Pizza Hut 2014 Annual Report Download - page 129

PART II
Quantitative and Qualitative
Disclosures About Market Risk
The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices. In the
normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use
of financial and commodity derivative instruments to hedge our underlying exposures. Our policies prohibit the use of derivative instruments for
trading purposes, and we have processes in place to monitor and control their use.
Interest Rate Risk
We have a market risk exposure to changes in interest rates, The estimated reductions are based upon the current level of variable
principally in the U.S. We have attempted to minimize this risk and rate debt and assume no changes in the volume or composition of that
lower our overall borrowing costs on a portion of our debt through the debt and include no impact from interest income related to cash and
utilization of derivative financial instruments, primarily interest rate cash equivalents. In addition, the fair value of our derivative financial
swaps. These swaps were entered into with financial institutions and instruments at December 27, 2014 and December 28, 2013 would
have reset dates and critical terms that match those of the underlying decrease approximately $4 million and $7 million, respectively, as a
debt. Accordingly, any change in fair value associated with interest result of the same hypothetical 100 basis-point increase and the fair
rate swaps is offset by the opposite impact on the related debt. value of our Senior Unsecured Notes at December 27, 2014 and
December 28, 2013 would decrease approximately $182 million and
At December 27, 2014 and December 28, 2013 a hypothetical 100 $185 million, respectively. Fair value was determined based on the
basis-point increase in short-term interest rates would result, over the present value of expected future cash flows considering the risks
following twelve-month period, in a reduction of approximately involved and using discount rates appropriate for the duration.
$5 million and $3 million, respectively, in income before income taxes.
Foreign Currency Exchange Rate Risk
Changes in foreign currency exchange rates impact the translation of payables. The notional amount and maturity dates of these contracts
our reported foreign currency denominated earnings, cash flows and match those of the underlying receivables or payables such that our
net investments in foreign operations and the fair value of our foreign foreign currency exchange risk related to these instruments is
currency denominated financial instruments. Historically, we have minimized.
chosen not to hedge foreign currency risks related to our foreign The Company’s foreign currency net asset exposure (defined as
currency denominated earnings and cash flows through the use of foreign currency assets less foreign currency liabilities) totaled
financial instruments. We attempt to minimize the exposure related to approximately $4.4 billion as of December 27, 2014. Operating in
our net investments in foreign operations by financing those international markets exposes the Company to movements in foreign
investments with local currency denominated debt when practical. In currency exchange rates. The Company’s primary exposures result
addition, we attempt to minimize the exposure related to foreign from our operations in Asia-Pacific, Europe and the Americas. For the
currency denominated financial instruments by purchasing goods and fiscal year ended December 27, 2014 Operating Profit would have
services from third parties in local currencies when practical. decreased approximately $150 million if all foreign currencies had
Consequently, foreign currency denominated financial instruments uniformly weakened 10% relative to the U.S. dollar. This estimated
consist primarily of intercompany short-term receivables and reduction assumes no changes in sales volumes or local currency
payables. At times, we utilize forward contracts to reduce our sales or input prices.
exposure related to these intercompany short-term receivables and
Commodity Price Risk
We are subject to volatility in food costs as a result of market risk environment in which we operate. We manage our exposure to this
associated with commodity prices. Our ability to recover increased risk primarily through pricing agreements with our vendors.
costs through higher pricing is, at times, limited by the competitive
YUM! BRANDS, INC. - 2014 Form 10-K 35
ITEM 7A
13MAR201516053226
Form 10-K