Pizza Hut 2004 Annual Report Download - page 41

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OPERATING฀PROFIT
฀ %฀Increase/฀
฀ (decrease)
฀2004฀ 2003฀ 2004฀ 2003
United฀States฀ $฀ 777฀ $฀ 812฀ (4)฀ 1
International฀ ฀ 542฀ ฀ 441฀ 23฀ 22
Unallocated฀and฀corporate฀฀
฀ expenses฀ ฀ (204)฀ ฀ (179)฀ (14)฀ —
Unallocated฀other฀income฀฀
฀ (expense)฀ ฀ (2)฀ ฀ (3)฀ NM฀ NM
Unallocated฀facility฀actions฀ ฀ 12฀ ฀ 4฀ NM฀ NM
Wrench฀litigation฀income฀฀
฀ (expense)฀ ฀ 14฀ ฀ (42)฀ NM฀ NM
AmeriServe฀and฀other฀฀
฀ (charges)฀credits฀ ฀ 16฀ ฀ 26฀ NM฀ NM
Operating฀profit฀ $฀1,155฀ $฀1,059฀ 9฀ 3
In฀2004,฀the฀decrease฀in฀U.S.฀operating฀profit฀was฀driven฀by฀
the฀impact฀on฀restaurant฀profit฀of฀higher฀commodity฀costs฀
(primarily฀cheese฀and฀ meat)฀and฀ the฀adjustment฀recorded฀
related฀to฀ our฀ accounting฀for฀leases฀ and฀ the฀ depreciation฀
of฀leasehold฀improvements,฀as฀well฀as฀higher฀general฀and฀
administrative฀expenses.฀The฀decrease฀was฀partially฀offset฀
by฀the฀impact฀of฀same฀store฀sales฀increases฀on฀restaurant฀
profit฀and฀franchise฀and฀license฀fees.฀Excluding฀the฀favorable฀
impact฀of฀the฀YGR฀acquisition,฀U.S.฀operating฀profit฀in฀2003฀
was฀flat฀compared฀to฀2002.฀Decreases฀driven฀by฀lower฀restau-
rant฀profit฀as฀a฀result฀of฀increased฀occupancy฀expenses฀and฀
the฀impact฀of฀unfavorable฀discounting฀and฀product฀mix฀shift฀
on฀food฀and฀paper฀costs฀were฀offset฀by฀lower฀franchise฀and฀
license฀and฀general฀and฀administrative฀expenses.
Excluding฀ the฀ favorable฀ impact฀ from฀ foreign฀ currency฀
translation,฀International฀operating฀profit฀increased฀17%฀in฀
2004.฀The฀increase฀was฀driven฀by฀new฀unit฀development,฀the฀
impact฀of฀same฀store฀sales฀increases฀on฀restaurant฀profit฀and฀
franchise฀and฀license฀fees฀and฀higher฀income฀from฀our฀invest-
ments฀in฀unconsolidated฀affiliates,฀partially฀offset฀by฀higher฀
general฀ and฀ administrative฀ costs.฀ Excluding฀ the฀ favorable฀
impact฀from฀foreign฀currency฀translation,฀International฀oper-
ating฀profit฀increased฀15%฀in฀2003.฀The฀increase฀was฀driven฀by฀
new฀unit฀development฀and฀the฀impact฀of฀supply฀chain฀savings฀
initiatives฀on฀the฀cost฀of฀food฀and฀paper,฀partially฀offset฀by฀the฀
impact฀of฀same฀store฀sales฀declines฀on฀restaurant฀profit฀and฀
higher฀general฀and฀administrative฀expenses.
Unallocated฀and฀corporate฀expenses฀comprise฀general฀
and฀administrative฀expenses฀and฀unallocated฀facility฀actions฀
comprise฀refranchising฀gains฀(losses),฀neither฀of฀which฀are฀
allocated฀to฀the฀U.S.฀ or฀International฀segments฀for฀perfor-
mance฀reporting฀purposes.
INTEREST฀EXPENSE,฀NET
฀2004฀ 2003฀ 2002
Interest฀expense฀ $฀145฀ $฀185฀ $฀180
Interest฀income฀ ฀ (16)฀ ฀ (12)฀ ฀ (8)
Interest฀expense,฀net฀ $฀129฀ $฀173฀ $฀172
Interest฀expense฀decreased฀$40฀million฀or฀22%฀in฀2004.฀The฀
decrease฀was฀primarily฀driven฀by฀a฀decrease฀in฀our฀average฀
interest฀rates฀primarily฀attributable฀to฀pay-variable฀interest฀
rate฀swaps฀entered฀into฀during฀2004.฀Also฀contributing฀to฀the฀
decrease฀was฀a฀reduction฀in฀our฀average฀debt฀outstanding฀
primarily฀ as฀ a฀ result฀ of฀ the฀ amended฀ YGR฀ sale-leaseback฀
agreement฀and฀lower฀International฀short-term฀borrowings.
Interest฀expense฀increased฀$5฀million฀or฀3%฀in฀2003.฀
Excluding฀the฀impact฀of฀the฀YGR฀acquisition,฀interest฀expense฀
decreased฀6%.฀The฀decrease฀was฀primarily฀due฀to฀a฀decrease฀
in฀our฀average฀debt฀outstanding.
INCOME฀TAXES
฀2004฀ 2003฀ 2002
Reported
฀ Income฀taxes฀ $฀286฀ $฀268฀ $฀275
฀ Effective฀tax฀rate฀ ฀27.9%฀ ฀30.2%฀ ฀32.1%
The฀reconciliation฀of฀income฀taxes฀calculated฀at฀ the฀ U.S.฀
federal฀tax฀statutory฀rate฀to฀our฀effective฀tax฀rate฀is฀set฀forth฀
below:
฀2004฀ 2003฀ 2002
U.S.฀federal฀statutory฀tax฀rate฀ 35.0%฀ 35.0%฀ 35.0%
State฀income฀tax,฀net฀of฀฀
฀ federal฀tax฀benefit฀ 1.3฀ 1.8฀ 2.0
Foreign฀and฀U.S.฀tax฀effects฀฀
฀ attributable฀to฀foreign฀operations฀ (5.8)฀ (3.6)฀ (2.8)
Adjustments฀to฀reserves฀฀
฀ and฀prior฀years฀ (6.7)฀ (1.7)฀ (1.8)
Foreign฀tax฀credit฀amended฀฀
฀ return฀benefit฀ —฀ (4.1)฀ —
Valuation฀allowance฀additions฀฀
฀ (reversals)฀ 4.2฀ 2.8฀ —
Other,฀net฀ (0.1)฀ —฀ (0.3)
Effective฀tax฀rate฀ 27.9%฀ 30.2%฀ 32.1%
Income฀ taxes฀ and฀ the฀ effective฀ tax฀ rate฀ as฀ shown฀ above฀
reflect฀tax฀on฀all฀amounts฀included฀in฀our฀results฀of฀operations฀
except฀for฀the฀income฀tax฀benefit฀of฀approximately฀$1฀million฀
on฀the฀$2฀million฀cumulative฀effect฀adjustment฀recorded฀in฀
the฀year฀ended฀December฀27,฀2003฀due฀to฀the฀adoption฀of฀
SFAS฀143.
The฀2004฀effective฀tax฀rate฀decreased฀2.3฀percentage฀
points฀ to฀ 27.9%.฀ The฀ decrease฀ in฀ the฀ effective฀ tax฀ rate฀
was฀ driven฀ by฀ a฀ number฀ of฀ factors,฀ including฀ the฀ reversal฀
of฀reserves฀in฀the฀current฀year฀associated฀with฀audits฀that฀
were฀settled฀as฀well฀as฀the฀effects฀of฀certain฀international฀
tax฀planning฀strategies฀implemented฀in฀2004.฀The฀decrease฀
was฀partially฀offset฀by฀the฀impact฀of฀lapping฀the฀benefit฀in฀
2003฀of฀amending฀certain฀prior฀U.S.฀income฀tax฀returns฀to฀
claim฀credit฀for฀foreign฀taxes฀paid฀in฀prior฀years฀as฀well฀as฀
39
Yum!฀Brands,฀Inc.