Pizza Hut 2012 Annual Report Download - page 110

YUM! BRANDS, INC.-2012 Form10-K 18
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
Year
2012 2011 2010
Detail of Special Items
U.S. Refranchising gain (loss) $ 122 $ (17) $ (18)
YUM Retirement Plan settlement charge (84) — —
Gain upon acquisition of Little Sheep 74 — —
Losses associated with refranchising equity markets outside the U.S. (70) (76) (59)
Losses and other costs relating to the LJS and A&W divestitures — (86) —
Other Special Items Income (Expense) 16 (8) —
Special Items Income (Expense) 58 (187) (77)
Tax Benefi t (Expense) on Special Items(a) 1 123 7
Special Items Income (Expense), net of tax $ 59 $ (64) $ (70)
Average diluted shares outstanding 473 481 486
Special Items diluted EPS $ 0.13 $ (0.13) $ (0.15)
Reconciliation of Operating Profi t Before Special Items to Reported
Operating Profi t
Operating Profi t before Special Items $ 2,236 $ 2,002 $ 1,846
Special Items Income (Expense) 58 (187) (77)
REPORTED OPERATING PROFIT $ 2,294 $ 1,815 $ 1,769
Reconciliation of EPS Before Special Items to Reported EPS
Diluted EPS before Special Items $ 3.25 $ 2.87 $ 2.53
Special Items EPS 0.13 (0.13) (0.15)
REPORTED EPS $ 3.38 $ 2.74 $ 2.38
Reconciliation of Effective Tax Rate Before Special Items to Reported
Effective Tax Rate
Effective Tax Rate before Special Items 25.8% 24.2% 25.3%
Impact on Tax Rate as a result of Special Items(a) (0.8)% (4.7)% 0.8%
REPORTED EFFECTIVE TAX RATE 25.0% 19.5% 26.1%
(a) The tax benefit (expense) was determined based upon the impact of the nature, as well as the jurisdiction of the respective individual components within Special Items.
U.S. Business Transformation
We took several measures in 2012, 2011 and 2010 to transform our
U.S. business including refranchising and G&A productivity initiatives and
realignment of resources (primarily severance and early retirement costs).
In the year ended December29, 2012, we recorded pre-tax refranchising
gains of $122million in the U.S., primarily due to gains on sales of Taco
Bells. In the years ended December31, 2011 and December25, 2010, we
recorded pre-tax losses of $17million and $18million from refranchising in
the U.S., respectively. The losses recorded in the years ended December31,
2011 and December25, 2010 were primarily the net result of gains from
restaurants sold and non-cash impairment charges related to our offers to
refranchise restaurants in the U.S., principally a substantial portion of our
Company-operated KFC restaurants. The non-cash impairment charges
that we recorded related to our offers to refranchise these Company-
operated KFC restaurants in the U.S. decreased depreciation expense
versus what we would have otherwise recorded by $3million, $10million
and $9million in the years ended December29, 2012, December31,
2011 and December25, 2010, respectively. This depreciation reduction
was recorded as a Special Item, resulting in depreciation expense in the
U.S. segment results continuing to be recorded at the rate at which it was
prior to the impairment charges being recorded for these restaurants. This
depreciation reduction is classifi ed within Other Special Items Income
(Expense) in the table above. 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 $5million, $21million and $9million in the years ended
December29, 2012, December31, 2011 and December25, 2010,
respectively. These charges are classifi ed within Other Special Items in
the above table.
YUM Retirement Plan Settlement Charge
During the fourth quarter of 2012, the Company allowed certain former
employees with deferred vested balances in the YUM Retirement Plan
(“the Plan”) an opportunity to voluntarily elect an early payout of their
pension benefi ts. We paid out $227million, all of which was funded from
existing pension plan assets.
As a result of settlement payments exceeding the sum of service and
interest costs within the Plan in 2012, pursuant to our policy, we recorded
a pre-tax settlement charge of $84million in General and administrative
expenses. See Note14 for further discussion of our pension plans.
Little Sheep Acquisition
On February1, 2012 we acquired an additional 66% interest in Little
Sheep for $540million, net of cash acquired of $44million, increasing
our ownership to 93%.The acquisition was driven by our strategy to
build leading brands across China in every signifi cant category.Prior to
our acquisition of this additional interest, our 27% interest in Little Sheep
was accounted for under the equity method of accounting.As a result
of the acquisition we obtained voting control of Little Sheep, and thus
we began consolidating Little Sheep upon acquisition.As required by
GAAP, we remeasured our previously held 27% ownership in the entity,
which had a recorded value of $107million at the date of acquisition, at
fair value based on Little Sheep’s traded share price immediately prior to
our offer and recognized a non-cash gain of $74million, which resulted
in no related income tax expense.
Under the equity method of accounting, we previously reported our 27%
share of the net income of Little Sheep as Other (income) expense in
the Consolidated Statements of Income. Since the acquisition, we have
reported the results of operations for the entity in the appropriate line items