Q2 FY14 10-Q
Table of Contents

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 November 24, 2013
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 December 13, 2013: 131,264,373 (excluding 1,286,019 shares held in our treasury).

Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
Part I -
Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
Part II -
Other Information
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 
 

2
Table of Contents

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, diluted net earnings per share growth, and capital expenditures in fiscal 2014, 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. For further information regarding such forward-looking statements, risks and uncertainties, please see “Forward-Looking Statements” under Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

3
Table of Contents

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
 
Six Months Ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Sales
$
2,049.9

 
$
1,960.0

 
$
4,208.4

 
$
3,994.8

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales:
 
 
 
 
 
 
 
Food and beverage
642.8

 
607.5

 
1,301.8

 
1,226.3

Restaurant labor
678.0

 
635.7

 
1,366.9

 
1,262.5

Restaurant expenses
349.3

 
325.5

 
702.7

 
629.7

Total cost of sales, excluding restaurant depreciation and amortization of $102.2, $94.1, $202.6 and $181.5, respectively
$
1,670.1

 
$
1,568.7

 
$
3,371.4

 
$
3,118.5

Selling, general and administrative
221.1

 
216.1

 
451.2

 
434.2

Depreciation and amortization
107.7

 
99.2

 
213.4

 
191.8

Interest, net
32.9

 
32.9

 
65.6

 
60.8

Total costs and expenses
$
2,031.8

 
$
1,916.9

 
$
4,101.6

 
$
3,805.3

Earnings before income taxes
18.1

 
43.1

 
106.8

 
189.5

Income taxes
(1.7
)
 
9.4

 
16.7

 
44.7

Earnings from continuing operations
$
19.8

 
$
33.7

 
$
90.1

 
$
144.8

Losses from discontinued operations, net of tax benefit of $0.0, $0.1, $0.1 and $0.3, respectively
—

 
(0.1
)
 
(0.1
)
 
(0.4
)
Net earnings
$
19.8

 
$
33.6

 
$
90.0

 
$
144.4

Basic net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.15

 
$
0.26

 
$
0.69

 
$
1.13

Losses from discontinued operations
—

 
—

 
—

 
(0.01
)
Net earnings
$
0.15

 
$
0.26

 
$
0.69

 
$
1.12

Diluted net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.15

 
$
0.26

 
$
0.68

 
$
1.10

Losses from discontinued operations
—

 
—

 
—

 
—

Net earnings
$
0.15

 
$
0.26

 
$
0.68

 
$
1.10

Average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
130.6

 
128.8

 
130.4

 
128.5

Diluted
132.8

 
131.7

 
132.7

 
131.4

Dividends declared per common share
$
0.55

 
$
0.50

 
$
1.10

 
$
1.00


See accompanying notes to our unaudited consolidated financial statements.

4
Table of Contents

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

 
Three Months Ended
 
Six Months Ended
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Net earnings
$
19.8

 
$
33.6

 
$
90.0

 
$
144.4

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency adjustment
(0.9
)
 
(0.1
)
 
(1.9
)
 
0.7

Change in fair value of marketable securities, net of tax benefit of $0.0, $0.1, $0.1 and $0.1, respectively
—

 
—

 
(0.1
)
 
(0.1
)
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of tax expense (benefit) of $3.1, $(0.9), $2.1 and $(2.6), respectively
5.8

 
(1.6
)
 
3.7

 
(5.2
)
Net unamortized gain arising during period, including amortization of unrecognized net actuarial loss, net of tax expense of $1.0, $1.0, $2.0 and $2.1, respectively
1.6

 
1.8

 
3.2

 
3.5

Other comprehensive income (loss)
$
6.5

 
$
0.1

 
$
4.9

 
$
(1.1
)
Total comprehensive income
$
26.3

 
$
33.7

 
$
94.9

 
$
143.3

See accompanying notes to our unaudited consolidated financial statements.


5
Table of Contents

DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
 
November 24,
2013
 
May 26,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
84.6

 
$
88.2

Receivables, net
83.0

 
85.4

Inventories
418.0

 
356.9

Prepaid income taxes
12.4

 
6.4

Prepaid expenses and other current assets
80.6

 
83.4

Deferred income taxes
155.7

 
144.6

Total current assets
$
834.3

 
$
764.9

Land, buildings and equipment, net of accumulated depreciation and amortization of $3,184.2 and $3,049.8, respectively
4,521.8

 
4,391.1

Goodwill
907.7

 
908.3

Trademarks
574.6

 
573.8

Other assets
318.9

 
298.8

Total assets
$
7,157.3

 
$
6,936.9

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
365.1

 
$
296.5

Short-term debt
324.2

 
164.5

Accrued payroll
145.6

 
150.5

Accrued income taxes
22.4

 
16.5

Other accrued taxes
59.0

 
67.6

Unearned revenues
248.4

 
270.5

Current portion of long-term debt
15.0

 
—

Other current liabilities
466.8

 
450.3

Total current liabilities
$
1,646.5

 
$
1,416.4

Long-term debt, less current portion
2,480.1

 
2,496.2

Deferred income taxes
345.6

 
356.4

Deferred rent
246.3

 
230.5

Obligations under capital leases, net of current installments
53.2

 
52.5

Other liabilities
326.4

 
325.4

Total liabilities
$
5,098.1

 
$
4,877.4

Stockholders’ equity:
 
 
 
Common stock and surplus
$
1,255.7

 
$
1,207.6

Retained earnings
944.7

 
998.9

Treasury stock
(7.8
)
 
(8.1
)
Accumulated other comprehensive income (loss)
(127.9
)
 
(132.8
)
Unearned compensation
(5.5
)
 
(6.1
)
Total stockholders’ equity
$
2,059.2

 
$
2,059.5

Total liabilities and stockholders’ equity
$
7,157.3

 
$
6,936.9


See accompanying notes to our unaudited consolidated financial statements.


6
Table of Contents

DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the six months ended November 24, 2013 and November 25, 2012
(In millions)
(Unaudited)
 
 
Common
Stock
And
Surplus
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Unearned
Compensation
 
Total
Stockholders’
Equity
Balance at May 26, 2013
$
1,207.6

 
$
998.9

 
$
(8.1
)
 
$
(132.8
)
 
$
(6.1
)
 
$
2,059.5

Net earnings
—

 
90.0

 
—

 
—

 
—

 
90.0

Other comprehensive income
—

 
—

 
—

 
4.9

 
—

 
4.9

Dividends declared
—

 
(143.8
)
 
—

 
—

 
—

 
(143.8
)
Stock option exercises (0.8 shares)
23.3

 
—

 
0.3

 
—

 
—

 
23.6

Stock-based compensation
16.0

 
—

 
—

 
—

 
—

 
16.0

ESOP note receivable repayments
—

 
—

 
—

 
—

 
0.6

 
0.6

Income tax benefits credited to equity
5.3

 
—

 
—

 
—

 
—

 
5.3

Repurchases of common stock (0.0 shares)
(0.1
)
 
(0.4
)
 
—

 
—

 
—

 
(0.5
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)
3.6

 
—

 
—

 
—

 
—

 
3.6

Balance at November 24, 2013
$
1,255.7

 
$
944.7

 
$
(7.8
)
 
$
(127.9
)
 
$
(5.5
)
 
$
2,059.2

 
 
 
 
 
 
 
 
 
 
 
 
Balance at May 27, 2012
$
2,518.8

 
$
3,172.8

 
$
(3,695.8
)
 
$
(146.6
)
 
$
(7.2
)
 
$
1,842.0

Net earnings
—

 
144.4

 
—

 
—

 
—

 
144.4

Other comprehensive income (loss)
—

 
—

 
—

 
(1.1
)
 
—

 
(1.1
)
Dividends declared
—

 
(129.3
)
 
—

 
—

 
—

 
(129.3
)
Stock option exercises (1.2 shares)
32.4

 
—

 
1.4

 
—

 
—

 
33.8

Stock-based compensation
13.1

 
—

 
—

 
—

 
—

 
13.1

ESOP note receivable repayments
—

 
—

 
—

 
—

 
0.9

 
0.9

Income tax benefits credited to equity
8.3

 
—

 
—

 
—

 
—

 
8.3

Repurchases of common stock (1.0 shares)
—

 
—

 
(52.3
)
 
—

 
—

 
(52.3
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)
3.1

 
—

 
0.5

 
—

 
—

 
3.6

Treasury shares retirement (159.3 shares)
(1,411.4
)
 
(2,326.1
)
 
3,737.5

 
—

 
—

 
—

Balance at November 25, 2012
$
1,164.3

 
$
861.8

 
$
(8.7
)
 
$
(147.7
)
 
$
(6.3
)
 
$
1,863.4


See accompanying notes to our unaudited consolidated financial statements.


7
Table of Contents

DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended
 
November 24,
2013
 
November 25,
2012
Cash flows—operating activities
 
 
 
Net earnings
$
90.0

 
$
144.4

Losses from discontinued operations, net of tax benefit
0.1

 
0.4

Adjustments to reconcile net earnings from continuing operations to cash flows:
 
 
 
Depreciation and amortization
213.4

 
191.8

Asset impairment charges
1.4

 
0.8

Amortization of loan costs and losses on interest-rate related derivatives
6.8

 
5.5

Stock-based compensation expense
31.3

 
28.7

Change in current assets and liabilities
(48.1
)
 
(110.9
)
Contributions to pension and postretirement plans
(0.8
)
 
(2.5
)
Loss on disposal of land, buildings and equipment
2.3

 
3.9

Change in cash surrender value of trust-owned life insurance
(8.4
)
 
(5.1
)
Deferred income taxes
(19.7
)
 
(11.5
)
Change in deferred rent
16.0

 
12.6

Change in other assets and liabilities
14.0

 
6.5

Income tax benefits from exercise of stock-based compensation credited to goodwill
0.1

 
0.1

Other, net
4.7

 
2.9

Net cash provided by operating activities of continuing operations
$
303.1

 
$
267.6

Cash flows—investing activities
 
 
 
Purchases of land, buildings and equipment
(344.0
)
 
(355.2
)
Proceeds from disposal of land, buildings and equipment
3.2

 
—

Purchases of marketable securities
—

 
(7.6
)
Proceeds from sale of marketable securities
3.3

 
11.5

Cash used in business acquisitions, net of cash acquired
—

 
(578.4
)
Increase in other assets
(15.8
)
 
(19.7
)
Net cash used in investing activities of continuing operations
$
(353.3
)
 
$
(949.4
)
Cash flows—financing activities
 
 
 
Proceeds from issuance of common stock
27.2

 
37.4

Income tax benefits credited to equity
5.3

 
8.3

Dividends paid
(143.3
)
 
(128.5
)
Repurchases of common stock
(0.5
)
 
(52.3
)
ESOP note receivable repayment
0.6

 
0.9

Proceeds from issuance of short-term debt
1,173.3

 
1,752.6

Repayments of short-term debt
(1,013.6
)
 
(1,639.2
)
Repayment of long-term debt
—

 
(350.9
)
Proceeds from issuance of long-term debt
—

 
1,050.0

Payment of debt issuance costs
(1.3
)
 
(7.3
)
Principal payments on capital leases
(1.0
)
 
(0.8
)
Net cash provided by financing activities of continuing operations
$
46.7

 
$
670.2

Cash flows—discontinued operations
 
 
 
Net cash used in operating activities of discontinued operations
(0.1
)
 
(0.2
)
Net cash provided by investing activities of discontinued operations
—

 
2.7

Net cash (used in) provided by discontinued operations
$
(0.1
)
 
$
2.5

 
 
 
 
Decrease in cash and cash equivalents
(3.6
)
 
(9.1
)
Cash and cash equivalents - beginning of period
88.2

 
70.5

Cash and cash equivalents - end of period
$
84.6

 
$
61.4

Cash flows from changes in current assets and liabilities
 
 
 
Receivables, net
1.7

 
5.8

Inventories
(61.2
)
 
(17.8
)
Prepaid expenses and other current assets
(0.4
)
 
(5.0
)
Accounts payable
65.8

 
12.6

Accrued payroll
(4.8
)
 
(25.0
)
Prepaid/accrued income taxes
(0.1
)
 
0.6

Other accrued taxes
(8.6
)
 
(8.5
)
Unearned revenues
(22.1
)
 
(13.4
)
Other current liabilities
(18.4
)
 
(60.2
)
Change in current assets and liabilities
$
(48.1
)
 
$
(110.9
)
See accompanying notes to our unaudited consolidated financial statements.


8
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Note 1.Basis of Presentation
Darden Restaurants, Inc. (we, our or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, Red Lobster®, LongHorn Steakhouse®, The Capital Grille®, Yard House®, Bahama Breeze®, Seasons 52®, Eddie V's Prime Seafood® and Wildfish Seafood Grille®. 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 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. Operating results for the quarter ended November 24, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending May 25, 2014.
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 26, 2013. 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 U.S. generally accepted accounting principles. 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.
Note 2.Supplemental Cash Flow Information
 
 
Six Months Ended
(in millions)
 
November 24, 2013
 
November 25, 2012
Interest paid, net of amounts capitalized
 
$
58.0

 
$
52.2

Income taxes paid, net of refunds
 
36.0

 
44.1


Note 3.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 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
During the Six Months Ended
 
November 24, 2013
 
November 25, 2012
Weighted-average fair value
$
12.05

 
$
12.24

Dividend yield
4.4
%
 
4.0
%
Expected volatility of stock
39.6
%
 
39.7
%
Risk-free interest rate
1.9
%
 
0.8
%
Expected option life (in years)
6.4

 
6.5

 

9
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents a summary of our stock-based compensation activity for the six months ended November 24, 2013: 
(in millions)
 
Stock
Options
 
Restricted
Stock/
Restricted
Stock
Units
 
Darden
Stock
Units
 
Performance
Stock Units
Outstanding beginning of period
 
11.6

 
0.2

 
2.2

 
0.9

Awards granted
 
1.7

 
0.1

 
0.6

 
0.3

Awards exercised
 
(0.8
)
 
(0.1
)
 
(0.4
)
 
(0.2
)
Awards forfeited
 
(0.1
)
 
—

 
(0.1
)
 
(0.2
)
Outstanding end of period
 
12.4

 
0.2

 
2.3

 
0.8

We recognized expense from stock-based compensation as follows: 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Stock options (1)
 
$
7.8

 
$
4.7

 
$
12.5

 
$
9.5

Restricted stock/restricted stock units
 
0.4

 
0.8

 
0.9

 
1.4

Darden stock units
 
7.6

 
5.7

 
11.0

 
10.5

Performance stock units (1)
 
2.3

 
1.5

 
4.3

 
5.2

Employee stock purchase plan
 
0.4

 
0.5

 
0.9

 
0.9

Director compensation program/other
 
1.7

 
1.1

 
1.7

 
1.2

Total stock-based compensation expense
 
$
20.2

 
$
14.3

 
$
31.3

 
$
28.7

(1)
The increase for the three months ended November 24, 2013 is primarily attributable to the workforce reduction efforts further discussed in Note 11.

Note 4.Income Taxes
The effective income tax rate for the quarter and six months ended November 24, 2013 was (9.4) percent and 15.6 percent, respectively, compared to an effective income tax rate of 21.8 percent and 23.6 percent for the quarter and six months ended November 25, 2012, respectively. The decrease in the effective income tax rate for the quarter and six months ended November 24, 2013 as compared to the quarter and six months ended November 25, 2012 is primarily attributable to an increase in the impact of FICA tax credits for employee reported tips and Work Opportunity Tax Credits on lower earnings before income taxes in addition to favorable resolution of prior year tax matters expensed in prior years.
Included in our remaining balance of unrecognized tax benefits is $16.8 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 5.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. Stock options and restricted stock do not impact the numerator of the diluted net earnings per share computation. Stock options and restricted stock excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows: 
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Anti-dilutive stock options and restricted stock
 
4.6

 
3.1

 
3.9

 
2.5



10
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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 6.Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended November 24, 2013 and November 25, 2012 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 August 26, 2013
$
(2.8
)
 
$
0.1

 
$
(55.9
)
 
$
(75.8
)
 
$
(134.4
)
Gain (loss)
(0.9
)
 
—

 
4.0

 
—

 
3.1

Reclassification realized in net earnings
—

 
—

 
1.8

 
1.6

 
3.4

Balance at November 24, 2013
$
(3.7
)
 
$
0.1

 
$
(50.1
)
 
$
(74.2
)
 
$
(127.9
)
 
 
 
 
 
 
 
 
 
 
Balance at August 27, 2012
$
(0.8
)
 
$
0.3

 
$
(53.3
)
 
$
(94.0
)
 
$
(147.8
)
Gain (loss)
(0.1
)
 
—

 
(2.6
)
 
—

 
(2.7
)
Reclassification realized in net earnings
—

 
—

 
1.0

 
1.8

 
2.8

Balance at November 25, 2012
$
(0.9
)
 
$
0.3

 
$
(54.9
)
 
$
(92.2
)
 
$
(147.7
)

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended November 24, 2013 and November 25, 2012 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)
Balances at May 26, 2013
$
(1.8
)
 
$
0.2

 
$
(53.8
)
 
$
(77.4
)
 
$
(132.8
)
Gain (loss)
(1.9
)
 
(0.1
)
 
(0.5
)
 
—

 
(2.5
)
Reclassification realized in net earnings
—

 
—

 
4.2

 
3.2

 
7.4

Balance at November 24, 2013
$
(3.7
)
 
$
0.1

 
$
(50.1
)
 
$
(74.2
)
 
$
(127.9
)
 
 
 
 
 
 
 
 
 
 
Balances at May 27, 2012
$
(1.6
)
 
$
0.4

 
$
(49.7
)
 
$
(95.7
)
 
$
(146.6
)
Gain (loss)
0.7

 
(0.1
)
 
(6.9
)
 
—

 
(6.3
)
Reclassification realized in net earnings
—

 
—

 
1.7

 
3.5

 
5.2

Balance at November 25, 2012
$
(0.9
)
 
$
0.3

 
$
(54.9
)
 
$
(92.2
)
 
$
(147.7
)

11
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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




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
 
Six Months Ended
(in millions)
AOCI Components
Location of Gain (Loss) Recognized in Earnings
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Derivatives
 
 
 
 
 
 
 
 
 
Commodity contracts
(1)
 
$
(0.5
)
 
$
(0.1
)
 
(0.7
)
 
(0.1
)
Equity contracts
(2)
 
—

 
—

 
(0.7
)
 
0.2

Interest rate contracts
Interest, net
 
(2.6
)
 
(2.0
)
 
(5.2
)
 
(3.1
)
Foreign currency contracts
(2)
 
0.2

 
(0.1
)
 
0.3

 
—

 
Total before tax
 
$
(2.9
)
 
$
(2.2
)
 
$
(6.3
)
 
$
(3.0
)
 
Tax benefit
 
1.1

 
1.2

 
2.1

 
1.3

 
Net of tax
 
$
(1.8
)
 
$
(1.0
)
 
$
(4.2
)
 
$
(1.7
)
 
 
 
 
 
 
 
 
 
 
Benefit plan funding position
 
 
 
 
 
 
 
 
 
Recognized net actuarial loss - pension/postretirement plans
(3)
 
$
(2.3
)
 
$
(2.2
)
 
$
(4.6
)
 
$
(4.4
)
Recognized net actuarial loss - other plans
(4)
 
(0.3
)
 
(0.6
)
 
(0.6
)
 
(1.2
)
 
Total before tax
 
$
(2.6
)
 
$
(2.8
)
 
$
(5.2
)
 
$
(5.6
)
 
Tax benefit
 
1.0

 
1.0

 
2.0

 
2.1

 
Net of tax
 
$
(1.6
)
 
$
(1.8
)
 
$
(3.2
)
 
$
(3.5
)
(1)
Primarily included in cost of sales. See Note 8 for additional details.
(2)
Primarily included in cost of sales and selling, general and administrative expenses. See Note 8 for additional details.
(3)
Included in the computation of net periodic benefit costs - pension and postretirement plans, which is a component of restaurant labor expenses and selling, general and administrative expenses. See Note 7 for additional details.
(4)
Included in the computation of net periodic benefit costs - other plans, which is a component of selling, general and administrative expenses.
Note 7.Retirement Plans
Components of net periodic benefit cost are as follows:
 
 
Defined Benefit Plans
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Service cost
 
$
1.1

 
$
1.2

 
$
2.2

 
$
2.4

Interest cost
 
2.6

 
2.5

 
5.1

 
5.0

Expected return on plan assets
 
(4.3
)
 
(4.7
)
 
(8.6
)
 
(9.7
)
Recognized net actuarial loss
 
2.3

 
2.2

 
4.6

 
4.4

Net periodic benefit cost
 
$
1.7

 
$
1.2

 
$
3.3

 
$
2.1

 

12
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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
 
Postretirement Benefit Plan
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 24,
2013
 
November 25,
2012
 
November 24,
2013
 
November 25,
2012
Service cost
 
$
0.2

 
$
0.2

 
$
0.4

 
$
0.4

Interest cost
 
0.3

 
0.3

 
0.6

 
0.6

Net periodic benefit cost
 
$
0.5

 
$
0.5

 
$
1.0

 
$
1.0

Note 8.Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as required by ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing and foreign currency exchange rate risks inherent in our business operations. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by ASC Topic 815, 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 derivatives are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by ASC Topic 815, 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 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 certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at November 24, 2013, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets in 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, currency 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. 
The notional values of our derivative contracts are as follows: 
 
 
Notional Values
(in millions)
 
November 24,
2013
 
May 26,
2013
Derivative contracts designated as hedging instruments
 
 
 
 
Commodities
 
$
11.1

 
$
18.2

Foreign currency
 
10.4

 
20.3

Interest rate swaps
 
200.0

 
100.0

Equity forwards
 
26.3

 
24.9

Derivative contracts not designated as hedging instruments
 
 
 
 
Equity forwards
 
$
39.4

 
$
49.1

Commodities
 
1.1

 
0.6

We periodically enter into commodity futures, swaps and option contracts (collectively, commodity contracts) to reduce the risk of variability in cash flows associated with fluctuations in the price we pay for natural gas, diesel fuel and butter. For certain of our commodity purchases, changes in the price we pay for these commodities are highly correlated with changes in the market price of these commodities. For these commodity purchases, we designate commodity contracts as cash flow hedging instruments. For the remaining commodity purchases, changes in the price we pay for these commodities are not

13
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


highly correlated with changes in the market price, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these commodity purchases, we utilize these commodity contracts as economic hedges. Our commodity contracts currently extend through May 2014.
We periodically enter into foreign currency forward contracts to reduce the risk of fluctuations in exchange rates specifically related to forecasted transactions or payments made in a foreign currency either for commodities and items used directly in our restaurants or for forecasted payments of services. Our foreign currency forward contracts currently extend through May 2014.
We entered into interest-rate swap agreements with $250.0 million of notional value to limit the risk of changes in fair value of a portion of the $350.0 million 5.625 percent senior notes due October 2012 and a portion of the $400.0 million 4.500 percent senior notes due October 2021. Additionally, we entered into interest-rate swap agreements with $100.0 million of notional value to limit the risk of changes in fair value of a portion 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. Concurrent with the repayment at maturity of the $350.0 million senior notes due October 2012, we settled $150.0 million of notional value of these swaps. During the quarters ended November 24, 2013 and November 25, 2012, $0.6 million and $0.9 million, respectively, was recorded as a reduction to interest expense related to the net swap settlements. During the six months ended November 24, 2013 and November 25, 2012, $1.1 million and $2.1 million, respectively, was recorded as a reduction to interest expense related to the 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 November 24, 2013, we were party to equity forward contracts that were indexed to 1.2 million shares of our common stock, at varying forward rates between $31.19 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.
We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with 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 0.3 million shares of our common stock at forward rates between $47.07 and $51.95 per share, can only be net settled in cash and expire between fiscal 2015 and 2016. 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 selling, general and administrative expenses in our consolidated statements of earnings.

14
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The fair value of our derivative contracts are as follows:
  
 
Balance
Sheet
Location
 
Derivative Assets
 
Derivative Liabilities
(in millions)
 
November 24,
2013
 
May 26,
2013
 
November 24,
2013
 
May 26,
2013
Derivative contracts designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
(1)
 
$
0.2

 
$
0.1

 
$
—

 
$
(0.3
)
Equity forwards
 
(1)
 
0.2

 
—

 
—

 
(0.6
)
Interest rate related
 
(1)
 
0.6

 
1.9

 
—

 
—

Foreign currency forwards
 
(1)
 
0.4

 
0.6

 
—

 
—

 
 
 
 
$
1.4

 
$
2.6

 
$
—

 
$
(0.9
)
Derivative contracts not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
(1)
 
$
—

 
$
—

 
$
(0.3
)
 
$
—

Equity forwards
 
(1)
 
0.3

 
—

 
—

 
(1.3
)
 
 
 
 
$
0.3

 
$
—

 
$
(0.3
)
 
$
(1.3
)
Total derivative contracts
 
$
1.7

 
$
2.6

 
$
(0.3
)
 
$
(2.2
)
 
(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.

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
 
November 24,
2013
 
November 25,
2012
 
 
 
November 24,
2013
 
November 25,
2012
 
 
 
November 24,
2013
 
November 25,
2012
Commodity
 
$
0.1

 
$
1.0

 
(2)
 
$
(0.5
)
 
$
(0.1
)
 
(2)
 
$
—

 
$
—

Equity
 
3.9

 
(0.4
)
 
(3)
 
—

 
—

 
(3)
 
0.3

 
0.2

Interest rate
 
—

 
(4.4
)
 
Interest, net
 
(2.6
)
 
(2.0
)
 
Interest, net
 
—

 
—

Foreign currency
 
—

 
(0.1
)
 
(4)
 
0.2

 
(0.1
)
 
(4)
 
—

 
—

 
 
$
4.0

 
$
(3.9
)
 
 
 
$
(2.9
)
 
$
(2.2
)
 
 
 
$
0.3

 
$
0.2



15
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(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)
 
 
Six Months Ended
 
 
 
Six Months Ended
 
 
 
Six Months Ended
Type of Derivative
 
November 24,
2013
 
November 25,
2012
 
 
 
November 24,
2013
 
November 25,
2012
 
 
 
November 24,
2013
 
November 25,
2012
Commodity
 
$
(0.3
)
 
$
1.0

 
(2)
 
$
(0.7
)
 
$
(0.1
)
 
(2)
 
$
—

 
$
—

Equity
 
(0.4
)
 
(0.8
)
 
(3)
 
(0.7
)
 
0.2

 
(3)
 
0.6

 
0.5

Interest rate
 
—

 
(10.1
)
 
Interest, net
 
(5.2
)
 
(3.1
)
 
Interest, net
 
—

 
—

Foreign currency
 
0.2

 
(0.7
)
 
(4)
 
0.3

 
—

 
(4)
 
—

 
—

 
 
$
(0.5
)
 
$
(10.6
)
 
 
 
$
(6.3
)
 
$
(3.0
)
 
 
 
$
0.6

 
$
0.5

 
(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 food and beverage costs and restaurant expenses, which are components of cost of sales.
(3)
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, which is a component of cost of sales, and selling, general and administrative expenses.
(4)
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 food and beverage costs, which is a component of cost of sales, and selling, 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
 
 
 
 
November 24,
2013
 
November 25,
2012
 
 
 
 
 
November 24,
2013
 
November 25,
2012
 
 
Interest rate
 
$
3.5

 
$
0.7

 
Interest, net
 
Fixed-rate debt
 
$
(3.5
)
 
$
(0.7
)
 
Interest, net

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
 
 
Six Months Ended
 
 
 
 
 
Six Months Ended
 
 
 
 
November 24,
2013
 
November 25,
2012
 
 
 
 
 
November 24,
2013
 
November 25,
2012
 
 
Interest rate
 
$
(1.4
)
 
$
1.2

 
Interest, net
 
Fixed-rate debt
 
$
1.4

 
$
(1.2
)
 
Interest, net


16
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
  
 
Location of Gain (Loss)
Recognized
in Earnings on
Derivatives
 
Amount of Gain (Loss) Recognized in Earnings
 
 
Three Months Ended
 
Six Months Ended
 
 
November 24, 2013
 
November 25, 2012
 
November 24, 2013
 
November 25, 2012
(in millions)
 
 
 
 
Commodity contracts
 
Cost of Sales (1)
 
$
0.1

 
$
—

 
$
(0.4
)
 
$
(0.2
)
Equity forwards
 
Cost of Sales (2)
 
1.8

 
0.7

 
0.3

 
1.1

Equity forwards
 
Selling, General and Administrative
 
5.0

 
1.6

 
1.0

 
1.3

 
 
 
 
$
6.9

 
$
2.3

 
$
0.9

 
$
2.2

 
(1)
Location of the gain (loss) recognized in earnings is food and beverage costs and restaurant expenses, which are components of cost of sales.
(2)
Location of the gain (loss) recognized in earnings is restaurant labor expenses, which is a component of cost of sales.
Based on the fair value of our derivative instruments designated as cash flow hedges as of November 24, 2013, we expect to reclassify $8.8 million of net losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months based on the timing of our forecasted commodity purchases and maturity of equity forward and 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.
Note 9. Fair Value Measurements
The fair values of cash equivalents, accounts receivable, 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 reflected on our consolidated balance sheets as of November 24, 2013 and May 26, 2013: 
Items Measured at Fair Value at November 24, 2013
(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
)
 
$
8.9

 
$
—

 
$
8.9

 
$
—

U.S. Treasury securities
(2
)
 
7.4

 
7.4

 
—

 
—

Mortgage-backed securities
(1
)
 
4.5

 
—

 
4.5

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
Commodities futures, swaps & options
(3
)
 
(0.1
)
 
—

 
0.2

 
(0.3
)
Equity forwards
(4
)
 
0.5

 
—

 
0.5

 
—

Interest rate swaps
(5
)
 
0.6

 
—

 
0.6

 
—

Foreign currency forwards
(6
)
 
0.4

 
—

 
0.4

 
—

Total
 
 
$
22.2

 
$
7.4

 
$
15.1

 
$
(0.3
)
 

17
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Items Measured at Fair Value at May 26, 2013
(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
)
 
$
10.0

 
$
—

 
$
10.0

 
$
—

U.S. Treasury securities
(2
)
 
8.7

 
8.7

 
—

 
—

Mortgage-backed securities
(1
)
 
5.6

 
—

 
5.6

 
—

Derivatives:
 
 

 

 

 

Commodities futures, swaps & options
(3
)
 
(0.2
)
 
—

 
(0.2
)
 
—

Equity forwards
(4
)
 
(1.9
)
 
—

 
(1.9
)
 
—

Interest rate locks & swaps
(5
)
 
1.9

 
—

 
1.9

 
—

Foreign currency forwards
(6
)
 
0.6

 
—

 
0.6

 
—

Total
 
 
$
24.7

 
$
8.7

 
$
16.0

 
$
—

(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 commodities futures, swaps and options classified as Level 2 is based on closing market prices of the contracts, inclusive of the risk of nonperformance. The fair value of our commodities futures, swaps and options classified as Level 3 is based on internal models that consider the various contract provisions, in addition to the closing market prices of the related commodities.
(4)
The fair value of our equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.
(5)
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.
(6)
The fair value of our foreign currency forward contracts is based on closing forward exchange market prices, inclusive of the risk of nonperformance.



The following table presents the changes in Level 3 financial instruments at November 24, 2013:
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3) 
(in millions)
 
Derivatives:
Commodities, Futures, Swaps & Options
Balances at May 26, 2013
 
$
—

Amount of gain (loss) recognized in earnings (1)
 
(0.3
)
Purchases, sales and settlements
 
—

Transfers in and/or out of Level 3
 
—

Balance at November 24, 2013
 
$
(0.3
)
(1)
The location of the loss recognized in earnings is restaurant expenses, which is a component of cost of sales.
The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of November 24, 2013, was $2.50 billion. The carrying value and fair value of long-term debt as of May 26, 2013, was $2.50 billion and $2.70 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.

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


Adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis as of November 24, 2013 and May 26, 2013 were not material.
Note 10. 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 November 24, 2013 and May 26, 2013, we had $113.5 million and $107.0 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of November 24, 2013 and May 26, 2013, we had $19.5 million and $20.6 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 November 24, 2013 and May 26, 2013, we had $3.7 million and $4.2 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 these potential payments discounted at our pre-tax cost of capital as of November 24, 2013 and May 26, 2013, amounted to $2.9 million and $3.4 million, respectively. We did not accrue for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was deemed to be less than probable. 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. These guarantees expire over their respective lease terms, which range from fiscal 2015 through fiscal 2021.
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. The following is a brief description of the more significant of these matters.
In September 2012, a collective action under the Fair Labor Standards Act was filed in the United States District Court for the Southern District of Florida, Alequin v. Darden Restaurants, Inc., in which named plaintiffs claim that the Company required or allowed certain employees at Olive Garden, Red Lobster, LongHorn Steakhouse, Bahama Breeze and Seasons 52  to work off the clock and required them to perform tasks unrelated to their tipped duties while taking a tip credit against their hourly rate of pay.  The plaintiffs seek an unspecified amount of alleged back wages, liquidated damages, and attorneys' fees.  In July 2013, the United States District Court for the Southern District of Florida conditionally certified a nationwide class of servers and bartenders who worked in the aforementioned restaurants at any point from September 6, 2009 through September 6, 2012.  Unlike a class action, a collective action requires potential class members to “opt in” rather than “opt out” following the issuance of a notice.  As of December 17, 2013, out of the approximately 215,000 original opt-in notices distributed, approximately 20,000 have been returned. On November 22, 2013, approximately 1,600 additional opt-in notices were distributed, for which the opt-in period ends February 20, 2014. The Company will have an opportunity to seek to have the class de-certified and/or seek to have the case dismissed on its merits.  We believe that our wage and hour policies comply with the law and that we have meritorious defenses to the substantive claims and strong defenses supporting de-certification.  An estimate of the possible loss, if any, or the range of loss cannot be made at this stage of the proceeding.
In November, 2011, a lawsuit entitled ChHab v. Darden Restaurants, Inc. was filed in the United States District Court for the Southern District of New York alleging a collective action under the Fair Labor Standards Act and a class action under the applicable New York state wage and hour statutes. The named plaintiffs claim that the Company required or allowed certain employees at The Capital Grille to work off the clock, share tips with individuals who polished silverware to assist the plaintiffs, and required the plaintiffs to perform tasks unrelated to their tipped duties while taking a tip credit against their hourly rate of pay. The plaintiffs seek an unspecified amount of alleged back wages, liquidated damages, and attorneys' fees. In September 2013, the United States District Court for the Southern District of New York conditionally certified a nationwide class for the Fair Labor Standards Act claims only of tipped employees who worked in the aforementioned restaurants at any point from November 17, 2008 through September 19, 2013. Potential class members are required to “opt in” rather than “opt out” following the issuance of a notice. As of December 16, 2013, out of the approximately 3,100 original opt-in notices distributed, approximately 500 have been returned. On December 3, 2013, an additional 65 opt-in notices were distributed, for which the opt-in period ends February 3, 2014. As with the Alequin matter, the Company will have an opportunity to seek to

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


have the class de-certified and/or seek to have the case dismissed on its merits. We believe that our wage and hour policies comply with the law and that we have meritorious defenses to the substantive claims in this matter. An estimate of the possible loss, if any, or the range of loss cannot be made at this stage of the proceeding.
Note 11. Workforce Reduction Costs
During the quarter ended November 24, 2013, we performed a comprehensive review of operations resulting in decisions to reduce operating support costs through a combination of workforce reductions and program spending cuts. In accordance with these actions, we incurred employee termination benefits and other costs which are included in selling, general and administrative expenses in our consolidated statements of earnings as follows:
 
 
Three months ended
(in millions)
 
November 24,
2013
 
 
 
Employee termination benefits (1)
 
$
10.9

Other (2)
 
0.8

Total
 
$
11.7

(1)
Includes salary and stock-based compensation expense.
(2)
Includes postemployment medical, outplacement and relocation costs.
The following table summarizes the accrued employee termination benefits and other costs which are primarily included in other current liabilities in our consolidated balance sheet as of November 24, 2013:
(in millions)
 
September 2013 Plan
 
Payments
 
Balance at
November 24, 2013
 
 
 
 
 
 
 
Employee termination benefits (1)
 
$
7.7

 
$
(1.7
)
 
$
6.0

Other
 
0.8

 
(0.1
)
 
0.7

Total
 
$
8.5

 
$
(1.8
)
 
$
6.7

(1)
Excludes costs associated with stock options and restricted stock that will be settled in shares upon vesting.
We expect the majority of the remaining liability to be paid by the first quarter of fiscal 2015 and the remainder to be paid by the first quarter of fiscal 2016.
Note 12. Application of New Accounting Standards
In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, Income Taxes (Topic 740), Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The objective of this update is to eliminate the diversity in practice in the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Under this guidance, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in certain circumstances. This update does not require any new recurring disclosures and is effective for annual and interim periods beginning after December 15, 2013, which will require us to adopt these provisions in the first quarter of fiscal 2015. We do not believe adoption of this new guidance will have a significant impact on our consolidated financial statements.
Note 13. Subsequent Events
On December 18, 2013, the Board of Directors declared a cash dividend of $0.55 per share to be paid February 3, 2014 to all shareholders of record as of the close of business on January 10, 2014.
On December 19, 2013, we announced a comprehensive plan to enhance shareholder value that will include separating the Red Lobster business. Although a final decision has not been made on the form of the separation, we expect to execute a tax-free spin-off of Red Lobster to our shareholders, but we may also consider a sale of the Red Lobster business. The

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


completion of the spin-off will be subject to certain customary conditions, including final approval by our Board of Directors, confirmation of the tax-free nature of the transaction, and the effectiveness of a registration statement that will be filed with the SEC. We expect the separation transaction to close in early fiscal 2015.


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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.
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 and six months ended November 24, 2013 and November 25, 2012.
 
 
Three Months Ended
 
Six Months Ended
 
November 24, 2013