Pizza Hut 2003 Annual Report Download - page 63

Yum! Brands Inc. 61.
GOODWILL AND INTANGIBLE ASSETS
note
12
The changes in the carrying amount of goodwill are as
follows:
Inter-
U.S. national Worldwide
Balance as of December 29, 2001 $ 21 $ 38 $ 59
Reclassification of reacquired
franchise rights(a) 145 96 241
Impairment(b) — (5) (5)
Acquisitions, disposals and other, net(c) 206 (16) 190
Balance as of December 28, 2002 $ 372 $ 113 $ 485
Acquisitions, disposals and other, net(d) 14 22 36
Balance as of December 27, 2003 $ 386 $ 135 $ 521
(a) The Company’s business combinations have included acquiring restaurants
from our franchisees. Prior to the adoption of SFAS 141, the primary intangible
asset to which we generally allocated value in these business combinations
was reacquired franchise rights. We determined that reacquired franchise rights
did not meet the criteria of SFAS 141 to be recognized as an asset apart from
goodwill. Accordingly, on December 30, 2001, we reclassified $241 million of
reacquired franchise rights to goodwill, net of related deferred tax liabilities of
$53 million, ($27 million for the U.S. and $26 million for International).
(b) Represents impairment of the goodwill of the Pizza Hut France reporting unit.
(c) Includes goodwill related to the YGR purchase price allocation. For International,
includes a $13 million transfer of goodwill to assets held for sale (see Note 7).
(d) Primarily includes goodwill recorded as a result of acquisitions of restaurants
from franchisees.
Intangible assets, net for the years ended 2003 and 2002
are as follows:
2003 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets
Franchise contract rights $ 141 $ (49) $ 135 $ (43)
Trademarks/brands 67 (1) — —
Favorable operating leases 19 (13) 21 (13)
Pension-related intangible 14 — 18 —
Other 31 (23) 26 (23)
$ 272 $ (86) $ 200 $ (79)
Unamortized intangible assets
Trademarks/brands $ 171 $ 243
The most significant recorded trademark/brand assets
resulted when we acquired YGR in 2002. The fair value of
a trademark/brand is determined based upon the value
derived from the royalty we avoid, in the case of Company
stores, or receive, in the case of franchise and licensee
stores, for the use of the trademark/brand. This fair value
determination is thus largely dependent upon our estima-
tion of sales attributable to the trademark/brand.
The fair value of the LJS trademark/brand was deter-
mined to be in excess of its carrying value during our 2003
annual impairment test. The estimate of sales attributable
to the LJS trademark/brand at the date of this test reflected
the opportunities we believe exist with regard to increased
penetration of LJS, for both stand-alone units and as a
multibrand partner. Accordingly, we now believe our system’s
development capital, at least through the term of our current
projections, will be primarily directed towards LJS.
The decision to focus short-term development largely
on increased penetration of LJS and our discretionary
capital spending limits have resulted in less than originally
planned development of A&W in the near term. Additionally,
while we continue to view A&W as a viable multibrand
partner, subsequent to acquisition we decided to close or
refranchise all Company-owned A&W restaurants that we
had acquired. These restaurants were low-volume, mall-
based units that were inconsistent with the remainder of
our Company-owned portfolio. Both the decision to close
these Company-owned A&W units and the decision to focus
on short-term development opportunities at LJS negatively
impacted the fair value of the A&W trademark/brand.
Accordingly, we recorded a $5 million charge in 2003 to
facility actions to write the value of the A&W trademark/
brand down to its fair value.
Historically, we have considered the assets acquired
representing trademark/brand to have indefinite useful
lives due to our expected use of the asset and the lack
of legal, regulatory, contractual, competitive, economic or
other factors that may limit their useful lives. As required by
SFAS 142, we reconsider the remaining useful life of indefi-
nite-life intangible assets each reporting period. Subsequent
to the recording of the impairment of the A&W trademark/
brand, we began amortizing its remaining balance over a
period of thirty years (less than $1 million of amortization
expense was recorded in 2003). While we continue to incor-
porate development of the A&W trademark/brand into our
multibranding plans, our decision to no longer operate the
acquired stand-alone Company-owned A&W restaurants is
considered a factor that limits its useful life. Accordingly, we
are amortizing the remaining balance of the A&W trademark/
brand over a period of thirty years, the typical term of our
multibrand franchise agreements including renewals. We
continue to believe that all of our other recorded trademark/
brand assets have indefinite lives.
As a result of adopting SFAS 142, we ceased amor-
tization of goodwill and indefinite-lived intangible assets
beginning December 30, 2001. Amortization expense for
definite-lived intangible assets was $7 million in 2003 and
$6 million in 2002, respectively. Amortization expense for
goodwill and all intangible assets was $37 million in 2001.
Amortization expense for definite-lived intangible assets will
approximate $9 million in 2004, $8 million in 2005 and
2006, and $7 million in both 2007 and 2008.
The following table provides a reconciliation of reported
net income to adjusted net income as though SFAS 142
had been effective for the year ended 2001:
2001
Amount Basic EPS Diluted EPS
Reported net income $ 492 $ 1.68 $ 1.62
Add back amortization expense
(net of tax):
Goodwill 25 0.09 0.09
Trademarks/brands 1 — —
Adjusted net income $ 518 $ 1.77 $ 1.71