Derivative Instruments and Hedging Activities

We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. To the extent our cash-flow hedging instruments 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 fair-value hedging instruments 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 cash flow 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 29, 2015, if counterparties to the derivative instruments failed completely to perform, would approximate the values of derivative instruments currently recognized as assets on 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.

As of November 29, 2015, we were party to interest-rate swap agreements with $200.0 million of notional value to limit the risk of changes in fair value of $100.0 million of the $121.9 million 4.500 percent senior notes due October 2021 and $100.0 million of the $500.0 million 6.200 percent senior notes due October 2017. 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 29, 2015 and November 23, 2014, $1.2 million and $1.3 million was recorded as a reduction to interest expense related to net swap settlements, respectively. During the six months ended November 29, 2015 and November 23, 2014, $1.7 million and $1.8 million was recorded as a reduction to interest expense related to the net swap settlements, respectively. Subsequent to the quarter ended November 29, 2015, in connection with the repayment of the 2017 and 2021 notes, we settled these swap agreements for a gain of $4.1 million.

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 29, 2015, we were party to equity forward contracts that were indexed to 0.9 million shares of our common stock, at varying forward rates between $40.69 per share and $60.60 per share, extending through September 2020. The forward contracts can only be net settled in cash. As the Darden stock units vest, we will de-designate that portion of the equity forward contract that no longer qualifies for hedge accounting and changes in fair value associated with that portion of the equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred or received.

We entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, cash-settled performance stock units and employee-directed investments in Darden stock within the non-qualified deferred compensation plan. The equity forward contracts are indexed to 0.2 million shares of our common stock at forward rates between $41.03 and $44.73 per share, can only be net settled in cash and expire between fiscal 2016 and 2019. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of the performance stock units and Darden stock investments in the non-qualified deferred compensation plan within general and administrative expenses in our consolidated statements of earnings.

Under the provisions of the equity forward agreements, the equity notional amount, initial price and number of shares in our contracts were adjusted to take into effect the dilutive impact of the spin-off of Four Corners.

The notional and fair values of our derivative contracts are as follows:



(in millions)	Notional Values				Balance Sheet Location	Fair Values
						Derivative Assets				Derivative Liabilities
	November 29, 2015		May 31, 2015			November 29, 2015		May 31, 2015		November 29, 2015			May 31, 2015
Derivative contracts designated as hedging instruments
Equity forwards	$	19.4	$	11.4	(1)	$	—	$	0.4	$	(1.6	)	$	—
Interest rate related	200.0		200.0		(1)	3.8		3.6		—			—
						$	3.8	$	4.0	$	(1.6	)	$	—
Derivative contracts not designated as hedging instruments
Equity forwards	$	28.0	$	51.7	(1)	$	0.5	$	1.3	$	(1.8	)	$	—
						$	0.5	$	1.3	$	(1.8	)	$	—
Total derivative contracts						$	4.3	$	5.3	$	(3.4	)	$	—


(1)	Derivative assets and liabilities are included in receivables, net, prepaid expenses and other current assets and other current liabilities, as applicable, on our consolidated balance sheets.

The effects of derivative instruments in cash flow hedging relationships in the consolidated statements of earnings are as follows:



(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)
	Three Months Ended						Three Months Ended							Three Months Ended
Type of Derivative	November 29, 2015			November 23, 2014			November 29, 2015			November 23, 2014				November 29, 2015		November 23, 2014
Equity	$	(2.1	)	$	2.7	(2)	$	—		$	—		(2)	$	0.4	$	0.3
Interest rate	—			—		Interest, net	(36.1		)	(1.4		)	Interest, net	—		—
	$	(2.1	)	$	2.7		$	(36.1	)	$	(1.4	)		$	0.4	$	0.3



(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 29, 2015			November 23, 2014			November 29, 2015			November 23, 2014				November 29, 2015		November 23, 2014
Equity	$	(0.1	)	$	0.7	(2)	$	2.1		$	(0.9	)	(2)	$	0.5	$	0.6
Interest rate	—			—		Interest, net	(37.4		)	(41.9		)	Interest, net	—		—
	$	(0.1	)	$	0.7		$	(35.3	)	$	(42.8	)		$	0.5	$	0.6


(1)	Generally, all of our derivative instruments designated as cash flow hedges have some level of ineffectiveness, which is recognized currently in earnings. However, as these amounts are generally nominal and our consolidated financial statements are presented “in millions,” these amounts may appear as zero in this tabular presentation.


(2)	Location of the gain (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is restaurant labor expenses and general and administrative expenses.

The effects of derivative instruments in fair value hedging relationships in the consolidated statements of earnings are as follows:

(in millions)

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

Hedged Item

Three Months Ended

November 29,
2015

November 23,
2014

November 29,
2015

November 23,
2014

Interest rate

0.4

(0.2

)

Interest, net

Debt

(0.4

)

0.2

Interest, net

(in millions)

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

Hedged Item

Six Months Ended

November 29,
2015

November 23,
2014

November 29,
2015

November 23,
2014

Interest rate

0.3

0.5

Interest, net

Debt

(0.3

)

(0.5

)

Interest, net

The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:



(in millions)	Location of Gain (Loss) Recognized in Earnings on Derivatives	Amount of Gain (Loss) Recognized in Earnings
		Three Months Ended					Six Months Ended
		November 29, 2015			November 23, 2014		November 29, 2015		November 23, 2014
		November 29, 2015			November 23, 2014		November 29, 2015		November 23, 2014
Equity forwards	Restaurant labor expenses	$	(0.7	)	$	1.8	1.0		1.2
Equity forwards	General and administrative expenses	(1.6		)	4.6		2.2		2.8
		$	(2.3	)	$	6.4	$	3.2	$	4.0

Based on the fair value of our derivative instruments designated as cash flow hedges as of November 29, 2015, we expect to reclassify $0.6 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of our equity forward contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.