Pizza Hut 2011 Annual Report Download - page 151

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity
prices. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies,
which may include the use of financial and commodity derivative instruments to hedge our underlying exposures. Our policies
prohibit the use of derivative instruments for trading purposes, and we have procedures in place to monitor and control their use.
Interest Rate Risk
We have a market risk exposure to changes in interest rates, principally in the U.S. We attempt to minimize this risk and lower
our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. These swaps
are entered into with financial institutions and have reset dates and critical terms that match those of the underlying
debt. Accordingly, any change in fair value associated with interest rate swaps is offset by the opposite impact on the related debt.
At December 31, 2011 and December 25, 2010 a hypothetical 100 basis-point increase in short-term interest rates would result,
over the following twelve-month period, in a reduction of approximately $5 million and $8 million, respectively, in income before
income taxes. The estimated reductions are based upon the current level of variable rate debt and assume no changes in the volume
or composition of that debt and include no impact from interest income related to cash and cash equivalents. In addition, the fair
value of our derivative financial instruments at December 31, 2011 and December 25, 2010 would decrease approximately $16
million and $22 million, respectively. The fair value of our Senior Unsecured Notes at December 31, 2011 and December 25,
2010 would decrease approximately $228 million and $191 million, respectively. Fair value was determined based on the present
value of expected future cash flows considering the risks involved and using discount rates appropriate for the duration.
Foreign Currency Exchange Rate Risk
Changes in foreign currency exchange rates impact the translation of our reported foreign currency denominated earnings, cash
flows and net investments in foreign operations and the fair value of our foreign currency denominated financial instruments.
Historically, we have chosen not to hedge foreign currency risks related to our foreign currency denominated earnings and cash
flows through the use of financial instruments. We attempt to minimize the exposure related to our net investments in foreign
operations by financing those investments 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 practical. Consequently, foreign currency denominated financial instruments consist primarily of
intercompany short-term receivables and payables. At times, we utilize forward contracts 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
underlying receivables or payables such that our foreign currency exchange risk related to these instruments is minimized.
The combined Operating Profits of China and YRI constitute more than 70% of our Operating Profit in 2011, excluding unallocated
income (expenses). In addition, the Company’s foreign currency net asset exposure (defined as foreign currency assets less foreign
currency liabilities) totaled approximately $3.0 billion as of December 31, 2011. Operating in international markets exposes the
Company to movements in foreign currency exchange rates. The Company’s primary exposures result from our operations in
Asia-Pacific, Europe and the Americas. For the fiscal year ended December 31, 2011 Operating Profit would have decreased
approximately $170 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.
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.
Form 10-K