Pizza Hut 2005 Annual Report Download - page 32

The฀ sale฀ did฀ not฀ have฀ a฀ significant฀ impact฀ on฀ our฀
subsequently฀reported฀results฀of฀operations฀in฀2005฀nor฀is฀
it฀expected฀to฀have฀a฀significant฀impact฀on฀the฀Company’s฀
results฀of฀operations฀going฀forward.
Hurricane฀ Katrina฀ During฀ the฀ third฀ quarter฀ of฀ 2005,฀
Hurricane฀ Katrina฀ caused฀ significant฀ damage฀ to฀ several฀
company฀ and฀ franchised฀ stores.฀ This฀ storm฀ resulted฀ in฀
approximately฀$4฀million฀of฀one-time฀costs฀being฀recorded฀
in฀the฀full฀year฀from฀property฀damage฀and฀asset฀write-offs฀
related฀ to฀ company฀ restaurants.฀ Additionally,฀ during฀ mid-
September฀2005,฀Hurricane฀Rita฀caused฀further฀damage฀to฀
company฀and฀franchised฀stores,฀though฀to฀a฀lesser฀extent฀
than฀ Hurricane฀ Katrina.฀ We฀ estimate฀ that฀ lost฀ operating฀
profits฀in฀2005฀as฀a฀result฀of฀stores฀being฀closed฀due฀to฀the฀
effects฀of฀these฀hurricanes฀was฀approximately฀$3฀million.฀
We฀do฀not฀expect฀insurance฀recoveries,฀if฀any,฀related฀to฀the฀
hurricanes฀to฀be฀significant.
In฀the฀fourth฀quarter,฀we฀experienced฀utility฀costs฀in฀the฀
U.S.฀that฀were฀approximately฀$10฀million฀higher฀than฀in฀the฀
prior฀year,฀which฀we฀believe฀were฀at฀least฀partially฀attributable฀
to฀these฀hurricanes.฀We฀expect฀this฀trend฀to฀continue฀into฀
the฀first฀quarter฀of฀2006฀with฀year-over-year฀utility฀inflation฀of฀
approximately฀20฀percent฀or฀approximately฀$7฀million.
Sale฀of฀Puerto฀Rico฀Business฀ Our฀Puerto฀Rico฀business฀
was฀held฀for฀sale฀beginning฀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฀ $159฀million฀ and฀ $29฀million,฀ respec-
tively,฀ franchise฀ fees฀ increased฀ $10฀million฀ and฀ general฀
and฀administrative฀expenses฀decreased฀$9฀million฀for฀the฀
year฀ended฀December฀31,฀2005฀as฀compared฀to฀the฀year฀
ended฀December฀25,฀2004.฀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.
Income฀ Tax฀ Impact฀ of฀ Repatriating฀ Qualified฀ Foreign฀
Earnings฀ The฀ American฀ Jobs฀ Creation฀ Act฀ of฀ 2004฀ (the฀
“Act”),฀which฀became฀law฀on฀October฀22,฀2004,฀allows฀a฀
dividends฀received฀deduction฀of฀85%฀of฀repatriated฀quali-
fied฀ foreign฀ earnings฀ in฀ fiscal฀ year฀ 2005.฀ We฀ recorded฀
$6฀million฀ in฀ income฀ tax฀ expense฀ during฀ the฀ year฀ ended฀
December฀25,฀2004฀as฀a฀result฀of฀our฀then฀determination฀
to฀repatriate฀approximately฀$110฀million฀in฀2005฀which฀will฀
be฀ eligible฀for฀ the฀ Act’s฀ dividends฀ received฀ deduction.฀ In฀
accordance฀with฀FASB฀Staff฀Position฀109-2,฀“Accounting฀and฀
Disclosure฀Guidance฀for฀the฀Foreign฀Earnings฀Repatriation฀
Provisions฀within฀the฀American฀Jobs฀Creation฀Act฀of฀2004,”฀
we฀continued฀to฀evaluate฀in฀2005฀whether฀we฀would฀repa-
triate฀other฀undistributed฀earnings฀from฀foreign฀investments฀
as฀a฀result฀of฀the฀Act.฀During฀the฀second฀quarter฀of฀2005,฀
we฀determined฀that฀we฀would฀repatriate฀additional฀qualified฀
foreign฀earnings฀of฀approximately฀$390฀million฀in฀fiscal฀year฀
2005฀which฀will฀be฀eligible฀for฀the฀Act’s฀dividends฀received฀
deduction฀ (for฀ a฀total฀repatriation฀of฀qualified฀earnings฀of฀
approximately฀$500฀million).฀As฀a฀result฀of฀this฀determina-
tion,฀approximately฀$20฀million฀of฀additional฀tax฀expense฀was฀
recognized฀in฀fiscal฀2005.฀No฀additional฀amounts฀beyond฀the฀
approximately฀$500฀million฀as฀discussed฀above฀are฀eligible฀
for฀the฀Act’s฀dividends฀received฀deduction.
Lease฀ Accounting฀ Adjustments฀ In฀ the฀ fourth฀ quarter฀
of฀2004,฀we฀recorded฀an฀adjustment฀to฀correct฀instances฀
where฀our฀leasehold฀improvements฀were฀not฀being฀depre-
ciated฀over฀the฀shorter฀of฀their฀useful฀lives฀or฀the฀term฀of฀
the฀lease,฀including฀options฀in฀some฀instances,฀over฀which฀
we฀were฀recording฀rent฀expense,฀including฀escalations,฀on฀a฀
straight-line฀basis.
The฀cumulative฀adjustment,฀primarily฀through฀increased฀
U.S.฀depreciation฀expense,฀totaled฀$11.5฀million฀($7฀million฀
after฀tax).฀The฀portion฀of฀this฀adjustment฀that฀related฀to฀2004฀
was฀approximately฀$3฀million.฀As฀the฀portion฀of฀our฀adjust-
ment฀recorded฀that฀was฀a฀correction฀of฀errors฀of฀amounts฀
reported฀in฀ our฀prior฀period฀ financial฀statements฀was฀ not฀
material฀to฀any฀of฀those฀prior฀period฀financial฀statements,฀the฀
entire฀adjustment฀was฀recorded฀in฀the฀2004฀Consolidated฀
Financial฀Statements฀and฀no฀adjustment฀was฀made฀to฀any฀
prior฀period฀financial฀statements.
Amendment฀of฀Sale-Leaseback฀Agreements฀ 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฀in฀2004฀versus฀2003฀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฀ Af filiate฀ Dissolution฀ On฀
November฀10,฀2003,฀we฀dissolved฀our฀unconsolidated฀affil-
iate฀that฀previously฀operated฀733฀restaurants฀in฀Canada.฀We฀
owned฀50%฀of฀this฀unconsolidated฀affiliate฀prior฀to฀its฀dissolu-
tion฀and฀accounted฀for฀our฀interest฀under฀the฀equity฀method.฀
Of฀the฀restaurants฀previously฀operated฀by฀the฀unconsolidated฀
affiliate,฀we฀now฀operate฀the฀vast฀majority฀of฀Pizza฀Huts฀and฀
Taco฀Bells,฀while฀almost฀all฀KFCs฀are฀operated฀by฀franchi-
sees.฀As฀a฀result฀of฀operating฀certain฀restaurants฀that฀were฀
previously฀ operated฀ by฀ the฀ unconsolidated฀ affiliate,฀ our฀
Company฀sales,฀restaurant฀profit฀and฀general฀and฀adminis-
trative฀expenses฀increased฀and฀our฀franchise฀fees฀decreased฀
in฀2004฀versus฀2003.฀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.
36.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.