Pizza Hut 2005 Annual Report Download - page 54

1.฀DESCRIPTION฀OF฀BUSINESS
YUM!฀ Brands,฀ Inc.฀ and฀ Subsidiaries฀ (collectively฀ referred฀
to฀as฀“YUM”฀or฀the฀“Company”)฀comprises฀the฀worldwide฀
operations฀of฀KFC,฀Pizza฀Hut,฀ Taco฀Bell฀and฀since฀ May฀ 7,฀
2002,฀Long฀John฀Silver’s฀(“LJS”)฀and฀A&W฀All-American฀Food฀
Restaurants฀(“A&W”)฀(collectively฀the฀“Concepts”),฀which฀
were฀added฀when฀we฀acquired฀Yorkshire฀Global฀Restaurants,฀
Inc.฀(“YGR”).฀YUM฀is฀the฀world’s฀largest฀quick฀service฀restau-
rant฀company฀based฀on฀the฀number฀of฀system฀units,฀with฀over฀
34,000฀units฀of฀which฀approximately฀40%฀are฀located฀outside฀
the฀U.S.฀in฀more฀than฀100฀countries฀and฀territories.฀YUM฀
was฀created฀as฀an฀independent,฀publicly-owned฀company฀on฀
October฀6,฀1997฀(the฀“Spin-off฀Date”)฀via฀a฀tax-free฀distribu-
tion฀by฀our฀former฀parent,฀PepsiCo,฀Inc.฀(“PepsiCo”),฀of฀our฀
Common฀Stock฀(the฀“Distribution”฀or฀“Spin-off”)฀to฀its฀share-
holders.฀References฀to฀YUM฀throughout฀these฀Consolidated฀
Financial฀Statements฀are฀made฀using฀the฀first฀person฀nota-
tions฀of฀“we,”฀“us”฀or฀“our.”
Through฀our฀widely-recognized฀Concepts,฀we฀develop,฀
operate,฀franchise฀and฀license฀a฀system฀of฀both฀traditional฀
and฀non-traditional฀quick฀service฀restaurants.฀Each฀Concept฀
has฀proprietary฀menu฀items฀and฀emphasizes฀the฀prepara-
tion฀of฀food฀with฀high฀quality฀ingredients฀as฀well฀as฀unique฀
recipes฀and฀special฀seasonings฀to฀provide฀appealing,฀tasty฀
and฀ attractive฀food฀ at฀ competitive฀ prices.฀ Our฀traditional฀
restaurants฀feature฀dine-in,฀carryout฀and,฀in฀some฀instances,฀
drive-thru฀or฀delivery฀service.฀Non-traditional฀ units,฀which฀
are฀principally฀licensed฀outlets,฀include฀express฀units฀and฀
kiosks฀which฀have฀a฀more฀limited฀menu฀and฀operate฀in฀non-
traditional฀locations฀like฀airports,฀gasoline฀service฀stations,฀
convenience฀ stores,฀ stadiums,฀ amusement฀ parks฀ and฀
colleges,฀where฀a฀full-scale฀traditional฀outlet฀would฀not฀be฀
practical฀or฀efficient.฀We฀are฀actively฀pursuing฀the฀strategy฀
of฀multibranding,฀ where฀ two฀ or฀more฀ of฀our฀Concepts฀are฀
operated฀in฀a฀single฀unit.฀In฀addition,฀we฀are฀pursuing฀the฀
multibrand฀ combination฀ of฀ Pizza฀Hut฀ and฀ WingStreet,฀ a฀
flavored฀chicken฀wings฀concept฀we฀have฀developed.
In฀2005,฀we฀began฀reporting฀information฀for฀our฀inter-
national฀business฀in฀two฀separate฀operating฀segments฀as฀a฀
result฀of฀changes฀to฀our฀management฀reporting฀structure.฀The฀
China฀Division฀includes฀mainland฀China฀(“China”),฀Thailand฀
and฀ KFC฀ Taiwan,฀ and฀ the฀ International฀ Division฀ includes฀
the฀ remainder฀ of฀ our฀international฀ operations.฀ While฀ this฀
reporting฀change฀did฀not฀impact฀our฀consolidated฀results,฀
segment฀information฀for฀previous฀periods฀has฀been฀restated฀
to฀be฀consistent฀with฀the฀current฀period฀presentation.
Beginning฀in฀2005,฀we฀also฀changed฀the฀China฀business฀
reporting฀calendar฀to฀more฀closely฀align฀the฀timing฀of฀the฀
reporting฀of฀its฀results฀of฀operations฀with฀our฀U.S.฀business.฀
Previously฀our฀China฀business,฀like฀the฀rest฀of฀our฀international฀
businesses,฀closed฀one฀month฀(or฀one฀period฀for฀certain฀of฀
our฀international฀businesses)฀earlier฀than฀YUM’s฀period฀end฀
date฀to฀facilitate฀consolidated฀reporting.฀To฀maintain฀compa-
rability฀of฀our฀consolidated฀results฀of฀operations,฀amounts฀
related฀to฀our฀China฀business฀for฀December฀2004฀have฀not฀
been฀reflected฀in฀our฀Consolidated฀Statements฀of฀Income฀and฀
net฀income฀for฀the฀China฀business฀for฀the฀one฀month฀period฀
ended฀December฀31,฀2004฀ was฀recognized฀as฀an฀ adjust-
ment฀directly฀to฀consolidated฀retained฀earnings฀in฀the฀year฀
to฀date฀ended฀December฀31,฀2005.฀Our฀consolidated฀results฀
of฀operations฀for฀the฀year฀to฀date฀ended฀December฀31,฀2005฀
include฀the฀results฀of฀operations฀of฀the฀China฀business฀for฀
the฀months฀of฀January,฀2005฀through฀December,฀2005.฀Our฀
consolidated฀results฀of฀operations฀for฀the฀years฀to฀date฀ended฀
December฀25,฀2004฀and฀December฀27,฀2003฀continue฀to฀
include฀the฀results฀of฀operations฀of฀the฀China฀business฀for฀
the฀months฀of฀December,฀2003฀through฀November,฀2004,฀
and฀December,฀2002฀through฀November,฀2003,฀respectively,฀
as฀previously฀reported.
For฀the฀month฀of฀December฀2004฀the฀China฀business฀
had฀revenues฀of฀$79฀million฀and฀net฀income฀of฀$6฀million.฀As฀
mentioned฀previously,฀neither฀of฀these฀amounts฀is฀included฀
in฀our฀Consolidated฀Statement฀of฀Income฀for฀the฀year฀to฀date฀
ended฀December฀31,฀2005฀and฀the฀net฀income฀figure฀was฀
credited฀directly฀to฀retained฀earnings฀in฀the฀first฀quarter฀of฀
2005.฀Net฀income฀for฀the฀month฀of฀December,฀2004฀was฀
negatively฀ impacted฀ by฀ costs฀ incurred฀ in฀ preparation฀ of฀
opening฀a฀significant฀number฀of฀new฀stores฀in฀early฀2005฀
as฀well฀as฀increased฀advertising฀expense,฀all฀of฀which฀was฀
recorded฀in฀December’s฀results฀of฀operations.฀Additionally,฀
the฀net฀increase฀in฀cash฀for฀the฀China฀business฀in฀December,฀
2004฀ has฀ been฀ presented฀ as฀ a฀ single฀ line฀ item฀ on฀ our฀
Consolidated฀Statement฀of฀Cash฀Flows฀for฀the฀year฀to฀date฀
ended฀December฀31,฀2005.฀The฀$34฀million฀net฀increase฀in฀
cash฀was฀primarily฀attributable฀to฀short-term฀borrowings฀for฀
working฀capital฀purposes,฀a฀majority฀of฀which฀were฀repaid฀
prior฀to฀the฀end฀of฀the฀China฀business’฀first฀quarter.
2.฀SUMMARY฀OF฀฀
SIGNIFICANT฀ACCOUNTING฀POLICIES
Our฀ preparation฀ of฀ the฀ accompanying฀ Consolidated฀
Financial฀Statements฀in฀conformity฀ with฀accounting฀prin-
ciples฀generally฀accepted฀in฀the฀United฀States฀of฀America฀
requires฀us฀to฀make฀estimates฀and฀assumptions฀that฀affect฀
reported฀amounts฀of฀assets฀and฀liabilities,฀disclosure฀of฀
contingent฀assets฀and฀liabilities฀at฀the฀date฀of฀the฀financial฀
statements,฀and฀the฀reported฀ amounts฀of฀ revenues฀and฀
expenses฀during฀the฀reporting฀period.฀Actual฀results฀could฀
differ฀from฀these฀estimates.
Principles฀of฀Consolidation฀and฀Basis฀of฀Preparation฀ Inter-
company฀accounts฀and฀transactions฀have฀been฀eliminated.฀
Cer tain฀ investments฀ in฀ businesses฀ that฀ operate฀ our฀
Concepts฀are฀accounted฀for฀by฀the฀equity฀method.฀Generally,฀
we฀possess฀50%฀ownership฀of฀and฀50%฀voting฀rights฀over฀
these฀affiliates.฀Our฀lack฀of฀majority฀voting฀rights฀precludes฀
us฀ from฀ controlling฀ these฀ affiliates,฀ and฀ thus฀ we฀ do฀ not฀
consolidate฀these฀affiliates.฀Our฀share฀of฀the฀net฀income฀or฀
loss฀of฀those฀unconsolidated฀affiliates฀is฀included฀in฀other฀
(income)฀expense.
Notes฀to฀Consolidated฀฀
Financial฀Statements
(Tabular฀amounts฀in฀millions,฀฀
except฀share฀data)
58.฀ ฀ ฀ |฀ ฀ ฀ Yum!฀Brands,฀Inc.