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EX-10.12 - AGREEMENT - DARDEN RESTAURANTS INCex1012q1fy16.htm
EX-10.11 - AGREEMENT - DARDEN RESTAURANTS INCex1011q1fy16.htm
EX-10.14 - AGREEMENT - DARDEN RESTAURANTS INCex1014q1fy16.htm
EX-10.15 - AGREEMENT - DARDEN RESTAURANTS INCex1015q1fy16.htm
EX-10.18 - AGREEMENT - DARDEN RESTAURANTS INCex1018q1fy16.htm
EX-31.B - SECTION 302 CERTIFICATION OF CFO - DARDEN RESTAURANTS INCex31bq1fy16.htm
EX-12 - COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES - DARDEN RESTAURANTS INCex12q1fy16.htm
EX-31.A - SECTION 302 CERTIFICATION OF CEO - DARDEN RESTAURANTS INCex31aq1fy16.htm
EX-32.B - SECTION 906 CERTIFICATION OF CFO - DARDEN RESTAURANTS INCex32bq1fy16.htm
EX-32.A - SECTION 906 CERTIFICATION OF CEO - DARDEN RESTAURANTS INCex32aq1fy16.htm
EX-10.13 - AGREEMENT - DARDEN RESTAURANTS INCex1013q1fy16.htm
EX-10.16 - AGREEMENT - DARDEN RESTAURANTS INCex1016q1fy16.htm
EX-10.17 - AGREEMENT - DARDEN RESTAURANTS INCex1017q1fy16.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 30, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
1-13666
Commission File Number
 DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
 
Florida
 
59-3305930
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
1000 Darden Center Drive
Orlando, Florida
 
32837
(Address of principal executive offices)
 
(Zip Code)
407-245-4000
(Registrant’s telephone number, including area code)
Not applicable (Former name, former address and former fiscal year, if changed since last report)
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    o  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    o  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o  Yes    x  No
Number of shares of common stock outstanding as of September 15, 2015: 128,138,946 (excluding 1,270,694 shares held in our treasury).



TABLE OF CONTENTS
 

2


Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report regarding the expected net increase in the number of our restaurants, U.S. same-restaurant sales, total sales growth, food and beverage expenses, restaurant labor expenses, restaurant expenses, marketing expenses, general and administrative expenses, depreciation expenses, diluted net earnings per share growth and capital expenditures in fiscal 2016, potential monetization of our real estate and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q (including this report) and Form 8-K reports.

3


PART I
FINANCIAL INFORMATION
Item  1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
Sales
$
1,687.0

 
$
1,595.8

Costs and expenses:
 
 
 
Food and beverage
502.8

 
502.0

Restaurant labor
536.0

 
508.3

Restaurant expenses
271.9

 
272.3

Marketing expenses
65.6

 
64.5

General and administrative expenses
97.1

 
95.4

Depreciation and amortization
81.1

 
78.7

Impairments and disposal of assets, net
(1.7
)
 
7.0

Total operating costs and expenses
$
1,552.8

 
$
1,528.2

Operating income
134.2

 
67.6

Interest, net
22.4

 
111.3

Earnings (loss) before income taxes
111.8

 
(43.7
)
Income tax expense (benefit)
30.8

 
(24.4
)
Earnings (loss) from continuing operations
$
81.0

 
$
(19.3
)
Earnings from discontinued operations, net of tax expense of $3.1 and $320.7, respectively
5.4

 
522.5

Net earnings
$
86.4

 
$
503.2

Basic net earnings per share:
 
 
 
Earnings (loss) from continuing operations
$
0.64

 
$
(0.14
)
Earnings from discontinued operations
0.04

 
3.95

Net earnings
$
0.68

 
$
3.81

Diluted net earnings per share:
 
 
 
Earnings (loss) from continuing operations
$
0.63

 
$
(0.14
)
Earnings from discontinued operations
0.04

 
3.95

Net earnings
$
0.67

 
$
3.81

Average number of common shares outstanding:
 
 
 
Basic
127.4

 
132.2

Diluted
129.3

 
132.2

Dividends declared per common share
$
0.55

 
$
0.55


See accompanying notes to our unaudited consolidated financial statements.

4


DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
Net earnings
$
86.4

 
$
503.2

Other comprehensive income (loss):
 
 
 
Foreign currency adjustment
0.8

 
1.5

Change in fair value of marketable securities, net of taxes of $0.0 and $0.0, respectively

 
(0.1
)
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.5 and $15.4, respectively
0.7

 
23.9

Amortization of unrecognized net actuarial loss, net of taxes of $(0.1) and $0.5, respectively, related to pension and other post-employment benefits
(0.1
)
 
0.3

Other comprehensive income
$
1.4

 
$
25.6

Total comprehensive income
$
87.8

 
$
528.8

See accompanying notes to our unaudited consolidated financial statements.


5


DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
 
August 30,
2015
 
May 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
690.1

 
$
535.9

Receivables, net
60.8

 
78.0

Inventories
162.6

 
163.9

Prepaid income taxes
26.4

 
18.9

Prepaid expenses and other current assets
74.3

 
69.4

Deferred income taxes
166.6

 
157.4

Assets held for sale
23.8

 
32.9

Total current assets
$
1,204.6

 
$
1,056.4

Land, buildings and equipment, net of accumulated depreciation and amortization of $2,319.0 and $2,304.6, respectively
3,104.2

 
3,215.8

Goodwill
872.4

 
872.4

Trademarks
574.6

 
574.6

Other assets
270.7

 
275.5

Total assets
$
6,026.5

 
$
5,994.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
210.2

 
$
198.8

Accrued payroll
106.5

 
141.1

Accrued income taxes
32.4

 
12.6

Other accrued taxes
53.5

 
51.5

Unearned revenues
298.8

 
328.6

Current portion of long-term debt
15.0

 
15.0

Other current liabilities
426.2

 
449.1

Total current liabilities
$
1,142.6

 
$
1,196.7

Long-term debt, less current portion
1,437.6

 
1,452.3

Deferred income taxes
331.6

 
341.8

Deferred rent
230.8

 
225.9

Other liabilities
459.8

 
444.5

Total liabilities
$
3,602.4

 
$
3,661.2

Stockholders’ equity:
 
 
 
Common stock and surplus
$
1,478.5

 
$
1,405.9

Retained earnings
1,042.3

 
1,026.0

Treasury stock
(7.8
)
 
(7.8
)
Accumulated other comprehensive income (loss)
(85.2
)
 
(86.6
)
Unearned compensation
(3.7
)
 
(4.0
)
Total stockholders’ equity
$
2,424.1

 
$
2,333.5

Total liabilities and stockholders’ equity
$
6,026.5

 
$
5,994.7


See accompanying notes to our unaudited consolidated financial statements.

6


DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the three months ended August 30, 2015 and August 24, 2014
(In millions)
(Unaudited)
 
 
Common
Stock
And
Surplus
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Unearned
Compensation
 
Total
Stockholders’
Equity
Balance at May 31, 2015
$
1,405.9

 
$
1,026.0

 
$
(7.8
)
 
$
(86.6
)
 
$
(4.0
)
 
$
2,333.5

Net earnings

 
86.4

 

 

 

 
86.4

Other comprehensive income

 

 

 
1.4

 

 
1.4

Dividends declared

 
(70.1
)
 

 

 

 
(70.1
)
Stock option exercises (1.5 shares)
55.7

 

 

 

 

 
55.7

Stock-based compensation
4.1

 

 

 

 

 
4.1

ESOP note receivable repayments

 

 

 

 
0.3

 
0.3

Income tax benefits credited to equity
11.6

 

 

 

 

 
11.6

Issuance of stock under Employee Stock Purchase Plan and other plans (0.0 shares)
1.2

 

 

 

 

 
1.2

Balance at August 30, 2015
$
1,478.5

 
$
1,042.3

 
$
(7.8
)
 
$
(85.2
)
 
$
(3.7
)
 
$
2,424.1

 
 
 
 
 
 
 
 
 
 
 
 
Balance at May 25, 2014
$
1,302.2

 
$
995.8

 
$
(7.8
)
 
$
(128.1
)
 
$
(5.2
)
 
$
2,156.9

Net earnings

 
503.2

 

 

 

 
503.2

Other comprehensive income

 

 

 
25.6

 

 
25.6

Dividends declared

 
(72.4
)
 

 

 

 
(72.4
)
Stock option exercises (0.2 shares)
7.7

 

 

 

 

 
7.7

Stock-based compensation
4.6

 

 

 

 

 
4.6

ESOP note receivable repayments

 

 

 

 
0.3

 
0.3

Income tax benefits credited to equity
1.0

 

 

 

 

 
1.0

Repurchases of common stock (0.0 shares)
(0.1
)
 
(0.5
)
 

 

 

 
(0.6
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.0 shares)
1.6

 

 

 

 

 
1.6

Accelerated share repurchase program
(500.0
)
 

 

 

 

 
(500.0
)
Balance at August 24, 2014
$
817.0

 
$
1,426.1

 
$
(7.8
)
 
$
(102.5
)
 
$
(4.9
)
 
$
2,127.9

See accompanying notes to our unaudited consolidated financial statements.


7


DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
Cash flows—operating activities
 
 
 
Net earnings
$
86.4

 
$
503.2

Earnings from discontinued operations, net of tax
(5.4
)
 
(522.5
)
Adjustments to reconcile net earnings from continuing operations to cash flows:
 
 
 
Depreciation and amortization
81.1

 
78.7

Impairments and disposal of assets, net
(1.7
)
 
7.0

Amortization of loan costs and losses on interest-rate related derivatives
1.8

 
3.0

Stock-based compensation expense
10.2

 
6.2

Change in current assets and liabilities
(22.5
)
 
(62.3
)
Contributions to pension and postretirement plans
(0.3
)
 
(0.3
)
Change in cash surrender value of trust-owned life insurance
4.7

 
(2.6
)
Deferred income taxes
(24.0
)
 
(22.6
)
Change in deferred rent
4.8

 
6.7

Change in other assets and liabilities
(0.4
)
 
(1.4
)
Loss on extinguishment of debt

 
80.0

Other, net
3.3

 
3.9

Net cash provided by operating activities of continuing operations
$
138.0

 
$
77.0

Cash flows—investing activities
 
 
 
Purchases of land, buildings and equipment
(64.9
)
 
(81.7
)
Proceeds from disposal of land, buildings and equipment
130.2

 

Proceeds from sale of marketable securities

 
5.1

Increase in other assets
(3.7
)
 
(3.9
)
Net cash provided by (used in) investing activities of continuing operations
$
61.6

 
$
(80.5
)
Cash flows—financing activities
 
 
 
Proceeds from issuance of common stock
56.9

 
9.3

Income tax benefits credited to equity
11.6

 
1.0

Dividends paid
(70.0
)
 
(72.8
)
Repurchases of common stock

 
(0.6
)
ESOP note receivable repayment
0.3

 
0.3

Proceeds from issuance of short-term debt

 
377.4

Repayments of short-term debt

 
(585.0
)
Repayment of long-term debt
(15.0
)
 
(949.9
)
Principal payments on capital and financing leases
(0.8
)
 
(0.5
)
Payment for accelerated share repurchase program

 
(500.0
)
Proceeds from financing lease obligation

 
93.1

Net cash used in financing activities of continuing operations
$
(17.0
)
 
$
(1,627.7
)
Cash flows—discontinued operations
 
 
 
Net cash used in operating activities of discontinued operations
(28.4
)
 
(32.4
)
Net cash provided by investing activities of discontinued operations

 
1,979.0

Net cash (used in) provided by discontinued operations
$
(28.4
)
 
$
1,946.6

 
 
 
 
Increase in cash and cash equivalents
154.2

 
315.4

Cash and cash equivalents - beginning of period
535.9

 
98.3

Cash and cash equivalents - end of period
$
690.1

 
$
413.7

 
 
 
 
See accompanying notes to our unaudited consolidated financial statements.

8


DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
Cash flows from changes in current assets and liabilities
 
 
 
Receivables, net
18.4

 
12.5

Inventories
1.3

 
26.8

Prepaid expenses and other current assets
(5.4
)
 
10.1

Accounts payable
9.8

 
(39.8
)
Accrued payroll
(34.6
)
 
(16.7
)
Prepaid/accrued income taxes
30.7

 
(18.5
)
Other accrued taxes
2.8

 
3.4

Unearned revenues
(23.5
)
 
(25.1
)
Other current liabilities
(22.0
)
 
(15.0
)
Change in current assets and liabilities
$
(22.5
)
 
$
(62.3
)
 
 
 
 
 
 
 
 
Supplemental schedule of noncash investing activities:
 
 
 
Increase in land, buildings and equipment through accrued purchases
$
18.9

 
$
30.5


See accompanying notes to our unaudited consolidated financial statements.


9

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Note 1.Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, The Capital Grille®, Yard House®, Bahama Breeze®, Seasons 52®, and Eddie V's Prime Seafood® and Wildfish Seafood Grille® (collectively "Eddie V's"). Through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for three restaurants located in Central Florida and three restaurants in California that we manage, but are jointly owned with third parties, two franchised U.S. airport restaurants and nine franchised restaurants in Puerto Rico. We also have area development and franchise agreements with unaffiliated operators to develop and operate our brands primarily in Asia, the Middle East and Latin America. Pursuant to these agreements, as of August 30, 2015, 27 franchised restaurants were in operation in the Middle East, Mexico, Brazil, Peru, El Salvador and Malaysia.
We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53 week fiscal year, which ends on the last Sunday in May and our fiscal year ending May 29, 2016 will contain 52 weeks of operation. Operating results for the quarter ended August 30, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending May 29, 2016.
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 for the fiscal year ended May 31, 2015. The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K.
We prepare our consolidated financial statements in conformity with GAAP. 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 costs and expenses during the reporting period. Actual results could differ from those estimates.
We have reclassified certain amounts in prior-period financial statements to conform to the current period's presentation. Included among these, in our consolidated statements of earnings, we revised the categories of our costs and expenses as follows: marketing expenses and general and administrative expenses, previously reported as components of selling, general and administrative expenses, are now reported as separate line items. Additionally, gains and losses on disposals of assets, previously reported as a component of selling, general and administrative expenses are now reported in impairments and disposal of assets, net.
Note 2.Dispositions
On July 28, 2014, we closed on the sale of 705 Red Lobster restaurants; however, as of August 30, 2015, 3 of the properties remain subject to landlord consents and satisfaction of other contractual requirements. Therefore, the assets of these remaining restaurants continue to be classified as held for sale and recognition of the gain on the related proceeds was deferred. The proceeds of approximately $14.1 million associated with the remaining landlord consents are classified as other current liabilities on our consolidated balance sheet as of August 30, 2015. As the landlord consents and remaining contractual requirements are satisfied, which we expect to occur in the second quarter of fiscal 2016, we will derecognize the related assets and record the commensurate gain on the transaction. All direct cash flows related to operating these businesses were eliminated at the date of sale. Our continuing involvement has been limited to a transition service agreement for up to two years from the date of sale with minimal impact to our cash flows. In conjunction with the sale of Red Lobster, there were 19 locations where Red Lobster shared a land parcel with another Darden brand. The land and related buildings for these 19 Darden locations were included in the sale transaction and simultaneously leased back to Darden. The proceeds associated with the sale of these properties are classified as a financing lease obligation on our consolidated balance sheet as a component of other liabilities and the associated lease payments will amortize the obligation over the life of the properties. In total, we have recognized a pre-tax gain on the sale of Red Lobster of $845.2 million, which is included in earnings from discontinued operations in our consolidated statements of earnings.
For the quarters ended August 30, 2015 and August 24, 2014, all gains on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to these restaurants, have been aggregated in a single caption entitled “Earnings from discontinued operations, net of tax expense” in our consolidated statements of earnings

10

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



for all periods presented. No amounts for shared general and administrative operating support expense or interest expense were allocated to discontinued operations. Assets associated with those restaurants not yet disposed of, that are considered held for sale, have been segregated from continuing operations and presented as assets held for sale on our accompanying consolidated balance sheets.
Earnings from discontinued operations, net of taxes in our accompanying consolidated statements of earnings are comprised of the following:
 
Three Months Ended
(in millions)
August 30, 2015
 
August 24, 2014
Sales
$

 
$
400.4

Costs and expenses:
 
 
 
Restaurant and marketing expenses
0.3

 
354.6

Depreciation and amortization

 
0.2

Other costs and expenses (1)
(8.8
)
 
(797.6
)
Earnings before income taxes
8.5

 
843.2

Income tax expense
3.1

 
320.7

Earnings from discontinued operations, net of tax
$
5.4

 
$
522.5

(1)
Amounts include the gain recognized on the sale of Red Lobster.

Assets classified as held for sale on our accompanying consolidated balance sheets as of August 30, 2015 and May 31, 2015, consisted of land, buildings and equipment with carrying amounts of $23.8 million and $32.9 million, respectively.

Note 3.Supplemental Cash Flow Information
 
 
Three Months Ended
(in millions)
 
August 30, 2015
 
August 24, 2014
Interest paid, net of amounts capitalized
 
$
6.2

 
$
54.0

Income taxes paid, net of refunds
 
29.3

 
10.2

Note 4.Stock-Based Compensation
We grant stock options for a fixed number of shares to certain employees and directors with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units, and performance stock units with a fair value generally determined based on our closing stock price on the date of grant. In addition, we also grant cash settled stock units (Darden Stock Units) and cash settled performance stock units, which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model were as follows: 
 
Stock Options Granted
 
Three Months Ended
 
August 30, 2015
 
August 24, 2014
Weighted-average fair value
$
14.35

 
$
10.35

Dividend yield
3.3
%
 
4.5
%
Expected volatility of stock
28.0
%
 
37.3
%
Risk-free interest rate
1.9
%
 
2.1
%
Expected option life (in years)
6.5

 
6.5

Weighted-average exercise price per share
$
73.18

 
$
44.49


11

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



 
The following table presents a summary of our stock-based compensation activity for the three months ended August 30, 2015: 
(in millions)
 
Stock
Options
 
Restricted
Stock/
Restricted
Stock
Units
 
Darden
Stock
Units
 
Cash-Settled
Performance
Stock Units
 
Equity-Settled
Performance
Stock Units
Outstanding beginning of period
 
7.71

 
0.10

 
1.37

 
0.38

 

Awards granted
 
0.38

 
0.02

 
0.28

 

 
0.16

Awards exercised
 
(1.42
)
 

 
(0.27
)
 
(0.10
)
 

Awards forfeited
 
(0.09
)
 

 
(0.02
)
 
(0.08
)
 

Performance unit adjustment
 

 

 

 
0.07

 

Outstanding end of period
 
6.58

 
0.12

 
1.36

 
0.27

 
0.16

We recognized expense from stock-based compensation as follows: 
 
 
Three Months Ended
(in millions)
 
August 30,
2015
 
August 24,
2014
Stock options
 
$
2.5

 
$
3.2

Restricted stock/restricted stock units
 
0.4

 
0.4

Darden stock units
 
4.2

 
1.3

Cash-settled performance stock units
 
1.8

 
0.9

Equity-settled performance stock units
 
0.3

 

Employee stock purchase plan
 
0.3

 
0.4

Director compensation program/other
 
0.7

 

Total stock-based compensation expense
 
$
10.2

 
$
6.2

Note 5.Income Taxes
The effective income tax rate for the quarter ended August 30, 2015 was 27.5 percent compared to an effective income tax rate benefit of 55.8 percent for the quarter ended August 24, 2014. Excluding the tax impact of the $80.0 million of debt breakage costs ($49.4 million net of tax), recognized during the quarter ended August 24, 2014, our effective tax rate would have been approximately 17.0 percent. The change in the effective income tax rate for the quarter ended August 30, 2015 as compared to the quarter ended August 24, 2014, excluding the impacts of the debt breakage costs, is primarily attributable to the impact of FICA tax credits for employee reported tips and Work Opportunity Tax Credits on lower earnings before income taxes for the quarter ended August 24, 2014.
Included in our remaining balance of unrecognized tax benefits is $0.9 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
Note 6.Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows: 
 
 
Three Months Ended
(in millions)
 
August 30,
2015
 
August 24,
2014
Anti-dilutive stock-based compensation awards
 
0.1

 
6.4


12

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Note 7.Stockholders' Equity

Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended August 30, 2015 and August 24, 2014 are as follows:

(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Marketable Securities
 
Unrealized Gains (Losses) on Derivatives
 
Benefit Plan Funding Position
 
Accumulated Other Comprehensive Income (Loss)
Balance at May 31, 2015
 
$
(1.7
)
 
$
0.1

 
$
(19.1
)
 
$
(65.9
)
 
$
(86.6
)
Gain (loss)
 
0.8

 

 
2.0

 

 
2.8

Reclassification realized in net earnings
 

 

 
(1.3
)
 
(0.1
)
 
(1.4
)
Balance at August 30, 2015
 
$
(0.9
)
 
$
0.1

 
$
(18.4
)
 
$
(66.0
)
 
$
(85.2
)
 
 
 
 
 
 
 
 
 
 
 
Balance at May 25, 2014
 
$
(4.7
)
 
$
0.1

 
$
(50.4
)
 
$
(73.1
)
 
$
(128.1
)
Gain (loss)
 
(1.2
)
 
(0.1
)
 
(2.0
)
 

 
(3.3
)
Reclassification realized in net earnings
 
2.7

 

 
25.9

 
0.3

 
28.9

Balance at August 24, 2014
 
$
(3.2
)
 
$

 
$
(26.5
)
 
$
(72.8
)
 
$
(102.5
)

Reclassifications related to foreign currency translation for the three months ended August 24, 2014, primarily relate to the disposition of Red Lobster and are included in earnings from discontinued operations, net of tax expense in our consolidated statement of earnings. The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded:
 
 
 
Amount Reclassified from AOCI into Net Earnings
 
 
 
Three Months Ended
(in millions)
AOCI Components
Location of Gain (Loss) Recognized in Earnings
 
August 30,
2015
 
August 24,
2014
Derivatives
 
 
 
 
 
Equity contracts
(1)
 
2.1

 
(0.9
)
Interest rate contracts
(2)
 
(1.3
)
 
(40.5
)
Total before tax
 
 
$
0.8

 
$
(41.4
)
Tax benefit
 
 
0.5

 
15.5

Net of tax
 
 
$
1.3

 
$
(25.9
)
 
 
 
 
 
 
Benefit plan funding position
 
 
 
 
 
Recognized net actuarial loss - pension/postretirement plans
(3)
 
$
(0.6
)
 
$
(0.6
)
Recognized net actuarial loss - other plans
(4)
 
0.8

 
(0.2
)
Total before tax
 
 
$
0.2

 
$
(0.8
)
Tax benefit
 
 
(0.1
)
 
0.5

Net of tax
 
 
$
0.1

 
$
(0.3
)
(1)
Primarily included in restaurant labor costs and general and administrative expenses. See Note 9 for additional details.

13

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



(2)
Included in interest, net, on our consolidated statements of earnings. Reclassifications for the three months ended August 24, 2014, primarily related to the acceleration of hedge loss amortization resulting from the pay down of long-term debt.
(3)
Included in the computation of net periodic benefit costs - pension and postretirement plans, which is a component of restaurant labor expenses and general and administrative expenses. See Note 8 for additional details.
(4)
Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses.
Note 8.Retirement Plans
Components of net periodic benefit cost are as follows:
 
 
Defined Benefit Plans
 
 
Three Months Ended
(in millions)
 
August 30,
2015
 
August 24,
2014
Service cost
 
$

 
$
0.2

Interest cost
 
2.7

 
2.1

Expected return on plan assets
 
(3.6
)
 
(3.1
)
Recognized net actuarial loss
 
0.6

 
0.5

Net periodic benefit (credit) cost
 
$
(0.3
)
 
$
(0.3
)
 
 
 
Postretirement Benefit Plan
 
 
Three Months Ended
(in millions)
 
August 30,
2015
 
August 24,
2014
Service cost
 
$

 
$
0.2

Interest cost
 
0.2

 
0.4

Amortization of unrecognized prior service credit
 
(1.2
)
 

Recognized net actuarial loss
 
0.3

 
0.1

Net periodic benefit (credit) cost
 
$
(0.7
)
 
$
0.7



Note 9.Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. To the extent our cash-flow hedging instruments are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of the FASB ASC, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs. To the extent our fair-value hedging instruments are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by Topic 815 of the FASB ASC, gains and losses in the derivatives’ fair value are included in current earnings, as are the gains and losses of the related hedged item. To the extent the cash flow hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur.
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a

14

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at August 30, 2015, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We are currently party to interest-rate swap agreements with $200.0 million of notional value to limit the risk of changes in fair value of $100.0 million of the $121.9 million 4.500 percent senior notes due October 2021 and $100.0 million of the $500.0 million 6.200 percent senior notes due October 2017. The swap agreements effectively swap the fixed-rate obligations for floating-rate obligations, thereby mitigating changes in fair value of the related debt prior to maturity. The swap agreements were designated as fair value hedges of the related debt and met the requirements to be accounted for under the short-cut method, resulting in no ineffectiveness in the hedging relationship. During each of the quarters ended August 30, 2015 and August 24, 2014, $0.5 million was recorded as a reduction to interest expense related to net swap settlements.
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized Darden stock units. 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 contracts were initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements. As of August 30, 2015, we were party to equity forward contracts that were indexed to 0.6 million shares of our common stock, at varying forward rates between $45.66 per share and $52.66 per share, extending through August 2018. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will 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. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.
We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, cash-settled performance stock units and employee-directed investments in Darden stock within the non-qualified deferred compensation plan. The equity forward contracts are indexed to 0.1 million shares of our common stock at forward rates between $46.17 and $50.19 per share, can only be net settled in cash and expire between fiscal 2016 and 2019. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of the performance stock units and Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings.
The notional and fair values of our derivative contracts are as follows: 
(in millions)
Notional Values
 
Balance
Sheet
Location
 
Fair Values
  
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
 
August 30,
2015
 
May 31,
2015
 
 
 
August 30,
2015
 
May 31,
2015
 
August 30,
2015
 
May 31,
2015
Derivative contracts designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Equity forwards
$
9.4

 
$
11.4

 
(1)
 
$

 
$
0.4

 
$
(0.7
)
 
$

Interest rate related
200.0

 
200.0

 
(1)
 
3.4

 
3.6

 

 

 
 
 
 
 
 
 
$
3.4

 
$
4.0

 
$
(0.7
)
 
$

Derivative contracts not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Equity forwards
$
24.7

 
$
51.7

 
(1)
 
$

 
$
1.3

 
$
(1.8
)
 
$

 
 
 
 
 
 
 
$

 
$
1.3

 
$
(1.8
)
 
$

Total derivative contracts
 
$
3.4

 
$
5.3

 
$
(2.5
)
 
$

 
(1)
Derivative assets and liabilities are included in receivables, net, prepaid expenses and other current assets and other current liabilities, as applicable, on our consolidated balance sheets.


15

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The effects of derivative instruments in cash flow hedging relationships in the consolidated statements of earnings are as follows:
(in millions)
 
Amount of Gain (Loss)
Recognized in AOCI
(effective portion)
 
Location of
Gain (Loss)
Reclassified
from AOCI to
Earnings
 
Amount of Gain (Loss)
Reclassified from AOCI to
Earnings (effective portion)
 
Location of
Gain (Loss)
Recognized
in Earnings
(ineffective
portion)
 
(1) Amount of Gain (Loss)
Recognized in Earnings
(ineffective portion)
 
 
Three Months Ended
 
 
 
Three Months Ended
 
 
 
Three Months Ended
Type of Derivative
 
August 30,
2015
 
August 24,
2014
 
 
 
August 30,
2015
 
August 24,
2014
 
 
 
August 30,
2015
 
August 24,
2014
Equity
 
$
2.0

 
$
(2.0
)
 
(2)
 
$
2.1

 
$
(0.9
)
 
(2)
 
$
0.1

 
$
0.3

Interest rate
 

 

 
Interest, net
 
(1.3
)
 
(40.5
)
 
Interest, net
 

 

 
 
$
2.0

 
$
(2.0
)
 
 
 
$
0.8

 
$
(41.4
)
 
 
 
$
0.1

 
$
0.3

 
(1)
Generally, all of our derivative instruments designated as cash flow hedges have some level of ineffectiveness, which is recognized currently in earnings. However, as these amounts are generally nominal and our consolidated financial statements are presented “in millions,” these amounts may appear as zero in this tabular presentation.
(2)
Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses.
 
The effects of derivative instruments in fair value hedging relationships in the consolidated statements of earnings are as follows:
(in millions)
 
Amount of Gain (Loss)
Recognized in Earnings on
Derivatives
 
Location of
Gain (Loss)
Recognized in
Earnings on
Derivatives
 
Hedged Item in
Fair Value Hedge
Relationship
 
Amount of Gain (Loss)
Recognized in Earnings on
Related Hedged Item
 
Location of
Gain (Loss)
Recognized in
Earnings on
Related
Hedged Item
 
 
Three Months Ended
 
 
 
 
 
Three Months Ended
 
 
 
 
August 30,
2015
 
August 24,
2014
 
 
 
 
 
August 30,
2015
 
August 24,
2014
 
 
Interest rate
 
$
(0.1
)
 
$
0.7

 
Interest, net
 
Debt
 
$
0.1

 
$
(0.7
)
 
Interest, net

The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
 (in millions)
 
Location of Gain (Loss) Recognized
 in Earnings on Derivatives
 
Amount of Gain (Loss) Recognized in Earnings
 
 
 
Three Months Ended
 
 
 
August 30, 2015
 
August 24, 2014
 
 
 
 
Equity forwards
 
Restaurant labor expenses
 
$
1.7

 
$
(0.6
)
Equity forwards
 
General and administrative expenses
 
3.8

 
(1.8
)
 
 
 
 
$
5.5

 
$
(2.4
)
 
Based on the fair value of our derivative instruments designated as cash flow hedges as of August 30, 2015, we expect to reclassify $4.0 million of net losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of our equity forward contracts and amortization of deferred losses on settled interest-rate related instruments. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates, as well as the probability of occurrence of interest payments on certain tranches of our long-term debt.

16

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 10. Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of August 30, 2015 and May 31, 2015: 
Items Measured at Fair Value at August 30, 2015
(in millions)
 
 
Fair value
of assets
(liabilities)
 
Quoted prices
in active
market for
identical assets
(liabilities)
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Fixed-income securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
(1)
 
$
2.2

 
$

 
$
2.2

 
$

U.S. Treasury securities
(2)
 
5.0

 
5.0

 

 

Mortgage-backed securities
(1)
 
1.5

 

 
1.5

 

Derivatives:
 
 
 
 
 
 
 
 
 
Equity forwards
(3)
 
(2.5
)
 

 
(2.5
)
 

Interest rate swaps
(4)
 
3.4

 

 
3.4

 

Total
 
 
$
9.6

 
$
5.0

 
$
4.6

 
$

 
Items Measured at Fair Value at May 31, 2015
(in millions)
 
 
Fair value
of assets
(liabilities)
 
Quoted prices
in active
market for
identical assets
(liabilities)
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Fixed-income securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
(1)
 
$
2.2

 
$

 
$
2.2

 
$

U.S. Treasury securities
(2)
 
5.0

 
5.0

 

 

Mortgage-backed securities
(1)
 
1.6

 

 
1.6

 

Derivatives:
 
 

 

 

 

Equity forwards
(3)
 
1.7

 

 
1.7

 

Interest rate swaps
(4)
 
3.6

 

 
3.6

 

Total
 
 
$
14.1

 
$
5.0

 
$
9.1

 
$

(1)
The fair value of these securities is based on closing market prices of the investments when applicable, or, alternatively, valuations utilizing market data and other observable inputs, inclusive of the risk of nonperformance.
(2)
The fair value of our U.S. Treasury securities is based on closing market prices.
(3)
The fair value of our equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.
(4)
The fair value of our interest rate lock and swap agreements is based on current and expected market interest rates, inclusive of the risk of nonperformance.
The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of August 30, 2015, was $1.45 billion and $1.56 billion, respectively. The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of May 31, 2015, was $1.47 billion and $1.57 billion, respectively. The fair value of long-term debt, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
Adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis as of August 30, 2015 were not material. As of May 31, 2015, non-financial assets measured at fair value on a non-recurring basis with a carrying value of $70.5 million, primarily related to restaurant assets involved in sale-leaseback arrangements, were written down to their fair value of $55.4 million resulting in an impairment charge of $15.1 million. The fair value of non-financial

17

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



assets measured at fair value on a non-recurring basis, which is classified as Level 3 in the fair value hierarchy, is determined based on appraisals or sales prices of comparable assets and estimates of future cash flows.
Note 11. Commitments and Contingencies
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of August 30, 2015 and May 31, 2015, we had $119.2 million and $124.2 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of August 30, 2015 and May 31, 2015, we had $14.1 million and $14.0 million, 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 August 30, 2015 and May 31, 2015, we had $150.9 million and $147.7 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of the maximum potential future payments discounted at our weighted-average cost of capital as of August 30, 2015 and May 31, 2015, amounted to $116.2 million and $113.4 million, respectively. We did not record a liability for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was deemed to be remote. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. Assuming exercise of all option periods, these guarantees expire over their respective lease terms, which range from fiscal 2016 through fiscal 2044.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. 

18

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 12. Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V's in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: 1) Olive Garden, 2) LongHorn Steakhouse, 3) Fine Dining and 4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V's restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Yard House, Seasons 52 and Bahama Breeze restaurants in the U.S. This segment also includes results from our franchises and consumer-packaged goods sales.
External sales are derived principally from food and beverage sales, we do not rely on any major customers as a source of sales and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively "restaurant and marketing expenses"). The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP:
(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the three months ended August 30, 2015
 
Sales
 
$
944.6

 
$
383.9

 
$
113.3

 
$
245.2

 
$

 
$
1,687.0

Restaurant and marketing expenses
 
752.6

 
326.8

 
95.5

 
201.4

 

 
1,376.3

Segment profit
 
$
192.0

 
$
57.1

 
$
17.8

 
$
43.8

 
$

 
$
310.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
36.5

 
$
19.4

 
$
6.8

 
$
12.5

 
$
5.9

 
$
81.1

Impairments and disposal of assets, net
 
(1.2
)
 
(1.2
)
 
0.7

 

 

 
(1.7
)
Capital expenditures
 
21.8

 
16.7

 
5.4

 
19.9

 
1.1

 
64.9

(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the three months ended August 24, 2014
 
Sales
 
$
913.5

 
$
356.9

 
$
104.0

 
$
221.4

 
$

 
$
1,595.8

Restaurant and marketing expenses
 
765.1

 
303.6

 
88.7

 
189.7

 

 
1,347.1

Segment profit
 
$
148.4

 
$
53.3

 
$
15.3

 
$
31.7

 
$

 
$
248.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
37.1

 
$
17.6

 
$
6.5

 
$
11.6

 
$
5.9

 
$
78.7

Impairments and disposal of assets, net
 
0.6

 
0.8

 

 
5.5

 
0.1

 
7.0

Capital expenditures
 
33.8

 
17.3

 
6.5

 
22.7

 
1.4

 
81.7


19

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Reconciliation of segment profit to earnings from continuing operations before income taxes:
 
 
Three Months Ended
(in millions)
 
August 30, 2015
 
August 24, 2014
Segment profit
 
$
310.7

 
$
248.7

Less general and administrative expenses
 
(97.1
)
 
(95.4
)
Less depreciation and amortization
 
(81.1
)
 
(78.7
)
Less impairments and disposal of assets, net
 
1.7

 
(7.0
)
Less interest, net
 
(22.4
)
 
(111.3
)
Earnings before income taxes
 
$
111.8

 
$
(43.7
)

Note 13. Impairments and Disposal of Assets, Net
During the fiscal quarter ended August 30, 2015, we recognized a net gain of $1.7 million in impairments and disposal of assets, net ($1.0 million net of tax), primarily related to sale-leaseback transactions. During the fiscal quarter ended August 24, 2014, we recognized a net impairment loss of $7.0 million in impairments and disposal of assets, net ($4.3 million net of tax), primarily related to restaurant impairments. Impairment charges were measured based on the amount by which the carrying amount of these assets exceeded their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets and estimates of future cash flows. These amounts are included in impairments and disposal of assets, net as a component of earnings from continuing operations in the accompanying consolidated statements of earnings.
Note 14. Workforce Reduction Costs
During fiscal 2014 and 2015, we performed reviews of our operations and support structure resulting in changes in our growth plans and related support structure needs. As a result, we had workforce reductions and program spending cuts throughout fiscal 2014 and 2015. In accordance with these actions, we incurred employee termination benefits costs and other costs. The following table summarizes the accrued employee termination benefits and other costs which are primarily included in other current liabilities on our consolidated balance sheet as of August 30, 2015:
(in millions)
 
Fiscal Year
2014 Plans
 
Fiscal Year
2015 Plans
 
Payments
 
Adjustments
 
Balance at August 30, 2015
Employee termination benefits (1)
 
$
13.4

 
$
24.2

 
$
(27.0
)
 
$
1.0

 
$
11.6

Other
 
1.1

 
0.6

 
(1.2
)
 
(0.2
)
 
0.3

Total
 
$
14.5

 
$
24.8

 
$
(28.2
)
 
$
0.8

 
$
11.9

(1)
Excludes costs associated with stock options and restricted stock that will be settled in shares upon vesting.
We expect the remaining liability to be paid by the second quarter of fiscal 2017.
Note 15. Application of New Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update was originally effective for annual and interim periods beginning after December 15, 2016, which would have required us to adopt these provisions in the first quarter of fiscal 2018. In July 2015, the FASB affirmed its proposal for a one-year deferral of the effective date. Early application is now permitted, but not before the original effective date. This update permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (Topic 330). This update requires inventory within the scope of the standard to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of

20

DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15, 2016, which will require us to adopt these provisions in the first quarter of fiscal 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements

Note 16. Subsequent Events
On September 17, 2015, the Board of Directors declared a cash dividend of $0.55 per share to be paid November 2, 2015 to all shareholders of record as of the close of business on October 9, 2015.


21


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below for the Company, which contains forward-looking statements, should be read in conjunction with the unaudited financial statements, the notes to such financial statements and the “Forward-Looking Statements” included elsewhere in this Form 10-Q.
To facilitate review of our discussion and analysis, the following table sets forth our financial results for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters ended August 30, 2015 and August 24, 2014. This information and the following analysis have been presented with the results of operations, costs incurred in connection with the sale and related gain on the sale of Red Lobster and results for the two closed company-owned synergy restaurants classified as discontinued operations for all periods presented.
 
Three Months Ended
 
August 30,
2015
 
August 24,
2014
 
% Chg
Sales
$
1,687.0

 
$
1,595.8

 
5.7
 %
Costs and expenses:
 
 
 
 
 
Food and beverage
502.8

 
502.0

 
0.2

Restaurant labor
536.0

 
508.3

 
5.4

Restaurant expenses
271.9

 
272.3

 
(0.1
)
Marketing expenses
65.6

 
64.5

 
1.7

General and administrative expenses
97.1

 
95.4

 
1.8

Depreciation and amortization
81.1

 
78.7

 
3.0

Impairments and disposal of assets, net
(1.7
)
 
7.0

 
(124.3
)
Total costs and expenses
$
1,552.8

 
$
1,528.2

 
1.6

Operating income
134.2

 
67.6

 
98.5

Interest, net
22.4

 
111.3

 
(79.9
)
Earnings (loss) before income taxes
111.8

 
(43.7
)
 
NM

Income tax expense (benefit) (1)
30.8

 
(24.4
)
 
NM

Earnings (loss) from continuing operations
$
81.0

 
$
(19.3
)
 
NM

Earnings from discontinued operations, net of tax
5.4

 
522.5

 
(99.0
)
Net earnings
$
86.4

 
$
503.2

 
(82.8
)%
Diluted net earnings per share:
 
 
 
 
 
Earnings (loss) from continuing operations
$
0.63

 
$
(0.14
)
 
NM

Earnings from discontinued operations
0.04

 
3.95

 
(99.0
)%
Net earnings
$
0.67

 
$
3.81

 
(82.4
)%
 
 
 
 
 
 
(1) Effective tax rate
27.5
%
 
55.8
%
 
 
The following table details the number of company-owned restaurants currently reported in continuing operations that were open at the end of the first quarter of fiscal 2016, compared with the number open at the end of fiscal 2015 and the end of the first quarter of fiscal 2015. 
 
 
August 30, 2015
 
May 31, 2015
 
August 24, 2014
Olive Garden (1)
 
843

 
846

 
840

LongHorn Steakhouse
 
482

 
480

 
465

The Capital Grille
 
54

 
54

 
54

Bahama Breeze
 
37

 
36

 
37

Seasons 52
 
43

 
43

 
40

Eddie V's
 
16

 
16

 
15

Yard House
 
59

 
59

 
53

Total
 
1,534

 
1,534

 
1,504

(1)
Includes six locations in Canada for all periods presented.

22


OVERVIEW OF OPERATIONS
Financial Highlights - Consolidated
Our sales from continuing operations were $1.69 billion for the first quarter of fiscal 2016, compared to $1.60 billion for the first quarter of fiscal 2015. The increase of 5.7 percent in sales for the first quarter of fiscal 2016 was primarily driven by a combined Darden same-restaurant sales increase of 3.4 percent as well as revenue from the addition of 30 net new company-owned restaurants since the first quarter of fiscal 2015.
For the first quarter of fiscal 2016, our net earnings from continuing operations were $81.0 million compared to a net loss from continuing operations of $19.3 million for the first quarter of fiscal 2015, and our diluted net earnings per share from continuing operations were $0.63 for the first quarter of fiscal 2016 compared to a diluted net loss per share from continuing operations of $0.14 for the first quarter of fiscal 2015. Our diluted per share results from continuing operations for the first quarter of fiscal 2016 were adversely impacted by approximately $0.05 related to the real estate plan implementation. Our diluted per share results from continuing operations for the first quarter of fiscal 2015 were adversely impacted by approximately $0.37 due to debt breakage costs related to the retirement of $900.0 million in principal of long-term debt and approximately $0.07 due to legal, financial advisory and other costs related to implementation of the strategic action plan announced in December 2013 and asset impairments.
Financial Highlights - Segments
Olive Garden's segment profit margin increased to 20.3 percent in the first quarter of fiscal 2016, compared to 16.2 percent for the first quarter of fiscal 2015 driven by positive same-restaurant sales, food and beverage cost favorability, fewer weeks of deep discounted promotions and cost reduction initiatives. LongHorn's segment profit margin was flat at 14.9 percent in the first quarter of fiscal 2016 and fiscal 2015 as significant beef cost inflation offset sales leverage. Fine Dining's segment profit margin increased to 15.7 percent in the first quarter of fiscal 2016, compared to 14.7 percent for the first quarter of fiscal 2015 driven by leverage from sales growth which more than offset beef cost inflation. The Other Business segment profit margin increased to 17.9 percent in the first quarter of fiscal 2016, compared to 14.3 percent for the first quarter of fiscal 2015 primarily driven by positive same-restaurant sales leverage and lower food and beverage costs.
Outlook
We expect the combined Darden same-restaurant sales increase in fiscal 2016 to range between 2.0 and 2.5 percent, with an increase in Olive Garden same-restaurant sales between 1.5 percent and 2.5 percent, an increase in LongHorn Steakhouse same-restaurant sales between 2.5 percent and 3.5 percent, and a blended same-restaurant sales increase for The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's and Yard House of approximately 3.0 percent. Based on fiscal 2015 sales of $6.76 billion, we expect fiscal 2016 sales from continuing operations to increase between 2.0 percent and 2.5 percent. In fiscal 2016, we expect to add approximately 18 - 22 new restaurants, and we expect capital expenditures incurred to build new restaurants and remodel and maintain existing restaurants to be between $230.0 million and $255.0 million.
SALES
The following table presents our sales and U.S. same-restaurant sales (SRS) by brand for the periods indicated.
 
Three Months Ended
(in millions)
August 30, 2015
 
August 24, 2014
 
% Chg
 
SRS (1)
Olive Garden
$
944.6

 
$
913.5

 
3.4
%
 
2.7
%
LongHorn Steakhouse
$
383.9

 
$
356.9

 
7.6
%
 
4.4
%
Yard House
$
124.2

 
$
111.1

 
11.8
%
 
3.4
%
The Capital Grille
$
88.7

 
$
82.6

 
7.4
%
 
7.2
%
Bahama Breeze
$
58.1

 
$
56.8

 
2.3
%
 
1.8
%
Seasons 52
$
59.5

 
$
50.4

 
18.1
%
 
3.9
%
Eddie V's
$
24.6

 
$
21.4

 
15.0
%
 
5.1
%
(1)
Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants open at least 16 months.
Olive Garden’s sales increase for the first quarter of fiscal 2016 was primarily driven by a U.S. same-restaurant sales increase in the first quarter fiscal 2016 combined with revenue from three net new restaurants. The increase in U.S. same-restaurant sales for the first quarter of fiscal 2016 resulted from a 2.4 percent increase in average check combined with a 0.3 percent increase in same-restaurant guest counts.

23


LongHorn Steakhouse’s sales increase for the first quarter of fiscal 2016 was primarily driven by revenue from 17 net new restaurants combined with a same-restaurant sales increase for the first quarter of fiscal 2016. The increase in same-restaurant sales for the first quarter of fiscal 2016 resulted from a 2.4 percent increase in same-restaurant guest counts combined with a 2.0 percent increase in average check.
In total, Yard House, The Capital Grille, Bahama Breeze, Seasons 52 and Eddie V's generated sales for the first quarter of fiscal 2016, which were 10.2 percent above last fiscal year’s first quarter, primarily driven by the incremental sales from 10 net new restaurants added since the first quarter of fiscal 2015, and a combined same-restaurant sales increase of 4.3 percent across these brands.
COSTS AND EXPENSES
The following table sets forth selected operating data as a percent of sales for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters ended August 30, 2015 and August 24, 2014.  Additionally, this information and the following analysis have been presented with the results of operations, costs incurred in connection with the sale and related gain on the sale of Red Lobster and results for the two closed synergy restaurants classified as discontinued operations for all periods presented.
 
Three Months Ended
 
August 30, 2015
 
August 24, 2014
Sales
100.0
 %
 
100.0
 %
Costs and expenses:
 
 
 
Food and beverage
29.8

 
31.5

Restaurant labor