Financial Review 2004 Management's Discussion and Analysis of Fi nanc i al Condition and Results of Operations NET EARNINGS AND NET EARNINGS PER SHARE  IMPACT OF INFLATION CRITICAL ACCOUNTING POLICIES  Land, Buildings, and Equipment SEASONALITY  26  Darden Restaurants  Land, buildings, and equipment are recorded at cost less accu-  mulated depreciation. Building components are depreciated over  estimated useful lives ranging from seven to 40 years using the  straight-line method. Leasehold improvements, which are reflected  on our consolidated balance sheets as a component of buildings, are  amortized over the lesser of the lease term or the estimated useful  lives of the related assets using the straight-line method. Equipment  is depreciated over estimated useful lives ranging from two to  10 years, also using the straight-line method. Accelerated deprecia-  tion methods are generally used for income tax purposes. Our sales volumes fluctuate seasonally. During fiscal 2004, 2003,  and 2002, our sales were highest in the spring, lowest in the fall, and  comparable during winter and summer. Holidays, 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  b e achieved for the full fiscal year.  Net earnings for fiscal 2003 decreased 2.3 percent and diluted net  earnings per share increased 0.8 percent, compared to fiscal 2002.  The decrease in net earnings was primarily due to increases in res-  taurant labor, restaurant expenses, and depreciation and amortiza-  tion expenses as a percent of sales, which were only partially offset  by decreases in food and beverage costs and selling, general, and  administrative costs as a percent of sales. The increase in diluted  net earnings per share was due to a reduction in the average diluted  shares outstanding from fiscal 2002 to fiscal 2003 because of our  continuing repurchase of our common stock. Critical accounting policies are those we believe are both most  important to the portrayal of our financial condition and operat-  ing results, and require our most difficult, subjective or complex  judgments, often as a result of the need to make estimates about  the effect of matters that are inherently uncertain. Judgments and  uncertainties affecting the application of those policies may result  in materially different amounts being reported under different con-  ditions or using different assumptions. We consider the following  policies to be most critical in understanding the judgments that are  involved in preparing our consolidated financial statements. We prepare our consolidated fina ncial statements in conformity  with accounting principles generally accepted in the United States  of America. 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. Net earnings for fiscal 2004 decreased 0.3 percent and diluted net  earnings per share increased 3.8 percent compared to fiscal 2003.  The decrease in net earnings was primarily due to the $38 million  pre-tax ($23 million after-tax) asset impairment and restructuring  charges recognized during fiscal 2004 related to the closing of six  Bahama Breeze restaurants and write-down of another four Baham a  Breeze restaurants, one Olive Garden restaurant, and one Red  Lobster restaurant. Net earnings were also impacted by decreases  in food and beverage costs as a percent of sales, which were only  partially offset by increases in restaurant labor, restaurant expenses,  selling, general, and administrative expenses, and depreciation and  amortization expense as a percent of sales. The increase in diluted  net earnings per share is due to a reduction in the average diluted  shares outstanding from fiscal 2003 to fiscal 2004 because of our  continuing repurchase of our common stock. We do not believe inflation had a significant overall effect on our  operations during fiscal 2004, 2003, and 2002. We believe we have  historically been able to pass on increased operating costs through  menu price increases and other strategies. Net earnings for fiscal 2004 were  $231 million ($1.36 per diluted  share) compared with net earnings for  fiscal 2003 of $232 million  ($ 1.31 per diluted share) and net earnings for fiscal 2002 of $238 mil-  lion ($ 1.30 per diluted share).