Pizza Hut 2005 Annual Report Download - page 59

We฀adopted฀SFAS฀123R฀using฀the฀modified฀retrospec-
tive฀application฀transition฀method฀effective฀September฀4,฀
2005,฀the฀beginning฀of฀our฀fourth฀quarter.฀As฀permitted฀by฀
SFAS฀123R,฀we฀applied฀the฀modified฀retrospective฀applica-
tion฀transition฀method฀to฀the฀beginning฀of฀the฀fiscal฀year฀of฀
adoption฀(our฀fiscal฀year฀2005).฀As฀such,฀the฀first฀three฀fiscal฀
quarters฀of฀2005฀are฀required฀to฀be฀adjusted฀to฀recognize฀
the฀compensation฀cost฀previously฀reported฀in฀the฀pro฀forma฀
footnote฀disclosures฀(modified฀subject฀to฀certain฀corrections฀
noted฀during฀the฀fourth฀quarter฀of฀2005฀that฀impacted฀net฀
income฀by฀approximately฀$0.5฀million฀in฀each฀quarter)฀under฀
the฀provisions฀of฀SFAS฀123.฀However,฀years฀prior฀to฀2005฀
have฀not฀been฀restated.
The฀ adoption฀ of฀ SFAS฀ 123R฀ in฀ 2005฀ resulted฀ in฀ the฀
reduction฀ of฀ operating฀ profit฀ of฀ $58฀million฀ ($10฀million฀
in฀ payroll฀ and฀ employee฀benefits฀ and฀ $48฀million฀in฀G&A฀
expense),฀a฀reduction฀of฀net฀income฀of฀$38฀million฀(net฀of฀
tax฀benefits฀of฀$20฀million),฀a฀reduction฀of฀both฀basic฀and฀
diluted฀earnings฀per฀share฀of฀$0.13฀per฀share,฀a฀reduction฀
of฀$87฀million฀in฀cash฀flows฀from฀operating฀activities฀and฀an฀
increase฀of฀$87฀million฀in฀cash฀flows฀from฀financing฀activi-
ties.฀The฀adoption฀of฀SFAS฀123R฀resulted฀in฀the฀reduction฀
of฀fourth฀quarter฀operating฀profit฀of฀$18฀million฀($3฀million฀
in฀ payroll฀and฀ employee฀ benefits฀ and฀ $15฀million฀in฀ G&A฀
expense),฀a฀reduction฀of฀net฀income฀of฀$12฀million฀(net฀of฀
tax฀benefits฀of฀$6฀million)฀and฀a฀reduction฀of฀both฀basic฀and฀
diluted฀earnings฀per฀share฀of฀$0.04฀per฀share.
The฀following฀table฀shows฀the฀2005฀quarterly฀after-tax฀
effect฀of฀adoption฀of฀SFAS฀123R฀on฀the฀first฀three฀quarters฀
of฀2005฀as฀previously฀reported.
฀ First฀Quarter฀ Second฀Quarter฀ Third฀Quarter
฀ Net฀ Diluted฀ Net฀ Diluted฀ Net฀ Diluted฀
฀ Income฀ EPS฀ Income฀ EPS฀ Income฀ EPS
Reported฀results฀฀
฀ prior฀to฀SFAS฀123R฀฀
฀ adoption฀ $฀161฀ $฀0.53฀ $฀187฀ $฀0.62฀ $฀214฀ $฀0.72
Impact฀of฀SFAS฀123R฀฀
฀ adoption฀ ฀ (8)฀ ฀(0.03)฀ ฀ (9)฀฀(0.03)฀ ฀ (9)฀ ฀(0.03)
Results฀subsequent฀฀
฀ to฀SFAS฀123R฀฀
฀ adoption฀ $฀153฀ $฀0.50฀ $฀178฀ $฀0.59฀ $฀205฀ $฀0.69
Prior฀to฀2005,฀all฀share-based฀payments฀were฀accounted฀for฀
under฀the฀recognition฀and฀measurement฀principles฀of฀APB฀25฀
and฀its฀related฀Interpretations.฀Accordingly,฀no฀expense฀was฀
reflected฀in฀the฀Consolidated฀Statements฀of฀Income฀for฀stock฀
options,฀as฀all฀stock฀options฀granted฀had฀an฀exercise฀price฀
equal฀to฀the฀market฀value฀of฀the฀underlying฀common฀stock฀
on฀the฀date฀of฀grant.฀The฀following฀table฀illustrates฀the฀pro฀
forma฀effect฀on฀net฀income฀and฀earnings฀per฀share฀if฀the฀
Company฀had฀applied฀the฀fair฀value฀recognition฀provisions฀of฀
SFAS฀123฀to฀all฀share-based฀payments฀for฀those฀years.
฀ ฀ 2004฀ 2003
Net฀Income,฀as฀reported฀฀ ฀ ฀ $฀ 740฀ $฀ 617
Add:฀Compensation฀expense฀included฀฀
฀ in฀reported฀net฀income,฀net฀of฀related฀tax฀฀฀ ฀ 3฀ ฀ 3
Deduct:฀Total฀stock-based฀employee฀
฀ compensation฀expense฀determined฀under฀฀
฀ fair฀value฀based฀method฀for฀all฀awards,฀฀
฀ net฀of฀related฀tax฀effects฀฀ ฀ ฀ ฀ (40)฀ ฀ (41)
Net฀income,฀pro฀forma฀ ฀ ฀ ฀ 703฀ ฀ 579
Basic฀Earnings฀per฀Common฀Share
฀ As฀reported฀ ฀ ฀ $฀2.54฀ $฀2.10
฀ Pro฀forma฀ ฀ ฀ ฀2.42฀ ฀1.98
Diluted฀Earnings฀per฀Common฀Share
฀ As฀reported฀ ฀ ฀ $฀2.42฀ $฀2.02
฀ Pro฀forma฀ ฀ ฀ ฀2.30฀ ฀1.90
Derivative฀Financial฀Instruments฀ We฀do฀not฀use฀derivative฀
instruments฀for฀trading฀purposes฀and฀we฀have฀procedures฀in฀
place฀to฀monitor฀and฀control฀their฀use.฀Our฀use฀of฀derivative฀
instruments฀has฀ included฀interest฀rate฀ swaps฀and฀ collars,฀
treasury฀ locks฀ and฀ foreign฀ currency฀ forward฀ contracts.฀ In฀
addition,฀on฀a฀limited฀basis฀we฀utilize฀commodity฀futures฀and฀
options฀contracts.฀Our฀interest฀rate฀and฀foreign฀currency฀deriv-
ative฀contracts฀are฀entered฀into฀with฀financial฀institutions฀while฀
our฀commodity฀derivative฀contracts฀are฀exchange฀traded.
We฀account฀for฀these฀derivative฀financial฀instruments฀in฀
accordance฀with฀SFAS฀No.฀133,฀“Accounting฀for฀Derivative฀
Instruments฀ and฀ Hedging฀ Activities”฀ (“SFAS฀ 133”)฀ as฀
amended฀ by฀ SFAS฀ No.฀ 149,฀ “Amendment฀ of฀ Statement฀
133฀ on฀ Derivative฀ Instruments฀ and฀ Hedging฀ Activities”฀
(“SFAS฀149”).฀SFAS฀133฀requires฀that฀all฀derivative฀instru-
ments฀be฀recorded฀on฀the฀Consolidated฀Balance฀Sheet฀at฀
fair฀value.฀The฀accounting฀for฀changes฀in฀the฀fair฀value฀(i.e.,฀
gains฀ or฀ losses)฀ of฀ a฀ derivative฀ instrument฀ is฀ dependent฀
upon฀whether฀the฀derivative฀has฀been฀designated฀and฀quali-
fies฀as฀part฀of฀a฀hedging฀relationship฀and฀further,฀on฀the฀type฀
of฀hedging฀relationship.฀For฀derivative฀instruments฀that฀are฀
designated฀and฀ qualify฀as฀ a฀fair฀ value฀hedge,฀the฀ gain฀or฀
loss฀on฀the฀derivative฀instrument฀as฀well฀as฀the฀offsetting฀
gain฀or฀loss฀on฀the฀hedged฀item฀attributable฀to฀the฀hedged฀
risk฀are฀recognized฀in฀the฀results฀of฀operations.฀For฀deriva-
tive฀instruments฀that฀are฀designated฀and฀qualify฀as฀a฀cash฀
flow฀hedge,฀the฀effective฀portion฀of฀the฀gain฀or฀loss฀on฀the฀
derivative฀instrument฀is฀reported฀as฀a฀component฀of฀other฀
comprehensive฀income฀(loss)฀and฀reclassified฀into฀earnings฀
in฀the฀same฀period฀or฀periods฀during฀which฀the฀hedged฀trans-
action฀affects฀earnings.฀Any฀ineffective฀portion฀of฀the฀gain฀or฀
loss฀on฀the฀derivative฀instrument฀is฀recorded฀in฀the฀results฀of฀
operations฀immediately.฀For฀derivative฀instruments฀not฀desig-
nated฀as฀hedging฀instruments,฀the฀gain฀or฀loss฀is฀recognized฀
in฀the฀results฀of฀operations฀immediately.฀See฀Note฀13฀for฀
a฀discussion฀of฀our฀use฀of฀derivative฀instruments,฀manage-
ment฀of฀credit฀risk฀inherent฀in฀derivative฀instruments฀and฀fair฀
value฀information.
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 63.