (956) (3,182) (4,170) (6,926)
Deferred income taxes...................................... (6,815) 4,057 (17,044) 8,693
Change in deferred rent.................................... 1,321 1,597 5,843 5,882
Change in other liabilities ............................... 5,885 812 8,446 1,618
Income tax benefits credited to equity..................... 11,059 3,212 24,763 11,278
Other, net................................................. 873 57 (903) (781)
-------- ------- -------- -------
Net cash provided by operating activities............... $ 192,835 $ 228,205 $ 419,582 $ 353,883
-------- ------- -------- -------
Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (83,879) (81,632) (230,661) (271,825)
Increase (decrease) in other assets.......................... 1,522 (1,261) (728) (3,902)
Proceeds from disposal of land, buildings, and equipment..... 2,263 5,443 7,467 10,881
-------- ------- -------- --------
Net cash used in investing activities.................... $ (80,094) $ (77,450) $ (223,922) $ (264,846)
-------- ------- -------- --------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 18,917 9,778 49,229 30,080
Dividends paid............................................... -- -- (6,251) (6,575)
Purchases of treasury stock.................................. (104,307) (88,169) (173,050) (131,902)
(Decrease) increase in short-term debt....................... -- (56,300) (14,500) 14,600
ESOP note receivable repayment............................... 1,278 830 2,268 3,995
Repayment of long-term debt.................................. (1,278) (830) (2,268) (3,995)
-------- ------- -------- --------
Net cash used in financing activities.................... $ (85,390) $(134,691) $ (144,572) $ (93,797)
-------- ------- -------- --------
Increase (decrease) in cash and cash equivalents................ 27,351 16,064 51,088 (4,760)
Cash and cash equivalents - beginning of period................. 60,431 27,806 36,694 48,630
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Cash and cash equivalents - end of period....................... $ 87,782 $ 43,870 $ 87,782 $ 43,870
======== ======== ======== ========
Cash flow from changes in current assets and liabilities
Receivables.................................................. (16,705) (8,552) (17,352) (5,201)
Inventories.................................................. (34,647) (5,764) (72,307) (89,117)
Prepaid expenses and other current assets.................... (6,601) 2,786 (4,039) 3,176
Accounts payable............................................. 24,683 20,588 11,858 12,481
Accrued payroll.............................................. 19,673 9,848 8,946 7,028
Accrued income taxes......................................... (11,344) 16,105 31,398 (1,027)
Other accrued taxes.......................................... 5,128 1,476 2,771 1,168
Unearned revenues........................................... 32,286 26,785 27,927 18,981
Other current liabilities.................................... 17,516 27,457 35,828 47,711
-------- -------- -------- --------
Change in current assets and liabilities.................... $ 29,989 $ 90,729 $ 25,030 $ (4,800)
======== ======== ======== ========
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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 U.S. generally accepted accounting principles 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 and nine months ended
February 27, 2005, 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, as amended by Amendment No. 1 on
Form 10-K/A for the fiscal year ended May 30, 2004 ("Form 10-K/A"). The
accounting policies used in preparing these consolidated financial statements
are the same as those described in our Form 10-K/A.
Note 2. Restatement of Financial Statements
This Note should be read in conjunction with Note 2, "Restatement of
Financial Statements" under Notes to Consolidated Financial Statements included
in Item 8, "Financial Statements and Supplementary Data" of our Form 10-K/A.
Following a review of our lease accounting and leasehold depreciation
policies in December 2004, we determined that it was appropriate to adjust
certain of our prior financial statements. As a result, we restated our
consolidated financial statements for the fiscal years 1996 through 2004 and for
the first quarter of fiscal 2005 (the "Restatement"). Historically, when
accounting for leases with renewal options, we recorded rent expense on a
straight-line basis over the initial non-cancelable lease term, with the term
commencing when actual rent payments began. We depreciate our buildings,
leasehold improvements and other long-lived assets on those properties over a
period that includes both the initial non-cancelable lease term and all option
periods provided for in the lease (or the useful life of the assets if shorter).
We previously believed that these longstanding accounting treatments were
appropriate under generally accepted accounting principles. We restated our
financial statements to recognize rent expense on a straight-line basis over the
expected lease term, including cancelable option periods where failure to
exercise such options would result in an economic penalty to the Company. The
lease term commences on the date when we become legally obligated for the rent
payments.
The cumulative effect of the Restatement as of May 30, 2004 was an increase
in deferred rent liability of $114,008 and a decrease in deferred income tax
liability of $43,526. As a result, retained earnings at the end of fiscal 2004
decreased by $70,268. Rent expense for the quarter and nine months ended
February 22, 2004 increased by $1,601 and $5,546, respectively, from amounts
previously reported. The Restatement decreased reported diluted net earnings per
share by $0.01 and $0.02 for the quarter and nine months ended February 22,
2004, respectively. The Restatement had no impact on our previously reported
cash flows, sales or same-restaurant sales or on our compliance with any
covenant under our credit facility or other debt instruments.
7
The consolidated financial statements included in this Form 10-Q have been
restated to reflect the adjustments described above. The following is a summary
of the impact of the Restatement on (i) our consolidated balance sheet at
February 22, 2004 and (ii) our consolidated statements of earnings for the
quarter and nine months ended February 22, 2004. The impact of the Restatement
on our consolidated balance sheet as of May 30, 2004 is presented in our Form
10-K/A. We have not presented a summary of the impact of the Restatement on our
consolidated statements of cash flows for any of the above-referenced quarterly
periods since the net impact for each quarterly period is zero.
As Previously As
February 22, 2004 Reported Adjustments Restated
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Consolidated Balance Sheet
- ------------------------------------------------------------ ------------------- ---------------- ------------------
Deferred income taxes $ 169,998 $ (42,885) $ 127,113
Deferred rent -- 121,178 121,178
Other liabilities 21,570 (8,746) 12,824
Total liabilities 1,586,673 69,547 1,656,220
Retained earnings 1,150,614 (69,233) 1,081,381
Accumulated other comprehensive income (loss) (10,181) (314) (10,495)
Total stockholders' equity 1,285,664 (69,547) 1,216,117
As Previously As
Quarter ended February 22, 2004 Reported Adjustments Restated
- ------------------------------------------------------------ ------------------- ---------------- ------------------
Consolidated Statement of Earnings
- ------------------------------------------------------------ ------------------- ---------------- ------------------
Restaurant expenses $ 188,709 $ 1,601 $ 190,310
Total cost of sales 952,272 1,601 953,873
Total costs and expenses 1,128,947 1,601 1,130,548
Earnings before income taxes 113,005 (1,601) 111,404
Income taxes 35,106 (790) 34,316
Net earnings 77,899 (811) 77,088
Basic net earnings per share 0.47 -- 0.47
Diluted net earnings per share 0.46 (0.01) 0.45
As Previously As
Nine months ended February 22, 2004 Reported Adjustments Restated
- ------------------------------------------------------------ ------------------- ---------------- ------------------
Consolidated Statement of Earnings
- ------------------------------------------------------------ ------------------- ---------------- ------------------
Restaurant expenses $ 570,541 $ 5,546 $ 576,087
Total cost of sales 2,844,966 5,546 2,850,512
Total costs and expenses 3,380,569 5,546 3,386,115
Earnings before income taxes 263,615 (5,546) 258,069
Income taxes 85,869 (2,292) 83,577
Net earnings 177,746 (3,254) 174,492
Basic net earnings per share 1.08 (0.02) 1.06
Diluted net earnings per share 1.04 (0.02) 1.02
In addition, certain amounts in Note 4 have been restated to reflect the
Restatement adjustments described above.
Note 3. Consolidated Statements of Cash Flows
During the quarter and nine months ended February 27, 2005, we paid $6,857
and $26,879, respectively, for interest (net of amounts capitalized) and $45,681
and $56,038, respectively, for income taxes. During the quarter and nine months
ended February 22, 2004, we paid $7,388 and $26,821, respectively, for interest
(net of amounts capitalized) and $11,075 and $64,382, respectively, for income
taxes.
8
Note 4. 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 Nine Months Ended
- ---------------------------------------------------------------------------------------------------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Net earnings, as reported $ 92,630 $ 77,088 $ 206,617 $ 174,492
Add: Stock-based compensation expense included
in reported net earnings, net of related 1,284 803 3,913 2,595
tax effects
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects
(5,203) (4,445) (15,815) (14,541)
------------------------------------------------------------------
Pro forma $ 88,711 $ 73,446 $ 194,715 $ 162,546
==================================================================
Basic net earnings per share
As reported $ 0.59 $ 0.47 $ 1.31 $ 1.06
Pro forma $ 0.56 $ 0.45 $ 1.24 $ 0.99
Diluted net earnings per share
As reported $ 0.56 $ 0.45 $ 1.26 $ 1.02
Pro forma $ 0.54 $ 0.43 $ 1.19 $ 0.95
=====================================================================================================================
Note 5. Provision for Impaired Assets and Restaurant Closings
During fiscal 2004, we recorded a restructuring charge of $1,112 related
primarily to severance payments made to certain restaurant employees and other
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
nine months ended February 27, 2005:
Balance at Cash Balance at
May 30, 2004 Additions Payments February 27, 2005
- ----------------------------------- ----------------- ----------------- ----------------- ------------------------
One-time termination benefits $ 49 $ -- $ (49) $ --
Other exit costs 311 -- (311) --
---------------------------------- ----------------- ----------------- ----------------- ------------------------
$ 360 $ -- $ (360) $ --
=================================== ================= ================= ================= ========================
During the quarter and nine months ended February 27, 2005, we recorded
charges of $27 and $610, respectively, for long-lived asset impairments
resulting from the decision to close, relocate, and rebuild certain restaurants.
During the quarter and nine months ended February 22, 2004, we recorded charges
of $672 and $4,860, respectively, for similar actions. During the quarter ended
February 27, 2005, we also recorded charges of $3,260 for the write-down of
carrying value of one Red Lobster and one Olive Garden restaurant, both of which
continued to operate. 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 quarter and nine months ended February 27, 2005, we also recorded
gains of $676 and $1,372, respectively, related to previously impaired assets
that were sold. During the quarter and nine months ended February 22, 2004, we
recorded gains of $75 and $816, respectively, related to the sale of previously
impaired assets. These amounts are included in selling, general, and
administrative expenses.
9
Note 6. 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 28,329 and 4,729,620 shares of common stock were
excluded from the calculation of diluted net earnings per share for the quarters
ended February 27, 2005 and February 22, 2004, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 2,768,460 and 4,734,630 shares of common stock were
excluded from the calculation of diluted net earnings per share for the nine
months ended February 27, 2005 and February 22, 2004, respectively, for the same
reason.
Note 7. Stockholders' Equity
Pursuant to the authorization of our Board of Directors to repurchase up to
137,400,000 shares in accordance with applicable securities regulations, we
repurchased 3,662,514 and 6,841,467 shares of our common stock for $104,307 and
$173,050 during the quarter and nine months ended February 27, 2005,
respectively, resulting in a cumulative repurchase of 116,083,151 shares as of
February 27, 2005.
Note 8. 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 February 27, 2005, we had 448,515 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, are 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 $1,401 related to the
equity forward contracts was recognized in accumulated other comprehensive
income (loss) at February 27, 2005. 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 $77 and $193 was recognized in earnings as a component of
restaurant labor during the quarter and nine months ended February 27, 2005,
respectively.
During the first quarter of fiscal 2005, we entered into an interest rate
swap agreement ("swap") to hedge the risk of changes in the benchmark interest
rate 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 the interest
payments associated with a forecasted issuance of debt in fiscal 2006. No swaps
were entered into during the third quarter of fiscal 2005. As of February 27,
2005, 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 $1,450, net of tax, related to the swaps was recognized in
accumulated other comprehensive income (loss) at February 27, 2005. No amounts
were recognized in earnings during the quarter and nine months ended February
27, 2005.
10
Note 9. Retirement Plans
Components of net periodic benefit cost are as follows:
Defined Benefit Plans Postretirement Benefit Plan
- ------------------------------------------------ --------------------------------- -- --------------------------------
Quarter Ended Quarter Ended
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
- ------------------------------------------------ ---------------- ---------------- -- ---------------- ---------------
Service cost $ 1,218 $ 1,152 $ 175 $ 153
Interest cost 1,829 1,769 252 230
Expected return on plan assets (3,210) (3,205) -- --
Amortization of unrecognized prior service cost (87) (87) -- 7
Recognized net actuarial loss 1,248 928 86 83
- ------------------------------------------------ ---------------- ---------------- -- ---------------- ---------------
Net periodic benefit cost $ 998 $ 557 $ 513 $ 473
================================================ ================ ================ == ================ ===============
Defined Benefit Plans Postretirement Benefit Plan
- ------------------------------------------------ --------------------------------- -- --------------------------------
Nine Months Ended Nine Months Ended
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
- ------------------------------------------------ ---------------- ---------------- -- ---------------- ---------------
Service cost $ 3,652 $ 3,440 $ 524 $ 456
Interest cost 5,486 5,307 754 689
Expected return on plan assets (9,630) (9,615) -- --
Amortization of unrecognized prior service cost (261) (261) -- 22
Recognized net actuarial loss 3,744 2,783 259 250
- ------------------------------------------------ ---------------- ---------------- -- ---------------- ---------------
Net periodic benefit cost $ 2,991 $ 1,654 $ 1,537 $ 1,417
================================================ ================ ================ == ================ ===============
Note 10. Commitments and Contingencies
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 February 27, 2005
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 February 27, 2005 and May 30, 2004,
we also had $13,772 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 February 27, 2005 and May 30, 2004, we had $1,892 and $4,346,
respectively, of guarantees associated with third party lease 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 February 27, 2005 and May 30, 2004
amounted to $1,447 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 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 2007 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 sought
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. During the second quarter of fiscal 2005, we
attended mediations with the plaintiffs and agreed to settle both lawsuits for
approximately $9,500; the full terms of the settlement are subject to judicial
review. We recorded settlement expenses amounting to approximately $0 and $4,500
associated with these lawsuits during the quarter and nine months ended February
27, 2005, which are included in selling, general, and administrative expenses.
The settlement amounts of these lawsuits are included in other current
liabilities at February 27, 2005.
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 appeal of the denial of reconsideration was also not
granted. We intend to vigorously defend our position in this case. Although the
outcome of the case
11
cannot be ascertained at this time, we do not believe that the disposition of
this case will 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 11. Future Application of Accounting Standards
In November 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 151, "Inventory Costs." SFAS No. 151 clarifies the accounting for
abnormal amounts of idle facilities expense, freight, handling costs, and wasted
material. SFAS No. 151 is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We do not believe the adoption of SFAS No.
151 will have a material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets." SFAS No. 153 eliminates the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. SFAS No. 153 is
effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a
material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and generally requires the cost associated with employee services
received in exchange for an award of equity instruments be measured based on the
grant-date fair value of the award and recognized in the financial statements
over the period during which employees are required to provide service in
exchange for the award. SFAS No. 123R also provides guidance on how to determine
the grant-date fair value for awards of equity instruments as well as
alternative methods of adopting its requirements. SFAS No. 123R is effective for
the beginning of the first interim or annual reporting period after June 15,
2005. As disclosed in Note 4, based on the current assumptions and calculations
used, had we recognized compensation expense based on the fair value of awards
of equity instruments, net earnings would have been reduced by approximately
$3,919 and $11,902 for the quarter and nine months ended February 27, 2005,
respectively, and $3,642 and $11,946 for the quarter and nine months ended
February 22, 2004, respectively. We have not yet determined the method of
adoption or the effect of adopting SFAS No. 123R and have not determined whether
the adoption will result in future amounts similar to the current pro forma
disclosures under SFAS No. 123.
Note 12. Subsequent Event
On March 23, 2005, the Board of Directors declared a four cents per share
cash dividend to be paid on May 1, 2005 to all shareholders of record as of the
close of business on April 8, 2005.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis below for the Company should be read in
conjunction with the financial statements and the notes to such financial
statements included elsewhere in this Form 10-Q. All applicable disclosures in
the following discussion have been modified to reflect the Restatement, as
described below.
RESTATEMENT
Following a review in December 2004 of accounting adjustments cited in
several Form 8-K filings by other restaurant companies, and in consultation with
our independent registered public accounting firm, KPMG LLP, we determined that
one of the adjustments in those filings relating to the treatment of lease
accounting and leasehold depreciation applied to us, and that it was appropriate
to adjust certain of our prior financial statements. As a result, we restated
our consolidated financial statements for the fiscal years 1996 through 2004 and
for the first quarter of fiscal 2005. Historically, when accounting for leases
with renewal options, we recorded rent expense on a straight-line basis over the
initial non-cancelable lease term, with the term commencing when actual rent
payments began. We depreciate our buildings, leasehold improvements and other
long-lived assets on those properties over a period that includes both the
initial non-cancelable lease term and all option periods provided for in the
lease (or the useful life of the assets if shorter). We previously believed that
these longstanding accounting treatments were appropriate under generally
accepted accounting principles. We restated our financial statements to
recognize rent expense on a straight-line basis over the expected lease term,
including cancelable option periods where failure to exercise such options would
result in an economic penalty to the Company. The lease term commences on the
date when we become legally obligated for the rent payments. These adjustments
were not attributable to any material non-compliance by us, as a result of any
misconduct, with any financial reporting requirements under the securities laws.
The cumulative effect of the Restatement as of May 30, 2004 was an increase
in deferred rent liability of $114 million and a decrease in deferred income tax
liability of $44 million. As a result, retained earnings at the end of fiscal
2004 decreased by $70 million. Rent expense for the quarter and nine months
ended February 22, 2004 increased by $2 million and $6 million, respectively.
The Restatement decreased reported diluted net earnings per share by $0.01 and
$0.02 for the quarter and nine months ended February 22, 2004, respectively. The
Restatement had no impact on our previously reported cash flows, sales or
same-restaurant sales or on our compliance with any covenant under our credit
facility or other debt instruments.
The consolidated financial statements included in this Form 10-Q have been
restated to reflect the adjustments described above.
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 and nine months ended
February 27, 2005 and February 22, 2004.
13
Quarter Ended Nine Months Ended
--------------------------------------------------------------------------------------------------------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
--------------------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Sales ....................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage....................................... 30.0 30.0 30.2 30.6
Restaurant labor........................................ 31.7 31.5 32.0 31.8
Restaurant expenses..................................... 15.0 15.3 15.5 15.8
---- ------ ------ ------
Total cost of sales, excluding restaurant
depreciation and amortization of 3.6%,
3.9%, 3.8% and 4.0%, respectively.................. 76.7% 76.8% 77.7% 78.2%
Selling, general, and administrative...................... 9.2 9.1 9.6 9.5
Depreciation and amortization............................. 3.8 4.2 4.1 4.3
Interest, net............................................. 0.8 0.9 0.8 0.9
---- ------ ------ ------
Total costs and expenses............................ 90.5% 91.0% 92.2% 92.9%
---- ------ ------ ------
Earnings before income taxes................................. 9.5 9.0 7.8 7.1
Income taxes................................................. (2.8) (2.8) (2.5) (2.3)
---- ------ ------ ------
Net earnings................................................. 6.7% 6.2% 5.3% 4.8%
==== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS
Our sales were $1.38 billion and $3.88 billion for the third quarter and
first nine months of fiscal 2005, respectively, compared to $1.24 billion and
$3.64 billion for the third quarter and first nine months of fiscal 2004. The
10.8 percent and 6.6 percent increases in sales for the third quarter and first
nine months of fiscal 2005, respectively, were driven primarily by increased
U.S. same-restaurant sales at Olive Garden and Red Lobster, and by additional
Company-owned restaurants opened since the third quarter of fiscal 2004. For the
third quarter of fiscal 2005, our net earnings were $93 million compared to $77
million for the third quarter of fiscal 2004, a 20.2 percent increase, and our
diluted net earnings per share were $0.56 for the third quarter of fiscal 2005
compared to $0.45 for the third quarter of fiscal 2004, a 24.4 percent increase.
For the first nine months of fiscal 2005, our net earnings were $207 million
compared to $174 million for the first nine months of fiscal 2004, an 18.4
percent increase, and our diluted net earnings per share were $1.26 for the
first nine months of fiscal 2005 compared to $1.02 for the first nine months of
fiscal 2004, a 23.5 percent increase. On March 23, 2005, we indicated that we
expected diluted net earnings per share growth for fiscal 2005 to be in the
range of 31 percent to 33 percent on a GAAP basis, which is a 19 percent to 21
percent increase excluding the asset impairment and restructuring charge ($23.1
million after tax, or $0.14 per diluted share) in the fourth quarter of fiscal
2004. We had previously estimated that diluted net earnings per share growth
would be in the range of 10 percent to 15 percent in fiscal 2005 excluding the
asset impairment and restructuring charge taken in the fourth quarter of fiscal
2004.
Olive Garden reported its 42nd consecutive quarter of U.S. same-restaurant
sales growth during the third quarter of fiscal 2005 with a 10.5 percent
increase. Olive Garden's same restaurant sales growth resulted primarily from
superior in-restaurant operations, effective marketing and strong guest
satisfaction. Red Lobster reported U.S. same-restaurant sales growth of 5.1
percent during the third quarter of fiscal 2005, its second consecutive quarter
of same-restaurant sales growth. Red Lobster's increase in U.S. same-restaurant
sales was attributable primarily to improved in-restaurant operations and more
effective advertising support. Red Lobster maintained best ever guest
satisfaction results during the third quarter of fiscal 2005. Bahama Breeze
delivered improved financial performance. Operating five fewer restaurants than
the prior year, Bahama Breeze achieved lower food and beverage, restaurant
labor, and restaurant expenses as a percent of sales while strengthening the
guest experience it provides. Bahama Breeze has made improvements to its core
menu, and is progressing in its efforts to become more accessible for every day
occasions. Smokey Bones operated 39 more restaurants than the prior year,
including 15 restaurants that were opened during the third quarter of fiscal
2005. During full fiscal 2005, Smokey Bones expects to open a total of 35 new
restaurants. In an effort to determine the concept's sales potential with
national advertising support, Smokey Bones continued a limited television
advertising test in the third quarter of fiscal 2005 and expects
14
to expand its advertising to several additional markets in the fourth quarter of
fiscal 2005. The costs associated with the advertising tests, as well as the
incremental new restaurant pre-opening expenses associated with the additional
Smokey Bones restaurants opened, resulted in an increase in its operating loss
in the third quarter of fiscal 2005 compared to the third quarter of fiscal
2004. However, we expect Smokey Bones to be accretive to earnings in the fourth
quarter of fiscal 2005.
SALES
Sales were $1.38 billion and $1.24 billion for the quarters ended February
27, 2005 and February 22, 2004, respectively. The 10.8 percent increase in sales
for the third quarter of fiscal 2005 was primarily due to increased U.S.
same-restaurant sales at Olive Garden and Red Lobster, and a net increase of 57
company-owned restaurants since the third quarter of fiscal 2004. Red Lobster
sales of $636 million were 5.4 percent above last year's third quarter, which
resulted primarily from a 5.1 percent increase in U.S. same-restaurant sales.
The increase in U.S. same-restaurant sales resulted primarily from a 2.9 percent
increase in same-restaurant guest counts and a 2.2 percent increase in average
check. Olive Garden's sales of $628 million were 13.9 percent above last year's
third quarter, driven primarily by a 10.5 percent increase in U.S.
same-restaurant sales and its 22 net new restaurants in operation versus last
year. Olive Garden achieved its 42nd consecutive quarter of U.S. same-restaurant
sales growth primarily as a result of a 9.0 percent increase in same-restaurant
guest counts and a 1.5 percent increase in average check.
Sales were $3.88 billion and $3.64 billion for the nine months ended
February 27, 2005 and February 22, 2004, respectively. The 6.6 percent increase
in sales for the first nine months of fiscal 2005 as compared to the first nine
months of fiscal 2004 was primarily due to increased same-restaurant sales at
Olive Garden and a net increase of 57 company-owned restaurants since the third
quarter of fiscal 2004. Red Lobster sales of $1.80 billion were 1.0 percent
above last year. U.S. same-restaurant sales for Red Lobster increased 0.1
percent, primarily as a result of a 1.9 percent increase in average check
substantially offset by a 1.8 percent decrease in same-restaurant guest counts.
Olive Garden's sales of $1.77 billion were 9.6 percent above last year, driven
primarily by a 6.3 percent increase in U.S. same-restaurant sales and its 22 net
new restaurants in operation versus last year. U.S. same-restaurant sales for
Olive Garden increased primarily as a result of a 4.5 percent increase in
same-restaurant guest counts and a 1.8 percent increase in average check.
COSTS AND EXPENSES
Total costs and expenses were $1.25 billion and $1.13 billion for the
quarters ended February 27, 2005 and February 22, 2004, respectively. As a
percent of sales, total costs and expenses decreased from 91.0 percent in the
third quarter of fiscal 2004 to 90.5 percent in the third quarter of fiscal
2005.
Food and beverage costs increased $40 million, or 10.8 percent, from $373
million to $413 million in the third quarter of fiscal 2005 compared to the
third quarter of fiscal 2004. As a percent of sales, food and beverage costs in
the third quarter of fiscal 2005 was comparable to the third quarter of fiscal
2004 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
offset by increased lobster, produce and dairy costs at Red Lobster and dairy
costs at Olive Garden. For the fourth quarter and fiscal 2005, we continue to
expect food and beverage expenses as a percent of sales to be lower than fiscal
2004 because we have forward contracts in place on many of our products and, in
some cases, we purchased inventory to lock in our positions. Restaurant labor
increased $45 million, or 11.4 percent, from $391 million to $436 million in the
third quarter of fiscal 2005 compared to the third quarter of fiscal 2004. As a
percent of sales, restaurant labor increased in the third quarter of fiscal 2005
primarily as a result of increased bonus expenses associated with stronger sales
and earnings growth at Olive Garden and Red Lobster, which was partially offset
by increased sales leverage. Restaurant expenses (which include lease, property
tax, credit card, utility, workers' compensation, insurance, new restaurant
pre-opening, and other restaurant-level operating expenses) increased $17
million, or 8.7 percent, from $190 million to $207 million in the third quarter
of fiscal 2005 compared to the third quarter of fiscal 2004. As a percent of
sales, restaurant expenses decreased in the third quarter of fiscal 2005
primarily as a result of lower workers' compensation and general liability
expenses and increased sales leverage, which were partially offset by higher
utility costs, higher new restaurant pre-opening expenses due to an increase in
new restaurant openings, and higher discretionary repairs at Red Lobster and
Olive Garden. The decrease in our workers' compensation and general liability
expenses resulted primarily from 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 $13 million, or
11.4 percent, from $114 million to $126 million in the third quarter of fiscal
2005 compared to the third quarter of fiscal 2004. As a percent of sales,
selling, general, and administrative expenses increased in the third quarter of
fiscal 2005 compared to the third
15
quarter of fiscal 2004 primarily as a result of the write-down of carrying value
of one Red Lobster and one Olive Garden restaurant, both of which continued to
operate.
Depreciation and amortization expense increased $1 million, or 1.0 percent,
from $52 million to $53 million in the third quarter of fiscal 2005 compared to
the third quarter of fiscal 2004. As a percent of sales, depreciation and
amortization expense decreased in the third quarter of fiscal 2005 compared to
the third quarter of fiscal 2004 primarily as a result of the favorable impact
of higher sales volumes.
Net interest expense, as a percent of sales, was lower in the third quarter
of fiscal 2005 compared to the third quarter of fiscal 2004 primarily as a
result of increased interest income in the third quarter of fiscal 2005 as a
result of higher cash balances than in the third quarter of fiscal 2004 and the
favorable impact of higher sales volumes.
Food and beverage costs increased $57 million, or 5.1 percent, from $1.12
billion to $1.17 billion in the first nine months of fiscal 2005 compared to the
first nine months of fiscal 2004. As a percent of sales, food and beverage costs
decreased in the first nine months 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. Restaurant labor increased $83 million, or 7.2 percent, from $1.16
billion to $1.24 billion in the first nine months of fiscal 2005 compared to the
first nine months of fiscal 2004. As a percent of sales, restaurant labor
increased primarily as a result of increased bonus expenses associated with
stronger sales and earnings growth and increased wage rates, which was partially
offset by increased sales leverage. Restaurant expenses (which include lease,
property tax, credit card, utility, workers' compensation, insurance, new
restaurant pre-opening, and other restaurant-level operating expenses) increased
$28 million, or 4.9 percent, from $576 million to $604 million in the first nine
months of fiscal 2005 compared to the first nine months of fiscal 2004. As a
percent of sales, restaurant expenses decreased in the first nine months of
fiscal 2005 primarily as a result of lower workers' compensation and general
liability expenses, which was partially offset by higher utility costs.
Selling, general, and administrative expenses increased $24 million, or 7.0
percent, from $348 million to $372 million in the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004. As a percent of sales,
selling, general, and administrative expenses increased in the first nine months
of fiscal 2005 compared to the first nine months of fiscal 2004 primarily as a
result of increased employee benefit costs and the expected resolution of the
meal and break period lawsuits in California, which were partially offset by the
favorable impact of higher sales volumes.
Depreciation and amortization expense increased $3 million, or 1.9 percent,
from $156 million to $159 million in the first nine months of fiscal 2005
compared to the first nine months of fiscal 2004. As a percent of sales,
depreciation and amortization expense decreased in the first nine months of
fiscal 2005 compared to the first nine months of fiscal 2004 primarily as a
result of the favorable impact of higher sales volumes.
Net interest expense, as a percent of sales, was lower in the first nine
months of fiscal 2005 compared to the first nine months of fiscal 2004 primarily
as a result of the favorable impact of higher sales volumes.
INCOME TAXES
The effective income tax rate for the third quarter and first nine months
of fiscal 2005 was 29.2 percent and 31.6 percent, respectively, compared to an
effective income tax rate of 30.8 and 32.4 percent in the third quarter and
first nine months of fiscal 2004, respectively. The rate decreases in fiscal
2005 were primarily due to the favorable resolution of prior year tax matters
and an increase in certain FICA tax credits for employee reported tips.
NET EARNINGS AND NET EARNINGS PER SHARE
For the third quarter of fiscal 2005, our net earnings were $93 million
compared to $77 million for the third quarter of fiscal 2004, a 20.2 percent
increase, and our diluted net earnings per share were $0.56 for the third
quarter of fiscal 2005 compared to $0.45 for the third quarter of fiscal 2004, a
24.4 percent increase. At Red Lobster, increased sales and decreased restaurant
expenses, and depreciation expenses as a percent of sales, partially
16
offset by higher food and beverage costs, restaurant labor, and selling,
general, and administrative expenses as a percent of sales, resulted in
near-record operating profit for the third quarter of fiscal 2005. At Olive
Garden, increased sales and lower selling, general, and administrative expenses
and depreciation expenses as a percent of sales, partially offset by increased
restaurant labor costs and restaurant expenses as a percent of sales, resulted
in record third quarter operating profit for Olive Garden in fiscal 2005. The
increase in both our net earnings and diluted net earnings per share for the
third quarter of fiscal 2005 was primarily due to increased U.S. same-restaurant
sales at Olive Garden and Red Lobster and decreased consolidated restaurant
expenses and depreciation expenses as a percent of sales more than offsetting
increased restaurant labor costs and selling, general, and administrative
expenses as a percentage of sales. Net earnings were favorably impacted by a
decrease in the effective income tax rate, primarily resulting from the
favorable resolution of prior year tax matters and an increase in certain FICA
tax credits for employee reported tips.
For the first nine months of fiscal 2005, our net earnings were $207
million compared to $174 million for the first nine months of fiscal 2004, an
18.4 percent increase, and our diluted net earnings per share were $1.26 for the
first nine months of fiscal 2005 compared to $1.02 for the first nine months of
fiscal 2004, a 23.5 percent increase. At Red Lobster, increased sales and lower
food and beverage costs, restaurant expenses, and depreciation expenses as a
percentage of sales more than offset higher restaurant labor costs and selling,
general, and administrative expenses as a percent of sales. As a result, Red
Lobster's operating profit increased versus the first nine months of fiscal
2004. At Olive Garden, increased sales and lower restaurant expenses, selling,
general, and administrative, and depreciation expenses as a percent of sales
more than offset increased restaurant labor costs as a percent of sales. As a
result, Olive Garden's operating profit increased versus the first nine months
of fiscal 2004. The increase in both our net earnings and diluted net earnings
per share for the first nine months 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, restaurant expenses, and depreciation
expenses as a percent of sales more than offsetting increased restaurant labor
costs and selling, general, and administrative expenses as a percentage of
sales.
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 third quarter of fiscal 2005, compared with the number open at the end of
fiscal 2004 and the end of the third quarter of fiscal 2004.
-------------------------------------------------------------------------------------------------------------------
February 27, 2005 May 30, 2004 February 22, 2004
-------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 648 649 649
Red Lobster - Canada............... 31 31 31
------ ------- ------
Total......................... 679 680 680
------ ------- ------
Olive Garden - USA................. 550 537 528
Olive Garden - Canada.............. 6 6 6
------ ------- ------
Total......................... 556 543 534
------ ------- ------
Bahama Breeze...................... 32 32 37
Smokey Bones ...................... 98 69 59
Seasons 52......................... 3 1 1
------- ------- ------
Total......................... 1,368 1,325 1,311
======= ======= ======
-------------------------------------------------------------------------------------------------------------------
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 February 27, 2005, no commercial paper was outstanding under
the program. To support our commercial paper program, we have
17
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. 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 February 27, 2005,
we were in compliance with all covenants under the Credit Agreement.
At February 27, 2005, our long-term debt consisted principally of: (1) $150
million of unsecured 5.75 percent medium-term notes due in March 2007, (2) $75
million of unsecured 7.45 percent medium-term notes due in April 2011, (3) $100
million of unsecured 7.125 percent debentures due in February 2016, and (4) an
unsecured, variable rate $27 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. We also have $150 million of unsecured 8.375
percent senior notes due in September 2005 and $150 million of unsecured 6.375
percent notes due in February 2006 included in current liabilities, which we
plan to repay through the issuance of unsecured debt securities in fiscal 2006.
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
February 27, 2005 is as follows (in thousands):
- -------------------------- -------------------------------------------------------------------------------------------
Payments Due by Period
- -------------------------- -------------------------------------------------------------------------------------------
Contractual Less than 1-3 3-5 More than 5
Obligations Total 1 Year Years Years Years
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Long-term debt (1) $ 652,135 $300,000 $150,000 $ -- $ 202,135
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 412,007 66,726 117,576 86,123 141,582
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Purchase obligations (2) 457,385 449,836 6,547 1,002 $ --
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $ 1,521,527 $816,562 $274,123 $ 87,125 $ 343,717
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- -------------------------- --------------- ---------------------------------------------------------------------------
Total Amounts
Other Commercial Committed Less than 1-3 3-5 More than 5
Commitments 1 Year Years Years Years
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (3) $ 86,449 $ 86,449 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (4) 1,892 498 767 391 236
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 88,341 $ 86,947 $ 767 $ 391 $ 236
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(1) Excludes issuance discount of $836.
(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 $5,108 associated with
lease payments included in contractual operating lease obligation payments
noted above.
(4) Consists solely of guarantees associated with leased 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.
Except for operating leases noted in the contractual obligations table
above and the derivative and hedging instruments disclosed in Note 8 "Derivative
Instruments and Hedging Activities" under Notes to Consolidated Financial
Statements contained elsewhere in this Form 10-Q, 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,
18
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. Net cash flows used by financing
activities included our repurchase of 3.7 million shares of our common stock for
$104 million in the third quarter of fiscal 2005, compared to 4.1 million shares
for $88 million in the third quarter of fiscal 2004. For the first nine months
of fiscal 2005, net cash flows used by financing activities included our
repurchase of 6.8 million shares of our common stock for $173 million, compared
to 6.3 million shares for $132 million for the first nine months of fiscal 2004.
As of February 27, 2005, we have repurchased a total of 116.1 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 $84 million and $231
million in the third quarter and first nine months of fiscal 2005, compared to
$82 million and $272 million in the third quarter and first nine months of
fiscal 2004. The increased expenditures in the third quarter of fiscal 2005
resulted primarily from the expansion of Smokey Bones and new restaurant growth
at Olive Garden. The decreased expenditures in the first nine months 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 $497 million at February 27, 2005, compared to
$346 million at May 30, 2004. The increase resulted primarily from an increase
in inventory of $72 million due to seasonality and opportunistic product
purchases and an increase in cash and cash equivalents of $51 million that was
primarily due to the increase in operating performance and seasonal sales of our
gift cards. The $17 million increase in receivables resulted primarily from an
increase in the amount of inventory conveyed to third party distribution
companies prior to delivery to our restaurants.
Our current liabilities totaled $1.09 billion at February 27, 2005, up from
$683 million at May 30, 2004. The increase in current liabilities is primarily
due to the classification of the $150 million of unsecured 8.375 percent senior
notes due in September 2005 and the $150 million of unsecured 6.375 percent
notes due in February 2006 as current liabilities at February 27, 2005. Accounts
payable of $186 million at February 27, 2005, increased 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 $112 million at
February 27, 2005, increased from $103 million at May 30, 2004, principally due
to increased incentive compensation associated with stronger sales and earnings
growth. Accrued income taxes of $80 million at February 27, 2005, increased from
$49 million at May 30, 2004, principally due to the income taxes accrued for in
the first nine months of fiscal 2005 and the timing of income tax payments.
Unearned revenues of $103 million at February 27, 2005, increased from $76
million at May 30, 2004, principally due to seasonal fluctuations in sales and
redemptions of our gift cards. Other current liabilities of $264 million at
February 27, 2005, increased from $228 million at May 30, 2004, principally due
to insurance, litigation, and employee benefit-related accruals.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with U.S.
generally accepted accounting principles. 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, "Summary
of Significant Accounting Policies" under Notes to Consolidated Financial
Statements included in Item 8, "Financial Statements and Supplementary Data" of
our Form 10-K/A). 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
19
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 expected lease
term, including cancelable option periods, 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 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.
Leases
We are obligated under various lease agreements for certain restaurants. We
recognize rent expense on a straight-line basis over the expected lease term,
including cancelable option periods as described below. Within the provisions of
certain of our leases, there are rent holidays and/or escalations in payments
over the base lease term, as well as renewal periods. The effects of the
holidays and escalations have been reflected in rent expense on a straight-line
basis over the expected lease term, which includes cancelable option periods
when it is deemed to be reasonably assured that we will exercise such option
periods due to the fact that we would incur an economic penalty for not doing
so. The lease term commences on the date when we become legally obligated for
the rent payments. For each restaurant, the consolidated financial statements
reflect the same lease term for amortizing leasehold improvements as we use to
determine capital versus operating lease classifications and in calculating
straight-line rent expense. Percentage rent expense is generally based upon
sales levels and is accrued at the point in time we determine that it is
probable that such sales levels will be achieved.
Our judgments related to the probable term for each restaurant affect the
classification and accounting for leases as capital versus operating, the rent
holidays and escalation in payments that are included in the calculation of
straight-line rent, and the term over which leasehold improvements for each
restaurant facility are amortized. These judgments may produce materially
different amounts of depreciation, amortization, and rent expense than would be
reported if different assumed lease terms were used.
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
sale 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
20
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 ($23 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. In the third quarter of fiscal 2005, we recognized asset
impairment charges of $3 million ($2 million after-tax) for the write-down of
one Olive Garden 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.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs."
SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilities
expense, freight, handling costs, and wasted material. SFAS No. 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
We do not believe the adoption of SFAS No. 151 will have a material impact on
our financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-Monetary
Assets." SFAS No. 153 eliminates the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of non-monetary assets that do not have commercial substance. SFAS No. 153 is
effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not believe the adoption of SFAS No. 153 will have a
material impact on our financial statements.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based
Compensation" and generally requires the cost associated with employee services
received in exchange for an award of equity instruments be measured based on the
grant-date fair value of the award and recognized in the financial statements
over the period during which employees are required to provide service in
exchange for the award. SFAS No. 123R also provides guidance on how to determine
the grant-date fair value for awards of equity instruments as well as
alternative methods of adopting its requirements. SFAS No. 123R is effective for
the beginning of the first interim or annual reporting period after June 15,
2005. As disclosed in Note 4, based on the current assumptions and calculations
used, had we recognized compensation expense based on the fair value of awards
of equity instruments, net earnings would have been reduced by approximately
$3,919 and $11,902 for the quarter and nine months ended February 27, 2005,
respectively, and $3,642 and $11,946 for the quarter and nine months ended
February 22, 2004 respectively. We have not yet determined the method of
adoption or the effect of adopting SFAS No. 123R and have not determined whether
the adoption will result in future amounts similar to the current pro forma
disclosures under SFAS No. 123.
21
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 statements include, but are not limited to,
projections regarding: our growth plans and the number and type of expected new
restaurant openings and related capital expenditures; our expectations regarding
lower food and beverage costs for fiscal 2005; expected earnings growth and the
impact of litigation on our financial position. 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 (which are
discussed in greater detail in Item 1, "Business" of our Form 10-K/A):
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;
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; and
o the effectiveness of internal controls over financial reporting.
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 February 27, 2005, 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
$7 million over a period of one year (including the impact of the interest rate
swap agreements discussed in Note 8 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 $18 million. The
fair value of our long-term fixed rate debt, including the amounts included in
current liabilities, during the first nine months of fiscal 2005 averaged $671
million, with a high of $677 million and a low of $664 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.
22
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 February 27, 2005, 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
February 27, 2005.
During the fiscal quarter ended February 27, 2005, 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.
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 sought
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. During the second quarter of fiscal 2005, we
attended mediations with the plaintiffs and agreed to settle both lawsuits for
approximately $9.5 million; the full terms of the settlement are subject to
judicial review. We recorded settlement expenses amounting to approximately $0
and $4.5 million associated with these lawsuits during the quarter and nine
months ended February 27, 2005, which are included in selling, general, and
administrative expenses. The settlement amounts of these lawsuits are included
in other current liabilities at February 27, 2005.
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 appeal of the denial of reconsideration was also not
granted. We intend to vigorously defend our position in this case. Although the
outcome of the case cannot be ascertained at this time, we do not believe that
the disposition of this case will 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.
23
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 quarter ended February 27, 2005. Since commencing
repurchases in December 1995, we have repurchased a total of 116,083,151 shares
under authorizations from our Board of Directors to repurchase an aggregate of
137.4 million shares, including an additional 22.0 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 Price Paid Announced Plans or Under the Plans or
Period Purchased (1) per Share Programs Programs (2)
- ----------------------------------- ------------------ -------------- ----------------------- -----------------------
November 29, 2004 through
January 2, 2005 155,528 $27.69 155,528 24,823,835
- ----------------------------------- ------------------ -------------- ----------------------- -----------------------
January 3, 2005 through
January 30, 2005 1,906,986 $28.58 1,906,986 22,916,849
- ----------------------------------- ------------------ -------------- ----------------------- -----------------------
January 31, 2005 through
February 27, 2005 1,600,000 $28.44 1,600,000 21,316,849
- ----------------------------------- ------------------ -------------- ----------------------- -----------------------
Total 3,662,514 $28.48 3,662,514 21,316,849
- ----------------------------------- ------------------ -------------- ----------------------- -----------------------
(1) All of the shares purchased during the third quarter ended February 27,
2005 were purchased as part of our repurchase program, the authority for
which was most recently increased 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 repurchase authority granted by our Board. The number of shares
repurchased 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 include the additional 22 million shares that were
authorized to be repurchased by our Board on September 28, 2004.
Item 6. Exhibits
Exhibit 10 Darden Restaurants, Inc. Performance Criteria for
Annual Cash Bonus under the Management and
Professional 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.
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 by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: April 7, 2005 By: /s/ Paula J. Shives
------------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: April 7, 2005 By: /s/ Linda J. Dimopoulos
------------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
25
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
10 Darden Restaurants, Inc. Performance Criteria for Annual Cash
Bonus under the Management and Professional 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.
26