Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2019, which ended May 26, 2019, consisted of 52 weeks and fiscal 2018, which ended May 27, 2018, consisted of 52 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 26, 2019, we operated 1,785 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze® and Eddie V’s Prime Seafood® trademarks. We own and operate all of our restaurants in the United States and Canada, except for 3 joint venture restaurants managed by us and 37 franchised restaurants. We also have 33 franchised restaurants in operation located in Latin America and the Middle East. All intercompany balances and transactions have been eliminated in consolidation.

We believe that capable operators of strong, multi-unit brands have the opportunity to increase their share of the restaurant industry’s full-service segment. Generally, the restaurant industry is considered to be comprised of three segments: quick service, fast casual, and full service. All of our restaurants fall within the full-service segment, which is highly fragmented and includes many independent operators and small chains. We believe we have strong brands and that the breadth and depth of our experience and expertise sets us apart in the full-service segment of the restaurant industry. This collective capability is the product of investments over many years in areas that are critical to success in our business, including restaurant operations excellence, brand management excellence, supply chain, talent management and information technology, among other things.

With a focus on growing same-restaurant sales, we’ve implemented a “Back-to-Basics” approach rooted in strong operating fundamentals. We’re focused on improving culinary innovation and execution inside each of our brands, delivering attentive service to each and every one of our guests, and creating an inviting and engaging atmosphere inside our restaurants. We support these priorities with smart and relevant integrated marketing programs that resonate with our guests. By delivering on these operational and brand-building imperatives, we expect to increase our market share through new restaurant and same-restaurant sales growth and deliver best-in-class profitability.

The Darden support structure enables our brands to achieve their ultimate potential through: (1) driving advantages in supply chain and general and administrative support; (2) applying insights collected from our significant guest and transactional databases to enhance guest relationships and identify new opportunities to drive sales growth; (3) relentlessly driving operating efficiencies and continuous improvement, operating with a sense of urgency and inspiring a performance-driven culture; and (4) our commitment to rigorous strategic planning.

We seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate our operations and assess our financial performance, we monitor a number of operating measures, with a special focus on two key factors:

•	Same-restaurant sales – which is a year-over-year 52-week comparison of each period’s sales volumes for restaurants open at least 16 months; and

•	Segment profit – which is restaurant sales, less food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (sometimes referred to as restaurant-level earnings).

Increasing same-restaurant sales can improve segment profit because these incremental sales provide better leverage of our fixed and semi-fixed restaurant-level costs. A restaurant brand can generate same-restaurant sales increases through increases in guest traffic, increases in the average guest check, or a combination of the two. The average guest check can be impacted by menu price changes and by the mix of menu items sold. For each restaurant brand, we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies. We focus on balancing our pricing and product offerings with other initiatives to produce sustainable same-restaurant sales growth. We compute same-restaurant sales using restaurants open at least 16 months because this period is generally required for new restaurant sales levels to normalize. Sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation due to operating or integration inefficiencies. Our sales and expenses can be impacted significantly by the number and timing of new restaurant openings and closings, and relocations and remodeling of existing restaurants. Pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods.

Fiscal 2019 Financial Highlights

Our sales from continuing operations were $8.51 billion in fiscal 2019 compared to $8.08 billion in fiscal 2018. The 5.3 percent increase in sales from continuing operations was primarily driven by revenue from the addition of 39 net new company-owned restaurants and a combined Darden same-restaurant sales increase of 2.5 percent.

Net earnings from continuing operations for fiscal 2019 were $718.6 million ($5.73 per diluted share) compared with net earnings from continuing operations for fiscal 2018 of $603.8 million ($4.79 per diluted share). Net earnings from continuing operations for fiscal 2019 increased 19.0 percent and diluted net earnings per share from continuing operations increased 19.6 percent compared with fiscal 2018.

Our net loss from discontinued operations was $5.2 million ($0.04 per diluted share) for fiscal 2019, compared with a net loss from discontinued operations of $7.8 million ($0.06 per diluted share) for fiscal 2018. When combined with results from continuing operations, our diluted net earnings per share were $5.69 and $4.73 for fiscal 2019 and 2018, respectively.

Outlook

We expect fiscal 2020 sales from continuing operations to increase between 5.3 percent and 6.3 percent, driven by the impact of the 53rd week in fiscal 2020, combined Darden same-restaurant sales growth of 1.0 percent to 2.0 percent and approximately 50 new restaurants. In fiscal 2020, we expect our annual effective tax rate to be between 10.0 percent and 11.0 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $450.0 million and $500.0 million.

In June 2019, we announced a quarterly dividend of $0.88 per share, payable on August 1, 2019. Based on the $0.88 quarterly dividend declaration, our expected annual dividend is $3.52 per share, which reflects an increase of 17.3 percent compared to our fiscal 2019 annual dividend. Dividends are subject to the approval of our Board of Directors and, accordingly, the timing and amount of our dividends are subject to change.

RESULTS OF OPERATIONS FOR FISCAL 2019 AND 2018

To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 26, 2019 and May 27, 2018:

	Fiscal Year Ended								Percent Change
(in millions)	May 26, 2019				May 27, 2018				2019 vs 2018
Sales	$	8,510.4			$	8,080.1			5.3	%
Costs and expenses:
Food and beverage	2,412.5				2,303.1				4.8	%
Restaurant labor	2,771.1				2,614.5				6.0	%
Restaurant expenses	1,477.8				1,417.1				4.3	%
Marketing expenses	255.3				252.3				1.2	%
General and administrative expenses	405.5				409.8				(1.0	)%
Depreciation and amortization	336.7				313.1				7.5	%
Impairments and disposal of assets, net	19.0				3.4				NM
Total operating costs and expenses	$	7,677.9			$	7,313.3			5.0	%
Operating income	832.5				766.8				8.6	%
Interest, net	50.2				161.1				(68.8	)%
Earnings before income taxes	782.3				605.7				29.2	%
Income tax expense (1)	63.7				1.9				NM
Earnings from continuing operations	$	718.6			$	603.8			19.0	%
Losses from discontinued operations, net of tax	(5.2		)		(7.8		)		NM
Net earnings	$	713.4			$	596.0			19.7	%
(1) Effective tax rate	8.1		%		0.3		%
NM- Not meaningful. Percentage increases and decreases over 100 percent were not considered meaningful.

The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2018:

		May 26, 2019			May 27, 2018
Olive Garden (1)		866			856
LongHorn Steakhouse		514			504
Cheddar’s Scratch Kitchen (2)		161			156
Yard House		79			72
The Capital Grille (3)		58			58
Seasons 52		44			42
Bahama Breeze		42			39
Eddie V’s		21			19
Total		1,785			1,746

(1)	Includes six locations in Canada.

(2)	Includes the 11 franchised restaurants acquired on August 28, 2017.

(3)	Includes one The Capital Burger restaurant.

SALES

The following table presents our company-owned restaurant sales, U.S. same-restaurant sales (SRS) and average annual sales per restaurant by brand for the periods indicated:

	Total Sales														Average Annual Sales per Restaurant (2)
	Fiscal Year Ended								Percent Change						Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				SRS (1)			May 26, 2019				May 27, 2018
Olive Garden	$	4,287.3			$	4,082.5			5.0	%		3.9	%		$	5.0			$	4.8
LongHorn Steakhouse	$	1,810.6			$	1,703.2			6.3	%		3.3	%		$	3.6			$	3.4
Cheddar’s Scratch Kitchen	$	664.0			$	652.7			1.7	%		(3.4	)%		$	4.2			$	4.3
Yard House	$	609.5			$	571.8			6.6	%		(1.2	)%		$	8.1			$	8.3
The Capital Grille	$	461.4			$	440.7			4.7	%		3.7	%		$	8.0			$	7.7
Seasons 52	$	253.2			$	249.6			1.4	%		(1.5	)%		$	5.9			$	6.1
Bahama Breeze	$	246.5			$	236.8			4.1	%		(1.0	)%		$	6.0			$	6.2
Eddie V’s	$	144.5			$	133.7			8.1	%		2.8	%		$	7.4			$	7.1

(1)	Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants open at least 16 months.

(2)	Average annual sales are calculated as net sales divided by total restaurant operating weeks multiplied by 52 weeks.

Olive Garden’s sales increase for fiscal 2019 was primarily driven by a U.S. same-restaurant sales increase combined with revenue from new restaurants. The increase in U.S. same-restaurant sales in fiscal 2019 resulted from a 3.8 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts.

LongHorn Steakhouse’s sales increase for fiscal 2019 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2019 resulted from a 3.2 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts.

In total, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s generated sales in fiscal 2019 that were 4.1 percent above fiscal 2018. The sales increase for fiscal 2019 was primarily driven by the incremental sales from new restaurants, as well as same-restaurant sales increases at The Capital Grille and Eddie V’s in fiscal 2019, partially offset by same-restaurant sales decreases at Cheddar’s Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze.

COSTS AND EXPENSES

The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 26, 2019 and May 27, 2018.

	Fiscal Year Ended
	May 26, 2019			May 27, 2018
Sales	100.0	%		100.0	%
Costs and expenses:
Food and beverage	28.3			28.5
Restaurant labor	32.6			32.4
Restaurant expenses	17.4			17.5
Marketing expenses	3.0			3.1
General and administrative expenses	4.8			5.1
Depreciation and amortization	4.0			3.9
Impairments and disposal of assets, net	0.2			—
Total operating costs and expenses	90.2	%		90.5	%
Operating income	9.8			9.5
Interest, net	0.6			2.0
Earnings before income taxes	9.2			7.5
Income tax expense	0.7			—
Earnings from continuing operations	8.4			7.5
Earnings (loss) from discontinued operations, net of taxes	(0.1	)		(0.1	)
Net earnings	8.4	%		7.4	%

Total operating costs and expenses from continuing operations were $7.68 billion in fiscal 2019 and $7.31 billion in fiscal 2018.

Fiscal 2019 Compared to Fiscal 2018*:*

•	Food and beverage costs decreased as a percent of sales primarily due to a 0.5% impact from pricing and a 0.3% impact related to cost savings initiatives, partially offset by a 0.7% impact from unfavorable menu mix and inflation.

•	Restaurant labor costs increased as a percent of sales primarily due to a 1.2% impact from inflation and a 0.2% impact related to workforce reinvestment costs, partially offset by a 0.6% impact from pricing leverage and a 0.7% impact from sales leverage and improved productivity.

•	General and administrative expenses decreased as a percent of sales primarily driven by a 0.2% impact due to expenses incurred in fiscal 2018 related to the integration of Cheddar’s Scratch Kitchen and a 0.3% impact related to sales leverage.

•	Impairments and disposal of assets, net increased as a percent of sales due to fiscal 2019 restaurant impairments in excess of fiscal 2018 restaurant impairments.

INTEREST EXPENSE

Net interest expense decreased as a percent of sales in fiscal 2019 primarily due to debt retirement costs of $102.2 million incurred in fiscal 2018 associated with the retirement of $310.9 million aggregate principal amount of long-term debt.

INCOME TAXES

The effective income tax rates for fiscal 2019 and 2018 for continuing operations were 8.1 percent and 0.3 percent, respectively. The increase in the effective income tax rate for fiscal 2019 was primarily due to the favorable impact in fiscal 2018 of the Tax Cuts and Jobs Act (Tax Act), which included a $79.3 million one-time adjustment of our net deferred tax liabilities and a corresponding income tax benefit reflected in our consolidated statements of earnings. The impact of the deferred tax adjustment was partially offset by a benefit in fiscal 2019 due to the lower federal corporate tax rate of 21.0 percent compared with the 29.4 percent blended federal corporate tax rate in effect for fiscal 2018.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net earnings from continuing operations for fiscal 2019 were $718.6 million ($5.73 per diluted share) compared with net earnings from continuing operations for fiscal 2018 of $603.8 million ($4.79 per diluted share).

Net earnings from continuing operations for fiscal 2019 increased 19.0 percent and diluted net earnings per share from continuing operations increased 19.6 percent compared with fiscal 2018. Our diluted per share results from continuing operations were positively impacted by the Tax Act by approximately $0.52 in fiscal 2019 due to the lower federal corporate tax rate of 21.0 percent as compared with the 29.4 percent blended federal corporate tax rate in effect for fiscal 2018. Our diluted per share results from continuing operations for fiscal 2018 were positively impacted by the Tax Act by approximately $0.62 due to a net benefit from deferred tax revaluation. Our diluted per share results from continuing operations for fiscal 2018 were adversely impacted by approximately $0.54 related to debt retirement costs and approximately $0.10 related to costs associated with the integration of Cheddar’s Scratch Kitchen.

LOSS FROM DISCONTINUED OPERATIONS

On an after-tax basis, results from discontinued operations for fiscal 2019 were a net loss of $5.2 million ($0.04 per diluted share) compared with a net loss for fiscal 2018 of $7.8 million ($0.06 per diluted share).

SEGMENT RESULTS

We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s in the U.S. and Canada as operating segments. 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. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business. See Note 6 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.

Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated:

		Fiscal Year Ended				Change
Segment		May 26, 2019		May 27, 2018		2019 vs 2018
Olive Garden		20.6%		20.1%		50		BP
LongHorn Steakhouse		17.9%		17.7%		20		BP
Fine Dining		21.1%		20.4%		70		BP
Other Business		14.3%		14.8%		(50	)	BP

The increase in the Olive Garden, LongHorn Steakhouse and Fine Dining segment profit margins for fiscal 2019 was driven primarily by leveraging positive same-restaurant sales. The decrease in Other Business’ segment profit margin for fiscal 2019 was driven primarily by margin impact from negative same-restaurant sales and workforce investments. Other Business’ segment profit margin was also negatively impacted by the adoption of new revenue recognition guidance which requires franchisee purchases of our inventory through our distribution network to be recognized as revenue with a corresponding increase to food and beverage expense.

RESULTS OF OPERATIONS FOR FISCAL 2018 COMPARED TO 2017

For a comparison of our results of operations for the fiscal years ended May 27, 2018 and May 28, 2017, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 27, 2018, filed with the SEC on July 20, 2018.

SEASONALITY

Our sales volumes fluctuate seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

IMPACT OF INFLATION

We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We do not believe inflation had a significant overall effect on our annual results of operations during fiscal 2019 or 2018.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Leases

We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably assured to exercise. Our judgment in determining the appropriate expected term for each lease affects our evaluation of:

•	The classification and accounting for leases as capital versus operating;

•	The rent holidays and escalation in payments that are included in the calculation of straight-line rent; and

•	The term over which leasehold improvements for each restaurant facility are amortized.

These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different expected lease terms were used.

Valuation of Long-Lived Assets

Land, buildings and equipment and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments we make related to the expected useful lives of long-lived assets, definitions of lease terms and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, changes in usage or operating performance, desirability of the restaurant sites and other factors, such as our ability to sell our assets held for sale. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to realize an impairment loss. Based on a review of operating results for each of our restaurants, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.

Valuation and Recoverability of Goodwill and Trademarks

Goodwill and trademarks are not subject to amortization and have been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist. Each reporting unit’s fair value is compared to its carrying value.

We estimate fair value of each reporting unit using the best information available, including market information (also referred to as the market approach) and discounted cash flow projections (also referred to as the income approach). A market approach estimates fair value by applying cash flow and sales multiples to the reporting unit’s operating performance. The

multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The income approach uses a reporting unit’s projection of estimated operating results and cash flows that are discounted using a weighted-average cost of capital that reflects current market conditions. We recognize an impairment loss when the fair value of the reporting unit is less than its carrying value.

We estimate the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from our annual long-range plan; assumed royalty rates that could be payable if we did not own the trademarks; and a discount rate. We recognize an impairment loss when the estimated fair value of the trademark is less than its carrying value.

We performed our annual impairment test of our goodwill and trademarks as of the first day of our fiscal 2019 fourth quarter. As of the beginning of our fiscal fourth quarter, we had eight reporting units, six of which had goodwill and seven of which had trademarks. As a result of the impairment tests, no indicators of impairment were identified and no additional indicators of impairment were identified through the end of our fourth fiscal quarter that would require us to test further for impairment. However, changes in circumstances existing at the measurement date or at other times in the future, such as declines in our market capitalization (reflected in our stock price) as well as in the market capitalization of other companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes in the operating environment for the restaurant industry could result in an impairment loss of all or a portion of our goodwill or trademarks. The fair value of each reporting unit exceeded its carrying value by at least 40 percent and the fair value of each reporting unit’s trademark exceeded its carrying value by at least 20 percent.

If our annual test resulted in an impairment of our goodwill or trademarks, our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our credit agreement would increase. A leverage ratio exceeding the maximum permitted under our credit agreement would be a default under our credit agreement. At May 26, 2019, a write-down of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.28 billion would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 12 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions on a prospective basis. Changing our breakage-rate estimates by 50 basis points would have resulted in an adjustment in our breakage income of approximately $3.6 million for fiscal 2019.

Income Taxes

We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.

Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 13 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $27.0 million balance of unrecognized tax benefits at May 26, 2019, includes $11.6 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The $11.6 million relates to items that would impact our effective income tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures for new restaurants and to remodel and maintain existing restaurants, to pay dividends to our shareholders and to repurchase shares of our common stock. Since substantially all of our sales are for cash and cash equivalents, and accounts

payable are generally paid in 5 to 60 days, we are able to carry current liabilities in excess of current assets. In addition to cash flows from operations, we use a combination of long-term and short-term borrowings to fund our capital needs.

We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:

•	Moody’s Investors Service “Baa2”;

•	Standard & Poor’s “BBB”; and

•	Fitch “BBB”.

Our commercial paper has ratings of:

•	Moody’s Investors Service “P-2”;

•	Standard & Poor’s “A-2”; and

•	Fitch “F-2”.

These ratings are as of the date of the filing of this report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

We maintain a $750.0 million revolving credit agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. As of May 26, 2019, we were in compliance with all covenants under the Revolving Credit Agreement.

The Revolving Credit Agreement matures on October 27, 2022, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Eurocurrency Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.000 percent for LIBOR loans and 0.000 percent for base rate loans. As of May 26, 2019, we had no outstanding balances under the Revolving Credit Agreement.

At May 26, 2019, our long-term debt consisted principally of:

•	$500.0 million of unsecured 3.850 percent senior notes due in May 2027;

•	$96.3 million of unsecured 6.000 percent senior notes due in August 2035;

•	$42.8 million of unsecured 6.800 percent senior notes due in October 2037; and

•	$300.0 million of unsecured 4.550 percent senior notes due in February 2048.

The interest rate on our $42.8 million 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 26, 2019, no such adjustments are made to this rate.

Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may issue unsecured debt securities from time to time in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.

From time to time, we may repurchase our outstanding debt in privately negotiated transactions. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors.

From time to time, we enter into interest rate derivative instruments to manage interest rate risk inherent in our operations. See Note 8 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).

A summary of our contractual obligations and commercial commitments at May 26, 2019, is as follows:

(in millions)		Payments Due by Period
Contractual Obligations		Total				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Long-term debt (1)		$	1,638.0			$	41.6			$	83.2			$	83.2			$	1,430.0
Leases (2)		3,367.7				394.0				724.4				605.9				1,643.4
Purchase obligations (3)		491.2				465.9				22.8				2.5				—
Benefit obligations (4)		330.3				25.0				55.1				61.9				188.3
Unrecognized income tax benefits (5)		28.8				12.6				3.6				12.6				—
Total contractual obligations		$	5,856.0			$	939.1			$	889.1			$	766.1			$	3,261.7
(in millions)		Amount of Commitment Expiration per Period
Other Commercial Commitments		Total Amounts Committed				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Standby letters of credit (6)		$	97.5			$	97.5			$	—			$	—			$	—
Guarantees (7)		151.6				40.2				65.0				33.3				13.1
Total commercial commitments		$	249.1			$	137.7			$	65.0			$	33.3			$	13.1

(1)	Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $11.4 million.

(2)	Includes all arrangements accounted for as operating, capital and financing leases. Includes imputed interest of $99.7 million over the life of financing lease obligations and imputed interest of $41.6 million over the life of capital lease obligations.

(3)	Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous commitments.

(4)	Includes expected contributions associated with our defined benefit plans and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2029.

(5)	Includes interest on unrecognized income tax benefits of $1.8 million, $1.0 million of which relates to contingencies expected to be resolved within one year.

(6)	Includes letters of credit for $75.9 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $21.6 million of surety bonds related to other payments.

(7)	Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster. We are not aware of any non-performance under these arrangements that would result in our having to perform in accordance with the terms of the guarantees.

Our adjusted debt to adjusted total capital ratio (which includes 6.00 times the combined total annual minimum rent for operating leases and annual minimum lease payments for financing leases on a consolidated basis of $359.5 million and $342.7 million for the fiscal years ended May 26, 2019 and May 27, 2018, respectively, as components of adjusted debt and adjusted total capital) was 58 percent and 60 percent as of May 26, 2019 and May 27, 2018, respectively. We include the lease-debt equivalent and contractual lease guarantees in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period and because it is consistent with the calculation of the covenant under our Revolving Credit Agreement.

Based on these ratios, we believe our financial condition is strong. The composition of our capital structure is shown in the following table:

(in millions, except ratios)		May 26, 2019				May 27, 2018
CAPITAL STRUCTURE
Long-term debt, excluding unamortized discount and issuance costs		$	939.1			$	939.1
Capital lease obligations		84.0				80.5
Total debt		$	1,023.1			$	1,019.6
Stockholders’ equity		2,392.6				2,194.8
Total capital		$	3,415.7			$	3,214.4
CALCULATION OF ADJUSTED CAPITAL
Total debt		$	1,023.1			$	1,019.6
Lease-debt equivalent		2,157.0				2,056.2
Guarantees		151.6				154.0
Adjusted debt		$	3,331.7			$	3,229.8
Stockholders’ equity		2,392.6				2,194.8
Adjusted total capital		$	5,724.3			$	5,424.6
CAPITAL STRUCTURE RATIOS
Debt to total capital ratio		30		%		32		%
Adjusted debt to adjusted total capital ratio		58		%		60		%

Net cash flows provided by operating activities from continuing operations were $1.27 billion and $1.02 billion in fiscal 2019 and 2018, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $718.6 million and $603.8 million in fiscal 2019 and 2018, respectively. Net cash flows provided by operating activities from continuing operations increased in fiscal 2019 primarily due to higher net earnings from continuing operations.

Net cash flows used in investing activities from continuing operations were $462.6 million in fiscal 2019 compared to net cash flows used in investing activities from continuing operations of $451.1 million in fiscal 2018. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $452.0 million in fiscal 2019, compared to $396.0 million in fiscal 2018. For fiscal 2018, net cash used in the acquisition of 11 Cheddar’s Scratch Kitchen restaurants from an existing franchisee was $40.4 million.

Net cash flows used in financing activities from continuing operations were $484.2 million in fiscal 2019, compared to $636.6 million in fiscal 2018. Net cash flows used in financing activities in fiscal 2019 included dividend payments of $370.8 million and share repurchases of $207.5 million, partially offset by proceeds from the exercise of employee stock options and proceeds from financing lease obligations. Net cash flows used in financing activities in fiscal 2018 reflected long-term debt payments of $408.2 million, including repurchase premiums and make-whole provisions, repayments of short-term debt of $960.0 million, dividend payments of $313.5 million and share repurchases of $234.8 million, partially offset by proceeds from the issuance of short-term debt of $960.0 million, proceeds from the issuance of $300.0 million of senior notes and proceeds from the exercise of employee stock options.

Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. We use certain assumptions including, but not limited to, the selection of a discount rate and expected long-term rate of return on plan assets. We set the discount rate assumption annually for each plan at its valuation date to reflect the yield of high-quality fixed-income debt

instruments, with lives that approximate the maturity of the plan benefits. At May 26, 2019, our discount rate was 2.66 percent and 3.95 percent, respectively, for our defined benefit and postretirement benefit plans. The expected long-term rate of return on plan assets is based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Our expected long-term rate of return on plan assets for our defined benefit plans was 4.25 percent for fiscal year 2019 and 5.75 percent for fiscal year 2018. We expect to contribute approximately $0.4 million to our defined benefit pension plans and approximately $1.4 million to our postretirement benefit plan during fiscal 2020. In April 2018, our Benefit Plans Committee approved the termination of our primary non-contributory defined benefit pension plan (the Retirement Income Plan for Darden Restaurants, Inc.). The termination of the plan involves many steps, including filing information with the IRS and the Pension Benefit Guaranty Corporation and obtaining proper approvals. We anticipate the termination process, which culminates in either the settlement or transfer of participant benefits, will be completed in fiscal 2020. The plan termination is expected to result in non-cash pre-tax pension settlement expense in fiscal 2020 of approximately $130.0 million.

We have recognized net losses of $100.4 million (net of tax) and of $4.9 million (net of tax) as components of accumulated other comprehensive income (loss) for the defined benefit plans and postretirement benefit plan, respectively, as of May 26, 2019. These net losses represent changes in the amount of the projected benefit obligation and plan assets resulting from differences in the assumptions used and actual experience.

We believe our defined benefit and postretirement benefit plan assumptions are appropriate based upon the factors discussed above. However, other assumptions could also be reasonably applied that could differ from the assumptions used. These changes in assumptions would not significantly impact our funding requirements.

We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of unsecured debt securities under our shelf registration statement and short-term commercial paper should be sufficient to finance our capital expenditures, debt maturities, dividend payments, stock repurchase program and other operating activities through fiscal 2020.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

FINANCIAL CONDITION

Our total current assets were $892.6 million at May 26, 2019, compared with $553.6 million at May 27, 2018. The increase was primarily due to an increase in cash and cash equivalents driven by cash from operations.

Our total current liabilities were $1.47 billion at May 26, 2019, compared with $1.38 billion at May 27, 2018. The increase was primarily due to an increase in accounts payable.

APPLICATION OF NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.