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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 28, 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.
[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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Number of shares of common stock outstanding as of January 2, 2005:
158,868,403 (excluding 109,093,707 shares held in our treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Changes
in Stockholders' Equity and Accumulated
Other Comprehensive Income (Loss) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
Item 4. Controls and Procedures 22
Part II - Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds 23
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits 25
Signatures 26
Index to Exhibits 27
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 Six Months Ended
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November 28, November 23, November 28, November 23,
2004 2003 2004 2003
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(as restated) (as restated)
Sales............................................... $1,229,373 $1,142,543 $2,508,017 $2,402,232
Costs and expenses:
Cost of sales:
Food and beverage.............................. 368,036 346,200 759,457 742,913
Restaurant labor............................... 400,714 375,614 806,530 767,949
Restaurant expenses............................ 202,287 192,948 397,304 385,777
--------- ---------- ---------- ----------
Total cost of sales, excluding restaurant
depreciation and amortization of $49,486,
$48,443, $98,705, and $96,525, respectively $ 971,037 $ 914,762 $1,963,291 $1,896,639
Selling, general, and administrative............. 130,785 120,320 245,365 233,961
Depreciation and amortization.................... 53,176 52,048 105,936 103,601
Interest, net.................................... 11,007 10,725 21,971 21,366
---------- ---------- ---------- ----------
Total costs and expenses..................... $1,166,005 $1,097,855 $2,336,563 $2,255,567
---------- ---------- ---------- ----------
Earnings before income taxes........................ 63,368 44,688 171,454 146,665
Income taxes........................................ (20,393) (14,635) (57,467) (49,261)
---------- ---------- ---------- ----------
Net earnings........................................ $ 42,975 $ 30,053 $ 113,987 $ 97,404
========== ========== ========== ==========
Net earnings per share:
Basic............................................ $ 0.27 $ 0.18 $ 0.73 $ 0.59
========== ========== ========== ==========
Diluted.......................................... $ 0.26 $ 0.18 $ 0.70 $ 0.57
========== ========== ========== ==========
Average number of common shares outstanding:
Basic............................................ 156,800 164,900 157,200 164,800
========== ========== ========== ==========
Diluted......................................... 163,400 171,000 163,400 170,700
========== ========== ========== ==========
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See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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November 28, 2004 May 30, 2004
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(as restated)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 60,431 $ 36,694
Receivables............................................... 30,905 30,258
Inventories............................................... 236,441 198,781
Assets held for sale...................................... 889 --
Prepaid expenses and other current assets................. 22,670 25,316
Deferred income taxes..................................... 60,338 55,258
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Total current assets.................................. $ 411,674 $ 346,307
Land, buildings, and equipment............................... 2,292,062 2,250,616
Other assets................................................. 184,182 183,425
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Total assets.......................................... $ 2,887,918 $ 2,780,348
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 162,142 $ 174,624
Short-term debt .......................................... -- 14,500
Accrued payroll........................................... 92,600 103,327
Accrued income taxes...................................... 91,495 48,753
Other accrued taxes....................................... 36,083 38,440
Unearned revenues......................................... 71,154 75,513
Current portion of long-term debt......................... 149,931 --
Other current liabilities................................. 246,493 228,324
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Total current liabilities............................. $ 849,898 $ 683,481
Long-term debt, less current portion ........................ 502,574 653,349
Deferred income taxes........................................ 126,233 132,690
Deferred rent................................................ 127,401 122,879
Other liabilities............................................ 15,093 12,661
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Total liabilities..................................... $ 1,621,199 $ 1,605,060
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Stockholders' equity:
Common stock and surplus.................................. $ 1,632,633 $ 1,584,115
Retained earnings......................................... 1,235,389 1,127,653
Treasury stock............................................ (1,547,759) (1,483,768)
Accumulated other comprehensive income (loss)............. (7,479) (10,173)
Unearned compensation..................................... (45,281) (41,401)
Officer notes receivable.................................. (784) (1,138)
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Total stockholders' equity............................ $ 1,266,719 $ 1,175,288
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Total liabilities and stockholders' equity............ $ 2,887,918 $ 2,780,348
============ ============
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See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the six months ended November 28, 2004 and November 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 (Loss) Compensation Receivable Equity
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Balance at May 30, 2004 (as restated).... $1,584,115 $ 1,127,653 $(1,483,768) $(10,173) $(41,401) $(1,138) $1,175,288
Comprehensive income:
Net earnings.......................... -- 113,987 -- -- -- -- 113,987
Other comprehensive income(loss):
Foreign currency adjustment....... -- -- -- 3,344 -- -- 3,344
Change in fair value of
derivatives, net of tax of $1,308 -- -- -- (650) -- -- (650)
-----------
Total comprehensive income........ 116,681
Cash dividends declared -- (6,251) -- -- -- -- (6,251)
Stock option exercises (2,667 shares) 24,357 -- 3,599 -- -- -- 27,956
Issuance of restricted stock (360 shares),
net of forfeiture adjustments.......... 8,281 -- -- -- (8,281) -- --
Earned compensation...................... -- -- -- -- 3,411 -- 3,411
ESOP note receivable repayments.......... -- -- -- -- 990 -- 990
Income tax benefits credited to equity... 13,704 -- -- -- -- -- 13,704
Purchases of common stock for treasury
(3,179 shares)......................... -- -- (68,743) -- -- -- (68,743)
Issuance of treasury stock under
Employee Stock Purchase and other
plans (163 shares).................. 2,176 -- 1,153 -- -- -- 3,329
Repayment of officer notes, net.......... -- -- -- -- -- 354 354
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Balance at November 28, 2004 $1,632,633 $1,235,389 $(1,547,759) $(7,479) $(45,281) $(784) $1,266,719
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Common Accumulated
Stock Other Officer Total
And Retained Treasury Comprehensive Unearned Notes Stockholders'
Surplus Earnings Stock Income (Loss) Compensation Receivable Equity
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Balance at May 25, 2003 (as restated).... $1,525,957 $ 913,464 $(1,254,293) $(10,646) $(42,848) $(1,579) $1,130,055
Comprehensive income:
Net earnings (as restated)............ -- 97,404 -- -- -- -- 97,404
Other comprehensive income (loss):
Foreign currency adjustment
(as restated) ..................... -- -- -- 1,301 -- -- 1,301
Change in fair value of derivatives,
net of tax of $460................ -- -- -- (621) -- -- (621)
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Total comprehensive income
(as restated).................. 98,084
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
(as restated) $1,559,909 $1,004,293 $(1,295,038) $(9,966) $(45,418) $(1,256) $1,212,524
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See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Quarter Ended Six Months Ended
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November 28, November 23, November 28, November 23,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Cash flows--operating activities
Net earnings................................................. $ 42,975 $ 30,053 $113,987 $ 97,404
Adjustments to reconcile net earnings to cash flows:
Depreciation and amortization.............................. 53,176 52,048 105,936 103,601
Asset impairment (credit) charge, net...................... (108) 2,945 (113) 3,447
Amortization of unearned compensation and loan costs....... 2,648 1,509 5,199 3,353
Non-cash compensation expense.............................. 945 743 973 810
Change in current assets and liabilities................... 9,931 (117,854) (4,959) (95,529)
Contributions to defined benefit pension plans and
postretirement plan.................................. (45) (85) (151) (141)
Loss (gain) on disposal of land, buildings, and equipment.. 153 1,081 307 (478)
Change in cash surrender value of trust owned life insurance (3,485) (1,744) (3,214) (3,744)
Deferred income taxes...................................... (6,503) 2,094 (10,229) 4,636
Change in deferred rent.................................... 2,461 2,368 4,522 4,285
Change in other liabilities ............................... 2,009 386 2,561 806
Income tax benefits credited to equity..................... 9,177 3,661 13,704 8,066
Other, net................................................. 556 (634) (1,776) (838)
--------- --------- -------- --------
Net cash provided by (used in) operating activities...... $ 113,890 $ (23,429) $226,747 $125,678
--------- ---------- -------- --------
Cash flows--investing activities
Purchases of land, buildings, and equipment.................. (84,117) (103,520) (146,782) (190,193)
Increase in other assets..................................... (1,931) (2,250) (2,250) (2,641)
Proceeds from disposal of land, buildings, and
equipment ................................................. 4,020 2,540 5,204 5,438
--------- --------- -------- --------
Net cash used in investing activities.................... $ (82,028) $(103,230) $(143,828) $(187,396)
--------- --------- -------- --------
Cash flows--financing activities
Proceeds from issuance of common stock....................... 20,797 9,773 30,312 20,302
Dividends paid............................................... (6,251) (6,575) (6,251) (6,575)
Purchases of treasury stock.................................. (6,780) (16,155) (68,743) (43,733)
(Decrease) increase in short-term debt....................... (17,800) 70,900 (14,500) 70,900
ESOP note receivable repayment............................... 240 1,880 990 3,165
Repayment of long-term debt.................................. (240) (1,880) (990) (3,165)
--------- --------- -------- --------
Net cash (used in) provided by financing activities...... $ (10,034) $ 57,943 $(59,182) $ 40,894
--------- --------- -------- --------
Increase (decrease) in cash and cash equivalents................ 21,828 (68,716) 23,737 (20,824)
Cash and cash equivalents - beginning of period................. 38,603 96,522 36,694 48,630
--------- --------- -------- --------
Cash and cash equivalents - end of period....................... $ 60,431 $ 27,806 $60,431 $ 27,806
========= ========= ======== ========
Cash flow from changes in current assets and liabilities
Receivables.................................................. (5,383) 16,065 (647) 3,351
Inventories.................................................. (18,452) (83,262) (37,660) (83,353)
Prepaid expenses and other current assets.................... 5,049 7,922 2,562 390
Accounts payable............................................. (2,899) (28,449) (12,825) (8,107)
Accrued payroll.............................................. 3,173 2,033 (10,727) (2,820)
Accrued income taxes......................................... 13,407 (30,809) 42,742 (17,132)
Other accrued taxes.......................................... (4,190) (3,099) (2,357) (308)
Unearned revenues........................................... 6,063 (1,793) (4,359) (7,804)
Other current liabilities.................................... 13,163 3,538 18,312 20,254
--------- --------- -------- --------
Change in current assets and liabilities................. $ 9,931 $(117,854) $ (4,959) $(95,529)
========= ========== ======== ========
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See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollar amounts in thousands, except per share data)
Note 1. Background
Darden Restaurants, Inc. ("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 (the "SEC"). 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 28, 2004, are not necessarily indicative
of the results that may be expected for the fiscal year ending May 29, 2005.
These statements should be read in conjunction with the consolidated
financial statements and related notes to consolidated financial statements
included in our Annual Report on Form 10-K/A for the fiscal year ended May 30,
2004. The accounting policies used in preparing these consolidated financial
statements are the same as those described in our Form 10-K/A.
Note 2. Restatement of Financial Statements
This Note should be read in conjunction with Note 2, "Restatement of
Financial Statements" under Notes to Consolidated Financial Statements included
in Item 8, "Financial Statements and Supplementary Data" of the Company's Annual
Report on Form 10-K/A for the fiscal year ended May 30, 2004.
Following a December 2004 review of our lease accounting and leasehold
depreciation policies, we determined that it was appropriate to adjust certain
of our prior financial statements. As a result, we have restated our
consolidated financial statements for the fiscal years 1996 through 2004 and for
the first quarter of fiscal 2005 (the "Restatement"). Historically, when
accounting for leases with renewal options, we recorded rent expense on a
straight-line basis over the initial non-cancelable lease term, with the term
commencing when actual rent payments began. We depreciate our buildings,
leasehold improvements and other long-lived assets on those properties over a
period that includes both the initial non-cancelable lease term and all option
periods provided for in the lease (or the useful life of the assets if shorter).
We previously believed that these longstanding accounting treatments were
appropriate under generally accepted accounting principles. We now have restated
our financial statements to recognize rent expense on a straight-line basis over
the expected lease term, including cancelable option periods where failure to
exercise such options would result in an economic penalty. The lease term
commences on the date when we become legally obligated for the rent payments.
The initial estimated impact of the Restatement was reported in our Current
Report on Form 8-K dated December 15, 2004, which indicated that the estimates
were subject to change as our independent registered public accounting firm
completed its review. The figures reported in this Form 10-Q reflect certain
adjustments to the estimates reported in the Form 8-K, with the result that the
impact of the Restatement is somewhat less than previously estimated. The
cumulative effect of the Restatement through fiscal 2004 is an increase in
deferred rent liability of $114,008 and a decrease in deferred income tax
liability of $43,526. As a result, retained earnings at the end of fiscal 2004
decreased by $70,268. Rent expense for fiscal years ended 2004, 2003 and 2002,
for the quarter ended November 23, 2003 and for the six months ended November
23, 2003 increased by $7,222, $10,145, $7,874, $1,938 and $3,945, respectively.
The Restatement decreased reported diluted net earnings per share by $0.02,
$0.04, $0.03, $0.00 and $0.01 for the fiscal years ended 2004, 2003 and 2002,
for the quarter ended November 23, 2003 and for the six months ended November
23, 2003, respectively. The Restatement had no impact on our previously reported
cash flows, sales or same-restaurant sales or on our compliance with any
covenant under our credit facility or other debt instruments.
7
The consolidated financial statements included in this Form 10-Q have been
restated to reflect the adjustments described above. The Restatement has been
set forth, for the respective periods presented therein, in (i) Amendment No. 1
to our Annual Report on Form 10-K/A for the fiscal year ended May 30, 2004 and
(ii) Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarterly
period ended August 29, 2004 which we are filing concurrently with this Form
10-Q.
The following is a summary of the impact of the Restatement on (i) our
consolidated balance sheet at November 23, 2003 and (ii) our consolidated
statements of earnings for the quarter and six months ended November 23, 2003.
The impact of the Restatement on our consolidated balance sheet as of May 30,
2004 is presented in our Annual Report on Form 10-K/A for the fiscal year ended
May 30, 2004. We have not presented a summary of the impact of the Restatement
on our consolidated statements of cash flows for any of the above-referenced
quarterly periods since the net impact for each quarterly period is zero.
As Previously As
November 23, 2003 Reported Adjustments Restated
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Consolidated Balance Sheet
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Deferred income taxes $ 160,980 $ (42,096) $ 118,884
Deferred rent -- 119,581 119,581
Other liabilities 20,693 (8,641) 12,052
Total liabilities 1,531,282 68,844 1,600,126
Retained earnings 1,072,715 (68,422) 1,004,293
Accumulated other comprehensive income (loss) (9,544) (422) (9,966)
Total stockholders' equity 1,281,368 (68,844) 1,212,524
As Previously As
Quarter ended November 23, 2003 Reported Adjustments Restated
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Consolidated Statement of Earnings
- --------------------------------------------------------------------------------------------------------------------
Restaurant expenses $ 191,010 $ 1,938 $ 192,948
Total cost of sales 912,824 1,938 914,762
Total costs and expenses 1,095,917 1,938 1,097,855
Earnings before income taxes 46,626 (1,938) 44,688
Income taxes 15,373 (738) 14,635
Net earnings 31,253 (1,200) 30,053
Basic net earnings per share 0.19 (0.01) 0.18
Diluted net earnings per share 0.18 -- 0.18
As Previously As
Six months ended November 23, 2003 Reported Adjustments Restated
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Consolidated Statement of Earnings
- --------------------------------------------------------------------------------------------------------------------
Restaurant expenses $ 381,832 $ 3,945 $ 385,777
Total cost of sales 1,892,694 3,945 1,896,639
Total costs and expenses 2,251,622 3,945 2,255,567
Earnings before income taxes 150,610 (3,945) 146,665
Income taxes 50,763 (1,502) 49,261
Net earnings 99,847 (2,443) 97,404
Basic net earnings per share 0.61 (0.02) 0.59
Diluted net earnings per share 0.58 (0.01) 0.57
In addition, certain amounts in Note 4 have been restated to reflect the
Restatement adjustments described above.
Note 3. Consolidated Statements of Cash Flows
During the quarter and six months ended November 28, 2004, we paid $12,584
and $20,022, respectively, for interest (net of amounts capitalized) and $3,657
and $10,357, respectively, for income taxes. 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.
8
Note 4. 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 28, November 23, November 28, November 23,
2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Net earnings, as reported $42,975 $ 30,053 $ 113,987 $ 97,404
Add: Stock-based compensation expense
included in reported net earnings, net
of related tax effects 1,569 1,130 2,629 1,792
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects (5,584) (5,438) (10,612) (10,096)
-------------------------------------------------------------------
Pro forma $38,960 $ 25,745 $ 106,004 $ 89,100
===================================================================
Basic net earnings per share
As reported $ 0.27 $ 0.18 $ 0.73 $ 0.59
Pro forma $ 0.25 $ 0.16 $ 0.67 $ 0.54
Diluted net earnings per share
As reported $ 0.26 $ 0.18 $ 0.70 $ 0.57
Pro forma $ 0.24 $ 0.15 $ 0.65 $ 0.52
====================================================================================================================
Note 5. Provision for Impaired Assets and Restaurant Closings
During fiscal 2004, we recorded a restructuring charge of $1,112 related
primarily to severance payments made to certain restaurant employees and other
exit costs associated with the closing of six Bahama Breeze restaurants in
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities". Below is a summary of the restructuring liability for the
six months ended November 28, 2004:
Balance at Cash Balance at
May 30, 2004 Additions Payments November 28, 2004
- --------------------------------------------------------------------------------------------------------------------
One-time termination benefits $ 49 $ -- $ (49) $ --
Other exit costs 311 -- (311) --
- --------------------------------------------------------------------------------------------------------------------
$ 360 $ -- $ (360) $ --
====================================================================================================================
During the quarter and six months ended November 28, 2004, we recorded
charges of $550 and $583, respectively, for long-lived asset impairments
resulting from the decision to close, relocate, and rebuild certain restaurants.
During the quarter and six months ended November 23, 2003, we recorded charges
of $3,004 and $4,188, respectively, for similar actions. 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 28, 2004, we also recorded gains of $658 and $696, respectively,
related to previously impaired assets that were sold. During the quarter and six
months ended November 23, 2003, we recorded gains of $59 and $741, respectively,
related to the sale of previously impaired assets. These amounts are included in
selling, general, and administrative expenses.
9
Note 6. Net Earnings per Share
Outstanding stock options and restricted stock granted by us represent the
only dilutive effect reflected in diluted weighted average shares outstanding.
Options and restricted stock do not impact the numerator of the diluted net
earnings per share computation.
Options to purchase 2,674,182 and 4,852,750 shares of common stock were
excluded from the calculation of diluted net earnings per share for the quarters
ended November 28, 2004 and November 23, 2003, respectively, because their
exercise prices exceeded the average market price of common shares for the
period. Options to purchase 3,539,251 and 4,859,420 shares of common stock were
excluded from the calculation of diluted net earnings per share for the six
months ended November 28, 2004 and November 23, 2003, respectively, for the same
reason.
Note 7. Stockholders' Equity
Pursuant to the authorization of our Board of Directors to repurchase up to
137,400,000 shares in accordance with applicable securities regulations, we
repurchased 256,155 and 3,178,953 shares of our common stock for $6,780 and
$68,743 during the quarter and six months ended November 28, 2004, respectively,
resulting in a cumulative repurchase of 112,420,637 shares as of November 28,
2004.
Note 8. Derivative Instruments and Hedging Activities
During the first quarter of fiscal 2005, we issued Darden stock units to
certain key employees. The Darden stock units were granted at a value equal to
the market price of our common stock at the date of grant and will be settled in
cash at the end of their vesting periods, which range between four and five
years, at the then market price of our common stock. Compensation expense is
measured based on the market price of our common stock each period and is
amortized over the vesting period. At November 28, 2004, we had 458,077 Darden
stock units outstanding. No Darden stock units were outstanding during fiscal
2004.
During the first quarter of fiscal 2005, we entered into equity forward
contracts to hedge the risk of changes in future cash flows associated with the
unvested unrecognized Darden stock units granted during the first quarter of
fiscal 2005. The equity forward contracts will be settled at the end of the
vesting periods of their underlying Darden stock units, which range between four
and five years. The equity forward contracts, which have a $3,904 notional
amount and can only be net settled in cash, are used to hedge the variability in
cash flows associated with the unvested unrecognized Darden stock units. To the
extent the equity forward contracts are effective in offsetting the variability
of the hedged cash flows, changes in the fair value of the equity forward
contracts are not included in current earnings but are reported as accumulated
other comprehensive income (loss). A deferred gain of $1,462 related to the
equity forward contracts was recognized in accumulated other comprehensive
income (loss) at November 28, 2004. As the Darden stock units vest, we will
effectively de-designate that portion of the equity forward contract that no
longer qualifies for hedge accounting, and changes in fair value associated with
that portion of the equity forward contract will be recognized in current
earnings. A gain of $102 and $116 was recognized in earnings as a component of
restaurant labor during the quarter and six months ended November 28, 2004,
respectively.
During the first quarter of fiscal 2005, we entered into an interest rate
swap agreement ("swap") to hedge the risk of changes in interest rates on the
cost of a future issuance of fixed-rate debt. The swap, which has a $25,000
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. No swaps were entered into during the second quarter of fiscal 2005. As of
November 28, 2004, we have swaps with a total notional principal amount of
indebtedness of $100,000 designated to hedge the 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 (loss). 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 $1,697, net of tax, related to the
swaps was recognized in accumulated other comprehensive income (loss) at
November 28, 2004. No amounts were recognized in earnings during the quarter and
six months ended November 28, 2004.
10
Note 9. Retirement Plans
Components of net periodic benefit cost are as follows:
Defined Benefit Plans Postretirement Benefit Plan
- -----------------------------------------------------------------------------------------------------------------------
Quarter Ended Quarter Ended
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Service cost $ 1,217 $ 1,143 $ 176 $ 153
Interest cost 1,829 1,769 251 230
Expected return on plan assets (3,210) (3,205) -- --
Amortization of unrecognized prior service cost (87) (87) -- 7
Recognized net actuarial loss 1,248 928 86 83
- ------------------------------------------------------------------------------------------------ ----------------------
Net periodic benefit cost $ 997 $ 548 $ 513 $ 473
=======================================================================================================================
Defined Benefit Plans Postretirement Benefit Plan
- -----------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
- -----------------------------------------------------------------------------------------------------------------------
Service cost $ 2,434 $ 2,287 $ 350 $ 303
Interest cost 3,657 3,538 502 459
Expected return on plan assets (6,420) (6,410) -- --
Amortization of unrecognized prior service cost (174) (174) -- 15
Recognized net actuarial loss 2,496 1,855 173 167
- -----------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,993 $ 1,096 $ 1,025 $ 944
=======================================================================================================================
Note 10. Commitments and Contingencies
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 28, 2004
and May 30, 2004, we had $72,677 and $72,480, respectively, of standby letters
of credit related to workers' compensation and general liabilities accrued in
our consolidated financial statements. As of November 28, 2004 and May 30, 2004,
we also had $13,780 and $15,896, 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 28, 2004 and May 30, 2004, we had $2,026 and $4,346,
respectively, of guarantees associated with third party lease assignment
obligations. These amounts represent the maximum potential amount of future
payments under the guarantees. The fair value of these potential payments,
discounted at our pre-tax cost of capital, at November 28, 2004 and May 30, 2004
amounted to $1,535 and $3,131, respectively. We did not accrue for the
guarantees, as we believed the likelihood of the third parties defaulting on the
assignment agreements was improbable. In the event of default by a third party,
the indemnity and default clauses in our assignment agreements govern our
ability to pursue and recover from 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 assignment agreements, except to the extent the assignment
allows us to repossess the building and personal property. The guarantees expire
over their respective lease terms, which range from fiscal 2005 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 sought
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. During the second quarter of fiscal 2005, we
attended mediations with the plaintiffs and agreed to settle both lawsuits for
approximately $9,500; the full terms of the settlement are subject to judicial
review. We recorded settlement expenses amounting to approximately $3,000 and
$4,500 associated with these lawsuits during the quarter and six months ended
November 28, 2004, which are included in selling, general, and administrative
expenses. The settlement amounts of these lawsuits are included in other current
liabilities at November 28, 2004.
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' motion for reconsideration was
not granted, and their motion for modification of the appellate decision is
pending. We intend to vigorously defend our position in this case. Although the
outcome of
11
the case cannot be ascertained at this time, we do not believe that the
disposition of this case will 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, either individually or in the
aggregate, on our financial position, results of operations or liquidity.
Note 11. Future Application of Accounting Standards
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment." SFAS
No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation" and
generally requires the cost associated with employee services received in
exchange for an award of equity instruments be measured based on the grant-date
fair value of the award and recognized in the financial statements over the
period during which employees are required to provide service in exchange for
the award. SFAS No. 123R also provides guidance on how to determine the
grant-date fair value for awards of equity instruments as well as alternative
methods of adopting its requirements. SFAS No. 123R is effective for the
beginning of the first interim or annual reporting period after June 15, 2005.
As disclosed in Note 4, based on the current assumptions and calculations used,
had we recognized compensation expense based on the fair value of awards of
equity instruments, net earnings would have been reduced by approximately $4,015
and $7,983 for the quarter and six months ended November 28, 2004, respectively,
and $4,308 and $8,304 for the quarter and six months ended November 23, 2003,
respectively.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussion and analysis below for the Company should be read in
conjunction with the financial statements and the notes to such financial
statements included elsewhere in this Form 10-Q. All applicable disclosures in
the following discussion have been modified to reflect the Restatement, as
described below.
RESTATEMENT
Following a December 2004 review of the accounting adjustments cited in
several recent Form 8-K filings by other restaurant companies, and in
consultation with our independent registered public accounting firm, KPMG LLP,
we determined that one of the adjustments in those filings relating to the
treatment of lease accounting and leasehold depreciation applied to us, and that
it was appropriate to adjust certain of our prior financial statements. As a
result, we have restated our consolidated financial statements for the fiscal
years 1996 through 2004 and for the first quarter of fiscal 2005. Historically,
when accounting for leases with renewal options, we recorded rent expense on a
straight-line basis over the initial non-cancelable lease term, with the term
commencing when actual rent payments began. We depreciate our buildings,
leasehold improvements and other long-lived assets on those properties over a
period that includes both the initial non-cancelable lease term and all option
periods provided for in the lease (or the useful life of the assets if shorter).
We previously believed that these longstanding accounting treatments were
appropriate under generally accepted accounting principles. We now have restated
our financial statements to recognize rent expense on a straight-line basis over
the expected lease term, including cancelable option periods where failure to
exercise such options would result in an economic penalty. The lease term
commences on the date when we become legally obligated for the rent payments.
These adjustments were not attributable to any material non-compliance by us, as
a result of any misconduct, with any financial reporting requirements under the
securities laws.
The cumulative effect of the Restatement through fiscal 2004 is an increase
in deferred rent liability of $114 million and a decrease in deferred income tax
liability of $44 million. As a result, retained earnings at the end of fiscal
2004 decreased by $70 million. Rent expense for fiscal years ended 2004, 2003
and 2002, for the quarter ended November 23, 2003 and for the six months ended
November 23, 2003 increased by $7 million, $10 million, $8 million, $2 million
and $4 million, respectively. The Restatement decreased reported diluted net
earnings per share by $0.02, $0.04, $0.03, $0.00 and $0.01 for the fiscal years
ended 2004, 2003 and 2002, for the quarter ended November 23, 2003 and for the
six months ended November 23, 2003, respectively. The Restatement had no impact
on our previously reported cash flows, sales or same-restaurant sales or on our
compliance with any covenant under our credit facility or other debt
instruments.
The consolidated financial statements included in this Form 10-Q have been
restated to reflect the adjustments described above. The Restatement has been
set forth, for the respective periods presented therein, in (i) Amendment No. 1
to our Annual Report on Form 10-K/A for the fiscal year ended May 30, 2004 and
(ii) Amendment No. 1 to our Quarterly Report on Form 10-Q/A for the quarterly
period ended August 29, 2004 which we are filing concurrently with this Form
10-Q.
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 quarters and six months ended
November 28, 2004 and November 23, 2003.
13
Quarter Ended Six Months Ended
---------------------------------------------------------------------------------------------------------------------
November 28, November 23, November 28, November 23,
2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
(as restated) (as restated)
Sales ................................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales:
Food and beverage................................... 29.9 30.3 30.3 30.9
Restaurant labor.................................... 32.6 32.9 32.2 32.0
Restaurant expenses................................. 16.5 16.9 15.8 16.0
------ ------ ------ ------
Total cost of sales, excluding restaurant
depreciation and amortization of 4.0%,
4.2%, 3.9% and 4.0%, respectively.............. 79.0% 80.1% 78.3% 78.9%
Selling, general, and administrative.................. 10.6 10.5 9.8 9.7
Depreciation and amortization......................... 4.3 4.6 4.2 4.3
Interest, net......................................... 0.9 0.9 0.9 0.9
------ ------ ------ ------
Total costs and expenses........................ 94.8% 96.1% 93.2% 93.8%
------ ------ ------ ------
Earnings before income taxes............................. 5.2 3.9 6.8 6.2
Income taxes............................................. (1.7) (1.3) (2.3) (2.1)
------ ------ ------ ------
Net earnings............................................. 3.5% 2.6% 4.5% 4.1%
====== ====== ====== ======
---------------------------------------------------------------------------------------------------------------------
OVERVIEW OF OPERATIONS
Our sales were $1.23 billion and $2.51 billion for the second quarter and
first six months of fiscal 2005, respectively, compared to $1.14 billion and
$2.40 billion for the second quarter and first six months of fiscal 2004. The
7.6 percent and 4.4 percent increases in sales for the second quarter and first
six months of fiscal 2005, respectively, were driven primarily by increased U.S.
same-restaurant sales at Olive Garden and Red Lobster, and by additional
Company-owned restaurants opened since the second quarter of fiscal 2004. For
the second quarter of fiscal 2005, our net earnings were $43 million compared to
$30 million for the second quarter of fiscal 2004, a 43.0 percent increase, and
our diluted net earnings per share were $0.26 for the second quarter of fiscal
2005 compared to $0.18 for the second quarter of fiscal 2004, a 44.4 percent
increase. For the first six months of fiscal 2005, our net earnings were $114
million compared to $97 million for the first six months of fiscal 2004, a 17.0
percent increase, and our diluted net earnings per share were $0.70 for the
first six months of fiscal 2005 compared to $0.57 for the first six months of
fiscal 2004, a 22.8 percent increase.
Olive Garden reported its 41st consecutive quarter of U.S. same-restaurant
sales growth during the second quarter of fiscal 2005 with a 5.5 percent
increase. Red Lobster reported U.S. same-restaurant sales growth of 3.4 percent
during the second quarter of fiscal 2005, its first quarter of same-restaurant
sales growth since the first quarter of fiscal 2004. Red Lobster's increase in
U.S. same-restaurant sales was attributable primarily to improved in-restaurant
operations, more effective advertising support, and a nationally advertised
"Endless Shrimp" promotion. Red Lobster also achieved record guest satisfaction
results during the second quarter of fiscal 2005. Bahama Breeze delivered
improved financial performance. Operating five fewer restaurants than the prior
year, Bahama Breeze achieved lower food and beverage and restaurant labor
expenses as a percent of sales while strengthening the guest experience it
provides. Smokey Bones operated 30 more restaurants than the prior year,
including seven restaurants that were opened during the second quarter of fiscal
2005. During full fiscal 2005, Smokey Bones expects to open a total of 30 to 40
new restaurants. In an effort to determine the concept's sales potential with
national advertising support, Smokey Bones began conducting a limited television
advertising test in two markets. Smokey Bones is also focused on reducing the
cost of new restaurants through design changes which include smaller prototypes.
14
SALES
Sales were $1.23 billion and $1.14 billion for the quarters ended November
28, 2004 and November 23, 2003, respectively. The 7.6 percent increase in sales
for the second quarter of fiscal 2005 was due primarily to increased U.S.
same-restaurant sales at Olive Garden and Red Lobster, and a net increase of 40
company-owned restaurants since the second quarter of fiscal 2004. Red Lobster
sales of $569 million were 4.4 percent above last year's second quarter, which
resulted primarily from a 3.4 percent increase in U.S. same-restaurant sales.
The increase in U.S. same-restaurant sales resulted primarily from a 2.2 percent
increase in average check and a 1.2 percent increase in same-restaurant guest
counts. Olive Garden's sales of $564 million were 8.8 percent above last year's
second quarter, driven primarily by its 15 net new restaurants in operation
versus last year and a 5.5 percent increase in U.S. same-restaurant sales. Olive
Garden achieved its 41st consecutive quarter of U.S. same-restaurant sales
growth primarily as a result of a 3.8 percent increase in same-restaurant guest
counts and a 1.7 percent increase in average check.
Sales were $2.51 billion and $2.40 billion for the six months ended
November 28, 2004 and November 23, 2003, respectively. The 4.4 percent increase
in sales for the first six months of fiscal 2005 as compared to the first six
months of fiscal 2004 was due primarily to increased same-restaurant sales at
Olive Garden and a net increase of 40 company-owned restaurants since the second
quarter of fiscal 2004. Red Lobster sales of $1.16 billion were 1.3 percent
below last year. U.S. same-restaurant sales for Red Lobster decreased 2.5
percent, primarily as a result of a 4.1 percent decrease in same-restaurant
guest counts offset only partially by a 1.6 percent increase in average check.
Olive Garden's sales of $1.14 billion were 7.4 percent above last year driven
primarily by its 15 net new restaurants in operation versus last year and a 4.1
percent increase in U.S. same-restaurant sales. U.S. same-restaurant sales for
Olive Garden increased 4.1 percent, primarily as a result of a 2.2 percent
increase in same-restaurant guest counts and a 1.9 percent increase in average
check.
COSTS AND EXPENSES
Total costs and expenses were $1.17 billion and $1.10 billion for the
quarters ended November 28, 2004 and November 23, 2003, respectively. As a
percent of sales, total costs and expenses decreased from 96.1 percent in the
second quarter of fiscal 2004 to 94.8 percent in the second quarter of fiscal
2005.
Food and beverage costs increased $22 million, or 6.3 percent, from $346
million to $368 million in the second quarter of fiscal 2005 compared to the
second quarter of fiscal 2004. As a percent of sales, food and beverage costs
decreased in the second quarter of fiscal 2005 primarily as a result of a more
favorable promotional mix and reduced waste at Red Lobster and the
implementation of cost savings initiatives, which were partially offset by
increased lobster, crab and dairy costs at Red Lobster and dairy costs at Olive
Garden. Restaurant labor increased $25 million, or 6.7 percent, from $376
million to $401 million in the second quarter of fiscal 2005 compared to the
second quarter of fiscal 2004. As a percent of sales, restaurant labor decreased
primarily as a result of increased sales leverage at Olive Garden and Red
Lobster, which was partially offset by an increase in wage rates. Restaurant
expenses (which include lease, property tax, credit card, utility, workers'
compensation, insurance, new restaurant pre-opening, and other restaurant-level
operating expenses) increased $9 million, or 4.8 percent, from $193 million to
$202 million in the second quarter of fiscal 2005 compared to the second quarter
of fiscal 2004. As a percent of sales, restaurant expenses decreased in the
second quarter of fiscal 2005 primarily as a result of lower new restaurant
pre-opening expenses due to fewer new restaurant openings and lower workers'
compensation and general liability expenses. The decrease in our workers'
compensation and general liability expenses resulted primarily from safety
initiatives that we believe should continue to provide long-term reductions in
both the number and severity of claims.
Selling, general, and administrative expenses increased $10 million, or 8.7
percent, from $120 million to $131 million in the second quarter of fiscal 2005
compared to the second quarter of fiscal 2004. As a percent of sales, selling,
general, and administrative expenses increased in the second quarter of fiscal
2005 compared to the second quarter of fiscal 2004 primarily as a result of
increased employee benefit costs and the expected resolution of the meal and
break period lawsuits in California, which were partially offset by decreased
marketing expenses at Red Lobster.
Depreciation and amortization expense increased $1 million, or 2.2 percent,
from $52 million to $53 million in the second quarter of fiscal 2005 compared to
the second quarter of fiscal 2004. As a percent of sales, depreciation and
amortization expense decreased in the second quarter of fiscal 2005 compared to
the second quarter of fiscal 2004 primarily as a result of the favorable impact
of higher sales volumes.
15
Net interest expense in the second quarter of fiscal 2005 was comparable to
the second quarter of fiscal 2004 reflecting lower capitalized interest in the
second quarter of fiscal 2005 as a result of less new restaurant and remodel
activity than in the second quarter of fiscal 2004, which was offset by the
favorable impact of higher sales volumes.
Food and beverage costs increased $17 million, or 2.2 percent, from $743
million to $759 million in the first six months of fiscal 2005 compared to the
first six months of fiscal 2004. As a percent of sales, food and beverage costs
decreased in the first six months of fiscal 2005 primarily as a result of a more
favorable promotional mix and reduced waste at Red Lobster and the
implementation of cost savings initiatives, which were partially offset by
increased lobster, crab and dairy costs at Red Lobster and dairy costs at Olive
Garden. Restaurant labor increased $39 million, or 5.0 percent, from $768
million to $807 million in the first six months of fiscal 2005 compared to the
first six months of fiscal 2004. As a percent of sales, restaurant labor
increased primarily as a result of increased wage rates and reduced sales
leverage at Red Lobster, which was partially offset by increased sales leverage
at Olive Garden. Restaurant expenses (which include lease, property tax, credit
card, utility, workers' compensation, insurance, new restaurant pre-opening, and
other restaurant-level operating expenses) increased $12 million, or 3.0
percent, from $386 million to $397 million in the first six months of fiscal
2005 compared to the first six months of fiscal 2004. As a percent of sales,
restaurant expenses decreased in the first six months of fiscal 2005 primarily
as a result of lower new restaurant pre-opening expenses as a result of fewer
new restaurant openings and lower workers' compensation and general liability
expenses, which was partially offset by higher utility costs.
Selling, general, and administrative expenses increased $11 million, or 4.9
percent, from $234 million to $245 million in the first six months of fiscal
2005 compared to the first six months of fiscal 2004. As a percent of sales,
selling, general, and administrative expenses increased in the first six months
of fiscal 2005 compared to the first six months of fiscal 2004 primarily as a
result of increased employee benefit costs and the expected resolution of the
meal and break period lawsuits in California, which were partially offset by
decreased marketing expenses at Red Lobster and Olive Garden.
Depreciation and amortization expense increased $2 million, or 2.3 percent,
from $104 million to $106 million in the first six months of fiscal 2005
compared to the first six months of fiscal 2004. As a percent of sales,
depreciation and amortization expense decreased in the first six months of
fiscal 2005 compared to the first six months of fiscal 2004 primarily as a
result of the favorable impact of higher sales volumes.
Net interest expense in the first six months of fiscal 2005 was comparable
to the first six months of fiscal 2004 reflecting lower capitalized interest in
the first six months of fiscal 2005 as a result of less new restaurant and
remodel activity than in the first six months of fiscal 2004, which was offset
by the favorable impact of higher sales volumes.
INCOME TAXES
The effective income tax rate for the second quarter and first six months
of fiscal 2005 was 32.2 percent and 33.5 percent, respectively, compared to an
effective income tax rate of 32.7 and 33.6 percent in the second quarter and
first six months of fiscal 2004, respectively. The rate decreases in fiscal 2005
were primarily due to an increase in the amount of tax credits that we expect to
receive for fiscal 2005 for providing work opportunities to individuals from
certain target groups.
NET EARNINGS AND NET EARNINGS PER SHARE
For the second quarter of fiscal 2005, our net earnings were $43 million
compared to $30 million for the second quarter of fiscal 2004, a 43.0 percent
increase, and our diluted net earnings per share were $0.26 for the second
quarter of fiscal 2005 compared to $0.18 for the second quarter of fiscal 2004,
a 44.4 percent increase. At Red Lobster, increased sales and decreased food and
beverage costs, restaurant labor, restaurant expenses, selling, general, and
administrative, and depreciation expenses as a percent of sales, resulted in
record operating profit for the second quarter of fiscal 2005. At Olive Garden,
increased sales and lower restaurant expenses and depreciation expenses as a
percent of sales, partially offset by increased labor costs and selling,
general, and administrative expenses as a percent of sales, resulted in record
second quarter operating profit for Olive Garden in fiscal 2005. The increase in
both our net earnings and diluted net earnings per share for the second quarter
of fiscal 2005 was due primarily to increased U.S. same-restaurant sales at
Olive Garden and Red Lobster and decreased consolidated food and beverage costs,
restaurant labor, restaurant expenses, and depreciation expenses as a percent of
sales more than offsetting increased selling, general, and administrative
expenses as a percentage of sales. Net earnings were
16
favorably impacted by a decrease in the effective income tax rate, primarily
resulting from an increase in the amount of tax credits that we expect to
receive for fiscal 2005 for providing work opportunities to individuals from
certain target groups.
For the first six months of fiscal 2005, our net earnings were $114 million
compared to $97 million for the first six months of fiscal 2004, a 17.0 percent
increase, and our diluted net earnings per share were $0.70 for the first six
months of fiscal 2005 compared to $0.57 for the first six months of fiscal 2004,
a 22.8 percent increase. At Red Lobster, decreased food and beverage costs,
restaurant expenses, and depreciation expenses as a percentage of sales more
than offset decreased sales and higher restaurant labor and selling, general,
and administrative expenses as a percent of sales. As a result, Red Lobster's
operating profit increased versus the first six months of fiscal 2004. At Olive
Garden, increased sales and lower restaurant expenses, selling, general, and
administrative, and depreciation expenses as a percent of sales more than offset
increased restaurant labor costs as a percent of sales. As a result, Olive
Garden's operating profit increased versus the first six months of fiscal 2004.
The increase in both our net earnings and diluted net earnings per share for the
first six months of fiscal 2005 was due primarily to increased U.S.
same-restaurant sales at Olive Garden and decreases in our consolidated food and
beverage costs, restaurant expenses, and depreciation expenses as a percent of
sales more than offsetting increased restaurant labor and selling, general, and
administrative expenses as a percentage of sales.
SEASONALITY
Our sales volumes fluctuate seasonally. In fiscal 2004 and 2003, our sales
were highest in the spring, lowest in the fall, and comparable during winter and
summer. Holidays, severe weather and similar conditions may affect sales volumes
seasonally in some operating regions. Because of the seasonality of our
business, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
NUMBER OF RESTAURANTS
The following table details the number of restaurants open at the end of
the second quarter of fiscal 2005, compared with the number open at the end of
fiscal 2004 and the end of the second quarter of fiscal 2004.
-------------------------------------------------------------------------------------------------------------------
November 28, 2004 May 30, 2004 November 23, 2003
-------------------------------------------------------------------------------------------------------------------
Red Lobster - USA.................. 649 649 649
Red Lobster - Canada............... 31 31 31
------ ------ ------
Total......................... 680 680 680
------ ------ ------
Olive Garden - USA................. 541 537 526
Olive Garden - Canada.............. 6 6 6
------ ------ ------
Total......................... 547 543 532
------ ------ ------
Bahama Breeze...................... 32 32 37
Smokey Bones ...................... 83 69 53
Seasons 52......................... 1 1 1
------ ------ ------
Total......................... 1,343 1,325 1,303
====== ====== ======
-------------------------------------------------------------------------------------------------------------------
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 28, 2004, no commercial paper 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 is determined by our debt rating.
The credit facility expires on October 17, 2008, and contains various
restrictive
17
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 28, 2004, we were in compliance with all
covenants under the Credit Agreement.
At November 28, 2004, our long-term debt consisted principally of: (1) $150
million of unsecured 6.375 percent notes due in February 2006, (2) $150 million
of unsecured 5.75 percent medium-term notes due in March 2007, (3) $75 million
of unsecured 7.45 percent medium-term notes due in April 2011, (4) $100 million
of unsecured 7.125 percent debentures due in February 2016, and (5) an
unsecured, variable rate $28 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. We also have $150 million of unsecured 8.375
percent senior notes due in September 2005 included in current liabilities,
which we plan to repay through the issuance of unsecured debt securities in
fiscal 2006. Through a shelf registration statement on file with the 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 have maturity dates of nine months or more after
issuance.
A summary of our contractual obligations and commercial commitments as of
November 28, 2004 is as follows (in thousands):
- ---------------------------------------------------------------------------------------------------------------------
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------------
Contractual Less than 1-3 3-5 After 5
Obligations Total 1 Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt (1) $ 653,413 $150,000 $300,000 $ -- $203,413
- ---------------------------------------------------------------------------------------------------------------------
Operating leases 401,856 65,296 115,587 85,504 135,469
- ---------------------------------------------------------------------------------------------------------------------
Purchase obligations (2) 592,878 570,267 20,472 2,139 --
- ---------------------------------------------------------------------------------------------------------------------
Total contractual cash
obligations $ 1,648,147 $785,563 $436,059 $ 87,643 $338,882
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Amount of Commitment Expiration per Period
- ---------------------------------------------------------------------------------------------------------------------
Total
Other Commercial Amounts Less than 1-3 3-5 Over 5
Commitments Committed 1 Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------------
Standby letters of
credit (3) $ 86,457 $ 86,457 $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
Guarantees (4) 2,026 498 810 441 277
- ---------------------------------------------------------------------------------------------------------------------
Total commercial
commitments $ 88,483 $ 86,955 $ 810 $ 441 $ 277
- ---------------------------------------------------------------------------------------------------------------------
(1) Excludes issuance discount of $908.
(2) Includes commitments for food and beverage items and supplies, capital
projects, and other miscellaneous commitments.
(3) Includes letters of credit for $72,677 associated with workers'
compensation and general liabilities accrued in our consolidated financial
statements; also includes letters of credit for $5,108 associated with
lease payments included in contractual operating lease obligation payments
noted above.
(4) Consists solely of guarantees associated with leased properties that have
been 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.
Except for operating leases noted in the contractual obligations table
above and the derivative and hedging instruments disclosed in Note 8 "Derivative
Instruments and Hedging Activities" under Notes to Consolidated Financial
Statements contained elsewhere in this Form 10-Q, we are not a party to any
off-balance sheet arrangements that have, or are reasonably likely to have, a
current or future material effect on our financial condition, changes in
financial condition, sales or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Our Board of Directors has authorized us to repurchase up to an aggregate
of 137.4 million shares of our common stock, after giving effect to the
additional 22.0 million shares that were authorized to be repurchased by our
18
Board on September 28, 2004. Net cash flows used by financing activities
included our repurchase of 0.3 million shares of our common stock for $7 million
in the second quarter of fiscal 2005, compared to 0.8 million shares for $16
million in the second quarter of fiscal 2004. For the first six months of fiscal
2005, net cash flows used by financing activities included our repurchase of 3.2
million shares of our common stock for $69 million, compared to 2.2 million
shares for $44 million for the first six months of fiscal 2004. As of November
28, 2004, we have repurchased a total of 112.4 million shares of our common
stock. The repurchased common stock is reflected as a reduction of stockholders'
equity.
Net cash flows used in investing activities included capital expenditures
incurred principally for building new restaurants, replacing equipment, and
remodeling existing restaurants. Capital expenditures were $84 million and $147
million in the second quarter and first six months of fiscal 2005, compared to
$104 million and $190 million in the second quarter and first six months of
fiscal 2004. The decreased expenditures in the second quarter and first six
months of fiscal 2005 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 believe that our internal cash generating
capabilities and borrowings available under our shelf registration statement 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 2005.
FINANCIAL CONDITION
Our current assets totaled $412 million at November 28, 2004, compared to
$346 million at May 30, 2004. The increase resulted primarily from an increase
in inventory of $38 million due to seasonality and opportunistic product
purchases and an increase in cash and cash equivalents of $24 million that was
due to the increase in operating performance and reduced Company share buy-back
during the second quarter of fiscal 2005.
Our current liabilities totaled $850 million at November 28, 2004, up from
$683 million at May 30, 2004. The increase in current liabilities is primarily
due to the reclassification of the $150 million of unsecured 8.375 percent
senior notes due in September 2005 from long-term debt to current liabilities.
Accounts payable of $162 million at November 28, 2004, decreased from $175
million at May 30, 2004, principally due to the timing and terms of inventory
purchases, capital expenditures, and related payments. Accrued payroll of $93
million at November 28, 2004, decreased from $103 million at May 30, 2004,
principally due to the payout of the fiscal 2004 incentive compensation during
the first quarter of fiscal 2005, which is partially offset by the amounts
accrued for the current fiscal year's incentive compensation. Accrued income
taxes of $91 million at November 28, 2004, increased from $49 million at May 30,
2004, principally due to the income taxes accrued for in the first six months of
fiscal 2005 and the timing of income tax payments. Other current liabilities of
$246 million at November 28, 2004, increased from $228 million at May 30, 2004,
principally due to insurance, litigation, 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 sales and expenses during the reporting
period (see Note 1, "Summary of Significant Accounting Policies" under Notes to
Consolidated Financial Statements included in Item 8, "Financial Statements and
Supplementary Data" of our Annual Report on Form 10-K/A for the fiscal year
ended May 30, 2004). 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 as a result of the
need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those
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.
19
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 reflected on our consolidated balance sheets as a
component of buildings, are amortized over the lesser of the expected lease
term, including cancelable option periods, or the estimated useful lives of the
related assets using the straight-line method. Equipment is depreciated over
estimated useful lives ranging from two to 10 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
of 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
undiscounted 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 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
sale 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.
In the fourth quarter of fiscal 2004, we recognized asset impairment charges of
$37 million ($22 million after-tax) for the closing of six Bahama Breeze
restaurants and the write-down of four other Bahama Breeze restaurants, one
Olive Garden restaurant, and one Red Lobster restaurant based on an evaluation
of expected cash flows.
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, depreciation and amortization expense
allowable for tax purposes, allowable tax credits for items such as taxes paid
on reported employee tip income, effective rates for state and local income
taxes, and the tax deductibility of certain other items.
20
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, generally years after the
returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment." SFAS
No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation" and
generally requires the cost associated with employee services received in
exchange for an award of equity instruments be measured based on the grant-date
fair value of the award and recognized in the financial statements over the
period during which employees are required to provide service in exchange for
the award. SFAS No. 123R also provides guidance on how to determine the
grant-date fair value for awards of equity instruments as well as alternative
methods of adopting its requirements. SFAS No. 123R is effective for the
beginning of the first interim or annual reporting period after June 15, 2005.
As disclosed in Note 4, "Future Application of Accounting Standards" under Notes
to Consolidated Financial Statements contained elsewhere in this Form 10-Q,
based on the current assumptions and calculations used, had we recognized
compensation expense based on the fair value of awards of equity instruments,
net earnings would have been reduced by approximately $4 million and $8 million
for the quarter and six months ended November 28, 2004, respectively, and $4
million and $8 million for the quarter and six months ended November 23, 2003,
respectively.
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 the Private Securities Litigation Reform
Act of 1995, as codified in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). 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: our growth plans and the number and type of expected new
restaurant openings and related capital expenditures; and the impact of
litigation on our financial position. 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 (which are discussed in greater detail
in Item 1, "Business" of our Annual Report on Form 10-K/A for the fiscal year
ended May 30, 2004):
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, public safety
conditions (including ongoing concerns about terrorism threats or the
continuing conflict in Iraq), 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, litigation costs, 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;
o government regulations and litigation relating to federal and state labor
laws, zoning, land use, environmental matters, and liquor licenses;
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; and
o the effectiveness of internal controls over financial reporting.
21
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 28, 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
$5 million over a period of one year (including the impact of the interest rate
swap agreements discussed in Note 8 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 $19 million. The
fair value of our long-term fixed rate debt, including the amounts included in
current liabilities, during the six months of fiscal 2005 averaged $673 million,
with a high of $677 million and a low of $666 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 Exchange Act) as
of November 28, 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
November 28, 2004.
Subsequent to the period covered by this report, and following a December
2004 review of the accounting adjustments cited in several recent Form 8-K
filings by other restaurant companies, and in consultation with our independent
registered public accounting firm, KPMG, LLP, we determined that one of the
adjustments in those filings relating to the treatment of lease accounting and
leasehold depreciation applied to us, and that it was appropriate to adjust
certain of our prior financial statements. As a result, on December 15, 2004,
our Board of Directors concluded that our previously-filed financial statements
for the fiscal years 1996 through 2004 and for the first quarter of fiscal 2005
should be restated. The Restatement is further discussed in the section entitled
"Restatement" in Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Item 2 of this Form 10-Q and in Note 2,
"Restatement of Financial Statements" under Notes to Consolidated Financial
Statements included in Item 1, "Financial Statements" of this Form 10-Q. In
connection with the Restatement and with the filing of the Form 10-Q/A for the
first quarter of fiscal 2005 and the Form 10-K/A for fiscal 2004, under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we re-evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of November 28, 2004. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of November 28, 2004.
During the fiscal quarter ended November 28, 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.
22
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 sought
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. During the second quarter of fiscal 2005, we
attended mediations with the plaintiffs and agreed to settle both lawsuits for
approximately $9.5 million; the full terms of the settlement are subject to
judicial review. We recorded settlement expenses amounting to approximately $3.0
million and $4.5 million associated with these lawsuits during the quarter and
six months ended November 28, 2004, which are included in selling, general, and
administrative expenses. The settlement amounts of these lawsuits are included
in other current liabilities at November 28, 2004.
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' motion for reconsideration was
not granted, and their motion for modification of the appellate decision is
pending. We intend to vigorously defend our position in this case. Although the
outcome of the case cannot be ascertained at this time, we do not believe that
the disposition of this case will 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,
either individually or in the aggregate, will have a material adverse effect on
our financial position, results of operations or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information concerning our repurchase of shares of
our common stock during the quarter ended November 28, 2004. Since commencing
repurchases in December 1995, we have repurchased a total of 112,420,637 shares
under authorizations from our Board of Directors to repurchase an aggregate of
137.4 million shares, including an additional 22.0 million shares that were
authorized by our Board of Directors to be repurchased on September 28, 2004.
- ----------------------------------------------------------------------------------------------------------------------
Total Number of Maximum Number of
Shares Purchased as Shares that
Total Number Average Part of Publicly May Yet be Purchased
of Shares Price Paid Announced Plans or Under the Plans or
Period Purchased (1) per Share Programs Programs (2)
- ----------------------------------------------------------------------------------------------------------------------
August 30, 2004 through October
3, 2004 19,164 $23.30 19,164 25,216,354
- ----------------------------------------------------------------------------------------------------------------------
October 4, 2004 through
October 31, 2004 36,991 $24.66 36,991 25,179,363
- ----------------------------------------------------------------------------------------------------------------------
November 1, 2004 through
November 28, 2004 200,000 $27.09 200,000 24,979,363
- ----------------------------------------------------------------------------------------------------------------------
Total 256,155 $26.47 256,155 24,979,363
- ----------------------------------------------------------------------------------------------------------------------
(1) All of the shares purchased during the second quarter ended November 28,
2004 were purchased as part of our repurchase program. The authority for
our repurchase program was increased to an aggregate of 115.4 million
shares by our Board on September 18, 2002, and announced publicly in a
press release that same day, and was most recently increased by 22.0
million shares to an aggregate of 137.4 million shares by our Board of
Directors on September 28, 2004, and announced publicly in a press release
issued that same day. There is
23
no expiration date for our program. The number of shares purchased includes
shares withheld for taxes on vesting of restricted stock, and shares
delivered or deemed to be delivered to us on tender of stock in payment for
the exercise price of options. These shares are included as part of our
repurchase program and deplete the repurchase authority granted by our
Board. The number of shares repurchased excludes shares we reacquired
pursuant to tax withholding on option exercises or forfeiture of restricted
stock.
(2) Repurchases are subject to prevailing market prices, may be made in open
market or private transactions, and may occur or be discontinued at any
time. There can be no assurance that we will repurchase any shares. The
figures in this column include the additional 22 million shares that were
authorized to be repurchased by our Board on September 28, 2004.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Our Annual Meeting of Shareholders was held on September 29, 2004.
(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 twelve directors:
For Withheld
--------- ----------
Leonard L. Berry 138,727,115 1,782,299
Odie C. Donald 138,777,557 1,731,857
David H. Hughes 137,254,001 3,255,413
Joe R. Lee 134,500,319 6,009,095
Senator Connie Mack, III 136,498,934 4,010,480
Andrew H. Madsen 138,590,962 1,918,452
Clarence Otis, Jr. 138,662,582 1,846,832
Michael D. Rose 137,758,378 2,751,036
Maria A. Sastre 137,341,507 3,167,907
Jack A. Smith 137,225,106 3,284,308
BlaineSweatt, III 138,636,615 1,872,799
Rita P. Wilson 138,822,671 1,686,743
(ii) Approved our amended and restated Employee Stock Purchase Plan.
For 116,841,450
Against 2,805,649
Abstain 1,573,366
Broker non-vote 19,288,949
(iii)Approved the appointment of KPMG LLP as our independent auditors
for the fiscal year ending May 29, 2005.
For 133,700,531
Against 5,521,494
Abstain 1,287,389
24
Item 6. Exhibits
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.
Exhibit 31(b) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(a) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32(b) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
25
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, 2005 By: /s/ Paula J. Shives
-----------------------------------------
Paula J. Shives
Senior Vice President,
General Counsel and Secretary
Dated: January 6, 2005 By: /s/ Linda J. Dimopoulos
--------------------------
Linda J. Dimopoulos
Senior Vice President and
Chief Financial Officer
(Principal financial officer)
26
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
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.
31(b) Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
27