Red Lobster 2004 Annual Report Download - page 28

Financial Review 2004
Management's Discussion and Analysis
of Financial Condition and Results of Operations
LIQUIDITY AND CAPITAL RESOURCES
Cash flows generated from operating activities provide us with a
significant source of liquidity. Since substantially all our sales are for
cash and cash equivalents, and accounts payable are generally due
in five to 30 days, we are able to carry current liabilities in excess of
current assets. In addition to cash flows from operations, we use a
combination of long-term and short-term borrowings to fund our
capital needs.
We manage our business and our financial ratios to maintain
an investment grade bond rating, which allows flexible access
to financing at reasonable costs. Currently, our publicly issued
long-term debt carries "Baal" (Moody's Investors Service), "BBB+"
(Standard & Poor's), and "BBB+" (Fitch) ratings. Our commercial
paper has ratings of "P-2" (Moody's Investors Service), "A-2"
(Standard & Poor's), and "F-2" (Fitch). These ratings are as of the
date of this annual report and have been obtained with the under-
standing that Moody's Investors Service, Standard & Poor's, and
Fitch will continue to monitor our credit and make future adjust-
ments to these ratings to the extent warranted. The ratings may
be changed, superseded, or withdrawn at any time.
Our commercial paper program serves as our primary source of short-
term financing. At May 30, 2004, $ 15 million was outstanding under
the program. To support our commercial paper program, we have a
credit facility under a Credit Agreement dated October 17, 2003,
as amended, with a consortium of banks, including Wachovia Bank,
N.A., as administrative agent, under which we can borrow up to
$400 million. The credit facility allows us to borrow at interest rates
based on a spread over (i) LIBOR or (ii) a base rate that is the higher
of the prime rate, or one-half of one percent above the federal funds
rate, at our option. The interest rate spread over LIBOR is determined
by our debt rating. The credit facility expires on October 17, 2008,
and contains various restrictive covenants, including a leverage
test that requires us to maintain a ratio of consolidated total debt
to consolidated total capitalization of less than 0.55 to 1.00 and a
limitation of $25 million on priority debt, subject to certain excep-
tions. The credit facility does not, however, contain a prohibition on
borrowing in the event of a ratings downgrade or a material adverse
change in and of itself. None of these covenants are expected to
impact our liquidity or capital resources. At May 30, 2004, we were
in compliance with all covenants under the Credit Agreement.
At May 30,2004, our long-term debt consisted principally of:
(l)$150millionof unsecured 8.3 75 percent senior notes due in
September 2005, (2) $ 150 million of unsecured 6.375 percent notes
due in February 2006, (3) $150 million of unsecured 5.75 percent
medium-term notes due in March 2007, (4) $75 million of unsecured
7.45 percent medium-term notes due in April 2011, (5) $ 100 mil-
lion of unsecured 7.125 percent debentures due in February 2016,
and (6) an unsecured, variable rate, $29 million commercial bank
loan due in December 2018 that supports two loans from us to
the Employee Stock Ownership Plan portion of the Darden Savings
Plan. Through a shelf registration on file with the Securities and
Exchange Commission (SEC), we may issue up to an additional
$ 125 million of unsecured debt securities from time to time. The debt
securities may bear interest at either fixed or floating rates, and may
have maturity dates of nine months or more after issuance.
28 Darden Restaurants