Pizza Hut 2007 Annual Report Download - page 48

52 YUM! BRANDS, INC.
Senior Unsecured Notes at December 29, 2007 and Decem-
ber 30, 2006 would decrease approximately $173 million and
$69 million, respectively. Fair value was determined by dis-
counting the projected cash flows.
FOREIGN CURRENCY EXCHANGE RATE RISK The combined
International Division and China Division operating profits con-
stitute approximately 54% of our operating profit in 2007,
excluding unallocated income (expenses). In addition, the
Company’s net asset exposure (defined as foreign currency
assets less foreign currency liabilities) totaled approximately
$1.5 billion as of December 29, 2007. Operating in interna-
tional markets exposes the Company to movements in foreign
currency exchange rates. The Company’s primary exposures
result from our operations in Asia-Pacific, the Americas and
Europe. Changes in foreign currency exchange rates would
impact the translation of our investments in foreign operations,
the fair value of our foreign currency denominated financial
instruments and our reported foreign currency denominated
earnings and cash flows. For the fiscal year ended December
29, 2007, operating profit would have decreased $89 million if
all foreign currencies had uniformly weakened 10% relative to
the U.S. dollar. The estimated reduction assumes no changes
in sales volumes or local currency sales or input prices.
We attempt to minimize the exposure related to our
investments in foreign operations by financing those invest-
ments with local currency debt when practical. In addition, we
attempt to minimize the exposure related to foreign currency
denominated financial instruments by purchasing goods and
services from third parties in local currencies when practi-
cal. Consequently, foreign currency denominated financial
instruments consist primarily of intercompany short-term
receivables and payables. At times, we utilize forward con-
tracts to reduce our exposure related to these intercompany
short-term receivables and payables. The notional amount and
maturity dates of these contracts match those of the under-
lying receivables or payables such that our foreign currency
exchange risk related to these instruments is minimized.
COMMODITY PRICE RISK We are subject to volatility in food
costs as a result of market risk associated with commodity
prices. Our ability to recover increased costs through higher
pricing is, at times, limited by the competitive environment
in which we operate. We manage our exposure to this risk
primarily through pricing agreements with our vendors.
Cautionary Statements
From time to time, in both written reports and oral state-
ments, we present “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The statements include those
identified by such words as “may,” “will,” “expect,” “project,”
“anticipate,” “believe,” “plan” and other similar terminology.
These “forward-looking statements” reflect our current expec-
tations regarding future events and operating and financial
performance and are based upon data available at the time
of the statements. Actual results involve risks and uncertain-
ties, including both those specific to the Company and those
specific to the industry, and could differ materially from expec-
tations. Accordingly, you are cautioned not to place undue
reliance on forward-looking statements.
Company risks and uncertainties include, but are not
limited to, changes in effective tax rates; potential unfavor-
able variances between estimated and actual liabilities; our
ability to secure distribution of products and equipment to our
restaurants on favorable economic terms and our ability to
ensure adequate supply of restaurant products and equipment
in our stores; unexpected disruptions in our supply chain;
effects and outcomes of any pending or future legal claims
involving the Company; the effectiveness of operating initia-
tives and marketing, advertising and promotional efforts; our
ability to continue to recruit and motivate qualified restaurant
personnel; the ongoing financial viability of our franchisees
and licensees; the success of our refranchising strategy; the
success of our strategies for international development and
operations; volatility of actuarially determined losses and loss
estimates; and adoption of new or changes in accounting poli-
cies and practices including pronouncements promulgated by
standard setting bodies.
Industry risks and uncertainties include, but are not lim-
ited to, economic and political conditions in the countries and
territories where we operate, including effects of war and ter-
rorist activities; new legislation and governmental regulations
or changes in laws and regulations and the consequent impact
on our business; new product and concept development by
us and/or our food industry competitors; changes in com-
petition in the food industry; publicity which may impact our
business and/or industry; severe weather conditions; volatility
of commodity costs; increases in minimum wage and other
operating costs; availability and cost of land and construction;
consumer preferences or perceptions concerning the products
of the Company and/or our competitors, spending patterns
and demographic trends; political or economic instability in
local markets and changes in currency exchange and interest
rates; and the impact that any widespread illness or general
health concern may have on our business and/or the economy
of the countries in which we operate.