|
UNITED
STATES
|
SECURITIES
AND EXCHANGE COMMISSION
|
Washington, D. C. 20549
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___________
FORM 10-Q
(Mark
One)
[ü]
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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|
EXCHANGE ACT OF 1934 for
the quarterly period ended March 21, 2009
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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
EXCHANGE
ACT OF 1934
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For
the transition period from ____________ to _________________
Commission file number
1-13163
________________________
YUM!
BRANDS, INC.
(Exact
name of registrant as specified in its charter)
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North Carolina
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13-3951308
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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1441 Gardiner Lane, Louisville, Kentucky
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40213
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (502) 874-8300
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [Ö] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer: [Ö] Accelerated
filer: [ ] Non-accelerated
filer: [ ] Smaller reporting
company: [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [Ö]
The
number of shares outstanding of the Registrant’s Common Stock as of April 20,
2009 was 461,585,845 shares.
YUM!
BRANDS, INC.
INDEX
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Page
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No.
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Part I.
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Financial Information
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Item 1 - Financial Statements
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Condensed
Consolidated Statements of Income - Quarters ended
March
21, 2009 and March 22, 2008
|
3
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|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows – Quarters ended
March
21, 2009 and March 22, 2008
|
4
|
|
|
|
|
|
|
|
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|
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Condensed
Consolidated Balance Sheets – March 21, 2009
and
December 27, 2008
|
5
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|
|
|
|
|
|
|
|
|
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Notes to Condensed Consolidated Financial Statements
|
6
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|
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|
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|
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Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
21
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Item 3 - Quantitative and Qualitative Disclosures about Market Risk
|
35
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Item 4 - Controls and Procedures
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36
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Report of Independent Registered Public Accounting Firm
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37
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Part II.
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Other Information and Signatures
|
38
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Item 1 – Legal Proceedings
|
38
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Item 1A – Risk Factors
|
38
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Item 6 – Exhibits
|
39
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Signatures
|
40
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PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
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|
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM!
BRANDS, INC. AND
SUBSIDIARIES
(in
millions, except per share data)
|
|
|
|
|
Quarter
|
Revenues
|
|
|
|
|
|
|
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|
3/21/09
|
|
|
3/22/08
|
Company
sales
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,918
|
|
|
|
$
|
2,094
|
|
Franchise
and license income
|
|
|
|
|
|
|
|
|
|
|
|
|
299
|
|
|
|
|
319
|
|
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
2,217
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|
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|
|
2,413
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|
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|
|
|
|
|
|
|
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Costs
and Expenses, Net
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|
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|
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|
|
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Company
restaurants
|
|
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Food
and paper
|
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|
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|
611
|
|
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|
669
|
|
Payroll
and employee benefits
|
|
|
|
|
|
|
|
|
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|
457
|
|
|
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|
533
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|
Occupancy
and other operating expenses
|
|
|
|
|
|
|
|
|
|
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|
|
542
|
|
|
|
|
584
|
|
Company
restaurant expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
|
1,786
|
|
General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
|
|
|
276
|
|
Franchise
and license expenses
|
|
|
|
|
|
|
|
|
|
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|
20
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|
|
|
|
19
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|
Closures
and impairment (income) expenses
|
|
|
|
|
|
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|
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|
4
|
|
|
|
|
(2
|
)
|
Refranchising
(gain) loss
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
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|
25
|
|
Other
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
(117
|
)
|
Total
costs and expenses, net
|
|
|
|
|
|
|
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|
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|
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1,866
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|
1,987
|
|
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
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|
351
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|
|
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426
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
|
|
53
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|
Income
Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
298
|
|
|
|
|
373
|
|
Income
tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
117
|
|
Net
Income – including noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
219
|
|
|
|
|
256
|
|
Net
Income – noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
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|
1
|
|
|
|
|
2
|
|
Net
Income – YUM! Brands, Inc.
|
|
|
|
|
|
|
|
|
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|
|
$
|
218
|
|
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.47
|
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Diluted
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
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|
$
|
0.46
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Dividends
Declared Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
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|
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|
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|
See accompanying Notes to Condensed Consolidated Financial Statements.
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM!
BRANDS, INC. AND SUBSIDIARIES
(in
millions)
|
|
Quarter
|
|
|
3/21/09
|
|
|
3/22/08
|
Cash
Flows – Operating Activities
|
|
|
|
|
|
|
|
|
|
Net
Income – YUM! Brands, Inc.
|
|
$
|
218
|
|
|
|
$
|
254
|
|
Depreciation
and amortization
|
|
|
117
|
|
|
|
|
120
|
|
Closures
and impairment (income) expenses
|
|
|
4
|
|
|
|
|
(2
|
)
|
Refranchising
(gain) loss
|
|
|
(14
|
)
|
|
|
|
25
|
|
Contributions
to defined benefit pension plans
|
|
|
(6
|
)
|
|
|
|
—
|
|
Gain
on sale of interest in Japan unconsolidated affiliate
|
|
|
—
|
|
|
|
|
(100
|
)
|
Deferred
income taxes
|
|
|
(5
|
)
|
|
|
|
19
|
|
Equity
income from investments in unconsolidated affiliates
|
|
|
(10
|
)
|
|
|
|
(11
|
)
|
Excess
tax benefits from share-based compensation
|
|
|
(8
|
)
|
|
|
|
(9
|
)
|
Share-based
compensation expense
|
|
|
13
|
|
|
|
|
15
|
|
Changes
in accounts and notes receivable
|
|
|
(7
|
)
|
|
|
|
(3
|
)
|
Changes
in inventories
|
|
|
19
|
|
|
|
|
6
|
|
Changes
in prepaid expenses and other current assets
|
|
|
(1
|
)
|
|
|
|
(5
|
)
|
Changes
in accounts payable and other current liabilities
|
|
|
(75
|
)
|
|
|
|
(34
|
)
|
Changes
in income taxes payable
|
|
|
(1
|
)
|
|
|
|
30
|
|
Other
non-cash charges and credits, net
|
|
|
53
|
|
|
|
|
62
|
|
Net
Cash Provided by Operating Activities
|
|
|
297
|
|
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Investing Activities
|
|
|
|
|
|
|
|
|
|
Capital
spending
|
|
|
(143
|
)
|
|
|
|
(132
|
)
|
Proceeds
from refranchising of restaurants
|
|
|
36
|
|
|
|
|
19
|
|
Acquisition
of restaurants from franchisees
|
|
|
(20
|
)
|
|
|
|
—
|
|
Sales
of property, plant and equipment
|
|
|
1
|
|
|
|
|
7
|
|
Other,
net
|
|
|
(2
|
)
|
|
|
|
3
|
|
Net
Cash Used in Investing Activities
|
|
|
(128
|
)
|
|
|
|
(103
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Financing Activities
|
|
|
|
|
|
|
|
|
|
Repayments
of long-term debt
|
|
|
(2
|
)
|
|
|
|
(4
|
)
|
Revolving
credit facilities, three months or less, net
|
|
|
(43
|
)
|
|
|
|
433
|
|
Short-term
borrowings by original maturity
|
|
|
|
|
|
|
|
|
|
More
than three months - proceeds
|
|
|
—
|
|
|
|
|
—
|
|
More
than three months - payments
|
|
|
—
|
|
|
|
|
—
|
|
Three
months or less, net
|
|
|
4
|
|
|
|
|
24
|
|
Repurchase
shares of Common Stock
|
|
|
—
|
|
|
|
|
(994
|
)
|
Excess
tax benefits from share-based compensation
|
|
|
8
|
|
|
|
|
9
|
|
Employee
stock option proceeds
|
|
|
21
|
|
|
|
|
12
|
|
Dividends
paid on Common Stock
|
|
|
(87
|
)
|
|
|
|
(75
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(99
|
)
|
|
|
|
(595
|
)
|
Effect
of Exchange Rates on Cash and Cash Equivalents
|
|
|
3
|
|
|
|
|
6
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
73
|
|
|
|
|
(325
|
)
|
Change
in Cash and Cash Equivalents due to consolidation of an entity in
China
|
|
|
—
|
|
|
|
|
17
|
|
Cash
and Cash Equivalents - Beginning of Period
|
|
|
216
|
|
|
|
|
789
|
|
Cash
and Cash Equivalents - End of Period
|
|
$
|
289
|
|
|
|
$
|
481
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in
millions)
|
|
(Unaudited)
|
|
|
|
|
|
3/21/09
|
|
|
12/27/08
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
289
|
|
|
|
$
|
216
|
|
Accounts
and notes receivable, less allowance: $25 in 2009 and $23 in
2008
|
|
|
283
|
|
|
|
|
229
|
|
Inventories
|
|
|
124
|
|
|
|
|
143
|
|
Prepaid
expenses and other current assets
|
|
|
191
|
|
|
|
|
172
|
|
Deferred
income taxes
|
|
|
78
|
|
|
|
|
81
|
|
Advertising
cooperative assets, restricted
|
|
|
100
|
|
|
|
|
110
|
|
Total
Current Assets
|
|
|
1,065
|
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated depreciation and
amortization
of
$3,211 in 2009 and $3,187 in 2008
|
|
|
3,670
|
|
|
|
|
3,710
|
|
Goodwill
|
|
|
615
|
|
|
|
|
605
|
|
Intangible
assets, net
|
|
|
332
|
|
|
|
|
335
|
|
Investments
in unconsolidated affiliates
|
|
|
32
|
|
|
|
|
65
|
|
Other
assets
|
|
|
558
|
|
|
|
|
561
|
|
Deferred
income taxes
|
|
|
298
|
|
|
|
|
300
|
|
Total
Assets
|
|
$
|
6,570
|
|
|
|
$
|
6,527
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities
|
|
$
|
1,267
|
|
|
|
$
|
1,473
|
|
Income
taxes payable
|
|
|
108
|
|
|
|
|
114
|
|
Short-term
borrowings
|
|
|
30
|
|
|
|
|
25
|
|
Advertising
cooperative liabilities
|
|
|
100
|
|
|
|
|
110
|
|
Total
Current Liabilities
|
|
|
1,505
|
|
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
3,512
|
|
|
|
|
3,564
|
|
Other
liabilities and deferred credits
|
|
|
1,377
|
|
|
|
|
1,335
|
|
Total
Liabilities
|
|
|
6,394
|
|
|
|
|
6,621
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Common Stock, no par value, 750 shares authorized;
461 shares and 459 shares
issued in 2009
and 2008, respectively
|
|
|
63
|
|
|
|
|
7
|
|
Retained
earnings
|
|
|
521
|
|
|
|
|
303
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(416
|
)
|
|
|
|
(418
|
)
|
Total
Shareholders’ Equity (Deficit) – YUM! Brands, Inc.
|
|
|
168
|
|
|
|
|
(108
|
)
|
Noncontrolling
interest
|
|
|
8
|
|
|
|
|
14
|
|
Total
Shareholders’ Equity (Deficit)
|
|
|
176
|
|
|
|
|
(94
|
)
|
Total
Liabilities and Shareholders’ Equity (Deficit)
|
|
$
|
6,570
|
|
|
|
$
|
6,527
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Condensed Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
(Tabular
amounts in millions, except per share data)
|
Financial
Statement Presentation
|
We have
prepared our accompanying unaudited Condensed Consolidated Financial Statements
(“Financial Statements”) in accordance with the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by United States (“U.S.”) generally accepted accounting
principles for complete financial statements. Therefore, we suggest
that the accompanying Financial Statements be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in our annual
report on Form 10-K for the fiscal year ended December 27, 2008 (“2008 Form
10-K”). Except as disclosed herein, there has been no material change
in the information disclosed in the Notes to our Consolidated Financial
Statements included in the 2008 Form 10-K.
YUM!
Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the
“Company”) comprise the worldwide operations of KFC, Pizza Hut, Taco Bell, Long
John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”)
(collectively the “Concepts”). References to YUM throughout these
Notes to our Financial Statements are made using the first person notations of
“we,” “us” or “our.”
YUM’s
business consists of three reporting segments: United States, YUM
Restaurants International (“YRI” or “International Division”) and YUM
Restaurants China (“China Division”). The China Division includes
mainland China (“China”), Thailand, and KFC Taiwan, and YRI includes the
remainder of our international operations.
In 2008,
we began consolidating an entity in which we have a majority ownership interest
and that operates the KFCs in Beijing, China. The increase in cash
related to the consolidation of this entity’s January 1, 2008 cash balance is
presented as a single line item on our Condensed Consolidated Statement of Cash
Flows.
Our
preparation of the accompanying Financial Statements in conformity with
generally accepted accounting principles in the United States of America
requires us to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the Financial Statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from the estimates.
In our
opinion, the accompanying Financial Statements include all normal and recurring
adjustments considered necessary to present fairly, when read in conjunction
with our 2008 Form 10-K, our financial position as of March 21, 2009, and the
results of our operations and cash flows for the quarters ended March 21,
2009 and March 22, 2008. Our results of operations for these interim
periods are not necessarily indicative of the results to be expected for the
full year.
Our
significant interim accounting policies include the recognition of certain
advertising and marketing costs, generally in proportion to revenue, and the
recognition of income taxes using an estimated annual effective tax
rate.
We have
reclassified certain items in the accompanying Financial Statements and Notes to
the Financial Statements for the prior period in order to be comparable with the
current classifications. As discussed in our 2008 Form 10-K, we have
begun reporting capital spending on our Condensed Consolidated Statements of
Cash Flows excluding the impact of purchases that have been accrued but not yet
paid. For the quarter ended March 22, 2008 this resulted in increased
Capital spending of $19 million with an offsetting impact to Changes in accounts
payable and other current liabilities. Also, as rental income from
franchisees has increased over time and is anticipated to continue to increase,
we believe it is more appropriate to report such income as Franchise and license
income as opposed to a reduction in Franchise and license expenses, as it has
historically been reported. For the quarter ended March 22, 2008 this
resulted in an increase of $5 million in both Franchise and license expenses and
Franchise and license income in our Condensed Consolidated Statement of
Income. A similar amount of rental income was reported in Franchise
and license income in the current quarter. These reclassifications
had no effect on previously reported Net Income.
|
Earnings
Per Common Share (“EPS”)
|
|
|
|
|
|
Quarter
ended
|
|
|
|
|
|
|
|
|
|
|
3/21/09
|
|
|
|
3/22/08
|
|
Net
Income – YUM! Brands, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
$
|
218
|
|
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding (for basic calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
466
|
|
|
|
|
486
|
|
Effect
of dilutive share-based employee compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
18
|
|
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
|
|
|
504
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.47
|
|
|
|
$
|
0.52
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.46
|
|
|
|
$
|
0.50
|
|
Unexercised
employee stock options and stock appreciation rights (in millions)
excluded from the diluted EPS computation(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
4.2
|
|
(a)
|
These
unexercised employee stock options and stock appreciation rights were not
included in the computation of diluted EPS because to do so would have
been antidilutive for the periods
presented.
|
Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during the quarter ended March 22, 2008, as indicated below. All
amounts exclude applicable transaction fees. We had no share
repurchases in the quarter ended March 21, 2009.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares Repurchased
|
Authorization
Date
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
January
2008
|
|
|
|
—
|
|
|
|
4,847
|
|
|
$
|
—
|
|
|
$
|
168
|
|
October
2007
|
|
|
|
—
|
|
|
|
22,875
|
|
|
|
—
|
|
|
|
813
|
|
Total
|
|
|
|
—
|
|
|
|
27,722
|
|
|
$
|
—
|
|
|
$
|
981
|
(a)
|
(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.
|
Comprehensive
income was as follows:
|
|
|
|
|
Quarter
ended
|
|
|
|
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
Net
Income – YUM! Brands, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
$
|
218
|
|
|
|
$
|
254
|
|
Foreign
currency translation adjustment arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
8
|
|
Foreign
currency translation adjustment included in Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(25
|
)
|
Changes
in fair value of derivatives, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
10
|
|
Reclassification
of derivative (gains) losses to Net Income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
(9
|
)
|
Reclassification
of pension actuarial losses to Net Income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
1
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
$
|
220
|
|
|
|
$
|
239
|
|
4.
|
U.S.
Business Transformation
|
As part
of our plan to transform our U.S. business we took several measures in 2008 and
are taking similar measures in 2009 (“the U.S. business transformation
measures”). These measures include: expansion of our U.S.
refranchising; charges relating to General and Administrative (“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
quarter ended March 21, 2009, we refranchised 109 restaurants in the U.S.
resulting in a pre-tax gain of $14 million. In the quarter ended
March 22, 2008, we recorded net refranchising losses of $26 million in the U.S.
primarily due to our offers to refranchise approximately 300 Long John Silver’s
restaurants.
In
connection with our G&A productivity initiatives and realignment of
resources we recorded a pre-tax charge of $4 million and $5 million in the
quarters ended March 21, 2009 and March 22, 2008, respectively. The
unpaid current liability for the severance portion of these charges was $22
million as of March 21, 2009. Severance payments in the quarter ended
March 21, 2009 totaled approximately $8 million.
Additionally,
the Company recognized $27 million in the quarter ended March 21, 2009 related
to investments in our U.S. Brands. These investments reflect our
reimbursements to, or obligations to reimburse, KFC franchisees for installation
costs of ovens for the national launch of Kentucky Grilled
Chicken. These investments were recorded as a reduction to Franchise
and license income in accordance with Emerging Issues Task Force (“EITF”) Issue
No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products)”. In the quarter
ended March 22, 2008, the Company recognized pre-tax expense of $1 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.
|
Recently
Adopted Accounting Pronouncements
|
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”
which permitted a one-year deferral for the implementation of SFAS No. 157,
“Fair Value Measurements” (“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). Beginning in the
quarter ended March 21, 2009, we adopted SFAS 157 for such non-financial assets
and liabilities, which, for the Company, primarily includes long-lived assets,
goodwill and intangibles. Such non-financial assets and liabilities
measured at fair value in the quarter ended March 21, 2009 were not significant
and the full adoption of SFAS 157 did not 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. The Company adopted SFAS 141R on December 28,
2008. Adoption of SFAS 141R did not significantly impact the
accounting for the Company’s acquisitions of franchise restaurants in the
quarter ended March 21, 2009.
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
changed 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 was effective for the quarter ended March 21, 2009
for the Company and requires retroactive adoption of its presentation and
disclosure requirements. There is a noncontrolling interest in an
entity that operates the KFCs in Beijing, China that is consolidated by the
Company. SFAS 160 requires us to report net income attributable to
the noncontrolling interest in this entity separately on the face of our
Condensed Consolidated Statements of Income. In 2008 we reported
Operating Profit attributable to the noncontrolling interest as an Other expense
and the related tax impact as a reduction to our Income tax
provision. Additionally, SFAS 160 required that the portion of equity
in the entity not attributable to the Company be reported within equity,
separately from the Company’s equity, in the Condensed Consolidated Balance
Sheet. In 2008 we reported this amount within Other liabilities and
deferred credits. As required, the presentation requirements of SFAS
160 were applied retroactively to the quarter ended March 22,
2008. In the quarter ended March 21, 2009, the entity that operates
the KFCs in Beijing, China declared a dividend of $7 million payable to the
noncontrolling interest, resulting in a reduction in the equity attributable to
the noncontrolling interest.
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 was effective for the quarter
ended March 21, 2009 for the Company, and we have included the required
disclosures in Note 11.
6.
|
New
Accounting Pronouncements Not Yet
Adopted
|
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.
In April
2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability has
Significantly Decreased and Identifying Transactions That Are Not Orderly” and
FSP No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), “Recognition and Presentation
of Other-Than-Temporary Impairments”. These two FSPs were issued to
provide additional guidance about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, and (2) recording impairment charges on investments in
debt instruments. Additionally, the FASB issued FSP No. FAS 107-1 and
APB 28-1 (“FSP FAS 107-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” to require disclosures of fair value of certain financial
instruments in interim financial statements. We do not anticipate the
adoption of these FSPs will materially impact the Company. These FSPs
are effective for financial statements issued for interim and annual reporting
periods ending after June 15, 2009, the quarter ending September 5, 2009 for the
Company.
Refranchising
(gain) loss, Store closure (income) costs and Store impairment charges by
reportable segment are as follows:
|
|
Quarter
ended March 21, 2009
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
(14
|
)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
$
|
1
|
|
|
|
$
|
1
|
|
|
|
$
|
1
|
|
|
|
$
|
3
|
|
Store
impairment charges
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
1
|
|
Closure
and impairment (income) expenses
|
|
$
|
2
|
|
|
|
$
|
1
|
|
|
|
$
|
1
|
|
|
|
$
|
4
|
|
|
|
Quarter
ended March 22, 2008
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
26
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
—
|
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
$
|
(2
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(4
|
)
|
Store
impairment charges
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Closure
and impairment (income) expenses
|
|
$
|
(1
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(2
|
)
|
(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.
|
Assets
held for sale at March 21, 2009 and December 27, 2008 total $24 million and $31
million, respectively, of U.S. property, plant and equipment and are included in
Prepaid expenses and other current assets on our Condensed Consolidated Balance
Sheets.
8.
|
Other
(Income) Expense
|
|
|
|
|
|
Quarter
ended
|
|
|
|
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
Equity
income from investments in unconsolidated affiliates
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(10
|
)
|
|
|
$
|
(11
|
)
|
Gain
upon sale of investment in unconsolidated affiliate(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
(100
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
(6
|
)
|
Other
(income) expense
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(9
|
)
|
|
|
$
|
(117
|
)
|
(a)
|
Quarter
ended March 22, 2008 reflects the gain recognized on the sale of our
interest in our unconsolidated affiliate in Japan. See our 2008 Form 10-K
for further discussion of this transaction.
|
|
|
|
Reportable
Operating Segments
|
In
connection with our U.S. business transformation measures our reported segment
results began reflecting increased allocations of certain expenses in 2009 that
were previously reported as unallocated and corporate G&A
expenses. While our consolidated results were not impacted, we
believe the revised allocation better aligns costs with accountability of our
segment managers. These revised allocations are being used by our
Chairman and Chief Executive Officer, in his role as chief operating decision
maker, in his assessment of operating performance. We have restated
segment information for the quarter ended March 22, 2008 to be consistent with
the current period presentation. This resulted in a $12 million
decrease in Unallocated and corporate G&A expense and increases in U.S. and
YRI G&A expense of $11 million and $1 million, respectively, for the quarter
ended March 22, 2008.
The
following tables summarize revenue and operating profit for each of our
reportable operating segments:
|
|
|
|
|
Quarter
ended
|
Revenues
|
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,046
|
|
|
|
$
|
1,192
|
|
International
Division(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
581
|
|
|
|
|
701
|
|
China
Division (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
617
|
|
|
|
|
520
|
|
Unallocated
Franchise and license income(c)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,217
|
|
|
|
$
|
2,413
|
|
|
|
|
|
|
Quarter
ended
|
Operating Profit
|
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
United
States
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157
|
|
|
|
$
|
146
|
|
International
Division
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
|
138
|
|
China
Division(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
131
|
|
|
|
|
103
|
|
Unallocated
Franchise and license income(c)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(27
|
)
|
|
|
|
—
|
|
Unallocated
and corporate G&A expenses(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
(42
|
)
|
Unallocated
Other income (expense)(e)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
106
|
|
Unallocated
Refranchising gain (loss)(f)
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
(25
|
)
|
Operating
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
351
|
|
|
|
|
426
|
|
Interest
expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
(53
|
)
|
Income
Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
$
|
298
|
|
|
|
$
|
373
|
|
(a)
|
Includes
revenues of $233 million and $295 million for the quarters ended March 21,
2009 and March 22, 2008, respectively, for entities in the United
Kingdom.
|
(b)
|
Includes
revenues of approximately $569 million and $471 million for the quarters
ended March 21, 2009 and March 22, 2008, respectively, in mainland
China.
|
(c)
|
Amount
consists of reimbursements to, or obligations to reimburse, KFC
franchisees for installation costs of ovens for the national launch of
Kentucky Grilled Chicken. See Note
4.
|
(d)
|
Includes
equity income from investments in unconsolidated affiliates of $10 million
for both the quarters ended March 21, 2009 and March 22, 2008 for the
China Division.
|
(e)
|
The
quarter ended March 22, 2008 includes a $100 million gain recognized on
the sale of our interest in our unconsolidated affiliate in
Japan. See our 2008 Form 10-K for further discussion of this
transaction.
|
(f)
|
Amounts
have not been allocated to the U.S., YRI or China Division segments for
performance reporting purposes.
|
We
sponsor noncontributory defined benefit pension plans covering certain full-time
salaried and hourly U.S. employees. The most significant of these
plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from the
other U.S. plans are paid by the Company as incurred. During 2001,
the plans covering our U.S. salaried employees were amended such that any
salaried employee hired or rehired by YUM after September 30, 2001 is not
eligible to participate in those plans. We also sponsor various
defined benefit pension plans covering certain of our non-U.S. employees, the
most significant
of which are in the United Kingdom (“U.K.”). Our plans in the U.K.
have previously been amended such that new participants are not eligible to
participate in these plans.
The
components of net periodic benefit cost associated with our U.S. pension plans
and significant International pension plans are as follows:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
Quarter
ended
|
|
|
Quarter
ended
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
3/21/09
|
|
|
3/22/08
|
Service
cost
|
|
$
|
6
|
|
|
|
$
|
7
|
|
|
|
$
|
1
|
|
|
|
$
|
2
|
|
Interest
cost
|
|
|
13
|
|
|
|
|
12
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Expected
return on plan assets
|
|
|
(13
|
)
|
|
|
|
(12
|
)
|
|
|
|
(1
|
)
|
|
|
|
(2
|
)
|
Amortization
of prior service cost
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Amortization
of net loss
|
|
|
3
|
|
|
|
|
2
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Net
periodic benefit cost
|
|
$
|
9
|
|
|
|
$
|
9
|
|
|
|
$
|
2
|
|
|
|
$
|
2
|
|
We
contributed $6 million to our U.K. plans during the quarter ended March 21,
2009. Subsequent to the quarter ended March 21, 2009 we made
contributions of $84 million to the Plan. No additional contributions
to the Plan are anticipated in 2009. The U.K. plans are currently
under review to determine if additional pension funding payments will be
committed to in 2009.
The
Company is exposed to certain market risks relating to its ongoing business
operations. The primary market risks managed by using derivative
instruments are interest rate risk and cash flow volatility arising from foreign
currency fluctuations.
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 March 21, 2009,
our interest rate derivative instruments outstanding had notional amounts of
$775 million. 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 No. 133, “Accounting for Derivative Instruments
and Hedging Activities”, 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. At March 21, 2009, foreign currency forward contracts
outstanding had a total notional amount of $482 million.
The
fair values of Derivatives designated as hedging instruments under SFAS
133 at the quarter ended March 21, 2009 were:
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheet Location
|
|
|
Interest
Rate Swaps
|
$
|
58
|
|
Other
assets
|
|
|
Foreign
Currency Forwards – Asset
|
|
38
|
|
Prepaid
expenses and other current assets
|
|
|
Foreign
Currency Forwards – Liability
|
|
(4)
|
|
Accounts
payable and other current liabilities
|
|
|
Total
|
$
|
92
|
|
|
|
The
unrealized gains associated with our interest rate swaps have been reported as
an addition of $55 million to long-term debt at March 21,
2009. Interest expense, net was reduced by $3 million during the
quarter ended March 21, 2009 for recognized gains on these interest rate
swaps.
For our
foreign currency forward contracts the following effective portions of gains and
losses were recognized into Other Comprehensive Income (“OCI”) and reclassified
into income from OCI in the quarter ended March 21, 2009.
|
Gains
(losses) recognized into OCI, net of tax
|
|
|
$
|
14
|
|
|
|
Gains
(losses) reclassified from Accumulated OCI into income, net of
tax
|
|
|
$
|
6
|
|
|
The gains
reclassified from Accumulated OCI into income were recognized as Other income in
our Condensed Consolidated Statement of Income, largely offsetting foreign
currency transaction losses recorded when the related intercompany receivables
and payables were adjusted for foreign currency fluctuations. Changes
in fair values of the foreign currency forwards recognized directly in our
results of operations either from ineffectiveness or exclusion from
effectiveness testing were insignificant in the quarter ended March 21,
2009.
Additionally,
we had a net deferred loss of $9
million, net of tax as of March 21, 2009 within Accumulated OCI due to
treasury locks and forward starting interest rate swaps that were cash settled
in previous years. The majority of this loss arose from the
settlement of forward starting interest rate swaps entered into prior to the
issuance of Senior Unsecured Notes due in 2037 and is being reclassified into
earnings through 2037 to interest expense. In the quarter ended March
21, 2009, an insignificant amount was reclassified from Accumulated OCI to
Interest expense, net as a result of these previously settled cash flow
hedges.
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 March 21, 2009, all of the counterparties
to our interest rate swaps and foreign currency forwards had investment grade
ratings. To date, all counterparties have performed in accordance
with their contractual obligations.
12.
|
Fair
Value Measurements
|
The
following table presents the fair values for those financial assets and
liabilities measured on a recurring basis as of March 21, 2009 and December 27,
2008:
|
|
|
|
Fair
Value Measurements at March 21, 2009
|
Description
|
|
Total
|
|
Level
1(a)
|
|
Level
2(b)
|
|
Level
3(c)
|
Foreign
Currency Forwards, net
|
|
$
|
34
|
|
|
$
|
—
|
|
|
$
|
34
|
|
|
$
|
—
|
|
Interest
Rate Swaps, net
|
|
|
58
|
|
|
|
—
|
|
|
|
58
|
|
|
|
—
|
|
Other
Investments(d)
|
|
|
9
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
101
|
|
|
$
|
9
|
|
|
$
|
92
|
|
|
$
|
—
|
|
|
|
|
|
Fair
Value Measurements at December 27, 2008
|
Description
|
|
Total
|
|
Level
1(a)
|
|
Level
2(b)
|
|
Level
3(c)
|
Foreign
Currency Forwards, net
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
Interest
Rate Swaps, net
|
|
|
62
|
|
|
|
—
|
|
|
|
62
|
|
|
|
—
|
|
Other
Investments(d)
|
|
|
10
|
|
|
|
10
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
84
|
|
|
$
|
10
|
|
|
$
|
74
|
|
|
$
|
—
|
|
(a)
|
Inputs
based upon quoted prices in active markets for
identical assets.
|
|
|
(b)
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset, either directly or indirectly.
|
|
|
(c)
|
Inputs
that are unobservable for the asset.
|
|
|
(d)
|
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.
|
13.
|
Guarantees,
Commitments and Contingencies
|
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 March 21, 2009, the potential amount of
undiscounted payments we could be required to make in the event of non-payment
by the primary lessee was approximately $450 million. The present
value of these potential payments discounted at our pre-tax cost of debt at
March 21, 2009 was approximately $325 million. Our franchisees are
the primary lessees under the vast majority of these leases. We
generally have cross-default provisions with these franchisees that would put
them in default of their franchise agreement in the event of non-payment under
the lease. We believe these cross-default provisions significantly
reduce the risk that we will be required to make payments under these
leases. Accordingly, the liability recorded for our probable exposure
under such leases at March 21, 2009 was not material.
Franchise Loan Pool and
Equipment Guarantees
We have
provided a partial guarantee of approximately $15 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 March 21, 2009. 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 $46 million at March 21,
2009.
In
addition to the guarantee described above, YUM has provided guarantees of
approximately $36 million on behalf of franchisees for several equipment
financing programs related to specific initiatives, the most significant of
which was the purchase of ovens by KFC franchisees for the launch of Kentucky
Grilled Chicken. 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 $46
million at March 21, 2009.
Insurance
Programs
We are
self-insured for a substantial portion of our current and prior years’ coverage
including workers’ compensation, employment practices liability, general
liability, automobile liability and property losses (collectively, “property and
casualty losses”). To mitigate the cost of our exposures for certain
property and casualty losses, we make annual decisions to self-insure the risks
of loss up to defined maximum per occurrence retentions on a line by line basis
or to combine certain lines of coverage into one loss pool with a single
self-insured aggregate retention. The Company then purchases
insurance coverage, up to a certain limit, for losses that exceed the
self-insurance per occurrence or aggregate retention. The insurers’
maximum aggregate loss limits are significantly above our actuarially determined
probable losses; therefore, we believe the likelihood of losses exceeding the
insurers’ maximum aggregate loss limits is remote.
In the
U.S. and in certain other countries, we are also self-insured for healthcare
claims and long-term disability for eligible participating employees subject to
certain deductibles and limitations. We have accounted for our
retained liabilities for property and casualty losses, healthcare and long-term
disability claims, including reported and incurred but not reported claims,
based on information provided by independent actuaries.
Due to
the inherent volatility of actuarially determined property and casualty loss
estimates, it is reasonably possible that we could experience changes in
estimated losses which could be material to our growth in quarterly and annual
Net Income. We believe that we have recorded reserves for property
and casualty losses at a level which has substantially mitigated the potential
negative impact of adverse developments and/or volatility.
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, and
again on February 28, 2009, without reaching resolution. Arbitration
on liability during a portion of the alleged restitution policy period is
currently scheduled for November 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 Condensed Consolidated Financial Statements.
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. On March 17, 2009, the court granted plaintiffs’ motion to
remand. A hearing on plaintiffs’ class certification motion is
scheduled for July 10, 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
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. A hearing on Taco Bell’s
motion to consolidate this case with the Leyva, Hardiman and Naranjo matters is
scheduled for May 11, 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. The Company was dismissed from the case without prejudice on
August 20, 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 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.
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. 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 March
26, 2009, Taco Bell was served with a putative class action lawsuit filed in
Orange County Superior Court against Taco Bell and the Company styled Endang Widjaja vs. Taco Bell
Corp., et al. The case was filed on behalf of Widjaja, a
former California hourly assistant manager, and purportedly all other
individuals employed in Taco Bell’s California restaurants as managers and
alleges failure to reimburse for business related expenses, failure to provide
rest periods, unfair business practices and conversion. This case
appears to be duplicative of Taco Bell’s other pending hourly class action cases
(Medlock, Hardiman, Leyva and Naranjo).
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.
The
parties participated in mediation on February 10, 2009 without reaching
resolution, but later agreed to a settlement in principle. Settlement
documents are now being finalized for submission to the court. The
expected costs associated with the settlement were recorded in the quarter ended
March 21, 2009 and did not significantly impact our results of
operations.
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. The parties are currently engaging in
discovery. A trial date has been set for August 11,
2009.
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 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, and again on March 26,
2009, without reaching resolution. Taco Bell plans to file its motion for
summary judgment on the ADA claims during July, 2009. A hearing on
the motion is scheduled for September 23, 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 significantly impacted 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 Condensed Consolidated Financial Statements.
On March
14, 2007, a lawsuit styled Boskovich Farms, Inc. v.
Taco Bell Corp. and Does 1 through 100 was filed in the Superior Court of
the State of California, Orange County. Boskovich Farms, a supplier
of produce to Taco Bell, alleges in its Complaint, among other things, that it
suffered damage to its reputation and business as a result of publications
and/or statements it claims were made by Taco Bell in connection with Taco
Bell’s reporting of results of certain tests conducted during investigations on
green onions used at Taco Bell restaurants. The 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.
Little Sheep
Acquisition
On March
24, 2009, our China Division paid approximately $44 million to purchase 14% of
the outstanding common shares of Little Sheep Group Limited (“Little Sheep”),
headquartered in Inner Mongolia. Upon regulatory approval,
anticipated during the third quarter of 2009, we will purchase an additional 6%
of Little Sheep for $19 million.
Little
Sheep is the leading brand in China’s “Hot Pot” restaurant category with 375
restaurants, primarily in China as well as Hong Kong, Japan, Canada and the
U.S.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Introduction
and Overview
The
following Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements
(“Financial Statements”), the Cautionary Note Regarding Forward-Looking
Statements and our annual report on Form 10-K for the fiscal year ended December
27, 2008. Throughout the MD&A, YUM! Brands, Inc. (“YUM” or the
“Company”) makes reference to certain performance measures as described
below.
·
|
The
Company provides the percentage changes excluding the impact of foreign
currency translation. These amounts are derived by translating
current year results at prior year average exchange rates. We
believe the elimination of the foreign currency translation impact
provides better year-to-year comparability without the distortion of
foreign currency fluctuations.
|
|
|
·
|
System
sales growth includes the results of all restaurants regardless of
ownership, including Company-owned, franchise, unconsolidated affiliate
and license restaurants. Sales of franchise, unconsolidated
affiliate and license restaurants generate franchise and license fees for
the Company (typically at a rate of 4% to 6% of
sales). Franchise, unconsolidated affiliate and license
restaurant sales are not included in Company sales on the Condensed
Consolidated Statements of Income; however, the franchise and license fees
are included in the Company’s revenues. We believe system sales
growth is useful to investors as a significant indicator of the overall
strength of our business as it incorporates all of our revenue drivers,
Company and franchise same store sales as well as net unit
development.
|
|
|
·
|
Same
store sales 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
revenues.
|
All Note
references herein refer to the accompanying Notes to the Financial
Statements. Tabular amounts are displayed in millions except per
share and unit count amounts, or as otherwise specifically
identified.
Description of
Business
YUM is
the world’s largest restaurant company based on number of system units, with
more than 36,000 units in more than 110 countries and territories operating
under the KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American
Food Restaurants brands. Four of the Company’s restaurant brands –
KFC, Pizza Hut, Taco Bell and Long John Silver’s – are the global leaders in the
quick-service chicken, pizza, Mexican-style food and seafood categories,
respectively. Of the over 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 YUM
Restaurants China (“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 over 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 our 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
YRI. 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 4,700 restaurants providing customers two or more of our brands
at a single location. We continue to evaluate our returns and
ownership positions with an earn the right to own philosophy
on Company owned restaurants. Our ongoing earnings growth model
calls for annual Operating Profit growth of 5% in the U.S. with same store sales
growth of 2% to 3% and leverage of our General and Administrative (“G&A”)
infrastructure.
Drive
Industry-Leading, Long-Term Shareholder and Franchisee Value – The Company is
focused on delivering high returns and returning substantial cash flows to its
shareholders via share repurchases and dividends. The Company has one
of the highest returns on invested capital in the Quick Service Restaurants
(“QSR”) industry. Additionally, 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 as of December 2008 can be found online at
http://www.yum.com/investors/news.asp
and http://investors.yum.com/phoenix.zhtml?c=117941&p=irol-newsEarnings.
Quarter Ended March 21, 2009
Highlights
·
|
Worldwide
same store sales growth of 1%, including 2% in mainland China and 6% in
YRI, partially offset by a decline of 2% in the U.S.
|
|
|
·
|
International
development of 256 new units including a first quarter record 98 new units
in mainland China
|
|
|
·
|
Worldwide
system sales growth of 4%, excluding foreign currency translation,
including 12% in mainland China, 10% in YRI and a decline of 2% in the
U.S.
|
|
|
·
|
Worldwide
restaurant margin improvement of 1.4 percentage points
|
|
|
·
|
Operating
Profit growth, excluding foreign currency translation, of 21% in the China
Division, 7% in the U.S. and 4% in YRI
|
|
|
·
|
Diluted
EPS decrease of $0.04, or 10%, due to lap of $0.13 per share gain in 2008
from the sale of our minority interest in KFC
Japan
|
All
preceding comparisons are versus the same period a year ago.
Significant
Known Events, Trends or Uncertainties Impacting or Expected to Impact
Comparisons of Reported or Future Results
The
following factors impacted comparability of operating performance for the
quarters ended March 21, 2009 and March 22, 2008 and/or could impact
comparability with the remainder of our results in 2009 or
beyond. Certain of these factors were previously discussed in our 2008 Form 10-K.
Commodity
Costs
During
2008 we experienced significant commodity inflation in the U.S. and China
Divisions. In the quarter ended March 21, 2009 commodity inflation
began to moderate, with increases of only $9 million and $3 million experienced
in the U.S. and China Divisions, respectively. As a result of pricing
actions we took to cover commodity inflation, primarily in 2008, our restaurant
margin in both Divisions was better than anticipated in the quarter ended March
21, 2009. In the U.S., restaurant margin as a percentage of sales
increased 0.8 percentage points versus the quarter ended March 22, 2008 despite
a company same store sales decline of 2%. In the China Division,
restaurant margin as a percentage of sales increased 1.7 percentage points
versus the quarter ended March 22, 2008 primarily due to higher average guest
check driving company same store sales growth of 2%. For the full
year we now expect modest commodity inflation in the U.S. and commodity
deflation of approximately $50 million in the China Division.
YRI also
anticipates commodity inflation to moderate as 2009 progresses, though to a
lesser extent due to a higher percentage of fixed price commodity commitments
and the impact of a strengthening U.S. Dollar on commodity purchases denominated
in that currency.
Impact of Foreign Currency
Translation on Operating Profit
Changes
in foreign currency exchange rates negatively impacted the translation of our
foreign currency denominated Operating Profit in our International Division by
$21 million and positively impacted Operating Profit in our China Division by $6
million for the quarter ended March 21, 2009. Given the nature and
volatility of the foreign currency markets the full year forecasted foreign
currency impact is difficult to quantify. However, for YRI we
currently expect Operating Profit to be negatively impacted by foreign currency
translation of nearly $25 million in the second quarter with continued negative
impact in the second half of the year. We do not anticipate that the
impact of foreign currency translation on the China Division’s Operating Profit
will be significant in the remainder of 2009.
Significant Gains and
Charges
As part
of our plan to transform our U.S. business we took several measures in 2008 and
are taking similar measures in 2009 that we do not believe are indicative of our
ongoing operations. These measures (“the U.S. business transformation
measures”) include: expansion of our U.S. refranchising, potentially reducing
our Company ownership in the U.S. to below 10%; 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 4,
we are not including the impacts of these U.S. business transformation measures
in our U.S. segment for performance reporting purposes.
We
recorded a pre-tax gain of $14 million and a pre-tax loss of $26
million from refranchising in the U.S. for the quarters ended March
21, 2009 and March 22, 2008, respectively. The refranchising losses
recorded for the quarter ended March 22, 2008 were primarily due to our
refranchising of, or our offers to refranchise, stores or groups of stores for a
price less than their carrying values. The refranchising gains and
losses are more fully discussed in Note 7 and the Store Portfolio Strategy
Section of the MD&A.
In
connection with our G&A productivity initiatives and realignment of
resources we recorded pre-tax charges of $4 million and $5 million in the
quarters ended March 21, 2009 and March 22, 2008, respectively.
Additionally,
the Company recognized a reduction to Franchise and license income of $27
million, pre-tax, in the quarter ended March 21, 2009 related to investments in
our U.S. Brands. These investments reflect our reimbursements to, or
obligations to reimburse, KFC franchisees for installation costs of ovens for
the national launch of Kentucky Grilled Chicken. In the quarter ended
March 22, 2008, the Company recognized pre-tax expense of $1 million related to
the investments in our U.S. Brands.
During
the quarter ended March 22, 2008 losses suffered as a result of our U.S.
business transformation measures were more than offset by a pre-tax gain of
approximately $100 million related to the sale of our interest in our
unconsolidated affiliate in Japan. This gain was recorded in Other
(income) expense in our Condensed 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 these stores. For fiscal year 2009, the expenses related to the
U.S. G&A productivity initiatives and realignment of resources are expected
to total approximately $10 million and investments in our U.S. Brands are
expected to total approximately $30 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 are taking in
2009.
Segment Reporting
Changes
In
connection with our U.S. business transformation measures our reported segment
results began reflecting increased allocations of certain expenses in 2009 that
were previously reported as unallocated and corporate G&A
expenses. While our consolidated results were not impacted, we
believe the revised allocation better aligns costs with accountability of our
segment managers. These revised allocations are being used by our
Chairman and Chief Executive Officer, in his role as chief operating decision
maker, in his assessment of operating performance. We have restated
segment information for the quarter ended March 22, 2008 to be consistent with
the current period presentation and will restate previously reported 2008
quarters as they are reported in 2009.
The
following table summarizes the 2008 quarterly impact of the revised
allocations by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Increase/(Decrease)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
U.S.
G&A
|
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
12
|
|
|
$
|
17
|
|
|
$
|
53
|
|
YRI
G&A
|
|
|
1
|
|
|
|
2
|
|
|
|
1
|
|
|
|
2
|
|
|
|
6
|
|
Unallocated
and corporate G&A expenses
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
(13
|
)
|
|
|
(19
|
)
|
|
|
(59
|
)
|
Store Portfolio
Strategy
From time
to time we sell Company restaurants to existing and new franchisees where
geographic synergies can be obtained or where franchisees’ expertise can
generally be leveraged to improve our overall operating performance, while
retaining Company ownership of strategic U.S. and international
markets. In the U.S., we are targeting Company ownership of
restaurants potentially below 10%, down from its current level of
18%. Consistent with this strategy, 109 Company restaurants in the
U.S. were sold to franchisees, for a gain of $14 million, in the quarter ended
March 21, 2009. We currently anticipate refranchising 500 units in
the U.S. in 2009.
Refranchisings
reduce our reported revenues and restaurant profits and increase the importance
of system sales growth as a key performance measure. Additionally,
G&A expenses will decline over time as a result of these refranchising
activities. The timing of G&A declines will vary and often lag
the actual refranchising activities as the synergies are typically dependent
upon the size and geography of the respective deals. G&A expenses
included in the tables below reflect only direct G&A that we no longer
incurred as a result of stores that were operated by us for all or some portion
of the respective comparable period in 2008 and were no longer operated by us as
of the last day of the current quarter.
The
following table summarizes our refranchising activities:
|
|
Quarter
ended
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
|
|
|
|
Number
of units refranchised
|
|
|
120
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
proceeds, pre-tax
|
|
$
|
36
|
|
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
(gain) loss, pre-tax
|
|
$
|
(14
|
)
|
|
|
$
|
25
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the impact of refranchising as described
above:
|
|
Quarter
ended 3/21/09
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased Company sales
|
|
$
|
(157
|
)
|
|
|
$
|
(16
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(174
|
)
|
Increased Franchise and license
income
|
|
|
8
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
9
|
|
Decrease in Total revenues
|
|
$
|
(149
|
)
|
|
|
$
|
(15
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(165
|
)
|
The
following table summarizes the estimated impact on Operating Profit of
refranchising:
|
|
Quarter
ended 3/21/09
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased Restaurant profit
|
|
$
|
(17
|
)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
(17
|
)
|
Increased Franchise and license
income
|
|
|
8
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
9
|
|
Decreased
G&A
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
3
|
|
Increase
(decrease) in Operating Profit
|
|
$
|
(6
|
)
|
|
|
$
|
1
|
|
|
|
$
|
—
|
|
|
|
$
|
(5
|
)
|
|
|
|
Quarter
ended
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
%
B/(W)
|
|
Company sales
|
|
|
$
|
1,918
|
|
|
|
$
|
2,094
|
|
|
|
(8
|
)
|
|
Franchise and license
income
|
|
|
|
299
|
|
|
|
|
319
|
|
|
|
(6
|
)
|
|
Total revenues
|
|
|
$
|
2,217
|
|
|
|
$
|
2,413
|
|
|
|
(8
|
)
|
|
Company restaurant profit
|
|
|
$
|
308
|
|
|
|
$
|
308
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Company sales
|
|
|
|
16.1%
|
|
|
|
|
14.7%
|
|
|
|
1.4
|
ppts.
|
|
Operating Profit
|
|
|
|
351
|
|
|
|
|
426
|
|
|
|
(18
|
)
|
|
Interest expense, net
|
|
|
|
53
|
|
|
|
|
53
|
|
|
|
1
|
|
|
Income tax provision
|
|
|
|
79
|
|
|
|
|
117
|
|
|
|
33
|
|
|
Net Income
– including noncontrolling interest
|
|
|
|
219
|
|
|
|
|
256
|
|
|
|
(14
|
)
|
|
Net
Income – noncontrolling interest
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
7
|
|
|
Net
Income – YUM! Brands, Inc.
|
|
|
$
|
218
|
|
|
|
$
|
254
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share(a)
|
|
|
$
|
0.46
|
|
|
|
$
|
0.50
|
|
|
|
(10
|
)
|
|
|
See
Note 2 for the number of shares used in this
calculation.
|
Restaurant
Unit Activity
Worldwide
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees
(a)
|
Beginning
of year
|
|
|
|
7,568
|
|
|
|
645
|
|
|
|
25,911
|
|
|
|
34,124
|
|
New
Builds
|
|
|
|
90
|
|
|
|
21
|
|
|
|
211
|
|
|
|
322
|
|
Acquisitions
|
|
|
|
42
|
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
—
|
|
Refranchising
|
|
|
|
(120
|
)
|
|
|
—
|
|
|
|
120
|
|
|
|
—
|
|
Closures
|
|
|
|
(21
|
)
|
|
|
(3
|
)
|
|
|
(141
|
)
|
|
|
(165
|
)
|
Other
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
(7
|
)
|
End
of quarter
|
|
|
|
7,559
|
|
|
|
663
|
|
|
|
26,052
|
|
|
|
34,274
|
|
%
of Total
|
|
|
|
22%
|
|
|
|
2%
|
|
|
|
76%
|
|
|
|
100%
|
|
United States
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Beginning
of year
|
|
|
|
3,314
|
|
|
|
—
|
|
|
|
14,482
|
|
|
|
17,796
|
|
New
Builds
|
|
|
|
3
|
|
|
|
—
|
|
|
|
63
|
|
|
|
66
|
|
Acquisitions
|
|
|
|
42
|
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
—
|
|
Refranchising
|
|
|
|
(109
|
)
|
|
|
—
|
|
|
|
109
|
|
|
|
—
|
|
Closures
|
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
(95
|
)
|
Other
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
End
of quarter
|
|
|
|
3,245
|
|
|
|
—
|
|
|
|
14,518
|
|
|
|
17,763
|
|
%
of Total
|
|
|
|
18%
|
|
|
|
—
|
|
|
|
82%
|
|
|
|
100%
|
|
International Division
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Beginning
of year
|
|
|
|
1,589
|
|
|
|
—
|
|
|
|
11,157
|
|
|
|
12,746
|
|
New
Builds
|
|
|
|
4
|
|
|
|
—
|
|
|
|
141
|
|
|
|
145
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
10
|
|
|
|
—
|
|
Closures
|
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
(58
|
)
|
Other
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
End
of quarter
|
|
|
|
1,576
|
|
|
|
—
|
|
|
|
11,254
|
|
|
|
12,830
|
|
%
of Total
|
|
|
|
12%
|
|
|
|
—
|
|
|
|
88%
|
|
|
|
100%
|
|
China Division
|
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
|
Beginning
of year
|
|
|
|
2,665
|
|
|
|
645
|
|
|
|
272
|
|
|
|
3,582
|
|
New
Builds
|
|
|
|
83
|
|
|
|
21
|
|
|
|
7
|
|
|
|
111
|
|
Acquisitions
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Closures
|
|
|
|
(9
|
)
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
(12
|
)
|
Other
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
End
of quarter
|
|
|
|
2,738
|
|
|
|
663
|
|
|
|
280
|
|
|
|
3,681
|
|
%
of Total
|
|
|
|
74%
|
|
|
|
18%
|
|
|
|
8%
|
|
|
|
100%
|
|
(a)
|
The
Worldwide, U.S. and International Division totals exclude 2,173, 2,001 and
172 licensed units, respectively, at March 21, 2009. 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.
|
|
|
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 at March 21, 2009 were as
follows:
|
|
|
|
Company
|
|
|
Franchisees
|
|
|
Total
|
|
United
States
|
|
|
|
1,524
|
|
|
|
3,262
|
|
|
|
4,786
|
|
|
International
Division
|
|
|
|
—
|
|
|
|
362
|
|
|
|
362
|
|
|
Worldwide
|
|
|
|
1,524
|
|
|
|
3,624
|
|
|
|
5,148
|
|
|
For the
quarter ended March 21, 2009, Company and franchise multibrand unit gross
additions were 12 and 194, 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 table details the key drivers of system
sales growth for each reportable segment for the quarter. 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.
|
|
Quarter
ended 3/21/09 vs. Quarter ended 3/22/08
|
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
Worldwide
|
|
Same
store sales growth (decline)
|
|
(2
|
)%
|
|
|
6
|
%
|
|
|
1
|
%
|
|
1
|
%
|
|
Net
unit growth and other
|
|
—
|
|
|
|
4
|
|
|
|
11
|
|
|
3
|
|
|
Foreign
currency translation (“forex”)
|
|
N/A
|
|
|
|
(13
|
)
|
|
|
4
|
|
|
(5
|
)
|
|
%
Change
|
|
(2
|
)%
|
|
|
(3
|
)%
|
|
|
16
|
%
|
|
(1
|
)%
|
|
%
Change, excluding forex
|
|
N/A
|
|
|
|
10
|
%
|
|
|
12
|
%
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Company
sales were as follows:
|
|
Quarter
ended
|
|
|
|
|
|
3/21/09
|
|
|
|
3/22/08
|
|
|
|
U.S.
|
|
$
|
882
|
|
|
$
|
1,034
|
|
|
|
YRI
|
|
|
432
|
|
|
|
552
|
|
|
|
China
Division
|
|
|
604
|
|
|
|
508
|
|
|
|
Worldwide
|
|
$
|
1,918
|
|
|
$
|
2,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table details the key drivers of the quarter-over-quarter changes of
Company sales. 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 due to new unit openings
and historical sales due to closures. Refranchising represents the
amount of Company sales for the periods in the prior quarter while the Company
operated the restaurants but did not operate them in the current
quarter. Other represents the impact of acquisitions, unusual or
significant items and roundings, which are footnoted as necessary.
The
percentage changes in Company sales by quarter were as follows:
|
|
Quarter
ended 3/21/09 vs. Quarter ended 3/22/08
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
|
(2
|
)%
|
|
|
|
3
|
%
|
|
|
|
2
|
%
|
|
|
|
1
|
%
|
Net
unit growth
|
|
|
1
|
|
|
|
|
3
|
|
|
|
|
13
|
|
|
|
|
4
|
|
Refranchising
|
|
|
(15
|
)
|
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
|
|
(8
|
)
|
Other
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
(1
|
)
|
|
|
|
—
|
|
Foreign
currency translation (“forex”)
|
|
|
N/A
|
|
|
|
|
(25
|
)
|
|
|
|
5
|
|
|
|
|
(5
|
)
|
%
Change
|
|
|
(15
|
)%
|
|
|
|
(22
|
)%
|
|
|
|
19
|
%
|
|
|
|
(8
|
)%
|
%
Change, excluding forex
|
|
|
N/A
|
|
|
|
|
3
|
%
|
|
|
|
14
|
%
|
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and license income was as follows:
|
|
|
|
|
|
|
%
Increase
|
|
|
|
|
|
%
Increase
|
|
(Decrease)
|
|
|
Quarter
ended
|
|
|
(Decrease)
|
|
excluding
forex
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
|
|
|
U.S.
|
|
$
|
164
|
|
|
$
|
158
|
|
|
4
|
|
N/A
|
YRI
|
|
|
149
|
|
|
|
149
|
|
|
—
|
|
13
|
China
Division
|
|
|
13
|
|
|
|
12
|
|
|
11
|
|
7
|
Unallocated
Franchise and license income
|
|
|
(27
|
)
|
|
|
—
|
|
|
NM
|
|
N/A
|
Worldwide
|
|
$
|
299
|
|
|
$
|
319
|
|
|
(6)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Franchise and license income decreased $27 million, or 8% as a result of
our reimbursements to, or obligations to reimburse, KFC franchisees for
installation costs for the national launch of Kentucky Grilled Chicken
that have not been allocated to the U.S. segment for performance reporting
purposes.
|
U.S.
Franchise and license income in the quarter ended March 21, 2009 was positively
impacted by 5 percent due to the impact of refranchising.
Company
Restaurant Margins
|
|
Quarter
ended 3/21/09
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
28.7
|
|
|
|
32.2
|
|
|
|
36.2
|
|
|
|
31.8
|
|
Payroll
and employee benefits
|
|
30.7
|
|
|
|
25.2
|
|
|
|
12.9
|
|
|
|
23.8
|
|
Occupancy
and other operating expenses
|
|
27.4
|
|
|
|
30.6
|
|
|
|
27.9
|
|
|
|
28.3
|
|
Company
restaurant margin
|
|
13.2
|
%
|
|
|
12.0
|
%
|
|
|
23.0
|
%
|
|
|
16.1
|
%
|
|
|
Quarter
ended 3/22/08
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
29.8
|
|
|
|
30.8
|
|
|
|
37.4
|
|
|
|
31.9
|
|
Payroll
and employee benefits
|
|
31.2
|
|
|
|
25.7
|
|
|
|
13.6
|
|
|
|
25.5
|
|
Occupancy
and other operating expenses
|
|
26.6
|
|
|
|
30.5
|
|
|
|
27.7
|
|
|
|
27.9
|
|
Company
restaurant margin
|
|
12.4
|
%
|
|
|
13.0
|
%
|
|
|
21.3
|
%
|
|
|
14.7
|
%
|
The
increase in U.S. restaurant margin as a percentage of sales was driven by lower
food and paper costs as a higher average guest check due to pricing actions we
have previously taken more than offset the impact of higher commodity costs
(primarily chicken and meats). Labor costs were positively impacted
by savings associated with productivity initiatives; same store sales
transaction declines negatively impacted Occupancy and other operating expenses,
partially offset by the impact of refranchising.
The
decrease in International Division restaurant margin as a percentage of sales
was primarily driven by the elimination of a Value Added Tax (“VAT”) exemption
in Mexico. The VAT exemption was eliminated beginning January 1, 2008
but given the period lag in our International Division reporting calendar, we
were lapping one period of benefit that impacted the quarter ended March 21,
2008. An increase in commodity and occupancy costs was partially
offset by higher average guest check.
The
increase in China Division restaurant margin as a percentage of sales was driven
by the favorable impact of same store sales growth on restaurant margin and
lower labor costs. The increase was partially offset by the impact of
lower margins associated with new units during the initial periods of
operation.
Worldwide
General and Administrative Expenses
G&A expenses
decreased 8% in the quarter, including a 5% favorable impact of foreign currency
translation. The decrease is being driven by savings from the actions
taken as part of our U.S. business transformation measures as discussed in the
Significant Gains and Charges section of this MD&A, project timing, and the
favorable impact of refranchising. These decreases were partially
offset by higher incentives and compensation costs related to strategic
initiatives in China and other YRI growth markets.
Worldwide
Other (Income) Expense
|
|
|
|
Quarter
ended
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
Equity
income from investments in unconsolidated affiliates
|
|
|
|
$
|
(10
|
)
|
|
|
$
|
(11
|
)
|
|
Gain
upon sale of investment in unconsolidated affiliate(a)
|
|
|
|
|
—
|
|
|
|
|
(100
|
)
|
|
Foreign
exchange net (gain) loss and other
|
|
|
|
|
1
|
|
|
|
|
(6
|
)
|
|
Other
(income) expense
|
|
|
|
$
|
(9
|
)
|
|
|
$
|
(117
|
)
|
|
(a)
|
Quarter
ended March 22, 2008 reflects the gain recognized on the sale of our
interest in our unconsolidated affiliate in Japan. See our 2008 Form 10-K
for further discussion on this
transaction.
|
See the
Store Portfolio Strategy section for more detail of our refranchising activity
and Note 7 for a summary of the components of facility actions by reportable
operating segment.
|
|
|
Quarter
ended
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
%
B/(W)
|
|
United
States
|
|
|
$
|
157
|
|
|
|
$
|
146
|
|
|
|
7
|
|
|
International
Division
|
|
|
|
123
|
|
|
|
|
138
|
|
|
|
(11
|
)
|
|
China
Division
|
|
|
|
131
|
|
|
|
|
103
|
|
|
|
27
|
|
|
Unallocated
Franchise and license income
|
|
|
|
(27
|
)
|
|
|
|
—
|
|
|
|
NM
|
|
|
Unallocated
and corporate general and administrative expenses
|
|
|
|
(46
|
)
|
|
|
|
(42
|
)
|
|
|
(5
|
)
|
|
Unallocated
Other income (expense)
|
|
|
|
(1
|
)
|
|
|
|
106
|
|
|
|
NM
|
|
|
Unallocated
Refranchising gain (loss)
|
|
|
|
14
|
|
|
|
|
(25
|
)
|
|
|
NM
|
|
|
Operating
Profit
|
|
|
$
|
351
|
|
|
|
$
|
426
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States operating margin
|
|
|
|
15.0
|
%
|
|
|
|
12.3
|
%
|
|
|
2.7
|
ppts.
|
|
International
Division operating margin
|
|
|
|
21.1
|
%
|
|
|
|
19.7
|
%
|
|
|
1.4
|
ppts. |
|
U.S.
Operating Profit increased 7% in the quarter ended March 21,
2009. The increase was driven by the savings from the actions
taken as part of our U.S. business transformation measures as discussed in the
Significant Gains and Charges section of this MD&A, and improved restaurant
margin as a percentage of sales.
International
Division Operating Profit decreased 11% in the quarter ended March 21, 2009,
including a 15% unfavorable impact from foreign currency
translation. Excluding the unfavorable impact from foreign currency
translation, International Division Operating Profit increased 4% in the
quarter. The increase was driven by the impact of same store sales
growth and net new unit development on Franchise and license income, partially
offset by the elimination of a VAT exemption in Mexico.
China
Division Operating Profit increased 27% in the quarter ended March 21, 2009,
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.
Unallocated
franchise and license income for the quarter ended March 21, 2009 reflects our
reimbursements to, or obligations to reimburse, KFC franchisees for installation
costs of ovens for the national launch of Kentucky Grilled Chicken that has not
been allocated to the U.S. segment for performance reporting
purposes.
Unallocated
other income (expense) for the quarter ended March 22, 2008 includes a $100
million gain recognized on the sale of our interest in our unconsolidated
affiliate in Japan.
|
|
|
|
Quarter
ended
|
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
|
%
B/(W)
|
|
Interest
expense
|
|
|
|
$
|
57
|
|
|
|
$
|
59
|
|
|
|
4
|
%
|
|
Interest
income
|
|
|
|
|
(4
|
)
|
|
|
|
(6
|
)
|
|
|
(34
|
)%
|
|
Interest
expense, net
|
|
|
|
$
|
53
|
|
|
|
$
|
53
|
|
|
|
1
|
%
|
|
Interest
expense decreased $2 million or 4% for the quarter. This decrease was
primarily driven by a decrease in interest rates on the variable portion of our
debt as compared to prior year.
Income Taxes
|
|
|
|
Quarter
ended
|
|
|
|
|
|
3/21/09
|
|
|
3/22/08
|
|
Income
taxes
|
|
|
|
$
|
79
|
|
|
|
$
|
117
|
|
|
Effective
tax rate
|
|
|
|
|
26.5
|
%
|
|
|
|
31.6
|
%
|
|
Our first
quarter 2009 effective tax rate was lower than prior year primarily as a result
of lapping 2008 expense associated with our plan to distribute certain foreign
earnings and 2008 tax expense associated with the gain on the sale of our
interest in our Japan unconsolidated affiliate. Additionally, our
rate was lower than prior year due to current year adjustments to prior year
foreign tax credit balances.
Net cash provided by operating activities was $297
million compared to $367
million in 2008. The decrease was driven by reimbursements
to KFC franchisees for installation costs of ovens for the national launch of
Kentucky Grilled Chicken, higher income tax payments and higher interest
payments.
Net cash used in investing activities was $128
million versus $103 million in 2008. The
increase was driven by acquisition activity and higher capital
spending, partially offset by higher refranchising proceeds.
Net cash used in financing activities was $99
million versus $595 million in 2008. The
decrease was driven by a reduction in share repurchases,
partially offset by lower net borrowings.
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. However, unforeseen
downturns in our business could adversely impact our cash flows from operations
from the levels historically realized.
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 March 21, 2009 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 March 21, 2009 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
In the
quarter ended March 21, 2009, we invested $143 million in our businesses,
including approximately $65 million in the U.S., $34 million for the
International Division and $44 million for the China Division.
During
the quarter ended March 21, 2009, we paid cash dividends of $87
million. Additionally, on March 27, 2009 our Board of Directors
approved a cash dividend of $.19 per share of Common Stock, to be distributed on
May 1, 2009 to shareholders of record at the close of business on April 10,
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 March 21, 2009, our unused Credit Facility totaled
$726 million net of outstanding letters of credit of $168
million. There were borrowings of $256 million outstanding under the
Credit Facility at March 21, 2009. 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
March 21, 2009. 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.
We have a
variable rate senior unsecured term loan (“Domestic Term Loan”), in an aggregate
principal amount of $375 million that matures in 2011. 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
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 March 21, 2009 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 March 21, 2009.
Recently
Adopted Accounting Pronouncements
See Note
5 to the Condensed Consolidated Financial Statements of this report for further
details of recently adopted accounting pronouncements.
New Accounting Pronouncements Not Yet Recognized
See Note
6 to the Condensed Consolidated Financial Statements of this report for further
details of new accounting pronouncements not yet adopted.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
There
were no material changes during the quarter ended March 21, 2009 to the
disclosures made in Item 7A of the Company’s 2008 Form 10-K.
Item
4.
|
Controls
and Procedures
|
Evaluation of Disclosure
Controls and Procedures
The
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 as of the end of the period covered by
this report. Based on the evaluation, performed under the supervision
and with the participation of the Company’s management, including the Chairman,
Chief Executive Officer and President (the “CEO”) and the Chief Financial
Officer (the “CFO”), the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by the report.
Changes in Internal
Control
There
were no significant changes with respect to the Company’s internal control over
financial reporting or in other factors that materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting during the quarter ended March 21, 2009.
Cautionary
Note Regarding 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 II, Item 1A of this report, (ii) the risks and
uncertainties described in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part I, Item 2 of this report,
(iii) the risks and uncertainties described in the Risk Factors included in Part
I, Item 1A of our Form 10-K for the year ended December 27, 2008 and (iv) the
factors described in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of our Form 10-K
for the year ended December 27, 2008. 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.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
reviewed the accompanying Condensed Consolidated Balance Sheet of YUM! Brands,
Inc. and Subsidiaries (“YUM”) as of March 21, 2009 and the related Condensed
Consolidated Statements of Income and Cash Flows for the twelve weeks ended
March 21, 2009 and March 22, 2008. These Condensed Consolidated Financial
Statements are the responsibility of YUM’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the Condensed Consolidated Financial Statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheet of
YUM as of December 27, 2008, and the related Consolidated Statements of Income,
Cash Flows and Shareholders’ Equity (Deficit) and Comprehensive Income (Loss)
for the year then ended not presented herein; and in our report dated February
23, 2009, we expressed an unqualified opinion on those Consolidated Financial
Statements. In our opinion, the information set forth in the accompanying
Condensed Consolidated Balance Sheet as of December 27, 2008, is fairly stated,
in all material respects, in relation to the Consolidated Balance Sheet from
which it has been derived.
/s/
KPMG LLP
|
|
Louisville,
Kentucky
|
April
28, 2009
|
Item
1. Legal
Proceedings
Information
regarding legal proceedings is incorporated by reference from Note 13 to the
Company’s Condensed Consolidated Financial Statements set forth in Part I of
this report.
Item
1A. Risk
Factors
We face a
variety of risks that are inherent in our business and our industry, including
operational, legal, regulatory and product risks. Such risks could
cause our actual results to differ materially from our forward-looking
statements, expectations and historical trends. The following are
some of the more significant factors that could affect our business and our
results of operations:
·
|
Food-borne
illnesses (such as E. coli, hepatitis A., trichinosis or salmonella), food
safety issues and health concerns arising from outbreaks of Avian Flu, may
have an adverse effect on our business;
|
|
|
·
|
A
significant and growing number of our restaurants are located in China,
and our business is increasingly exposed to risk there. These
risks include changes in economic conditions, tax rates, currency exchange
rates, laws and consumer preferences, as well as changes in the regulatory
environment and increased competition;
|
|
|
·
|
Our
other foreign operations, which are significant and increasing, subject us
to risks that could negatively affect our business. These
risks, which can vary substantially by market, include political
instability, corruption, social unrest, changes in economic conditions,
the regulatory environment, tax rates and laws and consumer preferences,
as well as changes in the laws 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;
|
|
|
·
|
Changes
in commodity and other operating costs could adversely affect our results
of operations;
|
|
|
·
|
Shortages
or interruptions in the availability or delivery of food or other supplies
or other supply chain or business disruptions could adversely affect the
availability, quality or cost of items we buy and the operations of our
restaurants;
|
|
|
·
|
Our
operating results are closely tied to the success of our franchisees, and
any significant inability of our franchisees to operate successfully could
adversely affect our operating results;
|
|
|
·
|
Our
results and financial condition could be affected by the success of our
refranchising program;
|
|
|
·
|
We
could be party to litigation that could adversely affect us by increasing
our expenses or subjecting us to material money damages and other
remedies;
|
|
|
·
|
We
may not attain our target development goals, which are dependent upon our
ability and the ability of our franchisees to upgrade existing restaurants
and open new restaurants, and any new restaurants may not produce
operating results similar to those of our existing
restaurants;
|
|
|
·
|
Our
business may be adversely impacted by current economic conditions or the
global financial crisis through decreased discretionary spending by
consumers, difficulty in refinancing or incurring indebtedness or the
insolvency of our suppliers;
|
|
|
·
|
Changes
in governmental regulations, including changing laws relating to
nutritional content, nutritional labeling, product safety and menu
labeling regulation, may adversely affect our business operations;
and
|
|
|
·
|
The
retail food industry in which we operate is highly
competitive.
|
These
risks are described in more detail under “Risk Factors” in Part I, Item 1A of
our Form 10-K for the year ended December 27, 2008. We encourage you
to read these risk factors in their entirety. These risks are not
exclusive, and our business and our actual results of operations could also be
affected by other risks that we cannot anticipate or that we do not consider to
be material based on currently available information.
|
(a)
|
Exhibit
Index
|
|
|
|
|
|
|
|
EXHIBITS
|
|
|
|
|
|
|
|
Exhibit
15
|
Letter
from KPMG LLP regarding Unaudited Interim Financial Information
(Acknowledgement of Independent Registered Public Accounting
Firm).
|
|
|
|
|
|
|
Exhibit
31.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to Rule
13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
Exhibit
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
Exhibit
32.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
Exhibit
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, duly
authorized officer of the registrant.
|
|
|
YUM!
BRANDS, INC.
|
|
|
|
|
(Registrant)
|
|
Date:
|
April 28,
2009
|
|
/s/ Ted
F. Knopf
|
|
|
|
|
Senior
Vice President of Finance
|
|
|
|
|
and
Corporate Controller
|
|
|
|
|
(Principal
Accounting Officer)
|
|