Red Lobster 2014 Annual Report Download - page 19

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Darden
2014 Annual Report 17
Our defined benefit and other postretirement benefit costs and liabilities
are determined using various actuarial assumptions and methodologies
prescribed under FASB ASC Topic 715, Compensation – Retirement Benefits
and Topic 712, Compensation – Nonretirement Postemployment Benefits.
We use certain assumptions including, but not limited to, the selection of a
discount rate, expected long-term rate of return on plan assets and expected
health care cost trend rates. We set the discount rate assumption annually
for each plan at its valuation date to reflect the yield of high-quality fixed-
income debt instruments, with lives that approximate the maturity of the plan
benefits. At May 25, 2014, our discount rate was 4.4 percent and 4.5 percent,
respectively, for our defined benefit and postretirement benefit plans. The
expected long-term rate of return on plan assets and health care cost trend
rates are based upon several factors, including our historical assumptions
compared with actual results, an analysis of current market conditions, asset
allocations and the views of leading financial advisers and economists.
Our expected long-term rate of return on plan assets for our defined benefit
plan was 8.0 percent for fiscal year 2014 and 9.0 percent for fiscal years
2013 and 2012. At May 25, 2014, the expected health care cost trend rate
assumed for our postretirement benefit plan for fiscal 2015 was 6.8 percent.
The rate gradually decreases to 5.0 percent through fiscal 2021 and
remains at that level thereafter. We made plan contributions of approximately
$0.4 million, $2.4 million and $22.2 million in fiscal years 2014, 2013 and
2012, respectively.
In the current year, we reduced our expected rate of return for investment
of pension plan assets from 9.0 percent to 8.0 percent in connection with
our current expectations for long-term returns and target asset fund allocation.
The expected long-term rate of return on plan assets component of our net
periodic benefit cost is calculated based on the market-related value of plan
assets. Currently, our target asset fund allocation is 37.0 percent U.S.
equities, 40.0 percent high-quality, long-duration fixed-income securities,
18.5 percent international equities and 4.5 percent real estate securities.
Prior to fiscal 2014, our target asset fund allocation was 40.0 percent U.S.
equities, 35.0 percent high-quality, long-duration fixed-income securities,
20.0 percent international equities and 5.0 percent real estate securities.
We monitor our actual asset fund allocation to ensure that it approximates
our target allocation and believe that our long-term asset fund allocation will
continue to approximate our target allocation. In developing our expected
rate of return assumption, we have evaluated the actual historical performance
and long-term return projections of the plan assets, which give consideration
to the asset mix and the anticipated timing of the pension plan outflows. We
employ a total return investment approach whereby a mix of equity and fixed
income investments are used to maximize the long-term return of plan assets
for what we consider a prudent level of risk. Our historical 10-year, 15-year
and 20-year rates of return on plan assets, calculated using the geometric
method average of returns, are approximately 9.3 percent, 8.4 percent and
9.9 percent, respectively, as of May 25, 2014.
We have recognized net actuarial losses, net of tax, as a component
of accumulated other comprehensive income (loss) for the defined benefit
plans and postretirement benefit plan as of May 25, 2014 of $64.0 million
and $5.8 million, respectively. These net actuarial losses represent changes
in the amount of the projected benefit obligation and plan assets resulting
from differences in the assumptions used and actual experience. The amor-
tization of the net actuarial loss component of our fiscal 2015 net periodic
benefit cost for the defined benefit plans and postretirement benefit plan is
expected to be approximately $2.6 million and $0.5 million, respectively.
We believe our defined benefit and postretirement benefit plan
assumptions are appropriate based upon the factors discussed above.
However, other assumptions could also be reasonably applied that could
differ from the assumptions used. A quarter-percentage point change in
the defined benefit plans’ discount rate and the expected long-term rate of
return on plan assets would increase or decrease earnings before income
taxes by $0.6 million and $0.5 million, respectively. A quarter-percentage
point change in our postretirement benefit plan discount rate would increase
or decrease earnings before income taxes by $0.1 million. A one-percentage
point increase in the health care cost trend rates would increase the accu-
mulated postretirement benefit obligation (APBO) by $7.4 million at May 25,
2014 and the aggregate of the service cost and interest cost components
of net periodic postretirement benefit cost by $0.5 million for fiscal 2014.
A one-percentage point decrease in the health care cost trend rates would
decrease the APBO by $5.9 million at May 25, 2014 and the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost by $0.4 million for fiscal 2014. These changes in assumptions
would not significantly impact our funding requirements. We expect to
contribute approximately $0.4 million to our defined benefit pension plans
and approximately $1.1 million to our postretirement benefit plan during
fiscal 2015.
Other than the pending sale of Red Lobster and related retirement of
debt, which we expect will enhance our capital structure, we are not aware
of any trends or events that would materially affect our capital requirements
or liquidity. We believe that our internal cash-generating capabilities, the
potential issuance of unsecured debt securities under our shelf registration
statement and short-term commercial paper should be sufficient to finance
our capital expenditures, debt maturities, stock repurchase program and
other operating activities through fiscal 2015.
OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on our financial
condition, changes in financial condition, sales or expenses, results of
operations, liquidity, capital expenditures or capital resources.
FINANCIAL CONDITION
Our total current assets were $1.98 billion at May 25, 2014, compared
with $764.9 million at May 26, 2013. The increase was primarily due
to the increase in assets held for sale as a result of the pending sale of
Red Lobster.
Our total current liabilities were $1.62 billion at May 25, 2014,
compared with $1.42 billion at May 26, 2013. The increase was primarily
due to the increase in liabilities associated with assets held for sale as a
result of the pending sale of Red Lobster, an increase in short-term debt and
an increase in unearned revenues associated with gift card sales in excess
of current-period redemptions.