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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 23, 2003
[ ] 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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of January 2, 2004:
164,817,052 (excluding 98,477,719 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 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 19
Item 4. Controls and Procedures 19
Part II - Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Quarter Ended
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November 23, 2003 November 24, 2002
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Sales........................................................ $1,142,543 $1,071,531
Costs and expenses:
Cost of sales:
Food and beverage....................................... 346,200 330,954
Restaurant labor........................................ 375,614 353,774
Restaurant expenses..................................... 191,010 170,727
----------- ----------
Total cost of sales, excluding restaurant depreciation
and amortization of $48,443 and $42,150, respectively. $ 912,824 $ 855,455
Selling, general, and administrative...................... 120,320 103,197
Depreciation and amortization............................. 52,048 45,930
Interest, net............................................. 10,725 10,729
---------- ----------
Total costs and expenses.............................. $1,095,917 $1,015,311
---------- ----------
Earnings before income taxes................................. 46,626 56,220
Income taxes................................................. (15,373) (18,742)
---------- ----------
Net earnings................................................. $ 31,253 $ 37,478
========== ==========
Net earnings per share:
Basic..................................................... $ 0.19 $ 0.22
========== ==========
Diluted................................................... $ 0.18 $ 0.21
========== ==========
Average number of common shares outstanding:
Basic..................................................... 164,900 170,900
========== ==========
Diluted................................................... 171,000 178,700
========== ==========
- --------------------------------------------------------------------------------------------------------------------
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 23, 2003 November 24, 2002
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Sales....................................................... $2,402,232 $2,246,096
Costs and expenses:
Cost of sales:
Food and beverage...................................... 742,913 696,190
Restaurant labor....................................... 767,949 723,136
Restaurant expenses.................................... 381,832 340,231
---------- ----------
Total cost of sales, excluding restaurant
depreciation .......................................... $1,892,694 $1,759,557
and amortization of $96,525 and $83,973, respectively
Selling, general, and administrative..................... 233,961 209,261
Depreciation and amortization............................ 103,601 91,071
Interest, net............................................ 21,366 20,982
---------- ----------
Total costs and expenses........................... $2,251,622 $2,080,871
---------- ----------
Earnings before income taxes................................ 150,610 165,225
Income taxes................................................ (50,763) (55,861)
---------- ----------
Net earnings................................................ $ 99,847 $ 109,364
========== ==========
Net earnings per share:
Basic................................................... $ 0.61 $ 0.64
========== ==========
Diluted.................................................. $ 0.58 $ 0.61
========== ==========
Average number of common shares outstanding:
Basic.................................................... 164,800 171,300
========== ==========
Diluted.................................................. 170,700 179,300
========== ==========
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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November 23, 2003 May 25, 2003
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 27,806 $ 48,630
Receivables............................................... 25,672 29,023
Inventories............................................... 256,997 173,644
Prepaid expenses and other current assets................. 24,736 25,126
Deferred income taxes..................................... 53,971 49,206
----------- -----------
Total current assets.................................. $ 389,182 $ 325,629
Land, buildings, and equipment............................... 2,239,571 2,157,132
Other assets................................................. 183,897 181,872
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Total assets.......................................... $ 2,812,650 $ 2,664,633
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 167,535 $ 175,991
Short-term debt .......................................... 70,900 --
Accrued payroll........................................... 83,155 85,975
Accrued income taxes...................................... 50,843 67,975
Other accrued taxes....................................... 34,761 35,069
Unearned revenues......................................... 64,894 72,698
Other current liabilities................................. 222,455 202,201
----------- -----------
Total current liabilities............................. $ 694,543 $ 639,909
Long-term debt............................................... 655,066 658,086
Deferred income taxes........................................ 160,980 150,537
Other liabilities............................................ 20,693 19,910
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Total liabilities..................................... $ 1,531,282 $ 1,468,442
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Stockholders' equity:
Common stock and surplus.................................. $ 1,559,909 $ 1,525,957
Retained earnings......................................... 1,072,715 979,443
Treasury (1,295,038) (1,254,293)
stock............................................
Accumulated other comprehensive income.................... (9,544) (10,489)
Unearned compensation..................................... (45,418) (42,848)
Officer notes receivable.................................. (1,256) (1,579)
----------- -----------
Total stockholders' equity............................ $ 1,281,368 $ 1,196,191
----------- -----------
Total liabilities and stockholders' equity............ $ 2,812,650 $ 2,664,633
=========== ===========
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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 23, 2003 and November 24, 2002
(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 25, 2003............$1,525,957 $ 979,443 $(1,254,293) $(10,489) $(42,848) $(1,579) $1,196,191
Comprehensive income:
Net earnings.................... -- 99,847 -- -- -- -- 99,847
Other comprehensive income:
Foreign currency adjustment -- -- -- 1,566 -- -- 1,566
Change in fair value of
derivatives, net of tax
of $460 -- -- -- (621) -- -- (621)
----------
Total comprehensive income -- -- -- -- -- -- 100,792
Cash dividends declared............. -- (6,575) -- -- -- -- (6,575)
Stock option exercises (1,856 shares) 16,117 -- 1,604 -- -- -- 17,721
Issuance of restricted stock (394
shares), net of forfeiture
adjustments....... 7,591 -- 171 -- (7,762) -- --
Earned compensation................. -- -- -- -- 2,027 -- 2,027
ESOP note receivable repayments..... -- -- -- -- 3,165 -- 3,165
Income tax benefits credited to
equity............................ 8,066 -- -- -- -- -- 8,066
Purchases of common stock for
treasury (2,199 shares)........... -- -- (43,733) -- -- -- (43,733)
Issuance of treasury stock under
Employee Stock Purchase and
other plans (202 shares).......... 2,178 -- 1,213 -- -- -- 3,391
Repayment of officer notes, net..... -- -- -- -- -- 323 323
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Balance at November 23, 2003 $1,559,909 $1,072,715 $(1,295,038) $ (9,544) $(45,418) $(1,256) $1,281,368
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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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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 23, 2003 November 24, 2002
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Cash flows--operating activities
Net earnings................................................. $ 31,253 $ 37,478
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 52,048 45,930
Asset impairment charge, net............................... 2,945 --
Amortization of unearned compensation and loan costs....... 1,509 1,769
Change in current assets and liabilities................... (117,854) (104,220)
Change in other liabilities ............................... 389 (154)
Loss on disposal of land, buildings, and equipment......... 1,081 1,009
Change in cash surrender value of trust owned life insurance (1,744) 188
Deferred income taxes...................................... 2,371 10,708
Income tax benefits credited to equity..................... 3,661 4,407
Non-cash restructuring credit.............................. -- 143
Non-cash compensation expense.............................. 743 707
Other, net................................................. 191 (1)
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Net cash used in operating activities.................... $ (23,407) $ (2,036)
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Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (103,520) (101,917)
Increase in other assets..................................... (2,272) (449)
Proceeds from maturity of short-term investments............. -- 10,000
Proceeds from disposal of land, buildings, and equipment .... 2,540 2,055
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Net cash used in investing activities.................... $ (103,252) $ (90,311)
------------ -----------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 9,773 8,945
Dividends paid............................................... (6,575) (6,795)
Purchases of treasury stock.................................. (16,155) (25,999)
Increase in short-term debt.................................. 70,900 --
ESOP note receivable repayment............................... 1,880 1,520
Repayment of long-term debt.................................. (1,880) (1,520)
------------ -----------
Net cash provided by (used in) financing activities...... $ 57,943 $ (23,849)
------------ -----------
Decrease in cash and cash equivalents........................... (68,716) (116,196)
Cash and cash equivalents - beginning of period................. 96,522 137,076
------------ -----------
Cash and cash equivalents - end of period....................... $ 27,806 $ 20,880
============ ===========
Cash flow from changes in current assets and liabilities
Receivables.................................................. 16,065 (5,062)
Inventories.................................................. (83,262) (51,224)
Prepaid expenses and other current assets.................... 7,922 (850)
Accounts payable............................................. (28,449) (15,556)
Accrued payroll.............................................. 2,033 (168)
Accrued income taxes......................................... (30,809) (33,005)
Other accrued taxes.......................................... (3,099) (2,679)
Unearned revenues............................................ (1,793) 2,810
Other current liabilities.................................... 3,538 1,514
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Change in current assets and liabilities................. $ (117,854) $ (104,220)
============ ===========
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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 23, 2003 November 24, 2002
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Cash flows--operating activities
Net earnings................................................. $ 99,847 $ 109,364
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 103,601 91,071
Asset impairment charge, net............................... 3,447 --
Amortization of unearned compensation and loan costs....... 3,353 3,544
Change in current assets and liabilities................... (95,529) (88,232)
Change in other liabilities ............................... 783 (570)
(Gain) loss on disposal of land, buildings, and equipment.. (478) 1,946
Change in cash surrender value of trust owned life insurance (3,744) 3,020
Deferred income taxes...................................... 5,678 12,543
Income tax benefits credited to equity..................... 8,066 8,453
Non-cash restructuring credit.............................. -- 143
Non-cash compensation expense.............................. 810 707
Other, net................................................. (112) (295)
----------- ----------
Net cash provided by operating activities................ $ 125,722 $ 141,694
----------- ----------
Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (190,193) (212,162)
Increase in other assets..................................... (2,685) (4,693)
Proceeds from maturity of short-term investments............. -- 10,000
Purchase of trust owned life insurance....................... -- (6,000)
Proceeds from disposal of land, buildings, and equipment .... 5,438 2,505
----------- ----------
Net cash used in investing activities.................... $ (187,440) $ (210,350)
----------- ----------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 20,302 15,525
Dividends paid............................................... (6,575) (6,795)
Purchases of treasury stock.................................. (43,733) (72,069)
Increase in short-term debt.................................. 70,900 --
ESOP note receivable repayment............................... 3,165 2,995
Repayment of long-term debt.................................. (3,165) (2,995)
----------- ----------
Net cash provided by (used in) financing activities...... $ 40,894 $ (63,339)
----------- ----------
Decrease in cash and cash equivalents........................... (20,824) (131,995)
Cash and cash equivalents - beginning of period................. 48,630 152,875
----------- ----------
Cash and cash equivalents - end of period....................... $ 27,806 $ 20,880
============ ==========
Cash flow from changes in current assets and liabilities
Receivables.................................................. 3,351 (3,326)
Inventories.................................................. (83,353) (59,401)
Prepaid expenses and other current assets.................... 390 (821)
Accounts payable............................................. (8,107) 5,561
Accrued payroll.............................................. (2,820) (14,240)
Accrued income taxes......................................... (17,132) (16,314)
Other accrued taxes.......................................... (308) 797
Unearned revenues............................................ (7,804) (4,996)
Other current liabilities.................................... 20,254 4,508
----------- ----------
Change in current assets and liabilities................. $ (95,529) $ (88,232)
=========== ==========
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See accompanying notes to consolidated financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 1. Background
Darden Restaurants, Inc. ("we", "our" or the "Company") owns and operates
casual dining restaurants in the United States and Canada under the trade names
Red Lobster(R), Olive Garden(R), Bahama Breeze(R), Smokey Bones(R) BBQ, and
Seasons 52sm. 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 six months ended
November 23, 2003, are not necessarily indicative of the results that may be
expected for the fiscal year ending May 30, 2004.
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 25, 2003. 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 six months ended November 23, 2003, we paid $12,240
and $19,433, respectively, for interest (net of amounts capitalized) and $39,174
and $53,307, respectively, for income taxes. 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.
Note 3. Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," encourages the use of a fair-value method of
accounting for stock-based awards under which the fair value of stock options is
determined on the date of grant and expensed over the vesting period. As allowed
by SFAS No. 123, we have elected to account for our stock-based compensation
plans under an intrinsic value method that requires compensation expense to be
recorded only if, on the date of grant, the current market price of our common
stock exceeds the exercise price the employee must pay for the stock. Our policy
is to grant stock options at the fair market value of our underlying stock at
the date of grant. Accordingly, no compensation expense has been recognized for
stock options granted under any of our stock plans because the exercise price of
all options granted was equal to the current market value of our stock on the
grant date. Had we determined compensation expense for our stock options based
on the fair value at the grant date as prescribed under SFAS No. 123, our net
earnings and net earnings per share would have been reduced to the pro forma
amounts indicated below:
Quarter Ended Six Months Ended
November 23, 2003 November 24, 2002 November 23, 2003 November 24, 2002
- -----------------------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 31,253 $ 37,478 $ 99,847 $ 109,364
Add: Stock-based compensation
expense included in reported
net earnings, net of related 1,130 903 1,792 1,489
tax effects
Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of related (5,438) (5,566) (10,096) (10,512)
tax effects
--------------------------------------------------------------------------------
Pro forma $ 26,945 $ 32,815 $ 91,543 $ 100,341
================================================================================
Basic net earnings per share
As reported $ 0.19 $ 0.22 $ 0.61 $ 0.64
Pro forma $ 0.16 $ 0.19 $ 0.56 $ 0.59
Diluted net earnings per share
As reported $ 0.18 $ 0.21 $ 0.58 $ 0.61
Pro forma $ 0.16 $ 0.18 $ 0.54 $ 0.56
========================================================================================================================
9
Note 4. Provision for Impaired Assets and Restaurant Closings
During the quarter and six months ended November 23, 2003, we recorded
charges of $3,004 and $4,188, respectively, for long-lived asset impairments
resulting from the decision to relocate and rebuild certain restaurants. These
impairments were measured based on the amount by which the carrying amount of
the assets exceeded their fair value. Fair value is generally determined based
on appraisals or sales prices of comparable assets. During the quarter and six
months ended November 23, 2003, we also recorded gains of $59 and $741,
respectively, related to assets sold that were previously impaired. These
amounts are included in selling, general, and administrative expenses.
Note 5. 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 net earnings per share computation.
Options to purchase 4,852,750 and 4,188,964 shares of common stock were
excluded from the calculation of diluted net earnings per share for the quarters
ended November 23, 2003 and November 24, 2002, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 4,859,420 and 4,188,964 shares of common stock were
excluded from the calculation of diluted earnings per share for the six months
ended November 23, 2003 and November 24, 2002, respectively, for the same
reason.
Note 6. Stockholders' Equity
Pursuant to the authorization of our Board of Directors to repurchase up to
115,400,000 shares in accordance with applicable securities regulations, we
repurchased 775,859 and 2,198,932 shares of our common stock for $16,155 and
$43,733 in the quarter and six months ended November 23, 2003, respectively,
resulting in a cumulative repurchase as of November 23, 2003 of 100,691,584
shares.
Note 7. Derivative Instruments and Hedging Activities
During the quarter and six months ended November 23, 2003, we entered into
interest rate swap agreements (swaps) to hedge the risk of changes in interest
rates on the cost of a future issuance of fixed-rate debt. The swaps, which had
a $50,000 notional principal amount of indebtedness, will be used to hedge a
portion of the interest payments associated with a forecasted issuance of debt
in fiscal 2006. To the extent the swaps are effective in offsetting the
variability of the hedged cash flows, changes in the fair value of the swaps are
not included in current earnings but are reported as accumulated other
comprehensive income, a component of stockholders' equity. The accumulated gain
or loss at the swap settlement date will be amortized into earnings as an
adjustment to interest expense over the same period in which the related
interest costs on the new debt issuance are recognized in earnings. A deferred
loss of $97 related to the swaps was recognized in accumulated other
comprehensive income at November 23, 2003. No amounts were recognized in
earnings during the quarter and six months ended November 23, 2003.
Note 8. Commitments and Contingencies
We make trade commitments in the course of our normal operations. As of
November 23, 2003 and May 25, 2003, we were contingently liable for
approximately $1,308 and $8,301, 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 November 23, 2003
and May 25, 2003, we had $69,103 and $41,442, respectively of standby letters of
credit related to workers' compensation and general liabilities accrued in our
consolidated financial statements. As of November 23, 2003 and May 25, 2003, we
had $9,746 and $7,503, respectively, of standby letters of credit related to
contractual operating lease obligations and other payments. All standby letters
of credit are renewable annually. As of November 23, 2003 and May 25, 2003, we
had other commercial commitments of $2,125 and $2,250, respectively.
As of November 23, 2003 and May 25, 2003, we had $4,350 and $4,254,
respectively, of guarantees associated with third party sublease or assignment
obligations. These amounts represent the maximum potential
10
amount of future payments under the guarantees. The fair value of these
potential payments discounted at our pre- tax cost of capital at November 23,
2003 and May 25, 2003 amounted to $2,996 and $2,935, respectively. We did not
accrue for the guarantees, as the likelihood of the third parties defaulting on
the sublease or assignment agreements was improbable. 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 the sublease or assignment allows us to
repossess the building and personal property. The guarantees expire over their
respective 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 9. Accounting Changes
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation and our associated
asset retirement cost. It also provides accounting guidance for legal
obligations associated with the retirement of tangible long-lived assets. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. We adopted SFAS No. 143 in the first quarter of fiscal
2004. Adoption of SFAS No. 143 did not materially impact our consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment to Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies the financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement is effective for hedging relationships
designated and contracts entered into or modified after June 30, 2003, except
for the provisions that relate to SFAS No. 133 implementation issues, which will
continue to be applied in accordance with their respective dates. We adopted
SFAS No. 149 in the first quarter of fiscal 2004. Adoption of SFAS No. 149 did
not materially impact our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes accounting standards for the classification and measurement
of certain financial instruments with characteristics of both liabilities and
equity. It requires certain financial instruments that were previously
classified as equity to be classified as assets or liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. We adopted SFAS No. 150 in the second quarter of
fiscal 2004. Adoption of SFAS No. 150 did not materially impact our consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51." Interpretation No.
46, which was revised in December 2003, addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Interpretation No. 46 is effective for interests in structures that are commonly
referred to as special-purpose entities for periods ending after December 15,
2003. Interpretation No. 46 is also effective for all other types of variable
interest entities for periods ending after March 15, 2005. We do not have any
interests that would change our current consolidated reporting entity or require
additional disclosures required by Interpretation No. 46.
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 six months ended
November 23, 2003 and November 24, 2002.
Quarter Ended Six Months Ended
---------------------------------------------------------------------------------------------------------------------
November 23, November 24, November 23, November 24,
2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------------------
Sales.......................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage......................... 30.3 30.9 30.9 31.0
Restaurant labor.......................... 32.9 33.0 32.0 32.2
Restaurant expenses....................... 16.7 15.9 15.9 15.1
------ ------ ------ ------
Total cost of sales, excluding restaurant
depreciation and amortization of 4.2%,
3.9%, 4.0% and 3.7%, respectively.... 79.9% 79.8% 78.8% 78.3%
Selling, general, and administrative........ 10.5 9.7 9.7 9.3
Depreciation and amortization............... 4.6 4.3 4.3 4.1
Interest, net............................... 0.9 1.0 0.9 0.9
------ ------ ------ ------
Total costs and expenses.............. 95.9% 94.8% 93.7% 92.6%
------ ------ ------ ------
Earnings before income taxes................... 4.1 5.2 6.3 7.4
Income taxes................................... (1.4) (1.7) (2.1) (2.5)
------ ------ ------ ------
Net earnings................................... 2.7% 3.5% 4.2% 4.9%
====== ====== ====== ======
---------------------------------------------------------------------------------------------------------------------
SALES
Sales were $1.14 billion and $1.07 billion for the quarters ended November
23, 2003 and November 24, 2002, respectively. The 6.6 percent increase in sales
for the second quarter of fiscal 2004 as compared to the second quarter of
fiscal 2003 was primarily due to increased same-restaurant sales at Olive Garden
and a net increase of 67 Company-owned restaurants since the second quarter of
fiscal 2003. Red Lobster sales of $545 million were 0.7 percent below last
year's second quarter, driven by a 3.1 percent decrease in U.S. same-restaurant
sales. This decline in same-restaurant sales was primarily as a result of a 6.1
percent increase in average check and a 9.2 percent decrease in guest counts,
which was partially offset by revenue from 10 net additional restaurants in
operation versus last year. The decrease ended Red Lobster's string of 23
consecutive quarters of U.S. same-restaurant sales gains. Red Lobster's total
sales were lower than planned. Olive Garden's sales of $518 million were 9.7
percent above last year's second quarter, driven primarily by its 25 net new
restaurants in operation versus last year. Olive Garden achieved its 37th
consecutive quarter of U.S. same-restaurant sales growth with a 4.3 percent
increase, primarily as a result of a 2.8 percent increase in average check and a
1.5 percent increase in guest counts. Bahama Breeze completed its planned
introduction of lunch to most restaurants during the second quarter of fiscal
2004. Three new Bahama Breeze restaurants were opened during the second quarter
of fiscal 2004. Smokey Bones opened nine new restaurants during the second
quarter of fiscal 2004.
Sales were $2.40 billion and $2.25 billion for the first six months ended
November 23, 2003 and November 24, 2002, respectively. The 7.0 percent increase
in sales for the first six months of fiscal 2004 as compared to the first six
months of fiscal 2003 was primarily due to increased same-restaurant sales at
Olive Garden and a net increase of 67 Company-owned restaurants since the second
quarter of fiscal 2003. Red Lobster sales of $1.18 billion were 1.0 percent
above last year. U.S. same-restaurant sales for Red Lobster decreased 0.9
percent, primarily as a result of a 4.9 percent increase in average check and a
5.8 percent decrease in guest counts. Olive Garden's sales of $1.07 billion were
9.7 percent above last year. U.S. same-restaurant sales for Olive Garden
increased 4.1 percent, primarily as a result of a 3.0 percent increase in
average check and a 1.1 percent increase in guest counts. Bahama Breeze opened
three new restaurants during the first six months of fiscal 2004. One more
opening is scheduled for fiscal 2004. Smokey Bones opened 14 new restaurants
during the first six months of fiscal 2004. During fiscal 2004, 25 to 30 new
Smokey Bones restaurants are expected to open.
12
COSTS AND EXPENSES
Total costs and expenses were $1.10 billion and $1.02 billion for the
quarters ended November 23, 2003 and November 24, 2002, respectively. As a
percent of sales, total costs and expenses increased from 94.8 percent in the
second quarter of fiscal 2003 to 95.9 percent in the second quarter of fiscal
2004. The following analysis of the components of total costs and expenses is
presented as a percent of sales.
Food and beverage costs as a percent of sales decreased in the second
quarter of fiscal 2004 primarily as a result of menu pricing changes, which was
partially offset by increased seafood costs. Restaurant labor decreased in the
second quarter of fiscal 2004 primarily as a result of lower employee health
insurance claims, improved labor management, and the favorable impact of higher
sales volumes, which were partially offset by a modest increase in wage rates.
Restaurant expenses, which include lease, property tax, credit card, utility,
workers' compensation, new restaurant pre-opening, and other operating costs,
increased in the second quarter of fiscal 2004. This increase was 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. Increased restaurant expenses were partially offset by the
favorable impact of higher sales volumes.
Selling, general, and administrative expenses increased in the second
quarter of fiscal 2004 primarily as a result of increased benefit costs and
marketing expense incurred in response to the current challenging economic and
competitive environment. These expenses were partially offset by the favorable
impact of higher sales volumes.
Depreciation and amortization expense increased in the second quarter of
fiscal 2004 primarily as a result of new restaurant and remodel activity,
partially offset by the favorable impact of higher sales volumes.
Net interest expense decreased in the second quarter of fiscal 2004
primarily due to the favorable impact of higher sales volumes.
Total costs and expenses were $2.25 billion and $2.08 billion for the six
months ended November 23, 2003 and November 24, 2002, respectively. As a percent
of sales, total costs and expenses increased from 92.6 percent in the first six
months of fiscal 2003 to 93.7 percent in the first six months of fiscal 2004.
The following analysis of the components of total costs and expenses is
presented as a percent of sales.
Food and beverage costs as a percent of sales decreased in the first six
months of fiscal 2004 primarily as a result of pricing changes, which was
partially offset by increased seafood costs and crab usage and additional plate
accompaniments at Red Lobster during its crab promotion. Restaurant labor
decreased in the first six months of fiscal 2004 primarily as a result of lower
employee health insurance claims, improved labor management, and the favorable
impact of higher sales volumes, which were partially offset by a modest increase
in wage rates. Restaurant expenses, which include lease, property tax, credit
card, utility, workers' compensation, new restaurant pre-opening, and other
operating costs, increased in the first six months of fiscal 2004 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 partially offset by the favorable impact of
higher sales volumes.
Selling, general, and administrative expenses increased in the first six
months of fiscal 2004 primarily as a result of increased benefit costs and
marketing expense incurred in response to the current challenging economic and
competitive environment, which was partially offset by the favorable impact of
higher sales volumes.
Depreciation and amortization expense increased in the first six months of
fiscal 2004 primarily as a result of new restaurant and remodel activity,
partially offset by the favorable impact of higher sales volumes.
Net interest expense in the first six months of fiscal 2004 was comparable
to the first six months of fiscal 2003 primarily due to lower interest income in
fiscal 2004, which was offset by the favorable impact of higher sales volumes.
13
INCOME TAXES
The effective income tax rate for the second quarter and first six months
of fiscal 2004 was 33.0 percent and 33.7 percent, respectively. This compared to
an effective income tax rate of 33.3 percent and 33.8 percent in the second
quarter and first six months of fiscal 2003. The rate decreases in fiscal 2004
were primarily a result of lower fiscal 2004 pre-tax earnings.
NET EARNINGS AND NET EARNINGS PER SHARE
Our net earnings for the second quarter of fiscal 2004 decreased 16.6
percent to $31 million (18 cents per diluted share) compared with net earnings
for the second quarter of fiscal 2003 of $37 million (21 cents per diluted
share). At Red Lobster, restaurant expenses, selling, general and administrative
expenses, and depreciation expense each increased as a percent of sales due
primarily to lower than expected sales growth. As a result, Red Lobster's
operating profit declined versus the second quarter of 2003. At Olive Garden,
increased sales and lower food and beverage and restaurant labor expenses as a
percent of sales more than offset increased restaurant and depreciation expenses
as a percent of sales. This resulted in record second quarter operating profit
for Olive Garden in fiscal 2004. The decrease in both our net earnings and
diluted net earnings per share for the second quarter of fiscal 2004 was
primarily due to lower than expected sales growth at Red Lobster, and increases
in our consolidated restaurant expenses, selling, general and administrative
expenses, and depreciation expense as a percent of sales. Earnings results were
negatively impacted by increased workers' compensation and insurance expense,
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 six months of fiscal 2004, net earnings decreased 8.7 percent
to $100 million (58 cents per diluted share) compared with net earnings for the
first six months of fiscal 2003 of $109 million (61 cents per diluted share).
The decreases in both net earnings and diluted net earnings per share for the
first six months of fiscal 2003 were primarily due to lower than expected sales
growth at Red Lobster and increases in our consolidated restaurant expenses,
selling, general and administrative expenses, and depreciation expense as a
percent of sales.
With respect to future earnings results, we indicated on December 19, 2003
that the then current range of estimates of diluted earnings per share for
fiscal 2004, which was $1.31 to $1.43, was relatively broad, and that, given the
uncertainty of the timing of Red Lobster's recovery and other factors, we
believed that range was appropriate.
SEASONALITY
Our sales volumes fluctuate seasonally. In fiscal 2003 and 2002, 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.
14
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the second quarter of fiscal 2004, compared with the number open at the end of
fiscal 2003 and the end of the second quarter of fiscal 2003.
-------------------------------------------------------------------------------------------------------------------
November 23, 2003 May 25, 2003 November 24, 2002
-------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 649 642 639
Red Lobster - Canada............... 31 31 31
----- ----- ------
Total......................... 680 673 670
----- ----- ------
Olive Garden - USA................. 526 518 501
Olive Garden - Canada.............. 6 6 6
----- ----- ------
Total......................... 532 524 507
----- ----- ------
Bahama Breeze...................... 37 34 32
Smokey Bones BBQ................... 53 39 27
Seasons 52......................... 1 1 --
----- ----- ------
Total......................... 1,303 1,271 1,236
===== ===== ======
-------------------------------------------------------------------------------------------------------------------
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 capital needs.
Our commercial paper program serves as our primary source of short-term
financing. As of November 23, 2003, $71 million was outstanding under the
program. To support our commercial paper program, we have a credit facility
under a Credit Agreement dated October 17, 2003, with a consortium of banks,
including Wachovia Bank, N.A., as administrative agent, under which we can
borrow up to $400 million. The credit facility allows us to borrow at interest
rates based on a spread over (i) LIBOR or (ii) a base rate that is the higher of
the prime rate, or one-half of one percent above the federal funds rate, at our
option. The interest rate spread over LIBOR or the base rate is determined by
our debt rating. The credit facility expires on October 17, 2008, 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 and a limitation of $25 million on priority debt,
subject to certain exceptions. The credit facility does not, however, contain a
prohibition on borrowing in the event of a ratings downgrade or a material
adverse change in and of itself. None of these covenants is expected to limit
our liquidity or capital resources. As of November 23, 2003, we were in
compliance with all covenants under the Credit Agreement.
At November 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) $150 million
of unsecured 5.75 percent medium-term notes due in March 2007, (4) $75 million
of unsecured 7.45 percent medium-term notes due in April 2011, (5) $100 million
of unsecured 7.125 percent debentures due in February 2016, and (6) an
unsecured, variable rate $31 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 (SEC), 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.
15
A summary of our contractual obligations and commercial commitments as of
November 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 (1) $656,265 $ -- $300,000 $150,000 $206,265
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 367,304 59,878 106,006 78,580 122,840
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
Obligations $1,023,569 $59,878 $406,006 $228,580 $329,105
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
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 $ 1,308 $ 1,308 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (2) 78,849 78,849 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (3) 4,350 669 1,268 1,220 1,193
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Other 2,125 1,000 1,125 -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
Commitments $ 86,632 $81,826 $ 2,393 $ 1,220 $ 1,193
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(1) Excludes issuance discount of $1,199.
(2) Includes letters of credit for $69,103 associated with workers'
compensation and general liabilities accrued in our consolidated financial
statements; also includes letters of credit for $8,318 associated with
lease payments included in contractual operating lease obligation payments
noted above.
(3) 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.
Our Board of Directors has authorized us to repurchase up to 115.4 million
shares of our common stock. Net cash flows used by financing activities included
our repurchase of 0.8 million shares of our common stock for $16 million in the
second quarter of fiscal 2004, compared to 1.2 million shares for $26 million in
the second quarter of fiscal 2003. For the first six months of fiscal 2004, net
cash flows used by financing activities included our repurchase of 2.2 million
shares of our common stock for $44 million compared to 3.2 million shares for
$72 million in the first six months of fiscal 2003. As of November 23, 2003, a
total of 100.7 million shares have been purchased under the program. 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 $104 million and $190
million in the second quarter and first six months of fiscal 2004, compared to
$102 million and $212 million in the second quarter and first six months of
fiscal 2003. The decreased expenditures in the first six months of fiscal 2004
resulted primarily from the timing of expenditures associated with building new
restaurants and replacing equipment.
We are not aware of any trends or events that would materially affect our
capital requirements or liquidity. We believe that our internal cash generating
capabilities and borrowings available under our shelf registration for unsecured
debt securities and short-term commercial paper program will be sufficient to
finance our capital expenditures, stock repurchase program, and other operating
activities through fiscal 2004.
FINANCIAL CONDITION
Our current assets totaled $389 million at November 23, 2003, compared to
$326 million at May 25, 2003. The increase resulted primarily from the increase
in inventory of $83 million that was due to seasonality and opportunistic
product purchases. The increase in inventory was partially offset by a decrease
in cash and cash
16
equivalents of $21 million that was due principally to payments associated with
the inventory purchases and capital expenditures.
Our current liabilities totaled $695 million at November 23, 2003, up from
$640 million at May 25, 2003. During the second quarter of fiscal 2004, we
borrowed $71 million under our commercial paper program to fund our current
operations and capital expenditures. No borrowings were outstanding under our
commercial paper program at May 25, 2003. Accounts payable of $168 million at
November 23, 2003, decreased from $176 million at May 25, 2003, principally due
to the timing and terms of the inventory purchases, capital expenditures, and
related payments. Accrued income taxes of $51 million at November 23, 2003,
decreased from $68 million at May 25, 2003, principally due to lower pre-tax
earnings in the second quarter of fiscal 2004 compared to the fourth quarter of
fiscal 2003. Unearned revenues of $65 million at November 23, 2003, decreased
from $73 million at May 25, 2003, principally due to seasonal fluctuations in
sales and usage of our gift cards. Other current liabilities of $222 million at
November 23, 2003, increased from $202 million at May 25, 2003, principally due
to increases in insurance and employee benefit-related accruals.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period (see Note 1 to our consolidated financial statements included
in our fiscal 2003 Annual Report on Form 10-K). Actual results could differ from
those estimates.
Critical accounting policies are those that we believe are most important
to the portrayal of our financial condition and operating results, and require
our most difficult, subjective or complex judgments. Often these judgments are 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.
Land, Buildings, and Equipment
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. Leasehold
improvements, which are a component of buildings, are amortized over the lesser
of the lease term or the estimated useful lives of the related assets 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, including
leasehold improvements, include our judgments regarding the estimated useful
lives of these assets, the residual values to which the assets are depreciated
or amortized, and the determination as to what constitutes enhancing the value
or increasing the life of existing assets. These judgments and estimates may
produce materially different amounts of reported depreciation and amortization
expense 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
Land, buildings, and equipment and certain other assets, including
capitalized software costs and liquor licenses, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the assets to the future net
cash flows expected to be generated by the assets. If these assets are
determined 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. Fair
value is generally determined based on appraisals or sales prices of comparable
assets. 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. Restaurant sites and certain other assets to be disposed of are included
in assets held for disposal when certain criteria are met. These criteria
include the requirement that the likelihood of disposing of these assets within
one year is probable. Those assets whose disposal is not probable within one
year remain in land, buildings, and equipment until their disposal is probable
within one year.
17
The judgments we make 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 these assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic conditions, and
changes in usage or operating performance. As we assess the ongoing expected
cash flows and carrying amounts of our long-lived assets, significant adverse
changes in these factors could cause us to realize a material impairment charge.
Self-Insurance Accruals
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 claims, both reported and not yet reported.
Our accounting policies regarding self-insurance programs include our
judgments and independent 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 reported expense under these
programs.
Income Taxes
We estimate certain components of our provision for income taxes. These
estimates include, among other items, effective rates for state and local income
taxes, allowable tax credits for items such as taxes paid on reported tip
income, estimates related to depreciation and amortization expense allowable for
tax purposes, and the tax deductibility of certain other items.
Our estimates are based on the best available information at the time that
we prepare the provision. We generally file our annual income tax returns
several months after our fiscal year-end. In general, income tax returns are
subject to audit by federal, state, and local governments years after the
returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.
FORWARD-LOOKING STATEMENTS
Certain statements included in this report and other materials filed or to
be filed by us with the SEC (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, projections
regarding expected casual dining sales growth; the ability of the casual dining
segment to weather economic downturns; demographic trends; our expansion plans,
capital expenditures, and business development activities; and our long-term
goals of increasing market share, expanding margins on incremental sales, and
earnings growth. 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 factors (each of which is discussed in greater detail in our
Annual Report on Form 10-K for the fiscal year ended May 23, 2003):
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 a protracted economic
slowdown or worsening economy, industry-wide cost pressures, weak consumer
demand, changes in consumer preferences, demographic trends, weather
conditions, construction costs, and the cost and availability of borrowed
funds;
o the price and availability of food, labor, utilities, insurance and media,
and other costs, including seafood costs, employee benefits, workers'
compensation insurance, and the general impact of inflation; o unfavorable
publicity relating to food safety or other concerns, including litigation
alleging poor food quality, food-borne illness, or personal injury;
o the availability of desirable restaurant locations;
18
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 November 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
$2 million over a period of one year (including the impact of the interest rate
swap agreements discussed in Note 7 to the Consolidated Financial Statements).
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 $23 million. The
fair value of our long-term fixed rate debt during the second quarter of fiscal
2004 averaged $692 million, with a high of $714 million and a low of $680
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
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-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")) as of November 23, 2003, the end of
the period covered by 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 November 23, 2003.
During the fiscal quarter ended November 23, 2003, there was no change in
our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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 25,
2003.
(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 eleven directors:
19
For Withheld
--- --------
Leonard L. Berry..........140,668,246 1,550,609
Odie C. Donald............134,622,080 7,596,775
David H. Hughes...........134,594,399 7,624,456
Joe R. Lee................139,388,305 2,830,550
Senator Connie Mack, III..138,575,002 3,643,854
Richard E. Rivera.........140,559,492 1,659,364
Michael D. Rose...........136,099,252 6,119,604
Maria A. Sastre...........134,600,946 7,617,910
Jack A. Smith.............137,383,242 4,835,614
Blaine Sweatt, III........140,628,222 1,590,634
Rita P. Wilson............137,519,915 4,698,941
(ii) Approved the appointment of KPMG LLP as our independent
auditors for the fiscal year ending May 30, 2004.
For ......................137,144,950
Against .................. 3,736,644
Abstain................... 1,337,262
Broker non-vote .......... 0
Item 5. Other Information
On January 6, 2003, we announced that Dick Rivera has resigned from Darden
to look at entrepreneurial opportunities in the industry. Rivera, who was our
President and Chief Operating Officer and a member of our Board of Directors,
will remain with us in a consulting capacity, providing advice and counsel to us
on the organization transition and competitive environment, while continuing as
a leader in industry organizations. Joe Lee, our Chairman and CEO, will assume
operating responsibilities for us and Red Lobster. We expect to name a new Red
Lobster president by the end of May.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 10 Credit Agreement dated as of October 17, 2003,
among Darden Restaurants, Inc. and the banks
named therein.
Exhibit 12 Computation of Ratio of Consolidated Earnings
to Fixed Charges.
Exhibit 31(a) Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated January 6, 2004.
Exhibit 31(b) Certification of Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated January 6, 2004.
Exhibit 32(a) Certification of Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated January 6, 2004.
Exhibit 32(b) Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated January 6, 2004.
20
(b) Reports on Form 8-K.
During the second quarter, we filed or furnished the following
reports on Form 8-K:
A current report on Form 8-K dated September 24, 2003,
announcing first quarter financial results.
A current report on Form 8-K dated September 25, 2003,
announcing the results of our annual meeting of
shareholders.
In addition, we filed or furnished the following reports on Form
8-K subsequent to the close of the second quarter of fiscal 2004:
A current report on Form 8-K dated December 18, 2003,
announcing second quarter financial results.
21
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 6, 2004 By:/s/ Paula J. Shives
---------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: January 6, 2004 By: /s/ Linda J. Dimopoulos
--------------------------
Linda J. Dimopoulos
Senior Vice President and Chief
Financial Officer
(Principal financial officer)
22
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
- ------- -------------
10 Credit Agreement dated as of October 17, 2003, among Darden Restaurants,
Inc. and the banks named therein.
12 Computation of Ratio of Consolidated Earnings to Fixed Charges.
31(a) Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated January 6, 2004.
31(b) Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated January 6, 2004.
32(a) Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated January 6, 2004.
32(b) Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated January 6, 2004.
23
Exhibit 12
DARDEN RESTAURANTS, INC.
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
Quarter Ended Six Months Ended
-------------------------------------------------------------------------------------------------------------------
November 23, November 24, November 23, November 24,
2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------
Consolidated earnings from operations
before income taxes..................... $ 46,626 $ 56,220 $150,610 $165,225
Plus fixed charges:
Gross interest expense.................. 11,885 11,846 23,789 23,772
40% of restaurant and equipment minimum
rent expense.......................... 5,681 5,256 10,969 10,544
-------- -------- -------- --------
Total fixed charges................. 17,566 17,102 34,758 34,316
Less capitalized interest.................. (1,043) (874) (2,109) (1,844)
-------- -------- --------- ---------
Consolidated earnings from operations
before income taxes available to cover
fixed charges.......................... $ 63,149 $ 72,448 $183,259 $197,697
======== ======== ======== ========
Ratio of consolidated earnings to fixed
charges................................. 3.59 4.24 5.27 5.76
======== ======== ======== ========
-------------------------------------------------------------------------------------------------------------------
24
Exhibit 31(a)
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
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 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
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
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
January 6, 2004
/s/Joe R. Lee
- -----------------
Joe R. Lee
Chairman and Chief Executive Officer
25
Exhibit 31(b)
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
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 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
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
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
January 6, 2004
/s/Linda J. Dimopoulos
- ----------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
26
Exhibit 32(a)
CERTIFICATION 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 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
January 6, 2004
27
Exhibit 32(b)
CERTIFICATION 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 23, 2003, as filed with the
Securities and Exchange Commission on the date hereof ("Report"), I, Linda J.
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 6, 2004
28