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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 November 24, 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 of (I.R.S. Employer Identification No.)
incorporation or organization)
5900 Lake Ellenor Drive,
Orlando, Florida 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
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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 January 2, 2003:
170,931,152 (excluding 89,520,641 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 5
Consolidated Statements of Changes in
Stockholders' Equity and Accumulated
Other Comprehensive Income 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Item 4. Controls and Procedures 18
Part II - Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Certifications 21
Index to Exhibits 24
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
-------------------------------------------------------------------------------------------------------------------
November 24, 2002 November 25, 2001
-------------------------------------------------------------------------------------------------------------------
Sales........................................................ $1,071,531 $1,007,081
Costs and Expenses:
Cost of sales:
Food and beverage....................................... 330,954 321,302
Restaurant labor........................................ 353,774 328,361
Restaurant expenses..................................... 169,889 151,096
-------- --------
Total Cost of Sales................................... $ 854,617 $ 800,759
Selling, general, and administrative...................... 103,892 102,293
Depreciation and amortization............................. 45,930 41,061
Interest, net............................................. 10,729 8,982
Restructuring credit and asset impairment................. 143 (2,269)
-------- --------
Total Costs and Expenses............................ $1,015,311 $ 950,826
--------- --------
Earnings before Income Taxes................................. 56,220 56,255
Income Taxes................................................. (18,742) (19,792)
-------- --------
Net Earnings................................................. $ 37,478 $ 36,463
======== ========
Net Earnings per Share:
Basic..................................................... $ 0.22 $ 0.21
======== ========
Diluted................................................... $ 0.21 $ 0.20
======== ========
Average Number of Common Shares Outstanding:
Basic..................................................... 170,900 175,100
======== ========
Diluted................................................... 178,700 182,900
======== ========
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See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except per Share Data)
(Unaudited)
Six Months Ended
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November 24, 2002 November 25, 2001
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Sales....................................................... $2,246,096 $2,080,491
Costs and Expenses:
Cost of sales:
Food and beverage...................................... 696,190 664,894
Restaurant labor....................................... 723,136 661,807
Restaurant expenses.................................... 338,466 302,346
--------- ---------
Total Cost of Sales.................................. $1,757,792 $1,629,047
Selling, general, and administrative..................... 210,883 204,054
Depreciation and amortization............................ 91,071 80,571
Interest, net............................................ 20,982 17,256
Restructuring credit and asset impairment................ 143 (2,269)
--------- ---------
Total Costs and Expenses........................... $2,080,871 $1,928,659
--------- ---------
Earnings before Income Taxes................................ 165,225 151,832
Income Taxes................................................ (55,861) (53,213)
--------- ---------
Net Earnings................................................ $ 109,364 $ 98,619
========= =========
Net Earnings per Share:
Basic.................................................... $ 0.64 $ 0.56
========= =========
Diluted.................................................. $ 0.61 $ 0.54
========= =========
Average Number of Common Shares Outstanding:
Basic.................................................... 171,300 175,600
========= =========
Diluted.................................................. 179,300 183,300
========= =========
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
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November 24, 2002 May 26, 2002
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ASSETS
Current Assets:
Cash and cash equivalents................................. $ 20,880 $ 152,875
Short-term investments.................................... -- 9,904
Receivables............................................... 32,415 29,089
Inventories............................................... 231,814 172,413
Assets held for disposal.................................. 10,087 10,047
Prepaid expenses and other current assets................. 17,424 23,076
Deferred income taxes..................................... 46,966 52,127
--------- ---------
Total Current Assets.................................. $ 359,586 $ 449,531
Land, Buildings, and Equipment............................... 2,039,977 1,920,768
Other Assets................................................. 162,549 159,437
--------- ---------
Total Assets.......................................... $2,562,112 $2,529,736
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 165,625 $ 160,064
Accrued payroll........................................... 73,696 87,936
Accrued income taxes...................................... 52,190 68,504
Other accrued taxes....................................... 31,271 30,474
Other current liabilities................................. 247,200 254,036
--------- ---------
Total Current Liabilities............................. $ 569,982 $ 601,014
Long-term Debt............................................... 659,656 662,506
Deferred Income Taxes........................................ 125,091 117,709
Other Liabilities............................................ 19,060 19,630
--------- ---------
Total Liabilities..................................... $1,373,789 $1,400,859
--------- ---------
Stockholders' Equity:
Common stock and surplus.................................. $1,501,787 $1,474,054
Retained earnings......................................... 863,253 760,684
Treasury stock............................................ (1,114,668) (1,044,915)
Accumulated other comprehensive income.................... (13,774) (12,841)
Unearned compensation..................................... (46,594) (46,108)
Officer notes receivable.................................. (1,681) (1,997)
--------- ---------
Total Stockholders' Equity............................ $1,188,323 $1,128,877
--------- ---------
Total Liabilities and Stockholders' Equity............ $2,562,112 $2,529,736
========= =========
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See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
For the Six Months Ended November 24, 2002 and November 25, 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.................. -- 109,364 -- -- -- -- 109,364
Other comprehensive income:
Foreign currency
adjustment.............. -- -- -- (668) -- -- (668)
Change in fair value of
derivatives, net of
tax of $78.............. -- -- -- (265) -- -- (265)
-------------
Total comprehensive
income............... -- -- -- -- -- -- 108,431
Cash dividends declared.......... -- (6,795) -- -- -- -- (6,795)
Stock option exercises (1,406
shares)........................ 12,183 -- 1,030 -- -- -- 13,213
Issuance of restricted stock
(197 shares), net of forfeiture
adjustments.................... 4,857 -- 507 -- (5,364) -- --
Earned compensation.............. -- -- -- -- 1,883 -- 1,883
ESOP note receivable repayments.. -- -- -- -- 2,995 -- 2,995
Income tax benefits credited to
equity......................... 8,453 -- -- -- -- -- 8,453
Purchases of common stock for
treasury (3,222 shares)........ -- -- (72,069) -- -- -- (72,069)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (130 shares)....... 2,240 -- 779 -- -- -- 3,019
Repayment of officer notes, net.. -- -- -- -- -- 316 316
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Balance at November 24, 2002 $1,501,787 $863,253 $(1,114,668) $(13,774) $(46,594) $(1,681) $1,188,323
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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................... -- 98,619 -- -- -- -- 98,619
Other comprehensive income:
Foreign currency adjustment.. -- -- -- (701) -- -- (701)
Change in fair value of
derivatives, net of tax
of $37..................... -- -- -- (128) -- -- (128)
---------------
Total comprehensive
income................. -- -- -- -- -- -- 97,790
Cash dividends declared.......... -- (4,637) -- -- -- -- (4,637)
Stock option exercises (483
shares)........................ 18,108 -- 619 -- -- -- 18,727
Issuance of restricted stock
(314 shares), net of forfeiture
adjustments.................... 4,648 -- 658 -- (5,318) -- (12)
Earned compensation.............. -- -- -- -- 2,047 -- 2,047
ESOP note receivable repayments.. -- -- -- -- 3,760 -- 3,760
Income tax benefits credited to
equity......................... 10,677 -- -- -- -- -- 10,677
Purchases of common stock for
treasury (3,339 shares)........ -- -- (61,866) -- -- -- (61,866)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (128 shares)....... 1,149 -- 854 -- -- -- 2,003
Issuance of officer notes, net... -- -- -- -- -- (35) (35)
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Balance at November 25, 2001 $1,440,381 $626,103 $(899,989) $(13,931) $(48,833) $(1,959) $1,101,772
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See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Quarter Ended
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November 24, 2002 November 25, 2001
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Cash Flows--Operating Activities
Net earnings................................................... $ 37,478 $ 36,463
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization................................ 45,930 41,061
Amortization of unearned compensation and loan costs......... 1,769 1,743
Change in current assets and liabilities..................... (104,220) (122,451)
Change in other liabilities ................................. (154) (129)
Loss on disposal of land, buildings, and equipment........... 1,009 1,428
Change in cash surrender value of trust owned life insurance 188 830
Deferred income taxes........................................ 10,708 1,341
Income tax benefits credited to equity....................... 4,407 3,446
Non-cash restructuring credit and asset impairment........... 143 (2,269)
Non-cash compensation expense................................ 707 --
Other, net................................................... (1) (332)
-------- ----------
Net Cash Used by Operating Activities...................... $ (2,036) $ (38,869)
-------- ----------
Cash Flows--Investing Activities
Purchases of land, buildings, and equipment.................... (101,917) (72,496)
Increase in other assets....................................... (449) (6,604)
Proceeds from maturity of short-term investments............... 10,000 --
Proceeds from disposal of land, buildings, and
equipment (including assets held for disposal)............... 2,055 2,140
-------- ----------
Net Cash Used by Investing Activities...................... $ (90,311) $ (76,960)
-------- ----------
Cash Flows--Financing Activities
Proceeds from issuance of common stock......................... 8,945 8,355
Dividends paid................................................. (6,795) (4,637)
Purchases of treasury stock.................................... (25,999) (10,670)
ESOP note receivable repayment................................. 1,520 1,735
Increase in short-term debt.................................... -- 107,000
Repayment of long-term debt.................................... (1,520) (1,735)
-------- ----------
Net Cash (Used by) Provided by Financing Activities........ $ (23,849) $ 100,048
-------- ----------
Decrease in Cash and Cash Equivalents............................. (116,196) (15,781)
Cash and Cash Equivalents - Beginning of Period................... 137,076 35,780
-------- ----------
Cash and Cash Equivalents - End of Period......................... $ 20,880 $ 19,999
======== ==========
Cash Flow from Changes in Current Assets and Liabilities
Receivables.................................................... (5,062) (504)
Inventories.................................................... (51,224) (55,124)
Prepaid expenses and other current assets...................... (850) 1,776
Accounts payable............................................... (15,556) (38,642)
Accrued payroll................................................ (168) 3,258
Accrued income taxes........................................... (33,005) (33,218)
Other accrued taxes............................................ (2,679) (3,591)
Other current liabilities...................................... 4,324 3,594
-------- ----------
Change in Current Assets and Liabilities................... $ (104,220) $ (122,451)
======== ==========
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See accompanying notes to consolidated financial statements.
7
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
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November 24, 2002 November 25, 2001
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Cash Flows--Operating Activities
Net earnings.................................................... $ 109,364 $ 98,619
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization................................. 91,071 80,571
Amortization of unearned compensation and loan costs.......... 3,544 3,637
Change in current assets and liabilities...................... (88,232) (112,547)
Change in other liabilities .................................. (570) (400)
Loss on disposal of land, buildings, and equipment............ 1,946 2,661
Change in cash surrender value of trust owned life insurance.. 3,020 830
Deferred income taxes......................................... 12,543 2,454
Income tax benefits credited to equity........................ 8,453 10,677
Non-cash restructuring credit and asset impairment............ 143 (2,269)
Non-cash compensation expense................................. 707 --
Other, net.................................................... (295) (139)
-------- --------
Net Cash Provided by Operating Activities................... $ 141,694 $ 84,094
-------- --------
Cash Flows--Investing Activities
Purchases of land, buildings, and equipment..................... (212,162) (132,682)
Increase in other assets........................................ (4,693) (13,195)
Purchase of trust owned life insurance.......................... (6,000) (31,500)
Proceeds from maturity of short-term investments................ 10,000 --
Proceeds from disposal of land, buildings, and
equipment (including assets held for disposal)................. 2,505 2,509
-------- --------
Net Cash Used by Investing Activities....................... $(210,350) $ (174,868)
-------- --------
Cash Flows--Financing Activities
Proceeds from issuance of common stock.......................... 15,525 20,523
Dividends paid.................................................. (6,795) (4,637)
Purchases of treasury stock..................................... (72,069) (61,866)
ESOP note receivable repayment.................................. 2,995 3,760
Increase in short-term debt..................................... -- 95,000
Repayment of long-term debt..................................... (2,995) (3,767)
Payment of loan costs........................................... -- (54)
-------- --------
Net Cash (Used by) Provided by Financing Activities......... $ (63,339) $ 48,959
-------- --------
Decrease in Cash and Cash Equivalents.............................. (131,995) (41,815)
Cash and Cash Equivalents - Beginning of Period.................... 152,875 61,814
-------- --------
Cash and Cash Equivalents - End of Period.......................... $ 20,880 $ 19,999
======== ========
Cash Flow from Changes in Current Assets and Liabilities
Receivables..................................................... (3,326) 8,291
Inventories..................................................... (59,401) (78,367)
Prepaid expenses and other current assets....................... (821) 2,235
Accounts payable................................................ 5,561 (24,475)
Accrued payroll................................................. (14,240) (14,812)
Accrued income taxes............................................ (16,314) (9,797)
Other accrued taxes............................................. 797 (968)
Other current liabilities....................................... (488) 5,346
-------- --------
Change in Current Assets and Liabilities.................... $ (88,232) $ (112,547)
======== ========
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See accompanying notes to consolidated financial statements.
8
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 accounting principles generally accepted in the United States of
America for complete financial statements. However, in the opinion of
management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature. Operating results for the
quarter and six months ended November 24, 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 and six months ended November 24, 2002, we paid $12,360
and $18,958, respectively, for interest (net of amounts capitalized) and $36,686
and $51,285, respectively, for income taxes. During the quarter and six months
ended November 25, 2001, we paid $7,642 and $15,138, respectively, for interest
(net of amounts capitalized) and $48,433 and $50,053, respectively, 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 4,188,964 and 51,702 shares of common stock were
excluded from the calculation of diluted earnings per share for the quarters
ended November 24, 2002 and November 25, 2001, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 4,188,964 and 110,879 shares of common stock were
excluded from the calculation of diluted earnings per share for the six months
ended November 24, 2002 and November 25, 2001, respectively, for the same
reason.
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 1,176,880
shares of our common stock for $25,999 in the quarter ended November 24, 2002,
resulting in a cumulative repurchase as of November 24, 2002 of 90,968,466
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.
9
During the quarter and six months ended November 24, 2002, we sold certain
assets held for disposal for a loss of $143 in excess of the original write-down
amount.
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 adopted SFAS No. 146 in January
of fiscal 2003 and do not expect its provisions to have a material impact on our
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 supersedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance on the recognition and disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees. The initial recognition and measurement provisions of
Interpretation No. 45 are effective for guarantees issued or modified after
December 31, 2002, and are to be applied prospectively. The disclosure
requirements are effective for financial statements for interim or annual
periods ending after December 15, 2002. We adopted Interpretation No. 45 in
January of fiscal 2003 and do not expect its provisions to have a material
impact on our consolidated financial statements.
In November 2002, the FASB's Emerging Issues Task Force (EITF) discussed
Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from
a Vendor." Issue No. 02-16 provides guidance on the recognition of cash
consideration received by a customer from a vendor. The consensus reached by the
EITF in November 2002 is effective for fiscal periods beginning after December
15, 2002. Income statements for prior periods are required to be reclassified to
comply with the consensus. Adoption of the consensus reached in November 2002
related to Issue No. 02-16 is not expected to materially impact our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
in financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No.148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. Adoption of SFAS No. 148 is not expected to materially impact our
consolidated financial statements.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth selected operating data as a percentage of
sales for the periods indicated. All information is derived from the
consolidated statements of earnings for the quarter and six months ended
November 24, 2002 and November 25, 2001.
Quarter Ended Six Months Ended
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November 24, November 25, November 24, November 25,
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Sales.......................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverage......................... 30.9 31.9 31.0 32.0
Restaurant labor.......................... 33.0 32.6 32.2 31.8
Restaurant expenses....................... 15.9 15.0 15.1 14.5
----- ----- ----- -----
Total Cost of Sales..................... 79.8% 79.5% 78.3% 78.3%
Selling, general, and administrative........ 9.7 10.1 9.4 9.8
Depreciation and amortization............... 4.3 4.1 4.0 3.9
Interest, net............................... 1.0 0.9 0.9 0.8
Restructuring credit and asset impairment... -- (0.2) -- (0.1)
----- ----- ----- -----
Total Costs and Expenses.............. 94.8% 94.4% 92.6% 92.7%
----- ----- ----- -----
Earnings before Income Taxes................... 5.2 5.6 7.4 7.3
Income Taxes................................... (1.7) (2.0) (2.5) (2.6)
----- ----- ----- -----
Net Earnings................................... 3.5% 3.6% 4.9% 4.7%
===== ===== ===== =====
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SALES
Sales were $1.07 billion and $1.01 billion for the quarters ended November
24, 2002 and November 25, 2001, respectively.
The 6.4 percent increase in sales for the second quarter of fiscal 2003 as
compared to the second quarter of fiscal 2002 was primarily due to increased
annual same-restaurant sales in the U.S. and a net increase of 54 company-owned
restaurants since the second quarter of fiscal 2002. Red Lobster sales of $549.2
million were 3.5 percent above last year's second quarter. U.S. same-restaurant
sales for Red Lobster increased 2.3 percent, primarily as a result of a 2.5
percent increase in average check and a 0.2 percent decrease in guest counts.
Red Lobster enjoyed strong November sales growth, partially offsetting the sales
softness it experienced during September and October of fiscal 2003. Olive
Garden sales of $472.7 million were 7.2 percent above last year's second
quarter. U.S. same-restaurant sales for Olive Garden increased 3.5 percent,
primarily as a result of a 3.4 percent increase in average check and a 0.1
percent increase in guest counts. Same-restaurant sales for Red Lobster and
Olive Garden benefited by approximately one percentage point for the second
quarter of fiscal 2003 from a shift in the Thanksgiving holiday. This holiday,
for which the restaurants are closed, was not in the second quarter of fiscal
2003 while it was in the second quarter of fiscal 2002. Red Lobster and Olive
Garden have enjoyed 20 and 33 consecutive quarters of U.S. same-restaurant sales
increases, respectively. Bahama Breeze continues to generate strong average
sales per restaurant, although it has not recovered as strongly as expected from
the sales declines it began to experience last year as the economy softened.
Bahama Breeze is responding with a range of menu and decor improvements. Bahama
Breeze opened two new restaurants during the second quarter of fiscal 2003.
Smokey Bones opened six new restaurants during the second quarter of fiscal
2003.
Sales were $2.25 billion and $2.08 billion for the first six months of
fiscal 2003 and 2002, respectively.
The 8.0 percent increase in sales for the first six months of fiscal 2003
as compared to the first six months of fiscal 2002 was primarily due to
increased annual same-restaurant sales in the U.S. and a net increase of 54
company-owned restaurants since the second quarter of fiscal 2002. Red Lobster
sales of $1.17 billion were 5.8 percent above last year. U.S. same-restaurant
sales for Red Lobster increased 4.6 percent, primarily as a result of a 3.3
percent increase in average check and a 1.3 percent increase in guest counts.
Olive Garden sales of $971.3 million were 7.8 percent above last year. U.S.
same-restaurant sales for Olive Garden increased 4.2 percent,
11
primarily as a result of a 3.9 percent increase in average check and a 0.3
percent increase in guest counts. Bahama Breeze opened three new restaurants
during the first six months of fiscal 2003. Three more openings are scheduledfor
fiscal 2003. Smokey Bones opened eight new restaurants during the first six
months of fiscal 2003. At least 20 restaurants are expected to open in fiscal
2003, which would more than double the total number of Smokey Bones restaurants
open at the end of fiscal 2002.
COSTS AND EXPENSES
Total costs and expenses were $1.02 billion and $950.8 million for the
quarters ended November 24, 2002 and November 25, 2001, respectively. As a
percent of sales, total costs and expenses increased from 94.4 percent in the
second quarter of fiscal 2002 to 94.8 percent in the second 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 second quarter of fiscal 2003 as
compared to the second quarter of fiscal 2002 primarily as a result of lower
product costs and pricing changes. Restaurant labor increased in the second
quarter of fiscal 2003 primarily as a result of a modest increase in wage rates
and higher benefit costs, 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 the second quarter of fiscal 2003
primarily as a result of increased workers' compensation and new restaurant
pre-opening expenses, which were only partially offset by lower utility expenses
and the favorable impact of higher sales volumes.
Selling, general, and administrative expenses decreased in the second
quarter of fiscal 2003 primarily as a result of the favorable impact of higher
sales volumes.
Depreciation and amortization expense increased in the second 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 second 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 favorable impact of
higher sales volumes.
Total costs and expenses were $2.08 billion and $1.93 billion for the first
six months of fiscal 2003 and 2002, respectively. As a percent of sales, total
costs and expenses decreased from 92.7 percent in the first six months of fiscal
2002 to 92.6 percent in the first six months 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 six months of fiscal 2003 as
compared to the first six months of fiscal 2002 primarily as a result of lower
product costs and pricing changes. Restaurant labor increased in the first six
months of fiscal 2003 primarily as a result of a modest increase in wage rates
and bonus costs, higher benefit costs, and higher promotional staffing levels,
which were only partially offset by the impact of higher sales volumes.
Restaurant expenses increased in the first six months of fiscal 2003 primarily
as a result of increased workers' compensation and new restaurant pre-opening
expenses, which was only partially offset by lower utility expenses and the
favorable impact of higher sales volumes.
Selling, general, and administrative expenses decreased in the first six
months of fiscal 2003 primarily as a result of the favorable impact of higher
sales volumes.
Depreciation and amortization expense increased in the first six months 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 six months of fiscal 2003
primarily due to increased interest expense associated with higher debt levels
in fiscal 2003, which was only partially offset by the favorable impact of
higher sales volumes.
INCOME TAXES
The effective income tax rate for the second quarter and first six months
of fiscal 2003 was 33.3 percent and 33.8 percent, respectively. This compared to
an effective income tax rate of 35.0 percent, before restructuring credit, in
the second quarter and first six months of fiscal 2002. The decreases in fiscal
2003 were primarily a result of
12
ongoing tax liability adjustments that were made as a result of information that
became available in fiscal 2003. These adjustments, which relate to beginning of
the year tax liabilities, were only partially offset by increased tax expense
associated with higher fiscal 2003 pre-tax earnings.
NET EARNINGS AND NET EARNINGS PER SHARE
Net earnings for the second quarter of fiscal 2003 increased 2.8 percent to
$37.5 million (21 cents per diluted share) compared with net earnings for the
second quarter of fiscal 2002 of $36.5 million (20 cents per diluted share). For
the first six months of fiscal 2003, net earnings increased 10.9 percent to
$109.4 million (61 cents per diluted share) compared with net earnings for the
first six months of fiscal 2002 of $98.6 million (54 cents per diluted share).
Excluding an after-tax restructuring credit of $1.4 million taken in the second
quarter of fiscal 2002, net earnings for the second quarter and first six months
of fiscal 2002 were $35.1 million (19 cents per diluted share) and $97.2 million
(53 cents per diluted share). The increase in both net earnings and diluted net
earnings per share for the second quarter and the first six months of fiscal
2003 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. Due to the combination of lower
than expected sales growth and a value-oriented marketing calendar during the
first two months of the second quarter of fiscal 2003, Red Lobster's restaurant
labor costs, restaurant expenses, and selling, general and administrative
expenses each increased as a percent of sales. As a result, its operating profit
declined versus the second quarter of 2002. Increased sales at Olive Garden,
combined with lower food and beverage expense and restaurant labor costs as a
percent of sales, resulted in record quarterly operating profit for Olive Garden
during the second quarter of fiscal 2003.
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 second quarter of fiscal 2003, compared with the number open at the end of
fiscal 2002 and the end of the second quarter of fiscal 2002.
- --------------------------------------------------------------------------------------------------------------------
November 24, 2002 May 26, 2002 November 25, 2001
- --------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 639 636 629
Red Lobster - Canada............... 31 31 32
---- ---- ----
Total......................... 670 667 661
Olive Garden - USA................. 501 490 478
Olive Garden - Canada.............. 6 6 6
---- ---- ----
Total......................... 507 496 484
Bahama Breeze...................... 32 29 25
Smokey Bones BBQ................... 27 19 12
---- ---- ----
Total......................... 1,236 1,211 1,182
===== ===== =====
- --------------------------------------------------------------------------------------------------------------------
13
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 November 24, 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
November 24, 2002, no amounts were outstanding under the credit facility.
At November 24, 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 $36.1 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
November 24, 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 $661,145 $ -- $150,000 $300,000 $211,145
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 303,991 54,274 87,403 63,794 98,520
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $965,136 $54,274 $237,403 $363,794 $309,665
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
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 $ 4,910 $ 4,910 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (1) 49,785 49,785 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (2) 4,808 950 1,174 1,150 1,534
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 59,503 $55,645 $ 1,174 $ 1,150 $ 1,534
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(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 $8,343 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.
14
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 1.2 million shares of our common stock for
$26.0 million in the second quarter of fiscal 2003, compared to 0.6 million
shares for $10.7 million in the second quarter of fiscal 2002. For the first six
months of fiscal 2003, net cash flows used by financing activities included our
repurchase of 3.2 million shares of our common stock for $72.1 million compared
to 3.3 million shares for $61.9 million in the first six months of fiscal 2002.
As of November 24, 2002, a total of 91.0 million shares have been repurchased
under the program. The stock repurchase program is used by us to offset, in
part, 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 $101.9 million and
$212.2 million in the second quarter and first six months of fiscal 2003,
respectively, compared to $72.5 million and $132.7 million in the second quarter
and first six months of fiscal 2002, respectively. The increased expenditures in
fiscal 2003 resulted primarily from increased spending associated with building
new restaurants.
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 our 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 $359.6 million at November 24, 2002, down from
$449.5 million at May 26, 2002. The decrease resulted primarily from a decrease
in cash and cash equivalents of $132.0 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. The decrease in cash and cash
equivalents was partially offset by an increase in inventories of $59.4 million
that was due to seasonality and opportunistic product purchases.
Our current liabilities totaled $570.0 million at November 24, 2002, down
from $601.0 million at May 26, 2002. Accounts payable of $165.6 million at
November 24, 2002, increased from $160.1 million at May 26, 2002, principally
due to the timing and terms of inventory purchases. Accrued payroll of $73.7
million at November 24, 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 $52.2 million at November 24, 2002, decreased
from $68.5 million at May 26, 2002, principally due to the timing of income tax
payments. Other current liabilities of $247.2 million at November 24, 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. Net deferred income
tax liabilities totaled $78.1 million at November 24, 2002, up from $65.6
million at May 26, 2002. The increase is primarily a result of current income
tax deductions for certain capitalized software costs, equipment, smallwares,
and property taxes.
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.
15
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. Leasehold improvements are amortized over the
term of the shorter of the related lease or the estimated useful lives of the
assets 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 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 adopted SFAS No. 146 in January
of fiscal 2003 and do not expect its provisions to have a material impact on our
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 supersedes
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others," and provides guidance on the recognition and disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees. The initial recognition and measurement provisions of
Interpretation No. 45 are effective for guarantees issued or modified after
December 31, 2002, and are to be applied prospectively.
16
The disclosure requirements are effective for financial statements for interim
or annual periods ending after December 15, 2002. We adopted Interpretation No.
45 in January of fiscal 2003 and do not expect its provisions to have a material
impact on our consolidated financial statements.
In November 2002, the FASB's Emerging Issues Task Force (EITF) discussed
Issue No. 02-16, "Accounting by a Reseller for Cash Consideration Received from
a Vendor." Issue No. 02-16 provides guidance on the recognition of cash
consideration received by a customer from a vendor. The consensus reached by the
EITF in November 2002 is effective for fiscal periods beginning after December
15, 2002. Income statements for prior periods are required to be reclassified to
comply with the consensus. Adoption of the consensus reached in November 2002
related to Issue No. 02-16 is not expected to materially impact our consolidated
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require more prominent and frequent disclosures
in financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No.148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. Adoption of SFAS No. 148 is not expected to materially impact our
consolidated financial statements.
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 the following,
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:
o the highly competitive nature of the restaurant industry, especially
pricing, service, location, personnel, and type and quality of food;
o economic, market, and other conditions, including changes in consumer
preferences, demographic trends, consumer perceptions of food safety and
the associated risk of food-borne illnesses, weather conditions,
construction costs, and the cost and availability of borrowed funds;
o changes in the cost or availability of food, real estate, and other items,
and the general impact of inflation;
o the availability of desirable restaurant locations;
o government regulations, including those relating to zoning, land use,
environmental matters, and liquor licenses; and
o growth plans, including real estate development and construction
activities, the issuance and renewal of licenses and permits for restaurant
development, and the availability of funds to finance growth.
17
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 November 24, 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
$900,000 over a period of one year. At November 24, 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 $31 million. The fair value of our
long-term fixed rate debt during the first six months of fiscal 2003 averaged
approximately $671 million, with a high of approximately $691 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
(a) Evaluation of Disclosure Controls and Procedures. Under the supervision
and with the participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a date (the
"Evaluation Date") within 90 days prior to the filing date of this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect those
controls subsequent to the date of their most recent evaluation.
18
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 4. Submission of Matters to a Vote of Security Holders
(a) Our Annual Meeting of Shareholders was held on September 19,
2002.
(b) The name of each director elected at the meeting is provided in
Item 4(c) of this report. There are no other directors with a
term of office that continued after the Annual Meeting.
(c) At the Annual Meeting, the shareholders took the following
actions:
(i) Elected the following thirteen directors:
For Withheld
------ ----------
Leonard L. Berry..........146,577,282....... 3,222,933
Bradley D. Blum...........148,789,217....... 1,010,998
Odie C. Donald............142,095,433....... 7,704,782
Julius Erving, II.........146,342,784....... 3,457,431
David H. Hughes...........139,777,646....... 10,022,569
Joe R. Lee................148,787,676....... 1,012,539
Senator Connie Mack, III..147,931,895....... 1,868,320
Richard E. Rivera.........148,790,035....... 1,010,180
Michael D. Rose...........141,957,898....... 7,842,317
Maria A. Sastre...........142,011,167....... 7,789,048
Jack A. Smith.............139,733,183....... 10,067,032
Blaine Sweatt, III........148,669,724....... 1,130,491
Rita P. Wilson............139,770,555....... 10,029,660
(ii) Approved the Darden Restaurants, Inc. 2002 Stock
Incentive Plan.
For....................... 77,847,132
Against .................. 70,528,228
Abstain................... 1,424,855
Broker non-vote........... 0
(iii) Approved the appointment of KPMG LLP as our independent
auditors for the fiscal year ending May 25, 2003.
For ...................... 145,629,307
Against .................. 3,126,312
Abstain................... 1,044,596
Broker non-vote .......... 0
19
Item 5. Other Information
On December 19, 2002, we announced that Dick Rivera, our Vice Chairman and
a member of our Board of Directors, was promoted to President and Chief
Operating Officer. Clarence Otis, our Executive Vice President and Chief
Financial Officer, was appointed President of Smokey Bones, and will continue in
his role as Executive Vice President. Linda Dimopoulos, our Senior Vice
President and Chief Information Officer, who had served as our corporate
controller and controller of Red Lobster, was promoted to Chief Financial
Officer. Brad Blum, also a Vice Chairman and a member of our Board of Directors,
left our company to accept a position as Chief Executive Officer of Burger King
Corporation. On January 7, 2003, we announced that Laurie Burns, our Senior Vice
President of Development, was promoted to President of Bahama Breeze. The
appointment will be effective March 15, 2003.
Also in December 2002, we announced that we will begin the next phase of
testing for a new restaurant called Seasons 52(SM). It is a casually
sophisticated fresh grill and wine bar with seasonally inspired menus offering
the freshest ingredients to create great tasting entrees that are nutritionally
balanced and lower in calories. Seasons 52(SM) is currently under construction
and is scheduled to open in Orlando, Florida, in our fiscal third quarter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10 Darden Restaurants, Inc. 2002 Stock Incentive
Plan.
Exhibit 12 Computation of Ratio of Consolidated Earnings
to Fixed Charges.
Exhibit 99(a) Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated January 7, 2003.
Exhibit 99(b) Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated January 7, 2003.
(b) Reports on Form 8-K.
During the second quarter, we filed the following reports on
Form 8-K:
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.
On October 29, 2002, we filed a current report on Form 8-K
dated October 29, 2002, announcing October same-restaurant
sales results.
In addition, we filed the following reports on Form 8-K
subsequent to the close of the second quarter of fiscal 2003:
On December 18, 2002, we filed a current report on Form 8-K
dated December 17, 2002, announcing second quarter financial
results.
On December 19, 2002, we filed a current report on Form 8-K
dated December 19, 2002, announcing key promotions and a
restructuring of our senior management team.
20
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: January 7, 2003 By: /s/ Paula J. Shives
-----------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: January 7, 2003 By: /s/ Linda J. Dimopoulos
------------------------------
Linda J. Dimopoulos
Senior Vice President and Chief Financial Officer
(Principal financial officer)
CERTIFICATIONS
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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
21
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
January 7, 2003
/s/ Joe R. Lee
- --------------------
Joe R. Lee
Chairman and Chief Executive Officer
I, Linda J. Dimopoulos, 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;
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which the quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
22
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
January 7, 2003
/s/ Linda J. Dimopoulos
- ---------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
23
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
- --------- ------------------
10 Darden Restaurants, Inc. 2002 Stock Incentive Plan.
12 Computation of Ratio of Consolidated Earnings to Fixed Charges.
99(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
January 7, 2003.
99(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated
January 7, 2003.
24
Exhibit 12
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
Quarter Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------
November 24, November 25, November 24, November 25,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations
before Income Taxes..................... $ 56,220 $ 56,255 $165,225 $ 151,832
Plus Fixed Charges:
Gross Interest Expense.................. 11,846 10,093 23,772 19,772
40% of Restaurant and Equipment Minimum
Rent Expense.......................... 5,256 5,086 10,544 10,160
------- ------ ------- -------
Total Fixed Charges................. 17,102 15,179 34,316 29,932
Less Capitalized Interest.................. (874) (994) (1,844) (1,880)
------- ------ ------- -------
Consolidated Earnings from Operations
before Income Taxes Available to Cover
Fixed Charges (1)...................... $ 72,448 $ 70,440 $197,697 $ 179,884
======== ======== ======== =======
Ratio of Consolidated Earnings to Fixed
Charges (1)............................. 4.24 4.64 5.76 6.01
======== ======== ======== =======
- --------------------------------------------------------------------------------------------------------------------
(1) The computation of our ratio of consolidated earnings to fixed charges, before restructuring credit, is as follows:
Quarter Ended Six Months Ended
- --------------------------------------------------------------------------------------------------------------------
November 24, November 25, November 24, November 25,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations,
before Restructuring Credit and Income
Taxes Available to Cover Fixed Charges.. $ 72,448 $ 68,171 $ 197,697 $ 177,615
======= ======= ======== ========
Ratio of Consolidated Earnings, before
Restructuring Credit, to Fixed
Charges................................. 4.24 4.49 5.76 5.93
======= ======= ======== ========
- --------------------------------------------------------------------------------------------------------------------
25
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 November 24, 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
January 7, 2003
26
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 November 24, 2002, as filed with the
Securities and Exchange Commission on the date hereof ("Report"), I, Linda
Dimopoulos, Senior 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/ Linda J. Dimopoulos
----------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
January 7, 2003
27