Pizza Hut 2013 Annual Report Download - page 114

YUM! BRANDS, INC.-2013 Form10-K18
Form 10-K
PART II
ITEM7Management’s Discussion and Analysis of Financial Condition and Results of Operations
The table below details items classified as Special Items.
Year
2013 2012 2011
Detail of Special Items
U.S. Refranchising gain (loss) $ 91 $ 122 $ (17)
Pension settlement charges (10) (84) —
Little Sheep impairment (295) — —
Gain upon acquisition of Little Sheep — 74 —
Losses associated with the refranchising of the Pizza Hut UK dine-in business (1) (70) (76)
Losses and other costs relating to the LJS and A&W divestitures — — (86)
Other Special Items Income (Expense) (7) 16 (8)
Special Items Income (Expense) – Operating Profit (222) 58 (187)
Losses related to the extinguishment of debt – Interest Expense, net (118) — —
Special Items Income (Expense) before income taxes (340) 58 (187)
Tax Benefit (Expense) on Special Items(a) 41 1 123
Special Items Income (Expense), net of tax – including noncontrolling interests (299) 59 (64)
Special Items Income (Expense), net of tax – noncontrolling interests 19 — —
Special Items Income (Expense), net of tax – YUM! Brands, Inc. $ (280) $ 59 $ (64)
Average diluted shares outstanding 461 473 481
Special Items diluted EPS $ (0.61) $ 0.13 $ (0.13)
Reconciliation of Operating Profit Before Special Items
to Reported Operating Profit
Operating Profit before Special Items $ 2,020 $ 2,236 $ 2,002
Special Items Income (Expense) – Operating Profit (222) 58 (187)
REPORTED OPERATING PROFIT $ 1,798 $ 2,294 $ 1,815
Reconciliation of EPS Before Special Items to Reported EPS
Diluted EPS before Special Items $ 2.97 $ 3.25 $ 2.87
Special Items EPS (0.61) 0.13 (0.13)
REPORTED EPS $ 2.36 $ 3.38 $ 2.74
Reconciliation of Effective Tax Rate Before Special Items to Reported
Effective Tax Rate
Effective Tax Rate before Special Items 28.0% 25.8% 24.2%
Impact on Tax Rate as a result of Special Items(a) 3.4% (0.8)% (4.7)%
REPORTED EFFECTIVE TAX RATE 31.4% 25.0% 19.5%
(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. Refranchising gain (loss)
In the years ended December 28, 2013 and December 29, 2012, we
recorded pre-tax refranchising gains of $91 million and $122 million,
respectively, in the U.S. primarily due to gains on sales of Taco Bell
restaurants. In the year ended December 31, 2011, we recorded pre-tax
losses of $17 million from refranchising in the U.S., which 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-owned KFC restaurants. Refranchising
gains and losses are more fully discussed in Note 4 and the Store Portfolio
Strategy Section of the MD&A.
Pension Settlement Charges
During the fourth quarter of 2012 and continuing through 2013, the Company
allowed certain former employees with deferred vested balances in our
U.S. pension plans an opportunity to voluntarily elect an early payout of
their pension benefits. The majority of these payouts were funded from
existing pension assets.
As a result of settlement payments from the programs discussed above
exceeding the sum of service and interest costs within these U.S. pension
plans in 2013 and 2012, pursuant to our accounting policy we recorded
pre-tax settlement charges of $10 million and $84 million for the years ended
December 28, 2013 and December 29, 2012, respectively, in General and
administrative expenses. See Note 14 for further discussion of our pension plans.
Little Sheep Acquisition and Subsequent Impairment
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 significant
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 in 2012.
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 Little Sheep’s results of operations 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 in
Net Income (loss) – noncontrolling interests. In 2012, the consolidation of
Little Sheep increased China Division Revenues by 4%, decreased China