filings.toolsItem 1. Financial Statements (Unaudited)
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Item 1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||
| Sales | $ | 2,448.9 | $ | 1,733.0 | $ | 7,027.1 | $ | 4,916.9 | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Food and beverage | 752.7 | 499.4 | 2,132.2 | 1,409.0 | |||||||||||||||||||
| Restaurant labor | 798.7 | 559.4 | 2,279.5 | 1,595.6 | |||||||||||||||||||
| Restaurant expenses | 395.7 | 336.8 | 1,158.8 | 958.2 | |||||||||||||||||||
| Marketing expenses | 27.2 | 19.2 | 73.0 | 66.8 | |||||||||||||||||||
| General and administrative expenses | 83.1 | 78.9 | 289.0 | 298.8 | |||||||||||||||||||
| Depreciation and amortization | 94.3 | 88.2 | 275.4 | 261.8 | |||||||||||||||||||
| Impairments and disposal of assets, net | (3.8) | 3.1 | (5.5) | 1.4 | |||||||||||||||||||
| Total operating costs and expenses | $ | 2,147.9 | $ | 1,585.0 | $ | 6,202.4 | $ | 4,591.6 | |||||||||||||||
| Operating income | 301.0 | 148.0 | 824.7 | 325.3 | |||||||||||||||||||
| Interest, net | 17.5 | 15.2 | 49.8 | 46.4 | |||||||||||||||||||
| Other (income) expense, net | 0.2 | 0.5 | 0.7 | 8.4 | |||||||||||||||||||
| Earnings before income taxes | 283.3 | 132.3 | 774.2 | 270.5 | |||||||||||||||||||
| Income tax expense | 35.4 | 3.1 | 101.2 | 7.1 | |||||||||||||||||||
| Earnings from continuing operations | $ | 247.9 | $ | 129.2 | $ | 673.0 | $ | 263.4 | |||||||||||||||
| Losses from discontinued operations, net of tax benefit of $0.0, $0.8, $0.4 and $2.4, respectively | (0.9) | (0.5) | (1.9) | (2.6) | |||||||||||||||||||
| Net earnings | $ | 247.0 | $ | 128.7 | $ | 671.1 | $ | 260.8 | |||||||||||||||
| Basic net earnings per share: | |||||||||||||||||||||||
| Earnings from continuing operations | $ | 1.95 | $ | 0.99 | $ | 5.22 | $ | 2.02 | |||||||||||||||
| Losses from discontinued operations | (0.01) | — | (0.01) | (0.02) | |||||||||||||||||||
| Net earnings | $ | 1.94 | $ | 0.99 | $ | 5.21 | $ | 2.00 | |||||||||||||||
| Diluted net earnings per share: | |||||||||||||||||||||||
| Earnings from continuing operations | $ | 1.93 | $ | 0.98 | $ | 5.17 | $ | 2.00 | |||||||||||||||
| Losses from discontinued operations | — | — | (0.01) | (0.02) | |||||||||||||||||||
| Net earnings | $ | 1.93 | $ | 0.98 | $ | 5.16 | $ | 1.98 | |||||||||||||||
| Average number of common shares outstanding: | |||||||||||||||||||||||
| Basic | 127.0 | 130.5 | 128.9 | 130.3 | |||||||||||||||||||
| Diluted | 128.2 | 132.0 | 130.1 | 131.5 |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||
| Net earnings | $ | 247.0 | $ | 128.7 | $ | 671.1 | $ | 260.8 | |||||||||||||||
| Foreign currency adjustment | 0.1 | 0.2 | (0.4) | 0.4 | |||||||||||||||||||
| Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.2, $0.2, $0.2 and $0.5, respectively | 1.1 | 7.1 | (2.4) | 16.6 | |||||||||||||||||||
| Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial gain (loss), net of taxes of $0.0, $0.1, $0.2 and $0.4, respectively, related to pension and other post-employment benefits | 0.2 | 0.5 | 0.6 | 1.3 | |||||||||||||||||||
| Other comprehensive income (loss) | $ | 1.4 | $ | 7.8 | $ | (2.2) | $ | 18.3 | |||||||||||||||
| Total comprehensive income | $ | 248.4 | $ | 136.5 | $ | 668.9 | $ | 279.1 |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
| February 27, 2022 | May 30, 2021 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 555.3 | $ | 1,214.7 | |||||||
| Receivables, net | 52.6 | 68.2 | |||||||||
| Inventories | 243.7 | 190.8 | |||||||||
| Prepaid income taxes | 298.1 | 337.2 | |||||||||
| Prepaid expenses and other current assets | 130.4 | 60.2 | |||||||||
| Total current assets | $ | 1,280.1 | $ | 1,871.1 | |||||||
| Land, buildings and equipment, net of accumulated depreciation and amortization of $3,057.8 and $2,843.8, respectively | 3,253.9 | 2,869.2 | |||||||||
| Operating lease right-of-use assets | 3,531.0 | 3,776.4 | |||||||||
| Goodwill | 1,037.4 | 1,037.4 | |||||||||
| Trademarks | 806.3 | 806.3 | |||||||||
| Other assets | 296.7 | 295.7 | |||||||||
| Total assets | $ | 10,205.4 | $ | 10,656.1 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 350.0 | $ | 304.5 | |||||||
| Accrued payroll | 177.5 | 177.4 | |||||||||
| Accrued income taxes | 4.8 | 35.9 | |||||||||
| Other accrued taxes | 59.7 | 60.5 | |||||||||
| Unearned revenues | 537.3 | 474.2 | |||||||||
| Other current liabilities | 686.6 | 795.8 | |||||||||
| Total current liabilities | $ | 1,815.9 | $ | 1,848.3 | |||||||
| Long-term debt | 916.4 | 929.8 | |||||||||
| Deferred income taxes | 232.0 | 221.6 | |||||||||
| Operating lease liabilities - non-current | 3,832.2 | 4,088.5 | |||||||||
| Other liabilities | 1,123.1 | 754.8 | |||||||||
| Total liabilities | $ | 7,919.6 | $ | 7,843.0 | |||||||
| Stockholders’ equity: | |||||||||||
| Common stock and surplus | $ | 2,249.8 | $ | 2,286.6 | |||||||
| Retained earnings | 34.0 | 522.3 | |||||||||
| Accumulated other comprehensive income (loss) | 2.0 | 4.2 | |||||||||
| Total stockholders’ equity | $ | 2,285.8 | $ | 2,813.1 | |||||||
| Total liabilities and stockholders’ equity | $ | 10,205.4 | $ | 10,656.1 |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three And Nine Months Ended February 27, 2022 and February 28, 2021
(In millions)
(Unaudited)
| Common Stock And Surplus | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Balance at November 28, 2021 | 128.3 | $ | 2,280.6 | $ | 261.8 | $ | 0.6 | $ | 2,543.0 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 247.0 | 247.0 | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | 1.4 | 1.4 | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($1.10 per share) | — | — | (140.7) | — | (140.7) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.1 | 8.1 | — | — | 8.1 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 6.1 | — | — | 6.1 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (2.7) | (47.7) | (334.1) | — | (381.8) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | — | 2.6 | — | — | 2.6 | ||||||||||||||||||||||||||||||||||||
| Other | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||||||||||||||
| Balance at February 27, 2022 | 125.7 | $ | 2,249.8 | $ | 34.0 | $ | 2.0 | $ | 2,285.8 | ||||||||||||||||||||||||||||||||
| Balance at May 30, 2021 | 130.8 | $ | 2,286.6 | $ | 522.3 | $ | 4.2 | $ | 2,813.1 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 671.1 | — | 671.1 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | (2.2) | (2.2) | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($3.30 per share) | — | — | (427.9) | — | (427.9) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.5 | 28.7 | — | — | 28.7 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 28.0 | — | — | 28.0 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (5.8) | (102.6) | (731.5) | — | (834.1) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | 0.2 | 7.7 | — | — | 7.7 | ||||||||||||||||||||||||||||||||||||
| Other | — | 1.4 | — | — | 1.4 | ||||||||||||||||||||||||||||||||||||
| Balance at February 27, 2022 | 125.7 | $ | 2,249.8 | $ | 34.0 | $ | 2.0 | $ | 2,285.8 |
| Balance at November 29, 2020 | 130.3 | $ | 2,239.0 | $ | 223.2 | $ | (7.1) | $ | 2,455.1 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 128.7 | — | 128.7 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 7.8 | 7.8 | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.37 per share) | — | — | (48.6) | — | (48.6) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.4 | 21.5 | — | — | 21.5 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 9.2 | — | — | 9.2 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | — | — | (0.4) | — | (0.4) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | — | 2.3 | — | — | 2.3 | ||||||||||||||||||||||||||||||||||||
| Other | — | (0.2) | 0.1 | — | (0.1) | ||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2021 | 130.7 | $ | 2,271.8 | $ | 303.0 | $ | 0.7 | $ | 2,575.5 | ||||||||||||||||||||||||||||||||
| Balance at May 31, 2020 | 129.9 | $ | 2,205.3 | $ | 143.5 | $ | (17.6) | $ | 2,331.2 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 260.8 | — | 260.8 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 18.3 | 18.3 | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($0.67 per share) | — | — | (88.1) | — | (88.1) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.5 | 27.1 | — | — | 27.1 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 32.2 | — | — | 32.2 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (0.1) | (1.5) | (5.7) | — | (7.2) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | 0.4 | 7.1 | — | — | 7.1 | ||||||||||||||||||||||||||||||||||||
| Other | — | 1.6 | (7.5) | — | (5.9) | ||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2021 | 130.7 | $ | 2,271.8 | $ | 303.0 | $ | 0.7 | $ | 2,575.5 |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| February 27, 2022 | February 28, 2021 | ||||||||||
| Cash flows—operating activities | |||||||||||
| Net earnings | $ | 671.1 | $ | 260.8 | |||||||
| Losses from discontinued operations, net of tax | 1.9 | 2.6 | |||||||||
| Adjustments to reconcile net earnings from continuing operations to cash flows: | |||||||||||
| Depreciation and amortization | 275.4 | 261.8 | |||||||||
| Impairments and disposal of assets, net | (5.5) | 1.4 | |||||||||
| Stock-based compensation expense | 49.8 | 60.0 | |||||||||
| Change in current assets and liabilities | (83.0) | 128.2 | |||||||||
| Contributions to pension and postretirement plans | (1.7) | (1.3) | |||||||||
| Deferred income taxes | 10.0 | (12.3) | |||||||||
| Change in other assets and liabilities | (6.0) | 71.2 | |||||||||
| Other, net | 4.5 | (26.4) | |||||||||
| Net cash provided by operating activities of continuing operations | $ | 916.5 | $ | 746.0 | |||||||
| Cash flows—investing activities | |||||||||||
| Purchases of land, buildings and equipment | (275.6) | (177.3) | |||||||||
| Proceeds from disposal of land, buildings and equipment | 10.1 | 5.4 | |||||||||
| Purchases of capitalized software and other assets | (18.3) | (10.6) | |||||||||
| Other, net | 2.9 | 1.1 | |||||||||
| Net cash used in investing activities of continuing operations | $ | (280.9) | $ | (181.4) | |||||||
| Cash flows—financing activities | |||||||||||
| Proceeds from issuance of common stock | 36.4 | 34.2 | |||||||||
| Dividends paid | (426.2) | (87.3) | |||||||||
| Repurchases of common stock | (834.1) | (7.2) | |||||||||
| Repayments of short-term debt | — | (270.0) | |||||||||
| Principal payments on finance leases | (9.0) | (5.0) | |||||||||
| Payments of debt issuance costs | (2.5) | (0.2) | |||||||||
| Net cash used in financing activities of continuing operations | $ | (1,235.4) | $ | (335.5) | |||||||
| Cash flows—discontinued operations | |||||||||||
| Net cash (used in) provided by operating activities of discontinued operations | (8.1) | 1.5 | |||||||||
| Net cash (used in) provided by discontinued operations | $ | (8.1) | $ | 1.5 | |||||||
| (Decrease) increase in cash, cash equivalents, and restricted cash | (607.9) | 230.6 | |||||||||
| Cash, cash equivalents, and restricted cash - beginning of period | 1,214.7 | 763.3 | |||||||||
| Cash, cash equivalents, and restricted cash - end of period | $ | 606.8 | $ | 993.9 | |||||||
| Reconciliation of cash, cash equivalents, and restricted cash: | February 27, 2022 | February 28, 2021 | ||||||||||||
| Cash and cash equivalents | $ | 555.3 | $ | 993.9 | ||||||||||
| Restricted cash included in prepaid expenses and other current assets | 51.5 | — | ||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 606.8 | $ | 993.9 |
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| February 27, 2022 | February 28, 2021 | ||||||||||
| Cash flows from changes in current assets and liabilities | |||||||||||
| Receivables, net | 15.6 | 5.8 | |||||||||
| Inventories | (52.9) | 18.7 | |||||||||
| Prepaid expenses and other current assets | (19.3) | 3.9 | |||||||||
| Accounts payable | 31.7 | (17.5) | |||||||||
| Accrued payroll | 0.1 | 12.2 | |||||||||
| Prepaid/accrued income taxes | 8.1 | 3.0 | |||||||||
| Other accrued taxes | (0.8) | 3.6 | |||||||||
| Unearned revenues | 63.1 | 25.8 | |||||||||
| Other current liabilities | (128.6) | 72.7 | |||||||||
| Change in current assets and liabilities | $ | (83.0) | $ | 128.2 |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
**Note 1.**Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood® and The Capital Burger®. As of February 27, 2022, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 34 franchised restaurants. We also have 25 franchised restaurants in operation located in Latin America.
We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53-week fiscal year which ends on the last Sunday in May. Our fiscal year ending May 29, 2022 will contain 52 weeks of operation. Operating results for interim periods presented are not necessarily indicative of results that may be expected for the full fiscal year.
These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 30, 2021. We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and costs and expenses during the reporting period. Actual results could differ from those estimates.
We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
COVID-19 Pandemic
For much of fiscal 2021, the COVID-19 pandemic resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and required personal protective equipment. Also, some state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements, bar closures and additional physical barriers. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early 2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses have eased. During fiscal 2022, increases in the numbers of cases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to other COVID-19-related restrictions such as mask requirements or vaccine requirements for team members, guests or both. Exclusions and quarantines of restaurant team members or groups thereof disrupt an individual restaurant’s operations and often come with little or no notice to the local restaurant management. We continue to monitor the progression of the COVID-19 pandemic and state, local and federal government regulatory and public health responses thereto. As of the date of this report, most of our restaurants were operating with few, if any, restrictions.
Recently Adopted Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting. These changes are intended to simplify the market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective upon issuance to modifications made as early as the beginning of the interim period through December 31, 2022. We elected to adopt this guidance during the quarter ended August 29, 2021; adoption did not have a material impact on our consolidated financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
**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) | February 27, 2022 | May 30, 2021 | ||||||||||||
| Unearned revenues | ||||||||||||||
| Deferred gift card revenue | $ | 564.3 | $ | 494.3 | ||||||||||
| Deferred gift card discounts | (27.4) | (20.5) | ||||||||||||
| Other | 0.4 | 0.4 | ||||||||||||
| Total | $ | 537.3 | $ | 474.2 | ||||||||||
| Other liabilities | ||||||||||||||
| Deferred franchise fees - non-current | $ | 2.5 | $ | 2.2 |
The following table presents a rollforward of deferred gift card revenue.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Beginning balance | $ | 476.9 | $ | 469.3 | $ | 494.3 | $ | 494.6 | ||||||||||||||||||
| Activations | 318.6 | 230.2 | 552.9 | 400.6 | ||||||||||||||||||||||
| Redemptions and breakage | (231.2) | (176.9) | (482.9) | (372.6) | ||||||||||||||||||||||
| Ending balance | $ | 564.3 | $ | 522.6 | $ | 564.3 | $ | 522.6 |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
**Note 3.**Additional Financial Information
Supplemental Balance Sheet Information
The components of lease assets and liabilities on the consolidated balance sheet are as follows:
| (in millions) | Balance Sheet Classification | February 27, 2022 | May 30, 2021 | |||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 3,531.0 | $ | 3,776.4 | |||||||||||||||
| Finance lease right-of-use assets | Land, buildings and equipment, net | 747.9 | 405.6 | |||||||||||||||||
| Total lease assets, net | $ | 4,278.9 | $ | 4,182.0 | ||||||||||||||||
| Operating lease liabilities - current | Other current liabilities | $ | 181.0 | $ | 176.8 | |||||||||||||||
| Finance lease liabilities - current | Other current liabilities | 14.2 | 7.3 | |||||||||||||||||
| Operating lease liabilities - non-current | Operating lease liabilities - non-current | 3,832.2 | 4,088.5 | |||||||||||||||||
| Finance lease liabilities - non-current | Other liabilities | 918.7 | 555.3 | |||||||||||||||||
| Total lease liabilities | $ | 4,946.1 | $ | 4,827.9 |
Supplemental Cash Flow Information
| Cash paid for interest and income taxes are as follows: | Nine Months Ended | |||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | ||||||||||||
| Interest, net of amounts capitalized | $ | 49.9 | $ | 45.7 | ||||||||||
| Income taxes, net of refunds | 79.3 | 12.4 |
| Non-cash investing and financing activities are as follows: | Nine Months Ended | |||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | ||||||||||||
| Increase in land, buildings and equipment through accrued purchases | $ | 42.9 | $ | 29.8 | ||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | 13.9 | 20.2 | ||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | 147.2 | 44.1 | ||||||||||||
| Net change in right-of-use assets mainly due to lease modifications resulting in reclassification of leases from operating to finance | 137.3 | 93.9 |
We have restricted cash of $51.5 million and $0 as of February 27, 2022 and May 30, 2021, respectively, which represents cash held as security for a standby letter of credit. Restricted cash is included in Prepaid Expenses and Other Current Assets on the balance sheet. See Note 11, Commitments and Contingencies.
**Note 4.**Income Taxes
The effective income tax rate for continuing operations for the quarter ended February 27, 2022 was 12.5 percent, reflecting income tax expense of $35.4 million compared to an effective income tax rate for the quarter ended February 28, 2021 of 2.3 percent, reflecting income tax expense of $3.1 million. The effective income tax rate for continuing operations for the nine months ended February 27, 2022 was 13.1 percent, reflecting income tax expense $101.2 million compared to an effective income tax rate of 2.6 percent for the nine months ended February 28, 2021, reflecting income tax expense $7.1 million. The change was primarily driven by higher net earnings from continuing operations in the quarter and nine months ended February 27, 2022 compared to the quarter and nine months ended February 28, 2021 and the impact of certain tax credits on earnings before income taxes.
Included in our remaining balance of unrecognized tax benefits is $4.8 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
**Note 5.**Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Anti-dilutive stock-based compensation awards | 0.2 | 0.3 | 0.1 | 0.7 |
**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, Eddie V’s and The Capital Burger 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, Bahama Breeze and The Capital Burger restaurants in the U.S and results from our franchise operations.
External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively “restaurant and marketing expenses”). Non-cash lease-related expenses included in restaurant expenses (which is a component of segment profit) and lease-related depreciation and amortization are reported at the corporate level as these are expenses for which our operating segments are not being evaluated. Additionally, our lease-related right-of-use assets are not managed or evaluated at the operating segment level, but rather at the corporate level.
In the first quarter of fiscal 2022, we changed our internal management reporting to include The Capital Burger in the Other Business segment. Previously, The Capital Burger was included in the Fine Dining segment due to its adjacency with The Capital Grille brand and overall immateriality. Fiscal 2021 figures have been restated for comparability.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP.
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the three months ended February 27, 2022 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ | 1,142.6 | $ | 612.7 | $ | 208.2 | $ | 485.4 | $ | — | $ | 2,448.9 | ||||||||||||||||||||||||||
| Restaurant and marketing expenses | 902.6 | 501.2 | 160.5 | 418.2 | (8.2) | 1,974.3 | ||||||||||||||||||||||||||||||||
| Segment profit | $ | 240.0 | $ | 111.5 | $ | 47.7 | $ | 67.2 | $ | 8.2 | $ | 474.6 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 34.9 | $ | 16.0 | $ | 8.5 | $ | 24.8 | $ | 10.1 | $ | 94.3 | ||||||||||||||||||||||||||
| Impairments and disposal of assets, net | (0.1) | 0.1 | — | — | (3.8) | (3.8) | ||||||||||||||||||||||||||||||||
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the nine months ended February 27, 2022 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ | 3,310.2 | $ | 1,727.0 | $ | 565.7 | $ | 1,424.2 | $ | — | $ | 7,027.1 | ||||||||||||||||||||||||||
| Restaurant and marketing expenses | 2,581.8 | 1,424.4 | 444.7 | 1,209.9 | (17.3) | 5,643.5 | ||||||||||||||||||||||||||||||||
| Segment profit | $ | 728.4 | $ | 302.6 | $ | 121.0 | $ | 214.3 | $ | 17.3 | $ | 1,383.6 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 106.2 | $ | 48.3 | $ | 25.2 | $ | 73.4 | $ | 22.3 | $ | 275.4 | ||||||||||||||||||||||||||
| Impairments and disposal of assets, net | 1.0 | 0.1 | — | — | (6.6) | (5.5) | ||||||||||||||||||||||||||||||||
| Purchases of land, buildings and equipment | 116.1 | 65.9 | 31.4 | 60.6 | 1.6 | 275.6 |
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the three months ended February 28, 2021 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ | 872.0 | $ | 454.3 | $ | 103.7 | $ | 303.0 | $ | — | $ | 1,733.0 | ||||||||||||||||||||||||||
| Restaurant and marketing expenses | 669.7 | 372.2 | 87.1 | 271.4 | 14.4 | 1,414.8 | ||||||||||||||||||||||||||||||||
| Segment profit | $ | 202.3 | $ | 82.1 | $ | 16.6 | $ | 31.6 | $ | (14.4) | $ | 318.2 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 35.7 | $ | 16.3 | $ | 7.6 | $ | 24.8 | $ | 3.8 | $ | 88.2 | ||||||||||||||||||||||||||
| Impairments and disposal of assets, net | — | — | — | 3.3 | (0.2) | 3.1 | ||||||||||||||||||||||||||||||||
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the nine months ended February 28, 2021 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ | 2,489.7 | $ | 1,238.4 | $ | 293.6 | $ | 895.2 | $ | — | $ | 4,916.9 | ||||||||||||||||||||||||||
| Restaurant and marketing expenses | 1,938.5 | 1,033.0 | 246.5 | 788.9 | 22.7 | 4,029.6 | ||||||||||||||||||||||||||||||||
| Segment profit | $ | 551.2 | $ | 205.4 | $ | 47.1 | $ | 106.3 | $ | (22.7) | $ | 887.3 | ||||||||||||||||||||||||||
| Depreciation and amortization | $ | 106.0 | $ | 49.7 | $ | 22.9 | $ | 73.1 | $ | 10.1 | $ | 261.8 | ||||||||||||||||||||||||||
| Impairments and disposal of assets, net | — | — | — | 3.3 | (1.9) | 1.4 | ||||||||||||||||||||||||||||||||
| Purchases of land, buildings and equipment | 69.8 | 27.3 | 31.6 | 46.5 | 2.1 | 177.3 |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A reconciliation of segment profit to earnings from continuing operations before income taxes is below.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Segment profit | $ | 474.6 | $ | 318.2 | $ | 1,383.6 | $ | 887.3 | ||||||||||||||||||
| Less general and administrative expenses | (83.1) | (78.9) | (289.0) | (298.8) | ||||||||||||||||||||||
| Less depreciation and amortization | (94.3) | (88.2) | (275.4) | (261.8) | ||||||||||||||||||||||
| Less impairments and disposal of assets, net | 3.8 | (3.1) | 5.5 | (1.4) | ||||||||||||||||||||||
| Less interest, net | (17.5) | (15.2) | (49.8) | (46.4) | ||||||||||||||||||||||
| Less other (income) expense, net | (0.2) | (0.5) | (0.7) | (8.4) | ||||||||||||||||||||||
| Earnings before income taxes | $ | 283.3 | $ | 132.3 | $ | 774.2 | $ | 270.5 |
**Note 7.**Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarter and nine months ended February 27, 2022 are as follows:
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gains (Losses) on Derivatives | Benefit Plan Funding Position | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
| Balance at November 28, 2021 | $ | 4.7 | $ | 4.4 | $ | (8.5) | $ | 0.6 | ||||||||||||||||||
| Gain (loss) | 0.1 | 1.5 | — | 1.6 | ||||||||||||||||||||||
| Reclassification realized in net earnings | — | (0.4) | 0.2 | (0.2) | ||||||||||||||||||||||
| Balance at February 27, 2022 | $ | 4.8 | $ | 5.5 | $ | (8.3) | $ | 2.0 | ||||||||||||||||||
| Balance at May 30, 2021 | $ | 5.2 | $ | 7.9 | $ | (8.9) | $ | 4.2 | ||||||||||||||||||
| Gain (loss) | (0.4) | (1.1) | — | (1.5) | ||||||||||||||||||||||
| Reclassification realized in net earnings | — | (1.3) | 0.6 | (0.7) | ||||||||||||||||||||||
| Balance at February 27, 2022 | $ | 4.8 | $ | 5.5 | $ | (8.3) | $ | 2.0 |
The components of accumulated other comprehensive income (loss), net of tax, for the quarter and nine months ended February 28, 2021 are as follows:
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gains (Losses) on Derivatives | Benefit Plan Funding Position | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
| Balance at November 29, 2020 | $ | 4.7 | $ | 0.9 | $ | (12.7) | $ | (7.1) | ||||||||||||||||||
| Gain (loss) | 0.2 | 8.2 | — | 8.4 | ||||||||||||||||||||||
| Reclassification realized in net earnings | — | (1.1) | 0.5 | (0.6) | ||||||||||||||||||||||
| Balance at February 28, 2021 | $ | 4.9 | $ | 8.0 | $ | (12.2) | $ | 0.7 | ||||||||||||||||||
| Balance at May 31, 2020 | $ | 4.5 | $ | (8.6) | $ | (13.5) | $ | (17.6) | ||||||||||||||||||
| Gain (loss) | 0.4 | 17.2 | — | 17.6 | ||||||||||||||||||||||
| Reclassification realized in net earnings | — | (0.6) | 1.3 | 0.7 | ||||||||||||||||||||||
| Balance at February 28, 2021 | $ | 4.9 | $ | 8.0 | $ | (12.2) | $ | 0.7 |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded.
| Amount Reclassified from AOCI into Net Earnings | |||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| (in millions) AOCI Components | Location of Gain (Loss) Recognized in Earnings | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
| Commodity contracts | (1) | $ | 0.7 | $ | (0.2) | $ | 0.8 | $ | (1.1) | ||||||||||||||||||||
| Equity contracts | (2) | (0.1) | 1.3 | 0.8 | 1.6 | ||||||||||||||||||||||||
| Interest rate contracts | (3) | — | — | (0.1) | (0.1) | ||||||||||||||||||||||||
| Total before tax | $ | 0.6 | $ | 1.1 | $ | 1.5 | $ | 0.4 | |||||||||||||||||||||
| Tax (expense) benefit | (0.2) | — | (0.2) | 0.2 | |||||||||||||||||||||||||
| Net of tax | $ | 0.4 | $ | 1.1 | $ | 1.3 | $ | 0.6 | |||||||||||||||||||||
| Benefit plan funding position | |||||||||||||||||||||||||||||
| Recognized net actuarial loss - pension/postretirement plans | (4) | $ | (0.1) | $ | — | $ | (0.4) | $ | (0.1) | ||||||||||||||||||||
| Recognized net actuarial gain (loss) - other plans | (4) | (0.1) | (0.6) | (0.4) | (1.6) | ||||||||||||||||||||||||
| Total before tax | $ | (0.2) | $ | (0.6) | $ | (0.8) | $ | (1.7) | |||||||||||||||||||||
| Tax (expense) benefit | — | 0.1 | 0.2 | 0.4 | |||||||||||||||||||||||||
| Net of tax | $ | (0.2) | $ | (0.5) | $ | (0.6) | $ | (1.3) |
(1)Primarily included in food and beverage costs and restaurant expenses. See Note 9 for additional details.
(2)Included in general and administrative expenses. See Note 9 for additional details.
(3)Included in interest, net on our consolidated statement of earnings.
(4)Included in the computation of net periodic benefit costs, which is a component of other (income) expense, net, restaurant labor expenses and general and administrative expenses.
**Note 8.**Stock-Based Compensation
We grant stock options for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units and performance stock units with a fair value generally determined based on our closing stock price on the date of grant. In addition, we grant cash settled stock units (Darden stock units) which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model for options granted during the periods presented, were as follows:
| Nine Months Ended | |||||||||||
| February 27, 2022 | February 28, 2021 | ||||||||||
| Weighted-average fair value | $ | 41.02 | $ | 20.07 | |||||||
| Dividend yield | 3.2 | % | 3.0 | % | |||||||
| Expected volatility of stock | 39.6 | % | 37.3 | % | |||||||
| Risk-free interest rate | 0.9 | % | 0.4 | % | |||||||
| Expected option life (in years) | 6.3 | 6.4 | |||||||||
| Weighted-average exercise price per share | $ | 148.20 | $ | 78.84 |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The weighted-average grant date fair value of market-based performance stock units and the related assumptions used in the Monte Carlo simulation to record stock-based compensation for units granted during the periods presented, were as follows:
| Nine Months Ended | |||||||||||
| February 27, 2022 | February 28, 2021 | ||||||||||
| Dividend yield (1) | 0.0 | % | 0.0 | % | |||||||
| Expected volatility of stock | 53.4 | % | 50.5 | % | |||||||
| Risk-free interest rate | 0.4 | % | 0.1 | % | |||||||
| Expected life (in years) | 2.8 | 2.8 | |||||||||
| Weighted-average grant date fair value per unit | $ | 172.34 | $ | 83.46 |
(1)Assumes a reinvestment of dividends.
The following table presents a summary of our stock-based compensation activity for the nine months ended February 27, 2022.
| (in millions) | Stock Options | Restricted Stock/ Restricted Stock Units | Equity-Settled Performance Stock Units | Cash-Settled Darden Stock Units | ||||||||||||||||||||||
| Outstanding beginning of period | 2.15 | 0.26 | 0.48 | 0.80 | ||||||||||||||||||||||
| Awards granted | 0.15 | 0.06 | 0.09 | 0.32 | ||||||||||||||||||||||
| Awards exercised/vested | (0.46) | (0.07) | (0.15) | (0.22) | ||||||||||||||||||||||
| Awards forfeited | (0.01) | — | — | (0.06) | ||||||||||||||||||||||
| Outstanding end of period | 1.83 | 0.25 | 0.42 | 0.84 |
We recognized expense from stock-based compensation as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Stock options | $ | 1.1 | $ | 2.2 | $ | 5.6 | $ | 6.7 | ||||||||||||||||||
| Restricted stock/restricted stock units | 1.4 | 2.1 | 6.3 | 7.9 | ||||||||||||||||||||||
| Equity-settled performance stock units | 2.6 | 4.0 | 13.1 | 14.7 | ||||||||||||||||||||||
| Cash-settled Darden stock units | 5.6 | 9.4 | 21.8 | 27.8 | ||||||||||||||||||||||
| Employee stock purchase plan | 0.7 | 0.6 | 2.0 | 1.8 | ||||||||||||||||||||||
| Director compensation program/other | 0.3 | 0.3 | 1.0 | 1.1 | ||||||||||||||||||||||
| Total stock-based compensation expense | $ | 11.7 | $ | 18.6 | $ | 49.8 | $ | 60.0 |
Note 9. Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. To the extent our cash-flow hedging instruments are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of the FASB ASC, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. To the extent the cash flow hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur. Cash flows related to derivatives are included in operating activities.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at February 27, 2022, 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 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 2022.
During the fourth quarter of fiscal 2021, we entered into interest-rate swap agreements with $300.0 million of notional value to limit the risk of change in fair value through fiscal 2031, of the $300.0 million 4.550 percent senior notes due February 2048. The swap agreements effectively swap the fixed-rate obligations for floating-rate obligations over the term of the agreements, thereby mitigating changes in fair value of the related debt. The swap agreements were designated as fair value hedges of the related debt and met the requirements to be accounted for under the short-cut method, resulting in no ineffectiveness in the hedging relationship. During the quarter and nine months ended February 27, 2022, $1.0 million and $3.5 million, respectively, was recorded as a reduction to interest expense related to net swap settlements.
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized cash-settled 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 2026. The contracts are 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 have net cash settlement terms and net settle every three months. 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 dividend equivalents on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.
We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings. These contracts currently extend through July 2026.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The notional and fair values of our derivative contracts are as follows:
| Fair Values | |||||||||||||||||||||||||||||||||||||||||
| (in millions, except per share data) | Number of Shares Outstanding | Weighted-Average Per Share Forward Rates | Notional Values | Derivative Assets (1) | Derivative Liabilities (1) | ||||||||||||||||||||||||||||||||||||
| February 27, 2022 | February 27, 2022 | May 30, 2021 | February 27, 2022 | May 30, 2021 | |||||||||||||||||||||||||||||||||||||
| Equity forwards: | |||||||||||||||||||||||||||||||||||||||||
| Designated | 0.3 | $126.50 | $ | 37.8 | $ | — | $ | 0.9 | $ | 0.8 | $ | — | |||||||||||||||||||||||||||||
| Not designated | 0.4 | 119.64 | 50.0 | — | 2.0 | 1.1 | — | ||||||||||||||||||||||||||||||||||
| Total equity forwards | $ | — | $ | 2.9 | $ | 1.9 | $ | — | |||||||||||||||||||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||||||||||||||||||||
| Designated | N/A | N/A | $ | 2.2 | $ | 0.5 | $ | 0.1 | $ | — | $ | — | |||||||||||||||||||||||||||||
| Not designated | N/A | N/A | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total commodity contracts | $ | 0.5 | $ | 0.1 | $ | — | $ | — | |||||||||||||||||||||||||||||||||
| Interest rate related | |||||||||||||||||||||||||||||||||||||||||
| Designated | N/A | N/A | $ | 300.0 | $ | — | $ | — | $ | 12.1 | $ | 0.2 | |||||||||||||||||||||||||||||
| Not designated | N/A | N/A | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Total interest rate related | $ | — | $ | — | $ | 12.1 | $ | 0.2 | |||||||||||||||||||||||||||||||||
| Total derivative contracts | $ | 0.5 | $ | 3.0 | $ | 14.0 | $ | 0.2 |
(1)Derivative assets and liabilities are included in receivables, net and other current liabilities, as applicable, on our consolidated balance sheets.
The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:
| Amount of Gain (Loss) Recognized in AOCI | Amount of Gain (Loss) Reclassified from AOCI to Earnings | |||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Equity (1) | $ | 0.6 | $ | 8.0 | $ | (0.1) | $ | 1.3 | ||||||||||||||||||||||||||||||
| Commodity (2) | 1.1 | 0.3 | 0.7 | (0.2) | ||||||||||||||||||||||||||||||||||
| Interest rate (3) | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 1.7 | $ | 8.3 | $ | 0.6 | $ | 1.1 | ||||||||||||||||||||||||||||||
| Amount of Gain (Loss) Recognized in AOCI | Amount of Gain (Loss) Reclassified from AOCI to Earnings | |||||||||||||||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Equity (1) | $ | (2.1) | $ | 16.7 | $ | 0.8 | $ | 1.6 | ||||||||||||||||||||||||||||||
| Commodity (2) | 1.2 | 0.7 | 0.8 | (1.1) | ||||||||||||||||||||||||||||||||||
| Interest rate (3) | — | — | (0.1) | (0.1) | ||||||||||||||||||||||||||||||||||
| Total | $ | (0.9) | $ | 17.4 | $ | 1.5 | $ | 0.4 |
(1)Location of the gain (loss) reclassified from AOCI to earnings is general and administrative expenses.
(2)Location of the gain (loss) reclassified from AOCI to earnings is food and beverage costs and restaurant expenses.
(3)Location of gain (loss) reclassified from AOCI to earnings is interest, net.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effects of derivative instruments in fair value hedging relationships in the consolidated statement of earnings are as follows:
| Amount of Gain (Loss) Recognized in Earnings on Derivatives | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | |||||||||||||||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||||||||||||||
| Interest rate (1)(2) | $ | (13.1) | $ | — | $ | 13.1 | $ | — | ||||||||||||||||||||||||||||||
| Amount of Gain (Loss) Recognized in Earnings on Derivatives | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Interest rate (1)(2) | $ | (11.9) | $ | — | $ | 11.9 | $ | — | ||||||||||||||||||
(1) Location of the gain (loss) recognized in earnings on derivatives and related hedged item is interest, net.
(2) Hedged item in fair value hedge relationship is debt.
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
| Amount of Gain (Loss) Recognized in Earnings | ||||||||||||||||||||||||||
| (in millions) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| Location of Gain (Loss) Recognized in Earnings on Derivatives | February 27, 2022 | February 28, 2021 | February 27, 2022 | February 28, 2021 | ||||||||||||||||||||||
| Food and beverage costs and restaurant expenses | $ | (0.1) | $ | — | $ | — | $ | 0.1 | ||||||||||||||||||
| General and administrative expenses | 2.7 | 13.6 | 4.3 | 28.7 | ||||||||||||||||||||||
| Total | $ | 2.6 | $ | 13.6 | $ | 4.3 | $ | 28.8 |
Based on the fair value of our derivative instruments designated as cash flow hedges as of February 27, 2022, we expect to reclassify $0.8 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of our equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of February 27, 2022 and May 30, 2021.
| Items Measured at Fair Value at February 27, 2022 | |||||||||||||||||||||||||||||
| (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) | $ | (1.9) | $ | — | $ | (1.9) | $ | — | ||||||||||||||||||||
| Interest rate swaps | (3) | (12.1) | — | (12.1) | — | ||||||||||||||||||||||||
| Total | $ | (13.5) | $ | — | $ | (13.5) | $ | — |
| Items Measured at Fair Value at May 30, 2021 | |||||||||||||||||||||||||||||
| (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) | $ | 0.1 | $ | — | $ | 0.1 | $ | — | ||||||||||||||||||||
| Equity forwards | (2) | 2.9 | — | 2.9 | — | ||||||||||||||||||||||||
| Interest rate swaps | (3) | (0.2) | — | (0.2) | — | ||||||||||||||||||||||||
| Total | $ | 2.8 | $ | — | $ | 2.8 | $ | — |
(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.
(3)The fair value of our interest rate swap agreements is based on current and expected market interest rates, inclusive of risk of nonperformance.
The carrying value and fair value of long-term debt as of February 27, 2022, was $916.4 million and $980.6 million, respectively. The carrying value and fair value of long-term debt as of May 30, 2021, was $929.8 million and $1.06 billion, respectively. The fair value of long-term debt, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2 in the fair value hierarchy, is determined based on third-party market appraisals. As of February 27, 2022 and May 30, 2021, adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2, were not material.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 3 in the fair value hierarchy, is determined based on appraisals, sales prices of comparable assets, or estimates of discounted future cash flows. As of February 27, 2022, adjustments to the fair values of non-financial assets, classified as Level 3, were not material. As of May 30, 2021, long-lived assets held and used with a carrying amount of $5.6 million, primarily related to four underperforming restaurants, were determined to have a fair value of $0.6 million resulting in an impairment charge of $5.0 million.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 11. Commitments and Contingencies
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of February 27, 2022 and May 30, 2021, we had $104.8 million and $70.5 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of February 27, 2022 and May 30, 2021, we had $18.8 million and $28.9 million, respectively, of surety bonds related to other payments. Most surety bonds are renewable annually.
As of February 27, 2022 and May 30, 2021, we had $104.4 million and $121.5 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of the maximum potential future payments discounted at our weighted-average cost of capital as of February 27, 2022 and May 30, 2021, amounted to $86.6 million and $99.7 million, respectively. 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 2022 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 12. Subsequent Events
On March 22, 2022, the Board of Directors declared a cash dividend of $1.10 per share to be paid May 2, 2022 to all shareholders of record as of the close of business on April 8, 2022.
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