Pizza Hut 2004 Annual Report Download - page 36

YGR฀Acquisition฀ On฀May฀7,฀2002,฀the฀Company฀completed฀
its฀acquisition฀of฀YGR,฀the฀parent฀company฀of฀LJS฀and฀A&W.฀
See฀Note฀4฀for฀a฀discussion฀of฀the฀acquisition.
As฀of฀the฀date฀of฀the฀acquisition,฀YGR฀consisted฀of฀742฀
and฀496฀company฀and฀franchise฀LJS฀units,฀respectively,฀and฀
127฀and฀ 742฀ company฀ and฀ franchise฀ A&W฀ units,฀respec-
tively.฀In฀addition,฀133฀multibranded฀LJS/A&W฀restaurants฀
were฀ included฀in฀the฀LJS฀unit฀totals.฀Except฀as฀discussed฀
in฀certain฀sections฀of฀the฀MD&A,฀the฀impact฀of฀the฀acquisi-
tion฀on฀our฀results฀of฀operations฀in฀2003฀was฀not฀significant฀
relative฀to฀2002.
Amendment฀of฀Sale-Leaseback฀Agreements฀ As฀discussed฀
in฀ Note฀ 14,฀ on฀ August฀ 15,฀ 2003฀ we฀ amended฀ two฀ sale-
leaseback฀agreements฀assumed฀in฀our฀2002฀acquisition฀of฀
YGR฀such฀that฀the฀agreements฀now฀qualify฀for฀sale-leaseback฀
accounting.฀Restaurant฀profit฀decreased฀by฀$5฀million฀and฀
by฀$3฀million฀in฀2004฀and฀2003,฀respectively,฀as฀a฀result฀of฀
the฀two฀amended฀agreements฀being฀accounted฀for฀as฀oper-
ating฀leases฀subsequent฀to฀the฀amendment.฀The฀decrease฀
in฀restaurant฀profit฀was฀largely฀offset฀by฀a฀similar฀decrease฀in฀
interest฀expense.
Canada฀Unconsolidated฀Affiliate฀Dissolution฀ On฀November฀
10,฀2003,฀we฀dissolved฀our฀unconsolidated฀affiliate฀that฀previ-
ously฀operated฀733฀restaurants฀in฀Canada.฀We฀owned฀50%฀
of฀this฀unconsolidated฀affiliate฀prior฀to฀ its฀dissolution฀and฀
accounted฀for฀our฀interest฀under฀the฀equity฀method.฀Of฀the฀
restaurants฀previously฀operated฀by฀the฀unconsolidated฀affil-
iate,฀we฀now฀operate฀the฀vast฀majority฀of฀Pizza฀Huts฀and฀Taco฀
Bells,฀while฀almost฀all฀KFCs฀are฀operated฀by฀franchisees.฀As฀
a฀result฀of฀operating฀certain฀restaurants฀that฀were฀previously฀
operated฀by฀the฀unconsolidated฀affiliate,฀our฀Company฀sales,฀
restaurant฀profit฀and฀general฀and฀administrative฀expenses฀
increased฀ and฀ our฀ franchise฀ fees฀ decreased.฀ Additionally,฀
on฀a฀full฀year฀basis฀other฀income฀increased฀as฀we฀recorded฀
a฀loss฀from฀our฀investment฀in฀the฀Canadian฀unconsolidated฀
affiliate฀in฀2003.
As฀a฀result฀of฀the฀ dissolution฀of฀our฀ Canadian฀ uncon-
solidated฀affiliate,฀Company฀sales฀increased฀$147฀million,฀
franchise฀ fees฀ decreased฀ $9฀million,฀ restaurant฀ profit฀
increased฀$8฀million,฀general฀and฀administrative฀expenses฀
increased฀$11฀million฀and฀other฀income฀increased฀$4฀million฀
for฀the฀year฀ended฀December฀25,฀2004฀compared฀to฀the฀year฀
ended฀December฀27,฀2003.฀The฀impact฀on฀2004฀net฀income฀
was฀not฀significant.฀The฀impact฀of฀the฀dissolution฀on฀our฀2003฀
results฀was฀also฀not฀significant.
Sale฀of฀Puerto฀Rico฀Business฀ Our฀Puerto฀Rico฀business฀was฀
held฀for฀sale฀since฀the฀fourth฀quarter฀of฀2002฀and฀was฀sold฀
on฀October฀4,฀2004฀for฀ an฀amount฀approximating฀its฀then฀
carrying฀value.฀Company฀sales฀and฀restaurant฀profit฀decreased฀
$27฀million฀ and฀ $4฀million,฀ respectively,฀ franchise฀ fees฀
increased฀$1฀million฀and฀general฀and฀administrative฀expenses฀
decreased฀$1฀million฀for฀the฀year฀ended฀December฀25,฀2004฀
as฀compared฀to฀the฀year฀ended฀December฀27,฀2003.
Commodity฀Inflation฀ The฀increased฀cost฀of฀certain฀commod-
ities฀negatively฀impacted฀our฀U.S.฀margins฀for฀the฀year฀ended฀
December฀25,฀2004.฀Higher฀commodity฀costs,฀particularly฀in฀
cheese฀and฀meat฀prices,฀negatively฀impacted฀U.S.฀restaurant฀
margins฀as฀a฀percentage฀of฀sales฀by฀approximately฀160฀basis฀
points฀for฀the฀year฀ended฀December฀25,฀2004.
Wrench฀Litigation฀ We฀recorded฀ income฀ of฀ $14฀million฀ in฀
2004฀and฀expense฀of฀$42฀million฀in฀2003.฀See฀Note฀24฀for฀a฀
discussion฀of฀the฀Wrench฀litigation.
AmeriServe฀ and฀ Other฀ Charges฀ (Credits)฀ We฀ recorded฀
income฀ of฀ $16฀million฀ in฀ 2004,฀ $26฀million฀ in฀ 2003฀ and฀
$27฀million฀in฀2002.฀See฀Note฀7฀for฀a฀detailed฀discussion฀of฀
AmeriServe฀and฀other฀charges฀(credits).
Store฀Portfolio฀Strategy฀ From฀time฀to฀time฀we฀sell฀Company฀
restaurants฀to฀existing฀and฀new฀franchisees฀where฀geographic฀
synergies฀ can฀ be฀ obtained฀ or฀ where฀ their฀ expertise฀ can฀
generally฀be฀leveraged฀to฀improve฀our฀overall฀operating฀perfor-
mance,฀while฀retaining฀Company฀ownership฀of฀key฀U.S.฀and฀
International฀markets.฀Such฀refranchisings฀reduce฀our฀reported฀
revenues฀and฀restaurant฀profits฀and฀increase฀the฀importance฀
of฀system฀sales฀growth฀as฀a฀key฀performance฀measure.
The฀ following฀ table฀ summarizes฀ our฀ refranchising฀
activities:
฀2004฀ 2003฀ 2002
Number฀of฀units฀refranchised฀ ฀317฀ 228฀ 174
Refranchising฀proceeds,฀pre-tax฀ $฀140฀ $฀92฀ $฀81
Refranchising฀net฀gains,฀pre-tax(a)฀$฀ 12฀ $฀ 4฀ $฀19
(a)฀Refranchising฀net฀gains฀for฀the฀year฀ended฀December฀25,฀2004฀include฀charges฀
to฀write฀down฀our฀Puerto฀Rico฀business฀to฀our฀then฀estimate฀of฀its฀fair฀value฀and฀
charges฀to฀write฀down฀ certain฀U.S.฀ restaurants฀we฀ currently฀own฀but฀ we฀have฀
offered฀to฀sell฀at฀amounts฀lower฀than฀their฀carrying฀values.฀Refranchising฀net฀gains฀
for฀the฀year฀ended฀December฀27,฀2003฀also฀include฀charges฀to฀write฀down฀our฀
Puerto฀Rico฀business฀to฀our฀then฀estimate฀of฀its฀fair฀value.฀As฀previously฀noted,฀
we฀sold฀our฀Puerto฀Rico฀business฀effective฀October฀4,฀2004฀for฀an฀amount฀approxi-
mating฀its฀then฀carrying฀value.
In฀addition฀to฀our฀refranchising฀program,฀from฀time฀to฀time฀
we฀close฀restaurants฀that฀are฀poor฀performing,฀we฀relocate฀
restaurants฀to฀a฀new฀site฀within฀the฀same฀trade฀area฀or฀we฀
consolidate฀two฀or฀more฀of฀our฀existing฀units฀into฀a฀single฀unit฀
(collectively฀“store฀closures”).
The฀following฀table฀summarizes฀Company฀store฀closure฀
activities:
฀2004฀ 2003฀ 2002
Number฀of฀units฀closed฀ ฀ 319฀ ฀ 287฀ ฀ 224
Store฀closure฀costs฀(income)(a)฀$฀(3)฀ $฀ 6฀ $฀15
Impairment฀charges฀for฀stores฀฀
฀ to฀be฀closed฀ $฀ 5฀ $฀12฀ $฀ 9
(a)฀Store฀closure฀income฀in฀2004฀is฀primarily฀the฀result฀of฀gains฀from฀the฀sale฀of฀
properties฀on฀which฀we฀formerly฀operated฀restaurants.
The฀ impact฀ on฀ operating฀ profit฀ arising฀ from฀ refranchising฀
and฀Company฀store฀closures฀is฀the฀net฀of฀(a)฀the฀estimated฀
reductions฀in฀restaurant฀profit,฀which฀reflects฀the฀decrease฀in฀
Company฀sales,฀and฀general฀and฀administrative฀expenses฀and฀
(b)฀the฀estimated฀increase฀in฀franchise฀fees฀from฀the฀stores฀
refranchised.฀The฀amounts฀presented฀below฀reflect฀the฀esti-
mated฀impact฀from฀stores฀that฀were฀operated฀by฀us฀for฀all฀
or฀some฀portion฀of฀the฀respective฀previous฀year฀and฀were฀no฀
longer฀operated฀by฀us฀as฀of฀the฀last฀day฀of฀the฀respective฀year.฀
The฀amounts฀do฀not฀include฀results฀from฀new฀restaurants฀that฀
we฀opened฀in฀connection฀with฀a฀relocation฀of฀an฀existing฀unit฀
or฀any฀incremental฀impact฀upon฀consolidation฀of฀two฀or฀more฀
of฀our฀existing฀units฀into฀a฀single฀unit.
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