Pizza Hut 2011 Annual Report Download - page 129

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results continuing to be recorded at the rate at which it was prior to the impairment charges being recorded for these restaurants.
Refranchising gains and losses are more fully discussed in Note 4 and the Store Portfolio Strategy Section of the MD&A.
In connection with our G&A productivity initiatives and realignment of resources (primarily severance and early retirement costs),
we recorded pre-tax charges of $21 million, $9 million and $16 million in the years ended December 31, 2011, December 25,
2010 and December 26, 2009, respectively.
As a result of a decline in future profit expectations for our LJS and A&W U.S. businesses due in part to the impact of a reduced
emphasis on multi-branding, we recorded a non-cash charge of $26 million, which resulted in no related income tax benefit, in
Closures and impairment expenses in the fourth quarter of 2009 to write-off goodwill associated with our LJS and A&W U.S.
businesses we owned at the time.
Additionally, the Company recognized a reduction to Franchise and license fees and income of $32 million, pre-tax, in the year
ended December 26, 2009 related to investments in our U.S. Brands. These investments reflected our reimbursements to KFC
franchisees for installation costs of ovens for the national launch of Kentucky Grilled Chicken. The reimbursements were recorded
as a reduction to Franchise and license fees and income as we would not have provided the reimbursements absent the ongoing
franchisee relationship.
LJS and A&W Divestitures
During the fourth quarter of 2011 we sold the Long John Silver's and A&W All American Food Restaurants brands to key franchise
leaders and strategic investors in separate transactions.
We recognized $86 million of pre-tax losses and other costs primarily in Closures and impairment (income) expenses during 2011
as a result of these transactions. Additionally, we recognized $104 million of tax benefits related to tax losses associated with the
transactions.
In 2011, these businesses contributed 5% to both System sales and Franchise and license fees and income for the U.S. segment,
and 1% to both System sales and Franchise and license fees and income for the YRI segment. While these businesses contributed
1% to both the U.S. and YRI segments' Operating Profit in 2011, the impact on our consolidated Operating Profit was not significant.
Refranchising of Equity Markets Outside the U.S.
During the year ended December 31, 2011, we decided to refranchise or close all of our remaining Company-operated Pizza Hut
restaurants in the UK market. While an asset group comprising approximately 350 dine-in restaurants did not meet the criteria for
held-for-sale classification as of December 31, 2011, our decision to sell was considered an impairment indicator. As such we
reviewed this asset group for potential impairment and determined that its carrying value was not recoverable based upon our
estimate of expected refranchising proceeds and holding period cash flows anticipated while we continue to operate the restaurants
as company units. Accordingly, we wrote this asset group down to our estimate of its fair value, which is based on the sales price
we would expect to receive from a buyer. This fair value determination considered current market conditions, trends in the Pizza
Hut UK business, and prices for similar transactions in the restaurant industry and resulted in a pre-tax, non-cash write-down of
$74 million which was recorded to Refranchising (gain) loss. This impairment charge decreased depreciation expense versus
what would have otherwise been recorded by approximately $3 million in 2011. This depreciation reduction was recorded as a
Special Item, resulting in depreciation expense in the YRI segment results continuing to be recorded at the rate at which it was
prior to the impairment charges being recorded for these restaurants. We will continue to review the asset group for any further
necessary impairment until the date it is sold. The write-down does not include any allocation of the Pizza Hut UK reporting unit
goodwill in the asset group carrying value. This additional non-cash write-down would be recorded, consistent with our historical
policy, if the asset group ultimately meets the criteria to be classified as held for sale. Upon the ultimate sale of the restaurants,
depending on the form of the transaction, we could also be required to record a charge for the fair value of any guarantee of future
lease payments for any leases we assign to a franchisee and for the cumulative foreign currency translation adjustment associated
with Pizza Hut UK. The decision to refranchise or close all remaining Pizza Hut restaurants in the UK was considered to be a
goodwill impairment indicator. We determined that the fair value of our Pizza Hut UK reporting unit exceeded its carrying value
and as such there was no impairment of the approximately $100 million in goodwill attributable to this reporting unit. We also
recorded a $2 million loss in Refranchising (gain) loss for obligations that we believe are probable related to the proposed
refranchising of Pizza Hut UK.
In the fourth quarter of 2010 we recorded a $52 million loss on the refranchising of our Mexico equity market as we sold all of
our Company-operated restaurants, comprised of 222 KFC and 123 Pizza Huts, to an existing Latin American franchise partner. The
buyer is also serving as the master franchisee for Mexico which had 102 KFCs and 53 Pizza Hut franchise restaurants at the time
Form 10-K