form10q.htm
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D. C. 20549
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___________
FORM
10-Q
(Mark
One)
[ü]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
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SECURITIES EXCHANGE ACT OF 1934 for
the quarterly period ended March 22, 2008
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from ____________ to _________________
Commission
file number 1-13163
________________________
YUM! BRANDS,
INC.
(Exact
name of registrant as specified in its charter)
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North
Carolina
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13-3951308
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1441
Gardiner Lane, Louisville, Kentucky
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40213
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (502)
874-8300
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [Ö] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer: [Ö] Accelerated
filer: [ ] Non-accelerated
filer: [ ] Smaller reporting
company: [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [Ö]
The
number of shares outstanding of the Registrant’s Common Stock as of April 21,
2008 was 473,731,339 shares.
YUM!
BRANDS, INC.
INDEX
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Page
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No.
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Part
I.
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Financial
Information
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Item
1 - Financial Statements
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Condensed
Consolidated Statements of Income - Quarters ended
March
22, 2008 and March 24, 2007
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3
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Condensed
Consolidated Statements of Cash Flows – Quarters ended
March
22, 2008 and March 24, 2007
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4
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Condensed
Consolidated Balance Sheets – March 22, 2008
and
December 29, 2007
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5
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Notes
to Condensed Consolidated Financial Statements
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6
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Item
2 - Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
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20
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Item
3 - Quantitative and Qualitative Disclosures about Market
Risk
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33
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Item
4 - Controls and Procedures
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33
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Report
of Independent Registered Public Accounting Firm
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34
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Part
II.
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Other
Information and Signatures
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Item
1 – Legal Proceedings
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35
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Item
1A – Risk Factors
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35
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Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
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36
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Item
6 – Exhibits
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36
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Signatures
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38
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PART
I - FINANCIAL INFORMATION
Item
1.
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Financial
Statements
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CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM! BRANDS, INC. AND
SUBSIDIARIES
(in
millions, except per share data)
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Quarter
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3/22/08
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3/24/07
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Revenues
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Company
sales
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$
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2,094
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$
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1,942
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Franchise
and license fees
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314
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281
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Total
revenues
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2,408
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2,223
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Costs
and Expenses, Net
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Company
restaurants
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Food
and paper
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669
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586
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Payroll
and employee benefits
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533
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514
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Occupancy
and other operating expenses
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584
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554
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1,786
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1,654
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General
and administrative expenses
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276
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262
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Franchise
and license expenses
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14
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8
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Closures
and impairment (income) expenses
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(2
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)
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4
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Refranchising
(gain) loss
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25
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(1
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)
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Other
(income) expense
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(115
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)
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(20
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)
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Total
costs and expenses, net
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1,984
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1,907
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Operating
Profit
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424
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316
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Interest
expense, net
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53
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36
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Income
Before Income Taxes
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371
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280
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Income
tax provision
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117
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86
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Net
Income
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$
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254
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$
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194
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Basic
Earnings Per Common Share
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$
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0.52
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$
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0.36
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Diluted
Earnings Per Common Share
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$
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0.50
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$
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0.35
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Dividends
Declared Per Common Share
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$
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0.15
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$
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—
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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YUM!
BRANDS, INC. AND SUBSIDIARIES
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(in
millions)
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Quarter
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3/22/08
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3/24/07
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Cash
Flows – Operating Activities
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Net
Income
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$
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254
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$
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194
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Depreciation
and amortization
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120
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112
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Closures
and impairment (income) expenses
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(2
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)
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4
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Refranchising
(gain) loss
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25
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(1
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)
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Gain
on sale of interest in Japan unconsolidated affiliate
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(100
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)
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—
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Deferred
income taxes
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19
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(11
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Equity
income from investments in unconsolidated affiliates
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(11
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)
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(13
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)
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Excess
tax benefits from share-based compensation
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(9
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)
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(12
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)
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Share-based
compensation expense
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15
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14
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Changes
in accounts and notes receivable
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(3
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)
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(12
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)
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Changes
in inventories
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6
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(4
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)
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Changes
in prepaid expenses and other current assets
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(5
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)
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(6
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)
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Changes
in accounts payable and other current liabilities
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(53
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)
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(35
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)
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Changes
in income taxes payable
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30
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53
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Other
non-cash charges and credits, net
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62
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57
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Net
Cash Provided by Operating Activities
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348
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340
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Cash
Flows – Investing Activities
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Capital
spending
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(113
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)
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(93
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Proceeds
from refranchising of restaurants
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19
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34
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Sales
of property, plant and equipment
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7
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12
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Other,
net
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3
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5
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Net
Cash Used in Investing Activities
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(84
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)
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(42
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)
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Cash
Flows – Financing Activities
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Repayments
of long-term debt
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(4
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)
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(2
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)
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Revolving
credit facilities, three months or less, net
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433
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165
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Short-term
borrowings by original maturity
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More
than three months – proceeds
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—
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1
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More
than three months – payments
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—
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(183
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)
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Three
months or less, net
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24
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(11
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)
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Repurchase
shares of Common Stock
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(994
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)
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(246
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)
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Excess
tax benefits from share-based compensation
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9
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12
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Employee
stock option proceeds
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12
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28
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Dividends
paid on Common Stock
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(75
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)
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(40
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)
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Net
Cash Used in Financing Activities
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(595
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)
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(276
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)
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Effect
of Exchange Rates on Cash and Cash Equivalents
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6
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—
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Net
Increase (Decrease) in Cash and Cash Equivalents
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(325
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)
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22
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Change
in Cash and Cash Equivalents due to consolidation of an entity in
China
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17
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—
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Cash
and Cash Equivalents - Beginning of Period
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789
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319
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Cash
and Cash Equivalents - End of Period
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$
|
481
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$
|
341
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See
accompanying Notes to Condensed Consolidated Financial
Statements.
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CONDENSED
CONSOLIDATED BALANCE SHEETS
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YUM!
BRANDS, INC. AND SUBSIDIARIES
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(in
millions)
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(Unaudited)
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3/22/08
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12/29/07
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ASSETS
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Current
Assets
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Cash
and cash equivalents
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$
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481
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$
|
789
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Accounts
and notes receivable, less allowance: $23 in 2008 and $21 in
2007
|
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268
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225
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Inventories
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130
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128
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Prepaid
expenses and other current assets
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197
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142
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Deferred
income taxes
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129
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125
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Advertising
cooperative assets, restricted
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95
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72
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Total
Current Assets
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1,300
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1,481
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Property,
plant and equipment, net of accumulated depreciation and
amortization
of
$3,420 in 2008 and $3,283 in 2007
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3,807
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3,849
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Goodwill
|
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661
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|
672
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Intangible
assets, net
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327
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333
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Investments
in unconsolidated affiliates
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33
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153
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Other
assets
|
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477
|
|
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|
464
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Deferred
income taxes
|
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308
|
|
|
|
290
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|
Total
Assets
|
$
|
6,913
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$
|
7,242
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
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Current
Liabilities
|
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Accounts
payable and other current liabilities
|
$
|
1,468
|
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$
|
1,650
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Income
taxes payable
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|
85
|
|
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52
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|
Short-term
borrowings
|
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312
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288
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Advertising
cooperative liabilities
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95
|
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|
|
72
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|
Total
Current Liabilities
|
|
1,960
|
|
|
|
2,062
|
|
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Long-term
debt
|
|
3,372
|
|
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|
2,924
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|
Other
liabilities and deferred credits
|
|
1,202
|
|
|
|
1,117
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|
Total
Liabilities
|
|
6,534
|
|
|
|
6,103
|
|
|
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|
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Shareholders’
Equity
|
|
|
|
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Common
Stock, no par value, 750 shares authorized; 473 shares and 499
shares
issued
in 2008 and 2007, respectively
|
|
—
|
|
|
|
—
|
|
Retained
earnings
|
|
374
|
|
|
|
1,119
|
|
Accumulated
other comprehensive income
|
|
5
|
|
|
|
20
|
|
Total
Shareholders’ Equity
|
|
379
|
|
|
|
1,139
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|
Total
Liabilities and Shareholders’ Equity
|
$
|
6,913
|
|
|
$
|
7,242
|
|
|
|
|
|
|
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|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
(Tabular
amounts in millions, except per share data)
1.
|
Financial
Statement Presentation
|
We have
prepared our accompanying unaudited Condensed Consolidated Financial Statements
(“Financial Statements”) in accordance with the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by United States (“U.S.”) generally accepted accounting
principles for complete financial statements. Therefore, we suggest
that the accompanying Financial Statements be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in our annual
report on Form 10-K for the fiscal year ended December 29, 2007 (“2007 Form
10-K”). Except as disclosed herein, there has been no material change
in the information disclosed in the Notes to our Consolidated Financial
Statements included in the 2007 Form 10-K.
YUM!
Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the
“Company”) comprise the worldwide operations of KFC, Pizza Hut, Taco
Bell, Long John Silver’s (“LJS”) and A&W All-American Food Restaurants
(“A&W”) (collectively the “Concepts”). References to YUM
throughout these Notes to our Financial Statements are made using the first
person notations of “we,” “us” or “our.”
YUM’s
business consists of three reporting segments: United States, the
International Division (“YRI”) and the China Division. The China
Division includes mainland China, Thailand, and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Our
preparation of the accompanying Financial Statements in conformity with
generally accepted accounting principles in the United States of America
requires us to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the Financial Statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from the estimates.
In our
opinion, the accompanying Financial Statements include all normal and recurring
adjustments considered necessary to present fairly, when read in conjunction
with our 2007 Form 10-K, our financial position as of March 22, 2008, and the
results of our operations and cash flows for the quarters ended March 22, 2008
and March 24, 2007. Our results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year.
Our
significant interim accounting policies include the recognition of certain
advertising and marketing costs, generally in proportion to revenue, and the
recognition of income taxes using an estimated annual effective tax
rate.
We have
reclassified certain items, including those discussed in our 2007 Form 10-K, in
the accompanying Financial Statements and Notes to the Financial Statements in
order to be comparable with the current classifications. These
reclassifications had no effect on previously reported Net Income.
2.
|
Consolidation
of a Former Unconsolidated Affiliate in
China
|
In 2008,
we began consolidating an entity in which we have a majority ownership
interest and that operates the KFCs in Beijing, China. Our partners
in this entity are essentially state-owned enterprises. We
historically did not consolidate this entity, instead accounting for the
unconsolidated affiliate using the equity method of accounting, due to the
effective participation of our partners in the significant decisions of the
entity that were made in the ordinary course of business as addressed in
Emerging Issues Task Force ("EITF") Issue No. 96-16, "Investor's Accounting for
an Investee When the Investor Has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain Approval or Veto
Rights". Concurrent with a decision that we made
on
January 1, 2008 regarding top management of the entity, we no longer believe
that our partners effectively participate
in the decisions that are made in the ordinary course of
business. Accordingly, we began consolidating this
entity.
Like our
other unconsolidated affiliates, the accounting for this entity prior to 2008
resulted in royalties being reflected as Franchise and license fees and our
share of the entity’s net income being reflected in Other (income)
expense. The impact on our Condensed Consolidated Statement of Income
for the quarter ended March 22, 2008 as a result of our consolidation of this
entity was as follows:
|
|
Increase
(Decrease)
|
Company
sales
|
|
$
|
46
|
|
Company
restaurant expenses
|
|
36
|
|
Franchise
and license fees
|
|
(3
|
)
|
General
and administrative expenses
|
|
1
|
|
Other
income
|
|
(5
|
)
|
Operating
Profit
|
|
1
|
|
The
impact on Other income includes both the current year minority interest in
pre-tax earnings of the unconsolidated affiliate as well as the reduction in
Other income that resulted from our share of after-tax earnings no longer
being reported in Other income. The increase in Operating Profit was
offset by a corresponding increase in Income tax provision such that there was
no impact to Net Income. Our Condensed Consolidated Balance Sheet at
March 22, 2008 reflects the consolidation of this entity; with Investment in
unconsolidated affiliates reduced, the entity’s balance sheet consolidated and a
minority interest reflected in Other liabilities and deferred
credits.
3.
|
Sale
of Our Interest in Our Japan Unconsolidated
Affiliate
|
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million in cash (including the impact of related foreign currency forward
contracts that were settled in December 2007). Our international
subsidiary that owned this interest operates on a fiscal calendar with a period
end that is approximately one month earlier than our consolidated period
close. Thus, consistent with our historical treatment of events
occurring during the lag period, the pre-tax gain on the sale of this investment
of $100 million was recorded in the quarter ended March 22,
2008. However, the cash proceeds from this transaction were
transferred from our international subsidiary to the U.S. in December 2007 and
thus were reported on our Consolidated Statement of Cash Flows for the year
ended December 29, 2007. The offset to this cash on our Consolidated
Balance Sheet at December 29, 2007 was a deferred gain included in accounts
payable and other current liabilities, which was reversed in the quarter ended
March 22, 2008 upon recognition of the gain.
While we
will no longer have an ownership interest in the entity that operates both KFCs
and Pizza Huts in Japan, it will continue to be a franchisee as it was when it
operated as an unconsolidated affiliate. Excluding the one-time gain,
the sale of our interest in our Japan unconsolidated affiliate did not have a
significant impact on our results of operations for the quarter ended March 22,
2008 as the Other income we recorded representing our share of earnings of the
unconsolidated affiliate has historically not been significant.
4.
|
Two-for-One
Common Stock Split
|
On May
17, 2007, the Company announced that its Board of Directors approved a
two-for-one split of the Company’s outstanding shares of Common
Stock. The stock split was effected in the form of a stock dividend
and entitled each shareholder of record at the close of business on June 1, 2007
to receive one additional share for every outstanding share of Common Stock
held. The stock dividend was distributed on June 26, 2007, with
approximately 261 million shares of Common Stock distributed. All per
share and share amounts in the accompanying Financial Statements and Notes to
the Financial Statements have been adjusted to reflect the stock
split.
5.
|
Earnings
Per Common Share (“EPS”)
|
|
|
Quarter
|
|
|
3/22/08
|
|
|
3/24/07
|
|
Net
Income
|
|
$
|
254
|
|
|
$
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (for basic calculation)
|
|
|
486
|
|
|
|
533
|
|
Effect
of dilutive share-based employee compensation
|
|
|
18
|
|
|
|
18
|
|
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
|
|
504
|
|
|
|
551
|
|
Basic
EPS
|
|
$
|
0.52
|
|
|
$
|
0.36
|
|
Diluted
EPS
|
|
$
|
0.50
|
|
|
$
|
0.35
|
|
Unexercised
employee stock options and stock appreciation rights (in millions)
excluded from the Diluted EPS computation (a)
|
|
|
4.2
|
|
|
|
9.9
|
|
(a)
|
These
unexercised employee stock options and stock appreciation rights were not
included in the computation of Diluted EPS because to do so would have
been antidilutive for the periods
presented.
|
Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during the quarters ended March 22, 2008 and March 24, 2007 as indicated
below. All amounts exclude applicable transaction fees.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares Repurchased
|
Authorization
Date
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
January
2008
|
|
|
|
4,847
|
|
|
|
—
|
|
|
$
|
168
|
|
|
$
|
—
|
|
October
2007
|
|
|
|
22,875
|
|
|
|
—
|
|
|
|
813
|
|
|
|
—
|
|
September
2006
|
|
|
|
—
|
|
|
|
7,744
|
|
|
|
—
|
|
|
|
229
|
|
Total
|
|
|
|
27,722
|
|
|
|
7,744
|
|
|
$
|
981
|
(a)
|
|
$
|
229
|
(b)
|
(a)
|
Amount
excludes the effect of $13 million in share repurchases (0.4 million
shares) with trade dates prior to the 2007 fiscal year end but cash
settlement dates subsequent to the 2007 fiscal year
end.
|
|
|
(b)
|
Amount
excludes effects of $17 million in share repurchases (0.6 million shares)
with trade dates prior to the 2006 fiscal year end but cash settlement
dates subsequent to the 2006 fiscal year
end.
|
As of
March 22, 2008, we have $1.1 billion available for future repurchases through
January 2009 under our January 2008 share repurchase
authorization. Based on market conditions and other factors,
additional repurchases may be made from time to time in the open market or
through privately negotiated transactions at the discretion of the
Company.
Comprehensive
income was as follows:
|
Quarter
|
|
3/22/08
|
|
|
3/24/07
|
|
Net
Income
|
$
|
254
|
|
|
$
|
194
|
|
Foreign
currency translation adjustment arising during the period
|
|
8
|
|
|
|
(2
|
)
|
Foreign
currency translation adjustment included in Net Income
|
|
(25
|
)
|
|
|
—
|
|
Changes
in fair value of derivatives, net of tax
|
|
10
|
|
|
|
1
|
|
Reclassification
of derivatives (gains) losses to Net Income, net of tax
|
|
(9
|
)
|
|
|
(1
|
)
|
Reclassification
of pension actuarial losses to Net Income, net of tax
|
|
1
|
|
|
|
4
|
|
Total
comprehensive income
|
$
|
239
|
|
|
$
|
196
|
|
7.
|
Recently
Adopted Accounting Pronouncements
|
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes
a framework for measuring fair value and enhances disclosures about fair value
measurements required under other accounting pronouncements, but does not change
existing guidance as to whether or not an instrument is carried at fair
value. In February 2008, the FASB issued FSP 157-2, “Effective Date
of FASB Statement No. 157” which permits a one-year deferral for the
implementation of SFAS 157 with regard to non-financial assets and liabilities
that are not recognized or disclosed at fair value in the financial statements
on a recurring basis (at least annually). We elected to defer
adoption of SFAS 157 for such items and we do not currently anticipate that full
adoption in 2009 will materially impact the Company’s results of operations or
financial condition.
On
December 30, 2007, the Company adopted the provisions of SFAS 157 related
to its financial assets and liabilities. The following table presents
the fair values for those assets and liabilities measured on a recurring basis
as of March 22, 2008:
|
|
|
|
Fair
Value Measurements
|
Description
|
|
Total
|
|
Quoted
Prices
in
Active
Markets
for
Identical
Assets
(Level
1)
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
Significant
Unobservable Inputs
(Level
3)
|
Foreign
Currency Forwards
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Interest
Rate Swaps
|
|
|
44
|
|
|
|
—
|
|
|
|
44
|
|
|
|
—
|
|
Other
Investments
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
67
|
|
|
$
|
14
|
|
|
$
|
53
|
|
|
$
|
—
|
|
We have
entered into interest rate swaps with the objective of hedging the fair value of
a portion of our fixed rate debt. We enter into foreign currency
forward contracts with the objective of reducing our exposure to cash flow
volatility arising from foreign currency fluctuations associated with certain
foreign currency denominated intercompany short-term receivables and
payables. The fair value of the Company’s foreign currency forwards
and interest rate swaps were determined based on the present value of expected
future cash flows considering the risks involved, including nonperformance risk,
and using discount rates appropriate for the duration. The other
investments include investments in mutual funds, which are used to offset
fluctuations in deferred compensation liabilities that employees have chosen to
invest in phantom shares of a Stock Index Fund or Bond Index
Fund. The fair value of the other investments is determined based on
the closing market prices of the respective mutual funds as of March 22,
2008.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. SFAS 159 was effective for fiscal years beginning
after November 15, 2007, the year beginning December 30, 2007 for the
Company. We did not elect to begin reporting any financial assets or
liabilities at fair value upon adoption of SFAS 159. In addition, we
did not elect to report at fair value any new financial assets or liabilities
entered into for the quarter ended March 22, 2008.
8.
|
New
Accounting Pronouncements Not Yet
Recognized
|
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” (“SFAS 158”). SFAS
158 amends SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88,
“Employers’ Accounting for Settlements and Curtailments of Defined Benefit Plans
and for Termination Benefits,” SFAS No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions” and SFAS No. 132(R), “Employers’
Disclosures about Pensions and Other Postretirement Benefits.” In the
fourth quarter of 2006, we adopted the recognition and disclosure provisions of
SFAS 158 as described in our 2007 Form 10-K. Additionally, SFAS 158
requires measurement of the funded status of pension and postretirement plans as
of the date of a company’s fiscal year ending after December 15, 2008, the
year ended December 27, 2008 for the Company. Certain of our plans
currently have measurement dates that do not coincide with our fiscal year end
and thus we will be required to change their measurement dates in
2008. As permitted by SFAS 158, we will use the measurements
performed in 2007 to estimate the effects of our changes to fiscal year end
measurement dates. The impact of the transition to fiscal year
end measurement dates will result in approximately $10 million of net
periodic benefit cost being recognized as a reduction to retained earnings in
the fourth quarter of 2008. Additionally, other changes in the
fair value of plan assets and benefit obligations during the transition period
will be recorded directly as other comprehensive income (loss) during
the fourth quarter of 2008.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R, which is broader in scope
than SFAS 141, applies to all transactions or other events in which an entity
obtains control of one or more businesses, and requires that the acquisition
method be used for such transactions or events. SFAS 141R, with
limited exceptions, will require an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. This
will result in acquisition related costs and anticipated restructuring costs
related to the acquisition being recognized separately from the business
combination. SFAS 141R is effective as of the beginning of an
entity’s first fiscal year beginning after December 15, 2008, the year beginning
December 28, 2008 for the Company. The impact of SFAS 141R on the
Company will be dependent upon the extent to which we have transactions or
events occur that are within its scope.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and
will change the accounting and reporting for noncontrolling interests, which are
the portion of equity in a subsidiary not attributable, directly or indirectly,
to a parent. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, the year beginning December 28, 2008 for the Company
and requires retroactive adoption of its presentation and disclosure
requirements. We do not anticipate that the adoption of SFAS 160 will
materially impact the Company.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 amends and expands the
disclosure requirements in SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities”. SFAS 161 is effective for fiscal years and
interim periods beginning after November 15, 2008, the year beginning
December 28, 2008 for the Company.
Refranchising
(gain) loss, Store closure (income) costs and Store impairment charges by
reportable segment are as follows:
|
|
Quarter
ended March 22, 2008
|
|
|
U.S.
|
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)(b)
|
|
$
|
26
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
—
|
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(c)
|
|
$
|
(2
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(4
|
)
|
Store
impairment charges
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Closure
and impairment (income) expenses
|
|
$
|
(1
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(2
|
)
|
|
|
Quarter
ended March 24, 2007
|
|
|
U.S.
|
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
(2
|
)
|
|
|
$
|
1
|
|
|
|
$
|
—
|
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(c)
|
|
$
|
(1
|
)
|
|
|
$
|
1
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Store
impairment charges
|
|
|
1
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
4
|
|
Closure
and impairment (income) expenses
|
|
$
|
—
|
|
|
|
$
|
4
|
|
|
|
$
|
—
|
|
|
|
$
|
4
|
|
(a)
|
Refranchising
(gain) loss is not allocated to segments for performance reporting
purposes.
|
|
|
(b)
|
As
part of our plan to transform our U.S. business, including the expansion
of our U.S. refranchising potentially reducing our Company ownership in
the U.S. to below 10% by the year end 2010, we recognized significant
refranchising losses during the quarter ended March 22, 2008 as a
result of our offers to refranchise stores or groups of stores in the
U.S. at prices less than their recorded carrying
values. These offers to refranchise were primarily made for
approximately 300 Long John Silver’s restaurants, which represents
substantially all of our Company owned Long John Silver’s restaurants in
the U.S. We believe that approximately 175 of these Long John
Silver’s for which we have entered into non-binding agreements to sell
have met the criteria for held for sale accounting at March 22, 2008 and
have included their carrying value of approximately $45 million in Prepaid
expenses and other current assets.
|
|
|
(c)
|
Store
closure (income) costs include the net gain or loss on sales of real
estate on which we formerly operated a Company restaurant that was closed,
lease reserves established when we cease using a property under an
operating lease and subsequent adjustments to those reserves, and other
facility-related expenses from previously closed
stores.
|
10.
|
Other
(Income) Expense
|
|
|
Quarter
|
|
|
3/22/08
|
|
|
3/24/07
|
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(11
|
)
|
|
$
|
(13
|
)
|
Minority
interest(a)
|
|
|
2
|
|
|
|
—
|
|
Gain
upon sale of investment in unconsolidated affiliate(b)(c)
|
|
|
(100
|
)
|
|
|
(5
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
(6
|
)
|
|
|
(2
|
)
|
Other
(income) expense
|
|
$
|
(115
|
)
|
|
$
|
(20
|
)
|
(a)
|
On
January 1, 2008, the Company began consolidating an entity in China in
which we have a majority ownership interest. See Note
2.
|
|
|
(b)
|
Quarter
ended March 22, 2008 reflects the gain recognized on the sale of our
interest in our unconsolidated affiliate in Japan. See Note
3.
|
|
|
(c)
|
Quarter
ended March 24, 2007 reflects recognition of income associated with
receipt of payment for a note receivable arising from the 2005 sale of our
fifty percent interest in the entity that operated almost all KFCs and
Pizza Huts in Poland and the Czech Republic to our then partner in the
entity.
|
11.
|
Reportable
Operating Segments
|
The
following tables summarize Revenue and Operating Profit for each of our
reportable operating segments:
|
|
Quarter
|
Revenues
|
|
3/22/08
|
|
|
|
3/24/07
|
|
United
States
|
|
$
|
1,191
|
|
|
|
$
|
1,200
|
|
International
Division (a)
|
|
|
697
|
|
|
|
|
681
|
|
China
Division (b)
|
|
|
520
|
|
|
|
|
342
|
|
|
|
$
|
2,408
|
|
|
|
$
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Operating
Profit
|
|
3/22/08
|
|
|
|
3/24/07
|
|
United
States
|
|
$
|
157
|
|
|
|
$
|
165
|
|
International
Division
|
|
|
139
|
|
|
|
|
119
|
|
China
Division(c)
|
|
|
101
|
|
|
|
|
76
|
|
Unallocated
and corporate general and administrative expenses(d)(f)
|
|
|
(54
|
)
|
|
|
|
(49
|
)
|
Unallocated
Other income (expense)(e)(f)
|
|
|
106
|
|
|
|
|
4
|
|
Unallocated
Refranchising gain (loss)(f)
|
|
|
(25
|
)
|
|
|
|
1
|
|
Operating
Profit
|
|
|
424
|
|
|
|
|
316
|
|
Interest
expense, net
|
|
|
(53
|
)
|
|
|
|
(36
|
)
|
Income
Before Income Taxes
|
|
$
|
371
|
|
|
|
$
|
280
|
|
(a)
|
Includes
revenues of $295 million for both the quarters ended March 22, 2008 and
March 24, 2007 for entities in the United Kingdom.
|
|
|
(b)
|
Includes
revenues of approximately $471 million and $300 million for the quarters
ended March 22, 2008 and March 24, 2007, respectively, in mainland
China.
|
|
|
(c)
|
Includes
equity income from investment in unconsolidated affiliates of $10 million
for both the quarters ended March 22, 2008 and March 24, 2007, for the
China Division.
|
|
|
(d)
|
The
quarter ended March 22, 2008 includes approximately $6 million of charges
relating to U.S. General and administrative productivity initiatives and
realignment of resources, as well as investments in our U.S.
Brands.
|
|
|
(e)
|
Includes
a $100 million gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
3.
|
(f)
|
Amounts
have not been allocated to the U.S., International Division or China
Division segments for performance reporting
purposes.
|
We
sponsor noncontributory defined benefit pension plans covering certain full-time
salaried and hourly U.S. employees. The most significant of these
plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from the
other U.S. plans are paid by the Company as incurred. During 2001,
the plans covering our U.S. salaried employees were amended such that any
salaried employee hired or rehired by YUM after September 30, 2001 is not
eligible to participate in those plans. Benefits are based on years
of service and earnings or stated amounts for each year of
service. We also sponsor various defined benefit pension plans
covering certain of our non-U.S. employees, the most significant of which are in
the United Kingdom (“U.K.”). Our plans in the U.K. have previously
been amended such that new employees are not eligible to participate in these
plans.
The
components of Net periodic benefit cost associated with our U.S. pension plans
and significant International pension plans are as follows:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
Quarter
|
|
|
Quarter
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
Service
cost
|
|
$
|
7
|
|
|
|
$
|
8
|
|
|
|
$
|
2
|
|
|
|
$
|
2
|
|
Interest
cost
|
|
|
12
|
|
|
|
|
12
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Expected
return on plan assets
|
|
|
(12
|
)
|
|
|
|
(12
|
)
|
|
|
|
(2
|
)
|
|
|
|
(2
|
)
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Amortization
of net loss
|
|
|
2
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Net
periodic benefit cost
|
|
$
|
9
|
|
|
|
$
|
14
|
|
|
|
$
|
2
|
|
|
|
$
|
2
|
|
As
disclosed in our 2007 Form 10-K, based on current funding rules, we do not
anticipate being required to make contributions to the Plan in
2008. While we may make discretionary contributions to the Plan
during the year, we do not currently intend to make any significant
contributions. Additionally, as disclosed in our 2007 Form 10-K, the
projected benefit obligation of our Pizza Hut U.K. pension plan exceeded plan
assets by approximately $27 million at our 2007 measurement date. We anticipate
taking steps to reduce this deficit in the near term, which could include a
decision to partially or completely fund the deficit in 2008. Also,
as disclosed in our 2007 Form 10-K, since plan assets approximate the projected
benefit obligation at the 2007 measurement date for our KFC U.K. pension plan,
we do not anticipate significant near term funding.
13.
|
Guarantees,
Commitments and Contingencies
|
Guarantees and
Contingencies
As a
result of (a) assigning our interest in obligations under real estate leases as
a condition to the refranchising of certain Company restaurants; (b)
contributing certain Company restaurants to unconsolidated affiliates; and (c)
guaranteeing certain other leases, we are frequently contingently liable on
lease agreements. These leases have varying terms, the latest of
which expires in 2026. As of March 22, 2008, the potential amount of
undiscounted payments we could be required to make in the event of non-payment
by the primary lessee was approximately $400 million. The present
value of these potential payments discounted at our pre-tax cost of debt at
March 22, 2008 was approximately $325 million. Our franchisees
are the primary lessees under the vast majority of these leases. We
generally have cross-default provisions with these franchisees that would put
them in default of their franchise agreement in the event of non-payment under
the lease. We believe these cross-default provisions significantly
reduce the risk that we will be required to make payments under these
leases. Accordingly, the liability recorded for our probable exposure
under such leases at March 22, 2008 was not material.
Franchise Loan Pool
Guarantees
We have
provided a partial guarantee of approximately $12 million of a franchisee loan
pool related primarily to the Company’s historical refranchising programs and,
to a lesser extent, franchisee development of new restaurants, at March 22,
2008. In support of these guarantees, we have provided a standby
letter of credit of $18 million under which we could potentially be required to
fund a portion of the franchisee loan pools. The total loans
outstanding under the loan pools were approximately $61 million at March 22,
2008.
The loan
pool is funded by the issuance of commercial paper by a conduit established
for that purpose. A disruption in the commercial paper markets may
result in the Company and the participating financial institutions having to
fund commercial paper issuances that have matured. Any funding under
the guarantee or letter of credit would be secured by the franchisee loans and
any related collateral. We believe that we have appropriately
provided for our estimated probable exposures under these contingent
liabilities. These provisions were primarily charged to net
Refranchising (gain) loss. New loans added to the loan pool in the
quarter ended March 22, 2008 were not significant.
Insurance
Programs
We are
self-insured for a substantial portion of our current and prior years’ coverage
including workers’ compensation, employment practices liability, general
liability, automobile liability and property losses (collectively, “property and
casualty losses”). To mitigate the cost of our exposures for certain
property and casualty losses, we make annual decisions to self-insure the risks
of loss up to defined maximum per occurrence retentions on a line by line basis
or to combine certain lines of coverage into one loss pool with a single
self-insured aggregate retention. The Company then purchases
insurance coverage, up to a certain limit, for losses that exceed the
self-insurance per occurrence or aggregate retention. The insurers’
maximum aggregate loss limits are significantly above our actuarially determined
probable losses; therefore, we believe the likelihood of losses exceeding the
insurers’ maximum aggregate loss limits is remote.
In the
U.S. and in certain other countries, we are also self-insured for healthcare
claims and long-term disability for eligible participating employees subject to
certain deductibles and limitations. We have accounted for our
retained liabilities for property and casualty losses, healthcare and long-term
disability claims, including reported and incurred but not reported claims,
based on information provided by independent actuaries.
Due to
the inherent volatility of actuarially determined property and casualty loss
estimates, it is reasonably possible that we could experience changes in
estimated losses which could be material to our growth in quarterly and annual
Net Income. We believe that we have recorded reserves for property
and casualty losses at a level which has substantially mitigated the potential
negative impact of adverse developments and/or volatility.
Litigation
We are
subject to various claims and contingencies related to lawsuits, real estate,
environmental and other matters arising in the normal course of
business. We provide reserves for such claims and contingencies when
payment is probable and estimable in accordance with SFAS No. 5, “Accounting for
Contingencies.”
On
November 26, 2001, a lawsuit against Long John Silver’s, Inc. (“LJS”) styled
Kevin Johnson, on
behalf of himself and all others similarly situated v. Long John Silver’s, Inc.
(“Johnson”) was filed in the United States District Court for the Middle District of Tennessee, Nashville
Division. Johnson’s suit alleged that LJS’s former
“Security/Restitution for Losses” policy (the “Policy”) provided for deductions
from Restaurant General Managers’ (“RGMs”) and Assistant Restaurant General
Managers’ (“ARGMs”) salaries that violate the salary basis test for exempt
personnel under regulations issued pursuant to the U.S. Fair Labor Standards Act
(“FLSA”). Johnson alleged that all RGMs and ARGMs who were employed
by LJS for the three year period prior to the lawsuit – i.e., since November 26,
1998 – should be treated as the equivalent of hourly employees and
thus were
eligible under the FLSA for overtime for any hours worked over 40 during all
weeks in the recovery period. In addition, Johnson claimed that the
potential members of the class are entitled to certain liquidated damages and
attorneys’ fees under the FLSA.
LJS
believed that Johnson’s claims, as well as the claims of all other similarly
situated parties, should be resolved in individual arbitrations pursuant to
LJS’s Dispute Resolution Program (“DRP”), and that a collective action to
resolve these claims in court was clearly inappropriate under the current state
of the law. Accordingly, LJS moved to compel arbitration in the
Johnson case. The Court determined on June 7, 2004 that Johnson’s
individual claims should be referred to arbitration. Johnson
appealed, and the decision of the District Court was affirmed in all respects by
the United States Court of Appeals for the Sixth Circuit on July 5,
2005.
On
December 19, 2003, counsel for plaintiff in the above referenced Johnson
lawsuit, filed a separate demand for arbitration with the American Arbitration
Association (“AAA”) on behalf of former LJS managers Erin Cole and Nick Kaufman
(the “Cole Arbitration”). Claimants in the Cole Arbitration demand a
class arbitration on behalf of the same putative class - and the same underlying
FLSA claims - as were alleged in the Johnson lawsuit. The complaint
in the Cole Arbitration subsequently was amended to allege a practice of
deductions (distinct from the allegations as to the Policy) in violation of
the FLSA salary basis test. LJS has denied the claims and the
putative class alleged in the Cole Arbitration.
Arbitrations
under LJS’s DRP, including the Cole Arbitration, are governed by the rules of
the AAA. In October 2003, the AAA adopted its Supplementary Rules for
Class Arbitrations (“AAA Class Rules”). The AAA appointed an
arbitrator for the Cole Arbitration. On June 15, 2004, the arbitrator
issued a clause construction award, ruling that the DRP does not preclude class
arbitration. LJS moved to vacate the clause construction award in the
United States District Court for the District of South Carolina. On
September 15, 2005, the federal court in South Carolina ruled that it did not
have jurisdiction to hear LJS’s motion to vacate. LJS appealed the
U.S. District Court’s ruling to the United States Court of Appeals for the
Fourth Circuit.
On
January 5, 2007, LJS moved to dismiss the clause construction award appeal and
that motion was granted by the Fourth Circuit on January 10,
2007. While judicial review of the clause construction award was
pending in the U.S. District Court, the arbitrator permitted claimants to move
for a class determination award, which was opposed by LJS. On
September 19, 2005, the arbitrator issued a class determination award,
certifying a class of LJS’s RGMs and ARGMs employed between December 17, 1998,
and August 22, 2004, on FLSA claims, to proceed on an opt-out basis under the
AAA Class Rules. That class determination award was upheld on appeal
by the United States District Court for the District of South Carolina on
January 20, 2006, and the arbitrator declined to reconsider the
award. LJS appealed the ruling of the U.S. District Court to the
United States Court of Appeals for the Fourth Circuit. On January 28,
2008, the Fourth Circuit issued its ruling, affirming the decision of the
District Court, and thereby affirming the class determination award of the
arbitrator. LJS is currently considering the merits of an appeal to
the United States Supreme Court.
In light
of the decision of the Fourth Circuit, LJS now believes that it is probable the
Cole Arbitration will proceed on a class basis, governed by the opt-out
collective action provisions of the AAA Class Rules. LJS also
believes, however, that each individual should not be able to recover for more
than two years (and a maximum three years) prior to the date they file a consent
to join the arbitration. We have provided for the estimated costs of
the Cole Arbitration, based on our current projection of eligible claims, the
amount of each eligible claim, the estimable claim recovery rates for class
actions of this type, the estimated legal fees incurred by the claimants and the
results of settlement negotiations in this and other wage and hour litigation
matters. But in view of the novelties of proceeding under the AAA
Class Rules and the inherent uncertainties of litigation, there can be no
assurance that the outcome of the arbitration will not result in losses in
excess of those currently provided for in our Condensed Consolidated Financial
Statements.
On
September 2, 2005, a collective action lawsuit against the Company and KFC
Corporation, originally styled Parler v. Yum Brands, Inc.,
d/b/a KFC, and KFC Corporation, was filed in the United States
District
Court for the District of Minnesota. Plaintiffs allege that they and
other current and former KFC Assistant Unit Managers (“AUMs”) were improperly
classified as exempt employees under the FLSA. Plaintiffs seek
overtime wages and liquidated damages. On January 17, 2006, the
District Court dismissed the claims against the Company with prejudice, leaving
KFC Corporation as the sole defendant. Plaintiffs amended the
complaint on September 8, 2006, to add related state law claims on behalf of a
putative class of KFC AUMs employed in Illinois, Minnesota, Nevada, New Jersey,
New York, Ohio, and Pennsylvania. On October 24, 2006,
plaintiffs moved to decertify the conditionally certified FLSA action, and KFC
Corporation did not oppose the motion. On June 4, 2007, the District
Court decertified the collective action and dismissed all opt-in plaintiffs
without prejudice. Subsequently, plaintiffs filed twenty-seven new
cases around the country, most of which allege a statewide putative
collective/class action. Plaintiffs also filed 324 individual
arbitrations with the American Arbitration Association (“AAA”). KFC filed a motion with
the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer all
twenty-eight pending cases to a single district court for coordinated pretrial
proceedings pursuant to the Multidistrict Litigation (“MDL”) statute, 28 U.S.C.
§ 1407. KFC also filed a motion with the Minnesota District Court to
enjoin the 324 AAA arbitrations on the ground that Plaintiffs waived the right
to arbitrate by their participation in the Minnesota (Parler)
litigation. Finally, KFC filed a motion in the new Minnesota action
to deny certification of a collective or class action on the ground that
Plaintiffs are judicially and equitably estopped from proceeding collectively on
behalf of a class in light of positions they took in the Parler
case. The Court denied KFC’s motion without prejudice. On
January 3, 2008, the JPML granted KFC’s motion to transfer all of the pending
court cases to the Minnesota District Court for discovery and pre-trial
proceedings. On January 4, 2008, KFC’s motion to enjoin the 324
arbitrations on the ground that plaintiffs have waived their right to arbitrate
was granted.
On
February 21, 2008, a status conference was held to discuss case management
issues. In particular, the parties reached agreement as to the
following issues: (a) the elimination of all state law class
allegations from plaintiffs’ amended complaints; (b) the elimination of
“collective action” allegations, which would form the basis for further attempts
by plaintiffs to certify these actions on a state-wide (or other) basis; and (c)
an agreement in principle to advance three “bellwether” cases, for the purpose
of expediting a limited number of the consolidated actions for pre-trial
proceedings.
On March
11, 2008, five of the Arbitration Opt-Ins filed an action against KFC Corp. in
the United States District Court for the District of Kansas, styled Thomas, et al. v. KFC
Corp.
We
believe that KFC has properly classified its AUMs as exempt under the FLSA and
applicable state law, and accordingly intend to vigorously defend against all
claims in these lawsuits. However, in view of the inherent
uncertainties of litigation, the outcome of these cases cannot be predicted at
this time. Likewise, the amount of any potential loss cannot be
reasonably estimated.
On August
4, 2006, a putative class action lawsuit against Taco Bell Corp. styled Rajeev Chhibber vs. Taco
Bell Corp. was filed in Orange County Superior Court. On August 7, 2006,
another putative class action lawsuit styled Marina Puchalski v. Taco
Bell Corp. was filed in San Diego County Superior Court. Both lawsuits
were filed by a Taco Bell RGM purporting to represent all current and former
RGMs who worked at corporate-owned restaurants in California from August 2002 to
the present. The lawsuits allege violations of California’s wage and
hour laws involving unpaid overtime and meal and rest period violations and seek
unspecified amounts in damages and penalties. As of September 7,
2006, the Orange County case was voluntarily dismissed by the plaintiff and
both cases have been consolidated in San Diego County. Discovery
is underway, with pre-certification discovery cutoff set for June 2, 2008 and a
July 1, 2008 deadline for plaintiffs to file their motion for class
certification.
Taco Bell
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
September 10, 2007, a putative class action against Taco Bell Corp., the Company
and other related entities styled Sandrika Medlock v. Taco
Bell Corp., was filed in United States District Court, Eastern District,
Fresno, California. The case was filed on behalf of all hourly employees who
have worked for the defendants within the last four years and alleges numerous
violations of California labor laws including unpaid overtime, failure to pay
wages on termination, denial of meal and rest breaks, improper wage statements,
unpaid business expenses and unfair or unlawful business practices in violation
of California Business & Professions Code §17200. The Company was
dismissed from the case without prejudice on January 10, 2008, and discovery is
underway.
On March
24, 2008, plaintiff filed a motion for leave to file a second amended complaint
adding a nationwide FLSA claim for unpaid overtime. Taco Bell is
opposing the motion.
Taco Bell
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
December 21, 2007, a putative class action lawsuit against KFC U.S. Properties,
Inc. styled Baskall v.
KFC U.S. Properties, Inc., was filed in San Diego County Superior Court
on behalf of all current and former RGMs, AUMs and Shift Supervisors who worked
at KFC's California restaurants since December 18, 2003. The lawsuit
alleges violations of California’s wage and hour and unfair competition laws,
including denial of sufficient meal and rest periods, improperly itemized pay
stubs, and delays in issuing final paychecks, and seeks unspecified amounts in
damages, injunctive relief, and attorneys' fees and costs. KFC
answered the amended complaint on March 21, 2008.
KFC
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of litigation, the
outcome of this case cannot be predicted at this time. Likewise, the
amount of any potential loss cannot be reasonably estimated.
On
December 17, 2002, Taco Bell was named as the defendant in a class action
lawsuit filed in the United States District Court for the Northern District of
California styled Moeller, et al. v. Taco Bell
Corp. On August 4, 2003, plaintiffs filed an amended complaint
that alleges, among other things, that Taco Bell has discriminated against the
class of people who use wheelchairs or scooters for mobility by failing to make
its approximately 220 company-owned restaurants in California (the “California
Restaurants”) accessible to the class. Plaintiffs contend that queue
rails and other architectural and structural elements of the Taco Bell
restaurants relating to the path of travel and use of the facilities by persons
with mobility-related disabilities do not comply with the U.S. Americans with
Disabilities Act (the “ADA”), the Unruh Civil Rights Act (the “Unruh Act”), and
the California Disabled Persons Act (the “CDPA”). Plaintiffs have
requested: (a) an injunction from the District Court ordering Taco
Bell to comply with the ADA and its implementing regulations; (b) that the
District Court declare Taco Bell in violation of the ADA, the Unruh Act, and the
CDPA; and (c) monetary relief under the Unruh Act or
CDPA. Plaintiffs, on behalf of the class, are seeking the minimum
statutory damages per offense of either $4,000 under the Unruh Act or $1,000
under the CDPA for each aggrieved member of the class. Plaintiffs
contend that there may be in excess of 100,000 individuals in the
class.
On
February 23, 2004, the District Court granted Plaintiffs' motion for class
certification. The District Court certified a Rule 23(b)(2) mandatory
injunctive relief class of all individuals with disabilities who use wheelchairs
or electric scooters for mobility who, at any time on or after December 17,
2001, were denied, or are currently being denied, on the basis of disability,
the full and equal enjoyment of the California Restaurants. The class
includes claims for injunctive relief and minimum statutory
damages.
Pursuant
to the parties’ agreement, on or about August 31, 2004, the District Court
ordered that the trial of this action be bifurcated so that stage one will
resolve Plaintiffs’ claims for equitable relief and stage two will resolve
Plaintiffs’ claims for damages. The parties are currently proceeding
with the equitable relief stage of this action.
During
this stage, Taco Bell filed a motion to partially decertify the class to exclude
from the Rule 23(b)(2) class claims for monetary damages. The
District Court denied the motion. Plaintiffs filed their own motion
for partial summary judgment as to liability relating to a subset of the
California Restaurants. The District Court denied that motion as
well.
On May
17, 2007, a hearing was held on Plaintiffs’ Motion for Partial Summary Judgment
seeking judicial declaration that Taco Bell was in violation of accessibility
laws as to three specific issues: indoor seating, queue rails and
door opening force. On August 8, 2007, the court granted Plaintiffs’
motion in part with regard to dining room seating. In addition, the
court granted Plaintiffs’ motion in part with regard to door opening force at
some restaurants (but not all) and denied the motion with regard to queue
lines.
At a
status conference on September 27, 2007, the court set a trial date of November
10, 2008 with respect to not more than 20 restaurants to determine the issue of
liability and common issues. Discovery related to the subject of the
mini-trial is underway. The parties participated in mediation on
March 25, 2008, without reaching resolution.
Taco Bell
has denied liability and intends to vigorously defend against all claims in this
lawsuit. Taco Bell has taken certain steps to address potential
architectural and structural compliance issues at the restaurants in accordance
with applicable state and federal disability access laws. The costs
associated with addressing these issues have not, and are not expected to
significantly impact our results of operations. It is not possible at
this time to reasonably estimate the probability or amount of liability for
monetary damages on a class wide basis to Taco Bell.
According
to the Centers for Disease Control (“CDC”), there was an outbreak of illness
associated with a particular strain of E. coli 0157:H7 in the northeast United
States during November and December 2006. Also according to the CDC,
the outbreak from this particular strain was most likely associated with
eating products containing contaminated shredded iceberg lettuce at Taco
Bell restaurants in Pennsylvania, New Jersey, New York, and
Delaware. The CDC concluded that the contamination likely occurred
before the lettuce reached the Taco Bell restaurants and that the outbreak ended
on or about December 6, 2006. The CDC has stated that it received
reports of 71 persons who became ill in association with the outbreak in the
above-mentioned area during the above time frame, and that no deaths have been
reported.
On
December 6, 2006, a lawsuit styled Tyler Vormittag, et. al. v.
Taco Bell Corp, Taco Bell of America, Inc. and Yum! Brands, Inc. was
filed in the Supreme Court of the State of New York, County of
Suffolk. Mr. Vormittag, a minor, alleges he became ill after
consuming food purchased from a Taco Bell restaurant in Riverhead, New York,
which was allegedly contaminated with E. coli 0157:H7. Subsequently,
twenty-eight other cases have been filed naming the Company, Taco Bell Corp.,
Taco Bell of America, and/or other subsidiaries of the Company, each alleging
similar facts on behalf of other customers. Additionally, the Company
has received a number of claims from customers who have alleged injuries related
to the E. coli outbreak, but have not filed lawsuits.
According
to the allegations common to all the Complaints, each Taco Bell customer became
ill after ingesting contaminated food in late November or early December 2006
from Taco Bell restaurants located in the northeast states implicated in the
outbreak. The majority of the implicated restaurants are owned and
operated by Taco Bell franchisees. The Company believes that at a
minimum it is not liable for any losses at these stores. Some of
these claims have been settled.
We have
provided for the estimated costs of these claims and litigation, based on a
projection of potential claims and their amounts as well as the results of
settlement negotiations in similar matters. But in view of the
inherent uncertainties of litigation, there can be no assurance that the outcome
of the litigation will not result in losses in excess of those currently
provided for in our Condensed Consolidated Financial Statements.
On March
14, 2007, a lawsuit styled Boskovich Farms, Inc. v.
Taco Bell Corp. and Does 1 through 100 was filed
in the
Superior Court of the State of California,
Orange County. Boskovich Farms, a supplier of produce to Taco
Bell, alleges in its Complaint, among other things, that it suffered damage to
its reputation and business as a result of publications and/or statements it
claims were made by Taco Bell in connection with Taco Bell’s reporting of
results of certain tests conducted during investigations on green onions used at
Taco Bell restaurants. The Company believes that the Complaint should
properly be heard in an alternative dispute resolution (“ADR”) forum according
to the contractual terms governing the relationship of the
parties. The Company filed a motion to compel ADR and stay the
litigation on May 1, 2007. The Court entered an order granting this
motion on June 14, 2007. Boskovich filed a writ petition to set aside
the trial court’s ruling compelling ADR; the writ petition was denied in October
2007. The parties participated in mediation on April 10, 2008,
without reaching resolution. The trial court has ordered the parties
to be back in court on September 3, 2008 to report on the results of the
anticipated arbitration. The Company denies liability and intends to
vigorously defend against all claims in any arbitration and the
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Introduction
and Overview
The
following Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements
(“Financial Statements”), the Cautionary Statements and our annual report on
Form 10-K for the fiscal year ended December 29, 2007. Throughout the
MD&A, YUM! Brands, Inc. (“YUM” or the “Company”) makes reference to certain
performance measures as described below.
·
|
The
Company provides the percentage changes excluding the impact of foreign
currency translation. These amounts are derived by translating
current year results at prior year average exchange rates. We
believe the elimination of the foreign currency translation impact
provides better year-to-year comparability without the distortion of
foreign currency fluctuations.
|
|
|
·
|
System
sales growth includes the results of all restaurants regardless of
ownership, including Company-owned, franchise, unconsolidated affiliate
and license restaurants. Sales of franchise, unconsolidated
affiliate and license restaurants generate Franchise and license fees for
the Company (typically at a rate of 4% to 6% of
sales). Franchise, unconsolidated affiliate and license
restaurant sales are not included in Company sales on the Condensed
Consolidated Statements of Income; however, the Franchise and license fees
are included in the Company’s revenues. We believe system sales
growth is useful to investors as a significant indicator of the overall
strength of our business as it incorporates all of our revenue drivers,
Company and franchise same store sales as well as net unit
development.
|
|
|
·
|
Same
store sales growth is the estimated growth in sales of all restaurants
that have been open one year or more. U.S. Company same store
sales include only KFC, Pizza Hut and Taco Bell Company owned restaurants
that have been open one year or more. U.S. same store sales for
Long John Silver’s and A&W restaurants are not included given the
relative insignificance of the Company stores for these brands and the
limited impact they currently have, and will have in the future, on our
U.S. same store sales as well as our overall U.S.
performance.
|
|
|
·
|
Company
restaurant margin as a percentage of sales is defined as Company sales
less expenses incurred directly by our Company restaurants in generating
Company sales divided by Company sales.
|
|
|
·
|
Operating
margin is defined as Operating Profit divided by Total
revenues.
|
All Note
references herein refer to the Notes to the Financial
Statements. Tabular amounts are displayed in millions except per
share and unit count amounts, or as otherwise specifically
identified. All per share and share amounts herein, and in the
accompanying Financial Statements and Notes to the Financial Statements have
been adjusted to reflect the June 26, 2007 stock split (see Note
4).
Description of
Business
YUM is
the world’s largest restaurant company based on number of system units, with
more than 35,000 units in more than 100 countries and territories operating
under the KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American
Food Restaurants brands. Four of the Company’s restaurant brands –
KFC, Pizza Hut, Taco Bell and Long John Silver’s – are the global leaders in the
quick-service chicken, pizza, Mexican-style food and seafood categories,
respectively. Of the over 35,000 restaurants, 22% are operated by the
Company, 72% are operated by franchisees and unconsolidated affiliates and 6%
are operated by licensees.
YUM’s
business consists of three reporting segments: United States, the
International Division (“YRI”) and the China Division. The China
Division includes mainland China, Thailand and KFC Taiwan, and the International
Division includes the remainder of our international operations. The
China and International Divisions have been
experiencing
dramatic growth and now represent over half of the Company’s Operating
Profits. The U.S. business operates in a highly competitive
marketplace resulting in slower profit growth, but continues to produce strong
cash flows.
Strategies
The
Company continues to focus on four key strategies:
Build
Leading Brands in China in Every Significant Category – The Company has
developed the KFC and Pizza Hut brands into the leading quick service and casual
dining restaurants, respectively, in mainland China. Additionally,
the Company owns and operates the distribution system for its restaurants in
mainland China which we believe provides a significant competitive
advantage. Given this strong competitive position, a rapidly growing
economy and a population of 1.3 billion in mainland China, the Company is
rapidly adding KFC and Pizza Hut Casual Dining restaurants and testing the
additional restaurant concepts of Pizza Hut Home Service (pizza delivery) and
East Dawning (Chinese food). Our ongoing earnings growth model
includes annual system-sales growth of 20% in mainland China driven by at least
425 new restaurants each year, which we expect to drive annual Operating Profit
growth of 20% in the China Division.
Drive
Aggressive International Expansion and Build Strong Brands Everywhere – The
Company and its franchisees opened over 850 new restaurants in 2007 in the
Company’s International Division, representing 8 straight years of opening over
700 restaurants. The International Division generated $480 million in
Operating Profit in 2007 up from $186 million in 1998. The Company
expects to continue to experience strong growth by building our existing markets
and growing in new markets including India, France, Russia, Vietnam and
Africa. Our ongoing earnings growth model includes annual Operating
Profit growth of 10% driven by 750 new restaurant openings annually for the
International Division. New unit development is expected to
contribute to system sales growth of at least 5% (3% to 4% unit growth and 2% to
3% same store sales growth) each year.
Dramatically
Improve U.S. Brand Positions, Consistency and Returns – The Company continues to
focus on improving its U.S. position through differentiated products and
marketing and an improved customer experience. The Company also
strives to provide industry-leading new product innovation which adds sales
layers and expands day parts. We are the leader in multibranding,
with over 3,700 restaurants providing customers two or more of our brands
at a single location. We continue to evaluate our returns and
ownership positions with an earn-the-right-to-own philosophy on Company-owned
restaurants. Our ongoing earnings growth model calls for annual
Operating Profit growth of 5% in the U.S. with same store sales growth of 2% to
3% and leverage of our General and Administrative (“G&A”)
infrastructure.
Drive
Industry-Leading, Long-Term Shareholder and Franchisee Value – The Company is
focused on delivering high returns and returning substantial cash flows to its
shareholders via share repurchases and dividends. The Company has one
of the highest returns on invested capital in the Quick Service Restaurants
(“QSR”) industry. Additionally, 2007 was the third consecutive year
in which the Company returned over $1.1 billion to its shareholders through
share repurchases and dividends. The Company is targeting an annual
dividend payout ratio of 35% to 40% of Net Income.
Quarter Ended March 22, 2008
Highlights
·
|
System
sales growth from China Division of 38% and YRI of 15%.
|
|
|
·
|
Worldwide
same store sales growth of 4%, including 12% in mainland China, 5% in YRI
and 3% in the U.S.
|
|
|
·
|
Worldwide
Operating Profit growth of 34%, including 33% for the China Division and
18% for YRI.
|
·
|
Diluted
earnings per share (“EPS”) of $0.50 or 43% growth.
|
|
|
·
|
$100
million pre-tax gain on the sale of our interest in our unconsolidated
affiliate in Japan, partially offset by $32 million in pre-tax losses from
U.S. refranchising and U.S. restructuring.
|
|
|
·
|
Repurchased
nearly $1 billion of shares.
|
All
preceding comparisons are versus the same period a year ago.
Significant
Known Events, Trends or Uncertainties Impacting or Expected to Impact
Comparisons of Reported or Future Results
The
following factors impacted comparability of operating performance for the
quarters ended March 22, 2008 and March 24, 2007 and/or could impact
comparability with the remainder of our results in 2008 or
beyond. Certain of these factors were previously discussed in our
2007 Form 10-K.
U.S. Restaurant
Profit
Our U.S.
restaurant margin as a percentage of sales decreased by 0.9 percentage points
for the quarter ended March 22, 2008. This decrease was the primary
driver in the U.S. Operating Profit decline of 5% for the quarter ended March
22, 2008.
Restaurant
profit in dollar terms was negatively impacted by $25 million of commodity
inflation (primarily cheese, wheat and chicken costs) for the quarter ended
March 22, 2008. The unfavorable impact of commodity inflation in the
quarter ended March 22, 2008 was partially offset by U.S. Company same store
sales growth of 3%, which was driven by Taco Bell.
We
anticipate that the U.S. restaurant margin in the second quarter of 2008 will be
adversely impacted by continued higher commodity costs (at a level similar to
inflation in the quarter ended March 22, 2008). Additionally, restaurant
margin in the second quarter of 2008 will be negatively impacted versus prior
year as we anticipate that self-insurance property and casualty insurance
expense will be approximately $20 million higher due to lapping
favorability recognized in 2007. Commodity inflation for the full
year 2008 is expected to be 6-7%.
Mainland China Restaurant
Profit
While the
China Division benefited from same store sales growth of 11% in the quarter
ended March 22, 2008, China Division restaurant margin as a percentage of
sales declined to 21.3% from 22.9% in the quarter ended March 24,
2007. This decline was driven by commodity inflation, primarily
chicken, of approximately $11 million and higher restaurant labor
costs. In mainland China, we expect that the high commodity inflation
rate (including higher chicken costs) will continue into the first three
quarters of 2008 and begin to moderate in the fourth quarter. We
anticipate that menu pricing increases will partially offset this inflation and
help to mitigate the impact on our full year restaurant margin.
Consolidation of a Former
Unconsolidated Affiliate in China
In 2008,
we began consolidating an entity in which we have a majority ownership interest
and that operates the KFCs in Beijing, China. Our partners in this
entity are essentially state-owned enterprises. We historically did
not consolidate this entity, instead accounting for the unconsolidated affiliate
using the equity method of accounting, due to the effective participation of our
partners in the significant decisions of the entity that were made in the
ordinary course of business as addressed in Emerging Issues Task Force ("EITF")
Issue No. 96-16, "Investor's Accounting for an Investee When the Investor Has a
Majority of the Voting Interest but the Minority
Shareholder
or Shareholders Have Certain Approval or Veto Rights". Concurrent
with a decision that we made on January 1, 2008 regarding top management of the
entity, we no longer believe that our partners effectively participate in the
decisions that are made in the ordinary course of
business. Accordingly, we began consolidating this
entity.
Like our
other unconsolidated affiliates, the accounting for this entity prior to 2008
resulted in royalties being reflected as Franchise and license fees and our
share of the entity’s net income being reflected in Other (income)
expense. The impact on our Condensed Consolidated Statement of Income
for the quarter ended March 22, 2008 as a result of our consolidation of this
entity was as follows:
|
|
Increase
(Decrease)
|
Company
sales
|
|
$
|
46
|
|
Company
restaurant expenses
|
|
36
|
|
Franchise
and license fees
|
|
(3
|
)
|
General
and administrative expenses
|
|
1
|
|
Other
income
|
|
(5
|
)
|
Operating
Profit
|
|
1
|
|
The
impact on Other income includes both the current year minority interest in
pre-tax earnings of the unconsolidated affiliate as well as the reduction in
Other income that resulted from our share of after-tax earnings no longer
being reported in Other income. The increase in Operating Profit was
offset by a corresponding increase in Income tax provision such that there was
no impact to Net Income.
Significant 2008 Gains and
Charges
As part
of our plan to transform our U.S. business we are taking several measures in
2008 that we do not believe are indicative of our ongoing
operations. These measures include: expansion of our U.S.
refranchising, potentially reducing our Company ownership in the U.S. to below
10% by the year end 2010; charges relating to G&A productivity initiatives
and realignment of resources (primarily severance and early retirement costs);
and investments in our U.S. Brands made on behalf of our franchisees such as
equipment purchases. As discussed in Note 11, we are not including
the impacts of these measures in our U.S. segment for performance reporting
purposes.
In the
quarter ended March 22, 2008, we recorded pre-tax losses from refranchising in
the U.S. of $26 million, expenses related to U.S. severance and early
retirement of $5 million and expenses related to investments in our U.S. brands
of $1 million. The refranchising losses recorded in the quarter ended
March 22, 2008 were primarily due to our offers to refranchise stores or groups
of stores, principally at Long John Silver's, for prices less than their
recorded carrying value. The refranchising losses are more fully
discussed in Note 9 and the Store Portfolio Strategy of the
MD&A.
These
losses were more than offset in the quarter ended March 22, 2008 by a pre-tax
gain of approximately $100 million related to the sale of our interest in our
unconsolidated affiliate in Japan (See Note 3 for further discussion of this
transaction). This gain was recorded in unallocated Other (income)
expense in our Condensed Consolidated Statement of Income.
We
anticipate that on a full year basis that the net impact of the U.S. business
transformation measures and the gain on the sale of our interest in our
unconsolidated affiliate in Japan will generate up to $50 million of Operating
Profit, or approximately $0.06 of diluted EPS in 2008.
Mexico Value Added Tax (“VAT”)
Exemption
On
October 1, 2007, Mexico enacted new legislation that eliminated a tax ruling
that allowed us to claim an exemption related to VAT
payments. Beginning on January 1, 2008, we were required to remit VAT
on all Company restaurant sales resulting in lower Company sales and
Restaurant Profit. As a result of this new legislation, our
International Division’s Company sales and Restaurant Profit for the
quarter ended March 22, 2008 were unfavorably impacted by approximately
$6 million and $5 million, respectively. We estimate that the
full year 2008 impact on the International Division’s Company sales and
Restaurant Profit will be unfavorable by approximately $38 million and $34
million, respectively. Additionally, the International Division’s system sales
growth and restaurant margin as a percentage of sales was negatively
impacted by approximately 0.2% and 1 percentage point, respectively, for the
quarter ended March 22, 2008, with similar negative impacts expected for the
full year.
Tax Legislation – Mainland
China
On March
16, 2007, the National People’s Congress in mainland China enacted new tax
legislation that went into effect on January 1, 2008. Upon enactment,
which occurred in the China Division’s 2007 second fiscal quarter, the deferred
tax balances of all Chinese entities, including our unconsolidated affiliates,
were adjusted. We currently estimate that these income tax rate
changes will positively impact our 2008 Net Income between $10 million and $15
million compared to what it would have otherwise been had no new tax legislation
been enacted. For the quarter ended March 22, 2008, the favorable
impact on our Income tax provision and Operating Profit was approximately $3
million and $1 million, respectively.
Store Portfolio
Strategy
From time
to time we sell Company restaurants to existing and new franchisees where
geographic synergies can be obtained or where franchisees’ expertise can
generally be leveraged to improve our overall operating performance, while
retaining Company ownership of strategic U.S. and international
markets. In the U.S., we are targeting Company ownership of
restaurants potentially below 10% by year end 2010, down from its current level
of 22%. We recorded net refranchising losses of $26 million in the
U.S. in the quarter ended March 22, 2008, primarily due to our offers to
sell certain stores or groups of stores, for a price less than their
carrying values. These offers to refranchise were primarily made for
approximately 300 Long John Silver’s restaurants, which represents substantially
all of our Company owned Long John Silver’s restaurants in the U.S.
In the
International Division, we expect to refranchise approximately 300 Pizza Huts in
the U.K. over the next several years reducing our Pizza Hut Company ownership in
that market from approximately 80% currently to approximately
40%.
Refranchisings
reduce our reported revenues and restaurant profits and increase the importance
of system sales growth as a key performance measure. Additionally,
G&A expenses will decline over time as a result of these refranchising activities. The timing of G&A declines will
vary and often lag the actual refranchising activities as the synergies are
typically dependent upon the size and geography of the respective
deals. G&A expenses included in the tables below reflect only
direct G&A expenses that we are no longer incurring as a result of stores
that were operated by us for all or some portion of the comparable period in
2007 and were no longer operated by us as of March 22, 2008.
The
following table summarizes our refranchising activities:
|
|
Quarter
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
Number
of units refranchised
|
|
|
37
|
|
|
|
|
117
|
|
Refranchising
proceeds, pre-tax
|
|
$
|
19
|
|
|
|
$
|
34
|
|
Refranchising
(gain) loss, pre-tax
|
|
$
|
25
|
|
|
|
$
|
(1
|
)
|
The
impact on Operating Profit arising from refranchising is the net of (a) the
estimated reductions in restaurant profit, which reflects the decrease in
Company sales, and G&A expenses and (b) the estimated increase in franchise
fees from the stores refranchised. The amounts presented below
reflect the estimated historical results
from stores that were
operated by us for all or some portion of the comparable period in 2007 and were
no longer operated by us as of March 22, 2008.
The
following table summarizes the estimated historical results of
refranchising:
|
Quarter
Ended 3/22/08
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(53
|
)
|
|
|
$
|
(27
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(81
|
)
|
Increased
Franchise and license fees
|
|
3
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
4
|
|
Decrease
in Total revenues
|
$
|
(50
|
)
|
|
|
$
|
(26
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(77
|
)
|
The
following table summarizes the estimated impact on Operating Profit of
refranchising:
|
Quarter
Ended 3/22/08
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
restaurant profit
|
$
|
(4
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(6
|
)
|
Increased
Franchise and license fees
|
|
3
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
4
|
|
Decreased
G&A expenses
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
1
|
|
Decrease
in Operating Profit
|
$
|
—
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(1
|
)
|
Results
of Operations
|
|
Quarter
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
|
|
%
B/(W)
|
Company
sales
|
|
$
|
2,094
|
|
|
|
$
|
1,942
|
|
|
|
8
|
|
Franchise
and license fees
|
|
|
314
|
|
|
|
|
281
|
|
|
|
12
|
|
Total
revenues
|
|
$
|
2,408
|
|
|
|
$
|
2,223
|
|
|
|
8
|
|
Company
restaurant profit
|
|
$
|
308
|
|
|
|
$
|
288
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Company sales
|
|
|
14.7%
|
|
|
|
|
14.9%
|
|
|
|
(0.2
|
) ppts.
|
Operating
Profit
|
|
|
424
|
|
|
|
|
316
|
|
|
|
34
|
|
Interest
expense, net
|
|
|
53
|
|
|
|
|
36
|
|
|
|
(45
|
)
|
Income
tax provision
|
|
|
117
|
|
|
|
|
86
|
|
|
|
(37
|
)
|
Net
Income
|
|
$
|
254
|
|
|
|
$
|
194
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share(a)
|
|
$
|
0.50
|
|
|
|
$
|
0.35
|
|
|
|
43
|
|
(a)
|
See
Note 5 for the number of shares used in this
calculation.
|
Restaurant
Unit Activity
Worldwide
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Beginning
of year
|
|
|
|
7,625
|
|
|
|
1,314
|
|
|
|
24,297
|
|
|
|
33,236
|
|
New
Builds
|
|
|
|
99
|
|
|
|
15
|
|
|
|
203
|
|
|
|
317
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
(37
|
)
|
|
|
(1
|
)
|
|
|
38
|
|
|
|
—
|
|
Closures
|
|
|
|
(22
|
)
|
|
|
(2
|
)
|
|
|
(167
|
)
|
|
|
(191
|
)
|
Other(b)(c)
|
|
|
|
182
|
|
|
|
(749
|
)
|
|
|
569
|
|
|
|
2
|
|
End
of quarter
|
|
|
|
7,847
|
|
|
|
577
|
|
|
|
24,940
|
|
|
|
33,364
|
|
%
of Total
|
|
|
|
23%
|
|
|
|
2%
|
|
|
|
75%
|
|
|
|
100%
|
|
United
States
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Beginning
of year
|
|
|
|
3,896
|
|
|
|
—
|
|
|
|
14,081
|
|
|
|
17,977
|
|
New
Builds
|
|
|
|
15
|
|
|
|
—
|
|
|
|
49
|
|
|
|
64
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
20
|
|
|
|
—
|
|
Closures
|
|
|
|
(13
|
)
|
|
|
—
|
|
|
|
(110
|
)
|
|
|
(123
|
)
|
Other
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
End
of quarter
|
|
|
|
3,878
|
|
|
|
—
|
|
|
|
14,041
|
|
|
|
17,919
|
|
%
of Total
|
|
|
|
22%
|
|
|
|
—
|
|
|
|
78%
|
|
|
|
100%
|
|
International
Division
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Beginning
of year
|
|
|
|
1,642
|
|
|
|
568
|
|
|
|
9,963
|
|
|
|
12,173
|
|
New
Builds
|
|
|
|
7
|
|
|
|
—
|
|
|
|
151
|
|
|
|
158
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
(17
|
)
|
|
|
(1
|
)
|
|
|
18
|
|
|
|
—
|
|
Closures
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(55
|
)
|
|
|
(57
|
)
|
Other(b)
|
|
|
|
—
|
|
|
|
(567
|
)
|
|
|
568
|
|
|
|
1
|
|
End
of quarter
|
|
|
|
1,630
|
|
|
|
—
|
|
|
|
10,645
|
|
|
|
12,275
|
|
%
of Total
|
|
|
|
13%
|
|
|
|
—
|
|
|
|
87%
|
|
|
|
100%
|
|
China
Division
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
|
Beginning
of year
|
|
|
|
2,087
|
|
|
|
746
|
|
|
|
253
|
|
|
|
3,086
|
|
New
Builds
|
|
|
|
77
|
|
|
|
15
|
|
|
|
3
|
|
|
|
95
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Closures
|
|
|
|
(7
|
)
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(11
|
)
|
Other(c)
|
|
|
|
182
|
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
—
|
|
End
of quarter
|
|
|
|
2,339
|
|
|
|
577
|
|
|
|
254
|
|
|
|
3,170
|
|
%
of Total
|
|
|
|
74%
|
|
|
|
18%
|
|
|
|
8%
|
|
|
|
100%
|
|
(a)
|
The
Worldwide, U.S. and International Division totals exclude 2,143, 1,962 and
181 licensed units, respectively, at March 22, 2008. There are
no licensed units in the China Division. Licensed units are
generally units that offer limited menus and operate in non-traditional
locations like malls, airports, gasoline service stations, convenience
stores, stadiums and amusement parks where a full scale traditional outlet
would not be practical or efficient. As licensed units have
lower average unit sales volumes than our traditional units and our
current strategy does not place a significant emphasis on expanding our
licensed units, we do not believe that providing further detail of
licensed unit activity provides significant or meaningful
information.
|
|
|
(b)
|
In
our fiscal quarter ended March 22, 2008, we sold our interest in our
unconsolidated affiliate in Japan. While we will no longer have
an ownership interest in the entity that operates both KFCs and Pizza Huts
in Japan, it will continue to be a franchisee as it was when it operated
as an unconsolidated affiliate. See Note 3.
|
|
|
(c)
|
On
January 1, 2008 we began consolidating an entity in China in which we have
a majority ownership interest. This entity was previously
accounted for as an unconsolidated affiliate and we have reclassified the
units accordingly. See Note
2.
|
Multibrand
restaurants are included in the totals above. Multibrand conversions
increase the sales and points of distribution for the second brand added to a
restaurant but do not result in an additional unit count. Similarly,
a new multibrand restaurant, while increasing sales and points of distribution
for two brands, results in just one additional unit count. Franchise
unit counts below include both franchisee and unconsolidated affiliate
multibrand units. Following are multibrand restaurant totals at March
22, 2008:
3/22/08
|
|
|
Company
|
|
|
Franchisees
|
|
|
Total
|
United
States
|
|
|
1,740
|
|
|
|
2,016
|
|
|
|
3,756
|
|
International
Division
|
|
|
—
|
|
|
|
302
|
|
|
|
302
|
|
Worldwide
|
|
|
1,740
|
|
|
|
2,318
|
|
|
|
4,058
|
|
For the
quarter ended March 22, 2008, Company and franchise multibrand unit gross
additions were 17 and 99, respectively. There are no multibrand units
in the China Division.
System
Sales Growth
|
|
Increase/
(Decrease)
|
|
|
Increase
excluding foreign
currency
translation
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
United
States
|
|
3%
|
|
|
|
(3)%
|
|
|
|
N/A
|
|
|
|
N/A
|
|
International
Division
|
|
15%
|
|
|
|
13%
|
|
|
|
9%
|
|
|
|
10%
|
|
China
Division
|
|
38%
|
|
|
|
24%
|
|
|
|
28%
|
|
|
|
19%
|
|
Worldwide
|
|
10%
|
|
|
|
4%
|
|
|
|
7%
|
|
|
|
3%
|
|
The
explanations that follow for system sales growth consider year over year changes
excluding the impact of foreign currency translation.
The
increases in U.S., China Division and Worldwide System sales were driven by new
unit development and same store sales growth, partially offset by store
closures.
The
increase in International Division system sales was driven by same store sales
growth and new unit development, partially offset by store
closures.
Revenues
|
|
Amount
|
|
|
%
Increase/(Decrease)
|
|
|
%
Increase/(Decrease)
excluding
foreign currency translation
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
1,034
|
|
|
|
$
|
1,051
|
|
|
|
(2
|
)
|
|
|
N/A
|
|
International
Division
|
|
|
552
|
|
|
|
|
560
|
|
|
|
(1
|
)
|
|
|
(5
|
)
|
China
Division
|
|
|
508
|
|
|
|
|
331
|
|
|
|
53
|
|
|
|
42
|
|
Worldwide
|
|
|
2,094
|
|
|
|
|
1,942
|
|
|
|
8
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and license fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
157
|
|
|
|
|
149
|
|
|
|
5
|
|
|
|
N/A
|
|
International
Division
|
|
|
145
|
|
|
|
|
121
|
|
|
|
20
|
|
|
|
14
|
|
China
Division
|
|
|
12
|
|
|
|
|
11
|
|
|
|
13
|
|
|
|
5
|
|
Worldwide
|
|
|
314
|
|
|
|
|
281
|
|
|
|
12
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
1,191
|
|
|
|
|
1,200
|
|
|
|
(1
|
)
|
|
|
N/A
|
|
International
Division
|
|
|
697
|
|
|
|
|
681
|
|
|
|
2
|
|
|
|
(1
|
)
|
China
Division
|
|
|
520
|
|
|
|
|
342
|
|
|
|
52
|
|
|
|
41
|
|
Worldwide
|
|
$
|
2,408
|
|
|
|
$
|
2,223
|
|
|
|
8
|
|
|
|
5
|
|
The
explanations that follow for revenue fluctuations consider year over year
changes excluding the impact of any foreign currency
translation.
Excluding
the favorable impact of the consolidation of a former China unconsolidated
affiliate, Worldwide Company sales increased 3%. The increase was
driven by new unit development and same stores sales growth, partially
offset by refranchising and store closures.
The
increase in Worldwide Franchise and license fees was driven by same stores
sales growth, new unit development and refranchising, partially offset by store
closures.
The
decrease in U.S. Company sales was driven by refranchising and store closures,
partially offset by same store sales growth and new unit
development.
U.S.
Company same store sales increased 3% due to an increase in average guest check,
partially offset by a decline in transactions.
The
increase in U.S. Franchise and license fees was driven by new unit development,
same store sales growth and refranchising, partially offset by store
closures.
The
decrease in International Division Company sales was driven by refranchising,
store closures and same store sales declines, primarily due to the loss of the
Mexico VAT exemption, partially offset by new unit development.
The
increase in International Division Franchise and license fees was driven by same
store sales growth, new unit development and refranchising, partially offset by
store closures.
Excluding
the favorable impact of the consolidation of a former China unconsolidated
affiliate, the China Division Company sales increased by 29%. The
increase was driven by new unit development and same store sales
growth.
Excluding
the unfavorable impact of the consolidation of a former China unconsolidated
affiliate, the China Division Franchise and license fees increased by
21%. The increase was driven by new unit development and same
store sales growth.
Company
Restaurant Margins
|
|
Quarter
Ended 3/22/08
|
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
29.8
|
|
|
|
30.8
|
|
|
|
37.4
|
|
|
|
31.9
|
|
Payroll
and employee benefits
|
|
31.2
|
|
|
|
25.7
|
|
|
|
13.6
|
|
|
|
25.5
|
|
Occupancy
and other operating expenses
|
|
26.6
|
|
|
|
30.5
|
|
|
|
27.7
|
|
|
|
27.9
|
|
Company
restaurant margin
|
|
12.4
|
%
|
|
|
13.0
|
%
|
|
|
21.3
|
%
|
|
|
14.7
|
%
|
|
|
Quarter
Ended 3/24/07
|
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
28.4
|
|
|
|
29.7
|
|
|
|
36.1
|
|
|
|
30.2
|
|
Payroll
and employee benefits
|
|
31.1
|
|
|
|
25.9
|
|
|
|
12.7
|
|
|
|
26.4
|
|
Occupancy
and other operating expenses
|
|
27.2
|
|
|
|
31.3
|
|
|
|
28.3
|
|
|
|
28.5
|
|
Company
restaurant margin
|
|
13.3
|
%
|
|
|
13.1
|
%
|
|
|
22.9
|
%
|
|
|
14.9
|
%
|
The
decrease in U.S. restaurant margin as a percentage of sales was driven by the
impact of higher commodity costs (primarily cheese, wheat and chicken costs) and
higher labor costs (primarily wage rates and benefits). The decrease
was partially offset by the favorable impact of same store sales growth on
restaurant margin including the impact of higher average guest
check.
The
decrease in International Division restaurant margin as a percentage of sales
was driven by the elimination of a VAT exemption in Mexico, partially offset by
the favorable impact on restaurant margin of refranchising and closing certain
restaurants. An increase in commodity costs was generally offset by
higher average guest check.
The
decrease in China Division restaurant margin as a percentage of sales was driven
by higher commodity costs (primarily chicken products), higher labor costs and
the impact of lower margins associated with new units during the initial periods
of operation. The decrease was partially offset by the impact of same
store sales growth on restaurant margin.
Worldwide
General and Administrative Expenses
G&A
expenses increased 5% in the quarter ended March 22, 2008, including a 2%
unfavorable impact of foreign currency translation. This increase
included approximately $5 million of severance and early retirement costs
related to the U.S. transformation as discussed in the Significant
2008 Gains and Charges section of this MD&A. The remaining
increases were primarily driven by continued investments in China and other
international growth markets.
Worldwide
Other (Income) Expense
|
|
Quarter
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(11
|
)
|
|
|
$
|
(13
|
)
|
Minority
Interest (a)
|
|
|
2
|
|
|
|
|
—
|
|
Gain
upon sale of investment in unconsolidated affiliate (b)(c)
|
|
|
(100
|
)
|
|
|
|
(5
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
(6
|
)
|
|
|
|
(2
|
)
|
Other
(income) expense
|
|
$
|
(115
|
)
|
|
|
$
|
(20
|
)
|
(a)
|
On
January 1, 2008 we began consolidating an entity in China in which we have
a majority ownership interest. See Note 2.
|
|
|
(b)
|
Quarter
ended March 22, 2008 reflects the gain recognized on the sale of our
interest in our unconsolidated affiliate in Japan. See Note
3.
|
|
|
(c)
|
Quarter
ended March 24, 2007 reflects recognition of income associated with
receipt of payment for a note receivable arising from the 2005 sale of our
fifty percent interest in the entity that operated almost all KFCs and
Pizza Huts in Poland and the Czech Republic to our then partner in the
entity.
|
Worldwide
Closure and Impairment Expense and Refranchising (Gain) Loss
See the
Store Portfolio Strategy section for more detail of our refranchising activity
and Note 9 for a summary of the components of facility actions by
reportable operating segment.
Operating
Profit
|
|
Quarter
|
|
|
3/22/08
|
|
|
|
3/24/07
|
|
|
|
%
B/(W)
|
United
States
|
|
$
|
157
|
|
|
|
$
|
165
|
|
|
|
(5
|
)
|
International
Division
|
|
|
139
|
|
|
|
|
119
|
|
|
|
18
|
|
China
Division
|
|
|
101
|
|
|
|
|
76
|
|
|
|
33
|
|
Unallocated
and corporate expenses
|
|
|
(54
|
)
|
|
|
|
(49
|
)
|
|
|
(11
|
)
|
Unallocated
Other income (expense)
|
|
|
106
|
|
|
|
|
4
|
|
|
|
NM
|
|
Unallocated
Refranchising gain (loss)
|
|
|
(25
|
)
|
|
|
|
1
|
|
|
|
NM
|
|
Operating
Profit
|
|
$
|
424
|
|
|
|
$
|
316
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States operating margin
|
|
|
13.2%
|
|
|
|
|
13.8%
|
|
|
|
(0.6
|
) ppts.
|
International
Division operating margin
|
|
|
20.0%
|
|
|
|
|
17.4%
|
|
|
|
2.6
|
ppts.
|
U.S.
Operating Profit decreased 5% in the quarter ended March 22,
2008. The decrease was driven by higher restaurant operating costs,
partially offset by the impact of same store sales on restaurant profit
(primarily due to higher average guest check) and Franchise and license
fees. The increase in higher restaurant operating costs was primarily
driven by higher commodity and labor costs.
International
Division Operating Profit increased 18% in the quarter ended March 22, 2008,
including a 7% favorable impact from foreign currency
translation. The increase was driven by the impact of same store
sales growth and new unit development on Franchise and license fees as well
as lower closure and impairment expenses. These increases were
partially offset by the loss of the VAT exemption in
Mexico.
China
Division Operating Profit increased 33% in the quarter ended March 22, 2008,
including a 10% favorable impact from foreign currency
translation. The increase was driven by the impact of same store
sales growth and new unit development on restaurant profit. These
increases were partially offset by higher restaurant operating
costs.
Interest
Expense, Net
|
|
Quarter
|
|
|
|
|
3/22/08
|
|
|
3/24/07
|
|
|
%
B/(W)
|
Interest
expense
|
|
$
|
59
|
|
|
$
|
43
|
|
|
(37
|
%)
|
Interest
income
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
(6
|
%)
|
Interest
expense, net
|
|
$
|
53
|
|
|
$
|
36
|
|
|
(45
|
%)
|
Interest
expense increased $16 million or 37% in 2008. This increase was
driven by an increase in borrowings, partially offset by a decrease in interest
rates on the variable portion of our debt as compared to the prior
year.
Income
Taxes
|
|
Quarter
|
|
|
3/22/08
|
|
3/24/07
|
Income
taxes
|
|
$
|
117
|
|
|
$
|
86
|
|
Effective
tax rate
|
|
|
31.6
|
%
|
|
|
30.6
|
%
|
Our
effective tax rate for the quarter was negatively impacted by tax expense
associated with the gain on the sale of our interest in our unconsolidated
affiliate in Japan. The benefit from a higher percentage of our
income being earned outside the U.S. was offset in the quarter by expense
associated with our plan to distribute certain foreign earnings.
Consolidated
Cash Flows
Net cash provided by operating
activities was $348 million compared to $340 million in
2007.
Net cash used in investing
activities was $84 million versus $42 million in 2007. The
increase was driven by higher capital spending and lower proceeds from
refranchising.
Net cash used in financing
activities was $595 million versus $276 million in
2007. The increase was driven by higher share repurchases, partially
offset by net debt borrowings in 2008 versus net debt repayments in
2007.
Consolidated
Financial Condition
During
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million in cash. Our international subsidiary that owned this
interest operates on a fiscal calendar with a period end that is approximately
one month earlier than our consolidated period close. Thus,
consistent with our historical treatment of events occurring during the lag
period, the pre-tax gain on the sale of this investment was recorded in the
quarter ended March 22, 2008 as Other income and was not allocated to any
segment for performance reporting purposes. However, the cash
proceeds from this transaction were transferred from our international
subsidiary to the U.S. in December 2007 and were thus reported on our
Consolidated Statement of Cash Flows for the year ended December 29, 2007 with
the offsetting deferred gain recorded in Accounts payable and other current
liabilities. During the quarter ended March 22, 2008, Accounts
payable and other current liabilities decreased by $128 million due to the
reversal of this deferred gain upon recognition of the sale.
Liquidity
and Capital Resources
Operating
in the QSR industry allows us to generate substantial cash flows from the
operations of our Company stores and from our franchise operations, which
require a limited YUM investment. In each of the last six fiscal
years, net cash provided by operating activities has exceeded $1
billion. We expect these levels of net cash provided by operating
activities to continue in the foreseeable future. Our discretionary
spending includes capital spending for new restaurants, acquisitions of
restaurants from franchisees, repurchases of shares of our Common Stock and
dividends paid to our shareholders. Unforeseen downturns in our
business could adversely impact our cash flows from operations from the levels
historically realized. However, we believe our ability to reduce
discretionary spending and our borrowing capacity will allow us to meet our cash
requirements in 2008 and beyond.
Discretionary
Spending
In the
quarter ended March 22, 2008, we invested $113 million in our businesses,
including $49 million in the U.S., $32 million for the International
Division and $32 million for the China Division.
In the
quarter ended March 22, 2008, we repurchased shares for
$994 million. At March 22, 2008, we had remaining capacity to
repurchase up to approximately $1.1 billion of our outstanding Common Stock
(excluding applicable transaction fees) through January 2009
under a January 2008 authorization.
During
the quarter ended March 22, 2008, we paid cash dividends of $75 million.
Additionally, on March 14, 2008 our Board of Directors approved cash dividends
of $0.15 per share of Common Stock to be distributed on May 2, 2008 to
shareholders of record at the close of business on April 11,
2008.
For 2008,
we expect to return over $2 billion to shareholders through both cash dividends
and share repurchases. The Company is targeting an annual dividend
payout ratio of 35% to 40% of Net Income.
Borrowing
Capacity
Our
primary bank credit agreement comprises a $1.15 billion senior unsecured
Revolving Credit Facility (the “Credit Facility”) which matures in November
2012. At March 22, 2008, our unused Credit Facility totaled $528 million, net of
outstanding letters of credit of $162 million. There were borrowings
of $460 million outstanding under the Credit Facility at March 22,
2008. We were in compliance with all debt covenants under this
facility at March 22, 2008.
We also
have a $350 million, five-year revolving credit facility (the “International
Credit Facility” or “ICF”) which matures in November 2012. There were
no borrowings outstanding under the ICF at March 22, 2008. We were in
compliance with all debt covenants under the ICF at March 22, 2008.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes with varying maturity dates from 2008 through 2037 and interest rates
ranging from 6.25% to 8.88%. The Senior Unsecured Notes represent
senior, unsecured obligations and rank equally in right of payment with all of
our existing and future unsecured unsubordinated
indebtedness. Amounts outstanding under Senior Unsecured Notes were
$2.8 billion at March 22, 2008, including $250 million of Senior Unsecured Notes
that mature in May 2008. We anticipate funding the repayment of the
Senior Unsecured Notes due in May 2008 with additional borrowings under our
Credit Facility.
Recently
Adopted Accounting Pronouncements
See Note
7 to the Condensed Consolidated Financial Statements of this report for
further details of recently adopted accounting pronouncements.
New
Accounting Pronouncements Not Yet Recognized
See Note
8 to the Condensed Consolidated Financial Statements of this report for
further details of new accounting pronouncements not yet adopted.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
There
were no material changes during the quarter ended March 22, 2008 to the
disclosures made in Item 7A of the Company’s 2007 Form 10-K.
Item
4.
|
Controls
and Procedures
|
Evaluation of Disclosure
Controls and Procedures
The
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 as of the end of the period covered by
this report. Based on the evaluation, performed under the supervision
and with the participation of the Company’s management, including the Chairman,
Chief Executive Officer and President (the “CEO”) and the Chief Financial
Officer (the “CFO”), the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by the report.
Changes in Internal
Control
There
were no significant changes with respect to the Company’s internal control over
financial reporting or in other factors that materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting during the quarter ended March 22, 2008.
Cautionary
Note Regarding Forward-Looking Statements
This
report may contain forward-looking statements within the meaning of the U.S.
federal securities laws. These forward-looking statements are
intended to be covered by the safe harbor provisions for forward-looking
statements in the federal securities laws. The statements include
those identified by such words as “may,” “will,” “expect,” “project,”
“anticipate,” “believe,” “plan” and other similar terminology. These
“forward-looking statements” reflect our current expectations regarding future
events and operating and financial performance and are based upon data available
at the time of the statements. Actual results involve risks and
uncertainties, including both those specific to us and those specific to the
industry, and could differ materially from expectations. These risks
and uncertainties include, but are not limited to those described in Part II,
Item 1A “Risk Factors” in this report, those described under “Risk Factors” in
Part I, Item 1A of our Form 10-K for the year ended December 29, 2007, and those
described from time to time in our reports filed with the Securities and
Exchange Commission. We do not undertake any obligation to update or
revise publicly any forward-looking statements, whether as a result of new
information, future events or otherwise. You are cautioned not to
place undue reliance on forward-looking statements.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
reviewed the accompanying Condensed Consolidated Balance Sheet of YUM! Brands,
Inc. and Subsidiaries (“YUM”) as of March 22, 2008, and the related Condensed
Consolidated Statements of Income and Cash Flows for the twelve weeks ended
March 22, 2008 and March 24, 2007. These Condensed Consolidated Financial
Statements are the responsibility of YUM’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the Condensed Consolidated Financial Statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheet of
YUM as of December 29, 2007, and the related Consolidated Statements of Income,
Cash Flows and Shareholders’ Equity and Comprehensive Income for the year then
ended not presented herein; and in our report dated February 25, 2008, we
expressed an unqualified opinion on those Consolidated Financial Statements. In
our opinion, the information set forth in the accompanying Condensed
Consolidated Balance Sheet as of December 29, 2007, is fairly stated, in all
material respects, in relation to the Consolidated Balance Sheet from which it
has been derived.
/s/ KPMG
LLP
Louisville,
Kentucky
April 29,
2008
PART
II – Other Information and Signatures
Item
1.
|
Legal
Proceedings
|
Information
regarding legal proceedings is incorporated by reference from Note 13 to
the Company’s Condensed Consolidated Financial Statements set forth in Part I of
this report.
We face a
variety of risks that are inherent in our business and our industry, including
operational, legal, regulatory and product risks. The following are
some of the more significant factors that could affect our business and our
results of operations:
·
|
Food-borne
illness (such as E. coli, hepatitis A., trichinosis or salmonella)
concerns, food safety issues and health concerns arising from outbreaks of
Avian Flu, may have an adverse effect on our business;
|
|
|
·
|
A
significant and growing number of our restaurants are located in China,
and our business is increasingly exposed to risk there. These
risks include changes in economic conditions, tax rates, exchange rates,
laws and consumer preferences, as well as changes in the regulatory
environment;
|
|
|
·
|
Our
other foreign operations, which are significant and increasing, subject us
to risks that could negatively affect our business such as fluctuations in
foreign currency exchange rates and changes in economic conditions, tax
systems, consumer preferences, social conditions and political
conditions;
|
|
|
·
|
Changes
in commodity and other operating costs or supply chain and business
disruptions could adversely affect our results of
operations;
|
|
|
·
|
Our
operating results are closely tied to the success of our franchisees, and
any significant inability of our franchisees to operate successfully could
adversely affect our operating results;
|
|
|
·
|
Our
results and financial condition could be affected by the success of our
refranchising program;
|
|
|
·
|
We
could be party to litigation that could adversely affect us by increasing
our expenses or subjecting us to material money damages and other
remedies;
|
|
|
·
|
Changes
in governmental regulations may adversely affect our business
operations;
|
|
|
·
|
We
may not attain our target development goals which are dependent upon our
ability and the ability of our franchisees to upgrade existing restaurants
and open new restaurants and to operate these restaurants on a profitable
basis; and
|
|
|
·
|
The
retail food industry in which we operate is highly
competitive.
|
These
risks are described in more detail under “Risk Factors” in Item 1A of our 2007
Form 10-K. We encourage you to read these risk factors in their
entirety. Other factors may also exist that we cannot anticipate or
that we do not consider to be significant based on information that is currently
available.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
The
following table provides information as of March 22, 2008 with respect to shares
of Common Stock repurchased by the Company during the quarter then
ended:
Fiscal
Periods
|
|
Total
number of
shares
purchased
|
|
Average
price
paid
per share
|
|
Total
number of
shares
purchased as
part
of publicly
announced
plans or
programs
|
|
Approximate
dollar
value
of shares that may
yet
be purchased under
the
plans or programs
|
Period
1
|
|
|
|
|
|
|
|
|
|
|
|
|
12/30/07
– 1/26/08
|
|
|
12,714,600
|
|
|
$
|
35.81
|
|
|
|
12,714,600
|
|
|
$
|
1,607,567,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/27/08
– 2/23/08
|
|
|
14,507,342
|
|
|
$
|
35.02
|
|
|
|
14,507,342
|
|
|
$
|
1,099,590,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/24/08
– 3/22/08
|
|
|
499,700
|
|
|
$
|
34.74
|
|
|
|
499,700
|
|
|
$
|
1,082,230,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,721,642
|
|
|
$
|
35.37
|
|
|
|
27,721,642
|
|
|
$
|
1,082,230,056
|
|
In
October 2007, our Board of Directors authorized share repurchases, through
October 2008, of up to an additional $1.25 billion (excluding applicable
transaction fees) of our outstanding Common Stock. For the quarter
ended March 22, 2008, approximately 22.9 million shares were repurchased under
this authorization. This authorization was completed during the
quarter ended March 22, 2008.
In
January 2008, our Board of Directors authorized additional share repurchases,
through January 2009, of up to an additional $1.25 billion (excluding applicable
transaction fees) of our outstanding Common Stock. For the quarter
ended March 22, 2008, approximately 4.8 million shares were repurchased under
this authorization.
|
(a)
|
Exhibit
Index
|
|
|
|
|
|
|
|
EXHIBITS
|
|
|
|
|
|
|
|
Exhibit
15
|
Letter
from KPMG LLP regarding Unaudited Interim Financial Information
(Acknowledgement of Independent Registered Public Accounting
Firm).
|
|
|
|
|
|
|
Exhibit
31.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to Rule
13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
Exhibit
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Exhibit
32.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
Exhibit
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, duly
authorized officer of the registrant.
|
|
|
YUM!
BRANDS, INC.
|
|
|
|
|
(Registrant)
|
|
Date:
|
April 29, 2008
|
|
/s/ Ted
F. Knopf
|
|
|
|
|
Senior
Vice President of Finance
|
|
|
|
|
and
Corporate Controller
|
|
|
|
|
(Principal
Accounting Officer)
|
|
38