Pizza Hut 2012 Annual Report Download - page 141

YUM! BRANDS, INC.-2012 Form10-K 49
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
LJSand A&W Divestitures
In 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 benefi ts
related to tax losses associated with the transactions.
We are not including the pre-tax losses and other costs in our U.S. and
YRI segments for performance reporting purposes as we do not believe
they are indicative of our ongoing operations. In 2012, System sales and
Franchise and license fees and income in the U.S. were negatively impacted
by 5% and 6%, respectively, due to these divestitures while YRI’s system
sales and Franchise and license fees and income were both negatively
impacted by 1%. While these divestitures negatively impacted both the
U.S. and YRI segments’ Operating Profi t by 1% in 2012, the impact on
our consolidated Operating Profi t was not signifi cant.
Little Sheep Acquisition
On February1, 2012 we acquired an additional 66% interest in Little Sheep
Group Limited (“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 Little Sheep, 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 to purchase the business and recognized
a non-cash gain of $74million.This gain, which resulted in no related
income tax expense, was recorded in Other (income) expense on our
Consolidated Statement of Income and was not allocated to any segment
for performance reporting purposes.
We recorded the following assets acquired and liabilities assumed upon
acquisition of Little Sheep as a result of our purchase price allocation:
Current assets, including cash of $44 $ 109
Property, plant and equipment 64
Goodwill 376
Intangible assets, including indefi nite-lived
trademark of $404 421
Other assets 35
Total assets acquired 1,005
Deferred taxes 105
Other liabilities 60
Total liabilities assumed 165
Redeemable noncontrolling interest 59
Other noncontrolling interests 16
NET ASSETS ACQUIRED $ 765
The fair values of intangible assets were determined using an income
approach based on expected cash fl ows. The goodwill recorded resulted
from the value expected to be generated from applying YUM’s processes
and knowledge in China, including YUM’s development capabilities, to
the Little Sheep business. The goodwill is not expected to be deductible
for income tax purposes and has been allocated to the China operating
segment.
As part of the acquisition, YUM granted an option to the shareholder that
holds the remaining 7% ownership interest in Little Sheep that would require
us to purchase their remaining shares owned upon exercise, which may occur
any time after the third anniversary of the acquisition. This noncontrolling
interest has been recorded as a Redeemable noncontrolling interest in the
Consolidated Balance Sheet. The Redeemable noncontrolling interest is
reported at its fair value of $59million at the date of acquisition, which is
based on the Little Sheep traded share price immediately subsequent to
our offer to purchase the additional interest.
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. From the date of the acquisition, we
have reported the results of operations for the entity in the appropriate line
items of our Consolidated Statement of Income.We no longer report Other
(income) expense as we did under the equity method of accounting.Net
income attributable to our partner’s ownership percentage is recorded as
Net Income - noncontrolling interest. Little Sheep reports on a one month
lag, and as a result, their consolidated results are included in the China
Division from the beginning of the quarter ended June16, 2012. In 2012,
the consolidation of Little Sheep increased China Division revenues by 4%
and did not have a signifi cant impact on China Division Operating Profi t.
The pro forma impact on our results of operations if the acquisition had been
completed as of the beginning of 2011 would not have been signifi cant.
YRI Acquisitions
In 2011, YRI acquired 68 KFC restaurants from an existing franchisee in
South Africa for $71million.
In 2010, we completed the exercise of our option with our Russian partner
to purchase their interest in the co-branded Rostik’s-KFC restaurants
across Russia and the Commonwealth of Independent States.As a result,
we acquired company ownership of 50 restaurants and gained full rights
and responsibilities as franchisor of 81 restaurants, which our partner
previously managed as master franchisee.We paid cash of $60million, net
of settlement of a long-term note receivable of $11million, and assumed
long-term debt of $10million which was subsequently repaid.Of the
remaining balance of the purchase price of $12million, a payment of
$9million was made in July2012 and the remainder is expected to be
paid in cash during 2013.
The impact of consolidating these businesses on all line-items within our
Consolidated Statement of Income was insignifi cant to the comparison
of our year-over-year results.