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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 February 22, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ............ to ..................
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1-13666
Commission File Number
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DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3305930
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5900 Lake Ellenor Drive,
Orlando, Florida 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of April 1, 2004:
160,984,328 (excluding 103,259,798 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 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Item 4. Controls and Procedures 20
Part II - Other Information
Item 1. Legal Proceedings 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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
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February 22, 2004 February 23, 2003
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Sales........................................................ $1,241,952 $1,181,383
Costs and expenses:
Cost of sales:
Food and beverage....................................... 372,544 364,328
Restaurant labor........................................ 391,019 375,320
Restaurant expenses..................................... 188,709 181,464
----------- -----------
Total cost of sales, excluding restaurant depreciation
and amortization of $48,690 and $44,911, respectively. $ 952,272 $ 921,112
Selling, general, and administrative...................... 113,552 108,145
Depreciation and amortization............................. 52,179 48,132
Interest, net............................................. 10,944 10,669
----------- -----------
Total costs and expenses.............................. $1,128,947 $1,088,058
----------- -----------
Earnings before income taxes................................. 113,005 93,325
Income taxes................................................. (35,106) (31,539)
----------- -----------
Net earnings................................................. $ 77,899 $ 61,786
=========== ===========
Net earnings per share:
Basic..................................................... $ 0.47 $ 0.36
=========== ===========
Diluted................................................... $ 0.46 $ 0.35
=========== ===========
Average number of common shares outstanding:
Basic..................................................... 164,200 170,700
=========== ===========
Diluted................................................... 170,100 177,500
=========== ===========
- --------------------------------------------------------------------------------------------------------------------
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
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February 22, 2004 February 23, 2003
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Sales....................................................... $3,644,184 $3,427,479
Costs and expenses:
Cost of sales:
Food and beverage...................................... 1,115,457 1,060,518
Restaurant labor....................................... 1,158,968 1,098,456
Restaurant expenses.................................... 570,541 521,695
---------- ----------
Total cost of sales, excluding restaurant
depreciation and amortization of $145,215 and
$128,884, respectively............................. $2,844,966 $2,680,669
Selling, general, and administrative..................... 347,513 317,406
Depreciation and amortization............................ 155,780 139,203
Interest, net............................................ 32,310 31,651
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Total costs and expenses........................... $3,380,569 $3,168,929
---------- ----------
Earnings before income taxes................................ 263,615 258,550
Income taxes................................................ (85,869) (87,400)
----------- ----------
Net earnings................................................ $ 177,746 $ 171,150
========== ==========
Net earnings per share:
Basic................................................... $ 1.08 $ 1.00
========== ==========
Diluted.................................................. $ 1.04 $ 0.96
========== ==========
Average number of common shares outstanding:
Basic.................................................... 164,600 171,100
========== ==========
Diluted.................................................. 170,600 178,700
========== ==========
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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February 22, 2004 May 25, 2003
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ASSETS
Current assets:
Cash and cash equivalents................................. $ 43,870 $ 48,630
Receivables............................................... 35,176 29,023
Inventories............................................... 262,761 173,644
Assets held for disposal.................................. 710 --
Prepaid expenses and other current assets................. 21,950 25,126
Deferred income taxes..................................... 58,162 49,206
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Total current assets.................................. $ 422,629 $ 325,629
Land, buildings, and equipment............................... 2,264,048 2,157,132
Other assets................................................. 185,660 181,872
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Total assets.......................................... $2,872,337 $2,664,633
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 188,132 $ 175,991
Short-term debt .......................................... 14,600 --
Accrued payroll........................................... 93,003 85,975
Accrued income taxes...................................... 66,948 67,975
Other accrued taxes....................................... 36,237 35,069
Unearned revenues......................................... 91,679 72,698
Other current liabilities................................. 250,197 202,201
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Total current liabilities............................. $ 740,796 $ 639,909
Long-term debt............................................... 654,309 658,086
Deferred income taxes........................................ 169,998 150,537
Other liabilities............................................ 21,570 19,910
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Total liabilities..................................... $1,586,673 $1,468,442
---------- ----------
Stockholders' equity:
Common stock and surplus.................................. $1,572,219 $1,525,957
Retained earnings......................................... 1,150,614 979,443
Treasury stock............................................ (1,381,631) (1,254,293)
Accumulated other comprehensive income.................... (10,181) (10,489)
Unearned compensation..................................... (44,173) (42,848)
Officer notes receivable.................................. (1,184) (1,579)
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Total stockholders' equity............................ $1,285,664 $1,196,191
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Total liabilities and stockholders' equity............ $2,872,337 $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 nine months ended February 22, 2004 and February 23, 2003
(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.......................... -- 177,746 -- -- -- -- 177,746
Other comprehensive income:
Foreign currency adjustment......... -- -- -- 961 -- -- 961
Change in fair value of derivatives,
net of tax of $480................. -- -- -- (653) -- -- (653)
--------
Total comprehensive income........ -- -- -- -- -- -- 178,054
Cash dividends declared.................. -- (6,575) -- -- -- -- (6,575)
Stock option exercises (2,664 shares).... 23,582 -- 2,737 -- -- -- 26,319
Issuance of restricted stock (436 shares),
net of forfeiture adjustments......... 8,459 -- 171 -- (8,630) -- --
Earned compensation...................... -- -- -- -- 3,310 -- 3,310
ESOP note receivable repayments.......... -- -- -- -- 3,995 -- 3,995
Income tax benefits credited to equity... 11,278 -- -- -- -- -- 11,278
Purchases of common stock for
treasury(6,330 shares)................ -- -- (131,902) -- -- -- (131,902)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (277 shares)................... 2,943 -- 1,656 -- -- -- 4,599
Repayment of officer notes, net.......... -- -- -- -- -- 395 395
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Balance at February 22, 2004 $1,572,219 $1,150,614 $(1,381,631) $(10,181) $(44,173) $(1,184) $1,285,664
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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.......................... -- 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
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Balance at February 23, 2003 $1,520,999 $925,039 $(1,148,677) $(12,578) $(44,568) $(1,584) $1,238,631
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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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February 22, 2004 February 23, 2003
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Cash flows--operating activities
Net earnings................................................. $ 77,899 $ 61,786
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 52,179 48,132
Asset impairment charge, net............................... 597 --
Amortization of unearned compensation and loan costs....... 2,496 1,776
Change in current assets and liabilities................... 90,729 117,013
Change in other liabilities ............................... 877 468
(Gain) loss on disposal of land, buildings, and equipment.. (1,404) 1,273
Change in cash surrender value of trust owned life insurance (3,182) 1,773
Deferred income taxes...................................... 4,827 7,543
Income tax benefits credited to equity..................... 3,212 6,325
Non-cash compensation expense.............................. 28 443
Other, net................................................. (32) 299
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Net provided by operating activities..................... $ 228,226 $ 246,831
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Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (81,632) (108,513)
Increase in other assets..................................... (1,282) (13,968)
Proceeds from disposal of land, buildings, and equipment .... 5,443 1,013
----------- ------------
Net cash used in investing activities.................... $ (77,471) $ (121,468)
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Cash flows--financing activities
Proceeds from issuance of common stock....................... 9,778 13,302
Purchases of treasury stock.................................. (88,169) (34,867)
Decrease in short-term debt.................................. (56,300) --
ESOP note receivable repayment............................... 830 1,080
Repayment of long-term debt.................................. (830) (1,080)
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Net cash used in financing activities.................... $ (134,691) $ (21,565)
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Increase in cash and cash equivalents........................... 16,064 103,798
Cash and cash equivalents - beginning of period................. 27,806 20,880
----------- ------------
Cash and cash equivalents - end of period....................... $ 43,870 $ 124,678
=========== ============
Cash flow from changes in current assets and liabilities
Receivables.................................................. (8,552) 2,587
Inventories.................................................. (5,764) 17,958
Prepaid expenses and other current assets.................... 2,786 411
Accounts payable............................................. 20,588 23,598
Accrued payroll.............................................. 9,848 7,033
Accrued income taxes......................................... 16,105 8,574
Other accrued taxes.......................................... 1,476 1,210
Unearned revenues............................................ 26,785 32,402
Other current liabilities.................................... 27,457 23,240
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Change in current assets and liabilities................. $ 90,729 $ 117,013
============= ============
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See accompanying notes to consolidated financial statements.
7
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
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February 22, 2004 February 23, 2003
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Cash flows--operating activities
Net earnings................................................. $ 177,746 $ 171,150
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 155,780 139,203
Asset impairment charge, net............................... 4,044 --
Amortization of unearned compensation and loan costs....... 5,849 5,320
Change in current assets and liabilities................... (4,800) 28,781
Change in other liabilities ............................... 1,660 (102)
(Gain) loss on disposal of land, buildings, and equipment.. (1,882) 3,219
Change in cash surrender value of trust owned life insurance (6,926) 4,793
Deferred income taxes...................................... 10,505 20,086
Income tax benefits credited to equity..................... 11,278 14,778
Non-cash restructuring credit.............................. -- 143
Non-cash compensation expense.............................. 838 1,150
Other, net................................................. (144) 4
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Net cash provided by operating activities................ $ 353,948 $ 388,525
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Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (271,825) (320,675)
Increase in other assets..................................... (3,967) (18,661)
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..... 10,881 3,518
------------ ----------
Net cash used in investing activities.................... $ (264,911) $ (331,818)
------------ ----------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 30,080 28,827
Dividends paid............................................... (6,575) (6,795)
Purchases of treasury stock.................................. (131,902) (106,936)
Increase in short-term debt.................................. 14,600 --
ESOP note receivable repayment............................... 3,995 4,075
Repayment of long-term debt.................................. (3,995) (4,075)
------------ ----------
Net cash used in financing activities.................... $ (93,797) $ (84,904)
------------ ----------
Decrease in cash and cash equivalents........................... (4,760) (28,197)
Cash and cash equivalents - beginning of period................. 48,630 152,875
------------ ----------
Cash and cash equivalents - end of period....................... $ 43,870 $ 124,678
============ ==========
Cash flow from changes in current assets and liabilities
Receivables.................................................. (5,201) (739)
Inventories.................................................. (89,117) (41,443)
Prepaid expenses and other current assets.................... 3,176 (410)
Accounts payable............................................. 12,481 29,159
Accrued payroll.............................................. 7,028 (7,207)
Accrued income taxes......................................... (1,027) (7,740)
Other accrued taxes.......................................... 1,168 2,007
Unearned revenues............................................ 18,981 27,405
Other current liabilities.................................... 47,711 27,749
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Change in current assets and liabilities................. $ (4,800) $ 28,781
============ ==========
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See accompanying notes to consolidated financial statements.
8
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 1. Background
Darden Restaurants, Inc. ("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 Barbeque &
GrillSM, 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 nine
months ended February 22, 2004, 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 nine months ended February 22, 2004, we paid $7,388
and $26,821, respectively, for interest (net of amounts capitalized) and $11,075
and $64,382, respectively, for income taxes. 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 $8,831and $60,116, 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 Nine Months Ended
February 22, 2004 February 23, 2003 February 22, 2004 February 23, 2003
- ------------------------------------------------------------------------------------------------------------------------
Net earnings, as reported $ 77,899 $ 61,786 $ 177,746 $ 171,150
Add: Stock-based compensation
expense included in reported
net earnings, net of related 803 683 2,595 2,172
tax effects
Deduct: Total stock-based
compensation expense determined
under fair value based method
for all awards, net of related (4,445) (4,200) (14,541) (14,712)
tax effects
--------------------------------------------------------------------------------
Pro forma $ 74,257 $ 58,269 $ 165,800 $ 158,610
================================================================================
Basic net earnings per share
As reported $ 0.47 $ 0.36 $ 1.08 $ 1.00
Pro forma $ 0.45 $ 0.34 $ 1.01 $ 0.93
Diluted net earnings per share
As reported $ 0.46 $ 0.35 $ 1.04 $ 0.96
Pro forma $ 0.44 $ 0.33 $ 0.97 $ 0.89
========================================================================================================================
9
Note 4. Provision for Impaired Assets and Restaurant Closings
During the quarter and nine months ended February 22, 2004, we recorded
charges of $672 and $4,860, 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 nine
months ended February 22, 2004, we also recorded gains of $75 and $816,
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 4,729,620 and 3,989,082 shares of common stock were
excluded from the calculation of diluted net earnings per share for the quarters
ended February 22, 2004 and February 23, 2003, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 4,734,630 and 3,984,663 shares of common stock were
excluded from the calculation of diluted net earnings per share for the nine
months ended February 22, 2004 and February 23, 2003, 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 4,131,392 and 6,330,324 shares of our common stock for $88,169 and
$131,902 during the quarter and nine months ended February 22, 2004,
respectively, resulting in a cumulative repurchase of 104,822,976 shares as of
February 22, 2004.
Note 7. Derivative Instruments and Hedging Activities
During the nine months ended February 22, 2004, 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 have 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 $362, net of tax, related to the swaps was recognized in accumulated
other comprehensive income at February 22, 2004. No amounts were recognized in
earnings during the quarter and nine months ended February 22, 2004.
Note 8. Commitments and Contingencies
We make trade commitments in the course of our normal operations. As of
February 22, 2004 and May 25, 2003, we were contingently liable for
approximately $211 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 February 22, 2004
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 February 22, 2004 and May 25, 2003, we
had $9,658 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 February 22, 2004 and May 25, 2003, we
had other commercial commitments of $2,125 and $2,250, respectively.
As of February 22, 2004 and May 25, 2003, we had $4,171 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 February 22,
2004 and May 25, 2003 amounted to $2,899 and $2,935, respectively. We did not
accrue for the guarantees, as we believe 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.
In March 2003 and March 2002, three of our current and former hourly
restaurant employees filed two purported class action lawsuits against us in
California Superior Court of Orange County alleging violations of California
labor laws with respect to providing meal and rest breaks. The lawsuits seek
penalties under Department of Labor rules providing a one hundred dollar penalty
per violation per employee, plus attorney's fees on behalf of the plaintiffs and
other purported class members. Discovery is currently underway in these matters.
One of the cases was removed to our mandatory arbitration program, although the
Court retained the authority to permit a sample of class-wide discovery. We are
prosecuting an appeal to cause the other case to be similarly removed to
arbitration. In September 2003, three former employees in Washington State filed
a similar purported class action in Washington State Superior Court in Spokane
County alleging violations of Washington labor laws with respect to providing
rest breaks. The Court stayed the action, and ordered the plaintiffs into our
mandatory arbitration program; the plaintiffs have filed a motion for
reconsideration. We intend to vigorously defend our position in all of these
cases. Although the outcome of the cases cannot be ascertained at this time, we
do not believe that the disposition of these cases, either individually or in
the aggregate, would have a material adverse effect on our financial position,
results of operations or liquidity.
We are subject to other private lawsuits, administrative proceedings and
claims that arise in the ordinary course of our business. These matters
typically involve claims from guests, employees and others related to
operational issues common to the restaurant industry. A number of these
lawsuits, proceedings and claims may exist at any given time. We do not believe
that the final disposition of the lawsuits and claims in which we are currently
involved will have a material adverse effect on our financial position, results
of operations or liquidity.
Note 9. Accounting Changes
In June 2001, the Financial Accounting Standards Board (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 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, 2004. We do not have any
interests that would change our current consolidated reporting entity or require
additional disclosures required by Interpretation No. 46.
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
11
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 December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits". SFAS No. 132, as revised,
establishes additional disclosures for defined benefit pension and other
postretirement plans. It requires additional annual disclosures about the
assets, obligations, cash flows, net periodic benefit cost and other
quantitative and qualitative information regarding defined benefit pension and
other postretirement plans. It also requires quarterly disclosures of the
components of the net periodic benefit cost recognized for each period presented
and significant changes in the estimated amount of annual contributions
previously disclosed for defined benefit pension and other postretirement plans.
The additional disclosure requirements of SFAS No. 132, as revised, are
effective for annual periods ending after December 15, 2003 and interim periods
beginning after December 15, 2003. We adopted the additional disclosure
requirements of SFAS No. 132 in the fourth quarter of fiscal 2004. Adoption of
the additional disclosure requirements of SFAS No. 132 did not materially impact
our consolidated financial statements.
Note 10. Subsequent Event
On March 25, 2004, the Board of Directors declared a four cents per share
cash dividend to be paid to shareholders on May 1, 2004 for all shareholders of
record as of the close of business on April 9, 2004.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth selected operating data as a percent of
sales for the periods indicated. All information is derived from the
consolidated statements of earnings for the quarter and nine months ended
February 22, 2004 and February 23, 2003.
Quarter Ended Nine Months Ended
- ---------------------------------------------------------------------------------------------------------------------
February 22, February 23, 2003 February 22, February 23,
2004 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Sales.......................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage......................... 30.0 30.8 30.6 30.9
Restaurant labor.......................... 31.5 31.8 31.8 32.1
Restaurant expenses....................... 15.2 15.4 15.6 15.2
------ ------ ------ ------
Total cost of sales, excluding restaurant
depreciation and amortization of 3.9%,
3.8%, 4.0% and 3.8%, respectively...... 76.7% 78.0% 78.0% 78.2%
Selling, general, and administrative........ 9.1 9.1 9.5 9.3
Depreciation and amortization............... 4.2 4.1 4.3 4.1
Interest, net............................... 0.9 0.9 0.9 0.9
------ ------- ------- -------
Total costs and expenses.............. 90.9% 92.1% 92.7% 92.5%
------ ------ ------ ------
Earnings before income taxes................. 9.1 7.9 7.3 7.5
Income taxes................................... (2.8) (2.7) (2.4) (2.5)
------ ------ ------ ------
Net earnings................................. 6.3% 5.2% 4.9% 5.0%
====== ====== ====== ======
- ---------------------------------------------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS
Sales for the third quarter and first nine months of fiscal 2004 increased
by 5.1 percent and 6.3 percent, respectively, compared to the same periods in
fiscal 2003. These increases were primarily driven by increased same-restaurant
sales at Olive Garden and by additional Company-owned restaurants, partially
offset by decreased same-restaurant sales at Red Lobster. Although Red Lobster's
same-restaurant sales decreased for the second consecutive quarter, sequential
improvement occurred each month during the third quarter of fiscal 2004. Red
Lobster is focusing on improving in-restaurant operations and developing a
better marketing plan that communicates its everyday strengths, which included
selecting a new advertising agency in March 2004. Red Lobster is developing new
entree offerings in the $10 - $15 price range to strengthen the value offered to
its guests. We also expect to complete our search for a new President of Red
Lobster by the end of fiscal 2004. Bahama Breeze did not open any new
restaurants during the third quarter of fiscal 2004 while it focused on
enhancing its new dinner menu and lunch business and on the completion of its
new prototype restaurant in Pittsburgh, PA, which opened in March 2004. Bahama
Breeze is also continuing to evaluate the results of each individual restaurant
against our expectations in light of the new dinner menu and the addition of
lunch and will make changes, if necessary, as these initiatives progress. Smokey
Bones opened six new restaurants during the third quarter of fiscal 2004. During
fiscal 2004, Smokey Bones expects to open 30 new restaurants.
Food and beverage costs as a percent of sales for the third quarter and
first nine months of fiscal 2004 decreased primarily as a result of menu pricing
changes, which was partially offset by increased crab costs at Red Lobster.
Other commodity costs, such as chicken and shrimp, decreased modestly.
Restaurant labor as a percent of sales decreased for the third quarter and first
nine months of fiscal 2004, favorably impacted by lower employee health
insurance claims and improved labor management. Restaurant expenses as a percent
of sales decreased for the third quarter of fiscal 2004 as lower incremental
pre-opening expenses were incurred due to a decrease in new restaurant openings,
which was partially offset by increased workers' compensation and utility
expenses. While workers' compensation claim frequency has decreased in fiscal
2004, the average cost per claim has increased, caused by medical cost inflation
and benefit increases from allowable medical procedures. We are continuing to
focus on reducing both the number and severity of these incidences and have
implemented programs that we believe should provide a long-term reduction in
both the number and severity of claims.
13
The effective income tax rate for the third quarter and first nine months
of fiscal 2004 was 31.1 percent and 32.6 percent, respectively. This compared to
an effective income tax rate of 33.8 percent in the third quarter and first nine
months of fiscal 2003. The rate decreases were primarily a result of a favorable
resolution of prior year tax matters during the third quarter of fiscal 2004.
The earnings benefit derived from the lower effective income tax rate was offset
primarily by an increase in the amount of discretionary contributions to the
Darden Restaurants, Inc. Foundation and costs incurred due to a change in Red
Lobster's advertising agency, which are components of selling, general, and
administrative expenses.
Net earnings per diluted share for the third quarter were 46 cents,
compared to 35 cents for the third quarter of fiscal 2003. On February 25, 2004,
we indicated that we estimated diluted net earnings per share growth for fiscal
2004 to be in the range of 12 to 15 percent.
SALES
Sales were $1.24 billion and $1.18 billion for the quarters ended February
22, 2004 and February 23, 2003, respectively. The 5.1 percent increase in sales
for the third quarter of fiscal 2004 as compared to the third quarter of fiscal
2003 was primarily due to increased same-restaurant sales at Olive Garden and a
net increase of 57 Company-owned restaurants since the third quarter of fiscal
2003. Red Lobster sales of $604 million were 2.8 percent below last year's third
quarter, which resulted from a 5.1 percent decrease in U.S. same-restaurant
sales, which was partially offset by revenue from eight net additional
restaurants in operation versus last year. The decline in U.S. same-restaurant
sales resulted primarily from a 7.4 percent decrease in guest counts offset only
partially by a 2.3 percent increase in average check. Red Lobster's total sales
were lower than planned. Olive Garden's sales of $551 million were 9.1 percent
above last year's third quarter, driven primarily by a 5.4 percent increase in
U.S. same-restaurant sales and its 18 net new restaurants in operation versus
last year. Olive Garden achieved its 38th consecutive quarter of U.S.
same-restaurant sales growth primarily as a result of a 3.4 percent increase in
average check and a 2.0 percent increase in guest counts. Third quarter
same-restaurant sales results at both Olive Garden and Red Lobster benefited by
approximately one percent from favorable weather comparisons to last year.
Sales were $3.64 billion and $3.43 billion for the first nine months ended
February 22, 2004 and February 23, 2003, respectively. The 6.3 percent increase
in sales for the first nine months of fiscal 2004 as compared to the first nine
months of fiscal 2003 was primarily due to increased same-restaurant sales at
Olive Garden and a net increase of 57 Company-owned restaurants since the third
quarter of fiscal 2003. Red Lobster sales of $1.78 billion were 0.3 percent
below last year. U.S. same-restaurant sales for Red Lobster decreased 2.4
percent, primarily as a result of a 6.4 percent decrease in guest counts offset
only partially by a 4.0 percent increase in average check. Olive Garden's sales
of $1.62 billion were 9.5 percent above last year. U.S. same-restaurant sales
for Olive Garden increased 4.5 percent, primarily as a result of a 3.1 percent
increase in average check and a 1.4 percent increase in guest counts. Bahama
Breeze opened three new restaurants during the first nine months of fiscal 2004.
In March 2004, Bahama Breeze opened its new prototype restaurant in Pittsburgh,
PA. Bahama Breeze will evaluate the new prototype restaurant before making any
further decisions on expansion. Smokey Bones opened 20 net new restaurants
during the first nine months of fiscal 2004.
COSTS AND EXPENSES
Total costs and expenses were $1.13 billion and $1.09 billion for the
quarters ended February 22, 2004 and February 23, 2003, respectively. As a
percent of sales, total costs and expenses decreased from 92.1 percent in the
third quarter of fiscal 2003 to 90.9 percent in the third 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 third
quarter of fiscal 2004 primarily as a result of menu pricing changes, partially
offset by increased crab costs at Red Lobster. Restaurant labor decreased in the
third 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,
decreased in the third quarter of fiscal 2004. This decrease was primarily a
result of lower incremental pre-opening expenses due to a decrease in new
restaurant openings and the favorable impact of higher sales volumes, which was
partially offset by higher workers' compensation and utility expenses.
Selling, general, and administrative expenses for the third quarter of
fiscal 2004 was comparable to the third quarter of fiscal 2003, and reflect
increased employee benefit costs, an increase in the amount of discretionary
contributions to the Darden Restaurants, Inc. Foundation and costs associated
with Red Lobster's change of
14
advertising agency, offset by decreases in other media and travel expenses and
the favorable impact of higher sales volumes.
Depreciation and amortization expense increased in the third 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 in the third quarter of fiscal 2004 was comparable to
the third quarter of fiscal 2003 reflecting lower interest income in fiscal
2004, offset by the favorable impact of higher sales volumes.
Total costs and expenses were $3.38 billion and $3.17 billion for the nine
months ended February 22, 2004 and February 23, 2003, respectively. As a percent
of sales, total costs and expenses increased from 92.5 percent in the first nine
months of fiscal 2003 to 92.7 percent in the first nine 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 nine
months of fiscal 2004 primarily as a result of pricing changes, partially offset
by higher seafood costs, crab usage and additional plate accompaniments at Red
Lobster during its crab promotion. Restaurant labor decreased in the first nine
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, 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 nine months of fiscal 2004. This increase was primarily 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, partially offset by the favorable impact of higher sales volumes.
Selling, general, and administrative expenses increased in the first nine
months of fiscal 2004 primarily as a result of increased employee benefit costs,
partially offset by the favorable impact of higher sales volumes.
Depreciation and amortization expense increased in the first nine 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 nine months of fiscal 2004 was comparable
to the first nine months of fiscal 2003, reflecting lower interest income in
fiscal 2004, offset by the favorable impact of higher sales volumes.
INCOME TAXES
The effective income tax rate for the third quarter and first nine months
of fiscal 2004 was 31.1 percent and 32.6 percent, respectively. This compared to
an effective income tax rate of 33.8 percent in the third quarter and first nine
months of fiscal 2003. The rate decreases in fiscal 2004 were primarily a result
of a favorable resolution of prior year tax matters during the third quarter of
fiscal 2004.
NET EARNINGS AND NET EARNINGS PER SHARE
Our net earnings for the third quarter of fiscal 2004 increased 26.1
percent to $78 million (46 cents per diluted share) compared with net earnings
for the third quarter of fiscal 2003 of $62 million (35 cents per diluted
share). At Red Lobster, lower food and beverage, restaurant labor, and selling,
general, and administrative expenses as a percent of sales more than offset
decreased sales and higher depreciation expense as a percentage of sales. As a
result, Red Lobster's operating profit increased versus the third quarter of
2003. At Olive Garden, increased sales and lower food and beverage, restaurant
expenses, and selling, general, and administrative expenses as a percent of
sales resulted in record third quarter operating profit for Olive Garden in
fiscal 2004. The increase in both our net earnings and diluted net earnings per
share for the third quarter of fiscal 2004 was primarily due to higher than
expected sales growth at Olive Garden, and decreases in our consolidated food
and beverage, restaurant labor, restaurant expenses, and selling, general, and
administrative expenses as a percent of sales. Earnings results were positively
impacted by a decrease in the effective income tax rate, which was a result of a
favorable resolution of prior year tax matters during the third quarter of
fiscal 2004. The net earnings impact derived from the lower tax rate was offset
primarily by an increase in the amount of discretionary charitable contributions
to the Darden Restaurants, Inc. Foundation and the costs associated with Red
Lobster's advertising agency change which are components of selling, general and
administrative expenses.
For the first nine months of fiscal 2004, net earnings increased 3.9
percent to $178 million ($1.04 per diluted share) compared with net earnings for
the first nine months of fiscal 2003 of $171 million (96 cents per diluted
share). At Red Lobster, decreased sales and higher restaurant expenses, selling,
general, and administrative and depreciation expenses as a percent of sales more
than offset decreased restaurant labor expenses as a percent of
15
sales. As a result, Red Lobster's operating profit decreased versus the first
nine months of fiscal 2003. At Olive Garden, increased sales and lower food and
beverage, restaurant labor, and selling, general, and administrative expenses as
a percent of sales more than offset higher depreciation expense as a percent of
sales. The increases in both net earnings and diluted net earnings per share for
the first nine months of fiscal 2004 were primarily due to higher than expected
sales growth at Olive Garden and decreases in our consolidated food and beverage
and restaurant labor expenses as a percent of sales.
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.
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the third quarter of fiscal 2004, compared with the number open at the end of
fiscal 2003 and the end of the third quarter of fiscal 2003.
- -------------------------------------------------------------------------------------------------------------------
February 22, 2004 May 25, 2003 February 23, 2003
- -------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 649 642 641
Red Lobster - Canada............... 31 31 31
----- ----- -----
Total......................... 680 673 672
----- ----- -----
Olive Garden - USA................. 528 518 510
Olive Garden - Canada.............. 6 6 6
----- ----- -----
Total......................... 534 524 516
----- ----- -----
Bahama Breeze...................... 37 34 32
Smokey Bones ...................... 59 39 34
Seasons 52......................... 1 1 --
----- ----- -----
Total......................... 1,311 1,271 1,254
===== ===== =====
- -------------------------------------------------------------------------------------------------------------------
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 February 22, 2004, $15 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 February 22, 2004, we were in
compliance with all covenants under the Credit Agreement.
At February 22, 2004, 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 $30 million commercial bank loan due in
16
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.
A summary of our contractual obligations and commercial commitments as of
February 22, 2004 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
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Short-term debt $ 14,600 $ 14,600 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Long-term debt (1) 655,435 -- 300,000 150,000 205,435
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Operating leases 372,677 61,262 107,239 79,088 125,088
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
Total contractual cash
Obligations $ 1,042,712 $ 75,862 $ 407,239 $ 229,088 $ 330,523
- -------------------------- --------------- ------------------ ----------------- ------------------- ------------------
- -------------------------- --------------- ---------------------------------------------------------------------------
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 $ 211 $ 211 $ -- $ -- $ --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Standby letters of
credit (2) 78,761 78,761 -- -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Guarantees (3) 4,171 652 1,185 1,191 1,143
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Other 2,125 750 1,375 -- --
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
Total commercial
commitments $ 85,268 $ 80,374 $ 2,560 $ 1,191 $ 1,143
- -------------------------- --------------- ------------------ ------------------ ----------------- -------------------
(1) Excludes issuance discount of $1,126.
(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 4.1 million shares of our common stock for $88 million in the
third quarter of fiscal 2004, compared to 1.7 million shares for $35 million in
the third quarter of fiscal 2003. For the first nine months of fiscal 2004, net
cash flows used by financing activities included our repurchase of 6.3 million
shares of our common stock for $132 million compared to 4.9 million shares for
$107 million in the first nine months of fiscal 2003. As of February 22, 2004,
we have repurchased a total of 104.8 million shares. 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 $82 million and $272
million in the third quarter and first nine months of fiscal 2004, compared to
$109 million and $321 million in the third quarter and first nine months of
fiscal 2003. The decreased expenditures in the third quarter and first nine
months of fiscal 2004 resulted primarily from decreased spending associated with
building new restaurants and remodels.
We are not aware of any trends or events that would materially affect our
capital requirements or liquidity. We also do not expect any changes in our
credit ratings. We believe that our internal cash generating capabilities and
borrowings available under our shelf registration for unsecured debt securities
and short-term commercial paper
17
program will be sufficient to finance our capital expenditures, stock repurchase
program, and other operating activities through fiscal 2005.
FINANCIAL CONDITION
Our current assets totaled $423 million at February 22, 2004, compared to
$326 million at May 25, 2003. The increase resulted primarily from the increase
in inventory of $89 million that was due to seasonality and opportunistic
product purchases.
Our current liabilities totaled $741 million at February 22, 2004, up from
$640 million at May 25, 2003. At February 22, 2004, $15 million of short-term
debt was outstanding under our commercial paper program, which was used to fund
our current operations and capital expenditures. No borrowings were outstanding
under our commercial paper program at May 25, 2003. Accounts payable of $188
million at February 22, 2004, increased from $176 million at May 25, 2003,
principally due to the timing and terms of inventory purchases, capital
expenditures, and related payments. Unearned revenues of $92 million at February
22, 2004, increased from $73 million at May 25, 2003, principally due to
seasonal fluctuations in sales and redemptions of our gift cards. Other current
liabilities of $250 million at February 22, 2004, increased from $202 million at
May 25, 2003, principally due to increases in insurance and employee
benefit-related accruals.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. Identifiable cash flows are
measured at the lowest level for which they are largely independent of the cash
flows of other groups of assets and liabilities, generally at the restaurant
level. 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
18
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.
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. 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 25, 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;
19
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, and the impact of litigation generally, including but not limited
to the litigation described in this report;
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 22, 2004, 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
$1.5 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 $21
million. The fair value of our long-term fixed rate debt during the third
quarter of fiscal 2004 averaged $690 million, with a high of $693 million and a
low of $685 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 February 22, 2004, 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 February 22, 2004.
During the fiscal quarter ended February 22, 2004, 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.
20
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In March 2003 and March 2002, three of our current and former hourly
restaurant employees filed two purported class action lawsuits against us in
California Superior Court of Orange County alleging violations of California
labor laws with respect to providing meal and rest breaks. The lawsuits seek
penalties under Department of Labor rules providing a one hundred dollar penalty
per violation per employee, plus attorney's fees on behalf of the plaintiffs and
other purported class members. Discovery is currently underway in these matters.
One of the cases was removed to our mandatory arbitration program, although the
Court retained the authority to permit a sample of class-wide discovery. We are
prosecuting an appeal to cause the other case to be similarly removed to
arbitration. In September 2003, three former employees in Washington State filed
a similar purported class action in Washington State Superior Court in Spokane
County alleging violations of Washington labor laws with respect to providing
rest breaks. The Court stayed the action, and ordered the plaintiffs into our
mandatory arbitration program; the plaintiffs have filed a motion for
reconsideration. We intend to vigorously defend our position in all of these
cases. Although the outcome of the cases cannot be ascertained at this time, we
do not believe that the disposition of these cases, either individually or in
the aggregate, would have a material adverse effect on our financial position,
results of operations or liquidity.
We are subject to other private lawsuits, administrative proceedings and
claims that arise in the ordinary course of our business. These matters
typically involve claims from guests, employees and others related to
operational issues common to the restaurant industry. A number of these
lawsuits, proceedings and claims may exist at any given time. We could be
affected by adverse publicity resulting from the allegations comprising a claim,
regardless of whether the allegations are valid or whether we are ultimately
found liable. From time to time, we also are involved in lawsuits related to
infringement of, or challenges to, our trademarks. We do not believe that the
final disposition of the lawsuits and claims in which we are currently involved
will have a material adverse effect on our financial position, results of
operations or liquidity.
Item 5. Other Information
On March 25, 2004, 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, 2004, to shareholders of record as of the
close of business on April 9, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit10(a) First Amendment dated February 4,
2004, to Credit Agreement dated as of
October 17, 2003, among Darden Restaurants,
Inc. and the banks named therein.
Exhibit 10(b) Letter Agreement dated February 3, 2004,
between Richard E. Rivera and Darden
Restaurants, Inc.
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
April 6, 2004.
Exhibit 31(b) Certification of Chief Financial Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, dated
April 6, 2004.
Exhibit 32(a) Certification of Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated
April 6, 2004.
Exhibit 32(b) Certification of Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, dated
April 6, 2004.
21
(b) Reports on Form 8-K.
During the third quarter, we filed or furnished the
following reports on Form 8-K:
A current report on Form 8-K dated December 18, 2003,
announcing second quarter financial results.
In addition, we filed or furnished the following reports on
Form 8-K subsequent to the close of the third quarter of
fiscal 2004:
A current report on Form 8-K dated February 25, 2004,
announcing our third quarter financial outlook.
A current report on Form 8-K dated March 17, 2004,
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 6, 2004 By: /s/ Paula J. Shives
-----------------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: April 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(a) First Amendment dated February 4, 2004, to Credit Agreement
dated as of October 17, 2003, among Darden Restaurants, Inc.
and the banks named therein.
10(b) Letter Agreement dated February 3, 2004, between
Richard E. Rivera and Darden Restaurants, Inc.
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 April 6, 2004.
31(b) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002, dated April 6, 2004.
32(a) Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated April 6, 2004.
32(b) Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, dated April 6, 2004.
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 22, February 23, February 22, February 23,
2004 2003 2004 2003
- -------------------------------------------------------------------------------------------------------------------
Consolidated earnings from operations
before income taxes..................... $ 113,005 $ 93,325 $ 263,615 $ 258,550
Plus fixed charges:
Gross interest expense.................. 11,967 11,849 35,756 35,621
40% of restaurant and equipment minimum
rent expense.......................... 5,709 5,754 16,678 16,298
--------- --------- -------- ----------
Total fixed charges................. 17,676 17,603 52,434 51,919
Less capitalized interest.................. (891) (875) (3,000) (2,719)
--------- --------- --------- ----------
Consolidated earnings from operations
before income taxes available to cover
fixed charges........................... $ 129,790 $ 110,053 $ 313,049 $ 307,750
========= ========= ========= ==========
Ratio of consolidated earnings to fixed
charges................................. 7.34 6.25 5.97 5.93
========= ========= ========= ==========
- -------------------------------------------------------------------------------------------------------------------
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.
April 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.
April 6, 2004
/s/ Linda J. Dimopoulos
- ----------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
Exhibit 32(a)
26
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 February 22, 2004, 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 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 February 22, 2004, 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
April 6, 2004
28