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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DARDEN
DARDEN RESTAURANTS, INC. • 2016 ANNUAL REPORT 39
During fiscal 2016, in connection with the repayment of our 2017 and
2021 senior notes, we settled our interest-rate swap agreements for a gain
of $4.1 million, which was recorded as a component of interest, net in our
consolidated statements of earnings and included in the total $106.8 million
of costs associated with the pay down of our debt in fiscal 2016. The swap
agreements effectively swapped the fixed-rate obligations for floating-rate
obligations, thereby mitigating changes in fair value of the related debt prior
to maturity. 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 fiscal 2016, 2015 and 2014, $1.7 million, $3.6 million and $2.9 million,
respectively, 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 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 four
and five years. The contracts were 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. As of May 29, 2016, we were party
to equity forward contracts that were indexed to 0.9 million shares of our
common stock, at varying forward rates between $40.69 per share and
$60.60 per share, extending through September 2020. 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 or received.
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. 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 compen-
sation plan within general and administrative expenses in our consolidated
statements of earnings. As of May 29, 2016, we were party to an equity
forward contract that was indexed to 0.1 million shares of our common stock
at forward rate of $41.03 per share, can only be net settled in cash and
expires in fiscal 2019.
The notional and fair values of our derivative contracts are as follows:
Notional Values Fair Values
Derivative Assets Derivative Liabilities
Balance
May 29, May 31, Sheet May 29, May 31, May 29, May 31,
(in millions)
2016 2015 Location 2016 2015 2016 2015
Derivative contracts designated as hedging instruments
Equity forwards $14.9 $ 11.4 (1) $1.2 $0.4 $ — $ —
Interest rate related — 200.0 (1) — 3.6 — —
$1.2 $4.0 $ — $ —
Derivative contracts not designated as hedging instruments
Equity forwards $28.2 $ 51.7 (1) $2.6 $1.3 $ — $ —
$2.6 $1.3 $ — $ —
Total derivative contracts $3.8 $5.3 $ — $ —
(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 in 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
2016 2015 2014 2016 2015 2014 2016 2015 2014
Equity $2.0 $2.1 $(3.5) (2) $ 2.1 $ (1.0) $ (0.8) (2) $0.9 $1.1 $1.4
Interest rate — — — Interest, net (37.4) (45.7) (10.3) Interest, net — — —
$2.0 $2.1 $(3.5) $(35.3) $(46.7) $(11.1) $0.9 $1.1 $1.4
(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 restaurant labor expenses and
general and administrative expenses.
.