Pizza Hut 2006 Annual Report Download - page 53

58 YUM! BRANDS, INC.
Notes to Consolidated Financial Statements
(Tabular amounts in millions, except share data)
business for the months of January through December. Our con-
solidated results of operations for the year ended December 25,
2004 continue to include the results of operations of the China
business for the months of December 2003 through November
2004 as previously reported.
For the month of December 2004 the China business had
revenues of $79 million and net income of $6 million. As men-
tioned previously, neither of these amounts is included in our
Consolidated Statement of Income for the year ended Decem-
ber 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 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 of 2006.
2.
Summary of Significant Accounting Policies
Our preparation of the accompanying Consolidated Financial
Statements in conformity with accounting principles generally
accepted in the United States of America requires us to make esti-
mates 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
Intercompany accounts and transactions have been eliminated.
Certain investments in businesses that operate our Concepts are
accounted for by the equity method. 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.
We participate in various advertising cooperatives with our
franchisees and licensees established to collect and admin-
ister funds contributed for use in advertising and promotional
programs designed to increase sales and enhance the
reputation of the Company and its franchise owners.
Contributions to the advertising cooperatives are
required for both company operated and franchise
restaurants and are generally based on a percent
of restaurant sales. In certain of these coopera-
tives we possess majority voting rights, and thus
control and consolidate the cooperatives. We
report all assets and liabilities of these adver-
tising cooperatives that we consolidate as
advertising cooperative assets, restricted
and advertising cooperative liabilities in
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 restaurant company based on the number of
system units, with more than 34,000 units of which approximately
42% 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
distribution by our former parent, PepsiCo, Inc. (“PepsiCo”), of our
Common Stock (the “Spin-off”) to its shareholders. References
to YUM throughout these Consolidated Financial Statements are
made using the first person notations of “we,” “us” or “our.”
Through our widely-recognized Concepts, we develop, oper-
ate, franchise and license a system of both traditional and non-
traditional quick service restaurants. Each Concept has proprietary
menu items and emphasizes the preparation of food with high
quality ingredients as well as unique recipes and special season-
ings 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, conve-
nience stores, stadiums, amusement parks and colleges, where
a full-scale traditional outlet would not be practical or efficient.
We also operate multibrand units, where two or more of our Con-
cepts are operated in a single unit. In addition, we continue to
pursue the multibrand combination of Pizza Hut and WingStreet,
a flavored chicken wings concept we have developed.
In 2005, we began reporting information for our interna-
tional 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 2004 was 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 report-
ing 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 con-
solidated reporting. To maintain comparability 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 adjustment directly to consolidated retained earnings in
the year ended December 31, 2005. Our consolidated results of
operations for the years ended December 30, 2006 and Decem-
ber 31, 2005 both include the results of operations of the China