Kentucky Fried Chicken 2001 Annual Report Download

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Tricon Global Restaurants

Table of contents

  • Page 1
    Tricon Global Restaurants

  • Page 2
    ... millions, except for store and per share amounts) Number of stores: 2001 2000 % B(W) change Company Unconsolidated affiliates Franchisees Licensees Total stores System sales Total revenues Ongoing operating profit Facility actions net loss (gain) Unusual items (income) expense Operating profit...

  • Page 3

  • Page 4
    ... a public company in October 1997. We've more than doubled our ongoing operating earnings per share and increased our ongoing operating profit at a 7% compound growth rate. We've grown system sales 9% and opened over 5,200 new restaurants, excluding license restaurants, around the world. We also...

  • Page 5
    ... best in our business at providing consistently good service. This Customer Mania focus will allow us to capitalize on the two major growth opportunities that make Tricon a great long term investment: driving average unit volumes and opening new restaurants of our leading brands BOTH internationally...

  • Page 6
    ...fact, they offer seven different food types - everything from burgers, chicken, fish, and shakes to breakfast. This drives sales by broadening consumer appeal. However, our Tricon brands focus on one category. Pizza Hut has pizza in its name. KFC means Kentucky Fried Chicken. Taco Bell means Mexican...

  • Page 7
    ... have achieved significant increases in average unit volumes and profits. We're convinced this acquisition strengthens our business in every Tricon U.S. Average Unit Volumes vs. McDonald's KFC Pizza Hut Taco Bell McDonald's are also opening high-return new restaurants in trade areas that used to be...

  • Page 8
    ...service restaurant industry. We expect to at least maintain our returns by driving at least 15% margins on the stores we own and exceeding our cost of capital with our investment. David C. Novak Chairman and Chief Executive Officer We intend to grow our ongoing operating EPS at least 10% every year...

  • Page 9
    7

  • Page 10
    ... Franchise RGM Terry Auld treats his customers as he would a guest in his own home. This 26-year veteran inspires his team to put the customer first, always. That's why they're the #1 CHAMPS restaurant with the second highest same store sales growth in the Pizza Hut system! Now that's Customer...

  • Page 11
    ...about ways to improve service and teaches others to be mentors, too. Fernando Rocha Lopez KFC, Juarez Humboldt, Mexico Right the first time - every time. RGM Chris Avila coaches his team to pay close attention to their customers, listen and give them exactly what they want. His team has had over 20...

  • Page 12
    ... customers noticed. Steve has increased sales by 50% in four years and is the second highest CHAMPS store (with the most 100% scores) in the Pizza Hut system. Now that's a YES! attitude. Steve Morozek Pizza Hut, Keyser, WV Franchise RGM Gary Reiner delivers Hot & Fresh food, every hour, every day...

  • Page 13
    ...that filling orders quickly and accurately guarantees repeat business. It must be working because her store has increased its' sales and received the highest CHAMPS evaluation in the Taco Bell system! Angella works alongside her team to ensure that her customers get fresh, delicious food - lightning...

  • Page 14
    ... to deliver great customer service 100% of the time and it may be a long journey, but we're on our way - and we hope you'll have one word to describe it - YUM! "I crave Taco Bell all of the time. I love the new Chicken Quesadillas. They're cheesy and delicious - and a great value. All of my friends...

  • Page 15
    "The best thing about having my fifth birthday party at Pizza Hut is the pepperoni pizza! YUM! I think pizza is my favorite food. I like to pull the cheese with my teeth. I ask my mom and dad all the time if I can eat at Pizza Hut - every day." Matthew McGrath 5 years old "We grew up eating KFC and...

  • Page 16
    ... of our key growth markets. Bottom: The United Kingdom is a key driver of our international business, growing ongoing operating profit by 33%. Over the years, our International business has successfully built a sandwich business via product innovation. One such example, KFC's Zinger Cheese Sandwich...

  • Page 17
    International System Sales by Brand KFC 65% Pizza Hut 33% Taco Bell 2% SOURCE: CREST CREST employed new tracking methodology in 2001, therefore percentages are not comparable to prior years' results. HERE WE GROW AGAIN TRICON RESTAURANTS INTERNATIONAL From Hong Kong to Malaysia, a Customer Mania ...

  • Page 18
    ... meals with dividers to keep food separated. Popular menu items like Popcorn Chicken, meet our customers' on-the-go needs. When our customers told us they wanted us to return Popcorn Chicken to our menu in 2001, we listened. In turn, our customers gave KFC an all-time record-high week of sales! 16

  • Page 19
    ... percentages are not comparable to prior years' results. THERE'S FAST FOOD. THEN THERE'S KFC. KFC In 2001, KFC delivered a 3 percent improvement in same store sales and returned our chicken-on-thebone core business to a strong position while significantly growing market share in the on-the-go...

  • Page 20
    ... a "Rip and Dip" breadstick crust delivered a whole new, fun way to eat pizza. With Twisted Crust, we said to our customers, "Go ahead, play with your food!" Home meal replacement represents the defining battle in the pizza category with delivery making up 50% of Pizza Hut's annual business.

  • Page 21
    ... customer, every time, in every restaurant. Even though same store sales were flat in 2001, we must be doing something right. Consumers continue to recognize the Pizza Hut brand as a "leader," but rate us as more "authentic" "high quality" "up to date" and "energetic" than they did just two years...

  • Page 22
    The new Taco Bell restaurants incorporate the very latest in engineering, technology and design - working together to reduce labor, improve food quality and ensure customer satisfaction! In 2001, Taco Bell successfully launched a number of exciting new products. Step up to the great taste of ...

  • Page 23
    ...Steak Tacos, which drove sales and created new customers for The Bell. Working as one system with our outstanding franchisees and company restaurant operators, our aim is to continue creating The Bold Choice for consumers by running better restaurants, improving food quality, introducing new product...

  • Page 24
    ...16.1 11.7 Total (a) Compounded annual growth rate Domino's Pizza Dairy Queen Burger King McDonald's Wendy's Tricon Subway BREAKDOWN OF WORLDWIDE SYSTEM UNITS Unconsolidated Affiliate Franchised Year-end 2001 Company Licensed Total United States KFC Pizza Hut Taco Bell Total U.S . 1,274...

  • Page 25
    .... Marketing innovations such as new dayparts can help grow sales. Most of our sales come from offpremises dining, which reflects customers' desire for convenient food. SOURCE: CREST CREST employed new tracking methodology in 2001, therefore percentages are not comparable to prior years' results...

  • Page 26
    ... AND ANALYSIS CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF CASH FLOWS CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS REPORT...

  • Page 27
    ... operations of KFC, Pizza Hut and Taco Bell ("the Concepts") and is the world's largest quick service restaurant ("QSR") company based on the number of system units. Separately, each brand ranks in the top ten among QSR chains in U.S. system sales and units. Our 10,927 international units make...

  • Page 28
    ... in a decline in our Company sales, restaurant margin dollars and G&A as well as higher franchise fees. We also record equity income (losses) from investments in unconsolidated affiliates ("equity income") and, in Canada, higher franchise fees since the royalty rate was increased for those stores...

  • Page 29
    ... expertise can generally be leveraged to improve our overall operating performance, while retaining Company ownership of key U.S. and International markets. This portfolio-balancing activity has reduced our reported revenues and restaurant profits and has increased the importance of system sales as...

  • Page 30
    ... 1999 System sales(a) Company sales Franchise and license fees Revenues Company restaurant margin % of Company sales Ongoing operating profit Facility actions net (loss) gain Unusual items income (expense) Operating profit Interest expense, net Income tax provision Net income Diluted earnings per...

  • Page 31
    ...-third week, system sales increased 1%. This increase was driven by new unit development, partially offset by store closures and same store sales declines. WORLDWIDE COMPANY RESTAURANT MARGIN 2001 2000 1999 Company sales Food and paper Payroll and employee benefits Occupancy and other operating...

  • Page 32
    ... process of $9 million has been included in unusual items expense in 2000. WORLDWIDE INCOME TAXES WORLDWIDE ONGOING OPERATING PROFIT 2001 % B(W) vs. 2000 2000 % B(W) vs. 1999 2001 2000 1999 United States International Unallocated and corporate expenses Foreign exchange net loss Ongoing operating...

  • Page 33
    ...5% in 2001. Excluding the unfavorable impact of lapping the fifty-third week in 2000, Company sales decreased 4%. The decrease was driven by refranchising, partially offset by new unit development. (a) See Note 4 for the number of shares used in these calculations. Ongoing operating EPS increased...

  • Page 34
    ... at Pizza Hut and Taco Bell. The G&A declines were partially offset by higher franchise-related expenses, primarily allowances for doubtful franchise and license fee receivables. INTERNATIONAL RESULTS OF OPERATIONS 2001 % B(W) vs. 2000 2000 % B(W) vs. 1999 U.S. COMPANY RESTAURANT MARGIN 2001 2000...

  • Page 35
    ... offset by new unit development and same store sales growth. Franchise and license fees increased $16 million or 6% in 2001, after a 6% unfavorable impact from foreign currency INTERNATIONAL COMPANY RESTAURANT MARGIN 2001 2000 1999 Company sales Food and paper Payroll and employee benefits...

  • Page 36
    ... in payment terms in our food and supply distribution agreement from 30 to 15 days. Net cash used in investing activities was $503 million versus $237 million in 2000. The increase in cash used was primarily due to lower gross refranchising proceeds as a result of selling fewer restaurants in 2001...

  • Page 37
    ... generate substantial cash ï¬,ows from the operations of our company stores and from our franchise operations, which require a limited TRICON investment in operating assets. Typically, our cash flows include a significant amount of discretionary capital spending. Though a decline in revenues could...

  • Page 38
    ... assets of over $900 million as of year-end 2001 and total revenues of approximately $1.6 billion in 2001. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices...

  • Page 39
    ... 29, 2001. Commodity Price Risk We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure...

  • Page 40
    ... of Income Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 (in millions, except per share data) 2001 2000 1999 Revenues Company sales Franchise and license fees $ 6,138 815 6,953 $ 6,305 788 7,093 $ 7,099 723 7,822 Costs and Expenses, net Company restaurants Food...

  • Page 41
    ...32) 121 89 Net Cash Provided by Operating Activities Cash Flows - Investing Activities Capital spending Proceeds from refranchising of restaurants Acquisition of restaurants AmeriServe funding, net Short-term investments Sales of property, plant and equipment Other, net Net Cash (Used in) Provided...

  • Page 42
    ...4,149 Total Current Assets Property, plant and equipment, net Intangible assets, net Investments in unconsolidated affiliates Other assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable and other current liabilities Income taxes payable Short-term...

  • Page 43
    Consolidated Statements of Shareholders' Equity (Deficit) and Comprehensive Income Fiscal years ended December 29, 2001, December 30, 2000 and December 25, 1999 Issued Common Stock (in millions) Shares Amount Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Balance at ...

  • Page 44
    ... of the worldwide operations of KFC, Pizza Hut and Taco Bell (the "Concepts") and is the world's largest quick service restaurant company based on the number of system units, with over 30,000 units in more than 100 countries and territories. Approximately 36% of our system units are located outside...

  • Page 45
    ...fees, franchise and license marketing funding, amortization expense for franchise related intangible assets and certain other direct incremental franchise and license support costs. Franchise and license expenses also includes rent income from subleasing restaurants to franchisees net of the related...

  • Page 46
    ... We evaluate restaurants using a "two-year history of operating losses" as our primary indicator of potential impairment. Based on the best information available, we write down an impaired restaurant to its estimated fair market value, which becomes its new cost basis. We generally measure estimated...

  • Page 47
    ..."Accounting for Stock-Based Compensation" ("SFAS 123"). Accordingly, we measure compensation cost for stock option grants to employees as the excess of the average market price of the Common Stock at the grant date over the amount the employee must pay for the stock. Our policy is to generally grant...

  • Page 48
    ...scal year 2003. SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. We have not yet determined the impact of adopting SFAS 143 on the Company's Financial Statements. In 2001...

  • Page 49
    ...closure costs Impairment charges for stores that will continue to be used in the business Impairment charges for stores to be closed Facility actions net loss The following table summarizes the carrying value of assets held for disposal by reportable operating segment. 2001 2000 U.S. International...

  • Page 50
    ...Force Issue No. 97-11 ("EITF 97-11"), "Accounting for Internal Costs Relating to Real Estate Property Acquisitions," upon its issuance in March 1998. In the first quarter of 1999, we also made a discretionary policy change limiting the types of costs eligible for capitalization to those direct cost...

  • Page 51
    ... in a one-time increase in our 1999 operating profit of over $8 million. At the end of 1998, we changed our method of determining the pension discount rate to better reflect the assumed investment strategies we would most likely use to invest any short-term cash surpluses. The pension discount...

  • Page 52
    ... 29, 2001 have been classified as short-term borrowings in the Consolidated Balance Sheet due to the October 2002 maturity. We are currently in negotiations to replace the Credit Facilities prior to the maturity date with new borrowings, which will reflect the market conditions and terms available...

  • Page 53
    ...both capital and long-term operating leases, primarily for our restaurants. Capital and operating lease commitments expire at various dates through 2087 and, in many cases, provide for rent escalations and renewal options. Most leases require us to pay related executory costs, which include property...

  • Page 54
    ...follows: 2001 Carrying Amount Fair Value Carrying Amount 2000 Fair Value Debt: Short-term borrowings and long-term debt, excluding capital leases and the derivative instrument adjustments Debt-related derivative instruments: Open contracts in a net asset position Foreign currency-related derivative...

  • Page 55
    ... Plan. Benefits are based on years of service and earnings or stated amounts for each year of service. 2001 1999 Service cost Interest cost Amortization of prior service cost Expected return on plan assets Recognized actuarial loss Net periodic benefit cost Additional (gain) loss recognized due...

  • Page 56
    ... service cost Net amount recognized at year-end Amounts recognized in the statement of financial position consist of: Accrued benefit liability Intangible asset Accumulated other comprehensive loss Additional year-end information for pension plans with benefit obligations in excess of plan assets...

  • Page 57
    ...pro forma net income for future years because variables such as the number of option grants, exercises and stock price volatility included in these disclosures may not be indicative of future activity. We estimated the fair value of each option grant made during 2001, 2000 and 1999 as of the date of...

  • Page 58
    ...amount in 2000 and $5.0 million in 1999 with a corresponding increase in our Common Stock account. NOTE 17 OTHER COMPENSATION AND BENEFIT PROGRAMS We sponsor two deferred compensation benefit programs, the Restaurant Deferred Compensation Plan and the Executive Income Deferral Program (the "RDC...

  • Page 59
    .... The EID Plan includes an investment option that allows participants to defer incentive compensation to purchase phantom shares of our Common Stock at a 25% discount from the average market price at the date of deferral (the "Discount Stock Account"). Participants bear the risk of forfeiture...

  • Page 60
    ... million shares for approximately $134 million at an average price of $40 per share. In 2001, valuation allowances related to deferred tax assets in certain states and foreign countries were reduced by $9 million ($6 million, net of federal tax) and $6 million, respectively, as a result of making...

  • Page 61
    ...961 1999 NOTE 21 REPORTABLE OPERATING SEGMENTS Long-lived Assets(e) United States International Corporate 2001 We are engaged principally in developing, operating, franchising and licensing the worldwide KFC, Pizza Hut and Taco Bell concepts. KFC, Pizza Hut and Taco Bell operate throughout the...

  • Page 62
    ... these supply sales. In 2001, we recorded unusual items income of $21 million related to net recoveries of residual assets and certain preference claims under the POR. We will record additional recoveries, if any, as unusual items as they are realized. certain Company restaurants to unconsolidated...

  • Page 63
    ..., taxes, environmental and other matters arising out of the normal course of business. Like certain other large retail employers, Pizza Hut and Taco Bell have been faced in certain states with allegations of purported class-wide wage and hour violations. On August 29, 1997, a class action lawsuit...

  • Page 64
    ...300 current and former California restaurant general managers of Pizza Hut and PacPizza, LLC. The lawsuit alleged violations of state wage and hour laws involving unpaid overtime wages and vacation pay and sought an unspecified amount in damages. On January 12, 2000, the Court certified a class of...

  • Page 65
    ...have included our best estimates of these liabilities in the accompanying Consolidated Financial Statements. In addition, we have indemnified PepsiCo for any costs or losses it incurs with respect to all letters of credit, guarantees and contingent liabilities relating to our businesses under which...

  • Page 66
    ... Fourth Quarter Total 2001 Revenues: Company sales Franchise and license fees Total revenues Total costs and expenses, net Operating profit Net income Diluted earnings per common share Operating profit attributable to: Facility actions net loss (gain) Unusual items (income) expense $ 1,326...

  • Page 67
    ... consolidated balance sheets of TRICON Global Restaurants, Inc. and Subsidiaries ("TRICON") as of December 29, 2001 and December 30, 2000, and the related consolidated statements of income, cash flows and shareholders' equity (deficit) and comprehensive income for each of the years in the three-year...

  • Page 68
    Selected Financial Data (in millions, except per share and unit amounts) 2001 2000 Fiscal Year 1999 1998 1997 Summary of Operations System sales(a) U.S. International Total Revenues Company sales(b) Franchise and license fees Total Facility actions net (loss) gain(c) Unusual items income (...

  • Page 69
    ...Financial Officer, Tricon Peter R. Hearl 50 Chief People Officer, Tricon Executive Vice President, Tricon Restaurants International Aylwin B. Lewis 47 Chief Operating Officer, Tricon Michael A. Miles 40 Chief Operating Officer, Pizza Hut, U.S.A. Robert T. Nilsen 42 Chief Operating Officer, Taco...

  • Page 70
    ... Option Plan Services P.O. Box 30446 New Brunswick, NJ 08989-0446 Telephone: (800) 637-2432 (U.S., Puerto Rico and Canada) (732) 560-9444 (all other locations) Independent Auditors KPMG LLP 400 West Market Street, Suite 2600 Louisville, KY 40202 Telephone: (502) 587-0535 CAPITAL STOCK INFORMATION...

  • Page 71
    Design: Sequel Studio, New York Hungry for more information? Contact: www.triconglobal.com

  • Page 72
    "Alone, we're delicious. Together, we're "