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 February 28, 2016
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 March 15, 2016: 126,725,709 (excluding 1,268,251 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 increase in the number of our restaurants, U.S. same-restaurant sales and capital expenditures in fiscal 2016 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
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
 
Nine Months Ended
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Sales
$
1,847.5

 
$
1,730.9

 
$
5,143.3

 
$
4,885.7

Costs and expenses:
 
 
 
 
 
 
 
Food and beverage
537.8

 
530.7

 
1,522.7

 
1,518.2

Restaurant labor
572.5

 
535.6

 
1,632.3

 
1,550.7

Restaurant expenses
305.2

 
276.0

 
855.1

 
825.7

Marketing expenses
50.7

 
51.4

 
174.6

 
177.8

General and administrative expenses
95.2

 
86.4

 
294.2

 
310.7

Depreciation and amortization
67.0

 
79.6

 
223.4

 
238.4

Impairments and disposal of assets, net
(2.1
)
 
0.8

 
3.9

 
47.1

Total operating costs and expenses
$
1,626.3

 
$
1,560.5

 
$
4,706.2

 
$
4,668.6

Operating income
221.2

 
170.4

 
437.1

 
217.1

Interest, net
83.1

 
23.3

 
162.8

 
168.3

Earnings before income taxes
138.1

 
147.1

 
274.3

 
48.8

Income tax expense (benefit)
29.9

 
18.7

 
55.0

 
(29.5
)
Earnings from continuing operations
$
108.2

 
$
128.4

 
$
219.3

 
$
78.3

Earnings (loss) from discontinued operations, net of tax expense (benefit) of $(0.3), $3.1, $2.9, and $322.4, respectively
(2.4
)
 
5.4

 
16.1

 
525.9

Net earnings
$
105.8

 
$
133.8

 
$
235.4

 
$
604.2

Basic net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.85

 
$
1.03

 
$
1.72

 
$
0.61

Earnings (loss) from discontinued operations
(0.02
)
 
0.04

 
0.12

 
4.10

Net earnings
$
0.83

 
$
1.07

 
$
1.84

 
$
4.71

Diluted net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.84

 
$
1.01

 
$
1.69

 
$
0.60

Earnings (loss) from discontinued operations
(0.02
)
 
0.04

 
0.13

 
4.04

Net earnings
$
0.82

 
$
1.05

 
$
1.82

 
$
4.64

Average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
127.6

 
124.6

 
127.7

 
128.2

Diluted
129.4

 
126.9

 
129.6

 
130.1

Dividends declared per common share
$
0.50

 
$
0.55

 
$
1.60

 
$
1.65


See accompanying notes to our unaudited consolidated financial statements.

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

 
Three Months Ended
 
Nine Months Ended
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Net earnings
$
105.8

 
$
133.8

 
$
235.4

 
$
604.2

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency adjustment
—

 
(2.0
)
 
0.9

 
3.5

Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.0, $1.0, $14.3 and $16.9, respectively
1.8

 
3.0

 
22.7

 
30.4

Amortization of unrecognized net actuarial (loss) gain, net of taxes of $0.0, $0.6, $(0.1) and $10.4, respectively, related to pension and other post-employment benefits
(0.1
)
 
1.0

 
(0.3
)
 
16.4

Other comprehensive income
$
1.7

 
$
2.0

 
$
23.3

 
$
50.3

Total comprehensive income
$
107.5

 
$
135.8

 
$
258.7

 
$
654.5

See accompanying notes to our unaudited consolidated financial statements.


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DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
 
February 28,
2016
 
May 31,
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
215.8

 
$
535.9

Receivables, net
53.8

 
78.0

Inventories
178.9

 
163.9

Prepaid income taxes
24.7

 
18.9

Prepaid expenses and other current assets
73.0

 
69.4

Deferred income taxes
164.7

 
157.4

Assets held for sale
19.0

 
32.9

Total current assets
$
729.9

 
$
1,056.4

Land, buildings and equipment, net of accumulated depreciation and amortization of $1,799.0 and $2,304.6, respectively
2,058.1

 
3,215.8

Goodwill
872.3

 
872.4

Trademarks
574.6

 
574.6

Other assets
267.0

 
275.5

Total assets
$
4,501.9

 
$
5,994.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
190.6

 
$
198.8

Accrued payroll
139.2

 
141.1

Accrued income taxes
22.4

 
12.6

Other accrued taxes
48.7

 
51.5

Unearned revenues
401.3

 
328.6

Current portion of long-term debt
8.0

 
15.0

Other current liabilities
390.9

 
449.1

Total current liabilities
$
1,201.1

 
$
1,196.7

Long-term debt, less current portion
439.7

 
1,452.3

Deferred income taxes
220.8

 
341.8

Deferred rent
243.1

 
225.9

Other liabilities
479.0

 
444.5

Total liabilities
$
2,583.7

 
$
3,661.2

Stockholders’ equity:
 
 
 
Common stock and surplus
$
1,485.1

 
$
1,405.9

Retained earnings
507.5

 
1,026.0

Treasury stock
(7.8
)
 
(7.8
)
Accumulated other comprehensive income (loss)
(63.3
)
 
(86.6
)
Unearned compensation
(3.3
)
 
(4.0
)
Total stockholders’ equity
$
1,918.2

 
$
2,333.5

Total liabilities and stockholders’ equity
$
4,501.9

 
$
5,994.7


See accompanying notes to our unaudited consolidated financial statements.

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the nine months ended February 28, 2016 and February 22, 2015
(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
—

 
235.4

 
—

 
—

 
—

 
235.4

Other comprehensive income
—

 
—

 
—

 
23.3

 
—

 
23.3

Dividends declared
—

 
(204.8
)
 
—

 
—

 
—

 
(204.8
)
Stock option exercises (1.9 shares)
75.6

 
—

 
—

 
—

 
—

 
75.6

Stock-based compensation
12.1

 
—

 
—

 
—

 
—

 
12.1

ESOP note receivable repayments
—

 
—

 
—

 
—

 
0.6

 
0.6

Income tax benefits credited to equity
14.5

 
—

 
—

 
—

 
—

 
14.5

Repurchases of common stock (2.3 shares)
(26.5
)
 
(113.7
)
 
—

 
—

 
—

 
(140.2
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.2 shares)
3.5

 
—

 
—

 
—

 
0.1

 
3.6

Separation of Four Corners Property Trust
—

 
(435.4
)
 
—

 
—

 
—

 
(435.4
)
Balance at February 28, 2016
$
1,485.1

 
$
507.5

 
$
(7.8
)
 
$
(63.3
)
 
$
(3.3
)
 
$
1,918.2

 
 
 
 
 
 
 
 
 
 
 
 
Balance at May 25, 2014
$
1,302.2

 
$
995.8

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

Net earnings
—

 
604.2

 
—

 
—

 
—

 
604.2

Other comprehensive income
—

 
—

 
—

 
50.3

 
—

 
50.3

Dividends declared
—

 
(211.2
)
 
—

 
—

 
—

 
(211.2
)
Stock option exercises (2.8 shares)
103.1

 
—

 
—

 
—

 
—

 
103.1

Stock-based compensation
21.3

 
—

 
—

 
—

 
—

 
21.3

ESOP note receivable repayments
—

 
—

 
—

 
—

 
0.8

 
0.8

Income tax benefits credited to equity
9.1

 
—

 
—

 
—

 
—

 
9.1

Repurchases of common stock (10.0 shares)
(102.5
)
 
(399.8
)
 
—

 
—

 
—

 
(502.3
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)
5.6

 
—

 
—

 
—

 
—

 
5.6

Balance at February 22, 2015
$
1,338.8

 
$
989.0

 
$
(7.8
)
 
$
(77.8
)
 
$
(4.4
)
 
$
2,237.8

See accompanying notes to our unaudited consolidated financial statements.


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Table of Contents

DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended
 
February 28,
2016
 
February 22,
2015
Cash flows—operating activities
 
 
 
Net earnings
$
235.4

 
$
604.2

Earnings from discontinued operations, net of tax
(16.1
)
 
(525.9
)
Adjustments to reconcile net earnings from continuing operations to cash flows:
 
 
 
Depreciation and amortization
223.4

 
238.4

Impairments and disposal of assets, net
3.9

 
47.1

Amortization of loan costs and losses on interest-rate related derivatives
3.4

 
6.7

Stock-based compensation expense
29.2

 
41.3

Change in current assets and liabilities
49.8

 
34.0

Contributions to pension and postretirement plans
(1.1
)
 
(1.1
)
Change in cash surrender value of trust-owned life insurance
8.7

 
(5.8
)
Deferred income taxes
(65.6
)
 
(0.4
)
Change in deferred rent
18.1

 
17.2

Change in other assets and liabilities
(4.4
)
 
6.3

Loss on extinguishment of debt
106.8

 
91.3

Other, net
5.7

 
2.7

Net cash provided by operating activities of continuing operations
$
597.2

 
$
556.0

Cash flows—investing activities
 
 
 
Purchases of land, buildings and equipment
(172.8
)
 
(230.1
)
Proceeds from disposal of land, buildings and equipment
321.4

 
24.8

Proceeds from sale of marketable securities
0.8

 
9.7

Increase in other assets
(12.8
)
 
(13.2
)
Net cash provided by (used in) investing activities of continuing operations
$
136.6

 
$
(208.8
)
Cash flows—financing activities
 
 
 
Proceeds from issuance of common stock
79.2

 
107.1

Income tax benefits credited to equity
14.5

 
9.1

Special cash distribution from Four Corners Property Trust
315.0

 
—

Dividends paid
(204.8
)
 
(209.3
)
Repurchases of common stock
(140.2
)
 
(502.3
)
ESOP note receivable repayment
0.6

 
0.8

Proceeds from issuance of short-term debt
—

 
397.4

Repayments of short-term debt
—

 
(605.0
)
Repayment of long-term debt
(1,088.8
)
 
(1,065.9
)
Principal payments on capital and financing leases
(2.5
)
 
(1.7
)
Proceeds from financing lease obligation
—

 
93.1

Net cash used in financing activities of continuing operations
$
(1,027.0
)
 
$
(1,776.7
)
Cash flows—discontinued operations
 
 
 
Net cash used in operating activities of discontinued operations
(33.2
)
 
(216.6
)
Net cash provided by investing activities of discontinued operations
6.3

 
1,984.0

Net cash (used in) provided by discontinued operations
$
(26.9
)
 
$
1,767.4

 
 
 
 
(Decrease) increase in cash and cash equivalents
(320.1
)
 
337.9

Cash and cash equivalents - beginning of period
535.9

 
98.3

Cash and cash equivalents - end of period
$
215.8

 
$
436.2

 
 
 
 

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
Nine Months Ended
 
February 28,
2016
 
February 22,
2015
Cash flows from changes in current assets and liabilities
 
 
 
Receivables, net
25.3

 
18.7

Inventories
(15.2
)
 
55.6

Prepaid expenses and other current assets
(6.6
)
 
(5.0
)
Accounts payable
(5.0
)
 
(43.5
)
Accrued payroll
(1.9
)
 
8.0

Prepaid/accrued income taxes
27.0

 
(55.7
)
Other accrued taxes
(1.8
)
 
(2.3
)
Unearned revenues
78.4

 
75.0

Other current liabilities
(50.4
)
 
(16.8
)
Change in current assets and liabilities
$
49.8

 
$
34.0


See accompanying notes to our unaudited consolidated financial statements.


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Table of Contents
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 3 restaurants located in Central Florida and 3 restaurants in California that we manage, but are jointly owned with third parties, 6 franchised LongHorn Steakhouse restaurants located in the San Antonio, Texas area, 2 franchised U.S. airport restaurants and 10 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 February 28, 2016, 30 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 February 28, 2016 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.
Application of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 completion, disposal, and transportation. This update is effective for annual and interim periods beginning after December 15,

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



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.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. 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. Other than the revised balance sheet presentation of deferred tax liabilities and assets, we do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018, which will require us to adopt these provisions in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. We have not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). This update was issued as part of the FASB’s simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. 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. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We have not yet selected a transition date nor have we determined the effect of the standard on our ongoing financial reporting.


Note 2.Real Estate Transactions
As a result of a comprehensive evaluation for the monetization of our real estate portfolio, we undertook strategies to pursue sale-leaseback transactions of individual restaurant properties and our corporate headquarters and to transfer 424 of our restaurant properties into a REIT, with substantially all of the REIT’s initial assets being leased back to Darden.
Sale leasebacks
During fiscal 2015, we implemented a plan to pursue sale-leaseback transactions of 64 restaurant properties, 14 of which were completed in the fourth quarter of fiscal 2015, 49 were completed in the first nine months of fiscal 2016, and the remaining property is expected to be completed in the fourth quarter of fiscal 2016. The 63 completed transactions generated net proceeds of $234.9 million resulting in deferred gains totaling $46.7 million which will be amortized over the expected leaseback periods on a straight-line basis. Additionally, during the nine months ended February 28, 2016, we completed the sale leaseback of our corporate headquarters, generating net proceeds of $131.0 million resulting in a deferred gain of $6.3 million which will be amortized over the expected leaseback period on a straight-line basis.
REIT Transaction - Separation of Four Corners
On June 23, 2015, we announced our plan to separate our business into two separate and independent publicly traded companies. We accomplished this separation on November 9, 2015 with the pro rata distribution of one share of Four Corners Property Trust, Inc. (Four Corners) common stock for every three shares of Darden common stock to holders of Darden common stock. The separation, which was completed pursuant to a separation and distribution agreement between Darden and Four Corners, includes (i) the transfer of 6 LongHorn Steakhouse restaurants located in the San Antonio, Texas area (the LongHorn San Antonio Business) and 418 restaurant properties (the Four Corners Properties) to Four Corners; (ii) the issuance to us of all of the outstanding common stock of Four Corners and corresponding pro rata distribution to our shareholders of the outstanding shares of Four Corners common stock as a tax-free stock dividend; and (iii) a cash dividend of $315.0 million received by us from Four Corners from the proceeds of Four Corners’ term loan borrowings. We requested and received a private letter ruling from the Internal Revenue Service on certain issues relevant to the qualification of the spin-off as a tax-free transaction.

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



Our shareholders’ equity decreased by $435.4 million as a result of the separation of Four Corners. The components of the decrease, principally comprised of the net book value of the net assets that we contributed to Four Corners in connection with the separation, included $834.8 million in net book value of fixed assets, $84.4 million consisting primarily of deferred tax liabilities, offset by the $315.0 million cash dividend received by us from Four Corners.

Agreements with Four Corners
We entered into lease agreements with Four Corners, pursuant to which we leased the Four Corners Properties on a triple-net basis with terms comparable to similar leases negotiated on an arm’s length basis. Under the lease agreements, our subsidiaries are the tenant while Four Corners is the landlord. The leases are triple-net leases that provide for an average initial term of approximately 15 years with stated annual rental payments and options to extend the leases for another 15 years. Under the lease agreements, the rent is subject to annual escalations of 1.5 percent, as well as, in most of the leases, a fair market value adjustment at the start of one of the renewal options.
We entered into franchise agreements with Four Corners pursuant to which we provide certain franchising services to Four Corners’ subsidiary which operates the LongHorn San Antonio Business. The franchising services consist of licensing the right to use and display certain trademarks in connection with the operation of the LongHorn San Antonio Business, marketing services, training and access to certain LongHorn operating procedures. The fees and conditions of these franchising services are on terms comparable to similar franchising services negotiated on an arm’s length basis.

Debt Retirement
During the second and third quarters of fiscal 2016, utilizing the proceeds of the Four Corners cash dividend, cash proceeds from the sale leasebacks of restaurant properties and our corporate headquarters and additional cash on hand, we retired approximately $1.01 billion aggregate principal of long-term debt (see Note 16 for additional details).

Note 3.Dispositions
On July 28, 2014, we closed on the sale of 705 Red Lobster restaurants; however, as of February 28, 2016, 2 of the properties remain subject to landlord consents. The two remaining consents represent approximately $1.6 million in proceeds and are expected to be satisfied by the end of fiscal 2016. All direct cash flows related to operating these businesses were eliminated at the date of sale. Our continuing involvement has primarily been limited to a transition services agreement, pursuant to which we provide limited, specific services for up to two years from the date of sale with minimal impact to our cash flows. In total, we have recognized a pre-tax gain on the sale of Red Lobster of $854.4 million, which is included in earnings from discontinued operations in our consolidated statements of earnings.
For the quarters and nine months ended February 28, 2016 and February 22, 2015, 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 (loss) from discontinued operations, net of tax expense (benefit)” in our consolidated statements of earnings 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.

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



Earnings (loss) from discontinued operations, net of taxes in our accompanying consolidated statements of earnings are comprised of the following:
 
Three Months Ended
 
Nine Months Ended
(in millions)
February 28, 2016
 
February 22, 2015
 
February 28, 2016
 
February 22, 2015
Sales
$
—

 
$
—

 
$
—

 
$
400.4

Costs and expenses:
 
 
 
 
 
 
 
Restaurant and marketing expenses
1.0

 
(0.6
)
 
1.3

 
353.4

Depreciation and amortization
—

 
—

 
—

 
0.2

Other costs and expenses (1)
1.7

 
(7.9
)
 
(20.3
)
 
(801.5
)
Earnings (loss) before income taxes
(2.7
)
 
8.5

 
19.0

 
848.3

Income tax expense (benefit)
(0.3
)
 
3.1

 
2.9

 
322.4

Earnings (loss) from discontinued operations, net of tax
$
(2.4
)
 
$
5.4

 
$
16.1

 
$
525.9

(1)
Amounts include the initial gain recognized on the sale of Red Lobster as well as gains recognized upon satisfaction of landlord consents.

Assets classified as held for sale on our accompanying consolidated balance sheets as of February 28, 2016 and May 31, 2015, consisted of land, buildings and equipment with carrying amounts of $19.0 million and $32.9 million, respectively.

Note 4.Supplemental Cash Flow Information
Cash paid for interest and income taxes are as follows:
 
Nine Months Ended
(in millions)
 
February 28, 2016
 
February 22, 2015
Interest paid, net of amounts capitalized
 
$
123.8

 
$
107.9

Income taxes paid, net of refunds
 
105.8

 
203.7

For the nine months ended February 28, 2016, interest paid includes payments of $68.7 million associated with the retirement of long-term debt (see Note 16 - Long-Term Debt for further information) in addition to $6.3 million of interest accrued through the date of retirement. For the nine months ended February 22, 2015, interest paid includes payments of $44.0 million associated with the retirement of long-term debt in addition to $12.8 million of interest accrued through the date of the retirement. For the nine months ended February 22, 2015, income taxes paid includes tax payments associated with the gain on the sale of Red Lobster.
Non-cash investing and financing activities are as follows:
 
Nine Months Ended
(in millions)
 
February 28, 2016
 
February 22, 2015
Increase in land, buildings and equipment through accrued purchases
 
$
14.1

 
$
18.9

Net book value of assets distributed in Four Corners separation, net of deferred tax liabilities
 
750.4

 
—



Note 5.Income Taxes
The effective income tax rate for the quarter ended February 28, 2016 was 21.7 percent compared to an effective income tax rate of 12.7 percent for the quarter ended February 22, 2015. The effective income tax rate for the nine months ended February 28, 2016 was 20.1 percent compared to an effective income tax rate benefit of 60.5 percent for the nine months ended February 22, 2015. Excluding the tax impact of costs related to implementation of our real estate plan, strategic action plan and other costs and debt retirement costs recognized during fiscal 2016 and 2015, our effective tax rate would have been approximately 27.1 percent and 19.2 percent for the quarters ended February 28, 2016 and February 22, 2015, respectively, and approximately 26.1 percent and 19.5 percent for the nine months ended February 28, 2016 and February 22, 2015, respectively.

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



The change in the effective income tax rate for the quarter and nine months ended February 28, 2016 as compared to the quarter and nine months ended February 22, 2015, excluding these impacts, 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 and nine months ended February 22, 2015.
Included in our remaining balance of unrecognized tax benefits is $1.4 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
 
Nine Months Ended
(in millions)
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Anti-dilutive stock-based compensation awards
 
0.4

 
—

 
0.3

 
1.5


Note 7.Stockholders' Equity

Stockholders’ Rights Plan
In connection with the announced REIT transaction, our Board approved a Rights Agreement dated June 23, 2015, to deter any person from acquiring ownership of more than 9.8 percent of our common stock during the period leading up to the REIT transaction. Under the Rights Agreement, each share of our common stock had associated with it one right to purchase one thousandth of a share of our Series A Junior Participating Cumulative Preferred Stock at a purchase price of $156.26 per share, subject to adjustment under certain circumstances to prevent dilution. On November 10, 2015, the Rights expired by their terms following completion of the spin-off of Four Corners. As a result, each share of our common stock is no longer accompanied by a Right. The holders of common stock are not entitled to any payment as a result of the expiration of the Rights Agreement and the Rights issued thereunder.
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended February 28, 2016 and February 22, 2015 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 November 29, 2015
 
$
(0.8
)
 
$
0.1

 
$
1.8

 
$
(66.1
)
 
$
(65.0
)
Gain (loss)
 
—

 
—

 
1.8

 
—

 
1.8

Reclassification realized in net earnings
 
—

 
—

 
—

 
(0.1
)
 
(0.1
)
Balance at February 28, 2016
 
$
(0.8
)
 
$
0.1

 
$
3.6

 
$
(66.2
)
 
$
(63.3
)
 
 
 
 
 
 
 
 
 
 
 
Balance at November 23, 2014
 
$
0.8

 
$
0.1

 
$
(23.0
)
 
$
(57.7
)
 
$
(79.8
)
Gain (loss)
 
(2.0
)
 
—

 
1.4

 
—

 
(0.6
)
Reclassification realized in net earnings
 
—

 
—

 
1.6

 
1.0

 
2.6

Balance at February 22, 2015
 
$
(1.2
)
 
$
0.1

 
$
(20.0
)
 
$
(56.7
)
 
$
(77.8
)

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



The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended February 28, 2016 and February 22, 2015 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)
 
0.9

 
—

 
1.7

 
—

 
2.6

Reclassification realized in net earnings
 
—

 
—

 
21.0

 
(0.3
)
 
20.7

Balance at February 28, 2016
 
$
(0.8
)
 
$
0.1

 
$
3.6

 
$
(66.2
)
 
$
(63.3
)
 
 
 
 
 
 
 
 
 
 
 
Balance at May 25, 2014
 
$
(4.7
)
 
$
0.1

 
$
(50.4
)
 
$
(73.1
)
 
$
(128.1
)
Gain (loss)
 
(3.8
)
 
—

 
2.1

 
14.6

 
12.9

Reclassification realized in net earnings
 
7.3

 
—

 
28.3

 
1.8

 
37.4

Balance at February 22, 2015
 
$
(1.2
)
 
$
0.1

 
$
(20.0
)
 
$
(56.7
)
 
$
(77.8
)

Reclassifications related to foreign currency translation for the nine months ended February 22, 2015, primarily relate to the disposition of Red Lobster and are included in earnings (loss) from discontinued operations, net of tax expense (benefit) 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
 
Nine Months Ended
(in millions)
AOCI Components
Location of Gain (Loss) Recognized in Earnings
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Derivatives
 
 
 
 
 
 
 
 
 
Equity contracts
(1)
 
—

 
—

 
2.1

 
(0.9
)
Interest rate contracts
(2)
 
—

 
(2.5
)
 
(37.4
)
 
(44.4
)
Total before tax
 
 
$
—

 
$
(2.5
)
 
$
(35.3
)
 
$
(45.3
)
Tax benefit
 
 
—

 
0.9

 
14.3

 
17.0

Net of tax
 
 
$
—

 
$
(1.6
)
 
$
(21.0
)
 
$
(28.3
)
 
 
 
 
 
 
 
 
 
 
Benefit plan funding position
 
 
 
 
 
 
 
 
 
Recognized net actuarial loss - pension/postretirement plans
(3)
 
$
(0.7
)
 
$
(0.6
)
 
$
(2.1
)
 
$
(1.9
)
Recognized net actuarial gain (loss) - other plans
(4)
 
0.8

 
(1.0
)
 
2.5

 
(1.3
)
Total before tax
 
 
$
0.1

 
$
(1.6
)
 
$
0.4

 
$
(3.2
)
Tax benefit (expense)
 
 
—

 
0.6

 
(0.1
)
 
1.4

Net of tax
 
 
$
0.1

 
$
(1.0
)
 
$
0.3

 
$
(1.8
)

(1)
Primarily included in restaurant labor costs and general and administrative expenses. See Note 9 for additional details.
(2)
Included in interest, net, on our consolidated statements of earnings. Reclassifications for the nine months ended February 28, 2016 and February 22, 2015 primarily related to the acceleration of hedge loss amortization resulting from the pay down of the associated 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.

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



Note 8.Retirement Plans
Components of net periodic benefit cost are as follows:
 
 
Defined Benefit Plans
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Service cost
 
$
—

 
$
0.4

 
$
—

 
$
0.9

Interest cost
 
2.7

 
2.5

 
8.0

 
7.5

Expected return on plan assets
 
(3.7
)
 
(3.8
)
 
(10.9
)
 
(11.4
)
Recognized net actuarial loss
 
0.7

 
0.6

 
2.1

 
1.9

Net periodic benefit (credit) cost
 
$
(0.3
)
 
$
(0.3
)
 
$
(0.8
)
 
$
(1.1
)
 
 
 
Postretirement Benefit Plan
 
 
Three Months Ended
 
Nine Months Ended
(in millions)
 
February 28,
2016
 
February 22,
2015
 
February 28,
2016
 
February 22,
2015
Service cost
 
$
—

 
$
0.1

 
$
0.1

 
$
0.4

Interest cost
 
0.2

 
—

 
0.6

 
0.8

Amortization of unrecognized prior service credit
 
(1.2
)
 
(1.6
)
 
(3.6
)
 
(1.6
)
Recognized net actuarial loss
 
0.3

 
0.3

 
0.9

 
0.6

Net periodic benefit (credit) cost
 
$
(0.7
)
 
$
(1.2
)
 
$
(2.0
)
 
$
0.2



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 certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at February 28, 2016, 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.

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



During the quarter ended February 28, 2016, in connection with the repayment of our 2017 and 2021 senior notes, we settled our interest-rate swap agreements for a gain of $4.1 million. The swap agreements effectively swapped 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 the quarters ended February 28, 2016 and February 22, 2015, $0.0 million and $0.5 million was recorded as a reduction to interest expense related to net swap settlements, respectively. During the nine months ended February 28, 2016 and February 22, 2015, $1.7 million and $2.3 million was recorded as a reduction to interest expense related to the net swap settlements, respectively.
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 February 28, 2016, we were party to equity forward contracts that were indexed to 0.9 million shares of our common stock, at varying forward rates between $40.69 per share and $60.60 per share, extending through September 2020. 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 0.2 million shares of our common stock at forward rates between $41.03 and $44.73 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.
Under the provisions of the equity forward agreements, the equity notional amount, initial price and number of shares in our contracts were adjusted to take into effect the dilutive impact of the spin-off of Four Corners.
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
 
February 28,
2016
 
May 31,
2015
 
 
 
February 28,
2016
 
May 31,
2015
 
February 28,
2016
 
May 31,
2015
Derivative contracts designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Equity forwards
$
17.2

 
$
11.4

 
(1)
 
$
1.4

 
$
0.4

 
$
—

 
$
—

Interest rate related
—

 
200.0

 
(1)
 
—

 
3.6

 
—

 
—

 
 
 
 
 
 
 
$
1.4

 
$
4.0

 
$
—

 
$
—

Derivative contracts not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Equity forwards
$
30.2

 
$
51.7

 
(1)
 
$
2.8

 
$
1.3

 
$
—

 
$
—

 
 
 
 
 
 
 
$
2.8

 
$
1.3

 
$
—

 
$
—

Total derivative contracts
 
$
4.2

 
$
5.3

 
$
—

 
$
—

 
(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.


17
Table of Contents
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
 
February 28,
2016
 
February 22,
2015
 
 
 
February 28,
2016
 
February 22,
2015
 
 
 
February 28,
2016
 
February 22,
2015
Equity
 
$
1.8

 
$
1.4

 
(2)
 
$
—

 
$
—

 
(2)
 
$
0.2

 
$
0.2

Interest rate
 
—

 
—

 
Interest, net
 
—

 
(2.5
)
 
Interest, net
 
—

 
—

 
 
$
1.8

 
$
1.4

 
 
 
$
—

 
$
(2.5
)
 
 
 
$
0.2

 
$
0.2

 
(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)
 
 
Nine Months Ended
 
 
 
Nine Months Ended
 
 
 
Nine Months Ended
Type of Derivative
 
February 28,
2016
 
February 22,
2015
 
 
 
February 28,
2016
 
February 22,
2015
 
 
 
February 28,
2016
 
February 22,
2015
Equity
 
$
1.7

 
$
2.1

 
(2)
 
$
2.1

 
$
(0.9
)
 
(2)
 
$
0.7

 
$
0.8

Interest rate
 
—

 
—

 
Interest, net
 
(37.4
)
 
(44.4
)
 
Interest, net
 
—

 
—

 
 
$
1.7

 
$
2.1

 
 
 
$
(35.3
)
 
$
(45.3
)
 
 
 
$
0.7

 
$
0.8

 
(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 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
 
Nine Months Ended
 
 
 
February 28, 2016
 
February 22, 2015
 
February 28, 2016
 
February 22, 2015
 
 
 
 
 
 
Equity forwards
 
Restaurant labor expenses
 
$
1.7

 
$
1.7

 
2.7

 
2.9

Equity forwards
 
General and administrative expenses
 
3.4

 
3.9

 
5.6

 
6.7

 
 
 
 
$
5.1

 
$
5.6

 
$
8.3

 
$
9.6

 
Based on the fair value of our derivative instruments designated as cash flow hedges as of February 28, 2016, we expect to reclassify $0.6 million of net gains 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. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.

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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 February 28, 2016 and May 31, 2015: 
Items Measured at Fair Value at February 28, 2016
(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)
 
$
2.0

 
$
—

 
$
2.0

 
$
—

U.S. Treasury securities
(2)
 
5.0

 
5.0

 
—

 
—

Mortgage-backed securities
(1)
 
1.0

 
—

 
1.0

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
Equity forwards
(3)
 
4.2

 
—

 
4.2

 
—

Interest rate swaps
(4)
 
—

 
—

 
—

 
—

Total
 
 
$
12.2

 
$
5.0

 
$
7.2

 
$
—

 
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 February 28, 2016, was $447.7 million and $488.0 million, 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.
The fair value of non-financial 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. As of February 28, 2016, non-financial assets measured at fair value on a non-recurring basis with a carrying value of $5.4 million, primarily related to two underperforming restaurants, were determined to have no fair value resulting in an impairment

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



charge of $5.4 million. 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.
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 February 28, 2016 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 February 28, 2016 and May 31, 2015, we had $12.8 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 February 28, 2016 and May 31, 2015, we had $137.4 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 February 28, 2016 and May 31, 2015, amounted to $106.9 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. 

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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 February 28, 2016
 
Sales
 
$
1,019.8

 
$
425.5

 
$
146.0

 
$
256.2

 
$
—

 
$
1,847.5

Restaurant and marketing expenses
 
799.7

 
340.5

 
112.1

 
213.9

 
—

 
1,466.2

Segment profit
 
$
220.1

 
$
85.0

 
$
33.9

 
$
42.3

 
$
—

 
$
381.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
27.1

 
$
15.7

 
$
6.7

 
$
12.8

 
$
4.7

 
$
67.0

Impairments and disposal of assets, net
 
(1.9
)
 
(0.2
)
 
—

 
—

 
—

 
(2.1
)
(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the three months ended February 22, 2015
 
Sales
 
$
957.1

 
$
403.8

 
$
138.5

 
$
231.5

 
$
—

 
$
1,730.9

Restaurant and marketing expenses
 
755.7

 
337.9

 
107.6

 
192.5

 
—

 
1,393.7

Segment profit
 
$
201.4

 
$
65.9

 
$
30.9

 
$
39.0

 
$
—

 
$
337.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
37.8

 
$
17.9

 
$
6.6

 
$
11.8

 
$
5.5

 
$
79.6

Impairments and disposal of assets, net
 
(2.1
)
 
(0.8
)
 
—

 
—

 
3.7

 
0.8


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



(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the nine months ended February 28, 2016
 
Sales
 
$
2,856.8

 
$
1,174.4

 
$
382.5

 
$
729.6

 
$
—

 
$
5,143.3

Restaurant and marketing expenses
 
2,287.6

 
977.5

 
308.3

 
611.3

 
—

 
4,184.7

Segment profit
 
$
569.2

 
$
196.9

 
$
74.2

 
$
118.3

 
$
—

 
$
958.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
96.9

 
$
52.5

 
$
20.3

 
$
37.8

 
$
15.9

 
$
223.4

Impairments and disposal of assets, net
 
(1.9
)
 
(1.5
)
 
0.7

 
6.6

 
—

 
3.9

Segments assets
 
951.0

 
980.2

 
852.7

 
996.8

 
721.2

 
4,501.9

Capital expenditures
 
67.2

 
40.7

 
12.7

 
49.4

 
2.8

 
172.8

(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the nine months ended February 22, 2015
 
Sales
 
$
2,752.3

 
$
1,106.5

 
$
362.9

 
$
664.0

 
$
—

 
$
4,885.7

Restaurant and marketing expenses
 
2,262.1

 
944.5

 
295.5

 
570.3

 
—

 
4,072.4

Segment profit
 
$
490.2

 
$
162.0

 
$
67.4

 
$
93.7

 
$
—

 
$
813.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
112.6