Pizza Hut 2013 Annual Report Download - page 152

YUM! BRANDS, INC.-2013 Form10-K56
Form 10-K
PART II
ITEM 8Financial Statements andSupplementaryData
The fair values of derivatives designated as hedging instruments for the years ended December 28, 2013 and December 29, 2012 were:
Fair Value
Consolidated Balance Sheet Location2013 2012
Interest Rate Swaps – Asset $ 17 $ 24 Other assets
Foreign Currency Forwards – Asset 2 — Prepaid expenses and other current assets
Foreign Currency Forwards – Liability (1) (5) Accounts payable and other current liabilities
TOTAL $ 18 $ 19
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 addition of
$14 million and $22 million to Long-term debt at December 28, 2013 and December 29, 2012, respectively. During the years ended December 28, 2013 and
December 29, 2012, Interest expense, net was reduced by $8 million and $12 million, respectively for recognized gains on these interest rate swaps.
Changes in fair value of derivative instruments:
2013 2012
Beginning of Year Balance $ 19 $ 34
Changes in fair value recognized into Other Comprehensive Income (“OCI”) 6 (7)
Changes in fair value recognized into income 2 16
Cash receipts (9) (24)
ENDING BALANCE $ 18 $ 19
For our cash flow hedges the following effective portions of gains and losses were recognized into Accumulated OCI and reclassified into income from
Accumulated OCI in the years ended December 28, 2013 and December 29, 2012.
2013 2012
Gains (losses) recognized into Accumulated OCI, net of tax $ 4 $ (4)
Gains (losses) reclassified from Accumulated OCI into income, net of tax $ 1 $ (4)
The gains/losses reclassified 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 fluctuations� 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
insignificant in the years ended December 28, 2013 and December 29, 2012.
Additionally, we had a net deferred loss of $9 million and $12 million, net of
tax, as of December 28, 2013 and December 29, 2012, 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 reclassified into
earnings through 2037 to interest expense. In 2013, 2012 and 2011 an
insignificant amount was reclassified from Accumulated OCI to Interest
expense, net as a result of these previously settled cash flow 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 financial institutions based upon their credit
ratings and other factors, and continually assess the creditworthiness
of counterparties. At December 28, 2013 and December 29, 2012, 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.
NOTE13 Fair Value Disclosures
At December 28, 2013 the carrying values of cash and cash equivalents,
short-term investments, accounts receivable and accounts payable
approximated their fair values because of the short-term nature of these
instruments. The fair value of notes receivable net of allowances and lease
guarantees less subsequent amortization approximates their carrying
value. The Company’s debt obligations, excluding capital leases, were
estimated to have a fair value of $3.0 billion (Level 2), compared to their
carrying value of $2.8 billion. We estimated the fair value of debt using
market quotes and calculations based on market rates.
Recurring Fair Value Measurements
The following table presents fair values for those assets and liabilities
measured at fair value on a recurring basis and the level within the fair
value hierarchy in which the measurements fall. No transfers among the
levels within the fair value hierarchy occurred during the years ended
December 28, 2013 or December 29, 2012.
Fair Value
Level 2013 2012
Foreign Currency Forwards, net 2 $ 1 $ (5)
Interest Rate Swaps, net 2 17 24
Other Investments 1 18 17
TOTAL $ 36 $ 36