Red Lobster 2010 Annual Report Download - page 35

DARDEN RESTAURANTS, INC. | 2010 ANNUAL REPORT 33
Notes to Consolidated Financial Statements
Darden Restaurants
DARDEN RESTAURANTS, INC. | 2010 ANNUAL REPORT 33
Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Darden
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 30, 2010, our discount rate was 5.9 percent and 6.0 percent, respec-
tively, 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 assumed
expected long-term rate of return on plan assets for our defined benefit plan
was 9.0 percent for each of the fiscal years reported. At May 30, 2010, the
expected health care cost trend rate assumed for our postretirement benefit
plan for fiscal 2011 was 8.0 percent. The rate gradually decreases to 5.0
percent through fiscal 2021 and remains at that level thereafter. We made
contributions of approximately $0.4 million, $0.5 million and $0.5 million in
fiscal years 2010, 2009 and 2008, respectively, to our defined benefit pension
plan to maintain its targeted funded status as of each annual valuation date.
Prior to fiscal 2009, our measurement date for our defined benefit and other
postretirement benefit costs and liabilities was as of our third fiscal quarter.
As of May 31, 2009, we adopted the measurement date provisions of FASB
ASC Topic 715, which requires that benefit plan assets and liabilities are
measured as of the end of the benefit plan sponsor’s fiscal year. As a result
of the change in measurement date, in accordance with the provisions of
FASB ASC Topic 715, we recognized a $0.6 million after tax charge to the
beginning balance of our fiscal 2009 retained earnings.
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. Our target asset fund allocation is 35 percent U.S. equities,
30 percent high-quality, long-duration fixed-income securities, 15 percent
international equities, 10 percent real assets and 10 percent private equities.
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 5.8 percent, 8.8 percent and
9.4 percent, respectively, as of May 30, 2010.
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 30, 2010 of $55.3 million and
$11.2 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 amortization
of the net actuarial loss component of our fiscal 2011 net periodic benefit
cost for the defined benefit plans and postretirement benefit plan is expected
to be approximately $4.5 million and $1.3 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 $1.4 million and
$0.5 million, respectively. A quarter-percentage point change in our post-
retirement benefit plan discount rate would increase or decrease earnings
before income taxes by $0.2 million. A one-percentage point increase in the
health care cost trend rates would increase the accumulated postretirement
benefit obligation (APBO) by $8.3 million at May 30, 2010 and the aggregate
of the service cost and interest cost components of net periodic postretirement
benefit cost by $0.5 million for fiscal 2010. A one-percentage point decrease
in the health care cost trend rates would decrease the APBO by $6.5 million
at May 30, 2010 and the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost by $0.4 million for
fiscal 2010. These changes in assumptions would not significantly impact
our funding requirements.
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 2011.
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 opera-
tions, liquidity, capital expenditures or capital resources.
FINANCIAL CONDITION
Our total current assets were $678.5 million at May 30, 2010, compared
with $554.8 million at May 31, 2009. The increase resulted primarily from an
increase in cash and cash equivalents to fund the repayment of debt due in
August 2010, an increase in receivables, net, due to the timing of distribution,
tenant allowances and an increase in the receivable portion of the fair value
interest swap as a result of favorable interest movements, offset by a decrease
in inventory levels due to the timing of inventory purchases, a decrease in
prepaid income taxes due to prior year overpayments and a decrease in
current deferred income tax assets based on current period activity of taxable
timing differences.
Our total current liabilities were $1.25 billion at May 30, 2010, compared
with $1.10 billion at May 31, 2009. The increase in current liabilities resulted
primarily from the reclassification of long-term debt maturing within the next
year, market driven changes in fair value related to our non-qualified deferred
compensation plans, an increase in unearned revenues associated with gift cards
and an increase in accrued bonuses offset by the repayment of short-term debt.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, including fluctuations in interest
rates, foreign currency exchange rates, compensation and commodity prices.
To manage this exposure, we periodically enter into interest rate and foreign
currency exchange instruments, equity forwards and commodity instruments
for other than trading purposes (see Notes 1 and 10 of the Notes to
Consolidated Financial Statements, included elsewhere in this report and
incorporated herein by reference).