Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
- --------------------------------------------------------------------------------
(Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended February 23, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............. to ................
- --------------------------------------------------------------------------------
1-13666
Commission File Number
- --------------------------------------------------------------------------------
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
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)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
- --------------------------------------------------------------------------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of April 1, 2003:
168,316,192 (excluding 92,931,726 shares held in our treasury).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 12
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 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21
Index to Exhibits 23
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
-------------------------------------------------------------------------------------------------------------------
February 23, 2003 February 24, 2002
-------------------------------------------------------------------------------------------------------------------
Sales........................................................ $1,181,383 $1,124,472
Costs and Expenses:
Cost of sales:
Food and beverage....................................... 364,328 350,310
Restaurant labor........................................ 375,320 358,327
Restaurant expenses..................................... 180,674 157,596
---------- ----------
Total Cost of Sales................................... $ 920,322 $ 866,233
Selling, general, and administrative...................... 108,935 104,482
Depreciation and amortization............................. 48,132 41,865
Interest, net............................................. 10,669 9,116
---------- ----------
Total Costs and Expenses............................ $1,088,058 $1,021,696
Earnings before Income Taxes................................. 93,325 102,776
Income Taxes................................................. (31,539) (36,556)
---------- ----------
Net Earnings................................................. $ 61,786 $ 66,220
========== ==========
Net Earnings per Share:
Basic..................................................... $ 0.36 $ 0.38
========== ==========
Diluted................................................... $ 0.35 $ 0.36
========== ==========
Average Number of Common Shares Outstanding:
Basic..................................................... 170,700 175,000
========== ==========
Diluted................................................... 177,500 184,400
========== ==========
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except per Share Data)
(Unaudited)
Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------
February 23, 2003 February 24, 2002
- --------------------------------------------------------------------------------------------------------------------
Sales....................................................... $3,427,479 $3,204,962
Costs and Expenses:
Cost of sales:
Food and beverage...................................... 1,060,518 1,015,204
Restaurant labor....................................... 1,098,456 1,020,134
Restaurant expenses.................................... 519,140 459,942
---------- ----------
Total Cost of Sales.................................. $2,678,114 $2,495,280
Selling, general, and administrative..................... 319,818 308,535
Depreciation and amortization............................ 139,203 122,436
Interest, net............................................ 31,651 26,372
Restructuring credit and asset impairment............... 143 (2,269)
---------- ----------
Total Costs and Expenses........................... $3,168,929 $2,950,354
---------- ----------
Earnings before Income Taxes................................ 258,550 254,608
Income Taxes................................................ (87,400) (89,769)
---------- ----------
Net Earnings................................................ $ 171,150 $ 164,839
========== ==========
Net Earnings per Share:
Basic................................................... $ 1.00 $ 0.94
========== ==========
Diluted.................................................. $ 0.96 $ 0.90
========== ==========
Average Number of Common Shares Outstanding:
Basic.................................................... 171,100 175,400
========== ==========
Diluted.................................................. 178,700 183,800
========== ==========
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------
February 23, 2003 May 26, 2002
- --------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 124,678 $ 152,875
Short-term investments.................................... -- 9,904
Receivables............................................... 29,828 29,089
Inventories............................................... 213,856 172,413
Assets held for disposal.................................. 9,613 10,047
Prepaid expenses and other current assets................. 17,013 23,076
Deferred income taxes..................................... 49,874 52,127
----------- -----------
Total Current Assets.................................. $ 444,862 $ 449,531
Land, Buildings, and Equipment............................... 2,101,089 1,920,768
Other Assets................................................. 172,401 159,437
----------- -----------
Total Assets.......................................... $ 2,718,352 $ 2,529,736
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 189,223 $ 160,064
Accrued payroll........................................... 80,729 87,936
Accrued income taxes...................................... 60,764 68,504
Other accrued taxes....................................... 32,481 30,474
Other current liabilities................................. 302,806 254,036
----------- -----------
Total Current Liabilities............................. $ 666,003 $ 601,014
Long-term Debt............................................... 658,648 662,506
Deferred Income Taxes........................................ 135,542 117,709
Other Liabilities............................................ 19,528 19,630
----------- -----------
Total Liabilities..................................... $ 1,479,721 $ 1,400,859
----------- -----------
Stockholders' Equity:
Common stock and surplus.................................. $ 1,520,999 $ 1,474,054
Retained earnings......................................... 925,039 760,684
Treasury stock............................................ (1,148,677) (1,044,915)
Accumulated other comprehensive income.................... (12,578) (12,841)
Unearned compensation..................................... (44,568) (46,108)
Officer notes receivable.................................. (1,584) (1,997)
----------- -----------
Total Stockholders' Equity............................ $ 1,238,631 $ 1,128,877
----------- -----------
Total Liabilities and Stockholders' Equity............ $ 2,718,352 $ 2,529,736
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
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 Nine Months Ended February 23, 2003 and February 24, 2002
(In Thousands)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Officer Total
and Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income Compensation Receivable Equity
- ------------------------------------------------------------------------------------------------------------------------------------
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........................ -- 171,150 -- -- -- -- 171,150
Other comprehensive income:
Foreign currency adjustment....... -- -- -- 374 -- -- 374
Change in fair value of
derivatives, net of tax of $79... -- -- -- (111) -- -- (111)
--------------
Total comprehensive income....... -- -- -- -- -- -- 171,413
Cash dividends declared................. -- (6,795) -- -- -- -- (6,795)
Stock option exercises (2,764 shares)... 24,259 -- 1,030 -- -- -- 25,289
Issuance of restricted stock (197 shares)
net of forfeiture adjustments.......... 4,857 -- 507 -- (5,364) -- --
Earned compensation..................... -- -- -- -- 2,829 -- 2,829
ESOP note receivable repayments......... -- -- -- -- 4,075 -- 4,075
Income tax benefits credited to equity.. 14,778 -- -- -- -- -- 14,778
Purchases of common stock for treasury
4,926 shares)......................... -- -- (106,936) -- -- -- (106,936)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (202 shares)............. 3,051 -- 1,637 -- -- -- 4,688
Repayment of officer notes, net......... -- -- -- -- -- 413 413
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 23, 2003 $1,520,999 $925,039 $(1,148,677) $(12,578) $(44,568) $(1,584) $1,238,631
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Common Accumulated
Stock Other Officer Total
and Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income Compensation Receivable Equity
- ------------------------------------------------------------------------------------------------------------------------------------
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.......................... -- 164,839 -- -- -- -- 164,839
Other comprehensive income:
Foreign currency adjustment......... -- -- -- (648) -- -- (648)
Change in fair value of derivatives,
net of tax of $328................ -- -- -- (532) -- -- (532)
-----------
Total comprehensive income....... -- -- -- -- -- -- 163,659
Cash dividends declared................. -- (4,637) -- -- -- -- (4,637)
Stock option exercises (3,801 shares)... 30,077 -- 1,161 -- -- -- 31,238
Issuance of restricted stock (318 shares),
net of forfeiture adjustments........ 4,517 -- 789 -- (5,426) -- (120)
Earned compensation...................... -- -- -- -- 3,064 -- 3,064
ESOP note receivable repayments.......... -- -- -- -- 5,040 -- 5,040
Income tax benefits credited to equity... 20,834 -- -- -- -- -- 20,834
Purchases of common stock for treasury
(7,526 shares)........................ -- -- (170,831) -- -- -- (170,831)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (231 shares)................... 1,963 -- 1,375 -- -- -- 3,338
Issuance of officer notes, net........... -- -- -- -- -- (59) (59)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 24, 2002 $1,463,190 $692,323 $(1,007,760) $(14,282) $(46,644) $(1,983) $1,084,844
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------
February 23, 2003 February 24, 2002
- --------------------------------------------------------------------------------------------------------------------
Cash Flows-Operating Activities
Net earnings................................................. $ 61,786 $ 66,220
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 48,132 41,865
Amortization of unearned compensation and loan costs....... 1,776 1,771
Change in current assets and liabilities................... 117,013 117,791
Change in other liabilities ............................... 468 (69)
Loss (Gain) on disposal of land, buildings, and equipment.. 1,273 (317)
Change in cash surrender value of trust owned life insurance 1,773 617
Deferred income taxes...................................... 7,543 10,954
Income tax benefits credited to equity..................... 6,325 10,157
Non-cash compensation expense.............................. 443 --
Other, net................................................. 299 (564)
------------ -------------
Net Cash Provided by Operating Activities................ $ 246,831 $ 248,425
------------ -------------
Cash Flows-Investing Activities
Purchases of land, buildings, and equipment.................. (108,513) (91,092)
Increase in other assets..................................... (13,968) (5,131)
Proceeds from disposal of land, buildings, and
equipment (including assets held for disposal)............. 1,013 4,355
------------- ------------
Net Cash Used by Investing Activities.................... $ (121,468) $ (91,868)
------------- ------------
Cash Flows-Financing Activities
Proceeds from issuance of common stock....................... 13,302 13,883
Purchases of treasury stock.................................. (34,867) (108,965)
ESOP note receivable repayment............................... 1,080 1,280
Decrease in short-term debt.................................. -- (44,300)
Repayment of long-term debt.................................. (1,080) (1,280)
Payment of loan costs........................................ -- (30)
------------ ------------
Net Cash Used by Financing Activities.................... $ (21,565) $ (139,412)
------------ ------------
Increase in Cash and Cash Equivalents........................... 103,798 17,145
Cash and Cash Equivalents - Beginning of Period................. 20,880 19,999
------------ ------------
Cash and Cash Equivalents - End of Period....................... $ 124,678 $ 37,144
============ ============
Cash Flow from Changes in Current Assets and Liabilities
Receivables.................................................. 2,587 (4,906)
Inventories.................................................. 17,958 (2,631)
Prepaid expenses and other current assets.................... 411 (372)
Accounts payable............................................. 23,598 42,010
Accrued payroll.............................................. 7,033 20,994
Accrued income taxes......................................... 8,574 9,284
Other accrued taxes.......................................... 1,210 2,620
Other current liabilities.................................... 55,642 50,792
------------ ------------
Change in Current Assets and Liabilities................. $ 117,013 $ 117,791
============ ============
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
7
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------
February 23, 2003 February 24, 2002
- --------------------------------------------------------------------------------------------------------------------
Cash Flows-Operating Activities
Net earnings................................................. $ 171,150 $ 164,839
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 139,203 122,436
Amortization of unearned compensation and loan costs....... 5,320 5,408
Change in current assets and liabilities................... 28,781 5,244
Change in other liabilities ............................... (102) (469)
Loss on disposal of land, buildings, and equipment......... 3,219 2,344
Change in cash surrender value of trust owned life insurance 4,793 1,447
Deferred income taxes...................................... 20,086 13,408
Income tax benefits credited to equity..................... 14,778 20,834
Non-cash restructuring credit and asset impairment......... 143 (2,269)
Non-cash compensation expense.............................. 1,150 --
Other, net................................................. 4 (703)
---------- -----------
Net Cash Provided by Operating Activities................ $ 388,525 $ 332,519
---------- -----------
Cash Flows-Investing Activities
Purchases of land, buildings, and equipment.................. (320,675) (223,774)
Increase in other assets..................................... (18,661) (18,326)
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).............. 3,518 6,864
---------- -----------
Net Cash Used by Investing Activities.................... $ (331,818) $ (266,736)
---------- -----------
Cash Flows-Financing Activities
Proceeds from issuance of common stock....................... 28,827 34,406
Dividends paid............................................... (6,795) (4,637)
Purchases of treasury stock.................................. (106,936) (170,831)
ESOP note receivable repayment............................... 4,075 5,040
Increase in short-term debt.................................. -- 50,700
Repayment of long-term debt.................................. (4,075) (5,047)
Payment of loan costs........................................ -- (84)
---------- -----------
Net Cash Used by Financing Activities.................... $ (84,904) $ (90,453)
---------- -----------
Decrease in Cash and Cash Equivalents........................... (28,197) (24,670)
Cash and Cash Equivalents - Beginning of Period................. 152,875 61,814
---------- -----------
Cash and Cash Equivalents - End of Period....................... $ 124,678 $ 37,144
========== ===========
Cash Flow from Changes in Current Assets and Liabilities
Receivables.................................................. (739) 3,385
Inventories.................................................. (41,443) (80,998)
Prepaid expenses and other current assets.................... (410) 1,863
Accounts payable............................................. 29,159 17,535
Accrued payroll.............................................. (7,207) 6,182
Accrued income taxes......................................... (7,740) (513)
Other accrued taxes.......................................... 2,007 1,652
Other current liabilities.................................... 55,154 56,138
---------- -----------
Change in Current Assets and Liabilities................. $ 28,781 $ 5,244
========== ===========
- --------------------------------------------------------------------------------------------------------------------
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. We have prepared these consolidated financial
statements 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 nine
months ended February 23, 2003, 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 to current period presentation.
Note 2. Consolidated Statements of Cash Flows
During the quarter and nine months ended February 23, 2003, we paid $7,287
and $26,245, respectively, for interest (net of amounts capitalized) and $8,831
and $60,116, respectively, for income taxes. During the quarter and nine months
ended February 24, 2002, we paid $7,739 and $22,877, respectively, for interest
(net of amounts capitalized) and $6,138 and $56,191, 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 3,989,082 and 1,538 shares of common stock were
excluded from the calculation of diluted earnings per share for the quarters
ended February 23, 2003 and February 24, 2002, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 3,984,663 and 20,288 shares of common stock were
excluded from the calculation of diluted earnings per share for the nine months
ended February 23, 2003 and February 24, 2002, 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 1,704,287
shares of our common stock for $34,867 in the quarter ended February 23, 2003,
resulting in a cumulative repurchase as of February 23, 2003 of 92,672,753
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. Commitments and Contingencies
We make trade commitments in the course of our normal operations. As of
February 23, 2003 and February 24, 2002, we were contingently liable for
approximately $14,931 and $1,026, respectively, under outstanding trade letters
of credit issued in connection with purchase commitments. These letters of
credit have terms of one month or less and are used to collateralize our
obligations to third parties for the purchase of inventories.
As collateral for performance on other contracts and as credit guarantees
to banks and insurers, we were contingently liable pursuant to guarantees of
subsidiary obligations under standby letters of credit. As of February 23, 2003
and February 24, 2002, we had $41,442 and $30,000, respectively of standby
letters of credit related to
9
workers' compensation and general liabilities accrued in our consolidated
financial statements. As of February 23, 2003 and February 24, 2002, we had
$8,245 and $10,002, respectively, of standby letters of credit related to
contractual operating lease obligations and other payments. All standby letters
of credit are renewable annually.
As of February 23, 2003 and February 24, 2002, we had $4,486 and $5,792,
respectively, of guarantees associated with third party sublease or assignment
obligations. These amounts represent the maximum potential amount of future
payments under the guarantees. We did not accrue for the guarantees, as the
likelihood of the third parties defaulting on the sublease or assignment
agreements was less than probable. In the event of default by a third party, the
indemnity and/or default clauses in our sublease and assignment agreements
govern our ability to recover from and pursue the third party for damages
incurred as a result of its default. We do not hold any third-party assets as
collateral related to these sublease or assignment agreements, except to the
extent that the sublease or assignment allows us to take back possession of the
building and personal property. The guarantees expire over the lease terms,
which range from fiscal 2004 through fiscal 2012.
We are involved in litigation arising from the normal course of business.
In the opinion of management, this litigation is not expected to materially
impact our consolidated financial statements.
Note 6. Accounting Changes
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.
During the quarter and nine months ended February 23, 2003, we sold certain
assets held for disposal for a loss of $0 and $143, respectively, in excess of
the original write-down amount.
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 the third
quarter of fiscal 2003. Adoption of SFAS No. 146 did not materially impact 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 the
third quarter of fiscal 2003. Adoption of Interpretation No. 45 did not
materially impact our consolidated financial statements.
Note 7. Future Application of Accounting Standards
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. We adopted the consensus reached in Issue No. 02-16
in the fourth quarter of fiscal 2003 and its provisions did not have a material
impact on our consolidated financial statements.
10
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.
Note 8. Subsequent Events
On February 24, 2003, we opened a new test restaurant in Orlando, Florida
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, nutritionally balanced meals that are lower in calories than comparable
restaurant meals.
On March 20, 2003, the Board of Directors declared a four cents per share
cash dividend to be paid to shareholders on May 1, 2003 for all shareholders of
record as of the close of business on April 10, 2003.
11
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 nine months ended
February 23, 2003 and February 24, 2002.
Quarter Ended Nine Months Ended
- ----------------------------------------------------------------------------------------------------------------------
February 23, February 24, February 23, February 24,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------
Sales.......................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverage......................... 30.8 31.2 30.9 31.7
Restaurant labor.......................... 31.8 31.9 32.1 31.8
Restaurant expenses....................... 15.3 14.0 15.1 14.4
------ ------ ------ ------
Total Cost of Sales..................... 77.9% 77.1% 78.1 77.9%
Selling, general, and administrative........ 9.2 9.3 9.4 9.6
Depreciation and amortization............... 4.1 3.7 4.1 3.8
Interest, net............................... 0.9 0.8 0.9 0.8
Restructuring credit and asset impairment... -- -- -- --
------ ------ ------ ------
Total Costs and Expenses.............. 92.1% 90.9% 92.5% 92.1%
------ ------ ------ ------
Earnings before Income Taxes................... 7.9 9.1 7.5 7.9
Income Taxes................................... (2.7) (3.2) (2.5) (2.8)
------ ------ ------ ------
Net Earnings................................... 5.2% 5.9% 5.0% 5.1%
====== ====== ====== ======
- ----------------------------------------------------------------------------------------------------------------------
SALES
Sales were $1.181 billion and $1.124 billion for the quarters ended
February 23, 2003 and February 24, 2002, respectively. The 5.1 percent increase
in sales for the third quarter of fiscal 2003 as compared to the third quarter
of fiscal 2002 was primarily due to increased annual same-restaurant sales in
the U.S. and a net increase of 61 company-owned restaurants since the third
quarter of fiscal 2002. Red Lobster sales of $621 million were 2.3 percent above
last year's third quarter, driven by nine additional restaurants in operation
versus prior year and a 1.2 percent increase in U.S. same-restaurant sales,
primarily as a result of a 3.3 percent increase in average check and a 2.1
percent decrease in guest counts. The increase extended Red Lobste's string of
comparable sales gains to 21 consecutive quarters. However, Red Lobster's total
sales were lower than planned. Olive Garden's sales of $505 million were 5.7
percent above last year's third quarter, driven primarily by its 28 new
restaurants in operation versus last year. Olive Garden achieved its 34th
consecutive quarter of same-restaurant sales growth with a 0.3 percent increase,
primarily as a result of a 3.1 percent increase in average check and a 2.8
percent decrease in guest counts. Same-restaurant sales for Red Lobster and
Olive Garden were adversely affected by approximately one percentage point for
the third quarter of fiscal 2003 by a shift in the Thanksgiving holiday. This
holiday, for which the restaurants are closed, was in the third quarter of
fiscal 2003 while it was in the second quarter of fiscal 2002. Sales for Red
Lobster and Olive Garden were also adversely affected by approximately one
percentage point for the third quarter of fiscal 2003 from more severe weather
than last year. 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 fiscal year as the economy softened. Bahama
Breeze is responding with a range of menu and decor improvements. Smokey Bones
opened seven new restaurants during the third quarter of fiscal 2003.
Sales were $3.427 billion and $3.205 billion for the first nine months of
fiscal 2003 and 2002, respectively. The 6.9 percent increase in sales for the
first nine months of fiscal 2003 as compared to the first nine months of fiscal
2002 was primarily due to increased annual same-restaurant sales in the U.S. and
a net increase of 61 company-owned restaurants since the third quarter of fiscal
2002. Red Lobster's sales of $1.788 billion were 4.6 percent above last year.
U.S. same-restaurant sales for Red Lobster increased 3.4 percent, primarily as a
result of a 3.2 percent increase in average check and a 0.2 percent increase in
guest counts. Olive Garden's sales of $1.477 billion were 7.1 percent above last
year. U.S. same-restaurant sales for Olive Garden increased 2.9 percent,
primarily as a result of a 3.6 percent increase in average check and a 0.7
percent decrease in guest counts. Bahama Breeze opened
12
three new restaurants during the first nine months of fiscal 2003. Two more
openings are scheduled for fiscal 2003. Smokey Bones opened 15 new restaurants
during the first nine months of fiscal 2003, with at least five more restaurants
expected to open in fiscal 2003. This 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 $1.088 billion and $1.022 billion for the
quarters ended February 23, 2003 and February 24, 2002, respectively. As a
percent of sales, total costs and expenses increased from 90.9 percent in the
third quarter of fiscal 2002 to 92.1 percent in the third 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 third quarter of fiscal 2003
primarily as a result of lower product costs and pricing changes. Restaurant
labor decreased in the third quarter of fiscal 2003 primarily as a result of
lower bonus costs and the favorable impact of higher sales volumes, which were
only partially offset by a modest increase in wage rates and higher staffing
levels. Restaurant expenses, which include lease, property tax, credit card,
utility, workers' compensation, new restaurant pre-opening, and other operating
expenses, increased in the third quarter of fiscal 2003 primarily as a result of
increased workers' compensation and insurance expenses, higher utility expenses,
and higher incremental pre-opening expenses due to an increase in new restaurant
openings, which were only partially offset by the favorable impact of higher
sales volumes.
Selling, general, and administrative expenses decreased in the third
quarter of fiscal 2003 primarily as a result of decreased bonus costs and the
favorable impact of higher sales volumes, which were only partially offset by
increased marketing expense incurred in response to the current challenging
economic and competitive environment.
Depreciation and amortization expense increased in the third 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 third 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 $3.169 billion and $2.950 billion for the
first nine months of fiscal 2003 and 2002, respectively. As a percent of sales,
total costs and expenses increased from 92.1 percent in the first nine months of
fiscal 2002 to 92.5 percent in the first nine 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 nine months of fiscal 2003
primarily as a result of lower product costs and pricing changes. Restaurant
labor increased in the first nine months of fiscal 2003 primarily as a result of
a modest increase in wage rates and higher promotional staffing levels, which
were only partially offset by the impact of higher sales volumes. Restaurant
expenses increased in the first nine months of fiscal 2003 primarily as a result
of increased workers' compensation and insurance expenses, and higher
incremental pre-opening expenses due to an increase in new restaurant openings,
which were only partially offset by the favorable impact of higher sales
volumes.
Selling, general, and administrative expenses decreased in the first nine
months of fiscal 2003 primarily as a result of decreased bonus costs and the
favorable impact of higher sales volumes, which were only partially offset by
increased marketing expense incurred in response to the current challenging
economic and competitive environment.
Depreciation and amortization expense increased in the first nine 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 nine 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.
13
INCOME TAXES
The effective income tax rate for the third quarter and first nine months
of fiscal 2003 was 33.8 percent. This compared to an effective income tax rate
of 35.6 percent and 35.3 percent in the third quarter and first nine months of
fiscal 2002, respectively. The decreases in fiscal 2003 were primarily a result
of 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 for the nine
months ended February 23, 2003.
NET EARNINGS AND NET EARNINGS PER SHARE
Net earnings for the third quarter of fiscal 2003 decreased 6.7 percent to
$62 million (35 cents per diluted share) compared with net earnings for the
third quarter of fiscal 2002 of $66 million (36 cents per diluted share). Due to
lower than expected sales growth, Red Lobster's restaurant labor costs,
restaurant expenses, selling, general, and administrative expenses, and
depreciation expense each increased as a percent of sales. As a result, its
operating profit declined versus the third quarter of 2002. Increased sales at
Olive Garden, combined with lower food and beverage and restaurant labor costs
as a percent of sales, more than offset increased restaurant and marketing
expenses and resulted in record third quarter operating profit for Olive Garden
in fiscal 2003. The decrease in both net earnings and diluted net earnings per
share for the third quarter of fiscal 2003 was primarily due to increases in
restaurant expenses and depreciation and amortization expenses as a percent of
sales at both Red Lobster and Olive Garden. Earnings results were negatively
impacted by unanticipated worker's compensation and insurance expenses, higher
than expected utility expense, increased marketing expense in response to the
current challenging economic and competitive environment and higher incremental
pre-opening expense versus prior year due to an increase in new restaurant
openings.
For the first nine months of fiscal 2003, net earnings increased 3.8
percent to $171 million (96 cents per diluted share) compared with net earnings
for the first nine months of fiscal 2002 of $165 million (90 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 first nine months of fiscal
2002 were $163 million (89 cents per diluted share). The increase in both net
earnings and diluted net earnings per share for the first nine 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.
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 third quarter of fiscal 2003, compared with the number open at the end of
fiscal 2002 and the end of the third quarter of fiscal 2002.
- --------------------------------------------------------------------------------------------------------------------
February 23, 2003 May 26, 2002 February 24, 2002
- --------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 641 636 631
Red Lobster - Canada............... 31 31 32
------ ------ ------
Total......................... 672 667 663
Olive Garden - USA................. 510 490 482
Olive Garden - Canada.............. 6 6 6
------ ------ ------
Total......................... 516 496 488
Bahama Breeze...................... 32 29 26
Smokey Bones BBQ................... 34 19 16
------ ------ ------
Total......................... 1,254 1,211 1,193
====== ====== ======
- --------------------------------------------------------------------------------------------------------------------
14
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 February 23, 2003, 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
February 23, 2003, no amounts were outstanding under the credit facility.
At February 23, 2003, 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 $35 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
February 23, 2003 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 $660,065 $ -- $300,000 $150,000 $210,065
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 309,422 53,979 90,075 66,169 99,199
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
obligations $969,487 $53,979 $390,075 $216,169 $309,264
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- -------------------------- --------------- ---------------------------------------------------------------------------
Total
Other Commercial Amounts Less than 2-3 4-5 Over 5
Commitments Committed 1 Year Years Years Years
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Trade letters of credit $ 14,931 $ 14,931 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (1) 49,687 49,687 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (2) 4,486 801 1,153 1,142 1,390
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 69,104 $ 65,419 $1,153 $1,142 $1,390
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(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 $6,782 of lease payments included in contractual
operating lease obligation payments noted above.
(2) Consists solely of guarantees associated with properties that have been
subleased or assigned. We are not aware of any non-performance under these
arrangements that would result in our having to perform in accordance with
the terms of the guarantees.
15
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 1.7 million shares of our common stock for
$35 million in the third quarter of fiscal 2003, compared to 4.2 million shares
for $109 million in the third quarter of fiscal 2002. For the first nine months
of fiscal 2003, net cash flows used by financing activities included our
repurchase of 4.9 million shares of our common stock for $107 million, compared
to 7.5 million shares for $171 million in the first nine months of fiscal 2002.
As of February 23, 2003, a total of 92.7 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 $109 million and $321
million in the third quarter and first nine months of fiscal 2003, respectively,
compared to $91 million and $224 million in the third quarter and first nine
months of fiscal 2002, respectively. The increased expenditures in fiscal 2003
resulted primarily from increased spending associated with building more new
restaurants and replacing equipment. Net cash flows used by investing activities
also included a $12 million funding of our defined benefit pension plans. An
additional $8 million was funded to the pension plans subsequent to the end of
the third quarter of fiscal 2003. These fundings allowed the pension plans to
maintain a fully funded status as of the February 28, 2003 annual valuation
date.
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 $445 million at February 23, 2003, compared to
$450 million at May 26, 2002. The decrease resulted primarily from decreases in
cash and cash equivalents of $28 million and short-term investments of $10
million that are due principally to our use of a portion of the proceeds
received from a March 2002 medium-term debt issuance to fund capital
expenditures and working capital needs. These decreases were offset by an
increase in inventories of $41 million that was due to seasonality and
opportunistic product purchases.
Our current liabilities totaled $666 million at February 23, 2003, up from
$601 million at May 26, 2002. Accounts payable of $189 million at February 23,
2003, increased from $160 million at May 26, 2002, principally due to the timing
and terms of inventory purchases. Accrued payroll of $81 million at February 23,
2003, decreased from $88 million at May 26, 2002, principally due to the payment
in June of annual management and employee bonuses. Accrued income taxes of $61
million at February 23, 2003, decreased from $69 million at May 26, 2002,
principally due to the timing of income tax payments. Other current liabilities
of $303 million at February 23, 2003, increased from $254 million at May 26,
2002, principally due to increases in gift card payables (associated with
seasonal fluctuations) and insurance 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.
16
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 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 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 the expected use 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 November 2002, the FAS'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. We adopted the consensus reached in Issue No. 02-16
in the fourth quarter of fiscal 2003 and its provisions did not have a material
impact on 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
17
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including fluctuations in
interest rates, foreign currency exchange rates, and commodity prices. To manage
this exposure, we periodically enter into interest rate, foreign currency
exchange, and commodity instruments for other than trading purposes.
We use the variance/covariance method to measure value at risk, over time
horizons ranging from one week to one year, at the 95 percent confidence level.
As of February 23, 2003, 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
$700,000 over a period of one year. At February 23, 2003, 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 $30 million. The fair value of our
long-term fixed rate debt during the first nine months of fiscal 2003 averaged
approximately $676 million, with a high of approximately $695 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.
18
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.
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 5. Other Information
On March 20, 2003, our Board of Directors declared a regular semi-annual
cash dividend of four cents per share on the Company's outstanding common stock.
The dividend is payable on May 1, 2003 to shareholders of record as of the close
of business on April 10, 2003.
After the end of the third quarter of fiscal 2003, we opened a new test
restaurant in Orlando, Florida 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, nutritionally balanced meals
that are lower in calories than comparable restaurant meals.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10(a) Darden Restaurants, Inc. 2002 Stock Incentive
Plan, as amended March 19, 2003.
Exhibit 10(b) Darden Restaurants, Inc. Stock Option and
Long-Term Incentive Plan of 1995, as amended
March 19, 2003.
Exhibit 10(c) Darden Restaurants, Inc. Restaurant Management
and Employee Stock Plan of 2000, as amended
March 19, 2003.
Exhibit 10(d) Darden Restaurants, Inc. Compensation Plan for
Non-Employee Directors, as amended March 19,
2003.
Exhibit 10(e) Darden Restaurants, Inc. Stock Plan for
Directors, as amended March 19, 2003.
Exhibit 10(f) Darden Restaurants, Inc. FlexComp Plan, as
amended March 19, 2003.
Exhibit 12 Computation of Ratio of Consolidated Earnings
to Fixed Charges.
19
Exhibit 99(a) Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated April 9, 2003.
Exhibit 99(b) Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated April 9, 2003.
(b) Reports on Form 8-K.
During the third quarter, we filed the following reports on Form 8-K:
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.
On February 18, 2003, we filed a current report on Form 8-K dated
February 18, 2003, announcing our third quarter financial
outlook.
In addition, we filed the following reports on Form 8-K subsequent to
the close of the third quarter of fiscal 2003:
On March 20, 2003, we filed a current report on Form 8-K dated
March 20, 2003, announcing third quarter financial results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: April 9, 2003 By: /s/ Paula J. Shives
-----------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: April 9, 2003 By: /s/ Linda J. Dimopoulos
-----------------------------
Linda J. Dimopoulos
Senior Vice President and Chief Financial Officer
(Principal financial officer)
20
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
(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.
April 9, 2003
/s/ Joe R. Lee
- -----------------
Joe R. Lee
Chairman and Chief Executive Officer
21
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
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.
April 9, 2003
/s/ Linda J. Dimopoulos
- --------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
22
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
10(a) Darden Restaurants, Inc. 2002 Stock Incentive Plan, as amended
March 19, 2003.
10(b) Darden Restaurants, Inc. Stock Option and Long-Term Incentive
Plan of 1995, as amended March 19, 2003.
10(c) Darden Restaurants, Inc. Restaurant Management and Employee
Stock Plan of 2000, as amended March 19, 2003.
10(d) Darden Restaurants, Inc. Compensation Plan for Non-Employee
Directors, as amended March 19, 2003.
10(e) Darden Restaurants, Inc.Stock Plan for Directors, as amended
March 19, 2003.
10(f) Darden Restaurants, Inc. FlexComp Plan, as amended March 19,
2003.
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 April 9, 2003.
99(b) Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, dated April 9, 2003.
23
Exhibit 12
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar Amounts in Thousands)
Quarter Ended Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------
February 23, February 24, February 23, February 24,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations
Before Income Taxes..................... $ 93,325 $ 102,776 $ 258,550 $ 254,608
Plus Fixed Charges:
Gross Interest Expense.................. 11,849 10,134 35,621 29,906
40% of Restaurant and Equipment Minimum
Rent Expense.......................... 5,754 5,171 16,298 15,331
--------- --------- --------- ---------
Total Fixed Charges................. 17,603 15,305 51,919 45,237
Less Capitalized Interest.................. (875) (886) (2,719) (2,766)
--------- --------- --------- ---------
Consolidated Earnings from Operations
before Income Taxes Available to Cover
Fixed Charges (1)...................... $ 110,053 $ 117,195 $ 307,750 $ 297,079
========= ========= ========= =========
Ratio of Consolidated Earnings to Fixed
Charges (1)............................. 6.25 7.66 5.93 6.57
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------
(1) The computation of our ratio of consolidated earnings to fixed charges,
before restructuring credit, is as follows:
Quarter Ended Nine Months Ended
- --------------------------------------------------------------------------------------------------------------------
February 23, February 24, February 23, February 24,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------
Consolidated Earnings from Operations,
before Restructuring Credit and Income
Taxes Available to Cover Fixed Charges... $ 110,053 $ 117,195 $ 307,750 $ 294,810
========= ========== ========= ==========
Ratio of Consolidated Earnings, before
Restructuring Credit, to Fixed Charges... 6.25 7.66 5.93 6.52
========= ========== ======== ==========
- --------------------------------------------------------------------------------------------------------------------
24
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 February 23, 2003 , 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
April 9, 2003
25
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 February 23, 2003, 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
April 9, 2003
26