Pizza Hut 2004 Annual Report Download - page 64

rate฀ swaps฀ with฀ notional฀ amounts฀ of฀$850฀million.฀These฀
swaps฀have฀reset฀dates฀and฀floating฀rate฀indices฀which฀match฀
those฀of฀our฀underlying฀fixed-rate฀debt฀and฀have฀been฀desig-
nated฀as฀fair฀value฀hedges฀of฀a฀portion฀of฀that฀debt.฀As฀the฀
swaps฀qualify฀for฀the฀short-cut฀method฀under฀SFAS฀133,฀no฀
ineffectiveness฀ has฀ been฀ recorded.฀ The฀ net฀ fair฀ value฀ of฀
these฀swaps฀as฀of฀December฀25,฀2004฀was฀approximately฀
$29฀million,฀of฀which฀$30฀million฀and฀$1฀million฀have฀been฀
included฀in฀ other฀assets฀and฀other฀liabilities฀and฀ deferred฀
credits,฀respectively.฀The฀portion฀of฀this฀fair฀value฀which฀has฀
not฀yet฀been฀recognized฀as฀a฀reduction฀to฀interest฀expense฀
at฀December฀25,฀2004฀(approximately฀$21฀million)฀has฀been฀
included฀in฀long-term฀debt.
Due฀to฀early฀redemption฀of฀the฀underlying฀7.45%฀Senior฀
Unsecured฀ Notes฀ on฀ November฀ 15,฀ 2004฀ (see฀ Note฀ 14),฀
pay-variable฀ interest฀ rate฀ swaps฀ with฀ notional฀ amounts฀
of฀ $350฀million฀ that฀ qualified฀ for฀ hedge฀ accounting฀ at฀
December฀27,฀2003,฀no฀longer฀qualify฀for฀hedge฀accounting฀
at฀December฀25,฀2004.฀As฀we฀elected฀to฀hold฀these฀swaps฀
until฀their฀May฀2005฀maturity,฀we฀entered฀into฀new฀pay-fixed฀
interest฀ rate฀ swaps฀ with฀ offsetting฀ notional฀ amounts฀ and฀
terms.฀Gains฀or฀losses฀due฀to฀changes฀in฀the฀fair฀value฀of฀
the฀pay-variable฀swaps฀will฀be฀recognized฀in฀the฀results฀of฀
operations฀through฀May฀2005฀but฀these฀gains฀or฀losses฀are฀
expected฀to฀be฀almost฀entirely฀offset฀by฀changes฀in฀fair฀value฀
of฀the฀pay-fixed฀swaps.฀The฀fair฀value฀of฀both฀of฀these฀swaps฀
were฀in฀an฀asset฀position฀as฀of฀December฀25,฀2004฀with฀a฀
fair฀value฀totaling฀approximately฀$9฀million.฀This฀fair฀value฀has฀
been฀included฀in฀prepaid฀expenses฀and฀other฀current฀assets.฀
The฀fair฀value฀of฀the฀swaps฀that฀previously฀qualified฀for฀hedge฀
accounting฀ was฀$31฀million฀at฀ December฀27,฀2003,฀which฀
was฀included฀in฀other฀assets.฀The฀portion฀of฀this฀fair฀value฀
which฀ had฀ not฀been฀ recognized฀as฀a฀ reduction฀ to฀ interest฀
expense฀at฀December฀27,฀2003฀(approximately฀$29฀million)฀
was฀included฀in฀long-term฀debt.
Foreign฀Exchange฀ Derivative฀Instruments฀ We฀ enter฀ into฀
foreign฀ currency฀ forward฀ contracts฀ with฀ the฀ objective฀ of฀
reducing฀ our฀ exposure฀ to฀ cash฀ flow฀ volatility฀ arising฀ from฀
foreign฀currency฀fluctuations฀associated฀with฀certain฀foreign฀
currency฀ denominated฀ financial฀ instruments,฀ the฀ majority฀
of฀ which฀ are฀ intercompany฀ short-term฀ receivables฀ and฀
payables.฀The฀notional฀amount,฀maturity฀date,฀and฀currency฀
of฀these฀contracts฀match฀those฀of฀the฀underlying฀receivables฀
or฀ payables.฀ For฀ those฀ foreign฀ currency฀ exchange฀ forward฀
contracts฀that฀we฀have฀designated฀as฀cash฀flow฀hedges,฀we฀
measure฀ineffectiveness฀by฀comparing฀the฀cumulative฀change฀
in฀the฀forward฀ contract฀ with฀the฀cumulative฀ change฀in฀ the฀
hedged฀item.฀ No฀ ineffectiveness฀was฀recognized฀in฀2004,฀
2003฀or฀2002฀for฀those฀foreign฀currency฀forward฀contracts฀
designated฀as฀cash฀flow฀hedges.
Equity฀Derivative฀Instruments฀ On฀December฀3,฀2004,฀we฀
entered฀into฀an฀accelerated฀share฀repurchase฀program฀(the฀
“Program”).฀In฀connection฀with฀the฀Program,฀a฀third-party฀invest-
ment฀bank฀borrowed฀approximately฀5.4฀million฀shares฀of฀our฀
common฀stock฀from฀shareholders.฀We฀then฀repurchased฀those฀
shares฀at฀their฀then฀market฀value฀($46.58)฀from฀the฀invest-
ment฀bank฀for฀approximately฀$250฀million.฀The฀repurchase฀of฀
the฀5.4฀million฀shares฀was฀made฀pursuant฀to฀a฀$300฀million฀
share฀repurchase฀program฀authorized฀by฀our฀Board฀of฀Directors฀
in฀May฀2004.
Simultaneously,฀we฀entered฀into฀a฀forward฀contract฀with฀
the฀ investment฀ bank฀ that฀ was฀ indexed฀ to฀ the฀ number฀ of฀
shares฀repurchased.฀Under฀the฀terms฀of฀the฀forward฀contract฀
we฀will฀receive฀or฀be฀required฀to฀pay฀a฀price฀adjustment฀based฀
on฀the฀difference฀between฀the฀weighted฀average฀price฀of฀our฀
common฀stock฀over฀the฀duration฀of฀the฀Program฀and฀the฀initial฀
purchase฀price฀of฀$46.58฀per฀share.฀We฀expect฀the฀Program฀
to฀be฀completed฀by฀the฀end฀of฀our฀first฀fiscal฀quarter฀in฀2005.฀
At฀our฀election,฀any฀payments฀we฀are฀obligated฀to฀make฀will฀
either฀be฀in฀cash฀or฀in฀shares฀of฀our฀common฀stock฀(not฀to฀
exceed฀15฀million฀shares฀as฀specified฀in฀the฀forward฀contract).฀
Therefore,฀in฀accordance฀ with฀EITF฀ 00-19,฀“Accounting฀ for฀
Derivative฀Financial฀Instruments฀Indexed฀to,฀and฀Potentially฀
Settled฀In,฀a฀Company’s฀Own฀Stock,”฀any฀changes฀in฀the฀fair฀
value฀of฀the฀forward฀contract฀will฀be฀recognized฀as฀an฀adjust-
ment฀ to฀ Shareholders’฀ Equity฀ at฀ the฀ end฀ of฀ the฀ Program.฀
Through฀ December฀25,฀ 2004,฀ the฀ difference฀ between฀ the฀
weighted฀average฀price฀of฀our฀common฀stock฀and฀the฀initial฀
purchase฀price฀was฀insignificant.
Commodity฀ Derivative฀ Instruments฀ We฀also฀utilize,฀on฀ a฀
limited฀basis,฀commodity฀ futures฀ and฀options฀contracts฀to฀
mitigate฀our฀exposure฀to฀commodity฀price฀fluctuations฀over฀
the฀next฀twelve฀months.฀Those฀contracts฀have฀not฀been฀desig-
nated฀ as฀ hedges฀ under฀ SFAS฀133.฀ Commodity฀ future฀ and฀
options฀contracts฀did฀not฀significantly฀impact฀the฀Consolidated฀
Financial฀Statements฀in฀2004,฀2003฀or฀2002.
Deferred฀Amounts฀in฀Accumulated฀ Other฀Comprehensive฀
Income฀ (Loss)฀ As฀ of฀ December฀25,฀2004,฀we฀ had฀ a฀ net฀
deferred฀loss฀associated฀with฀cash฀flow฀hedges฀of฀approxi-
mately฀$2฀million,฀net฀of฀tax.฀The฀loss,฀which฀primarily฀arose฀
from฀the฀settlement฀of฀treasury฀locks฀entered฀into฀prior฀to฀
the฀issuance฀of฀certain฀amounts฀of฀our฀fixed-rate฀debt,฀will฀be฀
reclassified฀into฀earnings฀from฀January฀1,฀2005฀through฀2012฀
as฀an฀increase฀to฀interest฀expense฀on฀this฀debt.
Credit฀Risks฀ Credit฀risk฀from฀interest฀rate฀swaps฀and฀foreign฀
exchange฀ contracts฀ is฀ dependent฀ both฀ on฀ movement฀ in฀
interest฀and฀currency฀rates฀and฀the฀possibility฀of฀non-payment฀
by฀counterparties.฀We฀mitigate฀credit฀risk฀by฀entering฀into฀
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