Pizza Hut 2006 Annual Report Download - page 64

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Future minimum commitments and amounts to be received
as lessor or sublessor under non-cancelable leases are set
forth below:
Commitments Lease Receivables
Direct
Capital Operating Financing Operating
2007 $ 20 $ 438 $ 3 $ 39
2008 20 398 3 34
2009 20 359 4 30
2010 19 327 4 29
2011 19 291 4 25
Thereafter 205 1,793 29 138
$ 303 $ 3,606 $ 47 $ 295
At December 30, 2006 and December 31, 2005, the present value
of minimum payments under capital leases was $228 million and
$114 million, respectively. At December 30, 2006 and December
31, 2005, unearned income associated with direct financing lease
receivables was $24 million and $38 million, respectively.
The details of rental expense and income are set forth
below:
2006 2005 2004
Rental expense
Minimum $ 412 $ 380 $ 376
Contingent 62 51 49
$ 474 $ 431 $ 425
Minimum rental income $21 $24 $27
14.
Financial Instruments
INTEREST RATE DERIVATIVE INSTRUMENTS We enter into
interest rate swaps with the objective of reducing our exposure
to interest rate risk and lowering interest expense for a portion
of our debt. Under the contracts, we agree with other parties to
exchange, at specified intervals, the difference between variable
rate and fixed rate amounts calculated on a notional principal
amount. At both December 30, 2006 and December 31, 2005,
interest rate derivative instruments outstanding had notional
amounts of $850 million. These swaps have reset dates and
floating rate indices which match those of our underlying fixed-rate
debt and have been designated as fair value hedges of a portion
of that debt. As the swaps qualify for the short-cut method under
SFAS 133, no ineffectiveness has been recorded. The fair value of
these swaps as of December 30, 2006 was a liability of approxi-
mately $15 million, which has been included in Other liabilities
and deferred credits. The net fair value of these swaps as of
December 31, 2005 was a net liability of approximately $5 mil-
lion, of which $4 million and $9 million were included in Other
assets and Other liabilities and deferred credits, respectively.
The portion of this fair value which has not yet been recognized
as an addition to interest expense at December 30, 2006 and
December 31, 2005 has been included as a reduction to long-
term debt ($13 million and $6 million, respectively).
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS We enter into
foreign currency forward contracts with the objective of reducing
our exposure to cash flow volatility arising from foreign currency
fluctuations associated with certain foreign currency denominated
intercompany short-term receivables and payables. The notional
amount, maturity date, and currency of these contracts match
those of the underlying receivables or payables. For those foreign
currency exchange forward contracts that we have designated
as cash flow hedges, we measure ineffectiveness by comparing
the cumulative change in the forward contract with the cumula-
tive change in the hedged item. No material ineffectiveness was
recognized in 2006, 2005 or 2004 for those foreign currency
forward contracts designated as cash flow hedges.
DEFERRED AMOUNTS IN ACCUMULATED OTHER COMPREHEN-
SIVE INCOME (LOSS) As of December 30, 2006, we had a net
deferred gain associated with cash flow hedges of approximately
$4 million, net of tax. The gain, which primarily arose from the
settlement of treasury locks entered into prior to the issuance of
certain amounts of our fixed-rate debt, is being reclassified into
earnings through 2016 as a decrease to interest expense on this
debt. See Note 12 for discussion of the current year settlement
of the treasury locks associated with the 2006 Notes.
CREDIT RISKS Credit risk from interest rate swaps and foreign
currency forward contracts is dependent both on movement in
interest and currency rates and the possibility of non-payment
by counterparties. We mitigate credit risk by entering into these
agreements with high-quality counterparties, and settle swap and
forward rate payments on a net basis.
Accounts receivable consists primarily of amounts due from
franchisees and licensees for initial and continuing fees. In addi-
tion, we have notes and lease receivables from certain of our
franchisees. The financial condition of these franchisees and
licensees is largely dependent upon the underlying business
trends of our Concepts. This concentration of credit risk is miti-
gated, in part, by the large number of franchisees and licensees
of each Concept and the short-term nature of the franchise and
license fee receivables.
FAIR VALUE At December 30, 2006 and December 31, 2005,
the fair values of cash and cash equivalents, short-term invest-
ments, accounts receivable and accounts payable approximated
their carrying values because of the short-term nature of these
instruments. The fair value of notes receivable approximates the
carrying value after consideration of recorded allowances.