Pizza Hut 2005 Annual Report Download - page 71

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Valuation฀ allowances฀ related฀ to฀ deferred฀ tax฀ assets฀
in฀foreign฀countries฀decreased฀by฀$10฀million฀in฀2005฀and฀
increased฀by฀$45฀million฀and฀$19฀million฀in฀2004฀and฀2003,฀
respectively.฀Valuation฀allowances฀related฀to฀federal฀deferred฀
tax฀ assets฀ decreased฀ by฀ $13฀million฀ in฀ 2005.฀ Valuation฀
allowances฀in฀certain฀states฀decreased฀by฀$8฀million฀in฀2005฀
($5฀million,฀net฀of฀federal฀tax)฀and฀increased฀by฀$6฀million฀
($4฀million,฀net฀of฀federal฀tax)฀in฀2003.฀The฀fluctuations฀were฀
a฀result฀of฀determinations฀regarding฀the฀likelihood฀of฀use฀of฀
certain฀loss฀carryforwards฀and฀credits฀prior฀to฀expiration.
The฀2005฀state฀deferred฀tax฀provision฀includes฀$8฀million฀
($5฀million,฀net฀of฀federal฀tax)฀for฀the฀impact฀of฀changes฀in฀
state฀statutory฀tax฀rates.฀In฀2004,฀the฀deferred฀foreign฀tax฀
provision฀included฀a฀$1฀million฀credit฀to฀reflect฀the฀impact฀of฀
changes฀in฀statutory฀tax฀rates฀in฀various฀countries.
U.S.฀and฀foreign฀income฀before฀income฀taxes฀are฀set฀
forth฀below:
฀2005฀ 2004฀ 2003
U.S.฀฀ $฀ 705฀ $฀ 704฀ $฀669
Foreign฀ ฀ 321฀ ฀ 322฀ ฀217
฀฀฀฀ $฀1,026฀ $฀1,026฀ $฀886
The฀reconciliation฀of฀ income฀taxes฀ calculated฀ at฀the฀U.S.฀
federal฀tax฀statutory฀rate฀to฀our฀effective฀tax฀rate฀is฀set฀forth฀
below:
฀2005฀ 2004฀ 2003
U.S.฀federal฀statutory฀rate฀ ฀ 35.0%฀ ฀ 35.0%฀ ฀ 35.0%
State฀income฀tax,฀net฀of฀federal฀฀
฀ tax฀benefit฀ ฀ 1.6฀ ฀ 1.3฀ ฀ 1.8
Foreign฀and฀U.S.฀tax฀effects฀฀
฀ attributable฀to฀foreign฀operations฀฀ (6.7)฀ ฀ (6.3)฀ ฀ (3.6)
Adjustments฀to฀reserves฀and฀฀
฀ prior฀years฀ ฀ (1.3)฀ ฀ (6.7)฀ ฀ (1.7)
Repatriation฀of฀foreign฀earnings฀ ฀ 2.0฀ ฀ 0.5฀ ฀ —
Non-recurring฀foreign฀tax฀credit฀฀
฀ adjustments฀ ฀ (2.9)฀ ฀ —฀ ฀ (4.1)
Valuation฀allowance฀additions฀฀
฀ (reversals)฀ ฀ (1.4)฀ ฀ 4.2฀ ฀ 2.8
Other,฀net฀ ฀ (0.5)฀ ฀ (0.1)฀ ฀ —
Effective฀income฀tax฀rate฀ ฀ 25.8%฀ ฀ 27.9%฀ ฀ 30.2%
The฀2005฀tax฀rate฀was฀favorably฀impacted฀by฀the฀recognition฀
of฀certain฀foreign฀tax฀credits฀that฀we฀were฀able฀to฀substan-
tiate฀during฀2005.฀In฀2003,฀we฀amended฀certain฀prior฀year฀
returns฀upon฀our฀determination฀that฀it฀was฀more฀beneficial฀to฀
claim฀credit฀on฀our฀U.S.฀tax฀returns฀for฀foreign฀taxes฀paid฀than฀
to฀deduct฀such฀taxes,฀as฀had฀been฀done฀when฀the฀returns฀
were฀originally฀filed.฀Both฀benefits฀are฀non-recurring.
The฀adjustments฀to฀reserves฀and฀prior฀years฀in฀2005฀
and฀2004฀were฀primarily฀driven฀by฀the฀reversal฀of฀reserves฀
associated฀with฀audits฀that฀were฀settled.
See฀above฀for฀a฀discussion฀of฀the฀valuation฀allowance฀
additions฀(reversals).
The฀details฀of฀2005฀and฀2004฀deferred฀tax฀liabilities฀
(assets)฀are฀set฀forth฀below:
฀ ฀ 2005฀ 2004
Intangible฀assets฀and฀property,฀plant฀฀
฀ and฀equipment฀ ฀ ฀ $฀ 169฀ $฀ 151
Other฀ ฀ ฀ ฀ 95฀ ฀ 84
Gross฀deferred฀tax฀liabilities฀ ฀ ฀ $฀ 264฀ $฀ 235
Net฀operating฀loss฀and฀tax฀credit฀฀
฀ carryforwards฀ ฀ ฀ $฀(223)฀ $฀(193)
Employee฀benefits฀ ฀ ฀ ฀(132)฀ ฀(103)
Self-insured฀casualty฀claims฀ ฀ ฀ ฀ (84)฀ ฀ (66)
Lease฀related฀assets฀and฀liabilities฀฀ ฀ ฀ (50)฀ ฀ (45)
Various฀liabilities฀฀ ฀ ฀ ฀(151)฀ ฀(162)
Deferred฀income฀and฀other฀ ฀ ฀ ฀(111)฀ ฀(114)
Gross฀deferred฀tax฀assets฀ ฀ ฀ ฀(751)฀ ฀(683)
Deferred฀tax฀asset฀valuation฀allowances฀ ฀ ฀ 233฀ ฀ 269
Net฀deferred฀tax฀assets฀ ฀ ฀ ฀(518)฀ ฀(414)
Net฀deferred฀tax฀(assets)฀liabilities฀ ฀ ฀ $฀(254)฀ $฀(179)
Reported฀in฀Consolidated฀Balance฀Sheets฀as:
฀ Deferred฀income฀taxes฀ ฀ ฀ $฀(163)฀ $฀(156)
฀ Other฀assets฀ ฀ ฀ ฀(156)฀ ฀ (89)
฀ Other฀liabilities฀and฀deferred฀credits฀ ฀ ฀ 24฀ ฀ 52
฀ Accounts฀payable฀and฀other฀current฀liabilities฀ ฀ 41฀ ฀ 14
฀ ฀ ฀ ฀ ฀ ฀ $฀(254)฀ $฀(179)
Federal฀ income฀ tax฀ receivables฀ of฀ $59฀million฀ were฀
included฀in฀prepaid฀expenses฀and฀other฀current฀assets฀at฀
December฀25,฀2004.
We฀ have฀ not฀ provided฀ deferred฀ tax฀ on฀ the฀ undistrib-
uted฀earnings฀from฀our฀foreign฀investments฀as฀we฀believe฀
they฀ are฀ permanent฀ in฀ nature,฀ except฀ for฀ approximately฀
$2฀million฀of฀both฀federal฀and฀foreign฀tax฀provided฀on฀undis-
tributed฀earnings฀we฀intend฀to฀distribute.฀We฀estimate฀that฀
our฀ total฀ net฀ undistributed฀ earnings฀upon฀ which฀ we฀ have฀
not฀provided฀deferred฀tax฀total฀approximately฀$400฀million฀
at฀December฀31,฀2005.฀A฀determination฀of฀the฀deferred฀tax฀
liability฀on฀such฀earnings฀is฀not฀practicable.
We฀have฀available฀net฀operating฀loss฀and฀tax฀credit฀carry-
forwards฀totaling฀approximately฀$1.6฀billion฀at฀December฀31,฀
2005฀to฀reduce฀future฀tax฀of฀YUM฀and฀certain฀subsidiaries.฀
The฀carryforwards฀are฀related฀to฀a฀number฀of฀foreign฀and฀
state฀jurisdictions.฀Of฀these฀carryforwards,฀$21฀million฀expire฀
in฀2006฀and฀$1.2฀billion฀expire฀at฀various฀times฀between฀
2006฀ and฀2024.฀ The฀remaining฀ carryforwards฀of฀ approxi-
mately฀$330฀million฀do฀not฀expire.
20.฀REPORTABLE฀OPERATING฀SEGMENTS
We฀are฀principally฀engaged฀in฀developing,฀operating,฀fran-
chising฀ and฀ licensing฀ the฀ worldwide฀ KFC,฀ Pizza฀ Hut฀ and฀
Taco฀Bell฀concepts,฀ and฀since฀ May฀ 7,฀ 2002,฀ the฀ LJS฀ and฀
A&W฀concepts,฀which฀were฀added฀when฀we฀acquired฀YGR.฀
KFC,฀Pizza฀Hut,฀Taco฀Bell,฀LJS฀and฀A&W฀operate฀throughout฀
the฀U.S.฀and฀in฀95,฀90,฀13,฀5฀and฀10฀countries฀and฀territories฀
outside฀the฀U.S.,฀respectively.฀Our฀five฀largest฀international฀
Yum!฀Brands,฀Inc.฀ ฀ ฀ |฀ ฀ ฀ 75.