Edgar Filing: DARDEN RESTAURANTS INC

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 28, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

1-13666

Commission File Number

DARDEN RESTAURANTS, INC.

(Exact name of registrant as specified in its charter)


Florida		59-3305930
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1000 Darden Center Drive, Orlando, Florida		32837
(Address of principal executive offices)		(Zip Code)

407-245-4000

(Registrant’s telephone number, including area code)

Not applicable (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

Number of shares of common stock outstanding as of December 15, 2010: 138,092,202 (excluding 148,267,414 shares held in our treasury).

DARDEN RESTAURANTS, INC.

TABLE OF CONTENTS


			Page
Part I - Financial Information
	Item 1.	Financial Statements (Unaudited)		3
		Consolidated Statements of Earnings		3
		Consolidated Balance Sheets		4
		Consolidated Statements of Changes in Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss)		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements (Unaudited)		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		27
	Item 4.	Controls and Procedures		27

Part II - Other Information
	Item 1.	Legal Proceedings		27
	Item 1A.	Risk Factors		28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28
	Item 6.	Exhibits		28

Signatures				29

Index to Exhibits				30

Cautionary Statement Regarding Forward-Looking Statements

Statements in this report regarding the expected net increase in the number of our restaurants, U.S. same-restaurant sales, total sales growth, diluted net earnings per share growth, and capital expenditures in fiscal 2011, and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. For further information regarding such forward-looking statements, risks and uncertainties, please see “Forward-Looking Statements” under Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In millions, except per share data)

(Unaudited)


	Quarter Ended						Six Months Ended
	November 28, 2010			November 29, 2009			November 28, 2010			November 29, 2009
Sales	$	1,726.2		$	1,641.3		$	3,532.9		$	3,375.3
Costs and expenses:
Cost of sales:
Food and beverage		494.7			471.3			1,002.2			971.6
Restaurant labor		571.9			563.7			1,150.7			1,131.7
Restaurant expenses		274.9			257.4			554.0			524.8

Total cost of sales, excluding restaurant depreciation and amortization of $72.8, $69.6, $144.5 and $139.1, respectively	$	1,341.5		$	1,292.4		$	2,706.9		$	2,628.1
Selling, general and administrative		180.0			169.9			360.9			341.3
Depreciation and amortization		78.0			73.8			154.7			146.7
Interest, net		23.5			24.5			48.1			48.3


Total costs and expenses	$	1,623.0		$	1,560.6		$	3,270.6		$	3,164.4


Earnings before income taxes		103.2			80.7			262.3			210.9
Income taxes		(27.4	)		(19.5	)		(73.3	)		(54.8	)

Earnings from continuing operations	$	75.8		$	61.2		$	189.0		$	156.1
Losses from discontinued operations, net of tax benefit of $0.8, $0.6, $0.9 and $1.0, respectively		(1.3	)		(0.9	)		(1.4	)		(1.5	)

Net earnings	$	74.5		$	60.3		$	187.6		$	154.6


Basic net earnings per share:
Earnings from continuing operations	$	0.55		$	0.44		$	1.37		$	1.12
Losses from discontinued operations		(0.01	)		(0.01	)		(0.01	)		(0.01	)

Net earnings	$	0.54		$	0.43		$	1.36		$	1.11

Diluted net earnings per share:
Earnings from continuing operations	$	0.54		$	0.43		$	1.34		$	1.10
Losses from discontinued operations		(0.01	)		—			(0.01	)		(0.01	)

Net earnings	$	0.53		$	0.43		$	1.33		$	1.09

Average number of common shares outstanding:
Basic		137.6			139.0			138.1			138.8
Diluted		141.2			141.7			141.5			141.6

Dividends declared per common share	$	0.32		$	0.25		$	0.64		$	0.50

See accompanying notes to our unaudited consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions)


	November 28, 2010			May 30, 2010
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	52.9		$	248.8
Receivables, net		56.0			53.2
Inventories		273.9			220.8
Prepaid income taxes		3.7			1.5
Prepaid expenses and other current assets		55.8			52.4
Deferred income taxes		120.7			101.8

Total current assets	$	563.0		$	678.5
Land, buildings and equipment, net of accumulated depreciation and amortization of $2,444.3 and $2,332.8, respectively		3,520.6			3,403.7
Goodwill		517.3			517.3
Trademarks		454.0			454.0
Other assets		197.4			193.9

Total assets	$	5,252.3		$	5,247.4


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	255.5		$	246.4
Short-term debt		168.0			—
Accrued payroll		128.0			161.8
Accrued income taxes		—			1.0
Other accrued taxes		52.4			62.0
Unearned revenues		156.7			167.2
Current portion of long-term debt		75.0			225.0
Other current liabilities		419.8			391.2

Total current liabilities	$	1,255.4		$	1,254.6
Long-term debt, less current portion		1,408.8			1,408.7
Deferred income taxes		276.6			268.6
Deferred rent		178.5			170.1
Obligations under capital leases, net of current installments		56.9			57.6
Other liabilities		197.5			193.8

Total liabilities	$	3,373.7		$	3,353.4

Stockholders’ equity:
Common stock and surplus	$	2,350.9		$	2,297.9
Retained earnings		2,721.0			2,621.9
Treasury stock		(3,112.5	)		(2,943.5	)
Accumulated other comprehensive income (loss)		(70.4	)		(71.1	)
Unearned compensation		(10.4	)		(11.2	)

Total stockholders’ equity	$	1,878.6		$	1,894.0

Total liabilities and stockholders’ equity	$	5,252.3		$	5,247.4

See accompanying notes to our unaudited consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

For the six months ended November 28, 2010 and November 29, 2009

(In millions)

(Unaudited)


	Common Stock And Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation			Officer Notes Receivable		Total Stockholders’ Equity
Balance at May 30, 2010	$	2,297.9	$	2,621.9		$	(2,943.5	)	$	(71.1	)	$	(11.2	)	$	—	$	1,894.0
Comprehensive income:
Net earnings		—		187.6			—			—			—			—		187.6
Other comprehensive income (loss):
Foreign currency adjustment		—		—			—			0.6			—			—		0.6
Change in fair value of marketable securities, net of tax of $0.1		—		—			—			0.2			—			—		0.2
Change in fair value of derivatives, net of tax of $4.1		—		—			—			(3.2	)		—			—		(3.2	)
Amortization of unrecognized net actuarial loss, net of tax of $1.9		—		—			—			3.1			—			—		3.1

Total comprehensive income																		188.3
Cash dividends declared		—		(88.5	)		—			—			—			—		(88.5	)
Stock option exercises (1.1 shares)		26.1		—			1.0			—			—			—		27.1
Stock-based compensation		16.5		—			—			—			—			—		16.5
ESOP note receivable repayments		—		—			—			—			0.8			—		0.8
Income tax benefits credited to equity		7.4		—			—			—			—			—		7.4
Purchases of common stock for treasury (4.0 shares)		—		—			(170.7	)		—			—			—		(170.7	)
Issuance of treasury stock under Employee Stock Purchase Plan and other plans (0.1 shares)		3.0		—			0.7			—			—			—		3.7

Balance at November 28, 2010	$	2,350.9	$	2,721.0		$	(3,112.5	)	$	(70.4	)	$	(10.4	)	$	—	$	1,878.6


	Common Stock And Surplus		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Unearned Compensation			Officer Notes Receivable			Total Stockholders’ Equity
Balance at May 31, 2009	$	2,183.1	$	2,357.4		$	(2,864.2	)	$	(57.2	)	$	(13.0	)	$	(0.1	)	$	1,606.0
Comprehensive income:
Net earnings		—		154.6			—			—			—			—			154.6
Other comprehensive income (loss):
Foreign currency adjustment		—		—			—			1.4			—			—			1.4
Change in fair value of marketable securities, net of tax of $0.1		—		—			—			0.2			—			—			0.2
Change in fair value of derivatives, net of tax of $1.4		—		—			—			(3.5	)		—			—			(3.5	)
Amortization of unrecognized net actuarial loss, net of tax of $0.6		—		—			—			1.0			—			—			1.0

Total comprehensive income																			153.7
Cash dividends declared		—		(69.9	)		—			—			—			—			(69.9	)
Stock option exercises (0.3 shares)		4.6		—			0.6			—			—			—			5.2
Stock-based compensation		16.5		—			—			—			—			—			16.5
ESOP note receivable repayments		—		—			—			—			0.9			—			0.9
Income tax benefits credited to equity		1.9		—			—			—			—			—			1.9
Purchases of common stock for treasury (0.1 shares)		—		—			(2.2	)		—			—			—			(2.2	)
Issuance of treasury stock under Employee Stock Purchase Plan and other plans (0.2 shares)		3.0		—			0.8			—			—			—			3.8
Repayment of officer notes		—		—			—			—			—			0.1			0.1

Balance at November 29, 2009	$	2,209.1	$	2,442.1		$	(2,865.0	)	$	(58.1	)	$	(12.1	)	$	—		$	1,716.0

See accompanying notes to our unaudited consolidated financial statements.

DARDEN RESTAURANTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)


	Six Months Ended
	November 28, 2010			November 29, 2009
Cash flows—operating activities
Net earnings	$	187.6		$	154.6
Losses from discontinued operations, net of tax benefit		1.4			1.5
Adjustments to reconcile net earnings from continuing operations to cash flows:
Depreciation and amortization		154.7			146.7
Asset impairment charges		2.9			2.8
Amortization of loan costs		1.5			1.6
Stock-based compensation expense		31.1			23.0
Change in current assets and liabilities		(85.5	)		(16.1	)
Contributions to pension and postretirement plans		(6.0	)		(0.8	)
Loss (gain) on disposal of land, buildings and equipment		2.4			(0.4	)
Change in cash surrender value of trust-owned life insurance		(6.0	)		(6.3	)
Deferred income taxes		(6.8	)		4.5
Change in deferred rent		8.7			7.6
Change in other liabilities		(5.4	)		(10.6	)
Income tax benefits from exercise of stock-based compensation credited to goodwill		0.1			0.2
Other, net		1.4			2.2

Net cash provided by operating activities of continuing operations	$	282.1		$	310.5


Cash flows—investing activities
Purchases of land, buildings and equipment		(276.2	)		(214.4	)
Proceeds from disposal of land, buildings and equipment		4.3			8.8
Purchases of marketable securities		(2.3	)		—
Proceeds from sale of marketable securities		4.4			1.7
Increase in other assets		(6.1	)		(2.7	)

Net cash used in investing activities of continuing operations	$	(275.9	)	$	(206.6	)


Cash flows—financing activities
Proceeds from issuance of common stock		30.7			8.6
Dividends paid		(88.3	)		(69.9	)
Purchases of treasury stock		(170.7	)		(2.2	)
Income tax benefits credited to equity		7.4			1.9
Proceeds from issuance (repayments) of short-term debt, net		168.0			(47.7	)
ESOP note receivable repayment		0.8			0.9
Principal payments on capital leases		(0.7	)		(0.6	)
Repayment of long-term debt		(150.8	)		(0.9	)

Net cash used in financing activities of continuing operations	$	(203.6	)	$	(109.9	)

Cash flows—discontinued operations
Net cash used in operating activities of discontinued operations		(1.3	)		(0.6	)
Net cash provided by investing activities of discontinued operations		2.8			0.6

Net cash provided by (used in) discontinued operations	$	1.5		$	—


Decrease in cash and cash equivalents		(195.9	)		(6.0	)
Cash and cash equivalents - beginning of period		248.8			62.9

Cash and cash equivalents - end of period	$	52.9		$	56.9


Cash flows from changes in current assets and liabilities
Receivables, net		(0.6	)		(10.5	)
Inventories		(53.2	)		(4.4	)
Prepaid expenses and other current assets		—			(13.8	)
Accounts payable		6.9			(2.5	)
Accrued payroll		(33.8	)		(13.9	)
Prepaid/accrued income taxes		(3.1	)		47.7
Other accrued taxes		(9.6	)		(5.3	)
Unearned revenues		(10.5	)		(13.0	)
Other current liabilities		18.4			(0.4	)

Change in current assets and liabilities	$	(85.5	)	$	(16.1	)

See accompanying notes to our unaudited consolidated financial statements.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

Darden Restaurants, Inc. (we, our or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Red Lobster^®, Olive Garden^®, LongHorn Steakhouse^®, The Capital Grille^®, Bahama Breeze^®, and Seasons 52^®. We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the quarter and six months ended November 28, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending May 29, 2011.

These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 30, 2010. The accounting policies used in preparing these consolidated financial statements are the same as those described in our Form 10-K.

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Unless otherwise noted, amounts and disclosures throughout the notes to consolidated financial statements relate to our continuing operations.

Note 2. Supplemental Cash Flow Information


(in millions)	Six Months Ended
	November 28, 2010		November 29, 2009
Interest paid, net of amounts capitalized	$	48.8	$	46.3
Income taxes paid, net of refunds		73.9		4.4

Note 3. Stock-Based Compensation

We grant stock options for a fixed number of shares to certain employees and directors with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units, and performance stock units with a fair value determined based on our closing stock price on the date of grant. In addition, we also grant cash settled stock units and cash settled performance stock units, which are classified as liabilities and are marked to market as of the end of each fiscal period.

The weighted-average fair value of stock options granted and the related assumptions used in the Black-Scholes option pricing model as of November 28, 2010 and November 29, 2009, were as follows:


	Stock Options Granted During the Six Months Ended
	November 28, 2010			November 29, 2009
Weighted-average fair value	$	12.82		$	10.71
Risk-free interest rate		2.21	%		2.96	%
Expected volatility of stock		39.1	%		40.6	%
Dividend yield		3.01	%		2.84	%
Expected option life		6.7 years			6.6 years

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents a summary of our stock-based compensation activity for the six months ended November 28, 2010:


(in millions)	Stock Options			Restricted Stock/ Restricted Stock Units			Darden Stock Units			Performance Stock Units
Outstanding beginning of period		13.9			0.8			1.6			0.9
Awards granted		1.4			—			0.6			0.3
Awards exercised		(1.1	)		(0.2	)		(0.2	)		(0.2	)
Awards forfeited		—			—			—			—

Outstanding end of period		14.2			0.6			2.0			1.0

During the quarters and six months ended November 28, 2010 and November 29, 2009, we recognized expense from stock-based compensation as follows:


(in millions)	Quarter Ended				Six Months Ended
	November 28, 2010		November 29, 2009		November 28, 2010		November 29, 2009
Stock options	$	5.1	$	5.1	$	10.0	$	9.5
Restricted stock/restricted stock units		2.2		2.5		4.3		4.8
Darden stock units		5.8		2.3		8.2		4.3
Performance stock units		3.3		1.7		6.4		2.2
Employee stock purchase plan		0.5		0.5		0.9		0.9
Director compensation program/other		1.0		1.1		1.3		1.3

Total stock-based compensation expense	$	17.9	$	13.2	$	31.1	$	23.0

Note 4. Income Taxes

The effective income tax rate for the quarter and six months ended November 28, 2010 was 26.6 percent and 27.9 percent, respectively, compared to an effective income tax rate of 24.2 percent and 26.0 percent for the quarter and six months ended November 29, 2009, respectively. The increase in the effective income tax rate during the second quarter and the first six months of fiscal 2011 is primarily attributable to the impact in fiscal 2010 of the favorable resolution of prior year tax matters expensed in prior years and due to an increase in earnings before income taxes.

We do not expect that the remaining balance of unrecognized tax benefits will change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.

Note 5. Long-Term Debt

We maintain a $750.0 million revolving credit facility under a Credit Agreement (Revolving Credit Agreement) dated September 20, 2007 with Bank of America, N.A. (BOA), as administrative agent, and the lenders (Revolving Credit Lenders) and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations, affirmative and negative covenants (including limitations on liens and subsidiary debt, and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. As of November 28, 2010, we were in compliance with the covenants under the Revolving Credit Agreement.

The Revolving Credit Agreement matures on September 20, 2012, and the proceeds may be used for commercial paper back-up, working capital and capital expenditures, the refinancing of certain indebtedness as well as general corporate purposes. The Revolving Credit Agreement also contains a sub-limit of $150.0 million for the issuance of letters of credit. The borrowings and letters of credit obtained under the Revolving Credit Agreement may be denominated in U.S. Dollars, Euro, Sterling, Yen, Canadian Dollars and each other currency approved by the Revolving Credit Lenders. The Company may elect to increase the commitments under the Revolving Credit Agreement by up to $250.0 million (to an aggregate amount of up to $1.0 billion), subject to the Company obtaining commitments from new and existing lenders for the additional amounts.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid, or the base rate (which is defined as the higher of the BOA prime rate or the Federal Funds rate plus 0.500 percent). Assuming a “BBB” equivalent credit rating level, the applicable margin under the Revolving Credit Agreement will be 0.350 percent. We may also request that loans under the Revolving Credit Agreement be made at interest rates offered by one or more of the Revolving Credit Lenders, which may vary from the LIBOR or base rate, for up to $100.0 million of borrowings. The Revolving Credit Agreement requires that we pay a facility fee on the total amount of such facility (ranging from 0.070 percent to 0.175 percent, based on our credit ratings) and, in the event that the outstanding amounts under the applicable Revolving Credit Agreement exceeds 50 percent of the aggregate commitments under such Revolving Credit Agreement, a utilization fee on the total amount outstanding under such facility (ranging from 0.050 percent to 0.150 percent, based on our credit ratings). As of November 28, 2010, we had no outstanding balances under the Revolving Credit Agreement. As of November 28, 2010, $168.0 million of commercial paper and $68.2 million of letters of credit were outstanding, which are backed by this facility. After consideration of borrowings currently outstanding and commercial paper and letters of credit backed by the Revolving Credit Agreement, as of November 28, 2010, we had $513.8 million of credit available under the Revolving Credit Agreement.

The interest rates on our $350.0 million 5.625 percent senior notes due October 2012, $500.0 million 6.200 percent senior notes due October 2017 and $300.0 million 6.800 percent senior notes due October 2037 (collectively, the New Senior Notes) are subject to adjustment from time to time if the debt rating assigned to such series of the New Senior Notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of November 28, 2010, no adjustments to these interest rates had been made.

During the quarter ended August 29, 2010, we repaid, at maturity, our $150.0 million 4.875 percent senior notes due August 2010 with excess cash from operations. Our $75.0 million of 7.450 percent medium-term notes due April 2011 are included in current liabilities as current portion of long-term debt. Following maturity of the notes due April 2011, we expect to issue unsecured debt securities that will effectively refinance both the notes that matured during the quarter ended August 29, 2010 and the notes due April 2011.

Note 6. Net Earnings per Share

Outstanding stock options and restricted stock granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding. Options and restricted stock do not impact the numerator of the diluted net earnings per share computation. Restricted stock and options to purchase shares of common stock totaling 1.4 million and 7.4 million shares were excluded from the calculation of diluted net earnings per share for the quarters ended November 28, 2010 and November 29, 2009, respectively, because the effect would have been anti-dilutive. Restricted stock and options to purchase shares of common stock totaling 1.1 million and 6.9 million shares were excluded from the calculation of diluted net earnings per share for the six months ended November 28, 2010 and November 29, 2009, respectively, for the same reason.

Note 7. Stockholders’ Equity

On December 17, 2010, our Board of Directors approved an additional share repurchase authorization totaling 25.0 million shares, bringing the total shares authorized to be repurchased to 187.4 million shares. Pursuant to the previous authorizations of our Board of Directors to repurchase up to 162.4 million shares of our common stock in accordance with applicable securities laws, we repurchased 1.6 million and 4.0 million shares of our common stock for $75.1 million and $170.7 million, respectively, during the quarter and six months ended November 28, 2010, resulting in a cumulative repurchase of 158.1 million shares as of November 28, 2010.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 8. Retirement Plans

Components of net periodic benefit cost are as follows:


(in millions)	Defined Benefit Plans						Postretirement Benefit Plan
	Quarter Ended						Quarter Ended
	November 28, 2010			November 29, 2009			November 28, 2010		November 29, 2009
Service cost	$	1.5		$	1.4		$	0.3	$	0.5
Interest cost		2.4			2.9			0.6		0.2
Expected return on plan assets		(4.1	)		(4.1	)		—		—
Recognized net actuarial loss		1.2			0.3			0.3		0.3

Net periodic benefit cost	$	1.0		$	0.5		$	1.2	$	1.0


(in millions)	Defined Benefit Plans						Postretirement Benefit Plan
	Six Months Ended						Six Months Ended
	November 28, 2010			November 29, 2009			November 28, 2010		November 29, 2009
Service cost	$	3.0		$	2.8		$	0.5	$	1.0
Interest cost		4.8			5.9			1.2		0.4
Expected return on plan assets		(8.1	)		(8.2	)		—		—
Recognized net actuarial loss		2.3			0.5			0.6		0.5

Net periodic benefit cost	$	2.0		$	1.0		$	2.3	$	1.9

Note 9. Derivative Instruments and Hedging Activities

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing and foreign currency exchange rate risks inherent in our business operations. To the extent our derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the cash flow hedge accounting criteria required by Topic 815 of the FASB ASC, changes in the derivatives’ fair value are not included in current earnings but are included in accumulated other comprehensive income (loss), net of tax. These changes in fair value will be reclassified into earnings at the time of the forecasted transaction. Ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period in which it occurs. To the extent our derivatives are effective in mitigating changes in fair value, and otherwise meet the fair value hedge accounting criteria required by Topic 815 of the FASB ASC, gains and losses in the derivatives’ fair value are included in current earnings, as are the gains and losses of the related hedged item. To the extent the hedge accounting criteria are not met, the derivative contracts are utilized as economic hedges and changes in the fair value of such contracts are recorded currently in earnings in the period in which they occur.

By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. We currently do not have any provisions in our agreements with counterparties that would require either party to hold or post collateral in the event that the market value of the related derivative instrument exceeds a certain limit. As such, the maximum amount of loss due to counterparty credit risk we would incur at November 28, 2010, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets in our consolidated balance sheet. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The notional values of derivative contracts designated as hedging instruments and derivative contracts that are not designated as hedging instruments as of November 28, 2010 and May 30, 2010, are as follows:


	Notional Values
(in millions)	November 28, 2010		May 30, 2010
Derivative contracts designated as hedging instruments

Natural gas	$	10.4	$	3.2
Foreign currency		11.8		18.9
Interest rate locks		150.0		150.0
Interest rate swaps		425.0		375.0
Equity forwards		21.6		12.6

Derivative contracts not designated as hedging instruments

Natural gas	$	—	$	0.6
Other commodities		1.0		4.2
Equity forwards		15.8		12.8

We periodically enter into natural gas futures, swaps and option contracts (collectively “natural gas contracts”) to reduce the risk of variability in cash flows associated with fluctuations in the price of natural gas during the fiscal year. For a certain portion of our natural gas purchases, changes in the price we pay for natural gas is highly correlated with changes in the market price of natural gas. For these natural gas purchases, we designate natural gas contracts as cash flow hedging instruments. For the remaining portion of our natural gas purchases, changes in the price we pay for natural gas are not highly correlated with changes in the market price of natural gas, generally due to the timing of when changes in the market prices are reflected in the price we pay. For these natural gas purchases, we utilize natural gas contracts as economic hedges. As of November 28, 2010, our natural gas contracts extend through September 2011.

We periodically enter into other commodity futures and swaps (typically for soybean oil, milk, diesel fuel and butter) to reduce the risk of fluctuations in the price we pay for these commodities, which are either used directly in our restaurants (i.e., class III milk contracts for cheese and soybean oil for salad dressing) or are components of the cost we pay for items used in our restaurants (i.e., diesel fuel contracts to mitigate risk related to diesel fuel surcharges charged by our distributors). As of November 28, 2010, our other commodity futures and swap contracts extend through February 2011.

We periodically enter into foreign currency forward contracts to reduce the risk of fluctuations in exchange rates specifically related to forecasted transactions or payments made in a foreign currency either for commodities and items used directly in our restaurants or for forecasted payments of services. As of November 28, 2010, our foreign currency forward contracts extend through August 2011.

We entered into treasury-lock derivative instruments with $150.0 million of notional value to hedge a portion of the risk of changes in the benchmark interest rate associated with the expected issuance of long-term debt to refinance our $150.0 million 4.875 percent senior notes due August 2010 and our $75.0 million 7.450 percent medium-term notes due April 2011, as changes in the benchmark interest rate will cause variability in our forecasted interest payments. These derivative instruments are designated as cash flow hedges.

During the quarter ended August 29, 2010, we entered into forward-starting interest rate swap agreements with $200.0 million of notional value to hedge a portion of the risk of changes in the benchmark interest rate associated with the expected issuance of long-term debt to refinance our $350.0 million 5.625 percent senior notes due October 2012, as changes in the benchmark interest rate will cause variability in our forecasted interest payments. These derivative instruments are designated as cash flow hedges.

During fiscal 2010, we entered into interest rate swap agreements with $375.0 million of notional value to limit the risk of changes in fair value of our $150.0 million 4.875 percent senior notes due August 2010, $75.0 million 7.450 percent medium-term notes due April 2011, and a portion of the $350 million 5.625 percent senior notes due October 2012 attributable to changes in the benchmark interest rate, between now and maturity of the related debt. Concurrent with the maturity of the $150.0 million senior notes due August 2010, interest rate swap

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

agreements with a notional value of $150.0 million expired during the quarter ended August 29, 2010. Accordingly, as of August 29, 2010, the remaining notional value of these swap agreements was $225.0 million. The swap agreements effectively swap 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 the quarters ended November 28, 2010 and November 29, 2009, $0.9 million and $1.1 million, respectively, was recorded as a reduction to interest expense related to the net swap settlements. During the six months ended November 28, 2010 and November 29, 2009, $1.9 million and $1.5 million, respectively, was recorded as a reduction to interest expense related to the 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 November 28, 2010, we were party to equity forward contracts that were indexed to 0.9 million shares of our common stock, at varying forward rates between $27.57 per share and $42.08 per share, extending through August 2015. 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 employee-directed investments in Darden stock within the non-qualified deferred compensation plan. The equity forward contracts are indexed to 0.2 million shares of our common stock at forward rates between $23.41 and $37.44 per share, can only be net settled in cash and expire between fiscal 2011 and 2013. 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 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 as of November 28, 2010 and May 30, 2010, are as follows:


	Balance Sheet Location	Derivative Assets				Derivative Liabilities
(in millions)	Balance Sheet Location	November 28, 2010		May 30, 2010		November 28, 2010			May 30, 2010
Derivative contracts designated as hedging instruments

Commodity contracts	(1)	$	0.2	$	—	$	—		$	(0.6	)
Equity forwards	(1)		0.3		—		—			(0.4	)
Interest rate related	(1)		4.4		3.4		(22.1	)		(10.5	)
Foreign currency forwards	(1)		0.9		1.1		—			—

		$	5.8	$	4.5	$	(22.1	)	$	(11.5	)

Derivative contracts not designated as hedging instruments

Commodity contracts	(1)	$	0.1	$	—	$	—		$	—
Equity forwards	(1)		0.2		—		—			(0.6	)

		$	0.3	$	—	$	—		$	(0.6	)

Total derivative contracts		$	6.1	$	4.5	$	(22.1	)	$	(12.1	)

(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.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The effects of derivative instruments in cash flow hedging relationships on the consolidated statements of earnings for the quarters and six months ended November 28, 2010 and November 29, 2009 are as follows:


(in millions)	Amount of Gain (Loss) Recognized in AOCI (effective portion)						Location of Gain (Loss) Reclassified from AOCI to Earnings	Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion)						Location of Gain (Loss) Recognized in Earnings (ineffective portion)		(1) Amount of Gain (Loss) Recognized in Earnings (ineffective portion)
	Quarter Ended							Quarter Ended								Quarter Ended
Type of Derivative	November 28, 2010			November 29, 2009				November 28, 2010			November 29, 2009					November 28, 2010			November 29, 2009
Commodity	$	0.2		$	0.4		(2)	$	(0.5	)	$	(1.3	)		(2)	$	—		$	—
Equity		3.9			(0.9	)	(3)		—			—			(3)		—			0.1
Interest rate		8.9			(4.3	)	Interest, net		0.2			0.1			Interest, net		(0.3	)		—
Foreign currency		(0.1	)		0.4		(4)		—			—			(4)		—			—

	$	12.9		$	(4.4	)		$	(0.3	)	$	(1.2	)			$	(0.3	)	$	0.1


(in millions)	Amount of Gain (Loss) Recognized in AOCI (effective portion)						Location of Gain (Loss) Reclassified from AOCI to Earnings	Amount of Gain (Loss) Reclassified from AOCI to Earnings (effective portion)						Location of Gain (Loss) Recognized in Earnings (ineffective portion)	(1) Amount of Gain (Loss) Recognized in Earnings (ineffective portion)
	Six Months Ended							Six Months Ended							Six Months Ended
Type of Derivative	November 28, 2010			November 29, 2009				November 28, 2010			November 29, 2009				November 28, 2010			November 29, 2009
Commodity	$	—		$	(0.8	)	(2)	$	(0.9	)	$	(2.7	)	(2)	$	—		$	—
Equity		3.5			(0.8	)	(3)		—			—		(3)		0.1			0.1
Interest rate		(11.3	)		(5.9	)	Interest, net		0.3			0.3		Interest, net		(0.3	)		—
Foreign currency		—			0.6		(4)		0.1			0.1		(4)		—			—

	$	(7.8	)	$	(6.9	)		$	(0.5	)	$	(2.3	)		$	(0.2	)	$	0.1

(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 will generally 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.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The effects of derivative instruments in fair value hedging relationships on the consolidated statements of earnings for the quarters and six months ended November 28, 2010 and November 29, 2009 are as follows:

(in millions)

Derivatives in Fair Value Hedging Relationships

Amount of Gain (Loss)
Recognized in Earnings on
Derivatives

Location of

Gain (Loss)

Recognized

in Earnings on

Derivatives

Hedged Item in

Fair Value

Hedge

Relationship

Amount of Gain (Loss)
Recognized in Earnings on
Related Hedged Item

Location of

Gain (Loss)

Recognized

in Earnings on
Related

Hedged Item

Quarter Ended

November 28,
2010

November 29,
2009

November 28,
2010

November 29,
2009

Interest rate

(0.6

)

2.1

Interest, net

Fixed-rate debt

0.6

(2.1

)

Interest, net

(in millions)

Derivatives in Fair Value Hedging Relationships

Amount of Gain (Loss)
Recognized in Earnings on
Derivatives

Location of
Gain (Loss)
Recognized
in Earnings on
Derivatives

Hedged Item in
Fair Value
Hedge
Relationship

Amount of Gain (Loss)
Recognized in Earnings on
Related Hedged Item

Location of
Gain (Loss)
Recognized
in Earnings on
Related
Hedged Item

Quarter Ended

November 28,
2010

November 29,
2009

November 28,
2010

November 29,
2009

Interest rate

0.9

4.0

Interest, net

Fixed-rate debt

(0.9

)

(4.0

)

Interest, net

The effects of derivatives not designated as hedging instruments on the consolidated statements of earnings for the quarters and six months ended November 28, 2010 and November 29, 2009 are as follows:


	Location of Gain (Loss) Recognized in Earnings on Derivatives		Amount of Gain (Loss) Recognized in Earnings
			Quarter Ended					Six Months Ended
			November 28,		November 29,			November 28,		November 29,
(in millions)			2010		2009			2010		2009
Commodity contracts		(1)	$	0.1	$	0.1		$	—	$	(0.1	)
Equity forwards		(2)		2.6		(0.6	)		2.5		(1.9	)
Equity forwards		Selling, General and Administrative		1.2		(0.4	)		1.2		(0.8	)

			$	3.9	$	(0.9	)	$	3.7	$	(2.8	)

(1)	Location of the gain (loss) recognized in earnings is food and beverage costs and restaurant expenses, which are components of cost of sales.

(2)	Location of the gain (loss) recognized in earnings is restaurant labor expenses, which is a component of cost of sales.

Based on the fair value of our derivative instruments designated as cash flow hedges as of November 28, 2010, we expect to reclassify $1.3 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next twelve months based on the timing of our forecasted commodity purchases and maturity of equity forward and interest rate related instruments. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10. Fair Value Measurements

The fair values of cash equivalents, accounts receivable, accounts payable and short-term debt approximate their carrying amounts due to their short duration.

The following table summarizes the fair values of financial instruments measured at fair value on a recurring basis as reflected in our unaudited consolidated balance sheet as of November 28, 2010:


Items Measured at Fair Value
(in millions)			Fair value of assets (liabilities) as of November 28, 2010			Quoted prices in active market for identical assets (liabilities) (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Fixed-income securities:
Corporate bonds	(1	)	$	15.8		$	—	$	15.8		$	—
U.S. Treasury securities	(2	)		8.6			8.6		—			—
Mortgage-backed securities	(1	)		4.4			—		4.4			—
Derivatives:
Commodities futures, swaps & options	(3	)		0.3			—		0.3			—
Equity forwards	(4	)		0.5			—		0.5			—
Interest rate locks & swaps	(5	)		(17.7	)		—		(17.7	)		—
Foreign currency forwards	(6	)		0.9			—		0.9			—

Total			$	12.8		$	8.6	$	4.2		$	—

(1)	The fair value of these securities is based on the closing market prices of the investments when applicable, or, alternatively, valuations utilizing market data and other observable inputs, inclusive of the risk of nonperformance.

(2)	The fair value of our U.S. Treasury securities is based on the closing market prices.

(3)	The fair value of our commodities futures, swaps and options is based on the closing market prices of the contracts, inclusive of the risk of nonperformance.

(4)	The fair value of our equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.

(5)	The fair value of our interest rate lock and swap agreements is based on current and expected market interest rates, inclusive of the risk of nonperformance.

(6)	The fair value of our foreign currency forward contracts is based on the closing forward exchange market prices, inclusive of the risk of nonperformance.

The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of November 28, 2010 was $1.48 billion and $1.59 billion, respectively. The carrying value and fair value of long-term debt, including the amounts included in current liabilities, as of May 30, 2010 was $1.63 billion and $1.71 billion, respectively. The fair value of long-term debt is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the fair values of non-financial assets measured at fair value on a non-recurring basis as of November 28, 2010:


Items Measured at Fair Value
(in millions)		Fair value of assets as of November 28, 2010		Quoted prices in active market for identical assets (liabilities) (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Long-lived assets held for disposal	(1)	$	3.7	$	—	$	—	$	3.7
Long-lived assets held and used	(2)		1.9		—		—		1.9

Total		$	5.6	$	—	$	—	$	5.6

(1)

In accordance with the provisions of ASC Topic 360, Property, Plant and Equipment, during the six months ended November 28, 2010, long-lived assets held for disposal with a carrying amount of $5.9 were written down to their fair value of $3.7 million, based on a review of comparable assets, resulting in an impairment charge of $2.2 million, of which $1.7 was included in earnings from continuing operations and $0.5 million was included in losses from discontinued operations.

(2)

In accordance with the provisions of ASC Topic 360, Property, Plant and Equipment, during the six months ended November 28, 2010, long-lived assets held and used with a carrying amount of $2.8 million were written down to their fair value of $1.9 million, based on a review of comparable assets, resulting in an impairment charge of $0.9 million, which was included in earnings from continuing operations.

Note 11. Commitments and Contingencies

As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of November 28, 2010 and May 30, 2010, we had $96.4 million and $97.3 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of November 28, 2010 and May 30, 2010, we had $18.4 million and $20.1 million, respectively, of standby letters of credit related to contractual operating lease obligations and other payments. All standby letters of credit are renewable annually.

As of November 28, 2010 and May 30, 2010, we had $8.1 million and $9.0 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of these potential payments discounted at our pre-tax cost of capital as of November 28, 2010 and May 30, 2010, amounted to $5.9 million and $6.4 million, respectively. During the quarter ended November 28, 2010, we accrued $1.4 million for the guarantees resulting from our reassessment of the likelihood of the third parties defaulting on the assignment agreements. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2011 through fiscal 2021.

We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.

DARDEN RESTAURANTS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 12. Application of New Accounting Standards

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements, which required additional disclosure of significant transfers in and out of instruments categorized as Level 1 and 2 in the Fair Value hierarchy. This update also clarified existing disclosure requirements by defining the level of disaggregation of instruments into classes as well as additional disclosure around the valuation techniques and inputs used to measure fair value. Additionally, for instruments categorized as Level 3 in the Fair Value hierarchy, the guidance required a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities. This update became effective for us in the fourth quarter of fiscal 2010 except for the disclosure on the roll forward of activities for Level 3 fair value measurements, which will become effective for us in the first quarter of fiscal 2012. Other than requiring additional disclosures, adoption of this new guidance will not have a significant impact on our consolidated financial statements.

Note 13. Subsequent Event

On December 17, 2010, the Board of Directors declared a cash dividend of 32 cents per share to be paid February 1, 2011 to all shareholders of record as of the close of business on January 10, 2011.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis below for the Company should be read in conjunction with the unaudited financial statements and the notes to such financial statements included elsewhere in this Form 10-Q. The discussion below contains forward looking statements which should be read in conjunction with “Forward-Looking Statements” included elsewhere in this Form 10-Q.

The following table sets forth selected operating data as a percent of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the quarters and six months ended November 28, 2010 and November 29, 2009.


	Quarter Ended						Six Months Ended
	November 28, 2010			November 29, 2009			November 28, 2010			November 29, 2009

Sales		100.0	%		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of sales:
Food and beverage		28.7			28.7			28.4			28.9
Restaurant labor		33.1			34.3			32.5			33.5
Restaurant expenses		15.9			15.7			15.7			15.5

Total cost of sales, excluding restaurant depreciation and amortization of 4.2%, 4.2%, 4.1% and 4.1%, respectively		77.7	%		78.7	%		76.6	%		77.9	%
Selling, general and administrative		10.4			10.4			10.2			10.2
Depreciation and amortization		4.5			4.5			4.4			4.3
Interest, net		1.4			1.5			1.4			1.4

Total costs and expenses		94.0	%		95.1	%		92.6	%		93.8	%


Earnings before income taxes		6.0			4.9			7.4			6.2
Income taxes		(1.6	)		(1.2	)		(2.1	)		(1.6	)

Earnings from continuing operations		4.4			3.7			5.3			4.6
Losses from discontinued operations		(0.1	)		—			—			—

Net earnings		4.3	%		3.7	%		5.3	%		4.6	%

OVERVIEW OF OPERATIONS

Our sales from continuing operations were $1.73 billion and $3.53 billion for the second quarter and first six months of fiscal 2011, respectively, compared to $1.64 billion and $3.38 billion for the second quarter and first six months of fiscal 2010. The increases of 5.2 percent and 4.7 percent in sales for the second quarter and first six months of fiscal 2011, respectively, were driven primarily by the addition of 63 net new restaurants since the second quarter of fiscal 2010 and blended same-restaurant sales increases for Olive Garden, Red Lobster and LongHorn Steakhouse of 1.4 percent and 1.2 percent for the second quarter and first six months of fiscal 2011, respectively. For the second quarter of fiscal 2011, the increase in blended same-restaurant sales compares to an increase of 1.1 percent for the Knapp-Track ™ benchmark of U.S. same-restaurant sales excluding Darden. For the second quarter of fiscal 2011, our net earnings from continuing operations were $75.8 million compared to $61.2 million for the second quarter of fiscal 2010, a 23.9 percent increase, and our diluted net earnings per share from continuing operations were $0.54 for the second quarter of fiscal 2011 compared to $0.43 for the second quarter of fiscal 2010, a 25.6 percent increase. For the first six months of fiscal 2011, our net earnings from continuing operations were $189.0 million compared to $156.1 million for the first six months of fiscal 2010, a 21.1 percent increase, and our diluted net earnings per share from continuing operations were $1.34 for the first six months of fiscal 2011 compared to $1.10 for the first six months of fiscal 2010, a 21.8 percent increase. The increases in net earnings from continuing operations and diluted net earnings per share from continuing operations for the second quarter of fiscal 2011 compared to the same period in the prior year

were primarily due to increased sales and lower restaurant labor expenses as a percent of sales, which were partially offset by higher restaurant expenses as a percent of sales and a higher effective income tax rate. The increases in net earnings from continuing operations and diluted net earnings per share from continuing operations for the first six months of fiscal 2011 compared to the same period in the prior year were primarily due to increased sales and lower food and beverage costs and restaurant labor expenses as a percent of sales, which were partially offset by higher restaurant expenses as a percent of sales and a higher effective income tax rate.

SALES

Sales from continuing operations were $1.73 billion and $1.64 billion for the quarters ended November 28, 2010 and November 29, 2009, respectively. The 5.2 percent increase in sales for the second quarter of fiscal 2011 was driven by the addition of 63 net new restaurants since the second quarter of fiscal 2010 and a 1.4 percent blended same-restaurant sales increase for Olive Garden, Red Lobster and LongHorn Steakhouse. Olive Garden’s sales of $828.2 million for the second quarter of fiscal 2011 were 5.8 percent above last fiscal year’s second quarter, driven by revenue from 33 net new restaurants and a U.S. same-restaurant sales increase of 2.0 percent. The increase in U.S. same-restaurant sales resulted from a 2.6 percent increase in average check partially offset by a 0.6 percent decrease in same-restaurant guest counts. Red Lobster’s sales of $556.0 million for the second quarter of fiscal 2011 were 1.1 percent below last fiscal year’s second quarter, which resulted primarily from a 1.6 percent decrease in U.S. same-restaurant sales partially offset by revenue from two net new restaurants. The decrease in U.S. same-restaurant sales resulted from a 3.5 percent decrease in same-restaurant guest counts partially offset by a 1.9 percent increase in average check. LongHorn Steakhouse’s sales of $224.3 million for the second quarter of fiscal 2011 were 12.4 percent above last fiscal year’s second quarter, which resulted from a 6.8 percent increase in same-restaurant sales and revenue from 17 net new restaurants. The increase in same-restaurant sales resulted from a 4.4 percent increase in same-restaurant guest counts combined with a 2.4 percent increase in average check. The Capital Grille’s sales of $66.1 million for the second quarter of fiscal 2011 were 12.4 percent above last fiscal year’s second quarter, driven by a same-restaurant sales increase of 5.6 percent combined with revenue from the addition of four new restaurants. Bahama Breeze sales of $29.6 million for the second quarter of fiscal 2011 were 8.2 percent above last fiscal year’s second quarter, driven by a 3.2 percent increase in same-restaurant sales combined with the addition of one new restaurant. Seasons 52 sales of $19.1 million for the second quarter of fiscal 2011 were 84.8 percent above last fiscal year’s second quarter, driven by the addition of seven new restaurants and a 3.8 percent increase in same-restaurant sales.

Sales from continuing operations were $3.53 billion and $3.38 billion for the six months ended November 28, 2010 and November 29, 2009, respectively. The 4.7 percent increase in sales for the first six months of fiscal 2011 was primarily due to the addition of 63 net new restaurants since the second quarter of fiscal 2010 and a 1.2 percent blended same-restaurant sales increase for Olive Garden, Red Lobster and LongHorn Steakhouse. Olive Garden’s sales of $1.71 billion for the first six months of fiscal 2011 were 6.4 percent above last year, driven primarily by revenue from 33 net new restaurants combined with a U.S. same-restaurant sales increase of 2.4 percent. The increase in U.S. same-restaurant sales resulted from a 0.1 percent increase in same-restaurant guest counts, combined with a 2.3 percent increase in average check. Red Lobster’s sales of $1.16 billion for the first six months of fiscal 2011 were 1.0 percent below last year, which resulted primarily from a 1.6 percent decrease in U.S. same-restaurant sales, partially offset by sales from two net new restaurants. The decrease in U.S. same-restaurant sales resulted primarily from a 4.1 percent decrease in same-restaurant guest counts, partially offset by a 2.5 percent increase in average check. LongHorn Steakhouse’s sales of $449.9 million for the first six months of fiscal 2011 were 9.5 percent above last year, which resulted from revenue from 17 net new restaurants and a 4.5 percent increase in U.S. same-restaurant sales. The increase in U.S. same-restaurant sales resulted from a 1.9 percent increase in same-restaurant guest counts combined with a 2.6 percent increase in average check. The Capital Grille’s sales of $120.3 million for the first six months of fiscal 2011 were 10.7 percent above last year, driven by a same-restaurant sales increase of 4.2 percent combined with revenue from the addition of four new restaurants. Bahama Breeze sales of $66.4 million for the first six months of fiscal 2011 were 6.0 percent above last year, driven by a same-restaurant sales increase of 1.6 percent combined with revenue from the addition of one new restaurant. Seasons 52 sales of $34.9 million for the first six months of fiscal 2011 were 68.0 percent above last year, driven by revenue from the addition of seven new restaurants and a same-restaurant sales increase of 5.5 percent.

Same-restaurant sales is a year-over-year comparison of each period’s sales volumes and is limited to restaurants open at least 16 months, including acquired restaurants, absent consideration of the date we acquired the restaurants.

COSTS AND EXPENSES

Quarter Ended November 28, 2010 Compared to Quarter Ended November 29, 2009

Total costs and expenses were $1.62 billion and $1.56 billion for the quarters ended November 28, 2010 and November 29, 2009, respectively. As a percent of sales, total costs and expenses decreased from 95.1 percent in the second quarter of fiscal 2010 to 94.0 percent in the second quarter of fiscal 2011.

Food and beverage costs were $494.7 million during the second quarter of fiscal 2011, an increase of $23.4 million, or 5.0 percent, from food and beverage costs of $471.3 million during the second quarter of fiscal 2010. As a percent of sales, food and beverage costs were flat for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010. Restaurant labor costs were $571.9 million during the second quarter of fiscal 2011, an increase of $8.2 million, or 1.5 percent, from restaurant labor costs of $563.7 million during the second quarter of fiscal 2010. Restaurant labor costs, as a percent of sales, decreased primarily as a result of pricing, increased employee productivity and continued low employee turnover, partially offset by an increase in wage rates. Restaurant expenses (which include utility, lease, property tax, maintenance, credit card, workers’ compensation, insurance, new restaurant pre-opening and other restaurant-level operating expenses) were $274.9 million during the second quarter of fiscal 2011, an increase of $17.5 million, or 6.8 percent, from restaurant expenses of $257.4 million during the second quarter of fiscal 2010. As a percent of sales, restaurant expenses increased in the second quarter of fiscal 2011 primarily due to higher credit card fees and pre-opening expenses, partially offset by sales leveraging.

Selling, general and administrative expenses were $180.0 million during the second quarter of fiscal 2011, an increase of $10.1 million, or 5.9 percent, from selling, general and administrative expenses of $169.9 million during the second quarter of fiscal 2010. As a percent of sales, selling, general and administrative expenses were flat for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010 as higher media expenses and unfavorable market driven changes in fair value related to our non-qualified deferred compensation plans were offset by lower compensation related expenses and sales leveraging.

Depreciation and amortization expense was $78.0 million during the second quarter of fiscal 2011, an increase of $4.2 million, or 5.7 percent, from depreciation and amortization expense of $73.8 million during the second quarter of fiscal 2010. As a percent of sales, depreciation and amortization expense was flat between the second quarter of fiscal 2011 and the second quarter of fiscal 2010.

Net interest expense was $23.5 million during the second quarter of fiscal 2011, a decrease of $1.0 million, or 4.1 percent, from net interest expense of $24.5 million during the second quarter of fiscal 2010. As a percent of sales, net interest expense decreased slightly between the second quarter of fiscal 2011 and the second quarter of fiscal 2010 primarily as a result of lower average debt balances associated with the repayment of a portion of our long-term debt.

Six Months Ended November 28, 2010 Compared to Six Months Ended November 29, 2009

Total costs and expenses were $3.27 billion and $3.16 billion for the six months ended November 28, 2010 and November 29, 2009, respectively. As a percent of sales, total costs and expenses decreased from 93.8 percent in the first six months of fiscal 2010 to 92.6 percent in the first six months of fiscal 2011.

Food and beverage costs were $1.00 billion during the first six months of fiscal 2011, an increase of $30.6 million, or 3.1 percent, from food and beverage costs of $971.6 million during the first six months of fiscal 2010. As a percent of sales, food and beverage costs decreased in the first six months of fiscal 2011 primarily as a result of pricing and lower seafood, beef, chicken and commodity costs. Restaurant labor costs were $1.15 billion during the first six months of fiscal 2011, an increase of $19.0 million, or 1.7 percent, from restaurant labor costs of $1.13 billion during the first six months of fiscal 2010. Restaurant labor costs, as a percent of sales, decreased primarily as a result of pricing, increased employee productivity and continued low employee turnover, partially offset by an increase in wage rates. Restaurant expenses (which include utility, lease, property tax, maintenance, credit card, workers’ compensation, insurance, new restaurant pre-opening and other restaurant-level operating expenses) were $554.0 million during the first six months of fiscal 2011, an increase of $29.2 million, or 5.6 percent, from restaurant expenses of $524.8 million during the first six months of fiscal 2010. As a percent of sales, restaurant expenses increased in the first six months of fiscal 2011 primarily due to higher credit card fees and pre-opening expenses, partially offset by sales leveraging.

Selling, general and administrative expenses were $360.9 million during the first six months of fiscal 2011, an increase of $19.6 million, or 5.7 percent, from selling, general and administrative expenses of $341.3 million during the first six months of fiscal 2010. As a percent of sales, selling, general and administrative expenses were flat for the first six months of fiscal 2011 compared to the first six months of fiscal 2010 as higher media expenses and unfavorable market driven changes in fair value related to our non-qualified deferred compensation plans were offset by lower compensation related expenses and sales leveraging.

Depreciation and amortization expense was $154.7 million during the first six months of fiscal 2011, an increase of $8.0 million, or 5.5 percent, from depreciation and amortization expense of $146.7 million during the first six months of fiscal 2010. As a percent of sales, depreciation and amortization expense increased in the first six months of fiscal 2011 primarily as a result of new restaurant activity.

Net interest expense was $48.1 million during the first six months of fiscal 2011, a decrease of $0.2 million, or 0.4 percent, from interest expense of $48.3 million during the first six months of fiscal 2010. As a percent of sales, net interest expense was flat between the first six months of fiscal 2011 and the first six months of 2010.

INCOME TAXES

The effective income tax rate for the quarter and six months ended November 28, 2010 was 26.6 percent and 27.9 percent, respectively, compared to an effective income tax rate of 24.2 percent and 26.0 percent for the quarter and six months ended November 29, 2009, respectively. The increase in the effective income tax rate during the second quarter and for the first six months of fiscal 2011 is primarily attributable to the impact in fiscal 2010 of the favorable resolution of prior year tax matters expensed in prior years and due to an increase in earnings before income taxes.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

For the second quarter of fiscal 2011, our net earnings from continuing operations were $75.8 million compared to $61.2 million in the second quarter of fiscal 2010, a 23.9 percent increase, and our diluted net earnings per share from continuing operations were $0.54 compared to $0.43 in the second quarter of fiscal 2010, a 25.6 percent increase. At Olive Garden, lower restaurant labor, restaurant expenses, selling, general and administrative expenses, and depreciation expenses as a percent of sales were partially offset by increased food and beverage costs as a percent of sales. As a result, operating profit, as a percent of sales, increased for Olive Garden in the second quarter of fiscal 2011, compared to the second quarter of fiscal 2010. At Red Lobster, lower food and beverage costs, restaurant labor and restaurant expenses as a percent of sales were partially offset by increased selling, general and administrative expenses, and depreciation expenses as a percent of sales. As a result, operating profit, as a percent of sales, increased for Red Lobster in the second quarter of fiscal 2011, compared to the second quarter of fiscal 2010. At LongHorn Steakhouse, lower food and beverage costs, restaurant labor, restaurant expenses and depreciation expenses as a percent of sales were partially offset by increased selling, general and administrative expenses, as a percent of sales. As a result, operating profit, as a percent of sales, increased for LongHorn Steakhouse in the second quarter of fiscal 2011, compared to the second quarter of fiscal 2010.

For the first six months of fiscal 2011, our net earnings from continuing operations were $189.0 million compared to $156.1 million in the first six months of fiscal 2010, a 21.1 percent increase, and our diluted net earnings per share from continuing operations were $1.34 compared to $1.10 in the first six months of fiscal 2010, a 21.8 percent increase. At Olive Garden, lower restaurant labor, restaurant expenses, selling, general and administrative expenses and depreciation expenses as a percent of sales were partially offset by increased food and beverage costs as a percent of sales. As a result, operating profit, as a percent of sales, increased for Olive Garden for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. At Red Lobster, lower food and beverage costs, restaurant labor and restaurant expenses as a percent of sales were partially offset by increased selling, general and administrative expenses, and depreciation expenses as a percent of sales. As a result, operating profit, as a percent of sales, increased for Red Lobster for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. At LongHorn Steakhouse, lower food and beverage costs, restaurant labor and depreciation

expenses as a percent of sales were partially offset by increased restaurant expenses and selling, general and administrative expenses as a percent of sales. As a result, operating profit, as a percent of sales, increased for LongHorn Steakhouse for the first six months of fiscal 2011, compared to the first six months of fiscal 2010.

SEASONALITY

Our sales volumes fluctuate seasonally. During fiscal 2010 and 2008, our average sales per restaurant were highest in the winter and spring, followed by the summer, and lowest in the fall. During 2009, our average sales per restaurant were highest in the summer and spring, followed by the winter, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

NUMBER OF RESTAURANTS

The following table details the number of restaurants currently reported in continuing operations that were open at the end of the second quarter of fiscal 2011, compared with the number open at the end of fiscal 2010 and the end of the second quarter of fiscal 2010.


	November 28, 2010		May 30, 2010		November 29, 2009
Red Lobster – USA		665		666		663
Red Lobster – Canada		28		28		28

Total		693		694		691


Olive Garden – USA		729		717		696
Olive Garden – Canada		6		6		6

Total		735		723		702


LongHorn Steakhouse		340		331		323
The Capital Grille		44		40		40
Bahama Breeze		25		25		24
Seasons 52		15		11		8
Other		—		—		1

Total		1,852		1,824		1,789

LIQUIDITY AND CAPITAL RESOURCES

Cash flows generated from operating activities provide us with a significant source of liquidity, which we use to finance the purchases of land, buildings and equipment, to pay dividends and to repurchase shares of our common stock. Since substantially all of our sales are for cash and cash equivalents and accounts payable are generally due in five to 30 days, we are able to carry current liabilities in excess of current assets. In addition to cash flows from operations, we use a combination of long-term and short-term borrowings to fund our capital needs.

We currently manage our business and financial ratios to maintain an investment grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Currently, our publicly issued long-term debt carries “Baa3” (Moody’s Investors Service), “BBB” (Standard & Poor’s) and “BBB” (Fitch) ratings. Our commercial paper has ratings of “P-3” (Moody’s Investors Service), “A-2” (Standard & Poor’s) and “F-2” (Fitch). These ratings are as of the date of the filing of this Form 10-Q and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

Our revolving credit facility and our commercial paper program serve as our primary source of short-term financing. Accordingly, we maintain a $750.0 million revolving credit facility under a Credit Agreement (Revolving Credit Agreement) dated September 20, 2007 with Bank of America, N.A. (BOA), as administrative agent, and the lenders (Revolving Credit Lenders) and other agents party thereto. The Revolving Credit Agreement is a senior

unsecured credit commitment to the Company and contains customary representations, affirmative and negative covenants (including limitations on liens and subsidiary debt, and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. As of November 28, 2010, we were in compliance with all covenants under the Revolving Credit Agreement. Additional information regarding terms and conditions of the Revolving Credit Agreement is incorporated by reference from Note 5 to our unaudited consolidated financial statements in Part I, Item 1 of this report.

As of November 28, 2010, we had no outstanding balances under the Revolving Credit Agreement. As of November 28, 2010, $168.0 million of commercial paper and $68.2 million of letters of credit were outstanding, which are backed by this facility. After consideration of borrowings currently outstanding and commercial paper and letters of credit backed by the Revolving Credit Agreement, as of November 28, 2010, we had $513.8 million of credit available under the Revolving Credit Agreement.

As of November 28, 2010, our long-term debt consisted principally of:

•

$350.0 million of unsecured 5.625 percent senior notes due in October 2012;

•

$100.0 million of unsecured 7.125 percent debentures due in February 2016;

•

$500.0 million of unsecured 6.200 percent senior notes due in October 2017;

•

$150.0 million of unsecured 6.000 percent senior notes due in August 2035;

•

$300.0 million of unsecured 6.800 percent senior notes due in October 2037; and

•

An unsecured, variable rate $9.0 million commercial bank loan due in December 2018 that is used to support two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan.

We also have $75.0 million of unsecured 7.450 percent medium-term notes due in April 2011 included in current liabilities as current portion of long-term debt. During the quarter ended August 29, 2010, we repaid, at maturity, our $150.0 million 4.875 percent senior notes due August 2010 with excess cash from operations. Following maturity of the notes due April 2011, we expect to issue unsecured debt securities that will effectively refinance both the notes that matured during the quarter ended August 29, 2010 and the notes due April 2011.

The interest rates on our $350.0 million senior notes due October 2012, $500.0 million senior notes due October 2017 and $300.0 million senior notes due October 2037 are subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of November 28, 2010, no adjustments to these interest rates had been made.

From time to time we enter into interest rate derivative instruments. See Note 9 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated by reference.

A summary of our contractual obligations and commercial commitments as of November 28, 2010 is as follows:


(in millions)	*Payments Due by Period*
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Short-term debt	$	168.0	$	168.0	$	—	$	—	$	—
Long-term debt ⁽¹⁾		2,558.3		167.3		509.1		137.5		1,744.4
Operating leases		792.6		131.7		231.1		172.9		256.9
Purchase obligations ⁽²⁾		622.5		609.6		12.8		0.1		—
Capital lease obligations ⁽³⁾		102.6		5.1		10.6		11.1		75.8
Benefit obligations ⁽⁴⁾		332.7		39.5		71.9		76.6		144.7
Unrecognized income tax benefits ⁽⁵⁾		36.8		—		34.0		2.8		—

Total contractual obligations	$	4,613.5	$	1,121.2	$	869.5	$	401.0	$	2,221.8


(in millions)	*Amount of Commitment Expiration per Period*
Other Commercial Commitments	Total Amounts Committed		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Standby letters of credit⁽⁶⁾	$	114.8	$	114.8	$	—	$	—	$	—
Guarantees ⁽⁷⁾		8.1		1.5		2.6		2.3		1.7

Total commercial commitments	$	122.9	$	116.3	$	2.6	$	2.3	$	1.7

(1)	Includes interest payments associated with existing long-term debt, including the current portion. Variable-rate interest payments associated with the ESOP loan were estimated based on an average interest rate of 4.0 percent. Excludes issuance discount of $4.6 million.

(2)	Includes commitments for food and beverage items, supplies, capital projects and other miscellaneous commitments.

(3)	Capital lease obligations include imputed interest of $44.3 million over the life of the obligations.

(4)	Includes expected contributions associated with our defined benefit plans and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2020.

(5)	Includes interest on unrecognized income tax benefits of $6.5 million, $0.0 million of which relates to contingencies expected to be resolved within one year.

(6)

Includes letters of credit for $96.4 million of workers’ compensation and general liabilities accrued in our consolidated financial statements, $68.2 million of which are backed by our Revolving Credit Agreement, letters of credit for $1.4 million of lease payments included in the contractual operating lease obligation payments noted above and other letters of credit totaling $17.0 million.

(7)	Consists solely of guarantees associated with leased properties that have been assigned to third parties. During the quarter ended November 28, 2010, we accrued $1.4 million resulting from our reassessment of the likelihood of the third parties defaulting on certain lease assignment agreements.

As of November 28, 2010, our Board of Directors had authorized us to repurchase up to an aggregate of 162.4 million shares of our common stock. During the quarter and six months ended November 28, 2010, we repurchased 1.6 million and 4.0 million shares of our common stock, respectively, compared to 4 thousand and 65 thousand shares for the quarter and six months ended November 29, 2009, respectively. As of November 28, 2010, we have repurchased a total of 158.1 million shares of our common stock. The repurchased common stock is reflected as a reduction of stockholders’ equity. In December 2010, our Board of Directors authorized an additional 25.0 million shares for repurchase, bringing our unused authorization to 29.3 million shares.

We may from time to time repurchase our outstanding debt in privately negotiated transactions. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors.

Net cash flows provided by operating activities of continuing operations decreased to $282.1 million for the first six months of fiscal 2011, from $310.5 million for the first six months of fiscal 2010. The decrease was primarily due to the timing of inventory purchases and overall product demand, and higher income tax payments during the first six months of 2011, partially offset by an increase in net earnings.

Net cash flows used in investing activities of continuing operations increased to $275.9 million for the first six months of fiscal 2011, from $206.6 million for the first six months of fiscal 2010, and included capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment and technology initiatives. Capital expenditures were $276.2 million for the first six months of fiscal 2011, compared to $214.4 million for the first six months of fiscal 2010. The increased expenditures for the first six months of fiscal 2011 resulted primarily from an increase in remodel activity and new restaurant construction during fiscal 2011.

Net cash flows used in financing activities of continuing operations increased to $203.6 million for the first six months of fiscal 2011, from $109.9 million for the first six months of fiscal 2010. Purchases of treasury stock were $170.7 million during the first six months of fiscal 2011, an increase from purchases of $2.2 million during the first six months of fiscal 2010. Net cash flows used in financing activities also included $88.3 million in dividends paid for the first six months of fiscal 2011, compared to $69.9 million in dividends paid for the first six months of fiscal 2010. On June 22, 2010, the Board of Directors approved an increase in the quarterly dividend to $0.32 per share, which indicates an annual dividend of $1.28 per share in fiscal 2011. In fiscal 2010, we paid quarterly dividends of $0.25 per share. Additionally, net cash flows used in financing activities for the first six months of fiscal 2011 included the repayment of $150.8 million of long-term debt as compared to $0.9 million in the first six months of fiscal 2010. The increases in net cash used in financing activities were partially offset by proceeds from the issuance of short-term debt of $168.0 million in fiscal 2011, as compared to repayments of short-term debt of $47.7 million during fiscal 2010.

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. We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our Revolving Credit Agreement and internal cash generating capabilities will be sufficient to finance our ongoing capital expenditures, dividends, stock repurchase program and other operating activities through fiscal 2011.

It is possible that changes in circumstances, existing as of our annual impairment test on the first day of the fourth quarter of fiscal 2010 or at other times in the future, or in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill and other indefinite-lived intangible assets, could result in an impairment charge of a portion or all of these assets. If we recorded an impairment charge, our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our credit agreement would increase. If such leverage ratio were to exceed the maximum permitted under our credit agreement, we would be in default under our credit agreement. As of November 28, 2010, a write down of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.10 billion, on an after-tax basis, would have been required to cause our leverage ratio to exceed the permitted maximum. Due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

FINANCIAL CONDITION

Our current assets totaled $563.0 million as of November 28, 2010, compared to $678.5 million as of May 30, 2010. The decrease was primarily due to a decrease in cash and cash equivalents resulting from the repayment of our $150.0 million August 2010 senior notes, partially offset by an increase in inventories of $53.1 million, primarily due to the timing of purchases of restaurant inventories due to seasonality and timing of promotions.

Our current liabilities totaled $1.26 billion as of November 28, 2010, compared to $1.25 billion as of May 30, 2010. Short-term debt increased $168.0 million, primarily due to our use of short-term financing to repurchase shares of our common stock. The increase was mostly offset by the decrease in current portion of long-term debt due to the repayment of our $150.0 million August 2010 senior notes during the first quarter of fiscal 2011.

CRITICAL ACCOUNTING POLICIES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results

could differ from those estimates. We have discussed the development, selection and disclosure of those estimates with the Audit Committee. Our critical accounting policies have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended May 30, 2010.

APPLICATION OF NEW ACCOUNTING STANDARDS

Information regarding application of new accounting standards is incorporated by reference from Note 12 to our unaudited consolidated financial statements in Part I, Item 1 of this report.

FORWARD-LOOKING STATEMENTS

Statements set forth in or incorporated into this report regarding the expected net increase in the number of our restaurants, U.S. same-restaurant sales, total sales growth, diluted net earnings per share growth, and capital expenditures in fiscal 2011, and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. In addition to the risks and uncertainties of ordinary business obligations, and those described in information incorporated into this report, the forward-looking statements contained in this report are subject to the risks and uncertainties described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 30, 2010, which are summarized as follows:

•

Food safety and food-borne illness concerns throughout the supply chain;

•

Litigation, including allegations of illegal, unfair or inconsistent employment practices, by employees, guests, suppliers, shareholders or others, regardless of whether the allegations made against us are valid or we are ultimately found liable;

•

Unfavorable publicity, or a failure to respond effectively to adverse publicity, relating to food safety or other concerns that could harm our reputation;

•

Federal, state and local regulation of our business, including laws and regulations relating to food safety, minimum wage and other labor issues including unionization, health care reform, menu labeling, building and zoning requirements, zoning, land use and environmental laws including climate change regulations, and liquor laws;

•

Labor and insurance costs, including increased labor costs as a result of federal and state-mandated increases in minimum wage rates and increased insurance costs as a result of increases in our current insurance premiums;

•

A material information technology failure, inadequacy, interruption or breach of security;

•

The health concerns arising from food-related pandemics, outbreaks of flu viruses or other diseases;

•

The intensely competitive nature of the restaurant industry, especially pricing, service, location, personnel and type and quality of food;

•

Factors impacting our ability to drive sufficient profitable sales growth through brand relevance, operating excellence, opening new restaurants and developing or acquiring new dining brands, including lower-than-expected sales of newly-opened restaurants and acquisition risks;

•

The impact of the substantial indebtedness we incurred in connection with the acquisition of RARE;

•

Our plans to expand newer brands like Bahama Breeze and Seasons 52 that have not yet proven their long-term viability may not be successful and could require us to make substantial further investments in these brands and result in losses and impairments;

•

A lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants;

•

Higher-than-anticipated costs to open, close, relocate or remodel restaurants;

•

Increased advertising and marketing costs;

•

A failure to develop and recruit effective leaders or the loss of key personnel;

•

The price and availability of key food products, ingredients and utilities used by our restaurants and a failure to achieve economies of scale in purchasing;

•

The impact of shortages or interruptions in the delivery of food and other products from third party vendors and suppliers;

•

The impact of volatility in the market value of derivatives we use to hedge commodity prices;

•

Economic and business factors specific to the restaurant industry and other general macroeconomic factors including unemployment, energy prices and interest rates, severe weather conditions including hurricanes, and public safety conditions, including actual or threatened armed conflicts or terrorist attacks;

•

The impact of disruptions in the financial markets, including the availability and cost of credit and an increase in pension plan expenses;

•

The negative effect of a possible impairment in the carrying value of our goodwill or other intangible assets; and

•

A failure of our internal control over financial reporting;

Any of the risks described above or elsewhere in this report or our other filings with the SEC could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the above is not intended to be a complete discussion of all potential risks or uncertainties.

Item 3. 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, foreign currency exchange rate, equity forward and commodity instruments for other than trading purposes (see Note 9 to our unaudited consolidated financial statements in Part 1 Item 1 of this report).

We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. As of November 28, 2010, our potential losses in future net earnings resulting from changes in floating rate debt interest rate, interest rate instrument, foreign currency exchange rate, equity forwards and commodity instrument exposures were approximately $44.0 million over a period of one year. The value at risk from an increase in the fair value of all of our long-term fixed rate debt, over a period of one year, was approximately $124.7 million. The fair value of our long-term fixed rate debt, including the amounts included in current liabilities, during the first six months of fiscal 2011 averaged $1.85 billion, with a high of $1.77 billion and a low of $1.57 billion. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed rate debt.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of November 28, 2010, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of November 28, 2010.

During the fiscal quarter ended November 28, 2010, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

See the discussion of legal proceedings contained in the third paragraph of Note 11 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 30, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below provides information concerning our repurchase of shares of our common stock during the quarter ended November 28, 2010. Since commencing repurchases in December 1995, we have repurchased a total of 158.1 million shares through November 28, 2010 under authorizations from our Board of Directors.


	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (2)
August 30, 2010 through October 3, 2010		620,747	$	43.37		620,747		5,329,021
October 4, 2010 through October 31, 2010		534,213	$	44.41		534,213		4,794,808
November 1, 2010 through November 28, 2010		502,987	$	48.53		502,987		4,291,821
Total		1,657,947	$	45.27		1,657,947		4,291,821

(1)

All of the shares purchased during the quarter ended November 28, 2010 were purchased as part of our repurchase program, the authority for which was announced in a press release issued on June 20, 2006. On December 17, 2010, our Board of Directors authorized an additional share repurchase authorization totaling 25.0 million shares, bringing the total shares authorized to be repurchased to 187.4 million shares. This additional authorization was announced publicly in a press release issued on December 20, 2010. There is no expiration date for our program. The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options, and shares reacquired pursuant to tax withholding on option exercises. These shares are included as part of our repurchase program and deplete the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to forfeiture of restricted stock.

(2)	Repurchases are subject to prevailing market prices, may be made in open market or private transactions and may occur or be discontinued at any time. There can be no assurance that we will repurchase any shares.

Item 6. Exhibits


Exhibit No.		Exhibit Title

12		Computation of Ratio of Consolidated Earnings to Fixed Charges.

31(a)		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b)		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(a)		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

101.LAB		XBRL Label Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	DARDEN RESTAURANTS, INC.

Dated: January 5, 2011	By:	/s/ Teresa M. Sebastian
		Teresa M. Sebastian
		Senior Vice President,
		General Counsel and Secretary

Dated: January 5, 2011	By:	/s/ C. Bradford Richmond
		C. Bradford Richmond
		Senior Vice President and Chief Financial Officer
		(Principal financial officer)

INDEX TO EXHIBITS


Exhibit Number		Exhibit Title

12		Computation of Ratio of Consolidated Earnings to Fixed Charges.

31(a)		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b)		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(a)		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

101.LAB		XBRL Label Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

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