Pizza Hut 2004 Annual Report Download - page 46

Download and view the complete annual report

Please find page 46 of the 2004 Pizza Hut annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 85

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85

See฀ Note฀ 2฀ for฀ a฀ further฀ discussion฀ of฀ our฀ policies฀
regarding฀goodwill฀and฀indefinite-lived฀intangible฀assets.
Allowances฀ for฀ Franchise฀ and฀ License฀ Receivables฀ and฀
Contingent฀Liabilities฀ We฀reserve฀a฀franchisee’s฀or฀licens-
ee’s฀ entire฀ receivable฀ balance฀ based฀ upon฀ pre-defined฀
aging฀criteria฀and฀upon฀the฀occurrence฀of฀other฀events฀that฀
indicate฀that฀we฀may฀not฀collect฀the฀balance฀due.฀As฀a฀result฀
of฀reserving฀using฀this฀methodology,฀we฀have฀an฀immaterial฀
amount฀of฀receivables฀that฀are฀past฀due฀that฀have฀not฀been฀
reserved฀for฀at฀December฀25,฀2004.฀
See฀ Note฀ 2฀ for฀ a฀ further฀ discussion฀ of฀ our฀ policies฀
regarding฀franchise฀and฀license฀operations.
Primarily฀ as฀ a฀ result฀ of฀ our฀ refranchising฀ efforts,฀ we฀
remain฀ liable฀ for฀ certain฀ lease฀ assignments฀ and฀ guaran-
tees.฀ We฀ record฀ a฀ liability฀ for฀ our฀ exposure฀ under฀ these฀
lease฀assignments฀and฀guarantees฀when฀such฀exposure฀is฀
probable฀and฀ estimable.฀At฀December฀25,฀2004,฀we฀have฀
recorded฀an฀immaterial฀liability฀for฀our฀exposure฀which฀we฀
consider฀to฀be฀probable฀and฀estimable.฀The฀potential฀total฀
exposure฀under฀such฀leases฀is฀significant,฀with฀$306฀million฀
representing฀the฀present฀value,฀discounted฀at฀our฀pre-tax฀cost฀
of฀debt,฀of฀the฀minimum฀payments฀of฀the฀assigned฀leases฀
at฀December฀25,฀2004.฀Current฀franchisees฀are฀the฀primary฀
lessees฀under฀the฀vast฀majority฀of฀these฀leases.฀We฀gener-
ally฀have฀cross-default฀provisions฀with฀these฀franchisees฀that฀
would฀put฀them฀in฀default฀of฀their฀franchise฀agreement฀in฀
the฀event฀of฀non-payment฀under฀the฀lease.฀We฀believe฀these฀
cross-default฀ provisions฀ significantly฀ reduce฀ the฀ risk฀ that฀
we฀will฀be฀required฀to฀make฀payments฀under฀these฀leases฀
and,฀historically,฀we฀have฀not฀been฀required฀to฀make฀such฀
payments฀in฀significant฀amounts.฀
See฀ Note฀ 24฀ for฀ a฀ further฀ discussion฀ of฀ our฀ lease฀
guarantees.
Self-Insured฀ Property฀ and฀ Casualty฀ Losses฀ We฀ record฀
our฀best฀estimate฀of฀the฀remaining฀cost฀to฀settle฀incurred฀
self-insured฀property฀and฀casualty฀claims.฀The฀estimate฀is฀
based฀on฀the฀results฀of฀an฀independent฀actuarial฀study฀and฀
considers฀historical฀claim฀frequency฀and฀severity฀as฀well฀as฀
changes฀in฀factors฀such฀as฀our฀business฀environment,฀benefit฀
levels,฀medical฀ costs฀and฀ the฀regulatory฀environment฀that฀
could฀impact฀overall฀self-insurance฀costs.฀Additionally,฀a฀risk฀
margin฀to฀cover฀unforeseen฀events฀that฀may฀occur฀over฀the฀
several฀years฀it฀takes฀for฀claims฀to฀settle฀is฀included฀in฀our฀
reserve,฀increasing฀ our฀confidence฀level฀that฀the฀recorded฀
reserve฀is฀adequate.
See฀Note฀24฀for฀a฀further฀discussion฀of฀our฀insurance฀
programs.
Pension฀Plans฀ Certain฀of฀our฀employees฀are฀covered฀under฀
noncontributory฀ defined฀ benefit฀ pension฀ plans.฀ The฀ most฀
significant฀of฀these฀plans฀was฀amended฀in฀2001฀such฀that฀
employees฀hired฀after฀September฀30,฀2001฀are฀not฀eligible฀
to฀participate.฀As฀of฀our฀September฀30,฀2004฀measurement฀
date,฀these฀plans฀had฀a฀projected฀benefit฀obligation฀(“PBO”)฀
of฀$700฀million,฀an฀accumulated฀benefit฀obligation฀(“ABO”)฀of฀
$629฀million฀and฀a฀fair฀value฀of฀plan฀assets฀of฀$518฀million.฀
As฀a฀result฀ of฀the฀$111฀million฀underfunded฀status฀of฀ the฀
plans฀relative฀to฀the฀ABO฀at฀September฀30,฀2004,฀we฀have฀
recorded฀a฀cumulative฀ $95฀million฀charge฀to฀accumulated฀
other฀comprehensive฀loss฀(net฀of฀tax฀of฀$58฀million)฀as฀of฀
December฀25,฀2004.
The฀PBO฀and฀ABO฀reflect฀the฀actuarial฀present฀value฀of฀all฀
benefits฀earned฀to฀date฀by฀employees.฀The฀PBO฀incorporates฀
assumptions฀as฀to฀future฀compensation฀levels฀while฀the฀ABO฀
reflects฀only฀current฀compensation฀levels.฀Due฀to฀the฀rela-
tively฀long฀time฀frame฀over฀which฀benefits฀earned฀to฀date฀are฀
expected฀to฀be฀paid,฀our฀PBO฀and฀ABO฀are฀highly฀sensitive฀to฀
changes฀in฀discount฀rates.฀We฀measured฀our฀PBO฀and฀ABO฀
using฀a฀discount฀rate฀of฀6.15%฀at฀September฀30,฀2004.฀This฀
discount฀rate฀was฀determined฀using฀a฀hypothetical฀portfolio฀
of฀high-quality฀debt฀instruments฀with฀maturities฀that฀mirror฀
our฀expected฀benefit฀obligations฀under฀the฀plans.฀A฀50฀basis฀
point฀increase฀in฀this฀discount฀rate฀would฀have฀decreased฀our฀
PBO฀by฀approximately฀$63฀million฀at฀September฀30,฀2004.฀
Conversely,฀a฀50฀basis฀point฀decrease฀in฀this฀discount฀rate฀
would฀have฀increased฀our฀PBO฀by฀approximately฀$65฀million฀
at฀September฀30,฀2004.
The฀pension฀ expense฀ we฀will฀record฀ in฀ 2005฀ is฀ also฀
impacted฀ by฀ the฀ discount฀ rate฀ we฀ selected฀ at฀ September฀
30,฀2004.฀In฀total,฀we฀expect฀pension฀expense฀to฀increase฀
approximately฀$3฀million฀to฀$56฀million฀in฀2005.฀The฀increase฀
is฀primarily฀driven฀by฀an฀increase฀in฀interest฀cost฀because฀of฀
the฀higher฀PBO.฀Service฀cost฀will฀also฀increase฀as฀a฀result฀of฀
the฀lower฀discount฀rate,฀though,฀as฀previously฀mentioned,฀the฀
plans฀are฀closed฀to฀new฀participants.฀A฀50฀basis฀point฀change฀
in฀our฀discount฀rate฀assumption฀of฀6.15%฀at฀September฀30,฀
2004฀would฀impact฀our฀2005฀pension฀expense฀by฀approxi-
mately฀$12฀million.
The฀assumption฀we฀make฀regarding฀our฀expected฀long-
term฀rate฀of฀return฀on฀plan฀assets฀also฀impacts฀our฀pension฀
expense.฀Our฀expected฀long-term฀rate฀of฀return฀on฀plan฀assets฀
at฀both฀September฀30,฀2004฀and฀September฀30,฀2003฀was฀
8.5%.฀We฀believe฀that฀this฀assumption฀is฀appropriate฀given฀the฀
composition฀of฀our฀plan฀assets฀and฀historical฀market฀returns฀
thereon.฀Given฀no฀change฀to฀the฀market-related฀value฀of฀our฀
plan฀assets฀as฀of฀September฀30,฀2004,฀a฀one฀percentage฀
point฀increase฀or฀decrease฀in฀our฀expected฀rate฀of฀return฀on฀
plan฀assets฀assumption฀would฀decrease฀or฀increase,฀respec-
tively,฀ our฀ 2005฀ pension฀ plan฀ expense฀ by฀ approximately฀
$5฀million.
The฀losses฀our฀plan฀assets฀have฀experienced,฀along฀with฀
the฀decrease฀in฀discount฀rates,฀have฀largely฀contributed฀to฀an฀
unrecognized฀actuarial฀loss฀of฀$225฀million฀in฀our฀plans฀as฀
of฀September฀30,฀2004.฀For฀purposes฀of฀determining฀2004฀
expense,฀our฀funded฀status฀was฀ such฀that฀we฀ recognized฀
$19฀million฀of฀unrecognized฀actuarial฀loss฀in฀2004.฀We฀will฀
recognize฀approximately฀$22฀million฀of฀unrecognized฀actu-
arial฀loss฀in฀2005.฀Given฀no฀change฀to฀the฀assumptions฀at฀
our฀September฀30,฀2004฀measurement฀date,฀actuarial฀loss฀
recognition฀will฀remain฀at฀an฀amount฀near฀that฀to฀be฀recog-
nized฀in฀2005฀over฀the฀next฀few฀years฀before฀it฀begins฀to฀
gradually฀decline.
44