10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 29, 2015
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
1-13666
Commission File Number
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
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| | |
Florida | | 59-3305930 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1000 Darden Center Drive Orlando, Florida | | 32837 |
(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)
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 o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | x | | Accelerated filer | | o |
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Non-accelerated filer | | o (Do not check if a smaller reporting company) | | Smaller reporting company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Number of shares of common stock outstanding as of December 15, 2015: 128,236,458 (excluding 1,270,694 shares held in our treasury).
TABLE OF CONTENTS
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Part I - | Financial Information | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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Part II - | Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
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Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report regarding the expected net increase in the number of our restaurants, U.S. same-restaurant sales, total sales growth and capital expenditures in fiscal 2016 and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q (including this report) and Form 8-K reports.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Sales | $ | 1,608.8 |
| | $ | 1,559.0 |
| | $ | 3,295.8 |
| | $ | 3,154.8 |
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Costs and expenses: | | | | | | | |
Food and beverage | 482.1 |
| | 485.5 |
| | 984.9 |
| | 987.5 |
|
Restaurant labor | 523.8 |
| | 506.8 |
| | 1,059.8 |
| | 1,015.1 |
|
Restaurant expenses | 278.0 |
| | 277.4 |
| | 549.9 |
| | 549.7 |
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Marketing expenses | 58.3 |
| | 61.9 |
| | 123.9 |
| | 126.4 |
|
General and administrative expenses | 101.9 |
| | 128.9 |
| | 199.0 |
| | 224.3 |
|
Depreciation and amortization | 75.3 |
| | 80.1 |
| | 156.4 |
| | 158.8 |
|
Impairments and disposal of assets, net | 7.7 |
| | 39.3 |
| | 6.0 |
| | 46.3 |
|
Total operating costs and expenses | $ | 1,527.1 |
| | $ | 1,579.9 |
| | $ | 3,079.9 |
| | $ | 3,108.1 |
|
Operating income (loss) | 81.7 |
| | (20.9 | ) | | 215.9 |
| | 46.7 |
|
Interest, net | 57.3 |
| | 33.7 |
| | 79.7 |
| | 145.0 |
|
Earnings (loss) before income taxes | 24.4 |
| | (54.6 | ) | | 136.2 |
| | (98.3 | ) |
Income tax expense (benefit) | (5.7 | ) | | (23.8 | ) | | 25.1 |
| | (48.2 | ) |
Earnings (loss) from continuing operations | $ | 30.1 |
| | $ | (30.8 | ) | | $ | 111.1 |
| | $ | (50.1 | ) |
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $0.2, $(1.5), $3.2, and $319.3, respectively | 13.1 |
| | (2.0 | ) | | 18.5 |
| | 520.5 |
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Net earnings (loss) | $ | 43.2 |
| | $ | (32.8 | ) | | $ | 129.6 |
| | $ | 470.4 |
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Basic net earnings per share: | | | | | | | |
Earnings (loss) from continuing operations | $ | 0.23 |
| | $ | (0.24 | ) | | $ | 0.87 |
| | $ | (0.39 | ) |
Earnings (loss) from discontinued operations | 0.11 |
| | (0.02 | ) | | 0.14 |
| | 4.01 |
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Net earnings (loss) | $ | 0.34 |
| | $ | (0.26 | ) | | $ | 1.01 |
| | $ | 3.62 |
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Diluted net earnings per share: | | | | | | | |
Earnings (loss) from continuing operations | $ | 0.23 |
| | $ | (0.24 | ) | | $ | 0.86 |
| | $ | (0.39 | ) |
Earnings (loss) from discontinued operations | 0.10 |
| | (0.02 | ) | | 0.14 |
| | 4.01 |
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Net earnings (loss) | $ | 0.33 |
| | $ | (0.26 | ) | | $ | 1.00 |
| | $ | 3.62 |
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Average number of common shares outstanding: | | | | | | | |
Basic | 128.1 |
| | 127.7 |
| | 127.7 |
| | 130.0 |
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Diluted | 129.9 |
| | 127.7 |
| | 129.7 |
| | 130.0 |
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Dividends declared per common share | $ | 0.55 |
| | $ | 0.55 |
| | $ | 1.10 |
| | $ | 1.10 |
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See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Net earnings (loss) | $ | 43.2 |
| | $ | (32.8 | ) | | $ | 129.6 |
| | $ | 470.4 |
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Other comprehensive income (loss): | | | | | | | |
Foreign currency adjustment | 0.1 |
| | 4.0 |
| | 0.9 |
| | 5.5 |
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Change in fair value of marketable securities, net of taxes of $0.0, $0.0, $0.0 and $0.0, respectively | — |
| | 0.1 |
| | — |
| | — |
|
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $13.8, $0.5, $14.3 and $15.9, respectively | 20.2 |
| | 3.5 |
| | 20.9 |
| | 27.4 |
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Amortization of unrecognized net actuarial (loss) gain, net of taxes of $0.0, $9.3, $(0.1) and $9.8, respectively, related to pension and other post-employment benefits | (0.1 | ) | | 15.1 |
| | (0.2 | ) | | 15.4 |
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Other comprehensive income | $ | 20.2 |
| | $ | 22.7 |
| | $ | 21.6 |
| | $ | 48.3 |
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Total comprehensive income (loss) | $ | 63.4 |
| | $ | (10.1 | ) | | $ | 151.2 |
| | $ | 518.7 |
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See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions) |
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| November 29, 2015 | | May 31, 2015 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 857.6 |
| | $ | 535.9 |
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Receivables, net | 63.3 |
| | 78.0 |
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Inventories | 170.0 |
| | 163.9 |
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Prepaid income taxes | 36.3 |
| | 18.9 |
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Prepaid expenses and other current assets | 76.8 |
| | 69.4 |
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Deferred income taxes | 161.1 |
| | 157.4 |
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Assets held for sale | 18.4 |
| | 32.9 |
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Total current assets | $ | 1,383.5 |
| | $ | 1,056.4 |
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Land, buildings and equipment, net of accumulated depreciation and amortization of $1,750.3 and $2,304.6, respectively | 2,074.6 |
| | 3,215.8 |
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Goodwill | 872.4 |
| | 872.4 |
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Trademarks | 574.6 |
| | 574.6 |
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Other assets | 277.2 |
| | 275.5 |
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Total assets | $ | 5,182.3 |
| | $ | 5,994.7 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 191.4 |
| | $ | 198.8 |
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Accrued payroll | 110.0 |
| | 141.1 |
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Accrued income taxes | — |
| | 12.6 |
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Other accrued taxes | 49.9 |
| | 51.5 |
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Unearned revenues | 307.8 |
| | 328.6 |
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Current portion of long-term debt | 759.4 |
| | 15.0 |
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Other current liabilities | 396.9 |
| | 449.1 |
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Total current liabilities | $ | 1,815.4 |
| | $ | 1,196.7 |
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Long-term debt, less current portion | 439.5 |
| | 1,452.3 |
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Deferred income taxes | 226.2 |
| | 341.8 |
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Deferred rent | 236.1 |
| | 225.9 |
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Other liabilities | 475.3 |
| | 444.5 |
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Total liabilities | $ | 3,192.5 |
| | $ | 3,661.2 |
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Stockholders’ equity: | | | |
Common stock and surplus | $ | 1,488.3 |
| | $ | 1,405.9 |
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Retained earnings | 577.9 |
| | 1,026.0 |
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Treasury stock | (7.8 | ) | | (7.8 | ) |
Accumulated other comprehensive income (loss) | (65.0 | ) | | (86.6 | ) |
Unearned compensation | (3.6 | ) | | (4.0 | ) |
Total stockholders’ equity | $ | 1,989.8 |
| | $ | 2,333.5 |
|
Total liabilities and stockholders’ equity | $ | 5,182.3 |
| | $ | 5,994.7 |
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See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the six months ended November 29, 2015 and November 23, 2014
(In millions)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock And Surplus | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Unearned Compensation | | Total Stockholders’ Equity |
Balance at May 31, 2015 | $ | 1,405.9 |
| | $ | 1,026.0 |
| | $ | (7.8 | ) | | $ | (86.6 | ) | | $ | (4.0 | ) | | $ | 2,333.5 |
|
Net earnings | — |
| | 129.6 |
| | — |
| | — |
| | — |
| | 129.6 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 21.6 |
| | — |
| | 21.6 |
|
Dividends declared | — |
| | (140.6 | ) | | — |
| | — |
| | — |
| | (140.6 | ) |
Stock option exercises (1.5 shares) | 59.7 |
| | — |
| | — |
| | — |
| | — |
| | 59.7 |
|
Stock-based compensation | 8.5 |
| | — |
| | — |
| | — |
| | — |
| | 8.5 |
|
ESOP note receivable repayments | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | 0.4 |
|
Income tax benefits credited to equity | 12.0 |
| | — |
| | — |
| | — |
| | — |
| | 12.0 |
|
Repurchases of common stock (0.0 shares) | (0.1 | ) | | (0.3 | ) | | — |
| | — |
| | — |
| | (0.4 | ) |
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares) | 2.3 |
| | — |
| | — |
| | — |
| | — |
| | 2.3 |
|
Separation of Four Corners Property Trust | — |
| | (436.8 | ) | | — |
| | — |
| | — |
| | (436.8 | ) |
Balance at November 29, 2015 | $ | 1,488.3 |
| | $ | 577.9 |
| | $ | (7.8 | ) | | $ | (65.0 | ) | | $ | (3.6 | ) | | $ | 1,989.8 |
|
| | | | | | | | | | | |
Balance at May 25, 2014 | $ | 1,302.2 |
| | $ | 995.8 |
| | $ | (7.8 | ) | | $ | (128.1 | ) | | $ | (5.2 | ) | | $ | 2,156.9 |
|
Net earnings | — |
| | 470.4 |
| | — |
| | — |
| | — |
| | 470.4 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 48.3 |
| | — |
| | 48.3 |
|
Dividends declared | — |
| | (140.9 | ) | | — |
| | — |
| | — |
| | (140.9 | ) |
Stock option exercises (1.4 shares) | 48.0 |
| | — |
| | — |
| | — |
| | — |
| | 48.0 |
|
Stock-based compensation | 17.5 |
| | — |
| | — |
| | — |
| | — |
| | 17.5 |
|
ESOP note receivable repayments | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
Income tax benefits credited to equity | 4.0 |
| | — |
| | — |
| | — |
| | — |
| | 4.0 |
|
Repurchases of common stock (8.7 shares) | (88.3 | ) | | (328.0 | ) | | — |
| | — |
| | — |
| | (416.3 | ) |
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares) | 2.9 |
| | — |
| | — |
| | — |
| | — |
| | 2.9 |
|
Accelerated share repurchase program | (85.6 | ) | | — |
| | — |
| | — |
| | — |
| | (85.6 | ) |
Balance at November 23, 2014 | $ | 1,200.7 |
| | $ | 997.3 |
| | $ | (7.8 | ) | | $ | (79.8 | ) | | $ | (4.9 | ) | | $ | 2,105.5 |
|
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) |
| | | | | | | |
| Six Months Ended |
| November 29, 2015 | | November 23, 2014 |
Cash flows—operating activities | | | |
Net earnings | $ | 129.6 |
| | $ | 470.4 |
|
Earnings from discontinued operations, net of tax | (18.5 | ) | | (520.5 | ) |
Adjustments to reconcile net earnings from continuing operations to cash flows: | | | |
Depreciation and amortization | 156.4 |
| | 158.8 |
|
Impairments and disposal of assets, net | 6.0 |
| | 46.3 |
|
Amortization of loan costs and losses on interest-rate related derivatives | 3.1 |
| | 4.9 |
|
Stock-based compensation expense | 17.3 |
| | 29.9 |
|
Change in current assets and liabilities | (91.0 | ) | | (68.6 | ) |
Contributions to pension and postretirement plans | (0.7 | ) | | (0.7 | ) |
Change in cash surrender value of trust-owned life insurance | 1.8 |
| | (3.9 | ) |
Deferred income taxes | (58.8 | ) | | (33.9 | ) |
Change in deferred rent | 10.7 |
| | 13.0 |
|
Change in other assets and liabilities | (5.0 | ) | | 9.6 |
|
Loss on extinguishment of debt | 35.5 |
| | 90.5 |
|
Other, net | 4.2 |
| | 2.1 |
|
Net cash provided by operating activities of continuing operations | $ | 190.6 |
| | $ | 197.9 |
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Cash flows—investing activities | | | |
Purchases of land, buildings and equipment | (122.2 | ) | | (167.4 | ) |
Proceeds from disposal of land, buildings and equipment | 311.4 |
| | 10.7 |
|
Proceeds from sale of marketable securities | 0.8 |
| | 7.7 |
|
Increase in other assets | (10.5 | ) | | (7.4 | ) |
Net cash provided by (used in) investing activities of continuing operations | $ | 179.5 |
| | $ | (156.4 | ) |
Cash flows—financing activities | | | |
Proceeds from issuance of common stock | 62.1 |
| | 50.9 |
|
Income tax benefits credited to equity | 12.0 |
| | 4.0 |
|
Special cash distribution from Four Corners Property Trust | 315.0 |
| | — |
|
Dividends paid | (140.6 | ) | | (140.9 | ) |
Repurchases of common stock | (0.4 | ) | | (2.0 | ) |
ESOP note receivable repayment | 0.4 |
| | 0.3 |
|
Proceeds from issuance of short-term debt | — |
| | 397.4 |
|
Repayments of short-term debt | — |
| | (585.0 | ) |
Repayment of long-term debt | (270.0 | ) | | (1,059.4 | ) |
Principal payments on capital and financing leases | (1.6 | ) | | (1.2 | ) |
Payment for accelerated share repurchase program | — |
| | (500.0 | ) |
Proceeds from financing lease obligation | — |
| | 93.1 |
|
Net cash used in financing activities of continuing operations | $ | (23.1 | ) | | $ | (1,742.8 | ) |
Cash flows—discontinued operations | | | |
Net cash used in operating activities of discontinued operations | (31.6 | ) | | (223.6 | ) |
Net cash provided by investing activities of discontinued operations | 6.3 |
| | 1,984.1 |
|
Net cash (used in) provided by discontinued operations | $ | (25.3 | ) | | $ | 1,760.5 |
|
| | | |
Increase in cash and cash equivalents | 321.7 |
| | 59.2 |
|
Cash and cash equivalents - beginning of period | 535.9 |
| | 98.3 |
|
Cash and cash equivalents - end of period | $ | 857.6 |
| | $ | 157.5 |
|
| | | |
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| November 29, 2015 | | November 23, 2014 |
Cash flows from changes in current assets and liabilities | | | |
Receivables, net | 15.9 |
| | 16.2 |
|
Inventories | (6.3 | ) | | 34.9 |
|
Prepaid expenses and other current assets | (7.6 | ) | | 13.8 |
|
Accounts payable | (1.2 | ) | | (36.9 | ) |
Accrued payroll | (31.0 | ) | | (13.2 | ) |
Prepaid/accrued income taxes | (7.1 | ) | | (34.0 | ) |
Other accrued taxes | (0.7 | ) | | 8.0 |
|
Unearned revenues | (10.6 | ) | | (21.6 | ) |
Other current liabilities | (42.4 | ) | | (35.8 | ) |
Change in current assets and liabilities | $ | (91.0 | ) | | $ | (68.6 | ) |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, The Capital Grille®, Yard House®, Bahama Breeze®, Seasons 52®, and Eddie V's Prime Seafood® and Wildfish Seafood Grille® (collectively "Eddie V's"). Through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 3 restaurants located in Central Florida and 3 restaurants in California that we manage, but are jointly owned with third parties, 6 franchised LongHorn Steakhouse restaurants located in the San Antonio, Texas area, 2 franchised U.S. airport restaurants and 10 franchised restaurants in Puerto Rico. We also have area development and franchise agreements with unaffiliated operators to develop and operate our brands primarily in Asia, the Middle East and Latin America. Pursuant to these agreements, as of November 29, 2015, 29 franchised restaurants were in operation in the Middle East, Mexico, Brazil, Peru, El Salvador and Malaysia.
We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53 week fiscal year, which ends on the last Sunday in May and our fiscal year ending May 29, 2016 will contain 52 weeks of operation. Operating results for the quarter ended November 29, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending May 29, 2016.
These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2015. The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K.
We prepare our consolidated financial statements in conformity with GAAP. 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 costs and expenses during the reporting period. Actual results could differ from those estimates.
We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. Included among these, in our consolidated statements of earnings, we revised the categories of our costs and expenses as follows: marketing expenses and general and administrative expenses, previously reported as components of selling, general and administrative expenses, are now reported as separate line items. Additionally, gains and losses on disposals of assets, previously reported as a component of selling, general and administrative expenses are now reported in impairments and disposal of assets, net.
Application of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update was originally effective for annual and interim periods beginning after December 15, 2016, which would have required us to adopt these provisions in the first quarter of fiscal 2018. In July 2015, the FASB affirmed its proposal for a one-year deferral of the effective date. Early application is now permitted, but not before the original effective date. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15,
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. Other than the revised balance sheet presentation of deferred tax liabilities and assets, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Note 2.Real Estate Transactions
As a result of a comprehensive evaluation for the monetization of our real estate portfolio, we undertook strategies to pursue sale-leaseback transactions of individual restaurant properties and our corporate headquarters and to transfer 424 of our restaurant properties into a REIT, with substantially all of the REIT’s initial assets being leased back to Darden.
Sale leasebacks
During fiscal 2015, we implemented a plan to pursue sale-leaseback transactions of 64 restaurant properties, 14 of which were completed in fiscal 2015, 48 were completed in the first six months of fiscal 2016, and the remaining properties are expected to be completed in fiscal 2016. The 62 completed transactions generated net proceeds of $228.3 million resulting in deferred gains totaling $44.8 million which will be amortized over the expected leaseback periods on a straight-line basis. Additionally, during the quarter ended November 29, 2015, we completed the sale leaseback of our corporate headquarters, generating net proceeds of $131.0 million resulting in a deferred gain of $6.3 million which will be amortized over the expected leaseback period on a straight-line basis.
REIT Transaction - Separation of Four Corners
On June 23, 2015, we announced our plan to separate our business into two separate and independent publicly traded companies. We accomplished this separation on November 9, 2015 with the pro rata distribution of one share of Four Corners Property Trust, Inc. (Four Corners) common stock for every three shares of Darden common stock to holders of Darden common stock. The separation, which was completed pursuant to a separation and distribution agreement between Darden and Four Corners, includes (i) the transfer of 6 LongHorn Steakhouse restaurants located in the San Antonio, Texas area (the LongHorn San Antonio Business) and 418 restaurant properties (the Four Corners Properties) to Four Corners; (ii) the issuance to us of all of the outstanding common stock of Four Corners and corresponding pro rata distribution to our shareholders of the outstanding shares of Four Corners common stock as a tax-free stock dividend; and (iii) a cash dividend of $315.0 million received by us from Four Corners from the proceeds of Four Corners’ term loan borrowings. We requested and received a private letter ruling from the Internal Revenue Service on certain issues relevant to the qualification of the spin-off as a tax-free transaction.
Our shareholders’ equity decreased by $436.8 million as a result of the separation of Four Corners. The components of the decrease, principally comprised of the net book value of the net assets that we contributed to Four Corners in connection with the separation, included $835.6 million in net book value of fixed assets, $83.8 million consisting primarily of deferred tax liabilities, offset by the $315.0 million cash dividend received by us from Four Corners.
Agreements with Four Corners
We entered into lease agreements with Four Corners, pursuant to which we leased the Four Corners Properties on a triple net basis with terms comparable to similar leases negotiated on an arm’s length basis. Under the lease agreements our subsidiaries are the tenant while Four Corners is the landlord. The leases are triple-net leases that provide for an average initial term of approximately 15 years with stated annual rental payments and options to extend the leases for another 15 years
. Under the lease agreements the rent is subject to annual escalations of 1.5 percent, as well as, in most of the leases, a fair market value adjustment at the start of one of the renewal options.
We entered into franchise agreements with Four Corners pursuant to which we provide certain franchising services to Four Corners’ subsidiary which operates the LongHorn San Antonio Business. The franchising services consist of licensing the right to use and display certain trademarks in connection with the operation of the LongHorn San Antonio Business, marketing services, training and access to certain LongHorn operating procedures. The fees and conditions of these franchising services are on terms comparable to similar franchising services negotiated on an arm’s length basis.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Debt Retirement
During the quarter ended November 29, 2015, utilizing the proceeds of the Four Corners cash dividend in addition to cash proceeds from the sale leasebacks of restaurant properties and our corporate headquarters, we repaid $255.0 million of our variable-rate term loan. Additionally, subsequent to the end of the quarter, we completed the retirement of an additional $743.0 million aggregate principal of long-term debt consisting of:
| |
• | $500.0 million of unsecured 6.200 percent senior notes due in October 2017; |
| |
• | $121.9 million of unsecured 4.500 percent senior notes due in October 2021; |
| |
• | $111.1 million of unsecured 3.350 percent senior notes due in November 2022; and |
| |
• | $10.0 million of unsecured 4.520 percent senior notes due in August 2024 |
We plan to retire the remaining $15.0 million balance of our variable-rate term loan in fiscal 2016. As of November 29, 2015, in association with the planned debt repayments, these balances were included in current liabilities on our consolidated balance sheet as current portion of long-term debt. Additionally, in association with the planned debt repayments, during the second quarter of fiscal 2016, we recorded approximately $35.2 million of expense resulting from the accelerated amortization of previously settled interest-rate related cash flow hedges on the issuance of our senior notes due October 2021 and November 2022. This expense was recorded in interest, net in our consolidated statement of earnings for the quarter and six months ended November 29, 2015.
Note 3.Dispositions
On July 28, 2014, we closed on the sale of 705 Red Lobster restaurants. During the quarter ended November 29, 2015, we satisfied one out of the remaining three landlord consents, recognizing $9.1 million of gain on this location. The two remaining consents represent approximately $1.6 million in proceeds and are expected to be satisfied by the end of fiscal 2016. All direct cash flows related to operating these businesses were eliminated at the date of sale. Our continuing involvement has primarily been limited to a transition services agreement, pursuant to which we provide limited, specific services for up to two years from the date of sale with minimal impact to our cash flows. In total, we have recognized a pre-tax gain on the sale of Red Lobster of $854.4 million, which is included in earnings from discontinued operations in our consolidated statements of earnings.
For the quarters and six months ended November 29, 2015 and November 23, 2014, all gains on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to these restaurants, have been aggregated in a single caption entitled “Earnings (loss) from discontinued operations, net of tax expense (benefit)” in our consolidated statements of earnings for all periods presented. No amounts for shared general and administrative operating support expense or interest expense were allocated to discontinued operations. Assets associated with those restaurants not yet disposed of, that are considered held for sale, have been segregated from continuing operations and presented as assets held for sale on our accompanying consolidated balance sheets.
Earnings (loss) from discontinued operations, net of taxes in our accompanying consolidated statements of earnings are comprised of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions) | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | 400.4 |
|
Costs and expenses: | | | | | | | |
Restaurant and marketing expenses | — |
| | (0.6 | ) | | 0.3 |
| | 353.9 |
|
Depreciation and amortization | — |
| | — |
| | — |
| | 0.2 |
|
Other costs and expenses (1) | (13.3 | ) | | 4.1 |
| | (22.0 | ) | | (793.5 | ) |
Earnings before income taxes | 13.3 |
| | (3.5 | ) | | 21.7 |
| | 839.8 |
|
Income tax expense (benefit) | 0.2 |
| | (1.5 | ) | | 3.2 |
| | 319.3 |
|
Earnings (loss) from discontinued operations, net of tax | $ | 13.1 |
| | $ | (2.0 | ) | | $ | 18.5 |
| | $ | 520.5 |
|
| |
(1) | Amounts include the initial gain recognized on the sale of Red Lobster as well as gains recognized upon satisfaction of landlord consents. |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets classified as held for sale on our accompanying consolidated balance sheets as of November 29, 2015 and May 31, 2015, consisted of land, buildings and equipment with carrying amounts of $18.4 million and $32.9 million, respectively.
Note 4.Supplemental Cash Flow Information
|
| | | | | | | | |
Cash paid for interest and income taxes are as follows: | | Six Months Ended |
(in millions) | | November 29, 2015 | | November 23, 2014 |
Interest paid, net of amounts capitalized (1) | | $ | 40.8 |
| | $ | 99.9 |
|
Income taxes paid, net of refunds | | 103.9 |
| | 199.4 |
|
| |
(1) | Interest paid during fiscal 2015 includes debt retirement costs of $44.4 million. |
|
| | | | | | | | |
Non-cash investing and financing activities are as follows: | | Six Months Ended |
(in millions) | | November 29, 2015 | | November 23, 2014 |
Increase in land, buildings and equipment through accrued purchases | | $ | 11.2 |
| | $ | 29.5 |
|
Net book value of assets distributed in Four Corners separation, net of deferred tax liabilities | | 751.8 |
| | — |
|
Note 5.Income Taxes
The effective income tax rate for the quarter ended November 29, 2015 was a 23.4 percent benefit compared to an effective income tax rate benefit of 43.6 percent for the quarter ended November 23, 2014. The effective income tax rate for the six months ended November 29, 2015 was 18.4 percent compared to an effective income tax rate benefit of 49.0 percent for the six months ended November 23, 2014. Excluding the tax impact of costs related to implementation of our real estate plan, strategic action plan and other costs and debt retirement costs recognized during fiscal 2016 and 2015, our effective tax rate would have been approximately 18.5 percent and 19.0 percent for the quarters ended November 29, 2015 and November 23, 2014, respectively, and approximately 25.0 percent and 19.0 percent for the six months ended November 29, 2015 and November 23, 2014, respectively. The change in the effective income tax rate for the quarter and six months ended November 29, 2015 as compared to the quarter and six months ended November 23, 2014, excluding these impacts, is primarily attributable to the impact of FICA tax credits for employee reported tips and Work Opportunity Tax Credits on lower earnings before income taxes for the quarter and six months ended November 23, 2014.
Included in our remaining balance of unrecognized tax benefits is $0.5 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
Note 6.Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Anti-dilutive stock-based compensation awards | | 0.4 |
| | 5.6 |
| | 0.2 |
| | 6.6 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7.Stockholders' Equity
Stockholders’ Rights Plan
In connection with the announced REIT transaction, our Board approved a Rights Agreement dated June 23, 2015, to deter any person from acquiring ownership of more than 9.8 percent of our common stock during the period leading up to the REIT transaction. Under the Rights Agreement, each share of our common stock had associated with it one right to purchase one thousandth of a share of our Series A Junior Participating Cumulative Preferred Stock at a purchase price of $156.26 per share, subject to adjustment under certain circumstances to prevent dilution. On November 10, 2015, the Right expired by their terms following completion of the spin-off of Four Corners. As a result, each share of our common stock is no longer accompanied by a Right. The holders of common stock are not entitled to any payment as a result of the expiration of the Rights Agreement and the Rights issued thereunder.
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended November 29, 2015 and November 23, 2014 are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Adjustment | | Unrealized Gains (Losses) on Marketable Securities | | Unrealized Gains (Losses) on Derivatives | | Benefit Plan Funding Position | | Accumulated Other Comprehensive Income (Loss) |
Balance at August 30, 2015 | | $ | (0.9 | ) | | $ | 0.1 |
| | $ | (18.4 | ) | | $ | (66.0 | ) | | $ | (85.2 | ) |
Gain (loss) | | 0.1 |
| | — |
| | (2.1 | ) | | — |
| | (2.0 | ) |
Reclassification realized in net earnings | | — |
| | — |
| | 22.3 |
| | (0.1 | ) | | 22.2 |
|
Balance at November 29, 2015 | | $ | (0.8 | ) | | $ | 0.1 |
| | $ | 1.8 |
| | $ | (66.1 | ) | | $ | (65.0 | ) |
| | | | | | | | | | |
Balance at August 24, 2014 | | $ | (3.2 | ) | | $ | — |
| | $ | (26.5 | ) | | $ | (72.8 | ) | | $ | (102.5 | ) |
Gain (loss) | | (0.5 | ) | | 0.1 |
| | 2.7 |
| | 14.6 |
| | 16.9 |
|
Reclassification realized in net earnings | | 4.5 |
| | — |
| | 0.8 |
| | 0.5 |
| | 5.8 |
|
Balance at November 23, 2014 | | $ | 0.8 |
| | $ | 0.1 |
| | $ | (23.0 | ) | | $ | (57.7 | ) | | $ | (79.8 | ) |
The components of accumulated other comprehensive income (loss), net of tax, for the six months ended November 29, 2015 and November 23, 2014 are as follows:
|
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Foreign Currency Translation Adjustment | | Unrealized Gains (Losses) on Marketable Securities | | Unrealized Gains (Losses) on Derivatives | | Benefit Plan Funding Position | | Accumulated Other Comprehensive Income (Loss) |
Balance at May 31, 2015 | | $ | (1.7 | ) | | $ | 0.1 |
| | $ | (19.1 | ) | | $ | (65.9 | ) | | $ | (86.6 | ) |
Gain (loss) | | 0.9 |
| | — |
| | (0.1 | ) | | — |
| | 0.8 |
|
Reclassification realized in net earnings | | — |
| | — |
| | 21.0 |
| | (0.2 | ) | | 20.8 |
|
Balance at November 29, 2015 | | $ | (0.8 | ) | | $ | 0.1 |
| | $ | 1.8 |
| | $ | (66.1 | ) | | $ | (65.0 | ) |
| | | | | | | | | | |
Balance at May 25, 2014 | | $ | (4.7 | ) | | $ | 0.1 |
| | $ | (50.4 | ) | | $ | (73.1 | ) | | $ | (128.1 | ) |
Gain (loss) | | (1.8 | ) | | — |
| | 0.7 |
| | 14.6 |
| | 13.5 |
|
Reclassification realized in net earnings | | 7.3 |
| | — |
| | 26.7 |
| | 0.8 |
| | 34.8 |
|
Balance at November 23, 2014 | | $ | 0.8 |
| | $ | 0.1 |
| | $ | (23.0 | ) | | $ | (57.7 | ) | | $ | (79.8 | ) |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications related to foreign currency translation for the quarter and six months ended November 23, 2014, primarily relate to the disposition of Red Lobster and are included in earnings (loss) from discontinued operations, net of tax expense (benefit) in our consolidated statement of earnings. The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded.
|
| | | | | | | | | | | | | | | | | |
| | | Amount Reclassified from AOCI into Net Earnings |
| | | Three Months Ended | | Six Months Ended |
(in millions) AOCI Components | Location of Gain (Loss) Recognized in Earnings | | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Derivatives | | | | | | | | | |
Equity contracts | (1) | | — |
| | — |
| | 2.1 |
| | (0.9 | ) |
Interest rate contracts | (2) | | (36.1 | ) | | (1.4 | ) | | (37.4 | ) | | (41.9 | ) |
Total before tax | | | $ | (36.1 | ) | | $ | (1.4 | ) | | $ | (35.3 | ) | | $ | (42.8 | ) |
Tax benefit | | | 13.8 |
| | 0.6 |
| | 14.3 |
| | 16.1 |
|
Net of tax | | | $ | (22.3 | ) | | $ | (0.8 | ) | | $ | (21.0 | ) | | $ | (26.7 | ) |
| | | | | | | | | |
Benefit plan funding position | | | | | | | | | |
Recognized net actuarial loss - pension/postretirement plans | (3) | | $ | (0.8 | ) | | $ | (0.7 | ) | | $ | (1.4 | ) | | $ | (1.3 | ) |
Recognized net actuarial gain (loss) - other plans | (4) | | 0.9 |
| | (0.1 | ) | | 1.7 |
| | (0.3 | ) |
Total before tax | | | $ | 0.1 |
| | $ | (0.8 | ) | | $ | 0.3 |
| | $ | (1.6 | ) |
Tax benefit (expense) | | | — |
| | 0.3 |
| | (0.1 | ) | | 0.8 |
|
Net of tax | | | $ | 0.1 |
| | $ | (0.5 | ) | | $ | 0.2 |
| | $ | (0.8 | ) |
| |
(1) | Primarily included in restaurant labor costs and general and administrative expenses. See Note 9 for additional details. |
| |
(2) | Included in interest, net, on our consolidated statements of earnings. Reclassifications for the quarter and six months ended November 29, 2015, and for the six months ended November 23, 2014, primarily related to the acceleration of hedge loss amortization resulting from the pay down of long-term debt. |
| |
(3) | Included in the computation of net periodic benefit costs - pension and postretirement plans, which is a component of restaurant labor expenses and general and administrative expenses. See Note 8 for additional details. |
| |
(4) | Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses. |
Note 8.Retirement Plans
Components of net periodic benefit cost are as follows:
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Service cost | | $ | — |
| | $ | 0.3 |
| | $ | — |
| | $ | 0.5 |
|
Interest cost | | 2.6 |
| | 2.9 |
| | 5.3 |
| | 5.0 |
|
Expected return on plan assets | | (3.6 | ) | | (4.5 | ) | | (7.2 | ) | | (7.6 | ) |
Recognized net actuarial loss | | 0.8 |
| | 0.8 |
| | 1.4 |
| | 1.3 |
|
Net periodic benefit (credit) cost | | $ | (0.2 | ) | | $ | (0.5 | ) | | $ | (0.5 | ) | | $ | (0.8 | ) |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Postretirement Benefit Plan |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
Service cost | | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.3 |
|
Interest cost | | 0.2 |
| | 0.4 |
| | 0.4 |
| | 0.8 |
|
Amortization of unrecognized prior service credit | | (1.2 | ) | | — |
| | (2.4 | ) | | — |
|
Recognized net actuarial loss | | 0.3 |
| | 0.2 |
| | 0.6 |
| | 0.3 |
|
Net periodic benefit (credit) cost | | $ | (0.6 | ) | | $ | 0.7 |
| | $ | (1.3 | ) | | $ | 1.4 |
|
Note 9.Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. To the extent our cash-flow hedging instruments are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of the FASB ASC, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs. To the extent our fair-value hedging instruments are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by Topic 815 of the FASB ASC, gains and losses in the derivatives’ fair value are included in current earnings, as are the gains and losses of the related hedged item. To the extent the cash flow hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur.
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at November 29, 2015, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
As of November 29, 2015, we were party to interest-rate swap agreements with $200.0 million of notional value to limit the risk of changes in fair value of $100.0 million of the $121.9 million 4.500 percent senior notes due October 2021 and $100.0 million of the $500.0 million 6.200 percent senior notes due October 2017. The swap agreements effectively swap the fixed-rate obligations for floating-rate obligations, thereby mitigating changes in fair value of the related debt prior to maturity. The swap agreements were designated as fair value hedges of the related debt and met the requirements to be accounted for under the short-cut method, resulting in no ineffectiveness in the hedging relationship. During the quarters ended November 29, 2015 and November 23, 2014, $1.2 million and $1.3 million was recorded as a reduction to interest expense related to net swap settlements, respectively. During the six months ended November 29, 2015 and November 23, 2014, $1.7 million and $1.8 million was recorded as a reduction to interest expense related to the net swap settlements, respectively. Subsequent to the quarter ended November 29, 2015, in connection with the repayment of the 2017 and 2021 notes, we settled these swap agreements for a gain of $4.1 million.
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized Darden stock units. 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 contracts were initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of November 29, 2015, we were party to equity forward contracts that were indexed to 0.9 million shares of our common stock, at varying forward rates between $40.69 per share and $60.60 per share, extending through September 2020. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will 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. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.
We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, cash-settled performance stock units and employee-directed investments in Darden stock within the non-qualified deferred compensation plan. The equity forward contracts are indexed to 0.2 million shares of our common stock at forward rates between $41.03 and $44.73 per share, can only be net settled in cash and expire between fiscal 2016 and 2019. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of the performance stock units and Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings.
Under the provisions of the equity forward agreements, the equity notional amount, initial price and number of shares in our contracts were adjusted to take into effect the dilutive impact of the spin-off of Four Corners.
The notional and fair values of our derivative contracts are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Notional Values | | Balance Sheet Location | | Fair Values |
| | | | | | | Derivative Assets | | Derivative Liabilities |
| November 29, 2015 | | May 31, 2015 | | | | November 29, 2015 | | May 31, 2015 | | November 29, 2015 | | May 31, 2015 |
Derivative contracts designated as hedging instruments | | | | | | | | | | |
Equity forwards | $ | 19.4 |
| | $ | 11.4 |
| | (1) | | $ | — |
| | $ | 0.4 |
| | $ | (1.6 | ) | | $ | — |
|
Interest rate related | 200.0 |
| | 200.0 |
| | (1) | | 3.8 |
| | 3.6 |
| | — |
| | — |
|
| | | | | | | $ | 3.8 |
| | $ | 4.0 |
| | $ | (1.6 | ) | | $ | — |
|
Derivative contracts not designated as hedging instruments | | | | | | | | | | |
Equity forwards | $ | 28.0 |
| | $ | 51.7 |
| | (1) | | $ | 0.5 |
| | $ | 1.3 |
| | $ | (1.8 | ) | | $ | — |
|
| | | | | | | $ | 0.5 |
| | $ | 1.3 |
| | $ | (1.8 | ) | | $ | — |
|
Total derivative contracts | | $ | 4.3 |
| | $ | 5.3 |
| | $ | (3.4 | ) | | $ | — |
|
| |
(1) | Derivative assets and liabilities are included in receivables, net, prepaid expenses and other current assets and other current liabilities, as applicable, on our consolidated balance sheets. |
The effects of derivative instruments in cash flow hedging relationships in the consolidated statements of earnings are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Amount of Gain (Loss) Recognized in AOCI (effective portion) | | Location of Gain (Loss) Reclassified from AOCI to Earnings | | Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion) | | Location of Gain (Loss) Recognized in Earnings (ineffective portion) | | (1) Amount of Gain (Loss) Recognized in Earnings (ineffective portion) |
| | Three Months Ended | | | | Three Months Ended | | | | Three Months Ended |
Type of Derivative | | November 29, 2015 | | November 23, 2014 | | | | November 29, 2015 | | November 23, 2014 | | | | November 29, 2015 | | November 23, 2014 |
Equity | | $ | (2.1 | ) | | $ | 2.7 |
| | (2) | | $ | — |
| | $ | — |
| | (2) | | $ | 0.4 |
| | $ | 0.3 |
|
Interest rate | | — |
| | — |
| | Interest, net | | (36.1 | ) | | (1.4 | ) | | Interest, net | | — |
| | — |
|
| | $ | (2.1 | ) | | $ | 2.7 |
| | | | $ | (36.1 | ) | | $ | (1.4 | ) | | | | $ | 0.4 |
| | $ | 0.3 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Amount of Gain (Loss) Recognized in AOCI (effective portion) | | Location of Gain (Loss) Reclassified from AOCI to Earnings | | Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion) | | Location of Gain (Loss) Recognized in Earnings (ineffective portion) | | (1) Amount of Gain (Loss) Recognized in Earnings (ineffective portion) |
| | Six Months Ended | | | | Six Months Ended | | | | Six Months Ended |
Type of Derivative | | November 29, 2015 | | November 23, 2014 | | | | November 29, 2015 | | November 23, 2014 | | | | November 29, 2015 | | November 23, 2014 |
Equity | | $ | (0.1 | ) | | $ | 0.7 |
| | (2) | | $ | 2.1 |
| | $ | (0.9 | ) | | (2) | | $ | 0.5 |
| | $ | 0.6 |
|
Interest rate | | — |
| | — |
| | Interest, net | | (37.4 | ) | | (41.9 | ) | | Interest, net | | — |
| | — |
|
| | $ | (0.1 | ) | | $ | 0.7 |
| | | | $ | (35.3 | ) | | $ | (42.8 | ) | | | | $ | 0.5 |
| | $ | 0.6 |
|
| |
(1) | Generally, all of our derivative instruments designated as cash flow hedges have some level of ineffectiveness, which is recognized currently in earnings. However, as these amounts are generally nominal and our consolidated financial statements are presented “in millions,” these amounts may appear as zero in this tabular presentation. |
| |
(2) | Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses. |
The effects of derivative instruments in fair value hedging relationships in the consolidated statements of earnings are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Amount of Gain (Loss) Recognized in Earnings on Derivatives | | Location of Gain (Loss) Recognized in Earnings on Derivatives | | Hedged Item in Fair Value Hedge Relationship | | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | | Location of Gain (Loss) Recognized in Earnings on Related Hedged Item |
| | Three Months Ended | | | | | | Three Months Ended | | |
| | November 29, 2015 | | November 23, 2014 | | | | | | November 29, 2015 | | November 23, 2014 | | |
Interest rate | | $ | 0.4 |
| | $ | (0.2 | ) | | Interest, net | | Debt | | $ | (0.4 | ) | | $ | 0.2 |
| | Interest, net |
|
| | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Amount of Gain (Loss) Recognized in Earnings on Derivatives | | Location of Gain (Loss) Recognized in Earnings on Derivatives | | Hedged Item in Fair Value Hedge Relationship | | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | | Location of Gain (Loss) Recognized in Earnings on Related Hedged Item |
| | Six Months Ended | | | | | | Six Months Ended | | |
| | November 29, 2015 | | November 23, 2014 | | | | | | November 29, 2015 | | November 23, 2014 | | |
Interest rate | | $ | 0.3 |
| | $ | 0.5 |
| | Interest, net | | Debt | | $ | (0.3 | ) | | $ | (0.5 | ) | | Interest, net |
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
|
| | | | | | | | | | | | | | | | | | |
(in millions) | | Location of Gain (Loss) Recognized in Earnings on Derivatives | | Amount of Gain (Loss) Recognized in Earnings |
| | | Three Months Ended | | Six Months Ended |
| | | November 29, 2015 | | November 23, 2014 | | November 29, 2015 | | November 23, 2014 |
| | | | | |
Equity forwards | | Restaurant labor expenses | | $ | (0.7 | ) | | $ | 1.8 |
| | 1.0 |
| | 1.2 |
|
Equity forwards | | General and administrative expenses | | (1.6 | ) | | 4.6 |
| | 2.2 |
| | 2.8 |
|
| | | | $ | (2.3 | ) | | $ | 6.4 |
| | $ | 3.2 |
| | $ | 4.0 |
|
Based on the fair value of our derivative instruments designated as cash flow hedges as of November 29, 2015, we expect to reclassify $0.6 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
earnings during the next 12 months based on the maturity of our equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.
Note 10. Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of November 29, 2015 and May 31, 2015:
|
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at November 29, 2015 |
(in millions) | | | Fair value of assets (liabilities) | | Quoted prices in active market for identical assets (liabilities) (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Fixed-income securities: | | | | | | | | | |
Corporate bonds | (1) | | $ | 2.0 |
| | $ | — |
| | $ | 2.0 |
| | $ | — |
|
U.S. Treasury securities | (2) | | 5.0 |
| | 5.0 |
| | — |
| | — |
|
Mortgage-backed securities | (1) | | 1.0 |
| | — |
| | 1.0 |
| | — |
|
Derivatives: | | | | | | | | | |
Equity forwards | (3) | | (2.9 | ) | | — |
| | (2.9 | ) | | — |
|
Interest rate swaps | (4) | | 3.8 |
| | — |
| | 3.8 |
| | — |
|
Total | | | $ | 8.9 |
| | $ | 5.0 |
| | $ | 3.9 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at May 31, 2015 |
(in millions) | | | Fair value of assets (liabilities) | | Quoted prices in active market for identical assets (liabilities) (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Fixed-income securities: | | | | | | | | | |
Corporate bonds | (1) | | $ | 2.2 |
| | $ | — |
| | $ | 2.2 |
| | $ | — |
|
U.S. Treasury securities | (2) | | 5.0 |
| | 5.0 |
| | — |
| | — |
|
Mortgage-backed securities | (1) | | 1.6 |
| | — |
| | 1.6 |
| | — |
|
Derivatives: | | |
| |
| |
| |
|
Equity forwards | (3) | | 1.7 |
| | — |
| | 1.7 |
| | — |
|
Interest rate swaps | (4) | | 3.6 |
| | — |
| | 3.6 |
| | — |
|
Total | | | $ | 14.1 |
| | $ | 5.0 |
| | $ | 9.1 |
| | $ | — |
|
| |
(1) | The fair value of these securities is based on closing market prices of the investments when applicable, or, alternatively, valuations utilizing market data and other observable inputs, inclusive of the risk of nonperformance. |
| |
(2) | The fair value of our U.S. Treasury securities is based on closing market prices. |
| |
(3) | The fair value of our equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance. |
| |
(4) | The fair value of our interest rate lock and swap agreements is based on current and expected market interest rates, inclusive of the risk of nonperformance. |
The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of November 29, 2015, was $1.20 billion and $1.31 billion, respectively. The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of May 31, 2015, was $1.47 billion and $1.57 billion, respectively. The fair value of long-term debt, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value of non-financial assets measured at fair value on a non-recurring basis, which is classified as Level 3 in the fair value hierarchy, is determined based on appraisals or sales prices of comparable assets and estimates of future cash flows. As of November 29, 2015, non-financial assets measured at fair value on a non-recurring basis with a carrying value of $7.3 million, primarily related to three underperforming restaurants, were determined to have no fair value resulting in an impairment charge of $7.3 million. As of May 31, 2015, non-financial assets measured at fair value on a non-recurring basis with a carrying value of $70.5 million, primarily related to restaurant assets involved in sale-leaseback arrangements, were written down to their fair value of $55.4 million resulting in an impairment charge of $15.1 million.
Note 11. Commitments and Contingencies
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of November 29, 2015 and May 31, 2015, we had $119.2 million and $124.2 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of November 29, 2015 and May 31, 2015, we had $13.4 million and $14.0 million, 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 November 29, 2015 and May 31, 2015, we had $145.5 million and $147.7 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of the maximum potential future payments discounted at our weighted-average cost of capital as of November 29, 2015 and May 31, 2015, amounted to $112.6 million and $113.4 million, respectively. We did not record a liability for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was deemed to be remote. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue 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 that the assignment allows us to repossess the building and personal property. Assuming exercise of all option periods, these guarantees expire over their respective lease terms, which range from fiscal 2016 through fiscal 2044.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V's in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: 1) Olive Garden, 2) LongHorn Steakhouse, 3) Fine Dining and 4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V's restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Yard House, Seasons 52 and Bahama Breeze restaurants in the U.S. This segment also includes results from our franchises and consumer-packaged goods sales.
External sales are derived principally from food and beverage sales, we do not rely on any major customers as a source of sales and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively "restaurant and marketing expenses"). The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the three months ended November 29, 2015 | |
Sales | | $ | 892.3 |
| | $ | 365.1 |
| | $ | 123.3 |
| | $ | 228.1 |
| | $ | — |
| | $ | 1,608.8 |
|
Restaurant and marketing expenses | | 735.2 |
| | 310.3 |
| | 100.9 |
| | 195.8 |
| | — |
| | 1,342.2 |
|
Segment profit | | $ | 157.1 |
| | $ | 54.8 |
| | $ | 22.4 |
| | $ | 32.3 |
| | $ | — |
| | $ | 266.6 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 33.4 |
| | $ | 17.4 |
| | $ | 6.7 |
| | $ | 12.5 |
| | $ | 5.3 |
| | $ | 75.3 |
|
Impairments and disposal of assets, net | | 1.2 |
| | — |
| | — |
| | 6.5 |
| | — |
| | 7.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the three months ended November 23, 2014 | |
Sales | | $ | 881.7 |
| | $ | 345.9 |
| | $ | 120.4 |
| | $ | 211.0 |
| | $ | — |
| | $ | 1,559.0 |
|
Restaurant and marketing expenses | | 741.2 |
| | 303.1 |
| | 99.3 |
| | 188.0 |
| | — |
| | 1,331.6 |
|
Segment profit | | $ | 140.5 |
| | $ | 42.8 |
| | $ | 21.1 |
| | $ | 23.0 |
| | $ | — |
| | $ | 227.4 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 37.7 |
| | $ | 17.6 |
| | $ | 6.5 |
| | $ | 11.7 |
| | $ | 6.6 |
| | $ | 80.1 |
|
Impairments and disposal of assets, net | | 15.2 |
| | — |
| | — |
| | 15.5 |
| | 8.6 |
| | 39.3 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the six months ended November 29, 2015 | |
Sales | | $ | 1,836.9 |
| | $ | 748.9 |
| | $ | 236.5 |
| | $ | 473.5 |
| | $ | — |
| | $ | 3,295.8 |
|
Restaurant and marketing expenses | | 1,487.8 |
| | 637.0 |
| | 196.3 |
| | 397.4 |
| | — |
| | 2,718.5 |
|
Segment profit | | $ | 349.1 |
| |
|