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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
1-13666
Commission File Number
 DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
 
Florida
 
59-3305930
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
1000 Darden Center Drive
 
 
Orlando,
Florida
 
32837
(Address of principal executive offices)
 
(Zip Code)
407-245-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, without par value
DRI
New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.      Yes      No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes      No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
  
Accelerated filer
 
Non-accelerated filer
 
  
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No
Number of shares of common stock outstanding as of September 15, 2020: 130,199,935.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
Page
Part I -
Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
Part II -
Other Information
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 5.
 
Item 6.
 
 

2

Table of Contents

Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan”, “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden’s Form 10-K, Form 10-Q (including this report) and Form 8-K reports.

3

Table of Contents

PART I
FINANCIAL INFORMATION
Item  1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended
 
August 30,
2020
 
August 25,
2019
Sales
$
1,527.4

 
$
2,133.9

Costs and expenses:
 
 
 
Food and beverage
434.5

 
603.3

Restaurant labor
500.7

 
703.8

Restaurant expenses
290.9

 
372.4

Marketing expenses
28.8

 
68.7

General and administrative expenses
128.3

 
98.0

Depreciation and amortization
87.6

 
86.2

Total operating costs and expenses
$
1,470.8

 
$
1,932.4

Operating income
56.6

 
201.5

Interest, net
16.6

 
11.1

Other (income) expense, net
7.5

 

Earnings before income taxes
32.5

 
190.4

Income tax expense (benefit)
(4.8
)
 
18.6

Earnings from continuing operations
$
37.3

 
$
171.8

Losses from discontinued operations, net of tax benefit of $0.9 and $0.2, respectively
(1.2
)
 
(1.2
)
Net earnings
$
36.1

 
$
170.6

Basic net earnings per share:
 
 
 
Earnings from continuing operations
$
0.29

 
$
1.40

Losses from discontinued operations
(0.01
)
 
(0.01
)
Net earnings
$
0.28

 
$
1.39

Diluted net earnings per share:
 
 
 
Earnings from continuing operations
$
0.28

 
$
1.38

Losses from discontinued operations

 
(0.01
)
Net earnings
$
0.28

 
$
1.37

Average number of common shares outstanding:
 
 
 
Basic
130.0

 
122.9

Diluted
130.9

 
124.6


See accompanying notes to our unaudited consolidated financial statements.

4

Table of Contents

DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)

 
Three Months Ended
 
August 30,
2020
 
August 25,
2019
Net earnings
$
36.1

 
$
170.6

Other comprehensive income (loss):
 
 
 
Foreign currency adjustment
0.2

 

Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.4 and $(0.2), respectively
4.5

 
(2.9
)
Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial (loss) gain, net of taxes of $0.1 and $0.0, respectively, related to pension and other post-employment benefits
0.4

 
0.1

Other comprehensive income (loss)
$
5.1

 
$
(2.8
)
Total comprehensive income
$
41.2

 
$
167.8

See accompanying notes to our unaudited consolidated financial statements.


5

Table of Contents


DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
 
August 30,
2020
 
May 31,
2020
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
654.6

 
$
763.3

Receivables, net
47.2

 
49.8

Inventories
190.1

 
206.9

Prepaid income taxes
16.2

 
18.4

Prepaid expenses and other current assets
62.9

 
63.0

Total current assets
$
971.0

 
$
1,101.4

Land, buildings and equipment, net of accumulated depreciation and amortization of $2,659.2 and $2,640.9, respectively
2,739.6

 
2,756.9

Operating lease right-of-use assets
3,951.4

 
3,969.2

Goodwill
1,037.4

 
1,037.4

Trademarks
806.3

 
805.9

Other assets
283.8

 
275.3

Total assets
$
9,789.5

 
$
9,946.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
248.8

 
$
249.4

Short-term debt

 
270.0

Accrued payroll
128.9

 
150.0

Accrued income taxes
6.1

 
6.2

Other accrued taxes
52.1

 
43.4

Unearned revenues
448.5

 
467.9

Other current liabilities
659.5

 
605.9

Total current liabilities
$
1,543.9

 
$
1,792.8

Long-term debt
929.1

 
928.8

Deferred income taxes
43.3

 
56.1

Operating lease liabilities - non-current
4,264.3

 
4,276.3

Other liabilities
633.9

 
560.9

Total liabilities
$
7,414.5

 
$
7,614.9

Stockholders’ equity:
 
 
 
Common stock and surplus
$
2,220.9

 
$
2,205.3

Retained earnings
166.6

 
143.5

Accumulated other comprehensive income (loss)
(12.5
)
 
(17.6
)
Total stockholders’ equity
$
2,375.0

 
$
2,331.2

Total liabilities and stockholders’ equity
$
9,789.5

 
$
9,946.1


See accompanying notes to our unaudited consolidated financial statements.

6

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended August 30, 2020 and August 25, 2019
(In millions)
(Unaudited)
 
 
Common
Stock
And
Surplus
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Unearned
Compensation
 
Total
Stockholders’
Equity
Balance at May 31, 2020
$
2,205.3

 
$
143.5

 
$
(17.6
)
 
$

 
$
2,331.2

Net earnings

 
36.1

 

 

 
36.1

Other comprehensive income (loss)

 

 
5.1

 

 
5.1

Stock option exercises (0.0 shares)
1.7

 

 

 

 
1.7

Stock-based compensation
11.1

 

 

 

 
11.1

Repurchases of common stock (0.1 shares)
(1.4
)
 
(5.2
)
 

 

 
(6.6
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares)
2.5

 

 

 

 
2.5

Other
1.7

 
(7.8
)
 

 

 
(6.1
)
Balance at August 30, 2020
$
2,220.9

 
$
166.6

 
$
(12.5
)
 
$

 
$
2,375.0

Balance at May 26, 2019
$
1,685.0

 
$
806.6

 
$
(98.2
)
 
$
(0.8
)
 
$
2,392.6

Net earnings

 
170.6

 

 

 
170.6

Other comprehensive income (loss)

 

 
(2.8
)
 

 
(2.8
)
Dividends declared ($0.88 per share)

 
(108.4
)
 

 

 
(108.4
)
Stock option exercises (0.2 shares)
9.2

 

 

 

 
9.2

Stock-based compensation
7.6

 

 

 

 
7.6

Repurchases of common stock (0.8 shares)
(10.9
)
 
(83.9
)
 

 

 
(94.8
)
Issuance of stock under Employee Stock Purchase Plan and other plans (0.0 shares)
2.0

 

 

 

 
2.0

Other

 
5.0

 

 
0.3

 
5.3

Balance at August 25, 2019
$
1,692.9

 
$
789.9

 
$
(101.0
)
 
$
(0.5
)
 
$
2,381.3

See accompanying notes to our unaudited consolidated financial statements.

7

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three Months Ended
 
August 30,
2020
 
August 25,
2019
Cash flows—operating activities
 
 
 
Net earnings
$
36.1

 
$
170.6

Losses from discontinued operations, net of tax
1.2

 
1.2

Adjustments to reconcile net earnings from continuing operations to cash flows:
 
 
 
Depreciation and amortization
87.6

 
86.2

Stock-based compensation expense
19.1

 
14.2

Change in current assets and liabilities
20.6

 
(30.6
)
Contributions to pension and postretirement plans
(0.4
)
 
(0.4
)
Deferred income taxes
(10.0
)
 
7.0

Change in other assets and liabilities
66.2

 
3.7

Other, net
(13.7
)
 
1.9

Net cash provided by operating activities of continuing operations
$
206.7

 
$
253.8

Cash flows—investing activities
 
 
 
Purchases of land, buildings and equipment
(42.2
)
 
(117.1
)
Proceeds from disposal of land, buildings and equipment
2.3

 
2.6

Cash used in business acquisitions, net of cash acquired

 
(37.0
)
Purchases of capitalized software and other assets
(3.7
)
 
(5.4
)
Other, net
(0.4
)
 
(10.0
)
Net cash used in investing activities of continuing operations
$
(44.0
)
 
$
(166.9
)
Cash flows—financing activities
 
 
 
Proceeds from issuance of common stock
4.2

 
11.2

Dividends paid

 
(108.1
)
Repurchases of common stock
(6.6
)
 
(94.8
)
Repayments of short-term debt
(270.0
)
 

Principal payments on capital and financing leases
(1.2
)
 
(1.3
)
Other, net

 
0.3

Net cash used in financing activities of continuing operations
$
(273.6
)
 
$
(192.7
)
Cash flows—discontinued operations
 
 
 
Net cash provided by (used in) operating activities of discontinued operations
2.2

 
(0.7
)
Net cash provided by (used in) discontinued operations
$
2.2

 
$
(0.7
)
 
 
 
 
Decrease in cash and cash equivalents
(108.7
)
 
(106.5
)
Cash and cash equivalents - beginning of period
763.3

 
457.3

Cash and cash equivalents - end of period
$
654.6

 
$
350.8

 
 
 
 

8

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DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
 
Three Months Ended
 
August 30,
2020
 
August 25,
2019
Cash flows from changes in current assets and liabilities
 
 
 
Receivables, net
2.6

 
13.0

Inventories
16.8

 
8.4

Prepaid expenses and other current assets
(0.1
)
 
(6.9
)
Accounts payable
(4.4
)
 
3.3

Accrued payroll
(21.1
)
 
(39.0
)
Prepaid/accrued income taxes
2.1

 
48.8

Other accrued taxes
8.7

 
7.5

Unearned revenues
(19.5
)
 
(39.7
)
Other current liabilities
35.5

 
(26.0
)
Change in current assets and liabilities
$
20.6

 
$
(30.6
)

See accompanying notes to our unaudited consolidated financial statements.


9

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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1.Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, and Eddie V’s Prime Seafood®. As of August 30, 2020, 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 31 franchised restaurants. We also have 26 franchised restaurants in operation located in Latin America.
We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53-week fiscal year which ends on the last Sunday in May. Our fiscal year ending May 30, 2021 will contain 52 weeks of operation. Operating results for interim periods presented are not necessarily indicative of results that may be expected for the full fiscal year.
These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2020. We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and costs and expenses during the reporting period. Actual results could differ from those estimates.
We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
COVID-19 Pandemic
The COVID-19 pandemic has resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements, bar closures and additional physical barriers. Beginning in late March 2020, we operated with all of our dining rooms closed and served our guests in a To Go only or To Go and delivery format. In late April 2020, state and local governments began to allow us to open dining rooms at limited capacities, along with other operating restrictions, and as of the date of this filing, 97.0 percent of our restaurants were able to open their dining rooms to some extent. While increasing our in-restaurant dining capacity is subject to the ordinances in the jurisdictions we operate, we are focused on increasing capacity where possible, while continuing to provide a safe environment for our team members and guests, and maintaining many of the operating efficiencies established during this time. As we navigate through the pandemic, we have taken significant steps to adapt our business to allow us to continue to serve guests, support our team members and secure our liquidity position to provide financial flexibility. Although we expect our restaurants’ dining room capacity to increase as public health conditions improve and restrictions are eased, it is possible additional outbreaks could require us to reduce our capacity or further suspend our in-restaurant dining operation.
Recently Adopted Accounting Standards
As of June 1, 2020, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13 Financial Instruments - Credit Losses (Topic 326). The amendments in this update require entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings. This guidance impacts, among other items, how a company determines liabilities associated with financial guarantees related to assigned leases. We remain contingently liable for lease payments under certain restaurant leases related to dispositions. We adopted this guidance using the modified retrospective transition method. Upon adoption, we recorded a $7.5 million (net of tax of $2.5 million) cumulative-effect adjustment to the beginning balance of retained earnings related to an expected credit loss liability for the contingent aspect of our lease guarantees. See Note 11 for information regarding contingent lease guarantees.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The amendments in this update are intended to simplify the accounting for income taxes by removing certain exceptions in the existing guidance and simplify areas such as franchise taxes, recognizing deferred taxes for tax goodwill, separate entity financial statements and interim recognition of enactment of tax laws or tax rate changes. This update is effective for us in the first quarter of fiscal 2022,

10

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

however we elected to early adopt this guidance during the quarter ended August 30, 2020. The adoption of this guidance did not have a material impact on our consolidated financial statements.



Note 2.Revenue Recognition  
Deferred revenue liabilities from contracts with customers included on our accompanying consolidated balance sheets is comprised of the following:
(in millions)
 
August 30, 2020
 
May 31, 2020
Unearned revenues
 
 
 
 
Deferred gift card revenue
 
$
475.6

 
$
494.6

Deferred gift card discounts
 
(28.1
)
 
(28.2
)
Other
 
1.0

 
1.5

Total
 
$
448.5

 
$
467.9

 
 
 
 
 
Other liabilities
 
 
 
 
Deferred franchise fees - non-current
 
$
2.6

 
$
2.8

The following table presents a rollforward of deferred gift card revenue.
 
 
Three Months Ended
(in millions)
 
August 30, 2020
 
August 25, 2019
Beginning balance
 
$
494.6

 
$
453.6

Activations
 
75.7

 
116.4

Redemptions and breakage
 
(94.7
)
 
(159.8
)
Ending balance
 
$
475.6

 
$
410.2



11

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3.Additional Financial Information

Supplemental Balance Sheet Information
The components of lease assets and liabilities on the consolidated balance sheet are as follows:
(in millions)
 
Balance Sheet Classification
 
August 30, 2020
 
May 31, 2020
Operating lease right-of-use assets
 
Operating lease right-of-use assets
 
$
3,951.4

 
$
3,969.2

Finance lease right-of-use assets
 
Land, buildings and equipment, net
 
250.8

 
235.2

Total lease assets, net
 
 
 
$
4,202.2

 
$
4,204.4

 
 
 
 
 
 
 
Operating lease liabilities - current
 
Other current liabilities
 
$
163.5

 
$
160.6

Finance lease liabilities - current
 
Other current liabilities
 
5.9

 
5.7

Operating lease liabilities - non-current
 
Operating lease liabilities - non-current
 
4,264.3

 
4,276.3

Finance lease liabilities - non-current
 
Other liabilities
 
387.3

 
368.4

Total lease liabilities
 
 
 
$
4,821.0

 
$
4,811.0


Supplemental Cash Flow Information
Cash paid for interest and income taxes are as follows:
 
Three Months Ended
(in millions)
 
August 30, 2020
 
August 25, 2019
Interest, net of amounts capitalized
 
$
16.5

 
$
12.4

Income taxes, net of refunds
 
1.9

 
(39.6
)

Non-cash investing and financing activities are as follows:
 
Three Months Ended
(in millions)
 
August 30, 2020
 
August 25, 2019
Increase in land, buildings and equipment through accrued purchases
 
$
26.8

 
$
45.9

Right-of-use assets obtained in exchange for new operating lease liabilities
 
31.7

 
14.4

Right-of-use assets obtained in exchange for new finance lease liabilities
 
19.4

 
78.5


Note 4.Income Taxes
The effective income tax rate for continuing operations for the quarter ended August 30, 2020 was (14.8) percent, reflecting an income tax benefit of $4.8 million compared to an effective income tax rate for the quarter ended August 25, 2019 of 9.8 percent, reflecting income tax expense of $18.6 million. The change was driven primarily by lower net earnings from continuing operations in the quarter ended August 30, 2020, compared to the quarter ended August 25, 2019 and the impact of certain tax credits on our lower earnings before income taxes.
Included in our remaining balance of unrecognized tax benefits is $6.1 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
Note 5.Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows: 

12

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
 
Three Months Ended
(in millions)
 
August 30,
2020
 
August 25,
2019
Anti-dilutive stock-based compensation awards
 
1.1

 
0.1



Note 6.Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s, in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V’s restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Cheddar’s Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze restaurants in the U.S and results from our franchise operations.
External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively “restaurant and marketing expenses”). Non-cash lease-related expenses included in restaurant expenses (which is a component of segment profit) and lease-related depreciation and amortization are reported at the corporate level as these are expenses for which our operating segments are not being evaluated. Additionally, our lease-related right-of-use assets are not managed or evaluated at the operating segment level, but rather at the corporate level.
The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP.
(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the three months ended August 30, 2020
 
Sales
 
$
788.2

 
$
376.8

 
$
83.1

 
$
279.3

 
$

 
$
1,527.4

Restaurant and marketing expenses
 
614.4

 
319.8

 
73.2

 
243.6

 
3.9

 
1,254.9

Segment profit
 
$
173.8

 
$
57.0

 
$
9.9

 
$
35.7

 
$
(3.9
)
 
$
272.5

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
35.9

 
$
17.0

 
$
7.7

 
$
24.0

 
$
3.0

 
$
87.6

Purchases of land, buildings and equipment
 
13.2

 
6.7

 
10.1

 
11.3

 
0.9

 
42.2

(in millions)
 
Olive Garden
 
LongHorn Steakhouse
 
Fine Dining
 
Other Business
 
Corporate
 
Consolidated
For the three months ended August 25, 2019
 
Sales
 
$
1,090.2

 
$
450.2

 
$
136.1

 
$
457.4

 
$

 
$
2,133.9

Restaurant and marketing expenses
 
861.3

 
375.7

 
115.8

 
393.0

 
2.4

 
1,748.2

Segment profit
 
$
228.9

 
$
74.5

 
$
20.3

 
$
64.4

 
$
(2.4
)
 
$
385.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
36.1

 
$
16.8

 
$
7.8

 
$
24.0

 
$
1.5

 
$
86.2

Impairments and disposal of assets, net
 
1.4

 

 

 

 
(1.4
)
 

Purchases of land, buildings and equipment
 
50.8

 
16.1

 
18.1

 
30.0

 
2.1

 
117.1



13

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Reconciliation of segment profit to earnings from continuing operations before income taxes:
 
 
Three Months Ended
(in millions)
 
August 30, 2020
 
August 25, 2019
Segment profit
 
$
272.5

 
$
385.7

Less general and administrative expenses
 
(128.3
)
 
(98.0
)
Less depreciation and amortization
 
(87.6
)
 
(86.2
)
Less interest, net
 
(16.6
)
 
(11.1
)
Less other (income) expense, net
 
(7.5
)


Earnings before income taxes
 
$
32.5

 
$
190.4



Note 7.Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of accumulated other comprehensive income (loss), net of tax, for the quarter ended August 30, 2020 are as follows:
(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Derivatives
 
Benefit Plan Funding Position
 
Accumulated Other Comprehensive Income (Loss)
Balance at May 31, 2020
 
$
4.5

 
$
(8.6
)
 
$
(13.5
)
 
$
(17.6
)
Gain (loss)
 
0.2

 
4.4

 

 
4.6

Reclassification realized in net earnings
 

 
0.1

 
0.4

 
0.5

Balance at August 30, 2020
 
$
4.7

 
$
(4.1
)
 
$
(13.1
)
 
$
(12.5
)

The components of accumulated other comprehensive income (loss), net of tax, for the quarter ended August 25, 2019 are as follows:
(in millions)
 
Foreign Currency Translation Adjustment
 
Unrealized Gains (Losses) on Derivatives
 
Benefit Plan Funding Position
 
Accumulated Other Comprehensive Income (Loss)
Balance at May 26, 2019
 
$
(1.0
)
 
$
9.0

 
$
(106.2
)
 
$
(98.2
)
Gain (loss)
 

 
(2.2
)
 

 
(2.2
)
Reclassification realized in net earnings
 

 
(0.7
)
 
0.1

 
(0.6
)
Balance at August 25, 2019
 
$
(1.0
)
 
$
6.1

 
$
(106.1
)
 
$
(101.0
)


14

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded.
 
 
 
Amount Reclassified from AOCI into Net Earnings
 
 
 
Three Months Ended
(in millions)
AOCI Components
Location of Gain (Loss) Recognized in Earnings
 
August 30,
2020
 
August 25,
2019
Derivatives
 
 
 
 
 
Commodity contracts
(1)
 
$
(0.5
)
 
$
(0.4
)
Equity contracts
(2)
 
0.4

 
1.0

Total before tax
 
 
$
(0.1
)
 
$
0.6

Tax (expense) benefit
 
 

 
0.1

Net of tax
 
 
$
(0.1
)
 
$
0.7

 
 
 
 
 
 
Benefit plan funding position
 
 
 
 
 
Recognized net actuarial loss - pension/postretirement plans
(3)
 
$

 
$
(0.9
)
Recognized net actuarial gain (loss) - other plans
(4)
 
(0.5
)
 
0.8

Total before tax
 
 
$
(0.5
)
 
$
(0.1
)
Tax (expense) benefit
 
 
0.1

 

Net of tax
 
 
$
(0.4
)
 
$
(0.1
)

(1)
Primarily included in food and beverage costs and restaurant expenses. See Note 9 for additional details.
(2)
Included in general and administrative expenses. See Note 9 for additional details.
(3)
Included in the computation of net periodic benefit costs - pension and postretirement plans, which is a component of restaurant labor expenses and general and administrative expenses and other (income) expense, net.
(4)
Included in the computation of net periodic benefit costs - other plans, which is a component of general and administrative expenses.
Note 8. Stock-Based Compensation
We grant stock options for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units, and performance stock units with a fair value generally determined based on our closing stock price on the date of grant. In addition, we grant cash settled stock units (Darden stock units) which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model were as follows.
 
Stock Options Granted
 
Three Months Ended
 
August 30, 2020
 
August 25, 2019
Weighted-average fair value
$
20.07

 
$
19.94

Dividend yield
3.0
%
 
3.0
%
Expected volatility of stock
37.3
%
 
22.5
%
Risk-free interest rate
0.4
%
 
1.9
%
Expected option life (in years)
6.4

 
6.3

Weighted-average exercise price per share
$
78.84

 
$
124.24





15

Table of Contents
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The weighted-average grant date fair value of performance-based restricted stock units and the related assumptions used in the Monte Carlo simulation to record stock-based compensation are as follows:
  
Granted in Fiscal Year Ended
 
Three Months Ended
 
August 30, 2020
 
August 25, 2019
Dividend yield (1)
0.0
%
 
0.0
%
Expected volatility of stock
50.5
%
 
23.1
%
Risk-free interest rate
0.1
%
 
1.8
%
Expected life (in years)
2.8

 
2.9

Weighted-average grant date fair value per unit
$
83.46

 
$
124.41

(1)
Assumes a reinvestment of dividends.
The following table presents a summary of our stock-based compensation activity for the three months ended August 30, 2020.
(in millions)
 
Stock
Options
 
Restricted
Stock/
Restricted
Stock
Units
 
Equity-Settled
Performance
Stock Units
 
Cash-Settled Darden
Stock
Units
Outstanding beginning of period
 
2.62

 
0.28

 
0.55

 
1.03

Awards granted
 
0.28

 
0.08

 
0.14

 
0.28

Awards exercised/vested
 
(0.04
)
 
(0.07
)
 
(0.19
)
 
(0.28
)
Awards forfeited
 
(0.01
)
 
(0.01
)
 

 
(0.03
)
Outstanding end of period
 
2.85

 
0.28

 
0.50

 
1.00


We recognized expense from stock-based compensation as follows: 
 
 
Three Months Ended
(in millions)
 
August 30,
2020
 
August 25,
2019
Stock options
 
$
1.6

 
$
1.3

Restricted stock/restricted stock units
 
2.8

 
1.8

Equity-settled performance stock units
 
5.7

 
3.8

Cash-settled Darden stock units
 
8.0

 
6.6

Employee stock purchase plan
 
0.6

 
0.4

Director compensation program/other
 
0.4

 
0.3

Total stock-based compensation expense
 
$
19.1

 
$
14.2


Note 9. Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. To the extent our cash-flow hedging instruments are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of the FASB ASC, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. To the extent the cash flow hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur.

16

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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at August 30, 2020, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We periodically enter into commodity futures, swaps and option contracts (collectively, commodity contracts) to reduce the risk of variability in cash flows associated with fluctuations in the price we pay for commodities, such as natural gas and diesel fuel. For certain of our commodity purchases, changes in the price we pay for these commodities are highly correlated with changes in the market price of these commodities. For these commodity purchases, we designate commodity contracts as cash flow hedging instruments. For the remaining commodity purchases, changes in the price we pay for these commodities are not highly correlated with changes in the market price, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these commodity purchases, we utilize these commodity contracts as economic hedges. Our commodity contracts currently extend through May 2021.
We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized 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 2024. 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 have net cash settlement terms and net settle every three months. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting, and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividend equivalents on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.
We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings. These contracts currently extend through September 2023.
The notional and fair values of our derivative contracts are as follows: 
 
 
 
 
 
 
 
Fair Values
(in millions, except
per share data)
Number of Shares Outstanding
 
Weighted-Average
 Per Share Forward Rates
 
Notional Values
 
Derivative Assets (1)
 
Derivative Liabilities (1)
 
August 30, 2020
 
August 30,
2020
 
May 31,
2020
 
August 30,
2020
 
May 31,
2020
Equity forwards:
 
 
 
 
 
 
 
 
 
 
 
 
 
Designated
0.2
 
$107.34
 
$
21.3

 
$
1.2

 
$
1.8

 
$

 
$

Not designated
0.5
 
$123.42
 
$
56.0

 
2.7

 
4.4

 

 

Total equity forwards
$
3.9

 
$
6.2

 
$

 
$

Commodity contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
Designated
N/A
 
N/A
 
$
12.8

 
$
1.1

 
$
0.3

 
$
1.1

 
$
1.8

Not designated
N/A
 
N/A
 
$
1.2

 
0.1

 

 
0.1

 
0.3

Total commodity contracts
 
 
 
 
 
 
$
1.2

 
$
0.3

 
$
1.2

 
$
2.1

Total derivative contracts
 
$
5.1

 
$
6.5

 
$
1.2

 
$
2.1

 

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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:
 
 
Amount of Gain (Loss) Recognized in AOCI
 
Amount of Gain (Loss) Reclassified from AOCI to Earnings
 
 
Three Months Ended
 
Three Months Ended
(in millions)
 
August 30,
2020
 
August 25,
2019
 
August 30,
2020
 
August 25,
2019
Equity (1)
 
$
3.7

 
$
(1.0
)
 
$
0.4

 
$
1.0

Commodity (2)
 
0.9

 
(1.4
)
 
(0.5
)
 
(0.4
)
Total
 
$
4.6

 
$
(2.4
)
 
$
(0.1
)
 
$
0.6

 
 
 
 
 
 
 
 
 

(1)
Location of the gain (loss) reclassified from AOCI to earnings is general and administrative expenses.
(2)
Location of the gain (loss) reclassified from AOCI to earnings is food and beverage costs and restaurant expenses.
 
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
 
 
Amount of Gain (Loss) Recognized in Earnings
(in millions)
Three Months Ended
Location of Gain (Loss) Recognized in Earnings on Derivatives
August 30, 2020
 
August 25, 2019
Food and beverage costs and restaurant expenses
 
$
0.1

 
$
0.3

General and administrative expenses
 
4.5

 
0.6

Total
 
$
4.6

 
$
0.9


Based on the fair value of our derivative instruments designated as cash flow hedges as of August 30, 2020, we expect to reclassify an immaterial amount of net losses on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of our equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.
Note 10. Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of August 30, 2020 and May 31, 2020
Items Measured at Fair Value at August 30, 2020
(in millions)
 
 
Fair value
of assets
(liabilities)
 
Quoted prices
in active
market for
identical assets
(liabilities)
(Level 1)
 
Significant
other
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Derivatives:
 
 
 
 
 
 
 
 
 
Equity forwards
(2)
 
3.9

 

 
3.9

 

Total
 
 
$
3.9

 
$

 
$
3.9

 
$

 

18

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DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Items Measured at Fair Value at May 31, 2020
(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)
 
$
(1.8
)
 
$

 
$
(1.8
)
 
$