Pizza Hut 2007 Annual Report Download - page 63

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In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS
159”). SFAS 159 provides companies with an option to report
selected financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings at each sub-
sequent reporting date. SFAS 159 is effective for fiscal years
beginning after November 15, 2007, the year beginning Decem-
ber 30, 2007 for the Company. We did not elect to begin reporting
any financial assets or liabilities at fair value upon adoption of
SFAS 159 nor do we currently anticipate that the adoption of SFAS
159 will materially impact the Company going forward.
In December 2007, the FASB issued SFAS No. 141 (revised
2007), “Business Combinations” (“SFAS 141R”). SFAS 141R,
which is broader in scope than SFAS 141, applies to all transac-
tions or other events in which an entity obtains control of one
or more businesses, and requires that the acquisition method
be used for such transactions or events. SFAS 141R, with lim-
ited exceptions, will require an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling inter-
est in the acquiree at the acquisition date, measured at their
fair values as of that date. This will result in acquisition related
costs and anticipated restructuring costs related to the acquisi-
tion being recognized separately from the business combination.
This statement is effective as the beginning of an entity’s first
fiscal year beginning after December 15, 2008, the year beginning
December 28, 2008 for the Company. The impact of SFAS 141R
on the Company will be dependent upon the extent to which we
have transactions or events occur that are within its scope.
In December 2007, the FASB issued SFAS No. 160, “Non-
controlling Interests in Consolidated Financial Statements”
(“SFAS 160”). SFAS 160 amends Accounting Research Bulletin
No. 51, “Consolidated Financial Statements,” and will change
the accounting and reporting for noncontrolling interests, which
are the portion of equity in a subsidiary not attributable, directly
or indirectly to a parent. SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008, the year beginning
December 28, 2008 for the Company and requires retroactive
adoption of its presentation and disclosure requirements. We
do not anticipate that the adoption of SFAS 160 will materially
impact the Company.
3.
Two-for-One Common Stock Split
On May 17, 2007, the Company announced that its Board of
Directors approved a two-for-one split of the Company’s outstand-
ing shares of Common Stock. The stock split was effected in
the form of a stock dividend and entitled each shareholder of
record at the close of business on June 1, 2007 to receive one
additional share for every outstanding share of Common Stock
held. The stock dividend was distributed on June 26, 2007, with
approximately 261 million shares of Common Stock distributed.
All per share and share amounts in the accompanying Financial
Statements and Notes to the Financial Statements have been
adjusted to reflect the stock split.
4.
Earnings Per Common Share (“EPS”)
2007 2006 2005
Net income $ 909 $ 824 $ 762
Weighted-average common shares
outstanding (for basic calculation) 522 546 572
Effect of dilutive share-based
employee compensation 19 18 25
Weighted-average common and
dilutive potential common
shares outstanding (for diluted
calculation) 541 564 597
Basic EPS $ 1.74 $ 1.51 $ 1.33
Diluted EPS $ 1.68 $ 1.46 $ 1.28
Unexercised employee stock options
and stock appreciation rights
(in millions) excluded from the
diluted EPS compensation(a) 5.7 13.3 7.5
(a) These unexercised employee stock options and stock appreciation rights were
not included in the computation of diluted EPS because to do so would have been
antidilutive for the periods presented.
5.
Items Affecting Comparability of Net Income
and Cash Flows
SALE OF AN INVESTMENT IN UNCONSOLIDATED AFFILIATE —
JAPAN In December 2007, we sold our interest in our uncon-
solidated affiliate in Japan for $128 million in cash (includes the
impact of related foreign currency contracts that were settled in
December 2007). Our 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 international subsidiary to
the U.S. in December 2007 and are thus reported on our Con-
solidated 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.
While we will no longer have an ownership interest in this
entity that operates both KFCs and Pizza Huts in Japan, it will
continue to be a franchisee as it was when it operated as an
unconsolidated affiliate. This sale of our interest will result in
lower Other income as we will no longer record our share of the
entity’s earnings under the equity method of accounting. Had this
sale occurred at the beginning of 2007, our International Divi-
sion’s Other income would have decreased $4 million.