Pizza Hut 2012 Annual Report Download - page 147

YUM! BRANDS, INC.-2012 Form10-K 55
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
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 fl ow volatility arising from foreign
currency fl uctuations.
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 fi xed-
rate debt.At December29, 2012, our interest rate swaps outstanding
had notional amounts of $300million and have been designated as fair
value hedges of a portion of our debt.These fair value hedges 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 fl ow volatility arising from foreign currency
fl uctuations 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 fl ow 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29, 2012, foreign currency forward contracts
outstanding had a total notional amount of $525million.
The fair values of derivatives designated as hedging instruments for the years ended December29, 2012 and December31, 2011 were:
Fair Value
Consolidated Balance Sheet Location2012 2011
Interest Rate Swaps - Asset $ — $ 10 Prepaid expenses and other current assets
Interest Rate Swaps - Asset 24 22 Other assets
Foreign Currency Forwards - Asset — 3 Prepaid expenses and other current assets
Foreign Currency Forwards - Liability (5) (1) Accounts payable and other current liabilities
TOTAL $ 19 $ 34
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 additional
$22million to Long-term debt at December29, 2012 and as an additional $5million and $21million to Short-term borrowings and Long-term debt,
respectively at December31, 2011.During the years ended December29, 2012 and December31, 2011, Interest expense, net was reduced by
$12million and $24million, respectively for recognized gains on these interest rate swaps.
Changes in fair value of derivative instruments:
2012 2011
Beginning of Year Balance $34 $45
Changes in fair value recognized into Other Comprehensive Income (“OCI”) (7) (3)
Changes in fair value recognized into income 16 18
Cash receipts (24) (26)
ENDING BALANCE $19$34
For our foreign currency forward contracts the following effective portions of gains and losses were recognized into OCI and reclassifi ed into income
from OCI in the years ended December29, 2012 and December31, 2011.
2012 2011
Gains (losses) recognized into OCI, net of tax $ (4) $ (2)
Gains (losses) reclassifi ed from Accumulated OCI into income, net of tax $ (4) $ (3)
The gains/losses reclassifi ed 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 fl uctuations.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
insignifi cant in the years ended December29, 2012 and December31, 2011.
Additionally, we had a net deferred loss of $12million, net of tax, as
of December29, 2012 and December31, 2011, 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 reclassifi ed into
earnings through 2037 to interest expense.In each of 2012, 2011 and 2010
an insignifi cant amount was reclassifi ed from Accumulated OCI to Interest
expense, net as a result of these previously settled cash fl ow hedges.
As a result of the use of derivative instruments, the Company is exposed to
risk that the counterparties will fail to meet their contractual obligations.To
mitigate the counterparty credit risk, we only enter into contracts with
carefully selected major fi nancial institutions based upon their credit
ratings and other factors, and continually assess the creditworthiness
of counterparties.At December29, 2012 and December31, 2011, all
of the counterparties to our interest rate swaps and foreign currency
forwards had investment grade ratings according to the three major ratings
agencies.To date, all counterparties have performed in accordance with
their contractual obligations.