Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Management Responsibilities	42
Management’s Report on Internal Control over Financial Reporting	42
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting	43
Report of Independent Registered Public Accounting Firm	44
Consolidated Statements of Earnings for the fiscal years ended May 26, 2019, May 27, 2018 and May 28, 2017	45
Consolidated Statements of Comprehensive Income for the fiscal years ended May 26, 2019, May 27, 2018 and May 28, 2017	46
Consolidated Balance Sheets at May 26, 2019 and May 27, 2018	47
Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended May 26, 2019, May 27, 2018 and May 28, 2017	48
Consolidated Statements of Cash Flows for the fiscal years ended May 26, 2019, May 27, 2018 and May 28, 2017	49
Notes to Consolidated Financial Statements	51

REPORT OF MANAGEMENT’S RESPONSIBILITIES

The management of Darden Restaurants, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, using management’s best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements.

Management has established a system of internal controls over financial reporting that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately, in all material respects, in accordance with management’s authorization. Our internal controls provide for appropriate segregation of duties and responsibilities and there are documented policies regarding utilization of our assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. We also maintain a strong audit program that independently evaluates the adequacy of the design and operating effectiveness of these internal controls.

The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal auditors and the independent registered public accounting firm are properly discharging their duties regarding internal control and financial reporting. Management, internal auditors and the independent registered public accounting firm have full and free access to the Audit Committee at any time.

KPMG LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements and the effectiveness of our internal control over financial reporting. Their reports follow.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 26, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Management has concluded that, as of May 26, 2019, the Company’s internal control over financial reporting was effective based on these criteria.

The Company’s independent registered public accounting firm KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which follows.

/s/ Eugene I. Lee, Jr.

Eugene I. Lee, Jr.

President and Chief Executive Officer

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Darden Restaurants, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Darden Restaurants, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of May 26, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 26, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 26, 2019 and May 27, 2018, the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended May 26, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated July 19, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Orlando, Florida

July 19, 2019

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Darden Restaurants, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries (the Company) as of May 26, 2019 and May 27, 2018, the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three‑year period ended May 26, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 26, 2019 and May 27, 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended May 26, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 26, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 19, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 1996.

Orlando, Florida

July 19, 2019

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share data)

	Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Sales	$	8,510.4			$	8,080.1			$	7,170.2
Costs and expenses:
Food and beverage	2,412.5				2,303.1				2,070.3
Restaurant labor	2,771.1				2,614.5				2,265.3
Restaurant expenses	1,477.8				1,417.1				1,265.2
Marketing expenses	255.3				252.3				239.7
General and administrative expenses	405.5				409.8				387.7
Depreciation and amortization	336.7				313.1				272.9
Impairments and disposal of assets, net	19.0				3.4				(8.4		)
Total operating costs and expenses	$	7,677.9			$	7,313.3			$	6,492.7
Operating income	832.5				766.8				677.5
Interest, net	50.2				161.1				40.2
Earnings before income taxes	782.3				605.7				637.3
Income tax expense	63.7				1.9				154.8
Earnings from continuing operations	$	718.6			$	603.8			$	482.5
Losses from discontinued operations, net of tax benefit of $1.8, $4.8 and $4.2, respectively	(5.2		)		(7.8		)		(3.4		)
Net earnings	$	713.4			$	596.0			$	479.1
Basic net earnings per share:
Earnings from continuing operations	$	5.82			$	4.87			$	3.88
Losses from discontinued operations	(0.04		)		(0.06		)		(0.03		)
Net earnings	$	5.78			$	4.81			$	3.85
Diluted net earnings per share:
Earnings from continuing operations	$	5.73			$	4.79			$	3.83
Losses from discontinued operations	(0.04		)		(0.06		)		(0.03		)
Net earnings	$	5.69			$	4.73			$	3.80
Average number of common shares outstanding:
Basic	123.5				124.0				124.3
Diluted	125.4				126.0				126.0

See accompanying notes to consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

	Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Net earnings	$	713.4			$	596.0			$	479.1
Other comprehensive income (loss):
Foreign currency adjustment	0.6				(0.9		)		0.5
Change in fair value of marketable securities, net of taxes of $0.0, $0.0 and $0.0, respectively	—				(0.1		)		—
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $(0.1), $0.0 and $0.5, respectively	5.6				(4.6		)		4.3
Net unamortized gain (loss) arising during period, including amortization of unrecognized net actuarial loss, net of taxes of $(6.4), $(0.7) and $11.9, respectively	(19.2		)		(1.1		)		19.3
Reclassification of tax effect	—				(15.6		)		—
Other comprehensive income (loss)	$	(13.0	)		$	(22.3	)		$	24.1
Total comprehensive income	$	700.4			$	573.7			$	503.2

See accompanying notes to consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions)

	May 26, 2019				May 27, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	457.3			$	146.9
Receivables, net	88.3				83.7
Inventories	207.3				205.3
Prepaid income taxes	41.6				15.9
Prepaid expenses and other current assets	98.1				89.9
Assets held for sale	—				11.9
Total current assets	$	892.6			$	553.6
Land, buildings and equipment, net	2,552.6				2,429.8
Goodwill	1,183.7				1,183.7
Trademarks	950.8				950.8
Other assets	313.1				351.7
Total assets	$	5,892.8			$	5,469.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	332.6			$	277.0
Accrued payroll	175.3				177.5
Accrued income taxes	11.6				—
Other accrued taxes	54.2				56.6
Unearned revenues	428.5				415.8
Other current liabilities	471.9				457.6
Total current liabilities	$	1,474.1			$	1,384.5
Long-term debt	927.7				926.5
Deferred income taxes	156.9				114.0
Deferred rent	354.4				318.0
Other liabilities	587.1				531.8
Total liabilities	$	3,500.2			$	3,274.8
Stockholders’ equity:
Common stock and surplus, no par value. Authorized 500.0 shares; issued 123.1 and 124.8 shares, respectively; outstanding 123.1 and 123.5 shares, respectively	1,685.0				1,631.9
Preferred stock, no par value. Authorized 25.0 shares; none issued and outstanding	—				—
Retained earnings	806.6				657.6
Treasury stock, 0.0 and 1.3 shares, at cost, respectively	—				(7.8		)
Accumulated other comprehensive income (loss)	(98.2		)		(85.2		)
Unearned compensation	(0.8		)		(1.7		)
Total stockholders’ equity	$	2,392.6			$	2,194.8
Total liabilities and stockholders’ equity	$	5,892.8			$	5,469.6

See accompanying notes to consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except per share data)

	Common Stock And Surplus				Retained Earnings				Treasury Stock				Accumulated Other Comprehensive Income (Loss)				Unearned Compensation				Total Stockholders’ Equity
Balances at May 29, 2016	$	1,502.6			$	547.5			$	(7.8	)		$	(87.0	)		$	(3.3	)		$	1,952.0
Net earnings	—				479.1				—				—				—				479.1
Other comprehensive income	—				—				—				24.1				—				24.1
Dividends declared ($2.24 per share)	—				(279.6		)		—				—				—				(279.6		)
Stock option exercises (2.7 shares)	107.8				—				—				—				—				107.8
Stock-based compensation	15.6				—				—				—				—				15.6
Income tax benefits credited to equity	27.2				—				—				—				—				27.2
Repurchases of common stock (3.7 shares)	(43.7		)		(186.5		)		—				—				—				(230.2		)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.2 shares)	5.1				—				—				—				0.2				5.3
Other	—				(0.4		)		—				—				0.8				0.4
Balances at May 28, 2017	$	1,614.6			$	560.1			$	(7.8	)		$	(62.9	)		$	(2.3	)		$	2,101.7
Net earnings	—				596.0				—				—				—				596.0
Other comprehensive income	—				—				—				(22.3		)		—				(22.3		)
Dividends declared ($2.52 per share)	—				(315.3		)		—				—				—				(315.3		)
Stock option exercises (0.8 shares)	32.0				—				—				—				—				32.0
Stock-based compensation	22.7				—				—				—				—				22.7
Repurchases of common stock (2.8 shares)	(36.0		)		(198.8		)		—				—				—				(234.8		)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)	5.7				—				—				—				0.1				5.8
Other	(7.1		)		15.6				—				—				0.5				9.0
Balances at May 27, 2018	$	1,631.9			$	657.6			$	(7.8	)		$	(85.2	)		$	(1.7	)		$	2,194.8
Net earnings	—				713.4				—				—				—				713.4
Other comprehensive income	—				—				—				(13.0		)		—				(13.0		)
Dividends declared ($3.00 per share)	—				(373.5		)		—				—				—				(373.5		)
Stock option exercises (1.2 shares)	52.2				—				—				—				—				52.2
Stock-based compensation	26.8				—				—				—				—				26.8
Repurchases of common stock (1.9 shares)	(26.2		)		(181.3		)		—				—				—				(207.5		)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)	7.1				—				—				—				0.8				7.9
Other	(6.8		)		(9.6		)		7.8				—				0.1				(8.5		)
Balances at May 26, 2019	$	1,685.0			$	806.6			$	—			$	(98.2	)		$	(0.8	)		$	2,392.6

See accompanying notes to consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

	Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Cash flows - operating activities
Net earnings	$	713.4			$	596.0			$	479.1
Losses from discontinued operations, net of tax	5.2				7.8				3.4
Adjustments to reconcile net earnings from continuing operations to cash flows:
Depreciation and amortization	336.7				313.1				272.9
Impairments and disposal of assets, net	19.0				3.4				(8.4		)
Stock-based compensation expense	59.8				42.8				40.7
Change in current assets and liabilities	36.4				(8.0		)		112.6
Contributions to pension and postretirement plans	(1.7		)		(62.0		)		(1.6		)
Deferred income taxes	47.5				(20.6		)		(22.9		)
Change in deferred rent	34.3				36.6				32.9
Change in other assets and liabilities	9.5				14.6				(5.0		)
Loss on extinguishment of debt	—				102.2				—
Other, net	7.5				(6.1		)		12.6
Net cash provided by operating activities of continuing operations	$	1,267.6			$	1,019.8			$	916.3
Cash flows - investing activities
Purchases of land, buildings and equipment	(452.0		)		(396.0		)		(293.0		)
Proceeds from disposal of land, buildings and equipment	13.2				3.3				8.3
Cash used in business acquisitions, net of cash acquired	—				(40.4		)		(764.4		)
Purchases of capitalized software and other assets	(25.9		)		(22.8		)		(25.3		)
Other, net	2.1				4.8				4.7
Net cash used in investing activities of continuing operations	$	(462.6	)		$	(451.1	)		$	(1,069.7	)
Cash flows - financing activities
Proceeds from issuance of common stock	59.3				37.8				113.1
Income tax benefits credited to equity	—				—				27.2
Dividends paid	(370.8		)		(313.5		)		(279.1		)
Repurchases of common stock	(207.5		)		(234.8		)		(230.2		)
Proceeds from issuance of short-term debt	137.5				960.0				—
Repayments of short-term debt	(137.5		)		(960.0		)		—
Repayments of long-term debt	—				(408.2		)		—
Proceeds from issuance of long-term debt	—				300.0				500.0
Principal payments on capital and financing leases	(6.2		)		(5.4		)		(3.9		)
Proceeds from financing lease obligation	40.9				—				5.7
Other, net	0.1				(12.5		)		(3.6		)
Net cash provided by (used) in financing activities of continuing operations	$	(484.2	)		$	(636.6	)		$	129.2
Cash flows - discontinued operations
Net cash used in operating activities of discontinued operations	(10.4		)		(18.5		)		(18.3		)
Net cash provided by investing activities of discontinued operations	—				0.2				0.8
Net cash used in discontinued operations	$	(10.4	)		$	(18.3	)		$	(17.5	)
Increase (decrease) in cash and cash equivalents	310.4				(86.2		)		(41.7		)
Cash and cash equivalents - beginning of year	146.9				233.1				274.8
Cash and cash equivalents - end of year	$	457.3			$	146.9			$	233.1

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

	Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Cash flows from changes in current assets and liabilities
Receivables, net	$	2.1			$	(7.2	)		$	(6.5	)
Inventories	(2.1		)		(26.6		)		5.0
Prepaid expenses and other current assets	(8.2		)		(12.5		)		(1.1		)
Accounts payable	55.0				12.6				(9.0		)
Accrued payroll	(2.2		)		25.9				0.8
Prepaid/accrued income taxes	(14.2		)		(9.9		)		41.4
Other accrued taxes	(2.4		)		1.6				0.4
Unearned revenues	11.3				33.5				41.6
Other current liabilities	(2.9		)		(25.4		)		40.0
Change in current assets and liabilities	$	36.4			$	(8.0	)		$	112.6

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries (Darden, the Company, we, us or our). We own and operate the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze® and Eddie V’s Prime Seafood® restaurant brands located in the United States and Canada. 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 37 franchised restaurants. We also have 33 franchised restaurants in operation located in Latin America and the Middle East. All significant intercompany balances and transactions have been eliminated in consolidation.

For fiscal 2019, 2018 and 2017, all gains and losses on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to the discontinued locations, have been aggregated in a single caption entitled “Losses from discontinued operations, net of tax benefit” in our consolidated statements of earnings for all periods presented. See Note 3 for additional information.

Unless otherwise noted, amounts and disclosures throughout these notes to consolidated financial statements relate to our continuing operations. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

Fiscal Year

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. Fiscal 2018, which ended May 27, 2018, consisted of 52 weeks and fiscal 2017, which ended May 28, 2017, consisted of 52 weeks.

Use of Estimates

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (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 expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents include highly liquid investments such as bank deposits and money market funds that have an original maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. The components of cash and cash equivalents are as follows:

(in millions)	May 26, 2019				May 27, 2018
Short-term investments	$	319.5			$	16.8
Credit card receivables	108.2				99.6
Depository accounts	29.6				30.5
Total cash and cash equivalents	$	457.3			$	146.9

As of May 26, 2019, and May 27, 2018, we had cash and cash equivalent accounts in excess of insured limits. We manage the credit risk of our positions through utilizing multiple financial institutions and monitoring the credit quality of those financial institutions that hold our cash and cash equivalents.

Receivables, Net

Receivables, net of the allowance for doubtful accounts, represent their estimated net realizable value. Provisions for doubtful accounts are recorded based on historical collection experience and the age of the receivables. Receivables are written off when they are deemed uncollectible. See Note 12 for additional information.

Inventories

Inventories consist of food and beverages and are valued at the lower of weighted-average cost or market.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Land, Buildings and Equipment, Net

Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from 7 to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings in land, buildings and equipment, net, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from 2 to 20 years also using the straight-line method. See Note 5 for additional information. Gains and losses on the disposal of land, buildings and equipment are included in impairments and disposal of assets, net, while the write-off of undepreciated book value associated with the replacement of equipment in the normal course of business is recorded as a component of restaurant expenses in our accompanying consolidated statements of earnings. Depreciation and amortization expense from continuing operations associated with buildings and equipment and losses on replacement of equipment were as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Depreciation and amortization on buildings and equipment	$	308.8			$	288.8			$	253.3
Losses on replacement of equipment	3.6				4.1				3.2

Capitalized Software Costs and Other Definite-Lived Intangibles

Capitalized software, which is a component of other assets, is recorded at cost less accumulated amortization. Capitalized software is amortized using the straight-line method over estimated useful lives ranging from 3 to 10 years. The cost of capitalized software and related accumulated amortization was as follows:

(in millions)	May 26, 2019				May 27, 2018
Capitalized software	$	221.6			$	205.7
Accumulated amortization	(146.9		)		(127.4		)
Capitalized software, net of accumulated amortization	$	74.7			$	78.3

We have other definite-lived intangible assets, including assets related to the value of below-market leases and reacquired franchise rights resulting from our acquisitions that are included as a component of other assets on our consolidated balance sheets. We also have definite-lived intangible liabilities related to the value of above-market leases and below-market agreements resulting from our acquisitions that are included in other liabilities on our consolidated balance sheets. Definite-lived intangibles are amortized on a straight-line basis over estimated useful lives of 1 to 20 years. The cost and related accumulated amortization was as follows:

(in millions)	May 26, 2019				May 27, 2018
Definite-lived intangible assets	$	80.3			$	83.0
Accumulated amortization	(30.4		)		(25.7		)
Definite-lived intangible assets, net of accumulated amortization	$	49.9			$	57.3
Definite-lived intangible liabilities	$	(33.5	)		$	(33.5	)
Accumulated amortization	13.6				11.3
Definite-lived intangible liabilities, net of accumulated amortization	$	(19.9	)		$	(22.2	)

Amortization expense from continuing operations associated with capitalized software and other definite-lived intangibles included in depreciation and amortization in our accompanying consolidated statements of earnings was as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Amortization expense - capitalized software	$	26.7			$	23.5			$	18.7
Amortization expense - other definite-lived intangibles	1.2				0.8				0.9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Amortization expense from continuing operations associated with above- and-below-market leases included in restaurant expenses as a component of rent expense in our consolidated statements of earnings was as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Restaurant expense - below-market leases	$	3.0			$	3.1			$	1.8
Restaurant expense - above-market leases	(1.6		)		(1.7		)		(1.4		)

Based on the net book values of our definite-lived intangible assets and liabilities at May 26, 2019, we expect amortization of capitalized software and other definite-lived intangible assets will be approximately $31.0 million annually for fiscal 2020 through 2024.

Trust-Owned Life Insurance

We have a trust that purchased life insurance policies covering certain of our officers and other key employees (trust-owned life insurance or TOLI). The trust is the owner and sole beneficiary of the TOLI policies. The policies were purchased to offset a portion of our obligations under our non-qualified deferred compensation plan. The cash surrender value for each policy is included in other assets, while changes in cash surrender values are included in general and administrative expenses.

Liquor Licenses

The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor licenses are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Annual liquor license renewal fees are expensed over the renewal term.

Goodwill and Intangible Assets

Our goodwill and trademark balances are allocated as follows:

	Goodwill								Trademarks
(in millions)	May 26, 2019				May 27, 2018				May 26, 2019				May 27, 2018
Olive Garden (1)	$	30.2			$	30.2			$	0.7			$	0.7
LongHorn Steakhouse	49.3				49.3				307.8				307.8
Cheddar’s Scratch Kitchen	311.4				311.4				375.0				375.0
Yard House	369.2				369.2				109.3				109.3
The Capital Grille	401.6				401.6				147.0				147.0
Seasons 52	—				—				0.5				0.5
Eddie V’s	22.0				22.0				10.5				10.5
Total	$	1,183.7			$	1,183.7			$	950.8			$	950.8

(1)	Goodwill related to Olive Garden is associated with the RARE Hospitality International, Inc. (RARE) acquisition and the estimated value of the direct benefits derived by Olive Garden as a result of the RARE acquisition.

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. 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.

We estimate fair value of each reporting unit using the best information available, including market information 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 estimated 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;

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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.

We evaluate the useful lives of our other intangible assets to determine if they are definite or indefinite-lived. A determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets.

Impairment or Disposal 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. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If such assets are determined to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined based on appraisals, sales prices of comparable assets or discounted future net cash flows expected to be generated by the assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for sale on our consolidated balance sheets when certain criteria are met. These criteria include, among other factors, the requirement that the likelihood of disposing of these assets within one year is probable. Assets not meeting the “held for sale” criteria remain in land, buildings and equipment until their disposal is probable within one year.

We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 420, Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets, primarily land, associated with a closed restaurant, any gain or loss is recorded in the same caption within our consolidated statements of earnings as the original impairment. See Note 4 for additional information.

Insurance Accruals

Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers’ compensation, certain employee medical and general liability programs. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and not yet reported.

Revenue Recognition

Sales, as presented in our consolidated statements of earnings, represents food and beverage product sold and is presented net of discounts, coupons, employee meals and complimentary meals. Revenue from restaurant sales is recognized when food and beverage products are sold. Revenue is presented net of sales tax. Sales taxes collected from customers are included in other accrued taxes on our consolidated balance sheets until the taxes are remitted to governmental authorities.

Franchise royalties, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur. Revenue from area development and franchise fees are recognized as the performance obligations are satisfied over the term of the franchise agreement, which is generally 10 years. Prior to the adoption of FASB Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), area development fees were recognized over the term of the area development agreement and franchise fees were recognized when received, upon a new restaurant opening. Advertising contributions, which are a percentage of net sales of franchised restaurants, are recognized in the period the related sales occur. Prior to the adoption of ASU 2014-09, these contributions were recorded as a reduction of general and administrative expenses. Additionally, upon adoption of ASU 2014-09, franchisee purchases of our inventory through our distribution network are now recognized as revenue in the period the purchases are made.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Revenue from the sale of consumer packaged goods includes ongoing royalty fees based on a percentage of licensed retail product sales and is recognized upon the sale of product by our licensed manufacturers to retail outlets.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. We recognize sales from our gift cards when the gift card is redeemed by the customer. Although there are no expiration dates or dormancy fees for our gift cards, based on our analysis of our historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” We recognize breakage within sales for unused gift card amounts in proportion to actual gift card redemptions, which is also referred to as the “redemption recognition” method. 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 prospectively to gift card redemptions. Discounts for gift cards sold by third parties are recorded to unearned revenues and are recognized over a period that approximates redemption patterns**.**

Food and Beverage Costs

Food and beverage costs include inventory, warehousing, related purchasing and distribution costs, and gains and losses on certain commodity derivative contracts. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned. For certain contracts, advance payments are made by the vendors based on estimates of volume to be purchased from the vendors and the terms of the agreement. As we make purchases from the vendors each period, we recognize the pro rata portion of allowances earned as a reduction of food and beverage costs for that period. Differences between estimated and actual purchases are settled in accordance with the terms of the agreements. Vendor agreements are generally for a period of one year or more and payments received are initially recorded as long-term liabilities. Amounts expected to be earned within one year are recorded as current liabilities.

Income Taxes

We provide for federal and state income taxes currently payable as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal income tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Interest recognized on reserves for uncertain tax positions is included in income tax expense in our consolidated statements of earnings. A corresponding liability for accrued interest is included as a component of other current liabilities on our consolidated balance sheets. Penalties, when incurred, are recognized in general and administrative expenses.

ASC Topic 740, Income Taxes, requires that a position taken or expected to be taken in a tax return be recognized (or derecognized) in the financial statements when it is more likely than not (i.e., a likelihood of more than 50 percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. See Note 13 for additional information.

Derivative Instruments and Hedging Activities

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as required by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks inherent in our business operations. Our use of derivative instruments is currently limited to equity forwards contracts and commodity swaps. These instruments are generally structured as hedges of the variability of cash flows related to forecasted transactions (cash flow hedges). However, we do at times enter into instruments designated as fair value hedges to reduce our exposure to changes in fair value of the related hedged item. We do not enter into derivative instruments for trading or speculative purposes, where changes in the cash flows or fair value of the derivative are not expected to offset changes in cash flows or fair value of the hedged item. However, we have entered into equity forwards to economically hedge changes in the fair value of employee investments in our non-qualified deferred compensation plan. All derivatives are recognized on the balance sheet at fair value. For those derivative instruments for which we intend to elect hedge accounting, on the date the derivative contract is entered into, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific forecasted transactions. We also formally assess, both

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.

To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of FASB ASC, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs. To the extent our derivatives are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by Topic 815 of FASB ASC, gains and losses in the derivatives’ fair value are included in current earnings, as are the gains and losses of the related hedged item. To the extent the 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. Cash flows related to derivatives are included in operating activities. See Note 8 for additional information.

Leases

For operating leases, we recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where we are reasonably assured to exercise the options. Differences between amounts paid and amounts expensed are recorded as deferred rent. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. Sale-leasebacks are transactions through which we sell assets (such as restaurant properties) at fair value and subsequently lease them back. The resulting leases generally qualify and are accounted for as operating leases. Financing leases are generally the product of a failed sale-leaseback transaction and result in retention of the “sold” assets within land, buildings and equipment with a financing lease obligation equal to the amount of proceeds received recorded as a component of other liabilities on our consolidated balance sheets.

Within the provisions of certain of our leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling 5 to 20 years, exercisable at our option, and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. The consolidated financial statements reflect the same lease term for amortizing leasehold improvements as we use to determine capital versus operating lease classifications and in calculating straight-line rent expense for each restaurant. Percentage rent expense is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved. Amortization expense related to capital leases is included in depreciation and amortization expense in our consolidated statements of earnings. Landlord allowances are recorded based on contractual terms and are included in accounts receivable, net, and as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the expected lease term. Gains on sale-leaseback transactions are recorded as a deferred liability and amortized as a reduction of rent expense on a straight-line basis over the expected lease term. See Note 11 for additional information.

Pre-Opening Expenses

Non-capital expenditures associated with opening new restaurants are expensed as incurred. These costs are reported as restaurant expenses in our consolidated statements of earnings.

Advertising

Production costs of commercials are expensed in the fiscal period the advertising is first aired while the costs of programming and other advertising, promotion and marketing programs are expensed as incurred. These costs are reported as marketing expenses in our consolidated statements of earnings.

Stock-Based Compensation

We recognize the cost of employee service received in exchange for awards of equity instruments based on the grant date fair value of those awards. We recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the employee service period for awards granted. We utilize the Black-Scholes option pricing model to estimate the fair value of stock option awards. The dividend yield has been estimated based upon our historical results and expectations for changes in dividend rates. The expected volatility was determined using historical stock prices. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term approximating the expected life of each grant. The expected life was estimated based on the exercise history of previous grants, taking into consideration the remaining contractual period for outstanding awards. We utilize a Monte Carlo simulation to estimate the fair value of our market-based equity-settled performance awards. The dividend yield assumes reinvestment of dividends. The expected volatility was determined using

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

historical stock prices. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term approximating the expected life of each grant. The expected life was estimated based on the performance measurement period for outstanding awards. See Note 15 for further information.

Net Earnings per Share

Basic net earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 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. These stock-based compensation instruments do not impact the numerator of the diluted net earnings per share computation.

The following table presents the computation of basic and diluted net earnings per common share:

	Fiscal Year Ended
(in millions, except per share data)	May 26, 2019				May 27, 2018				May 28, 2017
Earnings from continuing operations	$	718.6			$	603.8			$	482.5
Losses from discontinued operations	(5.2		)		(7.8		)		(3.4		)
Net earnings	$	713.4			$	596.0			$	479.1
Average common shares outstanding – Basic	123.5				124.0				124.3
Effect of dilutive stock-based compensation	1.9				2.0				1.7
Average common shares outstanding – Diluted	125.4				126.0				126.0
Basic net earnings per share:
Earnings from continuing operations	$	5.82			$	4.87			$	3.88
Losses from discontinued operations	(0.04		)		(0.06		)		(0.03		)
Net earnings	$	5.78			$	4.81			$	3.85
Diluted net earnings per share:
Earnings from continuing operations	$	5.73			$	4.79			$	3.83
Losses from discontinued operations	(0.04		)		(0.06		)		(0.03		)
Net earnings	$	5.69			$	4.73			$	3.80

Restricted stock and options to purchase shares of our common stock excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019			May 27, 2018			May 28, 2017
Anti-dilutive restricted stock and options	0.3			0.3			0.4

Foreign Currency

The Canadian dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains and losses are reported as a separate component of other comprehensive income (loss). Aggregate cumulative translation losses were $1.0 million and $1.6 million at May 26, 2019 and May 27, 2018, respectively. Net (gains) losses from foreign currency transactions recognized in our consolidated statements of earnings were $1.0 million, $(1.2) million and $0.8 million for fiscal 2019, 2018 and 2017, respectively.

Recently Adopted Accounting Standards

As of May 28, 2018, we adopted ASU 2014-09. 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. This guidance did not impact the recognition of our primary source of revenue from company-owned restaurants, which also includes gift card revenue. This guidance did impact the recognition of initial franchise fees and area development fees, however, due to the relative insignificance of these amounts, the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

adoption of this guidance did not have a material impact on our consolidated financial statements. We adopted this guidance using the modified retrospective method, recording a decrease of $3.3 million to retained earnings for the cumulative effect of the change, with an offsetting increase to unearned revenue of $1.2 million and other liabilities of $2.1 million for current and noncurrent deferred revenue, respectively. Comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 2.

As of May 28, 2018, we adopted ASU 2016-16, Income Taxes (Topic 740). This update addresses the income tax consequences of intra-entity transfers of assets other than inventory. Previous accounting guidance prohibited 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 had developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted these provisions using the modified retrospective method recording a decrease of $6.3 million to retained earnings for the cumulative effect of the change, with a corresponding decrease to other assets.

As of May 28, 2018, we adopted 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 adoption of this guidance did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update is effective for us in the first quarter of fiscal 2021, however, we elected to early adopt this guidance during the quarter ended November 25, 2018, using a prospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Application of New Accounting Standards

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. The initial guidance required entities to use a modified retrospective transition approach as of the beginning of the earliest comparable period presented. In July 2018, the FASB issued an amendment providing an optional transition method allowing entities to apply the new lease requirements at the adoption date, rather than at the beginning of the earliest comparative period, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transition method, an entity’s reporting for the comparative periods presented in the financial statements in the period of adoption will continue to be in accordance with current GAAP (Topic 840, Leases). We plan to adopt this guidance in the first quarter of fiscal 2020 using this optional transition method.

We implemented a new lease system in connection with the adoption and we also expect changes to our internal controls over financial reporting. We expect our balance sheet presentation to be impacted upon adoption by approximately $4.0 billion due to the recognition of right-of-use assets and approximately $4.5 billion due to the recognition of lease liabilities for operating leases. We do not expect adoption to have a material impact on our consolidated statements of earnings or our consolidated statements of cash flows. We do not expect our accounting for capital leases to substantially change. We plan to elect the short-term lease recognition exemption which provides the option to not recognize right-of-use assets and related liabilities that arise from certain leases with terms of 12 months or less. We also plan to elect the package of practical expedients which will allow us to not reassess previous accounting conclusions regarding lease identification and classification and we are finalizing our assessment of the other practical expedients and policy elections offered by the standard. We continue to evaluate the effect this guidance will have on our consolidated financial statements and related disclosures.

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 us 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 2 - REVENUE RECOGNITION

Deferred revenue liabilities from contracts with customers included on our accompanying consolidated balance sheets is comprised of the following:

(in millions)		May 26, 2019
Unearned revenues
Deferred gift card revenue		$	453.6
Deferred gift card discounts		(26.4		)
Other		1.3
Total		$	428.5
Other liabilities
Deferred franchise fees - non-current		$	3.9

The following table presents a rollforward of deferred gift card revenue:

(in millions)		Deferred Gift Card Revenue
Balances at May 27, 2018		$	443.1
Activations		740.2
Redemptions and breakage		(729.7		)
Balances at May 26, 2019		$	453.6

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:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Costs and expenses:
Restaurant and marketing expenses	4.2				1.4				1.6
Other income and expenses	2.8				11.2				6.0
Losses before income taxes	(7.0		)		(12.6		)		(7.6		)
Income tax benefit	(1.8		)		(4.8		)		(4.2		)
Losses from discontinued operations, net of tax	$	(5.2	)		$	(7.8	)		$	(3.4	)

Assets Held For Sale

Assets classified as held for sale on our accompanying consolidated balance sheet as of May 27, 2018, primarily related to excess land parcels adjacent to our corporate headquarters with a carrying amount of $11.9 million and were sold in the third quarter of fiscal 2019. See Note 4.

NOTE 4 –IMPAIRMENTS AND DISPOSAL OF ASSETS, NET

Impairments and disposal of assets, net, in our accompanying consolidated statements of earnings are comprised of the following:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Restaurant impairments	$	19.5			$	3.7			$	—
Disposal gains	(0.7		)		(1.1		)		(10.4		)
Other	0.2				0.8				2.0
Impairments and disposal of assets, net	$	19.0			$	3.4			$	(8.4	)

Restaurant impairments for fiscal 2019 and 2018 were primarily related to underperforming restaurants.

Disposal gains for fiscal 2019 and 2018 were primarily related to the sale of excess land parcels. Disposal gains for fiscal 2017 were primarily related to the sale of restaurant properties, favorable lease terminations and the sale of excess land parcels.

Other impairment charges for fiscal 2018 and 2017 related to cost-method investments.

Impairment charges were measured based on the amount by which the carrying amount of these assets exceeded their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets and estimates of discounted future cash flows. These amounts are included in impairments and disposal of assets, net as a component of earnings from continuing operations in the accompanying consolidated statements of earnings.

NOTE 5 - LAND, BUILDINGS AND EQUIPMENT, NET

The components of land, buildings and equipment, net, are as follows:

(in millions)	May 26, 2019				May 27, 2018
Land	$	148.1			$	141.5
Buildings	2,985.1				2,751.1
Equipment	1,716.5				1,581.2
Assets under capital leases	100.7				102.1
Construction in progress	84.8				85.6
Total land, buildings and equipment	$	5,035.2			$	4,661.5
Less accumulated depreciation and amortization	(2,437.4		)		(2,191.6		)
Less amortization associated with assets under capital leases	(45.2		)		(40.1		)
Land, buildings and equipment, net	$	2,552.6			$	2,429.8

NOTE 6 - SEGMENT INFORMATION

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 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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
At May 26, 2019 and for the year ended
Sales		$	4,287.3		$	1,810.6		$	605.9		$	1,806.6		$	—		$	8,510.4
Restaurant and marketing expenses		3,403.3			1,486.3			478.3			1,548.8			—			6,916.7
Segment profit		$	884.0		$	324.3		$	127.6		$	257.8		$	—		$	1,593.7
Depreciation and amortization		$	140.8		$	68.2		$	33.4		$	94.3		$	—		$	336.7
Impairments and disposal of assets, net		8.9			0.3			—			10.3			(0.5		)	19.0
Segment assets		1,063.7			972.5			902.8			2,090.6			863.2			5,892.8
Purchases of land, buildings and equipment		187.3			65.6			49.1			147.2			2.8			452.0

(in millions)		Olive Garden			LongHorn Steakhouse			Fine Dining			Other Business			Corporate			Consolidated
At May 27, 2018 and for the year ended
Sales		$	4,082.5		$	1,703.2		$	574.4		$	1,720.0		$	—		$	8,080.1
Restaurant and marketing expenses		3,262.8			1,402.1			457.4			1,464.7			—			6,587.0
Segment profit		$	819.7		$	301.1		$	117.0		$	255.3		$	—		$	1,493.1
Depreciation and amortization		$	132.9		$	65.7		$	31.5		$	83.0		$	—		$	313.1
Impairments and disposal of assets, net		2.0			1.5			0.1			—			(0.2		)	3.4
Segment assets		1,020.7			974.2			872.9			2,058.9			542.9			5,469.6
Purchases of land, buildings and equipment		163.4			76.1			32.1			119.5			4.9			396.0

(in millions)		Olive Garden			LongHorn Steakhouse			Fine Dining			Other Business			Corporate			Consolidated
At May 28, 2017 and for the year ended
Sales		$	3,938.6		$	1,622.2		$	535.6		$	1,073.8		$	—		$	7,170.2
Restaurant and marketing expenses		3,176.8			1,341.3			430.6			891.8			—			5,840.5
Segment profit		$	761.8		$	280.9		$	105.0		$	182.0		$	—		$	1,329.7
Depreciation and amortization		$	123.3		$	65.1		$	29.1		$	55.4		$	—		$	272.9
Impairments and disposal of assets, net		(1.5		)	(0.1		)	—			(6.2		)	(0.6		)	(8.4		)
Purchases of land, buildings and equipment		131.4			54.1			41.1			62.7			3.7			293.0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Reconciliation of segment profit to earnings from continuing operations before income taxes:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Segment profit	$	1,593.7			$	1,493.1			$	1,329.7
Less general and administrative expenses	(405.5		)		(409.8		)		(387.7		)
Less depreciation and amortization	(336.7		)		(313.1		)		(272.9		)
Less impairments and disposal of assets, net	(19.0		)		(3.4		)		8.4
Less interest, net	(50.2		)		(161.1		)		(40.2		)
Earnings before income taxes	$	782.3			$	605.7			$	637.3

NOTE 7 - DEBT

The components of long-term debt are as follows:

(in millions)	May 26, 2019				May 27, 2018
3.850% senior notes due May 2027	$	500.0			$	500.0
6.000% senior notes due August 2035	96.3				96.3
6.800% senior notes due October 2037	42.8				42.8
4.550% senior notes due February 2048	300.0				300.0
Total long-term debt	$	939.1			$	939.1
Less unamortized discount and issuance costs	(11.4		)		(12.6		)
Total long-term debt less unamortized discount and issuance costs	$	927.7			$	926.5

The aggregate contractual maturities of long-term debt for each of the five fiscal years subsequent to May 26, 2019, and thereafter are as follows:

(in millions)
Fiscal Year		2020				2021				2022				2023				2024				Thereafter
Debt repayments		$	—			$	—			$	—			$	—			$	—			$	939.1

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.

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.

NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We use financial derivatives to manage commodity price, interest rate and equity-based compensation risks inherent in our business operations. By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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 May 26, 2019, 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 2020.

We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized stock based awards we grant to certain employees (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 2023. The contracts were initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting, and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.

We enter 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 do 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 September 2023.

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)
	May 26, 2019											May 26, 2019				May 27, 2018				May 26, 2019				May 27, 2018
Equity Forwards
Designated	0.4			$	90.59			$	29.9			$	—			$	0.2			$	0.3			$	—
Not designated	0.6			$	76.39			$	47.7			—				0.4				0.5				—
Total equity forwards												$	—			$	0.6			$	0.8			$	—
Commodity contracts	N/A			N/A				$	10.0			$	0.1			$	0.5			$	0.1			$	—
Total derivative contracts												$	0.1			$	1.1			$	0.9			$	—

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The effects of derivative instruments in cash flow hedging relationships 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)
		Fiscal Year Ended												Fiscal Year Ended												Fiscal Year Ended
(in millions)		May 26, 2019				May 27, 2018				May 28, 2017				May 26, 2019				May 27, 2018				May 28, 2017				May 26, 2019				May 27, 2018				May 28, 2017
Equity (1)		$	10.8			$	(5.3	)		$	3.7			$	4.9			$	(0.2	)		$	(1.4	)		$	(0.8	)		$	—			$	0.5
Commodity (2)		0.2				0.9				—				0.7				0.3				—				—				—				—
Interest rate (3)		—				—				(1.3		)		(0.1		)		(0.1		)		—				—				—				—
Total		$	11.0			$	(4.4	)		$	2.4			$	5.5			$	—			$	(1.4	)		$	(0.8	)		$	—			$	0.5

(1)	Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses.

(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.

(3)	Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is interest, net.

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)		Fiscal Year Ended
Location of Gain (Loss) Recognized in Earnings on Derivatives		May 26, 2019				May 27, 2018				May 28, 2017
Restaurant labor expenses		$	11.2			$	1.5			$	5.3
General and administrative expenses		14.6				2.1				8.9
Total		$	25.8			$	3.6			$	14.2

Based on the fair value of our derivative instruments designated as cash flow hedges as of May 26, 2019, we expect to reclassify $0.3 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.

NOTE 9 – FAIR VALUE MEASUREMENTS

The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.

The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis at May 26, 2019 and May 27, 2018:

Items Measured at Fair Value at May 26, 2019
(in millions)			Fair Value of Assets (Liabilities)				Quoted Prices in Active Market for Identical Assets (Liabilities) (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Derivatives:
Equity forwards	(2)		(0.8		)		—				(0.8		)		—
Total			$	(0.8	)		$	—			$	(0.8	)		$	—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Items Measured at Fair Value at May 27, 2018
(in millions)			Fair Value of Assets (Liabilities)				Quoted Prices in Active Market for Identical Assets (Liabilities) (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Derivatives:
Commodities futures, swaps & options	(1)		0.5				—				0.5				—
Equity forwards	(2)		0.6				—				0.6				—
Total			$	1.1			$	—			$	1.1			$	—

(1)	The fair value of our commodities futures, swaps and options is based on closing market prices of the contracts, inclusive of the risk of nonperformance.

(2)	The fair value of equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.

The carrying value and fair value of long-term debt, as of May 26, 2019, was $927.7 million and $955.7 million, respectively. The carrying value and fair value of long-term debt as of May 27, 2018, was $926.5 million and $922.0 million, respectively. The fair value of long-term debt, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.

The fair value of non-financial assets measured at fair value on a non-recurring basis, which is classified as Level 3 in the fair value hierarchy, is determined based on appraisals or sales prices of comparable assets and estimates of discounted future cash flows. As of May 26, 2019, long-lived assets held and used with a carrying amount of $21.7 million, primarily related to seven underperforming restaurants, were determined to have a fair value of $2.5 million resulting in an impairment of $19.2 million. As of May 27, 2018, long-lived assets held and used with a carrying amount of $3.7 million, primarily related to four underperforming restaurants, were determined to have no fair value resulting in an impairment charge of $3.7 million.

NOTE 10 - STOCKHOLDERS’ EQUITY

Share Repurchase Program

All of the shares purchased during the fiscal year ended May 26, 2019 were purchased as part of our repurchase program authorized by our Board of Directors. On June 20, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to $500.0 million of our outstanding common stock. This repurchase program does not have an expiration and replaced the previously existing share repurchase authorization.

Share Retirements

In the fourth quarter of fiscal 2019, we retired our remaining treasury stock totaling 1.3 million shares and restored them to authorized but unissued shares of common stock. The retired treasury stock had a carrying amount of approximately $7.8 million. Upon formal retirement and in accordance with FASB ASC Topic 505, Equity, we reduced our common stock and surplus account by the carrying amount of the treasury stock.

As of May 26, 2019, of the 193.4 million cumulative shares repurchased under the current and previous authorizations, 182.0 million shares were retired and restored to authorized but unissued shares of common stock. We expect that all shares of common stock acquired in the future will also be retired and restored to authorized but unissued shares of common stock.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of tax, 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)	(0.9		)		—				(4.6		)		(1.0		)		(6.5		)
Reclassification realized in net earnings	—				(0.1		)		—				(0.1		)		(0.2		)
Reclassification of tax effect (1)	—				—				(0.2		)		(15.4		)		(15.6		)
Balances at May 27, 2018	$	(1.6	)		$	—			$	3.4			$	(87.0	)		$	(85.2	)
Gain (loss)	0.6				—				11.0				(24.8		)		(13.2		)
Reclassification realized in net earnings	—				—				(5.4		)		5.6				0.2
Balances at May 26, 2019	$	(1.0	)		$	—			$	9.0			$	(106.2	)		$	(98.2	)

(1)	Stranded tax effects reclassified from accumulated other comprehensive income (loss) to retained earnings from the adoption of ASU 2018-02.

The following table presents the amounts and line items in our consolidated statements of earnings where other adjustments reclassified from AOCI into net earnings were recorded:

			Fiscal Year Ended
(in millions) AOCI Components	Location of Gain (Loss) Recognized in Earnings		May 26, 2019				May 27, 2018
Derivatives
Commodity contracts	(1)		$	0.7			$	0.3
Equity contracts	(2)		4.9				(0.2		)
Interest rate contracts	(3)		(0.1		)		(0.1		)
	Total before tax		$	5.5			$	—
	Tax benefit (expense)		(0.1		)		—
	Net of tax		$	5.4			$	—
Benefit plan funding position
Pension/postretirement plans
Actuarial losses	(4)		$	(2.5	)		$	(2.8	)
Total - pension/postretirement plans			$	(2.5	)		$	(2.8	)
Recognized net actuarial gain - other plans	(5)		3.3				3.0
	Total before tax		$	0.8			$	0.2
	Tax benefit (expense)		(6.4		)		(0.1		)
	Net of tax		$	(5.6	)		$	0.1

(1)	Primarily included in food and beverage costs and restaurant expenses. See Note 8 for additional details.

(2)	Primarily included in restaurant labor costs and general and administrative expenses. See Note 8 for additional details.

(3)	Included in interest, net, on our consolidated statements of earnings.

(4)	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 14 for additional details.

(5)	Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 – LEASES

An analysis of rent expense incurred related to continuing operations is as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Restaurant minimum rent	$	338.3			$	321.8			$	286.8
Restaurant rent averaging expense	27.6				30.2				26.0
Restaurant percentage rent	7.3				7.2				7.9
Other	20.3				20.6				20.2
Total rent expense	$	393.5			$	379.8			$	340.9

Rent expense included in discontinued operations reflected $0.2 million, $0.1 million and $0.1 million of restaurant minimum rent for fiscal 2019, 2018 and 2017, respectively.

The annual future lease commitments under capital lease and financing lease obligations and noncancelable operating leases, including those related to restaurants reported as discontinued operations, for each of the five fiscal years subsequent to May 26, 2019 and thereafter is as follows:

(in millions)
Fiscal Year	Capital				Financing				Operating
2020	$	8.9			$	12.2			$	372.9
2021	8.9				12.4				355.0
2022	8.8				12.6				326.7
2023	8.9				12.8				299.8
2024	8.7				13.0				262.7
Thereafter	81.4				128.0				1,434.0
Total future lease commitments	$	125.6			$	191.0			$	3,051.1
Less imputed interest (at 6.5%), (various)	(41.6		)		(99.7		)
Present value of future lease commitments	$	84.0			$	91.3
Less current maturities	(4.1		)		(2.7		)
Obligations under capital and financing leases, net of current maturities	$	79.9			$	88.6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - ADDITIONAL FINANCIAL INFORMATION

The tables below provide additional financial information related to our consolidated financial statements:

Balance Sheets

(in millions)	May 26, 2019				May 27, 2018
Receivables, net
Retail outlet gift card sales	$	40.2			$	40.4
Landlord allowances due	24.0				18.1
Miscellaneous	24.4				25.5
Allowance for doubtful accounts	(0.3		)		(0.3		)
Total	$	88.3			$	83.7
Other Current Liabilities
Non-qualified deferred compensation plan	$	237.9			$	227.9
Sales and other taxes	70.0				72.7
Insurance-related	39.4				40.1
Employee benefits	45.5				39.9
Accrued interest	8.5				7.5
Miscellaneous	70.6				69.5
Total	$	471.9			$	457.6

Statements of Earnings

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Interest, net
Interest expense (1)	$	44.3			$	152.4			$	34.4
Imputed interest on capital and financing leases	11.9				11.4				8.8
Capitalized interest	(2.2		)		(1.9		)		(1.7		)
Interest income	(3.8		)		(0.8		)		(1.3		)
Total	$	50.2			$	161.1			$	40.2

(1)	Interest expense in fiscal 2018 includes approximately $102.2 million of expenses associated with the retirement of long-term debt.

Statements of Cash Flows

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Cash paid during the fiscal year for:
Interest, net of amounts capitalized (1)	$	50.8			$	155.5			$	37.0
Income taxes, net of refunds	$	23.7			$	25.7			$	106.2
Non-cash investing and financing activities:
Increase in land, buildings and equipment through accrued purchases	$	38.3			$	37.5			$	22.8

(1)	Interest paid in fiscal 2018 includes approximately $97.3 million of payments associated with the retirement of long-term debt.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13 - INCOME TAXES

The Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from 35.0 percent to 21.0 percent effective January 1, 2018. In accordance with FASB ASC 740, for the fiscal year ended May 27, 2018, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a $79.3 million one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of May 27, 2018 and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal year ended May 27, 2018. The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. In fiscal 2019, we concluded our analysis of the accounting impact of the Tax Act pursuant to SEC Staff Accounting Bulletin 118 and recorded immaterial adjustments to the provisional amounts.

Total income tax expense was allocated as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Earnings from continuing operations	$	63.7			$	1.9			$	154.8
Earnings from discontinued operations	(1.8		)		(4.8		)		(4.2		)
Total consolidated income tax expense (benefit)	$	61.9			$	(2.9	)		$	150.6

The components of earnings from continuing operations before income taxes and the provision for income taxes thereon are as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Earnings from continuing operations before income taxes:
U.S.	$	780.7			$	602.7			$	632.3
Foreign	1.6				3.0				5.0
Earnings from continuing operations before income taxes	$	782.3			$	605.7			$	637.3
Income taxes:
Current:
Federal	$	(7.2	)		$	10.2			$	160.5
State and local	20.3				8.9				22.2
Foreign	1.4				1.8				1.3
Total current	$	14.5			$	20.9			$	184.0
Deferred (principally U.S.):
Federal	$	44.9			$	(25.1	)		$	(24.1	)
State and local	4.3				6.1				(5.1		)
Total deferred	$	49.2			$	(19.0	)		$	(29.2	)
Total income taxes	$	63.7			$	1.9			$	154.8

The following table is a reconciliation of the U.S. statutory income tax rate to the effective income tax rate from continuing operations included in the accompanying consolidated statements of earnings:

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

	Fiscal Year Ended
	May 26, 2019			May 27, 2018			May 28, 2017
U.S. statutory rate	21.0	%		29.4	%		35.0	%
State and local income taxes, net of federal tax benefits	2.4			1.8			1.7
Enactment of the Tax Act	—			(13.1	)		—
Benefit of federal income tax credits	(10.8	)		(12.8	)		(9.2	)
Other, net	(4.5	)		(5.0	)		(3.2	)
Effective income tax rate	8.1	%		0.3	%		24.3	%

As of May 26, 2019, we had estimated current prepaid state and federal income taxes of $2.8 million and $38.8 million, respectively, which is included on our accompanying consolidated balance sheets as prepaid income taxes and estimated current state and federal income taxes payable of $5.6 million and $6.0 million, respectively, which is included on our accompanying consolidated balance sheets as accrued income taxes.

As of May 26, 2019, we had unrecognized tax benefits of $27.0 million, which represents the aggregate tax effect of the differences between tax return positions and benefits recognized in our consolidated financial statements, all of which would favorably affect the effective tax rate if resolved in our favor. Included in the balance of unrecognized tax benefits at May 26, 2019, is $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.

A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

(in millions)
Balances at May 27, 2018	$	17.4
Additions related to current-year tax positions	4.6
Additions related to prior-year tax positions	7.2
Net additions due to settlements with taxing authorities	0.7
Reductions to tax positions due to statute expiration	(2.9		)
Balances at May 26, 2019	$	27.0

Interest recorded on reserves for uncertain tax positions was included in income tax expense in our consolidated statements of earnings as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Interest recorded on unrecognized tax benefits	$	1.5			$	0.8			$	0.6

At May 26, 2019, we had $1.8 million accrued for the payment of interest associated with unrecognized tax benefits.

For U.S. federal income tax purposes, we participate in the IRS’s Compliance Assurance Process (CAP), whereby our U.S. federal income tax returns are reviewed by the IRS both prior to and after their filing. Income tax returns are subject to audit by state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, Canada, and all states in the U.S. that have an income tax. With a few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before fiscal 2019, and state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2015.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:

(in millions)	May 26, 2019				May 27, 2018
Accrued liabilities	$	69.2			$	66.6
Compensation and employee benefits	119.9				99.8
Deferred rent and interest income	91.1				81.1
Net operating loss, credit and charitable contribution carryforwards	75.3				71.9
Other	5.9				5.3
Gross deferred tax assets	$	361.4			$	324.7
Valuation allowance	(29.7		)		(26.6		)
Deferred tax assets, net of valuation allowance	$	331.7			$	298.1
Trademarks and other acquisition related intangibles	(211.5		)		(201.8		)
Buildings and equipment	(247.7		)		(176.9		)
Capitalized software and other assets	(24.6		)		(24.4		)
Other	(4.8		)		(9.0		)
Gross deferred tax liabilities	$	(488.6	)		$	(412.1	)
Net deferred tax liabilities	$	(156.9	)		$	(114.0	)

We have deferred tax assets of $15.4 million reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2020 and fiscal 2038. We have deferred tax assets of $16.5 million of federal and $39.9 million state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2039. Additionally, we have deferred tax assets of $11.1 million reflecting the benefit of foreign loss carryforwards, before valuation allowance, which have an indefinite life.

We have taken current and potential future expirations into consideration when evaluating the need for valuation allowances against these deferred tax assets. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which our deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at May 26, 2019.

NOTE 14 - RETIREMENT PLANS

Defined Benefit Plans and Postretirement Benefit Plan

We sponsor non-contributory defined benefit pension plans for a group of certain eligible employees in the United States under which benefits are based on various formulas, including a Final Average Pay formula and a Cash Balance formula. As of December 2014, the plans were frozen and no additional benefits will accrue for participants (except for continuing interest credits for eligible participants in the Cash Balance formula). Pension plan assets are invested in global fixed-income commingled funds. Our policy is to fund, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code (IRC), as amended by the Pension Protection Act of 2006. We also sponsor a non-contributory postretirement benefit plan that provides health care benefits to certain eligible salaried retirees as a subsidy credit to a health care reimbursement account. This benefit is not impacted by future changes in health care trend rates. 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 will be completed during fiscal 2020. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider. At this time, no additional contribution is needed by us to cover the lump-sum payments and annuity purchases. The amount of the final contribution is subject to a number of factors, including changes in interest rates and the exact proportion of the participants electing a lump-sum distribution versus an annuity. The plan termination is expected to result in non-cash pre-tax pension settlement expense in fiscal 2020 of approximately $130.0 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Fundings related to the defined benefit pension plans and postretirement benefit plan, which are funded on a pay-as-you-go basis, were as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Defined benefit pension plans funding (1)	$	0.4			$	60.8			$	0.4
Postretirement benefit plan funding	1.3				1.2				1.2

(1)	Fundings for fiscal 2018 include voluntary funding contributions of $60.4 million.

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.

We are required to recognize the over- or under-funded status of the plans as an asset or liability as measured by the difference between the fair value of the plan assets and the benefit obligation and any unrecognized prior service costs and actuarial gains and losses as a component of accumulated other comprehensive income (loss), net of tax. During the fourth quarter of fiscal 2017, the defined benefit pension plans recognized $19.9 million of previously unrecognized loss in net periodic benefit cost due to a settlement charge triggered by lump sum payouts.

The following provides a reconciliation of the changes in the plan benefit obligation, fair value of plan assets and the funded status of the plans as of May 26, 2019 and May 27, 2018:

	Defined Benefit Plans								Postretirement Benefit Plan
(in millions)	May 26, 2019				May 27, 2018				May 26, 2019				May 27, 2018
Change in Benefit Obligation:
Benefit obligation at beginning of period	$	237.2			$	252.3			$	19.9			$	20.8
Service cost	—				—				0.1				0.1
Interest cost	9.3				8.6				0.8				0.7
Benefits paid	(17.8		)		(15.6		)		(1.3		)		(1.2		)
Actuarial (gain) loss	23.3				(8.1		)		0.3				(0.5		)
Benefit obligation at end of period	$	252.0			$	237.2			$	19.8			$	19.9

Change in Plan Assets:
Fair value at beginning of period	$	253.8			$	207.7			$	—			$	—
Actual return on plan assets	12.1				0.9				—				—
Employer contributions	0.4				60.8				1.3				1.2
Benefits paid	(17.8		)		(15.6		)		(1.3		)		(1.2		)
Fair value at end of period	$	248.5			$	253.8			$	—			$	—

Funded (unfunded) status at end of period	$	(3.5	)		$	16.6			$	(19.8	)		$	(19.9	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following is a detail of the balance sheet components of each of our plans and a reconciliation of the amounts included in accumulated other comprehensive income (loss):

	Defined Benefit Plans								Postretirement Benefit Plan
(in millions)	May 26, 2019				May 27, 2018				May 26, 2019				May 27, 2018
Components of the Consolidated Balance Sheets:
Current liabilities	$	—			$	—			$	1.4			$	1.4
Noncurrent (assets) liabilities	3.5				(16.6		)		18.4				18.5
Net amounts recognized	$	3.5			$	(16.6	)		$	19.8			$	19.9
Amounts Recognized in Accumulated Other Comprehensive Income (Loss), net of tax:
Prior service credit	$	—			$	—			$	3.8			$	7.4
Net actuarial gain (loss)	(100.4		)		(85.4		)		(8.7		)		(9.6		)
Net amounts recognized	$	(100.4	)		$	(85.4	)		$	(4.9	)		$	(2.2	)

The following is a summary of our accumulated and projected benefit obligations for our defined benefit plans:

(in millions)	May 26, 2019				May 27, 2018
Accumulated benefit obligation for all defined benefit plans	$	252.0			$	237.2
Pension plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	252.0				—
Fair value of plan assets	248.5				—
Projected benefit obligations for all plans with projected benefit obligations in excess of plan assets	252.0				—

The following table presents the weighted-average assumptions used to determine benefit obligations and net expense:

	Defined Benefit Plans						Postretirement Benefit Plan
	May 26, 2019			May 27, 2018			May 26, 2019			May 27, 2018
Weighted-average assumptions used to determine benefit obligations at May 26 and May 27 (1)
Discount rate	2.66	%		4.32	%		3.95	%		4.28	%
Rate of future compensation increases	N/A			N/A			N/A			N/A
Weighted-average assumptions used to determine net expense for fiscal years ended May 26 and May 27 (2)
Discount rate	4.32	%		4.06	%		4.28	%		3.98	%
Expected long-term rate of return on plan assets	4.25	%		5.75	%		N/A			N/A
Rate of future compensation increases	N/A			N/A			N/A			N/A

(1)	Determined as of the end of fiscal year.

(2)	Determined as of the beginning of fiscal year.

We set the discount rate assumption annually for each of the plans at their valuation dates to reflect the yield of high-quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. Additionally, for our mortality assumption as of fiscal year end, we selected the most recent RP-2014 mortality tables and MP-2018 mortality improvement scale to measure the benefit obligations.

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 fund 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 5.75 percent in fiscal 2018 and was reduced to 4.25 percent for fiscal 2019 in connection with our current expectations for long-term returns and target asset fund allocation. In developing our expected rate of return assumption, we have evaluated the actual historical performance and long-term return projections of the plan assets, which give consideration to the asset mix and the anticipated

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

timing of the pension plan outflows. We employ a total return investment approach to maximize the long-term return of plan assets for what we consider a prudent level of risk dependent on the level of funding. Our historical 10-year, 15-year and 20-year rates of return on plan assets, calculated using the geometric method average of returns, are approximately 9.6 percent, 7.9 percent and 7.6 percent, respectively, as of May 26, 2019. Our Benefit Plans Committee has delegated to the Benefit Plans Investment Committee the authority to set the investment policy for the defined benefit plans and oversees the investment allocation, which includes setting long-term strategic targets. The investment policy establishes a re-balancing band around the established targets within which the asset class weight is allowed to vary. We monitor our actual asset fund allocation to ensure that it approximates, based on the current funding level, our target allocation and believe that our long-term asset fund allocation will continue to approximate our target allocation. Our investment strategy is to invest 100.0 percent in liability matching high-quality, long-duration fixed-income investments. Investments are held in various global fixed income commingled funds representing approximately 66.0 percent of total plan assets. The remainder of the assets are held in cash and cash equivalents. These investments are the only significant concentration of risk related to a single entity, sector, country, commodity or investment fund.

Components of net periodic benefit cost included in earnings are as follows:

	Defined Benefit Plans												Postretirement Benefit Plan
	Fiscal Year Ended												Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017				May 26, 2019				May 27, 2018				May 28, 2017
Service cost	$	—			$	—			$	—			$	0.1			$	0.1			$	0.2
Interest cost	9.3				8.6				10.1				0.8				0.7				0.6
Expected return on plan assets	(11.2		)		(12.0		)		(16.0		)		—				—				—
Amortization of unrecognized prior service cost	—				—				—				(4.8		)		(4.8		)		(4.8		)
Recognized net actuarial loss	2.5				2.8				3.3				1.5				1.7				1.7
Settlement loss recognized	—				—				19.9				—				—				—
Net pension and postretirement cost (benefit)	$	0.6			$	(0.6	)		$	17.3			$	(2.4	)		$	(2.3	)		$	(2.3	)

The amortization of the net actuarial gain (loss) component of our fiscal 2020 net periodic benefit cost for the defined benefit plans and postretirement benefit plan is expected to be approximately $(3.5) million and $3.3 million, respectively.

The fair values of the defined benefit pension plans assets at their measurement dates of May 26, 2019 and May 27, 2018, are as follows:

			Items Measured at Fair Value at May 26, 2019
(in millions)			Fair Value of Assets (Liabilities)				Quoted Prices in Active Market for Identical Assets (Liabilities) (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Fixed-Income:
Global Fixed-Income Commingled Funds	(1)		$	163.8			$	—			$	163.8			$	—
Cash and Accruals			84.7				84.7				—				—
Total			$	248.5			$	84.7			$	163.8			$	—

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

			Items Measured at Fair Value at May 27, 2018
(in millions)			Fair Value of Assets (Liabilities)				Quoted Prices in Active Market for Identical Assets (Liabilities) (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Fixed-Income:
Global Fixed-Income Commingled Funds	(1)		$	253.5			$	—			$	253.5			$	—
Cash and Accruals			0.3				0.3				—				—
Total			$	253.8			$	0.3			$	253.5			$	—

(1)	Global fixed-income commingled funds are comprised of investments in U.S. and non-U.S. government fixed-income securities. Investments are valued using a unit price or net asset value (NAV) based on the fair value of the underlying investments of the fund. There are no redemption restrictions associated with this fund.

The following benefit payments are expected to be paid between fiscal 2020 and fiscal 2029:

(in millions)		Defined Benefit Plans				Postretirement Benefit Plan
2020		$	247.5			$	1.4
2021		0.4				1.4
2022		0.4				1.3
2023		0.4				1.3
2024		0.4				1.3
2025-2029		1.8				6.5

Defined Contribution Plan

We have a defined contribution (401(k)) plan (Darden Savings Plan) covering most employees age 21 and older. We match contributions for participants with at least one year of service up to 6 percent of compensation, based on our performance. The match ranges from a minimum of $0.25 to $1.20 for each dollar contributed by the participant. The Darden Savings Plan also provides for a profit sharing contribution for eligible participants equal to 1.5 percent of the participant’s compensation. The Darden Savings Plan had net assets of $947.9 million at May 26, 2019, and $829.0 million at May 27, 2018. Expense recognized in fiscal 2019, 2018 and 2017 was $26.1 million, $19.6 million and $3.7 million, respectively. Employees classified as “highly compensated” under the IRC are not eligible to participate in the Darden Savings Plan. Instead, highly compensated employees are eligible to participate in a separate non-qualified deferred compensation (FlexComp) plan. The FlexComp plan allows eligible employees to defer the payment of part of their annual salary and all or part of their annual bonus and provides for awards that approximate the matching contributions that participants would have received had they been eligible to participate in the Darden Savings Plan, as well as an additional retirement contribution amount. Amounts payable to highly compensated employees under the FlexComp plan totaled $237.9 million and $227.9 million at May 26, 2019 and May 27, 2018, respectively. These amounts are included in other current liabilities on our accompanying consolidated balance sheets.

The Darden Savings Plan includes a leveraged Employee Stock Ownership Plan (ESOP). The ESOP borrowed $16.9 million from us at a variable rate of interest in July 1996. At May 26, 2019, the ESOP’s original debt to us had a balance of $0.7 million with a variable rate of interest of 2.48 percent and is due to be repaid no later than December 2019. Compensation expense is recognized as contributions are accrued. Fluctuations in our stock price impact the amount of expense to be recognized. Contributions to the Darden Savings Plan, plus the dividends accumulated on unallocated shares held by the ESOP, are used to pay principal, interest and expenses of the Darden Savings Plan. As loan payments are made, common stock is allocated to ESOP participants. In each of the fiscal years 2019, 2018 and 2017, the ESOP used dividends received of $0.2 million, $0.5 million and $0.8 million, respectively, and contributions received from us of $1.0 million, $0.1 million and $0.1 million, respectively, to pay principal and interest on our debt.

ESOP shares are included in weighted-average common shares outstanding for purposes of calculating net earnings per share with the exception of those shares acquired under the Additional Loan, which are accounted for in accordance with FASB ASC Subtopic 718-40, Employee Stock Ownership Plans. Fluctuations in our stock price are recognized as adjustments to common stock and surplus when the shares are committed to be released. The ESOP shares acquired under the Additional Loan

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

are not considered outstanding until they are committed to be released and, therefore, unreleased shares have been excluded for purposes of calculating basic and diluted net earnings per share. As of May 26, 2019, the ESOP shares included in the basic and diluted net earnings per share calculation totaled 1.9 million shares, representing 1.8 million allocated shares and 0.1 million suspense shares.

NOTE 15 - STOCK-BASED COMPENSATION

In September 2015, our shareholders approved the Darden Restaurants, Inc. 2015 Omnibus Incentive Plan (2015 Plan). All equity grants subject to ASC Topic 718 after the date of approval are made under the 2015 Plan. No further equity grants after that date are permitted under the Darden Restaurants, Inc. 2002 Stock Incentive Plan, the RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan or any other prior stock option and/or stock grant plans (collectively, the Prior Plans). The 2015 Plan and the Prior Plans are administered by the Compensation Committee of the Board of Directors. The 2015 Plan provides for the issuance of up to 7.6 million common shares in connection with the granting of non-qualified stock options, restricted stock, restricted stock units (RSUs), performance-based restricted stock units (PRSUs) and other stock-based awards such as Darden stock units to employees, consultants and non-employee directors. There are outstanding awards under the Prior Plans that may still vest and be exercised in accordance with their terms. As of May 26, 2019, approximately 1.5 million shares may be issued under outstanding awards that were granted under the Prior Plans.

Stock-based compensation expense and the associated income tax benefit included in continuing operations was as follows:

	Fiscal Year Ended
(in millions)	May 26, 2019				May 27, 2018				May 28, 2017
Stock options	$	5.0			$	4.6			$	6.0
Restricted stock/restricted stock units	6.1				3.9				1.9
Darden stock units	33.0				20.1				20.9
Cash-settled performance stock units	—				—				4.2
Equity-settled performance-based restricted stock units	12.9				11.7				5.3
Employee stock purchase plan	1.5				1.3				1.1
Director compensation program/other	1.3				1.2				1.3
Total	$	59.8			$	42.8			$	40.7
Income tax benefits (1)	$	19.5			$	12.0			$	—

(1)	In accordance with the fiscal 2018 adoption of ASU 2016-09, excess tax benefits are recognized in our provision for income taxes rather than in equity as previously recognized.

The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes model to record stock-based compensation are as follows:

	Granted in Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Weighted-average fair value	$	18.78			$	14.63			$	9.08
Dividend yield	3.2		%		3.0		%		3.5		%
Expected volatility of stock	22.6		%		23.5		%		24.3		%
Risk-free interest rate	2.9		%		2.0		%		1.4		%
Expected option life (in years)	6.4				6.4				6.5
Weighted-average exercise price per share	$	107.05			$	85.83			$	59.70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents a summary of our stock option activity as of and for the year ended May 26, 2019:

	Options (in millions)		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life (Yrs)		Aggregate Intrinsic Value (in millions)
Outstanding beginning of period	3.53		$41.87		5.89		$130.6
Options granted	0.37		107.05
Options exercised	(1.24)		42.14
Options canceled	(0.06)		76.32
Outstanding end of period	2.60		$62.50		6.22		$149.9
Exercisable	1.28		$45.12		4.54		$95.8

The total intrinsic value of options exercised during fiscal 2019, 2018 and 2017 was $83.5 million, $43.1 million and $99.1 million, respectively. Cash received from option exercises during fiscal 2019, 2018 and 2017 was $52.2 million, $32.0 million and $107.8 million, respectively. Stock options generally vest over 4 years and have a maximum contractual period of 10 years from the date of grant. We settle employee stock option exercises with authorized but unissued shares of Darden common stock.

As of May 26, 2019, there was $9.1 million of unrecognized compensation cost related to unvested stock options granted under our stock plans. This cost is expected to be recognized over a weighted-average period of 2.5 years. The total fair value of stock options that vested during fiscal 2019 was $5.0 million.

Restricted stock and RSUs are granted at a value equal to the market price of our common stock on the date of grant, and amortized over their service periods which generally range from one to four years. Restrictions with regard to restricted stock and RSUs lapse at the end of their service periods at which employees receive unrestricted shares of Darden stock.

The following table presents a summary of our restricted stock and RSU activity as of and for the fiscal year ended May 26, 2019:

	Shares (in millions)		Weighted-Average Grant Date Fair Value Per Share
Outstanding beginning of period	0.24		$71.99
Shares granted	0.09		108.36
Shares vested	(0.04)		56.93
Shares canceled	(0.01)		87.99
Outstanding end of period	0.28		$85.67

As of May 26, 2019, there was $10.6 million of unrecognized compensation cost related to unvested restricted stock and RSUs granted under our stock plans. This cost is expected to be recognized over a weighted-average period of 1.8 years. The total fair value of restricted stock and RSUs that vested during fiscal 2019, 2018 and 2017 was $2.3 million, $2.9 million and $1.7 million, respectively.

Darden stock units are granted at a value equal to the market price of our common stock on the date of grant and will be settled in cash at the end of their vesting periods, which typically range from three to five years, at the then market price of our common stock. Compensation expense is measured based on the market price of our common stock each period, is amortized over the vesting period and the vested portion is carried as a liability on our accompanying consolidated balance sheets. We also entered into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized Darden stock units granted (see Note 8 for additional information).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents a summary of our Darden stock unit activity as of and for the fiscal year ended May 26, 2019:

(All units settled in cash)	Units (in millions)		Weighted-Average Fair Value Per Unit
Outstanding beginning of period	1.39		$87.88
Units granted	0.23		107.05
Units vested	(0.33)		109.84
Units canceled	(0.09)		79.32
Outstanding end of period	1.20		$120.13

As of May 26, 2019, our total Darden stock unit liability was $80.6 million, including $30.7 million recorded in other current liabilities and $49.9 million recorded in other liabilities on our consolidated balance sheets. As of May 27, 2018, our total Darden stock unit liability was $62.7 million, including $26.1 million recorded in other current liabilities and $36.6 million recorded in other liabilities on our consolidated balance sheets.

Based on the value of our common stock as of May 26, 2019, there was $42.4 million of unrecognized compensation cost related to Darden stock units granted under our incentive plans. This cost is expected to be recognized over a weighted-average period of 2.3 years but the amount that vests is ultimately dependent on the value of Darden stock at the vesting date. The total fair value of Darden stock units that vested during fiscal 2019 was $36.2 million.

Relative total shareholder return PRSUs and absolute PRSUs vest over the service period which ranges from three to four years, and the number of units that actually vest is determined based on the achievement of performance criteria set forth in the award agreement. Relative total shareholder return PRSUs, which vest based on the achievement of market-based targets, are measured based on estimated fair value as of the date of grant using a Monte Carlo simulation, and amortized over the service period. Absolute PRSUs, which vest based on the achievement of company specific targets, are measured based on a value equal to the market price of our common stock on the date of grant, and amortized over the service period. Additionally, under special circumstances, Darden grants equity-settled PRSUs which are earned based on specific performance criteria. These PRSUs are measured based on a value equal to the market price of our common stock on the date of grant, and amortized over the service periods which generally range from two to five years.

The weighted-average grant date fair value of PRSUs and the related assumptions used in the Monte Carlo simulation to record stock-based compensation are as follows:

	Granted in Fiscal Year Ended
	May 26, 2019				May 27, 2018				May 28, 2017
Dividend yield (1)	0.0		%		0.0		%		0.0		%
Expected volatility of stock	23.4		%		21.5		%		22.5		%
Risk-free interest rate	2.7		%		1.5		%		0.8		%
Expected option life (in years)	2.9				2.9				2.8
Weighted-average grant date fair value per unit	$	100.72			$	90.51			$	60.05

(1)	Assumes a reinvestment of dividends.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table presents a summary of our equity-settled PRSU activity as of and for the fiscal year ended May 26, 2019:

	Units (in millions)		Weighted-Average Grant Date Fair Value Per Unit
Outstanding beginning of period	0.55		$74.04
Units granted	0.21		100.72
Units vested	(0.11)		63.91
Units canceled	(0.05)		85.09
Outstanding end of period	0.60		$84.11

As of May 26, 2019, there was $23.1 million of unrecognized compensation cost related to unvested equity-settled PRSUs granted under our stock plans. This cost is expected to be recognized over a weighted-average period of 2.4 years. The total fair value of equity-settled PRSUs that vested during fiscal 2019 was $6.9 million.

We maintain an Employee Stock Purchase Plan to provide eligible employees who have completed one year of service (excluding senior officers subject to Section 16(b) of the Securities Exchange Act of 1934, and certain other employees who are employed less than full time or own 5 percent or more of our capital stock or that of any subsidiary) an opportunity to invest up to $5.0 thousand per calendar quarter to purchase shares of our common stock, subject to certain limitations. Under the plan, up to an aggregate of 5.2 million shares are available for purchase by employees at a purchase price that is 85.0 percent of the fair market value of our common stock on either the first or last trading day of each calendar quarter, whichever is lower. Cash received from employees pursuant to the plan during fiscal 2019, 2018 and 2017 was $7.1 million, $5.8 million and $5.2 million, respectively.

NOTE 16 - COMMITMENTS AND CONTINGENCIES

As collateral for performance on contracts and as credit guarantees to banks and insurers, we were contingently liable for guarantees of subsidiary obligations under standby letters of credit. At May 26, 2019 and May 27, 2018, we had $75.9 million and $96.9 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. At May 26, 2019 and May 27, 2018, we had $21.6 million and $17.6 million, respectively, of surety bonds related to other payments. Most surety bonds are renewable annually.

At May 26, 2019 and May 27, 2018, we had $151.6 million and $154.0 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of these potential payments discounted at our weighted-average cost of capital at May 26, 2019 and May 27, 2018, amounted to $123.2 million and $131.0 million, respectively. We did not record a liability for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was deemed to be remote. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2020 through fiscal 2034.

We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.

NOTE 17 – SUBSEQUENT EVENT

On June 19, 2019, the Board of Directors declared a cash dividend of $0.88 per share to be paid August 1, 2019 to all shareholders of record as of the close of business on July 10, 2019.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 18 - QUARTERLY DATA (UNAUDITED)

The following table summarizes unaudited quarterly data for fiscal 2019 and fiscal 2018:

	Fiscal 2019 - Quarters Ended
(in millions, except per share data)	Aug. 26				Nov. 25				Feb. 24				May 26				Total
Sales	$	2,061.4			$	1,973.4			$	2,246.5			$	2,229.1			$	8,510.4
Earnings before income taxes	176.0				135.3				253.1				217.9				782.3
Earnings from continuing operations	168.9				115.9				225.1				208.7				718.6
Losses from discontinued operations, net of tax	(2.7		)		(0.3		)		(1.5		)		(0.7		)		(5.2		)
Net earnings	166.2				115.6				223.6				208.0				713.4
Basic net earnings per share:
Earnings from continuing operations	1.36				0.94				1.83				1.70				5.82
Losses from discontinued operations	(0.02		)		(0.01		)		(0.02		)		(0.01		)		(0.04		)
Net earnings	1.34				0.93				1.81				1.69				5.78
Diluted net earnings per share:
Earnings from continuing operations	1.34				0.92				1.80				1.67				5.73
Losses from discontinued operations	(0.02		)		—				(0.01		)		—				(0.04		)
Net earnings	1.32				0.92				1.79				1.67				5.69
	Fiscal 2018 - Quarters Ended
(in millions, except per share data)	Aug. 27				Nov. 26				Feb. 25				May 27				Total
Sales	$	1,936.1			$	1,881.5			$	2,128.4			$	2,134.1			$	8,080.1
Earnings before income taxes	159.5				113.4				116.0				216.8				605.7
Earnings from continuing operations	121.3				88.6				218.5				175.4				603.8
Losses from discontinued operations, net of tax	(2.3		)		(3.9		)		(0.7		)		(0.9		)		(7.8		)
Net earnings	119.0				84.7				217.8				174.5				596.0
Basic net earnings per share:
Earnings from continuing operations	0.97				0.72				1.77				1.42				4.87
Losses from discontinued operations	(0.02		)		(0.03		)		(0.01		)		(0.01		)		(0.06		)
Net earnings	0.95				0.69				1.76				1.41				4.81
Diluted net earnings per share:
Earnings from continuing operations	0.95				0.71				1.74				1.40				4.79
Losses from discontinued operations	(0.02		)		(0.04		)		(0.01		)		(0.01		)		(0.06		)
Net earnings	0.93				0.67				1.73				1.39				4.73