Pizza Hut 2011 Annual Report Download - page 175

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Note 12 – Derivative Instruments
The Company is exposed to certain market risks relating to its ongoing business operations. The primary market risks managed
by using derivative instruments are interest rate risk and cash flow volatility arising from foreign currency fluctuations.
We enter into interest rate swaps with the objective of reducing our exposure to interest rate risk and lowering interest expense
for a portion of our fixed-rate debt. At December 31, 2011, our interest rate swaps outstanding had notional amounts of $550
million and have been designated as fair value hedges of a portion of our debt. The Company's interest rate swaps meet the shortcut
method requirements and no ineffectiveness has been recorded.
We enter into foreign currency forward contracts with the objective of reducing our exposure to cash flow volatility arising from
foreign currency fluctuations associated with certain foreign currency denominated intercompany short-term receivables and
payables. The notional amount, maturity date, and currency of these contracts match those of the underlying receivables or
payables. For those foreign currency exchange forward contracts that we have designated as cash flow hedges, we measure
ineffectiveness by comparing the cumulative change in the fair value of the forward contract with the cumulative change in the
fair value of the hedged item. At December 31, 2011, foreign currency forward contracts outstanding had a total notional amount
of $459 million.
The fair values of derivatives designated as hedging instruments for the years ended December 31, 2011 and December 25,
2010 were:
Interest Rate Swaps - Asset
Interest Rate Swaps - Asset
Foreign Currency Forwards - Asset
Foreign Currency Forwards - Liability
Total
Fair Value
2011
$ 10
22
3
(1)
$ 34
2010
$ 8
33
7
(3)
$ 45
Consolidated Balance Sheet Location
Prepaid expenses and other current assets
Other assets
Prepaid expenses and other current assets
Accounts payable and other current liabilities
The unrealized gains associated with our interest rate swaps that hedge the interest rate risk for a portion of our debt have been
reported as an addition of $5 million and $21 million to Short-term borrowings and Long-term debt, respectively at December 31,
2011 and as an addition of $5 million and $26 million to Short-term borrowings and Long-term debt, respectively at December 25,
2010. During the years ended December 31, 2011 and December 25, 2010, Interest expense, net was reduced by $24 million and
$33 million, respectively for recognized gains on these interest rate swaps.
For our foreign currency forward contracts the following effective portions of gains and losses were recognized into Other
Comprehensive Income (“OCI”) and reclassified into income from OCI in the years ended December 31, 2011 and December 25,
2010.
Gains (losses) recognized into OCI, net of tax
Gains (losses) reclassified from Accumulated OCI into income, net of tax
2011
$ 2
$ 1
2010
$ 32
$ 33
The gains/losses reclassified from Accumulated OCI into income were recognized as Other income (expense) in our Consolidated
Statement of Income, largely offsetting foreign currency transaction losses/gains recorded when the related intercompany
receivables and payables were adjusted for foreign currency fluctuations. Changes in fair values of the foreign currency forwards
recognized directly in our results of operations either from ineffectiveness or exclusion from effectiveness testing were insignificant
in the years ended December 31, 2011 and December 25, 2010.
Additionally, we had a net deferred loss of $12 million and $13 million, net of tax, as of December 31, 2011 and December 25,
2010, respectively within Accumulated OCI due to treasury locks and forward-starting interest rate swaps that have been cash
settled, as well as outstanding foreign currency forward contracts. The majority of this loss arose from the settlement of forward
starting interest rate swaps entered into prior to the issuance of our Senior Unsecured Notes due in 2037, and is being reclassified
into earnings through 2037 to interest expense. In each of 2011, 2010 and 2009 an insignificant amount was reclassified from
Accumulated OCI to Interest expense, net as a result of these previously settled cash flow hedges.
Form 10-K