Red Lobster 2012 Annual Report Download - page 54

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Notes to Consolidated Financial Statements
Darden
50 Darden Restaurants, Inc. 2012 Annual Report
contracts that were indexed to 1.1 million shares of our common stock, at varying
forward rates between $27.57 per share and $45.66 per share, extending through
August 2016. 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.
We entered into equity forward contracts to hedge the risk of changes in
future cash flows associated with recognized, cash-settled performance stock
units and employee-directed investments in Darden stock within the non-qualified
deferred compensation plan. The equity forward contracts are indexed to 0.7 million
shares of our common stock at forward rates between $23.41 and $50.19 per
share, can only be net settled in cash and expire between fiscal 2013 and 2016.
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
the performance stock units and Darden stock investments in the non-qualified
deferred compensation plan within selling, general and administrative expenses
in our consolidated statements of earnings.
The fair value of our derivative contracts designated as hedging instruments and derivative contracts that are not designated as hedging instruments are as follows:
Balance Derivative Assets Derivative Liabilities
Sheet
(in millions)
Location May 27, 2012 May 29, 2011 May 27, 2012 May 29, 2011
Derivative contracts designated as hedging instruments
Commodity contracts (1) $0.3 $0.1 $ (0.4) $ —
Equity forwards (1) 0.9 0.4 — —
Interest rate related (1) 3.2 3.6 (44.9) (23.2)
Foreign currency forwards (1) 0.5 0.6 — —
$4.9 $4.7 $(45.3) $(23.2)
Derivative contracts not designated as hedging instruments
Commodity contracts (1) $ — $0.6 $ — $ —
Equity forwards (1) 1.9 0.5 — —
$1.9 $1.1 $ — $ —
Total derivative contracts $6.8 $5.8 $(45.3) $(23.2)
(1) Derivative assets and liabilities are included in receivables, net, prepaid expenses and other current assets, and other current liabilities, as applicable, on our consolidated balance sheets.
The effects of derivative instruments in cash flow hedging relationships on the consolidated statements of earnings are as follows:
Amount of Gain (Loss) Location of Gain (Loss) Amount of Gain (Loss) Location of Gain (Loss) Amount of Gain (Loss)
Recognized in AOCI Reclassified from AOCI Reclassified from AOCI Recognized in Earnings Recognized in Earnings
(in millions)
(Effective Portion) to Earnings to Earnings (Effective Portion) (Ineffective Portion) (Ineffective Portion) (1)
Fiscal Year Fiscal Year Fiscal Year
2012 2011 2010 2012 2011 2010 2012 2011 2010
Commodity $ (2.2) $ (0.2) $(2.1) (2) $(1.7) $(0.9) $(3.8) (2) $ — $ — $ —
Equity (0.7) 2.6 3.9 (3) — — — (3) 0.6 0.2 0.3
Interest rate (75.2) (12.2) (7.7) Interest, net (2.9) 0.7 0.5 Interest, net (0.7) (0.5) —
Foreign currency 0.9 (0.1) 1.3 (4) 0.8 0.4 1.1 (4) — — —
$(77.2) $ (9.9) $(4.6) $(3.8) $ 0.2 $(2.2) $(0.1) $(0.3) $0.3
(1) Generally, all of our derivative instruments designated as cash flow hedges have some level of ineffectiveness, which is recognized currently in earnings. However, as these amounts are generally nominal and our consolidated financial statements are
presented “in millions,” these amounts may appear as zero in this tabular presentation.
(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, which are components of cost of sales.
(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 restaurant labor expenses, which is a component of cost of sales, and selling, general and
administrative expenses.
(4) 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, which is a component of cost of sales, and selling, general and
administrative expenses.