NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations and Principles of Consolidation
The accompanying consolidated financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries (Darden, the Company, we, us or our). We own and operate the Olive Garden
®
, LongHorn Steakhouse
®
, Cheddar’s Scratch Kitchen
®
, Yard House
®
, The Capital Grille
®
, Bahama Breeze
®
, Seasons 52
®
and Eddie V’s Prime Seafood
®
restaurant brands located in the United States and Canada. Through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for
3
joint venture restaurants managed by us and
36
franchised restaurants. We also have
35
franchised restaurants in operation located in Latin America, the Middle East and Malaysia. All significant intercompany balances and transactions have been eliminated in consolidation.
Basis of Presentation
On April 24, 2017, we completed the acquisition of Cheddar’s Scratch Kitchen for
$799.8 million
in total consideration. The acquired operations of Cheddar’s Scratch Kitchen included
140
company-owned restaurants and
25
franchised restaurants. On August 28, 2017, we completed the acquisition of
11
Cheddar’s Scratch Kitchen restaurants and certain assets and liabilities from C&P Restaurant Company, LLC, an existing franchisee. The acquisition was funded with cash on hand for
$39.6 million
in total consideration. The results of operations, financial position and cash flows are included in our consolidated financial statements as of the date of acquisition. See Note 2 for additional information.
On November 9, 2015, we completed the spin-off of Four Corners Property Trust, Inc. (Four Corners) with the pro rata distribution of
one
share of common stock for every
three
shares of Darden common stock to Darden shareholders. The separation included the transfer of
418
restaurant properties and
6
LongHorn Steakhouse restaurants to Four Corners.
For fiscal
2018
,
2017
and
2016
, all gains and losses on disposition, impairment charges and disposal costs, along with the sales, costs and expenses and income taxes attributable to the discontinued locations, have been aggregated in a single caption entitled “Earnings (loss) from discontinued operations, net of tax expense (benefit)” in our consolidated statements of earnings for all periods presented. See Note 3 for additional information.
Unless otherwise noted, amounts and disclosures throughout these notes to consolidated financial statements relate to our continuing operations. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
Fiscal Year
We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal
2018
, which ended
May 27, 2018
, consisted of 52 weeks. Fiscal
2017
, which ended
May 28, 2017
, consisted of 52 weeks and fiscal
2016
, which ended
May 29, 2016
, consisted of 52 weeks.
Use of Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments such as bank deposits and money market funds that have an original maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. The components of cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
May 28, 2017
|
Short-term investments
|
$
|
16.8
|
|
|
$
|
102.8
|
|
Credit card receivables
|
99.6
|
|
|
93.6
|
|
Depository accounts
|
30.5
|
|
|
36.7
|
|
Total cash and cash equivalents
|
$
|
146.9
|
|
|
$
|
233.1
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
May 27, 2018
, and
May 28, 2017
, we had cash and cash equivalent accounts in excess of insured limits. We manage the credit risk of our positions through utilizing multiple financial institutions and monitoring the credit quality of those financial institutions that hold our cash and cash equivalents.
Receivables, Net
Receivables, net of the allowance for doubtful accounts, represent their estimated net realizable value. Provisions for doubtful accounts are recorded based on historical collection experience and the age of the receivables. Receivables are written off when they are deemed uncollectible. See Note 12 for additional information.
Inventories
Inventories consist of food and beverages and are valued at the lower of weighted-average cost or market.
Marketable Securities
Available-for-sale securities are carried at fair value. Classification of marketable securities as current or noncurrent is dependent upon management’s intended holding period, the security’s maturity date, or both. Unrealized gains and losses, net of tax, on available-for-sale securities are carried in accumulated other comprehensive income (loss) within the consolidated financial statements and are reclassified into earnings when the securities mature or are sold.
Land, Buildings and Equipment, Net
Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from
7
to
40
years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings in land, buildings and equipment, net, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from
2
to
15
years also using the straight-line method. See Note 5 for additional information. Gains and losses on the disposal of land, buildings and equipment are included in impairments and disposal of assets, net, while the write-off of undepreciated book value associated with the replacement of equipment in the normal course of business is recorded as a component of restaurant expenses in our accompanying consolidated statements of earnings. Depreciation and amortization expense from continuing operations associated with buildings and equipment and losses on replacement of equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Depreciation and amortization on buildings and equipment
|
$
|
288.8
|
|
|
$
|
253.3
|
|
|
$
|
274.4
|
|
Losses on replacement of equipment
|
4.1
|
|
|
3.2
|
|
|
5.5
|
|
Capitalized Software Costs and Other Definite-Lived Intangibles
Capitalized software, which is a component of other assets, is recorded at cost less accumulated amortization. Capitalized software is amortized using the straight-line method over estimated useful lives ranging from
3
to
10
years. The cost of capitalized software and related accumulated amortization was as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
May 28, 2017
|
Capitalized software
|
$
|
205.7
|
|
|
$
|
190.1
|
|
Accumulated amortization
|
(127.4
|
)
|
|
(108.2
|
)
|
Capitalized software, net of accumulated amortization
|
$
|
78.3
|
|
|
$
|
81.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We have other definite-lived intangible assets, including assets related to the value of below-market leases and reacquired franchise rights resulting from our acquisitions that are included as a component of other assets on our consolidated balance sheets. We also have definite-lived intangible liabilities related to the value of above-market leases and below-market agreements resulting from our acquisitions that are included in other liabilities on our consolidated balance sheets. Definite-lived intangibles are amortized on a straight-line basis over estimated useful lives of
1
to
20
years. The cost and related accumulated amortization was as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Definite-lived intangible assets
|
$
|
83.0
|
|
|
$
|
43.4
|
|
Accumulated amortization
|
(25.7
|
)
|
|
(23.3
|
)
|
Definite-lived intangible assets, net of accumulated amortization
|
$
|
57.3
|
|
|
$
|
20.1
|
|
|
|
|
|
Definite-lived intangible liabilities
|
$
|
(33.5
|
)
|
|
$
|
(31.6
|
)
|
Accumulated amortization
|
11.3
|
|
|
8.8
|
|
Definite-lived intangible liabilities, net of accumulated amortization
|
$
|
(22.2
|
)
|
|
$
|
(22.8
|
)
|
Amortization expense from continuing operations associated with capitalized software and other definite-lived intangibles included in depreciation and amortization in our accompanying consolidated statements of earnings was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Amortization expense - capitalized software
|
$
|
23.5
|
|
|
$
|
18.7
|
|
|
$
|
14.9
|
|
Amortization expense - other definite-lived intangibles
|
0.8
|
|
|
0.9
|
|
|
0.9
|
|
Amortization expense from continuing operations associated with above- and-below-market leases included in restaurant expenses as a component of rent expense in our consolidated statements of earnings was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Restaurant expense - below-market leases
|
$
|
3.1
|
|
|
$
|
1.8
|
|
|
$
|
1.8
|
|
Restaurant expense - above-market leases
|
(1.7
|
)
|
|
(1.4
|
)
|
|
(1.4
|
)
|
Based on the net book values of our definite-lived intangible assets and liabilities at
May 27, 2018
, we expect amortization of capitalized software and other definite-lived intangible assets will be approximately
$27.3 million
annually for fiscal
2019
through
2023
.
Trust-Owned Life Insurance
We have a trust that purchased life insurance policies covering certain of our officers and other key employees (trust-owned life insurance or TOLI). The trust is the owner and sole beneficiary of the TOLI policies. The policies were purchased to offset a portion of our obligations under our non-qualified deferred compensation plan. The cash surrender value for each policy is included in other assets, while changes in cash surrender values are included in general and administrative expenses.
Liquor Licenses
The costs of obtaining non-transferable liquor licenses that are directly issued by local government agencies for nominal fees are expensed as incurred. The costs of purchasing transferable liquor licenses through open markets in jurisdictions with a limited number of authorized liquor licenses are capitalized as indefinite-lived intangible assets and included in other assets. Liquor licenses are reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Annual liquor license renewal fees are expensed over the renewal term.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill and Trademarks
We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter or more frequently if indicators of impairment exist. Goodwill and trademarks are not subject to amortization and have been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. Our goodwill and trademark balances are allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Trademarks
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Olive Garden (1)
|
$
|
30.2
|
|
|
$
|
30.2
|
|
|
$
|
0.7
|
|
|
$
|
0.6
|
|
LongHorn Steakhouse
|
49.3
|
|
|
49.3
|
|
|
307.8
|
|
|
307.8
|
|
Cheddar’s Scratch Kitchen
|
311.4
|
|
|
329.4
|
|
|
375.0
|
|
|
375.0
|
|
Yard House
|
369.2
|
|
|
369.2
|
|
|
109.3
|
|
|
109.3
|
|
The Capital Grille
|
401.6
|
|
|
401.6
|
|
|
147.0
|
|
|
147.0
|
|
Seasons 52
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
Eddie V’s
|
22.0
|
|
|
22.0
|
|
|
10.5
|
|
|
10.5
|
|
Total
|
$
|
1,183.7
|
|
|
$
|
1,201.7
|
|
|
$
|
950.8
|
|
|
$
|
950.2
|
|
|
|
(1)
|
Goodwill related to Olive Garden is associated with the RARE Hospitality International, Inc. (RARE) acquisition and the estimated value of the direct benefits derived by Olive Garden as a result of the RARE acquisition.
|
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.
We elected to perform a qualitative assessment for goodwill to determine whether it is more likely than not that a reporting unit is impaired. In considering the qualitative approach, we evaluated factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability and the overall financial performance of the reporting units. Based on the results of the qualitative assessment, no impairment of goodwill was indicated for any of our brands. As we finalized the purchase price allocation for Cheddar’s Scratch Kitchen during our fourth fiscal quarter of 2018, we excluded the goodwill allocated to that brand from our qualitative assessment.
If the qualitative assessment is not performed or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds the carrying value, the fair value of the reporting unit is calculated through a two-step process. The first step is a comparison of each reporting unit’s fair value to its carrying value. We estimate fair value using the best information available, including market information and discounted cash flow projections (also referred to as the income approach). The income approach uses a reporting unit’s projection of estimated operating results and cash flows that is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management’s best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes in operating margins and cash expenditures. Other significant estimates and assumptions include terminal value growth rates, future estimates of capital expenditures and changes in future working capital requirements. We validate our estimates of fair value under the income approach by comparing the values to fair value estimates using a market approach. A market approach estimates fair value by applying cash flow and sales multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics of the reporting units. If the fair value of the reporting unit is higher than its carrying value, goodwill is deemed not to be impaired, and no further testing is required. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist and the second step must be performed to measure the amount of impairment loss. The amount of impairment is determined by comparing the implied fair value of reporting unit goodwill to the carrying value of the goodwill in the same manner as if the reporting unit was being acquired in a business combination. Specifically, fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less than the recorded goodwill, we would record an impairment loss for the difference.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A qualitative assessment was also performed for the trademarks. In considering the qualitative approach, we evaluate similar factors from the goodwill assessment, in addition to impacts of royalty rates and discount factors. As we finalized the purchase price allocation for Cheddar’s Scratch Kitchen during our fourth fiscal quarter of 2018, we excluded the Cheddar’s Scratch Kitchen trademark from our qualitative assessment. We completed our impairment test and concluded as of the date of the test, there was
no
impairment of our trademarks.
We evaluate the useful lives of our other intangible assets to determine if they are definite or indefinite-lived. A determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets.
Impairment or Disposal of Long-Lived Assets
Land, buildings and equipment and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If such assets are determined to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined based on appraisals, sales prices of comparable assets or discounted future net cash flows expected to be generated by the assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for sale on our consolidated balance sheets when certain criteria are met. These criteria include, among other factors, the requirement that the likelihood of disposing of these assets within one year is probable. Assets not meeting the “held for sale” criteria remain in land, buildings and equipment until their disposal is probable within one year.
We account for exit or disposal activities, including restaurant closures, in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 420, Exit or Disposal Cost Obligations. Such costs include the cost of disposing of the assets as well as other facility-related expenses from previously closed restaurants. These costs are generally expensed as incurred. Additionally, at the date we cease using a property under an operating lease, we record a liability for the net present value of any remaining lease obligations, net of estimated sublease income. Any subsequent adjustments to that liability as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets, primarily land, associated with a closed restaurant, any gain or loss is recorded in the same caption within our consolidated statements of earnings as the original impairment. See Note 4 for additional information.
Insurance Accruals
Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers’ compensation, certain employee medical and general liability programs. Accrued liabilities have been recorded based on our estimates of the anticipated ultimate costs to settle all claims, both reported and not yet reported.
Revenue Recognition
Sales, as presented in our consolidated statements of earnings, represents food and beverage product sold and is presented net of discounts, coupons, employee meals and complimentary meals. Revenue from restaurant sales is recognized when food and beverage products are sold. Sales taxes collected from customers and remitted to governmental authorities are presented on a net basis within sales in our consolidated statements of earnings.
Revenue from the sale of franchises is recognized as income when substantially all of our material obligations under the franchise agreement have been performed. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned. Revenue from the sale of consumer packaged goods includes ongoing royalty fees based on a percentage of licensed retail product sales and is recognized upon the sale of product by our licensed manufacturers to retail outlets.
Unearned Revenues
Unearned revenues represent our liability for gift cards that have been sold but not yet redeemed. We recognize sales from our gift cards when the gift card is redeemed by the customer. Although there are
no
expiration dates or dormancy fees for our gift cards, based on our analysis of our historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as “breakage.” We recognize breakage within sales for unused gift
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
card amounts in proportion to actual gift card redemptions, which is also referred to as the “redemption recognition” method. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of
12
years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions.
Food and Beverage Costs
Food and beverage costs include inventory, warehousing, related purchasing and distribution costs, and gains and losses on certain commodity derivative contracts. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned. For certain contracts, advance payments are made by the vendors based on estimates of volume to be purchased from the vendors and the terms of the agreement. As we make purchases from the vendors each period, we recognize the pro rata portion of allowances earned as a reduction of food and beverage costs for that period. Differences between estimated and actual purchases are settled in accordance with the terms of the agreements. Vendor agreements are generally for a period of one year or more and payments received are initially recorded as long-term liabilities. Amounts expected to be earned within one year are recorded as current liabilities.
Income Taxes
We provide for federal and state income taxes currently payable as well as for those deferred because of temporary differences between reporting income and expenses for financial statement purposes versus tax purposes. Federal income tax credits are recorded as a reduction of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Interest recognized on reserves for uncertain tax positions is included in interest, net in our consolidated statements of earnings. A corresponding liability for accrued interest is included as a component of other current liabilities on our consolidated balance sheets. Penalties, when incurred, are recognized in general and administrative expenses.
ASC Topic 740, Income Taxes, requires that a position taken or expected to be taken in a tax return be recognized (or derecognized) in the financial statements when it is more likely than not (i.e., a likelihood of more than 50 percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. See Note 13 for additional information.
Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as required by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks inherent in our business operations. Our use of derivative instruments is currently limited to equity forwards contracts. These instruments are generally structured as hedges of the variability of cash flows related to forecasted transactions (cash flow hedges). However, we do at times enter into instruments designated as fair value hedges to reduce our exposure to changes in fair value of the related hedged item. We do not enter into derivative instruments for trading or speculative purposes, where changes in the cash flows or fair value of the derivative are not expected to offset changes in cash flows or fair value of the hedged item. However, we have entered into equity forwards to economically hedge changes in the fair value of employee investments in our non-qualified deferred compensation plan. All derivatives are recognized on the balance sheet at fair value. For those derivative instruments for which we intend to elect hedge accounting, on the date the derivative contract is entered into, we document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking the various hedge transactions. This process includes linking all derivatives designated as cash flow hedges to specific assets and liabilities on the consolidated balance sheet or to specific forecasted transactions. We also formally assess, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items.
To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of FASB ASC, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs. To the extent our derivatives are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by Topic 815 of FASB ASC, gains and losses in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the derivatives’ fair value are included in current earnings, as are the gains and losses of the related hedged item. To the extent the hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges, and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur. Cash flows related to derivatives are included in operating activities. See Note 8 for additional information.
Leases
For operating leases, we recognize rent expense on a straight-line basis over the expected lease term, including cancelable option periods where we are reasonably assured to exercise the options. Differences between amounts paid and amounts expensed are recorded as deferred rent. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. Sale-leasebacks are transactions through which we sell assets (such as restaurant properties) at fair value and subsequently lease them back. The resulting leases generally qualify and are accounted for as operating leases. Financing leases are generally the product of a failed sale-leaseback transaction and result in retention of the “sold” assets within land, buildings and equipment with a financing lease obligation equal to the amount of proceeds received recorded as a component of other liabilities on our consolidated balance sheets.
Within the provisions of certain of our leases, there are rent holidays and escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term. The lease term commences on the date when we have the right to control the use of the leased property, which is typically before rent payments are due under the terms of the lease. Many of our leases have renewal periods totaling
5
to
20
years, exercisable at our option, and require payment of property taxes, insurance and maintenance costs in addition to the rent payments. The consolidated financial statements reflect the same lease term for amortizing leasehold improvements as we use to determine capital versus operating lease classifications and in calculating straight-line rent expense for each restaurant. Percentage rent expense is generally based on sales levels and is accrued at the point in time we determine that it is probable that such sales levels will be achieved. Amortization expense related to capital leases is included in depreciation and amortization expense in our consolidated statements of earnings. Landlord allowances are recorded based on contractual terms and are included in accounts receivable, net, and as a deferred rent liability and amortized as a reduction of rent expense on a straight-line basis over the expected lease term. Gains on sale-leaseback transactions are recorded as a deferred liability and amortized as a reduction of rent expense on a straight-line basis over the expected lease term. See Note 11 for additional information.
Pre-Opening Expenses
Non-capital expenditures associated with opening new restaurants are expensed as incurred.
Advertising
Production costs of commercials are expensed in the fiscal period the advertising is first aired while the costs of programming and other advertising, promotion and marketing programs are expensed as incurred. These costs are reported as marketing expenses on our consolidated statements of earnings.
Stock-Based Compensation
We recognize the cost of employee service received in exchange for awards of equity instruments based on the grant date fair value of those awards. We recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the employee service period for awards granted. We utilize the Black-Scholes option pricing model to estimate the fair value of stock option awards. The dividend yield has been estimated based upon our historical results and expectations for changes in dividend rates. The expected volatility was determined using historical stock prices. The risk-free interest rate was the rate available on zero coupon U.S. government obligations with a term approximating the expected life of each grant. The expected life was estimated based on the exercise history of previous grants, taking into consideration the remaining contractual period for outstanding awards. We utilize a Monte Carlo simulation to estimate the fair value of our market-based equity-settled performance awards. See Note 15 for further information.
Net Earnings per Share
Basic net earnings per share are computed by dividing net earnings by the weighted-average number of common shares outstanding for the reporting period. Diluted net earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted-average shares outstanding. These stock-based compensation instruments do not impact the numerator of the diluted net earnings per share computation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the computation of basic and diluted net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions, except per share data)
|
2018
|
|
2017
|
|
2016
|
Earnings from continuing operations
|
$
|
603.8
|
|
|
$
|
482.5
|
|
|
$
|
359.7
|
|
Earnings (loss) from discontinued operations
|
(7.8
|
)
|
|
(3.4
|
)
|
|
15.3
|
|
Net earnings
|
$
|
596.0
|
|
|
$
|
479.1
|
|
|
$
|
375.0
|
|
Average common shares outstanding – Basic
|
124.0
|
|
|
124.3
|
|
|
127.4
|
|
Effect of dilutive stock-based compensation
|
2.0
|
|
|
1.7
|
|
|
1.9
|
|
Average common shares outstanding – Diluted
|
126.0
|
|
|
126.0
|
|
|
129.3
|
|
Basic net earnings per share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
4.87
|
|
|
$
|
3.88
|
|
|
$
|
2.82
|
|
Earnings (loss) from discontinued operations
|
(0.06
|
)
|
|
(0.03
|
)
|
|
0.12
|
|
Net earnings
|
$
|
4.81
|
|
|
$
|
3.85
|
|
|
$
|
2.94
|
|
Diluted net earnings per share:
|
|
|
|
|
|
Earnings from continuing operations
|
$
|
4.79
|
|
|
$
|
3.83
|
|
|
$
|
2.78
|
|
Earnings (loss) from discontinued operations
|
(0.06
|
)
|
|
(0.03
|
)
|
|
0.12
|
|
Net earnings
|
$
|
4.73
|
|
|
$
|
3.80
|
|
|
$
|
2.90
|
|
Restricted stock and options to purchase shares of our common stock excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
(in millions)
|
May 27, 2018
|
|
May 28, 2017
|
|
May 29, 2016
|
Anti-dilutive restricted stock and options
|
0.3
|
|
|
0.4
|
|
|
0.3
|
|
Foreign Currency
The Canadian dollar is the functional currency for our Canadian restaurant operations. Assets and liabilities denominated in foreign currencies are translated into U.S. dollars using the exchange rates in effect at the balance sheet date. Results of operations are translated using the average exchange rates prevailing throughout the period. Translation gains and losses are reported as a separate component of other comprehensive income (loss). Aggregate cumulative translation losses were
$1.6 million
and
$0.7 million
at
May 27, 2018
and
May 28, 2017
, respectively. Net (gains) losses from foreign currency transactions recognized in our consolidated statements of earnings were
$(1.2) million
,
$0.8 million
and
$1.8 million
for fiscal
2018
,
2017
and
2016
, respectively.
Recently Adopted Accounting Standards
As of May 29, 2017, we adopted Accounting Standards Update (ASU) 2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. Upon adoption, we applied this guidance retrospectively which resulted in a reclassification of current deferred tax assets of
$211.8 million
on our consolidated balance sheet for the period ended
May 28, 2017
.
As of May 29, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718). The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The primary impact for us upon adoption is the recognition of excess tax benefits in our provision for income taxes rather than in equity as previously recognized. This change is required to be applied prospectively. The cash flows related to excess tax benefits will be presented as an operating activity rather than a financing activity in our consolidated statements of cash flows. We elected to apply the presentation requirements for the cash flows related to excess tax benefits prospectively and therefore have not adjusted prior periods. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated statements of cash flows since such cash flows have historically been presented as a financing activity. Additionally, we have elected to continue our current accounting policy of estimating forfeitures rather than accounting for forfeitures as they occur.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update provides clarification regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This update is effective for us in the first quarter of fiscal 2019, however, we elected to early adopt this guidance during the
quarter ended
February 25, 2018, using a retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2018, the FASB issued
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). The amendments in the update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (Tax Act).
This update is effective for us in the first quarter of fiscal 2020, however, we elected to early adopt this guidance
during the quarter ended
February 25, 2018. The adoption of this guidance resulted in a
$15.6 million
reclassification from accumulated other comprehensive income (loss) to retained earnings resulting from the Tax Act. See Note 10.
Application of New Accounting Standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update is effective for us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions using the cumulative effect transition method. This guidance will not impact the recognition of our primary source of revenue from company-owned restaurants, which also includes gift card revenue. This guidance will impact the recognition of our franchise revenue, however, due to the relative insignificance of these amounts, we do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance requires us to use a modified retrospective approach upon adoption with certain practical expedients available and we plan to adopt this guidance in the first quarter of fiscal 2020. We are implementing a new lease system in connection with the adoption and we also expect changes to our internal controls over financial reporting. We expect our balance sheet presentation to be materially impacted upon adoption due to the recognition of right-of-use assets and lease liabilities for operating leases, however, we do not expect adoption to have a material impact on our consolidated statements of earnings. We do not expect our accounting for capital leases to substantially change. We continue to evaluate the effect this guidance will have on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740). This update addresses the income tax consequences of intra-entity transfers of assets other than inventory. Current accounting guidance prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice over the years for transfers of certain intangible and tangible assets. The amendments in the update will require recognition of current and deferred income taxes resulting from an intra-entity transfer of an asset other than inventory when the transfer occurs. This update is effective for us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions using a modified retrospective approach. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715). The amendments in this update require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This update is effective for us in the first quarter of fiscal 2019, which is when we plan to adopt these provisions. The guidance will be applied retrospectively or prospectively, depending on the area covered in this update. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). The amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This update is effective for us in the first quarter of fiscal 2020. The guidance will be applied retrospectively or prospectively, depending on the area covered in this update. Early adoption is permitted. We are evaluating the effect this guidance will have on our consolidated financial statements and related disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - ACQUISITION OF CHEDDAR’S SCRATCH KITCHEN
On April 24, 2017, we acquired
100 percent
of the equity interest in Cheddar’s Scratch Kitchen for
$799.8 million
in total consideration. We funded the acquisition with the proceeds from the issuance of
$500.0 million
in senior notes combined with cash on hand. The acquired operations of Cheddar’s Scratch Kitchen included
140
company-owned restaurants and
25
franchised restaurants. The results of Cheddar’s Scratch Kitchen operations are included in our consolidated financial statements from the date of acquisition.
The assets and liabilities of Cheddar’s Scratch Kitchen were recorded at their respective fair values as of the date of acquisition. The following table summarizes the final allocation of the purchase price as of
May 27, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Preliminary
|
|
Adjustments
|
|
Final
|
Current assets
|
|
$
|
48.2
|
|
|
$
|
(0.7
|
)
|
|
$
|
47.5
|
|
Land, buildings and equipment
|
|
191.9
|
|
|
23.0
|
|
|
214.9
|
|
Trademark
|
|
375.0
|
|
|
—
|
|
|
375.0
|
|
Other assets
|
|
2.2
|
|
|
20.4
|
|
|
22.6
|
|
Goodwill
|
|
329.4
|
|
|
(29.5
|
)
|
|
299.9
|
|
Total assets acquired
|
|
$
|
946.7
|
|
|
$
|
13.2
|
|
|
$
|
959.9
|
|
Current liabilities
|
|
43.4
|
|
|
10.1
|
|
|
53.5
|
|
Other liabilities
|
|
104.3
|
|
|
2.3
|
|
|
106.6
|
|
Total liabilities assumed
|
|
$
|
147.7
|
|
|
$
|
12.4
|
|
|
$
|
160.1
|
|
Net assets acquired
|
|
$
|
799.0
|
|
|
$
|
0.8
|
|
|
$
|
799.8
|
|
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. Of the
$299.9 million
recorded as goodwill,
none
is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected as a result of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. The trademark has an indefinite life based on the expected use of the asset and the regulatory and economic environment within which it is being used. The trademark represents a highly respected brand with positive connotations and we intend to cultivate and protect the use of this brand. Goodwill and indefinite-lived trademarks are not amortized but are reviewed annually for impairment or more frequently if indicators of impairment exist. Buildings and equipment will be depreciated over a period of
2 years
to
30 years
. Other assets and liabilities include values associated with favorable and unfavorable market leases that will amortize over a weighted-average period of
16
years and a below-market franchise agreement that will amortize over a period of
10
years. Pro forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of Cheddar’s Scratch Kitchen on our consolidated financial statements.
On August 28, 2017, we completed the acquisition of
11
Cheddar’s Scratch Kitchen restaurants and certain assets and liabilities from C&P Restaurant Company, LLC, an existing franchisee. The acquisition was funded with cash on hand for
$39.6 million
in total consideration, of which
$22.5 million
was allocated to reacquired franchise rights. The reacquired franchise rights will amortize over a period of
15
years. The results of operations of these restaurants are included in our consolidated financial statements from the date of acquisition. The assets and liabilities of these restaurants were recorded at their respective fair values as of the date of acquisition. We completed the valuation process for the assets and liabilities of these restaurants as of
May 27, 2018
. The excess purchase price over the aggregate fair value of net assets acquired of
$11.5 million
was allocated to goodwill and is expected to be deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected as a result of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. Pro forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of the acquired restaurants on our consolidated financial statements.
As a result of the integration efforts for these acquisitions, we incurred expenses of approximately
$19.4 million
during the year ended
May 27, 2018
, which are included in general and administrative expenses in our consolidated statements of earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 – DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
Discontinued Operations
On July 28, 2014, we completed the sale of Red Lobster and certain related assets and liabilities. Earnings (loss) from discontinued operations, net of taxes in our accompanying consolidated statements of earnings is primarily related to the Red Lobster disposition and is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
(in millions)
|
May 27, 2018
|
|
May 28, 2017
|
|
May 29, 2016
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs and expenses:
|
|
|
|
|
|
Restaurant and marketing expenses
|
1.4
|
|
|
1.6
|
|
|
1.8
|
|
Other income and expenses
|
11.2
|
|
|
6.0
|
|
|
(20.5
|
)
|
Earnings (loss) before income taxes
|
(12.6
|
)
|
|
(7.6
|
)
|
|
18.7
|
|
Income tax expense (benefit)
|
(4.8
|
)
|
|
(4.2
|
)
|
|
3.4
|
|
Earnings (loss) from discontinued operations, net of tax
|
$
|
(7.8
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
15.3
|
|
Assets Held For Sale
Assets classified as held for sale on our accompanying consolidated balance sheets as of
May 27, 2018
and
May 28, 2017
, consisted of land, buildings and equipment with carrying amounts of
$11.9 million
and
$13.2 million
, respectively, primarily related to excess land parcels adjacent to our corporate headquarters.
NOTE 4 –IMPAIRMENTS AND DISPOSAL OF ASSETS, NET
Impairments and disposal of assets, net, in our accompanying consolidated statements of earnings are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Restaurant impairments
|
$
|
3.7
|
|
|
$
|
—
|
|
|
$
|
9.2
|
|
Disposal gains
|
(1.1
|
)
|
|
(10.4
|
)
|
|
(5.9
|
)
|
Other
|
0.8
|
|
|
2.0
|
|
|
2.5
|
|
Impairments and disposal of assets, net
|
$
|
3.4
|
|
|
$
|
(8.4
|
)
|
|
$
|
5.8
|
|
Restaurant impairments for fiscal
2018
were primarily related to underperforming restaurants. Restaurant impairments for fiscal
2016
were primarily related to underperforming restaurants and restaurant assets involved in individual sale-leaseback transactions.
Disposal gains for fiscal
2018
were primarily related to the sale of excess land parcels. Disposal gains for fiscal
2017
were primarily related to the sale of restaurant properties, favorable lease terminations and the sale of excess land parcels. Disposal gains for fiscal
2016
were primarily related to the sale of land parcels and sale-leaseback transactions.
Other impairment charges for fiscal
2018
and
2017
related to cost-method investments. Other impairment charges for fiscal
2016
related to a cost-method investment and the expected disposal of excess land parcels adjacent to our corporate headquarters.
Impairment charges were measured based on the amount by which the carrying amount of these assets exceeded their fair value. Fair value is generally determined based on appraisals or sales prices of comparable assets and estimates of discounted future cash flows. These amounts are included in impairments and disposal of assets, net as a component of earnings from continuing operations in the accompanying consolidated statements of earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - LAND, BUILDINGS AND EQUIPMENT, NET
The components of land, buildings and equipment, net, are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Land
|
$
|
141.5
|
|
|
$
|
136.7
|
|
Buildings
|
2,751.1
|
|
|
2,547.0
|
|
Equipment
|
1,581.2
|
|
|
1,444.2
|
|
Assets under capital leases
|
102.1
|
|
|
78.3
|
|
Construction in progress
|
85.6
|
|
|
62.9
|
|
Total land, buildings and equipment
|
$
|
4,661.5
|
|
|
$
|
4,269.1
|
|
Less accumulated depreciation and amortization
|
(2,191.6
|
)
|
|
(1,962.1
|
)
|
Less amortization associated with assets under capital leases
|
(40.1
|
)
|
|
(34.7
|
)
|
Land, buildings and equipment, net
|
$
|
2,429.8
|
|
|
$
|
2,272.3
|
|
NOTE 6 - SEGMENT INFORMATION
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Bahama Breeze, Seasons 52 and Eddie V’s in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have
four
reportable segments: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V’s restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Cheddar’s Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze restaurants in the U.S and results from our franchise operations. For periods prior to fiscal 2018, this segment also included results from our consumer-packaged goods sales. Beginning with the first quarter of fiscal 2018, the results from consumer-packaged goods are included in net sales of the associated brand, primarily Olive Garden.
External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively, restaurant and marketing expenses). The following tables reconcile our segment results to our consolidated results reported in accordance with generally accepted accounting principles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Olive Garden
|
LongHorn Steakhouse
|
Fine Dining
|
Other Business
|
Corporate
|
Consolidated
|
At May 27, 2018 and for the year ended
|
|
Sales
|
|
$
|
4,082.5
|
|
$
|
1,703.2
|
|
$
|
574.4
|
|
$
|
1,720.0
|
|
$
|
—
|
|
$
|
8,080.1
|
|
Restaurant and marketing expenses
|
|
3,262.8
|
|
1,402.1
|
|
457.4
|
|
1,464.7
|
|
—
|
|
6,587.0
|
|
Segment profit
|
|
$
|
819.7
|
|
$
|
301.1
|
|
$
|
117.0
|
|
$
|
255.3
|
|
$
|
—
|
|
$
|
1,493.1
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
132.9
|
|
$
|
65.7
|
|
$
|
31.5
|
|
$
|
83.0
|
|
$
|
—
|
|
$
|
313.1
|
|
Impairments and disposal of assets, net
|
|
2.0
|
|
1.5
|
|
0.1
|
|
—
|
|
(0.2
|
)
|
3.4
|
|
Segment assets
|
|
1,020.7
|
|
974.2
|
|
872.9
|
|
2,058.9
|
|
542.9
|
|
5,469.6
|
|
Purchases of land, buildings and equipment
|
|
163.4
|
|
76.1
|
|
32.1
|
|
119.5
|
|
4.9
|
|
396.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Olive Garden
|
LongHorn Steakhouse
|
Fine Dining
|
Other Business
|
Corporate
|
Consolidated
|
At May 28, 2017 and for the year ended
|
|
Sales
|
|
$
|
3,938.6
|
|
$
|
1,622.2
|
|
$
|
535.6
|
|
$
|
1,073.8
|
|
$
|
—
|
|
$
|
7,170.2
|
|
Restaurant and marketing expenses
|
|
3,176.8
|
|
1,341.3
|
|
430.6
|
|
891.8
|
|
—
|
|
5,840.5
|
|
Segment profit
|
|
$
|
761.8
|
|
$
|
280.9
|
|
$
|
105.0
|
|
$
|
182.0
|
|
$
|
—
|
|
$
|
1,329.7
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
123.3
|
|
$
|
65.1
|
|
$
|
29.1
|
|
$
|
55.4
|
|
$
|
—
|
|
$
|
272.9
|
|
Impairments and disposal of assets, net
|
|
(1.5
|
)
|
(0.1
|
)
|
—
|
|
(6.2
|
)
|
(0.6
|
)
|
(8.4
|
)
|
Segment assets
|
|
949.2
|
|
948.9
|
|
869.9
|
|
1,964.7
|
|
559.6
|
|
5,292.3
|
|
Purchases of land, buildings and equipment
|
|
131.4
|
|
54.1
|
|
41.1
|
|
62.7
|
|
3.7
|
|
293.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Olive Garden
|
LongHorn Steakhouse
|
Fine Dining
|
Other Business
|
Corporate
|
Consolidated
|
At May 29, 2016 and for the year ended
|
|
Sales
|
|
$
|
3,838.6
|
|
$
|
1,587.7
|
|
$
|
514.1
|
|
$
|
993.1
|
|
$
|
—
|
|
$
|
6,933.5
|
|
Restaurant and marketing expenses
|
|
3,079.4
|
|
1,312.4
|
|
413.6
|
|
825.0
|
|
—
|
|
5,630.4
|
|
Segment profit
|
|
$
|
759.2
|
|
$
|
275.3
|
|
$
|
100.5
|
|
$
|
168.1
|
|
$
|
—
|
|
$
|
1,303.1
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
135.5
|
|
$
|
72.6
|
|
$
|
28.6
|
|
$
|
53.5
|
|
$
|
—
|
|
$
|
290.2
|
|
Impairments and disposal of assets, net
|
|
(1.4
|
)
|
(1.5
|
)
|
0.7
|
|
6.0
|
|
2.0
|
|
5.8
|
|
Purchases of land, buildings and equipment
|
|
95.6
|
|
46.9
|
|
21.4
|
|
60.5
|
|
3.9
|
|
228.3
|
|
Reconciliation of segment profit to earnings from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
(in millions)
|
May 27, 2018
|
|
May 28, 2017
|
|
May 29, 2016
|
Segment profit
|
$
|
1,493.1
|
|
|
$
|
1,329.7
|
|
|
$
|
1,303.1
|
|
Less general and administrative expenses
|
(409.8
|
)
|
|
(387.7
|
)
|
|
(384.9
|
)
|
Less depreciation and amortization
|
(313.1
|
)
|
|
(272.9
|
)
|
|
(290.2
|
)
|
Less impairments and disposal of assets, net
|
(3.4
|
)
|
|
8.4
|
|
|
(5.8
|
)
|
Less interest, net
|
(161.1
|
)
|
|
(40.2
|
)
|
|
(172.5
|
)
|
Earnings before income taxes
|
$
|
605.7
|
|
|
$
|
637.3
|
|
|
$
|
449.7
|
|
NOTE 7 - DEBT
The components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
3.850% senior notes due May 2027
|
$
|
500.0
|
|
|
$
|
500.0
|
|
6.000% senior notes due August 2035
|
96.3
|
|
|
150.0
|
|
6.800% senior notes due October 2037
|
42.8
|
|
|
300.0
|
|
4.550% senior notes due February 2048
|
300.0
|
|
|
—
|
|
Total long-term debt
|
$
|
939.1
|
|
|
$
|
950.0
|
|
Less unamortized discount and issuance costs
|
(12.6
|
)
|
|
(13.4
|
)
|
Total long-term debt less unamortized discount and issuance costs
|
$
|
926.5
|
|
|
$
|
936.6
|
|
On
February 22, 2018
, we completed the issuance of
$300.0 million
aggregate principal amount of unsecured
4.550 percent
senior notes due in
February 2048
under a registration statement filed with the Securities and Exchange Commission (SEC) on
October 6, 2016
. Discount and issuance costs, which totaled
$3.7 million
, are being amortized over the term of the notes using the straight-line method, the results of which approximate the effective interest method. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year commencing August 15, 2018. We may redeem the notes at any
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
time in whole or from time to time in part, at the principal amount plus a make-whole premium. If we experience a change in control triggering event, unless we have previously exercised our right to redeem the notes, we may be required to purchase the notes from the holders at a purchase price equal to
101 percent
of their principal amount plus accrued and unpaid interest. We utilized the proceeds from this issuance, along with cash on hand, to retire
$310.9 million
aggregate principal amount of long-term debt consisting of:
|
|
•
|
$53.7 million
of unsecured
6.000 percent
senior notes due in August 2035; and
|
|
|
•
|
$257.2 million
of unsecured
6.800 percent
senior notes due in October 2037.
|
During fiscal
2018
, we recorded approximately
$102.2 million
of expenses associated with the retirements, including cash costs of approximately
$97.3 million
, primarily for repurchase premiums and non-cash charges of approximately
$4.9 million
associated with loan cost write-offs. These amounts were recorded in interest, net in our consolidated statements of earnings.
The aggregate contractual maturities of long-term debt for each of the five fiscal years subsequent to
May 27, 2018
, and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Fiscal Year
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
Debt repayments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
939.1
|
|
On October 27, 2017, we entered into a new
$750.0 million
revolving credit agreement with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of
0.75
to 1.00) and events of default usual for credit facilities of this type. The Revolving Credit Agreement replaced our prior
$750.0 million
revolving credit agreement, dated as of October 3, 2011 and amended as of October 24, 2013. As of
May 27, 2018
, we were in compliance with all covenants under the Revolving Credit Agreement.
The Revolving Credit Agreement matures on
October 27, 2022
, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus
0.500 percent
, and the Eurocurrency Rate plus
1.00 percent
) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be
1.000 percent
for LIBOR loans and
0 percent
for base rate loans. As of
May 27, 2018
, we had
no
outstanding balances under the Revolving Credit Agreement.
NOTE 8 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use financial derivatives to manage interest rate and equity-based compensation risks inherent in our business operations. By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high-quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at
May 27, 2018
, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We periodically enter into commodity futures, swaps and option contracts (collectively, commodity contracts) to reduce the risk of variability in cash flows associated with fluctuations in the price we pay for commodities, such as natural gas and diesel fuel. For certain of our commodity purchases, changes in the price we pay for these commodities are highly correlated with changes in the market price of these commodities. For these commodity purchases, we designate commodity contracts as cash flow hedging instruments. For the remaining commodity purchases, changes in the price we pay for these commodities are not highly correlated with changes in the market price, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these commodity purchases, we utilize these commodity contracts as economic hedges. Our commodity contracts currently extend through
April 2019
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized stock based awards we grant to certain employees (Darden stock units). The equity forward contracts will be settled at the end of the vesting periods of their underlying Darden stock units, which range between
three
and
five
years and currently extend through
July 2022
. The contracts were initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting, and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We do not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings. These contracts currently extend through
July 2021
.
The notional and fair values of our derivative contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values
|
(in millions, except
per share data)
|
Number of Shares Outstanding
|
|
Weighted-Average
Per Share Forward Rates
|
|
Notional Values
|
|
Derivative Assets (1)
|
|
Derivative Liabilities (1)
|
|
May 27, 2018
|
|
May 27, 2018
|
|
May 28, 2017
|
|
May 27, 2018
|
|
May 28, 2017
|
Equity Forwards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated
|
0.4
|
|
|
$
|
77.66
|
|
|
$
|
29.1
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Not designated
|
0.6
|
|
|
$
|
59.34
|
|
|
$
|
36.1
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
Total equity forwards
|
|
|
|
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
Commodity contracts
|
N/A
|
|
|
N/A
|
|
|
$
|
6.7
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total derivative contracts
|
|
|
|
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
|
(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 in cash flow hedging relationships in the consolidated statements of earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI (Effective Portion)
|
|
Amount of Gain (Loss) Reclassified from AOCI to Earnings (Effective Portion)
|
|
Amount of Gain (Loss) Recognized in Earnings (Ineffective Portion)
|
|
|
Fiscal Year
|
|
Fiscal Year
|
|
Fiscal Year
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Equity (1)
|
|
$
|
(5.3
|
)
|
|
$
|
3.7
|
|
|
$
|
2.0
|
|
|
$
|
(0.2
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
2.1
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.9
|
|
Commodity (2)
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest rate (3)
|
|
—
|
|
|
(1.3
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(37.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
(4.4
|
)
|
|
$
|
2.4
|
|
|
$
|
2.0
|
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
$
|
(35.3
|
)
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
0.9
|
|
|
|
(1)
|
Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses.
|
|
|
(2)
|
Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is food and beverage costs and restaurant expenses.
|
|
|
(3)
|
Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is interest, net.
|
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in Earnings
|
(in millions)
|
|
Fiscal Year
|
Location of Gain (Loss) Recognized in Earnings on Derivatives
|
|
2018
|
|
2017
|
|
2016
|
Restaurant labor expenses
|
|
$
|
1.5
|
|
|
$
|
5.3
|
|
|
$
|
3.9
|
|
General and administrative expenses
|
|
2.1
|
|
|
8.9
|
|
|
7.5
|
|
Total
|
|
$
|
3.6
|
|
|
$
|
14.2
|
|
|
$
|
11.4
|
|
Based on the fair value of our derivative instruments designated as cash flow hedges as of
May 27, 2018
, we expect to reclassify
$0.7 million
of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.
NOTE 9 – FAIR VALUE MEASUREMENTS
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis at
May 27, 2018
and
May 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Measured at Fair Value at May 27, 2018
|
(in millions)
|
|
|
Fair Value
of Assets
(Liabilities)
|
|
Quoted Prices
in Active
Market for
Identical Assets
(Liabilities)
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Commodities futures, swaps & options
|
(1)
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Equity forwards
|
(2)
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
Total
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Measured at Fair Value at May 28, 2017
|
(in millions)
|
|
|
Fair Value
of Assets
(Liabilities)
|
|
Quoted Prices
in Active
Market for
Identical Assets
(Liabilities)
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Fixed-income securities:
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
(3)
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
U.S. Treasury securities
|
(4)
|
|
2.0
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities
|
(3)
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
Equity forwards
|
(2)
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Total
|
|
|
$
|
3.7
|
|
|
$
|
2.0
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
|
(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 these securities is based on closing market prices of the investments when applicable, or, alternatively, valuations utilizing market data and other observable inputs, inclusive of the risk of nonperformance.
|
|
|
(4)
|
The fair value of our U.S. Treasury securities is based on closing market prices.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying value and fair value of long-term debt, as of
May 27, 2018
, was
$926.5 million
and
$922.0 million
, respectively. The carrying value and fair value of long-term debt as of
May 28, 2017
, was
$936.6 million
and
$1.05 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, which is classified as Level 3 in the fair value hierarchy, is determined based on appraisals or sales prices of comparable assets and estimates of future cash flows. As of
May 27, 2018
, long-lived assets held and used with a carrying amount of
$3.7 million
, primarily related to
four
underperforming restaurants, were determined to have
no
fair value resulting in an impairment charge of
$3.7 million
. As of
May 28, 2017
, adjustments to the fair values of non-financial assets were not material.
NOTE 10 - STOCKHOLDERS’ EQUITY
Share Repurchase Program
All of the shares purchased during the fiscal year ended
May 27, 2018
were purchased as part of our repurchase program authorized by our Board of Directors on September 29, 2016. On
June 20, 2018
, our Board of Directors authorized a new share repurchase program under which we may repurchase up to
$500.0 million
of our outstanding common stock. This repurchase program does not have an expiration and replaces the previously existing share repurchase authorization.
Share Retirements
As of
May 27, 2018
, of the
191.4 million
cumulative shares repurchased under the current and previous authorizations,
178.8 million
shares were retired and restored to authorized but unissued shares of common stock. We expect that all shares of common stock acquired in the future will also be retired and restored to authorized but unissued shares of common stock.
Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustment
|
|
Unrealized Gains (Losses) on Marketable Securities
|
|
Unrealized Gains (Losses) on Derivatives
|
|
Benefit Plan Funding Position
|
|
Accumulated Other Comprehensive Income (Loss)
|
Balances at May 29, 2016
|
$
|
(1.2
|
)
|
|
$
|
0.1
|
|
|
$
|
3.9
|
|
|
$
|
(89.8
|
)
|
|
$
|
(87.0
|
)
|
Gain (loss)
|
0.5
|
|
|
—
|
|
|
2.9
|
|
|
6.4
|
|
|
9.8
|
|
Reclassification realized in net earnings
|
—
|
|
|
—
|
|
|
1.4
|
|
|
12.9
|
|
|
14.3
|
|
Balances at May 28, 2017
|
$
|
(0.7
|
)
|
|
$
|
0.1
|
|
|
$
|
8.2
|
|
|
$
|
(70.5
|
)
|
|
$
|
(62.9
|
)
|
Gain (loss)
|
(0.9
|
)
|
|
—
|
|
|
(4.6
|
)
|
|
(1.0
|
)
|
|
(6.5
|
)
|
Reclassification realized in net earnings
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Reclassification of tax effect (1)
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(15.4
|
)
|
|
(15.6
|
)
|
Balances at May 27, 2018
|
$
|
(1.6
|
)
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
(87.0
|
)
|
|
$
|
(85.2
|
)
|
|
|
(1)
|
Stranded tax effects reclassified from accumulated other comprehensive income (loss) to retained earnings from the adoption of ASU 2018-02.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the amounts and line items in our consolidated statements of earnings where other adjustments reclassified from AOCI into net earnings were recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
AOCI Components
|
Location of Gain (Loss) Recognized in Earnings
|
|
May 27,
2018
|
|
May 28,
2017
|
Derivatives
|
|
|
|
|
|
Commodity contracts
|
(1)
|
|
$
|
0.3
|
|
|
$
|
—
|
|
Equity contracts
|
(2)
|
|
(0.2
|
)
|
|
(1.4
|
)
|
Interest rate contracts
|
(3)
|
|
(0.1
|
)
|
|
—
|
|
|
Total before tax
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
Tax benefit
|
|
—
|
|
|
—
|
|
|
Net of tax
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
Benefit plan funding position
|
|
|
|
|
|
Pension/postretirement plans
|
|
|
|
|
|
Actuarial losses
|
(4)
|
|
$
|
(2.8
|
)
|
|
$
|
(3.3
|
)
|
Settlement loss
|
(4)
|
|
—
|
|
|
(19.9
|
)
|
Total - pension/postretirement plans
|
|
|
$
|
(2.8
|
)
|
|
$
|
(23.2
|
)
|
Recognized net actuarial gain - other plans
|
(5)
|
|
3.0
|
|
|
2.3
|
|
|
Total before tax
|
|
$
|
0.2
|
|
|
$
|
(20.9
|
)
|
|
Tax benefit (expense)
|
|
(0.1
|
)
|
|
8.0
|
|
|
Net of tax
|
|
$
|
0.1
|
|
|
$
|
(12.9
|
)
|
|
|
(1)
|
Primarily included in food and beverage costs and restaurant expenses. See Note 8 for additional details.
|
|
|
(2)
|
Primarily included in restaurant labor costs and general and administrative expenses. See Note 8 for additional details.
|
|
|
(3)
|
Included in interest, net, on our consolidated statements of earnings.
|
|
|
(4)
|
Included in the computation of net periodic benefit costs - pension and postretirement plans, which is a component of restaurant labor expenses and general and administrative expenses. See Note 14 for additional details.
|
|
|
(5)
|
Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses.
|
NOTE 11 – LEASES
An analysis of rent expense incurred related to continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Restaurant minimum rent
|
$
|
321.8
|
|
|
$
|
286.8
|
|
|
$
|
233.6
|
|
Restaurant rent averaging expense
|
30.2
|
|
|
26.0
|
|
|
15.9
|
|
Restaurant percentage rent
|
7.2
|
|
|
7.9
|
|
|
8.0
|
|
Other
|
11.8
|
|
|
11.3
|
|
|
8.1
|
|
Total rent expense
|
$
|
371.0
|
|
|
$
|
332.0
|
|
|
$
|
265.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Total rent expense included in discontinued operations was
$0.1 million
,
$0.1 million
and
$0.0 million
for fiscal 2018, 2017 and 2016, respectively. These amounts include restaurant minimum rent of
$0.1 million
,
$0.1 million
and
$0.0 million
for fiscal 2018, 2017 and 2016, respectively.
The annual future lease commitments under capital lease obligations and noncancelable operating and financing leases, including those related to restaurants reported as discontinued operations, for each of the
five
fiscal years subsequent to
May 27, 2018
and thereafter is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
Fiscal Year
|
Capital
|
|
Financing
|
|
Operating
|
2019
|
$
|
8.6
|
|
|
$
|
9.5
|
|
|
$
|
353.0
|
|
2020
|
8.7
|
|
|
9.6
|
|
|
344.0
|
|
2021
|
8.7
|
|
|
9.8
|
|
|
322.6
|
|
2022
|
8.5
|
|
|
9.9
|
|
|
297.5
|
|
2023
|
8.3
|
|
|
10.1
|
|
|
270.4
|
|
Thereafter
|
75.6
|
|
|
124.0
|
|
|
1,548.5
|
|
Total future lease commitments
|
$
|
118.4
|
|
|
$
|
172.9
|
|
|
$
|
3,136.0
|
|
Less imputed interest (at 6.5%), (various)
|
(37.9
|
)
|
|
(79.9
|
)
|
|
|
Present value of future lease commitments
|
$
|
80.5
|
|
|
$
|
93.0
|
|
|
|
Less current maturities
|
(4.1
|
)
|
|
(2.5
|
)
|
|
|
Obligations under capital and financing leases, net of current maturities
|
$
|
76.4
|
|
|
$
|
90.5
|
|
|
|
NOTE 12 - ADDITIONAL FINANCIAL INFORMATION
The tables below provide additional financial information related to our consolidated financial statements:
Balance Sheets
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Receivables, net
|
|
|
|
Retail outlet gift card sales
|
$
|
40.4
|
|
|
$
|
43.0
|
|
Landlord allowances due
|
18.1
|
|
|
14.2
|
|
Miscellaneous
|
25.5
|
|
|
19.0
|
|
Allowance for doubtful accounts
|
(0.3
|
)
|
|
(0.3
|
)
|
Total
|
$
|
83.7
|
|
|
$
|
75.9
|
|
|
|
|
|
Other Current Liabilities
|
|
|
|
Non-qualified deferred compensation plan
|
$
|
227.9
|
|
|
$
|
210.3
|
|
Sales and other taxes
|
72.7
|
|
|
66.9
|
|
Insurance-related
|
40.1
|
|
|
41.7
|
|
Employee benefits
|
39.9
|
|
|
41.8
|
|
Accrued interest
|
7.5
|
|
|
7.3
|
|
Miscellaneous
|
69.5
|
|
|
77.9
|
|
Total
|
$
|
457.6
|
|
|
$
|
445.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Statements of Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Interest, net
|
|
|
|
|
|
Interest expense (1)
|
$
|
152.4
|
|
|
$
|
34.4
|
|
|
$
|
165.4
|
|
Imputed interest on capital and financing leases
|
11.4
|
|
|
8.8
|
|
|
8.9
|
|
Capitalized interest
|
(1.9
|
)
|
|
(1.7
|
)
|
|
(0.7
|
)
|
Interest income
|
(0.8
|
)
|
|
(1.3
|
)
|
|
(1.1
|
)
|
Total
|
$
|
161.1
|
|
|
$
|
40.2
|
|
|
$
|
172.5
|
|
|
|
(1)
|
Interest expense in fiscal
2018
and
2016
includes approximately
$102.2 million
and
$106.8 million
, respectively, of expenses associated with the retirement of long-term debt.
|
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Cash paid during the fiscal year for:
|
|
|
|
|
|
Interest, net of amounts capitalized (1)
|
$
|
155.5
|
|
|
$
|
37.0
|
|
|
$
|
140.8
|
|
Income taxes, net of refunds
|
$
|
25.7
|
|
|
$
|
106.2
|
|
|
$
|
128.0
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
Increase in land, buildings and equipment through accrued purchases
|
$
|
37.5
|
|
|
$
|
22.8
|
|
|
$
|
14.9
|
|
Net book value of assets distributed in Four Corners separation, net of deferred tax liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
750.4
|
|
|
|
(1)
|
Interest paid in fiscal
2018
and
2016
includes approximately
$97.3 million
and
$68.7 million
, respectively, of payments associated with the retirement of long-term debt.
|
NOTE 13 - INCOME TAXES
The Tax Act was enacted on December 22, 2017, and includes, among other items, a reduction in the federal corporate income tax rate from
35.0 percent
to
21.0 percent
effective January 1, 2018. Our federal corporate income tax rate for fiscal
2018
is
29.4 percent
and represents a blended income tax rate for the current fiscal year. For fiscal
2019
, our federal corporate income tax rate will be
21.0 percent
. Additionally, for the fiscal year ended
May 27, 2018
, in accordance with FASB ASC 740, we remeasured our deferred tax balances to reflect the reduced rate that will apply when these deferred taxes are settled or realized in future periods. The remeasurement resulted in a
$79.3 million
one-time adjustment of our net deferred tax liabilities reflected in our consolidated balance sheet as of
May 27, 2018
and a corresponding income tax benefit reflected in our consolidated statements of earnings for the fiscal year ended
May 27, 2018
. The SEC staff issued Staff Accounting Bulletin 118 which allows companies to record provisional amounts during a measurement period that is similar to the measurement period used when accounting for business combinations. While we are able to make a reasonable estimate of the impacts of the Tax Act, adjustments may occur and may be affected by other factors, including, but not limited to further refinement of our calculations, changes in interpretations and assumptions and regulatory changes from the Internal Revenue Service (IRS), the SEC, the FASB and various tax jurisdictions. The fiscal 2018 impact of the enactment of the Tax Act is reflected in the tables below.
Total income tax expense was allocated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Earnings from continuing operations
|
$
|
1.9
|
|
|
$
|
154.8
|
|
|
$
|
90.0
|
|
Earnings from discontinued operations
|
(4.8
|
)
|
|
(4.2
|
)
|
|
3.4
|
|
Total consolidated income tax expense (benefit)
|
$
|
(2.9
|
)
|
|
$
|
150.6
|
|
|
$
|
93.4
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of earnings from continuing operations before income taxes and the provision for income taxes thereon are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Earnings from continuing operations before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
602.7
|
|
|
$
|
632.3
|
|
|
$
|
450.6
|
|
Foreign
|
3.0
|
|
|
5.0
|
|
|
(0.9
|
)
|
Earnings from continuing operations before income taxes
|
$
|
605.7
|
|
|
$
|
637.3
|
|
|
$
|
449.7
|
|
Income taxes:
|
|
|
|
|
|
Current:
|
|
|
|
|
|
Federal
|
$
|
10.2
|
|
|
$
|
160.5
|
|
|
$
|
89.1
|
|
State and local
|
8.9
|
|
|
22.2
|
|
|
2.7
|
|
Foreign
|
1.8
|
|
|
1.3
|
|
|
1.9
|
|
Total current
|
$
|
20.9
|
|
|
$
|
184.0
|
|
|
$
|
93.7
|
|
Deferred (principally U.S.):
|
|
|
|
|
|
Federal
|
$
|
(25.1
|
)
|
|
$
|
(24.1
|
)
|
|
$
|
(2.4
|
)
|
State and local
|
6.1
|
|
|
(5.1
|
)
|
|
(1.3
|
)
|
Total deferred
|
$
|
(19.0
|
)
|
|
$
|
(29.2
|
)
|
|
$
|
(3.7
|
)
|
Total income taxes
|
$
|
1.9
|
|
|
$
|
154.8
|
|
|
$
|
90.0
|
|
The following table is a reconciliation of the U.S. statutory income tax rate to the effective income tax rate from continuing operations included in the accompanying consolidated statements of earnings:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2018
|
|
2017
|
|
2016
|
U.S. statutory rate
|
29.4
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes, net of federal tax benefits
|
1.8
|
|
|
1.7
|
|
|
1.2
|
|
Enactment of the Tax Act
|
(13.1
|
)
|
|
—
|
|
|
—
|
|
Benefit of federal income tax credits
|
(12.8
|
)
|
|
(9.2
|
)
|
|
(12.5
|
)
|
Other, net
|
(5.0
|
)
|
|
(3.2
|
)
|
|
(3.7
|
)
|
Effective income tax rate
|
0.3
|
%
|
|
24.3
|
%
|
|
20.0
|
%
|
As of
May 27, 2018
, we had estimated current prepaid state and federal income taxes of
$2.6 million
and
$13.3 million
, respectively, which is included on our accompanying consolidated balance sheets as prepaid income taxes.
As of
May 27, 2018
, we had unrecognized state tax benefits of
$17.4 million
, which represents the aggregate tax effect of the differences between tax return positions and benefits recognized in our consolidated financial statements, all of which would favorably affect the effective tax rate if resolved in our favor. Included in the balance of unrecognized tax benefits at
May 27, 2018
, is
$2.0 million
related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The
$2.0 million
relates to items that would impact our effective income tax rate.
A reconciliation of the beginning and ending amount of unrecognized state tax benefits follows:
|
|
|
|
|
(in millions)
|
|
Balances at May 28, 2017
|
$
|
16.4
|
|
Additions related to current-year tax positions
|
4.5
|
|
Reductions due to settlements with taxing authorities
|
(0.5
|
)
|
Reductions to tax positions due to statute expiration
|
(3.0
|
)
|
Balances at May 27, 2018
|
$
|
17.4
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest expense associated with unrecognized tax benefits, excluding the release of accrued interest related to prior year matters due to settlement or the lapse of the statute of limitations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Interest expense on unrecognized tax benefits
|
$
|
0.8
|
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
At
May 27, 2018
, we had
$1.1 million
accrued for the payment of interest associated with unrecognized state tax benefits.
For U.S. federal income tax purposes, we participate in the IRS’s Compliance Assurance Process (CAP), whereby our U.S. federal income tax returns are reviewed by the IRS both prior to and after their filing. Income tax returns are subject to audit by state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws. The major jurisdictions in which the Company files income tax returns include the U.S. federal jurisdiction, Canada, and all states in the U.S. that have an income tax. With a few exceptions, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before fiscal 2018, and state and local, or non-U.S. income tax examinations by tax authorities for years before fiscal 2013.
The tax effects of temporary differences that give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Accrued liabilities
|
$
|
66.6
|
|
|
$
|
137.1
|
|
Compensation and employee benefits
|
99.8
|
|
|
174.6
|
|
Deferred rent and interest income
|
81.1
|
|
|
110.3
|
|
Net operating loss, credit and charitable contribution carryforwards
|
71.9
|
|
|
78.0
|
|
Other
|
5.3
|
|
|
6.9
|
|
Gross deferred tax assets
|
$
|
324.7
|
|
|
$
|
506.9
|
|
Valuation allowance
|
(26.6
|
)
|
|
(17.0
|
)
|
Deferred tax assets, net of valuation allowance
|
$
|
298.1
|
|
|
$
|
489.9
|
|
Trademarks and other acquisition related intangibles
|
(201.8
|
)
|
|
(310.7
|
)
|
Buildings and equipment
|
(176.9
|
)
|
|
(275.4
|
)
|
Capitalized software and other assets
|
(24.4
|
)
|
|
(38.1
|
)
|
Other
|
(9.0
|
)
|
|
(11.3
|
)
|
Gross deferred tax liabilities
|
$
|
(412.1
|
)
|
|
$
|
(635.5
|
)
|
Net deferred tax liabilities
|
$
|
(114.0
|
)
|
|
$
|
(145.6
|
)
|
We have deferred tax assets of
$12.6 million
reflecting the benefit of state loss carryforwards, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2037. We have deferred tax assets of
$17.1 million
of federal and
$42.6 million
state tax credits, before federal benefit and valuation allowance, which expire at various dates between fiscal 2019 and fiscal 2039. Additionally, we have deferred tax assets of
$11.1 million
reflecting the benefit of foreign loss carryforwards, before valuation allowance, which have an indefinite life.
We have taken current and potential future expirations into consideration when evaluating the need for valuation allowances against these deferred tax assets. A valuation allowance for deferred tax assets is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which our deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of the existing valuation allowances at
May 27, 2018
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 14 - RETIREMENT PLANS
Defined Benefit Plans and Postretirement Benefit Plan
We sponsor non-contributory defined benefit pension plans for a group of certain eligible employees in the United States under which benefits are based on various formulas, including a Final Average Pay formula and a Cash Balance formula. As of December 2014, the plans were frozen and no additional benefits will accrue for participants (except for continuing interest credits for eligible participants in the Cash Balance formula). Pension plan assets are invested in global fixed-income commingled funds. Our policy is to fund, at a minimum, the amount necessary on an actuarial basis to provide for benefits in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code (IRC), as amended by the Pension Protection Act of 2006. We also sponsor a non-contributory postretirement benefit plan that provides health care benefits to our salaried retirees as a subsidy credit to a health care reimbursement account. This benefit is not impacted by future changes in health care trend rates. In April 2018, our Benefit Plans Committee approved the termination of our primary non-contributory defined benefit pension plan (the Retirement Income Plan for Darden Restaurants, Inc.). The termination of the plan involves many steps, including filing information with the IRS and the Pension Benefit Guaranty Corporation and obtaining proper approvals. We anticipate the termination process, which culminates in either the settlement or transfer of participant benefits, will take approximately two years to complete.
Fundings related to the defined benefit pension plans and postretirement benefit plan, which are funded on a pay-as-you-go basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Defined benefit pension plans funding (1)
|
$
|
60.8
|
|
|
$
|
0.4
|
|
|
$
|
25.4
|
|
Postretirement benefit plan funding
|
1.2
|
|
|
1.2
|
|
|
1.1
|
|
|
|
(1)
|
Fundings for fiscal 2018 and 2016 include voluntary funding contributions of
$60.4 million
and
$25.0 million
, respectively.
|
We expect to contribute approximately
$0.4 million
to our defined benefit pension plans and approximately
$1.4 million
to our postretirement benefit plan during fiscal
2019
.
We are required to recognize the over- or under-funded status of the plans as an asset or liability as measured by the difference between the fair value of the plan assets and the benefit obligation and any unrecognized prior service costs and actuarial gains and losses as a component of accumulated other comprehensive income (loss), net of tax. During the fourth quarter of fiscal
2017
, the defined benefit pension plans recognized
$19.9 million
of previously unrecognized loss in net periodic benefit cost due to a settlement charge triggered by lump sum payouts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following provides a reconciliation of the changes in the plan benefit obligation, fair value of plan assets and the funded status of the plans as of
May 27, 2018
and
May 28, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Postretirement Benefit Plan
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
252.3
|
|
|
$
|
298.5
|
|
|
$
|
20.8
|
|
|
$
|
19.9
|
|
Service cost
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.2
|
|
Interest cost
|
8.6
|
|
|
10.1
|
|
|
0.7
|
|
|
0.6
|
|
Plan settlements
|
—
|
|
|
(44.2
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(15.6
|
)
|
|
(10.0
|
)
|
|
(1.2
|
)
|
|
(1.2
|
)
|
Actuarial (gain) loss
|
(8.1
|
)
|
|
(2.1
|
)
|
|
(0.5
|
)
|
|
1.3
|
|
Benefit obligation at end of period
|
$
|
237.2
|
|
|
$
|
252.3
|
|
|
$
|
19.9
|
|
|
$
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
$
|
207.7
|
|
|
$
|
242.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
0.9
|
|
|
19.5
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
60.8
|
|
|
0.4
|
|
|
1.2
|
|
|
1.2
|
|
Plan settlements
|
—
|
|
|
(44.2
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(15.6
|
)
|
|
(10.0
|
)
|
|
(1.2
|
)
|
|
(1.2
|
)
|
Fair value at end of period
|
$
|
253.8
|
|
|
$
|
207.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded (unfunded) status at end of period
|
$
|
16.6
|
|
|
$
|
(44.6
|
)
|
|
$
|
(19.9
|
)
|
|
$
|
(20.8
|
)
|
The following is a detail of the balance sheet components of each of our plans and a reconciliation of the amounts included in accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Postretirement Benefit Plan
|
(in millions)
|
May 27,
2018
|
|
May 28,
2017
|
|
May 27,
2018
|
|
May 28,
2017
|
Components of the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
1.3
|
|
Noncurrent (assets) liabilities
|
(16.6
|
)
|
|
44.6
|
|
|
18.5
|
|
|
19.5
|
|
Net amounts recognized
|
$
|
(16.6
|
)
|
|
$
|
44.6
|
|
|
$
|
19.9
|
|
|
$
|
20.8
|
|
Amounts Recognized in Accumulated Other Comprehensive Income (Loss), net of tax:
|
|
|
|
|
|
|
|
Prior service credit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.4
|
|
|
$
|
9.0
|
|
Net actuarial gain (loss)
|
(85.4
|
)
|
|
(70.1
|
)
|
|
(9.6
|
)
|
|
(9.3
|
)
|
Net amounts recognized
|
$
|
(85.4
|
)
|
|
$
|
(70.1
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(0.3
|
)
|
The following is a summary of our accumulated and projected benefit obligations for our defined benefit plans:
|
|
|
|
|
|
|
|
|
(in millions)
|
May 27, 2018
|
|
|
May 28, 2017
|
|
Accumulated benefit obligation for all defined benefit plans
|
$
|
237.2
|
|
|
$
|
252.3
|
|
Pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
|
Accumulated benefit obligation
|
—
|
|
|
252.3
|
|
Fair value of plan assets
|
—
|
|
|
207.7
|
|
Projected benefit obligations for all plans with projected benefit obligations in excess of plan assets
|
—
|
|
|
252.3
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents the weighted-average assumptions used to determine benefit obligations and net expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Postretirement Benefit Plan
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average assumptions used to determine benefit obligations at May 27 and May 28 (1)
|
|
|
|
|
|
|
|
Discount rate
|
4.32
|
%
|
|
4.06
|
%
|
|
4.28
|
%
|
|
3.98
|
%
|
Rate of future compensation increases
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net expense for fiscal years ended May 27 and May 28 (2)
|
|
|
|
|
|
|
|
Discount rate
|
4.06
|
%
|
|
4.18
|
%
|
|
3.98
|
%
|
|
4.00
|
%
|
Expected long-term rate of return on plan assets
|
5.75
|
%
|
|
6.50
|
%
|
|
N/A
|
|
|
N/A
|
|
Rate of future compensation increases
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
|
(1)
|
Determined as of the end of fiscal year.
|
|
|
(2)
|
Determined as of the beginning of fiscal year.
|
We set the discount rate assumption annually for each of the plans at their valuation dates to reflect the yield of high-quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. Additionally, for our mortality assumption as of fiscal year end, we selected the most recent RP-2014 mortality tables and MP-2017 mortality improvement scale to measure the benefit obligations.
The expected long-term rate of return on plan assets is based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset fund allocations and the views of leading financial advisers and economists. Our expected long-term rate of return on plan assets for our defined benefit plans was
6.5 percent
in fiscal
2016
and fiscal
2017
and was reduced to
5.75 percent
in fiscal
2018
in connection with our current expectations for long-term returns and target asset fund allocation. In developing our expected rate of return assumption, we have evaluated the actual historical performance and long-term return projections of the plan assets, which give consideration to the asset mix and the anticipated timing of the pension plan outflows. We employ a total return investment approach to maximize the long-term return of plan assets for what we consider a prudent level of risk dependent on the level of funding. Our historical 10-year, 15-year and 20-year rates of return on plan assets, calculated using the geometric method average of returns, are approximately
6.0 percent
,
8.6 percent
and
7.7 percent
, respectively, as of
May 27, 2018
. Our Benefit Plans Committee has delegated to the Benefit Plans Investment Committee the authority to set the investment policy for the defined benefit plans and oversees the investment allocation, which includes setting long-term strategic targets. The investment policy establishes a re-balancing band around the established targets within which the asset class weight is allowed to vary. We monitor our actual asset fund allocation to ensure that it approximates, based on the current funding level, our target allocation and believe that our long-term asset fund allocation will continue to approximate our target allocation. With the plan in excess of
100.0 percent
funded, our investment strategy is to invest
100.0 percent
in liability matching high-quality, long-duration fixed-income investments. Investments are held in various global fixed income commingled funds representing approximately
99.9 percent
of total plan assets. These investments are the only significant concentration of risk related to a single entity, sector, country, commodity or investment fund.
Components of net periodic benefit cost included in earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Postretirement Benefit Plan
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
8.6
|
|
|
10.1
|
|
|
10.6
|
|
|
0.7
|
|
|
0.6
|
|
|
0.8
|
|
Expected return on plan assets
|
(12.0
|
)
|
|
(16.0
|
)
|
|
(14.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
(4.8
|
)
|
|
(4.8
|
)
|
Recognized net actuarial loss
|
2.8
|
|
|
3.3
|
|
|
2.8
|
|
|
1.7
|
|
|
1.7
|
|
|
1.2
|
|
Settlement loss recognized
|
—
|
|
|
19.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net pension and postretirement cost (benefit)
|
$
|
(0.6
|
)
|
|
$
|
17.3
|
|
|
$
|
(1.1
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(2.6
|
)
|
The amortization of the net actuarial gain (loss) component of our fiscal
2019
net periodic benefit cost for the defined benefit plans and postretirement benefit plan is expected to be approximately
$(2.5) million
and
$3.2 million
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair values of the defined benefit pension plans assets at their measurement dates of
May 27, 2018
and
May 28, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Measured at Fair Value at May 27, 2018
|
(in millions)
|
|
|
Fair Value
of Assets
(Liabilities)
|
|
Quoted Prices
in Active
Market for
Identical Assets
(Liabilities)
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Fixed-Income:
|
|
|
|
|
|
|
|
|
|
Global Fixed-Income Commingled Funds
|
(1)
|
|
$
|
253.5
|
|
|
$
|
—
|
|
|
$
|
253.5
|
|
|
$
|
—
|
|
Cash and Accruals
|
|
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
253.8
|
|
|
$
|
0.3
|
|
|
$
|
253.5
|
|
|
$
|
—
|
|
|
|
(1)
|
Global fixed-income commingled funds are comprised of investments in U.S. and non-U.S. government fixed-income securities. Investments are valued using a unit price or net asset value (NAV) based on the fair value of the underlying investments of the fund. There are no redemption restrictions associated with this fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items Measured at Fair Value at May 28, 2017
|
(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)
|
Equity:
|
|
|
|
|
|
|
|
|
|
U.S. Commingled Funds
|
(1)
|
|
$
|
63.7
|
|
|
$
|
—
|
|
|
$
|
63.7
|
|
|
$
|
—
|
|
International Commingled Fund
|
(2)
|
|
22.8
|
|
|
—
|
|
|
22.8
|
|
|
—
|
|
Emerging Market Commingled Fund
|
(3)
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
Emerging Market Mutual Fund
|
(4)
|
|
5.7
|
|
|
5.7
|
|
|
—
|
|
|
—
|
|
Real Estate Commingled Fund
|
(5)
|
|
6.0
|
|
|
—
|
|
|
6.0
|
|
|
—
|
|
Fixed-Income:
|
|
|
|
|
|
|
|
|
|
Global Fixed-Income Commingled Fund
|
(6)
|
|
20.6
|
|
|
—
|
|
|
20.6
|
|
|
—
|
|
U.S. Fixed-Income Commingled Funds
|
(7)
|
|
82.4
|
|
|
—
|
|
|
82.4
|
|
|
—
|
|
Cash and Accruals
|
|
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
207.7
|
|
|
$
|
6.2
|
|
|
$
|
201.5
|
|
|
$
|
—
|
|
|
|
(1)
|
U.S. commingled funds are comprised of investments in funds that purchase publicly traded U.S. common stock for total return purposes. Investments are valued using a unit price or NAV based on the fair value of the underlying investments of the funds. There are no redemption restrictions associated with these funds.
|
|
|
(2)
|
International commingled fund is comprised of investments in funds that purchase publicly traded non-U.S. common stock for total return purposes. Investments are valued using a unit price or NAV based on the fair value of the underlying investments of the fund. There are no redemption restrictions associated with this fund.
|
|
|
(3)
|
Emerging market commingled fund and developed market securities are comprised of investments in funds that purchase publicly traded common stock of non-U.S. companies in emerging economies for total return purposes. Funds are valued using a unit price or NAV based on the fair value of the underlying investments of the funds. There are no redemption restrictions associated with these funds.
|
|
|
(4)
|
Emerging market mutual fund is comprised of securities associated with emerging markets and frontier markets. Fund is valued using quoted market prices from national exchanges.
|
|
|
(5)
|
Real estate commingled fund is comprised of investments in funds that purchase publicly traded common stock of real estate companies for purposes of total return. These investments are valued using a unit price or NAV based on the fair value of the underlying investments of the fund. There are no redemption restrictions associated with this fund.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
(6)
|
Global fixed-income commingled fund is comprised of investments in U.S. and non-U.S. government fixed-income securities. Investments are valued using a unit price or NAV based on the fair value of the underlying investments of the fund. There are no redemption restrictions associated with this fund.
|
|
|
(7)
|
U.S. fixed-income commingled funds are comprised of a diversified portfolio of U.S. investment-grade corporate and government securities. Investments are valued using a unit price or NAV based on the fair value of the underlying investments of the funds. There are no redemption restrictions associated with these funds.
|
The following benefit payments are expected to be paid between fiscal
2019
and fiscal
2028
:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Defined Benefit Plans
|
|
Postretirement Benefit Plan
|
2019
|
|
$
|
12.7
|
|
|
$
|
1.4
|
|
2020
|
|
12.8
|
|
|
1.4
|
|
2021
|
|
13.1
|
|
|
1.4
|
|
2022
|
|
13.2
|
|
|
1.4
|
|
2023
|
|
13.5
|
|
|
1.3
|
|
2024-2028
|
|
71.9
|
|
|
6.6
|
|
Postemployment Severance Practice
We accrue for postemployment severance costs in our consolidated financial statements and recognize actuarial gains and losses as well as prior service credits related to our postemployment severance accrual as a component of accumulated other comprehensive income (loss). As of
May 27, 2018
and
May 28, 2017
,
$0.9 million
and
$(0.1) million
, respectively, of unrecognized actuarial gain (loss) related to our postemployment severance practice were included in accumulated other comprehensive income (loss) on a net of tax basis.
Defined Contribution Plan
We have a defined contribution (401(k)) plan (Darden Savings Plan) covering most employees age
21
and older. We match contributions for participants with at least
one
year of service up to
6 percent
of compensation, based on our performance. The match ranges from a minimum of
$0.25
to
$1.20
for each dollar contributed by the participant. The Darden Savings Plan also provides for a profit sharing contribution for eligible participants equal to
1.5 percent
of the participant’s compensation. The Darden Savings Plan had net assets of
$829.0 million
at
May 27, 2018
, and
$753.7 million
at
May 28, 2017
. Expense recognized in fiscal
2018
,
2017
and
2016
was
$19.6 million
,
$3.7 million
and
$15.1 million
, respectively. Employees classified as “highly compensated” under the IRC are not eligible to participate in the Darden Savings Plan. Instead, highly compensated employees are eligible to participate in a separate non-qualified deferred compensation (FlexComp) plan. The FlexComp plan allows eligible employees to defer the payment of part of their annual salary and all or part of their annual bonus and provides for awards that approximate the matching contributions that participants would have received had they been eligible to participate in the Darden Savings Plan, as well as an additional retirement contribution amount. Amounts payable to highly compensated employees under the FlexComp plan totaled
$227.9 million
and
$210.3 million
at
May 27, 2018
and
May 28, 2017
, respectively. These amounts are included in other current liabilities on our accompanying consolidated balance sheets.
The Darden Savings Plan includes a leveraged Employee Stock Ownership Plan (ESOP). The ESOP borrowed
$16.9 million
from us at a variable rate of interest in July 1996. At
May 27, 2018
, the ESOP’s original debt to us had a balance of
$0.9 million
with a variable rate of interest of
1.90 percent
and is due to be repaid no later than
December 2019
. At the end of fiscal 2005, the ESOP borrowed an additional
$1.6 million
(Additional Loan) from us at a variable interest rate and acquired an additional
0.05 million
shares of our common stock, which were held in suspense within the ESOP at that time. At
May 27, 2018
, the Additional Loan had a balance of
$1.0 million
with a variable interest rate of
2.34 percent
and is due to be repaid no later than December 2018. Compensation expense is recognized as contributions are accrued. Fluctuations in our stock price impact the amount of expense to be recognized. Contributions to the Darden Savings Plan, plus the dividends accumulated on unallocated shares held by the ESOP, are used to pay principal, interest and expenses of the Darden Savings Plan. As loan payments are made, common stock is allocated to ESOP participants. In each of the fiscal years
2018
,
2017
and
2016
, the ESOP used dividends received of
$0.5 million
,
$0.8 million
and
$0.7 million
, respectively, and contributions received from us of
$0.1 million
,
$0.1 million
and
$0.1 million
, respectively, to pay principal and interest on our debt.
ESOP shares are included in weighted-average common shares outstanding for purposes of calculating net earnings per share with the exception of those shares acquired under the Additional Loan, which are accounted for in accordance with FASB ASC Subtopic 718-40, Employee Stock Ownership Plans. Fluctuations in our stock price are recognized as adjustments to common stock and surplus when the shares are committed to be released. The ESOP shares acquired under the Additional Loan
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
are not considered outstanding until they are committed to be released and, therefore, unreleased shares have been excluded for purposes of calculating basic and diluted net earnings per share. As of
May 27, 2018
, the ESOP shares included in the basic and diluted net earnings per share calculation totaled
2.1 million
shares, representing
1.9 million
allocated shares and
0.2 million
suspense shares.
NOTE 15 - STOCK-BASED COMPENSATION
In September 2015, our shareholders approved the Darden Restaurants, Inc. 2015 Omnibus Incentive Plan (2015 Plan). All equity grants subject to ASC Topic 718 after the date of approval are made under the 2015 Plan. No further equity grants after that date are permitted under the Darden Restaurants, Inc. 2002 Stock Incentive Plan, the RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan or any other prior stock option and/or stock grant plans (collectively, the Prior Plans). The 2015 Plan and the Prior Plans are administered by the Compensation Committee of the Board of Directors. The 2015 Plan provides for the issuance of up to
7.6 million
common shares in connection with the granting of non-qualified stock options, restricted stock, restricted stock units (RSUs), performance-based restricted stock units (PRSUs) and other stock-based awards such as Darden stock units to employees, consultants and non-employee directors. There are outstanding awards under the Prior Plans that may still vest and be exercised in accordance with their terms. As of
May 27, 2018
, approximately
2.8 million
shares may be issued under outstanding awards that were granted under the Prior Plans.
Stock-based compensation expense and the associated income tax benefit included in continuing operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
(in millions)
|
2018
|
|
2017
|
|
2016
|
Stock options
|
$
|
4.6
|
|
|
$
|
6.0
|
|
|
$
|
7.8
|
|
Restricted stock/restricted stock units
|
3.9
|
|
|
1.9
|
|
|
1.6
|
|
Darden stock units
|
20.1
|
|
|
20.9
|
|
|
15.9
|
|
Cash-settled performance stock units
|
—
|
|
|
4.2
|
|
|
6.5
|
|
Equity-settled performance-based restricted stock units
|
11.7
|
|
|
5.3
|
|
|
2.7
|
|
Employee stock purchase plan
|
1.3
|
|
|
1.1
|
|
|
1.1
|
|
Director compensation program/other
|
1.2
|
|
|
1.3
|
|
|
1.7
|
|
Total
|
$
|
42.8
|
|
|
$
|
40.7
|
|
|
$
|
37.3
|
|
|
|
|
|
|
|
Income tax benefits (1)
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
In accordance with the fiscal 2018 adoption of ASU 2016-09, excess tax benefits are recognized in our provision for income taxes rather than in equity as previously recognized.
|
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes model to record stock-based compensation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
Granted in Fiscal Year
|
|
2018
|
|
2017
|
|
2016
|
Weighted-average fair value
|
$
|
14.63
|
|
|
$
|
9.08
|
|
|
$
|
12.72
|
|
Dividend yield
|
3.0
|
%
|
|
3.5
|
%
|
|
3.3
|
%
|
Expected volatility of stock
|
23.5
|
%
|
|
24.3
|
%
|
|
28.0
|
%
|
Risk-free interest rate
|
2.0
|
%
|
|
1.4
|
%
|
|
1.9
|
%
|
Expected option life (in years)
|
6.4
|
|
|
6.5
|
|
|
6.5
|
|
Weighted-average exercise price per share
|
$
|
85.83
|
|
|
$
|
59.70
|
|
|
$
|
64.85
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table presents a summary of our stock option activity as of and for the year ended
May 27, 2018
:
|
|
|
|
|
|
|
|
|
|
Options
(in millions)
|
|
Weighted-Average
Exercise Price
Per Share
|
|
Weighted-Average
Remaining
Contractual Life (Yrs)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Outstanding beginning of period
|
4.01
|
|
$45.81
|
|
6.09
|
|
$168.9
|
Options granted
|
0.35
|
|
85.83
|
|
|
|
|
Options exercised
|
(0.80)
|
|
40.07
|
|
|
|
|
Options canceled
|
(0.03)
|
|
66.15
|
|
|
|
|
Outstanding end of period
|
3.53
|
|
$50.92
|
|
5.89
|
|
$130.6
|
Exercisable
|
2.09
|
|
$41.87
|
|
4.53
|
|
$96.2
|
The total intrinsic value of options exercised during fiscal
2018
,
2017
and
2016
was
$43.1 million
,
$99.1 million
and
$73.6 million
, respectively. Cash received from option exercises during fiscal
2018
,
2017
and
2016
was
$32.0 million
,
$107.8 million
and
$94.4 million
, respectively. Stock options generally vest over
4
years and have a maximum contractual period of
10
years from the date of grant. We settle employee stock option exercises with authorized but unissued shares of Darden common stock or treasury shares we have acquired through our ongoing share repurchase program.
As of
May 27, 2018
, there was
$7.8 million
of unrecognized compensation cost related to unvested stock options granted under our stock plans. This cost is expected to be recognized over a weighted-average period of
2.4 years
. The total fair value of stock options that vested during fiscal
2018
was
$4.9 million
.
Restricted stock and RSUs are granted at a value equal to the market price of our common stock on the date of grant, and amortized over their service periods which generally range from one to four years. Restrictions with regard to restricted stock and RSUs lapse at the end of their service periods at which employees receive unrestricted shares of Darden stock.
The following table presents a summary of our restricted stock and RSU activity as of and for the fiscal year ended
May 27, 2018
:
|
|
|
|
|
|
Shares
(in millions)
|
|
Weighted-Average
Grant Date Fair
Value Per Share
|
Outstanding beginning of period
|
0.19
|
|
$57.44
|
Shares granted
|
0.11
|
|
87.09
|
Shares vested
|
(0.05)
|
|
51.72
|
Shares canceled
|
(0.01)
|
|
69.76
|
Outstanding end of period
|
0.24
|
|
$71.99
|
As of
May 27, 2018
, there was
$8.9 million
of unrecognized compensation cost related to unvested restricted stock and RSUs granted under our stock plans. This cost is expected to be recognized over a weighted-average period of
2.0 years
. The total fair value of restricted stock and RSUs that vested during fiscal
2018
,
2017
and
2016
was
$2.9 million
,
$1.7 million
and
$1.6 million
, respectively.
Darden stock units are granted at a value equal to the market price of our common stock on the date of grant and will be settled in cash at the end of their vesting periods, which typically range from
three
to
five
years, at the then market price of our common stock. Compensation expense is measured based on the market price of our common stock each period, is amortized over the vesting period and the vested portion is carried as a liability on our accompanying consolidated balance sheets. We also entered into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized Darden stock units granted (see Note 8 for additional information).
The following table presents a summary of our Darden stock unit activity as of and for the fiscal year ended
May 27, 2018
:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
(All units settled in cash)
|
Units
(in millions)
|
|
Weighted-Average
Fair Value
Per Unit
|
Outstanding beginning of period
|
1.35
|
|
$87.95
|
Units granted
|
0.42
|
|
91.18
|
Units vested
|
(0.30)
|
|
85.76
|
Units canceled
|
(0.08)
|
|
63.58
|
Outstanding end of period
|
1.39
|
|
$87.88
|
As of
May 27, 2018
, our total Darden stock unit liability was
$62.7 million
, including
$26.1 million
recorded in other current liabilities and
$36.6 million
recorded in other liabilities on our consolidated balance sheets. As of
May 28, 2017
, our total Darden stock unit liability was
$65.0 million
, including
$24.0 million
recorded in other current liabilities and
$41.0 million
recorded in other liabilities on our consolidated balance sheets.
Based on the value of our common stock as of
May 27, 2018
, there was
$44.8 million
of unrecognized compensation cost related to Darden stock units granted under our incentive plans. This cost is expected to be recognized over a weighted-average period of
2.6 years
but the amount that vests is ultimately dependent on the value of Darden stock at the vesting date. The total fair value of Darden stock units that vested during fiscal
2018
was
$25.8 million
.
The following table presents a summary of our cash-settled performance stock unit activity as of and for the fiscal year ended
May 27, 2018
:
|
|
|
|
|
(All units settled in cash)
|
Units
(in millions)
|
|
Weighted-Average
Fair Value
Per Unit
|
Outstanding beginning of period
|
0.09
|
|
$87.95
|
Units vested
|
(0.09)
|
|
83.85
|
Outstanding end of period
|
—
|
|
$—
|
Beginning in fiscal
2016
, cash-settled performance stock units were replaced with two types of PRSUs: relative total shareholder return PRSUs and absolute PRSUs. These PRSUs vest over the service period which ranges from
three
to
four
years, and the number of units that actually vest is determined based on the achievement of performance criteria set forth in the award agreement. Relative total shareholder return PRSUs, which vest based on the achievement of market-based targets, are measured based on estimated fair value as of the date of grant using a Monte Carlo simulation, and amortized over the service period. Absolute PRSUs, which vest based on the achievement of company specific targets, are measured based on a value equal to the market price of our common stock on the date of grant, and amortized over the service period. Additionally, under special circumstances, Darden grants equity-settled PRSUs which are earned based on specific performance criteria. These PRSUs are measured based on a value equal to the market price of our common stock on the date of grant, and amortized over the service periods which generally range from
two
to
five
years.
The following table presents a summary of our equity-settled PRSU activity as of and for the fiscal year ended
May 27, 2018
:
|
|
|
|
|
|
Units
(in millions)
|
|
Weighted-Average
Grant Date
Fair Value
Per Unit
|
Outstanding beginning of period
|
0.33
|
|
$62.40
|
Units granted
|
0.24
|
|
90.51
|
Units canceled
|
(0.02)
|
|
78.12
|
Outstanding end of period
|
0.55
|
|
$74.04
|
As of
May 27, 2018
, there was
$21.8 million
of unrecognized compensation cost related to unvested equity-settled PRSUs granted under our stock plans. This cost is expected to be recognized over a weighted-average period of
2.4
years. None of these equity-settled PRSUs vested during fiscal
2018
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We maintain an Employee Stock Purchase Plan to provide eligible employees who have completed one year of service (excluding senior officers subject to Section 16(b) of the Securities Exchange Act of 1934, and certain other employees who are employed less than full time or own
5 percent
or more of our capital stock or that of any subsidiary) an opportunity to invest up to
$5.0 thousand
per calendar quarter to purchase shares of our common stock, subject to certain limitations. Under the plan, up to an aggregate of
5.2 million
shares are available for purchase by employees at a purchase price that is
85.0 percent
of the fair market value of our common stock on either the first or last trading day of each calendar quarter, whichever is lower. Cash received from employees pursuant to the plan during fiscal
2018
,
2017
and
2016
was
$5.8 million
,
$5.2 million
and
$4.8 million
, respectively.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
As collateral for performance on contracts and as credit guarantees to banks and insurers, we were contingently liable for guarantees of subsidiary obligations under standby letters of credit. At
May 27, 2018
and
May 28, 2017
, we had
$96.9 million
and
$127.5 million
, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. At
May 27, 2018
and
May 28, 2017
, we had
$17.6 million
and
$10.6 million
, respectively, of standby letters of credit related to contractual operating lease obligations and other payments. All standby letters of credit are renewable annually.
At
May 27, 2018
and
May 28, 2017
, we had
$154.0 million
and
$163.2 million
, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of these potential payments discounted at our weighted-average cost of capital at
May 27, 2018
and
May 28, 2017
, amounted to
$131.0 million
and
$137.6 million
, respectively. We did not record a liability for the guarantees, as the likelihood of the third parties defaulting on the assignment agreements was deemed to be remote. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal
2019
through fiscal
2031
.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.
NOTE 17 – SUBSEQUENT EVENT
On
June 20, 2018
, the Board of Directors declared a cash dividend of
$0.75
per share to be paid
August 1, 2018
to all shareholders of record as of the close of business on
July 10, 2018
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 18 - QUARTERLY DATA (UNAUDITED)
The following table summarizes unaudited quarterly data for fiscal
2018
and fiscal
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018 - Quarters Ended
|
(in millions, except per share data)
|
Aug. 27
|
|
Nov. 26
|
|
Feb. 25
|
|
May 27
|
|
Total
|
Sales
|
$
|
1,936.1
|
|
|
$
|
1,881.5
|
|
|
$
|
2,128.4
|
|
|
$
|
2,134.1
|
|
|
$
|
8,080.1
|
|
Earnings before income taxes
|
159.5
|
|
|
113.4
|
|
|
116.0
|
|
|
216.8
|
|
|
605.7
|
|
Earnings from continuing operations
|
121.3
|
|
|
88.6
|
|
|
218.5
|
|
|
175.4
|
|
|
603.8
|
|
Losses from discontinued operations, net of tax
|
(2.3
|
)
|
|
(3.9
|
)
|
|
(0.7
|
)
|
|
(0.9
|
)
|
|
(7.8
|
)
|
Net earnings
|
119.0
|
|
|
84.7
|
|
|
217.8
|
|
|
174.5
|
|
|
596.0
|
|
Basic net earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
0.97
|
|
|
0.72
|
|
|
1.77
|
|
|
1.42
|
|
|
4.87
|
|
Losses from discontinued operations
|
(0.02
|
)
|
|
(0.03
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.06
|
)
|
Net earnings
|
0.95
|
|
|
0.69
|
|
|
1.76
|
|
|
1.41
|
|
|
4.81
|
|
Diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
0.95
|
|
|
0.71
|
|
|
1.74
|
|
|
1.40
|
|
|
4.79
|
|
Losses from discontinued operations
|
(0.02
|
)
|
|
(0.04
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.06
|
)
|
Net earnings
|
0.93
|
|
|
0.67
|
|
|
1.73
|
|
|
1.39
|
|
|
4.73
|
|
Dividends paid per share
|
0.63
|
|
|
0.63
|
|
|
0.63
|
|
|
0.63
|
|
|
2.52
|
|
Stock price:
|
|
|
|
|
|
|
|
|
|
High
|
95.22
|
|
|
85.56
|
|
|
100.11
|
|
|
96.97
|
|
|
100.11
|
|
Low
|
80.98
|
|
|
76.27
|
|
|
79.88
|
|
|
82.38
|
|
|
76.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2017 - Quarters Ended
|
(in millions, except per share data)
|
Aug. 28
|
|
Nov. 27
|
|
Feb. 26
|
|
May 28
|
|
Total
|
Sales
|
$
|
1,714.4
|
|
|
$
|
1,642.5
|
|
|
$
|
1,878.7
|
|
|
$
|
1,934.6
|
|
|
$
|
7,170.2
|
|
Earnings before income taxes
|
151.4
|
|
|
107.0
|
|
|
220.2
|
|
|
158.7
|
|
|
637.3
|
|
Earnings from continuing operations
|
111.1
|
|
|
79.7
|
|
|
166.3
|
|
|
125.4
|
|
|
482.5
|
|
Losses from discontinued operations, net of tax
|
(0.9
|
)
|
|
(0.2
|
)
|
|
(0.7
|
)
|
|
(1.6
|
)
|
|
(3.4
|
)
|
Net earnings
|
110.2
|
|
|
79.5
|
|
|
165.6
|
|
|
123.8
|
|
|
479.1
|
|
Basic net earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
0.89
|
|
|
0.65
|
|
|
1.34
|
|
|
1.00
|
|
|
3.88
|
|
Losses from discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.03
|
)
|
Net earnings
|
0.88
|
|
|
0.65
|
|
|
1.33
|
|
|
0.99
|
|
|
3.85
|
|
Diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
0.88
|
|
|
0.64
|
|
|
1.32
|
|
|
0.99
|
|
|
3.83
|
|
Losses from discontinued operations
|
(0.01
|
)
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
(0.03
|
)
|
Net earnings
|
0.87
|
|
|
0.64
|
|
|
1.32
|
|
|
0.98
|
|
|
3.80
|
|
Dividends paid per share
|
0.56
|
|
|
0.56
|
|
|
0.56
|
|
|
0.56
|
|
|
2.24
|
|
Stock price:
|
|
|
|
|
|
|
|
|
|
High
|
68.68
|
|
|
74.99
|
|
|
79.43
|
|
|
89.14
|
|
|
89.14
|
|
Low
|
59.50
|
|
|
60.16
|
|
|
71.02
|
|
|
73.81
|
|
|
59.50
|
|
|
|
|
|
|
|
|
|
|
|