SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-Q ------------------------- (MarkOne) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 29, 1999 [ ] 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 (I.R.S. Employer Identification No.) of 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 outstanding as of September 27, 1999: 131,418,755 (excluding 34,050,825 shares held in treasury).
DARDEN RESTAURANTS, INC. TABLE OF CONTENTS Page Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11 Index to Exhibits 12 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 - ------------------------------------------------------------------------------------------------------- August 29, 1999 August 30, 1998 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> Sales ...................................................... $ 929,391 $ 886,057 Costs and Expenses: Cost of sales: Food and beverages...................................... 298,828 296,415 Restaurant labor........................................ 295,119 282,550 Restaurant expenses..................................... 132,121 131,987 ---------- ---------- Total Cost of Sales................................... $ 726,068 $ 710,952 Selling, general and administrative....................... 94,150 84,787 Depreciation and amortization............................. 31,370 31,012 Interest, net............................................. 4,576 5,435 ---------- ---------- Total Costs and Expenses............................ $ 856,164 $ 832,186 ---------- ---------- Earnings before Income Taxes................................ 73,227 53,871 Income Taxes................................................ (25,914) (18,692) ---------- ---------- Net Earnings................................................ $ 47,313 $ 35,179 ========== ========== Net Earnings per Share: Basic..................................................... $ 0.36 $ 0.25 ========== ========== Diluted................................................... $ 0.35 $ 0.24 ========== ========== Average Number of Common Shares Outstanding: Basic..................................................... 132,200 139,700 ========== ========== Diluted................................................... 136,400 145,900 ========== ========== See accompanying notes to consolidated financial statements. </TABLE> 3
DARDEN RESTAURANTS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands) <TABLE> <CAPTION> (Unaudited) - ----------------------------------------------------------------------------------------------------- August 29, 1999 May 30, 1999 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents................................. $ 30,285 $ 40,960 Receivables............................................... 22,526 20,256 Inventories............................................... 192,492 144,115 Net assets held for disposal.............................. 35,692 35,269 Prepaid expenses and other current assets................. 16,327 21,475 Deferred income taxes..................................... 60,890 65,662 ----------- ----------- Total Current Assets.................................... $ 358,212 $ 327,737 Land, Buildings and Equipment............................... 1,468,629 1,473,535 Other Assets................................................ 102,482 104,388 ----------- ----------- Total Assets.......................................... $ 1,929,323 $ 1,905,660 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 156,202 $ 144,725 Short-term debt........................................... 27,000 23,500 Current portion of long-term debt......................... 2,386 2,386 Accrued payroll........................................... 63,946 74,265 Accrued income taxes...................................... 18,923 16,544 Other accrued taxes....................................... 26,573 25,965 Other current liabilities................................. 231,377 246,830 ----------- ----------- Total Current Liabilities............................... $ 526,407 $ 534,215 Long-term Debt.............................................. 313,490 314,065 Deferred Income Taxes....................................... 72,389 72,086 Other Liabilities........................................... 21,334 21,258 ----------- ----------- Total Liabilities..................................... $ 933,620 $ 941,624 ----------- ----------- Stockholders' Equity: Common stock and surplus.................................. $ 1,341,274 $ 1,328,796 Retained earnings......................................... 225,321 178,008 Treasury stock............................................ (493,869) (466,902) Accumulated other comprehensive income.................... (12,458) (12,115) Unearned compensation..................................... (64,565) (63,751) ----------- ----------- Total Stockholders' Equity............................ $ 995,703 $ 964,036 ----------- ----------- Total Liabilities and Stockholders' Equity.......... $ 1,929,323 $ 1,905,660 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> 4
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Thirteen Weeks Ended August 29, 1999 and August 30, 1998 (In Thousands) (Unaudited) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 30, 1999.................... $1,328,796 $178,008 $(466,902) $(12,115) $(63,751) $ 964,036 Comprehensive income: Net earnings............................. 47,313 47,313 Other comprehensive income, foreign currency adjustment.................... (343) (343) ---------- Total comprehensive income........... 46,970 Stock option exercises (602 shares)........ 5,314 5,314 Issuance of restricted stock (158 shares), net of forfeiture adjustments............ 2,181 (2,153) 28 Earned compensation........................ 739 739 ESOP note receivable repayments............ 600 600 Income tax benefit credited to equity...... 3,361 3,361 Proceeds from issuance of equity put options.................................. 1,139 1,139 Purchases of common stock for treasury (1,367 shares)........................... (27,425) (27,425) Issuance of treasury stock under Employee Stock Purchase Plan (52 shares) ......... 483 458 941 - ---------------------------------------------------------------------------------------------------------------------------- Balance at August 29, 1999................. $1,341,274 $225,321 $(493,869) $(12,458) $(64,565) $ 995,703 - ---------------------------------------------------------------------------------------------------------------------------- <CAPTION> - ---------------------------------------------------------------------------------------------------------------------------- Common Accumulated Stock Other Total and Retained Treasury Comprehensive Unearned Stockholders' Surplus Earnings Stock Income Compensation Equity - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Balance at May 31, 1998.................... $1,286,191 $ 48,327 $(239,876) $(11,749) $(63,048) $1,019,845 Comprehensive income: Net earnings............................. 35,179 35,179 Other comprehensive income, foreign currency adjustment.................... (1,981) (1,981) ---------- Total comprehensive income........... 33,198 Stock option exercises (1,167 shares)...... 9,881 9,881 Issuance of restricted stock (288 shares), net of forfeiture adjustments............ 3,263 (3,235) 28 Earned compensation........................ 472 472 Income tax benefit credited to equity...... 3,633 3,633 Proceeds from issuance of equity put options.................................. 826 826 Purchases of common stock for treasury (3,219 shares)........................... (52,626) (52,626) - ---------------------------------------------------------------------------------------------------------------------------- Balance at August 30, 1998................. $1,303,794 $83,506 $(292,502) $(13,730) $(65,811) $1,015,257 - ---------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. </TABLE> 5
DARDEN RESTAURANTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) <TABLE> <CAPTION> Thirteen Weeks Ended - ------------------------------------------------------------------------------------------------------------------ August 29, 1999 August 30, 1998 - ------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows--Operating Activities Net earnings.................................................... $ 47,313 $ 35,179 Adjustments to reconcile net earnings to cash flow: Depreciation and amortization................................. 31,370 31,012 Amortization of unearned compensation and loan costs.......... 1,406 1,099 Change in current assets and liabilities...................... (50,484) 19,990 Change in other liabilities .................................. 76 266 Loss (gain) on disposal of land, buildings and equipment...... 214 (866) Deferred income taxes......................................... 5,075 4,524 Other, net.................................................... 381 (574) --------- --------- Net Cash Provided by Operating Activities................... $ 35,351 $ 90,630 --------- --------- Cash Flows--Investing Activities Purchases of land, buildings and equipment...................... (40,602) (24,364) Purchases of intangibles........................................ (583) (508) Decrease (increase) in other assets............................. 1,271 (207) Proceeds from disposal of land, buildings and equipment (including net assets held for disposal)...................... 7,073 12,825 --------- --------- Net Cash Used by Investing Activities....................... $ (32,841) $ (12,254) --------- --------- Cash Flows--Financing Activities Proceeds from issuance of common stock.......................... 6,246 9,881 Income tax benefit credited to equity........................... 3,361 3,633 Purchases of treasury stock..................................... (27,425) (52,626) ESOP note receivable repayment.................................. 600 Increase (decrease) in short-term debt.......................... 3,500 (45,600) Repayment of long-term debt..................................... (606) (5) Proceeds from issuance of equity put options.................... 1,139 826 --------- --------- Net Cash Used by Financing Activities....................... $ (13,185) $ (83,891) --------- --------- Decrease in Cash and Cash Equivalents.............................. (10,675) (5,515) Cash and Cash Equivalents - Beginning of Period.................... 40,960 33,505 --------- --------- Cash and Cash Equivalents - End of Period.......................... $ 30,285 $ 27,990 ========= ========= Cash Flow from Changes in Current Assets and Liabilities Receivables..................................................... (2,270) 4,211 Inventories..................................................... (48,377) 37,222 Prepaid expenses and other current assets....................... (2,210) 384 Accounts payable................................................ 11,477 (28,534) Accrued payroll................................................. (10,319) (13,011) Accrued income taxes............................................ 2,379 22,083 Other accrued taxes............................................. 608 1,342 Other current liabilities....................................... (1,772) (3,707) --------- --------- Change in Current Assets and Liabilities...................... $ (50,484) $ 19,990 ========= ========= See accompanying notes to consolidated financial statements. </TABLE> 6
DARDEN RESTAURANTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollar Amounts in Thousands, Except per Share Data) Note 1. Background ---------- These consolidated financial statements 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 weeks ended August 29, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ended May 28, 2000. 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 30, 1999. The accounting policies used in preparing these consolidated financial statements are the same as those described in our annual report on Form 10-K. Note 2. Consolidated Statements of Cash Flows ------------------------------------- During the thirteen weeks ended August 29, 1999, Darden paid $7,902 for interest (net of amount capitalized) and $16,274 for income taxes. During the thirteen weeks ended August 30, 1998, Darden paid $8,673 for interest (net of amount capitalized) and received income tax refunds of $10,051. 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 to purchase 2,621,129 and 3,000 shares of common stock were excluded from the calculation of diluted earnings per share for the thirteen weeks ended August 29, 1999 and August 30, 1998, respectively, because their exercise prices exceeded the average market price of common shares for the period. 7
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 weeks ended August 29, 1999 and August 30, 1998. Thirteen Weeks Ended - -------------------------------------------------------------------------------- August 29, 1999 August 30, 1998 - -------------------------------------------------------------------------------- Sales..................................... 100.0% 100.0% Costs and Expenses: Cost of sales: Food and beverages.................... 32.1 33.4 Restaurant labor...................... 31.8 31.9 Restaurant expenses................... 14.2 14.9 ------ ------ Total Cost of Sales................. 78.1% 80.2% Selling, general and administrative..... 10.1 9.6 Depreciation and amortization........... 3.4 3.5 Interest, net........................... 0.5 0.6 ------ ------ Total Costs and Expenses.......... 92.1% 93.9% ------ ------ Earnings before Income Taxes.............. 7.9 6.1 Income Taxes.............................. (2.8) (2.1) ------ ------ Net Earnings.............................. 5.1% 4.0% ====== ====== For the fiscal 2000 first quarter ended August 29, 1999, earnings after tax were $47.3 million or 35 cents per diluted share, compared to earnings after tax of $35.2 million or 24 cents per diluted share in the first quarter of last year. The increase in first quarter earnings was primarily attributable to strong same-restaurant sales at both Red Lobster and Olive Garden. Sales of $929.4 million for the first quarter were 4.9% higher than last year's first quarter. Food and beverage costs for the first quarter were 32.1% of sales, compared to 33.4% of sales last year primarily attributable to reduced costs, pricing and a lower margin promotion run by Red Lobster during the first quarter last year. Restaurant labor costs amounting to 31.8% of sales were comparable to last year's 31.9% of sales. Restaurant expenses decreased to 14.2% of sales compared to 14.9% last year primarily due to the fixed component of these expenses which are not impacted by higher sales volumes. The increase in first quarter selling, general and administrative expenses to 10.1% of sales compared to 9.6% of sales last year was primarily attributable to increased marketing expenses and additional labor costs associated with strong financial performance and new concept expansion and development. Depreciation and amortization as a percentage of sales decreased to 3.4% compared to last year's 3.5% primarily as a result of higher sales volume. The effective tax rate for the first quarter of fiscal 2000 was 35.4% compared to 34.7% in last year's first quarter. The increase in the effective tax rate reflects a higher level of expected pre-tax income for fiscal 2000. Inventories totaled $192.5 million as of August 29, 1999, up from $144.1 million at May 30, 1999. The increase resulted primarily from purchases of seafood at prices which the Company believes were favorable. This additional seafood is expected to be used during the current fiscal year. Division Results - ---------------- Red Lobster sales of $522.5 million were 1.8% above last year's first quarter. Same-restaurant sales in the United States were up 4.0% for the quarter, marking the seventh consecutive quarter of same-restaurant sales increases. First quarter operating profit improved significantly over the prior year primarily as a result of favorable food and beverage costs and restaurant expenses as a percentage of sales. These results were achieved even though Red Lobster operated 29 fewer restaurants than the same period last year and did not repeat its high volume "Bottomless Crab" promotion that helped to generate its high sales and traffic volumes in the first quarter of last year. 8
Olive Garden continued its positive momentum in the first quarter with a 7.8% increase in sales to $396.0 million. Same-restaurant sales in the United States increased 8.1%, representing the twentieth consecutive quarter of same-restaurant sales increases. First quarter operating profits were substantially improved over the prior year primarily due to increased sales and lower food and beverage costs and restaurant expenses as a percentage of sales. Bahama Breeze continues to produce strong sales at each of its six restaurants. Six additional restaurants are currently under construction, all of which have expected fiscal 2000 opening dates. The table below details the number of restaurants open at the end of the first quarter of fiscal 2000, compared with the number open at the end of May 1999 and the end of last fiscal year's first quarter. In addition, the Company opened its first Smokey Bones BBQ and Hometown Sports Bar restaurant on September 13, 1999 in Orlando, Florida. NUMBER OF RESTAURANTS - -------------------------------------------------------------------------------- August 29, 1999 May 30, 1999 August 30, 1998 - -------------------------------------------------------------------------------- Red Lobster - USA............ 617 635 646 Red Lobster - Canada......... 34 34 34 ------ ------ ------ Total................... 651 669 680 Olive Garden - USA........... 459 459 459 Olive Garden - Canada........ 5 5 5 ------ ------ ------ Total................... 464 464 464 Bahama Breeze................ 6 6 3 ------ ------ ------ Total................... 1,121 1,139 1,147 ====== ====== ====== Year 2000 - --------- The total costs to the Company of Year 2000 activities has not been and is not anticipated to be material to its financial position or results of operations in any given year. As of August 29, 1999, the Company had spent approximately $3.2 million on Year 2000 issues. This amount does not include the costs incurred to develop and install new systems resulting from the Company's seafood inventory accounting system project which was already contemplated for replacement. The total costs to the Company of addressing Year 2000 issues is estimated to be less than $5 million. These total costs are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ from those estimates. Forward-Looking Statements - -------------------------- Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements 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. Such statements include information relating to current expansion plans, business development activities, and Year 2000 compliance. Such forward-looking information is based on assumptions concerning important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to real estate development and construction activities, the issuance and renewal of licenses and permits for restaurant development and operation, economic conditions, changes in federal or state laws or the administration of such laws, and the Year 2000 readiness of suppliers, banks, vendors and others having a direct or indirect business relationship with the Company. 9
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. *Exhibit 10(a) Darden Restaurants, Inc. Amended and Restated Stock Option and Long-Term Incentive Plan of 1995, as approved September 23, 1999 Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K. (i) On June 22, 1999, the Company filed a current report on Form 8-K to announce fourth quarter financial results for fiscal year 1999. (ii) On June 28, 1999, the Company filed a current report on Form 8-K to announce the appointment of Barry Moullet to Senior Vice President of Darden Restaurants. - ------------------------ * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 6(a) of Form 10-Q. 10
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: October 7, 1999 By: /s/ Paula J. Shives ------------------------------------------ Paula J. Shives Senior Vice President, General Counsel and Secretary Dated: October 7, 1999 By: /s/ Linda Dimopoulos ------------------------------------------ Linda Dimopoulos Senior Vice President - Corporate Controller and Business Information Systems (Principal accounting officer) 11
INDEX TO EXHIBITS Exhibit Number Exhibit Title Page - ------- ------------- ---- *10(a) Darden Restaurants, Inc. Amended and Restated Stock Option and Long-Term Incentive Plan of 1995, as approved September 23, 1999 13 12 Computation of Ratio of Consolidated Earnings to Fixed Charges 20 27 Financial Data Schedule 21 - ------------------------ * Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 6(a) of Form 10-Q. 12