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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 26, 2017
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
Emerging growth company
 
o 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
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, 2017: 123,533,817 (excluding 1,263,682 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.
 
 
 
 

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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 2018 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.

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PART I
FINANCIAL INFORMATION
Item  1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Sales
$
1,881.5

 
$
1,642.5

 
$
3,817.6

 
$
3,356.9

Costs and expenses:
 
 
 
 
 
 
 
Food and beverage
542.9

 
478.1

 
1,098.1

 
971.3

Restaurant labor
622.4

 
538.1

 
1,246.6

 
1,083.9

Restaurant expenses
351.5

 
305.3

 
694.4

 
609.0

Marketing expenses
58.1

 
57.1

 
124.1

 
120.8

General and administrative expenses
98.9

 
79.5

 
196.9

 
167.2

Depreciation and amortization
78.8

 
67.8

 
154.9

 
134.6

Impairments and disposal of assets, net
—

 
0.1

 
(0.8
)
 
(7.7
)
Total operating costs and expenses
$
1,752.6

 
$
1,526.0

 
$
3,514.2

 
$
3,079.1

Operating income
128.9

 
116.5

 
303.4

 
277.8

Interest, net
15.5

 
9.5

 
30.5

 
19.4

Earnings before income taxes
113.4

 
107.0

 
272.9

 
258.4

Income tax expense
24.8

 
27.3

 
63.0

 
67.6

Earnings from continuing operations
$
88.6

 
$
79.7

 
$
209.9

 
$
190.8

Losses from discontinued operations, net of tax benefit of $(2.5), $(0.6), $(3.5) and $(1.3), respectively
(3.9
)
 
(0.2
)
 
(6.2
)
 
(1.1
)
Net earnings
$
84.7

 
$
79.5

 
$
203.7

 
$
189.7

Basic net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.72

 
$
0.65

 
$
1.69

 
$
1.54

Losses from discontinued operations
(0.03
)
 
—

 
(0.05
)
 
(0.01
)
Net earnings
$
0.69

 
$
0.65

 
$
1.64

 
$
1.53

Diluted net earnings per share:
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.71

 
$
0.64

 
$
1.66

 
$
1.52

Losses from discontinued operations
(0.04
)
 
—

 
(0.05
)
 
(0.01
)
Net earnings
$
0.67

 
$
0.64

 
$
1.61

 
$
1.51

Average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
123.6

 
123.1

 
124.4

 
124.0

Diluted
125.5

 
124.9

 
126.4

 
125.8

Dividends declared per common share
$
0.63

 
$
0.56

 
$
1.26

 
$
1.12


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
 
Six Months Ended
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Net earnings
$
84.7

 
$
79.5

 
$
203.7

 
$
189.7

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency adjustment
(0.2
)
 
0.6

 
(0.7
)
 
0.6

Change in fair value of marketable securities, net of taxes of $0.0, $0.0, $0.0 and $0.0, respectively
(0.1
)
 
—

 
(0.1
)
 
—

Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.0, $0.0, $0.0, and $0.0, respectively
(1.8
)
 
5.3

 
(4.4
)
 
2.8

Amortization of unrecognized net actuarial (loss) gain, net of taxes of $0.0 ,$0.1, $0.0 and $0.2 respectively, related to pension and other post-employment benefits
—

 
0.2

 
(0.1
)
 
0.3

Other comprehensive loss
$
(2.1
)
 
$
6.1

 
$
(5.3
)
 
$
3.7

Total comprehensive income
$
82.6

 
$
85.6

 
$
198.4

 
$
193.4

See accompanying notes to our unaudited consolidated financial statements.


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DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
 
November 26,
2017
 
May 28,
2017
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
114.7

 
$
233.1

Receivables, net
66.7

 
75.9

Inventories
199.1

 
178.9

Prepaid income taxes
3.2

 
6.2

Prepaid expenses and other current assets
90.4

 
80.6

Assets held for sale
11.1

 
13.2

Total current assets
$
485.2

 
$
587.9

Land, buildings and equipment, net of accumulated depreciation and amortization of $2,110.9 and $1,996.8, respectively
2,386.2

 
2,272.3

Goodwill
1,173.1

 
1,201.7

Trademarks
950.2

 
950.2

Other assets
322.9

 
280.2

Total assets
$
5,317.6

 
$
5,292.3

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
262.0

 
$
249.5

Short-term debt
153.5

 
—

Accrued payroll
129.0

 
149.1

Accrued income taxes
—

 
1.9

Other accrued taxes
57.3

 
54.2

Unearned revenues
366.9

 
388.6

Other current liabilities
449.3

 
445.9

Total current liabilities
$
1,418.0

 
$
1,289.2

Long-term debt
935.6

 
936.6

Deferred income taxes
143.6

 
145.6

Deferred rent
301.4

 
282.8

Other liabilities
542.9

 
536.4

Total liabilities
$
3,341.5

 
$
3,190.6

Stockholders’ equity:
 
 
 
Common stock and surplus
$
1,606.8

 
$
1,614.6

Retained earnings
447.3

 
560.1

Treasury stock
(7.8
)
 
(7.8
)
Accumulated other comprehensive income (loss)
(68.2
)
 
(62.9
)
Unearned compensation
(2.0
)
 
(2.3
)
Total stockholders’ equity
$
1,976.1

 
$
2,101.7

Total liabilities and stockholders’ equity
$
5,317.6

 
$
5,292.3


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 six months ended November 26, 2017 and November 27, 2016
(In millions)
(Unaudited)
 
 
Common
Stock
And
Surplus
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Unearned
Compensation
 
Total
Stockholders’
Equity
Balance at May 28, 2017
$
1,614.6

 
$
560.1

 
$
(7.8
)
 
$
(62.9
)
 
$
(2.3
)
 
$
2,101.7

Net earnings
—

 
203.7

 
—

 
—

 
—

 
203.7

Other comprehensive loss
—

 
—

 
—

 
(5.3
)
 
—

 
(5.3
)
Dividends declared
—

 
(157.0
)
 
—

 
—

 
—

 
(157.0
)
Stock option exercises (0.4 shares)
14.6

 
—

 
—

 
—

 
—

 
14.6

Stock-based compensation
10.6

 
—

 
—

 
—

 
—

 
10.6

Repurchases of common stock (2.3 shares)
(29.4
)
 
(159.5
)
 
—

 
—

 
—

 
(188.9
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.0 shares)
2.8

 
—

 
—

 
—

 
—

 
2.8

Other
(6.4
)
 
—

 
—

 
—

 
0.3

 
$
(6.1
)
Balance at November 26, 2017
$
1,606.8

 
$
447.3

 
$
(7.8
)
 
$
(68.2
)
 
$
(2.0
)
 
$
1,976.1

 
 
 
 
 
 
 
 
 
 
 
 
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

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

Other
—

 
—

 
—

 
—

 
0.5

 
0.5

Balance at November 27, 2016
$
1,522.9

 
$
424.4

 
$
(7.8
)
 
$
(83.3
)
 
$
(2.8
)
 
$
1,853.4

See accompanying notes to our unaudited consolidated financial statements.


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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended
 
November 26,
2017
 
November 27,
2016
Cash flows—operating activities
 
 
 
Net earnings
$
203.7

 
$
189.7

Losses from discontinued operations, net of tax
6.2

 
1.1

Adjustments to reconcile net earnings from continuing operations to cash flows:
 
 
 
Depreciation and amortization
154.9

 
134.6

Impairments and disposal of assets, net
(0.8
)
 
(7.7
)
Amortization of loan costs and losses on interest-rate related derivatives
0.9

 
0.5

Stock-based compensation expense
18.1

 
18.0

Change in current assets and liabilities
(98.9
)
 
(72.6
)
Contributions to pension and postretirement plans
(0.8
)
 
(0.8
)
Change in cash surrender value of trust-owned life insurance
(6.9
)
 
(3.5
)
Deferred income taxes
18.1

 
(5.8
)
Change in deferred rent
19.1

 
15.9

Change in other assets and liabilities
(1.5
)
 
15.1

Other, net
2.0

 
9.8

Net cash provided by operating activities of continuing operations
$
314.1

 
$
294.3

Cash flows—investing activities
 
 
 
Purchases of land, buildings and equipment
(197.7
)
 
(135.3
)
Proceeds from disposal of land, buildings and equipment
3.1

 
6.9

Purchases of marketable securities
—

 
(0.9
)
Proceeds from sale of marketable securities
4.4

 
2.0

Cash used in business acquisitions, net of cash acquired
(40.4
)
 
—

Purchases of capitalized software and other assets
(10.2
)
 
(13.4
)
Net cash used in investing activities of continuing operations
$
(240.8
)
 
$
(140.7
)
Cash flows—financing activities
 
 
 
Proceeds from issuance of common stock
17.4

 
46.0

Income tax benefits credited to equity
—

 
8.3

Dividends paid
(157.0
)
 
(139.5
)
Repurchases of common stock
(188.9
)
 
(214.7
)
Proceeds from issuance of short-term debt
593.6

 
—

Repayments of short-term debt
(440.1
)
 
—

Principal payments on capital and financing leases
(2.3
)
 
(1.8
)
Other, net
(8.2
)
 
0.5

Net cash used in financing activities of continuing operations
$
(185.5
)
 
$
(301.2
)
Cash flows—discontinued operations
 
 
 
Net cash used in operating activities of discontinued operations
(6.2
)
 
(10.4
)
Net cash used in discontinued operations
$
(6.2
)
 
$
(10.4
)
 
 
 
 
Decrease in cash and cash equivalents
(118.4
)
 
(158.0
)
Cash and cash equivalents - beginning of period
233.1

 
274.8

Cash and cash equivalents - end of period
$
114.7

 
$
116.8

 
 
 
 

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
Six Months Ended
 
November 26,
2017
 
November 27,
2016
Cash flows from changes in current assets and liabilities
 
 
 
Receivables, net
9.5

 
(1.7
)
Inventories
(20.1
)
 
(8.3
)
Prepaid expenses and other current assets
(12.8
)
 
(5.3
)
Accounts payable
(9.0
)
 
(3.5
)
Accrued payroll
(20.1
)
 
(26.1
)
Prepaid/accrued income taxes
1.0

 
1.4

Other accrued taxes
2.3

 
(0.2
)
Unearned revenues
(16.9
)
 
(12.9
)
Other current liabilities
(32.8
)
 
(16.0
)
Change in current assets and liabilities
$
(98.9
)
 
$
(72.6
)

See accompanying notes to our unaudited consolidated financial statements.


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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®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Bahama Breeze®, Seasons 52®, and Eddie V's Prime Seafood® and Wildfish Seafood Grille® (collectively "Eddie V's"). As of November 26, 2017, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 3 joint venture restaurants managed by us and 35 franchised restaurants. We also have 35 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 27, 2018 will contain 52 weeks of operation. Operating results for interim periods presented are not necessarily indicative of results that may be expected for the full fiscal year.
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 28, 2017. 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.
Recently Adopted Accounting Standards
As of May 29, 2017, we adopted Accounting Standards Update (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. Upon adoption, we applied this guidance retrospectively which resulted in a reclassification of current deferred tax assets of $211.8 million on our consolidated balance sheet for the period ended May 28, 2017.
As of May 29, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718). 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. The primary impact for us upon adoption is the recognition of excess tax benefits in our provision for income taxes rather than in equity as previously recognized. This change is required to be applied prospectively. The cash flows related to excess tax benefits will be presented as an operating activity rather than a financing activity in our consolidated statements cash flows. We elected to apply the presentation requirements for the cash flows related to excess tax benefits prospectively and therefore have not adjusted prior periods. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated statements cash flows since such cash flows have historically been presented as a financing activity. Additionally, we have elected to continue our current accounting policy of estimating forfeitures rather than accounting for forfeitures as they occur.
New Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update 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.

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

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. We plan to elect the available practical expedients upon adoption. We expect our balance sheet presentation to be materially impacted upon adoption due to the recognition of right-of-use assets and lease liabilities for operating leases. However, we do not expect adoption to have a material impact on our consolidated statements of earnings. We do not expect our accounting for capital leases to substantially change. We are continuing to evaluate the effect this guidance will have on our consolidated financial statements and related disclosures.
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 us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions using a modified retrospective approach. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715).  The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization.  This update is effective for us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions. The guidance will be applied retrospectively or prospectively, depending on the area covered in this update.  We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. 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. The guidance will be applied retrospectively or prospectively, depending on the area covered in this update. Early adoption is permitted. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.

Note 2. Acquisition of Cheddar's Scratch Kitchen
On April 24, 2017, we acquired 100 percent of the equity interest in Cheddar’s Scratch Kitchen for $799.8 million in total consideration. We funded the acquisition with the proceeds from the issuance of $500.0 million in senior notes combined with cash on hand. The acquired operations of Cheddar’s Scratch Kitchen included 140 company-owned restaurants and 25 franchised restaurants. The results of Cheddar’s Scratch Kitchen operations are included in our consolidated financial statements from the date of acquisition.
The assets and liabilities of Cheddar’s Scratch Kitchen were recorded at their respective fair values as of the date of acquisition. We are in the process of confirming, through internal studies and third-party valuations, the fair value of these assets, including land, buildings and equipment, intangible assets, and income tax assets and liabilities. The fair values set forth below are based on preliminary valuations and are subject to adjustment as additional information is obtained. When the valuation process is completed, adjustments to goodwill may result.

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

The preliminary allocation of the purchase price is as follows:
 
 
 
 
 
 
Balances at
(in millions)
 
Preliminary
 
Adjustments
 
November 26, 2017
Current assets
 
$
48.2

 
$
(0.3
)
 
$
47.9

Land, buildings and equipment
 
191.9

 
18.7

 
210.6

Trademark
 
375.0

 
—

 
375.0

Other assets
 
2.2

 
20.4

 
22.6

Goodwill
 
329.4

 
(39.7
)
 
289.7

     Total assets acquired
 
$
946.7

 
$
(0.9
)
 
$
945.8

Current liabilities
 
43.4

 
3.7

 
47.1

Other liabilities
 
104.3

 
(5.4
)
 
98.9

     Total liabilities assumed
 
$
147.7


$
(1.7
)

$
146.0

Net assets acquired
 
$
799.0

 
$
0.8

 
$
799.8

The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. Of the $289.7 million recorded as goodwill, none is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected as a result of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. The trademark has an indefinite life based on the expected use of the asset and the regulatory and economic environment within which it is being used. The trademark represents a highly respected brand with positive connotations and we intend to cultivate and protect the use of this brand. Goodwill and indefinite-lived trademarks are not amortized but are reviewed annually for impairment or more frequently if indicators of impairment exist. Buildings and equipment will be depreciated over a period of 2 years to 30 years. Pro-forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of Cheddar’s Scratch Kitchen on our consolidated financial statements.
On August 28, 2017, we completed the acquisition of 11 Cheddar's Scratch Kitchen restaurants and certain assets and liabilities from C&P Restaurant Company, LLC, an existing franchisee. The acquisition was funded with cash on hand for $39.6 million in total consideration, of which $22.5 million was allocated to reacquired franchise rights. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition. The assets and liabilities of these restaurants were recorded at their respective fair values as of the date of acquisition. We are in the process of confirming, through internal studies and third-party valuations, the fair value of these assets and liabilities. When the valuation process is completed, adjustments to goodwill may result. The excess purchase price over the aggregate fair value of net assets acquired of $11.1 million was allocated to goodwill and is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected as a result of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. Pro-forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
As a result of the integration efforts for these acquisitions, we incurred expenses of approximately $4.2 million and $10.6 million during the quarter and six months ended November 26, 2017, respectively, which are included in general and administrative expenses in our consolidated statements of earnings.

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


Note 3.Discontinued Operations and Assets Held for Sale

Discontinued Operations
Losses from discontinued operations, net of taxes in our accompanying consolidated statements of earnings is primarily related to the run-off of retained rights and obligations from the Red Lobster disposition and is comprised of the following:
 
Three Months Ended
 
Six Months Ended
(in millions)
November 26, 2017
 
November 27, 2016
 
November 26, 2017
 
November 27, 2016
Costs and expenses:
 
 
 
 
 
 
 
Restaurant and marketing expenses
$
—

 
$
(0.2
)
 
$
(0.3
)
 
$
—

Other income and expenses
6.4

 
1.0

 
10.0

 
2.4

Losses before income taxes
(6.4
)
 
(0.8
)
 
(9.7
)
 
(2.4
)
Income tax benefit
(2.5
)
 
(0.6
)
 
(3.5
)
 
(1.3
)
Losses from discontinued operations, net of tax
$
(3.9
)
 
$
(0.2
)
 
$
(6.2
)
 
$
(1.1
)

Assets Held For Sale
Assets classified as held for sale on our accompanying consolidated balance sheets as of November 26, 2017 and May 28, 2017, primarily related to excess land parcels adjacent to our corporate headquarters with carrying amounts of $11.1 million and $13.2 million, respectively.
Note 4.Supplemental Cash Flow Information
Cash paid for interest and income taxes are as follows:
 
Six Months Ended
(in millions)
 
November 26, 2017
 
November 27, 2016
Interest paid, net of amounts capitalized
 
$
30.2

 
$
18.6

Income taxes paid, net of refunds
 
39.0

 
57.2

Non-cash investing and financing activities are as follows:
 
Six Months Ended
(in millions)
 
November 26, 2017
 
November 27, 2016
Increase in land, buildings and equipment through accrued purchases
 
$
44.3

 
$
26.1

Note 5.Income Taxes

The effective income tax rate for continuing operations for the quarter ended November 26, 2017 was 21.9 percent compared to an effective income tax rate of 25.5 percent for the quarter ended November 27, 2016. The effective income tax rate for continuing operations for the six months ended November 26, 2017 was 23.1 percent compared to an effective income tax rate of 26.2 percent for the six months ended November 27, 2016. The decrease in the effective income tax rate for the quarter and six months ended November 26, 2017 was primarily related to the tax benefit from the favorable resolution of prior-year tax matters.
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.
H.R.1, originally known as the Tax Cuts and Jobs Act was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate, which will have a material favorable impact on our effective income tax rate going forward. Additionally, since our deferred tax balances are calculated based on the tax rates in effect during the period, a change in federal corporate income tax rates is recorded as a component of the income tax provision for the period in

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

which the law is enacted to change current or future tax rates. Therefore, this reduction in the corporate federal income tax rate will result in a material non-cash adjustment of our deferred tax balances and a corresponding credit to income tax expense in fiscal 2018.
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
 
Six Months Ended
(in millions)
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Anti-dilutive stock-based compensation awards
 
0.4

 
0.9

 
0.3

 
0.7


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

Note 7. Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Yard House, The Capital Grille, 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 Cheddar's Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze restaurants in the U.S and results from our franchise operations. For periods prior to fiscal 2018, this segment also included results from our consumer-packaged goods sales. Beginning with the first quarter of fiscal 2018, the results from consumer-packaged goods are included in net sales of the associated brand, primarily Olive Garden.
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 26, 2017
 
Sales
 
$
951.6

 
$
387.7

 
$
140.6

 
$
401.6

 
$
—

 
$
1,881.5

Restaurant and marketing expenses
 
784.0

 
327.2

 
113.5

 
350.2

 
—

 
1,574.9

Segment profit
 
$
167.6

 
$
60.5

 
$
27.1

 
$
51.4

 
$
—

 
$
306.6

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
33.4

 
$
16.4

 
$
7.8

 
$
21.2

 
$
—

 
$
78.8

Impairments and disposal of assets, net
 
—

 
—

 
—

 
—

 
—

 
—

(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



15
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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 six months ended November 26, 2017
 
Sales
 
$
1,941.4

 
$
792.1

 
$
262.8

 
$
821.3

 
$
—

 
$
3,817.6

Restaurant and marketing expenses
 
1,574.7

 
668.1

 
216.4

 
704.0

 
—

 
3,163.2

Segment profit
 
$
366.7

 
$
124.0

 
$
46.4

 
$
117.3

 
$
—

 
$
654.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
65.5

 
$
32.9

 
$
15.6

 
$
40.9

 
$
—

 
$
154.9

Impairments and disposal of assets, net
 
—

 
—

 
—

 
—

 
(0.8
)
 
(0.8
)
Purchases of land, buildings and equipment
 
89.2

 
36.4

 
13.3

 
54.7

 
4.1

 
197.7

(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


Reconciliation of segment profit to earnings from continuing operations before income taxes:
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 26, 2017
 
November 27, 2016
 
November 26, 2017
 
November 27, 2016
Segment profit
 
$
306.6

 
$
263.9

 
$
654.4

 
$
571.9

Less general and administrative expenses
 
(98.9
)
 
(79.5
)
 
(196.9
)
 
(167.2
)
Less depreciation and amortization
 
(78.8
)
 
(67.8
)
 
(154.9
)
 
(134.6
)
Less impairments and disposal of assets, net
 
—

 
(0.1
)
 
0.8

 
7.7

Less interest, net
 
(15.5
)
 
(9.5
)
 
(30.5
)
 
(19.4
)
Earnings before income taxes
 
$
113.4

 
$
107.0

 
$
272.9

 
$
258.4

Note 8. 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 26, 2017
 
November 27, 2016
 
November 26, 2017
 
November 27, 2016
Disposal gains
 
$
—

 
$
(1.2
)
 
$
(0.8
)
 
$
(9.0
)
Other
 
—

 
1.3

 
—

 
1.3

Impairments and disposal of assets, net
 
$
—

 
$
0.1

 
$
(0.8
)
 
$
(7.7
)
Disposal gains for the six months ended November 26, 2017 were primarily related to the sale of excess land parcels. For the quarter and six months ended November 27, 2016, disposal gains were primarily related to the sale of restaurant properties, favorable lease terminations and the sale of excess land parcels.
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.

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

Note 9.Stockholders' Equity

Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarters ended November 26, 2017 and November 27, 2016 are as follows:
(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Marketable Securities
 
Unrealized Gains (Losses) on Derivatives
 
Benefit Plan Funding Position
 
Accumulated Other Comprehensive Income (Loss)
Balance at August 27, 2017
 
$
(1.2
)
 
$
0.1

 
$
5.6

 
$
(70.6
)
 
$
(66.1
)
Gain (loss)
 
(0.2
)
 
—

 
(1.8
)
 
—

 
(2.0
)
Reclassification realized in net earnings
 
—

 
(0.1
)
 
—

 
—

 
(0.1
)
Balance at November 26, 2017
 
$
(1.4
)
 
$
—

 
$
3.8

 
$
(70.6
)
 
$
(68.2
)
 
 
 
 
 
 
 
 
 
 
 
Balance 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
)

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended November 26, 2017 and November 27, 2016 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 28, 2017
 
$
(0.7
)
 
$
0.1

 
$
8.2

 
$
(70.5
)
 
$
(62.9
)
Gain (loss)
 
(0.7
)
 
—

 
(4.6
)
 
—

 
(5.3
)
Reclassification realized in net earnings
 
—

 
(0.1
)
 
0.2

 
(0.1
)
 
—

Balance at November 26, 2017
 
$
(1.4
)
 
$
—

 
$
3.8

 
$
(70.6
)
 
$
(68.2
)
 
 
 
 
 
 
 
 
 
 
 
Balance 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
)



17
Table of Contents
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 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Derivatives
 
 
 
 
 
 
 
 
 
Equity contracts
(1)
 
$
—

 
$
—

 
$
(0.2
)
 
$
(1.4
)
Total before tax
 
 
$
—

 
$
—

 
$
(0.2
)
 
$
(1.4
)
Tax benefit
 
 
—

 
—

 
—

 
—

Net of tax
 
 
$
—

 
$
—

 
$
(0.2
)
 
$
(1.4
)
 
 
 
 
 
 
 
 
 
 
Benefit plan funding position
 
 
 
 
 
 
 
 
 
Recognized net actuarial loss - pension/postretirement plans
(2)
 
$
(0.7
)
 
$
(0.8
)
 
$
(1.4
)
 
$
(1.6
)
Recognized net actuarial gain - other plans
(3)
 
0.7

 
0.5

 
1.5

 
1.1

Total before tax
 
 
$
—

 
$
(0.3
)
 
$
0.1

 
$
(0.5
)
Tax benefit
 
 
—

 
0.1

 
—

 
0.2

Net of tax
 
 
$
—

 
$
(0.2
)
 
$
0.1

 
$
(0.3
)

(1)
Primarily included in restaurant labor costs and general and administrative expenses. See Note 12 for additional details.
(2)
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 10 for additional details.
(3)
Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses.
Note 10. Retirement Plans
Components of net periodic benefit cost are as follows:
 
 
Defined Benefit Plans
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Interest cost
 
$
2.2

 
$
2.6

 
$
4.3

 
$
5.1

Expected return on plan assets
 
(3.0
)
 
(4.1
)
 
(6.0
)
 
(8.0
)
Recognized net actuarial loss
 
0.7

 
0.8

 
1.4

 
1.6

Net periodic benefit (credit) cost
 
$
(0.1
)
 
$
(0.7
)
 
$
(0.3
)
 
$
(1.3
)
 

18
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
 
Postretirement Benefit Plan
 
 
Three Months Ended
 
Six Months Ended
(in millions)
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Service cost
 
$
0.1

 
$
0.1

 
$
0.1

 
$
0.1

Interest cost
 
0.1

 
0.2

 
0.3

 
0.4

Amortization of unrecognized prior service credit
 
(1.2
)
 
(1.2
)
 
(2.4
)
 
(2.4
)
Recognized net actuarial loss
 
0.5

 
0.4

 
0.9

 
0.8

Net periodic benefit (credit) cost
 
$
(0.5
)
 
$
(0.5
)
 
$
(1.1
)
 
$
(1.1
)
Note 11. 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) 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 26, 2017
 
November 27, 2016
Weighted-average fair value
$
14.63

 
$
9.08

Dividend yield
3.0
%
 
3.5
%
Expected volatility of stock
23.5
%
 
24.3
%
Risk-free interest rate
2.0
%
 
1.4
%
Expected option life (in years)
6.4

 
6.5

Weighted-average exercise price per share
$
85.83

 
$
59.70

The following table presents a summary of our stock-based compensation activity for the six months ended November 26, 2017: 
(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
 
4.01

 
0.19

 
1.35

 
0.09

 
0.33

Awards granted
 
0.35

 
0.09

 
0.23

 
—

 
0.24

Awards exercised/vested
 
(0.35
)
 
(0.03
)
 
(0.29
)
 
(0.09
)
 
—

Awards forfeited
 
(0.02
)
 
—

 
(0.04
)
 
—

 
(0.01
)
Outstanding end of period
 
3.99

 
0.25

 
1.25

 
—

 
0.56


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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 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Stock options
 
$
1.2

 
$
1.6

 
$
2.4

 
$
3.1

Restricted stock/restricted stock units
 
1.1

 
0.3

 
1.8

 
0.7

Darden stock units
 
3.7

 
6.7

 
7.5

 
9.3

Cash-settled performance stock units
 
—

 
1.3

 
—

 
1.3

Equity-settled performance stock units
 
3.0

 
1.3

 
5.1

 
2.4

Employee stock purchase plan
 
0.3

 
0.3

 
0.6

 
0.6

Director compensation program/other
 
0.4

 
0.3

 
0.7

 
0.6

Total stock-based compensation expense
 
$
9.7

 
$
11.8

 
$
18.1

 
$
18.0

Note 12. 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 26, 2017, 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 periodically enter into commodity futures, swaps and option contracts (collectively, commodity contracts) to reduce the risk of variability in cash flows associated with fluctuations in the price we pay for commodities, such as natural gas and diesel fuel. For certain of our commodity purchases, changes in the price we pay for these commodities are highly correlated with changes in the market price of these commodities. For these commodity purchases, we designate commodity contracts as cash flow hedging instruments. For the remaining commodity purchases, changes in the price we pay for these commodities are not highly correlated with changes in the market price, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these commodity purchases, we utilize these commodity contracts as economic hedges. Our commodity contracts currently extend through May 2018.
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 three and five years and currently extend through July 2022. 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

20
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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 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.
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)
 
November 26, 2017
 
November 26,
2017
 
May 28,
2017
 
November 26,
2017
 
May 28,
2017
Equity forwards:
 
 
 
 
 
 
 
 
 
 
 
 
 
Designated
0.3
 
$67.47
 
$
22.9

 
$
—

 
$
—

 
$
0.6

 
$
0.1

Not designated
0.5
 
$56.43
 
$
28.1

 
—

 
—

 
0.9

 
0.3

Total equity forwards
$
—

 
$
—

 
$
1.5

 
$
0.4

Commodity contracts
N/A
 
N/A
 
$
8.2

 
$
0.7

 
$
—

 
$
0.4

 
$
—

Total derivative contracts
 
$
0.7

 
$
—

 
$
1.9

 
$
0.4

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

The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:
 
 
Amount of Gain (Loss) Recognized in AOCI (effective portion)
 
Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion)
 
Amount of Gain (Loss) Recognized in Earnings (ineffective portion)
 
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
(in millions)
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Equity (1)
 
$
(2.0
)
 
$
5.3

 
$
—

 
$
—

 
$
0.1

 
$
0.1

Commodity (2)
 
0.3

 
—

 
—

 
—

 
—

 
—

Total
 
$
(1.7
)
 
$
5.3

 
$
—

 
$
—

 
$
0.1

 
$
0.1


 
 
Amount of Gain (Loss) Recognized in AOCI (effective portion)
 
Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion)
 
Amount of Gain (Loss) Recognized in Earnings (ineffective portion)
 
 
Six Months Ended
 
Six Months Ended
 
Six Months Ended
(in millions)
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
 
November 26,
2017
 
November 27,
2016
Equity (1)
 
$
(4.8
)
 
$
1.4

 
$
(0.2
)
 
$
(1.4
)
 
$
0.1

 
$
0.3

Commodity (2)
 
0.3

 
—

 
—

 
—

 
—

 
—

Total
 
$
(4.5
)
 
$
1.4

 
$
(0.2
)
 
$
(1.4
)
 
$
0.1

 
$
0.3


(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.
(2)
Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is food and beverage costs and restaurant expenses.

21
Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
 
 
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 26, 2017
 
November 27, 2016
 
November 26, 2017
 
November 27, 2016
Restaurant labor expenses
 
$
(0.1
)
 
$
2.6

 
$