2013 Annual Report - Investor Relations - Darden Restaurants

Management’s Discussion and Analysisof Financial Condition and Results of OperationsDardenSEASONALITYOur sales volumes fluctuate seasonally. During fiscal 2013, our average sales perrestaurant were highest in the spring and winter, followed by the summer, andlowest in the fall. During fiscal 2012 and 2011, our average sales per restaurantwere highest in the winter and spring, followed by the summer, and lowest in thefall. Holidays, changes in the economy, severe weather and similar conditionsmay impact sales volumes seasonally in some operating regions. Because of theseasonality of our business, results for any quarter are not necessarily indicativeof the results that may be achieved for the full fiscal year.IMPACT OF INFLATIONWe attempt to minimize the annual effects of inflation through appropriate planning,operating practices and menu price increases. We do not believe inflation had asignificant overall effect on our annual results of operations during fiscal 2013or fiscal 2011. However, we experienced higher than normal inflationary costsduring fiscal 2012 and were able to partially reduce the annual impact utilizingthese strategies.CRITICAL ACCOUNTING POLICIESWe prepare our consolidated financial statements in conformity with U.S. generallyaccepted accounting principles. The preparation of these financial statementsrequires us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of sales and expensesduring the reporting period. Actual results could differ from those estimates.Our significant accounting policies are more fully described in Note 1 to theconsolidated financial statements. However, certain of our accounting policiesthat are considered critical are those we believe are both most important to theportrayal of our financial condition and operating results and require our mostdifficult, subjective or complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain. Judgments anduncertainties affecting the application of those policies may result in materiallydifferent amounts being reported under different conditions or using differentassumptions. We consider the following policies to be most critical in understandingthe judgments that are involved in preparing our consolidated financial statements.Land, Buildings and EquipmentLand, buildings and equipment are recorded at cost less accumulated depreciation.Building components are depreciated over estimated useful lives ranging from7 to 40 years using the straight-line method. Leasehold improvements, which arereflected on our consolidated balance sheets as a component of buildings in land,buildings and equipment, net, are amortized over the lesser of the expected leaseterm, including cancelable option periods, or the estimated useful lives of the relatedassets using the straight-line method. Equipment is depreciated over estimateduseful lives ranging from 2 to 10 years, also using the straight-line method.Our accounting policies regarding land, buildings and equipment, includingleasehold improvements, include our judgments regarding the estimated usefullives of these assets, the residual values to which the assets are depreciated oramortized, the determination of what constitutes expected lease term and thedetermination as to what constitutes enhancing the value of or increasing thelife of existing assets. These judgments and estimates may produce materiallydifferent amounts of reported depreciation and amortization expense if differentassumptions were used. As discussed further below, these judgments mayalso impact our need to recognize an impairment charge on the carrying amountof these assets as the cash flows associated with the assets are realized, or as ourexpectations of estimated future cash flows change.LeasesWe are obligated under various lease agreements for certain restaurants. Foroperating leases, we recognize rent expense on a straight-line basis over theexpected lease term, including option periods as described below. Capital leasesare recorded as an asset and an obligation at an amount equal to the presentvalue of the minimum lease payments during the lease term.Within the provisions of certain of our leases, there are rent holidays andescalations in payments over the base lease term, as well as renewal periods. Theeffects of the holidays and escalations have been reflected in rent expense on astraight-line basis over the expected lease term, which includes cancelable optionperiods we are reasonably assured to exercise because failure to exercise suchoptions would result in an economic penalty to the Company. The lease termcommences on the date when we have the right to control the use of the leasedproperty, which is typically before rent payments are due under the terms of thelease. The leasehold improvements and property held under capital leases for eachrestaurant facility are amortized on the straight-line method over the shorter of theestimated life of the asset or the same expected lease term used for lease accountingpurposes. Many of our leases have renewal periods totaling 5 to 20 years,exercisable at our option, and require payment of property taxes, insurance andmaintenance costs in addition to the rent payments. The consolidated financialstatements reflect the same lease term for amortizing leasehold improvements aswe use to determine capital versus operating lease classifications and in calculatingstraight-line rent expense for each restaurant. Percentage rent expense isgenerally based upon sales levels and is accrued when we determine that it isprobable that such sales levels will be achieved. Landlord allowances are recordedbased on contractual terms and are included in accounts receivable, net and as adeferred rent liability and amortized as a reduction of rent expense on a straightlinebasis over the expected lease term.Our judgments related to the probable term for each restaurant affect theclassification and accounting for leases as capital versus operating, the rent holidaysand escalation in payments that are included in the calculation of straight-line rentand the term over which leasehold improvements for each restaurant facilityare amortized. These judgments may produce materially different amounts ofdepreciation, amortization and rent expense than would be reported if differentassumed lease terms were used.Impairment of Long-Lived AssetsLand, buildings and equipment and certain other assets, including definite-livedintangible assets, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of the assets to the future undiscounted net cash flowsexpected to be generated by the assets. Identifiable cash flows are measured atthe lowest level for which they are largely independent of the cash flows of othergroups of assets and liabilities, generally at the restaurant level. If these assets are22 Darden Restaurants, Inc. 2013 Annual Report