Red Lobster 2005 Annual Report Download - page 42

Notes to Consolidated Financial Statements
Financial Review 2005
50 Darden Restaurants
earnings as an adjustment to interest expense during fiscal
2005, 2004 and 2003. It is expected that $53 of this gain will
be recognized in earnings as an adjustment to interest
expense during the next 12 months.
Interest Rate Swaps
During fiscal 2005 and 2004, we entered into interest
rate swap agreements (swaps) to hedge the risk of changes
in interest rates of a future issuance of fixed-rate debt. The
swaps, which have a $100,000 notional principal amount of
indebtedness, will be used to hedge the interest payments
associated with a forecasted issuance of debt in fiscal 2006.
To the extent the swaps are effective in offsetting the variabil-
ity of the hedged cash flows, changes in the fair value of the
swaps are not included in current earnings but are reported
as accumulated other comprehensive income (loss). The
accumulated gain or loss at the swap settlement date will be
amortized into earnings as an adjustment to interest expense
over the same period in which the related interest costs on
the new debt issuance are recognized in earnings. The fair
value of the swaps at May 29, 2005 was a loss of $3,131 and
is included in accumulated other comprehensive income
(loss) at May 29, 2005. No amounts were recognized in earn-
ings during fiscal 2005 and fiscal 2004.
We had interest rate swaps with a notional amount of
$200,000, which we used to convert variable rates on our
long-term debt to fixed rates effective May 30, 1995. We
received the one-month commercial paper interest rate
and paid fixed-rate interest ranging from 7.51 percent to
7.89 percent. The interest rate swaps were settled during
January 1996 at a cost to us of $27,670. This cost is being
recognized as an adjustment to interest expense over
the term of our 10-year, 6.375 percent notes and 20-year,
7.125 percent debentures (see Note 8).
Equity Forwards
During fiscal 2005, we entered into equity forward con-
tracts to hedge the risk of changes in future cash flows
associated with the unvested unrecognized Darden stock
units granted during the first quarter of fiscal 2005 (see
Note 16). The equity forward contracts will be settled at the
end of the vesting periods of their underlying Darden stock
units, which range between four and five years. The equity
forward contracts, which are indexed to 200,000 shares of
our common stock, have a $3,904 notional amount and can
only be net settled in cash. The equity forward contracts are
used to hedge the variability in cash flows associated with
the unvested unrecognized Darden stock units. To the extent
the equity forward contracts are effective in offsetting the
variability of the hedged cash flows, changes in the fair value
of the equity forward contracts are not included in current
earnings but are reported as accumulated other comprehen-
sive income (loss). A deferred gain of $2,185 related to the
equity forward contracts was recognized in accumulated
other comprehensive income (loss) at May 29, 2005. As the
Darden stock units vest, we will effectively 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. A gain of $471 was
recognized in earnings as a component of restaurant labor
during fiscal 2005.
NOTE 10
Financial Instruments
The fair values of cash equivalents, accounts receivable,
accounts payable and short-term debt approximate their
carrying amounts due to their short duration.
The carrying value and fair value of long-term debt at
May 29, 2005 was $650,247 and $686,040, respectively.
The carrying value and fair value of long-term debt at May 30,
2004 was $653,349 and $700,383, respectively. The fair
value of long-term debt is determined based on market
prices or, if market prices are not available, the present
value of the underlying cash flows discounted at our incre-
mental borrowing rates.
NOTE 11
Stockholders’ Equity
Treasury Stock
Our Board of Directors has authorized us to repurchase
up to 137.4 million shares of our common stock. In fiscal
2005, 2004 and 2003, we purchased treasury stock totaling
$311,686, $235,462 and $213,311, respectively. At May 29,
2005, a total of 120.6 million shares have been repurchased
under the authorization. The repurchased common stock is
reflected as a reduction of stockholders’ equity.