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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 22, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
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1-13666
Commission File Number
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DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3305930
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5900 LAKE ELLENOR DRIVE,
ORLANDO, FLORIDA 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
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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
----- -----
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of March 20, 1998:
142,749,933 (excluding 18,185,103 shares held in treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 2
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
Index to Exhibits 13
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirteen Weeks Ended
- --------------------------------------------------------------------------------
February 22, 1998 February 23, 1997
- --------------------------------------------------------------------------------
Sales...................................... $ 811,261 $ 800,846
Costs and Expenses:
Cost of sales:
Food and beverages..................... 269,164 277,824
Restaurant labor....................... 263,382 258,555
Restaurant expenses.................... 113,065 116,908
---------- ----------
Total Cost of Sales.................. $ 645,611 $ 653,287
Selling, general and administrative...... 83,269 85,245
Depreciation and amortization............ 32,074 35,067
Interest, net............................ 5,079 5,634
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Total Costs and Expenses........... $ 766,033 $ 779,233
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Earnings before Income Taxes............... 45,228 21,613
Income Taxes............................... (15,470) (5,890)
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Net Earnings............................... $ 29,758 $ 15,723
========== ==========
Net Earnings per Share, Basic and Diluted.. $ 0.20 $ 0.10
========== ==========
Average Number of Common Shares Outstanding:
Basic.................................... 148,100 154,200
========== ==========
Diluted.................................. 151,300 154,900
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirty-Nine Weeks Ended
- --------------------------------------------------------------------------------
February 22, 1998 February 23, 1997
- --------------------------------------------------------------------------------
Sales...................................... $ 2,365,855 $ 2,355,158
Costs and Expenses:
Cost of sales:
Food and beverages..................... 776,973 803,621
Restaurant labor....................... 775,328 757,763
Restaurant expenses.................... 353,750 360,090
----------- -----------
Total Cost of Sales.................. $ 1,906,051 $ 1,921,474
Selling, general and administrative.... 256,886 277,636
Depreciation and amortization.......... 95,159 105,170
Interest, net.......................... 14,495 16,191
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Total Costs and Expenses........... $ 2,272,591 $ 2,320,471
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Earnings before Income Taxes............... 93,264 34,687
Income Taxes............................... (31,568) (9,660)
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Net Earnings............................... $ 61,696 $ 25,027
=========== ===========
Net Earnings per Share, Basic and Diluted.. $ 0.41 $ 0.16
=========== ===========
Average Number of Common Shares Outstanding:
Basic.................................... 150,300 156,500
=========== ===========
Diluted.................................. 152,200 157,400
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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 22, 1998 May 25, 1997
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ASSETS
Current Assets:
Cash and cash equivalents..................... $ 35,679 $ 25,490
Receivables................................... 27,363 16,333
Refundable income taxes, net.................. 4,550 16,968
Inventories................................... 176,276 132,241
Net assets held for disposal.................. 50,618 47,471
Prepaid expenses and other current assets..... 13,048 14,709
Deferred income taxes......................... 79,963 84,157
----------- -----------
Total Current Assets........................ $ 387,497 $ 337,369
Land, Buildings and Equipment................... 1,500,552 1,533,272
Other Assets.................................... 95,105 93,081
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Total Assets............................ $ 1,983,154 $ 1,963,722
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................. $ 138,989 $ 113,087
Short-term debt............................... 33,500 43,400
Current portion of long-term debt............. 5 5
Accrued payroll............................... 68,535 58,312
Other accrued taxes........................... 21,907 22,180
Other current liabilities..................... 256,910 243,596
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Total Current Liabilities................... $ 519,846 $ 480,580
Long-term Debt.................................. 310,871 313,187
Deferred Income Taxes........................... 73,731 70,118
Other Liabilities............................... 19,007 18,624
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Total Liabilities......................... $ 923,455 $ 882,509
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Stockholders' Equity:
Common stock and surplus...................... $ 1,277,633 $ 1,268,656
Retained earnings (deficit)................... 13,985 (41,706)
Treasury stock................................ (156,102) (69,184)
Cumulative foreign currency adjustment........ (11,129) (10,037)
Unearned compensation......................... (64,688) (66,516)
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Total Stockholders' Equity................ $ 1,059,699 $ 1,081,213
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Total Liabilities and Stockholders'
Equity................................ $ 1,983,154 $ 1,963,722
=========== ===========
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirteen Weeks Ended
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February 22, February 23,
1998 1997
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Cash Flows--Operating Activities:
Net earnings...................................... $ 29,758 $ 15,723
Adjustments to reconcile net earnings to cash
flow:
Depreciation and amortization................. 32,074 35,067
Amortization of unearned compensation and
loan costs.................................. 882 960
Change in current assets and liabilities...... 34,770 28,461
Change in other liabilities .................. 117 91
Loss on disposal of land, buildings and
equipment................................... 149 1,593
Deferred income taxes......................... 766 4,581
Other, net.................................... 232 (71)
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Net Cash Provided by Operating Activities. $ 98,748 $ 86,405
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Cash Flows--Investment Activities:
Purchases of land, buildings and equipment....... (31,068) (42,548)
Purchases of intangibles......................... (393) (88)
Decrease in other assets......................... 22 247
Proceeds from disposal of land, buildings and
equipment (including net assets held for
disposal)...................................... 11,067 9,569
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Net Cash Used by Investment Activities... $ (20,372) $ (32,820)
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Cash Flows--Financing Activities:
Proceeds from issuance of common stock........... 2,994 337
Income tax benefit credited to equity............ 577 71
Purchases of treasury stock...................... (40,253) (34,813)
ESOP note receivable repayment................... 600 1,000
Decrease in short-term debt...................... (28,800) (11,000)
Repayment of long-term debt...................... (600) (1,000)
Proceeds from issuance of equity puts............ 716
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Net Cash Used by Financing Activities.... $ (64,766) $ (45,405)
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Increase in Cash and Cash Equivalents.............. 13,610 8,180
Cash and Cash Equivalents - Beginning of Period.... 22,069 20,607
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Cash and Cash Equivalents - End of Period.......... $ 35,679 $ 28,787
========== ==========
Cash Flow from Changes in Current Assets and
Liabilities:
Receivables.................................... $ (7,863) $ (1,805)
Refundable income taxes, net.................... 7,403 1,670
Inventories..................................... 6,558 (7,524)
Prepaid expenses and other current assets....... (601) 3,170
Accounts payable................................ 6,745 22,805
Accrued payroll................................. 9,071 3,246
Other accrued taxes............................. (1,435) (2,106)
Other current liabilities....................... 14,892 9,005
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Change in Current Assets and Liabilities...... $ 34,770 $ 28,461
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirty-Nine Weeks Ended
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February 22, February 23,
1998 1997
- --------------------------------------------------------------------------------
Cash Flows--Operating Activities:
Net earnings...................................... $ 61,696 $ 25,027
Adjustments to reconcile net earnings to cash
flow:
Depreciation and amortization................. 95,159 105,170
Amortization of unearned compensation and
loan costs.................................. 2,599 2,781
Change in current assets and liabilities...... 7,024 (20,806)
Change in other liabilities .................. 383 272
Loss on disposal of land, buildings and
equipment................................... 1,700 4,461
Deferred income taxes......................... 7,807 12,611
Other, net.................................... 338 10
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Net Cash Provided by Operating Activities. $ 176,706 $ 129,526
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Cash Flows--Investment Activities:
Purchases of land, buildings and equipment........ (87,181) (125,948)
Purchases of intangibles.......................... (1,264) (617)
(Increase) decrease in other assets............... (3,045) 1,265
Proceeds from disposal of land, buildings and
equipment (including net assets held for
disposal)....................................... 20,128 22,303
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Net Cash Used by Investment Activities.... $ (71,362) $ (102,997)
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Cash Flows--Financing Activities:
Proceeds from issuance of common stock............ 5,490 1,275
Income tax benefit credited to equity............. 1,156 360
Dividends paid.................................... (6,005) (6,284)
Purchases of treasury stock....................... (86,918) (44,005)
ESOP note receivable repayments................... 2,400 1,600
Increase (decrease) in short-term debt............ (9,900) 6,700
Proceeds from issuance of long-term debt.......... 16,900
Repayment of long-term debt....................... (2,405) (4,454)
Proceeds from issuance of equity puts............. 1,027
Payment of loan costs............................. (177)
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Net Cash Used by Financing Activities..... $ (95,155) $ (28,085)
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Increase (Decrease) in Cash and Cash Equivalents.... 10,189 (1,556)
Cash and Cash Equivalents - Beginning of Period..... 25,490 30,343
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Cash and Cash Equivalents - End of Period........... $ 35,679 $ 28,787
========== ==========
Cash Flow from Changes in Current Assets and
Liabilities:
Receivables..................................... $ (11,030) $ (5,932)
Refundable income taxes, net.................... 12,418 (9,555)
Inventories..................................... (44,035) (26,701)
Prepaid expenses and other current assets....... 1,661 2,528
Accounts payable................................ 25,902 24,267
Accrued payroll................................. 10,223 2,848
Accrued income taxes............................ (12,522)
Other accrued taxes............................. (273) 923
Other current liabilities....................... 12,158 3,338
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Change in Current Assets and Liabilities...... $ 7,024 $ (20,806)
========== ==========
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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
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These consolidated financial statements do not include certain
information and footnotes required by 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 thirteen and
thirty-nine weeks ended February 22, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending May 31, 1998.
These statements should be read in conjunction with the consolidated
financial statements and footnotes included in the annual report on Form 10-K of
Darden Restaurants, Inc. (hereinafter called the "Company" or "Darden") for the
year ended May 25, 1997. The accounting policies used in preparing these
consolidated financial statements are the same as those described in Darden's
annual report on Form 10-K.
NOTE 2. CONSOLIDATED STATEMENTS OF CASH FLOWS
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During the thirteen and thirty-nine weeks ended February 22, 1998,
Darden paid $8,483 and $16,665, respectively, for interest (net of amount
capitalized) and $6,678 and $10,749, respectively, for income taxes.
NOTE 3. NET EARNINGS PER SHARE
----------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share", which requires presentation of basic and diluted earnings per share.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. As required, the Company adopted the
provisions of SFAS 128 in the quarter ended February 22, 1998. All prior year
weighted average and per share information has been restated in accordance with
SFAS 128. Outstanding stock options issued by the Company represent the only
dilutive effect reflected in diluted weighted average shares.
Options to purchase 375,000 and 14.0 million shares of common stock
were excluded from the calculation of diluted EPS for the thirteen weeks ended
February 22, 1998 and February 23, 1997, respectively, because their exercise
prices exceeded the average market price of common shares for the period.
Options to purchase 8.9 million and 14.1 million shares of common stock were
excluded from the calculation of diluted EPS for the thirty-nine weeks ended
February 22, 1998 and February 23, 1997, respectively, for the same reason.
NOTE 4. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS
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On January 31, 1997, the Securities and Exchange Commission (SEC)
issued amended disclosure rules for derivatives and exposures to market risk
from derivative and other financial and certain commodity instruments. Enhanced
accounting policy disclosures in accordance with this SEC release follow.
The Company may, from time to time, use financial and commodities
derivatives in the management of interest rate and commodities pricing risks
that are inherent in its business operations. Such instruments are not held or
issued for trading or speculative purposes.
7
The Company uses commodities hedging instruments, including forwards,
futures and options, to reduce the risk of price fluctuations related to future
raw materials requirements for commodities such as coffee, soybean oil, and
shrimp. The terms of such instruments generally do not exceed twelve months, and
depend on the commodity and other market factors. Deferred gains and losses are
subsequently recorded as cost of products sold in the statement of earnings when
the inventory is sold. If the inventory is not acquired and the hedge is
disposed of, the deferred gain or loss is recognized immediately in cost of
products sold.
The Company may, from time to time, use interest rate swap and cap
agreements in the management of interest rate exposure. The interest rate
differential to be paid or received is normally accrued as interest rates
change, and is recognized as a component of interest expense over the life of
the agreements. If an agreement is terminated prior to the maturity date and is
characterized as a hedge, any accrued rate differential would be deferred and
recognized as interest expense over the life of the hedged item.
The Company does not have any material risk from any of the above
financial instruments, and the Company does not anticipate any material losses
from the use of such instruments.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth selected restaurant operating data as a
percentage of sales for the periods indicated. All information is derived from
the consolidated statements of earnings for the thirteen and thirty-nine weeks
ended February 22, 1998 and February 23, 1997.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
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February 22, February 23, February 22, February 23,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
Sales...................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverages................... 33.2 34.7 32.8 34.1
Restaurant labor..................... 32.5 32.3 32.8 32.2
Restaurant expenses.................. 13.9 14.6 15.0 15.3
------ ------ ------ ------
Total Cost of Sales................ 79.6% 81.6% 80.6% 81.6%
Selling, general and administrative.... 10.3 10.6 10.9 11.8
Depreciation and amortization.......... 3.9 4.4 4.0 4.4
Interest, net.......................... 0.6 0.7 0.6 0.7
------ ------ ------ ------
Total Costs and Expenses......... 94.4% 97.3% 96.1% 98.5%
------ ------ ------ ------
Earnings before Income Taxes............... 5.6 2.7 3.9 1.5
Income Taxes............................... (1.9) (0.7) (1.3) (0.4)
------ ------ ------ ------
Net Earnings .............................. 3.7% 2.0% 2.6% 1.1%
====== ====== ====== ======
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RESULTS OF OPERATIONS
- ---------------------
For the fiscal 1998 third quarter ended February 22, 1998, earnings
after tax were $29.8 million or twenty cents per diluted share, compared to
earnings after tax of $15.7 million or ten cents per diluted share in the third
quarter of fiscal 1997. The increase in third quarter earnings was primarily
attributable to strong same store sales at The Olive Garden and improved margins
at Red Lobster. Sales of $811.3 million for the quarter, with 65 fewer
restaurants at the end of the quarter, were slightly ahead of last year's second
quarter.
For the first nine months of fiscal 1998, net earnings were $61.7
million or 41 cents per diluted share, compared to $25.0 million or 16 cents per
diluted share in the same fiscal 1997 period. Sales approximating $2.4 billion
for the nine months of fiscal 1998 were comparable to last year.
Food and beverage costs for the quarter were 33.2% of sales, compared
to 34.7% of sales last year primarily attributable to reduced costs, pricing and
sales mix. Restaurant labor increased to 32.5% of sales compared to last year's
32.3% due to wage rate inflation and higher manager bonuses, net of productivity
gains realized during the quarter. Restaurant expenses decreased to 13.9% of
sales compared to 14.6% last year. Restaurant level profit margin increased to
20.4% of sales in the third quarter compared to 18.4% last year. The decrease in
third quarter selling, general and administrative expense to 10.3% of sales
compared to 10.6% of sales last year was mainly attributable to reduced
marketing expenses. Depreciation and amortization expense declined to 3.9% of
sales compared to 4.4% in the prior year. This decline resulted from restaurant
closings and asset impairment write-downs subsequent to fiscal 1997's third
quarter.
The effective tax rate for the third quarter of fiscal 1998 was 34.2%
compared to 27.3% last year. The estimated effective tax rate for fiscal 1998 is
approximately 33.9% which is up from last year's effective tax rate before
unusual items of 27.9% due to a higher level of expected pre-tax income for the
year.
9
Food and beverage costs for the first nine months of fiscal 1998 were
32.8% of sales, down from last year's 34.1% and also attributable to reduced
costs, pricing and sales mix. Restaurant labor increased to 32.8% of sales
compared to last year's 32.2%, also due to wage rate inflation and higher
manager bonuses, net of productivity gains. Restaurant expenses were 15.0% of
sales, compared to 15.3% in the prior year. Selling, general and administrative
expenses decreased to 10.9% of sales compared to 11.8% in the prior year, again
primarily attributable to reduced marketing expenses. Depreciation and
amortization expense declined to 4.0% of sales compared to 4.4% in the prior
year. This decline also resulted from restaurant closings and asset impairment
write-downs subsequent to fiscal 1997's third quarter.
DIVISION RESULTS
- ----------------
Red Lobster sales of $467.3 million, with 42 fewer restaurants at the
end of the quarter, was 1.7% below last year's third quarter. Same-store sales
in the U.S. were up 2.8% for the quarter which compares favorably to last year's
strong sales and traffic due to heavy marketing associated with the
repositioning of Red Lobster. Third quarter margins and operating profits
substantially improved over the prior year because of lower restaurant level
costs as a percentage of sales and reduced marketing and depreciation expense.
Through the first nine months of fiscal 1998, Red Lobster's sales declined 2.4%
to $1.35 billion and same-store sales in the U.S. increased by 1.6%. The overall
reduction in sales was attributable to units closed subsequent to fiscal 1997's
third quarter.
The Olive Garden continued its positive momentum in the third quarter
of fiscal 1998 with a 5.3% increase in sales to $341.0 million. Same-store sales
in the U.S. increased 9.1%, marking the fourteenth consecutive quarter of
same-store sales increases. Third quarter operating profits were significantly
ahead of last year. Through the first nine months of fiscal 1998, The Olive
Garden sales increased 4.0% to $1.0 billion and same-store sales in the U.S.
increased by 7.4%.
Darden's newest concept Bahama Breeze continues to report strong sales
at both restaurants. Three more restaurants are currently under development.
The table below details the number of restaurants open at the end of
the third quarter fiscal year 1998, compared with the number open at the end of
May 1997 and the end of last fiscal year's third quarter.
NUMBER OF RESTAURANTS
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FEBRUARY 22, 1998 MAY 25, 1997 FEBRUARY 23, 1997
- --------------------------------------------------------------------------------
Red Lobster - USA......... 649 652 674
Red Lobster - Canada...... 35 51 52
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Total................ 684 703 726
------- ------- -------
Olive Garden - USA........ 460 461 473
Olive Garden - Canada..... 5 16 16
------- ------- -------
Total................ 465 477 489
------- ------- -------
Bahama Breeze............. 2 2 1
------- ------- -------
Grand Total...... 1,151 1,182 1,216
======= ======= =======
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10
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On March 26, 1998, the Company's Board of Directors (the "Board") elected
Odie C. Donald a Director. Mr. Donald is Group President - Customer Operations
for BellSouth Communications in Atlanta. Previously, Mr. Donald was President of
BellSouth Mobility, Inc.
In other action on March 26, 1998, the Board approved a semi-annual
dividend of four cents per share to be paid on May 1, 1998, to shareholders of
record on April 10, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 12 Computation of Ratio of Consolidated Earnings to
Fixed Charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the fiscal quarter covered
by this Form 10-Q.
11
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: March 27, 1998 By: /s/ C.L. Whitehill
------------------------------------
C.L. Whitehill
Senior Vice President,
General Counsel and Secretary
Dated: March 27, 1998 By: /s/ James D. Smith
------------------------------------
James D. Smith
Senior Vice President - Finance
(Principal financial and accounting
officer)
12
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title Page
12 Computation of Ratio of Consolidated Earnings
to Fixed Charges 14
27 Financial Data Schedule 15
13