Attached files
file | filename |
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EX-31.1 - CEO CERTIFICATION EX31.1 - YUM BRANDS INC | exhib31_1.htm |
EX-32.1 - CEO CERTIFICATION EX32.1 - YUM BRANDS INC | exhib32_1.htm |
EX-32.2 - CFO CERTIFICATION EX32.2 - YUM BRANDS INC | exhib32_2.htm |
EX-31.2 - CFO CERTIFICATION EX31.2 - YUM BRANDS INC | exhib31_2.htm |
EXCEL - IDEA: XBRL DOCUMENT - YUM BRANDS INC | Financial_Report.xls |
EX-15 - INDEPENDENT ACCOUNTANTS ACKNOWLEDGMENT EX15 - YUM BRANDS INC | exhib15.htm |
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
|
Washington,
D. C. 20549
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___________
FORM
10-Q
(Mark
One)
[ü]
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|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
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|
|
|
EXCHANGE ACT OF 1934 for
the quarterly period ended September 5, 2009
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OR
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[ ]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from ____________ to _________________
Commission file number
1-13163
________________________
YUM!
BRANDS, INC.
(Exact
name of registrant as specified in its charter)
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North Carolina
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13-3951308
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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1441
Gardiner Lane, Louisville, Kentucky
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40213
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (502)
874-8300
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [Ö] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [Ö] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer: [Ö] Accelerated
filer: [ ] Non-accelerated
filer: [ ] Smaller reporting
company: [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [Ö]
The
number of shares outstanding of the Registrant’s Common Stock as of October 5,
2009 was 467,702,275 shares.
YUM!
BRANDS, INC.
INDEX
Page
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||||||
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No.
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|||
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Part
I.
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Financial
Information
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|||
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Item
1 - Financial Statements
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||||
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Condensed
Consolidated Statements of Income - Quarters and Years to date
ended
September
5, 2009 and September 6, 2008
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3
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|||
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Condensed
Consolidated Statements of Cash Flows – Years to date ended
September
5, 2009 and September 6, 2008
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4
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|||
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Condensed
Consolidated Balance Sheets – September 5, 2009
and
December 27, 2008
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5
|
|
|
|
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|
|
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||
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Notes
to Condensed Consolidated Financial Statements
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6
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|
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||||
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Item
2 - Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
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26
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|||
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||||
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Item
3 - Quantitative and Qualitative Disclosures about Market
Risk
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47
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|||
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||||
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Item
4 - Controls and Procedures
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47
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|||
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||||
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Report
of Independent Registered Public Accounting Firm
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49
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|||
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||||
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Part
II.
|
Other
Information and Signatures
|
||||
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||||
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Item
1 – Legal Proceedings
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50
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|||
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Item
1A – Risk Factors
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50
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|||
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||
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Item
6 – Exhibits
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51
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|||
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||
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Signatures
|
52
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PART
I - FINANCIAL INFORMATION
Item
1.
|
Financial
Statements
|
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
YUM!
BRANDS, INC. AND
SUBSIDIARIES
(in
millions, except per share data)
Quarter
|
Year
to date
|
||||||||||||||||||
Revenues
|
9/5/09
|
9/6/08
|
9/5/09
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9/6/08
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|||||||||||||||
Company
sales
|
$
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2,432
|
$
|
2,482
|
$
|
6,502
|
$
|
6,899
|
|||||||||||
Franchise
and license fees and income
|
346
|
360
|
969
|
1,015
|
|||||||||||||||
Total
revenues
|
2,778
|
2,842
|
7,471
|
7,914
|
|||||||||||||||
Costs
and Expenses, Net
|
|||||||||||||||||||
Company
restaurants
|
|||||||||||||||||||
Food
and paper
|
777
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830
|
2,081
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2,265
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|||||||||||||||
Payroll
and employee benefits
|
523
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575
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1,485
|
1,682
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|||||||||||||||
Occupancy
and other operating expenses
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707
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719
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1,879
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1,975
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|||||||||||||||
Company
restaurant expenses
|
2,007
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2,124
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5,445
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5,922
|
|||||||||||||||
General
and administrative expenses
|
276
|
305
|
812
|
898
|
|||||||||||||||
Franchise
and license expenses
|
29
|
25
|
74
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63
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|||||||||||||||
Closures
and impairment (income) expenses
|
5
|
3
|
31
|
9
|
|||||||||||||||
Refranchising
(gain) loss
|
4
|
(8
|
)
|
(9
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)
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16
|
|||||||||||||
Other
(income) expense
|
(13
|
)
|
(18
|
)
|
(97
|
)
|
(148
|
)
|
|||||||||||
Total
costs and expenses, net
|
2,308
|
2,431
|
6,256
|
6,760
|
|||||||||||||||
Operating
Profit
|
470
|
411
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1,215
|
1,154
|
|||||||||||||||
Interest
expense, net
|
42
|
47
|
138
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152
|
|||||||||||||||
Income
Before Income Taxes
|
428
|
364
|
1,077
|
1,002
|
|||||||||||||||
Income
tax provision
|
88
|
79
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212
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236
|
|||||||||||||||
Net
Income – including noncontrolling interest
|
340
|
285
|
865
|
766
|
|||||||||||||||
Net
Income – noncontrolling interest
|
6
|
3
|
10
|
6
|
|||||||||||||||
Net
Income – YUM! Brands, Inc.
|
$
|
334
|
$
|
282
|
$
|
855
|
$
|
760
|
|||||||||||
Basic
Earnings Per Common Share
|
$
|
0.71
|
$
|
0.60
|
$
|
1.82
|
$
|
1.59
|
|||||||||||
Diluted
Earnings Per Common Share
|
$
|
0.69
|
$
|
0.58
|
$
|
1.77
|
$
|
1.53
|
|||||||||||
Dividends
Declared Per Common Share
|
$
|
—
|
$
|
—
|
$
|
0.38
|
$
|
0.34
|
|||||||||||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
3
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
YUM!
BRANDS, INC. AND SUBSIDIARIES
(in
millions)
Year
to date
|
|||||||||
9/5/09
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9/6/08
|
||||||||
Cash
Flows – Operating Activities
|
|||||||||
Net
Income – including noncontrolling interest
|
$
|
865
|
$
|
766
|
|||||
Depreciation
and amortization
|
385
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389
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|||||||
Closures
and impairment (income) expenses
|
31
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9
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|||||||
Refranchising
(gain) loss
|
(9
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)
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16
|
||||||
Contributions
to defined benefit pension plans
|
(96
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)
|
(7
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)
|
|||||
Gain
upon consolidation of a former unconsolidated affiliate in
China
|
(68
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)
|
—
|
||||||
Gain
on sale of interest in Japan unconsolidated affiliate
|
—
|
(100
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)
|
||||||
Deferred
income taxes
|
59
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(13
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)
|
||||||
Equity
income from investments in unconsolidated affiliates
|
(29
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)
|
(33
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)
|
|||||
Distributions
of income received from unconsolidated affiliates
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29
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40
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|||||||
Excess
tax benefits from share-based compensation
|
(48
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)
|
(32
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)
|
|||||
Share-based
compensation expense
|
39
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44
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|||||||
Changes
in accounts and notes receivable
|
1
|
(18
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)
|
||||||
Changes
in inventories
|
34
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(16
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)
|
||||||
Changes
in prepaid expenses and other current assets
|
(26
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)
|
(27
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)
|
|||||
Changes
in accounts payable and other current liabilities
|
2
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23
|
|||||||
Changes
in income taxes payable
|
(87
|
)
|
24
|
||||||
Other
non-cash charges and credits, net
|
53
|
82
|
|||||||
Net
Cash Provided by Operating Activities
|
1,135
|
1,147
|
|||||||
Cash
Flows – Investing Activities
|
|||||||||
Capital
spending
|
(505
|
)
|
(583
|
)
|
|||||
Proceeds
from refranchising of restaurants
|
91
|
142
|
|||||||
Acquisition
of restaurants from franchisees
|
(24
|
)
|
(9
|
)
|
|||||
Acquisitions
and investments
|
(75
|
)
|
—
|
||||||
Sales
of property, plant and equipment
|
16
|
58
|
|||||||
Other,
net
|
(8
|
)
|
(8
|
)
|
|||||
Net
Cash Used in Investing Activities
|
(505
|
)
|
(400
|
)
|
|||||
Cash
Flows – Financing Activities
|
|||||||||
Proceeds
from long-term debt
|
499
|
375
|
|||||||
Repayments
of long-term debt
|
(522
|
)
|
(260
|
)
|
|||||
Revolving
credit facilities, three months or less, net
|
(289
|
)
|
305
|
||||||
Short-term
borrowings by original maturity
|
|||||||||
More
than three months - proceeds
|
—
|
—
|
|||||||
More
than three months - payments
|
—
|
—
|
|||||||
Three
months or less, net
|
5
|
(15
|
)
|
||||||
Repurchase
shares of Common Stock
|
—
|
(1,513
|
)
|
||||||
Excess
tax benefits from share-based compensation
|
48
|
32
|
|||||||
Employee
stock option proceeds
|
91
|
51
|
|||||||
Dividends
paid on Common Stock
|
(263
|
)
|
(234
|
)
|
|||||
Other,
net
|
(8
|
)
|
—
|
||||||
Net
Cash Used in Financing Activities
|
(439
|
)
|
(1,259
|
)
|
|||||
Effect
of Exchange Rates on Cash and Cash Equivalents
|
—
|
—
|
|||||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
191
|
(512
|
)
|
||||||
Change
in Cash and Cash Equivalents due to consolidation of entities in
China
|
17
|
17
|
|||||||
Cash
and Cash Equivalents - Beginning of Period
|
216
|
789
|
|||||||
Cash
and Cash Equivalents - End of Period
|
$
|
424
|
$
|
294
|
|||||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
4
CONDENSED
CONSOLIDATED BALANCE SHEETS
YUM!
BRANDS, INC. AND SUBSIDIARIES
(in
millions)
(Unaudited)
|
|||||||||
9/5/09
|
12/27/08
|
||||||||
ASSETS
|
|||||||||
Current
Assets
|
|||||||||
Cash
and cash equivalents
|
$
|
424
|
$
|
216
|
|||||
Accounts
and notes receivable, net
|
241
|
229
|
|||||||
Inventories
|
116
|
143
|
|||||||
Prepaid
expenses and other current assets
|
287
|
172
|
|||||||
Deferred
income taxes
|
54
|
81
|
|||||||
Advertising
cooperative assets, restricted
|
84
|
110
|
|||||||
Total
Current Assets
|
1,206
|
951
|
|||||||
Property,
plant and equipment, net
|
3,844
|
3,710
|
|||||||
Goodwill
|
686
|
605
|
|||||||
Intangible
assets, net
|
447
|
335
|
|||||||
Investments
in unconsolidated affiliates
|
98
|
65
|
|||||||
Other
assets
|
549
|
561
|
|||||||
Deferred
income taxes
|
291
|
300
|
|||||||
Total
Assets
|
$
|
7,121
|
$
|
6,527
|
|||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|||||||||
Current
Liabilities
|
|||||||||
Accounts
payable and other current liabilities
|
$
|
1,388
|
$
|
1,473
|
|||||
Income
taxes payable
|
27
|
114
|
|||||||
Short-term
borrowings
|
35
|
25
|
|||||||
Advertising
cooperative liabilities
|
84
|
110
|
|||||||
Total
Current Liabilities
|
1,534
|
1,722
|
|||||||
Long-term
debt
|
3,258
|
3,564
|
|||||||
Other
liabilities and deferred credits
|
1,340
|
1,335
|
|||||||
Total
Liabilities
|
6,132
|
6,621
|
|||||||
Shareholders’
Equity (Deficit)
|
|||||||||
Common
Stock, no par value, 750 shares authorized; 468 shares and 459
shares
issued
in 2009 and 2008, respectively
|
202
|
7
|
|||||||
Retained
earnings
|
979
|
303
|
|||||||
Accumulated
other comprehensive income (loss)
|
(279
|
)
|
(418
|
)
|
|||||
Total
Shareholders’ Equity (Deficit) – YUM! Brands, Inc.
|
902
|
(108
|
)
|
||||||
Noncontrolling
interest
|
87
|
14
|
|||||||
Total
Shareholders’ Equity (Deficit)
|
989
|
(94
|
)
|
||||||
Total
Liabilities and Shareholders’ Equity (Deficit)
|
$
|
7,121
|
$
|
6,527
|
|||||
See
accompanying Notes to Condensed Consolidated Financial
Statements.
|
5
(Tabular
amounts in millions, except per share data)
We have
prepared our accompanying unaudited Condensed Consolidated Financial Statements
(“Financial Statements”) in accordance with the rules and regulations of the
Securities and Exchange Commission (“SEC”) for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by United States (“U.S.”) generally accepted accounting
principles for complete financial statements. Therefore, we suggest
that the accompanying Financial Statements be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in our annual
report on Form 10-K for the fiscal year ended December 27, 2008 (“2008 Form
10-K”). Except as disclosed herein, there has been no material change
in the information disclosed in the Notes to our Consolidated Financial
Statements included in the 2008 Form 10-K.
YUM!
Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the
“Company”) comprise the worldwide operations of KFC, Pizza Hut, Taco Bell, Long
John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”)
(collectively the “Concepts”). References to YUM throughout these
Notes to our Financial Statements are made using the first person notations of
“we,” “us” or “our.”
YUM’s
business consists of three reporting segments: United States, YUM
Restaurants International (“YRI” or “International Division”) and YUM
Restaurants China (“China Division”). The China Division includes
mainland China (“China”), Thailand, and KFC Taiwan, and YRI includes the
remainder of our international operations.
Our
fiscal year ends on the last Saturday in December and, as a result, a 53rd week
is added every five or six years. The first three quarters of each
fiscal year consist of 12 weeks and the fourth quarter consists of 16 weeks in
fiscal years with 52 weeks and 17 weeks in fiscal years with 53
weeks. Our subsidiaries operate on similar fiscal calendars except
that certain international subsidiaries operate on a monthly calendar, with two
months in the first quarter, three months in the second and third quarters and
four months in the fourth quarter. All of our international
businesses except China close one period or one month earlier to facilitate
consolidated reporting.
In 2008,
we began consolidating an entity in which we have a majority ownership interest
and that operates the KFCs in Beijing, China. Additionally, as
discussed in Note 4, in the quarter ended June 13, 2009 we began consolidating
the entity that operates the KFCs in Shanghai, China. The increases
in cash related to the consolidation of these entities’ cash balances ($17
million in both instances) are presented as a single line item on our Condensed
Consolidated Statement of Cash Flows.
Our
preparation of the accompanying Financial Statements in conformity with
generally accepted accounting principles in the United States of America
requires us to make estimates and assumptions that affect reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the Financial Statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from the estimates.
In our
opinion, the accompanying Financial Statements include all normal and recurring
adjustments considered necessary to present fairly, when read in conjunction
with our 2008 Form 10-K, our financial position as of September 5, 2009, and the
results of our operations for the quarters and years to date ended September 5,
2009 and September 6, 2008 and cash flows for the years to date ended September
5, 2009 and September 6, 2008. Our results of operations for these
interim periods are not necessarily indicative of the results to be expected for
the full year.
Our
significant interim accounting policies include the recognition of certain
advertising and marketing costs, generally in proportion to revenue, and the
recognition of income taxes using an estimated annual effective tax rate.
Our quarter and year to date tax rates for both 2009 and 2008 are lower
than the expected U.S. federal statutory rate of 35% primarily due to the
majority of our income being earned outside of the U.S. where tax rates are
generally lower than the U.S. rate.
6
We have
reclassified certain items in the accompanying Financial Statements and Notes to
the Financial Statements for the prior periods in order to be comparable with
the current classifications. As discussed in our 2008 Form 10-K, we
have begun reporting capital spending on our Condensed Consolidated Statements
of Cash Flows excluding the impact of purchases that have been accrued but not
yet paid. For the year to date ended September 6, 2008 this resulted
in increased Capital spending of $12 million with an offsetting impact to
Changes in accounts payable and other current liabilities. Also, as
rental income from franchisees has increased over time and is anticipated to
continue to increase, we believe it is more appropriate to report such income as
Franchise and license fees and income as opposed to a reduction in Franchise and
license expenses, as it has historically been reported. For the
quarter and year to date ended September 6, 2008 this resulted in an increase of
$7 million and $18 million, respectively, in both Franchise and license expenses
and Franchise and license fees and income in our Condensed Consolidated
Statement of Income. A similar amount of rental income was reported
in Franchise and license fees and income in the quarter and year to date ended
September 5, 2009. These reclassifications had no effect on
previously reported Net Income.
Quarter
ended
|
Year
to date
|
||||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||||
Net
Income – YUM! Brands, Inc.
|
$
|
334
|
$
|
282
|
$
|
855
|
$
|
760
|
|||||||||||
Weighted-average
common shares outstanding (for basic calculation)
|
472
|
470
|
469
|
479
|
|||||||||||||||
Effect
of dilutive share-based employee compensation
|
13
|
17
|
13
|
17
|
|||||||||||||||
Weighted-average
common and dilutive potential common shares outstanding (for diluted
calculation)
|
485
|
487
|
482
|
496
|
|||||||||||||||
Basic
EPS
|
$
|
0.71
|
$
|
0.60
|
$
|
1.82
|
$
|
1.59
|
|||||||||||
Diluted
EPS
|
$
|
0.69
|
$
|
0.58
|
$
|
1.77
|
$
|
1.53
|
|||||||||||
Unexercised
employee stock options and stock appreciation rights (in millions)
excluded from the diluted EPS computation(a)
|
12.3
|
6.5
|
13.8
|
5.8
|
(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
3 - Shareholders’ Equity
|
Under the
authority of our Board of Directors, we repurchased shares of our Common Stock
during the year to date ended September 6, 2008, as indicated
below. All amounts exclude applicable transaction fees. We
had no share repurchases in the year to date ended September 5,
2009.
|
|
|
Shares
Repurchased
(thousands)
|
|
Dollar
Value of Shares Repurchased
|
||||||||||||
Authorization
Date
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
||||||||
January
2008
|
|
|
—
|
|
|
19,584
|
|
$
|
—
|
|
$
|
687
|
|
||||
October
2007
|
|
|
—
|
|
22,875
|
|
|
—
|
|
|
813
|
|
|||||
Total
|
|
|
—
|
|
42,459
|
|
$
|
—
|
|
$
|
1,500
|
(a)
|
(a)
|
Amount
excludes the effect of $13 million in share repurchases (0.4 million
shares) with trade dates prior to the 2007 fiscal year end but cash
settlement dates subsequent to the 2007 fiscal year
end.
|
On
September 30, 2009, our Board of Directors authorized share repurchases through
September 30, 2010 of up to $300 million (excluding applicable transaction fees)
of our outstanding Common Stock.
7
Comprehensive
income was as follows:
Quarter
ended
|
Year
to date
|
||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||
Net
Income – YUM! Brands, Inc.
|
$
|
334
|
$
|
282
|
$
|
855
|
$
|
760
|
|||||||||
Foreign
currency translation adjustment arising during the period
|
61
|
(18
|
)
|
126
|
10
|
||||||||||||
Foreign
currency translation adjustment included in Net Income
|
—
|
—
|
—
|
(25
|
)
|
||||||||||||
Changes
in fair value of derivatives, net of tax
|
(15
|
)
|
2
|
(10
|
)
|
12
|
|||||||||||
Reclassification
of derivative (gains) losses to Net Income, net of tax
|
12
|
(4
|
)
|
15
|
(13
|
)
|
|||||||||||
Reclassification
of pension actuarial losses to Net Income, net of tax
|
3
|
1
|
8
|
4
|
|||||||||||||
Total
comprehensive income
|
$
|
395
|
$
|
263
|
$
|
994
|
$
|
748
|
Note
4 - Items Affecting Comparability of Net Income and Cash
Flows
|
U.S. Business
Transformation
As part
of our plan to transform our U.S. business we took several measures in 2008 and
are taking similar measures in 2009 (“the U.S. business transformation
measures”). These measures include: expansion of our U.S.
refranchising; charges relating to General and Administrative (“G&A”)
productivity initiatives and realignment of resources (primarily severance and
early retirement costs); and investments in our U.S. Brands made on behalf of
our franchisees such as equipment purchases.
In the
quarter and year to date ended September 5, 2009, we recorded pre-tax gains of
$8 million and $23 million, respectively, from refranchising in the
U.S. In the quarter and year to date ended September 6, 2008, we
recorded a pre-tax gain of $3 million and a pre-tax loss of $22 million,
respectively, from refranchising in the U.S. The refranchising losses
recorded for the year to date ended September 6, 2008 were primarily due to our
refranchising of stores or groups of stores, principally at Long John Silver’s,
for prices less than their recorded carrying value.
In
connection with our G&A productivity initiatives and realignment of
resources we recorded no charges in the quarter ended September 5, 2009 and a
pre-tax charge of $1 million in the quarter ended September 6, 2008, and pre-tax
charges of $9 million and $8 million in the years to date ended September 5,
2009 and September 6, 2008, respectively. The unpaid current
liability for the severance portion of these charges was $8 million as of
September 5, 2009. Severance payments in the quarter and year to date
ended September 5, 2009 totaled approximately $6 million and $22 million,
respectively.
Additionally,
the Company recognized a reduction to Franchise and license fees and income of
$1 million and $32 million, pre-tax, in the quarter and year to date ended
September 5, 2009, respectively, related to investments in our U.S.
Brands. These investments reflect our reimbursements to KFC
franchisees for installation costs of ovens for the national launch of Kentucky
Grilled Chicken. This reduction to Franchise and license fees and
income was recorded in accordance with Emerging Issues Task Force (“EITF”) Issue
No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor’s Products)”. In the quarter and
year to date ended September 6, 2008, the Company recognized pre-tax expense of
$2 million and $5 million, respectively, related to investments in our U.S.
Brands.
We are
not including the impacts of these U.S. business transformation measures in our
U.S. segment for performance reporting purposes as we do not believe they are
indicative of our ongoing operations.
8
Acquisition of Interest in
Little Sheep
On March
24, 2009, our China Division paid approximately $44 million to purchase 14% of
the outstanding common shares of Little Sheep Group Limited (“Little
Sheep”). On June 2, 2009, we purchased an additional 6% of Little
Sheep for $19 million and obtained Board of Directors
representation. Accordingly, in the quarter ended September 5, 2009
we began reporting our investment in Little Sheep using the equity method of
accounting and this investment is now included in Investments in unconsolidated
affiliates on our Condensed Consolidated Balance Sheet. Equity income
recognized from our investment in Little Sheep was not significant in the
quarter ended September 5, 2009.
Little
Sheep is the leading brand in China’s “Hot Pot” restaurant category with
approximately 375 restaurants, primarily in China as well as Hong Kong, Japan,
Canada and the U.S.
Consolidation of a Former
Unconsolidated Affiliate in China
On May 4,
2009 we acquired an additional 7% ownership in the entity that operates more
than 200 KFCs in Shanghai, China for $12 million, increasing our ownership to
58%. The acquisition was driven by our desire to increase our
management control over the entity and further integrate the business with the
remainder of our KFC operations in China. This entity has
historically been accounted for as an unconsolidated affiliate under the equity
method of accounting due to the effective participation of our partners in the
significant decisions of the entity that were made in the ordinary course of
business as addressed in 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 the acquisition we received additional
rights in the governance of the entity, and thus we began consolidating the
entity upon acquisition. As required by Statement of Financial
Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS 141R”),
we remeasured our previously held 51% ownership in the entity, which had a
recorded value of $17 million at the date of acquisition, at fair value and
recognized a gain of $68 million accordingly. This gain, which
resulted in no related income tax expense, was recorded in Other (income)
expense on our Condensed Consolidated Statements of Income during the quarter
ended June 13, 2009 and was not allocated to any segment for performance
reporting purposes.
Our
preliminary estimate of the identifiable assets acquired and liabilities assumed
upon acquisition for the consolidated entity is as follows:
Current
assets, including cash of $17
|
$
|
27
|
|
Property,
plant and equipment
|
61
|
||
Goodwill
|
60
|
||
Intangible
assets
|
97
|
||
Other
long-term assets
|
2
|
||
Total
assets acquired
|
247
|
||
Current
liabilities
|
55
|
||
Other
long-term liabilities
|
25
|
||
Total
liabilities assumed
|
80
|
||
Net
assets acquired
|
$
|
167
|
Additionally,
$70 million was recorded as Noncontrolling interest in our Condensed
Consolidated Balance Sheet, representing the fair value of our partner’s
interest in the entity’s net assets upon acquisition. Intangible
assets primarily comprise reacquired franchise rights which are being amortized
over the franchise contract period of ten years.
Goodwill,
which will be allocated to the China Division, is not expected to be deductible
for income tax purposes.
9
Under the
equity method of accounting, we previously reported our 51% share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Condensed Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. From the date of the
acquisition through August 31, 2009 (our China Division’s third quarter end), we
reported the results of operations for the entity in the appropriate line items
of our Condensed Consolidated Statement of Income. We no longer
recorded franchise fee income for these restaurants nor did we report Other
(income) expense as we did under the equity method of accounting. For
the quarter and year to date ended September 5, 2009 the consolidation of this
entity increased Company sales by $82 million and $105 million, respectively,
and decreased Franchise and license fees and income by $5 million and $6
million, respectively. The consolidation of this entity positively
impacted Operating Profit by $4 million and $5 million for the quarter and year
to date ended September 5, 2009, respectively. The impact on Net
Income – YUM! Brands, Inc. was not significant to either the quarter or the year
to date ended September 5, 2009.
The pro
forma impact on our results of operations if the acquisition had been completed
as of the beginning of both 2009 and 2008 would not have been
significant.
Cash Tender Offer to
Purchase Senior Unsecured Notes
During
the quarter ended June 13, 2009 we completed a cash tender offer to repurchase
certain of our Senior Unsecured Notes due July 1, 2012 with an aggregate
principal amount of $137 million. In conjunction with this
transaction, we settled interest rate swaps with a notional amount of $150
million that were hedging these Senior Unsecured Notes, receiving $14 million in
cash. The net impact of the repurchase of Senior Unsecured Notes and
related interest rate swap settlement had no significant impact on Interest
expense.
Issuance of Senior Unsecured
Notes
On August
20, 2009, we issued $250 million aggregate principal amount of 4.25% Senior
Unsecured Notes that are due on September 15, 2015 and $250 million aggregate
principal amount of 5.30% Senior Unsecured Notes that are due on September 15,
2019 (together the “2009 Notes”). We used a portion of the proceeds
to repay our variable rate senior unsecured term loan with an aggregate
principal amount of $375 million that was scheduled to mature in 2011 and the
remainder of the proceeds will be used to make discretionary payments to our
pension plans during the fourth quarter of 2009.
In the
quarter ended September 5, 2009, in anticipation of issuing the Senior Unsecured
Notes due in 2019, we entered into treasury locks with aggregate notional
amounts of $188 million to hedge a portion of the interest rate risk
attributable to changes in United States Treasury Rates. As the
treasury locks were designated and highly effective in offsetting the
variability in cash flows associated with the future interest payments, a
resulting $3 million loss from settlement of these instruments is being
amortized over ten years as an increase in interest expense.
In
connection with the issuance of the $250 million Senior Unsecured Notes due in
2015, we entered into pay-variable interest rate swaps with an aggregate
notional amount of $150 million with the objective of reducing our exposure to
interest rate risk and lowering interest expenses for a portion of our
debt. These swaps have been designated as fair value hedges of a
portion of our fixed rate debt.
10
Facility
Actions
Refranchising
(gain) loss, Store closure (income) costs and Store impairment charges by
reportable segment are as follows:
Quarter
ended September 5, 2009
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Refranchising
(gain) loss(a)
|
$
|
(8
|
)
|
$
|
2
|
$
|
10
|
$
|
4
|
||||||||||
Store
closure (income) costs(b)
|
$
|
—
|
$
|
(1
|
)
|
$
|
—
|
$
|
(1
|
)
|
|||||||||
Store
impairment charges
|
4
|
—
|
2
|
6
|
|||||||||||||||
Closure
and impairment (income) expenses
|
$
|
4
|
$
|
(1
|
)
|
$
|
2
|
$
|
5
|
Quarter
ended September 6, 2008
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Refranchising
(gain) loss(a)
|
$
|
(3
|
)
|
$
|
(5
|
)
|
$
|
—
|
$
|
(8
|
)
|
||||||||
Store
closure (income) costs(b)
|
$
|
2
|
$
|
(2
|
)
|
$
|
—
|
$
|
—
|
||||||||||
Store
impairment charges
|
2
|
—
|
1
|
3
|
|||||||||||||||
Closure
and impairment (income) expenses
|
$
|
4
|
$
|
(2
|
)
|
$
|
1
|
$
|
3
|
Year
to date ended September 5, 2009
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Refranchising
(gain) loss(a)
|
$
|
(23
|
)
|
$
|
4
|
$
|
10
|
$
|
(9
|
)
|
|||||||||
Store
closure (income) costs(b)
|
$
|
3
|
$
|
—
|
$
|
—
|
$
|
3
|
|||||||||||
Store
impairment charges
|
17
|
3
|
8
|
28
|
|||||||||||||||
Closure
and impairment (income) expenses
|
$
|
20
|
$
|
3
|
$
|
8
|
$
|
31
|
11
Year
to date ended September 6, 2008
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Refranchising
(gain) loss(a)
|
$
|
22
|
$
|
(5
|
)
|
$
|
(1
|
)
|
$
|
16
|
|||||||||
Store
closure (income) costs(b)
|
$
|
(6
|
)
|
$
|
(5
|
)
|
$
|
(2
|
)
|
$
|
(13
|
)
|
|||||||
Store
impairment charges
|
15
|
2
|
5
|
22
|
|||||||||||||||
Closure
and impairment (income) expenses
|
$
|
9
|
$
|
(3
|
)
|
$
|
3
|
$
|
9
|
(a)
|
Refranchising
(gain) loss is not allocated to segments for performance reporting
purposes.
|
(b)
|
Store
closure (income) costs include the net gain or loss on sales of real
estate on which we formerly operated a Company restaurant that was closed,
lease reserves established when we cease using a property under an
operating lease and subsequent adjustments to those reserves and other
facility-related expenses from previously closed
stores.
|
Assets
held for sale at September 5, 2009 and December 27, 2008 total $35 million and
$31 million, respectively, of U.S. property, plant and equipment and are
included in Prepaid expenses and other current assets on our Condensed
Consolidated Balance Sheets.
12
In
February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”
which permitted a one-year deferral for the implementation of SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”) with regard to non-financial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We adopted SFAS
157 at the beginning of 2009 for such non-financial assets and liabilities,
which, for the Company, primarily includes long-lived assets, goodwill and
intangibles. The fair values of such non-financial assets and
liabilities measured at fair value during 2009 and remaining on our
Condensed Consolidated Balance Sheet at September 5, 2009 are included in the
required disclosures in Note 12. The full adoption of SFAS 157 did
not materially impact the measurement of these disclosed amounts.
In
December 2007, the FASB issued SFAS 141R. SFAS 141R, which is broader
in scope than SFAS 141, applies to all transactions or other events in which an
entity obtains control of one or more businesses, and requires that the
acquisition method be used for such transactions or events. SFAS
141R, with limited exceptions, will require an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that
date. This will result in acquisition related costs and anticipated
restructuring costs related to the acquisition being recognized separately from
the business combination. The Company adopted SFAS 141R on December
28, 2008. Adoption of SFAS 141R did not significantly impact the
accounting for the Company’s acquisitions of franchise restaurants in the
quarter or year to date ended September 5, 2009. SFAS 141R did
require that our existing equity interest in the entity that operates the KFCs
in Shanghai, China be remeasured at its fair value upon our acquisition of
additional ownership in and consolidation of the entity (See Note
4).
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and
changed the accounting and reporting for noncontrolling interests, which are the
portion of equity in a subsidiary not attributable, directly or indirectly, to a
parent. SFAS 160 was effective for the quarter ended March 21, 2009
for the Company and requires retroactive adoption of its presentation and
disclosure requirements. SFAS 160 requires us to report net income
attributable to the noncontrolling interests separately on the face of our
Condensed Consolidated Statements of Income. Additionally, SFAS 160
requires that the portion of equity in the entity not attributable to the
Company be reported within equity, separately from the Company’s equity on the
Condensed Consolidated Balance Sheets.
In 2008,
the Company consolidated one entity for which a third party owned a
noncontrolling interest. This entity operates the KFCs in Beijing,
China. Prior to the adoption of SFAS 160, we reported Operating
Profit attributable to the noncontrolling interest in the Beijing entity in
Other (income) expense and the related tax impact as a reduction to our Income
tax provision. Additionally, we reported the equity attributable to
the noncontrolling interest in the Beijing entity within Other liabilities and
deferred credits. As required, the presentation requirements of SFAS
160 were applied retroactively to the quarter and year to date ended September
6, 2008 for this noncontrolling interest.
During
second quarter 2009, we began consolidating the entity that operates the KFCs in
Shanghai, China in which a third party owns a noncontrolling interest (See Note
4). We are accounting for the noncontrolling interest in this entity
in accordance with SFAS 160.
A
reconciliation of the beginning and ending carrying amount of the equity
attributable to noncontrolling interests is as follows:
Noncontrolling
interest as of December 27, 2008
|
$
|
14
|
|||
Net
income – noncontrolling interest
|
10
|
||||
Purchase
of subsidiary shares from noncontrolling interest (See Note
4)
|
70
|
||||
Dividends
declared
|
(7
|
)
|
|||
Noncontrolling
interest as of September 5, 2009
|
$
|
87
|
13
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). SFAS 161 amends and expands the
disclosure requirements in SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities”. SFAS 161 was effective for the quarter ended
March 21, 2009 for the Company, and we have included the required disclosures in
Note 11.
In April
2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability has
Significantly Decreased and Identifying Transactions That Are Not Orderly” and
FSP No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), “Recognition and Presentation
of Other-Than-Temporary Impairments”. These two FSPs were issued to
provide additional guidance about (1) measuring the fair value of financial
instruments when the markets become inactive and quoted prices may reflect
distressed transactions, and (2) recording impairment charges on investments in
debt instruments. Additionally, the FASB issued FSP No. FAS 107-1 and
APB 28-1 (“FSP FAS 107-1”), “Interim Disclosures about Fair Value of Financial
Instruments,” to require disclosures of fair value of certain financial
instruments in interim financial statements. These FSPs were
effective for the quarter ended September 5, 2009 for the
Company. The adoption of these FSPs did not significantly impact the
Company’s results of operations. We have expanded our fair value
disclosures in accordance with these FSPs.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”). SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS
165 was effective for the quarter ended September 5, 2009 for the
Company. The Company evaluated subsequent events through the date the
financial statements were issued and filed with the Securities and Exchange
Commission.
Note
6 - New Accounting Pronouncements Not Yet
Adopted
|
In
December 2008, the FASB issued FSP No. FAS 132(R)-1 (“FSP FAS 132(R)-1”),
“Employers’ Disclosures about Postretirement Benefit Plan Assets,” which expands
the disclosure requirements about plan assets for defined benefit pension plans
and postretirement plans. FSP FAS 132(R)-1 is effective for financial
statements issued for fiscal years ending after December 15, 2009, the year
ending December 26, 2009 for the Company.
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140” (“SFAS 166”) and SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 166
will require more information about transfers of financial assets, eliminates
the qualifying special purpose entity (QSPE) concept, changes the requirements
for derecognizing financial assets and requires additional
disclosures. SFAS 167 amends FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities” regarding certain guidance for
determining whether an entity is a variable interest entity and modifies the
methods allowed for determining the primary beneficiary of a variable interest
entity. In addition, SFAS 167 requires ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity
and enhanced disclosures related to an enterprise’s involvement in a variable
interest entity. We are evaluating whether the adoption of SFAS 166
and SFAS 167 will require the Company to consolidate an entity that provides
loans used primarily to assist franchisees in the development of new restaurants
and, to a lesser extent, in connection with the Company’s historical
refranchising programs. If required, the consolidation of this entity
would increase the Company’s long-term debt by approximately $52 million with a
corresponding increase to receivables. See Note 13 for additional
information regarding this franchisee loan program. SFAS 166 and SFAS
167 are effective for the first annual reporting period that begins after
November 15, 2009, our fiscal 2010.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles – a replacement of
FASB Statement No. 162” (“SFAS 168”). SFAS 168 provides for the FASB
Accounting Standards CodificationTM (the
“Codification”) to become the single official source of authoritative,
nongovernmental U.S. generally accepted accounting principles
(“GAAP”). The Codification did not change GAAP but reorganizes the
literature. SFAS 168 is effective for interim and annual periods
ending after September 15, 2009, the year ending December 26, 2009 for the
Company.
14
Note
7 - Other (Income) Expense
|
Quarter
ended
|
Year
to date
|
|||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
|||||||||||||
Equity
income from investments in unconsolidated affiliates
|
$
|
(12
|
)
|
$
|
(13
|
)
|
$
|
(29
|
)
|
$
|
(33
|
)
|
||||
Gain
upon consolidation of former unconsolidated affiliate in China(a)
|
—
|
—
|
(68
|
)
|
—
|
|||||||||||
Gain
upon sale of investment in unconsolidated affiliate(b)
|
—
|
—
|
—
|
(100
|
)
|
|||||||||||
Foreign
exchange net (gain) loss and other
|
(1
|
)
|
(5
|
)
|
—
|
(15
|
)
|
|||||||||
Other
(income) expense
|
$
|
(13
|
)
|
$
|
(18
|
)
|
$
|
(97
|
)
|
$
|
(148
|
)
|
(a)
|
See
Note 4 for further discussion of the consolidation of a former
unconsolidated affiliate in China.
|
(b)
|
Reflects
the gain recognized on the sale of our interest in our unconsolidated
affiliate in Japan. See our 2008 Form 10-K for further discussion of this
transaction.
|
Note
8 – Supplemental Balance Sheet
Information
|
9/5/09
|
12/27/08
|
||||||||
Accounts
and notes receivable
|
$
|
271
|
$
|
252
|
|||||
Allowance
for doubtful accounts
|
(30
|
)
|
(23
|
)
|
|||||
Accounts
and notes receivable, net
|
$
|
241
|
$
|
229
|
Property,
plant and equipment, gross
|
$
|
7,213
|
$
|
6,897
|
|||||
Accumulated
depreciation and amortization
|
(3,369
|
)
|
(3,187
|
)
|
|||||
Property,
plant and equipment, net
|
$
|
3,844
|
$
|
3,710
|
In
connection with our U.S. business transformation measures our reported segment
results began reflecting increased allocations of certain expenses in 2009 that
were previously reported in Unallocated and corporate expenses. While
our consolidated results were not impacted, we believe the revised allocation
better aligns costs with accountability of our segment
managers. These revised allocations are being used by our Chairman
and Chief Executive Officer, in his role as chief operating decision maker, in
his assessment of operating performance. We have restated segment
information for the quarter and year to date ended September 6, 2008 to be
consistent with the current period presentation. This resulted in a
$13 million decrease in Unallocated and corporate expense and increases in U.S.
and YRI G&A expense of $12 million and $1 million, respectively, for the
quarter ended September 6, 2008, and a $40 million decrease in Unallocated and
corporate G&A expense and increases in U.S. and YRI G&A expense of $36
million and $4 million, respectively, for the year to date ended September 6,
2008.
The
following tables summarize revenue and operating profit for each of our
reportable operating segments:
Quarter
ended
|
Year
to date
|
|||||||||||||||
Revenues
|
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||
United
States
|
$
|
1,055
|
$
|
1,215
|
$
|
3,200
|
$
|
3,633
|
||||||||
YRI(a)
|
661
|
753
|
1,830
|
2,184
|
||||||||||||
China
Division (b)
|
1,063
|
874
|
2,473
|
2,097
|
||||||||||||
Unallocated
Franchise and license fees and income(c)(f)
|
(1
|
)
|
—
|
(32
|
)
|
—
|
||||||||||
$
|
2,778
|
$
|
2,842
|
$
|
7,471
|
$
|
7,914
|
15
Quarter
ended
|
Year
to date
|
|||||||||||||||
Operating Profit
|
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||
United
States
|
$
|
171
|
$
|
146
|
$
|
497
|
$
|
447
|
||||||||
YRI
|
119
|
137
|
342
|
393
|
||||||||||||
China
Division (d)
|
217
|
165
|
453
|
360
|
||||||||||||
Unallocated
Franchise and license fees and income(c)(f)
|
(1
|
)
|
—
|
(32
|
)
|
—
|
||||||||||
Unallocated
and corporate expenses(f)
|
(33
|
)
|
(50
|
)
|
(122
|
)
|
(145
|
)
|
||||||||
Unallocated
Other income (expense)(e)(f)
|
1
|
5
|
68
|
115
|
||||||||||||
Unallocated
Refranchising gain (loss)(f)
|
(4
|
)
|
8
|
9
|
(16
|
)
|
||||||||||
Operating
Profit
|
470
|
411
|
1,215
|
1,154
|
||||||||||||
Interest
expense, net
|
(42
|
)
|
(47
|
)
|
(138
|
)
|
(152
|
)
|
||||||||
Income
Before Income Taxes
|
$
|
428
|
$
|
364
|
$
|
1,077
|
$
|
1,002
|
(a)
|
Includes
revenues of $268 million and $300 million for the quarters ended September
5, 2009 and September 6, 2008, respectively, and $737 million and $891
million for the years to date ended September 5, 2009 and September 6,
2008, respectively, for entities in the United Kingdom.
|
(b)
|
Includes
revenues of approximately $994 million and $803 million for the quarters
ended September 5, 2009 and September 6, 2008, respectively, and
approximately $2.3 billion and $1.9 billion for the years to date ended
September 5, 2009 and September 6, 2008, respectively, in mainland
China.
|
(c)
|
Amount
consists of reimbursements to KFC franchisees for installation costs of
ovens for the national launch of Kentucky Grilled Chicken (See Note
4).
|
(d)
|
Includes
equity income from investments in unconsolidated affiliates of $12 million
and $13 million for the quarters ended September 5, 2009 and September 6,
2008, respectively, and $29 million and $32 million for years to date
ended September 5, 2009 and September 6, 2008, respectively, for the China
Division.
|
(e)
|
The
year to date ended September 5, 2009 includes a $68 million gain
recognized upon our acquisition of additional ownership in, and
consolidation of, the operating entity that owns the KFCs in Shanghai,
China. See Note 4 for further discussion of this
transaction. The year to date ended September 6, 2008 includes
a $100 million gain recognized on the sale of our interest in our
unconsolidated affiliate in Japan. See our 2008 Form 10-K for
further discussion of this transaction.
|
(f)
|
Amounts
have not been allocated to the U.S., YRI or China Division segments for
performance reporting purposes.
|
16
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. plan are paid by the Company as incurred. During 2001, the
plans covering our U.S. salaried employees were amended such that any salaried
employee hired or rehired by YUM after September 30, 2001 is not eligible to
participate in those plans. We also sponsor various defined benefit
pension plans covering certain of our non-U.S. employees, the most significant
of which are in the United Kingdom (“U.K.”). Our plans in the U.K.
have previously been amended such that new employees are not eligible to
participate in these plans.
The
components of net periodic benefit cost associated with our U.S. pension plans
and significant International pension plans are as follows:
U.S.
Pension Plans
|
International
Pension Plans
|
||||||||||||||||||
Quarter
ended
|
Quarter
ended
|
||||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||||
Service
cost
|
$
|
6
|
$
|
7
|
$
|
2
|
$
|
2
|
|||||||||||
Interest
cost
|
13
|
13
|
2
|
2
|
|||||||||||||||
Expected
return on plan assets
|
(13
|
)
|
(12
|
)
|
(1
|
)
|
(2
|
)
|
|||||||||||
Amortization
of net loss
|
3
|
1
|
—
|
—
|
|||||||||||||||
Net
periodic benefit cost
|
$
|
9
|
$
|
9
|
$
|
3
|
$
|
2
|
U.S.
Pension Plans
|
International
Pension Plans
|
||||||||||||||||||
Year
to date
|
Year
to date
|
||||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||||
Service
cost
|
$
|
18
|
$
|
21
|
$
|
4
|
$
|
6
|
|||||||||||
Interest
cost
|
40
|
37
|
5
|
6
|
|||||||||||||||
Expected
return on plan assets
|
(40
|
)
|
(36
|
)
|
(4
|
)
|
(7
|
)
|
|||||||||||
Amortization
of net loss
|
9
|
4
|
1
|
—
|
|||||||||||||||
Net
periodic benefit cost
|
$
|
27
|
$
|
26
|
$
|
6
|
$
|
5
|
We made
contributions of $84 million and $8 million to the Plan and our U.K. plans,
respectively, during the year to date ended September 5, 2009. We
anticipate making additional discretionary contributions of $150 to $200 million
to our pension plans during the fourth quarter of 2009.
17
The
Company is exposed to certain market risks relating to its ongoing business
operations. The primary market risks managed by using derivative
instruments are interest rate risk and cash flow volatility arising from foreign
currency fluctuations.
We enter
into interest rate swaps with the objective of reducing our exposure to interest
rate risk and lowering interest expense for a portion of our fixed-rate
debt. At September 5, 2009, our interest rate derivative instruments
outstanding had notional amounts of $775 million. These swaps have
reset dates and floating rate indices which match those of our underlying
fixed-rate debt and have been designated as fair value hedges of a portion of
that debt. As the swaps qualify for the short-cut method under SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities”, no
ineffectiveness has been recorded.
We enter
into foreign currency forward contracts with the objective of reducing our
exposure to cash flow volatility arising from foreign currency fluctuations
associated with certain foreign currency denominated intercompany short-term
receivables and payables. The notional amount, maturity date, and
currency of these contracts match those of the underlying receivables or
payables. For those foreign currency exchange forward contracts that
we have designated as cash flow hedges, we measure ineffectiveness by comparing
the cumulative change in the forward contract with the cumulative change in the
hedged item. At September 5, 2009, foreign currency forward contracts
outstanding had a total notional amount of $505 million.
The
fair values of derivatives designated as hedging instruments under SFAS
133 at the quarter ended September 5, 2009 were:
|
||||||
Fair
Value
|
Condensed
Consolidated Balance Sheet Location
|
|||||
Interest
Rate Swaps
|
$
|
46
|
Other
assets
|
|||
Foreign
Currency Forwards – Asset
|
10
|
Prepaid
expenses and other current assets
|
||||
Foreign
Currency Forwards – Liability
|
(16)
|
Accounts
payable and other current liabilities
|
||||
Total
|
$
|
40
|
The
unrealized gains associated with our interest rate swaps that hedge the interest
rate risk for a portion of our debt have been reported as an addition of $41
million to long-term debt at September 5, 2009. During the quarter
and year to date ended September 5, 2009, Interest expense, net was reduced by
$5 million and $23 million, respectively, for recognized gains on these interest
rate swaps, including $13 million in the year to date ended September 5, 2009
related to the settlement of interest rate swaps that were hedging the 2012
Senior Unsecured Notes that were extinguished (See Note 4).
For our
foreign currency forward contracts the following effective portions of gains and
losses were recognized into Other Comprehensive Income (“OCI”) and reclassified
into income from OCI in the quarter and year to date ended September 5,
2009.
Quarter
ended
|
Year
to date
|
||||||
Gains
(losses) recognized into OCI, net of tax
|
$
|
(15)
|
$
|
(10)
|
|||
Gains
(losses) reclassified from Accumulated OCI into income, net of
tax
|
$
|
(12)
|
$
|
(15)
|
The
gains/losses reclassified from Accumulated OCI into income were recognized as
Other income (expense) in our Condensed Consolidated Statement of Income,
largely offsetting foreign currency transaction losses/gains recorded when the
related intercompany receivables and payables were adjusted for foreign currency
fluctuations. Changes in fair values of the foreign currency forwards
recognized directly in our results of operations either from ineffectiveness or
exclusion from effectiveness testing were insignificant in the quarter and year
to date ended September 5, 2009.
18
Additionally,
we had a net deferred loss of $12 million, net of tax, as of September 5, 2009
within Accumulated OCI due to treasury locks and forward starting interest rate
swaps that have been cash settled, including $2 million, net of tax, for
treasury locks settled during the quarter ended September 5, 2009 associated
with the 2009 Notes. In the quarter and year to date ended September
5, 2009, an insignificant amount was reclassified from Accumulated OCI to
Interest expense, net as a result of these previously settled cash flow
hedges.
As a
result of the use of derivative instruments, the Company is exposed to risk that
the counterparties will fail to meet their contractual
obligations. To mitigate the counterparty credit risk, we only enter
into contracts with carefully selected major financial institutions based upon
their credit ratings and other factors, and continually assess the
creditworthiness of counterparties. At September 5, 2009, all of the
counterparties to our interest rate swaps and foreign currency forwards had
investment grade ratings. To date, all counterparties have performed
in accordance with their contractual obligations.
Note
12 - Fair Value Disclosures
|
The
following table presents the fair values for those assets and liabilities
measured at fair value on a recurring basis as of September 5,
2009:
Fair
Value Measurements at September 5, 2009
|
||||||||||||||||
Description
|
Total
|
Level
1(a)
|
Level
2(b)
|
Level
3(c)
|
||||||||||||
Foreign
Currency Forwards, net
|
$
|
(6
|
)
|
$
|
—
|
$
|
(6
|
)
|
$
|
—
|
||||||
Interest
Rate Swaps, net
|
46
|
—
|
46
|
—
|
||||||||||||
Other
Investments(d)
|
12
|
12
|
—
|
—
|
||||||||||||
Total
|
$
|
52
|
$
|
12
|
$
|
40
|
$
|
—
|
The
following table presents the fair values for those assets and liabilities
measured at fair value during 2009 on a non-recurring basis, and remaining on
our Condensed Consolidated Balance Sheet as of September 5, 2009. Total
losses include losses recognized from all non-recurring fair value
measurements during the quarter and year to date ended September 5,
2009:
Fair
Value Measurements Using
|
Total
Losses
|
||||||||||||||||||||||||
Description
|
As
of
September
5, 2009
|
Level
1(a)
|
Level
2(b)
|
Level
3(c)
|
Quarter
ended
|
Year
to date
|
|||||||||||||||||||
Long-lived
assets held for use
|
$
|
31
|
$
|
—
|
$
|
—
|
$
|
31
|
$
|
10
|
$
|
34
|
(a)
|
Inputs
based upon quoted prices in active markets for identical
assets.
|
(b)
|
Inputs
other than quoted prices included within Level 1 that are observable for
the asset, either directly or indirectly.
|
(c)
|
Inputs
that are unobservable for the asset.
|
(d)
|
The
Other Investments include investments in mutual funds, which are used to
offset fluctuations in deferred compensation liabilities that employees
have chosen to invest in phantom shares of a Stock Index Fund or Bond
Index Fund.
|
Long-lived
assets (primarily property, plant and equipment and allocated intangible assets
subject to amortization) of restaurants or groups of restaurants that
are currently operating and have not been offered for refranchise are reviewed
for impairment semi-annually or whenever events or changes in circumstances
indicate that the carrying amount of the restaurants’ assets may not be
recoverable.
19
Additionally,
we test for impairment when we have offered to refranchise a restaurant or
groups of restaurants for a price less than their carrying value but do not
believe the restaurants have met the criteria to be classified as held for
sale. Any such impairment is recorded at the offer date and is
classified as refranchising loss. Our impairment of long-lived assets
policy is fully described in our 2008 Form 10-K.
Long-lived
assets held for use presented in the table above include restaurants or groups
of restaurants that were impaired as a result of our semi-annual impairment
review or restaurants not meeting held for sale criteria that have been offered
for sale at a price less than their carrying value during the quarter and year
to date ended September 5, 2009. All $10 million in impairment
charges shown in the table above for the quarter ended September 5, 2009 was
included in Refranchising (gain) loss in the Condensed Consolidated Statements
of Income. For the $34 million of impairment charges shown in the
table above for the year to date ended September 5, 2009, $17 million was
included in both Closures and impairment (income) expenses and Refranchising
(gain) loss.
At
September 5, 2009 the carrying values of cash and cash equivalents, accounts
receivable and accounts payable approximated their fair values because of the
short-term nature of these instruments. The fair value of notes
receivable net of allowances and lease guarantees less subsequent amortization
approximates their carrying value. The Company’s debt obligations,
excluding capital leases, were estimated to have a fair value of $3.3 billion,
compared to their carrying value of $3.0 billion. We estimated the
fair value of debt using market quotes and calculations based on market
rates.
Note
13 - Guarantees, Commitments and
Contingencies
|
Lease
Guarantees
As a
result of (a) assigning our interest in obligations under real estate leases as
a condition to the refranchising of certain Company restaurants; (b)
contributing certain Company restaurants to unconsolidated affiliates; and (c)
guaranteeing certain other leases, we are frequently contingently liable on
lease agreements. These leases have varying terms, the latest of
which expires in 2031. As of September 5, 2009, the potential amount
of undiscounted payments we could be required to make in the event of
non-payment by the primary lessee was approximately $450 million. The
present value of these potential payments discounted at our pre-tax cost of debt
at September 5, 2009 was approximately $375 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 September 5, 2009 was not material.
Franchise Loan Pool and
Equipment Guarantees
We have
provided a partial guarantee of approximately $15 million of a franchisee loan
program used primarily to assist franchisees in the development of new
restaurants and, to a lesser extent, in connection with the Company’s historical
refranchising programs at September 5, 2009. We have also provided
two letters of credit totaling approximately $23 million in support of the
franchisee loan program. One such letter of credit could be used if
we fail to meet our obligations under our guarantee. The other letter
of credit could be used, in certain circumstances, to fund our participation in
the funding of the franchisee loan program. The total loans
outstanding under the loan pool were approximately $52 million at September 5,
2009.
20
In
addition to the guarantee described above, YUM has provided guarantees of
approximately $42 million on behalf of franchisees for several equipment
financing programs related to specific initiatives, the most significant of
which was the purchase of ovens by KFC franchisees for the launch of Kentucky
Grilled Chicken. The total loans outstanding under these equipment
financing programs were approximately $56 million at September 5,
2009.
Insurance
Programs
We are
self-insured for a substantial portion of our current and prior years’ coverage
including workers’ compensation, employment practices liability, general
liability, automobile liability and property losses (collectively, “property and
casualty losses”). To mitigate the cost of our exposures for certain
property and casualty losses, we make annual decisions to self-insure the risks
of loss up to defined maximum per occurrence retentions on a line by line basis
or to combine certain lines of coverage into one loss pool with a single
self-insured aggregate retention. The Company then purchases
insurance coverage, up to a certain limit, for losses that exceed the
self-insurance per occurrence or aggregate retention. The insurers’
maximum aggregate loss limits are significantly above our actuarially determined
probable losses; therefore, we believe the likelihood of losses exceeding the
insurers’ maximum aggregate loss limits is remote. As of September
5, 2009, we had approximately $180 million of liabilities recorded for property
and casualty losses.
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.
21
Legal
Proceedings
We are
subject to various claims and contingencies related to lawsuits, real estate,
environmental and other matters arising in the normal course of
business. We provide reserves for such claims and contingencies when
payment is probable and reasonably estimable in accordance with SFAS No. 5,
“Accounting for Contingencies.”
On
November 26, 2001, Kevin Johnson, a former Long John Silver’s (“LJS”) restaurant
manager, filed a collective action against LJS in the United States District
Court for the Middle District of Tennessee alleging violation of the Fair Labor
Standards Act (“FLSA”) on behalf of himself and allegedly similarly-situated LJS
general and assistant restaurant managers. Johnson alleged that LJS
violated the FLSA by perpetrating a policy and practice of seeking monetary
restitution from LJS employees, including Restaurant General Managers (“RGMs”)
and Assistant Restaurant General Managers (“ARGMs”), when monetary or property
losses occurred due to knowing and willful violations of LJS policies that
resulted in losses of company funds or property, and that LJS had thus
improperly classified its RGMs and ARGMs as exempt from overtime pay under the
FLSA. Johnson sought overtime pay, liquidated damages, and attorneys’
fees for himself and his proposed class.
LJS moved
the Tennessee district court to compel arbitration of Johnson’s
suit. The district court granted LJS’s motion on June 7, 2004, and
the United States Court of Appeals for the Sixth Circuit affirmed on July 5,
2005.
On
December 19, 2003, while the arbitrability of Johnson’s claims was being
litigated, former LJS managers Erin Cole and Nick Kaufman, represented by
Johnson’s counsel, initiated arbitration with the American Arbitration
Association (“AAA”) (the “Cole Arbitration”). The Cole Claimants sought a
collective arbitration on behalf of the same putative class as alleged in the
Johnson lawsuit and alleged the same underlying claims.
On June
15, 2004, the arbitrator in the Cole Arbitration issued a Clause Construction
Award, finding that LJS’s Dispute Resolution Policy did not prohibit Claimants
from proceeding on a collective or class basis. LJS moved unsuccessfully
to vacate the Clause Construction Award in federal district court in South
Carolina. On September 19, 2005, the arbitrator issued a Class
Determination Award, finding, inter alia, that a class
would be certified in the Cole Arbitration on an “opt-out” basis, rather than as
an “opt-in” collective action as specified by the FLSA.
On
January 20, 2006, the district court denied LJS’s motion to vacate the Class
Determination Award and the United States Court of Appeals for the Fourth
Circuit affirmed the district court’s decision on January 28, 2008. A
petition for a writ of certiorari filed in the United States Supreme Court
seeking a review of the Fourth Circuit’s decision was denied on October 7,
2008. The parties participated in mediation on April 24, 2008, and
again on February 28, 2009, without reaching resolution. Arbitration
on liability during a portion of the alleged restitution policy period is
currently scheduled for November, 2009.
Based on
the rulings issued to date in this matter, LJS expects that the Cole Arbitration
will proceed as an “opt-out” class action, rather than as an “opt-in” collective
action. LJS denies liability and is vigorously defending the claims
in the Cole Arbitration. We have provided for a reasonable estimate
of the cost of the Cole Arbitration, taking into account a number of factors,
including our current projection of eligible claims, the estimated amount of
each eligible claim, the estimated claim recovery rate, the estimated legal fees
incurred by Claimants and the reasonable settlement value of this and other wage
and hour litigation matters. However, in light of the inherent
uncertainties of litigation, the fact-specific nature of Claimants’ claims, and
the novelty of proceeding in an FLSA lawsuit on an “opt-out” basis, there can be
no assurance that the arbitration will not result in losses in excess of those
currently provided for in our Condensed Consolidated Financial
Statements.
22
On August
4, 2006, a putative class action lawsuit against Taco Bell Corp. styled Rajeev Chhibber vs. Taco
Bell Corp. was filed in Orange County Superior Court. On
August 7, 2006, another putative class action lawsuit styled Marina Puchalski v. Taco
Bell Corp. was filed in San Diego County Superior Court. Both
lawsuits were filed by a Taco Bell RGM purporting to represent all current and
former RGMs who worked at corporate-owned restaurants in California from August
2002 to the present. The lawsuits allege violations of California’s wage
and hour laws involving unpaid overtime and meal period violations and seek
unspecified amounts in damages and penalties. The cases were consolidated
in San Diego County as of September 7, 2006.
Based on
plaintiffs’ revised class definition in their class certification motion, Taco
Bell removed the case to federal court in San Diego on August 29,
2008. On March 17, 2009, the court granted plaintiffs’ motion to
remand. A hearing on plaintiffs’ class certification motion has been
continued to December 4, 2009.
Taco Bell
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of litigation, the
outcome of this case cannot be predicted at this time. Likewise, the
amount of any potential loss cannot be reasonably estimated.
On
September 10, 2007, a putative class action against Taco Bell Corp., the Company
and other related entities styled Sandrika Medlock v. Taco
Bell Corp., was filed in United States District Court, Eastern District,
Fresno, California. The case was filed on behalf of all hourly
employees who have worked for the defendants within the last four years and
alleges numerous violations of California labor laws including unpaid overtime,
failure to pay wages on termination, denial of meal and rest breaks, improper
wage statements, unpaid business expenses and unfair or unlawful business
practices in violation of California Business & Professions Code
§17200. The Company was dismissed from the case without prejudice on
January 10, 2008.
On April
11, 2008, Lisa Hardiman filed a Private Attorneys General Act (“PAGA”) complaint
in the Superior Court of the State of California, County of Fresno against Taco
Bell Corp., the Company and other related entities. This lawsuit,
styled Lisa Hardiman
vs. Taco Bell Corp., et al., was filed on behalf of
Hardiman individually and all other aggrieved employees pursuant to
PAGA. The complaint seeks penalties for alleged violations of
California’s Labor Code. On June 25, 2008, Hardiman filed an amended
complaint adding class action allegations on behalf of hourly employees in
California very similar to the Medlock case,
including allegations of unpaid overtime, missed meal and rest periods, improper
wage statements, non-payment of wages upon termination, unreimbursed business
expenses and unfair or unlawful business practices in violation of California
Business & Professions Code §17200.
On June
16, 2008, a putative class action lawsuit against Taco Bell Corp. and the
Company, styled Miriam
Leyva vs. Taco Bell Corp., et al., was filed in Los Angeles Superior
Court. The case was filed on behalf of Leyva and purportedly all
other California hourly employees and alleges failure to pay overtime, failure
to provide meal and rest periods, failure to pay wages upon discharge, failure
to provide itemized wage statements, unfair business practices and wrongful
termination and discrimination. The Company was dismissed from the
case without prejudice on August 20, 2008.
On
November 5, 2008, a putative class action lawsuit against Taco Bell Corp. and
the Company styled Loraine Naranjo vs. Taco
Bell Corp., et al., was filed in Orange County Superior
Court. The case was filed on behalf of Naranjo and purportedly all
other California employees and alleges failure to pay overtime, failure to
reimburse for business related expenses, improper wage statements, failure to
pay accrued vacation wages, failure to pay minimum wage and unfair business
practices. The Company filed a motion to dismiss on December 15,
2008, which was denied on January 20, 2009.
Taco Bell
moved to consolidate the Medlock, Hardiman, Leyva and Naranjo matters, and
the court granted the motion to consolidate on May 19, 2009. The
consolidated case is styled In Re Taco Bell Wage and
Hour Actions. Plaintiffs filed a consolidated complaint on
June 29, 2009, and the court set a filing deadline of August 26, 2010 for
motions regarding class certification. The hearing on any class
certification motion is currently scheduled for January 10,
2011. Discovery is underway.
23
Taco Bell
and the Company deny liability and intend to vigorously defend against all
claims in this lawsuit. However, in view of the inherent uncertainties of
litigation, the outcome of this case cannot be predicted at this
time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On March
26, 2009, Taco Bell was served with a putative class action lawsuit filed in
Orange County Superior Court against Taco Bell and the Company styled Endang Widjaja vs. Taco Bell
Corp., et al. The case was filed on behalf of Widjaja, a
former California hourly assistant manager, and purportedly all other
individuals employed in Taco Bell’s California restaurants as managers and
alleges failure to reimburse for business related expenses, failure to provide
rest periods, unfair business practices and conversion. This case
appears to be duplicative of Taco Bell’s pending consolidated hourly class
action case (In Re
Taco Bell Wage and Hour Actions). Taco Bell removed the case
to federal district court and filed a notice of related case. On June
18, 2009 the case was transferred to the Eastern District of California where
the In Re Taco Bell
Wage and Hour Actions case is pending and was subsequently transferred to
the same district court judge. Taco Bell filed a motion on July 22,
2009 to dismiss, stay or consolidate this case with the In Re Taco Bell Wage and
Hour Actions, and the hearing on this motion is scheduled for October 19,
2009.
Taco Bell
and the Company deny liability and intend to vigorously defend against all
claims in this lawsuit. However, in view of the inherent
uncertainties of litigation, the outcome of this case cannot be predicted at
this time. Likewise, the amount of any potential loss cannot be
reasonably estimated.
On
October 14, 2008, a putative class action, styled Kenny Archila v. KFC U.S.
Properties, Inc., was filed in California state court on behalf of all
California hourly employees alleging various California Labor Code violations,
including rest and meal break violations, overtime violations, wage statement
violations and waiting time penalties. KFC removed the case to the
United States District Court for the Central District of California on January
7, 2009. On July 7, 2009, the Judge ruled that the case would not go
forward as a class action. Plaintiff also sought recovery of civil
penalties under the California Private Attorney General Act as a representative
of other “aggrieved employees.” On August 3, 2009, the Court ruled
that the Plaintiff could not assert such claims and the case had to proceed as a
single plaintiff action. On the eve of the August 18, 2009 trial, the
Plaintiff stipulated to a dismissal of his individual claims with prejudice but
reserved his right to appeal the Court’s rulings regarding class and PAGA
claims. KFC reserved its right to make any and all challenges to the
appeal. On or about September 16, 2009, Plaintiff filed a notice of
appeal.
KFC
denies liability and intends to vigorously defend against all claims in this
lawsuit. However, in view of the inherent uncertainties of litigation, the
outcome of this case cannot be predicted at this time. Likewise, the amount of
any potential loss cannot be reasonably estimated.
On
December 17, 2002, Taco Bell was named as the defendant in a class action
lawsuit filed in the United States District Court for the Northern District of
California styled Moeller, et al. v. Taco Bell
Corp. On August 4, 2003, plaintiffs filed an amended complaint that
alleges, among other things, that Taco Bell has discriminated against the class
of people who use wheelchairs or scooters for mobility by failing to make its
approximately 220 company-owned restaurants in California accessible to the
class. Plaintiffs contend that queue rails and other architectural and
structural elements of the Taco Bell restaurants relating to the path of travel
and use of the facilities by persons with mobility-related disabilities do not
comply with the U.S. Americans with Disabilities Act (the “ADA”), the Unruh
Civil Rights Act (the “Unruh Act”), and the California Disabled Persons Act (the
“CDPA”). Plaintiffs have requested: (a) an injunction from the
District Court ordering Taco Bell to comply with the ADA and its implementing
regulations; (b) that the District Court declare Taco Bell in violation of the
ADA, the Unruh Act, and the CDPA; and (c) monetary relief under the Unruh Act or
CDPA. Plaintiffs, on behalf of the class, are seeking the minimum
statutory damages per offense of either $4,000 under the Unruh Act or $1,000
under the CDPA for each aggrieved member of the class. Plaintiffs contend
that there may be in excess of 100,000 individuals in the class.
On
February 23, 2004, the District Court granted plaintiffs’ motion for class
certification. The class includes claims for injunctive relief and minimum
statutory damages.
24
Pursuant
to the parties’ agreement, on or about August 31, 2004, the District Court
ordered that the trial of this action be bifurcated so that stage one will
resolve plaintiffs’ claims for equitable relief and stage two will resolve
plaintiffs’ claims for damages. The parties are currently proceeding with
the equitable relief stage of this action.
On May
17, 2007, a hearing was held on plaintiffs’ Motion for Partial Summary Judgment
seeking judicial declaration that Taco Bell was in violation of accessibility
laws as to three specific issues: indoor seating, queue rails and door
opening force. On August 8, 2007, the court granted plaintiffs’ motion in
part with regard to dining room seating. In addition, the court granted
plaintiffs’ motion in part with regard to door opening force at some restaurants
(but not all) and denied the motion with regard to queue lines.
The
parties participated in mediation on March 25, 2008, and again on March 26,
2009, without reaching resolution. The court granted Taco Bell’s
request for an extension to file its motion for summary judgment on the ADA
claims until October 20, 2009. A hearing on the motion is now
scheduled for December 16, 2009.
Taco Bell
has denied liability and intends to vigorously defend against all claims in this
lawsuit. Taco Bell has taken certain steps to address potential
architectural and structural compliance issues at the restaurants in accordance
with applicable state and federal disability access laws. The costs
associated with addressing these issues have not significantly impacted our
results of operations. It is not possible at this time to reasonably
estimate the probability or amount of liability for monetary damages on a class
wide basis to Taco Bell.
On March
14, 2007, a lawsuit styled Boskovich Farms, Inc. v.
Taco Bell Corp. and Does 1 through 100 was filed in the Superior Court of
the State of California, Orange County. Boskovich Farms, a supplier of
produce to Taco Bell, alleges in its complaint, among other things, that it
suffered damage to its reputation and business as a result of publications
and/or statements it claims were made by Taco Bell in connection with Taco
Bell’s reporting of results of certain tests conducted during investigations on
green onions used at Taco Bell restaurants. The parties participated in
mediation on April 10, 2008, without reaching resolution. The arbitration
panel heard the parties’ cross motions for summary judgment on August 12,
2009. On August 14, 2009, the arbitration panel issued an opinion
granting Taco Bell’s motion for summary judgment and dismissing all of
Boskovich’s claims with prejudice. On September 23, 2009, Boskovich
filed a motion to vacate the arbitration award. The hearing on
Boskovich’s motion has been scheduled for January 6, 2010. Taco Bell
denies liability and intends to vigorously defend against all claims in any
arbitration and the lawsuit. However, in view of the inherent
uncertainties of litigation, the outcome of this case cannot be predicted at
this time. Likewise, the amount of any potential loss cannot be reasonably
estimated.
On July
9, 2009, a putative class action styled Mark Smith v. Pizza Hut,
Inc. was filed in the United States District Court for the District of
Colorado. The complaint alleges that Pizza Hut did not properly
reimburse its delivery drivers for various automobile costs, uniforms costs, and
other job-related expenses and seeks to represent a class of delivery drivers
nationwide under the Fair Labor Standards Act (FLSA) and Colorado state
law. On September 15, 2009, a putative class action styled Sue Blackwood and Scott
Lewis v. Pizza Hut of America, Inc. was filed in the United States
District Court for the District of Kansas. The Blackwood complaint
alleges that delivery drivers received insufficient reimbursement and seeks to
represent a nationwide class under the FLSA.
Pizza Hut
denies liability and intends to vigorously defend against all claims in these
lawsuits. However, in view of the inherent uncertainties of
litigation, the outcome of these cases cannot be predicted at this time.
Likewise, the amount of any potential loss cannot be reasonably
estimated.
25
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Introduction
and Overview
The
following Management’s Discussion and Analysis (“MD&A”) should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements
(“Financial Statements”), the Cautionary Note Regarding Forward-Looking
Statements and our annual report on Form 10-K for the fiscal year ended December
27, 2008. Throughout the MD&A, YUM! Brands, Inc. (“YUM” or the
“Company”) makes reference to certain performance measures as described
below.
·
|
The
Company provides the percentage changes excluding the impact of foreign
currency translation. These amounts are derived by translating
current year results at prior year average exchange rates. We
believe the elimination of the foreign currency translation impact
provides better year-to-year comparability without the distortion of
foreign currency fluctuations.
|
·
|
System
sales growth includes the results of all restaurants regardless of
ownership, including Company-owned, franchise, unconsolidated affiliate
and license restaurants. Sales of franchise, unconsolidated
affiliate and license restaurants generate franchise and license fees for
the Company (typically at a rate of 4% to 6% of
sales). Franchise, unconsolidated affiliate and license
restaurant sales are not included in Company sales on the Condensed
Consolidated Statements of Income; however, the franchise and license fees
are included in the Company’s revenues. We believe system sales
growth is useful to investors as a significant indicator of the overall
strength of our business as it incorporates all of our revenue drivers,
Company and franchise same store sales as well as net unit
development.
|
|
|
·
|
Same
store sales is the estimated growth in sales of all restaurants that have
been open one year or more.
|
·
|
Company
restaurant margin as a percentage of sales is defined as Company sales
less expenses incurred directly by our Company restaurants in generating
Company sales divided by Company sales.
|
|
|
·
|
Operating
margin is defined as Operating Profit divided by Total
revenues.
|
All Note
references herein refer to the accompanying Notes to the Condensed Consolidated
Financial Statements. Tabular amounts are displayed in millions
except per share and unit count amounts, or as otherwise specifically
identified.
Description of
Business
YUM is
the world’s largest restaurant company based on number of system units, with
more than 36,000 units in more than 110 countries and territories operating
under the KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American
Food Restaurants brands. Four of the Company’s restaurant brands –
KFC, Pizza Hut, Taco Bell and Long John Silver’s – are the global leaders in the
quick-service chicken, pizza, Mexican-style food and seafood categories,
respectively. Of the over 36,000 restaurants, 21% are operated by the
Company, 73% are operated by franchisees and unconsolidated affiliates and 6%
are operated by licensees.
YUM’s
business consists of three reporting segments: United States, YUM
Restaurants International (“YRI” or “International Division”) and YUM
Restaurants China (“China Division”). The China Division includes
mainland China (“China”), Thailand and KFC Taiwan, and YRI includes the
remainder of our international operations. The China Division and YRI
have been experiencing dramatic growth and now represent approximately 60% of
the Company’s operating profits. The U.S. business operates in a
highly competitive marketplace resulting in slower profit growth, but continues
to produce strong cash flows.
26
Strategies
The
Company continues to focus on four key strategies:
Build
Leading Brands in China in Every Significant Category – The Company has
developed the KFC and Pizza Hut brands into the leading quick service and casual
dining restaurants, respectively, in mainland China. Additionally,
the Company owns and operates the distribution system for its restaurants in
mainland China which we believe provides a significant competitive
advantage. Given this strong competitive position, a rapidly growing
economy and a population of 1.3 billion in mainland China, the Company is
rapidly adding KFC and Pizza Hut Casual Dining restaurants and testing the
additional restaurant concepts of Pizza Hut Home Service (pizza delivery) and
East Dawning (Chinese food). Our ongoing earnings growth model
includes annual system-sales growth of 20% in mainland China driven by new unit
development each year, which we expect to drive annual Operating Profit growth
of 20% in the China Division.
Drive
Aggressive International Expansion and Build Strong Brands Everywhere – The
Company and its franchisees opened over 900 new restaurants in 2008 in the
Company’s International Division, representing 9 straight years of opening over
700 restaurants. The International Division generated $528 million in
Operating Profit in 2008 up from $186 million in 1998. The Company
expects to continue to experience strong growth by building our existing markets
and growing in new markets including India, France and Russia. Our
ongoing earnings growth model includes annual Operating Profit growth of 10%
driven by new unit development and same store sales growth for
YRI. New unit development is expected to contribute to system sales
growth of at least 6% each year.
Dramatically
Improve U.S. Brand Positions, Consistency and Returns – The Company continues to
focus on improving its U.S. position through differentiated products and
marketing and an improved customer experience. The Company also
strives to provide industry leading new product innovation which adds sales
layers and expands day parts. We are the leader in multibranding,
with more than 5,000 restaurants providing customers two or more of our brands
at a single location. We continue to evaluate our returns and
ownership positions with an earn the right to own philosophy on Company owned
restaurants. Our ongoing earnings growth model calls for annual
Operating Profit growth of 5% in the U.S. with same store sales growth of 2% to
3% and leverage of our General and Administrative (“G&A”)
infrastructure.
Drive
Industry-Leading, Long-Term Shareholder and Franchisee Value – The Company is
focused on delivering high returns and returning substantial cash flows to its
shareholders via share repurchases and dividends. The Company has one
of the highest returns on invested capital in the Quick Service Restaurants
(“QSR”) industry. Additionally, 2008 was the fourth consecutive year
in which the Company returned over $1.1 billion to its shareholders through
share repurchases and dividends. The Company is targeting an annual
dividend payout ratio of 35% to 40% of net income.
Details
of our 2009 Guidance by division and updates can be found online at http://www.yum.com/investors.
27
Quarter Ended September 5,
2009 Highlights
·
|
International
development of 267 new restaurants including 88 in mainland China and 165
in YRI.
|
·
|
System
sales growth of 10% in the China Division and 4% in YRI was offset by
a 5% decline in the U.S. resulting in flat Worldwide system sales in local
currency. Worldwide system sales declined 4% after foreign
currency translation.
|
·
|
Worldwide
restaurant margin improved over 3 percentage points driven by improvement
in the U.S. and near record levels in the China
Division.
|
·
|
Worldwide
operating profit growth of 14% was driven by growth of 32% in China
Division and 18% in the U.S. YRI profit declined 13% driven by
foreign currency translation. Worldwide operating profit growth
was 18% prior to foreign currency translation.
|
·
|
Foreign
currency translation negatively impacted EPS by $0.02 per
share.
|
All
preceding comparisons are versus the same period a year ago.
28
Significant
Known Events, Trends or Uncertainties Impacting or Expected to Impact
Comparisons of Reported or Future Results
The
following factors impacted comparability of operating performance for the
quarters and/or years to date ended September 5, 2009 and September 6, 2008
and/or could impact comparability with the remainder of our results in 2009 or
beyond. Certain of these factors were previously discussed in our 2008 Form 10-K.
Restaurant
Margin
In the
U.S., restaurant margin as a percentage of sales increased 3.3 percentage points
and 2.1 percentage points versus the quarter and year to date ended September 6,
2008, respectively. In the China Division, restaurant margin as a
percentage of sales increased 2.3 percentage points and 1.8 percentage points
versus the quarter and year to date ended September 6, 2008,
respectively. These improvements were largely driven by commodity
deflation. For the quarter ended September 5, 2009, we experienced
commodity deflation of $16 million and $21 million for our U.S. and China
Divisions, respectively. For the year to date ended September 5,
2009, U.S. and China Division commodity deflation was $11 million and $22
million, respectively. We expect commodity deflation of about $10
million in the U.S. and about $30 million in the China Division in the fourth
quarter of 2009. For the full year, the impact on U.S. restaurant
margin as a result of the anticipated commodity deflation benefit is expected to
be partially offset by same store sales declines.
YRI has
not experienced the benefit of commodity decreases, compared to the U.S. and
China Divisions, as YRI has been more significantly impacted by a higher
percentage of fixed price commodity commitments.
Impact of Foreign Currency
Translation on Operating Profit
Changes
in foreign currency exchange rates negatively impacted the translation of our
foreign currency denominated Operating Profit in our International Division by
$17 million and $62 million for the quarter and year to date ended September 5,
2009, respectively, and positively impacted Operating Profit in our China
Division by $1 million and $10 million for the quarter and year to date ended
September 5, 2009, respectively. Given the nature and volatility of
the foreign currency markets the full year forecasted foreign currency impact is
difficult to quantify. However, we do not anticipate that the impact
of foreign currency translation on either YRI or the China Division’s Operating
Profit will be significant in the fourth quarter of 2009.
29
U.S. Business
Transformation
As part
of our plan to transform our U.S. business we took several measures in 2008 and
are taking similar measures in 2009 that we do not believe are indicative of our
ongoing operations. These measures (“the U.S. business transformation
measures”) include: expansion of our U.S. refranchising; charges relating to
G&A productivity initiatives and realignment of resources (primarily
severance and early retirement costs); and investments in our U.S. Brands made
on behalf of our franchisees such as equipment purchases. As
discussed in Note 4, we are not including the impacts of these U.S. business
transformation measures in our U.S. segment for performance reporting
purposes.
We
recorded pre-tax gains of $8 million and $23 million from refranchising in the
U.S. for the quarter and year to date ended September 5, 2009,
respectively. We recorded a pre-tax gain of $3 million and a pre-tax
loss of $22 million from refranchising in the U.S. for the quarter and year to
date ended September 6, 2008, respectively. The refranchising gains
and losses are more fully discussed in Note 4 and the Store Portfolio Strategy
Section of the MD&A.
In
connection with our G&A productivity initiatives and realignment of
resources we recorded no charges in the quarter ended September 5, 2009 and a
pre-tax charge of $1 million in the quarter ended September 6,
2008. In the years to date ended September 5, 2009 and September 6,
2008, we recorded pre-tax charges of $9 million and $8 million,
respectively.
Additionally,
the Company recognized a reduction to Franchise and license fees and income of
$1 million and $32 million, pre-tax, in the quarter and year to date ended
September 5, 2009, respectively, related to investments in our U.S.
Brands. These investments reflect our reimbursements to KFC
franchisees for installation costs of ovens for the national launch of Kentucky
Grilled Chicken. In the quarter and year to date ended September 6,
2008, the Company recognized pre-tax expense of $2 million and $5 million,
respectively, related to the investments in our U.S. Brands.
In 2009,
we currently expect to refranchise 500 restaurants in the U.S. The
impact of this refranchising on our 2009 results will be determined by the
stores that we are able to sell and the specific prices we are able to obtain
for these stores.
30
Consolidation of a Former
Unconsolidated Affiliate in China
On May 4,
2009 we acquired an additional 7% ownership in the entity that operates more
than 200 KFCs in Shanghai, China for $12 million, increasing our ownership to
58%. This entity has historically been accounted for as an
unconsolidated affiliate under the equity method of
accounting. Concurrent with the acquisition we received additional
rights in the governance of the entity and thus we began consolidating the
entity upon acquisition. As required by Statement of Financial
Accounting Standards (“SFAS”) No. 141(R), “Business Combinations”, we remeasured
our previously held 51% ownership, which had a recorded value of $17 million at
the date of acquisition, in the entity at fair value and recognized a gain of
$68 million accordingly. This gain, which resulted in no related
income tax expense, was recorded in Other (income) expense in our Condensed
Consolidated Statements of Income during the quarter ended June 13, 2009 and was
not allocated to any segment for performance reporting purposes.
Under the
equity method of accounting, we previously reported our 51% share of the net
income of the unconsolidated affiliate (after interest expense and income taxes)
as Other (income) expense in the Condensed Consolidated Statements of
Income. We also recorded a franchise fee for the royalty received
from the stores owned by the unconsolidated affiliate. From the date of the
acquisition through August 31, 2009 (our China Division’s third quarter end), we
reported the results of operations for the entity in the appropriate line items
of our Condensed Consolidated Statement of Income. We no longer
recorded franchise fee income for these restaurants nor did we report Other
(income) expense as we did under the equity method of accounting. Net
income attributable to our partner’s ownership percentage is recorded as Net
Income-noncontrolling interest within our Condensed Consolidated Statements of
Income. For the quarter and year to date ended September 5, 2009 the
consolidation of this entity increased Company sales by $82 million and $105
million, respectively and decreased Franchise and license fees and income by $5
million and $6 million, respectively. The consolidation of this
entity positively impacted Operating Profit by $4 million and $5 million for the
quarter and year to date ended September 5, 2009, respectively. For
the full year we expect the China Division’s Company sales to increase by
approximately $200 million, Franchise and license fees and income to decrease by
approximately $12 million and Operating Profit to increase by approximately $10
million as a result of this transaction. The impact on Net Income –
YUM! Brands, Inc. was not significant to either the quarter or the year to date
ended September 5, 2009 and is not expected to be significant on a full year
basis.
Sale of our Interest in Our
Unconsolidated Affiliate in Japan
During
the year to date ended September 6, 2008 we recorded a pre-tax gain of
approximately $100 million related to the sale of our interest in our
unconsolidated affiliate in Japan. This gain was recorded in Other
(income) expenses in our Condensed Consolidated Statement of Income and was not
allocated to any segment for performance reporting purposes.
Segment Reporting
Changes
In
connection with our U.S. business transformation measures our reported segment
results began reflecting increased allocations of certain expenses in 2009 that
were previously reported as unallocated and corporate G&A
expenses. While our consolidated results were not impacted, we
believe the revised allocation better aligns costs with accountability of our
segment managers. These revised allocations are being used by our
Chairman and Chief Executive Officer, in his role as chief operating decision
maker, in his assessment of operating performance. We have restated
segment information for the quarter and year to date ended September 6, 2008
to be consistent with the current period presentation and will restate
previously reported 2008 quarters as they are reported in 2009.
31
The
following table summarizes the 2008 quarterly impact of the revised
allocations by segment:
|
||||||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
Increase/(Decrease)
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Total
|
|||||||||||||||
U.S.
G&A
|
$
|
11
|
$
|
13
|
$
|
12
|
$
|
17
|
$
|
53
|
||||||||||
YRI
G&A
|
1
|
2
|
1
|
2
|
6
|
|||||||||||||||
Unallocated
and corporate G&A expenses
|
(12
|
)
|
(15
|
)
|
(13
|
)
|
(19
|
)
|
(59
|
)
|
Store Portfolio
Strategy
From time
to time we sell Company restaurants to existing and new franchisees where
geographic synergies can be obtained or where franchisees’ expertise can
generally be leveraged to improve our overall operating performance, while
retaining Company ownership of strategic U.S. and international
markets. In the U.S., we are targeting Company ownership of
restaurants potentially below 10%, down from its current level of
17%. Consistent with this strategy, 286 Company restaurants in the
U.S. were sold to franchisees in the year to date ended September 5,
2009. A net gain from refranchising in the U.S. of $23 million has
been recognized in the year to date ended September 5, 2009, including losses on
certain stores which we have offered to sell but have not yet
sold. We currently anticipate refranchising 500 units in the U.S. in
2009 for approximately $175 million in proceeds.
Refranchisings
reduce our reported revenues and restaurant profits and increase the importance
of system sales growth as a key performance measure. Additionally,
G&A expenses will decline over time as a result of these refranchising
activities. The timing of G&A declines will vary and often lag
the actual refranchising activities as the synergies are typically dependent
upon the size and geography of the respective deals. G&A expenses
included in the tables below reflect only direct G&A that we no longer
incurred as a result of stores that were operated by us for all or some portion
of the respective comparable period in 2008 and were no longer operated by us as
of the last day of the current quarter.
The
following table summarizes our refranchising activities:
Quarter
ended
|
Year
to date
|
||||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||||
Number
of units refranchised
|
119
|
255
|
324
|
462
|
|||||||||||||||
Refranchising
proceeds, pre-tax
|
$
|
28
|
$
|
76
|
$
|
91
|
$
|
142
|
|||||||||||
Refranchising
(gain) loss, pre-tax
|
$
|
4
|
$
|
(8
|
)
|
$
|
(9
|
)
|
$
|
16
|
The
refranchising loss recognized in the quarter ended September 5, 2009 includes
$10 million as a result of our decision to offer to refranchise an equity market
outside the U.S. at a loss.
32
The
following tables summarize the impact of refranchising as described
above:
Quarter
ended 9/5/09
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Decreased
Company sales
|
$
|
(143
|
)
|
$
|
(19
|
)
|
$
|
(1
|
)
|
$
|
(163
|
)
|
|||||||
Increased
Franchise and license fees and income
|
9
|
1
|
—
|
10
|
|||||||||||||||
Decrease
in Total revenues
|
$
|
(134
|
)
|
$
|
(18
|
)
|
$
|
(1
|
)
|
$
|
(153
|
)
|
Year
to date ended 9/5/09
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Decreased
Company sales
|
$
|
(467
|
)
|
$
|
(56
|
)
|
$
|
(3
|
)
|
$
|
(526
|
)
|
|||||||
Increased
Franchise and license fees and income
|
27
|
3
|
—
|
30
|
|||||||||||||||
Decrease
in Total revenues
|
$
|
(440
|
)
|
$
|
(53
|
)
|
$
|
(3
|
)
|
$
|
(496
|
)
|
The
following tables summarize the estimated impact on Operating Profit of
refranchising:
Quarter
ended 9/5/09
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Decreased
Restaurant profit
|
$
|
(12
|
)
|
$
|
(1
|
)
|
$
|
—
|
$
|
(13
|
)
|
||||||||
Increased
Franchise and license fees and income
|
9
|
1
|
—
|
10
|
|||||||||||||||
Decreased
G&A
|
3
|
—
|
—
|
3
|
|||||||||||||||
Increase
(decrease) in Operating Profit
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
Year
to date ended 9/5/09
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Decreased
Restaurant profit
|
$
|
(45
|
)
|
$
|
(2
|
)
|
$
|
—
|
$
|
(47
|
)
|
||||||||
Increased
Franchise and license fees and income
|
27
|
3
|
—
|
30
|
|||||||||||||||
Decreased
G&A
|
10
|
—
|
—
|
10
|
|||||||||||||||
Increase
(decrease) in Operating Profit
|
$
|
(8
|
)
|
$
|
1
|
$
|
—
|
$
|
(7
|
)
|
33
Results
of Operations
Quarter
ended
|
Year
to date
|
|||||||||||||||||||||
9/5/09
|
9/6/08
|
%
B/(W)
|
9/5/09
|
9/6/08
|
%
B/(W)
|
|||||||||||||||||
Company
sales
|
$
|
2,432
|
$
|
2,482
|
(2
|
)
|
$
|
6,502
|
$
|
6,899
|
(6
|
)
|
||||||||||
Franchise
and license fees and income
|
346
|
360
|
(3
|
)
|
969
|
1,015
|
(4
|
)
|
||||||||||||||
Total
revenues
|
$
|
2,778
|
$
|
2,842
|
(2
|
)
|
$
|
7,471
|
$
|
7,914
|
(6
|
)
|
||||||||||
Company
restaurant profit
|
$
|
425
|
$
|
358
|
19
|
$
|
1,057
|
$
|
977
|
8
|
||||||||||||
|
||||||||||||||||||||||
%
of Company sales
|
17.5%
|
14.4%
|
3.1
|
ppts.
|
16.2%
|
14.2%
|
2.0
|
ppts.
|
||||||||||||||
Operating
Profit
|
470
|
411
|
14
|
1,215
|
1,154
|
5
|
||||||||||||||||
Interest
expense, net
|
42
|
47
|
13
|
138
|
152
|
9
|
||||||||||||||||
Income
tax provision
|
88
|
79
|
(12
|
)
|
212
|
236
|
10
|
|||||||||||||||
Net
Income – including noncontrolling interest
|
340
|
285
|
19
|
865
|
766
|
13
|
||||||||||||||||
Net
Income – noncontrolling interest
|
6
|
3
|
NM
|
10
|
6
|
NM
|
||||||||||||||||
Net
Income – YUM! Brands, Inc.
|
$
|
334
|
$
|
282
|
18
|
$
|
855
|
$
|
760
|
12
|
||||||||||||
|
||||||||||||||||||||||
Diluted
earnings per share (a)
|
$
|
0.69
|
$
|
0.58
|
19
|
$
|
1.77
|
$
|
1.53
|
16
|
(a) See
Note 2 for the number of shares used in this calculation.
Restaurant
Unit Activity
Total
|
|||||||||||||||||
Unconsolidated
|
Excluding
|
||||||||||||||||
Worldwide
|
Company
|
Affiliates
|
Franchisees
|
Licensees
(a)
|
|||||||||||||
Beginning
of year
|
7,568
|
645
|
25,911
|
34,124
|
|||||||||||||
New
Builds
|
329
|
48
|
654
|
1,031
|
|||||||||||||
Acquisitions
|
57
|
—
|
(57
|
)
|
—
|
||||||||||||
Refranchising
|
(324
|
)
|
—
|
323
|
(1
|
)
|
|||||||||||
Closures
|
(96
|
)
|
(6
|
)
|
(588
|
)
|
(690
|
)
|
|||||||||
Other(b)
|
236
|
(236
|
)
|
(4
|
)
|
(4
|
)
|
||||||||||
End
of quarter
|
7,770
|
451
|
26,239
|
34,460
|
|||||||||||||
%
of Total
|
23%
|
1%
|
76%
|
100%
|
Total
|
|||||||||||||||||||
Unconsolidated
|
Excluding
|
||||||||||||||||||
United States
|
Company
|
Affiliates
|
Franchisees
|
Licensees(a)
|
|||||||||||||||
Beginning
of year
|
3,314
|
—
|
14,482
|
17,796
|
|||||||||||||||
New
Builds
|
19
|
—
|
161
|
180
|
|||||||||||||||
Acquisitions
|
42
|
—
|
(42
|
)
|
—
|
||||||||||||||
Refranchising
|
(286
|
)
|
—
|
285
|
(1
|
)
|
|||||||||||||
Closures
|
(28
|
)
|
—
|
(253
|
)
|
(281
|
)
|
||||||||||||
Other
|
—
|
—
|
(1
|
)
|
(1
|
)
|
|||||||||||||
End
of quarter
|
3,061
|
—
|
14,632
|
17,693
|
|||||||||||||||
%
of Total
|
17%
|
—
|
83%
|
100%
|
34
Total
|
|||||||||||||||||||
Unconsolidated
|
Excluding
|
||||||||||||||||||
YRI
|
Company
|
Affiliates
|
Franchisees
|
Licensees(a)
|
|||||||||||||||
Beginning
of year
|
1,589
|
—
|
11,157
|
12,746
|
|||||||||||||||
New
Builds
|
30
|
—
|
473
|
503
|
|||||||||||||||
Acquisitions
|
—
|
—
|
—
|
—
|
|||||||||||||||
Refranchising
|
(35
|
)
|
—
|
35
|
—
|
||||||||||||||
Closures
|
(30
|
)
|
—
|
(321
|
)
|
(351
|
)
|
||||||||||||
Other
|
—
|
—
|
(3
|
)
|
(3
|
)
|
|||||||||||||
End
of quarter
|
1,554
|
—
|
11,341
|
12,895
|
|||||||||||||||
%
of Total
|
12%
|
—
|
88%
|
100%
|
China Division
|
Company
|
Unconsolidated
Affiliates
|
Franchisees
|
Total
|
|||||||||||||
Beginning
of year
|
2,665
|
645
|
272
|
3,582
|
|||||||||||||
New
Builds
|
280
|
48
|
20
|
348
|
|||||||||||||
Acquisitions
|
15
|
—
|
(15
|
)
|
—
|
||||||||||||
Refranchising
|
(3
|
)
|
—
|
3
|
—
|
||||||||||||
Closures
|
(38
|
)
|
(6
|
)
|
(14
|
)
|
(58
|
)
|
|||||||||
Other(b)
|
236
|
(236
|
)
|
—
|
—
|
||||||||||||
End
of quarter
|
3,155
|
451
|
266
|
3,872
|
|||||||||||||
%
of Total
|
81%
|
12%
|
7%
|
100%
|
(a)
|
The
Worldwide, U.S. and YRI totals exclude 2,168, 2,003 and 165 licensed
units, respectively, at September 5, 2009. There are no
licensed units in the China Division. Licensed units are
generally units that offer limited menus and operate in non-traditional
locations like malls, airports, gasoline service stations, convenience
stores, stadiums and amusement parks where a full scale traditional outlet
would not be practical or efficient. As licensed units have
lower average unit sales volumes than our traditional units and our
current strategy does not place a significant emphasis on expanding our
licensed units, we do not believe that providing further detail of
licensed unit activity provides significant or meaningful
information.
|
(b)
|
During
the second quarter of 2009 we acquired additional ownership in and began
consolidating an entity that operates the KFC business in Shanghai, China
and have reclassified the units accordingly. This entity was
previously accounted for as an unconsolidated
affiliate.
|
Multibrand
restaurants are included in the totals above. Multibrand conversions
increase the sales and points of distribution for the second brand added to a
restaurant but do not result in an additional unit count. Similarly,
a new multibrand restaurant, while increasing sales and points of distribution
for two brands, results in just one additional unit count. Franchise
unit counts include both franchisee and unconsolidated affiliate multibrand
units. Multibrand restaurant totals at September 5, 2009 were as
follows:
Company
|
Franchisees
|
Total
|
||||||||||||
United
States
|
1,386
|
3,858
|
5,244
|
|||||||||||
YRI
|
—
|
391
|
391
|
|||||||||||
Worldwide
|
1,386
|
4,249
|
5,635
|
For the
year to date ended September 5, 2009, Company and franchise multibrand unit
gross additions were 35 and 758, respectively. There are no
multibrand units in the China Division.
35
System
Sales Growth
System
sales growth includes the results of all restaurants regardless of ownership,
including Company-owned, franchise, unconsolidated affiliate and license
restaurants. The following tables detail the key drivers of system
sales growth for each reportable segment for the quarter and year to
date. Same store sales growth is the estimated growth in sales of all
restaurants that have been open one year or more. Net unit growth and
other represents the net impact of actual system sales growth due to new unit
openings and historical system sales lost due to closures as well as any
necessary rounding.
Quarter
ended 9/5/09 vs. Quarter ended 9/6/08
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Same
store sales growth (decline)
|
(6
|
)%
|
—
|
%
|
(1
|
)%
|
(3
|
)%
|
|||||||
Net
unit growth and other
|
1
|
4
|
11
|
3
|
|||||||||||
Foreign
currency translation (“forex”)
|
N/A
|
(11
|
)
|
1
|
(4
|
)
|
|||||||||
%
Change
|
(5
|
)%
|
(7
|
)%
|
11
|
%
|
(4
|
)%
|
|||||||
%
Change, excluding forex
|
N/A
|
4
|
%
|
10
|
%
|
—
|
%
|
||||||||
Year
to date ended 9/5/09 vs. Year to date ended 9/6/08
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Same
store sales growth (decline)
|
(3
|
)%
|
2
|
%
|
(2
|
)%
|
(1
|
)%
|
|||||||
Net
unit growth and other
|
—
|
5
|
11
|
3
|
|||||||||||
Foreign
currency translation (“forex”)
|
N/A
|
(14
|
)
|
2
|
(5
|
)
|
|||||||||
%
Change
|
(3
|
)%
|
(7
|
)%
|
11
|
%
|
(3
|
)%
|
|||||||
%
Change, excluding forex
|
N/A
|
7
|
%
|
9
|
%
|
2
|
%
|
||||||||
36
Revenues
Company
sales were as follows:
Quarter
ended
|
Year
to date
|
||||||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
||||||||||||||||
U.S.
|
$
|
879
|
$
|
1,040
|
$
|
2,684
|
$
|
3,133
|
|||||||||||
YRI
|
505
|
588
|
1,388
|
1,717
|
|||||||||||||||
China
Division
|
1,048
|
854
|
2,430
|
2,049
|
|||||||||||||||
Worldwide
|
$
|
2,432
|
$
|
2,482
|
$
|
6,502
|
$
|
6,899
|
|||||||||||
The
following table details the key drivers of the quarter-over-quarter and
year-over-year changes of Company sales. Same store sales growth is
the estimated growth in sales of all restaurants that have been open one year or
more. Net unit growth represents the net impact of actual sales due
to new unit openings and historical sales due to
closures. Refranchising represents the amount of Company sales for
the periods in the prior quarter or prior year to date while the Company
operated the restaurants but did not operate them in the current quarter or
current year to date. Other represents the impact of acquisitions,
unusual or significant items and roundings.
The
percentage changes in Company sales by quarter and year to date were as
follows:
Quarter
ended 9/5/09 vs. Quarter ended 9/6/08
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Same
store sales growth (decline)
|
(6
|
)%
|
2
|
%
|
—
|
%
|
(2
|
)%
|
|||||||||||
Net
unit growth
|
1
|
4
|
12
|
6
|
|||||||||||||||
Refranchising
|
(14
|
)
|
(3
|
)
|
—
|
(7
|
)
|
||||||||||||
Other
|
4
|
—
|
11
|
5
|
|||||||||||||||
Foreign
currency translation (“forex”)
|
N/A
|
(17
|
)
|
—
|
(4
|
)
|
|||||||||||||
%
Change
|
(15
|
)%
|
(14
|
)%
|
23
|
%
|
(2
|
)%
|
|||||||||||
%
Change, excluding forex
|
N/A
|
3
|
%
|
23
|
%
|
2
|
%
|
||||||||||||
Year
to date ended 9/5/09 vs. Year to date ended 9/6/08
|
|||||||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||||||
Same
store sales growth (decline)
|
(3
|
)%
|
3
|
%
|
—
|
%
|
(1
|
)%
|
|||||||||||
Net
unit growth
|
1
|
4
|
12
|
5
|
|||||||||||||||
Refranchising
|
(15
|
)
|
(3
|
)
|
—
|
(8
|
)
|
||||||||||||
Other
|
3
|
(1
|
)
|
5
|
3
|
||||||||||||||
Foreign
currency translation (“forex”)
|
N/A
|
(22
|
)
|
2
|
(5
|
)
|
|||||||||||||
%
Change
|
(14
|
)%
|
(19
|
)%
|
19
|
%
|
(6
|
)%
|
|||||||||||
%
Change, excluding forex
|
N/A
|
3
|
%
|
17
|
%
|
(1
|
)%
|
||||||||||||
The China
Division Other includes 10% and 5% for the quarter and year to date ended
September 5, 2009, respectively, related to the acquisition in, and
consolidation of, an entity that operates the KFCs in Shanghai,
China. See Note 4 for a further discussion of this
transaction.
37
Franchise
and license fees and income was as follows:
%
Increase
|
||||||||||||
%
Increase
|
(Decrease)
|
|||||||||||
Quarter
ended
|
(Decrease)
|
excluding
forex
|
||||||||||
9/5/09
|
9/6/08
|
|||||||||||
U.S.
|
$
|
176
|
$
|
175
|
1
|
N/A
|
||||||
YRI
|
156
|
165
|
(5)
|
5
|
||||||||
China
Division
|
15
|
20
|
(25)
|
(25)
|
||||||||
Unallocated
Franchise and license fees and income
|
(1
|
)
|
—
|
—
|
N/A
|
|||||||
Worldwide
|
$
|
346
|
$
|
360
|
(3)
|
1
|
||||||
%
Increase
|
||||||||||||
%
Increase
|
(Decrease)
|
|||||||||||
Year
to date
|
(Decrease)
|
excluding
forex
|
||||||||||
9/5/09
|
9/6/08
|
|||||||||||
U.S.
|
$
|
516
|
$
|
500
|
3
|
N/A
|
||||||
YRI
|
442
|
467
|
(5)
|
8
|
||||||||
China
Division
|
43
|
48
|
(10)
|
(11)
|
||||||||
Unallocated
Franchise and license fees and income
|
(32
|
)
|
—
|
—
|
N/A
|
|||||||
Worldwide
|
$
|
969
|
$
|
1,015
|
(4)
|
2
|
||||||
Worldwide
Franchise and license fees and income included reductions of $1 million
and $32 million for the quarter and year to date ended September 5, 2009,
respectively, as a result of our reimbursements to KFC franchisees for
installation costs for the national launch of Kentucky Grilled Chicken
that have not been allocated to the U.S. segment for performance reporting
purposes.
|
China
division Franchise and license fees and income for the quarter and year to
date ended September 5, 2009 was negatively impacted by 25% and 13%,
respectively, related to the acquisition in, and consolidation of, an
entity that operates the KFCs in Shanghai, China.
|
U.S.
Franchise and license fees and income for both the quarter and year to
date ended September 5, 2009 were positively impacted by 5% due to the
impact of refranchising.
|
38
Company
Restaurant Margins
Quarter
ended 9/5/09
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Company
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Food
and paper
|
28.3
|
31.9
|
35.0
|
31.9
|
|||||||||||
Payroll
and employee benefits
|
29.9
|
26.2
|
12.3
|
21.5
|
|||||||||||
Occupancy
and other operating expenses
|
27.7
|
30.6
|
29.5
|
29.1
|
|||||||||||
Company
restaurant margin
|
14.1
|
%
|
11.3
|
%
|
23.2
|
%
|
17.5
|
%
|
Quarter
ended 9/6/08
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Company
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Food
and paper
|
31.1
|
31.8
|
37.4
|
33.4
|
|||||||||||
Payroll
and employee benefits
|
30.2
|
26.1
|
12.6
|
23.2
|
|||||||||||
Occupancy
and other operating expenses
|
27.9
|
30.7
|
29.1
|
29.0
|
|||||||||||
Company
restaurant margin
|
10.8
|
%
|
11.4
|
%
|
20.9
|
%
|
14.4
|
%
|
The
increase in U.S. restaurant margin as a percentage of sales was driven by lower
food and paper costs due to the impact of commodity deflation (primarily cheese
and meats), lower restaurant operating costs (primarily insurance and utilities)
and refranchising. The increase was partially offset by the negative
impact of same store sales decline on restaurant margin.
The
decrease in International Division restaurant margin as a percentage of sales
was driven by the impact of higher commodity and occupancy costs offset by the
impact of higher average guest check.
The
increase in China Division restaurant margin as a percentage of sales was driven
by lower food and paper costs due to the impact of commodity deflation and
pricing actions we have previously taken. The increase was partially
offset by the impact of lower margins associated with new units during the
initial periods of operation.
39
Year
to date ended 9/5/09
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Company
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Food
and paper
|
28.8
|
32.0
|
35.5
|
32.0
|
|||||||||||
Payroll
and employee benefits
|
30.0
|
25.9
|
13.2
|
22.9
|
|||||||||||
Occupancy
and other operating expenses
|
27.2
|
30.6
|
29.8
|
28.9
|
|||||||||||
Company
restaurant margin
|
14.0
|
%
|
11.5
|
%
|
21.5
|
%
|
16.2
|
%
|
Year
to date ended 9/6/08
|
|||||||||||||||
U.S.
|
YRI
|
China
Division
|
Worldwide
|
||||||||||||
Company
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||||
Food
and paper
|
30.5
|
31.5
|
37.5
|
32.8
|
|||||||||||
Payroll
and employee benefits
|
30.6
|
26.1
|
13.5
|
24.4
|
|||||||||||
Occupancy
and other operating expenses
|
27.0
|
30.8
|
29.3
|
28.6
|
|||||||||||
Company
restaurant margin
|
11.9
|
%
|
11.6
|
%
|
19.7
|
%
|
14.2
|
%
|
The
increase in U.S. restaurant margin as a percentage of sales was driven by higher
average guest check due to pricing actions we have previously taken and
commodity deflation (primarily cheese). Additionally, our U.S.
restaurant margin was positively impacted by refranchising, lower restaurant
operating costs (primarily insurance and utilities) and labor cost savings
associated with productivity initiatives.
The
decrease in International Division restaurant margin as a percentage of sales
was driven by an increase in commodity and occupancy costs and by the impact of
lower margins associated with new units during the initial period of
operations. This decrease was offset by higher average guest
check.
The
increase in China Division restaurant margin as a percentage of sales was driven
by lower food and paper costs due to the impact of commodity deflation and
pricing actions we have previously taken. The increase was partially
offset by the impact of lower margins associated with new units during the
initial periods of operation.
40
%
Increase
|
||||||||||||
%
Increase
|
(Decrease)
|
|||||||||||
Quarter
ended
|
(Decrease)
|
excluding
forex
|
||||||||||
9/5/09
|
9/6/08
|
|||||||||||
U.S.
|
$
|
109
|
$
|
125
|
(12)
|
N/A
|
||||||
YRI
|
83
|
87
|
(5)
|
7
|
||||||||
China
Division
|
51
|
45
|
10
|
10
|
||||||||
Unallocated
|
33
|
48
|
(27)
|
N/A
|
||||||||
Worldwide
|
$
|
276
|
$
|
305
|
(9)
|
(5)
|
||||||
%
Increase
|
||||||||||||
%
Increase
|
(Decrease)
|
|||||||||||
Year
to date
|
(Decrease)
|
excluding
forex
|
||||||||||
9/5/09
|
9/6/08
|
|||||||||||
U.S.
|
$
|
330
|
$
|
384
|
(14)
|
N/A
|
||||||
YRI
|
228
|
253
|
(10)
|
5
|
||||||||
China
Division
|
132
|
121
|
9
|
8
|
||||||||
Unallocated
|
122
|
140
|
(13)
|
N/A
|
||||||||
Worldwide
|
$
|
812
|
$
|
898
|
(9)
|
(5)
|
||||||
The
decreases in U.S. and Unallocated G&A expenses for the quarter and year to
date ended September 5, 2009 were driven by savings from the actions taken as
part of our U.S. business transformation measures.
The
increases in YRI G&A expenses, excluding the impact of foreign currency
translation, for the quarter and year to date ended September 5, 2009 were
driven by increased costs in strategic growth markets, primarily driven by
increased headcount.
The
increases in China Division G&A expenses for the quarter and year to date
ended September 5, 2009 were driven by increased compensation costs resulting
from higher headcount in mainland China.
41
Worldwide
Other (Income) Expense
Quarter
ended
|
Year
to date
|
|||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
|||||||||||||
Equity
income from investments in unconsolidated affiliates
|
$
|
(12
|
)
|
$
|
(13
|
)
|
$
|
(29
|
)
|
$
|
(33
|
)
|
||||
Gain
upon consolidation of former unconsolidated affiliate in China(a)
|
—
|
—
|
(68
|
)
|
—
|
|||||||||||
Gain
upon sale of investment in unconsolidated affiliate(b)
|
—
|
—
|
—
|
(100
|
)
|
|||||||||||
Foreign
exchange net (gain) loss and other
|
(1
|
)
|
(5
|
)
|
—
|
(15
|
)
|
|||||||||
Other
(income) expense
|
$
|
(13
|
)
|
$
|
(18
|
)
|
$
|
(97
|
)
|
$
|
(148
|
)
|
(a)
|
See
Note 4 for further discussion of the consolidation of a former
unconsolidated affiliate in China.
|
(b)
|
Reflects
the gain recognized on the sale of our interest in our unconsolidated
affiliate in Japan. See our 2008 Form 10-K for further discussion on this
transaction.
|
See the
Store Portfolio Strategy section for more detail of our refranchising activity
and Note 4 for a summary of the components of facility actions by reportable
operating segment.
Quarter
ended
|
Year
to date
|
|||||||||||||||||||||||
9/5/09
|
9/6/08
|
%
B/(W)
|
9/5/09
|
9/6/08
|
%
B/(W)
|
|||||||||||||||||||
United
States
|
$
|
171
|
$
|
146
|
18
|
$
|
497
|
$
|
447
|
11
|
||||||||||||||
YRI
|
119
|
137
|
(13
|
)
|
342
|
393
|
(13
|
)
|
||||||||||||||||
China
Division
|
217
|
165
|
32
|
453
|
360
|
26
|
||||||||||||||||||
Unallocated
Franchise and license fees and income
|
(1
|
)
|
—
|
NM
|
(32
|
)
|
—
|
NM
|
||||||||||||||||
Unallocated
and corporate expenses
|
(33
|
)
|
(50
|
)
|
27
|
(122
|
)
|
(145
|
)
|
15
|
||||||||||||||
Unallocated
Other income (expense)
|
1
|
5
|
NM
|
68
|
115
|
NM
|
||||||||||||||||||
Unallocated
Refranchising gain (loss)
|
(4
|
)
|
8
|
NM
|
9
|
(16
|
)
|
NM
|
||||||||||||||||
Operating
Profit
|
$
|
470
|
$
|
411
|
14
|
$
|
1,215
|
$
|
1,154
|
5
|
||||||||||||||
United
States operating margin
|
16.2%
|
12.0%
|
4.2
|
ppts.
|
15.5%
|
12.3%
|
3.2
|
ppts.
|
||||||||||||||||
International
Division operating margin
|
18.0%
|
18.1%
|
(0.1
|
)
ppts.
|
18.7%
|
18.0%
|
0.7
|
ppts.
|
U.S.
Operating Profit increased 18% in the quarter ended September 5,
2009. This increase was driven by improved restaurant margin and
G&A savings from the actions taken as part of the U.S. business
transformation measures.
U.S.
Operating Profit increased 11% in the year to date ended September 5,
2009. This increase was driven by the G&A savings from the
actions taken as part of our U.S. business transformation measures and improved
restaurant margin. The increases were partially offset by higher
Franchise and license expenses.
42
YRI
Operating Profit decreased 13% in the quarter ended September 5, 2009, including
a 13% unfavorable impact from foreign currency translation. Excluding
the unfavorable impact from foreign currency translation, International Division
Operating Profit was flat in the quarter as an increase in Franchise and license
fees and income due to new unit development was offset by an increase in G&A
costs.
YRI
Operating Profit decreased 13% in the year to date ended September 5, 2009,
including a 16% unfavorable impact from foreign currency
translation. Excluding the unfavorable impact from foreign currency
translation, International Division Operating Profit increased 3% year to
date. The increase was driven by the impact of new unit development
partially offset by an increase in G&A costs.
China
Division Operating Profit increased 32% and 26% in the quarter and year to date
ended September 5, 2009, respectively, including a 1% and 3% favorable impact
from foreign currency translation for the quarter and year to date ended
September 5, 2009, respectively. These increases were driven by the
impact of improved restaurant margin and new unit development.
Unallocated
franchise and license fees and income for the quarter and year to date ended
September 5, 2009 reflects our reimbursements to KFC franchisees for
installation costs of ovens for the national launch of Kentucky Grilled Chicken
that has not been allocated to the U.S. segment for performance reporting
purposes.
Unallocated
other income (expense) for the year to date ended September 5, 2009 includes a
$68 million gain upon acquisition of additional ownership in, and consolidation
of, the entity that operates KFCs in Shanghai, China. For the year to
date ended September 6, 2008 unallocated other income (expense) includes a $100
million gain recognized on the sale of our interest in our unconsolidated
affiliate in Japan.
Quarter
ended
|
Year
to date
|
|||||||||||||||||||||
9/5/09
|
9/6/08
|
%
B/(W)
|
9/5/09
|
9/6/08
|
%
B/(W)
|
|||||||||||||||||
Interest
expense
|
$
|
46
|
$
|
53
|
15
|
$
|
149
|
$
|
171
|
13
|
||||||||||||
Interest
income
|
(4
|
)
|
(6
|
)
|
(31
|
)
|
(11
|
)
|
(19
|
)
|
(39
|
)
|
||||||||||
Interest
expense, net
|
$
|
42
|
$
|
47
|
13
|
$
|
138
|
$
|
152
|
9
|
Interest
expense, net decreased $5 million or 13% for the quarter and $14 million or 9%
for the year to date ended September 5, 2009. These decreases
were primarily driven by a decrease in interest rates on the variable portion of
our debt as compared to prior year.
43
Income Taxes
Quarter
ended
|
Year
to date
|
|||||||||||||||
9/5/09
|
9/6/08
|
9/5/09
|
9/6/08
|
|||||||||||||
Income
taxes
|
$
|
88
|
$
|
79
|
$
|
212
|
$
|
236
|
||||||||
Effective
tax rate
|
20.6
|
%
|
21.7
|
%
|
19.7
|
%
|
23.5
|
%
|
Our third
quarter effective tax rate was favorably impacted by the year-over-year change
in adjustments to reserves and prior years, including prior year foreign tax
credit balances. Our rate was also favorably impacted by the
year-over-year change in reversals of foreign valuation allowances associated
with certain deferred tax assets we now believe are more likely than not to be
utilized on future tax returns. These favorable impacts were
partially offset by an increase in tax expense associated with certain foreign
markets.
Year to
date, our effective tax rate was favorably impacted by the year-over-year change
in adjustments to reserves and prior years, including prior year foreign tax
credit balances. Our rate was also favorably impacted by a one-time
gain recognized upon our acquisition of additional interest in, and
consolidation of, the operating entity that operates the KFCs in Shanghai,
China, which resulted in no related tax expense. Additionally, our
rate was lower as a result of lapping 2008 tax expense associated with a gain on
the sale of our interest in our unconsolidated affiliate in Japan.
Net cash provided by operating
activities was $1,135 million compared to $1,147 million in
2008. The decrease was driven by higher pension contributions and
income tax payments partially offset by higher Net Income.
Net cash used in investing
activities was $505 million versus $400 million in 2008. The
increase was driven by the acquisition of Little Sheep, as discussed in Note 4,
lower refranchising proceeds, and lower proceeds from sales of property, plant
and equipment, partially offset by lower capital spending.
Net cash used in financing
activities was $439 million versus $1,259 million in 2008. The
decrease was driven by a reduction in share repurchases, partially offset by
lower net borrowings.
Consolidated
Financial Condition
The
acquisition of additional ownership in, and consolidation of, a former
unconsolidated affiliate that operates the KFCs in Shanghai, China during 2009
impacted our Condensed Consolidated Balance Sheet at September 5,
2009. See Note 4 for a discussion of this transaction and a summary
of the assets acquired and liabilities assumed as a result of the acquisition
and consolidation.
44
Liquidity
and Capital Resources
Operating
in the QSR industry allows us to generate substantial cash flows from the
operations of our company stores and from our substantial franchise operations
which require a limited YUM investment. In each of the last seven
fiscal years, net cash provided by operating activities has exceeded $1.1
billion. We expect these levels of net cash provided by operating
activities to continue in the foreseeable future. However, unforeseen
downturns in our business could adversely impact our cash flows from operations
from the levels historically realized.
In the
event our cash flows are negatively impacted by business downturns, we believe
we have the ability to temporarily reduce our discretionary spending without
significant impact to our long-term business prospects. Our
discretionary spending includes capital spending for new restaurants,
acquisitions of restaurants from franchisees, repurchases of shares of our
Common Stock and dividends paid to our shareholders. As of September
5, 2009 we also had approximately $1.3 billion in unused capacity under
revolving credit facilities that expire in 2012.
We are
currently managing our cash and debt positions in order to maintain our current
investment grade ratings from Standard & Poor’s Rating Services (BBB-) and
Moody’s Investors Service (Baa3). A downgrade of our credit rating
would increase the Company’s current borrowing costs and could impact the
Company’s ability to access the credit markets if necessary. Based on
the amount and composition of our debt at September 5, 2009 our interest expense
would not materially increase on a full year basis should we receive a one-level
downgrade in our ratings.
Discretionary
Spending
In the
year to date ended September 5, 2009, we invested $505 million in capital
spending, including approximately $174 million in the U.S., $141 million for the
International Division and $190 million for the China Division.
On
September 30, 2009, our Board of Directors authorized share repurchases through
September 30, 2010 of up to $300 million (excluding applicable transaction fees)
of our outstanding Common Stock. No share repurchases took place in
the year to date ended September 5, 2009.
During
the year to date ended September 5, 2009, we paid cash dividends of $263
million. Additionally, on September 30, 2009 our Board of Directors
approved a cash dividend of $0.21 per share of Common Stock, to be distributed
on November 5, 2009 to shareholders of record at the close of business on
October 16, 2009. The Company is targeting an ongoing annual dividend
payout ratio of 35% - 40% of net income.
During
the year to date ended September 5, 2009, our China Division paid approximately
$63 million to purchase 20% of the outstanding common shares of Little
Sheep. See Note 4 for further description.
Borrowing
Capacity
Our
primary bank credit agreement comprises a $1.15 billion syndicated senior
unsecured revolving credit facility (the “Credit Facility”) which matures in
November 2012 and includes 23 participating banks with commitments ranging from
$20 million to $113 million. We believe the syndication reduces our
dependency on any one bank.
Under the
terms of the Credit Facility, we may borrow up to the maximum borrowing limit,
less outstanding letters of credit or banker’s acceptances, where
applicable. At September 5, 2009, our unused Credit Facility totaled
$968 million net of outstanding letters of credit of $171
million. There were borrowings of $11 million outstanding under the
Credit Facility at September 5, 2009. The interest rate for
borrowings under the Credit Facility ranges from 0.25% to 1.25% over the London
Interbank Offered Rate (“LIBOR”) or is determined by an Alternate Base Rate,
which is the greater of the Prime Rate or the Federal Funds Rate plus
0.50%. The exact spread over LIBOR or the Alternate Base Rate, as
applicable, depends on our performance under specified financial
criteria. Interest on any outstanding borrowings under the Credit
Facility is payable at least quarterly.
45
We also
have a $350 million, syndicated revolving credit facility (the “International
Credit Facility,” or “ICF”) which matures in November 2012 and includes 6 banks
with commitments ranging from $35 million to $90 million. We believe
the syndication reduces our dependency on any one bank. There was
available credit of $350 million and no borrowings outstanding under the ICF at
September 5, 2009. The interest rate for borrowings under the ICF ranges from
0.31% to 1.50% over LIBOR or is determined by a Canadian Alternate Base Rate,
which is the greater of the Citibank, N.A., Canadian Branch’s publicly announced
reference rate or the “Canadian Dollar Offered Rate” plus 0.50%. The
exact spread over LIBOR or the Canadian Alternate Base Rate, as applicable,
depends upon YUM’s performance under specified financial criteria. Interest on
any outstanding borrowings under the ICF is payable at least
quarterly.
The
Credit Facility and the ICF are unconditionally guaranteed by our principal
domestic subsidiaries. Additionally, the ICF is unconditionally
guaranteed by YUM. These agreements contain financial covenants
relating to maintenance of leverage and fixed charge coverage ratios and also
contain affirmative and negative covenants including, among other things,
limitations on certain additional indebtedness and liens, and certain other
transactions specified in the agreement. Given the Company’s strong
balance sheet and cash flows we were able to comply with all debt covenant
requirements at September 5, 2009 with a considerable amount of
cushion.
The
majority of our remaining long-term debt primarily comprises Senior Unsecured
Notes with varying maturity dates from 2011 through 2037 and interest rates
ranging from 4.25% to 8.88%. The Senior Unsecured Notes represent
senior, unsecured obligations and rank equally in right of payment with all of
our existing and future unsecured unsubordinated
indebtedness. Amounts outstanding under Senior Unsecured Notes,
reflecting the events described below, were $2.9 billion at September 5,
2009.
During
the quarter ended June 13, 2009 we repurchased Senior Unsecured Notes due July
1, 2012 with an aggregate principal amount of $137 million.
On August
20, 2009, we issued $250 million aggregate principal amount of 4.25% Senior
Unsecured Notes that are due on September 15, 2015 and $250 million aggregate
principal amount of 5.30% Senior Unsecured Notes that are due on September 15,
2019. We used a portion of the proceeds from our issuance of these
Senior Unsecured Notes to repay our variable rate senior unsecured term loan, in
an aggregate principal amount of $375 million that was scheduled to mature in
2011 and the remainder of the proceeds will be used to make discretionary
payments to our pension plans in the fourth quarter of 2009.
Our
Senior Unsecured Notes, Credit Facility, and ICF all contain cross-default
provisions, whereby a default under any of these agreements constitutes a
default under each of the other agreements.
Recently
Adopted Accounting Pronouncements
See Note
5 to the Condensed Consolidated Financial Statements of this report for further
details of recently adopted accounting pronouncements.
New
Accounting Pronouncements Not Yet Recognized
See Note
6 to the Condensed Consolidated Financial Statements of this report for further
details of new accounting pronouncements not yet adopted.
46
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
There
were no material changes during the quarter ended September 5, 2009 to the
disclosures made in Item 7A of the Company’s 2008 Form 10-K.
Item
4.
|
Controls
and Procedures
|
Evaluation of Disclosure
Controls and Procedures
The
Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 as of the end of the period covered by
this report. Based on the evaluation, performed under the supervision
and with the participation of the Company’s management, including the Chairman,
Chief Executive Officer and President (the “CEO”) and the Chief Financial
Officer (the “CFO”), the Company’s management, including the CEO and CFO,
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by the report.
Changes in Internal
Control
There
were no significant changes with respect to the Company’s internal control over
financial reporting or in other factors that materially affected, or are
reasonably likely to materially affect, internal control over financial
reporting during the quarter ended September 5, 2009.
47
Cautionary
Note Regarding Forward-Looking Statements
From time
to time, in both written reports and oral statements, we present
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We intend such forward-looking statements to be covered
by the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, and we are including this statement for purposes of complying with those
safe harbor provisions.
Forward-looking
statements can be identified by the fact that they do not relate strictly to
historical or current facts. These statements often include words
such as “may,” “will,” “estimate,” “intend,” “seek,” “expect,” “project,”
“anticipate,” “believe,” “plan” or other similar terminology. These
forward-looking statements are based on current expectations and assumptions and
upon data available at the time of the statements and are neither predictions
nor guarantees of future events or circumstances. The forward-looking
statements are subject to risks and uncertainties, which may cause actual
results to differ materially. Important factors that could cause
actual results and events to differ materially from our expectations and
forward-looking statements include (i) the risks and uncertainties described in
the Risk Factors included in Part II, Item 1A of this report, (ii) the risks and
uncertainties described in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part I, Item 2 of this report,
(iii) the risks and uncertainties described in the Risk Factors included in Part
I, Item 1A of our Form 10-K for the year ended December 27, 2008 and (iv) the
factors described in the Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in Part II, Item 7 of our Form 10-K
for the year ended December 27, 2008. You should not place undue
reliance on forward-looking statements, which speak only as of the date
hereof. In making these statements, we are not undertaking to address
or update any risk factor set forth herein, in future filings or communications
regarding our business results.
48
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
YUM!
Brands, Inc.:
We have
reviewed the accompanying Condensed Consolidated Balance Sheet of YUM! Brands,
Inc. and Subsidiaries (“YUM”) as of September 5, 2009, and the related Condensed
Consolidated Statements of Income for the twelve and thirty-six weeks ended
September 5, 2009 and September 6, 2008 and the Condensed Consolidated
Statements of Cash Flows for the thirty-six weeks ended September 5, 2009 and
September 6, 2008. These Condensed Consolidated Financial Statements
are the responsibility of YUM’s management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the Condensed Consolidated Financial Statements referred to above for them to
be in conformity with U.S. generally accepted accounting
principles.
We have
previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheet of
YUM as of December 27, 2008, and the related Consolidated Statements of Income,
Cash Flows and Shareholders’ Equity (Deficit) and Comprehensive Income (Loss)
for the year then ended not presented herein; and in our report dated February
23, 2009, we expressed an unqualified opinion on those Consolidated Financial
Statements. In our opinion, the information set forth in the
accompanying Condensed Consolidated Balance Sheet as of December 27, 2008, is
fairly stated, in all material respects, in relation to the Consolidated Balance
Sheet from which it has been derived.
/s/
KPMG LLP
|
|
Louisville,
Kentucky
|
|
October
13, 2009
|
49
Item
1.
|
Legal
Proceedings
|
Information
regarding legal proceedings is incorporated by reference from Note 13 to the
Company’s Condensed Consolidated Financial Statements set forth in Part I of
this report.
Item
1A.
|
Risk
Factors
|
We face a
variety of risks that are inherent in our business and our industry, including
operational, legal, regulatory and product risks. Such risks could
cause our actual results to differ materially from our forward-looking
statements, expectations and historical trends. The following are
some of the more significant factors that could affect our business and our
results of operations:
·
|
Food-borne
illnesses (such as E. coli, hepatitis A., trichinosis or salmonella), food
safety issues and health concerns arising from outbreaks of Avian Flu, may
have an adverse effect on our business;
|
·
|
A
significant and growing number of our restaurants are located in China,
and our business is increasingly exposed to risk there. These
risks include changes in economic conditions, tax rates, currency exchange
rates, laws and consumer preferences, as well as changes in the regulatory
environment and increased competition;
|
·
|
Our
other foreign operations, which are significant and increasing, subject us
to risks that could negatively affect our business. These
risks, which can vary substantially by market, include political
instability, corruption, social unrest, changes in economic conditions,
the regulatory environment, tax rates and laws and consumer preferences,
as well as changes in the laws that govern foreign investment in countries
where our restaurants are operated. In addition, our results of
operations and the value of our foreign assets are affected by
fluctuations in foreign currency exchange rates, which may favorably or
adversely affect reported earnings;
|
·
|
Changes
in commodity and other operating costs could adversely affect our results
of operations;
|
·
|
Shortages
or interruptions in the availability or delivery of food or other supplies
or other supply chain or business disruptions could adversely affect the
availability, quality or cost of items we buy and the operations of our
restaurants;
|
·
|
Our
operating results are closely tied to the success of our franchisees, and
any significant inability of our franchisees to operate successfully could
adversely affect our operating results;
|
·
|
Our
results and financial condition could be affected by the success of our
refranchising program;
|
·
|
We
could be party to litigation that could adversely affect us by increasing
our expenses or subjecting us to material money damages and other
remedies;
|
·
|
We
may not attain our target development goals, which are dependent upon our
ability and the ability of our franchisees to upgrade existing restaurants
and open new restaurants, and any new restaurants may not produce
operating results similar to those of our existing
restaurants;
|
·
|
Our
business may be adversely impacted by current economic conditions or the
global financial crisis through decreased discretionary spending by
consumers, difficulty in refinancing or incurring indebtedness or the
insolvency of our suppliers;
|
·
|
Changes
in governmental regulations, including changing laws relating to
nutritional content, nutritional labeling, product safety and menu
labeling regulation, may adversely affect our business operations;
and
|
·
|
The
retail food industry in which we operate is highly
competitive.
|
50
These
risks are described in more detail under “Risk Factors” in Part I, Item 1A of
our Form 10-K for the year ended December 27, 2008. We encourage you
to read these risk factors in their entirety. These risks are not
exclusive, and our business and our actual results of operations could also be
affected by other risks that we cannot anticipate or that we do not consider to
be material based on currently available information.
Item
6.
|
Exhibits
|
(a)
|
Exhibit
Index
|
||
EXHIBITS
|
|||
Exhibit
15
|
Letter
from KPMG LLP regarding Unaudited Interim Financial Information
(Acknowledgement of Independent Registered Public Accounting
Firm).
|
||
Exhibit
31.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to Rule
13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
Exhibit
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
Exhibit
32.1
|
Certification
of the Chairman, Chief Executive Officer and President pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||
Exhibit
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
||
Exhibit
101.INS*
|
XBRL
Instance Document
|
||
Exhibit
101.SCH*
|
XBRL
Taxonomy Extension Schema Document
|
||
Exhibit
101.CAL*
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
||
Exhibit
101.LAB*
|
XBRL
Taxonomy Extension Label Linkbase Document
|
||
Exhibit
101.PRE*
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
||
Exhibit
101.DEF*
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
||
*
|
In
accordance with Regulation S-T, the XBRL-related information in Exhibit
101 to this Quarterly Report on Form 10-Q shall be deemed to be
“furnished” and not “filed.”
|
51
SIGNATURES
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, duly
authorized officer of the registrant.
YUM!
BRANDS, INC.
|
||||
(Registrant)
|
Date:
|
October
13, 2009
|
/s/ Ted
F. Knopf
|
||
Senior
Vice President of Finance
|
||||
and
Corporate Controller
|
||||
(Principal
Accounting Officer)
|
52