Pizza Hut 2005 Annual Report Download - page 43

$316฀million฀representing฀the฀present฀value,฀discounted฀at฀
our฀pre-tax฀cost฀of฀debt,฀of฀the฀minimum฀payments฀of฀the฀
assigned฀leases฀at฀December฀31,฀2005.฀Current฀franchisees฀
are฀the฀primary฀ lessees฀ under฀the฀vast฀majority฀of฀these฀
leases.฀We฀generally฀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฀ 2฀ for฀ a฀ further฀ discussion฀ of฀ our฀ policies฀
regarding฀franchise฀and฀license฀operations.
See฀ Note฀ 21฀ 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฀losses.฀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฀21฀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,฀2005฀measurement฀
date,฀these฀plans฀had฀a฀projected฀benefit฀obligation฀(“PBO”)฀
of฀$815฀million,฀an฀accumulated฀benefit฀obligation฀(“ABO”)฀of฀
$736฀million฀and฀a฀fair฀value฀of฀plan฀assets฀of฀$610฀million.฀
As฀a฀result฀of฀the฀$126฀million฀underfunded฀status฀of฀the฀
plans฀relative฀to฀the฀ABO฀at฀September฀30,฀2005฀and฀an฀
additional฀$10฀million฀contribution฀to฀the฀plans฀made฀subse-
quent฀to฀the฀measurement฀date฀but฀prior฀to฀December฀31,฀
2005,฀we฀have฀recorded฀a฀cumulative฀$110฀million฀charge฀
to฀ accumulated฀ other฀ comprehensive฀ loss฀ (net฀ of฀ tax฀ of฀
$66฀million)฀as฀of฀December฀31,฀2005.
The฀PBO฀and฀ABO฀reflect฀the฀actuarial฀present฀value฀of฀
all฀benefits฀earned฀to฀date฀by฀employees.฀The฀PBO฀incorpo-
rates฀assumptions฀as฀to฀future฀compensation฀levels฀while฀
the฀ABO฀reflects฀only฀current฀compensation฀levels.฀Due฀to฀the฀
relatively฀long฀time฀frame฀over฀which฀benefits฀earned฀to฀date฀
are฀expected฀to฀be฀paid,฀our฀PBO฀and฀ABO฀are฀highly฀sensi-
tive฀to฀changes฀in฀discount฀rates.฀We฀measured฀our฀PBO฀and฀
ABO฀using฀a฀discount฀rate฀of฀5.75%฀at฀September฀30,฀2005.฀
This฀discount฀rate฀was฀determined฀with฀the฀assistance฀of฀our฀
independent฀actuary.฀The฀basis฀for฀our฀discount฀rate฀deter-
mination฀is฀a฀model฀that฀consists฀of฀a฀hypothetical฀portfolio฀
of฀ten฀or฀more฀high-quality฀corporate฀debt฀instruments฀with฀
cash฀flows฀that฀mirror฀our฀expected฀benefit฀payment฀cash฀
flows฀under฀the฀plans.฀In฀considering฀possible฀bond฀portfo-
lios,฀the฀model฀allows฀the฀bond฀cash฀flows฀for฀a฀particular฀
year฀to฀ exceed฀ the฀benefit฀cash฀ flows฀for฀ that฀year.฀Such฀
excesses฀ are฀ assumed฀ to฀ be฀ reinvested฀ at฀ appropriate฀
one-year฀forward฀rates฀and฀used฀to฀meet฀the฀benefit฀cash฀
flows฀in฀ a฀ future฀ year.฀The฀weighted฀ average฀ yield฀of฀this฀
hypothetical฀portfolio฀was฀used฀to฀arrive฀at฀an฀appropriate฀
discount฀rate.฀We฀also฀insure฀that฀changes฀in฀the฀discount฀
rate฀as฀compared฀to฀the฀prior฀year฀are฀consistent฀with฀the฀
overall฀change฀in฀prevailing฀market฀rates.฀A฀50฀basis฀point฀
increase฀ in฀ this฀ discount฀ rate฀ would฀ have฀ decreased฀ our฀
PBO฀by฀approximately฀$69฀million฀at฀September฀30,฀2005.฀
Conversely,฀a฀50฀basis฀point฀decrease฀in฀this฀discount฀rate฀
would฀have฀increased฀our฀PBO฀by฀approximately฀$77฀million฀
at฀September฀30,฀2005.
The฀ pension฀ expense฀ we฀ will฀ record฀ in฀ 2006฀ is฀ also฀
impacted฀by฀the฀discount฀rate฀we฀selected฀at฀September฀30,฀
2005.฀ In฀ total,฀ we฀ expect฀ pension฀ expense฀ to฀ increase฀
approximately฀ $10฀million฀ to฀ $66฀million฀ in฀ 2006.฀ The฀
increase฀ is฀ primarily฀ driven฀ by฀ an฀ increase฀ in฀ recognized฀
actuarial฀loss฀of฀$8฀million฀in฀2006.฀A฀50฀basis฀point฀change฀
in฀our฀discount฀rate฀assumption฀of฀5.75%฀at฀September฀30,฀
2005฀would฀impact฀our฀2006฀pension฀expense฀by฀approxi-
mately฀$13฀million.
The฀assumption฀we฀make฀regarding฀our฀expected฀long-
term฀rate฀of฀return฀on฀plan฀assets฀also฀impacts฀our฀pension฀
expense.฀ Our฀ estimated฀ long-term฀ rate฀ of฀ return฀ on฀ plan฀
assets฀represents฀the฀weighted-average฀of฀historical฀returns฀
for฀ each฀ asset฀ category,฀ adjusted฀ for฀ an฀ assessment฀ of฀
current฀market฀conditions.฀Our฀expected฀long-term฀rate฀of฀
return฀was฀lowered฀to฀8.0%฀from฀8.5%฀in฀connection฀with฀
our฀September฀30,฀2005฀valuation.฀We฀believe฀this฀revision฀
was฀appropriate฀given฀the฀composition฀of฀our฀plan฀assets฀
and฀historical฀market฀returns฀thereon,฀including฀those฀expe-
rienced฀in฀calendar฀year฀2005.฀This฀change฀did฀not฀impact฀
our฀reported฀pension฀expense฀for฀2005฀but฀will฀increase฀our฀
2006฀expense฀by฀approximately฀$3฀million.
The฀losses฀our฀plan฀assets฀have฀experienced,฀along฀with฀
the฀decrease฀in฀discount฀rates,฀have฀largely฀contributed฀to฀
an฀unrecognized฀actuarial฀loss฀of฀$256฀million฀in฀our฀plans฀
as฀ of฀ September฀30,฀ 2005.฀For฀ purposes฀ of฀ determining฀
2005฀expense,฀our฀funded฀status฀was฀such฀that฀we฀recog-
nized฀ $22฀million฀ of฀ unrecognized฀ actuarial฀ loss.฀ We฀ will฀
recognize฀approximately฀$30฀million฀of฀unrecognized฀actu-
arial฀loss฀in฀2006.฀Given฀no฀change฀to฀the฀assumptions฀at฀
our฀September฀30,฀2005฀measurement฀date,฀actuarial฀loss฀
recognition฀will฀remain฀at฀an฀amount฀near฀that฀to฀be฀recog-
nized฀in฀2006฀over฀the฀next฀few฀years฀before฀it฀begins฀to฀
gradually฀decline.
See฀Note฀14฀for฀further฀discussion฀of฀our฀pension฀and฀
post-retirement฀plans.
Income฀ Tax฀Valuation฀Allowances฀and฀ Tax฀Reserves฀ At฀
December฀31,฀ 2005,฀ we฀ have฀ a฀ valuation฀ allowance฀ of฀
$233฀million฀ primarily฀ to฀ reduce฀ our฀ net฀ operating฀ loss฀
and฀tax฀credit฀carryforwards฀of฀$223฀million฀and฀our฀other฀
deferred฀tax฀ assets฀to฀ amounts฀that฀will฀more฀likely฀than฀
not฀be฀realized.฀The฀net฀operating฀loss฀and฀tax฀credit฀carry-
forwards฀exist฀in฀many฀state฀and฀foreign฀jurisdictions฀and฀
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 47.