- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q - -------------------------------------------------------------------------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 25, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ................ to .................. - -------------------------------------------------------------------------------- 1-13666 Commission File Number - -------------------------------------------------------------------------------- DARDEN RESTAURANTS, INC. (Exact name of registrant as specified in its charter) Florida 59-3305930 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5900 Lake Ellenor Drive Orlando, Florida 32809 (Address of principal executive offices) (Zip Code) 407-245-4000 (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No - -------------------------------------------------------------------------------- APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of Common Stock, no par value, outstanding as of December 28, 2001: 117,063,516 (excluding 54,281,328 shares held in the Company's treasury). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 5 Consolidated Statements of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II - Other Information Item 1. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Index to Exhibits 20 2
PART I FINANCIAL INFORMATION Item 1. Financial Statements DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 November 26, 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $1,013,504 $ 931,958 Costs and Expenses: Cost of sales: Food and beverage...................................... 321,302 298,361 Restaurant labor....................................... 328,361 302,908 Restaurant expenses.................................... 153,658 135,857 ---------- ---------- Total Cost of Sales.................................. $ 803,321 $ 737,126 Selling, general and administrative...................... 106,154 105,955 Depreciation and amortization............................ 41,061 35,789 Interest, net............................................ 8,982 7,777 Restructuring credit.................................... (2,269) -- ---------- ---------- Total Costs and Expenses........................... $ 957,249 $ 886,647 ---------- ---------- Earnings before Income Taxes................................ 56,255 45,311 Income Taxes................................................ (19,792) (15,770) ---------- ---------- Net Earnings................................................ $ 36,463 $ 29,541 ========== =========== Net Earnings per Share: Basic ................................................... $ 0.31 $ 0.25 ========== =========== Diluted.................................................. $ 0.30 $ 0.24 ========== =========== Average Number of Common Shares Outstanding: Basic ................................................... 116,800 119,800 ========== =========== Diluted.................................................. 122,000 123,700 ========== =========== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 3
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except per Share Data) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 November 26, 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales....................................................... $ 2,094,994 $ 1,950,163 Costs and Expenses: Cost of sales: Food and beverage...................................... 664,894 629,398 Restaurant labor....................................... 661,807 621,539 Restaurant expenses.................................... 307,808 275,301 ----------- ----------- Total Cost of Sales.................................. $ 1,634,509 $ 1,526,238 Selling, general and administrative...................... 213,095 205,300 Depreciation and amortization............................ 80,571 71,425 Interest, net............................................ 17,256 14,051 Restructuring credit.................................... (2,269) -- ----------- ----------- Total Costs and Expenses........................... $ 1,943,162 $ 1,817,014 ----------- ----------- Earnings before Income Taxes................................ 151,832 133,149 Income Taxes................................................ (53,213) (46,687) ----------- ------------ Net Earnings................................................ $ 98,619 $ 86,462 =========== ============ Net Earnings per Share: Basic................................................... $ 0.84 $ 0.72 =========== =========== Diluted.................................................. $ 0.81 $ 0.70 =========== =========== Average Number of Common Shares Outstanding: Basic.................................................... 117,100 120,700 =========== =========== Diluted.................................................. 122,200 124,100 =========== =========== </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 4
DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) (Unaudited) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 May 27, 2001 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................ $ 19,999 $ 61,814 Receivables.............................................. 24,579 32,870 Inventories.............................................. 226,796 148,429 Net assets held for disposal............................. 10,489 10,087 Prepaid expenses and other current assets................ 16,355 26,942 Deferred income taxes.................................... 48,502 48,000 ------------ ------------ Total Current Assets................................... $ 346,720 $ 328,142 Land, Buildings and Equipment............................... 1,824,715 1,779,515 Other Assets................................................ 150,193 108,877 ------------ ------------ Total Assets......................................... $ 2,321,628 $2,216,534 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable......................................... $ 132,384 $ 156,859 Short-term debt.......................................... 107,000 12,000 Current portion of long-term debt........................ 2,640 2,647 Accrued payroll.......................................... 67,776 82,588 Accrued income taxes..................................... 37,901 47,698 Other accrued taxes...................................... 26,461 27,429 Other current liabilities................................ 217,829 225,037 ------------ ------------ Total Current Liabilities.............................. $ 591,991 $ 554,258 Long-term Debt.............................................. 514,278 517,927 Deferred Income Taxes....................................... 93,738 90,782 Other Liabilities........................................... 19,849 20,249 ------------ ------------ Total Liabilities................................... $ 1,219,856 $ 1,183,216 ------------ ------------ Stockholders' Equity: Common stock and surplus................................. $ 1,440,381 $ 1,405,799 Retained earnings........................................ 626,103 532,121 Treasury stock........................................... (899,989) (840,254) Accumulated other comprehensive income................... (13,931) (13,102) Unearned compensation.................................... (48,833) (49,322) Officer notes receivable................................. (1,959) (1,924) ------------ ------------ Total Stockholders' Equity.......................... $ 1,101,772 $ 1,033,318 ------------ ------------ Total Liabilities and Stockholders' Equity.... $ 2,321,628 $ 2,216,534 ============ ============ - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 5
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Twenty-Six Weeks Ended November 25, 2001 and November 26, 2000 (In Thousands) (Unaudited) <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Officer Total and Retained Treasury Comprehensive Unearned Notes Stockholders' Surplus Earnings Stock Income Compensation Receivable Equity - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at May 27, 2001..........$1,405,799 $532,121 $(840,254) $(13,102) $(49,322) $(1,924) $1,033,318 Comprehensive income: Net earnings.................. -- 98,619 -- -- -- -- 98,619 Other comprehensive income: Foreign currency adjustment -- -- -- (701) -- -- (701) Change in fair value of derivatives............ -- -- -- (128) -- -- (128) ----------- Total comprehensive income -- -- -- -- -- -- 97,790 Cash dividends declared.......... -- (4,637) -- -- -- -- (4,637) Stock option exercises (322 shares) 18,108 -- 619 -- -- -- 18,727 Issuance of restricted stock (209 shares), net of forefeiture 4,648 -- 658 -- (5,318) -- (12) adjustments................... Earned compensation.............. -- -- -- -- 2,047 -- 2,047 ESOP note receivable repayments.. -- -- -- -- 3,760 -- 3,760 Income tax benefit credited to equity 10,677 -- -- -- -- -- 10,677 Purchases of common stock for treasury (2,226 shares)....... -- -- (61,866) -- -- -- (61,866) Issuance of treasury stock under Employee Stock Purchase and other plans (85 shares)....... 1,149 -- 854 -- -- -- 2,003 Issuance of officer notes (net).. -- -- -- -- -- (35) (35) - ----------------------------------------------------------------------------------------------------------------------------- Balance at November 25, 2001 $1,440,381 $626,103 $(899,989) $(13,931) $(48,833) $(1,959) $1,101,772 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Officer Total and Retained Treasury Comprehensive Unearned Notes Stockholders' Surplus Earnings Stock Income Compensation Receivable Equity - ----------------------------------------------------------------------------------------------------------------------------- Balance at May 28, 2000..........$1,351,707 $344,579 $(666,837) $(12,457) $(56,522) $(1,868) $ 958,602 Comprehensive income: Net earnings.................. -- 86,462 -- -- -- -- 86,462 Other comprehensive income, foreign currency adjustment.. -- -- -- (679) -- -- (679) ----------- Total comprehensive income -- -- -- -- -- -- 85,783 Cash dividends declared.......... -- (4,766) -- -- -- -- (4,766) Stock option exercises (1,960 shares)................ 19,985 -- -- -- -- -- 19,985 Issuance of restricted stock (358 shares), net of forfeiture adjustments....... 3,941 -- 1,035 -- (5,040) -- (64) Earned compensation.............. -- -- -- -- 2,035 -- 2,035 ESOP note receivable repayments.. -- -- -- -- 5,950 -- 5,950 Income tax benefit credited to equity........................ 8,625 -- -- -- -- -- 8,625 Purchases of common stock for treasury (4,483 shares)....... -- -- (83,223) -- -- -- (83,223) Issuance of treasury stock under Employee Stock Purchase Plan (122 shares).................. 689 -- 1,156 -- -- -- 1,845 Issuance of officer notes (net).. -- -- -- -- -- (94) (94) - ----------------------------------------------------------------------------------------------------------------------------- Balance at November 26, 2000 $1,384,947 $426,275 $(747,869) $(13,136) $(53,577) $(1,962) $994,678 - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> See accompanying notes to consolidated financial statements. 6
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 November 26, 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 36,463 $ 29,541 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 41,061 35,789 Amortization of unearned compensation and loan costs.... 1,743 1,773 Change in current assets and liabilities................ (122,451) (96,310) Change in other liabilities ............................ (129) 39 (Gain) loss on disposal of land, buildings and equipment 1,428 (520) Change in cash surrender value of trust owned life Insurance.......................................... 830 -- Deferred income taxes................................... 1,341 100 Income tax benefit credited to equity................. 3,446 6,509 Non-cash restructuring credit......................... (2,269) -- Other, net.............................................. (332) 51 ------------ ----------- Net Cash Used by Operating Activities................. $ (38,869) $ (23,028) ------------ ------------ Cash Flows--Investing Activities Purchases of land, buildings and equipment................ (72,496) (75,970) Increase in other assets.................................. (6,604) (247) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...... 2,140 4,237 ------------ ----------- Net Cash Used by Investing Activities................. $ (76,960) $ (71,980) ------------- ----------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 8,355 15,712 Dividends paid............................................ (4,637) (4,766) Purchases of treasury stock............................... (10,670) (25,801) ESOP note receivable repayment............................ 1,735 3,000 Increase (decrease) in short-term debt.................... 107,000 (63,000) Proceeds from issuance of long-term debt.................. -- 149,539 Repayment of long-term debt............................... (1,735) (3,000) Payment of loan costs..................................... -- (1,304) ------------ ----------- Net Cash Provided by Financing Activities............. $ 100,048 $ 70,380 ------------ ----------- Decrease in Cash and Cash Equivalents........................ (15,781) (24,628) Cash and Cash Equivalents - Beginning of Period.............. 35,780 32,381 ------------ ----------- Cash and Cash Equivalents - End of Period.................... $ 19,999 $ 7,753 ============ =========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... (504) (7,806) Inventories............................................... (55,124) (34,407) Prepaid expenses and other current assets................. 1,776 156 Accounts payable.......................................... (38,642) (20,692) Accrued payroll........................................... 3,258 1,267 Accrued income taxes...................................... (33,218) (44,868) Other accrued taxes....................................... (3,591) (1,990) Other current liabilities................................. 3,594 12,030 ------------ ----------- Change in Current Assets and Liabilities.............. $ (122,451) $ (96,310) ============= ============ - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE> 7
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 November 26, 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows--Operating Activities Net earnings.............................................. $ 98,619 $ 86,462 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization........................... 80,571 71,425 Amortization of unearned compensation and loan costs.... 3,637 3,404 Change in current assets and liabilities................ (112,547) (91,061) Change in other liabilities ............................ (400) (42) Loss on disposal of land, buildings and equipment....... 2,661 19 Change in cash surrender value of trust owned life Insurance.......................................... 830 -- Deferred income taxes................................... 2,454 (1,157) Income tax benefit credited to equity................. 10,677 8,625 Non-cash restructuring credit......................... (2,269) -- Other, net.............................................. (139) (36) ----------- ----------- Net Cash Provided by Operating Activities............. $ 84,094 $ 77,639 ----------- ----------- Cash Flows--Investing Activities Purchases of land, buildings and equipment................ (132,682) (158,192) Increase in other assets.................................. (13,195) (2,679) Purchase of trust owned life insurance.................... (31,500) -- Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)....... 2,509 8,813 ----------- ----------- Net Cash Used by Investing Activities................. $ (174,868) $ (152,058) ----------- ----------- Cash Flows--Financing Activities Proceeds from issuance of common stock.................... 20,523 21,677 Dividends paid............................................ (4,637) (4,766) Purchases of treasury stock............................... (61,866) (83,223) ESOP note receivable repayment............................ 3,760 5,950 Increase (decrease) in short-term debt.................... 95,000 (25,700) Proceeds from issuance of long-term debt.................. -- 149,539 Repayment of long-term debt............................... (3,767) (5,956) Payment of loan costs..................................... (54) (1,451) ----------- ----------- Net Cash Provided by Financing Activities............. $ 48,959 $ 56,070 ----------- ----------- Decrease in Cash and Cash Equivalents........................ (41,815) (18,349) Cash and Cash Equivalents - Beginning of Period.............. 61,814 26,102 ----------- ----------- Cash and Cash Equivalents - End of Period.................... $ 19,999 $ 7,753 =========== =========== Cash Flow from Changes in Current Assets and Liabilities Receivables............................................... 8,291 (7,252) Inventories............................................... (78,367) (68,286) Prepaid expenses and other current assets................. 2,235 338 Accounts payable.......................................... (24,475) 3,722 Accrued payroll........................................... (14,812) (11,131) Accrued income taxes...................................... (9,797) (14,942) Other accrued taxes....................................... (968) 765 Other current liabilities................................. 5,346 5,725 ----------- ----------- Change in Current Assets and Liabilities.............. $ (112,547) $ (91,061) ============ ============ </TABLE> - -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 8
DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 1. Background Darden Restaurants, Inc. (the "Company") owns and operates casual dining restaurants under the trade names Red Lobster(R), Olive Garden(R), Bahama Breeze(R) and Smokey Bones(R) BBQ Sports Bar. These consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). They do not include certain information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the thirteen and twenty-six weeks ended November 25, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending May 26, 2002. These statements should be read in conjunction with the consolidated financial statements and footnotes included in our annual report on Form 10-K for the year ended May 27, 2001 ("Form 10-K"). The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K. Certain reclassifications have been made to prior period amounts to conform with current period presentation. Note 2. Consolidated Statements of Cash Flows During the thirteen and twenty-six weeks ended November 25, 2001, the Company paid $7,642 and $15,138 respectively, for interest (net of amounts capitalized) and $48,433 and $50,053 respectively, for income taxes. During the thirteen and twenty-six weeks ended November 26, 2000, the Company paid $43 and $9,700, respectively, for interest (net of amounts capitalized) and $54,330 and $55,181, respectively, for income taxes. Note 3. Net Earnings Per Share Outstanding stock options issued by the Company represent the only dilutive effect reflected in diluted weighted average shares outstanding. Options do not impact the numerator of the diluted earnings per share computation. Options to purchase 34,468 and 2,503,099 shares of common stock were excluded from the calculation of diluted earnings per share for the thirteen weeks ended November 25, 2001 and November 26, 2000, respectively, because their exercise prices exceeded the average market price of common shares for the period. Options to purchase 73,919 and 3,475,132 shares of common stock were excluded from the calculation of diluted earnings per share for the twenty-six weeks ended November 25, 2001 and November 26, 2000, respectively, for the same reason. Note 4. Derivatives In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Gains or losses resulting from changes in the fair values of those derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges is recognized in earnings. In June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". SFAS 138, which amended the accounting and reporting standards of SFAS 133 for certain derivative instruments and hedging activities, was required to be adopted concurrently with SFAS 133. The Company adopted SFAS 133 and SFAS 138 in the thirteen weeks ended August 26, 2001. There were no transition adjustments that were required to be recognized as a result of the adoption of these new standards, and therefore, adoption of these standards did not materially impact the Company's consolidated financial position, results of operations or cash flows. 9
During the thirteen and twenty-six weeks ended November 25, 2001, the Company entered into futures contracts to reduce the risk of natural gas and coffee price fluctuations. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives' fair value are not included in current earnings but are reported as other comprehensive income, a component of stockholders' equity. These changes in fair value will be included in earnings of future periods when the natural gas and coffee are purchased and used by the Company in its operations. Net losses of $35 were recognized in earnings during the thirteen and twenty-six weeks ended November 25, 2001. It is expected that $128 of net losses related to these contracts, recognized in accumulated other comprehensive income as November 25, 2001, will be reclassified into food and beverage costs or restaurant expenses during the next 12 months. To the extent these derivatives are not effective, changes in their fair value are immediately recognized in current earnings. As of November 25, 2001, the maximum length of time over which the Company is hedging its exposure to the variability in future natural gas and coffee cash flows is six months and ten months, respectively. No gains or losses were reclassified into earnings as a result of the discontinuance of natural gas and coffee cash flow hedges because it was probable that the original forecasted transactions would not occur. Note 5. Trust Owned Life Insurance In August 2001, the Company caused a trust, that it previously had established, to purchase life insurance policies covering certain Company 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 some of the costs of the participant earnings component of the Company's existing nonqualified deferred compensation plan. The cash surrender value of the policies, which is included in other assets in the accompanying consolidated balance sheets, amounted to $30,670 at November 25, 2001. Changes in cash surrender value are included in selling, general and administrative expense in the accompanying consolidated statements of earnings. Note 6. Restructuring Liability In 1997, the Company recorded restructuring charges of $70,900 in connection with the closing of certain restaurant properties. The related liabilities are included in other current liabilities in the accompanying consolidated balance sheets and were established to accrue for estimated carrying costs of buildings and equipment prior to disposal, employee severance costs, lease buy-out provisions and other costs associated with the restructuring action. All restaurant closings under this restructuring action have been completed. The remaining restructuring actions, including disposal of the closed owned properties and the lease buy-outs related to the closed leased properties, are expected to be substantially completed during the current fiscal year. A summary of restructuring liability activity for the twenty-six weeks ended November 25, 2001 is as follows: <TABLE> <CAPTION> <S> <C> <C> Balance at May 27, 2001................................................ $ 5,798 Non-cash adjustments: Restructuring credit............................................. (2,269) Cash payments: Carrying costs and employee severance payments................... (452) Lease payments including lease buy-outs.......................... (196) ------- Balance at November 25, 2001........................................... $ 2,881 ======= </TABLE> During the thirteen and twenty-six weeks ended November 25, 2001, the Company reversed a portion of its 1997 restructuring liability totaling $2,269. The reversal was primarily the result of favorable lease terminations. 10
Note 7. Stockholders' Equity Pursuant to the Company's 64.6 million share stock repurchase program and in accordance with applicable securities regulations, the Company repurchased 410,188 shares of its common stock for $10,670 in the thirteen weeks ended November 25, 2001, resulting in a cumulative repurchase as of November 25, 2001 of a total of 54,742,959 shares. The Company's stock repurchase plan is used by the Company to offset the dilutive effect of stock option exercises and to increase shareholder value. The repurchased common stock is reflected as a reduction of stockholders' equity. The Company has share ownership guidelines for its executive management. To assist management in meeting these guidelines, the Company implemented the 1998 Stock Purchase/Loan Program (1998 Program) under its Stock Option and Long-Term Incentive Plan of 1995. The 1998 Program provides loans to executives and awards two options for every new share purchased, up to a maximum total share value equal to a designated percentage of the executive's base compensation. Loans are full recourse and interest bearing, with a maximum amount of 75% of the value of the stock purchased. All stock purchased is held on deposit with the Company until the loan payment requirements are met. The interest rate for loans under the 1998 Program is the applicable federal rate for mid-term loans with semi-annual compounding for the month in which the loan originates. The Company accounts for outstanding officer notes receivable as a reduction of stockholders' equity. Prior to the thirteen weeks ended November 25, 2001, the Company accounted for these notes receivable as other assets. In the accompanying consolidated balance sheets, notes receivable at May 27, 2001, have been reclassified as a reduction of stockholders' equity to conform to the current presentation. Note 8. Future Application of Accounting Standards In July 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives". EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. Sales incentives include discounts, coupons and generally any other offers that entitle a customer to receive a reduction in the price of a product by submitting a claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of the selling price of the product resulting from any sales incentives should be classified as a reduction of revenue. Currently, the Company recognizes certain sales incentives as selling, general and administrative expense. Although this pronouncement will not have any impact on the Company's consolidated results of operations or financial position, the presentation prescribed will have an effect of reducing net sales and selling, general and administrative expense in comparison to prior periods. The Company must adopt EITF 00-14 for all periods presented in the fourth quarter of fiscal 2002. Sales incentives included in selling, general and administrative expense for the thirteen weeks ending November 25, 2001 and November 26, 2000 amounted to $5,881 and $5,950, respectively. Sales incentives included in selling, general and administrative expense for the twenty-six weeks ended November 25, 2001 and November 26, 2000 amounted to $13,315 and $12,793, respectively. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and resolves significant implementation issues that had evolved since the issuance of SFAS 121. SFAS 144 also establishes a single accounting model for long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in the first quarter of fiscal 2003. Adoption of SFAS 144 is not expected to materially impact the Company's consolidated financial position, results of operations or cash flows. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table sets forth selected restaurant operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the thirteen and twenty-six weeks ended November 25, 2001 and November 26, 2000. <TABLE> <CAPTION> Thirteen Weeks Ended Twenty-Six Weeks Ended - -------------------------------------------------------------------------------------------------------------------- November 25, November 26, November 25, November 26, 2001 2000 2001 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Sales..................................... 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverage.................... 31.7 32.0 31.7 32.3 Restaurant labor..................... 32.4 32.5 31.6 31.9 Restaurant expenses.................. 15.2 14.6 14.7 14.1 ------- ------ ------ ------ Total Cost of Sales................ 79.3% 79.1% 78.0% 78.3% Selling, general and administrative.... 10.4 11.4 10.2 10.5 Depreciation and amortization.......... 4.0 3.8 3.9 3.7 Interest, net.......................... 0.9 0.8 0.8 0.7 Restructuring credit................... (0.2) __ (0.1) __ ------- ------ ------- ------ Total Costs and Expenses......... 94.4% 95.1% 92.8% 93.2% ------- ------ ------ ------ Earnings before Income Taxes.............. 5.6 4.9 7.2 6.8 Income Taxes.............................. (2.0) (1.7) (2.5) (2.4) ------- ------ ------ ------ Net Earnings.............................. 3.6% 3.2% 4.7% 4.4% ======= ====== ====== ====== - -------------------------------------------------------------------------------------------------------------------- </TABLE> Results of Operations For the fiscal 2002 second quarter ended November 25, 2001, earnings after tax were $36.5 million or 30 cents per diluted share, compared to earnings after tax of $29.5 million or 24 cents per diluted share in the second quarter of fiscal 2001. An after-tax restructuring credit of $1.4 million was taken in the second quarter of fiscal 2002 as the Company reversed portions of its 1997 restructuring liability. The reversal resulted from favorable lease terminations and had no effect on the Company's cash flow. Earnings after tax for the second quarter of fiscal 2002 before the restructuring credit were $35.1 million or 29 cents per diluted share. The increase in second quarter earnings was primarily attributable to strong same-restaurant sales growth at both Red Lobster and Olive Garden. Sales of $1.01 billion for the second quarter were 8.8% higher than last year's second quarter. For the first six months of fiscal 2002, net earnings were $98.6 million or 81 cents per diluted share, compared to $86.5 million or 70 cents per diluted share in the same fiscal 2001 period. Net earnings for the first six months of fiscal 2002 before the restructuring credit were $97.2 million or 80 cents per diluted share. Sales approximating $2.09 billion for the first six months of fiscal 2002 were 7.4% higher than last year. Food and beverage costs for the second quarter were 31.7% of sales, compared to 32.0% of sales last year primarily attributable to lower product costs. Restaurant labor costs decreased to 32.4% of sales compared to last year's 32.5% of sales primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses increased to 15.2% of sales compared to 14.6% of sales last year primarily due to increased utility, restaurant technology and new restaurant preopening expenses, partially offset by the impact of higher sales volumes. Second quarter selling, general and administrative expense decreased to 10.4% of sales compared to 11.4% of sales last year. The decrease was primarily attributable to less national television marketing versus last year, media deflation and the favorable impact of higher sales volumes, partially offset by the impact of the Company's $1.5 million pre-tax contribution to the Red Cross Disaster Relief Fund made as part of the Company's participation in the restaurant industry's Dine Out for America benefit held on October 11, 2001. Depreciation and amortization expense as a percentage of sales increased from 3.8% to 4.0% primarily as a result of new restaurant and remodel activity, partially offset by the favorable impact of higher sales volumes. Interest expense increased to 0.9% of sales compared to 0.8% of sales last year primarily due to higher debt levels. The effective tax rate for the second quarter of fiscal 2002, before the restructuring credit, was 35.0% compared to 34.8% in last year's second quarter. The increase in the effective tax rate resulted primarily from increases in the level of expected annual pre-tax income for fiscal 2002 and a reduction in certain tax deductible costs. Food and beverage costs for the first six months of fiscal 2002 were 31.7% of sales, compared to 32.3% of sales last year primarily attributable to lower product costs. Restaurant labor costs decreased to 31.6% of sales compared to last year's 31.9% of sales primarily due to efficiencies resulting from higher sales volumes. Restaurant expenses increased to 14.7% of sales compared to 14.1% of sales last year primarily due to increased utility and new restaurant pre-opening expenses, partially offset by the impact of higher sales volumes. Selling, general and administrative expense decreased to 10.2% of sales compared to 10.5% of sales last year. The decrease was primarily attributable to less national television marketing versus last year, media deflation, and the favorable impact of higher sales volumes, partially offset by the impact of the Company's donation made as a result of the industry's Dine Out for America benefit. Depreciation and amortization expense as a percentage of sales increased from 3.7% to 3.9% primarily as a result of new restaurant and remodel activity, partially offset by the favorable impact of higher sales volumes. Interest expense increased to 0.8% of sales compared to 0.7% of sales last year primarily due to higher debt levels. 12
The effective tax rate for the first six months of fiscal 2002, before the restructuring credit, was 35.0% compared to 35.1% last year. The decrease in the effective tax rate resulted primarily from increases in annual expected tax credits and tax exempt income, partially offset by a higher level of expected annual pre-tax income for fiscal 2002 and a reduction in certain tax deductible costs. Division Results Red Lobster sales of $534.9 million were 6.3% above last year's second quarter. Same-restaurant sales in the United States increased 6.1% for the quarter, marking the sixteenth consecutive quarter of same-restaurant sales increases. Second quarter operating profits improved over the prior year primarily as a result of the increased sales and lower food costs and marketing expenses as a percentage of sales, partially offset by higher restaurant expenses as a percentage of sales. Through the first six months of fiscal 2002, Red Lobster sales increased 5.0% to $1.11 billion and same-restaurant sales in the United States increased by 4.6%. Olive Garden sales of $442.5 million were 8.6% above last year's second quarter. Same-restaurant sales in the United States increased 5.9%, representing the twenty-ninth consecutive quarter of same-restaurant sales increases. Second quarter operating profits improved over the prior year primarily as a result of increased sales and lower restaurant labor and marketing expenses as a percentage of sales, partially offset by higher restaurant expenses as a percentage of sales. Through the first six months of fiscal 2002, Olive Garden sales increased 7.3% to $904.7 million and same-restaurant sales in the United States increased by 5.0%. Bahama Breeze continued to produce strong average sales per restaurant during the quarter. Two new openings occurred in the second quarter, bringing the total number of restaurants in operation to 25. At least four more openings are scheduled for fiscal 2002. Restaurant sales at Smokey Bones continue to exceed management's initial expectations. Two new openings occurred in the second quarter, bringing the total number of restaurants in operation to 12. Five additional restaurants under construction are planned to open in fiscal 2002. 13
The table below details the number of restaurants open at the end of the second quarter of fiscal 2002, compared with the number open at the end of May 2001 and the end of last fiscal year's second quarter. <TABLE> <CAPTION> NUMBER OF RESTAURANTS - -------------------------------------------------------------------------------------------------------------------- November 25, 2001 May 27, 2001 November 26, 2000 - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Red Lobster - USA........................... 629 629 620 Red Lobster - Canada........................ 32 32 32 ----- ----- ----- Total.................................. 661 661 652 Olive Garden - USA.......................... 478 472 463 Olive Garden - Canada....................... 6 5 5 ----- ----- ----- Total.................................. 484 477 468 Bahama Breeze............................... 25 21 15 Smokey Bones ............................... 12 9 4 ----- ----- ----- Total.................................. 1,182 1,168 1,139 ===== ===== ===== - -------------------------------------------------------------------------------------------------------------------- </TABLE> Seasonality The Company's sales volumes fluctuate seasonally. In fiscal years 2000 and 2001, the Company's sales were highest in the spring, lowest in the fall, and comparable during winter and summer. Severe weather, storms and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Financial Condition, Liquidity and Capital Resources Inventories totaled $226.8 million as of November 25, 2001, up from $148.4 million at May 27, 2001. The increase resulted from typical increases in seafood inventory levels during the first half of the year due to availability and upcoming promotions. The additional seafood is expected to be used during the current fiscal year. Other assets totaled $150.2 million as of November 25, 2001, up from $108.9 million at May 27, 2001. The increase resulted primarily from the Company's purchase of trust owned life insurance during the first quarter of fiscal 2002 with an initial cash surrender value totaling $31.5 million. The trust owned life insurance was purchased to offset some of the costs of the Company's nonqualified deferred compensation plan. Other assets also increased as a result of capitalized costs associated with software improvements. Cash and cash equivalents of $20.0 million at November 25, 2001, decreased from $61.8 million at May 27, 2001, primarily as a result of the purchase of the trust owned life insurance. Cash and cash equivalents also decreased as a result of Company restaurants being closed for the Thanksgiving holiday as well as the timing of checks being issued as of the end of the current quarter in comparison to May 27, 2001. Accounts payable of $132.4 million at November 25, 2001, increased from $156.9 million at May 27, 2001, principally due to the timing and terms of inventory purchases. 14
In addition to cash flows from operations, the Company uses a combination of long-term and short-term borrowings to fund its liquidity needs. Short-term debt totaled $107.0 million as of November 25, 2001, up from $12.0 million at May 27, 2001. The increase in short-term debt was used to fund seasonal working capital needs and share repurchases. The Company's long-term debt consists principally of (i) $150.0 million of unsecured 6.375 percent notes due in February 2006, (ii) $100.0 million of unsecured 7.125 percent debentures due in February 2016, (iii) $150.0 million of unsecured 8.375 percent senior notes due in September 2005, (iv) $75.0 million of unsecured 7.45 percent medium-term notes due in April 2011, and (v) a $40.7 million commercial bank loan that is used to support two loans from the Company to the Employee Stock Ownership Plan portion of the Darden Savings Plan. The Company has a shelf registration on file with the SEC that provides for the issuance of an additional $275.0 million of unsecured debt securities from time to time. The Company also has a commercial paper program that serves as its primary source of short-term financing. As of November 25, 2001, there were no borrowings outstanding under the program. To support the program, the Company has a credit facility with a consortium of banks under which the Company can borrow up to $300.0 million. As of November 25, 2001, no amounts were outstanding under the credit facility. Capital expenditures were $72.5 million for the second quarter of fiscal 2002 compared to $76.0 million in last year's second quarter. For the first six months of fiscal 2002, capital expenditures were $132.7 million, compared to $158.2 million in the same period last year. The decrease in capital expenditures for the first six months of fiscal 2002 principally related to timing as the Company estimates that its fiscal 2002 capital expenditures will be slightly more than that of fiscal 2001. The Company repurchased 410,188 shares of its common stock for $10.7 million in the second quarter of fiscal 2002 compared to 1,128,360 shares for $25.8 million in last year's second quarter. The Company repurchased 2,225,592 shares of its common stock for $61.9 million in the first six months of fiscal 2002 compared to 4,483,348 shares for $83.2 million in the first six months of last year. Future Application of Accounting Standards In July 2000, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on EITF Issue 00-14, "Accounting for Certain Sales Incentives". EITF 00-14 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. Sales incentives include discounts, coupons and generally any other offers that entitle a customer to receive a reduction in the price of a product by submitting a claim for a refund or rebate. Under EITF 00-14, the reduction in or refund of the selling price of the product resulting from any sales incentives should be classified as a reduction of revenue. Currently, the Company recognizes certain sales incentives as selling, general and administrative expense. Although this pronouncement will not have any impact on the Company's consolidated results of operations or financial position, the presentation prescribed will have an effect of reducing net sales and selling, general and administrative expense in comparison to prior periods. The Company must adopt EITF 00-14 for all periods presented in the fourth quarter of fiscal 2002. Sales incentives included in selling, general and administrative expense for the thirteen weeks ending November 25, 2001 and November 26, 2000 amounted to $5.9 million and $6.0 million, respectively. Sales incentives included in selling, general and administrative expense for the twenty-six weeks ended November 25, 2001 and November 26, 2000 amounted to $13.3 million and $12.8 million, respectively. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and resolves significant implementation issues that had evolved since the issuance of SFAS 121. SFAS 144 also establishes a single accounting model for long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in the first quarter of fiscal 2003. Adoption of SFAS 144 is not expected to materially impact the Company's consolidated financial position, results of operations or cash flows. 15
Forward-Looking Statements Certain information included in this report and other materials filed or to be filed by the Company with the SEC (as well as information included in oral or written statements made or to be made by the Company) may contain statements that are forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words or phrases such as "believe", "plan", "will", "expect", "intend", "estimate", and "project", and similar expressions are intended to identify forward-looking statements. All of these statements, and any other statements in this report that are not historical facts, are forward-looking. Examples of forward-looking statements include, but are not limited to, statements regarding the number of new Bahama Breeze and Smokey Bones restaurants expected to be opened during fiscal 2002, the completion of certain restructuring actions during the current fiscal year and the amount of capital expenditures for fiscal 2002. These forward-looking statements are based on assumptions concerning important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, could cause the actual results to materially differ from those expressed in the forward-looking statements. These risks and uncertainties include, but are not limited to, competition, economic and market conditions, changes in food and other costs, importance of locations, effects of government regulations and the Company's ability to achieve its growth objectives, each of which is more specifically discussed in Exhibit 99 filed with the Company's Form 10-K, which is incorporated into this report by reference. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, and commodity prices. To manage this exposure, the Company periodically enters into interest rate, foreign currency exchange, and commodity instruments for other than trading purposes. The Company uses the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. As of November 25, 2001, the Company's potential losses in future net earnings resulting from changes in foreign currency exchange rates, commodity prices, and floating rate debt interest rate exposures were approximately $3 million over a period of one year (including the impact of the natural gas and coffee hedges discussed above in Note 4 to the Financial Statements). At November 25, 2001, the value at risk from an increase in the fair value of all of the Company's long-term fixed-rate debt, over a period of one year, was approximately $35 million. The fair value of the Company's long-term fixed-rate debt during the first half of fiscal 2002 averaged approximately $486 million, with a high of approximately $503 million and a low of approximately $470 million. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed rate debt. 16
PART II OTHER INFORMATION Item 1. Legal Proceedings From time to time, the Company is made a party to legal proceedings arising in the ordinary course of business. The Company does not believe that the results of these legal proceedings, even if unfavorable to the Company, will have a materially adverse impact on its financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on September 20, 2001. (b) The name of each director elected at the meeting is provided in Item 4 (c) of this report. There are no other directors with a term of office that continued after the Annual Meeting. (c) At the Annual Meeting, the shareholders took the following actions: (i) Elected the following twelve directors: Leonard L. Berry For 102,695,409 Withheld 826,360 Bradley D. Blum For 102,688,534 Withheld 833,235 Odie C. Donald For 102,728,877 Withheld 792,892 Julius Erving, II For 85,399,164 Withheld 18,122,605 Joe R. Lee For 102,701,422 Withheld 820,347 Senator Connie Mack, III For 102,583,408 Withheld 938,361 Richard E. Rivera For 102,714,587 Withheld 807,182 Michael D. Rose For 102,688,580 Withheld 833,189 Maria A. Sastre For 102,724,217 Withheld 797,552 Jack A. Smith For 102,727,058 Withheld 794,711 Blaine Sweatt, III For 102,740,904 Withheld 780,865 Rita P. Wilson For 102,702,949 Withheld 818,820 17
(ii) Approved appointment of KPMG LLP as independent auditor for the fiscal year ending May 26, 2002. For 101,944,775 Against 919,200 Abstain 657,794 Broker non-votes 0 Item 5. Other Information On December 13, 2001, the Company elected David Hughes to its Board of Directors, bringing the total number of directors to thirteen. Mr. Hughes is the Chairman of the Board and Chief Executive Officer of Hughes Supply, Inc. He also serves on the Board of Directors of SunTrust Banks, Inc. and Brown & Brown Insurance. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges (b) Reports on Form 8-K. On September 25, 2001, the Company filed a current report on Form 8-K to announce earnings for the first quarter, the declaration of a semi-annual dividend and the election of Leonard Berry to the Board of Directors. On December 17, 2001, the Company filed a current report on Form 8-K to announce earnings for the second quarter and the election of David Hughes to the Board of Directors. 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DARDEN RESTAURANTS, INC. Dated: January 7, 2002 By: /s/ Paula J. Shives ----------------------------- Paula J. Shives Senior Vice President, General Counsel and Secretary Dated: January 7, 2002 By: /s/ Clarence Otis, Jr. ----------------------------- Clarence Otis, Jr. Senior Vice President, Chief Financial Officer (Principal financial and accounting officer) 19
INDEX TO EXHIBITS Exhibit Number Exhibit Title 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 20