SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
[ü]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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EXCHANGE ACT OF 1934 for
the fiscal year ended December 27, 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
SECURITIES
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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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Securities
registered pursuant to Section 12(b) of the Act
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, no par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
the Rule 405 of the Securities Act. Yes Ö No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
No Ö
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Ö]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or smaller reporting company. See
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12-b 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
aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of June 14, 2008
computed by reference to the closing price of the registrant’s Common Stock on
the New York Stock Exchange Composite Tape on such date was $17,938,014,271. All
executive officers and directors of the registrant have been deemed, solely for
the purpose of the foregoing calculation, to be “affiliates” of the registrant.
The number of shares outstanding of the registrant’s Common Stock as of February
11, 2009 was 459,931,675 shares.
Documents
Incorporated by Reference
Portions
of the definitive proxy statement furnished to shareholders of the registrant in
connection with the annual meeting of shareholders to be held on May 21, 2009
are incorporated by reference into Part III.
Forward-Looking
Statements
From time
to time, in both written reports and oral statements, we present
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We intend such forward-looking statements to be covered
by the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and we are including this statement for purposes of complying with those
safe harbor provisions.
Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. These statements often include words
such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,”
“anticipate,” “believe,” “plan” or other similar terminology. These
forward-looking statements are based on current expectations and assumptions and
upon data available at the time of the statements and are neither predictions
nor guarantees of future events or circumstances. The forward-looking
statements are subject to risks and uncertainties, which may cause actual
results to differ materially. Important factors that could cause
actual results and events to differ materially from our expectations and
forward-looking statements include (i) the risks and uncertainties described in
the Risk Factors included in Part I, Item 1A of this Form 10-K and (ii) the
factors described in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of this Form
10-K. You should not place undue reliance on forward-looking
statements, which speak only as of the date hereof. In making these
statements, we are not undertaking to address or update any risk factor set
forth herein, in future filings or communications regarding our business
results.
PART
I
YUM!
Brands, Inc. (referred to herein as “YUM” or the “Company”), was incorporated
under the laws of the state of North Carolina in 1997. The principal
executive offices of YUM are located at 1441 Gardiner Lane, Louisville,
Kentucky 40213, and the telephone number at that location is (502)
874-8300.
YUM, the
registrant, together with its subsidiaries, is referred to in this Form 10-K
annual report (“Form 10-K”) as the Company. The terms “we,” “us” and
“our” are also used in the Form 10-K to refer to the
Company. Throughout this Form 10-K, the terms “restaurants,” “stores”
and “units” are used interchangeably.
This Form
10-K should be read in conjunction with the Forward-Looking Statements on page 2
and the Risk Factors set forth in Item 1A.
(a)
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General
Development of Business
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In
January 1997, PepsiCo announced its decision to spin-off its restaurant
businesses to shareholders as an independent public company (the
“Spin-off”). Effective October 6, 1997, PepsiCo disposed of its
restaurant businesses by distributing all of the outstanding shares of Common
Stock of YUM to its shareholders.
On May 7,
2002, YUM completed the acquisition of Yorkshire Global Restaurants, Inc.
(“YGR”), the parent company and operator of Long John Silver’s (“LJS”) and
A&W All-American Food Restaurants (“A&W”). On May 16, 2002,
following receipt of shareholder approval, the Company changed its name from
TRICON Global Restaurants, Inc. to YUM! Brands, Inc.
(b)
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Financial
Information about Operating
Segments
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YUM
consists of six operating segments: KFC-U.S., Pizza Hut-U.S., Taco
Bell-U.S., LJS/A&W-U.S., YUM Restaurants International (“YRI” or
“International Division”) and YUM Restaurants China (“China
Division”). For financial reporting purposes, management considers
the four U.S. operating segments to be similar and, therefore, has aggregated
them into a single reportable operating segment. The China Division
includes mainland China (“China”), Thailand and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Operating
segment information for the years ended December 27, 2008, December 29, 2007 and
December 30, 2006 for the Company is included in Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”) in Part
II, Item 7, pages 24 through 52 and in the related Consolidated Financial
Statements and footnotes in Part II, Item 8, pages 53 through 106.
(c)
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Narrative
Description of Business
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General
YUM is
the world’s largest quick service restaurant (“QSR”) company based on number of
system units, with more than 36,000 units in more than 110 countries and
territories. Through the five concepts of KFC, Pizza Hut, Taco Bell,
LJS and A&W (the “Concepts”), the Company develops, operates, franchises and
licenses a worldwide system of restaurants which prepare, package and sell a
menu of competitively priced food items. The Company either operates
units or they are operated by independent franchisees or licensees under the
terms of franchise or license agreements. Franchisees can range in
size from individuals owning just one unit to large publicly traded
companies. In addition, the Company owns non-controlling interests in
Unconsolidated Affiliates in China who operate similar to
franchisees.
At year
end 2008, we had approximately 20,000 system restaurants in the U.S. which
achieved revenues of $5.1 billion and Operating Profit of $694 million during
2008. The International Division, based in Dallas, Texas, comprises
approximately 13,000 system restaurants, primarily KFCs and Pizza Huts,
operating in over 110 countries outside the U.S. In 2008, YRI
achieved revenues of $3.0 billion and Operating Profit of $528
million. The China Division, based in Shanghai, China, comprises
approximately 3,600 system restaurants, predominately KFCs. In 2008,
the China Division achieved revenues of $3.1 billion and Operating Profit of
$469 million.
Restaurant
Concepts
Most
restaurants in each Concept offer consumers the ability to dine in and/or carry
out food. In addition, Taco Bell, KFC, LJS and A&W offer a
drive-thru option in many stores. Pizza Hut offers a drive-thru
option on a much more limited basis. Pizza Hut and, on a much more
limited basis, KFC offer delivery service.
Each
Concept has proprietary menu items and emphasizes the preparation of food with
high quality ingredients, as well as unique recipes and special seasonings to
provide appealing, tasty and attractive food at competitive prices.
The
franchise program of the Company is designed to assure consistency and quality,
and the Company is selective in granting franchises. Under standard
franchise agreements, franchisees supply capital – initially by paying a
franchise fee to YUM, purchasing or leasing the land, building and equipment and
purchasing signs, seating, inventories and supplies and, over the longer term,
by reinvesting in the business. Franchisees then contribute to the
Company’s revenues through the payment of royalties based on a percentage of
sales.
The
Company believes that it is important to maintain strong and open relationships
with its franchisees and their representatives. To this end, the
Company invests a significant amount of time working with the franchisee
community and their representative organizations on all aspects of the business,
including products, equipment, operational improvements and standards and
management techniques.
The
Company and its franchisees also operate multibrand units, primarily in the
U.S., where two or more of the Concepts are operated in a single
unit. At year end 2008, there were 4,958 multibranded units in the
worldwide system, of which 4,629 were in the U.S. These units were
comprised of 2,751 units offering food products from two of the Concepts, 40
units offering food products from three of the Concepts and 2,167 units offering
food products from Pizza Hut and WingStreet, a flavored chicken wings
concept.
Following
is a brief description of each concept:
KFC
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KFC
was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early
developer of the quick service food business and a pioneer of the
restaurant franchise concept. The Colonel perfected his secret
blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed
up his first franchisee in 1952. KFC is based in Louisville,
Kentucky.
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As
of year end 2008, KFC was the leader in the U.S. chicken QSR segment among
companies featuring chicken-on-the-bone as their primary product offering,
with a 44 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment, which is more than three times that of
its closest national competitor.
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KFC
operates in 109 countries and territories throughout the
world. As of year end 2008, KFC had 5,253 units in the U.S.,
and 10,327 units outside the U.S., including 2,497 units in mainland
China. Approximately 18 percent of the U.S. units and 28
percent of the non-U.S. units are operated by the
Company.
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Traditional
KFC restaurants in the U.S. offer fried chicken-on-the-bone products,
primarily marketed under the names Original Recipe and Extra Tasty
Crispy. Other principal entree items include chicken sandwiches
(including the Snacker and the Twister), KFC Famous Bowls, Colonel’s
Crispy Strips, Wings, Popcorn Chicken and seasonally, Chunky Chicken Pot
Pies. KFC restaurants in the U.S. also offer a variety of side
items, such as biscuits, mashed potatoes and gravy, coleslaw, corn, and
potato wedges, as well as desserts. While many of these
products are offered outside of the U.S., international menus are more
focused on chicken sandwiches and Colonel’s Crispy Strips, and include
side items that are suited to local preferences and
tastes. Restaurant decor throughout the world is characterized
by the image of the Colonel.
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Pizza
Hut
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The
first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and
within a year, the first franchise unit was opened. Today,
Pizza Hut is the largest restaurant chain in the world specializing in the
sale of ready-to-eat pizza products. Pizza Hut is based in
Dallas, Texas.
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As
of year end 2008, Pizza Hut was the leader in the U.S. pizza QSR segment,
with a 15 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Pizza
Hut operates in 97 countries and territories throughout the world. As of
year end 2008, Pizza Hut had 7,564 units in the U.S., and 5,611 units
outside of the U.S. Approximately 14 percent of the U.S. units
and 25 percent of the non-U.S. units are operated by the
Company.
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Pizza
Hut features a variety of pizzas, which may include Pan Pizza, Thin ‘n
Crispy, Hand Tossed, Sicilian, Stuffed Crust, Twisted Crust, Sicilian
Lasagna Pizza, Cheesy Bites Pizza, The Big New Yorker, The Insider, The
Chicago Dish, the Natural and 4forALL. Each of these pizzas is
offered with a variety of different toppings. Pizza Hut now
also offers a variety of Tuscani Pastas. In some restaurants,
Pizza Hut also offers WingStreet chicken wings, breadsticks, salads and
sandwiches. Menu items outside of the U.S. are generally
similar to those offered in the U.S., though pizza toppings are often
suited to local preferences and tastes.
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Taco
Bell
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The
first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey,
California, and in 1964, the first Taco Bell franchise was
sold. Taco Bell is based in Irvine,
California.
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As
of year end 2008, Taco Bell was the leader in the U.S. Mexican QSR
segment, with a 54 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Taco
Bell operates in 17 countries and territories throughout the world. As of
year end 2008, there were 5,588 Taco Bell units in the U.S., and 245 units
outside of the U.S. Approximately 24 percent of the U.S. units
and 1 percent of the non-U.S. units are operated by the
Company.
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Taco
Bell specializes in Mexican-style food products, including various types
of tacos, burritos, gorditas, chalupas, quesadillas, taquitos, salads,
nachos and other related items. Additionally, proprietary
entrée items include Grilled Stuft Burritos and Border
Bowls. Taco Bell units feature a distinctive bell logo on their
signage.
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LJS
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The
first LJS restaurant opened in 1969 and the first LJS franchise unit
opened later the same year. LJS is based in Louisville,
Kentucky.
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As
of year end 2008, LJS was the leader in the U.S. seafood QSR segment, with
a 35 percent market share (Source: The NPD Group, Inc.; NPD Foodworld;
CREST) in that segment.
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LJS
operates in 7 countries and territories throughout the
world. As of year end 2008, there were 1,022 LJS units in the
U.S., and 38 units outside the U.S. All single-brand units
inside and outside of the U.S. are operated by franchisees or
licensees. As of year end 2008, there were 137 company operated
multi-brand units that included the LJS concept.
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LJS
features a variety of seafood and chicken items, including meals featuring
batter-dipped fish, chicken and shrimp, non-fried salmon, shrimp and
tilapia, hushpuppies and portable snack items. LJS units
typically feature a distinctive seaside/nautical
theme.
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A&W
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A&W
was founded in Lodi, California by Roy Allen in 1919 and the first A&W
franchise unit opened in 1925. A&W is based in Louisville,
Kentucky.
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A&W
operates in 10 countries and territories throughout the
world. As of year end 2008, there were 363 A&W units in the
U.S., and 264 units outside the U.S. All single-brand units
inside and outside of the U.S. are operated by franchisees. As
of year end 2008, there were 89 company operated multi-brand units that
included the A&W concept.
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A&W
serves A&W draft Root Beer and a signature A&W Root Beer float, as
well as hot dogs and hamburgers.
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Restaurant
Operations
Through
its Concepts, YUM develops, operates, franchises and licenses a worldwide system
of both traditional and non-traditional QSR restaurants. Traditional
units feature dine-in, carryout and, in some instances, drive-thru or delivery
services. Non-traditional units, which are typically licensed
outlets, include express units and kiosks which have a more limited menu and
operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a
full-scale traditional outlet would not be practical or efficient.
The
Company’s restaurant management structure varies by Concept and unit
size. Generally, each Company restaurant is led by a restaurant
general manager (“RGM”), together with one or more assistant managers, depending
on the operating complexity and sales volume of the restaurant. In
the U.S., the average restaurant has 25 to 30 employees, while internationally
this figure can be significantly higher depending on the location and sales
volume of the restaurant. Most of the employees work on a part-time
basis. We issue detailed manuals, which may then be customized to
meet local regulations and customs, covering all aspects of restaurant
operations, including food handling and product preparation procedures, safety
and quality issues, equipment maintenance, facility standards and accounting
control procedures. The restaurant management teams are responsible
for the day-to-day operation of each unit and for ensuring compliance with
operating standards. CHAMPS – which stands for Cleanliness, Hospitality,
Accuracy, Maintenance, Product Quality and Speed of Service – is our proprietary
core systemwide program for training, measuring and rewarding employee
performance against key customer measures. CHAMPS is intended to
align the operating processes of our entire system around one set of standards.
RGMs’ efforts, including CHAMPS performance measures, are monitored by Area
Coaches. Area Coaches typically work with approximately six to twelve
restaurants. Various senior operators visit the Company’s restaurants
from time to time to help ensure adherence to system standards and mentor
restaurant team members.
Supply and Distribution
The
Company is a substantial purchaser of a number of food and paper products,
equipment and other restaurant supplies. The principal items purchased include
chicken, cheese, beef and pork products, seafood, paper and packaging
materials.
The
Company is committed to conducting its business in an ethical, legal and
socially responsible manner. Our suppliers are selected, assessed and
rewarded through a rigorous audit system that sets and monitors standards for
all of our brands’ key suppliers. All of our restaurants, regardless
of their ownership structure or location, must adhere to our strict food quality
and safety standards. The guidelines are translated to local market
requirements and regulations where appropriate and without compromising the
standards. Long-term contracts and long-term vendor relationships are
used to ensure availability of products. The Company has not
experienced any significant continuous shortages of supplies, and alternative
sources for most of these products are generally available. Prices
paid for these supplies fluctuate. When prices increase, the Company
may be able to pass on such increases to its customers, although there is no
assurance that this can be done practically.
U.S.
Division. The Company, along with the representatives of the
Company’s KFC, Pizza Hut, Taco Bell, LJS and A&W franchisee groups, are
members in the Unified FoodService Purchasing Co-op, LLC (the “Unified Co-op”)
which was created for the purpose of purchasing certain restaurant products and
equipment in the U.S. The core mission of the Unified Co-op is to
provide the lowest possible sustainable store-delivered prices for restaurant
products and equipment while ensuring compliance with certain quality and safety
standards. This arrangement combines the purchasing power of the
Company and franchisee restaurants in the U.S. which the Company believes
leverages the system’s scale to drive cost savings and effectiveness in the
purchasing function. The Company also believes that the Unified Co-op
has resulted, and should continue to result, in closer alignment of interests
and a stronger relationship with its franchisee community.
Most food
products, paper and packaging supplies, and equipment used in the operation of
the Company’s restaurants are distributed to individual restaurant units by
third party distribution companies. McLane Company, Inc. (“McLane”)
is the exclusive distributor for Company-operated restaurants in the U.S. and
for a substantial number of franchisee and licensee stores. McLane
became the distributor when it assumed all distribution responsibilities under
an existing agreement between Ameriserve Food Distribution, Inc. (“AmeriServe”)
and the Company. This agreement extends through October 31, 2010 and
generally prohibits Company-operated restaurants from using alternative
distributors in the U.S.
International and China
Divisions. Outside of the U.S. we and our franchisees use
decentralized sourcing and distribution systems involving many different global,
regional, and local suppliers and distributors. In China, we work
with approximately 500 suppliers. In our YRI markets we have
approximately 1,400 suppliers, including U.S.-based suppliers that export to
many countries. In certain countries, we own all or a portion of the
distribution system, including China where we own the entire distribution
system.
Trademarks
and Patents
The
Company and its Concepts own numerous registered trademarks and service
marks. The Company believes that many of these marks, including its
Kentucky Fried Chicken®, KFC®, Pizza Hut®, Taco Bell® and Long John Silver’s®
marks, have significant value and are materially important to its
business. The Company’s policy is to pursue registration of its
important marks whenever feasible and to oppose vigorously any infringement of
its marks. The Company also licenses certain A&W trademarks and
service marks (the “A&W Marks”), which are owned by A&W Concentrate
Company (formerly A&W Brands, Inc.). A&W Concentrate Company,
which is not affiliated with the Company, has granted the Company an exclusive,
worldwide (excluding Canada), perpetual, royalty-free license (with the right to
sublicense) to use the A&W Marks for restaurant services.
The use
of these marks by franchisees and licensees has been authorized in KFC, Pizza
Hut, Taco Bell, LJS and A&W franchise and license
agreements. Under current law and with proper use, the Company’s
rights in its marks can generally last indefinitely. The Company also
has certain patents on restaurant equipment which, while valuable, are not
material to its business.
Working
Capital
Information
about the Company’s working capital is included in MD&A in Part II, Item 7,
pages 24 through 52 and the Consolidated Statements of Cash Flows in Part II,
Item 8, page 57.
Customers
The
Company’s business is not dependent upon a single customer or small group of
customers.
Seasonal
Operations
The
Company does not consider its operations to be seasonal to any material
degree.
Backlog
Orders
Company
restaurants have no backlog orders.
Government
Contracts
No
material portion of the Company’s business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the U.S.
government.
Competition
The
retail food industry, in which the Company competes, is made up of supermarkets,
supercenters, warehouse stores, convenience stores, coffee shops, snack bars,
delicatessens and restaurants (including the QSR segment), and is intensely
competitive with respect to food quality, price, service, convenience, location
and concept. The industry is often affected by changes in consumer
tastes; national, regional or local economic conditions; currency fluctuations;
demographic trends; traffic patterns; the type, number and location of competing
food retailers and products; and disposable purchasing power. Each of
the Concepts compete with international, national and regional restaurant chains
as well as locally-owned restaurants, not only for customers, but also for
management and hourly personnel, suitable real estate sites and qualified
franchisees. In 2008, the restaurant business in the U.S. consisted
of about 945,000 restaurants representing approximately $552 billion in annual
sales. The Company’s Concepts accounted for about 2% of those
restaurants and about 3% of those sales. There is currently no way to
reasonably estimate the size of the competitive market outside the
U.S.
Research
and Development (“R&D”)
The
Company’s subsidiaries operate R&D facilities in Louisville, Kentucky (KFC);
Dallas, Texas (Pizza Hut and YRI); and Irvine, California (Taco Bell) and in
several locations outside the U.S., including Shanghai, China
(China). The Company expensed $34 million, $39 million and $33
million in 2008, 2007 and 2006, respectively, for R&D
activities. From time to time, independent suppliers also conduct
research and development activities for the benefit of the YUM
system.
Environmental
Matters
The
Company is not aware of any federal, state or local environmental laws or
regulations that will materially affect its earnings or competitive position, or
result in material capital expenditures. However, the Company cannot
predict the effect on its operations of possible future environmental
legislation or regulations. During 2008, there were no material
capital expenditures for environmental control facilities and no such material
expenditures are anticipated.
Government
Regulation
U.S.
Division. The Company and its
U.S. Division are subject to various federal, state and local laws affecting its
business. Each of the Company’s restaurants in the U.S. must comply
with licensing and regulation by a number of governmental authorities, which
include health, sanitation, safety and fire agencies in the state or
municipality in which the restaurant is located. In addition, the
Company must comply with various state laws that regulate the
franchisor/franchisee relationship. To date, the Company has not been
significantly affected by any difficulty, delay or failure to obtain required
licenses or approvals.
The
Company is also subject to federal and state laws governing such matters as
employment and pay practices, overtime, tip credits and working
conditions. The bulk of the Company’s employees are paid on an hourly
basis at rates related to the federal and state minimum wages.
The
Company is also subject to federal and state child labor laws which, among other
things, prohibit the use of certain “hazardous equipment” by employees younger
than 18 years of age. The Company has not been materially adversely
affected by such laws to date.
The
Company continues to monitor its facilities for compliance with the Americans
with Disabilities Act (“ADA”) in order to conform to its
requirements. Under the ADA, the Company could be required to expend
funds to modify its restaurants to better provide service to, or make reasonable
accommodation for the employment of, disabled persons.
International and
China Divisions. The
Company’s restaurants outside the U.S. are subject to national and local laws
and regulations which are similar to those affecting the Company’s U.S.
restaurants, including laws and regulations concerning labor, health, sanitation
and safety. The restaurants outside the U.S. are also subject to
tariffs and regulations on imported commodities and equipment and laws
regulating foreign investment. International compliance with
environmental requirements has not had a material adverse effect on the
Company’s results of operations, capital expenditures or competitive
position.
Employees
As of
year end 2008, the Company employed approximately 336,000 persons, approximately
85 percent of whom were part-time. Approximately 26 percent of the
Company’s employees are employed in the U.S. The Company believes
that it provides working conditions and compensation that compare favorably with
those of its principal competitors. Most Company employees are paid
on an hourly basis. Some of the Company’s non-U.S. employees are
subject to labor council relationships that vary due to the diverse cultures in
which the Company operates. The Company considers its employee
relations to be good.
(d)
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Financial
Information about Geographic Areas
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Financial
information about our significant geographic areas (U.S., International Division
and China Division) is incorporated herein by reference from Selected Financial
Data in Part II, Item 6, page 22; Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7,
pages 24 through 52; and in the related Consolidated Financial Statements and
footnotes in Part II, Item 8, pages 53 through 106.
(e)
|
Available
Information
|
The
Company makes available through the Investor Relations section of its internet
website at www.yum.com its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after
electronically filing such material with the Securities and Exchange
Commission. Our Corporate Governance Principles and our Code of
Conduct are also located within this section of the website. The
reference to the Company’s website address does not constitute incorporation by
reference of the information contained on the website and should not be
considered part of this document. These documents, as well as our SEC
filings, are available in print to any shareholder who requests a copy from our
Investor Relations Department.
You
should carefully review the risks described below as they identify important
factors that could cause our actual results to differ materially from those in
our forward-looking statements and historical trends. These risks are
not exclusive, and our business and our results of operations could also be
affected by other risks that we cannot anticipate or that we do not
consider material based on currently available information.
Food
safety and food-borne illness concerns may have an adverse effect on our
business.
Food
safety is a top priority, and we dedicate substantial resources to ensure that
our customers enjoy safe, quality food products. However, food-borne
illnesses, such as E. coli, hepatitis A, trichinosis or salmonella, and food
safety issues have occurred in the past (see Note 21, Contingencies, to the
Consolidated Financial Statements included in Part II, Item 8 of this report for
a discussion of litigation arising from an E. coli outbreak allegedly linked to
a number of Taco Bell restaurants in the Northeast U.S. during November/December
2006), and could occur in the future. Any report or publicity linking
us or one of our Concepts to instances of food-borne illness or other food
safety issues, including food tampering, could adversely affect our Concepts’
brands and reputations as well as our revenues and profits. If
our customers become ill from food-borne illnesses, we could also be forced to
temporarily close some restaurants. In addition, instances of
food-borne illness or food tampering occurring solely at restaurants of
competitors could adversely affect our sales as a result of negative publicity
about the foodservice industry generally. Food-borne illness or food
tampering could also be caused by food suppliers or distributors and, as a
result, could be out of our control. The occurrence of food-borne
illnesses or food safety issues could also adversely affect the price and
availability of affected ingredients, which could result in disruptions in our
supply chain and/or lower margins for us and our franchisees.
Furthermore,
like other companies in the restaurant industry, some of our products may
contain genetically engineered food products, and our U.S. suppliers are
currently not required to label their products as such. Increased
regulation of and opposition to genetically engineered food products have on
occasion and may in the future force the use of alternative sources at increased
costs and lower margins for us and our franchisees.
Our
China operations subject us to risks that could negatively affect our
business.
A
significant and growing portion of our restaurants are located in
China. As a result, our financial results are increasingly dependent
on our results in China, and our business is increasingly exposed to risks
there. These risks include changes in economic conditions (including
wage and commodity inflation, consumer spending and unemployment levels), tax
rates and laws and consumer preferences, as well as changes in the regulatory
environment and increased competition. In addition, our results of
operations in China and the value of our Chinese assets are affected by
fluctuations in currency exchange rates, which may favorably or adversely affect
reported earnings. There can be no assurance as to the future effect
of any such changes on our results of operations, financial condition or cash
flows.
In
addition, any significant or prolonged deterioration in U.S.-China
relations could adversely affect our China business. Many of the
risks and uncertainties of doing business in China are solely within the control
of the Chinese government. China’s government regulates the scope of
our foreign investments and business conducted within China. Although
management believes it has structured our China operations to comply with local
laws, there are uncertainties regarding the interpretation and application of
laws and regulations and the enforceability of intellectual property and
contract rights in China. If we were unable to enforce our
intellectual property or contract rights in China, our business would be
adversely impacted.
Our
other foreign operations subject us to risks that could negatively affect our
business.
A
significant portion of our restaurants are operated in foreign countries and
territories outside of the U.S. and China, and we intend to continue expansion
of our international operations. As a result, our business is
increasingly exposed to risks inherent in foreign operations. These
risks, which can vary substantially by market, include political instability,
corruption, social and ethnic unrest, changes in economic conditions (including
wage and commodity inflation, consumer spending and unemployment levels), the
regulatory environment, tax rates and laws and consumer preferences as well as
changes in the laws and policies that govern foreign investment in countries
where our restaurants are operated.
In
addition, our results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates, which may favorably
or adversely affect reported earnings. More specifically, an increase
in the value of the United States Dollar relative to other currencies, such as
the Australian Dollar, the British Pound, the Canadian Dollar and the Euro,
could have an adverse effect on our reported earnings. There can be
no assurance as to the future effect of any such changes on our results of
operations, financial condition or cash flows.
Changes
in commodity and other operating costs could adversely affect our results of
operations.
Any
increase in certain commodity prices, such as food, energy and supply
costs, could adversely affect our operating results. Because we
provide moderately priced food, our ability to pass along commodity price
increases to our customers may be limited. Significant increases in
gasoline prices could also result in a decrease of customer traffic at our
restaurants or the imposition of fuel surcharges by our distributors, each of
which could adversely affect our business. Our operating expenses
also include employee benefits and insurance costs (including workers’
compensation, general liability, property and health) which may increase over
time.
Shortages
or interruptions in the availability and delivery of food and other supplies may
increase costs or reduce revenues.
We are
dependent upon third parties to make frequent deliveries of food products and
supplies that meet our specifications at competitive
prices. Shortages or interruptions in the supply of food items and
other supplies to our restaurants could adversely affect the availability,
quality and cost of items we buy and the operations of our
restaurants. Such shortages or disruptions could be caused by
inclement weather, natural disasters such as floods, drought and hurricanes,
increased demand, problems in production or distribution, the inability of our
vendors to obtain credit, food safety warnings or advisories or the prospect of
such pronouncements (such as reports during 2008 relating to tomatoes and
jalapenos in the U.S.), or other conditions beyond our control. A
shortage or interruption in the availability of certain food products or
supplies could increase our costs and limit the availability of products
critical to our restaurant operations. In addition, if a principal
distributor for us and/or our franchisees fails to meet its service requirements
for any reason, it could lead to a disruption of service or supply until a new
distributor is engaged, which could have an adverse effect on our
business.
Our operating results are closely tied to the success
of our Concepts’ franchisees.
We
receive significant revenues in the form of royalties from our
franchisees. Because a significant and growing portion of our
restaurants are run by franchisees, the success of our business is increasingly
dependent upon the operational and financial success of our
franchisees. While our franchise agreements set forth certain
operational standards and guidelines, we have limited control over how our
franchisees’ businesses are run, and any significant inability of our
franchisees to operate successfully could adversely affect our operating results
through decreased royalty payments. For example, franchisees may not
have access to the financial or management resources that they need to open or
continue operating the restaurants contemplated by their franchise agreements
with us. In addition, franchisees may not be able to find suitable
sites on which to develop new restaurants or negotiate acceptable lease or
purchase terms for the sites, obtain the necessary permits and government
approvals or meet construction schedules.
In
addition, although in certain instances we require franchisees to meet certain
financial criteria on an ongoing basis or in order to grow, franchisees' levels
of indebtedness are generally not within our control. If our
franchisees incur too much debt or if economic or sales trends deteriorate such
that they are unable to repay existing debt, it could result in financial
distress or even possible insolvency or bankruptcy. If a significant
number of our franchisees become financially distressed, this could harm our
operating results through reduced or delayed royalty payments or increased rent
obligations for leased properties on which we are contingently
liable.
Our
results and financial condition could be affected by the success of our
refranchising program.
We are in
the process of a refranchising program, which could reduce the percentage of
company ownership in the U.S., excluding licensees, from approximately 19% at
the end of 2008 to potentially less than 10% by the end of 2010. Our
ability to execute this plan will depend on, among other things, whether we
receive fair offers for our restaurants, whether we can find viable and suitable
buyers and how quickly we can agree to terms with potential
buyers. In addition, some lenders have increased lending requirements
or otherwise reduced the amount of loans they are making generally or to the
restaurant industry in particular. To the extent potential buyers are
unable to obtain financing at attractive prices – or unable to obtain financing
at any price – our refranchising program could be delayed.
Once
executed, the success of the refranchising program will depend on, among other
things, selection of buyers who can effectively operate our restaurants, our
ability to limit our exposure to contingent liabilities in connection with the
sale of our restaurants, and whether the resulting ownership mix of
Company-operated and franchisee-operated restaurants allows us to meet our
financial objectives. In addition, refranchising activity could vary
significantly from quarter-to-quarter and year-to-year and that volatility could
impact our reported earnings.
We
could be party to litigation that could adversely affect us by increasing our
expenses or subjecting us to significant money damages and other
remedies.
Like
others in the restaurant industry, we are susceptible to claims filed by
customers alleging that we are responsible for an illness or injury they
suffered at or after a visit to our restaurants. Regardless of
whether any claims against us are valid, or whether we are ultimately held
liable, such litigation may be expensive to defend and may divert time and money
away from our operations and hurt our performance. A judgment for
significant monetary damages in excess of any insurance coverage could
adversely affect our financial condition or results of
operations. Any adverse publicity resulting from these allegations
may also adversely affect our reputation, which in turn could adversely affect
our results.
In
addition, the restaurant industry has been subject to claims that relate to the
nutritional content of food products, as well as claims that the menus and
practices of restaurant chains have led to the obesity of some
customers. We may also be subject to this type of claim in the future
and, even if we are not, publicity about these matters (particularly directed at
the quick service and fast-casual segments of the industry) may harm our
reputation and adversely affect our results.
Health
concerns arising from outbreaks of Avian Flu may have an adverse effect on our
business.
Asian and
European countries have experienced outbreaks of Avian Flu, and some
commentators have hypothesized that further outbreaks could occur and reach
pandemic levels. While fully-cooked chicken has been determined to be
safe for consumption, and while we have taken and continue to take measures to
prepare for and minimize the effect of these outbreaks on our business, future
outbreaks could adversely affect the price and availability of poultry and cause
customers to eat less chicken. In addition, outbreaks on a widespread
basis could also affect our ability to attract and retain
employees.
We
may not attain our target development goals.
Our
growth strategy depends in large part on our ability to increase our net
restaurant count in markets outside the United States. The successful
development of new units will depend in large part on our ability and the
ability of our franchisees to open new restaurants, upgrade existing
restaurants, and to operate these restaurants on a profitable
basis. We cannot guarantee that we, or our franchisees, will be able
to achieve our expansion goals or that new, upgraded or converted restaurants
will be operated profitably. Further, there is no assurance that any
restaurant we open or convert will produce operating results similar to those of
our existing restaurants. Other risks which could impact our ability
to increase our net restaurant count include prevailing economic conditions and
our, or our franchisees’, ability to obtain suitable restaurant locations,
obtain required permits and approvals and hire and train qualified
personnel.
Our
franchisees also frequently depend upon financing from banks and other financial
institutions in order to construct and open new
restaurants. Disruptions in credit markets may make financing more
difficult or expensive to obtain. If it becomes more difficult or
expensive for our franchisees to obtain financing to develop new restaurants,
our planned growth could slow and our future revenue and cash flows could be
adversely impacted.
Our
business may be adversely impacted by economic conditions.
Our
results of operations are dependent upon discretionary spending by consumers,
which may be affected by general economic conditions and the current global
financial crisis. Worldwide economic conditions and consumer spending
have recently deteriorated significantly and may remain depressed for some
time. Some of the factors that are having an impact on discretionary
consumer spending include increased unemployment, reductions in disposable
income as a result of recent severe market declines and declines in residential
real estate values, credit availability and consumer
confidence. These and other macroeconomic factors could have an
adverse effect on our sales and development plans, which could harm our
financial condition and operating results.
In
addition, the current financial crisis has resulted in diminished liquidity and
credit availability, and the recent or future turmoil in the financial markets
could make it more difficult for us to refinance our existing indebtedness (if
necessary) or incur additional indebtedness and could impact the ability of
banks to honor draws on our existing credit facilities.
The
current credit crisis is also having a significant negative impact on businesses
around the world, and the impact of this crisis on our suppliers cannot be
predicted. The inability of suppliers to access financing, or the
insolvency of suppliers, could lead to disruptions in our supply chain which
could adversely impact our sales and financial condition.
Changes
in governmental regulations may adversely affect our business
operations.
We and
our franchisees are subject to various federal, state and local regulations.
Each of our restaurants is subject to state and local licensing and
regulation by health, sanitation, food, workplace safety, fire and other
agencies. Requirements of local authorities with respect to zoning,
land use, licensing, permitting and environmental standards could delay or
prevent development of new restaurants in particular locations. In
addition, we face risks arising from compliance with and enforcement of
increasingly complex federal and state immigration laws and
regulations.
We are
subject to the Americans with Disabilities Act and similar state laws that give
civil rights protections to individuals with disabilities in the context of
employment, public accommodations and other areas. The expenses
associated with any facilities modifications required by these laws could be
material. Our operations are also subject to the U.S. Fair Labor
Standards Act, which governs such matters as minimum wages, overtime and other
working conditions, family leave mandates and a variety of similar state laws
that govern these and other employment law matters. The compliance
costs associated with these laws and evolving regulations could be substantial,
and any failure or alleged failure to comply with these laws could lead to
litigation, which could adversely affect our financial condition.
We also
face risks from new or changing laws and regulations relating to nutritional
content, nutritional labeling, product safety and menu labeling
regulation. Compliance with these laws and regulations can be costly
and can increase our exposure to litigation or governmental investigations or
proceedings. New or changing laws and regulations relating to union
organizing rights and activities may impact our operations at the restaurant
level and increase our cost of labor. In addition, we are subject to
laws relating to information security, privacy, cashless payments and consumer
credit, protection and fraud, and any failure or perceived failure to comply
with those laws could harm our reputation or lead to litigation, which could
adversely affect our financial condition.
The
retail food industry in which we operate is highly competitive.
The
retail food industry in which we operate is highly competitive with respect to
price and quality of food products, new product development,
price, advertising levels and promotional initiatives, customer service,
reputation, restaurant location, and attractiveness and maintenance of
properties. If consumer preferences change, or our restaurants are
unable to compete successfully with other retail food outlets in new and
existing markets, our business could be adversely affected. In the
retail food industry, labor is a primary operating cost
component. Competition for qualified employees could also require us
to pay higher wages to attract a sufficient number of employees, which could
adversely impact our margins.
Item
1B.
|
Unresolved
Staff Comments.
|
The
Company has received no written comments regarding its periodic or current
reports from the staff of the Securities and Exchange Commission that were
issued 180 days or more preceding the end of its 2008 fiscal year and that
remain unresolved.
As of
year end 2008, the Company owned more than 1,500 units and leased land, building
or both in more than 5,800 units worldwide. These units are further
detailed as follows:
·
|
The
Company owned more than 1,100 units and leased land, building or both in
more than 2,100 units in the U.S.
|
·
|
The
International Division owned more than 400 units and leased land, building
or both in more than 1,100 units.
|
·
|
The
China Division leased land, building or both in more than 2,600
units.
|
Company
restaurants in the U.S. which are not owned are generally leased for initial
terms of 15 or 20 years and generally have renewal options; however, Pizza Hut
delivery/carryout units in the U.S. generally are leased for significantly
shorter initial terms with short renewal options. Company restaurants
in the International Division which are not owned have initial lease terms and
renewal options that vary by country. Company restaurants in the
China Division are generally leased for initial terms of 10 to 15 years and
generally do not have renewal options. Historically, the Company has
either been able to renew its China Division leases or enter into competitive
leases at replacement sites without significant impact on our operations, cash
flows or capital resources. The Company currently does not have a
significant number of units that it leases or sub-leases to
franchisees.
Pizza Hut
and YRI lease their corporate headquarters and a research facility in Dallas,
Texas. Taco Bell leases its corporate headquarters and research facility in
Irvine, California. YRI owns KFC’s, LJS’s, A&W’s and YUM’s corporate
headquarters and a research facility in Louisville, Kentucky. In
addition, YUM leases office facilities for certain support groups in Louisville,
Kentucky. The China Division leases their corporate headquarters and
research facilities in Shanghai, China. Additional information about
the Company’s properties is included in the Consolidated Financial Statements
and footnotes in Part II, Item 8, pages 53 through 106.
Item
3.
|
Legal
Proceedings.
|
The
Company is subject to various claims and contingencies related to lawsuits, real
estate, environmental and other matters arising in the normal course of
business. The Company believes that the ultimate liability, if any,
in excess of amounts already provided for these matters in the Consolidated
Financial Statements, is not likely to have a material adverse effect on the
Company’s annual results of operations, financial condition or cash
flows. The following is a brief description of the more significant
of the categories of lawsuits and other matters we face from time to
time. Descriptions of specific claims and contingencies appear in
Note 21, Contingencies, to the Consolidated Financial Statements included in
Part II, Item 8.
Franchising
A
substantial number of the restaurants of each of the Concepts are franchised to
independent businesses operating under arrangements with the
Concepts. In the course of the franchise relationship, occasional
disputes arise between the Company and its Concepts’ franchisees relating to a
broad range of subjects, including, without limitation, quality, service, and
cleanliness issues, contentions regarding grants, transfers or terminations of
franchises, territorial disputes and delinquent payments.
Suppliers
The
Company, through approved distributors, purchases food, paper, equipment and
other restaurant supplies from numerous independent suppliers throughout the
world. These suppliers are required to meet and maintain compliance
with the Company’s standards and specifications. On occasion,
disputes arise between the Company and its suppliers on a number of issues,
including, but not limited to, compliance with product specifications and terms
of procurement and service requirements.
Employees
At any
given time, the Company or its affiliates employ hundreds of thousands of
persons, primarily in its restaurants. In addition, each year thousands of
persons seek employment with the Company and its restaurants. From
time to time, disputes arise regarding employee hiring, compensation,
termination and promotion practices.
Like
other retail employers, the Company has been faced in a few states with
allegations of purported class-wide wage and hour and other labor law
violations.
Customers
The
Company’s restaurants serve a large and diverse cross-section of the public and
in the course of serving so many people, disputes arise regarding products,
service, accidents and other matters typical of large restaurant systems such as
those of the Company.
Intellectual
Property
The
Company has registered trademarks and service marks, many of which are of
material importance to the Company’s business. From time to time, the
Company may become involved in litigation to defend and protect its use and
ownership of its registered marks.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a vote of shareholders during the fourth quarter of
2008.
Executive
Officers of the Registrant
The
executive officers of the Company as of February 11, 2009, and their ages and
current positions as of that date are as follows:
David C. Novak, 56, is
Chairman of the Board, Chief Executive Officer and President of
YUM. He has served in this position since January
2001. From December 1999 to January 2001, Mr. Novak served as
Vice Chairman of the Board, Chief Executive Officer and President of YUM. From
October 1997 to December 1999, he served as Vice Chairman and President of
YUM. Mr. Novak previously served as Group President and Chief
Executive Officer, KFC and Pizza Hut from August 1996 to July 1997.
Richard T. Carucci, 51, is
Chief Financial Officer for YUM. He has served in this position since
March 2005. From October 2004 to February 2005, he served as Senior Vice
President, Finance and Chief Financial Officer – Designate of YUM. From May 2003
to October 2004, he served as Executive Vice President and Chief Development
Officer of YRI. From November 2002 to May 2003, he served as Senior
Vice President for YRI and also assisted Pizza Hut in asset strategy
development. From November 1999 to July 2002, he was Chief Financial
Officer of YRI.
Christian L. Campbell,
58, is Senior Vice
President, General Counsel, Secretary and Chief Franchise Policy Officer for
YUM. He has served as Senior Vice President, General Counsel and
Secretary since September 1997. In January 2003, his title and job
responsibilities were expanded to include Chief Franchise Policy
Officer.
Jonathan D. Blum, 50, is
Senior Vice President Public Affairs for YUM. He has served in this
position since July 1997.
Anne P. Byerlein, 50, is Chief
People Officer for YUM. She has served in this position since
December 2002. From October 1997 to December 2002, she was Vice
President of Human Resources of YUM. From October 2000 to December
2002, she also served as KFC’s Chief People Officer.
Ted F. Knopf, 57, is Senior Vice President
Finance and Corporate Controller of YUM. He has served in this
position since April 2005. From September 2001 to April 2005,
Mr. Knopf served as Vice President of Corporate Planning and Strategy of
YUM.
Emil J. Brolick, 61, is Chief
Operating Officer for YUM. He has served as Chief Operating Officer
since June 2008. Prior to this position, he served as President of
U.S. Brand Building, a position he held from December 2006 to June
2008. Prior to that, he served as President and Chief Concept Officer
of Taco Bell, a position he held from July 2000 to November
2006. Prior to joining Taco Bell, Mr. Brolick served as Senior
Vice President of New Product Marketing, Research & Strategic Planning for
Wendy’s International, Inc. from August 1995 to July 2000.
Scott O. Bergren, 62, is President and Chief
Concept Officer of Pizza Hut. He has served in this position since
November 2006. Prior to this position, he served as Chief Marketing
Officer of KFC and YUM from August 2003 to November 2006. From
September 2002 until July 2003, he was the Executive Vice President, Marketing
and Chief Concept Officer for YUM Restaurants International,
Inc. From April 2002 until September 2002, he was Senior Vice
President New Concepts for YUM Restaurants International, Inc. From
June 1995 until 2002, he was Chief Executive Officer of Chevy’s Mexican
Restaurants, Inc.
Greg Creed, 51, is President
and Chief Concept Officer of Taco Bell. He has served in this position since
December 2006. Prior to this position, Mr. Creed served as Chief
Operating Officer of YUM from December 2005 to November
2006. Mr. Creed served as Chief Marketing Officer of Taco Bell
from July 2001 to October 2005.
Roger Eaton, 48, is President
and Chief Concept Officer of KFC. He has served in this position
since June 2008. From April 2008 to June 2008, he served as Chief
Operating and Development Officer of YUM. From January 2008 until
April 2008, he served as Chief Operating and Development Officer –
Designate. From 2000 until January 2008, he was Senior Vice
President/Managing Director of YUM! Restaurants International South
Pacific.
Graham D. Allan, 53, is the President of YRI. He
has served in this position since November 2003. Immediately prior to
this position he served as Executive Vice President of YRI. From
December 2000 to May 2003, Mr. Allan was the Managing Director of
YRI.
Jing-Shyh S. Su, 56, is
Vice-Chairman of the Board and President of YUM Restaurants China. He
has served as Vice- Chairman of the Board since March 2008, and he has served as
President of YUM Restaurants China since 1997. Prior to this, he was
the Vice President of North Asia for both KFC and Pizza Hut. Mr. Su
started his career with YUM in 1989 as KFC International’s Director of Marketing
for the North Pacific area.
Executive
officers are elected by and serve at the discretion of the Board of
Directors.
PART
II
Item
5.
|
Market
for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
The
Company’s Common Stock trades under the symbol YUM and is listed on the New York
Stock Exchange (“NYSE”). The following sets forth the high and low
NYSE composite closing sale prices by quarter for the Company’s Common Stock and
dividends per common share. All per share and share amounts herein
have been adjusted for the two-for-one stock split on June 26,
2007.
2008
|
Quarter
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
39.00
|
|
$
|
33.12
|
|
|
|
$
|
0.15
|
|
|
|
$
|
0.15
|
|
Second
|
|
41.34
|
|
|
36.85
|
|
|
|
|
0.19
|
|
|
|
|
0.15
|
|
Third
|
|
38.68
|
|
|
33.78
|
|
|
|
|
—
|
|
|
|
|
0.19
|
|
Fourth
|
|
39.23
|
|
|
22.25
|
|
|
|
|
0.38
|
|
|
|
|
0.19
|
|
2007
|
Quarter
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
31.03
|
|
$
|
27.69
|
|
|
|
$
|
—
|
|
|
|
$
|
0.075
|
|
Second
|
|
34.37
|
|
|
28.85
|
|
|
|
|
0.15
|
|
|
|
|
0.15
|
|
Third
|
|
34.80
|
|
|
29.62
|
|
|
|
|
—
|
|
|
|
|
0.15
|
|
Fourth
|
|
40.27
|
|
|
31.45
|
|
|
|
|
0.30
|
|
|
|
|
0.15
|
|
In 2007,
the Company declared three cash dividends of $0.15 per share of Common Stock,
one of which was paid in 2008. In 2008, the Company declared one cash
dividend of $0.15 per share of Common Stock and three cash dividends of $0.19
per share of Common Stock, one of which had a distribution date of February 6,
2009. The Company is targeting an annual dividend payout ratio of 35%
to 40% of net income.
As of
February 11, 2009, there were approximately 81,000 registered holders of record
of the Company’s Common Stock.
The
Company had no sales of unregistered securities during 2008, 2007 or
2006.
Issuer Purchases of Equity
Securities
The
following table provides information as of December 27, 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
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/7/08
– 10/4/08
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
563,376,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/5/08
– 11/1/08
|
|
3,269,400
|
|
|
$
|
27.08
|
|
|
3,269,400
|
|
|
$
|
474,840,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/2/08
– 11/29/08
|
|
1,089,500
|
|
|
$
|
24.96
|
|
|
1,089,500
|
|
|
$
|
447,649,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/30/08
– 12/27/08
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
447,649,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
4,358,900
|
|
|
$
|
26.55
|
|
|
4,358,900
|
|
|
$
|
447,649,895
|
In
January 2008, our Board of Directors authorized additional share repurchases of
up to an additional $1.25 billion (excluding applicable transaction fees) of our
outstanding Common Stock. For the quarter ended December 27, 2008,
approximately 4.4 million shares were repurchased under this
authorization. This authorization expired in January
2009.
Stock Performance
Graph
This
graph compares the cumulative total return of our Common Stock to the cumulative
total return of the S&P 500 Stock Index and the S&P 500 Consumer
Discretionary Sector, a peer group that includes YUM, for the period from
December 26, 2003 to December 26, 2008, the last trading day of our 2008 fiscal
year. The graph assumes that the value of the investment in our
Common Stock and each index was $100 at December 26, 2003 and that all dividends
were reinvested.
|
|
|
12/26/03
|
|
12/23/04
|
|
12/30/05
|
|
12/29/06
|
|
12/28/07
|
|
12/27/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YUM!
|
|
$ 100
|
|
$ 138
|
|
$ 141
|
|
$ 179
|
|
$ 239
|
|
$ 191
|
|
|
S&P
500
|
|
$ 100
|
|
$ 112
|
|
$ 118
|
|
$ 137
|
|
$ 145
|
|
$ 88
|
|
|
S&P
Consumer Discretionary
|
|
$ 100
|
|
$ 113
|
|
$ 108
|
|
$ 128
|
|
$ 111
|
|
$ 70
|
|
Item
6.
|
Selected
Financial Data.
|
Selected
Financial Data
YUM!
Brands, Inc. and Subsidiaries
(in
millions, except per share and unit amounts)
|
Fiscal
Year
|
|
2008
|
2007
|
2006
|
2005
|
2004
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,843
|
|
$
|
9,100
|
|
$
|
8,365
|
|
$
|
8,225
|
|
$
|
7,992
|
|
Franchise
and license fees
|
|
1,436
|
|
|
1,316
|
|
|
1,196
|
|
|
1,124
|
|
|
1,019
|
|
Total
|
|
11,279
|
|
|
10,416
|
|
|
9,561
|
|
|
9,349
|
|
|
9,011
|
|
Closures
and impairment income (expenses)(a)
|
|
(43
|
)
|
|
(35
|
)
|
|
(59
|
)
|
|
(62
|
)
|
|
(38
|
)
|
Refranchising
gain (loss)(a)
|
|
5
|
|
|
11
|
|
|
24
|
|
|
43
|
|
|
12
|
|
Operating
Profit(b)
|
|
1,506
|
|
|
1,357
|
|
|
1,262
|
|
|
1,153
|
|
|
1,155
|
|
Interest
expense, net
|
|
226
|
|
|
166
|
|
|
154
|
|
|
127
|
|
|
129
|
|
Income
before income taxes
|
|
1,280
|
|
|
1,191
|
|
|
1,108
|
|
|
1,026
|
|
|
1,026
|
|
Net
income
|
|
964
|
|
|
909
|
|
|
824
|
|
|
762
|
|
|
740
|
|
Basic
earnings per common share(c)
|
|
2.03
|
|
|
1.74
|
|
|
1.51
|
|
|
1.33
|
|
|
1.27
|
|
Diluted
earnings per common share(c)
|
|
1.96
|
|
|
1.68
|
|
|
1.46
|
|
|
1.28
|
|
|
1.21
|
|
Cash
Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided
by operating activities
|
$
|
1,521
|
|
$
|
1,551
|
|
$
|
1,257
|
|
$
|
1,233
|
|
$
|
1,186
|
|
Capital
spending, excluding acquisitions
|
|
935
|
|
|
726
|
|
|
572
|
|
|
609
|
|
|
645
|
|
Proceeds
from refranchising of restaurants
|
|
266
|
|
|
117
|
|
|
257
|
|
|
145
|
|
|
140
|
|
Repurchase
shares of Common Stock
|
|
1,628
|
|
|
1,410
|
|
|
983
|
|
|
1,056
|
|
|
569
|
|
Dividends
paid on Common Stock
|
|
322
|
|
|
273
|
|
|
144
|
|
|
123
|
|
|
58
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
6,527
|
|
$
|
7,188
|
|
$
|
6,368
|
|
$
|
5,797
|
|
$
|
5,696
|
|
Long-term
debt
|
|
3,564
|
|
|
2,924
|
|
|
2,045
|
|
|
1,649
|
|
|
1,731
|
|
Total
debt
|
|
3,589
|
|
|
3,212
|
|
|
2,272
|
|
|
1,860
|
|
|
1,742
|
|
Other
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores at year end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
7,568
|
|
|
7,625
|
|
|
7,736
|
|
|
7,587
|
|
|
7,743
|
|
Unconsolidated
Affiliates
|
|
645
|
|
|
1,314
|
|
|
1,206
|
|
|
1,648
|
|
|
1,662
|
|
Franchisees
|
|
25,911
|
|
|
24,297
|
|
|
23,516
|
|
|
22,666
|
|
|
21,858
|
|
Licensees
|
|
2,168
|
|
|
2,109
|
|
|
2,137
|
|
|
2,376
|
|
|
2,345
|
|
System
|
|
36,292
|
|
|
35,345
|
|
|
34,595
|
|
|
34,277
|
|
|
33,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
same store sales growth(d)
|
|
2%
|
|
|
—
|
|
|
1%
|
|
|
3%
|
|
|
3%
|
|
YRI
system sales growth(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
10%
|
|
|
15%
|
|
|
7%
|
|
|
9%
|
|
|
14%
|
|
Local
currency(e)
|
|
8%
|
|
|
10%
|
|
|
7%
|
|
|
6%
|
|
|
6%
|
|
China
Division system sales growth(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
31%
|
|
|
31%
|
|
|
26%
|
|
|
13%
|
|
|
23%
|
|
Local
currency(e)
|
|
20%
|
|
|
24%
|
|
|
23%
|
|
|
11%
|
|
|
23%
|
|
Shares
outstanding at year end(c)
|
|
459
|
|
|
499
|
|
|
530
|
|
|
556
|
|
|
581
|
|
Cash
dividends declared per Common Stock(c)
|
$
|
0.72
|
|
$
|
0.45
|
|
$
|
0.43
|
|
$
|
0.22
|
|
$
|
0.15
|
|
Market
price per share at year end (c)
|
$
|
30.28
|
|
$
|
38.54
|
|
$
|
29.40
|
|
$
|
23.44
|
|
$
|
23.14
|
|
Fiscal
years 2008, 2007, 2006 and 2004 include 52 weeks and fiscal year 2005 includes
53 weeks.
Fiscal
years 2008, 2007, 2006 and 2005 include the impact of the adoption of Statement
of Financial Accounting Standards (“SFAS”) No. 123R (Revised 2004), “Share Based
Payment,” (“SFAS 123R”). If SFAS 123R had been effective for 2004
both reported basic and diluted earnings per share would have decreased $0.06
consistent with pro-forma information that was disclosed previous to that
date.
The
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto.
(a)
|
See
Note 5 to the Consolidated Financial Statements for a description of
Closures and Impairment Expenses and Refranchising Gain (Loss) in 2008,
2007 and 2006.
|
|
|
(b)
|
Fiscal
year 2008 included a gain of approximately $100 million related to the
sale of our interest in our unconsolidated affiliate in Japan and $61
million expense related to U.S. business transformation measures as
discussed in the Significant Gains and Charges section of the
MD&A. Fiscal year 2004 included $30 million of income
related to Wrench litigation and AmeriServe. The Wrench
litigation relates to a lawsuit against Taco Bell Corporation, which was
settled in 2004, and the income was a result of financial recoveries from
settlements with insurance carriers. Amounts related to
AmeriServe are the result of cash recoveries related to the AmeriServe
bankruptcy reorganization process for which we incurred significant
expense in years prior to those presented here (primarily
2000). AmeriServe was formerly our primary distributor of food
and paper supplies to our U.S. stores.
|
|
|
(c)
|
Adjusted
for the two for one stock split on June 26, 2007. See Note 3 to
the Consolidated Financial Statements.
|
|
|
(d)
|
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 we present on the
Consolidated Statements of Income; however, the 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 our revenue drivers, Company and franchise
same store sales as well as net unit development. Same store
sales growth includes the results of all restaurants that have been open
one year or more. Additionally, we began reporting information
for our international business in two separate operating segments (the
International Division and the China Division) in 2005 as a result of
changes in our management structure. Segment information for
periods prior to 2005 has been restated to reflect this
reporting.
|
|
|
(e)
|
Local
currency represents the percentage change 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.
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following Management’s Discussion and Analysis (“MD&A”), should be read in
conjunction with the Consolidated Financial Statements on pages 56 through 59
(“Financial Statements”) and the Forward-Looking Statements on page 2 and the
Risk Factors set forth in Item 1A. 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 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 is the estimated growth in sales of all restaurants that have
been open one year or more.
|
|
|
·
|
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
revenue.
|
All Note
references herein refer to the Notes to the Financial Statements on pages 60
through 106. 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
3).
Description of
Business
YUM is
the world’s largest restaurant company in terms of system restaurants with over
36,000 restaurants in more than 110 countries and territories operating under
the KFC, Pizza Hut, Taco Bell, Long John Silver’s or 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
chicken, pizza, Mexican-style food and quick-service seafood categories,
respectively. Of the over 36,000 restaurants, 21% are operated by the
Company, 73% are operated by franchisees and unconsolidated affiliates and 6%
are operated by licensees.
YUM’s
business consists of three reporting segments: United States, YUM
Restaurants International (“YRI” or “International Division”) and the China
Division. The China Division includes mainland China (“China”),
Thailand and KFC Taiwan and YRI includes the remainder of our international
operations. The China Division and YRI have been experiencing
dramatic growth and now represent nearly 60% 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 new unit
development 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 900 new restaurants in 2008 in the
Company’s International Division, representing 9 straight years of opening over
700 restaurants. The International Division generated $528 million in
Operating Profit in 2008 up from $186 million in 1998. The Company
expects to continue to experience strong growth by building out existing markets
and growing in new markets including India, France and Russia. Our
ongoing earnings growth model includes annual operating profit growth of 10%
driven by new unit development and same store sales growth for the International
Division. New unit development is expected to contribute to system
sales growth of at least 6% 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 more than 4,600 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, 2008 was the fourth 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.
Details
of our 2009 Guidance by division can be found online at http://www.yum.com/investors/news.asp
and http://investors.yum.com/phoenix.zhtml?c=117941&p=irol-newsEarnings.
The
fourth quarter earnings release included preliminary and unaudited Consolidated
Statements of Cash Flows and Consolidated Balance Sheets, which have been
updated in this Form 10-K.
2008
Highlights
·
|
Worldwide
system sales growth of 7%, excluding foreign currency
translation
|
|
|
·
|
Worldwide
same store sales growth of 3%
|
|
|
·
|
Record
international development of 1,495 new units
|
|
|
·
|
Worldwide
Operating Profit growth of 11%, including a 3%, or $39 million, positive
impact as described in the Significant Gains and Charges section of this
MD&A
|
|
|
·
|
Operating
Profit growth of 25% in the China Division and 10% in the YRI Division,
partially offset by a 6% decline in the U.S.
|
|
|
·
|
Record
shareholder payout of nearly $2 billion through share buybacks and
dividends, with share buybacks reducing average diluted share counts by
9%
|
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 years
ended December 27, 2008, December 29, 2007 and December 30, 2006 and could
impact comparability with our results in 2009.
U.S. Restaurant
Profit
Our U.S.
restaurant margin as a percentage of sales decreased 0.8 percentage points in
2008 and decreased 1.3 percentage points in 2007. These decreases
were the primary drivers in the U.S. Operating Profit declines of 6% and 3% for
the years ended December 27, 2008 and December 29, 2007,
respectively.
Restaurant
profit in dollar terms was negatively impacted by $119 million of commodity
inflation for the full year 2008. Additionally, restaurant profit in
2008 was negatively impacted by $30 million due to higher property and casualty
self insurance expense, exclusive of the estimated reduction due to refranchised
stores, as we lapped favorability in 2007. These decreases were
partially offset by Company same store sales growth of 3% resulting from pricing
actions we have taken.
In 2007,
restaurant profit was negatively impacted versus 2006 by Company same store
sales declines of 3% (primarily due to Taco Bell) and $44 million of commodity
inflation. This unfavorability was partially offset by $27 million of
lower self-insured property and casualty insurance expense, exclusive of the
estimated reduction due to refranchised stores, driven by improved loss
trends.
We
anticipate that the U.S. restaurant margin as a percentage of sales will improve
approximately 1% for the full year 2009 as a result of pricing actions we have
taken and the moderation of commodity inflation.
China Restaurant
Profit
China
Division restaurant margin as a percentage of sales was 18.4%, 20.1% and 20.4%
for 2008, 2007 and 2006, respectively. The declines in 2008 and 2007
were driven by commodity inflation, primarily chicken, of approximately $78
million and $34 million, respectively, and higher labor costs. The
decreases were partially offset by the impact of same store sales growth on
restaurant margin. In the China Division, we expect that commodity
inflation will moderate as 2009 progresses and restaurant margin will be at
least flat versus 2008.
Impact of Foreign Currency
Translation on Operating Profit
Changes
in foreign currency exchange rates positively impacted the translation of our
foreign currency denominated Operating Profit in our International and China
Divisions by $9 million and $41 million, respectively, for the year ended
December 27, 2008 and $24 million and $19 million, respectively, for the year
ended December 29, 2007. In 2009, we currently expect foreign
currency translation to have a significant negative impact on our reported
International Division Operating Profit and no significant impact on our
reported China Division Operating Profit. Given the nature and
volatility of the foreign currency markets the full year forecasted foreign
currency impact is difficult to quantify. However, for the first
quarter of 2009 we currently expect a $20 million negative impact on YRI’s
Operating Profit and a similar impact for the second quarter of
2009.
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 Consolidated Statement of Income for the
year ended December 27, 2008 as a result of our consolidation of this entity was
as follows:
|
Increase
(Decrease)
|
Company sales
|
$
|
299
|
|
|
Company restaurant expenses
|
|
237
|
|
|
Franchise and license fees
|
|
(19
|
)
|
|
General and administrative expenses
|
|
6
|
|
|
Other (income) expense
|
|
(30
|
)
|
|
Operating Profit
|
|
7
|
|
|
The
impact on Other (income) expense includes both the current year minority
interest in pre-tax earnings of the unconsolidated affiliate as well as the
reduction in Other (income) expense that resulted from our share of after-tax
earnings no longer being reported in Other (income) expense. 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 Gains and
Charges
As part
of our plan to transform our U.S. business we took several measures in 2008 that
we do not believe are indicative of our ongoing operations. These
measures (“the U.S. business transformation measures”) included: expansion of
our U.S. refranchising, potentially reducing our Company ownership in the U.S.
to below 10% by 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 5, we
are not including the impacts of these U.S. business transformation measures in
our U.S. segment for performance reporting purposes.
In the
year ended December 27, 2008, we recorded a pre-tax loss of $5 million from
refranchising in the U.S., pre-tax expense related to U.S. G&A productivity
initiatives and realignment of resources of $49 million, and pre-tax expense
related to investments in our U.S. brands of $7 million. The
refranchising losses are more fully discussed in Note 5 and the Store Portfolio
Strategy of the MD&A.
These
losses were more than offset in the year ended December 27, 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 5 for further discussion of this
transaction). This gain was recorded in Other (income) expense in our
Consolidated Statement of Income and was not allocated to any segment for
performance reporting purposes.
In 2009,
we currently expect to refranchise 500 restaurants in the U.S. The
impact of this refranchising on our 2009 results will be determined by the
stores that we are able to sell and the specific prices we are able to obtain
for those stores. In the first quarter of 2009, the expenses related
to the U.S. G&A productivity initiatives and realignment of resources are
expected to total approximately $5 million and investments in our U.S. Brands
are expected to total approximately $25 million.
We
currently anticipate ongoing G&A savings of approximately $70 million,
primarily within the U.S. segment, as a result of the U.S. business
transformation measures we took in 2008 and will take in 2009.
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 year ended December 27, 2008 were unfavorably impacted
by approximately $38 million and $34 million, respectively. The
International Division’s system sales growth and restaurant margin as a
percentage of sales were negatively impacted by approximately 0.3 and 1.2
percentage points, respectively, for the year ended December 27,
2008. For the first quarter of 2009, the negative lapping impact is
expected to be $4 million after which there will be no impact on subsequent
quarters in 2009.
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. These income tax rate changes positively impacted our
2008 net income by approximately $20 million compared to what it would have
otherwise been had no new tax legislation been enacted. The impacts
on our income tax provision and operating profit in the year ended December 29,
2007 were not significant.
Pizza Hut United Kingdom
Acquisition
On September 12, 2006, we
completed the acquisition of the remaining fifty percent ownership interest of
our Pizza Hut United Kingdom (“U.K.”) unconsolidated affiliate from our
partner, paying approximately $178 million in cash, including transaction
costs and net of $9 million of cash assumed. Additionally, we assumed
the full liability, as opposed to our fifty percent share, associated with the
Pizza Hut U.K.’s capital leases of $97 million and short-term borrowings of $23
million. This unconsolidated
affiliate operated more than 500 restaurants in the U.K. at the date of
acquisition.
Prior to
the acquisition, we accounted for our fifty percent ownership interest using the
equity method of accounting. Thus, we reported our fifty percent
share of the net income of the unconsolidated affiliate (after interest expense
and income taxes) as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. Since the date
of the acquisition, we have reported Company sales and the associated restaurant
costs, G&A expense, interest expense and income taxes associated with the
restaurants previously owned by the unconsolidated affiliate in the appropriate
line items of our Consolidated Statement of Income. We no longer
record franchise fee income for the restaurants previously owned by the
unconsolidated affiliate, nor do we report other income under the equity method
of accounting. As a result of this acquisition, Company sales and
restaurant profit increased $576 million and $59 million, respectively,
franchise fees decreased $19 million and G&A expenses increased $33 million
in the year ended December 29, 2007 compared to the year ended December 30,
2006.
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 19%. Consistent with this strategy, 700 Company restaurants in the
U.S. were sold to franchisees in 2008. We recorded net refranchising
losses of $5 million in the U.S. for the year ended December 27, 2008, primarily
due to our refranchising of, or our offers to sell, certain stores or groups of
stores for a price less than their carrying values. We currently
anticipate refranchising 500 units in the U.S. in 2009.
We expect
U.S. refranchising will generate the following financial impacts over the
three-year period (2008-2010): pre-tax sales proceeds of about $1
billion, U.S. restaurant margin improvement of about 2.5 percentage points,
neutral to slightly dilutive to U.S. operating profit and net refranchising
gains of about $150 million.
While it
remains our intent to significantly reduce our ownership levels of Pizza Huts in
the U.K. through refranchising, minimal activity took place in
2008. The timing of future refranchising is currently difficult to
predict given refranchising results to date and the current economic
environment.
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 such 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 that we no longer
incurred as a result of stores that were operated by us for all or some of the
respective previous year and were no longer operated by us as of the last day of
the respective current year.
The
following table summarizes our worldwide refranchising activities:
|
|
2008
|
|
2007
|
|
2006
|
|
Number
of units refranchised
|
|
|
775
|
|
|
|
420
|
|
|
|
622
|
|
|
Refranchising
proceeds, pretax
|
|
$
|
266
|
|
|
$
|
117
|
|
|
$
|
257
|
|
|
Refranchising
net gains, pretax
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
24
|
|
|
The
following table summarizes the impact of refranchising as described
above:
|
2008
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(300
|
)
|
|
|
$
|
(106
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(411
|
)
|
Increased
Franchise and license fees
|
|
16
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
22
|
|
Decrease
in Total revenues
|
$
|
(284
|
)
|
|
|
$
|
(100
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(389
|
)
|
|
2007
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(374
|
)
|
|
|
$
|
(144
|
)
|
|
|
$
|
(3
|
)
|
|
|
$
|
(521
|
)
|
Increased
Franchise and license fees
|
|
20
|
|
|
|
|
9
|
|
|
|
|
—
|
|
|
|
|
29
|
|
Decrease
in Total revenues
|
$
|
(354
|
)
|
|
|
$
|
(135
|
)
|
|
|
$
|
(3
|
)
|
|
|
$
|
(492
|
)
|
The
following table summarizes the estimated impact on Operating Profit of
refranchising:
|
2008
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Restaurant profit
|
$
|
(19
|
)
|
|
|
$
|
(8
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(28
|
)
|
Increased
Franchise and license fees
|
|
16
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
22
|
|
Decreased
G&A
|
|
7
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
8
|
|
Increase
(decrease) in Operating Profit
|
$
|
4
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
2
|
|
|
2007
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Restaurant profit
|
$
|
(37
|
)
|
|
|
$
|
(7
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(44
|
)
|
Increased
Franchise and license fees
|
|
20
|
|
|
|
|
9
|
|
|
|
|
—
|
|
|
|
|
29
|
|
Decreased
G&A
|
|
7
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
10
|
|
Increase
(decrease) in Operating Profit
|
$
|
(10
|
)
|
|
|
$
|
5
|
|
|
|
$
|
—
|
|
|
|
$
|
(5
|
)
|
Results
of Operations
|
2008
|
|
|
%
B/(W)
vs.
2007
|
|
|
2007
|
|
|
%
B/(W)
vs.
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,843
|
|
|
|
|
8
|
|
|
|
$
|
9,100
|
|
|
|
|
9
|
|
Franchise
and license fees
|
|
1,436
|
|
|
|
|
9
|
|
|
|
|
1,316
|
|
|
|
|
10
|
|
Total
revenues
|
$
|
11,279
|
|
|
|
|
8
|
|
|
|
$
|
10,416
|
|
|
|
|
9
|
|
Company
restaurant profit
|
$
|
1,378
|
|
|
|
|
4
|
|
|
|
$
|
1,327
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Company sales
|
|
14.0%
|
|
|
|
|
(0.6
|
)
ppts.
|
|
|
|
14.6
|
%
|
|
|
|
(0.6
|
)
ppts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
1,506
|
|
|
|
|
11
|
|
|
|
|
1,357
|
|
|
|
|
8
|
|
Interest
expense, net
|
|
226
|
|
|
|
|
(36
|
)
|
|
|
|
166
|
|
|
|
|
(8
|
)
|
Income
tax provision
|
|
316
|
|
|
|
|
(12
|
)
|
|
|
|
282
|
|
|
|
|
1
|
|
Net
income
|
$
|
964
|
|
|
|
|
6
|
|
|
|
$
|
909
|
|
|
|
|
10
|
|
Diluted
earnings per share(a)
|
$
|
1.96
|
|
|
|
|
17
|
|
|
|
$
|
1.68
|
|
|
|
|
15
|
|
(a)
|
See
Note 4 for the number of shares used in this
calculation.
|
Restaurant
Unit Activity
Worldwide
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Balance
at end of 2006
|
|
|
7,736
|
|
|
|
1,206
|
|
|
|
23,516
|
|
|
|
32,458
|
|
New
Builds
|
|
|
505
|
|
|
|
132
|
|
|
|
1,070
|
|
|
|
1,707
|
|
Acquisitions
|
|
|
9
|
|
|
|
6
|
|
|
|
(14
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(420
|
)
|
|
|
(6
|
)
|
|
|
426
|
|
|
|
—
|
|
Closures
|
|
|
(204
|
)
|
|
|
(24
|
)
|
|
|
(706
|
)
|
|
|
(934
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
5
|
|
|
|
4
|
|
Balance
at end of 2007
|
|
|
7,625
|
|
|
|
1,314
|
|
|
|
24,297
|
|
|
|
33,236
|
|
New
Builds
|
|
|
596
|
|
|
|
89
|
|
|
|
1,173
|
|
|
|
1,858
|
|
Acquisitions
|
|
|
106
|
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(775
|
)
|
|
|
(1
|
)
|
|
|
776
|
|
|
|
—
|
|
Closures
|
|
|
(166
|
)
|
|
|
(8
|
)
|
|
|
(800
|
)
|
|
|
(974
|
)
|
Other(b)(c)
|
|
|
182
|
|
|
|
(749
|
)
|
|
|
570
|
|
|
|
3
|
|
Balance
at end of 2008
|
|
|
7,568
|
|
|
|
645
|
|
|
|
25,911
|
|
|
|
34,124
|
|
%
of Total
|
|
|
22%
|
|
|
|
2%
|
|
|
|
76%
|
|
|
|
100%
|
|
United States
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Balance
at end of 2006
|
|
|
4,212
|
|
|
|
—
|
|
|
|
13,905
|
|
|
|
18,117
|
|
New
Builds
|
|
|
87
|
|
|
|
—
|
|
|
|
262
|
|
|
|
349
|
|
Acquisitions
|
|
|
8
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(304
|
)
|
|
|
—
|
|
|
|
304
|
|
|
|
—
|
|
Closures
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
(386
|
)
|
|
|
(492
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
3
|
|
|
|
2
|
|
Balance
at end of 2007
|
|
|
3,896
|
|
|
|
—
|
|
|
|
14,081
|
|
|
|
17,977
|
|
New
Builds
|
|
|
94
|
|
|
|
—
|
|
|
|
269
|
|
|
|
363
|
|
Acquisitions
|
|
|
95
|
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
700
|
|
|
|
—
|
|
Closures
|
|
|
(71
|
)
|
|
|
—
|
|
|
|
(477
|
)
|
|
|
(548
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
Balance
at end of 2008
|
|
|
3,314
|
|
|
|
—
|
|
|
|
14,482
|
|
|
|
17,796
|
|
%
of Total
|
|
|
19%
|
|
|
|
—
|
|
|
|
81%
|
|
|
|
100%
|
|
YRI
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Balance
at end of 2006
|
|
|
1,762
|
|
|
|
561
|
|
|
|
9,387
|
|
|
|
11,710
|
|
New
Builds
|
|
|
54
|
|
|
|
18
|
|
|
|
780
|
|
|
|
852
|
|
Acquisitions
|
|
|
1
|
|
|
|
6
|
|
|
|
(7
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(109
|
)
|
|
|
(6
|
)
|
|
|
115
|
|
|
|
—
|
|
Closures
|
|
|
(66
|
)
|
|
|
(11
|
)
|
|
|
(314
|
)
|
|
|
(391
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Balance
at end of 2007
|
|
|
1,642
|
|
|
|
568
|
|
|
|
9,963
|
|
|
|
12,173
|
|
New
Builds
|
|
|
55
|
|
|
|
—
|
|
|
|
869
|
|
|
|
924
|
|
Acquisitions
|
|
|
4
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(71
|
)
|
|
|
(1
|
)
|
|
|
72
|
|
|
|
—
|
|
Closures
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
(310
|
)
|
|
|
(351
|
)
|
Other(b)
|
|
|
—
|
|
|
|
(567
|
)
|
|
|
567
|
|
|
|
—
|
|
Balance
at end of 2008
|
|
|
1,589
|
|
|
|
—
|
|
|
|
11,157
|
|
|
|
12,746
|
|
%
of Total
|
|
|
12%
|
|
|
|
—
|
|
|
|
88%
|
|
|
|
100%
|
|
China Division
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding Licensees(a)
|
Balance
at end of 2006
|
|
|
1,762
|
|
|
|
645
|
|
|
|
224
|
|
|
|
2,631
|
|
New
Builds
|
|
|
364
|
|
|
|
114
|
|
|
|
28
|
|
|
|
506
|
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
Closures
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
(6
|
)
|
|
|
(51
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
at end of 2007
|
|
|
2,087
|
|
|
|
746
|
|
|
|
253
|
|
|
|
3,086
|
|
New
Builds
|
|
|
447
|
|
|
|
89
|
|
|
|
35
|
|
|
|
571
|
|
Acquisitions
|
|
|
7
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Closures
|
|
|
(54
|
)
|
|
|
(8
|
)
|
|
|
(13
|
)
|
|
|
(75
|
)
|
Other(c)
|
|
|
182
|
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance
at end of 2008
|
|
|
2,665
|
|
|
|
645
|
|
|
|
272
|
|
|
|
3,582
|
|
%
of Total
|
|
|
74%
|
|
|
|
18%
|
|
|
|
8%
|
|
|
|
100%
|
|
(a)
|
The
Worldwide, U.S. and YRI totals exclude 2,168, 1,994 and 174 licensed
units, respectively, at December 27,
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 5.
|
|
|
(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 reclassified the units
accordingly. See Note 5.
|
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 include both franchisee and unconsolidated affiliate multibrand
units. Multibrand restaurant totals were as follows:
2008
|
|
|
Company
|
|
|
Franchise
|
|
|
Total
|
U.S.
|
|
|
1,601
|
|
|
|
3,028
|
|
|
|
4,629
|
|
YRI
|
|
|
—
|
|
|
|
329
|
|
|
|
329
|
|
Worldwide
|
|
|
1,601
|
|
|
|
3,357
|
|
|
|
4,958
|
|
2007
|
|
|
Company
|
|
|
Franchise
|
|
|
Total
|
U.S.
|
|
|
1,750
|
|
|
|
1,949
|
|
|
|
3,699
|
|
YRI
|
|
|
6
|
|
|
|
284
|
|
|
|
290
|
|
Worldwide
|
|
|
1,756
|
|
|
|
2,233
|
|
|
|
3,989
|
|
For 2008
and 2007, Company multibrand unit gross additions were 251 and 86,
respectively. For 2008 and 2007, franchise multibrand unit gross
additions were 830 and 283, respectively. There are no multibrand
units in the China Division.
System
Sales Growth
System
sales growth includes the results of all restaurants regardless of ownership,
including Company-owned, franchise, unconsolidated affiliate and license
restaurants. The following tables detail the key drivers of system
sales growth for each reportable segment by year. Same store sales
growth is the estimated growth in sales of all restaurants that have been open
one year or more. Net unit growth and other represents the net impact
of actual system sales growth due to new unit openings and historical system
sales lost due to closures as well as any necessary rounding.
|
|
2008
vs. 2007
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
2
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
3
|
%
|
Net
unit growth and other
|
|
1
|
|
|
|
4
|
|
|
|
14
|
|
|
4
|
|
Foreign
currency translation (“forex”)
|
|
N/A
|
|
|
|
2
|
|
|
|
11
|
|
|
1
|
|
%
Change
|
|
3
|
%
|
|
|
10
|
%
|
|
|
31
|
%
|
|
8
|
%
|
%
Change, excluding forex
|
|
N/A
|
|
|
|
8
|
%
|
|
|
20
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
—
|
%
|
|
|
6
|
%
|
|
|
10
|
%
|
|
3
|
%
|
Net
unit growth and other
|
|
—
|
|
|
|
4
|
|
|
|
14
|
|
|
3
|
|
Foreign
currency translation (“forex”)
|
|
N/A
|
|
|
|
5
|
|
|
|
7
|
|
|
2
|
|
%
Change
|
|
—
|
%
|
|
|
15
|
%
|
|
|
31
|
%
|
|
8
|
%
|
%
Change, excluding forex
|
|
N/A
|
|
|
|
10
|
%
|
|
|
24
|
%
|
|
6
|
%
|
Revenues
Company
sales were as follows:
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
U.S.
|
|
$
|
4,410
|
|
|
$
|
4,518
|
|
|
$
|
4,952
|
|
YRI
|
|
|
2,375
|
|
|
|
2,507
|
|
|
|
1,826
|
|
China
Division
|
|
|
3,058
|
|
|
|
2,075
|
|
|
|
1,587
|
|
Worldwide
|
|
$
|
9,843
|
|
|
$
|
9,100
|
|
|
$
|
8,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following tables detail the key drivers of the year-over-year changes of Company
sales and Franchise and license fees. Same store sales growth is the
estimated growth in sales of all restaurants that have been open one year or
more. Net unit growth represents the net impact of actual sales or
fee additions due to new unit openings and historical sales or fee reductions
due to closures. Refranchising represents the amount of Company sales
for the periods in the prior year while the Company operated the restaurants but
did not operate them in the current year or the impact on Franchise and license
fees for amounts from refranchised restaurants that were recorded by the Company
in the current year during periods in which the restaurants were Company stores
in the prior year. Other represents the impact of acquisitions,
unusual or significant items and roundings, which are footnoted as
necessary.
The
percentage changes in company sales by year were as follows:
|
|
2008
vs. 2007
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
|
3
|
%
|
|
|
|
—
|
%
|
|
|
|
7
|
%
|
|
|
|
3
|
%
|
Net
unit growth
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
16
|
|
|
|
|
4
|
|
Refranchising
|
|
|
(7
|
)
|
|
|
|
(4
|
)
|
|
|
|
—
|
|
|
|
|
(5
|
)
|
Other(a)
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
13
|
|
|
|
|
4
|
|
Foreign
currency translation (“forex”)
|
|
|
N/A
|
|
|
|
|
(2
|
)
|
|
|
|
11
|
|
|
|
|
2
|
|
%
Change
|
|
|
(2
|
)%
|
|
|
|
(5
|
)%
|
|
|
|
47
|
%
|
|
|
|
8
|
%
|
%
Change, excluding forex
|
|
|
N/A
|
|
|
|
|
(3
|
)%
|
|
|
|
36
|
%
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
|
(3
|
)%
|
|
|
|
5
|
%
|
|
|
|
10
|
%
|
|
|
|
2
|
%
|
Net
unit growth
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
15
|
|
|
|
|
4
|
|
Refranchising
|
|
|
(8
|
)
|
|
|
|
(8
|
)
|
|
|
|
—
|
|
|
|
|
(6
|
)
|
Other(b)
|
|
|
1
|
|
|
|
|
32
|
|
|
|
|
(1
|
)
|
|
|
|
6
|
|
Foreign
currency translation (“forex”)
|
|
|
N/A
|
|
|
|
|
6
|
|
|
|
|
7
|
|
|
|
|
3
|
|
%
Change
|
|
|
(9
|
)%
|
|
|
|
37
|
%
|
|
|
|
31
|
%
|
|
|
|
9
|
%
|
%
Change, excluding forex
|
|
|
N/A
|
|
|
|
|
31
|
%
|
|
|
|
24
|
%
|
|
|
|
6
|
%
|
(a)
|
China
and Worldwide include 13 percentage points and 3 percentage points,
respectively, attributable to the consolidation of a former China
unconsolidated affiliate at the beginning of 2008. See Note
5.
|
(b)
|
YRI
and Worldwide include 32 percentage points and 7 percentage points,
respectively, attributable to the acquisition of the remaining fifty
percent ownership interest of our Pizza Hut U.K. unconsolidated affiliate
on September 12, 2006. See Note
5.
|
Franchise
and license fees were as follows:
|
|
2008
|
|
|
|
2007
|
|
|
|
2006
|
|
U.S.
|
|
$
|
715
|
|
|
$
|
679
|
|
|
$
|
651
|
|
YRI
|
|
|
651
|
|
|
|
568
|
|
|
|
494
|
|
China
Division
|
|
|
70
|
|
|
|
69
|
|
|
|
51
|
|
Worldwide
|
|
$
|
1,436
|
|
|
$
|
1,316
|
|
|
$
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
percentage changes in franchise and license fees by year were as
follows:
|
|
2008
vs. 2007
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
|
2
|
%
|
|
|
|
6
|
%
|
|
|
|
4
|
%
|
|
|
|
4
|
%
|
Net
unit growth
|
|
|
1
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
3
|
|
Refranchising
|
|
|
2
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Other(a)
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
(16
|
)
|
|
|
|
(1
|
)
|
Foreign
currency translation (“forex”)
|
|
|
N/A
|
|
|
|
|
2
|
|
|
|
|
8
|
|
|
|
|
1
|
|
%
Change
|
|
|
5
|
%
|
|
|
|
15
|
%
|
|
|
|
2
|
%
|
|
|
|
9
|
%
|
%
Change, excluding forex
|
|
|
N/A
|
|
|
|
|
13
|
%
|
|
|
|
(6
|
)%
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
vs. 2006
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
|
—
|
%
|
|
|
|
6
|
%
|
|
|
|
10
|
%
|
|
|
|
3
|
%
|
Net
unit growth
|
|
|
1
|
|
|
|
|
6
|
|
|
|
|
15
|
|
|
|
|
3
|
|
Refranchising
|
|
|
3
|
|
|
|
|
2
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Other(b)
|
|
|
—
|
|
|
|
|
(4
|
)
|
|
|
|
4
|
|
|
|
|
—
|
|
Foreign
currency translation (“forex”)
|
|
|
N/A
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
2
|
|
%
Change
|
|
|
4
|
%
|
|
|
|
15
|
%
|
|
|
|
35
|
%
|
|
|
|
10
|
%
|
%
Change, excluding forex
|
|
|
N/A
|
|
|
|
|
10
|
%
|
|
|
|
29
|
%
|
|
|
|
8
|
%
|
(a)
|
China
and Worldwide include negative 19 percentage points and negative 1
percentage point, respectively, attributable to the consolidation of a
former China unconsolidated affiliate at the beginning of
2008. See Note 5.
|
(b)
|
YRI
and Worldwide include negative 4 percentage points and negative 2
percentage points, respectively, attributable to the acquisition of the
remaining fifty percent ownership interest of our Pizza Hut U.K.
unconsolidated affiliate on September 12, 2006. See Note
5.
|
Company
Restaurant Margins
|
|
|
|
2008
|
|
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
30.3
|
|
|
|
31.6
|
|
|
|
37.7
|
|
|
|
32.9
|
|
Payroll
and employee benefits
|
|
|
|
30.1
|
|
|
|
26.0
|
|
|
|
13.8
|
|
|
|
24.1
|
|
Occupancy
and other operating expenses
|
|
|
|
27.1
|
|
|
|
31.3
|
|
|
|
30.1
|
|
|
|
29.0
|
|
Company
restaurant margin
|
|
|
|
12.5
|
%
|
|
|
11.1
|
%
|
|
|
18.4
|
%
|
|
|
14.0
|
%
|
|
|
|
|
2007
|
|
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
29.2
|
|
|
|
29.9
|
|
|
|
36.4
|
|
|
|
31.0
|
|
Payroll
and employee benefits
|
|
|
|
30.5
|
|
|
|
26.1
|
|
|
|
13.2
|
|
|
|
25.3
|
|
Occupancy
and other operating expenses
|
|
|
|
27.0
|
|
|
|
31.7
|
|
|
|
30.3
|
|
|
|
29.1
|
|
Company
restaurant margin
|
|
|
|
13.3
|
%
|
|
|
12.3
|
%
|
|
|
20.1
|
%
|
|
|
14.6
|
%
|
|
|
|
|
2006
|
|
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
28.2
|
|
|
|
32.2
|
|
|
|
35.4
|
|
|
|
30.5
|
|
Payroll
and employee benefits
|
|
|
|
30.1
|
|
|
|
24.6
|
|
|
|
12.9
|
|
|
|
25.6
|
|
Occupancy
and other operating expenses
|
|
|
|
27.1
|
|
|
|
31.0
|
|
|
|
31.3
|
|
|
|
28.7
|
|
Company
restaurant margin
|
|
|
|
14.6
|
%
|
|
|
12.2
|
%
|
|
|
20.4
|
%
|
|
|
15.2
|
%
|
In 2008,
the decrease in U.S. restaurant margin as a percentage of sales was driven by
the impact of higher commodity costs (primarily cheese, meat, chicken and wheat
costs), higher labor costs (primarily wage rate and salary increases) and higher
property and casualty insurance expense as we lapped favorability recognized in
2007. 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.
In 2007,
the decrease in U.S. restaurant margin as a percentage of sales was driven by
the impact of higher commodity costs (primarily cheese and meats) and higher
wage rates, due primarily to state minimum wage rate increases. The
decrease was partially offset by the favorable impact of lower self-insured
property and casualty insurance expense driven by improved loss trends, as well
as the favorable impact on restaurant margin of refranchising and closing
certain restaurants.
In 2008,
the decrease in YRI restaurant margin as a percentage of sales was driven by the
elimination of a VAT exemption in Mexico. An increase in commodity
costs was partially offset by higher average guest check.
In 2007,
the increase in YRI restaurant margin as a percentage of sales was driven by the
impact of same store sales growth on restaurant margin as well as the favorable
impact of refranchising certain restaurants. The increase was almost
fully offset by higher labor costs (primarily wage rates) and the impact of
lower margins associated with Pizza Hut units in the U.K. which we now
operate. As a percentage of sales, Pizza Hut U.K. restaurants
negatively impacted payroll and employee benefits and occupancy and other
expenses and positively impacted food and paper.
In 2008,
the decrease in China Division restaurant margin as a percentage of sales was
driven by higher commodity costs (primarily chicken products), the impact of
lower margins associated with new units during the initial periods of operation,
and higher labor costs. The decrease was partially offset by the
impact of same store sales growth on restaurant margin.
In 2007,
the decrease in China Division restaurant margin as a percentage of sales was
driven by higher commodity costs (primarily chicken products), the impact of
lower margins associated with new units during the initial periods of operation
and higher labor costs. 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 4% in 2008, including a 1% unfavorable impact of foreign
currency translation. This increase was driven by approximately $49
million of G&A productivity initiatives and realignment of resources related
to the U.S. transformation as discussed in the Significant Gains & Charges
section of this MD&A.
G&A
expenses increased 9% in 2007, including a 2% unfavorable impact of foreign
currency translation. Excluding the additional G&A expenses
associated with acquiring the Pizza Hut U.K. business (which were previously
netted within equity income prior to our acquisition of the remaining fifty
percent of the business) and the unfavorable impact of foreign currency
translation, G&A expense increased 4%. The increase was driven by
higher annual incentive and other compensation costs, including amounts
associated with strategic initiatives in China and other international growth
markets.
Worldwide
Franchise and License Expenses
Franchise
and license expenses increased 86% in 2008. The increase was driven
by higher marketing funding on behalf of franchisees, investments in our U.S.
brands as discussed in the Significant Gains & Charges section of this
MD&A and increased provision for uncollectible receivables.
Franchise
and license expenses increased 14% in 2007. The increase was driven
by higher marketing funding on behalf of franchisees, franchise convention costs
and increased provision for uncollectible receivables.
Worldwide
Other (Income) Expense
|
|
2008
|
|
|
2007
|
|
|
2006
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(41
|
)
|
|
|
$
|
(51
|
)
|
|
|
$
|
(51
|
)
|
Minority
Interest(a)
|
|
|
11
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Gain
upon sale of investment in unconsolidated affiliate(b)(c)
|
|
|
(100
|
)
|
|
|
|
(6
|
)
|
|
|
|
(2
|
)
|
Contract
termination charge(d)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
8
|
|
Wrench
litigation income(e)
|
|
|
—
|
|
|
|
|
(11
|
)
|
|
|
|
—
|
|
Foreign
exchange net (gain) loss and other
|
|
|
(16
|
)
|
|
|
|
(3
|
)
|
|
|
|
(7
|
)
|
Other
(income) expense
|
|
$
|
(146
|
)
|
|
|
$
|
(71
|
)
|
|
|
$
|
(52
|
)
|
(a)
|
On
January 1, 2008 the Company began consolidating an entity in China in
which we have a majority ownership interest. See Note
5.
|
|
|
(b)
|
Fiscal
year 2008 reflects the gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
5.
|
|
|
(c)
|
Fiscal
years 2007 and 2006 reflect recognition of income associated with receipt
of payments 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.
|
|
|
(d)
|
Reflects
an $8 million charge associated with the termination of a beverage
agreement in the U.S. segment in 2006.
|
|
|
(e)
|
Fiscal
year 2007 reflects financial recoveries from settlements with insurance
carriers related to a lawsuit settled by Taco Bell Corporation in
2004.
|
Worldwide
Closure and Impairment Expenses and Refranchising (Gain) Loss
See the
Store Portfolio Strategy section for more detail of our refranchising activity
and Note 5 for a summary of the components of facility actions by reportable
operating segment.
Operating
Profit
|
|
|
%
B/(W)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
United
States
|
$
|
694
|
|
|
$
|
739
|
|
|
|
(6
|
)
|
|
|
(3
|
)
|
YRI
|
|
528
|
|
|
|
480
|
|
|
|
10
|
|
|
|
18
|
|
China
Division
|
|
469
|
|
|
|
375
|
|
|
|
25
|
|
|
|
30
|
|
|
Unallocated
and corporate expenses
|
|
(307
|
)
|
|
|
(257
|
)
|
|
|
(19
|
)
|
|
|
(12
|
)
|
Unallocated
Other income (expense)
|
|
117
|
|
|
|
9
|
|
|
|
NM
|
|
|
|
NM
|
|
Unallocated
Refranchising gain (loss)
|
|
5
|
|
|
|
11
|
|
|
|
NM
|
|
|
|
NM
|
|
Operating
Profit
|
$
|
1,506
|
|
|
$
|
1,357
|
|
|
|
11
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States operating margin
|
|
13.5
|
%
|
|
|
14.2
|
%
|
|
|
(0.7
|
)
ppts.
|
|
|
0.6
|
ppts.
|
YRI
operating margin
|
|
17.4
|
%
|
|
|
15.6
|
%
|
|
|
1.8
|
ppts.
|
|
|
(2.0
|
)
ppts.
|
U.S.
Operating Profit decreased 6% in 2008. The decrease was driven by
higher restaurant operating costs and higher closure and impairment expenses,
partially offset by the impact of same store sales growth on restaurant profit
(primarily due to higher average guest check) and Franchise and license
fees. The increase in restaurant operating costs was primarily driven
by higher commodity costs.
U.S.
Operating Profit decreased 3% in 2007. The decrease was driven by
higher restaurant operating costs, principally commodities and labor, partially
offset by lower G&A expenses, lower closure and impairment expenses and an
increase in Other income.
YRI
Operating Profit increased 10% in 2008, including a 2% favorable impact from
foreign currency translation. The increase was driven by the impact
of same store sales growth and net unit development on Franchise and license
fees. These increases were partially offset by the loss of the VAT
exemption in Mexico.
YRI
Operating Profit increased 18% in 2007 including a 6% 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 and
franchise and license fees. The increase was partially offset by
higher G&A expenses (including expenses which were previously netted within
equity income prior to our acquisition of the remaining fifty percent of the
Pizza Hut U.K. business) and higher restaurant operating costs.
China
Division Operating Profit increased 25% and 30% in 2008 and 2007, respectively,
including an 11% and 7% favorable impact from foreign currency translation,
respectively. The increases were driven by the impact of same store
sales growth and net unit development on restaurant profit. The
increases were partially offset by higher restaurant operating costs and higher
G&A expenses.
Unallocated
and corporate expenses increased 19% in 2008 due to U.S. G&A productivity
initiatives and realignment of resources and investments in the U.S. Brands, as
discussed in the Significant Gains and Charges section of this MD&A,
partially offset by lower annual incentive compensation expenses. The
12% increase in unallocated and corporate expenses in 2007 was driven by an
increase in annual incentive compensation and project costs.
Unallocated
Other income (expense) in 2008 includes a $100 million gain recognized on the
sale of our interest in our unconsolidated affiliate in Japan. See
Note 5.
Interest
Expense, Net
|
|
2008
|
|
2007
|
|
2006
|
|
Interest
expense
|
|
$
|
253
|
|
|
$
|
199
|
|
|
$
|
172
|
|
|
Interest
income
|
|
|
(27
|
)
|
|
|
(33
|
)
|
|
|
(18
|
)
|
|
Interest
expense, net
|
|
$
|
226
|
|
|
$
|
166
|
|
|
$
|
154
|
|
|
Net
interest expense increased $60 million or 36% in 2008. The increase
was driven by an increase in borrowings in 2008 compared to 2007, partially
offset by a decrease in interest rates in the variable portion of our debt as
compared to prior year.
Net
interest expense increased $12 million or 8% in 2007. The increase
was driven by an increase in borrowings in 2007 compared to 2006, partially
offset by an increase in interest bearing cash equivalents in 2007 compared to
2006.
Income
Taxes
|
|
2008
|
|
2007
|
|
2006
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
316
|
|
|
$
|
282
|
|
|
$
|
284
|
|
|
Effective
tax rate
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
|
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
2008
|
|
2007
|
|
2006
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
2.0
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(14.5
|
)
|
|
|
(5.7
|
)
|
|
|
(7.8
|
)
|
Adjustments
to reserves and prior years
|
|
|
3.5
|
|
|
|
2.6
|
|
|
|
(3.5
|
)
|
Repatriation
of foreign earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.4
|
)
|
Non-recurring
foreign tax credit adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
(6.2
|
)
|
Valuation
allowance additions (reversals)
|
|
|
0.6
|
|
|
|
(9.0
|
)
|
|
|
6.8
|
|
Other,
net
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Effective
income tax rate
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
Our 2008
effective income tax rate was negatively impacted by lapping valuation allowance
reversals made in the prior year as discussed below. This negative
impact was partially offset by the reversal of foreign valuation allowances in
the current year associated with certain deferred tax assets that we now believe
are more likely than not to be utilized on future tax
returns. Additionally, the effective tax rate was negatively impacted
by the year-over-year change in adjustments to reserves and prior years
(including certain out-of-year adjustments that increased our effective tax rate
by 1.8 percentage points in 2008). Benefits associated with our
foreign and U.S. tax effects attributable to foreign operations positively
impacted the effective tax rate as a result of lapping 2007 expenses associated
with the distribution of an intercompany dividend and adjustments to our
deferred tax balances that resulted from the Mexico tax law change, as further
discussed below, as well as a higher percentage of our income being earned
outside the U.S. These benefits were partially offset in 2008 by the
gain on the sale of our interest in our unconsolidated affiliate in Japan and
expense associated with our plan to distribute certain foreign
earnings. We also recognized deferred tax assets for the net
operating losses generated by certain tax planning strategies implemented in
2008 included in foreign and U.S. tax effects attributable to foreign operations
(1.7 percentage point impact). However, we provided a full valuation
allowance on these assets as we do not believe it is more likely than not that
they will be realized in the future.
Our 2007
effective income tax rate was positively impacted by valuation allowance
reversals. In December 2007, the Company finalized various tax
planning strategies based on completing a review of our international
operations, distributed a $275 million intercompany dividend and sold our
interest in our Japan unconsolidated affiliate. As a result, in the
fourth quarter of 2007, we reversed approximately $82 million of valuation
allowances associated with foreign tax credit carryovers that are more likely
than not to be claimed on future tax returns. In 2007, benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations were negatively impacted by $36 million of expense associated with
the $275 million intercompany dividend and approximately $20 million of expense
for adjustments to our deferred tax balances as a result of the Mexico tax law
change enacted during the fourth quarter of 2007. These negative
impacts were partially offset by a higher percentage of our income being earned
outside the U.S. Additionally, the effective tax rate was negatively
impacted by the year-over-year change in adjustments to reserves and prior
years.
Our 2006
effective income tax rate was positively impacted by the reversal of tax
reserves in connection with our regular U.S. audit cycle as well as certain
out-of-year adjustments to reserves and accruals that lowered our effective
income tax rate by 2.2 percentage points. The reversal of tax
reserves was partially offset by valuation allowance additions on foreign tax
credits for which, as a result of the tax reserve reversals, we believed were
not likely to be utilized before they expired. We also recognized
deferred tax assets for the foreign tax credit impact of non-recurring decisions
to repatriate certain foreign earnings in 2007. However, we provided
full valuation allowances on such assets as we did not believe it was more
likely than not that they would be realized at that time.
Adjustments
to reserves and prior years include the effects of the reconciliation of income
tax amounts recorded in our Consolidated Statements of Income to amounts
reflected on our tax returns, including any adjustments to the Consolidated
Balance Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established for potential
exposure we may incur if a taxing authority takes a position on a matter
contrary to our position. We evaluate these reserves on a quarterly
basis to insure that they have been appropriately adjusted for events, including
audit settlements that we believe may impact our exposure.
Consolidated
Cash Flows
Net cash provided by operating
activities was $1,521 million compared to $1,551 million in
2007. The decrease was primarily driven by higher interest payments
and pension contributions.
In 2007,
net cash provided by operating activities was $1,551 million compared to
$1,257 million in
2006. The increase was driven by higher net income, lower pension
contributions and lower income tax payments in 2007.
Net cash used in investing
activities was $641 million versus $416 million in 2007. The
increase was driven by higher capital spending in 2008 and the lapping of
proceeds from the sale of our interest in the Japan unconsolidated affiliate in
2007, partially offset by the year over year change in proceeds from
refranchising of restaurants.
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million (includes the impact of related foreign currency contracts that
were settled in December 2007). The 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 first quarter of 2008. 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. The offset to this cash on our Consolidated Balance Sheet at
December 29, 2007 was in accounts payable and other current
liabilities.
In 2007,
net cash used in investing activities was $416 million versus $434 million in
2006. The decrease was driven by the lapping of the acquisition of
the remaining interest in our Pizza Hut U.K. unconsolidated affiliate in 2006
and proceeds from the sale of our interest in the Japan unconsolidated affiliate
in December 2007, partially offset by the year over year change in proceeds from
refranchising of restaurants and a 2007 increase in capital
spending.
Net cash used in financing
activities was $1,459 million versus $678 million in 2007. The
increase was driven by lower net borrowings, higher share repurchases and higher
dividend payments in 2008.
In 2007,
net cash used in financing activities was $678 million versus $670 million in
2006. The increase was driven by higher share repurchases and higher
dividend payments, partially offset by an increase in net
borrowings.
Consolidated
Financial Condition
Upon
recognition of the sale of our interest in our unconsolidated affiliate in
Japan, as described above, during the first quarter 2008 accounts payable and
other current liabilities decreased by $128 million due to the reversal of the
associated deferred gain.
In May
2008, $250 million of Senior Unsecured Notes matured, and the repayment was
funded with additional borrowings under our Credit Facility, which are included
in Long-term debt.
During
2008 our Shareholders’ Equity decreased approximately $1.2 billion resulting in
the Company ending the year with a Shareholders’ Deficit. This
decrease was primarily driven by our shareholder payouts of approximately $2
billion through share buybacks and dividends, a decline in the unrecognized
funded status of our U.S. pension plans of approximately $200 million and
approximately $200 million of foreign currency translation adjustments during
the year due to the strengthening of the U.S. Dollar. These declines
were partially offset by the Company’s Net income for the year ended December
27, 2008. A recorded Shareholders’ Deficit under generally accepted
accounting principles does not by itself preclude us from paying dividends to
our shareholders or repurchasing shares of our Common Stock.
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 substantial franchise operations
which require a limited YUM investment. In each of the last seven
fiscal years, net cash provided by operating activities has exceeded $1.1
billion. We expect these levels of net cash provided by operating
activities to continue in the foreseeable future. Additionally, we
estimate that refranchising proceeds, prior to income taxes, will total at least
$250 million in 2009. However, unforeseen downturns in our business
could adversely impact our cash flows from operations from the levels
historically realized or our refranchising proceeds from those amounts
expected.
In the
event our cash flows are negatively impacted by business downturns, we believe
we have the ability to temporarily reduce our discretionary spending without
significant impact to our long-term business prospects. 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. Additionally, as
of December, 2008 we had approximately $1 billion in unused capacity under
revolving credit facilities that expire in 2012. Given this available
borrowing capacity under our credit facilities, our debt maturity schedule and
our ability to reduce discretionary spending, we do not believe we will need to
access the credit markets during 2009. To help ensure that we do not need to
access the credit markets while continuing to build our liquidity and
maintaining our financial flexibility, we do not currently plan to repurchase
shares in 2009.
Additionally,
we are managing our cash and debt positions in order to maintain our current
investment grade ratings from Standard & Poor’s Rating Services (BBB-) and
Moody’s Investors Service (Baa3). A downgrade of our credit rating
would increase the Company’s current borrowing costs and could impact the
Company’s ability to access the credit markets if necessary. Based on
the amount and composition of our debt at December 27, 2008 our interest expense
would increase approximately $1.3 million on a full year basis should we receive
a one-level downgrade in our ratings.
Discretionary
Spending
During
2008, we invested $935 million in our businesses, including approximately $355
million in the U.S., $260 million for the International Division and $320
million for the China Division. For 2009, we estimate capital
spending will be approximately $900 million.
We
returned approximately $2 billion to our shareholders through share repurchases
and quarterly dividends in 2008. This is the fourth straight year
that we returned over $1.1 billion to our shareholders. Under the
authority of our Board of Directors, we repurchased 46.8 million shares of our
Common Stock for $1.6 billion during 2008. As mentioned above, the
Company does not currently plan to repurchase shares during
2009.
During
the year ended December 27, 2008, we paid cash dividends of $322
million. Additionally, on November 21, 2008 our Board of Directors
approved cash dividends of $.19 per share of Common Stock to be distributed on
February 6, 2009 to shareholders of record at the close of business on January
16, 2009. The Company is targeting an ongoing annual dividend payout
ratio of 35% - 40% of net income.
Borrowing
Capacity
Our
primary bank credit agreement comprises a $1.15 billion syndicated senior
unsecured revolving credit facility (the “Credit Facility”) which matures in
November 2012 and includes 23 participating banks with commitments ranging from
$20 million to $113 million. We believe the syndication reduces our
dependency on any one bank.
Under the
terms of the Credit Facility, we may borrow up to the maximum borrowing limit,
less outstanding letters of credit or banker’s acceptances, where
applicable. At December 27, 2008, our unused Credit Facility totaled
$685 million net of outstanding letters of credit of $166
million. There were borrowings of $299 million outstanding under the
Credit Facility at December 27, 2008. The interest rate for
borrowings under the Credit Facility ranges from 0.25% to 1.25% over the London
Interbank Offered Rate (“LIBOR”) or is determined by an Alternate Base Rate,
which is the greater of the Prime Rate or the Federal Funds Rate plus
0.50%. The exact spread over LIBOR or the Alternate Base Rate, as
applicable, depends on our performance under specified financial
criteria. Interest on any outstanding borrowings under the Credit
Facility is payable at least quarterly.
We also
have a $350 million, syndicated revolving credit facility (the “International
Credit Facility,” or “ICF”) which matures in November 2012 and includes 6 banks
with commitments ranging from $35 million to $90 million. We believe
the syndication reduces our dependency on any one bank. There was
available credit of $350 million and no borrowings outstanding under the ICF at
the end of 2008. The interest rate for borrowings under the ICF ranges from
0.31% to 1.50% over LIBOR or is determined by a Canadian Alternate Base Rate,
which is the greater of the Citibank, N.A., Canadian Branch’s publicly announced
reference rate or the “Canadian Dollar Offered Rate” plus 0.50%. The
exact spread over LIBOR or the Canadian Alternate Base Rate, as applicable,
depends upon YUM’s performance under specified financial criteria. Interest on
any outstanding borrowings under the ICF is payable at least
quarterly.
On July
11, 2008 we entered into a variable rate senior unsecured term loan (“Domestic
Term Loan”), in an aggregate principal amount of $375 million that matures in
three years. At our discretion the variable rate resets at one, two,
three or six month intervals. We determine whether the variable rate
at each reset date is based upon: (1) LIBOR plus an applicable spread
of up to 2.5%, or (2) an Alternative Base Rate. The Alternate Base
Rate is the greater of the Prime Rate or the Federal Funds Rate plus 0.50%, plus
an applicable spread of up to 1.5%. The proceeds from the Domestic
Term Loan were used for general corporate purposes.
The
Credit Facility, Domestic Term Loan, and the ICF are unconditionally guaranteed
by our principal domestic subsidiaries. Additionally, the ICF is
unconditionally guaranteed by YUM. These agreements contain financial
covenants relating to maintenance of leverage and fixed charge coverage ratios
and also contain affirmative and negative covenants including, among other
things, limitations on certain additional indebtedness and liens, and certain
other transactions specified in the agreement. Given the Company’s
strong balance sheet and cash flows we were able to comply with all debt
covenant requirements at December 27, 2008 with a considerable amount of
cushion.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes with varying maturity dates from 2011 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
$2.6 billion at December 27, 2008. In May 2008, $250 million of
Senior Unsecured Notes matured, and the repayment was funded with additional
borrowings under our Credit Facility.
Contractual
Obligations
In
addition to any discretionary spending we may choose to make, our significant
contractual obligations and payments as of December 27, 2008
included:
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
Long-term
debt obligations(a)
|
|
$
|
5,224
|
|
|
|
$
|
201
|
|
|
|
$
|
1,365
|
|
|
|
$
|
925
|
|
|
|
$
|
2,733
|
|
Capital
leases(b)
|
|
|
384
|
|
|
|
|
26
|
|
|
|
|
87
|
|
|
|
|
43
|
|
|
|
|
228
|
|
Operating
leases(b)
|
|
|
4,576
|
|
|
|
|
491
|
|
|
|
|
860
|
|
|
|
|
701
|
|
|
|
|
2,524
|
|
Purchase
obligations(c)
|
|
|
675
|
|
|
|
|
570
|
|
|
|
|
96
|
|
|
|
|
6
|
|
|
|
|
3
|
|
Other(d)
|
|
|
169
|
|
|
|
|
144
|
|
|
|
|
9
|
|
|
|
|
7
|
|
|
|
|
9
|
|
Total
contractual obligations
|
|
$
|
11,028
|
|
|
|
$
|
1,432
|
|
|
|
$
|
2,417
|
|
|
|
$
|
1,682
|
|
|
|
$
|
5,497
|
|
(a)
|
Debt
amounts include principal maturities and expected interest
payments. Rates utilized to determine interest payments for
variable rate debt are based on an estimate of future interest
rates. Excludes a fair value adjustment of $59 million included
in debt related to interest rate swaps that hedge the fair value of a
portion of our debt. See Note 12.
|
|
|
(b)
|
These
obligations, which are shown on a nominal basis, relate to more than 5,800
restaurants. See Note 13.
|
|
|
(c)
|
Purchase
obligations include agreements to purchase goods or services that are
enforceable and legally binding on us and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of the
transaction. We have excluded agreements that are cancelable
without penalty. Purchase obligations relate primarily to
information technology, marketing, commodity agreements, purchases of
property, plant and equipment as well as consulting, maintenance and other
agreements.
|
|
|
(d)
|
Other
consists of 2009 pension plan funding obligations, the current portion of
unrecognized tax benefits and projected payments for deferred
compensation.
|
We have
not included in the contractual obligations table approximately $229 million for
long-term liabilities for unrecognized tax benefits for various tax positions we
have taken. These liabilities may increase or decrease over time as a
result of tax examinations, and given the status of the examinations, we cannot
reliably estimate the period of any cash settlement with the respective taxing
authorities. These liabilities also include amounts that are
temporary in nature and for which we anticipate that over time there will be no
net cash outflow. We have included in the contractual obligations
table $53 million in liabilities for unrecognized tax benefits that we expect to
settle in cash in the next year.
We have
included $85 million in contributions we expect to make to our pension plans in
2009 in the contractual obligations table. Our most significant plan,
the YUM Retirement Plan (the “U.S. Plan”), is a noncontributory defined benefit
pension plan covering certain full-time U.S. salaried employees. Our
funding policy with respect to the U.S. Plan is to contribute amounts necessary
to satisfy minimum pension funding requirements, including requirements of the
Pension Protection Act of 2006, plus such additional amounts from time to time
as determined to be appropriate to improve the U.S. Plan’s funded
status. We currently estimate that we will contribute approximately
$80 million to the U.S. Plan in 2009. Contributions beyond 2009 will
depend upon the timing and amount of our asset returns as well as changes in
applicable discount rates. At our 2008 measurement date, our pension
plans in the U.S., which include the U.S. Plan and an unfunded supplemental
executive plan, had a projected benefit obligation of $923 million and plan
assets of $513 million.
The
funding rules for our pension plans outside of the U.S. vary from country to
country and depend on many factors including discount rates, performance of plan
assets, local laws and regulations. Our most significant plans are in
the U.K. The projected benefit obligation of our pension plans in the
U.K. exceeded plan assets by $43 million at our 2008 measurement
date. We have committed to make a discretionary funding contribution
of approximately $5 million in 2009 to one of these plans. The plans
are currently under review to determine if additional discretionary pension
funding payments will be committed to in 2009.
Our
postretirement plan in the U.S. is not required to be funded in advance, but is
pay as you go. We made postretirement benefit payments of $5 million
in 2008 and no future funding amounts are included in the contractual
obligations table. See Note 15 for further details about our pension
and postretirement plans.
We have
excluded from the contractual obligations table payments we may make for
exposures for which we are self-insured, including workers’ compensation,
employment practices liability, general liability, automobile liability, product
liability and property losses (collectively “property and casualty losses”) and
employee healthcare and long-term disability claims.
The
majority of our recorded liability for self-insured employee healthcare,
long-term disability and property and casualty losses represents estimated
reserves for incurred claims that have yet to be filed or settled.
Off-Balance
Sheet Arrangements
We have
provided a partial guarantee of approximately $16 million of a franchisee loan
program used primarily to assist franchisees in the development of new
restaurants and, to a lesser extent, in connection with the Company’s historical
refranchising programs at December 27, 2008. We have also provided
two letters of credit totaling approximately $23 million in support of the
franchisee loan program. One such letter of credit could be used if
we fail to meet our obligations under our guarantee. The other letter of
credit could be used, in certain circumstances, to fund our participation in the
funding of the franchisee loan program. The total loans outstanding
under the loan pool were approximately $48 million at December 27,
2008.
Our
unconsolidated affiliates had approximately $51 million and $22 million of debt
outstanding as of December 27, 2008 and December 29, 2007,
respectively.
New
Accounting Pronouncements Not Yet Adopted
See Note
2 to the Consolidated Financial Statements included in Part II, Item 8 of this
report for further details of new accounting pronouncements not yet
adopted.
Critical
Accounting Policies and Estimates
Our
reported results are impacted by the application of certain accounting policies
that require us to make subjective or complex judgments. These
judgments involve estimations of the effect of matters that are inherently
uncertain and may significantly impact our quarterly or annual results of
operations or financial condition. Changes in the estimates and
judgments could significantly affect our results of operations, financial
condition and cash flows in future years. A description of what we
consider to be our most significant critical accounting policies
follows.
Impairment or Disposal of
Long-Lived Assets
We
evaluate our restaurant assets and certain definite-lived intangible assets for
impairment at the individual restaurant level except when there is an
expectation that we will refranchise restaurants as a
group. Impairment evaluations for individual restaurants that we are
currently operating and have not offered for sale are performed on a semi-annual
basis or whenever events or circumstances indicate that the carrying amount of a
restaurant may not be recoverable (including a decision to close a
restaurant). Our semi-annual impairment test includes those
restaurants that have experienced two consecutive years of operating
losses. Our semi-annual impairment evaluations require an estimation
of forecasted cash flows of the restaurant and any terminal value. We
limit assumptions about important factors such as sales growth and margin
improvement to those that are supportable based upon our plans for the unit and
actual results at comparable restaurants.
If the
long-lived assets of a restaurant subject to our semi-annual test are not
recoverable based upon forecasted, undiscounted cash flows, we write the assets
down to their fair value. This fair value is determined by
discounting the forecasted after tax cash flows, including terminal value, of
the restaurant. The discount rate is our estimate of the required
rate of return that a third-party buyer would expect to receive when purchasing
a restaurant or groups of restaurants and its related long-lived
assets. The discount rate incorporates observed rates of returns for
historical refranchising market transactions and we believe it is commensurate
with the risks and uncertainty inherent in the forecasted cash
flows.
We often
refranchise restaurants in groups and, therefore, perform such impairment
evaluations at the group level. These impairment evaluations are
generally performed at the date such restaurants are offered for
sale. Forecasted cash flows in such instances consist of estimated
holding period cash flows and the expected sales proceeds. Expected
sales proceeds are based on the most relevant of historical sales multiples or
bids from buyers, and have historically been reasonably accurate estimations of
the proceeds ultimately received.
We have
certain definite-lived intangible assets that are not attributable to a specific
restaurant, such as the LJS and A&W trademark/brand intangible assets and
franchise contract rights, which are amortized over their expected useful
lives. We base the expected useful lives of our trademark/brand
intangible assets on a number of factors including the competitive environment,
our future development plans for the applicable Concept and the level of
franchisee commitment to the Concept. We generally base the expected
useful lives of our franchise contract rights on their respective contractual
terms including renewals when appropriate.
These
definite-lived intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An intangible asset that is deemed
impaired is written down to its estimated fair value, which is based on
discounted cash flows. For purposes of our impairment analysis, we
update the cash flows that were initially used to value the definite-lived
intangible asset to reflect our current estimates and assumptions over the
asset’s future remaining life.
See Note
2 for a further discussion of our policy regarding the impairment or disposal of
long-lived assets.
Impairment of
Goodwill
We
evaluate goodwill for impairment on an annual basis or more often if an event
occurs or circumstances change that indicates impairment might
exist. Goodwill is evaluated for impairment through the comparison of
fair value of our reporting units to their carrying values. Our
reporting units are our operating segments in the U.S. and our business
management units internationally (typically individual
countries). Fair value is the price a willing buyer would pay for the
reporting unit, and is generally estimated using either discounted expected
future cash flows from operations or the present value of the estimated future
franchise royalty stream plus any estimated sales proceeds from
refranchising.
Future
cash flow estimates and the discount rate are the key assumptions when
estimating the fair value of a reporting unit. Future cash flows are
based on our growth expectations relative to recent historical
performance. These growth expectations are based on assumptions for
key performance indicators such as company sales, franchise and license fees and
restaurant profit and are consistent with our internal operating
plans. The discount rate is our estimate of the required rate of
return that a third-party buyer would expect to receive when purchasing a
business from us that constitutes a reporting unit. We believe the discount rate
is commensurate with the risks and uncertainty inherent in the forecasted cash
flows.
We have
two international reporting units that have experienced deteriorating operating
performance over the past few years. These reporting units have
goodwill of $100 million and $36 million as of the end of 2008. The
assumptions used in determining fair value for these reporting units reflect our
belief that the businesses are experiencing temporary declines and that they
will turn around. While these growth assumptions are consistent with
our internal operating plans and reflect what we believe are reasonable and
achievable growth rates, failure to realize these growth rates could result in
future impairment of some or all of the recorded goodwill. Likewise,
if we believe the risks inherent in the businesses increase, the resulting
change in the discount rate could result in future impairment of some or all of
the recorded goodwill.
See Note
2 for a further discussion of our policies regarding goodwill.
Allowances for Franchise and
License Receivables/Lease Guarantees
We
reserve a franchisee’s or licensee’s entire receivable balance based upon
pre-defined aging criteria and upon the occurrence of other events that indicate
that we may not collect the balance due. As a result of reserving
using this methodology, we have an immaterial amount of receivables that are
past due that have not been reserved for at December 27, 2008.
We have
also issued certain guarantees as a result of assigning our interest in
obligations under operating leases, primarily as a condition to the
refranchising of certain Company restaurants. Such guarantees are
subject to the requirements of Statement of Financial Accounting Standards
(“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). We
recognize a liability for the fair value of such lease guarantees under SFAS 145
upon refranchising and upon any subsequent renewals of such leases when we
remain contingently liable. The fair value of a guarantee is the
estimated amount at which the liability could be settled in a current
transaction between willing unrelated parties.
If
payment on the guarantee becomes probable and estimable, we record a liability
for our exposure under these lease assignments and guarantees. At
December 27, 2008, we have recorded an immaterial liability for our exposure
which we consider to be probable and estimable. The potential total
exposure under such leases is significant, with approximately $325 million
representing the present value, discounted at our pre-tax cost of debt, of the
minimum payments of the assigned leases at December 27, 2008. Current
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 and, historically, we have not been required to make
such payments in significant amounts.
See Note
2 for a further discussion of our policies regarding franchise and license
operations.
See Note
14 for a further discussion of our lease guarantees.
Self-Insured Property and
Casualty Losses
We record
our best estimate of the remaining cost to settle incurred self-insured property
and casualty losses. The estimate is based on the results of an
independent actuarial study and considers historical claim frequency and
severity as well as changes in factors such as our business environment, benefit
levels, medical costs and the regulatory environment that could impact overall
self-insurance costs. Additionally, a risk margin to cover unforeseen
events that may occur over the several years it takes for claims to settle is
included in our reserve, increasing our confidence level that the recorded
reserve is adequate.
See Note
21 for a further discussion of our insurance programs.
Pension
Plans
Certain
of our employees are covered under defined benefit pension plans. The
most significant of these plans are in the U.S. We have recorded the
under-funded status of $410 million for these U.S. plans as a pension liability
in our Consolidated Balance Sheet as of December 27, 2008. These U.S.
plans had a projected benefit obligation (“PBO”) of $923 million and a fair
value of plan assets of $513 million at December 27, 2008.
The PBO
reflects the actuarial present value of all benefits earned to date by employees
and incorporates assumptions as to future compensation levels. Due to
the relatively long time frame over which benefits earned to date are expected
to be paid, our PBO’s are highly sensitive to changes in discount
rates. For our U.S. plans, we measured our PBO using a discount rate
of 6.5% at December 27, 2008. This discount rate was determined with
the assistance of our independent actuary. The primary basis for our
discount rate determination is a model that consists of a hypothetical portfolio
of ten or more corporate debt instruments rated Aa or higher by Moody’s with
cash flows that mirror our expected benefit payment cash flows under the
plans. We excluded from the model those corporate debt instruments
flagged by Moody’s for a potential downgrade and bonds with yields that were two
standard deviations or more above the mean. In considering possible
bond portfolios, the model allows the bond cash flows for a particular year to
exceed the expected benefit cash flows for that year. Such excesses
are assumed to be reinvested at appropriate one-year forward rates and used to
meet the benefit cash flows in a future year. The weighted average
yield of this hypothetical portfolio was used to arrive at an appropriate
discount rate. We also insure that changes in the discount rate as
compared to the prior year are consistent with the overall change in prevailing
market rates and make adjustments as necessary. A 50 basis
point increase in this discount rate would have decreased our U.S. plans’ PBO by
approximately $64 million at our measurement date. Conversely, a 50
basis point decrease in this discount rate would have increased our U.S. plans’
PBO by approximately $74 million at our measurement dates.
The
pension expense we will record in 2009 is also impacted by the discount rate we
selected at our measurement date. We expect pension expense for our
U.S. plans to increase approximately $3 million to $39 million in
2009. The increase is primarily driven by an increase in amortization
of net loss. A 50 basis point change in our discount rate assumption
at our measurement date would impact our 2009 U.S. pension expense by
approximately $12 million.
The
assumption we make regarding our expected long-term rates of return on plan
assets also impacts our pension expense. Our estimated long-term rate
of return on U.S. plan assets represents the weighted-average of historical
returns for each asset category, adjusted for an assessment of current market
conditions. Our expected long-term rate of return on U.S. plan assets
at December 27, 2008 was 8.0%. We believe this rate is appropriate
given the composition of our plan assets and historical market returns
thereon. A one percentage point increase or decrease in our expected
long-term rate of return on plan assets assumption would decrease or increase,
respectively, our 2009 U.S. pension plan expense by approximately $7
million.
The
losses our U.S. plan assets have experienced, along with a decrease in discount
rates over time, have largely contributed to an unrecognized pre-tax net loss of
$374 million included in Accumulated other comprehensive income (loss) for the
U.S. plans at December 27, 2008. For purposes of determining 2008
expense, our funded status was such that we recognized $6 million of net loss in
net periodic benefit cost. We will recognize approximately $13
million of such loss in 2009.
See Note
15 for further discussion of our pension and post-retirement plans.
Stock Options and Stock
Appreciation Rights Expense
Compensation
expense for stock options and stock appreciation rights (“SARs”) is estimated on
the grant date using a Black-Scholes option pricing model. Our
specific weighted-average assumptions for the risk-free interest rate, expected
term, expected volatility and expected dividend yield are documented in Note
16. Additionally, under SFAS No. 123 (revised 2004), “Share-Based
Compensation” (“SFAS 123R”) we are required to estimate pre-vesting forfeitures
for purposes of determining compensation expense to be
recognized. Future expense amounts for any particular quarterly or
annual period could be affected by changes in our assumptions or changes in
market conditions.
We have
determined that it is appropriate to group our awards into two homogeneous
groups when estimating expected term and pre-vesting
forfeitures. These groups consist of grants made primarily to
restaurant-level employees under our Restaurant General Manager Stock Option
Plan (the “RGM Plan”) and grants made to executives under our other stock award
plans. Historically, approximately 15% - 20% of total options and
SARs granted have been made under the RGM Plan.
Grants
under the RGM Plan typically cliff vest after four years and grants made to
executives under our other stock award plans typically have a graded vesting
schedule and vest 25% per year over four years. We use a single
weighted-average expected term for our awards that have a graded vesting
schedule as permitted by SFAS 123R. We revaluate our expected term
assumptions using historical exercise and post-vesting employment termination
behavior on a regular basis. Based on the results of this analysis,
we have determined that six years is an appropriate expected term for awards to
both restaurant level employees and to executives.
Upon each
stock award grant we revaluate the expected volatility, including consideration
of both historical volatility of our stock as well as implied volatility
associated with our traded options. We have estimated forfeitures
based on historical data. Based on such data, we believe that
approximately 50% of all awards granted under the RGM Plan will be forfeited and
approximately 20% of all awards granted to above-store executives will be
forfeited.
Income
Taxes
At
December 27, 2008, we had a valuation allowance of $254 million primarily to
reduce our net operating loss and tax credit carryforward benefits of $256
million, as well as our other deferred tax assets, to amounts that will more
likely than not be realized. The net operating loss and tax credit
carryforwards exist in federal, state and foreign jurisdictions that have
varying carryforward periods and restrictions on usage, including approximately
$150 million in certain foreign jurisdictions that may be carried forward
indefinitely. The estimation of future taxable income in these
jurisdictions and our resulting ability to utilize net operating loss and tax
credit carryforwards can significantly change based on future events, including
our determinations as to the feasibility of certain tax planning
strategies. Thus, recorded valuation allowances may be subject to
material future changes.
As a
matter of course, we are regularly audited by federal, state and foreign tax
authorities. Effective December 31, 2006, we adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” an interpretation of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“FIN
48”). FIN 48 requires that a position taken or expected to be taken
in a tax return be recognized in the financial statements when it is more likely
than not (i.e. a likelihood of more than fifty percent) that the position would
be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement. At December
27, 2008, we had $296 million of unrecognized tax benefits, $225 million of
which, if recognized, would affect the effective tax rate. Since
adopting FIN 48, we have evaluated unrecognized tax benefits, including interest
thereon, on a quarterly basis to insure that they have been appropriately
adjusted for events, including audit settlements, which may impact our ultimate
payment for such exposures.
Additionally,
we have not recorded the deferred tax impact for certain undistributed earnings
from our foreign subsidiaries totaling approximately $1.1 billion at December
27, 2008, as we believe these amounts are indefinitely reinvested. If
our intentions were to change in the future based on a change in circumstances,
deferred tax may need to be provided that could materially impact income
taxes.
See Note
19 for a further discussion of our income taxes.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
The
Company is exposed to financial market risks associated with interest rates,
foreign currency exchange rates and commodity prices. In the normal
course of business and in accordance with our policies, we manage these risks
through a variety of strategies, which may include the use of derivative
financial and commodity instruments to hedge our underlying
exposures. Our policies prohibit the use of derivative instruments
for trading purposes, and we have procedures in place to monitor and control
their use.
Interest Rate
Risk
We have a
market risk exposure to changes in interest rates, principally in the
U.S. We attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial instruments, primarily
interest rate swaps. These swaps are entered into with financial
institutions and have reset dates and critical terms that match those of the
underlying debt. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact on the related
debt.
At
December 27, 2008 and December 29, 2007, a hypothetical 100 basis point increase
in short-term interest rates would result, over the following twelve-month
period, in a reduction of approximately $9 million and $3 million, respectively,
in income before income taxes. The estimated reductions are based
upon the current level of variable rate debt and assume no changes in the volume
or composition of that debt and include no impact from interest income related
to cash and cash equivalents. In addition, the fair value of our
derivative financial instruments at December 27, 2008 and December 29, 2007
would decrease approximately $35 million and $31 million,
respectively. The fair value of our Senior Unsecured Notes at
December 27, 2008 and December 29, 2007 would decrease approximately $120
million and $173 million, respectively. Fair value was determined
based on the present value of expected future cash flows considering the risks
involved and using discount rates appropriate for the duration.
Foreign Currency Exchange
Rate Risk
The
combined International Division and China Division Operating Profits constitute
approximately 60% of our Operating Profit in 2008, excluding unallocated income
(expenses). In addition, the Company’s net asset exposure (defined as
foreign currency assets less foreign currency liabilities) totaled approximately
$2.1 billion as of December 27, 2008. Operating in international markets exposes
the Company to movements in foreign currency exchange rates. The
Company’s primary exposures result from our operations in Asia-Pacific, Europe
and the Americas. Changes in foreign currency exchange rates would
impact the translation of our investments in foreign operations, the fair value
of our foreign currency denominated financial instruments and our reported
foreign currency denominated earnings and cash flows. For the fiscal
year ended December 27, 2008, Operating Profit would have decreased $109 million
if all foreign currencies had uniformly weakened 10% relative to the U.S.
dollar. The estimated reduction assumes no changes in sales volumes
or local currency sales or input prices.
We
attempt to minimize the exposure related to our investments in foreign
operations by financing those investments with local currency debt when
practical. In addition, we attempt to minimize the exposure related
to foreign currency denominated financial instruments by purchasing goods and
services from third parties in local currencies when practical. Consequently,
foreign currency denominated financial instruments consist primarily of
intercompany short-term receivables and payables. At times, we
utilize forward contracts to reduce our exposure related to these intercompany
short-term receivables and payables. The notional amount and maturity
dates of these contracts match those of the underlying receivables or payables
such that our foreign currency exchange risk related to these instruments is
minimized.
Commodity Price
Risk
We are
subject to volatility in food costs as a result of market risk associated with
commodity prices. Our ability to recover increased costs through
higher pricing is, at times, limited by the competitive environment in which we
operate. We manage our exposure to this risk primarily through
pricing agreements with our vendors.
Item
8.
|
Financial
Statements and Supplementary Data.
|
INDEX
TO FINANCIAL INFORMATION
|
Page
Reference
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
54
|
|
|
|
|
Consolidated
Statements of Income for the fiscal years ended December 27, 2008,
December 29, 2007 and December 30, 2006
|
56
|
|
|
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended December 27, 2008,
December 29, 2007 and December 30, 2006
|
57
|
|
|
|
|
Consolidated
Balance Sheets as of December 27, 2008 and December 29,
2007
|
58
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity (Deficit) and Comprehensive Income
(Loss) for the fiscal years ended
December
27, 2008, December 29, 2007 and December
30, 2006
|
59
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
60
|
|
|
|
|
Management’s
Responsibility for Financial Statements
|
106
|
|
Financial
Statement Schedules
No
schedules are required because either the required information is not present or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the above listed financial
statements or notes thereto.
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and
Subsidiaries (YUM) as of December 27, 2008 and December 29, 2007, and the
related consolidated statements of income, cash flows, and shareholders’ equity
(deficit) and comprehensive income (loss) for each of the years in the
three-year period ended December 27, 2008. These consolidated
financial statements are the responsibility of YUM’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of YUM as of December 27, 2008
and December 29, 2007, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 27, 2008, in
conformity with U.S. generally accepted accounting principles.
As
discussed in the Notes to the consolidated financial statements, YUM adopted the
provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, in 2007, and Statement of Financial Accounting Standards (SFAS)
No. 158, Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, and Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year, in
2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), YUM’s internal control over financial reporting
as of December 27, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 23, 2009 expressed an
unqualified opinion on the effectiveness of internal control over financial
reporting.
/s/ KPMG
LLP
Louisville,
Kentucky
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
audited the internal control over financial reporting of YUM! Brands, Inc. and
Subsidiaries (YUM) as of December 27, 2008, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. YUM’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
“Management’s Report on Internal Control over Financial Reporting” appearing
under Item 9A. Our responsibility is to express an opinion on YUM’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, YUM maintained, in all material respects, effective internal control
over financial reporting as of December 27, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of YUM as of
December 27, 2008 and December 29, 2007, and the related consolidated statements
of income, cash flows, and shareholders’ equity (deficit) and comprehensive
income (loss) for each of the years in the three-year period ended December 27,
2008, and our report dated February 23, 2009 expressed an unqualified opinion on
those consolidated financial statements.
/s/ KPMG
LLP
Louisville,
Kentucky
Consolidated
Statements of Income
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 27, 2008, December 29, 2007 and December 30,
2006
(in
millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
9,843
|
|
|
|
$
|
9,100
|
|
|
|
$
|
8,365
|
|
Franchise
and license fees
|
|
|
1,436
|
|
|
|
|
1,316
|
|
|
|
|
1,196
|
|
Total
revenues
|
|
|
11,279
|
|
|
|
|
10,416
|
|
|
|
|
9,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food
and paper
|
|
|
3,239
|
|
|
|
|
2,824
|
|
|
|
|
2,549
|
|
Payroll
and employee benefits
|
|
|
2,370
|
|
|
|
|
2,305
|
|
|
|
|
2,142
|
|
Occupancy
and other operating expenses
|
|
|
2,856
|
|
|
|
|
2,644
|
|
|
|
|
2,403
|
|
Company
restaurant expenses
|
|
|
8,465
|
|
|
|
|
7,773
|
|
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,342
|
|
|
|
|
1,293
|
|
|
|
|
1,187
|
|
Franchise
and license expenses
|
|
|
74
|
|
|
|
|
40
|
|
|
|
|
35
|
|
Closures
and impairment (income) expenses
|
|
|
43
|
|
|
|
|
35
|
|
|
|
|
59
|
|
Refranchising
(gain) loss
|
|
|
(5
|
)
|
|
|
|
(11
|
)
|
|
|
|
(24
|
)
|
Other
(income) expense
|
|
|
(146
|
)
|
|
|
|
(71
|
)
|
|
|
|
(52
|
)
|
Total
costs and expenses, net
|
|
|
9,773
|
|
|
|
|
9,059
|
|
|
|
|
8,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
1,506
|
|
|
|
|
1,357
|
|
|
|
|
1,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
226
|
|
|
|
|
166
|
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
1,280
|
|
|
|
|
1,191
|
|
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
316
|
|
|
|
|
282
|
|
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
964
|
|
|
|
$
|
909
|
|
|
|
$
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
2.03
|
|
|
|
$
|
1.74
|
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
1.96
|
|
|
|
$
|
1.68
|
|
|
|
$
|
1.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared Per Common Share
|
|
$
|
0.72
|
|
|
|
$
|
0.45
|
|
|
|
$
|
0.43
|
|
See
accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash
Flows
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 27, 2008, December 29, 2007 and December 30,
2006
(in
millions)
|
|
2008
|
|
|
2007
|
|
|
2006
|
Cash
Flows – Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
964
|
|
|
|
$
|
909
|
|
|
|
$
|
824
|
|
Depreciation
and amortization
|
|
|
556
|
|
|
|
|
542
|
|
|
|
|
479
|
|
Closures
and impairment expenses
|
|
|
43
|
|
|
|
|
35
|
|
|
|
|
59
|
|
Refranchising
(gain) loss
|
|
|
(5
|
)
|
|
|
|
(11
|
)
|
|
|
|
(24
|
)
|
Contributions
to defined benefit pension plans
|
|
|
(66
|
)
|
|
|
|
(8
|
)
|
|
|
|
(43
|
)
|
Gain
on sale of interest in Japan unconsolidated affiliate
|
|
|
(100
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Deferred
income taxes
|
|
|
1
|
|
|
|
|
(41
|
)
|
|
|
|
(30
|
)
|
Equity
income from investments in unconsolidated affiliates
|
|
|
(41
|
)
|
|
|
|
(51
|
)
|
|
|
|
(51
|
)
|
Distributions
of income received from unconsolidated affiliates
|
|
|
41
|
|
|
|
|
40
|
|
|
|
|
32
|
|
Excess
tax benefit from share-based compensation
|
|
|
(44
|
)
|
|
|
|
(74
|
)
|
|
|
|
(65
|
)
|
Share-based
compensation expense
|
|
|
59
|
|
|
|
|
61
|
|
|
|
|
65
|
|
Changes
in accounts and notes receivable
|
|
|
(6
|
)
|
|
|
|
(4
|
)
|
|
|
|
24
|
|
Changes
in inventories
|
|
|
(8
|
)
|
|
|
|
(31
|
)
|
|
|
|
(3
|
)
|
Changes
in prepaid expenses and other current assets
|
|
|
4
|
|
|
|
|
(6
|
)
|
|
|
|
(33
|
)
|
Changes
in accounts payable and other current liabilities
|
|
|
18
|
|
|
|
|
102
|
|
|
|
|
(72
|
)
|
Changes
in income taxes payable
|
|
|
39
|
|
|
|
|
70
|
|
|
|
|
10
|
|
Other
non-cash charges and credits, net
|
|
|
66
|
|
|
|
|
18
|
|
|
|
|
85
|
|
Net
Cash Provided by Operating Activities
|
|
|
1,521
|
|
|
|
|
1,551
|
|
|
|
|
1,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
spending
|
|
|
(935
|
)
|
|
|
|
(726
|
)
|
|
|
|
(572
|
)
|
Proceeds
from refranchising of restaurants
|
|
|
266
|
|
|
|
|
117
|
|
|
|
|
257
|
|
Acquisition
of remaining interest in unconsolidated affiliate, net of cash
assumed
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(178
|
)
|
Proceeds
from the sale of interest in Japan unconsolidated
affiliate
|
|
|
—
|
|
|
|
|
128
|
|
|
|
|
—
|
|
Acquisition
of restaurants from franchisees
|
|
|
(35
|
)
|
|
|
|
(4
|
)
|
|
|
|
(7
|
)
|
Sales
of property, plant and equipment
|
|
|
72
|
|
|
|
|
56
|
|
|
|
|
57
|
|
Other,
net
|
|
|
(9
|
)
|
|
|
|
13
|
|
|
|
|
9
|
|
Net
Cash Used in Investing Activities
|
|
|
(641
|
)
|
|
|
|
(416
|
)
|
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
375
|
|
|
|
|
1,195
|
|
|
|
|
300
|
|
Repayments
of long-term debt
|
|
|
(268
|
)
|
|
|
|
(24
|
)
|
|
|
|
(211
|
)
|
Revolving
credit facilities, three months or less, net
|
|
|
279
|
|
|
|
|
(149
|
)
|
|
|
|
(23
|
)
|
Short-term
borrowings by original maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than three months – proceeds
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
236
|
|
More
than three months – payments
|
|
|
—
|
|
|
|
|
(184
|
)
|
|
|
|
(54
|
)
|
Three
months or less, net
|
|
|
(11
|
)
|
|
|
|
(8
|
)
|
|
|
|
4
|
|
Repurchase
shares of Common Stock
|
|
|
(1,628
|
)
|
|
|
|
(1,410
|
)
|
|
|
|
(983
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
44
|
|
|
|
|
74
|
|
|
|
|
65
|
|
Employee
stock option proceeds
|
|
|
72
|
|
|
|
|
112
|
|
|
|
|
142
|
|
Dividends
paid on Common Stock
|
|
|
(322
|
)
|
|
|
|
(273
|
)
|
|
|
|
(144
|
)
|
Other,
net
|
|
|
—
|
|
|
|
|
(12
|
)
|
|
|
|
(2
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(1,459
|
)
|
|
|
|
(678
|
)
|
|
|
|
(670
|
)
|
Effect
of Exchange Rate on Cash and Cash Equivalents
|
|
|
(11
|
)
|
|
|
|
13
|
|
|
|
|
8
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(590
|
)
|
|
|
|
470
|
|
|
|
|
161
|
|
Change
in Cash and Cash Equivalents due to Consolidation of an entity in
China
|
|
|
17
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Cash
and Cash Equivalents – Beginning of Year
|
|
|
789
|
|
|
|
|
319
|
|
|
|
|
158
|
|
Cash
and Cash Equivalents – End of Year
|
|
$
|
216
|
|
|
|
$
|
789
|
|
|
|
$
|
319
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Balance
Sheets
YUM!
Brands, Inc. and Subsidiaries
December
27, 2008 and December 29, 2007
(in
millions)
|
|
2008
|
|
|
2007
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
216
|
|
|
|
$
|
789
|
|
Accounts
and notes receivable, less allowance: $23 in 2008 and $21 in
2007
|
|
|
229
|
|
|
|
|
225
|
|
Inventories
|
|
|
143
|
|
|
|
|
128
|
|
Prepaid
expenses and other current assets
|
|
|
172
|
|
|
|
|
142
|
|
Deferred
income taxes
|
|
|
81
|
|
|
|
|
125
|
|
Advertising
cooperative assets, restricted
|
|
|
110
|
|
|
|
|
72
|
|
Total
Current Assets
|
|
|
951
|
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
3,710
|
|
|
|
|
3,849
|
|
Goodwill
|
|
|
605
|
|
|
|
|
672
|
|
Intangible
assets, net
|
|
|
335
|
|
|
|
|
354
|
|
Investments
in unconsolidated affiliates
|
|
|
65
|
|
|
|
|
153
|
|
Other
assets
|
|
|
561
|
|
|
|
|
443
|
|
Deferred
income taxes
|
|
|
300
|
|
|
|
|
236
|
|
Total
Assets
|
|
$
|
6,527
|
|
|
|
$
|
7,188
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities
|
|
$
|
1,473
|
|
|
|
$
|
1,650
|
|
Income
taxes payable
|
|
|
114
|
|
|
|
|
52
|
|
Short-term
borrowings
|
|
|
25
|
|
|
|
|
288
|
|
Advertising
cooperative liabilities
|
|
|
110
|
|
|
|
|
72
|
|
Total
Current Liabilities
|
|
|
1,722
|
|
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
3,564
|
|
|
|
|
2,924
|
|
Other
liabilities and deferred credits
|
|
|
1,349
|
|
|
|
|
1,063
|
|
Total
Liabilities
|
|
|
6,635
|
|
|
|
|
6,049
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Common
Stock, no par value, 750 shares authorized; 459 shares and 499 shares
issued in 2008 and 2007, respectively
|
|
|
7
|
|
|
|
|
—
|
|
Retained
earnings
|
|
|
303
|
|
|
|
|
1,119
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(418
|
)
|
|
|
|
20
|
|
Total
Shareholders’ Equity (Deficit)
|
|
|
(108
|
)
|
|
|
|
1,139
|
|
Total
Liabilities and Shareholders’ Equity (Deficit)
|
|
$
|
6,527
|
|
|
|
$
|
7,188
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Shareholders’
Equity (Deficit) and Comprehensive Income (Loss)
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 27, 2008, December 29, 2007 and December 30,
2006
(in
millions, except per share data)
|
|
Issued
Common Stock
|
|
Retained
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income(Loss)
|
|
Total
|
Balance
at December 31, 2005
|
|
|
556
|
|
|
$
|
—
|
|
|
$
|
1,631
|
|
|
$
|
(170
|
)
|
|
$
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply SAB No. 108
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
824
|
|
|
|
|
|
|
|
824
|
|
Foreign
currency translation adjustment arising during the period (includes tax
impact of $13 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
59
|
|
Minimum
pension liability adjustment (net of tax impact of $11
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
17
|
|
Net
unrealized gain on derivative instruments (net of tax impact of $3
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
905
|
|
Adjustment
to initially apply SFAS No. 158 (net of tax impact of $37
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
(67
|
)
|
Dividends
declared on Common Stock ($0.43 per common share)
|
|
|
|
|
|
|
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
(234
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(40
|
)
|
|
|
(287
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
(1,000
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $68
million)
|
|
|
13
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Compensation-related
events (includes tax impact of $3 million)
|
|
|
1
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Balance
at December 30, 2006
|
|
|
530
|
|
|
$
|
—
|
|
|
$
|
1,608
|
|
|
$
|
(156
|
)
|
|
$
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
909
|
|
|
|
|
|
|
|
909
|
|
Foreign
currency translation adjustment arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
93
|
|
Foreign
currency translation adjustment included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Pension
and post-retirement benefit plans (net of tax impact of $55
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
96
|
|
Net
unrealized loss on derivative instruments (net of tax impact of $8
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
Adjustment
to initially apply FIN 48
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
Dividends
declared on Common Stock ($0.45 per common share)
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(42
|
)
|
|
|
(252
|
)
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
(1,406
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $69
million)
|
|
|
10
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Compensation-related
events (includes tax impact of $5 million)
|
|
|
1
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Balance
at December 29, 2007
|
|
|
499
|
|
|
$
|
—
|
|
|
$
|
1,119
|
|
|
$
|
20
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
964
|
|
|
|
|
|
|
|
964
|
|
Foreign
currency translation adjustment arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
(198
|
)
|
Foreign
currency translation adjustment included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Pension
and post-retirement benefit plans (net of tax impact of $114
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208
|
)
|
|
|
(208
|
)
|
Net
unrealized loss on derivative instruments (net of tax impact of $4
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
Adjustment
to change measurement date pursuant to SFAS 158 (net of tax impact of $4
million)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Dividends
declared on Common Stock ($0.72 per common share)
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
(339
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(47
|
)
|
|
|
(181
|
)
|
|
|
(1,434
|
)
|
|
|
|
|
|
|
(1,615
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $40
million)
|
|
|
6
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Compensation-related
events (includes tax impact of $6 million)
|
|
|
1
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
Balance
at December 27, 2008
|
|
|
459
|
|
|
$
|
7
|
|
|
$
|
303
|
|
|
$
|
(418
|
)
|
|
$
|
(108
|
)
|
See accompanying Notes to Consolidated Financial Statements.
Notes
to Consolidated Financial Statements
(Tabular
amounts in millions, except share data)
Note
1 – Description of Business
YUM!
Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the
“Company”) comprises 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”). YUM is the world’s largest quick
service restaurant company based on the number of system units, with more than
36,000 units of which approximately 45% are located outside the U.S. in more
than 110 countries and territories. YUM was created as an
independent, publicly-owned company on October 6, 1997 (the “Spin-off Date”) via
a tax-free distribution by our former parent, PepsiCo, Inc., of our Common Stock
(the “Spin-off”) to its shareholders. References to YUM throughout
these Consolidated Financial Statements are made using the first person
notations of “we,” “us” or “our.”
Through
our widely-recognized Concepts, we develop, operate, franchise and license a
system of both traditional and non-traditional quick service
restaurants. Each Concept has proprietary menu items and emphasizes
the preparation of food with high quality ingredients as well as unique recipes
and special seasonings to provide appealing, tasty and attractive food at
competitive prices. Our traditional restaurants feature dine-in,
carryout and, in some instances, drive-thru or delivery
service. Non-traditional units, which are principally licensed
outlets, include express units and kiosks which have a more limited menu and
operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a
full-scale traditional outlet would not be practical or efficient. We
also operate multibrand units, where two or more of our Concepts are operated in
a single unit. In addition, we continue to pursue the multibrand
combination of Pizza Hut and WingStreet, a flavored chicken wings concept we
have developed.
YUM
consists of six operating segments: KFC-U.S., Pizza Hut-U.S., Taco
Bell-U.S., LJS/A&W-U.S., YUM Restaurants International (“YRI” or
“International Division”) and YUM Restaurants China (“China
Division”). For financial reporting purposes, management considers
the four U.S. operating segments to be similar and, therefore, has aggregated
them into a single reportable operating segment. The China Division
includes mainland China (“China”), Thailand and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Note
2 – Summary of Significant Accounting Policies
Our
preparation of the accompanying Consolidated Financial Statements in conformity
with accounting principles generally accepted 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 these estimates.
Principles of Consolidation and Basis
of Preparation. Intercompany accounts and transactions have
been eliminated. Certain investments in businesses that operate our Concepts are
accounted for by the equity method. Our lack of majority voting
rights precludes us from controlling these affiliates, and thus we do not
consolidate these affiliates. Our share of the net income or loss of
those unconsolidated affiliates is included in other (income)
expense. On January 1, 2008 we began consolidating the entity that
operates the KFCs in Beijing, China that was previously accounted for using the
equity method. See Note 5 for the impact on our Consolidated
Financial Statements.
We
participate in various advertising cooperatives with our franchisees and
licensees established to collect and administer funds contributed for use in
advertising and promotional programs designed to increase sales and enhance the
reputation of the Company and its franchise owners. Contributions to the
advertising cooperatives are required for both company operated and franchise
restaurants and are generally based on a percent of restaurant
sales. In certain of these cooperatives we possess majority voting
rights, and thus control and consolidate the cooperatives. We report
all assets and liabilities of these advertising cooperatives that we consolidate
as advertising cooperative assets, restricted and advertising cooperative
liabilities in the Consolidated Balance Sheet. The advertising
cooperatives assets, consisting primarily of cash received from the Company and
franchisees and accounts receivable from franchisees, can only be used for
selected purposes and are considered restricted. The advertising
cooperative liabilities represent the corresponding obligation arising from the
receipt of the contributions to purchase advertising and promotional
programs. As the contributions to these cooperatives are designated
and segregated for advertising, we act as an agent for the franchisees and
licensees with regard to these contributions. Thus, in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting
for Franchise Fee Revenue,” we do not reflect franchisee and licensee
contributions to these cooperatives in our Consolidated Statements of Income or
Consolidated Statements of Cash Flows.
Fiscal Year. Our
fiscal year ends on the last Saturday in December and, as a result, a 53rd week
is added every five or six years. Fiscal year 2005 included 53
weeks. The Company’s next fiscal year with 53 weeks will be
2011. The first three quarters of each fiscal year consist of 12
weeks and the fourth quarter consists of 16 weeks in fiscal years with 52 weeks
and 17 weeks in fiscal years with 53 weeks. Our subsidiaries operate
on similar fiscal calendars with period or month end dates suited to their
businesses. Our U.S. and China subsidiaries’ period end dates are
within one week of YUM’s period end date. All of our international
businesses except China close one period or one month earlier to facilitate
consolidated reporting.
Reclassifications. We
have reclassified certain items in the accompanying Consolidated Financial
Statements and Notes thereto for prior periods to be comparable with the
classification for the fiscal year ended December 27, 2008. These
reclassifications had no effect on previously reported Net income.
Specifically,
we reclassified $21 million from Other assets to Intangible assets in our
December 29, 2007 Consolidated Balance Sheet representing our transferable right
to tenancy under commercial property leases in certain International
locations. Additionally, we reclassified $54 million from long-term
Deferred income tax assets to Other liabilities and deferred credits to present
deferred tax assets associated with foreign tax credit carryforwards and
unrecognized tax benefits on a net basis where appropriate.
We have
reduced Capital spending on our Consolidated Statements of Cash Flows by $16
million and $42 million in 2007 and 2006, respectively, for the net impact of
capital spending that had been accrued for but not yet paid. The
offsetting impact was to Changes in Accounts payable and other current
liabilities.
Franchise and License
Operations. We execute franchise or license agreements for
each unit which set out the terms of our arrangement with the franchisee or
licensee. Our franchise and license agreements typically require the
franchisee or licensee to pay an initial, non-refundable fee and continuing fees
based upon a percentage of sales. Subject to our approval and their
payment of a renewal fee, a franchisee may generally renew the franchise
agreement upon its expiration.
The
internal costs we incur to provide support services to our franchisees and
licensees are charged to general and administrative (“G&A”) expenses as
incurred. Certain direct costs of our franchise and license
operations are charged to franchise and license expenses. These costs
include provisions for estimated uncollectible fees, franchise and license
marketing funding, amortization expense for franchise related intangible assets
and certain other direct incremental franchise and license support
costs.
We
monitor the financial condition of our franchisees and licensees and record
provisions for estimated losses on receivables when we believe that our
franchisees or licensees are unable to make their required
payments. While we use the best information available in making our
determination, the ultimate recovery of recorded receivables is also dependent
upon future economic events and other conditions that may be beyond our
control. Net provisions for uncollectible franchise and license
receivables of $8 million, $2 million and $2 million were included in Franchise
and license expenses in 2008, 2007 and 2006, respectively.
Revenue
Recognition. Our revenues consist of sales by Company operated
restaurants and fees from our franchisees and licensees. Revenues from Company
operated restaurants are recognized when payment is tendered at the time of
sale. The Company presents sales net of sales tax and other sales
related taxes. We recognize initial fees received from a franchisee
or licensee as revenue when we have performed substantially all initial services
required by the franchise or license agreement, which is generally upon the
opening of a store. We recognize continuing fees based upon a
percentage of franchisee and licensee sales as earned. We recognize
renewal fees when a renewal agreement with a franchisee or licensee becomes
effective. We include initial fees collected upon the sale of a
restaurant to a franchisee in Refranchising (gain) loss.
Direct Marketing
Costs. We charge direct marketing costs to expense ratably in
relation to revenues over the year in which incurred and, in the case of
advertising production costs, in the year the advertisement is first
shown. Deferred direct marketing costs, which are classified as
prepaid expenses, consist of media and related advertising production costs
which will generally be used for the first time in the next fiscal year and have
historically not been significant. To the extent we participate in
advertising cooperatives, we expense our contributions as
incurred. Our advertising expenses were $584 million, $556 million
and $521 million in 2008, 2007 and 2006, respectively. We report
substantially all of our direct marketing costs in occupancy and other operating
expenses.
Research and Development
Expenses. Research and development expenses, which we expense
as incurred, are reported in G&A expenses. Research and
development expenses were $34 million, $39 million and $33 million in 2008, 2007
and 2006, respectively.
Share-Based Employee
Compensation. We account for share-based employee compensation
in accordance with SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”). SFAS 123R requires all share-based payments to employees,
including grants of employee stock options and stock appreciation rights
(“SARs”), to be recognized in the financial statements as compensation cost over
the service period based on their fair value on the date of
grant. Compensation cost is recognized over the service period on a
straight-line basis for the fair value of awards that actually
vest.
Impairment or Disposal of Long-Lived
Assets. In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we review our
long-lived assets related to each restaurant that we are currently operating and
have not offered to refranchise, including any allocated intangible assets
subject to amortization, semi-annually for impairment, or whenever events or
changes in circumstances indicate that the carrying amount of a restaurant may
not be recoverable. We evaluate restaurants using a “two-year history
of operating losses” as our primary indicator of potential
impairment. Based on the best information available, we write down an
impaired restaurant to its estimated fair market value, which becomes its new
cost basis. Fair value is determined by discounting the forecasted
after tax cash flows, including terminal value, of the
restaurant. The discount rate is our estimate of the required rate of
return that a third-party buyer would expect to receive when purchasing a
restaurant or groups of restaurants and its related long-lived
assets. The discount rate incorporates observed rates of returns for
historical refranchising market transactions and we believe it is commensurate
with the risks and uncertainty inherent in the forecasted cash
flows. In addition, when we decide to close a restaurant it is
reviewed for impairment and depreciable lives are adjusted based on the expected
disposal date. The impairment evaluation is based on the estimated
cash flows from continuing use through the expected disposal date plus the
expected terminal value.
We
account for exit or disposal activities, including store closures, in accordance
with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” (“SFAS 146”). Store closure (income) costs include costs
of disposing of the assets as well as other facility-related expenses from
previously closed stores. These store closure costs are generally
expensed as incurred. Additionally, at the date we cease using a
property under an operating lease, we record a liability for the net present
value of any remaining lease obligations, net of estimated sublease income, if
any. Any subsequent adjustments to that liability as a result of
lease termination or changes in estimates of sublease income are recorded in
store closure costs as well. To the extent we sell assets, primarily
land, associated with a closed store, any gain or loss upon that sale is also
recorded in store closure (income) costs.
Refranchising
(gain) loss includes the gains or losses from the sales of our restaurants to
new and existing franchisees and the related initial franchise fees, reduced by
transaction costs. In executing our refranchising initiatives, we
most often offer groups of restaurants. We classify restaurants as
held for sale and suspend depreciation and amortization when (a) we make a
decision to refranchise; (b) the stores can be immediately removed from
operations; (c) we have begun an active program to locate a buyer; (d)
significant changes to the plan of sale are not likely; and (e) the sale is
probable within one year. We recognize estimated losses on
refranchisings when the restaurants are classified as held for
sale. When we have offered to refranchise stores or groups of stores
for a price less than their carrying value, but do not believe the store(s) have
met the criteria to be classified as held for sale, we recognize impairment at
the offer date for any excess of carrying value over the expected sales proceeds
plus holding period cash flows, if any. Such impairment is classified
as refranchising loss. We recognize gains on restaurant
refranchisings when the sale transaction closes, the franchisee has a minimum
amount of the purchase price in at-risk equity, and we are satisfied that the
franchisee can meet its financial obligations. If the criteria for
gain recognition are not met, we defer the gain to the extent we have a
remaining financial exposure in connection with the sales
transaction. Deferred gains are recognized when the gain recognition
criteria are met or as our financial exposure is reduced. When we
make a decision to retain a store, or group of stores, previously held for sale,
we revalue the store at the lower of its (a) net book value at our original sale
decision date less normal depreciation and amortization that would have been
recorded during the period held for sale or (b) its current fair market
value. This value becomes the store’s new cost basis. We
record any resulting difference between the store’s carrying amount and its new
cost basis to Refranchising (gain) loss.
Considerable
management judgment is necessary to estimate future cash flows, including cash
flows from continuing use, terminal value, sublease income and refranchising
proceeds. Accordingly, actual results could vary significantly from
our estimates.
Impairment of Investments in
Unconsolidated Affiliates. We record impairment charges
related to an investment in an unconsolidated affiliate whenever events or
circumstances indicate that a decrease in the fair value of an investment has
occurred which is other than temporary. In addition, we evaluate our
investments in unconsolidated affiliates for impairment when they have
experienced two consecutive years of operating losses. We recorded no
impairment associated with our investments in unconsolidated affiliates during
the years ended December 27, 2008, December 29, 2007 and December 30,
2006.
Guarantees. We
account for certain guarantees in accordance with Financial Accounting Standards
Board (“FASB”) Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45
clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of certain obligations
undertaken.
We have
also issued guarantees as a result of assigning our interest in obligations
under operating leases as a condition to the refranchising of certain Company
restaurants. Such guarantees are subject to the requirements of SFAS
No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections” (“SFAS 145”). We
recognize a liability for the fair value of such lease guarantees under SFAS 145
upon refranchising and upon any subsequent renewals of such leases when we
remain contingently liable. The related expense in both instances is
included in Refranchising (gain) loss.
Income Taxes. We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). Under SFAS 109, we record deferred tax assets
and liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, a
valuation allowance is recorded to reduce the carrying amount of deferred tax
assets if it is more likely than not all or a portion of the asset will not be
realized.
Effective
December 31, 2006, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes”, an interpretation of SFAS 109 (“FIN
48”). FIN 48 requires that a position taken or expected to be taken
in a tax return be recognized in the financial statements when it is more likely
than not (i.e. a likelihood of more than fifty percent) that the position would
be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement. FIN 48 also
requires that changes in judgment that result in subsequent recognition,
derecognition or change in a measurement of a tax position taken in a prior
annual period (including any related interest and penalties) be recognized as a
discrete item in the interim period in which the change occurs. Prior
to adopting FIN 48, we provided reserves for potential exposures when we
considered it probable that a taxing authority may take a sustainable position
on a matter contrary to our position and recorded any changes in judgment
thereon as a component of our annual effective rate.
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as components of its income tax provision.
See Note
19 for a further discussion of our income taxes.
Fair Value Measurements. In September 2006, the
Financial Accounting Standards Board (“FASB”) issued 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. For those financial assets and liabilities we record or
disclose at fair value, we adopted SFAS 157 at the beginning of
2008. Fair value is determined based on the present value of expected
future cash flows considering the risks involved and using discount rates
appropriate for the duration, and considers counterparty performance
risk.
Cash and Cash
Equivalents. Cash equivalents represent funds we have
temporarily invested (with original maturities not exceeding three months) as
part of managing our day-to-day operating cash receipts and disbursements,
including short-term, highly liquid debt securities.
Inventories. We
value our inventories at the lower of cost (computed on the first-in, first-out
method) or market.
Property, Plant and
Equipment. We state property, plant and equipment at cost less
accumulated depreciation and amortization. We calculate depreciation
and amortization on a straight-line basis over the estimated useful lives of the
assets as follows: 5 to 25 years for buildings and improvements, 3 to
20 years for machinery and equipment and 3 to 7 years for capitalized software
costs. As discussed above, we suspend depreciation and amortization
on assets related to restaurants that are held for sale.
Leases and Leasehold
Improvements. We account for our leases in accordance with
SFAS No. 13, “Accounting for Leases” (“SFAS 13”) and other related authoritative
guidance. When determining the lease term, we often include option
periods for which failure to renew the lease imposes a penalty on the Company in
such an amount that a renewal appears, at the inception of the lease, to be
reasonably assured. The primary penalty to which we are subject is
the economic detriment associated with the existence of leasehold improvements
which might be impaired if we choose not to continue the use of the leased
property. Leasehold improvements, which are a component of buildings
and improvements described above, are amortized over the shorter of their
estimated useful lives or the lease term.
We record
rent expense for leases that contain scheduled rent increases on a straight-line
basis over the lease term, including any option periods considered in the
determination of that lease term. Contingent rentals are generally
based on sales levels in excess of stipulated amounts, and thus are not
considered minimum lease payments and are included in rent expense as they
accrue. We generally do not receive leasehold improvement incentives
upon opening a store that is subject to a lease.
In
accordance with FASB Staff Position (“FSP”) No. 13-1, “Accounting for Rental
Costs Incurred during a Construction Period” (“FSP 13-1”), we expense rent
associated with leased land or buildings while a restaurant is being constructed
whether rent is paid or we are subject to a rent holiday.
Internal Development Costs and
Abandoned Site Costs. We capitalize direct costs associated
with the site acquisition and construction of a Company unit on that site,
including direct internal payroll and payroll-related costs. Only
those site-specific costs incurred subsequent to the time that the site
acquisition is considered probable are capitalized. If we
subsequently make a determination that a site for which internal development
costs have been capitalized will not be acquired or developed, any previously
capitalized internal development costs are expensed and included in G&A
expenses.
Goodwill and Intangible
Assets. The Company accounts for acquisitions of restaurants
from franchisees and other acquisitions of businesses that may occur from time
to time in accordance with SFAS No. 141, “Business Combinations” (“SFAS
141”). Goodwill in such acquisitions represents the excess of the
cost of a business acquired over the net of the amounts assigned to assets
acquired, including identifiable intangible assets and liabilities
assumed. SFAS 141 specifies criteria to be used in determining
whether intangible assets acquired in a business combination must be recognized
and reported separately from goodwill. We base amounts assigned to
goodwill and other identifiable intangible assets on independent appraisals or
internal estimates. If a Company restaurant is sold within two years
of acquisition, the goodwill associated with the acquisition is written off in
its entirety. If the restaurant is refranchised beyond two years, the
amount of goodwill written off is based on the relative fair value of the
restaurant to the fair value of the reporting unit, as described
below.
The
Company accounts for recorded goodwill and other intangible assets in accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). In accordance with SFAS 142, we do not amortize goodwill and
indefinite-lived intangible assets. We evaluate the remaining useful
life of an intangible asset that is not being amortized each reporting period to
determine whether events and circumstances continue to support an indefinite
useful life. If an intangible asset that is not being amortized is
subsequently determined to have a finite useful life, we amortize the intangible
asset prospectively over its estimated remaining useful
life. Amortizable intangible assets are amortized on a straight-line
basis.
In
accordance with the requirements of SFAS 142, goodwill has been assigned to
reporting units for purposes of impairment testing. Our reporting
units are our operating segments in the U.S. (see Note 20) and our business
management units internationally (typically individual countries). We
evaluate goodwill and indefinite lived assets for impairment on an annual basis
or more often if an event occurs or circumstances change that indicate
impairments might exist. Goodwill impairment tests consist of a
comparison of each reporting unit’s fair value with its carrying
value. Fair value is the price a willing buyer would pay for a
reporting unit, and is generally estimated using either discounted expected
future cash flows from operations or the present value of the estimated future
franchise royalty stream plus any estimated sales proceeds from
refranchising. Any estimated sales proceeds are based on relevant
historical sales multiples. The discount rate is our estimate of the
required rate of return that a third-party buyer would expect to receive when
purchasing a business from us that constitutes a reporting unit. We
believe the discount rate is commensurate with the risks and uncertainty
inherent in the forecasted cash flows. If the carrying value of a
reporting unit exceeds its fair value, goodwill is written down to its implied
fair value. We have selected the beginning of our fourth quarter as
the date on which to perform our ongoing annual impairment test for
goodwill. For 2008, 2007 and 2006, there was no impairment of
goodwill identified during our annual impairment testing.
For
indefinite-lived intangible assets, our impairment test consists of a comparison
of the fair value of an intangible asset with its carrying
amount. Fair value is an estimate of the price a willing buyer would
pay for the intangible asset and is generally estimated by discounting the
expected future cash flows associated with the intangible asset. We
also perform our annual test for impairment of our indefinite-lived intangible
assets at the beginning of our fourth quarter. No impairment of
indefinite-lived intangible assets was recorded in 2008, 2007 and
2006.
Our
definite-lived intangible assets that are not allocated to an individual
restaurant are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may not
be recoverable. An intangible asset that is deemed impaired is
written down to its estimated fair value, which is based on discounted cash
flows. For purposes of our impairment analysis, we update the cash
flows that were initially used to value the definite-lived intangible asset to
reflect our current estimates and assumptions over the asset’s future remaining
life.
Derivative Financial
Instruments. Historically, our use of derivative instruments
has primarily been to hedge interest rates and foreign currency denominated
assets and liabilities. These derivative contracts are entered into
with financial institutions. We do not use derivative instruments for
trading purposes and we have procedures in place to monitor and control their
use.
We
account for these derivative financial instruments in accordance with SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”)
as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities” (“SFAS 149”). SFAS 133 requires
that all derivative instruments be recorded on the Consolidated Balance Sheet at
fair value. For derivative instruments that are designated and
qualify as a fair value hedge, the gain or loss on the derivative instrument as
well as the offsetting gain or loss on the hedged item attributable to the
hedged risk are recognized in the results of operations. For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative instrument is reported
as a component of other comprehensive income (loss) and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. For derivative instruments that are designated and
qualify as a net investment hedge, the effective portion of the gain or loss on
the derivative instrument is reported in the foreign currency translation
component of other comprehensive income (loss). Any ineffective
portion of the gain or loss on the derivative instrument for a cash flow hedge
or net investment hedge is recorded in the results of operations
immediately. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in the results of operations
immediately. See Note 14 for a discussion of our use of derivative
instruments, management of credit risk inherent in derivative instruments and
fair value information.
Common Stock Share
Repurchases. From time to time, we repurchase shares of our
Common Stock under share repurchase programs authorized by our Board of
Directors. Shares repurchased constitute authorized, but unissued
shares under the North Carolina laws under which we are
incorporated. Additionally, our Common Stock has no par or stated
value. Accordingly, we record the full value of share repurchases,
upon the trade date, against Common Stock except when to do so would result in a
negative balance in our Common Stock account. In such instances, on a
period basis, we record the cost of any further share repurchases as a reduction
in retained earnings. Due to the large number of share repurchases
and the increase in our Common Stock market value over the past several years,
our Common Stock balance is frequently zero at the end of any
period. Accordingly, $1,434 million, $1,154 million and $713 million
in share repurchases were recorded as a reduction in Retained earnings in 2008,
2007 and 2006, respectively. See Note 18 for additional
information.
Pension and Post-Retirement Medical
Benefits. In September 2006, the FASB issued SFAS No. 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (“SFAS
158”). In the fourth quarter of 2006, we adopted the recognition and
disclosure provisions of SFAS 158. 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. The Company had certain plans
which had measurement dates that did not coincide with our fiscal year end and
thus were required to change their measurement dates in 2008. As
permitted by SFAS 158, we used the measurements performed in 2007 to estimate
the effects of our change to fiscal year end measurement dates.
The
recognition and disclosure requirements of SFAS 158 required the Company to
recognize the funded status of its pension and post-retirement plans in the
December 30, 2006 Consolidated Balance Sheet, with a corresponding adjustment to
Accumulated other comprehensive income (loss), net of tax. The impact
of adopting these provisions of SFAS 158 was an after tax reduction of
Shareholders’ Equity (Deficit) of $67 million in 2006. Subsequent to
the adoption of SFAS 158, gains or losses and prior service costs or credits are
being recognized as they arise as a component of other comprehensive income
(loss) to the extent they have not been recognized as a component of net
periodic benefit cost pursuant to SFAS No. 87, “Employers’ Accounting for
Pensions,” or SFAS No. 106, “Employers’ Accounting for Postretirement Benefits
Other Than Pensions”. In the fourth quarter of 2008, we adopted the
measurement date provisions of SFAS 158 and recorded a decrease to Retained
Earnings of $9 million, or $6 million after tax, for our pension plans and $2
million, or $1 million after tax, for our post-retirement medical plan,
respectively.
Quantification of
Misstatements. In September 2006, the Securities and Exchange
Commission (the “SEC”) issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement for the purpose of a materiality assessment. SAB 108
requires that registrants quantify a current year misstatement using an approach
that considers both the impact of prior year misstatements that remain on the
balance sheet and those that were recorded in the current year income statement
(the “Dual Method”). Historically, we quantified misstatements and
assessed materiality based on a current year income statement
approach. We were required to adopt SAB 108 in the fourth quarter of
2006.
The
transition provisions of SAB 108 permitted uncorrected prior year misstatements
that were not material to any prior periods under our historical income
statement approach but that would have been material under the dual method of
SAB 108 to be corrected in the carrying amounts of assets and liabilities at the
beginning of 2006 with the offsetting adjustment to retained earnings for the
cumulative effect of misstatements. We have adjusted certain balances
in the accompanying Consolidated Financial Statements at the beginning of 2006
to correct the misstatements discussed below which we considered to be
immaterial in prior periods under our historical approach. The impact
of the January 1, 2006 cumulative effect adjustment, net of any income tax
effect, was an increase to retained earnings as follows:
Deferred
Tax Liabilities Adjustments
|
|
$
|
79
|
Reversal
of Unallocated Reserve
|
|
|
6
|
Non-GAAP
Conventions
|
|
|
15
|
Net
Increase to January 1, 2006 Retained Earnings
|
|
$
|
100
|
Deferred
Taxes Our opening Consolidated Balance Sheet at Spin-off
included significant deferred tax assets and liabilities. Over time
we have determined that deferred tax liability amounts were recorded in excess
of those necessary to reflect our temporary differences.
Unallocated
Reserves A reserve was established in 1999 equal to certain
out of year corrections recorded during that year such that there was no
misstatement under our historical approach. No adjustments have been
recorded to this reserve since its establishment and we do not believe the
reserve is required.
Non-GAAP Accounting
Conventions Prior to 2006, we used certain non-GAAP
conventions to account for capitalized interest on restaurant construction
projects, the leases of our then Pizza Hut United Kingdom (“U.K.”)
unconsolidated affiliate and certain state tax benefits. The net
income statement impact on any given year from the use of these non-GAAP
conventions was immaterial both individually and in the aggregate under our
historical approach. Below is a summary of the accounting policies we
adopted effective the beginning of 2006 and the impact of the cumulative effect
adjustment under SAB 108, net of any income tax effect.
Interest
Capitalization SFAS No. 34, “Capitalization of Interest Cost”
requires that interest be capitalized as part of an asset’s acquisition
cost. We traditionally have not capitalized interest on individual
restaurant construction projects. We increased our 2006 beginning
retained earnings balance by approximately $12 million for the estimated
capitalized interest on existing restaurants, net of accumulated
depreciation.
Lease Accounting by our
Pizza Hut United Kingdom Unconsolidated Affiliate Prior to our
fourth quarter 2006 acquisition of the remaining fifty percent interest in our
Pizza Hut U.K. unconsolidated affiliate, we accounted for our ownership under
the equity method. The unconsolidated affiliate historically
accounted for all of its leases as operating and we made no adjustments in
recording equity income. We decreased our 2006 beginning retained
earnings balance by approximately $4 million to reflect our fifty percent share
of the cumulative equity income impact of properly recording certain leases as
capital.
Recognition of Certain State
Tax Benefits We historically recognized certain state tax
benefits on a cash basis as they were recognized on the respective state tax
returns instead of in the year the benefit originated. We increased
our 2006 beginning retained earnings by approximately $7 million to recognize
these state tax benefits as deferred tax assets.
New
Accounting Pronouncements Not Yet Adopted.
In
February 2008, the FASB issued FASB Staff Position (“FSP”) No. 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 non-financial assets and liabilities, which, for the Company,
primarily includes long-lived assets, goodwill and intangibles for which fair
value would be determined as part of related impairment tests, and we do not
currently anticipate that full adoption in 2009 will materially impact the
Company’s results of operations or financial condition.
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 and interim
periods 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.
In
December 2008, the FASB issued FSP No. FAS 132(R)-1 (“FSP FAS 132(R)-1”),
“Employers’ Disclosures about Postretirement Benefit Plan Assets,” which expands
the disclosure requirements about plan assets for defined benefit pension plans
and postretirement plans. FSP FAS 132(R)-1 is effective for financial
statements issued for fiscal years ending after December 15, 2009, the year
ending December 26, 2009 for the Company.
Note 3 – 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.
Note 4 – Earnings Per Common Share
(“EPS”)
|
2008
|
|
|
2007
|
|
|
2006
|
Net
income
|
$
|
964
|
|
|
|
$
|
909
|
|
|
|
$
|
824
|
|
Weighted-average
common shares outstanding (for basic calculation)
|
|
475
|
|
|
|
|
522
|
|
|
|
|
546
|
|
Effect
of dilutive share-based employee compensation
|
|
16
|
|
|
|
|
19
|
|
|
|
|
18
|
|
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
|
491
|
|
|
|
|
541
|
|
|
|
|
564
|
|
Basic
EPS
|
$
|
2.03
|
|
|
|
$
|
1.74
|
|
|
|
$
|
1.51
|
|
Diluted
EPS
|
$
|
1.96
|
|
|
|
$
|
1.68
|
|
|
|
$
|
1.46
|
|
Unexercised
employee stock options and stock appreciation rights (in millions)
excluded from the diluted EPS compensation(a)
|
|
5.9
|
|
|
|
|
5.7
|
|
|
|
|
13.3
|
|
(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.
|
Note
5 – Items Affecting Comparability of Net Income and Cash
Flows
|
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 Consolidated Statement of Income for the
year ended December 27, 2008 as a result of our consolidation of this entity was
as follows:
|
Increase
(Decrease)
|
Company
sales
|
$
|
|
299
|
|
Company
restaurant expenses
|
|
|
237
|
|
Franchise
and license fees
|
|
|
(19
|
)
|
General
and administrative expenses
|
|
|
6
|
|
Other
(income) expense
|
|
|
(30
|
)
|
Operating
Profit
|
|
|
7
|
|
The
impact on Other (income) expense includes both the current year minority
interest in pre-tax earnings of the unconsolidated affiliate as well as the
reduction in Other (income) expense that resulted from our share of after-tax
earnings no longer being reported in Other (income) expense. 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
Consolidated Balance Sheet at December 27, 2008 reflects the consolidation of
this entity; with Investment in unconsolidated affiliates eliminated, the
entity’s balance sheet consolidated and a minority interest reflected in Other
liabilities and deferred credits.
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 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 in accounts payable and other current
liabilities, which was relieved 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 year ended December 27,
2008 as the Other income we previously recorded representing our share of
earnings of the unconsolidated affiliate has historically not been
significant.
U.S. Business
Transformation
As part
of our plan to transform our U.S. business we took several measures (“the U.S.
business transformation measures”) in 2008. These measures included:
expansion of our U.S. refranchising; 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.
In the
year ended December 27, 2008, we refranchised 700 restaurants in the U.S.
resulting in a pre-tax loss of $5 million. These refranchising losses
were the net result of our refranchising of, or offers to refranchise, stores or
groups of stores in the U.S. at prices less than their recorded carrying
values.
We
provided severance and early retirement benefits to certain U.S. based employees
as part of our G&A productivity initiatives and realignment of
resources. In connection with this we recorded a pre-tax charge of
$49 million during 2008 including $18 million from the resulting impact on our
pension and post retirement medical plans. The current liability for
the severance portion of this charge was $27 million as of December 27,
2008.
Additionally,
the Company recognized pre-tax expenses of $7 million related to investments in
our U.S. Brands.
We are
not including the impacts of these U.S. business transformation measures in our
U.S. segment for performance reporting purposes as we do not believe they are
indicative of our ongoing operations.
Pizza Hut United Kingdom
Acquisition
On
September 12, 2006, we completed the acquisition of the remaining fifty percent
ownership interest of our Pizza Hut U.K. unconsolidated affiliate for $187
million in cash, including transaction costs and prior to $9 million of cash
assumed. This
unconsolidated affiliate owned more than 500 restaurants in the
U.K. The acquisition was driven by growth opportunities we see in the
market and the desire of our former partner in the unconsolidated affiliate to
refocus its business to other industry sectors. Prior to this
acquisition, we accounted for our ownership interest under the equity method of
accounting.
Under the
equity method of accounting, we reported our fifty percent share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. Since the date
of acquisition, we have reported Company sales and the associated restaurant
costs, G&A expense, interest expense and income taxes associated with the
restaurants previously owned by the unconsolidated affiliate in the appropriate
line items of our Consolidated Statements of Income. We no longer
record franchise fee income for the restaurants previously owned by the
unconsolidated affiliate nor do we report other income under the equity method
of accounting. As a result of this acquisition, Company sales and
restaurant profit increased $576 million and $59 million, respectively,
franchise fees decreased $19 million and G&A expenses increased $33 million
in 2007 compared to 2006.
If the
acquisition had been completed as of the beginning of the year ended December
30, 2006, pro forma Company sales and franchise and license fees would have been
as follows:
|
|
|
|
2006
|
|
|
|
Company
sales
|
|
|
|
|
|
$
|
8,886
|
|
|
|
|
|
|
Franchise
and license fees
|
|
|
|
|
|
$
|
1,176
|
|
|
|
|
|
|
The pro
forma impact of the acquisition on net income and diluted earnings per share
would not have been significant in 2006. The pro forma information is
not necessarily indicative of the results of operations had the acquisition
actually occurred at the beginning of this period nor is it necessarily
indicative of future results.
Facility
Actions
Refranchising
(gain) loss, Store closure (income) costs and Store impairment charges by
reportable segment are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
(gain) loss(a)
|
|
$
|
5
|
|
|
|
$
|
(12
|
)
|
|
|
$
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(4
|
)
|
|
|
|
(9
|
)
|
|
|
|
(1
|
)
|
Store
impairment charges
|
|
|
34
|
|
|
|
|
23
|
|
|
|
|
38
|
|
Closure
and impairment (income) expenses
|
|
$
|
30
|
|
|
|
$
|
14
|
|
|
|
$
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YRI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
(gain) loss(a)
|
|
$
|
(9
|
)
|
|
|
$
|
3
|
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(6
|
)
|
|
|
|
1
|
|
|
|
|
1
|
|
Store
impairment charges
|
|
|
11
|
|
|
|
|
13
|
|
|
|
|
15
|
|
Closure
and impairment (income) expenses
|
|
$
|
5
|
|
|
|
$
|
14
|
|
|
|
$
|
16
|
|
China
Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
(gain) loss(a)
|
|
$
|
(1
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(2
|
)
|
|
|
|
—
|
|
|
|
|
(1
|
)
|
Store
impairment charges
|
|
|
10
|
|
|
|
|
7
|
|
|
|
|
7
|
|
Closure
and impairment (income) expenses
|
|
$
|
8
|
|
|
|
$
|
7
|
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
(gain) loss(a)
|
|
$
|
(5
|
)
|
|
|
$
|
(11
|
)
|
|
|
$
|
(24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(12
|
)
|
|
|
|
(8
|
)
|
|
|
|
(1
|
)
|
Store
impairment charges
|
|
|
55
|
|
|
|
|
43
|
|
|
|
|
60
|
|
Closure
and impairment (income) expenses
|
|
$
|
43
|
|
|
|
$
|
35
|
|
|
|
$
|
59
|
|
(a)
|
Refranchising
(gain) loss is not allocated to segments for performance reporting
purposes.
|
|
|
(b)
|
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.
|
The
following table summarizes the 2008 and 2007 activity related to reserves for
remaining lease obligations for closed stores.
|
|
|
|
Beginning
Balance
|
|
|
Amounts
Used
|
|
|
New
Decisions
|
|
|
Estimate/Decision
Changes
|
|
|
CTA/
Other
|
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Activity
|
|
|
|
$
|
34
|
|
|
|
(7
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
$
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Activity
|
|
|
|
$
|
36
|
|
|
|
(12
|
)
|
|
|
8
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
34
|
|
Assets
held for sale at December 27, 2008 and December 29, 2007 total $31 million and
$9 million, respectively, of U.S. property, plant and equipment and are included
in prepaid expenses and other current assets on our Consolidated Balance
Sheets.
Note
6 – Supplemental Cash Flow Data
|
|
2008
|
|
|
2007
|
|
|
2006
|
Cash
Paid For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
248
|
|
|
|
$
|
177
|
|
|
|
$
|
185
|
|
Income
taxes
|
|
|
260
|
|
|
|
|
264
|
|
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations incurred to acquire assets
|
|
$
|
24
|
|
|
|
$
|
59
|
(a)
|
|
|
$
|
9
|
|
Net
investment in direct financing leases
|
|
|
26
|
|
|
|
|
33
|
|
|
|
|
—
|
|
(a)
|
Includes
the capital lease of an airplane (see Note
13).
|
Note
7 – Franchise and License Fees
|
|
2008
|
|
2007
|
|
2006
|
|
Initial
fees, including renewal fees
|
|
$
|
61
|
|
|
$
|
49
|
|
|
$
|
57
|
|
|
Initial
franchise fees included in refranchising gains
|
|
|
(20
|
)
|
|
|
(10
|
)
|
|
|
(17
|
)
|
|
|
|
|
41
|
|
|
|
39
|
|
|
|
40
|
|
|
Continuing
fees
|
|
|
1,395
|
|
|
|
1,277
|
|
|
|
1,156
|
|
|
|
|
$
|
1,436
|
|
|
$
|
1,316
|
|
|
$
|
1,196
|
|
|
Note
8 – Other (Income) Expense
|
|
2008
|
|
2007
|
|
2006
|
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(41
|
)
|
|
$
|
(51
|
)
|
|
$
|
(51
|
)
|
|
Minority
Interest(a)
|
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
Gain
upon sale of investment in unconsolidated affiliate(b)(c)
|
|
|
(100
|
)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
Contract
termination charge(d)
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
Wrench
litigation income(e)
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
—
|
|
|
Foreign
exchange net (gain) loss and other
|
|
|
(16
|
)
|
|
|
(3
|
)
|
|
|
(7
|
)
|
|
Other
(income) expense
|
|
$
|
(146
|
)
|
|
$
|
(71
|
)
|
|
$
|
(52
|
)
|
|
(a)
|
On
January 1, 2008, the Company began consolidating an entity in China in
which we have a majority ownership interest. See Note
5.
|
|
|
(b)
|
Fiscal
year 2008 reflects the gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
5.
|
|
|
(c)
|
Fiscal
years 2007 and 2006 reflect recognition of income associated with receipt
of payments 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.
|
|
|
(d)
|
Reflects
an $8 million charge associated with the termination of a beverage
agreement in the U.S. segment.
|
|
|
(e)
|
Fiscal
year 2007 reflects financial recoveries from settlements with insurance
carriers related to a lawsuit settled by Taco Bell Corporation in
2004.
|
Note 9 – Property, Plant and Equipment,
net
|
|
2008
|
|
|
2007
|
Land
|
|
$
|
517
|
|
|
|
$
|
548
|
|
Buildings
and improvements
|
|
|
3,596
|
|
|
|
|
3,649
|
|
Capital
leases, primarily buildings
|
|
|
259
|
|
|
|
|
284
|
|
Machinery
and equipment
|
|
|
2,525
|
|
|
|
|
2,651
|
|
|
|
|
6,897
|
|
|
|
|
7,132
|
|
Accumulated
depreciation and amortization
|
|
|
(3,187
|
)
|
|
|
|
(3,283
|
)
|
|
|
$
|
3,710
|
|
|
|
$
|
3,849
|
|
Depreciation
and amortization expense related to property, plant and equipment was $542
million, $514 million and $466 million in 2008, 2007 and 2006,
respectively.
Note
10 – Goodwill and Intangible Assets
The
changes in the carrying amount of goodwill are as follows:
|
|
U.S.
|
|
|
YRI
|
|
China
Division
|
|
|
Worldwide
|
Balance
as of December 30, 2006
|
|
$
|
367
|
|
|
|
$
|
237
|
|
|
|
$
|
58
|
|
|
|
$
|
662
|
|
Acquisitions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Disposals
and other, net(a)
|
|
|
(9
|
)
|
|
|
|
17
|
|
|
|
|
2
|
|
|
|
|
10
|
|
Balance
as of December 29, 2007
|
|
$
|
358
|
|
|
|
$
|
254
|
|
|
|
$
|
60
|
|
|
|
$
|
672
|
|
Acquisitions
|
|
|
10
|
|
|
|
|
—
|
|
|
|
|
6
|
|
|
|
|
16
|
|
Disposals
and other, net(b)
|
|
|
(12
|
)
|
|
|
|
(71
|
)
|
|
|
|
—
|
|
|
|
|
(83
|
)
|
Balance
as of December 27, 2008
|
|
$
|
356
|
|
|
|
$
|
183
|
|
|
|
$
|
66
|
|
|
|
$
|
605
|
|
(a)
|
Disposals
and other, net for YRI primarily reflects adjustments to the Pizza Hut
U.K. goodwill allocation and the impact of foreign currency translation on
existing balances. Disposals and other, net for the U.S.
Division, primarily reflects goodwill write-offs associated with
refranchising.
|
|
|
(b)
|
Disposals
and other, net for YRI primarily reflects the impact of foreign currency
translation on existing balances. Disposals and other, net for
the U.S. Division, primarily reflects goodwill write-offs associated with
refranchising.
|
Intangible
assets, net for the years ended 2008 and 2007 are as follows:
|
|
2008
|
|
|
2007
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
Definite-lived
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
contract rights
|
|
$
|
147
|
|
|
|
$
|
(70
|
)
|
|
|
$
|
157
|
|
|
|
$
|
(73
|
)
|
Trademarks/brands
|
|
|
221
|
|
|
|
|
(35
|
)
|
|
|
|
221
|
|
|
|
|
(26
|
)
|
Lease
tenancy rights
|
|
|
31
|
|
|
|
|
(7
|
)
|
|
|
|
27
|
|
|
|
|
(6
|
)
|
Favorable/unfavorable
operating leases
|
|
|
12
|
|
|
|
|
(9
|
)
|
|
|
|
15
|
|
|
|
|
(12
|
)
|
Reacquired
franchise rights
|
|
|
11
|
|
|
|
|
(1
|
)
|
|
|
|
17
|
|
|
|
|
(1
|
)
|
Other
|
|
|
6
|
|
|
|
|
(2
|
)
|
|
|
|
6
|
|
|
|
|
(2
|
)
|
|
|
$
|
428
|
|
|
|
$
|
(124
|
)
|
|
|
$
|
443
|
|
|
|
$
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/brands
|
|
$
|
31
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
We have
recorded intangible assets through past acquisitions representing the value of
our KFC, LJS and A&W trademarks/brands. The value of a
trademark/brand is determined based upon the value derived from the royalty we
avoid, in the case of Company stores, or receive, in the case of franchise and
licensee stores, for the use of the trademark/brand. We have
determined that our KFC trademark/brand intangible asset has an indefinite life
and therefore is not amortized. We have determined that our LJS and
A&W trademarks/brands are subject to amortization and are being amortized
over their expected useful lives which are currently thirty years.
Amortization
expense for all definite-lived intangible assets was $18 million in 2008, $19
million in 2007 and $15 million in 2006. Amortization expense for
definite-lived intangible assets will approximate $17 million annually in 2009
through 2012 and $14 million in 2013.
Note
11 – Accounts Payable and Other Current Liabilities
|
|
|
|
2008
|
|
|
2007
|
Accounts
payable
|
|
|
|
$
|
508
|
|
|
|
$
|
519
|
|
Capital
expenditure liability
|
|
|
|
|
130
|
|
|
|
|
120
|
|
Accrued
compensation and benefits
|
|
|
|
|
376
|
|
|
|
|
372
|
|
Dividends
payable
|
|
|
|
|
87
|
|
|
|
|
75
|
|
Proceeds
from sale of interest in Japan unconsolidated affiliate (See Note
5)
|
|
|
|
|
—
|
|
|
|
|
128
|
|
Other
current liabilities
|
|
|
|
|
372
|
|
|
|
|
436
|
|
|
|
|
|
$
|
1,473
|
|
|
|
$
|
1,650
|
|
Note
12 – Short-term Borrowings and Long-term Debt
|
|
2008
|
|
|
2007
|
Short-term
Borrowings
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
15
|
|
|
|
$
|
268
|
|
Other
|
|
|
10
|
|
|
|
|
20
|
|
|
|
$
|
25
|
|
|
|
$
|
288
|
|
Long-term
Debt
|
|
|
|
|
|
|
|
|
|
Unsecured
International Revolving Credit Facility, expires November
2012
|
|
$
|
—
|
|
|
|
$
|
28
|
|
Unsecured
Revolving Credit Facility, expires November 2012
|
|
|
299
|
|
|
|
|
—
|
|
Senior,
Unsecured Term Loan, due July 2011
|
|
|
375
|
|
|
|
|
—
|
|
Senior,
Unsecured Notes, due May 2008
|
|
|
—
|
|
|
|
|
250
|
|
Senior,
Unsecured Notes, due April 2011
|
|
|
648
|
|
|
|
|
648
|
|
Senior,
Unsecured Notes, due July 2012
|
|
|
399
|
|
|
|
|
399
|
|
Senior,
Unsecured Notes, due April 2016
|
|
|
300
|
|
|
|
|
300
|
|
Senior,
Unsecured Notes, due March 2018
|
|
|
598
|
|
|
|
|
598
|
|
Senior,
Unsecured Notes, due November 2037
|
|
|
597
|
|
|
|
|
597
|
|
Capital
lease obligations (See Note 13)
|
|
|
234
|
|
|
|
|
282
|
|
Other,
due through 2019 (11%)
|
|
|
70
|
|
|
|
|
73
|
|
|
|
|
3,520
|
|
|
|
|
3,175
|
|
Less
current maturities of long-term debt
|
|
|
(15
|
)
|
|
|
|
(268
|
)
|
Long-term
debt excluding SFAS 133 adjustment
|
|
|
3,505
|
|
|
|
|
2,907
|
|
Derivative
instrument adjustment under SFAS 133 (See Note 14)
|
|
|
59
|
|
|
|
|
17
|
|
Long-term
debt including SFAS 133 adjustment
|
|
$
|
3,564
|
|
|
|
$
|
2,924
|
|
Our
primary bank credit agreement comprises a $1.15 billion syndicated senior
unsecured revolving credit facility (the “Credit Facility”) which matures in
November 2012 and includes 23 participating banks with commitments ranging from
$20 million to $113 million. Under the terms of the Credit Facility,
we may borrow up to the maximum borrowing limit, less outstanding letters of
credit or banker’s acceptances, where applicable. At December 27,
2008, our unused Credit Facility totaled $685 million net of outstanding letters
of credit of $166 million. There were borrowings of $299 million
outstanding under the Credit Facility at December 27, 2008. The
interest rate for borrowings under the Credit Facility ranges from 0.25% to
1.25% over the London Interbank Offered Rate (“LIBOR”) or is determined by an
Alternate Base Rate, which is the greater of the Prime Rate or the Federal Funds
Rate plus 0.50%. The exact spread over LIBOR or the Alternate Base
Rate, as applicable, depends on our performance under specified financial
criteria. Interest on any outstanding borrowings under the Credit
Facility is payable at least quarterly.
We also
have a $350 million, syndicated revolving credit facility (the “International
Credit Facility,” or “ICF”) which matures in November 2012 and includes 6 banks
with commitments ranging from $35 million to $90 million. There was
available credit of $350 million and no borrowings outstanding under the ICF at
the end of 2008. The interest rate for borrowings under the ICF ranges from
0.31% to 1.50% over LIBOR or is determined by a Canadian Alternate Base Rate,
which is the greater of the Citibank, N.A., Canadian Branch’s publicly announced
reference rate or the “Canadian Dollar Offered Rate” plus 0.50%. The
exact spread over LIBOR or the Canadian Alternate Base Rate, as applicable,
depends upon YUM’s performance under specified financial criteria. Interest on
any outstanding borrowings under the ICF is payable at least
quarterly.
On July
11, 2008 we entered into a variable rate senior unsecured term loan (“Domestic
Term Loan”), in an aggregate principal amount of $375 million that matures in
three years. At our discretion the variable rate resets at one, two,
three or six month intervals. We determine whether the variable rate
at each reset date is based upon: (1) LIBOR plus an applicable spread
of up to 2.5%, or (2) an Alternate Base Rate. The Alternate Base Rate
is the greater of the Prime Rate or the Federal Funds Rate plus 0.50%, plus an
applicable spread of up to 1.5%. The proceeds from the Domestic Term
Loan were used for general corporate purposes.
The
Credit Facility, Domestic Term Loan, and the ICF are unconditionally guaranteed
by our principal domestic subsidiaries. Additionally, the ICF is
unconditionally guaranteed by YUM. These agreements contain financial
covenants relating to maintenance of leverage and fixed charge coverage ratio
and also contain affirmative and negative covenants including, among other
things, limitations on certain additional indebtedness and liens, and certain
other transactions specified in the agreement. Given the Company’s
strong balance sheet and cash flows we were able to comply with all debt
covenant requirements at December 27, 2008 with a considerable amount of
cushion.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes with varying maturity dates from 2011 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
$2.6 billion at December 27, 2008. In May 2008, $250 million of
Senior Unsecured Notes matured, and the repayment was funded with additional
borrowings under our Credit Facility.
The
following table summarizes all Senior Unsecured Notes issued that remain
outstanding at December 27, 2008:
|
|
|
|
|
|
|
Interest
Rate
|
Issuance
Date(a)
|
|
Maturity
Date
|
|
Principal
Amount
(in
millions)
|
|
Stated
|
|
Effective(b)
|
April
2001
|
|
April
2011
|
|
$
|
650
|
|
8.88%
|
|
9.20%
|
June
2002
|
|
July
2012
|
|
$
|
400
|
|
7.70%
|
|
8.04%
|
April
2006
|
|
April
2016
|
|
$
|
300
|
|
6.25%
|
|
6.03%
|
October
2007
|
|
March
2018
|
|
$
|
600
|
|
6.25%
|
|
6.38%
|
October
2007
|
|
November
2037
|
|
$
|
600
|
|
6.88%
|
|
7.29%
|
(a)
|
Interest
payments commenced six months after issuance date and are payable
semi-annually thereafter.
|
|
|
(b)
|
Includes
the effects of the amortization of any (1) premium or discount; (2) debt
issuance costs; and (3) gain or loss upon settlement of related treasury
locks and forward starting interest rate swaps utilized to hedge the
interest rate risk prior to the debt issuance. Excludes the
effect of any swaps that remain outstanding as described in Note
14.
|
The
annual maturities of short-term borrowings and long-term debt as of December 27,
2008, excluding capital lease obligations of $234 million and derivative
instrument adjustments of $59 million, are as follows:
Year
ended:
|
|
|
|
2009
|
|
|
$
|
12
|
|
2010
|
|
|
|
3
|
|
2011
|
|
|
|
1,029
|
|
2012
|
|
|
|
704
|
|
2013
|
|
|
|
5
|
|
Thereafter
|
|
|
|
1,551
|
|
Total
|
|
|
$
|
3,304
|
|
Interest
expense on short-term borrowings and long-term debt was $253 million, $199
million and $172 million in 2008, 2007 and 2006, respectively.
Note
13 – Leases
At
December 27, 2008 we operated more than 7,300 restaurants, leasing the
underlying land and/or building in more than 5,800 of those restaurants with the
vast majority of our commitments expiring within 20 years from the inception of
the lease. Our longest lease expires in 2151. We also
lease office space for headquarters and support functions, as well as certain
office and restaurant equipment. We do not consider any of these
individual leases material to our operations. Most leases require us
to pay related executory costs, which include property taxes, maintenance and
insurance.
In 2007,
we entered into an agreement to lease a corporate aircraft to enhance our
international travel capabilities. This lease provided for an upfront
payment of $10 million and monthly payments for three years. At the
end of the three year period we have the option to purchase the
aircraft. In accordance with SFAS No. 13, this lease has been
classified as capital and we had a related capital lease obligation recorded of
$40 million at December 27, 2008. Our lease is with CVS Corporation
(“CVS”). One of the Company’s directors is the Chairman, Chief
Executive Officer and President of CVS. Multiple independent
appraisals were obtained during the negotiation process to insure that the lease
was reflective of an arms-length transaction.
Future
minimum commitments and amounts to be received as lessor or sublessor under
non-cancelable leases are set forth below:
|
|
Commitments
|
|
|
|
Lease
Receivables
|
|
|
|
Capital
|
|
|
|
Operating
|
|
|
|
Direct
Financing
|
|
|
|
Operating
|
|
2009
|
|
$
|
26
|
|
|
|
$
|
491
|
|
|
|
$
|
13
|
|
|
|
$
|
41
|
|
2010
|
|
|
64
|
|
|
|
|
451
|
|
|
|
|
13
|
|
|
|
|
37
|
|
2011
|
|
|
23
|
|
|
|
|
409
|
|
|
|
|
14
|
|
|
|
|
34
|
|
2012
|
|
|
22
|
|
|
|
|
368
|
|
|
|
|
14
|
|
|
|
|
30
|
|
2013
|
|
|
21
|
|
|
|
|
333
|
|
|
|
|
14
|
|
|
|
|
27
|
|
Thereafter
|
|
|
228
|
|
|
|
|
2,524
|
|
|
|
|
79
|
|
|
|
|
103
|
|
|
|
$
|
384
|
|
|
|
$
|
4,576
|
|
|
|
$
|
147
|
|
|
|
$
|
272
|
|
At
December 27, 2008 and December 29, 2007, the present value of minimum payments
under capital leases was $234 million and $282 million,
respectively. At December 27, 2008 and December 29, 2007, unearned
income associated with direct financing lease receivables was $63 million and
$46 million, respectively.
The
details of rental expense and income are set forth below:
|
|
2008
|
|
2007
|
|
2006
|
|
Rental
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
531
|
|
|
$
|
474
|
|
|
$
|
412
|
|
|
Contingent
|
|
|
113
|
|
|
|
81
|
|
|
|
62
|
|
|
|
|
$
|
644
|
|
|
$
|
555
|
|
|
$
|
474
|
|
|
Minimum
rental income
|
|
$
|
28
|
|
|
$
|
23
|
|
|
$
|
21
|
|
|
Note
14 – Financial Instruments
Derivative
Instruments
We enter
into interest rate swaps with the objective of reducing our exposure to interest
rate risk and lowering interest expense for a portion of our
debt. Under the contracts, we agree with other parties to exchange,
at specified intervals, the difference between variable rate and fixed rate
amounts calculated on a notional principal amount. At December 27,
2008 and December 29, 2007, interest rate derivative instruments outstanding had
notional amounts of $775 million and $850 million,
respectively. These swaps have reset dates and floating rate indices
which match those of our underlying fixed-rate debt and have been designated as
fair value hedges of a portion of that debt. As the swaps qualify for
the short-cut method under SFAS 133, no ineffectiveness has been
recorded.
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 notional amount, maturity date, and
currency of these contracts match those of the underlying receivables or
payables. For those foreign currency exchange forward contracts that
we have designated as cash flow hedges, we measure ineffectiveness by comparing
the cumulative change in the forward contract with the cumulative change in the
hedged item. No material ineffectiveness was recognized in 2008, 2007
or 2006 for those foreign currency forward contracts designated as cash flow
hedges.
As of
December 27, 2008, we had a net deferred loss associated with cash flow hedges
of approximately $17 million, net of tax, due to treasury locks, forward
starting interest rate swaps and foreign currency forward
contracts. The majority of this loss arose from the settlement of
forward starting interest rate swaps entered into prior to the issuance of our
Senior Unsecured Notes due in 2037, and is being reclassified into earnings
through 2037 to interest expense.
As a
result of the use of derivative instruments, the Company is exposed to risk that
the counterparties will fail to meet their contractual
obligations. Recent adverse developments in the global financial and
credit markets could negatively impact the creditworthiness of our
counterparties and cause one or more of our counterparties to fail to perform as
expected. To mitigate the counterparty credit risk, we only enter
into contracts with carefully selected major financial institutions based upon
their credit ratings and other factors, and continually assess the
creditworthiness of counterparties. At December 27, 2008, all of the
counterparties to our interest rate swaps and foreign currency forwards had
investment grade ratings. To date, all couterparties have performed
in accordance with their contractual obligations.
Lease
Guarantees
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 December 27, 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 $425 million. The
present value of these potential payments discounted at our pre-tax cost of debt
at December 27, 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 December 27, 2008 and December 29, 2007 was not
material.
Franchise Loan Pool and
Equipment Guarantees
We have
provided a partial guarantee of approximately $16 million of a franchisee loan
program used primarily to assist franchisees in the development of new
restaurants and, to a lesser extent, in connection with the Company’s historical
refranchising programs at December 27, 2008. We have also provided
two letters of credit totaling approximately $23 million in support of the
franchisee loan program. One such letter of credit could be used if
we fail to meet our obligations under our guarantee. The other letter
of credit could be used, in certain circumstances, to fund our participation in
the funding of the franchisee loan program. The total loans
outstanding under the loan pool were approximately $48 million at December 27,
2008.
In
addition to the guarantee described above, YUM has provided guarantees of
approximately $14 million on behalf of franchisees for several equipment
financing programs related to specific initiatives. We have provided
a letter of credit totaling $5 million which could be used if we fail to meet
our obligations under our guarantee under one equipment financing
program. The total loans outstanding under these equipment financing
programs were approximately $29 million at December 27, 2008.
Unconsolidated Affiliates
Guarantees
From time
to time we have guaranteed certain lines of credit and loans of unconsolidated
affiliates. At December 27, 2008 there are no guarantees outstanding
for unconsolidated affiliates. Our unconsolidated affiliates had
total revenues of $871 million for the year ended December 27, 2008 and assets
and debt of approximately $304 million and $51 million, respectively, at
December 27, 2008.
Fair
Value
At
December 27, 2008 and December 29, 2007, the fair values of cash and cash
equivalents, accounts receivable and accounts payable approximated their
carrying values because of the short-term nature of these
instruments. The fair value of notes receivable approximates the
carrying value after consideration of recorded allowances. Accounts
receivable consists primarily of amounts due from franchisees and licensees for
initial and continuing fees. In addition, we have notes and lease
receivables from certain of our franchisees. The financial condition
of these franchisees and licensees is largely dependent upon the underlying
business trends of our Concepts. This concentration of credit risk is
mitigated, in part, by the large number of franchisees and licensees of each
Concept and the short-term nature of the franchise and license fee
receivables.
On
December 30, 2007, the Company adopted the provisions of SFAS 157 related
to its financial assets and liabilities. The carrying amounts and
fair values of our other financial instruments not measured on a recurring basis
subject to fair value disclosures are as follows:
|
|
2008
|
|
|
2007
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings and long-term debt, excluding capital leases and the derivative
instrument adjustments
|
|
$
|
3,296
|
|
|
|
$
|
3,185
|
|
|
|
$
|
2,913
|
|
|
|
$
|
3,081
|
|
Lease
guarantees
|
|
|
26
|
|
|
|
|
26
|
|
|
|
|
22
|
|
|
|
|
26
|
|
Guarantees
supporting financial arrangements of certain franchisees and other third
parties
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
8
|
|
Letters
of credit
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
1
|
|
We
estimated the fair value of debt, guarantees and letters of credit using market
quotes and calculations based on market rates.
The
following table presents the fair values for those financial assets and
liabilities measured on a recurring basis as of December 27, 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, net
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
Interest
Rate Swaps, net
|
|
|
62
|
|
|
|
—
|
|
|
|
62
|
|
|
|
—
|
|
Other
Investments
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
84
|
|
|
$
|
10
|
|
|
$
|
74
|
|
|
$
|
—
|
|
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 other investments are
classified as trading securities and their fair value is determined based on the
closing market prices of the respective mutual funds as of December 27,
2008.
As of
December 27, 2008, $62 million was included in Other assets related to the fair
value of the Company’s interest rate swaps. The fair value of these
swaps as of December 29, 2007 was a net asset of approximately $15 million, of
which $16 million and $1 million were included in Other assets and Other
liabilities and deferred credits, respectively. The portion of this
fair value which has not yet been recognized as an addition to interest expense
at December 27, 2008 and December 29, 2007 has been included as an addition of
$59 million and an addition of $17 million, respectively, to long-term
debt.
Note
15 – Pension and Postretirement Medical Benefits
The
following disclosures reflect our adoption of the provisions of SFAS 158 as
discussed in Note 2.
Pension
Benefits. 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 U.K. (including a plan for Pizza Hut U.K.
employees that was sponsored by our unconsolidated affiliate prior to our
acquisition of the remaining fifty percent interest in the unconsolidated
affiliate in 2006). Our plans in the U.K. have previously been
amended such that new employees are not eligible to participate in these
plans.
Obligation
and Funded Status at Measurement Date:
The
following chart summarizes the balance sheet impact, as well as benefit
obligations, assets, and funded status associated with our U.S. pension plans
and significant International pension plans. The actuarial valuations
for all plans reflect measurement dates coinciding with our fiscal year ends in
2008 and September 30 in 2007 except for the Pizza Hut U.K. Plan which has
historically been measured as of its fiscal year end.
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
842
|
|
|
|
$
|
864
|
|
|
|
$
|
161
|
|
|
|
$
|
152
|
|
SFAS
158 measurement date adjustment
|
|
|
21
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
—
|
|
Service
cost
|
|
|
30
|
|
|
|
|
33
|
|
|
|
|
8
|
|
|
|
|
9
|
|
Interest
cost
|
|
|
53
|
|
|
|
|
50
|
|
|
|
|
8
|
|
|
|
|
8
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Plan
amendments
|
|
|
1
|
|
|
|
|
4
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Acquisitions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
4
|
|
Curtailment
gain
|
|
|
(6
|
)
|
|
|
|
(4
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Settlement
loss
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Special
termination benefits
|
|
|
13
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(48
|
)
|
|
|
|
8
|
|
Benefits
paid
|
|
|
(48
|
)
|
|
|
|
(34
|
)
|
|
|
|
(3
|
)
|
|
|
|
(2
|
)
|
Settlement
payments
|
|
|
(9
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Actuarial
(gain) loss
|
|
|
25
|
|
|
|
|
(71
|
)
|
|
|
|
(4
|
)
|
|
|
|
(20
|
)
|
Benefit
obligation at end of year
|
|
$
|
923
|
|
|
|
$
|
842
|
|
|
|
$
|
126
|
|
|
|
$
|
161
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
732
|
|
|
|
$
|
673
|
|
|
|
$
|
139
|
|
|
|
$
|
117
|
|
Actual
return on plan assets
|
|
|
(213
|
)
|
|
|
|
93
|
|
|
|
|
(33
|
)
|
|
|
|
11
|
|
Employer
contributions
|
|
|
54
|
|
|
|
|
2
|
|
|
|
|
12
|
|
|
|
|
6
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Settlement
payments
|
|
|
(9
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Benefits
paid
|
|
|
(48
|
)
|
|
|
|
(33
|
)
|
|
|
|
(3
|
)
|
|
|
|
(2
|
)
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(34
|
)
|
|
|
|
5
|
|
Administrative
expenses
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Fair
value of plan assets at end of year
|
|
$
|
513
|
|
|
|
$
|
732
|
|
|
|
$
|
83
|
|
|
|
$
|
139
|
|
Funded
status at end of year
|
|
$
|
(410
|
)
|
|
|
$
|
(110
|
)
|
|
|
$
|
(43
|
)
|
|
|
$
|
(22
|
)
|
Amounts
recognized in the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Accrued
benefit asset – non-current
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
5
|
|
Accrued
benefit liability – current
|
|
|
(11
|
)
|
|
|
|
(6
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Accrued
benefit liability – non-current
|
|
|
(399
|
)
|
|
|
|
(104
|
)
|
|
|
|
(43
|
)
|
|
|
|
(27
|
)
|
|
|
$
|
(410
|
)
|
|
|
$
|
(110
|
)
|
|
|
$
|
(43
|
)
|
|
|
$
|
(22
|
)
|
Amounts
recognized as a loss in Accumulated Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Actuarial
net loss
|
|
$
|
371
|
|
|
|
$
|
77
|
|
|
|
$
|
41
|
|
|
|
$
|
13
|
|
Prior
service cost
|
|
|
3
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
374
|
|
|
|
$
|
80
|
|
|
|
$
|
41
|
|
|
|
$
|
13
|
|
The
accumulated benefit obligation for the U.S. and International pension plans was
$970 million and $900 million at December 27, 2008 and December 29, 2007,
respectively.
Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Projected
benefit obligation
|
|
$
|
923
|
|
|
|
$
|
73
|
|
|
|
$
|
63
|
|
|
|
$
|
80
|
|
Accumulated
benefit obligation
|
|
|
867
|
|
|
|
|
64
|
|
|
|
|
58
|
|
|
|
|
74
|
|
Fair
value of plan assets
|
|
|
513
|
|
|
|
|
—
|
|
|
|
|
34
|
|
|
|
|
53
|
|
Information
for pension plans with a projected benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Projected
benefit obligation
|
|
$
|
923
|
|
|
|
$
|
842
|
|
|
|
$
|
126
|
|
|
|
$
|
80
|
|
Accumulated
benefit obligation
|
|
|
867
|
|
|
|
|
770
|
|
|
|
|
103
|
|
|
|
|
74
|
|
Fair
value of plan assets
|
|
|
513
|
|
|
|
|
732
|
|
|
|
|
83
|
|
|
|
|
53
|
|
Our
funding policy with respect to the U.S. Plan is to contribute amounts necessary
to satisfy minimum pension funding requirements, including requirements of the
Pension Protection Act of 2006, plus such additional amounts from time to time
as are determined to be appropriate to improve the U.S. Plan’s funded
status. We currently estimate that we will contribute approximately
$80 million to the U.S. Plan in 2009.
The
funding rules for our pension plans outside of the U.S. vary from country to
country and depend on many factors including discount rates, performance of plan
assets, local laws and regulations. The projected benefit obligation
of our pension plans in the U.K. exceeded plan assets by $43 million at our 2008
measurement date. We have committed to make a discretionary funding
contribution of approximately $5 million in 2009 to one of these
plans. The plans are currently under review to determine if
additional discretionary pension funding payments will be committed to in
2009.
We do not
anticipate any plan assets being returned to the Company during 2009 for any
plans.
Components
of net periodic benefit cost:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans(d)
|
Net
periodic benefit cost
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
Service
cost
|
|
$
|
30
|
|
|
|
$
|
33
|
|
|
|
$
|
34
|
|
|
|
$
|
8
|
|
|
|
$
|
9
|
|
|
|
$
|
5
|
|
Interest
cost
|
|
|
53
|
|
|
|
|
50
|
|
|
|
|
46
|
|
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
4
|
|
Amortization
of prior service cost(a)
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Expected
return on plan assets
|
|
|
(53
|
)
|
|
|
|
(51
|
)
|
|
|
|
(47
|
)
|
|
|
|
(9
|
)
|
|
|
|
(9
|
)
|
|
|
|
(4
|
)
|
Amortization
of net loss
|
|
|
6
|
|
|
|
|
23
|
|
|
|
|
30
|
|
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
1
|
|
Net
periodic benefit cost
|
|
$
|
36
|
|
|
|
$
|
56
|
|
|
|
$
|
66
|
|
|
|
$
|
7
|
|
|
|
$
|
9
|
|
|
|
$
|
6
|
|
Additional
loss recognized due to:
Settlement(b)
|
|
$
|
2
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Special
termination benefits(c)
|
|
$
|
13
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension losses in accumulated
other comprehensive income (loss):
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Beginning
of year
|
|
$
|
80
|
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
$
|
13
|
|
|
|
$
|
31
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
301
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
Amortization
of net loss
|
|
|
(6
|
)
|
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
Settlements
|
|
|
(1
|
)
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
Prior
service cost
|
|
|
—
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
—
|
|
|
|
|
|
|
End
of year
|
|
$
|
374
|
|
|
|
$
|
80
|
|
|
|
|
|
|
|
|
$
|
41
|
|
|
|
$
|
13
|
|
|
|
|
|
|
(a)
|
Prior
service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive
benefits.
|
|
|
(b)
|
Settlement
loss results from benefit payments from a non-funded plan exceeding the
sum of the service cost and interest cost for that plan during the
year.
|
|
|
(c)
|
Special
termination benefits primarily related to the U.S. business transformation
measures taken in 2008.
|
|
|
(d)
|
Excludes
pension expense for the Pizza Hut U.K. pension plan of $4 million in 2006
related to periods prior to our acquisition of the remaining fifty percent
interest in the unconsolidated
affiliate.
|
The
estimated net loss for the U.S. and International pension plans that will be
amortized from accumulated other comprehensive loss into net periodic pension
cost in 2009 is $13 million and $2 million, respectively. The
estimated prior service cost for the U.S. pension plans that will be amortized
from accumulated other comprehensive loss into net periodic pension cost in 2009
is $1 million.
Weighted-average
assumptions used to determine benefit obligations at the measurement
dates:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Discount
rate
|
|
|
6.50%
|
|
|
|
|
6.50%
|
|
|
|
|
5.50%
|
|
|
|
|
5.60%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
4.10%
|
|
|
|
|
4.30%
|
|
Weighted-average
assumptions used to determine the net periodic benefit cost for fiscal
years:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
Discount
rate
|
|
|
6.50%
|
|
|
|
|
5.95%
|
|
|
|
|
5.75%
|
|
|
|
|
5.60%
|
|
|
|
|
5.00%
|
|
|
|
|
5.00%
|
|
Long-term
rate of return on plan assets
|
|
|
8.00%
|
|
|
|
|
8.00%
|
|
|
|
|
8.00%
|
|
|
|
|
7.28%
|
|
|
|
|
7.07%
|
|
|
|
|
6.70%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
4.30%
|
|
|
|
|
3.78%
|
|
|
|
|
3.85%
|
|
Our
estimated long-term rate of return on plan assets represents the
weighted-average of expected future returns on the asset categories included in
our target investment allocation based primarily on the historical returns for
each asset category, adjusted for an assessment of current market
conditions.
Plan
Assets
Our
pension plan weighted-average asset allocations at the measurement dates, by
asset category are set forth below:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
Asset
Category
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
Equity
securities
|
|
|
59
|
%
|
|
|
|
71
|
%
|
|
|
|
73
|
%
|
|
|
|
80
|
%
|
Debt
securities
|
|
|
41
|
|
|
|
|
29
|
|
|
|
|
27
|
|
|
|
|
20
|
|
Total
|
|
|
100
|
%
|
|
|
|
100
|
%
|
|
|
|
100
|
%
|
|
|
|
100
|
%
|
Our
primary objectives regarding the Plan’s assets, which make up 86% of total
pension plan assets at the 2008 measurement dates, are to optimize return on
assets subject to acceptable risk and to maintain liquidity, meet minimum
funding requirements and minimize plan expenses. To achieve these
objectives, we have adopted a passive investment strategy in which the asset
performance is driven primarily by the investment allocation. Our
target investment allocation is 65% equity securities and 35% debt securities,
consisting primarily of low cost index mutual funds that track several
sub-categories of equity and debt security performance. The
investment strategy is primarily driven by our Plan’s participants’ ages and
reflects a long-term investment horizon favoring a higher equity component in
the investment allocation.
A mutual
fund held as an investment by the Plan includes YUM stock valued at less than
$0.5 million at December 27, 2008 and September 30, 2007 (less than 1% of total
plan assets in each instance).
Benefit
Payments
The
benefits expected to be paid in each of the next five years and in the aggregate
for the five years thereafter are set forth below:
Year
ended:
|
|
|
|
U.S.
Pension
Plans
|
|
|
International
Pension
Plans
|
2009
|
|
|
|
$
|
65
|
|
|
|
$
|
1
|
|
2010
|
|
|
|
|
50
|
|
|
|
|
1
|
|
2011
|
|
|
|
|
34
|
|
|
|
|
2
|
|
2012
|
|
|
|
|
37
|
|
|
|
|
2
|
|
2013
|
|
|
|
|
43
|
|
|
|
|
2
|
|
2014
- 2018
|
|
|
|
|
243
|
|
|
|
|
7
|
|
Expected
benefits are estimated based on the same assumptions used to measure our benefit
obligation on the measurement date and include benefits attributable to
estimated further employee service.
Postretirement
Medical Benefits
Our
postretirement plan provides health care benefits, principally to U.S. salaried
retirees and their dependents, and includes retiree cost sharing
provisions. During 2001, the plan was amended such that any salaried
employee hired or rehired by YUM after September 30, 2001 is not eligible to
participate in this plan. Employees hired prior to September 30, 2001
are eligible for benefits if they meet age and service requirements and qualify
for retirement benefits. We fund our postretirement plan as benefits
are paid.
At the
end of both 2008 and 2007, the accumulated postretirement benefit obligation was
$73 million. The unrecognized actuarial loss recognized in
Accumulated other comprehensive loss is $2 million at the end of 2008 and $9
million at the end of 2007. The net periodic benefit cost recorded in
2008, 2007 and 2006 was $10 million, $5 million and $6 million, respectively,
the majority of which is interest cost on the accumulated postretirement benefit
obligation. 2008 costs included $4 million of special termination
benefits primarily related to the U.S. business transformation measures
described in Note 5. Approximately $2 million was charged to retained
earnings in 2008 related to the SFAS 158 measurement date change. The
weighted-average assumptions used to determine benefit obligations and net
periodic benefit cost for the postretirement medical plan are identical to those
as shown for the U.S. pension plans. Our assumed heath care cost
trend rates for the following year as of 2008 and 2007 are 7.5% and 8.0%,
respectively, both with an expected ultimate trend rate of 5.5% reached in
2012.
There is
a cap on our medical liability for certain retirees. The cap for
Medicare eligible retirees was reached in 2000 and the cap for non-Medicare
eligible retirees is expected to be reached in 2011; once the cap is reached,
our annual cost per retiree will not increase. A one-percentage-point
increase or decrease in assumed health care cost trend rates would have less
than a $1 million impact on total service and interest cost and on the post
retirement benefit obligation. The benefits expected to be paid in
each of the next five years are approximately $7 million and in aggregate for
the five years thereafter are $32 million.
Note
16 – Stock Options and Stock Appreciation Rights
At year
end 2008, we had four stock award plans in effect: the YUM! Brands, Inc.
Long-Term Incentive Plan (“1999 LTIP”), the 1997 Long-Term Incentive Plan (“1997
LTIP”), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan (“RGM
Plan”) and the YUM! Brands, Inc. SharePower Plan
(“SharePower”). Under all our plans, the exercise price of stock
options and stock appreciation rights (“SARs”) granted must be equal to or
greater than the average market price or the ending market price of the
Company’s stock on the date of grant.
Potential
awards to employees and non-employee directors under the 1999 LTIP include stock
options, incentive stock options, SARs, restricted stock, stock units,
restricted stock units, performance shares and performance
units. Potential awards to employees and non-employee directors under
the 1997 LTIP include restricted stock and performance restricted stock
units. Prior to January 1, 2002, we also could grant stock options,
incentive stock options and SARs under the 1997 LTIP. Through
December 27, 2008, we have issued only stock options and performance restricted
stock units under the 1997 LTIP and have issued stock options, SARs and
restricted stock units under the 1999 LTIP. While awards under the
1999 LTIP can have varying vesting provisions and exercise periods, previously
granted awards under the 1997 LTIP and 1999 LTIP vest in periods ranging from
immediate to 10 years and expire ten to fifteen years after grant.
Potential
awards to employees under the RGM Plan include stock options and
SARs. RGM Plan awards granted have a four year cliff vesting period
and expire ten years after grant. Certain RGM Plan awards are granted
upon attainment of performance conditions in the previous
year. Expense for such awards is recognized over a period that
includes the performance condition period.
Potential
awards to employees under SharePower include stock options, SARs, restricted
stock and restricted stock units. SharePower awards granted
subsequent to the Spin-off Date consist only of stock options and SARs to date,
which vest over a period ranging from one to four years and expire no longer
than ten years after grant.
At year
end 2008, approximately 30 million shares were available for future share-based
compensation grants under the above plans.
We
estimated the fair value of each award made during 2008, 2007 and 2006 as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
2008
|
|
|
2007
|
|
|
2006
|
Risk-free
interest rate
|
|
3.0
|
%
|
|
|
4.7
|
%
|
|
|
4.5
|
%
|
Expected
term (years)
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility
|
|
30.9
|
%
|
|
|
28.9
|
%
|
|
|
31.0
|
%
|
Expected
dividend yield
|
|
1.7
|
%
|
|
|
2.0
|
%
|
|
|
1.0
|
%
|
We
believe it is appropriate to group our awards into two homogeneous groups when
estimating expected term. These groups consist of grants made
primarily to restaurant-level employees under the RGM Plan, which cliff vest
after four years and expire ten years after grant, and grants made to executives
under our other stock award plans, which typically have a graded vesting
schedule of 25% per year over four years and expire ten years after
grant. We use a single-weighted average expected term for our awards
that have a graded vesting schedule as permitted by SFAS 123R. Based
on analysis of our historical exercise and post-vesting termination behavior we
have determined that six years is an appropriate term for both awards to our
restaurant-level employees and awards to our executives.
When
determining expected volatility, we consider both historical volatility of our
stock as well as implied volatility associated with our traded
options.
A summary
of award activity as of December 27, 2008, and changes during the year then
ended is presented below.
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-
Average Remaining Contractual Term
|
|
Aggregate
Intrinsic Value (in millions)
|
Outstanding
at the beginning of the year
|
|
49,137
|
|
|
|
$
|
17.57
|
|
|
|
|
|
|
|
|
|
Granted
|
|
6,533
|
|
|
|
|
37.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(6,271
|
)
|
|
|
|
13.49
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
(2,481
|
)
|
|
|
|
23.58
|
|
|
|
|
|
|
|
|
|
Outstanding
at the end of the year
|
|
46,918
|
|
|
|
$
|
20.55
|
|
|
|
5.45
|
|
|
$
|
501
|
|
Exercisable
at the end of the year
|
|
30,060
|
|
|
|
$
|
14.88
|
|
|
|
4.01
|
|
|
$
|
463
|
|
The
weighted-average grant-date fair value of awards granted during 2008, 2007 and
2006 was $10.91, $8.85 and $8.52, respectively. The total intrinsic
value of stock options and SARs exercised during the years ended December 27,
2008, December 29, 2007 and December 30, 2006, was $145 million, $238 million
and $215 million, respectively.
As of
December 27, 2008, there was $107 million of unrecognized compensation cost,
which will be reduced by any forfeitures that occur, related to unvested awards
that is expected to be recognized over a weighted-average period of 2.7
years. The total fair value at grant date of awards vested during
2008, 2007 and 2006 was $57 million, $58 million and $57 million,
respectively.
The total
compensation expense for stock options and SARs recognized was $51 million, $56
million and $60 million in 2008, 2007 and 2006, respectively. The
related tax benefit recognized from this expense was $17 million, $19 million
and $21 million in 2008, 2007 and 2006, respectively.
Cash
received from stock options exercises for 2008, 2007 and 2006, was $72 million,
$112 million and $142 million, respectively. Tax benefits realized on
our tax returns from tax deductions associated with stock options and SARs
exercised for 2008, 2007 and 2006 totaled $46 million, $76 million and $68
million, respectively.
While
historically the Company has repurchased shares on the open market to satisfy
award exercises, it does not currently plan to repurchase shares during
2009.
In
January 2008, we granted an award of 187,398 restricted stock units to our Chief
Executive Officer (“CEO”). The award was made under the 1999
LTIP. The award vests after four years and had a market value of $7.0
million as of January 24, 2008. The award is being expensed over the
four year vesting period. The award will be paid to our CEO in shares
of YUM common stock six months following his retirement provided that he does
not leave the company before the award vests. Total expense recorded
in 2008 was $2 million.
Note
17 – Other Compensation and Benefit Programs
Executive Income Deferral
Program (the “EID Plan”)
The EID
Plan allows participants to defer receipt of a portion of their annual salary
and all or a portion of their incentive compensation. As defined by
the EID Plan, we credit the amounts deferred with earnings based on the
investment options selected by the participants. These investment
options are limited to cash, phantom shares of our Common Stock, phantom shares
of a Stock Index Fund and phantom shares of a Bond Index
Fund. Additionally, the EID Plan allows participants to defer
incentive compensation to purchase phantom shares of our Common Stock and
receive a 33% Company match on the amount deferred. Deferrals
receiving a match are similar to a restricted stock unit award in that
participants will generally forfeit both the match and incentive compensation
amounts deferred if they voluntarily separate from employment during a vesting
period that is two years. We expense the intrinsic value of the match
and, beginning in 2006, the incentive compensation over the requisite service
period which includes the vesting period. Investments in cash, the
Stock Index fund and the Bond Index fund will be distributed in cash at a date
as elected by the employee and therefore are classified as a liability on our
Consolidated Balance Sheets. We recognize compensation expense or
income for the appreciation or depreciation, respectively, of these
investments. We recognized compensation income of $4 million in 2008
and compensation expense of $4 million and $3 million in 2007 and 2006,
respectively, for losses and earnings on these investments.
As
investments in the phantom shares of our Common Stock can only be settled in
shares of our Common Stock, we do not recognize compensation expense for the
appreciation or the depreciation, if any, of these
investments. Deferrals into the phantom shares of our Common Stock
are credited to the Common Stock Account. As of December 27, 2008,
deferrals to phantom shares of our Common Stock within the EID Plan totaled
approximately 6.2 million shares. We recognized compensation expense
for amortization of the Company match of $6 million, $5 million and $5 million,
in 2008, 2007 and 2006, respectively. These expense amounts do not
include the salary or bonus actually deferred into Common Stock of $20 million,
$17 million and $16 million in 2008, 2007 and 2006,
respectively.
Contributory 401(k)
Plan
We
sponsor a contributory plan to provide retirement benefits under the provisions
of Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for eligible
U.S. salaried and hourly employees. Participants are able to elect to
contribute up to 75% of eligible compensation on a pre-tax
basis. Participants may allocate their contributions to one or any
combination of 10 investment options within the 401(k)
Plan. Effective for contributions made from and after April 1, 2008,
we match 100% of the participant’s contribution to the 401(k) Plan up to 6% of
eligible compensation. Prior to April 1, 2008, we matched 100% of the
participant’s contribution to the 401(k) Plan up to 3% of eligible compensation
and 50% of the participant’s contribution on the next 2% of eligible
compensation. We recognized as compensation expense our total
matching contribution of $16 million in 2008, $13 million in 2007 and $12
million in 2006.
Note
18 – Shareholders’ Equity
Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during 2008, 2007 and 2006. All amounts exclude applicable
transaction fees.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares
Repurchased
|
Authorization
Date
|
|
|
2008
|
|
2007
|
|
2006
|
|
2008
|
|
2007
|
|
2006
|
January
2008
|
|
|
23,943
|
|
—
|
|
—
|
|
$
|
802
|
|
|
$
|
—
|
|
|
$
|
—
|
|
October
2007
|
|
|
22,875
|
|
11,431
|
|
—
|
|
|
813
|
|
|
|
437
|
|
|
|
—
|
|
March
2007
|
|
|
—
|
|
15,092
|
|
—
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
September
2006
|
|
|
—
|
|
15,274
|
|
1,056
|
|
|
—
|
|
|
|
469
|
|
|
|
31
|
|
March
2006
|
|
|
—
|
|
—
|
|
20,145
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
November
2005
|
|
|
—
|
|
—
|
|
19,128
|
|
|
—
|
|
|
|
—
|
|
|
|
469
|
|
Total
|
|
|
46,818
|
|
41,797
|
|
40,329
|
|
$
|
1,615
|
(a)
|
|
$
|
1,406
|
(b)
|
|
$
|
1,000
|
(c)
|
(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)
|
Amounts
excludes the 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 and includes 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.
|
|
|
(c)
|
Amount
includes 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.
|
Accumulated Other
Comprehensive Income (Loss) – Comprehensive income is net income plus
certain other items that are recorded directly to shareholders’
equity. Amounts included in other accumulated comprehensive loss for
the Company’s derivative instruments and unrecognized pension and post
retirement losses are recorded net of the related income tax
effects. Refer to Note 15 for additional information about our
pension accounting and Note 14 for additional information about our derivative
instruments. The following table gives further detail regarding the
composition of other accumulated comprehensive income (loss) at December 27,
2008 and December 29, 2007.
|
|
2008
|
|
|
2007
|
Foreign
currency translation adjustment
|
|
$
|
(129
|
)
|
|
|
$
|
94
|
|
Pension
and post retirement losses, net of tax
|
|
|
(272
|
)
|
|
|
|
(64
|
)
|
Net
unrealized losses on derivative instruments, net of tax
|
|
|
(17
|
)
|
|
|
|
(10
|
)
|
Total
accumulated other comprehensive income (loss)
|
|
$
|
(418
|
)
|
|
|
$
|
20
|
|
Note
19 – Income Taxes
The
details of our income tax provision (benefit) are set forth below:
|
|
2008
|
|
|
2007
|
|
|
2006
|
Current:
|
Federal
|
$
|
168
|
|
|
|
$
|
175
|
|
|
|
$
|
181
|
|
|
Foreign
|
|
148
|
|
|
|
|
151
|
|
|
|
|
131
|
|
|
State
|
|
(1
|
)
|
|
|
|
(3
|
)
|
|
|
|
2
|
|
|
|
|
315
|
|
|
|
|
323
|
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
Federal
|
|
(12
|
)
|
|
|
|
(71
|
)
|
|
|
|
(33
|
)
|
|
Foreign
|
|
3
|
|
|
|
|
27
|
|
|
|
|
(13
|
)
|
|
State
|
|
10
|
|
|
|
|
3
|
|
|
|
|
16
|
|
|
|
|
1
|
|
|
|
|
(41
|
)
|
|
|
|
(30
|
)
|
|
|
$
|
316
|
|
|
|
$
|
282
|
|
|
|
$
|
284
|
|
The
deferred tax provision includes $30 million and $120 million of benefit in 2008
and 2007, respectively, and $4 million of expense in 2006 for changes in
valuation allowances due to changes in determinations regarding the likelihood
of the use of certain deferred tax assets that existed at the beginning of the
year. The deferred tax provisions also include $43 million, $16
million and $72 million in 2008, 2007 and 2006, respectively, for increases in
valuation allowances recorded against deferred tax assets generated during the
year. Total changes in valuation allowances, including the impact of
foreign currency translation and other adjustments, were decreases of $54
million and $37 million in 2008 and 2007, respectively, and an increase of
$112 million in 2006. See additional discussion of federal valuation
allowances adjustments in the effective tax rate discussion on the following
page.
The
deferred foreign tax provision includes less than $1 million, $17 million
and $2 million of expense in 2008, 2007 and 2006 respectively, for the
impact of changes in statutory tax rates in various
countries. Additionally, in 2008, the deferred foreign tax provision
included $36 million of expense offset by the same amount in the current foreign
tax provision that resulted from a tax law change. The $17 million of
expense for 2007 includes $20 million for the Mexico tax law change enacted
during the fourth quarter of 2007. The 2008 deferred state tax
provision includes $18 million ($12 million, net of federal tax) of expense for
the impact associated with our plan to distribute certain foreign
earnings. The 2007 deferred state tax provision includes $4 million
($3 million, net of federal tax) of benefit for the impact of state law
changes. The 2006 deferred state tax provision includes $12 million
($8 million, net of federal tax) of expense for the impact of state law
changes.
U.S. and
foreign income before income taxes are set forth below:
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
$
|
430
|
|
|
|
$
|
527
|
|
|
|
$
|
626
|
|
Foreign
|
|
850
|
|
|
|
|
664
|
|
|
|
|
482
|
|
|
$
|
1,280
|
|
|
|
$
|
1,191
|
|
|
|
$
|
1,108
|
|
The above
U.S. income includes all income taxed in the U.S. even if the income is earned
outside the U.S.
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
2.0
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(14.5
|
)
|
|
|
(5.7
|
)
|
|
|
(7.8
|
)
|
Adjustments
to reserves and prior years
|
|
|
3.5
|
|
|
|
2.6
|
|
|
|
(3.5
|
)
|
Repatriation
of foreign earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.4
|
)
|
Non-recurring
foreign tax credit adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
(6.2
|
)
|
Valuation
allowance additions (reversals)
|
|
|
0.6
|
|
|
|
(9.0
|
)
|
|
|
6.8
|
|
Other,
net
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Effective
income tax rate
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
Our 2008
effective income tax rate was negatively impacted by lapping valuation allowance
reversals made in the prior year as discussed below. This negative
impact was partially offset by the reversal of foreign valuation allowances in
the current year associated with certain deferred tax assets that we now believe
are more likely than not to be utilized on future tax
returns. Additionally, the effective tax rate was negatively impacted
by the year-over-year change in adjustments to reserves and prior years
(including certain out-of-year adjustments that increased our effective tax rate
by 1.8 percentage points in 2008). Benefits associated with our
foreign and U.S. tax effects attributable to foreign operations positively
impacted the effective tax rate as a result of lapping 2007 expenses associated
with the distribution of an intercompany dividend and adjustments to our
deferred tax balances that resulted from the Mexico tax law change, as further
discussed below, as well as a higher percentage of our income being earned
outside the U.S. These benefits were partially offset in 2008 by the
gain on the sale of our interest in our unconsolidated affiliate in Japan and
expense associated with our plan to distribute certain foreign
earnings. We also recognized deferred tax assets for the net
operating losses generated by certain tax planning strategies implemented in
2008 included in foreign and U.S. tax effects attributable to foreign operations
(1.7 percentage point impact). However, we provided a full valuation
allowance on these assets as we do not believe it is more likely than not that
they will be realized in the future.
Our 2007
effective income tax rate was positively impacted by valuation allowance
reversals. In December 2007, the Company finalized various tax
planning strategies based on completing a review of our international
operations, distributed a $275 million intercompany dividend and sold our
interest in our Japan unconsolidated affiliate. As a result, in the
fourth quarter of 2007, we reversed approximately $82 million of valuation
allowances associated with foreign tax credit carryovers that are more likely
than not to be claimed on future tax returns. In 2007, benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations were negatively impacted by $36 million of expense associated with
the $275 million intercompany dividend and approximately $20 million of expense
for adjustments to our deferred tax balances as a result of the Mexico tax law
change enacted during the fourth quarter of 2007. These negative
impacts were partially offset by a higher percentage of our income being earned
outside the U.S. Additionally, the effective tax rate was negatively
impacted by the year-over-year change in adjustments to reserves and prior
years.
Our 2006
effective income tax rate was positively impacted by the reversal of tax
reserves in connection with our regular U.S. audit cycle as well as certain
out-of-year adjustments to reserves and accruals that lowered our effective
income tax rate by 2.2 percentage points. The reversal of tax
reserves was partially offset by valuation allowance additions on foreign tax
credits for which, as a result of the tax reserve reversals, we believed were
not likely to be utilized before they expired. We also recognized
deferred tax assets for the foreign tax credit impact of non-recurring decisions
to repatriate certain foreign earnings in 2007. However, we provided
full valuation allowances on such assets as we did not believe it was more
likely than not that they would be realized at that time.
Adjustments
to reserves and prior years include the effects of the reconciliation of income
tax amounts recorded in our Consolidated Statements of Income to amounts
reflected on our tax returns, including any adjustments to the Consolidated
Balance Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established for potential
exposure we may incur if a taxing authority takes a position on a matter
contrary to our position. We evaluate these reserves on a quarterly
basis to insure that they have been appropriately adjusted for events,
including audit settlements that we believe may impact our
exposure.
The
details of 2008 and 2007 deferred tax assets (liabilities) are set forth
below:
|
2008
|
|
|
2007
|
Net
operating loss and tax credit carryforwards
|
$
|
256
|
|
|
|
$
|
309
|
|
Employee
benefits, including share-based compensation
|
|
329
|
|
|
|
|
209
|
|
Self-insured
casualty claims
|
|
71
|
|
|
|
|
73
|
|
Lease
related liabilities
|
|
150
|
|
|
|
|
115
|
|
Various
liabilities
|
|
98
|
|
|
|
|
124
|
|
Deferred
income and other
|
|
41
|
|
|
|
|
36
|
|
Gross
deferred tax assets
|
|
945
|
|
|
|
|
866
|
|
Deferred
tax asset valuation allowances
|
|
(254
|
)
|
|
|
|
(308
|
)
|
Net
deferred tax assets
|
$
|
691
|
|
|
|
$
|
558
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets and property, plant and equipment
|
$
|
(164
|
)
|
|
|
$
|
(156
|
)
|
Lease
related assets
|
|
(69
|
)
|
|
|
|
(41
|
)
|
Other
|
|
(134
|
)
|
|
|
|
(58
|
)
|
Gross
deferred tax liabilities
|
|
(367
|
)
|
|
|
|
(255
|
)
|
Net
deferred tax assets (liabilities)
|
$
|
324
|
|
|
|
$
|
303
|
|
Reported
in Consolidated Balance Sheets as:
|
|
|
|
|
|
|
|
Deferred
income taxes – current
|
$
|
81
|
|
|
|
$
|
125
|
|
Deferred
income taxes – long-term
|
|
300
|
|
|
|
|
236
|
|
Accounts
payable and other current liabilities
|
|
(4
|
)
|
|
|
|
(8
|
)
|
Other
liabilities and deferred credits
|
|
(53
|
)
|
|
|
|
(50
|
)
|
|
$
|
324
|
|
|
|
$
|
303
|
|
We have
not provided deferred tax on certain undistributed earnings from our foreign
subsidiaries as we believe they are indefinitely reinvested. This
amount may become taxable upon an actual or deemed repatriation of assets from
the subsidiaries or a sale or liquidation of the subsidiaries. We
estimate that our total net undistributed earnings upon which we have not
provided deferred tax total approximately $1.1 billion at December 27,
2008. A determination of the deferred tax liability on such earnings
is not practicable.
Foreign
operating and capital loss carryforwards totaling $687 million and state
operating loss carryforwards totaling $1.2 billion at year end 2008 are
being carried forward in jurisdictions where we are permitted to use tax losses
from prior periods to reduce future taxable income. These losses will
expire as follows: $19 million in 2009, $126 million between 2010 and
2013, $1.2 billion between 2014 and 2028 and $554 million may be carried forward
indefinitely. In addition, tax credits totaling $21 million are
available to reduce certain federal and state liabilities, of which $13 million
will expire between 2014 and 2028 and $8 million may be carried forward
indefinitely.
Effective
December 31, 2006, we adopted FIN 48 which requires that a position taken
or expected to be taken in a tax return be recognized in the financial
statements when it is more likely than not (i.e. a likelihood of more than fifty
percent) that the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent likely of being
realized upon settlement.
At year
end 2008, we decreased our 2007 beginning and ending amounts of unrecognized tax
benefits to $294 million and $343 million, respectively. This
resulted from netting, where appropriate, certain long-term Deferred income tax
assets against unrecognized tax benefits included as part of Other liabilities
and deferred credits recorded on our Consolidated Balance Sheet at December 29,
2007. The Company had $296 million of unrecognized tax benefits at
December 27, 2008, $225 million of which, if recognized, would affect the
effective income tax rate. A reconciliation of the beginning and
ending amount of unrecognized tax benefits follows:
|
2008
|
|
|
2007
|
|
Beginning
of Year
|
|
$
|
343
|
|
|
$
|
294
|
|
Additions
on tax positions related to the current year
|
|
|
53
|
|
|
|
105
|
|
Additions
for tax positions of prior years
|
|
|
21
|
|
|
|
17
|
|
Reductions
for tax positions of prior years
|
|
|
(110
|
)
|
|
|
(58
|
)
|
Reductions
for settlements
|
|
|
(2
|
)
|
|
|
(6
|
)
|
Reductions
due to statute expiration
|
|
|
(7
|
)
|
|
|
(11
|
)
|
Foreign
currency translation adjustment
|
|
|
(2
|
)
|
|
|
2
|
|
End
of Year
|
|
$
|
296
|
|
|
$
|
343
|
|
|
|
|
|
|
|
The major
jurisdictions in which the Company files income tax returns include the U.S.
federal jurisdiction, China, the United Kingdom, Mexico and
Australia. As of December 27, 2008, the earliest years that the
Company was subject to examination in these jurisdictions were 1999 in the U.S.,
2005 in China, 2000 in the United Kingdom, 2001 in Mexico and 2004 in
Australia. In addition, the Company is subject to various U.S. state
income tax examinations, for which, in the aggregate, we had significant
unrecognized tax benefits at December 27, 2008. The Company believes
that it is reasonably possible that its unrecognized tax benefits may decrease
by approximately $60 million in the next 12 months, including approximately $18
million, which if recognized upon audit settlement or statute expiration, will
affect the 2009 effective tax rate. The remaining decrease in
unrecognized tax benefits relate to various positions, each of which are
individually insignificant.
At
December 27, 2008, long-term liabilities of $229 million, including $32 million
for the payment of accrued interest and penalties, are included in Other
liabilities and deferred credits as reported on the Consolidated Balance
Sheet. Total accrued interest and penalties recorded at December 27,
2008 were $49 million. During 2008, accrued interest and penalties
decreased by $9 million, of which $7 million affected the 2008 effective tax
rate. At December 29, 2007, long-term liabilities of $265 million,
including $51 million for the payment of accrued interest and penalties, are
included in Other liabilities and deferred credits as reported on the
Consolidated Balance Sheet. Total accrued interest and penalties
recorded at December 29, 2007 were $58 million. During 2007, accrued
interest and penalties decreased by $16 million, of which $11 million affected
the 2007 effective tax rate. The Company recognizes accrued interest
and penalties related to unrecognized tax benefits as components of its income
tax provision.
Note
20 – Reportable Operating Segments
We are
principally engaged in developing, operating, franchising and licensing the
worldwide KFC, Pizza Hut, Taco Bell, LJS and A&W concepts. KFC, Pizza Hut,
Taco Bell, LJS and A&W operate throughout the U.S. and in 108, 96, 16, 6 and
9 countries and territories outside the U.S., respectively. Our five
largest international markets based on operating profit in 2008 are China, Asia
Franchise, Australia, United Kingdom, and Europe Franchise. At the
end of fiscal year 2008, we had investments in 4 unconsolidated affiliates in
China which operate KFC restaurants. During 2008 the Company sold its
interest in its unconsolidated affiliate in Japan (See Note 5 for further
discussion) and began consolidating one previously unconsolidated affiliate in
China (See Note 5).
We
identify our operating segments based on management
responsibility. The China Division includes mainland China, Thailand,
KFC Taiwan, and YRI includes the remainder of our international
operations. For purposes of applying SFAS No. 131, “Disclosure About
Segments of An Enterprise and Related Information” (“SFAS 131”) in the U.S., we
consider LJS and A&W to be a single operating segment. We
consider our KFC, Pizza Hut, Taco Bell and LJS/A&W operating segments in the
U.S. to be similar and therefore have aggregated them into a single reportable
operating segment.
|
|
|
|
Revenues
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
5,125
|
|
|
|
$
|
5,197
|
|
|
|
$
|
5,603
|
|
YRI(a)
|
|
|
|
|
3,026
|
|
|
|
|
3,075
|
|
|
|
|
2,320
|
|
China
Division(a)
|
|
|
|
|
3,128
|
|
|
|
|
2,144
|
|
|
|
|
1,638
|
|
|
|
|
|
$
|
11,279
|
|
|
|
$
|
10,416
|
|
|
|
$
|
9,561
|
|
|
|
|
|
Operating
Profit; Interest Expense, Net; and
Income
Before Income Taxes
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
694
|
|
|
|
$
|
739
|
|
|
|
$
|
763
|
|
YRI
|
|
|
|
|
528
|
|
|
|
|
480
|
|
|
|
|
407
|
|
China
Division(b)
|
|
|
|
|
469
|
|
|
|
|
375
|
|
|
|
|
290
|
|
Unallocated
and corporate expenses(c)(d)
|
|
|
|
|
(307
|
)
|
|
|
|
(257
|
)
|
|
|
|
(229
|
)
|
Unallocated
Other income (expense)(d)(e)
|
|
|
|
|
117
|
|
|
|
|
9
|
|
|
|
|
7
|
|
Unallocated
Refranchising gain (loss)(d)
|
|
|
|
|
5
|
|
|
|
|
11
|
|
|
|
|
24
|
|
Operating
Profit
|
|
|
|
|
1,506
|
|
|
|
|
1,357
|
|
|
|
|
1,262
|
|
Interest
expense, net
|
|
|
|
|
(226
|
)
|
|
|
|
(166
|
)
|
|
|
|
(154
|
)
|
Income
Before Income Taxes
|
|
|
|
$
|
1,280
|
|
|
|
$
|
1,191
|
|
|
|
$
|
1,108
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
231
|
|
|
|
$
|
247
|
|
|
|
$
|
259
|
|
YRI
|
|
|
|
|
158
|
|
|
|
|
161
|
|
|
|
|
115
|
|
China
Division
|
|
|
|
|
151
|
|
|
|
|
117
|
|
|
|
|
95
|
|
Corporate
|
|
|
|
|
16
|
|
|
|
|
17
|
|
|
|
|
10
|
|
|
|
|
|
$
|
556
|
|
|
|
$
|
542
|
|
|
|
$
|
479
|
|
|
|
|
|
Capital
Spending
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
349
|
|
|
|
$
|
320
|
|
|
|
$
|
299
|
|
YRI
|
|
|
|
|
260
|
|
|
|
|
179
|
|
|
|
|
114
|
|
China
Division
|
|
|
|
|
320
|
|
|
|
|
224
|
|
|
|
|
157
|
|
Corporate
|
|
|
|
|
6
|
|
|
|
|
3
|
|
|
|
|
2
|
|
|
|
|
|
$
|
935
|
|
|
|
$
|
726
|
|
|
|
$
|
572
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
2,739
|
|
|
|
$
|
2,884
|
|
|
|
$
|
2,909
|
|
YRI(f)
|
|
|
|
|
1,873
|
|
|
|
|
2,254
|
|
|
|
|
2,100
|
|
China
Division(f)
|
|
|
|
|
1,395
|
|
|
|
|
1,116
|
|
|
|
|
869
|
|
Corporate(g)
|
|
|
|
|
520
|
|
|
|
|
934
|
|
|
|
|
490
|
|
|
|
|
|
$
|
6,527
|
|
|
|
$
|
7,188
|
|
|
|
$
|
6,368
|
|
|
|
|
|
Long-Lived
Assets(h)
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
U.S.
|
|
|
|
$
|
2,413
|
|
|
|
$
|
2,595
|
|
|
|
$
|
2,604
|
|
YRI(i)
|
|
|
|
|
1,162
|
|
|
|
|
1,450
|
|
|
|
|
1,357
|
|
China
Division(i)
|
|
|
|
|
1,012
|
|
|
|
|
757
|
|
|
|
|
595
|
|
Corporate
|
|
|
|
|
63
|
|
|
|
|
73
|
|
|
|
|
84
|
|
|
|
|
|
$
|
4,650
|
|
|
|
$
|
4,875
|
|
|
|
$
|
4,640
|
|
(a)
|
Includes
revenues of $1.2 billion, $1.3 billion and $673 million for entities in
the United Kingdom for 2008, 2007 and 2006, respectively. Includes revenues
of $2.8 billion, $1.9 billion and $1.4 billion in mainland China for 2008,
2007 and 2006, respectively.
|
|
|
(b)
|
Includes
equity income of unconsolidated affiliates of $40 million, $47 million and
$41 million in 2008, 2007 and 2006, respectively, for the China
Division.
|
|
|
(c)
|
2008
includes approximately $56 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. See Note
5.
|
|
|
(d)
|
Amounts
have not been allocated to the U.S., YRI or China Division segments for
performance reporting purposes.
|
|
|
(e)
|
2008
includes a $100 million gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
5.
|
|
|
(f)
|
Includes
investment in unconsolidated affiliates of $63 million and $64 million for
2007 and 2006, respectively, for YRI. There was no investment
in unconsolidated affiliates for YRI in 2008, as we sold our interest in
our unconsolidated affiliate in Japan during 2008. See Note
5. Includes investment in unconsolidated affiliates of $65
million, $90 million and $74 million for 2008, 2007 and 2006,
respectively, for the China Division.
|
|
|
(g)
|
Primarily
includes deferred tax assets, property, plant and equipment, net, related
to our office facilities and cash.
|
|
|
(h)
|
Includes
property, plant and equipment, net, goodwill, and intangible assets,
net.
|
|
|
(i)
|
Includes
long-lived assets of $602 million, $843 million and $813 million for
entities in the United Kingdom for 2008, 2007 and 2006,
respectively. The 2008 decrease in long-lived assets was driven
by the impact of foreign currency. Includes long-lived assets
of $905 million, $651 million and $495 million in mainland China for 2008,
2007 and 2006, respectively.
|
See Note
5 for additional operating segment disclosures related to impairment, store
closure (income) costs and the carrying amount of assets held for
sale.
Note
21 – Contingencies
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, product 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.
Legal
Proceedings
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, Kevin Johnson, a former LJS restaurant manager, filed a
collective action against LJS in the United States District Court for the Middle
District of Tennessee alleging violation of the Fair Labor Standards Act
(“FLSA”) on behalf of himself and allegedly similarly-situated LJS general and
assistant restaurant managers. Johnson
alleged that LJS violated the FLSA by perpetrating a policy and practice of
seeking monetary restitution from LJS employees, including Restaurant General
Managers (“RGMs”) and Assistant Restaurant General Managers (“ARGMs”), when
monetary or property losses occurred due to knowing and willful violations of
LJS policies that resulted in losses of company funds or property, and that LJS
had thus improperly classified its RGMs and ARGMs as exempt from overtime pay
under the FLSA. Johnson sought overtime pay, liquidated damages, and
attorneys’ fees for himself and his proposed class.
LJS moved
the Tennessee district court to compel arbitration of Johnson’s
suit. The district court granted LJS’s motion on June 7, 2004, and
the United States Court of Appeals for the Sixth Circuit affirmed on July 5,
2005.
On
December 19, 2003, while the arbitrability of Johnson’s claims was being
litigated, former LJS managers Erin Cole and Nick Kaufman, represented by
Johnson’s counsel, initiated an arbitration with the American Arbitration
Association (“AAA”) (the “Cole Arbitration”). The Cole Claimants sought a
collective arbitration on behalf of the same putative class as alleged in the
Johnson lawsuit and alleged the same underlying claims.
On June
15, 2004, the arbitrator in the Cole Arbitration issued a Clause Construction
Award, finding that LJS’s Dispute Resolution Policy did not prohibit Claimants
from proceeding on a collective or class basis. LJS moved unsuccessfully
to vacate the Clause Construction Award in federal district court in South
Carolina. On September 19, 2005, the arbitrator issued a Class
Determination Award, finding, inter alia, that a class
would be certified in the Cole Arbitration on an “opt-out” basis, rather than as
an “opt-in” collective action as specified by the FLSA.
On
January 20, 2006, the district court denied LJS’s motion to vacate the Class
Determination Award and the United States Court of Appeals for the Fourth
Circuit affirmed the district court’s decision on January 28, 2008. A
petition for a writ of certiorari filed in the United States Supreme Court
seeking a review of the Fourth Circuit’s decision was denied on October 7,
2008. The parties participated in mediation on April 24, 2008,
without reaching resolution. A second mediation is scheduled for
February 28, 2009.
LJS
expects, based on the rulings issued to date in this matter, that the Cole
Arbitration will more likely than not proceed as an “opt-out” class action,
rather than as an “opt-in” collective action. LJS denies liability
and is vigorously defending the claims in the Cole Arbitration. We
have provided for a reasonable estimate of the cost of the Cole Arbitration,
taking into account a number of factors, including our current projection of
eligible claims, the estimated amount of each eligible claim, the estimated
claim recovery rate, the estimated legal fees incurred by Claimants and the
reasonable settlement value of this and other wage and hour litigation
matters. However, in light of the inherent uncertainties of
litigation, the fact-specific nature of Claimants’ claims, and the novelty of
proceeding in an FLSA lawsuit on an “opt-out” basis, there can be no assurance
that the arbitration will not result in losses in excess of those currently
provided for in our 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 alleged that they and
other current and former KFC Assistant Unit Managers (“AUMs”) were improperly
classified as exempt employees under the FLSA. Plaintiffs sought 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 alleged 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.
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 August
30, 2008, KFC and counsel for plaintiffs entered into a settlement in principle
to resolve this matter. On November 11, 2008, the parties entered
into a formal Settlement Agreement and Release. On November 20, 2008,
the court entered an Order Granting Final Judgment. The costs
associated with the settlement did not significantly impact our results of
operations.
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
period violations and seek unspecified amounts in damages and penalties.
As of September 7, 2006, both cases have been consolidated in San
Diego County. Discovery is underway.
Based on
plaintiffs’ revised class definition in their class certification motion, Taco
Bell removed the case to federal court in San Diego on August 29,
2008. Plaintiffs have sought to remand the case back to state court
and the court took the matter under submission without a hearing on November 17,
2008.
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.
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 opposed the
motion and on June 10, 2008 the court denied plaintiff’s motion to
amend. Discovery is underway, with pre-certification discovery cutoff
set for February 20, 2009 and an April 20, 2009 deadline for plaintiff to file a
motion for class certification. A hearing on the class certification
motion has been scheduled for July 27, 2009.
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 June
16, 2008, a putative class action lawsuit against Taco Bell Corp. and the
Company styled Miriam
Leyva vs. Taco Bell Corp., et al., was filed in Los Angeles Superior
Court. The case was filed on behalf of Leyva and purportedly all
other California hourly employees and alleges failure to pay overtime, failure
to provide meal and rest periods, failure to pay wages upon discharge, failure
to provide itemized wage statements, unfair business practices and wrongful
termination and discrimination. This case is very similar to the
Medlock case;
accordingly, on July 3, 2008, Taco Bell filed a notice of related
case. The Company was dismissed from the case without prejudice on
August 20, 2008. Taco Bell removed the case to federal court in Los
Angeles on January 23, 2009. Plaintiff did not oppose removal, and
the parties stipulated to transfer the case to the Eastern District of
California, where the Medlock case is
pending.
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 April
11, 2008, Lisa Hardiman filed a Private Attorneys General Act (“PAGA”) complaint
in the Superior Court of the State of California, County of Fresno against Taco
Bell Corp., the Company and other related entities. This lawsuit,
styled Lisa Hardiman
vs. Taco Bell Corp., et al., is
filed on behalf of Hardiman individually and all other aggrieved employees
pursuant to PAGA. The complaint seeks penalties for alleged
violations of California’s Labor Code. On June 25, 2008, Hardiman
filed an amended complaint adding class action allegations on behalf of hourly
employees in California very similar to the Medlock case,
including allegations of unpaid overtime, missed meal and rest periods, improper
wage statements, non-payment of wages upon termination, unreimbursed business
expenses and unfair or unlawful business practices in violation of California
Business & Professions Code §17200. On July 25, 2008, Taco Bell
removed the case to the United States District Court for the Eastern District of
California, and subsequently filed a notice of related case. On July
31, 2008, the case was transferred to the same judge as in the Medlock
case. Taco Bell then filed a motion to strike the PAGA
claims. A scheduling conference is scheduled for February 27,
2009.
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
November 5, 2008, a putative class action lawsuit against Taco Bell Corp. and
the Company styled Loraine Naranjo vs. Taco
Bell Corp., et al., was filed in Orange County Superior
Court. The case was filed on behalf of Naranjo and purportedly all
other California employees and alleges failure to pay overtime, failure to
reimburse for business related expenses, improper wage statements, failure to
pay accrued vacation wages, failure to pay minimum wage and unfair business
practices. Taco Bell removed the case to federal court on December 5,
2008. Plaintiffs did not oppose removal and agreed to transfer the
case to the Eastern District of California, where the Medlock case is
pending. The Company filed a motion to dismiss on December 15, 2008,
which was denied on January 20, 2009.
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 21, 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. A first amended
complaint was filed on February 5, 2008. KFC answered the amended
complaint on March 21, 2008.
The
parties participated in mediation on February 10, 2009 without reaching
resolution, but plan to continue to explore potential settlement
options.
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
October 14, 2008, a putative class action styled Kenny Archila v. KFC U.S.
Properties, Inc., was filed in California state court on behalf of all
California hourly employees alleging various California Labor Code violations,
including rest and meal break violations, overtime violations, wage statement
violations and waiting time penalties.
KFC
removed the case to the United States District Court for the Central District of
California on January 7, 2009. No court deadlines have yet been
set.
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.
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.
The
parties participated in mediation on March 25, 2008, without reaching
resolution. A new trial court judge was assigned on April 4,
2008. The court ordered supplemental discovery and heard Taco Bell’s
motion for partial summary judgment regarding statute of limitations on November
5, 2008, which was denied. Cross motions for summary judgment
regarding ADA issues, and cross motions for summary judgment regarding state law
issues, are scheduled to be filed in late summer, 2009.
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, thirty-five 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 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. An arbitration panel has been selected, and the arbitration is
currently scheduled for September, 2009. 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.
Note 22 – Selected Quarterly Financial Data
(Unaudited)
|
|
2008
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
2,094
|
|
$
|
2,323
|
|
$
|
2,482
|
|
$
|
2,944
|
|
$
|
9,843
|
Franchise
and license fees
|
|
|
314
|
|
|
330
|
|
|
353
|
|
|
439
|
|
|
1,436
|
Total
revenues
|
|
|
2,408
|
|
|
2,653
|
|
|
2,835
|
|
|
3,383
|
|
|
11,279
|
Restaurant
profit(a)
|
|
|
308
|
|
|
311
|
|
|
358
|
|
|
401
|
|
|
1,378
|
Operating
Profit(b)
|
|
|
424
|
|
|
315
|
|
|
407
|
|
|
360
|
|
|
1,506
|
Net
income
|
|
|
254
|
|
|
224
|
|
|
282
|
|
|
204
|
|
|
964
|
Basic
earnings per common share
|
|
|
0.52
|
|
|
0.47
|
|
|
0.60
|
|
|
0.44
|
|
|
2.03
|
Diluted
earnings per common share
|
|
|
0.50
|
|
|
0.45
|
|
|
0.58
|
|
|
0.43
|
|
|
1.96
|
Dividends
declared per common share
|
|
|
0.15
|
|
|
0.19
|
|
|
—
|
|
|
0.38
|
|
|
0.72
|
|
|
2007
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
1,942
|
|
$
|
2,073
|
|
$
|
2,243
|
|
$
|
2,842
|
|
$
|
9,100
|
Franchise
and license fees
|
|
|
281
|
|
|
294
|
|
|
321
|
|
|
420
|
|
|
1,316
|
Total
revenues
|
|
|
2,223
|
|
|
2,367
|
|
|
2,564
|
|
|
3,262
|
|
|
10,416
|
Restaurant
profit(a)
|
|
|
288
|
|
|
310
|
|
|
353
|
|
|
376
|
|
|
1,327
|
Operating
Profit
|
|
|
316
|
|
|
310
|
|
|
401
|
|
|
330
|
|
|
1,357
|
Net
income
|
|
|
194
|
|
|
214
|
|
|
270
|
|
|
231
|
|
|
909
|
Basic
earnings per common share
|
|
|
0.36
|
|
|
0.41
|
|
|
0.52
|
|
|
0.45
|
|
|
1.74
|
Diluted
earnings per common share
|
|
|
0.35
|
|
|
0.39
|
|
|
0.50
|
|
|
0.44
|
|
|
1.68
|
Dividends
declared per common share
|
|
|
—
|
|
|
0.15
|
|
|
—
|
|
|
0.30
|
|
|
0.45
|
(a)
|
Restaurant
profit is defined as Company sales less expenses incurred directly by
Company restaurants in generating Company sales. These expenses
are presented as subtotals on our Consolidated Statements of
Income.
|
|
|
(b)
|
Operating
Profit includes a gain of $68 million, loss of $3 million and loss of $26
million in the first, second and fourth quarters of 2008, respectively,
related to the gain on the sale of our interest in our Japan
unconsolidated affiliate and charges related to the U.S. business
transformation measures. See Note 5.
|
To Our
Shareholders:
We are
responsible for the preparation, integrity and fair presentation of the
Consolidated Financial Statements, related notes and other information included
in this annual report. The financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America and include certain amounts based upon our estimates and assumptions, as
required. Other financial information presented in the annual report
is derived from the financial statements.
We
maintain a system of internal control over financial reporting, designed to
provide reasonable assurance as to the reliability of the financial statements,
as well as to safeguard assets from unauthorized use or
disposition. The system is supported by formal policies and
procedures, including an active Code of Conduct program intended to ensure
employees adhere to the highest standards of personal and professional
integrity. We have conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, we concluded that our
internal control over financial reporting was effective as of December 27,
2008. Our internal audit function monitors and reports on the
adequacy of and compliance with the internal control system, and appropriate
actions are taken to address significant control deficiencies and other
opportunities for improving the system as they are identified.
The
Consolidated Financial Statements have been audited and reported on by our
independent auditors, KPMG LLP, who were given free access to all financial
records and related data, including minutes of the meetings of the Board of
Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and
appropriate. Additionally, the effectiveness of our internal control
over financial reporting has been audited and reported on by KPMG
LLP.
The Audit
Committee of the Board of Directors, which is composed solely of outside
directors, provides oversight to our financial reporting process and our
controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent
auditors and internal auditors have free access to the Audit
Committee.
Although
no cost-effective internal control system will preclude all errors and
irregularities, we believe our controls as of December 27, 2008 provide
reasonable assurance that our assets are reasonably safeguarded.
Richard
T. Carucci
Item
9.
|
Changes In and Disagreements
with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
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 this report.
Management’s Report on
Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control
– Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control
– Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 27,
2008.
KPMG LLP,
an independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and the
effectiveness of our internal control over financial reporting and has issued
their reports, included herein.
Changes in Internal
Control
There
were no 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 December 27, 2008.
Item
9B.
|
Other
Information.
|
None.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
Information
regarding Section 16(a) compliance, the Audit Committee and the Audit Committee
financial expert, the Company’s code of ethics and background of the directors
appearing under the captions “Stock Ownership Information,” “Governance of the
Company,” “Executive Compensation” and “Item 1: Election of
Directors” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 27, 2008.
Information regarding executive
officers of the Company is included in Part I.
Item
11.
|
Executive
Compensation.
|
Information
regarding executive and director compensation and the Compensation Committee
appearing under the captions “Governance of the Company” and “Executive
Compensation” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 27, 2008.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
Information
regarding equity compensation plans and security ownership of certain beneficial
owners and management appearing under the captions “Executive Compensation” and
“Stock Ownership Information” is incorporated by reference from the Company’s
definitive proxy statement which will be filed with the Securities and Exchange
Commission no later than 120 days after December 27, 2008.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Information
regarding certain relationships and related transactions and information
regarding director independence appearing under the caption “Governance of the
Company” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 27, 2008.
Item
14.
|
Principal
Accountant Fees and Services.
|
Information
regarding principal accountant fees and services and audit committee
pre-approval policies and procedures appearing under the caption “Item
2: Ratification of Independent Auditors” is incorporated by reference
from the Company’s definitive proxy statement which will be filed with the
Securities and Exchange Commission no later than 120 days after December 27,
2008.
PART
IV
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
(a)
|
(1)
|
Financial
Statements: Consolidated financial statements filed as part of
this report are listed under Part II, Item 8 of this Form
10-K.
|
|
|
|
|
(2)
|
Financial
Statement Schedules: No schedules are required because either
the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the financial statements or the
related notes thereto filed as a part of this Form
10-K.
|
|
|
|
|
(3)
|
Exhibits: The
exhibits listed in the accompanying Index to Exhibits are filed as part of
this Form 10-K. The Index to Exhibits specifically identifies each
management contract or compensatory plan required to be filed as an
exhibit to this Form 10-K.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this annual report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
David
C. Novak
|
|
Chairman
of the Board,
Chief
Executive Officer and President
(principal
executive officer)
|
|
February
23, 2009
|
Richard
T. Carucci
|
|
Chief
Financial Officer
(principal
financial officer)
|
|
February
23, 2009
|
Ted
F. Knopf
|
|
Senior
Vice President Finance and Corporate Controller
(principal
accounting officer)
|
|
February
23, 2009
|
David
W. Dorman
|
|
Director
|
|
February
23, 2009
|
Massimo
Ferragamo
|
|
Director
|
|
February
23, 2009
|
J.
David Grissom
|
|
Director
|
|
February
23, 2009
|
Bonnie
G. Hill
|
|
Director
|
|
February
23, 2009
|
Robert
Holland, Jr.
|
|
Director
|
|
February
23, 2009
|
Kenneth
G. Langone
|
|
Director
|
|
February
23, 2009
|
Jonathan
S. Linen
|
|
Director
|
|
February
23, 2009
|
Thomas
C. Nelson
|
|
Director
|
|
February
23, 2009
|
Thomas
M. Ryan
|
|
Director
|
|
February
23, 2009
|
Jing-Shyh
S. Su
|
|
Vice-Chairman
of the Board
|
|
February
23, 2009
|
Jackie
Trujillo
|
|
Director
|
|
February
23, 2009
|
Robert
D. Walter
|
|
Director
|
|
February
23,
2009
|
YUM!
Brands, Inc.
Exhibit
Index
(Item
15)
Exhibit
Number
|
|
Description of Exhibits
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of YUM dated September 12, 2008 (as filed
herewith).
|
|
|
|
3.2
|
|
Amended
and restated Bylaws of YUM, which are incorporated herein by reference
from Exhibit 3.2 on Form 8-K filed on May 17, 2002.
|
|
|
|
4.1
|
|
Indenture,
dated as of May 1, 1998, between YUM and J.P. Morgan Chase Bank, National
Association, successor in interest to The First National Bank of Chicago,
pertaining to 7.65% Senior Notes due May 15, 2008, 8.5% Senior Notes and
8.875% Senior Notes due April 15, 2006 and April 15, 2011, respectively,
and 7.70% Senior Notes due July 1, 2012, which is incorporated herein by
reference from Exhibit 4.1 to YUM’s Report on Form 8-K filed on May 13,
1998.
(i)
6.25% Senior Notes due April 15, 2016 issued under the foregoing May 1,
1998 indenture, which notes are incorporated by reference from Exhibit 4.2
to YUM’s Report on Form 8-K filed on April 17, 2006.
(ii)
6.25% Senior Notes due March 15, 2018 issued under the foregoing May 1,
1998 indenture, which notes are incorporated by reference from Exhibit 4.2
to YUM’s Report on Form 8-K filed on October 22, 2007.
(iii)
6.875% Senior Notes due November 15, 2037 issued under the foregoing May
1, 1998 indenture, which notes are incorporated by reference from Exhibit
4.3 to YUM’s Report on Form 8-K filed on October 22, 2007.
|
|
|
|
10.5
|
|
Amended
and Restated Sales and Distribution Agreement between AmeriServe Food
Distribution, Inc., YUM, Pizza Hut, Taco Bell and KFC, effective as of
November 1, 1998, which is incorporated herein by reference from Exhibit
10 to YUM’s Annual Report on Form 10-K for the fiscal year ended December
26, 1998, as amended by the First Amendment thereto, which is incorporated
herein by reference from Exhibit 10.5 to YUM’s Annual Report on Form 10-K
for the fiscal year ended December 30, 2000.
|
|
|
|
10.6
|
|
Amended
and Restated Credit Agreement, dated November 29, 2007 among YUM, the
lenders party thereto, JP Morgan Chase Bank, N.A., as Administrative
Agent, J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as
Lead Arrangers and Bookrunners and Citibank N.A., as Syndication Agent,
which is incorporated herein by reference from Exhibit 10.6 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
|
|
|
10.7†
|
|
YUM
Director Deferred Compensation Plan, as effective October 7, 1997, which
is incorporated herein by reference from Exhibit 10.7 to YUM’s Annual
Report on Form 10-K for the fiscal year ended December 27,
1997.
|
|
|
|
10.8†
|
|
YUM
1997 Long Term Incentive Plan, as effective October 7, 1997, which is
incorporated herein by reference from Exhibit 10.8 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 27,
1997.
|
|
|
|
10.9†
|
|
YUM
Executive Incentive Compensation Plan, which is incorporated herein by
reference from Exhibit A of YUM’s Definitive Proxy Statement on Form DEF
14A for the Annual Meeting of Shareholders held on May 20,
2004.
|
|
|
|
10.10†
|
|
YUM
Executive Income Deferral Program, as effective October 7, 1997, and as
amended through May 16, 2002, which is incorporated herein by reference
from Exhibit 10.10 to YUM’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.
|
|
|
|
10.13†
|
|
YUM
Pension Equalization Plan, as effective October 7, 1997, which is
incorporated herein by reference from Exhibit 10.14 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 27,
1997.
|
|
|
|
10.16
|
|
Form
of Directors’ Indemnification Agreement, which is incorporated herein by
reference from Exhibit 10.17 to YUM’s Annual Report on Form 10-K for the
fiscal year ended December 27, 1997.
|
|
|
|
10.17†
|
|
Amended
and restated form of Severance Agreement (in the event of a change in
control), which is incorporated herein by reference from Exhibit 10.17 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 30,
2000.
|
|
|
|
10.18†
|
|
YUM
Long Term Incentive Plan, as Amended through the Third Amendment, as
effective May 15 2008, which is incorporated herein by
reference from Appendix I to YUM’s Definitive Proxy Statement on Form DEF
14A for the Annual Meeting of Shareholders held on May 15,
2008.
|
|
|
|
10.19†
|
|
Employment
Agreement between YUM and Christian L. Campbell, dated as of September 3,
1997, which is incorporated herein by reference from Exhibit 10.19 to
YUM’s Annual Report on Form 10-K for fiscal year ended December 26,
1998.
|
|
|
|
10.20
|
|
Amended
and Restated YUM Purchasing Co-op Agreement, dated as of August 26, 2002,
between YUM and the Unified FoodService Purchasing Co-op, LLC, which is
incorporated herein by reference from Exhibit 10.20 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 28,
2002.
|
|
|
|
10.22†
|
|
YUM
Restaurant General Manager Stock Option Plan, as effective April 1, 1999,
and as amended through June 23, 2003, which is incorporated herein by
reference from Exhibit 10.22 to YUM’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
|
|
|
|
10.23†
|
|
YUM
SharePower Plan, as effective October 7, 1997, and as amended through June
23, 2003, which is incorporated herein by reference from Exhibit 10.23 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
|
|
|
|
10.24†
|
|
Employment
agreement between YUM and David C. Novak, dated September 24, 2004, which
is incorporated herein by reference from Exhibit 10.24 on Form 8-K filed
on September 24, 2004.
|
|
|
|
10.25†
|
|
Form
of YUM Director Stock Option Award Agreement, which is incorporated herein
by reference from Exhibit 10.25 to YUM’s Quarterly Report on Form 10-Q for
the quarter ended September 4, 2004.
|
|
|
|
10.26†
|
|
Form
of YUM 1999 Long Term Incentive Plan Award Agreement, which is
incorporated herein by reference from Exhibit 10.26 to YUM’s Quarterly
Report on Form 10-Q for the quarter ended September 4,
2004.
|
|
|
|
10.27†
|
|
YUM!
Brands, Inc. International Retirement Plan, as in effect January 1, 2005,
which is incorporated herein by reference from Exhibit 10.27 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 25,
2004.
|
|
|
|
10.28†
|
|
Letter
of Understanding, dated July 13, 2004, by and between the Company and
Samuel Su, which is incorporated herein by reference from Exhibit 10.28 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 25,
2004.
|
|
|
|
10.29†
|
|
Form of 1999 Long Term Incentive
Plan Award Agreement (Stock Appreciation Rights) which is incorporated by
reference from Exhibit 99.1 to YUM’s Report on Form 8-K as filed on
January 30, 2006.
|
|
|
|
10.30
|
|
Amended
and Restated Credit Agreement, dated November 29, 2007, among YUM, the
lenders party thereto, Citigroup Global Markets Ltd. and J.P. Morgan
Securities Inc., as Lead Arrangers and Bookrunners, and Citigroup
International Plc and Citibank, N.A., Canadian Branch, as Facility Agents,
which is incorporated herein by reference from Exhibit 10.30 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
|
|
|
10.31†
|
|
Severance
Agreement (in the event of change in control) for Emil Brolick, dated as
of February 15, 2001, which is incorporated herein by reference from
Exhibit 10.31 to YUM’s Annual Report on Form 10-K for the fiscal year
ended December 30, 2006.
|
|
|
|
10.32†
|
|
YUM!
Brands Leadership Retirement Plan, as in effect January 1, 2005, which is
incorporated herein by reference from Exhibit 10.32 to YUM’s Quarterly
Report on Form 10-Q for the quarter ended March 24,
2007.
|
|
|
|
10.33†
|
|
1999
Long Term Incentive Plan Award (Restricted Stock Unit Agreement) by and
between the Company and David C. Novak, dated as of January 24, 2008,
which is incorporated herein by reference from Exhibit 10.33 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
|
|
|
10.34
|
|
Credit
Agreement, dated July 11, 2008, among YUM, and the lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities
Inc. as Lead Arranger and Sole Bookrunner and Bank of America, N.A., as
Syndication Agent, which is incorporated by reference from Exhibit 10.34
to YUM’s Quarterly Report on Form 10-Q for the quarter ended June 14,
2008.
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges.
|
|
|
|
21.1
|
|
Active
Subsidiaries of YUM.
|
|
|
|
23.1
|
|
Consent
of KPMG LLP.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
† Indicates
a management contract or compensatory plan.