Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 27, 2016
or
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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)
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| | |
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):
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Large accelerated filer | | x | | Accelerated filer | | o |
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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 15, 2016: 124,165,070 (excluding 1,268,251 shares held in our treasury).
TABLE OF CONTENTS
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Part I - | Financial Information | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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Part II - | Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 6. | | |
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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 2017 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”, “outlook” 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.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Sales | $ | 1,642.5 |
| | $ | 1,608.8 |
| | $ | 3,356.9 |
| | $ | 3,295.8 |
|
Costs and expenses: | | | | | | | |
Food and beverage | 478.1 |
| | 482.1 |
| | 971.3 |
| | 984.9 |
|
Restaurant labor | 538.1 |
| | 523.8 |
| | 1,083.9 |
| | 1,059.8 |
|
Restaurant expenses | 305.3 |
| | 278.0 |
| | 609.0 |
| | 549.9 |
|
Marketing expenses | 57.1 |
| | 58.3 |
| | 120.8 |
| | 123.9 |
|
General and administrative expenses | 79.5 |
| | 101.9 |
| | 167.2 |
| | 199.0 |
|
Depreciation and amortization | 67.8 |
| | 75.3 |
| | 134.6 |
| | 156.4 |
|
Impairments and disposal of assets, net | 0.1 |
| | 7.7 |
| | (7.7 | ) | | 6.0 |
|
Total operating costs and expenses | $ | 1,526.0 |
| | $ | 1,527.1 |
| | $ | 3,079.1 |
| | $ | 3,079.9 |
|
Operating income | 116.5 |
| | 81.7 |
| | 277.8 |
| | 215.9 |
|
Interest, net | 9.5 |
| | 57.3 |
| | 19.4 |
| | 79.7 |
|
Earnings before income taxes | 107.0 |
| | 24.4 |
| | 258.4 |
| | 136.2 |
|
Income tax expense (benefit) | 27.3 |
| | (5.7 | ) | | 67.6 |
| | 25.1 |
|
Earnings from continuing operations | $ | 79.7 |
| | $ | 30.1 |
| | $ | 190.8 |
| | $ | 111.1 |
|
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $(0.6), $0.2, $(1.3) and $3.2, respectively | (0.2 | ) | | 13.1 |
| | (1.1 | ) | | 18.5 |
|
Net earnings | $ | 79.5 |
| | $ | 43.2 |
| | $ | 189.7 |
| | $ | 129.6 |
|
Basic net earnings per share: | | | | | | | |
Earnings from continuing operations | $ | 0.65 |
| | $ | 0.23 |
| | $ | 1.54 |
| | $ | 0.87 |
|
Earnings (loss) from discontinued operations | — |
| | 0.11 |
| | (0.01 | ) | | 0.14 |
|
Net earnings | $ | 0.65 |
| | $ | 0.34 |
| | $ | 1.53 |
| | $ | 1.01 |
|
Diluted net earnings per share: | | | | | | | |
Earnings from continuing operations | $ | 0.64 |
| | $ | 0.23 |
| | $ | 1.52 |
| | $ | 0.86 |
|
Earnings (loss) from discontinued operations | — |
| | 0.10 |
| | (0.01 | ) | | 0.14 |
|
Net earnings | $ | 0.64 |
| | $ | 0.33 |
| | $ | 1.51 |
| | $ | 1.00 |
|
Average number of common shares outstanding: | | | | | | | |
Basic | 123.1 |
| | 128.1 |
| | 124.0 |
| | 127.7 |
|
Diluted | 124.9 |
| | 129.9 |
| | 125.8 |
| | 129.7 |
|
Dividends declared per common share | $ | 0.56 |
| | $ | 0.55 |
| | $ | 1.12 |
| | $ | 1.10 |
|
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Net earnings | $ | 79.5 |
| | $ | 43.2 |
| | $ | 189.7 |
| | $ | 129.6 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency adjustment | 0.6 |
| | 0.1 |
| | 0.6 |
| | 0.9 |
|
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.0, $13.8, $0.0 and $14.3, respectively | 5.3 |
| | 20.2 |
| | 2.8 |
| | 20.9 |
|
Amortization of unrecognized net actuarial (loss) gain, net of taxes of $0.1, $0.0, $0.2 and $(0.1), respectively, related to pension and other post-employment benefits | 0.2 |
| | (0.1 | ) | | 0.3 |
| | (0.2 | ) |
Other comprehensive income | $ | 6.1 |
| | $ | 20.2 |
| | $ | 3.7 |
| | $ | 21.6 |
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Total comprehensive income | $ | 85.6 |
| | $ | 63.4 |
| | $ | 193.4 |
| | $ | 151.2 |
|
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions) |
| | | | | | | |
| November 27,
2016 | | May 29,
2016 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 116.8 |
| | $ | 274.8 |
|
Receivables, net | 69.8 |
| | 64.0 |
|
Inventories | 183.6 |
| | 175.4 |
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Prepaid income taxes | 44.6 |
| | 46.1 |
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Prepaid expenses and other current assets | 82.2 |
| | 76.4 |
|
Deferred income taxes | 173.1 |
| | 163.3 |
|
Assets held for sale | 13.3 |
| | 20.3 |
|
Total current assets | $ | 683.4 |
| | $ | 820.3 |
|
Land, buildings and equipment, net of accumulated depreciation and amortization of $1,909.9 and $1,819.0, respectively | 2,056.9 |
| | 2,041.6 |
|
Goodwill | 872.3 |
| | 872.3 |
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Trademarks | 575.2 |
| | 574.6 |
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Other assets | 274.1 |
| | 273.8 |
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Total assets | $ | 4,461.9 |
| | $ | 4,582.6 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 249.6 |
| | $ | 241.9 |
|
Accrued payroll | 109.0 |
| | 135.1 |
|
Other accrued taxes | 48.9 |
| | 49.1 |
|
Unearned revenues | 336.2 |
| | 360.4 |
|
Other current liabilities | 407.6 |
| | 400.6 |
|
Total current liabilities | $ | 1,151.3 |
| | $ | 1,187.1 |
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Long-term debt, less current portion | 440.5 |
| | 440.0 |
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Deferred income taxes | 260.8 |
| | 255.2 |
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Deferred rent | 266.1 |
| | 249.7 |
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Other liabilities | 489.8 |
| | 498.6 |
|
Total liabilities | $ | 2,608.5 |
| | $ | 2,630.6 |
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Stockholders’ equity: | | | |
Common stock and surplus | $ | 1,522.9 |
| | $ | 1,502.6 |
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Retained earnings | 424.4 |
| | 547.5 |
|
Treasury stock | (7.8 | ) | | (7.8 | ) |
Accumulated other comprehensive income (loss) | (83.3 | ) | | (87.0 | ) |
Unearned compensation | (2.8 | ) | | (3.3 | ) |
Total stockholders’ equity | $ | 1,853.4 |
| | $ | 1,952.0 |
|
Total liabilities and stockholders’ equity | $ | 4,461.9 |
| | $ | 4,582.6 |
|
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the six months ended November 27, 2016 and November 29, 2015
(In millions)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock And Surplus | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Unearned Compensation | | Total Stockholders’ Equity |
Balance at May 29, 2016 | $ | 1,502.6 |
| | $ | 547.5 |
| | $ | (7.8 | ) | | $ | (87.0 | ) | | $ | (3.3 | ) | | $ | 1,952.0 |
|
Net earnings | — |
| | 189.7 |
| | — |
| | — |
| | — |
| | 189.7 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 3.7 |
| | — |
| | 3.7 |
|
Dividends declared | — |
| | (139.5 | ) | | — |
| | — |
| | — |
| | (139.5 | ) |
Stock option exercises (1.1 shares) | 43.4 |
| | — |
| | — |
| | — |
| | — |
| | 43.4 |
|
Stock-based compensation | 7.4 |
| | — |
| | — |
| | — |
| | — |
| | 7.4 |
|
ESOP note receivable repayments | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
Income tax benefits credited to equity | 8.3 |
| | — |
| | — |
| | — |
| | — |
| | 8.3 |
|
Repurchases of common stock (3.5 shares) | (41.4 | ) | | (173.3 | ) | | — |
| | — |
| | — |
| | (214.7 | ) |
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares) | 2.6 |
| | — |
| | — |
| | — |
| | — |
| | 2.6 |
|
Balance at November 27, 2016 | $ | 1,522.9 |
| | $ | 424.4 |
| | $ | (7.8 | ) | | $ | (83.3 | ) | | $ | (2.8 | ) | | $ | 1,853.4 |
|
| | | | | | | | | | | |
Balance at May 31, 2015 | $ | 1,405.9 |
| | $ | 1,026.0 |
| | $ | (7.8 | ) | | $ | (86.6 | ) | | $ | (4.0 | ) | | $ | 2,333.5 |
|
Net earnings | — |
| | 129.6 |
| | — |
| | — |
| | — |
| | 129.6 |
|
Other comprehensive income | — |
| | — |
| | — |
| | 21.6 |
| | — |
| | 21.6 |
|
Dividends declared | — |
| | (140.6 | ) | | — |
| | — |
| | — |
| | (140.6 | ) |
Stock option exercises (1.5 shares) | 59.7 |
| | — |
| | — |
| | — |
| | — |
| | 59.7 |
|
Stock-based compensation | 8.5 |
| | — |
| | — |
| | — |
| | — |
| | 8.5 |
|
ESOP note receivable repayments | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | 0.4 |
|
Income tax benefits credited to equity | 12.0 |
| | — |
| | — |
| | — |
| | — |
| | 12.0 |
|
Repurchases of common stock (0.0 shares) | (0.1 | ) | | (0.3 | ) | | — |
| | — |
| | — |
| | (0.4 | ) |
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares) | 2.3 |
| | — |
| | — |
| | — |
| | — |
| | 2.3 |
|
Separation of Four Corners Property Trust | — |
| | (436.8 | ) | | — |
| | — |
| | — |
| | (436.8 | ) |
Balance at November 29, 2015 | $ | 1,488.3 |
| | $ | 577.9 |
| | $ | (7.8 | ) | | $ | (65.0 | ) | | $ | (3.6 | ) | | $ | 1,989.8 |
|
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) |
| | | | | | | |
| Six Months Ended |
| November 27,
2016 | | November 29,
2015 |
Cash flows—operating activities | | | |
Net earnings | $ | 189.7 |
| | $ | 129.6 |
|
(Earnings) losses from discontinued operations, net of tax | 1.1 |
| | (18.5 | ) |
Adjustments to reconcile net earnings from continuing operations to cash flows: | | | |
Depreciation and amortization | 134.6 |
| | 156.4 |
|
Impairments and disposal of assets, net | (7.7 | ) | | 6.0 |
|
Amortization of loan costs and losses on interest-rate related derivatives | 0.5 |
| | 3.1 |
|
Stock-based compensation expense | 18.0 |
| | 17.3 |
|
Change in current assets and liabilities | (72.6 | ) | | (91.0 | ) |
Contributions to pension and postretirement plans | (0.8 | ) | | (0.7 | ) |
Change in cash surrender value of trust-owned life insurance | (3.5 | ) | | 1.8 |
|
Deferred income taxes | (5.8 | ) | | (58.8 | ) |
Change in deferred rent | 15.9 |
| | 10.7 |
|
Change in other assets and liabilities | 15.1 |
| | (5.0 | ) |
Loss on extinguishment of debt | — |
| | 35.5 |
|
Other, net | 9.8 |
| | 4.2 |
|
Net cash provided by operating activities of continuing operations | $ | 294.3 |
| | $ | 190.6 |
|
Cash flows—investing activities | | | |
Purchases of land, buildings and equipment | (135.3 | ) | | (122.2 | ) |
Proceeds from disposal of land, buildings and equipment | 6.9 |
| | 311.4 |
|
Purchases of marketable securities | (0.9 | ) | | — |
|
Proceeds from sale of marketable securities | 2.0 |
| | 0.8 |
|
Purchases of capitalized software and other assets | (13.4 | ) | | (10.5 | ) |
Net cash provided by (used in) investing activities of continuing operations | $ | (140.7 | ) | | $ | 179.5 |
|
Cash flows—financing activities | | | |
Proceeds from issuance of common stock | 46.0 |
| | 62.1 |
|
Income tax benefits credited to equity | 8.3 |
| | 12.0 |
|
Special cash distribution from Four Corners Property Trust | — |
| | 315.0 |
|
Dividends paid | (139.5 | ) | | (140.6 | ) |
Repurchases of common stock | (214.7 | ) | | (0.4 | ) |
ESOP note receivable repayments | 0.5 |
| | 0.4 |
|
Repayment of long-term debt | — |
| | (270.0 | ) |
Principal payments on capital and financing leases | (1.8 | ) | | (1.6 | ) |
Net cash used in financing activities of continuing operations | $ | (301.2 | ) | | $ | (23.1 | ) |
Cash flows—discontinued operations | | | |
Net cash used in operating activities of discontinued operations | (10.4 | ) | | (31.6 | ) |
Net cash provided by investing activities of discontinued operations | — |
| | 6.3 |
|
Net cash used in discontinued operations | $ | (10.4 | ) | | $ | (25.3 | ) |
| | | |
Increase (decrease) in cash and cash equivalents | (158.0 | ) | | 321.7 |
|
Cash and cash equivalents - beginning of period | 274.8 |
| | 535.9 |
|
Cash and cash equivalents - end of period | $ | 116.8 |
| | $ | 857.6 |
|
| | | |
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| November 27,
2016 | | November 29,
2015 |
Cash flows from changes in current assets and liabilities | | | |
Receivables, net | (1.7 | ) | | 15.9 |
|
Inventories | (8.3 | ) | | (6.3 | ) |
Prepaid expenses and other current assets | (5.3 | ) | | (7.6 | ) |
Accounts payable | (3.5 | ) | | (1.2 | ) |
Accrued payroll | (26.1 | ) | | (31.0 | ) |
Prepaid/accrued income taxes | 1.4 |
| | (7.1 | ) |
Other accrued taxes | (0.2 | ) | | (0.7 | ) |
Unearned revenues | (12.9 | ) | | (10.6 | ) |
Other current liabilities | (16.0 | ) | | (42.4 | ) |
Change in current assets and liabilities | $ | (72.6 | ) | | $ | (91.0 | ) |
See accompanying notes to our unaudited consolidated financial statements.
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 6 joint venture restaurants managed by us and 19 franchised restaurants. We also have 34 franchised restaurants in operation located in Latin America, the Middle East 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 28, 2017 will contain 52 weeks of operation. Operating results for the quarter ended November 27, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending May 28, 2017.
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 29, 2016. 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.
REIT Transaction - Separation of Four Corners
On November 9, 2015, we completed the spin-off of Four Corners Property Trust, Inc. (Four Corners) with the pro rata distribution of one share of common stock for every three shares of Darden common stock to Darden shareholders. The separation included the transfer of 6 LongHorn Steakhouse restaurants and 418 restaurant properties to Four Corners.
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 is effective for us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions. This update permits the use of either the retrospective or cumulative effect transition method, however we have not yet selected a transition method. Upon initial evaluation, we do not believe this guidance will impact our recognition of revenue from company-owned restaurants, which is our primary source of revenue. We are continuing to evaluate the effect this guidance will have on other, less significant revenue sources, including franchises and consumer packaged goods.
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 us in the first quarter of fiscal 2018, which is when we plan to adopt these provisions. 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 us in the first quarter of fiscal 2018, which is when we plan to adopt these provisions. Other than the revised
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 us in the first quarter of fiscal 2020, which is when we plan to adopt these provisions. Upon initial evaluation, we expect our balance sheet presentation will be materially impacted upon adoption. We are continuing to evaluate the effect this guidance will have on our consolidated financial statements and related disclosures.
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 us in the first quarter of fiscal 2018, which is when we plan to adopt these provisions. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. We have not yet determined the effect of the standard on our ongoing financial reporting.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740). This update addresses the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for annual and interim periods beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal 2019 using a modified retrospective approach. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
Note 2.Discontinued Operations and Assets Held for Sale
Discontinued Operations
Earnings (loss) from discontinued operations, net of taxes in our accompanying consolidated statements of earnings is primarily related to the Red Lobster disposition and is comprised of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions) | November 27, 2016 | | November 29, 2015 | | November 27, 2016 | | November 29, 2015 |
Costs and expenses: | | | | | | | |
Restaurant and marketing expenses | $ | (0.2 | ) | | $ | — |
| | $ | — |
| | $ | 0.3 |
|
Other income and expenses (1) | 1.0 |
| | (13.3 | ) | | 2.4 |
| | (22.0 | ) |
Earnings (loss) before income taxes | (0.8 | ) | | 13.3 |
| | (2.4 | ) | | 21.7 |
|
Income tax expense (benefit) | (0.6 | ) | | 0.2 |
| | (1.3 | ) | | 3.2 |
|
Earnings (loss) from discontinued operations, net of tax | $ | (0.2 | ) | | $ | 13.1 |
| | $ | (1.1 | ) | | $ | 18.5 |
|
| |
(1) | Amounts for the quarter and six months ended November 29, 2015 include gains recognized upon satisfaction of landlord consents. |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets Held For Sale
Assets classified as held for sale on our accompanying consolidated balance sheets as of November 27, 2016 and May 29, 2016, consisted of land, buildings and equipment with carrying amounts of $13.3 million and $20.3 million, respectively, primarily related to excess land parcels adjacent to our corporate headquarters.
Note 3.Supplemental Cash Flow Information
|
| | | | | | | | |
Cash paid for interest and income taxes are as follows: | | Six Months Ended |
(in millions) | | November 27, 2016 | | November 29, 2015 |
Interest paid, net of amounts capitalized | | $ | 18.6 |
| | $ | 40.8 |
|
Income taxes paid, net of refunds | | 57.2 |
| | 103.9 |
|
|
| | | | | | | | |
Non-cash investing and financing activities are as follows: | | Six Months Ended |
(in millions) | | November 27, 2016 | | November 29, 2015 |
Increase in land, buildings and equipment through accrued purchases | | $ | 26.1 |
| | $ | 11.2 |
|
Net book value of assets distributed in Four Corners separation, net of deferred tax liabilities | | — |
| | 751.8 |
|
Note 4.Income Taxes
The effective income tax rate for the quarter ended November 27, 2016 was 25.5 percent compared to an effective income tax rate benefit of 23.4 percent for the quarter ended November 29, 2015. The effective income tax rate for the six months ended November 27, 2016 was 26.2 percent compared to an effective income tax rate of 18.4 percent for the six months ended November 29, 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, our effective tax rates would have been approximately 18.5 percent and 25.0 percent for the quarter and six months ended November 29, 2015, respectively. The increase in the effective income tax rate for the quarter and six months ended November 27, 2016 as compared to the quarter and six months ended November 29, 2015, excluding these impacts, is primarily attributable to the unfavorable impact of FICA tax credits for employee reported tips and Work Opportunity Tax Credits on higher earnings before income taxes.
Included in our remaining balance of unrecognized tax benefits is $0.6 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, 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 | | Six Months Ended |
(in millions) | | November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Anti-dilutive stock-based compensation awards | | 0.9 |
| | 0.4 |
| | 0.7 |
| | 0.2 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 6. 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 November 27, 2016 | |
Sales | | $ | 915.0 |
| | $ | 365.0 |
| | $ | 128.6 |
| | $ | 233.9 |
| | $ | — |
| | $ | 1,642.5 |
|
Restaurant and marketing expenses | | 761.5 |
| | 312.6 |
| | 105.2 |
| | 199.3 |
| | — |
| | 1,378.6 |
|
Segment profit | | $ | 153.5 |
| | $ | 52.4 |
| | $ | 23.4 |
| | $ | 34.6 |
| | $ | — |
| | $ | 263.9 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 31.1 |
| | $ | 16.3 |
| | $ | 7.2 |
| | $ | 13.2 |
| | $ | — |
| | $ | 67.8 |
|
Impairments and disposal of assets, net | | (0.2 | ) | | — |
| | — |
| | — |
| | 0.3 |
| | 0.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the three months ended November 29, 2015 | |
Sales | | $ | 892.3 |
| | $ | 365.1 |
| | $ | 123.3 |
| | $ | 228.1 |
| | $ | — |
| | $ | 1,608.8 |
|
Restaurant and marketing expenses | | 735.2 |
| | 310.3 |
| | 100.9 |
| | 195.8 |
| | — |
| | 1,342.2 |
|
Segment profit | | $ | 157.1 |
| | $ | 54.8 |
| | $ | 22.4 |
| | $ | 32.3 |
| | $ | — |
| | $ | 266.6 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 36.3 |
| | $ | 18.7 |
| | $ | 7.1 |
| | $ | 13.2 |
| | $ | — |
| | $ | 75.3 |
|
Impairments and disposal of assets, net | | 1.2 |
| | — |
| | — |
| | 6.5 |
| | — |
| | 7.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the six months ended November 27, 2016 | |
Sales | | $ | 1,876.2 |
| | $ | 751.3 |
| | $ | 242.8 |
| | $ | 486.6 |
| | $ | — |
| | $ | 3,356.9 |
|
Restaurant and marketing expenses | | 1,536.4 |
| | 638.8 |
| | 202.6 |
| | 407.2 |
| | — |
| | 2,785.0 |
|
Segment profit | | $ | 339.8 |
| | $ | 112.5 |
| | $ | 40.2 |
| | $ | 79.4 |
| | $ | — |
| | $ | 571.9 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 61.1 |
| | $ | 32.6 |
| | $ | 14.4 |
| | $ | 26.5 |
| | $ | — |
| | $ | 134.6 |
|
Impairments and disposal of assets, net | | (1.7 | ) | | (0.1 | ) | | — |
| | (6.1 | ) | | 0.2 |
| | (7.7 | ) |
Purchases of land, buildings and equipment | | 60.9 |
| | 28.4 |
| | 21.6 |
| | 22.7 |
| | 1.7 |
| | 135.3 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the six months ended November 29, 2015 | |
Sales | | $ | 1,836.9 |
| | $ | 748.9 |
| | $ | 236.5 |
| | $ | 473.5 |
| | $ | — |
| | $ | 3,295.8 |
|
Restaurant and marketing expenses | | 1,487.8 |
| | 637.0 |
| | 196.3 |
| | 397.4 |
| | — |
| | 2,718.5 |
|
Segment profit | | $ | 349.1 |
| | $ | 111.9 |
| | $ | 40.2 |
| | $ | 76.1 |
| | $ | — |
| | $ | 577.3 |
|
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 76.0 |
| | $ | 39.4 |
| | $ | 14.4 |
| | $ | 26.6 |
| | $ | — |
| | $ | 156.4 |
|
Impairments and disposal of assets, net | | — |
| | (1.2 | ) | | 0.7 |
| | 6.5 |
| | — |
| | 6.0 |
|
Purchases of land, buildings and equipment | | 44.1 |
| | 30.3 |
| | 8.0 |
| | 37.4 |
| | 2.4 |
| | 122.2 |
|
Reconciliation of segment profit to earnings from continuing operations before income taxes:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 27, 2016 | | November 29, 2015 | | November 27, 2016 | | November 29, 2015 |
Segment profit | | $ | 263.9 |
| | $ | 266.6 |
| | $ | 571.9 |
| | $ | 577.3 |
|
Less general and administrative expenses | | (79.5 | ) | | (101.9 | ) | | (167.2 | ) | | (199.0 | ) |
Less depreciation and amortization | | (67.8 | ) | | (75.3 | ) | | (134.6 | ) | | (156.4 | ) |
Less impairments and disposal of assets, net | | (0.1 | ) | | (7.7 | ) | | 7.7 |
| | (6.0 | ) |
Less interest, net | | (9.5 | ) | | (57.3 | ) | | (19.4 | ) | | (79.7 | ) |
Earnings before income taxes | | $ | 107.0 |
| | $ | 24.4 |
| | $ | 258.4 |
| | $ | 136.2 |
|
Note 7. Impairments and Disposal of Assets, Net
Impairments and disposal of assets, net, in our accompanying consolidated statements of earnings are comprised of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
(in millions) | November 27, 2016 | | November 29, 2015 | | November 27, 2016 | | November 29, 2015 |
Restaurant impairments | $ | — |
| | $ | 7.9 |
| | $ | — |
| | $ | 9.2 |
|
Disposal gains | (1.2 | ) | | (0.2 | ) | | (9.0 | ) | | (3.2 | ) |
Other | 1.3 |
| | — |
| | 1.3 |
| | — |
|
Impairments and disposal of assets, net | $ | 0.1 |
| | $ | 7.7 |
| | $ | (7.7 | ) | | $ | 6.0 |
|
Restaurant impairments for the quarter and six months ended November 29, 2015 were primarily related to underperforming restaurants and restaurant assets involved in individual sale-leaseback transactions.
Disposal gains for the quarter and six months ended November 27, 2016 were primarily related to the sale of restaurant properties, favorable lease terminations and the sale of excess land parcels. For the six months ended November 29, 2015, disposal gains were primarily related to sale-leaseback transactions and a restaurant lease termination.
Other impairment charges for the quarter and six months ended November 27, 2016 primarily related to a cost-method investment, which has no remaining carrying value.
Impairment charges were measured based on the amount by which the carrying amount of these assets exceeded their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets and estimates of future cash flows. These amounts are included in impairments and disposal of assets, net, as a component of earnings from continuing operations in the accompanying consolidated statements of earnings.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8.Stockholders' Equity
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended November 27, 2016 and November 29, 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) |
Balances at August 28, 2016 | | $ | (1.2 | ) | | $ | 0.1 |
| | $ | 1.4 |
| | $ | (89.7 | ) | | $ | (89.4 | ) |
Gain (loss) | | 0.6 |
| | — |
| | 5.3 |
| | — |
| | 5.9 |
|
Reclassification realized in net earnings | | — |
| | — |
| | — |
| | 0.2 |
| | 0.2 |
|
Balance at November 27, 2016 | | $ | (0.6 | ) | | $ | 0.1 |
| | $ | 6.7 |
| | $ | (89.5 | ) | | $ | (83.3 | ) |
| | | | | | | | | | |
Balance at August 30, 2015 | | $ | (0.9 | ) | | $ | 0.1 |
| | $ | (18.4 | ) | | $ | (66.0 | ) | | $ | (85.2 | ) |
Gain (loss) | | 0.1 |
| | — |
| | (2.1 | ) | | — |
| | (2.0 | ) |
Reclassification realized in net earnings | | — |
| | — |
| | 22.3 |
| | (0.1 | ) | | 22.2 |
|
Balance at November 29, 2015 | | $ | (0.8 | ) | | $ | 0.1 |
| | $ | 1.8 |
| | $ | (66.1 | ) | | $ | (65.0 | ) |
The components of accumulated other comprehensive income (loss), net of tax, for the six months ended November 27, 2016 and November 29, 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) |
Balances at May 29, 2016 | | $ | (1.2 | ) | | $ | 0.1 |
| | $ | 3.9 |
| | $ | (89.8 | ) | | $ | (87.0 | ) |
Gain (loss) | | 0.6 |
| | — |
| | 1.4 |
| | — |
| | 2.0 |
|
Reclassification realized in net earnings | | — |
| | — |
| | 1.4 |
| | 0.3 |
| | 1.7 |
|
Balance at November 27, 2016 | | $ | (0.6 | ) | | $ | 0.1 |
| | $ | 6.7 |
| | $ | (89.5 | ) | | $ | (83.3 | ) |
| | | | | | | | | | |
Balance at May 31, 2015 | | $ | (1.7 | ) | | $ | 0.1 |
| | $ | (19.1 | ) | | $ | (65.9 | ) | | $ | (86.6 | ) |
Gain (loss) | | 0.9 |
| | — |
| | (0.1 | ) | | — |
| | 0.8 |
|
Reclassification realized in net earnings | | — |
| | — |
| | 21.0 |
| | (0.2 | ) | | 20.8 |
|
Balance at November 29, 2015 | | $ | (0.8 | ) | | $ | 0.1 |
| | $ | 1.8 |
| | $ | (66.1 | ) | | $ | (65.0 | ) |
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 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Derivatives | | | | | | | | | |
Equity contracts | (1) | | $ | — |
| | $ | — |
| | $ | (1.4 | ) | | $ | 2.1 |
|
Interest rate contracts | (2) | | — |
| | (36.1 | ) | | — |
| | (37.4 | ) |
Total before tax | | | $ | — |
| | $ | (36.1 | ) | | $ | (1.4 | ) | | $ | (35.3 | ) |
Tax benefit | | | — |
| | 13.8 |
| | — |
| | 14.3 |
|
Net of tax | | | $ | — |
| | $ | (22.3 | ) | | $ | (1.4 | ) | | $ | (21.0 | ) |
| | | | | | | | | |
Benefit plan funding position | | | | | | | | | |
Recognized net actuarial loss - pension/postretirement plans | (3) | | $ | (0.8 | ) | | $ | (0.8 | ) | | $ | (1.6 | ) | | $ | (1.4 | ) |
Recognized net actuarial gain - other plans | (4) | | 0.5 |
| | 0.9 |
| | 1.1 |
| | 1.7 |
|
Total before tax | | | $ | (0.3 | ) | | $ | 0.1 |
| | $ | (0.5 | ) | | $ | 0.3 |
|
Tax benefit (expense) | | | 0.1 |
| | — |
| | 0.2 |
| | (0.1 | ) |
Net of tax | | | $ | (0.2 | ) | | $ | 0.1 |
| | $ | (0.3 | ) | | $ | 0.2 |
|
| |
(1) | Primarily included in restaurant labor costs and general and administrative expenses. See Note 11 for additional details. |
| |
(2) | Included in interest, net, on our consolidated statements of earnings. Reclassifications for the quarter and six months ended November 29, 2015 primarily related to the acceleration of hedge loss amortization resulting from the pay down of 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 9 for additional details. |
| |
(4) | Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses. |
Note 9.Retirement Plans
Components of net periodic benefit cost are as follows:
|
| | | | | | | | | | | | | | | | |
| | Defined Benefit Plans |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Interest cost | | $ | 2.6 |
| | $ | 2.6 |
| | $ | 5.1 |
| | $ | 5.3 |
|
Expected return on plan assets | | (4.1 | ) | | (3.6 | ) | | (8.0 | ) | | (7.2 | ) |
Recognized net actuarial loss | | 0.8 |
| | 0.8 |
| | 1.6 |
| | 1.4 |
|
Net periodic benefit (credit) cost | | $ | (0.7 | ) | | $ | (0.2 | ) | | $ | (1.3 | ) | | $ | (0.5 | ) |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Postretirement Benefit Plan |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Service cost | | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
| | $ | 0.1 |
|
Interest cost | | 0.2 |
| | 0.2 |
| | 0.4 |
| | 0.4 |
|
Amortization of unrecognized prior service credit | | (1.2 | ) | | (1.2 | ) | | (2.4 | ) | | (2.4 | ) |
Recognized net actuarial loss | | 0.4 |
| | 0.3 |
| | 0.8 |
| | 0.6 |
|
Net periodic benefit (credit) cost | | $ | (0.5 | ) | | $ | (0.6 | ) | | $ | (1.1 | ) | | $ | (1.3 | ) |
Note 10. Stock-Based Compensation
We grant stock options for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units, and performance stock units with a fair value generally determined based on our closing stock price on the date of grant. In addition, we also grant cash settled stock units (Darden Stock Units) and cash settled performance stock units, which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model were as follows.
|
| | | | | | | |
| Stock Options Granted |
| Six Months Ended |
| November 27, 2016 | | November 29, 2015 |
Weighted-average fair value (1) | $ | 9.08 |
| | $ | 12.72 |
|
Dividend yield | 3.5 | % | | 3.3 | % |
Expected volatility of stock | 24.3 | % | | 28.0 | % |
Risk-free interest rate | 1.4 | % | | 1.9 | % |
Expected option life (in years) | 6.5 |
| | 6.5 |
|
Weighted-average exercise price per share (1) | $ | 59.70 |
| | $ | 64.85 |
|
(1) Weighted averages for the three months ended November 29, 2015 were adjusted for the impact of the separation of Four Corners.
The following table presents a summary of our stock-based compensation activity for the six months ended November 27, 2016:
|
| | | | | | | | | | | | | | | |
(in millions) | | Stock Options | | Restricted Stock/ Restricted Stock Units | | Darden Stock Units | | Cash-Settled Performance Stock Units | | Equity-Settled
Performance
Stock Units |
Outstanding beginning of period | | 6.32 |
| | 0.11 |
| | 1.43 |
| | 0.21 |
| | 0.17 |
|
Awards granted | | 0.58 |
| | 0.05 |
| | 0.31 |
| | — |
| | 0.19 |
|
Awards exercised/vested | | (1.12 | ) | | (0.01 | ) | | (0.27 | ) | | (0.10 | ) | | — |
|
Awards forfeited | | (0.15 | ) | | (0.01 | ) | | (0.05 | ) | | (0.03 | ) | | (0.03 | ) |
Performance unit adjustment | | — |
| | — |
| | — |
| | 0.01 |
| | — |
|
Outstanding end of period | | 5.63 |
| | 0.14 |
| | 1.42 |
| | 0.09 |
| | 0.33 |
|
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We recognized expense from stock-based compensation as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 27,
2016 | | November 29,
2015 | | November 27,
2016 | | November 29,
2015 |
Stock options | | $ | 1.6 |
| | $ | 2.4 |
| | $ | 3.1 |
| | $ | 4.9 |
|
Restricted stock/restricted stock units | | 0.3 |
| | 0.5 |
| | 0.7 |
| | 0.9 |
|
Darden stock units | | 6.7 |
| | 2.6 |
| | 9.3 |
| | 6.8 |
|
Cash-settled performance stock units | | 1.3 |
| | 0.2 |
| | 1.3 |
| | 2.0 |
|
Equity-settled performance stock units | | 1.3 |
| | 0.8 |
| | 2.4 |
| | 1.1 |
|
Employee stock purchase plan | | 0.3 |
| | 0.3 |
| | 0.6 |
| | 0.6 |
|
Director compensation program/other | | 0.3 |
| | 0.3 |
| | 0.6 |
| | 1.0 |
|
Total stock-based compensation expense | | $ | 11.8 |
| | $ | 7.1 |
| | $ | 18.0 |
| | $ | 17.3 |
|
Note 11. 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 Accounting Standards Codification (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 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 November 27, 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.
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 and currently extend through July 2021. 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. 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, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. 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. These contracts currently extend through July 2021.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The notional and fair values of our derivative contracts are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair Values |
(in millions, except per share data) | Number of Shares Outstanding | | Weighted-Average Per Share Forward Rates | | Notional Values | | Derivative Assets (1) | | Derivative Liabilities (1) |
Equity forwards | November 27, 2016 | | November 27,
2016 | | May 29,
2016 | | November 27,
2016 | | May 29,
2016 |
Designated | 0.4 | | $ | 58.37 |
| | $ | 23.6 |
| | $ | 0.7 |
| | $ | 1.2 |
| | $ | — |
| | $ | — |
|
Not designated | 0.5 | | $ | 51.34 |
| | $ | 26.6 |
| | 1.0 |
| | 2.6 |
| | — |
| | — |
|
Total equity forwards | $ | 1.7 |
| | $ | 3.8 |
| | $ | — |
| | $ | — |
|
| |
(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 equity forwards accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in millions) | | November 27, 2016 | | November 29, 2015 | | November 27,
2016 | | November 29,
2015 |
Gain (loss) recognized in AOCI (effective portion) | | $ | 5.3 |
| | $ | (2.1 | ) | | $ | 1.4 |
| | $ | (0.1 | ) |
Gain (loss) reclassified from AOCI to earnings (effective portion) | | — |
| | — |
| | (1.4 | ) | | 2.1 |
|
Gain (loss) recognized in earnings (ineffective portion) (1) | | 0.1 |
| | 0.4 |
| | 0.3 |
| | 0.5 |
|
| |
(1) | 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 equity forwards not designated as hedging instruments in the consolidated statements of earnings are as follows:
|
| | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in Earnings |
(in millions) | Three Months Ended | | Six Months Ended |
Location of Gain (Loss) Recognized in Earnings on Derivatives | November 27, 2016 | | November 29, 2015 | | November 27, 2016 | | November 29, 2015 |
Restaurant labor expenses | | $ | 2.6 |
| | $ | (0.7 | ) | | $ | 1.5 |
| | $ | 1.0 |
|
General and administrative expenses | | 4.9 |
| | (1.6 | ) | | 2.9 |
| | 2.2 |
|
Total | | $ | 7.5 |
| | $ | (2.3 | ) | | $ | 4.4 |
| | $ | 3.2 |
|
Based on the fair value of our derivative instruments designated as cash flow hedges as of November 27, 2016, we expect to reclassify $0.9 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.
During fiscal 2016, in connection with the repayment of our 2017, 2021 and 2022 senior notes, we settled the associated interest-rate swap agreements and accelerated the associated amortization of previously settled interest-rate related cash flow hedges.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Fair Value Measurements
The fair values of cash equivalents, receivables, net and accounts payable 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 November 27, 2016 and May 29, 2016:
|
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at November 27, 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) | | $ | 1.7 |
| | $ | — |
| | $ | 1.7 |
| | $ | — |
|
U.S. Treasury securities | (2) | | 3.1 |
| | 3.1 |
| | — |
| | — |
|
Mortgage-backed securities | (1) | | 1.0 |
| | — |
| | 1.0 |
| | — |
|
Derivatives: | | | | | | | | | |
Equity forwards | (3) | | 1.7 |
| | — |
| | 1.7 |
| | — |
|
Total | | | $ | 7.5 |
| | $ | 3.1 |
| | $ | 4.4 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | |
Items Measured at Fair Value at May 29, 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) | | 3.9 |
| | 3.9 |
| | — |
| | — |
|
Mortgage-backed securities | (1) | | 1.0 |
| | — |
| | 1.0 |
| | — |
|
Derivatives: | | |
| |
| |
| |
|
Equity forwards | (3) | | 3.8 |
| | — |
| | 3.8 |
| | — |
|
Total | | | $ | 10.7 |
| | $ | 3.9 |
| | $ | 6.8 |
| | $ | — |
|
| |
(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. |
The carrying value and fair value of long-term debt as of November 27, 2016, was $440.5 million and $494.1 million, respectively. The carrying value and fair value of long-term debt as of May 29, 2016, was $440.0 million and $499.5 million, 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. During the quarter and six months ended November 27, 2016, there were no adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis. As of May 29, 2016, long-lived assets held and used 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 charge of $5.4 million. As of May 29, 2016, long-lived assets held for sale with a carrying value of $17.5 million, related to excess land parcels adjacent to our corporate headquarters, were written down to their fair value of $16.9 million, resulting in an impairment charge of $0.6 million.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)