Pizza Hut 2004 Annual Report Download - page 42

the฀recognition฀in฀2004฀of฀valuation฀allowances฀for฀certain฀
deferred฀tax฀assets฀whose฀realization฀is฀no฀longer฀considered฀
more฀likely฀than฀not.
The฀2003฀effective฀tax฀rate฀decreased฀1.9฀percentage฀
points฀to฀30.2%.฀The฀decrease฀in฀the฀effective฀tax฀rate฀was฀
primarily฀due฀to฀a฀4.1฀percentage฀point฀benefit฀of฀amending฀
certain฀prior฀U.S.฀income฀tax฀returns฀to฀claim฀credit฀for฀foreign฀
taxes฀paid฀in฀prior฀years.฀The฀returns฀were฀amended฀upon฀
our฀determination฀that฀it฀was฀more฀beneficial฀to฀claim฀credit฀
for฀such฀taxes฀than฀to฀deduct฀such฀taxes,฀as฀had฀been฀done฀
when฀the฀returns฀were฀originally฀filed.฀In฀future฀years,฀we฀antic-
ipate฀continuing฀to฀claim฀credit฀for฀foreign฀taxes฀paid฀in฀the฀
then฀current฀year,฀as฀we฀have฀done฀in฀2004,฀2003฀and฀2002.฀
However,฀the฀amended฀return฀benefit฀recognized฀in฀2003฀was฀
non-recurring.฀The฀decrease฀in฀the฀2003฀effective฀tax฀rate฀
was฀partially฀offset฀by฀the฀recognition฀of฀valuation฀allowances฀
for฀certain฀deferred฀tax฀assets฀whose฀realization฀is฀no฀longer฀
considered฀more฀likely฀than฀not.฀See฀Note฀22฀for฀a฀discussion฀
of฀valuation฀allowances.
Adjustments฀ to฀ reserves฀ and฀ prior฀ years฀ include฀ the฀
effects฀of฀the฀reconciliation฀of฀income฀tax฀amounts฀recorded฀
in฀ our฀ Consolidated฀ Statements฀ of฀ Income฀ to฀ amounts฀
reflected฀on฀our฀tax฀returns,฀including฀any฀adjustments฀to฀the฀
Consolidated฀Balance฀Sheets.฀Adjustments฀to฀reserves฀and฀
prior฀years฀also฀includes฀changes฀in฀tax฀reserves฀established฀
for฀potential฀exposure฀we฀may฀incur฀if฀a฀taxing฀authority฀takes฀
a฀position฀on฀a฀matter฀contrary฀to฀our฀position.฀We฀evaluate฀
these฀reserves,฀including฀ interest฀ thereon,฀on฀a฀quarterly฀
basis฀to฀insure฀that฀they฀have฀been฀appropriately฀adjusted฀
for฀events,฀including฀audit฀settlements,฀that฀we฀believe฀may฀
impact฀our฀exposure.
CONSOLIDATED฀CASH฀FLOWS
Net฀cash฀provided฀by฀operating฀activities฀was฀$1,131฀million฀
compared฀ to฀ $1,053฀million฀ in฀ 2003.฀ The฀ increase฀ was฀
primarily฀driven฀by฀an฀increase฀in฀net฀income฀and฀a฀decrease฀
in฀the฀amount฀of฀voluntary฀contributions฀to฀our฀funded฀pension฀
plan฀compared฀to฀2003,฀partially฀offset฀by฀higher฀income฀tax฀
payments฀in฀2004.
In฀2003,฀net฀cash฀provided฀by฀operating฀activities฀was฀
$1,053฀million฀ compared฀ to฀ $1,088฀million฀ in฀ 2002.฀ The฀
decrease฀was฀primarily฀driven฀by฀$130฀million฀in฀voluntary฀
contributions฀to฀our฀funded฀pension฀plan฀in฀2003,฀partially฀
offset฀by฀higher฀net฀income.
Net฀cash฀used฀in฀investing฀activities฀was฀$486฀million฀
versus฀$519฀million฀ in฀ 2003.฀The฀decrease฀ was฀primarily฀
driven฀by฀higher฀proceeds฀from฀refranchising฀of฀restaurants฀
and฀lower฀capital฀spending฀compared฀to฀2003,฀partially฀offset฀
by฀the฀impact฀of฀the฀timing฀of฀purchases฀and฀sales฀of฀short-
term฀investments.
In฀ 2003,฀ net฀ cash฀ used฀ in฀ investing฀ activities฀ was฀
$519฀million฀versus฀$885฀million฀in฀2002.฀The฀decrease฀in฀
cash฀used฀was฀primarily฀driven฀by฀the฀$275฀million฀acquisi-
tion฀of฀YGR฀in฀2002฀and฀lower฀capital฀spending฀in฀2003.
Net฀cash฀used฀in฀financing฀activities฀was฀$779฀million฀
versus฀ $475฀million฀ in฀ 2003.฀ The฀ increase฀ in฀ 2004฀ was฀
primarily฀driven฀by฀higher฀share฀repurchases,฀higher฀net฀debt฀
repayments฀and฀the฀payment฀of฀two฀quarterly฀dividends,฀partially฀
offset฀by฀higher฀proceeds฀from฀stock฀option฀exercises.
In฀ 2003,฀ net฀ cash฀ used฀ in฀ financing฀ activities฀ was฀
$475฀million฀ versus฀ $187฀million฀ in฀ 2002.฀ The฀ increase฀
was฀primarily฀driven฀by฀higher฀net฀debt฀repayments฀and฀higher฀
shares฀repurchased฀in฀2003.
CONSOLIDATED฀FINANCIAL฀CONDITION
Assets฀increased฀$76฀million฀or฀1%฀to฀$5.7฀billion฀primarily฀
due฀to฀an฀increase฀in฀property,฀plant฀and฀equipment฀driven฀by฀
capital฀expenditures฀in฀excess฀of฀depreciation.฀The฀increase฀
was฀also฀partially฀driven฀by฀the฀existence฀of฀a฀federal฀income฀
tax฀ receivable฀ at฀ December฀25,฀2004฀ recorded฀in฀prepaid฀
expenses฀and฀other฀current฀assets฀and฀the฀timing฀of฀the฀collec-
tion฀of฀certain฀accounts฀receivable.฀The฀increase฀was฀partially฀
offset฀by฀the฀impact฀of฀higher฀spending฀for฀financing฀activities฀
compared฀to฀2003,฀as฀described฀above,฀and฀a฀decrease฀in฀
other฀assets฀as฀a฀result฀of฀the฀utilization฀of฀deferred฀income฀
tax฀assets฀in฀2004.
Liabilities฀decreased฀$399฀million฀or฀9%฀to฀$4.1฀billion฀
primarily฀ due฀ to฀ lower฀ long-term฀ debt฀ as฀ a฀ result฀ of฀ the฀
early฀ redemption฀of฀ our฀ 2005฀ Senior฀ Unsecured฀ Notes฀ of฀
$350฀million฀in฀2004฀and฀lower฀income฀taxes฀payable฀due฀
to฀the฀excess฀of฀current฀year฀tax฀payments฀made฀over฀the฀
current฀year฀provision.
LIQUIDITY฀AND฀CAPITAL฀RESOURCES
Operating฀in฀the฀QSR฀industry฀allows฀us฀to฀generate฀substan-
tial฀cash฀flows฀from฀the฀operations฀of฀our฀company฀stores฀
and฀from฀our฀franchise฀operations,฀which฀require฀a฀limited฀
YUM฀investment.฀In฀each฀of฀the฀last฀three฀fiscal฀years,฀net฀
cash฀provided฀by฀operating฀activities฀has฀exceeded฀$1฀billion.฀
These฀cash฀flows฀have฀allowed฀us฀to฀fund฀our฀discretionary฀
spending,฀ while฀ at฀ the฀ same฀ time฀ reducing฀ our฀ long-term฀
debt฀balances.฀We฀expect฀these฀levels฀of฀net฀cash฀provided฀
by฀operating฀activities฀to฀continue฀in฀the฀foreseeable฀future.฀
Our฀discretionary฀spending฀includes฀capital฀spending฀for฀new฀
restaurants,฀acquisitions฀ of฀ restaurants฀ from฀franchisees,฀
repurchases฀of฀shares฀of฀our฀common฀stock฀and฀dividends฀
paid฀to฀our฀shareholders.฀Though฀a฀decline฀in฀revenues฀could฀
adversely฀impact฀our฀cash฀flows฀from฀operations,฀we฀believe฀
our฀operating฀cash฀flows,฀our฀ability฀to฀reduce฀discretionary฀
spending,฀and฀our฀borrowing฀capacity฀will฀allow฀us฀to฀meet฀our฀
cash฀requirements฀in฀2005฀and฀beyond.
We฀ initiated฀ the฀ payment฀ of฀ quarterly฀ dividends฀ in฀
2004฀with฀two฀quarterly฀dividends฀paid฀totaling฀$58฀million.฀
Additionally,฀on฀November฀12,฀2004฀our฀Board฀of฀Directors฀
approved฀a฀ cash฀ dividend฀ of฀ $0.10฀ per฀share฀of฀common฀
stock฀to฀be฀distributed฀on฀February฀4,฀2005฀to฀shareholders฀
of฀record฀at฀the฀close฀of฀business฀on฀January฀14,฀2005.฀On฀
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