Pizza Hut 2002 Annual Report Download - page 63

At December 29, 2001, we had outstanding pay-fixed inter-
est rate swaps with a notional amount of $650 million. These
swaps had been designated as cash flow hedges of a portion of
our variable-rate debt. As the critical terms of the swaps and
hedged interest payments were the same, we determined that the
swaps were completely effective in offsetting the variability in cash
flows associated with interest payments on that debt due to inter-
est rate fluctuations. During 2002, due to decreased borrowings
under our New Credit Facility, interest rate swaps with a notional
amount of $150 million were terminated. An insignificant amount
was reclassed from accumulated other comprehensive income to
interest expense as a result of this termination. The remaining
interest swaps with notional amounts of $500 million matured dur-
ing 2002.
Foreign Exchange
We enter into foreign currency forward contracts with the objective
of reducing our exposure to cash flow volatility arising from foreign
currency fluctuations associated with certain foreign currency
denominated financial instruments, the majority of which are inter-
company short-term receivables and payables. The notional
amount, maturity date, and currency of these contracts match
those of the underlying receivables or payables. For those foreign
currency exchange forward contracts that we have designated as
cash flow hedges, we measure ineffectiveness by comparing the
cumulative change in the forward contract with the cumulative
change in the hedged item. No ineffectiveness was recognized in
2002 or 2001 for those foreign currency forward contracts desig-
nated as cash flow hedges.
Commodities
We also utilize on a limited basis commodity futures and options
contracts to mitigate our exposure to commodity price fluctuations
over the next twelve months. Those contracts have not been des-
ignated as hedges under SFAS 133. Commodity future and options
contracts entered into for the fiscal years ended December 28,
2002 and December 29, 2001 did not significantly impact the
Consolidated Financial Statements.
Deferred Amounts in Accumulated
Other Comprehensive Income (Loss)
As of December 28, 2002, we had a net deferred loss associated
with cash flow hedges of approximately $2 million, net of tax. Of
this amount, we estimate that a net after-tax loss of less than $1 mil-
lion will be reclassified into earnings through December 27, 2003.
The remaining net after-tax loss of approximately $2 million, which
arose from the settlement of treasury locks entered into prior to the
issuance of certain amounts of our fixed-rate debt, will be reclas-
sified into earnings from December 28, 2003 through 2012 as an
increase to interest expense on this debt.
Credit Risks
Credit risk from interest rate swap, treasury lock and forward rate
agreements and foreign exchange contracts is dependent both
on movement in interest and currency rates and the possibility of
non-payment by counterparties. We mitigate credit risk by enter-
ing into these agreements with high-quality counterparties, and
netting swap and forward rate payments within contracts.
Accounts receivable consists primarily of amounts due from
franchisees and licensees for initial and continuing fees. In addi-
tion, we have notes and lease receivables from certain of our
franchisees. The financial condition of these franchisees and
licensees is largely dependent upon the underlying business
trends of our Concepts. This concentration of credit risk is mitigated,
in part, by the large number of franchisees and licensees of each
Concept and the short-term nature of the franchise and license
fee receivables.
Fair Value
At December 28, 2002 and December 29, 2001, the fair values of
cash and cash equivalents, short-term investments, accounts
receivable, and accounts payable approximated carrying value
because of the short-term nature of these instruments. The fair
value of notes receivable approximate carrying value after con-
sideration of recorded allowances.
61.
Yum! Brands Inc.