Pizza Hut 2015 Annual Report Download - page 154

YUM! BRANDS, INC.-2015 Form10-K46
Form 10-K
PART II
ITEM 8Financial Statements and Supplementary Data
NOTE4 Items Affecting Comparability of Net Income and Cash Flows
Little Sheep 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 primary assets recorded
as a result of the acquisition and resulting consolidation of Little Sheep
were the Little Sheep trademark and goodwill of approximately $400million
and $375 million, respectively.
Sustained declines in sales and profits in 2013 resulted in a determination
that the Little Sheep trademark, goodwill and certain restaurant level PP&E
were impaired during the quarter ended September 7, 2013. As a result,
we recorded impairment charges to the trademark, goodwill and PP&E
of $69 million, $222 million and $4 million, respectively, during the quarter
ended September 7, 2013.
The Little Sheep business continued to underperform during 2014 with
actual average-unit sales volumes and profit levels significantly below those
assumed in our 2013 estimation of the Little Sheep trademark and reporting
unit fair values. As a result, a significant number of Company-operated
restaurants were closed or refranchised during 2014 with future plans calling
for further focus on franchise-ownership for the Concept. We tested the
Little Sheep trademark and goodwill for impairment in the fourth quarter
of 2014 pursuant to our accounting policy. As a result of comparing the
trademark’s 2014 fair value estimate of $58 million to its carrying value of
$342 million, we recorded a $284 million impairment charge. Additionally,
after determining the 2014 fair value estimate of the Little Sheep reporting
unit was less than its carrying value we wrote off Little Sheep’s remaining
goodwill balance of $160 million. The Company also evaluated other
Little Sheep long-lived assets for impairment and recorded $14 million
of restaurant-level PP&E impairment and a $5 million impairment of our
equity method investment in a meat processing business that supplies
lamb to Little Sheep.
The losses related to Little Sheep that have occurred concurrent with our
trademark and goodwill impairments in 2014 and 2013, none of which
have been allocated to any segment for performance reporting purposes,
are summarized below:
2014 2013 Income Statement Classification
Impairment of Goodwill $ 160 $ 222 Closures and Impairment (income) expense
Impairment of Trademark 284 69 Closures and Impairment (income) expense
Impairment of PP&E 14 4 Closures and Impairment (income) expense
Impairment of Investment in Little Sheep Meat 5 — Closures and Impairment (income) expense
Tax Benefit (76) (18) Income tax provision
Loss Attributable to Non-Controlling Interest (26) (19) Net Income (loss) noncontrolling interests
Net Loss $ 361 $ 258 Net Income – YUM! Brands, Inc.
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.
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
2015 2014 2013
China $ (13) $ (17) $ (5)
KFC Division(a) 30 (18) (8)
Pizza Hut Division(a)(b) 55 4 (3)
Taco Bell Division (65) (4) (84)
India 3 2 —
Worldwide $ 10 $ (33) $ (100)
(a) In 2010 we refranchised our then-remaining Company-operated restaurants in Mexico. To the extent we owned it, we did not sell the real estate related to certain of these restaurants,
instead leasing it to the franchisee. During 2015, we sold the real estate for approximately $58 million. While these proceeds exceeded the book value of the real estate, the sale represented
a substantial liquidation of our Mexican foreign entities under GAAP. As such, the accumulated translation losses associated with our Mexican business were included in our loss on the sale.
We recorded charges of $80 million representing the excess of the sum of the book value of the real estate and other related assets and our accumulated translation losses over the sales
price. Consistent with the classification of the original market refranchising transaction, these charges were classified as Refranchising (gain) loss. Refranchising losses of $40 million were
associated with both the KFC and Pizza Hut Divisions.
Our KFC and Pizza Hut Divisions earned approximately $2 million and $1 million, respectively, of rental income in 2015 and $3 million and $1 million, respectively, of rental income in 2014
related to this real estate that transferred to the buyer subsequent to the sale of the real estate. We continue to earn U.S. dollar-denominated franchise fees, most of which are sales-based
royalties, under our existing franchise contracts with our Mexico franchisee.
(b) During 2015 we recognized charges of $16 million within Refranchising (gain) loss associated with the refranchising of our company-owned Pizza Hut restaurants in Korea. While additional
gains or losses may occur as the refranchising plans move forward, such amounts are not expected to be material at this time.