Pizza Hut 2013 Annual Report Download - page 146

YUM! BRANDS, INC.-2013 Form10-K50
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
Losses Related to the Extinguishment of Debt
During the fourth quarter of 2013, we completed a cash tender offer to
repurchase $550 million of our Senior Unsecured Notes due either March
2018 or November 2037. This transaction resulted in $120 million of losses
as a result of premiums paid and other costs, $118 million of which was
classified as Interest expense, net in our Consolidated Statement of Income.
The repurchase of the Senior Unsecured Notes was funded primarily
by proceeds of $599 million received from the issuance of new Senior
Unsecured Notes. See Note 10 for further discussion on the issuance of
Senior Unsecured Notes.
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 plan assets.
As a result of settlement payments 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 $30 million
and $89 million for the years ended December 28, 2013 and December 29,
2012, respectively, in General and administrative expenses. These
amounts included settlement charges of $10 million and $84 million in the
years ended December 28, 2013 and December 29, 2012, respectively,
related to the programs discussed above that were not allocated for
performance reporting purposes. See Note 14 for further discussion of
our pension plans.
U.S. Business Transformation
As part of our plan to transform our U.S. business we took several measures
in 2013, 2012 and 2011 (“the U.S. business transformation measures”).
These measures included: continuation of our U.S. refranchising; G&A
productivity initiatives and realignment of resources (primarily severance
and early retirement costs).
For information on our U.S. refranchising, see the Refranchising (Gain)
Loss section below.
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, $5 million and $21 million in the years
ended December 28, 2013, December 29, 2012 and December 31,
2011, respectively. The unpaid current liability for the severance portion
of these charges was $1 million and $5 million as of December 28, 2013
and December 29, 2012, respectively. Severance payments in the years
ended December 28, 2013, December 29, 2012 and December 31, 2011
totaled approximately $4 million, $14 million and $4 million respectively.
We are not including the impacts of these U.S. business transformation
measures in our U.S. segment for performance reporting purposes as we
do not believe they are indicative of our ongoing operations.
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 benefits
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
versus 2011 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 Profit by 1% in 2012, the
impact on our consolidated Operating Profit was not significant.
Refranchising (Gain) Loss
The Refranchising (gain) loss by reportable segment is presented below.
We do not allocate such gains and losses to our segments for performance
reporting purposes.
Refranchising (gain) loss
2013 2012 2011
China $ (5) $ (17) $ (14)
YRI(a) (4) 61 69
U.S.(b) (91) (122) 17
India — — —
WORLDWIDE $ (100) $ (78) $ 72
(a) During the fourth quarter of 2012, we refranchised our remaining 331 Company-owned Pizza Hut dine-in restaurants in the United Kingdom (“UK”). The franchise agreement for these stores
allows the franchisee to pay continuing franchise fees in the initial years of the agreement at a reduced rate. We agreed to allow the franchisee to pay these reduced fees in part as consideration
for their assumption of lease liabilities related to underperforming stores that we anticipate they will close that were part of the refranchising. We recognize the estimated value of terms in
franchise agreements entered into concurrently with a refranchising transaction that are not consistent with market terms as part of the upfront refranchising (gain) loss. Accordingly, upon the
closing of this refranchising we recognized a loss of $53 million representing the estimated value of these reduced continuing fees. The associated deferred credit is being amortized into YRI’s
Franchise and license fees and income through 2016. This upfront loss largely contributed to a $70 million Refranchising loss we recognized during 2012 as a result of this refranchising. Also
included in that loss was the write-off of $14 million in goodwill allocated to the Pizza Hut UK reporting unit. The remaining carrying value of goodwill allocated to our Pizza Hut UK business of
$87 million, immediately subsequent to the aforementioned write-off, was determined not to be impaired as the fair value of the Pizza Hut UK reporting unit exceeded its carrying amount. For the
year ended December 28, 2013, the refranchising of the Pizza Hut UK dine-in restaurants decreased Company sales by 18% and increased Franchise and license fees and income and Operating
Profit by 2% and 3%, respectively, for the YRI Division versus 2012.
During 2011, we recorded a $76 million charge in Refranchising (gain) loss as a result of our decision to refranchise or close all of our remaining Company-owned Pizza Hut UK dine-in
restaurants, primarily to write down these restaurants’ long-lived assets to their then estimated fair value. Impairment charges of Pizza Hut UK long-lived assets incurred as a result of this decision,
including the charge mentioned in the previous sentence, reduced depreciation expense versus what would have otherwise been recorded by $13 million and $3 million for the years ended
December 29, 2012 and December 31, 2011, respectively. These depreciation reductions were not allocated to the YRI segment resulting in depreciation expense in the YRI segment results
continuing to be recorded at the rate which it was prior to the impairment charges being recorded for these restaurants.
(b) U.S. Refranchising (gain) loss in the years ended December 28, 2013 and December 29, 2012 is primarily due to gains on sales of Taco Bell restaurants. U.S. Refranchising (gain) loss in
the year ended December 31, 2011 is primarily due to losses on sales of and offers to refranchise KFCs in the U.S. The non-cash impairment charges that were recorded related to our
offers to refranchise these Company-owned KFC restaurants in the U.S. decreased depreciation expense versus what would have otherwise been recorded by $3 million and $10 million in
the years ended December 29, 2012 and December 31, 2011, respectively. These depreciation reductions were not allocated to the U.S. segment 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.
See Note 2 for our policy for writing off goodwill in a refranchising transaction.