form10k.htm
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 29, 2007
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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EXCHANGE
ACT OF 1934
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For
the transition period from ____________ to _________________
Commission
file number 1-13163
YUM!
BRANDS, INC.
(Exact
name of registrant as specified in its charter)
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North
Carolina
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13-3951308
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1441
Gardiner Lane, Louisville, Kentucky
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40213
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (502)
874-8300
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Securities
registered pursuant to Section 12(b) of the Act
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Title of Each
Class
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Name of Each Exchange
on Which Registered
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Common
Stock, no par value
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
the Rule 405 of the Securities Act. Yes Ö No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
No Ö
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes Ö No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Ö]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, non-accelerated filer or smaller reporting company. See
definition of “accelerated filer, large accelerated filer and smaller reporting
company” in Rule 12-b of the Exchange Act (Check one): Large
accelerated filer: [Ö] Accelerated
filer: [ ] Non-accelerated
filer: [ ] Smaller reporting
company: [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
No Ö
The
aggregate market value of the voting stock (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of June 16, 2007
computed by reference to the closing price of the registrant’s Common Stock on
the New York Stock Exchange Composite Tape on such date was $17,730,290,814. 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
18, 2008 was 475,493,520 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 15, 2008
are incorporated by reference into Part III.
PART
I
YUM!
Brands, Inc. (referred to herein as “YUM” or the “Company”), was incorporated
under the laws of the state of North Carolina in 1997. The principal
executive offices of YUM are located at 1441 Gardiner Lane, Louisville,
Kentucky 40213, and the telephone number at that location is (502)
874-8300.
YUM, the
registrant, together with its subsidiaries, is referred to in this Form 10-K
annual report (“Form 10-K”) as the Company. The terms “we,” “us” and
“our” are also used in the Form 10-K to refer to the Company. Throughout this
Form 10-K, the terms “restaurants,” “stores” and “units” are used
interchangeably.
This Form
10-K should be read in conjunction with the Cautionary Statements on pages 47
through 48.
(a)
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General
Development of Business
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In
January 1997, PepsiCo announced its decision to spin-off its restaurant
businesses to shareholders as an independent public company (the “Spin-off”).
Effective October 6, 1997, PepsiCo disposed of its restaurant businesses by
distributing all of the outstanding shares of Common Stock of YUM to its
shareholders.
On May 7,
2002, YUM completed the acquisition of Yorkshire Global Restaurants, Inc.
(“YGR”), the parent company and operator of Long John Silver’s (“LJS”) and
A&W All-American Food Restaurants (“A&W”). On May 16, 2002,
following receipt of shareholder approval, the Company changed its name from
TRICON Global Restaurants, Inc. to YUM! Brands, Inc.
(b)
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Financial
Information about Operating
Segments
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YUM
consists of six operating segments: KFC-U.S., Pizza Hut-U.S., Taco
Bell-U.S., LJS/A&W-U.S., YUM Restaurants International (“YRI” or
“International Division”) and YUM Restaurants China (“China
Division”). For financial reporting purposes, management considers
the four U.S. operating segments to be similar and, therefore, has aggregated
them into a single reportable operating segment. The China Division
includes mainland China (“China”), Thailand and KFC Taiwan, and the
International Division includes the remainder of our international
operations.
Operating
segment information for the years ended December 29, 2007, December 30, 2006 and
December 31, 2005 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 21 through 48 and in the related Consolidated Financial
Statements and footnotes in Part II, Item 8, pages 49 through 101.
(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 35,000 units in more than 100 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. In all five of its Concepts,
the Company either operates units or they are operated by independent
franchisees or licensees under the terms of franchise or license
agreements. Franchisees can range in size from individuals owning
just one unit to large publicly traded companies. In addition, the Company owns
non-controlling interests in Unconsolidated Affiliates who operate similar to
franchisees.
At year end 2007, we had approximately 20,000
system restaurants in the U.S. which generated revenues of $5.2 billion and
operating profit of $739 million during 2007. The International
Division, based in Dallas, Texas, comprises more than 12,000 system restaurants,
primarily KFCs and Pizza Huts, operating in over 100 countries outside the
U.S. In 2007, YRI achieved revenues of $3.1 billion and operating
profit of $480 million. The China Division, based in Shanghai, China,
comprises more than 3,000 system restaurants, predominately KFCs. In
2007, the China Division achieved revenues of $2.1 billion and operating profit
of $375 million.
Restaurant
Concepts
Most
restaurants in each Concept offer consumers the ability to dine in and/or carry
out food. In addition, Taco Bell, KFC, LJS and A&W offer a drive-thru option
in many stores. Pizza Hut offers a drive-thru option on a much more
limited basis. Pizza Hut and, on a much more limited basis, KFC offer
delivery service.
Each
Concept has proprietary menu items and emphasizes the preparation of food with
high quality ingredients, as well as unique recipes and special seasonings to
provide appealing, tasty and attractive food at competitive prices.
The
franchise program of the Company is designed to assure consistency and quality,
and the Company is selective in granting franchises. Under standard
franchise agreements, franchisees supply capital – initially by paying a
franchise fee to YUM, purchasing or leasing the land, building and equipment and
purchasing signs, seating, inventories and supplies and, over the longer term,
by reinvesting in the business. Franchisees then contribute to the
Company’s revenues through the payment of royalties based on a percentage of
sales.
The
Company believes that it is important to maintain strong and open relationships
with its franchisees and their representatives. To this end, the
Company invests a significant amount of time working with the franchisee
community and their representative organizations on all aspects of the business,
including products, equipment, operational improvements and standards and
management techniques.
The
Company and its franchisees also operate multibrand units, primarily in the
U.S., where two or more of the Concepts are operated in a single
unit. At year end 2007, there were 3,989 multibranded units in the
worldwide system, of which 3,699 were in the U.S. These units were
comprised of 2,703 units offering food products from two of the Concepts, 47
units offering food products from three of the Concepts and 1,216 units offering
food products from Pizza Hut and WingStreet, a flavored chicken wings
concept. YUM has 23 units offering food products from KFC and Wing
Works, another flavored chicken wings concept developed by YUM.
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 2007, 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 45 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment, which is nearly four times that of its
closest national competitor.
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KFC
operates in 105 countries and territories throughout the world. As of year
end 2007, KFC had 5,358 units in the U.S. and 9,534 units outside the
U.S., including 2,140 units in mainland China. Approximately 18
percent of the U.S. units and 25 percent of the non-U.S. units are
operated by the Company.
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Traditional
KFC restaurants in the U.S. offer fried chicken-on-the-bone products,
primarily marketed under the names Original Recipe and Extra Tasty
Crispy. Other principal entree items include chicken sandwiches
(including the Snacker and the Twister), KFC Famous Bowls, Colonel’s
Crispy Strips, Wings, Popcorn Chicken and seasonally, Chunky Chicken Pot
Pies. KFC restaurants in the U.S. also offer a variety of side
items, such as biscuits, mashed potatoes and gravy, coleslaw, corn, and
potato wedges, as well as desserts. While many of these
products are offered outside of the U.S., international menus are more
focused on chicken sandwiches and Colonel’s Crispy Strips, and include
side items that are suited to local preferences and
tastes. Restaurant decor throughout the world is characterized
by the image of the Colonel.
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Pizza
Hut
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The
first Pizza Hut restaurant was opened in 1958 in Wichita, Kansas, and
within a year, the first franchise unit was opened. Today,
Pizza Hut is the largest restaurant chain in the world specializing in the
sale of ready-to-eat pizza products. Pizza Hut is based in
Dallas, Texas.
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As
of year end 2007, Pizza Hut was the leader in the U.S. pizza QSR segment,
with a 15 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Pizza
Hut operates in 97 countries and territories throughout the world. As of
year end 2007, Pizza Hut had 7,515 units in the U.S., and 5,362 units
outside of the U.S. Approximately 17 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 and 4forALL. Each of these pizzas is offered with
a variety of different toppings. In some restaurants, Pizza Hut
also offers chicken wings, breadsticks, pasta, salads and
sandwiches. Menu items outside of the U.S. are generally
similar to those offered in the U.S., though pizza toppings are often
suited to local preferences and
tastes.
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Taco
Bell
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The
first Taco Bell restaurant was opened in 1962 by Glen Bell in Downey,
California, and in 1964, the first Taco Bell franchise was sold. Taco Bell
is based in Irvine, California.
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As
of year end 2007, Taco Bell was the leader in the U.S. Mexican QSR
segment, with a 54 percent market share (Source: The NPD Group, Inc.; NPD
Foodworld; CREST) in that segment.
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Taco
Bell operates in 15 countries and territories throughout the world. As of
year end 2007, there were 5,580 Taco Bell units in the U.S., and 240 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 2007, LJS was the leader in the U.S. seafood QSR segment, with
a 32 percent market share (Source: The NPD Group, Inc.; NPD Foodworld;
CREST) in that segment.
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LJS
operates in 7 countries and territories throughout the
world. As of year end 2007, there were 1,081 LJS units in the
U.S., and 38 units outside the U.S. Approximately 30 percent of
the U.S. units are operated by the Company. All non-U.S. units
are operated by franchisees or licensees.
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LJS
features a variety of seafood and chicken items, including meals featuring
batter-dipped fish, chicken, shrimp, 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 11 countries and territories throughout the
world. As of year end 2007, there were 371 A&W units in the
U.S., and 254 units outside the U.S. Approximately 1 percent of
the U.S. units are operated by the Company. All non-U.S. units
are 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.
The
Company’s restaurant management structure varies by Concept and unit size.
Generally, each Company restaurant is led by a restaurant general manager
(“RGM”), together with one or more assistant managers, depending on the
operating complexity and sales volume of the restaurant. In the U.S.,
the average restaurant has 25 to 30 employees, while internationally this figure
can be significantly higher depending on the location and sales volume of the
restaurant. Most of the employees work on a part-time
basis. We issue detailed manuals, which may then be customized to
meet local regulations and customs, covering all aspects of restaurant
operations, including food handling and product preparation procedures, safety
and quality issues, equipment maintenance, facility standards and accounting
control procedures. The restaurant management teams are responsible
for the day-to-day operation of each unit and for ensuring compliance with
operating standards. CHAMPS – which stands for Cleanliness, Hospitality,
Accuracy, Maintenance, Product Quality and Speed of Service – is our proprietary
core systemwide program for training, measuring and rewarding employee
performance against key customer measures. CHAMPS is intended to
align the operating processes of our entire system around one set of standards.
RGMs’ efforts, including CHAMPS performance measures, are monitored by Area
Coaches. Area Coaches typically work with approximately six to twelve
restaurants. Various senior operators visit the Company’s restaurants
from time to time to help ensure adherence to system standards and mentor
restaurant team members.
Supply and Distribution
The
Company is a substantial purchaser of a number of food and paper products,
equipment and other restaurant supplies. The principal items purchased include
chicken, cheese, beef and pork products, seafood, paper and packaging
materials.
U.S.
Division. The Company, along with the representatives of the
Company’s KFC, Pizza Hut, Taco Bell, LJS and A&W franchisee groups, are
members in the Unified FoodService Purchasing Co-op, LLC (the “Unified Co-op”)
which was created for the purpose of purchasing certain restaurant products and
equipment in the U.S. The core mission of the Unified Co-op is to
provide the lowest possible sustainable store-delivered prices for restaurant
products and equipment while ensuring compliance with certain quality and safety
standards. This arrangement combines the purchasing power of the
Company and franchisee restaurants in the U.S. which the Company believes
leverages the system’s scale to drive cost savings and effectiveness in the
purchasing function. The Company also believes that the Unified Co-op
has resulted, and should continue to result, in closer alignment of interests
and a stronger relationship with its franchisee community.
The
Company is committed to conducting its business in an ethical, legal and
socially responsible manner. To encourage compliance with all legal
requirements and ethical business practices, YUM has a supplier code of conduct
for all U.S. suppliers to our business. To ensure the quality and
safety of food products, suppliers and distributors are required to meet strict
quality control standards. Long-term contracts and long-term vendor
relationships are used to ensure availability of products. The
Company has not experienced any significant continuous shortages of supplies,
and alternative sources for most of these products are generally
available. Prices paid for these supplies fluctuate. When
prices increase, the Company may be able to pass on such increases to its
customers, although there is no assurance that this can be done
practically.
Most food
products, paper and packaging supplies, and equipment used in the operation of
the Company’s restaurants are distributed to individual restaurant units by
third party distribution companies. McLane Company, Inc. (“McLane”)
is the exclusive distributor for Company-operated KFCs, Pizza Huts, Taco Bells
and Long John Silvers in the U.S. and for a substantial number of franchisee and
licensee stores. McLane became the distributor when it assumed all
distribution responsibilities under an existing agreement between Ameriserve
Food Distribution, Inc. (“AmeriServe”) and the Company. This
agreement extends through October 31, 2010 and generally prohibits
Company-operated KFC, Pizza Hut and Taco Bell restaurants from using alternative
distributors in the U.S. The Company stores within the LJS and
A&W systems are covered under a separate agreement with McLane.
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 certain countries,
we own all or a portion of the distribution system, including mainland 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 21 through 48 and the Consolidated Statements of Cash Flows in Part II,
Item 8, page 53.
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 2007, the restaurant business in the U.S. consisted
of about 935,000 restaurants representing approximately $535 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 operates R&D facilities in Louisville, Kentucky; Dallas, Texas; and
Irvine, California and in several locations outside the U.S., including
Shanghai, China. The Company expensed $39 million, $33 million and
$33 million in 2007, 2006 and 2005, 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 2007, there were no material
capital expenditures for environmental control facilities and no such material
expenditures are anticipated.
Government
Regulation
U.S.
Division. The Company and its
U.S. Division are subject to various federal, state and local laws affecting its
business. Each of the Company’s restaurants in the U.S. must comply
with licensing and regulation by a number of governmental authorities, which
include health, sanitation, safety and fire agencies in the state or
municipality in which
the
restaurant is located. In addition, the Company must comply with
various state laws that regulate the franchisor/franchisee
relationship. To date, the Company has not been significantly
affected by any difficulty, delay or failure to obtain required licenses or
approvals.
The
Company is also subject to federal and state laws governing such matters as
employment and pay practices, overtime, tip credits and working
conditions. The bulk of the Company’s employees are paid on an hourly
basis at rates related to the federal and state minimum wages.
The
Company is also subject to federal and state child labor laws which, among other
things, prohibit the use of certain “hazardous equipment” by employees younger
than 18 years of age. The Company has not been materially adversely
affected by such laws to date.
The
Company continues to monitor its facilities for compliance with the Americans
with Disabilities Act (“ADA”) in order to conform to its
requirements. Under the ADA, the Company could be required to expend
funds to modify its restaurants to better provide service to, or make reasonable
accommodation for the employment of, disabled persons. We believe
that expenditures, if required, would not have a material adverse effect on the
Company’s results of operations or cash flows.
International and
China Divisions. The
Company’s restaurants outside the U.S. are subject to national and local laws
and regulations which are similar to those affecting the Company’s U.S.
restaurants, including laws and regulations concerning labor, health, sanitation
and safety. The restaurants outside the U.S. are also subject to
tariffs and regulations on imported commodities and equipment and laws
regulating foreign investment. International compliance with
environmental requirements has not had a material adverse effect on the
Company’s results of operations, capital expenditures or competitive
position.
Employees
As of
year end 2007, the Company employed approximately 301,000 persons, approximately
84 percent of whom were part-time. Approximately 34 percent of the Company’s
employees are employed in the U.S. The Company believes that it
provides working conditions and compensation that compare favorably with those
of its principal competitors. Most Company employees are paid on an
hourly basis. Some of the Company’s non-U.S. employees are subject to
labor council relationships that vary due to the diverse cultures in which the
Company operates. The Company considers its employee relations to be
good.
(d)
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Financial
Information about Geographic Areas
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Financial
information about our significant geographic areas (U.S., International Division
and China Division) is incorporated herein by reference from Selected Financial
Data in Part II, Item 6, page 19; Management’s Discussion and Analysis of
Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7,
pages 21 through 48; and in the related Consolidated Financial Statements and
footnotes in Part II, Item 8, pages 49 through 101.
(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.
Our
business and industry face a variety of risks, including operational, legal,
regulatory and product risks. The following are some of the more
significant factors that could affect our business and our results of
operations. Other factors may exist that we cannot anticipate or that
we do not consider significant based on currently available
information.
Food
safety and food-borne illness concerns may have an adverse effect on our
business.
We
consider food safety a top priority and dedicate substantial resources to ensure
that our customers enjoy safe, quality food products. However,
food-borne illnesses (such as E. coli, hepatitis A, trichinosis or salmonella)
and food safety issues have occurred in the past (see Note 22, Guarantees,
Commitments and Contingencies, to the Consolidated Financial Statements included
in Part II, Item 8 of this report for a discussion of litigation arising from an
E. coli outbreak allegedly linked to a number of Taco Bell restaurants in the
Northeast U.S. during November/December 2006), and could occur in the
future. If such instances of food-borne illness or other food safety
issues were to occur, whether at our restaurants or those of our competitors,
negative publicity could result which could adversely affect sales and
profitability. If our customers become ill from food-borne illnesses,
we could also be forced to temporarily close some
restaurants. Additionally, the occurrence of food-borne illnesses or
food safety issues could adversely affect the price and availability of affected
ingredients. Finally, 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 us to use
alternative sources at increased costs.
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
inflation, consumer spending and unemployment levels), tax rates and laws and
consumer preferences, as well as changes in the regulatory
environment. 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 and 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,
social and ethnic unrest, changes in economic conditions (including 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. 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 or supply chain and business disruptions
could adversely affect our results of operations.
While we
take measures to anticipate and react to changes in food, energy and supply
costs, any increase in certain commodity prices 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. Additionally, significant increases in gasoline prices could
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. We rely on third party distribution companies to deliver
food and supplies to our stores. Interruption of distribution
services due to financial distress or other issues could impact our
operations. Our operating expenses also include employee benefits and
insurance costs (including workers’ compensation, general liability, property
and health) which may increase over time. Finally, our industry is
susceptible to natural disasters which could result in restaurant closures and
supply chain and business disruptions.
Health
concerns arising from outbreaks of Avian Flu may have an adverse effect on our
business.
Asian and
European countries have experienced outbreaks of Avian Flu, and some
commentators have hypothesized that further outbreaks could occur and reach
pandemic levels. While fully-cooked chicken has been determined to be
safe for consumption, and while we have taken and continue to take measures to
anticipate 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 shift their preferences. In addition, outbreaks on a
widespread basis could also affect our ability to attract and retain
employees.
Our
operating results are closely tied to the success of our Concepts’
franchisees.
As a
result of our franchising programs, our operating results are dependent upon the
sales volumes and viability of our franchisees. Any significant
inability of our franchisees to operate successfully could adversely affect our
operating results. We have limited control over our franchisees and
the quality of franchise restaurant operations may be impacted by factors that
are not in our control. 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, or be able
to find suitable sites on which to develop them. In addition,
franchisees may not be able to negotiate acceptable lease or purchase terms for
the sites, obtain the necessary permits and government approvals or meet
construction schedules. Our franchisees generally depend upon
financing from banks and other financial institutions in order to construct and
open new restaurants. In some instances, financing has been difficult
to obtain for some operators. Any of these problems could slow our
planned growth.
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 22% at
the end of 2007 to potentially less than 10% by the end of 2010. Our
ability to execute this plan will depend on, among other things, whether we can
find viable and appropriate buyers for our restaurants, how quickly we can agree
to terms with potential buyers and the availability of financing to potential
buyers. The success of the refranchising program once executed will
depend on, among other things, our selection of buyers who can effectively
operate our restaurants, our ability to limit our exposure to contingent
liabilities in connection with the sale of our restaurants, and whether the
resulting ownership mix of Company-operated and franchisee-operated restaurants
allows us to meet our financial objectives. In addition,
refranchising activity could vary significantly from quarter-to-quarter and
year-to-year and that volatility could impact our reported
earnings.
We
could be party to litigation that could adversely affect us by increasing our
expenses or subjecting us to material money damages and other
remedies.
Like
others in the restaurant industry, we are susceptible to claims filed by
customers alleging that we are responsible for an illness or injury they
suffered at or after a visit to our restaurants. Regardless of
whether any claims against us are
valid, or
whether we are ultimately held liable, such litigation may be expensive to
defend and may divert time and money away from our operations and hurt our
performance. A judgment for significant monetary damages in excess of
any insurance coverage could adversely affect our financial condition or
results of operations. Any adverse publicity resulting from these
allegations may also adversely affect our reputation, which in turn could
adversely affect our results.
In
addition, the restaurant industry has been subject to claims that relate to the
nutritional content of food products, as well as claims that the menus and
practices of restaurant chains have led to the obesity of some
customers. We may also be subject to this type of claim in the future
and, even if we are not, publicity about these matters (particularly directed at
the quick service and fast-casual segments of the industry) may harm our
reputation and adversely affect our results.
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 and workplace safety and other
agencies. Requirements of local authorities with respect to zoning,
land use, licensing, permitting and environmental factors 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.
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. 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.
We
may not attain our target development goals.
We are
pursuing a disciplined growth strategy, which, to be successful, will depend in
large part on our ability and the ability of our franchisees to upgrade existing
restaurants and open new restaurants, and to operate these restaurants on a
profitable basis. 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 obtain operating results
similar to those of our existing restaurants. The success of our
planned expansion will depend upon numerous factors, many of which are beyond
our control.
Our
growth strategy depends in large part on our ability to increase our net
restaurant count in our international markets. 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.
The
retail food industry in which we operate is highly competitive.
The
retail food industry in which we operate is highly competitive with respect to
price and quality of food products, new product development,
price, advertising levels and promotional initiatives, customer service,
reputation, restaurant location, and attractiveness and maintenance of
properties. If consumer preferences change, or our restaurants are
unable to compete successfully with other retail food outlets in new and
existing markets, our business could be adversely
affected. In
the retail food industry, labor is a primary operating cost
component. Competition for qualified employees could also require us
to pay higher wages to attract a sufficient number of employees. In
addition, our success depends to a significant extent on numerous factors
affecting discretionary consumer spending, including economic conditions,
disposable consumer income and consumer confidence. Adverse changes
in these factors could reduce guest traffic or impose practical limits on
pricing, either of which could harm our results of operations.
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 2007 fiscal year and that
remain unresolved.
As of
year end 2007, the Company owned more than 1,600 units and leased land, building
or both in more than 6,000 units worldwide. These units are further detailed as
follows:
·
|
The
Company owned more than 1,300 units and leased land, building or both in
more than 2,500 units in the U.S.
|
·
|
The
International Division owned more than 200 units and leased land, building
or both in more than 1,300 units.
|
·
|
The
China Division leased land, building or both in more than 2,000
units.
|
Company
restaurants in the U.S. which are not owned are generally leased for initial
terms of 15 or 20 years and generally have renewal options; however, Pizza Hut
delivery/carryout units in the U.S. generally are leased for significantly
shorter initial terms with short renewal options. Company restaurants
in the International Division which are not owned have initial lease terms and
renewal options that vary by country. Company restaurants in the
China Division are generally leased for initial terms of 10 to 15 years and
generally do not have renewal options. Historically, the Company has
either been able to renew its China Division leases or enter into competitive
leases at replacement sites without significant impact on our operations, cash
flows or capital resources. The Company generally does not lease or
sub-lease units that it owns or leases to franchisees.
Pizza Hut
and YRI lease their corporate headquarters and a research facility in Dallas,
Texas. Taco Bell leases its corporate headquarters and research facility in
Irvine, California. KFC owns its and LJS’s, A&W’s and YUM’s corporate
headquarters and a research facility in Louisville, Kentucky. In
addition, YUM leases office facilities for certain support groups in Louisville,
Kentucky. The China Division leases their corporate headquarters and
research facilities in Shanghai, China. Additional information about
the Company’s properties is included in the Consolidated Financial Statements
and footnotes in Part II, Item 8, pages 49 through 101.
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 22, Guarantees, Commitments and Contingencies, to the Consolidated
Financial Statements included in Part II, Item 8.
Franchising
A
substantial number of the restaurants of each of the Concepts are franchised to
independent businesses operating under arrangements with the
Concepts. In the course of the franchise relationship, occasional
disputes arise between the Company and its Concepts’ franchisees relating to a
broad range of subjects, including, without limitation, quality, service, and
cleanliness issues, contentions regarding grants, transfers or terminations of
franchises, territorial disputes and delinquent payments.
Suppliers
The
Company, through approved distributors, purchases food, paper, equipment and
other restaurant supplies from numerous independent suppliers throughout the
world. These suppliers are required to meet and maintain compliance
with the Company’s standards and specifications. On occasion,
disputes arise between the Company and its suppliers on a number of issues,
including, but not limited to, compliance with product specifications and terms
of procurement and service requirements.
Employees
At any
given time, the Company or its affiliates employ hundreds of thousands of
persons, primarily in its restaurants. In addition, each year thousands of
persons seek employment with the Company and its restaurants. From
time to time, disputes arise regarding employee hiring, compensation,
termination and promotion practices.
Like
other retail employers, the Company has been faced in a few states with
allegations of purported class-wide wage and hour and other labor law
violations.
Customers
The
Company’s restaurants serve a large and diverse cross-section of the public and
in the course of serving so many people, disputes arise regarding products,
service, accidents and other matters typical of large restaurant systems such as
those of the Company.
Intellectual
Property
The
Company has registered trademarks and service marks, many of which are of
material importance to the Company’s business. From time to time, the
Company may become involved in litigation to defend and protect its use and
ownership of its registered marks.
Item
4.
|
Submission
of Matters to a Vote of Security
Holders.
|
No
matters were submitted to a vote of shareholders during the fourth quarter of
2007.
Executive
Officers of the Registrant
The
executive officers of the Company as of February 18, 2008, and their ages and
current positions as of that date are as follows:
David C. Novak, 55, 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, 50, is
Chief Financial Officer of 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.
Peter R. Hearl, 56, is Chief
Operating and Development Officer of YUM. He has served in this
position since December 2006. From December 2002 to November 2006, he
served as President and Chief Concept Officer of Pizza Hut. From
January 2002 to November 2002, he was Chief People Officer and Executive Vice
President of YUM. Mr. Hearl intends to retire from the Company at the
end of March 2008.
Christian L. Campbell,
57, is Senior Vice
President, General Counsel, Secretary and Chief Franchise Policy Officer of
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, 49, is
Senior Vice President – Public Affairs for YUM. He has served in this
position since July 1997.
Anne P. Byerlein, 49, is Chief
People Officer of 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, 56, 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, 60, is
President of U.S. Brand Building. He has served in this position
since December 2006. Prior to this position, 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.
Gregg R. Dedrick, 48, is President and Chief
Concept Officer of KFC. He has served in this position since
September 2003. From January 2002 to September 2003, Mr. Dedrick acted as a
Strategic Advisor to YUM while serving as Chief Administrative Officer of his
church, which is one of the ten largest churches in the United
States. From July 1997 to January 2002, he served as Chief People
Officer of YUM and Executive Vice President of People and Shared
Services.
Scott O. Bergren, 61, 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, 50, 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.
Graham D. Allan, 52, 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.
Samuel Su, 55, is the
President of YUM Restaurants China. He has served in this position
since 1997. Prior to this, he was the Vice President of North Asia
for both KFC and Pizza Hut. Mr. Su started his career with YUM in
1989 as KFC International’s Director of Marketing for the North Pacific
area.
Executive
officers are elected by and serve at the discretion of the Board of
Directors.
PART
II
Item
5.
|
Market
for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
The
Company’s Common Stock trades under the symbol YUM and is listed on the New York
Stock Exchange (“NYSE”). The following sets forth the high and low
NYSE composite closing sale prices by quarter for the Company’s Common Stock and
dividends per common share. All per share and share amounts herein
have been adjusted for the two-for-one stock split on June 26,
2007.
|
2007
|
Quarter
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
31.03
|
|
$
|
27.69
|
|
|
|
$
|
—
|
|
|
|
$
|
0.075
|
|
Second
|
|
34.37
|
|
|
28.85
|
|
|
|
|
0.15
|
|
|
|
|
0.15
|
|
Third
|
|
34.80
|
|
|
29.62
|
|
|
|
|
—
|
|
|
|
|
0.15
|
|
Fourth
|
|
40.27
|
|
|
31.45
|
|
|
|
|
0.30
|
|
|
|
|
0.15
|
|
|
2006
|
Quarter
|
High
|
Low
|
|
|
Dividends
Declared
|
|
|
Dividends
Paid
|
First
|
$
|
25.59
|
|
$
|
23.38
|
|
|
|
$
|
0.0575
|
|
|
|
$
|
0.0575
|
|
Second
|
|
26.84
|
|
|
23.83
|
|
|
|
|
0.075
|
|
|
|
|
0.0575
|
|
Third
|
|
25.96
|
|
|
22.47
|
|
|
|
|
—
|
|
|
|
|
0.075
|
|
Fourth
|
|
31.74
|
|
|
25.59
|
|
|
|
|
0.30
|
|
|
|
|
0.075
|
|
In 2006,
the Company declared one cash dividend of $0.0575 per share of Common Stock,
three cash dividends of $0.075 per share of Common Stock and one cash dividend
of $0.15 per share of Common Stock. In 2007, the Company declared
three cash dividends of $0.15 per share of Common Stock, one of which had a
distribution date of February 1, 2008. The Company is targeting an
annual dividend payout ratio of 35% to 40% of net income.
As of
February 18, 2008, there were approximately 85,000 registered holders of record
of the Company’s Common Stock.
The
Company had no sales of unregistered securities during 2007, 2006 or
2005.
Issuer Purchases of Equity
Securities
The
following table provides information as of December 29, 2007 with respect to
shares of Common Stock repurchased by the Company during the quarter then
ended:
Fiscal
Periods
|
|
Total
number
of
shares purchased
|
|
|
Average
price
paid per
share
|
|
|
Total
number of
shares
purchased
as
part of publicly
announced
plans
or
programs
|
|
|
Approximate
dollar
value
of shares that
may
yet be
purchased
under the
plans
or programs
|
Period
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9/9/07
– 10/6/07
|
|
4,140,000
|
|
|
$
|
33.56
|
|
|
4,140,000
|
|
|
$
|
26,137,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/7/07
– 11/3/07
|
|
5,706,777
|
|
|
$
|
38.37
|
|
|
5,706,777
|
|
|
$
|
1,057,158,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/4/07
– 12/1/07
|
|
3,958,428
|
|
|
$
|
37.87
|
|
|
3,958,428
|
|
|
$
|
907,256,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/2/07
– 12/29/07
|
|
2,468,063
|
|
|
$
|
38.24
|
|
|
2,468,063
|
|
|
$
|
812,876,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
16,273,268
|
|
|
$
|
37.01
|
|
|
16,273,268
|
|
|
$
|
812,876,870
|
In March
2007, our Board of Directors authorized additional share repurchases, through
March 2008, of up to an additional $500 million (excluding applicable
transaction fees) of our outstanding Common Stock. For the quarter
ended December 29, 2007, approximately 4.9 million shares were repurchased under
this authorization. This authorization was completed during the
quarter.
In
October 2007, our Board of Directors authorized additional share repurchases,
through October 2008, of up to an additional $1.25 billion (excluding applicable
transaction fees) of our outstanding Common Stock. For the quarter
ended December 29, 2007, approximately 11.4 million shares were repurchased
under this authorization.
In
January 2008, our Board of Directors authorized additional share repurchases,
through January 2009, of up to an additional $1.25 billion (excluding applicable
transaction fees) of our outstanding Common Stock.
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 27, 2002 to December 28, 2007, the last trading day of our 2007 fiscal
year. The graph assumes that the value of the investment in our
Common Stock and each index was $100 at December 27, 2002 and that all dividends
were reinvested.
|
|
12/27/02
|
|
12/26/03
|
|
12/23/04
|
|
12/30/05
|
|
12/29/06
|
|
12/28/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YUM!
|
|
$ 100
|
|
$ 140
|
|
$ 193
|
|
$ 197
|
|
$ 250
|
|
$ 333
|
S&P
500
|
|
$ 100
|
|
$ 125
|
|
$ 138
|
|
$ 143
|
|
$ 162
|
|
$ 169
|
S&P
Consumer Discretionary
|
|
$ 100
|
|
$ 137
|
|
$ 153
|
|
$ 144
|
|
$ 169
|
|
$ 145
|
Item
6.
|
Selected Financial
Data.
|
Selected
Financial Data
YUM!
Brands, Inc. and Subsidiaries
(in
millions, except per share and unit amounts)
|
Fiscal
Year
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
Summary
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,100
|
|
$
|
8,365
|
|
$
|
8,225
|
|
$
|
7,992
|
|
$
|
7,441
|
|
Franchise
and license fees
|
|
1,316
|
|
|
1,196
|
|
|
1,124
|
|
|
1,019
|
|
|
939
|
|
Total
|
|
10,416
|
|
|
9,561
|
|
|
9,349
|
|
|
9,011
|
|
|
8,380
|
|
Closures
and impairment expenses(a)
|
|
(35
|
)
|
|
(59
|
)
|
|
(62
|
)
|
|
(38
|
)
|
|
(40
|
)
|
Refranchising
gain (loss)(a)
|
|
11
|
|
|
24
|
|
|
43
|
|
|
12
|
|
|
4
|
|
Operating
profit(b)
|
|
1,357
|
|
|
1,262
|
|
|
1,153
|
|
|
1,155
|
|
|
1,059
|
|
Interest
expense, net
|
|
166
|
|
|
154
|
|
|
127
|
|
|
129
|
|
|
173
|
|
Income
before income taxes and cumulative effect of accounting
change
|
|
1,191
|
|
|
1,108
|
|
|
1,026
|
|
|
1,026
|
|
|
886
|
|
Income
before cumulative effect of accounting change
|
|
909
|
|
|
824
|
|
|
762
|
|
|
740
|
|
|
618
|
|
Cumulative
effect of accounting change, net of tax(c)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Net
income
|
|
909
|
|
|
824
|
|
|
762
|
|
|
740
|
|
|
617
|
|
Basic
earnings per common share
|
|
1.74
|
|
|
1.51
|
|
|
1.33
|
|
|
1.27
|
|
|
1.05
|
|
Diluted
earnings per common share
|
|
1.68
|
|
|
1.46
|
|
|
1.28
|
|
|
1.21
|
|
|
1.01
|
|
Cash
Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provided
by operating activities
|
$
|
1,567
|
|
$
|
1,299
|
|
$
|
1,233
|
|
$
|
1,186
|
|
$
|
1,099
|
|
Capital
spending, excluding acquisitions
|
|
742
|
|
|
614
|
|
|
609
|
|
|
645
|
|
|
663
|
|
Proceeds
from refranchising of restaurants
|
|
117
|
|
|
257
|
|
|
145
|
|
|
140
|
|
|
92
|
|
Repurchase
shares of Common Stock
|
|
1,410
|
|
|
983
|
|
|
1,056
|
|
|
569
|
|
|
278
|
|
Dividends
paid on common shares
|
|
273
|
|
|
144
|
|
|
123
|
|
|
58
|
|
|
—
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
7,242
|
|
$
|
6,368
|
|
$
|
5,797
|
|
$
|
5,696
|
|
$
|
5,620
|
|
Long-term
debt
|
|
2,924
|
|
|
2,045
|
|
|
1,649
|
|
|
1,731
|
|
|
2,056
|
|
Total
debt
|
|
3,212
|
|
|
2,272
|
|
|
1,860
|
|
|
1,742
|
|
|
2,066
|
|
Other
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of stores at year end
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
7,625
|
|
|
7,736
|
|
|
7,587
|
|
|
7,743
|
|
|
7,854
|
|
Unconsolidated
Affiliates
|
|
1,314
|
|
|
1,206
|
|
|
1,648
|
|
|
1,662
|
|
|
1,512
|
|
Franchisees
|
|
24,297
|
|
|
23,516
|
|
|
22,666
|
|
|
21,858
|
|
|
21,471
|
|
Licensees
|
|
2,109
|
|
|
2,137
|
|
|
2,376
|
|
|
2,345
|
|
|
2,362
|
|
System
|
|
35,345
|
|
|
34,595
|
|
|
34,277
|
|
|
33,608
|
|
|
33,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Company same store sales growth(d)
|
|
(3)%
|
|
|
—
|
|
|
4%
|
|
|
3%
|
|
|
—
|
|
International
Division system sales growth(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
15%
|
|
|
7%
|
|
|
9%
|
|
|
14%
|
|
|
13%
|
|
Local
currency(f)
|
|
10%
|
|
|
7%
|
|
|
6%
|
|
|
6%
|
|
|
5%
|
|
China
Division system sales growth(e)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
|
|
31%
|
|
|
26%
|
|
|
13%
|
|
|
23%
|
|
|
23%
|
|
Local
currency(f)
|
|
24%
|
|
|
23%
|
|
|
11%
|
|
|
23%
|
|
|
23%
|
|
Shares
outstanding at year end(g)
|
|
499
|
|
|
530
|
|
|
556
|
|
|
581
|
|
|
583
|
|
Cash
dividends declared per common share(g)
|
$
|
0.45
|
|
$
|
0.4325
|
|
$
|
0.2225
|
|
$
|
0.15
|
|
$
|
—
|
|
Market
price per share at year end (g)
|
$
|
38.54
|
|
$
|
29.40
|
|
$
|
23.44
|
|
$
|
23.14
|
|
$
|
16.82
|
|
Fiscal
years 2007, 2006, 2004 and 2003 include 52 weeks and fiscal year 2005 includes
53 weeks.
Fiscal
years 2007, 2006 and 2005 include the impact of the adoption of Statement of
Financial Accounting Standards (“SFAS”) No. 123R (Revised 2004), “Share Based
Payment,” (“SFAS 123R”). This resulted in a $37 million, $39 million
and $38 million decrease in net income, for 2007, 2006 and 2005,
respectively. This translates to a decrease of $0.07 to both basic
and diluted earnings per share for 2007 and 2006, and a decrease of $0.07 and
$0.06 to basic and diluted earnings per share, respectively, for
2005. If SFAS 123R had been effective for prior years presented, both
reported basic and diluted earnings per share would have decreased $0.06 for
2004 and 2003 consistent with previously disclosed pro-forma
information.
The
selected financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto.
(a)
|
See
Note 5 to the Consolidated Financial Statements for a description of
Closures and Impairment Expenses and Refranchising Gain (Loss) in 2007,
2006 and 2005.
|
|
|
(b)
|
Fiscal
years 2007, 2006, 2005, 2004 and 2003 included $11 million income, $1
million income, $4 million income, $30 million income and $16 million
expense, respectively, related to Wrench litigation and
AmeriServe. The Wrench litigation relates to a lawsuit against
Taco Bell Corporation, which was settled in 2004, including financial
recoveries from settlements with insurance carriers. Amounts
related to AmeriServe are the result of cash recoveries related to the
AmeriServe bankruptcy reorganization process for which we incurred
significant expense in years prior to those presented here (primarily
2000). AmeriServe was formerly our primary distributor of food
and paper supplies to our U.S. stores.
|
|
|
(c)
|
Fiscal
year 2003 includes the impact of the adoption of SFAS No. 143, “Accounting
for Asset Retirement Obligations,” which addresses the financial
accounting and reporting for legal obligations associated with the
retirement of long-lived assets and the associated asset retirement
costs.
|
|
|
(d)
|
U.S.
Company same-store sales growth only includes the results of Company owned
KFC, Pizza Hut and Taco Bell restaurants that have been open one year or
more. U.S. same store sales for Long John Silver’s and A&W
restaurants are not included given the relative insignificance of the
Company stores for these brands and the limited impact they currently have
and will have in the future, on our U.S. same store sales, as well as our
overall U.S. performance.
|
|
|
(e)
|
International
Division and China Division 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. Additionally, we began reporting information
for our international business in two separate operating segments (the
International Division and the China Division) in 2005 as a result of
changes in our management structure. Segment information for
periods prior to 2005 has been restated to reflect this
reporting.
|
|
|
(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.
|
|
|
(g)
|
Adjusted
for the two for one stock split on June 26, 2007. See Note 3 to
the Consolidated Financial
Statements.
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
The
following Management’s Discussion and Analysis (“MD&A”), should be read in
conjunction with the Consolidated Financial Statements on pages 52 through 55
(“Financial Statements”) and the Cautionary Statements on pages 47 through
48. Throughout the MD&A, YUM! Brands, Inc. (“YUM” or the
“Company”) makes reference to certain performance measures as described
below.
·
|
The
Company provides the percentage changes excluding the impact of foreign
currency translation. These amounts are derived by translating
current year results at prior year average exchange rates. We
also provide the percentage changes excluding the extra week that certain
of our businesses had in fiscal year 2005. We believe the
elimination of the foreign currency translation and the 53rd
week impact provides better year-to-year comparability without the
distortion of foreign currency fluctuations or an extra week in fiscal
year 2005.
|
|
|
·
|
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.
|
|
|
·
|
Worldwide
same store sales is the estimated growth in sales of all restaurants that
have been open one year or more. U.S. Company same store sales
include only KFC, Pizza Hut and Taco Bell Company owned restaurants that
have been open one year or more. U.S. same store sales for Long
John Silver’s and A&W restaurants are not included given the relative
insignificance of the Company stores for these brands and the limited
impact they currently have, and will have in the future, on our U.S. same
store sales as well as our overall U.S. performance.
|
|
|
·
|
Company
restaurant margin as a percentage of sales is defined as Company sales
less expenses incurred directly by our Company restaurants in generating
Company sales divided by Company
sales.
|
All Note
references herein refer to the Notes to the Financial Statements on pages 56
through 101. 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
35,000 restaurants in more than 100 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 35,000 restaurants, 22% are operated by the
Company, 72% are operated by franchisees and unconsolidated affiliates and 6%
are operated by licensees.
YUM’s
business consists of three reporting segments: United States, the
International Division and the China Division. The China Division
includes mainland China, Thailand and KFC Taiwan and the International Division
includes the remainder of our international operations. The China and
International Divisions have been experiencing dramatic growth and now represent
over half of the Company’s operating profits. The U.S. business
operates in a highly competitive marketplace resulting in slower profit growth,
but continues to produce strong cash flows.
Strategies
The
Company continues to focus on four key strategies:
Build
Leading Brands in China in Every Significant Category – The Company has
developed the KFC and Pizza Hut brands into the leading quick service and casual
dining restaurants, respectively, in mainland China. Additionally,
the Company owns and operates the distribution system for its restaurants in
mainland China which we believe provides a significant competitive
advantage. Given this strong competitive position, a rapidly growing
economy and a population of 1.3 billion in mainland China, the Company is
rapidly adding KFC and Pizza Hut Casual Dining restaurants and testing the
additional restaurant concepts of Pizza Hut Home Service (pizza delivery) and
East Dawning (Chinese food). Our ongoing earnings growth model
includes annual system-sales growth of 20% in mainland China driven by at least
425 new restaurants each year, which we expect to drive annual operating profit
growth of 20% in the China Division.
Drive
Aggressive International Expansion and Build Strong Brands Everywhere – The
Company and its franchisees opened over 850 new restaurants in 2007 in the
Company’s International Division, representing 8 straight years of opening over
700 restaurants. The International Division generated $480 million in
operating profit in 2007 up from $186 million in 1998. The Company
expects to continue to experience strong growth by building out existing markets
and growing in new markets including India, France, Russia, Vietnam and
Africa. Our ongoing earnings growth model includes annual operating
profit growth of 10% driven by 750 new restaurant openings annually for the
International Division. New unit development is expected to
contribute to system sales growth of at least 5% (3% to 4% unit growth and 2% to
3% same store sales growth) each year.
Dramatically
Improve U.S. Brand Positions, Consistency and Returns – The Company continues to
focus on improving its U.S. position through differentiated products and
marketing and an improved customer experience. The Company also
strives to provide industry leading new product innovation which adds sales
layers and expands day parts. We are the leader in multibranding,
with nearly 3,700 restaurants providing customers two or more of our brands at a
single location. We continue to evaluate our returns and ownership
positions with an earn the right to own philosophy on Company owned
restaurants. Our ongoing earnings growth model calls for annual
operating profit growth of 5% in the U.S. with same store sales growth of 2% to
3% and leverage of our General and Administrative (“G&A”)
infrastructure.
Drive
Industry-Leading, Long-Term Shareholder and Franchisee Value – The Company is
focused on delivering high returns and returning substantial cash flows to its
shareholders via share repurchases and dividends. The Company has one
of the highest returns on invested capital in the Quick Service Restaurants
(“QSR”) industry. Additionally, 2007 was the third consecutive year
in which the Company returned over $1.1 billion to its shareholders through
share repurchases and dividends. The Company is targeting an annual
dividend payout ratio of 35% to 40% of net income.
2007
Highlights
·
|
Diluted
earnings per share of $1.68 or 15% growth.
|
|
|
·
|
Worldwide
system sales growth of 8% driven by new-unit growth in mainland China and
the International Division.
|
|
|
·
|
Worldwide
same store sales growth of 3% and operating profit growth of
8%.
|
|
|
·
|
Double
digit operating profit growth of 30% from the China Division and 18% from
the International Division, offsetting a 3% decline in the
U.S.
|
|
|
·
|
Effective
tax rate of 23.7%.
|
|
|
·
|
Payout
to shareholders of $1.7 billion through share repurchases and dividends,
with repurchases helping to reduce our diluted share count by a net
4%.
|
Significant
Known Events, Trends or Uncertainties Impacting or Expected to Impact
Comparisons of Reported or Future Results
The
following factors impacted comparability of operating performance for the years
ended December 29, 2007, December 30, 2006 and December 31, 2005 and could
impact comparability with our results in 2008.
Mainland China Commodity
Inflation
China
Division restaurant margin as a percentage of sales declined to 20.1% during
2007 from 20.4% in 2006. This decline was driven by rising chicken
costs in mainland China, which make up approximately 40% of mainland China’s
cost of food and paper, and higher restaurant labor costs in mainland
China. Rising chicken costs are resulting from both lower than
expected availability and increased demand in the market. The
increased costs were partially offset in 2007 by strong same store sales growth,
including the impact of menu pricing increases. In mainland China, we
expect that high commodity inflation (including higher chicken costs) will
continue into the first half of 2008 and moderate later in the
year.
U.S. Restaurant
Profit
Our
resulting U.S. restaurant margin as a percentage of sales decreased 1.3
percentage points in 2007 and increased 0.8 percentage points in
2006. Our U.S. restaurant profit was impacted in 2007 and 2006 by
several key events and trends. These include the negative impact on
the Taco Bell business of adverse publicity related to a produce-sourcing issue
in the fourth quarter of 2006 and an infestation issue in one franchise store in
February 2007, fluctuations in commodity costs, and lower self-insured property
and casualty insurance reserves.
Taco Bell
experienced significant sales declines at both Company and franchise stores in
the fourth quarter 2006 and for almost all of 2007, particularly in the
northeast U.S. where both issues originated. For the full year 2007,
Taco Bell's Company same store sales were down 5%. Taco Bell’s
Company same store sales were flat in the fourth quarter of 2007 and we believe
that Taco Bell will fully recover from these issues. However, our
experience has been that recoveries of this type vary in duration.
In 2007,
we experienced significant increases in commodity costs resulting in
approximately $44 million of commodity inflation. This inflation was
primarily driven by meats and cheese products. We expect these
unfavorable commodity trends to continue in 2008 resulting in commodity
inflation of approximately 5% for the full year, with the majority of this
impact seen in the first half of the year. In 2006, restaurant
profits were positively impacted versus 2005 by a decline in commodity costs,
principally meats and cheese, of approximately $45 million.
The
sizeable February 2008 beef recall in the U.S. had no impact on our results
though the impact, if any, on beef prices going forward is not yet
known.
Self-insurance
property and casualty insurance expenses were down $27 million versus the prior
year in both 2007 and 2006, exclusive of the estimated reduction due to
refranchising stores. The favorability in insurance expenses was the
result of improved loss trends, which we believe are primarily driven by safety
and claims handling procedures we implemented over time, as well as workers’
compensation reforms at the state level. We anticipate that given the
significant favorability in 2007, property and casualty expense in 2008 will be
significantly higher in comparison. The increased expenses are
currently expected to be most impactful to our second quarter of
2008.
Pizza Hut United Kingdom
Acquisition
On September 12, 2006, we
completed the acquisition of the remaining fifty percent ownership interest of
our Pizza Hut United Kingdom (“U.K.”) unconsolidated affiliate from our
partner, paying approximately $178 million in cash, including transaction
costs and net of $9 million of cash assumed. Additionally, we assumed
the full liability, as opposed to our fifty percent share, associated with the
Pizza Hut U.K.’s capital leases of $97 million and short-term borrowings of $23
million. This unconsolidated
affiliate operated more than 500 restaurants in the U.K.
Prior to
the acquisition, we accounted for our fifty percent ownership interest using the
equity method of accounting. Thus, we reported our fifty percent
share of the net income of the unconsolidated affiliate (after interest expense
and income taxes) as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. Since the date
of the acquisition, we have reported Company sales and the associated restaurant
costs, G&A expense, interest expense and income taxes associated with the
restaurants previously owned by the unconsolidated affiliate in the appropriate
line items of our Consolidated Statement of Income. We no longer
record franchise fee income for the restaurants previously owned by the
unconsolidated affiliate, nor do we report other income under the equity method
of accounting. As a result of this acquisition, Company sales and
restaurant profit increased $576 million and $59 million, respectively,
franchise fees decreased $19 million and G&A expenses increased $33 million
in the year ended December 29, 2007 compared to the year ended December 30,
2006. As a result of this acquisition, Company sales and restaurant
profit increased $164 million and $16 million, respectively, franchise fees
decreased $7 million and G&A expenses increased $8 million in the year ended
December 30, 2006 compared to the year ended December 31, 2005. The
impacts on operating profit and net income were not significant in either
year.
Extra Week in
2005
Our
fiscal calendar results in a 53rd week every five or six
years. Fiscal year 2005 included a 53rd week in the fourth quarter
for the majority of our U.S. businesses as well as our international businesses
that report on a period, as opposed to a monthly, basis. In the U.S.,
we permanently accelerated the timing of the KFC business closing by one week in
December 2005, and thus, there was no 53rd week benefit for this
business. Additionally, all China Division businesses report on a
monthly basis and thus did not have a 53rd week.
The
following table summarizes the estimated increase (decrease) of the 53rd week on
fiscal year 2005 revenues and operating profit:
|
U.S.
|
|
|
International
Division
|
|
|
Unallocated
|
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
58
|
|
|
|
$
|
27
|
|
|
|
$
|
—
|
|
|
|
$
|
85
|
|
Franchise
and license fees
|
|
8
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
11
|
|
Total
Revenues
|
$
|
66
|
|
|
|
$
|
30
|
|
|
|
$
|
—
|
|
|
|
$
|
96
|
|
Operating
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and license fees
|
$
|
8
|
|
|
|
$
|
3
|
|
|
|
$
|
—
|
|
|
|
$
|
11
|
|
Restaurant
profit
|
|
14
|
|
|
|
|
5
|
|
|
|
|
—
|
|
|
|
|
19
|
|
General
and administrative expenses
|
|
(2
|
)
|
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
|
|
|
(8
|
)
|
Equity
income from investments in unconsolidated affiliates
|
|
—
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
1
|
|
Operating
profit
|
$
|
20
|
|
|
|
$
|
6
|
|
|
|
$
|
(3
|
)
|
|
|
$
|
23
|
|
Mainland China 2005 Business
Issues
Our KFC
business in mainland China was negatively impacted by the interruption of
product offerings and negative publicity associated with a supplier ingredient
issue experienced in late March 2005 as well as consumer concerns related to
Avian Flu in the fourth quarter of 2005. As a result of the
aforementioned issues, the China Division experienced system sales growth in
2005 of 11%, excluding foreign currency translation which was below our ongoing
target of at least 22%. During the year ended December 30, 2006, the
China Division recovered from these issues and achieved growth rates of 23% for
both system sales and Company sales, both excluding foreign currency
translation. During 2005, we entered into agreements with the
supplier of the aforementioned ingredient. As a result, we recognized
recoveries of approximately $24 million in Other income (expense) in our
Consolidated Statement of Income for the year ended December 31,
2005.
Significant 2008 Gains and
Charges
In 2008,
we expect that our results of operations will be significantly impacted by
several events, including the sale of our interest in our unconsolidated
affiliate in Japan and refranchising gains and charges related to our U.S.
business.
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million in cash (includes 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 approximately $87
million will be recorded in the first quarter of 2008. We also
anticipate pre-tax gains from refranchising in the U.S. of $20 million to $50
million in 2008. We expect, that together these gains will be
partially offset by charges relating to G&A productivity initiatives and
realignment of resources, as well as investments in our U.S. brands to drive
stronger growth. The net impact of all of the aforementioned gains
and charges is expected to generate approximately $50 million in operating
profit in 2008.
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,
we do not expect that the sale of our interest in our Japan unconsolidated
affiliate will have a significant impact on our subsequently reported results of
operations in 2008 and beyond as the Other income we recorded representing our
share of earnings of the unconsolidated affiliate has historically not been
significant ($4 million in 2007).
Future 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. The impacts on our income tax provision and operating
profit in the year ended December 29, 2007 were not significant. We
currently estimate that these income tax rate changes will positively impact our
2008 net income between $10 million and $15 million compared to what it would
have otherwise been had no new tax legislation been enacted.
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 will be required to remit
VAT on all Company restaurant sales resulting in lower Company sales and
restaurant profit. As a result of this new legislation, we estimate
that our 2008 International Division’s Company sales and restaurant profit will
be unfavorably impacted by approximately $38 million and $34 million,
respectively. Additionally, the International Division’s system sales
growth and restaurant margin as a percentage of sales will be negatively
impacted by approximately 0.3% and 1.2 percentage points,
respectively.
China 2008 Reporting
Issues
We have
historically not consolidated an entity in China in which we have a majority
ownership interest, instead accounting for the unconsolidated affiliate using
the equity method of accounting. Our partners in this entity are
essentially state-owned enterprises. We have not consolidated this
entity due to the historical effective participation of our partners in the
significant decisions of the entity that were made in the ordinary course of
business as addressed in Emerging Issues Task Force ("EITF") Issue No. 96-16,
"Investor's Accounting for an Investee When the Investor Has a Majority of the
Voting Interest but the Minority Shareholder or Shareholders Have Certain
Approval or Veto Rights". Concurrent with a decision that we made on
January 1, 2008 regarding top management of the entity, we no longer believe
that our partners effectively participate in the decisions that are made in the
ordinary course of business. Accordingly, we will begin to
consolidate this entity in 2008. The change will result in higher
Company sales, restaurant profit, G&A expenses and Income tax provision, as
well as lower franchise and license fees and Other income. Had this
change occurred at the beginning of 2007, our China Division’s Company sales,
restaurant profit and G&A expenses would have increased approximately $227
million, $49 million and $5 million, respectively, and our franchise and license
fees and Other income would have decreased $14 million and $13 million,
respectively. The net impact of these changes and the resulting
minority interest would have resulted in Operating profit increasing by $11
million with an offsetting increase in Income tax provision such that Net income
would not have been impacted.
From time
to time we sell Company restaurants to existing and new franchisees where
geographic synergies can be obtained or where franchisees’ expertise can
generally be leveraged to improve our overall operating performance, while
retaining Company ownership of strategic U.S. and international
markets. In the U.S., we are targeting Company ownership of
restaurants potentially below 10% by year end 2010, down from its current level
of 22%. Consistent with this strategy, 756 Company restaurants in the
U.S. were sold to franchisees in 2006 and 2007. In the International
Division, we expect to refranchise approximately 300 Pizza Huts in the U.K. over
the next several years reducing our Pizza Hut Company ownership in that market
from approximately 80% currently to approximately 40%. Refranchisings
reduce our reported revenues and restaurant profits and increase the importance
of system sales growth as a key performance measure. Additionally,
G&A expenses will decline over time as a result of these refranchising
activities. The timing of such declines will vary and often lag the
actual refranchising activities as the synergies are typically dependent upon
the size and geography of the respective deals. G&A expenses
included in the tables below reflect only direct G&A that we are no longer
incurring as a result of stores that were operated by us for all or some of the
respective previous year and were no longer operated by us as of the last day of
the respective year.
The
following table summarizes our worldwide refranchising activities:
|
|
2007
|
|
2006
|
|
2005
|
|
Number
of units refranchised
|
|
|
420
|
|
|
|
622
|
|
|
|
382
|
|
|
Refranchising
proceeds, pre-tax
|
|
$
|
117
|
|
|
$
|
257
|
|
|
$
|
145
|
|
|
Refranchising
net gains, pre-tax
|
|
$
|
11
|
|
|
$
|
24
|
|
|
$
|
43
|
|
|
In
addition to our refranchising program, from time to time we close restaurants
that are poor performing, we relocate restaurants to a new site within the same
trade area or we consolidate two or more of our existing units into a single
unit
(collectively
“store closures”). Store closure (income) costs includes the net of
gain or loss on sales of real estate on which we formerly operated a Company
restaurant that was closed, lease reserves established when we cease using a
property under an operating lease and subsequent adjustments to those reserves,
and other facility-related expenses from previously closed stores.
The
following table summarizes worldwide Company store closure
activities:
|
|
2007
|
|
2006
|
|
2005
|
|
Number
of units closed
|
|
|
204
|
|
|
|
214
|
|
|
|
246
|
|
|
Store
closure (income) costs
|
|
$
|
(8
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
The
following table summarizes the estimated historical results of
refranchising and Company store closures:
|
2007
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(449
|
)
|
|
|
$
|
(181
|
)
|
|
|
$
|
(34
|
)
|
|
|
$
|
(664
|
)
|
Increased
franchise and license fees
|
|
20
|
|
|
|
|
9
|
|
|
|
|
—
|
|
|
|
|
29
|
|
Decrease
in total revenues
|
$
|
(429
|
)
|
|
|
$
|
(172
|
)
|
|
|
$
|
(34
|
)
|
|
|
$
|
(635
|
)
|
|
2006
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
Company sales
|
$
|
(377
|
)
|
|
|
$
|
(136
|
)
|
|
|
$
|
(22
|
)
|
|
|
$
|
(535
|
)
|
Increased
franchise and license fees
|
|
14
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
20
|
|
Decrease
in total revenues
|
$
|
(363
|
)
|
|
|
$
|
(130
|
)
|
|
|
$
|
(22
|
)
|
|
|
$
|
(515
|
)
|
The
following table summarizes the estimated impact on operating profit of
refranchising and Company store closures:
|
2007
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
restaurant profit
|
$
|
(39
|
)
|
|
|
$
|
(7
|
)
|
|
|
$
|
(4
|
)
|
|
|
$
|
(50
|
)
|
Increased
franchise and license fees
|
|
20
|
|
|
|
|
9
|
|
|
|
|
—
|
|
|
|
|
29
|
|
Decreased
general and administrative expenses
|
|
7
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
10
|
|
Increase
(decrease) in operating profit
|
$
|
(12
|
)
|
|
|
$
|
5
|
|
|
|
$
|
(4
|
)
|
|
|
$
|
(11
|
)
|
|
2006
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Decreased
restaurant profit
|
$
|
(38
|
)
|
|
|
$
|
(5
|
)
|
|
|
$
|
—
|
|
|
|
$
|
(43
|
)
|
Increased
franchise and license fees
|
|
14
|
|
|
|
|
6
|
|
|
|
|
—
|
|
|
|
|
20
|
|
Decreased
general and administrative expenses
|
|
1
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
2
|
|
Increase
(decrease) in operating profit
|
$
|
(23
|
)
|
|
|
$
|
2
|
|
|
|
$
|
—
|
|
|
|
$
|
(21
|
)
|
Results
of Operations
|
2007
|
|
|
%
B/(W)
vs.
2006
|
|
|
2006
|
|
|
%
B/(W)
vs.
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
$
|
9,100
|
|
|
|
|
9
|
|
|
|
$
|
8,365
|
|
|
|
|
2
|
|
Franchise
and license fees
|
|
1,316
|
|
|
|
|
10
|
|
|
|
|
1,196
|
|
|
|
|
7
|
|
Total
revenues
|
$
|
10,416
|
|
|
|
|
9
|
|
|
|
$
|
9,561
|
|
|
|
|
2
|
|
Company
restaurant profit
|
$
|
1,327
|
|
|
|
|
4
|
|
|
|
$
|
1,271
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
of Company sales
|
|
14.6
|
%
|
|
|
|
(0.6
|
)
ppts.
|
|
|
|
15.2
|
%
|
|
|
|
1.2
|
ppts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit
|
|
1,357
|
|
|
|
|
8
|
|
|
|
|
1,262
|
|
|
|
|
9
|
|
Interest
expense, net
|
|
166
|
|
|
|
|
(8
|
)
|
|
|
|
154
|
|
|
|
|
(22
|
)
|
Income
tax provision
|
|
282
|
|
|
|
|
1
|
|
|
|
|
284
|
|
|
|
|
(7
|
)
|
Net
income
|
$
|
909
|
|
|
|
|
10
|
|
|
|
$
|
824
|
|
|
|
|
8
|
|
Diluted
earnings per share(a)
|
$
|
1.68
|
|
|
|
|
15
|
|
|
|
$
|
1.46
|
|
|
|
|
14
|
|
(a)
|
See
Note 4 for the number of shares used in this
calculation.
|
Restaurant
Unit Activity
Worldwide
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)(b)
|
Balance
at end of 2005
|
|
|
7,587
|
|
|
|
1,648
|
|
|
|
22,666
|
|
|
|
31,901
|
|
New
Builds
|
|
|
426
|
|
|
|
136
|
|
|
|
953
|
|
|
|
1,515
|
|
Acquisitions
|
|
|
556
|
|
|
|
(541
|
)
|
|
|
(15
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(622
|
)
|
|
|
(1
|
)
|
|
|
626
|
|
|
|
3
|
|
Closures
|
|
|
(214
|
)
|
|
|
(33
|
)
|
|
|
(675
|
)
|
|
|
(922
|
)
|
Other
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
(39
|
)
|
|
|
(39
|
)
|
Balance
at end of 2006
|
|
|
7,736
|
|
|
|
1,206
|
|
|
|
23,516
|
|
|
|
32,458
|
|
New
Builds
|
|
|
505
|
|
|
|
132
|
|
|
|
1,070
|
|
|
|
1,707
|
|
Acquisitions
|
|
|
9
|
|
|
|
6
|
|
|
|
(14
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(420
|
)
|
|
|
(6
|
)
|
|
|
426
|
|
|
|
—
|
|
Closures
|
|
|
(204
|
)
|
|
|
(24
|
)
|
|
|
(706
|
)
|
|
|
(934
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
5
|
|
|
|
4
|
|
Balance
at end of 2007
|
|
|
7,625
|
|
|
|
1,314
|
|
|
|
24,297
|
|
|
|
33,236
|
|
%
of Total
|
|
|
23%
|
|
|
|
4%
|
|
|
|
73%
|
|
|
|
100%
|
|
United
States
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)
|
Balance
at end of 2005
|
|
|
4,686
|
|
|
|
—
|
|
|
|
13,605
|
|
|
|
18,291
|
|
New
Builds
|
|
|
99
|
|
|
|
—
|
|
|
|
235
|
|
|
|
334
|
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
(452
|
)
|
|
|
—
|
|
|
|
455
|
|
|
|
3
|
|
Closures
|
|
|
(124
|
)
|
|
|
—
|
|
|
|
(368
|
)
|
|
|
(492
|
)
|
Other
|
|
|
3
|
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
(19
|
)
|
Balance
at end of 2006
|
|
|
4,212
|
|
|
|
—
|
|
|
|
13,905
|
|
|
|
18,117
|
|
New
Builds
|
|
|
87
|
|
|
|
—
|
|
|
|
262
|
|
|
|
349
|
|
Acquisitions
|
|
|
8
|
|
|
|
—
|
|
|
|
(7
|
)
|
|
|
1
|
|
Refranchising
|
|
|
(304
|
)
|
|
|
—
|
|
|
|
304
|
|
|
|
—
|
|
Closures
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
(386
|
)
|
|
|
(492
|
)
|
Other
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
3
|
|
|
|
2
|
|
Balance
at end of 2007
|
|
|
3,896
|
|
|
|
—
|
|
|
|
14,081
|
|
|
|
17,977
|
|
%
of Total
|
|
|
22%
|
|
|
|
—
|
|
|
|
78%
|
|
|
|
100%
|
|
International
Division
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees(a)(b)
|
Balance
at end of 2005
|
|
|
1,375
|
|
|
|
1,096
|
|
|
|
8,848
|
|
|
|
11,319
|
|
New
Builds
|
|
|
47
|
|
|
|
35
|
|
|
|
703
|
|
|
|
785
|
|
Acquisitions
|
|
|
555
|
|
|
|
(541
|
)
|
|
|
(14
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(168
|
)
|
|
|
(1
|
)
|
|
|
169
|
|
|
|
—
|
|
Closures
|
|
|
(47
|
)
|
|
|
(25
|
)
|
|
|
(303
|
)
|
|
|
(375
|
)
|
Other
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(16
|
)
|
|
|
(19
|
)
|
Balance
at end of 2006
|
|
|
1,762
|
|
|
|
561
|
|
|
|
9,387
|
|
|
|
11,710
|
|
New
Builds
|
|
|
54
|
|
|
|
18
|
|
|
|
780
|
|
|
|
852
|
|
Acquisitions
|
|
|
1
|
|
|
|
6
|
|
|
|
(7
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(109
|
)
|
|
|
(6
|
)
|
|
|
115
|
|
|
|
—
|
|
Closures
|
|
|
(66
|
)
|
|
|
(11
|
)
|
|
|
(314
|
)
|
|
|
(391
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
Balance
at end of 2007
|
|
|
1,642
|
|
|
|
568
|
|
|
|
9,963
|
|
|
|
12,173
|
|
%
of Total
|
|
|
13%
|
|
|
|
5%
|
|
|
|
82%
|
|
|
|
100%
|
|
China
Division
|
|
|
Company
|
|
|
Unconsolidated
Affiliates
|
|
|
Franchisees
|
|
|
Total
Excluding
Licensees
|
Balance
at end of 2005
|
|
|
1,526
|
|
|
|
552
|
|
|
|
213
|
|
|
|
2,291
|
|
New
Builds
|
|
|
280
|
|
|
|
101
|
|
|
|
15
|
|
|
|
396
|
|
Acquisitions
|
|
|
1
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Refranchising
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
Closures
|
|
|
(43
|
)
|
|
|
(8
|
)
|
|
|
(4
|
)
|
|
|
(55
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Balance
at end of 2006
|
|
|
1,762
|
|
|
|
645
|
|
|
|
224
|
|
|
|
2,631
|
|
New
Builds
|
|
|
364
|
|
|
|
114
|
|
|
|
28
|
|
|
|
506
|
|
Acquisitions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Refranchising
|
|
|
(7
|
)
|
|
|
—
|
|
|
|
7
|
|
|
|
—
|
|
Closures
|
|
|
(32
|
)
|
|
|
(13
|
)
|
|
|
(6
|
)
|
|
|
(51
|
)
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
at end of 2007
|
|
|
2,087
|
|
|
|
746
|
|
|
|
253
|
|
|
|
3,086
|
|
%
of Total
|
|
|
68%
|
|
|
|
24%
|
|
|
|
8%
|
|
|
|
100%
|
|
(a)
|
The
Worldwide, U.S. and International Division totals exclude 2,109, 1,928 and
181 licensed units, respectively, at December 29,
2007. There are no licensed units in the China
Division. Licensed units are generally units that offer limited
menus and operate in non-traditional locations like malls, airports,
gasoline service stations, convenience stores, stadiums and amusement
parks where a full scale traditional outlet would not be practical or
efficient. As licensed units have lower average unit sales
volumes than our traditional units and our current strategy does not place
a significant emphasis on expanding our licensed units, we do not believe
that providing further detail of licensed unit activity provides
significant or meaningful information.
|
|
|
(b)
|
The
Worldwide and International Division totals at the end of 2007 exclude
approximately 32 units from the 2006 acquisition of the Rostik’s brand in
Russia that have not yet been co-branded into Rostik’s/KFC
restaurants. The Rostik’s units will be presented as franchisee
new builds as the co-branding into Rostik’s/KFC restaurants
occurs.
|
Multibrand
restaurants are included in the totals above. Multibrand conversions
increase the sales and points of distribution for the second brand added to a
restaurant but do not result in an additional unit count. Similarly,
a new multibrand restaurant, while increasing sales and points of distribution
for two brands, results in just one additional unit count. Franchise
unit counts include both franchisee and unconsolidated affiliate multibrand
units. Multibrand restaurant totals were as follows:
2007
|
|
|
Company
|
|
|
Franchise
|
|
|
Total
|
United
States
|
|
|
1,750
|
|
|
|
1,949
|
|
|
|
3,699
|
|
International
Division
|
|
|
6
|
|
|
|
284
|
|
|
|
290
|
(a)
|
Worldwide
|
|
|
1,756
|
|
|
|
2,233
|
|
|
|
3,989
|
|
2006
|
|
|
Company
|
|
|
Franchise
|
|
|
Total
|
United
States
|
|
|
1,802
|
|
|
|
1,631
|
|
|
|
3,433
|
|
International
Division
|
|
|
11
|
|
|
|
192
|
|
|
|
203
|
|
Worldwide
|
|
|
1,813
|
|
|
|
1,823
|
|
|
|
3,636
|
|
(a)
|
Includes
53 Pizza Hut Wing Street units that were not reflected as multibrand units
at December 30, 2006.
|
For 2007
and 2006, Company multibrand unit gross additions were 86 and 212,
respectively. For 2007 and 2006, franchise multibrand unit gross
additions were 283 and 197, respectively. There are no multibrand
units in the China Division.
System
Sales Growth
|
|
Increase
|
|
|
Increase
excluding foreign currency translation
|
|
|
Increase
excluding foreign currency translation and 53rd week
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
United
States
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
1%
|
|
International
Division
|
|
15%
|
|
|
|
7%
|
|
|
|
10%
|
|
|
|
7%
|
|
|
|
10%
|
|
|
|
9%
|
|
China
Division
|
|
31%
|
|
|
|
26%
|
|
|
|
24%
|
|
|
|
23%
|
|
|
|
24%
|
|
|
|
23%
|
|
Worldwide
|
|
8%
|
|
|
|
4%
|
|
|
|
6%
|
|
|
|
4%
|
|
|
|
6%
|
|
|
|
5%
|
|
The
explanations that follow for system sales growth consider year over year changes
excluding, where applicable, the impact of foreign currency translation and the
53rd
week in fiscal year 2005.
The
increases in International Division, China Division and Worldwide system sales
in 2007 and 2006 were driven by new unit development and same store sales
growth, partially offset by store closures.
In 2007
U.S. system sales were flat as new unit development was largely offset by store
closures. The increase in U.S. system sales in 2006 was driven by new
unit development and same store sales growth, partially offset by store
closures.
Revenues
|
|
Amount
|
|
%
Increase
(Decrease)
|
|
%
Increase
(Decrease)
excluding
foreign
currency
translation
|
|
%
Increase
(Decrease)
excluding
foreign
currency
translation
and
53rd
week
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
|
2007
|
|
2006
|
|
2007
|
|
|
2006
|
Company
sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
4,518
|
|
|
|
$
|
4,952
|
|
|
(9
|
)
|
|
|
(6
|
)
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
(5)
|
International
Division
|
|
|
2,507
|
|
|
|
|
1,826
|
|
|
37
|
|
|
|
9
|
|
|
31
|
|
|
8
|
|
|
31
|
|
|
10
|
China
Division
|
|
|
2,075
|
|
|
|
|
1,587
|
|
|
31
|
|
|
|
26
|
|
|
24
|
|
|
23
|
|
|
24
|
|
|
23
|
Worldwide
|
|
|
9,100
|
|
|
|
|
8,365
|
|
|
9
|
|
|
|
2
|
|
|
6
|
|
|
1
|
|
|
6
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
and license fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
679
|
|
|
|
|
651
|
|
|
4
|
|
|
|
3
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
4
|
International
Division
|
|
|
568
|
|
|
|
|
494
|
|
|
15
|
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
11
|
China
Division
|
|
|
69
|
|
|
|
|
51
|
|
|
35
|
|
|
|
25
|
|
|
29
|
|
|
21
|
|
|
29
|
|
|
21
|
Worldwide
|
|
|
1,316
|
|
|
|
|
1,196
|
|
|
10
|
|
|
|
7
|
|
|
8
|
|
|
6
|
|
|
8
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
5,197
|
|
|
|
|
5,603
|
|
|
(7
|
)
|
|
|
(5
|
)
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
(4)
|
International
Division
|
|
|
3,075
|
|
|
|
|
2,320
|
|
|
33
|
|
|
|
9
|
|
|
26
|
|
|
9
|
|
|
26
|
|
|
10
|
China
Division
|
|
|
2,144
|
|
|
|
|
1,638
|
|
|
31
|
|
|
|
26
|
|
|
24
|
|
|
23
|
|
|
24
|
|
|
23
|
Worldwide
|
|
$
|
10,416
|
|
|
|
$
|
9,561
|
|
|
9
|
|
|
|
2
|
|
|
6
|
|
|
2
|
|
|
6
|
|
|
3
|
The
explanations that follow for revenue fluctuations consider year-over-year
changes excluding, where applicable, the impact of foreign currency translation
and the 53rd week in
fiscal year 2005.
Excluding
the favorable impact of the Pizza Hut U.K. acquisition, Worldwide Company sales
decreased 1% in 2007. The decrease was driven by refranchising and
store closures, partially offset by new unit development and same store sales
growth. Excluding the favorable impact of the Pizza Hut U.K.
acquisition, Worldwide Company sales were flat in 2006. Increases
from new unit development and same store sales growth were offset by decreases
in refranchising and store closures.
Excluding
the unfavorable impact of the Pizza Hut U.K. acquisition, Worldwide franchise
and license fees increased 9% and 8% in 2007 and 2006,
respectively. These increases were driven by new unit development,
same store sales growth and refranchising, partially offset by store
closures.
In 2007,
the decrease in U.S. Company sales was driven by refranchising, same store sales
declines and store closures, partially offset by new unit
development. In 2006, the decrease in U.S. Company sales was driven
by refranchising and store closures, partially offset by new unit
development.
In 2007,
U.S. Company same store sales were down 3% due to transaction declines partially
offset by an increase in average guest check. In 2006, U.S. Company
same store sales were flat as a decrease in transactions was offset by an
increase in average guest check.
In 2007,
the increase in U.S. franchise and license fees was driven by refranchising and
new unit development, partially offset by store closures. In 2006, the increase
in U.S. franchise and license fees was driven by new unit development,
refranchising and same store sales growth, partially offset by store
closures.
Excluding
the favorable impact of the Pizza Hut U.K. acquisition, International Division
Company sales decreased 1% in 2007. The decrease was driven by
refranchising and store closures, partially offset by same store sales growth
and new unit development. Excluding the favorable impact of the Pizza
Hut U.K. acquisition, International Division Company sales were flat in
2006. The impacts of refranchising and store closures were partially
offset by new unit development and same store sales growth.
Excluding
the unfavorable impact of the Pizza Hut U.K. acquisition, International Division
franchise and license fees increased 14% and 13% in 2007 and 2006,
respectively. The increases were driven by new unit development and
same store sales, partially offset by store closures. 2007 was also
favorably impacted by refranchising.
In 2007
and 2006, the increases in China Division Company sales and franchise and
license fees were driven by new unit development and same store sales
growth.
Company
Restaurant Margins
2007
|
|
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
29.2
|
|
|
|
29.9
|
|
|
|
36.4
|
|
|
|
31.0
|
|
Payroll
and employee benefits
|
|
|
|
30.5
|
|
|
|
26.1
|
|
|
|
13.2
|
|
|
|
25.3
|
|
Occupancy
and other operating expenses
|
|
|
|
27.0
|
|
|
|
31.7
|
|
|
|
30.3
|
|
|
|
29.1
|
|
Company
restaurant margin
|
|
|
|
13.3
|
%
|
|
|
12.3
|
%
|
|
|
20.1
|
%
|
|
|
14.6
|
%
|
2006
|
|
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
28.2
|
|
|
|
32.2
|
|
|
|
35.4
|
|
|
|
30.5
|
|
Payroll
and employee benefits
|
|
|
|
30.1
|
|
|
|
24.6
|
|
|
|
12.9
|
|
|
|
25.6
|
|
Occupancy
and other operating expenses
|
|
|
|
27.1
|
|
|
|
31.0
|
|
|
|
31.3
|
|
|
|
28.7
|
|
Company
restaurant margin
|
|
|
|
14.6
|
%
|
|
|
12.2
|
%
|
|
|
20.4
|
%
|
|
|
15.2
|
%
|
2005
|
|
|
|
U.S.
|
|
|
International
Division
|
|
|
China
Division
|
|
|
Worldwide
|
Company
sales
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Food
and paper
|
|
|
|
29.8
|
|
|
|
33.1
|
|
|
|
36.2
|
|
|
|
31.4
|
|
Payroll
and employee benefits
|
|
|
|
30.2
|
|
|
|
24.1
|
|
|
|
13.3
|
|
|
|
26.4
|
|
Occupancy
and other operating expenses
|
|
|
|
26.2
|
|
|
|
30.7
|
|
|
|
33.1
|
|
|
|
28.2
|
|
Company
restaurant margin
|
|
|
|
13.8
|
%
|
|
|
12.1
|
%
|
|
|
17.4
|
%
|
|
|
14.0
|
%
|
In 2007,
the decrease in U.S. restaurant margin as a percentage of sales was driven by
the impact of higher commodity costs (primarily cheese and meats) and higher
wage rates, due primarily to state minimum wage rate increases. The
decrease was partially offset by the favorable impact of lower self-insured
property and casualty insurance expense driven by improved loss trends, as well
as the favorable impact on restaurant margin of refranchising and closing
certain restaurants.
In 2006,
the increase in U.S. restaurant margin as a percentage of sales was driven by
the impact of lower commodity costs (primarily meats and cheese), the impact of
same store sales on restaurant margin (due to higher average guest
check)
and the favorable impact of lower self-insured property and casualty insurance
expense. The increase was partially offset by higher occupancy and
other costs, higher labor costs, primarily driven by wage rates and benefits,
and the lapping of the favorable impact of the 53rd week in 2005. The
higher occupancy and other costs were driven by increased advertising and higher
utility costs.
In 2007,
the increase in International Division restaurant margin as a percentage of
sales was driven by the impact of same store sales growth on restaurant margin
as well as the favorable impact of refranchising certain
restaurants. The increase was almost fully offset by higher labor
costs (primarily wage rates) and the impact of lower margins associated with
Pizza Hut units in the U.K. which we now operate. As a percentage of
sales, Pizza Hut U.K. restaurants negatively impacted payroll and employee
benefits and occupancy and other expenses and positively impacted food and
paper.
In 2006,
the increase in International Division restaurant margin as a percentage of
sales was driven by the impact of same store sales growth on restaurant margin
as well as the favorable impact of refranchising and closing certain
restaurants. These increases were offset by higher labor costs and
higher food and paper costs.
In 2007,
the decrease in China Division restaurant margin as a percentage of sales was
driven by higher commodity costs (primarily chicken products), the impact of
lower margins associated with new units during the initial periods of operation
and higher labor costs. The decrease was partially offset by the
impact of same store sales growth on restaurant margin.
In 2006,
the increase in China Division restaurant margin as a percentage of sales was
driven by the impact of same store sales growth on restaurant
margin. The increase was partially offset by the impact of lower
margins associated with new units during the initial periods of
operations.
Worldwide
General and Administrative Expenses
G&A
expenses increased 9% in 2007, including a 2% unfavorable impact of foreign
currency translation. Excluding the additional G&A expenses
associated with acquiring the Pizza Hut U.K. business (which were previously
netted within equity income prior to our acquisition of the remaining fifty
percent of the business) and the unfavorable impact of foreign currency
translation, G&A expense increased 4%. The increase was driven by
higher annual incentive and other compensation costs, including amounts
associated with strategic initiatives in China and other international growth
markets.
G&A
expenses increased 2% in 2006. The increase was primarily driven by
higher compensation related costs, including amounts associated with investments
in strategic initiatives in China and other international growth markets, partially offset by lapping higher prior year
litigation related costs. The net impact of the additional G&A
expenses associated with acquiring the Pizza Hut U.K. business, the favorable
impact of lapping the 53rd week in
2005 and the unfavorable impact of foreign currency translation was not
significant.
Worldwide
Other (Income) Expense
|
|
2007
|
|
|
2006
|
|
|
2005
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(51
|
)
|
|
|
$
|
(51
|
)
|
|
|
$
|
(51
|
)
|
Gain
upon sale of investment in unconsolidated affiliate (a)
|
|
|
(6
|
)
|
|
|
|
(2
|
)
|
|
|
|
(11
|
)
|
Recovery
from supplier (b)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(20
|
)
|
Contract
termination charge (c)
|
|
|
—
|
|
|
|
|
8
|
|
|
|
|
—
|
|
Wrench
litigation income(d)
|
|
|
(11
|
)
|
|
|
|
—
|
|
|
|
|
(2
|
)
|
Foreign
exchange net (gain) loss and other
|
|
|
(3
|
)
|
|
|
|
(7
|
)
|
|
|
|
—
|
|
Other
(income) expense
|
|
$
|
(71
|
)
|
|
|
$
|
(52
|
)
|
|
|
$
|
(84
|
)
|
(a)
|
Fiscal
years 2007 and 2006 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. Fiscal year 2005 reflects the gain recognized at the
date of this sale.
|
|
|
(b)
|
Relates
to a financial recovery from a supplier ingredient issue in mainland China
totaling $24 million in 2005, $4 million of which was recognized through
equity income from investments in unconsolidated
affiliates.
|
|
|
(c)
|
Reflects
an $8 million charge associated with the termination of a beverage
agreement in the U.S. segment in 2006.
|
|
|
(d)
|
Fiscal
years 2007 and 2005 reflect 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 and
closure activities and Note 5 for a summary of the components of facility
actions by reportable operating segment.
Operating
Profit
|
|
|
%
Increase/(Decrease)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
United
States
|
$
|
739
|
|
|
$
|
763
|
|
|
|
(3
|
)
|
|
|
—
|
|
International
Division
|
|
480
|
|
|
|
407
|
|
|
|
18
|
|
|
|
9
|
|
China
Division
|
|
375
|
|
|
|
290
|
|
|
|
30
|
|
|
|
37
|
|
|
Unallocated
and corporate expenses
|
|
(257
|
)
|
|
|
(229
|
)
|
|
|
12
|
|
|
|
(7
|
)
|
Unallocated
other income (expense)
|
|
9
|
|
|
|
7
|
|
|
|
NM
|
|
|
|
NM
|
|
Unallocated
refranchising gain (loss)
|
|
11
|
|
|
|
24
|
|
|
|
NM
|
|
|
|
NM
|
|
Operating
profit
|
$
|
1,357
|
|
|
$
|
1,262
|
|
|
|
8
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States operating margin
|
|
14.2
|
%
|
|
|
13.6
|
%
|
|
|
0.6
|
ppts.
|
|
|
0.8
|
ppts.
|
International
Division operating margin
|
|
15.6
|
%
|
|
|
17.6
|
%
|
|
|
(2.0
|
)
ppts.
|
|
|
0.1
|
ppts.
|
Neither
unallocated and corporate expenses, which comprise G&A expenses, nor
unallocated refranchising gain (loss) are allocated to the U.S., International
Division or China Division segments for performance reporting
purposes. The increase in unallocated and corporate expenses in 2007
was driven by an increase in annual incentive compensation and project
costs. The decrease in 2006 unallocated and corporate expenses was
driven by the lapping of the unfavorable impact of 2005 litigation related
costs.
U.S.
operating profit decreased 3% in 2007. The decrease was driven by
higher restaurant operating costs, principally commodities and labor, partially
offset by lower G&A expenses, lower closure and impairment expenses and an
increase in Other income.
Excluding
the unfavorable impact of lapping the 53rd week in 2005, U.S. operating profit
increased 3% in 2006. The increase was driven by the impact of same
store sales on restaurant profit (due to higher average guest check) and
franchise and license fees, new unit development and lower closures and
impairment expenses. These increases were
partially
offset by the unfavorable impact of refranchising, higher G&A expenses and a
charge associated with the termination of a beverage agreement in
2006. The impact of lower commodity costs and lower property and
casualty insurance expense on restaurant profit was largely offset by higher
other restaurant costs, including labor, advertising and utilities.
International
Division operating profit increased 18% in 2007 including a 6% favorable impact
from foreign currency translation. The increase was driven by the
impact of same store sales growth and new unit development on restaurant profit
and franchise and license fees. The increase was partially offset by
higher G&A expenses (including expenses which were previously netted within
equity income prior to our acquisition of the remaining fifty percent of the
Pizza Hut U.K. business) and higher restaurant operating costs.
Excluding
the unfavorable impact of lapping the 53rd week in 2005, International Division
operating profit increased 11% in 2006. The increase was driven by
the impact of same store sales growth and new unit development on franchise and
license fees and restaurant profit. These increases were partially
offset by higher restaurant operating costs and lower equity income from
unconsolidated affiliates. Foreign currency translation did not have
a significant impact.
China
Division operating profit increased 30% in 2007 including a 7% favorable impact
from foreign currency translation. The increase was driven by the
impact of same store sales growth and new unit development on restaurant
profit. The increase was partially offset by higher restaurant
operating costs and G&A expenses.
China
Division operating profit increased 37% in 2006 including a 4% favorable impact
from foreign currency translation. The increase was driven by the
impact of same store sales growth and new unit development on restaurant profit
as well as an increase in equity income from our unconsolidated
affiliates. These increases were partially offset by higher G&A
expenses and the lapping of a prior year financial recovery from a
supplier.
Interest
Expense, Net
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
expense
|
|
$
|
199
|
|
|
$
|
172
|
|
|
$
|
147
|
|
|
Interest
income
|
|
|
(33
|
)
|
|
|
(18
|
)
|
|
|
(20
|
)
|
|
Interest
expense, net
|
|
$
|
166
|
|
|
$
|
154
|
|
|
$
|
127
|
|
|
Net
interest expense increased $12 million or 8% in 2007. The increase
was driven by an increase in borrowings in 2007 compared to 2006, partially
offset by an increase in interest bearing cash equivalents in 2007 compared to
2006. Net interest expense increased $27 million or 21% in
2006. The increase was driven by both an increase in interest rates
on the variable rate portion of our debt and increased borrowings as compared to
prior year.
Income
Taxes
|
|
2007
|
|
2006
|
|
2005
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
282
|
|
|
$
|
284
|
|
|
$
|
264
|
|
|
Effective
tax rate
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
|
|
25.8
|
%
|
|
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
2007
|
|
2006
|
|
2005
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
1.6
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(5.7
|
)
|
|
|
(7.8
|
)
|
|
|
(8.4
|
)
|
Adjustments
to reserves and prior years
|
|
|
2.6
|
|
|
|
(3.5
|
)
|
|
|
(1.1
|
)
|
Repatriation
of foreign earnings
|
|
|
—
|
|
|
|
(0.4
|
)
|
|
|
2.0
|
|
Non-recurring
foreign tax credit adjustments
|
|
|
—
|
|
|
|
(6.2
|
)
|
|
|
(1.7
|
)
|
Valuation
allowance additions (reversals)
|
|
|
(9.0
|
)
|
|
|
6.8
|
|
|
|
(1.1
|
)
|
Other,
net
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
Effective
income tax rate
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
|
|
25.8
|
%
|
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 we now believe are
more likely than not to be claimed on future tax returns. In 2007,
benefits associated with our foreign and U.S. tax effects attributable to
foreign operations were negatively impacted by $36 million of expense associated
with the $275 million intercompany dividend and approximately $20 million of
expense for adjustments to our deferred tax balances as a result of the Mexico
tax law change enacted during the fourth quarter of 2007. These
negative impacts were partially offset by a higher percentage of our income
being earned outside the U.S. Additionally, the effective tax rate
was negatively impacted by the year-over-year change in adjustments to reserves
and prior years.
Our 2006
effective income tax rate was positively impacted by the reversal of tax
reserves in connection with our regular U.S. audit cycle as well as certain
out-of-year adjustments to reserves and accruals that lowered our effective
income tax rate by 2.2 percentage points. The reversal of tax
reserves was partially offset by valuation allowance additions on foreign tax
credits for which, as a result of the tax reserve reversals, we believed were
not likely to be utilized before they expired. We also recognized
deferred tax assets for the foreign tax credit impact of non-recurring decisions
to repatriate certain foreign earnings in 2007. However, we provided
full valuation allowances on such assets as we did not believe it was more
likely than not that they would be realized at that time.
Our 2005
effective income tax rate was positively impacted by valuation allowance
reversals for certain deferred tax assets whose realization became more likely
than not as well as the recognition of certain non-recurring foreign tax credits
we were able to substantiate in 2005. The impact of these items was
partially offset by tax expense associated with our 2005 decision to repatriate
approximately $390 million in qualified foreign earnings. These
earnings were eligible for a dividends received deduction in accordance with the
American Jobs Creation Act of 2004.
Adjustments
to reserves and prior years include the effects of the reconciliation of income
tax amounts recorded in our Consolidated Statements of Income to amounts
reflected on our tax returns, including any adjustments to the Consolidated
Balance Sheets. Adjustments to reserves and prior years also includes
changes in tax reserves, including interest thereon, established for potential
exposure we may incur if a taxing authority takes a position on a matter
contrary to our position. We evaluate these reserves on a quarterly
basis to insure that they have been appropriately adjusted for events, including
audit settlements that we believe may impact our exposure.
Consolidated
Cash Flows
Net cash provided by operating
activities was $1,567 million compared to $1,299 million in
2006. The increase was primarily driven by higher net income, lower
pension contributions and lower income tax payments in 2007.
In 2006,
net cash provided by operating activities was $1,299 million compared to
$1,233 million in
2005. The increase was driven by a higher net income, lower pension
contributions and a 2006 partial receipt of the settlement related to the 2005
mainland China supplier ingredient issue. These factors were offset
by higher income tax and interest payments in 2006.
Net cash used in investing
activities was $432 million versus $476 million in 2006. The
decrease was driven by the lapping of the acquisition of the remaining interest
in our Pizza Hut U.K. unconsolidated affiliate in 2006 and proceeds from the
sale of our interest in the Japan unconsolidated affiliate in December 2007,
partially offset by the year over year change in proceeds from refranchising of
restaurants and a 2007 increase in capital spending.
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 approximately $87 million will be 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
are thus reported on our Consolidated Statement of Cash Flows for the year ended
December 29, 2007. The offset to this cash on our Consolidated
Balance Sheet at December 29, 2007 is in accounts payable and other current
liabilities.
In 2006,
net cash used in investing activities was $476 million versus $345 million in
2005. The increase was driven by the 2006 acquisitions of the
remaining interest in our Pizza Hut U.K. unconsolidated affiliate and the
Rostik’s brand and associated intellectual properties in Russia. The
lapping of proceeds related to the 2005 sale of our fifty percent interest in
our former Poland/Czech Republic unconsolidated affiliate also contributed to
the increase. These factors were partially offset by an increase in
proceeds from refranchising in 2006.
Net cash used in financing
activities was $678 million versus $670 million in 2006. The
increase was driven by higher share repurchases and higher dividend payments,
partially offset by an increase in net borrowings.
In 2006,
net cash used in financing activities was $670 million versus $827 million in
2005. The decrease was driven by an increase in net borrowings and
lower share repurchases, partially offset by a reduction in the excess tax
benefits from share-based compensation and higher dividend
payments.
Consolidated
Financial Condition
The
increase in short-term borrowings at December 29, 2007 was primarily due to the
classification of $250 million in Senior Unsecured Notes as short-term
borrowings due to their May 2008 maturity date, partially offset by the
repayment of two term-loans in the International Division during the year ended
December 29, 2007. The increase in long-term debt was primarily due
to the 2007 issuance of $600 million aggregate principal amount of 6.25% Senior
Unsecured Notes that are due March 15, 2018 and $600 million aggregate principal
amount of 6.875% Senior Unsecured Notes that are due November 15,
2037.
Liquidity
and Capital Resources
Operating
in the QSR industry allows us to generate substantial cash flows from the
operations of our company stores and from our franchise operations, which
require a limited YUM investment. In each of the last six fiscal
years, net cash
provided
by operating activities has exceeded $1 billion. We expect these
levels of net cash provided by operating activities to continue in the
foreseeable future. Additionally, we estimate that refranchising
proceeds, prior to income taxes, will total at least $400 million in
2008. Our discretionary spending includes capital spending for new
restaurants, acquisitions of restaurants from franchisees, repurchases of shares
of our Common Stock and dividends paid to our
shareholders. Unforeseen downturns in our business could adversely
impact our cash flows from operations from the levels historically
realized. However, we believe our ability to reduce discretionary
spending and our borrowing capacity would allow us to meet our cash requirements
in 2008 and beyond.
Discretionary
Spending
During
2007, we invested $742 million in our businesses, including approximately $307
million in the U.S., $189 million for the International Division and $246
million for the China Division. For 2008, we estimate capital
spending will be between $700 and $750 million.
We
returned approximately $1.7 billion to our shareholders through share
repurchases and quarterly dividends in 2007. This is the third
straight year that we returned over $1.1 billion to our
shareholders. Under the authority of our Board of Directors, we
repurchased 41.8 million shares of our Common Shares for $1.4 billion during
2007. At December 29, 2007, we had remaining capacity to repurchase
up to $813 million of our outstanding Common Stock (excluding applicable
transaction fees) under an October 2007 authorization by our Board of Directors
that allowed us to repurchase $1.25 billion of the Company’s outstanding Common
Stock (excluding applicable transaction fees) to be purchased through October
2008. Subsequent to the Company’s year end, our Board of Directors
authorized additional share repurchases of up to an additional $1.25 billion of
the Company’s outstanding Common Stock (excluding applicable transaction fees)
to be purchased through January 2009.
In
October 2007, the Company announced that we plan to substantially increase the
amount of share buybacks over the next two years; buying back a total of up to
$4 billion of the Company’s outstanding Common Stock, helping to reduce our
diluted share count by as much as 20%. Since the announcement of this
plan, the Company has repurchased $437 million of our outstanding Common Stock
through December 29, 2007. We expect this two-year share repurchase
program will be funded by a combination of the Company’s ongoing free cash flow,
additional debt and refranchising proceeds. The completion of this
plan will depend on the Company’s cash flows, credit rating, proceeds from our
refranchising efforts and availability of other investment opportunities, among
other factors.
During
the year ended December 29, 2007, we paid cash dividends of $273
million. Additionally, on November 16, 2007 our Board of Directors
approved cash dividends of $0.15 per share of Common Stock to be distributed on
February 1, 2008 to shareholders of record at the close of business on January
11, 2008.
For 2008,
we expect to return over $2 billion to shareholders through both cash dividends
and significant share repurchases. We are now expecting a reduction
in average diluted shares outstanding of approximately 8% for 2008 and an
ongoing annual dividend payout ratio of 35% - 40% of net income.
Borrowing
Capacity
On
November 29, 2007, the Company executed an amended and restated five-year senior
unsecured Revolving Credit Facility (the “Credit Facility”) totaling $1.15
billion which replaced a five-year facility in the amount of $1.0 billion that
was set to expire on September 7, 2009. The Credit Facility is
unconditionally guaranteed by our principal domestic subsidiaries and contains
financial covenants relating to maintenance of leverage and fixed charge
coverage ratios. The Credit Facility also contains affirmative and
negative covenants including, among other things, limitations on certain
additional indebtedness and liens, and certain other transactions specified in
the agreement. We were in compliance with all debt covenants at
December 29, 2007.
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 29, 2007, our unused Credit Facility totaled
$971 million
net
of outstanding letters of credit of $179 million. There were no
borrowings outstanding under the Credit Facility at December 29,
2007. 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.
On
November 29, 2007, the Company executed an amended and restated five-year
revolving credit facility (the “International Credit Facility” or “ICF”)
totaling $350 million, which replaced a five-year facility also in the amount of
$350 million that was set to expire on November 8, 2010. The ICF is
unconditionally guaranteed by YUM and by YUM’s principal domestic subsidiaries
and contains covenants substantially identical to those of the Credit
Facility. We were in compliance with all debt covenants at the end of
2007.
There
were borrowings of $28 million and available credit of $322 million outstanding
under the ICF at the end of 2007. 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.
In 2006,
we executed two short-term borrowing arrangements (the “Term Loans”) on behalf
of the International Division. There were borrowings of $183 million
outstanding at the end of 2006 under the Term Loans, both of which expired and
were repaid in the first quarter of 2007.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes with varying maturity dates from 2008 through 2037 and interest rates
ranging from 6.25% to 8.88%. The Senior Unsecured Notes represent
senior, unsecured obligations and rank equally in right of payment with all of
our existing and future unsecured unsubordinated
indebtedness. Amounts outstanding under Senior Unsecured Notes were
$2.8 billion at December 29, 2007. This amount includes $600 million
aggregate principal amount of 6.25% Senior Unsecured Notes due March 15, 2018
and $600 million aggregate principal amount of 6.875% Senior Unsecured Notes due
November 15, 2037, both of which were issued in October 2007. We are
using the proceeds from these notes to repay outstanding borrowings on our
Credit Facility, for additional share repurchases and for general corporate
purposes.
Contractual
Obligations
In
addition to any discretionary spending we may choose to make, our significant
contractual obligations and payments as of December 29, 2007
included:
|
|
Total
|
|
|
Less
than 1 Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
than 5 Years
|
Long-term
debt obligations(a)
|
|
$
|
5,034
|
|
|
|
$
|
470
|
|
|
|
$
|
375
|
|
|
|
$
|
1,355
|
|
|
|
$
|
2,834
|
|
Capital
leases(b)
|
|
|
390
|
|
|
|
|
24
|
|
|
|
|
86
|
|
|
|
|
40
|
|
|
|
|
240
|
|
Operating
leases(b)
|
|
|
3,886
|
|
|
|
|
462
|
|
|
|
|
798
|
|
|
|
|
640
|
|
|
|
|
1,986
|
|
Purchase
obligations(c)
|
|
|
414
|
|
|
|
|
356
|
|
|
|
|
50
|
|
|
|
|
5
|
|
|
|
|
3
|
|
Other
long-term liabilities reflected on our Consolidated Balance Sheet under
GAAP
|
|
|
44
|
|
|
|
|
15
|
|
|
|
|
10
|
|
|
|
|
6
|
|
|
|
|
13
|
|
Total
contractual obligations
|
|
$
|
9,768
|
|
|
|
$
|
1,327
|
|
|
|
$
|
1,319
|
|
|
|
$
|
2,046
|
|
|
|
$
|
5,076
|
|
(a)
|
Debt
amounts include principal maturities and expected interest
payments. Rates utilized to determine interest payments for
variable rate debt are based on an estimate of future interest
rates. Excludes a fair value adjustment of $17 million included
in debt related to interest rate swaps that hedge the fair value of a
portion of our debt. See Note 13.
|
|
|
(b)
|
These
obligations, which are shown on a nominal basis, relate to 6,000
restaurants. See Note 14.
|
(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.
|
We have
not included in the contractual obligations table approximately $319
million for long-term liabilities for unrecognized tax benefits for
various tax positions we have taken. These liabilities may increase
or decrease over time as a result of tax examinations, and given the status of
the examinations, we cannot reliably estimate the period of any cash settlement
with the respective taxing authorities. These liabilities also
include amounts that are temporary in nature and for which we anticipate that
over time there will be no net cash outflow. We have included in the
contractual obligations table $9 million in liabilities for unrecognized tax
benefits that we expect to settle in cash in the next year.
We have
not included obligations under our pension and postretirement medical benefit
plans in the contractual obligations table. Our most significant
plan, the YUM Retirement Plan (the “U.S. Plan”), is a noncontributory defined
benefit pension plan covering certain full-time U.S. salaried
employees. Our funding policy with respect to the U.S. Plan is to
contribute amounts necessary to satisfy minimum pension funding requirements,
including requirements of the Pension Protection Act of 2006, plus such
additional amounts from time to time as are determined to be appropriate to
improve the U.S. Plan’s funded status. The U.S. Plan’s funded status
is affected by many factors including discount rates and the performance of U.S.
Plan assets. Based on current funding rules, we do not anticipate
being required to make minimum pension funding payments in 2008, but we may make
discretionary contributions during the year based on our estimate of the U.S.
Plan’s expected December 27, 2008 funded status. During 2007, we did
not make a discretionary contribution to the U.S. Plan. At our
September 30, 2007 measurement date, our pension plans in the U.S., which
include the U.S. Plan and an unfunded supplemental executive plan, had a
projected benefit obligation of $842 million and plan assets of $732
million.
The
funding rules for our pension plans outside of the U.S. vary from country to
country and depend on many factors including discount rates, performance of plan
assets, local laws and tax regulations. Our most significant plans
are in the U.K., including a plan for which we assumed full liability upon our
purchase of the remaining fifty percent interest in our former Pizza Hut U.K.
unconsolidated affiliate. Since our plan assets approximate our
projected benefit obligation for our KFC U.K. pension plan, we did not make a
significant contribution in 2007 and we do not anticipate any significant
further, near term funding. The projected benefit obligation of our
Pizza Hut U.K. pension plan exceeds plan assets by approximately $27 million at
our November 30, 2007 measurement date. We anticipate taking steps to
reduce this deficit in the near term, which could include a decision to
partially or completely fund the deficit in 2008. However, given the
level of cash flows from operations the Company anticipates generating in 2008,
any funding decision would not materially impact our ability to maintain our
planned levels of discretionary spending.
Our
postretirement plan in the U.S. is not required to be funded in advance, but is
pay as you go. We made postretirement benefit payments of $4 million
in 2007. See Note 16 for further details about our pension and
postretirement plans.
We have
excluded from the contractual obligations table payments we may make for
exposures for which we are self-insured, including workers’ compensation,
employment practices liability, general liability, automobile liability 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 had
provided a partial guarantee of approximately $12 million of a franchisee loan
pool related primarily to the Company’s historical refranchising programs and,
to a lesser extent, franchisee development of new restaurants at December 29,
2007. In support of this guarantee, we have provided a standby letter
of credit of $18 million, under which we could potentially be required to fund a
portion of the franchisee loan pool. The total loans outstanding
under the loan pool were approximately $62 million at December 29,
2007.
The loan
pool is funded by the issuance of commercial paper by a conduit established for
that purpose. A disruption in the commercial paper markets may result
in the Company and the participating financial institutions having to fund
commercial paper issuances that have matured. Any Company funding
under its guarantee or letter of credit would be secured by the franchisee loans
and any related collateral. We believe that we have appropriately
provided for our estimated probable exposures under these contingent
liabilities. These provisions were primarily charged to net refranchising (gain)
loss. New loans added to the loan pool in 2007 were not
significant.
Our
unconsolidated affiliates do not have significant amounts of debt outstanding as
of December 29, 2007.
New
Accounting Pronouncements Not Yet Adopted
See Note
2 to the Consolidated Financial Statements included in Part II, Item 8 of this
report for further details of new accounting pronouncements not yet
adopted.
Critical
Accounting Policies and Estimates
Our
reported results are impacted by the application of certain accounting policies
that require us to make subjective or complex judgments. These
judgments involve estimations of the effect of matters that are inherently
uncertain and may significantly impact our quarterly or annual results of
operations or financial condition. Changes in the estimates and
judgments could significantly affect our results of operations, financial
condition and cash flows in future years. A description of what we
consider to be our most significant critical accounting policies
follows.
Impairment or Disposal of
Long-Lived Assets
We
evaluate our long-lived assets for impairment at the individual restaurant level
except when there is an expectation that we will refranchise restaurants as a
group. Impairment evaluations for individual restaurants that we are
currently operating and have not offered for sale are performed on a semi-annual
basis or whenever events or circumstances indicate that the carrying amount of a
restaurant may not be recoverable (including a decision to close a
restaurant). Our semi-annual impairment test includes those
restaurants that have experienced two consecutive years of operating losses. Our
semi-annual impairment evaluations require an estimation of cash flows over the
remaining useful life of the primary asset of the restaurant, which can be for a
period of over 20 years, and any terminal value. We limit assumptions
about important factors such as sales growth and margin improvement to those
that are supportable based upon our plans for the unit and actual results at
comparable restaurants.
If the
long-lived assets of a restaurant subject to our semi-annual test are not
recoverable based upon forecasted, undiscounted cash flows, we write the assets
down to their fair value. This fair value is determined by
discounting the forecasted after tax cash flows, including terminal value, of
the restaurant at an appropriate rate. The discount rate used is our
weighted average cost of capital plus a risk premium where deemed
appropriate.
We often
refranchise restaurants in groups and, therefore, perform such impairment
evaluations at the group level. These impairment evaluations are
generally performed at the date such restaurants are offered for
sale. Forecasted cash flows in such instances consist of estimated
holding period cash flows and the expected sales proceeds. Expected
sales proceeds
are based
on the most relevant of historical sales multiples or bids from buyers, and have
historically been reasonably accurate estimations of the proceeds ultimately
received.
See Note
2 for a further discussion of our policy regarding the impairment or disposal of
long-lived assets.
Impairment of Goodwill and
Indefinite-Lived Intangible Assets
We
evaluate goodwill and indefinite-lived intangible assets for impairment on an
annual basis or more often if an event occurs or circumstances change that
indicates impairment might exist. Goodwill is evaluated for
impairment through the comparison of fair value of our reporting units to their
carrying values. Our reporting units are our operating segments in
the U.S. and our business management units internationally (typically individual
countries). Fair value is the price a willing buyer would pay for the
reporting unit, and is generally estimated using either discounted expected
future cash flows from operations or the present value of the estimated future
franchise royalty stream plus any estimated sales proceeds from
refranchising. Any estimated sales proceeds are based on relevant
historical sales multiples. The discount rate used in determining
fair value is our weighted average cost of capital plus a risk premium where
deemed appropriate.
We have
recorded intangible assets as a result of business
acquisitions. These include trademark/brand intangible assets for
KFC, LJS and A&W. We believe the value of a trademark/brand is
derived from the royalty we avoid, in the case of Company stores, or receive, in
the case of franchise stores, due to our ownership of the
trademark/brand. We have determined that the KFC trademark/brand has
an indefinite life and therefore it is not being amortized. Our
impairment test for the KFC trademark/brand consists of a comparison of the fair
value of the asset with its carrying amount. Future sales are the
most important assumption in determining the fair value of the KFC
trademark/brand.
In
determining the fair value of our reporting units and the KFC trademark/brand,
we limit assumptions about important factors such as sales growth, margin
improvement and other factors impacting the fair value calculation to those that
are supportable based upon our plans. For 2007, there was no
impairment of goodwill or the KFC trademark/brand.
We have
certain intangible assets, such as the LJS and A&W trademark/brand
intangible assets, franchise contract rights, reacquired franchise rights and
favorable/unfavorable operating leases, 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. We
base the expected useful lives of reacquired franchise rights over a period for
which we believe it is reasonable that we will operate a Company restaurant in
the trade area. We base the expected useful lives of our
favorable/unfavorable operating leases on the remaining lease term.
Our
amortizable intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An intangible asset that is deemed
impaired is written down to its estimated fair value, which is based on
discounted cash flows. For purposes of our impairment analysis, we
update the cash flows that were initially used to value the amortizable
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 policies regarding goodwill and intangible
assets.
Allowances for Franchise and
License Receivables/Lease Guarantees
We
reserve a franchisee’s or licensee’s entire receivable balance based upon
pre-defined aging criteria and upon the occurrence of other events that indicate
that we may not collect the balance due. As a result of reserving
using this methodology, we have an immaterial amount of receivables that are
past due that have not been reserved for at December 29, 2007.
We have
also issued certain guarantees as a result of assigning our interest in
obligations under operating leases, primarily as a condition to the
refranchising of certain Company restaurants. Such guarantees are
subject to the requirements of Statement of Financial Accounting Standards
(“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). We
recognize a liability for the fair value of such lease guarantees under SFAS 145
upon refranchising and upon any subsequent renewals of such leases when we
remain contingently liable. The fair value of a guarantee is the
estimated amount at which the liability could be settled in a current
transaction between willing parties.
If
payment on the guarantee becomes probable and estimable, we record a liability
for our exposure under these lease assignments and guarantees. At
December 29, 2007, we have recorded an immaterial liability for our exposure
which we consider to be probable and estimable. The potential total
exposure under such leases is significant, with approximately $325 million
representing the present value, discounted at our pre-tax cost of debt, of the
minimum payments of the assigned leases at December 29, 2007. Current
franchisees are the primary lessees under the vast majority of these
leases. We generally have cross-default provisions with these
franchisees that would put them in default of their franchise agreement in the
event of non-payment under the lease. We believe these cross-default
provisions significantly reduce the risk that we will be required to make
payments under these leases and, historically, we have not been required to make
such payments in significant amounts.
See Note
2 for a further discussion of our policies regarding franchise and license
operations.
See Note
22 for a further discussion of our lease guarantees.
Self-Insured Property and
Casualty Losses
We record
our best estimate of the remaining cost to settle incurred self-insured property
and casualty losses. The estimate is based on the results of an
independent actuarial study and considers historical claim frequency and
severity as well as changes in factors such as our business environment, benefit
levels, medical costs and the regulatory environment that could impact overall
self-insurance costs. Additionally, a risk margin to cover unforeseen
events that may occur over the several years it takes for claims to settle is
included in our reserve, increasing our confidence level that the recorded
reserve is adequate.
See Note
22 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. In accordance with
SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (“SFAS 158”), we have recorded the under-funded status of
$110 million for these U.S. plans as a pension liability in our Consolidated
Balance Sheet as of December 29, 2007. These U.S. plans had projected
benefit obligations (“PBO”) of $842 million and fair values of plan assets of
$732 million in December 29, 2007.
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 6.50% at September 30, 2007. 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. In considering possible bond portfolios, the model
allows the bond cash flows for a particular year to exceed the expected benefit
cash flows for that year. Such excesses are assumed to be reinvested
at appropriate one-year forward rates and used to meet the benefit cash flows in
a future year. The weighted average yield of this hypothetical
portfolio was used to arrive at an appropriate discount rate. We also
insure that changes in the discount rate as compared to the prior year are
consistent with the overall change in prevailing market rates and make
adjustments as
necessary. A 50 basis
point increase in this discount rate would have decreased our U.S. plans’ PBO by
approximately $65 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 $71 million at our measurement dates.
The
pension expense we will record in 2008 is also impacted by the discount rate we
selected at our measurement date. We expect pension expense for our
U.S. plans to decrease approximately $19 million to $37 million in
2008. The decrease is primarily driven by a decrease in amortization
of net loss of $17 million in 2008. A 50 basis point change in our
weighted average discount rate assumption at our measurement date would impact
our 2008 U.S. pension expense by approximately $10 million.
The
assumption we make regarding our expected long-term rates of return on plan
assets also impacts our pension expense. Our estimated long-term rate
of return on U.S. plan assets represents the weighted-average of historical
returns for each asset category, adjusted for an assessment of current market
conditions. Our expected long-term rate of return on U.S. plan assets
at September 30, 2007 was 8.0%. We believe this rate is appropriate
given the composition of our plan assets and historical market returns
thereon. A one percentage point increase or decrease in our expected
long-term rate of return on plan assets assumption would decrease or increase,
respectively, our 2008 U.S. pension plan expense by approximately $7
million.
The
losses our U.S. plan assets have experienced, along with a decrease in discount
rates over time, have largely contributed to an unrecognized net loss of $80
million included in Accumulated other comprehensive income (loss) for the U.S.
plans at December 29, 2007. For purposes of determining 2007 expense,
our funded status was such that we recognized $23 million of this loss in net
periodic benefit cost. We will recognize approximately $6 million of
such loss in 2008.
See Note
16 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
17. Additionally, under SFAS No. 123 (revised 2004), “Share-Based
Compensation” (“SFAS 123R”) we are required to estimate pre-vesting forfeitures
for purposes of determining compensation expense to be
recognized. Future expense amounts for any particular quarterly or
annual period could be affected by changes in our assumptions or changes in
market conditions.
We have
determined that it is appropriate to group our awards into two homogeneous
groups when estimating expected term and pre-vesting
forfeitures. These groups consist of grants made primarily to
restaurant-level employees under our Restaurant General Manager Stock Option
Plan (the “RGM Plan”) and grants made to executives under our other stock award
plans. Historically, approximately 15% - 20% of total options and
SARs granted have been made under the RGM Plan.
Grants
under the RGM Plan typically cliff vest after four years and grants made to
executives under our other stock award plans typically have a graded vesting
schedule and vest 25% per year over four years. We use a single
weighted-average expected term for our awards that have a graded vesting
schedule as permitted by SFAS 123R. We revaluate our expected term
assumptions using historical exercise and post-vesting employment termination
behavior on a regular basis. Based on the results of this analysis,
we have determined that six years is an appropriate expected term for awards to
both restaurant level employees and to executives.
Upon each
stock award grant we revaluate the expected volatility, including consideration
of both historical volatility of our stock as well as implied volatility
associated with our traded options. We have estimated forfeitures
based on historical data. Based on such data, we believe that
approximately 45% of all awards granted under the RGM Plan will be forfeited and
approximately 20% of all awards granted to above-store executives will be
forfeited.
Income Tax Valuation
Allowances and Unrecognized Tax Benefits
At
December 29, 2007, we had a valuation allowance of $308 million primarily to
reduce our net operating loss and tax credit carryforward benefits of $363
million, as well as our other deferred tax assets, to amounts that will more
likely than not be realized. The net operating loss and tax credit
carryforwards exist in federal, state and foreign jurisdictions and have varying
carryforward periods and restrictions on usage. The estimation of
future taxable income in these jurisdictions and our resulting ability to
utilize net operating loss and tax credit carryforwards can significantly change
based on future events, including our determinations as to the feasibility of
certain tax planning strategies. Thus, recorded valuation allowances
may be subject to material future changes.
As a
matter of course, we are regularly audited by federal, state and foreign tax
authorities. Effective December 31, 2006, we adopted Financial
Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), an interpretation of Statement of
Financial Accounting Standards No. 109, “Accounting for Income
Taxes”. FIN 48 requires that a position taken or expected to be taken
in a tax return be recognized in the financial statements when it is more likely
than not (i.e. a likelihood of more than fifty percent) that the position would
be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement. At December
29, 2007, we had $376 million of unrecognized tax benefits, $194 million of
which, if recognized, would affect the effective tax rate. We
evaluate unrecognized tax benefits, including interest thereon, on a quarterly
basis to insure that they have been appropriately adjusted for events, including
audit settlements, which may impact our ultimate payment for such
exposures.
See Note
20 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 29, 2007 and December 30, 2006, 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 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 29, 2007 and December 30, 2006 would decrease
approximately $31 million and $32 million, respectively. The fair
value of our Senior Unsecured Notes at December 29, 2007 and December 30, 2006
would decrease approximately $173 million and $69 million, respectively. Fair
value was determined by discounting the projected cash flows.
Foreign Currency Exchange
Rate Risk
The
combined International Division and China Division operating profits constitute
approximately 54% of our operating profit in 2007, excluding unallocated income
(expenses). In addition, the Company’s net asset exposure (defined as
foreign currency assets less foreign currency liabilities) totaled approximately
$1.5 billion as of December 29, 2007. 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, the
Americas and Europe. 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 29, 2007, operating profit would have decreased $89 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.
Cautionary
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. The statements include those identified by such words as
“may,” “will,” “expect,” “project,” “anticipate,” “believe,” “plan” and other
similar terminology. These “forward-looking statements” reflect our
current expectations regarding future events and operating and financial
performance and are based upon data available at the time of the
statements. Actual results involve risks and uncertainties, including
both those specific to the Company and those specific to the industry, and could
differ materially from expectations. Accordingly, you are cautioned
not to place undue reliance on forward-looking statements.
Company
risks and uncertainties include, but are not limited to, changes in effective
tax rates; potential unfavorable variances between estimated and actual
liabilities; our ability to secure distribution of products and equipment to our
restaurants on favorable economic terms and our ability to ensure adequate
supply of restaurant products and equipment in our stores; unexpected
disruptions in our supply chain; effects and outcomes of any pending or future
legal claims involving the Company; the effectiveness of operating initiatives
and marketing, advertising and promotional efforts; our ability to continue to
recruit and motivate qualified restaurant personnel; the ongoing financial
viability of our franchisees and licensees; the success of our refranchising
strategy; the success of our strategies for international development and
operations; volatility of actuarially determined losses and loss estimates; and
adoption of new or changes in accounting policies and practices including
pronouncements promulgated by standard setting bodies.
Industry
risks and uncertainties include, but are not limited to, economic and political
conditions in the countries and territories where we operate, including effects
of war and terrorist activities; new legislation and governmental regulations or
changes in laws and regulations and the consequent impact on our business; new
product and concept development by us and/or our food industry competitors;
changes in competition in the food industry; publicity which may impact
our
business
and/or industry; severe weather conditions; volatility of commodity costs;
increases in minimum wage and other operating costs; availability and cost of
land and construction; consumer preferences or perceptions concerning the
products of the Company and/or our competitors, spending patterns and
demographic trends; political or economic instability in local markets and
changes in currency exchange and interest rates; and the impact that any
widespread illness or general health concern may have on our business and/or the
economy of the countries in which we operate.
Item
8.
|
Financial
Statements and Supplementary Data.
|
INDEX
TO FINANCIAL INFORMATION
|
Page
Reference
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
Reports
of Independent Registered Public Accounting Firm
|
50
|
|
|
|
|
Consolidated
Statements of Income for the fiscal years ended December 29, 2007,
December
30, 2006 and December 31, 2005
|
52
|
|
|
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended December 29, 2007,
December
30, 2006 and December 31, 2005
|
53
|
|
|
|
|
Consolidated
Balance Sheets at December 29, 2007 and December 30, 2006
|
54
|
|
|
|
|
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income for the fiscal
years
ended December 29, 2007, December 30, 2006 and December 31,
2005
|
55
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
56
|
|
|
|
|
Management’s
Responsibility for Financial Statements
|
101
|
|
Financial
Statement Schedules
No
schedules are required because either the required information is not present or
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the above listed financial
statements or notes thereto.
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
audited the accompanying consolidated balance sheets of YUM! Brands, Inc. and
Subsidiaries (“YUM”) as of December 29, 2007 and December 30, 2006, and the
related consolidated statements of income, cash flows and shareholders’ equity
and comprehensive income for each of the years in the three-year period ended
December 29, 2007. These consolidated financial statements are the
responsibility of YUM’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of YUM as of December 29, 2007
and December 30, 2006, and the results of its operations and its cash flows for
each of the years in the three-year period ended December 29, 2007, in
conformity with U.S. generally accepted accounting principles.
As
discussed in the Notes to the consolidated financial statements, YUM adopted the
provisions of the Financial Accounting Standards Board Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes, in 2007, Statement of Financial
Accounting Standards (SFAS) No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
and Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in the
Current Year, in 2006, and SFAS No. 123R, Share-based
Payment, in 2005.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), YUM’s internal control over financial reporting
as of December 29, 2007, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated February 25, 2008 expressed an
unqualified opinion on the effectiveness of internal control over financial
reporting.
/s/ KPMG
LLP
Louisville,
Kentucky
February
25, 2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
audited the internal control over financial reporting of YUM! Brands, Inc. and
Subsidiaries (“YUM”) as of December 29, 2007, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. YUM’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
“Management’s Report on Internal Control over Financial Reporting” appearing
under Item 9A. Our responsibility is to express an opinion on YUM’s internal
control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, YUM maintained, in all material respects, effective internal control
over financial reporting as of December 29, 2007, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of YUM as of
December 29, 2007 and December 30, 2006, and the related consolidated statements
of income, cash flows and shareholders’ equity and comprehensive income for each
of the years in the three-year period ended December 29, 2007, and our report
dated February 25, 2008, expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG
LLP
Louisville,
Kentucky
February
25, 2008
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 29, 2007, December 30, 2006 and December 31,
2005
(in
millions, except per share data)
|
|
2007
|
|
|
2006
|
|
|
2005
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
9,100
|
|
|
|
$
|
8,365
|
|
|
|
$
|
8,225
|
|
Franchise
and license fees
|
|
|
1,316
|
|
|
|
|
1,196
|
|
|
|
|
1,124
|
|
Total
revenues
|
|
|
10,416
|
|
|
|
|
9,561
|
|
|
|
|
9,349
|
|
Costs
and Expenses, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
restaurants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Food
and paper
|
|
|
2,824
|
|
|
|
|
2,549
|
|
|
|
|
2,584
|
|
Payroll
and employee benefits
|
|
|
2,305
|
|
|
|
|
2,142
|
|
|
|
|
2,171
|
|
Occupancy
and other operating expenses
|
|
|
2,644
|
|
|
|
|
2,403
|
|
|
|
|
2,315
|
|
|
|
|
7,773
|
|
|
|
|
7,094
|
|
|
|
|
7,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,293
|
|
|
|
|
1,187
|
|
|
|
|
1,158
|
|
Franchise
and license expenses
|
|
|
40
|
|
|
|
|
35
|
|
|
|
|
33
|
|
Closures
and impairment expenses
|
|
|
35
|
|
|
|
|
59
|
|
|
|
|
62
|
|
Refranchising
(gain) loss
|
|
|
(11
|
)
|
|
|
|
(24
|
)
|
|
|
|
(43
|
)
|
Other
(income) expense
|
|
|
(71
|
)
|
|
|
|
(52
|
)
|
|
|
|
(84
|
)
|
Total
costs and expenses, net
|
|
|
9,059
|
|
|
|
|
8,299
|
|
|
|
|
8,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Profit
|
|
|
1,357
|
|
|
|
|
1,262
|
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
166
|
|
|
|
|
154
|
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
1,191
|
|
|
|
|
1,108
|
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
282
|
|
|
|
|
284
|
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
909
|
|
|
|
$
|
824
|
|
|
|
$
|
762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Common Share
|
|
$
|
1.74
|
|
|
|
$
|
1.51
|
|
|
|
$
|
1.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Common Share
|
|
$
|
1.68
|
|
|
|
$
|
1.46
|
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
Declared Per Common Share
|
|
$
|
0.45
|
|
|
|
$
|
0.4325
|
|
|
|
$
|
0.2225
|
|
See
accompanying Notes to Consolidated Financial Statements.
Consolidated
Statements of Cash Flows
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 29, 2007, December 30, 2006 and December 31,
2005
(in
millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
Cash
Flows – Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
909
|
|
|
|
$
|
824
|
|
|
|
$
|
762
|
|
Depreciation
and amortization
|
|
|
542
|
|
|
|
|
479
|
|
|
|
|
469
|
|
Closures
and impairment expenses
|
|
|
35
|
|
|
|
|
59
|
|
|
|
|
62
|
|
Refranchising
(gain) loss
|
|
|
(11
|
)
|
|
|
|
(24
|
)
|
|
|
|
(43
|
)
|
Contributions
to defined benefit pension plans
|
|
|
(1
|
)
|
|
|
|
(43
|
)
|
|
|
|
(74
|
)
|
Deferred
income taxes
|
|
|
(95
|
)
|
|
|
|
(30
|
)
|
|
|
|
(101
|
)
|
Equity
income from investments in unconsolidated affiliates
|
|
|
(51
|
)
|
|
|
|
(51
|
)
|
|
|
|
(51
|
)
|
Distributions
of income received from unconsolidated affiliates
|
|
|
40
|
|
|
|
|
32
|
|
|
|
|
44
|
|
Excess
tax benefits from share-based compensation
|
|
|
(74
|
)
|
|
|
|
(65
|
)
|
|
|
|
(92
|
)
|
Share-based
compensation expense
|
|
|
61
|
|
|
|
|
65
|
|
|
|
|
62
|
|
Changes
in accounts and notes receivable
|
|
|
(4
|
)
|
|
|
|
24
|
|
|
|
|
(1
|
)
|
Changes
in inventories
|
|
|
(31
|
)
|
|
|
|
(3
|
)
|
|
|
|
(4
|
)
|
Changes
in prepaid expenses and other current assets
|
|
|
(6
|
)
|
|
|
|
(33
|
)
|
|
|
|
78
|
|
Changes
in accounts payable and other current liabilities
|
|
|
118
|
|
|
|
|
(30
|
)
|
|
|
|
(10
|
)
|
Changes
in income taxes payable
|
|
|
70
|
|
|
|
|
10
|
|
|
|
|
54
|
|
Other
non-cash charges and credits, net
|
|
|
65
|
|
|
|
|
85
|
|
|
|
|
78
|
|
Net
Cash Provided by Operating Activities
|
|
|
1,567
|
|
|
|
|
1,299
|
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
spending
|
|
|
(742
|
)
|
|
|
|
(614
|
)
|
|
|
|
(609
|
)
|
Proceeds
from refranchising of restaurants
|
|
|
117
|
|
|
|
|
257
|
|
|
|
|
145
|
|
Acquisition
of remaining interest in unconsolidated affiliate, net of cash
assumed
|
|
|
—
|
|
|
|
|
(178
|
)
|
|
|
|
—
|
|
Proceeds
from the sale of interest in Japan unconsolidated
affiliate
|
|
|
128
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Acquisition
of restaurants from franchisees
|
|
|
(4
|
)
|
|
|
|
(7
|
)
|
|
|
|
(2
|
)
|
Short-term
investments
|
|
|
6
|
|
|
|
|
39
|
|
|
|
|
12
|
|
Sales
of property, plant and equipment
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
81
|
|
Other,
net
|
|
|
7
|
|
|
|
|
(30
|
)
|
|
|
|
28
|
|
Net
Cash Used in Investing Activities
|
|
|
(432
|
)
|
|
|
|
(476
|
)
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows – Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
1,195
|
|
|
|
|
300
|
|
|
|
|
—
|
|
Repayments
of long-term debt
|
|
|
(24
|
)
|
|
|
|
(211
|
)
|
|
|
|
(14
|
)
|
Revolving
credit facilities, three months or less, net
|
|
|
(149
|
)
|
|
|
|
(23
|
)
|
|
|
|
160
|
|
Short-term
borrowings by original maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
than three months – proceeds
|
|
|
1
|
|
|
|
|
236
|
|
|
|
|
—
|
|
More
than three months – payments
|
|
|
(184
|
)
|
|
|
|
(54
|
)
|
|
|
|
—
|
|
Three
months or less, net
|
|
|
(8
|
)
|
|
|
|
4
|
|
|
|
|
(34
|
)
|
Repurchase
shares of Common Stock
|
|
|
(1,410
|
)
|
|
|
|
(983
|
)
|
|
|
|
(1,056
|
)
|
Excess
tax benefit from share-based compensation
|
|
|
74
|
|
|
|
|
65
|
|
|
|
|
92
|
|
Employee
stock option proceeds
|
|
|
112
|
|
|
|
|
142
|
|
|
|
|
148
|
|
Dividends
paid on Common Stock
|
|
|
(273
|
)
|
|
|
|
(144
|
)
|
|
|
|
(123
|
)
|
Other,
net
|
|
|
(12
|
)
|
|
|
|
(2
|
)
|
|
|
|
—
|
|
Net
Cash Used in Financing Activities
|
|
|
(678
|
)
|
|
|
|
(670
|
)
|
|
|
|
(827
|
)
|
Effect
of Exchange Rate on Cash and Cash Equivalents
|
|
|
13
|
|
|
|
|
8
|
|
|
|
|
1
|
|
Net
Increase in Cash and Cash Equivalents
|
|
|
470
|
|
|
|
|
161
|
|
|
|
|
62
|
|
Net
Increase in Cash and Cash Equivalents of Mainland China for December
2004
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
34
|
|
Cash
and Cash Equivalents – Beginning of Year
|
|
|
319
|
|
|
|
|
158
|
|
|
|
|
62
|
|
Cash
and Cash Equivalents – End of Year
|
|
$
|
789
|
|
|
|
$
|
319
|
|
|
|
$
|
158
|
|
See
accompanying Notes to Consolidated
Financial Statements.
Consolidated
Balance Sheets
YUM!
Brands, Inc. and Subsidiaries
December
29, 2007 and December 30, 2006
(in
millions)
|
|
2007
|
|
|
2006
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
789
|
|
|
|
$
|
319
|
|
Accounts
and notes receivable, less allowance: $21 in 2007 and $18 in
2006
|
|
|
225
|
|
|
|
|
220
|
|
Inventories
|
|
|
128
|
|
|
|
|
93
|
|
Prepaid
expenses and other current assets
|
|
|
142
|
|
|
|
|
138
|
|
Deferred
income taxes
|
|
|
125
|
|
|
|
|
57
|
|
Advertising
cooperative assets, restricted
|
|
|
72
|
|
|
|
|
74
|
|
Total
Current Assets
|
|
|
1,481
|
|
|
|
|
901
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
3,849
|
|
|
|
|
3,631
|
|
Goodwill
|
|
|
672
|
|
|
|
|
662
|
|
Intangible
assets, net
|
|
|
333
|
|
|
|
|
347
|
|
Investments
in unconsolidated affiliates
|
|
|
153
|
|
|
|
|
138
|
|
Other
assets
|
|
|
464
|
|
|
|
|
369
|
|
Deferred
income taxes
|
|
|
290
|
|
|
|
|
320
|
|
Total
Assets
|
|
$
|
7,242
|
|
|
|
$
|
6,368
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other current liabilities
|
|
$
|
1,650
|
|
|
|
$
|
1,386
|
|
Income
taxes payable
|
|
|
52
|
|
|
|
|
37
|
|
Short-term
borrowings
|
|
|
288
|
|
|
|
|
227
|
|
Advertising
cooperative liabilities
|
|
|
72
|
|
|
|
|
74
|
|
Total
Current Liabilities
|
|
|
2,062
|
|
|
|
|
1,724
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
2,924
|
|
|
|
|
2,045
|
|
Other
liabilities and deferred credits
|
|
|
1,117
|
|
|
|
|
1,147
|
|
Total
Liabilities
|
|
|
6,103
|
|
|
|
|
4,916
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, no par value, zero shares and 250 shares authorized in 2007 and
2006, respectively; no shares issued
|
|
|
—
|
|
|
|
|
—
|
|
Common
Stock, no par value, 750 shares authorized; 499 shares and 530 shares
issued in 2007 and 2006, respectively
|
|
|
—
|
|
|
|
|
—
|
|
Retained
earnings
|
|
|
1,119
|
|
|
|
|
1,608
|
|
Accumulated
other comprehensive income (loss)
|
|
|
20
|
|
|
|
|
(156
|
)
|
Total
Shareholders’ Equity
|
|
|
1,139
|
|
|
|
|
1,452
|
|
Total
Liabilities and Shareholders’ Equity
|
|
$
|
7,242
|
|
|
|
$
|
6,368
|
|
See
accompanying Notes to Consolidated Financial Statements.
Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
YUM!
Brands, Inc. and Subsidiaries
Fiscal
years ended December 29, 2007, December 30, 2006 and December 31,
2005
(in
millions, except per share data)
|
|
Issued
Common Stock
|
|
Retained
|
|
Accumulated
Other
Comprehensive
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income
(Loss)
|
|
Total
|
Balance
at December 25, 2004
|
|
|
581
|
|
|
$
|
659
|
|
|
$
|
1,074
|
|
|
$
|
(131
|
)
|
|
$
|
1,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
762
|
|
|
|
|
|
|
|
762
|
|
Foreign
currency translation adjustment arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
(31
|
)
|
Foreign
currency translation adjustment included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
6
|
|
Minimum
pension liability adjustment (net of tax impact of $8
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Net
unrealized gain on derivative instruments (net of tax impact of $1
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
Dividends
declared on Common Stock ($0.2225 per common share)
|
|
|
|
|
|
|
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
(129
|
)
|
China
December 2004 net income
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Repurchase
of shares of Common Stock
|
|
|
(43
|
)
|
|
|
(974
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
(1,056
|
)
|
Employee
stock option exercises (includes tax impact of $94
million)
|
|
|
17
|
|
|
|
242
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
Compensation-related
events (includes tax impact of $5 million)
|
|
|
1
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
Balance
at December 31, 2005
|
|
|
556
|
|
|
$
|
—
|
|
|
$
|
1,631
|
|
|
$
|
(170
|
)
|
|
$
|
1,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
to initially apply SAB No. 108
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
824
|
|
|
|
|
|
|
|
824
|
|
Foreign
currency translation adjustment arising during the period (includes tax
impact of $13 million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
|
59
|
|
Minimum
pension liability adjustment (net of tax impact of $11
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
17
|
|
Net
unrealized gain on derivative instruments (net of tax impact of $3
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
5
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
905
|
|
Adjustment
to initially apply SFAS No. 158 (net of tax impact of $37
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
|
|
(67
|
)
|
Dividends
declared on Common Stock ($0.4325 per common share)
|
|
|
|
|
|
|
|
|
|
|
(234
|
)
|
|
|
|
|
|
|
(234
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(40
|
)
|
|
|
(287
|
)
|
|
|
(713
|
)
|
|
|
|
|
|
|
(1,000
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $68
million)
|
|
|
13
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
210
|
|
Compensation-related
events (includes tax impact of $3 million)
|
|
|
1
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Balance
at December 30, 2006
|
|
|
530
|
|
|
$
|
—
|
|
|
$
|
1,608
|
|
|
$
|
(156
|
)
|
|
$
|
1,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
909
|
|
|
|
|
|
|
|
909
|
|
Foreign
currency translation adjustment arising during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
93
|
|
Foreign
currency translation adjustment included in net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Pension
and post-retirement benefit plans (net of tax impact of $55
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
96
|
|
Net
unrealized loss on derivative instruments (net of tax impact of $8
million)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,085
|
|
Adjustment
to initially apply FIN 48
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
(13
|
)
|
Dividends
declared on Common Stock ($0.45 per common share)
|
|
|
|
|
|
|
|
|
|
|
(231
|
)
|
|
|
|
|
|
|
(231
|
)
|
Repurchase
of shares of Common Stock
|
|
|
(42
|
)
|
|
|
(252
|
)
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
(1,406
|
)
|
Employee
stock option and SARs exercises (includes tax impact of $69
million)
|
|
|
10
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Compensation-related
events (includes tax impact of $5 million)
|
|
|
1
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
71
|
|
Balance
at December 29, 2007
|
|
|
499
|
|
|
$
|
—
|
|
|
$
|
1,119
|
|
|
$
|
20
|
|
|
$
|
1,139
|
|
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
35,000 units of which approximately 44% are located outside the U.S. in more
than 100 countries and territories. YUM was created as an
independent, publicly-owned company on October 6, 1997 (the “Spin-off Date”) via
a tax-free distribution by our former parent, PepsiCo, Inc., of our Common Stock
(the “Spin-off”) to its shareholders. References to YUM throughout these
Consolidated Financial Statements are made using the first person notations of
“we,” “us” or “our.”
Through
our widely-recognized Concepts, we develop, operate, franchise and license a
system of both traditional and non-traditional quick service
restaurants. Each Concept has proprietary menu items and emphasizes
the preparation of food with high quality ingredients as well as unique recipes
and special seasonings to provide appealing, tasty and attractive food at
competitive prices. Our traditional restaurants feature dine-in,
carryout and, in some instances, drive-thru or delivery
service. Non-traditional units, which are principally licensed
outlets, include express units and kiosks which have a more limited menu and
operate in non-traditional locations like malls, airports, gasoline service
stations, convenience stores, stadiums, amusement parks and colleges, where a
full-scale traditional outlet would not be practical or efficient. We
also operate multibrand units, where two or more of our Concepts are operated in
a single unit. In addition, we continue to pursue the multibrand
combination of Pizza Hut and WingStreet, a flavored chicken wings concept we
have developed.
Beginning
in 2005, we changed the China Division, which includes mainland China (“China”),
Thailand and KFC Taiwan, reporting calendar to more closely align the timing of
the reporting of its results of operations with our U.S.
business. Previously our China business, like the rest of our
international businesses, closed one month (or one period for certain of our
international businesses) earlier than YUM’s period end date to facilitate
consolidated reporting. To maintain comparability of our consolidated
results of operations, amounts related to our China business for December 2004
were not reflected in our Consolidated Statements of Income and net income for
the China business for the one month period ended December 31, 2004 was
recognized as an adjustment directly to consolidated retained earnings in the
year ended December 31, 2005.
For the
month of December 2004 the China business had revenues of $79 million and net
income of $6 million. As mentioned previously, neither of these
amounts is included in our Consolidated Statement of Income for the year ended
December 31, 2005 and the net income figure was credited directly to retained
earnings in the first quarter of 2005. Net income for the month of
December 2004 was negatively impacted by costs incurred in preparation of
opening a significant number of new stores in early 2005 as well as increased
advertising expense, all of which was recorded in December’s results of
operations. Additionally, the net increase in cash for the China
business in December 2004 has been presented as a single line item on our
Consolidated Statement of Cash Flows for the year ended December 31,
2005. The $34 million net increase in cash was primarily attributable
to short-term borrowings for working capital purposes, a majority of which were
repaid prior to the end of the China business’ first quarter of
2005.
Note
2 - Summary of Significant Accounting Policies
Our
preparation of the accompanying Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from these estimates.
Principles of Consolidation and Basis
of Preparation. Intercompany accounts and transactions have
been eliminated. Certain investments in businesses that operate our Concepts are
accounted for by the equity method. Our lack of majority voting
rights precludes us from controlling these affiliates, and thus we do not
consolidate these affiliates. Our share of the net income or loss of
those unconsolidated affiliates is included in other (income)
expense.
We
participate in various advertising cooperatives with our franchisees and
licensees established to collect and administer funds contributed for use in
advertising and promotional programs designed to increase sales and enhance the
reputation of the Company and its franchise owners. Contributions to the
advertising cooperatives are required for both company operated and franchise
restaurants and are generally based on a percent of restaurant
sales. In certain of these cooperatives we possess majority voting
rights, and thus control and consolidate the cooperatives. We report all assets
and liabilities of these advertising cooperatives that we consolidate as
advertising cooperative assets, restricted and advertising cooperative
liabilities in the Consolidated Balance Sheet. The advertising
cooperatives assets, consisting primarily of cash received from the Company and
franchisees and accounts receivable from franchisees, can only be used for
selected purposes and are considered restricted. The advertising
cooperative liabilities represent the corresponding obligation arising from the
receipt of the contributions to purchase advertising and promotional
programs. As the contributions to these cooperatives are designated
and segregated for advertising, we act as an agent for the franchisees and
licensees with regard to these contributions. Thus, in accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting
for Franchise Fee Revenue,” we do not reflect franchisee and licensee
contributions to these cooperatives in our Consolidated Statements of Income or
Consolidated Statements of Cash Flows.
Fiscal Year. Our
fiscal year ends on the last Saturday in December and, as a result, a 53rd week
is added every five or six years. Fiscal year 2005 included 53
weeks. The 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. In fiscal year 2005, the
53rd week added $96 million to total revenues and $23 million to total operating
profit in our Consolidated Statement of Income. Our subsidiaries
operate on similar fiscal calendars with period or month end dates suited to
their businesses. The subsidiaries’ period end dates are within one week of
YUM’s period end date with the exception of all of our international businesses
except China. The international businesses except China close one
period or one month earlier to facilitate consolidated reporting.
Reclassifications. We
have reclassified certain items in the accompanying Consolidated Financial
Statements and Notes thereto for prior periods to be comparable with the
classification for the fiscal year ended December 29, 2007. These
reclassifications had no effect on previously reported net income.
Specifically,
we reclassified $15 million for the cumulative impact of excess tax benefits
from prior year exercises of share-based compensation that were inappropriately
recognized as Deferred income taxes in 2006 to Common Stock. This
correction also resulted in Net Cash Provided by Operating Activities decreasing
by $3 million and $5 million versus previously reported amounts for the years
ended 2006 and 2005, respectively, with an offsetting impact to Net Cash Used in
Financing Activities.
Additionally,
we have netted amounts previously presented as Wrench litigation (income)
expense and AmeriServe and other charges (credits) in our Consolidated
Statements of Income for 2006 and 2005 and included those amounts in Other
(income) expense in the current year presentation. These two items
resulted in a $1 million and $4 million increase in Other (income) expense in
2006 and 2005, respectively.
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.
We incur
expenses that benefit both our franchise and license communities and their
representative organizations and our Company operated
restaurants. These expenses, along with other costs of servicing of
franchise and license agreements are charged to general and administrative
(“G&A”) expenses as incurred. Certain direct costs of our
franchise and license operations are charged to franchise and license
expenses. These costs include provisions for estimated uncollectible
fees, franchise and license marketing funding, amortization expense for
franchise related intangible assets and certain other direct incremental
franchise and license support costs.
We
monitor the financial condition of our franchisees and licensees and record
provisions for estimated losses on receivables when we believe that our
franchisees or licensees are unable to make their required
payments. While we use the best information available in making our
determination, the ultimate recovery of recorded receivables is also dependent
upon future economic events and other conditions that may be beyond our
control. Net provisions for uncollectible franchise and license
receivables of $2 million, $2 million and $3 million were included in Franchise
and license expenses in 2007, 2006 and 2005, respectively.
Revenue
Recognition. Our revenues consist of sales by Company operated
restaurants and fees from our franchisees and licensees. Revenues from Company
operated restaurants are recognized when payment is tendered at the time of
sale. The Company presents sales net of sales tax and other sales related
taxes. We recognize initial fees received from a franchisee or licensee as
revenue when we have performed substantially all initial services required by
the franchise or license agreement, which is generally upon the opening of a
store. We recognize continuing fees based upon a percentage of
franchisee and licensee sales as earned. We recognize renewal fees
when a renewal agreement with a franchisee or licensee becomes
effective. We include initial fees collected upon the sale of a
restaurant to a franchisee in refranchising (gain) loss.
Direct Marketing
Costs. We charge direct marketing costs to expense ratably in
relation to revenues over the year in which incurred and, in the case of
advertising production costs, in the year the advertisement is first
shown. Deferred direct marketing costs, which are classified as
prepaid expenses, consist of media and related advertising production costs
which will generally be used for the first time in the next fiscal year and have
historically not been significant. To the extent we participate in
advertising cooperatives, we expense our contributions as
incurred. Our advertising expenses were $556 million, $521 million
and $519 million in 2007, 2006 and 2005, 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 $39 million, $33 million and $33 million in 2007, 2006 and 2005,
respectively.
Share-Based Employee
Compensation. We account for share-based employee compensation
in accordance with SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”). SFAS 123R requires all share-based payments to employees,
including grants of employee stock options and stock appreciation rights
(“SARs”), to be recognized in the financial statements as compensation cost over
the service period based on their fair value on the date of
grant. Compensation cost is recognized over the service period on a
straight-line basis for the fair value of awards that actually
vest.
Impairment or Disposal of Long-Lived
Assets. In accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), we review our
long-lived assets related to each restaurant that we are currently operating and
have not offered to refranchise, including any allocated intangible assets
subject to amortization, semi-annually for impairment, or whenever events or
changes in circumstances indicate that the carrying amount of a restaurant may
not be recoverable. We evaluate restaurants using a “two-year history
of operating losses” as our primary indicator of potential
impairment. Based on the best information available, we write down an
impaired restaurant to its estimated fair market value, which becomes its new
cost basis. We generally measure estimated fair market value by
discounting estimated future cash flows. In addition, when we decide to close a
restaurant it is reviewed for impairment and depreciable lives are adjusted
based on the expected disposal date. The impairment evaluation is
based on the estimated cash flows from continuing use through the expected
disposal date plus the expected terminal value.
We
account for exit or disposal activities, including store closures, in accordance
with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal
Activities” (“SFAS 146”). Store closure costs include costs of
disposing of the assets as well as other facility-related expenses from
previously closed stores. These store closure costs are generally
expensed as incurred. Additionally, at the date we cease using a
property under an operating lease, we record a liability for the net present
value of any remaining lease obligations, net of estimated sublease income, if
any. Any subsequent adjustments to that liability as a result of
lease termination or changes in estimates of sublease income are recorded in
store closure costs as well. To the extent we sell assets, primarily
land, associated with a closed store, any gain or loss upon that sale is also
recorded in store closure (income) costs.
Refranchising
(gain) loss includes the gains or losses from the sales of our restaurants to
new and existing franchisees and the related initial franchise fees, reduced by
transaction costs. In executing our refranchising initiatives, we
most often offer groups of restaurants. We classify restaurants as
held for sale and suspend depreciation and amortization when (a) we make a
decision to refranchise; (b) the stores can be immediately removed from
operations; (c) we have begun an active program to locate a buyer; (d)
significant changes to the plan of sale are not likely; and (e) the sale is
probable within one year. We recognize estimated losses on
refranchisings when the restaurants are classified as held for
sale. When we have offered to refranchise stores or groups of stores
for a price less than their carrying value, but do not believe the store(s) have
met the criteria to be classified as held for sale, we recognize impairment at
the offer date for any excess of carrying value over the expected sales proceeds
plus holding period cash flows, if any. Such impairment is classified
as refranchising loss. We recognize gains on restaurant
refranchisings when the sale transaction closes, the franchisee has a minimum
amount of the purchase price in at-risk equity, and we are satisfied that the
franchisee can meet its financial obligations. If the criteria for
gain recognition are not met, we defer the gain to the extent we have a
remaining financial exposure in connection with the sales
transaction. Deferred gains are recognized when the gain recognition
criteria are met or as our financial exposure is reduced. When we
make a decision to retain a store, or group of stores, previously held for sale,
we revalue the store at the lower of its (a) net book value at our original sale
decision date less normal depreciation and amortization that would have been
recorded during the period held for sale or (b) its current fair market
value. This value becomes the store’s new cost basis. We
record any resulting difference between the store’s carrying amount and its new
cost basis to refranchising (gain) loss.
Considerable
management judgment is necessary to estimate future cash flows, including cash
flows from continuing use, terminal value, sublease income and refranchising
proceeds. Accordingly, actual results could vary significantly from
our estimates.
Impairment of Investments in
Unconsolidated Affiliates. We record impairment charges
related to an investment in an unconsolidated affiliate whenever events or
circumstances indicate that a decrease in the fair value of an investment has
occurred which is other than temporary. In addition, we evaluate our
investments in unconsolidated affiliates for impairment when they have
experienced two consecutive years of operating losses. We recorded no
impairment associated with our investments in unconsolidated affiliates during
the years ended December 29, 2007, December 30, 2006 and December 31,
2005.
Considerable
management judgment is necessary to estimate future cash
flows. Accordingly, actual results could vary significantly from our
estimates.
Guarantees. We
account for certain guarantees in accordance with Financial Accounting Standards
Board (“FASB”) Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees
issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of
certain obligations undertaken.
We have
also issued guarantees as a result of assigning our interest in obligations
under operating leases as a condition to the refranchising of certain Company
restaurants. Such guarantees are subject to the requirements of SFAS
No. 145,
“Rescission
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections” (“SFAS 145”). We recognize a liability for the fair value
of such lease guarantees under SFAS 145 upon refranchising and upon any
subsequent renewals of such leases when we remain contingently
liable. The related expense in both instances is included in
refranchising (gain) loss.
Income Taxes. We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”). Under SFAS 109, we record deferred tax assets
and liabilities for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. In addition, a
valuation allowance is recorded to reduce the carrying amount of deferred tax
assets if it is more likely than not all or a portion of the asset will not be
realized.
Effective
December 31, 2006, we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS
109. FIN 48 requires that a position taken or expected to be taken in
a tax return be recognized in the financial statements when it is more likely
than not (i.e. a likelihood of more than fifty percent) that the position would
be sustained upon examination by tax authorities. A recognized tax
position is then measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon settlement. FIN 48 also
requires that changes in judgment that result in subsequent recognition,
derecognition or change in a measurement of a tax position taken in a prior
annual period (including any related interest and penalties) be recognized as a
discrete item in the interim period in which the change occurs. Prior
to adopting FIN 48, we provided reserves for potential exposures when we
considered it probable that a taxing authority may take a sustainable position
on a matter contrary to our position and recorded any changes in judgment
thereon as a component of our annual effective rate.
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits as components of its income tax provision.
See Note
20 for a further discussion of our income taxes.
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. Included in cash
equivalents are short-term, highly liquid debt securities of $481 million and
$92 million classified as held-to-maturity at December 29, 2007 and December 30,
2006, respectively.
Inventories. We
value our inventories at the lower of cost (computed on the first-in, first-out
method) or net realizable value.
Property, Plant and
Equipment. We state property, plant and equipment at cost less
accumulated depreciation and amortization. We calculate depreciation
and amortization on a straight-line basis over the estimated useful lives of the
assets as follows: 5 to 25 years for buildings and improvements, 3 to
20 years for machinery and equipment and 3 to 7 years for capitalized software
costs. As discussed above, we suspend depreciation and amortization
on assets related to restaurants that are held for sale.
Leases and Leasehold
Improvements. We account for our leases in accordance with
SFAS No. 13, “Accounting for Leases” (“SFAS 13”) and other related authoritative
guidance. When determining the lease term, we often include option
periods for which failure to renew the lease imposes a penalty on the Company in
such an amount that a renewal appears, at the inception of the lease, to be
reasonably assured. The primary penalty to which we are subject is
the economic detriment associated with the existence of leasehold improvements
which might be impaired if we choose not to continue the use of the leased
property.
We record
rent expense for leases that contain scheduled rent increases on a straight-line
basis over the lease term, including any option periods considered in the
determination of that lease term. Contingent rentals are generally
based on sales levels in excess of stipulated amounts, and thus are not
considered minimum lease payments and are included in rent expense as they
accrue. We generally do not receive leasehold improvement incentives
upon opening a store that is subject to a lease.
Prior to
fiscal year 2006, we capitalized rent while we were constructing a restaurant
even if such construction period was subject to a rent holiday. Such
capitalized rent was then expensed on a straight-line basis over the remaining
term of the lease upon opening of the restaurant. Effective January
1, 2006 as required by FASB Staff Position (“FSP”) No. 13-1, “Accounting for
Rental Costs Incurred during a Construction Period” (“FSP 13-1”), we began
expensing rent associated with leased land or buildings for construction periods
whether rent was paid or we were subject to a rent holiday. The
adoption of FSP 13-1 did not significantly impact our results of operations in
2007 or 2006 and we do not anticipate significant future impact.
Internal Development Costs and
Abandoned Site Costs. We capitalize direct costs associated
with the site acquisition and construction of a Company unit on that site,
including direct internal payroll and payroll-related costs. Only
those site-specific costs incurred subsequent to the time that the site
acquisition is considered probable are capitalized. If we
subsequently make a determination that a site for which internal development
costs have been capitalized will not be acquired or developed, any previously
capitalized internal development costs are expensed and included in G&A
expenses.
Goodwill and Intangible
Assets. The Company accounts for acquisitions of restaurants
from franchisees and other acquisitions of businesses that may occur from time
to time in accordance with SFAS No. 141, “Business Combinations” (“SFAS
141”). Goodwill in such acquisitions represents the excess of the
cost of a business acquired over the net of the amounts assigned to assets
acquired, including identifiable intangible assets, and liabilities
assumed. SFAS 141 specifies criteria to be used in determining
whether intangible assets acquired in a business combination must be recognized
and reported separately from goodwill. We base amounts assigned to
goodwill and other identifiable intangible assets on independent appraisals or
internal estimates. If a Company restaurant is sold within two years
of acquisition, the goodwill associated with the acquisition is written off in
its entirety. If the restaurant is refranchised beyond two years, the
amount of goodwill written off is based on the relative fair value of the
restaurant to the fair value of the reporting unit, as described
below.
The
Company accounts for recorded goodwill and other intangible assets in accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS
142”). In accordance with SFAS 142, we do not amortize goodwill and
indefinite-lived intangible assets. We evaluate the remaining useful
life of an intangible asset that is not being amortized each reporting period to
determine whether events and circumstances continue to support an indefinite
useful life. If an intangible asset that is not being amortized is
subsequently determined to have a finite useful life, we amortize the intangible
asset prospectively over its estimated remaining useful
life. Amortizable intangible assets are amortized on a straight-line
basis.
In
accordance with the requirements of SFAS 142, goodwill has been assigned to
reporting units for purposes of impairment testing. Our reporting
units are our operating segments in the U.S. (see Note 21) and our business
management units internationally (typically individual countries). We
evaluate goodwill and indefinite lived assets for impairment on an annual basis
or more often if an event occurs or circumstances change that indicate
impairments might exist. Goodwill impairment tests consist of a
comparison of each reporting unit’s fair value with its carrying
value. Fair value is the price a willing buyer would pay for a
reporting unit, and is generally estimated using either discounted expected
future cash flows from operations or the present value of the estimated future
franchise royalty stream plus any estimated sales proceeds from
refranchising. Any estimated sales proceeds are based on relevant
historical sales multiples. 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 2007, 2006 and 2005, there was no impairment
of goodwill identified during our annual impairment testing.
For
indefinite-lived intangible assets, our impairment test consists of a comparison
of the fair value of an intangible asset with its carrying
amount. Fair value is an estimate of the price a willing buyer would
pay for the intangible asset and is generally estimated by discounting the
expected future cash flows associated with the intangible asset. We
also perform our annual test for impairment of our indefinite-lived intangible
assets at the beginning of our fourth quarter. No impairment of
indefinite-lived intangible assets was recorded in 2007, 2006 and
2005.
Our
amortizable intangible assets are evaluated for impairment whenever events or
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An intangible asset that is deemed
impaired is written down to its estimated fair value, which is based on
discounted cash flows. For purposes of our impairment analysis, we
update the cash flows that were initially used to value the amortizable
intangible asset to reflect our current estimates and assumptions over the
asset’s future remaining life.
Derivative Financial
Instruments. Historically we have engaged in
transactions involving various derivative instruments to hedge interest rates
and foreign currency denominated purchases, assets and
liabilities. These derivative contracts are entered into with
financial institutions. We do not use derivative instruments for trading
purposes and we have procedures in place to monitor and control their
use.
We
account for these derivative financial instruments in accordance with SFAS No.
133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”)
as amended by SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities” (“SFAS 149”). SFAS 133 requires
that all derivative instruments be recorded on the Consolidated Balance Sheet at
fair value. The accounting for changes in the fair value (i.e., gains
or losses) of a derivative instrument is dependent upon whether the derivative
has been designated and qualifies as part of a hedging relationship and further,
on the type of hedging relationship. 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 15 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, $1,154 million and $713 million in share
repurchases were recorded as a reduction in retained earnings in 2007 and 2006,
respectively. We have no legal restrictions on the payment of
dividends. See Note 19 for additional information.
Pension and Post-Retirement Medical
Benefits. In the fourth quarter of 2006, we adopted the
recognition and disclosure provisions of SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement
Plans –
an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS
158”). SFAS 158 amends SFAS No. 87, “Employers’ Accounting for
Pensions” (“SFAS 87”), SFAS No. 88, “Employers’ Accounting for Settlements and
Curtailments of Defined Benefit Plans and for Termination Benefits” (“SFAS 88”),
SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than
Pensions” (“SFAS 106”) and SFAS No. 132(R), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits.”
SFAS 158
required the Company to recognize the funded status of its pension and
post-retirement plans in the December 30, 2006 Consolidated Balance Sheet, with
a corresponding adjustment to accumulated other comprehensive income, net of
tax. Gains or losses and prior service costs or credits that arise in
future years will be recognized as a component of other comprehensive income to
the extent they have not been recognized as a component of net periodic benefit
cost pursuant to SFAS 87 or SFAS 106.
The
incremental effects of adopting the provisions of SFAS 158 on the Company’s
Consolidated Balance Sheet at December 30, 2006 are presented as
follows. The adoption of SFAS 158 had no impact on the Consolidated
Statement of Income.
|
|
Before
Application of SFAS 158
|
|
|
Adjustments
|
|
|
After
Application of SFAS 158
|
Intangible
assets, net
|
|
$
|
350
|
|
|
|
$
|
(3
|
)
|
|
|
$
|
347
|
|
Deferred
income taxes
|
|
|
283
|
|
|
|
|
37
|
|
|
|
|
320
|
|
Total
assets
|
|
|
6,334
|
|
|
|
|
34
|
|
|
|
|
6,368
|
|
Accounts
payable and other current liabilities
|
|
|
1,384
|
|
|
|
|
2
|
|
|
|
|
1,386
|
|
Other
liabilities and deferred credits
|
|
|
1,048
|
|
|
|
|
99
|
|
|
|
|
1,147
|
|
Total
liabilities
|
|
|
4,815
|
|
|
|
|
101
|
|
|
|
|
4,916
|
|
Accumulated
other comprehensive loss
|
|
|
(89
|
)
|
|
|
|
(67
|
)
|
|
|
|
(156
|
)
|
Total
shareholders’ equity
|
|
|
1,519
|
|
|
|
|
(67
|
)
|
|
|
|
1,452
|
|
Quantification of
Misstatements. In September 2006, the Securities and Exchange
Commission (the “SEC”) issued Staff Accounting Bulletin No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a current year
misstatement for the purpose of a materiality assessment. SAB 108
requires that registrants quantify a current year misstatement using an approach
that considers both the impact of prior year misstatements that remain on the
balance sheet and those that were recorded in the current year income statement
(the “Dual Method”). Historically, we quantified misstatements and
assessed materiality based on a current year income statement
approach. We were required to adopt SAB 108 in the fourth quarter of
2006.
The
transition provisions of SAB 108 permit uncorrected prior year misstatements
that were not material to any prior periods under our historical income
statement approach but that would have been material under the dual method of
SAB 108 to be corrected in the carrying amounts of assets and liabilities at the
beginning of 2006 with the offsetting adjustment to retained earnings for the
cumulative effect of misstatements. We have adjusted certain balances
in the accompanying Consolidated Financial Statements at the beginning of 2006
to correct the misstatements discussed below which we considered to be
immaterial in prior periods under our historical approach. The impact
of the January 1, 2006 cumulative effect adjustment, net of any income tax
effect, was an increase to retained earnings as follows:
Deferred
Tax Liabilities Adjustments
|
|
$
|
79
|
Reversal
of Unallocated Reserve
|
|
|
6
|
Non-GAAP
Conventions
|
|
|
15
|
Net
Increase to January 1, 2006 Retained Earnings
|
|
$
|
100
|
Deferred
Taxes Our opening Consolidated Balance Sheet at Spin-off
included significant deferred tax assets and liabilities. Over time
we have determined that deferred tax liability amounts were recorded in excess
of those necessary to reflect our temporary differences.
Unallocated
Reserves A reserve was established in 1999 equal to certain
out of year corrections recorded during that year such that there was no
misstatement under our historical approach. No adjustments have been
recorded to this reserve since its establishment and we do not believe the
reserve is required.
Non-GAAP Accounting
Conventions Prior to 2006, we used certain non-GAAP
conventions to account for capitalized interest on restaurant construction
projects, the leases of our Pizza Hut United Kingdom (“U.K.”) unconsolidated
affiliate and certain state tax benefits. The net income statement
impact on any given year from the use of these non-GAAP conventions was
immaterial both individually and in the aggregate under our historical
approach. Below is a summary of the accounting policies we adopted
effective the beginning of 2006 and the impact of the cumulative effect
adjustment under SAB 108, net of any income tax effect. The impact of
these accounting policy changes was not significant to our results of operations
in 2006 or 2007.
Interest
Capitalization SFAS No. 34, “Capitalization of Interest Cost”
requires that interest be capitalized as part of an asset’s acquisition
cost. We traditionally have not capitalized interest on individual
restaurant construction projects. We increased our 2006 beginning
retained earnings balance by approximately $12 million for the estimated
capitalized interest on existing restaurants, net of accumulated
depreciation.
Lease Accounting by our
Pizza Hut United Kingdom Unconsolidated Affiliate Prior to our
fourth quarter 2006 acquisition of the remaining fifty percent interest in our
Pizza Hut U.K. unconsolidated affiliate, we accounted for our ownership under
the equity method. The unconsolidated affiliate historically
accounted for all of its leases as operating and we made no adjustments in
recording equity income. We decreased our 2006 beginning retained
earnings balance by approximately $4 million to reflect our fifty percent share
of the cumulative equity income impact of properly recording certain leases as
capital.
Recognition of Certain State
Tax Benefits We historically recognized certain state tax
benefits on a cash basis as they were recognized on the respective state tax
returns instead of in the year the benefit originated. We increased
our 2006 beginning retained earnings by approximately $7 million to recognize
these state tax benefits as deferred tax assets.
New
Accounting Pronouncements Not Yet Adopted.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measures” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value and enhances disclosures about fair value measures required
under other accounting pronouncements, but does not change existing guidance as
to whether or not an instrument is carried at fair value. SFAS 157,
as issued, was effective for fiscal years beginning after November 15, 2007, the
year beginning December 30, 2007 for the Company. In February 2008,
the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” which
permits a one-year deferral for the implementation of SFAS 157 with regard to
non-financial assets and liabilities that are not recognized or disclosed at
fair value in the financial statements on a recurring basis (at least
annually). We intend to defer adoption of SFAS 157 for such
items. We currently anticipate that neither the partial adoption of
SFAS 157 in 2008 nor the full adoption in 2009 will materially impact the
Company’s results of operations or financial condition.
In the
fourth quarter of 2006, we adopted the recognition and disclosure provisions of
SFAS 158 as described previously. Additionally, SFAS 158 requires
measurement of the funded status of pension and postretirement plans as of the
date of a company’s fiscal year that ends after December 15, 2008 (the year
ended December 27, 2008 for the Company). Certain of our plans
currently have measurement dates that do not coincide with our fiscal year end
and thus we will be required to change their measurement dates in
2008. As permitted by SFAS 158, we will use the measurements
performed in 2007
to
estimate the effects of our changes to fiscal year end measurement dates. The
impact of transitioning to fiscal year end measurement dates, including the net
periodic benefit cost computed for the period between our previous measurement
dates and our fiscal year ends, as well as changes in the fair value of plan
assets and benefit obligations during the same periods, will be recorded
directly to Shareholders’ Equity. We do not currently anticipate any
such amount will materially impact our financial condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to report selected financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings at each
subsequent reporting date. SFAS 159 is effective for fiscal years beginning
after November 15, 2007, the year beginning December 30, 2007 for the
Company. We did not elect to begin reporting any financial assets or
liabilities at fair value upon adoption of SFAS 159 nor do we currently
anticipate that the adoption of SFAS 159 will materially impact the Company
going forward.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R, which is broader in scope
than SFAS 141, applies to all transactions or other events in which an entity
obtains control of one or more businesses, and requires that the acquisition
method be used for such transactions or events. SFAS 141R, with
limited exceptions, will require an acquirer to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. This
will result in acquisition related costs and anticipated restructuring costs
related to the acquisition being recognized separately from the business
combination. This statement is effective as the beginning of an
entity’s first fiscal year beginning after December 15, 2008, the year beginning
December 28, 2008 for the Company. The impact of SFAS 141R on the
Company will be dependent upon the extent to which we have transactions or
events occur that are within its scope.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and
will change the accounting and reporting for noncontrolling interests, which are
the portion of equity in a subsidiary not attributable, directly or indirectly
to a parent. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008, the year beginning December 28, 2008 for the Company
and requires retroactive adoption of its presentation and disclosure
requirements. We do not anticipate that the adoption of SFAS 160 will
materially impact the Company.
Note
3 - Two-for-One Common Stock Split
On May
17, 2007, the Company announced that its Board of Directors approved a
two-for-one split of the Company’s outstanding shares of Common
Stock. The stock split was effected in the form of a stock dividend
and entitled each shareholder of record at the close of business on June 1, 2007
to receive one additional share for every outstanding share of Common Stock
held. The stock dividend was distributed on June 26, 2007, with
approximately 261 million shares of Common Stock distributed. All per
share and share amounts in the accompanying Financial Statements and Notes to
the Financial Statements have been adjusted to reflect the stock
split.
Note 4 – Earnings Per Common Share
(“EPS”)
|
2007
|
|
|
2006
|
|
|
2005
|
Net
income
|
$
|
909
|
|
|
|
$
|
824
|
|
|
|
$
|
762
|
|
Weighted-average
common shares outstanding (for basic calculation)
|
|
522
|
|
|
|
|
546
|
|
|
|
|
572
|
|
Effect
of dilutive share-based employee compensation
|
|
19
|
|
|
|
|
18
|
|
|
|
|
25
|
|
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
|
541
|
|
|
|
|
564
|
|
|
|
|
597
|
|
Basic
EPS
|
$
|
1.74
|
|
|
|
$
|
1.51
|
|
|
|
$
|
1.33
|
|
Diluted
EPS
|
$
|
1.68
|
|
|
|
$
|
1.46
|
|
|
|
$
|
1.28
|
|
Unexercised
employee stock options and stock appreciation rights (in millions)
excluded from the diluted EPS compensation (a)
|
|
5.7
|
|
|
|
|
13.3
|
|
|
|
|
7.5
|
|
(a)
|
These
unexercised employee stock options and stock appreciation rights were not
included in the computation of diluted EPS because to do so would have
been antidilutive for the periods
presented.
|
Note
5 – Items Affecting Comparability of Net Income and Cash Flows
Sale of an Investment in
Unconsolidated Affiliate - Japan
In
December 2007, we sold our interest in our unconsolidated affiliate in Japan for
$128 million in cash (includes 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 approximately $87 million will be 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
are thus reported on our Consolidated Statement of Cash Flows for the year ended
December 29, 2007. The offset to this cash on our Consolidated
Balance Sheet at December 29, 2007 is in accounts payable and other current
liabilities.
While we
will no longer have an ownership interest in this 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. This sale of our interest
will result in lower Other income as we will no longer record our share of the
entity’s earnings under the equity method of accounting. Had this
sale occurred at the beginning of 2007, our International Division’s Other
income would have decreased $4 million.
Facility
Actions
Refranchising
(gain) loss, store closure (income) costs and store impairment charges by
reportable segment are as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
net (gain) loss(a)
|
|
$
|
(12
|
)
|
|
|
$
|
(20
|
)
|
|
|
$
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(9
|
)
|
|
|
|
(1
|
)
|
|
|
|
2
|
|
Store
impairment charges
|
|
|
23
|
|
|
|
|
38
|
|
|
|
|
44
|
|
Closure
and impairment expenses
|
|
$
|
14
|
|
|
|
$
|
37
|
|
|
|
$
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
net (gain) loss(a)
|
|
$
|
3
|
|
|
|
$
|
(4
|
)
|
|
|
$
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
(1
|
)
|
Store
impairment charges
|
|
|
13
|
|
|
|
|
15
|
|
|
|
|
10
|
|
Closure
and impairment expenses
|
|
$
|
14
|
|
|
|
$
|
16
|
|
|
|
$
|
9
|
|
China
Division
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
net (gain) loss(a)
|
|
$
|
(2
|
)
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
—
|
|
|
|
|
(1
|
)
|
|
|
|
(1
|
)
|
Store
impairment charges
|
|
|
7
|
|
|
|
|
7
|
|
|
|
|
8
|
|
Closure
and impairment expenses
|
|
$
|
7
|
|
|
|
$
|
6
|
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refranchising
net (gain) loss(a)
|
|
$
|
(11
|
)
|
|
|
$
|
(24
|
)
|
|
|
$
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store
closure (income) costs(b)
|
|
|
(8
|
)
|
|
|
|
(1
|
)
|
|
|
|
—
|
|
Store
impairment charges
|
|
|
43
|
|
|
|
|
60
|
|
|
|
|
62
|
|
Closure
and impairment expenses
|
|
$
|
35
|
|
|
|
$
|
59
|
|
|
|
$
|
62
|
|
(a)
|
Refranchising
(gain) loss is not allocated to segments for performance reporting
purposes.
|
|
|
(b)
|
Store
closure (income) costs include the net gain or loss on sales of real
estate on which we formerly operated a Company restaurant that was closed,
lease reserves established when we cease using a property under an
operating lease and subsequent adjustments to those reserves, and other
facility-related expenses from previously closed
stores.
|
The
following table summarizes the 2007 and 2006 activity related to reserves for
remaining lease obligations for closed stores.
|
|
|
|
Beginning
Balance
|
|
|
Amounts
Used
|
|
|
New
Decisions
|
|
|
Estimate/Decision
Changes
|
|
|
CTA/
Other
|
|
|
Ending
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Activity
|
|
|
|
$
|
36
|
|
|
|
(12
|
)
|
|
|
8
|
|
|
|
1
|
|
|
|
1
|
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Activity
|
|
|
|
$
|
44
|
|
|
|
(17
|
)
|
|
|
8
|
|
|
|
1
|
|
|
|
—
|
|
|
|
$
|
36
|
|
Assets
held for sale at December 29, 2007 and December 30, 2006 total $9 million and
$13 million, respectively, of U.S. property, plant and equipment, primarily
land, on which we previously operated restaurants and are included in prepaid
expenses and other current assets on our Consolidated Balance
Sheets.
Note
6 – Supplemental Cash Flow Data
|
|
2007
|
|
|
2006
|
|
|
2005
|
Cash
Paid For:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
177
|
|
|
|
$
|
185
|
|
|
|
$
|
132
|
|
Income
taxes
|
|
|
264
|
|
|
|
|
304
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations incurred to acquire assets
|
|
$
|
59
|
(a)
|
|
|
$
|
9
|
|
|
|
$
|
7
|
|
Net
investment in direct financing leases
|
|
|
33
|
|
|
|
|
—
|
|
|
|
|
—
|
|
(a)
|
Includes
the capital lease of an airplane (see Note
14).
|
During
2006 we assumed the full liability associated with capital leases of $97 million
and short-term borrowings of $23 million when we acquired the remaining fifty
percent ownership interest of our Pizza Hut U.K. unconsolidated
affiliate (See Note 7). Previously, our fifty percent share of these
liabilities were reflected in our Investment in unconsolidated affiliate balance
under the equity method of accounting and were not presented as liabilities on
our Consolidated Balance Sheet.
Note 7 - Pizza Hut United Kingdom
Acquisition
On
September 12, 2006, we completed the acquisition of the remaining fifty percent
ownership interest of our Pizza Hut U.K. unconsolidated affiliate for $187
million in cash, including transaction costs and prior to $9 million of cash
assumed. This
unconsolidated affiliate owned more than 500 restaurants in the
U.K. The acquisition was driven by growth opportunities we see in the
market and the desire of our former partner in the unconsolidated affiliate to
refocus its business to other industry sectors. Prior to this
acquisition, we accounted for our ownership interest under the equity method of
accounting. Our Investment in unconsolidated affiliate balance for
the Pizza Hut U.K. unconsolidated affiliate was $51 million at the date of this
acquisition.
Subsequent
to the acquisition we consolidated all of the assets and liabilities of Pizza
Hut U.K. These assets and liabilities were valued at fifty percent of
their historical carrying value and fifty percent of their fair value upon
acquisition. During 2007 we finalized our purchase price allocation
such that assets and liabilities recorded for Pizza Hut U.K. due to the
acquisition were as follows:
Current
assets, including cash of $9
|
|
$
|
27
|
Property,
plant and equipment
|
|
|
338
|
Intangible
assets
|
|
|
18
|
Goodwill
|
|
|
125
|
Total
assets acquired
|
|
|
508
|
|
|
|
|
Current
liabilities, other than capital lease obligations and short-term
borrowings
|
|
|
107
|
Capital
lease obligation, including current portion
|
|
|
97
|
Short-term
borrowings
|
|
|
23
|
Other
long-term liabilities
|
|
|
43
|
Total
liabilities assumed
|
|
|
270
|
Net
assets acquired (cash paid and investment allocated)
|
|
$
|
238
|
All of
the $18 million in intangible assets (primarily reacquired franchise rights) are
subject to amortization with a weighted average life of approximately 18
years. The $125 million in goodwill is not expected to be deductible
for income tax purposes and will be allocated to the International Division in
its entirety.
Under the
equity method of accounting, we reported our fifty percent share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. Since the date
of acquisition, we have reported Company sales and the associated restaurant
costs, G&A expense, interest expense and income taxes associated with the
restaurants previously owned by the unconsolidated affiliate in the appropriate
line items of our Consolidated Statements of Income. We no longer
record franchise fee income for the restaurants previously owned by the
unconsolidated affiliate nor do we report other income under the equity method
of accounting. As a result of this acquisition, Company sales and
restaurant profit increased $576 million and $59 million, respectively,
franchise fees decreased $19 million and G&A expenses increased $33 million
in 2007 compared to 2006. As a result of this acquisition, Company
sales and restaurant profit increased $164 million and $16 million,
respectively, franchise fees decreased $7 million and G&A expenses increased
$8 million in 2006 compared to 2005. The impact of the acquisition on
operating profit and net income was not significant in either year.
If the
acquisition had been completed as of the beginning of the years ended December
30, 2006 and December 31, 2005, pro forma Company sales and franchise and
license fees would have been as follows:
|
|
|
|
2006
|
|
2005
|
|
Company
sales
|
|
|
|
|
|
$
|
8,886
|
|
|
$
|
8,944
|
|
|
Franchise
and license fees
|
|
|
|
|
|
$
|
1,176
|
|
|
$
|
1,095
|
|
|
The pro
forma impact of the acquisition on net income and diluted earnings per share
would not have been significant in 2006 and 2005. The pro forma
information is not necessarily indicative of the results of operations had the
acquisition actually occurred at the beginning of each of these periods nor is
it necessarily indicative of future results.
Note
8 – Franchise and License Fees
|
|
2007
|
|
2006
|
|
2005
|
|
Initial
fees, including renewal fees
|
|
$
|
49
|
|
|
$
|
57
|
|
|
$
|
51
|
|
|
Initial
franchise fees included in refranchising gains
|
|
|
(10
|
)
|
|
|
(17
|
)
|
|
|
(10
|
)
|
|
|
|
|
39
|
|
|
|
40
|
|
|
|
41
|
|
|
Continuing
fees
|
|
|
1,277
|
|
|
|
1,156
|
|
|
|
1,083
|
|
|
|
|
$
|
1,316
|
|
|
$
|
1,196
|
|
|
$
|
1,124
|
|
|
Note
9 – Other (Income) Expense
|
|
2007
|
|
2006
|
|
2005
|
|
Equity
income from investments in unconsolidated affiliates
|
|
$
|
(51
|
)
|
|
$
|
(51
|
)
|
|
$
|
(51
|
)
|
|
Gain
upon sale of investment in unconsolidated affiliate(a)
|
|
|
(6
|
)
|
|
|
(2
|
)
|
|
|
(11
|
)
|
|
Recovery
from supplier(b)
|
|
|
—
|
|
|
|
—
|
|
|
|
(20
|
)
|
|
Contract
termination charge(c)
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
Wrench
litigation income
(d)
|
|
|
(11
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
|
Foreign
exchange net (gain) loss and other
|
|
|
(3
|
)
|
|
|
(7
|
)
|
|
|
—
|
|
|
Other
(income) expense
|
|
$
|
(71
|
)
|
|
$
|
(52
|
)
|
|
$
|
(84
|
)
|
|
(a)
|
Fiscal
years 2007 and 2006 reflect recognition of income associated with receipt
of payments for a note receivable arising from the 2005 sale of our fifty
percent interest in the entity that operated almost all KFCs and Pizza
Huts in Poland and the Czech Republic to our then partner in the
entity. Fiscal year 2005 reflects the gain recognized at the
date of this sale.
|
|
|
(b)
|
Relates
to a financial recovery from a supplier ingredient issue in mainland China
totaling $24 million, $4 million of which was recognized through equity
income from investments in unconsolidated affiliates. Our KFC
business in mainland China was negatively impacted by the interruption of
product offerings and negative publicity associated with a supplier
ingredient issue experienced in late March 2005. During 2005,
we entered into agreements with the supplier for a partial recovery of our
losses.
|
|
|
(c)
|
Reflects
an $8 million charge associated with the termination of a beverage
agreement in the U.S. segment.
|
|
|
(d)
|
Fiscal
years 2007 and 2005 reflect financial recoveries from settlements with
insurance carriers related to a lawsuit settled by Taco Bell Corporation
in 2004.
|
Note
10 - Property, Plant and Equipment, net
|
|
2007
|
|
|
2006
|
Land
|
|
$
|
548
|
|
|
|
$
|
541
|
|
Buildings
and improvements
|
|
|
3,649
|
|
|
|
|
3,449
|
|
Capital
leases, primarily buildings
|
|
|
284
|
|
|
|
|
221
|
|
Machinery
and equipment
|
|
|
2,651
|
|
|
|
|
2,566
|
|
|
|
|
7,132
|
|
|
|
|
6,777
|
|
Accumulated
depreciation and amortization
|
|
|
(3,283
|
)
|
|
|
|
(3,146
|
)
|
|
|
$
|
3,849
|
|
|
|
$
|
3,631
|
|
Depreciation
and amortization expense related to property, plant and equipment was $514
million, $466 million and $459 million in 2007, 2006 and 2005,
respectively.
Note
11 – Goodwill and Intangible Assets
The
changes in the carrying amount of goodwill are as follows:
|
|
U.S.
|
|
|
International
Division
|
|
China
Division
|
|
|
Worldwide
|
Balance
as of December 31, 2005
|
|
$
|
384
|
|
|
|
$
|
96
|
|
|
|
$
|
58
|
|
|
|
$
|
538
|
|
Acquisitions
|
|
|
—
|
|
|
|
|
123
|
|
|
|
|
—
|
|
|
|
|
123
|
|
Disposals
and other, net(a)
|
|
|
(17
|
)
|
|
|
|
18
|
|
|
|
|
—
|
|
|
|
|
1
|
|
Balance
as of December 30, 2006
|
|
$
|
367
|
|
|
|
$
|
237
|
|
|
|
$
|
58
|
|
|
|
$
|
662
|
|
Acquisitions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Disposals
and other, net(b)
|
|
|
(9
|
)
|
|
|
|
17
|
|
|
|
|
2
|
|
|
|
|
10
|
|
Balance
as of December 29, 2007
|
|
$
|
358
|
|
|
|
$
|
254
|
|
|
|
$
|
60
|
|
|
|
$
|
672
|
|
(a)
|
Disposals
and other, net for the International Division 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)
|
Disposals
and other, net for the International Division primarily reflects
adjustments to the Pizza Hut U.K. goodwill allocation and the impact of
foreign currency translation on existing balances. Disposals
and other, net for the U.S. Division, primarily reflects goodwill
write-offs associated with
refranchising.
|
Intangible
assets, net for the years ended 2007 and 2006 are as follows:
|
|
2007
|
|
|
2006
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
Amortized
intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
contract rights
|
|
$
|
157
|
|
|
|
$
|
(73
|
)
|
|
|
$
|
153
|
|
|
|
$
|
(66
|
)
|
Trademarks/brands
|
|
|
221
|
|
|
|
|
(26
|
)
|
|
|
|
220
|
|
|
|
|
(18
|
)
|
Favorable/unfavorable
operating leases
|
|
|
15
|
|
|
|
|
(12
|
)
|
|
|
|
15
|
|
|
|
|
(10
|
)
|
Reacquired
franchise rights
|
|
|
17
|
|
|
|
|
(1
|
)
|
|
|
|
18
|
|
|
|
|
—
|
|
Other
|
|
|
6
|
|
|
|
|
(2
|
)
|
|
|
|
5
|
|
|
|
|
(1
|
)
|
|
|
$
|
416
|
|
|
|
$
|
(114
|
)
|
|
|
$
|
411
|
|
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
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 $19 million in 2007, $15
million in 2006 and $13 million in 2005. Amortization expense for
definite-lived intangible assets will approximate $18 million annually in 2008
through 2012.
Note
12 – Accounts Payable and Other Current Liabilities
|
|
|
|
2007
|
|
|
2006
|
Accounts
payable
|
|
|
|
$
|
639
|
|
|
|
$
|
554
|
|
Accrued
compensation and benefits
|
|
|
|
|
372
|
|
|
|
|
302
|
|
Dividends
payable
|
|
|
|
|
75
|
|
|
|
|
119
|
|
Proceeds
from sale of interest in Japan unconsolidated affiliate (See Note
5)
|
|
|
|
|
128
|
|
|
|
|
—
|
|
Other
current liabilities
|
|
|
|
|
436
|
|
|
|
|
411
|
|
|
|
|
|
$
|
1,650
|
|
|
|
$
|
1,386
|
|
Note
13 – Short-term Borrowings and Long-term Debt
|
|
2007
|
|
|
2006
|
Short-term
Borrowings
|
|
|
|
|
|
|
|
|
|
Unsecured
Term Loans, expire January 2007
|
|
$
|
—
|
|
|
|
$
|
183
|
|
Current
maturities of long-term debt
|
|
|
268
|
|
|
|
|
16
|
|
Other
|
|
|
20
|
|
|
|
|
28
|
|
|
|
$
|
288
|
|
|
|
$
|
227
|
|
Long-term
Debt
|
|
|
|
|
|
|
|
|
|
Unsecured
International Revolving Credit Facility, expires November
2012
|
|
$
|
28
|
|
|
|
$
|
174
|
|
Unsecured
Revolving Credit Facility, expires November 2012
|
|
|
—
|
|
|
|
|
—
|
|
Senior,
Unsecured Notes, due May 2008
|
|
|
250
|
|
|
|
|
251
|
|
Senior,
Unsecured Notes, due April 2011
|
|
|
648
|
|
|
|
|
646
|
|
Senior,
Unsecured Notes, due July 2012
|
|
|
399
|
|
|
|
|
399
|
|
Senior,
Unsecured Notes, due April 2016
|
|
|
300
|
|
|
|
|
300
|
|
Senior,
Unsecured Notes, due March 2018
|
|
|
598
|
|
|
|
|
—
|
|
Senior,
Unsecured Notes, due November 2037
|
|
|
597
|
|
|
|
|
—
|
|
Capital
lease obligations (See Note 14)
|
|
|
282
|
|
|
|
|
228
|
|
Other,
due through 2019 (11%)
|
|
|
73
|
|
|
|
|
76
|
|
|
|
|
3,175
|
|
|
|
|
2,074
|
|
Less
current maturities of long-term debt
|
|
|
(268
|
)
|
|
|
|
(16
|
)
|
Long-term
debt excluding SFAS 133 adjustment
|
|
|
2,907
|
|
|
|
|
2,058
|
|
Derivative
instrument adjustment under SFAS 133 (See Note 15)
|
|
|
17
|
|
|
|
|
(13
|
)
|
Long-term
debt including SFAS 133 adjustment
|
|
$
|
2,924
|
|
|
|
$
|
2,045
|
|
On
November 29, 2007, the Company executed an amended and restated five-year senior
unsecured Revolving Credit Facility (the “Credit Facility”) totaling $1.15
billion which replaced a five-year facility in the amount of $1.0 billion that
was set to expire on September 7, 2009. The Credit Facility is
unconditionally guaranteed by our principal domestic subsidiaries and contains
financial covenants relating to maintenance of leverage and fixed charge
coverage ratios. The Credit Facility also contains affirmative and
negative covenants including, among other things, limitations on certain
additional indebtedness and liens and certain other transactions specified in
the agreement. We were in compliance with all debt covenants at
December 29, 2007.
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 29, 2007, our unused Credit Facility totaled
$971 million, net of outstanding letters of credit of $179
million. There were no borrowings under the Credit Facility at
December 29, 2007. 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.
On
November 29, 2007, the Company executed an amended and restated five-year
revolving credit facility (the “International Credit Facility” or “ICF”)
totaling $350 million, which replaced a five-year facility also in the amount of
$350 million that was set to expire on November 8, 2010. The ICF is
unconditionally guaranteed by YUM and by YUM’s principal domestic subsidiaries
and contains covenants substantially identical to those of the Credit Facility.
We were in compliance with all debt covenants at the end of 2007.
There
were borrowings of $28 million and available credit of $322 million outstanding
under the ICF at the end of 2007. 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.
In 2006,
we executed two short-term borrowing arrangements (the "Term Loans") on behalf
of the International Division. There were borrowings of $183 million
outstanding at the end of 2006 under the Term Loans, both of which expired and
were repaid in the first quarter of 2007.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes. The Senior Unsecured Notes represent senior, unsecured
obligations and rank equally in right of payment with all of our existing and
future unsecured unsubordinated indebtedness. Amounts outstanding
under Senior Unsecured Notes were $2.8 billion at December 29,
2007. This amount includes $600 million aggregate principal amount of
6.25% Senior Unsecured Notes that were issued in October 2007 and are due on
March 15, 2018 and $600 million aggregate principal amount of 6.875% Senior
Unsecured Notes that were issued in October 2007 and are due November 15, 2037
(together the “2007 Notes”). We are using the proceeds from the 2007
Notes to repay outstanding borrowings on our Credit Facility, for additional
share repurchases and for general corporate purposes.
In
anticipation of issuing the 2007 Notes, we entered into treasury locks and
forward starting interest rate swaps with aggregate notional amounts of $100
million and $400 million, respectively, to hedge the interest rate risk
attributable to changes in the United States Treasury Rates and the LIBOR,
respectively, prior to issuance of the 2007 Notes. As these treasury
locks and forward starting interest rate swaps were designated and highly
effective in offsetting this variability in cash flows associated with the
future interest payments, a resulting $1 million treasury lock gain and $22
million forward starting interest rate swap loss from settlement of these
instruments is being amortized over ten and thirty years, respectively, as a
decrease and increase in interest expense,
respectively.
The
following table summarizes all Senior Unsecured Notes issued that remain
outstanding at December 29, 2007:
|
|
|
|
|
|
Interest
Rate
|
Issuance
Date(a)
|
|
Maturity
Date
|
|
Principal
Amount (in millions)
|
|
Stated
|
|
Effective(b)
|
May
1998
|
|
May
2008
|
|
250
|
|
7.65%
|
|
7.81%
|
April
2001
|
|
April
2011
|
|
650
|
|
8.88%
|
|
9.20%
|
June
2002
|
|
July
2012
|
|
400
|
|
7.70%
|
|
8.04%
|
April
2006
|
|
April
2016
|
|
300
|
|
6.25%
|
|
6.03%
|
October
2007
|
|
March
2018
|
|
600
|
|
6.25%
|
|
6.38%
|
October
2007
|
|
November
2037
|
|
600
|
|
6.88%
|
|
7.29%
|
(a)
|
Interest
payments commenced six months after issuance date and are payable
semi-annually thereafter.
|
|
|
(b)
|
Includes
the effects of the amortization of any (1) premium or discount; (2) debt
issuance costs; and (3) gain or loss upon settlement of related treasury
locks and forward starting interest rate swaps utilized to hedge the
interest rate risk prior to the debt issuance. Excludes the
effect of any swaps that remain outstanding as described in Note
15.
|
The
annual maturities of short-term borrowings and long-term debt as of December 29,
2007, excluding capital lease obligations of $282 million and derivative
instrument adjustments of $17 million, are as follows:
Year
ended:
|
|
|
|
2008
|
|
|
$
|
273
|
|
2009
|
|
|
|
3
|
|
2010
|
|
|
|
3
|
|
2011
|
|
|
|
654
|
|
2012
|
|
|
|
433
|
|
Thereafter
|
|
|
|
1,555
|
|
Total
|
|
|
$
|
2,921
|
|
Interest
expense on short-term borrowings and long-term debt was $199 million, $172
million and $147 million in 2007, 2006 and 2005, respectively.
Note
14 – Leases
At
December 29, 2007 we operated more than 7,600 restaurants, leasing the
underlying land and/or building in more than 6,000 of those restaurants with the
vast majority of our commitments expiring within 15 to 20 years from the
inception of the lease. Our longest lease expires in
2151. We also lease office space for headquarters and support
functions, as well as certain office and restaurant equipment. We do
not consider any of these individual leases material to our
operations. Most leases require us to pay related executory costs,
which include property taxes, maintenance and insurance.
In 2007,
we entered into an agreement to lease a corporate aircraft to enhance our
international travel capabilities. This lease provides for an upfront
payment of $10 million and monthly payments for three years. At the
end of the three-year period we have the option to purchase the
aircraft. In accordance with SFAS No. 13, this lease has been
classified as capital and we had a related capital lease obligation recorded of
$41 million at December 29, 2007. Our lease is with CVS Corporation
(“CVS”). One of the Company’s directors is the Chairman, Chief
Executive Officer and President of CVS. Multiple independent
appraisals were obtained during the negotiation process to insure that the lease
was reflective of an arms-length transaction.
Future
minimum commitments and amounts to be received as lessor or sublessor under
non-cancelable leases are set forth below:
|
|
Commitments
|
|
|
|
Lease
Receivables
|
|
|
|
Capital
|
|
|
|
Operating
|
|
|
|
Direct
Financing
|
|
|
|
Operating
|
|
2008
|
|
$
|
24
|
|
|
|
$
|
462
|
|
|
|
$
|
7
|
|
|
|
$
|
41
|
|
2009
|
|
|
24
|
|
|
|
|
417
|
|
|
|
|
8
|
|
|
|
|
37
|
|
2010
|
|
|
62
|
|
|
|
|
381
|
|
|
|
|
8
|
|
|
|
|
35
|
|
2011
|
|
|
20
|
|
|
|
|
340
|
|
|
|
|
8
|
|
|
|
|
29
|
|
2012
|
|
|
20
|
|
|
|
|
300
|
|
|
|
|
8
|
|
|
|
|
24
|
|
Thereafter
|
|
|
240
|
|
|
|
|
1,986
|
|
|
|
|
58
|
|
|
|
|
124
|
|
|
|
$
|
390
|
|
|
|
$
|
3,886
|
|
|
|
$
|
97
|
|
|
|
$
|
290
|
|
At
December 29, 2007 and December 30, 2006, the present value of minimum payments
under capital leases was $282 million and $228 million,
respectively. At December 29, 2007 and December 30, 2006, unearned
income associated with direct financing lease receivables was $46 million and
$24 million, respectively.
The
details of rental expense and income are set forth below:
|
|
2007
|
|
2006
|
|
2005
|
|
Rental
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
$
|
474
|
|
|
$
|
412
|
|
|
$
|
380
|
|
|
Contingent
|
|
|
81
|
|
|
|
62
|
|
|
|
51
|
|
|
|
|
$
|
555
|
|
|
$
|
474
|
|
|
$
|
431
|
|
|
Minimum
rental income
|
|
$
|
23
|
|
|
$
|
21
|
|
|
$
|
24
|
|
|
Note
15 - Financial Instruments
Interest Rate Derivative
Instruments. We enter into interest rate swaps with the
objective of reducing our exposure to interest rate risk and lowering interest
expense for a portion of our debt. Under the contracts, we agree with other
parties to exchange, at specified intervals, the difference between variable
rate and fixed rate amounts calculated on a notional principal
amount. At both December 29, 2007 and December 30, 2006, interest
rate derivative instruments outstanding had notional amounts of $850
million. These swaps have reset dates and floating rate indices which
match those of our underlying fixed-rate debt and have been designated as fair
value hedges of a portion of that debt. As the swaps qualify for the short-cut
method under SFAS 133, no ineffectiveness has been recorded. The fair
value of these swaps as of December 29, 2007 was a net asset of approximately
$15 million, of which $16 million and $1 million were included in Other assets
and Other liabilities and deferred credits, respectively. The fair
value of these swaps as of December 30, 2006 was a liability of approximately
$15 million, which were included in Other liabilities and deferred
credits. The portion of this fair value which has not yet been
recognized as an addition to interest expense at December 29, 2007 and December
30, 2006 has been included as an addition of $17 million and a reduction of $13
million, respectively, to long-term debt.
Foreign Exchange Derivative
Instruments. We enter into foreign currency forward contracts
with the objective of reducing our exposure to cash flow volatility arising from
foreign currency fluctuations associated with certain foreign currency
denominated intercompany short-term receivables and payables. The
notional amount, maturity date, and currency of these contracts match those of
the underlying receivables or payables. For those foreign currency
exchange forward contracts that we have designated as cash flow hedges, we
measure ineffectiveness by comparing the cumulative
change in
the forward contract with the cumulative change in the hedged
item. No material ineffectiveness was recognized in 2007, 2006 or
2005 for those foreign currency forward contracts designated as cash flow
hedges.
Deferred Amounts in
Accumulated Other Comprehensive Income (Loss). As of December
29, 2007, we had a net deferred loss associated with cash flow hedges of
approximately $10 million, net of tax, due to treasury locks, forward starting
interest rate swaps and foreign currency forward contracts. The vast
majority of this loss arose from the settlement of forward starting interest
rate swaps entered into prior to the issuance of our Senior Unsecured Notes due
in 2037, and is being reclassified into earnings through 2037 to interest
expense. See Note 13 for further discussion of these forward starting
interest rate swaps.
Credit
Risks. Credit risk from interest rate swaps and foreign
currency forward contracts is dependent both on movement in interest and
currency rates and the possibility of non-payment by
counterparties. We mitigate credit risk by entering into these
agreements with high-quality counterparties, and settle both interest rate swaps
and foreign currency forward contracts for the net of our payable and receivable
with the counterparty under the agreement.
Accounts
receivable consists primarily of amounts due from franchisees and licensees for
initial and continuing fees. In addition, we have notes and lease
receivables from certain of our franchisees. The financial condition
of these franchisees and licensees is largely dependent upon the underlying
business trends of our Concepts. This concentration of credit risk is
mitigated, in part, by the large number of franchisees and licensees of each
Concept and the short-term nature of the franchise and license fee
receivables.
Fair
Value. At December 29, 2007 and December 30, 2006, the fair
values of cash and cash equivalents, accounts receivable and accounts payable
approximated their carrying values because of the short-term nature of these
instruments. The fair value of notes receivable approximates the
carrying value after consideration of recorded allowances.
The
carrying amounts and fair values of our other financial instruments subject to
fair value disclosures are as follows:
|
|
2007
|
|
|
2006
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings and long-term debt, excluding capital leases and the derivative
instrument adjustments
|
|
$
|
2,913
|
|
|
|
$
|
3,081
|
|
|
|
$
|
2,057
|
|
|
|
$
|
2,230
|
|
Debt-related
derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
contracts in a net asset (liability) position
|
|
|
15
|
|
|
|
|
15
|
|
|
|
|
(15
|
)
|
|
|
|
(15
|
)
|
Foreign
currency-related derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Open
contracts in a net asset (liability) position
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
(7
|
)
|
|
|
|
(7
|
)
|
Lease
guarantees
|
|
|
22
|
|
|
|
|
26
|
|
|
|
|
19
|
|
|
|
|
28
|
|
Guarantees
supporting financial arrangements of certain franchisees and other third
parties
|
|
|
8
|
|
|
|
|
8
|
|
|
|
|
7
|
|
|
|
|
7
|
|
Letters
of credit
|
|
|
—
|
|
|
|
|
1
|
|
|
|
|
—
|
|
|
|
|
1
|
|
We
estimated the fair value of debt, debt-related derivative instruments, foreign
currency-related derivative instruments, guarantees and letters of credit using
market quotes and calculations based on market rates.
Note
16 – Pension and Postretirement Medical Benefits
The
following disclosures reflect our 2006 adoption of the recognition and
disclosure provisions of SFAS 158 as discussed in Note 2.
Pension
Benefits. We sponsor noncontributory defined benefit pension
plans covering certain full-time salaried and hourly U.S.
employees. The most significant of these plans, the YUM Retirement
Plan (the “Plan”), is funded while benefits from the other U.S. plans are paid
by the Company as incurred. During 2001, the plans covering our U.S.
salaried employees were amended such that any salaried employee hired or rehired
by YUM after September 30, 2001 is not eligible to participate in those
plans. Benefits are based on years of service and earnings or stated
amounts for each year of service. We also sponsor various defined
benefit pension plans covering certain of our non-U.S. employees, the most
significant of which are in the U.K. (including a plan for Pizza Hut U.K.
employees that was sponsored by our unconsolidated affiliate prior to our
acquisition of the remaining fifty percent interest in the unconsolidated
affiliate in 2006). Our plans in the U.K. have previously been
amended such that new employees are not eligible to participate in these
plans.
Obligation
and Funded Status at Measurement Date:
The
following chart summarizes the balance sheet impact, as well as benefit
obligations, assets, and funded status associated with our U.S. pension plans
and significant International pension plans based on actuarial valuations
prepared as of a measurement date of September 30, 2007 and 2006, with the
exception of the Pizza Hut U.K. pension plan where such information is presented
as of a measurement date of November 30, 2007 and 2006.
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
864
|
|
|
|
$
|
815
|
|
|
|
$
|
152
|
|
|
|
$
|
57
|
|
Service
cost
|
|
|
33
|
|
|
|
|
34
|
|
|
|
|
9
|
|
|
|
|
5
|
|
Interest
cost
|
|
|
50
|
|
|
|
|
46
|
|
|
|
|
8
|
|
|
|
|
4
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
1
|
|
Plan
amendments
|
|
|
4
|
|
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Acquisitions(a)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
4
|
|
|
|
|
71
|
|
Curtailment
gain
|
|
|
(4
|
)
|
|
|
|
(1
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
8
|
|
|
|
|
14
|
|
Benefits
and expenses paid
|
|
|
(34
|
)
|
|
|
|
(29
|
)
|
|
|
|
(2
|
)
|
|
|
|
(1
|
)
|
Actuarial
(gain) loss
|
|
|
(71
|
)
|
|
|
|
2
|
|
|
|
|
(20
|
)
|
|
|
|
1
|
|
Benefit
obligation at end of year
|
|
$
|
842
|
|
|
|
$
|
864
|
|
|
|
$
|
1611
|
|
|
|
$
|
152
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
673
|
|
|
|
$
|
610
|
|
|
|
$
|
117
|
|
|
|
$
|
39
|
|
Actual
return on plan assets
|
|
|
93
|
|
|
|
|
60
|
|
|
|
|
11
|
|
|
|
|
6
|
|
Employer
contributions
|
|
|
2
|
|
|
|
|
35
|
|
|
|
|
6
|
|
|
|
|
19
|
|
Participant
contributions
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
2
|
|
|
|
|
1
|
|
Acquisitions(a)
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
40
|
|
Benefits
paid
|
|
|
(33
|
)
|
|
|
|
(29
|
)
|
|
|
|
(2
|
)
|
|
|
|
(1
|
)
|
Exchange
rate changes
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
5
|
|
|
|
|
13
|
|
Administrative
expenses
|
|
|
(3
|
)
|
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Fair
value of plan assets at end of year
|
|
$
|
732
|
|
|
|
$
|
673
|
|
|
|
$
|
139
|
|
|
|
$
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status at end of year
|
|
$
|
(110
|
)
|
|
|
$
|
(191
|
)
|
|
|
$
|
(22
|
)
|
|
|
$
|
(35
|
)
|
(a)
|
Relates
to the acquisition of the remaining fifty percent interest in our Pizza
Hut U.K. unconsolidated affiliate.
|
Amounts
recognized in the Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Accrued
benefit asset – non-current
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
5
|
|
|
|
$
|
—
|
|
Accrued
benefit liability – current
|
|
|
(6
|
)
|
|
|
|
(2
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Accrued
benefit liability – non-current
|
|
|
(104
|
)
|
|
|
|
(189
|
)
|
|
|
|
(27
|
)
|
|
|
|
(35
|
)
|
|
|
$
|
(110
|
)
|
|
|
$
|
(191
|
)
|
|
|
$
|
(22
|
)
|
|
|
$
|
(35
|
)
|
Amounts
recognized as a loss in Accumulated Other Comprehensive
Income:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Actuarial
net loss
|
|
$
|
77
|
|
|
|
$
|
216
|
|
|
|
$
|
13
|
|
|
|
$
|
31
|
|
Prior
service cost
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
$
|
80
|
|
|
|
$
|
216
|
|
|
|
$
|
13
|
|
|
|
$
|
31
|
|
The
accumulated benefit obligation for the U.S. and International pension plans was
$900 million and $916 million at December 29, 2007 and December 30, 2006,
respectively.
Information
for pension plans with an accumulated benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Projected
benefit obligation
|
|
$
|
73
|
|
|
|
$
|
864
|
|
|
|
$
|
80
|
|
|
|
$
|
79
|
|
Accumulated
benefit obligation
|
|
|
64
|
|
|
|
|
786
|
|
|
|
|
74
|
|
|
|
|
75
|
|
Fair
value of plan assets
|
|
|
—
|
|
|
|
|
673
|
|
|
|
|
53
|
|
|
|
|
44
|
|
Information
for pension plans with a projected benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Projected
benefit obligation
|
|
$
|
842
|
|
|
|
$
|
864
|
|
|
|
$
|
80
|
|
|
|
$
|
79
|
|
Accumulated
benefit obligation
|
|
|
770
|
|
|
|
|
786
|
|
|
|
|
74
|
|
|
|
|
75
|
|
Fair
value of plan assets
|
|
|
732
|
|
|
|
|
673
|
|
|
|
|
53
|
|
|
|
|
44
|
|
Based on
current funding rules, we do not anticipate being required to make contributions
to the Plan in 2008, but we may make discretionary contributions during the year
based on our estimate of the Plan’s expected December 27, 2008 funded
status. The funding rules for our pension plans outside the U.S. vary
from country to country and depend on many factors including discount rates,
performance of plan assets, local laws and tax regulations. Since our
plan assets currently approximate our projected benefit obligation for our KFC
U.K. pension plan, we did not make a significant contribution in 2007 and we do
not anticipate any significant near term funding. The projected
benefit obligation of our Pizza Hut U.K. pension plan exceeds plan assets by
approximately $27 million. We anticipate taking steps to reduce this
deficit in the near term, which could include a decision to partially or
completely fund the deficit in 2008.
We do not
anticipate any plan assets being returned to the Company during 2008 for any
plans.
Components
of net periodic benefit cost:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans(d)
|
Net
periodic benefit cost
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Service
cost
|
|
$
|
33
|
|
|
|
$
|
34
|
|
|
|
$
|
33
|
|
|
|
$
|
9
|
|
|
|
$
|
5
|
|
|
|
$
|
3
|
|
Interest
cost
|
|
|
50
|
|
|
|
|
46
|
|
|
|
|
43
|
|
|
|
|
8
|
|
|
|
|
4
|
|
|
|
|
2
|
|
Amortization
of prior service cost(a)
|
|
|
1
|
|
|
|
|
3
|
|
|
|
|
3
|
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
—
|
|
Expected
return on plan assets
|
|
|
(51
|
)
|
|
|
|
(47
|
)
|
|
|
|
(45
|
)
|
|
|
|
(9
|
)
|
|
|
|
(4
|
)
|
|
|
|
(2
|
)
|
Amortization
of net loss
|
|
|
23
|
|
|
|
|
30
|
|
|
|
|
22
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
—
|
|
Net
periodic benefit cost
|
|
$
|
56
|
|
|
|
$
|
66
|
|
|
|
$
|
56
|
|
|
|
$
|
9
|
|
|
|
$
|
6
|
|
|
|
$
|
3
|
|
Additional
loss recognized due to: Curtailment(b)
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
1
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
Settlement(c)
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
3
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension losses in accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Beginning
of year
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial gain
|
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net loss
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service cost
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
End
of year
|
|
$
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Prior
service costs are amortized on a straight-line basis over the average
remaining service period of employees expected to receive
benefits.
|
|
|
(b)
|
Curtailment
losses have been recognized as refranchising losses as they have resulted
primarily from refranchising activities.
|
|
|
(c)
|
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.
|
|
|
(d)
|
Excludes
pension expense for the Pizza Hut U.K. pension plan of $4 million in both
2006 and 2005 related to periods prior to our acquisition of the remaining
fifty percent interest in the unconsolidated
affiliate.
|
The
estimated net loss for the U.S. and International pension plans that will be
amortized from accumulated other comprehensive loss into net periodic pension
cost in 2008 is $6 million and $1 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 2008
is $1 million.
Weighted-average
assumptions used to determine benefit obligations at the measurement
dates:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Discount
rate
|
|
|
6.50%
|
|
|
|
|
5.95%
|
|
|
|
|
5.60%
|
|
|
|
|
5.00%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
4.30%
|
|
|
|
|
3.77%
|
|
Weighted-average
assumptions used to determine the net periodic benefit cost for fiscal
years:
|
|
|
|
|
|
|
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
Discount
rate
|
|
|
5.95%
|
|
|
|
|
5.75%
|
|
|
|
|
6.15%
|
|
|
|
|
5.00%
|
|
|
|
|
5.00%
|
|
|
|
|
5.50%
|
|
Long-term
rate of return on plan assets
|
|
|
8.00%
|
|
|
|
|
8.00%
|
|
|
|
|
8.50%
|
|
|
|
|
7.07%
|
|
|
|
|
6.70%
|
|
|
|
|
7.00%
|
|
Rate
of compensation increase
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
3.75%
|
|
|
|
|
3.78%
|
|
|
|
|
3.85%
|
|
|
|
|
4.00%
|
|
Our
estimated long-term rate of return on plan assets represents the
weighted-average of expected future returns on the asset categories included in
our target investment allocation based primarily on the historical returns for
each asset category, adjusted for an assessment of current market
conditions.
Plan
Assets
Our
pension plan weighted-average asset allocations at the measurement dates, by
asset category are set forth below:
|
|
U.S.
Pension Plans
|
|
|
International
Pension Plans
|
Asset
Category
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
Equity
securities
|
|
|
71
|
%
|
|
|
|
70
|
%
|
|
|
|
80
|
%
|
|
|
|
80
|
%
|
Debt
securities
|
|
|
29
|
|
|
|
|
30
|
|
|
|
|
20
|
|
|
|
|
20
|
|
Total
|
|
|
100
|
%
|
|
|
|
100
|
%
|
|
|
|
100
|
%
|
|
|
|
100
|
%
|
Our
primary objectives regarding the Plan’s assets, which make up 84% of total
pension plan assets at the 2007 measurement dates, are to optimize return on
assets subject to acceptable risk and to maintain liquidity, meet minimum
funding requirements and minimize plan expenses. To achieve these
objectives, we have adopted a passive investment strategy in which the asset
performance is driven primarily by the investment allocation. Our
target investment allocation is 70% equity securities and 30% debt securities,
consisting primarily of low cost index mutual funds that track several
sub-categories of equity and debt security performance. The
investment strategy is primarily driven by our Plan’s participants’ ages and
reflects a long-term investment horizon favoring a higher equity component in
the investment allocation.
A mutual
fund held as an investment by the Plan includes YUM stock in the amount of $0.4
million at September 30, 2007 and 2006 (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
|
2008
|
|
|
|
$
|
43
|
|
|
|
$
|
2
|
|
2009
|
|
|
|
|
34
|
|
|
|
|
2
|
|
2010
|
|
|
|
|
36
|
|
|
|
|
2
|
|
2011
|
|
|
|
|
39
|
|
|
|
|
2
|
|
2012
|
|
|
|
|
42
|
|
|
|
|
2
|
|
2013
- 2017
|
|
|
|
|
263
|
|
|
|
|
12
|
|
Expected
benefits are estimated based on the same assumptions used to measure our benefit
obligation on the measurement date and include benefits attributable to
estimated further employee service.
Postretirement
Medical Benefits
Our
postretirement plan provides health care benefits, principally to U.S. salaried
retirees and their dependents, and includes retiree cost sharing
provisions. During 2001, the plan was amended such that any salaried
employee hired or rehired by YUM after September 30, 2001 is not eligible to
participate in this plan. Employees hired prior to September 30, 2001
are eligible for benefits if they meet age and service requirements and qualify
for retirement benefits. We fund our postretirement plan as benefits
are paid.
At the
end of 2007 and 2006, the accumulated postretirement benefit obligation is $73
million and $68 million, respectively. The unrecognized actuarial
loss recognized in Accumulated other comprehensive loss is $9 million at the end
of 2007 and $4 million at the end of 2006. The net periodic benefit cost
recorded in 2007, 2006 and 2005 was $5 million, $6 million and $8 million,
respectively, the majority of which is interest cost on the accumulated
postretirement benefit obligation. The weighted-average assumptions
used to determine benefit obligations and net periodic benefit cost for the
postretirement medical plan are identical to those as shown for the U.S. pension
plans. Our assumed heath care cost trend rates for the following year
as of 2007 and 2006 are 8.0% and 9.0%, respectively, both with an expected
ultimate trend rate of 5.5% reached in 2012.
There is
a cap on our medical liability for certain retirees. The cap for
Medicare eligible retirees was reached in 2000 and the cap for non-Medicare
eligible retirees is expected to be reached in 2011; once the cap is reached,
our annual cost per retiree will not increase. A one-percentage-point
increase or decrease in assumed health care cost trend rates would have less
than a $1 million impact on total service and interest cost and on the post
retirement benefit obligation. The benefits expected to be paid in
each of the next five years are approximately $6 million and in aggregate for
the five years thereafter are $33 million.
Note
17 –Stock Options and Stock Appreciation Rights
At year
end 2007, we had four stock award plans in effect: the YUM! Brands, Inc.
Long-Term Incentive Plan (“1999 LTIP”), the 1997 Long-Term Incentive Plan (“1997
LTIP”), the YUM! Brands, Inc. Restaurant General Manager Stock Option Plan (“RGM
Plan”) and the YUM! Brands, Inc. SharePower Plan
(“SharePower”). Under all our plans, the exercise price of stock
options and stock appreciation rights (“SARs”) granted must be equal to or
greater than the average market price or the ending market price of the
Company’s stock on the date of grant.
We may
grant awards of up to 59.6 million shares and 90.0 million shares of stock under
the 1999 LTIP, as amended, and 1997 LTIP, respectively. Potential
awards to employees and non-employee directors under the 1999 LTIP include stock
options, incentive stock options, SARs, restricted stock, stock units,
restricted stock units, performance shares and performance
units. Potential awards to employees and non-employee directors under
the 1997 LTIP include restricted stock and performance restricted stock
units. Prior to January 1, 2002, we also could grant stock options,
incentive stock options and SARs under the 1997 LTIP. Through
December 29, 2007, we have issued only stock options and performance restricted
stock units under the 1997 LTIP and have issued only stock options and SARs
under the 1999 LTIP. While awards under the 1999 LTIP can have
varying vesting provisions and exercise periods, previously granted awards under
the 1997 LTIP and 1999 LTIP vest in periods ranging from immediate to 10 years
and expire ten to fifteen years after grant.
We may
grant awards to purchase up to 30.0 million shares of stock under the RGM
Plan. Potential awards to employees under the RGM Plan include stock
options and SARs. RGM Plan awards granted have a four year cliff
vesting period and expire ten years after grant. Certain RGM Plan
awards are granted upon attainment of performance conditions in the previous
year. Expense for such awards is recognized over a period that
includes the performance condition period.
We may
grant awards to purchase up to 28.0 million shares of stock under
SharePower. Potential awards to employees under SharePower include
stock options, SARs, restricted stock and restricted stock
units. SharePower awards granted subsequent to the Spin-off Date
consist only of stock options and SARs to date, which vest over a period ranging
from one to four years and expire no longer than ten years after
grant. Previously granted SharePower awards have expirations through
2017.
We
estimated the fair value of each award made during 2007, 2006 and 2005 as of the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
|
|
2007
|
|
|
2006
|
|
|
2005
|
Risk-free
interest rate
|
|
4.7
|
%
|
|
|
4.5
|
%
|
|
|
3.8
|
%
|
Expected
term (years)
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Expected
volatility
|
|
28.8
|
%
|
|
|
31.0
|
%
|
|
|
36.6
|
%
|
Expected
dividend yield
|
|
2.0
|
%
|
|
|
1.0
|
%
|
|
|
0.9
|
%
|
We
believe it is appropriate to group our awards into two homogeneous groups when
estimating expected term. These groups consist of grants made
primarily to restaurant-level employees under the RGM Plan, which cliff vest
after four years and expire ten years after grant, and grants made to executives
under our other stock award plans, which typically have a graded vesting
schedule of 25% per year over four years and expire ten years after
grant. We use a single-weighted average expected term for our awards
that have a graded vesting schedule as permitted by SFAS 123R. Based
on analysis of our historical exercise and post-vesting termination behavior we
have determined that six years is an appropriate term for both awards to our
restaurant-level employees and awards to our executives.
When
determining expected volatility, we consider both historical volatility of our
stock as well as implied volatility associated with our traded
options.
A summary
of award activity as of December 29, 2007, 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
|
|
54,603
|
|
|
|
$
|
14.93
|
|
|
|
|
|
|
|
|
|
Granted
|
|
7,302
|
|
|
|
|
29.77
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(10,564
|
)
|
|
|
|
11.16
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
(2,204
|
)
|
|
|
|
23.35
|
|
|
|
|
|
|
|
|
|
Outstanding
at the end of the year
|
|
49,137
|
|
|
|
$
|
17.57
|
|
|
|
5.67
|
|
|
$
|
1,030
|
|
Exercisable
at the end of the year
|
|
30,516
|
|
|
|
$
|
12.80
|
|
|
|
4.23
|
|
|
$
|
786
|
|
The
weighted-average grant-date fair value of awards granted during 2007, 2006 and
2005 was $8.85, $8.52 and $8.89, respectively. The total intrinsic
value of stock options and SARs exercised during the years ended December 29,
2007, December 30, 2006 and December 31, 2005, was $238 million, $215 million
and $271 million, respectively.
As of
December 29, 2007, there was $103 million of unrecognized compensation cost,
which will be reduced by any forfeitures that occur, related to unvested awards
that is expected to be recognized over a weighted-average period of 2.7
years. The total fair value at grant date of awards vested during
2007, 2006 and 2005 was $58 million, $57 million and $57 million,
respectively.
The total
compensation expense for stock options and SARs recognized was $56 million, $60
million and $58 million in 2007, 2006 and 2005, respectively. The
related tax benefit recognized from this expense was $19 million, $21 million
and $20 million in 2007, 2006 and 2005, respectively.
Cash
received from stock options exercises for 2007, 2006 and 2005, was $112 million,
$142 million and $148 million, respectively. Tax benefits realized on
our tax returns from tax deductions associated with stock options and SARs
exercised for 2007, 2006 and 2005 totaled $76 million, $68 million and $94
million, respectively.
The
Company has a policy of repurchasing shares on the open market to satisfy award
exercises and expects to repurchase approximately 10 million shares during 2008
based on estimates of stock option and SARs exercises for that
period.
Note
18 – 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 at a 25% discount from the average market price at
the date of deferral (the “Discount Stock Account”). Deferrals to the
Discount Stock Account are similar to a restricted stock unit award in that
participants will generally forfeit both the discount and incentive compensation
amounts deferred to the Discount Stock Account if they voluntarily separate from
employment during a vesting period that is two years. We expense the
intrinsic value of the discount and, beginning in 2006, the incentive
compensation over the requisite service period which includes the vesting
period. Investments in cash, the Stock Index fund and the Bond Index
fund will be distributed in cash at a date as elected by the employee and
therefore are classified as a liability on our Consolidated Balance
Sheets. We recognize compensation expense for the appreciation
or
depreciation
of these investments. As investments in the phantom shares of our
Common Stock can only be settled in shares of our Common Stock, we do not
recognize compensation expense for the appreciation or the depreciation, if any,
of these investments. Deferrals into the phantom shares of our Common
Stock are credited to the Common Stock Account.
As of
December 29, 2007, total deferrals to phantom shares of our Common Stock within
the EID Plan totaled approximately 6.1 million shares. We recognized
compensation expense of $9 million, $8 million and $4 million, including
discount amortization of $5 million, $5 million and $4 million, in 2007, 2006
and 2005, respectively, for the EID Plan. These expense amounts do
not include the salary or bonus actually deferred into Common Stock of $15
million, $17 million and $13 million in 2007, 2006 and 2005,
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 25% of eligible compensation on a pre-tax
basis. Participants may allocate their contributions to one or any
combination of 10 investment options within the 401(k) Plan. We match
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 $13 million in 2007 and $12 million in 2006 and
2005.
Note
19 – Shareholders’ Equity
Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during 2007, 2006 and 2005. All amounts exclude applicable
transaction fees.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares
Repurchased
|
Authorization
Date
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
October
2007
|
|
|
11,431
|
|
—
|
|
—
|
|
$
|
437
|
|
|
$
|
—
|
|
|
$
|
—
|
|
March
2007
|
|
|
15,092
|
|
—
|
|
—
|
|
|
500
|
|
|
|
—
|
|
|
|
—
|
|
September
2006
|
|
|
15,274
|
|
1,056
|
|
—
|
|
|
469
|
|
|
|
31
|
|
|
|
—
|
|
March
2006
|
|
|
—
|
|
20,145
|
|
—
|
|
|
—
|
|
|
|
500
|
|
|
|
—
|
|
November
2005
|
|
|
—
|
|
19,128
|
|
1,289
|
|
|
—
|
|
|
|
469
|
|
|
|
31
|
|
May
2005
|
|
|
—
|
|
—
|
|
20,279
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
January
2005
|
|
|
—
|
|
—
|
|
19,926
|
|
|
—
|
|
|
|
—
|
|
|
|
500
|
|
May
2004
|
|
|
—
|
|
—
|
|
1,068
|
|
|
—
|
|
|
|
—
|
|
|
|
25
|
|
Total
|
|
|
41,797
|
|
40,329
|
|
42,562
|
|
$
|
1,406
|
(a)
|
|
$
|
1,000
|
(b)
|
|
$
|
1,056
|
|
(a)
|
Amounts
excludes the effects of $17 million in share repurchases (0.6 million
shares) with trade dates prior to the 2006 fiscal year end but cash
settlement dates subsequent to the 2006 fiscal year end and includes the
effect of $13 million in share repurchases (0.4 million shares) with trade
dates prior to the 2007 fiscal year end but cash settlement dates
subsequent to the 2007 fiscal year.
|
|
|
(b)
|
Amount
includes effects of $17 million in share repurchases (0.6 million shares)
with trade dates prior to the 2006 fiscal year end but cash settlement
dates subsequent to the 2006 fiscal year
end.
|
As of
December 29, 2007, we have $813 million available for future repurchases
(includes the impact of shares repurchased but not yet cash settled above) under
our October 2007 share repurchase
authorization. Additionally, in January 2008 our Board of Directors
authorized additional share repurchases, through January 2009, of up to an
additional $1.25 billion (excluding applicable transaction fees) of our
outstanding Common Stock. Based on market conditions and other
factors, additional repurchases may be made from time to time in the open market
or through privately negotiated transactions at the discretion of the
Company.
Accumulated Other
Comprehensive Income (Loss) – Comprehensive income is net income plus
certain other items that are recorded directly to shareholders’
equity. Amounts included in other accumulated comprehensive loss for
the Company’s derivative instruments and unrecognized actuarial losses are
recorded net of the related income tax effects. Refer to Note 16 for
additional information about our pension accounting and Note 15 for additional
information about our derivative instruments. The following table
gives further detail regarding the composition of other accumulated
comprehensive income (loss) at December 29, 2007 and December 30,
2006.
|
|
2007
|
|
|
2006
|
Foreign
currency translation adjustment
|
|
$
|
94
|
|
|
|
$
|
—
|
|
Pension
and post retirement losses, net of tax
|
|
|
(64
|
)
|
|
|
|
(160
|
)
|
Net
unrealized losses on derivative instruments, net of tax
|
|
|
(10
|
)
|
|
|
|
4
|
|
Total
accumulated other comprehensive income (loss)
|
|
$
|
20
|
|
|
|
$
|
(156
|
)
|
Note
20 – Income Taxes
The
details of our income tax provision (benefit) are set forth below:
|
2007
|
|
|
2006
|
|
|
2005
|
Current: Federal
|
$
|
229
|
|
|
|
$
|
181
|
|
|
|
$
|
241
|
|
Foreign
|
|
151
|
|
|
|
|
131
|
|
|
|
|
113
|
|
State
|
|
(3
|
)
|
|
|
|
2
|
|
|
|
|
11
|
|
|
|
377
|
|
|
|
|
314
|
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
Federal
|
|
(125
|
)
|
|
|
|
(33
|
)
|
|
|
|
(66
|
)
|
Foreign
|
|
27
|
|
|
|
|
(13
|
)
|
|
|
|
(20
|
)
|
State
|
|
3
|
|
|
|
|
16
|
|
|
|
|
(15
|
)
|
|
|
(95
|
)
|
|
|
|
(30
|
)
|
|
|
|
(101
|
)
|
|
$
|
282
|
|
|
|
$
|
284
|
|
|
|
$
|
264
|
|
Included
in the federal tax provision above for 2005 is approximately $20 million current
tax provided on $500 million of earnings in our foreign investments which we
repatriated to the U.S. in 2005. We made the determination to
repatriate such earnings as the result of The American Jobs Creation Act of 2004
which became law on October 22, 2004 (the “Act”). The Act allowed a
dividend received deduction of 85% of repatriated qualified foreign earnings in
fiscal year 2005. The federal and state tax provision for 2006 includes $4
million current tax benefit as a result of the reconciliation of tax on
repatriated earnings as recorded in our Consolidated Statements of Income to the
amounts on our tax returns.
The
deferred tax provision includes $120 million and $39 million of benefit in
2007 and 2005, respectively, and $4 million of expense in 2006 for changes in
valuation allowances due to changes in determinations regarding the likelihood
of the use of certain deferred tax assets that existed at the beginning of the
year. The deferred tax provisions also include $16 million, $72
million and $26 million in 2007, 2006 and 2005, respectively, for increases in
valuation allowances recorded against deferred tax assets generated during the
year. Additionally, foreign currency translation and
other
adjustments
contributed to the fluctuations. Total changes in valuation
allowances were decreases of $37 million and $36 million in 2007 and 2005,
respectively, and an increase of $112 million in 2006. See
additional discussion of federal valuation allowances adjustments in the
effective tax rate discussion below.
The
deferred foreign tax provision includes $17 million and $2 million of expense in
2007 and 2006, respectively, for the impact of changes in statutory tax rates in
various countries. The $17 million of expense for 2007 includes $20 million
for the Mexico tax law change enacted during the fourth quarter of
2007. The 2007 deferred state tax provision includes $4 million
($3 million, net of federal tax) of benefit for the impact of state
law changes. The 2006 deferred state tax provision includes
$12 million ($8 million, net of federal tax) of expense for the impact
of state law changes. The 2005 deferred state tax provision includes
$8 million ($5 million, net of federal tax) of expense for the impact of state
law changes.
U.S. and
foreign income before income taxes are set forth below:
|
2007
|
|
|
2006
|
|
|
2005
|
U.S.
|
$
|
527
|
|
|
|
$
|
626
|
|
|
|
$
|
690
|
|
Foreign
|
|
664
|
|
|
|
|
482
|
|
|
|
|
336
|
|
|
$
|
1,191
|
|
|
|
$
|
1,108
|
|
|
|
$
|
1,026
|
|
The above
U.S. income includes all income taxed in the U.S. even if the income is earned
outside the U.S.
The
reconciliation of income taxes calculated at the U.S. federal tax statutory rate
to our effective tax rate is set forth below:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
U.S.
federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State
income tax, net of federal tax benefit
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
1.6
|
|
Foreign
and U.S. tax effects attributable to foreign operations
|
|
|
(5.7
|
)
|
|
|
(7.8
|
)
|
|
|
(8.4
|
)
|
Adjustments
to reserves and prior years
|
|
|
2.6
|
|
|
|
(3.5
|
)
|
|
|
(1.1
|
)
|
Repatriation
of foreign earnings
|
|
|
—
|
|
|
|
(0.4
|
)
|
|
|
2.0
|
|
Non-recurring
foreign tax credit adjustments
|
|
|
—
|
|
|
|
(6.2
|
)
|
|
|
(1.7
|
)
|
Valuation
allowance additions (reversals)
|
|
|
(9.0
|
)
|
|
|
6.8
|
|
|
|
(1.1
|
)
|
Other,
net
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
Effective
income tax rate
|
|
|
23.7
|
%
|
|
|
25.6
|
%
|
|
|
25.8
|
%
|
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 we now believe are
more likely than not to be claimed on future tax returns. In 2007,
benefits associated with our foreign and U.S. tax effects attributable to
foreign operations were negatively impacted by $36 million of expense associated
with the $275 million intercompany dividend and approximately $20 million of
expense for adjustments to our deferred tax balances as a result of the Mexico
tax law change enacted during the fourth quarter of 2007. These
negative impacts were partially offset by a higher percentage of our income
being earned outside the U.S. Additionally, the effective tax rate
was negatively impacted by the year-over-year change in adjustments to reserves
and prior years.
Our 2006
effective income tax rate was positively impacted by the reversal of tax
reserves in connection with our regular U.S. audit cycle as well as certain
out-of-year adjustments to reserves and accruals that lowered our effective
income tax rate by 2.2 percentage points. The reversal of tax
reserves was partially offset by valuation allowance additions on foreign tax
credits of approximately $36 million for which, as a result of the tax reserve
reversals, we believed were not likely to be utilized before they
expired. We also recognized deferred tax assets for the foreign tax
credit impact of non-recurring decisions to repatriate certain foreign earnings
in 2007. However, we provided full valuation allowances on such
assets as we did not believe it was more likely than not that they would be
realized at that time. The 2005 tax rate was favorably impacted by
the reversal of valuation allowances and the recognition of certain
non-recurring foreign tax credits that we were able to substantiate during
2005.
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, including
interest thereon, on a quarterly basis to insure that they have
been appropriately adjusted for events, including audit settlements, that
we believe may impact our exposure.
The
details of 2007 and 2006 deferred tax assets (liabilities) are set forth
below:
|
2007
|
|
|
2006
|
Net
operating loss and tax credit carryforwards
|
$
|
363
|
|
|
|
$
|
337
|
|
Employee
benefits, including share-based compensation
|
|
209
|
|
|
|
|
189
|
|
Self-insured
casualty claims
|
|
73
|
|
|
|
|
85
|
|
Lease
related liabilities
|
|
115
|
|
|
|
|
95
|
|
Various
liabilities
|
|
124
|
|
|
|
|
92
|
|
Deferred
income and other
|
|
36
|
|
|
|
|
66
|
|
Gross
deferred tax assets
|
|
920
|
|
|
|
|
864
|
|
Deferred
tax asset valuation allowances
|
|
(308
|
)
|
|
|
|
(345
|
)
|
Net
deferred tax assets
|
$
|
612
|
|
|
|
$
|
519
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets and property, plant and equipment
|
$
|
(156
|
)
|
|
|
$
|
(149
|
)
|
Lease
related assets
|
|
(41
|
)
|
|
|
|
(23
|
)
|
Other
|
|
(58
|
)
|
|
|
|
(55
|
)
|
Gross
deferred tax liabilities
|
|
(255
|
)
|
|
|
|
(227
|
)
|
Net
deferred tax assets (liabilities)
|
$
|
357
|
|
|
|
$
|
292
|
|
Reported
in Consolidated Balance Sheets as:
|
|
|
|
|
|
|
|
Deferred
income taxes – current
|
$
|
125
|
|
|
|
$
|
57
|
|
Deferred
income taxes – long-term
|
|
290
|
|
|
|
|
320
|
|
Accounts
payable and other current liabilities
|
|
(8
|
)
|
|
|
|
(8
|
)
|
Other
liabilities and deferred credits
|
|
(50
|
)
|
|
|
|
(77
|
)
|
|
$
|
357
|
|
|
|
$
|
292
|
|
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 $810 million at December 29,
2007. A determination of the deferred tax liability on such earnings
is not practicable. Foreign operating and capital loss carryforwards
totaling $705 million and state operating loss carryforwards
totaling $1.1 billion at year end 2007 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: $27 million in 2008, $113 million between 2009 and
2012, $1.1 billion between 2013 and 2027 and $601 million may be
carried forward indefinitely. In addition, tax credits totaling
$99 million are available to reduce certain federal and state liabilities,
of which $26 million will expire between 2009 and 2012, $66 million will
expire between 2013 and 2027 and $7 million may be carried forward
indefinitely.
Effective
December 31, 2006, we adopted FIN 48 which requires that a position taken
or expected to be taken in a tax return be recognized in the financial
statements when it is more likely than not (i.e. a likelihood of more than fifty
percent) that the position would be sustained upon examination by tax
authorities. A recognized tax position is then measured at the
largest amount of benefit that is greater than fifty percent likely of being
realized upon settlement. Upon adoption, we recognized an additional
$13 million for unrecognized tax benefits, which we accounted for as a reduction
to our opening balance of retained earnings.
The
Company had $376 million of unrecognized tax benefits at December 29, 2007,
$194 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:
|
2007
|
Balance
upon adoption at December 31, 2006
|
$
|
318
|
|
Additions
on tax positions related to the current year
|
|
105
|
|
Additions
for tax positions of prior years
|
|
17
|
|
Reductions
for tax positions of prior years
|
|
(49
|
)
|
Reductions
for settlements
|
|
(6
|
)
|
Reductions
due to statute expiration
|
|
(11
|
)
|
Foreign
currency translation adjustment
|
|
2
|
|
Balance
at December 29, 2007
|
$
|
376
|
|
The
balance of unrecognized tax benefits previously disclosed upon adoption as of
December 31, 2006 increased from $283 million to $318 million as a result of
additional uncertain temporary tax positions identified in
2007. These unrecognized tax benefits were properly recorded on our
Consolidated Balance Sheet at December 31, 2006, but were not identified as
uncertain tax positions for disclosure purposes. As these items were
temporary in nature, there was no change to the disclosed amount of $185 million
of unrecognized tax benefits which, if recognized, would affect the effective
income tax rate.
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 29, 2007, the earliest years that the
Company was subject to examination in these jurisdictions were 1999 in the U.S.,
2004 in China, 2000 in the United Kingdom, 2001 in Mexico and 2003 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 29, 2007. The Company believes
that it is reasonably possible that its unrecognized tax benefits may decrease
by approximately $110 million in the next 12 months. Of this amount,
approximately $95 million relates to items temporary in nature which will have
no impact on the 2008 effective tax rate. The remaining $15 million
decrease in unrecognized tax benefits relate to various positions, each of which
are individually insignificant, which if recognized upon audit settlement or
statute expiration, will affect the effective income tax rate by approximately
$12 million.
At
December 29, 2007, total liabilities of $319 million, including $58 million for
the payment of accrued interest and penalties, are included in Other liabilities
and deferred credits as reported on the Consolidated Balance Sheet. Total
accrued
interest and penalties recorded at December 29, 2007 were $58 million.
During 2007, accrued interest decreased by $16 million, of which $11 million
affected the 2007 effective tax rate. The Company recognizes accrued
interest and penalties related to unrecognized tax benefits as components of its
income tax provision.
See Note
22 for further discussion of certain proposed Internal Revenue Service
adjustments.
Note
21 – Reportable Operating Segments
We are
principally engaged in developing, operating, franchising and licensing the
worldwide KFC, Pizza Hut, Taco Bell, LJS and A&W concepts. KFC, Pizza Hut,
Taco Bell, LJS and A&W operate throughout the U.S. and in 104, 96, 14, 6 and
10 countries and territories outside the U.S., respectively. Our five
largest international markets based on operating profit in 2007 are China,
United Kingdom, Asia Franchise, Australia and Mexico. At the end of
fiscal year 2007, we had investments in 6 unconsolidated affiliates outside the
U.S. which operate principally KFC and/or Pizza Hut
restaurants. These unconsolidated affiliates operate in China and
Japan. Subsequent to the fiscal year ended 2007 the Company sold its interest in
its unconsolidated affiliate in Japan (See Note 5 for further
discussion).
We
identify our operating segments based on management
responsibility. The China Division includes mainland China, Thailand,
KFC Taiwan, and the International Division includes the remainder of our
international operations. For purposes of applying SFAS No. 131,
“Disclosure About Segments of An Enterprise and Related Information” (“SFAS
131”) in the U.S., we consider LJS and A&W to be a single operating
segment. We consider our KFC, Pizza Hut, Taco Bell and LJS/A&W
operating segments in the U.S. to be similar and therefore have aggregated them
into a single reportable operating segment.
|
|
|
|
Revenues
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
5,197
|
|
|
|
$
|
5,603
|
|
|
|
$
|
5,929
|
|
International
Division(a)
|
|
|
|
|
3,075
|
|
|
|
|
2,320
|
|
|
|
|
2,124
|
|
China
Division(a)
|
|
|
|
|
2,144
|
|
|
|
|
1,638
|
|
|
|
|
1,296
|
|
|
|
|
|
$
|
10,416
|
|
|
|
$
|
9,561
|
|
|
|
$
|
9,349
|
|
|
|
|
|
Operating
Profit; Interest Expense, Net; and
Income
Before Income Taxes
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
739
|
|
|
|
$
|
763
|
|
|
|
$
|
760
|
|
International
Division(b)
|
|
|
|
|
480
|
|
|
|
|
407
|
|
|
|
|
372
|
|
China
Division(b)
|
|
|
|
|
375
|
|
|
|
|
290
|
|
|
|
|
211
|
|
Unallocated
and corporate expenses
|
|
|
|
|
(257
|
)
|
|
|
|
(229
|
)
|
|
|
|
(246
|
)
|
Unallocated
other income (expense)(c)
|
|
|
|
|
9
|
|
|
|
|
7
|
|
|
|
|
13
|
|
Unallocated
refranchising gain (loss)(d)
|
|
|
|
|
11
|
|
|
|
|
24
|
|
|
|
|
43
|
|
Total
operating profit
|
|
|
|
|
1,357
|
|
|
|
|
1,262
|
|
|
|
|
1,153
|
|
Interest
expense, net
|
|
|
|
|
(166
|
)
|
|
|
|
(154
|
)
|
|
|
|
(127
|
)
|
Income
before income taxes
|
|
|
|
$
|
1,191
|
|
|
|
$
|
1,108
|
|
|
|
$
|
1,026
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
247
|
|
|
|
$
|
259
|
|
|
|
$
|
266
|
|
International
Division
|
|
|
|
|
161
|
|
|
|
|
115
|
|
|
|
|
107
|
|
China
Division
|
|
|
|
|
117
|
|
|
|
|
95
|
|
|
|
|
82
|
|
Corporate
|
|
|
|
|
17
|
|
|
|
|
10
|
|
|
|
|
14
|
|
|
|
|
|
$
|
542
|
|
|
|
$
|
479
|
|
|
|
$
|
469
|
|
|
|
|
|
Capital
Spending
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
304
|
|
|
|
$
|
329
|
|
|
|
$
|
333
|
|
International
Division
|
|
|
|
|
189
|
|
|
|
|
118
|
|
|
|
|
96
|
|
China
Division
|
|
|
|
|
246
|
|
|
|
|
165
|
|
|
|
|
159
|
|
Corporate
|
|
|
|
|
3
|
|
|
|
|
2
|
|
|
|
|
21
|
|
|
|
|
|
$
|
742
|
|
|
|
$
|
614
|
|
|
|
$
|
609
|
|
|
|
|
|
Identifiable
Assets
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
2,884
|
|
|
|
$
|
2,909
|
|
|
|
$
|
3,118
|
|
International
Division(e)
|
|
|
|
|
2,254
|
|
|
|
|
2,100
|
|
|
|
|
1,536
|
|
China
Division(e)
|
|
|
|
|
1,116
|
|
|
|
|
869
|
|
|
|
|
746
|
|
Corporate(f)
|
|
|
|
|
988
|
|
|
|
|
490
|
|
|
|
|
397
|
|
|
|
|
|
$
|
7,242
|
|
|
|
$
|
6,368
|
|
|
|
$
|
5,797
|
|
|
|
|
|
Long-Lived
Assets(g)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
United
States
|
|
|
|
$
|
2,595
|
|
|
|
$
|
2,604
|
|
|
|
$
|
2,800
|
|
International
Division(h)
|
|
|
|
|
1,429
|
|
|
|
|
1,357
|
|
|
|
|
804
|
|
China
Division(h)
|
|
|
|
|
757
|
|
|
|
|
595
|
|
|
|
|
517
|
|
Corporate
|
|
|
|
|
73
|
|
|
|
|
84
|
|
|
|
|
103
|
|
|
|
|
|
$
|
4,854
|
|
|
|
$
|
4,640
|
|
|
|
$
|
4,224
|
|
(a)
|
Includes
revenues of $1.3 billion, $673 million and $483 million for entities in
the United Kingdom for 2007, 2006 and 2005, respectively. Includes revenues
of $1.9 billion, $1.4 billion and $1.0 billion in mainland China for 2007,
2006 and 2005, respectively.
|
|
|
(b)
|
Includes
equity income of unconsolidated affiliates of $4 million, $10 million and
$21 million in 2007, 2006 and 2005, respectively, for the International
Division. Includes equity income of unconsolidated affiliates
of $47 million, $41 million, and $30 million in 2007, 2006 and 2005,
respectively, for the China Division.
|
|
|
(c)
|
Includes
net gains of approximately $6 million, $2 million and $11 million in 2007,
2006 and 2005, respectively, associated with the sale of our Poland/Czech
Republic business. See Note 9.
|
|
|
(d)
|
Refranchising
gain (loss) is not allocated to the U.S., International Division or China
Division segments for performance reporting purposes.
|
|
|
(e)
|
Includes
investment in unconsolidated affiliates of $63 million, $64 million and
$117 million for 2007, 2006 and 2005, respectively, for the International
Division. Includes investment in unconsolidated affiliates of
$90 million, $74 million and $56 million for 2007, 2006 and 2005,
respectively, for the China Division.
|
|
|
(f)
|
Primarily
includes deferred tax assets, property, plant and equipment, net, related
to our office facilities and cash.
|
|
|
(g)
|
Includes
property, plant and equipment, net, goodwill, and intangible assets,
net.
|
(h)
|
Includes
long-lived assets of $843 million, $813 million and $271 million for
entities in the United Kingdom for 2007, 2006 and 2005,
respectively. Includes long-lived assets of $651 million, $495
million and $430 million in mainland China for 2007, 2006 and 2005,
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
22 – Guarantees, Commitments and Contingencies
Lease Guarantees and
Contingencies
As a
result of (a) assigning our interest in obligations under real estate leases as
a condition to the refranchising of certain Company restaurants; (b)
contributing certain Company restaurants to unconsolidated affiliates; and (c)
guaranteeing certain other leases, we are frequently contingently liable on
lease agreements. These leases have varying terms, the latest of
which expires in 2026. As of December 29, 2007, the potential amount
of undiscounted payments we could be required to make in the event of
non-payment by the primary lessee was approximately $400 million. The
present value of these potential payments discounted at our pre-tax cost of debt
at December 29, 2007 was approximately $325 million. Our franchisees
are the primary lessees under the vast majority of these leases. We
generally have cross-default provisions with these franchisees that would put
them in default of their franchise agreement in the event of
non-payment
under the
lease. We believe these cross-default provisions significantly reduce
the risk that we will be required to make payments under these
leases. Accordingly, the liability recorded for our probable exposure
under such leases at December 29, 2007 and December 30, 2006 was not
material.
Franchise Loan Pool
Guarantees
We have
provided a partial guarantee of approximately $12 million of a franchisee loan
pool related primarily to the Company’s historical refranchising programs and,
to a lesser extent, franchisee development of new restaurants, at December 29,
2007. In support of this guarantee, we have provided a standby letter
of credit of $18 million under which we could potentially be required to fund a
portion of the franchisee loan pool. The total loans outstanding
under the loan pool were approximately $62 million at December 29,
2007.
The loan
pool is funded by the issuance of commercial paper by a conduit established for
that purpose. A disruption in the commercial paper markets may result
in the Company and the participating financial institutions having to fund
commercial paper issuances that have matured. Any funding under the
guarantee or letter of credit would be secured by the franchisee loans and any
related collateral. We believe that we have appropriately provided
for our estimated probable exposures under these contingent liabilities. These
provisions were primarily charged to net refranchising (gain)
loss. New loans added to the loan pool in 2007 were not
significant.
All
outstanding loans in another franchisee loan pool we previously partially
guaranteed were paid in full during 2007. No further loans will be
made from this loan pool.
Unconsolidated Affiliates
Guarantees
From time
to time we have guaranteed certain lines of credit and loans of unconsolidated
affiliates. At December 29, 2007 there are no guarantees outstanding
for unconsolidated affiliates. Our unconsolidated affiliates had
total revenues of $1.4 billion for the year ended December 29, 2007 and assets
and debt of approximately $665 million and $22 million, respectively, at
December 29, 2007.
Insurance
Programs
We are
self-insured for a substantial portion of our current and prior years’ coverage
including workers’ compensation, employment practices liability, general
liability, automobile liability and property losses (collectively, “property and
casualty losses”). To mitigate the cost of our exposures for certain
property and casualty losses, we make annual decisions to self-insure the risks
of loss up to defined maximum per occurrence retentions on a line by line basis
or to combine certain lines of coverage into one loss pool with a single
self-insured aggregate retention. The Company then purchases
insurance coverage, up to a certain limit, for losses that exceed the
self-insurance per occurrence or aggregate retention. The insurers’
maximum aggregate loss limits are significantly above our actuarially determined
probable losses; therefore, we believe the likelihood of losses exceeding the
insurers’ maximum aggregate loss limits is remote.
In the
U.S. and in certain other countries, we are also self-insured for healthcare
claims and long-term disability for eligible participating employees subject to
certain deductibles and limitations. We have accounted for our
retained liabilities for property and casualty losses, healthcare and long-term
disability claims, including reported and incurred but not reported claims,
based on information provided by independent actuaries.
Due to
the inherent volatility of actuarially determined property and casualty loss
estimates, it is reasonably possible that we could experience changes in
estimated losses which could be material to our growth in quarterly and annual
net income. We believe that we have recorded reserves for property
and casualty losses at a level which has substantially mitigated the potential
negative impact of adverse developments and/or volatility.
Legal
Proceedings
We are
subject to various claims and contingencies related to lawsuits, real estate,
environmental and other matters arising in the normal course of
business. We provide reserves for such claims and contingencies when
payment is probable and estimable in accordance with SFAS No. 5, “Accounting for
Contingencies.”
On
November 26, 2001, a lawsuit against Long John Silver’s, Inc. (“LJS”) styled
Kevin Johnson, on
behalf of himself and all others similarly situated v. Long John Silver’s, Inc.
(“Johnson”) was filed in the United States District Court for the Middle
District of Tennessee, Nashville Division. Johnson’s suit alleged
that LJS’s former “Security/Restitution for Losses” policy (the “Policy”)
provided for deductions from Restaurant General Managers’ (“RGMs”) and Assistant
Restaurant General Managers’ (“ARGMs”) salaries that violate the salary basis
test for exempt personnel under regulations issued pursuant to the U.S. Fair
Labor Standards Act (“FLSA”). Johnson alleged that all RGMs and ARGMs
who were employed by LJS for the three year period prior to the lawsuit – i.e.,
since November 26, 1998 – should be treated as the equivalent of hourly
employees and thus were eligible under the FLSA for overtime for any hours
worked over 40 during all weeks in the recovery period. In addition,
Johnson claimed that the potential members of the class are entitled to certain
liquidated damages and attorneys’ fees under the FLSA.
LJS
believed that Johnson’s claims, as well as the claims of all other similarly
situated parties, should be resolved in individual arbitrations pursuant to
LJS’s Dispute Resolution Program (“DRP”), and that a collective action to
resolve these claims in court was clearly inappropriate under the current state
of the law. Accordingly, LJS moved to compel arbitration in the
Johnson case. The Court determined on June 7, 2004 that Johnson’s
individual claims should be referred to arbitration. Johnson
appealed, and the decision of the District Court was affirmed in all respects by
the United States Court of Appeals for the Sixth Circuit on July 5,
2005.
On
December 19, 2003, counsel for plaintiff in the above referenced Johnson
lawsuit, filed a separate demand for arbitration with the American Arbitration
Association (“AAA”) on behalf of former LJS managers Erin Cole and Nick Kaufman
(the “Cole Arbitration”). Claimants in the Cole Arbitration demand a
class arbitration on behalf of the same putative class - and the same underlying
FLSA claims - as were alleged in the Johnson lawsuit. The complaint
in the Cole Arbitration subsequently was amended to allege a practice of
deductions (distinct from the allegations as to the Policy) in violation of the
FLSA salary basis test. LJS has denied the claims and the putative
class alleged in the Cole Arbitration.
Arbitrations
under LJS’s DRP, including the Cole Arbitration, are governed by the rules of
the AAA. In October 2003, the AAA adopted its Supplementary Rules for
Class Arbitrations (“AAA Class Rules”). The AAA appointed an
arbitrator for the Cole Arbitration. On June 15, 2004, the arbitrator
issued a clause construction award, ruling that the DRP does not preclude class
arbitration. LJS moved to vacate the clause construction award in the
United States District Court for the District of South Carolina. On
September 15, 2005, the federal court in South Carolina ruled that it did not
have jurisdiction to hear LJS’s motion to vacate. LJS appealed the
U.S. District Court’s ruling to the United States Court of Appeals for the
Fourth Circuit.
On
January 5, 2007, LJS moved to dismiss the clause construction award appeal and
that motion was granted by the Fourth Circuit on January 10,
2007. While judicial review of the clause construction award was
pending in the U.S. District Court, the arbitrator permitted claimants to move
for a class determination award, which was opposed by LJS. On
September 19, 2005, the arbitrator issued a class determination award,
certifying a class of LJS’s RGMs and ARGMs employed between December 17, 1998,
and August 22, 2004, on FLSA claims, to proceed on an opt-out basis under the
AAA Class Rules. That class determination award was upheld on appeal
by the United States District Court for the District of South Carolina on
January 20, 2006, and the arbitrator declined to reconsider the
award. LJS appealed the ruling of the United States District Court to
the United States Court of Appeals for the Fourth Circuit. On January
28, 2008, the Fourth Circuit issued its ruling, affirming the decision of the
District Court, and thereby affirming the class determination award of the
arbitrator. LJS is currently considering the merits of an appeal to
the United States Supreme Court.
In light
of the decision of the Fourth Circuit, LJS now believes that it is probable the
Cole Arbitration will proceed on a class basis, governed by the opt-out
collective action provisions of the AAA Class Rules. LJS also
believes, however, that each individual should not be able to recover for more
than two years (and a maximum three years) prior to the date they file a consent
to join the arbitration. We have provided for the estimated costs of
the Cole Arbitration, based on our current projection of eligible claims, the
amount of each eligible claim, the estimable claim recovery rates for class
actions of this type, the estimated legal fees incurred by the claimants and the
results of settlement negotiations in this and other wage and hour litigation
matters. But in view of the novelties of proceeding under the AAA
Class Rules and the inherent uncertainties of litigation, there can be no
assurance that the outcome of the arbitration will not result in losses in
excess of those currently provided for in our Consolidated Financial
Statements.
On
September 2, 2005, a collective action lawsuit against the Company and KFC
Corporation, originally styled Parler v. Yum Brands, Inc.,
d/b/a KFC, and KFC Corporation, was filed in the United States District
Court for the District of Minnesota. Plaintiffs allege that they and
other current and former KFC Assistant Unit Managers (“AUMs”) were improperly
classified as exempt employees under the FLSA. Plaintiffs seek
overtime wages and liquidated damages. On January 17, 2006, the
District Court dismissed the claims against the Company with prejudice, leaving
KFC Corporation as the sole defendant. Plaintiffs amended the
complaint on September 8, 2006, to add related state law claims on behalf of a
putative class of KFC AUMs employed in Illinois, Minnesota, Nevada, New Jersey,
New York, Ohio, and Pennsylvania. On October 24, 2006,
plaintiffs moved to decertify the conditionally certified FLSA action, and KFC
Corporation did not oppose the motion. On June 4, 2007, the District
Court decertified the collective action and dismissed all opt-in plaintiffs
without prejudice. Subsequently, plaintiffs filed twenty-seven new
cases around the country, most of which allege a statewide putative
collective/class action. Plaintiffs also filed 324 individual
arbitrations with the American Arbitration Association (“AAA”). KFC filed a motion with
the Judicial Panel on Multidistrict Litigation (“JPML”) to transfer all
twenty-eight pending cases to a single district court for coordinated pretrial
proceedings pursuant to the Multidistrict Litigation (“MDL”) statute, 28 U.S.C.
§ 1407. KFC also filed a motion with the Minnesota District Court to
enjoin the 324 AAA arbitrations on the ground that Plaintiffs waived the right
to arbitrate by their participation in the Minnesota (Parler)
litigation. Finally, KFC filed a motion in the new Minnesota action
to deny certification of a collective or class action on the ground that
Plaintiffs are judicially and equitably estopped from proceeding collectively on
behalf of a class in light of positions they took in the Parler
case. The Court denied KFC’s motion without prejudice. On
January 3, 2008, the JPML granted KFC’s motion to transfer all of the pending
court cases to the Minnesota District Court for discovery and pre-trial
proceedings. On January 4, 2008, KFC’s motion to enjoin the 324
arbitrations on the ground that plaintiffs have waived their right to arbitrate
was granted.
We
believe that KFC has properly classified its AUMs as exempt under the FLSA and
applicable state law, and accordingly intend to vigorously defend against all
claims in these lawsuits. However, in view of the inherent
uncertainties of litigation, the outcome of this case cannot be predicted at
this time. Likewise, the amount of any potential loss cannot be
reasonably estimated.
On August
4, 2006, a putative class action lawsuit against Taco Bell Corp. styled Rajeev Chhibber vs. Taco
Bell Corp. was filed in Orange County Superior Court. On August 7, 2006,
another putative class action lawsuit styled Marina Puchalski v. Taco
Bell Corp. was filed in San Diego County Superior Court. Both lawsuits
were filed by a Taco Bell RGM purporting to represent all current and former
RGMs who worked at corporate-owned restaurants in California from August 2002 to
the present. The lawsuits allege violations of California’s wage and
hour laws involving unpaid overtime and meal and rest period violations and seek
unspecified amounts in damages and penalties. As of September 7,
2006, the Orange County case was voluntarily dismissed by the plaintiff and
both cases have been consolidated in San Diego County. Discovery
is underway, with pre-certification discovery cutoff set for June 2, 2008 and a
July 1, 2008 deadline for plaintiffs to file their motion for class
certification.
Taco Bell
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
September 10, 2007, a putative class action against Taco Bell Corp., the
Company and other related entities styled Sandrika Medlock v. Taco
Bell Corp., was filed in United States District Court, Eastern District,
Fresno, California. The case was filed on behalf of all hourly employees who
have worked for the defendants within the last four years and alleges numerous
violations of California labor laws including unpaid overtime, failure to pay
wages on termination, denial of meal and rest breaks, improper wage statements,
unpaid business expenses and unfair or unlawful business practices in violation
of California Business & Professions Code §17200. The Company was
dismissed from the case without prejudice on January 10, 2008, and discovery is
underway.
Taco Bell
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On
December 21, 2007, a putative class action lawsuit against KFC U.S. Properties,
Inc. styled Baskall v. KFC U.S. Properties, Inc., was filed in San Diego County
Superior Court on behalf of all current and former RGMs, AUMs and Shift
Supervisors who worked at KFC's California restaurants since December 18,
2003. The lawsuit alleges violations of California’s wage and hour
and unfair competition laws, including denial of sufficient meal and rest
periods, improperly itemized pay stubs, and delays in issuing final paychecks,
and seeks unspecified amounts in damages, injunctive relief, and attorneys' fees
and costs. KFC has not yet been served with the
complaint.
KFC
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of litigation, the
outcome of this case cannot be predicted at this time. Likewise, the
amount of any potential loss cannot be reasonably estimated.
On
December 17, 2002, Taco Bell was named as the defendant in a class action
lawsuit filed in the United States District Court for the Northern District of
California styled Moeller, et al. v. Taco Bell
Corp. On August 4, 2003, plaintiffs filed an amended complaint
that alleges, among other things, that Taco Bell has discriminated against the
class of people who use wheelchairs or scooters for mobility by failing to make
its approximately 220 company-owned restaurants in California (the “California
Restaurants”) accessible to the class. Plaintiffs contend that queue
rails and other architectural and structural elements of the Taco Bell
restaurants relating to the path of travel and use of the facilities by persons
with mobility-related disabilities do not comply with the U.S. Americans with
Disabilities Act (the “ADA”), the Unruh Civil Rights Act (the “Unruh Act”), and
the California Disabled Persons Act (the “CDPA”). Plaintiffs have
requested: (a) an injunction from the District Court ordering Taco
Bell to comply with the ADA and its implementing regulations; (b) that the
District Court declare Taco Bell in violation of the ADA, the Unruh Act, and the
CDPA; and (c) monetary relief under the Unruh Act or
CDPA. Plaintiffs, on behalf of the class, are seeking the minimum
statutory damages per offense of either $4,000 under the Unruh Act or $1,000
under the CDPA for each aggrieved member of the class. Plaintiffs
contend that there may be in excess of 100,000 individuals in the
class.
On
February 23, 2004, the District Court granted Plaintiffs' motion for class
certification. The District Court certified a Rule 23(b)(2) mandatory
injunctive relief class of all individuals with disabilities who use wheelchairs
or electric scooters for mobility who, at any time on or after December 17,
2001, were denied, or are currently being denied, on the basis of disability,
the full and equal enjoyment of the California Restaurants. The class
includes claims for injunctive relief and minimum statutory
damages.
Pursuant
to the parties’ agreement, on or about August 31, 2004, the District Court
ordered that the trial of this action be bifurcated so that stage one will
resolve Plaintiffs’ claims for equitable relief and stage two will resolve
Plaintiffs’ claims for damages. The parties are currently proceeding
with the equitable relief stage of this action. During this stage,
Taco Bell filed a motion to partially decertify the class to exclude from the
Rule 23(b)(2) class claims for monetary damages. The District Court
denied the motion. Plaintiffs filed their own motion for partial
summary judgment as to liability relating to a subset of the California
Restaurants. The District Court denied that motion as
well.
On May
17, 2007, a hearing was held on Plaintiffs’ Motion for Partial Summary Judgment
seeking judicial declaration that Taco Bell was in violation of accessibility
laws as to three specific issues: indoor seating, queue rails and
door opening force. On August 8, 2007, the court granted Plaintiffs’
motion in part with regard to dining room seating. In addition, the
court granted Plaintiffs’ motion in part with regard to door opening force at
some restaurants (but not all) and denied the motion with regard to queue
lines.
At a
status conference on September 27, 2007, the court set a trial date of November
10, 2008 with respect to not more than 20 restaurants to determine the issue of
liability and common issues. Discovery related to the subject of the
mini-trial is underway. The parties are in discussions intended
to get to mediation.
Taco Bell
has denied liability and intends to vigorously defend against all claims in this
lawsuit. Taco Bell has taken certain steps to address potential
architectural and structural compliance issues at the restaurants in accordance
with applicable state and federal disability access laws. The costs
associated with addressing these issues have not, and are not expected to
significantly impact our results of operations. It is not possible at
this time to reasonably estimate the probability or amount of liability for
monetary damages on a class wide basis to Taco Bell.
According
to the Centers for Disease Control (“CDC”), there was an outbreak of illness
associated with a particular strain of E. coli 0157:H7 in the northeast United
States during November and December 2006. Also according to the CDC,
the outbreak from this particular strain was associated with eating at Taco
Bell restaurants in Pennsylvania, New Jersey, New York, and
Delaware. The CDC concluded that the outbreak ended on or about
December 6, 2006. The CDC has stated that it received reports of 71
persons who became ill in association with the outbreak in the above-mentioned
area during the above time frame, and that no deaths have been
reported.
On
December 6, 2006, a lawsuit styled Tyler Vormittag, et. al. v.
Taco Bell Corp, Taco Bell of America, Inc. and Yum! Brands, Inc. was
filed in the Supreme Court of the State of New York, County of
Suffolk. Mr. Vormittag, a minor, alleges he became ill after
consuming food purchased from a Taco Bell restaurant in Riverhead, New York,
which was allegedly contaminated with E. coli 0157:H7. Subsequently,
twenty-six other cases have been filed naming the Company, Taco Bell Corp., Taco
Bell of America, K.F.C. Company (alleged owner/operator of the Taco Bell
restaurant claimed to be at issue in one case), and/or Yum! Restaurant Services
Group, Inc. and alleging similar facts on behalf of other
customers.
According
to the allegations common to all the Complaints, each Taco Bell customer became
ill after ingesting contaminated food in late November or early December 2006
from Taco Bell restaurants located in the northeast states implicated in the
outbreak. Discovery is in the preliminary stages. However,
the Company believes, based on the allegations, that the stores identified
in fourteen of the Complaints are in fact not owned by the Company or any
of its subsidiaries. As such, the Company believes that at a minimum it is not
liable for any losses at these stores. Three of these Complaints
have been dismissed without prejudice pending settlement discussions with
plaintiffs’ counsel. A fourth was dismissed with prejudice as against
the Company on the ground that neither the Company nor any of its subsidiaries
owned or operated the store at issue.
Additionally,
the Company has received a number of claims from customers who have alleged
injuries relating to the E.coli outbreak, but have not filed
lawsuits. Several of these claims have been settled.
We have
provided for the estimated costs of these claims and litigation, based on a
projection of potential claims and their amounts as well as the results of
settlement negotiations in similar matters. But in view of the
inherent uncertainties of litigation, there can be no assurance that the outcome
of the litigation will not result in losses in excess of those currently
provided for in our Consolidated Financial Statements.
On March
14, 2007, a lawsuit styled Boskovich Farms, Inc. v.
Taco Bell Corp. and Does 1 through 100 was filed in the Superior Court of
the State of California, Orange County. Boskovich Farms, a
supplier of produce to Taco Bell, alleges in
its
Complaint, among other things, that it suffered damage to its reputation and
business as a result of publications and/or statements it claims were made by
Taco Bell in connection with Taco Bell’s reporting of results of certain tests
conducted during investigations on green onions used at Taco Bell
restaurants. The Company believes that the Complaint should properly
be heard in an alternative dispute resolution forum according to the contractual
terms governing the relationship of the parties. The Company filed a
motion to compel ADR and stay the litigation on May 1, 2007. The
Court entered an order granting this motion on June 14,
2007. Boskovich filed a writ petition to set aside the trial court’s
ruling compelling ADR; the writ petition was denied in October
2007. The parties are currently in the process of selecting a
mediator. The Company denies liability and intends to vigorously
defend against all claims in any arbitration and the
lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
Proposed Internal Revenue
Service Adjustments
In early
2007, the Internal Revenue Service (the “IRS”) informed the Company of its
intent to propose certain adjustments based on its position that the Company did
not file Gain Recognition Agreements (“GRAs”) in connection with certain
transfers of foreign subsidiaries among its affiliated group. In the
fourth quarter of 2007, prior to any adjustments being proposed, the Company and
the IRS settled this matter for an amount that was not significant to the
Company’s financial results or condition.
Note 23 - Selected Quarterly Financial
Data (Unaudited)
|
|
2007
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
1,942
|
|
$
|
2,073
|
|
$
|
2,243
|
|
$
|
2,842
|
|
$
|
9,100
|
Franchise
and license fees
|
|
|
281
|
|
|
294
|
|
|
321
|
|
|
420
|
|
|
1,316
|
Total
revenues
|
|
|
2,223
|
|
|
2,367
|
|
|
2,564
|
|
|
3,262
|
|
|
10,416
|
Restaurant
profit(a)
|
|
|
288
|
|
|
310
|
|
|
353
|
|
|
376
|
|
|
1,327
|
Operating
profit
|
|
|
316
|
|
|
310
|
|
|
401
|
|
|
330
|
|
|
1,357
|
Net
income
|
|
|
194
|
|
|
214
|
|
|
270
|
|
|
231
|
|
|
909
|
Diluted
earnings per common share
|
|
|
0.35
|
|
|
0.39
|
|
|
0.50
|
|
|
0.44
|
|
|
1.68
|
Dividends
declared per common share
|
|
|
—
|
|
|
0.15
|
|
|
—
|
|
|
0.30
|
|
|
0.45
|
|
|
2006
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
sales
|
|
$
|
1,819
|
|
$
|
1,912
|
|
$
|
1,989
|
|
$
|
2,645
|
|
$
|
8,365
|
Franchise
and license fees
|
|
|
266
|
|
|
270
|
|
|
289
|
|
|
371
|
|
|
1,196
|
Total
revenues
|
|
|
2,085
|
|
|
2,182
|
|
|
2,278
|
|
|
3,016
|
|
|
9,561
|
Restaurant
profit(a)
|
|
|
284
|
|
|
301
|
|
|
321
|
|
|
365
|
|
|
1,271
|
Operating
profit
|
|
|
282
|
|
|
307
|
|
|
344
|
|
|
329
|
|
|
1,262
|
Net
income
|
|
|
170
|
|
|
192
|
|
|
230
|
|
|
232
|
|
|
824
|
Diluted
earnings per common share
|
|
|
0.30
|
|
|
0.34
|
|
|
0.41
|
|
|
0.41
|
|
|
1.46
|
Dividends
declared per common share
|
|
|
0.0575
|
|
|
0.075
|
|
|
—
|
|
|
0.30
|
|
|
0.4325
|
(a)
|
Restaurant
profit is defined as Company sales less expenses incurred directly by
Company restaurants in generating Company sales. These expenses
are presented as subtotals on our Consolidated Statements of
Income.
|
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 29,
2007. 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 29, 2007 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 29,
2007.
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 29, 2007.
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 “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 29, 2007.
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 29, 2007.
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 29, 2007.
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 29, 2007.
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 29,
2007.
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.
Date: February
22, 2008
YUM!
BRANDS, INC.
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
22, 2008
|
Richard
T. Carucci
|
|
Chief
Financial Officer
(principal
financial officer)
|
|
February
22, 2008
|
Ted
F. Knopf
|
|
Senior
Vice President Finance and Corporate Controller
(principal
accounting officer)
|
|
February
22, 2008
|
/s/
David W. Dorman
David
W. Dorman
|
|
Director
|
|
February
22, 2008
|
Massimo
Ferragamo
|
|
Director
|
|
February
22, 2008
|
J.
David Grissom
|
|
Director
|
|
February
22, 2008
|
/s/
Bonnie G. Hill
Bonnie
G. Hill
|
|
Director
|
|
February
22, 2008
|
Robert
Holland, Jr.
|
|
Director
|
|
February
22, 2008
|
Kenneth
G. Langone
|
|
Director
|
|
February
22, 2008
|
/s/
Jonathan S. Linen
Jonathan
S. Linen
|
|
Director
|
|
February
22, 2008
|
/s/
Thomas C. Nelson
Thomas
C. Nelson
|
|
Director
|
|
February
22, 2008
|
/s/
Thomas M. Ryan
Thomas
M. Ryan
|
|
Director
|
|
February
22, 2008
|
Jackie
Trujillo
|
|
Director
|
|
February
22, 2008
|
YUM!
Brands, Inc.
Exhibit
Index
(Item
15)
Exhibit
Number
|
|
Description of
Exhibits
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation of YUM, which are incorporated herein by
reference from Exhibit 3.1 to YUM’s Quarterly Report on Form 10-Q for the
quarter ended September 3, 2005.
|
|
|
|
3.2
|
|
Amended
and restated Bylaws of YUM, which are incorporated herein by reference
from Exhibit 3.2 on Form 8-K filed on May 17, 2002.
|
|
|
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4.1*
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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.
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10.1
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Separation
Agreement between PepsiCo, Inc. and YUM effective as of August 26, 1997,
and the First Amendment thereto dated as of October 6, 1997, which is
incorporated herein by reference from Exhibit 10.1 to YUM’s Annual Report
on Form 10-K for the fiscal year ended December 27,
1997.
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10.2
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Tax
Separation Agreement between PepsiCo, Inc. and YUM effective as of August
26, 1997, which is incorporated herein by reference from Exhibit 10.2 to
YUM’s Annual Report on Form 10-K for the fiscal year ended December 27,
1997.
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10.5
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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.
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10.6
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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 (as
filed herewith).
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10.7†
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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.
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10.8†
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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.
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10.9†
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YUM
Executive Incentive Compensation Plan, which is incorporated herein by
reference from Exhibit A of YUM’s Definitive Proxy Statement on Form DEF
14A for the Annual Meeting of Shareholders held on May 20,
2004.
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10.10†
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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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10.13†
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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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10.16
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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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10.17†
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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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10.18†
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YUM
Long Term Incentive Plan, as Amended through the First Amendment, as
effective May 20, 1999, which is incorporated herein by reference from
Exhibit B to YUM’s Definitive Proxy Statement on Form DEF 14A for the
Annual Meeting of Shareholders held on May 15, 2003.
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10.19†
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Employment
Agreement between YUM and Christian L. Campbell, dated as of September 3,
1997, which is incorporated herein by reference from Exhibit 10.19 to
YUM’s Annual Report on Form 10-K for fiscal year ended December 26,
1998.
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10.20
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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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10.22†
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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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10.23†
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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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10.24†
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Employment
agreement between YUM and David C. Novak, dated September 24, 2004, which
is incorporated herein by reference from Exhibit 10.24 on Form 8-K
filed on September 24, 2004.
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10.25†
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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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10.26†
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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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10.27†
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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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10.28†
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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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10.29†
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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.
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10.30
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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
(as filed herewith).
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10.31†
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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.
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10.32†
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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.
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10.33†
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1999
Long Term Incentive Plan Award (Restricted Stock Unit Agreement) by and
between the Company and David Novak, dated as of January 24, 2008 (as
filed herewith).
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12.1
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Computation
of ratio of earnings to fixed charges.
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21.1
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Active
Subsidiaries of YUM.
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23.1
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Consent
of KPMG LLP.
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31.1
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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.
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31.2
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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.
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32.1
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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.
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32.2
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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.
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*
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Neither
YUM nor any of its subsidiaries is party to any other long-term debt
instrument under which securities authorized exceed 10 percent of the
total assets of YUM and its subsidiaries on a consolidated
basis. Copies of instruments with respect to long-term debt of
lesser amounts will be furnished to the Commission upon
request.
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† Indicates
a management contract or compensatory plan.
110