FACILITY ACTIONS NET LOSS (GAINS)
|Refranchising gains, net||$(112)||$(248)||$(139)||$ (93)|
|Store closure costs||248||35||40||38|
|Impairment charges for stores to be
used in the business
|Facility actions net loss (gain)||$247||$(163)||$ (37)||$282|
Refranchising gains, which included initial franchise fees of $41 million, $22 million and $8 million in 1997, 1996 and 1995,respectively, as well as a $100 million tax-free gain from refranchising our restaurants in New Zealand through an initial public offering, arose from the refranchising of 1,418, 659 and 264 units in 1997, 1996 and 1995, respectively.
Store closure costs are provided upon management's decision to close a unit.These costs included the estimated cost of closing an additional 697 units approved for closure in 1997, which were not yet closed at December 27, 1997.We closed 661, 352 and 267 units in 1997, 1996 and 1995, respectively.
Impairment charges in 1997 of $50 million and in 1996 of $62 million resulted from our semi-annual impairment evaluations of each restaurant which will continue to be used in the business that initially met our "two-year history of operating losses" primary impairment indicator or due to other changes in circumstances. The $337 million charge in 1995 was related to the initial adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which we believe requires periodic impairment evaluations at the restaurant level. Previously, impairment was evaluated and measured if a restaurant concept was incurring operating losses and was expected to incur operating losses in the future.
|Foreign exchange losses||(16)||NM||(5)||NM|
|Ongoing operating profit||$649||10||$591||(15)|
NM - Not Meaningful
Exclusive of the fourth quarter charge and other facility actions, operating profits increased $58 million or 10% in 1997. Excluding the negative impact of unfavorable currency translation, the increase in operating profit was $67 million or 11%. This increase in 1997 relates primarily to higher franchise fees and improved restaurant margins, partially offset by an increase in unallocated expenses primarily reflecting an increase in general, administrative and other expenses.
Operating profits, exclusive of facility actions, decreased $103 million or 15% in 1996. The decrease in 1996 is due primarily to an increase in general, administrative and other expenses and a decline in restaurant margins, partially offset by higher franchise fees.
Interest Expense, Net
Prior to the Spin-off, our operations were financed through operating cash flows, refranchising activities and investments by and advances from PepsiCo.At the Spin-off Date, a bank credit agreement replaced the financing previously provided by PepsiCo and, additionally, funded a dividend to PepsiCo. See Notes 3 and 9. Our interest expense includes an allocation by PepsiCo of its interest expense (PepsiCo's weighted average interest rate applied to the average balance of investments by and advances from PepsiCo) and interest on our external debt for all periods prior to the Spin-off. We believe such allocated interest expense is not indicative of the interest expense that we would have incurred as an independent, publicly owned company or will incur in future periods.See Note 16.Subsequent to the Spin-off Date, our interest cost consists primarily of interest expense related to our bank credit agreement and interest on other third party debt, including capital leases, most of which existed at the Spin-off Date.
Interest expense decreased in 1997, primarily due to the lower outstanding amount of PepsiCo-provided financing. Such impact is partially offset by the higher interest rate on our bank credit agreement, as compared to the PepsiCo rate used in the allocation process, and also higher outstanding debt levels.
Interest expense decreased in 1996 primarily due to the lower outstanding amount of PepsiCo-provided financing and a lower weighted average interest rate than in 1995.
For periods prior to the Spin-off, income tax expense was calculated, to the extent possible, as if we filed income tax returns separate from PepsiCo.As PepsiCo managed its tax position on a consolidated basis, which takes into account the results of all its businesses, our effective tax rate in the future could vary significantly from our calculated historical effective tax rates. Our future effective tax rate will largely depend on our structure and tax strategies as an independent, publicly owned company.
Income Taxes and Effective Tax Rate
|Core Business Actual
Effective tax rate
Effective tax rate
*Adjusted to exclude the effects of the 1997 fourth quarter charge, the 1997 $100 million tax-free gain associated with the New Zealand initial public offering and the initial impact of adopting SFAS 121 in 1995. See Note 4.
NM - Not Meaningful
|The following reconciles the U.S. Federal statutory tax rate to our ongoing effective rate:|
of Federal tax benefit
to foreign operations
|Ongoing effective tax rate||46.7%||55.9%||45.1%|
The 1997 ongoing effective tax rate decreased 9.2 points to 46.7%. The decrease in the 1997 ongoing effective tax rate was primarily due to the decrease in taxes attributable to foreign operations, partially offset by an increase in state taxes. The foreign decrease was due to the absence of the adjustment recorded in 1996 to establish a valuation allowance, which is more fully described below, as well as a decrease in adjustments related to prior tax years. The increase in state tax was primarily due to an increase in adjustments related to prior tax years.
The increase in the 1996 ongoing effective tax rate related to an increase in taxes attributable to foreign operations, due in part to adjustments related to prior tax years, and the establishment of a valuation allowance due to a change in judgment as to the expected realization of certain foreign deferred tax assets resulting from a larger than expected net operating loss during 1996 and forecasted continuing operating losses for the next several years in a foreign jurisdiction.
The effective tax rate attributable to foreign operations varied from year-to-year but in each year was higher than the U.S. Federal statutory tax rate. This was primarily due to foreign tax rate differentials, including foreign withholding tax paid without benefit of the related foreign tax credit for U.S. income tax purposes and losses of foreign operations for which no tax benefit could be currently recognized.
Earnings (Loss) Per Share
The components of basic earnings (loss) per share would have been as follows:
|Core Business operating earnings||$1.34||$ .83||$1.29|
|Fourth quarter charge||(2.80)|
|Other facility actions net gain (loss)||.90||.14||(1.40)|
|Core Businesses net (loss)
earnings per share
|Non-core Businesses operating earnings (loss)||.05||(.08)||(.22)|
|Non-core Businesses facility
actions net loss
and unusual charges
|Net loss per share||$ (.73)||$(.35)||$(.87)|
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