Pizza Hut 2003 Annual Report Download - page 49

Yum! Brands Inc. 47.
Foreign Currency Exchange Rate Risk
International operating profit constitutes approximately 36%
of our operating profit in 2003, excluding unallocated and
corporate expenses. In addition, the Company’s net asset
exposure (defined as foreign currency assets less foreign
currency liabilities) totaled approximately $1.3 billion as
of December 27, 2003. Operating in international markets
exposes the Company to movements in foreign currency
exchange rates. The Company’s primary exposures result
from our operations in Asia-Pacific, the Americas and
Europe. Changes in foreign currency exchange rates would
impact the translation of our investments in foreign opera-
tions, the fair value of our foreign currency denominated
financial instruments and our reported foreign currency
denominated earnings and cash flows. For the fiscal year
ended December 27, 2003, operating profit would have
decreased $49 million if all foreign currencies had uniformly
weakened 10% relative to the U.S. dollar. The estimated
reduction assumes no changes in sales volumes or local
currency sales or input prices.
We attempt to minimize the exposure related to our
investments in foreign operations by financing those
investments with local currency debt when practical and
holding cash in local currencies when possible. In addition,
we attempt to minimize the exposure related to foreign
currency denominated financial instruments by purchasing
goods and services from third parties in local currencies
when practical. Consequently, foreign currency denominated
financial instruments consist primarily of intercompany
short-term receivables and payables. At times, we utilize
forward contracts to reduce our exposure related to these
foreign currency denominated financial instruments. The
notional amount and maturity dates of these contracts
match those of the underlying receivables or payables
such that our foreign currency exchange risk related to
these instruments is eliminated.
Commodity Price Risk
We are subject to volatility in food costs as a result of
market risk associated with commodity prices. Our ability
to recover increased costs through higher pricing is, at
times, limited by the competitive environment in which we
operate. We manage our exposure to this risk primarily
through pricing agreements as well as, on a limited basis,
commodity future and option contracts. Commodity future
and option contracts entered into for the fiscal years
ended December 27, 2003, and December 28, 2002, did
not significantly impact our financial position, results of
operations or cash flows.
CAUTIONARY STATEMENTS
From time to time, in both written reports and oral state-
ments, we present “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. The statements include those iden-
tified by such words as “may,” “will,” “expect,” “project,”
“anticipate,” “believe,” “plan” and other similar terminology.
These “forward-looking statements” reflect our current
expectations regarding future events and operating and
financial performance and are based upon data available at
the time of the statements. Actual results involve risks and
uncertainties, including both those specific to the Company
and those specific to the industry, and could differ materially
from expectations.
Company risks and uncertainties include, but are not
limited to, potentially substantial tax contingencies related
to the Spin-off, which, if they occur, require us to indemnify
PepsiCo, Inc.; changes in effective tax rates; our debt
leverage and the attendant potential restriction on our
ability to borrow in the future; potential unfavorable vari-
ances between estimated and actual liabilities; our ability
to secure distribution of products and equipment to our
restaurants on favorable economic terms and our ability to
ensure adequate supply of restaurant products and equip-
ment in our stores; effects and outcomes of legal claims
involving the Company; the effectiveness of operating initia-
tives and advertising and promotional efforts; the ongoing
financial viability of our franchisees and licensees; the
success of our refranchising strategy; volatility of actuarially
determined losses and loss estimates; and adoption of new
or changes in accounting policies and practices including
pronouncements promulgated by standard setting bodies.
Industry risks and uncertainties include, but are not
limited to, economic and political conditions in the countries
and territories where we operate, including effects of war
and terrorist activities; changes in legislation and govern-
mental regulation; new product and concept development
by us and/or our food industry competitors; changes in
commodity, labor, and other operating costs; changes in
competition in the food industry; publicity which may impact
our business and/or industry; severe weather conditions;
volatility of commodity costs; increases in minimum wage
and other operating costs; availability and cost of land and
construction; consumer preferences, spending patterns
and demographic trends; political or economic instability
in local markets and changes in currency exchange and
interest rates; the impact that any widespread illness or
general health concern may have on our business and/or
the economy of the countries in which we operate.