Pizza Hut 2007 Annual Report Download - page 42

46 YUM! BRANDS, INC.
In December 2007, we sold our interest in our unconsoli-
dated affiliate in Japan for $128 million (includes the impact
of related foreign currency contracts that were settled in
December 2007). The international subsidiary that owned
this interest operates on a fiscal calendar with a period end
that is approximately one month earlier than our consolidated
period close. Thus, consistent with our historical treatment
of events occurring during the lag period, the pre-tax gain on
the sale of this investment of approximately $87 million will
be recorded in the first quarter of 2008. However, the cash
proceeds from this transaction were transferred from our inter-
national subsidiary to the U.S. in December 2007 and are
thus reported on our Consolidated Statement of Cash Flows
for the year ended December 29, 2007. The offset to this cash
on our Consolidated Balance Sheet at December 29, 2007 is
in accounts payable and other current liabilities.
In 2006,net cash used in investing activities was $476 mil-
lion versus $345 million in 2005. The increase was driven by
the 2006 acquisitions of the remaining interest in our Pizza
Hut U.K. unconsolidated affiliate and the Rostik’s brand and
associated intellectual properties in Russia. The lapping of
proceeds related to the 2005 sale of our fifty percent inter-
est in our former Poland/Czech Republic unconsolidated
affiliate also contributed to the increase. These factors were
partially offset by an increase in proceeds from refranchising
in 2006.
Net cash used in financing activities was $678 million versus
$670 million in 2006. The increase was driven by higher share
repurchases and higher dividend payments, partially offset by
an increase in net borrowings.
In 2006,net cash used in financing activities was $670 mil-
lion versus $827 million in 2005. The decrease was driven by
an increase in net borrowings and lower share repurchases,
partially offset by a reduction in the excess tax benefits from
share-based compensation and higher dividend payments.
Consolidated Financial Condition
The increase in short-term borrowings at December 29,
2007 was primarily due to the classification of $250 million
in Senior Unsecured Notes as short-term borrowings due to
their May 2008 maturity date, partially offset by the repay-
ment of two term-loans in the International Division during
the year ended December 29, 2007. The increase in long-term
debt was primarily due to the 2007 issuance of $600 million
aggregate principal amount of 6.25% Senior Unsecured Notes
that are due March 15, 2018 and $600 million aggregate
principal amount of 6.875% Senior Unsecured Notes that are
due November 15, 2037.
Liquidity and Capital Resources
Operating in the QSR industry allows us to generate substan-
tial cash flows from the operations of our company stores
and from our franchise operations, which require a limited
YUM investment. In each of the last six fiscal years, net cash
provided by operating activities has exceeded $1 billion. We
expect these levels of net cash provided by operating activities
to continue in the foreseeable future. Additionally, we estimate
that refranchising proceeds, prior to income taxes, will total
at least $400 million in 2008. Our discretionary spending
includes capital spending for new restaurants, acquisitions
of restaurants from franchisees, repurchases of shares of
our Common Stock and dividends paid to our shareholders.
Unforeseen downturns in our business could adversely impact
our cash flows from operations from the levels historically real-
ized. However, we believe our ability to reduce discretionary
spending and our borrowing capacity would allow us to meet
our cash requirements in 2008 and beyond.
DISCRETIONARY SPENDING During 2007, we invested $742
million in our businesses, including approximately $307 mil-
lion in the U.S., $189 million for the International Division and
$246 million for the China Division. For 2008, we estimate
capital spending will be between $700 and $750 million.
We returned approximately $1.7 billion to our sharehold-
ers through share repurchases and quarterly dividends in
2007. This is the third straight year that we returned over
$1.1 billion to our shareholders. Under the authority of our
Board of Directors, we repurchased 41.8 million shares of
our Common Shares for $1.4 billion during 2007. At Decem-
ber 29, 2007, we had remaining capacity to repurchase up
to $813 million of our outstanding Common Stock (excluding
applicable transaction fees) under an October 2007 authoriza-
tion by our Board of Directors that allowed us to repurchase
$1.25 billion of the Company’s outstanding Common Stock
(excluding applicable transaction fees) to be purchased
through October 2008. Subsequent to the Company’s year
end, our Board of Directors authorized additional share repur-
chases of up to an additional $1.25 billion of the Company’s
outstanding Common Stock (excluding applicable transaction
fees) to be purchased through January 2009.
In October 2007, the Company announced that we plan to
substantially increase the amount of share buybacks over the
next two years; buying back a total of up to $4 billion of the
Company’s outstanding Common Stock, helping to reduce our
diluted share count by as much as 20%. Since the announce-
ment of this plan, the Company has repurchased $437 million
of our outstanding Common Stock through December 29,
2007. We expect this two-year share repurchase program will
be funded by a combination of the Company’s ongoing free
cash flow, additional debt and refranchising proceeds. The
completion of this plan will depend on the Company’s cash
flows, credit rating, proceeds from our refranchising efforts
and availability of other investment opportunities, among
other factors.
During the year ended December 29, 2007, we paid cash
dividends of $273 million. Additionally, on November 16, 2007
our Board of Directors approved cash dividends of $0.15
per share of Common Stock to be distributed on February 1,
2008 to shareholders of record at the close of business on
January 11, 2008.
For 2008, we expect to return over $2 billion to share-
holders through both cash dividends and significant share
repurchases. We are now expecting a reduction in average
diluted shares outstanding of approximately 8% for 2008
and an ongoing annual dividend payout ratio of 35%–40% of
net income.