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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 25, 2002
[ ] 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 October 1, 2002:
170,895,538 (excluding 88,607,665 shares held in our treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes in 5
Stockholders' Equity
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
Item 4. Controls and Procedures 14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Index to Exhibits 18
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except per Share Data)
(Unaudited)
Quarter Ended
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August 25, 2002 August 26, 2001
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Sales........................................................ $1,174,565 $1,073,410
Costs and Expenses:
Cost of sales:
Food and beverage....................................... 365,236 343,592
Restaurant labor........................................ 369,362 333,446
Restaurant expenses..................................... 168,577 151,250
---------- ----------
Total Cost of Sales................................... $ 903,175 $ 828,288
Selling, general, and administrative...................... 106,991 101,761
Depreciation and amortization............................. 45,141 39,510
Interest, net............................................. 10,253 8,274
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Total Costs and Expenses............................ $1,065,560 $ 977,833
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Earnings before Income Taxes................................. 109,005 95,577
Income Taxes................................................. (37,119) (33,421)
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Net Earnings................................................. $ 71,886 $ 62,156
========== ==========
Net Earnings per Share:
Basic..................................................... $ 0.42 $ 0.35
========== ==========
Diluted................................................... $ 0.40 $ 0.34
========== ==========
Average Number of Common Shares Outstanding:
Basic..................................................... 171,600 176,100
========== ==========
Diluted................................................... 180,000 183,800
========== ==========
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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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August 25, 2002 May 26, 2002
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ASSETS
Current Assets:
Cash and cash equivalents................................. $ 137,076 $ 152,875
Short-term investments.................................... 9,994 9,904
Receivables............................................... 27,353 29,089
Inventories............................................... 180,590 172,413
Net assets held for disposal.............................. 10,688 10,047
Prepaid expenses and other current assets................. 16,574 23,076
Deferred income taxes..................................... 53,918 52,127
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Total Current Assets.................................. $ 436,193 $ 449,531
Land, Buildings, and Equipment............................... 1,984,980 1,920,768
Other Assets................................................. 164,593 159,437
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Total Assets.......................................... $2,585,766 $2,529,736
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 181,181 $ 160,064
Accrued payroll........................................... 73,864 87,936
Accrued income taxes...................................... 85,195 68,504
Other accrued taxes....................................... 33,950 30,474
Other current liabilities................................. 242,553 254,036
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Total Current Liabilities............................. $ 616,743 $ 601,014
Long-term Debt............................................... 661,103 662,506
Deferred Income Taxes........................................ 121,335 117,709
Other Liabilities............................................ 19,214 19,630
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Total Liabilities..................................... $1,418,395 $1,400,859
---------- ----------
Stockholders' Equity:
Common stock and surplus.................................. $1,488,987 $1,474,054
Retained earnings......................................... 832,570 760,684
Treasury stock............................................ (1,089,928) (1,044,915)
Accumulated other comprehensive income.................... (13,477) (12,841)
Unearned compensation..................................... (49,052) (46,108)
Officer notes receivable.................................. (1,729) (1,997)
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Total Stockholders' Equity............................ $1,167,371 $1,128,877
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Total Liabilities and Stockholders' Equity............ $2,585,766 $2,529,736
========== ==========
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Quarters Ended August 25, 2002 and August 26, 2001
(In Thousands)
(Unaudited)
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Common Accumulated
Stock Other Officer Total
And Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income Compensation Receivable Equity
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Balance at May 26, 2002................... $1,474,054 $760,684 $(1,044,915) $(12,841) $(46,108) $(1,997) $1,128,877
Comprehensive income:
Net earnings........................... -- 71,886 -- -- -- -- 71,886
Other comprehensive income:
Foreign currency adjustment........ -- -- -- (408) -- -- (408)
Change in fair value of
derivatives, net of tax of $39..... -- -- -- (228) -- -- (228)
-----------
Total comprehensive income........ -- -- -- -- -- -- 71,250
Stock option exercises (598 shares)....... 5,421 -- 82 -- -- -- 5,503
Issuance of restricted stock (197 shares),
net of forfeiture adjustments.......... 4,694 -- 670 -- (5,364) -- --
Earned compensation....................... -- -- -- -- 945 -- 945
ESOP note receivable repayments........... -- -- -- -- 1,475 -- 1,475
Income tax benefits credited to equity.... 4,046 -- -- -- -- -- 4,046
Purchases of common stock for treasury
(2,043 shares)......................... -- -- (46,070) -- -- -- (46,070)
Issuance of treasury stock under Employee
Stock Purchase and other plans
(80 shares)............................ 772 -- 305 -- -- -- 1,077
Repayment of officer notes, net........... -- -- -- -- -- 268 268
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Balance at August 25, 2002 $1,488,987 $832,570 $(1,089,928) $(13,477) $(49,052) $(1,729) $1,167,371
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Common Accumulated
Stock Other Officer Total
And Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income Compensation Receivable Equity
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Balance at May 27, 2001.................. $1,405,799 $532,121 $(840,254) $(13,102) $(49,322) $(1,924) $1,033,318
Comprehensive income:
Net earnings.......................... -- 62,156 -- -- -- -- 62,156
Other comprehensive income:
Foreign currency adjustment........ -- -- -- 102 -- -- 102
Change in fair value of derivatives,
net of tax of $3................. -- -- -- (22) -- -- (22)
----------
Total comprehensive income..... -- -- -- -- -- -- 62,236
Stock option exercises (1,443 shares).... 11,262 -- -- -- -- -- 11,262
Issuance of restricted stock (282 shares),
net of forfeiture adjustments......... 4,144 -- 658 -- (4,742) -- 60
Earned compensation...................... -- -- -- -- 1,067 -- 1,067
ESOP note receivable repayments.......... -- -- -- -- 2,025 -- 2,025
Income tax benefits credited to equity... 7,231 -- -- -- -- -- 7,231
Purchases of common stock for
treasury (2,722 shares)............... -- -- (51,196) -- -- -- (51,196)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (67 shares)..................... 510 -- 396 -- -- -- 906
Issuance of officer notes, net........... -- -- -- -- -- (5) (5)
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Balance at August 26, 2001 $1,428,946 $594,277 $(890,396) $(13,022) $(50,972) $(1,929) $1,066,904
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See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Quarter Ended
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August 25, 2002 August 26, 2001
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Cash Flows--Operating Activities
Net earnings.................................................... $ 71,886 $ 62,156
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization................................. 45,141 39,510
Amortization of unearned compensation and loan costs.......... 1,775 1,894
Change in current assets and liabilities...................... 15,988 9,904
Decrease in other liabilities................................. (416) (271)
Loss on disposal of land, buildings, and equipment............ 937 1,233
Decrease in cash surrender value of trust-owned life insurance 2,832 --
Deferred income taxes......................................... 1,835 1,113
Income tax benefits credited to equity........................ 4,046 7,231
Other, net.................................................... (294) 193
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Net Cash Provided by Operating Activities................... $ 143,730 $ 122,963
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Cash Flows--Investing Activities
Purchases of land, buildings, and equipment..................... (110,245) (60,186)
Increase in other assets........................................ (4,244) (6,591)
Purchase of trust owned life insurance......................... (6,000) (31,500)
Proceeds from disposal of land, buildings, and equipment
(including net assets held for disposal)...................... 450 369
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Net Cash Used by Investing Activities....................... $(120,039) $ (97,908)
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Cash Flows--Financing Activities
Proceeds from issuance of common stock.......................... 6,580 12,168
Purchases of treasury stock..................................... (46,070) (51,196)
ESOP note receivable repayment.................................. 1,475 2,025
Decrease in short-term debt..................................... -- (12,000)
Repayment of long-term debt..................................... (1,475) (2,032)
Payment of loan costs........................................... -- (54)
--------- ---------
Net Cash Used by Financing Activities....................... $ (39,490) $ (51,089)
--------- ---------
Decrease in Cash and Cash Equivalents.............................. (15,799) (26,034)
Cash and Cash Equivalents - Beginning of Period.................... 152,875 61,814
--------- ---------
Cash and Cash Equivalents - End of Period.......................... $ 137,076 $ 35,780
========= =========
Cash Flow from Changes in Current Assets and Liabilities
Receivables..................................................... 1,736 8,795
Inventories..................................................... (8,177) (23,243)
Prepaid expenses and other current assets....................... 29 459
Accounts payable................................................ 21,117 14,167
Accrued payroll................................................. (14,072) (18,070)
Accrued income taxes............................................ 16,691 23,421
Other accrued taxes............................................. 3,476 2,623
Other current liabilities....................................... (4,812) 1,752
--------- ---------
Change in Current Assets and Liabilities.................... $ 15,988 $ 9,904
========= =========
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See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar Amounts in Thousands, Except per Share Data)
Note 1. Background
Darden Restaurants, Inc. owns and operates casual dining restaurants under
the trade names Red Lobster(R), Olive Garden(R), Bahama Breeze(R) and Smokey
Bones(R) BBQ Sports Bar. These consolidated financial statements have been
prepared by us pursuant to the rules and regulations of the Securities and
Exchange Commission. They 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 quarter ended August 25, 2002, are
not necessarily indicative of the results that may be expected for the fiscal
year ending May 25, 2003.
These statements should be read in conjunction with the consolidated
financial statements and footnotes included in our Annual Report on Form 10-K
for the fiscal year ended May 26, 2002. The accounting policies used in
preparing these consolidated financial statements are the same as those
described in our Form 10-K. Certain reclassifications have been made to prior
period amounts to conform with current period presentation.
Note 2. Consolidated Statements of Cash Flows
During the quarter ended August 25, 2002, we paid $6,598 for interest (net
of amounts capitalized) and $14,599 for income taxes. During the quarter ended
August 26, 2001, we paid $7,496 for interest (net of amounts capitalized) and
$1,620 for income taxes.
Note 3. Net Earnings Per Share
Outstanding stock options granted by us represent the only dilutive effect
reflected in diluted weighted average shares outstanding. Options do not impact
the numerator of the diluted earnings per share computation.
Options to purchase 3,078,779 and 103,233 shares of common stock were
excluded from the calculation of diluted earnings per share for the quarters
ended August 25, 2002 and August 26, 2001, respectively, because their exercise
prices exceeded the average market price of common shares for the period.
Note 4. Stockholders' Equity
Pursuant to our stock repurchase program, under which our Board of
Directors has authorized the repurchase of up to 115,400,000 shares in
accordance with applicable securities regulations, we repurchased 2,045,248
shares of our common stock for $46,070 in the quarter ended August 25, 2002,
resulting in a cumulative repurchase as of August 25, 2002 of a total of
89,791,586 shares. Our stock repurchase program is used to offset the dilutive
effect of stock option exercises and to increase shareholder value. The
repurchased common stock is reflected as a reduction of stockholders' equity.
Note 5. Accounting Change
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and resolves significant implementation issues that
had evolved since the issuance of SFAS No. 121. SFAS No. 144 also establishes a
single accounting model for long-lived assets to be disposed of by sale. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001, and its provisions are generally to be applied
prospectively. We adopted SFAS No. 144 in the first quarter of fiscal 2003.
Adoption of SFAS No. 144 did not materially impact our consolidated financial
statements.
7
Note 6. Future Application of Accounting Standards
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides guidance on
the recognition and measurement of liabilities for costs associated with exit or
disposal activities. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We will adopt SFAS No. 146 in the
third quarter of fiscal 2003 and are currently reviewing its provisions to
determine the impact upon adoption.
Note 7. Subsequent Events
On September 18, 2002, our Board of Directors declared a four cents per
share cash dividend on our outstanding common stock to be paid on November 1,
2002 to all stockholders of record as of the close of business on October 10,
2002. On September 18, 2002, the Board of Directors also approved an additional
stock repurchase authorization of 18,500,000 shares, bringing the total number
of shares authorized for repurchase under the program to 115,400,000.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth selected operating data as a percentage of
sales for the periods indicated. All information is derived from the
consolidated statements of earnings for the quarters ended August 25, 2002 and
August 26, 2001.
Quarter Ended
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August 25, 2002 August 26, 2001
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Sales........................................................ 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverage....................................... 31.1 32.0
Restaurant labor........................................ 31.4 31.1
Restaurant expenses..................................... 14.4 14.1
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Total Cost of Sales................................... 76.9% 77.2%
Selling, general, and administrative...................... 9.1 9.6
Depreciation and amortization............................. 3.8 3.6
Interest, net............................................. 0.9 0.8
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Total Costs and Expenses.............................. 90.7% 91.2%
Earnings before Income Taxes................................. 9.3 8.8
Income Taxes................................................. (3.2) (3.1)
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Net Earnings................................................. 6.1% 5.7%
======= =======
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SALES
Sales were $1.17 billion and $1.07 billion for the quarters ended August
25, 2002 and August 26, 2001, respectively.
The 9.4 percent increase in sales for the first quarter of fiscal 2003 was
primarily due to increased annual same-restaurant sales in the U.S. and a net
increase of 43 company-owned restaurants since the first quarter of fiscal 2002.
Red Lobster sales of $618.4 million were 7.9 percent above last year's first
quarter. U.S. same-restaurant sales for Red Lobster increased 6.6 percent,
primarily as a result of a 3.8 percent increase in average check and a 2.8
percent increase in guest counts. Olive Garden sales of $498.7 million were 8.4
percent above last year's first quarter. U.S. same-restaurant sales for Olive
Garden increased 4.8 percent, primarily as a result of a 4.3 percent increase in
average check and a 0.5 percent increase in guest counts. Red Lobster and Olive
Garden have enjoyed 19 and 32 consecutive quarters of U.S. same-restaurant sales
increases, respectively. Bahama Breeze opened one new restaurant during the
first quarter of fiscal 2003. Average sales per restaurant remained high,
annualizing at over $5.0 million over the twelve months ending August 25, 2002.
At least five more openings are scheduled for fiscal 2003. Smokey Bones opened
two restaurants during the first quarter of fiscal 2003. Twenty to 25
restaurants are expected to open in fiscal year 2003, which would more than
double the total number of Smokey Bones open at the end of fiscal 2002.
COSTS AND EXPENSES
Total costs and expenses were $1.07 billion and $977.8 million for the
quarters ended August 25, 2002 and August 26, 2001, respectively. As a percent
of sales, total costs and expenses decreased from 91.2 percent in the first
quarter of fiscal 2002 to 90.7 percent in the first quarter of fiscal 2003. The
following analysis of the components of total costs and expenses is presented as
a percent of sales.
Food and beverage costs decreased in the first quarter of fiscal 2003
primarily as a result of lower product costs and pricing changes. Restaurant
labor increased in the first quarter of fiscal 2003 primarily as a result of a
modest increase in wage rates, higher bonus and benefit costs, and higher
promotional staffing levels, which were only partially offset by the impact of
higher sales volumes. Restaurant expenses, which include lease, property tax,
credit card, utility, workers' compensation, new restaurant pre-opening, and
other operating expenses, increased in
9
the first quarter of fiscal 2003 primarily as a result of increased workers'
compensation expense, which was only partially offset by lower utility expenses
and the impact of higher sales volumes.
Selling, general, and administrative expenses decreased in the first
quarter of fiscal 2003 primarily as a result of decreased marketing expenses and
the favorable impact of higher sales volumes.
Depreciation and amortization expense increased in the first quarter of
fiscal 2003 primarily as a result of new restaurant and remodel activity,
partially offset by the favorable impact of higher sales volumes.
Net interest expense increased in the first quarter of fiscal 2003
primarily due to increased interest expense associated with higher debt levels
in fiscal 2003, which was only partially offset by the impact of higher sales
volumes.
INCOME TAXES
The effective income tax rate for the first quarter of fiscal 2003 was 34.1
percent, compared to 35.0 percent in the first quarter of fiscal 2002. The
decrease in fiscal 2003 was primarily a result of ongoing tax liability
adjustments that were made as a result of information that became available in
the first quarter of fiscal 2003. These adjustments, which relate to beginning
of the year tax liabilities, were only partially offset by increased tax expense
associated with higher first quarter fiscal 2003 pre-tax earnings.
NET EARNINGS AND NET EARNINGS PER SHARE
Net earnings for the first quarter of fiscal 2003 increased 15.7 percent to
$71.9 million (40 cents per diluted share) compared with net earnings for the
first quarter of fiscal 2002 of $62.2 million (34 cents per diluted share). The
increase in both net earnings and diluted net earnings per share was primarily
due to increases in sales at both Red Lobster and Olive Garden and decreases in
food and beverage costs and selling, general, and administrative expenses as a
percent of sales.
SEASONALITY
Our sales volumes fluctuate seasonally. In fiscal 2002 and 2001, our sales
were highest in the spring, lowest in the fall, and comparable during winter and
summer. Holidays, severe weather, storms, and similar conditions may affect
sales volumes seasonally in some operating regions. Because of the seasonality
of our business, results for any quarter are not necessarily indicative of the
results that may be achieved for the full fiscal year.
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the first quarter of fiscal 2003, compared with the number open at the end of
fiscal 2002 and the end of the first quarter of fiscal 2002.
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August 25, 2002 May 26, 2002 August 26, 2001
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Red Lobster - USA.................. 638 636 628
Red Lobster - Canada............... 31 31 32
------ ------ ------
Total......................... 669 667 660
Olive Garden - USA................. 490 490 475
Olive Garden - Canada.............. 6 6 5
------ ------ ------
Total......................... 496 496 480
Bahama Breeze...................... 30 29 23
Smokey Bones BBQ................... 21 19 10
------ ------ ------
Total......................... 1,216 1,211 1,173
====== ====== ======
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10
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide us with a
significant source of liquidity. Since substantially all of our sales are for
cash and cash equivalents, and accounts payable are generally due in five to 30
days, we are able to carry current liabilities in excess of current assets. In
addition to cash flows from operations, we use a combination of long-term and
short-term borrowings to fund our liquidity needs.
Our commercial paper program serves as our primary source of short-term
financing. As of August 25, 2002, there were no borrowings outstanding under the
program. To support our commercial paper program, we have a credit facility
under a Credit Agreement dated October 29, 1999, as amended, with a consortium
of banks, including Wachovia Bank, N.A., as administrative agent, under which we
can borrow up to $300 million. The credit facility expires on October 29, 2004,
and contains various restrictive covenants, including a leverage test that
requires us to maintain a ratio of consolidated total debt to consolidated total
capitalization of less than 0.55 to 1.00. The credit facility does not, however,
contain a prohibition on borrowing in the event of a ratings downgrade. None of
these covenants is expected to limit our liquidity or capital resources. As of
August 25, 2002, no amounts were outstanding under the credit facility.
At August 25, 2002, our long-term debt consisted principally of: (1) $150
million of unsecured 8.375 percent senior notes due in September 2005, (2) $150
million of unsecured 6.375 percent notes due in February 2006, (3) $75 million
of unsecured 7.45 percent medium-term notes due in April 2011, (4) $100 million
of unsecured 7.125 percent debentures due in February 2016, (5) $150 million of
unsecured 5.75 percent medium-term notes due in March 2007, and (6) an
unsecured, variable rate, $37.7 million commercial bank loan due in December
2018 that is used to support two loans from us to the Employee Stock Ownership
Plan portion of the Darden Savings Plan. Through a shelf registration on file
with the Securities and Exchange Commission, we have the ability to issue an
additional $125 million of unsecured debt securities from time to time. The debt
securities may bear interest at either fixed or floating rates, and may have
maturity dates of nine months or more after issuance.
A summary of our contractual obligations and commercial commitments as of
August 25, 2002 is as follows (in thousands):
- -------------------------- -------------------------------------------------------------------------------------------
Payments Due by Period
- -------------------------- -------------------------------------------------------------------------------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Contractual Less than 2-3 4-5 After 5
Obligations Total 1 Year Years Years Years
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Long-term debt $662,665 $ -- $ -- $450,000 $212,665
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 275,665 53,361 82,697 59,631 79,976
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $938,330 $53,361 $82,697 $509,631 $292,641
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- -------------------------- --------------- ---------------------------------------------------------------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total Amounts
Other Commercial Committed Less than 2-3 4-5 Over 5
Commitments 1 Year Years Years Years
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Trade letters of credit $ 15,618 $15,618 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (1) 49,240 49,240 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (2) 5,149 877 1,279 1,171 1,822
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 70,007 $65,735 $1,279 $1,171 $1,822
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(1) Includes letters of credit for $41,442 of workers'
compensation and general liabilities accrued in our
consolidated financial statements; also includes letters
of credit for $7,798 of lease payments included in
contractual operating lease obligation payments noted
above.
(2) Consists solely of guarantees associated with sub-leased
properties. We are not aware of any non-performance under
these sub-lease arrangements that would result in our
having to perform in accordance with the terms of the
guarantees.
11
Our Board of Directors has approved a stock repurchase program that
authorizes us to repurchase up to 115.4 million shares of our common stock,
which includes an additional 18.5 million shares authorized by the Board of
Directors for repurchase on September 18, 2002. Net cash flows used by financing
activities included our repurchase of 2.0 million shares of our common stock for
$46.1 million in the first quarter of fiscal 2003, compared to 2.7 million
shares for $51.2 million in the first quarter of fiscal 2002. As of August 25,
2002, a total of 89.8 million shares have been purchased under the program. The
stock repurchase program is used by us to offset the dilutive effect of stock
option exercises and to increase shareholder value. The repurchased common stock
is reflected as a reduction of stockholders' equity.
Net cash flows used by investing activities included capital expenditures
incurred principally for building new restaurants, replacing equipment, and
remodeling existing restaurants. Capital expenditures were $110.2 million in the
first quarter of fiscal 2003, compared to $60.2 million in the first quarter of
fiscal 2002. The increased expenditures in fiscal 2003 resulted primarily from
increased spending associated with building new restaurants and replacing
equipment.
We are not aware of any trends or events that would materially affect our
capital requirements or liquidity. We believe that our internal cash generating
capabilities and borrowings available under our shelf registration for unsecured
debt securities and short-term commercial paper program should be sufficient to
finance our capital expenditures, stock repurchase program, and other operating
activities through fiscal 2003.
FINANCIAL CONDITION
Our current assets totaled $436.2 million at August 25, 2002, down from
$449.5 million at May 26, 2002. The decrease resulted primarily from a decrease
in cash and cash equivalents of $15.8 million that is due principally to our use
of a portion of the proceeds received from a March 2002 medium-term debt
issuance to fund working capital needs.
Our current liabilities totaled $616.7 million at August 25, 2002, up from
$601.0 million at May 26, 2002. Accounts payable of $181.2 million at August 25,
2002, increased from $160.1 million at May 26, 2002, principally due to the
timing and terms of inventory purchases. Accrued payroll of $73.9 million at
August 25, 2002, decreased from $87.9 million at May 26, 2002, principally due
to the payment in June of annual management and employee bonuses. Accrued income
taxes of $85.2 million at August 25, 2002, increased from $68.5 million at May
26, 2002, principally due to the timing of income tax payments. Other current
liabilities of $242.6 million at August 25, 2002, decreased from $254.0 million
at May 26, 2002, principally due to decreases in net gift card payables
(associated with seasonal fluctuations), which were offset by increases in
employee benefit-related accruals.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period (see Note 1 to our consolidated financial statements included
in our fiscal 2002 Annual Report on Form 10-K). Actual results could differ from
those estimates.
Critical accounting policies are those that management believes are most
important to the portrayal of our financial condition and operating results, and
that require management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Judgments affecting the application of these policies may
result in materially different amounts being reported under different conditions
or using different assumptions. We consider the following policies to be most
critical in understanding the judgments that are involved in preparing our
consolidated financial statements.
12
Land, Buildings, and Equipment
All land, buildings, and equipment are recorded at cost less accumulated
depreciation. Building components are depreciated over estimated useful lives
ranging from seven to 40 years using the straight-line method. Equipment is
depreciated over estimated useful lives ranging from three to ten years also
using the straight-line method. Accelerated depreciation methods are generally
used for income tax purposes.
Our accounting policies regarding land, buildings, and equipment include
judgments by management regarding the estimated useful lives of these assets,
the residual values to which the assets are depreciated, and the determination
as to what constitutes enhancing the value of or increasing the life of existing
assets. These judgments and estimates may produce materially different amounts
of depreciation and amortization expense than would be reported if different
assumptions were used. As discussed further below, these judgments may also
impact our need to recognize an impairment charge on the carrying amount of
these assets as the cash flows associated with the assets are realized.
Impairment of Long-Lived Assets
Restaurant sites and certain other assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future net
cash flows expected to be generated by the assets. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds their fair value. Restaurant
sites and certain other assets to be disposed of are reported at the lower of
their carrying amount or fair value, less estimated costs to sell, and are
included in net assets held for disposal.
Judgments made by us related to the expected useful lives of long-lived
assets and our ability to realize undiscounted cash flows in excess of the
carrying amounts of such assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions, and
changes in operating performance. As we assess the ongoing expected cash flows
and carrying amounts of our long-lived assets, these factors could cause us to
realize a material impairment charge.
Self-Insurance Reserves
We self-insure a significant portion of expected losses under our workers'
compensation, employee medical, and general liability programs. Accrued
liabilities have been recorded based on our estimates of the ultimate costs to
settle incurred and incurred but not reported claims.
Our accounting policies regarding self-insurance programs include certain
management judgments and actuarial assumptions regarding economic conditions,
the frequency or severity of claims and claim development patterns, and claim
reserve, management, and settlement practices. Unanticipated changes in these
factors may produce materially different amounts of expense that would be
reported under these programs.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 provides guidance on
the recognition and measurement of liabilities for costs associated with exit or
disposal activities. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002. We will adopt SFAS No. 146 in the
third quarter of fiscal 2003 and are currently reviewing its provisions to
determine the impact upon adoption.
13
FORWARD-LOOKING STATEMENTS
Certain information included in this report and other materials filed or to
be filed by us with the Securities and Exchange Commission (as well as
information included in oral or written statements made or to be made by us) may
contain statements that are forward-looking within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words or phrases such as "believe," "plan,"
"will," "expect," "intend," "estimate," and "project," and similar expressions
are intended to identify forward-looking statements. All of these statements,
and any other statements in this report that are not historical facts, are
forward-looking. Examples of forward-looking statements include, but are not
limited to, the estimated number of new restaurants to be constructed and
statements regarding the amount of capital expenditures for fiscal 2003. These
forward-looking statements are based on assumptions concerning important
factors, risks, and uncertainties that could significantly affect anticipated
results in the future and, accordingly, could cause the actual results to differ
materially from those expressed in the forward-looking statements. These
factors, risks, and uncertainties include, but are not limited to, competition;
economic, market and other conditions; changes in food and other costs;
importance of locations; government regulation; and growth plans, each of which
is discussed in greater detail under the heading "Forward-Looking Statements" on
pages 11-12 of our Form 10-K for fiscal 2002, which is incorporated into this
Form 10-Q by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including fluctuations in
interest rates, foreign currency exchange rates, and commodity prices. To manage
this exposure, we periodically enter into interest rate, foreign currency
exchange, and commodity instruments for other than trading purposes.
We use the variance/covariance method to measure value at risk, over time
horizons ranging from one week to one year, at the 95 percent confidence level.
As of August 25, 2002, our potential losses in future net earnings resulting
from changes in foreign currency exchange rate instruments, commodity
instruments, and floating rate debt interest rate exposures were approximately
$500,000 over a period of one year. At August 25, 2002, the value at risk from
an increase in the fair value of all of our long-term fixed rate debt, over a
period of one year, was approximately $34 million. The fair value of our
long-term fixed rate debt during the first quarter of fiscal 2003 averaged
approximately $660 million, with a high of approximately $670 million and a low
of approximately $645 million. Our interest rate risk management objective is to
limit the impact of interest rate changes on earnings and cash flows by
targeting an appropriate mix of variable and fixed rate debt.
Item 4. Controls and Procedures
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to their
evaluation.
14
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are made a party to legal proceedings arising in the
ordinary course of business. We do not believe that the results of these legal
proceedings, even if unfavorable to us, will have a materially adverse impact on
our financial position, results of operations, or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10(a) Credit Agreement dated as of October 29,
1999, among Darden Restaurants, Inc.,
and the banks listed therein.
Exhibit 10(b) First Amendment dated as of July 26, 2002,
to Credit Agreement dated as of October 29,
1999, among Darden Restaurants, Inc. and the
banks listed therein.
Exhibit 12 Computation of Ratio of Consolidated
Earnings to Fixed Charges.
Exhibit 99(a) Written statement of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated October 8,
2002.
Exhibit 99(b) Written statement of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated October 8,
2002.
(b) Reports on Form 8-K.
During the first quarter, we filed the following reports on
Form 8-K:
On June 21, 2002, we filed a current report on Form 8-K
dated June 20, 2002, announcing annual and fourth quarter
financial results for fiscal 2002.
In addition, we filed the following reports on Form 8-K
subsequent to the close of the first quarter of fiscal 2003:
On September 19, 2002, we filed a current report on Form 8-K
dated September 19, 2002, announcing first quarter financial
results and the results of the voting at the annual meeting
of shareholders held on September 19, 2002.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: October 8, 2002 By: /s/ Paula J. Shives
-----------------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: October 8, 2002 By: /s/ Clarence Otis, Jr.
--------------------------
Clarence Otis, Jr.
Executive Vice President and
Chief Financial Officer
(Principal financial officer)
I, Joe R. Lee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Darden Restaurants,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
October 8, 2002
/s/ Joe R. Lee
- --------------------------------------
Joe R. Lee
Chairman and Chief Executive Officer
16
I, Clarence Otis, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Darden Restaurants,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
October 8, 2002
/s/ Clarence Otis, Jr.
- ----------------------------
Clarence Otis, Jr.
Executive Vice President and
Chief Financial Officer
17
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
10(a) Credit Agreement dated as of October 29, 1999, among Darden
Restaurants, Inc., and the banks listed therein.
10(b) First Amendment dated as of July 26, 2002, to Credit Agreement
dated as of October 29, 1999, among Darden Restaurants,
Inc., and the banks listed therein.
12 Computation of Ratio of Consolidated Earnings to Fixed
Charges.
99(a) Written statement of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
October 8, 2002.
99(b) Written statement of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
October 8, 2002.
18
Exhibit 12
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
August 25, 2002 August 26, 2001
- --------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations before Income Taxes.... $ 109,005 $ 95,577
Plus Fixed Charges:
Gross Interest Expense.................................... 11,926 9,679
40% of Restaurant and Equipment Minimum
Rent Expense......................................... 5,288 5,074
--------- ----------
Total Fixed Charges................................. 17,214 14,753
Less Capitalized Interest.................................... (970) (886)
--------- ----------
Consolidated Earnings from Operations before Income
Taxes Available to Cover Fixed Charges.................... $ 125,249 $ 109,444
========= =========
Ratio of Consolidated Earnings to Fixed Charges.............. 7.28 7.42
========= =========
- --------------------------------------------------------------------------------------------------------------------
19
EXHIBIT 99(a)
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Darden Restaurants, Inc. ("Company")
on Form 10-Q for the quarter ended August 25, 2002, as filed with the Securities
and Exchange Commission on the date hereof ("Report"), I, Joe R. Lee, Chairman
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joe R. Lee
-----------------------------------
Joe R. Lee
Chairman and Chief Executive Officer
October 8, 2002
20
EXHIBIT 99(b)
CERTIFICATION PURSUANT TO
18 U.S.C. ss.1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Darden Restaurants, Inc. ("Company")
on Form 10-Q for the quarter ended August 25, 2002, as filed with the Securities
and Exchange Commission on the date hereof ("Report"), I, Clarence Otis, Jr.,
Executive Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Clarence Otis, Jr.
--------------------------
Clarence Otis, Jr.
Executive Vice President and
Chief Financial Officer
October 8, 2002
21