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 29, 2021

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, 2021: 129,785,003.

TABLE OF CONTENTS

			Page
Part I -	Financial Information
	Item 1.	Financial Statements (Unaudited)	4
		Consolidated Statements of Earnings	4
		Consolidated Statements of Comprehensive Income	5
		Consolidated Balance Sheets	6
		Consolidated Statements of Changes in Stockholders’ Equity	7
		Consolidated Statements of Cash Flows	8
		Notes to Consolidated Financial Statements	10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
	Item 4.	Controls and Procedures	29
Part II -	Other Information
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 5.	Other Information	30
	Item 6.	Exhibits	31
Signature			32

2

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

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 29, 2021		August 30, 2020
Sales	$	2,306.0	$	1,527.4
Costs and expenses:
Food and beverage	685.4		434.5
Restaurant labor	736.0		500.7
Restaurant expenses	378.1		290.9
Marketing expenses	23.9		28.8
General and administrative expenses	112.8		128.3
Depreciation and amortization	89.0		87.6
Total operating costs and expenses	$	2,025.2	$	1,470.8
Operating income	280.8		56.6
Interest, net	15.6		16.6
Other (income) expense, net	0.2		7.5
Earnings before income taxes	265.0		32.5
Income tax expense (benefit)	33.3		(4.8)
Earnings from continuing operations	$	231.7	$	37.3
Losses from discontinued operations, net of tax benefit of $0.5 and $0.9, respectively	(0.8)		(1.2)
Net earnings	$	230.9	$	36.1
Basic net earnings per share:
Earnings from continuing operations	$	1.78	$	0.29
Losses from discontinued operations	(0.01)		(0.01)
Net earnings	$	1.77	$	0.28
Diluted net earnings per share:
Earnings from continuing operations	$	1.76	$	0.28
Losses from discontinued operations	(0.01)		—
Net earnings	$	1.75	$	0.28
Average number of common shares outstanding:
Basic	130.3		130.0
Diluted	131.7		130.9

See accompanying notes to our unaudited consolidated financial statements.

4

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

	Three Months Ended
	August 29, 2021		August 30, 2020
Net earnings	$	230.9	$	36.1
Foreign currency adjustment	(0.4)		0.2
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.0 and $0.4, respectively	1.8		4.5
Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial gain (loss), net of taxes of $0.1 and $0.1, respectively, related to pension and other post-employment benefits	0.2		0.4
Other comprehensive income	$	1.6	$	5.1
Total comprehensive income	$	232.5	$	41.2

See accompanying notes to our unaudited consolidated financial statements.

5

DARDEN RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions)

	August 29, 2021		May 30, 2021
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	947.8	$	1,214.7
Receivables, net	67.6		68.2
Inventories	210.9		190.8
Prepaid income taxes	303.2		337.2
Prepaid expenses and other current assets	128.5		60.2
Total current assets	$	1,658.0	$	1,871.1
Land, buildings and equipment, net of accumulated depreciation and amortization of $2,910.8 and $2,843.8, respectively	3,060.1		2,869.2
Operating lease right-of-use assets	3,673.3		3,776.4
Goodwill	1,037.4		1,037.4
Trademarks	806.3		806.3
Other assets	306.6		295.7
Total assets	$	10,541.7	$	10,656.1
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	325.0	$	304.5
Accrued payroll	154.3		177.4
Accrued income taxes	34.9		35.9
Other accrued taxes	67.9		60.5
Unearned revenues	447.1		474.2
Other current liabilities	685.8		795.8
Total current liabilities	$	1,715.0	$	1,848.3
Long-term debt	936.7		929.8
Deferred income taxes	216.3		221.6
Operating lease liabilities - non-current	3,981.6		4,088.5
Other liabilities	939.7		754.8
Total liabilities	$	7,789.3	$	7,843.0
Stockholders’ equity:
Common stock and surplus	$	2,300.7	$	2,286.6
Retained earnings	445.9		522.3
Accumulated other comprehensive income (loss)	5.8		4.2
Total stockholders’ equity	$	2,752.4	$	2,813.1
Total liabilities and stockholders’ equity	$	10,541.7	$	10,656.1

See accompanying notes to our unaudited consolidated financial statements.

6

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended August 29, 2021 and August 30, 2020

(In millions)

(Unaudited)

	Common Stock And Surplus
	Shares	Amount		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Stockholders’ Equity
Balance at May 30, 2021	130.8	$	2,286.6	$	522.3	$	4.2	$	2,813.1
Net earnings	—	—		230.9		—		230.9
Other comprehensive income	—	—		—		1.6		1.6
Dividends declared ($1.10 per share)	—	—		(144.1)		—		(144.1)
Stock option exercises	0.3	17.0		—		—		17.0
Stock-based compensation	—	16.3		—		—		16.3
Repurchases of common stock	(1.3)	(23.1)		(163.2)		—		(186.3)
Issuance of stock under Employee Stock Purchase Plan and other plans	0.2	2.6		—		—		2.6
Other		1.3				—		1.3
Balance at August 29, 2021	130.0	$	2,300.7	$	445.9	$	5.8	$	2,752.4

Balance at May 31, 2020	129.9	$	2,205.3	$	143.5	$	(17.6)	$	2,331.2
Net earnings	—	—		36.1		—		36.1
Other comprehensive income	—	—		—		5.1		5.1
Stock option exercises	—	1.7		—		—		1.7
Stock-based compensation	—	11.1		—		—		11.1
Repurchases of common stock	(0.1)	(1.4)		(5.2)		—		(6.6)
Issuance of stock under Employee Stock Purchase Plan and other plans	0.4	2.5		—		—		2.5
Other	—	1.7		(7.8)		—		(6.1)
Balance at August 30, 2020	130.2	$	2,220.9	$	166.6	$	(12.5)	$	2,375.0

See accompanying notes to our unaudited consolidated financial statements.

7

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

	Three Months Ended
	August 29, 2021		August 30, 2020
Cash flows—operating activities
Net earnings	$	230.9	$	36.1
Losses from discontinued operations, net of tax	0.8		1.2
Adjustments to reconcile net earnings from continuing operations to cash flows:
Depreciation and amortization	89.0		87.6
Stock-based compensation expense	27.6		19.1
Change in current assets and liabilities	(151.8)		20.6
Contributions to pension and postretirement plans	(0.5)		(0.4)
Deferred income taxes	(5.4)		(10.0)
Change in other assets and liabilities	(5.4)		66.2
Other, net	(4.9)		(13.7)
Net cash provided by operating activities of continuing operations	$	180.3	$	206.7
Cash flows—investing activities
Purchases of land, buildings and equipment	(82.7)		(42.2)
Proceeds from disposal of land, buildings and equipment	3.4		2.3
Purchases of capitalized software and other assets	(5.5)		(3.7)
Other, net	1.1		(0.4)
Net cash used in investing activities of continuing operations	$	(83.7)	$	(44.0)
Cash flows—financing activities
Proceeds from issuance of common stock	19.6		4.2
Dividends paid	(143.5)		—
Repurchases of common stock	(186.3)		(6.6)
Repayments of short-term debt	—		(270.0)
Principal payments on finance leases	(2.6)		(1.2)
Net cash used in financing activities of continuing operations	$	(312.8)	$	(273.6)
Cash flows—discontinued operations
Net cash provided by operating activities of discontinued operations	0.8		2.2
Net cash provided by discontinued operations	$	0.8	$	2.2
Decrease in cash, cash equivalents, and restricted cash	(215.4)		(108.7)
Cash, cash equivalents, and restricted cash - beginning of period	1,214.7		763.3
Cash, cash equivalents, and restricted cash - end of period	$	999.3	$	654.6

Reconciliation of cash, cash equivalents, and restricted cash:	August 29, 2021		August 30, 2020
Cash and cash equivalents	$	947.8	$	654.6
Restricted cash included in prepaid expenses and other current assets	51.5		—
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	999.3	$	654.6

8

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In millions)

(Unaudited)

	Three Months Ended
	August 29, 2021		August 30, 2020
Cash flows from changes in current assets and liabilities
Receivables, net	0.8		2.6
Inventories	(20.0)		16.8
Prepaid expenses and other current assets	(11.8)		(0.1)
Accounts payable	14.7		(4.4)
Accrued payroll	(23.1)		(21.1)
Prepaid/accrued income taxes	33.0		2.1
Other accrued taxes	7.4		8.7
Unearned revenues	(27.1)		(19.5)
Other current liabilities	(125.7)		35.5
Change in current assets and liabilities	$	(151.8)	$	20.6

See accompanying notes to our unaudited consolidated financial statements.

9

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.Basis of Presentation

Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood® and The Capital Burger®. As of August 29, 2021, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 34 franchised restaurants. We also have 25 franchised restaurants in operation located in Latin America.

We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53-week fiscal year which ends on the last Sunday in May. Our fiscal year ending May 29, 2022 will contain 52 weeks of operation. Operating results for interim periods presented are not necessarily indicative of results that may be expected for the full fiscal year.

These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 30, 2021. We prepare our consolidated financial statements in conformity with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and costs and expenses during the reporting period. Actual results could differ from those estimates.

We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

COVID-19 Pandemic

For much of fiscal 2021, the COVID-19 pandemic resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and required personal protective equipment 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. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early 2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses have eased. As of the date of this report, all of our restaurants were able to open their dining rooms and few capacity restrictions remained in place in the United States. Following increases in the numbers of cases of COVID-19 throughout the United States during the first quarter of fiscal 2022, some of our restaurants are subject to other COVID-19-related restrictions such as mask requirements or vaccine requirements for team members, guests or both. For the health and safety of our guests and team members, we continue to maintain our own COVID-19 protocols for our restaurant teams, including mask wearing, contact tracing, and exclusion of team members who meet our exclusion criteria. Exclusions and quarantines of restaurant team members or groups thereof disrupt an individual restaurant’s operations and often come with little or no notice to the local restaurant management. We continue to monitor the progression of the COVID-19 pandemic and state, local and federal government regulatory and public health responses thereto, including the federal Occupational Health and Safety Administration’s expected rules implementing a nationwide vaccine requirement for large employers.

Recently Adopted Accounting Standards

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting. These changes are intended to simplify the market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance is effective upon issuance to modifications made as early as the beginning of the interim period through December 31, 2022. We elected to adopt this guidance during the quarter ended August 29, 2021; adoption did not have a material impact on our consolidated financial statements.

10

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 2.Revenue Recognition  

Deferred revenue liabilities from contracts with customers included on our accompanying consolidated balance sheets is comprised of the following:

(in millions)	August 29, 2021		May 30, 2021
Unearned revenues
Deferred gift card revenue	$	465.0	$	494.3
Deferred gift card discounts	(18.3)		(20.5)
Other	0.4		0.4
Total	$	447.1	$	474.2
Other liabilities
Deferred franchise fees - non-current	$	2.7	$	2.2

The following table presents a rollforward of deferred gift card revenue.

	Three Months Ended
(in millions)	August 29, 2021		August 30, 2020
Beginning balance	$	494.3	$	494.6
Activations	106.6		75.7
Redemptions and breakage	(135.9)		(94.7)
Ending balance	$	465.0	$	475.6

11

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 29, 2021		May 30, 2021
Operating lease right-of-use assets	Operating lease right-of-use assets	$	3,673.3	$	3,776.4
Finance lease right-of-use assets	Land, buildings and equipment, net	588.7		405.6
Total lease assets, net		$	4,262.0	$	4,182.0
Operating lease liabilities - current	Other current liabilities	$	176.1	$	176.8
Finance lease liabilities - current	Other current liabilities	8.0		7.3
Operating lease liabilities - non-current	Operating lease liabilities - non-current	3,981.6		4,088.5
Finance lease liabilities - non-current	Other liabilities	745.5		555.3
Total lease liabilities		$	4,911.2	$	4,827.9

Supplemental Cash Flow Information

Cash paid for interest and income taxes are as follows:	Three Months Ended
(in millions)	August 29, 2021		August 30, 2020
Interest, net of amounts capitalized	$	15.3	$	16.5
Income taxes, net of refunds	4.2		1.9

Non-cash investing and financing activities are as follows:	Three Months Ended
(in millions)	August 29, 2021		August 30, 2020
Increase in land, buildings and equipment through accrued purchases	$	35.0	$	26.8
Right-of-use assets obtained in exchange for new operating lease liabilities	3.6		17.9
Right-of-use assets obtained in exchange for new finance lease liabilities	67.8		—
Net change in right-of-use assets due to lease modifications resulting in reclassification of leases from operating to finance	73.5		33.2

We have restricted cash, of $51.5 million and $0 as of August 29, 2021 and May 30, 2021, respectively, which represents cash held as security for a standby letter of credit. Restricted cash is included in Prepaid Expenses and Other Current Assets on the balance sheet. See Note 11, Commitments and Contingencies.

Note 4.Income Taxes

The effective income tax rate for continuing operations for the quarter ended August 29, 2021 was 12.6 percent, reflecting income tax expense of $33.3 million compared to an effective income tax rate for the quarter ended August 30, 2020 of (14.8) percent, reflecting an income tax benefit of $4.8 million. The change was primarily driven by higher net earnings from continuing operations in the quarter ended August 29, 2021 compared to the quarter ended August 30, 2020 and the impact of certain tax credits on earnings before income taxes for the quarter ended August 30, 2020.

Included in our remaining balance of unrecognized tax benefits is $34.9 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.

12

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5.Net Earnings per Share

Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows: 

	Three Months Ended
(in millions)	August 29, 2021	August 30, 2020
Anti-dilutive stock-based compensation awards	—	1.1

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, Eddie V’s and The Capital Burger in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business.

The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V’s restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Cheddar’s Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze and The Capital Burger restaurants in the U.S and results from our franchise operations.

External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.

Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively “restaurant and marketing expenses”). Non-cash lease-related expenses included in restaurant expenses (which is a component of segment profit) and lease-related depreciation and amortization are reported at the corporate level as these are expenses for which our operating segments are not being evaluated. Additionally, our lease-related right-of-use assets are not managed or evaluated at the operating segment level, but rather at the corporate level.

In the first quarter of fiscal 2022, we changed our internal management reporting to include The Capital Burger in the Other Business segment. Previously, The Capital Burger was included in the Fine Dining segment due to its adjacency with The Capital Grille brand and overall immateriality. Fiscal 2021 figures have been restated for comparability.

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 29, 2021
Sales	$	1,090.4	$	567.1	$	168.8	$	479.7	$	—	$	2,306.0
Restaurant and marketing expenses	837.1		459.6		135.3		394.9		(3.5)		1,823.4
Segment profit	$	253.3	$	107.5	$	33.5	$	84.8	$	3.5	$	482.6
Depreciation and amortization	$	35.3	$	16.0	$	8.2	$	24.1	$	5.4	$	89.0
Purchases of land, buildings and equipment	35.3		20.1		8.7		17.9		0.7		82.7

13

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(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	$	82.6	$	279.8	$	—	$	1,527.4
Restaurant and marketing expenses	614.4		319.8		72.4		244.4		3.9		1,254.9
Segment profit	$	173.8	$	57.0	$	10.2	$	35.4	$	(3.9)	$	272.5
Depreciation and amortization	$	35.9	$	17.0	$	7.6	$	24.1	$	3.0	$	87.6
Purchases of land, buildings and equipment	13.2		6.7		10.1		11.3		0.9		42.2

Reconciliation of segment profit to earnings from continuing operations before income taxes:

	Three Months Ended
(in millions)	August 29, 2021		August 30, 2020
Segment profit	$	482.6	$	272.5
Less general and administrative expenses	(112.8)		(128.3)
Less depreciation and amortization	(89.0)		(87.6)
Less interest, net	(15.6)		(16.6)
Less other (income) expense, net	(0.2)		(7.5)
Earnings before income taxes	$	265.0	$	32.5

Note 7.Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss) (AOCI)

The components of accumulated other comprehensive income (loss), net of tax, for the quarter ended August 29, 2021 are as follows:

(in millions)	Foreign Currency Translation Adjustment		Unrealized Gains (Losses) on Derivatives		Benefit Plan Funding Position		Accumulated Other Comprehensive Income (Loss)
Balance at May 30, 2021	$	5.2	$	7.9	$	(8.9)	$	4.2
Gain (loss)	(0.4)		2.6		—		2.2
Reclassification realized in net earnings	—		(0.8)		0.2		(0.6)
Balance at August 29, 2021	$	4.8	$	9.7	$	(8.7)	$	5.8

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)

14

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 29, 2021		August 30, 2020
Derivatives
Commodity contracts	(1)	$	—	$	(0.5)
Equity contracts	(2)	0.8		0.4
Total before tax		$	0.8	$	(0.1)
Tax (expense) benefit		—		—
Net of tax		$	0.8	$	(0.1)
Benefit plan funding position
Recognized net actuarial loss - pension/postretirement plans	(3)	$	(0.1)	$	—
Recognized net actuarial gain (loss) - other plans	(4)	(0.2)		(0.5)
Total before tax		$	(0.3)	$	(0.5)
Tax (expense) benefit		0.1		0.1
Net of tax		$	(0.2)	$	(0.4)

(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 other (income) expense, net, restaurant labor expenses and general and administrative expenses.

(4)Included in the computation of net periodic benefit costs - other plans, which is a component of restaurant labor, general and administrative expenses and other (income) expense, net.

Note 8.Stock-Based Compensation

We grant stock options for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units and performance stock units with a fair value generally determined based on our closing stock price on the date of grant. In addition, we grant cash settled stock units (Darden stock units) which are classified as liabilities and are marked to market as of the end of each period.

The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model for options granted during the periods presented, were as follows:

	Three Months Ended
	August 29, 2021			August 30, 2020
Weighted-average fair value	$	41.02		$	20.07
Dividend yield	3.2		%	3.0		%
Expected volatility of stock	39.6		%	37.3		%
Risk-free interest rate	0.9		%	0.4		%
Expected option life (in years)	6.3			6.4
Weighted-average exercise price per share	$	148.20		$	78.84

15

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The weighted-average grant date fair value of market-based performance stock units and the related assumptions used in the Monte Carlo simulation to record stock-based compensation for units granted during the periods presented, were as follows:

	Three Months Ended
	August 29, 2021			August 30, 2020
Dividend yield (1)	0.0		%	0.0		%
Expected volatility of stock	53.4 %			50.5 %
Risk-free interest rate	0.4 %			0.1 %
Expected life (in years)	2.8			2.8
Weighted-average grant date fair value per unit	$	172.34		$	83.46

(1)Assumes a reinvestment of dividends.

The following table presents a summary of our stock-based compensation activity for the three months ended August 29, 2021.

(in millions)	Stock Options	Restricted Stock/ Restricted Stock Units	Equity-Settled Performance Stock Units	Cash-Settled Darden Stock Units
Outstanding beginning of period	2.15	0.26	0.48	0.80
Awards granted	0.15	0.04	0.09	0.31
Awards exercised/vested	(0.29)	(0.05)	(0.15)	(0.21)
Awards forfeited	—	—	—	(0.02)
Outstanding end of period	2.01	0.25	0.42	0.88

We recognized expense from stock-based compensation as follows: 

	Three Months Ended
(in millions)	August 29, 2021		August 30, 2020
Stock options	$	3.4	$	1.6
Restricted stock/restricted stock units	3.8		2.8
Equity-settled performance stock units	8.1		5.7
Cash-settled Darden stock units	11.3		8.0
Employee stock purchase plan	0.7		0.6
Director compensation program/other	0.3		0.4
Total stock-based compensation expense	$	27.6	$	19.1

Note 9. Derivative Instruments and Hedging Activities

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

16

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 29, 2021, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

We periodically enter into commodity futures, swaps and option contracts (collectively, commodity contracts) to reduce the risk of variability in cash flows associated with fluctuations in the price we pay for commodities, such as natural gas and diesel fuel. For certain commodity purchases, changes in the price we pay for these commodities are highly correlated with changes in the market price of these commodities. For these commodity purchases, we designate commodity contracts as cash flow hedging instruments. For the remaining commodity purchases, changes in the price we pay for these commodities are not highly correlated with changes in the market price, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these commodity purchases, we utilize these commodity contracts as economic hedges. Our commodity contracts currently extend through November 2021.

During the fourth quarter of fiscal 2021, we entered into interest-rate swap agreements with $300.0 million of notional value to limit the risk of change in fair value through fiscal 2031, of the $300.0 million 4.550 percent senior notes due February 2048. The swap agreements effectively swap the fixed-rate obligations for floating-rate obligations over the term of the agreements, thereby mitigating changes in fair value of the related debt. The swap agreements were designated as fair value hedges of the related debt and met the requirements to be accounted for under the short-cut method, resulting in no ineffectiveness in the hedging relationship. During the quarter ended August 29, 2021, $1.3 million was recorded as a reduction to interest expense related to net swap settlements.

We enter into equity forward contracts to hedge the risk of changes in future cash flows associated with the unvested, unrecognized cash-settled Darden stock units. The equity forward contracts will be settled at the end of the vesting periods of their underlying Darden stock units, which range between three and five years and currently extend through July 2026. The contracts are initially designated as cash flow hedges to the extent the Darden stock units are unvested and, therefore, unrecognized as a liability in our financial statements. The forward contracts have net cash settlement terms and net settle every three months. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting, and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividend equivalents on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.

We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings. These contracts currently extend through July 2026.

17

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The notional and fair values of our derivative contracts are as follows: 

					Fair Values
(in millions, except per share data)	Number of Shares Outstanding	Weighted-Average  Per Share Forward Rates	Notional Values		Derivative Assets (1)				Derivative Liabilities (1)
	August 29, 2021				August 29, 2021		May 30, 2021		August 29, 2021		May 30, 2021
Equity forwards:
Designated	0.4	$125.51	$	46.7	$	4.8	$	0.9	$	—	$	—
Not designated	0.3	127.04	43.7		4.4		2.0		—		—
Total equity forwards					$	9.2	$	2.9	$	—	$	—
Commodity contracts:
Designated	N/A	N/A	$	1.7	$	—	$	0.1	$	—	$	—
Not designated	N/A	N/A	—		—		—		—		—
Total commodity contracts					$	—	$	0.1	$	—	$	—
Interest rate related
Designated	N/A	N/A	$	300.0	$	6.5	$	—	$	—	$	0.2
Not designated	N/A	N/A			—		—		—		—
Total interest rate related					$	6.5	$	—	$	—	$	0.2
Total derivative contracts					$	15.7	$	3.0	$	—	$	0.2

 

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

    The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:

	Amount of Gain (Loss) Recognized in AOCI				Amount of Gain (Loss) Reclassified from AOCI to Earnings
	Three Months Ended				Three Months Ended
(in millions)	August 29, 2021		August 30, 2020		August 29, 2021		August 30, 2020
Equity (1)	$	2.7	$	3.7	$	0.8	$	0.4
Commodity (2)	(0.1)		0.9		—		(0.5)
Total	$	2.6	$	4.6	$	0.8	$	(0.1)

(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 derivative instruments in fair value hedging relationships in the consolidated statement of earnings are as follows:

	Amount of Gain (Loss) Recognized in Earnings on Derivatives			Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item
	Three Months Ended			Three Months Ended
(in millions)	August 29, 2021		August 30, 2020	August 29, 2021	August 30, 2020
Interest rate (1)(2)	$	6.7	$