SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
FORM
10-K
[ü]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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EXCHANGE ACT OF 1934 for
the fiscal year ended December 26, 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
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EXCHANGE
ACT OF 1934
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For
the transition period from ____________ to _________________
Commission
file number 1-13163
YUM!
BRANDS, INC.
(Exact
name of registrant as specified in its charter)
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North Carolina
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13-3951308
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1441
Gardiner Lane, Louisville, Kentucky
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40213
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (502)
874-8300
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Securities
registered pursuant to Section 12(b) of the Act
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common
Stock, no par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes Ö No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
No Ö
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes Ö No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes Ö No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Ö]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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
aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of June 13, 2009
computed by reference to the closing price of the registrant’s Common Stock on
the New York Stock Exchange Composite Tape on such date was
$16,255,525,133. All executive officers and directors of the
registrant have been deemed, solely for the purpose of the foregoing
calculation, to be “affiliates” of the registrant. The number of
shares outstanding of the registrant’s Common Stock as of February 10, 2010 was
469,275,605 shares.
Documents
Incorporated by Reference
Portions
of the definitive proxy statement furnished to shareholders of the registrant in
connection with the annual meeting of shareholders to be held on May 20, 2010
are incorporated by reference into Part III.
Forward-Looking
Statements
From time
to time, in both written reports and oral statements, we present
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We intend such forward-looking statements to be covered
by the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and we are including this statement for purposes of complying with those
safe harbor provisions.
Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. These statements often include words
such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,”
“anticipate,” “believe,” “plan” or other similar terminology. These
forward-looking statements are based on current expectations and assumptions and
upon data available at the time of the statements and are neither predictions
nor guarantees of future events or circumstances. The forward-looking
statements are subject to risks and uncertainties, which may cause actual
results to differ materially. Important factors that could cause
actual results and events to differ materially from our expectations and
forward-looking statements include (i) the risks and uncertainties described in
the Risk Factors included in Part I, Item 1A of this Form 10-K and (ii) the
factors described in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of this Form
10-K. You should not place undue reliance on forward-looking
statements, which speak only as of the date hereof. In making these
statements, we are not undertaking to address or update any risk factor set
forth herein, in future filings or communications regarding our business
results.
PART
I
YUM!
Brands, Inc. (referred to herein as “YUM”, the “Registrant” or the “Company”),
was incorporated under the laws of the state of North Carolina in
1997. The principal executive offices of YUM are located at 1441
Gardiner Lane, Louisville, Kentucky 40213, and the telephone number
at that location is (502) 874-8300.
YUM,
together with its subsidiaries, is referred to in this Form 10-K annual report
(“Form 10-K”) as the Company. The terms “we,” “us” and “our” are also
used in the Form 10-K to refer to the Company. Throughout this Form
10-K, the terms “restaurants,” “stores” and “units” are used
interchangeably.
This Form
10-K should be read in conjunction with the Forward-Looking Statements on page 2
and the Risk Factors set forth in Item 1A.
(a)
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General
Development of Business
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In
January 1997, PepsiCo announced its decision to spin-off its restaurant
businesses to shareholders as an independent public company (the
“Spin-off”). Effective October 6, 1997, PepsiCo disposed of its
restaurant businesses by distributing all of the outstanding shares of Common
Stock of YUM to its shareholders. On May 16, 2002, following receipt
of shareholder approval, the Company changed its name from TRICON Global
Restaurants, Inc. to YUM! Brands, Inc.
(b)
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Financial
Information about Operating
Segments
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YUM
consists of six operating segments: KFC-U.S., Pizza Hut-U.S., Taco
Bell-U.S., Long John Silver’s (“LJS”)-U.S. and A&W All American Food
Restaurants (“A&W”)-U.S., YUM Restaurants International (“YRI” or
“International Division”) and YUM Restaurants China (“China
Division”). For financial reporting purposes, management considers
the four U.S. operating segments to be similar and, therefore, has aggregated
them into a single reportable operating segment (“U.S.”). The China
Division includes mainland China (“China”), Thailand and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Operating
segment information for the years ended December 26, 2009, December 27, 2008 and
December 29, 2007 for the Company is included in Management’s Discussion and
Analysis of Financial Condition and Results of Operations (“MD&A”) in Part
II, Item 7, pages 24 through 58 and in the related Consolidated Financial
Statements and footnotes in Part II, Item 8, pages 59 through 116.
(c)
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Narrative
Description of Business
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General
YUM is
the world’s largest quick service restaurant (“QSR”) company based on number of
system units, with more than 37,000 units in more than 110 countries and
territories. Through the five concepts of KFC, Pizza Hut, Taco Bell,
LJS and A&W (the “Concepts”), the Company develops, operates, franchises and
licenses a worldwide system of restaurants which prepare, package and sell a
menu of competitively priced food items. Units are operated by a
Concept or by independent franchisees or licensees under the terms of franchise
or license agreements. Franchisees can range in size from individuals
owning just one unit to large publicly traded companies. In addition,
the Company owns non-controlling interests in entities in China who operate
similar to franchisees of KFC and a non-controlling interest in Little Sheep, a
Hot Pot concept headquartered in Hong Kong.
At year
end 2009, we had approximately 20,000 system restaurants in the U.S. which
achieved revenues of $4.5 billion and Operating Profit of $647 million during
2009. The International Division, based in Dallas, Texas, comprises
approximately 13,000 system restaurants, primarily KFCs and Pizza Huts,
operating in over 110 countries outside the U.S. In 2009 YRI achieved
revenues of $2.7 billion and Operating Profit of $491 million. The
China Division, based in Shanghai, China, comprises approximately 4,000 system
restaurants, predominately KFCs. In 2009, the China Division achieved
revenues of $3.7 billion and Operating Profit of $602 million.
Restaurant
Concepts
Most
restaurants in each Concept offer consumers the ability to dine in and/or carry
out food. In addition, Taco Bell, KFC, LJS and A&W offer a
drive-thru option in many stores. Pizza Hut offers a drive-thru
option on a much more limited basis. Pizza Hut and, on a much more
limited basis, KFC offer delivery service.
Each
Concept has proprietary menu items and emphasizes the preparation of food with
high quality ingredients, as well as unique recipes and special seasonings to
provide appealing, tasty and attractive food at competitive prices.
The
franchise program of the Company is designed to assure consistency and quality,
and the Company is selective in granting franchises. Under standard
franchise agreements, franchisees supply capital – initially by paying a
franchise fee to YUM, purchasing or leasing the land, building and equipment and
purchasing signs, seating, inventories and supplies and, over the longer term,
by reinvesting in the business. Franchisees then contribute to the
Company’s revenues through the payment of royalties based on a percentage of
sales.
The
Company believes that it is important to maintain strong and open relationships
with its franchisees and their representatives. To this end, the
Company invests a significant amount of time working with the franchisee
community and their representative organizations on all aspects of the business,
including products, equipment, operational improvements and standards and
management techniques.
The
Company and its franchisees also operate multibrand units, primarily in the
U.S., where two or more of the Concepts are operated in a single
unit.
Following
is a brief description of each concept:
KFC
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KFC
was founded in Corbin, Kentucky by Colonel Harland D. Sanders, an early
developer of the quick service food business and a pioneer of the
restaurant franchise concept. The Colonel perfected his secret
blend of 11 herbs and spices for Kentucky Fried Chicken in 1939 and signed
up his first franchisee in 1952. KFC is based in Louisville,
Kentucky.
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As
of year end 2009, KFC was the leader in the U.S. chicken QSR segment among
companies featuring chicken-on-the-bone as their primary product offering,
with a 42 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment, which is more than three times that of
its closest national competitor.
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KFC
operates in 108 countries and territories throughout the
world. As of year end 2009, KFC had 5,162 units in the U.S.,
and 11,102 units outside the U.S., including 2,872 units in mainland
China. Approximately 17 percent of the U.S. units and 31
percent of the non-U.S. units are operated by the
Company.
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Traditional
KFC restaurants in the U.S. offer fried and non-fried chicken-on-the-bone
products, primarily marketed under the names Original Recipe, Extra Tasty
Crispy and Kentucky Grilled Chicken. Other principal entree
items include chicken sandwiches (including the Snacker and the Twister),
KFC Famous Bowls, Colonel’s Crispy Strips, Wings, Popcorn Chicken and
seasonally, Chunky Chicken Pot Pies. KFC restaurants in the
U.S. also offer a variety of side items, such as biscuits, mashed potatoes
and gravy, coleslaw, corn, and potato wedges, as well as
desserts. While many of these products are offered outside of
the U.S., international menus are more focused on chicken sandwiches and
Colonel’s Crispy Strips, and include side items that are suited to local
preferences and tastes. Restaurant decor throughout the world
is characterized by the image of the
Colonel.
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Pizza
Hut
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The
first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and
within a year, the first franchise unit was opened. Today,
Pizza Hut is the largest restaurant chain in the world specializing in the
sale of ready-to-eat pizza products. Pizza Hut is based in
Dallas, Texas.
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As
of year end 2009, Pizza Hut was the leader in the U.S. pizza QSR segment,
with a 14 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Pizza
Hut operates in 92 countries and territories throughout the world. As of
year end 2009, Pizza Hut had 7,566 units in the U.S., and 5,715 units
outside of the U.S. Approximately 8 percent of the U.S. units
and 25 percent of the non-U.S. units are operated by the
Company.
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Pizza
Hut features a variety of pizzas, which may include Pan Pizza, Thin ‘n
Crispy, Hand Tossed, Sicilian, Stuffed Crust, Twisted Crust, Sicilian
Lasagna Pizza, Cheesy Bites Pizza, The Big New Yorker, The Insider, The
Chicago Dish, the Natural, Pizza Mia and 4forALL. Each of these
pizzas is offered with a variety of different toppings. Pizza
Hut now also offers a variety of Tuscani Pastas. WingStreet
chicken wings are served in over 3,000 Pizza Hut locations, primarily in
the U.S. Menu items outside of the U.S. are generally similar
to those offered in the U.S., though pizza toppings are often suited to
local preferences and tastes.
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Taco
Bell
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The
first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey,
California, and in 1964, the first Taco Bell franchise was
sold. Taco Bell is based in Irvine,
California.
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As
of year end 2009, Taco Bell was the leader in the U.S. Mexican QSR
segment, with a 52 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Taco
Bell operates in 20 countries and territories throughout the world. As of
year end 2009, there were 5,604 Taco Bell units in the U.S., and 251 units
outside of the U.S. Approximately 23 percent of the U.S. units
and 1 percent of the non-U.S. units are operated by the
Company.
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Taco
Bell specializes in Mexican-style food products, including various types
of tacos, burritos, gorditas, chalupas, quesadillas, taquitos, salads,
nachos and other related items. Additionally, proprietary
entrée items include Grilled Stuft Burritos and Border
Bowls. Taco Bell units feature a distinctive bell logo on their
signage.
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LJS
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The
first LJS restaurant opened in 1969 and the first LJS franchise unit
opened later the same year. LJS is based in Louisville,
Kentucky.
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As
of year end 2009, LJS was the leader in the U.S. seafood QSR segment, with
a 36 percent market share (Source: The NPD Group, Inc.; NPD Foodworld;
CREST) in that segment.
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LJS
operates in 6 countries and territories throughout the
world. As of year end 2009, there were 989 LJS units in the
U.S., and 35 units outside the U.S. All single-brand units
inside and outside of the U.S. are operated by franchisees or
licensees. As of year end 2009, there were 110 company operated
multi-brand units that included the LJS concept.
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LJS
features a variety of seafood and chicken items, including meals featuring
batter-dipped fish, chicken and shrimp, non-fried salmon, shrimp and
tilapia, hushpuppies and portable snack items. LJS units
typically feature a distinctive seaside/nautical
theme.
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A&W
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A&W
was founded in Lodi, California by Roy Allen in 1919 and the first A&W
franchise unit opened in 1925. A&W is based in Louisville,
Kentucky.
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A&W
operates in 9 countries and territories throughout the
world. As of year end 2009, there were 344 A&W units in the
U.S., and 293 units outside the U.S. As of year end 2009, all
units were operated by franchisees.
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A&W
serves A&W draft Root Beer and a signature A&W Root Beer float, as
well as hot dogs and hamburgers.
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Restaurant
Operations
Through
its Concepts, YUM develops, operates, franchises and licenses a worldwide system
of both traditional and non-traditional QSR restaurants. Traditional
units feature dine-in, carryout and, in some instances, drive-thru or delivery
services. Non-traditional units, which are typically licensed
outlets, include express units and kiosks which have a more limited menu and
operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a
full-scale traditional outlet would not be practical or efficient.
Restaurant
management structure varies by Concept and unit size. Generally, each
Concept-owned restaurant is led by a restaurant general manager (“RGM”),
together with one or more assistant managers, depending on the operating
complexity and sales volume of the restaurant. In the U.S., the
average restaurant has 25 to 30 employees, while internationally this figure can
be significantly higher depending on the location and sales volume of the
restaurant. Most of the employees work on a part-time
basis. Each Concept issues detailed manuals, which may then be
customized to meet local regulations and customs, covering all aspects of
restaurant operations, including food handling and product preparation
procedures, safety and quality issues, equipment maintenance, facility standards
and accounting control procedures. The restaurant management teams
are responsible for the day-to-day operation of each unit and for ensuring
compliance with operating standards. CHAMPS – which stands for Cleanliness,
Hospitality, Accuracy, Maintenance, Product Quality and Speed of Service – is
our proprietary core systemwide program for training, measuring and rewarding
employee performance against key customer measures. CHAMPS is
intended to align the operating processes of our entire system around one set of
standards. RGMs’ efforts, including CHAMPS performance measures, are monitored
by Area Coaches. Area Coaches typically work with approximately six
to twelve restaurants. Various senior operators visit Concept-owned
restaurants from time to time to help ensure adherence to system standards and
mentor restaurant team members.
Supply and Distribution
The
Company’s Concepts and franchisees are substantial purchasers of a number of
food and paper products, equipment and other restaurant supplies. The principal
items purchased include chicken, cheese, beef and pork products, seafood, paper
and packaging materials.
The
Company is committed to conducting its business in an ethical, legal and
socially responsible manner. All restaurants, regardless of their
ownership structure or location, must adhere to strict food quality and safety
standards. The guidelines are translated to local market requirements
and regulations where appropriate and without compromising the
standards. The Company has not experienced any significant continuous
shortages of supplies, and alternative sources for most of these products are
generally available. Prices paid for these supplies
fluctuate. When prices increase, the Concepts may attempt to pass on
such increases to their customers, although there is no assurance that this can
be done practically.
U.S.
Division. The Company, along with the representatives of the
Company’s KFC, Pizza Hut, Taco Bell, LJS and A&W franchisee groups, are
members in the Unified FoodService Purchasing Co-op, LLC (the “Unified Co-op”)
which was created for the purpose of purchasing certain restaurant products and
equipment in the U.S. The core mission of the Unified Co-op is to
provide the lowest possible sustainable store-delivered prices for restaurant
products and equipment. This arrangement combines the purchasing
power of the Concept and franchisee restaurants in the U.S. which the Company
believes leverages the system’s scale to drive cost savings and effectiveness in
the purchasing function. The Company also believes that the Unified
Co-op has resulted, and should continue to result, in closer alignment of
interests and a stronger relationship with its franchisee
community.
Most food
products, paper and packaging supplies, and equipment used in restaurant
operations are distributed to individual restaurant units by third party
distribution companies. McLane Company, Inc. (“McLane”) is the
exclusive distributor for the majority of items used in Concept-owned
restaurants in the U.S. and for a substantial number of franchisee and licensee
stores. McLane became the distributor when it assumed all
distribution responsibilities under an existing agreement between Ameriserve
Food Distribution, Inc. and the Company. This agreement extends
through October 31, 2010 and generally restricts Concept-owned restaurants from
using alternative distributors in the U.S. for most products.
International and China
Divisions. Outside of the U.S. we and our franchisees use
decentralized sourcing and distribution systems involving many different global,
regional, and local suppliers and distributors. In China, we work
with approximately 500 suppliers. In our YRI markets we have
approximately 1,400 suppliers, including U.S.-based suppliers that export to
many countries. In certain countries, we own all or a portion of the
distribution system, including China where we own the entire distribution
system.
Trademarks
and Patents
The
Company and its Concepts own numerous registered trademarks and service
marks. The Company believes that many of these marks, including its
Kentucky Fried Chicken®, KFC®, Pizza Hut®, Taco Bell® and Long John Silver’s®
marks, have significant value and are materially important to its
business. The Company’s policy is to pursue registration of its
important marks whenever feasible and to oppose vigorously any infringement of
its marks. The Company also licenses certain A&W trademarks and
service marks (the “A&W Marks”), which are owned by A&W Concentrate
Company (formerly A&W Brands, Inc.). A&W Concentrate Company,
which is not affiliated with the Company, has granted the Company an exclusive,
worldwide (excluding Canada), perpetual, royalty-free license (with the right to
sublicense) to use the A&W Marks for restaurant services.
The use
of these marks by franchisees and licensees has been authorized in KFC, Pizza
Hut, Taco Bell, LJS and A&W franchise and license
agreements. Under current law and with proper use, the Company’s
rights in its marks can generally last indefinitely. The Company also
has certain patents on restaurant equipment which, while valuable, are not
material to its business.
Working
Capital
Information
about the Company’s working capital is included in MD&A in Part II, Item 7,
pages 24 through 58 and the Consolidated Statements of Cash Flows in Part II,
Item 8, page 62.
Customers
The
Company’s business is not dependent upon a single customer or small group of
customers.
Seasonal
Operations
The
Company does not consider its operations to be seasonal to any material
degree.
Backlog
Orders
Company
restaurants have no backlog orders.
Government
Contracts
No
material portion of the Company’s business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the U.S.
government.
Competition
The
retail food industry, in which the Company competes, is made up of supermarkets,
supercenters, warehouse stores, convenience stores, coffee shops, snack bars,
delicatessens and restaurants (including the QSR segment), and is intensely
competitive with respect to food quality, price, service, convenience, location
and concept. The industry is often affected by changes in consumer
tastes; national, regional or local economic conditions; currency fluctuations;
demographic trends; traffic patterns; the type, number and location of competing
food retailers and products; and disposable purchasing power. Each of
the Concepts compete with international, national and regional restaurant chains
as well as locally-owned restaurants, not only for customers, but also for
management and hourly personnel, suitable real estate sites and qualified
franchisees. In 2009, the restaurant business in the U.S. consisted
of about 945,000 restaurants representing approximately $566 billion in annual
sales. The Company’s Concepts accounted for about 2% of those
restaurants and about 3% of those sales. There is currently no way to
reasonably estimate the size of the competitive market outside the
U.S.
Research
and Development (“R&D”)
The
Company’s subsidiaries operate R&D facilities in Louisville, Kentucky (KFC);
Dallas, Texas (Pizza Hut and YRI); and Irvine, California (Taco Bell) and in
several locations outside the U.S., including Shanghai, China
(China). The Company expensed $31 million, $34 million and $39
million in 2009, 2008 and 2007, respectively, for R&D
activities. From time to time, independent suppliers also conduct
research and development activities for the benefit of the YUM
system.
Environmental
Matters
The
Company is not aware of any federal, state or local environmental laws or
regulations that will materially affect its earnings or competitive position, or
result in material capital expenditures. However, the Company cannot
predict the effect on its operations of possible future environmental
legislation or regulations. During 2009, there were no material
capital expenditures for environmental control facilities and no such material
expenditures are anticipated.
Government
Regulation
U.S.
Division. The Company and its
U.S. Division are subject to various federal, state and local laws affecting its
business. Each of the Concept’s restaurants in the U.S. must comply
with licensing and regulation by a number of governmental authorities, which
include health, sanitation, safety and fire agencies in the state and/or
municipality in which the restaurant is located. In addition, each
Concept must comply with various state and federal laws that regulate the
franchisor/franchisee relationship. To date, no Concept has been
significantly affected by any difficulty, delay or failure to obtain required
licenses or approvals.
The
Company and each Concept are also subject to federal and state laws governing
such matters as employment and pay practices, overtime, tip credits and working
conditions. The bulk of the Concepts’ employees are paid on an hourly
basis at rates related to the federal and state minimum wages.
The
Company and each Concept are also subject to federal and state child labor laws
which, among other things, prohibit the use of certain “hazardous equipment” by
employees younger than 18 years of age. Neither the Company nor any
Concept has been materially adversely affected by such laws to
date.
The
Company and each Concept, as applicable, continue to monitor their facilities
for compliance with the Americans with Disabilities Act (“ADA”) in order to
conform to its requirements. Under the ADA, the Company or the
relevant Concept could be required to expend funds to modify its restaurants to
better provide service to, or make reasonable accommodation for the employment
of, disabled persons.
International and
China Divisions. The
Company’s restaurants outside the U.S. are subject to national and local laws
and regulations which are similar to those affecting U.S. restaurants, including
laws and regulations concerning labor, health, sanitation and
safety. The restaurants outside the U.S. are also subject to tariffs
and regulations on imported commodities and equipment and laws regulating
foreign investment. International compliance with environmental
requirements has not had a material adverse effect on the Company’s results of
operations, capital expenditures or competitive position.
Employees
As of
year end 2009, the Company and its Concepts employed approximately 350,000
persons, approximately 86 percent of whom were
part-time. Approximately 21 percent of these employees are employed
in the U.S. The Company believes that it provides working conditions
and compensation that compare favorably with those of its principal
competitors. The majority of employees are paid on an hourly
basis. Some non-U.S. employees are subject to labor council
relationships that vary due to the diverse cultures in which the Company
operates. The Company considers its employee relations to be
good.
(d)
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Financial
Information about Geographic Areas
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Financial
information about our significant geographic areas (U.S., International Division
and China Division) is incorporated herein by reference from Selected Financial
Data in Part II, Item 6, page 22; Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7,
pages 24 through 58; and in the related Consolidated Financial Statements and
footnotes in Part II, Item 8, pages 59 through 116.
(e)
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Available
Information
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The
Company makes available through the Investor Relations section of its internet
website at www.yum.com its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after
electronically filing such material with the Securities and Exchange
Commission. Our Corporate Governance Principles and our Code of
Conduct are also located within this section of the website. The
reference to the Company’s website address does not constitute incorporation by
reference of the information contained on the website and should not be
considered part of this document. These documents, as well as our SEC
filings, are available in print to any shareholder who requests a copy from our
Investor Relations Department.
You
should carefully review the risks described below as they identify important
factors that could cause our actual results to differ materially from those in
our forward-looking statements and historical trends. These risks are
not exclusive, and our business and our results of operations could also be
affected by other risks that we cannot anticipate or that we do not consider
material based on currently available information.
Food
safety and food-borne illness concerns may have an adverse effect on our
business.
Food
safety is a top priority, and we dedicate substantial resources to ensure that
our customers enjoy safe, quality food products. However, food-borne
illnesses, such as E. coli, hepatitis A, trichinosis or salmonella, and food
safety issues have occurred in the past, and could occur in the
future. Any report or publicity linking us or one of our Concepts to
instances of food-borne illness or other food safety issues, including food
tampering or contamination, could adversely affect our Concepts’ brands and
reputations as well as our revenues and profits. If our customers
become ill from food-borne illnesses, we could also be forced to temporarily
close some restaurants. In addition, instances of food-borne illness,
food tampering or food contamination occurring solely at restaurants of
competitors could adversely affect our sales as a result of negative publicity
about the foodservice industry generally. Food-borne illness, food
tampering and food contamination could also be caused by food suppliers or
distributors and, as a result, could be out of our control. The
occurrence of food-borne illnesses or food safety issues could also adversely
affect the price and availability of affected ingredients, which could result in
disruptions in our supply chain and/or lower margins for us and our
franchisees.
Furthermore,
like other companies in the restaurant industry, some of our products may
contain genetically engineered food products, and our U.S. suppliers are
currently not required to label their products as such. Increased
regulation of and opposition to genetically engineered food products have on
occasion and may in the future force the use of alternative sources at increased
costs and lower margins for us and our franchisees.
Our
China operations subject us to risks that could negatively affect our
business.
A
significant and growing portion of our restaurants are located in
China. As a result, our financial results are increasingly dependent
on our results in China, and our business is increasingly exposed to risks
there. These risks include changes in economic conditions (including
wage and commodity inflation, consumer spending and unemployment levels), tax
rates and laws and consumer preferences, as well as changes in the regulatory
environment and increased competition. In addition, our results of
operations in China and the value of our Chinese assets are affected by
fluctuations in currency exchange rates, which may favorably or adversely affect
reported earnings. There can be no assurance as to the future effect
of any such changes on our results of operations, financial condition or cash
flows.
In
addition, any significant or prolonged deterioration in U.S.-China relations
could adversely affect our China business. Many of the risks and
uncertainties of doing business in China are solely within the control of the
Chinese government. China’s government regulates the scope of our
foreign investments and business conducted within China. Although
management believes it has structured our China operations to comply with local
laws, there are uncertainties regarding the interpretation and application of
laws and regulations and the enforceability of intellectual property and
contract rights in China. If we were unable to enforce our
intellectual property or contract rights in China, our business would be
adversely impacted.
Our
other foreign operations subject us to risks that could negatively affect our
business.
A
significant portion of our restaurants are operated in foreign countries and
territories outside of the U.S. and China, and we intend to continue expansion
of our international operations. As a result, our business is
increasingly exposed to risks inherent in foreign operations. These
risks, which can vary substantially by market, include political instability,
corruption, social and ethnic unrest, changes in economic conditions (including
wage and commodity inflation, consumer spending and unemployment levels), the
regulatory environment, tax rates and laws and consumer preferences as well as
changes in the laws and policies that govern foreign investment in countries
where our restaurants are operated.
In
addition, our results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates, which may favorably
or adversely affect reported earnings. More specifically, an increase
in the value of the United States Dollar relative to other currencies, such as
the Chinese Renminbi, Australian Dollar, the British Pound, the Canadian Dollar
and the Euro, could have an adverse effect on our reported
earnings. There can be no assurance as to the future effect of any
such changes on our results of operations, financial condition or cash
flows.
Changes
in commodity and other operating costs could adversely affect our results of
operations.
Any
increase in certain commodity prices, such as food, energy and supply costs,
could adversely affect our operating results. Because we provide
moderately priced food, our ability to pass along commodity price increases to
our customers may be limited. Significant increases in gasoline
prices could also result in a decrease of customer traffic at our restaurants or
the imposition of fuel surcharges by our distributors, each of which could
adversely affect our business. Our operating expenses also include
employee benefits and insurance costs (including workers’ compensation, general
liability, property and health) which may increase over time.
Shortages
or interruptions in the availability and delivery of food and other supplies may
increase costs or reduce revenues.
We are
dependent upon third parties to make frequent deliveries of food products and
supplies that meet our specifications at competitive
prices. Shortages or interruptions in the supply of food items and
other supplies to our restaurants could adversely affect the availability,
quality and cost of items we buy and the operations of our
restaurants. Such shortages or disruptions could be caused by
inclement weather, natural disasters such as floods, drought and hurricanes,
increased demand, problems in production or distribution, the inability of our
vendors to obtain credit, food safety warnings or advisories or the prospect of
such pronouncements, or other conditions beyond our control. A
shortage or interruption in the availability of certain food products or
supplies could increase costs and limit the availability of products critical to
restaurant operations. In addition, if a principal distributor for
our Concepts and/or our franchisees fails to meet its service requirements for
any reason, it could lead to a disruption of service or supply until a new
distributor is engaged, which could have an adverse effect on our
business.
Risks
associated with the suppliers from whom our products are sourced and the safety
of those products could adversely affect our financial performance.
The
products we sell are sourced from a wide variety of domestic and international
suppliers. Political and economic instability in the countries in
which foreign suppliers are located, the financial instability of suppliers,
suppliers’ failure to meet our supplier standards, product quality issues,
inflation, and other factors relating to the suppliers and the countries in
which they are located are beyond our control. These and other
factors affecting our suppliers and our access to products could adversely
affect our financial performance.
Concerns
regarding the safety of food ingredients or products that we source from our
suppliers could cause customers to avoid purchasing certain products from us
even if the basis for the concern is outside of our control. Any lost
confidence on the part of our customers would be difficult and costly to
reestablish.
Our
operating results are closely tied to the success of our Concepts’
franchisees.
We
receive significant revenues in the form of royalties from our
franchisees. Because a significant and growing portion of our
restaurants are run by franchisees, the success of our business is increasingly
dependent upon the operational and financial success of our
franchisees. While our franchise agreements set forth certain
operational standards and guidelines, we have limited control over how our
franchisees’ businesses are run, and any significant inability of our
franchisees to operate successfully could adversely affect our operating results
through decreased royalty payments. For example, franchisees may not
have access to the financial or management resources that they need to open or
continue operating the restaurants contemplated by their franchise agreements
with us. In addition, franchisees may not be able to find suitable
sites on which to develop new restaurants or negotiate acceptable lease or
purchase terms for the sites, obtain the necessary permits and government
approvals or meet construction schedules.
If our
franchisees incur too much debt or if economic or sales trends deteriorate such
that they are unable to repay existing debt, it could result in financial
distress or even possible insolvency or bankruptcy. If a significant
number of our franchisees become financially distressed, this could harm our
operating results through reduced or delayed royalty payments or increased rent
obligations for leased properties on which we are contingently
liable.
Our
results and financial condition could be affected by the success of our
refranchising program.
We are in
the process of a refranchising program, which could reduce the percentage of
company ownership in the U.S., excluding licensees, from approximately 16% at
the end of 2009 to potentially less than 10% by the end of 2011. Our
ability to execute this plan will depend on, among other things, whether we
receive fair offers for these restaurants, whether we can find viable and
suitable buyers and how quickly we can agree to terms with potential
buyers. In addition, some lenders have increased lending requirements
or otherwise reduced the amount of loans they are making generally or to the
restaurant industry in particular. To the extent potential buyers are
unable to obtain financing at attractive prices – or unable to obtain financing
at any price – our refranchising program could be delayed.
Once
executed, the success of the refranchising program will depend on, among other
things, selection of buyers who can effectively operate these restaurants, our
ability to limit our exposure to contingent liabilities in connection with the
sale of our restaurants, and whether the resulting ownership mix of
Company-operated and franchisee-operated restaurants allows us to meet our
financial objectives. In addition, refranchising activity could vary
significantly from quarter-to-quarter and year-to-year and that volatility could
impact our reported earnings.
We
could be party to litigation that could adversely affect us by increasing our
expenses or subjecting us to significant money damages and other
remedies.
We are
involved in a number of legal proceedings, which include consumer, employment,
tort and other litigation. We are currently a defendant in cases
containing class action allegations in which the plaintiffs have brought claims
under federal and state wage and hour and other laws. Plaintiffs in
these types of lawsuits often seek recovery of very large or indeterminate
amounts, and the magnitude of the potential loss relating to such lawsuits may
not be accurately estimated. Regardless of whether any claims against
us are valid, or whether we are ultimately held liable, such litigation may be
expensive to defend and may divert time and money away from our operations and
hurt our performance. A judgment for significant monetary damages in
excess of any insurance coverage could adversely affect our financial condition
or results of operations. Any adverse publicity resulting from these
allegations may also adversely affect our reputation, which in turn could
adversely affect our results.
In
addition, the restaurant industry has been subject to claims that relate to the
nutritional content of food products, as well as claims that the menus and
practices of restaurant chains have led to the obesity of some
customers. We may also be subject to this type of claim in the future
and, even if we are not, publicity about these matters (particularly directed at
the quick service and fast-casual segments of the industry) may harm our
reputation and adversely affect our results.
Health
concerns arising from outbreaks of viruses or other diseases may have an adverse
effect on our business.
Asian and
European countries have experienced outbreaks of Avian Flu, and some
commentators have hypothesized that further outbreaks could occur and reach
pandemic levels. While fully-cooked chicken has been determined to be
safe for consumption, and while we have taken and continue to take measures to
prepare for and minimize the effect of these outbreaks on our business, future
outbreaks could adversely affect the price and availability of poultry and cause
customers to eat less chicken. In addition, outbreaks on a widespread
basis could also affect our ability to attract and retain
employees.
To the
extent a virus such as H1N1 or “swine flu” is transmitted through human contact,
employees or guests could become infected, or could choose, or be advised, to
avoid gathering in public places, any of which could adversely affect restaurant
guest traffic or the ability to adequately staff restaurants. We
could also be adversely affected if jurisdictions in which we have restaurants
impose mandatory closures, seek voluntary closures or impose restrictions on
operations. Even if such measures are not implemented and a virus or
other disease does not spread significantly, the perceived risk of infection or
significant health risk may affect our business.
We
may not attain our target development goals.
Our
growth strategy depends in large part on our ability to increase our net
restaurant count in markets outside the United States. The successful
development of new units will depend in large part on our ability and the
ability of our franchisees to open new restaurants, upgrade existing
restaurants, and to operate these restaurants on a profitable
basis. We cannot guarantee that we, or our franchisees, will be able
to achieve our expansion goals or that new, upgraded or converted restaurants
will be operated profitably. Further, there is no assurance that any
restaurant we open or convert will produce operating results similar to those of
our existing restaurants. Other risks which could impact our ability
to increase our net restaurant count include prevailing economic conditions and
our, or our franchisees’, ability to obtain suitable restaurant locations,
obtain required permits and approvals and hire and train qualified
personnel.
Our
franchisees also frequently depend upon financing from banks and other financial
institutions in order to construct and open new
restaurants. Disruptions in credit markets may make financing more
difficult or expensive to obtain. If it becomes more difficult or
expensive for our franchisees to obtain financing to develop new restaurants,
our planned growth could slow and our future revenue and cash flows could be
adversely impacted.
Our
business may be adversely impacted by general economic conditions.
Our
results of operations are dependent upon discretionary spending by consumers,
which may be affected by general economic conditions globally or in one or more
of the markets we serve. Worldwide economic conditions and consumer
spending have deteriorated and there can be no assurance that consumer spending
will return to prior levels. Some of the factors that are having an
impact on discretionary consumer spending include increased unemployment,
reductions in disposable income as a result of equity market declines and
declines in residential real estate values, credit availability and consumer
confidence. These and other macroeconomic factors could have an
adverse effect on our sales mix, profitability or development plans, which could
harm our financial condition and operating results.
The
impact of potentially limited credit availability on third party vendors such as
our suppliers cannot be predicted. The inability of our suppliers to
access financing, or the insolvency of suppliers, could lead to disruptions in
our supply chain which could adversely impact our sales and financial
condition.
Changes
in governmental regulations may adversely affect our business
operations.
We and
our franchisees are subject to various federal, state and local
regulations. Each of our restaurants is subject to state and local
licensing and regulation by health, sanitation, food, workplace safety, fire and
other agencies. Requirements of local authorities with respect to
zoning, land use, licensing, permitting and environmental standards could delay
or prevent development of new restaurants in particular locations. In
addition, we face risks arising from compliance with and enforcement of
increasingly complex federal and state immigration laws and
regulations.
We are
subject to the Americans with Disabilities Act and similar state laws that give
civil rights protections to individuals with disabilities in the context of
employment, public accommodations and other areas. The expenses
associated with any facilities modifications required by these laws could be
material. Our operations are also subject to the U.S. Fair Labor
Standards Act, which governs such matters as minimum wages, overtime and other
working conditions, family leave mandates and a variety of similar state laws
that govern these and other employment law matters. The compliance
costs associated with these laws and evolving regulations could be substantial,
and any failure or alleged failure to comply with these laws could lead to
litigation, which could adversely affect our financial
condition.
We also
face risks from new or changing laws and regulations relating to nutritional
content, nutritional labeling, product safety and menu labeling
regulation. Compliance with these laws and regulations can be costly
and can increase our exposure to litigation or governmental investigations or
proceedings. New or changing laws and regulations relating to union
organizing rights and activities may impact our operations at the restaurant
level and increase our cost of labor. In addition, we are subject to
laws relating to information security, privacy, cashless payments and consumer
credit, protection and fraud, and any failure or perceived failure to comply
with those laws could harm our reputation or lead to litigation, which could
adversely affect our financial condition.
The
retail food industry in which we operate is highly competitive.
The
retail food industry in which we operate is highly competitive with respect to
price and quality of food products, new product development, price, advertising
levels and promotional initiatives, customer service, reputation, restaurant
location, and attractiveness and maintenance of properties. If
consumer or dietary preferences change, or our restaurants are unable to compete
successfully with other retail food outlets in new and existing markets, our
business could be adversely affected. We also face growing
competition as a result of convergence in grocery, deli and restaurant services,
including the offering by the grocery industry of convenient meals, including
pizzas and entrees with side dishes. In addition, in the retail food
industry, labor is a primary operating cost component. Competition
for qualified employees could also require us to pay higher wages to attract a
sufficient number of employees, which could adversely impact our
margins.
Item
1B.
|
Unresolved
Staff Comments.
|
The
Company has received no written comments regarding its periodic or current
reports from the staff of the Securities and Exchange Commission that were
issued 180 days or more preceding the end of its 2009 fiscal year and that
remain unresolved.
As of
year end 2009, the Company owned more than 1,400 units and leased land, building
or both in nearly 6,200 units worldwide. These units are further
detailed as follows:
·
|
The
Company and its Concepts owned more than 1,000 units and leased land,
building or both in more than 1,700 units in the U.S.
|
·
|
The
International Division owned more than 400 units and leased land, building
or both in more than 1,100 units.
|
·
|
The
China Division leased land, building or both in more than 3,300
units.
|
Concept
restaurants in the U.S. which are not owned are generally leased for initial
terms of 15 or 20 years and generally have renewal options; however, Pizza Hut
delivery/carryout units in the U.S. generally are leased for significantly
shorter initial terms with short renewal options. Company restaurants
in the International Division which are not owned have initial lease terms and
renewal options that vary by country. Company restaurants in the
China Division are generally leased for initial terms of 10 to 15 years and
generally do not have renewal options. Historically, the Company has
either been able to renew its China Division leases or enter into competitive
leases at replacement sites without significant impact on our operations, cash
flows or capital resources. The Company currently does not have a
significant number of units that it leases or subleases to
franchisees.
Pizza Hut
and YRI lease their corporate headquarters and a research facility in Dallas,
Texas. Taco Bell leases its corporate headquarters and research facility in
Irvine, California. The KFC, LJS, A&W and YUM corporate headquarters and a
research facility in Louisville, Kentucky are owned by YRI. In
addition, YUM leases office facilities for certain support groups in Louisville,
Kentucky. The China Division leases their corporate headquarters and
research facilities in Shanghai, China. Additional information about
the Company’s properties is included in the Consolidated Financial Statements
and footnotes in Part II, Item 8, pages 59 through 116.
The Company believes that its properties
are generally in good operating condition and are suitable for the purposes for
which they are being used.
Item
3.
|
Legal
Proceedings.
|
The
Company is subject to various claims and contingencies related to lawsuits, real
estate, environmental and other matters arising in the normal course of
business. The Company believes that the ultimate liability, if any,
in excess of amounts already provided for these matters in the Consolidated
Financial Statements, is not likely to have a material adverse effect on the
Company’s annual results of operations, financial condition or cash
flows. The following is a brief description of the more significant
of the categories of lawsuits and other matters we face from time to
time. Descriptions of specific claims and contingencies appear in
Note 21, Contingencies, to the Consolidated Financial Statements included in
Part II, Item 8.
Franchising
A
substantial number of the restaurants of each of the Concepts are franchised to
independent businesses operating under arrangements with the
Concepts. In the course of the franchise relationship, occasional
disputes arise between the Company and its Concepts’ franchisees relating to a
broad range of subjects, including, without limitation, quality, service, and
cleanliness issues, contentions regarding grants, transfers or terminations of
franchises, territorial disputes and delinquent payments.
Suppliers
The
Company purchases food, paper, equipment and other restaurant supplies from
numerous independent suppliers throughout the world. These suppliers
are required to meet and maintain compliance with the Company’s standards and
specifications. On occasion, disputes arise between the Company and
its suppliers on a number of issues, including, but not limited to, compliance
with product specifications and terms of procurement and service
requirements.
Employees
At any
given time, the Company or its affiliates employ hundreds of thousands of
persons, primarily in its restaurants. In addition, each year thousands of
persons seek employment with the Company and its restaurants. From
time to time, disputes arise regarding employee hiring, compensation,
termination and promotion practices.
Like
other retail employers, the Company has been faced in a few states with
allegations of purported class-wide wage and hour and other labor law
violations.
Customers
The
Company’s restaurants serve a large and diverse cross-section of the public and
in the course of serving so many people, disputes arise regarding products,
service, accidents and other matters typical of large restaurant systems such as
those of the Company.
Intellectual
Property
The
Company has registered trademarks and service marks, many of which are of
material importance to the Company’s business. From time to time, the
Company may become involved in litigation to defend and protect its use and
ownership of its registered marks.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a vote of shareholders during the fourth quarter of
2009.
Executive
Officers of the Registrant
The
executive officers of the Company as of February 10, 2010, and their ages and
current positions as of that date are as follows:
David C. Novak, 57, is
Chairman of the Board, Chief Executive Officer and President of
YUM. He has served in this position since January
2001. From December 1999 to January 2001, Mr. Novak served as
Vice Chairman of the Board, Chief Executive Officer and President of YUM. From
October 1997 to December 1999, he served as Vice Chairman and President of
YUM. Mr. Novak previously served as Group President and Chief
Executive Officer, KFC and Pizza Hut from August 1996 to July 1997.
Richard T. Carucci, 52, is
Chief Financial Officer for YUM. He has served in this position since
March 2005. From October 2004 to February 2005, he served as Senior Vice
President, Finance and Chief Financial Officer – Designate of YUM. From May 2003
to October 2004, he served as Executive Vice President and Chief Development
Officer of YRI. From November 2002 to May 2003, he served as Senior
Vice President for YRI and also assisted Pizza Hut in asset strategy
development. From November 1999 to July 2002, he was Chief Financial
Officer of YRI.
Christian L. Campbell,
59, is Senior Vice
President, General Counsel, Secretary and Chief Franchise Policy Officer for
YUM. He has served as Senior Vice President, General Counsel and
Secretary since September 1997. In January 2003, his title and job
responsibilities were expanded to include Chief Franchise Policy
Officer.
Jonathan D. Blum, 51, is
Senior Vice President Public Affairs for YUM. He has served in this
position since July 1997.
Anne P. Byerlein, 51, is Chief
People Officer for YUM. She has served in this position since
December 2002. From October 1997 to December 2002, she was Vice
President of Human Resources of YUM. From October 2000 to December
2002, she also served as KFC’s Chief People Officer.
Ted F. Knopf, 58, is Senior Vice President
Finance and Corporate Controller of YUM. He has served in this
position since April 2005. From September 2001 to April 2005,
Mr. Knopf served as Vice President of Corporate Planning and Strategy of
YUM.
Emil J. Brolick, 62, is Chief
Operating Officer for YUM and President of LJS/A&W. He has served
as Chief Operating Officer since June 2008 and as President of LJS/A&W since
January 2010. Prior to being named Chief Operating Officer, he served
as President of U.S. Brand Building, a position he held from December 2006 to
June 2008. Prior to that, he served as President and Chief Concept
Officer of Taco Bell, a position he held from July 2000 to November
2006. Prior to joining Taco Bell, Mr. Brolick served as Senior
Vice President of New Product Marketing, Research & Strategic Planning for
Wendy’s International, Inc. from August 1995 to July 2000.
Scott O. Bergren, 63, is President and Chief
Concept Officer of Pizza Hut. He has served in this position since
November 2006. Prior to this position, he served as Chief Marketing
Officer of KFC and YUM from August 2003 to November 2006. From
September 2002 until July 2003, he was the Executive Vice President, Marketing
and Chief Concept Officer for YUM Restaurants International,
Inc. From April 2002 until September 2002, he was Senior Vice
President New Concepts for YUM Restaurants International, Inc. From
June 1995 until 2002, he was Chief Executive Officer of Chevy’s Mexican
Restaurants, Inc.
Greg Creed, 52, is President
and Chief Concept Officer of Taco Bell. He has served in this position since
December 2006. Prior to this position, Mr. Creed served as Chief
Operating Officer of YUM from December 2005 to November
2006. Mr. Creed served as Chief Marketing Officer of Taco Bell
from July 2001 to October 2005.
Roger Eaton, 49, is President
and Chief Concept Officer of KFC. He has served in this position
since June 2008. From April 2008 to June 2008, he served as Chief
Operating and Development Officer of YUM. From January 2008 until
April 2008, he served as Chief Operating and Development Officer –
Designate. From 2000 until January 2008, he was Senior Vice
President/Managing Director of YUM! Restaurants International South
Pacific.
Graham D. Allan, 54, is the President of
YRI. He has served in this position since November
2003. Immediately prior to this position he served as Executive Vice
President of YRI. From December 2000 to May 2003, Mr. Allan was
the Managing Director of YRI.
Jing-Shyh S. Su, 57, is
Vice-Chairman of the Board and President of YUM Restaurants China. He
has served as Vice- Chairman of the Board since March 2008, and he has served as
President of YUM Restaurants China since 1997. Prior to this, he was
the Vice President of North Asia for both KFC and Pizza Hut. Mr. Su
started his career with YUM in 1989 as KFC International’s Director of Marketing
for the North Pacific area.
Executive
officers are elected by and serve at the discretion of the Board of
Directors.
PART
II
Item
5.
|
Market
for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
The
Company’s Common Stock trades under the symbol YUM and is listed on the New York
Stock Exchange (“NYSE”). The following sets forth the high and low
NYSE composite closing sale prices by quarter for the Company’s Common Stock and
dividends per common share.
2009
|
Quarter
|
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
32.87
|
|
$
|
23.47
|
|
|
|
$
|
—
|
|
|
|
$
|
0.19
|
|
Second
|
|
36.64
|
|
|
27.48
|
|
|
|
|
0.38
|
|
|
|
|
0.19
|
|
Third
|
|
36.56
|
|
|
32.57
|
|
|
|
|
—
|
|
|
|
|
0.19
|
|
Fourth
|
|
36.06
|
|
|
32.50
|
|
|
|
|
0.42
|
|
|
|
|
0.21
|
|
2008
|
Quarter
|
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
39.00
|
|
$
|
33.12
|
|
|
|
$
|
0.15
|
|
|
|
$
|
0.15
|
|
Second
|
|
41.34
|
|
|
36.85
|
|
|
|
|
0.19
|
|
|
|
|
0.15
|
|
Third
|
|
38.68
|
|
|
33.78
|
|
|
|
|
—
|
|
|
|
|
0.19
|
|
Fourth
|
|
39.23
|
|
|
22.25
|
|
|
|
|
0.38
|
|
|
|
|
0.19
|
|
In 2008,
the Company declared one cash dividend of $0.15 per share of Common Stock and
three cash dividends of $0.19 per share of Common Stock, one of which was paid
in 2009. In 2009, the Company declared two cash dividends of $0.19
per share and two cash dividends of $0.21 per share of Common Stock, one of
which had a distribution date of February 5, 2010. The Company is
targeting an annual dividend payout ratio of 35% to 40% of net
income.
As of
February 10, 2010, there were approximately 77,000 registered holders of record
of the Company’s Common Stock.
The
Company had no sales of unregistered securities during 2009, 2008 or
2007.
Issuer
Purchases of Equity Securities
For the
year ended December 26, 2009, there were no shares of Common Stock repurchased
by the Company.
In
September 2009, our Board of Directors authorized share repurchases of up to
$300 million (excluding applicable transaction fees) of our outstanding Common
Stock. This authorization expires in September 2010.
Stock Performance
Graph
This
graph compares the cumulative total return of our Common Stock to the cumulative
total return of the S&P 500 Stock Index and the S&P 500 Consumer
Discretionary Sector, a peer group that includes YUM, for the period from
December 23, 2004 to December 25, 2009, the last trading day of our 2009 fiscal
year. The graph assumes that the value of the investment in our
Common Stock and each index was $100 at December 23, 2004 and that all dividends
were reinvested.
|
|
|
12/23/04
|
|
12/30/05
|
|
12/29/06
|
|
12/28/07
|
|
12/26/08
|
|
12/25/09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YUM!
|
|
$ 100
|
|
$ 102
|
|
$ 130
|
|
$ 173
|
|
$ 138
|
|
$ 166
|
|
|
S&P
500
|
|
$ 100
|
|
$ 105
|
|
$ 122
|
|
$ 129
|
|
$ 78
|
|
$ 103
|
|
|
S&P
Consumer
Discretionary
|
|
$ 100
|
|
$ 95
|
|
$ 113
|
|
$ 98
|
|
$ 63
|
|
$ 93
|
|
Item
6.
|
Selected
Financial Data.
|
Selected
Financial Data
YUM!
Brands, Inc. and Subsidiaries
(in
millions, except per share and unit amounts)
|
Fiscal
Year
|
|
2009
|
2008
|
2007
|
2006
|
2005
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,413
|
|
$
|
9,843
|
|
$
|
9,100
|
|
$
|
8,365
|
|
$
|
8,225
|
|
Franchise
and license fees and income
|
|
1,423
|
|
|
1,461
|
|
|
1,335
|
|
|
1,196
|
|
|
1,124
|
|
Total
|
|
10,836
|
|
|
11,304
|
|
|
10,435
|
|
|
9,561
|
|
|
9,349
|
|
Closures
and impairment income (expenses)(a)
|
|
(103
|
)
|
|
(43
|
)
|
|
(35
|
)
|
|
(59
|
)
|
|
(62
|
)
|
Refranchising
gain (loss)(a)
|
|
26
|
|
|
5
|
|
|
11
|
|
|
24
|
|
|
43
|
|
Operating
Profit(b)
|
|
1,590
|
|
|
1,517
|
|
|
1,357
|
|
|
1,262
|
|
|
1,153
|
|
Interest
expense, net
|
|
194
|
|
|
226
|
|
|
166
|
|
|
154
|
|
|
127
|
|
Income
before income taxes
|
|
1,396
|
|
|
1,291
|
|
|
1,191
|
|
|
1,108
|
|
|
1,026
|
|
Net
Income – including noncontrolling interest
|
|
1,083
|
|
|
972
|
|
|
909
|
|
|
824
|
|
|
762
|
|
Net
Income – YUM! Brands, Inc.
|
|
1,071
|
|
|
964
|
|
|
909
|
|
|
824
|
|
|
762
|
|
Basic
earnings per common share(c)
|
|
2.28
|
|
|
2.03
|
|
|
1.74
|
|
|
1.51
|
|
|
1.33
|
|
Diluted
earnings per common share(c)
|
|
2.22
|
|
|
1.96
|
|
|
1.68
|
|
|
1.46
|
|
|
1.28
|
|
Diluted
earnings per common share before special items(d)
|
|
2.17
|
|
|
1.91
|
|
|
1.68
|
|
|
1.46
|
|
|
1.27
|
|
Cash
Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided
by operating activities
|
$
|
1,404
|
|
$
|
1,521
|
|
$
|
1,551
|
|
$
|
1,257
|
|
$
|
1,233
|
|
Capital
spending, excluding acquisitions
|
|
797
|
|
|
935
|
|
|
726
|
|
|
572
|
|
|
609
|
|
Proceeds
from refranchising of restaurants
|
|
194
|
|
|
266
|
|
|
117
|
|
|
257
|
|
|
145
|
|
Repurchase
shares of Common Stock
|
|
—
|
|
|
1,628
|
|
|
1,410
|
|
|
983
|
|
|
1,056
|
|
Dividends
paid on Common Stock
|
|
362
|
|
|
322
|
|
|
273
|
|
|
144
|
|
|
123
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
7,148
|
|
$
|
6,527
|
|
$
|
7,188
|
|
$
|
6,368
|
|
$
|
5,797
|
|
Long-term
debt
|
|
3,207
|
|
|
3,564
|
|
|
2,924
|
|
|
2,045
|
|
|
1,649
|
|
Total
debt
|
|
3,266
|
|
|
3,589
|
|
|
3,212
|
|
|
2,272
|
|
|
1,860
|
|
Other
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores at year end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
7,666
|
|
|
7,568
|
|
|
7,625
|
|
|
7,736
|
|
|
7,587
|
|
Unconsolidated Affiliates
|
|
469
|
|
|
645
|
|
|
1,314
|
|
|
1,206
|
|
|
1,648
|
|
Franchisees
|
|
26,745
|
|
|
25,911
|
|
|
24,297
|
|
|
23,516
|
|
|
22,666
|
|
Licensees
|
|
2,200
|
|
|
2,168
|
|
|
2,109
|
|
|
2,137
|
|
|
2,376
|
|
System
|
|
37,080
|
|
|
36,292
|
|
|
35,345
|
|
|
34,595
|
|
|
34,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
same store sales growth(e)
|
|
(5%
|
)
|
|
2%
|
|
|
—
|
|
|
1%
|
|
|
3%
|
|
YRI
system sales growth(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
(3%
|
)
|
|
10%
|
|
|
15%
|
|
|
7%
|
|
|
9%
|
|
Local currency(f)
|
|
5%
|
|
|
8%
|
|
|
10%
|
|
|
7%
|
|
|
6%
|
|
China
Division system sales growth(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
10%
|
|
|
31%
|
|
|
31%
|
|
|
26%
|
|
|
13%
|
|
Local
currency(f)
|
|
9%
|
|
|
20%
|
|
|
24%
|
|
|
23%
|
|
|
11%
|
|
Shares
outstanding at year end(c)
|
|
469
|
|
|
459
|
|
|
499
|
|
|
530
|
|
|
556
|
|
Cash
dividends declared per Common Stock(c)
|
$
|
0.80
|
|
$
|
0.72
|
|
$
|
0.45
|
|
$
|
0.43
|
|
$
|
0.22
|
|
Market
price per share at year end (c)
|
$
|
35.38
|
|
$
|
30.28
|
|
$
|
38.54
|
|
$
|
29.40
|
|
$
|
23.44
|
|
Fiscal
years 2009, 2008, 2007 and 2006 include 52 weeks and fiscal year 2005 includes
53 weeks.
The
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto.
(a)
|
Fiscal
year 2009 included non-cash charges of $26 million and $12 million to
write-off goodwill related to our LJS/A&W U.S. and Pizza Hut South
Korea businesses, respectively. See Note 5 to the Consolidated
Financial Statements for a description of our store closures, store
impairment expenses and Refranchising Gain (Loss) in 2009, 2008 and
2007. Additionally, see Note 10 describing our goodwill
impairment expense recognized in 2009.
|
|
|
(b)
|
Fiscal
year 2009 included a gain of $68 million related to the consolidation of a
former unconsolidated affiliate in China, a loss of $40 million related to
U.S. business transformation measures, including the $26 million goodwill
charge described in (a), and a loss of $10 million as a result of our
decision to offer to refranchise an equity market outside the
U.S. Fiscal year 2008 included a gain of $100 million related
to the sale of our interest in our unconsolidated affiliate in Japan and a
loss of $61 million related to U.S. business transformation
measures. These items are discussed further within our
MD&A. Fiscal year 2005 included gains of $2 million for
recoveries related to both the Wrench litigation and Ameriserve
bankruptcy.
|
|
|
(c)
|
Adjusted
for the two for one stock split on June 26, 2007. See Note 3 to
the Consolidated Financial Statements.
|
|
|
(d)
|
In
addition to the results provided in accordance with U.S. Generally
Accepted Accounting Principles (“GAAP”) throughout this document, the
Company has provided non-GAAP measurements which present operating results
on a basis before Special Items. The Company uses earnings
before Special Items as a key performance measure of results of operations
for the purpose of evaluating performance internally. This
non-GAAP measurement is not intended to replace the presentation of our
financial results in accordance with GAAP. Rather, the Company
believes that the presentation of earnings before Special Items provides
additional information to investors to facilitate the comparison of past
and present operations, excluding items that the Company does not believe
are indicative of our ongoing operations due to their size and/or
nature. The gains and charges described in (b), above, are
considered Special Items. The 2009 and 2008 Special Items are
discussed in further detail within the MD&A.
|
|
|
(e)
|
System
sales growth includes the results of all restaurants regardless of
ownership, including Company owned, franchise, unconsolidated affiliate
and license restaurants. Sales of franchise, unconsolidated
affiliate and license restaurants generate franchise and license fees for
the Company (typically at a rate of 4% to 6% of
sales). Franchise, unconsolidated affiliate and license
restaurant sales are not included in Company sales we present on the
Consolidated Statements of Income; however, the fees are included in the
Company’s revenues. We believe system sales growth is useful to
investors as a significant indicator of the overall strength of our
business as it incorporates all our revenue drivers, Company and franchise
same store sales as well as net unit development. Same store
sales growth includes the results of all restaurants that have been open
one year or more.
|
|
|
(f)
|
Local
currency represents the percentage change excluding the impact of foreign
currency translation. These amounts are derived by translating
current year results at prior year average exchange rates. We
believe the elimination of the foreign currency translation impact
provides better year-to-year comparability without the distortion of
foreign currency fluctuations.
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Introduction and Overview
The
following Management’s Discussion and Analysis (“MD&A”), should be read in
conjunction with the Consolidated Financial Statements on pages 61 through 64
(“Financial Statements”) and the Forward-Looking Statements on page 2 and the
Risk Factors set forth in Item 1A. Throughout the MD&A, YUM!
Brands, Inc. (“YUM” or the “Company”) makes reference to certain performance
measures as described below.
·
|
The
Company provides the percentage changes excluding the impact of foreign
currency translation (“FX” or “Forex”). These amounts are
derived by translating current year results at prior year average exchange
rates. We believe the elimination of the foreign currency
translation impact provides better year-to-year comparability without the
distortion of foreign currency fluctuations.
|
|
|
·
|
System
sales growth includes the results of all restaurants regardless of
ownership, including Company-owned, franchise, unconsolidated affiliate
and license restaurants. Sales of franchise, unconsolidated
affiliate and license restaurants generate franchise and license fees for
the Company (typically at a rate of 4% to 6% of
sales). Franchise, unconsolidated affiliate and license
restaurant sales are not included in Company sales on the Consolidated
Statements of Income; however, the franchise and license fees are included
in the Company’s revenues. We believe system sales growth is
useful to investors as a significant indicator of the overall strength of
our business as it incorporates all of our revenue drivers, Company and
franchise same store sales as well as net unit
development.
|
|
|
·
|
Same
store sales is the estimated growth in sales of all restaurants that have
been open one year or more.
|
|
|
·
|
Company
restaurant profit is defined as Company sales less expenses incurred
directly by our Company restaurants in generating Company
sales. Company restaurant margin as a percentage of sales is
defined as Company restaurant profit divided by Company
sales.
|
|
|
·
|
Operating
margin is defined as Operating Profit divided by Total
revenue.
|
All Note
references herein refer to the Notes to the Financial Statements on pages 65
through 116. Tabular amounts are displayed in millions except per
share and unit count amounts, or as otherwise specifically
identified. All per share and share amounts herein, and in the
accompanying Financial Statements and Notes to the Financial Statements have
been adjusted to reflect the June 26, 2007 stock split (see Note
3).
Description of
Business
YUM is
the world’s largest restaurant company in terms of system restaurants with over
37,000 restaurants in more than 110 countries and territories operating under
the KFC, Pizza Hut, Taco Bell, Long John Silver’s or A&W All-American Food
Restaurants brands. Four of the Company’s restaurant brands – KFC,
Pizza Hut, Taco Bell and Long John Silver’s – are the global leaders in the
chicken, pizza, Mexican-style food and quick-service seafood categories,
respectively. Of the over 37,000 restaurants, 21% are operated by the
Company, 73% are operated by franchisees and unconsolidated affiliates and 6%
are operated by licensees.
YUM’s
business consists of three reporting segments: United States, YUM
Restaurants International (“YRI” or “International Division”) and the China
Division. The China Division includes mainland China (“China”),
Thailand and KFC Taiwan and YRI includes the remainder of our international
operations. The China Division, YRI and Taco Bell-U.S. now represent
approximately 85% of the Company’s operating profits. Our KFC-U.S.
and Pizza Hut-U.S. businesses operate in highly competitive marketplaces
resulting in slower profit growth, but continue to produce strong cash
flows.
Segment Reporting
Changes
In the
first quarter of 2010 we will begin reporting information for our Thailand and
KFC Taiwan businesses within our International Division as a result of changes
to our management reporting structure. The China Division will only
consist of operations in mainland China and the International Division will
include the remainder of our international operations. While our
consolidated results will not be impacted, we will restate our historical
segment information during 2010 for consistent presentation. All
forward looking information within this MD&A reflects these changes in our
reporting structure.
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 years ended December 27, 2008
and December 29, 2007 to be consistent with the current period
presentation.
The
following table summarizes the 2008 and 2007 impact of the revised
allocations by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
2008
|
|
2007
|
|
|
U.S.
G&A
|
|
|
|
|
|
|
|
|
|
$
|
53
|
|
|
$
|
54
|
|
|
|
|
|
YRI
G&A
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
Unallocated
and corporate G&A expenses
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
(60
|
)
|
|
|
|
|
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 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 in mainland China
is driven by new unit development each year and modest same store sales growth,
which we expect to drive annual Operating Profit growth of 15%.
Drive
Aggressive International Expansion and Build Strong Brands Everywhere – The
Company and its franchisees opened approximately 900 new restaurants in 2009 in
the Company’s International Division, representing 10 straight years of opening
over 700 restaurants, and is the leading international retail developer in terms
of units opened. The Company expects to continue to experience strong
growth by building out existing markets and growing in new markets including
France, Russia and India. The International Division’s Operating
Profit has experienced a 7 year compound annual growth rate of
11%. Our ongoing earnings growth model includes annual Operating
Profit growth of 10% driven by new unit development, modest same store sales
growth, modest margin improvement and leverage of our General and Administrative
(“G&A”) infrastructure for YRI.
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 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%,
modest restaurant margin improvement and leverage of our 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 dividends and share repurchases. The Company has one
of the highest returns on invested capital in the Quick Service Restaurants
(“QSR”) industry. The Company’s dividend and share repurchase
programs have returned over $1 billion and $6 billion to shareholders,
respectively, since 2004. The Company is targeting an annual dividend
payout ratio of 35% to 40% of net income and has increased the quarterly
dividend each year since inception in 2004. Shares are repurchased
opportunistically as part of our regular capital structure
decisions.
Details
of our 2010 Guidance by division can be found online at http://www.yum.com.
2009
Highlights
·
|
Diluted
EPS growth of 13% or $2.17 per share, excluding Special
Items.
|
|
|
·
|
Worldwide
system sales growth of 1% prior to foreign currency
translation.
|
|
|
·
|
Worldwide
revenue declined 4% driven by foreign currency translation and
refranchising.
|
|
|
·
|
International
development of 1,467 new restaurants including 509 in mainland China and
898 in YRI.
|
|
|
·
|
Worldwide
Operating Profit growth of 9% prior to foreign currency translation and
Special Items, including growth of 23% in the China Division, 5% in YRI
and 1% in the U.S. After foreign currency translation, but
prior to Special Items, worldwide Operating Profit growth was
6%.
|
|
|
·
|
Worldwide
restaurant margin improved by 1.7 percentage points driven by the China
Division and the U.S.
|
|
|
·
|
Diluted
EPS growth was negatively impacted by approximately $0.07 per share due to
foreign currency translation that was fully offset by lower interest
expense and a lower tax rate.
|
Results
of Operations
|
Amount
|
|
%
B/(W)
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,413
|
|
|
$
|
9,843
|
|
|
$
|
9,100
|
|
|
|
(4
|
)
|
|
|
8
|
|
Franchise
and license fees and income
|
|
1,423
|
|
|
|
1,461
|
|
|
|
1,335
|
|
|
|
(3
|
)
|
|
|
9
|
|
Total
revenues
|
$
|
10,836
|
|
|
$
|
11,304
|
|
|
$
|
10,435
|
|
|
|
(4
|
)
|
|
|
8
|
|
Company
restaurant profit
|
$
|
1,479
|
|
|
$
|
1,378
|
|
|
$
|
1,327
|
|
|
|
7
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Company sales
|
|
15.7%
|
|
|
|
14.0%
|
|
|
|
14.6%
|
|
|
|
1.7
|
ppts.
|
|
|
(0.6
|
)
ppts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
1,590
|
|
|
|
1,517
|
|
|
|
1,357
|
|
|
|
5
|
|
|
|
12
|
|
Interest
expense, net
|
|
194
|
|
|
|
226
|
|
|
|
166
|
|
|
|
14
|
|
|
|
(36
|
)
|
Income
tax provision
|
|
313
|
|
|
|
319
|
|
|
|
282
|
|
|
|
2
|
|
|
|
(13
|
)
|
Net
Income – including noncontrolling interest
|
|
1,083
|
|
|
|
972
|
|
|
|
909
|
|
|
|
11
|
|
|
|
7
|
|
Net
Income – noncontrolling interest
|
|
12
|
|
|
|
8
|
|
|
|
—
|
|
|
|
NM
|
|
|
|
NM
|
|
Net
Income – YUM! Brands, Inc.
|
$
|
1,071
|
|
|
$
|
964
|
|
|
$
|
909
|
|
|
|
11
|
|
|
|
6
|
|
Diluted
EPS(a)
|
$
|
2.22
|
|
|
$
|
1.96
|
|
|
$
|
1.68
|
|
|
|
13
|
|
|
|
17
|
|
Diluted
EPS before Special Items(a)
|
$
|
2.17
|
|
|
$
|
1.91
|
|
|
$
|
1.68
|
|
|
|
13
|
|
|
|
14
|
|
Effective
tax rate
|
|
22.4%
|
|
|
|
24.7%
|
|
|
|
23.7%
|
|
|
|
|
|
|
|
|
|
(a)
|
See
Note 4 for the number of shares used in these
calculations.
|
Significant
Known Events, Trends or Uncertainties Impacting or Expected to Impact
Comparisons of Reported or Future Results
Special
Items
In
addition to the results provided in accordance with U.S. Generally Accepted
Accounting Principles (“GAAP”) above and throughout this document, the Company
has provided non-GAAP measurements which present operating results in 2009 and
2008 on a basis before Special Items. Included in Special Items are
the impact of measures we took to transform our U.S. business (“the U.S.
business transformation measures”) including: the U.S. refranchising (gain)
loss, charges relating to U.S. General and Administrative (“G&A”)
productivity initiatives and realignment of resources, investments in our U.S.
Brands and a 2009 U.S. Goodwill impairment charge. Special items also
include the 2009 loss recognized as a result of our decision to offer to
refranchise an equity market outside the U.S., the 2009 gain upon our
acquisition of additional ownership in, and consolidation of, the operating
entity that owns the KFCs in Shanghai, China, and the 2008 gain on the sale of
our minority interest in our Japan unconsolidated affiliate. These
amounts are further described below.
The
Company uses earnings before Special Items as a key performance measure of
results of operations for the purpose of evaluating performance
internally. This non-GAAP measurement is not intended to replace the
presentation of our financial results in accordance with
GAAP. Rather, the Company believes that the presentation of earnings
before Special Items provides additional information to investors to facilitate
the comparison of past and present operations, excluding items in 2009 and 2008
that the Company does not believe are indicative of our ongoing operations due
to their size and/or nature.
|
Year
|
|
|
12/26/09
|
|
12/27/08
|
|
|
|
|
|
|
|
|
U.S.
Refranchising gain (loss)
|
$
|
34
|
|
$
|
(5)
|
|
Long
John Silver’s/A&W U.S. Goodwill impairment charge
|
|
(26)
|
|
|
—
|
|
Charges
relating to U.S. G&A productivity initiatives and realignment of
resources
|
|
(16)
|
|
|
(49)
|
|
Investments
in our U.S. Brands
|
|
(32)
|
|
|
(7)
|
|
Gain
upon consolidation of a former unconsolidated affiliate in
China
|
|
68
|
|
|
—
|
|
Loss
as a result of our offer to refranchise an equity market outside the
U.S.
|
|
(10)
|
|
|
—
|
|
Gain
upon the sale of our interest in our Japan unconsolidated
affiliate
|
|
—
|
|
|
100
|
|
Total
Special Items Income (Expense)
|
|
18
|
|
|
39
|
|
Tax Benefit (Expense) on Special Items(a)
|
|
5
|
|
|
(14)
|
|
Special
Items Income (Expense), net of tax
|
$
|
23
|
|
$
|
25
|
|
Average
diluted shares outstanding
|
|
483
|
|
|
491
|
|
Special
Items diluted EPS
|
$
|
0.05
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
Reconciliation
of Operating Profit Before Special Items to Reported Operating
Profit
|
|
|
|
|
|
|
Operating
Profit before Special Items
|
$
|
1,572
|
|
$
|
1,478
|
|
Special
Items Income (Expense)
|
|
18
|
|
|
39
|
|
Reported
Operating Profit
|
$
|
1,590
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
Reconciliation
of EPS Before Special Items to Reported EPS
|
|
|
|
|
|
|
Diluted
EPS before Special Items
|
$
|
2.17
|
|
$
|
1.91
|
|
Special
Items EPS
|
|
0.05
|
|
|
0.05
|
|
Reported
EPS
|
$
|
2.22
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
Reconciliation
of Effective Tax Rate Before Special Items to Reported Effective Tax
Rate
|
|
|
|
|
|
|
Effective
Tax Rate before Special Items
|
|
23.1%
|
|
|
24.3%
|
|
Impact on Tax Rate as a result of Special
Items(a)
|
|
(0.7)%
|
|
|
0.4%
|
|
Reported
Effective Tax Rate
|
|
22.4%
|
|
|
24.7%
|
|
(a)
|
The
tax benefit (expense) was determined based upon the impact of the nature,
as well as the jurisdiction of the respective individual components within
Special Items.
|
U.S.
Business Transformation Measures
The U.S.
business transformation measures in 2008 and 2009 included: expansion of our
U.S. refranchising; a reduced emphasis on multi-branding as a long-term growth
strategy; 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. We do not believe these measures are indicative of our
ongoing operations and are not including the impacts of these U.S. business
transformation measures in our U.S. segment for performance reporting
purposes.
In the
years ended December 26, 2009 and December 27, 2008, we recorded a pre-tax gain
of $34 million and a pre-tax loss of $5 million from refranchising in the U.S.,
respectively. In 2010, we currently expect to refranchise 500
restaurants in the U.S. The impact of this refranchising on our 2010
results will be determined by the stores that we are able to sell and the
specific prices we are able to obtain for those stores. Additionally,
to the extent we offer to sell a store or group of stores at a loss, such loss
is recorded at the date we make such offer. Gains upon refranchising,
however, are not recorded until we consummate the sale. This timing
difference can create quarterly or annual earnings volatility as decisions are
made to refranchise a portfolio of stores.
As a
result of a decline in future profit expectations for our LJS and A&W U.S.
businesses due in part to the impact of a reduced emphasis on multi-branding, we
recorded a non-cash charge of $26 million, which resulted in no related income
tax benefit, in the fourth quarter of 2009 to write-off goodwill associated with
these businesses.
In
connection with our G&A productivity initiatives and realignment of
resources (primarily severance and early retirement costs) we recorded pre-tax
charges of $16 million and $49 million in the years ended December 26, 2009 and
December 27, 2008, respectively. We realized a $65 million decline in
our U.S. G&A expenses in the year ended December 26, 2009 driven by the U.S.
productivity initiatives and realignment of resources measures we took in 2008
and 2009.
Additionally,
the Company recognized a reduction to Franchise and license fees and income of
$32 million, pre-tax, in the year ended December 26, 2009 related to investments
in our U.S. Brands. These investments reflect our reimbursements to
KFC franchisees for installation costs of ovens for the national launch of
Kentucky Grilled Chicken. The reimbursements were recorded as a
reduction to franchise and license fees and income as we would not have provided
the reimbursements absent the ongoing franchisee relationship. In the
year ended December 27, 2008, the Company recognized pre-tax expense of $7
million related to investments in our U.S. Brands in Franchise and license
expenses.
Consolidation
of a Former Unconsolidated Affiliate in Shanghai, China
On May 4,
2009 we acquired an additional 7% ownership in the entity that operates more
than 200 KFCs in Shanghai, China for $12 million, increasing our ownership to
58%. This entity has historically been accounted for as an
unconsolidated affiliate under the equity method of
accounting. Concurrent with the acquisition we received additional
rights in the governance of the entity and thus we began consolidating the
entity upon acquisition. As required by GAAP, we remeasured our
previously held 51% ownership, which had a recorded value of $17 million at the
date of acquisition, in the entity at fair value and recognized a gain of $68
million accordingly. This gain, which resulted in no related income
tax expense, was recorded in Other (income) expense in our Consolidated
Statements of Income and was not allocated to any segment for performance
reporting purposes.
Under the
equity method of accounting, we previously reported our 51% share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. Subsequent to the date of
the acquisition, we reported the results of operations for the entity in the
appropriate line items of our Consolidated Statement of Income. We no
longer record franchise fee income for these restaurants nor do we report Other
(income) expense as we did under the equity method of accounting. Net
income attributable to our partner’s ownership percentage is recorded as Net
Income-noncontrolling interest within our Consolidated Statements of
Income. For the year ended December 26, 2009 the consolidation of
this entity increased Company sales by $192 million and decreased Franchise and
license fees and income by $12 million. The consolidation of this
entity positively impacted Operating Profit by $4 million in
2009. The impact on Net Income – YUM! Brands, Inc. was not
significant to the year ended December 26, 2009. Prior to lapping the
acquisition of this entity during the second quarter of 2010, we expect the
impact of this transaction to increase the China Division’s Company sales by
approximately $100 million, decrease Franchise and license fees and income by
approximately $6 million and provide a modest increase to Operating Profit
during the first half of 2010.
Refranchising
of an International Equity Market
In
the third quarter of 2009 we recognized a $10 million refranchising loss as a
result of our decision to offer to refranchise our KFC Taiwan equity
market. This loss, which resulted in no related income tax benefit,
was not allocated to any segment for performance reporting
purposes. This market was refranchised on January 31,
2010. We are currently evaluating what amount of the $37 million in
goodwill associated with KFC Taiwan should be written off in the first quarter
of 2010 as a result of this refranchising.
Sale
of our Interest in our Unconsolidated Affiliate in Japan
During
the year ended December 27, 2008 we recorded a pre-tax gain of approximately
$100 million related to the sale of our interest in our unconsolidated affiliate
in Japan (See Note 5 for further discussion of this
transaction). This gain was recorded in Other (income) expense in our
Consolidated Statement of Income and was not allocated to any segment for
performance reporting purposes.
Restaurant
Profit
The U.S.
restaurant margin increased 1.4 percentage points in 2009. This
increase was largely driven by commodity deflation of $28 million and
productivity initiatives partially offset by Company same store sales declines
of 4%. Additionally, our U.S. store portfolio actions, including the
refranchising of 541 stores during 2009, positively impacted our restaurant
margin by 0.4 percentage points.
Our U.S.
restaurant margin decreased 0.8 percentage points in 2008. Restaurant
profit was negatively impacted by $119 million of commodity inflation for the
full year 2008. Additionally, restaurant profit in 2008 was
negatively impacted by $30 million due to higher property and casualty
self-insurance expense, exclusive of the estimated reduction due to refranchised
stores, as we lapped favorability in 2007. These decreases were
partially offset by Company same store sales growth of 3% resulting from pricing
actions we took.
China
Division restaurant margin increased 1.8 percentage points and declined 1.7
percentage points in 2009 and 2008, respectively. The 2009
improvement was largely driven by commodity deflation of $61 million offsetting
Company same store sales declines 1%. Commodity inflation of $78
million and higher labor costs partially offset by Company same store sales
growth of 7% drove the 2008 restaurant margin decline.
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
$56 million and positively impacted Operating Profit in our China Division by
$10 million for the year ended December 26, 2009. In the year ended
December 27, 2008 our Operating Profit in our International and China Divisions
was positively impacted by $9 million and $42 million, respectively, by changes
in foreign currency exchange rates.
Pizza Hut South Korea
Goodwill Impairment
As a
result of a decline in future profit expectations for our Pizza Hut South Korea
market we recorded a goodwill impairment charge of $12 million for this market
during 2009. This charge was recorded in Closure and impairment
(income) expenses in our Consolidated Statement of Income and was allocated to
our International Division for performance reporting purposes.
Consolidation of a Former
Unconsolidated Affiliate in Beijing, China
In 2008,
we began consolidating an entity in which we have a majority ownership interest
and that operates the KFCs in Beijing, China. Our partners in this
entity are essentially state-owned enterprises. We historically did
not consolidate this entity, instead accounting for the unconsolidated affiliate
using the equity method of accounting, due to the effective participation of our
partners in the significant decisions of the entity that were made in the
ordinary course of business. Concurrent with a decision that we made
on January 1, 2008 regarding top management of the entity, we no longer believe
that our partners effectively participate in the decisions that are made in the
ordinary course of business. In accordance with GAAP, we began
consolidating this entity on that date.
Like our
other unconsolidated affiliates, the accounting for this entity prior to 2008
resulted in royalties being reflected as Franchise and license fees and our
share of the entity’s net income being reflected in Other (income)
expense. Subsequent to the date of consolidation, we reported the
results of operations for the entity in the appropriate line items of our
Consolidated Statement of Income. We no longer record franchise fee
income for these restaurants nor do we report Other (income) expense as we did
under the equity method of accounting. Net income attributable to our
partner’s ownership percentage is recorded as Net Income-noncontrolling interest
within our Consolidated Statement of Income. For the year ended December 27,
2008 the consolidation of this entity increased the China Division’s Company
sales by approximately $300 million and decreased Franchise and license fees and
income by approximately $20 million. The consolidation of this entity
positively impacted Operating Profit by approximately $20 million in
2008. The positive impact on Operating Profit was offset by Net
Income – noncontrolling interest of $8 million and a higher Income tax provision
such that there was no impact on Net Income – YUM! Brands, Inc. for the year
ended December 27, 2008. The Consolidated Statement of Income was
impacted by similar amounts for the year ended December 26, 2009.
Mexico Value Added Tax
(“VAT”) Exemption
On
October 1, 2007, Mexico enacted new legislation that eliminated a tax ruling
that allowed us to claim an exemption related to VAT
payments. Beginning on January 1, 2008, we were required to remit VAT
on all Company restaurant sales resulting in lower Company sales and Restaurant
profit. As a result of this new legislation, our International
Division’s Company sales and Restaurant profit for the year ended December 27,
2008 were unfavorably impacted by approximately $38 million and $34 million,
respectively. The International Division’s system sales growth and
restaurant margin as a percentage of sales were negatively impacted by
approximately 0.3 and 1.2 percentage points, respectively, for the year ended
December 27, 2008. The 2009 impact versus 2008 was not significant to
our International Division’s results of operations.
Tax Legislation – Mainland
China
On March
16, 2007, the National People’s Congress in mainland China enacted new tax
legislation that went into effect on January 1, 2008. Upon enactment,
which occurred in the China Division’s 2007 second fiscal quarter, the deferred
tax balances of all Chinese entities, including our unconsolidated affiliates,
were adjusted. These income tax rate changes positively impacted our
2009 and 2008 Net Income – YUM! Brands, Inc. by approximately $15 million and
$20 million, respectively, compared to what it would have otherwise been had no
new tax legislation been enacted. The impacts on our Income tax
provision and Operating Profit in the year ended December 29, 2007 were not
significant.
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
16%. Consistent with this strategy, 541, 700 and 304 Company
restaurants in the U.S. were sold to franchisees in the years ended December 26,
2009, December 27, 2008 and December 29, 2007, respectively.
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 previous year and were no longer operated by us as of the last
day of the respective current year.
The
following table summarizes our worldwide refranchising activities:
|
|
|
2009
|
|
2008
|
|
2007
|
|
Number
of units refranchised
|
|
|
|
613
|
|
|
|
775
|
|
|
|
420
|
|
|
Refranchising
proceeds, pre-tax
|
|
|
$
|
194
|
|
|
$
|
266
|
|
|
$
|
117
|
|
|
Refranchising
net gains, pre-tax
|
|
|
$
|
26
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
The
impact on Operating Profit arising from refranchising is the net of (a) the
estimated reductions in restaurant profit, which reflects the decrease in
Company sales, and G&A expenses and (b) the increase in franchise fees from
the restaurants that have been refranchised. The tables presented
below reflect the impacts on Total revenues and on Operating Profit from stores
that were operated by us for all or some portion of the respective previous year
and were no longer operated by us as of the last day of the respective current
year. In these tables, Decreased Company sales and Decreased
Restaurant profit represents the amount of sales or restaurant profit earned by
the refranchised restaurants during the period we owned them in the prior year
but did not own them in the current year. Increased Franchise and
license fees represents the franchise and license fees from the refranchised
restaurants that were recorded by the Company in the current year during periods
in which the restaurants were Company stores in the prior year.
The
following table summarizes the impact of refranchising as described
above:
|
2009
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(640
|
)
|
|
|
$
|
(77
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(722
|
)
|
Increased
Franchise and license fees and income
|
|
36
|
|
|
|
|
5
|
|
|
|
|
—
|
|
|
|
|
41
|
|
Decrease
in Total revenues
|
$
|
(604
|
)
|
|
|
$
|
(72
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(681
|
)
|
|
2008
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(300
|
)
|
|
|
$
|
(106
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(411
|
)
|
Increased
Franchise and license fees and income
|
|
16
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
22
|
|
Decrease
in Total revenues
|
$
|
(284
|
)
|
|
|
$
|
(100
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
(389
|
)
|
The
following table summarizes the estimated impact on Operating Profit of
refranchising:
|
2009
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Restaurant profit
|
$
|
(63
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(66
|
)
|
Increased
Franchise and license fees and income
|
|
36
|
|
|
|
|
5
|
|
|
|
|
—
|
|
|
|
|
41
|
|
Decreased
G&A
|
|
14
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
14
|
|
Increase
(decrease) in Operating Profit
|
$
|
(13
|
)
|
|
|
$
|
3
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
(11
|
)
|
|
2008
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Restaurant profit
|
$
|
(19
|
)
|
|
|
$
|
(8
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(28
|
)
|
Increased
Franchise and license fees and income
|
|
16
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
22
|
|
Decreased
G&A
|
|
7
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
8
|
|
Increase
(decrease) in Operating Profit
|
$
|
4
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
2
|
|
Restaurant
Unit Activity
Worldwide
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Balance
at end of 2007
|
|
|
7,625
|
|
|
|
1,314
|
|
|
|
24,297
|
|
|
|
33,236
|
|
New
Builds
|
|
|
596
|
|
|
|
89
|
|
|
|
1,173
|
|
|
|
1,858
|
|
Acquisitions
|
|
|
106
|
|
|
|
—
|
|
|
|
(105
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(775
|
)
|
|
|
(1
|
)
|
|
|
776
|
|
|
|
—
|
|
Closures
|
|
|
(166
|
)
|
|
|
(8
|
)
|
|
|
(800
|
)
|
|
|
(974
|
)
|
Other(b)(c)
|
|
|
182
|
|
|
|
(749
|
)
|
|
|
570
|
|
|
|
3
|
|
Balance
at end of 2008
|
|
|
7,568
|
|
|
|
645
|
|
|
|
25,911
|
|
|
|
34,124
|
|
New
Builds
|
|
|
595
|
|
|
|
70
|
|
|
|
1,068
|
|
|
|
1,733
|
|
Acquisitions
|
|
|
57
|
|
|
|
—
|
|
|
|
(57
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(613
|
)
|
|
|
—
|
|
|
|
612
|
|
|
|
(1
|
)
|
Closures
|
|
|
(178
|
)
|
|
|
(10
|
)
|
|
|
(756
|
)
|
|
|
(944
|
)
|
Other(d)
|
|
|
237
|
|
|
|
(236
|
)
|
|
|
(33
|
)
|
|
|
(32
|
)
|
Balance
at end of 2009
|
|
|
7,666
|
|
|
|
469
|
|
|
|
26,745
|
|
|
|
34,880
|
|
%
of Total
|
|
|
22%
|
|
|
|
1%
|
|
|
|
77%
|
|
|
|
100%
|
|
United States
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Balance
at end of 2007
|
|
|
3,896
|
|
|
|
—
|
|
|
|
14,081
|
|
|
|
17,977
|
|
New
Builds
|
|
|
94
|
|
|
|
—
|
|
|
|
269
|
|
|
|
363
|
|
Acquisitions
|
|
|
95
|
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
700
|
|
|
|
—
|
|
Closures
|
|
|
(71
|
)
|
|
|
—
|
|
|
|
(477
|
)
|
|
|
(548
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
3
|
|
Balance
at end of 2008
|
|
|
3,314
|
|
|
|
—
|
|
|
|
14,482
|
|
|
|
17,796
|
|
New
Builds
|
|
|
45
|
|
|
|
—
|
|
|
|
221
|
|
|
|
266
|
|
Acquisitions
|
|
|
42
|
|
|
|
—
|
|
|
|
(42
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(541
|
)
|
|
|
—
|
|
|
|
540
|
|
|
|
(1
|
)
|
Closures
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
(354
|
)
|
|
|
(414
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
(28
|
)
|
|
|
(28
|
)
|
Balance
at end of 2009
|
|
|
2,800
|
|
|
|
—
|
|
|
|
14,819
|
|
|
|
17,619
|
|
%
of Total
|
|
|
16%
|
|
|
|
—
|
|
|
|
84%
|
|
|
|
100%
|
|
YRI
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Balance
at end of 2007
|
|
|
1,642
|
|
|
|
568
|
|
|
|
9,963
|
|
|
|
12,173
|
|
New
Builds
|
|
|
55
|
|
|
|
—
|
|
|
|
869
|
|
|
|
924
|
|
Acquisitions
|
|
|
4
|
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(71
|
)
|
|
|
(1
|
)
|
|
|
72
|
|
|
|
—
|
|
Closures
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
(310
|
)
|
|
|
(351
|
)
|
Other(b)
|
|
|
—
|
|
|
|
(567
|
)
|
|
|
567
|
|
|
|
—
|
|
Balance
at end of 2008
|
|
|
1,589
|
|
|
|
—
|
|
|
|
11,157
|
|
|
|
12,746
|
|
New
Builds
|
|
|
74
|
|
|
|
—
|
|
|
|
824
|
|
|
|
898
|
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
61
|
|
|
|
—
|
|
Closures
|
|
|
(46
|
)
|
|
|
—
|
|
|
|
(387
|
)
|
|
|
(433
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Balance
at end of 2009
|
|
|
1,556
|
|
|
|
—
|
|
|
|
11,650
|
|
|
|
13,206
|
|
%
of Total
|
|
|
12%
|
|
|
|
—
|
|
|
|
88%
|
|
|
|
100%
|
|
China Division
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Balance
at end of 2007
|
|
|
2,087
|
|
|
|
746
|
|
|
|
253
|
|
|
|
3,086
|
|
New
Builds
|
|
|
447
|
|
|
|
89
|
|
|
|
35
|
|
|
|
571
|
|
Acquisitions
|
|
|
7
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(4
|
)
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
Closures
|
|
|
(54
|
)
|
|
|
(8
|
)
|
|
|
(13
|
)
|
|
|
(75
|
)
|
Other(c)
|
|
|
182
|
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
—
|
|
Balance
at end of 2008
|
|
|
2,665
|
|
|
|
645
|
|
|
|
272
|
|
|
|
3,582
|
|
New
Builds
|
|
|
476
|
|
|
|
70
|
|
|
|
23
|
|
|
|
569
|
|
Acquisitions
|
|
|
15
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
11
|
|
|
|
—
|
|
Closures
|
|
|
(72
|
)
|
|
|
(10
|
)
|
|
|
(15
|
)
|
|
|
(97
|
)
|
Other(d)
|
|
|
237
|
|
|
|
(236
|
)
|
|
|
—
|
|
|
|
1
|
|
Balance
at end of 2009
|
|
|
3,310
|
|
|
|
469
|
|
|
|
276
|
|
|
|
4,055
|
|
%
of Total
|
|
|
81%
|
|
|
|
12%
|
|
|
|
7%
|
|
|
|
100%
|
|
(a)
|
The
Worldwide, U.S. and YRI totals exclude 2,200, 2,046 and 154 licensed
units, respectively, at December 26,
2009. There are no licensed units in the China
Division. As licensed units have lower average unit sales
volumes than our traditional units and our current strategy does not place
a significant emphasis on expanding our licensed units, we do not believe
that providing further detail of licensed unit activity provides
significant or meaningful information.
|
|
|
(b)
|
In
our fiscal quarter ended March 22, 2008, we sold our interest in our
unconsolidated affiliate in Japan. While we will no longer have
an ownership interest in the entity that operates both KFCs and Pizza Huts
in Japan, it will continue to be a franchisee as it was when it operated
as an unconsolidated affiliate. See Note 5.
|
|
|
(c)
|
On
January 1, 2008, we began consolidating an entity in China in which we
have a majority ownership interest. This entity was previously
accounted for as an unconsolidated affiliate and we reclassified the units
accordingly. See Note 5.
|
|
|
(d)
|
During
the second quarter of 2009 we acquired additional ownership in and began
consolidating an entity that operates the KFC business in Shanghai, China
and have reclassified the units accordingly. This entity was
previously accounted for as an unconsolidated
affiliate.
|
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.
System
Sales Growth
The
following tables detail the key drivers of system sales growth for each
reportable segment by year. Net unit growth 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.
|
|
2009
vs. 2008
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
(5)
|
%
|
|
|
1
|
%
|
|
|
(2)
|
%
|
|
(2)
|
%
|
Net
unit growth and other
|
|
1
|
|
|
|
4
|
|
|
|
11
|
|
|
3
|
|
Foreign
currency translation
|
|
N/A
|
|
|
|
(8)
|
|
|
|
1
|
|
|
(3)
|
|
%
Change
|
|
(4)
|
%
|
|
|
(3)
|
%
|
|
|
10
|
%
|
|
(2)
|
%
|
%
Change, excluding forex
|
|
N/A
|
|
|
|
5
|
%
|
|
|
9
|
%
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
vs. 2007
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
Worldwide
|
Same
store sales growth (decline)
|
|
2
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
3
|
%
|
Net
unit growth and other
|
|
1
|
|
|
|
4
|
|
|
|
14
|
|
|
4
|
|
Foreign
currency translation
|
|
N/A
|
|
|
|
2
|
|
|
|
11
|
|
|
1
|
|
%
Change
|
|
3
|
%
|
|
|
10
|
%
|
|
|
31
|
%
|
|
8
|
%
|
%
Change, excluding forex
|
|
N/A
|
|
|
|
8
|
%
|
|
|
20
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Operated Store
Results
The
following tables detail the key drivers of the year-over-year changes of Company
Sales and Restaurant Profit. Store portfolio actions represent the
net impact of new unit openings, acquisitions, refranchisings and store closures
on Company Sales or Restaurant Profit. The impact of new unit
openings and acquisitions represent the actual Company Sales or Restaurant
Profit for the periods the Company operated the restaurants in the current year
but did not operate them in the prior year. The impact of
refranchisings and store closures represent the actual Company Sales or
Restaurant Profit for the periods in the prior year while the Company operated
the restaurants but did not operate them in the current year.
The
dollar changes in Company Restaurant Profit by year were as
follows:
U.S.
|
|
|
2009
vs. 2008
|
Income
/ (Expense)
|
2008
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2009
|
Company
Sales
|
$
|
4,410
|
|
|
$
|
(515
|
)
|
|
$
|
(157
|
)
|
|
$
|
N/A
|
|
|
$
|
3,738
|
|
Cost
of Sales
|
|
(1,335
|
)
|
|
|
158
|
|
|
|
107
|
|
|
|
N/A
|
|
|
|
(1,070
|
)
|
Cost
of Labor
|
|
(1,329
|
)
|
|
|
157
|
|
|
|
51
|
|
|
|
N/A
|
|
|
|
(1,121
|
)
|
Occupancy
and Other
|
|
(1,195
|
)
|
|
|
154
|
|
|
|
13
|
|
|
|
N/A
|
|
|
|
(1,028
|
)
|
Restaurant
Profit
|
$
|
551
|
|
|
$
|
(46
|
)
|
|
$
|
14
|
|
|
$
|
N/A
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
12.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.9
|
%
|
|
2008
vs. 2007
|
Income
/ (Expense)
|
2007
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2008
|
Company
Sales
|
$
|
4,518
|
|
|
$
|
(242
|
)
|
|
$
|
134
|
|
|
$
|
N/A
|
|
|
$
|
4,410
|
|
Cost
of Sales
|
|
(1,317
|
)
|
|
|
75
|
|
|
|
(93
|
)
|
|
|
N/A
|
|
|
|
(1,335
|
)
|
Cost
of Labor
|
|
(1,377
|
)
|
|
|
75
|
|
|
|
(27
|
)
|
|
|
N/A
|
|
|
|
(1,329
|
)
|
Occupancy
and Other
|
|
(1,221
|
)
|
|
|
77
|
|
|
|
(51
|
)
|
|
|
N/A
|
|
|
|
(1,195
|
)
|
Restaurant
Profit
|
$
|
603
|
|
|
$
|
(15
|
)
|
|
$
|
(37
|
)
|
|
$
|
N/A
|
|
|
$
|
551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.5
|
%
|
In 2009,
the decrease in U.S. Company Sales and Restaurant Profit associated with store
portfolio actions was primarily driven by refranchising. Significant
other factors impacting Company Sales and/or Restaurant Profit were Company same
store sales decline of 4%, commodity deflation of $28 million (primarily
cheese), and cost savings associated with productivity initiatives.
In 2008,
the decrease in U.S. Company Sales and Restaurant Profit associated with store
portfolio actions was primarily driven by refranchising. Significant
other factors impacting Company Sales and/or Restaurant Profit were Company same
store sales growth of 3%, commodity inflation of $119 million (primarily cheese,
meat, chicken and wheat costs), higher labor costs (primarily wage rate and
salary increases) and higher property and casualty insurance expense as we
lapped favorability recognized in 2007.
YRI
|
|
|
|
2009
vs. 2008
|
|
Income
/ (Expense)
|
2008
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2009
|
|
Company
Sales
|
$
|
2,375
|
|
|
$
|
26
|
|
|
$
|
34
|
|
|
$
|
(382
|
)
|
|
$
|
2,053
|
|
Cost
of Sales
|
|
(752
|
)
|
|
|
(11
|
)
|
|
|
(16
|
)
|
|
|
123
|
|
|
|
(656
|
)
|
Cost
of Labor
|
|
(618
|
)
|
|
|
(6
|
)
|
|
|
(6
|
)
|
|
|
97
|
|
|
|
(533
|
)
|
Occupancy
and Other
|
|
(742
|
)
|
|
|
(6
|
)
|
|
|
(9
|
)
|
|
|
122
|
|
|
|
(635
|
)
|
Restaurant
Profit
|
$
|
263
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
(40
|
)
|
|
$
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.1
|
%
|
|
|
|
|
2008
vs. 2007
|
|
Income
/ (Expense)
|
2007
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2008
|
|
Company
Sales
|
$
|
2,507
|
|
|
$
|
(75
|
)
|
|
$
|
(10
|
)
|
|
$
|
(47
|
)
|
|
$
|
2,375
|
|
Cost
of Sales
|
|
(751
|
)
|
|
|
17
|
|
|
|
(29
|
)
|
|
|
11
|
|
|
|
(752
|
)
|
Cost
of Labor
|
|
(655
|
)
|
|
|
25
|
|
|
|
(1
|
)
|
|
|
13
|
|
|
|
(618
|
)
|
Occupancy
and Other
|
|
(794
|
)
|
|
|
27
|
|
|
|
3
|
|
|
|
22
|
|
|
|
(742
|
)
|
Restaurant
Profit
|
$
|
307
|
|
|
$
|
(6
|
)
|
|
$
|
(37
|
)
|
|
$
|
(1
|
)
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.1
|
%
|
In 2009,
the increase in YRI Company Sales and Restaurant Profit associated with store
portfolio actions was driven by new unit development partially offset by
refranchising and closures. Significant other factors impacting
Company Sales and/or Restaurant Profit were Company same store sales growth of
1% due to higher average guest check, commodity inflation, higher labor costs
(primarily wage rate and salary increases) and higher occupancy
costs.
In 2008,
the decrease in YRI Company Sales and Restaurant Profit associated with store
portfolio actions was driven by refranchising and closures, partially offset by
new unit development. Significant other factors impacting Company
Sales and/or Restaurant Profit were the elimination of a VAT exemption in Mexico
with an estimated negative impact of $38 million and $34 million,
respectively. An increase in commodity costs was partially offset by
higher average guest check.
China Division
|
|
|
|
2009
vs. 2008
|
|
Income
/ (Expense)
|
2008
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2009
|
|
Company
Sales
|
$
|
3,058
|
|
|
$
|
548
|
|
|
$
|
(22
|
)
|
|
$
|
38
|
|
|
$
|
3,622
|
|
Cost
of Sales
|
|
(1,152
|
)
|
|
|
(199
|
)
|
|
|
87
|
|
|
|
(13
|
)
|
|
|
(1,277
|
)
|
Cost
of Labor
|
|
(423
|
)
|
|
|
(81
|
)
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
(500
|
)
|
Occupancy
and Other
|
|
(919
|
)
|
|
|
(196
|
)
|
|
|
12
|
|
|
|
(11
|
)
|
|
|
(1,114
|
)
|
Restaurant
Profit
|
$
|
564
|
|
|
$
|
72
|
|
|
$
|
85
|
|
|
$
|
10
|
|
|
$
|
731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.2
|
%
|
|
2008
vs. 2007
|
|
Income
/ (Expense)
|
2007
|
|
Store
Portfolio
Actions
|
|
Other
|
|
FX
|
|
2008
|
|
Company
Sales
|
$
|
2,075
|
|
|
$
|
588
|
|
|
$
|
150
|
|
|
$
|
245
|
|
|
$
|
3,058
|
|
Cost
of Sales
|
|
(756
|
)
|
|
|
(220
|
)
|
|
|
(84
|
)
|
|
|
(92
|
)
|
|
|
(1,152
|
)
|
Cost
of Labor
|
|
(273
|
)
|
|
|
(88
|
)
|
|
|
(29
|
)
|
|
|
(33
|
)
|
|
|
(423
|
)
|
Occupancy
and Other
|
|
(629
|
)
|
|
|
(196
|
)
|
|
|
(21
|
)
|
|
|
(73
|
)
|
|
|
(919
|
)
|
Restaurant
Profit
|
$
|
417
|
|
|
$
|
84
|
|
|
$
|
16
|
|
|
$
|
47
|
|
|
$
|
564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant
Margin
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.4
|
%
|
In 2009,
the increase in China Division Company Sales and Restaurant Profit associated
with store portfolio actions was primarily driven by the development of new
units and the acquisition of additional interest in and consolidation of a
former China unconsolidated affiliate during 2009. Significant other
factors impacting Company Sales and/or Restaurant Profit were Company same store
sales declines of 1% and commodity deflation (primarily chicken) of $61
million.
In 2008,
the increase in China Division Company Sales and Restaurant Profit associated
with store portfolio actions was primarily driven by the development of new
units and the consolidation of a former China unconsolidated affiliate at the
beginning of 2008. Significant other factors impacting Company Sales
and/or Restaurant Profit were Company same store sales growth of 7% and
commodity inflation (primarily chicken) of $78 million.
Franchise
and license fees and income
|
|
Amount
|
|
%
Increase
(Decrease)
|
|
%
Increase
(Decrease)
excluding
foreign
currency translation
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
U.S.
|
|
$
|
735
|
|
|
$
|
722
|
|
|
$
|
684
|
|
|
2
|
|
|
5
|
|
|
N/A
|
|
|
N/A
|
|
YRI
|
|
|
660
|
|
|
|
669
|
|
|
|
582
|
|
|
(1
|
)
|
|
15
|
|
|
7
|
|
|
14
|
|
China
Division
|
|
|
60
|
|
|
|
70
|
|
|
|
69
|
|
|
(15
|
)
|
|
2
|
|
|
(16
|
)
|
|
(6
|
)
|
Unallocated
|
|
|
(32
|
)
|
|
|
—
|
|
|
|
—
|
|
|
N/A
|
|
|
—
|
|
|
N/A
|
|
|
N/A
|
|
Worldwide
|
|
$
|
1,423
|
|
|
$
|
1,461
|
|
|
$
|
1,335
|
|
|
(3
|
)
|
|
9
|
|
|
1
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
Franchise and license fees and income for 2009 included a reduction of $32
million as a result of our reimbursements to KFC franchisees for
installation costs for the national launch of Kentucky Grilled Chicken
that has not been allocated to the U.S. segment for performance reporting
purposes.
|
|
U.S.
Franchise and license fees and income for 2009 and 2008 was positively
impacted by 5% and 2%, respectively, due to the impact of
refranchising.
|
|
China
Division Franchise and license fees and income for 2009 and 2008 was
negatively impacted by 17% and 19%, respectively, related to the
consolidation of two former China unconsolidated
affiliates. See Note 5.
|
|
General
and Administrative Expenses
|
|
Amount
|
|
%
Increase
(Decrease)
|
|
%
Increase
(Decrease)
excluding
foreign
currency translation
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
U.S.
|
|
$
|
482
|
|
|
$
|
547
|
|
|
$
|
564
|
|
|
(12
|
)
|
|
(3
|
)
|
|
N/A
|
|
|
N/A
|
|
YRI
|
|
|
341
|
|
|
|
371
|
|
|
|
381
|
|
|
(8
|
)
|
|
(3
|
)
|
|
2
|
|
|
(3
|
)
|
China
Division
|
|
|
209
|
|
|
|
186
|
|
|
|
151
|
|
|
12
|
|
|
24
|
|
|
11
|
|
|
16
|
|
Unallocated
|
|
|
189
|
|
|
|
238
|
|
|
|
197
|
|
|
(21
|
)
|
|
21
|
|
|
N/A
|
|
|
N/A
|
|
Worldwide
|
|
$
|
1,221
|
|
|
$
|
1,342
|
|
|
$
|
1,293
|
|
|
(9
|
)
|
|
4
|
|
|
(6
|
)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
decreases in U.S. and Unallocated G&A expenses for 2009 were driven by the
actions taken as part of our U.S. business transformation measures.
In 2008,
the decrease in U.S. G&A expenses was driven by refranchising company
stores. The increase in Unallocated G&A expense was driven by
approximately $49 million of charges associated with G&A productivity
initiatives and realignment of resources related to the U.S. business
transformation measures.
The
increase in YRI G&A expenses for 2009, excluding the impact of foreign
currency translation, was driven by increased costs in strategic growth markets,
primarily driven by increased headcount.
In 2008,
the decrease in YRI G&A expenses, excluding the impact of foreign currency
translation, was driven by a reduction in convention and training expenses, as
well as legal fees.
The
increases in China Division G&A expenses for 2009 and 2008, excluding the
impact of foreign currency translation, were driven by increased compensation
costs resulting from higher headcount in mainland China.
Worldwide
Franchise and License Expenses
Franchise
and license expenses increased 19% in 2009. The increase was driven
by quality control initiatives, increased provision for U.S. past due
receivables (primarily at KFC and LJS) and higher international franchise
convention costs.
Franchise
and license expenses increased 67% in 2008. The increase was driven
by higher marketing funding on behalf of franchisees, investments in our U.S.
brands related to the U.S. business transformation measures and increased
provision for past due receivables.
Worldwide
Other (Income) Expense
|
|
2009
|
|
2008
|
|
|
2007
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(36
|
)
|
|
$
|
(41
|
)
|
|
|
$
|
(51
|
)
|
Gain
upon consolidation of a former unconsolidated affiliate in China(a)
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
|
—
|
|
Gain
upon sale of investment in unconsolidated affiliate(b)(c)
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
|
(6
|
)
|
Wrench
litigation income(d)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(11
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
|
(3
|
)
|
Other
(income) expense
|
|
$
|
(104
|
)
|
|
$
|
(157
|
)
|
|
|
$
|
(71
|
)
|
(a)
|
See
Note 5 for further discussion of the consolidation of a former
unconsolidated affiliate.
|
|
|
(b)
|
Fiscal
year 2008 reflects the gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
5.
|
|
|
(c)
|
Fiscal
year 2007 reflects recognition of income associated with receipt of
payment for a note receivable arising from the 2005 sale of our fifty
percent interest in the entity that operated almost all KFCs and Pizza
Huts in Poland and the Czech Republic to our then partner in the
entity.
|
|
|
(d)
|
Fiscal
year 2007 reflects financial recoveries from settlements with insurance
carriers related to a lawsuit settled by Taco Bell Corporation in
2004.
|
Worldwide
Closure and Impairment Expenses and Refranchising (Gain) Loss
See the
Store Portfolio Strategy section for more detail of our refranchising activity
and Notes 5 and 10 for a summary of the components of facility actions and
goodwill impairments by reportable operating segment, respectively.
Operating
Profit
|
Amount
|
|
%
B/(W)
|
|
2009
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
2008
|
United
States
|
$
|
647
|
|
|
$
|
641
|
|
|
$
|
685
|
|
|
|
1
|
|
|
|
(6
|
)
|
YRI
|
|
491
|
|
|
|
522
|
|
|
|
474
|
|
|
|
(6
|
)
|
|
|
10
|
|
China
Division
|
|
602
|
|
|
|
480
|
|
|
|
375
|
|
|
|
25
|
|
|
|
28
|
|
Unallocated
Franchise and license fees and income
|
|
(32
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
NM
|
|
|
|
NM
|
|
Unallocated
and corporate expenses
|
|
(189
|
)
|
|
|
(248
|
)
|
|
|
(197
|
)
|
|
|
24
|
|
|
|
(26
|
)
|
Unallocated
Impairment expense
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
NM
|
|
|
|
NM
|
|
Unallocated
Other income (expense)
|
|
71
|
|
|
|
117
|
|
|
|
9
|
|
|
|
NM
|
|
|
|
NM
|
|
Unallocated
Refranchising gain (loss)
|
|
26
|
|
|
|
5
|
|
|
|
11
|
|
|
|
NM
|
|
|
|
NM
|
|
Operating
Profit
|
$
|
1,590
|
|
|
$
|
1,517
|
|
|
$
|
1,357
|
|
|
|
5
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States operating margin
|
|
14.5
|
%
|
|
|
12.5
|
%
|
|
|
13.2
|
%
|
|
|
2.0
|
ppts.
|
|
|
(0.7
|
)
ppts.
|
International
Division operating margin
|
|
18.1
|
%
|
|
|
17.1
|
%
|
|
|
15.4
|
%
|
|
|
1.0
|
ppts.
|
|
|
1.7
|
ppts.
|
U.S.
Operating Profit increased 1% in 2009. The increase was driven by the
G&A savings from the actions taken as part of our U.S. business
transformation measures and improved restaurant operating costs, primarily
driven by commodity deflation. These increases were partially offset
by same store sales declines.
U.S.
Operating Profit decreased 6% in 2008. The decrease was driven by
higher restaurant operating costs and higher closure and impairment expenses,
partially offset by the impact of same store sales growth on Restaurant Profit
(primarily due to higher average guest check) and Franchise and license
fees. The increase in restaurant operating costs was primarily driven
by higher commodity costs.
YRI
Operating Profit decreased 6% in 2009, including an 11% unfavorable impact from
foreign currency translation. Excluding the unfavorable impact from
foreign currency translation, YRI Operating Profit increased 5% in
2009. The increase was driven by the impact of franchise net unit
development on franchise and license fees partially offset by a $12 million
goodwill impairment charge related to our Pizza Hut South Korea
market.
YRI
Operating Profit increased 10% in 2008, including a 2% favorable impact from
foreign currency translation. The increase was driven by the impact
of same store sales growth and net unit development on Franchise and license
fees. These increases were partially offset by the loss of the VAT
exemption in Mexico.
China
Division Operating Profit increased 25% in 2009, including a 2% favorable impact
from foreign currency translation. The increase was driven by the
impact of commodity deflation and new unit development, partially offset by
higher G&A expenses.
China
Division Operating Profit increased 28% in 2008, including an 11% favorable
impact from foreign currency translation. The increase was driven by
the impact of same store sales growth and net unit development on Restaurant
Profit. The increase was partially offset by higher restaurant
operating costs and higher G&A expenses.
Unallocated
Franchise and license fees and income for 2009 reflects our reimbursements to
KFC franchisees for installation costs of ovens for the national launch of
Kentucky Grilled Chicken that have not been allocated to the U.S. segment for
performance reporting purposes.
Unallocated
and corporate expenses decreased 24% in 2009 due to the current year G&A
savings attributable to, and the lapping of costs associated with, the 2008
actions taken as part of our U.S. business transformation
measures.
Unallocated
and corporate expenses increased 26% in 2008 due to costs associated with the
U.S. business transformation measures, partially offset by lower annual
incentive compensation expenses.
Unallocated
impairment expense in 2009 includes a $26 million charge related to a goodwill
impairment charge related to LJS/A&W U.S. goodwill.
Unallocated
Other income (expense) in 2009 includes a $68 million gain recognized upon
acquisition of additional ownership in, and consolidation of, the entity that
operates KFCs in Shanghai, China, and 2008 includes a $100 million gain
recognized on the sale of our interest in our unconsolidated affiliate in
Japan. See Note 5.
Interest
Expense, Net
|
|
2009
|
|
2008
|
|
2007
|
|
Interest
expense
|
|
$
|
212
|
|
|
$
|
253
|
|
|
$
|
199
|
|
|
Interest
income
|
|
|
(18
|
)
|
|
|
(27
|
)
|
|
|
(33
|
)
|
|
Interest
expense, net
|
|
$
|
194
|
|
|
$
|
226
|
|
|
$
|
166
|
|
|
Interest
expense, net decreased $32 million or 14% in 2009. The decrease was
driven by a decline in interest rates on the variable portion of our debt and a
decrease in borrowings as compared to prior year.
Interest
expense, net increased $60 million or 36% in 2008. The increase was
driven by an increase in borrowings in 2008 compared to 2007, partially offset
by a decrease in interest rates on the variable portion of our
debt.
Income
Taxes
|
|
2009
|
|
2008
|
|
2007
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
313
|
|
|
$
|
319
|
|
|
$
|
282
|
|
|
Effective
tax rate
|
|
|
22.4
|
%
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
|
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
2009
|
|
2008
|
|
2007
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.0
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(11.4
|
)
|
|
|
(14.5
|
)
|
|
|
(5.7
|
)
|
Adjustments
to reserves and prior years
|
|
|
(0.6
|
)
|
|
|
3.5
|
|
|
|
2.6
|
|
Valuation
allowance additions (reversals)
|
|
|
(0.7
|
)
|
|
|
0.6
|
|
|
|
(9.0
|
)
|
Other,
net
|
|
|
(0.9
|
)
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
Effective
income tax rate
|
|
|
22.4
|
%
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
Our 2009 effective tax rate was
positively impacted by the year-over-year change in adjustments to reserves and
prior years (including certain out-of-year adjustments that decreased our
effective tax rate by 1.6 percentage points in
2009). Benefits associated with our foreign and U.S.
tax effects attributable to foreign operations decreased versus prior
year as a result of withholding taxes associated with the
distribution of intercompany dividends and an increase in tax expense for
certain foreign markets. These increases were partially offset by
lapping a 2008 expense associated with our plan to distribute certain foreign
earnings. Our 2009 effective tax rate was also positively impacted by
the reversal of foreign valuation allowances associated with certain deferred
tax assets that we now believe are more likely than not to be utilized on future
tax returns. Additionally, our rate was lower as a result of lapping
the 2008 gain on the sale of our interest in our unconsolidated affiliate in
Japan.
Our 2008
effective income tax rate was negatively impacted versus 2007 by lapping
valuation allowance reversals made in the prior year as discussed
below. This negative impact was partially offset by the reversal of
foreign valuation allowances in the current year associated with certain
deferred tax assets that we now believe are more likely than not to be utilized
on future tax returns. Additionally, the effective tax rate was
negatively impacted by the year-over-year change in adjustments to reserves and
prior years (including certain out-of-year adjustments that increased our
effective tax rate by 1.8 percentage points in 2008). Benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations positively impacted the effective tax rate as a result of lapping
2007 expenses associated with the distribution of an intercompany dividend and
adjustments to our deferred tax balances that resulted from the Mexico tax law
change, as further discussed below, as well as a higher percentage of our income
being earned outside the U.S. These benefits were partially offset in
2008 by the gain on the sale of our interest in our unconsolidated affiliate in
Japan and expense associated with our plan to distribute certain foreign
earnings. We also recognized deferred tax assets for the net
operating losses generated by certain tax planning strategies implemented in
2008 included in foreign and U.S. tax effects attributable to foreign operations
(1.7 percentage point impact). However, we provided a full valuation
allowance on these assets as we do not believe it is more likely than not that
they will be realized in the future.
Our 2007
effective income tax rate was positively impacted by valuation allowance
reversals. In December 2007, the Company finalized various tax
planning strategies based on completing a review of our international
operations, distributed a $275 million intercompany dividend and sold our
interest in our Japan unconsolidated affiliate. As a result, in the
fourth quarter of 2007, we reversed approximately $82 million of valuation
allowances associated with foreign tax credit carryovers that are more likely
than not to be claimed on future tax returns. In 2007, benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations were negatively impacted by $36 million of expense associated with
the $275 million intercompany dividend and approximately $20 million of expense
for adjustments to our deferred tax balances as a result of the Mexico tax law
change enacted during the fourth quarter of 2007.
Adjustments
to reserves and prior years include the effects of the reconciliation of income
tax amounts recorded in our Consolidated Statements of Income to amounts
reflected on our tax returns, including any adjustments to the Consolidated
Balance Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established for potential
exposure we may incur if a taxing authority takes a position on a matter
contrary to our position. We evaluate these reserves on a quarterly
basis to ensure that they have been appropriately adjusted for events, including
audit settlements that we believe may impact our exposure.
Consolidated
Cash Flows
Net cash provided by operating
activities was $1,404 million compared to $1,521 million in
2008. The decrease was primarily driven by higher pension
contributions, partially offset by higher net income.
In 2008,
net cash provided by operating activities was $1,521 million compared to
$1,551 million in
2007. The decrease was primarily driven by higher interest payments
and pension contributions.
Net cash used in investing
activities was $727 million versus $641 million in 2008. The
increase was driven by the acquisition of an interest in Little Sheep, as
discussed in Note 5, lower proceeds from refranchising and sales of property,
plant and equipment, partially offset by lower capital spending.
In 2008,
net cash used in investing activities was $641 million versus $416 million in
2007. The increase was driven by higher capital spending in 2008 and
the lapping of proceeds from the sale of our interest in the Japan
unconsolidated affiliate in 2007, partially offset by the year-over-year change
in proceeds from refranchising of restaurants.
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million (includes the impact of related foreign currency contracts that
were settled in December 2007). The international subsidiary that
owned this interest operates on a fiscal calendar with a period end that is
approximately one month earlier than our consolidated period
close. Thus, consistent with our historical treatment of events
occurring during the lag period, the pre-tax gain on the sale of this investment
of $100 million was recorded in the first quarter of 2008. However,
the cash proceeds from this transaction were transferred from our international
subsidiary to the U.S. in December 2007 and were thus reported on our
Consolidated Statement of Cash Flows for the year ended December 29,
2007.
Net cash used in financing
activities was $542 million versus $1,459 million in 2008. The
decrease was driven by a reduction in share repurchases, partially offset by net
payments on debt.
In 2008,
net cash used in financing activities was $1,459 million versus $678 million in
2007. The increase was driven by lower net borrowings, higher share
repurchases and higher dividend payments in 2008.
Consolidated
Financial Condition
The
acquisition of additional ownership in, and consolidation of, a former
unconsolidated affiliate that operates the KFCs in Shanghai, China during 2009
impacted our Consolidated Balance Sheet at December 26, 2009. See
Note 5 for a discussion of this transaction and a summary of the assets acquired
and liabilities assumed as a result of the acquisition and
consolidation.
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 eight
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 December, 2009 we had approximately $1.3 billion in unused capacity under our
revolving credit facilities that expire in 2012, primarily related to a domestic
facility.
Our
China Division and YRI represent more than 60% of the Company’s operating profit
and both generate a significant amount of positive cash flows that we have
historically used to fund our international development. To the
extent we have needed to repatriate international cash to fund our U.S.
discretionary cash spending, including share repurchases, dividends and debt
repayments, we have historically been able to do so in a tax efficient
manner. As a result of our substantial international development a
significant amount of non-cash undistributed earnings in our foreign
subsidiaries is considered indefinitely reinvested as of December 26,
2009. If we experience an unforeseen decrease in our cash flows from
our U.S. business or are unable to refinance future U.S. debt maturities we may
be required to repatriate future international earnings at tax rates higher than
we have historically experienced.
We are
currently 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). As a commitment to maintaining our
investment grade rating we improved our capital structure by extending our
scheduled debt maturities while reducing our debt outstanding during
2009. Additionally, we funded $280 million of our unfunded pension
obligation and did not repurchase shares of our Common Stock. Subsequent to year
end, we have resumed repurchasing shares of our Common Stock. However
we believe we can do so while maintaining a capital structure that allows us to
remain an investment grade borrower. While we do not anticipate a
downgrade in our credit rating, a downgrade would increase the Company’s current
borrowing costs and could impact the Company’s ability to access the credit
markets if necessary. Based on the amount and composition of our debt
at December 26, 2009, which included a minimal amount outstanding under our
credit facilities, our interest expense would not materially increase on a full
year basis should we receive a one-level downgrade in our ratings.
Discretionary
Spending
During
2009, we invested $797 million in our businesses, including approximately $275
million in the U.S., $232 million for the International Division and $290
million for the China Division. For 2010, we estimate capital
spending will be approximately $1 billion.
During
the year ended December 26, 2009, we paid cash dividends of $362
million. Additionally, on November 20, 2009 our Board of Directors
approved cash dividends of $0.21 per share of Common Stock to be distributed on
February 5, 2010 to shareholders of record at the close of business on January
15, 2010. The Company is targeting an ongoing annual dividend payout
ratio of 35% - 40% of net income.
The
Company did not repurchase shares of our Common Stock during 2009. As
of December 26, 2009, we have $300 million (excluding applicable transaction
fees) available for future repurchases under a share repurchase authorization
that expires in September 2010.
Borrowing
Capacity
Our
primary bank credit agreement comprises a $1.15 billion syndicated senior
unsecured revolving credit facility (the “Credit Facility”) which matures in
November 2012 and includes 23 participating banks with commitments ranging from
$20 million to $113 million. We believe the syndication reduces our
dependency on any one bank.
Under the
terms of the Credit Facility, we may borrow up to the maximum borrowing limit,
less outstanding letters of credit or banker’s acceptances, where
applicable. At December 26, 2009, our unused Credit Facility totaled
$975 million net of outstanding letters of credit of $170
million. There were borrowings of $5 million outstanding under the
Credit Facility at December 26, 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
the end of 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.
The
Credit Facility 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 balance
sheet and cash flows we were able to comply with all debt covenant requirements
at December 26, 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 stated interest
rates ranging from 4.25% 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,
reflecting the events described below, were $2.9 billion at December 26,
2009.
During
the second quarter of 2009 we repurchased Senior Unsecured Notes due July 1,
2012 with an aggregate principal amount of $137 million.
In August
2009, we issued $250 million aggregate principal amount of 4.25% Senior
Unsecured Notes that are due in September 2015 and $250 million aggregate
principal amount of 5.30% Senior Unsecured Notes that are due in September
2019. We used the proceeds from our issuance of these Senior
Unsecured Notes to repay a variable rate senior unsecured term loan in an
aggregate principal amount of $375 million that was scheduled to mature in 2011
and to make discretionary payments to our pension plans in the fourth quarter of
2009.
Our
Senior Unsecured Notes, Credit Facility, and ICF all contain cross-default
provisions, whereby a default under any of these agreements constitutes a
default under each of the other agreements.
Contractual
Obligations
In
addition to any discretionary spending we may choose to make, our significant
contractual obligations and payments as of December 26, 2009
included:
|
|
Total
|
|
|
Less
than 1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5
Years
|
Long-term
debt obligations(a)
|
|
$
|
4,844
|
|
|
|
$
|
178
|
|
|
|
$
|
1,207
|
|
|
|
$
|
258
|
|
|
|
$
|
3,201
|
|
Capital
leases(b)
|
|
|
409
|
|
|
|
|
67
|
|
|
|
|
51
|
|
|
|
|
48
|
|
|
|
|
243
|
|
Operating
leases(b)
|
|
|
4,675
|
|
|
|
|
535
|
|
|
|
|
938
|
|
|
|
|
778
|
|
|
|
|
2,424
|
|
Purchase
obligations(c)
|
|
|
737
|
|
|
|
|
551
|
|
|
|
|
173
|
|
|
|
|
11
|
|
|
|
|
2
|
|
Other(d)
|
|
|
50
|
|
|
|
|
22
|
|
|
|
|
11
|
|
|
|
|
7
|
|
|
|
|
10
|
|
Total
contractual obligations
|
|
$
|
10,715
|
|
|
|
$
|
1,353
|
|
|
|
$
|
2,380
|
|
|
|
$
|
1,102
|
|
|
|
$
|
5,880
|
|
(a)
|
Debt
amounts include principal maturities and expected interest
payments. Rates utilized to determine interest payments for
variable rate debt are based on the LIBOR forward yield
curve. Excludes a fair value adjustment of $36 million included
in debt related to interest rate swaps that hedge the fair value of a
portion of our debt. See Note 11.
|
|
|
(b)
|
These
obligations, which are shown on a nominal basis, relate to nearly 6,200
restaurants. See Note 12.
|
|
|
(c)
|
Purchase
obligations include agreements to purchase goods or services that are
enforceable and legally binding on us and that specify all significant
terms, including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of the
transaction. We have excluded agreements that are cancelable
without penalty. Purchase obligations relate primarily to
information technology, marketing, commodity agreements, purchases of
property, plant and equipment as well as consulting, maintenance and other
agreements.
|
|
|
(d)
|
Other
consists of 2010 pension plan funding obligations, the current portion of
liabilities for unrecognized tax benefits and projected payments for
deferred compensation.
|
We have
not included in the contractual obligations table approximately $264 million for
long-term liabilities for unrecognized tax benefits for various tax positions we
have taken. These liabilities may increase or decrease over time as a
result of tax examinations, and given the status of the examinations, we cannot
reliably estimate the period of any cash settlement with the respective taxing
authorities. These liabilities also include amounts that are
temporary in nature and for which we anticipate that over time there will be no
net cash outflow.
We
sponsor noncontributory defined benefit pension plans covering certain salaried
and hourly employees, the most significant of which are in the U.S. and
U.K. 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. Our funding policy for the Plan is to contribute
annually amounts that will at least equal the minimum amounts required to comply
with the Pension Protection Act of 2006. However, additional
voluntary contributions are made from time to time as are determined to be
appropriate to improve the Plan’s funded status. At December 26, 2009, the Plan was
in a net underfunded position of $83 million. Based on the current
funding status of the Plan, we will not be required to make minimum
contributions in 2010. Investment performance and corporate bond
rates have a significant effect on our net funding position as they drive our
asset balances and discount rate assumption. Future changes in
investment performance and corporate bond rates could impact our funded status
and the timing and amounts of required contributions beyond
2010.
The U.K.
pension plans are in a net underfunded position of $29 million at our 2009
measurement date. We have committed to making discretionary funding
contributions of $15 million to one of these plans in 2010 and this amount is
included in our contractual obligations table above.
Our
post-retirement plan in the U.S. is not required to be funded in advance, but is
pay as you go. We made post-retirement benefit payments of $6 million
in 2009 and no future funding amounts are included in the contractual
obligations table. See Note 15 for further details about our pension
and post-retirement plans.
We have
excluded from the contractual obligations table payments we may make for
exposures for which we are self-insured, including workers’ compensation,
employment practices liability, general liability, automobile liability, product
liability and property losses (collectively “property and casualty losses”) and
employee healthcare and long-term disability claims. The majority of
our recorded liability for self-insured employee healthcare, long-term
disability and property and casualty losses represents estimated reserves for
incurred claims that have yet to be filed or settled.
Off-Balance
Sheet Arrangements
We have
provided a partial guarantee of approximately $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 December 26, 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 $54 million at December 26, 2009.
Our
unconsolidated affiliates had approximately $40 million and $50 million of debt
outstanding as of December 26, 2009 and December 27, 2008,
respectively.
New
Accounting Pronouncements Not Yet Adopted
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued new
guidance and clarifications for improving disclosures about fair value
measurements. This guidance requires enhanced disclosures regarding
transfers in and out of the levels within the fair value
hierarchy. Separate disclosures are required for transfers in and out
of Level 1 and 2 fair value measurements, and the reasons for the transfers must
be disclosed. In the reconciliation for Level 3 fair value
measurements, separate disclosures are required for purchases, sales, issuances,
and settlements on a gross basis. We do not anticipate the adoption
of this guidance to materially impact the Company. The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements, which are effective for
interim and annual reporting periods beginning after December 15,
2010.
In June
2009, the FASB issued guidance on transfers and servicing of financial assets,
requiring more information about transfers of financial assets, eliminating the
qualifying special purpose entity concept, changing the requirements for
derecognizing financial assets and requiring additional
disclosures. The FASB also issued guidance for determining whether an
entity is a variable interest entity, that modifies the methods allowed for
determining the primary beneficiary of a variable interest entity, requires
ongoing reassessments of whether an enterprise is the primary beneficiary of a
variable interest entity and requires enhanced disclosures related to an
enterprise’s involvement in a variable interest entity. The adoption
of this guidance may require the Company to consolidate an entity that provides
loans 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. If consolidation of this entity is required,
the Company’s long-term debt will increase by approximately $54 million with a
corresponding increase to receivables. See Note 21 for additional
information regarding this franchisee loan program. This guidance is
effective for the first annual reporting period that begins after November 15,
2009, our fiscal 2010.
Critical
Accounting Policies and Estimates
Our
reported results are impacted by the application of certain accounting policies
that require us to make subjective or complex judgments. These
judgments involve estimations of the effect of matters that are inherently
uncertain and may significantly impact our quarterly or annual results of
operations or financial condition. Changes in the estimates and
judgments could significantly affect our results of operations, financial
condition and cash flows in future years. A description of what we
consider to be our most significant critical accounting policies
follows.
Impairment or Disposal of
Long-Lived Assets
We review
our long-lived assets of restaurants (primarily PP&E and allocated
intangible assets subject to amortization) that are currently operating and have
not been offered for refranchise semi-annually for impairment, or whenever
events or changes in circumstances indicate that the carrying amount of a
restaurant may not be recoverable. We evaluate recoverability based
on the restaurant’s forecasted undiscounted cash flows, which incorporate our
best estimate of sales growth and margin improvement based upon our plans for
the unit and actual results at comparable restaurants. For restaurant
assets that are not deemed to be recoverable, we write down an impaired
restaurant to its estimated fair market value. Key assumptions in the
determination of fair value are the after-tax cash flows and discount
rate. The after-tax cash flows incorporate reasonable sales growth
and margin improvement assumptions that would be used by a franchisee in the
determination of a purchase price for the restaurant. Estimates of
future cash flows are highly subjective judgments and can be significantly
impacted by changes in the business or economic conditions.
We
perform an impairment evaluation at a restaurant group level if there is an
expectation that we will refranchise the restaurants as a
group. These impairment evaluations are generally performed at the
date such restaurants are offered for sale. Expected net sales
proceeds are generally based on actual bids from the buyer, if available, or
anticipated bids given the discounted projected after-tax cash flows for the
restaurant or group of restaurants. The after-tax cash flows used in
determining the anticipated bids incorporate reasonable assumptions we believe a
franchisee would make such as sales growth and margin improvement as well as
expectations as to the useful lives of the restaurant
assets. Historically, these anticipated bids have been reasonably
accurate estimations of the proceeds ultimately received.
The
discount rate used in the fair value calculations is our estimate of the
required rate of return that a franchisee would expect to receive when
purchasing a similar restaurant or groups of restaurants and the related
long-lived assets. The discount rate incorporates rates of returns
for historical refranchising market transactions and is commensurate with the
risks and uncertainty inherent in the forecasted cash flows.
We have
certain definite-lived intangible assets that are not attributable to a specific
restaurant, such as the LJS and A&W trademark/brand intangible assets and
franchise contract rights, which are amortized over their expected useful
lives. We base the expected useful lives of our trademark/brand
intangible assets on a number of factors including the competitive environment,
our future development plans for the applicable Concept and the level of
franchisee commitment to the Concept. We generally base the expected
useful lives of our franchise contract rights on their respective contractual
terms including renewals when appropriate.
These
definite-lived intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An intangible asset that is deemed
impaired is written down to its estimated fair value, which is based on
discounted after-tax cash flows. For purposes of our impairment
analysis, we update the cash flows that were initially used to value the
definite-lived intangible asset to reflect our current estimates and assumptions
over the asset’s future remaining life.
See Note
2 for a further discussion of our policy regarding the impairment or disposal of
property, plant and equipment.
Impairment of
Goodwill
We
evaluate goodwill for impairment on an annual basis or more often if an event
occurs or circumstances change that indicates impairment might
exist. Goodwill is evaluated for impairment through the comparison of
fair value of our reporting units to their carrying values. Our
reporting units are our operating segments in the U.S. and our business units
internationally (typically individual countries). Fair value is the
price a willing buyer would pay for the reporting unit, and is generally
estimated using discounted expected future after-tax cash flows from company
operations and franchise royalties.
Future
cash flow estimates and the discount rate are the key assumptions when
estimating the fair value of a reporting unit. Future cash flows are
based on growth expectations relative to recent historical performance and
incorporate sales growth and margin improvement assumptions that we believe a
buyer would assume when determining a purchase price for the reporting
unit. The assumptions that factor into the discounted cash flows are
highly correlated as cash flow growth can be achieved through various
interrelated strategies such as product pricing and restaurant productivity
initiatives. The discount rate is our estimate of the required rate of return
that a third-party buyer would expect to receive when purchasing a business from
us that constitutes a reporting unit. We believe the discount rate is
commensurate with the risks and uncertainty inherent in the forecasted cash
flows.
Except
for the LJS/A&W-U.S. and Pizza Hut South Korea reporting units discussed
below, the fair value of each of our other reporting units was substantially in
excess of its respective carrying value as of the 2009 goodwill impairment test
that was performed at the beginning of the fourth quarter. YUM
recorded goodwill impairment charges of $26 million and $12 million for our
LJS/A&W-U.S. and Pizza Hut South Korea reporting units, respectively, as the
carrying value of these reporting units exceeded their fair
values. The fair value of the LJS/A&W-U.S. reporting unit was
based on our discounted expected after-tax cash flows from the future royalty
stream, net of G&A, expected to be earned from the underlying franchise
agreements. These cash flows incorporated a decline in future profit
expectations for our LJS/A&W-U.S. reporting unit, which were due in part to
the impact of a reduced emphasis on multi-branding as a long-term U.S. growth
strategy. The fair value of the Pizza Hut South Korea reporting unit
was based on the discounted expected after-tax future cash flows from company
operations and franchise royalties for this reporting unit. Our
expectations of after-tax cash flows for this business were negatively impacted
by recent profit declines for this reporting unit.
See Note
2 for a further discussion of our policies regarding goodwill.
Allowances for Franchise and
License Receivables/Guarantees
Franchise
and license receivable balances include royalties, initial fees as well as other
ancillary receivables such as rent and fees for support services. Our
reserve for franchisee or licensee receivable balances is based upon pre-defined
aging criteria or upon the occurrence of other events that indicate that we may
not collect the balance due. This methodology results in an
immaterial amount of unreserved past due receivable balances at December 26,
2009. As such, we believe our allowance for franchise and license
receivables is adequate to cover potential exposure from uncollectible
receivable balances at December 26, 2009.
We have
historically issued certain guarantees on behalf of franchisees primarily as a
result of 1) assigning our interest in obligations under operating leases,
primarily as a condition to the refranchising of certain Company restaurants, 2)
facilitating franchisee development and 3) equipment financing arrangements to
facilitate the launch of new sales layers by franchisees. We
recognize a liability for the fair value of such guarantees upon inception of
the guarantee and upon any subsequent modification, such as renewals, when we
remain contingently liable. The fair value of a guarantee is the
estimated amount at which the liability could be settled in a current
transaction between willing unrelated parties.
The
potential total exposure for lease assignments is significant when aggregated,
with approximately $425 million representing the present value, discounted at
our pre-tax cost of debt, of the minimum payments of the assigned leases at
December 26, 2009. Current franchisees are the primary lessees under
the vast majority of these leases. Additionally, we have guaranteed
approximately $40 million of franchisee loans of various equipment
programs. 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 assigned leases and certain of the equipment loan
programs. We believe these cross-default provisions significantly
reduce the risk that we will be required to make payments under these guarantees
and, historically, we have not been required to make significant payments for
guarantees. If payment on these guarantees becomes probable and
estimable, we record a liability for our exposure under these
guarantees. At December 26, 2009, we have recorded an immaterial
liability for our exposure under these guarantees which we consider to be
probable and estimable. If we begin to be required to perform under
these guarantees to a greater extent, our results of operations could be
negatively impacted.
See Note
2 for a further discussion of our policies regarding franchise and license
operations.
See Note
21 for a further discussion of our guarantees.
Self-Insured Property and
Casualty Losses
We record
our best estimate of the remaining cost to settle incurred self-insured property
and casualty losses. The estimate is based on the results of an
independent actuarial study and considers historical claim frequency and
severity as well as changes in factors such as our business environment, benefit
levels, medical costs and the regulatory environment that could impact overall
self-insurance costs. Additionally, a risk margin to cover unforeseen
events that may occur over the several years it takes for claims to settle is
included in our reserve, increasing our confidence level that the recorded
reserve is adequate.
See Note
21 for a further discussion of our insurance programs.
Pension
Plans
Certain
of our employees are covered under defined benefit pension plans. The
most significant of these plans are in the U.S. We have recorded the
under-funded status of $175 million for these U.S. plans as a pension liability
in our Consolidated Balance Sheet as of December 26, 2009. These U.S.
plans had a projected benefit obligation (“PBO”) of $1,010 million and a fair
value of plan assets of $835 million at December 26, 2009.
The PBO
reflects the actuarial present value of all benefits earned to date by employees
and incorporates assumptions as to future compensation levels. Due to
the relatively long time frame over which benefits earned to date are expected
to be paid, our PBO’s are highly sensitive to changes in discount
rates. For our U.S. plans, we measured our PBO using a discount rate
of 6.3% at December 26, 2009. This discount rate was determined with
the assistance of our independent actuary. The primary basis for our
discount rate determination is a model that consists of a hypothetical portfolio
of ten or more corporate debt instruments rated Aa or higher by Moody’s with
cash flows that mirror our expected benefit payment cash flows under the
plans. We excluded from the model those corporate debt instruments
flagged by Moody’s for a potential downgrade and bonds with yields that were two
standard deviations or more above the mean. In considering possible
bond portfolios, the model allows the bond cash flows for a particular year to
exceed the expected benefit cash flows for that year. Such excesses
are assumed to be reinvested at appropriate one-year forward rates and used to
meet the benefit cash flows in a future year. The weighted-average
yield of this hypothetical portfolio was used to arrive at an appropriate
discount rate. We also ensure that changes in the discount rate as
compared to the prior year are consistent with the overall change in prevailing
market rates and make adjustments as necessary. A 50 basis
point increase in this discount rate would have decreased our U.S. plans’ PBO by
approximately $73 million at our measurement date. Conversely, a 50
basis point decrease in this discount rate would have increased our U.S. plans’
PBO by approximately $84 million at our measurement date.
The
pension expense we will record in 2010 is also impacted by the discount rate we
selected at our measurement date. We expect pension expense for our
U.S. plans to increase approximately $2 million to $41 million in
2010. The increase is primarily driven by increases in amortization
of net loss and interest costs, partially offset by a higher expected return on
plan assets due to increases in the plan assets balance during
2009. A 50 basis point change in our discount rate assumption at our
measurement date would impact our 2010 U.S. pension expense by approximately $13
million.
The
assumption we make regarding our expected long-term rates of return on plan
assets also impacts our pension expense. Our estimated long-term rate
of return on U.S. plan assets represents the weighted-average of historical
returns for each asset category, adjusted for an assessment of current market
conditions. Our expected long-term rate of return on U.S. plan
assets, for purposes of determining 2010 pension expense, at December 26, 2009
was 7.75%. We believe this rate is appropriate given the composition
of our plan assets and historical market returns thereon. A one
percentage point increase or decrease in our expected long-term rate of return
on plan assets assumption would decrease or increase, respectively, our 2010
U.S. pension plan expense by approximately $9 million.
The
losses our U.S. plan assets have experienced, along with a decrease in discount
rates over time, have largely contributed to an unrecognized pre-tax net loss of
$346 million included in Accumulated other comprehensive income (loss) for the
U.S. plans at December 26, 2009. For purposes of determining 2009
expense, our funded status was such that we recognized $13 million of net loss
in net periodic benefit cost. We will recognize approximately $23
million of such loss in 2010.
See Note
15 for further discussion of our pension and post-retirement
plans.
Stock Options and Stock
Appreciation Rights Expense
Compensation
expense for stock options and stock appreciation rights (“SARs”) is estimated on
the grant date using a Black-Scholes option pricing model. Our
specific weighted-average assumptions for the risk-free interest rate, expected
term, expected volatility and expected dividend yield are documented in Note
16. Additionally, we estimate pre-vesting forfeitures for purposes of
determining compensation expense to be recognized. Future expense
amounts for any particular quarterly or annual period could be affected by
changes in our assumptions or changes in market conditions.
We have
determined that it is appropriate to group our awards into two homogeneous
groups when estimating expected term and pre-vesting
forfeitures. These groups consist of grants made primarily to
restaurant-level employees under our Restaurant General Manager Stock Option
Plan (the “RGM Plan”) and grants made to executives under our other stock award
plans. Historically, approximately 10% - 15% of total options and
SARs granted have been made under the RGM Plan.
Grants
under the RGM Plan typically cliff vest after four years and grants made to
executives under our other stock award plans typically have a graded vesting
schedule and vest 25% per year over four years. We use a single
weighted-average expected term for our awards that have a graded vesting
schedule. We reevaluate our expected term assumptions using
historical exercise and post-vesting employment termination behavior on a
regular basis. Based on the results of this analysis, we have
determined that five years and six years are appropriate expected terms for
awards to restaurant level employees and to executives,
respectively.
Upon each
stock award grant we reevaluate the expected volatility, including consideration
of both historical volatility of our stock as well as implied volatility
associated with our traded options. We have estimated forfeitures
based on historical data. Based on such data, we believe that
approximately 50% of all awards granted under the RGM Plan will be forfeited and
approximately 25% of all awards granted to above-store executives will be
forfeited.
Income
Taxes
At
December 26, 2009, we had a valuation allowance of $187 million primarily to
reduce our net operating loss and tax credit carryforward benefits of $230
million, as well as our other deferred tax assets, to amounts that will more
likely than not be realized. The net operating loss and tax credit
carryforwards exist in state and foreign jurisdictions that have varying
carryforward periods and restrictions on usage, including approximately $110
million in certain foreign jurisdictions that may be carried forward
indefinitely. The estimation of future taxable income in these
jurisdictions and our resulting ability to utilize net operating loss and tax
credit carryforwards can significantly change based on future events, including
our determinations as to the feasibility of certain tax planning
strategies. Thus, recorded valuation allowances may be subject to
material future changes.
As a
matter of course, we are regularly audited by federal, state and foreign tax
authorities. We recognize the benefit of positions taken or expected
to be taken in our tax returns in our Income tax provision when it is more
likely than not (i.e. a likelihood of more than fifty percent) that the position
would be sustained upon examination by these tax authorities. A
recognized tax position is then measured at the largest amount of benefit that
is greater than fifty percent likely of being realized upon
settlement. At December 26, 2009, we had $301 million of unrecognized
tax benefits, $259 million of which, if recognized, would affect the effective
tax rate. We evaluate unrecognized tax benefits, including interest
thereon, on a quarterly basis to ensure that they have been appropriately
adjusted for events, including audit settlements, which may impact our ultimate
payment for such exposures.
Additionally,
we have not recorded the deferred tax impact for certain undistributed earnings
from our foreign subsidiaries totaling approximately $875 million at December
26, 2009, as we believe these amounts are indefinitely reinvested. If
our intentions were to change in the future based on a change in circumstances,
deferred tax may need to be provided that could materially impact income
taxes.
See Note
19 for a further discussion of our income taxes.
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market
Risk.
|
The
Company is exposed to financial market risks associated with interest rates,
foreign currency exchange rates and commodity prices. In the normal
course of business and in accordance with our policies, we manage these risks
through a variety of strategies, which may include the use of derivative
financial and commodity instruments to hedge our underlying
exposures. Our policies prohibit the use of derivative instruments
for trading purposes, and we have procedures in place to monitor and control
their use.
Interest Rate
Risk
We have a
market risk exposure to changes in interest rates, principally in the
U.S. We attempt to minimize this risk and lower our overall borrowing
costs through the utilization of derivative financial instruments, primarily
interest rate swaps. These swaps are entered into with financial
institutions and have reset dates and critical terms that match those of the
underlying debt. Accordingly, any change in market value associated
with interest rate swaps is offset by the opposite market impact on the related
debt.
At
December 26, 2009 and December 27, 2008, a hypothetical 100 basis point increase
in short-term interest rates would result, over the following twelve-month
period, in a reduction of approximately $3 million and $9 million, respectively,
in income before income taxes. The estimated reductions are based
upon the current level of variable rate debt and assume no changes in the volume
or composition of that debt and include no impact from interest income related
to cash and cash equivalents. In addition, the fair value of our
derivative financial instruments at December 26, 2009 and December 27, 2008
would decrease approximately $20 million and $27 million,
respectively. The fair value of our Senior Unsecured Notes at
December 26, 2009 and December 27, 2008 would decrease approximately $181
million and $120 million, respectively. Fair value was determined
based on the present value of expected future cash flows considering the risks
involved and using discount rates appropriate for the duration.
Foreign Currency Exchange
Rate Risk
The
combined International Division and China Division Operating Profits constitute
more than 60% of our Operating Profit in 2009, excluding unallocated income
(expenses). In addition, the Company’s net asset exposure (defined as
foreign currency assets less foreign currency liabilities) totaled approximately
$2.6 billion as of December 26, 2009. Operating in international markets exposes
the Company to movements in foreign currency exchange rates. The
Company’s primary exposures result from our operations in Asia-Pacific, Europe
and the Americas. Changes in foreign currency exchange rates would
impact the translation of our investments in foreign operations, the fair value
of our foreign currency denominated financial instruments and our reported
foreign currency denominated earnings and cash flows. For the fiscal
year ended December 26, 2009, Operating Profit would have decreased
approximately $120 million if all foreign currencies had uniformly weakened 10%
relative to the U.S. dollar. The estimated reduction assumes no
changes in sales volumes or local currency sales or input prices.
We
attempt to minimize the exposure related to our investments in foreign
operations by financing those investments with local currency debt when
practical. In addition, we attempt to minimize the exposure related
to foreign currency denominated financial instruments by purchasing goods and
services from third parties in local currencies when practical. Consequently,
foreign currency denominated financial instruments consist primarily of
intercompany short-term receivables and payables. At times, we
utilize forward contracts to reduce our exposure related to these intercompany
short-term receivables and payables. The notional amount and maturity
dates of these contracts match those of the underlying receivables or payables
such that our foreign currency exchange risk related to these instruments is
minimized.
Commodity Price
Risk
We are
subject to volatility in food costs as a result of market risk associated with
commodity prices. Our ability to recover increased costs through
higher pricing is, at times, limited by the competitive environment in which we
operate. We manage our exposure to this risk primarily through
pricing agreements with our vendors.
Item
8.
|
Financial
Statements and Supplementary Data.
|
INDEX
TO FINANCIAL INFORMATION
|
Page
Reference
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
60
|
|
|
|
|
Consolidated
Statements of Income for the fiscal years ended December 26, 2009,
December 27, 2008 and December 29, 2007
|
61
|
|
|
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended December 26, 2009,
December 27, 2008 and December 29, 2007
|
62
|
|
|
|
|
Consolidated
Balance Sheets as of December 26, 2009 and December 27,
2008
|
63
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity (Deficit) and Comprehensive Income
(Loss) for the fiscal years ended December 26, 2009, December 27, 2008 and
December 29, 2007
|
64
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
65
|
|
|
|
|
Management’s
Responsibility for Financial Statements
|
116
|
|
Financial
Statement Schedules
No
schedules are required because either the required information is not present or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the above listed financial
statements or notes thereto.
Report of Independent Registered Public
Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.
We have
audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and
Subsidiaries (YUM) as of December 26, 2009 and December 27, 2008, and the
related consolidated statements of income, cash flows, and shareholders’ equity
(deficit) and comprehensive income (loss) for each of the fiscal years in the
three-year period ended December 26, 2009. We also have audited YUM’s
internal control over financial reporting as of December 26, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. YUM’s management is responsible for these consolidated
financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Item 9A, “Management’s Report
on Internal Control over Financial Reporting”. Our responsibility is to express
an opinion on these consolidated financial statements and an opinion on YUM’s
internal control over financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of YUM as of December 26,
2009 and December 27, 2008, and the results of its operations and its cash flows
for each of the fiscal years in the three-year period ended December 26,
2009, in conformity with U.S. generally accepted accounting principles. Also in
our opinion, YUM maintained, in all material respects, effective internal
control over financial reporting as of December 26, 2009, based on criteria
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
As
discussed in Note 2 to the consolidated financial statements, in 2009 YUM
changed its method of reporting non-controlling interests due to the adoption of
new accounting requirements issued by the FASB.
/s/ KPMG
LLP
Louisville,
Kentucky
February 17,
2010
Consolidated Statements of
Income
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 26, 2009, December 27, 2008 and December 29,
2007
(in
millions, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
9,413
|
|
|
|
$
|
9,843
|
|
|
|
$
|
9,100
|
|
Franchise
and license fees and income
|
|
|
1,423
|
|
|
|
|
1,461
|
|
|
|
|
1,335
|
|
Total
revenues
|
|
|
10,836
|
|
|
|
|
11,304
|
|
|
|
|
10,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food
and paper
|
|
|
3,003
|
|
|
|
|
3,239
|
|
|
|
|
2,824
|
|
Payroll
and employee benefits
|
|
|
2,154
|
|
|
|
|
2,370
|
|
|
|
|
2,305
|
|
Occupancy
and other operating expenses
|
|
|
2,777
|
|
|
|
|
2,856
|
|
|
|
|
2,644
|
|
Company
restaurant expenses
|
|
|
7,934
|
|
|
|
|
8,465
|
|
|
|
|
7,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,221
|
|
|
|
|
1,342
|
|
|
|
|
1,293
|
|
Franchise
and license expenses
|
|
|
118
|
|
|
|
|
99
|
|
|
|
|
59
|
|
Closures
and impairment (income) expenses
|
|
|
103
|
|
|
|
|
43
|
|
|
|
|
35
|
|
Refranchising
(gain) loss
|
|
|
(26
|
)
|
|
|
|
(5
|
)
|
|
|
|
(11
|
)
|
Other
(income) expense
|
|
|
(104
|
)
|
|
|
|
(157
|
)
|
|
|
|
(71
|
)
|
Total
costs and expenses, net
|
|
|
9,246
|
|
|
|
|
9,787
|
|
|
|
|
9,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
1,590
|
|
|
|
|
1,517
|
|
|
|
|
1,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
194
|
|
|
|
|
226
|
|
|
|
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
1,396
|
|
|
|
|
1,291
|
|
|
|
|
1,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
313
|
|
|
|
|
319
|
|
|
|
|
282
|
|
Net
Income – including noncontrolling interest
|
|
|
1,083
|
|
|
|
|
972
|
|
|
|
|
909
|
|
Net
Income – noncontrolling interest
|
|
|
12
|
|
|
|
|
8
|
|
|
|
|
—
|
|
Net
Income – YUM! Brands, Inc.
|
|
$
|
1,071
|
|
|
|
$
|
964
|
|
|
|
$
|
909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
2.28
|
|
|
|
$
|
2.03
|
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
2.22
|
|
|
|
$
|
1.96
|
|
|
|
$
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared Per Common Share
|
|
$
|
0.80
|
|
|
|
$
|
0.72
|
|
|
|
$
|
0.45
|
|
See accompanying Notes to Consolidated Financial
Statements.
|
Consolidated
Statements of Cash Flows
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 26, 2009, December 27, 2008 and December 29,
2007
(in
millions)
|
|
2009
|
|
|
2008
|
|
|
2007
|
Cash
Flows – Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income – including noncontrolling interest
|
|
$
|
1,083
|
|
|
|
$
|
972
|
|
|
|
$
|
909
|
|
Depreciation
and amortization
|
|
|
580
|
|
|
|
|
556
|
|
|
|
|
542
|
|
Closures
and impairment (income) expenses
|
|
|
103
|
|
|
|
|
43
|
|
|
|
|
35
|
|
Refranchising
(gain) loss
|
|
|
(26
|
)
|
|
|
|
(5
|
)
|
|
|
|
(11
|
)
|
Contributions
to defined benefit pension plans
|
|
|
(280
|
)
|
|
|
|
(66
|
)
|
|
|
|
(8
|
)
|
Gain
upon consolidation of a former unconsolidated affiliate in
China
|
|
|
(68
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Gain
on sale of interest in Japan unconsolidated affiliate
|
|
|
—
|
|
|
|
|
(100
|
)
|
|
|
|
—
|
|
Deferred
income taxes
|
|
|
72
|
|
|
|
|
1
|
|
|
|
|
(41
|
)
|
Equity
income from investments in unconsolidated affiliates
|
|
|
(36
|
)
|
|
|
|
(41
|
)
|
|
|
|
(51
|
)
|
Distributions
of income received from unconsolidated affiliates
|
|
|
31
|
|
|
|
|
41
|
|
|
|
|
40
|
|
Excess
tax benefit from share-based compensation
|
|
|
(59
|
)
|
|
|
|
(44
|
)
|
|
|
|
(74
|
)
|
Share-based
compensation expense
|
|
|
56
|
|
|
|
|
59
|
|
|
|
|
61
|
|
Changes
in accounts and notes receivable
|
|
|
3
|
|
|
|
|
(6
|
)
|
|
|
|
(4
|
)
|
Changes
in inventories
|
|
|
27
|
|
|
|
|
(8
|
)
|
|
|
|
(31
|
)
|
Changes
in prepaid expenses and other current assets
|
|
|
(7
|
)
|
|
|
|
4
|
|
|
|
|
(6
|
)
|
Changes
in accounts payable and other current liabilities
|
|
|
(62
|
)
|
|
|
|
18
|
|
|
|
|
102
|
|
Changes
in income taxes payable
|
|
|
(95
|
)
|
|
|
|
39
|
|
|
|
|
70
|
|
Other
non-cash charges and credits, net
|
|
|
82
|
|
|
|
|
58
|
|
|
|
|
18
|
|
Net
Cash Provided by Operating Activities
|
|
|
1,404
|
|
|
|
|
1,521
|
|
|
|
|
1,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
spending
|
|
|
(797
|
)
|
|
|
|
(935
|
)
|
|
|
|
(726
|
)
|
Proceeds
from refranchising of restaurants
|
|
|
194
|
|
|
|
|
266
|
|
|
|
|
117
|
|
Acquisition
of restaurants from franchisees
|
|
|
(24
|
)
|
|
|
|
(35
|
)
|
|
|
|
(4
|
)
|
Acquisitions
and disposals of investments
|
|
|
(115
|
)
|
|
|
|
—
|
|
|
|
|
128
|
|
Sales
of property, plant and equipment
|
|
|
34
|
|
|
|
|
72
|
|
|
|
|
56
|
|
Other,
net
|
|
|
(19
|
)
|
|
|
|
(9
|
)
|
|
|
|
13
|
|
Net
Cash Used in Investing Activities
|
|
|
(727
|
)
|
|
|
|
(641
|
)
|
|
|
|
(416
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
499
|
|
|
|
|
375
|
|
|
|
|
1,195
|
|
Repayments
of long-term debt
|
|
|
(528
|
)
|
|
|
|
(268
|
)
|
|
|
|
(24
|
)
|
Revolving
credit facilities, three months or less, net
|
|
|
(295
|
)
|
|
|
|
279
|
|
|
|
|
(149
|
)
|
Short-term
borrowings by original maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than three months – proceeds
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
1
|
|
More
than three months – payments
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(184
|
)
|
Three
months or less, net
|
|
|
(8
|
)
|
|
|
|
(11
|
)
|
|
|
|
(8
|
)
|
Repurchase
shares of Common Stock
|
|
|
—
|
|
|
|
|
(1,628
|
)
|
|
|
|
(1,410
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
59
|
|
|
|
|
44
|
|
|
|
|
74
|
|
Employee
stock option proceeds
|
|
|
113
|
|
|
|
|
72
|
|
|
|
|
112
|
|
Dividends
paid on Common Stock
|
|
|
(362
|
)
|
|
|
|
(322
|
)
|
|
|
|
(273
|
)
|
Other,
net
|
|
|
(20
|
)
|
|
|
|
—
|
|
|
|
|
(12
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(542
|
)
|
|
|
|
(1,459
|
)
|
|
|
|
(678
|
)
|
Effect
of Exchange Rates on Cash and Cash Equivalents
|
|
|
(15
|
)
|
|
|
|
(11
|
)
|
|
|
|
13
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
|
120
|
|
|
|
|
(590
|
)
|
|
|
|
470
|
|
Change
in Cash and Cash Equivalents due to consolidation of entities in
China
|
|
|
17
|
|
|
|
|
17
|
|
|
|
|
—
|
|
Cash
and Cash Equivalents – Beginning of Year
|
|
|
216
|
|
|
|
|
789
|
|
|
|
|
319
|
|
Cash
and Cash Equivalents – End of Year
|
|
$
|
353
|
|
|
|
$
|
216
|
|
|
|
$
|
789
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated
Balance Sheets
YUM!
Brands, Inc. and Subsidiaries
December
26, 2009 and December 27, 2008
(in
millions)
|
|
2009
|
|
|
2008
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
353
|
|
|
|
$
|
216
|
|
Accounts
and notes receivable, net
|
|
|
239
|
|
|
|
|
229
|
|
Inventories
|
|
|
122
|
|
|
|
|
143
|
|
Prepaid
expenses and other current assets
|
|
|
314
|
|
|
|
|
172
|
|
Deferred
income taxes
|
|
|
81
|
|
|
|
|
81
|
|
Advertising
cooperative assets, restricted
|
|
|
99
|
|
|
|
|
110
|
|
Total
Current Assets
|
|
|
1,208
|
|
|
|
|
951
|
|
Property,
plant and equipment, net
|
|
|
3,899
|
|
|
|
|
3,710
|
|
Goodwill
|
|
|
640
|
|
|
|
|
605
|
|
Intangible
assets, net
|
|
|
462
|
|
|
|
|
335
|
|
Investments
in unconsolidated affiliates
|
|
|
144
|
|
|
|
|
65
|
|
Other
assets
|
|
|
544
|
|
|
|
|
561
|
|
Deferred
income taxes
|
|
|
251
|
|
|
|
|
300
|
|
Total
Assets
|
|
$
|
7,148
|
|
|
|
$
|
6,527
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities
|
|
$
|
1,413
|
|
|
|
$
|
1,473
|
|
Income
taxes payable
|
|
|
82
|
|
|
|
|
114
|
|
Short-term
borrowings
|
|
|
59
|
|
|
|
|
25
|
|
Advertising
cooperative liabilities
|
|
|
99
|
|
|
|
|
110
|
|
Total
Current Liabilities
|
|
|
1,653
|
|
|
|
|
1,722
|
|
Long-term
debt
|
|
|
3,207
|
|
|
|
|
3,564
|
|
Other
liabilities and deferred credits
|
|
|
1,174
|
|
|
|
|
1,335
|
|
Total
Liabilities
|
|
|
6,034
|
|
|
|
|
6,621
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
Common
Stock, no par value, 750 shares authorized; 469 shares and 459 shares
issued in 2009 and 2008, respectively
|
|
|
253
|
|
|
|
|
7
|
|
Retained
earnings
|
|
|
996
|
|
|
|
|
303
|
|
Accumulated
other comprehensive loss
|
|
|
(224
|
)
|
|
|
|
(418
|
)
|
Total
Shareholders’ Equity (Deficit) – YUM! Brands, Inc.
|
|
|
1,025
|
|
|
|
|
(108
|
)
|
Noncontrolling
interest
|
|
|
89
|
|
|
|
|
14
|
|
Total
Shareholders’ Equity (Deficit)
|
|
|
1,114
|
|
|
|
|
(94
|
)
|
Total
Liabilities and Shareholders’ Equity (Deficit)
|
|
$
|
7,148
|
|
|
|
$
|
6,527
|
|
See accompanying Notes to Consolidated Financial Statements.
Consolidated
Statements of Shareholders’ Equity (Deficit) and Comprehensive Income
(Loss)
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 26, 2009, December 27, 2008 and December 29,
2007
(in
millions, except per share data)
|
|
Yum!
Brands, Inc.
|
|
|
|
|
|
|
Issued
Common Stock
|
|
Retained
|
|
Accumulated
Other
Comprehensive
|
|
Noncontrolling
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income(Loss)
|
|
Interest
|
|
Total
|
Balance
at December 30, 2006
|
|
|
530
|
|
|
$
|
—
|
|
|
$
|
1,608
|
|
|
$
|
(156
|
)
|
|
$
|
—
|
|
|
$
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
909
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
93
|
|
Foreign
currency translation adjustment included in Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Pension
and post-retirement benefit plans (net of tax impact of $55
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
96
|
|
Net
unrealized loss on derivative instruments (net of tax impact of $8
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
Adjustment
for change in accounting for uncertainty in income taxes
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(42
|
)
|
|
|
(252
|
)
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,406
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $69
million)
|
|
|
10
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Compensation-related
events (includes tax impact of $5 million)
|
|
|
1
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Balance
at December 29, 2007
|
|
|
499
|
|
|
$
|
—
|
|
|
$
|
1,119
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
964
|
|
|
|
|
|
|
|
8
|
|
|
|
972
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198
|
)
|
|
|
|
|
|
|
(198
|
)
|
Foreign
currency translation adjustment included in Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
(25
|
)
|
Pension
and post-retirement benefit plans (net of tax impact of $114
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
(208
|
)
|
Net
unrealized loss on derivative instruments (net of tax impact of $4
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534
|
|
Consolidation
of a former unconsolidated affiliate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
Adjustment
to change pension plans measurement dates (net of tax impact of $4
million)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
(339
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
(345
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(47
|
)
|
|
|
(181
|
)
|
|
|
(1,434
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,615
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $40
million)
|
|
|
6
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Compensation-related
events (includes tax impact of $6 million)
|
|
|
1
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
Balance
at December 27, 2008
|
|
|
459
|
|
|
$
|
7
|
|
|
$
|
303
|
|
|
$
|
(418
|
)
|
|
$
|
14
|
|
|
$
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
|
|
|
|
|
|
12
|
|
|
|
1,083
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
Pension
and post-retirement benefit plans (net of tax impact of $9
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
13
|
|
Net
unrealized gain on derivative instruments (net of tax impact of $3
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,277
|
|
Purchase
of subsidiary shares from noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
70
|
|
Dividends
declared
|
|
|
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
|
|
|
|
(7
|
)
|
|
|
(385
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $57
million)
|
|
|
10
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
Compensation-related
events (includes tax impact of $2 million)
|
|
|
—
|
|
|
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
Balance
at December 26, 2009
|
|
|
469
|
|
|
$
|
253
|
|
|
$
|
996
|
|
|
$
|
(224
|
)
|
|
$
|
89
|
|
|
$
|
1,114
|
|
See accompanying Notes to Consolidated Financial Statements.
Notes
to Consolidated Financial Statements
(Tabular
amounts in millions, except share data)
Note
1 – Description of Business
YUM!
Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the
“Company”) comprises the worldwide operations of KFC, Pizza Hut, Taco Bell, Long
John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”)
(collectively the “Concepts”). YUM is the world’s largest quick
service restaurant company based on the number of system units, with more than
37,000 units of which approximately 47% are located outside the U.S. in more
than 110 countries and territories. YUM was created as an
independent, publicly-owned company on October 6, 1997 (the “Spin-off Date”) via
a tax-free distribution by our former parent, PepsiCo, Inc., of our Common Stock
to its shareholders. References to YUM throughout these Consolidated
Financial Statements are made using the first person notations of “we,” “us” or
“our.”
Through
our widely-recognized Concepts, we develop, operate, franchise and license a
system of both traditional and non-traditional quick service
restaurants. Each Concept has proprietary menu items and emphasizes
the preparation of food with high quality ingredients as well as unique recipes
and special seasonings to provide appealing, tasty and attractive food at
competitive prices. Our traditional restaurants feature dine-in,
carryout and, in some instances, drive-thru or delivery
service. Non-traditional units, which are principally licensed
outlets, include express units and kiosks which have a more limited menu and
operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a
full-scale traditional outlet would not be practical or efficient. We
also operate multibrand units, where two or more of our Concepts are operated in
a single unit. In addition, we continue to pursue the multibrand
combination of Pizza Hut and WingStreet, a flavored chicken wings concept we
have developed.
YUM
consists of six operating segments: KFC-U.S., Pizza Hut-U.S., Taco
Bell-U.S., LJS/A&W-U.S., YUM Restaurants International (“YRI” or
“International Division”) and YUM Restaurants China (“China
Division”). For financial reporting purposes, management considers
the four U.S. operating segments to be similar and, therefore, has aggregated
them into a single reportable operating segment (“U.S.”). The China
Division includes mainland China (“China”), Thailand and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Note
2 – Summary of Significant Accounting Policies
Our
preparation of the accompanying Consolidated Financial Statements in conformity
with Generally Accepted Accounting Principles (“GAAP”) in the United States of
America requires us to make estimates and assumptions that affect reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from these estimates. The Company evaluated subsequent
events through the date the financial statements were issued and filed with the
Securities and Exchange Commission.
Principles of Consolidation and Basis
of Preparation. Intercompany accounts and transactions have
been eliminated. Certain investments in businesses that operate our Concepts and
other restaurant concepts are accounted for by the equity method. Our
lack of majority voting rights precludes us from controlling these affiliates,
and thus we do not consolidate these affiliates. Our share of the net
income or loss of those unconsolidated affiliates is included in Other (income)
expense. On January 1, 2008 we began consolidating the entity that
operates the KFCs in Beijing, China that was previously accounted for using the
equity method. Additionally, in the second quarter of 2009 we began
consolidating the entity that operates the KFCs in Shanghai,
China. The increases in cash related to the consolidation of these
entities’ cash balances ($17 million in both instances) are presented as a
single line item on our Consolidated Statements of Cash Flows.
In our
2008 Consolidated Financial Statements, we reported Operating profit
attributable to the non-controlling interest in the Beijing entity in Other
(income) expense and the related tax impact as a reduction to our Income tax
provision. Additionally, we reported the equity attributable to the
Beijing entity within Other liabilities and deferred credits. As
required at the beginning of 2009, we began reporting Net income attributable to
the non-controlling interest in Beijing separately on the face of our
Consolidated Statements of Income. Also as required, the portion of
equity in the entity not attributable to the Company began being reported within
equity, separately from the Company’s equity on the Consolidated Balance
Sheet. These requirements were retroactive to our previous
Consolidated Financial Statements and we have restated 2008
accordingly.
See Note
5 for a further description of the accounting for the noncontrolling interests
in the Beijing and Shanghai entities and discussions on the impact on our
Consolidated Financial Statements.
We
participate in various advertising cooperatives with our franchisees and
licensees established to collect and administer funds contributed for use in
advertising and promotional programs designed to increase sales and enhance the
reputation of the Company and its franchise owners. Contributions to the
advertising cooperatives are required for both Company operated and franchise
restaurants and are generally based on a percent of restaurant
sales. In certain of these cooperatives we possess majority voting
rights, and thus control and consolidate the cooperatives. We report
all assets and liabilities of these advertising cooperatives that we consolidate
as advertising cooperative assets, restricted and advertising cooperative
liabilities in the Consolidated Balance Sheet. The advertising
cooperatives assets, consisting primarily of cash received from the Company and
franchisees and accounts receivable from franchisees, can only be used for
selected purposes and are considered restricted. The advertising
cooperative liabilities represent the corresponding obligation arising from the
receipt of the contributions to purchase advertising and promotional
programs. As the contributions to these cooperatives are designated
and segregated for advertising, we act as an agent for the franchisees and
licensees with regard to these contributions. Thus, we do not reflect
franchisee and licensee contributions to these cooperatives in our Consolidated
Statements of Income or Consolidated Statements of Cash Flows.
Fiscal Year. Our
fiscal year ends on the last Saturday in December and, as a result, a 53rd week
is added every five or six years. The Company’s next fiscal year with
53 weeks will be 2011. The first three quarters of each fiscal year
consist of 12 weeks and the fourth quarter consists of 16 weeks in fiscal years
with 52 weeks and 17 weeks in fiscal years with 53 weeks. Our
subsidiaries operate on similar fiscal calendars with period or month end dates
suited to their businesses. Our U.S. and China subsidiaries’ period
end dates are within one week of YUM’s period end date. All of our
international businesses except China close one period or one month earlier to
facilitate consolidated reporting.
Foreign
Currency. The functional currency determination for operations
outside the U.S. is based upon a number of economic factors, including but not
limited to cash flows and financing transactions. Income and expense
accounts are translated into U.S. dollars at the average exchange rates
prevailing during the period. Assets and liabilities are translated
into U.S. dollars at exchange rates in effect at the balance sheet
date. Resulting translation adjustments are recorded in Accumulated
other comprehensive income (loss) in the Consolidated Balance
Sheet. Gains and losses arising from the impact of foreign currency
exchange rate fluctuations on transactions in foreign currency are included in
Other (income) expense in our Consolidated Statement of Income.
Reclassifications. We
have reclassified certain items in the accompanying Consolidated Financial
Statements and Notes thereto for prior periods to be comparable with the
classification for the fiscal year ended December 26, 2009. 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 fees and income as opposed to a reduction in Franchise and
license expenses, as it has historically been reported. For the years
ended December 27, 2008 and December 29, 2007 this resulted in increases of $25
million and $19 million, respectively in both Franchise and license expenses and
Franchise and license fees and income in our Consolidated Statement of
Income. A similar amount of rental income was reported in Franchise
and license fees and income in the year ended December 26,
2009.
In
connection with our plan to transform our U.S. business we began reflecting
increased allocations of certain expenses in our reported segment results during
2009 that were previously reported as unallocated and corporate General and
administrative (“G&A”) expenses. 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 years ended December 27, 2008
and December 29, 2007 to be consistent with the current period
presentation.
The
following table summarizes the 2008 and 2007 impact of the revised
allocations by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
2008
|
|
2007
|
|
|
U.S.
G&A
|
|
|
|
|
|
|
|
|
|
$
|
53
|
|
|
$
|
54
|
|
|
|
|
|
YRI
G&A
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
Unallocated
and corporate G&A expenses
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
(60
|
)
|
|
|
|
|
These
reclassifications had no effect on previously reported Net Income – YUM! Brands,
Inc.
Franchise and License
Operations. We execute franchise or license agreements for
each unit which set out the terms of our arrangement with the franchisee or
licensee. Our franchise and license agreements typically require the
franchisee or licensee to pay an initial, non-refundable fee and continuing fees
based upon a percentage of sales. Subject to our approval and their
payment of a renewal fee, a franchisee may generally renew the franchise
agreement upon its expiration.
The
internal costs we incur to provide support services to our franchisees and
licensees are charged to G&A expenses as incurred. Certain direct
costs of our franchise and license operations are charged to franchise and
license expenses. These costs include provisions for estimated
uncollectible fees, rent or depreciation expense associated with restaurants we
sublease or lease to franchisees, franchise and license marketing funding,
amortization expense for franchise related intangible assets and certain other
direct incremental franchise and license support costs.
We
monitor the financial condition of our franchisees and licensees and record
provisions for estimated losses on receivables when we believe that our
franchisees or licensees are unable to make their required
payments. While we use the best information available in making our
determination, the ultimate recovery of recorded receivables is also dependent
upon future economic events and other conditions that may be beyond our
control. Net provisions for uncollectible franchise and license
receivables of $11 million, $8 million and $2 million were included in Franchise
and license expenses in 2009, 2008 and 2007, respectively.
Revenue
Recognition. Revenues from Company operated restaurants are
recognized when payment is tendered at the time of sale. The Company
presents sales net of sales tax and other sales related taxes. Income
from our franchisees and licensees includes initial fees, continuing fees,
renewal fees and rental income. We recognize initial fees received
from a franchisee or licensee as revenue when we have performed substantially
all initial services required by the franchise or license agreement, which is
generally upon the opening of a store. We recognize continuing fees
based upon a percentage of franchisee and licensee sales and rental income as
earned. We recognize renewal fees when a renewal agreement with a
franchisee or licensee becomes effective. We include initial fees
collected upon the sale of a restaurant to a franchisee in Refranchising (gain)
loss.
Direct Marketing
Costs. We charge direct marketing costs to expense ratably in
relation to revenues over the year in which incurred and, in the case of
advertising production costs, in the year the advertisement is first
shown. Deferred direct marketing costs, which are classified as
prepaid expenses, consist of media and related advertising production costs
which will generally be used for the first time in the next fiscal year and have
historically not been significant. To the extent we participate in
advertising cooperatives, we expense our contributions as
incurred. Our advertising expenses were $548 million, $584 million
and $556 million in 2009, 2008 and 2007, respectively. We report
substantially all of our direct marketing costs in Occupancy and other operating
expenses.
Research and Development
Expenses. Research and development expenses, which we expense
as incurred, are reported in G&A expenses. Research and
development expenses were $31 million, $34 million and $39 million in 2009, 2008
and 2007, respectively.
Share-Based Employee
Compensation. We recognize all share-based payments to
employees, including grants of employee stock options and stock appreciation
rights (“SARs”), in the financial statements as compensation cost over the
service period based on their fair value on the date of grant. This
compensation cost is recognized over the service period on a straight-line basis
for the fair value of awards that actually vest. We report this
compensation cost consistent with the other compensation costs for the employee
recipient in either Payroll and employee benefits or G&A
expenses.
Impairment or Disposal of Property,
Plant and Equipment. Property, plant and equipment
(“PP&E”) is tested for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable. The assets are not recoverable if their carrying value
is less than the undiscounted cash flows we expect to generate from such
assets. If the assets are not deemed to be recoverable, impairment is
measured based on the excess of their carrying value over their fair
value.
For
purposes of impairment testing for PP&E, we have concluded that an
individual restaurant is the lowest level of cash flows unless our intent is to
refranchise restaurants as a group. We review our long-lived assets
of restaurants (primarily PP&E and allocated intangible assets subject to
amortization) that are currently operating and have not been offered for
refranchise semi-annually for impairment, or whenever events or changes in
circumstances indicate that the carrying amount of a restaurant may not be
recoverable. We use two consecutive years of operating losses as our
primary indicator of potential impairment for our semi-annual impairment testing
of these restaurant assets. We evaluate the recoverability of these
restaurant assets by comparing the estimated undiscounted future cash flows,
which are based on our entity specific assumptions, to the carrying value of
such assets. For restaurant assets that are not deemed to be
recoverable, we write down an impaired restaurant to its estimated fair value,
which becomes its new cost basis. Fair value is an estimate of the
price a franchisee would pay for the restaurant and its related assets and is
determined by discounting the estimated future after-tax cash flows of the
restaurant. The after-tax cash flows incorporate reasonable
assumptions we believe a franchisee would make such as sale growth and margin
improvement. The discount rate used in the fair value calculation is
our estimate of the required rate of return that a franchisee would expect to
receive when purchasing a similar restaurant and the related long-lived
assets. The discount rate incorporates rates of returns for
historical refranchising market transactions and is commensurate with the risks
and uncertainty inherent in the forecasted cash flows.
In
executing our refranchising initiatives, we most often offer groups of
restaurants. When we have offered to refranchise stores or groups of
stores for a price less than their carrying value, but do not believe the
store(s) have met the criteria to be classified as held for sale, we review the
restaurants for impairment. We evaluate the recoverability of
these restaurant assets at the offer date by comparing estimated sales proceeds
plus holding period cash flows, if any, to the carrying value of the restaurant
or group of restaurants. For restaurant assets that are not deemed to
be recoverable, we recognize impairment for any excess of carrying value over
the fair value of the restaurants which is based on the expected net sales
proceeds. We recognize any such impairment charges in Refranchising
(gain) loss. We classify restaurants as held for sale and suspend
depreciation and amortization when (a) we make a decision to refranchise; (b)
the stores can be immediately removed from operations; (c) we have begun an
active program to locate a buyer; (d) significant changes to the plan of sale
are not likely; and (e) the sale is probable within one
year. Restaurants classified as held for sale are recorded at the
lower of their carrying value or fair value less cost to sell. We
recognize estimated losses on restaurants that are classified as held for sale
in Refranchising (gain) loss.
Refranchising
(gain) loss includes the gains or losses from the sales of our restaurants to
new and existing franchisees, including impairment charges discussed above, and
the related initial franchise fees. We recognize gains on restaurant
refranchisings when the sale transaction closes, the franchisee has a minimum
amount of the purchase price in at-risk equity, and we are satisfied that the
franchisee can meet its financial obligations. If the criteria for
gain recognition are not met, we defer the gain to the extent we have a
remaining financial exposure in connection with the sales
transaction. Deferred gains are recognized when the gain recognition
criteria are met or as our financial exposure is reduced. When we
make a decision to retain a store, or group of stores, previously held for sale,
we revalue the store at the lower of its (a) net book value at our original sale
decision date less normal depreciation and amortization that would have been
recorded during the period held for sale or (b) its current fair
value. This value becomes the store’s new cost basis. We
record any resulting difference between the store’s carrying amount and its new
cost basis to Closure and impairment (income) expense.
When we
decide to close a restaurant it is reviewed for impairment and depreciable lives
are adjusted based on the expected disposal date. Other costs
incurred when closing a restaurant such as costs of disposing of the assets as
well as other facility-related expenses from previously closed stores are
generally expensed as incurred. Additionally, at the date we cease
using a property under an operating lease, we record a liability for the net
present value of any remaining lease obligations, net of estimated sublease
income, if any. Any costs recorded upon store closure as well as any
subsequent adjustments to liabilities for remaining lease obligations as a
result of lease termination or changes in estimates of sublease income are
recorded in Closures and impairment (income) expenses. To the
extent we sell assets, primarily land, associated with a closed store, any gain
or loss upon that sale is also recorded in Closures and impairment (income)
expenses.
Considerable
management judgment is necessary to estimate future cash flows, including cash
flows from continuing use, terminal value, sublease income and refranchising
proceeds. Accordingly, actual results could vary significantly from
our estimates.
Impairment of Investments in
Unconsolidated Affiliates. We record impairment charges
related to an investment in an unconsolidated affiliate whenever events or
circumstances indicate that a decrease in the fair value of an investment has
occurred which is other than temporary. In addition, we evaluate our
investments in unconsolidated affiliates for impairment when they have
experienced two consecutive years of operating losses. We recorded no
impairment associated with our investments in unconsolidated affiliates during
2009, 2008 and 2007.
Guarantees. We
recognize, at inception of a guarantee, a liability for the fair value of
certain obligations undertaken. The majority of our guarantees are
issued as a result of assigning our interest in obligations under operating
leases as a condition to the refranchising of certain Company
restaurants. We recognize a liability for the fair value of such
lease guarantees upon refranchising and upon subsequent renewals of such leases
when we remain contingently liable. The related expense is included
in Refranchising (gain) loss. The related expense for other franchise
support guarantees not associated with a refranchising transaction is included
in Franchise and license expense.
Income Taxes. We record deferred tax assets and liabilities for
the future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment
date. Additionally, in determining the need for recording a
valuation allowance against the carrying amount of deferred tax assets, we
considered the amount of taxable income and periods over which it must be
earned, actual levels of past taxable income and known trends, events or
transactions that are expected to affect future levels of taxable
income. Where we determined that it is more likely than not that all
or a portion of an asset will not be realized, we recorded a valuation
allowance.
We
recognize the benefit of positions taken or expected to be taken in our tax
returns in our Income tax provision when it is more likely than not (i.e. a
likelihood of more than fifty percent) that the position would be sustained upon
examination by tax authorities. A recognized tax position is then
measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement. Changes in judgment that
result in subsequent recognition, derecognition or change in a measurement of a
tax position taken in a prior annual period (including any related interest and
penalties) are recognized as a discrete item in the interim period in which the
change occurs.
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as components of its Income tax provision.
See Note
19 for a further discussion of our income taxes.
Fair Value
Measurements. Fair value is the price we would receive to sell
an asset or pay to transfer a liability (exit price) in an orderly transaction
between market participants. For those assets and liabilities we
record or disclose at fair value, we determine fair value based upon the quoted
market price, if available. If a quoted market price is not available
for identical assets, we determine fair value based upon the quoted market price
of similar assets or the present value of expected future cash flows considering
the risks involved and using discount rates appropriate for the duration, and
considering counterparty performance risk. The fair values are
assigned a level within the fair value hierarchy, depending on the source of the
inputs into the calculation.
Level
1
|
Inputs
based upon quoted prices in active markets for identical
assets.
|
|
|
Level
2
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset, either directly or indirectly.
|
|
|
Level
3
|
Inputs
that are unobservable for the
asset.
|
Cash and Cash
Equivalents. Cash equivalents represent funds we have
temporarily invested (with original maturities not exceeding three months) as
part of managing our day-to-day operating cash receipts and disbursements,
including short-term, highly liquid debt securities.
Inventories. We
value our inventories at the lower of cost (computed on the first-in, first-out
method) or market.
Property, Plant and
Equipment. We state property, plant and equipment at cost less
accumulated depreciation and amortization. We calculate depreciation
and amortization on a straight-line basis over the estimated useful lives of the
assets as follows: 5 to 25 years for buildings and improvements, 3 to
20 years for machinery and equipment and 3 to 7 years for capitalized software
costs. As discussed above, we suspend depreciation and amortization
on assets related to restaurants that are held for sale.
Leases and Leasehold
Improvements. The Company leases land, buildings or both for
nearly 6,200 of its restaurants worldwide. Lease terms, which vary by
country and often include renewal options, are an important factor in
determining the appropriate accounting for leases including the initial
classification of the lease as capital or operating and the timing of
recognition of rent expense over the duration of the lease. We
include renewal option periods in determining the term of our leases when
failure to renew the lease would impose a penalty on the Company in such an
amount that a renewal appears to be reasonably assured at the inception of the
lease. The primary penalty to which we are subject is the economic
detriment associated with the existence of leasehold improvements which might be
impaired if we choose not to continue the use of the leased
property. Leasehold improvements, which are a component of buildings
and improvements described above, are amortized over the shorter of their
estimated useful lives or the lease term. We generally do not receive
leasehold improvement incentives upon opening a store that is subject to a
lease.
We
expense rent associated with leased land or buildings while a restaurant is
being constructed whether rent is paid or we are subject to a rent
holiday. Additionally, certain of the Company's operating leases
contain predetermined fixed escalations of the minimum rent during the lease
term. For leases with fixed escalating payments and/or rent holidays,
we record rent expense on a straight-line basis over the lease term, including
any option periods considered in the determination of that lease
term. Contingent rentals are generally based on sales levels in
excess of stipulated amounts, and thus are not considered minimum lease payments
and are included in rent expense when achievement of the stipulated amount is
considered probable.
Internal Development Costs and
Abandoned Site Costs. We capitalize direct costs associated
with the site acquisition and construction of a Company unit on that site,
including direct internal payroll and payroll-related costs. Only
those site-specific costs incurred subsequent to the time that the site
acquisition is considered probable are capitalized. If we
subsequently make a determination that a site for which internal development
costs have been capitalized will not be acquired or developed, any previously
capitalized internal development costs are expensed and included in G&A
expenses.
Goodwill and Intangible
Assets. From time to time, the Company acquires restaurants
from one of our Concept’s franchisees or acquires another
business. Goodwill from these acquisitions represents the excess of
the cost of a business acquired over the net of the amounts assigned to assets
acquired, including identifiable intangible assets and liabilities
assumed. The primary identifiable intangible asset we record in an
acquisition of restaurants of one of our Concepts from a franchisee is
reacquired franchise rights. If a Company restaurant is sold within
two years of acquisition, the goodwill associated with the acquisition is
written off in its entirety. If the restaurant is refranchised beyond
two years, the amount of goodwill written off is based on the relative fair
value of the refranchised restaurant to the fair value of the reporting unit, as
described below.
We do not
amortize goodwill and indefinite-lived intangible assets. We evaluate
the remaining useful life of an intangible asset that is not being amortized
each reporting period to determine whether events and circumstances continue to
support an indefinite useful life. If an intangible asset that is not
being amortized is subsequently determined to have a finite useful life, we
amortize the intangible asset prospectively over its estimated remaining useful
life. Amortizable intangible assets are amortized on a straight-line
basis to their residual value.
Goodwill
has been assigned to reporting units for purposes of impairment
testing. Our reporting units are our operating segments in the U.S.
(see Note 20) and our business units internationally (typically individual
countries). We evaluate goodwill and indefinite lived assets for
impairment on an annual basis or more often if an event occurs or circumstances
change that indicate impairments might exist. Goodwill impairment
tests consist of a comparison of each reporting unit’s fair value with its
carrying value. Fair value is the price a willing buyer would pay for
a reporting unit, and is generally estimated using discounted expected future
after-tax cash flows from Company operations and franchise
royalties. The discount rate is our estimate of the required rate of
return that a third-party buyer would expect to receive when purchasing a
business from us that constitutes a reporting unit. We believe the
discount rate is commensurate with the risks and uncertainty inherent in the
forecasted cash flows. If the carrying value of a reporting unit
exceeds its fair value, goodwill is written down to its implied fair
value. We have selected the beginning of our fourth quarter as the
date on which to perform our ongoing annual impairment test for
goodwill.
For
indefinite-lived intangible assets, our impairment test consists of a comparison
of the fair value of an intangible asset with its carrying
amount. Fair value is an estimate of the price a willing buyer would
pay for the intangible asset and is generally estimated by discounting the
expected future after-tax cash flows associated with the intangible
asset. We also perform our annual test for impairment of our
indefinite-lived intangible assets at the beginning of our fourth
quarter.
Our
definite-lived intangible assets that are not allocated to an individual
restaurant are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of the intangible asset may not
be recoverable. An intangible asset that is deemed impaired on a
undiscounted basis is written down to its estimated fair value, which is our
estimate of the price a willing buyer would pay for the intangible asset based
on discounted expected future after-tax cash flows. For purposes of
our impairment analysis, we update the cash flows that were initially used to
value the definite-lived intangible asset to reflect our current estimates and
assumptions over the asset’s future remaining life.
Derivative Financial
Instruments. Historically, our use of derivative instruments
has primarily been to hedge interest rates and foreign currency denominated
assets and liabilities. These derivative contracts are entered into
with financial institutions. We do not use derivative instruments for
trading purposes and we have procedures in place to monitor and control their
use.
We record
all derivative instruments on our Consolidated Balance Sheet at fair
value. For derivative instruments that are designated and qualify as
a fair value hedge, the gain or loss on the derivative instrument as well as the
offsetting gain or loss on the hedged item attributable to the hedged risk are
recognized in the results of operations. For derivative instruments
that are designated and qualify as a cash flow hedge, the effective portion of
the gain or loss on the derivative instrument is reported as a component of
other comprehensive income (loss) and reclassified into earnings in the same
period or periods during which the hedged transaction affects
earnings. For derivative instruments that are designated and qualify
as a net investment hedge, the effective portion of the gain or loss on the
derivative instrument is reported in the foreign currency translation component
of other comprehensive income (loss). Any ineffective portion of the
gain or loss on the derivative instrument for a cash flow hedge or net
investment hedge is recorded in the results of operations
immediately. For derivative instruments not designated as hedging
instruments, the gain or loss is recognized in the results of operations
immediately. See Note 13 for a discussion of our use of derivative
instruments, management of credit risk inherent in derivative instruments and
fair value information.
Common Stock Share
Repurchases. From time to time, we repurchase shares of our
Common Stock under share repurchase programs authorized by our Board of
Directors. Shares repurchased constitute authorized, but unissued
shares under the North Carolina laws under which we are
incorporated. Additionally, our Common Stock has no par or stated
value. Accordingly, we record the full value of share repurchases,
upon the trade date, against Common Stock except when to do so would result in a
negative balance in our Common Stock account. In such instances, on a
period basis, we record the cost of any further share repurchases as a reduction
in retained earnings. Due to the large number of share repurchases
and the increase in our Common Stock market value over the past several years,
our Common Stock balance is frequently zero at the end of any
period. Accordingly, $1,434 million and $1,154 million in share
repurchases were recorded as a reduction in Retained earnings in 2008 and 2007,
respectively. There were no shares of our Common Stock repurchased
during 2009. See Note 18 for additional information.
Pension and Post-retirement Medical
Benefits. We measure and recognize the overfunded or
underfunded status of our pension and post-retirement plans as an asset or
liability in our Consolidated Balance Sheet as of our fiscal year
end. The funded status represents the difference between the
projected benefit obligation and the fair value of plan assets. The
projected benefit obligation is the present value of benefits earned to date by
plan participants, including the effect of future salary increases, as
applicable. The difference between the projected benefit obligation
and the fair value of assets that has not previously been recognized as expense
is recorded as a component of Other comprehensive income
(loss). Prior to 2008, we measured and recognized the funded status
of certain plans on dates that did not coincide with our fiscal year
end. As required by the Financial Accounting Standards Board
(“FASB”), we changed these plans’ measurement dates in 2008 to coincide with our
fiscal year end and estimated the impact based on the measurements performed in
2007. The change in the measurement dates resulted in a decrease to
Retained Earnings of $9 million, or $6 million after-tax, for our pension plans
and $2 million, or $1 million after-tax, for our post-retirement medical plan,
respectively, during the fourth quarter of 2008.
Note 3 – Two-for-One Common Stock
Split
On May
17, 2007, the Company announced that its Board of Directors approved a
two-for-one split of the Company’s outstanding shares of Common
Stock. The stock split was effected in the form of a stock dividend
and entitled each shareholder of record at the close of business on June 1, 2007
to receive one additional share for every outstanding share of Common Stock
held. The stock dividend was distributed on June 26, 2007, with
approximately 261 million shares of Common Stock distributed. All per
share and share amounts in these Consolidated Financial Statements and Notes to
the Consolidated Financial Statements have been adjusted to reflect the stock
split.
Note 4 – Earnings Per Common Share
(“EPS”)
|
2009
|
|
|
2008
|
|
|
2007
|
Net
Income – YUM! Brands, Inc.
|
$
|
1,071
|
|
|
|
$
|
964
|
|
|
|
$
|
909
|
|
Weighted-average
common shares outstanding (for basic calculation)
|
|
471
|
|
|
|
|
475
|
|
|
|
|
522
|
|
Effect
of dilutive share-based employee compensation
|
|
12
|
|
|
|
|
16
|
|
|
|
|
19
|
|
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
|
483
|
|
|
|
|
491
|
|
|
|
|
541
|
|
Basic
EPS
|
$
|
2.28
|
|
|
|
$
|
2.03
|
|
|
|
$
|
1.74
|
|
Diluted
EPS
|
$
|
2.22
|
|
|
|
$
|
1.96
|
|
|
|
$
|
1.68
|
|
Unexercised
employee stock options and SARs (in millions) excluded from the diluted
EPS compensation(a)
|
|
13.3
|
|
|
|
|
5.9
|
|
|
|
|
5.7
|
|
(a)
|
These
unexercised employee stock options and SARs were not included in the
computation of diluted EPS because to do so would have been antidilutive
for the periods presented.
|
Note
5 – Items Affecting Comparability of Net Income and Cash
Flows
|
U.S. Business
Transformation
As part
of our plan to transform our U.S. business we took several measures (“the U.S.
business transformation measures”) in 2008 and 2009 including: expansion of our
U.S. refranchising; a reduced emphasis on multi-branding as a long-term growth
strategy; 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
years ended December 26, 2009 and December 27, 2008, we recorded a pre-tax gain
of $34 million and a pre-tax loss of $5 million from refranchising in the U.S.,
respectively. The 2008 refranchising losses were the net result of,
or offers to refranchise, stores or groups of stores in the U.S. at prices less
than their recorded carrying values.
As a
result of a decline in future profit expectations for our LJS and A&W
businesses in the U.S. due in part to the impact of a reduced emphasis on
multi-branding, we recorded a non-cash charge of $26 million, which resulted in
no related tax benefit, in the fourth quarter of 2009 to write-off the goodwill
associated with these businesses. See Note 10.
In
connection with our G&A productivity initiatives and realignment of
resources we recorded pre-tax charges of $16 million and $49 million in 2009 and
2008, respectively. The unpaid current liability for the severance
portion of these charges was $5 million and $27 million as of December 26, 2009
and December 27, 2008, respectively. Severance payments in the year
ended December 26, 2009 totaled approximately $26 million.
Additionally,
the Company recognized a reduction to Franchise and license fees and income of
$32 million, pre-tax, in the year ended December 26, 2009 related to investments
in our U.S. Brands. These investments reflect our reimbursements to
KFC franchisees for installation costs of ovens for the national launch of
Kentucky Grilled Chicken. The reimbursements were recorded as a
reduction to franchise and license fees and income as we would not have provided
the reimbursements absent the ongoing franchise relationship. In the
year ended December 27, 2008, the Company recognized pre-tax expense of $7
million related to investments in our U.S. Brands in Franchise and license
expenses.
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.
Acquisition of
Interest in Little Sheep
|
During
2009, our China Division paid approximately $103 million, in several tranches,
to purchase 27% of the outstanding common shares of Little Sheep Group Limited
(“Little Sheep”) and obtain Board of Directors representation. We
began reporting our investment in Little Sheep using the equity method of
accounting and this investment is included in Investments in unconsolidated
affiliates on our Consolidated Balance Sheet. The fair value of our
investment in Little Sheep was approximately $156 million as of December 26,
2009. Equity income recognized from our investment in Little Sheep
was not significant in the year ended December 26, 2009.
Little
Sheep is the leading brand in China’s “Hot Pot” restaurant category with
approximately 375 restaurants, primarily in China as well as Hong Kong, Japan,
Canada and the U.S.
Consolidation of a Former
Unconsolidated Affiliate in Shanghai, China
On May 4,
2009 we acquired an additional 7% ownership in the entity that operates more
than 200 KFCs in Shanghai, China for $12 million, increasing our ownership to
58%. The acquisition was driven by our desire to increase our
management control over the entity and further integrate the business with the
remainder of our KFC operations in China. This entity has
historically been accounted for as an unconsolidated affiliate under the equity
method of accounting due to the effective participation of our partners in the
significant decisions of the entity that were made in the ordinary course of
business. Concurrent with the acquisition we received additional
rights in the governance of the entity, and thus we began consolidating the
entity upon acquisition. As required by GAAP, we remeasured our
previously held 51% ownership in the entity, which had a recorded value of $17
million at the date of acquisition, at fair value and recognized a gain of $68
million accordingly. This gain, which resulted in no related income
tax expense, was recorded in Other (income) expense on our Consolidated
Statements of Income during the quarter ended June 13, 2009 and was not
allocated to any segment for performance reporting purposes.
We
recorded the following identifiable assets acquired and liabilities assumed upon
acquisition for the consolidated entity:
|
Current
assets, including cash of $17
|
$
|
27
|
|
Property,
plant and equipment
|
|
61
|
|
Goodwill
|
|
53
|
|
Intangible
assets
|
|
114
|
|
Other
long-term assets
|
|
2
|
|
Total
assets acquired
|
|
257
|
|
|
|
|
|
Current
liabilities
|
|
55
|
|
Other
long-term liabilities
|
|
35
|
|
Total
liabilities assumed
|
|
90
|
|
Net
assets acquired
|
$
|
167
|
Additionally,
$70 million was recorded as Noncontrolling interest in our Consolidated Balance
Sheet, representing the fair value of our partner’s interest in the entity’s net
assets upon acquisition. Intangible assets primarily comprise
reacquired franchise rights which are being amortized over the franchise
contract period of ten years. Goodwill is not expected to be
deductible for income tax purposes.
Under the
equity method of accounting, we previously reported our 51% share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. From the date of the
acquisition, we have reported the results of operations for the entity in the
appropriate line items of our Consolidated Statement of Income. We no
longer recorded franchise fee income for these restaurants nor did we report
Other (income) expense as we did under the equity method of
accounting. Net income attributable to our partner’s ownership
percentage is recorded as Net Income – noncontrolling interest. For
the year ended December 26, 2009 the consolidation of this entity increased
Company sales by $192 million and decreased Franchise and license fees and
income by $12 million. The consolidation of this entity positively
impacted Operating Profit by $4 million for the year ended December 26,
2009. The impact on Net Income – YUM! Brands, Inc. was not
significant to the year ended December 26, 2009.
The pro
forma impact on our results of operations if the acquisition had been completed
as of the beginning of 2009, 2008 or 2007 would not have been
significant.
Sale of Our Interest
in Our Japan Unconsolidated
Affiliate
|
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million in cash (including the impact of related foreign currency contracts
that were settled in December 2007). Our international subsidiary
that owned this interest operates on a fiscal calendar with a period end that is
approximately one month earlier than our consolidated period
close. Thus, consistent with our historical treatment of events
occurring during the lag period, the pre-tax gain on the sale of this investment
of $100 million was recorded in the quarter ended March 22,
2008. However, the cash proceeds from this transaction were
transferred from our international subsidiary to the U.S. in December 2007 and
thus were reported on our Consolidated Statement of Cash Flows for the year
ended December 29, 2007.
While we
will no longer have an ownership interest in the entity that operates both KFCs
and Pizza Huts in Japan, it will continue to be a franchisee as it was when it
operated as an unconsolidated affiliate. Excluding the one-time gain,
the sale of our interest in our Japan unconsolidated affiliate did not have a
significant impact on our results of operations for 2008 or 2009 as the Other
income we previously recorded representing our share of earnings of the
unconsolidated affiliate has historically not been significant.
Consolidation of a Former
Unconsolidated Affiliate in Beijing, China
In 2008,
we began consolidating an entity in which we have a majority ownership interest
and that operates the KFCs in Beijing, China. Our partners in this
entity are essentially state-owned enterprises. We historically did
not consolidate this entity, instead accounting for the unconsolidated affiliate
using the equity method of accounting, due to the effective participation of our
partners in the significant decisions of the entity that were made in the
ordinary course of business. Concurrent with a decision that we made
on January 1, 2008 regarding top management of the entity, we no longer believe
that our partners effectively participate in the decisions that are made in the
ordinary course of business. Accordingly, we began consolidating this
entity.
Like our
other unconsolidated affiliates, the accounting for this entity prior to 2008
resulted in royalties being reflected as Franchise and license fees and our
share of the entity’s net income being reflected in Other (income)
expense. Beginning January 1, 2008, we have reported the results of
operations for the entity in the appropriate line items of our Consolidated
Statement of Income. We no longer recorded franchise fee income for
these restaurants nor did we report Other (income) expense as we did under the
equity method of accounting. Net income attributable to our partner’s
ownership percentage is recorded as Net Income – noncontrolling
interest. For the year ended December 27, 2008 the consolidation of
this entity increased the China Division’s Company sales by approximately $300
million and decreased Franchise and license fees and income by approximately $20
million. The consolidation of this entity positively impacted
Operating Profit by approximately $20 million in 2008. The positive
impact on Operating Profit was offset by Net Income – noncontrolling interest of
$8 million and a higher Income tax provision such that there was no impact on
Net Income – YUM! Brands, Inc. for the year ended December 27, 2008. The
Consolidated Statement of Income was impacted by similar amounts for the year
ended December 26, 2009.
Facility
Actions
Refranchising
(gain) loss, Store closure (income) costs and Store impairment charges by
reportable segment are as follows:
|
|
2009
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
(34
|
)
|
|
|
$
|
—
|
|
|
|
$
|
8
|
|
|
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
$
|
13
|
|
|
|
$
|
(1
|
)
|
|
|
$
|
(3
|
)
|
|
|
$
|
9
|
|
Store
impairment charges(c)
|
|
|
33
|
|
|
|
|
19
|
|
|
|
|
16
|
|
|
|
|
68
|
|
Closure
and impairment (income) expenses(d)
|
|
$
|
46
|
|
|
|
$
|
18
|
|
|
|
$
|
13
|
|
|
|
$
|
77
|
|
|
|
2008
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
5
|
|
|
|
$
|
(9
|
)
|
|
|
$
|
(1
|
)
|
|
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
$
|
(4
|
)
|
|
|
$
|
(6
|
)
|
|
|
$
|
(2
|
)
|
|
|
$
|
(12
|
)
|
Store
impairment charges
|
|
|
34
|
|
|
|
|
11
|
|
|
|
|
10
|
|
|
|
|
55
|
|
Closure
and impairment (income) expenses
|
|
$
|
30
|
|
|
|
$
|
5
|
|
|
|
$
|
8
|
|
|
|
$
|
43
|
|
|
|
2007
|
|
|
U.S.
|
|
|
YRI
|
|
|
China
Division
|
|
|
Worldwide
|
Refranchising
(gain) loss(a)
|
|
$
|
(12
|
)
|
|
|
$
|
3
|
|
|
|
$
|
(2
|
)
|
|
|
$
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
$
|
(9
|
)
|
|
|
$
|
1
|
|
|
|
$
|
—
|
|
|
|
$
|
(8
|
)
|
Store
impairment charges
|
|
|
23
|
|
|
|
|
13
|
|
|
|
|
7
|
|
|
|
|
43
|
|
Closure
and impairment (income) expenses
|
|
$
|
14
|
|
|
|
$
|
14
|
|
|
|
$
|
7
|
|
|
|
$
|
35
|
|
(a)
|
Refranchising
(gain) loss is not allocated to segments for performance reporting
purposes. During 2009 we recognized a $10 million refranchising
loss as a result of our decision to offer to refranchise our KFC Taiwan
equity market. The sale of the market was consummated in the
first quarter of 2010.
|
|
|
(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.
|
|
|
(c)
|
The
2009 store impairment charges for YRI include $12 million of goodwill
impairment for our Pizza Hut South Korea market. See Note
10.
|
|
|
(d)
|
An
additional $26 million of goodwill impairment related to our LJS and
A&W-U.S. businesses was not allocated to segments for performance
reporting purposes and is not included in this table. See Note
10.
|
The
following table summarizes the 2009 and 2008 activity related to reserves for
remaining lease obligations for closed stores.
|
|
|
|
Beginning
Balance
|
|
|
Amounts
Used
|
|
|
New
Decisions
|
|
|
Estimate/Decision
Changes
|
|
|
CTA/
Other
|
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
Activity
|
|
|
|
$
|
27
|
|
|
|
(12
|
)
|
|
|
10
|
|
|
|
4
|
|
|
|
4
|
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Activity
|
|
|
|
$
|
34
|
|
|
|
(7
|
)
|
|
|
3
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
$
|
27
|
|
Assets
held for sale at December 26, 2009 and December 27, 2008 total $32 million and
$31 million, respectively, of U.S. property, plant and equipment and are
included in prepaid expenses and other current assets in our Consolidated
Balance Sheet.
Note
6 – Supplemental Cash Flow Data
|
|
2009
|
|
|
2008
|
|
|
2007
|
Cash
Paid For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
209
|
|
|
|
$
|
248
|
|
|
|
$
|
177
|
|
Income
taxes
|
|
|
308
|
|
|
|
|
260
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations incurred to acquire assets
|
|
$
|
7
|
|
|
|
$
|
24
|
|
|
|
$
|
59
|
|
Net
investment in direct financing leases
|
|
|
8
|
|
|
|
|
26
|
|
|
|
|
33
|
|
Note
7 – Franchise and License Fees and Income
|
|
2009
|
|
2008
|
|
2007
|
|
Initial
fees, including renewal fees
|
|
$
|
57
|
|
|
$
|
61
|
|
|
$
|
49
|
|
|
Initial
franchise fees included in refranchising gains
|
|
|
(17
|
)
|
|
|
(20
|
)
|
|
|
(10
|
)
|
|
|
|
|
40
|
|
|
|
41
|
|
|
|
39
|
|
|
Continuing
fees
|
|
|
1,383
|
|
|
|
1,420
|
|
|
|
1,296
|
|
|
|
|
$
|
1,423
|
|
|
$
|
1,461
|
|
|
$
|
1,335
|
|
|
Note
8 – Other (Income) Expense
|
|
|
2009
|
|
2008
|
|
2007
|
Equity
income from investments in unconsolidated affiliates
|
|
|
$
|
(36
|
)
|
|
$
|
(41
|
)
|
|
$
|
(51
|
)
|
Gain
upon consolidation of a former unconsolidated affiliate in China(a)
|
|
|
|
(68
|
)
|
|
|
—
|
|
|
|
—
|
|
Gain
upon sale of investment in unconsolidated affiliate(b)(c)
|
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
(6
|
)
|
Wrench
litigation income(d)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
|
—
|
|
|
|
(16
|
)
|
|
|
(3
|
)
|
Other
(income) expense
|
|
|
$
|
(104
|
)
|
|
$
|
(157
|
)
|
|
$
|
(71
|
)
|
(a)
|
See
Note 5 for further discussion of the consolidation of a former
unconsolidated affiliate in Shanghai, China.
|
|
|
(b)
|
Fiscal
year 2008 reflects the gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See Note
5.
|
|
|
(c)
|
Fiscal
year 2007 reflects recognition of income associated with receipt of
payments for a note receivable arising from the 2005 sale of our fifty
percent interest in the entity that operated almost all KFCs and Pizza
Huts in Poland and the Czech Republic to our then partner in the
entity.
|
|
|
(d)
|
Fiscal
year 2007 reflects financial recoveries from settlements with insurance
carriers related to a lawsuit settled by Taco Bell Corporation in
2004.
|
Note 9 – Supplemental Balance Sheet
Information
|
|
|
2009
|
|
|
2008
|
Accounts
and notes receivable
|
|
|
$
|
274
|
|
|
|
$
|
252
|
|
Allowance
for doubtful accounts
|
|
|
|
(35
|
)
|
|
|
|
(23
|
)
|
Accounts
and notes receivable, net
|
|
|
$
|
239
|
|
|
|
$
|
229
|
|
Prepaid Expenses and Other Current
Assets
|
|
|
2009
|
|
|
2008
|
Income
tax receivable
|
|
|
$
|
158
|
|
|
|
$
|
20
|
|
Other
prepaid expenses and current assets
|
|
|
|
156
|
|
|
|
|
152
|
|
|
|
|
$
|
314
|
|
|
|
$
|
172
|
|
Property, Plant and
Equipment
|
|
|
2009
|
|
|
2008
|
Land
|
|
|
$
|
538
|
|
|
|
$
|
517
|
|
Buildings
and improvements
|
|
|
|
3,800
|
|
|
|
|
3,596
|
|
Capital
leases, primarily buildings
|
|
|
|
282
|
|
|
|
|
259
|
|
Machinery
and equipment
|
|
|
|
2,627
|
|
|
|
|
2,525
|
|
Property,
Plant and equipment, gross
|
|
|
|
7,247
|
|
|
|
|
6,897
|
|
Accumulated
depreciation and amortization
|
|
|
|
(3,348
|
)
|
|
|
|
(3,187
|
)
|
Property,
Plant and equipment, net
|
|
|
$
|
3,899
|
|
|
|
$
|
3,710
|
|
Depreciation
and amortization expense related to property, plant and equipment was $553
million, $542 million and $514 million in 2009, 2008 and 2007,
respectively.
Accounts Payable and Other Current
Liabilities
|
|
|
2009
|
|
|
2008
|
Accounts
payable
|
|
|
$
|
499
|
|
|
|
$
|
508
|
|
Capital
expenditure liability
|
|
|
|
114
|
|
|
|
|
130
|
|
Accrued
compensation and benefits
|
|
|
|
342
|
|
|
|
|
376
|
|
Dividends
payable
|
|
|
|
98
|
|
|
|
|
87
|
|
Accrued
taxes, other than income taxes
|
|
|
|
100
|
|
|
|
|
100
|
|
Other
current liabilities
|
|
|
|
260
|
|
|
|
|
272
|
|
|
|
|
$
|
1,413
|
|
|
|
$
|
1,473
|
|
Note
10 – Goodwill and Intangible Assets
The
changes in the carrying amount of goodwill are as follows:
|
|
U.S.
|
|
|
YRI
|
|
China
Division
|
|
|
Worldwide
|
Balance
as of December 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
gross
|
|
$
|
358
|
|
|
|
$
|
259
|
|
|
|
$
|
60
|
|
|
|
$
|
677
|
|
Accumulated
impairment losses
|
|
|
—
|
|
|
|
|
(5
|
)
|
|
|
|
—
|
|
|
|
|
(5
|
)
|
Goodwill,
net
|
|
|
358
|
|
|
|
|
254
|
|
|
|
|
60
|
|
|
|
|
672
|
|
Acquisitions
|
|
|
10
|
|
|
|
|
—
|
|
|
|
|
6
|
|
|
|
|
16
|
|
Impairment
losses
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Disposals
and other, net(a)
|
|
|
(12
|
)
|
|
|
|
(71
|
)
|
|
|
|
—
|
|
|
|
|
(83
|
)
|
Balance
as of December 27, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
gross
|
|
|
356
|
|
|
|
|
188
|
|
|
|
|
66
|
|
|
|
|
610
|
|
Accumulated
impairment losses
|
|
|
—
|
|
|
|
|
(5
|
)
|
|
|
|
—
|
|
|
|
|
(5
|
)
|
Goodwill,
net
|
|
|
356
|
|
|
|
|
183
|
|
|
|
|
66
|
|
|
|
|
605
|
|
Acquisitions
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
53
|
|
|
|
|
54
|
|
Impairment
losses(b)(c)
|
|
|
(26
|
)
|
|
|
|
(12
|
)
|
|
|
|
—
|
|
|
|
|
(38
|
)
|
Disposals
and other, net(a)
|
|
|
(5
|
)
|
|
|
|
24
|
|
|
|
|
—
|
|
|
|
|
19
|
|
Balance
as of December 26, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill,
gross
|
|
|
352
|
|
|
|
|
212
|
|
|
|
|
119
|
|
|
|
|
683
|
|
Accumulated
impairment losses
|
|
|
(26
|
)
|
|
|
|
(17
|
)
|
|
|
|
—
|
|
|
|
|
(43
|
)
|
Goodwill,
net
|
|
$
|
326
|
|
|
|
$
|
195
|
|
|
|
$
|
119
|
|
|
|
$
|
640
|
|
(a)
|
Disposals
and other, net for YRI primarily reflects the impact of foreign currency
translation on existing balances. Disposals and other, net for
the U.S. Division, primarily reflects goodwill write-offs associated with
refranchising.
|
|
|
(b)
|
We
recorded a non-cash goodwill impairment charge of $26 million, which
resulted in no related tax benefit, associated with our LJS and
A&W-U.S. reporting unit in the fourth quarter of 2009 as the carrying
value of this reporting unit exceeded its fair value. The fair
value of the reporting unit was based on our discounted expected after-tax
cash flows from the future royalty stream, net of G&A, expected to be
earned from the underlying franchise agreements. These cash
flows incorporated the decline in future profit expectations for our LJS
and A&W-U.S. reporting unit which were due in part to the impact of a
reduced emphasis on multi-branding as a U.S. growth
strategy. This charge was recorded in Closure and impairment
(income) expenses in our Consolidated Statement of Income and was not
allocated to the U.S. segment for performance reporting
purposes. See Note 5.
|
|
|
(c)
|
We
recorded a non-cash goodwill impairment charge of $12 million for our
Pizza Hut South Korea reporting unit in the fourth quarter of 2009 as the
carrying value of this reporting unit exceeded its fair
value. The fair value of this reporting unit was based on the
discounted expected after-tax cash flows from company operations and
franchise royalties for the business. Our expectations of
future cash flows were negatively impacted by recent profit declines the
business has experienced. This charge was recorded in Closure
and impairment (income) expenses in our Consolidated Statement of Income
and was allocated to our International segment for performance reporting
purposes.
|
Intangible
assets, net for the years ended 2009 and 2008 are as follows:
|
|
2009
|
|
|
2008
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
Definite-lived
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
contract rights
|
|
$
|
153
|
|
|
|
$
|
(78
|
)
|
|
|
$
|
147
|
|
|
|
$
|
(71
|
)
|
Trademarks/brands
|
|
|
225
|
|
|
|
|
(48
|
)
|
|
|
|
225
|
|
|
|
|
(39
|
)
|
Lease tenancy rights
|
|
|
66
|
|
|
|
|
(24
|
)
|
|
|
|
31
|
|
|
|
|
(7
|
)
|
Favorable operating leases
|
|
|
27
|
|
|
|
|
(8
|
)
|
|
|
|
9
|
|
|
|
|
(8
|
)
|
Reacquired
franchise rights
|
|
|
121
|
|
|
|
|
(8
|
)
|
|
|
|
14
|
|
|
|
|
(1
|
)
|
Other
|
|
|
7
|
|
|
|
|
(2
|
)
|
|
|
|
6
|
|
|
|
|
(2
|
)
|
|
|
$
|
599
|
|
|
|
$
|
(168
|
)
|
|
|
$
|
432
|
|
|
|
$
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks/brands
|
|
$
|
31
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
We have
recorded intangible assets through past acquisitions representing the value of
our KFC, LJS and A&W trademarks/brands. The value of a
trademark/brand is determined based upon the value derived from the royalty we
avoid, in the case of Company stores, or receive, in the case of franchise and
licensee stores, for the use of the trademark/brand. We have
determined that our KFC trademark/brand intangible asset has an indefinite life
and therefore is not amortized. We have determined that our LJS and
A&W trademarks/brands are subject to amortization and are being amortized
over their expected useful lives which are currently thirty years.
Amortization
expense for all definite-lived intangible assets was $25 million in 2009, $18
million in 2008 and $19 million in 2007. Amortization expense for
definite-lived intangible assets will approximate $24 million annually in 2010
through 2012, $23 million and $21 million in 2013 and 2014,
respectively.
Note
11 – Short-term Borrowings and Long-term Debt
|
|
2009
|
|
|
2008
|
Short-term
Borrowings
|
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
56
|
|
|
|
$
|
15
|
|
Other
|
|
|
3
|
|
|
|
|
10
|
|
|
|
$
|
59
|
|
|
|
$
|
25
|
|
Long-term
Debt
|
|
|
|
|
|
|
|
|
|
Unsecured
International Revolving Credit Facility, expires November
2012
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Unsecured
Revolving Credit Facility, expires November 2012
|
|
|
5
|
|
|
|
|
299
|
|
Senior,
Unsecured Term Loan, due July 2011
|
|
|
—
|
|
|
|
|
375
|
|
Senior
Unsecured Notes
|
|
|
2,906
|
|
|
|
|
2,542
|
|
Capital
lease obligations (See Note 12)
|
|
|
249
|
|
|
|
|
234
|
|
Other,
due through 2019 (11%)
|
|
|
67
|
|
|
|
|
70
|
|
|
|
|
3,227
|
|
|
|
|
3,520
|
|
Less
current maturities of long-term debt
|
|
|
(56
|
)
|
|
|
|
(15
|
)
|
Long-term
debt excluding hedge accounting adjustment
|
|
|
3,171
|
|
|
|
|
3,505
|
|
Derivative
instrument hedge accounting adjustment (See Note 13)
|
|
|
36
|
|
|
|
|
59
|
|
Long-term
debt including hedge accounting adjustment
|
|
$
|
3,207
|
|
|
|
$
|
3,564
|
|
Our
primary bank credit agreement comprises a $1.15 billion syndicated senior
unsecured revolving credit facility (the “Credit Facility”) which matures in
November 2012 and includes 23 participating banks with commitments ranging from
$20 million to $113 million. Under the terms of the Credit Facility,
we may borrow up to the maximum borrowing limit, less outstanding letters of
credit or banker’s acceptances, where applicable. At December 26,
2009, our unused Credit Facility totaled $975 million net of outstanding letters
of credit of $170 million. There were borrowings of $5 million
outstanding under the Credit Facility at December 26, 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. There was
available credit of $350 million and no borrowings outstanding under the ICF at
the end of 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 on our performance under specified financial
criteria. Interest on any outstanding borrowings under the ICF is payable at
least quarterly.
The
Credit Facility and the ICF are unconditionally guaranteed by our principal
domestic subsidiaries. Additionally, the ICF is unconditionally
guaranteed by YUM. These agreements contain financial covenants
relating to maintenance of leverage and fixed charge coverage ratio and also
contain affirmative and negative covenants including, among other things,
limitations on certain additional indebtedness and liens, and certain other
transactions specified in the agreement. Given the Company’s balance
sheet and cash flows we were able to comply with all debt covenant requirements
at December 26, 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 stated interest
rates ranging from 4.25% 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.
During
the second quarter of 2009 we completed a cash tender offer to repurchase
certain of our Senior Unsecured Notes due July 1, 2012 with an aggregate
principal amount of $137 million. In conjunction with this
transaction, we settled interest rate swaps with a notional amount of $150
million that were hedging these Senior Unsecured Notes, receiving $14 million in
cash. The net impact of the repurchase of Senior Unsecured Notes and
related interest rate swap settlement had no significant impact on Interest
expense.
In August
2009, we issued $250 million aggregate principal amount of 4.25% Senior
Unsecured Notes that are due in September 2015 and $250 million aggregate
principal amount of 5.30% Senior Unsecured Notes that are due in September
2019. We used the proceeds from our issuance of these Senior
Unsecured Notes to repay a variable rate senior unsecured term loan, in an
aggregate principal amount of $375 million that was scheduled to mature in 2011
and to make discretionary payments to our pension plans in the fourth quarter of
2009.
The
following table summarizes all Senior Unsecured Notes issued that remain
outstanding at December 26, 2009:
|
|
|
|
|
|
|
Interest
Rate
|
Issuance
Date(a)
|
|
Maturity
Date
|
|
Principal
Amount
(in
millions)
|
|
Stated
|
|
Effective(b)
|
April
2001
|
|
April
2011
|
|
$
|
650
|
|
8.88%
|
|
9.20%
|
June
2002
|
|
July
2012
|
|
$
|
263
|
|
7.70%
|
|
8.04%
|
April
2006
|
|
April
2016
|
|
$
|
300
|
|
6.25%
|
|
6.03%
|
October
2007
|
|
March
2018
|
|
$
|
600
|
|
6.25%
|
|
6.38%
|
October
2007
|
|
November
2037
|
|
$
|
600
|
|
6.88%
|
|
7.29%
|
September
2009
|
|
September
2015
|
|
$
|
250
|
|
4.25%
|
|
4.44%
|
September
2009
|
|
September
2019
|
|
$
|
250
|
|
5.30%
|
|
5.59%
|
(a)
|
Interest
payments commenced six months after issuance date and are payable
semi-annually thereafter.
|
|
|
(b)
|
Includes
the effects of the amortization of any (1) premium or discount; (2) debt
issuance costs; and (3) gain or loss upon settlement of related treasury
locks and forward starting interest rate swaps utilized to hedge the
interest rate risk prior to the debt issuance. Excludes the
effect of any swaps that remain outstanding as described in Note
13.
|
Our
Senior Unsecured Notes, Credit Facility, and ICF all contain cross-default
provisions, whereby a default under any of these agreements constitutes a
default under each of the other agreements.
The
annual maturities of short-term borrowings and long-term debt as of December 26,
2009, excluding capital lease obligations of $249 million and derivative
instrument adjustments of $36 million, are as follows:
Year
ended:
|
|
|
|
2010
|
|
|
$
|
5
|
|
2011
|
|
|
|
654
|
|
2012
|
|
|
|
273
|
|
2013
|
|
|
|
5
|
|
2014
|
|
|
|
6
|
|
Thereafter
|
|
|
|
2,045
|
|
Total
|
|
|
$
|
2,988
|
|
Interest
expense on short-term borrowings and long-term debt was $212 million, $253
million and $199 million in 2009, 2008 and 2007, respectively.
Note
12 – Leases
At
December 26, 2009 we operated more than 7,600 restaurants, leasing the
underlying land and/or building in nearly 6,200 of those restaurants with the
vast majority of our commitments expiring within 20 years from the inception of
the lease. Our longest lease expires in 2151. We also
lease office space for headquarters and support functions, as well as certain
office and restaurant equipment. We do not consider any of these
individual leases material to our operations. Most leases require us
to pay related executory costs, which include property taxes, maintenance and
insurance.
Future
minimum commitments and amounts to be received as lessor or sublessor under
non-cancelable leases are set forth below:
|
|
Commitments
|
|
|
|
Lease
Receivables
|
|
|
|
Capital
|
|
|
|
Operating
|
|
|
|
Direct
Financing
|
|
|
|
Operating
|
|
2010
|
|
$
|
67
|
|
|
|
$
|
535
|
|
|
|
$
|
13
|
|
|
|
$
|
50
|
|
2011
|
|
|
26
|
|
|
|
|
492
|
|
|
|
|
13
|
|
|
|
|
41
|
|
2012
|
|
|
25
|
|
|
|
|
446
|
|
|
|
|
13
|
|
|
|
|
35
|
|
2013
|
|
|
24
|
|
|
|
|
409
|
|
|
|
|
17
|
|
|
|
|
31
|
|
2014
|
|
|
24
|
|
|
|
|
369
|
|
|
|
|
16
|
|
|
|
|
28
|
|
Thereafter
|
|
|
243
|
|
|
|
|
2,424
|
|
|
|
|
72
|
|
|
|
|
118
|
|
|
|
$
|
409
|
|
|
|
$
|
4,675
|
|
|
|
$
|
144
|
|
|
|
$
|
303
|
|
At
December 26, 2009 and December 27, 2008, the present value of minimum payments
under capital leases was $249 million and $234 million,
respectively. At December 26, 2009 and December 27, 2008, unearned
income associated with direct financing lease receivables was $61 million and
$63 million, respectively.
The
details of rental expense and income are set forth below:
|
|
2009
|
|
2008
|
|
2007
|
|
Rental
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
541
|
|
|
$
|
531
|
|
|
$
|
474
|
|
|
Contingent
|
|
|
123
|
|
|
|
113
|
|
|
|
81
|
|
|
|
|
$
|
664
|
|
|
$
|
644
|
|
|
$
|
555
|
|
|
Minimum
rental income
|
|
$
|
38
|
|
|
$
|
28
|
|
|
$
|
23
|
|
|
Note
13 – Derivative Instruments
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 fixed-rate
debt. At December 26, 2009, our interest rate derivative instruments
have an outstanding notional amount of $775 million and have been designated as
fair value hedges of a portion of our debt. The critical terms of
these swaps, including reset dates and floating rate indices match those of our
underlying fixed-rate debt and 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 December 26, 2009, foreign currency forward contracts
outstanding had a total notional amount of $687 million.
The
fair values of derivatives designated as hedging instruments for the year
ended December 26, 2009 were:
|
|
|
|
|
|
|
|
|
Fair
Value
|
|
Consolidated
Balance Sheet Location
|
|
|
Interest
Rate Swaps
|
$
|
44
|
|
Other
assets
|
|
|
Foreign
Currency Forwards – Asset
|
|
6
|
|
Prepaid
expenses and other current assets
|
|
|
Foreign
Currency Forwards – Liability
|
|
(3)
|
|
Accounts
payable and other current liabilities
|
|
|
Total
|
$
|
47
|
|
|
|
The
unrealized gains associated with our interest rate swaps that hedge the interest
rate risk for a portion of our debt have been reported as an addition of $36
million to long-term debt at December 26, 2009. During the year ended
December 26, 2009, Interest expense, net was reduced by $31 million, for
recognized gains on these interest rate swaps, including $13 million related to
the settlement of interest rate swaps that were hedging the 2012 Senior
Unsecured Notes that were extinguished (See Note 11).
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 year ended December 26, 2009.
|
|
|
|
|
2009
|
|
Gains
(losses) recognized into OCI, net of tax
|
|
|
|
|
$
|
(4)
|
|
Gains
(losses) reclassified from Accumulated OCI into income, net of
tax
|
|
|
|
|
$
|
(9)
|
The
gains/losses reclassified from Accumulated OCI into income were recognized as
Other income (expense) in our Consolidated Statement of Income, largely
offsetting foreign currency transaction losses/gains 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 year ended
December 26, 2009.
We had a
net deferred loss of $12 million, net of tax, as of December 26, 2009 within
Accumulated OCI due to treasury locks and forward starting interest rate swaps
that have been cash settled, as well as outstanding foreign currency forward
contracts. The majority of this loss arose from the settlement of
forward starting interest rate swaps entered into prior to the issuance of our
Senior Unsecured Notes due in 2037, and is being reclassed into earnings through
2037 to interest expense. In 2009, 2008 and 2007 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. To mitigate the counterparty credit risk, we only enter
into contracts with carefully selected major financial institutions based upon
their credit ratings and other factors, and continually assess the
creditworthiness of counterparties. At December 26, 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.
Note
14 – Fair Value Disclosures
The
following table presents the fair values for those assets and liabilities
measured on a recurring basis.
|
|
Fair
Value
|
|
|
|
Description
|
|
Level
|
|
2009
|
|
2008
|
|
|
|
Foreign
Currency Forwards, net
|
|
|
2
|
|
|
$
|
3
|
|
|
$
|
12
|
|
|
|
|
|
Interest
Rate Swaps, net
|
|
|
2
|
|
|
|
44
|
|
|
|
62
|
|
|
|
|
|
Other
Investments
|
|
|
1
|
|
|
|
13
|
|
|
|
10
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
60
|
|
|
$
|
84
|
|
|
|
|
|
The fair
value of the Company’s foreign currency forwards and interest rate swaps were
determined based on the present value of expected future cash flows considering
the risks involved, including nonperformance risk, and using discount rates
appropriate for the duration based upon observable inputs. The other
investments include investments in mutual funds, which are used to offset
fluctuations in deferred compensation liabilities that employees have chosen to
invest in phantom shares of a Stock Index Fund or Bond Index
Fund. The other investments are classified as trading securities and
their fair value is determined based on the closing market prices of the
respective mutual funds as of December 26, 2009 and December 27,
2008.
The
following table presents the fair values for those assets and liabilities
measured at fair value during 2009 on a non-recurring basis, and remaining on
our Consolidated Balance Sheet as of December 26, 2009. Total losses
include losses recognized from all non-recurring fair value measurements during
the year ended December 26, 2009:
|
|
|
|
Fair
Value Measurements Using
|
|
Total
Losses
|
Description
|
|
As
of
December
26, 2009
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
2009
|
Long-lived
assets held for use
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
|
$
|
56
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
38
|
|
Long-lived
assets held for use presented in the table above include restaurants or groups
of restaurants that were impaired as a result of our semi-annual impairment
review or restaurants not meeting held for sale criteria that have been offered
for sale at a price less than their carrying value during the year ended
December 26, 2009. Of the $56 million in impairment charges shown in
the table above for the year ended December 26, 2009, $20 million was included
in Refranchising (gain) loss and $36 million was included in Closures and
impairment (income) expenses in the Consolidated Statements of
Income.
Goodwill
in the table above includes the goodwill impairment charges for our Pizza Hut
South Korea and LJS/A&W-U.S. reporting units, which are discussed in Note
10. These impairment charges were recorded in Closures and impairment
(income) expenses in the Consolidated Statements of Income.
At
December 26, 2009 the carrying values of cash and cash equivalents, accounts
receivable and accounts payable approximated their fair values because of the
short-term nature of these instruments. The fair value of notes
receivable net of allowances and lease guarantees less subsequent amortization
approximates their carrying value. The Company’s debt obligations,
excluding capital leases, were estimated to have a fair value of $3.3 billion,
compared to their carrying value of $3 billion. We estimated the fair
value of debt using market quotes and calculations based on market
rates.
Note
15 – Pension and Post-retirement Medical Benefits
Pension
Benefits. We sponsor noncontributory defined benefit pension
plans covering certain full-time salaried and hourly U.S.
employees. The most significant of these plans, the YUM Retirement
Plan (the “Plan”), is funded while benefits from the other U.S. plans are paid
by the Company as incurred. During 2001, the plans covering our U.S.
salaried employees were amended such that any salaried employee hired or rehired
by YUM after September 30, 2001 is not eligible to participate in those
plans. Benefits are based on years of service and earnings or stated
amounts for each year of service. We also sponsor various defined
benefit pension plans covering certain of our non-U.S. employees, the most
significant of which are in the U.K. Our plans in the U.K. have
previously been amended such that new employees are not eligible to participate
in these plans.
Obligation
and Funded Status at Measurement Date:
The
following chart summarizes the balance sheet impact, as well as benefit
obligations, assets, and funded status associated with our U.S. pension plans
and significant International pension plans. The actuarial valuations
for all plans reflect measurement dates coinciding with our fiscal year
ends.
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
923
|
|
|
|
$
|
842
|
|
|
|
$
|
126
|
|
|
|
$
|
161
|
|
Measurement
date adjustment
|
|
|
—
|
|
|
|
|
21
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Service
cost
|
|
|
26
|
|
|
|
|
30
|
|
|
|
|
5
|
|
|
|
|
8
|
|
Interest
cost
|
|
|
58
|
|
|
|
|
53
|
|
|
|
|
7
|
|
|
|
|
8
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Plan
amendments
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Acquisitions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Curtailment
gain
|
|
|
(9
|
)
|
|
|
|
(6
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Settlement
loss
|
|
|
2
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Special
termination benefits
|
|
|
4
|
|
|
|
|
13
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
15
|
|
|
|
|
(48
|
)
|
Benefits
paid
|
|
|
(47
|
)
|
|
|
|
(48
|
)
|
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
Settlement
payments
|
|
|
(10
|
)
|
|
|
|
(9
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Actuarial
(gain) loss
|
|
|
62
|
|
|
|
|
25
|
|
|
|
|
18
|
|
|
|
|
(4
|
)
|
Benefit
obligation at end of year
|
|
$
|
1,010
|
|
|
|
$
|
923
|
|
|
|
$
|
170
|
|
|
|
$
|
126
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
513
|
|
|
|
$
|
732
|
|
|
|
$
|
83
|
|
|
|
$
|
139
|
|
Actual
return on plan assets
|
|
|
132
|
|
|
|
|
(213
|
)
|
|
|
|
20
|
|
|
|
|
(33
|
)
|
Employer
contributions
|
|
|
252
|
|
|
|
|
54
|
|
|
|
|
28
|
|
|
|
|
12
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
2
|
|
Settlement
payments
|
|
|
(10
|
)
|
|
|
|
(9
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Benefits
paid
|
|
|
(47
|
)
|
|
|
|
(48
|
)
|
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
11
|
|
|
|
|
(34
|
)
|
Administrative
expenses
|
|
|
(5
|
)
|
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Fair
value of plan assets at end of year
|
|
$
|
835
|
|
|
|
$
|
5133
|
|
|
|
$
|
141
|
|
|
|
$
|
83
|
|
Funded
status at end of year
|
|
$
|
(175
|
)
|
|
|
$
|
(410
|
)
|
|
|
$
|
(29
|
)
|
|
|
$
|
(43
|
)
|
Amounts
recognized in the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Accrued
benefit liability – current
|
|
$
|
(8
|
)
|
|
|
$
|
(11
|
)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Accrued
benefit liability – non-current
|
|
|
(167
|
)
|
|
|
|
(399
|
)
|
|
|
|
(29
|
)
|
|
|
|
(43
|
)
|
|
|
$
|
(175
|
)
|
|
|
$
|
(410
|
)
|
|
|
$
|
(29
|
)
|
|
|
$
|
(43
|
)
|
Amounts
recognized as a loss in Accumulated Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Actuarial
net loss
|
|
$
|
342
|
|
|
|
$
|
371
|
|
|
|
$
|
48
|
|
|
|
$
|
41
|
|
Prior
service cost
|
|
|
4
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
346
|
|
|
|
$
|
374
|
|
|
|
$
|
48
|
|
|
|
$
|
41
|
|
The
accumulated benefit obligation for the U.S. and International pension plans was
$1,099 million and $970 million at December 26, 2009 and December 27, 2008,
respectively.
Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Projected
benefit obligation
|
|
$
|
1,010
|
|
|
|
$
|
923
|
|
|
|
$
|
82
|
|
|
|
$
|
63
|
|
Accumulated
benefit obligation
|
|
|
958
|
|
|
|
|
867
|
|
|
|
|
76
|
|
|
|
|
58
|
|
Fair
value of plan assets
|
|
|
835
|
|
|
|
|
513
|
|
|
|
|
71
|
|
|
|
|
34
|
|
Information
for pension plans with a projected benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Projected
benefit obligation
|
|
$
|
1,010
|
|
|
|
$
|
923
|
|
|
|
$
|
170
|
|
|
|
$
|
126
|
|
Accumulated
benefit obligation
|
|
|
958
|
|
|
|
|
867
|
|
|
|
|
141
|
|
|
|
|
103
|
|
Fair
value of plan assets
|
|
|
835
|
|
|
|
|
513
|
|
|
|
|
141
|
|
|
|
|
83
|
|
Our
funding policy with respect to the U.S. Plan is to contribute amounts necessary
to satisfy minimum pension funding requirements, including requirements of the
Pension Protection Act of 2006, plus such additional amounts from time to time
as are determined to be appropriate to improve the U.S. Plan’s funded
status. We currently do not plan to make any contributions to the
U.S. Plan in 2010.
The
funding rules for our pension plans outside of the U.S. vary from country to
country and depend on many factors including discount rates, performance of plan
assets, local laws and regulations. The projected benefit obligation
of our pension plans in the U.K. exceeded plan assets by $29 million at our 2009
measurement date. We have committed to make discretionary funding
contributions of approximately $15 million in 2010 to one of these
plans.
We do not
anticipate any plan assets being returned to the Company during 2010 for any
plans.
Components
of net periodic benefit cost:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
Net
periodic benefit cost
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
Service
cost
|
|
$
|
26
|
|
|
|
$
|
30
|
|
|
|
$
|
33
|
|
|
|
$
|
5
|
|
|
|
$
|
8
|
|
|
|
$
|
9
|
|
Interest
cost
|
|
|
58
|
|
|
|
|
53
|
|
|
|
|
50
|
|
|
|
|
7
|
|
|
|
|
8
|
|
|
|
|
8
|
|
Amortization
of prior service cost(a)
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Expected
return on plan assets
|
|
|
(59
|
)
|
|
|
|
(53
|
)
|
|
|
|
(51
|
)
|
|
|
|
(7
|
)
|
|
|
|
(9
|
)
|
|
|
|
(9
|
)
|
Amortization
of net loss
|
|
|
13
|
|
|
|
|
6
|
|
|
|
|
23
|
|
|
|
|
2
|
|
|
|
|
—
|
|
|
|
|
1
|
|
Net
periodic benefit cost
|
|
$
|
39
|
|
|
|
$
|
36
|
|
|
|
$
|
56
|
|
|
|
$
|
7
|
|
|
|
$
|
7
|
|
|
|
$
|
9
|
|
Additional
loss recognized due to:
Settlement(b)
|
|
$
|
2
|
|
|
|
$
|
2
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Special
termination benefits(c)
|
|
$
|
4
|
|
|
|
$
|
13
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Pension losses in accumulated
other comprehensive income (loss):
|
|
|
U.S.
Pension Plans
|
|
|
|
International
Pension Plans
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning
of year
|
|
$
|
374
|
|
|
|
$
|
80
|
|
|
|
|
|
$
|
41
|
|
|
|
$
|
13
|
|
|
|
Net
actuarial loss
|
|
|
(15
|
)
|
|
|
|
301
|
|
|
|
|
|
|
5
|
|
|
|
|
40
|
|
|
|
Amortization
of net loss
|
|
|
(13
|
)
|
|
|
|
(6
|
)
|
|
|
|
|
|
(2
|
)
|
|
|
|
—
|
|
|
|
Settlements
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
Prior
service cost
|
|
|
2
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
Amortization
of prior service cost
|
|
|
(1
|
)
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
4
|
|
|
|
|
(12
|
)
|
|
|
End
of year
|
|
$
|
346
|
|
|
|
$
|
374
|
|
|
|
|
|
$
|
48
|
|
|
|
$
|
41
|
|
|
|
(a)
|
Prior
service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive
benefits.
|
|
|
(b)
|
Settlement
loss results from benefit payments from a non-funded plan exceeding the
sum of the service cost and interest cost for that plan during the
year.
|
|
|
(c)
|
Special
termination benefits primarily related to the U.S. business transformation
measures taken in 2008 and 2009.
|
The
estimated net loss for the U.S. and International pension plans that will be
amortized from accumulated other comprehensive loss into net periodic pension
cost in 2010 is $23 million and $2 million, respectively. The
estimated prior service cost for the U.S. pension plans that will be amortized
from accumulated other comprehensive loss into net periodic pension cost in 2010
is $1 million.
Weighted-average
assumptions used to determine benefit obligations at the measurement
dates:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
Discount
rate
|
|
|
6.30%
|
|
|
|
|
6.50%
|
|
|
|
|
5.50%
|
|
|
|
|
5.50%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
4.41%
|
|
|
|
|
4.10%
|
|
Weighted-average
assumptions used to determine the net periodic benefit cost for fiscal
years:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
Discount
rate
|
|
|
6.50%
|
|
|
|
|
6.50%
|
|
|
|
|
5.95%
|
|
|
|
|
5.50%
|
|
|
|
|
5.60%
|
|
|
|
|
5.00%
|
|
Long-term
rate of return on plan assets
|
|
|
8.00%
|
|
|
|
|
8.00%
|
|
|
|
|
8.00%
|
|
|
|
|
7.20%
|
|
|
|
|
7.28%
|
|
|
|
|
7.07%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
4.11%
|
|
|
|
|
4.30%
|
|
|
|
|
3.78%
|
|
Our
estimated long-term rate of return on plan assets represents the
weighted-average of expected future returns on the asset categories included in
our target investment allocation based primarily on the historical returns for
each asset category, adjusted for an assessment of current market
conditions.
Plan
Assets
The fair
values of our pension plan assets at December 26, 2009 by asset category and
level within the fair value hierarchy are as follows:
|
|
U.S.
Pension
Plans
|
|
International
Pension
Plans
|
Level
1:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
Level
2:
|
|
|
|
|
|
|
|
|
Cash
Equivalents(a)
|
|
|
39
|
|
|
|
—
|
|
Equity
Securities - U.S. Large cap(b)
|
|
|
271
|
|
|
|
5
|
|
Equity
Securities - U.S. Mid cap(b)
|
|
|
46
|
|
|
|
—
|
|
Equity
Securities - U.S. Small cap(b)
|
|
|
46
|
|
|
|
—
|
|
Equity
Securities - Non-U.S.(b)
|
|
|
89
|
|
|
|
96
|
|
Fixed
Income Securities – U.S. Corporate(b)
|
|
|
194
|
|
|
|
14
|
|
Fixed
Income Securities – U.S. Government and Government Agencies(c)
|
|
|
132
|
|
|
|
—
|
|
Fixed
Income Securities – Non-U.S. Government(b)(c)
|
|
|
14
|
|
|
|
19
|
|
Total
fair value of plan assets
|
|
$
|
835
|
|
|
$
|
141
|
|
(a)
|
Short-term
investments in money market funds
|
|
|
(b)
|
Securities
held in common trusts
|
|
|
(c)
|
Investments
held by the U.S. Plan are directly
held
|
Our
primary objectives regarding the investment strategy for the Plan’s assets,
which make up 86% of total pension plan assets at the 2009 measurement date, are
to reduce interest rate and market risk, to provide adequate liquidity to meet
immediate and future payment requirements and to meet minimum funding
requirements. To achieve these objectives, we are using a combination
of active and passive investment strategies. Our equity securities,
currently targeted at 55% of our investment mix, consist primarily of low cost
index funds focused on achieving long-term capital appreciation. We
diversify our equity risk by investing in several different U.S. and foreign
market index funds. Investing in these index funds provides us with
the adequate liquidity required to fund benefit payments and plan
expenses. The fixed income asset allocation, currently targeted at
45% of our mix, is actively managed and consists of long duration fixed income
securities that help to reduce exposure to interest rate variation and to better
correlate asset maturities with obligations.
A mutual
fund held as an investment by the Plan includes YUM stock valued at less than
$0.5 million at December 26, 2009 and December 27, 2008 (less than 1% of total
plan assets in each instance).
Benefit
Payments
The
benefits expected to be paid in each of the next five years and in the aggregate
for the five years thereafter are set forth below:
Year
ended:
|
|
|
|
U.S.
Pension
Plans
|
|
|
International
Pension
Plans
|
2010
|
|
|
|
$
|
52
|
|
|
|
$
|
2
|
|
2011
|
|
|
|
|
51
|
|
|
|
|
2
|
|
2012
|
|
|
|
|
40
|
|
|
|
|
2
|
|
2013
|
|
|
|
|
48
|
|
|
|
|
2
|
|
2014
|
|
|
|
|
46
|
|
|
|
|
2
|
|
2015
- 2019
|
|
|
|
|
278
|
|
|
|
|
10
|
|
Expected
benefits are estimated based on the same assumptions used to measure our benefit
obligation on the measurement date and include benefits attributable to
estimated further employee service.
Post-retirement
Medical Benefits
Our
post-retirement plan provides health care benefits, principally to U.S. salaried
retirees and their dependents, and includes retiree cost sharing
provisions. During 2001, the plan was amended such that any salaried
employee hired or rehired by YUM after September 30, 2001 is not eligible to
participate in this plan. Employees hired prior to September 30, 2001
are eligible for benefits if they meet age and service requirements and qualify
for retirement benefits. We fund our post-retirement plan as benefits
are paid.
At the
end of both 2009 and 2008, the accumulated post-retirement benefit obligation
was $73 million. The unrecognized actuarial loss recognized in
Accumulated other comprehensive loss is less than $1 million at the end of 2009
and $2 million at the end of 2008. The net periodic benefit cost
recorded in 2009, 2008 and 2007 was $7 million, $10 million and $5 million,
respectively, the majority of which is interest cost on the accumulated
post-retirement benefit obligation. 2009 and 2008 costs included $1
million and $4 million, respectively, of special termination benefits primarily
related to the U.S. business transformation measures described in Note
5. Approximately $2 million was charged to retained earnings in 2008
related to changing the measurement date for our post-retirement plan to our
fiscal year end. The weighted-average assumptions used to determine
benefit obligations and net periodic benefit cost for the post-retirement
medical plan are identical to those as shown for the U.S. pension
plans. Our assumed heath care cost trend rates for the following year
as of 2009 and 2008 are 7.8% and 7.5%, respectively, with expected ultimate
trend rates of 4.5% reached in 2028 and 5.25% reached in 2015,
respectively.
There is
a cap on our medical liability for certain retirees. The cap for
Medicare eligible retirees was reached in 2000 and the cap for non-Medicare
eligible retirees is expected to be reached in 2011; once the cap is reached,
our annual cost per retiree will not increase. A one-percentage-point
increase or decrease in assumed health care cost trend rates would have less
than a $1 million impact on total service and interest cost and on the
post-retirement benefit obligation. The benefits expected to be paid
in each of the next five years are approximately $7 million and in aggregate for
the five years thereafter are $31 million.
Note
16 – Stock Options and Stock Appreciation Rights
At year
end 2009, we had four stock award plans in effect: the YUM! Brands, Inc.
Long-Term Incentive Plan and the 1997 Long-Term Incentive Plan (“collectively
the “LTIPs”), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan
(“RGM Plan”) and the YUM! Brands, Inc. SharePower Plan
(“SharePower”). Under all our plans, the exercise price of stock
options and stock appreciation rights (“SARs”) granted must be equal to or
greater than the average market price or the ending market price of the
Company’s stock on the date of grant.
Potential
awards to employees and non-employee directors under the LTIPs include stock
options, incentive stock options, SARs, restricted stock, stock units,
restricted stock units, performance restricted stock units, performance share
units and performance units. Through December 26, 2009, we have
issued only stock options, SARs, restricted stock units and performance share
units under the LTIPs. While awards under the LTIPs can have varying
vesting provisions and exercise periods, outstanding awards under the LTIPs vest
in periods ranging from immediate to 5 years and expire ten years after
grant.
Potential
awards to employees under the RGM Plan include stock options, SARs, restricted
stock and restricted stock units. Through December 26, 2009, we have
issued only stock options and SARs under this plan. RGM Plan awards
granted have a four year cliff vesting period and expire ten years after
grant. Certain RGM Plan awards are granted upon attainment of
performance conditions in the previous year. Expense for such awards
is recognized over a period that includes the performance condition
period.
Potential
awards to employees under SharePower include stock options, SARs, restricted
stock and restricted stock units. SharePower awards consist only of
stock options and SARs to date, which vest over a period ranging from one to
four years and expire no longer than ten years after grant.
At year
end 2009, approximately 24 million shares were available for future share-based
compensation grants under the above plans.
We
estimated the fair value of each award made during 2009, 2008 and 2007 as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
2009
|
|
|
2008
|
|
|
2007
|
Risk-free
interest rate
|
|
1.9
|
%
|
|
|
3.0
|
%
|
|
|
4.7
|
%
|
Expected
term (years)
|
|
5.9
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility
|
|
32.3
|
%
|
|
|
30.9
|
%
|
|
|
28.9
|
%
|
Expected
dividend yield
|
|
2.6
|
%
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
We
believe it is appropriate to group our awards into two homogeneous groups when
estimating expected term. These groups consist of grants made
primarily to restaurant-level employees under the RGM Plan, which cliff vest
after four years and expire ten years after grant, and grants made to executives
under our other stock award plans, which typically have a graded vesting
schedule of 25% per year over four years and expire ten years after
grant. We use a single weighted-average term for our awards that have
a graded vesting schedule. Based on analysis of our historical
exercise and post-vesting termination behavior, we have determined that our
restaurant-level employees and our executives exercised the awards on average
after five years and six years, respectively.
When
determining expected volatility, we consider both historical volatility of our
stock as well as implied volatility associated with our traded
options.
A summary
of award activity as of December 26, 2009, and changes during the year then
ended is presented below.
|
|
Shares
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
(in
millions)
|
Outstanding
at the beginning of the year
|
|
46,918
|
|
|
|
$
|
20.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
7,766
|
|
|
|
|
29.30
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(10,646
|
)
|
|
|
|
12.82
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
(2,373
|
)
|
|
|
|
30.46
|
|
|
|
|
|
|
|
|
|
Outstanding
at the end of the year
|
|
41,665
|
|
|
|
$
|
23.59
|
|
|
|
5.78
|
|
|
$
|
502
|
|
Exercisable
at the end of the year
|
|
25,127
|
|
|
|
$
|
18.74
|
|
|
|
4.20
|
|
|
$
|
420
|
|
The
weighted-average grant-date fair value of awards granted during 2009, 2008 and
2007 was $7.29, $10.91 and $8.85, respectively. The total intrinsic
value of stock options and SARs exercised during the years ended December 26,
2009, December 27, 2008 and December 29, 2007, was $217 million, $145 million
and $238 million, respectively.
As of
December 26, 2009, there was $93 million of unrecognized compensation cost,
which will be reduced by any forfeitures that occur, related to unvested awards
that is expected to be recognized over a remaining weighted-average period of
2.6 years. The total fair value at grant date of awards vested during
2009, 2008 and 2007 was $56 million, $54 million and $57 million,
respectively.
The total
compensation expense for stock options and SARs recognized was $48 million, $51
million and $56 million in 2009, 2008 and 2007, respectively. The
related tax benefit recognized from this expense was $16 million, $17 million
and $19 million in 2009, 2008 and 2007, respectively.
Cash
received from stock options exercises for 2009, 2008 and 2007, was $113 million,
$72 million and $112 million, respectively. Tax benefits realized on
our tax returns from tax deductions associated with stock options and SARs
exercised for 2009, 2008 and 2007 totaled $57 million, $40 million and $76
million, respectively.
While
historically the Company has repurchased shares of our Common Stock on the open
market to satisfy award exercises, we did not repurchase shares during
2009.
In
January 2008, we granted an award of 187,398 restricted stock units to our Chief
Executive Officer (“CEO”). The award was made under the
LTIPs. The award vests after four years and had a market value of
$7.0 million as of January 24, 2008. The award is being expensed over
the four year vesting period. The award will be paid to our CEO in
shares of YUM common stock six months following his retirement provided that he
does not leave the company before the award vests. We recognized $2
million of expense in both 2009 and 2008.
In 2009
we modified our long-term incentive compensation program for certain executives,
including our CEO, Chief Financial Officer and our operating segment
Presidents. As part of these changes we granted 78,499 performance share
units, with a total grant date fair value of $2.3 million, under the
LTIPs. The awards vest after three years and are being expensed over this
period. The ultimate number of shares to be issued is contingent upon the
achievement of certain performance conditions with a maximum payout of 156,998
shares. Total expense recognized in 2009 for these awards was $0.8
million. Additionally, these executives are no longer eligible to
participate in the matching stock program under our Executive Income Deferral
Program as described in Note 17.
Note
17 – Other Compensation and Benefit Programs
Executive Income Deferral
Program (the “EID Plan”)
The EID
Plan allows participants to defer receipt of a portion of their annual salary
and all or a portion of their incentive compensation. As defined by
the EID Plan, we credit the amounts deferred with earnings based on the
investment options selected by the participants. These investment
options are limited to cash, phantom shares of our Common Stock, phantom shares
of a Stock Index Fund and phantom shares of a Bond Index
Fund. Additionally, the EID Plan allows participants to defer
incentive compensation to purchase phantom shares of our Common Stock and
receive a 33% Company match on the amount deferred. Deferrals
receiving a match are similar to a restricted stock unit award in that
participants will generally forfeit both the match and incentive compensation
amounts deferred if they voluntarily separate from employment during a vesting
period that is two years. We expense the intrinsic value of the match
and the incentive compensation over the requisite service period which includes
the vesting period. Investments in cash, the Stock Index fund and the
Bond Index fund will be distributed in cash at a date as elected by the employee
and therefore are classified as a liability on our Consolidated Balance
Sheets. We recognize compensation expense or income for the
appreciation or depreciation, respectively, of these investments. We
recognized compensation expense of $4 million in 2009, compensation income of $4
million in 2008 and compensation expense of $4 million in 2007 for losses and
earnings on these investments.
As
investments in the phantom shares of our Common Stock can only be settled in
shares of our Common Stock, we do not recognize compensation expense for the
appreciation or the depreciation, if any, of these
investments. Deferrals into the phantom shares of our Common Stock
are credited to the Common Stock Account as they are earned. As of
December 26, 2009, deferrals to phantom shares of our Common Stock within the
EID Plan totaled approximately 6.4 million shares. We recognized
compensation expense for amortization of the Company match of $5 million, $6
million and $5 million, in 2009, 2008 and 2007, respectively. These
expense amounts do not include the salary or bonus actually credited to Common
Stock of $23 million, $20 million and $17 million in 2009, 2008 and 2007,
respectively.
Contributory 401(k)
Plan
We
sponsor a contributory plan to provide retirement benefits under the provisions
of Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) for eligible
U.S. salaried and hourly employees. Participants are able to elect to
contribute up to 75% of eligible compensation on a pre-tax
basis. Participants may allocate their contributions to one or any
combination of 10 investment options or a self-managed account within the 401(k)
Plan. Effective for contributions made from and after April 1, 2008,
we match 100% of the participant’s contribution to the 401(k) Plan up to 6% of
eligible compensation. Prior to April 1, 2008, we matched 100% of the
participant’s contribution to the 401(k) Plan up to 3% of eligible compensation
and 50% of the participant’s contribution on the next 2% of eligible
compensation. We recognized as compensation expense our total
matching contribution of $16 million in 2009 and 2008 and $13 million in
2007.
Note
18 – Shareholders’ Equity
There
were no shares of our Common Stock repurchased during 2009. Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during 2008 and 2007. All amounts exclude applicable transaction
fees.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares
Repurchased
|
Authorization
Date
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
September
2009
|
|
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
January
2008
|
|
|
—
|
|
23,943
|
|
—
|
|
|
—
|
|
|
|
802
|
|
|
|
—
|
|
October
2007
|
|
|
—
|
|
22,875
|
|
11,431
|
|
|
—
|
|
|
|
813
|
|
|
|
437
|
|
March
2007
|
|
|
—
|
|
—
|
|
15,092
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
September
2006
|
|
|
—
|
|
—
|
|
15,274
|
|
|
—
|
|
|
|
—
|
|
|
|
469
|
|
Total
|
|
|
—
|
|
46,818
|
|
41,797
|
|
$
|
—
|
|
|
$
|
1,615
|
(a)
|
|
$
|
1,406
|
(b)
|
(a)
|
Amount
excludes the effect of $13 million in share repurchases (0.4 million
shares) with trade dates prior to the 2007 fiscal year end but cash
settlement dates subsequent to the 2007 fiscal year
end.
|
|
|
(b)
|
Amount
excludes the effects of $17 million in share repurchases (0.6 million
shares) with trade dates prior to the 2006 fiscal year end but cash
settlement dates subsequent to the 2006 fiscal year end and includes the
effect of $13 million in share repurchases (0.4 million shares) with trade
dates prior to the 2007 fiscal year end but cash settlement dates
subsequent to the 2007 fiscal year.
|
As of
December 26, 2009, we have $300 million available for future repurchases under
our September 2009 share repurchase authorization.
Accumulated Other
Comprehensive Income (Loss) – Comprehensive income is Net Income plus
certain other items that are recorded directly to shareholders’
equity. Amounts included in accumulated other comprehensive loss for
the Company’s derivative instruments and unrecognized pension and
post-retirement losses are recorded net of the related income tax
effects. Refer to Note 15 for additional information about our
pension accounting and Note 13 for additional information about our derivative
instruments. The following table gives further detail regarding the
composition of accumulated other comprehensive income (loss) at December 26,
2009 and December 27, 2008.
|
|
2009
|
|
|
2008
|
|
Foreign
currency translation adjustment
|
|
$
|
47
|
|
|
|
$
|
(129
|
)
|
|
Pension
and post-retirement losses, net of tax
|
|
|
(259
|
)
|
|
|
|
(272
|
)
|
|
Net
unrealized losses on derivative instruments, net of tax
|
|
|
(12
|
)
|
|
|
|
(17
|
)
|
|
Total
accumulated other comprehensive income (loss)
|
|
$
|
(224
|
)
|
|
|
$
|
(418
|
)
|
|
Note
19 – Income Taxes
The
details of our income tax provision (benefit) are set forth below:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current:
|
Federal
|
$
|
(21
|
)
|
|
|
$
|
168
|
|
|
|
$
|
175
|
|
|
|
Foreign
|
|
251
|
|
|
|
|
151
|
|
|
|
|
151
|
|
|
|
State
|
|
11
|
|
|
|
|
(1
|
)
|
|
|
|
(3
|
)
|
|
|
|
|
241
|
|
|
|
|
318
|
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
Federal
|
|
92
|
|
|
|
|
(12
|
)
|
|
|
|
(71
|
)
|
|
|
Foreign
|
|
(30
|
)
|
|
|
|
3
|
|
|
|
|
27
|
|
|
|
State
|
|
10
|
|
|
|
|
10
|
|
|
|
|
3
|
|
|
|
|
|
72
|
|
|
|
|
1
|
|
|
|
|
(41
|
)
|
|
|
|
$
|
313
|
|
|
|
$
|
319
|
|
|
|
$
|
282
|
|
|
For 2009,
the current federal tax benefit resulted from the favorable impact for pension
contributions made during the year and lower U.S. taxable income. The
benefit associated with pension contributions was fully offset in the deferred
federal provision. Also, for 2009, the current foreign tax provision
included tax expense primarily related to continued growth in the China business
as well as withholding tax expense associated with the distribution of
intercompany dividends.
The
deferred tax provision includes $26 million, $30 million and $120 million of
benefit in 2009, 2008 and 2007, respectively, for changes in valuation
allowances due to changes in determinations regarding the likelihood of the use
of certain deferred tax assets that existed at the beginning of the
year. The deferred tax provision also includes $16 million, $43
million and $16 million in 2009, 2008 and 2007, respectively, for increases in
valuation allowances recorded against deferred tax assets generated during the
year. The increase for 2008 includes a full valuation allowance for
net operating losses generated by certain tax planning strategies implemented
during the year. Total changes in valuation allowances, including the
impact of foreign currency translation and other adjustments, were decreases of
$67 million, $54 million and $37 million in 2009, 2008 and 2007,
respectively. See additional discussion of valuation allowance
adjustments in the effective tax rate discussion on the following
page.
The
deferred foreign tax provision includes less than $1 million of expense in 2009
and 2008, respectively, and $17 million of expense in 2007 for the impact of
changes in statutory tax rates in various countries. The deferred
foreign tax provision in 2008 includes $36 million of expense offset by the same
amount in the current foreign tax provision that resulted from a tax law
change. The $17 million of expense in 2007 includes $20 million for
the Mexico tax law change enacted during the fourth quarter of
2007.
The
deferred state tax provision in 2009 includes $10 million ($7 million, net of
federal tax) of expense for the impact of pension contributions made during the
year. The deferred state tax provision in 2008 includes $18 million
($12 million, net of federal tax) of expense for the impact associated with our
plan to distribute certain foreign earnings. The deferred state tax
provision in 2007 includes $4 million ($3 million, net of federal tax) of
benefit for the impact of state law changes.
U.S. and
foreign income before income taxes are set forth below:
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
$
|
269
|
|
|
|
$
|
430
|
|
|
|
$
|
527
|
|
Foreign
|
|
1,127
|
|
|
|
|
861
|
|
|
|
|
664
|
|
|
$
|
1,396
|
|
|
|
$
|
1,291
|
|
|
|
$
|
1,191
|
|
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.0
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(11.4
|
)
|
|
|
(14.5
|
)
|
|
|
(5.7
|
)
|
Adjustments
to reserves and prior years
|
|
|
(0.6
|
)
|
|
|
3.5
|
|
|
|
2.6
|
|
Valuation
allowance additions (reversals)
|
|
|
(0.7
|
)
|
|
|
0.6
|
|
|
|
(9.0
|
)
|
Other,
net
|
|
|
(0.9
|
)
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
Effective
income tax rate
|
|
|
22.4
|
%
|
|
|
24.7
|
%
|
|
|
23.7
|
%
|
Our 2009
effective tax rate was positively impacted by the year-over-year change in
adjustments to reserves and prior years (including certain out-of-years
adjustments that decreased our effective tax rate by 1.6 percentage points in
2009). Benefits associated with our foreign and U.S. tax effects
attributable to foreign operations decreased versus prior year as a
result of withholding taxes associated with the distribution of intercompany
dividends and an increase in tax expense for certain foreign
markets. These increases were partially offset by lapping a 2008
expense associated with our plan to distribute certain foreign
earnings. Our 2009 effective tax rate was also positively impacted by
the reversal of foreign valuation allowances associated with certain
deferred tax assets that we now believe are more likely than not to be utilized
on future tax returns. Additionally, our rate was lower as a result
of lapping the 2008 gain on the sale of our interest in our unconsolidated
affiliate in Japan.
Our 2008
effective income tax rate was negatively impacted versus 2007 by lapping
valuation allowance reversals made in the prior year as discussed
below. This negative impact was partially offset by the reversal of
foreign valuation allowances in the current year associated with certain
deferred tax assets that we now believe are more likely than not to be utilized
on future tax returns. Additionally, the effective tax rate was
negatively impacted by the year-over-year change in adjustments to reserves and
prior years (including certain out-of-year adjustments that increased our
effective tax rate by 1.8 percentage points in 2008). Benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations positively impacted the effective tax rate as a result of lapping
2007 expenses associated with the distribution of an intercompany dividend and
adjustments to our deferred tax balances that resulted from the Mexico tax law
change, as further discussed below, as well as a higher percentage of our income
being earned outside the U.S. These benefits were partially offset in
2008 by the gain on the sale of our interest in our unconsolidated affiliate in
Japan and expense associated with our plan to distribute certain foreign
earnings. We also recognized deferred tax assets for the net
operating losses generated by certain tax planning strategies implemented in
2008 included in foreign and U.S. tax effects attributable to foreign operations
(1.7 percentage point impact). However, we provided a full valuation
allowance on these assets as we do not believe it is more likely than not that
they will be realized in the future.
Our 2007
effective income tax rate was positively impacted by valuation allowance
reversals. In December 2007, the Company finalized various tax
planning strategies based on completing a review of our international
operations, distributed a $275 million intercompany dividend and sold our
interest in our Japan unconsolidated affiliate. As a result, in the
fourth quarter of 2007, we reversed approximately $82 million of valuation
allowances associated with foreign tax credit carryovers that are more likely
than not to be claimed on future tax returns. In 2007, benefits
associated with our foreign and U.S. tax effects attributable to foreign
operations were negatively impacted by $36 million of expense associated with
the $275 million intercompany dividend and approximately $20 million of expense
for adjustments to our deferred tax balances as a result of the Mexico tax law
change enacted during the fourth quarter of 2007.
Adjustments
to reserves and prior years include the effects of the reconciliation of income
tax amounts recorded in our Consolidated Statements of Income to amounts
reflected on our tax returns, including any adjustments to the Consolidated
Balance Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established for potential
exposure we may incur if a taxing authority takes a position on a matter
contrary to our position. We evaluate these reserves on a quarterly
basis to ensure that they have been appropriately adjusted for events, including
audit settlements that we believe may impact our exposure.
The
details of 2009 and 2008 deferred tax assets (liabilities) are set forth
below:
|
2009
|
|
|
2008
|
Net
operating loss and tax credit carryforwards
|
$
|
230
|
|
|
|
$
|
256
|
|
Employee
benefits
|
|
148
|
|
|
|
|
233
|
|
Share-based
compensation
|
|
106
|
|
|
|
|
96
|
|
Self-insured
casualty claims
|
|
59
|
|
|
|
|
71
|
|
Lease
related liabilities
|
|
157
|
|
|
|
|
150
|
|
Various
liabilities
|
|
100
|
|
|
|
|
98
|
|
Deferred
income and other
|
|
30
|
|
|
|
|
41
|
|
Gross
deferred tax assets
|
|
830
|
|
|
|
|
945
|
|
Deferred
tax asset valuation allowances
|
|
(187
|
)
|
|
|
|
(254
|
)
|
Net
deferred tax assets
|
$
|
643
|
|
|
|
$
|
691
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets and property, plant and equipment
|
$
|
(184
|
)
|
|
|
$
|
(164
|
)
|
Lease
related assets
|
|
(75
|
)
|
|
|
|
(69
|
)
|
Other
|
|
(125
|
)
|
|
|
|
(134
|
)
|
Gross
deferred tax liabilities
|
|
(384
|
)
|
|
|
|
(367
|
)
|
Net
deferred tax assets (liabilities)
|
$
|
259
|
|
|
|
$
|
324
|
|
Reported
in Consolidated Balance Sheets as:
|
|
|
|
|
|
|
|
Deferred
income taxes – current
|
$
|
81
|
|
|
|
$
|
81
|
|
Deferred
income taxes – long-term
|
|
251
|
|
|
|
|
300
|
|
Accounts
payable and other current liabilities
|
|
(7
|
)
|
|
|
|
(4
|
)
|
Other
liabilities and deferred credits
|
|
(66
|
)
|
|
|
|
(53
|
)
|
|
$
|
259
|
|
|
|
$
|
324
|
|
We have
not provided deferred tax on certain undistributed earnings from our foreign
subsidiaries as we believe they are indefinitely reinvested. This
amount may become taxable upon an actual or deemed repatriation of assets from
the subsidiaries or a sale or liquidation of the subsidiaries. We
estimate that our total net undistributed earnings upon which we have not
provided deferred tax total approximately $875 million at December 26,
2009. A determination of the deferred tax liability on such earnings
is not practicable.
Foreign
operating and capital loss carryforwards totaling $610 million and state
operating loss carryforwards totaling $1.4 billion at year end 2009 are being
carried forward in jurisdictions where we are permitted to use tax losses from
prior periods to reduce future taxable income. These losses will
expire as follows: $10 million in 2010, $150 million between 2011 and
2014, $1.4 billion between 2015 and 2029 and $428 million may be carried forward
indefinitely. In addition, tax credits totaling $4 million are
available to reduce certain state liabilities, of which all may be carried
forward indefinitely.
We
recognize the benefit of our positions taken or expected to be taken in our tax
returns in the financial statements when it is more likely than not (i.e. a
likelihood of more than fifty percent) that the position would be sustained upon
examination by tax authorities. A recognized tax position is then
measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon settlement.
The
Company had $301 million of unrecognized tax benefits at December 26, 2009, $259
million of which, if recognized, would affect the effective income tax
rate. A reconciliation of the beginning and ending amount of
unrecognized tax benefits follows:
|
|
|
2009
|
|
|
2008
|
|
Beginning
of Year
|
|
$
|
296
|
|
|
$
|
343
|
|
|
Additions
on tax positions related to the current year
|
|
|
48
|
|
|
|
53
|
|
|
Additions
for tax positions of prior years
|
|
|
59
|
|
|
|
21
|
|
|
Reductions
for tax positions of prior years
|
|
|
(68
|
)
|
|
|
(110
|
)
|
|
Reductions
for settlements
|
|
|
(33
|
)
|
|
|
(2
|
)
|
|
Reductions
due to statute expiration
|
|
|
(6
|
)
|
|
|
(7
|
)
|
|
Foreign
currency translation adjustment
|
|
|
5
|
|
|
|
(2
|
)
|
End
of Year
|
|
$
|
301
|
|
|
$
|
296
|
|
|
|
|
|
|
|
The major
jurisdictions in which the Company files income tax returns include the U.S.
federal jurisdiction, China, the United Kingdom, Mexico and
Australia. As of December 26, 2009, the earliest years that the
Company was subject to examination in these jurisdictions were 1999 in the U.S.,
2006 in China, 2003 in the United Kingdom, 2001 in Mexico and 2005 in
Australia. In addition, the Company is subject to various U.S. state
income tax examinations, for which, in the aggregate, we had significant
unrecognized tax benefits at December 26, 2009. The Company believes
that it is reasonably possible that its unrecognized tax benefits may decrease
by approximately $87 million in the next 12 months, each of which are
individually insignificant, including approximately $71 million, which if
recognized upon audit settlement or statute expiration, will affect the 2010
effective tax rate.
At
December 26, 2009, long-term liabilities of $264 million, including $49 million
for the payment of accrued interest and penalties, are included in Other
liabilities and deferred credits as reported on the Consolidated Balance
Sheet. Total accrued interest and penalties recorded at December 26,
2009 were $41 million. During 2009, accrued interest and penalties
decreased by $8 million, of which $6 million was recognized in our Consolidated
Statement of Income. At December 27, 2008, long-term liabilities of
$229 million, including $32 million for the payment of accrued interest and
penalties, were included in Other liabilities and deferred credits as reported
on the Consolidated Balance Sheet. Total accrued interest and
penalties recorded at December 27, 2008 were $49 million. During
2008, accrued interest and penalties decreased $9 million, of which $7 million
was recognized in our Consolidated Statement of Income. The Company
recognizes accrued interest and penalties related to unrecognized tax benefits
as components of its income tax provision.
Note
20 – Reportable Operating Segments
We are
principally engaged in developing, operating, franchising and licensing the
worldwide KFC, Pizza Hut, Taco Bell, LJS and A&W concepts. KFC, Pizza Hut,
Taco Bell, LJS and A&W operate in 108, 92, 20, 6 and 9 countries and
territories, respectively. Our five largest international markets
based on operating profit in 2009 are China, Asia Franchise, Australia, United
Kingdom, and Latin America Franchise.
We
identify our operating segments based on management
responsibility. The China Division includes mainland China, Thailand
and KFC Taiwan, and YRI includes the remainder of our international
operations. In the U.S., we consider LJS and A&W to be a single
operating segment. We consider our KFC, Pizza Hut, Taco Bell and
LJS/A&W operating segments in the U.S. to be similar and therefore have
aggregated them into a single reportable operating segment.
Reported
segment results for 2008 and 2007 have been restated to be consistent with
current period presentation (See Note 2).
|
|
|
|
Revenues
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
4,473
|
|
|
|
$
|
5,132
|
|
|
|
$
|
5,202
|
|
YRI(a)
|
|
|
|
|
2,713
|
|
|
|
|
3,044
|
|
|
|
|
3,089
|
|
China
Division(a)
|
|
|
|
|
3,682
|
|
|
|
|
3,128
|
|
|
|
|
2,144
|
|
Unallocated(b)(c)
|
|
|
|
|
(32
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
$
|
10,836
|
|
|
|
$
|
11,304
|
|
|
|
$
|
10,435
|
|
|
|
|
|
Operating
Profit; Interest Expense, Net; and
Income
Before Income Taxes
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
647
|
|
|
|
$
|
641
|
|
|
|
$
|
685
|
|
YRI
|
|
|
|
|
491
|
|
|
|
|
522
|
|
|
|
|
474
|
|
China
Division(d)
|
|
|
|
|
602
|
|
|
|
|
480
|
|
|
|
|
375
|
|
Unallocated
Franchise and license fees and income(b)(c)
|
|
|
|
|
(32
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Unallocated
and corporate expenses(c)(e)
|
|
|
|
|
(189
|
)
|
|
|
|
(248
|
)
|
|
|
|
(197
|
)
|
Unallocated
Impairment expense(c)(f)
|
|
|
|
|
(26
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Unallocated
Other income (expense)(c)(g)
|
|
|
|
|
71
|
|
|
|
|
117
|
|
|
|
|
9
|
|
Unallocated
Refranchising gain (loss)(c)
|
|
|
|
|
26
|
|
|
|
|
5
|
|
|
|
|
11
|
|
Operating
Profit
|
|
|
|
|
1,590
|
|
|
|
|
1,517
|
|
|
|
|
1,357
|
|
Interest
expense, net
|
|
|
|
|
(194
|
)
|
|
|
|
(226
|
)
|
|
|
|
(166
|
)
|
Income
Before Income Taxes
|
|
|
|
$
|
1,396
|
|
|
|
$
|
1,291
|
|
|
|
$
|
1,191
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
216
|
|
|
|
$
|
231
|
|
|
|
$
|
247
|
|
YRI
|
|
|
|
|
149
|
|
|
|
|
158
|
|
|
|
|
161
|
|
China
Division
|
|
|
|
|
200
|
|
|
|
|
151
|
|
|
|
|
117
|
|
Corporate
|
|
|
|
|
15
|
|
|
|
|
16
|
|
|
|
|
17
|
|
|
|
|
|
$
|
580
|
|
|
|
$
|
556
|
|
|
|
$
|
542
|
|
|
|
|
|
Capital
Spending
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
270
|
|
|
|
$
|
349
|
|
|
|
$
|
320
|
|
YRI
|
|
|
|
|
232
|
|
|
|
|
260
|
|
|
|
|
179
|
|
China
Division
|
|
|
|
|
290
|
|
|
|
|
320
|
|
|
|
|
224
|
|
Corporate
|
|
|
|
|
5
|
|
|
|
|
6
|
|
|
|
|
3
|
|
|
|
|
|
$
|
797
|
|
|
|
$
|
935
|
|
|
|
$
|
726
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
2,575
|
|
|
|
$
|
2,739
|
|
|
|
$
|
2,884
|
|
YRI(h)
|
|
|
|
|
2,294
|
|
|
|
|
1,873
|
|
|
|
|
2,254
|
|
China
Division(h)
|
|
|
|
|
1,786
|
|
|
|
|
1,395
|
|
|
|
|
1,116
|
|
Corporate(i)
|
|
|
|
|
493
|
|
|
|
|
520
|
|
|
|
|
934
|
|
|
|
|
|
$
|
7,148
|
|
|
|
$
|
6,527
|
|
|
|
$
|
7,188
|
|
|
|
|
|
Long-Lived
Assets(j)
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
U.S.
|
|
|
|
$
|
2,260
|
|
|
|
$
|
2,413
|
|
|
|
$
|
2,595
|
|
YRI(k)
|
|
|
|
|
1,413
|
|
|
|
|
1,162
|
|
|
|
|
1,450
|
|
China
Division(k)
|
|
|
|
|
1,283
|
|
|
|
|
1,012
|
|
|
|
|
757
|
|
Corporate
|
|
|
|
|
45
|
|
|
|
|
63
|
|
|
|
|
73
|
|
|
|
|
|
$
|
5,001
|
|
|
|
$
|
4,650
|
|
|
|
$
|
4,875
|
|
(a)
|
Includes
revenues of $1.1 billion, $1.2 billion and $1.3 billion for entities in
the United Kingdom for 2009, 2008 and 2007, respectively. Includes revenues
of $3.4 billion, $2.8 billion and $1.9 billion in mainland China for 2009,
2008 and 2007, respectively.
|
|
|
(b)
|
Amount
consists of reimbursements to KFC franchisees for installation costs of
ovens for the national launch of Kentucky Grilled Chicken. See
Note 5.
|
|
|
(c)
|
Amounts
have not been allocated to the U.S., YRI or China Division segments for
performance reporting purposes.
|
|
|
(d)
|
Includes
equity income of unconsolidated affiliates of $36 million, $40 million and
$47 million in 2009, 2008 and 2007, respectively, for the China
Division.
|
|
|
(e)
|
2009
and 2008 includes approximately $16 million and $49 million, respectively,
of charges relating to U.S. general and administrative productivity
initiatives and realignment of resources. Additionally, 2008
includes $7 million of charges relating to investments in our U.S.
Brands. See Note 5.
|
|
|
(f)
|
2009
includes a $26 million charge to write-off goodwill associated with our
LJS and A&W businesses in the U.S. See Note
10.
|
|
|
(g)
|
2009
includes a $68 million gain related to the acquisition of additional
interest in and consolidation of a former unconsolidated affiliate and
2008 includes a $100 million gain recognized on the sale of our interest
in our unconsolidated affiliate in Japan. See Note
5.
|
|
|
(h)
|
There
was no investment in unconsolidated affiliates for YRI in 2009 or 2008, as
we sold our interest in our unconsolidated affiliate in Japan during
2008. See Note 5. YRI had an investment in our Japan
unconsolidated affiliate of $63 million for 2007. China
Division includes investment in 4 unconsolidated affiliates totaling $144
million for 2009. 2008 and 2007 includes investments in
unconsolidated affiliates of $65 million and $90 million, respectively,
for the China Division. The 2009 increase was driven by our
acquisition of interest in Little Sheep, net of our acquisition of
additional interest in and consolidation of our unconsolidated affiliate
in Shanghai, China. See Note 5.
|
|
|
(i)
|
Primarily
includes deferred tax assets, property, plant and equipment, net, related
to our office facilities and cash.
|
|
|
(j)
|
Includes
property, plant and equipment, net, goodwill, and intangible assets,
net.
|
|
|
(k)
|
Includes
long-lived assets of $660 million, $602 million and $843 million for
entities in the United Kingdom for 2009, 2008 and 2007,
respectively. The yearly fluctuations in long-lived assets were
primarily driven by the impact of foreign currency. Includes
long-lived assets of $1.2 billion, $905 million and $651 million in
mainland China for 2009, 2008 and 2007,
respectively.
|
See Note
5 for additional operating segment disclosures related to impairment, store
closure (income) costs and the carrying amount of assets held for
sale.
Note
21 – Contingencies
Lease
Guarantees
As a
result of (a) assigning our interest in obligations under real estate leases as
a condition to the refranchising of certain Company restaurants; (b)
contributing certain Company restaurants to unconsolidated affiliates; and (c)
guaranteeing certain other leases, we are frequently contingently liable on
lease agreements. These leases have varying terms, the latest of
which expires in 2026. As of December 26, 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 $500 million. The
present value of these potential payments discounted at our pre-tax cost of debt
at December 26, 2009 was approximately $425 million. Our franchisees
are the primary lessees under the vast majority of these leases. We
generally have cross-default provisions with these franchisees that would put
them in default of their franchise agreement in the event of non-payment under
the lease. We believe these cross-default provisions significantly
reduce the risk that we will be required to make payments under these
leases. Accordingly, the liability recorded for our probable exposure
under such leases at December 26, 2009 and December 27, 2008 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 December 26, 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 $54 million at December 26,
2009.
In
addition to the guarantee described above, YUM has provided guarantees of $40
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 $48 million at December
26, 2009.
Unconsolidated Affiliates
Guarantees
From time
to time we have guaranteed certain lines of credit and loans of unconsolidated
affiliates. At December 26, 2009 there are no guarantees outstanding
for unconsolidated affiliates. Our unconsolidated affiliates had
total revenues of approximately $760 million for the year ended December 26,
2009 and assets and debt of approximately $365 million and $40 million,
respectively, at December 26, 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, product liability and property losses
(collectively, “property and casualty losses”). To mitigate the cost
of our exposures for certain property and casualty losses, we make annual
decisions to self-insure the risks of loss up to defined maximum per occurrence
retentions on a line by line basis or to combine certain lines of coverage into
one loss pool with a single self-insured aggregate retention. The
Company then purchases insurance coverage, up to a certain limit, for losses
that exceed the self-insurance per occurrence or aggregate
retention. The insurers’ maximum aggregate loss limits are
significantly above our actuarially determined probable losses; therefore, we
believe the likelihood of losses exceeding the insurers’ maximum aggregate loss
limits is remote.
The
following table summarizes the 2009 and 2008 activity related to our
self-insured property and casualty reserves as of December 26,
2009. The decrease in 2009 insurance expense primarily was driven by
U.S. refranchising and improved loss trends.
|
|
Beginning
Balance
|
|
Expense
|
|
Payments
|
|
Ending
Balance
|
2009
Activity
|
|
$
|
196
|
|
|
44
|
|
|
|
(67
|
)
|
|
$
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Activity
|
|
$
|
197
|
|
|
68
|
|
|
|
(69
|
)
|
|
$
|
196
|
|
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 reasonably estimable.
On
November 26, 2001, Kevin Johnson, a former Long John Silver’s (“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 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 began in
November, 2009 but was delayed at the request of the plaintiffs. The
parties again participated in mediation on November 18, 2009 without reaching
resolution. Arbitration proceedings are scheduled to resume at the
end of May, 2010.
Based on
the rulings issued to date in this matter, the Cole Arbitration is proceeding 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 a reasonable settlement value of Claimants’
claims. 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 Cole Arbitration will not result in losses in excess of those currently
provided for in our 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. The cases were consolidated
in San Diego County as of September 7, 2006.
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. On January 29, 2010, the court granted the plaintiffs’ class
certification motion with respect to the unpaid overtime claims of RGMs and
Market Training Managers but denied class certification on the meal period
claims.
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 at corporate-owned restaurants in California since
September 2003 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 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., was filed on behalf of
Hardiman individually and all other aggrieved employees pursuant to
PAGA. The complaint seeks penalties for alleged violations of
California’s Labor Code. On June 25, 2008, Hardiman filed an amended
complaint adding class action allegations on behalf of hourly employees in
California very similar to the Medlock case,
including allegations of unpaid overtime, missed meal and rest periods, improper
wage statements, non-payment of wages upon termination, unreimbursed business
expenses and unfair or unlawful business practices in violation of California
Business & Professions Code §17200.
On 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. The Company was dismissed from the
case without prejudice on August 20, 2008.
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.
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. Taco Bell
removed the case to federal district court and filed a notice of related
case. On June 18, 2009 the case was transferred to the Eastern
District of California.
On May
19, 2009 the court granted Taco Bell’s motion to consolidate the Medlock, Hardiman, Leyva and Naranjo matters, and
the consolidated case is styled In Re Taco Bell Wage and
Hour Actions. On July 22, 2009, Taco Bell filed a motion to
dismiss, stay or consolidate the Widjaja case with the
In Re Taco Bell Wage
and Hour Actions, and Taco Bell’s motion to consolidate was granted on
October 19, 2009.
The In Re Taco Bell Wage and
Hour Actions plaintiffs filed a consolidated complaint on June 29, 2009,
and the court set a filing deadline of August 26, 2010 for motions regarding
class certification. The hearing on any class certification motion is
currently scheduled for January 10, 2011. Discovery is
underway.
Taco Bell
and the Company deny liability and intend 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 28, 2009, a putative class action styled Marisela Rosales v. Taco
Bell Corp. was filed in Orange County Superior Court. The
plaintiff, a former Taco Bell crew member, alleges that Taco Bell failed to
timely pay her final wages upon termination, and seeks restitution and late
payment penalties on behalf of herself and similarly situated
employees. This case appears to be duplicative of the In Re Taco Bell Wage and
Hour Actions case described above. Taco Bell removed the case
to federal court on November 5, 2009, and subsequently filed a motion to
dismiss, stay or transfer the case to the same district court as the In Re Taco Bell Wage and
Hour Actions case. The plaintiff did not move to remand, but
the court on its own motion ordered Taco Bell to show cause why the case should
not be remanded to state court. Taco Bell must file its response to the order to
show cause by March 22, 2010. A hearing on Taco Bell’s motion to
dismiss is currently scheduled for April 12, 2010.
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
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. On July 7, 2009, the Judge ruled that the case would not go
forward as a class action. Plaintiff also sought recovery of civil
penalties under the California Private Attorney General Act as a representative
of other “aggrieved employees.” On August 3, 2009, the Court ruled
that the plaintiff could not assert such claims and the case had to proceed as a
single plaintiff action. On the eve of the August 18, 2009 trial, the
plaintiff stipulated to a dismissal of his individual claims with prejudice but
reserved his right to appeal the Court’s rulings regarding class and PAGA
claims. KFC reserved its right to make any and all challenges to the
appeal. On or about September 16, 2009, plaintiff filed a notice of
appeal. The Ninth Circuit Court of Appeals has set a briefing
schedule for the appeal and plaintiff’s opening brief and KFC’s response are
each due in March 2010.
KFC
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
October 2, 2009, a putative class action, styled Domonique Hines 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. Plaintiff is a current
non-managerial KFC restaurant employee represented by the same counsel that
filed the Archila action
described above. KFC filed an answer on October 28, 2009, in which it
denied plaintiff’s claims and allegations. KFC removed the action to
the United States District Court for the Southern District of California on
October 29, 2009. KFC filed a motion to transfer the action to the
Central District of California due to the overlapping nature of the claims in
this action and the Archila
action. Plaintiff filed a motion to remand the action to state
court. Both motions have been fully briefed and are under submission
with the District Court. The case is in its early stages, and no
discovery has yet commenced. No trial date has been set.
KFC
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
December 17, 2002, Taco Bell was named as the defendant in a class action
lawsuit filed in the United States District Court for the Northern District of
California styled Moeller, et al. v. Taco Bell
Corp. On August 4, 2003, plaintiffs filed an amended complaint that
alleges, among other things, that Taco Bell has discriminated against the class
of people who use wheelchairs or scooters for mobility by failing to make its
approximately 220 company-owned restaurants in California 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. On December 16, 2009, the court
denied Taco Bell’s motion for summary judgment on the ADA claims and ordered
plaintiff to file a definitive list of remaining issues after which Taco Bell
may renew its motion for summary judgment on those issues.
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.
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. The arbitration
panel heard the parties’ cross motions for summary judgment on August 12,
2009. On August 14, 2009, the arbitration panel issued an opinion
granting Taco Bell’s motion for summary judgment and dismissing all of
Boskovich’s claims with prejudice. On September 23, 2009, Boskovich
filed a motion to vacate the arbitration award. On January 6, 2010
the court heard oral arguments on Boskovich’s motion to vacate and took the
matter under submission. Taco Bell 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.
On July
9, 2009, a putative class action styled Mark Smith v. Pizza Hut,
Inc. was filed in the United States District Court for the District of
Colorado. The complaint alleges that Pizza Hut did not properly
reimburse its delivery drivers for various automobile costs, uniforms costs, and
other job-related expenses and seeks to represent a class of delivery drivers
nationwide under the Fair Labor Standards Act (FLSA) and Colorado state
law. On September 15, 2009, a putative class action styled Sue Blackwood and Scott
Lewis v. Pizza Hut of America, Inc. was filed in the United States
District Court for the District of Kansas. Because the Blackwood
complaint brought essentially the same claims and purported to represent the
same class as the Smith case, Blackwood’s attorneys voluntarily dismissed the
lawsuit in December 2009.
Pizza Hut
denies liability and intends to vigorously defend against all claims in these
lawsuits. However, in view of the inherent uncertainties of
litigation, the outcome of these cases cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
Note 22 – Selected Quarterly Financial Data
(Unaudited)
|
|
2009
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
1,918
|
|
$
|
2,152
|
|
$
|
2,432
|
|
$
|
2,911
|
|
$
|
9,413
|
Franchise
and license fees and income
|
|
|
299
|
|
|
324
|
|
|
346
|
|
|
454
|
|
|
1,423
|
Total
revenues
|
|
|
2,217
|
|
|
2,476
|
|
|
2,778
|
|
|
3,365
|
|
|
10,836
|
Restaurant
profit
|
|
|
308
|
|
|
324
|
|
|
425
|
|
|
422
|
|
|
1,479
|
Operating
Profit(a)
|
|
|
351
|
|
|
394
|
|
|
470
|
|
|
375
|
|
|
1,590
|
Net
Income – YUM! Brands, Inc.
|
|
|
218
|
|
|
303
|
|
|
334
|
|
|
216
|
|
|
1,071
|
Basic
earnings per common share
|
|
|
0.47
|
|
|
0.65
|
|
|
0.71
|
|
|
0.46
|
|
|
2.28
|
Diluted
earnings per common share
|
|
|
0.46
|
|
|
0.63
|
|
|
0.69
|
|
|
0.45
|
|
|
2.22
|
Dividends
declared per common share
|
|
|
—
|
|
|
0.38
|
|
|
—
|
|
|
0.42
|
|
|
0.80
|
|
|
2008
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
2,094
|
|
$
|
2,323
|
|
$
|
2,482
|
|
$
|
2,944
|
|
$
|
9,843
|
Franchise
and license fees and income
|
|
|
319
|
|
|
336
|
|
|
360
|
|
|
446
|
|
|
1,461
|
Total
revenues
|
|
|
2,413
|
|
|
2,659
|
|
|
2,842
|
|
|
3,390
|
|
|
11,304
|
Restaurant
profit
|
|
|
308
|
|
|
311
|
|
|
358
|
|
|
401
|
|
|
1,378
|
Operating
Profit(b)
|
|
|
426
|
|
|
317
|
|
|
411
|
|
|
363
|
|
|
1,517
|
Net
Income – YUM! Brands, Inc.
|
|
|
254
|
|
|
224
|
|
|
282
|
|
|
204
|
|
|
964
|
Basic
earnings per common share
|
|
|
0.52
|
|
|
0.47
|
|
|
0.60
|
|
|
0.44
|
|
|
2.03
|
Diluted
earnings per common share
|
|
|
0.50
|
|
|
0.45
|
|
|
0.58
|
|
|
0.43
|
|
|
1.96
|
Dividends
declared per common share
|
|
|
0.15
|
|
|
0.19
|
|
|
—
|
|
|
0.38
|
|
|
0.72
|
(a)
|
Includes
net losses of $17 million, $3 million and $22 million in the first, third
and fourth quarters of 2009, respectively, and a net gain of $60 million
in the second quarter of 2009 related to the consolidation of a former
unconsolidated affiliate, charges related to the U.S. business
transformation measures and an impairment of an international
market. See Note 5.
|
|
|
(b)
|
Includes
a net gain of $68 million, net loss of $3 million and net loss of $26
million in the first, second and fourth quarters of 2008, respectively,
related to the gain on the sale of our interest in our Japan
unconsolidated affiliate and charges related to the U.S. business
transformation measures. See Note
5.
|
Management’s Responsibility for
Financial Statements
To Our
Shareholders:
We are
responsible for the preparation, integrity and fair presentation of the
Consolidated Financial Statements, related notes and other information included
in this annual report. The financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America and include certain amounts based upon our estimates and assumptions, as
required. Other financial information presented in the annual report
is derived from the financial statements.
We
maintain a system of internal control over financial reporting, designed to
provide reasonable assurance as to the reliability of the financial statements,
as well as to safeguard assets from unauthorized use or
disposition. The system is supported by formal policies and
procedures, including an active Code of Conduct program intended to ensure
employees adhere to the highest standards of personal and professional
integrity. We have conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation, we concluded that our
internal control over financial reporting was effective as of December 26,
2009. Our internal audit function monitors and reports on the
adequacy of and compliance with the internal control system, and appropriate
actions are taken to address significant control deficiencies and other
opportunities for improving the system as they are identified.
The
Consolidated Financial Statements have been audited and reported on by our
independent auditors, KPMG LLP, who were given free access to all financial
records and related data, including minutes of the meetings of the Board of
Directors and Committees of the Board. We believe that management
representations made to the independent auditors were valid and
appropriate. Additionally, the effectiveness of our internal control
over financial reporting has been audited and reported on by KPMG
LLP.
The Audit
Committee of the Board of Directors, which is composed solely of outside
directors, provides oversight to our financial reporting process and our
controls to safeguard assets through periodic meetings with our independent
auditors, internal auditors and management. Both our independent
auditors and internal auditors have free access to the Audit
Committee.
Although
no cost-effective internal control system will preclude all errors and
irregularities, we believe our controls as of December 26, 2009 provide
reasonable assurance that our assets are reasonably safeguarded.
Richard
T. Carucci
Chief
Financial Officer
Item
9.
|
Changes In and Disagreements
with Accountants on Accounting and Financial
Disclosure.
|
None.
Item
9A.
|
Controls
and Procedures.
|
Evaluation of Disclosure
Controls and Procedures
The
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 as of the end of the period covered by
this report. Based on the evaluation, performed under the supervision
and with the participation of the Company’s management, including the Chairman,
Chief Executive Officer and President (the “CEO”) and the Chief Financial
Officer (the “CFO”), the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by this report.
Management’s Report on
Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934. Under the supervision and
with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control
– Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation under the
framework in Internal Control
– Integrated Framework, our management concluded that our internal
control over financial reporting was effective as of December 26,
2009.
KPMG LLP,
an independent registered public accounting firm, has audited the consolidated
financial statements included in this Annual Report on Form 10-K and the
effectiveness of our internal control over financial reporting and has issued
their report, included herein.
Changes in Internal
Control
There
were no changes with respect to the Company’s internal control over financial
reporting or in other factors that materially affected, or are reasonably likely
to materially affect, internal control over financial reporting during the
quarter ended December 26, 2009.
Item
9B.
|
Other
Information.
|
None.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate
Governance.
|
Information
regarding Section 16(a) compliance, the Audit Committee and the Audit Committee
financial expert, the Company’s code of ethics and background of the directors
appearing under the captions “Stock Ownership Information,” “Governance of the
Company,” “Executive Compensation” and “Item 1: Election of
Directors” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 26, 2009.
Information regarding executive
officers of the Company is included in Part I.
Item
11.
|
Executive
Compensation.
|
Information
regarding executive and director compensation and the Compensation Committee
appearing under the captions “Governance of the Company” and “Executive
Compensation” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 26, 2009.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
Information
regarding equity compensation plans and security ownership of certain beneficial
owners and management appearing under the captions “Executive Compensation” and
“Stock Ownership Information” is incorporated by reference from the Company’s
definitive proxy statement which will be filed with the Securities and Exchange
Commission no later than 120 days after December 26, 2009.
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Information
regarding certain relationships and related transactions and information
regarding director independence appearing under the caption “Governance of the
Company” is incorporated by reference from the Company’s definitive proxy
statement which will be filed with the Securities and Exchange Commission no
later than 120 days after December 26, 2009.
Item
14.
|
Principal
Accountant Fees and Services.
|
Information
regarding principal accountant fees and services and audit committee
pre-approval policies and procedures appearing under the caption “Item
2: Ratification of Independent Auditors” is incorporated by reference
from the Company’s definitive proxy statement which will be filed with the
Securities and Exchange Commission no later than 120 days after December 26,
2009.
PART
IV
Item
15.
|
Exhibits
and Financial Statement Schedules.
|
(a)
|
(1)
|
Financial
Statements: Consolidated financial statements filed as part of
this report are listed under Part II, Item 8 of this Form
10-K.
|
|
|
|
|
(2)
|
Financial
Statement Schedules: No schedules are required because either
the required information is not present or not present in amounts
sufficient to require submission of the schedule, or because the
information required is included in the financial statements or the
related notes thereto filed as a part of this Form
10-K.
|
|
|
|
|
(3)
|
Exhibits: The
exhibits listed in the accompanying Index to Exhibits are filed as part of
this Form 10-K. The Index to Exhibits specifically identifies each
management contract or compensatory plan required to be filed as an
exhibit to this Form 10-K.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this Form 10-K annual report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this annual report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
David C. Novak
|
|
Chairman
of the Board,
Chief
Executive Officer and President
(principal
executive officer)
|
|
February
17, 2010
|
Richard T. Carucci
|
|
Chief
Financial Officer
(principal
financial officer)
|
|
February
17, 2010
|
Ted F. Knopf
|
|
Senior
Vice President Finance and Corporate Controller
(principal
accounting officer)
|
|
February
17, 2010
|
David W. Dorman
|
|
Director
|
|
February
17, 2010
|
Massimo Ferragamo
|
|
Director
|
|
February
17, 2010
|
J. David Grissom
|
|
Director
|
|
February
17, 2010
|
Bonnie G. Hill
|
|
Director
|
|
February
17, 2010
|
Robert Holland, Jr.
|
|
Director
|
|
February
17, 2010
|
Kenneth G. Langone
|
|
Director
|
|
February
17, 2010
|
Jonathan S. Linen
|
|
Director
|
|
February
17, 2010
|
Thomas C. Nelson
|
|
Director
|
|
February
17, 2010
|
Thomas M. Ryan
|
|
Director
|
|
February
17, 2010
|
Jing-Shyh S. Su
|
|
Vice-Chairman
of the Board
|
|
February
17, 2010
|
Jackie Trujillo
|
|
Director
|
|
February
17, 2010
|
Robert D. Walter
|
|
Director
|
|
February
17, 2010
|
YUM!
Brands, Inc.
Exhibit
Index
(Item
15)
Exhibit
Number
|
|
Description of Exhibits
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of YUM, which is incorporated herein by
reference from Exhibit 3.1 to YUM’s Annual Report on Form 10-K for the
fiscal year ended December 27, 2008.
|
|
|
|
3.2
|
|
Amended
and restated Bylaws of YUM, which are incorporated herein by reference
from Exhibit 3.1 on Form 8-K filed on November 23,
2009.
|
|
|
|
4.1
|
|
Indenture,
dated as of May 1, 1998, between YUM and J.P. Morgan Chase Bank, National
Association, successor in interest to The First National Bank of Chicago,
pertaining to 7.65% Senior Notes due May 15, 2008, 8.5% Senior Notes and
8.875% Senior Notes due April 15, 2006 and April 15, 2011, respectively,
and 7.70% Senior Notes due July 1, 2012, which is incorporated herein by
reference from Exhibit 4.1 to YUM’s Report on Form 8-K filed on May 13,
1998.
|
|
|
(i)
|
6.25%
Senior Notes due April 15, 2016 issued under the foregoing May 1, 1998
indenture, which notes are incorporated by reference from Exhibit 4.2 to
YUM’s Report on Form 8-K filed on April 17, 2006.
|
|
|
|
|
|
(ii)
|
6.25%
Senior Notes due March 15, 2018 issued under the foregoing May 1, 1998
indenture, which notes are incorporated by reference from Exhibit 4.2 to
YUM’s Report on Form 8-K filed on October 22, 2007.
|
|
|
|
|
|
|
(iii)
|
6.875%
Senior Notes due November 15, 2037 issued under the foregoing May 1, 1998
indenture, which notes are incorporated by reference from Exhibit 4.3 to
YUM’s Report on Form 8-K filed on October 22, 2007.
|
|
|
|
|
|
|
(iv)
|
4.25%
Senior Notes due September 15, 2015 issued under the foregoing May 1, 1998
indenture, which notes are incorporated by reference from Exhibit 4.1 to
YUM’s Report on Form 8-K filed on August 25, 2009.
|
|
|
|
|
|
(v)
|
5.30%
Senior Notes due September 15, 2019 issued under the foregoing May 1, 1998
indenture, which notes are incorporated by reference from Exhibit 4.1 to
YUM’s Report on Form 8-K filed on August 25, 2009.
|
|
|
|
10.1
|
|
Amended
and Restated Sales and Distribution Agreement between AmeriServe Food
Distribution, Inc., YUM, Pizza Hut, Taco Bell and KFC, effective as of
November 1, 1998, which is incorporated herein by reference from Exhibit
10 to YUM’s Annual Report on Form 10-K for the fiscal year ended December
26, 1998, as amended by the First Amendment thereto, which is incorporated
herein by reference from Exhibit 10.5 to YUM’s Annual Report on Form 10-K
for the fiscal year ended December 30, 2000.
|
|
|
|
10.2
|
|
Amended
and Restated Credit Agreement, dated November 29, 2007 among YUM, the
lenders party thereto, JP Morgan Chase Bank, N.A., as Administrative
Agent, J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as
Lead Arrangers and Bookrunners and Citibank N.A., as Syndication Agent,
which is incorporated herein by reference from Exhibit 10.6 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
10.3†
|
|
YUM
Director Deferred Compensation Plan, as effective October 7, 1997, which
is incorporated herein by reference from Exhibit 10.7 to YUM’s Annual
Report on Form 10-K for the fiscal year ended December 27,
1997.
|
|
|
|
10.3.1†
|
|
YUM
Director Deferred Compensation Plan, Plan Document for the 409A Program,
as effective January 1, 2005, and as Amended through November 14, 2008,
which is incorporated by reference from Exhibit 10.7.1 to YUM’s Quarterly
Report on Form 10-Q for the quarter ended June 13,
2009.
|
|
|
|
10.4†
|
|
YUM
1997 Long Term Incentive Plan, as effective October 7, 1997, which is
incorporated herein by reference from Exhibit 10.8 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 27,
1997.
|
|
|
|
10.5†
|
|
YUM
Executive Incentive Compensation Plan, as effective May 20, 2004, and as
Amended through the Second Amendment, as effective May 21, 2009, which is
incorporated herein by reference from Exhibit A of YUM’s Definitive Proxy
Statement on Form DEF 14A for the Annual Meeting of Shareholders held on
May 21, 2009.
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|
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10.6†
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YUM
Executive Income Deferral Program, as effective October 7, 1997, and as
amended through May 16, 2002, which is incorporated herein by reference
from Exhibit 10.10 to YUM’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2005.
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10.6.1†
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YUM!
Brands Executive Income Deferral Program, Plan Document for the 409A
Program, as effective January 1, 2005, and as Amended through June 30,
2009, which is incorporated by reference from Exhibit 10.10.1 to YUM’s
Quarterly Report on Form 10-Q for the quarter ended June 13,
2009.
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10.7†
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YUM
Pension Equalization Plan, as effective October 7, 1997, which is
incorporated herein by reference from Exhibit 10.14 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 27,
1997.
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10.7.1†
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YUM!
Brands, Inc. Pension Equalization Plan, Plan Document for the 409A
Program, as effective January 1, 2005, and as Amended through December 30,
2008, which is incorporated by reference from Exhibit 10.13.1 to YUM’s
Quarterly Report on Form 10-Q for the quarter ended June 13,
2009.
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10.8†
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Form
of Directors’ Indemnification Agreement, which is incorporated herein by
reference from Exhibit 10.17 to YUM’s Annual Report on Form 10-K for the
fiscal year ended December 27, 1997.
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|
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10.9†
|
|
Amended
and restated form of Severance Agreement (in the event of a change in
control), which is incorporated herein by reference from Exhibit 10.17 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 30,
2000.
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10.9.1†
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|
YUM!
Brands, Inc. 409A Addendum to Amended and restated form of Severance
Agreement, as effective December 31, 2008, which is incorporated by
reference from Exhibit 10.17.1 to YUM’s Quarterly Report on Form 10-Q for
the quarter ended June 13, 2009.
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10.10†
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|
YUM
Long Term Incentive Plan, as Amended through the Fourth Amendment, as
effective November 21, 2008, which is incorporated by reference from
Exhibit 10.18 to YUM’s Quarterly Report on Form 10-Q for the quarter ended
June 13, 2009.
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10.11
|
|
Amended
and Restated YUM Purchasing Co-op Agreement, dated as of August 26, 2002,
between YUM and the Unified FoodService Purchasing Co-op, LLC, which is
incorporated herein by reference from Exhibit 10.20 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 28,
2002.
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10.12†
|
|
YUM
Restaurant General Manager Stock Option Plan, as effective April 1, 1999,
and as amended through June 23, 2003, which is incorporated herein by
reference from Exhibit 10.22 to YUM’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
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10.13†
|
|
YUM
SharePower Plan, as effective October 7, 1997, and as amended through June
23, 2003, which is incorporated herein by reference from Exhibit 10.23 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
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10.14†
|
|
Form
of YUM Director Stock Option Award Agreement, which is incorporated herein
by reference from Exhibit 10.25 to YUM’s Quarterly Report on Form 10-Q for
the quarter ended September 4, 2004.
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|
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10.15†
|
|
Form
of YUM 1999 Long Term Incentive Plan Award Agreement, which is
incorporated herein by reference from Exhibit 10.26 to YUM’s Quarterly
Report on Form 10-Q for the quarter ended September 4,
2004.
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10.16†
|
|
YUM!
Brands, Inc. International Retirement Plan, as in effect January 1, 2005,
which is incorporated herein by reference from Exhibit 10.27 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 25,
2004.
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|
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10.17†
|
|
Letter
of Understanding, dated July 13, 2004, by and between the Company and
Samuel Su, which is incorporated herein by reference from Exhibit 10.28 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 25,
2004.
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10.18†
|
|
Form
of 1999 Long Term Incentive Plan Award Agreement (Stock Appreciation
Rights) which is incorporated by reference from Exhibit 99.1 to YUM’s
Report on Form 8-K as filed on January 30, 2006.
|
|
|
|
10.19
|
|
Amended
and Restated Credit Agreement, dated November 29, 2007, among YUM, the
lenders party thereto, Citigroup Global Markets Ltd. and J.P. Morgan
Securities Inc., as Lead Arrangers and Bookrunners, and Citigroup
International Plc and Citibank, N.A., Canadian Branch, as Facility Agents,
which is incorporated herein by reference from Exhibit 10.30 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
|
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|
10.20†
|
|
Severance
Agreement (in the event of change in control) for Emil Brolick, dated as
of February 15, 2001, which is incorporated herein by reference from
Exhibit 10.31 to YUM’s Annual Report on Form 10-K for the fiscal year
ended December 30, 2006.
|
|
|
|
10.20.1†
|
|
YUM!
Brands 409A Addendum to Severance Agreement for Emil Brolick, as effective
December 31, 2008, which is incorporated by reference from Exhibit 10.31.1
to YUM’s Quarterly Report on Form 10-Q for the quarter ended June 13,
2009.
|
|
|
|
10.21†
|
|
YUM!
Brands Leadership Retirement Plan, as in effect January 1, 2005, which is
incorporated herein by reference from Exhibit 10.32 to YUM’s Quarterly
Report on Form 10-Q for the quarter ended March 24,
2007.
|
|
|
|
10.21.1†
|
|
YUM!
Brands Leadership Retirement Plan, Plan Document for the 409A Program, as
effective January 1, 2005, and as Amended through December, 2009 (as filed
herewith).
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|
|
|
10.22†
|
|
1999
Long Term Incentive Plan Award (Restricted Stock Unit Agreement) by and
between the Company and David C. Novak, dated as of January 24, 2008,
which is incorporated herein by reference from Exhibit 10.33 to YUM’s
Annual Report on Form 10-K for the fiscal year ended December 29,
2007.
|
|
|
|
10.23
|
|
Credit
Agreement, dated July 11, 2008, among YUM, and the lenders party thereto,
JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Securities
Inc. as Lead Arranger and Sole Bookrunner and Bank of America, N.A., as
Syndication Agent, which is incorporated by reference from Exhibit 10.34
to YUM’s Quarterly Report on Form 10-Q for the quarter ended June 14,
2008.
|
|
|
|
10.24†
|
|
YUM!
Performance Share Plan, as effective January 1, 2009 (as filed
herewith).
|
|
|
|
10.25†
|
|
YUM!
Brands Third Country National Retirement Plan, as effective January 1,
2009 (as filed herewith).
|
|
|
|
10.26†
|
|
2010
YUM! Brands Supplemental Long Term Disability Coverage Summary, as
effective January 1, 2010 (as filed herewith).
|
|
|
|
12.1
|
|
Computation
of ratio of earnings to fixed charges.
|
|
|
|
21.1
|
|
Active
Subsidiaries of YUM.
|
|
|
|
23.1
|
|
Consent
of KPMG LLP.
|
|
|
|
31.1
|
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to Rule
13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1
|
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.2
|
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
101.INS*
|
|
XBRL
Instance Document
|
|
|
|
101.SCH*
|
|
XBRL
Taxonomy Extension Schema Document
|
|
|
|
101.CAL*
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
|
101.LAB*
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
|
101.PRE*
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
|
|
101.DEF*
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
|
*
|
In
accordance with Regulation S-T, the XBRL-related information in Exhibit
101 to this Annual Report on this Form 10-K shall be deemed to be
“furnished” and not “filed.”
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† Indicates
a management contract or compensatory plan.