Pizza Hut 2006 Annual Report Download - page 61

66 YUM! BRANDS, INC.
Subsequent to the acquisition we consolidated all of the
assets and liabilities of Pizza Hut U.K. These assets and liabilities
were valued at fifty percent of their historical carrying value and
fifty percent of their fair value upon acquisition. We have prelimi-
narily assigned fair values such that assets and liabilities recorded
for Pizza Hut U.K. at the acquisition date were as follows:
Current assets, including cash of $9 $ 27
Property, plant and equipment 340
Intangible assets 19
Goodwill 117
Total assets acquired 503
Current liabilities, other than capital lease obligations
and short-term borrowings 102
Capital lease obligation, including current portion 95
Short-term borrowings 23
Other long-term liabilities 38
Total liabilities assumed 258
Net assets acquired (cash paid and investment allocated) $ 245
All of the $19 million in intangible assets (primarily reacquired
franchise rights) are subject to amortization with a weighted aver-
age life of approximately 18 years. The $117 million in goodwill
is not expected to be deductible for income tax purposes and will
be allocated to the International Division in its entirety.
Under the equity method of accounting, we reported our
fifty percent share of the net income of the unconsolidated affili-
ate (after interest expense and income taxes) as Other (income)
expense in the Consolidated Statements of Income. We also
recorded a franchise fee for the royalty received from the stores
owned by the unconsolidated affiliate. From the date of the acqui-
sition through December 4, 2006 (the end of our fiscal year for
Pizza Hut U.K.), we reported Company sales and the associated
restaurant costs, general and administrative expense, interest
expense and income taxes associated with the restaurants pre-
viously owned by the unconsolidated affiliate in the appropriate
line items of our Consolidated Statements of Income. We no
longer recorded franchise fee income for the restaurants previ-
ously owned by the unconsolidated affiliate nor did we report other
income under the equity method of accounting. As a result of this
acquisition, company sales and restaurant profit increased $164
million and $16 million, respectively, franchise fees decreased
$7 million and G&A expenses increased $8 million compared to
the year ended December 31, 2005. The impacts on operating
profit and net income were not significant.
If the acquisition had been completed as of the beginning of
the years ended December 30, 2006 and December 31, 2005,
pro forma Company sales and franchise and license fees would
have been as follows:
2006 2005
Company sales $ 8,886 $ 8,944
Franchise and license fees $ 1,176 $ 1,095
The pro forma impact of the acquisition on net income and diluted
earnings per share would not have been significant in 2006 and
2005. The pro forma information is not necessarily indicative of
the results of operations had the acquisition actually occurred
at the beginning of each of these periods nor is it necessarily
indicative of future results.
7.
Franchise and License Fees
2006 2005 2004
Initial fees, including renewal fees $57$51$43
Initial franchise fees included in
refranchising gains (17) (10) (10)
40 41 33
Continuing fees 1,156 1,083 986
$ 1,196 $ 1,124 $ 1,019
8.
Other (Income) Expense
2006 2005 2004
Equity income from investments in
unconsolidated affiliates $ (51) $ (51) $ (54)
Gain upon sale of investment in
unconsolidated affiliate(a) (2) (11) —
Recovery from supplier(b) — (20) —
Contract termination charge(c) 8 — —
Foreign exchange net (gain) loss
and other (6) 2 (1)
Other (income) expense $ (51) $ (80) $ (55)
(a) Reflects net gains related to the 2005 sale of our fifty percent interest in the entity
that operated almost all KFCs and Pizza Huts in Poland and the Czech Republic to
our then partner in the entity, principally for cash. This transaction has generated
net gains of approximately $13 million for YUM as cumulative cash proceeds (net
of expenses) of approximately $27 million from the sale of our interest in the entity
exceeded our recorded investment in this unconsolidated affiliate.
(b) Relates to a financial recovery from a supplier ingredient issue in mainland China
totaling $24 million, $4 million of which was recognized through equity income from
investments in unconsolidated affiliates. Our KFC business in mainland China was
negatively impacted by the interruption of product offerings and negative publicity
associated with a supplier ingredient issue experienced in late March 2005. During
2005, we entered into agreements with the supplier for a partial recovery of our
losses.
(c) Reflects an $8 million charge associated with the termination of a beverage agree-
ment in the United States segment.
9.
Property, Plant and Equipment, net
2006 2005
Land $ 541 $ 567
Buildings and improvements 3,449 3,094
Capital leases, primarily buildings 221 126
Machinery and equipment 2,566 2,399
6,777 6,186
Accumulated depreciation and amortization (3,146) (2,830)
$ 3,631 $ 3,356
Depreciation and amortization expense related to property, plant
and equipment was $466 million, $459 million and $434 million
in 2006, 2005 and 2004, respectively.