Pizza Hut 2012 Annual Report Download - page 126

YUM! BRANDS, INC.-2012 Form10-K 34
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations
The assumption we make regarding our expected long-term rates of return
on plan assets also impacts our pension expense.Our estimated long-
term rate of return on U.S. plan assets represents the weighted-average
of historical returns for each asset category, adjusted for an assessment
of current market conditions.Our expected long-term rate of return on
U.S. plan assets, for purposes of determining 2013 pension expense, at
December29, 2012 was 7.25%.We believe this rate is appropriate given
the composition of our plan assets and historical market returns thereon.A
one percentage-point change in our expected long-term rate of return on
plan assets assumption would impact our 2013 U.S. pension expense
by approximately $8million.
A decrease in discount rates over time along with actual asset returns
below expected returns have largely contributed to an unrecognized
pre-tax actuarial net loss of $421million included in Accumulated other
comprehensive income (loss) for the U.S. plans at December29, 2012.For
purposes of determining 2012 pension expense, our funded status was
such that we recognized $63million of net loss in net periodic benefi t
cost.We will recognize approximately $58million of such loss in 2013.
See Note14 for further discussion of our pension plans.
Stock Options and Stock Appreciation
Rights Expense
Compensation expense for stock options and stock appreciation rights
(“SARs”) is estimated on the grant date using a Black-Scholes option
pricing model.Our assumptions for the risk-free interest rate, expected
term, expected volatility and expected dividend yield are documented in
Note15.Additionally, we estimate pre-vesting forfeitures for purposes of
determining compensation expense to be recognized.Future expense
amounts for any particular quarterly or annual period could be affected by
changes in our assumptions or changes in market conditions.
We have determined that it is appropriate to group our stock option and
SAR awards into two homogeneous groups when estimating expected term
and pre-vesting forfeitures.These groups consist of grants made primarily
to restaurant-level employees under our Restaurant General Manager
Stock Option Plan (the “RGM Plan”) and grants made to executives under
our other stock award plans.Historically, approximately 10% - 15% of
total options and SARs granted have been made under the RGM Plan.
Stock option and SAR grants under the RGM Plan typically cliff-vest after
four years and grants made to executives under our other stock award
plans typically have a graded vesting schedule and vest 25% per year
over four years.We use a single weighted-average expected term for our
awards that have a graded vesting schedule.We re-evaluate our expected
term assumptions using historical exercise and post-vesting employment
termination behavior on a regular basis.We have determined that fi ve years
and six years are appropriate expected terms for awards to restaurant-
level employees and to executives, respectively.
Upon each stock award grant we re-evaluate the expected volatility,
including consideration of both historical volatility of our stock as well as
implied volatility associated with our traded options.We have estimated
pre-vesting forfeitures based on historical data.Based on such data, we
believe that approximately 50% of all awards granted under the RGM
Plan will be forfeited and approximately 20% of all awards granted to
above-store executives will be forfeited.
Income Taxes
At December29, 2012, we had valuation allowances of $358million to
reduce our $1.2billion of deferred tax assets to amounts that will more
likely than not be realized.The net deferred tax assets primarily relate to
temporary differences in currently profi table U.S. federal and state, and
foreign jurisdictions as well as U.S. federal and state capital loss and
tax credit carryovers that may be carried forward generally for fi ve and
ten years, respectively. The estimation of future taxable income in these
jurisdictions and our resulting ability to utilize deferred tax assets can
signifi cantly change based on future events, including our determinations
as to feasibility of certain tax planning strategies. Thus, recorded valuation
allowances may be subject to material future changes.
As a matter of course, we are regularly audited by federal, state and foreign
tax authorities.We recognize the benefi t of positions taken or expected
to be taken in our tax returns in our Income Tax Provision when it is more
likely than not that the position would be sustained upon examination by
these tax authorities.A recognized tax position is then measured at the
largest amount of benefi t that is greater than fi ftypercent likely of being
realized upon settlement.At December29, 2012 we had $309million of
unrecognized tax benefi ts, $184million of which, if recognized, would
impact the effective tax rate.We evaluate unrecognized tax benefi ts,
including interest thereon, on a quarterly basis to ensure that they have
been appropriately adjusted for events, including audit settlements, which
may impact our ultimate payment for such exposures.
Additionally, we have not provided deferred tax for investments in foreign
subsidiaries where the carrying values for fi nancial reporting exceed the
tax basis, totaling approximately $2.6billion at December29, 2012, as
we believe the excess is essentially permanently invested.If our intentions
regarding the duration of these investments change, deferred tax may need
to be provided on this excess that could materially impact the provision
for income taxes.
See Note17 for a further discussion of our income taxes.